2019 Annual Report
Bank of Cover photo:
Intesa Sanpaolo Gold Partner of Matera European Capital of Culture 2019 Annual Report 2019
TABLE OF CONTENTS
Senior Management Profiles ……………………………………………………...... 4
Macroeconomic Environment and Banking Sector …………………………………...... 12
Financials at a Glance ...... 20
Management Discussion ...... 22
Domestic Environment ……………………………………………..……………...... 23
Intesa Sanpaolo Bank Albania 2018 Main Challenges and Achievements ...... 23
Manage risk well ...... 24
Retail Banking ...... 24
Corporate Banking & SME ...... 26
Finance and Capital Market ...... 26
ICT Management ……………………………………………..………………...... 28
Operations ……………………………………………..……………………...... 29
Financial Performance Review ...... 30
Corporate Social Responsibility ………………………………………………….....…...... 36
Audited Financial Statements ...... 45
Organizational Structure of the Bank ...... 124
Bank Business Network ...... 126
Intesa Sanpaolo Group Network ...... 129
Cover photo:
Intesa Sanpaolo Gold Partner of Matera European Capital of Culture 2019
3 Senior Management Profiles Annual Report 2019 - Senior Management Profiles
Board of Directors
Božo Prka Paolo Genovese Marco Fabris Chairman of the Board of Directors Deputy Chairman of the Member - Head of Planning and Board of Directors Control Department, International Subsidiary Banks Division, Intesa Sanpaolo
Gabriele Gherardi Silvio Pedrazzi Ilir Panda Member Member Independent Member Head of People Management and Chief Executive Officer, Development Sub-Department, Intesa Sanpaolo Bank Albania International Subsidiary Banks Division, Intesa Sanpaolo, Italy Audit Committee
Marco Fabris Božo Prka Florion Tefiku Member – Head of Planning and Member Member Control Department, International Office of Foreign Banks, CEE, CIS & Subsidiary Banks Division, SM, Internal Auditing Directory, Intesa Sanpaolo Intesa Sanpaolo Italy
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Senior Management
Silvio Pedrazzi Chief Executive Officer
Mr. Silvio Pedrazzi has been appointed as Chief Executive Officer (CEO) and Member of the Board of Directors of Intesa Sanpaolo Bank Albania in October 2013. Since then he has driven the profound evolution of the Bank with a particular focus on innovation and Digital Banking, while implementing all the policies and standards of Intesa Sanpaolo Group. During this journey Intesa Sanpaolo Albania has achieved high appreciation in the Country being recognized as a frontrunner in the fields of Economic Sustainable Development, Corporate Governance as well as Corporate Social Responsibility. Under his leadership, the Bank has developed an intensive cooperation with all the State Institutions aimed to an effective development of the most promising economic activities in Albania like Energy Sector, Tourism, IT Services as well as Agriculture. During the tenure of Mr. Pedrazzi, the Bank has received several Awards by international and local organizations. The most recent ones are: “Best Bank Governance 2018” (Capital Finance International - cfi.co); “Corporate Bank of the Year 2019 in Albania” (Corporate INTL Global Awards 2019); “Best Digital Bank in the Balkans 2018” (Business Vision 2018 Awards Winner).
Apart of his office duties, in Albania, Mr. Pedrazzi currently serves as Chairman of the Association of Albanian Banks (AAB), Board member of AIDA (Albanian Investment Development Agency), Board Member of Confindustria Albania, member of the National Labor Council as well as National Economic Council. In the recent past he was Chairman and then Board Member of FIAA (Foreign Investors Association of Albania) and Board Member of Camera di Commercio Italo-Albanese. Mr. Pedrazzi cooperates on regular basis with the most reputable International Financial Institutions, among which, the International Monetary Fund, World Bank and European Bank for Reconstruction and Development.
Silvio Pedrazzi started working in the Banking Industry in 1978 reaching his first Top Manager position in 1996 when he was appointed Director General of Cassa di Risparmio di Spoleto Spa. Afterward, within the Banking Group, he moved to Cassa di Risparmio di Ascoli Piceno again as Director General. In 2006 Silvio Pedrazzi started his journey abroad being appointed as First Deputy Chairman of the Executive Board in Banca Intesa Beograd; in 2008 he moved to Ukraine as Chairman of the Supervisory Board in Pravex Bank. Before joining Intesa Sanpaolo Bank Albania he covered as well the position of Area Manager (within International Subsidiary Banks Division of Intesa Sanpaolo) for Ukraine, Russian Federation and Egypt and served as Board Member and Chairman of the Audit Committee in Bank of Alexandria. He completed his studies in Italy were he got the University Degree in Economics and a Master Degree in Economic Sciences.
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Julian Çela Chief Financial Officer
Mr. Cela holds the position of Chief Financial Officer.
Mr. Cela is responsible for coordinating the preparation and monitoring of Strategic Plan and annual budgets, presenting and reporting accurate and timely financial information, asset liability management and treasury as well as accounting and procurement activities. He joined the Bank (former American Bank of Albania) in 2004. His prior work experience was at Procredit Bank in Internal Audit Department.
Mr. Cela has graduated in Finance and Banking at University of Tirana, Economic Faculty. In 2003-2004 he completed an accelerated finance and banking curriculum, a Georgetown University Program, at University of Wisconsin.
Ervin Xhomo Head of Corporate & SME Division
Mr. Xhomo is currently holding the position of the Division Head of Corporate & SME in charge of the Corporate, SME, Product and CRM & Network Support’s Departments.
Previous experiences of Mr. Xhomo include management positions at Banca Italo Albanese (BIA) as Head of Credit Office for 2 years, Treasury Responsible at BIA and at Emporiki Bank and BIA Main Branch Manager. Since 2008, by the merger of BIA with American Bank of Albania, Mr. Xhomo was first appointed as Head of Corporate Department followed by the promotion as Division Head since 2009 thanks to his consolidated experience and know how in commercial business and credit risk management, associated with a thorough knowledge of treasury products. Moreover for a transitory period of almost 1 year months during 2015-2016, Mr. Xhomo was holding also the position of Retail Division Head, contributing to positive indicators at retail banking.
Mr. Xhomo holds a bachelor’s degree in Business Administration from University of Tirana and a Master Degree in Business Administration from Nebraska University in cooperation with University of Tirana.
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Klodiana Piqani (Keçi) Head of Retail Division
Mrs. Piqani holds the position of Head of Retail, covering the whole network of the Bank including Individual segment and Small Business, as well as other supporting departments for the development of these client segments. Mrs. Piqani joined Intesa Sanpaolo Bank in 2013, initially in the Risk Management Division holding for three years the position of Head of Risk Analysis, and later the current position.
Before joining the Bank, Mrs. Piqani has developed an extensive experience in other Banks such as ProCredit and Societe generale Albania, in the latter holding important managerial positions such as Branch manager of Main Branch of Tirana as well as Head of Department for the Business Promotion.
Mrs. Piqani graduated in Finance & Accounting in the University of Economics of Tirana, and is in the process of finalizing a Masters Degree in European Economic Studies at the University of Tirana in conjunction with Bamberg University. During these years she has followed and has been certified in various courses and trainings in the banking field.
Jola Dima Head of Risk Management Division
Mrs. Dima holds the position of Head of Risk Management Division, covering the areas of Underwriting, Non-Performing Loans, Credit, Market and Operational Risks.
Following her initial experience in a Group member Bank in Milan, she joined the Bank (former American Bank of Albania) in 2005, initially at CFO Division and later managing Market, Operational and Credit Risk Departments.
Ms. Dima is Deputy Chairman of ISBA committees, including Credit, Financial, Underwriting, Asset Quality and Operational Risk Committees.
Ms. Dima graduated with Laude in Business Economics at the University of Bologna, Italy in 2001 and later completed two master degrees, in Management and Information Technology (ALMAWEB, Bologna) and Banking Risk Management (UNSBC, Tirana).
During these years she has lectured in different private universities and followed professional training courses related to her area of interest.
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Albina Mançka Head of Operations Division
Mrs. Mançka holds the position of Head of Operations Division, covering the areas of Back office,
Real Estate and Security. Mrs. Mançka has a twenty year successful experience in management, project financing and coordination in financial institution(s) and private companies. Prior to joining the Bank (former American Bank of Albania) in 2007, she worked for seven years for Albanian-American Enterprise
Fund, where she managed the biggest and most important investments of the Fund in Real Estate area. Mrs. Mançka’s experience also includes management of the first private telecommunication company, managing position in different USAID projects, private consulting company as well as lecturing at the State Economic Faculty in the subjects of Strategic Management.
Mrs. Mançka graduated at the University of Tirana, Economic Faculty. In 1995 she was awarded a Fulbright Scholarship and in 1997 she obtained her MBA from Wisconsin University, USA.
Alketa Lamçe Head of IT Division
Mrs.Lamçe holds the position of Head of ICT Division, where her responsibilities include development of IT strategies, IT applications and infrastructure, IT projects and IT services support.
Mrs. Lamçe joined the Bank (former American Bank of Albania) in 1999 and she has worked in different leading positions, such as Head of Information System Department and Deputy Head of IT.
Before joining the bank, Mrs. Lamçe worked as a Developer at INIMA and IT specialist at Savings Banks of Albania.
Mrs. Lamçe has a degree in Applied Mathematics, Faculty of Natural Sciences, University of Tirana and completed the Master in Business Administration, University of Tirana (Nebraska University Program). Throughout her outstanding career, in addition to successfully leading complex projects, she has attended numerous advanced trainings on ICT, Banking and Leadership Development Program.
Mrs. Lamce represents ISP Albania in the Albanian Association of Banks as chairman of the ICT Committee established in February 2017.
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Ledia Plaku Head of Legal Department
Mrs. Plaku holds the position of Head of Legal Department.
Mrs. Plaku has a long and remarkable career in the Bank, which starts back on year 2000 at former American Bank of Albania and includes managerial positions such as Head of Legal, Compliance, Human Resources, General Secretariat and Physical Security Department(s). Before that, she used to work for PMU/Immovable Properties Registration System as Head of Legal Department and has also taught Law at the Faculty of Law, University of Tirana.
Mrs. Plaku graduated in Law at the University of Tirana and completed the Master of Laws at Queens’ University, Canada (full time). She has attended advanced courses on Leadership such as Executive Program, Emerging Leaders at London Business School, U.K and Leadership Development Program organized by Intesa Sanpaolo Group. Ms. Ledia Plaku is member of Tirana Bar Association since May 2003.
Ediola Biçaku Head of Internal Audit Department
Ms. Biçaku holds the position of Head of Internal Audit.
Ms. Biçaku joined Intesa Sanpaolo Bank Albania in April 2017. She brings a wide range of experiences from a 10+ years of career in audit. Prior to joining ISBA, she worked in National Commercial Bank (BKT). She began her professional banking career in 2006 working at BKT Internal Audit Group as an assistant auditor and achieved all hierarchical audit rankings within the Group. She served as Responsible Person for the design and maintenance of audit methodologies, prior to becoming the Manager of Internal Control Department under Internal Audit Group in 2014, in charge of establishing new functionalities of continuous audit for the company.
Ms. Biçaku graduated from the Political Sciences Faculty, Ankara University in Turkey, with a Bachelor’s degree in International Relations. During these years, she has attended a series of professional training courses related to her areas of responsibility. She is a passionate audit leader and has prepared several training modules on a variety of topics related to international standards of internal audit, periodic and continuous audit, COSO framework, control optimization, fraud prevention and detection.
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Markeljan Rriska Head of Compliance and AML Department
Mr. Rriska holds the position of the Head of Compliance and AML Department.
Mr. Rriska joined the Bank (former American Bank of Albania) in April, 2004 and has held different positions such as Head of Legal Affairs Unit and Deputy Head of Legal Department. In September 2002, he was admitted at Tirana Bar Association where he still is a member.
Following a successful experience as Attorney at Law, he was appointed Head of Legal Department and Public Relationship at Albanian Shares Register, a position held until 2004. His vast experience in Legal Departments enabled him to accrue a depth of professional expertise and proficiency. Mr. Rriska has taught several Law Courses during his career. Mr. Rriska graduated in Law at the University of Bucharest, Romania. He has attended the Leadership Development Program and Compliance Function Training organized by Intesa Sanpaolo Group.
Entela Zigori Head of Human Resources and General Secretariat Department
Mrs. Zigori holds the position of Head of Human Resources and Organization Department.
Mrs. Zigori started her professional career in the Bank (former Banca Italo Albanese) in June 1993.
Through the years Ms. Zigori has been part of the management team of the Bank holding the position of Responsible of Administration Division in charge of Financial Control & Accounting Department, HR Department, IT Department and Treasury Back Office. In March 2008, following the reorganization of Intesa Sanpaolo Bank Albania sh.a., she was appointed as Head of Human Resources. Her main contribution is dedicated to the development and growth of the Human Resources capital.
Mrs. Zigori has a Bachelor Degree in Industry Economics, Faculty of Economy at Tirana University. She has also gained other qualifications through many courses and programs including Leadership Development Program, Business Communications, IFRS and Banking & Finance.
11 Macroeconomic Environment and Banking Sector Annual Report 2019 - Macroeconomic Environment and Banking Sector
General Overview
The Albanian economy significantly slowed down growth recent months, while tourism remained the main factor in 2019, after reaching a year ago the highest level of driving sales. expansion since 2008. The growth of the Consumer Price Index (CPI) continued According to INSTAT, during the first 9 months of 2019, to be weak in 2019, remaining below the target of the the average growth of Gross Domestic Product (GDP) Bank of Albania of approximately 3%, for the eighth was 2.95% compared to 4.15% of the previous year, consecutive year. The slowdown of the economy, low mainly impacted by the group of “Trade, Transport, imported inflation, as a result of the over-pricing of the Accommodation and Food Service”, which led the growth local currency, were the main factors that maintained the over the three quarters, reflecting mainly the expansion of Consumer Price Index low. The average annual inflation tourism activity in the country and the return of Albania to for 2019 decreased to 1.4%, from 2% a year ago. The a favorite target destination for foreigners. inflationary pressures were higher only in the first two months of the year, driven by food prices, which reflected On the contrary, energy production, which affected almost unfavorable weather conditions, with a decreasing impact half of the growth in 2018, favored by rainy weather, in on domestic production. For the rest of the year, the 2019 it was the main factor that turned into a negative CPI remained averagely below 1.5%, whereby the main contributor, witnessing the unsustainable sources of the impact was rendered by the decrease of the prices of economic growth. The closure of the gambling activity, domestic products, health care and fuel. from January 1, 2019, and the decrease of the intensity of large projects of TAP pipeline and hydropower plants The low-inflation environment enabled the Bank of on the Devoll River, as they are close to their completion, Albania to continue to pursue a monetary easing policy were also other factors that influenced the economy for the ninth consecutive year. In 2019, the interest base slowdown. rate continued to remain at the minimum historical level of 1%. After the economy slowdown and the earthquake, On November 26, Central Albania was hit by an earthquake the Bank of Albania signaled that it can continue with with devastating consequences. Due to this earthquake the easing policy, further lowering the base rate, although 51 people lost their lives, at least 913 others were injured, the expectation at the beginning of 2019 was to change and 17,000 were left homeless and nearly 200,000 the course of monetary policy, increasing interest rates people were affected directly or indirectly. The earthquake and reducing monetary incentives, in line with expected caused extensive severe damages in 11 municipalities, developments in the Eurozone. including the two most populated, urbanized and developed municipalities (Tirana and Durres). The most Foreign direct investment in Albania continued the positive affected municipalities were: Shijak, Durrës, Kruja, Tirana, trend, increasing by 7.2% on an annual basis for the first 9 Kamza, Kavaja, Kurbin and Lezha. The Post-Disaster Needs months of 2019, reaching Euro 810 million. The two major Assessment Report (PDNA), compiled with the support projects, TAP pipeline and the continuation of works for of the United Nations, World Bank, European Union and the construction of hydropower plants on the Devoll River Council of Ministers, highlighted that the damage caused by Statkraft Energy were the main factors that have kept by the earthquake totaled the amount of EUR 985 million, foreign investments at high levels in recent years. Both or 7.5% the Gross Domestic Product (GDP). Durrës, the these projects were completed almost entirely in 2019. third largest city in the country after Tirana and Fier, is the For the first 9 months, investments in energy fell by 37%. most affected city, with 32.4% of the damages, followed Their decline was offset by the increased investments in by Tirana with 30% and then Kruja with 9%. the extractive industry, information and communication, construction and entertainment. As a result of the economy slowdown for 9 months and the earthquake at the end of the year, the Albanian Rating agencies continued to maintain a sustainable government has revised significantly decreasing the assessment, with positive expectations for Albania, assessment of the country’s economic performance for continuing to highlight the Albanian government’s efforts 2019, to 2.7% compared to 4.3% that was expected for fiscal consolidation and reduction of public debt, but at the beginning of that year. The Post-Disaster Needs meanwhile warning of the risks that may come from high Assessment Report (PDNA) report provides an even lower government engagement in public-private partnership estimate at 2.4%. The consequences of the earthquake (PPP) projects, establishment of an investment corporation will continue to be felt at least throughout the year 2020, and the consequences that the earthquake will have on with the forecast for growth decreasing to 3.2%, from the economy. 4.1% being the initial expectation. In February 2020, Standard & Poors maintained a B + Consumption slowed slightly in 2019, reflecting the rating for Albania, with a stable perspective. The B + rating slowing trend of the economy and the earthquake in is based on S&P expectations for a sustainable economic
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growth over the medium-term period, continuing to keep Bosnia and Herzegovina. The indicators that Albania has the budget deficit under control and reducing public debt. worsen are obtaining construction permits, protection But S&P has warned that the risk of creating fiscal liabilities of small investors, and enforcement of contracts and remains high as a result of using Public Private Partnership payment of taxes. The most positive indicator is starting (PPP) projects and the ceiling for PPP payments, which a business, cross border trading, resolving insolvency, is equal to the 5% of annual tax income, will not be obtaining a credit. The World Bank reported that the applied by the government, as there is no supervisor for ranking deterioration is also related to the change of the the implementation of this definition. The establishment methodology for the protection of small investors and of the Strategic Investment Corporation, which aims also the lack of a functional stock exchange. to divert some of the capital expenditures outside the budget administration and the Ministry of Finance, The unemployment rate, for the population aged 15 creates a secondary budget leading to new liabilities that and over, reached 11.4% at the end of 9-month period jeopardize public debt, S&P warned. of 2019, falling by 0.9 point percentage compared to the end of the previous year, according to data from the In August 2019, the other rating agency, Moody’s, Labor Force Survey, reaching the lowest level of transition. maintained the B1 rating for Albania, with stable Improvement has resulted from increased employment expectations. This confirmation is based on sustainable mainly in the non-agricultural private sector, where economic growth and its continuation in the medium services, industry and, to a lesser extent, agriculture have term perspective; reduction of the public debt and deficit, played a major role. as well as on the improvement of the current account and their affordability from the inflows of Foreign Direct According to the estimates of the Bank of Albania, Investment. Also Moody’s points out that the high rate investments had a downward trend for the first 9 months of using public-private partnership schemes, the lack of a of 2019, which accelerated in the third quarter. According regulatory framework, and the functioning of unsolicited to the bank, their decline reflected the continuation of bids pose a fiscal risk. the strike by the final phase of the investment in the construction of the TransAdriatik Pipeline (TAP) project. As a previous user of the International Monetary Fund The increase of capacity utilization in the manufacturing (IMF), Albania is part of the so-called “Post-Program sector, continuation of the impact of eased financial Monitoring”, which requires reviews twice a year of conditions, increasing foreign investment have affected macroeconomic developments, risks and policies. In positively. the last review, on November 26, 2019, the IMF, in the closing statement of the Mission team of Article IV for In line with this downward trend in private investments, 2019 stated that, although Albania has maintained an during 2019 imports of ‘Machinery, equipment and spare economic stability, the growth has slowed down mainly parts’, an indicator of investments in the economy, fell due to lower energy production. The fund highlighted by 2.5%, after an increase of 6.1% the previous year, that the weaknesses in infrastructure and economic impacted by completion of the pipeline project. institutions in Albania, hinder the wide and sustainable improvement of living standards. The IMF also demanded Albania, for the third consecutive year experienced a the implementation of current plans for improving public tourism boom. The number of foreigners visiting the investments management, including public-private country in 2019 reached a record level of 6.4 million partnerships, which is essential to increasing their quality people, an increase of 8.1% on an annual basis, and mitigating growing fiscal risks. contributing to the revival of the trade and services sector. The intention of 95% of the foreigners coming to In the Global Competitiveness Report 2019-2020, Albania Albania was for holiday purposes, or visiting relatives. But, ranked 81st out of 140 countries, with a deterioration of this trend of tourists is expected to be affected by the 5 positions compared to the previous year, ranking lower earthquake of November 26, due to the damage of many than Serbia and Montenegro, but better than Macedonia private accommodation units in the area of Durres, which and Bosnia and Herzegovina. The deterioration of the is also the largest host of tourists. The Bank of Albania ranking of 2019 was influenced by the indicator of the estimates that tourism in these countries may be reduced legislative environment and innovative capacity. Albania due to damage of relevant structures and psychological reflects problematic issues for organized crime, judicial effects on holidaymakers, both domestic and foreign. performance, and legislative efficiency, followed by property related rights issues. The best ranking is for the indicator of health and primary education, but it is poor in innovation and sophistication. In the World Bank report, “Doing Business 2020” (referring to 2019), Albania is ranked 82nd, deteriorating by 19 positions compared to the previous year, being penultimate in the region and leaving behind only
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accommodation and food service activities” marked Macroeconomic the main contribution and increased by 5.69% on an annual basis for the 9 months, driven by the revival of environment in 2019 consumption, improvement of the employment rate, increase of travel and increasing tourist activity. “Extractive industry and energy” recorded an annual The growth rates of the Albanian economy slowed down decline of 0.55% for the first 9 months, after a strong significantly in the first quarters of the year, reflecting the increase of 14.06% of the previous year, affected by the effect of declining energy production and the closure of decline of energy production. gambling activity, factors that are considered temporary. In the third quarter, the economy revived, driven by trade, “Processing industry” slowed the growth rates to 4.59% services and increased consumption, where tourism also (from 8.34% in 2018), mainly due to the impact of the rendered its effect. In the fourth quarter, the economy depreciation of euro on exports. is estimated to have slowed down again, due to the “Construction” continued to be slow for the second year extraordinary shock of the November 26 earthquake. in a row. This sector grew by 1.21% for the 9-month period (compared to 2.84% in 2018 and 7.04% in 2017). In the first quarter of 2019, the growth of domestic While residential construction is on the rise, especially production was 2.56%, significantly slowing down in the capital city. The main impact on the slowdown compared to the same period of 2018 (4.44%). Unlike resulted from the completion of TAP pipeline. the same period last year, when economic growth was The activity of “Information and Communication” was absolutely driven by the energy production sector, favored revived again at 6.65%, after the fall of the previous year, by rainy weather, in the first quarter of 2019, the main as a result of the exit from the market of the fourth mobile engine of growth was “Trade, Transport, Accommodation operator at the end of 2017. and food service ”(0.7 point percentage), followed by“ Real Estate Activities ”(0.5 point percentage). The Agriculture accelerated slightly, with an increase of 1.45% energy contribution in the same quarter was negative in the first nine months of the year, driven by increased by -0.8 point percentage. Negative, by 0.5%, was also exports of agricultural products. the contribution of “Arts, entertainment and recreation, Other service activities”, due to the legal closure of the Private consumption increased by 3.1% for the first 9 gambling activity. months of 2019, with a slight slowdown compared to last year, mainly in the first half of the year. Private The economic growth rates were also slow in the second consumption was particularly high in the third quarter, quarter, reaching 2.48%. Again, “Trade, Transport, reaching 3.89% (from 3.70% in the same period a year Accommodation and Food Service” led the increase (+ earlier), influenced by the improvement of tourism activity. 0.71%), followed by “Agriculture, Forests and Fisheries” Consumption continued to be supported by stimulating and “Public Administration, Education, Health”, with 0.4 monetary policy, increase of consumer loan, the increase point percentage points each. The contribution of the of the number of employees, the improvement of “Extracting, processing industry, energy, water” and “Arts, financial balance sheets and by the increase of salaries. entertainment and recreation; Other service activities” The earthquake of November 26 is expected to have had continued to be negative, by -0.2 and -0.5 percentage a significant effect on consumption in the last quarter of points, respectively. the year, which is expected to recover gradually. In the third quarter, the economy significantly accelerated The Consumer Price Index fluctuated between 1.1% and growth rates, to 3.82%, again affected by “Trade, 1.9% during 2019, staying at the lowest levels since 2016. Transport, Accommodation and food service”, with Inflation reached the highest level in January, when it 1.3 point percentage, but also the contribution of the reached 1.9%, while it reached the lowest level in March extractive, processing industry; energy, water ”returned and December, at 1.1%. The average annual inflation was positive to almost 0.7 point percentage. 1.4% in 2019, compared to 2% the previous year. In the fourth quarter, the Bank of Albania estimates that Throughout the year, inflation-boosting groups were the November 26 earthquake had a negative impact on “Vegetables including potatoes,” which averagely economic growth. This impact is expected to continue increased by 10.7% and “Fruits” by 5.6%. Agricultural also during 2020. The Bank of Albania predicts that products continue to reflect the spontaneity of Albanian the consequences of the earthquake may reduce the agriculture, where the lack of the vegetables production, economic growth by 0.3 - 0.6 point percentage during following their overproduction last year, led to an increase 2020. This effect combines the reduction of tourism of their prices. revenues and slowdown of consumer expenses under the The other groups recorded minimal changes, where conditions of increasing uncertainty. negative contribution was rendered by “Health” as a result of the reduction of medicine prices and the cost “Wholesale and retail trade; transport and storage;
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of hospital services and by “Transport”. A slight positive positive performance, but their weight in total exports growth, below 2% was marked by “Alcoholic beverages remains low. and tobacco”, “Hotels, cafes and restaurants”. Exports of “Textiles and footwear” declined by 4.48% on an The Bank of Albania estimates that in terms of annual basis in 2019. This group, whose main advantage macroeconomics, low inflation rates and below the is the free labor force and works based on the process target reflect the still insufficient increase of the salaries of active processing regime, suffered the consequences and domestic production costs, low inflation in our of the underpricing of the local currency, which reduced trading partners, as well as the retroactive effects of the the competitiveness of enterprises, unable to reflect it on rapid strengthening of the exchange rate during 2018. prices. The sector is demonstrating difficulties in finding The inhibitory effect of these factors will be gradually manpower, due to the migration trend. “Textiles and mitigated in the medium term period. The effects of the footwear” are the largest group exported in Albania, earthquake are expected to have a slowing effect on by 39.55% of the total, with a slight decrease from the growth and inflation, but this slowdown is expected to be previous year. Italy remains the main export destination temporary and concentrated during 2020. of this group, making this sector dependent on the developments and demand of the neighboring country. The Bank of Albania has continued to pursue a monetary easing policy, which it has been pursuing since September The goods group “Minerals, Fuel, Energy” declined by 2011, but the intensity of interventions has decreased. 10.85%, after a strong increase of 30.88% in 2018. The During the last three years, the Bank of Albania has negative performance of this group was due to the decline intervened only once, in June 2018, lowering the base of energy exports, as a result of dry weather. Oil exports, rate to a new historical low of 1%. In parallel, the Bank another important category of this group, declined in of Albania continued to supply the banking system with the first half of the year, mainly due to domestic sales. the required liquidity, through open market interventions. ‘Minerals, fuel and energy’ constitute the second largest group in the country, with 16.82% of the total from Due to the increase of risks in the downstream, such as the 18.27% in 2018. effects of the earthquake on the economy and possible delays in the reconstruction program, the Bank of Albania “Construction materials and metals”, were the third has signaled a review in terms of easing the monetary largest group in the country, with 15.19% of the total policy stance, abandoning its plans reversing the policies from 17.03% in 2018. This group recorded a decrease of toward increasing the base rate, which would put an end 14.68%, impacted by the decline of metal prices and the to a stimulating monetary policy that is ongoing for more contraction of construction materials exports. than nine years. Exports of “Food, Beverages, Tobacco” increased by The easing monetary policy was transmitted to further 9.40% in 2019. Exports of “Machinery, equipment and reduce the cost of lending in Albanian lek, during 2019. spare parts”, continued a positive double-digit increase, The average monthly rate of new loans in lek for the entire by 16.03%, as a result of increased investment in the 2019 was 6.37%, compared to 6.66% the previous year. assembly sector of electrical systems for vehicles, which In December 2019, the average interest rate of new loans works mainly based on the active processing regime. This in lek decreased to 6.46%, from 6.83% in December sector, which again has as a competitive advantage the 2019. The Bank of Albania deems that the low interest free labor force, is constantly attracting foreign investors. rates reflect a reduction in risk premiums and a more For other groups, which occupy a low share in total positive approach of banks toward lending, also driven by exports, their performance was relatively modest. increased competition after the consolidation process in Italy remains the country’s main export partner, with the banking system. 47.89% of the total, almost unchanged in comparison to the last year. Exports to Italy fell by 4.02% in 2019, The same trend was shown also by deposit interest rates, affected by the poor performance of the group “Textiles after their slight increase in the previous three years. and footwear”. The latter account for 64.22% of exports In 2019, the average rate of new time deposits (1-60 to the neighboring country. months) in Lek was 0.80%, compared to 0.95%, the average in 2018. Kosovo continued for the sixth consecutive year to be the country’s second largest trading partner, with 9.98% of After two years of double-digit growth, exports declined the total, compared to 8.73% a year before. Exports to in 2019. They fell by 3.75% in 2019, after an expansion of the neighboring country increased significantly by 10.04% 13.70% in 2018. The three main groups, which account in 2019. “Minerals, fuels and energy” and “Construction for about 71.5% of total exports, “Textiles and footwear”, materials and metals” are the products that are mostly “Minerals, fuels, energy” and “Construction materials and exported to Kosovo. metals” declined. The groups “Food, beverages, tobacco” and “Machinery, equipment and spare parts” had a Spain is Albania’s third largest export partner, with 7.98%
16 Annual Report 2019 - Macroeconomic Environment and Banking Sector
of the total, reduced by 1.36% on yearly basis in 2019, in the February auction and 8 million euro at the March following a strong increase of 61.25% during last year. auction. In the auctions organized in the second quarter, “Minerals, fuels and energy” (oil) is the main group were bought 39.20 million euros. In the third quarter, the exported to this country and the performance of exports Bank of Albania organized 5 auctions for the purchase of to Spain is directly related to oil shipments. foreign currency, at a total of 42.10 million euro. For the entire 9 months, the Bank of Albania bought, with the Germany was again the country’s fourth largest trading objective of increasing the foreign exchange reserve, 99.3 partner, with 4.75% of the total. Exports to this country million euro, compared to 242.65 million euro in the same increased by 5.61%. period a year ago.
Greece was the fifth partner, with 4.28% of the total. The immigrants’ remittances for the first 9 months of Exports to this country fell by 2.54% on an annual basis. 2019 amounted EUR 520 million, marking an increase of 3.79% compared to the same period a year ago. This is Imports increased by 1.18%, where the highest impact the sixth consecutive year that remittances have increased was rendered by the group “Minerals, fuel, energy” and since reaching a record historical low level in 2013. The “Food, beverages, tobacco”. Italy is also the main trading revitalization of the immigration cycle is one of the main partner in terms of imports, with 25.29% of the total, reasons that immigrants’ remittances have re-entered the followed by Turkey with 9.52%, whereas the third partner growth cycle. has become China (9.20%) and Greece has moved to fourth position (8.37%). The unemployment rate dropped to 11.40% at the end of the third quarter of 2019, compared to 12.30% in 2018, As a result of declining exports and increasing imports, according to data from the Labor Force Survey, marking the the trade balance was deteriorated by 5.8% in 2019. The lowest level of the transition period. The unemployment ratio of imports to exports was 46.03%, deteriorated rate has been declining throughout the quarter, reflecting compared to 48.39% a year ago. increased business capacity utilization, the good tourist season, especially in the third quarter. The youth The average exchange rate of the euro against the local unemployment rate continued to decline, falling by 0.9 currency in 2019 was 123 lek per euro, depreciating point percentage in the third quarter of 2019, compared by 3.6% compared to the previous year, reaching the to the same period last year, to reach 21.40%, but still lowest level as an annual average since 2008. This is the influenced only by men, while unemployment among fourth consecutive year that the common currency has women increased slightly. The Bank of Albania estimates depreciated significantly against the lek. that the growing employment dynamics continues to be attributed mainly to the service sector activity, and to a In the first four months of the year, the euro fluctuated lesser extent to the industrial activity. around the level of 125 lek, to decrease later in the summer, falling to 120.75 lek in August, near the The average monthly salary for an employee at the end of minimum historical level, since the euro was issued as a the third quarter of 2019 was ALL 51,870. In comparison physical currency. The common currency recovered slightly to the end of 2018, the change of the average gross later, closing the year at the level of 122 lek. Unlike 2018, monthly salary for an employee was a minimum increase when the Bank of Albania made a series of extraordinary of 0.84%. interventions in the foreign exchange market, to curb the The average monthly salary for an employee in the public decline of the common currency, as Euro depreciation sector at the end of the third quarter was ALL 63,911, was affecting the objective of targeted inflation of the marking an increase of 1.00% compared to the end of central monetary institution, in 2019. The Bank of Albania 2018. has intervened in the market only in order to increase its foreign exchange reserve. The bank estimated that the Total budget revenues further slowed down their growth exchange rate was more stable in 2019 and it is expected in 2019, expanding by 2.40%, on an annual basis, being to be the same in 2020. The annual appreciation of the 6% lower than the initial plan. exchange rate has been declining, reducing the tightening impact on the financing conditions. Revenues from “Income Tax” and “Personal Income Tax” had the most positive performance, increasing by 6.2% Unlike the euro, the dollar was slightly overpriced in and 26.4%, respectively, on an annual basis for the 12 2019, by 1.69%. The green currency was exchanged months. VAT remains the item that brings the largest at an average of 109.84 lek, from 108.01, which was share of budget revenues, with 31.94% of the total, but the average of the previous year, mostly reflecting its revenues from this item marked an annual decline of performance in the international stock exchanges. 7.7%, impacted by factors such as exemption from VAT of the subcontractors of TAP pipeline, lowering the prices of In the first quarter, in two organized auctions were bought some excise products, closing gambling, VAT exemptions 18 million euro, of which 10 million euro were bought for some products.
17 Annual Report 2019 - Macroeconomic Environment and Banking Sector
foreign currency deposits (mainly in euro) accounted for Revenues from local government also had a good 54.59% of the total, compared to 53.87% a year ago. performance, expanding by 5.7%. The revenues from special funds expanded by 5.6%, in line with the plan. The Bank of Albania evaluates that the banking activity has shown greater sensitivity to the measures pursuant to In line with declining revenues, expenditures decreased by increasing the use of local currency and reducing the use 5.3% on an annual basis in 2019, in order not to exceed of currency. However, the Bank believes that in line with the objective of the budget deficit. However, due to the the objectives of the strategy, this process is proceeding high non-realization of the revenue plan, the budget slowly and it will take more time for the measures to have deficit deepened by 18.86% compared to the previous even more significant effects. The most visible results were year. on the part of the balance sheet assets of the banking sector. At the end of 2019, the share of foreign currency Public debt is estimated to have dropped to 66.2% of GDP portfolio fell to 51.4%, decreased by 2.3 point percentage in 2019, decreased by one point percentage from 2018. from mid-2019 and 5.2 percentage points compared to In the fiscal macroeconomic framework 2021-2023, the the end of 2018. government expects to gradually reduce public debt, to reach 58.80% of GDP in 2023. The profit of the system for 2019, reported according to local standards, was ALL 19.89 billion, with an increase of 8.17% compared to the previous year, where the decline of the interest income was offset by an increase of other Banking sector income.
The banking system accelerated the growth rate of assets The increase in profits also affected the improvement of in 2019, but again these rates continued to slow. More profitability indicators. Return on Assets (RoA) increased accelerated was the increase of lending and deposits, to 1.40% at the end of 2019, from 1.20% in 2018. Return signaling that the consolidation of the banking system, on equity (RoE) increased 13.45% at the end of 2019, which culminated in 2018, is rendering its positive effects compared to 12.96% last year. on the performance of the system. The indicator of non- performing loans continued to decline. Non-performing loans closed the year with a significant According to the Bank of Albania, the total assets of the decline, reaching the level of 8.37%, marking a decrease system at the end of 2019 amounted to ALL 1.47 trillion, of 2.71 point percentage compared to the previous year, an increase of 1.55% compared to the end of 2018, falling to the lowest level since the second quarter of from the increase of 0.52% of the previous year. The 2009. The Bank of Albania estimates that the decline system invested the free money mainly in the purchase of in non-performing loans reflects the concrete measures government securities. taken by the Bank of Albania pursuant to their reduction, as well as the improvement the economic environment Lending to the economy revived in 2019, after four and the financial situation of borrowers. years in stagnation. At the end of December 2019, the credit stock for the economy reached ALL 570.5 billion, In 2019, the consolidation of the banking system, which an increase of 7.08%, marking the highest growth rates started three years ago, ended. In March, OTP Bank’s since 2011. The increase of lending was affected by the Hungarians took 100% of control of Societe Generale, increase of lending to businesses, as well as for individuals. which was owned by French Societe Generale and in minority by a group of Albanian shareholders. In Banks continued to focus on lending in lek, while the June 2019, the concentration completed through the weight of the foreign currency loans fell to 46.68%, acquisition of control of the International Commercial from 49.20%, in December 2018. The Bank of Albania Bank by Union Bank. In April, Credit Bank demanded presented in early 2018 a de-euroization strategy, aimed the liquidation of its activities. These were added to the at reducing the use of euro in the Albanian economy, an previous transactions of the acquisition of Veneto Bank by action that aimed at increasing the effectiveness of the Intesa SanPaolo, the sale of the National Bank of Greece monetary policy of the central monetary institution. This to the American Bank of Albania and the purchase of strategy has proved more effective in terms of lending. Tirana Bank by the Albanian Balfin Group as a majority Total deposits reached ALL 1.03 trillion at the end of 2019, shareholder and Komercijalna Bank of Macedonia as a an annual increase of 3.85%, as a result of the increase minority shareholder. At the end of 2019, the Albanian of deposits in both lek and foreign currency. This is the banking system had 12 banks, from 16 at the end of 2017, highest rate of deposit growth since 2012. before the commencement of consolidating process.
Despite the de-euroization policy of the Bank of Albania, By the end of the third quarter of 2019, the bank continued foreign currency deposits continue to be preferred and to be well-diversified according to the origin of capital, have performed better than those in lek. In December, although it is making changes due to consolidation and
18 Annual Report 2019 - Macroeconomic Environment and Banking Sector
sales. Currently, 26.93% of the system’s assets originate At the end of the first 9 months of 2019, the banking from Turkey, 15.15% from Austria, 12.59% from Italy. system had 446 branches, 28 branches less than in the The share of Greek banks, from 13.20% at the end of same period las year, as a result of the system consolidation the third quarter of 2018, has dropped to 5.37% in the process. The number of employees was 6,827 decreasing third quarter of 2019, after the sale of two Greek-owned by 88 employees, compared to September 2018. banks. After the sale of Tirana Bank to Balfin Group, the acquisition of the International Commercial Bank by Union (Data source: quarterly publications of GDP, INSTAT; Bank and the organic growth of Credins Bank, the share Labor Force Survey and Labor Market, Q III 2019, INSTAT; of Albanian capital banks increased by 23.87% in the Data on the banking system, Bank of Albania and the third quarter of 2019, from 16.34% in the same period of Association of Banks; data on the balance of payments, one year ago. The Hungarian capital, which replaced the Bank of Albania; Fiscal Statistics 2019, Ministry of French one, accounts for 6.09% of the total. The German Finance; Fiscal Macroeconomic Framework 2021-2023; capital occupies 2.16%; the American one 5.21% (after PDNA- Post-Disaster Needs Assessment Report). the absorption of NBG by the American Bank of Albania), the Bulgarian capital 2.05%, and 0.61% are from other countries.
19 Financials at a Glance Annual Report 2019 - Financials at a Glance
Explanatory note: Managerial financial statements and audited “Financial Statements” are different due to the fact that the Bank has restated its comparative financial statements to include the assets, liabilities, results of operations and cash flows of Veneto Banka sh.a from 5 December 2017 in the audited FS.
FINANCIALIST AT A GLANCE
2016* 2017* 2018* 2019*
Income Statement Amounts in ALL/1,000
Net Interest Income 4,257,405 3,983,035 3,782,370 Net Fees and Commissions 704,326 820,771 785,295 3,538,978 Pre-tax Income 2,767,228 1,123,910 670,219 852,700 Taxes 483,508 282,635 8,983 2,420,288 Profit 2,283,719 799,827 436,707 381,606 1,701,875 Balance Sheet Total Assets 141,427,369 149,528,532 184,559,044 177,699,734 Loans 45,000,001 45,239,962 55,193,813 46,500,426 Securities 56,320,615 57,980,881 59,350,512 64,000,757 Due from Banks 23,902,937 17,106,968 21,952,883 20,253,667 Deposits 118,842,127 125,974,220 147,985,177 145,483,303 Capital 19,432,580 19,504,474 23,329,338 20,274,284 Total Liabilities 121,994,789 130,024,058 161,229,706 157,425,450
Indicators Profit / Assets 1.56% 1.53% 0.43% 0.25% Profit / Total Capital 11.38% 11.71% 3.43% 2.15% Income from interest / Assets 4.03% 3.20% 2.57% 2.54% Interest expense / Liability 0.95% 0.60% 0.47% 0.47% Capital Adequacy 16.58% 17.57% 18.91% 23.17% Net Assets / Employee 214,026 224,955 230,658 245,973 Number of employees 570 578 699 640
INTESA SANPAOLO BANK / KEY FIGURES
2018* 2019* Change Change in %
Net Interest Margin 3,782 3,539 (243) -6.4% Non Interest Income 562 1,332 448 50.7% Total Revenue 4,344 4,871 205 4.4% Operating Expenses (2,930) (2,382) (543) -18.6% Loan Provisions (27) 42 247 120.7% Net Income 437 1,702 1,265 289.7% Return on Equity 2.1% 8.1% 5.8% Cost/Income Ratio 67.5% 48.9% -13.8% 0.11 0.12 Total Assets 177,700 183,007 5,307 3.0% Total Loans (gross) 46,500 46,878 378 0.8% Customer Deposits 145,483 150,942 5,458 3.8% Total Shareholders’ Equity 20,274 21,631 1,357 6.7% *Consolidated with Veneto Bank
21 Management Discussion Annual Report 2019 - Management Discussion
The year 2019 was closed with the yield at 1.76% from Management Discussion 1.36% as of January 2019. Such trends have been reflected not only in the 12M T-Bill yields but as well in the longer DOMESTIC ENVIRONMENT tenors from 2Y to 10Y. During 2019, the public offering of long-term securities investments has been higher in the At the end of 2019, GDP growth stood at 2.2%, lower Q1& and Q4 than the government borrowing demand, than 4.1% of the previous year. The development was while in the Q2&Q3 was been squared which justifies as driven largely by consumption, private investment and the well the behavior of yields during 2019. expansion of tourist’s revenues. Growth this year has fallen mainly due to lower electricity production. Weaknesses in However, the interbank money market rates during 2019 Albania’s infrastructure and economic institutions impede have been closed to the base rate equal to 1.00% with a broad and sustained improvement in living standards. small changes during the months due to the market The monetary policy will remain accommodative in the demand and offer. medium term. However, the effect of the last earthquake November 26th which hit the country, may impose a Intesa Sanpaolo Bank Albania 2019 Main Challenges and delay for the economy to return to equilibrium and Achievements. targeting inflation. The consequences of the earthquake are expected to have two characteristics, the negative side Historical minimum interest rates continued to impact on of a possible contraction of consumption, production, Bank’s Net Interest Income, dragging it down. and private investment especially in tourism, and on the other side the reconstruction and compensation The bank managed to grow in terms of number of program should give a positive boost to the sectors of customers and profitable transactions in most business economy. The effect of the earthquake in the economy units. will depend on the form and intensity of the response. Inflation remains below the 3 percent target, supported The Bank made significant progress during 2019 in the by the Bank of Albania’s accommodative policy stance following aspects: and flexible exchange rate policy. At the last month of the year 2019, the inflation stood at 1.1% compared to Solid capital position: while following the Bank’s strategy the 1.8% of the same period last year. The Albanian CPI for 100% dividend distribution, the capital adequacy ratio in 2019 averaged at 1.41% compared to 2.04% of 2018. in 2019 stood at the level of 22.69%, keeping ISP Albania The curbed inflation is driven largely by fluctuations in in a comfortable position for taking advantage of organic food prices and low inflation pressure from abroad. growth opportunities.
The Albanian banking sector continues to remain Credit quality: further improvement of the NPL stock in financially sound and has shown an upward dynamism. 2019, which decreased significantly by 17.2% pushing This sector has been profitable throughout 2019, while further down the NPL ratio by 1.2% reaching 5.4% in its indicators of liquidity and capitalization stand above December 2019. the regulatory requirements. Even in the banking sector and its commercial activity, the impact of the earthquake Commercial activity: optimistic growth and a well- has yet to be assessed. However, the consolidation of positioned commercial model focus on higher growth, the economy and revitalization of the credit sector it is especially in Individuals and Small Business segments. By demonstrated by the drop of NPL at year end at 8.40% the end of 2019, in line with its strategy, supported by from 11.08% in 2018, and by the expansion of total loans short and medium objectives, was presented a change (residential) in December 2019 at 6.53% yoy. on the organizational structures of Retail Division, aiming at strengthening the sales force team. Financial leasing During the year 2019, in the primary market of Albanian project, which was finalized on 2019, will increase the debt securities in local currency, the average interest rates opportunities for the Bank to extend its product portfolio, of the 12 M T-Bills as the main indicator of such market increase lending volumes and customer base. has been quite volatile. The year 2019 has started with a Digitalization has remained one of the Bank priorities. decline in the Q1 where the 12M T-Bill auction has almost During 2019, many developments were launched in this reached the level of the base rate (1Week REPO Rate equal direction, and those will continue to evolve further during to 1%). The trend followed a moderate rise in the Q2 and 2020, with the aim to offer to our customers a unique by continuing to strengthen its trend in the third quarter, experience. where the 12M T-Bill yield has reached the level 2.26% same as May 2018. The Q4 was again characterized by a Cost-to-income ratio at 48.9%: In 2019 affected by non- decrease in yields, which was influenced by the liquidity recurring events. Cost saving initiatives and improved in the market and by the potential issuance in 2020 of control systems ensured another year driven by operational the Albanian Eurobond with the aim of substituting efficiency. the ALBANI2020 and increase the borrowing in the international market.
23 Annual Report 2019 - Management Discussion
Manage risk well RETAIL BANKING During 2019 Retail Division made encouraging progress in CREDIT RISK delivering against its strategic plan with strong focus on products and services to meet our clients’ diverse financial Credit Origination quality was at healthy levels with just needs, customer satisfaction and a high-quality customer 1.12% of new lending for the last three years recording experience. 90+ days average vintage The purpose of efforts during 2019 focused on the New lending is acquired based on know-how and continued advancement of its economic performance awareness of sectors’ specificities, predefined solutions, well into the future, as well as strengthening its position policies & products, mainly mentioning Energy and as a product leader in offering the most progressive Agribusiness as components of volumes increase. banking products, through the optimal mix of traditional Such results involved also partnerships and risk sharing and modern distribution channels. agreements with experienced players such as EBRD. 2019 was also marked by a relevant improvement of the The Bank, in compliance with Group rules, has in place a Bank main indicators and achievements of all business Risk Appetite Framework (RAF) with regards to the control KPIs. We managed to grow the total Retail Customer base of main risks such as Credit Concentration risk, Real Estate with 4% and retained the same level of active customers. risk, Sovereign risk, Foreign Exchange credit risk, etc. Whereas in Small Business the strategy was to clean the Since 2016 the function of Proactive Credit Exposures customer base in order to improve it’s quality. As a result, Management (PCEM) is established, having a more the Bank achieved a growth of 6.8% in Active Customers proactive credit quality monitoring and addressing credit for this segment. The programs initially implemented deterioration since the first signals. since 2017 further enabled us to follow our Customers throughout their entire lifecycle, preventing the inactivity, The framework on Credit Control activities, setting up 1st as well improving customer experience and satisfaction. and 2nd level controls on credit, area aims at a prompt and better identification of any inadequate credit practices One cornerstone of 2019 activity was surely focus on and mechanisms as well as ensuring effective corrective lending activity, well in line with the Group and Bank actions. Business plan 2018 – 2021. The efforts in applying new processes flow, pricing structure, shortening and The Bank adopted IFRS 9 standard from 1 January 2018 improvements of processing time, combined with an by reclassifying the financial assets in stages as per risk aggressive new customer acquiring approach, resulted classification applying respective credit losses calculation successful in all customer segments, showing an increase (1 year or Lifetime expected credit losses). While in 2019, of overall retail performing loan volumes of 12% year on the bank adopted the New Definition of the Default being year with Individuals lending increase at 14% followed by compliant with ISP Group rules. Small Business increase of 7%.
We managed to grow our total lending portfolio, NPL MANAGEMENT strengthening our position in the markets by almost 0.4% compared to the previous year. We continued the positive In 2019 continued the trend of significant improvement in increasing trend with regard to the new production both loan portfolio quality. The Bank continues to outperform on Mortgage and consumer loans as well. the Banking sector average regarding the reductions of NPL having lowered their percentage 1.2%. These results Applying the same strategy as in the last year, due to mainly depend upon: the revised and improved features of different sub- products within consumer loans products catalogue, • NPL stock Reduction to healthy levels enabled by good the Bank had especially a remarkable performance in collection results, coupled with the moving off balance Individuals Segment both in terms of numbers and new sheet of staled positions as per Central Bank regulations. volumes, impacting positively not only in terms of net increase performing volumes but in terms of profitability • Early intervention on positions potentially object of as well. As a result of a well-defined strategy for both restructuring/rescheduling avoiding portfolio deterioration existing and new customers, during 2019 the Division combined with support/involvement by Under-writing achieved the goal to increase customer loan penetration team and the new PCEM role, in defining solutions from vs 2018, notwithstanding the relevant increase of the early revision stages to later deteriorated ones. customer base as well. In order to address the needs of specific customer segments, the last month of the year • Repossessed Assets structure, a separated unit within we launched for the first time in the market the new Risk Management Division went on generating positive Mortgage Loan in EUR with fixed Interest Rate, which results with regards to assets marketing and sale.
24 Annual Report 2019 - Management Discussion
is a very attractive product targeting customers with and calculation of key indicators of success in managing incomes in EUR. We expect the positive impact of such relations between the client and the Bank. campaign to be reflected in the first months of 2020. We pay special attention to our customer’s needs and Quality of the lending portfolio has been another aspect evaluate their feedback, which drives us to improve closely monitored which is always a priority for the Bank. product features and have made it easier for customers to The measures taken through continuous performance operate with us through digital transformation. review as well as timely and holistic addressing of first signs of possible customer defaults combined with a Branch footprint was optimized further with the opening good quality of the new credits origination enabled an of a new Branch in Saranda, relocating of Boulevard improved NPL ratio, both on segments and division level. “Bajram Curri” branch to “Unaza e Re”, relocation of “Fieri” branch and of “Rruga e Dibres Branch” to a The strategy on deposits is focused on providing the more attractive and useful location, “Rruga e Kavajes 2” customers with a catalogue which enables to meet branch as wellas the rebranding of “TEG” branch. The customer demands in terms of tenor diversification and new feel-at home style surely aims to further improve interest repayment options. The Bank has been prudent as customer perception and comfort whilst in branch as well in building up a strategy for improving and optimizing well as enhance the level of service offered to them. In the ratio between deposits in local currency towards those addition we managed to continue the process of ATM in foreign currency. fleet replacement responding thus to customer feedback and ensuring the good quality of service level we aim to Our market share for outstanding term deposits increased offer to our customers by 0.7% compared to previous year. Deposits volumes marked an increase by 6% versus previous year, with the Electronic authentication and signature remained a priority highest increase noted in the Small Business segment with in 2019. Results related to electronic signature continued to almost 17% form previous year. linger around the 20% indicating of signature verifications were performed using the electronic signature process. Intesa Sanpaolo Bank Albania was the first bank joining In addition to restructuring and repositioning the the Western Balkans Women in Business Program back in traditional distribution channels of the business network, 2015, supporting women-owned & women-led business during 2019 we continued to develop and improve its from micro, small and medium categories in Albania, with direct banking distribution channels. Apart form the New dedicated loans and packages, including a bundle of daily Public Portal launched back in 2018, the bank managed products & services. The Bank financed a total sum of €2 to successfully launch the new Digital Banking Platform in million to 147 successful women entrepreneurs within the end of February 2019. first 2 years of the program. The new interface provides unique user experience and Fostering this successful collaboration, it was decided functionalities, regardless of which device or app the to extend the program in a second phase with a bigger clients are using (computer, tablet or mobile phone). In investment totaling €5 million aiming to wider spread the new service, the clients have a graphic representation these opportunities geographically & category wise. These of their assets with the option to manage them according funds will improve access to finance, creating specific loans to their own preferences. with lower interests and packages of products & services. Advisory services are offered alongside mentoring and With the improvement of existing functionalities, numerous longer-term coaching to provide women entrepreneurs new options and innovative functionalities are available, with the knowledge and confidence to take the next step. such as #withCASH (cardless cash withdrawal), #withPay Also, during 2019 we continued to facilitate lending to the (new payment concept between the service users using agribusiness sector leveraging from the new instruments a mobile phone number), app login using fingerprints or on risk management previously introduced through face identification, quick overview of the balance without cooperation with EBRD Risk Sharing Program. logging into the app, new mobile token integrated into the mobile banking app that provides easier access to Internet In support of all business segments, the improvement and banking, the option to receive automated notifications to excellent use of the Customer Relationship Management the mobile device, restructuring of payment processes platform (CR-ISP) further consolidated customer insights to automatize and easy the payment process not only in and analysis which are crucial also in designing products terms of steps but also in terms of instantaneity and 24/7 that meet these customer needs. The wide and extensive availability. ranges of campaigns launched during the year have given positive results in products sale, as well as in services offered. Since the launch of the new Digital Banking platform The key tasks during 2019 revolved around, conducting our customers increasingly engage with Intesa Sanpaolo analyses (of clients, products, services and distribution Banka Albania using a smartphone and we see that our network) and direct marketing, the development of app, has become a vital part of their financial life. support for better relationship management with clients
25 Annual Report 2019 - Management Discussion
Almost 21% of the active customer base has contracted renewable energy production, tourism, manufacturing the new service, 67% of which is on average logging in wholesale trade and Project Financing etc. while on monthly basis. addressing special attention on diversified risk profile.
The app also supports the digital customers through their Last year Intesa Sanpaolo Bank enhanced its lending life moments, for example, buying a home starts with product portfolio by introducing Financial Leasing, aiming helping customers save for a deposit, not just when they to meet market development needs. need a mortgage. We enable them relevant offers of our full range of products and services which the customers Cash Management team focused on optimizing the can view from the commodity of. payment businesses, aiming to improving customers’ cash flow, while a special attention was paid on the We will continue to evolve the new digital banking service digitalization of cash management products and services, around the theme of being a one-stop-shop for all the by addressing special attention to Bulk payments, affecting money management needs our customers have. We positively the customer’s efficiency on performing their intend to do so through our investments in cutting edge banking transactions. technology and data capabilities and through gathering customer feedback we will continue to listen to our During 2019, on the Corporate & SME’ focus has been customers to make the digital banking service the best supporting customers involved in export-import activity, experience in the country. by offering assistance regarding to the Trade Finance products, and give advice in specific transactions.
CORPORATE BANKING & SME Supported by our Treasury team, Corporate and SME Division showed good results in FX trading revenues, as Corporate Banking in Intesa Sanpaolo Bank Albania one of the core business streams especially for Domestic comprises Domestic Corporate & Institutional Customers and Multinational Corporate Customers. (International Organizations, Government, Municipalities, and Public Sector Entities), as well as Multinational The bank successfully met the needs of Corporate & SME Customers. While SME Segment includes companies with clients, while Multinational segment remains in strong a turnover in the range of € 1 million to € 10 million. position providing extensive banking services to some of the most important and largest foreign investors in During 2019, in the focus of Corporate & SME Division Albania. was the business development, giving priorities to the establishing of sustainable relations with our customers by Following the tragic event that had shaken the country a careful management of existing customer and serious on November 26th 2019, Corporate & SME Division, commitment to the new ones. stayed closed to its customers, in identifying their needs and supporting to overcome the difficulties. Namely Notwithstanding of the very competitive environment in “Earthquake Relief and Support Plan”, specifically designed terms of low interest rates offered in the local market, by the Bank for the relief of the population affected by the Corporate & SME consolidated its lending and deposit earthquake, introduced specific financial schemas for new market share, keeping in consideration the quality of its and existing business customers, offering the possibility lending portfolio. to postpone or rescheduling loan repayments and receive new financing for repairs or reallocation purpose, with 6 In 2019, Corporate & SME Division continued to achieve months grace period and preferential interest rate. a sustainable growth both in lending and non-lending revenues. In overall, the Corporate & SME Division improved its contribution in Bank’ results with an increase FINANCE AND CAPITAL MARKET of 3,81% of its Net Operating Margin. Treasury and ALM during the year 2019 delivered The Division continued to be a strategic partner to its a decreased contribution in NII as it relates to the customers offering a comprehensive variety of product investments in Albanian Government Securities, which and services to Corporate & SME customer including was driven by the sharp decrease and high volatility of financing facilities (standard loans, overdraft facilities, the Albanian Governments Securities yields in the local project financing, syndication loans), trade finance currency ( 12M T-Bill in 2019 yields varied from 1.094% facilities (guarantees and letters of credit), deposits, to 2.26% with average 1.58% versus the range 1.43% - treasury products (spot and forward transactions), 2.77% in year 2018 with average 2.09%). Such effect has domestic and international payment transactions, POS- been smoothed by a better management of investment terminals, business cards and “on-line” banking. made in terms of volumes (increased in comparison with the year 2018 from Lek 49.18 BIO to Lek 54.8 BIO) and Main industries in the focus of the lending activity have increased duration. As well the contribution of the bonds been supporting the investments in green economy / in FCY has been lower in comparison with the year 2018,
26 Annual Report 2019 - Management Discussion
justified by the negative yields in international markets for One of the important activities of this department, EUR. closely related to the activity of Corporate & SME and Retail customers, has been competitiveness in trading During 2019, representing the bank in its role of market the financial instruments like Spot Foreign Exchange makers for the Albanian Government Securities, Treasury transactions and Albanian Government securities in the and ALM has contributed in providing liquidity for the retail market, both increased compared to previous year. benchmark bonds, supporting in this way in the Albanian Government bonds yield curve construction.
Volume of Securities Portfolio (Balance of yearly average)
60,000,000
50,000,000 48,440,607 47,527,166 47,252,806
40,000,000
30,000,000 FCY
20,000,000 11,803,928 13,421,630 lume in Lek/1,000 11,282,640 LCY Vo 10,000,000
- Dec-17 Dec-18 Dec-19
Revenues from Securities
3,000,000 2,641,863 2,500,000 2,106,994 2,000,000 1,781,539 1,500,000 FCY 1,000,000 LCY Incomes in Lek/1,000 500,000 441,722 333,769 314,657 0 Dec-17 Dec-18 Dec-19
27 Annual Report 2019 - Management Discussion
ICT MANAGEMENT Several initiatives in Risk business area, such as LDG & PD During 2019 Intesa Sanpaolo Bank Albania went through models have been performed during 2019 implementing the execution of several successful initiatives, needed for the forecast of the risk parameters as per IFRS 9 standard, achieving the goals of the division but also ISP Albania and also the simulation of the risk in case of replacement business needs. of the risk parameters.
In line with the objectives of the ISBD Strategic Business Also new DoD initiative has been implemented to be plan 2018-2021, the main pillars for year 2019 have been: compliant with ECB new definition of default for NPL customers. New definition of the calculation of days past • Drive the Digital transformation of the bank. due has been applied in Finevare and a tool has been locally developed to calculate and additionally validate the • Provide services that are integrated with current business calculation performed. needs. Other ISP Group strategic initiatives were implemented • Increase revenue, improve productivity, lower cost and during 2019 related to the improvement of Financial increase customer satisfaction. reporting and security standards.
• Implement Group Operating Model in the Key Areas. Accounting Factory: Developed as part of the ISP Group Strategic plan, a new reporting tool has been implemented ICT project portfolio for year 2019 included a list of 22 during 2018 for replacing the previous reporting tool used Projects from which the most important include the Go- for the manual preparation of the CFO reporting packages. Live of Digical, the new Online Banking platform providing In 2019, Phase 2 has been Initiated and successfully a new banking experience and innovative services, completed. Phase 2 included the establishment of data implementation of Collateral Management Tool which is flows feeding the reporting tool with granular data the ISP Group target solution for managing collateral data with all information related to balance sheet (assets and and process, conclusion of phase 2 of Accounting Factory liabilities) and profit & loss accounting, to fully automate for the automation and improvement of the reporting the CFO reporting packages preparation. packages and also implementation of centralized risk management and security solutions for the standardization Single Sign On: In line with ISP Group security guidelines, and alignment with ISP group standards. Single Sign On solution has been implemented during 2019, improving the security of access to all bank As one of the main pillars of the ISBD strategic plan, web applications by adding an additional layer of Digitalization is an opportunity to make ICT resources security control, providing centralized Management more accessible and promote this access to a wider and of Access, applications managed separately and also diverse customer base. Digitalization to ICT also means a multiple credentials (User/Password) usage by binding fusion between IT and business. authentication only on a set of single credentials.
Digical: Initiated in 2018 as part of the ISP Group Strategic In addition to the ISP Group strategic initiatives, there plan for the Digital Strategy, the implementation of Digical are also local initiatives in 2019, mostly oriented toward Online Banking platform was completed in 2019 providing digitalization and reengineering of existing processes, customers a unique and seamless experience and a variety such as the Credit Process automation by implementing of services available 24x7. ISP Albania has been one of a solution aiming to introduce a paperless credit process the first subsidiaries of ISP Group to have full deployments and automatic/semiautomatic booking/disbursement for of Digical Mobile, Digical Responsive, Digical Branch and unsecured credit products. Public Portal. In 2019 the feasibility study for the implementation of an ISP group strategic initiatives during 2019 represented enterprise Document Management System & Electronic a significant qualitative step forward regarding the Archiving has been performed, with the goal is to enhancement and standardization of Risk Management integrate systems with DMS and provide faster search, and compliance with ECB requirements. better organization and reduce physical storage space.
Collateral Management Tool: In order to comply with ECB Through the deployment and management of innovative, regulatory and mandatory requirements the project for proven and secured technologies and methodologies, the implementation of Collateral Management Tool was leverage on information assets for the achieving of initiated. CMT is a new application developed by Intesa financial, commercial, management and service goals, ICT Sanpaolo for the collaterals management. Through the aim at becoming a real business initiator and a strategic implementation of the CMT project it is aimed to enhance asset, able to generate value providing ideas together and standardize the maintenance and management of with high-performance, innovative, cost-effective, top- ISBA’s collaterals in line with all the group banks by using notch solutions. the same platform. The application will become fully operational in the beginning of 2020.
28 Annual Report 2019 - Management Discussion
OPERATIONS Enhancement of power infrastructure was a big and very important project that started with a Feasibility Intesa Sanpaolo Bank Albania during 2019 expanded its study and was finalized with the replacement of the old network in Albania by adding one new attractive location, infrastructure with a new one, construction of a Technical Saranda city. This new location improved the footprint Room according to contemporary technology standards, of the Bank in the Albanian territory by reaching new replacing this way the 4 (four) small technical rooms customers. Also, it improved the presence of the Bank located over all in bank premises. The Technical room by responding to economic and development challenges. was constructed with fire protection, Emergency Doors, Last year, one of the branches was reallocated from main and back up generators, according to the latest Boulevard “Bajram Curri” to “Unaza e Re”. The expansion technology, ISSO, Health and Safety in the work place and and repositioning of branches aimed to be near its Business Continuity Management standards. The remote clients, costs optimization and improving bank image by control of the systems it was an added value of the new implementing Group Layout and Standards for making infrastructure. people feel “at home” by focusing on a welcoming customer service and human relationship. Intesa Sanpoalo Group gives a very important attention to “Occupational Health and Safety” and “Energy and The focus of the bank is also the improvement of the Environment”. During 2019, these functions and rules bank’s image and one important project that contributed of the Group were adapted locally from Intesa Sanpoalo during 2019 was the Remodeling of the Façade in Head Bank Albania. Quarter located in Rruga I.Qemali. This investment was an added value not only for the Bank but also for the Occupational Health and Safety in the workplace is the community of the area as well. It showed once more the Bank’s goal to adopt, through an ongoing process aimed Corporate Social Responsibility of Intesa Sanpaolo Bank at continuously raising the standard of protection of our Albania. During the 2019 ISBA was considered a leader colleagues, a common OH&S baseline for the international institution in Albania in meeting the Health and Safety network, which makes the Group a benchmark for best requirement in terms of respecting the legislation and not practice and a place where the physical and psychological only. integrity of colleagues is a non-negotiable core value. Operation Division and other structures of the bank to During February and March 2019, were finalized the operate as an effective and active instrument in respecting works for reallocation of Rruga e Dibres Branch in the the health, security and safety of the staff, clients and New Residential Area in Tirana (Rruga e Kavajes ish Parku) collaborators. and Fieri Branch. In the first reallocation Tirana we were able to successfully implemet the newest Model of the Energy and Environment is the bank’s goal, to monitor Group, the Branch in Partnership with a Bar. the compliance risk regarding environmental protection, ensuring fulfillments with international and local Furthermore, on June 2019 is finalized successfully one requirements on environmental issues (e.g. waste disposal, of the biggest activities implemented during 2018, the environment dangerous substances management, soil optimization of Head Quarter of Ex Veneto Bank and and water discharges, atmospheric emissions, noise accommodation of additional working positions in Intesa pollution, etc.), identify actions, measures, proceedings Sanpaolo Branches by supporting the business expansion and strategies to promote the rational use of energy. due to integration of ex Veneto Bank clients. Main focus of the Operation Division remains optimization, After the finalization of these projects the total number of cost saving, increase of customer satisfaction, Occupational branches of Intesa Group Layout in the last 4 years arrived Health and Safety and Energy and Environment, all in the in 11 (eleven) out of 36 (thirty six) of Intesa Sanpaolo Bank light of Intesa Group values. Albania Network. Implementation of Intesa Sanpaolo Group standards All these investments make these branches a place of that refers to best international standards, are supported partnership, an open place for dialogue, meetings, strongly by the High Management of Intesa Sanpaolo communication and work, a friendly customer service, Bank Albania. strengthening human relations. The new layout offers many diversions while waiting to be served: besides Prevention of economic and reputational loses coming internet access, clients can also read one of the many from cyber-fraud attacks has been the main challenge books available for consultation, enjoy a good cup of during 2019.The only cases suffered on cyber-fraud coffee in a very relaxed environment while listening to area have been noticed on e-commerce online card the background music, which mitigates the surrounding transactions where card data is compromised on ‘working’ noise. In addition to all the customer’s facilities merchant’s environment and/or from cybercrime. To and friendly environment the new branches offer better mitigate this risk ISPBA has started the implementation of working conditions for the staff of our Bank as well, more “3D Secure” online card authorizations which is going to natural light, more fresh air and more spacious working be finalized during 2020. No other forms of cyber-fraud place. have been detected during 2019.
29 Financial Review Annual Report 2019 - Financial Review
1 Lending results – entirely generated in domestic Financial Review market
In 2019 ISP Albania reported a net profit of ALL 1,702 • Total performing loans in Dec 2019 at ALL 44,356 mln, million. In comparison with 2018, net revenues increased, up 2.1% from Dec 2018, totally driven by Retail segments. mainly driven by higher income on commissions and profit Positive results generated in: on trading, due to loss on revaluation of capital during 2018, in part offset by higher regulatory expenses. • Individuals in Dec-2019 at ALL 10,533 mln up 8% • Small Business in Dec-2019 at ALL 4,701 mln, up 11% Transaction-based revenues still reflect growth in commercial activity, motivated by payments and cards business. Operating cost were successfully maintained Credit quality - further improvement under control, and delivered a good performance in 2019 in all components. Credit quality positively improved • Improved credit quality, with a decline in the NPL ratio keeping provision expenses and cost of risk at minimal impacted by Corporate division. Total Nonperforming levels. NPL ratio stood at a historical low level of 5.4%. loans in Dec-2019 at ALL 2,523 mln, down 17.2% from Dec-2018. The increased net profit in 2019 compared to 2018 by ALL 1,265 mln or 289.7%, was in particular driven by merger with Veneto Bank in 2018, causing higher expenses in Strengthened capital position – notwithstanding integration costs and loss due to Veneto Bank capital 100% dividend distribution conversion from EUR to ALL. • Regulatory Capital in Dec-2019 at ALL 18,445 million, The analysis is made based on 2019 and 2018 results down by 2.5% from Dec-2018 impacted from the according to IFRS. If otherwise stated, all figures are decrease in Retained Earnings with ALL 368 mln (due to presented in millions of ALL. dividend distribution) and from the increase in intangible assets with ALL 104 mln.
Results 2019 highlights • Capital Adequacy Ratio at 22.69%, down by 0.48% (Dec 2018: 23.17%) • Net Interest Income at ALL 3,539 mln, down 6.4% (2018: ALL 3,782 mln) Cost discipline and efficiency measures to offset • Net Commissions at ALL 853 mln, up by 8.6% decrease in operating income (2018: ALL 785 mln) • Cost income ratio at 48.9%, down 13.8% (2018: 62.7%) Financial Review • FX result at ALL 548 mln (2018: ALL 105 mln) • Operating Income at ALL 4,871 mln, up 4.4% (2018: ALL 4,666 mln)
• Operating Costs at ALL 2,382 mln, down 18.6% (2018: ALL 2,925 mln)
• Operating Margin at ALL 2,489 mln, up 42.9% (2018: ALL 1,741 mln)
• Net Income at ALL 1,702 mln, up 289% (2018: ALL 437 mln)
1 Taking into consideration positive non-recurring recoveries in 2019, and negative effects in 2018 from accumulated unpaid expenses of Veneto Bank, along with higher intra-group expenses generated by strategic projects, operating costs were managed substantially in line with previous year.
31 Annual Report 2019 - Financial Review
Change
amount %
1,702 NET INCOME (LOSS) 432 1,265 290%
Minority interests -5 (5) -100% Levies and other changes concerning -277 the banking industry (net of tax) -274 (4) -1% Charges (net of tax) for integration -60 and exit incentives -255 165 73% -382 Taxes on income -57 324 n.r. 2,420 Income (loss) before tax 997 1,423 143% 21 Other income (expenses) -100 121 121% - Net impairment losses -147 on other assets -412 265 64% 15 - Net privisions for risks and charges -27 42 156% 42 Net adjustments to loans -205 247 121%
Operating margin 2,489 1,741 747 43% -2,382 Operating costs -2,925 (543) -19% Adjustments to poperty, -439 equipment and intangible assets -548 (109) -20% -876 Other administrative expenses -1,042 (166) -16% -1,068 Personnel Expenses -1,335 (267) -20% 4,871 Operating income 4,666 205 4% -69 Other Operating Income (Expenses) -6 (63) n.r. Net result of fin. assets and liab. valued 548 at FV through PL and on Oth. 105 444 n.r. 853 Net fee and commission income 785 67 9% 3,539 Net Interest Income 3,782 (234) -6%
Y 2019 Y 2018
OPERATING INCOME OPERATING COSTS OPERATING MARGINS NET PROFIT (LOSS)
4,870.9 536.9 136.3 1,170.4 709.9 2,488.6 1,701.9 2,382.3 460.6 1,218.3 761.9 456.4 437.6 1,156.2 607.7 648.5 591.0 1,325.9 717.7 608.2
1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY
32 Annual Report 2019 - Financial Review
Operating Income
Operating Income increased in 2019 by 4.4%, primarily driven by positive on income from trading, ALL 444 mln higher than 2018, partially offset by lower net interest income, lower ALL 243 mln than in 2018:
Lower net interest income
Net interest income decreased, reflecting continuous decrease of interest rates and market behavior, affecting income from loans and securities, which decrease in all components. Liabilities side, higher expenses are evidenced compared to previous year driven by deposits in LCY, mainly due to long term deposits, partially offset from lower due to banks.
To be emphasized the reduction of income from placements with 39%, determined by the deterioration of interest rates.
Average Assets (reclass) Global spread
2.28% 171 175
1.95%
2018 2019 2018 2019
Higher commissions income in almost all categories
Net commission resulted 8.6% higher in 2019, with positive impact in almost all categories, fully supported by core items, like payments, cards, and current accounts:
• Current Account Commissions increased by 2% in 2019 compared to 2018 driven by the increase in customer base. • Payment commissions increased by 6% in 2019 compared to 2018. Higher income on trading transactions by 15% in 2019 compared to 2018. Although the overall result in 2019 was 425% higher compared to 2018, it was as a combined effect of negative impact on Veneto Bank conversion of capital in 2018, fully offsetting the positive contribution of Eurobond Sale in 2018.
Net Commisions FX result
853 548
785
105
2018 2019 2018 2019
Lower other net operating expenses
Other operating expenses went down by ALL 63 Mln year on year due to nonrecurring negative impact of “Resolution Plan expense” in 2019 accounting for ALL 82 Mln. In 2018 such expense has not been acquired as per confirmation of central bank.
Total Operating Costs
Operating cost resulted 18.6% lower than 2018. Good performance on costs during 2019 was a mix effect of several items impacting the results of both years under analysis. Results of 2018 were impacted by extraordinary bookings of
33 Annual Report 2019 - Financial Review
expenses not booked from Veneto bank through the years and 2019 results were impacted from release of available provisions.
Although “intra group” expenses in 2019 were higher compared to 2018 and the Bank performed branch reallocation at better location and opened a new branch in Saranda city, running costs remained on focus and still resulted as a positive contributor in 2019. Cost reductions compared to 2018 were achieved for most of cost categories thanks to:
• Target-oriented procurement activities, the Bank has negotiated better terms in almost all administrative costs in collaboration with central procurement.
• Enhanced cost control for all cost centers In full alignment with Bank’s strategy, the bank keeps under particular focus the lowering of “run the bank” costs by leveraging on the development of economies of scale through ISG Central Procurement.
Operating Expenses Cost/Income Ratio
2,925 62.7%
2,382
48.9%
2018 2019 2018 2019
Improved credit risk
NPL ratio was further reduced in 2019, reaching a historical minimum level of 5.4%. The Bank managed to keep cost of risk at minimal levels. The following events determined the yearly loan impairment costs:
• Partial sale of NPL portfolio; • Improvement of some customers in STAGE2 through cash collections contributing in loan impairment release; • Several repayments of lost loans from customers;
Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018
NPL ratio 26.5% 19.9% 13.9% 7.6% 6.6%
NPL coverage ratio 51.0% 44.9% 36.6% 36.9% 47.7%
Cost of risk 2.4% 2.3% -0.5% 0.14% 0.47%
*) Consolidated with Veneto Bank
Legal Disputes
On December 2019, the Bank had forty-one outstanding litigations. The internal Policy for “Operating Rules for Accounting for Provisions on Contingent Liability and Contingent Assets” approved by Board of Directors on July 2014 outlines the rules for establishment of provision on litigations as well as the actors involved in the process.
Based on the above policy, provisions have been duly recognized when present obligation have been evidenced or when a probable outflow of resources has been estimated to settle the probable obligation.
Forward looking statement
34 Annual Report 2019 - Financial Review
During 2019 the bank performed several initiatives in Improve credit quality - NPL Management order to revamp Retail business, including and not limited to a new branch opened, reallocation of a branch to Optimization of collection processes by improving the a better position, strengthen the sales force and fully monitoring of performance & effectiveness Identify exploit all possibilities offered by enhancement of online opportunities to accelerate further deleveraging of banking (Digical platform). It is our strong belief that the selected NPLs portfolios also through disposals, leveraging Bank is properly positioned for following its key strategic on the experience and best practice in the processes guidelines in 2020 as projected by the Business Plan obtained during the previous years: 2019-2021: • Early warning system. Increase revenues in a very competitive environment while improving fee-based contribution • Focus on deleveraging the repossessed assets
• Enhance product cross selling by leveraging on ISP Improve cost discipline - Cost efficiency throughout product factories. processes review • Proactive Sales Approach • Enhance Pricing Capability We aim a continuous analysis of potential cost reductions • Wealth Management & Insurance Growth based on different sourcing possibilities – use the “Make or Buy” approach. Drive the digital transformation while reviewing the role of the physical network The ATM fleet replacement aiming in diversifying the range of services offered through ATMs as well as Digical in ISBA will evolve further, with an eye on revenues: reduce the cost of serving in branch to customers who E2E credit-lines for individuals will bring additional income want to make deposits. By leveraging on Procurement to the Bank. Remote Digital Signature will be introduced, Centralization and optimizing Sourcing Strategy aiming allowing for online sales of products. CRM integration cost reductions, attaining economies of scale and will enhance marketing capabilities, and tech will be improving the expenditure process. instrumental for targeting. Digi4Biz will be deployed, paving the way for future sales with Phase 2. Reducing the cost of service through shifting clients towards channels.
35 Annual Report 2019
Corporate Social Responsibility
36 Annual Report 2019 - CorporateAnnual Social Report Responsibility 2019
relationship with their employer also provides a positive CORPORATE SOCIAL identity for an employee, therefore the employees of Intesa Sanpaolo Bank Albania sh.a. desire to feel challenged and RESPONSIBILITY motivated by their jobs.
Intesa Sanpaolo Bank Albania based on the excellent One of the major functions of Human Resource experience of Intesa Sanpaolo Group, remains focused on Department of Intesa Sanpaolo Bank Albania sh.a is providing continuously qualitative banking services and the training & development human capital. Training products by contributing this way to the development of process molds the thinking of employees and leads to the economy of the country. quality performance of employees and the bank itslef. It is continuous and never ending in nature. Even in 2019, The entire activity of the Bank is driven by the Code of continuous professional trainings are organized. Ethics, believing that the sustainable growth is achieved -Trainings organized by AAB(Albanian Association of only by meriting the trust of our stakeholders. Our Banks ) - Several training initiatives were also organized core ethical values are centered in our vision toward a in collaboration with Albanian Association of Banks sustainable future. related to different fields of banking sector such as: Governance,SME financing, Retail, Risk Management, Intesa Sanpaolo Bank Albania pays dedicated attention Digital Banking, Audit, AML, Fraud and Information to the community by expanding access to credit, Security. offering access to financial instruments, managing with transparency and prudently the customer savings, and -Training on security issues – All staff branches - Intesa by offering products tailor made for different categories Sanpaolo Bank Albania strongly encourages the security of of customers! Of course, that this process requires a his employees by offering trainings on health and safety at continuous dialogue not only with our customers, but also work. In this framework were delivered several trainings with all the actors that impact and are impacted by our during 2019, involving different branches colleagues banking activity. Listening and dialogue are two powerful by giving them the ability and knowledge to deal with tools that orient our governance toward a corporate emergencies in working place. culture that enhances and encourages the critical thinking philosophy, the innovation and the continuous -Compliance& AML trainings _Training on CRS Pre-existing improvement. process and FATCA Periodical review
The Bank follows specific politics and procedures on hiring Based on annual AML Annual Plan trainings and activities and management of employees that are based on fairness related to the Pre-existing process and a general overview and consistent conduct, preventing favoritism, abuse and on FATCA & CRS, trainings with all Network staff who avoiding discrimination. Intesa Sanpaolo respects the is daily contacting with the customers, opening the professional standing and dignity of all its employees, relation with the customer and/or updating the customer recognizing the set of technical, organizational and information, were organized during November 2019. The relational skills as the Bank’s main strategic resource. training was mainly focused on two important pillars: Only by undertaking to protect and bring out the best of our employees we can maintain sustainable competitive - the activities related with Pre-existing process advantages. - and a general training in relation to FATCA & CRS with Intesa Sanpaolo Bank Albania pursues its goals with the aim of informing/updating all staff in the branch, honesty, fairness and responsibility, in full and true eliminating the problems encountered so far respect of the rules and professional ethics and in the spirit of signed agreements. We contribute in the fight -Trainings on Ethical complains against corruption, also through a zero-tolerance policy with respect to episodes of corruption in the workplace. During 2019 in accordance with Group’s predesigned Besides, the Bank requires the utmost transparency in format, the Offices of CSR & Internal Communications and company behaviors, representing Bank’s interests in a Customer Satisfaction & Complains, completed a training transparent manner. regarding Ethical Complains for all Branches of the Bank, including all the network working force. The training purpose was to better integrate the ethical complaints RELATIONSHIP WITH EMPLOYEES handling and reporting with the general complaints processes and where applicable, with other existent As every year even during year 2019 Intesa Sanpaolo channels. The course was structured as a classroom Bank Albania sh.a. has been focused to further enrich training and, besides theory, included several real case the relationship with employees as it leads to a healthy studies. In this training participated 250 colleagues. work culture, impacting on the employees well being and their crucial role in Bank’s development. Having a good
37 Annual Report 2019 - Corporate Social Responsibility
-Training on Strategic Communication Feb.2019), launched it in March 2019 for almost all the Head Office structures. This innovative way of working In cooperation with “Confindustria Albania” with The Skill will increase colleagues’ work life balance and, at the Company , a training on “Strategic Communication” was same time, encourage productivity. organized during September 2019. The training, involving colleagues from SB, Corporate &SME , PR &Marketing, We are the first Bank in the Albanian Banking System to was detailed as follows: offer this new modality of work to our employees.
1. The importance of communication in the banking The Flexible Work reshapes entirely our point of view on sector. Behaviors and methods to follow for groups and work and workspace and should bring benefits both for affiliates. the employees and the Bank in general.
2. Communicating a crisis: how to manage it, how to deal The common purpose of ISPAL and the Trade Union is to with a crisis, a negative event, and how to communicate maintain mutually satisfactory working relations between it outside and inside the bank. the Employer and the Employees. In this context it was reached an Understanding Memorandum during year 3. Communication of legal issues. How should the 2019, as result of which the bank contributed to each of relationship between the judiciary and the media be its employees with alimentary treatment during business managed? hours, a contribution that employees will receive under a special agreement that the bank signed with “SPAR” 4. Suggestions for the development of banking supermarket in Albania. communication, in the light of Italian and European legislation on anti-corruption and transparency, as a way The Memorandum of Understanding was focused as well of preventing crises and legal problems and improving on agreeing in regulating some economic requests related customer relations. to the Fix Pay; Role Allowance and some criteria’s leading to Increase of Salaries. 5. Ideas to improve the marketing of Intesa Sanpaolo Bank Albania. Leadership development 360° Excellence project - The 360° feedback is a process whereby each participant receives -Knowledge Empowerment IT Skills a feedback from a panel of colleagues (‘respondents’) organizationally related to him/her through a hierarchical Knowledge Empowerment Program dedicated to IT or co-operation relationship. This initiative is dedicated to people has been developed from Trainings Dept- ISBD the Top Management of each Bank. in order to support the IT Plan 2018-2021. In line with the Global Governance Program education, the plan was The HR department supported in preparing the extended also to the international subsidiaries’ banks. The Respondents file and organizing the one-to-one in person training, involving colleagues from ICT and Operations feedback interview. Division, aimed at developing common learning paths and at supporting the upskilling of IT competences of the The evaluation concerns a set of competences identified colleagues, mainly on 4 topics: as crucial for an accomplished international manager to remain abreast of the constant and pressing challenges. -ITIL Certification – ITIL is the most used framework for identify, plan, delivery and support IT Service Management After completion this evaluation will generate a personal development/action plan. The data aggregated by Bank, -PMI Certification - the certification aims to improve the on the other hand, will stimulate the reflection to set up success rate of projects in all areas of knowledge, by local and cross-Country initiatives. applying standardized of project management principles. Health Care. In 2019 all Employees with open-ended -Agile Methodology – methodology for the creation of employment relationships are automatically enrolled the software based on an iterative and incremental model in the Programme of Health Care. From this innovative where the software production is subdivided into multiple programme is expected the improvement of well-being cycles (release sprint). and the reinforcement of the sense of belonging for the employees as part of Intesa Sanpaolo Group. Flexible Working hours - Intesa Sanpaolo Group remains committed and focused on increasing employee’s With the goal of offering the best possible help for wellbeing! In this framework one of the most successful Employees who suffer from serious diseases, the projects regarding People Care is Flexible Working. Intesa Programme ensures that colleagues with serious diseases Sanpaolo Bank Albania is one of the first Banks in ISBD will not be left alone and will receive the best possible that, after finishing successfully the testing phase (2018- care.
38 Annual Report 2019 - CorporateAnnual Social Report Responsibility 2019
For the second time this year the Intesa Sanpaolo Bank ISPBA as part of Intesa Group during 2019 has been Albania sh.a. participated in ISBD Junior Sports Event which working for completing the Group’s centralized was organized in the city of Poreč Croatia, on 10-12th procurement project with the principles of transparency May 2019. All the kids of colleagues from Subsidiary’s’ and fairness declared in the Code of Ethics and align with Banks participated in the sport events under a special care EU and ECB procurement directives. of the organizers and each country Tutors & Trainers. The kids of Intesa Sanpaolo Bank Albania sh.a. were awarded with two trophies, which made us proud. RAISING AWARENESS ON SUSTAINABLE DEVELOPMENT GOALS!
RELATIONSHIP WITH SHAREHOLDERS During 2019 Intesa Sanpaolo Bank Albania supported the Sustainable Development Goals (SDG) organizing Intesa Sanpaolo Bank Albania guarantees timely and several activities and events. Some of the most important transparent communication to shareholders and to activities organized during the year according to these the financial community in general, with the intent of objectives were: providing clear, complete and prompt information on the status of the Bank’s implementation of strategies and the SDG 1 – NO POVERTY results it achieves. SCHOOL SUPPLIES FOR KIDS The Bank has established a specific relation with its shareholders, based on transparency and full mutual trust. Employees of Intesa Sanpaolo We act in such a way that the value of all shareholders’ Bank Albania in collaboration with capital invested in Intesa Sanpaolo Bank Albania is “La Casa nel cuore” organization, protected and increased in a sustainable manner. We invests voluntarily donated school bags in enhancing this trust with information flow through and school supplies to children that different communication channels as: the publication cannot afford them. of the financial statements after each semester, annual reports and press releases in the Bank’s website, keeping “DONATE THE CLOTHES YOU DON’T USE” the continuous correspondence and organizing frequent meetings with the Shareholders Assemblies in writing or In collaboration with the Albanian Red Cross, our in their physical presence. The Bank’s capacity to generate employees voluntarily collected a considerable number of constant growth in profitability is also determined by high children’s and adult clothing to help people and families liquidity, the further improvement of the capital base, living in extreme poverty. All clothes collected throughout the reduction of operating costs, rigorous and prudent October were distributed by the Albanian Red Cross in provisioning policy as well as the continuous and careful remote areas of the country. The donation of used clothes crediting to support the economy. provides clothing for many who live in difficult economic conditions.
RESPONSIBLE MANAGEMENT OF THE SUPPLY Do you know that when you donate clothes You are CHAIN helping environment?
We believe that behavior based on listening and sharing - Energy and water saving (used from the textile industries) ideas with our suppliers fosters the ongoing improvement of those relationships, reinforcing them and generating - Reduction of carbon footprint (The fashion industry is reciprocal value. Our attitudes are based on trust that responsible for 10 % of annual global carbon emissions) involve the suppliers in an active role and that lead them to promptly report problems that require the identification - Reduce waste at the landfill of a common solution. We believe that a clear and transparent attitude contributes to maintaining enduring relationships with our suppliers. We are convinced that integrity is a fundamental premise of these relationships. Our choice of suppliers is based on clear and proven criteria through objective and transparent procedures. We guarantee equal opportunity in the selection of suppliers and commercial partners, considering their compatibility with and capacity for the size and needs of our company. Intesa Sanpaolo Bank Albania criteria on supplier and technology selection are part of the process to have a better environment and energy efficiency equipment.
39 Annual Report 2019 - Corporate Social Responsibility
SDG 2 – ZERO HUNGER BLOOD DONATION-DONATE BLOOD, SAVE A LIFE!
FOOD COLLECTION For the 10th consecutive year, employees of Intesa Sanpaolo Bank Albania participated in the voluntary Intesa Sanpaolo Bank Albania blood donation initiative, to help children suffering from decided to collaborate with Food Thalassemia. (76 colleagues volunteered to donated Bank Albania for helping the blood, but only 57 colleagues donated due to good families in need, that cannot afford medical conditions) The initiative was organized during the food. In the branches of Tirana, May and December in cooperation with the Albanian Durres, Shkodra, Lezha, Kavaja, Blood Bank. The need for blood is always present. The Fier, Lushnja, Elbasan and Korça the employees donated bank in order to raise awareness of Voluntary Blood 760 kg of food. Donors has communicated with customers and the public through ATM screens, e-mail exchange footers, the bank’s website and the bank’s official social media pagës
SDG 3 – GOOD HEALTH AND WELLBEING
HEALTH AND SAFETY AT March 25-31: INTERNATIONAL MONEY WEEK! WORK COUNCIL This Week represents a worldwide celebration of money, COUNCIL Based on the law no. aiming to raise awareness of the younger generation to 10237 dated 18.02.2010 and become responsible citizens in the future and capable Decision of Council of Ministers of making well-thought financial decisions. For the sixth no. 107 dated 9.02.2011 ‘On consecutive year, Intesa Sanpaolo Bank Albania joined the the composition of the rules of Bank of Albania and the Albanian Association of Banks organization and functioning of the Council for Safety and other partners, and supporting the activities that were and Health at Work and Employee Representatives’, organized. Silvio Pedrazzi, CEO of Intesa Sanpaolo Bank 6 colleagues were elected in March, with a two- Albania and Chairman of AAB, as a permanent supporter of year mandate, with renewal right for representing financial education in his welcoming speech, appreciated the employees and 6 other colleagues as Employer the importance of financial inclusion and economic representatives for the Occupational Safety and Health growth. On March 28, KAHOOT - European Money Quiz Council. This Council is very functinal and meets several took place, also with the support of Intesa Sanpaolo Bank times a year to further improve working conditions. Albania, with ninth graders from all over Albania. First place winners represented our country at European level in the competition held in Belgium on May 7th.
40 Annual Report 2019 - Corporate Social Responsibility
Intesa Sanpaolo Bank Albania offered 2 First Prizes for the winners of Essay Contest on the topic: “Re-nominations: examples from history and the Albanian case”. 2 girls, students of Tirana and Korça Faculty of Economics, had the opportunity of a 3 month paid internship at our Bank.
ESTEC TIRANA YOUTH SUPPORT
Intesa Sanpaolo Bank Albania has supported for the second consecutive year a competition with the theme of the “Big Data Analysis” organized by EESTEC Tirana. The project was conceived through a Hackathon, a real-time competition attended by students from the Universities of Tirana, oriented to the fields of Information Engineering and Computer Science. Within two days the participating teams managed to create their own projects in the banking sector by solving a concrete task given by ICT experts of Intesa Sanpaolo Bank Albania. Students used a variety of technologies to implement projects ranging from programming languages like Java, Python and PHP to Frameworks / Libraries like Spring and Selenium. This competition was guided by Bank IT experts, who evaluated student solutions for the assignment and also selected the winners! The CEO of Intesa Sanpaolo Bank Albania, Mr. Silvio Pedrazzi, present at the final day of the competition, discussed with young people the opportunities for development and employment within the country and why it is important to always challenge themselves. To all finalists was offered a job interview and currently two of them have been selected to be employed in the Bank’s Information Technology Division!
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ART OF SAVINGS
On the occasion of the World Savings Day, October 31, 2019, Intesa Sanpaolo Bank Albania joined for the third consecutive year the successful international initiative “ART OF SAVING” of Intesa Sanpaolo Group & Savings Museum (Museo del Risparmio), Gallerie d’Italia & the Historical Archive. The concept was created by the Museum of Saving, a multimedia laboratory located in Turin, Italy that specializes in economic-financial education. The initiative “ART OF SAVING”, which is based on informal education methods, aims to teach children the importance of savings by using practical examples. The national wide initiative “ART OF SAVING” was organized with the support of the Ministry of Education, Youth and Sports in Albania involved 56 Intesa Sanpaolo Bank Albania employees, 1,300 students of elementary school, around 460 of secondary school and 350 from high schools. Three curricula were focused on saving concepts, engaging children through games and group plays to create simple financial plans and to understand how to control their expenses, while the fourth one was focused on recycling and on the basic concepts of circular economy. The multimedia labs for “ART OF SAVING” activities were designed based on the needs of each age group, considering their previous knowledge and children age-interests.
Mr. Silvio Pedrazzi, CEO of Intesa Sanpaolo Bank Albania emphasized that ART OF SAVINGS initiative highlights for another consecutive year the active role that every bank employee has in raising the awareness about the importance of financial education, starting from the early ages. In addition, children are learning about the basic concepts of a circular economy and about recycling.
SDG 5 – GENDER EQUALITY
INTESA SANPAOLO BANK ALBANIA AND THE EUROPEAN BANK FOR RECONSTRUCTION & DEVELOPMENT SIGNED A NEW AGREEMENT IN THE FRAME OF THE SECOND WESTERN BALKANS WOMEN IN BUSINESS PROGRAM SUPPORTING WOMEN OWNED & LED BUSINESSES IN ALBANIA
€5 million to improve access to finance, creating specific loans with lower interests and packages of products & services, providing enhanced education, personal development trainings & counselling from the EBRD & Bank’s experts.
Intesa Sanpaolo Bank Albania was the first bank joining the Western Balkans Women in Business Program back in 2015, supporting women-owned & women-led business from micro, small and medium categories in Albania, with dedicated loans and packages, including a bundle of daily products & services. The Bank financed a total sum of €2 million to 147 successful women entrepreneurs within the first 2 years of the program. The European Bank for Reconstruction and Development (EBRD) fostering this successful collaboration has decided to extend the program in a second phase with a bigger investment sum of €5 million aiming to wider spread these opportunities geographically & category wise. These Credit lines are extended to partner banks for on-lending. Advisory services are offered alongside mentoring and longer- term coaching to provide women entrepreneurs with the knowledge and confidence to take the next step.
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Mr. Silvio Pedrazzi, CEO, guaranteed that the new loan to Intesa Sanpaolo Bank Albania will support the introduction of even more inclusive, sustainable and gender-responsive products specifically designed for female entrepreneurs, who should consider the Bank a long-term business partner and a supporter of their efforts to succeed in a very challenging environment.
INTESA SANPAOLO BANK ALBANIA SUPPORTED UN WOMEN FOR ORGANIZATION OF FIRST WOMEN INTERNATIONAL FILM FESTIVAL
Intesa Sanpaolo Bank Albania supported UN Women country office in Albania, which in partnership with the Albanian National Center of Cinematography, organized the first “Women International Film Festival”. This festival started on 8th of March to mark the International Women’s Day and focused on the theme of gender-based violence. Documentaries and films were shown to the public for FREE during an entire week. The festival dealt with sensitive topics and served as a great opportunity to reflect on the equality of roles and rights of women and men.
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SDG 8 – DECENT WORK AND ECONOMIC GROWTH
ISBA SIGNED THE MEMORANDUM FOR THE NATIONAL WORK PRACTICES PROGRAMME Our bank was one of the largest companies in the country that signed an agreement with the Ministry of Education Sports and Youth regarding the National Work Practices Programme. The objective of the programme is to support young proffesionals, graduates of the first cycle “Bachelor” for performing work practices at private, or public institutions for a 3 months period, offering them a professional experience and enhanced know-how of the real working environment. Intesa Sanpaolo Bank provided a request for 81 young covering its entire geographical location. The agreement was signed at the premises of the Ministry of Education by Ms. E. Zigori and by Vice. Minister of the Ministry of Education, Sports and Youth, Ms. L. Haxhiu.
ISBA SUPPORTED TIRANA MUNICIPALITY OF FOR THE PROJECT “YOUNGSTERS TOWARD A PROFESSION” Intesa Sanpaolo Bank Albania responded positively to the call of Tirana Municipality for promoting employment. In the framework of this Project, 4 young people had the possibility of being employed on a part-time contract at our Bank.
SDG 9 – INNOVATION AND INFRASTRUCTURE
INTESA SANPAOLO BANK ALBANIA SUPPORTED THE ALBANIAN TEAM OF ROBOTICS The Bank supported the Albanian Robotics Team which represented our country at the FIRST Global Challenge on October 24-27 in Dubai, where 5 talented young people introduced the robot created by them and reached the finals of this competition and won the second place for the “Clara Barton Award for Helping Hands”.
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SDG 10 – REDUCED INEQUALITIES
RUN FOR REFUGEES! A team of 35 employees of Intesa Sanpaolo Bank Albania demonstrated an excellent team spirit during the 4th edition of Tirana Marathon organized on October 13th! In collaboration with UNHCR all our runners donated their kilometers for the campaign #Run4Refugees: 2 billion km to safety!
SDG 13 – CLIMATE ACTION
MARCH 30 – EARTH HOUR In solidarity with one of the world’s largest environmental movements of the WWF (World Wild Life Foundation), Intesa Sanpaolo Bank Albania joined Earth Hour 2019 by turning off the lights on March 30 at 8: 30-9: 30 pm in head office It’s- time to # Connect2Earth. During 2018, more than 180 countries around the world joined this initiative. While climate change remains a vital issue for our planet, this conscious and symbolic movement aims to bring to everyone’s attention how climate change and the fast-moving loss of biodiversity are becoming a threat to all humans.
SDG 13 - CLIMATE ACTION / SDG 14 - LIFE BELOW WATER / SDG 15 - LIFE ON LAND
WORLD ENVIRONMENT DAY AN AWARENESS CAMAIGN FOR ALL EMPLOYEES AND CUSTOMERS On the 5th of June for the world environment day our Bank launched the #BeatAirPollution awareness campaign dedicated to colleagues and customers. This campaign continued for one week and during these days several postcards and awareness messages about the impact that air pollution has on human health and on the environment were delivered. To all colleagues were given more detailed information on environmental policies and what the countries are doing to prevent air pollution. Many employees participated in a QUIZ with questions about this topic and the winners of this campaign were invited by CEO to a special dinner! Communication with customers and the public was done through ATM screens, e-mail exchange footers, bank websites, bank official websites on social media.
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SDG 17 – PARTNERSHIP FOR THE GOALS
CONTRIBUTIONS FOR THE EARTHQUAKE
Intesa Sanpaolo Bank Albania confirmed its concrete commitment for the relief of the population affected by the earthquake that hit the country on the 26th of November 2019. The earthquake of Magnitude 6.4 Richter caused catastrophic events, with more than 50 lives lost and a lot of damages in the infrastructure and buildings.
Intesa Sanpaolo Bank Albania was the first Bank in the country that reacted immediately by contacting and interviewing all the customers, beneficiaries of financing, residents in the areas hit by the earthquake (Durres, Kavaja, Lezha and some branches in Tirana) through a questionnaire prepared especially for this purpose. All commissions on all accounts that were opened to help earthquake-affected families, whether from state institutions or NGOs, were waived immediately.
Intesa Sanpaolo Bank Albania has decided to introduce and offer Financial Schemes specifically designed for the affected Citizens and Legal Entities. The objective of “Earthquake Relief and Support Plan” was to help all the ones who have lost their homes, relatives, businesses, jobs as well as the subjects that need new financing to repair damages, cover reallocation costs and other immediate needs. To all these customers Intesa Sanpaolo Bank Albania has offered the following options:
• Moratorium up to 12 months without applying any charges • Rescheduling of the existing repayment plans in order to reduce the installments • Refinancing or Additional Financing for damages repair, or for restarting their business activity, with privileged terms and conditions, as well as initial grace period.
All the applications have been timely approved! Intesa Sanpaolo Bank Albania reconfirms this way, its own concrete contribution and support to all families and businesses hit by the tragic events and will continue with other concrete actions also in the future!
Employees of Fier and Lezha branches donated assistance to families affected by the earthquake in the first moments of the emergency situation. Many SOS Village families were assisted with food packages collected in collaboration with FoodBank Albania from Bank colleagues themselves. The bank employees also voluntarily contributed with financial donations to the accounts opened for fundraising for the victims of this natural disaster.
46 Audited Financial Statements Annual Report 2019 - Audited Financial Statements
INTESA SANPAOLO BANK ALBANIA SH.A. Financial Statements as at and for the year ended 31 December 2019 (with independent auditors’ report thereon)
48 Annual Report 2019 - Audited Financial Statements
Contents ndependent Auditors’ Report...... 1 Statement of financial position ...... 1 Statement of profit or loss and other comprehensive income ...... 2 Statement of changes in equity...... 3 Statement of cash flows...... 5 1. Reporting entity ...... 6 2. Basis of accounting...... 6 3. Basis of measurement ...... 6 4. Functional and presentation currency...... 6 5. Use of estimates and judgments...... 6 6. Changes in accounting policy ...... 7 7. Significant accounting policies...... 9 8. Financial Risk Management ...... 26 9. Financial Assets and Financial Liabilities ...... 55 10. Cash and cash equivalents ...... 57 11. Loans and advances to banks...... 57 12. Investment securities ...... 58 13. Loans and advances to customers ...... 59 14. Non-current assets held for sale...... 59 15. Property and Equipment ...... 60 16. Leases ...... 61 17. Intangible Assets...... 62 18. Investment property ...... 62 19. Inventory and other assets ...... 63 20. Due to banks ...... 63 21. Due to customers ...... 64 22. Deferred Tax ...... 65 23. Provisions ...... 66 24. Other liabilities ...... 67 25. Share capital and share premium ...... 67 26. Reserves...... 67 27. Net Interest income...... 68 28. Net fee and commission income...... 68 29. Net other income...... 69 30. Other operating expenses, net...... 69 31. Personnel expenses ...... 69 32. Other administrative expenses ...... 69 33. Income tax expenses...... 70 34. Commitments and contingencies ...... 71 35. Related parties ...... 72 36. Subsequent events ...... 72
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Intesa Sanpaolo Bank Albania Sh.a. Statement of financial position as at 31 December 2019 (in thousands of Lek)
Statement of financial position
Notes 31 December 2019 31 December 2018 Assets Cash and cash equivalents 10 30,240,115 35,290,306 Loans and advances to banks 11 29,146,303 20,253,667 Investment securities 12 66,919,643 63,727,118 Loans and advances to customers 13 44,864,090 43,928,731 Non-current assets held for sale 14 20,711 1,132,672 Current tax assets 347,992 551,650 Property and equipment 15 2,211,673 2,190,495 Right-of-use assets 16 460,883 - Intangible assets 17 600,977 494,336 Investment property 18 545,556 545,556 Deferred tax assets 22 531,687 568,492 Inventory and other assets 19 1,682,647 2,666,634 Total Assets 177,572,277 171,349,657
Liabilities Due to banks 20 2,250,043 2,762,419 Due to customers 21 150,941,625 145,483,303 Lease liabilities 16 445,944 - Deferred tax liabilities 22 213,684 138,439 Provisions 23 1,065,558 1,234,359 Other liabilities 24 1,018,663 1,452,227 Total Liabilities 155,935,517 151,070,747
Equity Share capital 25 5,562,518 5,562,518 Share premium 25 1,383,880 1,383,880 Reserves 26 6,169,157 6,031,724 Retained earnings 8,521,205 7,300,788 Total Equity 21,636,760 20,278,910 Total Liabilities and Equity 177,572,277 171,349,657
The Statement of financial position is to be read in conjunction with the accompanying notes on pages 6 to 72 forming an integral part of these financial statements.
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Intesa Sanpaolo Bank Albania Sh.a. Statement of profit or loss and other comprehensive income for the year ended 31 December 2019 (in thousands of Lek)
Statement of profit or loss and other comprehensive income
Notes 2019 2018
Interest income 4,326,621 4,513,522 Interest expense (888,984) (819,303) Net interest income 27 3,437,637 3,694,219 Fee and commission income 1,208,021 1,112,574 Fee and commission expense (355,321) (327,280) Net fee and commission income 28 852,700 785,294 Net other income 29 548,308 104,276 Other operating expenses, net 30 (456,762) (44,754) Operating income 4,381,883 4,539,035
Net impairment on financial assets 9(a) (201,791) (227,691) Net impairment loss on off-balance sheet 23 28,106 21,182 Write down of inventory 19 267,260 (80,583) Personnel expenses 31 (1,065,593) (1,389,366) Operating lease expenses 35 (47,783) (257,610) Depreciation and amortization 16,17,18 (462,332) (381,086) Impairment of investment property 18 - (29,762) Amortization of leasehold improvements 19 (14,192) (26,271) Other administrative expenses 32 (876,596) (1,323,974) Provisions for risk and expenses 23 15,082 (30,353) Total expenses (2,357,839) (3,725,514)
Net income before taxes 2,024,044 813,521 Income tax (expense)/credit 33 (322,170) 30,640
Profit for the year 1,701,874 844,161
Other comprehensive income Items that are or may be reclassified subsequently to profit or loss Change in fair value of investment securities at FVOCI 161,528 (181,720) Related tax (24,095) 27,953 Items that will not be reclassified to profit or loss Change in revaluation of functional properties - - Related tax - - Other comprehensive income/(loss) for the year, net of tax 137,433 (153,767) Total comprehensive income for the year, net of tax 1,839,307 690,394
The Statement of profit or loss and other comprehensive income is to be read in conjunction with the accompanying notes on pages 6 to 72 forming an integral part of these financial statements.
2 53 Annual Report 2019 - Audited Financial Statements - Total (44,750) 137,433 (436,707) (436,707) 1,701,874 1,794,557 20,278,910 21,636,760 - (44,750) earnings Retained Retained (436,707) 1,701,874 (436,707) 7,300,788 1,657,124 8,521,205 - - - - - Merger Merger Reserve Reserve 2,813,396 2,813,396 - - - - - Other capital reserve forming an integral part of these financial financial of these part integral an forming 714,555 714,555 - - - - - reserve 775,431 775,431 Revaluation - - - notes on pages 6 to 72 6 to pages on notes 40,152 137,433 reserve 137,433 (97,281) Fair value value Fair - - - - - 3 reserves reserves Legal and and Legal regulatory 1,825,623 1,825,623 - - - - - 2019 Share premium 1,383,880 1,383,880 - - - - - Share capital 5,562,518 5,562,518 2018 2019 equity FVOCI, net of tax income Balance at 31 December Profit for the year income comprehensive Other of debt investment value in fair Change at Change in the DTA of FTA reserve the for income comprehensive Total year Transaction with owners, recorded directly in Dividends to equity holders Total contributions by and distribution to owners Balance at 31 December Intesa Sanpaolo Bank Albania Sh.a. Statement of changes equity in for the year ended 31 December Lek) of thousands (in Statement of changes in equity The Statement of changes in equity is to be read in conjunction with the accompanying statements.
54 Annual Report 2019 - Audited Financial Statements - Total 844,161 690,394 (153,767) 2,673,582 19,709,442 22,383,024 21,245,271 20,278,910 (1,137,753) (1,656,755) (1,656,755) - 844,161 844,161 earnings Retained Retained (140,270) 9,391,405 9,251,135 8,113,382 7,300,788 (1,137,753) (1,656,755) (1,656,755) ------Merger Merger Reserve Reserve 2,813,396 2,813,396 2,813,396 2,813,396 ------Other capital reserve 714,555 714,555 714,555 714,555 forming an integral part of these financial financial of these part integral an forming ------reserve 775,431 775,431 775,431 775,431 Revaluation - - - - 456 030 notes on pages 6 to 72 6 to pages on notes 56, 56,486 56,486 reserve (97,281) (153,767) (153,767) Fair value value Fair ------4 reserves reserves Legal and and Legal regulatory 1,825,623 1,825,623 1,825,623 1,825,623 ------2019 Share premium 1,383,880 1,383,880 1,383,880 1,383,880 ------Share capital 5,562,518 5,562,518 5,562,518 5,562,518 is to be read in conjunction with the accompanying , as ) note 10 (c) note December 2017 December 1 3 at 31 December 2017, as 2017, as 31 at December contributions by and distribution he Statement of changes in equity Balance at previously reported Restatement due to merger* Balance restated* Adjustment initial on application of IFRS 9, net of tax (see 2018 1 January at balance Restated Profit for the year income comprehensive Other of debt investment value in fair Change at FVOCI, net of tax income the for income comprehensive Total year Transaction with owners, recorded equity in directly Dividends to equity holders Total to owners 2018 31 at December Balance Intesa Sanpaolo Bank Albania Sh.a. Statement of changes equity in for the year ended 31 December Lek) of thousands (in T statements.
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Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
1. Reporting entity Intesa Sanpaolo Bank Albania Sh.a, (the “Bank”), is a company domiciled in Albania. The Bank’s registered office is at “Ismail Qemali” street, no. 27, and operates through a network of 35 branches and agencies, located in different cities of Albania: Tirana, Durres, Vlora, Elbasan, Fier, Berat, Gjirokastra, Korca, Lushnja, Shkoder, Lezhe, Kavaje (2018: 34 branches and agencies). The Bank was incorporated on May 1998, and is primarily involved in banking activities in Albania. The Bank started operations on 24 September 1998. On October 1rst 2018, the Bank and “Veneto Banka sh.a.” (also known as “VBA”) legally merged by incorporating VBA assets and liabilities into the Bank. Prior to the merger, the Bank and VBA were under common control of Intesa Sanpaolo SpA being the same and only shareholder since 5 December 2017 when Intesa Sanpaolo SpA acquired VBA. The Bank and VBA shareholder approved the terms and conditions of the merger on 18 September 2018. The Bank had 663 employees as at 31 December 2019 (2018: 641). 2. Basis of accounting These financial statements have been prepared in accordance with IFRS Standards. They were authorized for issue by Management on 24 February for approval by the Board of Directors. This is the first set of the Bank’s financial statements in which IFRS 16 Leases has been applied. The related changes to significant policies are described in Note 6. 3. Basis of measurement The financial statements are prepared on the amortized or historical cost basis except for financial assets at FVOCI, investment properties and own used properties, which are stated at fair value. 4. Functional and presentation currency The financial statements are presented in Lek, which is the Bank’s functional and presentation currency. Except as indicated otherwise, financial information presented in Lek has been rounded to the nearest thousand. 5. Use of estimates and judgments In preparing these financial statements, management has made judgements, estimates and assumptions that affect the application of the Bank’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively. A. Judgements Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognized in the financial statements is included in the following notes. - Note 7 (g) (ii): classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are SPPI on the principal amount outstanding. - Note 8 (a): establishing the criteria for determining whether credit risk on the financial asset has increased significantly since initial recognition, determining methodology for incorporating forward- looking information into measurement of ECL and selection and approval of models used to measure ECL.
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Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated) 5. Use of estimates and judgments (continued) B. Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ended 31 December 2019 is included in the following notes. - Note 8 (a): impairment of financial instruments: determining inputs into the ECL impairment model, including incorporation of forward-looking information - Note 7 (g) (vi): determination of the fair value of financial instruments with significant unobservable inputs - Note 7 (f) (ii): recognition of deferred tax assets - Note 7 (r): recognition and measurement of contingencies: key assumption about the likelihood and magnitude of an outflow of resources - Note 7 (o): net realizable value of inventory: fair value measurement with significant unobservable inputs - Note 7 (g) (vii): impairment of financial instruments: key assumptions used in estimating recoverable cash flows 6. Changes in accounting policy The Bank initially applied IFRS 16 from 1 January 2019. The Bank adopted IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognized in retained earnings as 1 January 2019, if any. Accordingly, the comparative information presented for 2018 is not restated-i.e. it is presented, as previously reported, under IAS 17 and related interpretations. The details of the changes in accounting policies are disclosed below. Additionally, the disclosures requirements in IFRS 16 have not generally been applied to comparative information. i. Definition of a lease Previously, the Bank determined at contract inception whether an arrangement is or contains a lease under IFRIC 4 Determining whether an Arrangement contains a Lease. The Bank now assesses whether a contract is or contains a lease based on the definition of a lease as explained in note 7. On transition to IFRS 16, the Bank elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Bank applied IFRS 16 only to contracts that were previously identified as leases. Contract that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is lease under IFRS 16. ii. As a lessee As a lessee, the Bank leases some branches office premises and vehicles. The Bank previously classified these leases as operating leases under IAS 17 bases on its assessment of whether the lease transferred substantially all of the risks and rewards incidental to ownership of the underlying asset to the Bank. Under IFRS 16, the Bank recognizes right-of-use assets and lease liabilities for leases of branch and office premises-i.e these leases are on-balance sheet. At commencement or on modification of a contract that contains a lease component, the Bank allocates the consideration in the contract to each lease component on the basis of its relative stand- alone prices. On transition, for these leases, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Bank’s incremental borrowing rate as at 1 January 2019 (see note 16). Right-of-use assets are measure at their carrying amount as if IFRS 16 had been applied IFRS 16 to leases the commencement date, discounted using the lessee’s incremental borrowing rate at the date of initial application.
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Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated) 6. Changes in accounting policy (continued) ii. As a lessee (continued) The Bank used a number of practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17. In particular, the Bank: - did not recognize right-of-use assets and liabilities for leases for which the lease term ends within 12 months of the date of initial application; - did not recognize right-of-use assets and liabilities for leases of low-value assets; - excluded initial direct costs from measuring the right-of-use asset at the date of initial application; and - Used hindsight when determining the lease term. iii. As a lessor The Bank leases out certain property and equipment. The Bank has classified these leases as follows: - operating leases of investment property: see Notes 18. The Bank is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor. The Bank has applied IFRS 15 Revenue from Contracts with Customers to allocate consideration in the contract to each lease and non-lease component. iv. Impact on financial statements Impact on transition On transition to IFRS 16, the Bank recognized additional right-of-use assets and additional lease liabilities. The impact on transition is summarized below. 1 January 2019 Right-of-use asset presented in property and equipment 337,299 Deferred tax assets 50,595 Lease liabilities 337,299 Deferred tax liabilities 50,595 For impact of IFRS 16 on profit or loss for the period, see Note 16. For impact of IFRS 16 on segment information, see Note 16. For details of accounting policies under IFRS 16 and IAS 17, see Note 7. When measuring lease liabilities for leases that were classified as operating leases, the Bank discounted lease payments using its incremental borrowing rate 1 January 2019. The weighted- average rate applied is 1.77%
Operating lease commitments as at 31 December 2018 as disclosed under IAS 17 in the Bank’s financial statements 380,977
Discounted using the incremental borrowing rate at 1 January 2019 (20,977) Recognition exemption for leases of low-value assets (703) Recognition exemption for leases with less than 12 months of lease term at transition (21,998) Lease liabilities recognized at 1 January 2019 337,299
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Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies The accounting policies set out below have been consistently applied to all periods presented in these financial statements by the Bank, except for the changes explained in Note 6. (a) Transfer of control of interest in entities under common control In the absence of specific guidance, entities involved in common control transactions should develop an appropriate accounting policy, to be applied consistently, using the hierarchy described in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Management has elected to account for transfers of control of interests in entities that are under the control of the shareholder that ultimately controls the Bank for using book value accounting. The assets and liabilities acquired are recognized at the carrying amounts recognized previously in the financial statements of the acquired entity. (b) Foreign currency Transactions in foreign currencies are translated into the functional currency at the spot exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the spot exchange rate at the end of the year. Non- monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the spot exchange rate at the date that the fair value was determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are generally recognized in profit or loss. Foreign currency differences arising from retranslation of transactions with owners are recorded directly in equity. (c) Interest Effective Interest rate Interest income and expense are recognized in profit or loss using the effective interest method. The ‘effective interest rate’ is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to - The gross carrying amount of the financial asset; or - The amortized cost of the financial liability When calculating the effective interest rate for financial instruments other than purchased or originated credit-impaired assets, the Bank estimates future cash flows considering all contractual terms of the financial instrument, but not ECL. For purchased or originated credit-impaired financial assets, a credit-adjusted effective interest rate is calculated using estimated future cash flows including ECL. The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability Amortized cost and gross carrying amount The ‘amortized 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 amortization 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. The ‘gross carrying amount of a financial asset’ is the amortized cost of a financial asset before adjusting for any expected credit loss allowance.
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Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (c) Interest (continued) Calculation of interest income and expense The effective interest rate of a financial asset or financial liability is calculated on initial recognition of a financial asset or a financial liability. In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit- impaired) or to the amortized cost of the liability. The effective interest rate is revised as a result of periodic re-estimation of cash flows of floating rate instruments to reflect movements in market rates of interest. However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortized cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis. For financial assets that were credit-impaired on initial recognition, interest income is calculated by applying the credit-adjusted effective interest rate to the amortized cost of the asset. The calculation of interest income does not revert to a gross basis, even if the credit risk of the asset improves. For information on when financial assets are credit-impaired, see Note 7(g)(vii). (d) Fees and commissions Fees, commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate (see 7 (c)). If a loan commitment is not expected to result in the draw-down of a loan, then the related loan commitment fee is recognized on straight-line basis over the commitment period. Other fee and commission income, including account servicing fees, investment management fees, sales commission and placement fees are recognized as the related services are performed. If a loan commitment is not expected to result in a draw-down of a loan, then the related loan commitment fees are recognized on a straight-line basis over the commitment period. A contract with a customer that results in a recognized financial instrument in the Bank’s financial statements may be partially in the scope of IFRS 9 and partially in the scope of IFRS 15. If this is the case, then the Bank first applies IFRS 9 to separate and measure the part of the contract that is in the scope of IFRS 9 and then applies IFRS 15 to the residual. Other fee and commission expense relate mainly to transaction and service fees, which are expensed as the services are received.
10 61 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (e) Leases The Bank has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. The details of accounting policies under IAS 17 and IFRIC 4 are disclosed separately. The policy is applied to contracts entered into (or changed) on or after 1 January 2019. i. Bank acting as a lessee At commencement or on modification of a contract that contains a lease component, the Bank allocates consideration in the contract to each lease component on the basis of its relative stand- alone prices. However, for leases of branches and offices premises the Bank has elected not to separate non-lease components and accounts for the lease and non-lease components as a single lease component. The Bank recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove any improvements made to branches or office premises. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain measurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rare cannot be readily determined, the Bank’s incremental borrowing rate. Generally, the Bank uses its incremental borrowing rate as the discount rate. The Bank determines its incremental borrowing rate by analyzing its borrowings from various external sources and makes certain adjustments to reflect the terms of the lease and type of asset leased. Lease payment included in the measurement of the lease liability comprise the following: -fixed payments, including in-substance fixed payments; - variable lease payments that depend on an index or a rate, initially measured using the index of rate as the commencement date; -amounts expected to be payable under a residual value guarantee; and -the exercise price under a purchase option that the Bank is reasonably certain to exercise, lease payments in an optional renewal period if the Bank is reasonably to exercise an extension option, and penalties for early termination of a lease unless the Bank is reasonably certain not to terminate early. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is change in the Bank’s estimate of the amount expected to payable under a residual value guarantee, if the Bank changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset is reduced to zero.
11 62 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (e) Leases (continued) i. Bank acting as a lessee (continued) The Bank presents right-of-use assets in and lease liabilities as part of “other liabilities” in the face of statement of financial position. Short-term leases and leases of low-value assets The Bank has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Bank recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term. ii. Bank acting as a lessor At inception or on modification of a contract that contains a lease component, the Bank allocates the consideration in the contract to each lease component on the basis of their relative stand-alone selling prices. When the Bank acts as a lessor, it determines at lease inception whether the lease is a financial lease or an operating lease. To classify each lease, the Bank makes an overall assessment of whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying lease. As part of this assessment, the Bank considers certain indicators such as whether the lease is for the major part of the economic life of the asset. The Bank applies the derecognition and impairment requirements in IFRS 9 to the net investment in the lease. The Bank further regularly reviews estimated unguaranteed residual values used in calculating the gross investment in the lease. Policy applicable before 1 January 2019 For contracts entered into before 1 January 2019, the Bank determined whether the arrangement was or contained a lease based on the assessment of whether: -fulfillment of the arrangement was dependent on the use of a specific asset or assets, and -the arrangement had conveyed a right to use the asset. i. As a lessee The Bank did not have any finance leases under IAS 17 Assets held under other leases were classified as operating leases and were not recognized in the Bank’s statement of financial position. Payments made under operating leases were recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received were recognized as an integral part of the total lease expense, over the term of the lease. ii. As a lessor When the Bank acted as a lessor, it determined at lease inception whether each lease was a finance lease or an operating lease. To classify each lease, the Bank made an overall assessment of whether the lease transferred substantially all of the risks and rewards incidental to ownership of the underlying assets. If this was the case, then the lease was a finance lease; if not, the it was an operating lease. As part of this assessment, the Bank considered certain indicators such as whether the lease was for the major part of the economic life of the asset.
12 63 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (f) Income Tax
Income tax expense comprises current and deferred tax. It is recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in OCI. Interest and penalties related to income taxes, including uncertain tax treatments, are accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. (i) Current Tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax assets and liabilities are offset only if certain criteria are met. (ii) Deferred Tax Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognized for unused tax losses and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Future taxable profits are determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary differences is insufficient to recognize a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on the business plans. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized; such reductions are reversed when the probability of future taxable profits improves. Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that future taxable profits will be available against which they can be used. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Bank expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.
13 64 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (g) Financial assets and financial liabilities (i) Recognition and initial measurement The Bank initially recognizes loans and advances, deposits and debt securities on the date on which they are originated. All other financial instruments (including regular-way purchases and sales of financial assets) are initially recognized on the trade date on which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit and loss, transaction costs that are directly attributable to its acquisition or issue. (ii) Classification On initial recognition, the Bank classified a financial asset as measured at amortized cost, FVOCI or FVTPL. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: – the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; - the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI. A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: – the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; - the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI. On initial recognition of an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by- investment basis. All other financial assets are classified as 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.
14 65 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (g) Financial assets and financial liabilities (continued) (ii) Classification (continued) Business model assessment The Bank assesses the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: -the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realizing cash flows through the sale of the assets; - how the performance of the portfolio is evaluated and reported to the Bank’s management; -the risks that affect the performance of the business model (and the financial assets held within that business model) and its strategy for how those risks are managed; -how managers of the business are compensated (e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected); -the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank stated objective for managing the financial assets is achieved and how cash flows are realized. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Assessment of 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 and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as profit margin. In assessing whether the contractual cash flows are SPPI, 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 loans); - and features that modify consideration of the time value of money (e.g. periodical reset of interest rates).
15 66 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (g) Financial assets and financial liabilities (continued) (ii) Classification (continued) Reclassifications Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets. Financial liabilities The Bank classifies its financial liabilities as other financial liabilities, subsequently measured at amortized cost. See notes 7 (q). (iii) De-recognition Financial Assets The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognized) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognized as a separate asset or liability. The Bank enters into transactions whereby it transfers assets recognized on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognized. Examples of such transactions are securities lending and sale and repurchase transactions. In transactions in which the Bank neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset Financial liabilities The Bank derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire. (iv) Modification of financial assets and financial liabilities Financial assets If the terms of a financial asset are modified, then the Bank evaluates whether the cash flows of the modified asset are substantially different.
16 67 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (g) Financial assets and financial liabilities (continued) (iv) Modification of financial assets and financial liabilities (continued) If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognized (see (iii)) and a new financial asset is recognized at fair value plus any eligible transaction costs. Any fees received as part of the modification are accounted for as follows: – fees that are considered in determining the fair value of the new asset and fees that represent reimbursement of eligible transaction costs are included in the initial measurement of the asset; and – other fees are included in profit or loss as part of the gain or loss on derecognition. If cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximize recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Bank plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place (see below for write-off policy). This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases. If the modification of a financial asset measured at amortized cost or FVOCI does not result in derecognition of the financial asset, then the Bank first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognizes the resulting adjustment as a modification gain or loss in profit or loss. For floating-rate financial assets, the original effective interest rate used to calculate the modification gain or loss is adjusted to reflect current market terms at the time of the modification. Any costs or fees incurred and fees received as part of the modification adjust the gross carrying amount of the modified financial asset and are amortized over the remaining term of the modified financial asset. If such a modification is carried out because of financial difficulties of the borrower (see 7.g.(vii)), then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method (see 7 (c)). Financial liabilities The Bank derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognized at fair value. The difference between the carrying amount of the financial liability derecognized and consideration paid is recognized in profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability. If the modification of a financial liability is not accounted for as derecognition, then the amortized cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or loss is recognized in profit or loss. For floating-rate financial liabilities, the original effective interest rate used to calculate the modification gain or loss is adjusted to reflect current market terms at the time of the modification. Any costs and fees incurred are recognized as an adjustment to the carrying amount of the liability and amortized over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument
17 68 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (g) Financial assets and financial liabilities (continued) (v) Off-setting Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Bank has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from Bank’s similar transactions such as in the trading activity. (vi) Fair value measurement Fair value is 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 in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Bank uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would consider in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is entirely supported by observable market data or the transaction is closed out. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. The Bank recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.
18 69 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (g) Financial assets and financial liabilities (continued) (vii) Impairment The Bank recognizes loss allowances for ECL on the following financial instruments that are not measured at FVTPL: - financial assets that are debt instruments; - financial guarantee contracts issued; and - loan commitments issued. The Bank measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: - debt investment securities that are determined to have low credit risk at the reporting date; and - other financial instruments on which credit risk has not increased significantly since their initial recognition. The Bank considers a debt investment security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment grade’. The Bank does not apply the low credit risk exemption to any other financial instruments. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12- month ECL is recognized are referred to as ‘Stage 1 financial instruments’. Life-time ECL are the ECL that result from all possible default events over the expected life of the financial instrument. Financial instruments for which a lifetime ECL is recognized but which are not credit-impaired are referred to as ‘Stage 2 financial instruments’. Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows: - financial assets that are not credit-impaired at the reporting date: as 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: as the difference between the gross carrying amount and the present value of estimated future cash flows; - undrawn loan commitments: as 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 expected payments to reimburse the holder less any amounts that the Bank expects to recover. See also Note 8(a). Credit-impaired financial assets At each reporting date, the Bank assesses whether financial assets carried at amortized cost and debt financial assets carried at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
19 70 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (g) Financial assets and financial liabilities (continued) (vii) Impairment (continued) Credit-impaired financial assets (continued) Evidence that a financial asset is credit-impaired includes the following observable data: - significant financial difficulty of the borrower or issuer; - a breach of contract such as a default or past due event; - the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise; - it is becoming probable that the borrower will enter bankruptcy or other financial reorganization; or - the disappearance of an active market for a security because of financial difficulties. A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In making an assessment of whether an investment in sovereign debt is credit-impaired, the Bank considers the following factors. - The market’s assessment of creditworthiness as reflected in the bond yields. - The rating agencies’ assessments of creditworthiness. - The country’s ability to access the capital markets for new debt issuance. - The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. - The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria. Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: - financial assets measured at amortized cost: as a deduction from the gross carrying amount of the assets; - loan commitments and financial guarantee contracts: generally, as a provision; - where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision; and - debt instruments measured at FVOCI: no loss allowance is recognized in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognized in the fair value reserve. Write-off Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. Recoveries of amounts previously written off are included in ‘impairment losses on financial instruments’ in the statement of profit or loss and OCI. Financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due.
20 71 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (h) Cash and cash equivalents ‘Cash and cash equivalents’ include notes and coins on hand, balances with banks, unrestricted balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the statement of financial position. (i) Loans and advances Loans and advances captions in the statement of financial position include loans and advances measured at amortized cost. They are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortized cost using the effective interest method. When the Bank purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date (reverse repo or stock borrowing), the arrangement is accounted for as a loan or advance, and the underlying asset is not recognized in the Bank’s financial statements. (j) Investment securities The “investment securities” caption in the statement of financial position includes - debt investment securities measured at amortized cost (see g (ii)); these are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortized cost using the effective interest method; - debt securities measured at FVOCI; For debt securities measured at FVOCI, gains and losses are recognized in OCI, except for the following, which are recognized in profit or loss in the same manner as for financial assets measured at amortized cost: - Interest revenue using the effective interest method - ECL and reversals, and - Foreign exchange gains and losses When debt security measured at FVOCI is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss.
21 72 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (k) Non-current assets held for sale Non-current assets for which a disposal process has commenced are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets are generally measured at the lower of their carrying amount and fair value less costs to sell. (l) Property and equipment (i) Recognition and measurement Equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Property are measured at revalued amounts, being the fair value at the date of revaluation less accumulated depreciation and any accumulated impairment losses (see Note 17). If significant parts of an item of property or equipment have different useful lives, then they are accounted for as separate items (major components) of property and equipment. Any gain or loss on disposal of an item of property and equipment is recognized within other income in profit or loss. (ii) Subsequent costs Subsequent expenditure is capitalized only when it is probable that the future economic benefits of the expenditure will flow to the Bank. Ongoing repairs and maintenance are expensed as incurred. (iii) Depreciation Depreciation is calculated to write off the cost of items of property and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognized in profit or loss. Land and art work are not depreciated. The estimated useful live for the current and comparative periods are as follows:
2019 2018 • Buildings 33 years 33 years • IT and Electrical Equipment 4 to 8 years 4 to 8 years • Furniture 3 to 10 years 3 to 10 years • Other non-electrical assets 5 years 5 years
(m) Intangible assets Software, licenses and trademarks compose intangible assets and are stated at cost less accumulated amortization. Subsequent expenditure on intangible assets is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortization is charged on a straight-line basis in profit or loss over the estimated useful lives, from the date that it is available for use. The estimated useful lives for the current and comparative periods are as follows: 2019 2018 • Software 5 years 5 years • Licenses and trademarks 10 years 10 years
(n) Investment property Investment property is initially measured at cost and subsequently at fair value, with any change therein recognized in profit or loss within other income. Any gain or loss on disposal of investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognized in profit or loss. When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting
22 73 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (o) Inventory Inventory comprises repossessed assets acquired through enforcement of security over non- performing loans and advances to customers which do not earn rental, and are not used by the Bank and are intended for disposal in a reasonably short period of time, without significant restructuring. Repossessed assets are measured at the lower of cost and net realizable value and any write-down is recognized in the profit or loss. (p) Impairment of non-financial assets At each reporting date, the Bank reviews the carrying amount of its non-financial assets (other than inventory and deferred tax assets) 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 recognized if the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset 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 which reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognized in profit or loss. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (q) Deposits Deposits are the Bank’s sources of debt funding. Deposits are initially measured at fair value plus directly attributable transaction costs, and subsequently measured at their amortized cost using the effective interest method. When the Bank sells a financial asset and simultaneously enters into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future date (“repo” or “stock lending”), the arrangement is accounted for as a deposit, and the underlying asset continues to be recognized in the Bank’s financial statements.
23 74 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (r) Provisions A provision is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money, and where appropriate, the risks specific to the liability. A provision for bank levies is recognized when the condition that triggers the payment of the levy is met. If a levy obligation is subject to a minimum activity threshold so that the obligating event is reaching a minimum activity, then a provision is recognized when that minimum activity threshold is reached. A provision for restructuring is recognized when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. (s) Financial guarantees and loan commitments Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. Financial guarantees issued or commitments to provide a loan at a below-market interest rate are initially measured at fair value. Subsequently, they are measured as follows: - at the higher of the loss allowance determined in accordance with IFRS 9 and the amount initially recognized less, when appropriate, the cumulative amount of income recognized in accordance with the principles of IFRS 15. For other loan commitments: - the Bank recognizes a loss allowance Liabilities arising from financial guarantees and loan commitments are included within provisions. (t) Employee benefits (i) Defined contribution plans The Bank makes only compulsory social security contributions that provide pension benefits for employees upon retirement. In Albania, the local authorities are responsible for providing the legally set minimum threshold for pensions under a defined contribution pension plan. The Bank’s contributions to the benefit pension plan are expensed in profit or loss as incurred. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
24 75 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
7. Significant accounting policies (continued) (u) New standards and interpretation not yet adopted A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2019 and earlier application is permitted; however, the Bank has not early adopted them in preparing these financial statements. The following amended standards are not expected to have a significant impact on the Bank’s Financial Statements: - Amendments to References to Conceptual Framework in IFRS Standards. - Definition of Business (Amendments to IFRS 3). - IFRS 17 Insurance Contracts.
25 76 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management The Bank is exposed to the following risks from financial instruments: a. credit risk b. liquidity risk c. market risk d. operational risk This note presents information about the Bank’s exposure to each of the above risks, the Bank’s objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital. Risk management framework The Board of Directors of the Bank has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board has established the Bank’s Governance Committees (Executive Directors Committee, Credit Committee, Asset Liability Committee, Operational Risk Committee, Credit Risk Governance Committee, Problematic Loans Committee and other committees) that have the authority for decision-making in their specified areas. Risk Management Division is responsible for developing and monitoring the Bank’s risk management policies in these areas. All the Bank’s committees have both executive and non-executive members and report regularly to the Board of Directors on their activities. The Bank’s risk management policies are established to identify and analyze the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. (a) Credit Risk In the normal course of its business, the Bank is exposed to credit risk on its loans and advances to customers and financial institutions, investment securities and other off-balance-sheet items. Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances to customers, debt securities, on funds with other financial institutions and other off-balance sheet items. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). The Bank manages its exposure to credit risk on a regular basis by closely monitoring credit limits, its loan portfolio and concentration of exposure. (i) Management of credit risk The Board of Directors has delegated responsibility for decision-making to Committees in Credit Area. The Risk Management Division, reporting to the CEO, is responsible for the oversight and management of the Bank’s credit risk, including: • Formulating credit policies in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements. • Reviewing and assessing credit risk. The Bank’s Underwriting Department assesses all credit exposures, before facilities are committed to customers by the Bank. Renewals and reviews of facilities are subject to the same review process. • Limiting concentrations of exposure to counterparties, geographies and industries (for loans and advances), and by issuer, credit rating band, market liquidity and country (for investment securities).
26 77 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (i) Management of credit risk (continued) • Developing and maintaining the Bank’s risk classifications in order to categorize exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The risk classification is used in determining where impairment may be required against specific credit exposures. According to the Bank’s methodology, all exposures are classified between Performing (including Stage 1 and Stage 2) and Non- Performing exposures (Stage 3 - including Past Due, Unlikely to Pay and Doubtful). The bank classifies the performing portfolio in two clusters Stage 1 and Stage 2 based on a set of rules harmonized with the guidelines of Intesa Sanpaolo Group, driven by the signs of deterioration of the exposure as per below specifications:
Stage 1 Stage 2 Stage 3 • Performing exposures • Performing exposures with more • Exposures with without days past than 30 days past due more than 90 days due • Forborne performing exposures past due • Performing exposures • Performing exposures showing • Unlikely to Pay with less than 30 days Early Warning signals (orange, red • Doubtful past due and light blue) and PCM. The Non-Performing portfolio is classified by analyzing the exposures also based on a set of rules harmonized with the guidelines of Intesa Sanpaolo Group. These rules include objective evidence being: breach of contract (such as default or delinquency in interest or principal payments); significant financial difficulty of the borrower; and other significant adverse financial information relating to the customer. Starting from the 1st of November 2019, the new Definition of Default has been introduced in accordance with EBA’s (European Banking Authority) Guidelines on application of the definition of default (EBA/GL/2016/07) and the Regulatory Technical Standards on the materiality threshold (EBA/RTS/2016/06) that specify how default definition should be applied. Under the new guidelines two new materiality thresholds have been introduced, a relative threshold equal to 1% of the obligor cash exposure and an absolute threshold on obligor level equal to 500 Euros for non-retail exposures and 100 Euros for retail exposures. The new days past due, used as objective criteria for Stage 2 classification (Over 30 days past due) and the Past Due Classification (Over 90 days past due), are counted incrementally when both the relative and the absolute thresholds are breached. In addition, once an obligor has defaulted, it will remain on default status for at least 90 days after no signs of default are present. Furthermore, a new trigger of Unlikeliness to Pay has been introduced for Forborne distressed restructuring which net present value has decreased with more than 1% compared to previous agreement. The New Definition of Default was accounted retrospectively starting from 1st of November 2019. • Reviewing compliance of business units with agreed exposure limits, including those for selected industries and product types. Detailed analyses are provided monthly to the Problem Assets Committee on the credit quality of customer exposures and specific actions are proposed. • Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.
27 78 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (ii) Maximum Exposure to Credit Risk The following table shows the current maximum exposure to credit risk for the applicable components of statement of financial position: Gross Maximum Exposure 31 December 2019 31 December 2018 Cash and cash equivalents (excluding cash on hand) 28,796,627 33,844,583 Loans and advances to banks 29,146,303 20,253,667 Investment securities 66,919,643 63,727,118 Loans and advances to customers 44,864,090 43,928,731 Sundry debtors 53,399 443,042 Total on-balance-sheet risk 169,780,062 162,197,141 Undrawn credit commitments 4,868,368 4,378,023 Letters of credit 1,316,966 948,692 Guarantees in favor of customers 4,456,046 4,245,210 Total credit related commitments 10,641,380 9,571,925 Total Credit Risk Exposure 180,421,442 171,769,066 Where financial assets are recorded at fair value, the amounts shown represent the current credit risk exposure, but not the maximum risk exposure that could arise in the future as a result of changes in values. The Bank makes available to its customers guarantees which may require that the Bank makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Letters of credit and guarantees commit the Bank to make payments on behalf of customers in the event of a specific act or event, generally related to the import or export of goods, and payment and performance guarantees. Such commitments expose the Bank to similar credit risks, which are mitigated by the same control processes and policies. Every month, the Bank assesses the credit related commitments for impairment. Amounts subject to individual impairment assessment are non-cancellable commitments granted to non-performing customers or customers with restructured credit facilities.
28 79 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (iii) Credit Quality by class of financial assets The following table sets out information about the credit quality of financial assets measured at amortized cost and FVOCI debt investments. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. Explanation of the terms ‘Stage 1’, ‘Stage 2’ and ‘Stage 3’ is included in Note 7(g)(vii).
31 December 2019 Stage 1 Stage 2 Stage3 Total Loans and advances to customers Performing 43,720,062 635,684 - 44,335,746 Past Due - - 104,414 104,414 Unlikely to Pay - - 1,466,978 1,466,978 Doubtful - - 951,266 951,266 Total 43,720,062 635,684 2,522,658 46,878,404 Loss allowance 710,117 136,858 1,167,339 2,014,314 Carrying amount 43,009,945 498,826 1,355,319 44,864,090
31 December 2018 Stage 1 Stage 2 Stage3 Total Loans and advances to customers Performing 41,106,026 2,347,997 - 43,454,023 Past Due - - 151,825 151,825 Unlikely to Pay - - 1,149,101 1,149,101 Doubtful - - 1,745,476 1,745,476 Total 41,106,026 2,347,997 3,046,402 46,500,425 Loss allowance 663,165 456,354 1,452,175 2,571,694 Carrying amount 40,442,861 1,891,643 1,594,227 43,928,731
31 December 2019 PD Range Stage 1 Stage 2 Stage3 Total Loans and advances to customers 0-0.18 43,720,062 - 2,048,023 45,768,085 0.19-0.66 - 635,684 1,317 637,001 0.67-1 - - 473,318 473,318 Total 43,720,062 635,684 2,522,658 46,878,404 Loss allowance 710,117 136,858 1,167,339 2,014,314 Carrying amount 43,009,945 498,826 1,355,319 44,864,090
31 December 2018 PD Range Stage 1 Stage 2 Stage3 Total Loans and advances to customers 0-0.18 41,106,026 - 2,652,923 43,758,949 0.19-0.66 - 2,347,997 9,395 2,357,392 0.67-1 - - 384,084 384,084 Total 41,106,026 2,347,997 3,046,402 46,500,425 Loss allowance 663,165 456,354 1,452,175 2,571,694 Carrying amount 40,442,861 1,891,643 1,594,227 43,928,731
29 80 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (iii) Credit Quality by class of financial assets (continued)
31 December 2019 Stage 1 Stage 2 Stage3 Total Loans and advances to banks Performing 39,204,886 3,288,711 - 42,493,597 Total 39,204,886 3,288,711 - 42,493,597 Loss allowance 8,634 608 - 9,242 Carrying amount 39,196,252 3,288,103 42,484,355
Investment securities at FVOCI Performing 4,289,282 - - 4,289,282 Total 4,289,282 - - 4,289,282 Carrying amount 4,289,282 - - 4,289,282 Loss allowance 5,517 - - 5,517
Investment securities at amortized cost Performing 60,831,517 2,107,366 - 62,938,883 Total 60,831,517 2,107,366 - 62,938,883 Loss allowance 301,928 6,594 - 308,522 Carrying amount 60,529,589 2,100,772 - 62,630,361
31 December 2018 Stage 1 Stage 2 Stage3 Total Loans and advances to banks Performing 35,069,277 3,714,468 - 38,783,745 Total 35,069,277 3,714,468 - 38,783,745 Loss allowance 9,509 6,539 - 16,048 Carrying amount 35,059,768 3,707,929 - 38,767,697
Investment securities at FVOCI Performing 6,323,591 - - 6,323,591 Total 6,323,591 - - 6,323,591 Carrying amount 6,323,591 - - 6,323,591 Loss allowance* 4,629 - - 4,629
Investment securities at amortized cost Performing 55,566,406 2,110,759 - 57,677,165 Total 55,566,406 2,110,759 - 57,677,165 Loss allowance 265,837 7,801 - 273,638 Carrying amount 55,300,569 2,102,958 - 57,403,527 *Loss allowance for investment securities at FVOCI is recognized in other comprehensive income and not as a contra account to the carrying amount of the financial asset in the statement of financial position (see Note 7 (g) (vii) Presentation of allowance for ECL in the statement of financial position). **Loans and advances to banks include current accounts with banks, money market placements (see Note 10) and deposits with correspondent banks (see Note 11).
30 81 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (iii) Credit Quality by class of financial assets (continued) The following table sets out information about the overdue status of loans and advances to customers in Stages 1, 2 and 3. 31 December 2019 Loans and advances to customers Stage 1 Stage 2 Stage3 Total Up to 30 days in arrears 43,720,062 417,094 553,401 44,690,557 More than 30 days in arrears - 218,590 1,969,257 2,187,847 Total 43,720,062 635,684 2,522,658 46,878,404 31 December 2018 Loans and advances to customers Stage 1 Stage 2 Stage3 Total Up to 30 days in arrears 40,653,651 1,682,259 24,748 42,360,658 More than 30 days in arrears 452,374 665,738 3,021,655 4,139,767 Total 41,106,025 2,347,997 3,046,403 46,500,425 All loans and advances to banks and investment securities fall in the overdue status of less than 30 days in arrears as of 31 December 2019 and 31 December 2018. The following table sets out the credit quality of debt securities and loans and advances to banks based on Moody's ratings, Staging and IFRS Category:
Investments debt securities 31 December 2019 Sovereign Stage 1 Stage 2 Total Rate Baa2 2,827,008 2,100,772 4,927,780 FOCI 2,827,008 - 2,827,008 AC - 2,100,772 2,100,772 Rate B1 61,251,450 - 61,251,450 FVOCI 721,861 - 721,861 AC 60,529,589 - 60,529,589 64,078,458 2,100,772 66,179,230
Financial Institutions Stage 1 Stage 2 Total Rated Aaa 740,413 - 740,413 FVOCI 740,413 - 740,413 Total carrying amount 64,818,871 2,100,772 66,919,643
31 December 2018 Sovereign Stage 1 Stage 2 Total Rate Baa2 3,574,631 2,102,958 5,677,589 FOCI 3,574,631 - 3,574,631 AC - 2,102,958 2,102,958 Rate B1 57,512,156 - 57,512,156 FVOCI 2,211,587 - 2,211,587 AC 55,300,569 - 55,300,569 61,086,787 2,102,958 63,189,745
Financial Institutions Stage 1 Stage 2 Total Rated Aaa 537,373 - 537,373 FVOCI 537,373 - 537,373 Total carrying amount 61,624,160 2,102,958 63,727,118
31 82 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (iii) Credit Quality by class of financial assets (continued)
Loans and advances to Banks 31 December 2019 Stage 1 Stage 2 Total Rated Aa1 - - Rated Aa2 - - Rated Aa3 13,762 - 13,762 Rated A1 7,764,149 - 7,764,149 Rated A2 5,962,337 3,239,897 9,202,234 Rated A3 - - - Rated Baa1 - 48,814 48,814 Rated Baa2 20,891,230 - 20,891,230 Rated Baa3 2,496,226 - 2,496,226 Rated Ba3 1,094,419 - 1,094,419 Rated B1 800,104 - 800,104 Rated B2 - - - Rated CAA 182,660 - 182,660 Non rated - - - 39,204,887 3,288,711 42,493,598
31 December 2018 Stage 1 Stage 2 Total Rated Aa1 11,672 - 11,672 Rated Aa2 24,093 - 24,093 Rated Aa3 6,944,439 - 6,944,439 Rated A1 38,631 - 38,631 Rated A2 - - - Rated A3 4,887,532 17,114 4,904,646 Rated Baa1 16,464,970 - 16,464,970 Rated Baa3 4,927,241 3,690,815 8,618,056 Rated Ba3 1,499,513 - 1,499,513 Rated B1 76,677 - 76,677 Rated B2 185,000 - 185,000 Rated CAA - - - Non rated - - - 35,059,768 3,707,929 38,767,697
32 83 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (iv) Collateral held and other credit enhancements The estimated cash flows derived from the collateral, including guarantees securing the exposures, are usually the main source of future cash flows from non-performing loans. Some of the valuation parameters used for the calculation are: • Realizable value of collaterals, which is estimated by reducing the appraised market value of the collateral with a discount factor. This considers the characteristics of similar groups of collaterals. It presumes an average recoverable value of specific collateral, based on the Bank’s experience. • Timing of the expected cash flow, which represents the expected recovery time (in years) for a specific type of collateral. The recovery costs are deducted from estimated future cash flows. Collateral, generally, is not held over loans and advances to financial institutions, except when securities are held as part of reverse repurchase and securities borrowing activity. Usually, collateral is not held against investment securities, and no such collateral was held at 31 December 2019 and 2018. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and are updated every three years. An estimate of the undiscounted and discounted fair value of collaterals and other security enhancements held against financial assets is shown below: Collateral of Loans and Collateral of Loans and advances to customers advances to customers 31 December 2019 31 December 2018 Undiscounted Discounted Undiscounted Discounted Against individually impaired Property 4,765,766 1,709,133 5,156,673 1,930,937 Debt securities 421,236 1,523 5,950 - Cash 193 193 - - Pledges and guarantees 39,700 - 296,532 247 Other - - - - Total 5,226,895 1,710,849 5,459,155 1,931,184 Net carrying amount 1,355,319 1,258,002 The gross amount of collaterals includes the value of collaterals before testing the individually impaired loans. The net amount shows the present value of the same collaterals under this test. The table below shows the total amount of collaterals for the loans assessed under the category of collectively impaired including all the Stage 3 exposures that are lower than EUR 100 thousand. These collaterals do not undergo the same testing procedures as the above group. The information on the table below provides information on how much the collectively impaired loans and advances to customers are secured against their respective collaterals. Collateral of Loans and Collateral of Loans and advances to customers advances to customers 31 December 2018 31 December 2017 Undiscounted Discounted Undiscounted Discounted Against Collectively Impaired Property 79,525,887 34,465,256 76,090,868 33,216,469 Pledges and guarantees 19,023,744 1,483,977 17,393,858 1,208,001 Cash 1,381,122 1,331,340 1,621,477 1,565,114 Debt securities 2,604,292 42,981 2,797,132 24,647 Other 1,204,056 - 1,646,216 - Total 103,739,101 37,323,554 99,549,551 36,014,231 Net carrying amount 43,508,771 42,670,729
33 84 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (iv) Collateral held and other credit enhancements (continued) It is the Bank’s policy to dispose of assets repossessed through the recovering process. The amounts collected from the proceeds are used to reduce or liquidate the carrying amount of the non- performing loans. The table below sets out the carrying amount and the value of undiscounted collateral of the loans and advances to customers measured at amortized cost. 31 December 2019 31 December 2018 Carrying amount Collateral Carrying amount Collateral Stage 1 and Stage 2 44,355,746 102,462,453 43,454,022 97,062,977 Stage 3 2,522,658 6,503,543 3,046,403 7,945,729 46,878,404 108,965,996 46,500,425 105,008,706 When the Bank holds repossessed assets in its ownership, their conversion into cash is the Bank’s first aim, through marketing the properties for sale. If there is no satisfactory offer collected, the Bank’s practice is to keep the asset for sale until receiving the best offer. The amounts of repossessed properties are disclosed in note 19. Depending on operational needs and the suitability of the asset to fulfill those needs, management may decide to make use of the property; in such cases a reclassification into property and equipment (see note 15) of the Bank is performed. (v) Amounts arising from ECL Inputs, assumptions and techniques used for estimating impairment See accounting policy in Note 7 (g)(vii). Significant increase in credit risk When determining whether the 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. This includes both quantitative and qualitative information and analysis, based on the Bank’s historical experience and expert credit assessment and including forward-looking information. The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing: – the remaining lifetime probability of default (PD) as at the reporting date; with – the remaining lifetime PD for this point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes in prepayment expectations). The Bank uses three criteria for determining whether there has been a significant increase in credit risk: – quantitative test based on movement in PD, for loans to banks and investment securities only; – qualitative indicators based on forbearance and early warning signals; and – a backstop of 30 days past due. New Definition of default The Bank considers a financial asset to be in default when: – the borrower is in a state of insolvency (even though not legally insolvent) or in a de facto equivalent status. By “state of insolvency” the following shall be intended: structural and permanent (not transitory) inability to satisfy, regularly and through ordinary sources, the Counterparty’s obligations due to lack of liquidity and/or access to external funding – the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse to actions such as the enforcement of guarantees/ collateral. – the borrower is more than 90 days past due as described in 8/(a)/(i) in this document
34 85 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (v) Amounts arising from ECL (continued) Incorporation of forward-looking information The Bank incorporates forward-looking information into the measurement of ECL. The Bank has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between EBA (European Banking Authority) stress coefficients and credit losses. The Bank considers three economic scenarios: baseline, adverse scenario, as published by EBA, and best scenario, an internal estimate as a symmetrical reflection of adverse scenario toward baseline one.
Inputs, assumptions and techniques used for estimating impairment (continued) 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 recognised as a new loan at fair value in accordance with the accounting policy set out in Note 7 (g)(iv). Measurement of ECL (Expected Credit Losses) The framework, IFRS 9 (International Financial Reporting Standard) – Financial Instruments, is based on the estimation of expected losses, different from the incurred losses used under IAS 39. When significant deterioration of the credit quality is recognized, the new concept of Lifetime expected loss is introduced. Lifetime expected loss covers expected loss for the whole IFRS 9 specifies that if the credit risk on a financial instrument has increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to Lifetime expected credit losses and if the credit risk on such instrument has not increased significantly, 12- months expected losses should be calculated instead. ECL for exposures in Stage 1 is calculated by multiplying the 12-month PD by LGD and EAD. Lifetime ECL is calculated by multiplying the lifetime PD by LGD and EAD. The Bank employs statistical models to analyze the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time. The Bank collects performance and default information about its credit risk exposures analyzed by type of product and borrower as well as by credit risk grading. For some portfolios, information purchased from external credit reference agencies is also used. LGD is the magnitude of the likely loss if there is a default. The Bank estimates LGD parameters based on the history of loss rates from defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For loans secured by retail property, LTV ratios are a key parameter in determining LGD. LGD estimates are calculated on a discounted cash flow basis using the effective interest rate as the discounting factor. EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract and arising from amortization. The EAD of a financial asset is its gross carrying amount at the time of default. For lending commitments, the EADs are potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward- looking forecasts.
35 86 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (v) Amounts arising from ECL (continued) Inputs, assumptions and techniques used for estimating impairment (continued) Measurement of ECL (Expected Credit Losses) (continued) Low Default Portfolio A new category of financial instruments are considered for impairment purposes under the IFRS 9 rules, called “Low Default Portfolio”. It includes securities and loans to banks, and as defined by Parent Company consists of exposures with the following parties: • Sovereign (Central Banks, Governments, Municipalities, Public Sector Entities); • Institutions (Banks, and other financial institutions); Intragroup exposures are exposures with the following parties: • Parent Company; • Other ISP subsidiaries. Intragroup transactions are generally classified as Stage 1 with a 12- months ECL following the staging rules for Low Default Portfolio and intragroup exposures based on parent company driven methodologies including validation. Exposures are classified to Stage 2 based on the significant increase of credit risk criterion measured by Lifetime PD comparison. This criterion for Low Default Portfolio is defined based on the specific rating and residual maturity of exposure. Thresholds are provided by Parent Company. The criteria used to access whether the debt securities credit quality deteriorated significantly since origination is Lifetime PDs comparison. The instrument issuer rating (counterparty rating) is used for the Lifetime PD comparison rather than rating of the single instrument (i.e. at the reporting date different instruments or tranches related to the same issuer will be assigned with the rating of the counterparty at a given date). Debt securities purchased in tranches PD at origination is determined through First In First Out (FIFO) methodology. Debt securities include “Low Credit Risk Exemption” based on the assumption that the credit risk on has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. Therefore, Investment grade instruments at the reporting date are classified to Stage 1. This exemption is applicable only for instruments belonging to Available For Sale (AFS) portfolio upon the IFRS 9 transition. The following criteria are approved for each stage for Bonds residual maturity of the financial instrument. Stage 1 Stage 2 Stage 3 • Debt with no significant • Debt with significant • Defaulted Debt credit quality deterioration increase in PD since • Investment grade debts origination For Stage 3 – Defaulted debt the impairment testing process for any individually securities is applied. If the fair value is less than the carrying amount or if the issuer is delinquent in its debtor obligations or defaults on payments as demonstrated by any one of the following events: 1. Default; 2. Bankruptcy proceedings; 3. Delinquency in interest or principal payments. Where any one of these events occurs, given the gravity and the irreversibility of the confirmed situation, an impairment loss should be recorded directly. If the fair value is not more than 20% less than the carrying amount and no other impairment indicators are found, there is no need to test the securities further for impairment. The impairment test for this stage classification is performed according to the rules defined in the ISP Group accounting policy. Both collective assessment and individual assessment on portfolio basis are approaches to impairment evaluation based on statistical methods by using credit risk parameters which are estimated based on historical data for homogenous groups of assets. 36
87 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (v) Amounts arising from ECL (continued) Loss allowances The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, as well as collectively assessed and less significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of expected losses that have not been identified. The following tables show reconciliations from the opening to the closing balance of the loss allowance by class of financial instrument. Movements in impairment allowance funds for: Loans and advances to banks Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2019 9,509 6,539 - 16,048 Transfer to Stage 1 - - - - Transfer to Stage 2 - - - - Transfer to Stage 3 - - - - Financial Assets that have been derecognized (6,488) - - (6,488) Net remeasurement of loss allowances 1,155 (5,880) - (4,725) New financial assets originated or purchased 4,538 - 4,538 Foreign exchange and other movements (80) (51) - (131) Balances at 31 December 2019 8,634 608 - 9,242
Loans and advances to banks Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2018 62,923 15,202 - 78,125 Transfer to Stage 1 - - - - Transfer to Stage 2 - - - - Transfer to Stage 3 - - - - Financial Assets that have been derecognized (8,579) - - (8,579) Net remeasurement of loss allowances (50,589) (12,592) - (63,181) New financial assets originated or purchased 6,467 4,306 - 10,773 Foreign exchange and other movements (713) (377) - (1,090) Balances at 31 December 2019 9,509 6,539 - 16,048
Investment securities at FVOCI Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2019 4,629 - - 4,629 Transfer to Stage 1 - - - - Transfer to Stage 2 - - - - Transfer to Stage 3 - - - - Financial Assets that have been derecognized (2,077) - - (2,077) Net remeasurement of loss allowances (169) - - (169) New financial assets originated or purchased 3,158 - - 3,158 Foreign exchange and other movements (24) - - (24) Balances at 31 December 2019 5,517 - - 5,517
37 88 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (v) Amounts arising from ECL (continued)
Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2018 27,515 - - 27,515 Transfer to Stage 1 - - - - Transfer to Stage 2 - - - - Transfer to Stage 3 - - - - Financial Assets that have been derecognized (6,028) - - (6,028) Net remeasurement of loss allowances (16,239) - - (16,239) New financial assets originated or purchased 544 - - 544 Foreign exchange and other Movements (1,163) - - (1,163) Balances at 31 December 2018 4,629 - - 4,629
Investment securities at amortized cost Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2019 265,837 7,801 - 273,638 Transfer to Stage 1 - - - - Transfer to Stage 2 - - - - Transfer to Stage 3 - - - - Financial Assets that have been derecognized (88,037) - (88,037) Net remeasurement of loss allowances (25,823) (1,266) - (27,089) New financial assets originated or purchased 150,137 - 150,137 Foreign exchange and other movements (186) 59 - (127) Balances at 31 December 2019 301,928 6,594 - 308,522
Investment securities at amortized cost Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2018 232,723 9,732 - 242,455 Transfer to Stage 1 - - - - Transfer to Stage 2 - - - - Transfer to Stage 3 - - - - Financial Assets that have been derecognized (70,136) - - (70,136) Net remeasurement of loss allowances (39,947) (1,648) - (41,595) New financial assets originated or purchased 144,241 - - 144,241 Foreign exchange and other movements (1,044) (283) - (1,327) Balances at 31 December 2018 265,837 7,801 - 273,638
38 89 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (v) Amounts arising from ECL (continued) Loss allowances (continued) Loans and advances to customers Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2019 663,165 456,354 1,452,175 2,571,694 Transfer to Stage 1 (218,731) 77,027 141,704 - Transfer to Stage 2 3,769 (300,063) 296,294 - Transfer to Stage 3 451 3,978 (4,429) - Transfer to Non-current assets held for sale - - - Financial assets de-recognized / repaid (82,111) (188,125) (99,121) (369,357) Net remeasurement of loss allowances 89,053 46,706 15,336 151,095 New financial assets originated or 257,528 42,957 90,319 390,804 purchased Write offs - - (696,935) (696,935) Foreign exchange and other movements (3,007) (1,976) (28,004) (32,987) Balances at 31 December 2019 710,117 136,858 1,167,339 2,014,314
Loans and advances to customers Stage 1 Stage 2 Stage 3 Total Balances at 1 January 2018 936,079 488,406 1,665,031 3,089,516 Transfer to Stage 1 215,511 (90,834) (124,677) 0 Transfer to Stage 2 (13,377) 51,953 (38,576) 0 Transfer to Stage 3 (114,700) (227,616) 342,316 0 Transfer to Non-current assets held for - - (151,544) (151,544) sale 0 Net remeasurement of loss allowances (602,439) 30,816 (245,699) (817,322) New financial assets originated or 267,576 220,152 607,485 1,095,213 purchased Write offs - - (513,464) (513,464) Foreign exchange and other movements (25,485) (16,523) (88,697) (130,705) Balances at 31 December 2018 663,165 456,354 1,452,175 2,571,694
39 90 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (v) Amounts arising from ECL (continued) The following table provides a reconciliation between: amounts shown in the above tables reconciling opening and closing balances of loss allowance per class of financial instrument; and the ‘impairment losses on financial instruments’ line item in the consolidated statement of profit or loss and other comprehensive income. Loans and Loans and Investment Investment advances advances to securities securities at to banks customers at FVOCI amortized cost Total Net remeasurement of loss allowance 11,212 218,262 2,246 115,126 346,846 New financial assets originated or purchased (4,538) (390,804) (3,158) (150,137) (548,637) Balances at 31 December 6,674 (172,542) (912) (35,011) (201,791) (vi) Write-off policy The Bank writes off a loan (and any related allowances for impairment losses) when the Bank’s Board of Directors determines that the loans are uncollectible. This is generally the case when the Board of Directors determines that significant changes in the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. The Bank’s policy is also in compliance with the Regulation no.62 “On Administration of Credit Risk for Banks and Foreign Banks Subsidiaries”.
40 91 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (vii) Concentration of Credit Risk The Bank monitors concentration of credit risk by sector and location. An analysis of credit risk at the reporting date is shown below:
Net Loans and advances to customers Concentration by sector 31 December 2019 31 December 2018 Services 14,994,397 12,996,807 Wholesale 8,957,759 10,311,235 Construction 2,464,497 2,494,865 Manufacturing 5,578,467 5,201,578 Real Estate 487,818 726,549 Other 1,539,817 1,955,755 Corporate 34,022,755 33,686,789 Mortgage 8,521,717 8,166,442 Consumer 2,319,618 2,075,500 Retail 10,841,335 10,241,942 Carrying amount 44,864,090 43,928,731 Loans and advances to banks Concentration by sector 31 December 2019 31 December 2018 Bank 29,146,303 20,253,667 Carrying amount 29,146,303 20,253,667
Investment securities Concentration by sector 31 December 2019 31 December 2018 Sovereign 66,179,213 63,189,745 Bank - - Other Financial l Institutions 740,430 537,373 Carrying amount 66,919,643 63,727,118
The following concentrations of credit risk arise in the Bank’s credit-risk portfolio.
31 December Exposure 31 December Exposure In 2019 In % 2018 %
Republic of Albania securities 58,773,316 34% 57,511,936 35% Balances with Bank of Albania 15,458,575 9% 15,330,553 9% Total direct Albanian Sovereign risk 74,231,891 43% 72,842,489 44% Largest bank 16,564,712 10% 16,466,776 10% Largest customer 3,256,625 2% 1,426,673 1% Total largest bank and customer 19,821,337 12% 17,893,449 11% Total on-balance-sheet risk 94,053,228 55% 90,735,938 55% The largest exposure toward the banks is exposure to the Group bank and the largest customer is a private company.
41 92 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (a) Credit Risk (continued) (viii) Settlement risk The Bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a company to honor its obligations to deliver cash, securities or other assets as contractually agreed. The settlement risk with financial institutions and government counterparties is included within a system of limits for all the transactions with such counterparties and is subject to daily monitoring, defined and regulated in the internal documents “ISBA Credit Autonomy Level” and “ISBA Rules for the management and maintenance of the FI-s limits” and the Central Bank of Albania regulation “On risk management arising from the large exposures of the Bank”. The Bank of Albania regulation “On risk management arising from the large exposures of Bank” was revised during 2014 and entered in force in March 2015. The Bank has been within the limits in accordance with Central Bank of Albania regulation up to 31 December 2019.
With the aim to prevent any breaches of local regulatory counterparty limits with Financial Institutions, generated by fluctuations of exchange rates, the bank has integrated warning level limits (soft limits), 23.4 % of regulatory capital for the exposures toward ISP Group and 18.7 % of regulatory capital for the exposures toward other Financial Institutions/Governments, as approved by FRCO on 24 January 2017 and reapproved the same level of soft limits by ALCO 21 March 2019.
(b) Liquidity Risk Liquidity risk is defined as the possibility that an institution is unable to meet its payment obligations due to its incapacity to liquidate assets or obtain adequate funding from the market (funding liquidity risk), or due to the difficulty of easily unwinding positions in financial assets without negatively and significantly affecting their price due to inadequate market depth or temporary market disruptions. (i) Management of liquidity risk The Bank’s approach to managing liquidity risk is to ensure, as much as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. The Bank defines the guidelines for liquidity risk management and the contingency liquidity plan, which are subject to review by Group structures and approval by the Bank’s Financial Risk Committee and Board of Directors. The Treasury and ALM Department is responsible for liquidity management and the Risk Management Division is responsible for monitoring indicators and verifying adherence to the limits and the Bank’s Regulation on Liquidity Risk Management is annually updated. The Bank monitors liquidity, in accordance with this regulation, in order to manage its obligations when they fall due and activate emergency procedures in case of escalation. A balanced ratio should be maintained between incoming sources and outflows, in both the short and medium-long term. This target is organized through the use of the following specific metrics “Liquidity Coverage Ratio up to 30 days” and “Net Stable Funding Ratio”. • Liquidity Coverage Ratio (LCR) up to 30 days: aims to ensure that the Bank maintains an adequate level of unencumbered high-quality liquid assets (HQLA) to meet its short-term liquidity needs under liquidity stress scenario (LCR≥100%). • Net Stable Funding Ratio (NSFR): aims to guarantee an adequate liquidity position over a medium/long-term time horizon. It establishes a minimum “acceptable” amount of funding over one-year horizon in relation to the needs arising from the liquidity characteristics and the residual maturities of assets and off-balances exposures (NSFR≥100%). Holding reserves of liquid assets (so-called Liquidity Buffer) is one of the main tools for mitigating liquidity risk. For the purpose of identifying and measuring this risk, both short and medium-long term, the classification of highly-liquid assets takes on crucial importance.
42 93 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (b) Liquidity Risk (continued) (i) Management of liquidity risk (continued) In its Liquidity Policy, the Bank projects an LCR indicator of up to 3 months by including the estimated market effect of specific acute liquidity tensions (at bank level) combined with a widespread and general market crisis, based on assumptions provided by the Group’s guidelines. (LCR up to 3 months ≥90%). A similar, but not identical, calculation is used to measure the Bank’s compliance with the liquidity limits established by the Bank of Albania, which should be above 20% for all currencies and foreign currencies and above 15% for the local currency. A new indicator is introduced by the Bank of Albania, LCR as per Banka of Albania (BOA) regulation requirements regulation. The limits for LCR BOA will enter in force on 1 March 2020 and are as below: A limit of total currencies is defined at least 100% and for total significant foreign currencies with a gradually implementation as below: LCR TOTAL SIGNIFICANT CURRENCY • 1st of Mar 2020 50% • 1st of Jan 2021 70% • 1st of Jan 2022 80% in accordance with risk appetite framework, the bank should decide internal limits for Lek and each significant currency (Eur and USD). The limits of LCR in LEK, USD and EUR are not decided yet. (ii) Compulsory reserve On 7 February 2018 Bank of Albania approved the decision no.14 for the change on the Compulsory Reserve requirement. These changes has entered in force during June 2018 up to August 2019 and consist of the following: - Decrease for the obligatory reserve requirement rate for local currency liabilities to 7.5% and 5% (previous rate applied: 10%). - The new obligatory reserve requirement rate for foreign currency liabilities is 12.5% and 20%. Liabilities in foreign currency up to 50% of the total liabilities have a 12.5% requirement rate and for the part of above 50% of the total liabilities the requirement rate is 20% (previous rate applied: 10 %). All the above liquidity ratios are periodically monitored by the Bank with reference to the Group internal limits and guidelines and to the Bank of Albania requirements. During the year 2019, the bank has been within the internal and regulatory limits.
43 94 Annual Report 2019 - Audited Financial Statements - - - be Total (48,146) (281,462) abilities. 1,444,030 (281,462) 15,462,646 15,469,686 58,898,355 19,355,199 27,030,020 49,876,059 (2,074,049) 32,281,915 32,000,453 (93,661,120) (93,612,974) (59,518,911) 187,535,995 (155,254,080) ------ion history assumptions wdown percentages for off (200,977) > 5 years 2,227,022 (200,977) 10,967,206 13,194,228 12,993,251 32,000,453 12,993,251 ------licy. The other securities are positioned 5 years - 1 7,854,245 15,462,646 19,628,585 42,945,476 23,486,194 19,007,202 23,486,194 (19,459,282) (19,459,282) the cash flows in/out of the Bank for on and off ------the current account from customers are expected to 2,106,637 9,624,816 5,606,351 12 months - 17,337,804 (8,645,057) (4,478,992) (8,645,057) (25,982,861) 3 (25,982,861) ------for example 44 3 months 6,917,706 9,046,721 1,242,601 - 7,658,376 4,166,065 7,658,376 (9,548,652) 1 17,207,028 (9,548,652) - - rantees. The breakdown considers 249,589 (48,146) (281,462) 1,444,030 8,358,483 (281,462) 15,469,686 58,898,355 12,431,316 (2,074,049) (4,327,139) 96,851,459 (3,210,849) (3,492,311) (3,492,311) (93,661,120) (93,612,974) from this representation, Up to 1 Up month (100,062,308) differ ) Current - 9 gross gross 9 Time deposits - only for representative purposes and shows breakdown by the earliest contractual residual maturity of financial assets and li December 20 1 December , unless otherwise stated otherwise unless , IN) December 20 1 December ) ent. The expected cash flows 31 31 balance sheet balance balance sheet - - enclosed is sheet financial assets and liabilities, according to the earliest contractual residual maturity and not reflecting any retent sheet categories such as committed credit lines and gua - - Liquidity Risk Risk (continued) Liquidity Balance sheet (Cash flow out) flow (Cash sheet Balance Balance sheet (Cash flow in) flow (Cash sheet Balance - - Financial Risk Management (continued) (b) Assets (Cash Flow Assets (Cash Cash Net Minimum reserve requirements Advances to banks Investment Securities InvestmentOther Securities banks to Loans ( customers to advances and Loans loans performing flow (Cash OUT) Liabilities Deposits from banks and customers accounts with banks accounts Current customers with accounts Current Deposits from banks Deposits from customers Total gap on Off Off Total gap off 2019 31 December gap Total 2019 31 gap December Cumulated stable or to be increased. balance 8. The table Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 Lek of thousands (in or earlier repaym The classificationThe ofsecurities portfolio in Level 1 is done based on the criteria’s defined in ISBA Liquidity Risk po as per left maturity, since are considered as not liquid assets. Behavioral coefficients of ISP Group are applied for the dra balance
95 Annual Report 2019 - Audited Financial Statements - - Total (290,009) 1,445,991 (290,009) 14,993,585 14,170,513 77,113,289 23,827,161 24,956,315 49,096,503 (1,526,913) (1,244,774) 55,436,114 55,146,105 (86,635,435) (85,108,522) (62,287,034) 205,603,357 (150,167,243) ------(710,759) > 5 years 3,235,165 3,235,165 (710,759) 10,445,000 16,915,330 16,204,571 16,204,571 55,146,105 ------5 years - 1 7,320,997 7,320,997 14,993,585 19,466,995 49,102,574 33,232,747 33,232,747 38,941,534 (15,869,827) (15,869,827) ------2,926,227 2,926,227 5,255,447 5,984,179 5,708,787 12 months - 17,092,080 (28,674,589) 3 (28,674,589) (11,582,509) (11,582,509) ------45 3 months 8,205,840 8,205,840 9,948,950 1,277,258 - 1 27,637,888 15,777,533 15,777,533 17,291,296 (11,860,355) (11,860,355) - - month Up to 1 (290,009) 1,445,991 2,138,932 9,751,918 (290,009) 1,803,772 1,513,763 1,513,763 14,170,513 55,425,060 11,923,071 (1,526,913) (1,244,774) (5,171,504) 94,855,485 (86,635,435) (85,108,522) (93,051,713) ) Current 8 - 1 20 Time deposits - , unless otherwise stated otherwise unless , 31 December 31 December 31 December 201 8 31 December balance sheet balance balance sheet - - Balance sheet (Cash flow out) flow (Cash sheet Balance Balance sheet (Cash flow in) flow (Cash sheet Balance - - Financial Risk Management (continued) Risk (continued) Liquidity Assets (Cash IN) Flow Assets (Cash Net Cash Net Minimum reserve requirements Advances to banks Investment Securities InvestmentOther Securities banks to Loans (gross customers to advances and Loans performing loans) flow (Cash OUT) Liabilities Deposits from banks and customers accounts with banks accounts Current customers with accounts Current Deposits from banks Deposits from customers Total gap on Off Off Total gap off 2018 31 December gap Total 2018 31 gap December Cumulated Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 Lek of thousands (in 8. (b)
96 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (b) Liquidity Risk (continued) The information provided relates to cash flows deriving from financial off-balance-sheet liabilities, therefore it considerably differs from the face of the statement of financial position. The analysis does not include non-financial liabilities and equity, and comprises of cash flows of contractual interest. The table below shows the Bank’s financial contingent liabilities and financial commitments. 1 1-3 3-12 1-5 >5 Total 31 December 2019 Month Months Months Years Years Commitments 4,868,368 - - - - 4,868,368 Guarantees 5,773,011 - - - - 5,773,011 31 December 2018 Commitments 4,378,023 - - - 4,378,023 Guarantees 5,193,902 - - - - 5,193,902 The Bank expects only a small part of the commitments to be demanded within one month and guarantees to be closed at maturity date. (Refer also to note 30 Commitment and contingencies) Reconciliation between contingent liabilities and commitments maturity table and note 30 Commitment and contingencies is as follows: 31 December 2019 31 December 2018 Commitments 4,868,368 4,378,023 Un-drawn credit facilities 4,868,368 4,378,023 Guarantees 5,773,011 5,193,902 Letters of credit 1,316,966 948,692 Guarantees in favor of customers 4,456,045 4,245,210 (c) 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. Management of market risks
The Bank holds its securities portfolio in accordance with IFRS 9 as either Held to Collect (HTC) or Held to collect and sell (HTCS). ISBA Security Portfolio is managed by “ISBA Financial Portfolio Policy “which defines the below specific limits: • Hold to collect and sell portfolio is not allowed to exceed the 55% of the sum of customer’s deposits and shareholder’s equity. • Hold to collect portfolio has the maximum weighted average modified duration, 3 years. • The security portfolio should obey the specific limits related to type of issuer limits (presented on the next slide) with the following further constraints for HTC Securities: a) country of issuer must be an OECD member and b) issuer rating must be not below A-. • The overall portfolio must comply with some pre-defined type of issuer limits, which are categorized based on the issuer type, rating and currency. For all the investments in debt securities, classified as HTCS or HTC, issued by countries considered “at risk” according to ISP Country Risk Guidelines (i.e. countries not belonging to euro area with an internal rating lower than AA-), the approval process and authorization procedure required by the guidelines in force must be followed.
97 46 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (c) Market Risk (continued) (i) Exposure to Foreign Exchange rate risk Foreign exchange rate risk is defined as the possibility that foreign exchange rate fluctuations will produce significant changes, both positive and negative, in the Bank’s statement of financial position. The key sources of exchange rate risk consist of: - Foreign currency loans and deposits held by corporate and retail customers; - Investment securities in foreign currencies; - Trading of foreign banknotes; - Collection and/or payment of interest, commissions, administrative costs, etc. in foreign currencies. The Bank’s exposure to exchange rate risk is monitored on a daily basis by Market and Operational Risk Office ensuring compliance with the internal and regulatory limits. Internal regulations set limits for each open currency position, global open position, maximum loss and Value at Risk (VaR). A detailed analysis was carried out on a one-year historical data in order to confirm/establish the aforementioned limits. The local regulatory limits refer to a maximum of 20% of the regulatory capital for each open currency position and 30% for the overall open currency position. The Bank has been within the limits in accordance with Bank of Albania regulation during the year 2019 Financial assets denominated in foreign currencies are disclosed in each relevant note to the financial statements.
98 47 Annual Report 2019 - Audited Financial Statements - - - 0 TOTAL 20,711 460,883 600,977 545,556 531,687 347,992 445,944 213,684 4,289,282 2,211,673 1,682,647 2,250,043 1,065,558 1,018,662 30,240,115 29,146,303 62,630,361 44,864,090 21,636,761 177,572,277 150,941,625 177,572,277 144,388,629 144,388,629 171,349,657 171,349,657 ------0 77 3,086 1,031 6,009 16,212 OTHER 14,833 14,833 (11,992) 2,361,714 2,332,801 2,200,019 2,182,018 2,364,877 2,350,044 ------346 EUR , 18,906 24,184 386,430 529,703 442 392,661 959,978 333,654 417,207 168,027 - 3,019,658 2,478,134 1,215,637 (626,324) 23,546,047 24,753,989 25,815,126 80,032,151 75,754,550 76,003,730 80,847,497 81,807,475 129,231,596 128,897,942 ------) ) USD 1,063 5,233 1,125 36,541 32,946 24,482 ( 17,538 543,636 90,119 107,657 ( 2,754,534 1,422,215 2,100,772 3,171,659 9,864,334 4,484,681 4,574,800 (149,113) 9,921,700 10,941,361 10,787,015 10,029,357 ) 598 LEK , 1,805 3 725,988 460,883 600,977 545,556 531,687 347,992 427,383 502,909 600,488 213,684 837,488 593,953 243,535 1,577,820 2,970,099 2,211,673 1,846,338 48 ( (256,102) (179,269) 58,051,455 15,877,228 58,712,339 21,613,702 10,672,352 10,915,887 82,453,727 82,376,894 84,330,546 83,493,058 9 ) 9 8 (2) - at 31 December 2018 at 31 December , unless otherwise stated otherwise unless , equipment’s assets held for sale held assets Market Risk (continued) Exposure to Foreign Exchange rate risk (continued) current - Financial Risk Management (continued) Lease liabilities Assets equivalents cash and Cash banks to advances and Loans Investment securities at FVOCI Investment securities at amortized cost customers to advances and Loans Property and Right of use assets Intangible Investment Property Deferred tax assets assets tax Current Non assetsOther Assets (1) Total Liabilities Due to Banks to customersDue Provisions Other liabilities Deferred tax liabilities Equity Net (2) Liabilities Total 2019 (1) 31 at December Position FX Net Off balance sheet Assets Off balance sheet Liabilities 201 at 31 December Position FX Off BSH Net 31 201 at December Position Net FX Total 2018 as at 31 December Assets sheet Balance Balance sheet Liabilities as at 31 December 2018 Position Off FX BSH Net 31 201 at December Position Net FX Total (c) (i) Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 Lek of thousands (in 8.
99 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (c) Market Risk (continued) (ii) Exposure to Interest Rate risk The principal Interest Rate risk to which the Bank’s portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of the change in market interest rates. This risk arises primarily from securities portfolio, retail and corporate banking. Interest rate risk is managed principally through periodic monitoring of interest rate spreads between the Bank’s assets and liabilities and also preparing related scenario analysis on interest rates for decision making purposes. The method used to measure Interest Rate risk of the Bank’s assets and liabilities is based on the sensitivity analysis. The measurement system adopted by the Bank must ensure that the risk profile can be examined from two distinctive but complementary points of view: • the economic value perspective (EVE - Economic Value of Equity), that evaluates the impact of interest rates shocks (and their volatilities) on the present value of future cash flows; • the net interest income perspective (NII - Net Interest Income), that evaluates the impact of interest rates shocks (and their volatilities) on net interest income. The Bank’s financial assets and liabilities have mainly variable interest rate or have a re-pricing date of less than one year, except for Albanian Securities and for certain non-Albanian securities investment, which have coupon rates between 2 - 6.9% for USD denominated securities (2018: 1.3 - 6.9%) and between 0.3 - 5.8% for EUR denominated securities (2018: 0.4 - 5.8%) The Bank’s Regulation on Interest Rate Risk Management, “ISBA Guidelines on the governance of IRRBB" and “ISBA Rules on the measurement and control of IRRBB” have been approved by the ISBA Board of Directors on July 30th, 2019. These documents implement the latest regulatory provisions, recently defined in the Guidelines issued by the Parent Company on January 2019, based on the EBA regulation (EBA/GL/2018/02), and keeping the provisions of the Bank of Albania guideline “On managing interest rate risk in the banking book", approved as per decision No. 33, dated 30 April 2013. Interest rate risk generated by the Bank’s assets and liabilities, as measured through shift sensitivity of Fair Value analysis of ± 100 basis points, registered at the end of December 2019 a value of ALL -619 million (for +100 basis points) compared to the end of year 2018 ALL -659 million.
100 49 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (c) Market Risk (continued) (ii) Exposure to Interest Rate risk (continued) The table below shows the currency breakdown of the shift sensitivity for the year end 2019 and 2018.
Shift sensitivity Increase in basis Sensitivity of Sensitivity of Total 31 December 2019 points Profit & Loss Equity EUR +100 b.p. / -100 b.p. (214,693)/(143,471) (206,040)/138,733 (8,654)/4,738 USD +100 b.p. / -100 b.p. (99,150)/(108,806) (96,935)/106,652 (2,215)/2,155 ALL +100 b.p. / -100 b.p. (307,181)/307,609 (290,312)/291,657 (16,869)/15,952 Other (GBP & CHF) +100 b.p. / -100 b.p. 1,763/(1,804) 1,763/(1,804) 0/0
Shift sensitivity Sensitivity of Sensitivity of crease in basis points Total 31 December 2018 Profit & Loss Equity EUR +100 b.p. / -100 b.p. (225,240)/ 111,277 (216,998)/ 105,218 (8,242)/ 6,059 USD +100 b.p. / -100 b.p. (107,348)/ 118,124 (105,428)/ 116,178 (1,920)/ 1,946 ALL +100 b.p. / -100 b.p. (327,223)/ 332,664 (322,341)/ 327,540 (4,882)/ 5,125 Other (GBP & CHF) +100 b.p. / -100 b.p. 1,235/ (1,269) 1,235/(1,269) 0/ 0 The limits on shift sensitivity of Fair Value (EVE) for shock +100bp and the NII Sensitivity for shocks +/-50bp are part of the RAF limits for ISBA 2019. The NII sensitivity records the NII effects generated by the market rates movement on the renewal/re- pricing of the banking book. It quantifies the short-term impact on the net interest income of a parallel, instantaneous, permanent shock of ±50 basis points to the interest rate curve. This measure highlights the effect of variations in market rates on the interest margin generated by the portfolio that is being measured, excluding potential effects deriving from the new operations and future changes in the mix of assets and liabilities. The reference time horizon is typically limited to 1 year and according to the hypothesis that the institution is able to continue its activities ("going concern" approach). The Interest rate risk generated by the Bank’s assets and liabilities, as measured through shift sensitivity of Net Interest Income analysis of ± 50 basis points, registered at 31 December 2019 a value of Lek 258 million (for +50 basis points) and a value of Lek -260 million (for -50 basis points), compared to December 2018 Lek 218 million (for +50 basis points) and a value of Lek -269 million (for -50 basis points). The sight positions with customers in ALL and EUR are treated based on behavioral model for the NII sensitivity defining the customer interest rate in the long-term and including the behavioral features and delayed reaction to market interest rates (in the short-term) resulting from the model. The behavioral model is developed by ISP Financial and Market Risks Head Office Department, based on the ISBA historical data provided from the Local Risk structure. A different method used to measure Interest Rate risk is required by the Bank of Albania, which consists of quarterly monitoring of the interest rate risk exposure towards a parallel shock of ±200 basis points of the interest rate curve. For all the financial categories of assets and liabilities divided into either fixed or floating rate, their present value is calculated and is distributed in 14-time buckets. The total present value is then multiplied accordingly with the estimated modified duration of each time bucket. The limit for this exposure is 20% of the Bank’s regulatory capital. The Bank has been within the limit with the interest rate risk exposures at 31 December 2019 being 7.9% of the Bank’s regulatory capital (31 December 2018: 6.3%). The Bank has been within the limits in accordance with Bank of Albania regulation and the internal regulation during the year 2019.
101 50 Annual Report 2019 - Audited Financial Statements - - - - - by Total flows or or flows 5,711,559 (on demand) (on 57,967,716 22,833,312 27,520,206 65,999,022 24,777,735 (2,267,910) 180,031,815 (152,986,170) (155,254,080) ------bearing liabilities in - bearing. - n specific behaviors specific n 567,739 >5 years (200,977) 1,097,731 5,056,626 terest (200,977) 6,722,096 6,521,119 ------24,517 pricing takes place. 5 years 488,603 – - (312,444) 1,285,437 8,644,785 (796,400) 3 10,443,342 (10,927,298) . (11,239,742) , not considered in considered not , bearing assets and interest ------30,826 3 years 625,210 - 2,588,225 13,920,677 (6,073,294) 17,164,938 11,091,644 (6,073,294) oths m 18 - - - - - (71,417) 9,624,816 4,727,470 3,046,786 18 months 20,070,008 31,562,700 - 69,031,780 40,518,812 (28,441,551) 3 (28,512,968) 51 - - - - - d by management and adjusted as per adjusted below and d by management 773,965 3 months 5,694,239 6,667,894 2,609,430 - 32,865,605 (1,690,188) 0 48,611,133 33,342,479 (13,578,466) (15,268,654) ------O/N 74,407 , each, financial instrument is mapped to the repricing gap based on contractual undiscounted cash – financial assets and liabilities with both fixed and floating interest rates, as reported to Parent company and and company to Parent as reported rates, interest floating and fixed both with liabilities and assets financial rules on Interest rate risk as the difference between interest 146,340 (193,861) 15,477,295 12,360,484 28,058,526 (93,764,582) (93,958,443) (65,899,917) bearing - regulation ludes instruments where the Bank knows exactly when the maturity or next re ) (continued) Interest rateInterest type Fix Floating Fix Floating Fix Floating Fix Floating Fix Floating contractual inc The information is not reconcilable as it is as provide it reconcilable is not information The loans (advances to banks and advances to customers) and sight deposits (current accounts to customers) are positioned in the O/N the in positioned are customers) to accounts (current deposits sight and customers) to advances and banks to (advances loans , unless otherwise stated otherwise unless , 2019 includes instruments not amenable, whose residual life and/or interest rate have high levels of uncertainty that may depend o pricing date.pricing The gap is calculated according to the internal - re behavioral Financial Risk Management (continued) 31 December 31 December Assets banks to advances and Loans to advances and Loans customers Investment Securities assets financial Other financial assets Total Liabilities banks to Deposits to customersDue Other liabilities financial liabilities Total gap Reprising c) Market Risk (continued) Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 Lek of thousands (in 8. ( (ii) Exposure Interest to Rate risk The tables below summarize the Bank’s interest The customers, as the sight bucket, until the definition of behavioral coefficients. coefficients. of behavioral the definition until bucket, The reprising a given time bucket. Other financial assets/liabilities, capital and reserves, are items not included in the gap reprising Based on the management of Rate Interest risk management of the Bank. behavioral
102 Annual Report 2019 - Audited Financial Statements - - - - - Total 8,758,308 54,120,490 21,286,666 27,757,002 60,427,688 22,182,911 (2,771,687) 172,350,154 (147,395,556) (150,167,243) ------4,785 576,274 (686,539) 1,021,695 4,074,342 (686,539) 5,677,096 4,990,557 >5 years ------38,216 502,526 1,085,042 5 years 6,242,316 13,304,548 - (8,688,016) 14,930,332 (8,688,016) 3 ------3 - 47,359 636,721 (144,616) oths 3,615,549 9,618,471 9,336,156 years (4,437,328) m 13,918,100 (4,581,944) 18 ------5,255,447 3,459,693 4,058,005 20,142,929 23,145,054 18 months 56,061,128 24,788,459 - (31,272,669) 52 (31,272,669) 3 - - - - - 659,437 5,860,770 4,609,943 30,071,336 10,285,273 3 months (1,100,158) - 51,486,759 33,537,795 (16,848,806) 0 (17,948,964) ------37,782 O/N 18,793,707 11,445,250 (1,526,913) 30,276,739 (85,462,198) (86,989,111) (56,712,372) ) - (continued) Interest rateInterest type Fix Floating Fix Floating Fix Floating Fix Floating Fix Floating , unless otherwise stated otherwise unless , Financial Risk Management (continued) Rate risk Interest to Exposure 31 December 201 8 31 December Assets to advances and Loans banks to advances and Loans customers Investment Securities assets financial Other financial assets Total Liabilities banks to Deposits to customersDue Other liabilities financial liabilities Total gap Reprising Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 Lek of thousands (in 8. (c) Market Risk (continued) (ii)
103 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (d) Operational Risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, systems or external events. This definition includes: legal risk, or the risk of losses resulting from violations of law or regulations, from contractual or constructive liability or from other disputes; model risk, defined as the potential loss which can be suffered by an entity, resulting from decisions mainly based on the results of internal models, caused by errors occurred during their development, implementation or use; Compliance risk, defined as the risk to incur judicial or administrative penalties, relevant financial losses resulting from the violation of mandatory rules or self-regulation; ICT risk (Information and Communication Technology, or simply computer risk), defined as the risk to incur economic losses related to the use of information and communication technology. Strategic and reputational risks are excluded. The Bank’s Board of Directors has approved the guidelines on the overall operational risk management framework adopting a policy and an organizational process for measuring, managing and controlling operational risk. The Bank’s Regulation on Guideline for Operational Risk Management is fully in compliance with the Group Guidelines on Operational Risk Management issued on December 2014. The Bank’s Operational Risk Management Committee (hereinafter as ORCO) is responsible for the management of the operational risk of the Bank in terms of reviewing operational risk governance documentation and approving changes, preparing policies, standards and methodologies regarding operational risk management. One of the tools introduced for the management of operational risk is the definition of Operational Risk Key Indicators (KRIs). The final list of KRIs and thresholds was approved in ISBA Operational Risk Committee on October 2015. Since their approval, the Internal KRIs have been monitored and reported on quarterly bases in the ORCO and BoD meetings. The Internal KRIs are subject of an annual review process in order to ensure that they are aligned with the dynamic of the operational context and the significant risks that the Bank faces. Any amendment on KRIs policy will be submitted in ORCO and BoD for approval. Thresholds for Bank of Albania KRI-s are defined and integrated within “ISBA KRIs Policy”, approved in ISBA BOD 4 May 2018. The KRI-s are monitored on quarterly basis as per regulation BoA “On Operational Risk Management” in place, and reported in ORCO and BoD meetings. The Bank’s Risk Management Division is responsible for the identification, assessment, management and mitigation of operational risks, the verification of mitigation effectiveness and reporting to the Bank Senior Management and Group Risk Management with the aim of assessing the potential economic impact of particularly serious operational events. The Bank carries out an annual assessment campaign set up by Intesa Sanpaolo Group, Self-Diagnosis process, which consists on the operational risk identification and assessment linked to the activity of each single unit within a structure. The objectives of the Self Diagnosis process are to identify, measure, monitor, and mitigate operational risks. The Self Diagnosis process contributes to the spread of risk - control culture within the Bank. This process is composed of phases relative to the Assessment of the Business Environment, which determines the quality of each structure’s risk control profile through the analysis of the importance and the level of management of risk factors in the operating context and phases relative to Scenario Analysis, which determine the size of each structure’s risk profile by collecting estimated quantitative data from Business and Operational Units Responsible. The Bank has the same responsibilities towards the Bank of Albania, based on the regulation on management of operational risk, entered into force on January 2011. The Bank reports regularly on the key indicators and classifications of effective operational losses as per business lines according to the regulatory requirements.
104 53 Annual Report 2019 - Audited Financial Statements
Intesa Sanpaolo Bank Albania Sh.a. Notes to the financial statements for the year ended 31 December 2019 (in thousands of Lek, unless otherwise stated)
8. Financial Risk Management (continued) (e) Capital Management The Bank’s lead regulator, the Central Bank of Albania, sets and monitors capital requirements for the Bank. The Bank’s policy is to maintain the capital base within limits, capitalizing all activity earnings so as to sustain future development of the business recognizing the impact of the le