Annual Report 2018

ANNUAL REPORT 2018

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TABLE OF CONTENTS

CHIEF EXECUTIVE OFFICER STATEMENT 1 QEVERISJA E KORPORATËS 2 CORPORATION GOVERNANCE 3 TIRANA BANK MAIN INDICATORS A. RETAIL BANKING ACTIVITY B. SME BANKING C. CORPORATE BANKING DIVISION D. TREASURY DIVISION 4 E. IT AND ORGANIZATION F. RISK MANAGEMENT G. COMPLIANCE DEPARTMENT

CORPORATE SOCIAL RESPONSIBILITY 5 A. SOCIAL ACTIVITIES B. EDUCATION 6 HUMAN RESOURCES 7 TIRANA BANK COMMITTIES 8 ORGANISATIONAL STRUCTURE

9 FINANCIAL STATEMENTS A. FINANCIAL STATEMENTS CONTENT B. INDIPENDENT AUTHOR’S REPORT C. INCOME STATEMENT D. BALANCE SHEET E. STATEMENTS OF CHANGES IN EQUITY F. CASH FLOW STATEMENT G. NOTES TO THE FINANCIAL STATEMENTS

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CEO’s FOREWARD

During 2018, Tirana Bank successfully completed the process of shareholding structure change, in the framework of the local (and regional) market exit strategy of the traditional investor Piraeus Bank. Despite such lengthy process and special commitments in this regard, the bank has operated regularly with the aim of maintaining stability in relationships with clients, realigning the standard portfolio through a sound lending activity, as well as substantially reducing non-performing financial assets. The Bank continues to hold a strong capital and liquidity position.

The new shareholders (Balfin Group and Komercijalna Bank) have clearly set out their vision for expanding the Bank’s activity, as an important actor of the Albanian banking sector, to support and develop the local economy.

Tirana Bank’s strategic objective for 2019, likewise for the mid-term period, focuses on expanding activity and broadening client base, building on the adequate current branch network, stable liquidity situation, as well as the goodwill that the Bank enjoys in the market. We will take advantage of the development opportunities offered by the local market, for a cautious but dynamic approach towards expanding the credit portfolio, by referring to the segments of individuals and businesses in a balanced manner. Tirana Bank will continue investing in operational infrastructure and information technology systems modernization, in line with the best banking standards and practices. We aim for Tirana Bank to remain a systemic-important bank in the financial industry of Albania.

Dritan Mustafa CEO

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CORPORATION GOVERNANCE

Senior Management Bodies

The supreme body of Tirana Bank is the General Assembly of Shareholders, which elects the Bank’s Board of Directors as decision- making and supervisory body. The Bank’s Articles of Association stipulate the operation mode of its bodies and the management of the Bank. This document makes special mention of the composition of the Board of Directors as well as the obligations / duties of the members thereof, according to Law 9901/14.04.2008 “On entrepreneurs and commercial Companies” and Law 9662/18.12.2006 “On banks in Republic of Albania”.

Board of Directors

The Board of Directors consists of an odd number, five (5) minimum and nine (9) maximum, executive and non-executive members. Executive members shall be those engaged in the daily management issues of the Bank; non-executive member shall be those entrusted with the promotion of corporate affairs. The total number of executive members shall not constitute the majority of the total number of Board members. The majority of Board members shall be independent. The capacity of the Board members, i.e. executive or non-executive shall be defined by the Board of the Directors. If a member is provisionally elected by the Board, until the next general Assembly meeting, to fill in for a resigned, deceased or otherwise forfeited independent member, such elected member shall also be independent.

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Board of Directors

Constantinos Loizides Chairman Bedri Collaku V/Chairman Dritan Mustafa Member Agkop Mardikian Member Christos Bougiouklis Member

Executive Committee

Dritan Mustafa Chief Executive Officer Konstantinos Tsigaras Chief Financial Officer Eralda Tafaj Gurga Chief Operations Officer Elona Gjipali Head of Recovery Manjola Capo Head of Credit Division Eranda Shehu Chief Retail Officer Grigorios Michailidis Chief Business Officer

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ECONOMIC OUTLOOK

Global Economy

The global economy started 2018 with strong, synchronized lowered its economic growth forecast for the UK in 2019 to 1.2%, growth. But the global activity slowed notably in the second half which will mark the slowest annual growth since 2009. of the year, reflecting a confluence of factors affecting major The economic growth in Europe is expected to slow down during economies. 2019, tied to poor economic performance of several major Global growth, which peaked at close 4% in 2017, softened to economies as per slower car production in Germany, social 3.6% in 2018 and is projected to decline further to 3.3% in 2019. tensions in France and strong uncertainty on budget policies in The US economy accelerated, as a result of fiscal stimulus Italy. enacted early in 2018, while the economies of Eurozone, the UK and China began to weaken. According to IMF, the global economy is expected to grow at The US economy growth in 2018 was the strongest since 2015 3.5% in 2019 and 3.6% in 2020. Global growth has been revised and better than 2.2% logged in 2017. Following the rebounded downward because of negative effects of tariff increases US economy, increasing inflation and almost full employment, enacted in the US and China, and softer momentum in Europe in Fed has increased the funding rate 4 times during 2018, by the second half of 2018. 25bps respectively to the range of 2.25%-2.50%. For 2019, the FOMC project the inflation rate will be around the Fed’s target of 2%, the unemployment rate at 3.7% while the economic growth will slow down to 2.1%. The projected slowdown in 2019 is a side effect of the trade war, a key component of Trump’s economic policies. China’s economy grew by 6.6% in 2018, the lowest pace in 28 years. For 2019, China has set a target of 6-6.5%. Chinas authority had already announced stimulus measures. These include a series of tax cut to boost small businesses and consumption. The European Union’s gross domestic product growth performance slowed down in 2018 compared with the previous year. EU 28 posted 1.9% economic growth in 2018 as the euro area saw 1.8% GDP growth. Traditionally one of the euro zone’s strongest economies, Germany experienced an economic slowdown in 2018 that is still ongoing due to “weakening export growth and growing consumer restraint”. The country had a real GDP growth rate of 1.5% in 2018. The economy of Italy performed poorly during 2018 as the concerns about sovereign and financial risks have weighed down on domestic demand. French economic growth hit 1.5% in 2018, below the government’s original forecast of 1.7% and well below 2017, decade high growth rate of 2.3%. The economic growth in the UK dropped to its lowest since 2012 at 1.4%, down from 1.8% in 2017. Apart from a decrease in the country’s exports coming from global weakness, Brexit related uncertainty and the potential for a no deal exit from the European Union is hurting the UK economy. The central bank

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Banking Sector

Positive developments in real economy and in the banking sector have contributed in the financial strengthening. Banking sector’s indicators of solvency, liquidity and reserves for specific risks have been within the regulatory level. The ratio on non- performing loans to total loans resulted to 11.1% at the end of December 2018, following a stable downtrend from years now.

Albanian Economy Credit to the private sector showed signs of recovery excluding the effects arising from the cleaning of balance sheets from The Albanian economy has followed a growth trajectory in 2018. both non-performing loans and the effect of the exchange The economy is estimated to have expanded by 4.06% in 2018 rate. Excluding these two effects, credit to the private sector from 3.84% in 2017. Currently, Albania is enjoying one of the recorded 5.9% annual growth at the end of 2018. Credit growth fastest economic growth rates in the region. is supported mainly by the expansion of credit in local currency. The economic growth is driven mainly by the increase in the private consumption, investments and exports and from the The interest rates for deposit and loans in local currency remain increase in the electricity production as per favored weather near historic low in line with the accommodative monetary conditions. From the other side, the fiscal stimulus in the policy followed by the Central Bank. economy has been lower than expected due to the decrease in the budget deficit at 1.6% of GDP from 2.0% of GDP projected. Total deposits in the banking system increased by 1.1% in The average inflation rate resulted at the same levels of the annual average terms in the last quarter of 2018. The annual previous year, 2.0% for 2018, under the Central Bank official growth of deposits by currency is by an average of 1.0% in local target. The monetary policy followed by the Central Bank currency and 1.2% in foreign currency. remained accommodative during 2018. In the second half of the year, Central Bank increased the monetary stimulus, cutting Considering the low interest rate environment, the time structure the repo rate by 25p.p to 1.0% in June 2018, aiming to give of deposits continues to reflect shifting in two directions: an additional stimulus to the aggregate demand through the towards term deposits and in time deposits with maturity of over reduction of the financing cost of consumption and investments two years. By the end of December 18, term deposits accounted and building up domestic pressure on inflation. for about 44% of the total deposit, while time deposits with Albanian economy is expected to grow robustly in 2019, based maturity of over two years accounted for about 11.8%. on a positive outlook of domestic demand, supported by an Source: Reuters, IMF, Bank of Albania. improvement in the labor market and private credit growth. Moreover, the electricity production should continue to support the exports. However, unfavorable weather conditions may threaten the sector, while the slowdown of economic growth in the Eurozone could also affect negatively the economic outlook.

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TIRANA BANK MAIN INDICATORS

Amounts in 000 ALL

Assets 72.964.854

Net Loans 20.845.099

Deposits 57.164.880

CAR ratio 29,64 %

Branches 37

Employees 430

Customers

Loan/ Deposit Ratio 42.9%

Cost/Income Ratio 86,65 %

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Total Assets (000 ALL) 101,708,499 101,379,321 97,485,381 81,461,806 81,364,754 77,843,781 72,964,854

2012 2013 2014 2015 2016 2017 2018

Loans to Customer (000 ALL)

50,659,319 39,252,337 38,700,399 28,796,615 25,273,650 24,037,231 20,845,099 2012 2013 2014 2015 2016 2017 2018

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Employees 466 466 448 439 432 430 422

2012 2013 2014 2015 2016 2017 2018

Customer Deposits (000 ALL)

78,648,027 78,083,284 72,869,393 63,585,400 63,746,983 60,957,146 57,164,880

2012 2013 2014 2015 2016 2017 2018

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Profit or Loss before Tax(000 ALL)

2012 2013 2014 2015 2016 2017 2018 69,379 -197,530 -1,631,469 -520,405 -757,241 -3,315,665 -1,302,482 Branches Network 56 56 47

39 39 39 37

2012 2013 2014 2015 2016 2017 2018

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Banking services for individuals 2018 has been a year of major changes for Tirana Bank, which had a major impact RETAIL on the bank’s activity as a whole and especially retail activity. Nonetheless, our Bank successfully managed once again to firmly retain the trust and sustainability of its BANKING customers. Being a strong actor in the Albanian banking market, Tirana Bank as continues to successfully serve its customers for the 22nd year in a row with commitment and ACTIVITY dedication, gradually improving the service quality with the aim of strengthening a productive and long-term relationship. During this year characterized by dynamic developments, great attention has been paid to the handling and retention of the existing customer base, increasing customer satisfaction by providing a full range of banking products with rapid processes and favorable terms and prices.

The bank credit process for 2018, on consumer and mortgage products, was oriented towards the lending quality and optimization of the existing portfolio. Therefore, we have actively participated in three important promotional campaigns, two of which were dedicated to mortgage loans, whilst the other to consumer loans. The main objectives of retail lending are: • Increase of the retail performing portfolio; • Continuous monitoring and management of non-performing portfolio, with the purpose of limiting and recovering, whilst aiming and working hard to also make this part of the portfolio a performing one; • Greater outreach of our current customer base, of both payroll and standard customer;

In terms of deposits, progress for 2018 has been in line with the bank’s strategy, maintaining a high level liquidity, above the ratio required by the Bank of Albania. Nonetheless, considering the Bank sale process, a particular focus was given on building immediate initiatives to impede the deposit flows from retail customers. As a consequence, not only was this phenomenon tackled during the Q3-2018 period, but in the last quarter of 2018, the deposits portfolio balance for Retail Customers increased in both the in LEK in EUR currencies, recovering to some extent the double recorded losses during the first half of 2018.

Cards marked a stable performance, by simultaneously maintaining their position in the market.

The main objectives in line with the Retail Division’s strategy were: 1.portfolio activation and cards use promotion, thus encouraging the customer to perform their daily-purchases-related transactions especially within the country with their cards. 2.outreach to our payroll and standard customers 3.careful management of non-performing portfolio for credit cardsTirana Bank continues to be in a great competitive advantage in the market with the Debit Card “On the Spot”, considering it a significant service provided to our customers by offering the debit card immediately when the client applies in the branch. Additionally, in line with the recent technological novelties, the Contactless Debit Card has been successfully launched for the first time in the market, the additional safety elements of which enable clients to make faster payments in any sale point..

The Winbank electronic platform Tirana Bank continues to faithfully hold its promise for continuously enriching internet services, by providing new solutions to its customers in making the banking system more appropriate, whilst providing them with the opportunity to save time and money in a secure environment. The Winbank electronic platform provides online access to banking services and balance check 24 hours a day, 7 days a week

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During this year, the Bank’s main objective was to maintain a stable SME portfolio, given that the Bank during the first 6 months focused on the sales process, whereas during the second 6 months focused on the finalization of this process. This year’s SMALL AND focus was to finance current clients and support new plans for these clients. During this year, we stood by our clients professionally by fulfilling their requirements, and as a result none of our clients left to other banks. The total amount of disbursements for MEDIUM 2018 was 6 million Euros, which resulted in a portfolio increase with 20 new clients. ENTERPRISES Despite the above, the SME Department has continuously been in contact with new businesses by always having updated information on the market and its demands. (SME) Such prudent focus on managing SME clients has expanded and yielded results in cross-sales of bank products.

The SME continues to be focused on potential industry sectors such as agrotourism, manufacture and trade, sectors which have an important impact on the country’s employment and economic growth. Creating and maintaining long-term relationships with our clients remains our daily focus.

Tirana Bank has been and continues to be a trusted principal bank for corporate clients providing customized, effective solutions to each problem by virtue of its comprehensive service approach and understanding them. CORPORATE 2018 was a stagnation year for the business activity of our bank, due to several decisions that affected the Piraeus Group’s business shrinkage. Nonetheless, Tirana BANKING Bank continued to work on reactivating and reassessing corporate clients by paying close attention in strengthening relationships with them. We have supported them DIVISION through new ways of financing, offering new competitive services and enriching relationships in all aspects. Our focus for 2018 was on the administration and good service to our customers. Thanks to the experienced staff and the spirit of team work, the Corporate Banking System met a considerable part of the bank’s objectives in this sector.

Cooperation between corporate advisers and product specialists enables Tirana Bank to become a trustworthy partner for its clients.

The total sum for new disbursements in 2018 reached 9 million Euros, being in line with the bank’s strategy, and with the dynamics of expected shareholding structure changes.

In addition to competitive and attractive financing terms, our goal was to provide full support to our customers in all segments and cycles of their businesses by continuously improving service quality and products and services with new benefits operating as per the required market conditions.

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One of the main functions of the Treasury Division is to control and manage the liquidity surplus and to ensure that all bank business lines have access to the liquidity they TREASURY may need for their business activity. In this way, this division ensures that the bank remains financially secure, stable and capable of functioning efficiently. Among other functions we can mention: maximizing profits at a predetermined level, and safeguard- DIVISION ing from the risk arising from interest rate movements and foreign exchange rates. 2018 was marked by a very low level of interest rates, based on the Central Bank’s accommodative monetary policy. The Treasury and Financial Markets Division has participated actively in management of deposit balances aiming for stability in funds and keeping their cost at a low level. Being the main contributor to ALCO and the main pricing center for bank activities, the Treasury and Financial Markets Division continuously monitors and analyzes the world’s largest economies, macroeconomic trends, Bank of Albania monetary policies and indexes and assesses the potential impacts of the latest developments on our domestic economy, particularly on the banking sector. The Treasury and Financial Markets Division’s activities focus on financial and investment products provision, as well as product-related consultancy. Mediation in securities markets has been performed on an ongoing basis, adding value to bank activities and further enhancing customer relations with the bank. Treasury activities continued to provide significant benefits to the bank and on December 31, 2018, treasury transactions accounted for 65% of total bank assets. Treasury and Financial Markets Division is an important player in the foreign exchange market and financial markets as a result of its trading and sales activity. Foreign exchange operations have continued to be beneficial to the bank, reflecting swearing and careful sales. All treasury actions have been performed in compliance with the bank’s policies and with regulatory requirements.

In the context of harmonizing IT & Organization strategy with Bank Business Strategy, and in accordance with regulatory requirements, the Information Technology Depart- TECHNOLOGY ment has been focused on the following projects and activities: OPERATION & • Improvement of the IT operations reliability and quality of the Bank with the utilization INFORMATION & of cutting edge technology TECHNOLOGICAL • Institutional obligations as per regulatory changes. • Review and upgrade procedures and operations. ORGANIZATION • Upgrade and further Integration of the information systems INFRASTRUCTURES • Mitigation of Risks in IT systems infrastructure

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The drivers for the development and improvement of the information systems for 2018, have been the optimization as well as increasing the reliability on IT infrastructures solutions, procedures and systems that is demanded by the constantly changing DEVELOPMENT & business, economic and technological environment with the main goal of achieving economies of scale, increased security, functionality, integrated management from the end user and finally increase of the competitiveness of the Bank. IMPROVEMENT Migration to new ATMs’ host processor In 2018, due to the change of shareholders of the Bank and other projects requirements, OF IT SYSTEMS Tirana Bank has migrated the ATMs’ processor from Piraeus’s host to Euronet Worlwide processor. This change will lead to better service and new opportunities for future Alternative Channels of the Bank. Upgrades and system’s changes implemented in the banking systems in order to comply with regulatory requirements As per new regulatory directions the bank has the need to do several development and changes in the Money Laundry systems, Credit Register and Deposit assurance system.

New services are presented to the customers. As per request from businesses, are implemented several online services, where customers can pay utilities bills in real time.

Upgrades and in the banking systems to facilitate Bank Business needs Following the business needs and technological changes, in 2018 the Bank has performed several upgrades like ”Upgrade of In-House Application platform”, “Upgrade of Retail Loan Origination System”, Enhancement of the Core Banking System, etc.

Consistent to the goal on one hand of the constant improvement of availability and the efficiency of the Technological Infrastructures of the Bank and on the other hand OPERATION & of effective and secure management of their operation, a series of interventions were made, the most important of which follow: Upgrade of Core communication infrastructure and improvement of DR site and TECHNOLOGICAL solution The main scope of this project has been the upgrade of bank Core communication INFRASTRUCTURES infrastructure in Primary and Disaster sites for better performance & higher speed.

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The Board of Directors and Senior Management recognize that the Bank is exposed RISK to different types of risks deriving from its operations. Under the current economic, management practices aiming to mitigate the risks while maximizing returns for the MANAGEMENT shareholders.

strategic objectives and to ensure quality returns to its shareholders, on an on-going basis.

The mission of the Risk Management Department function is to: “Create added value for shareholders by utilizing risk management best practices

compliance with regulatory requirements”.

The Bank places particular emphasis on the effective monitoring and management

operations.

The BoD is responsible for developing and supervising the implementation of the risk management framework. Risk management framework is ensured as well through a number of specialized committees. Risk Management Department is administratively independent from the other units of the Bank. The Bank has established detailed processes and adequate risk control mechanisms for identifying/managing/ monitoring/reporting risks. This ensures independence between risk taking, risk management and control functions. The existing organizational structure ensures separation of responsibility and aims to prevent instances that could lead to conflict of interest.

with strong involvement of top management. The Bank aims to maintain a culture of continuous improvement of processes, policies, models and tools for measuring and monitoring risk exposures.

Through the Risk & Capital Strategy, the principles of an integrated risk management framework are aimed to achieve the Bank’s strategic and business objectives as determined by the BoD, without exceeding the risk taking ability. The risk management framework is constantly evaluated and evolving taking into account the current economic and market dynamics, the regulatory requirements and international best practices. Its effectiveness is assessed through:

objectives;

Risk Management Department consists of the following risk lines/units: • Credit risk management unit • Market, liquidity and operational risk unit • Capital management unit • Information security unit The department is subject to the independent audit of the Internal Audit review in terms of the adequacy and effectiveness of the applied risk management processes.

The purpose of the Risk Management Governance Framework is to promote an effective and prudent management of all risks, ensuring appropriate allocation of responsibilities and accountability based on the risk origination aiming at aligning the risk taking process with the Bank’s risk appetite. A robust communication of risk information is essential across the Bank with focus on maintaining risk awareness at all levels and in particular the BoD and Senior Management levels. For the implementation of the adopted principles, the risk management governance

management operations in four lines of defense, while the second one addresses the hierarchy levels in which the abovementioned activities take place.

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risk. • The second line of defense is responsible for the ex-ante risk management, since it is engaged in risk management activities that take place prior to risk taking (credit scoring, new product risk assessment). • The third line of defense is responsible both for the ex-ante monitoring (e.g. participation in evaluation of products) as well as the ex-post control and monitoring of risks. • The fourth line of defense is responsible for the independent review of the overall risk management framework of the Bank. The fourth line checks the adequacy and defense.

The second governance dimension constitutes of three levels: strategy, tactic, and operation. • Strategy level – Includes the risk management functions that are executed at a BoD level. • Tactics level – Includes the risk management functions that are executed at a high level of authority both by individuals as well as specialized committees. • Operations level – Includes the risk management functions that are executed in various units of the Bank.

Throughout 2017, Tirana Bank has continued paying particular attention to the risks to which the banking system is exposed. In this regard, it has further strengthened the organizational structure and the control functions, aiming at enhancing its risk management practices, without harming its business operations. The main focus continued to be the improvement of the quality of assets, especially the recoverability of the non-performing portfolio.

Credit Risk effective monitoring and management are one of the Management’s priorities. The implementation of the credit policy, which describes the Bank’s credit risk management principles, ensures that credit risk is treated in a uniform and effective manner and the credit risk practices with respect to the assessment methods and processes for

• The Bank seeks to control credit risk through stringent credit criteria which

(second way out) and the evaluation of the customer. The process is supported by the use of internal rating systems with strong discriminating ability and systems for credit risk measurement and calculation of capital requirements. • The Bank is focusing on deleveraging in sectors with a poor outlook and rebalancing its portfolio towards key sectors with better growth prospects. monitoring and countervailing measures. • The Bank seeks to effectively manage its current NPL/NPE levels through the Recovery Banking Division by reducing the rate of NPL/NPE formation and ultimately lowering the absolute level of NPLs/NPEs. regularly updated and cover all Bank activities in order to mitigate the credit risk. All lending decisions are made in compliance with the Credit Policy & Practice Manual of Piraeus Bank. • The Group aims at the direct and centralized monitoring of all credit risk exposures at debtor portfolio level as well as connected borrowers level. • The Bank has minimal appetite for FX lending risk, ensured through the implementation of appropriate credit policy statements. In general, lending in foreign currency is acceptable only when hedging is apparent.

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Liquidity Risk

Liquidity risk is the risk of not being able to fulfill the financial obligations when they come due. The Bank recognizes liquidity risk as one of the major risk types that may have a significant impact on the capacity of the Bank to fund its commercial operations and to meet its financial obligations. The management of liquidity risk is a key objective of the Bank and involves a broad set of activities spanning from the close monitoring of its liquidity position to the management of its funding sources and the uses of funds, in a way that does not compromise the ability of the Bank to meet its obligations.

The Bank has adopted the best practices and regulatory/supervisory guidelines in depicting the Bank’s liquidity position and the potential effects of adverse changes arising from the maturity (and non-renewal) of its funding sources as well as potential reduction in the value of its liquid assets. It exercises close monitoring of the cost of liquidity and it has ensured compliance with the regulatory liquidity risk framework while maintaining and regularly reviewing methodologies, policies, procedures and systems so as to effectively manage liquidity risk.

The bank has maintained under careful monitoring its liquidity levels ensuring they remain above the regulatory minimums.

Deposits from customers are considered well diversified with 89% being deposits from retail customers while deposits decrease on annual basis is assessed at ~3%. During the last years, there has been a clear trend of shifting from time to savings, noticed as well in the market. Deposits in LCY have shown a greater decrease vs. those in FCY, a change highly impacted by the competition of Government Securities considering the very low environment of interest rates. Key liquidity indicators remain above the minimal regulatory ones and show for the abundant liquidity.

December December 2017 2018 Loans / Deposits 45% 43% Net Loans / Deposits 33% 33% Liquid Assets / 47% 53% Short Term Liabilities – Total Liquid Assets / 54% 49% Short Term Liabilities - Total FCY Liquid Assets / 40% 57% Short Term Liabilities – Total LCY

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Market Risk

Market risk is defined as the risk of incurring losses due to adverse changes in the level or the volatility of interest rates, currency exchange rates, equity prices and commodity prices.

The Bank establishes and maintains adequate measurement methods in order to monitor and control market risk, including interest rate risk in the banking book. Tirana Bank applies an interest rate risk management policy and adopts risk assessment techniques based on the Interest Rate Gap Analysis. It assesses interest rate risk through “Earnings-at-Risk” measure, which expresses the negative impact on projected annual interest rate over a specified period caused by a change in interest rates across all maturities and currencies.

In addition, it assesses interest rate risk through the expected change in the Net Present Value of Assets and Liabilities caused by a change in interest rates by 1 basic point.

December December 2017 2016 Net FX Open position / Regulatory Capital 5.6% 1.57% Exposure to IRR in the Banking Book / 7.5% 2% Regulatory Capital Balance Sheet IRR Exposure (PV01) 4.4 K EUR 26 K EUR Earning at Risk 1.694 KEUR 883K EUR

Operational Risk

Operational risk has received special attention, through reviewing of the Bank’s operations, aiming at identifying possible improvements for purpose of reducing operational losses and other negative impacts (being those reputational, regulatory, etc).

Careful monitoring of the operational losses, key risk indicators and annual performance of the risk control self assessment exercise remained the main sources of operational risk management framework. Tirana Bank wishes to avoid operational risk events/losses which are due to the inadequacy and ineffectiveness of the internal control system (internal control environment) or in non-compliance with the principles and objectives of this system.

It wishes to completely avoid losses generated from internal fraud as well as completely avoid events with significant negative impact on its reputation and corporate image.

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Capital Adequacy

The Bank recognizes the importance of maintaining a strong capital base against risks undertaken. It has retained a sound capital base, capable to support the Bank’s business/strategic plan/s and safeguard the ability to continue its operations smoothly. Capital requirements are calculated against all material types of risks that the Bank undertakes, in full compliance with all applicable regulatory and supervisory requirements. Capital adequacy ratio has exceeded the minimum regulatory limit, closing 2017 at the level of 29.6% vs the minimum regulatory level of 15%, ensuring therefore the confidence of depositors and its sufficient armor against the challenges of the current economic conditions.

December 2017 December 2018

Capital Adequacy Ratio 21.2% 29.6% Regulatory capital (in Mio €) 62 75 RWA (in Mio €) 291 253 Of which: Credit Risk 229 217 Market Risk 0 0 Operational Risk 37 36 Other 24 0

The Bank aims to maintain adequate infrastructure, policies, processes and methodologies to support and meet the supervisory and regulatory compliance needs regarding capital management.

Information Security

A risk management framework, aiming at mitigation of ICT and cyber risks, has been developed and documented by the Information Security Unit. A Cyber Security Awareness Program, addressed to all personnel, aiming at enhancing the risk culture in terms of Cyber Security and IT related risks. The Bank has established a framework of policies and procedures for mitigating the risk arising from the use of risk assessment models, through review, challenge, training and validation processes. Information security has been in the focus during the year and a number of projects have increased such security. Continuous awareness on the topic is considered of ultimate importance.

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Compliance’s role is to respect all banking and financial regulations: legal and regulatory provisions, professional and ethical standards, as well as protect client s’ interests and Tirana Bank‘s reputation. REGULATORY The role of Tirana Bank’s Compliance function is to define and implement rules to prevent non-compliance risk, including the risks associated with money laundering COMPLIANCE and the financing of terrorism, the violation of embargoes, conflicts of interest and the personal data protection of customers and employees. All these initiatives help reduce reputational risk. DEPARTMENT The Compliance Department ensures that effective systems are in place to achieve compliance. To this end, the compliance function: · advises operating staff by giving its opinion on transactions when such advice is requested; · is part of the product marketing process, from the design phase to the distribution phase, and issues compliance notices; · together with Legal and Human Resources ensures that conflicts of interest are identified in accordance with internal policy on conflict of interest as well as the local legal framework; · ensures that employees are trained in compliance issues; · ensures that customer protection is effective at every stage in the relationship between the bank and its customers, from the provision of pre-contractual information, the subsequent giving of advice, and during the life and final termination of the contract. In order to achieve compliance within Tirana Bank the Compliance function uses the following tools and resources: · the inclusion of compliance standards in bank’s procedures; · periodic reporting on risk and compliance activities, enabling implementation of compliance systems within the Bank; · AML software tools, which include customer profiling and account monitoring tools to detect unusual or suspicious transactions and tools to monitor international fund transfers for enforcement of asset freezes and embargoes; Tirana Bank has also enhanced its system to improve the quality of the know-your- customer (KYC) data that it collects, both at the beginning of and throughout the business relationship. Customer identification checks are a first filter at the beginning of any relationship. This relies on knowledge of our customers and beneficial owners. We carry out suitable and risk-appropriate oversight throughout the relationship. Bank’s employees are assisted in this by AML software for profiling customers and detecting unusual transactions. Based on our annual risk assessment and regulatory changes, we are continually strengthening our overall AML/CFT system.

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CORPORATE SOCIAL RESPONSIBILITY

• Tirana Bank continues to support the SOS Children’s Village

Any child needs a family to care and show love to them. In this framework, Tirana Bank SOCIAL has continued to support SOS Families, which provide a sustainable, safe and loving care in a family environment to children who have lost their parents or who cannot live ACTIVITIES with their biological family. Showing our continuous commitment to social issues, and our willingness to provide assistance to solving current social problems, Tirana Bank has committed itself to the “adoption” of three children from the SOS Village. The sponsoring of such children’s lifestyle is a long-term cooperation, relying on our company’s continuous support to provide tailored care and promote development, education, health care, and social, sports and entertainment activities for such children.

• Food aid baskets for families in need

In the framework of “World Hunger Day”, Tirana Bank in cooperation with Spar Albania and with the support of Albanian Red Cross, made possible the preparation of 100 baskets containing basic food for families in need of the Tirana area. Food was distributed at the Red Cross branch in Tirana. Mrs. Xhulieta Muçollari, director of this branch, in her speech thanked Tirana Bank for the aid provided throughout the years on these sensitive cases, thanking Spar Albania as well for their cooperation. With the good will to stay close to and alleviate to some extent the difficult situation of these families, our contribution aims at no one feeling excluded.

• Planting trees at Kurbin Municipality

With the good will to contribute to increasing vegetation in the area of Kurbin, Tirana Bank joined the Municipality’s initiative by supporting the planting of 60 decorative trees. This initiative is an effective way to help clean up the city air, lowering pollution and increasing life quality, by helping the creation of a healthier environment. Improving environment and life quality remains an important goal for Tirana Bank. Trees represent not only the desire to live in a better environment, but also the courage to envision a green future for the entire community.

• Blood Donation

For several years now, Tirana Bank staff has established the blood donation practice, considering its vital importance for the lives of hundreds of people Tirana Bank staff has established the blood donation practice, considering its vital importance for the lives of hundreds of people. Similar to previous years, the activity was organized not only in the premises of the Bank’s Headquarters, but also in all the Bank’s branches. Through continuous communication, Tirana Bank aimed to raise the awareness by inviting family members, customers and partners to participate in this humanitarian act. 24 ANNUAL REPORT 2018

• Children’s Day All children should undoubtedly have fun and be happy. They deserve to be happy every day of the year, but on some marked days they are given special attention than the rest. The 20th of May is World Orphan’s Day while the 1st of June is Children’s Day. Aiming to bring about more laughter, Tirana Bank has supported the orphaned children in the community. Tirana Bank in cooperation with the Albanian Red Cross helped organize a festive day, during which children enjoyed a theatrical puppet show at the Metropolitan Theater and also received gifts specially prepared for them. The future shall be brighter, for they are the future!

• Tirana Bank supports the organizing of the European Youth Parliament For the 2nd year in a row, the European Youth Parliament was held in Albania. This year, Tirana Bank was the main supporter of this event, supporting the youth from any high school in Albania to participate in the Tirana 2018 conference, held on 16-17 February. Education This event counted around 90 participants, 30 of whom were peer trainers, organizers, photographers, and the international jury. This event is organized by youth for youth, inviting from time to time specialists from various fields in support of the debate and information that is required for the topics presented for discussion in the conference. The EYP is a non-profit organization, established as a platform in 40 countries, having as a main purpose to bring the country in which it operates closer to EU accession, but above all it aims in promoting civic culture, understanding, equality and cooperation through political debate. Topics vary according to the main current disputes of the European Union. Topics such as: Security and Protection, Economy, Member States Development, Human rights, In- ternational Relations, Internal Affairs and so on. By supporting this activity, Tirana Bank wishes to encourage youth inclusion in the socio-political environment, having the utmost confidence that their commitment will help the future prosperity of our company.

25 ANNUAL REPORT 2018

HUMAN RESOURCES

HUMAN RESOURCES MANAGEMENT

HUMAN RESOURCES DEPARTMENT For Tirana Bank human capital is the key factor in achieving the Distribution by Generation bank’s strategic goals and objectives. The bank’s philosophy is excellent staffing according to business needs and creation of strong relations with employees.

Moral integrity, team spirit, professional skills, trust, devotion and acceptance of diversity are the main compounds of our employees.

Below, you will find some highlights regarding workforce:

• Number of employees at the end of 2018: 430 • Distribution by Gender Hierarchy • Distribution by Generation

Y Generation (22-35) X Generation (36-50) 450 400 Baby Boomers (over 50) 350 300 • Average age of the Bank’s employees is 38.4 years. 250 • Average length of service 7.7 years. 200 150 100 50

0 MALE FEMALE TOTAL

neIn percentagepërqindje 26% 74% Activefuqia workforce 112 318 430

26 ANNUAL REPORT 2018

RECRUITMENT

Our recruitment process aims at selecting the most qualified, experienced and high integrity personnel and this is achieved through a set of standard tools, such as job simulation exercises, competency test and a structured interview by an interview panel.

Although, our staffing needs during 2018 have been covered by new employees (61 new hires), our internal candidates, as a result of their good performance and personal development, are our main potential to fill in our job vacancies. In this regard, we promote our internal staff by establishing a career development with the aim of rewarding our staff.

Filled through internal recruitment

Filled through external recruitment

0 10 20 30 40 50 60 70

INTERNSHIPS

Even during 2018 Tirana Bank has offered University students of the country or from universities abroad, internships, which provides growth and learning opportunities to students. We designed a working program that fits the needs and studies of the intern and we also give the opportunity, when this is applicable, to be part of our future staff.

27 ANNUAL REPORT 2018

EMPLOYEES’ HUMAN RESOURCES TRAININGS & COMMUNICATION DEVELOPMENT PHILOSOPHY

Tirana Bank consistently invests in the development and Tirana Bank recognizes the vital importance of internal improvement of its employees’ competencies and skills, by communication, as it promotes open, two-way communication creating a learning and development environment, aiming to between Management and employees, it creates a sense of bring out the full potential of its people. security, dignity and collaboration, it reduces any possible Training & development programs are a key investment for our tensions and achieves greater and more effective dissemination people and for our business. of knowledge and information – useful for developing new products and services for all levels. Below you will find some training data:

• Training man hours distinguished by gender: total 4557

• Allocation of training hours into Categories

Allocation of Training Man Hours into Categories

Banking & Business

People Skills

Leadership Developement

Workplace Wellbeing

28 ANNUAL REPORT 2018

A SAFE WORK ENVIRONMENT

Tirana Bank complies with the legislative regulations regarding The remuneration policy is in accordance with the Bank’s employees’ health and safety. Fully respecting its legal business strategy and supports its performance-driven obligations, and showing particular sensitivity to employees’ culture, which aligns the organization’s goals with those physical health, the Bank takes care to provide a modern, healthy of the interested parties, employees, management and and safe workplace. shareholders. Tirana Bank places special emphases to the wellbeing of its employees. In addition to legal requirements, the Bank provides a Private Health Insurance Plan for all its employees, fully The remuneration-defining procedures are clear, recorded covered by the bank, the highest private health insurance plan and with internal transparency. on average per employee compared to the banking sector in Albania. The Remuneration Policy is based on the following principles: In addition, Tirana Bank is offering trainings on annual basis to its employees, related to fire protection and safety, as well • Maximization of performance as first aid, which equip the staff with skills such as: rescue operations, first aid provision, turning off fire, guide evacuation through certain actions etc. • Talent attraction and retention

• Alignment of remuneration and rewards with profitabili- ty, risk, capital adequacy and sustainable growth.

• Compliance with the regulatory framework REWARDING • Internal transparency • Deterring from excessive risk-taking HUMAN RESOURCES

Tirana Bank offers to its employees (new or existing) a competitive remuneration package, in order to attract highly motivated employees to its team and to retrain existing ones.

A remuneration policy is in place, as an integral part of the Bank’s coorporate governance, aimed at deterring from excessive risk-taking and at continually strengthening the Bank’s values and long-term interests.

29 ANNUAL REPORT 2018

Remuneration forms and components of the Governing Board and executive directors The Governing Board is composed of the chairperson and four members. Three of these members are independent. The independent members of the Governing Board receive a fixed annual remuneration for this position and a fixed remuneration for each presence in a Board meeting. The other board members are not paid for their positions on the Governing Board; instead they are paid for other functions which they perform in the Bank.

The annual aggregate payment amount for Governing Board members is shown in the table below:

Governing Board

The total aggregate amount of Immediate/for the For past periods payments and remuneration for the current period (in ALL) current fiscal year

Unchangeable components of 2,214,382 remuneration Cash/bonus n/a n/a Shares n/a Other n/a Changeable components of remuneration Cash/bonus n/a Shares n/a n/a Other n/a

30 ANNUAL REPORT 2018

The annual aggregate payment amount for Executive Directors is shown in the table below:

Executive Directors

The total aggregate amount of Immediate/for the For past periods payments and remuneration for the current period (in ALL) current fiscal year

Unchangeable components of 52,478,577 remuneration Cash/bonus n/a n/a Shares n/a Other n/a Changeable components of remuneration Cash/bonus n/a Shares n/a n/a Other n/a

31 ANNUAL REPORT 2018

TIRANA BANK COMMITTEES

EXECUTIVE COMMITEE 1. CEO as Chairman Classification & Provisioning Committee 2. Chief Financial Officer 5. CEO as Chairman 3. Chief Operations Officer 6. Credit Division Head 4. Head of Recovery Banking Division 7. Chief Retail Officer 5. Head of Credit Division 8. Chief Business Office 6. Chief Retail Officer 9. Recovery Division Head 7. Chief Business Officer 10. Risk Department Manager 11. Business Development Advisor (with non-voting rights)

Credit Committees: Asset-Liability Committee (ALCO) A) Corporate Credit Committee 1. CEO - Chairman 8. CEO as Chairman 2. Chief Financial Officer 9. Head of Credit Division 3. Chief Operations Officer 10. Acting Chief Business Officer 4. Chief Retail Officer 11. Acting Head of Corporate Division 5. Chief Business Officer 12. Manager of Risk Department 6. Treasury & Financial Markets Head 13. Manager of Business Department, Credit Division 7. Credit Division Head 8. Risk Department Manager B) SME Credit Committee 1. CEO as Chairman 2. Head of Credit Division Disciplinary Committee 3. Acting Chief Business Officer 1. CEO as Chairman 4. SME Manager 2. Chief Operations Officer 5. Manager of Risk Department 3. Head of respective Division/Department the employee 6. Manager of Business Department, Credit Division belongs to 4. Legal Department Manager 5. Human Resources Manager

Recovery Banking Committees Internal Operational Risk Committee A) Recovery Banking Committee (RBU) 1. CEO as Chairman 1. CEO as Chairman 2. Chief Operations Officer 2. Head of Credit Division 3. Chief Retail Officer 3. Head of RBU 4. Risk Department Manager 4. Chief Financial Officer 5. Internal Audit Manager 5. Risk Department Manager 6. Compliance Department Manager 6. Legal Department Manager 7. Manager Business Department, Credit Division Sponsorship Committee 1. CEO as Chairman B) Recovery Banking Sub Committee 2. Chief Financial Officer 1. Head of Credit Division as Chairman 3. Chief Operations Officer 2. Head of RBU 4. Chief Retail Officer 3. Manager, Retail Department, Credit Division 5. Marketing & PR Department Manager 4. Retail Recovery Department Acting Manager 32 ANNUAL REPORT 2018

IT Steerring Committee Audit Committee 1. CEO as Chairman 2. International Banking, PB Group The Audit Committee assists the Board of Directors in exercising 3. Group Information Systems – Core Banking, PB Group its internal control duties. 4. Group IT Operations, PB Group The members of the Audit Committee are appointed by General 5. International Organosis, PB Group Meeting of shareholders. The main competencies of the Audit 6. Chief Financial Officer Committee, as well as its mode of operation are regulated by the 7. Chief Operations Officer provisions of Law no 9662/18.12.2006 “On banks in Republic of 8. Risk Manager Albania”. It is clarified that the Audit Committee’s main task is to establish that each and every responsibility and, where appropriate, the Internal Audit System -i.e. the applicable procedures and Procurement Committee established mechanisms- are properly applied and are sufficient and effective. 1. Head of Risk Department 2. Head of Branch Network 3. Head of Legal Department 4. Head of Financial Control Department 5. Supporting Services Manager Board Risk Management Committee

The Board Risk Management Committee is appointed by the Fraud Risk Management Committee BOD of the Bank and consists of members with adequate knowledge and experience in the risk management field. The 1. CEO as Chairman Committee consist of an odd number of members (at least 2. Risk Department Manager – Vice Chairman three members) with voting rights and the Executive Secretary 3. Compliance Department Manager – Permanent with no voting right. The head of the Risk Management Member Department is appointed as Executive Secretary of the Board 4. Human Resources Department Manager – Permanent Risk Management Committee, who is responsible for collecting Member material and information that is useful or necessary for the work 5. Head of Operational & Market Risk Unit – Secretary of of the Committee. He also prepares the issues to be discussed the Committee in the Committee. Invited members: • Internal Audit • COO • Legal • Head of Information Security Unit • Head of the respective Unit

ESMS Steering Committee 1. Country ESMS Officer as Chairman 2. Chief Operations Officer 3. Chief Business Officer 4. Credit Division Head 5. Recovery Division Head

33 ANNUAL REPORT 2018

Board of Directors

AUDIT RISK COMMITTEE COMMITTEE

RISK INTERNAL CEO AUDIT MANAGEMENT DEPARTMENT DEPARTMENT

LEGAL COMPLIANCE HUMAN DEPARTMENT DEPARTMENT RESOURCES DEPARTMENT

RECOVERY CREDIT CFO CBO BANKING DIVISION DIVISION

TREASURY & CORPORATE BRANCH NETWORK FINANCIAL MARKETS LEGAL DIVISION DIVISION TEAM

BUSINESS BUSINESS BUSINESS SMEs REGIONS FINANCIAL WORKOUT RECOVERY DEPARTMENT DEPARTMENT (REGIONAL CONTROL DEPARTMENT DEPARTMENT MANAGERS) DEPARTMENT

MIS/BUDGETING RETAIL REO RETAIL RELATIONSHIP RECOVERIES DEPARTMENT DEPARTMENT & PLANNING DEPARTMENT OFFICERS FOR DEPARTMENT BUSINESS (ROB) ACCOUNTING CONTRACT UNIT FOR CARDS ADMINISTRATION & E-CHANNELS UNIT

ENVIRONMENTAL & SOCIAL MNG. UNIT

34 ANNUAL REPORT 2018

Tirana Bank Organizational structure - December 2018

PRESS OFFICE

CRO COO

BRANCH NETWORK CARDS & E-CHANNELS OPERATIONS INFORMATION & BACK OFFICE LOAN SUPPORTING MANAGER ORGANISATION SERVICES ADMINISTRATION SERVICES MANAGER MANAGER MANAGER MANAGER RETAIL SEGMENTS & PRODUCTS CARDS DEPARTMENT DEPARTMENT INFORMATION TECHNOLOGY DEPARTMENT PAYMENT’S BUSINESS ADMINISTRATION MARKETING & ELECTRONIC UNIT UNIT DEPARTMENT PUBLIC RELATION CHANNELS DEPARTMENT ORGANIZATION DEPARTMENT DEPARTMENT INSTITUTIONS RETAIL PROCUREMENT SERVICE UNIT UNIT UNIT

BRANCH SUPPORT & BACK OFFICE FINANCE PHYSICAL CONTROL UNIT UNIT TRADE UNIT SECURITY UNIT

CUSTODY & DEPOSITORY UNIT

RETAIL MIDDLE OFFICE UNIT BLOCKING ORDER UNIT

CASH MANAGEMENT UNIT

35 ANNUAL REPORT 2018

Independent Auditor’s Report and the Financial Statements as of and for the year ended December 31, 2018

36 ANNUAL REPORT 2018

TABLE OF CONTENT

STATEMENT OF PROFIT OR LOSS 42

STATEMENT OF FINANCIAL POSITION 43

STATEMENT OF CHANGES IN EQUITY 44

STATEMENT OF CASH FLOW 45

1 CORPORATE INFORMATION 46

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 47

33. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS 66

44. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS 67

55. STANDARDS ISSUED BUT NOT YET EFFECTIVE 68

66. FINANCIAL RISK MANAGEMENT 69

77. INTEREST INCOME 98

88. INTEREST EXPENSE 99

99. NET FEES AND COMMISSION INCOME 99

1010. PERSONNEL EXPENSES 98

1111. OTHER OPERATING EXPENSES 100

1212. INCOME TAX EXPENSE 100

1313. CASH AND BALANCES WITH THE CENTRAL BANK 103

37 ANNUAL REPORT 2018

1414. LOANS AND ADVANCES TO CUSTOMERS 106

1515. FINANCIAL ASSETS AT FVOCI 117

1616. INVESTMENT PROPERTY AND REPOSSESSED ASSETS, NET 119

1717. INTANGIBLE ASSETS 121

1818. PROPERTY AND EQUIPMENT 122

1919. OTHER ASSETS 123

2020. DUE TO BANKS 123

2121. DUE TO CUSTOMERS 124

2222. OTHER LIABILITIES 125

2323. PROVISIONS 126

2424. PAID-IN CAPITAL AND SHARE PREMIUM 126

2525. OTHER RESERVES 127

2626. CASH AND CASH EQUIVALENTS 127

2727. RELATED PARTIES 128

2828. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY 129

2929. COMMITMENTS AND CONTINGENCIES 130

3030. EVENTS AFTER THE REPORTING DATE 132

38 ANNUAL REPORT 2018

INDEPENDENT AUDITOR’S REPORT

To the Shareholders and Management of Tirana Bank SHA

Opinion

We have audited the financial statements of Tirana Bank SHA (“the Bank”), which comprise the statement of financial position as at December 31, 2018, and the statement of profit or loss and other comprehensive income, statement of changes in equity and cash flows statement for the year ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2018, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Albania, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Responsibilities of Management and Those Charged with Governance for the Financial State- ments

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no real- istic alternative but to do so. Those charged with governance are responsible for overseeing the Bank’s financial reporting process.

Other matter

Management is responsible for the other information. The other information comprises the information included in the Annual Report prepared by Management of the Bank in accordance with Article 53 of Law no. 9662, dated 18 December 2006 “On Banks in the Republic of Alba- nia”, amended, but does not include the financial statements and the auditor’s report thereon. The Annual Report is expected to be made available to us after the date of this auditors’ report.

39 ANNUAL REPORT 2018

Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrep- resentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

40 ANNUAL REPORT 2018

Auditor’s Responsibilities for the Audit of the Financial Statements (continued)

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Deloitte Audit Albania SHPK Rr. Elbasanit, Pallati poshte Fakultetit Gjeologji - Miniera, Tirana, Albania Identification number (NUIS): L41709002H

Enida Cara Engagement Partner Statutory Auditor

June 19, 2019 Tirana, Albania

41 ANNUAL REPORT 2018

Tirana Bank SHA

Statement of profit or loss and other comprehensive income for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek, unless otherwise stated)

Year ended December Year ended December Notes 31, 2018 31, 2017 Interest income 7 1,737,847 1,884,387 Interest expense 8 (194,939) (198,854) Net interest income 1,542,907 1,685,533 Fee and commission income 9 417,101 423,747 Fee and commission expense 9 (21,211) (20,227) Net fee and commission income 395,890 403,521 Expected credit losses from loans and advances to customers 14 (528,404) (130,578) Expected credit losses from advances to Banks, Securities and Off balance sheet items 14 (48,669) -

Total expected credit losses (577,073) (130,578) Foreign exchange gains less (losses) (1,061,059) (254,313) Other operating income 44,535 190,675 Personnel expenses 10 (654,789) (632,536) Other operating expenses 11 (940,954) (939,964) (Loss)/ gain on property revaluation 16 (42,958) (7,600) Provision for impairment of repossessed assets 16 (246,113) (126,437) Other Provisions 107,829 60,991 Depreciation and amortisation (195,451) (185,621) Total of operating expenses (2,988,960) (1,879,604) (Loss)/ Profit before income tax (1,627,236) 78,872 Income tax expense 11 (4,233) (9,493) (Loss)/ Profit for the year (1,631,469) 69,379 Other comprehensive income/(expense), net of tax: Items that may be reclassified subsequently to profit/loss:

- Net fair value gain/ (loss) on available-for-sale financial assets 15 41,467 (117,979) - Deferred tax related to fair value (loss)/ gain recorded directly in other comprehensive income 12 (6,220) 17,697 Other comprehensive income/ (expense) for the year 35,247 (100,282) Total comprehensive loss for the yeara (1,596,222) (30,903)

The accompanying notes on pages 10 to 91 form an integral part of these financial statements. The financial statements were approved by the Bank’s Management on June 19, 2019 and signed on its behalf by: Dritan Mustafa Tedi Zeri Chief Executive Officer Financial Control Manager 42 ANNUAL REPORT 2018

Tirana Bank SHA

ear ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

Year ended December Year ended December Notes 31, 2018 31, 2017 ASSETS Cash and balances with the Central Bank 13 7,120,132 6,914,728 Loans and advances to banks 13 17,447,073 26,544,252 Loans and advances to customers, net 14 20,845,099 24,037,231 Financial assets at fair value through other comprehensive income 15 23,857,367 15,343,098 Prepaid income tax, net 12 94,073 26,182 Investment property, net 16 74,506 117,464 Repossessed assets, net 16 2,403,649 2,921,930 Intangible assets 17 207,819 242,035 Property and equipment 18 529,206 498,064 Deferred tax assets 12 22,551 33,005 Other assets 19 363,379 715,969

TOTAL ASSETS 72,964,854 77,393,958

LIABILITIES AND EQUITY Due to banks 20 2,617,270 1,252,282 Due to customers 21 57,164,880 60,957,146 Other liabilities 22 399,806 617,209 Provisions 23 131,125 62,886

TOTAL LIABILITIES 60,313,081 62,889,523 Equity Paid-in capital 24 14,754,741 14,754,741 Share premium 24 1,735,494 1,735,494 Other reserves 25 1,858,716 1,700,011 Accumulated losses (5,697,178) (3,685,811)

TOTAL EQUITY 12,651,773 14,504,435

TOTAL LIABILITIES AND EQUITY 72,964,854 77,393,958

its behalf by:

Dritan Mustafa Tedi Zeri Financial Control Manager

43 ANNUAL REPORT 2018

Tirana Bank SHA

Statement of changes in equity for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

Paid-in Share Other Accumulated capital premium reserves losses Total Equity As at January 1, 2017 14,754,741 1,735,494 1,800,293 (3,755,190) 14,535,338

Profit of the year - - - 69,379 69,379

Changes in Other Reserves - - (100,282) - (100,282)

As at December 31, 2017 14,754,741 1,735,494 1,700,011 (3,685,811) 14,504,435

As at January 1, 2018 14,754,741 1,735,494 1,700,011 (3,685,811) 14,504,435 Changes on initial application of IFRS 9 (see note 13) 59,172 (379,898) (320,726) Loss of the year - - - (1,631,469) (1,631,469) Changes in Reserves for Financial Assets at FVOCI from IFRS 9 application - - 74,194 - 74,194

Changes in Other Reserves - - 25,339 - 25,339

As at December 31, 2018 14,754,741 1,735,494 1,858,716 (5,697,178) 12,651,773

Dritan Mustafa Tedi Zeri Chief Executive Officer Financial Control Manager

44 ANNUAL REPORT 2018

Tirana Bank SHA

Statement of cash flow for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

Year ended Year ended Notes December 31, 2018 December 31, 2017 CASH FLOW FROM OPERATING ACTIVITIES (Loss)/ profit before tax (1,627,236) 78,872 Adjustments for: Depreciation and amortisation 18, 19 195,451 185,621 Impairment of loans and advances 14 528,404 130,578 Net changes in fair value of financial assets 289,070 118,836 Net interest income (1,542,907) (1,685,533) Other non-cash items 42,506 (214,539) (2,114,712) (1,386,165) Decrease in compulsory reserve with the Central Bank 214,266 361,227 Decrease in loans and advances to customers 2,378,127 1,030,410 Decrease in other assets 352,591 160,322 Increase/ (decrease) in due to banks 1,364,989 (1,033,881) Decrease in due to customers (3,782,137) (2,597,005) Decrease/ (increase) in Repossessed assets 272,168 (301,384) (Decrease)/increase in other liabilities (217,404) 242,640 (Increase)/decrease in income tax (67,891) 25,096 Interest received 1,802,157 1,959,818 Interest paid (205,068) (230,103) Net cash used in operating activities (2,914) (1,769,025) CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment 19 (138,514) (57,307) Purchase of intangible assets 18 (53,881) (29,631) Purchase of financial assets at FVOCI 15 (16,277,514) (7,499,004) Proceeds from maturing financial assets at FVOCI 15 7,795,313 13,638,858 Net cash (used in)/ generated from investing activities (8,674,596) 6,052,916 Net (decrease)/ increase in cash and cash equivalents (8,677,510) 4,283,891 Cash and cash equivalents at the beginning of the year 28,236,955 23,953,064 Cash and cash equivalents at the year end 26 19,559,445 28,236,955

Dritan Mustafa Tedi Zeri Chief Executive Officer Financial Control Manager

45 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

1 Corporate information

Tirana Bank SHA (the “Bank”), was founded in 1996 to Licence was given in accordance with Law No. 8365, operate as a bank in all fields of retail banking activity “On Banks in the Republic of Albania”, dated 2 July 1998, in Albania. According to article 4 of its Statute, the which was subsequently replaced by Law No. 9662 scope of work of the Bank is to execute, on its behalf dated 18 December 2006 “On Banks in the Republic of or on behalf of third parties, any and every operation Albania”, as amended. The Bank is also subject to Law acknowledged or delegated by law to banks. Principal No. 9901 dated 14 April 2008, “On entrepreneurs and activity of the Bank consists in banking and financial commercial companies”, as amended, as well as other activities under a full operating banking licence issued relevant laws. by the Bank of Albania.

As at December 31, 2018 and 2017 Tirana Bank SHA ownership structure is presented below:

Shareholder Shares In% Piraeus Bank S.A. Greece 496,098 98.83% Mr. Tzivelis Ioanis 5,877 1.17% Total 501,975 100%

As of August 17, 2018, Piraeus Bank S.A., holding 98.83% of the shares in the Bank, announces that it has entered into an agreement dated August 3, 2018 with Balfin Group SHPK and the Komercijalna Banka AD Skopje, for the sale of its shares. The sale transaction was approved on January 19, 2019 by the Competition Authority of the Republic of Albania and on February 6, 2019 by the Bank of Albania and on February 28, 2019 from the Hellenic Fund. The sale transaction was finalized as at February 28, 2019 (see note 30.2).

As at December 31, 2018 The Bank has 37 branches (2017: 39) within the Republic of Albania and has no overseas operations. The Bank’s registered address is Rruga Ibrahim Rugova, Tirana, Albania. At December 31, 2018 the Bank had 430 employees (December 31, 2017: 439 employees). As at December 31, 2018 and 2017 the Executive Committee is comprised as follows:

Dritan Mustafa Chief Executive Director Konstantinos Tsigaras Chief Financial Officer Eralda Tafaj Chief Operation Officer Elona Gjipali Head of Recovery Division Manjola Capo Head of Credit Division Eranda Shehu Chief Retail Officer

Following the sale of the Bank as of February 28, 2019, as described above, the Executive Committee is as follows: Dritan Mustafa Chief Executive Director Elvira Kapoli Chief Financial Officer Eralda Tafaj Chief Operation Officer Elona Gjipali Head of Recovery Division Manjola Capo Head of Credit Division Lila Canaj Chief Retail Officer Glenda Kurti Head of Corporate Division

Principal activity The Bank’s principal business activity is commercial and retail banking operations within the Republic of Albania. The Bank has been operating under a full banking licence issued by the Central Bank of the Republic of Albania (“Bank of Albania” or “BoA”) since 1996.

46 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

2.1 Statement of compliance

The financial statements of Tirana Bank SHA have been prepared in accordance with International Financial Reporting Standards (IFRSs).

The accounting policies adopted are consistent with those of the previous financial year.

2.2 Basis of preparation

The financial statements have been prepared on a historical cost basis, except for Fair value through other comprehensive income (“FVOCI”) financial investments that have been measured at fair value. The financial statements are presented in Albanian Lek and all values are rounded to the nearest thousand (LEK ‘000) except when otherwise indicated. a) Position of the Bank

In the current environment the focus of the Bank has been on liquidity and capital adequacy. As disclosed in Note 24, the Bank’s main source of funding is locally collected deposits from corporate and retail customers.

Going concern assumption has been applied in the preparation of the financial statements. Management prepared these financial statements on a going concern basis, which assumes that the Bank will continue to operate in the foreseeable future. In order to assess the reasonability of this assumption, management reviews the forecasts of the future cash inflows and the support provided by shareholders.

Included in the new Shareholder’s strategy, vision and commitment, there is an irrevocable commitment to support the Bank on its growth for the foreseeable future.

The Bank’s capital adequacy ratio (as prescribed by Bank of Albania) as at December 31, 2018 amounts to 29.64% (2017: 21.25%).

Bank is in compliance with the regulatory requirements on the minimum capital adequacy ratio (see note 30.1).

The main accounting policies used in the preparation of these financial statements are set out below.

2. Summary of significant accounting policies (continued)

2.2 Basis of preparation b) Foreign currency translation The financial statements are presented in Albanian Lek, which is the Bank’s functional and presentation currency. Transaksionet dhe tepricat Transactions in foreign currencies are translated into the respective functional currency of the operation at the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the spot exchange rate at the end of the period.

47 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historic cost, are translated at the prevailing foreign exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Foreign currency differences arising on translation are generally recognised in profit or loss, except for foreign currency differences arising from the translation of available-for-sale equity instruments, which are recognised in OCI.The applicable rates of exchange (Lek to foreign currency unit) for the principal currencies as at December 31, 2018 and 2017 were as follows:

2018 2017 USD 107.82 111.10 EUR 123.42 132.95

2. Summary of significant accounting policies (continued)

2.3 Financial instruments – initial recognition and subsequent measurement Date of recognition

Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Bank commits to purchase or sell the asset. Changes in significant accounting policies

The Bank applied for the first time IFRS 9 Financial Instruments from January 1, 2018. It replaces IAS 39 Financial Instruments: Recognition and Measurement. This note explains the impact of the adoption of IFRS 9 in the Bank’s financial statements, which resulted in changes in accounting policies (ii-iii) below and adjustments to the amounts recognized in the financial statements. IFRS 9 Financial Instruments - Accounting policies applied from January 1, 2018

i. IFRS 9 - The Impact of Adoption

As permitted by the transitional provisions of IFRS 9, the Bank elected not to restate comparative figures. Differences in the carrying amount of financial assets and financial liabilities arising from the adoption of IFRS 9 are recognized in retained earnings on January 1, 2018. The determination of the business model within which a financial asset is held is made on the basis of facts and the circumstances that exist at the date of the initial application.

ii. IFRS 9 - Measurement and classification

IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 includes three principal classification categories for financial assets: measured at amortized cost, FVOCI and FVTPL. It eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: – it is held within a business model whose objective is to hold assets to collect contractual cash flows; and – its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: – it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and – its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

48 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued)

2.3 Financial instruments – initial recognition and subsequent measurement (continued) ii. IFRS 9 - Measurement and classification (continued)

All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. In addition, on initial recognition the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

A financial asset is classified into one of these categories on initial recognition. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9 are not separated. Instead, the hybrid financial instrument as a whole is assessed for classification.

Business model assessment

The Bank has finalized its business model as well as the SPPI testing and has concluded as below stated:

 Government bonds and treasury bills portfolio For the Bank’s treasury products (bonds and T-bills), the identified business model is the“Hold to collect and sell” that requires measurement at fair value through other comprehensive income (FVTOCI) if also the conditions of SPPI test are met.

According to IFRS 9 (4.1.2A), a financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met:

- the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and

- the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Tirana Bank does not maintain securities portfolio for trading purposes therefore, with the objective of actively buying/selling depending on the assets’ fair value.

 Loans and advances to customers

For the Bank’s loans and advances to customers’ portfolio the business model identified is the “Hold to collect” business model and therefore, loans classified in this business model will be measured at amortized cost if also the conditions of SPPI test are met. Any loans that will fail the SPPI test will be measured at fair value through PL.

According to the IFRS 9 (4.1.2), a financial asset shall be measured at amortized cost if both of the following conditions are met:

- the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and

- the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

49 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued)

2.3 Financial instruments – initial recognition and subsequent measurement (continued)

ii IFRS 9 - Measurement and classification (continued)

The Bank’s business model is to originate loans and to collect their contractual cash flows. Any sales of financial assets within this business model are carried out due to the loans’ credit deterioration and in order to reduce NPE’s and NPL’s and does not in any case reflect the initial purpose of the lending activity.

Assessments whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank will consider the contractual terms of the instrument. This will include assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition.

In making the assessment, the Bank considers: – contingent events that would change the amount and timing of cash flows; – leverage features; – prepayment and extension terms; – terms that limit the Bank’s claim to cash flows from specified assets – e.g. non-recourse asset arrangements; and – features that modify consideration for the time value of money – e.g. periodic reset of interest rates. Interest rates on retail loans made by the Bank are based on Standard Fixed Rates (SFR) that are set at the discretion of the Bank. In these cases, the Bank assess whether the SFR set are in line with market rates and provide the Bank with sufficient returns to cover for the: - time value of money, - credit risk associated with the principal amount outstanding during a particular period of time, and - other basic lending risks and costs, as well as a profit margin.

All of the Banks retail loans contain prepayment features. A prepayment feature is consistent with the SPPI criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable compensation for early termination of the contract. Impact assessment

The Bank has estimated that, the adoption of IFRS 9 at January 1, 2018, will bring changes to its current measurement of the financial assets under IAS 39. The classification of its financial assets held as at January 1, 2018 will change as follows.

50 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued)

2.3 Changes in significant accounting policies (continued) ii. IFRS 9 - Measurement and classification (continued)

Impact assessment (continued)

Table of the changes in the classifications and measurement of financial assets and liabilities as at the date of initial application of IFRS 9.

IAS 39 IFRS 9 Carrying amount Carrying amount as Measurement Measurement category as of January 1, of December 31, 2017 category 2018 Financial assets Cash and balances with Amortised cost (Loans Central Bank and receivables) 6,914,728 Amortised cost 6,914,728 Loans and advances to Amortised cost (Loans banks, net and receivables) 26,544,252 Amortised cost 26,516,343 Loans and advances to Amortised cost (Loans customers, net and receivables) 24,037,231 Amortised cost 23,815,940 Investment securities FVOCI (Available for sale) 15,343,098 FVOCI 15,283,926 Provision (financial Amortised cost (Loans guarantee) and receivables) 5,572,540 Amortised cost 5,501,013

51 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

The table of changes in the classifications of financial assets and financial liabilities as at the date ofinitial application of IFRS 9, with the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9. IFRS 9 IAS 39 carrying carrying amount December Reclassi-fications Remeasurements amount 31, 2017 January 1, 2018 Amortised cost Cash and balances with Central Bank Opening balances under IAS 39 and closing balance under 6,914,728 - - 6,914,728 IFRS 9 Loans and advances to banks Opening balances under IAS 39 26,544,252 Re-measurement: ECL - 27,909 allowance Closing balance under IFRS 9 26,516,343 Loans and advances to customers Opening balance under IAS 39 24,037,231 Re-measurement: ECL - 221,291 allowance Closing balance under IFRS 9 23,815,940 Total financial assets 57,496,211 - 246,532 57,249,679 measured at amortised cost Fair value through other comprehensive income (FVOCI) Investment securities - Available for sale financial assets Opening balance under IAS 39 15,343,098 Re-measurement: ECL 59,172 allowance Closing balance under IFRS 9 - - 15,283,926 Total financial assets 15,343,098 - - 15,283,926 measured at FVOCI

52 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued) 2.3 Changes in significant accounting policies (continued) ii. IFRS 9 - Measurement and classification (continued)

Loan commitments and financial guarantee contracts Provisions (financial guarantees) Opening balance under IAS 39 5,572,540 - - - Re-measurement: ECL allowance - - 71,572 - Closing balance under IFRS 9 - - - 5,501,013 Total loan commitments and financial guarantee contracts - 71,572 Total impact from IFRS 9 - - 379,898 - iii. IFRS 9 - Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (‘ECL’) model. This will require considerable judgment over how changes in economic factors affect ECLs, which are determined on a probability-weighted basis. In addition to Financial Assets measured at Amortized Cost, the new impairment model applies also to the following financial instruments that are not measured at FVTPL: – financial assets that are debt instruments; and – loan commitments and financial guarantee contracts issued (previously, impairment was measured under IAS 37 Provisions, Contingent Liabilities and Contingent Assets). IFRS 9 requires a loss allowance to be recognized at an amount equal to either 12-month ECLs or lifetime ECLs depending on the assessment of the risk of default in comparison to the moment of initial recognition. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument, whereas 12-month ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date. The Bank will recognize loss allowances at an amount equal to lifetime ECLs, except in the following cases, for which the amount recognized, will be 12-month ECLs: – debt investment securities that are determined to have low credit risk at the reporting date. The Bank considers a debt security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment-grade’; and – loans and debt investment securities for which credit risk has not increased significantly since initial recognition. The impairment requirements of IFRS 9 are complex and require management judgments, estimates and assumptions, particularly in the following areas, which are discussed in detail below: – Estimating the key inputs into ECL, being probability of default (PD), loss given default (LGD and exposure at default (EAD). – assessing whether the credit risk of an instrument has increased significantly since initial recognition; and

– incorporating forward-looking information into the measurement of ECLs. 2. Summary of significant accounting policies (continued) 2.3 Changes in significant accounting policies (continued) iii. IFRS 9 - Impairment (continued) Measurement of ECLs (continued) ECLs are a probability-weighted estimate of credit losses and will be measured as follows:

53 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

– financial assets that are not credit-impaired at the reporting date: the present value of all cash shortfalls – i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Bank expects to receive; – financial assets that are credit-impaired at the reporting date: the difference between the gross carrying amount and the present value of estimated future cash flows; – undrawn loan commitments: the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive; and – financial guarantee contracts: the present value of the expected payments to reimburse the holder less any amounts that the Bank expects to recover. – Financial assets that are credit-impaired are defined by IFRS 9 in a similar way to financial assets that are impaired under IAS 39 • Inputs in the measurement of ECLs The main inputs in the measurement of ECLs are likely to be the long-term structure of the following variables: PD, Loss given default (LGD), and Exposure at default (EAD). These parameters derive from internally developed statistical models and other historical data that use regulatory models. They are tailored to reflect future information as described below. Credit risk levels will be a primary contribution to determining the long-term structure of the PD for exposures. The Bank will use statistical models to analyze the collected data and generate estimates of the remaining PD of the exposures and how these are expected to change over time. This analysis will include identifying and calibrating the relationship between changes in default rates and changes in key macroeconomic factors, as well as a deep analysis of the impact of some other factors (eg, sustainability experience) at the risk of non-payment. For most exposures, key macroeconomic indicators are likely to include GDP growth, interest rates and unemployment. The Bank’s approach to the inclusion of future information in this assessment is discussed below. LGD (Loss given default) is the size of the possible loss if there is a non-payment. The Bank will assess LGD’s parameters based on the history of recovery rates of claims against unpaid parties. LGD models will consider the structure, collateral, seniority of the claim and the recovery costs of any collateral that is part of the financial asset. For loans secured by retail property, credit quality ratios (LTVs) are likely to be a key parameter in determining LGD. EAD (Exposure at default) represents the expected exposure in the event of a default. The Bank will release the EAD from the current exposure to the other party and the possible changes to the actual amount permitted under the contract, including amortization and prepayments. The EAD of a financial asset will be the gross carrying amount in default. For lending commitments and financial guarantees, EAD will consider the amount withdrawn as well as future potential amounts that can be drawn or paid under the contract, which will be assessed based on historical observations and future projections The Bank will measure ECLs taking into account the risk of default for the maximum contractual period (including the borrower’s extension options) over which it is exposed to credit risk, even if for the purposes of risk management the Bank receives consider a longer period. The maximum contractual period lasts until the date on which the Bank has the right to request an advance payment or to terminate a commitment or loan guarantee. 2. Summary of significant accounting policies (continued) 2.3 Changes in significant accounting policies (continued) iii. IFRS 9 - Impairment (continued) Measurement of ECLs (continued) • Inputs on ECL M easurement (continued) For retail overdrafts and credit card facilities and some rotating corporate structures that include both a loan and a component of unmanaged engagement, the Bank may measure ECLs for a longer period than the maximum contractual period if the contractual ability of the Bank to request repayment and cancellation of non-recomputable commitments does not limit the Bank’s exposure to credit losses in the contractual notice period. These facilities do not have a fixed term or repayment structure and are managed on a collective basis. The Bank may cancel them with immediate effect but this contractual right does not apply to normal day-to-day management but only when the Bank becomes aware of an increase in credit risk at the facility level. However, this period will be assessed taking into account the credit risk management actions that the Bank expects to undertake and serve to mitigate

54 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

ECLs. These include a reduction in the limits and cancellation of the facility. When modelling a parameter is carried out on a collective basis, financial instruments will be grouped on the basis of common risk characteristics that include: – type of instrument; and

– credit risk classification. Clusters will be subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous. For investment in debt securities in respect of which the Bank has limited historical data, external reference information published by recognized foreign credit rating agencies such as Moody’s will be used to supplement available data within the country.

Definition of default Under IFRS 9, the Bank will consider a financial asset to be in default when: – the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realizing security (if any is held); or

– the borrower is more than 90 days past due on any material credit obligation to the Bank. This definition is largely consistent with the definition used for regulatory purposes for loans classifiedas substandard, doubtful or lost. The identification of the below characteristics results to default. a) Days past due (DPD). Exposures more than 90 days past due at the reporting date (using the pulling effect of 20% - at debtor level). b) Unlikeliness to Pay (UTP) c) Credit impaired asset as defined in IFRS 9 requirements d) Forborne Non Performing Exposures (FNPEs) e) Forborne Performing Exposures (FPEs) during the probation period (24 months after cure period) for which either additional forbearance measures are extended or they have more than 90 days past due. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances.

55 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued) 2.3 Changes in significant accounting policies (continued) iii. IFRS 9 - Impairment (continued) Credit risk grades The Bank allocates each business exposure to a credit risk grade based on requirements set forth by Credit Risk Management regulation by using qualitative and quantitative factors that are indicative of the risk of default. In addition to the risk classes introduced for regulatory purposes, the Bank identifies and monitors separately standard loans in past due from standard loans not in past due. Each business exposure is allocated to a credit risk grade on initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. • Determining whether credit risk has increased significantly Under IFRS 9, when determining whether the credit risk (i.e. risk of default) on a financial instrument has increased significantly since initial recognition, the Bank will consider reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on the Bank’s historical experience, expert credit assessment and forward-looking information.

The Bank considers both quantitative and qualitative criteria in order to assess whether significant increase in credit risk has occurred.

The quantitative element is calculated based on the change in lifetime PDs by comparing: • the remaining lifetime PD as at the reporting date; with • the remaining lifetime PD that was estimated based on facts and circumstances at the time of initial recognition of the exposure The bank defines criteria for the relative quantitative increases in PD that are indicative of a significant increase in credit risk.

The Bank has set three kinds of indicators, a) primary, b) secondary and c) backstop to demonstrate the priority of indicators used to assess whether significant increase in credit risk has occurred. Despite their priority, all criteria have the same weight in the assessment process for significant increase in credit risk.

Primary or secondary indicators may vary per each portfolio, while backstop indicator is present on the following conditions: • Instruments which are more than 30 days past due All loans showing significant increase in credit risk are classified in Stage 2. The Bank will monitor the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that: – the criteria are capable of identifying significant increases in credit risk before an exposure is in default; – the average time between the identification of a significant increase in credit risk and default appears reasonable; and – exposures are not generally transferred directly from 12-month ECL measurement to credit-impaired.

56 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued) 2.3 Changes in significant accounting policies (continued) iii. IFRS 9 - 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 recognized as a new loan at fair value. Under IFRS 9, when the terms of a financial asset are modified and the modification does not result in derecognition, the Bank will consider whether the asset’s credit risk has increased significantly by analysing quantitative and qualitative factors affecting risk of default. The Bank renegotiates loans to customers in financial difficulties (referred to as ‘forbearance activities’) to maximize collection opportunities and minimize the risk of default. Under the Bank’s forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. Both retail and business loans are subject to the forbearance policy. Generally, forbearance is a qualitative indicator of default and credit impairment and expectations of forbearance are relevant to assessing whether there is a significant increase in credit. Following forbearance, a customer needs to demonstrate consistently good payment behaviour over twenty-four months before the exposure is measured at an amount equal to 12-month ECLs.

Forward-looking information Under IFRS 9, the Bank will incorporate forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since initial recognition and its measurement of ECLs. The Bank will formulate a ‘base case’ view of the future direction of relevant economic variables and a representative range of other possible forecast scenarios based on advice from the Bank Risk Committee and economic experts and consideration of a variety of external actual and forecast information. This process will involve developing two or more additional economic scenarios and considering the relative probabilities of each outcome. External information may include economic data and forecasts published by governmental bodies and monetary authorities in the countries where the Bank operates, supranational organizations such as the Organization for Economic Co-operation and Development and the International Monetary Fund, and selected private sector and academic forecasters.

57 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued) 2.3 Changes in significant accounting policies (continued) iii. IFRS 9 - Impairment (continued) Forward-looking information (continued) The base case will represent a most-likely outcome and be aligned with information used by the Bank for other purposes, such as strategic planning and budgeting. The other scenarios will represent more optimistic and more pessimistic outcomes. The Bank will also periodically carry out stress-testing of more extreme shocks to calibrate its determination of these other representative scenarios. The Bank has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. These key drivers include CPI, unemployment rates and GDP forecasts. Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past 5 years. Impact assessment The most significant impact on the Bank’s financial statements from the implementation of IFRS 9 results from the new impairment requirements. Impairment losses have increased and may become more volatile for financial instruments within the devaluation IFRS 9 model, as follows. Table of the reconciliation of the ending impairment allowances in accordance with IAS 39 and the provisions in accordance with IAS 37 to the opening loss allowances determined in accordance with IFRS 9.

Loan loss Loan loss allowance under Measurement category Reclassification Remeasurement allowance IAS 39/Provision under IFRS 9 under IAS 37 Loans and receivables (IAS 39)/Financial assets at amortised cost (IFRS 9) Cash and balances with central banks - - - - Loans and advances to banks - - 27,909 27,909 Loans and advances to customers 3,334,554 - 221,291 3,555,845 Total 3,334,554 249,200 3,583,754 Available for sale financial instruments (IAS 39)/Financial assets at FVOCI (IFRS 9) Investment securities - - 59,172 59,172 Loan commitments and financial guarantee contracts Loans and advances to customers (loan commitments) - - - - Provisions (loan commitments) - - - - Provisions (financial guarantees) - - 71,527 71,527 Total - - 130,698 130,698 Total impact from IFRS 9 - - 379,898 -

58 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2. Summary of significant accounting policies (continued)

2.3 Changes in significant accounting policies (continued) iv. Financial instruments – initial recognition and subsequent measurement (continued) a) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. b) Derecognition Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognising). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished. 2.4 Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date (“repos”) are not derecognised from the balance sheet. The corresponding cash received, including accrued interest, is recognised in the statement of financial position as a “Due to Banks”, reflecting its economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method. Conversely, securities purchased under agreements to resell at a specified future date (‘reverse repos’) are recorded as due from other banks or loans and advances to customers, as appropriate. The corresponding cash paid, including accrued interest, is recognised in the statement of financial position as “Due from Banks”. The difference between the purchase and resale prices is treated as interest income and is accrued over the life of the agreement using the effective interest rate method. 2.5 Determination of fair value For financial instruments that are traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive. Indicators that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions, a significant decrease in the average daily trading volume of all the shares under consideration in country 2 over the last 5 years, etc..

59 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2 Summary of significant accounting policies (continued) 2.5 Determination of fair value (continued) For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other relevant valuation models. Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). 2.6 Leasing The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. i. Bank as a Lessee Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at commencement of the lease term at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in “Property and equipment” with the corresponding liability to the lessor included in “Other liabilities”. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income in “Interest and similar expense”. The Bank did not have significant financial lease agreements during the reporting period. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term. Any operating lease rentals payable are accounted for on a straight-line basis over the lease term and included in “Other operating expenses”. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place. ii. Bank as a Lessor Where the Bank is a lessor in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the Bank to the leasee, the total lease payments are recognised in profit or loss for the year (rental income – note 2.7, b) on a straight-line basis over the period of the lease. 2.7 Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.

60 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2 Summary of significant accounting policies (continued) 2.7 Revenue recognition (continued) a) Interest and similar income and expense Interest and similar income includes coupons earned on fixed income investments, any discount and premium on zero coupon treasury bills recognised using in profit or loss the effective interest rate method and interest income on loans and advances. For all financial instruments measured at amortised cost and interest bearing financial instruments classified as available-for-sale financial investments, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount. Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: i. Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan. ii. Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. b) Rental income Rental income is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in profit or loss in “Other operating income”. The Bank did not have significant investment property as at year end and during the reporting period.

61 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2 Summary of significant accounting policies (continued) 2.8 Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. For the purpose of the Cash Flow Statement, cash and cash equivalents consist of cash on hand, current accounts with Central Bank and amounts due from other banks on demand and with an original maturity of three months or less. The statutory reserve with the Central Bank is not available for the Bank’s day-to-day operations and is not included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Cash and cash equivalents are carried at amortised cost. Further details of what cash and cash equivalents comprises can be found in note 13. 2.9 Property and equipment Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows: • Own Buildings: up to 20 years • Furniture and other equipment: 5 years • Vehicles: 5 years • Computer hardware: 4 years • Leasehold improvements: the shorter of useful life and lease term The assets’ residual value and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in “Other operating income” or “Other operating expenses” in profit or loss in the year the asset is derecognised. 2.10 Intangible assets Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Internally-generated intangible assets - research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated:

62 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2 Summary of significant accounting policies (continued) 2.10 Intangible assets (continued) • the technical feasibility of completing the intangible asset so that it will be available for use or sale; • the intention to complete the intangible asset and use or sell it; • the ability to use or sell the intangible asset; • how the intangible asset will generate probable future economic benefits; • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally- generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Intangible assets include the Bank’s software with an estimated useful life of five years. 2.11 Investment properties Investment properties are properties held to earn rentals and/or for capital appreciation (including property under construction for such purposes). Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are measured at fair value. All of the Bank’s property interests held under operating leases to earn rentals or for capital appreciation purposes are accounted for as investment properties and are measured using the fair value model. Gains and losses arising from changes in the fair value of investment properties are included in profit or loss in the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised. Investment properties includes collateral obtained due to legal process include land, building and business premises which are not used by the Bank for its core operations. 2.12 Repossessed assets In certain circumstances, property is repossessed following the foreclosure on loans that are in default. Repossessed properties are measured at the lower of auction value and fair value less costs to sell. Management intention on repossessed properties is to sale as soon as practicable, with the proceeds used to reduce the outstanding indebtedness. 2.13 Impairment of non-financial assets The Bank assesses at each reporting date or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, whether there is an indication that a non-financial asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Bank makes an estimate of the asset’s recoverable amount. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount.

63 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2 Summary of significant accounting policies (continued) 2.13 Impairment of non-financial assets (continued) For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount to the extent that the increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.

2.14 Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization calculated to recognize in profit or loss the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the reporting date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to profit or loss under other operating expenses. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment. 2.15 Pensions and other post-employment benefits The Bank contributes to its employees post retirement plans as prescribed by the domestic social security legislation. Bank’s pension obligations, relate only to defined contribution plans. Defined contribution plans, based on salaries, are made to the state administered institution (i.e. Social Security Institute) responsible for the payment of pensions. Once the contributions have been paid, the Bank has no further payment obligations. The contributions constitute net periodic costs for the year in which they are due and as such they are included in “Personnel expenses” in the statement of comprehensive income. 2.16 Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any item included in the same class of obligations may be small.

64 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2 Summary of significant accounting policies (continued) 2.16 Provisions (continued) Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. 2.17 Income tax Income taxes have been provided for in the financial statements in accordance with Albanian legislation enacted or substantively enacted by the reporting date. The income tax charge comprises current tax and deferred tax and is recognised in the statement of comprehensive income except if it is recognised in other comprehensive income because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income. Current tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date 2018:15% (2017: 15%). Deferred tax Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank.

65 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

2 Summary of significant accounting policies (continued) 2.17 Income tax (continued) Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date. 2.18 Comparative information Certain disclosures have been reclassified or amended in new financial statements to reflect a better effect of the accounts. Balance of prepaid income tax is presented in net including impairment that was classified as other provision in 2017 (see note 23). Suspense accounts included in other assets and other liabilities are presented in net (see note 19 and 22). 3 Critical accounting estimates and judgments The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a Bank, or national or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by -/+5%, the provision would be estimated Lek 387,441 thousand higher or Lek 395,815 thousand lower (2017: Lek 206,343 thousand higher or Lek 205,507 thousand lower). 3. Critical accounting estimates and judgments (continued) (b) Uncertain tax positions. The Bank’s uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting

66 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated) period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period. During 2018, the Bank has been subject to a tax control from the Tax Authorities as described in note 12. (c) Determining fair values Information about fair values of financial assets and liabilities that were valued using assumptions that are not based on observable market data is disclosed in Note 2.5 4 Adoption of New or Revised Standards and Interpretations (a) Standards and Interpretations effective in the current period The following new amendments to the existing standards issued by the International Accounting Standards Board (IASB) are effective for the current reporting period:

• IFRS 15 “Revenue from Contracts with Customers” and further amendments (effective for annual periods beginning on or after January 1, 2018).

IFRS 15 established a single comprehensive model to use in accounting for revenue arising from contracts with customers. IFRS 15 replaces the revenue recognition guidance included in IAS 18 “Revenue”, IAS 11 “Construction Contracts” and the related interpretations. IFRS 15 establishes the principles that an entity shall apply to report useful information to the users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The new standard shall be applied to all contracts with customers, except those that are in scope of other standards such as financial instruments, financial leases. The five – step approach to revenue recognition provided by IFRS 15 is as per below: - Identify the contract with the Customer - Identify the performance obligations in the contracts - Determine the transaction price - Allocate the transaction price to the performance obligations in the contracts - Recognize revenue when the entity satisfies a performance obligation

The main revenue stream of the bank is “Interest Income” which doesn’t fall in the scope of IFRS 15. The Bank apply IFRS 15 in revenue recognition coming from:

- Banking Commissions - Other operating Income

IFRS 15 First Time Adoption as at January 1, 2018

The Bank carried out an exercise for the impact assessment of IFRS 15 as of 01/01/2018. As per the exercise, no impact resulted to the Financial Statements of the Bank, therefore although the above mentioned categories fall within the scope of IFRS 15, based on the results, there is no change in the current accounting treatment.

67 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

5 Standards issued but not yet effective A number of new standards, amendments to standards and interpretations are not yet mandatorily effective for annual periods beginning on or after 1 January 2018, and have not been applied in preparing these financial statements. The Bank plans to adopt these pronouncements when they become effective. IFRS 16, Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases almost result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the statement of profit or loss and other comprehensive income. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Bank decided that it will apply the standard from its mandatory adoption date of 1 January 2019 using the modified retrospective method, without restatement of comparatives. Lease Liability at the date of initial application is at the amount of Lek 544,564,639. Right-of-use assets for property are measured on transition at the amount of the lease liability adjusted for the prepaid amount at the amount of Lek 573,651,984. The following table presents a reconciliation of the operating lease commitments disclosed in Note 29 to the recognised liability:

December 31, 2018 / January 1, 2019 Total future minimum lease payments for non-cancellable operating leases (Note 29) 551,966,506 - Future lease payments that are due in periods subject to lease extension options that are reasonably certain to be exercised 544,564,639 - Future variable lease payments that are based on an index or a rate - - Effect of discounting to present value 7,401,867

The amendments that may be relevant to the Bank, but are not expected to have any significant impact in its financial statements, are set out below:

• Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB).

• IFRS 17 “Insurance Contracts”(issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021).

• IFRIC 23 “Uncertainty over Income Tax Treatments” (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019). • Prepayment Features with Negative Compensation – Amendments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019). • Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement” (issued on 7 February 2018 and effective for annual periods beginning on or after 1 January 2019). • Definition of materiality – Amendments to IAS 1 and IAS 8 (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020).

68 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk management The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance. The Bank’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. Risk management is carried out by a risk department in the Bank under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as, credit risk, foreign exchange risk, interest rate risk and liquidity risk. In addition, internal audit is responsible for the independent review of risk management and the control environment. The most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest rate and other price risk. 6.1. Credit risk

Credit risk is the risk of loss for the Bank, arising from the potential failure of counterparty to meet its contractual obligations. Tirana Bank analysis the full spectrum of credit risk including its sub-categories such as lending risk, counterparty risk, issuer risk, settlement risk, concentration risk, Fx lending risk, sovereign risk and residual risk. Such assessment is translated into the internal evaluation of the capital need for credit risk. Credit risk is the most material risk for the bank requiring the major part of the minimum capital and it mainly derives from lending activities (loans and advances) to customers and investments in debt securities as presented in its structure of the balance sheet. On and off balance sheet exposures are analyzed in terms of the possible loss they can produce and provisioned accordingly as per the documented provisioning methodologies approved by the Board of Directors. The Bank’s Corporate Governance principles ensure proper allocation of responsibility and accountability based on the risk origination, aiming to align the risk taking process with the risk appetite. The Bank’s exposure to credit risk is regularly monitored in relation to the approved risk appetite ensuring that the risk profile of the Bank stays within the acceptable levels. Deviations, if any, from the risk appetite are escalated according to the Board of Directors.

The main targets of the Bank’s Credit Risk Management are to: 1) Set centralized policies aligned with the Group Policies and in compliance with Central Bank requirements; 2) Monitor the Bank’s portfolio. 3) Managing risk pro-actively to identify and analyse risk at an early stage 4) Create risk management function independent of commercial lines of the business 5) Integrate the risk management function into the organizational business process 6) Report on risk across the organization

69 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk management (continued) 6.1. Credit risk (continued) The Credit Risk Management Committee is responsible for: • Developing Credit Risk management systems and infrastructure: analysing results and reporting to the management • Preparing the Bank for Basel II implementations • Relationship with Bank of Albania (Central Bank), Piraeus Bank and/or other authorities in the terms of effectiveness of Credit Risk Management The Audit Committee and Internal Auditing Department follow up the compliance with policies and procedures. 6.1.1. Credit risk measurement The procedures described below relate to credit risk measurements for operational purpose as well as for reporting under Bank of Albania regulation. Impairment losses on loans and advances for financial reporting are determined based on the procedures described in Note 6.1.3. (a) Loans and advances In measuring credit risk of loan and advances to customers and to banks at a counterparty level, the Bank reflects three components (i) the ‘probability of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Bank derives the ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’). (i) The Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the Bank are segmented into five rating classes. The Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The Bank regularly validates the performance of the rating and their predictive power with regard to default events. Bank’s internal ratings scale

Bank’s rating Description of the grade A Investment Grade B Standard C Special Monitoring D Substandard E Doubtful and Loss

70 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk management (continued) 6.1. Credit risk (continued) 6.1.1. Credit risk measurement (continued) Criterion for classification of Financial Assets into groups A, B, C, D and E are as follows: Financial Assets are classified into Group A if they are toward debtors that have been evaluated in investment grade ratings by external rating agencies, e.g. Moody’s, S&P, Fitch, regardless of the internal MRA rating. The bank has no such customers as at December 31, 2018 and 2017. Financial Assets are classified into Group B if they are towards: • Bank of Albania and Albanian Government; • debtors which are not likely to default and who repay their obligations within the maturity, or with a delay of 30 days; and • exposures secured by pledging collateral graded as first class collateral. Financial Assets are classified into Group C if they are towards debtors: • whose cash flows are assessed as adequate to duly fulfil its due obligations, regardless its present financial position is assessed as weak, without signs of further deterioration in the future; and • who settle their liabilities with delay of up to 30 days, occasionally with delay between 31 and 90 days. Financial Assets are classified into Group D if they are towards debtors: • for which it is assessed, that cash flows will not be sufficient foregular r repayment of matured liabilities; • that settle their liabilities with delay of up to 90 days, occasionally with delay between 91 to 180 days; • that are clearly undercapitalized; • that do not have sufficient long term capital resources for financing long term investments; and • from whom bank does not receive currently satisfactory information or adequate documentation concerning repayment of liabilities. Financial Assets are classified into Group E if they are towards debtors: • for which exists a strong likelihood of loss of part of financial asset; • that settle their liabilities with delay of more than 90 to 180 days, occasionally with delay between 181 to 360 days; • which are insolvent; • for which a motion for commencement of process of liquidation or declaration of bankruptcy began and was filed at the provisional court; • that are in the process of reform or in the process of liquidation; • that declared bankruptcy; • from whom no repayment is expected; and • with questionable legal grounds.

71 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.1. Credit Risk Measurement (continued) (ii) Exposure at default is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur. (iii) Loss given default or loss severity represents the Bank’s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation. (b) Debt securities and other bills For debt securities and other bills, the risk department for managing of the credit risk exposures uses ratings depending on the issuer, which is Albanian Government. The investments in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time. Investment is allowed only in liquid securities that have high credit rating. Given their high credit ratings management of the Bank does not expect any counterpart to fail to meet its obligations. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. 6.1.2. Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties and groups, and to industries and countries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product and industry sector are approved by the Board of Directors. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Some other specific control and mitigation measures are outlined below. (a) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • Cash, banks and first class companies’ guarantees; • Mortgages over residential properties; • Charges over business assets such as premises, inventory and accounts receivable; and • Charges over financial instruments such as debt securities and equities.

72 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.2. Risk limit control and mitigation policies (continued) Loans to corporate entities and individuals are generally secured; over drafts and credit cards issued to individuals are secured mostly by cash deposits and collateral in cases of credit customers at the full amount of principal, interest and other charges. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Debt securities, treasury and other eligible bills are generally unsecured. (b) Credit-related contingencies The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans and are secured with same collateral as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. 6.1.3. Impairment and provisioning policies

The Bank shall recognize a loss allowance for expected credit losses on a financial asset, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply. The financial assets which are subject to impairment calculation are the following: a) financial assets measured at amortised cost b) financial assets measured at fair value through other comprehensive income c) lease receivables d) contract assets e) loan commitments to provide a loan at a below-market interest rate financial guarantee contracts

6.1.3.1. Measurement of Expected Credit Losses (ECL)

The Bank shall measure expected credit losses of a financial instrument in a way that reflects: a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; b) the time value of money; and c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

73 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.3. Impairment and provisioning policies (continued) 6.1.3.1. Measurement of Expected Credit Losses (ECL) (continued)

Expected credit losses are a probability-weighted estimate of credit losses (i.e. the present value of all cash shortfalls) over the expected life of the financial instrument. A cash shortfall is the difference between the cash flows that are due to the Bank in accordance with the contract and the cash flows that the Bank expects to receive. Because expected credit losses consider the amount and timing of payments, a credit loss arises even if the Bank expects to be paid in full but later than when contractually due.

6.1.3.2. Significant Increase in Credit Risk

At each reporting date, the Bank shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Bank shall use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, a comparison of the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition should be done and reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant increases in credit risk since initial recognition should be considered. The credit risk on a financial instrument is considered low, if the financial instrument has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfill its contractual cash flow obligations. Financial instruments are not considered to have low credit risk when they are regarded as having a low risk of loss simply because of the value of collateral and the financial instrument without that collateral would not be considered low credit risk. Financial instruments are also not considered to have low credit risk simply because they have a lower risk of default than the Bank’s other financial instruments or relative to the credit risk of the jurisdiction within which the Bank operates. If reasonable and supportable forward-looking information is available without undue cost or effort, a Bank cannot rely solely on past due information when determining whether credit risk has increased significantly since initial recognition. However, when information that is more forward-looking than past due status (either on an individual or a collective basis) is not available without undue cost or effort, the Bank may use past due information to determine whether there have been significant increases in credit risk since initial recognition. Regardless of the way in which a Bank assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. The Bank can rebut this presumption if it has reasonable and supportable information that is available without undue cost or effort, that demonstrates that the credit risk has not increased significantly since initial recognition even though the contractual payments are more than 30 days past due. When it determines that there have been significant increases in credit risk before contractual payments are more than 30 days past due, the rebuttable presumption does not apply.

74 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.3. Impairment and provisioning policies (continued) 6.1.3.3. Timing of Expected Credit Losses measurement At each reporting date, the Bank measures the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition. In case, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses should be measured. 6.1.3.4 Issues related to Expected Credit Losses calculation 6.1.3.4.1 Derecognition Before evaluating whether, and to what extent, derecognition is appropriate, the Bank determines whether derecognition should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows: a) Derecognition is applied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions. i. The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). ii. The part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or a group of similar financial assets). iii. The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets). b) In all other cases, derecognition is applied to the financial asset in its entirety (or to the group of similar financial assets in their entirety).

The Bank shall derecognize a financial asset when, and only when: a) the contractual rights to the cash flows from the financial asset expire, or b) it transfers the financial asset and the transfer qualifies for derecognition.

On derecognition of a financial asset in its entirety, the difference between: a) the carrying amount (measured at the date of derecognition) and b) the consideration received (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss. If the transferred asset is part of a larger financial asset and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The difference between: a) the carrying amount (measured at the date of derecognition) allocated to the part derecognised and b) the consideration received for the part derecognised (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss.

75 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.3. Impairment and provisioning policies (continued) 6.1.3.4.2. POCI (purchased or originated credit-impaired financial assets)

For purchased or originated credit-impaired financial assets, expected credit losses shall be discounted using the credit-adjusted effective interest rate determined at initial recognition. At the reporting date, the Bank shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial assets. At each reporting date, the Bank shall recognise in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. The Bank recognises favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition. 6.1.3.4.3. Credit Impaired Financial Assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: a) significant financial difficulty of the issuer or the borrower; b) a breach of contract, such as a default or past due event; c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganization; e) the disappearance of an active market for that financial asset because of financial difficulties; or f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired. 6.1.3.4.4. Collectively vs individually

In order to meet the objective of recognizing lifetime expected credit losses for significant increases in credit risk since initial recognition, it may be necessary to perform the assessment of significant increases in credit risk on a collective basis by considering information that is indicative of significant increases in credit risk on, for example, a group or sub-group of financial instruments. This is to ensure that the Bank meets the objective of recognizing lifetime expected credit losses when there are significant increases in credit risk, even if evidence of such significant increases in credit risk at the individual instrument level is not yet available. Lifetime expected credit losses are generally expected to be recognized before a financial instrument becomes past due. Typically, credit risk increases significantly before a financial instrument becomes past due or other lagging borrower-specific factors (for example, a modification or restructuring) are observed. Consequently when reasonable and supportable information that is more forward-looking than past due information is available without undue cost or effort, it must be used to assess changes in credit risk.

76 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.3. Impairment and provisioning policies (continued) 6.1.3.4.4.Collectively vs individually (continued)

However, depending on the nature of the financial instruments and the credit risk information available for particular groups of financial instruments, the Bank may not be able to identify significant changes in credit risk for individual financial instruments before the financial instrument becomes past due. This may be the case for financial instruments such as retail loans for which there is little or no updated credit risk information that is routinely obtained and monitored on an individual instrument until a customer breaches the contractual terms. If changes in the credit risk for individual financial instruments are not captured before they become past due, a loss allowance based only on credit information at an individual financial instrument level would not faithfully represent the changes in credit risk since initial recognition. In some circumstances the Bank does not have reasonable and supportable information that is available without undue cost or effort to measure lifetime expected credit losses on an individual instrument basis. In that case, lifetime expected credit losses shall be recognized on a collective basis that considers comprehensive credit risk information. This comprehensive credit risk information must incorporate not only past due information but also all relevant credit information, including forward-looking macroeconomic information, in order to approximate the result of recognizing lifetime expected credit losses when there has been a significant increase in credit risk since initial recognition on an individual instrument level. For the purpose of determining significant increases in credit risk and recognizing a loss allowance on a collective basis, the Bank groups the financial instruments on the basis of shared credit risk characteristics withthe objective of facilitating an analysis that is designed to enable significant increases in credit risk to be identified on a timely basis. The Bank should not obscure this information by grouping financial instruments with different risk characteristics. 6.1.3.4.5. Probability-weighted outcome

The purpose of estimating expected credit losses is neither to estimate a worst-case scenario nor to estimate the best-case scenario. Instead, an estimate of expected credit losses shall always reflect the possibility that a credit loss occurs and the possibility that no credit loss occurs even if the most likely outcome is no credit loss.

77 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1 Credit Risk (continued) 6.1.4. Credit Quality The below tables shows information about the credit quality of Financial Assets measured at Amortized Cost:

Cash and Balances with As at December As at December 31, 2018 Central Bank 31, 2017 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Total Standard 7,120,301 - - - 7,120,301 6,914,728 Special monitoring ------Substandard ------Doubtful and Lost ------Total Gross Balances 7,120,301 - - - 7,120,301 6,914,728 Standard 169 - - - 169 - Special monitoring ------Substandard ------Doubtful and Lost ------Total Allowance 169 - - - 169 - Balances Net of Impairment 7,120,132 - - - 7,120,132 6,914,728

As at Loans and advances to As at December 31, 2018 December Banks 31, 2017 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Total Standard 17,454,093 - - - 17,454,093 26,544,252 Special monitoring ------Substandard ------Doubtful and Lost ------Total Gross Balances 17,454,093 - - - 17,454,093 26,544,252 Standard 7,020 - - - 7,020 - Special monitoring ------Substandard ------Doubtful and Lost ------Total Allowance 7,020 - - - 7,020 - Balances Net of Impairment 17,447,073 - - - 17,447,073 26,544,252

78 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.4. Credit Quality (continued)

As at Loans and advances As at December 31, 2018 December to Customers 31, 2017 Internal rating grade Stage 1 Stage 2 Stage 3 POCI Total Total Standard 14,069,174 2,559,297 32,489 - 16,660,960 17,760,997 Special monitoring 93,250 502,376 1,318,171 - 1,913,797 2,394,475 Substandard - - 271,027 - 271,027 567,995 Doubtful and Lost - - 5,610,295 - 5,610,295 6,648,318 Total Gross Balances 14,162,424 3,061,673 7,231,982 - 24,456,079 27,371,785 Standard 110,405 136,200 6,847 - 254,253 112,968 Special monitoring 11,186 68,453 200,790 - 298,611 224,385 Substandard - - 43,710 - 45,694 115,083 Doubtful and Lost - - 2,824,191 - 3,012,422 2,882,118 Total Allowance 121,591 204,653 3,075,539 - 3,610,980 3,334,554 Balances Net of Impairment 14,040,833 2,857,020 4,156,443 - 20,845,099 24,037,231 The internal rating systems described in Note 6.1.1 focus more on credit-quality mapping from the inception of the lending and investment activities. The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. However, the majority of the impairment provision comes from bottom two grades. The table below shows the percentage of the Bank’s on-balance sheet items relating to loans and advances and the associated impairment provision for each of the Bank’s internal rating categories:

Bank’s rating 2018 2017 Loans and Impairment Loans and Impairment advances (%) provision level (%) advances (%) provision level (%)

Investment Grade - - - - Standard 68.13 1.53 64.89 0.64 Special monitoring 7.83 15.60 8.75 9.37 Sub-standard 1.11 16.86 2.08 20.26 Doubtful and Loss 22.94 53.69 24.29 43.35 Total 100.00 14.77 100.00 12.18

79 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.5. Maximum exposure to credit risk before collateral held or other credit enhancements

Maximum exposure 2018 2017 Credit risk exposures relating to on-balance sheet assets are as follows: Cash and balances with Central Bank 5,341,403 5,222,274 Loans and advances to banks 17,447,072 26,544,252 Loans and advances to customers: Loans to individuals − Consumer/Overdrafts 2,037,421 1,854,145 − Credit cards 135,219 134,162 − Mortgages 5,525,917 5,989,826 7,698,557 7,978,133 Loans to corporate entities: − Large corporate customers 2,114,533 2,134,042 − Small and medium size enterprises (SMEs) 11,032,009 13,925,057 13,146,542 16,059,098 Total loans and advances to customers 20,845,099 24,037,231

Financial assets FVOCI 23,857,367 15,343,098

Credit risk exposures relating to off-balance sheet items are as follows: Letters of Guarantees 305,799 329,461 Letters of Credit 5,739 21,242 Loans Commitment 6,379,489 4,794,011 At 31 December 74,120,127 76,291,569 The above table represents a worst case scenario of credit risk exposure to the Bank at December 31, 2018 and 2017, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet. Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and debt securities based on the following: • 75.95 % of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2017: 73.64%); • Loans to SMEs, which represents the biggest group in the portfolio, are backed by collateral; • 56.71 % of the loans and advances portfolio are considered to be neither past due nor impaired (2017: 51.98%); and • The Bank has introduced a more stringent selection process upon granting loans and advances.

80 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.6. Loans and advances Loans and advances are summarised as follows:

December 31, 2018 December 31, 2017 Loans and Loans and Loans and Loans and advances to advances to advances to advances to customers banks customers banks

Neither past due nor impaired 13,868,578 17,454,093 14,228,527 26,544,252 Past due but not impaired 4,342,895 - 5,698,629 - Individually impaired 6,244,606 - 7,444,629 - Gross 24,456,079 17,454,093 27,371,785 26,544,252 Less: allowance for impairment (3,610,980) (7,020) (3,334,554) -

Carrying amount 20,845,099 17,447,073 24,037,231 26,544,252 Further information of the impairment allowance for loans and advances to banks and to customers is provided in Notes 13 and 14. Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired (classified as standard) can be assessed by reference to the internal rating system adopted by the Bank.

December 31, 2018 Loans and advances to customers

Individual (retail customers) Corporate entities Total Loans and Large Loans and Consumer/ Credit advances to Mortgages corporate SMEs advances to Overdrafts cards banks customers customers Gross carrying amount 1,597,041 115,864 3,650,573 2,003,215 6,501,885 13,868,578 17,454,093 Less: allowance for impairment (17,318) (4,507) (30,110) (11,999) (105,387) (169,320) (7,020) Net carrying amount 1,579,723 111,357 3,620,463 1,991,216 6,396,498 13,699,258 17,447,073

81 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

December 31, 2017 Loans and advances to customers

Individual (retail customers) Corporate entities Total Loans and Large Loans and Consumer/ Credit advances Mortgages corporate SMEs advances to Overdrafts cards to banks customers customers Gross carrying amount 1,390,534 116,201 3,494,560 1,567,418 7,659,815 14,228,527 26,544,252 Less: allowance for impairment (18,887) (6,590) (21,489) (356) (14,413) (61,736) - Net carrying amount 1,409,421 122,791 3,516,049 1,567,774 7,674,228 14,290,263 26,544,252

82 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.6. Loans and advances (continued) Loans and advances in the Sub-standard and Doubtful grades were considered not to be impaired after taking into consideration the recoverability from collateral for retail customer mortgage and consumer loans. (a) Loans and advances past due but not impaired Gross amount of loans and advances that are past due but not impaired: (i) Loans and advances to customers

December 31, 2018 Corporate and SMEs Past due 1 up to 90 days 1,469,186 Past due 91-180 days 25,580 Past due 181-360 days 44,124 Past due > 360 days 528,931 Total 2,067,821 Fair value of collateral 1,852,040 Total loans and advances past due but not impaired at December 31, 2018 4,342,895

December 31, 2018 Individual (retail customers) Consumer/ Overdrafts Mortgages Visa Card Total Past due 1 up to 90 days 419,462 1,693,506 24,569 2,137,537 Past due 91-180 days 85,893 85,893 Past due 181-360 days 22,028 22,028 Past due > 360 days 29,616 29,616 Total 419,462 1,831,043 24,569 2,275,074 Fair value of collateral 279,003 1,791,636 - 2,070,639

December 31, 2017 Corporate and SMEs Past due 1 up to 90 days 2,309,925 Past due 91-180 days 60,407 Past due 181-360 days 53,110 Past due > 360 days 609,224 Total 3,032,666 Fair value of collateral 2,988,402 Total loans and advances past due but not impaired at December 31, 2018 5,698,629

83 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.6. Loans and advances (continued) (a) Loans and advances past due but not impaired Loans and advances to banks There are no loans and advances to banks as at December 31, 2018, which are past due but not impaired (2017: nil).

December 31, 2017 Individual (retail customers) Consumer/ Mortgages Visa Card Total Overdrafts Past due 1 up to 90 days 402,596 2,052,697 26,001 2,481,295 Past due 91-180 days 99,524 99,524 Past due 181-360 days 17,947 17,947 Past due > 360 days 67,198 67,198 Total 402,596 2,237,366 26,001 2,665,964 Fair value of collateral 313,852 2,209,786 1,918 2,525,556 Loans and advances impaired Loans and advances to customers The breakdown of the gross amount of individually impaired loans and advances by class, along with the fair value of related collateral held by the Bank as security, are as follows:

Consumer and Corporate and Mortgage Total Visa Cards SMEs December 31, 2018 Individually impaired loans 5,068 46,270 5,457,441 5,508,779 Fair value of collateral - 44,087 4,311,578 4,355,665

December 31, 2017 Individually impaired loans 1,205 95,777 6,715,518 6,812,500 Fair value of collateral - 76,452 6,302,233 6,378,685

84 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

The breakdown of the gross amount of collectively impaired loans and advances by class, along with the fair value of related collateral held by the Bank as security, are as follows:

Consumer and Mortgage Corporate and Visa Cards Total SMEs December 31, 2018 Collectively impaired loans 228,810 302,695 204,322 735,827 Fair value of collateral 72,544 267,462 100,773 440,779 December 31, 2017 Collectively impaired loans 243,423 363,849 24,857 632,129 Fair value of collateral 101,229 351,065 12,086 464,380

85 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.1. Credit Risk (continued) 6.1.6. Loans and advances (continued) The disclosed fair value of collateral is determined by local certified valuators and represents value realisable by the legal owners of the assets. Management considers the loans covered by collateral on corporate loans as impaired because experience shows that a significant proportion of the collateral on corporate loans cannot be enforced due to administrative and legal difficulties such as such as decrease of collateral value at auctions administered by bailiff office, time necessary for collaterals to be enforced. The impairment provisions reflect the probability that management will not be able to enforce its rights and repossess collateral on defaulted loans. Despite difficulties in enforcing repossession of collateral, the Bank’s management will vigorously pursuethe outstanding debts with all possible means at their disposal. There are no individually impaired loans and advances to banks as at December 31, 2018 and 2017. Renegotiated loans as at December 31, 2018 are Lek 245,003 thousand on 29 cases (2017: Lek 729,392 thousand on 55 cases). 6.2. Market risk Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s / issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Market Risk issues are followed up in regular basis by “Asset & Liabilities Management Committee” (ALCO). 6.2.1. Foreign exchange risk The Bank is exposed to currency risk through transactions in foreign currencies. The Bank ensures that the net exposure is kept to an acceptable level by buying or selling foreign currency at spot when necessary to address short-term imbalances. The Management sets limits on the level of exposure by currencies, which are monitored daily.

86 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.2. Market risk (continued) 6.2.1. Foreign exchange risk (continued) Concentrations of currency risk – on and off-balance sheet financial instruments:

Other At December 31, 2018 EUR USD LEK Total currencies Assets Cash and balances with the Central Bank 3,206,455 398,400 23,382 3,491,895 7,120,132 Due from banks 15,758,362 1,032,755 655,956 - 17,447,073 Loans and advances to customers 10,610,595 827,426 15,562 9,391,516 20,845,099 Investment securities FVOCI 5,886,887 - - 17,970,480 23,857,367 Financial assets held to maturity - - - - - Total financial assets 35,462,299 2,258,581 694,900 30,853,891 69,269,671

Liabilities Due to banks 207,133 - 13,089 2,397,048 2,617,270 Due to customers 23,647,481 2,199,825 663,950 30,653,624 57,164,880 Total financial liabilities 23,854,614 2,199,825 677,039 33,050,672 59,782,150 Net on-balance sheet currency position 11,607,684 58,755 17,861 (2,196,780) 9,487,520 Off-balance sheet items 4,895,848 40,431 611,519 1,143,228 6,691,026 Sensitivity if exchange rates increase by 5% (6,953) (153) 604 (6,502) Sensitivity if exchange rates decrease by 5% 6,953 153 (604) 6,502 The Bank manages its foreign currency exposure taking into consideration that its share capital and share premium is denominated in EUR. The sensitivity presented in the table above calculates the increase/decrease of pre-tax profit if at the reporting date, Lek exchange rate had increased/decreased by 5% against the respective foreign currencies with all other variables held constant.

87 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.2. Market risk (continued) 6.2.1. Foreign exchange risk (continued)

Other At December 31, 2017 EUR USD LEK Total currencies Assets Cash and balances with the Central Bank 3,202,924 411,662 18,214 3,281,928 6,914,728 Due from banks 24,738,436 1,276,316 64,625 464,875 26,544,252 Loans and advances to customers 13,527,180 1,063,069 17,802 9,429,180 24,037,231 Investment securities available for sale 2,998,893 - - 12,344,205 15,343,098 Financial assets held to maturity - - - - -

Total financial assets 44,467,433 2,751,047 100,641 25,520,188 72,839,309

Liabilities and equity Due to banks 135,922 - 15,954 1,100,406 1,252,282 Due to customers 25,956,351 2,539,180 528,443 31,933,172 60,957,146

Total financial liabilities 26,092,273 2,539,180 544,397 33,033,578 62,209,428

Net on balance sheet currency position 18,375,160 211,867 (443,756) (7,513,390) 10,629,881 Off balance sheet items 4,704,308 116,848 479,840 271,545 5,572,541 Sensitivity if exchange rates increase by 5% (8,098) (49) 999 (7,148) Sensitivity if exchange rates decrease by 5% 8,098 49 (999) 7,148 6.2.2. Interest rate risk The Bank’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-bearing liabilities mature or re-price at different times or in differing amounts. In the case of floating rate assets and liabilities, the Bank is also exposed to basis risk, which is the difference in re-pricing characteristics of the various floating rate indices, such as the savings rate, LIBOR and different types of interest. Risk management activities are aimed at optimising net interest income, given market interest rate levels consistent with the Bank’s business strategies. Asset-liability risk management activities are conducted in the context of the Bank’s sensitivity to interest rate changes. In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rates. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation.

88 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.2. Market risk (continued) 6.2.2. Interest rate risk (continued) The Bank attempts to mitigate this interest rate risk by monitoring the reprising dates of its assets and liabilities and setting product reprising terms in order to manage gain / loss from changes in market base rates. In addition, the Bank has contractual rights to revise the interest rates on the major part of its loan portfolio on a quarterly basis. The following table presents the interest rate reprising dates for the Bank’s assets and liabilities. Variable-rate assets and liabilities have been reported according to their next rate change date. Fixed-rate assets and liabilities have been reported according to their scheduled principal repayment dates:

Less than one From 1 to 3 From 3 to Over Non-interest As at December 31, Total month months 12 months 1 year bearing 2018 Assets Cash and balances with the Central 5,341,403 - 1,778,729 Bank - - 7,120,132 Due from banks 17,447,073 - - - - 17,447,073 Loans and advances 3,115,770 3,108,503 14,306,110 314,716 - 20,845,099 to customers Investment 1,319,064 3,795,995 6,398,776 12,343,532 - 23,857,367 Securities at FVOCI Total financial 27,223,310 6,904,498 20,704,886 12,658,248 1,778,729 69,269,671 assets

Liabilities Due to banks 2,617,270 2,617,270 Due to customers 28,216,602 4,554,405 20,403,079 3,978,133 12,661 57,164,880 Total financial 30,833,872 4,554,405 20,403,079 3,978,133 12,661 59,782,150 liabilities Interest sensitivity (3,610,562) 2,350,093 301,807 8,680,115 1,766,068 9,487,521 gap

89 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.2. Market risk (continued) 6.2.2. Interest rate risk (continued) The following table includes figures of comparative period:

Less than Non- As at December 31, From 1 to From 3 to Over one interest Total 2017 3 months 12 months 1 year month bearing Assets Cash and balances with 5,222,274 - 1,692,454 the Central Bank - - 6,914,728 Due from banks 26,544,252 - - - - 26,544,252 Loans and advances to 5,039,065 4,123,027 14,779,866 95,273 - 24,037,231 customers Investment Securities 401,898 4,173,070 3,028,658 7,739,472 - 15,343,098 Available for Sale Financial assets held to ------maturity Total financial assets 37,207,489 8,296,097 17,808,524 7,834,745 1,692,454 72,839,309

Liabilities Due to banks 1,252,282 1,252,282 Due to customers 27,559,640 6,534,067 23,074,425 3,695,710 93,304 60,957,146 Total financial liabilities 28,811,922 6,534,067 23,074,425 3,695,710 93,304 62,209,428 Interest sensitivity gap 8,395,567 1,762,030 (5,265,901) 4,139,036 1,599,150 10,629,881

90 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.2. Market risk (continued) 6.2.2. Interest rate risk (continued) Due to specifics of Albanian market, a large amount of customer deposits has a maturity of less than one month. However, the potential negative effect of adverse evolution in interest rates is significantly reduced due to low interest rates set by the Bank on customer demand deposits. The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. At December 31, 2018, if interest rates had been 100 basis points higher/lower with all other variables were held constant, the Bank’s pre-tax profit for the twelve month period ended December 31, 2018 would respectively increase/decrease by approximately Lek 73,878 thousand (2017: Lek 90,211 thousand). Interest rate sensitivity analysis by currency is presented below.

Other EUR USD LEK Total currencies At December 31, 2018 Total interest bearing financial 34,553,489 2,077,935 671,517 29,854,357 67,157,298 assets Total interest bearing financial 23,844,424 2,198,747 677,039 33,049,279 59,769,489 liabilities Interest sensitivity gap 10,709,065 (120,812) (5,522) (3,194,922) 7,387,809 Sensitivity if interest rates 107,091 (1,208) (55) (31,949) 73,879 increase by 100 bp Sensitivity if interest rates (107,091) 1,208 55 31,949 (73,879) decrease by 100 bp

Other EUR USD LEK Total currencies At December 31, 2017 Total interest bearing financial 43,683,400 2,590,698 82,427 24,780,664 71,137,189 assets Total interest bearing financial 26,022,893 2,536,819 544,348 33,012,063 62,116,123 liabilities Interest sensitivity gap 17,660,507 53,879 (461,921) (8,231,399) 9,021,066 Sensitivity if interest rates increase 176,605 539 (4,619) (82,314) 90,211 by 100 bp Sensitivity if interest rates (176,605) (539) 4,619 82,314 (90,211) decrease by 100 bp

91 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.3. Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfil commitments to lend. A Liquidity Risk Management Policy has been applied in all Bank units since the end of 2003. This policy is adjusted to internationally applied practices and regulatory environments and adapted to the specific activities of Piraeus Bank. The policy specifies the principal liquidity risk assessment definitions and methods, defines the rolesand responsibilities of the units and staff involved and sets out the guidelines for liquidity crisis management. The policy is focused on the liquidity needs expected to emerge, in one week or one month, on the basis of hypothetical liquidity crisis scenarios. Furthermore, the Policy defines a contingency funding plan to be used in the case of a liquidity crisis. Such a crisis can take place either due to a Tirana Bank specific event or a general market event. Triggers and warning signals serve as indicators of when the contingency plan should be put into operation. This contingency plan is mainly based on additional financing to be received from the Parent upon request. In addition, Tirana Bank calculates and monitors the Liquidity ratios, “Liquid Assets/ Total Liabilities” and “Net Current Assets/Total Liabilities”, as they are defined in the Bank of Albania Directive, which refers to the control framework of banks’ liquidity adequacy, by the Bank of Albania (note 2.2.a). The levels of these particular ratios are daily communicated to the responsible business units, and comments, as well as respective assessments, are included in the reporting package to the members of ALCO. The ALCO has the responsibility: to design the bank’s strategy on the assets and liabilities development, depending on the qualitative and quantitative data of the organization and development of the business environment; to ensure high competitiveness and effectiveness of the organization, maintaining assumed risk within the set limits; to manage the assets and liabilities by applying a pricing policy on products and services at the same time. 6.3.1. Liquidity risk management process “The management of liquidity risk is a key objective of the Bank and evolves a broad set of activities spanning from the close monitoring of its liquidity position to the management of its funding sources and the uses of funds, in a way that does not compromise the ability of the Bank to meet its obligations. The Bank has adopted best practices and regulatory/supervisory guidelines in depicting the Bank’s liquidity position and the potential effects of adverse changes arising from the maturity (and non-renewal) of its funding sources as well as potential reduction in the value of its liquid assets. It exercises close monitoring of the cost of liquidity and it has ensured compliance with the regulatory liquidity risk framework while maintaining and regularly reviewing methodologies, policies, procedures and systems so as to effectively manage liquidity risk. The bank has maintained under careful monitoring its liquidity levels ensuring they remain above the regulatory minimums. Frequent stress tests are applied varying from sensitivity analysis to cash flow scenario analysis. The Bank has in place a contingency funding plan, well defined recovery plans and regularly updated internal regulatory framework covering the liquidity risk management.

92 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.3. Liquidity risk (continued) 6.3.1. Liquidity risk management process (continued) The table below analyses assets and liabilities into relevant time periods based on the remaining period at reporting date to the contractual maturity date. Assets and liabilities in foreign currency are converted into LEK using FX rates as at the year end. The assumptions made are that scheduled payments to the bank are honoured in full and on time and in addition, all contractual payments are discharged in full – e.g. that depositors will withdraw their money rather than roll it over on maturity. Those assets and liabilities lacking actual maturities (e.g. open accounts, sight deposits, or savings accounts) are assigned to the time band less than one month.

As at December Less than From 1 to From 3 to 12 From 1 to Over 5 Total 31, 2018 one month 3 months months 5 years Years Assets liquidity Cash and balances with the Central 7,120,132 - - 7,120,132 Bank - - Due from banks 17,447,072 - - - - 17,447,072 Loans and advanc- 757,526 1,489,365 5,854,332 20,845,099 es to customers 9,289,300 3,454,576 Investment Securi- 1,319,065 3,795,995 6,398,776 23,857,368 ties at FVOCI 12,343,532 - Financial assets - - - - held to maturity - - Total financial 69,269,671 assets 26,643,795 5,285,360 12,253,108 21,632,832 3,454,576

Liabilities liquidity Due to banks 2,617,270 - - - - 2,617,270 Due to customers 28,213,708 4,516,796 20,188,064 4,246,312 - 57,164,880 Loan commit- 4,859,444 7,305 1,470,588 13,347 28,805 6,379,489 ments Letters of Guaran- 31,042 112,564 156,022 6,171 - 305,799 tees Letters of Credit 5,739 - - - - 5,739 Total financial 35,727,203 4,636,665 21,814,674 4,265,830 28,805 66,473,177 liabilities Net liquidity gap (9,083,408) 648,695 (9,561,566) 17,367,002 3,425,771 2,796,494

All Bank’s customer current accounts are included in liabilities maturing less than one month. Current accounts do represent balances that have a history and a deviation in amounts which is measured by the Bank and is far less than the shown negative gap on tenors less than one month. Any issue arising from liquidity mismatch is managed through inter-bank activity (borrowing, lending) within the pre-approved credit lines

93 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.3. Liquidity risk (continued) 6.3.1. Liquidity risk management process (continued) The following table includes figures of comparative period:

Less than one From 1 to 3 From 3 to 12 From 1 to 5 Over 5 As at December 31, 2017 Total month months months years years Assets liquidity Cash and balances with the 6,914,728 - - 6,914,728 Central Bank - - Due from banks 26,544,252 - - - - 26,544,252 Loans and advances to 2,258,372 1,504,051 6,907,618 24,037,231 customers 10,020,735 3,346,455 Investment Securities 401,898 4,173,070 3,028,658 15,343,098 available for Sale 7,739,472 - Financial assets held to - - - - maturity - - Total financial assets 36,119,250 5,677,121 9,936,276 17,760,207 3,346,455 72,839,309

Liabilities liquidity Due to banks 1,252,282 - - - - 1,252,282 Due to customers 27,640,865 6,488,424 22,961,144 3,532,965 333,748 60,957,146 Loan commitments 4,468,798 27,342 247,667 14,821 35,383 4,794,011 Letters of Guarantees 40,244 12,896 276,321 - - 329,461 Letters of Credit - 21,242 - - - 21,242 Total financial liabilities 33,402,189 6,549,904 23,485,132 3,547,786 369,131 67,354,142 Net liquidity gap 2,717,061 (872,783) (13,548,856) 14,212,421 2,977,324 5,485,167

94 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.3. Liquidity risk (continued) 6.3.1. Liquidity risk management process (continued) Letters of credit and guarantees given to customers commit the Bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses. The Tirana Bank branch network includes 31 (2017: 33) rented buildings which are rented under operating leases. The Bank’s policy is to enter into long term contracts, which vary from 10 years to 20 years. The contracts are renewed following a negotiation between both parties in order to agree new terms of the contract. 6.4. Fair value of financial assets and liabilities Financial instruments not measured at fair value The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value. Carrying value Fair value 2018 2017 2018 2017 Financial assets Loans and advances to banks 17,447,072 26,544,252 17,447,072 26,544,252 Loans and advances to customers 20,845,099 24,037,231 19,721,930 23,200,582 Financial liabilities Due to customers 57,164,880 60,957,146 57,271,343 60,992,112 Due to banks 2,617,270 1,252,282 2,617,270 1,252,282 a) Loans and advances to banks Loans and advances to other banks include inter-bank placements. The fair value of fixed rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. With respect to deposits in Credit Institutions, these are short-term deposits, for which the carrying interest rate does not significantly differ from the market interest rate as at 31 December. b) Loans and advances to customers Loans and advances are net of allowances for impairment. The Bank’s loan portfolio has an estimated fair value which is smaller than its book value due to the higher market interest rates prevailing at the end of 2018 as a result of the actual market conditions. The majority of the loan portfolio is subject to re-pricing within a year. The fair value of loans and advances to customers is their expected cash flow discounted at current market rates. Current market rates are interest rates we would charge at the moment (year-end).

95 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.4. Fair value of financial assets and liabilities (continued) c) Due to other banks and customers, other deposits and other borrowings. The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity. The carrying value differs from the fair value because the carrying interest rates are higher than the market interest rate as at December 31, 2018, because at year end the banks are granting higher interest rates in the competition to attract deposits. Due to banks mainly refers to loans taken from the parent with a maturity of one month from the date of the balances sheet and therefore their fair value is consider to be approximate to the carrying value. Financial instruments measured at fair value Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) Level 1 are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities; (ii) Level 2 measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and (iii) Level 3 measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If afair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows:

December 31, 2018 Level 1 Level 2 Level 3 Total FINANCIAL ASSETS Loans and advances to banks - 17,447,072 - 17,447,072 Loans and advances to customers - - 19,721,930 19,721,930 Investments securities held to maturity - - - - Investment securities available for sale - 23,857,367 - 23,857,367 FINANCIAL LIAIBILITIES Customer accounts - - 57,271,343 57,271,343 Due to banks - - 2,617,270 2,617,270

96 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk Management (continued) 6.4. Fair value of financial assets and liabilities (continued)

December 31, 2017 Level 1 Level 2 Level 3 Total FINANCIAL ASSETS Loans and advances to banks - 26,544,252 - 26,544,252 Loans and advances to customers - - 23,200,582 23,200,582 Investments securities held to maturity - - - - Investment securities available for sale - 15,343,098 - 15,343,098

FINANCIAL LIAIBILITIES - Customer accounts - - 60,992,112 60,992,112 Due to banks - - 1,252,282 1,252,282

6.5. Capital management The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are: . to comply with the capital requirements set by the Bank of Albania; . to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and . to maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by Bank of Albania, for supervisory purposes. The required information is filed with Bank of Albania on a quarterly basis. Bank of Albania requires generally each bank or banking Group to: (a) hold the minimum level of the regulatory capital of 1 billion LEK and (b) maintain a ratio of total regulatory capital to the risk-weighted asset (the ‘Basel ratio’) at or above the Bank of Albania required minimum of 12% (2017: 12%). Bank of Albania has requested specifically that Tirana Bank maintains a minimum capital adequacy ratio of 15%, amidst the uncertainties of the financial crisis in Greece and its potential effect in Albania. The Bank’s regulatory capital as managed by its Risk Department is divided into two tiers: . Tier 1 capital: share capital (net of any book values of the treasury shares), retained earnings and reserves created by appropriations of retained earnings ; and . Tier 2 capital: qualifying subordinated loan capital, collective impairment allowances and unrealised gains arising on the fair valuation of equity and debt instruments held as available for sale.

The risk-weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of − and reflecting an estimate of credit, market and other risks associated with − each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off- balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses. The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended December 31, 2018 and 2017. The Bank complied with all of the externally imposed capital requirements to which they are subject in 2018.

97 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

6. Financial risk management (continued) 6.5. Capital management (continued)

2018 2017 Tier 1 capital Share capital 16,490,344 16,490,344 Statutory reserve 1,374,250 1,374,250 Profit of the period (certified by Auditors) 712,339 - Revaluation differences for statutory reporting (1,011,727) (181,922) Total qualifying Tier 1 capital 17,565,206 17,682,672

Tier 2 capital Subordinated liability - - Revaluation reserve - - Total qualifying Tier 2 capital - -

Deductions from regulatory capital (8,305,214) (9,462,534) Total regulatory capital 9,259,992 8,220,138

Risk-weighted assets: On-balance sheet 30,581,557 37,968,803 Off-balance sheet 661,567 713,203 Total risk-weighted assets 31,243,124 38,682,006

CAR ratio 29,64% 21,25% The capital adequacy ratio is calculated based on the Bank of Albania’s financial information, shown above. 7. Interest income

Year ended December 31, Year ended December 31, 2018 2017 Interest income from accounts with banks 65,305 36,087 Interest income from financial assets available for sale 645,629 577,564 Interest on loans and advances to customers 1,026,912 1,270,736 1,737,846 1,884,387

For the year ended December 31, 2018, interest on loans and advances to customers includes Lek 150,454 thousand (2017: Lek 245,313 thousand) interest income, recognised on impaired loans to customers.

98 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

8. Interest expense

Year ended December 31, 2018 Year ended December 31, 2017

Interest on due to banks 33,886 14,053 Interest on due to customers 161,053 184,801 194,939 198,854 9. Net fees and commission income

Year ended December 31, 2018 Year ended December 31, 2017 FX transactions 15 27 Letters of Credit 7,502 6,930 Money Transfer 73,357 72,202 Commission from Loans & Visa Card 76,004 75,526 Import-Export 12,776 12,618 Other fees received 247,447 256,445 Total fees and commission income 417,101 423,748

Credit Cards (17,099) (5,183) Correspondent Banks (4,112) (15,044) Total fees and commission expense (21,211) (20,227) Net fee and commission income 395,890 403,521

10. Personnel expenses

Year ended December 31, 2018 Year ended December 31, 2017

Wages and salaries 560,808 545,658 Contributions to state pension funds 68,316 68,217 Other staff costs 25,665 18,661 654,789 632,536

99 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

11. Other operating expenses

Year ended December 31, 2018 Year ended December 31, 2017 Fees for deposits insurance (ASD) 205,702 169,665 Rental charges payable under operating leases 160,583 216,813 Security and maintenance expenses 123,241 116,665 Telecommunication expenses 116,382 116,340 Card related expenses 75,431 63,973 Fees and other similar expenses 42,973 39,288 Utility expenses 40,814 40,462 Bank resolution fund 34,290 33,974 Advertising and marketing 28,390 36,546 Taxes (excluding income tax) 25,903 24,393 Other insurance expenses 23,647 21,401 Travel expense 17,464 16,945 Stationeries and consumables 12,955 13,570 Other 33,179 29,929 940,954 939,964

Fees for deposits insurance (ASD) are calculated and recorded each quarter by applying 12.5% on average insured deposits in accordance with law “On insurance of deposits”, no. 53/2014 dated May 22, 2014.

12. Income tax expense The components of income tax expense for the years ended December 31, 2018 and 2017 are:

Year ended December 31, 2018 Year ended December 31, 2017 Current tax Current tax expense - - Deferred tax Relating to origination and reversal of temporary differences (4,233) (9,493) Income tax expense reported in profit or loss (4,233) (9,493)

100 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

12. Income tax expense (continued) Reconciliation between the tax expense and the accounting profit multiplied by Albania’s domestic tax rate for the years ended December 31, 2018 and 2017 is as follows: Year ended Year ended December 31, 2018 December 31, 2017 Accounting (loss)/ profit before tax as per IFRS financial statements (1,627,236) 78,872 Theoretical income tax at 15% (2017: 15%) (244,085) 11,831 Tax effect of permanent differences: 59,767 154,139 -Income which is exempt from taxation (8,538) (21,127) -Non-deductible expenses 68,305 175,266 Unrecognised tax losses carry forward - (165,970) Current-year losses for which no deferred tax asset is recognized 184,319 - Current tax expense - -

Deferred tax Repossessed assets revaluation (28,833) (4,783) Other deferred tax items 24,600 (4,710) Deferred tax income charged in profit or loss (4,233) (9,493) Financial assets to FVOCI 6,220 17,697 Deferred tax expense charged in other comprehensive income 6,220 17,697 The Bank has unrecognised potential deferred tax assets of Lek 228,019 thousand (2017: Lek 43,700 thousand) in respect of unused tax losses carry forward. The tax loss carry forwards expire as follows:

Year ended December 31, Year ended December 31, 2018 2017 Tax losses carry-forwards expiring by the end of: - December 31, 2017 (291,333) (291,333) - December 31, 2018 (1,228,793) - Total tax loss carry forwards (1,520,126) (291,333) The effective income tax rate for 2018 is nil (2017: nil). As per tax assessment notice on tax liabilities dated March 27, 2019 for the fiscal period from 2014 to 2017, the accumulated loss of the Bank for the year ended December 31, 2017 was reassessed to Lek 234,471 thousand. Following the change in the ownership of the Bank as described in note 30.1, the Bank is not eligible to carry forward tax losses as prescribed in article 27 of law no. 8438, dated December 28, 1998 “On income tax”, amended. Corporate income tax receivable 2018 2017 January 1, 275,818 300,914 Prepayments during the year - - Income tax expense - - Offset with withholding tax liabilities (52,280) (25,097) Impairment (129,465) (249,635) December 31, 94,073 26,182 101 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

12. Income tax expense (continued) The deferred tax included in the balance sheet and changes recorded in the income tax expense are as follows:

2018 2017 Financial Financial assets assets Deferred Deferred available Deferred Deferred available tax tax Income for sale tax tax Income for sale Assets Liabilities Statement Reserve assets Liabilities statement Reserve

(Dr)/Cr (Dr)/Cr (Dr)/Cr (Dr)/Cr

Repossessed assets - (28,833) - 28,830 (4,783) - revaluation - Financial assets through - (61,959) - 6,220 - (55,736) 17,697 FVOCI Other deferred tax items 84,510 - 24,600 - 59,910 - (4,710) Total 84,510 (61,959) (4,233) 6,220 88,740 (55,736) (9,493) 17,697 Deferred tax assets, net 22,551 33,004

As at December 31, 2018 and 2017, other deferred tax items, include deferred tax assets as a result of temporary differences between the carrying amount and tax base at the balance sheet date of Property, plant and equipment’s and loan commissions.

102 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

13. Cash and balances with the Central Bank

Cash and balances with Central Bank As at December 31, 2018 As at December 31, 2017 Cash in hand Notes and coins in LEK 666,058 730,107 Notes and coins in foreign currency 1,112,671 962,348 1,778,729 1,692,455 Balances with the Central Bank Current account in LEK 333,477 - in foreign currency 167 248 333,644 248 Compulsory reserves in LEK 2,489,451 2,548,021 in foreign currency 2,517,021 2,671,800 5,006,472 5,219,821 Accrued interest 1,456 2,204 Impairment (169) - Total balances with Central Bank 5,341,403 5,222,273

Total cash and balances with Central Bank 7,120,132 6,914,728

Compulsory reserves with Central Bank are not for everyday use by Tirana Bank and represent a minimum reserve deposit, required by the Central Bank of Albania. Cash and balances with Central Bank, excluding cash in hand, is included in the analysis of the maximum exposure to credit risk (Note 6.1.5). Loans and advances to banks

Current accounts As at December 31, 2018 As at December 31, 2017 Nostro and sight accounts with banks 1,979,254 9,101,484 Cash in transit to correspondent banks - 132,950 Total current accounts 1,979,254 9,234,434

Placements Placements– Resident - - Placements – non resident 15,465,720 17,301,830 Accrued Interest 9,119 7,988 Total placements 15,474,839 17,309,818

Impairment on loans and advances to banks (7,020) -

Total loans and advances to banks 17,447,073 26,544,252

103 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

13. Cash and balances with the bank (continued) The interest rates on compulsory reserves during 2018 and 2017 fluctuated as follows: 2018 Currency Minimum Maximum Method of calculation LEK 1 % 1 % 100% of the yield on REPO with Central Bank USD 0% 0% - EUR -0,40% -0,40% - 2017 Currency Minimum Maximum Method of calculation LEK 0,875% 0,875% 70% of the yield on REPO with Central Bank USD 0% 0% - EUR -0,40% -0,40% - Current accounts with the Central Bank are non-interest bearing. The interest rates for nostros and sight accounts are floating. Nostro and sight accounts are detailed in the following table.

S&P LT/ST Year ended December 31, 2018 Year ended December 31, 2017 Nostro and sight accounts with banks Raiffeisen Bank International AG BBB+ 30,544 1,905,547 Deutche Bank AG BBB+ 1,917,735 7,223,308 Deutsche Bank Trust Bank Americas BBB+ 2,476 72,178 Piraeus Bank SA B- 28,499 33,401 Total 1,979,254 9,234,434

S&P Currency Original Currency In Lek ‘000 December 31, 2018 LT/ST Piraeus Bank B- EUR 85,000,000 10,490,700 BBVA A- EUR 27,000,000 3,332,340 BBVA A- GBP 4,500,000 618,390 BBVA A- USD 9,500,000 1,024,290 Accrued Interest 9,119 Total 15,474,839

S&P Currency Original Currency In Lek ‘000 December 31, 2017 LT/ST Piraeus Bank CCC+ EUR 72,000,000 9,598,990 BBVA BBB+ EUR 45,500,000 6,049,225 BBVA BBB+ GBP 3,100,000 464,845 San Paolo di Torino BBB USD 10,700,000 1,188,770 Accrued Interest 7,988 Total 17,309,818

104 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

13. Cash and balances with the bank (continued) The table below shows the changes in the loss allowance for Loans and advances to Banks and the reasons for those changes during year 2018:

Stage 1 Stage 2 Stage 3 POCI Purchased Loans and advances to Banks 12 month ECL Lifetime ECL Lifetime ECL Credit Total Impaired Loss allowance as at January 1, 2018 27,909 - - - 27,909 Movements with profit or loss impact: - - - - Transfer between Stages - - - - -

New financial assets originated or purchased - - - - - Changes in PDs/LGDs/EADs (18,719) - - - (18,719) Changes to model assumptions and - - - methodologies - - Modification of contractual cash flows of - - - financial assets - - Unwind of discount - - - - - Write offs - - - - - FX and other movements (2,001) - - - (2,001)

Total net profit or loss charge during the period (18,719) - - - (18,719)

Other movements with no profit or loss impact - - - - - Financial assets derecognised during the period - - - - - Loss allowance as at December 31, 2018 7,189 - - - 7,189 Changes in the gross carrying amount of Loans and advances to Banks during the period that have contributed to changes in the loss allowances are presented in the below table:

Stage 1 Stage 2 Stage 3 POCI Purchased Lifetime Lifetime Loans and advances to Banks 12 months ECL Credit Total ECL ECL Impaired Gross carrying amount as of January 1, 2018 26,544,252 - - - 26,544,252 Transfer between Stages ------Financial assets derecognised during the period other than write- offs - - - - New financial assets originated or purchased 15,479,137 - - - 15,479,137 Modification of contractual cash flows of financial assets - - - - - Changes in Interest accruals - - - - - Write – offs - -- - - FX and other movements (24,569,296) (24,569,296) Gross carrying amount as at December 31, 2018 17,454,093 17,454,093

105 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net

As at December 31, 2018 As at December 31, 2017

Corporate lending 2,124,845 2,143,580 SME lending 14,076,514 16,769,334 Total corporate and SME lending 16,201,359 18,912,914 Consumer lending 1,951,032 1,718,225 Mortgage 5,830,675 6,188,792 Overdrafts 195,803 243,383 Credit cards 242,439 212,295 Loan commissions deferred (83,110) (86,015) Accrued interest 117,881 182,191 Gross loans and advances 24,456,079 27,371,785

Less: Allowance for impairment losses (3,610,980) (3,334,554)

Total 20,845,099 24,037,231 Current 9,917,566 12,441,512 Non-current 10,927,533 11,595,719 The table below shows the industry analysis of gross loans (without taking into consideration the “Loan commissions deferred” and “Accrued interest”) granted to corporate and SMEs clients.

2018 2017 Manufacturing 4,309,209 4,833,733 Electricity 773,169 907,735 Trade 5,258,929 6,169,832 Construction 2,164,076 2,965,201 Other industries 3,695,976 4,036,413 Total gross loans 16,201,359 18,912,914

The interest rates for loans and overdrafts are floating as follows:

Currency Interest Rate Additional Penalty Interest Rate 2018 LEK 12 months TRIBOR + (1-8)% 5.0% -10 % USD 12 months LIBOR + (6.0)% 5.0% EUR 12 months EURIBOR+ (2 - 5)% 5.0%

2017 LEK 12 months TRIBOR + (1.6 - 8)% 5.0% - 10% USD 12 months LIBOR + (6.0)% 5.0% EUR 12 months EURIBOR+ (3.7 - 5)% 5.0%

106 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued) The movement in allowances (impairment) for losses on loans and advances to customers is as follows:

2018 2017 At 1 January 3,334,554 5,398,062 Initial Impact IFRS 9 221,291 - Write off (504,361) (2,225,842) Charge for the year 528,404 130,578 Exchange rate effect (121,738) (72,831) Other movements (payment from WO) 152,830 104,587 At 31 December 3,610,980 3,334,554

Individual impairments 2,594,447 2,736,323 Collective impairments 1,016,533 598,231 3,610,980 3,334,554 The movement in allowances for losses by classes of loans during 2018 is as follows:

Corporate and SME Consumer Mortgages Credit cards and overdrafts Total

At January 1, 2018 2,943,417 113,734 199,749 77,655 3,334,555 Impact IFRS 9 157,624 (4,017) 72,442 (4,758) 221,291 Write Offs (455,655) (30,791) (17,904) (11) (504,361) Charge for the year 466,245 11,216 23,613 27,330 528,404 Exchange rate effect (105,265) (1,119) (15,355) - (121,739) Other (payment from WO) 81,775 22,752 42,119 6,184 152,830 At December 31, 2018 3,088,141 111,775 304,664 106,400 3,610,980

The movement in allowances for losses by classes of loans during 2017 is as follows:

Corporate and SME Consumer Mortgages Credit cards and overdrafts Total At January 1, 2017 4,658,900 189,262 484,287 65,613 5,398,062 Write Off (2,015,494) (54,861) (142,380) (13,107) (2,225,842) Charge for the year 285,201 (26,832) (152,938) 25,147 130,578 Exchange rate effect (65,202) (689) (6,940) - (72,831) Other (payment from WO) 80,013 6,855 17,719 104,587 At December 31, 2017 2,943,418 113,735 199,748 77,653 3,334,554

In accordance with IFRS 9 below are presented the changes in the loss allowance for loans and advances to customers and the reasons for those changes during year 2018 as per loan category. In the summary table below is presented an explanation of how changes in the gross carrying amount of loans and advances to customers during the period contributed to changes in the loss allowance during the period ended December 31, 2018.

107 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued)

Stage 1 Stage 2 Stage 3 POCI Purchased 12-month Lifetime Lifetime Loans and advances to customers credit- Total ECL ECL ECL impaired Gross carrying amount as at January 1, 2018 16,753,826 1,912,914 8,705,045 - 27,371,786 Transfers: (1,698,086) 1,226,225 471,861 - - Transfer from Stage 1 to Stage 2 (1,757,845) 1,757,845 - - - Transfer from Stage 1 to Stage 3 (388,891) - 388,891 - - Transfer from Stage 2 to Stage 3 - (251,699) 251,699 - - Transfer from Stage 3 to Stage 2 - 138,209 (138,209) - - Transfer from Stage 3 to Stage 1 30,520 - (30,520) - - Transfer from Stage 2 to Stage 1 418,130 (418,130) - - - Financial assets derecognised during the period other than write-offs - - - - - New financial assets originated or purchased 3,809,898 499,777 213,693 - 4,523,368 Net decrease due to new disbursement/ loan payments (4,052,717) (469,471) (1,297,681) (5,819,869) Modification of contractual cash flows of financial assets - - - - - Changes in interest accrual - - - - - Write-offs - - (504,361) - (504,361) FX and other movements (650,497) (107,772) (356,575) - (1,114,844) Gross carrying amount as at December 31, 2018 14,162,424 3,061,673 7,231,983 - 24,456,079

108 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued) Table of changes in the loss allowance for loans to companies and the reasons for those changes:

Stage 1 Stage 2 Stage 3 POCI Purchased 12-month Lifetime Lifetime or originated Companies Total ECL ECL ECL credit- impaired Loss allowance as at January 1, 2018 43,550 11,338 3,046,153 - 3,101,041 Movements with profit or loss impact Transfers: (6,297) 32,207 192,154 - 218,064 Transfers from Stage 1 to Stage 2 7,526 38,861 - - 31,334 Transfers from Stage 1 to Stage 3 (1,208) - 149,567 - 148,359 Transfers from Stage 3 to Stage 1 1 - - - 1 Transfers from Stage 2 to Stage 1 2,437 (8,015) - - (5,578) Transfers from Stage 2 to Stage 3 - - 45,407 - 45,407 Transfers from Stage 3 to Stage 2 - 1,360 2,820 - (1,459) New financial assets originated or purchased 39,103 21,499 27,059 - 87,660 Changes in PDs/LGDs/EADs 16,297 3,443 256,031 - 275,771 Changes to model assumptions and methodologies - - - - - Modification of contractual cash flows of financial assets - - - - - Unwind of discount - - - - - Write-offs - - (33,475) - (33,475) FX and other movements - - (81,775) - (81,775) Total net profit or loss charge during the period 49,103 57,149 359,993 - 466,245 Other movements with no profit or loss impact (1,492) (708) (476,944) - (479,144) Financial assets derecognised during the period - - - - - Loss allowance as at December 31, 2018 91,160 67,778 2,929,203 - 3,088,141

109 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued)

Changes in the gross carrying amount of loans and advances to companies during the period which contributed to changes in the loss allowance is presented in below table:

Stage 1 Stage 2 Stage 3 POCI Purchased Companies 12-month ECL Lifetime ECL Lifetime ECL credit- Total impaired Gross carrying amount as at January 1, 2018 10,683,803 750,926 7,565,544 - 19,000,274 Transfers: (1,577,912) 1,170,533 407,379 Transfer from Stage 1 to Stage 2 (1,432,576) 1,432,576 - - - Transfer from Stage 1 to Stage 3 (321,757) - 321,757 - - Transfer from Stage 2 to Stage 3 - (114,054) 114,054 - - Transfer from Stage 3 to Stage 2 - 7,443 (7,443) - - Transfer from Stage 3 to Stage 1 20,988 - (20,988) - - Transfer from Stage 2 to Stage 1 155,434 (155,434) - - - Financial assets derecognised during the period other than write-offs - - - - - New financial assets originated or purchased 2,160,942 405,660 160,612 - 2,727,214 Increase/(Decrease) due to new disbursement/loan payments (2,874,128) (255,338) (1,108,358) (4,237,824) Modification of contractual cash flows of financial assets - - - - - Changes in interest accrual - - - - - Write-offs - - (455,655) - (455,655) FX and other movements (452,675) (48,330) (298,321) - (799,326) Gross carrying amount as at December 31, 2018 7,940,030 2,023,450 6,271,203 - 16,234,683

110 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued)

Table of changes in the loss allowance for consumer loans and the reasons for those changes:

Stage 1 Stage 2 Stage 3 POCI Purchased or 12-month Lifetime Lifetime Consumer originated credit- Total ECL ECL ECL impaired Loss allowance as at January 1, 2018 13,628 8,621 87,470 - 109,719 Movements with profit or loss impact Transfers: (323) 7,217 7,886 - 14,781 Transfers from Stage 1 to Stage 2 (384) 7,031 - - 6,647 Transfers from Stage 1 to Stage 3 (266) - 8,761 - 8,495 Transfers from Stage 3 to Stage 1 175 - (696) - (521) Transfers from Stage 2 to Stage 1 153 (2,709) - - (2,556) Transfers from Stage 2 to Stage 3 - (1,011) 3,207 - 2,196 Transfers from Stage 3 to Stage 2 - 3,906 (3,386) - 520 New financial assets originated or purchased 8,282 5,402 4,896 - 18,580 Changes in PDs/LGDs/EADs (6,064) 1,333 (570) - (5,301) Changes to model assumptions and methodologies - - - - - Modification of contractual cash flows of financial assets - - - - - Unwind of discount - - - - - Write-offs - - 5,509 - 5,509 FX and other movements - - (22,353) - (22,353) Total net profit or loss charge during the period 1,896 13,952 (4,632) - 11,216 Other movements with no profit or loss impact (223) (254) (8,682) - (9,159) Financial assets derecognised during the period - - - - - Loss allowance as at December 31, 2018 15,300 22,319 74,156 - 111,775

111 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued)

Changes in the gross carrying amount of consumer loans during the period which contributed to changes in the loss allowance is presented in below table:

Stage 1 Stage 2 Stage 3 Lifetime Lifetime Consumer 12-month ECL Total ECL ECL Gross carrying amount as at January 1, 2018 1,571,986 182,465 213,878 1,968,329 Transfers: (28,781) 17,379 11,402 Transfer from Stage 1 to Stage 2 (67,090) 67,090 - - Transfer from Stage 1 to Stage 3 (18,653) - 18,653 - Transfer from Stage 2 to Stage 3 - (19,779) 19,779 - Transfer from Stage 3 to Stage 2 - 26,681 (26,681) - Transfer from Stage 3 to Stage 1 349 - (349) - Transfer from Stage 2 to Stage 1 56,613 (56,613) - - Financial assets derecognised during the period other than - - - - write-offs New financial assets originated or purchased 843,302 23,972 7,389 874,663 Increase/(Decrease) due to new disbursement/loan (567,906) (35,206) (32,799) (635,911) payments Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (30,436) (30,436) FX and other movements (17,424) (4,584) (5,441) (27,449) Gross carrying amount as at December 31, 2018 1,801,177 184,026 163,994 2,149,197

112 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

Table of changes in the loss allowance for mortgage loans and the reasons for those changes: Stage 1 Stage 2 Stage 3 Lifetime Mortgage 12-month ECL Lifetime ECL Total ECL Loss allowance as at January 1, 2018 17,900 61,044 193,246 272,190 Movements with profit or loss impact Transfers: (507) 28,392 4,603 32,487 Transfers from Stage 1 to Stage 2 (1,185) 33,895 - 32,710 Transfers from Stage 1 to Stage 3 (422) - 7,707 7,285 Transfers from Stage 3 to Stage 1 38 - (94) (56) Transfers from Stage 2 to Stage 1 1,062 (12,424) - (11,362) Transfers from Stage 2 to Stage 3 - (11,549) 21,152 9,603 Transfers from Stage 3 to Stage 2 - 18,469 (24,162) (5,692) New financial assets originated or purchased 2,709 9,746 8,794 21,249 Changes in PDs/LGDs/EADs (7,490) 14,721 (3,044) 4,187 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows of financial assets - - - - Unwind of discount - - - - Write-offs - - 8,208 8,208 FX and other movements - - (42,518) (42,518) Total net profit or loss charge during the period (5,288) 52,858 (23,958) 23,613 Other movements with no profit or loss impact (1,262) (3,600) 13,723 8,861 Financial assets derecognised during the period - - - - Loss allowance as at December 31, 2018 11,350 110,304 183,010 304,664

113 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued) Changes in the gross carrying amount of mortgage loans during the period which contributed to changes in the loss allowance is presented in below table: Stage 1 Stage 2 Stage 3 12-month Mortgage Lifetime ECL Lifetime ECL Total ECL Gross carrying amount as at January 1, 2018 4,365,308 970,062 856,182 6,191,552 Transfers: (87,888) 38,893 48,995 Transfer from Stage 1 to Stage 2 (254,671) 254,671 - - Transfer from Stage 1 to Stage 3 (45,305) - 45,305 - Transfer from Stage 2 to Stage 3 - (116,695) 116,695 - Transfer from Stage 3 to Stage 2 - 103,835 (103,835) - Transfer from Stage 3 to Stage 1 9,171 - (9,171) - Transfer from Stage 2 to Stage 1 202,918 (202,918) - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 799,365 70,017 45,637 915,019 Increase/(Decrease) due to new disbursement/loan payments (608,575) (176,779) (184,464) (969,818) Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (18,259) (18,259) FX and other movements (180,362) (54,865) (52,687) (287,913) Gross carrying amount as at December 31, 2018 4,287,850 847,328 695,403 5,830,581

114 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

Table of changes in the loss allowance for Visa Card and the reasons for those changes:

Stage 1 Stage 2 Stage 3 12-month Lifetime Lifetime Visa Card Total ECL ECL ECL Loss allowance as at January 1, 2018 6,243 5,031 61,622 72,896 Movements with P&L impact Transfers: (315) 10 3,954 3,649 Transfers from Stage 1 to Stage 2 (224) 3,207 - 2,982 Transfers from Stage 1 to Stage 3 (187) - 3,502 3,315 Transfers from Stage 3 to Stage 1 1 - (1) (10) Transfers from Stage 2 to Stage 1 95 (2,623) - (2,528) Transfers from Stage 2 to Stage 3 - (734) 1,125 390 Transfers from Stage 3 to Stage 2 - 161 (661) (501) New financial assets originated or purchased 199 116 54 369 Changes in PDs/LGDs/EADs (2,348) (904) 32,746 29,464 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows of financial assets - - - - Unwind of discount - - - - Write-offs - - 1 1 FX and other movements - - (6,184) (6,184) Total net P&L charge during the period (2,463) (778) 30,571 27,330 Other movements with no P&L impact - - 6,173 6,173 Financial assets derecognised during the period - - - - Loss allowance as at December 31, 2018 3,779 4,253 98,367 106,399

115 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

14. Loans and advances to customers, net (continued)

Changes in the gross carrying amount of Visa Card during the period which contributed to changes in the loss allowance is presented in below table: Stage 1 Stage 2 Stage 3 12-month Lifetime Lifetime Visa Card Total ECL ECL ECL Gross carrying amount as at January 1, 2018 132,729 9,461 69,441 211,630 Transfers: (3,506) (580) 4,085 Transfer from Stage 1 to Stage 2 (3,508) 3,508 - - Transfer from Stage 1 to Stage 3 (3,176) - 3,176 - Transfer from Stage 2 to Stage 3 - (1,172) 1,172 - Transfer from Stage 3 to Stage 2 - 250 (250) - Transfer from Stage 3 to Stage 1 12 - (12) - Transfer from Stage 2 to Stage 1 3,165 (3,165) - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 6,288 129 54 6,471 Increase/(Decrease) due to new disbursement/loan payments (2,107) (2,149) 27,940 23,684 Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - (11) (11) FX and other movements (36) 6 (126) (156) Gross carrying amount as at December 31, 2018 133,367 6,868 101,383 241,618

116 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

15. Financial assets at fair value through other comprehensive income As at December 31, 2018 As at December 31, 2017

Government bonds 14,664,428 10,805,926 Government treasury bills 9,192,939 4,537,172 23,857,367 15,343,098

Shares in Visa Inc As at December 31, 2018 As at December 31, 2017

As at January 1, - 195,211 Sale - (195,211) As at December 31, - - The shares in Visa Inc. held by the Bank are granted by Visa as a form of reward for the long-standing cooperation with the Bank. The shares are granted on the basis of the performance against revenue and marketing expenditure targets.

As at December 31, As at December 31, Government bonds 2018 2017

As at January 1, 10,805,926 16,207,807 Purchase 6,991,221 2,972,213 Matured (2,958,749) (8,399,113) Gains from change in fair value 16,630 25,019 Other (foreign exchange) (190,600) As at December 31, 14,664,428 10,805,926

As at December 31, As at December 31, Government treasury bills 2018 2017

As at January 1, 4,537,172 5,044,534 Purchase 9,286,310 4,526,791 Matured during the year (4,645,964) (5,044,534) Gains from change in fair value, net 15,421 10,381 As at December 31, 9,192,939 4,537,172

117 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

15. Financial assets at fair value through other comprehensive income (continued)

Table of changes in the loss allowance for securities and the reasons for those changes:

Stage 1 Stage 2 Stage 3 12-month Securities Lifetime ECL Lifetime ECL Total ECL Loss allowance as at January 1, 2018 59,172 - - 59,172 Movements with profit or loss impact Transfers between stages - - - - New financial assets originated or purchased - - - - Changes in PDs/LGDs/EADs 75,349 - - 75,349 Changes to model assumptions and methodologies - - - - Modification of contractual cash flows of financial assets - - - - Unwind of discount - - - - Write-offs - - - - FX and other movements (1,155) - - (1,155) Total net P&L charge during the period 75,349 - - 75,349 Other movements with no P&L impact - - - - Financial assets derecognised during the period - - - - Loss allowance as at December 31, 2018 133,366 - - 133,366

Changes in the gross carrying amount of securities during the period which contributed to changes in the loss allowance are presented in below table:

Stage 1 Stage 2 Stage 3

Securities 12-month ECL Lifetime ECL Lifetime ECL Total

Gross carrying amount as at January 1, 2018 15,343,098 - - 15,343,098 Transfers between stages - - - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 16,277,531 - - 16,277,531 Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - - - FX and other movements (7,763,262) - - (7,763,262) Gross carrying amount as at December 31, 2018 23,857,367 - - 23,857,367

118 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

16. Investment property and repossessed assets, net Investment properties include repossessed assets real estate assets acquired by the Bank in settlement of overdue loans. The Bank intends to hold the properties for capital appreciation. Only 4 (four) properties have been rented during year 2018. No maintenance and repair works were performed to investment properties in 2018 and 2017.

As at December 31, 2018 As at December 31, 2017

Investment property, net 74,506 117,464 Repossessed assets, net 2,403,649 2,921,930

Movement in investment properties for the years ended December 31, 2018 and 2017 is presented as follows: As at December 31, 2018 As at December 31, 2017

Balance at beginning of year 90,519 90,519 (Loss)/ gain reserve on revaluation of investment property (16,013) 26,945 Balance at the end of the year 74,506 117,464 Movements in revaluation of investment property for the years ended December 31, 2018 and 2017 is presented as follows:

As at December 31, 2018 As at December 31, 2017

Balance at beginning of year 26,945 19,345 (Loss)/ gain on property revaluation (42,958) 7,600 Balance at the end of the year (16,013) 26,945 Repossessed assets represent real estate assets acquired by the Bank in settlement of overdue loans. The Bank expects to dispose the assets in the foreseeable future. The assets do not meet the definition of non-current assets held for sale, and are classified as inventories in accordance with IAS 2 “Inventories”. The assets were initially recognised at fair value when acquired. Repossessed assets, net comprise the following:

As at December 31, 2018 As at December 31, 2017

Balance at beginning of year 3,214,519 2,961,213 Acquisitions through legal process for settlement of loans to customers 207,775 508,129 Disposals (510,928) (254,822) Balance at the end of the year 2,911,366 3,214,520 Allowance for impairment of repossessed assets (507,717) (292,589) Balance at the end of the year, net of allowance for impairment 2,403,649 2,921,931

119 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

16. Investment property and repossessed assets, net (continued)

Movements in the provisions for impairment of repossessed assets are as follows:

As at December 31, 2018 As at December 31, 2017 Balance at the beginning of the year (292,589) (214,231) Expense for repossessed assets impairment (246,113) (126,437) Release for repossessed assets impairment 30,985 48,079 Balance at the end of the year (507,717) (292,589) 16.1 Fair value measurement of the Bank’s investment and Inventory properties The fair value of the Bank’s investment property as at December 31, 2018 and 2017 has been measured on the basis of a valuation carried out on the respective dates by several independent appraisers, including the bailiff offices, outsourced from the Bank. All appraisers are registered and certified in accordance with the Albanian Laws. They have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The fair value was determined based on the market comparable approach that reflects recent transaction prices for similar properties. There has been no change to the valuation technique during the year. In estimating the fair value of the properties, the highest and best use of the properties is their current use. There were no investment properties classified as Level 1 or Level 3, nor transfers between levels 1, 2 and 3 during the year. Details of the Bank’s investment properties and repossessed assets, on a gross basis before any impairment allowance and information about the fair value hierarchy as at December 31, 2018 and 2017 are as follows:

As at December 31, 2018 As at December 31, 2017 Level 2 Level 2 Durres 792,682 855,835 Tirane 671,342 804,809 Korce 218,102 256,679 Kavaje 111,023 125,402 Kruje 120,733 116,533 Vlore 104,881 116,024 Fier 31,417 103,352 Lezhe 47,825 85,266 Elbasan 75,677 84,930 Lushnje 61,626 68,019 Kukes 61,984 65,603 Shkoder 30,746 55,968 Sarande 19,958 27,521 Other 130,159 273,453 Total 2,478,155 3,039,394

120 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

17. Intangible assets

Software Total Cost At 1 January 2017 1,347,759 1,347,759 Additions 29,631 29,631 At December 31, 2017 1,377,390 1,377,390 At January 1, 2018 1,377,390 1,377,390 Additions 53,881 53,881 At December 31, 2018 1,431,271 1,431,271

Amortization At 1 January 2017 (1,054,473) (1,054,473) Amortization charge for the year (80,882) (80,882) At December 31, 2017 (1,135,355) (1,135,355) At January 1, 2018 (1,135,355) (1,135,355) Amortization charge for the year (88,097) (88,097) At December 31, 2018 (1,223,452) (1,223,452) Carrying amount At December 31, 2017 242,035 242,035 At December 31, 2018 207,819 207,819

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Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

18. Property and equipment

Furniture and Land and Leasehold Vehicles electronic Total buildings improvement equipment Cost At 1 January 2017 709,484 97,404 1,540,465 906,757 3,254,110 Additions 4,034 510 35,403 16,483 56,430 Disposals - - (879) - (879) At December 31, 2017 713,518 97,914 1,574,989 923,240 3,309,660

At January 1, 2018 713,518 97,914 1,574,989 923,240 3,309,660 Additions 11,028 579 104,075 22,833 138,514 Disposals - - (35,466) (17,252) (52,719) At December 31, 2018 724,545 98,492 1,643,597 928,820 3,395,455

Depreciation At 1 January 2017 (339,482) (97,086) (1,458,339) (813,709) (2,708,616) Depreciation charge for the year (33,892) (670) (35,820) (33,479) (103,860) Disposals - - 879 - 879 At December 31, 2017 (373,374) (97,756) (1,493,280) (847,185) (2,811,596)

At January 1, 2018 (373,374) (97,756) (1,493,280) (847,185) (2,811,596) Depreciation charge for the year (34,145) 459 (41,221) (32,448) (107,355) Disposals - - 35,449 17,252 52,701 At December 31, 2018 (407,519) (97,298) (1,499,051) (862,381) (2,866,249)

Carrying amount At December 31, 2017 340,144 158 81,709 76,055 498,064 At December 31, 2018 317,026 1,194 144,546 66,440 529,206 Property and equipment’s are not pledged as collateral to third parties as at December 31, 2018 (2017: none).

122 ANNUAL REPORT 2018

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Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

19. Other assets

As at December 31, 2018 As at December 31, 2017 Other financial assets Other debtors, net 149,264 173,386 Other receivables from customers 71,835 72,177 Total other financial assets 221,099 245,563

Advance payments 452 629 Inventory 25,556 28,319 Prepaid expenses 57,798 166,856 Other assets 58,473 274,602 Total other assets 363,378 715,969 Other debtors are presented net of impairment. As at December 31, 2018 other debtors amount to Lek 217,561 thousand (2017: Lek 241,683) and the related impairment amounts respectively to Lek 68,297 (2017: Lek 68,297). 20. Due to banks

As at December 31, 2018 As at December 31, 2017 Current accounts Residents 13,157 202,459 Non residents 125,674 502 138,831 202,961 Borrowings Residents 2,466,586 1,033,097 Non residents 11,508 15,952 2,478,094 1,049,049 Accrued interest 345 272 2,617,270 1,252,282

123 ANNUAL REPORT 2018

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Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

21. Due to customers

As at December 31,2018 As at December 31, 2017 Corporate customers Current accounts 5,038,138 5,531,394 Term deposits 618,482 541,351 Other deposits 626,990 831,665 6,283,610 6,904,410 Retail customers Current / Savings accounts 19,268,767 18,242,028 Term deposits 31,250,390 35,347,365 Other deposits 242,311 252,768 50,761,468 53,842,161 Accrued interest 107,142 117,271 Cheques payables and remittances 12,660 93,304

Total 57,164,880 60,957,146

The below interest rates are applied on Customer Deposits for years 2018 and 2017:

21. Due to customers (continued)

Saving accounts: 2018 Currency Minimum Maximum LEK 0.00% 0.10% USD/EUR 0.00% 0.10%

2017 Currency Minimum Maximum LEK 0.00% 2.00% USD/EUR 0.00% 0.10%

Time deposits: 2018 Currency Minimum Maximum LEK 0.10% 2.50% USD/EUR 0.00% 0.80%

2017 Currency Minimum Maximum LEK 0.10% 2.60% USD/EUR 0.00% 0.80%

124 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

22. Other liabilities

As at December 31, 2018 As at December 31, 2017 Accrued expenses 151,458 187,831 Other liabilities 222,786 404,650 Other financial liabilities 374,244 592,481 Other taxes payable 16,177 14,493 Social insurance payable 9,385 10,235 Total 399,806 617,209

Accrued expenses include expenses on utilities, telephone expenses and bonuses related to current year and will be paid the year after.

125 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

23. Provisions

As at December 31, 2018 As at December 31,2017

Operational risk provision 69,285 62,885 Provision for off balance sheet items 61,840 - Total 131,125 62,885

Included in provision for off balance sheet there is an amount of Lek 71,527 thousand which belong to initial impact of IFRS 9, Lek 7,960 thousand which belong to the reversal and Lek 1,725 thousand which is foreign exchange effect in off balance sheet items.

Whereas movement in provision for operational risk is detailed below as at December 31, 2018 and 2017 are stated below: As at December 31, 2018 As at December 31, 2017

At 1 January 62,885 441,978 Reversals (5,942) (87,815) Charge of the year 12,342 26,825 Other - (170) Reclassification - (317,933) At 31 December 69,285 62,885 As at December 31, 2018 and 2017 provisions are mainly related to operational risks considered by the Bank. During 2018, provisions include the impact of IFRS 9 application in the off balance sheet items. 24. Paid-in capital and share premium

As at December 31, 2018 As at December 31, 2017 Paid in Capital-authorized, issued and fully paid 14,754,741 14,754,741 Share premium 1,735,494 1,735,494 Statutory Reserve 260,623 260,623 Legal Reserve 1,113,627 1,113,627 Other reserves (FVOCI) 484,466 325,761 Total 18,348,951 18,190,246 The table below shows the shareholders structure of the Bank as December 31, 2018 and 2017.

Number of Share in % Share in % Number of shares Shareholder’s name shares December 31, December 31, in 2017 in 2018 2018 2017

Piraeus Bank S.A Greece 496,098 98,83 496,098 98,83 Mr. Tzivelis Ioannis 5,877 1.17 5,877 1,17 Total 501,975 100,00 501,975 100,00 On December 31, 2018 and 2017, the authorised and issued share capital of the Bank was comprised of 501,975 shares with the nominal value of EUR 216.24 all fully paid.

126 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

24. Paid-in capital and share premium (continued) Following the Board of Directors resolution no.202, dated May 25, 2018, the Shareholders unanimously approved the partial conversion of share capital of the Bank in the General Meeting of Shareholders held on June 7, 2018. The share capital was converted for the total amount of Lek 3,685,810,815 or equivalent to EUR 27 million. Following the conversion described above, the share capital of the Bank is originally denominated EUR 108,547,074 or equivalent of Lek 14,754,741,000. Subsequent to the year end, the share capital of the Bank was reduced by EUR 28,635,254.53 through the reduction of nominal value of shares from EUR 216.4 to EUR 159.19 each. The basis and reasoning of this decision is the over-capitalization of the Bank (see note 30). 25. Other reserves Legal reserves have been established according to the Bank of Albania regulation “On the minimum initial capital for allowed activities of banks and branches of foreign licensed banks”, no.51, dated 22 April 1999. Banks and branches of foreign banks shall create reserves at 1,25% up to 2% of total risk weighted assets by deducting 1/5 of the profit after taxes before paying dividends. The statutory reserve has been established according to article no. 39 of the bank’s statute, which requires establishing of reserves by taking 5% of the bank’s net income after deducting the losses of the previous years. This procedure it’s not obligatory if the reserves exceed 1/10th of the bank’s share capital. 26. Cash and cash equivalents For the purpose of Cash Flow Statement, cash and cash equivalent comprises as follows:

Notes As at December 31, 2018 As at December 31, 2017

Cash in hand 8 1,778,729 1,692,454 Current accounts with Central Bank 8 333,643 248 Nostro and sight accounts with banks 8 1,979,254 9,234,434 Due from banks 8 15,467,819 17,309,818 19,559,445 28,236,954

127 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

27. Related parties In the course of conducting its banking business, the Bank entered into various business transactions with related parties. Related parties include: (a) Piraeus Bank S.A Greece for sight deposits, inter-bank placements and borrowings (b) Tirana Leasing (subsidiary of the parent) for lending and deposits (c) Cielo Consultancy Ltd (a subsidiary controlled by Piraeus Bank S.A), a Bank operating in the area of immovable property purchase and sale The below mentioned companies have been related to Piraeus Bank during year 2017 but aren’t any more during year 2018: 1. Piraeus Real Estate Tirana Ltd (a subsidiary controlled by Piraeus Bank S.A.) provides services related to immovable properties (valuations, analyzes) 2. Edificio Enterprise Ltd (a subsidiary controlled by Piraeus Bank S.A), a Bank operating in the field of immovable property purchase and sale 3. Tierra Projects Ltd, (a subsidiary controlled by Piraeus Bank S.A), a Bank operating in the area of immovable property purchase and sale

The immediate and ultimate parent of the Bank is Piraeus Bank SA (Greece).

As at December 31, 2018 As at December 31, 2017 Piraeus Bank SA Greece Sight deposits 28,499 33,401 Placements 10,499,730 9,607,219 Due to banks (2,255) (502) Borrowings (11,508) (15,954) 10,514,466 9,624,164

As at December 31, 2018 As at December 31, 2017 Tirana Leasing (subsidiary of Piraeus Bank SA) Due to Tirana Leasing (96,600) (433,351) (96,600) (433,351)

As at December 31, 2018 As at December 31, 2017 Cielo Consultancy SHPK Due to (45,061) (51,852) (45,061) (51,852)

As at December 31, 2018 As at December 31, 2017 Bank Directors Loans given 16,818 26,055 Due to (16,986) (10,735) (168) 15,320

128 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

27. Related parties (continued)

Income and expenses Year ended December 31, 2018 Year ended December 31, 2017

Piraeus Bank S.A. Greece Interest income 67,414 33,587 Interest expenses (422) (293) Fees and commission income 82 16 Fees and commission expenses (10) (19) Custody Fees (1,001) (1,183) 66,063 32,108

Management’s Compensation Year ended December 31, 2018 Year ended December 31, 2017

Income and expenses Salaries 45,865 46,117 Bonuses 3,474 - Total 49,339 46,117 Presentation of financial instruments by measurement category The following table provides a reconciliation of classes of financial assets with the measurement categories as of December 31, 2018:

Fair value Fair value As at December 31, 2018 Amortised cost through profit Total through OCI or loss Cash and balances with Central Bank 7,120,132 - - 7,120,132 Loans and advances to banks 17,447,072 - - 17,447,072 Financial assets at FVOCI - 23,857,367 - 23,857,367 Loans and advances to customers 20,845,099 - - 20,845,099 Total financial assets 69,269,670 Other assets 221,099 Total Assets 69,490,769

129 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

28. Presentation of financial instruments by measurement category (continued)

Loans and As at December 31, 2017 Available for sale Held to maturity Total receivables

Cash and balances with Central Bank 6,914,728 - - 6,914,728 Loans and advances to banks 26,544,252 - - 26,544,252

Held to maturity financial assets - - - - Financial assets available for sale - 15,343,098 - 15,343,098

Loans and advances to customers 24,037,231 - - 24,037,231 Total financial assets 72,839,309 Other assets 245,563 Total Assets 73,084,872 As of December 31, 2018 and December 31, 2017 all of the Bank’s financial liabilities were carried at amortised cost. 29. Commitments and contingencies Contingencies and commitments include guarantees extended to customers and received from Piraeus Bank. The balances as at December 31, 2018 and 2017 are composed of the following:

As at December 31, 2018 As at December 31, 2017

Granted Loan commitments 6,379,489 4,794,011 Letters of Guarantees 305,799 329,461 Letters of Credit 5,739 21,242

Received Guarantees received 2,457,911 2,643,806 IFRS 9 requirements for commitments and contingencies Table of changes in the loss allowance for securities and the reasons for those changes:

Stage 1 Stage 2 Stage 3 POCI Purchased or 12-month Lifetime Lifetime Off balance sheet originated credit- Total ECL ECL ECL impaired Loss allowance as at January 1, 2018 53,564 17,963 - - 71,527 Movements with P&L impact Changes in PDs/LGDs/EADs (7,231) (730) - - (7,961) FX and other movements (1,300) (426) - - (1,726) Total net P&L charge during the period (7,231) (730) - - (7,961) Other movements with no P&L impact - - - - - Loss allowance as at December 31, 2018 45,033 16,807 - - 61,840

130 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

29. Commitments and contingencies (continued) Changes in the gross carrying amount of commitment and contingencies during the period which contributed to changes in the loss allowance are presented in below table: Stage 1 Stage 2 Stage 3 12-month Lifetime Off balance sheets Lifetime ECL Total ECL ECL Gross carrying amount as at January 1, 2018 1,802,442 97,562 - 1,900,004 Transfers: (15,591) 25,220 (9,629) - Transfer from Stage 1 to Stage 2 2,015 (2,015) - - Transfer from Stage 1 to Stage 3 3,834 - (3,834) - Transfer from Stage 2 to Stage 3 - 4,235 (4,235) - Transfer from Stage 3 to Stage 2 - 1,402 (1,402) - Transfer from Stage 3 to Stage 1 158 - (158) - Transfer from Stage 2 to Stage 1 (21,597) 21,597 - - Financial assets derecognised during the period other than write-offs - - - - New financial assets originated or purchased 526,071 560 - 526,631 Modification of contractual cash flows of financial assets - - - - Changes in interest accrual - - - - Write-offs - - - - FX and other movements (573,321) (48,750) 9,629 (612,442) Gross carrying amount as at December 31, 2018 1,739,602 74,591 - 1,814,193 Litigation Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing. Lease commitments The Bank leases office premises in Tirana, Tiranë, Durrës, Korçë, Vlorë, Lezhë, Elbasan, Gjirokastër, Fushë Krujë, Shkodër, Lushnjë, Pogradec, Berat, Sarandë, Fier etc. These leases are cancellable with three months’ notice. Lease commitments are classified as follows:

As at December 31, 2018 As at December 31, 2017

Up to 1 year 174,233 125,327 From 1 to 5 years 287,026 261,927 More than 5 year 90,707 40,573 Total 551,966 427,826

131 ANNUAL REPORT 2018

Tirana Bank SHA

Note to financial statement for the year ended December 31, 2018 (All amounts are in thousands Albanian Lek unless otherwise stated)

30. Events after the reporting date 30.1 Share Capital Reduction The shareholders of Tirana Bank SHA on August 17, 2018 in the Extraordinary General Meeting of Shareholders unilaterally approved the reduction of the share capital of the Bank, based on the decision of the Board of Directors no. 204, dated August 14, 2018. Share capital was reduced to EUR 28,635,254.53 through the reduction of nominal value of shares from EUR 216.4 to EUR 159.19 each. The basis and reasoning of this decision is the over-capitalization of the Bank. The transaction was materialized on February 28, 2019. Following as well on the sale of the Bank (see note 30.2) the new capital structure is as follows:

Participation Shareholders Nominal Value (EUR) No. of shares (%) Balfin SHPK 159.19 496,098 90.12 Komercijalna Banka AD Skopje 159.19 5,877 9.88 Total 159.19 501,975 100.00

The table below summarizes the composition of the Regulatory Capital and the Bank’s reports after the reduction of capital, based on the latest data available as of March 31,2019. The Bank complies with all capital requirements for which they are subject in 2019.

Regulatory Capital As at December 31, 2018 As at March 31, 2019

- Share Capital 14,754,741 11,161,303 - Share Premium 1,735,603 1,735,603 - Reserves 1,374,250 1,374,250 - Revaluation Reserve (1,011,727) (823,975) - Carried forward Losses (8,230,228) (7,517,889) - Loss/(profit) of the period 712,339 - - Intangible Assets (74,985) (69,104)

Regulatory Capital 9,259,993 5,860,188

Total RWA 31,243,124 31,673,472

CAR in % 29.64% 18.50% 30.2 Sale of the Piraeus Bank shares held at Tirana Bank SHA Based on the Sale Purchase Agreements signed between Piraeus Bank S.A Greece, Balfin SHPK and Komercijalna Banka AD Skopje on February 28, 2019 and between Mr. Ioannis Tzivelis and Balfin SHPK, registered on the Commercial Register, respectively on 5 and March 19, 2019, the Bank has changed the ownership, after all the respective approvals from the authorities were received (see note 1). All the shares previously owned by Piraeus Bank S.A and Mr.Ioannis Tzivelis have been sold respectively 90.12% to Balfin SHPK and 9.88% to Komercijalna Banka AD Skopje. There will be no change in Tirana Bank Sha continuity and operations from the sale of the share capital. There are no other events after the reporting date that would require either adjustments or additional disclosures in the financial statements.

132