2019 Annual Report 2019 Annual Report Bank of PBZ je član grupe ANNUAL REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2019 Table of contents ANNUAL REPORT 2019 Introduction 5 Report from the President of the Supervisory Board 11 Management Board report of the Status of the Bank 14 Management Board report of the Status of the Group 20 Macroeconomic developments in Croatia in 2019 25 Business description of the Bank 37 Business description of the Group 50 Overview of activities within the PBZ corporate social responsibility programme 55 The statement on the implementation of corporate governance code 62 Responsibilities of the Management and Supervisory Boards for the preparation and approval of the separate and consolidated financial statements, other information and supplementary information 76 Independent auditor’s report 78 Income statement 84 Statement of comprehensive income 85 Statement of financial position 86 Statement of cash flows 88 Statement of changes in equity 90 Notes to the financial statements 92 Appendix 1 - Supplementary forms required by local regulation 224 Appendix 2 - Supplementary financial statements in EUR (unaudited) 262 Appendix 3 – Other legal and regulatory requirements 265 3 Introduction ANNUAL REPORT 2019 Introduction The Management Board of Privredna banka Zagreb d.d. ABBREVIATIONS has the pleasure of presenting its Annual report to the In this Annual Report, Privredna banka Zagreb d.d. is re- shareholders of the Bank. This comprises a summary of ferred to as “the Bank” or “PBZ” or as “Privredna banka financial information, Management Board reports for the Zagreb”, and Privredna banka Zagreb d.d., together with Bank and the Group, the audited financial statements its subsidiaries and associates undertakings are referred and the accompanying audit report, supplementary forms to collectively as “the Group” or “the Privredna banka required by local regulation and unaudited supplementary Zagreb Group”. statements in EUR and other information. Audited financial The central bank, the Croatian National Bank, is referred statements are presented for the Group and the Bank. to as “the CNB”. The European Bank for Reconstruction and Development is referred to as “EBRD”. CROATIAN AND ENGLISH VERSION In this report, the abbreviations “HRK thousand”, This document comprises the Annual Report which also “HRK million”, “USD thousand”, “USD million”, “CHF includes separate and consolidated financial statements thousand”, “CHF million”, “EUR thousand”, “EUR of Privredna banka Zagreb d.d. for the year ended 31 million” and “BAM thousand” or “BAM million” rep- December 2019 in the English language. This report is resent thousands and millions of Croatian kunas, US also published in the Croatian language for presentation dollars, Swiss francs, Euros and Bosnian convertible to shareholders at the Annual General Meeting. marks respectively. LeGAL STATUS EXCHANGE RATES The separate and consolidated financial statements are pre- The following mid exchange rates set by the CNB ruling on pared in accordance with International Financial Reporting 31 December 2019 have been used to translate balances Standards as adopted by European Union (hereinafter: EU) in foreign currency on that date: and audited in accordance with International Standards on Auditing. CHF 1 = 6.839 HRK The Annual Report is prepared in accordance with the USD 1 = 6.650 HRK provisions of the Companies Act and the Accounting Law, which require the Management Board to report to share- EUR 1 = 7.443 HRK holders of the company at the Annual General Meeting. BAM 1 = 3.805 HRK 5 Who we are and what we do ANNUAL REPORT 2019 We are a leading Croatian financial services group engaged in retail and corporate banking, credit card operations, investment banking, private banking, leasing, investment management services and real estate activities. We oper- ate in the entire area of Croatia, Slovenia and in Bosnia and Herzegovina and employ over four thousand people. Our mission is to permanently and effectively utilize all of the resources at our disposal to continuously improve all aspects of our business activities, including human resources, technology and business processes. Our vision is to be a model company and centre of ex- cellence in creating new value, as well as provision of high-quality service in all of our activities for the benefit of our clients, the community, our stakeholders and our employees. 2,036 thousand HRK 91.8 billion 490,333 TOTAL CUSTOMERS TOTAL CUSTOMERS’ FUNDS* INTERNET BANKING USERS 1,896 thousand HRK 18.5 billion 278 CURRENT ACCOUNTS ASSETS UNDER CUSTODY TOTAL BRANCHES 1,140 HRK 80.4 billion 2,850 thousand ATM MACHINES TOTAL GROSS LOANS TOTAL CARDS ISSUED 195 HRK 16.7 billion 42,869 DAY AND NIGHT VAULTS TOTAL HOUSING LOANS EFT POS *Comprises customers deposits, assets under management and assets under custody 7 Five year summary and financial highlights ANNUAL REPORT 2019 Five year summary and financial highlights (in HRK million) GROUP 2019 2018 2017 2016** 2015** Income statement and statement of financial position Total gross revenue 5,720 5,727 5,797 6,294 6,047 Net interest income 2,813 2,813 2,979 2,950 2,895 Net operating income 4,920 4,859 4,919 5,224 4,625 Net profit for the year 1,738 1,720 1,295 1,739 461 Total assets 117,917 112,086 104,054 99,708 95,791 Loans and advances to customers 70,565 66,897 65,169 65,177 62,305 Due to customers 89,876 85,938 78,827 74,284 71,745 Shareholders’ equity attributable to equity holders of the Bank 16,319 16,036 15,725 15,626 14,292 Other data (as per management accounts) Return on average equity 9.80% 10.21% 8.10%** 10.83% 2.90% Return on average assets 1.33% 1.47% 1.20%** 1.68% 0.44% Assets per employee 22.6 21.2 20.4** 20.1 20.4 Cost income ratio 42.20% 44.20% 42.70%** 38.66% 43.79% **Presented information does not include Veneto banka dd (subsidiary acquired and merged in 2018) (in HRK million) BANK 2019 2018 2017 2016 2015 Income statement and statement of financial position Total gross revenue 4,501 3,885 4,315 4,532 4,087 Net interest income 2,189 2,207 2,374 2,335 2,193 Net operating income 3,998 3,321 3,815 3,839 3,161 Net profit for the year 1,880 1,380 1,443 1,605 193 Total assets 87,4 40 82,961 75,497 72,050 69,214 Loans and advances to customers 47,188 45,611 44,562 45,667 44,186 Due to customers 65,890 63,042 57,173 54,108 52,815 Shareholders’ equity attributable to equity holders of the Bank 14,661 14,151 13,755 12,769 11,424 Other data (as per management accounts) Return on average equity 13.40% 10.10% 11.10% 13.44% 1.67% Return on average assets 2.11% 1.65% 1.80% 2.13% 0.26% Assets per employee 24.5 22.8 21.8 21.3 21.7 Cost income ratio 32.90% 41.50% 35.30% 38.36% 43.73% 9 Report from the President of the Supervisory Board ANNUAL REPORT 2019 Report from the President of the Supervisory Board On behalf of the Supervisory Board of Privredna banka Zagreb dd., I am honored to present you the business results of the Bank and the Group for the year 2019. Gross domestic product in 2019 recorded a growth of around 3% finally ex- ceeding the pre-crisis level of 2008. The growth was primarily based on personal consumption and investment activity, while net foreign demand generated a negative contribution. Rise in household disposable income, supported by wage increase, employment growth and low inflation, stimulated personal consump- tion, additionally driven also by the awoken households’ credit appetite amid favourable financing conditions. Simultaneously, better withdrawal of the EU funds achieved a positive impact on investment activity, especially of the public sector through project such as the Pelješac Bridge, the railway and other infra- structures. Despite the visible slowdown of economic growth in the Eurozone amid the industrial recession in Germany, the export of goods recorded a solid growth in 2019, where the biggest contribution to growth came from the export of pharmaceutical products and other transport equipment. At the same time, tourism continued to rise and the financial performance, greatly surpassed the physical indicators of arrivals and overnight stays that grew at a slower pace than it used to be the case in recent years. Along with the continuation of positive economic trends, the past year was also characterised by the continuation of accommodative monetary policy of both Croatian National Bank and European Central Bank which, prompted by an evident slowdown of economic dynamics, in September additionally relaxed the mone- tary policy by reducing the deposit interest rate and reactivating asset purchase programme. During the year we also observed a number of important develop- ments such as exiting from the excessive macroeconomic imbalances procedure, upgrading of the investment rating by two rating agencies and sending the letter of intent to join the European Exchange Rate Mechanism (ERM2), as well as the related launching of a comprehensive assessment of five Croatian banks by the European Central Bank. At the same time, the economy faced the challenge of labour shortage, that along with the still unsatisfying pace of structural reforms implementation represents a limiting factor of potential growth. The financial sector, that has proven to be the most stable segment of economy, successfully overcomes the challenges of low interest rates environment. In this challenging environment, the PBZ Group managed to stabilize its business and to control risks arising from its transactions far better than our peers.