Annual Report 2019
TABLE OF CONTENTS
LETTER FROM THE CHIEF EXECUTIVE OFFICER 1. page 4 GROUP PROFILE 2. A. CHANGES IN SHAREHOLDERS’ STRUCTURE DURING 2019 B. CURRENT SHARE STRUCTURE C. INFORMATION ON BALFIN GROUP AND KOMERCIJALNA BANKA AD SKOPJE (‘KB’) page 6
CORPORATE GOVERNANCE 3. page 10 A GENERAL OVERVIEW OF THE ECONOMY KEY 4. page 12 INDICATORS OF TIRANA BANK 5. A. RETAIL BANKING ACTIVITY B. SMALL AND MEDIUM ENTERPRISES (SME) C. CORPORATE BANKING DIVISION D. TREASURY DIVISION E. INFORMATION TECHNOLOGY AND ORGANIZATION CORPORATE F. RISK MANAGEMENT SOCIAL G. COMPLIANCE DEPARTMENT page 18 RESPONSIBILITY 6. A. SOCIAL ACTIVITY B. EDUCATION page 42
7. HUMAN RESOURCES COMMITTEES OF page 44 8. TIRANA BANK page 50
ORGANIZATIONAL 9. STRUCTURE page 54 FINANCIAL STATEMENTS, INDEPENDENT AUDITOR’S REPORT 10. A. CONTENTS OF THE FINANCIAL STATEMENTS B. INDEPENDENT AUDITOR’S REPORT C. INCOME STATEMENT D. BALANCE SHEET E. STATEMENT OF CHANGES IN EQUITY F. CASH FLOW STATEMENT G. NOTES TO THE FINANCIAL STATEMENTS
page 58 01.ANNUAL REPORT 2019
LETTER FROM THE CHIEF EXECUTIVE OFFICER 4 ANNUAL REPORT 2019
DRITAN MUSTAFA CHIEF EXECUTIVE OFFICER
2019 marked a return in the growth trend of the Bank and positive performance of key financial indicators, in line with the clear vision and orientations of the new shareholders to expand the Bank's activity.
Referring to the strategy of development and redimensioning of commercial and financial goals, we have achieved significant growth of basic portfolios, deposits and loans, as well as an increase in the customer database. The Bank continues to maintain a strong position of capital and liquidity.
The activity growth, which remains stable, is valued as an indicator of public confidence of local economic actors towards our Bank, and as a reaffirmation of the loyalty of traditional customers to our values and the quality of service provided.
The successful completion of the transition, referring to the formal change of shareholders’ structure in early 2019, was accompanied by the undertaking of a transformation process, currently at a significant implementation stage, aiming at the modernization of operational infrastructure and information technology systems.
The Bank continues to adhere to the strategic target of further growth for 2020 and in the medium term, with a dynamic but also cautious approach to development opportunities, as well as to the risks that characterize the local market.
Also, we remain very attentive to recent developments, caused mainly by natural factors and with an impact in the local and broader market, with full confidence that we will successfully overcome them.
Gratitude and thanks to the Bank staff, for their work and dedication, as well as for the support and special understanding in this period of unusual changes and challenges.
WE REMAIN COMMITTED TO PROVIDING OUR BEST SERVICE TO OUR ESTEEMED CUSTOMERS AS WELL AS SUPPORTING THE DEVELOPMENT OF THE LOCAL ECONOMY.
5 02.ANNUAL REPORT 2019
GROUP PROFILE 6 ANNUAL REPORT 2019
Tirana Bank is the first foreign private bank in Albania. It was established in 1996 and during this period it has had a rapid development in the local market, extending its branches throughout Albania. The economic crisis in international markets and the tendency to consolidate financial and banking institutions brought significant changes in the ownership of some banks in the local market and the shareholders’ structure of Tirana Bank in particular. This transformation of 2018-2019 was successful for the bank, making it part of the Balfin Group and Komercijalna Banka with the main goal of increasing the dynamics of banking activity and diversifying its portfolio.
Below are the changes in the share structure as well as a brief description of BALFIN Group and Komercijalna Banka.
A. CHANGES IN SHAREHOLDERS’ STRUCTURE DURING 2019
The Extraordinary General Meeting of Shareholders of Tirana Bank dated 28.02.2019 approved the transfer of (a) 98,83% of TIRANA BANK share capital from Piraeus Bank S. A to BALFIN Ltd with 88,95% of shares and Komercijalna Banka AD with 9,88% and (b) 1,17% of TIRANA BANK share capital from Mr Ioannis Tzivelis to BALFIN Ltd.
The change in controlling interests of Tirana Bank ownership was approved by all relevant regulatory authorities i.e. the Competition Authority, through Competition Commission Decision no. 580, dated 17.01.2019 “On the acquisition of control through the sale of 98,83% of TIRANA BANK SHA shares from PIRAEUS BANK SA to BALFIN Ltd and KOMERCIJALNA BANKA AD SKOPJE”, Bank of Albania Supervisory Council Decision no. 17, dated 6.2.2019 “On granting preliminary approval for the acquisition of 88.95% of the equity capital of TIRANA BANK S.A, by BALFIN Ltd”, and Hellenic Financial Stability Fund, General Council Decision dated 27.02.2019.
B. CURRENT SHARE STRUCTURE Following the change in shareholders’ structure, the share capital of the Bank is covered as follows:
SHAREHOLDERS NO. PARTICIPATION PARTICIPATION OF SHARES (NË EURO) (%)
BALFIN LTD. 452.365 72.014.164,48 90,12
KOMERCIJALNA 49.610 7.897.654,99 9,88 BANKA AD SKOPJE
TOTAL 501.975 79.911.819,47 100,00
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C. INFORMATION ON BALFIN GROUP AND KOMERCIJALNA BANKA AD SKOPJE (‘KB’).
BALFIN GROUP
BALFIN Group, a limited liability company, with NUIS K72223031K and Headoffice in St: "Papa Gjon Pali II”, ABA Business Center, 11-th Floor, Office no. 1206, Tirana, Albania. BALFIN Ltd. is part and sole partner of most Balfin Group companies.
Balfin Group is one of the largest and most respected private investment enterprises in the field of business in Albania and the region, with more than 20 years of successful activity and continuous expansion. The Group's investment portfolio can be categorized into real estate development activities, retail sales, commercial or industrial property management, services, telecommunications, the banking sector, consumer funding, the mining industry, tourism, agriculture and energy. Balfin Group represents one of the leading actors in Albania and the international markets operating in 9 countries.
This Group has already established a reputation as one of the most active and innovative groups, thanks to the successful investment ideas that have transformed not only the market but also consumer behavior. Currently, with its headquarters in Tirana, Balfin Group is present with its activities across the borders of Albania, in Austria, North Macedonia, Dubai, Kosovo, Bosnia and Herzegovina, Montenegro, the United Kingdom and the Netherlands.
KOMERCIJALNA BANKA AD SKOPJE (‘KB’).
KOMERCIJALNA BANKA AD SKOPJE (‘KB’) is a banking financial institution, established under the law of the Republic of Macedonia as a joint-stock company, with headquarters: Str. Orce Nikolov No.3 1000 Skopje, with registration number 4065573, at the Commercial Register of North Macedonia.
This Bank was established in 1955 as the Komunalna Bank of Skopje and was specialized in approving housing loans and financial operations related to construction. Nowadays, this bank is a universal bank that performs a wide range of banking services such as deposits, approvals of loans to companies and individuals, services related to national and international payments and others such as the sale of foreign currency, etc.
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CORPORATE GOVERNANCE 10 ANNUAL REPORT 2019
TOP MANAGEMENT BODIES
The highest management body of Tirana Bank is the General Assembly of Shareholders, which elects the Board of Directors of the Bank to oversee and make decisions.
The articles of the Bank's Statute determine the functioning of the Bank's bodies and its management. This document clearly expresses the composition of the Board of Directors, as well as the obligations/functions of its members, according to the Law "On Traders and Commercial Companies" no. 9901 dated 14.04.2008 and the Law "On banks in the Republic of Albania" no. 9662 dated 18.12.2006. BOARD OF DIRECTORS
The Board of Directors is comprised of five (5) executive and non-executive members. Executive members are engaged in the day-to-day management of the bank whereas non-executive members are entrusted the promotion of corporate affairs. The total number of executive members does not constitute the majority of the total number of members of the Board of Directors. Most members of the Board of Directors must be independent. The capacity of the members of the Board of Directors, i.e. executive or non-executive is determined by the Board of Directors. If a member is temporarily elected by the Board of Director, until the next General Assembly meeting to replace an independent member who has resigned, died or has lost his/her independence, the new elected temporary member must be independent.
BOARD OF DIRECTORS 1.01.2019-28.02.19
CONSTANTINOS LOIZIDES CHAIRMAN BEDRI COLLAKU VICE CHAIRMAN DRITAN MUSTAFA MEMBER AGKOP MARDIKIAN MEMBER CHRISTOS BOUGIOUKLIS MEMBER
BOARD OF DIRECTORS 29.02.2019-31.12.2019
STEVEN GRUNERUD CHAIRMAN MARTIN ROUSSEL VICE CHAIRMAN ERNST WELTEKE MEMBER PERIKLIS DROUGKAS MEMBER HUBERT DE SAINT JEAN MEMBER
EXECUTIVE COMMITTEE DRITAN MUSTAFA CHIEF EXECUTIVE OFFICER ERALDA TAFAJ GURGA CHIEF OPERATIONS OFFICER MANJOLA CAPO HEAD OF CREDIT DIVISION ELONA GJIPALI HEAD OF RECOVERY AND REO-S DIVISION ELVIRA KAPOLI CHIEF FINANCIAL OFFICER LILA CANAJ CHIEF RETAIL OFFICER GLENDA KURTI HEAD OF CORPORATE DIVISION 11 04.ANNUAL REPORT 2019
A GENERAL OVERVIEW OF THE ECONOMY 12 ANNUAL REPORT 2019
GLOBAL ECONOMY
Global economic growth slowed sharply throughout 2019, as a result of a severe decline in global trade and investment. This slowdown affected both types of economies: the developed economies (especially the Eurozone) and the emerging markets and economies (EMDE). The main indicators of various economic activities fell at the same time, thus approaching the lowest historical levels since the global financial crisis of 2008. In particular, commodity trade shrank during most of 2019. A significant slowdown also occurred in the manufacturing activity while services experienced a more moderate decline.
MAIN ECONOMIES
Economic activity in developed economies slowed more than expected during 2019, mainly due to the manufacturing activity decline and political uncertainties.
The economic growth of the United States has slowed down with the decline in investment and exports. Despite trade negotiations with China, the new tariffs have increased trade costs, while political uncertainty has reduced investments and confidence. Concerns about the performance of the global economy and the performance of the inflation rate, which has long been below the target set by the Federal Reserve, made it possible for the latter to lower the key interest rate by 75 basis points (0.75%), starting from the second half of 2019.
China's economic growth slowed more than expected during 2019, as a result of declining domestic demand and rising trade tensions with the United States. Economic growth was estimated at 6.1% in 2019.
THE MAIN INDICATORS OF VARIOUS ECONOMIC ACTIVITIES FELL AT THE SAME TIME, THUS APPROACHING THE LOWEST HISTORICAL LEVELS SINCE THE GLOBAL FINANCIAL CRISIS OF 2008.
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EUROZONE
The Eurozone's economic activity has deteriorated significantly. The TKURRJA EKONOMIKE economic growth estimate for 2019 is 1.2% from 1.9% in 2018. Some economies were on the verge of recession last year. In particular, the German industrial sector experienced a significant reduction in car production, caused by a decline in demand from the Asian market. Uncertainty about Brexit also weighed on the pace of economic growth. The European Central Bank increased the monetary stimulus by further lowering in the negative territory the one-day deposit rate to -0.5% from -0.4% previously. Part of the monetary stimulus was the resumption of quantitative easing and the continued provision of low-cost liquidity insurance to banks. GLOBAL ECONOMY In the Western Balkans, a slowdown in public investment (in Kosovo), manufacturing (in Serbia) and increased exports (in Albania, Serbia) contributed to a moderate growth rate estimated at 3.2% for 2019. Temporary factors related to weather and energy production faded the % economic activity in Albania, while the increase in the import demand for public investment projects led to a negative contribution of net exports in Montenegro.
-3,0 The global economy is expected to be in recession in 2020 as a result of the COVID-19 pandemic. Referring to the preliminary data of the IMF, the necessary measures taken to protect against this pandemic are expected to affect economic activity. As a result, the global economy USA is projected to shrink sharply by -3% in 2020, much worse than during the 2008-2009 financial crisis. In an initial scenario, (which assumes that the pandemic rate will decrease in the second half of 2020 and the economic activity will begin to normalize) the global economy is projected to grow by 5.8% in 2021. Because the decline in economic % activity was immediate in some special sectors, policymakers will have to take significant fiscal and monetary measures to help affected families and businesses. Internationally, multilateral cooperation is essential to overcome the effects of pandemics, including financial -5,9 assistance to countries facing immediate financial and health shock, and channelling medical aid to countries with weak health-care systems.
Some of the most developed countries during 2020 and 2021 are expected to undergo an economic growth such as United States -5.9% EUROZONE for 2020 and + 4.7% for 2021, the Eurozone, which is expected to be one of the most affected economies, is projected at-7.5% for 2020(wherein particular Germany -7.0%, France -7.2%, Italy -9.1% Spain -8.0%) and +4.7% for 2021 (Germany 5.2%, France 4.5%, Italy 4.8% Spain 4.3%). China is projected % to grow by 1% by 2020, although positive this will be the first time China is going to record a growth rate under 6% since 1990, accompanied by a slowdown in labor productivity growth and unfavorable economic externalities, while in 2021 it is forecasted an economic growth of -7,5 about 8.5%.
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ALBANIAN ECONOMY
According to INSTAT, the Gross Domestic Product growth for 2019 is estimated to be 2.21% compared to 4.06% in 2018. The slowdown in GDP growth has come as a result of a declining domestic demand by 2.4% compared to a year ago and a decline in investments by -1.3% in 2019. On the other hand, the factors influencing GDP growth are consumption at 2.8% in 2019 from 2.4% a year ago and the increase in the budget deficit to 2% from 1.3% last year.
The monetary policy pursued by the Central Bank remained accommodating throughout the year. The annual inflation rate in 2019 was 1.4%, lower compared to 2.0% in 2018 and even lower compared to the official target of 3% of the Central Bank.
In Albania, the COVID-19 crisis follows a severe earthquake at the end of 2019, and both of these shocks are expected to adversely affect the economy, especially its most important sector, which is tourism. Albania's strong economic ties with Italy, which has been hit severely by the virus, exacerbates predictions of a crisis. According to the IMF, given the great difficulties that these two sudden shocks are going to reflect, economic activity is projected to decline sharply in 2020, by -5%. The annual inflation The Government and the Bank of Albania have undertaken a full package of measures to rate in 2019 address the situation of COVID-19: The Bank of Albania reduced the key interest rate to was 1.4% 0.5%, provided unlimited liquidity in the banking system, approved the postponement of payment of loan instalments with 6 months for borrowers economically affected by the pandemic, and eased the operating cost of the electronic payment system.
The Albanian government has approved two Anti-COVID-19 packages in the total amount of ALL 45m (€ 360 million) as financial support for individuals and businesses whose activities were influenced by COVID-19. The packages consist of an increase in government spending, issuing a sovereign guarantee to businesses (as a loan for working capital), and postponing tax payments.
However, economic growth in 2021 is expected to grow exponentially (8%) as a result of the normal return of economic activity after pandemics and plans designed for reconstruction. Continuous structural reforms will be essential for growth in the medium term. The EU's latest decision to open membership talks with Albania (conditioned to meeting the preconditions on further improvements in governance) could also support this growth process.
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BANKING SECTOR
2019 confirmed the sustainability of the Albanian banking system. All structural changes that began in 2018 were successfully accomplished in 2019, leading to the deliberate consolidation of the banking system. The sector activity increased in terms of the volume of assets by 2.32% and the volume of deposits by 2.38%, more than the previous year 2018.
Meanwhile, the quality of the loan portfolio improved by about 3 percentage points during 2019 (Problem Loan Ratio fell to the lowest historical level of 8.36%). This improvement was attributed to the plan of measures taken by most banks to regulate the portfolio of non- performing loans. This plan consisted of loan repayment by customers, restructuring, execution of collateral, or penalty forgiveness. But in some cases, the action plan also included the sale of non-performing portfolios.
The growth in loan to the private sector was estimated at an average of 7.8% during 2019. Positive developments in the lending activity were supported through the facilitation of the loan offer and structural improvements which occurred in the banking sector during 2019. The lending activity in local currency contributed to 4.8 percentage points in annual growth. The main contributor to this growth is the corporate loan and especially the expansion in investment loans. This portfolio grew by an average of 9.2% compared to the previous year, or about 4 percentage points higher than in the third quarter.
Interest rates on deposits and loans in domestic currency have continued to be below their historical minimum, in line with an accommodative monetary policy implemented by the Central Bank.
Total deposits in the banking system increased by an average of 4.3% during 2019. This performance was mainly supported by the rapid expansion of deposits in foreign currency by about 6.5% in annual terms, while deposits in Lek increased by 4.9 %. Concerning the deposit schedule, the latter continues to shift towards two maturities in the banking system, in the form of a demand deposit, as well as a term deposit with a maturity of over two years. At the end of 2019, demand deposits accounted for about 47% of total deposits, while those with a maturity of over two years accounted for about 13.4% of total deposits. jatë se dy vite u llogaritën rreth 13.4% të totalit të depozitave.
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KEY INDICATORS OF TIRANA BANK 18 ANNUAL REPORT 2019
AMOUNTS IN THOUSANDS LEK
TIRANA BANK DECEMBER 2019
ASSETS 75,900,015
NET LOAN 31,179,091
DEPOSITS 63,324,971
EBA CT1 REPORT 17.72%.
BRANCHES 35
EMPLOYEES 450
CUSTOMERS 122,307
CREDIT-DEPOSIT RATIO 52,15 %
COST/INCOME RATIO 71.32 %
TOTAL ASSETS (IN THOUSANDS LEK)
2012
97,485,381 2013
101,379,321 2014
101,708,499 2015
81,461,806 2016
81,364,754 2017
77,843,781 2018
72,964,854 2019
75,900,015 19 ANNUAL REPORT 2019
LOAN (IN THOUSANDS LEK)
2012
50,659,319 2013
38,700,399 2014
39,252,338 2015
28,796,615 2016
25,273,650 2017
24,037,231 2018
20,845,099 2019
31,179,091
EMPLOYEES
2012
466 2013
466 2014
448 2015
422 2016
432 2017
439 2018
430 2019
450
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CUSTOMERS' DEPOSITS (IN THOUSANDS LEK)
2012
72,869,393 2013
78,648,027 2014
78,083,284 2015
63,746,983 2016
63,585,400 2017
60,957,146 2018
57,164,880 2019
63,324,971
EARNINGS AND LOSS BEFORE TAX (IN THOUSANDS LEK)
2012
-197,530 2013
-1,302,482 2014
-757,241 2015
-3,315,665 2016
-520,405 2017
69,379 2018
-1,631,469 2019
400,840
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BRANCH NETWORK
2012
56 2013
56 2014
47 2015
39 2016
39 2017
39 2018
37 2019
35
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A. RETAIL BANKING ACTIVITY
INDIVIDUAL BANKING SERVICES
2019 has been a year of great changes for Tirana Bank, changes which could not go unnoticed in the bank’s activity as a whole and the Individuals’ Business activity in particular.
Tirana Bank, as a strong player in the Albanian banking market, continues successfully for the 23-rd consecutive year to be close to its customers with commitment and dedication, improving in every step the quality of service to strengthen a fruitful and long-term relationship. During this year of dynamic developments, the Bank has devoted maximum attention to the treatment and retention of the existing client, the growth of new customers aiming at absorbing new healthy payrolls, increasing customer satisfaction by offering a full range of products and banking services with fast processes and preferential rates and terms. Crediting in consumer and mortgage products The lending process during 2019 has been very is oriented towards quality and optimization of dynamic for the Retail Credit activity, achieving the existing portfolio. For this reason, we have been present in the media with important an annual target growth of performance promotional campaigns, dedicated to portfolio. mortgage loans, consumer loans, credit cards and overdrafts.
THE MAIN OBJECTIVES OF LENDING TO INDIVIDUALS ARE: • A Retail performing portfolio growth; • Ongoing monitoring and management of the non-performing portfolio, in order to limit and recover them, aiming and working hard to turn this part of the portfolio back into good performance credit; • A Higher penetration in our existing clientele and increased cross-selling to new customers, such as payroll and standard deposits;
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In terms of deposits, the portfolio performance for 2019 has been in line with the bank's strategy, maintaining a high level of liquidity, the achievement of the annual target with an increase in balance by 106% compared to set objectives.
Throughout the year, the individual customers' portfolio who applied for “Working Conditions” were reviewed, based on a detailed analysis of the evolution of the banking sector, its competition trend as well as the performance of our products and services to:
• Increase the customer base to absorb new payroll customers • Increase active customers • Increase cross-selling ratio • Continuously improve the service • Increase customer satisfaction • Increase bank profits
The Bank has continued to develop strategies to increase cross-selling to customers. Maximum attention has been paid to increasing customer satisfaction by offering a full range of products and banking services with fast processes and preferential rates and terms.
In a highly competitive banking market where technological advances are changing the DNA of modern banking, to stay relevant to the customer, Tirana Bank has made its priority the building of a new approach named “Customer- Centric approach" by taking care of the 360 Degree Customer Experience in the bank.
Through new Customer Relationship Management, Customer Experience and SFE units which are today part of the new Customer and Development Experience department,
it is aimed to not only improve customer knowledge through Moments of Truth initiatives, the evolution of its service model, cross-selling and upselling growth, but also to increase the quality and efficiency of our sales force with a direct impact on customer’s experience. Various promotional offers have been presented throughout the year aiming to promote and encourage services/channels payment, package sales by offering various products and service combinations that have allowed customers to choose the right offer for their needs or consumer and mortgage loan campaigns.
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The cards have had a stable performance while maintaining their position in the market.
The main objectives in line with the Retail Division strategy were:
1. replacement of the debit card with VISA Contactless Debit Card 2. activating the portfolio and promoting the use of cards by encouraging customers to make as many card transactions as possible in their daily purchases, especially within the country. 3. penetration into standard and payroll customers. 4. careful management of the non-performing portfolio of Credit cards
Tirana Bank continues to be in a competitive advantage in the market with the issuance of the "Instant" Debit Card as the only bank which offers a card issuance on the spot in all its branches.
Also, during 2018 in cooperation with the branch network, the Bank has continued its initiative to replace its debit card with the VISA Contactless Debit Card, which is equipped with additional security elements, offering greater convenience to the customers to make fast payments at every point of sale.
WINBANK DIGITAL PLATFORM
Tirana Bank continues to stay true to its promise to continually enrich its online services, offering to its customers' new solutions that make the banking system more convenient, while allowing them to save time and money in a safe environment.
The Winbank electronic platform offers the possibility of performing online banking services, viewing your accounts 24 hours a day and 7 days a week
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B. SMALL AND MEDIUM ENTERPRISES (SME)
During this year, the main goal of the Bank on SME has been to increase the loan portfolio as well as strengthen and maintain relationships with existing customers. Given that 2019 is the first full-year with new shareholders, we can proudly say that it has been the most successful year in the last 5 years in terms of new disbursements and portfolio maintenance.
Throughout the year, we were professional to our customers responding to their requests, and as a result, we did not have any customer attrition to other banks. The total of new disbursements for 2019 reached an amount of 15.5 million Euros compared to 2018 (6 million Euro). We can say that they have almost tripled.
The SME Department has been in constant contact with new businesses, having always up-to-date information about the market and its requirements, have significantly increased the number of new loans and operational customers and reached its targets.
This careful focus on managing SME customers, and increasing the diversity of customers expansion which resulted in the cross-selling of bank products. Adding and opening new business accounts, increasing payroll customer numbers has also been one of our priorities in addition to lending.
Throughout the year, we have focused on new financings in specific, strategic sectors, and with potential to the economy such as Tourism, Production, Trade, agritourism, etc.…SME’s continue to be focused on key sectors of the economy that have a significant impact on employment and economic growth of the country. Creating and preserving new long-term relationships with customers is and will remain our daily focus.
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C. CORPORATE BANKING DIVISION
2019 marked the revival of Tirana Bank activity in many directions, and consequently of the Corporate Division. Thanks to the new lending strategies and policies, proposed by the bank's new shareholder structure, and well-adapted by its executives, the bank has increased its credit portfolio in its entirety. While the Corporate Division has doubled it by showing care in customer selection to maintain the quality of the loan portfolio and keeping the non-performing loan portfolio pretty nearly zero.
At the end of 2018, the corporate loan portfolio closed with a balance of 7,471 Million Lekë (Exch.Rate 123.42). While at the end of 2019, the balance of the corporate loan portfolio was 16,104 Million Lekë (Exch.Rate 121.77) with an increase of 116%. Likewise, the volume of new loans, disbursed during this year, marked the highest value compared to recent years (11,568 Million Lekë).
It is worth mentioning the fact that based on the many years of experience of Tirana Bank, and its existing and new staff, the Corporate Division continued to serve the new and existing customers with the purpose to establish a long-term partnership and relationship. Such efforts were reflected in the borrowers’ database growth, which during 2019 increased by 51% compared to the previous year. For the Corporate division, it remains a goal in itself and a priority to provide a wide range of banking services and products, preferably personalized for corporate clients, in order to meet the business needs and to provide conventional financial and operational solutions to them.
The cooperation of corporate advisors and product specialists enables Tirana Bank to act as a reliable partner to its customers.
In addition to competitive and attractive funding conditions, our goal is to provide full support to our customers in all segments and cycles of their business by constantly improving the quality of service and our new product offers, functioning based on the required market conditions.
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D. TREASURY DIVISION
One of the main functions of the Directorate of Treasury and Financial Markets is to manage the excess liquidity by ensuring that all business lines of the bank have access to the liquidity that may be needed for their business activity. In this way, this directorate ensures that the Bank remains financially secure, stable and able to operate efficiently. Among other functions, we can mention profit maximization within an acceptable level of risk, risk management that comes from the movement of interest rates and exchange rates.
The Directorate of Treasury and Financial Markets continuously monitors and analyzes the world's major economies, macroeconomic trends, indexes and indicators of the monetary policy of the Bank of Albania and evaluates the impacts that the latest developments may have in our economy and especially in the banking sector.
2019 is characterized by a low level of interest-based on the accommodative monetary policy pursued by the Central Bank. The Directorate of Treasury and Financial Markets has actively participated in the management of bank deposit balances, aiming, in addition to stability, to increase funds at a relatively low cost.
The Directorate of Treasury and Financial Markets activities focus on providing financial products tailored to customer requirements, as well as consulting services related to the products offered. Mediation and trading in securities markets have continued normally during 2019, adding value to the Bank's activities and further improving customer relations with the Bank. Treasury activities have had a significant positive impact on the Bank's profit for 2019. As of December 31, 2019, treasury- managed assets accounted for about 54% of the Bank's total assets.
The Directorate of Treasury and Financial Markets is an important player in the foreign exchange market and financial markets. The volume of foreign exchange transactions carried out during 2019 has increased by approximately 30% compared to a year ago, in line with the development of the Bank's business. Revenues from foreign exchange transactions rose above expectations, dictated by careful management of the Bank's foreign exchange position.
All treasury activities are carried out under the Bank's policies and regulatory requirements.
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E. INFORMATION TECHNOLOGY
During 2019, the IT Department has worked in several directions and areas, but the main focus was to prepare the local infrastructure of Tirana Bank to relocate all services and solutions which were supported by Piraeus Bank, the former shareholder of Tirana Bank.
At the same time, it focused on new developments related to security and other innovative solutions.
IT SYSTEM DEVELOPMENT & IMPROVEMENT
Optimization, as well as reliability growth in IT infrastructure solutions, procedures and systems, which are required by the constant demands of business, economy and technology with the main goal to move forward by responding quickly to Digital Banking Business development; increasing security, functionality, integrated management from end-user and ultimately increasing the Bank's competition, were the focus of the 2019 information systems development and improvement. End-users security increase:
During 2019, the new "Cisco End Point, AMP" security solution was implemented, which is going to improve the protection of users’ daily work, especially from malware (mainly known as Ransomware
A NEW “CALL CENTER” SOLUTION Being part of Tirana Bank's detachment, it has been more appropriate to replace the existing Call Center solution with a new Cisco Unified Contact Center Express solution, which will provide a better service for integration with the Bank’s new solutions as well as integrate with social services and the official website of the Bank’s internet. This way we will provide a better service to the Bank's customers.
SYSTEMS IMPROVEMENTS AND CHANGES IMPLEMENTED IN BANKING SYSTEMS TO MEET REGULATORY REQUIREMENTS According to the new regulatory guidelines, the bank has made developments and changes in the systems and reports for various institutions such as Money Laundering, Credit Registry and Deposit Insurance System.
NEW SERVICES INTRODUCED TO CUSTOMERS. Real-time services were introduced to customers to provide better and faster services. This is an ongoing process, where new customer services are constantly being added.
INFRASTRUCTURE IMPROVEMENT In line with the goal on the one hand of continuous improvement of the Bank's Technological Infrastructures availability and efficiency and on the other hand of effective and safe management of their functioning, a series of interventions have been made, which will enable a full separation from Piraeus Bank without interrupting for a single moment the daily work of the bank.
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F. RISK MANAGEMENT
The Board of Directors and the Senior Management recognize that the Bank is exposed to different types of risks deriving from its operations. Under the current economic, financial and market environment, the Bank focuses on the effectiveness of its risk management practices aiming to mitigate the risks while maximizing return for the shareholders.
Efficient risk management is considered vital for the Bank in order to achieve its strategic objectives and to ensure quality returns to its shareholders, on an on-going basis.
The mission of the Risk Management Department function is to:
“Create added value for shareholders by utilizing risk management best practices towards the optimization of the Bank’s risk-return profile, while ensuring the compliance with regulatory requirements”.
The Bank places particular emphasis on the effective Through the Risk & Capital Strategy, the principles of an monitoring and management of risks, intending to integrated risk management framework are aimed to maintain stability, financial soundness and continuity of achieve the Bank’s strategic and business objectives as its operations. determined by the BoD, without exceeding the risk-taking ability. The BoD is responsible for developing and supervising the The risk management framework is constantly evaluated implementation of the risk management framework. The and evolving taking into account the current economic risk management framework is as well ensured through and market dynamics, the regulatory requirements and several specialized committees. Risk Management international best practices. Its effectiveness is assessed Department is administratively independent of the other through: units of the Bank. The Bank has established detailed processes and adequate risk control mechanisms Its effectiveness is assessed through: for identifying/managing/monitoring/reporting risks. • Parallel assessment of the bank’s results/profile vs This ensures independence between risk-taking, risk the risk appetite and business objectives; management and control functions. • Monitoring of KRIs specified per each type of risk The existing organizational structure ensures segregation of duties and aims to prevent instances that could lead to a conflict of interest.
The Bank must have sufficient liquidity and capital resources, to maintain stable and recurring profitability. It aims to maintain an independent risk management culture with strong involvement of top management. The Bank aims to maintain a culture of continuous improvement of processes, policies, models and tools for measuring and monitoring risk exposures.
30 ANNUAL REPORT 2019
General Risk Appetite Statements:
In the medium term, the Bank gives priority to the maintenance of a solid capital base, the diversification of financing sources, the safeguarding of the quality of assets and loan portfolio diversification, the cost-effective management of operating expenses and meet the Business Plan commitments.
• The Bank seeks to combine satisfactory profitability preserving the Bank’s credit standards and ensuring that risk exposures are commensurate with the risk appetite framework approved by the Board. Also, continues in its efforts to adopt an appropriate risk-adjusted pricing method for its business activities to ensure sustainable returns on lending activities.
• The Bank aims at further enhancing risk management practices to ensure that it runs under a clear and rigorous risk management system, with optimal IT infrastructure, so that it ensures a prominent role of risk in strategic planning. The Bank aims at maintaining a culture of continuous improvement of risk management processes, policies, models and tools for identifying, measuring and monitoring risk exposures in line with regulations and international best practices.
• The Board of Directors of Tirana Bank recognizes all material risks (undertaken) and has the responsibility for the approval of the risk management framework. The Bank aims at maintaining risk management culture through strong involvement and training of top management on ensuring that the Board and the management bodies have at their disposal all the necessary risk information to develop business plans and make sound business decisions.
• The Bank has in place appropriate processes for approving the launch of new products or changes to processes in order to assess the potential impact on Bank’s risk levels.
• The Bank aims at maintaining a communication policy and culture that strengthens the confidence of customers, shareholders, investors, employees and partners.
• The Bank aims at ensuring the availability and adequacy of resources necessary for the effective implementation of the risk appetite framework.
• The Bank will seek all reasonable means to guarantee the highest quality of available data and the adoption of best practices.
• The Bank aims at maintaining a remuneration policy that is not conducive to excessive risk-taking (than desired).
31 ANNUAL REPORT 2019
RISK MANAGEMENT GOVERNANCE
Risk Management Department consists of the following The first governance dimension is composed of 4 lines risk lines/units: of defense as described below:
• Credit risk analysis and reporting, provisioning and • The first line of defense is comprised of the units which RWA calculation Unit are closest to the origin of risk. • Market, liquidity and operational risk unit • The second line of defense is responsible for ex- • Information security unit ante risk management since it is engaged in risk • Risk Modeling function management activities that take place before risk- taking (credit scoring, new product risk assessment). • The third line of defense is responsible both for the ex- The department is subject to the independent audit of ante monitoring (e.g. participation in the evaluation of the Internal Audit review in terms of the adequacy and products) as well as the ex-post control and monitoring effectiveness of the applied risk management processes. of risks. • The fourth line of defense is responsible for the The purpose of the Risk Management Governance independent review of the overall risk management Framework is to promote effective and prudent framework of the Bank. The fourth line checks the management of all risks, ensuring appropriate allocation adequacy and effectiveness of risk management and of responsibilities and accountability based on the risk control mechanisms in the first three lines of defense. origination aiming at aligning the risk-taking process with the Bank’s risk appetite, hence the Bank’s viability. A robust communication of risk information is essential The second governance dimension constitutes of three across the Bank with a focus on maintaining risk levels: strategy, tactic, and operation. awareness at all levels and in particular the Board of Directors and Senior Management levels. • Strategy level – Includes the risk management functions that are executed at a Board of Directors For the implementation of the adopted principles, the level. risk management governance framework is organized in • Tactics level – Includes the risk management functions two main dimensions. that are executed at a high level of authority both by individuals as well as specialized committees. The first dimension classifies the risk management • Operations level – Includes the risk management operations in four lines of defense, while the second functions that are executed in various units of the one addresses the hierarchy levels in which the Bank. abovementioned activities take place.
During 2019, Tirana Bank has continued paying particular attention to the risks to which the banking system is exposed. In this regard, it has further strengthened the organizational structure and the control functions, aiming at enhancing its risk management practices, without harming its business operations. The main focus continued to be the improvement of the quality of assets, especially the recoverability of the non-performing portfolio, increase of its performing loans portfolio, keeping a sustainable profit throughout the year, as well as maintaining a good liquidity position, adequate capital, optimize its operations and further enhance the internal control system.
32 ANNUAL REPORT 2019
CREDIT RISK
Credit risk is the most significant source of risk for the Bank; therefore, its effective monitoring and management are one of the Management’s priorities.
The Bank:
• seeks to control credit risk through stringent credit criteria which necessarily include the repayment option (first way out), the provision of collaterals (second way out) and the evaluation of the customer. The process is supported by the use of internal rating systems with discriminating ability and systems for credit risk measurement and calculation of capital requirements. • is focusing on deleveraging in sectors with a poor outlook and rebalancing its portfolio towards key sectors with better growth prospects. • aims at curbing new arrears, through credit risk identification, continuous monitoring and countervailing measures. • seeks to effectively manage its current NPL levels through the Recovery Banking Division by reducing the rate of NPL formation and ultimately lowering the absolute level of NPLs. • operates within the credit approving limits defined by the Board of Directors which are regularly updated and cover all Bank activities in order to mitigate the credit risk. All lending decisions are made in compliance with the Credit Policies & Practice Manual in place. • aims at the direct and centralized monitoring of all credit risk exposures at the debtor portfolio level as well as connected borrowers’ level.
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LIQUIDITY RISK
Liquidity risk is the risk of not being able to fulfil financial obligations when they come due. The Bank recognizes liquidity risk as one of the major risk types that may have a significant impact on the capacity of the Bank to fund its commercial operations and to meet its financial obligations. The management of liquidity risk is a key objective of the Bank and evolves a broad set of activities spanning from the close monitoring of its liquidity position to the management of its funding sources and the uses of funds, in a way that does not compromise the ability of the Bank to meet its obligations.
The Bank has adopted best practices and regulatory/supervisory guidelines in depicting the Bank’s liquidity position and the potential effects of adverse changes arising from the maturity (and non-renewal) of its funding sources as well as a potential reduction in the value of its liquid assets. It exercises close monitoring of the cost of liquidity and it has ensured compliance with the regulatory liquidity risk framework while maintaining and regularly reviewing methodologies, policies, procedures and systems to effectively manage liquidity risk.
The bank has maintained under careful monitoring its liquidity levels ensuring they remain above the regulatory minimums.
Deposits from customers are considered well diversified with 85% of deposits from retail customers while deposit increase on an annual basis is assessed at ~11%. During the last years, there has been a clear trend of shifting from time to savings, noticed as well in the market. Deposits in Eur currency maintain by the end of the year a share of 44% over total deposits showing as well a higher growth rate during the year vs deposits in Lek. Key liquidity indicators remain above the min regulatory ones and show for the abundant liquidity.
DECEMBER 2019 DECEMBER 2018
LOANS / DEPOSITS 52% 43%
NET LOANS / DEPOSITS 47% 33%
LIQUID ASSETS / SHORT TERM LIABILITIES 45% 53% – TOTAL
LIQUID ASSETS / SHORT TERM LIABILITIES 31% 49% – TOTAL FCY
LIQUID ASSETS / SHORT TERM LIABILITIES 58 % 57% – TOTAL LCY
The bank:
• aims at maintaining a diversified funding base while closely monitoring the liquidity levels in order to ensure that the bank remains self-funded. The Bank aims at maintaining liquidity indicators within the regulatory limits. • aims at continually running stress tests regularly, as part of the routine risk management processes and conduct tailored stress tests on an ad hoc basis, in response to market developments. • aims at maintaining internal liquidity indicators within internal Bank’s limits. • aims at an effective Asset – Liability Management in order to ensure the availability of highly liquid assets.
34 ANNUAL REPORT 2019
MARKET RISK
Market risk is defined as the risk of incurring losses due to adverse changes in the level or the volatility of interest rates, currency exchange rates, equity prices and commodity prices.
The Bank establishes and maintains adequate measurement methods in order to monitor and control market risk, including interest rate risk in the banking book.
Tirana Bank applies an interest rate risk management policy and adopts risk assessment techniques based on the Interest Rate Gap Analysis.
It assesses interest rate risk through “Earnings-at-Risk” measure, which expresses the negative impact on projected annual interest rate over a specified period caused by a change in interest rates across all maturities and currencies.
Also, it assesses interest rate risk through the expected change in the Net Present Value of Assets and Liabilities caused by a change in interest rates by 1 basis points.
DECEMBER 2019 DECEMBER 2018
NET FX OPEN POSITION / REGULATORY 0,6% 1,57% CAPITAL
EXPOSURE TO IRR IN THE BANKING BOOK / 4,42% 2,0% REGULATORY CAPITAL
BALANCE SHEET IRR EXPOSURE (PV01) 46 26 (‘000 EUR)
EARNING AT RISK 159 884 (‘000 EURO)
The bank:
• aims to engage at a low-level market risk exposure through its trading activities and to the centralized and direct management of market risks arising from customer activities. • aims at maintaining the exposures within the market risk limits established by the Board of Directors.
35 ANNUAL REPORT 2019
OPERATIONAL RISK
Operational risk has received special attention, through reviewing of the Bank’s operations, aiming at identifying possible improvements for purpose of reducing operational losses and other negative impacts (being those reputational, regulatory, etc).
Careful monitoring of the operational losses, key risk indicators and annual performance of the risk control self-assessment exercise as well as the assessment of extreme scenarios, remained the main sources of operational risk management framework.
The bank:
• wishes to avoid operational risk losses caused by the inadequacy and ineffectiveness of the Internal Control System or to the non-compliance of all involved parties with the principles and objectives of the control environment. • wishes to completely avoid losses caused by internal fraud and losses related to all forms of corruption including among others fraud, bribery, market abuse or manipulation and use of financial institutions for money laundering or terrorism financing purposes. In this context, the Bank adopts adequate measures and policies to prevent such practices and to protect its reputation concerning ethical conduct, financial integrity and staff reliability. Continuous compliance of human resources with the code of ethics and the code of banking conduct as well as the principles of corporate governance and the internal operation regulation of the Bank is required in order to avoid such losses. • wishes to completely avoid incidents with a significant negative impact on its reputation and corporate image. These incidents could involve loss of life, physical integrity or health of customers and employees, non-compliance with the regulatory and supervisory framework, inconsistency with the principles of Corporate & Social Responsibility (society, culture, and environment) or business continuity and/or information systems operations. • wishes to avoid incidents and losses from Cyber Crime by aiming at the constant improvement, expansion and use of advanced mechanisms and infrastructure for the monitoring, prevention and mitigation of the aforementioned risk.
CAPITAL ADEQUACY
The Bank recognizes the importance of maintaining a strong capital base against risks undertaken. It has retained a sound capital base, capable to support the Bank’s business/ strategic plan/s and safeguard the ability to continue its operations smoothly.
Capital requirements are calculated against all material types of risks that the Bank undertakes, in full compliance with all applicable regulatory and supervisory requirements. Capital adequacy ratio has exceeded the minimum regulatory limit, closing the year 2019 at the level of 17.72% vs the minimum regulatory level of 15%, ensuring, therefore, the confidence of depositors and its sufficient armour against the challenges of the current economic conditions.
36 ANNUAL REPORT 2019
DECEMBER 2019 DECEMBER 2018
CAPITAL ADEQUACY 17,72% 29,6% RATIO
REGULATORY CAPITAL (IN MIO €) 60,8 75
RWA (IN MIO €) 343 253
OF WHICH:
309 217 CREDIT RISK
0 0 MARKET RISK
35 36 OPERATIONAL RISK
The bank:
• aims to maintain a strong capital base that supports its business plans and safeguards the ability to continue its operations smoothly. • wishes to maintain capital adequacy ratios, exceeding the minimum regulatory limits, in order to ensure the confidence of depositors and its sufficient armor against the challenges of the current economic conditions. • aims to maintain adequate infrastructure, policies, processes and methodologies to support and meet the supervisory and regulatory compliance needs regarding capital management.
Capital management and planning, as a function, ensure the Bank’s sustainability under normal and stressed conditions of the economic and financial environment, taking into account the risks that the Bank is exposed to.
Capital targets are set to ensure sufficient stability to protect depositors, as well as to support on- going business, by keeping a comfort buffer over regulatory requirements.
Capital management is also an integral part of the Internal Capital Adequacy Assessment Process which aims to assess capital requirements in alignment with the Bank’s risk profile and strategy. In this context, and in order to assess capital adequacy, the Bank regularly performs projections for both capital requirements and available capital, taking into account the macroeconomic and operating environment, the Bank's current business profile as well as the changes in the regulatory framework that will affect capital adequacy over the next periods. The forward-looking assessment of the Bank's capital adequacy is aligned on the projections and respective figures of the Bank’s Business Plan incorporating most recently available information.
Should changes in the environment necessitate a Budget or Business Plan revision, key components of the ICAAP are revised as well to ensure an accurate and current capital plan.
37 ANNUAL REPORT 2019
Capital management and planning within ICAAP is carried out on an annual basis and regards the assessment of the Bank’s capital adequacy, considering both Pillar I and ICAAP capital requirements and respective projections with a 3-year horizon. It consists of two phases, the Capital Assessment and the Capital Planning; the former concerns the definition of the scope of the exercise regarding entities and risks identified through Bank’s risk identification process, which has been further enhanced in the last years, as well as the estimation of the Bank’s capital position at year-end, which is the starting point for the forward-looking assessment of the latter. During the Capital Planning, scenarios are defined through a scenario generation process.
The aforementioned process is overseen by top management Committees. Key results and conclusions of the capital assessment and planning activities as well as the key underlying assumptions and approaches are submitted for approval to the Executive Committee of the Bank and are finally presented to the Board of Directors for final approval.
INFORMATION SECURITY
A risk management framework, aiming at mitigation of ICT and cyber risks, has been developed and documented by the Information Security Unit. A Cyber Security Awareness Program, addressed to all personnel, aiming at enhancing the risk culture in terms of Cyber Security and IT-related risks. The Bank has established a framework of policies and procedures for mitigating the risk arising from the use of risk assessment models, through review, challenge, training and validation processes. Information security has continued being on the focus to increase such security. Continuous awareness of the topic is considered of ultimate importance.
The bank:
• wishes to avoid incidents and losses from cyber-attacks on systems and networks crime by aiming at the constant improvement, expansion and use of advanced mechanisms, infrastructure and technical controls for monitoring, prevention and mitigation of the aforementioned risk. • wishes to avoid incidents leading to unavailability of systems that support its critical business functions and aims to minimize the time needed for recovery of critical operations as defined by the RTOs (Recovery Time Objectives) identified and agreed. • wishes to avoid IT system-related incidents which are generated by poor change management practices. The Bank is opened to new technologies to improve its efficiency and productivity, recognizing the potential for change management challenges and aims at the harmonization of digital innovation with information security.
38 ANNUAL REPORT 2019
G. COMPLIANCE DEPARTMENT
Compliance’s role is to respect all banking and financial regulations: legal and regulatory provisions, professional and ethical standards, as well as protect client s’ interests and Tirana Bank’s reputation.
All these initiatives help reduce reputational risk monitors compliance of Bank’s The role of Tirana Bank’s Compliance internal acts with the regulations, in particular those relating to the protection function is to define and implement rules of client’s interests, adequate informing to prevent non-compliance risk, including and notification of clients, protection of personal data and banking secrecy, the risks associated with money laundering identification and assessment of clients, and the financing of terrorism, the violation customer complaints management, sales and marketing relations, risk of conflict of embargoes, conflicts of interest and the of interest, use of internal whistleblowing personal data protection of customers and rights and other regulatory areas per the employees. adopted compliance program.
The Compliance Department ensures that effective systems are in place to achieve compliance. To this end, the compliance function:
• advises operating staff by giving its opinion on transactions when such advice is requested; • is part of the product marketing process, from the design phase to the distribution phase, and issues compliance notices; • together with Legal and Human Resources ensures that conflicts of interest are identified following the internal policy on conflict of interest as well as the local legal framework; • ensures that employees are regularly trained in compliance and AML/CFT issues; • ensures that customer protection is effective at every stage in the relationship between the bank and its customers, from the provision of pre-contractual information, the subsequent giving of advice, and during the life and final termination of the contract. • monitors compliance of Bank’s internal acts with the regulations, in particular those relating to the protection of client’s interests, adequate informing and notification of clients, protection of personal data and banking secrecy, identification and assessment of clients, customer complaints management, sales and marketing relations, risk of conflict of interest, use of internal whistleblowing rights and other regulatory areas under the adopted compliance program.
39 ANNUAL REPORT 2019
To achieve compliance within Tirana Bank, the Compliance department uses the following tools and resources:
• the inclusion of compliance standards in the bank’s procedures; • periodic reporting on risk and compliance activities, enabling the implementation of compliance systems within the Bank; • AML software tools, which include customer profiling and account monitoring tools to detect unusual or suspicious transactions and tools to monitor international fund transfers for enforcement of asset freezes and embargoes;
Tirana Bank has also enhanced its system to improve the quality of the know-your-customer (KYC) data that it collects, both at the beginning of and throughout the business relationship. Customer identification checks are the first filter at the beginning of any relationship.
This relies on the knowledge of our customers and beneficial owners.
We carry out suitable and risk-appropriate oversight throughout the relationship.
Bank’s employees are assisted in this by AML software for profiling customers and detecting unusual transactions.
The compliance function conducts control in a manner that ensures identification and management of existing and potential compliance risks, which are duly reported to the competent authorities of the Bank. It strives to promote the highest compliance standards and raises employees’ awareness on the need to operate following the regulations, internal acts and good business practices Based on our annual risk assessment and regulatory changes, we are continually strengthening our overall compliance and AML/CFT system.
40 ANNUAL REPORT 2019
41 06.ANNUAL REPORT 2019
SOCIAL CORPORATE RESPONSIBILITY 42 ANNUAL REPORT 2019
A. SOCIAL ACTIVITIES
HOUSE DONATION Tirana Bank in cooperation with "Fundjavë Ndryshe" foundation, participated in this donation even with the purchase of furniture and materials needed for the new house donated by the bank to a family in need.
INTERNATIONAL FESTIVAL OF “KADRI ROSHI” PROFESSIONAL THEATRE This sponsorship edition aimed at promoting all artists who contribute to the art on stage field.
LEZHA TALENT 2019 Tirana Bank sponsored "Lezha Talent 2019" project where children aged 07-15 years old competed against their peers in the art of dancing, acting and singing. The final event for this competition took place on June 1, 2019, in the premises of the Palace of Culture of Lezha.
BLOOD DONATION For several years now, Tirana Bank staff has established a blood donation practice, considering it vital to the lives of hundreds of people. Just like in previous years, blood donation was carried out not only in the premises of the Bank’s Head office but in all branches where Tirana Bank operates. Through continuous communication, Tirana Bank aims to raise awareness by inviting family members, customers and partners to participate in this act of humanity.
UNDP PROJECT Tirana Bank in cooperation with UNDP and the "Ministry of Tourism and Environment of Albania" sponsored and supported two "sensitive issues" in the field of environment, for which the general public is more sensitive and reactive. This cooperation was achieved in the context of climate change, promoting plastic recycling.
CONSTRUCTING A CHILDREN’S PLAYGROUND Tirana Bank in cooperation with the Municipality of Tirana, considering the creation of outdoor play space for children as essential, sponsored the creation of a playground in Sauk area.
TIRANA MARATHON The Tirana Marathon, an event that is already annual and of ever-increasing proportions in terms of mass participation, from professionals to ordinary citizens. Tirana Bank was the only bank that was present as a sponsor but also as a direct participant with many of its employees competing in this marathon. Tirana Bank's message in the marathon was: "For Sport, for Life!".
B. EDUCATION:
Tirana Bank supports the organization of the European Youth Parliament For the third year in a row, the European Youth Parliament was organized in Albania. This year, Tirana Bank has been the main supporter for its achievement, in support of young people who have come from all high schools in Albania to participate in this organization.
The European Youth Parliament was held on March 25, 2019. Key participants in this activity were the First Deputy Governor of the Bank of Albania, Mrs. Luljeta Minxhozi, Deputy Minister of Education, Sports and Youth, Mrs. Lorena Haxhiu, and the President of the Albanian Association of Banks, Mr. Silvio Pedrazzi.
This event was organized by young people for young people, through the occasional invitation of specialists of various fields to help the debate and information, who were required for the topics defined in the conference.
The topics vary according to the main current controversies of the European Union, such as Security and Defense, Economy, State Development, Human Rights, International Relations and so on.
Through its support to this activity, Tirana Bank wants to encourage young people to become involved in the country’s social and political life, totally believing that their commitment will help build the future and prosperity of our society.
43 07.ANNUAL REPORT 2019
HUMAN RESOURCES 44 ANNUAL REPORT 2019
HUMAN RESOURCES MANAGEMENT
2019 has been a very challenging year for Tirana Bank as we became part of Balfin Group, one of the most important and powerful Groups in Albania and the Balkan Region. During 2019 the bank changed its strategy and we focused more on retail business by creating and establishing new products and features, which best fit to the new model of banking to offer excellent banking service to the clients.
Human capital for Tirana Bank is the key factor in achieving the bank’s strategic goals and objectives.
Our philosophy is high responsibility in what we do, collaboration and respect between colleagues, exchange of experiences and professional communication with our clients.
High integrity, team spirit, professional skills, trust, devotion and acceptance of diversity are the main pillars that drive the company to undisputed success.
Below, you will find some highlights, regarding workforce:
- Number of employees at the end of 2019: 450 - Distribution by Gender Hierarchy
MALE FEMALE TOTAL
IN PERCENTAGE 25% 75%
ACTIVE WORKFORCE 114 336 450
- The average age of the Bank’s employees is 36 years. - The average length of service 7.7 years.
45 ANNUAL REPORT 2019
RECRUITMENT
Recruitment is a dynamic process and crucial for every organization - finding the right people for the right roles at the right time and who fully fit with the philosophy and values of the bank. Recruitment process ensures the relevant skills and abilities of the workforce for an organization’s current and future needs.
Our recruitment process is based on competencies and ability tests, simulations exercises and a structured interview by a highly qualified interview panel.
New hires vacancy process was very dynamic resulting in 120 new hires, out of which 40 were filled from our internal candidates, as a result of their good performance and personal development, as our main potential for covering our job vacancies. In this regard, we promote our internal staff by establishing career development to reward our staff.
FILLED THROUGH INTERNAL RECRUITMENT
FILLED THROUGH EXTERNALL RECRUITMENT
0 20 40 60 80 100
INTERNSHIPS
2019 has been a revolutionary year for our internship programs, as we have participated in Universities’ career fairs where a considerable number of students were offered the opportunity to experience and learn a diverse knowledge on banking sector from our skilled employees. Approximately 40 students have participated in internship programs in the branches and Head Office premises, while 5 interns are currently employed by the Bank.
EMPLOYEES’ TRAINING & DEVELOPMENT
Training and development are one of the most important pillars of Human Resources. It refers to educational activities within the Bank, which is created to enhance the knowledge and skills of employees while providing information and instruction on how to better perform specific tasks.
Training may be viewed as related to immediate changes in organizational effectiveness via organized instruction, while development is related to the progress of long-term organizational and employee goals.
Training & development programs are a key investment for our people and for our business.
46 ANNUAL REPORT 2019
REGARDING 2019 TRAINING AND DEVELOPMENT HAS BEEN FOCUSED MAINLY ON:
TRAINING MAN-HOURS FOR 2019: 6449 HOURS
TALENT IDENTIFICATION PROCESS
In the framework of the Bank’s Business Strategy of continuous and sustainable growth, Talent Identification and Development (TID) is set as a strategic HR objective that aims to insure long- term development and retention of capacity management within the Bank. There are many reasons why companies need to think about Talent Identification. The most important reason, of course, is that we rely on staff to carry out our mission, provide services and meet Bank's goals. We need to think about what would happen to those services or our ability to fulfil our mission if a key staff member would not have a backup and/or develop those skills to other team members.
This process has been adopted by the Group and was implemented successfully during 2019.
HUMAN RESOURCES COMMUNICATION PHILOSOPHY
Tirana Bank recognizes the vital importance of internal communication, as it promotes open, two- way communication between Management and employees. It creates a sense of transparency, dignity and collaboration, it reduces any possible tensions and achieves greater and more effective dissemination of knowledge and information – useful for developing new products and services to all levels.
A SAFE WORK ENVIRONMENT
Tirana Bank complies with the legislative regulations regarding employees’ health and safety. Fully respecting its legal obligations, and showing particular sensitivity to employees’ physical health, the Bank takes care to provide a modern, healthy and safe workplace. Tirana Bank places special emphases to the wellbeing of its employees. In addition to legal requirement, the Bank provides a Private Health Insurance Plan for all its employees, fully covered by the bank.
In addition, Tirana Bank is offering on yearly bases trainings to its employees, related to fire protection and safety, as well as first aid, which equip the staff with skills such as: rescue operations, first aid provision, turning off fire, guide evacuation through certain actions etc.
47 ANNUAL REPORT 2019
REWARDING HUMAN RESOURCES
Tirana Bank offers to its employees a competitive remuneration package, in order to attract highly engaged employees to its team and to retain existing ones.
Remuneration policy is in place, as an integral part of the Bank’s corporate governance, aimed at deterring from excessive risk-taking and at continually strengthening the Bank’s values and long-term interests. The remuneration policy, following the Bank’s business strategy, supports performance-driven culture which aligns the bank’s objectives with those of interested parties, employees, management and shareholders. The remuneration-defining procedures are clear, recorded and with internal transparency.
The Remuneration Policy is based on the following principles:
• Maximization of performance • Talent attraction and retention • Alignment of remuneration and rewards with profitability, risk, capital adequacy and sustainable growth. • Compliance with the regulatory framework • Internal transparency • Deterring from excessive risk-taking
FORMS AND ELEMENTS OF REMUNERATION FOR THE BOARD OF DIRECTORS AND EXECUTIVE DIRECTORS
The Board of Directors is composed of the Chairman and four members. Three members of the Board of Directors are independent. For the duty performed, the Independent Members of the Board of Directors are paid a fixed annual remuneration and a fixed reward for each participation in the Assembly’s meetings. The aggregated annual amount of payments for the members of the Board of Directors is shown in the next table: 48 ANNUAL REPORT 2019
BOARD OF DIRECTORS
TOTAL AGGREGATE PAYMENT AND REWARDS IMMEDIATE/FOR THE CURRENT PERIOD FOR THE CURRENT FISCAL YEAR (IN LEK)
FIX REWARD ELEMENTS 5,043,410
CASH/BONUS NOT APPLIED
SHARES NOT APPLIED
OTHERS NOT APPLIED
VARIABLE REWARD ELEMENTS
CASH/BONUS NOT APPLIED
SHARES NOT APPLIED
OTHERS NOT APPLIED
The annual aggregate reward of Executive Directors is shown in the below table:
EXECUTIVE DIRECTORS
TOTAL AGGREGATE PAYMENT AND REWARDS IMMEDIATE/FOR THE CURRENT PERIOD FOR THE CURRENT FISCAL YEAR (IN LEK)
FIX REWARD ELEMENTS 43,428,000
CASH/BONUS NOT APPLIED
SHARES NOT APPLIED
OTHERS NOT APPLIED
VARIABLE REWARD ELEMENTS
CASH/BONUS 7,653,577
SHARES NOT APPLIED
OTHERS NOT APPLIED
49 08.ANNUAL REPORT 2019
TIRANA BANK COMMITEES 50 ANNUAL REPORT 2019
EXECUTIVE COMMITTEE
1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 2. CHIEF FINANCIAL OFFICER 3. CHIEF OPERATIONS OFFICER 4. HEAD OF BANK RECOVERY DIVISION 5. HEAD OF CREDIT DIVISION 6. HEAD OF RETAIL DIVISION 7. HEAD OF CORPORATE DIVISION
CREDIT COMMITTEE CREDIT COMMITTEE ON LARGE BUSINESSES
1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 2. HEAD OF CREDIT DIVISION 3. HEAD OF CORPORATE DIVISION 4. HEAD OF BUSINESS DEPARTMENT, CREDIT DIVISION
CREDIT COMMITTEE ON SME
1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 2. HEAD OF SME DEPARTMENT 3. REGIONAL DIRECTOR & BUSINESS RELATIONS OFFICER 4. HEAD OF CREDIT DIVISION 5. HEAD OF BUSINESS DEPARTMENT, CREDIT DIVISION
BANK RECOVERY COMMITTEE CREDIT COMMITTEE ON LARGE BUSINESSES
1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 2. HEAD OF CREDIT DIVISION 3. HEAD OF RECOVERY DIVISION 4. HEAD OF LEGAL DEPARTMENT 5. HEAD OF RISK MANAGEMENT DEPARTMENT 6. HEAD OF BUSINESS DEPARTMENT, CREDIT DIVISION 7. HEAD OF BUSINESS RECOVERY DEPARTMENT
RECOVERY SUBCOMMITTEE
1. HEAD OF CREDIT DIVISION - CHAIRMAN 2. HEAD OF RECOVERY DIVISION 3. HEAD OF RETAIL DEPARTMENT, CREDIT DIVISION
51 ANNUAL REPORT 2019
HEAD OF RETAIL RECOVERY PROCUREMENT COMMITTEE DEPARTMENT 1. HEAD OF RISK MANAGEMENT DEPARTMENT CLASSIFICATIONS & PROVISIONS 2. HEAD OF BRANCH NETWORK DIVISION COMMITTEE 3. HEAD OF LEGAL DEPARTMENT 4. HEAD OF FINANCIAL CONTROL DEPARTMENT 1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 5. HEAD OF DEPARTMENT OF SUPPORT SERVICES 2. HEAD OF CREDIT DIVISION 3. CHIEF RETAIL OFFICER FRAUD RISK MANAGEMENT 4. HEAD OF CORPORATE DIVISION 5. HEAD OF SME DEPARTMENT COMMITTEE 6. HEAD OF RECOVERY DIVISION 7. HEAD OF RISK MANAGEMENT DEPARTMENT 1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 2. HEAD OF RISK MANAGEMENT DEPARTMENT – VICE CHAIRMAN ASSET LIABILITY COMMITTEE (ALCO) 3. HEAD OF COMPLIANCE DEPARTMENT – PERMANENT MEMBER 1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 4. HEAD OF HUMAN RESOURCES 2. CHIEF FINANCIAL OFFICER DEPARTMENT – PERMANENT MEMBER 3. CHIEF OPERATIONS OFFICER 5. HEAD OF OPERATIONAL AND MARKET RISK 4. CHIEF RETAIL OFFICER UNIT 5. HEAD OF CORPORATE DIVISION 6. HEAD OF SME DEPARTMENT 7. HEAD OF TREASURY & FINANCIAL SPONSORSHIP COMMITTEE MARKETS’ DIVISION 8. HEAD OF CREDIT DIVISION 1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 9. HEAD OF RISK MANAGEMENT DEPARTMENT 2. CHIEF FINANCIAL OFFICER 3. CHIEF OPERATIONS OFFICER 4. CHIEF RETAIL OFFICER DISCIPLINARY COMMITTEE 5. HEAD OF MARKETING & PUBLIC RELATIONS DEPARTMENT 1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 2. CHIEF OPERATIONS OFFICER 3. HEAD OF THE DIVISION/DEPARTMENT WHERE THE EMPLOYEE BELONGS 4. HEAD OF LEGAL DEPARTMENT AUDIT COMMITTEE 5. HEAD OF HUMAN RESOURCES DEPARTMENT The Audit Committee assists the Board of Directors in exercising its internal control duties. INTERNAL OPERATIONS RISK The members of the Audit Committee are appointed COMMITTEE by the General Meeting of shareholders. The main competencies of the Audit Committee, as well as its 1. CHIEF EXECUTIVE OFFICER – CHAIRMAN mode of operation, are regulated by the provisions of Law 2. CHIEF OPERATIONS OFFICER no 9662/18.12.2006 “On banks in the Republic of Albania”. 3. CHIEF RETAIL OFFICER It is clarified that the Audit Committee’s main task is to 4. HEAD OF RISK MANAGEMENT DEPARTMENT establish that every responsibility and, where appropriate, 5. HEAD OF COMPLIANCE DEPARTMENT the Internal Audit System -i.e. the applicable procedures and established mechanisms- are properly applied and are sufficient and effective.
INFORMATION MANAGEMENT COMMITTEE
1. CHIEF EXECUTIVE OFFICER – CHAIRMAN 2. CHIEF FINANCIAL OFFICER 3. CHIEF OPERATIONS OFFICER 4. HEAD OF RISK MANAGEMENT DEPARTMENT
52 ANNUAL REPORT 2019
53 09.ANNUAL REPORT 2019
ORGANISATIONAL STRUCTURE 54 ANNUAL REPORT 2019
55 ANNUAL REPORT 2019
BOARD OF DIRECTORS
COM CONT
RISK INTERNAL CHIEF EXECUTIVE MANAGEMENT AUDIT OFFICER
HUMAN LEGAL COMPLIANCE RESOURCES
BANK BUSINESS RETAIL CREDIT RECOVERY
GROUP LEGAL BRANCH NETWORK RETAIL PROD COORPORATE MANAGMENT
BUSINESS CRM & SME REGIONS ANALYSES
NETWORK BUSINESS ROB RETAIL SUPPORT RECOVERY
MB & BRANCH RETAIL CONTROL RECOVERY
REO
56 ANNUAL REPORT 2019
LEGJENDA
DIVIZION DEPARTAMENT
RISK /AREA UNIT MANAGEMENT
HUMAN MARKETING & PUBLIC RESOURCES RELATIONS
FINANCE OPERATIONS
TREASURY CARD OPERATIONS & BACK OFFICE LOAN SUPPORT ELECTRON CHANNELS SERVICES ADMINIST SERVICES
RETAIL BUSINESS IT CARDS FINANCIAL CONTROL ORGANIZ. ELECTRON TRADE ADMINISTRATION CHANNELS FINANCE
MIS/BUDGETING & BACK PAYMENTS PROCUREMENT PLANNING OFFICE
BLOCKING CUSTODY & PHYSICAL TAXES ORDER DEPOSITORY SECURITY & ACCOUNTING
CASH SERVICE MANAGEM TO INSTIT
57 10.ANNUAL REPORT 2019
FINANCIAL STATEMENTS 58 ANNUAL REPORT 2019
TIRANA BANK SHA
TIRANA BANK SHA INDEPENDENT AUDITOR’S REPORT AND THE FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2019
59 ANNUAL REPORT 2019 CONTENTS INDEPENDENT AUDITOR’S REPORT
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 63 STATEMENT OF FINANCIAL POSITION 64 STATEMENT OF CHANGES IN EQUITY 65 STATEMENT OF CASH FLOWS 66 1. CORPORATE INFORMATION 67 2. BASIS OF PREPARATION 68 3. STATEMENT OF COMPLIANCE 68 4. PRESENTATION OF FINANCIAL STATEMENTS 68 5. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES 68 6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 70 7. STANDARDS ISSUED BUT NOT YET EFFECTIVE 85 8. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS 85 9. FINANCIAL RISK MANAGEMENT 87 10. INTEREST AND SIMILAR INCOME 112 11. INTEREST EXPENSE 112 12. NET FEES AND COMMISSION INCOME 113 13. EXPECTED CREDIT LOSSES FROM ADVANCES TO BANKS, SECURITIES AND OFF-BALANCE SHEET ITEMS 113 14. PERSONNEL EXPENSES 113 15. OTHER OPERATING EXPENSES 114 16. INCOME TAX EXPENSE 114 17. CASH AND BALANCES WITH THE CENTRAL BANK 116 18. DUE FROM BANKS 117 19. LOANS AND ADVANCES TO CUSTOMERS, NET 120 20. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 132 21. FINANCIAL ASSETS AT AMORTISED COST 134 22. INVESTMENT PROPERTY AND REPOSSESSED ASSETS, NET 135 23. INTANGIBLE ASSETS 136 24. PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSETS 137 25. OTHER ASSETS 138 26. DUE TO BANKS 138 27. DUE TO CUSTOMERS 138 28. OTHER LIABILITIES 139 29. PROVISIONS 139 30. PAID-IN CAPITAL AND SHARE PREMIUM 140 31. CASH AND CASH EQUIVALENTS 140 32. RELATED PARTIES 140 33. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY 142 34. COMMITMENTS AND CONTINGENCIES 143 35. EVENTS AFTER THE REPORTING DATE 146
60 ANNUAL REPORT 2019 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF BANKA E TIRANËS SH.A REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
OPINION
We have audited the financial statements of Banka e Tiranës sh.a (the “Bank”), which comprise the statement of financial position as at December 31, 2019 and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects the financial position of the Bank as at December 31, 2019 and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”).
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”) together with the ethical requirements that are relevant to our audit of the financial statements in Albania (“IEKA Code”), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion
OTHER MATTER
The financial statements of Banka e Tiranës sh.a as at and for the year ending on December 31, 2018 were audited by another auditor, who issued an unqualified opinion on June 19, 2019.
OTHER INFORMATION INCLUDED IN BANKA E TIRANËS SH.A 2019 ANNUAL REPORT
Other information consists of the information included in Bank’s 2019 Annual Report, prepared in accordance with articles 17 and 19 of the Law no. 25/ 2018 “For Accounting and Financial Statements” other than the financial statements and our auditor’s report thereon. Management is responsible for the other information. The Bank’s 2019 Annual Report is expected to be made available to us after the date of this auditor’s report. Our opinion on the financial statements does not cover the other information and we will not express any formof assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
61 ANNUAL REPORT 2019 AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance of Banka e Tiranës sh.a regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
62 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDING ON 31 DECEMBER 2019
Year ended Year ended December 31, December 31, Notes 2019 2019 Interest and similar income 10 2,264,561 1,737,846 Interest and similar expense 11 (173,971) (194,939) Net interest income 2,090,590 1,542,907 Fee and commission income 12 471,496 417,101 Fee and commission expense 12 (22,507) (21,211) Net fee and commission income 448,989 395,890 Expected credit losses from loans and advances to customers 19 389,450 (528,404) Expected credit losses from advances to Banks, Securities and Off-balance sheet items 13 (196,542) (48,669) Total expected credit losses 192,908 (577,073) Foreign exchange gains / (losses) 67,397 (1,061,059) Other operating (expense)/ income (79,650) 44,535 Personnel expenses 14 (659,200) (654,789) (Loss)/ gain on investment property revaluation 22 - (42,958) Provision for impairment of repossessed assets 22 (155,531) (246,113) Other Provisions (3,444) 107,829 Amortization of intangible assets 23 (78,883) (88,097) Depreciation of property, equipment and right-of-use assets 24 (256,608) (107,357) Other operating expenses 15 (932,608) (940,954) (2,098,527) (2,988,960) Profit\(Loss) before income tax 633,960 (1,627,236) Income tax expense 16 (233,120) (4,233) Profit/(Loss) for the year 400,840 (1,631,469)
Other comprehensive income: Items that may be reclassified subsequently to profit/loss: - Net fair value gain on FVOCI financial assets
20 274,430 105,753 - Deferred tax related to fair value gain recorded directly in other comprehensive income 16 (61,170) (6,220) Other comprehensive income/ (expense) for the year 213,260 99,533 Total comprehensive income/ (loss) for the year 614,100 (1,531,936)
The accompanying notes on pages 10 to 90 form an integral part of these financial statements. The financial statements were approved by the Bank’s Management on July 16, 2020 and signed on its behalf by:
Dritan Mustafa Elvira Kapoli Chief Executive Officer Chief Financial Officer
63 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019
Notes December 31, 2019 December 31, 2018 ASSETS Cash and balances with the Central Bank 17 6,867,587 7,120,132 Due from banks 18 3,896,781 17,447,073 Loans and advances to customers, net 19 31,179,091 20,845,099 Financial assets at fair value through OCI 20 28,275,976 23,857,367 Financial assets at amortized cost 21 2,589,250 - Prepaid income tax, net 16 - 94,073 Investment property, net 22 - 74,506 Repossessed assets, net 22 1,509,602 2,403,649 Intangible assets 23 158,005 207,819 Property, equipment and right-of-use assets 24 784,438 529,206 Deferred tax assets 16 - 22,551 Other assets 25 639,285 363,379 TOTAL ASSETS 75,900,015 72,964,854
LIABILITIES AND EQUITY Due to banks 26 2,017,025 2,617,270 Due to customers 27 63,324,971 57,164,880 Other liabilities 28 700,992 399,806 Provisions 29 142,935 131,125 Deferred tax liability 16 41,657 - TOTAL LIABILITIES 66,227,580 60,313,081
Equity Paid-in capital 30 11,161,303 14,754,741 Share premium 30 1,735,494 1,735,494 Reserves 31 2,071,976 1,858,716 Accumulated losses (5,296,338) (5,697,178) TOTAL EQUITY 9,672,435 12,651,773 TOTAL LIABILITIES AND EQUITY 75,900,015 72,964,854
The accompanying notes on pages 10 to 90 form an integral part of these financial statements. The financial statements were approved by the Bank’s Management on July 16, 2020 and signed on its behalf by:
Dritan Mustafa Elvira Kapoli Chief Executive Officer Chief Financial Officer
64 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2019
Legal Paid-in Share and other Fair value Accumulated capital premium reserves reserve losses Total Equity
As at January 1, 2018 14,754,741 1,735,494 1,374,250 384,933 (4,065,709) 14,183,709 Comprehensive income for
the year Net change in Reserves for 99,533 Financial Assets at FVOCI - - - - 99,533 Total comprehensive income 484,466 for the year 99,533 Loss of the year - - - (1,631,469) (1,631,469) As at December 31, 2018 14,754,741 1,735,494 1,374,250 484,466 (5,697,178) 12,651,773 - Decrease in paid in capital (3,593,438) - - (3,593,438) Net change in Reserves for - 213,260 Financial Assets at FVOCI - - - 213,260 Total comprehensive income - 213,260 for the year - - - 213,260 Profit of the year - - - 400,840 400,840 As at December 31, 2019 11,161,303 1,735,494 1,374,250 697,726 (5,296,338) 9,672,435
The accompanying notes on pages 10 to 90 form an integral part of these financial statements. The financial statements were approved by the Bank’s Management on July 16, 2020 and signed on its behalf by:
Dritan Mustafa Elvira Kapoli Chief Executive Officer Chief Financial Officer
65 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2019 Year ended December Year ended December 31, 2019 31, 2018 OPERATING ACTIVITIES: Profit before tax 633,960 (1,627,236) Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 17,18 335,491 195,452 Impairment of reposessed properties 22 155,531 289,070 (Reversal)\Charge for loan loss provisions 19 (389,450) 528,404 Loss on disposal of assets 29,401 17 Other provisions 199,784 (61,055) Interest Income 3 (2,264,561) (1,737,846) Interest expenses 4 173,971 194,939 Changes in operating assets and liabilities Compulsory reserve (37,322) 213,349 Loans and advances banks (9,063) 27,208 Loans and advances to customers (9,956,031) 2,647,208 Other assets (184,863) 352,590 Repossessed assets 813,022 272,168 Due to banks (600,238) 1,364,880 Due to customers 6,155,988 (3,780,621) Other liabilities 283,665 (93,318) Interest received 2,221,614 1,596,527 Interest paid (169,874) (206,476) Income tax paid (199,245) - Net cash (for)\from operating activities (2,808,220) 175,260
INVESTING ACTIVITIES: Purchases of investment securities (18,250,333) (16,277,531) Proceeds from sale of securities 11,383,840 7,617,157 Right of use assets (365,651) - Purchases of intangible assets (29,067) (53,881) Purchases of property and equipment (175,592) (138,514) Net cash for investing activities (7,436,803) (8,852,769)
FINANCING ACTIVITIES: Increase/decrease of capital (3,593,438) - Net cash for financing activities (3,593,438) -
Decrease in cash and cash equivalents (13,838,461) (8,677,509) Cash and cash equivalents, beginning of year 19,559,445 28,236,954 Cash and cash equivalents, end of year 27 5,720,984 19,559,445
The accompanying notes on pages 10 to 90 form an integral part of these financial statements. The financial statements were approved by the Bank’s Management on July 16, 2020 and signed on its behalf by:
Dritan Mustafa Elvira Kapoli Chief Executive Officer Chief Financial Officer
66 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019 1. CORPORATE INFORMATION Tirana Bank SHA (the “Bank”), was founded in 1996 to operate as a bank in all fields of retail banking activity in Albania. According to article 4 of its Statute, the scope of work of the Bank is to execute, on its behalf or on behalf of third parties, any and every operation acknowledged or delegated by law to banks. Principal activity of the Bank consists in banking and financial activities under a full operating banking licence issued by the Bank of Albania.
Licence was given in accordance with Law No. 8365, “On Banks in the Republic of Albania”, dated 2 July 1998, which was subsequently replaced by Law No. 9662 dated 18 December 2006 “On Banks in the Republic of Albania”, as amended. The Bank is also subject to Law No. 9901 dated 14 April 2008, “On entrepreneurs and commercial companies”, as amended, as well as other relevant laws.
Based on the Sale Purchase Agreements signed between Piraeus Bank S.A Greece, Balfin SHPK and Komercijalna Banka AD Skopje on 28.02.2019 and between Mr. Ioannis Tzivelis and Balfin SHPK, on 28.02.2019, registered on the Commercial Register, respectively on 5 and 19 March 2019, the Bank has changed the ownership, after all the respective approvals from the authorities were received. All the shares previously owned by Piraeus Bank S.A and Mr. Ioannis Tzivelis have been respectively Balfin SHPK 90.12% and Komercijalna Banka AD Skopje 9.88%.
As at December 31, 2019 and 2018 Tirana Bank SHA ownership structure is presented below:
DECEMBER 31, 2019
Shareholder Shares Në% Balfin shpk 452,365 90.12% Komercijalna Banka AD Shkup 49,610 9.88% Total 501,975 100%
DECEMBER 31, 2019
Shareholder Shares Në% Piraeus Bank S.A. Greqi 496,098 98.83% Z. Tzivelis Ioanis 5,877 1.17% Total 501,975 100%
As at December 31, 2019 The Bank has 35 branches (2018: 37) within the Republic of Albania and has no overseas operations. The Bank’s registered address is Ibrahim Rugova Street, P.O. Box 2400/1, Tirana, Albania. At December 31, 2019 the Bank had 450 employees (December 31, 2018: 430 employees). As at December 31, 2019 the Executive Committee is comprised as follows:
Dritan Mustafa Chief Executive Director Elvira Kapoli Chief Financial Officer Eralda Tafaj Chief Operation Officer Elona Gjipali Head of Recovery Division Manjola Capo Head of Credit Division Lila Canaj Chief Retail Officer Glenda Kurti Head of Corporate Division
67 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) AS AT DECEMBER 31, 2018 THE EXECUTIVE COMMITTEE IS COMPRISED AS FOLLOWS:
Dritan Mustafa Chief Executive Director Konstantinos Tsigaras Chief Financial Officer Eralda Tafaj Chief Operation Officer Elona Gjipali Head of Recovery Division Manjola Capo Head of Credit Division Eranda Shehu Chief Retail Officer
2. PRINCIPAL ACTIVITY The Bank’s principal business activity is commercial and retail banking operations within the Republic of Albania. The Bank has been operating under a full banking licence issued by the Central Bank of the Republic of Albania (“Bank of Albania” or “BoA”) since 1996. 2. BASIS OF PREPARATION The financial statements have been prepared on the historical cost basis, except for fair value through other comprehensive income (“FVOCI”) financial investments that have been measured at fair value and repossessed collaterals which are measured at the lower of cost and net realizable value. The financial statements are presented in Albanian Lek and all values are rounded to the nearest thousand (LEK ‘000) except when otherwise indicated.
2.1 GOING CONCERN The Bank’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt on the Bank’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.
2.2 COMPARATIVE AMOUNTS Me përjashtim të rasteve kur një standard ose një interpretim lejon ose kërkon ndryshe, të gjitha shumat raportohen ose paraqiten me shuma krahasuese. Kur është e aplikueshme, shifrat krahasuese janë riklasifikuar në përputhje me ndryshimet në paraqitje në vitin aktual.
3. STATEMENT OF COMPLIANCE The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The accounting policies adopted are consistent with those of the previous financial year.
4. PRESENTATION OF FINANCIAL STATEMENTS The Bank presents its statement of financial position in order of liquidity based on the Bank’s intention and perceived ability to recover/settle the majority of assets/liabilities of the corresponding financial statement line item. Financial assets and financial liabilities are generally reported gross in the consolidated statement of financial position except when IFRS netting criteria are met.
5. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
5.1 NEW AND AMENDED STANDARDS AND INTERPRETATIONS
In these financial statements, the Bank has applied IFRS 16 Leases for the first time. The nature and effectofthe changes as a result of adoption of this new accounting standard are described Note 5.1.1 below. Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the Bank’s financial statements. The new and amended standards and interpretations are effective for annual periods beginning on or after 1 January 2019, unless otherwise stated. The Bank has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.
68 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
5.1.1 IFRS 16 LEASES
IFRS 16 Leases supersedes IAS 17 Leases and related interpretations. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognise most leases on the balance sheet. The Bank adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 January 2019, without restatement of comparatives. The Bank elected to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. The Bank has leases of certain office equipment (i.e., printing and photocopying machines) that are considered of low value.
Before the adoption of IFRS 16, the Bank classified each of its leases (as lessee) at the inception date as an operating lease. Refer to Note 6.9 for the accounting policy prior to 1 January 2019. The Bank did not have leases classified as finance leases prior to 1 January 2019.
• Leases previously accounted for as operating leases
The Bank recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases. The right-of-use assets for most leases were recognised based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application. In some leases, the right-of-use assets were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.
• Leases previously accounted for as operating leases
The Bank also applied the available practical expedients wherein it: • Used a single discount rate to a portfolio of leases with reasonably similar characteristics • Relied on its assessment of whether leases are onerous immediately before the date of initial application • Applied the short-term leases exemptions to leases with lease term that ends within 12 months of the date of initial application • Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application • Used hindsight in determining the lease term where the contract contained options to extend or terminate the lease
At this date, the Bank has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition.
Based on the above, as at 1 January 2019: • Right-of-use assets of 365,651 thousand Lek were recognised and presented in the statement of financial position within “Property, plant and right-of-use assets”. • Additional lease liabilities of 365,651 thousand Lek (included in “Other liabilities”) were recognised. • The adoption of IFRS 16 had no impact on the Bank’s retained earnings and no material impact on its CET1 ratio.
5.1.2 OTHER STANDARDS AND AMENDMENTS
IFRIC Interpretation 23 Uncertainty over Income Tax Treatment
The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. Upon adoption of the Interpretation, the Bank considered whether it has any uncertain tax positions. The Interpretation did not have an impact on the financial statements of the Bank
69 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
5. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (CONTINUED)
5.1 NEW AND AMENDED STANDARDS AND INTERPRETATIONS (CONTINUED)
5.1.2 OTHER STANDARDS AND AMENDMENTS (CONTINUED)
Amendments to IFRS 9: Prepayment Features with Negative Compensation
Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the ‘SPPI’ criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. Early termination can result from a contractual term or from an event outside the control of the parties to the contract, such as a change in law or regulation leading to the early termination of the contract. Where the prepayment is made at current fair value or at an amount that includes the fair value of the cost to terminate an associated hedging instruments, the Bank assesses the specific contractual cash flows for the relevant debt instruments in order to determine whether they meet the SPPI criterion. These amendments had no impact on the financial statements of the Bank. The following standards were issued and effective for the annual period starting from 1 January 2019, but that do not have an impact for the Company.
Long-term Interests in Associates and Joint Ventures - Amendments to IAS 28: the amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests).
Plan Amendment, Curtailment or Settlement - Amendments to IAS 19: the amendments address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period.
Annual Improvement Process 2015 – 2017 cycle (issued in December 2017): - IFRS 3 Business Combinations - Previously held Interests in a joint operation; - IFRS 11 Joint Arrangements - Previously held Interests in a joint operation; - IAS 12 Income Taxes - Income tax consequences of payments on financial instruments classified as equity; - IAS 23 Borrowing Costs - Borrowing costs eligible for capitalization.
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.
6.1 FOREIGN CURRENCY TRANSLATION Functional and presentational currency The functional and presentation currency of the Bank is Albanian Lek (“Lek”). Lek is the primary currency in the economic environment in which the Bank operates, the Republic of Albania. The amounts presented in these financial statements are rounded to the nearest thousand, unless otherwise stated. Transactions and balances Transactions in foreign currencies are translated into the respective functional currency of the operation at the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into the functional currency at the spot rate of exchange at the reporting date. The foreign currency gains or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the spot exchange rate at the end of the period.
70 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.1 FOREIGN CURRENCY TRANSLATION
Transactions and balances
Non-monetary assets and liabilities denominated in foreign currencies, which are measured at historic cost, are translated using the spot exchange rates as at the date of recognition.
Foreign currency differences arising on translation are generally recognised in profit or loss, except for foreign currency differences arising from the translation of available-for-sale equity instruments, which are recognised in OCI.
The applicable rates of exchange (Lek to foreign currency unit) for the principal currencies as at December 31, 2019 and 2018 were as follows:
As at December 31, 2019 As at December 31, 2018 USD 108.64 107.82 EUR 121.77 123.42
6.2 REVENUE RECOGNITION
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.
A) INTEREST AND SIMILAR INCOME AND EXPENSE
Interest and similar income include coupons earned on fixed income investments, any discount and premium on zero coupon treasury bills recognised using in profit or loss the effective interest rate method and interest income on loans and advances. For all financial instruments measured at amortised cost and interest bearing financial instruments classified as available-for-sale financial investments, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount. The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance (or impairment allowance before 1 January 2018). The ‘gross carrying amount of a financial asset’ is the amortised cost of a financial asset before adjusting for any expected credit loss allowance.
B) FEE AND COMMISSION INCOME
In accordance with IFRS 15, revenue from contracts with customers is recognised when the Bank has fulfilled its performance obligations by transferring the promised services to the customer. Revenue is recognised at an amount reflecting the consideration expected to be received in return.
71 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.2 REVENUE RECOGNITION (CONTINUED)
B) FEE AND COMMISSION INCOME (CONTINUED) The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:
i. Fee income earned from services that are provided over a certain period of time
Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission account servicing fees, card and E-banking maintenance fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan.
ii. Fee income from providing transaction services recognised at a point in time
These fees and commission include fees from payment and transfer orders of the customers, and other banking services offered. These fees or components of fees that are linked to a certain performance and are recognised as the related services are performed.
• Lending fees
The fees included here include among other things fees charged for servicing a loan, a letter of credit or bank guarantee.
Other fees and commission income and expenses arise on financial services operated by the Bank and are recognized when the corresponding service is provided or received.
c) Rental income
Rental income is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in profit or loss in “Other operating income”. The Bank has no investment property as at year end and during the reporting period.
6.3 FINANCIAL INSTRUMENTS – INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT
a) Date of recognition
Financial assets and liabilities, with the exception of loans and advances to customers and balances due to customers, are initially recognised on the trade date, i.e., the date on which the Bank becomes a party to the contractual provisions of the instrument. This includes regular way trades, i.e., purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Loans and advances to customers are recognised when funds are transferred to the customers’ accounts. The Bank recognises balances due to customers when funds are transferred to the Bank.
b) Initial measurement of financial instruments
The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments as described in Note 6.2. Financial instruments are initially measured at fair value, except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the bank accounts for the Day 1 profit or loss, as described below.
c) Day 1 profit or loss
When the fair value of the instrument differs from the fair value at origination and the fair value is based on a valuation technique using only inputs observable in market transactions, the Bank recognises the difference between the transaction price and the fair value in net trading income. In those cases where fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is deferred and is only recognised in profit or loss when the inputs become observable, or when the instrument is derecognised. 72 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.3 FINANCIAL INSTRUMENTS – INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT (CONTINUED)
d) Measurement categories of financial assets and liabilities
The Bank classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either
• Amortised cost (AC) • Fair value through other comprehensive income (FVOCI)
Financial liabilities, other than loan commitments and financial guarantees, are measured at amortized cost or at FVPL when they are held for trading or the fair value designation is applied. See accounting policies 6.3.
e) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
f) Derecognition
Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognising). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished. i.e. when the obligation specified in the contract, is discharged, cancelled, or expires.
g) Write-offs
The Bank writes off financial assets in their entirety or a portion thereof when it has exhausted all practical recovery efforts and has no reasonable expectations of recovery. Criteria indicating that that there is no reasonable expectation of recovery include default period, quality of collateral and different stages of enforcement procedures. The Bank may write- off financial assets that are still subject to enforcement activities, but this does not affect its rights in the enforcement procedures. The Bank still seeks to recover all amounts it is legally entitled to in full. Write-off reduces the gross carrying amount of a financial asset and allowance for the impairment. Any subsequent recoveries are credited to credit loss expense.
6.4 DETERMINATION OF FAIR VALUE
In order to show how fair values have been derived, financial instruments are classified based on a hierarchy of valuation techniques, as summarised below:
• Level 1 financial instruments − Those where the inputs used in the valuation are unadjusted quoted prices from active markets for identical assets or liabilities that the Bank has access to at the measurement date. The Bank considers markets as active only if there are sufficient trading activities with regards to the volume and liquidity of the identical assets or liabilities and when there are binding and exercisable price quotes available on the balance sheet date. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive. Indicators that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions, a significant decrease in the average daily trading volume of all the shares under consideration in country over the last 5 years, etc.
73 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.4 DETERMINATION OF FAIR VALUE (CONTINUED)
• Level 2 financial instruments − Those where the inputs that are used for valuation and are significant, are derived from directly or indirectly observable market data available over the entire period of the instrument’s life. Such inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in inactive markets and observable inputs other than quoted prices such as interest rates and yield curves, implied volatilities, and credit spreads. In addition, adjustments may be required for the condition or location of the asset or the extent to which it relates to items that are comparable to the valued instrument. However, if such adjustments are based on unobservable inputs which are significant to the entire measurement, the Bank will classify the instruments as Level 3.
• Level 3 financial instruments − Those that include one or more unobservable input that is significant to the measurement as whole.
For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other relevant valuation models. Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available.
The Bank evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary, based on the facts at the end of the reporting period.
6.5 FINANCIAL ASSETS AND LIABILITIES
i. Measurement and classification
Financial instruments are classified as per IFRS 9 rules based on the:
-Bank’s business model for managing the financial asset and -Contractual cash flow characteristics (referred as to as the ‘SPPI test’). Based on the above criteria, the Bank classifies financial instruments into one of the following three categories: (a) at Amortized cost (b) at FVOCI and (c) at FVTP
A financial asset (i.e. Due from Banks, Loans and advances to customers, and other financial investments) is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:
–it is held within a business model whose objective is to hold assets to collect contractual cash flows; and –its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL:
–it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and –its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. In addition, on initial recognition the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
The Bank has no VFTPL instruments as at reporting date. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9 are not separated. Instead, the hybrid financial instrument as a whole is assessed for classification.
74 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.5 FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
i. Measurement and classification (continued)
Business model assessment
The Bank has finalized its business model as well as the SPPI testing and has concluded as below stated:
Government bonds and treasury bills portfolio
For the Bank’s treasury products (bonds and T-bills), the identified business models are the “Hold to collect” and “Hold to collect and sell” that require measurement at fair value through other comprehensive income (FVTOCI) if also the conditions of SPPI test are met.
According to IFRS 9 (4.1.2A), a financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met:
- the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and - the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
FVTOCI financial assets are subsequently measured at fair value with gains and losses arising due to change in fair value recognised in OCI. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. The ECL calculation for financial asset is explained in note 6.5 ii). Where the Bank holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. On derecognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss.
Tirana Bank does not maintain securities portfolio for trading purposes therefore, with the objective of actively buying/selling depending on the assets’ fair value.
Loans and advances to customers
For the Bank’s loans and advances to customers’ portfolio the business model identified is the “Hold to collect” business model and therefore, loans classified in this business model will be measured at amortized cost if also the conditions of SPPI test are met.
Any loans that will fail the SPPI test will be measured at fair value through PL. According to the IFRS 9 (4.1.2), a financial asset shall be measured at amortized cost if both of the following conditions are met:
- the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and - the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
The Bank’s business model is to originate loans and to collect their contractual cash flows. Any sales of financial assets within this business model are carried out due to the loans’ credit deterioration and in order to reduce NPE’s and NPL’s and does not in any case reflect the initial purpose of the lending activity.
Assessments whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin.
75 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.5 FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
i. Measurement and classification (continued)
Business model assessment (continued)
Loans and advances to customers (continued)
In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Bank considers:
– contingent events that would change the amount and timing of cash flows; – leverage features; – prepayment and extension terms; – terms that limit the Bank’s claim to cash flows from specified assets – e.g. non-recourse asset arrangements; and – features that modify consideration for the time value of money – e.g. periodic reset of interest rates.
Interest rates on retail loans made by the Bank are based on Internal Rates that are set at the discretion of the Bank. In these cases, the Bank assess whether the SFR set are in line with market rates and provide the Bank with sufficient returns to cover for the:
– time value of money, – credit risk associated with the principal amount outstanding during a particular period of time, and – other basic lending risks and costs, as well as a profit margin. All of the Banks retail loans contain prepayment features. A prepayment feature is consistent with the SPPI criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable compensation for early termination of the contract.
ii. Impairment
The Bank has been recording the allowance for expected credit losses for all loans and other financial assets not held at FVLP, together with loan commitments and financial guarantee contracts. This requires estimate over changes in economic factors affect ECLs, which are determined on a probability-weighted basis.
In addition to Financial Assets measured at Amortized Cost, the new impairment model had applied also to the following financial instruments that are not measured at FVTPL:
– financial assets that are debt instruments; and – loan commitments and financial guarantee contracts issued (previously, impairment was measured under IAS 37 Provisions, Contingent Liabilities and Contingent Assets).
IFRS 9 requires a loss allowance to be recognized at an amount equal to either 12-month ECLs or lifetime ECLs depending on the assessment of the risk of default in comparison to the moment of initial recognition. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument, whereas 12-month ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date.
The Bank will recognize loss allowances at an amount equal to lifetime ECLs, except in the following cases, for which the amount recognized, will be 12-month ECLs: – debt investment securities that are determined to have low credit risk at the reporting date. The Bank considers a debt security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment-grade’; and – loans and debt investment securities for which credit risk has not increased significantly since initial recognition hence, they are classified Stage 1
76 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.5 FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
ii. Impairment (continued)
The impairment requirements of IFRS 9 are complex and require management judgments, estimates and assumptions, particularly in the following areas, which are discussed in detail below:
– Estimating the key inputs into ECL, being probability of default (PD), loss given default (LGD and exposure at default (EAD).
– assessing whether the credit risk of an instrument has increased significantly since initial recognition; and
– incorporating forward-looking information into the measurement of ECLs.
ECLs are a probability-weighted estimate of credit losses and will be measured as follows:
– financial assets that are not credit-impaired at the reporting date: the present value of all cash shortfalls – i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Bank expects to receive;
– financial assets that are credit-impaired at the reporting date: the difference between the gross carrying amount and the present value of estimated future cash flows;
– undrawn loan commitments: the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive; and
– financial guarantee contracts: the present value of the expected payments to reimburse the holder less any amounts that the Bank expects to recover.
• Inputs in the measurement of ECLs
The main inputs in the measurement of ECLs are likely to be the long-term structure of the following variables: PD, Loss given default (LGD), and Exposure at default (EAD).
These parameters derive from internally developed statistical models and other historical data. They are tailored to reflect future information as described below.
Credit risk levels will be a primary contribution to determining the long-term structure of the PD for exposures. The Bank uses statistical models to analyze the collected data and generate estimates of the remaining PD of the exposures and how these are expected to change over time. This analysis includes identifying and calibrating the relationship between changes in default rates and changes in key macroeconomic factors. For most exposures, key macroeconomic indicators are likely to include GDP growth, interest rates unemployment and exchange rate. The Bank's approach to the inclusion of future information in this assessment is discussed below.
• LGD (Loss given default) is the size of the possible loss if the borrower defaults. The Bank assesses LGD's parameters based on the history of recovery rates of claims against defaulted parties. LGD models consider the structure, collateral, seniority of the claim and the recovery costs of any collateral that is part of the financial asset.
• EAD (Exposure at default) represents the expected exposure in the event of a default. The EAD of a financial asset will be the gross carrying amount in default. For lending commitments and financial guarantees, EAD will consider the amount withdrawn as well as future potential amounts that can be drawn or paid under the contract, which are assessed based on historical observations and future projections
The Bank measures ECLs taking into account the risk of default for the maximum contractual period (including the borrower's extension options) over which it is exposed to credit risk, The maximum contractual period lasts until the date on which the Bank has the right to request an advance payment or to terminate a commitment or loan guarantee.
77 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.5 FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
ii. Impairment (continued)
• Inputs in the measurement of ECLs (continued) For retail overdrafts and credit card facilities and some rotating corporate structures that include both a loan and a component of unmanaged engagement, the Bank may measure ECLs for a longer period than the maximum contractual period if the contractual ability of the Bank to request repayment and cancellation of non re-computable commitments does not limit the Bank's exposure to credit losses in the contractual notice period. These facilities do not have a fixed term or repayment structure and are managed on a collective basis. The Bank may cancel them with immediate effect, but this contractual right does not apply to normal day-to-day management but only when the Bank becomes aware of an increase in credit risk at the facility level. However, this period will be assessed considering the credit risk management actions that the Bank expects to undertake and serve to mitigate ECLs. These includes a reduction in the limits and cancellation of the facility.
When modelling of a parameter is carried out on a collective basis, financial instruments will be grouped on the basis of common risk characteristics that include:
- type of instrument/customer; and - credit risk classification. Clusters are subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous.
For investment in debt securities in respect of which the Bank has limited historical data, external reference information published by recognized foreign credit rating agencies such as Moody's are used to supplement available data within the country
Definition of default
Under IFRS 9, the Bank considers a financial asset to be in default when:
– the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realizing security (if any is held); or – the borrower is more than 90 days past due on any material credit obligation to the Bank. This definition is largely consistent with the definition used for regulatory purposes for loans classified as substandard, doubtful or lost.
The identification of the below characteristics results to default. a) Days past due (DPD). Exposures more than 90 days past due at the reporting date (using the pulling effect of 20% - at debtor level). b) Unlikeliness to Pay (UTP) c) Credit impaired asset as defined in IFRS 9 requirements d) Forborne Non-Performing Exposures (FNPEs) e) Forborne Performing Exposures (FPEs) during the probation period (24 months after cure period) for which either additional forbearance measures are extended, or they have more than 90 days past due.
Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances.
Credit risk grades
The Bank allocates each business exposure to a credit risk grade based on requirements set forth by Credit Risk Management regulation by using qualitative and quantitative factors that are indicative of the risk of default. In addition to the risk classes introduced for regulatory purposes, the Bank identifies and monitors separately standard loans in past due from standard loans not in past due.
Each business exposure is allocated to a credit risk grade on initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade.
78 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.5 FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
ii. Impairment (continued)
• Determining whether credit risk has increased significantly Under IFRS 9, when determining whether the credit risk (i.e. risk of default) on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on the Bank’s historical experience, expert credit assessment and forward-looking information. The Bank considers both quantitative and qualitative criteria in order to assess whether significant increase in credit risk has occurred. The quantitative element is calculated based on the change in lifetime PDs by comparing: • the PD as at the reporting date; with • the PD that was estimated based on facts and circumstances at the time of initial recognition of the exposure The bank defines criteria for the relative quantitative increases in PD that are indicative of a significant increase in credit risk. The Bank has set three kinds of indicators, a) primary, b) secondary and c) backstop to demonstrate the priority of indicators used to assess whether significant increase in credit risk has occurred. Despite their priority, all criteria have the same weight in the assessment process for significant increase in credit risk. Primary or secondary indicators may vary per each portfolio, while backstop indicator is present on the following conditions: • Instruments which are more than 30 days past due All loans showing significant increase in credit risk are classified in Stage 2. The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that: – the criteria are capable of identifying significant increases in credit risk before an exposure is in default; – the average time between the identification of a significant increase in credit risk and default appears reasonable; and – exposures are not generally transferred directly from 12-month ECL measurement to credit-impaired.
Forborne and Modified financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognized and the renegotiated loan recognized as a new loan at fair value. Under IFRS 9, when the terms of a financial asset are modified and the modification does not result in derecognition, the Bank will consider whether the asset’s credit risk has increased significantly by analyzing quantitative and qualitative factors affecting risk of default. The Bank renegotiates loans to customers in financial difficulties (referred to as ‘forbearance activities’) to maximize collection opportunities and minimize the risk of default. Under the Bank’s forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. .
79 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.5 FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
ii. Impairment (continued)
Forborne and Modified financial assets (continued)
The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. Both retail and business loans are subject to the forbearance policy. Generally, forbearance is a qualitative indicator of default and credit impairment and expectations of forbearance are relevant to assessing whether there is a significant increase in credit. Following forbearance, a customer needs to demonstrate consistently good payment behavior over twenty-four months before the exposure is measured at an amount equal to 12-month ECLs.
Forward-looking information Under IFRS 9, the Bank has incorporated forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since initial recognition and its measurement of ECLs. The Bank has formulated a ‘base case’ view of the future direction of relevant economic variables and a representative range of other possible forecast scenarios and consideration of a variety of external actual and forecast information. This process involves developing two or more additional economic scenarios and considering the relative probabilities of each outcome. External information may include economic data and forecasts published by governmental bodies and monetary authorities in the countries where the Bank operates, supranational organizations such as the European Commission and the International Monetary Fund, and selected private sector and academic forecasters. The base case represents a most-likely outcome and is aligned with information used by the Bank for other purposes, such as strategic planning and budgeting. The other scenarios represent more optimistic and more pessimistic outcomes. The Bank also periodically carries out stress-testing of more extreme shocks to calibrate its determination of these other representative scenarios. The Bank has identified and documented key drivers of credit risk and credit losses for each portfolio offinancial instruments and, using an analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. These key drivers include CPI, unemployment rates and GDP forecasts. Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analyzing historical data over the past 5 years.
6.6 REPOSSESSED ASSETS
In certain circumstances, the collateral is repossessed following the foreclosure on loans that are in default. The Bank’s policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset. Assets for which selling is determined to be a better option are transferred as inventory (“repossessed assets”) until recognition criteria to classify these assets as “held for sale” are fulfilled, at which moment they are measured at their fair value (if financial assets) and fair value less cost to sell for non-financial assets at the repossession date in, line with the Bank’s policy.
80 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 6.7 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. For the purpose of the Cash Flow Statement, cash and cash equivalents consist of cash on hand, current accounts with Central Bank and amounts due from other banks on demand and with an original maturity of three months or less from the date of acquisition that are subject to an insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. The statutory reserve with the Central Bank is not available for the Bank’s day-to-day operations and is not included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Cash and cash equivalents are carried at amortised cost. Further details of what cash and cash equivalents comprises can be found in Note 31.
6.8 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase at a specified future date are not derecognised from the statement of financial position as the Bank retains substantially all of the risks and rewards of ownership.
The corresponding cash received, including accrued interest, is recognised in the statement of financial position as a “Due to Banks”, reflecting its economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method. Conversely, securities purchased under agreements to resell at a specified future date (‘reverse repos’) are recorded as due from other banks or loans and advances to customers, as appropriate. The corresponding cash paid, including accrued interest, is recognised in the statement of financial position as “Due from Banks”. The difference between the purchase and resale prices is treated as interest income and is accrued over the life of the agreement using the effective interest rate method.
6.9 LEASES (POLICY APPLICABLE BEFORE 1 JANUARY 2019)
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. i. Bank as a Lessee
Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at commencement of the lease term at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in “Property and equipment” with the corresponding liability to the lessor included in “Other liabilities”. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income in “Interest and similar expense”. The Bank did not have significant financial lease agreements during the reporting period. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term. Any operating lease rentals payable are accounted for on a straight-line basis over the lease term and included in “Other operating expenses”. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place. ii. Bank as a Lessor
Where the Bank is a lessor in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the Bank to the leasee, the total lease payments are recognised in profit or loss for the year on a straight-line basis over the period of the lease.
81 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.9 LEASES (POLICY APPLICABLE AS OF 1 JANUARY 2019)
The Bank assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. i. Bank as a Lessee
The Bank applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Bank recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
Right-of-use assets
The Bank recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the lease term. The right-of-use assets are presented within Note 24 Property, equipment and right-of-use assets and are subject to impairment in line with the Bank’s policy as described in Note 6.10 Impairment of non-financial assets.
Lease liabilities
At the commencement date of the lease, the Bank recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments, less any lease incentives receivable. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Bank and payments of penalties for terminating the lease, if the lease term reflects exercising the option to terminate. ii. Bank as a Lessor
Leases in which the Bank does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.
6.10 PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSET
Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Right-of-use assets are presented together with property and equipment in the statement of financial position – refer to the accounting policy in Note 6.10. Right-of-use assets are depreciated on a straight-line basis over the lease term.
Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:
•Own Buildings: up to 20 years •Furniture and other equipment: 5 years •Vehicles: 5 years •Computer hardware: 4 years •Leasehold improvements: the shorter of useful life and lease term
The assets’ residual value and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
82 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.10 PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSET (CONTINUED)
An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in “Other operating income” or “Other operating expenses” in profit or loss in the year the asset is derecognised.
6.11 INTANGIBLE ASSETS
Intangible assets are stated at cost less accumulated amortization and any impairment losses. Amortization is calculated on a straight-line basis over the expected useful life of the asset. The estimated useful live for the current and comparative periods are as follows:
• IT software and applications In years 4-10
6.12 IMPAIRMENT OF NON-FINANCIAL ASSETS
The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets, and inventories, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rate basis.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
6.13 FINANCIAL GUARANTEE CONTRACTS Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument.
Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization calculated to recognize in profit or loss the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the reporting date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to profit or loss under other operating expenses.
Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment.
83 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6.14 EMPLOYEE BENEFITS
The Bank contributes to its employees post retirement plans as prescribed by the domestic social security legislation. Bank’s pension obligations relate only to defined contribution plans. Defined contribution plans, based on salaries, are made to the state administered institution (i.e. Social Security Institute) responsible for the payment of pensions. Once the contributions have been paid, the Bank has no further payment obligations. The contributions constitute net periodic costs for the year in which they are due and as such they are included in “Personnel expenses” in the statement of comprehensive income.
6.15 PROVISIONS A provision is recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
6.16 INCOME TAX Income taxes have been provided for in the financial statements in accordance with Albanian legislation enacted or substantively enacted by the reporting date. The income tax charge comprises current tax and deferred tax and is recognised in the statement of comprehensive income except if it is recognised in other comprehensive income because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income.
Current tax
Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date 2019:15% (2018: 15%).
Deferred tax
Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank.
Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date.
84 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
7. STANDARDS ISSUED BUT NOT YET EFFECTIVE
The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financial statements are disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective.
IFRS 16: Covid-19 Related Rent Concessions (Amendment)
The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the covid-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. It applies to covid-19-related rent concessions that reduce lease payments due on or before 30 June 2021. The amendment is available to lessees only and is effective from 1 June 2020. It can be applied immediately in any financial statements—interim or annual—not yet authorized for issue. Amendments to IAS 1 and IAS 8: Definition of Material
In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ’Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’ The amendments to the definition of material is not expected to have a significant impact on the Bank’s financial statements. Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7
Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39 and IFRS 7 includes a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainties about the timing and or amount of benchmark-based cash flows of the hedged item or the hedging instrument. The amendment is effective from 1 January 2020. The Bank does not expect a significant impact from this amendment. The Conceptual Framework for Financial Reporting
The revised Conceptual Framework for Financial Reporting (the Conceptual Framework) is not a standard, and none of the concepts override those in any standard or any requirements in a standard. The IASB issued the Conceptual Framework in March 2018. It sets out a comprehensive set of concepts for financial reporting, standard setting, guidance for preparers in developing consistent accounting policies and assistance to others in their efforts to understand and interpret the standards. The Conceptual Framework includes some new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. The Bank will adopt the following standards when they become effect, but expects not to have an impact over its financial statements because these are not applicable to the Bank. - IFRS 17 Insurance contracts, effective on or after 1 January 2023.
- Amendments to IFRS 3: Definition of a Business, effective on or after 1 January 2020.
- Amendments to IAS 1: Classification of Liabilities as Current or Non-current, effective on or after 1 January 2022.
- Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28. In December 2015, the IASB decided to defer the effective date of the amendments until such time as it has finalised any amendments that result from its research project on the equity method
8. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The Bank makes estimates and judgments that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
85 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
8. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) (a) Impairment losses on loans and advances
The measurement of impairment losses both under IFRS 9 across all categories of financial assets in scope requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.
The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include: • The Bank’s internal credit grading model, which assigns PDs to the individual grades. • The Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a LTECL basis and the qualitative assessment. • The segmentation of financial assets when their ECL is assessed on a collective basis. • Development of ECL models, including the various formulas and the choice of inputs. • Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs. • Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models.
It has been the Bank’s policy to regularly review its models in the context of actual loss experience and adjust when necessary.
(b) Fair value of financial instrument
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e., an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values. Judgements and estimates include considerations of liquidity and model inputs related to items such as credit risk (both own and counterparty), funding value adjustments, correlation and volatility. For further details about determination of fair value please see Note 6.3 and Note 9.4.
(c) Tax Exposures
In determining the amount of current and deferred tax, the Bank takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Bank to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.
(d) Deferred tax assets
Deferred tax assets are recognised in respect of temporary differences to the extent that it is probable that future taxable profit will be available against which the losses can be utilised.. Judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with future tax-planning strategies.
(e) Litigation risk
The Bank Management has established an internal process with respect to recognition and measurement of provisions and contingencies due to actual or threaten litigations. Key assumptions about the likelihood and magnitude of an outflow of resources are based on the internal and external legal advice following the respective successful defense strategies against resulting actions. Each action and corresponding risk is assessed on its merits and the underlying constructive or legal obligation and the estimate of cash outflows considered payable. Management believes, that existing or potential future litigation are remote, however due to causes beyond legal background and framework further risks might be triggered.
86 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
(f) Determination of the lease term for lease contracts with renewal and termination options (Bank as a lessee)
The Bank determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Bank has several lease contracts that include extension and termination options. The Bank applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Bank reassesses the lease term if there is a significant event or change in circumstances that is within its control that affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customisation of the leased asset).
(g) Estimating the incremental borrowing rate
The Bank cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (‘IBR’) to measure lease liabilities. The IBR is the rate of interest that the Bank would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Bank ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease.
9. FINANCIAL RISK MANAGEMENT
The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance.
The Bank’s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems.
The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice.
Risk management is carried out by an independent risk department in the Bank under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as, credit risk, foreign exchange risk, interest rate risk and liquidity risk. In addition, internal audit is responsible for the independent review of risk management and the control environment.
The most important types of risks addressed by the Bank are credit risk, liquidity risk, market risk and operational risk. Market risk includes currency risk (including information security risk), interest rate and other price risk.
9.1. CREDIT RISK
Credit risk is the risk of loss for the Bank, arising from the potential failure of counterparty to meet its contractual obligations. Tirana Bank analysis the full spectrum of credit risk including its sub-categories such as lending risk, counterparty risk, issuer risk, settlement risk, concentration risk, foreign currency lending risk, sovereign risk and residual risk. Such assessment is translated into the internal evaluation of the capital need for credit risk.
Credit risk is the most material risk for the bank requiring the major part of the minimum capital and it mainly derives from lending activities (loans and advances) to customers and investments in debt securities as presented in its structure of the balance sheet.
On and off balance sheet exposures are analyzed in terms of the possible loss they can produce and provisioned accordingly as per the documented provisioning methodologies approved by the Board of Directors.
The Bank’s Corporate Governance principles ensure proper allocation of responsibility and accountability based on the risk origination, aiming to align the risk taking process with the risk appetite.
87 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED)
The Bank’s exposure to credit risk is regularly monitored in relation to the approved risk appetite ensuring that the risk profile of the Bank stays within the acceptable levels. Deviations, if any, from the risk appetite are escalated according to the Board of Directors.
The main targets of the Bank’s Credit Risk Management are to: 1) Set centralized policies in compliance with Central Bank requirements; 2) Monitor the Bank’s portfolio exposed to credit risk. 3) Managing risk pro-actively to identify and analyse risk at an early stage 4) Create risk management function independent of commercial lines of the business 5) Integrate the risk management function into the organizational business process 6) Report on risk across the organization
9.1.1. CREDIT RISK MEASUREMENT
The procedures described below relate to credit risk measurements for operational purpose as well as for reporting under Bank of Albania regulation and IFRS. Impairment losses on loans and advances for financial reporting are determined based on the procedures described in Note 9.1.3. (a)Loans and advances In measuring credit risk of loan and advances to customers and to banks at a counterparty level, the Bank reflects three components
(i) the ‘probability of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Bank derives the ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’).
(i)The Bank assesses the probability of default of individual business counterparties based on a mapping between the probabilities of default and the internal rating of the customer Business customers are grouped into five main categories containing customers with ratings representing similar credit risk characteristics. The Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The Bank regularly validates the performance of the rating and their predictive power with regard to default events.
Bank’s internal ratings scale
Bank’s rating Description of the grade A Investment Grade B Standard C Special Monitoring D Substandard E Doubtful and Loss
Criterion for classification of Financial Assets into groups A, B, C, D and E are as follows:
Financial Assets are classified into Group A if they are toward debtors that have been evaluated in investment grade ratings by external rating agencies, e.g. Moody’s, S&P, Fitch, regardless of the internal MRA rating. The Bank has no such customers as at December 31, 2019 and 2018.
Financial Assets are classified into Group B if they are towards: • Bank of Albania and Albanian Government; • debtors which are not likely to default and who repay their obligations within the maturity, or with a delay of 30 days; and • exposures secured by pledging collateral graded as first class collateral. Financial Assets are classified into Group C if they are towards debtors: • whose cash flows are assessed as adequate to duly fulfil its due obligations, regardless its present financial position is assessed as weak, without signs of further deterioration in the future; and • who settle their liabilities with delay of up to 30 days, occasionally with delay between 31 and 90 days. 88 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.1. CREDIT RISK MEASUREMENT (CONTINUED)
Financial Assets are classified into Group D if they are towards debtors:
• for which it is assessed, that cash flows will not be sufficient foregular r repayment of matured liabilities; • that settle their liabilities with delay of up to 90 days, occasionally with delay between 91 to 180 days; • that are clearly undercapitalized; • that do not have sufficient long term capital resources for financing long term investments; and • from whom bank does not receive currently satisfactory information or adequate documentation concerning repayment of liabilities.
Financial Assets are classified into Group E if they are towards debtors: • for which exists a strong likelihood of loss of part of financial asset; • that settle their liabilities with delay of more than 90 to 180 days, occasionally with delay between 181 to 360 days; • which are insolvent; • for which a motion for commencement of process of liquidation or declaration of bankruptcy began and was filed at the provisional court; • that are in the process of reform or in the process of liquidation; • that declared bankruptcy; • from whom no repayment is expected; and • with questionable legal grounds.
(ii) Exposure at default is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur.
(iii) Loss given default or loss severity represents the Bank’s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation.
(b) Debt securities and other bills For debt securities and other bills, the risk department for managing of the credit risk exposures uses ratings depending on the issuer. The investments in investments in Albanian Government Bonds and Treasury Bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time.
9.1.2. RISK LIMIT CONTROL AND MITIGATION POLICIES
The Bank manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties and groups, and to industries and countries.
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product and industry sector are approved by the Board of Directors.
89 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.2. RISK LIMIT CONTROL AND MITIGATION POLICIES
Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.
Some other specific control and mitigation measures are outlined below.
(a) Collateral
The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice.
The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • Cash, banks and first class companies’ guarantees; • Mortgages over residential properties; • Charges over business assets such as premises, inventory and accounts receivable; and • Charges over financial instruments such as debt securities and equities. Loans to corporate entities and individuals are generally secured; over drafts and credit cards issued to individuals are secured mostly by cash deposits and collateral in cases of credit customers at the full amount of principal, interest and other charges. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances.
Debt securities, treasury and other eligible bills are generally unsecured.
(b) Credit-related contingencies
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans and are secured with same collateral as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments.
However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.
9.1.3. IMPAIRMENT AND PROVISIONING POLICIES
The Bank shall recognize a loss allowance for expected credit losses on a financial asset, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply.
The financial assets which are subject to impairment calculation are the following: a) financial assets measured at amortised cost b) financial assets measured at fair value through other comprehensive income c) lease receivables d) contract assets e) loan commitments to provide a loan at a below-market interest rate financial guarantee contracts
90 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.3. IMPAIRMENT AND PROVISIONING POLICIES 9.1.3.1. MEASUREMENT OF EXPECTED CREDIT LOSSES (ECL)
The Bank is required to measure expected credit losses of a financial instrument in a way that reflects: a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; b) the time value of money; and c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. Expected credit losses are a probability-weighted estimate of credit losses (i.e. the present value of all cash shortfalls) over the expected life of the financial instrument. A cash shortfall is the difference between the cash flows that are due to the Bank in accordance with the contract and the cash flows that the Bank expects to receive. Because expected credit losses consider the amount and timing of payments, a credit loss arises even if the Bank expects to be paid in full but later than when contractually due.
9.1.3.2. SIGNIFICANT INCREASE IN CREDIT RISK
At each reporting date, the Bank shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Bank shall use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, a comparison of the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition should be done and reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant increases in credit risk since initial recognition should be considered.
The credit risk on a financial instrument is considered low, if the financial instrument has a low risk of default,the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfill its contractual cash flow obligations. Financial instruments are not considered to have low credit risk when they are regarded as having a low risk of loss simply because of the value of collateral and the financial instrument without that collateral would not be considered low credit risk. Financial instruments are also not considered to have low credit risk simply because they have a lower risk of default than the Bank's other financial instruments or relative to the credit risk of the jurisdiction within which the Bank operates.
If reasonable and supportable forward-looking information is available without undue cost or effort, the Bank cannot rely solely on past due information when determining whether credit risk has increased significantly since initial recognition. However, when information that is more forward-looking than past due status (either on an individual or a collective basis) is not available without undue cost or effort, the Bank may use past due information to determine whether there have been significant increases in credit risk since initial recognition. Regardless of the way in which a Bank assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due.
The Bank can rebut this presumption if it has reasonable and supportable information that is available without undue cost or effort, that demonstrates that the credit risk has not increased significantly since initial recognition even though the contractual payments are more than 30 days past due. When it determines that there have been significant increases in credit risk before contractual payments are more than 30 days past due, the rebuttable presumption does not apply.
91 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.3. IMPAIRMENT AND PROVISIONING POLICIES (CONTINUED) 9.1.3.3. TIMING OF EXPECTED CREDIT LOSSES MEASUREMENT
At each reporting date, the Bank measures the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition. In case, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses should be measured.
9.1.3.4 ISSUES RELATED TO EXPECTED CREDIT LOSSES CALCULATION 9.1.3.4.1 DERECOGNITION
Before evaluating whether, and to what extent, derecognition is appropriate, the Bank determines whether derecognition should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows: a)Derecognition is applied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions. i. The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). ii.The part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or a group of similar financial assets). iii.The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets). b)In all other cases, derecognition is applied to the financial asset in its entirety (or to the group of similar financial assets in their entirety).
The Bank shall derecognize a financial asset when, and only when: a) the contractual rights to the cash flows from the financial asset expire, or b) it transfers the financial asset and the transfer qualifies for derecognition.
On derecognition of a financial asset in its entirety, the difference between: a) the carrying amount (measured at the date of derecognition) and b) the consideration received (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss. If the transferred asset is part of a larger financial asset and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall be allocated between the part that continues tobe recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The difference between: a) the carrying amount (measured at the date of derecognition) allocated to the part derecognised and b) the consideration received for the part derecognised (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss.
9.1.3.4.2. POCI (PURCHASED OR ORIGINATED CREDIT-IMPAIRED FINANCIAL ASSETS) For purchased or originated credit-impaired financial assets, expected credit losses shall be discounted using the credit- adjusted effective interest rate determined at initial recognition.
At the reporting date, the Bank shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial assets.
At each reporting date, the Bank shall recognise in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. The Bank recognises favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition. 92 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9.1.3.4.3. CREDIT IMPAIRED FINANCIAL ASSETS
A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: a) significant financial difficulty of the issuer or the borrower; b) a breach of contract, such as a default or past due event; c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganization; e) the disappearance of an active market for that financial asset because of financial difficulties; or f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired.
9.1.3.4.4. COLLECTIVELY VS INDIVIDUALLY
In order to meet the objective of recognizing lifetime expected credit losses for significant increases in credit risk since initial recognition, it may be necessary to perform the assessment of significant increases in credit risk on a collective basis by considering information that is indicative of significant increases in credit risk on, for example, a group or sub- group of financial instruments. This is to ensure that the Bank meets the objective of recognizing lifetime expected credit losses when there are significant increases in credit risk, even if evidence of such significant increases in credit risk at the individual instrument level is not yet available.
Lifetime expected credit losses are generally expected to be recognized before a financial instrument becomes past due. Typically, credit risk increases significantly before a financial instrument becomes past due or other lagging borrower-specific factors (for example, a modification or restructuring) are observed. Consequently, when reasonable and supportable information that is more forward-looking than past due information is available without undue cost or effort, it must be used to assess changes in credit risk.
However, depending on the nature of the financial instruments and the credit risk information available for particular groups of financial instruments, the Bank may not be able to identify significant changes in credit risk for individual financial instruments before the financial instrument becomes past due. This may be the case for financial instruments such as retail loans for which there is little or no updated credit risk information that is routinely obtained and monitored on an individual instrument until a customer breaches the contractual terms. If changes in the credit risk for individual financial instruments are not captured before they become past due, a loss allowance based only on credit information at an individual financial instrument level would not faithfully represent the changes in credit risk since initial recognition.
In some circumstances the Bank does not have reasonable and supportable information that is available without undue cost or effort to measure lifetime expected credit losses on an individual instrument basis. In that case, lifetime expected credit losses shall be recognized on a collective basis that considers comprehensive credit risk information. This comprehensive credit risk information must incorporate not only past due information but also all relevant credit information, including forward-looking macroeconomic information, in order to approximate the result of recognizing lifetime expected credit losses when there has been a significant increase in credit risk since initial recognition on an individual instrument level.
For the purpose of determining significant increases in credit risk and recognizing a loss allowance on a collective basis, the Bank groups the financial instruments on the basis of shared credit risk characteristics with the objective of facilitating an analysis that is designed to enable significant increases in credit risk to be identified on a timely basis. The Bank should not obscure this information by grouping financial instruments with different risk characteristics.
9.1.3.4.5. PROBABILITY-WEIGHTED OUTCOME
The purpose of estimating expected credit losses is neither to estimate a worst-case scenario nor to estimate the best- case scenario. Instead, an estimate of expected credit losses shall always reflect the possibility that a credit loss occurs and the possibility that no credit loss occurs even if the most likely outcome is no credit loss.
93 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1 CREDIT RISK (CONTINUED) 9.1.4. CREDIT QUALITY The below tables show information about the credit quality of Financial Assets measured at Amortized Cost:
Cash and Balances with Central Bank
As at December 31, 2019 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Standard 6,867,746 - - - 6,867,746 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Gross Balances 6,867,746 - - - 6,867,746 Standard 159 - - - 159 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Allowance 159 - - - 159 Balances Net of Impairment 6,867,587 - - - 6,867,587
As at December 31, 2018 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Standard 7,120,301 - - - 7,120,301 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Gross Balances 7,120,301 - - - 7,120,301 Standard 169 - - - 169 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Allowance 169 - - - 169 Balances Net of Impairment 7,120,132 - - - 7,120,132
Due from banks
As at December 31, 2019 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Standard 3,897,337 - - - 3,897,337 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Gross Balances 3,897,337 - - - 3,897,337 Standard 556 - - - 556 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Allowance 556 - - - 556 Balances Net of Impairment 3,896,781 - - - 3,896,781
94 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1 CREDIT RISK (CONTINUED) 9.1.4. CREDIT QUALITY Due from banks (continued)
As at December 31, 2018 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Standard 17,454,093 - - - 17,454,093 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Gross Balances 17,454,093 - - - 17,454,093 Standard 7,020 - - - 7,020 Special monitoring - - - - - Substandard - - - - - Doubtful and Lost - - - - - Total Allowance 7,020 - - - 7,020 Balances Net of Impairment 17,447,073 - - - 17,447,073
Loans and advances to Customers
As at December 31, 2019 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Standard 27,215,695 1,581,016 5,377 - 28,802,088 Special monitoring 22,742 493,156 218,075 - 733,974 Substandard - - 747,349 - 747,349 Doubtful and Lost - - 2,667,079 - 2,667,079 Total Gross Balances 27,238,437 2,074,172 3,637,881 32,950,490 Standard 310,026 72,879 437 - 383,342 Special monitoring 53 50,627 60,197 - 110,878 Substandard - - 86,351 - 86,351 Doubtful and Lost - - 1,190,829 - 1,190,829 Total Allowance 310,079 123,506 1,337,814 - 1,771,400 Balances Net of Impairment 26,928,358 1,950,666 2,300,067 - 31,179,091
As at December 31, 2018 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Standard 14,069,174 2,559,297 32,489 - 16,660,960 Monitorim i veçantë 93,250 502,376 1,318,171 - 1,913,797 Nënstandard - - 271,027 - 271,027 Të dyshimtë dhe të humbur - - 5,610,295 - 5,610,295 Total Gross Balances 14,162,424 3,061,673 7,231,982 - 24,456,079 Standard 110,405 136,200 7,648 - 254,252 Special monitoring 11,186 68,453 218,972 - 298,611 Substandard - - 45,694 - 45,694 Doubtful and Lost - - 3,012,422 - 3,012,422 Total Allowance 121,591 204,653 3,284,736 - 3,610,979 Balances Net of Impairment 14,040,833 2,857,020 3,947,246 - 20,845,099
95 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1 CREDIT RISK (CONTINUED) 9.1.4. CREDIT QUALITY (CONTINUED) The internal rating systems described in Note 9.1.1 focus more on credit-quality mapping from the inception of the lending and investment activities.
The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. However, the majority of the impairment provision comes from bottom two grades. The table below shows the percentage of the Bank’s on-balance sheet items relating to loans and advances and the associated impairment provision for each of the Bank’s internal rating categories:
Bank’s rating 2019 2018
Loans and Impairment provision Loans and Impairment provision advances (%) level (%) advances (%) level (%) Investment Grade - - Standard 87.41 1.33 68.13 1.53 Special monitoring 2.23 15.07 7.83 15.60 Sub-standard 2.27 11.53 1.11 16.86 Doubtful and Loss 8.09 44.55 22.94 53.69 Total 100 5.36 100.00 14.77
9.1.5. MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS
Maximum exposure 2019 2018 Credit risk exposures relating to on-balance sheet assets are as follows: Cash and balances with Central Bank 5,289,070 5,341,403 Due from banks 3,896,781 17,447,072 Loans and advances to customers: Loans to individuals − Consumer/Overdrafts 2,671,833 2,037,421 − Credit cards 159,947 135,219 − Mortgages 7,232,790 5,525,917 10,064,570 7,698,557 Loans to corporate entities: − Large corporate customers 3,766,964 2,114,533 − Small and medium size enterprises (SMEs) 17,347,557 11,032,009 21,114,521 13,146,542 Total loans and advances to customers 31,179,091 20,845,099
Financial assets at fair value through OCI 28,275,976 23,857,367 Financial assets at amortized cost 2,589,250 -
Credit risk exposures relating to off-balance sheet items are as follows: Loans Commitment 3,703,042 6,379,489 Letters of Guarantees 844,660 305,799 Letters of Credit 296,100 5,739 At 31 December 76,073,970 74,181,968
96 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.5. MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS (CONTINUED)
The above table represents a worst-case scenario of credit risk exposure to the Bank at December 31, 2019 and 2018, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet.
Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and debt securities based on the following:
• 89.64 % of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2018: 75.95%); • Loans to SMEs, which represents the biggest group in the portfolio, are backed by collateral; • 80.01 % of the loans and advances portfolio are considered to be neither past due nor impaired (2018: 56.71%); and • The Bank has introduced a more stringent selection process upon granting loans and advances.
Loans and advances are summarised as follows: December 31, 2019 December 31, 2018 Loans and Loans and advances to advances to customers Due from banks customers Due from banks
Performing 26,364,628 3,897,337 13,868,578 17,454,093 Past due but not impaired 3,288,155 - 4,342,895 - Individually impaired 3,297,707 - 6,244,606 - Gross 32,950,490 3,897,337 24,456,079 17,454,093 Less: allowance for impairment (1,771,400) (556) (3,610,980) (7,020)
Carrying amount 31,179,091 3,896,781 20,845,099 17,447,073
Further information of the allowance for impairment of Due from banks and Loans and advanced to customers is provided in Notes 18 and 19.
97 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.6. LOANS AND ADVANCES
a) Loans and advances neither past due nor impaired
The credit quality of the portfolio of loans and advances that were neither past due nor impaired (classified as standard) as at 31 December 2019 can be assessed by reference to the internal rating system adopted by the Bank, as follows:
December 31, 2019 Loans and advances to customers Individual (retail customers) Corporate entities Large Total Loans Consumer/ Credit corporate and advances Due to Overdrafts cards Mortgages customers SMEs to customers Banks Gross carrying amount 2,334,368 140,539 5,954,409 2,992,166 14,943,146 26,364,628 3,897,337 Less: allowance for impairment (34,376) (7,701) (26,319) (41,448) (207,375) (317,218) (556) Net carrying amount 2,299,992 132,837 5,928,090 2,950,718 14,735,771 26,047,409 3,896,781
a) Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired (classified as standard) as at 31 December 2018 can be assessed by reference to the internal rating system adopted by the Bank, as follows:
December 31, 2018 Loans and advances to customers Individual (retail customers) Corporate entities
Total Large Loans and Consumer/ Credit corporate advances to Overdrafts cards Mortgages customers SMEs customers Due to Banks Gross carrying amount 1,597,041 115,864 3,650,573 2,003,215 6,501,885 13,868,578 17,454,093 Less: allowance for impairment (17,318) (4,507) (30,110) (11,999) (105,387) (169,320) (7,020) Net carrying amount 1,579,723 111,357 3,620,463 1,991,216 6,396,498 13,699,258 17,447,073
98 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.6. LOANS AND ADVANCES (CONTINUED) Loans and advances in the Sub-standard and Doubtful grades were considered not to be impaired after taking into consideration the recoverability from collateral for retail customer mortgage and consumer loans. b) Loans and advances past due but not impaired
Gross amount of loans and advances that are past due but not impaired:
(i) Loans and advances to customers
Corporate and SMEs December 31, 2019 December 31, 2018
Past due 1 up to 90 days 1,728,064 1,469,186 Past due 91-180 days 33,876 25,580 Past due 181-360 days 27,696 44,124 Past due > 360 days 21,391 528,931 Total 1,811,026 2,067,821 Fair value of collateral 1,168,568 1,852,040 Total loans and advances past due but not impaired at December 31 3,288,155 4,342,895
December 31, 2019 Individual (retail customers) Consumer/ Visa Overdrafts Mortgages Card Total Past due 1 up to 90 days 337,344 1,077,865 28,161 1,443,370 Past due 91-180 days 381.99 17,867 - 18,249 Past due 181-360 days 1,460.60 4,858 25 6,344 Past due > 360 days 5,147.98 4,010 7 9,164 Total 344,335 1,104,600 28,193 1,477,129 Fair value of collateral 206,755 1,097,763 - 1,304,517
December 31, 2019 Individual (retail customers) Consumer/ Visa Overdrafts Mortgages Card Total Past due 1 up to 90 days 419,462 1,693,506 24,569 2,137,537 Past due 91-180 days - 85,893 - 85,893 Past due 181-360 days - 22,028 - 22,028 Past due > 360 days - 29,616 - 29,616 Total 419,462 1,831,043 24,569 2,275,074 Fair value of collateral 279,003 1,791,636 - 2,070,639
99 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.1. CREDIT RISK (CONTINUED) 9.1.6. LOANS AND ADVANCES (CONTINUED) (ii) Due from banks
There are no loans and advances to banks as at December 31, 2019 and 2018, which are past due but not impaired. c) Loans and advances impaired Loans and advances to customers
The breakdown of the gross amount of individually impaired loans and advances by class, along with the fair value of related collateral held by the Bank as security, are as follows:
Consumer and Visa Corporate and Cards Mortgage SMEs Total December 31, 2019 Individually impaired loans 874 27,965 2,210,282 2,239,121 Fair value of collateral - - 2,113,797 2,113,797 December 31, 2018 Individually impaired loans 5,068 46,270 5,457,441 5,508,779 Fair value of collateral - 44,087 4,311,578 4,355,665
The breakdown of the gross amount of collectively impaired loans and advances by class, along with the fair value of related collateral held by the Bank as security, are as follows:
Consumer and Visa Corporate and Cards Mortgage SMEs Total December 31, 2019 Collectively impaired loans 156,204 334,445 567,938 1,058,587 Fair value of collateral 51,083 303,872 458,177 813,132 December 31, 2018 Collectively impaired loans 228,810 302,695 204,322 735,827 Fair value of collateral 72,544 267,462 100,773 440,779
The disclosed fair value of collateral is determined by local certified valuators and represents value realisable by the legal owners of the assets. Management considers the loans covered by collateral on corporate loans as impaired because experience shows that a significant proportion of the collateral on corporate loans cannot be enforced due to administrative and legal difficulties such as such as decrease of collateral value at auctions administered by bailiff office, time necessary for collaterals to be enforced. The impairment provisions reflect the probability that management will not be able to enforce its rights and repossess collateral on defaulted loans. Despite difficulties in enforcing repossession of collateral, the Bank's management will vigorously pursue the outstanding debts with all possible means at their disposal.
There are no individually impaired Due from banks as at December 31, 2019 and 2018.
100 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.2. MARKET RISK
Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s / issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.
The Market Risk issues are followed up in regular basis by “Asset & Liabilities Management Committee” (ALCO).
9.2.1. FOREIGN EXCHANGE RISK
Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Bank attempts to manage this risk by closing daily open foreign currency positions and by establishing and monitoring limits on open positions
Concentrations of currency risk – on and off-balance sheet financial instruments is presented below:
Other At December 31, 2019 EUR USD LEK currencies Total Assets Cash and balances with the Central Bank 3,546,431 406,619 2,873,029 41,507 6,867,587 Due from banks 1,838,297 962,015 469,854 626,615 3,896,781 Loans and advances to customers, net 16,658,999 739,537 13,766,220 14,334 31,179,091 Financial assets at FVOCI 10,306,039 - 17,969,937 - 28,275,976 Financial assets at AC 2,589,250 - - - 2,589,250 Total financial assets 34,939,016 2,108,171 35,079,040 682,458 72,808,685
Liabilities Due to banks 52,373 - 1,942,192 22,460 2,017,025 Due to customers 27,571,363 2,124,769 32,979,239 649,600 63,324,971 Lease liabilities 267,588 - - - 267,588 Total financial liabilities and equity 27,891,324 2,124,769 34,921,431 672,061 65,609,584 Net on-balance sheet currency position 7,047,692 (16,598) 157,609 10,396 7,199,101 Off-balance sheet items 2,086,525 376,750 2,380,526 - 4,843,802
101 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.2. MARKET RISK (CONTINUED) 9.2.1. FOREIGN EXCHANGE RISK (CONTINUED)
Other At December 31, 2018 EUR USD LEK currencies Total Assets Cash and balances with the Central Bank 3,206,455 398,400 3,491,895 23,382 7,120,132 Due from banks 15,758,362 1,032,755 - 655,956 17,447,073 Loans and advances to customers, net 10,610,595 827,426 9,391,516 15,562 20,845,099 Financial assets at FVOCI 5,886,887 - 17,970,480 - 23,857,367 Total financial assets 35,462,299 2,258,581 30,853,891 694,900 69,269,671
Liabilities and equity Due to banks 207,133 - 2,397,048 13,089 2,617,270 Due to customers 23,647,481 2,199,825 30,653,624 663,950 57,164,880 Total financial liabilities and equity 23,854,614 2,199,825 33,050,672 677,039 59,782,150 Net on balance sheet currency position 11,607,685 58,756 (2,196,781) 17,861 9,487,521 Off balance sheet items 4,895,848 40,431 611,519 1,143,228 6,691,026
Sensitivity analysis of currency risk
The Bank is mainly exposed to EUR and US Dollar (USD). The following table details the Bank’s sensitivity to the respective increase and decrease in the value of LEK against the foreign currencies. The percentage used is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a respective change in foreign currency rates. The Bank has applied a 10% increase or decrease to the currency exchange rates. A positive number below indicates an increase in profit and other equity where the LEK strengthens with respective percentages against the relevant currency.
31-Dec-19 31-Dec-18 Increase/(Decrease) Sensitivity of profit Sensitivity of Sensitivity of profit Sensitivity of in basis points or loss equity or loss equity EURO +/(-) 100 704,769 (704,769) 1,160,769 (1,160,769) USD +/(-) 100 (1,660) 1,660 5,876 (5,876) Other +/(-) 100 1,040 (1,040) 1,786 (1,786)
9.2.2. INTEREST RATE RISK
The Bank’s financial income and expenses are subject to the risk of fluctuations to the extent that income-earning assets and income-bearing liabilities mature or re-price at different times or in differing amounts. The Bank attempts to mitigate this risk by monitoring the re-pricing dates of its assets and liabilities. In addition, the actual effect will depend on a number of other factors, including the extent to which repayments are made earlier or later than the contracted dates and variations in interest rate sensitivity within re-pricing periods and among currencies.
Risk management activities are aimed at optimising net interest income, given market interest rate levels consistent with the Bank’s business strategies.
102 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.2. MARKET RISK (CONTINUED) 9.2.2. INTEREST RATE RISK (CONTINUED)
Asset-liability risk management activities are conducted in the context of the Bank’s sensitivity to interest rate changes.
In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rates. However, the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation.
The Bank attempts to mitigate this interest rate risk by monitoring the reprising dates of its assets and liabilities and setting product reprising terms in order to manage gain / loss from changes in market base rates. In addition, the Bank has contractual rights to revise the interest rates on the major part of its loan portfolio on a quarterly basis.
The following table presents the interest rate reprising dates for the Bank’s assets and liabilities. Variable-rate assets and liabilities have been reported according to their next rate change date. Fixed-rate assets and liabilities have been reported according to their scheduled principal repayment dates:
As at December Less than one From 1 to 3 From 3 to 12 Over Non-interest 31, 2019 month months months 1 year bearing Total Assets Cash and balances with the Central Bank 5,289,070 - - - 1,578,517 6,867,587 Loans and advances to banks 3,896,781 - - - - 3,896,781 Loans and advances to customers, net 2,220,076 3,779,982 24,320,763 858,270 - 31,179,091 Financial assets at FVOCI 966,417 3,923,017 10,870,644 12,515,898 - 28,275,976 Financial assets 2,589,250 2,589,250 at AC - - - - Total financial 72,808,685 assets 12,372,344 7,702,999 35,191,406 15,963,418 1,578,517
Liabilities Due to banks 2,017,025 - - - - 2,017,026 Due to customers 31,787,820 4,292,027 18,815,198 8,429,926 - 63,324,971 Lease liabilities 45,132 45,132 106,841 115,616 - 267,588 Total financial 33,804,846 4,337,159 18,922,039 8,545,541 - 65,609,585 liabilities Interest sensitivity gap (21,432,502) 3,365,840 16,269,367 7,417,877 1,578,517 7,199,099
103 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.2. MARKET RISK (CONTINUED) 9.2.2. INTEREST RATE RISK (CONTINUED)
The following table presents re-pricing dates for the Bank’s assets and liabilities as at December 31, 2018.
As at December Less than one From 1 to 3 From 3 to 12 Over Non-interest 31, 2019 month months months 1 year bearing Total Assets Cash and balances with the Central Bank 5,341,403 - - - 1,778,729 7,120,132 Due from banks 17,447,073 - - - - 17,447,073 Loans and advances to customers 3,115,770 3,108,503 14,306,110 314,716 - 20,845,099 Financial Assets at FVOCI 1,319,064 3,795,995 6,398,776 12,343,532 - 23,857,367 Total financial assets 27,223,310 6,904,498 20,704,886 12,658,248 1,778,729 69,269,671
Liabilities Due to banks 2,617,270 - - - - 2,617,270 Due to customers 28,216,602 4,554,405 20,403,079 3,978,133 12,661 57,164,880 Total financial liabilities 30,833,872 4,554,405 20,403,079 3,978,133 12,661 59,782,150 Interest sensitivity gap (3,610,562) 2,350,093 301,807 8,680,115 1,766,068 9,487,521
Due to specifics of Albanian market, a large amount of customer deposits has a maturity of less than onemonth. However, the potential negative effect of adverse evolution in interest rates is significantly reduced due to low interest rates set by the Bank on customer demand deposits.
The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. At December 31, 2019, if interest rates had been 100 basis points higher/lower with all other variables were held constant, the Bank’s pre-tax profit for the twelve-month period ended December 31, 2019 would respectively increase/ decrease by approximately Lek 58,155 thousand (2018: Lek 73,878 thousand).
104 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019 Interest rate sensitivity analysis by currency is presented below.
EUR USD Other currencies LEK Totali At December 31, 2019 Total interest-bearing 34,607,264 1,935,606 650,304 financial assets 33,974,337 71,157,511 Total interest-bearing 27,623,736 2,124,769 672,060 34,921,432 6 5 , 3 4 1 , 9 9 6 financial liabilities Interest sensitivity gap 6,983,528 (189,162) (31,756) (947,095) 5,815,515 Sensitivity if interest rates increase by 100 bp 69,835 (1,892) (318) (9,471) 58,155 Sensitivity if interest rates decrease by 100 bp (69,835) 1,892 318 9,471 (58,155)
EUR USD Other currencies LEK Totali At December 31, 2018 Total interest-bearing financial 34,553,489 2,077,935 671,517 29,854,357 67,157,298 assets Total interest-bearing financial liabilities 23,844,424 2,198,747 677,039 33,049,279 59,769,489
Interest sensitivity gap 10,709,065 (120,812) (5,522) (3,194,922) 7,387,809 Sensitivity if interest rates 107,091 (1,208) (55) (31,949) 73,879 increase by 100 bp Sensitivity if interest rates (107,091) 1,208 55 31,949 (73,879) decrease by 100 bp
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.3. LIQUIDITY RISK
Liquidity risk arises in the general funding of the Bank’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturity and rates (funding risk) and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate period to meet the liability obligations (market liquidity risk). Funds are raised using a broad range of instruments including deposits, other liabilities evidenced by paper, and share capital. The Bank makes its best efforts to maintain a balance between continuity of funding and flexibility using liabilities with a range of maturity. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required meeting business goals and targets set in terms of the overall Bank strategy, while regularly performing liquidity risk stress testing presented to the Board of Directors. In addition, the Bank holds a portfolio of liquid assets as part of its liquidity risk management strategy. The levels of these indicators are communicated on a daily basis to the persons in charge of the Bank's departments, and the comments, as well as the respective estimates, are included in the reporting package for the members of the Assets and Liabilities Management Committee ("ALCO"). ALCO has the responsibility to define the strategy for the development of assets and liabilities, depending on the qualitative and quantitative data of the organization and developments in the market; Ensure a high level of competition and effective organization; Maintain risks at defined limits; Manage assets and liabilities by applying price policies to products and services at the same time. For liquidity purposes, the Bank classifies demand and saving deposits as due on demand and maturing within one month. As a result, the remaining maturity liquidity gap of up to twelve months is increased. However, the bank performs various stress tests to confirm the ability to cover with liquidity any possible severe situation of deposits withdrawal. Furthermore, it has high level of liquid assets and a very diversified funding base with very low concentration which further lowers the liquidity risk.
105 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) The Bank is maintaining a portfolio of highly marketable financial assets that can easily be liquidated as protection against any unforeseen interruption to cash flow. The management of the Bank is monitoring liquidity ratios against internal and regulatory requirements on a daily basis. As a result, Management believes that the Bank can respond properly to possible cash outflows over short term.
9.3.1. LIQUIDITY RISK MANAGEMENT PROCESS
The management of liquidity risk is a key objective of the Bank and evolves a broad set of activities spanning from the close monitoring of its liquidity position to the management of its funding sources and the uses of funds, in a way that does not compromise the ability of the Bank to meet its obligations.
The Bank has adopted best practices and regulatory/supervisory guidelines in depicting the Bank’s liquidity position and the potential effects of adverse changes arising from the maturity (and non-renewal) of its funding sources as well as potential reduction in the value of its liquid assets. It exercises close monitoring of the cost of liquidity and it has ensured compliance with the regulatory liquidity risk framework while maintaining and regularly reviewing methodologies, policies, procedures and systems so as to effectively manage liquidity risk.
The bank has maintained under careful monitoring its liquidity levels ensuring they remain above the regulatory minimums and internal limits. Frequent stress tests are applied varying from sensitivity analysis to cash flow scenario analysis. The Bank has in place a contingency funding plan, well defined recovery plans and regularly updated internal regulatory framework covering the liquidity risk management.
106 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.3. LIQUIDITY RISK (CONTINUED) 9.3.1. LIQUIDITY RISK MANAGEMENT PROCESS (CONTINUED)
The table below analyses assets and liabilities into relevant time periods based on the remaining period at reporting date to the contractual maturity date. Assets and liabilities in foreign currency are converted into LEK using FX rates as at the year end. The assumptions made are that scheduled payments to the bank are honored in full and on time and in addition, all contractual payments are discharged in full – e.g. that depositors will withdraw their money rather than roll it over on maturity. Those assets and liabilities lacking actual maturities (e.g. open accounts, demand deposits, or savings accounts) are assigned to the time band less than one month.
Less than From 1 to 3 From 3 to 12 From 1 to 5 Over As at December 31, 2019 one month months months years 5 Years Total Assets liquidity Cash and balances with the Central Bank 6,867,587 - - - - 6,867,587 Due from banks 3,896,781 - - - - 3,896,781 Loans and advances to customers, net 1,307,159 1,586,024 10,873,367 5,372,704 12,039,837 31,179,091 Financial assets at FVOCI 966,417 3,923,017 10,870,644 5,765,892 6,750,007 28,275,976 Financial assets at AC - - - - 2,589,250 2,589,250 Other Assets 307,595 - - - - 307,595 Total financial assets 13,345,539 5,509,041 21,744,010 11,138,596 21,379,094 73,116,280
Liabilities liquidity Due to banks 2,017,025 - - - - 2,017,025 Due to customers 31,768,483 4,247,323 18,679,639 8,254,313 375,213 63,324,971 Other Liabilities 641,444 641,444 Loan commitments 1,968 176,290 3,279,909 32,475 212,399 3,703,042 Letters of Guarantees 17,047 60,840 766,773 - - 844,660 Letters of Credit - - 296,100 - - 296,100 Total financial liabilities 34,445,967 4,484,453 23,022,421 8,286,788 587,612 70,827,242 Net liquidity gap (21,100,428) 1,024,588 (1,278,410) 2,851,808 20,791,482 2,289,038
All Bank’s customer current accounts are included in liabilities maturing less than one month. Current accounts do represent balances that have a history and a deviation in amounts which is measured by the Bank and is far less than the shown negative gap on tenors less than one month. Any issue arising from liquidity mismatch is managed through inter-bank activity (borrowing, lending) within the pre-approved credit lines.
107 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. MENAXHIMI I RREZIKUT FINANCIAR (VAZHDIM) 9.3. RREZIKU I LIKUIDITETIT (VAZHDIM) 9.3.1. PROCESI I MENAXHIMIT TË RREZIKUT TË LIKUIDITETIT (VAZHDIM)
Tabela e mëposhtme tregon aktivet dhe detyrimet e Bankës nëpërmjet maturimit të mbetur kontraktual deri më 31 Dhjetor 2018:
Less than one From 1 to 3 From 3 to 12 From 1 to 5 Over As at December 31, 2018 month months months years 5 Years Total Assets liquidity Cash and balances with the Central Bank 7,120,132 - - - - 7,120,132 Due from banks 17,447,072 - - - - 17,447,072 Loans and advances to customers, net 757,526 1,489,365 5,854,332 9,289,300 3,454,576 20,845,099 Financial assets at FVOCI 1,319,065 3,795,995 6,398,776 12,343,532 - 23,857,368 Financial assets at AC 221,099 221,099 Total financial assets 26,864,894 5,285,360 12,253,108 21,632,832 3,454,576 69,490,770
Liabilities liquidity Due to banks 2,617,270 - - - - 2,617,270 Due to customers 28,213,708 4,516,796 20,188,064 4,246,312 - 57,164,880 Other Liabilities 374,244 374,244 Loan commitments 4,859,444 7,305 1,470,588 13,347 28,805 6,379,489 Letters of Guarantees 31,042 112,564 156,022 6,171 - 305,799 Letters of Credit 5,739 - - - - 5,739 Total financial liabilities 36,101,447 4,636,665 21,814,674 4,265,830 28,805 66,847,421 Net liquidity gap (9,236,553) 648,695 (9,561,566) 17,367,002 3,425,771 2,643,349
108 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.3. LIQUIDITY RISK (CONTINUED) 9.3.1. LIQUIDITY RISK MANAGEMENT PROCESS (CONTINUED)
Letters of credit and guarantees given to customers commit the Bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses.
9.4. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Financial instruments carried at amortized cost IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values have been based on management assumptions according to the profile of the asset and liability base. The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value.
Carrying value Fair value 2019 2018 2019 2018 FINANCIAL ASSETS
Cash and balances with the Central Bank 6,867,587 7,120,132 6,867,587 7,120,132 Due from banks 3,896,781 17,447,072 3,896,781 17,447,072 Loans and advances to customers 31,179,091 20,845,099 31,128,889 19,721,930 Financial assets at AC 2,589,250 - 2,589,250 - FINANCIAL LIABILITIES Due to customers 63,324,971 57,164,880 63,107,004 57,271,343 Due to banks 2,017,025 2,617,270 2,017,025 2,617,270 a) Cash and balances with the Central Bank, Due from banks
The fair value of cash and balances with the Central Bank is approximately equal to the carrying value, because of their short-term maturity. Loans and advances to banks include inter-bank placements. The fair value of fixed rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. With respect to deposits to banks, these are short-term deposits, for which the carrying interest rate does not significantly differ from the market interest rate as at 31 December 2019 and 2018. b) Loans and advances to customers
Loans and advances are net of allowances for impairment. For year 2019, the fair value of loans and advances to customers is approximately equal to their carrying value due to fact that the main part of the loan portfolio carries floating interest rates which reflect the changes in the market conditions. For year 2018, the Bank’s loan portfolio has an estimated fair value which is smaller than its book value due to the higher market interest rates prevailing at the end of 2018 as a result of the actual market conditions. The fair value of loans and advances to customers is their expected cash flow discounted at current market rates. Current market rates are interest rates the Bank would charge at the moment (year-end).
109 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.4. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) c) Due to banks and customers
The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand.
The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity. At year-end 2018, the carrying value differs from the fair value because the carrying interest rates are higher than the market interest rate as at December 31, 2018, because at year end the banks are granting higher interest rates in the competition to attract deposits. At year-end 2019, management estimates the due to customers fair value approximates the carrying value, because during the year 2019 the Bank has issued interest rates for the customer deposits similar to market.
Due to banks mainly refers to market borrowing with a maturity of one month from the date of the balances sheet and therefore their fair value is considered to approximate the carrying value.
Financial instruments measured at fair value
Fair value measurements are analysed by level in the fair value hierarchy as follows:
(i) Level 1 are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities;
(ii) Level 2 measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and
(iii) Level 3 measurements are valuations not based on observable market data (that is, unobservable inputs).
Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows:
December 31, 2019 Carrying amount Level 1 Level 2 Level 3 FINANCIAL ASSETS Cash and balances with the Central Bank 6,867,587 - 6,867,587 - Due from Banks 3,896,781 - 3,896,781 - Loans and advances to customers 31,128,889 - 31,128,889 Investment Securities at FVOCI 28,275,976 - 28,275,976 - Financial assets held to maturity 2,589,250 - 2,589,250 - FINANCIAL LIAIBILITIES Customer accounts 63,324,971 - 63,107,004 Due to banks 2,017,025 - 2,017,025
110 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.4. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
December 31, 2018 Carrying amount Level 1 Level 2 Level 3 FINANCIAL ASSETS Cash and balances with the Central Bank 7,120,132 - 7,120,132 - Due from Banks 17,447,072 - 17,447,072 - Loans and advances to customers 19,721,930 - - 19,721,930 Investment Securities at FVOCI 23,857,367 - 23,857,367 -
FINANCIAL LIAIBILITIES Customer accounts 57,271,343 - - 57,271,343 Due to banks 2,617,270 - - 2,617,270
9.5. CAPITAL MANAGEMENT
The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are:
• to comply with the capital requirements set by the Bank of Albania; • to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • to maintain a strong capital base to support the development of its business.
Capital adequacy and the use of regulatory capital are monitored by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by Bank of Albania, for supervisory purposes. The required information is filed with Bank of Albania on a quarterly basis. The Bank has established internal procedures in compliance with the regulation on "Capital Adequacy Ratio”, for the assessment and monitoring of capital requirement and capital adequacy.
Capital management and planning, ensures the Bank’s sustainability under normal and stressed conditions of the economic and financial environment, taking into account the risks that the Bank is exposed to. Capital targets are set to ensure sufficient stability to protect depositors, as well as to support on-going business, by keeping a comfort buffer over regulatory requirements. Capital management is also an integral part of the Internal Capital Adequacy Assessment
Process which aims to assess capital requirements in alignment with the Bank’s risk profile and strategy.
Bank of Albania requires the banks to: (a) hold the minimum level of the regulatory capital of 1 billion LEK and (b) maintain a ratio of total regulatory capital to the risk-weighted asset (the ‘Basel ratio’) at or above the Bank of Albania required minimum of 12% (2018: 12%). Bank of Albania has requested specifically that Tirana Bank maintains a minimum capital adequacy ratio of 15%, until February 2021.
Regulatory capital is the Bank's capital, calculated pursuant to the requirements of the Bank of Albania regulation, to cover credit risk, market risk and operational risk. The Bank’s regulatory capital is divided into two tiers. The Bank calculates the regulatory capital as the sum of Tier 1 capital and Tier 2 capital, considering the deductions pursuant to the requirements prescribed in the Bank of Albania regulations.
The Banks calculates risk-weighted exposures as the sum of the following elements: a) Items of exposures and possible exposures weighted for the credit, or counterparty risk; b) Capital requirements for market risks; and c) Capital requirement for operational risk.
111 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
9. FINANCIAL RISK MANAGEMENT (CONTINUED) 9.5. CAPITAL MANAGEMENT (CONTINUED)
The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended December 31, 2019 and 2018. The Bank’s capital adequacy is managed by its Risk Department. During these two years, the Bank complied with all of the externally imposed capital requirements.
2019 2018 Tier 1 capital Share capital 12,896,906 16,490,344 Reserves 1,374,250 1,374,250 Profit of the period 1,084,136 712,339 Revaluation differences for statutory reporting (904,290) (1,011,727) Total qualifying Tier 1 capital 14,451,002 17,565,206
Tier 2 capital
Deductions from regulatory capital (7,530,030) (8,305,213) Total regulatory capital 6,920,972 9,259,992
Total risk-weighted assets 41,920,793 31,243,124
Tier 1 ratio CAR ratio 16.51% 29.64%
The current year profit is included as an element of Common Equity Tier 1 after the audited financial statements are certified and reported to the regulator and after any intermediate (partial) dividend paid during the year, taxes and other obligations on the profit have been deducted. After the inclusion of the current year profit, management estimates the capital adequacy ratio to become 17.70% as at 31 December 2019 (2018: 29.64%).
10. INTEREST AND SIMILAR INCOME
Year ended December 31, Year ended December 31, 2019 2018
Income from loans and advances to customers 1,398,689 1,026,912 Income from financial assets at FVOCI 827,848 645,629 Income on accounts with banks 38,014 65,305 Total interest and similar income 2,264,561 1,737,846
11. INTEREST EXPENSE
Year ended December 31, Year ended December 31, 2019 2018
Interest expense on due to customers 155,428 161,053 Interest expense on due to banks 18,055 33,886 Interest expense on lease liabilities 489 - Total Interest and similar expense 173,971 194,939
112 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
12. NET FEES AND COMMISSION INCOME
Year ended December 31, Year ended December 31, 2019 2018 Fee income earned from services that are provided over a certain period of time Account maintenance fee 165,468 169,655 Other Banking Services 83,333 77,792 Commission from Visa Card 115,100 76,004
Fee income from providing financial services and earned on the execution of a transaction Transfer and payments 83,911 73,357 Import-Export 13,940 12,776 Letters of Credit and other 9,744 7,517 Total fees and commission income 471,496 417,101
Credit Cards (17,069) (17,099) Banking services (1,570) (2,336) Correspondent banks (3,868) (1,775) Total fees and commission expense (22,507) (21,211) Net fee and commission income 448,989 395,890
13. EXPECTED CREDIT LOSSES FROM ADVANCES TO BANKS, SECURITIES AND OFF-BALANCE SHEET ITEMS
Year ended December 31, Year ended December 31, 2019 2018 Banks (6,392) (18,888) Financial assets at FVOCI (11,267) 75,349 Financial assets at amortized cost 172,411 - Off-balance sheet 41,589 (9,687) Foreign exchange 201 1,895 Total 196,542 48,669
14. PERSONNEL
Year ended December 31, Year ended December 31, 2019 2018
Wages and salaries 573,118 560,808 Contributions to state pension funds 70,325 68,316 Other staff costs 15,757 25,665 Totali 659,200 654,789
113 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
15. OTHER OPERATING EXPENSES
Year ended December 31, Year ended December 31, 2019 2018
Fees for deposits insurance (ASD) 201,993 205,702 Telecommunication expenses 153,182 116,382 Card related expenses 111,988 75,431 Security and maintenance expenses 103,618 123,241 Advertising and marketing 56,587 28,390 Fees and other similar expenses 45,796 42,973 Utility expenses 34,840 40,814 Bank resolution fund 33,221 34,290 Other insurance expenses 29,609 23,647 Taxes (excluding income tax) 25,117 25,903 Stationeries and consumables 14,469 12,955 Travel expense 9,976 17,464 Rental charges payable under operating leases - 160,583 Other expenses 112,213 33,179 Total 932,609 940,954
16. INCOME TAX EXPENSE
The components of income tax expense for the years ended December 31, 2019 and 2018 are:
Year ended December 31, Year ended December 31, 2019 2018 Current tax Current tax expense (230,091) - Deferred tax Relating to origination and reversal of temporary differences (3,029) (4,233) Income tax expense reported in profit or loss (233,120) (4,233)
114 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
16. INCOME TAX EXPENSE (CONTINUED) Reconciliation between the tax expense and the accounting profit multiplied by Albania’s domestic tax rate for the years ended December 31, 2019 and 2018 is as follows:
Year ended December 31, Year ended December 31, 2019 2018 Accounting (loss)/ profit before tax as per IFRS financial statements 633,960 (1,627,236) Theoretical income tax at 15% (2018: 15%) 95,094 (244,085) Tax effect of permanent differences: 134,997 59,767 -Income which is exempt from taxation (4,727) (8,538) -Non-deductible expenses 139,724 68,305 Current-year losses for which no deferred tax asset is recognized 230,091 - Current tax expense 230,091 -
Deferred tax Repossessed assets revaluation - (28,833) Other deferred tax items (3,029) 24,600 Deferred tax income charged in profit or loss (3,029) (4,233) Financial assets to FVOCI 61,170 6,220 Deferred tax expense charged in other comprehensive income 61,170 6,220
The effective income tax rate for 2019 is 37% (2018: nil). As per tax assessment notice on tax liabilities dated March 27, 2019 for the fiscal period from 2014 to 2017, the accumulated loss of the Bank for the year ended December 31, 2017 was reassessed to Lek 234,471 thousand. Following the change in the ownership of the Bank as described in note 30.1, the Bank is not eligible to carry forward tax losses as prescribed in article 27 of law no. 8438, dated December 28, 1998 “On income tax”, amended.
Corporate income tax payable/(receivable) 2019 2018 Income tax (receivable) as at 1 January (103,023) (155,303) Income tax prepaid to Tax Office (199,245) - Withholding tax prepaid to Tax Office 103,023 52,280 Current Income tax 230,091 - Income tax payable /(receivable) as at 31 December 30,846 (103,023)
The deferred tax included in the balance sheet and changes recorded in the income tax expense are as follows: 2019 Deferred tax Deferred tax Income Financial assets Assets Liabilities Statement available for sale Reserve
(Dr)/Cr (Dr)/Cr Rivlerësimi i aktiveve të riposeduara - - - - Aktivet financiare përmes FVOCI - (123,138) - 61,170 Zëra të tjerë të tatimit të shtyrë 81,481 - (3,029) - Total 81,481 (123,138) (3,029) 61,170 Deferred tax liability, net (41,657)
115 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
16. INCOME TAX EXPENSE (CONTINUED)
2018 Deferred tax Deferred tax Income Financial assets Assets Liabilities Statement available for sale Reserve
(Dr)/Cr (Dr)/Cr
Repossessed assets revaluation - - (28,833) - Financial assets through FVOCI - (61,958) - 6,220 Other deferred tax items 84,510 - 24,600 - Total 84,510 (61,958) (4,233) 6,220 Deferred tax assets, net 22,551
As at December 31, 2019 and 2018, other deferred tax items, include deferred tax assets/liabilities as a result of temporary differences between the carrying amount and tax base at the balance sheet date of Property, plant and equipment’s and loan commissions.
17. CASH AND BALANCES WITH THE CENTRAL BANK
As at December 31, As at December 31, 2019 2018
Cash in hand Notes and coins in LEK 856,889 666,058 Notes and coins in foreign currency 721,628 1,112,671 1,578,517 1,778,729 Balances with the Central Bank Current account in LEK 245,098 333,477 in foreign currency 32 167 245,130 333,644 Compulsory reserves in LEK 1,768,130 2,489,451 in foreign currency 3,275,663 2,517,021 5,043,793 5,006,472 Accrued interest 306 1,456 Impairment (159) (169) Total balances with Central Bank 5,289,070 5,341,403
Total cash and balances with Central Bank 6,867,587 7,120,132
116 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
17. CASH AND BALANCES WITH THE CENTRAL BANK (CONTINUED) Included in balances with the Central Bank is the statutory reserve for liquidity purposes, which represents a minimum reserve deposit, required by the Central Bank of Albania. Statutory reserves were calculated as a percentage of 10% of the amount of deposits at the end of each month owed to banks and customers, and were held both in LEK and in foreign currency (USD and EUR), up to 24 July 2018.
Since 24 July 2018, the reserve ratio in LEK is: • 7.5% for the liabilities included in the reserve base and with a maturity term up to 12 months. • 5.0% for the liabilities included in the reserve base and with an initial maturity term of over 12 months to 2 years. Since 24 July 2018, the reserve ratio in foreign currency is: • 12.5% for the liabilities included in the reserve base, when the ratio of "liabilities in the relevant currency / the total of liabilities" of the Bank is up to 50 (fifty) per cent”. • 20% for the liabilities included in the reserve base, when the ratio of "liabilities in the relevant currency / the total of liabilities" of the Bank is higher than 50 (fifty) per cent”.
The Bank must hold its minimum reserves in the reserve accounts at the Bank of Albania. During the maintenance period, the Bank may use only the minimum reserve in LEK, provided that the average of the reserve balance on the last day of the maintenance period does not fall below the required reserve level. The level of reserves, used on daily basis by the Bank is expressed as a percentage and it is decided by the Bank of Albania’s Supervisory Council. Starting from February 24th,2018, the ratio is 70 per cent of the minimum required reserves. Cash and balances with Central Bank, excluding cash in hand, is included in the analysis of the maximum exposure to credit risk (Note 9.1.5).
Interest on statutory reserve in the Central Bank is calculated as follows:
2019 Currency Minimum Maximum Calculating method LEK 1.00% 1.00% 100% of base lending rate USD - - n.a EUR -0.40% -0.50% ECB interest rate on the deposit 2018 Currency Minimum Maximum Calculating method LEK 0.88% 1.00% 70%-100% of base lending rate USD - - n.a EUR -0.40% -0.40% ECB interest rate on the deposit
18. DUE FROM BANKS
As at December 31, As at December 31, Current accounts 2019 2018 Nostro and demand deposits with banks 1,377,217 1,979,254 Total current accounts 1,377,217 1,979,254
Placements Placements – non resident 2,519,970 15,465,720 Accrued Interest 137 9,119 Total placements 2,520,107 15,474,839
Impairment on loans and advances to banks (543) (7,020)
Total loans and advances to banks 3,896,781 17,447,073
117 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
18. DUE FROM BANKS (CONTINUED) Llogaritë rrjedhëse me Bankën Qendrore janë pa interesa. Normat e interesit për llogaritë e depozitave Nostro dhe me të parë janë luhatëse. Llogaritë Nostro dhe me të parë detajohen në tabelën si më poshtë.
S&P Year ended December Year ended December LT/ST 31, 2019 31, 2018
Nostro and demand deposits with banks Raiffeisen Bank International AG BBB+ 24,667 30,544 Deutche Bank AG BBB+ 1,239,621 1,917,735 Deutsche Bank Trust Bank Americas BBB+ 89,140 2,476 Piraeus Bank SA B- 23,789 28,499 Total 1,377,217 1,979,254
S&P December 31, 2019 LT/ST Currency Original Currency In Lek ‘000 OTP Bank B+ ALL 350,000,000 350,000 Union Bank B+ ALL 120,000,000 120,000 Alpha Bank Greqi B- EUR 5,000,000 608,850 BBVA A- GBP 4,000,000 572,000 BBVA A- USD 8,000,000 869,120 Accrued Interest 137 Total 2,520,107
December 31, 2018 S&P LT/ST Currency Original Currency In Lek ‘000 Piraeus Bank B- EUR 85,000,000 10,490,700 BBVA A- EUR 27,000,000 3,332,340 BBVA A- GBP 4,500,000 618,390 BBVA A- USD 9,500,000 1,024,290 Accrued Interest 9,119 Total 15,474,839
The table below shows the changes in the loss allowance of Due from Banks and the reasons for those changes during year 2019:
Stage 1 Stage 2 Stage 3 POCI Total Loss allowance as at January 1, 2019 7,020 - - - 7,020 Movements with profit or loss impact: - - - Transfer between Stages - - - - - New financial assets originated or purchased 535 - - - 535 Changes in PDs/LGDs/EADs (6,917) - - - (6,917) Changes to model assumptions and methodologies - - - - - Modification of contractual cash flows of financial assets - - - - - Unwind of discount - - - - - Write offs - - - - - FX and other movements - - - - Total net profit or loss charge during the period (6,382) - - - (6,382) Other movements with no profit or loss impact (94) - - - (94) Financial assets derecognized during the period - - - - - Loss allowance as at December 31, 2019 543 - - - 543
118 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
18. DUE FROM BANKS (CONTINUED) The table below shows the changes in the loss allowance for Due from Banks and the reasons for those changes during year 2018:
Stage 1 Stage 2 Stage 3 POCI Total Loss allowance as at January 1, 2018 27,909 - - - 27,909 Movements with profit or loss impact: - - - - Transfer between Stages - - - - - New financial assets originated or purchased - - - - - Changes in PDs/LGDs/EADs (18,888) - - - (18,888) Changes to model assumptions and methodologies - - - - - Modification of contractual cash flows of financial assets - - - - - Unwind of discount - - - - - Write offs - - - - - FX and other movements (2,001) - - - (2,001) Total net profit or loss charge during the period (20,889) - - - (20,889) Other movements with no profit or loss impact - - - - - Financial assets derecognised during the period - - - - - Loss allowance as at December 31, 2018 7,020 - - - 7,020
Changes in the gross carrying amount of Due from Banks during 2019 that have contributed to changes in the loss allowances are presented in the below table:
Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount as of January 1, 2019 17,454,093 - - - 17,454,093 Transfer between Stages - - - - -
Financial assets derecognised during the period other than write- offs - - - - - New financial assets originated or purchased 3,897,337 - - - 3,897,337 Modification of contractual cash flows of financial assets - - - - - Changes in Interest accruals - - - - - Write – offs - - - - - FX and other movements (17,454,106) - - - (17,454,106) Gross carrying amount as at December 31, 2019 3,897,324 - - - 3,897,324
119 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
18. DUE FROM BANKS (CONTINUED)
Changes in the gross carrying amount of Due from Banks during the year 2018 that have contributed to changes in the loss allowances are presented in the below table:
Stage 1 Stage 2 Stage 3 POCI Totali Gross carrying amount as of January 1, 2018 26,544,252 - - - 26,544,252 Transfer between Stages - - - - - Financial assets derecognised during the period other than write- offs - - - - - New financial assets originated or purchased 15,479,137 - - - 15,479,137 Modification of contractual cash flows of financial assets - - - - - Changes in Interest accruals - - - - - Write – offs - - - - - FX and other movements (24,569,296) - - - (24,569,296) Gross carrying amount as at December 31, 2018 17,454,093 - - - 17,454,093
19. LOANS AND ADVANCES TO CUSTOMERS, NET
As at December 31, 2019 As at December 31, 2018
Corporate lending 3,260,375 2,124,845 SME lending 19,246,861 14,076,514 Total corporate and SME lending 22,507,236 16,201,359 Consumer lending 2,528,476 1,951,032 Mortgage 7,420,511 5,830,675 Overdrafts 257,159 195,803 Credit cards 213,333 242,439 Loan commissions deferred (75,597) (83,110) Accrued interest 99,372 117,881 Gross loans and advances 32,950,490 24,456,079
Less: Allowance for impairment losses (1,771,399) (3,610,980)
Total 31,179,091 20,845,099 Current 13,766,535 9,917,566 Non-current 17,412,556 10,927,533
The table below shows the industry analysis of gross loans (without taking into consideration the “Loan commissions deferred” and “Accrued interest”) granted to corporate and SMEs clients.
2019 2018
Manufacturing 3,984,734 4,309,209 Electricity 1,536,697 773,169 Trade 7,342,864 5,258,929 Construction 2,806,142 2,164,076 Other industries 6,836,800 3,695,976 Total gross loans 22,507,236 16,201,359
120 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED)
The interest rates for Loans and advances to customers are floating and are presented as follows:
Currency 2019 2018 12 monthsj TRIBOR LEK 12 months TRIBOR + (1% - 10%) + (1% - 8%) 12 months LIBOR + USD 12 months LIBOR + (2% - 6%) (6%) 12 months EUR 12 months EURIBOR+ (2% - 10%) EURIBOR+ (2% - 5%)
The movement in allowances (impairment) for losses on loans and advances to customers is as follows:
2019 2018 At 1 January 3,610,980 3,555,845
Write off (1,533,261) (504,361) Charge for the year (389,450) 528,404 Exchange rate effect (20,298) (121,738) Other movements (payment from WO) 103,429 152,830 At 31 December 1,771,400 3,610,980
Individual impairments 921,666 2,594,447 Collective impairments 849,734 1,016,533 1,771,400 3,610,980
The movement in allowances for losses by classes of loans during 2019 is as follows:
Credit cards and Corporate and SME Consumer Mortgages overdrafts Total
At January 1, 2019 3,088,141 111,776 304,664 106,399 3,610,980 Write Offs (1,415,684) (11,393) (48,152) (58,032) (1,533,261) Charge for the year (325,709) 11,624 (79,896) 4,531 (389,450) Exchange rate effect (17,189) (153) (2,956) - (20,298) Other (payment from WO) 80,474 7,981 14,974 - 103,429 At December 31, 2019 1,410,033 119,835 188,634 52,898 1,771,400
The movement in allowances for losses by classes of loans during 2018 is as follows:
Credit cards and Corporate and SME Consumer Mortgages overdrafts Total At January 1, 2018 3,101,041 109,717 272,191 72,897 3,555,846 Write Offs (455,655) (30,791) (17,904) (11) (504,361) Charge for the year 466,245 11,216 23,613 27,330 528,404 Exchange rate effect (105,265) (1,119) (15,355) - (121,739) Other (payment from WO) 81,775 22,752 42,119 6,184 152,830 At December 31, 2018 3,088,141 111,775 304,664 106,400 3,610,980
121 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED)
In accordance with IFRS 9 below are presented the changes in the loss allowance for loans and advances to customers and the reasons for those changes during year 2019 and 2018 as per loan category. In the summary table below is presented an explanation of how changes in the gross carrying amount of loans and advances to customers during the period contributed to changes in the loss allowance during the period ended December 31, 2019 and 2018.
Stage 1 Stage 2 Stage 3 POCI Total Loss allowance as at January 1, 2019 121,590 204,653 3,284,736 - 3,610,980 Movements with profit or loss impact Transfers: 81,641 630 (82,271) - - Transfers from Stage 1 to Stage 2 (3,844) 3,844 - - - Transfers from Stage 1 to Stage 3 (413) - 413 - - Transfers from Stage 2 to Stage 1 41,906 (41,906) - - - Transfers from Stage 2 to Stage 3 - (20,897) 20,897 - - Transfers from Stage 3 to Stage 2 43,992 - (43,992) - - Transfers from Stage 3 to Stage 1 - 59,589 (59,589) - - New financial assets originated or purchased 200,619 20,146 261,699 - 482,465 Changes in PDs/LGDs/EADs (92,436) (108,064) (255,970) - (456,471) Changes to model assumptions and methodologies - - - - - Modification of contractual cash flows - - - - - Write-offs 937 - (519,810) (518,873) FX and other movements - - 103,326 103,429 Total net profit or loss charge during the period 190,760 (87,287) (492,924) - (389,450) Other movements with no profit or loss impact (1,578) (1,446) (1,447,106) (1,450,130) Derecognised during the period - - - - - Loss allowance as at December 31, 2019 310,772 115,921 1,344,707 1,771,400
Stage 1 Stage 2 Stage 3 POCI Total Loss allowance as at January 1, 2018 81,321 86,034 3,388,491 - 3,555,846 Movements with profit or loss impact Transfers: 30,211 (59,176) 28,965 - - Transfers from Stage 1 to Stage 2 5,733 (5,733) - - - Transfers from Stage 1 to Stage 3 (2,083) - 2,083 - - Transfers from Stage 2 to Stage 1 13,441 (13,347) (94) - - Transfers from Stage 2 to Stage 3 12,424 (59,576) 47,152 - - Transfers from Stage 3 to Stage 2 696 (11,549) 10,853 - - Transfers from Stage 3 to Stage 1 - 31,029 (31,029) - - New financial assets originated or purchased 50,293 36,763 40,803 - 127,859 Changes in PDs/LGDs/EADs (37,256) 145,594 464,793 - 573,131 Changes to model assumptions and methodologies - - - - - Modification of contractual cash flows - - - - - Write-offs - - (19,757) - (19,757) FX and other movements - - (152,830) (152,830) Total net profit or loss charge during the period 43,248 123,181 361,974 - 528,403 Other movements with no profit or loss impact (2,978) (4,563) (465,729) - (473,270) Derecognised during the period - - - - - Loss allowance as at December 31, 2019 121,589 204,654 3,284,736 - 3,610,980
122 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
19. HUATË DHE PARADHËNIET PËR KLIENTËT, NETO (VAZHDIM)
Changes in the gross carrying amount of loans and advances to customers during the period which contributed to changes in the loss allowance is presented in below table:
Stage 1 Stage 2 Stage 3 POCI Totali Gross carrying amount as at January 1, 2019 14,162,426 3,061,674 7,231,979 24,456,079 Transfers: 916,668 (124,971) (791,697) - - Transfer from Stage 1 to Stage 2 (370,312) 370,312 - - - Transfer from Stage 1 to Stage 3 (60,924) - 60,924 - - Transfer from Stage 2 to Stage 1 1,335,191 (1,335,191) - - - Transfer from Stage 2 to Stage 3 (109,070) 109,070 - - Transfer from Stage 3 to Stage 1 12,714 (12,714) - - Transfer from Stage 3 to Stage 2 - 948,978 (948,978) - - Financial assets derecognised during the period other than write-offs - - - - - New assets originated or purchased 15,261,398 175,205 1,054,874 - 16,491,477 Net new disbursement/ (735,809) (6,308,007) loan payments (3,299,345) (2,272,853) - Modification of contractual cash flows - - - - Changes in interest accrual - - - - Write-offs (949) - (1,532,311) - (1,533,260) FX and other movements (74,731) (27,713) (53,355) - (155,799) Gross carrying amount 26,965,468 2,348,386 3,636,636 - 32,950,490 as at December 31, 2019
Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount as at January 1, 2018 16,753,826 1,912,914 8,705,045 - 27,371,786 Transfers: (1,698,086) 1,226,225 471,861 - - Transfer from Stage 1 to Stage 2 (1,757,845) 1,757,845 - - - Transfer from Stage 1 to Stage 3 (388,891) - 388,891 - - Transfer from Stage 2 to Stage 1 418,130 (418,130) Transfer from Stage 2 to Stage 3 - (251,699) 251,699 - - Transfer from Stage 3 to Stage 1 - 138,209 (138,209) - - Transfer from Stage 3 to Stage 2 30,520 - (30,520) - - Financial assets derecognised during the period other than write-offs - - - - - New assets originated or purchased 3,809,898 499,777 213,693 - 4,523,368 Net new disbursement/ loan payments (4,052,717) (469,471) (1,297,681) - (5,819,869) Modification of contractual cash flows - - - - - Changes in interest accrual - - - - - Write-offs - - (504,361) - (504,361) FX and other movements (650,497) (107,772) (356,575) - (1,114,844) Gross carrying amount 14,162,424 3,061,673 7,231,983 - 24,456,079 as at December 31, 2018
123 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED)
Table of changes in the loss allowance for loans to companies and the reasons for those changes:
Companies
Stage 1 Stage 2 Stage 3 Total Loss allowance as at January 1, 2019 91,160 67,778 2,929,203 3,088,141 Movements with profit or loss impact Transfers: 38,954 29,342 (68,296) - Transfers from Stage 1 to Stage 2 (3,053) 3,053 - - Transfers from Stage 1 to Stage 3 (177) - 177 - Transfers from Stage 3 to Stage 1 1,170 (1,170) - - Transfers from Stage 2 to Stage 1 - - - - Transfers from Stage 2 to Stage 3 41,014 - (41,014) - Transfers from Stage 3 to Stage 2 - 27,459 (27,459) - New financial assets originated or purchased 178,634 16,579 253,423 448,636 Changes in PDs/LGDs/EADs (48,253) (68,693) (231,557) (348,503) Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs 937 - (507,252) (506,315) FX and other movements - - 80,473 80,473 Total net profit or loss charge during the period 170,272 (22,772) (473,209) (325,709) Other movements with no profit or loss impact (1,517) (587) (1,350,296) (1,352,400) Derecognised during the period - - - - Loss allowance as at December 31, 2019 259,915 44,420 1,105,698 1,410,034
Stage 1 Stage 2 Stage 3 Total Loss allowance as at January 1, 2019 43,550 11,338 3,046,153 3,101,041 Movements with profit or loss impact Transfers: 14,333 (58,128) 43,795 - Transfers from Stage 1 to Stage 2 7,526 (7,526) - - Transfers from Stage 1 to Stage 3 (1,208) - 1,208 - Transfers from Stage 3 to Stage 1 - (45,407) 45,407 - Transfers from Stage 2 to Stage 1 - - - - Transfers from Stage 2 to Stage 3 - 2,820 (2,820) - Transfers from Stage 3 to Stage 2 14,333 (58,128) 43,795 New financial assets originated or purchased 39,103 21,499 27,059 87,661 Changes in PDs/LGDs/EADs (4,333) 93,778 404,389 493,834 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - (33,475) (33,475) FX and other movements - - (81,775) (81,775) Total net profit or loss charge during the period 49,103 57,149 359,993 466,245 Other movements with no profit or loss impact (1,493) (709) (476,943) (479,145) Derecognised during the period - - - - Loss allowance as at December 31, 2018 91,160 67,778 2,929,203 3,088,141
124 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED)
Companies (continued)
Changes in the gross carrying amount of loans and advances to companies during the period which contributed to changes in the loss allowance is presented in below table:
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2019 7,940,033 2,023,451 6,271,199 16,234,683
Transfers: 722,710 42,615 (765,325) - Transfer from Stage 1 to Stage 2 (250,538) 250,538 - - Transfer from Stage 1 to Stage 3 (44,191) - 44,191 - Transfer from Stage 2 to Stage 1 1,017,439 (1,017,439) - - Transfer from Stage 2 to Stage 3 - (6,068) 6,068 - Transfer from Stage 3 to Stage 1 - - - - Transfer from Stage 3 to Stage 2 - 815,584 (815,584) - Derecognised during the period other than write-offs - - - - New financial assets originated or purchased 11,484,676 157,639 1,024,959 12,667,274 Increase/(Decrease) due to new disbursement/loan payments (2,122,405) (587,182) (2,142,324) (4,851,912) Modification of contractual cash flows - - - - Changes in interest accrual - - - - Write-offs (950) - (1,414,735) (1,415,684) FX and other movements (44,785) (19,549) (45,487) (109,820) Gross carrying amount as at 17,979,279 1,616,975 2,928,287 22,524,542 December 31, 2019
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2018 10,683,803 750,926 7,565,544 19,000,274 Transfers: (1,577,912) 1,170,533 407,379 Transfer from Stage 1 to Stage 2 (1,432,576) 1,432,576 - - Transfer from Stage 1 to Stage 3 (321,757) - 321,757 - Transfer from Stage 2 to Stage 3 - (114,054) 114,054 - Transfer from Stage 3 to Stage 2 - 7,443 (7,443) - Transfer from Stage 3 to Stage 1 20,988 - (20,988) - Transfer from Stage 2 to Stage 1 155,434 (155,434) - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 2,160,942 405,660 160,612 2,727,214 Increase/(Decrease) due to new disbursement/loan payments (2,874,128) (255,338) (1,108,358) (4,237,824) Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (455,655) (455,655) FX and other movements (452,675) (48,330) (298,321) (799,326) Gross carrying amount as at 7,940,030 2,023,450 6,271,203 16,234,683 December 31, 2018
125 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED)
Table of changes in the loss allowance for consumer loans and the reasons for those changes:
Consumer Stage 1 Stage 2 Stage 3 Total Loss allowance as at January 1, 2019 15,300 22,319 74,156 111,775 Movements with profit or loss impact Transfers: 6,207 (7,957) 1,750 - Transfers from Stage 1 to Stage 2 (248) 248 - - Transfers from Stage 1 to Stage 3 (140) - 140 - Transfers from Stage 3 to Stage 1 4,777 (4,777) - - Transfers from Stage 2 to Stage 1 - (8,269) 8,269 - Transfers from Stage 2 to Stage 3 1,818 - (1,818) - Transfers from Stage 3 to Stage 2 - 4,841 (4,841) - New financial assets originated or purchased 14,961 3,198 5,611 23,770 Changes in PDs/LGDs/EADs (2,973) (3,163) 313 (5,823) Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - (14,202) (14,202) FX and other movements - - 7,879 7,879 Total net profit or loss charge during the period 18,195 (7,922) 1,453 11,624 Other movements with no profit or loss impact (2) (33) (3,529) (3,564) Derecognised during the period - - - - Loss allowance as at December 31, 2019 33,493 14,364 72,080 119,835
Stage 1 Stage 2 Stage 3 Total Loss allowance as at January 1, 2018 13,628 8,621 87,470 109,719 Movements with profit or loss impact Transfers: 2,755 50 (2,805) - Transfers from Stage 1 to Stage 2 (384) 384 - - Transfers from Stage 1 to Stage 3 (266) - 266 - Transfers from Stage 3 to Stage 1 - (1,011) 1,011 - Transfers from Stage 2 to Stage 1 696 - (696) - Transfers from Stage 2 to Stage 3 - 3,386 (3,386) - Transfers from Stage 3 to Stage 2 2,755 50 (2,805) - New financial assets originated or purchased 8,282 5,402 4,896 18,580 Changes in PDs/LGDs/EADs (9,141) 8,500 10,121 9,480 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - 5,509 5,509 FX and other movements - - (22,353) (22,353) Total net profit or loss charge during the period 1,896 13,952 (4,632) 11,216 Other movements with no profit or loss impact (223) (254) (8,682) (9,159) Derecognised during the period - - - - Loss allowance as at December 31, 2018 15,300 22,319 74,156 111,775
126 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED)
Consumer (continued)
Changes in the gross carrying amount of consumer loans during the period which contributed to changes in the loss allowance is presented in below table:
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2019 1,801,177 184,026 163,994 2,149,196 Transfers: 14,971 (23,554) 8,582 - Transfer from Stage 1 to Stage 2 (39,027) 39,027 - - Transfer from Stage 1 to Stage 3 (7,427) - 7,427 - Transfer from Stage 2 to Stage 3 56,925 (56,925) - - Transfer from Stage 3 to Stage 2 - (25,404) 25,404 - Transfer from Stage 3 to Stage 1 4,500 (4,500) - Transfer from Stage 2 to Stage 1 - 19,748 (19,748) - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 1,272,395 7,048 19,356 1,298,798 Increase/(Decrease) due to new disbursement/loan payments (569,230) (36,084) (35,695) (641,009) Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs (11,393) (11,393) FX and other movements (2,658) (748) (508) (3,915) Gross carrying amount as at 2,516,654 130,688 144,336 2,791,678 December 31, 2019
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2018 1,571,986 182,465 213,878 1,968,329 Transfers: (28,781) 17,379 11,402 Transfer from Stage 1 to Stage 2 (67,090) 67,090 - - Transfer from Stage 1 to Stage 3 (18,653) - 18,653 - Transfer from Stage 2 to Stage 3 - (19,779) 19,779 - Transfer from Stage 3 to Stage 2 - 26,681 (26,681) - Transfer from Stage 3 to Stage 1 349 - (349) - Transfer from Stage 2 to Stage 1 56,613 (56,613) - - Financial assets derecognised during the period - - - - other than write-offs New financial assets originated or purchased 843,302 23,972 7,389 874,663 Increase/(Decrease) due to new disbursement/loan (567,906) (35,206) (32,799) (635,911) payments Modification of contractual cash flows of financial - - - - assets Changes in interest accrual - - - - Write-offs - - (30,436) (30,436) FX and other movements (17,424) (4,584) (5,441) (27,449) Gross carrying amount as at 1,801,177 184,026 163,994 2,149,197 December 31, 2018
127 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED) Table of changes in the loss allowance for mortgage loans and the reasons for those changes: Mortgage Stage 1 Stage 2 Stage 3 Total Loss allowance as at January 1, 2019 11,350 110,303 183,011 304,664 Movements with profit or loss impact Transfers: 34,950 (21,283) (13,667) - Transfers from Stage 1 to Stage 2 (338) 338 - - Transfers from Stage 1 to Stage 3 (26) - 26 - Transfers from Stage 3 to Stage 1 34,273 (34,273) - - Transfers from Stage 2 to Stage 1 - (11,625) 11,625 - Transfers from Stage 2 to Stage 3 1,041 - (1,041) - Transfers from Stage 3 to Stage 2 - 24,277 (24,277) - New financial assets originated or purchased 5,769 66 2,556 8,391 Changes in PDs/LGDs/EADs (41,207) (37,091) (8,268) (86,566) Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - (16,696) (16,696) FX and other movements - - 14,974 14,974 - Total net profit or loss charge during the period (488) (58,308) (21,101) (79,896) Other movements with no profit or loss impact (59) (825) (35,249) (36,134) Derecognised during the period - - - - Loss allowance as at December 31, 2019 10,803 51,169 126,661 188,634
Stage 1 Stage 2 Stage 3 Total Provigjon për humbjen më 1 janar 2018 17,900 61,044 193,246 272,190 Lëvizje me ndikim në fitim ose humbje Transfers: 10,911 1,374 (12,285) - Transfers from Stage 1 to Stage 2 (1,185) 1,185 - - Transfers from Stage 1 to Stage 3 (422) - 422 - Transfers from Stage 3 to Stage 1 94 - (94) - Transfers from Stage 2 to Stage 1 12,424 (12,424) - - Transfers from Stage 2 to Stage 3 - (11,549) 11,549 - Transfers from Stage 3 to Stage 2 - 24,162 (24,162) - New financial assets originated or purchased 2,709 9,746 8,794 21,249 Changes in PDs/LGDs/EADs (18,908) 41,738 13,843 36,673 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - 8,208 8,208 FX and other movements - - (42,518) (42,518) Total net profit or loss charge during the period (5,288) 52,858 (23,958) 23,613 Other movements with no profit or loss impact (1,262) (3,600) 13,723 8,861 Derecognised during the period - - - - Loss allowance as at December 31, 2018 11,350 110,304 183,010 304,664
128 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED) Mortgage (continued) Changes in the gross carrying amount of mortgage loans during the period which contributed to changes in the loss allowance is presented in below table:
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2019 4,287,849 847,329 695,404 5,830,581 Transfers: 185,478 (147,388) (38,090) - Transfer from Stage 1 to Stage 2 (74,618) 74,618 - - Transfer from Stage 1 to Stage 3 (7,209) - 7,209 - Transfer from Stage 2 to Stage 3 259,119 (259,119) - - Transfer from Stage 3 to Stage 2 - (76,272) 76,272 - Transfer from Stage 3 to Stage 1 8,185 - (8,185) - Transfer from Stage 2 to Stage 1 - 113,385 (113,385) - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 2,475,470 10,071 10,288 2,495,829 Increase/(Decrease) due to new disbursement/loan payments (610,930) (111,848) (91,981) (814,760) Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (48,152) (48,152) FX and other movements (27,288) (7,428) (7,360) (42,075) Gross carrying amount as at 6,310,578 590,737 520,108 7,421,423 December 31, 2019
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2018 4,365,308 970,062 856,182 6,191,552 Transfers: (87,888) 38,893 48,995 Transfer from Stage 1 to Stage 2 (254,671) 254,671 - - Transfer from Stage 1 to Stage 3 (45,305) - 45,305 - Transfer from Stage 2 to Stage 3 - (116,695) 116,695 - Transfer from Stage 3 to Stage 2 - 103,835 (103,835) - Transfer from Stage 3 to Stage 1 9,171 - (9,171) - Transfer from Stage 2 to Stage 1 202,918 (202,918) - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 799,365 70,017 45,637 915,019 Increase/(Decrease) due to new disbursement/loan payments (608,575) (176,779) (184,464) (969,818) Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (18,259) (18,259) FX and other movements (180,362) (54,865) (52,687) (287,913) Gross carrying amount as at 4,287,850 847,328 695,403 5,830,581 December 31, 2018
129 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED) Table of changes in the loss allowance for Visa Card and the reasons for those changes: Visa Card Stage 1 Stage 2 Stage 3 Total Loss allowance as at January 1, 2019 3,779 4,254 98,366 106,399 Movements with P&L impact - - - - Transfers: 1,530 528 (2,058) - Transfers from Stage 1 to Stage 2 (205) 205 - - Transfers from Stage 1 to Stage 3 (70) - 70 - Transfers from Stage 2 to Stage 1 1,686 (1,686) - - Transfers from Stage 2 to Stage 3 - (1,003) 1,003 - Transfers from Stage 3 to Stage 1 119 - (119) - Transfers from Stage 3 to Stage 2 - 3,012 (3,012) - New originated or purchased 1,254 304 211 1,769 Changes in PDs/LGDs/EADs (3) 883 (16,458) (15,578) Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - 18,340 18,340 FX and other movements - - - - Total net P&L charge during the period 2,781 1,715 35 4,531 Other movements with no P&L impact - - (58,032) (58,032) Derecognised during the period - - - - Loss allowance as at December 31, 2019 6,560 5,968 40,369 52,898
Stage 1 Stage 2 Stage 3 Total Provigjon për humbjen më 1 janar 2018 6,243 5,031 61,622 72,896 Movements with P&L impact Transfers: 2,212 (2,472) 260 - Transfers from Stage 1 to Stage 2 (224) 224 - - Transfers from Stage 1 to Stage 3 (187) - 187 - Transfers from Stage 2 to Stage 1 - (734) 734 - Transfers from Stage 2 to Stage 3 - - - - Transfers from Stage 3 to Stage 1 2,623 (2,623) - - Transfers from Stage 3 to Stage 2 - 661 (661) - New originated or purchased 199 116 54 369 Changes in PDs/LGDs/EADs (4,874) 1,578 36,440 33,144 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - 1 1 FX and other movements - - (6,184) (6,184) Total net P&L charge during the period (2,463) (778) 30,571 27,330 Other movements with no P&L impact - - 6,173 6,173 Derecognised during the period - - - - Loss allowance as at December 31, 2018 3,779 4,253 98,367 106,399
130 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
19. LOANS AND ADVANCES TO CUSTOMERS, NET (CONTINUED)
Changes in the gross carrying amount of Visa Card during the period which contributed to changes in the loss allowance is presented in below table:
Visa Card (continued)
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2019 133,368 6,868 101,383 241,618 Transfers: (6,490) 3,355 3,135 - Transfer from Stage 1 to Stage 2 (6,129) 6,129 - - Transfer from Stage 1 to Stage 3 (2,098) - 2,098 - Transfer from Stage 2 to Stage 3 1,708 (1,708) - - Transfer from Stage 3 to Stage 2 - (1,326) 1,326 - Transfer from Stage 3 to Stage 1 29 - (29) - Transfer from Stage 2 to Stage 1 - 260 (260) - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 28,858 447 272 29,576 Increase/(Decrease) due to new disbursement/loan payments 3,229 (696) (2,853) (317) Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (58,032) (58,032) FX and other movements - - - - Gross carrying amount as at 158,965 9,974 43,905 212,845 December 31, 2019
Stage 1 Stage 2 Stage 3 Total Gross carrying amount as at January 1, 2018 132,729 9,461 69,441 211,630 Transfers: (3,506) (580) 4,085 Transfer from Stage 1 to Stage 2 (3,508) 3,508 - - Transfer from Stage 1 to Stage 3 (3,176) - 3,176 - Transfer from Stage 2 to Stage 3 - (1,172) 1,172 - Transfer from Stage 3 to Stage 2 - 250 (250) - Transfer from Stage 3 to Stage 1 12 - (12) - Transfer from Stage 2 to Stage 1 3,165 (3,165) - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 6,288 129 54 6,471 Increase/(Decrease) due to new disbursement/ loan payments (2,107) (2,149) 27,940 23,684 Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (11) (11) FX and other movements (36) 6 (126) (156) Gross carrying amount as at 133,367 6,868 101,383 241,618 December 31, 2018
131 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
20. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
As at December 31, As at December 31, 2019 2018 Government bonds 18,112,977 14,664,428 Government treasury bills 10,162,999 9,192,939 28,275,976 23,857,367
Treasury bills at December 31, 2019 and 2018 include zero-coupon bills issued by the Government of Albania with contractual maturity of 12 months. While, coupon rates on Government Bonds issued by the Government of Albania are fixed and vary from 1.45% to 9.25% (2018: 2% to 9%).
As at December 31, As at December 31, Government bonds 2019 2018 As at January 1, 14,664,428 10,805,926 Purchase 6,196,354 6,991,221 Matured (3,015,398) (2,958,749) Gains from change in fair value 300,593 16,630 Other (foreign exchange) (33,000) (190,600) As at December 31, 18,112,977 14,664,428
Government treasury bills As at December 31, As at December 31, 2019 2018 As at January 1, 9,192,939 4,537,172 Purchase 10,368,339 9,286,310 Matured during the year (9,384,101) (4,645,964) Gains from change in fair value, net (14,178) 15,421 As at December 31, 10,162,999 9,192,939
Table of changes in the loss allowance for Financial assets at fair value through other comprehensive income and the reasons for those changes:
Stage 1 Stage 2 Stage 3 Financial Assets FVOCI 12-month ECL Lifetime ECL Lifetime ECL Total Loss allowance as at January 1, 2019 133,366 - - 133,366 Movements with profit or loss impact - Transfers between stages - - - - New originated or purchased 57,524 - - 57,524 Changes in PDs/LGDs/EADs (68,792) - - (68,792) Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - - - FX and other movements - - - Total net P&L charge during the period (11,267) - - (11,267) Other movements with no P&L impact (655) - - (655) Derecognised during the period - - - - Loss allowance as at December 31, 2019 121,444 - - 121,444
132 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
20. AKTIVE FINANCIARE ME VLERËN E DREJTË PËRMES TË ARDHURAVE TË TJERA GJITHËPËRFSHIRËSE (VAZHDIM)
Stage 1 Stage 2 Stage 3 Financial Assets FVOCI 12-month Lifetime ECL Lifetime ECL Total ECL Loss allowance as at January 1, 2018 59,172 - - 59,172 Movements with profit or loss impact Transfers between stages - - - - New originated or purchased - - - - Changes in PDs/LGDs/EADs 75,349 - - 75,349 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - - - FX and other movements - - - - Total net P&L charge during the period 75,349 - - 75,349 Other movements with no P&L impact (1,155) - - (1,155) Derecognised during the period - - - - Loss allowance as at December 31, 2018 133,366 - - 133,366
Changes in the gross carrying amount of Financial assets at fair value through other comprehensive income during the period which contributed to changes in the loss allowance are presented in below table:
Stage 1 Stage 2 Stage 3 12-month Financial Assets FVOCI ECL Lifetime ECL Lifetime ECL Total Gross carrying amount as at January 1, 2019 23,857,367 - - 23,857,367 Transfers between stages Derecognised during the period other than write-offs - - - - New originated or purchased 16,564,693 - - 16,564,693 Modification of contractual cash flows - - - Changes in interest accrual - - - - Write-offs - - - - FX and other movements (12,146,084) - - (12,146,084) Gross carrying amount as at December 31, 2019 28,275,976 - - 28,275,976
Stage 1 Stage 2 Stage 3 12-month Financial Assets FVOCI ECL Lifetime ECL Lifetime ECL Total Gross carrying amount as at January 1, 2018 15,343,098 - - 15,343,098 Transfers between stages - - - - Derecognised during the period other than write-offs - - - - New originated or purchased 16,277,531 - - 16,277,531 Modification of contractual cash flows - - - - Changes in interest accrual - - - - Write-offs - - - - FX and other movements (7,763,262) - - (7,763,262) Gross carrying amount as at December 31, 2019 23,857,367 - - 23,857,367
133 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
21. FINANCIAL ASSETS AT AMORTISED COST
31 December 2019 31 December 2018 Financial assets at amortized cost Government Bonds 2,761,661 - Allowance for impairment losses (172,411) - Total Financial assets at amortized cost 2,589,250 -
The table below sets out the financial assets classified as held to maturity at 31 December 2019, and 31 December 2018:
31 December 2019 Average Interest Remaining Revaluation IFRS 9 Carrying Maturity Rate Nominal Value Accrued Interest Premium Difference Allowance Value 36 months 3.58% 2,435,400 107,148 219,176 (63) (172,411) 2,589,250 Total 2,435,400 107,148 219,176 (63) (172,411) 2,589,250
Table of changes in the loss allowance for Financial assets at amortised cost and the reasons for those changes:
Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL Total Loss allowance as at January 1, 2019 - - - - Movements with profit or loss impact Transfers between stages - - - - New financial assets originated or purchased 172,411 - - 172,411 Changes in PDs/LGDs/EADs - - - - Changes to model assumptions and methodologies - - - Modification of contractual cash flows - - - - Unwind of discount - - - - Write-offs - - - - FX and other movements - - - Total net P&L charge during the period 172,411 - - 172,411 Other movements with no P&L impact - - - - Derecognised during the period - - - - Loss allowance as at December 31, 2019 172,411 - - 172,411
Changes in the gross carrying amount of Financial assets at AC during the period which contributed to changes in the loss allowance are presented in below table: Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL Total Gross carrying amount as at January 1, 2019 - - - - Transfers between stages - - - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 2,761,724 - - 2,761,724 Modification of contractual cash flows - - - - Changes in interest accrual - - - - Write-offs - - - - FX and other movements (63) - - (63) Gross carrying amount as at December 31, 2019 2,761,661 - - 2,761,661
134 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
22. INVESTMENT PROPERTY AND REPOSSESSED ASSETS, NET
Investment properties included in 2018 repossessed assets real estate assets acquired by the Bank in settlement of overdue loans with the intention to hold the properties for capital appreciation. The Bank has reclassified the investment properties into repossessed assets during year 2019, as expects to dispose the assets in the foreseeable future.
As at December 31, As at December 31, 2019 2018
Investment property, net - 74,506 Repossessed assets, net 1,509,602 2,403,649
Movement in investment properties balance and revaluation for the years ended December 31, 2019 and 2018 are presented as follows:
As at December 31, As at December 31, 2019 2018
Balance at beginning of year 90,519 90,519 Transfer to Repossessed assets (90,519) - Balance at the end of the year - 90,519 Allowance for impairment of Investment property (16,013) (16,013) Transfer to Allowance for impairment for Repossessed assets 16,013 - Balance at the end of the year, net of allowance for impairment - 74,506
Repossessed assets represent real estate assets acquired by the Bank in settlement of overdue loans. The Bank expects to dispose the assets in the foreseeable future. The assets do not meet the definition of non-current assets held for sale,and are classified as inventories in accordance with IAS 2 “Inventories”. The assets were initially recognised at fair value when acquired.
Repossessed assets, net comprise the following:
As at December 31, As at December 31, 2019 2018
2,403,649 3,214,519 Balance at beginning of year Acquisitions through legal process for settlement of 470,129 loans to customers 207,775 Transfer from Investment properties 90,519 - Disposals (1,283,150) (510,928) Balance at the end of the year 2,188,863 2,911,366 Allowance for impairment of repossessed assets (679,261) (507,717) Balance at the end of the year, net of allowance for impairment 1,509,602 2,403,649
Movements in the provisions for impairment of repossessed assets are as follows:
As at December 31, As at December 31, 2019 2018 Balance at the beginning of the year (507,717) (292,589) Transfer of the Allowance for impairment of Investment property (16,013) - Expense for repossessed assets impairment (220,021) (246,113) Release for repossessed assets impairment 64,489 30,985 Balance at the end of the year (679,261) (507,717) 135 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
22. INVESTMENT PROPERTY AND REPOSSESSED ASSETS, NET (CONTINUED) The fair value of the Bank's repossessed assets as at December 31, 2019 and 2018 has been measured on the basis of a valuation carried out on the respective dates by several independent appraisers, outsourced from the Bank. All appraisers are registered and certified in accordance with the Albanian Laws. They have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The fair value was determined based on the market comparable approach that reflects recent transaction prices for similar properties. In estimating the fair value of the properties, the highest and best use of the properties is their current use. All the repossessed assets were classified as Level 2, hence there were no repossessed assets classified as Level 1 or Level 3, nor transfers between levels 1, 2 and 3 during the year.
23. INTANGIBLE ASSETS
Software and licenses Total Cost At 1 January 2018 1,377,390 1,377,390 Additions 53,881 53,881 At December 31, 2018 1,431,271 1,431,271 At January 1, 2019 1,431,271 1,431,271 Additions 29,069 29,069 At December 31, 2019 1,460,340 1,460,340
Amortization At 1 January 2018 (1,135,355) (1,135,355) Amortization charge for the year (88,097) (88,097) At December 31, 2018 (1,223,452) (1,223,452) At January 1, 2019 (1,223,452) (1,223,452) Amortization charge for the year (78,883) (78,883) At December 31, 2019 (1,302,335) (1,302,335) Carrying amount At December 31, 2018 207,819 207,819 At December 31, 2019 158,005 158,005
136 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
24. PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSETS
Furniture and Land and electronic Leasehold Right of buildings Vehicles equipment improvement use assets Total Cost At 1 January 2018 713,518 97,914 1,574,989 923,240 - 3,309,660 Additions 11,028 579 104,954 22,833 - 139,394 Disposals - - (35,466) (17,252) - (52,719) At December 31, 2018 724,545 98,492 1,644,477 928,820 - 3,396,337
At January 1, 2019 724,546 98,493 1,644,477 928,821 365,651 3,761,987 Additions 11,375 - 93,574 20,979 49,664 175,592 Disposals (67,887) (33,953) - (6,494) - (108,335) At December 31, 2019 668,033 64,540 1,738,050 943,306 415,315 3,829,245
Depreciation At 1 January 2018 (373,374) (97,756) (1,493,280) (847,185) - (2,811,596) Depreciation charge for the year (34,145) 459 (41,221) (32,448) - (107,355) Disposals - - 34,572 17,252 - 51,824 At December 31, 2018 (407,519) (97,298) (1,499,929) (862,381) - (2,866,249)
At January 1, 2019 (407,519) (97,298) (1,499,929) (862,381) - (2,866,249) Depreciation charge for the year (33,676) (337) (56,071) (32,625) (133,899) (256,608) Disposals 38,757 33,677 - 6,495 - 78,929 At December 31, 2019 (402,439) (63,958) (1,556,000) (888,511) (133,899) (3,044,806)
Carrying amount At December 31, 2018 317,027 1,194 144,547 66,440 - 529,209 At December 31, 2019 265,595 582 182,050 54,795 281,417 784,438
Property and equipment’s are not pledged as collateral to third parties as at December 31, 2019 and 2018.
Set out below are the carrying amounts of lease liabilities (included under ‘Other liabilities’ in Note 28) and the movements during the period:
2019 As at 1 January – effect of adoption of IFRS 16 (Note 5) 365,651 Additions 49,664 Accretion of interest 489 Payments (144,202) As at 31 December 2019 271,602
The Bank had total cash outflows for leases of Lek 144,202 thousand. The initial application of IFRS 16 resulted in non- cash additions to right-of-use assets and lease liabilities of Lek 365,651 thousand at 1 January 2019.
137 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
25. OTHER ASSETS
As at December As at December 31, 2019 31, 2018 Other financial assets Other debtors, net 76,377 149,264 Other receivables from customers 231,218 71,835 Total other financial assets 307,595 221,099
Advance payments 881 452 Inventory 26,598 25,556 Prepaid expenses 114,388 57,798 Other assets 189,823 58,473 Total other assets 639,285 363,378
Other debtors are presented net of impairment. As at December 31, 2019 other debtors’ amount to Lek 111,539 thousand (2018: Lek 217,561) and the related impairment amounts respectively to Lek 35,192 (2018: Lek 68,297).
26. DETYRIME NDAJ BANKAVE
As at December As at December 31, 2019 31, 2018 Current accounts Residents 11,306 13,157 Non residents 108,181 125,674 119,487 138,831 Borrowings Residents 1,897,232 2,466,586 Non residents - 11,508 1,897,232 2,478,094 Accrued interest 306 345 Total 2,017,025 2,617,270
27. DUE TO CUSTOMERS
As at December As at December 31, 2019 31, 2019 Corporate customers Current accounts 6,980,929 5,038,138 Term deposits 677,947 618,482 Other deposits 1,814,448 626,990 9,473,324 6,283,610 Retail customers Current / Savings accounts 21,089,274 19,268,767 Term deposits 31,989,583 31,250,390 Other deposits 642,350 242,311 53,721,207 50,761,468 Accrued interest 114,001 107,142 Cheques payables and remittances 16,439 12,660
Total 63,324,971 57,164,880
138 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019 The below interest rates are applied on Customer Deposits for years 2019 and 2018:
Saving accounts: 2019 2018 Currency Minimum Maximum Minimum Maximum LEK 0.00% 0.26% 0.00% 0.10% USD/EUR 0.00% 0.64% 0.00% 0.10%
Time Deposits : 2019 2018 Currency Minimum Maximum Minimum Maximum LEK 0.10% 2.50% 0.10% 2.50% USD/EUR 0.00% 0.90% 0.00% 0.80%
28. DETYRIME TË TJERA
As at December As at December 31, 2019 31, 2018 Accrued expenses 151,715 151,458 Deferred income 67,583 - Lease liability (IFRS 16) 267,588 - Other liabilities 154,012 170,232 Other financial liabilities 640,897 374,244 Income tax payable 30,846 - Other taxes payable 18,947 16,177 Social insurance payable 10,311 9,385 Total 701,001 399,806
Accrued expenses include expenses on utilities, telephone, security and expenses and bonuses related to current year and will be paid the year after.
29. PROVISIONS
As at December As at December 31, 2019 31, 2018
Operational risk provisions 39,228 69,285 Provision for off balance sheet items 103,707 61,840 Total 142,935 131,125
Whereas movement in provision for operational risk is detailed below:
Më 31 Dhjetor, Më 31 Dhjetor, 2019 2018
At 1 January 69,285 62,885 Reversals (39,390) (5,942) Charge of the year 9,333 12,342 At 31 December 39,228 69,285
As at December 31, 2019 and 2018 provisions are mainly related to litigations and operational risks as considered by the Bank and off-balance sheet items. Provisions for off balance sheet items include the impact of IFRS 9 application in the off-balance sheet items.
139 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
30. PAID-IN CAPITAL AND SHARE PREMIUM
As at December 31, As at December 31, 2019 2018 Paid in Capital-authorized, issued and fully paid 11,161,303 14,754,741 Share premium 1,735,494 1,735,494 Other Reserve 1,374,250 1,374,250 Revaluation reserve in financial assets at FVOCI 697,726 484,466 Total 14,968,773 18,348,951
The statutory reserves were created based on the decision of the Supervisory Council of the Bank of Albania No. 69, dated 18 December 2014, which states that reserves are created by appropriating 20% of the Bank's net profit for the year, as reported for FRM purposes. Additionally, a legal reserve created, as 5% of the statutory profit is required by Law No. 9901, dated 14 April 2008, “On entrepreneurs and commercial companies”.
The table below shows the shareholders structure of the Bank as December 31, 2019 and 2018.
December 31, 2019 December 31, 2018 Shareholder’s name Number of shares Aksione në % Numri i aksioneve Aksione në % Balfin shpk Share in % - - Komercijalna Banka AD Skopje 49,610 9.88 - - Piraeus Bank S.A Greece Number of shares 496,098 98,83 Mr. Tzivelis Ioannis Share in % 5,877 1.17 Total 100,00 501,975 100,00
Subsequent to the year-end 2018, the share capital of the Bank was reduced by EUR 28,635,254.53 through the reduction of nominal value of shares from EUR 216.4 to EUR 159.19 each, fully paid. The basis and reasoning of this decision is the over-capitalization of the Bank (see note 9.5). 31. CASH AND CASH EQUIVALENTS
For the purpose of Cash Flow Statement, cash and cash equivalent comprises as follows:
As at December 31, As at December 31, Notes 2019 2018
Cash in hand 17 1,578,517 1,778,729 Current accounts with Central Bank 17 245,130 333,643 Nostro and sight accounts with banks 18 1,377,230 1,979,254 Deposits with maturities with less than 3 months 18 2,520,107 15,467,819 5,720,984 19,559,445
32. RELATED PARTIES In the course of conducting its banking business, the Bank entered into various business transactions with related parties. Tirana Bank has changed the ownership based on the Sale Purchase Agreements signed between Piraeus Bank S.A Greece, Balfin SHPK and Komercijalna Banka AD Skopje on 28.02.2019 and between Mr. Ioannis Tzivelis and Balfin SHPK, on 28.02.2019. Until February 28, 2019 and during 2018 related parties include: (a) Piraeus Bank S.A Greece for sight deposits, inter-bank placements and borrowings (b) Tirana Leasing (subsidiary of the parent) for lending and deposits (in liquidation) (c) Cielo Consultancy Ltd (subsidiary of the parent), a company that offeres services related to the real estate market. The above-mentioned companies which have been related to Piraeus Bank during year 2019 for the period from January, 1 up to February 28,2019 are not any more Related Parties during the following period for the year 2019. The immediate and ultimate parent of the Bank during 2019 has been Balfin SHPK and Komercijalna Banka AD Skopje. Please refer to note 1 on changes on ownership.
140 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
32. RELATED PARTIES (CONTINUED)
ASSETS AND LIABILITIES As at December 31, As at December 31, 2019 2018 Piraeus Bank SA Greece Demand deposits - 28,499 Placements - 10,499,730 Due to banks - (2,255) Borrowings - (11,508) - 10,514,466
As at December 31, As at December 31, 2019 2018 Tirana Leasing (subsidiary of Piraeus Bank SA) (96,600) Deposits from Tirana Leasing (96,600)
As at December 31, As at December 31, 2019 2018 Cielo Consultancy SHPK (45,061) Deposits - (45,061) -
As at December 31, As at December 31, 2019 2018 Balfin Group Companies Loans and advances 552,448 - Savings Accounts (728,866) - Time Deposits (48,708) - Total (252,125) -
ASSETS AND LIABILITIES As at December 31, As at December 31, 2019 2018 Bank’s Management 37,718 16,818 Loans and advances (47,401) (16,986) Deposits (9,683) (168) Total
As at December 31, As at December 31, 2019 2018 Off Balance Sheet Piraeus Bank (Parent Bank) Commitments given - (4,196,280) Commitments received - 2,211,052 Total - (1,985,228)
Balfin Group's Companies Commitments given (280,071) - Total (280,071) -
141 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
32. RELATED PARTIES (CONTINUED) INCOME AND EXPENSES (CONTINUED)
As at December 31, As at December 31, Piraeus Bank (Parent Bank) 2019 2018
Interest income 12,584 67,414 Interest expense (28) (422) Commission income 37 82 Commission expense (1) (10) Custody Fees (317) (1,001) Total 12,275 66,063
Year ended Year ended Balfin Group Companies As at December 31,2019 As at December 31,2018 Interest income 13,924 - Interest expense (1) - Commission income 9,587 - Total 23,780 -
Management’s compensation and benefits Year ended Year ended As at December 31,2019 As at December 31,2018 Short-term benefits Salaries 43,428 45,865 Bonuses 7,653 3,474 Total 51,081 49,339
33. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY The following table provides a reconciliation of classes of financial assets with the measurement categories as of December 31, 2019:
Fair value through Fair value through As at December 31, 2019 Amortised cost OCI profit or loss Total Cash and balances with Central Bank 6,867,587 - - 6,867,587 Due from Banks 3,896,781 - - 3,896,781 Loans and advances to customers 31,179,091 - - 31,179,091 Financial assets at FVOCI - 28,275,976 - 28,275,976 Financial assets at AC 2,589,250 - - 2,589,250 Total financial assets 72,808,685 Other assets - - - 307,595 Total Assets 73,116,280
Fair value through Fair value through As at December 31, 2018 Amortised cost OCI profit or loss Total Cash and balances with Central Bank 7,120,132 - - 7,120,132 Due from Banks 17,447,072 - - 17,447,072 Loans and advances to customers 20,845,099 - - 20,845,099 Financial assets at FVOCI - 23,857,367 - 23,857,367 Total financial assets 69,269,670 Other assets 221,099 Total Assets 69,490,769
As of December 31, 2019, and December 31, 2018 all of the Bank’s financial liabilities were carried at amortised cost.
142 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
34. COMMITMENTS AND CONTINGENCIES
The Bank grants letter of credits and guarantees to its customers, which would require the Bank to make paymantes if the clients default in settling their liabilities toward third parties. Credit commitments comprise contractual commitments to grant loans and advances up to the set limit within certain time frames and repayment terms. These are recorded as loans and advances to customers when the Bank disburses the committed funds to the customers. Contingencies and commitments as at December 31, 2019 and 2018 are composed of the following:
As at December As at December 31, 2019 31, 2018
Granted Loan commitments 3,703,042 6,379,489 Letters of Guarantees 844,660 305,799 Letters of Credit 296,100 5,739
Received Guarantees received - 2,457,911
Table of changes in the loss allowance for commitments and contingencies and the reasons for those changes:
Stage 1 Stage 2 Stage 3 POCI Off balance sheet Purchased or originated credit- 12-month ECL Lifetime ECL Lifetime ECL impaired Total Loss allowance as at January 1, 2019 45,033 16,807 - - 61,840 Movements with P&L impact Transfer from Stage 1 to Stage 2 (336) 336 - - - Transfer from Stage 1 to Stage 3 (47) 47 - - Transfer from Stage 2 to Stage 1 9,258 (9,258) - - - Transfer from Stage 2 to Stage 3 - (329) 329 - - Transfer from Stage 3 to Stage 1 42 - (42) - - Transfer from Stage 3 to Stage 2 - 6,735 (6,735) - - Changes in PDs/LGDs/EADs 29,478 5,060 6,401 - 40,939 FX and other movements - - - - Total net P&L charge during the period 38,395 2,544 - - 40,939 Other movements with no P&L impact 678 (28) - 650 Loss allowance as at December 31, 2019 84,106 19,323 - - 103,429
143 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
34. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Stage 1 Stage 2 Stage 3 POCI Purchased or originated Off balance sheet credit- 12-month ECL Lifetime ECL Lifetime ECL impaired Total Loss allowance as at January 1, 2018 53,564 17,963 - - 71,527 Movements with P&L impact Changes in PDs/LGDs/EADs (7,231) (730) - - (7,961) FX and other movements (1,300) (426) - - (1,726) Total net P&L charge during the period (8,531) (1,156) - - (9,687) Other movements with no P&L impact - - - - - Loss allowance as at December 31, 2018 45,033 16,807 - - 61,840
Changes in the gross carrying amount of commitment and contingencies during the period which contributed to changes in the loss allowance are presented below:
Stage 1 Stage 2 Stage 3 Off balance sheets 12-month ECL Lifetime ECL Lifetime ECL Total Gross carrying amount as at January 1, 2019 1,739,602 74,591 - 1,814,193 Transfers: 137,462 (11,296) (123,836) 2,329 Transfer from Stage 1 to Stage 2 (12,780) - - Transfer from Stage 1 to Stage 3 - - 1,906 - Transfer from Stage 2 to Stage 3 24,077 (24,077) 423 - Transfer from Stage 3 to Stage 2 124,434 - (124,434) - Transfer from Stage 3 to Stage 1 1,731 - (1,731) Transfer from Stage 2 to Stage 1 - - - - Financial guarantees derecognised during the period other than write-offs - - - - New financial guarantees originated or purchased 2,779,657 7,436 123,844 2,910,938 Modification of contractual cash flows of financial guarantees - - - - Changes in interest accrual - - - - Write-offs - - - - FX and other movements (7,835) (494) (8) (8,337) Gross carrying amount as at December 31, 2019 4,648,885 70,237 - 4,719,123
144 Note to financial statement for the year ended December 31, 2019 (All amounts are in thousands Albanian Lek unless otherwise stated) ANNUAL REPORT 2019
34. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Stage 1 Stage 2 Stage 3 Off balance sheets 12-month ECL Lifetime ECL Lifetime ECL Total Gross carrying amount as at January 1, 2018 1,802,442 97,562 - 1,900,004 Transfers: (15,591) 25,220 (9,629) - Transfer from Stage 1 to Stage 2 2,015 (2,015) - - Transfer from Stage 1 to Stage 3 3,834 - (3,834) - Transfer from Stage 2 to Stage 3 - 4,235 (4,235) - Transfer from Stage 3 to Stage 2 - 1,402 (1,402) - Transfer from Stage 3 to Stage 1 158 - (158) - Transfer from Stage 2 to Stage 1 (21,597) 21,597 - - Financial guarantees derecognised during the period other than write-offs - - - - New financial guarantees originated or purchased 526,071 560 - 526,631 Modification of contractual cash flows of financial guarantees - - - - Changes in interest accrual - - - - Write-offs - - - - FX and other movements (573,321) (48,750) 9,629 (612,442) Gross carrying amount as at December 31, 2019 1,739,602 74,591 - 1,814,193
Litigation
Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. Litigation provisions arise out of current or potential claims or pursuits alleging non-compliance with contractual or other legal or regulatory responsibilities, which have resulted or may arise in claims from customers, counterparties or other parties in civil litigations.
The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing.
Lease commitments
The Bank leases office premises in Tirana, Tiranë, Durrës, Korçë, Vlorë, Lezhë, Elbasan, Gjirokastër, Fushë Krujë, Shkodër, Lushnjë, Pogradec, Berat, Sarandë, Fier etc. These leases are cancellable with three months’ notice.
Lease commitments are classified as follows:
As at December As at December 31, 2019 31, 2018
Up to 1 year 142,149 174,233 From 1 to 5 years 179,167 287,026 More than 5 year 15,749 90,707 Total 337,065 551,966
145 Note to financial statement for the year ended December 31, 2019 ANNUAL REPORT 2019 (All amounts are in thousands Albanian Lek unless otherwise stated)
35. EVENTS AFTER THE REPORTING DATE
In December 2019 the news first emerged from China about the COVID-19 (Coronavirus). The situation at year end, was that a limited number of cases of an unknown virus had been reported to the World Health Organization. In the first few months of 2020 the virus had spread globally and its negative impact has gained momentum. Amid the worldwide situation and the spread of the virus in Albania, the Government of Albania and Bank of Albania issued a joint order no. 1650 date 17 March 2020 on the extension of the deadline of payment of loans to enterprises and households that may face difficulties during this period due to the coronavirus COVID-19. The possible coronavirus and the governmental measures to prevent its spread do have consequences on our customers, and up to now around 33% of our portfolio has received facilities due to COVID-19. Key affected customers by the outbreak were customers operating in the sectors of Hotels, Restaurants and Bars, Processing Industry (excluding food products), Other services, Trade of goods (exc food product), Mining, etc.
The break-out and restrictions due to the coronavirus have led to:
• Decline in demand for products and/or services especially from the retail customers and it is expected to affect the risk appetite as well in the banking system (already reflected in Q2’20 as indicated also by the surveys of the Bank of Albania). • Reduction of the loan repayments impacted from the government measures against COVID-19. • Expected deterioration in the quality of the loans portfolio therefore increase in the credit risk.
In response to the current situation, the following measures have been taken:
• Offering of facilities to the customers asking for relief due to COVID-19, in the form of waive of penalties, payment holidays or restructuring (33% of the portfolio so far receiving such facilities). • Close monitoring of this pool of customers and the rest not asking for such relief. • Identification of the biggest customers that may face difficulties in order to define the strategies to preventtheir downgrade to NPL. Until now, 6% of the portfolio is considered to be materially affected and the rest is expected to experience temporary problems. • Estimate of around Eur 2.6 million additional loan provision expense vs budget, during 2020. This represents an increase of 26% of the provisions fund for the loans portfolio. It reflects forward looking effects, changes in the allocation of balances per stages, new NPLs as well as provisions for individually impaired customers. • Review of the expectations for 2020 in order to reflect the impacts of the situation on the loans portfolio balances, deposits, NPLs, provisions, net income and finally the Capital Adequacy Ratio.
As the situation is still evolving and its extent is highly uncertain at the time of issuing these financial statements, management considers it impracticable to provide a reasonable and accurate quantitative estimate of the potential impact of this outbreak on the Bank. The management expect loan provision, provision on fair value of investment securities and interest income and interest expenses related to financial instruments to be impacted by the situation. The impact will be recognized by the Bank in 2020.
Management will continue to monitor the potential impact that will take all steps possible to mitigate any effects. The management of the Bank is not aware of any other subsequent events that would require either adjustments or additional disclosures in the financial statements. .
146 ANNUAL REPORT 2019
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