2018 Annual Report ANNUAL REPORT 2018 TABLE OF CONTENTS BUSINESS REPORT FINANCIAL REPORT Table Of Contents BUSINESS REPORT Intesa Sanpaolo Bank at a glance 9 Milestones in the Bank’s corporate history 11 Management overview 12 1. MANAGEMENT BOARD’S FOREWORD 12 2. REPORT OF THE SUPERVISORY BOARD 14 3. BODIES OF CORPORATE GOVERNANCE 18 4. ECONOMIC AND BANKING ENVIRONMENT 19 5. AN OVERVIEW OF THE BANK’S OPERATIONS IN 2018 20 5.1 LENDING OPERATIONS 20 5.2 DEPOSITS 21 5.3 OTHER SERVICES 21 5.3.1 Card operations 21 5.3.2 Marketing and sale of mutual investment funds 22 5.3.3 Leasing 22 5.3.4 Open-ended mutual pension funds by Intesa Sanpaolo Bank 22 5.3.5 Depositary banking 23 6. THE BANK’S ORGANIC GROWTH AND DEVELOPMENT 24 6.1 CAPITAL INVESTMENTS 24 6.2 INFORMATION TECHNOLOGY AND TECHNOLOGICAL DEVELOPMENT 24 7. ACTIVITIES IN THE FIELD OF SUSTAINABLE DEVELOPMENT 25 7.1 RESPONSIBILITY TOWARDS EMPLOYEES 25 7.1.1 Training programmes 25 7.1.2 Development of key personnel 25 7.1.3 Concern for and dialogue with employees 26 7.2 RESPONSIBILITY TOWARDS CUSTOMERS 26 7.3 CORPORATE SOCIAL RESPONSIBILITY 26 8. TERRITORIAL CHART OF COMMERCIAL UNITS 27 9. INTERNAL ORGANISATION CHART 28 10. THE CORPORATE GOVERNANCE STATEMENT OF BANKA INTESA SANPAOLO D.D. 29 FINANCIAL REPORT Independent auditors’ report on financial statements 36 Statement of management’s responsibilities 43 Financial statements 44 1. INCOME STATEMENT 44 2. STATEMENT OF COMPREHENSIVE INCOME 45 3. STATEMENT OF FINANCIAL POSITION 46 4. STATEMENT OF CHANGES IN EQUITY 47 5. STATEMENT OF CASH FLOWS 48 Notes to financial statements 49 TABLE OF CONTENTS BUSINESS REPORT FINANCIAL REPORT 1. GENERAL INFORMATION 49 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 49 2.1 BASIS OF PREPARATION 49 2.2 FOREIGN CURRENCY TRANSLATION 54 2.3 RELATED PARTIES 55 2.4 FINANCIAL ASSETS AND LIABILITIES 55 2.4.1 Treatment of financial assets and liabilities in financial statements 55 2.4.2 Classification 55 2.4.3 De-recognition of financial instruments 57 2.4.4 Modifications of financial assets and financial liabilities 57 2.4.5 Offsetting 58 2.4.6 Designated at fair value through profit or loss 59 2.4.7 Impairment of financial assets 59 2.5 DERIVATIVE FINANCIAL INSTRUMENTS 61 2.5.1 Hedge accounting 62 2.6 LOANS AND ADVANCES 62 2.7 SECURITIES 63 2.8 INTEREST 65 2.9 FEE AND COMMISSION INCOME 65 2.10 NET TRADING INCOME 65 2.11 INTANGIBLE ASSETS 65 2.12 PROPERTY, PLANT AND EQUIPMENT 65 2.13 NON-CURRENT ASSETS AND DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE 66 2.14 IMPAIRMENT OF NON-FINANCIAL ASSETS 67 2.15 DEPOSITS AND RECEIVED LOANS 67 2.16 ACCOUNTING FOR LEASES 67 2.17 CASH AND CASH EQUIVALENTS 68 2.18 NON-CURRENT ASSETS AND DISPOSAL GROUPS CLASSIFIES AS HELD FOR SALE 68 2.19 PROVISIONS 68 2.20 FINANCIAL GUARANTEES 68 2.21 INCOME TAX 68 2.22 EMPLOYEE BENEFITS 69 2.23 SHARE CAPITAL 69 2.24 FIDUCIARY ACTIVITIES 69 2.25 COMPARATIVE INFORMATION 69 2.26 ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES 69 3. RISK MANAGEMENT ORGANISATION 71 3.1 CORPORATE RISK MANAGEMENT AND ORGANIZATIONAL STRUCTURE 71 3.1.1 Corporate risk management 71 3.1.2. The organisational structure of Risk Division 72 3.2 CAPITAL ADEQUACY AND OWN FUNDS (CAPITAL) MANAGEMENT 73 3.2.1 Compliance with the regulatory capital requirement 73 3.2.2 Risk Appetite Framework Limits 75 3.3 CREDIT RISK 75 3.4 ANALYSIS OF PAST DUE FINANCIAL INSTRUMENTS, COMPARATIVE INFORMATION UNDER IAS 39 82 3.5 LIQUIDITY RISK 84 3.6 BANKING BOOK EQUITY RISK 88 3.7 MARKET RISK 88 3.7.1 Derivative instruments 88 3.7.2 Currency Risk 88 3.7.3 Interest rate risk 90 3.8 OPERATIONAL RISK 96 3.9 FAIR VALUE OF ASSETS AND LIABILITIES THAT ARE NOT MEASURED AT FAIR VALUE 97 TABLE OF CONTENTS BUSINESS REPORT FINANCIAL REPORT 4. NET INTEREST INCOME 101 5. DIVIDEND INCOME 101 6. NET FEE AND COMMISSION INCOME 102 7. REALISED GAINS AND LOSSES OF FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS 102 8. NET GAINS OR LOSSES ON FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING 103 9. NET GAINS OR LOSSES ON NON-TRADING FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS 103 10. NET GAINS OR LOSSES FROM HEDGE ACCOUNTING 103 11. NET GAINS AND LOSSES ON DERECOGNITION OF NON-FINANCIAL ASSETS 103 12. OTHER OPERATING INCOME/EXPENSES 104 13. ADMINISTRATIVE EXPENSES 104 14. DEPRECIATION AND AMORTISATION 105 15. PROVISIONS 105 16. IMPAIRMENTS 105 17. PROFIT OR LOSS FROM NON-CURRENT ASSETS AND DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE, NOT QUALIFYING AS DISCONTINUED OPERATIONS 105 18. TAX EXPENSE 106 19. EARNINGS PER SHARE 107 20. CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS AT BANKS 107 21. DERIVATIVE FINANCIAL INSTRUMENTS 108 22. AVAILABLE-FOR-SALE FINANCIAL ASSETS 109 23. NON-TRADING FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS 109 24. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 110 25. DEBT SECURITIES 110 26. LOANS TO BANKS 111 27. LOANS TO NON-BANK CUSTOMERS 111 28. ADVANCES 115 29. NON-CURRENT ASSETS HELD FOR SALE 115 30. PROPERTY, PLANT AND EQUIPMENT 116 31. INVESTMENT PROPERTY 117 32. INTANGIBLE ASSETS 117 33. OTHER ASSETS 118 34. DEPOSITS FROM BANKS AND CENTRAL BANKS 118 35. DEPOSITS FROM NON-BANK CUSTOMERS 118 36. LOANS FROM BANKS AND CENTRAL BANKS 119 37. LOANS FROM NON-BANK CUSTOMERS 119 38. OTHER FINANCIAL LIABILITIES 119 39. PROVISIONS FOR LIABILITIES AND CHARGES 119 40. RETIREMENT BENEFIT OBLIGATIONS 120 41. DEFERRED INCOME TAXES 121 42. OTHER LIABILITIES 121 43. SHARE CAPITAL 122 44. ACCUMULATED OTHER COMPREHENSIVE INCOME 122 45. RESERVES FROM PROFIT AND RETAINED EARNINGS 123 46. DIVIDENDS PER SHARE 123 47. CASH AND CASH EQUIVALENTS 124 48. CONTINGENT LIABILITIES AND COMMITMENTS 124 49. RELATED PARTY TRANSACTIONS 125 Business Report 2018 TABLE OF CONTENTS BUSINESS REPORT FINANCIAL REPORT Intesa Sanpaolo Bank at a glance In 2018, Intesa Sanpaolo Bank continued the activities designed to strengthen the name of the Bank in the wider area of Slovenia. With the strong support of our parent company Intesa Sanpaolo, the Bank provided suitable conditions for planning and implementation of changes to its business, which in times of economic growth is of strategic importance. By renaming Banka Koper to Intesa Sanpaolo Bank and by transferring majority ownership to Privredna Banka Zagreb, the Bank laid the foundations in 2017 for a further development strategy. Throughout the entire period of its existence, Intesa Sanpaolo Bank has grown and contributed to the growth of the economy through its successful operations. The Bank is one of the first banks in Slovenia to have shifted its business to digital platforms and at the same time maintained the highest credit rating of all commercial banks in Slovenia during the financial crisis period. The Bank’s wish is to grow, develop further, and strengthen its position in the markets that are not traditionally domicile. In the Coastal-karst region, the Bank has achieved a dominant position with impressive market share. With the new strategy, the Bank wishes to outgrow the regional frameworks and establish itself as a modern and innovative bank in the all-Slovenian territory. For this reason, in 2018 the Bank adopted a new 2018–2021 Business Plan, which in its four pillars – Commercial revamp with a new light multichannel service model, Greater speed and efficiency, Engaged and empowered organization, New image position - assumes the expansion of the solid business from the regional environment to the national level. With this simpler and agile model, the Bank will be able to adapt more easily to the current market standards, to the new needs and expectations of its users, and the technological boom the Bank is witnessing. 9 TABLE OF CONTENTS BUSINESS REPORT FINANCIAL REPORT The Plan’s implementation started in the second half of 2018. Simultaneously, the renovation of the Bank’s larger offices began and the plans to design some new ones were developed. One of the most important measures of the new strategy is the opening of a new business center in Ljubljana. Shifting the focus to the heart of the active Slovenian economy will bring the Bank closer to certain segments, making it easier to gain new clients and strengthen the Bank’s position in other regions. Plans for the implementation of a simple multi- channel service model are also in progress. This will help the Bank will further strengthen its position in the field of digital business. Ownership structure of Intesa Sanpaolo Bank Equity holding in per cent Shareholders 31.12.2018 31.12.2017 Privredna banka Zagreb d.d. 51.0% 51.0% Intesa Sanpaolo S.P.A 48.1% 48.1% Minority shareholders 0.9% 0.9% International credit ratings 2018 2017 Long-term BBB- BBB- Short-term F3 F3 Viability bb+ bb Support 2 2 In July 2018, Fitch Ratings London confirmed Intesa Sanpaolo Bank’s long-term and short-term rating, an also the viability and support rating remained the same as in 2017. In April 2018 Bank’s viability rating was improved by Fitch Ratings due to higher quality of assets, considerable capital buffer and good liquidity. Hence, the long-term rating is BBB-, short-term rating is F3, viability rating is bb+ and support rating is 2. In September 2018 Fitch Ratings decreased prospects for the future from “ Stable” to “ Negative” which reflects the assessment that rating could decrease in the next 1-2 years.