ANNUAL REPORT 2011 LAIKI BANK GROUP CONTENTS 3. Financial Highlights 5. Chairman’s Statement 7. Group Chief Executive Officer’s Statement 10. Board of Directors and other Officers 11. Analysis of Shareholders 12. Comments on the Results for 2011 27. Corporate Social Responsibility 31. Economic Developments 33. Financial Results 37. Risk Management 43. Consolidated Financial Statements 165. Important Addresses 2 ANNUAL REPORT 2011 LAIKI BANK GROUP Laiki Bank Group, with a history of over 110 years, has developed into a dynamic financial organization with a presence in 10 countries: Cyprus, Greece, United Kingdom, Russia, Ukraine, Romania, Serbia, Malta, Guernsey and a Representative Office in China. The Bank offers services to private individuals, enterprises and large organizations, private banking, foreign exchange and treasury services, electronic banking, factoring, financing and leasing, international banking, insurance, investment and fund management. The Group’s competitive advantage is its manpower, which is guided by a culture of innovation, competitiveness and successes. Its distinction in technological leadership, its customer-oriented approach and its anthropocentric philosophy confirm that Laiki Bank is more than just a Bank. FINANCIAL HIGHLIGHTS 2011 2010 2009 2008 2007 x '000 x '000 x '000 x '000 x '000 Profit before impairments 388.093 375.987 454.723 515.679 646.186 (Loss)/profit attributable to the owners of the Bank ( 3.650.380) 87.080 173.872 394.563 563.338 Capital resources Share capital 1.369.444 834.799 720.930 705.607 680.613 Reserves (875.284 ) 2.700.712 2.914.992 2.724.214 2.708.982 Non-controlling interests 106.398 105.863 123.321 139.755 92.623 Total equity 600.558 3.641.374 3.759.243 3.569.576 3.482.218 Loan capital 1.333.727 1.267.931 1.050.501 725.907 604.049 Total capital resources 1.934.285 4.909.305 4.809.744 4.295.483 4.086.267 Customer deposits 20.160.804 25.508.361 23.885.776 24.828.269 20.694.917 Advances to customers 24.778.623 26.417.333 25.082.163 23.427.226 17.615.108 Total assets 33.761.978 42.580.486 41.828.363 38.367.152 30.257.573 Per ordinary share (Loss)/earnings - cent (246,0) 10,0 20,8 48,3 72,1 Dividend – cent - 32,0(1) 8,0 15,0 35,0 (1) Interim dividend of x22,0 cent and a final dividend of x10,0 cent. 3 We fully recognize our great responsibility as well as the challenge to lead the Group during this particularly critical period of adjustment to the new state of affairs. LAIKI BANK GROUP CHAIRMAN’S STATEMENT Dear Shareholders, 2011 was certainly a year of challenges and important decisions for the Eurozone. At the same time, many Eurozone members and especially Greece were faced with a protracted period of uncertainty in the management of the debt crisis. The financial results for the year 2011 were significantly affected by the decisions regarding the restructuring of the Greek public debt, while reflecting at the same time the wider prevailing economic and business environment, mainly in Greece but also in Cyprus. The fiscal consolidation efforts in Greece, together with the adoption and effective implementation of structural reforms in the public and private sector, create the necessary conditions for the stabilization of the Greek economy and set the stage for gradual recovery and healthy growth. The prospects for the Cyprus economy are positive, especially following the recent necessary fiscal adjustment and the discovery of natural gas reserves, as well as the intention of the Cyprus government to proceed with further licenses for exploration in the Exclusive Economic Zone (EEZ) of the Republic of Cyprus. Infrastructure projects related to the management and exploitation of mineral resources are expected to contribute significantly to the development of the Cyprus economy and attract foreign investors with multiple benefits for many sectors of the economy, including the banking sector. Within the context of a prudent management, long-term growth conditions could be created without affecting the competitiveness of the Cyprus economy. We are presented with an attractive opportunity for Cyprus to become a regional energy hub and an alternative energy source for other European countries. At the beginning of 2011, our Group successfully completed the largest capital increase ever achieved by a company listed on the Cyprus Stock Exchange. However, subsequent developments and the final decisions for the Private Sector Involvement (PSI +) for the restructuring of the Greek public debt at the end of the year, created the need for our Bank, as well as for most European banks, to prepare capital enhancement plans in compliance with the new higher regulatory Core Tier I capital ratio requirements by 30 June 2012. Following the assumption of duties by the new Board of Directors at the beginning of 2012, we have initiated a comprehensive Capital Plan. The Plan combines a series of targeted actions and initiatives aimed at increasing the Core Tier I capital required, while targeting to safeguard and strengthen the Group’s resilience. The Group is repositioning itself strategically with Cyprus as its home base constituting its growth and development platform. The Group’s revised strategic orientation incorporates controlled exposure to concentrated risk, with upgraded mechanisms for efficient risk evaluation and management, stable results from the key business segments, focus on financing the core of the economy, businesses and households, and also growth based on its especially successful international business banking and international operations model. The Greek operations are being restructured, so as to improve efficiency and reduce the Group’s exposure, with a view to benefiting from recovery of the Greek economy in the future, while the Group is implementing a particularly tight cost containment policy. During 2011, despite the relative deceleration of lending growth rates necessitated by changing conditions and our responsibility for the Group’s stability, we upgraded the products and services we offer to our clients, which are expected to boost further our income growth. Supported by our recognised and high caliber human resources, we continue to focus our efforts on the satisfaction of our clients’ constantly increasing needs as well as the creation of further value. In our Group, we believe that corporate and social responsibility constitute an integral part of our corporate governance. We have continued to abide by our tradition to support the local communities in which we live and work. Dear shareholders, I would like to reassure you that we fully recognize our heavy responsibility as well as the challenge to lead the Bank during this critical adjustment period imposed by the current adverse economic conditions in Greece, Cyprus, but also in the rest of Europe. Our Group continues to benefit from a number of significant strategic advantages, among which are its leading position in the Cypriot domestic and international banking, its extensive international network connecting Cyprus with key markets abroad, and Cyprus’ healthy economic foundations and prospects arising from the recent discovery of gas reserves. This allows us to be optimistic for the success of the significant initiatives and efforts we are undertaking to continue contributing substantially to the growth of our economy. Michalis Sarris Chairman 5 We are formulating a new development model which is consistent with the new challenges, the Bank´s leading position, but also with its decisive contribution to an economic development. LAIKI BANK GROUP GROUP CHIEF EXECUTIVE OFFICER’S STATEMENT Dear shareholders, 2011 was an exceptionally difficult year for the broader European financial system and also for Laiki Bank Group. Banks had to operate in an environment characterized on the one hand by the escalation of the prolonged economic crisis and on the other hand by persistent tensions in financial markets. The protracted uncertainty regarding the outcome of the efforts to restructure Greek public debt, but also the unstable broader business environment, formed a determining factor for 2011 results. TARGETED ACTIONS AND FIRM STEPS At times of economic instability, it is very important to be clear as regards our strategy. After assuming my duties as Group CEO in December 2011, we have taken, under the guidance of our Board of Directors, important decisions on a number of issues regarding the future of the Group. Our top priority in the immediate future is the strengthening of our capital base, and our key objective is to enhance and strengthen the areas in which we have comparative advantage and superiority in order to lead Laiki Bank Group back to its historic high profitability levels. The primary objective in this short period of time was to identify our problems, which emerged from the effects of the prolonged crisis, and to confront them immediately and sincerely in order to be able to solve them decisively. In this context our initiatives are summarized as follows: • Further improved the mechanisms for efficient risk assessment and management. Meanwhile, at the end of 2011, we initiated and completed the appointment of two independent specialized consultants for the timely diagnostic assessment of the Group's loan portfolio to ensure preservation of the portfolio’s quality as well as decisively deal with risks from potential impairments • Focused on the transparent reflection of the impact on the loan portfolio, particularly in Greece due to the prolonged economic crisis, in order to make start with a revised and solid base • Completed the design of a comprehensive capital strengthening plan for the Group, given that our main goal for 2012 is to strengthen our capital base 2011 OPERATING RESULTS The market conditions in the area of operations, especially in Greece, during the last twelve months were the worst in the recent history of our Group.