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TEB Sh. A Kosova – 2016 Annual Report 1

Table of Contents

2016 Annual Report

TEB SH. A, Kosova

TEB Sh. A Kosova – 2016 Annual Report2

Table of Contents

Expanding Your World

Focusing on the future: we will strive to further increase our customers’

satisfaction.

The best service for both individual clients and enterprises – that is what

drives TEB SH. A. with ethical business practice central to that service and our

mission. That is why today our number one asset is the relationship of trust we

have built up with customers over time.

Our Values

• Honest and trustworthy

• Leading, pioneering and innovative

• Customer oriented with a strong focus on high quality

• Respectful of society, human rights and the environment

• Transparent


Table of Contents

Table of Contents

1. About TEB SH. A1.1. Corporate Profile1.2. Our Mission, Vision and Strategy

1.3. Our Core Values

1.4. Shareholder Structure

2. 2016 Overview and 2017 Outlook2.1. From the Chairman

2.2. From the CEO

3. TEB SH. A in 20163.1. TEB SH. A in Figures

3.2. Key Financial Indicators

4. Business Units4.1. Individual Banking

4.2. Card Business

4.3. SME Banking

4.4. Commercial and Corporate Banking

4.5. Trade Finance

4.6. Cash Management and Payment Systems

4.7. Treasury and ALM

4.8. Human Resources

4.9. Organization and Process Development

4.10. Information Technology

4.11. Information Security and Personal Data Protection

5. Management / Corporate Governance5.1. TEB Sh. A Organizational Structure

5.2. Board of Directors

5.3. Committees

5.4. Internal Audit

5.5. Risk Management and Operational Risk & Business Continuity

5.6. Compliance and Internal Control

6. Auditor’s Report6.1. Independent Audit Report at 31 December 2016

and Notes to the Financial Statements

6

9

10

11

13

14

17

18

21

22

25

26

27

28

29

30

32

33

34

36

37

39

42

42

45

47


Table of Contents

TEB Sh. A Annual Report 2016

Report date: 01.01.2015 — 31.12.2016

Address: Agim Ramadani Street, Nr. 15, 10000 Prishtina

Telephone: +381 (0) 38 230 123

Fax: +381 (0) 38 224 699

Email: [email protected]

Web: www.teb-kos.com

1

About TEB SH. A


Table of Contents

1.1. Corporate ProfileExpanding your world…

After nine successful years in Kosovo, TEB

SH. A. (TEB) has become one of the foremost

names in the banking sector, earning a

well-deserved reputation for excellent

service. Throughout our history, we have

systematically pioneered meeting the

banking and financial needs of individuals and businesses by launching numerous

‘firsts’ for the Kosovo market.

In a rapidly changing world, TEB is there

to consistently support customers and

employees. This ability is also based on our

position as a prominent member of the TEB

Group. The Group was formed through a joint

venture between one of the world’s strongest

financial institutions, BNP Paribas, and one of the most reputable banks in Turkey, Turk

Ekonomi Bankasi.

We aim to be a responsible bank. That

is why we pursue a range of socially

responsible activities that contribute to

social development. For TEB, corporate

social responsibility is a highly valuable

and fundamental tool that complements

our economic mission. So, in addition

to providing excellent, innovative and

responsible service to our customers, we

also undertake projects that are designed to

make a difference in education, culture and

sports - all aimed at positive impacts for

the greatest possible number of people in

Kosovo.

Value, Service, Excellence…

For TEB, the customer is at the center of

everything we do. Our customers are special

and valued. This is expressed in all of the

specially-designed products and services that

we offer to different groups of customers,

ranging from entrepreneurs to senior citizens

and from employees to students.

We believe the systematic, year-on-year

growth in number of customers, our service

network, transaction volumes and our

personnel is a recognition of our efforts to:

• Continually expand the range of non-

branch banking products and services

and add functionality to our innovative

multi-channel banking network. We offer

all manner of quality-focused banking

products and services that people need at

different stages in their lives - all through

our extensive and multi-channel delivery

network.

• Offer optimal financial solutions to private banking customers based on ‘personalized

service’.

• Outperform the industry in terms of growth

in credit cards, growth that is enhanced

continuously by new products and services,

as well as through specific card campaigns organized with another customer group,

our merchant members. Through the

segmentation of the card business, we

identify specific groups, serving them with products such as the She Card for Ladies,

the Woman Entrepreneurship Credit Card,

and the Business Card for owners of SMEs.

• Maintain our strong position in retail cash

management services.

• Provide the commercial banking support

that is a key driver in the roadmap to

future economic growth in Kosovo. Every

year, we reinforce our already strong focus

on supporting TEB’s hundreds of thousands

of commercial and SME customers as they

play an increasingly important role in the

economic development process.


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Real, Smart, Value…

As a member of two strong international

financial groups – TEB A.S., a highly reputable and premier financial institution in the Turkish banking sector, and BNP Paribas,

one of the Eurozone’s top banks with an

extensive and international network – TEB

benefits from Group experience, solidity and range. This enables us to generate the best

outcomes for our clients.

From these sound foundations, TEB continues

to progress by enhancing the quality of its

services and by developing products tailored

to customer’s expectations. In line with rapid

advances in technology, we systematically

improve our innovative multi-channel

banking network (such as Internet and

Mobile Banking, Call Center, SMS Services,

ATMs, POS) allowing customers to utilize the

most suitable distribution channel for their

banking transactions - conveniently, quickly

and reliably.

More community

commitment…

Since TEB was established in 2008, we have

had a pioneering position. As a strong full-

service bank, we have focused on responding

to customer demand for financial services. Over the years, we have been able to put

our corporate competencies and vision to

work effectively, producing added value for

both customers and shareholders. In 2016,

we continued to pursue our – now expected

- balanced and healthy growth, further

reinforcing our position as the country’s one

of the strongest financial institution. This gives us an even firmer foundation for our future as an important force in Kosovo.

Corporate social responsibility plays a

significant role. Our policy is to contribute to Kosovo’s social development. We have

created a framework of long-term initiatives

based on a range of projects that will create

the greatest social benefits. In terms of business support, we are working through

the Women’s Entrepreneurship Support

Program, the Business Academy and the

Business Forum.

TEB Sh. A assists and provides support to

numerous projects in the arts, cooperation

and sports such as:

1. Sponsorship of the Football Federation of

Kosovo.

2. Sponsorship of Kosovo’s national

basketball team for the Euro 2017

qualifiers.

3. Sponsorship of the Dielli TEB Open 2016

tennis tournament.

4. Joint support with Swiss Contact and

the Rijnvest Institute for the ‘Female

Entrepreneurs in Kosovo’ event that was

organized by the Innovation Center Kosovo

(ICK) in collaboration with the Women’s

Economic Forum (WEF).

5. Sponsorship of the Ye! Kosovo Boost

Program for young entrepreneurs to

stimulate innovative ideas. TEB SH.

A. aims to encourage and promote

entrepreneurship with a view of

creating new jobs and overall economic

development in Kosovo.

After nine successful years in

Kosovo, TEB Sh. A (TEB) has

become one of the foremost

names in the banking sector,

earning a well-deserved

reputation for excellent service.


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Exceeding your expectations…

TEB owes its success to our people who bring our innovative and proactive approach to

customers, work hard to maintain and grow the quality of our services and the assets our

brand name represents. Our goals are to help people and businesses build their future, to

realize their ambitions and to help them manage their financial risks. We want to be a financial institution our customers feel comfortable with.

TEB owes its success to our people

who bring our innovative and proactive

approach to customers...

Our customers are special and valued.

Our goals are to help people and businesses

build their future, to realize their ambitions

and to help them manage their financial risks.


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To continually create and increase

outstanding value for our customers,

shareholders, employees and society.

1.2 Our Vision, Mission, and Strategy

Our Vision

Our vision is to be the best bank in Kosovo.

Our Mission

To continually create and increase outstanding value for our customers, shareholders,

employees and society.

Our Strategy

In line with our vision and mission, our strategy is to provide an outstanding and efficient banking experience for all our customers. We achieve this by offering innovative and

practical products and services to achieve continuous and sustainable growth. TEB’s offering

is always founded on our commitment to being a responsible bank. This is embedded in all

our values and is reflected in our business, the way we develop products and services and how we deliver on our goals and promises.


Table of Contents

1.3. Our Core Values

Customer-centricity

Our success is based on complete

commitment to our customers at all times,

earning us the trust and loyalty of our

customer base. We maintain that trust by

always placing our customers at the heart

of everything we do. Customer needs and

expectations are our drivers through our

fast, proactive approach and response to

rapidly-evolving requirements. This enables

us to create and deliver true value as we

serve our customers with innovative, above-

expectation, tailored and trend-setting

products and services.

Integrity

We have embraced the highest standards

of integrity in everything we say and do and

we commit to creating added value for our

customers, shareholders and employees by

always doing more than just what is right. We

communicate openly and honestly, we invite

and appreciate challenging views aimed at

generating better ideas and reaching more

appropriate and balanced decisions.

We generate value for our shareholders

through long-term success rather than

short-term gain. So our objective is for our

core business to deliver sound and strong

operating profitability and dividends through an entrepreneurial spirit that balances risks

and returns responsibly.

Innovation

We aspire to innovations that matter. TEB

values enthusiasm coupled with intellectual

curiosity in our people as they continuously

seek to create products that will facilitate

our customers’ success and provide suitable

solutions to their needs.

Operational EfficiencyWe build processes and products that are

user-friendly, easy to access and designed

to add value. We strive to ensure that the

services offered to our customers are priced

in a way that equates fairly with the actual

cost of providing them.

Discipline

We think and act like owners of the Bank, so

we protect its resources and focus on shared

rather than individual goals. We are proud

of TEB’s successes and the value we create

for our shareholders and customers. Every

one of our 580 employees feel responsible if

we fail to meet customer expectations and

we are all accountable for delivering on our

promises – there are no excuses. We strive

for operational excellence by getting it right

first time.

Competent HR

We seek to strengthen our position as an

employer of choice and strive to create a

culture that attracts talented individuals,

fosters diverse yet responsible and agile

collaborative teamwork, nurturing and

investing in the best talent, and management

based on merit and equal opportunities.

Partnership

We pursue lasting and mutually beneficial customer and employee relationships in

which the value created is shared fairly.

We are responsible partners with all our

stakeholders and regulators, and in serving

society.

Strong distribution channels

We strive to offer services and support to

our customers at their own convenience

by providing diverse distribution channels,

including our branch offices, call center, direct sales and extensive alternative

distribution channels.


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1.4. Shareholder’s Structure

The Bank’s share capital is €24,000,000 based on 2,400,000 issued shares each with a par

value of €10.

Number of shares relates to ordinary shares with no rights, preferences or restrictions

attached to them.

* 50%-50% BNP Paribas Fortis Yatırımlar Holding A.Ş.and Çolakoğlu Group Joint Venture

Shareholder as of December

31 2016

Shares ownership paid in

capital (€)

Share

TEB Holding A.Ş.* 24,000,000 100%

2

2016 Overview

and 2017 Outlook


Table of Contents

2.1. Message from the Chairman

The Bank‘s goal is to maintain its growth in the coming years while continuing our customer-oriented approach. We will continue to support growth with strong risk management and compliance frameworks that are at the heart of the Bank’s culture.

To our Customers, Business Partners and Shareholders,

One of the major financial services players in the Kosovo banking sector, during 2016 TEB SH. A. continued its suppress customer-oriented, pioneering and innovative approach. At TEB SH. A.,

growth and performance are driven by a strong focus on value creation for all our customers.

They are underpinned by the financial strength and profitability essential for fulfilling our role and ensuring that we stay relevant to the community we operate in. We created good

financial figures in 2016, with €18.3 million net profit and a robust 15.9% capital adequacy ratio. Furthermore, TEB SH. A.’s shareholder equity reached over €71.3 million, an increase of around

35% on the previous year.

The past year was also far from a typical one through the evolving nature of financial sector regulation, essential focus on infrastructure and greater regulatory compliance. TEB SH. A. has

concerned by objective to remain an ethical financial institution.

We have further reinforced our strong focus on supporting the Bank’s numerous SME customers

and other potential segments such as Agrobusiness and Women Entrepreneurship. We have

built a unique position in Kosovo through our support to contributing to their development

with an introduced concept as ‘’Business Academy’’ that aims to enhance the competencies of

the SME sector and help them grow their business. Within these supporting programs, we are

also in cooperation with international institutions; such as, The U.S. Agency for International

Development (USAID) and The European Bank for Reconstruction and Development EBRD.

Besides all its new activities and innovations, TEB SH. A. has maintained its leading position in

the retail banking segment and as the undisputed leader of Kosovo’s Card business. In terms of

business innovations and trends in digitalization, the Bank has been engaged in migrating its

banking products and services to digital.

All these commitments were once again recognized internationally in 2016. We have been

awarded the title for best bank in Kosovo from the Bankers and Global Finance. We thank to

our customers for their continued trust and confidence and looking for further enhancing our relationship with them in the future.

I would like to thank Mr Musa Erden who during the reporting year stepped down as chairman of

TEB in Kosovo, a position he held from 2010. He was exceptionally successful in ensuring that we

have a very solid foundation here in Kosovo for the Bank’s future growth and service aspirations.

I would also like to extend my gratitude to all our customers, business partners and shareholders

for the solid results we achieved in 2016.

Jacques Roger Jean Marie Rinino

Chairman of the Board of Directors


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2.2. Message from the CEO

2016 was a good year for TEB SH. A. We further strengthened our client relationships and consistently maintained our client focus. As a result, we were able to record the Bank’s highest ever net profit of more than €18 million.

To our Customers, Business Partners and Stakeholders,

At TEB SH. A. our mission - ‘to continually create and increase outstanding value for customers,

shareholders, employees and society’ – forms the basis for everything we do. That includes

the trust we are building by expanding our customers’ world, innovating financial services and enabling growth in Kosovo. Since its foundation, the Bank has played a key role in this

economy, which is showing significant progress in transitioning to a market-based system and maintaining macroeconomic stability although in 2016, the economy was not able to achieve

all necessary growth levels. Expansion of private sector activities and productivity is of critical

importance for the country’s longer-term economic growth and the banking sector has a clear

role to play there. We play that role with the dedication and commitment of all our 580

employees, underpinned by 26 branches in all cities, municipalities and a range of customized

products and services.

Our goal in 2016 was to achieve significant growth with balanced risk. This growth strategy combined with maintaining customer satisfaction as key objective has yielded remarkable

performance on profit while maintaining our position in the market. Through continuous prudent portfolio management, our well-balanced risk and growth strategy resulted in exceptional

profits, steady growth in our loan portfolio. At year-end 2016, the Bank’s total assets reached €430 million and the gross loan portfolio increased to €352 million.

TEB SH. A. and its parents, TEB and BNP Paribas, shares the same values, including a proactive

focus on corporate and social responsibility. The following range of products, services and

activities are an indication of how TEB SH. A. translates these into innovative tools that reflect our commitment to always anticipating and meeting customer needs:

• Most recently, we launched the Women Entrepreneur Card to support women in business;

• During 2016 the Bank continued to invest in SME sub segments that correlate strongly with

the country’s economic development, such as Agri-business, Entrepreneurship and Female

Entrepreneurship;

• In Agri-business we continued to promote domestic producers and farmers by organizing

fairs and events to raise awareness of home-produced food. In addition to fairs show-casing

agri-products, we also organized a novel event celebrating ‘Beaujolais Nouveau’.

Our strategic partnership with the globally recognized brand that is BNP Paribas also motivates

us and strengthens our ability to correctly interpret global market conditions and to quickly

adapt our corporate strategies accordingly.


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The past year was far from typical in terms of the evolving nature of financial sector regulation, essential focus on infrastructure and greater regulatory compliance. More and more, compliance

is becoming the crux where strategy and the Bank and our customers’ everyday actions

intersect. TEB SH. A. is keeping pace with growing regulatory requirements to anticipate and

accommodate any impacts on our position as a highly reputable and trustworthy financial services provider.

In terms of business innovations and trends in digitalization, TEB SH. A. has been transforming

its banking products and services to digital. The Bank will continue to generate many innovative

practices in the market. Our strategic partnership with the globally recognized brand that is

BNP Paribas also motivates us and strengthens our ability to correctly interpret global market

conditions and to quickly adapt our corporate strategies accordingly.

TEB Mobile Banking is a service aimed at people who are looking for a new financial services model based on simplicity, transparency and social experience. During 2016, we launched this

new service supported by a comprehensive range of financial services specifically designed for the mobile environment. It is available for both IOS and Android operating systems.

In order to increase security level for e-commerce services, ‘Visa 3D Secure’ was implemented

to protect cardholders from online threats. It is one of the most up to date fraud prevention

methods for online transactions.

All of this innovation, our customer-orientation and strong financial performance once again helped TEB to achieve ‘The Bank of the Year 2016 for Kosovo’ by both the Banker and the

Global Finance magazines. Furthermore, TEB SH. A. also received an award for its “Women

Entrepreneurship Program” from Global Banking Alliance GBA - a leading international

consortium of financial institutions and other organizations interested in building women’s wealth worldwide. These prestigious awards reaffirm our Bank’s ability to respond to the ever-changing financial needs of our clients as well as their loyalty to and trust in our institution.

I would like to take this opportunity to extend my sincere appreciation to our team members.

All of these results have been achieved by them. I am fully confident that, our success will continue in 2017 and beyond.

Ayhan Albeyoglu

Managing Director

3

TEB SH. A in 2016


Table of Contents

TEB in Figures 2016 2015Increase/

(Decrease) Percentage

Balance Sheet Indicators

Total Assets 429,255 410,576 18,679 4.5%

Total Loans (Gross) 352,695 340,215 12,480 3.7%

Deposits 334,467 342,878 -8,411 -2.5%

Shareholders’ Equity 71,324 52,991 18,333 34.6%

NPL / Total Loans 6.2% 7.1% - 0.9% -13.4%

Loans / Total Assets 82.2% 82.9% -0.7% -0.8%

NPL Coverage Ratio 94.2% 93.2% 1.0% 1.10%

Income Statement Indicators

Net Interest Income 29,036 30,343 -1,307 -4.3%

Net Non-Interest Income 6,276 6,350 -74 -1.2%

Cost / Income Ratio 48.4% 44.1% 4.3% 9.8%

Net Banking Income 35,694 37,041 -1,347 -3.6%

Net Profit for the Year 18,333 17,336 997 5.8%

Profitability Ratios

Return on Equity 35.7% 51.1% -15.3% -30.0%

Return on Assets 4.3% 4.2% 0.0% 1.2%

Net Interest /

Average Interest Earning Assets 8.3% 9.3% -1.1% -11.4%

Solvency & Liquidity Ratios

Capital Adequacy Ratio 15.9% 16.7% -0.8% -4.9%

Liquid Assets / Total Assets 19.5% 21.3% -1.9% -8.9%

Risk Weighted Assets 479,976 349,247 130,729 37.4%

Other Indicators

Branches 26 26 0 0.0%

Employees 580 585 -5 -0.9%


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3.2. Key Financial Indicators

Well-diversified and managed loan portfolio, further operation cost optimization

and continuous product innovations, cemented Bank’s position as a key player in the

Kosovo market.

At year-end 2016, the Bank’s total assets reached €429.3 million, increasing by €18.7 million

or 4.5% compared to 2015, keeping bank’s asset size at the in the range of the targeted level.

The gross loan portfolio increased to €352.7 million, an increase of 3.7% or a volume increase

of €12.5 million on the previous year’s performance. Gross loans now comprise 82.2% of total

Bank assets in TEB’s balance sheet.

The Non-Performing Loan (NPL) ratio (loans over 90 days in arrears) at the end of 2016 was

6.1% compared to 7.1% in 2015, a decrease of almost 100 basis points due to better NPL

management and improved credit practices of the Bank. Total customers’ deposits at the end

of 2016 reached €334.5 million, decrease of €8.4 million or 2.5% compared to the end of 2015.

An agreement with the European Bank for Reconstruction and Development (EBRD) for

Woman in Business Program in the amount of €5 million was signed during December 2016.

Shareholders’ equity increased from €53.0 million in 2015 to €71.3 million in 2016, due to

increased retained earnings during the year. Altogether this represents a 34.6% increase in

shareholders’ equity compared to 2015.

Income statement indicators also show sustainability in performance similar to the previous

year with a marginal decrease. Net interest income reached €29.0 million, €1.3 million

decrease or 4.3% compared to 2015, as loan interest rates continued the decreasing trend.

Net non-interest income amounted to €6.3 million, a decrease of €0.1 million or a 1.2%

increase in comparison with 2015.

4.5% €18.7M

Increase in total assets (€429.3M total)

34.6% €18.3M Increase in

shareholders’ equity (€71.3M total)


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Cost-to-income ratio in 2016 increased

further to 48.4% from 44.1% in 2015, due to

decrease of interest income and increase of

investment in efficiency projects. Net banking income at year-end was €35.7 million

compared to the €37.0 million realized in

2015, again mainly affected from the decline

of loan interest rates.

The Bank ended the year with €18.3 million

profit after tax compared to €17.3 million in 2015 or increase of 5.7%.

In terms of profitability indicators, at the end of 2016 the Bank generated a Return

on Equity (ROE) yield of 35.7% compared to

51.1% in 2015, mainly as a result of increase

of shareholders equity due to continuous

retained earnings. Return on Assets (ROA)

stood at 4.3% compared to 4.2% in the

previous year. The Net Interest over Average

Interest Earning Assets ratio was 8.3%

compared to 9.4% in the previous year.

As for bank capital management at the end of

2016, the Bank’s Capital Adequacy Ratio (CAR)

was 15.9%, exceeding the Central Bank of

Kosovo (CBK) minimum requirement of 12%.

The Liquid Assets to Total Assets ratio stood

at 19.5% at the end of 2016 compared to

21.4% in 2015, while Risk Weighted Assets

(RWA) reached €480.0 million, up from

€349.2 million in the previous year following

growth in the loan portfolio during 2016.

In 2016, the Bank maintained the branch

number to 26 while the number of

employees decreased to 580 compared to

585 at the end of 2015.

The Bank ended the year

with €18.3M profit after tax

compared to €17.3M in 2015

Increase of 5.8%

4

Business Units


Table of Contents

4.1. Individual Banking

Throughout 2016, we continually attempted

to be innovative and to promptly offer our

customers optimal products. In addition to

expanding our range of optimal products,

and like the previous year, TEB SH. A.

Individual Banking continued to make

attractive credit offers to private sector

employees and private banking clients.

As a result of loan campaigns and system

improvements, we were able to increase our

market share to 22% with a €13.8 million

net increase in individual loans. Our unique

campaigns in 2016 included:

• Mortgage loan campaigns with most of

the best-known construction development

companies;

• Lending to purchase cars from world

brands, such as Renault, Nissan, Mercedes,

Range Rover, Ford, Dacia, Suzuki and

Hyundai;

• Continuing to support young people

through educational loan campaigns.

Individual Banking’s main activities include:

• Improving products and services designed

for different client segments, monitoring

the market, and creating impact analyses

of any changes in the competitive

environment.

• Improving technological and operational

processes related to individual banking.

• Monitoring, evaluating and strategic

planning to develop the business line.

• Offering banking products and services

through the branches and digital channels

(internet, mobile).

• Increasing TEB SH. A.’s market share via

new branches and ATMs while offering

innovative solutions through new branch

and ATM concepts to meet changing

customer needs.

• Developing new loan, deposit and other

banking products through an innovative,

customer-focused perspective and closely

monitoring product performance to

increase our market share.

Private Banking

Privileged Services Designed to Touch the Lives of our Customers Private Banking offers optimal financial solutions to private banking customers

based on a personalized-service approach

that includes specially tailored banking

products and services that people need at

different stages in their lives - all through

our extensive and multi-channel delivery

network.

Alternative Distribution Channels Every year, TEB SH. A. adds functionality

to its innovative multi-channel banking

network, including E-banking, Call

Centers, SMS Services, ATMs and POSs.

TEB SH. A. Individual Banking is continually engaged in identifying,

developing and providing innovative products based on customers’

real needs. Our success in meeting these needs through excellent

customer experience is clear by systematic growth in our customer

base. In 2016, it grew by 6.8%.


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TEB systematically identifies strategically important channels and continues

investments into non-branch banking

services, such as TEB Mobile Banking.

TEB SH. A. has created a new, fully-digital

service model based on the latest advances

in technology. While delivering a better

customer experience, with TEB Mobile

Banking we are also aiming to simplify

processes and interfaces to reduce branch

costs through digital migration and new

customer acquisition.

TEB Mobile Banking is aimed at customers

who are looking for a new financial services model based on simplicity, transparency and

social experience. It was launched in 2015

with a comprehensive financial-services offer specifically designed for the mobile environment.

Social-media marketing is a part of doing

business in the new millennium and TEB

is no exception when it comes to using

these channels to establish one-on-one

communication with our customers.

We have a presence on a number of social-

media networks such as Twitter, LinkedIn,

Instagram, YouTube. And we already have

139,000 likes on Facebook.

What’s next?

TEB SH. A. is inherently customer centric and

customer care is key. Everything we do is

focused on our customers, from developing

relevant products and services to creating

technological infrastructure to support them.

The Bank will continue to invest significantly in improving the efficiency of internal processes. And our focus next year will

again be to further reinforce all our business

processes so that we continue to improve

efficiency and customer satisfaction.

4.2. Card Business

With over 11,000 new cards approved during

2016, StarCard remains the most used

and preferred credit card in the market.

Our position as the customer’s first choice gives us an even greater responsibility

to be wherever our customers are and to

listen actively to their needs. Unrivalled

competence, expertise, active listening and

implementation capabilities have once again

proved to be the key in another notable

year for this business. By blending customer

needs and new technological developments,

we have continued to introduce new

products, expanded services and new

utilization channels so that our customers

can bank at their convenience, wherever they

are and without the limitations imposed by

traditional banking hours.

The TEB Debit Card helps clients to manage

their cash by showing how much was spent

and where on the bank balance statement.

In addition, clients may have access to the

overdraft facility. Balances can be checked

and withdrawals made 24/7 through our

ATM network, spread throughout Kosovo.

Shopping is also made easier as the TEB

Debit Card provides access to the largest

network of POS (Point of Sales) terminals in

the country where customers can use the

card to pay for purchases free of charge.

Each debit card transaction carried out

within the TEB POS terminals network is

rewarded with bonus points.

In order to further facilitate customer service

and in addition to our Visa cards, MasterCard

is now accepted at TEB Bank’s POS terminals

and ATMs using the latest contactless

technology. TEB has over 4,000 POSs and 80

ATMs that also give access to ATMs, POSs or

e-commerce networks worldwide that help

to simplify purchases and other transactions.

Another innovative service introduced

in 2016 is online Debit Card payments.


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The number of transactions through POS

terminals increased 16% compared to the

previous year. We take pride in the fact

that customers are very satisfied with our services. This has led to even greater market

penetration and, as of year-end 2016, our

Bank had issued 75% of all active credit

cards in Kosovo. Our fees and commissions

associated with the maintenance and use

of cards remain highly competitive in the

market and we also offer a multiple range of

transactions free of charge, such as online

payments and international credit card

purchases.

With a growing customer base, the need

to guarantee better service is a priority. So

we have expanded our direct sales team

and its activities. We are now even closer

to customers and able to respond faster

and even more reliably to their needs. The

direct sales team is also available to provide

information on special offers to which the

customer may be entitled. It also advises on

new products and services made available

by the Bank to clients and which we think

may be of interest and benefit to them. Throughout the year and in partnership with

merchants, the Bank initiated numerous

personalized campaigns, offering various

propositions that feature additional

installment plans, discounts, grace periods,

and bonus products. We are grateful for

our customers’ loyalty so we have again

distributed over €500,000 in bonus points on

cards or as other bonuses.

TEB has invested heavily in advanced

security for our infrastructure network.

This is managed securely and effectively

by our highly vigilant real-time monitoring

team. As technology becomes even more

sophisticated, card fraud around the world

is proliferating at a dynamic pace. TEB

has invested heavily in advanced security

for our infrastructure network. We believe

the security of transactions is one of

our undoubted successes, as attempted

fraudulent transactions using our cards and

in our network remain well under sector

trends. The latest advance is the 3-D Secure

system we launched during 2016. It ensures

that each transaction carried out by vendors

who carry the authenticated ‘Verified by VISA’ logo goes through the 3DS process. When

making a purchase this way, clients will

always receive an authorization password via

SMS. If the sale is made at vendors outside

the 3D Secure network, then the transaction

will be allowed. However, in order to avoid

any possible misuse, we have established a

daily limit for such transactions. This limits

purchases with a debit card.

Social media has had a tremendous impact

on our culture, in business, on the world-

at-large. So, we have been increasing our

brand awareness through active social-

media campaigns, especially on our Facebook

fan page for ‘StarCard’. We were able to

achieve 33% growth in the number of likes

compared to the year before. Our daily reach

on average through 2016 was 20,000 views

while around people searched for StarCard

on Facebook about 350 times every day.

During 2016, we organized around 240

campaigns, 105 of them with a particular

merchant while the rest, 140 of them, were

general campaigns. We have been using

social media to advertise our products, build

customer loyalty and many other functions.

Interactions with and feedback from

customers helped the Bank to understand

the market, and fine-tune our products and strategies. Compared to television

advertising and other expensive forms of

marketing, a social media presence is a

(cost-)effective tool to enhance brand image

and popularity.

In 2016 and as part of our social

responsibility, we continued to highly

recommend the e-statement option to

customers. The Earth is 4.6 billion years old.


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Let’s scale that to 46 years. We have been

here for 4 hours. Our Industrial Revolution

began 1 minute ago. In that time, we have

destroyed more than 50% of the world’s

forests. This is not sustainable. So, even

though this might be considered a small

gesture in saving forests and trees, we have

decided to change this, by reducing the use

of paper and now, over 80% of statements

are sent electronically via e-mail. This

means over 395 trees were saved in 2016.

What’s next?

According to reliable statistics, there has

been a tremendous increase in online

sales over the last couple of years. It is

estimated that a business that incorporates

an e-commerce platform can increase its

revenue by up to 250%. This is due to the

fact that many people prefer the ease of

access and convenience that comes with

e-commerce platforms. This is especially

true for those systems that are able to

process credit-card payments. Given this

phenomenal growth trend around the world,

TEB SH. A. decided to invest in digitalizing

the vast majority of our services. We further

plan to provide our merchants and retailers

with an e-commerce platform where they

will be able to sell their products online.

It is clear that e-commerce brings a lot of

convenience in terms of payments. This

helps to push up customer transactions and

also impulse buyers. As a result, we have

more and more contacts with potential

customers for the Bank. Some of the

additional benefits for businesses that sell online include the opportunity to be open

24/7 without any increase in overhead or

someone having to be physically present to

accept payments as everything can be done

online. A business operating exclusively

offline may have difficulty in reaching a broad range of customers. Moreover, mobile

e-commerce and payments have both

seen unprecedented growth in the recent

years. Several analysts have estimated that

by 2017, the mobile payments industry

will be worth $1 trillion. In response, the

world’s major banks have prioritized mobile

payments, mobile banking and online

banking as their top priority alongside other

IT initiatives.

We will also implement Interactive Voice

Response (IVR) as a technology that allows a

computer to interact with our clients through

the use of voice and tones input via a keypad.

Using a one-size-fits-all approach to your cardholder base does not reflect the realities of today’s marketplace. The various

segments of cardholders have very different

behaviors, motivations, and expectations

with regard to how they use their payment

options. So, in the coming year we are

planning a card segmentation/differentiation

so we can approach those specific groups of clients based on their card use behavior.

Our objective is to ease the payment process

and increase security against card fraud

for these transactions. To increase card

payment security along with other features

that MasterCard offers, we will also start

issuing MasterCard. On the vendor side we

are aiming to increase merchant numbers

in those sectors with low coverage, while on

the customer side we will expand our base

by offering MasterCard.

In 2016 and as part of

our social responsibility,

we continued to highly

recommend the e-statement

option to customers.


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As in previous years, during

2016 TEB continued to

invest in SME sub-segment

that correlate strongly to

the country’s economic

development.

4.3. SME Banking

TEB SH. A. facilitates doing business for SMEs, farmers and agricultural businesses

During 2016, the SME sector continued to

be one of the Bank’s focus areas as it is

expected to play a significant role in Kosovo’s development by generating growth, securing

new jobs and inspiring innovative business

models for the economy. Unsurprisingly,

interbank competition for an increasing

share of this exciting market segment

remained high, resulting in an impact on

average interest rates. TEB maintained its

focus on becoming a preferred bank for the

SME sector through our proactive, responsive

and innovative approach to customer

demands.

Throughout the reporting year, the Bank took

a number of strategic segmenting decisions

that are expected to generate efficiency and improve the portfolio quality. Following a

careful analysis of our portfolio, we decided

to withdraw from lower segment of micro

clients with an annual turnover under

€1.2 million, increasing our focus on SMEs

generating at least €2 million per annum.

With this shift, we aim to attract more

consolidated SME clients with standardized

reporting systems, higher employment

capacity and greater prospects for growth.

This change in segmentation obviously

had an effect on the portfolio growth rate.

However, increased efficiency meant that

compared with 2015, the Bank still managed

to secure overall growth of €3.2 million in

loans outstanding.

As in previous years, during 2016 TEB

continued to invest in SME sub-segment

that correlate strongly to the country’s

economic development. That is why

Agribusiness, Entrepreneurship and

Women’s Entrepreneurship remain a focus

for us. In Agribusiness we continued to

promote domestic producers and farmers

by organizing a number of specialized

fairs and events to raise awareness of

domestically produced food. One fair

showcased agriculture products while

another promoted the local wine production,

which is considered as a sub-sector that

has an export potential for Kosovo. We

supported several agri-business projects and

enterprises with financing, resulting in 13.5% in the loan outstanding portfolio.

The Bank understands and recognizes the

relevance of an entrepreneurial culture

in accelerating economic development

for the country. It is very important that

entrepreneurial values are embedded in all

segments of society and especially among

young people who have vast transformative

powers for the economy. For this reason, we

sponsored the ‘Ye Kosova Boost program’

organized by the Kosovo Investment and

Enterprise support agency (KIESA) and the

‘Entrepreneurship Bootcamp’ initiated by the

Jakova Innovation Centre (JIC). These events

provided training, mentoring and awards

to the best ideas from a selected group of

young and aspiring entrepreneurs.

Similar intensive focus was dedicated to the

development of the Women Entrepreneurs

program which aims to stimulate higher

participation of women in business. In this

regard, the EBRD credit line of €5 million

was fully utilized and a second line for the

same amount was signed in December 2016.


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Intensive focus was dedicated to the development of the Women Entrepreneurs program which aims to stimulate

higher participation of women in business.

At the same time, the scope of similar partnerships was expanded as the Bank entered

into agreements with development agencies such as ‘GIZ for training and ‘Swisscontact’ in

providing loans up to €3,000 at 0% interest. This approach that combines access to finance with non-financial services reflects our development strategy for this market. Additionally, to further increase the product scope offered to this target group, in August, the Bank launched

the ‘Women Entrepreneurship’ credit card. This distinctly branded credit card aims to reflect the unique identity of women entrepreneurs as new emerging participants in business.

What’s next?

In November, we signed an agreement that will increase SME access to finance in the coming years. By collaborating with the Kosova Credit Guarantee Fund (KCGF), obstacles for SME

finance will be overcome. Entrepreneurs and SMEs will have greater access to mortgages and business finance.

4.4. Commercial and

Corporate Banking

Through its close relationships with clients

and solution-oriented approach, TEB SH. A.

is a highly visible player in the commercial

and corporate segment. At TEB, we recognize

that this particular client segment is the

most complex in terms of needs and as such

we have developed a strategy of tailor-made

solutions and advanced cash management

services to provide our clients with a value-

added system that also benefits the Bank. As in previous years, our strategy in 2016

focused on growing our market share and

profitability. The latter proved challenging as the market dictated a significant drop in interest rates whereas the limited number of

clients in this segment demanded a proactive

approach from the Bank. The department

achieved a €1.6 million growth in loans,

or an increase of 2.3 % compared to the

previous year. The market values the Bank’s

quality offering in services, such as transfers,

POS payments and other transactions.

We continued to provide advanced cash

management solutions, such as an expanded

POS network, differentiated business-related

debit and credit cards, and state-of-the-

art business e-banking with many features

and options. Expanding alternative delivery

channels and enhancing cash management

solutions is an important strategic approach

for the coming years as the business market

is seeking more efficient and broader partnerships.

One of the Bank’s special priorities in 2016

was enhanced efficiency in operations. We have invested considerable time and effort in

promoting the vast range of options and the

multiple benefits business e-banking has to offer. This initiative proved quite successful


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as many clients adopted e-banking for their

day-to-day banking needs. As a result, 71%

of total national transfer transactions were

conducted using e-banking, with 66.3%

of international transfers using the same

channel. This shift in customer behavior

represents a significant achievement for the department as it also reduces the workload

in branches and enables branch teams to

spend more time on advisory and support for

customers. In strengthening the relationship

with clients, the Bank continued offering

non-financial services in the form of business advisory to corporate clients. This shows

that the scope of cooperation with corporate

clients is constrained only by creativity and

imagination as the opportunities are endless.

What’s next?

Looking ahead to 2017, we anticipate

another challenging year as the country is

facing political tensions and there are still

fluctuations in interest rates. Nevertheless, we are committed to

increasing our cooperation with the

corporate segment and we have a clear idea

on how to achieve this objective. As a bank,

we will continue to rely on innovation and

customized solutions to achieve a higher

share of our corporate clients’ business and

increase our market share and profitability. At the same time, we will be actively

targeting projects in the production and

export sector as they are seen as strategic

for further corporate growth and also for the

overall growth of the economy.

4.5. Trade Finance

TEB SH. A. understands that international

business in a globalized world is a challenge

- success demands extensive professional

knowledge and an effective network. TEB

has both.

During 2016, we continued to support

our customers by creating and adapting

trade finance solutions for their business needs. Moreover, we worked consistently

on expanding our networks, strengthening

relationships with other banks, and

further enhancing our high standards of

professionalism and competence. Supported

by the BNP Paribas and TEB A.Ş. global presence and expertise in international

trade, we are continually broadening our

geographic cover and product range.

Trade Finance products for documentary

operations include import and export letters

of credit, discount on letters of credit,

national and international guarantees,

stand-by letters of credit and collections.

The agreement signed in 2011 with the

International Finance Corporation’s (IFC)

trade facility program has provided us with a

great opportunity and even more flexibility in responding to demand related to confirmed letters of credit and counter guarantees.

During the reporting year, we also further

expanded our relationships with new

correspondent banks.

TEB SH. A. has maintained consistent support

for its clients and it aims to always be

the most reliable and preferred business

partner in Kosovo, by continuing to share

professionalism and expertise in trade

finance products to its clients and also providing innovative solutions.

What’s next?

In the coming year, we will continue to

support our clients by providing a safe bridge

to new opportunities. Professionalism and

expertise will be our guidelines as we see

these as differentiators in a fast-moving

world. We are also aiming to add new

international trade products to our range

in 2017.


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4.6. Cash Management

and Payment Systems

Our vision is to be the best bank in Kosovo. This is why we are investing heavily in alternative distribution channels by developing and upgrading our e-banking platform.

At a time of rapid technological advances,

TEB is more than keeping pace with and

anticipating progress in cash management

and payment systems while continuing

to introduce new payment channels and

opportunities for better services. Our cash

management and payments solutions are

tailor-made to offer our business customers

a range of products and services that will

enhance liquidity. We provide the appropriate

infrastructure for fast and reliable payments

processing. Moreover, by utilizing our cutting-

edge solutions our customers create cost

advantages and benefit from more optimized operational direct and indirect costs.

Payments System

TEB pioneered the Direct Debiting System

(DDS), a unique product in the Kosovo market

that is designed to support B2B commercial

cooperation. Its core function is to improve

our business customers’ financial liquidity by offering complete management of receivables

and payables. It is considered the most

effective cash-flow management system as it is supported by cutting-edge technology

and interfaces to facilitate complete and

automatic invoice payment processing.

This allows customers to authorize us to

automatically debit (withdraw) funds directly

from their bank account to make various

monthly payments to different public and

private companies. Only an authorization

form (signed by the customer) is needed and

the related transaction will be performed

automatically. DDS customers are provided

with a dedicated credit line that facilitates

payments to suppliers and guarantees that

invoice payment terms are fully respected.

The next logical step was the introduction of

DDS discounting that guarantees receivables.

By applying DDS discounting, the customer

consolidates finances and benefits from early collection of receivables. Our ultra-modern

online e-banking service employs the most

advanced security systems and gives access

to secure, convenient and time-saving

banking services 24/7. Our customers can

transfer funds electronically to beneficiaries worldwide and process national payments,

including utility and other regular debits,

such energy, water and telephone).

Moreover, customers can also make their

Tax Administration of Kosovo (TAK) payments

automatically using e-banking. The RTGS –

Real Time Gross Settlement System project

was completed successfully in July 2016

and all national payments including the

high value payments are now processed

in real time.

Today, rapid and safe international money

transfers are of paramount importance for

customers with cross-border ambitions.

That is why we provide a service that is

the easiest, fastest and most reliable way

to make international payments. Through

our extensive network of over 50 foreign

correspondent relationships and 10

placement banks, outgoing international

payments can be executed to foreign

beneficiaries worldwide. As a member of SWIFT, the world’s largest payments network,

our customers enjoy a clear advantage,

especially in international outgoing

payments. International incoming payments

can be managed using the same system.

This means we are able to offer market-

leading payment services, also through highly

efficient internal operations and the continual expansion of our global network.


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In 2016, we again received an award the

high quality of our International Outgoing

Payments from KBC Bank NV, Belgium. We

achieved the extraordinary rate of 98% STP.

The award recognized transactions in 2015.

4.7. Treasury & ALM

(Asset and Liability Management)

TEB SH. A.’s Treasury & ALM department is

responsible for managing the Bank’s cash

flow and balance sheet risks effectively and according to limits that are set by

international and national regulators. The

Department’s role is crucial to ensure the

continuity of the Bank’s daily operations

and are in line with identified risk levels that require constant fine tuning against developments and expectations in the

markets and the economy.

It is extremely important that the Bank

has the required level of liquidity in all

active currencies to be in the service of its

customers may require and that it can meet

all of its obligations at the minimum possible

cost. This is achieved through effective

daily cash flow and long-term liquidity management using the Department’s

exclusive access to national and

international capital and money markets.

Interest rate gaps and FX risks to the

balance sheet that are inherent due to the

nature of the business are also managed by

the Department by using various on and off-

balance sheet hedging instruments.

In conducting its business, Treasury & ALM

has a very strong risk awareness in line

with the Bank’s established and prudent

approach. As a result, the Department works

to maintain an optimal funding mix through

consistent liquidity and interest rate gap

management. This approach is in line with

balance sheet targets, business strategies

and economic expectations. Moreover, in

terms of risk management, Treasury& ALM

manages assets and liabilities by continually

analyzing potential risks and market

opportunities within the framework of rules

established by the Central Bank of Kosovo,

the Board of Directors and the Asset and

Liability Committee (ALCO).

The Department’s FTP desk performs the

Fund Transfer Pricing function for the Bank’s

other business units, guiding and directing

business targets and centralizing interest-

rate risk.

The Treasury Marketing desk serves

customers in all segments with an extensive

range of products that include foreign

exchange transactions, forward foreign

exchange transactions, foreign currency

swap transactions, and government bonds

and bills.

The Department enjoys the strong support

of both its French and Turkish parents in

controlling risks and performing its duties.

What’s next?

Business will not be easier in 2017 and

expecting an intensive yield hunting with the

increasing competition in the market while

political risks are on the rise worldwide.

Treasury & ALM will continue to support the

bank in order to ensure its solvency and solid

performance in best possible ways within the

strict risk management framework, extreme

respect to national and international laws

and all other stakeholders.

Today, rapid and safe international

money transfers are of paramount

importance for customers with

cross-border ambitions.


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4.8. Human Resources

Human Resources Policy

Employees are TEB SH. A.’s most important

asset, as it is their commitment, experience

and energy that help the Bank to achieve its

strategic objectives.

The continuous challenge of the Human

Resources team is:

• Work closely with Bank management to

ensure a synergy and to create an inspiring

working environment for employees.

• To recruit and retain the best young

dynamic and energetic talents in the

market whose own ambitions fit with our dynamic business culture, who will

contribute to the Bank’s growth and who

are capable of generating added value. In

return, we offer development opportunities

and competitive benefit packages.

• To support employees on their career path

through continuous development.

• To develop and manage the performance

evaluation system.

• To provide every person with equal

opportunity during the process of

recruitment, development, career

progression and advancement.

These focus point have been translated

into a Human Resources policy driven by

internal mobility, continuous development

of employees’ skills and knowledge, and the

continual promotion of all forms of diversity.

At year-end 2016, the full TEB team

consisted of 590 employees. A total of 84

banking and financial services professionals were recruited during the year. In terms of

mobility, 173 TEB people were promoted or

given new challenges during 2016. When

new positions opened up, employees were

always given the opportunity to move up

the organization with 34 colleagues able to

take up new challenges in different locations,

while seven existing employees were

promoted to manager.

Career Development

TEB SH. A. gives its employees opportunities

to advance through continuous development

and by creating career plans and in

2016 significant investment was made in improving related processes. Given

that corporate culture cascades down

from managers to employees, advanced

training for bank managers was prioritized.

Throughout the year, a series of specially

designed multi-module development

programs were held for (senior) managers

and these will continue in the coming years.

Special attention was given to existing

employees with management potential.

Throughout the year, 45 of these high-

potential employees were offered

opportunities to attend Assessment Center /

Development Program. From this program

which started in 2014 and is still continuing,

we appointed seven new managers during

2016 and we have an available pool of

potential managers to be considered

for future vacancies. We believe such

programs contribute to the well-being of

employees and increase their motivation and

confidence, as know they are valued by the Bank and they see a bright future ahead in

our family.

TEB SH. A. gives its

employees opportunities to

advance through continuous

development and by creating

career plans


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During 2016, continuous training programs

were organized, both in-house and

externally; these courses were given by

management and by well-known training

companies. Special focus was given to

mandatory Compliance training and all

active employees where trained on this

topic at least once. In total, 92 different

courses were organized to train our staff. In

order to ensure our people’s development

is in line with global changes in economics

and technology, 48 of our staff travelled

outside the country to attend seminars,

fairs, workshops, conferences and training

in different European countries, including

Turkey, Luxembourg, the United States of

America, France, Hungary, Macedonia and

Albania.

Human Resources continued to assign and

follow online technical training through

BNP Paribas online training platform in

order to meet BNP Paribas Group training

requirements and standards.

In 2016, we launched e-campus, the in-

house online training platform. Furthermore,

several soft skill and technical training

courses were assigned to and completed

by our employees. We found this platform

very useful for employees as training can

be offered in Albanian, ensuring that all the

content is clear and understandable for all

employees.

Inovations

Innovation is part of TEB SH. A.’s DNA

and at the Bank we believe it is a key

component in our success. During 2016,

the Human Resources team organized

several ‘Brainstorm Days’ aimed at sharing

innovative ideas to support our aim to be

the best customer-focused bank in Kosovo.

Employees shared and promoted ideas as

they increased team synergy that adds value

for both the Bank and staff.

The outcomes of these Brainstorm Days

are many brilliant ideas and new projects

based on them are being developed and

implemented.

Social Activities

At TEB, we believe that the Bank has a role

in promoting the well-being, happiness

and motivation of our people. That is why

we also organize social activities so that

they can strengthen work relationships in

a more relaxed environment. During 2016,

we organized several such events, including

parties, meetings, and sport activities. TEB

SH. A. strives to be a socially responsible

institution so we supported several activities

voluntary teams of employees had organized

that contribute to the society.

What’s next?

In 2017, the Human Resources team will

continue to give full support to recruiting

and retaining the best talent. It will be

focused on development of employee skills

and knowledge, and offer new career paths

and opportunities for internal mobility.

Training is a major priority and courses will

be organized through the year to ensure

that staff development is in line with the

Group’s requirements and standards. We will

further focus on social activities to maintain

the motivation of our employees. Activities

that contribute to society will always be

important. Moreover, we will strengthen the

platform that enables our people to generate

ideas for innovation.

Innovation is part of TEB SH.

A.’s DNA and at the Bank we

believe it is a key component in

our success.


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4.9. Organization and

Process Development

Through our corporate culture in which

customer value and quality service is at

the center of everything we do, we have

continued to leverage our strength by

further adapting our vigorous and risk-aware

business model.

As a proud member of two strong

international financial groups, we are taking full advantage of their wide-ranging

expertise so that TEB can become even

more robust in facing every challenge. We

continued our efforts to embed Group values

and strategies into our business activities

and processes. The emphasis is always on

compliance with laws and regulations, a

strong culture of ethics, and the quality of

services provided to our customers.

Policies and procedures are an essential

factor for the communication of corporate

values and professional standards. They

serve as the cornerstone for the proper

management of the Bank’s activities,

compliance with regulatory and legislative

requirements, control of the risks and the

quality of services offered to customers.

As such, throughout the year, the Bank has

invested extensive efforts in drafting and

revising exhaustive policy and procedure

documents, covering all its activities, to

ensure these are of a high quality and align

business strategies and business activities.

Customer satisfaction is at the heart of the

brand image which in turn strengthens

our reputation. That is why we have a

comprehensive quality management program

at Group level. The priorities are to make

customer satisfaction a central pillar of

strategy to ensure that every contact with

the Bank results in a greater appreciation

for the Bank and a better image of our

profession. It also aims to measure customer

satisfaction and set targets for improvement.

while listening to any expression of customer

dissatisfaction. It supports our endeavor

to respond quickly in the most appropriate

way, and to protect the interests of clients

by behaving in an exemplary manner at all

times and by offering products and services

which meet their needs.

We work in a dynamic banking environment.

The bank continues to rise to the challenge

of providing bespoke products and services

to meet their needs. The initiatives for

development and operational efficiency that we undertake are aimed at controlling and

optimizing our processes in order to secure

customer operations, and to improve the

efficiency and speed of our services.

The operational efficiency program, its methodology and its principles, aims

to enrich the customer experience and

satisfaction by significantly reducing lead times while contributing to internal

productivity.

What’s next?

Looking ahead, we will continue to optimize

and develop essential organizational

structures and process infrastructures in line

with the Bank’s business strategy. Customer

satisfaction and operational efficiency will remain one of the drivers for value creation.

Customer satisfaction is at

the heart of the brand image

which in turn strengthens our

reputation.

The bank continues to rise to the challenge of providing

bespoke products and services to meet their needs.


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4.10. Information

Technology

The Department of Information Technology in

2016 was committed on delivering a strategic

advantage to TEB by fostering creative and

innovative use of technology to achieve

Bank objectives. The Department promoted

effective stewardship of information assets

and provided a secure, highly reliable

technology infrastructure along with high-

quality, customer-oriented services and

support, so as to meet the ever-changing

needs of management, Bank and staff.

Achievements

• During 2016, we had the opportunity to

contribute to the Women Entrepreneurship

Credit Card project to support female

entrepreneurs in business. We increased

the number of ATMs to improve our

distribution channels. ATM and POS

terminals were configured to accept MasterCard cards.

• As a project for all banks, the national

transfer platform was automated to

provide our clients with real-time service

delivery.

• The TebMobile application is available in

both operating systems, IOS and Android;

we launched the Android version at the

beginning of 2016.

• To support business process improvement,

we installed scanners in our branches

to reduce the time needed for the client

onboarding process, or to make loan and

credit card applications. We also designed

and implemented online application forms

in our internal system to simplify the

processes. This feature has contributed to

minimizing the paper waste in our Bank

and improved the application processing

time by 50% compared with previous years.

• In order to increase security for

e-commerce services, we implemented the

‘Visa 3D Secure’ project that will protect

cardholders from online frauds, this is one

of the most up to date fraud prevention

methods for online transactions.

• In addition, the number of Q-Matic devices

was increased to improve the management

of client waiting times in our branches.

Secure Banking and

Strong Infrastructure

We closely monitor any security

vulnerabilities both at home and abroad,

taking action to protect the Bank and our

customers accordingly. A number of upgrades

in our production systems were completed to

provide a more stable and more responsive

infrastructure. A small but important

practical change that contributes to our

environmental commitment is the move to

double-sided printing on all our printers.

This is now standard practice at the Bank.

What’s next?

Our goals are to support the achievement of

the Bank’s strategic objectives.

Our long-term strategy plan is to

continually increase the quality and

improve the effectiveness in services to and

communications with our stakeholders.

As a continual improvement process, we will

review and update IT processes, procedures

and documentation based on International

standards for IT Service Management and

Quality Management.

In 2017, we will continue implementation

and integration of additional features in our

products and services in accordance with

corporate strategies.


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4.11. Information

Security and Personal

Data Protection

Information Security is everybody’s responsibility.

This was our basic principle in 2016 and will

continue to be so in the coming year. During

2016, we met all legal obligations and

requirements. This principle ensured that

the Bank’s reliability and reputation were

protected, risks and opportunities related to

business processes were managed, main and

support activities continued with only rare

interruptions, and awareness of information

security among employees was created,

thus providing constant improvement

for the Bank’s information security

management system. In support, several

documents were developed and published

during 2016. The Bank’s training programs

include Information Security training and

notifications which ensure employees are aware and equipped to safeguard our

customers’ and the Bank’s assets.

Data protection

Everyone has the right to the protection of personal data.

Therefore, protecting our clients’ information

is both a top priority and a legal requirement.

The Bank’s Data Protection Unit respects the

privacy and data protection rights of those

whose personal data is entrusted to TEB

SH. A., collecting and processing personal

data only when this is legally permitted.

We respect defined obligations regarding the processing of personal data. The Bank

responds to complaints regarding breaches

of data protection rules. And we collaborate

with the National Agency for Personal Data

Protection. The Bank’s training programs

include mandatory Data Protection training

even though it is not compulsory. The

aim of the training is to provide a basic

understanding of the Data Protection Law

for newcomers and existing employees

so that we can exercise our responsibility

in protecting the rights and privacy of

individuals when handling personal data.

5

Management and

Organizational Structure

5.1. TEB Sh. A Organizational Structure


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5.2. Board of Directors

Jacques Roger Jean Marie Rinino*

Chairman

Dr. Ismail Yanık*

Vice-Chairman

Alp Yılmaz

Vice-Chairman

Ayşe Aşardağ

Member

Pascal Alfred J. Gilliard

Member

Birol Deper*

Member

Tuğbay Kumoğlu

Member

Ayhan Albeyoğlu

Member (ex-officio)

* An extraordinary meeting of shareholders held on 28 March 2016 appointed Jacques Rinino as Chairman, Ismail Yanık as Vice-Chairman and Birol Deper as member of the Board of Directors of TEB SH. A. after previous Chairman and two members of the BoD have resigned on 28 March 2016.


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Governance

TEB Sh. A (the Bank/TEB) has a Board of Directors currently comprising eight members. All

have extensive banking experience (please see biographies of members). The Board carries

out its duties and responsibilities according to requirements set out in the Bank’s charter

and Board of Directors’ By-laws and in line with all relevant legislation and requirements

imposed by the Central Bank of Kosovo (CBK) and regulators. The Board meets at least

quarterly.

The role of the Board of Directors

Although the details are defined in the Articles 26, 27 and 28 of the Law No. 04/L-093 on Banks, Microfinance Institutions and Non-Bank Financial Institutions, the Board’s primary task is to supervise the financial and business activities of the Bank. It is responsible for defining the Bank’s organizational and administrative structure, its business policy including operational and administrative units, their sub-units and functions, supervisory positions

and reporting relationships. Moreover, the Board is also tasked with the supervision of

senior management activities. The Board of Directors determines and establishes the

Bank’s banking structure and exposure levels, reviews and approves necessary adjustments

and measures. Furthermore, the Board is responsible for adopting the report of senior

management on business operations based on the semi-annual balance sheet, profit and loss statement, annual balance sheet and internal and external audit reports. Decisions

taken by the Board require a majority vote from members who are either present or voting

by proxy.


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5.3. Committees

Committees of the TEB Sh. A Board

In line with TEB SH. A.’s Charter, regulations and the Bank’s requirements, our Board had

appointed an Audit Committee, a Risk Management Committee, an Asset and Liability

Committee, an Upper Credit Committee that are all made up of members of the Board with

relevant experience and external experts. The Board can also establish ad hoc committees

and determine their composition and tasks, where relevant and appropriate. As per Article

22 of the Charter of TEB SH. A., dated 24 June 2013, Committees may be selected from the

ranks of the Bank’s shareholders, directors and employees, as well as from the ranks of

other persons outside the bank, subject to any restrictions in the Charter. Committees shall

not take decisions in lieu of the BoD or shareholders, but shall act as advisors to them.

Audit Committee

Chairman: Ayşe Aşardağ

Vice-Chairmen: Birol Deper

Member: Pascal Alfred J. Gilliard

Member: Nexhat Kryeziu (external expert member)

Duties and Responsibilities

The audit committee has clear duties and responsibilities that are defined in the audit committee by-laws and are in line with relevant legislation and regulations. Its tasks

include:

• Recommending appropriate accounting, operational and administrative internal controls;

• Supervising the Bank’s compliance with policies and procedures;

• Requesting and reviewing reports from the Bank’s head of internal audit;

• Recommending compensation for the head of the internal audit department;

• Monitoring compliance with relevant banking legislation and applicable regulations or

requirements;

• Recommending the appointment of an external auditor;

• Monitoring the performance of the external auditor, reviewing the external auditor’s report

on the Bank’s financial statements and reporting any findings to the Board of Directors;

• Delivering opinions to the Board of Directors on any matters submitted to it by the Board of

Directors, or that the committee wishes to address; and

• Approving the external and internal audit plan of TEB SH. A.

The Audit Committee meets at least quarterly.


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Upper Credit Committee (CRECOM)

Chairman: Pascal Alfred J. Gilliard

Vice-Chairman: Haluk Kırcalı

Member: Alp Yılmaz


This committee is authorized to take credit decisions on amounts between

€500,000 and €2.5 million.

Asset and Liability Management Committee (ALM)

Chairman: Dr Ismail Yanık

Vice-Chairman: Ayhan Albeyoğlu

Member: Alp Yılmaz

Member: Pascal Alfred J. Gilliard

Member: Tolga Gürdem

Member: Orçun Özdemir

Member: Serhan Özarslan


• Monitoring financial markets, checking the situation, movements and changes in the Bank’s balance sheet and taking decisions, all in accordance with the Bank’s Policy and

Procedures;

• Guiding and monitoring the Treasury and ALM Department’s operations on an ongoing

basis and acting as the decision-making body as defined in the ALM committee by-laws;

• Supervising asset & liability management by the Treasury and ALM Department in terms of

the following criteria:

• Ensuring the observance of external (regulatory) ratios set by the Central Bank of Kosovo

(CBK) and internal rules set by the Board or ALCO;

• Monitoring minimum requirement reserves set by the CBK.

The Asset & Liability Committee meets at least quarterly.


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Risk Management Committee (RMC)

Chairman: Pascal Alfred J. Gilliard

Vice-Chairman: Alp Yılmaz

Member: Jacques Roger Jean Marie Rinino


The Risk Management Committee is responsible for monitoring all risk-related components

and functions involved in credit, market, liquidity, operational, reputational, the Bank’s

capital adequacy and other risks.

The Risk Management Committee meets on monthly basis.


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5.4. Internal Audit

The Board of Directors of TEB SH. A.

established the Internal Audit Department in

February 2013 as one of the key components

in the Bank’s governance structure. Prior

to that date, the Bank had outsourced its

internal audit function to Turk Ekonomi

Bankası (TEB) A.Ş. based on a Service Level Agreement (SLA) signed in 2008. The Bank

continues to receive audit support from TEB

A.Ş. through audit advice to the Internal Audit Department. Moreover, TEB A.Ş. carries out specific audits on selected activities based on pre-prepared audit plans. The Bank’s

Internal Audit Department is independent

and as such reports directly to the Board of

Directors through the Audit Committee and

on its own initiative if deemed necessary or

appropriate.

The Internal Audit Department has an

assurance function, helping the Bank to

accomplish its objectives by bringing a

systematic and disciplined approach to

evaluating and improving the effectiveness

of the control environment, including risk

management, control and governance

processes. It is Internal Audit’s responsibility

to assess whether the control environment

ensures that risks that could arise from

the Bank’s operations are managed in a

manner that enables an acceptable level of

mitigation. Audit activities are carried out

by the Internal Audit Department according

to the audit plan, which is prepared at

least on an annual basis using a risk-based

approach consistent with the Bank’s goals

and objectives. Each audit plan is approved

by the Bank’s Audit Committee. The plan

is updated regularly to reflect changes inherent to the internal control system and

to integrate new business lines. In the same

manner, the responsible internal auditor

develops and records a risk-focused plan for

each audit task, which analyzes the inherent

risk items and includes objectives, scope,

timing and resource allocation.

The work of the Internal Audit Department

is performed in compliance with the

International Standards for the Professional

Practice of Internal Auditing developed by

The Institute of Internal Auditors, which is

the governing body for the internal audit

profession worldwide, and TEB A.Ş. audit practices.

5.5. Risk Management

TEB SH. A. has a comprehensive and

prudent approach to risk, its identification and continuous management. The Bank

measures and monitors credit, market,

liquidity and operational risk and other

related bank risks using methods in line with

Group and international standards. The risk

management process is organized within

the framework of TEB A.Ş. and BNP Paribas risk management methodologies (GRM and

IRB, respectively) and favors a common

risk management culture. The process is

composed of risk identification, analysis, risk acceptance or mitigation and risk monitoring

through establishing sound policies and

procedures. Group Risk Management (GRM)

supervises the overall risk management

process within the group. The TEB SH. A.

Risk Management department works in

cooperation with executive management to

ensure that the risks assumed by the Bank

are in accordance with TEB A.Ş.’s GRM and BNPP’s IRB policies and are in line with

bank risk appetite. The Risk Management

department reports directly to the Board

of Directors through the Risk Management

Committee (RMC) on a monthly basis at

portfolio level, for which risk mitigation

directives are given.


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Credit RiskCredit risk is the most frequent risk bank face

based on local market conditions. We define credit risk as the loss that may be incurred if

the counterparty in a loan relationship fails,

partially or entirely, to fulfill its obligations as stipulated in the loan agreement. TEB

SH. A. is exposed to credit risk through

its lending, trade finance, and treasury activities but credit risk may arise in other

circumstances.

Mitigation: The Board of Directors is

ultimately responsible for determining

credit policies and approving loan facilities.

This authority is delegated to the Upper

Credit Committee and the Chief Executive

Officer under certain conditions and limits. The exercise of these delegated powers

is regularly monitored and reported by

internal audit and risk management

through relevant committees. TEB SH. A.’s

primary exposure to credit risk is through

its loans and advances to customers.

Concentrations of credit risk can arise

when a number of customers are engaged

in similar business activities, or activities

in the same geographical region, or have

similar economic features that would cause

their ability to meet contractual obligations

to be affected by changes in economic,

political or other conditions. A branch

portfolio officer visits loan applicants and obtains financial statements and information related to the customer’s activities and

investment plans. A credit loan proposal

is prepared containing a commentary on

the client company’s financial position and other qualitative information, an industry

analysis, information about the partners

and managers, other stakeholders as well

as references from other available sources.

This information is then submitted to the

Credit Allocation Division that assesses the

applicant’s creditworthiness on an individual

basis and forwards the credit file to the

Upper Credit Committee for a decision. The

Risk Management department assesses and

manages all financial risks, including credit risk, on a monthly basis at portfolio level.

The Bank level analysis has to be revised

whenever there is a significant change in the operating environment that can affect

the Bank. Credit stress testing is another

important component in understanding

possible events or changes in the market

that could impact the Bank’s balance sheet.

A separate Corporate Monitoring Unit within

Credit Allocation has been established in

order to monitor clients with high exposure,

while also observing the market and industry

outlooks in order to minimize credit risk due

to external factors. Reporting sectorial NPL

is crucial to understanding movements in

the market and industry. As a result of the

prudent credit policy adopted by the Bank,

the maximum loan limit that can be granted

to a single customer or group of related

customers is kept below legal limits, thus

minimizing the risk of loan concentration.

Limits set by the Board of Directors are

monitored and reported on a monthly basis

to the Risk Management Committee. The

Credit Allocation and Monitoring Division

make assessments of the loan portfolio

for the Credit and Risk Management

Committees, reporting high risk cases and

non-performing loans. After a loan facility is

offered, the Credit Monitoring Department

monitors the customer’s repayment

capability and the sufficiency and adequacy of the collateral. In this way, any problematic

loan is identified at an early stage. Internally, the Bank has started to apply credit rating

scores for its legal entities. As such, the

rating contains quantitative and qualitative

information. Should the credit rating and/or

the quality of the collateral raise any doubts,

the customer is then closely reviewed and

monitored.


Table of Contents

Market RiskMarket risk involves possible losses a bank

may incur as a result of the exposure of

its balance sheet and off-balance sheet

accounts to interest-rate risk, equity-position

risk or exchange-rate risk resulting from

fluctuations in the financial markets.

Mitigation: TEB Sh. A’s market risk

management is designed to manage and

control market-risk exposures in order to

optimize returns while maintaining the

Bank’s conservative risk profile.

Interest-Rate RiskAs part of market risk, interest-rate risk can

arise from the risk that an asset losses value

due to a change in interest rates. Hedging

against interest rates volatility is a top

priority for TEB SH. A.

Mitigation: Interest-rate risk is determined

by measuring the rate of sensitivity of

assets, liabilities and off-balance sheet

items through positive and negative shock

simulations over Net Banking Income

which are carried out on regular basis. As

preventive measure, the bank tries to match

each deposit maturity with an asset of the

same maturity. IRR is monitored closely

through GAP and Duration analyses. Possible

negative effects of interest-rate fluctuations on financial position and cash flow are minimized by means of prompt decisions.

When determining short, medium and long-

term pricing strategies, TEB SH. A.’s Assets

and Liabilities Committee manages maturity

of balance sheet positions and adopts the

principle of working with positive balance-

sheet margins as its pricing policy.

Exchange-Rate RiskExchange-rate risk is defined as a possible loss that a bank may incur on all of its

currency assets and liabilities in the event of

changes in exchange rates.

Mitigation: Position limits determined by

the Board of Directors are monitored on

a daily basis and possible changes in the

Bank’s monetary positions that may come

about as a result of routine foreign currency

transactions are also examined.

Liquidity RiskLiquidity risk occurs when there is

insufficient cash or cash inflows to meet net funding requirements when due. Liquidity

risk may also occur when open positions

cannot be closed quickly at suitable prices.

Mitigation: The Bank’s policy is to have an

asset structure that is sufficiently liquid to meet all kinds of liabilities as they fall due.

The Board of Directors regularly monitors

and determines liquidity ratios and the

relevant standards for maintaining high

liquidity at all times. TEB SH. A. has in place

an effective system for the timely reporting

of the liquidity position to the Board of

Directors, senior management and all related

departments. Moreover, liquidity stress tests

are another important tool to measure bank

liquidity at different business assumptions.

Moreover, as part of Basel III directive,

on regular basis the Bank calculates the

Liquidity Coverage Ratio, ensuring that short-

term liquidity is adequate.

Capital AdequacyThe Bank’s aim is to ensure it has sufficient capital to cover the risks involved in

its lending business activities. The Risk

Management department monitors and

reports capital adequacy ratios to executive

management and to the Board of Directors

through the Risk Management Committee.

As per the Banking Law and Central Bank of

Kosovo regulations, there are three adequacy

ratios that must be met at all times: Tier 1

capital over RWA of at least 8%; Total Capital

over RWA of at least 12%; and Total Equity

over Total Assets of at least 7%.


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Operational Risk and

Business ContinuityOperational risk is defined as the risk of loss that may result from inadequate or failed

internal processes, people and systems or

from certain external events.

Mitigation: The Risk Management

department at TEB and its dedicated

operational risk unit is responsible for

monitoring operational risk events. The bank

has in place a system appropriate to the

nature, extent and complexity of the Bank’s

business in order to effectively identify Key

Risk Indicators and assess, monitor and

control related operational risk events.

The Operational Risk unit implements

methods to assist other departments in

identifying, monitoring, controlling and

mitigating potential operational incidents.

Operational Risk provides operational risk

training for all staff, especially those who

are responsible for reporting incidents to

the Operational Risk and Business Continuity

Unit, and assessing all processes in terms

of operational risk and identifying risky

processes.

Business Continuity, regardless of its type

and reason, consists entirely of plans

ensuring the continuity of the Bank’s critical

business functions in case of any business

interruption arising from internal and

external factors. The Operational Risk and

Business Continuity Unit are continuously

engaged in defining, measuring and reporting risk to the Risk Management department.

The results of Operational Risk and Business

Continuity activities are reviewed and

assessed on a monthly basis to the Board-

level Risk Management Committee.

5.6. ComplianceWe are committed to responsible banking

and acting with integrity and responsibility

in everything we do. At TEB, we believe

that in creating value for our customers,

shareholders, employees and society, how

we do business is just as important as the

sustainability of our business growth. It goes

without saying that adherence to laws and

regulations and the highest international

standards and guidelines is part of our

identity and forms the foundation for how we

do business.

At the same time, we set high standards

of business integrity and ethical conduct

aimed at increasing the effectiveness of the

compliance framework. In recent years, there

has been a constant increase in regulatory

requirements in Kosovo and at BNP Paribas

Group Level where compliance management

is becoming a top priority. As in previous

years, we faced a lot of challenges but

we appreciate the increased importance,

awareness and implementation in the field of compliance. Our team spirit, commitment

and the sustainable improvement of our

efficiency are all aimed at safeguarding the integrity of our financial institution.

We expect our employees to act honestly,

responsibly, fairly and professionally, to

serve the best interests of customers and to

respect the integrity of the markets. Our code

of conduct, comprising our values, ethical

business conduct and requirements, forms

the basis for how our employees should

behave with colleagues and our customers,

business partners, shareholders and the

authorities. TEB’s code of conduct includes

ethical business provisions that are aimed

at managing conflict of interest, preventing market abuse, fighting terrorism and other economic crimes.

We are committed to adhering to strict laws,

regulations and guidelines to combat money

laundering, finance of terrorism, and to prevent violation of international financial sanctions. We scrutinize our customers

and their transactions to prevent our name


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and our products and services from being

misused for such purposes. This can be seen

in the increased number of employees who

work in our Compliance Department, as

well as in the implementation of advanced

tools related to AML/CFT and International

financial sanctions.

To this end, we apply meticulous measures

supported by automated monitoring systems,

and the ‘Know Your Customer’ (KYC) Review

process. Our KYC Review process serves

to update information in order to manage

AML risks that may arise due to serving

an existing customer. The process is in the

form of regular reviews according to defined procedures and including assessment

of people or entities that are ultimate

beneficiary owners. Preventive measures and the implementation of thorough

controls help us maintain strict adherence

to laws and regulations as well as to the

adapted policies and procedures of the

BNP Paribas Group. Therefore, we continue

to implement crucial projects to reinforce

our IT infrastructure and cross-functional

approaches to work ethics, preventing money

laundering/terrorism financing/breach of international financial sanctions and conflict of interest, and will continue working on

similar projects in the future. In order to

promote our compliance program and to

ensure awareness and adherence by our

employees, we have expanded our training

program to include e-learning and special

modules on key compliance topics.

The modules are available to all employees

and can be adapted to the needs of our

business lines according to job-specific requirements. They also complement the

wide range of on-site training programs

that address compliance topics. Most of

the disciplines covered by the professional

modules are based on common notions of

transparency. Our Compliance Department

reports directly to the Board of Directors

through the Audit Committee. Its purpose is

to manage compliance risk in an appropriate

manner to ensure that banking activities

comply with relevant laws, rules and

regulations.

Internal ControlThe Internal Control Department aims to

ensure a sound internal control environment

is in place at TEB SH. A. It handles essential

coordination and makes sure related

activities are performed regularly, efficiently, effectively and in line with the Bank’s

management strategies and policies, as well

as with applicable rules and regulations. At

TEB, the Internal Control and Operational

Risk functions are structured separately.

Within the scope of internal control, controls

of critical activities at branches and head-

office departments are carried out by the Branch Control Unit, Central Control Unit and

Credit Control Unit.

A controller performs his/her controls in

accordance with check-lists that are prepared

in advance and in compliance with internal

and external rules and regulations. The

check-lists are revised if any changes occur in

internal and/or external rules and regulations.

Control points in check-lists are used for:• Verifying proper adherence to internal

rules and procedures and the consistency

of internal rules with legal regulations and

compliance with them;

• Contributing to safeguarding assets;

• Assessing the adequacy, effectiveness and

efficiency of daily operations; and

• Contributing to the identification and assessment of risks related to the

organization’s current and proposed future

business activities, including new products.

The Internal Control Department reports

directly to the Board of Directors through the

Audit Committee on a quarterly basis.

1

TEB SH.A.

Financial Statements prepared in accordance with International Financial Reporting Standards

For the year ended 31 December 2016

(with Independent Auditors’ Report thereon)

2

TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS’ REPORT FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION 1 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 2 STATEMENT OF CHANGES IN EQUITY 3 STATEMENT OF CASH FLOWS 4 NOTES TO THE FINANCIAL STATEMENTS 5 - 35

KPMG Albania Shpk Kosovo Branch6, Pashko Vasa StreetPristina, KosovoTelephone +381 (38)24677 1Telefax +381(38)610772Email [email protected] kpmg.com/al

lndependent Auditors' ReportTo the Shareholder and Board of Directors of TEB SH.A.OpinionWe have audited the financial statements of TEB SH.A. ("the Bank"), whichcomprise the statement of financial position as at 3'l December 2016, thestatements of profit or loss and other comprehensive income, changes in equityand cash flows for the year then ended, and notes, comprising significantaccounting policies and other explanatory information.ln our opinion, the accompanying financial statements give a true and fair viewof the financial position ofthe Bank as at 31 December 2016, and of its financialperformance and its cash flows for the year then ended in accordance withlnternational Financial Reporting Standards (IFRS).

Basis for OpinionWe conducted our audit in accordance with lnternational Standards on Auditing(lSAs). Our responsibilities under those standards are further described in theAuditors' Responsibilities for the Audit of the Financial Statements section of ourreport. We are independent of the Bank in accordance with lnternational EthicsStandards Board for Accountants Code of Ethics for Professional Accountants(IESBA Code), together with the ethical requirements of the Law No.04/L -014"On accounting, financial reporting and audit", that are relevant to our audit ofthe financial statements in Kosovo, and we have fulfilled our other ethicalresponsibilities in accordance with these requirements and the IESBA Code. Webelieve that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our opinion.

Other lnformation

Management is responsible for the other information. The other informationcomprises the information included in the annual report prepared bymanagement in accordance with Article 56 of the Law No. 04/L-093 "Law onBanks, Microfinance lnstitutions and Non-Bank Financial lnstitutions", but doesnot include the financial statements and our auditors' report thereon. The annualreport is expected to be made available to us after the date of this auditors'report.

KPMG Ab.ni. Slrpk l(o$F B6ncn, hnnch or KPMG Alb.ni. shpk. anarb.ni.n limit d liltbiliiy conp..y. m.rb.r rlm ol (PMG n.lmd( otind.r.nd. m6frb.rfim3.ftli.t d lith KPMG lhl.h.liond coop.Elrw(XPMG lnl.mation.f) . s*s.ntiryo..um.nrd.ri6cno XPMGcoit'dent.l

R.!'3t Ed wihih. K6orc Busin.ssRe0ind6n ac.ncy k1h Burmss

Our opinion on the financial statements does not cover the other informationand we will not express any form of assurance conclusion thereon.ln connection with our audit of the financial statements, our responsibility is toread the other information identified above when it becomes available and, indoing so, consider whether the other information is materially inconsistent withthe financial statements or our knowledge obtained in the audit, or otheMiseappears to be materially misstated.When we read the annual report, if we conclude that there is a materialmisstatement therein, we are required to communicate the matter to thosecharged with governance.

Responslb/lles of Management and Those Charged with Governance for theFinancial StatementsManagement is responsible for the preparation and fair presentation of thefinancial statements in accordance with IFRS and for such internal control asmanagement determines is necessary to enable the preparation of financialstatements that are free from material misstatement, whether due to fraud orerror.ln preparing the financial statements, management is responsible for assessingthe Bank's ability to continue as a going concern, disclosing, as applicable,matters related to going concern and using the going concern basis ofaccounting unless management either intends to liquidate the Bank or to ceaseoperations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank'sfi nancial reporting process.

Auditors' Responsibilities for the Audit of the Financial StatementsOur objectives are to obtain reasonable assurance about whether the financialstatements as a whole are free from material misstatement, whether due to fraudor error, and to issue an auditors' report that includes our opinion. Reasonableassurance is a high level of assurance, but is not a guarantee that an auditconducted in accordance with lSAs will always detect a material misstatementwhen it exists. Misstatements can arise from fraud or error and are consideredmaterial if, individually or in the aggregate, they could reasonably be expectedto influence the economic decisions of users taken on the basis ofthese financialstatements.As part of an audit in accordance with lSAs, we exercise professional judgmentand maintain professional scepticism throughout the audit. We also:

- ldentify and assess the risks of material misstatement of the financialstatements, whether due to fraud or error, design and perform auditprocedures responsive to those risks, and obtain audit evidence that issufficient and appropriate to provide a basis for our opinion. The risk of notdetecting a material misstatement resulting from fraud is higherthan for oneresulting from error, as fraud may involve collusion, forgery, intentionalomissions, misrepresentations, or the override of internal control.

- Obtain an understanding of internal control relevant to the audit in order todesign audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Bank'sinternal conlrol.

- Evaluate the appropriateness of accounting policies used and thereasonableness of accounting estimates and related disclosures made bymanagement.

- Conclude on the appropriateness of management's use ofthe going concembasis of accounling and, based on the audit evidence obtained, whether amaterial uncertainty exists related to events or conditions that may castsignificant doubt on the Bank's ability to continue as a going concern. lf weconclude that a material uncertainty exists, we are required to draw attentionin our audilors' report to the related disclosures in the financial statementsor, if such disclosures are inadequate, to modify our opinion. Our conclusionsare based on the audit evidence obtained up to the date of our auditors'report. However, future events or conditions may cause the Bank to ceaseto continue as a going concern.

- Evaluate the overall presentation, structure and content of the financialstatements, including the disclosures, and whether the financial statementsrepresent the underlying transactions and events in a manner that achievesfair presentation.

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

k?l/ t Atrra,'iq btrt" bnuo 8t ot dtKPMG Albania Shpk Kosovo Branch6, Pashko Vasa StreetPristina, Kosovo

Pristina, 28 Aptil2017

TEB SH.A. Statement of profit or loss and other comprehensive income For the year ended 31 December In EUR thousand

2

The notes on pages 5 to 35 are an integral part of these financial statements.

Note 2016 2015 Interest income 18 30,553 32,843 Interest expense 19 (1,516) (2,500) Net interest income 29,037 30,343 Fee and commission income 20 8,093 7,904 Fee and commission expense 21 (1,817) (1,554) Net fee and commission income 6,276 6,350 Net foreign exchange gain 277 326 Other operating income 105 22 Impairment reversals/(losses) on loans to customers 7 2,202 (1,099) Provisions 15 (103) (226) Personnel costs 22 (7,090) (7,005) Depreciation and amortisation 11,12 (2,467) (2,334) Administrative and other operating expenses 23 (7,722) (6,997) (14,798) (17,313) Profit before tax 20,515 19,380 Income tax expense 24 (2,182) (2,044) Net profit for the year 18,333 17,336 Other comprehensive income - - Total comprehensive income 18,333 17,336

TEB SH.A. Statement of changes in equity For the year ended 31 December In EUR thousand

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Share capital Retained earnings Total Balance at 1 January 2015 24,000 11,655 35,655 Transactions with equity owners of the Bank - - - Net profit for the year - 17,336 17,336 Other comprehensive income - - - Total comprehensive income - 17,336 17,336 Balance at 31 December 2015 24,000 28,991 52,991 Transactions with equity owners of the Bank - - - Net profit for the year - 18,333 18,333 Other comprehensive income - - - Total comprehensive income - 18,333 18,333 Balance at 31 December 2016 24,000 47,324 71,324


TEB SH.A. Statement of cash flows For the year ended 31 December In EUR thousand

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Note 2016 2015 Cash flows from operating activities Net profit for the year 18,333 17,336 Adjustments for: Depreciation 11 1,130 1,229 Amortization 12 1,337 1,105 Impairment (reversals)/losses on loans to customers 7 (2,202) 1,099 Provisions 15 103 226 Net foreign exchange gain (277) (326) Other operating income 105 22 Loss from sale of assets - 6 Write off of property and equipment - (5) Interest income 18 (30,553) (32,843) Interest expense 19 1,516 2,500 Tax expense 2,182 2,044 (8,326) (7,607) Changes in: Statutory reserve with the Central Bank 5 6 (1,658) Loans and advances to customers (12,480) (28,039) Other financial assets 9 (723) (47) Other assets (356) (451) Due to customers (8,645) 27,046 Other financial liabilities 14 2,118 (214) Other liabilities 15 181 (12) (28,225) (10,982) Interest received 30,481 32,502 Interest paid (1,656) (1,603) Income tax paid (2,271) (991) Net cash (used in)/ from operating activities (1,671) 18,926 Cash flows from investing activities Purchases of property and equipment 11 (1,533) (710) Purchases of intangible assets 12 (1,312) (1,998) Purchases of financial assets available for sale (4,368) (3,011) Net cash used in investing activities (7,213) (5,719) Cash flows from financing activities Proceeds from borrowings 8,000 26,000 Repayment of borrowings (1,429) (30,878) Net cash from/ (used in) financing activities 6,571 (4,878) (Decrease)/ increase in cash and cash equivalents (2,313) 8,329 Cash and cash equivalents at 1 January 47,420 39,091 Cash and cash equivalents at 31 December 6 45,107 47,420


TEB SH.A. Notes to the financial statements For the year ended 31 December 2016 (All amounts are expressed in thousand EUR, unless otherwise stated)

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1. Reporting entity On 19 December 2007, TEB Sh.a. (the “Bank”) obtained a license for banking activities based on the Central Bank of Kosovo (“CBK”) regulations, and commenced operations during January 2008. The registered head office of the Bank is located in Street. Agim Ramadani, No. 15, 10000 Pristina, Kosovo. The Bank operates as a commercial and savings bank for all categories of customers in Kosovo, through its network of 26 (2015: 26) branches located in Prishtina, Gjakova, Peja, Prizren, Ferizaj, Mitrovica and Gjilan. The Bank is controlled by TEB Holding incorporated in Turkey (the “Parent”), which owns 100% (2015: 100%) of the ordinary shares as at 31 December 2016. The shareholders of TEB Holding are BNP Paribas and Çolakoĝlu Group, each of them owning 50% of the shares. At 31 December 2016, the Board of Directors is composed of: Jacques Roger Jean Marie Rinino – Chairman Alp Yilmaz - Vice Chairman İsmail Yanik - Vice Chairman Ayhan Albeyoglu - Member and Managing Director Ayşe Aşardağ – Member Birol Deper - Member Pascal Alfred J. Gilliard – Member Tuğbay Kumoğlu – Member. 2. Basis of accounting 2.1. Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Details of the Bank’s accounting policies are included in Note 3. 2.2. Basis of measurement The financial statements have been prepared on a historical cost basis except for the available-for-sale financial assets and the derivative financial instruments, which are measured at fair value. 2.3. Functional and presentation currency These financial statements are presented in EUR, which is the Bank’s functional currency. All amounts have been rounded to the nearest thousand, except when otherwise indicated. 3. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. 3.1. Interest income and expense Interest income and expense are recognised in profit or loss using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability to the carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability. Interest income and expense presented in the statement of profit or loss and other comprehensive income (OCI) include: • interest on financial assets and financial liabilities measured at amortised cost calculated on an effective

interest basis; and • interest on available-for-sale investment securities calculated on an effective interest basis.


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3. Significant Accounting Policies (continued) 3.2. Fee and commission Fees and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the measurement of the effective interest rate (see (3.1)). Other fees and commission income are recognised as the related services are performed. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. 3.3. Foreign currency transactions Transactions in foreign currencies are translated into the respective functional currency at the spot exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated 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 the amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in the foreign currency translated at the spot exchange rate at the end of the year. Foreign currency differences arising on translation are generally recognised in profit or loss. 3.4. Non-derivative financial assets and financial liabilities (i) Recognition The Bank initially recognises loans, deposits, and borrowings on the date on which they are originated. All other financial instruments are recognized on the trade date, which is the date on which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. (ii) Classification Non-derivative financial assets are classified in the following categories: financial assets available-for-sale and loans and receivables. The classification of financial assets is determined at their initial recognition, depends on the instrument’s characteristics and management’s intention. See 3.5, 3.6, and 3.7. The Bank classifies its non-derivative financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost. See 3.13 and 3.14. (iii) Derecognition Financial assets are derecognized when the contractual rights to the cash flows from the financial assets expire or financial assets are transferred and the transfer qualifies for derecognition. The transaction is treated as a transfer of a financial asset, where substantially all risks and rewards of ownership are transferred. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. (iv) Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the amounts and it intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS. (v) Amortised cost measurement The ‘amortized cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. (vi) Fair value measurement Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date.


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3. Significant Accounting Policies (continued) 3.4. Non-derivative financial assets and financial liabilities (continued) (vi) Fair value measurement (continued) When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. The Bank recognises transfers between levels of the fair value hierarchy (see Note 28.(i)) as of the end of the reporting period during which the change has occurred. (vii) Impairment The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Impairment and classification of loans is based upon a review of several factors attended to the credit, contain the weaknesses that are inherent in a credit, or of whether there is a probability that a portion of the loan amount will not be paid. The main criteria that the Bank observes to determine that there is objective evidence of an impairment loss include: • Default or delinquency in interest or principal payments; • Default in repayment in other financial institutions, subject of certain thresholds; • Liquidity difficulties of the issuer; • Breach of contract covenants or conditions; • Bankruptcy of the issuer; • Deterioration of economic and market conditions. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit or loss for the year. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Bank’s grading process that considers asset type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.


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3. Significant Accounting Policies (continued) 3.4. Non-derivative financial assets and financial liabilities (continued) (vii) Impairment (continued) Collective assessment is established based on a credit risk model that considers the Probability of Default (“PD”) factor and Loss Given Default factor (“LGD”) adjusted as appropriate for the local circumstances. The PD factor is observed through a twelve-month period while the recovery rate which is calculated after deducting the LGD factor is analysed within a 24 months period. The model is updated on annual basis for three separate segments; retail, corporate businesses and credit card exposures. Certain credit exposures having an outstanding amount of EUR 500 thousand or more (2015: EUR 500 thousand or more) are assessed individually, while credit exposures below this threshold are assessed on a collective basis. For the purposes of a collective evaluation of impairment, the Bank classifies the portfolio into the following categories: • Standard: not in arrears and arrears 1-30 days • Watch: arrears 31-60 days • Substandard: arrears 61-90 days • Doubtful: arrears 91-180 days • Loss: arrears > 180 days

The loan loss collective rates for the first two categories have been assessed by the Bank, using a model that was approved by the Board of Directors on 28 April 2016 and by the Central Bank of Kosovo on 22 June 2016. The Bank creates allowances for losses based on the past due loans only. The allowance levels for Standard past due loans and for Watch loans were calculated using the following rates: Standard Past Due Watch Credit cards 10.54% 19.76% Retail 7.7% 25.55% Corporate business 19.56% 36.76%

The PD and LGD factors used to determine the allowance levels presented above, are derived from the Bank’s local historical default information. The Bank has applied an additional factor to the results derived from using the PD and LGD factors generated by the model, aiming to account for further losses that might result from any adverse development or change in the inputs, or any inaccuracy in the model application. The Bank has further tailored the credit risk model by applying a minimum ratio of 50% for loans classified as substandard and doubtful, and 100% for loans classified as loss. Such minimum levels aim to cover for the local uncertainties relating to the value and enforcement of collateral. The doubtful and loss loans for which the minimum levels mentioned above are used, are presented as individually assessed exposures in Note 28.(g). To assess the appropriateness of the factors used in establishing the allowance, the Bank has compared the current non-performing loans ratio to the ratios derived from using the historical default information, to ensure that estimated losses reflect the current developments. Restructured credit exposures that are past due less than 90 days and where no financial deterioration in the repayment is observed are classified as performing exposures, otherwise exposures are classified as non-performing restructured credit exposures. A restructured credit exposure is classified in the substandard category or worse until sustained performance is observed. After the completion of each period of sustained performance, the Bank upgrades restructured loans. The restructured exposures are monitored by the Risk Management Department, and their classification is improved only after four regular consecutive repayments. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the profit or loss in impairment charge for credit losses.


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3. Significant Accounting Policies (continued) 3.4 Non-derivative financial assets and financial liabilities (continued) (vii) Impairment (continued) Impairment of available for sale financial assets The Bank assesses at each balance sheet date whether there is objective evidence that financial assets available for sale are impaired. In case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered an objective evidence of impairment. If any such evidence exists, the cumulative loss is removed from other comprehensive income and recognised in the profit or loss. The Bank has adopted the criteria established by TEB Holding Group to determine a decline in a quoted market price is 'significant' or 'prolonged'. According to such criteria ‘significant’ is evaluated against the original cost at initial recognition and is deemed to be over 20% of the original cost and ‘prolonged’ is evaluated against the period in which the fair value of the investment has been below original cost at initial recognition and is deemed to be over six months. Impairment losses recognised in the profit or loss on equity instruments are not reversed through the profit or loss. Subsequent increases in fair value after impairment are recognized in other comprehensive income. 3.5. Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the statement of financial position 3.6. Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances to banks and loans and advances to customers are classified as loans and receivables. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method and minus any reduction (through the use of an allowance account) for impairment or un-collectability. 3.7. Financial assets available for sale Financial assets available for sale are initially measured at fair value plus incremental direct transaction costs. Subsequently they are carried at fair value. Available-for-sale investments comprise debt securities. Gains and losses arising from changes in fair value of available-for-sale financial assets are recognized through other comprehensive income. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognized in the profit or loss. 3.8. Derivative financial instruments The Bank holds derivative financial instruments to hedge its foreign currency risk exposures. The Bank does not apply hedge accounting. Derivatives are initially measured at fair value; any directly attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognised in profit or loss. 3.9. Property and equipment Property and equipment are stated at cost less accumulated depreciation and accumulated impairment loss, where required. Each year, the Bank assesses whether there are indications that assets may be impaired. If any such indication exists, the recoverable amounts are estimated. The estimated recoverable amount is the higher of an asset’s fair value less costs to sell and its value-in-use. When the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount and the difference is charged to the profit or loss. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining the operating result for the period. Repair and maintenance costs are charged to the profit or loss when the expenditure is incurred.


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3. Significant Accounting Policies (continued) 3.9 Property and equipment (continued) Depreciation is recognised in profit or loss using the straight-line basis and the estimated useful lives in years are as follows: Category of assets Depreciation rates used

Leasehold improvements 5 years or lease term, whichever is shorter Furniture, fixtures and equipment 3-5 years Computers and related equipment 3-5 years Motor vehicles 5 years

Land is not depreciated 3.10. Intangible assets Intangible assets acquired by the Bank are stated at cost less accumulated amortisation and impairment losses, when required. Amortisation is provided on a straight-line over a period of five years. Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific assets to which it relates. All other expenditure is expensed as incurred. Amortization does not begin until the assets are available for use. 3.11. Foreclosed assets Foreclosed properties comprise non-financial repossessed assets acquired through enforcement of security over non-performing loans and advances to customers that do not earn rental, and are not used by the Bank and are intended for disposal in a reasonably short period of time, without significant restructuring. Reposessed assets are initially recognised and subsequently remeasured at the lower of their carrying amount and net realizable value and are classified as other assets. Any loss arising from the above measurement is recorded in profit or loss and can be reversed in the future. Assets in this category are not depreciated. Gains or losses from the sale of these assets are recognized in the profit or loss. 3.12. Impairment of non-financial assets An impairment loss is recognised whenever the carrying value of an asset exceeds its recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs to sell and value in use. The value in use of an asset is the present value of estimated future cash flows expected from the continuing use of an asset and from its disposal. 3.13. Deposits and borrowings Deposits and borrowings are the Bank’s main sources of debt funding. When the Bank sells a financial asset and simultaneously enters into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future date (sale and repurchase agreement), the arrangement is accounted for as a deposit, and the underlying asset continues to be recognised in the Bank’s financial statements. Deposits and borrowings are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest rate method. 3.14. Financial guarantees and loan commitments Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. Such financial commitments are recorded in the statement of financial position if and when they become payable. 3.15. Taxation Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in Other Comprehensive Income. (i) Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date.


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3. Significant Accounting Policies (continued) 3.15. Taxation (continued) (ii) Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting, nor taxable profit or loss. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. (iii) Tax exposures In determining the amount of current and deferred tax, the Bank considers the impact of tax exposures, including whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Bank to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities would impact tax expense in the period in which such a determination is made. 3.16. Provisions Provisions are recorded when the Bank has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are measured at the management’s best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect is material. 3.17. Employee benefits The Bank pays contributions to the publicly administered pension plan (KPST) on a mandatory basis. The Bank has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. 3.18. Operating leases Payments made under operating leases are charged to expenses on a straight-line basis over the term of the lease. 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. 3.19. Standards issued but not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016, and have not been applied in preparing these financial statements. The Bank does not plan to adopt these standards and amendments early. IFRS 9 Financial Instruments IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculation impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 “Financial Instruments” will have an impact on the classification, recognition and measurement, the impairment as well as on the disclosure requirements of financial instruments. Based on the preliminary assessment, the application of IFRS 9 impairment requirements are expected to result in an increase in loss allowance at the moment of transition and moderate increases for expenses for allowance for losses on loans and advances. The new hedge accounting requirements will not affect the financial statements as the Bank does not apply hedge accounting. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.


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3. Significant Accounting Policies (continued) 3.19. Standards issued but not yet adopted (continued) IFRS 9: Implementation Program The Bank, in order to ensure proper application of the new standard, has planned an IFRS 9 Implementation Program. The Program will be directed towards determining the classification of its financial instruments based on the new criteria, developing key methodologies regarding IFRS 9 concepts, designing the operating model and the systems operating model will be maintained and developing risk modeling methodologies for the calculation of impairment. IFRS 9: Classification and measurement work stream The Bank is in the process of assessing the existing, and defining the new business models, where necessary, that will be compatible with the Bank’s business strategy. The result of the assessment will be the mapping of the Bank’s financial assets to the new business models. Additionally, the Bank is in the process of assessing its financial assets in order to determine whether the SPPI criterion (i.e. cash flows represent Solely Payments of Principal and Interest) is met. For standardised retail loans, the assessment is based on product characteristics while for non-standardised (mainly corporate) loans and debt securities the assessment is based on the characteristics of the individual asset. The Bank will update policies and design new classification processes that shall be applied for the classification of financial assets from 1 January 2018. IFRS 9: Impairment work stream The Bank will be required to record an allowance for expected losses for all loans and other debt financial assets not held at fair value through profit or loss, together with loan commitments and financial guarantee contracts. The allowance is based on the expected credit losses associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination, in which case, the allowance is based on the probability of default over the life of the asset. When determining whether the risk of default has significantly increased since initial recognition, the Bank intends to consider reasonable and supportable information, both quantitative and qualitative, that could vary between portfolios. The Bank will develop its detailed methodologies for assessing when there is an increase in credit risk. IFRS 16 Leases IFRS 16 is effective for the periods beginning on or after 1 January 2019, with early adoption permitted, but only if the entity also applies IFRS 15 Revenue from Contracts with Customers. IFRS 16 replaces the previous leases standard, IAS 17 Leases, and related Interpretations. The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, ie the customer (‘lessee’) and the supplier (‘lessor’). 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. Applying that model, a lessee is 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 income statement. 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. IFRS 16 “Leases” will have an impact on the recognition, measurement, presentation and disclosure of leases. The overall impact of the standard is currently being assessed. The following new or amended standards are expected to have a minor, or no impact on the Bank’s financial statements: • Amendments to IAS 7: Disclosure Initiative • IFRIC Interpretation 22: Foreign Currency Transactions and Advance Consideration • IFRS 15 Revenue from Contracts with Customers • Annual Improvements to IFRS Standards 2014-2016 Cycle; • Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses; • Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions; • Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts; • Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Asso-

ciate or Joint Venture”; and • Amendments to IAS 40: Transfers of Investment Property.


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4. Critical accounting judgments and key sources of estimation uncertainty 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. Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the subsequent years is set out below in relation to the impairment of financial instruments and in Note 28 – determination of fair value of financial instruments. (i) Impairment charge for credit losses 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 the 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 group, 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. The adjustments to the loss factors derived from the impairment model, and the assessments made by the Bank to reflect the current conditions in the allowance for impairment are detailed in Note 3.4 (vii). As a result of the adjustments made to the factors derived by the impairment model, management believes that the allowance for impairment established by the Bank includes consideration of adverse changes in the estimated loss factors used in establishing the collective allowance for impairment. The Bank creates the collective allowances for impairment based on the probability of default and loss given default (“LGD”). A change in the LGD parameter by +/- 10%, would result in a change in the allowance for impairment as at 31 December 2016, by +/- EUR 380 thousand (2015: EUR 396 thousand). (ii) Impairment of available for-sale investments The Bank determines that available-for-sale investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Bank evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. As at year end 31 December 2016, the change in the fair value of Available for Sale portfolio is insignificant. Based on the Bank’s assessment, such assets are not impaired as at 31 December 2016. (iii) Repossessed assets The Bank has established a policy with respect to the fair values of repossessed assets which are being measured at the lower of cost and net realizable value. The fair value measurement includes the use of external property valuers, having recognized professional qualifications. The values are subsequently reviewed by the Bank Management for significant unobservable inputs and any required write down adjustments. An initial write down of 20% is recognized by the Bank for all assets (see Note 10 for further details). The fair value of repossessed assets is classified in terms of fair value hierarchy in Level 3, since the Bank has made use of research inputs, assumptions and inputs relating to properties of relevant characteristics and therefore encompass a range of non-observable market inputs. (iv) Determining fair values The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair values using other valuation techniques. For financial instruments that are traded infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. See note 28.(i) for further details on the fair values.


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4. Critical accounting judgments and key sources of estimation uncertainty (iv) Determining fair values The Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. • Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments. • Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e.

as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

• Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The Bank recognises transfers between levels of the fair value hierarchy at end of the reporting period, during which the change has occurred. For more information on the determination of the fair value of financial instruments see Note 28 Financial instruments: risk management and fair values. 5. Cash and balances with the Central Bank

2016 2015 Cash on hand 16,639 16,621 Current accounts with banks 12,235 5,246 Amounts held at the CBK Current account 1,534 20,549 Statutory reserve account 30,454 30,460 60,862 72,876

In accordance with the CBK’s requirement relating to the deposits reserve for liquidity purposes, the Bank should maintain a minimum of 10% of customer deposits with maturities up to one year, as statutory reserves. The statutory reserves may be held in the form of highly liquid instruments, including cash on hand, accounts at the CBK or at other banks in Kosovo, and the amounts held at the CBK should not be less than half of the total statutory reserves. 6. Loans and advances to banks 2016 2015 Loans and advances to banks 14,699 5,004

14,699 5,004 Loans and advances to banks at 31 December 2016 and 2015, have original maturities of less than 3 months and are included in cash equivalents. Cash and cash equivalents in the statement of cash flows comprise: 2016 2015 Cash on hand and at banks 28,874 21,867 Unrestricted balance with the CBK 1,534 20,549 Loans and advances to banks 14,699 5,004

45,107 47,420


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7. Loans and advances to customers 2016 2015 Loans to customers 280,326 265,005 Overdrafts 38,199 41,406 Credit cards 34,170 33,804 Gross loans to customers 352,695 340,215 Allowance for impairment on loans to customers (24,240) (26,471) 328,455 313,744

The movement in the allowance for impairment on loans to customers is as follows:

2016 2015 Balance at 1 January 26,471 25,396 (Reversal)/charge during the year (2,202) 1,099 Loans written-off (29) (24) Balance at 31 December 24,240 26,471

At 31 December 2016, the ten largest borrowers represent 7.9% (2015: 6.7%) of the total loans. At 31 December 2016, loans and advances to customers include accrued interest of EUR 1,716 thousand (2015: EUR 1,746 thousand) and deferred disbursement fee of EUR 1,183 thousand (2015: EUR 1,214 thou-sand).

8. Financial assets available for sale 2016 2015 Kosovo Government Treasury bills 1,982 996 Kosovo Government Bonds 12,745 9,292 14,727 10,288

The yields for Government Bonds and Tbills range from 2.55% to 5.15% and 0.20% to 3.79%, respectively (2015: 0.03% to 3.2% and 0.45% to 4.00%).

9. Other financial assets 2016 2015 Non-derivatives: Account maintenance and credit card fees receivable 1,398 1,540 Receivables from financial institutions 840 21 Other financial assets 96 170 Derivatives: Derivative foreign exchange swaps 309 189 2,643 1,920

10. Other assets 2016 2015 Prepaid expenses 215 68 Foreclosed assets 1,618 885 Other 84 228 Total other assets 1,917 1,181

Foreclosed assets consist mainly of real estate property acquired through the enforcement of security over customer loans and advances. The three largest properties at 31 December 2016, represent 57% of the total value of such assets. The Bank typically obtains these properties at the third auction with a value of 1/3 of the valuation provided by the external valuation specialists. Such value is written down by 20% in the first year when the assets are recognized, and is written off by the end of the fifth year following initial recognition. Movements in the foreclosed assets during the year are shown below:


16

10. Other assets (continued) 2016 2015

Balance at the beginning of the year 885 307 Additions 955 799 Disposals (39) - Write downs of the assets (183) (221) Balance at the end of the period 1,618 885

11. Property and equipment

Land Leasehold

improvements

Furniture, fixtures

and equipment

Computers and related equipment

Motor vehicles Total

Cost As at 1 January 2015 1,200 3,750 280 6,738 948 12,916 Additions - 166 23 521 - 710 Disposals - - (7) (187) - (194) As at 31 December 2015 1,200 3,916 296 7,072 948 13,432 Additions - 51 6 1,371 105 1,533 Disposals - (81) - - - (81) As at 31 December 2016 1,200 3,886 302 8,443 1,053 14,884 Accumulated depreciation As at 1 January 2015 - 2,973 203 4,824 642 8,642 Charge for the year - 327 47 744 111 1,229 Disposals - - (8) (181) - (189) As at 31 December 2015 - 3,300 242 5,387 753 9,682 Charge for the year - 294 32 719 85 1,130 Disposals - (81) - - - (81) As at 31 December 2016 - 3,513 274 6,106 838 10,731

Carrying amount As at 31 December 2015 1,200 616 54 1,685 195 3,750 As at 31 December 2016 1,200 373 28 2,337 215 4,153

Land acquired in previous years, will be used by the Bank to construct the new bank premises.


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12. Intangible assets Software Cost

As at 1 January 2015 3,190 Additions 1,998 As at 31 December 2015 5,188 Additions 1,312 As at 31 December 2016 6,500

Accumulated amortization As at 1 January 2015 2,360 Charge for the year 1,105 As at 31 December 2015 3,465 Charge for the year 1,337 As at 31 December 2016 4,802 Carrying amount As at 31 December 2015 1,723 As at 31 December 2016 1,698

All intangible assets are acquired assets and are amortized during their useful life.

13. Due to customers 2016 2015 Demand Deposits Individuals 165,800 160,057 SMEs 55,082 56,346 Corporate and Commercial 36,727 62,577 257,609 278,980 Term Deposits Individuals 58,820 44,074 SMEs 8,887 11,718 Corporate and Commercial 9,151 8,106 76,858 63,898

334,467 342,878 As at 31 December 2016, customer accounts include accrued interest of EUR 747 thousand (2015: EUR 863 thousand). Term deposits and current accounts by sector as a portion of the total balance are as follows: 2016 2015 Individuals 67% 60% Enterprises and other legal entities 33% 40% 100% 100%


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14. Other financial liabilities 2016 2015 Transfers of customers’ funds in transit 1,704 990 Credit cards bonuses payable 731 662 Due to suppliers 1,583 390 SMS banking-mobile 75 70 Prepayments for credit cards 191 54 4,284 2,166

15. Other liabilities 2016 2015 Provisions for:

Guarantees 37 119 Unused holidays - 17 Legal cases 43 43 Provision for accrued account maintenance fees 205 -

Bonuses - 146 Taxes and social charges payable:

Withholding tax 41 17 Social security 63 47 Personnel income tax 37 37 VAT and other taxes 75 68

Other 174 - 675 494

The net charge for provisions during the year is presented below:

2016 2015 Provision charges:

Accrued account maintenance fees (205) - Bonuses - (146) Legal cases and litigations - (102) Unused annual leave - (5)

Release of provisions: Guarantees 82 27 Unused annual leave 20 -

Charge to profit or loss (103) (226)


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16. Borrowings 2016 2015 Subordinated debt 4,500 4,500 Other borrowings 13,143 6,571 Deferred front-end-fees (153) (130) Interest accrued 32 34 Total borrowings 17,522 10,975

During 2013 the Bank entered into a subordinated loan agreement with International Finance Corporation (the “IFC”) amounting to EUR 4,500 thousand. The purpose of this loan is to provide the Bank with Tier 2 Capital, and enable the Bank to use the proceeds for financing its general lending activities. The loan will be repaid in one bullet payment 10 years from the date disbursement. Interest is paid semi-annually. The annual interest rate for this loan is 4.77%. In 2013 and 2014, the Bank entered into two borrowing agreements with EBRD for a total amount of EUR 5,000 thousand. The interest rate is 3% p.a. The purpose of these borrowings is to finance loans for energy efficiency. The principal outstanding as at 31 December 2016 is EUR 2,143 thousand (2015: EUR 3,571 thousand). In 2014, 2015 and 2016, the Bank entered into three borrowing agreements with EBRD for a total amount of EUR 8,000 thousand. The interest rates are in the range of 2.6% to 3.3% p.a. The purpose of these borrowings is to finance loans to promote women entrepreneurship. The principal outstanding as at 31 December 2016, is EUR 8,000 thousand (2015: EUR 3,000 thousand). Borrowings include a short term borrowing from Is-Bank London of EUR 3,000 thousand (2015: nil). The interest rate is 0.7% p.a. 17. Share capital The authorised and paid up share capital of the Bank as at 31 December 2016 and 2015 comprises 2,400 thousand ordinary shares with a nominal value of EUR 10 each.

Shareholder As at 31 December 2016 As at 31 December 2015 Percentage

ownership Amount Percentage

ownership amount

TEB Holding A.S. 100% 24,000 100% 24,000 100% 24,000 100% 24,000

The shares are ordinary in nature and have no preferences or restrictions attached thereto. All shares are fully paid. 18. Interest income 2016 2015 Loans and advances to customers 30,231 32,596 Available for sale financial assets 241 243 Loans and advances to banks 81 4

30,553 32,843 During 2016, the Bank has not accrued and recognised interest from collectively impaired loans at an amount of EUR 560 thousand (2015: EUR 447 thousand). 19. Interest expense 2016 2015 Term deposits 1,060 1,745 Borrowed funds 445 748 Savings accounts 11 7

1,516 2,500 Interest rates for term deposits vary based on the maturity of the deposits. The interest rates for term deposits vary from 0% to 2% at 31 December 2016 (2015: from 0.01% to 1.5%).


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20. Fee and commission income 2016 2015 Credit cards 4,391 4,258 Account service fees 1,294 783 International payments 1,128 1,495 Domestic payments 617 341 Guarantees and letters of credit 236 666 SMS Banking 223 217 Other fees 204 144

8,093 7,904

21. Fee and commission expenses 2016 2015 Credit cards 1,027 766 Central bank fees 297 281 International payments 204 206 Domestic payments 138 94 Guarantees and letters of credit 38 51 Other fees 113 156 1,817 1,554

22. Personnel costs 2016 2015 Salaries and wages 6,109 6,118 Bonuses 491 354 Mandatory pension contributions 293 282 Health insurance 98 130 Staff training 88 89 Other costs 11 32 Total staff costs 7,090 7,005

23. Administrative and other operating expenses 2016 2015 Operating lease 1,507 1,503 Telecommunication 763 828 Security and insurance 975 747 Marketing and sponsorship 504 582 Service expenses, credit cards 129 196 Travel 440 370 Consultancy and professional fees 387 447 Office supplies 378 241 Other operational expenses - 62 Utilities 286 349 Repair and maintenance 269 259 Cleaning expenses 156 161 Business taxes and licenses 215 172 Representation 103 127 Legal, collateral execution, and audit fees 627 478 Software maintenance fee 242 139 Taxes and commissions - 7 Points of sale maintenance expenses 18 43 Loss on sale or disposal of fixed assets - 6 Accrued maintenance fee written off 192 - Provisions for accrued maintenance and cards fees 205 - Other expenses 326 280 Total administrative and other operating expense 7,722 6,997


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24. Income tax expense 2016 2015 Current tax expense (2,193) (2,063) Deferred tax credit 11 19

(2,182) (2,044) Detailed below is the calculation of the effective tax rate and a reconciliation of the current income tax expense: 2016 2015 Profit before taxation 20,515 19,380 Tax using the 10% tax rate 10.0% 2,052 10.0% 1,938 Non-deductible expenses 0.8% 152 0.6% 125 Origination of temporary differences for loans loss allowances (0.1%) (11) (0.1%) (19) Total income tax expense 10.7% 2,193 10.5% 2,044

Current income tax is calculated based on the income tax regulations applicable in Kosovo, using tax rates enacted at the reporting date. The tax rate on corporate income is 10% (2015: 10%). Differences between the IFRS financial statements and the Kosovo taxation regulations give rise to temporary differences between the carrying amount of loans and advances to customers for IFRS reporting purposes and for tax purposes. The tax effect of these temporary differences is calculated at the enacted rate of 10%. Deferred tax movement 2016 2015 Opening balance as of 1 January 90 71 Credit for the year 11 19 Total deferred tax asset for loans’ impairment 101 90


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25. Related party disclosures The Bank is controlled by TEB Holding A.S incorporated in Turkey (Parent), which owns 100 % of the ordinary shares as at 31 December 2016 and 2015 (see Note 1). The following table summarizes the related party transactions and balances at 31 December 2016 and the related expenses for the year then ended.

2016 2015 Assets Loans to customers Key Management 269 273 Total loans to customers 269 273 Loans and advances to banks

TEB A.S 2 10 BNP Paribas N.Y. 205 5 BNP Paribas 2 1 BNL 2 3 Total loans and advances to banks 211 19 Total Assets 480 292 Liabilities Other liabilities TEB A.S 120 - Parent 30 29 Total Liabilities 150 29 Commitments and contingencies Guarantees issued by the Bank to: TEB A.S 989 698 BNP Paribas 70 100 BNL 50 60 BNP Paribas SA Sucursal en Espana 210 210 Findomestic Bank AD 75 75 Total commitments and contingencies 1,394 1,143

Expenses Interest expenses TEB A.S 2 1 Findomestic Bank AD 37 - BNP Paribas - 1 Total expenses 39 2 Key management Compensation Executive Management Salaries 303 347 Bonus 201 106 Total key management compensation 504 453


23

26. Commitments and contingencies Guarantees and letters of credit Credit related commitments include commitments to extend credit, letters of credit and guarantees given, which are designed to meet the requirements of the Bank’s customers. 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 a contract. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire without being drawn upon, the total amounts do not necessarily represent cash requirements. The aggregate outstanding amounts of guarantees and letters of credit issued by the Bank are as follows:

2016 2015 Letters of guarantee for payments 6,901 7,780 Letters of credit 1,018 774 Other guarantees 23 20 7,942 8,574 Loans commitments not yet disbursed 69,818 63,908 77,760 72,482

The Bank calculates collective provision for guarantees and letter of credits by applying the following rates to underlying exposures based on the classification of respective customers for their on-balance credit exposures: • 0.20% for customers with credit exposures classified as standard loans (0 – 30 days past due) • 1.0% for customers with credit exposures classified as watch loans (31 – 60 days past due). • 50% and 100% for customers with credit exposures classified as substandard or doubtful (61 to 180 days

past due) and loss (over 180 days past due), respectively. Legal cases In the normal course of business the Bank is presented with legal claims. The Bank’s management is of the opinion that the possibility of an outflow of economic benefits in relation to legal claims outstanding as at 31 December 2016 and 2015 is remote, except for the provisions charged as shown in note 15. Operating lease commitments

The Bank has outstanding commitments under non-cancellable rental contracts which fall due as follows:

2016 2015 Within one year 1,236 1,456 Within two to five years 1,178 2,033 Total 2,414 3,489

27. Events after the end of the reporting period Subsequent to year end, two new members of the Board of Directors were appointed. Mr. Sabri Davaz and Mrs. Esra Peri Aydogan are the new members of the Board of Directors for a period of four years, effective from 1 March 2017. In addition, Mr. Orçun Ozdemir was appointed Managing Director of the Bank and member of the Board of Directors for a four years period, effective from 1 April 2017, and is replacing Mr. Ayhan Albeyoglu. No other significant events subsequent to the reporting date have occurred which require disclosure in the financial statements.


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28. Financial Instruments: fair values and risk management a. Capital management The Bank’s objectives when managing capital are: (i) to comply with the capital requirements set by the Central Bank of Kosovo (CBK); (ii) to safeguard the Bank’s ability to continue as a going concern and continue to provide returns for the

shareholder; and (iii) to maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are regularly monitored by the Bank’s management, employing techniques based on the guidelines of the CBK. The required information is provided to the CBK on a quarterly basis. The assets are classified using a hierarchy of five risk weights, reflecting an estimate of credit, market and other risks associated with each asset and off-balance sheet exposure. The regulation requires banks to hold a minimum regulatory capital of EUR 7,000 thousand, to maintain a minimum ratio of Tier I capital to risk-weighted assets of 8%, a minimum total regulatory capital to risk-weighted assets of 12%, and a minimum total equity to total assets ratio (leverage ratio) of 7%. Minimum Risk-Based Capital Ratios The capital levels, risk weighted assets and capital adequacy ratios as per CBK regulations at 31 December 2016 and 2015, are as follows:

2016 2015 Tier 1 capital Share capital 24,000 24,000 Retained earnings as per Central Bank of Kosovo reporting 48,234 29,803 Less: Intangible assets (1,698) (1,723) Credits to Bank’s related persons (480) (292) Total qualifying Tier 1 capital 70,056 51,788 Subordinated liability 4,500 4,500 Provisions for loan losses (limited to 1.25% of RWA) 1,830 2,186 Total qualifying Tier 2 capital 6,330 6,686 Total regulatory capital 76,386 58,474 Risk-weighted assets: On balance sheet 430,166 307,006 Off balance sheet 9,025 7,736 Risk assets for operational risk 40,785 34,505 Total risk-weighted assets 479,976 349,247 Tier I capital to risk-weighted assets ratio 14.60% 14.83% Total regulatory capital to risk-weighted assets ratio 15.91% 16.74% Total equity to total assets ratio (regulatory reporting) 16.79% 13.08%


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28. Financial Instruments: fair values and risk management (continued) b. Categories of financial instruments As at the year end the Bank has the following financial instruments: 2016 2015 Financial assets Cash on hand and balances with banks 60,862 72,876 Loans and advances to banks 14,699 5,004 Loans and advances to customers 328,455 313,744 Financial assets available for sale 14,727 10,288 Other financial assets 2,643 1,920 Total financial assets 421,386 403,832 Financial liabilities Due to customers 334,467 342,878 Borrowings 17,522 10,975 Other financial liabilities 4,284 2,166 Total financial liabilities 356,273 356,019

c. Financial risk management objectives The Bank’s corporate treasury function provides services to the business, coordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Bank through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk and interest rate risk), credit risk, and liquidity risk. Compliance with policies and exposure limits is reviewed by the management committees and internal auditors on a continuous basis. The Bank does not trade significant derivative financial instruments. d. Market risk The activities of the Bank are to some extent exposed to possible losses as a result of the exposure of its financial instruments to interest-rate risk, or exchange-rate risk resulting from fluctuations in the financial markets. The majority of transactions of the Bank are in local currency and majority and exposure to foreign exchange risk is limited. e. Foreign currency risk The Policy on Management of the currency risk of TEB Sh.a, defines the methods of currency risk management within the Bank. The Bank manages foreign currency risk through managing the currency structure of its assets and liabilities. Foreign exchange rate risk is managed and governed according to the policies of the TEB Group. TEB Sh.a continuously monitors exchange rate movements and foreign currency markets, and determines its currency positions on a daily basis. Any exception to the policy is subject to approval by the Board of Directors of TEB Sh.a and the Risk Management Department of TEB Group. The Bank and the Group policy do not allow the Bank to maintain open currency position for speculative purposes. Nevertheless, foreign exchange derivatives may be used for hedging purposes to close certain positions, in which case they are closely monitored at both local and group levels. The Bank undertakes transactions in EUR and in foreign currencies. The Bank has not entered into significant forward exchange derivatives and does not have any embedded derivative at 31 December 2016 and 2015. As the currency in which the Bank presents its financial statements is Euro, the Bank’s financial statements are effected by movements in the exchange rates between the Euro and other currencies. The Bank’s transactional exposures give rise to foreign currency gains and losses that are recognized in the profit or loss. These exposures comprise the monetary assets and monetary liabilities of the Bank that are not denominated in the functional currency of the Bank. Foreign currency sensitivity analysis The Bank is mainly exposed to US Dollar (USD) and Swiss Franc (CHF). The following table details the Bank’s sensitivity to the respective increase and decrease in the value of Euro against the foreign currencies. The percentage used is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates.


26

28. Financial instruments: fair values and risk management (continued) e. Foreign currency risk (continued) The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a respective change in foreign currency rates. The Bank has applied a 10% increase or decrease to the current currency exchange rates. A positive number below indicates an increase in profit and other equity where the EUR strengthens with respective percentages against the relevant currency. 2016 2015

+10% Euro -10% Euro +10% Euro -10% Euro Assets: Impact on cash and due from banks (509) 622 (274) 335 Liabilities: Impact on due to banks and customers 1,094 (1,337) 1,010 (1,235) Net impact on profit or loss and equity 585 (715) 736 (900)

The following table summarises the Bank’s currency position as at 31 December 2016:

Amounts presented in EUR ‘000 EURO USD CHF Other Total Financial assets Cash on hand and balances with CBK 56,775 681 2,444 962 60,862 Loans and advances to banks 13,500 1,199 - - 14,699 Loans and advances to customers 328,455 - - - 328,455 Financial assets available for sale 14,727 - - - 14,727 Other financial assets 2,334 301 8 - 2,643 Total assets 415,791 2,181 2,452 962 421,386 Financial liabilities Due to customers 322,433 6,600 4,472 962 334,467 Borrowings 17,522 - - - 17,522 Other financial liabilities 4,284 - - - 4,284 Total liabilities 344,239 6,600 4,472 962 356,273 Net currency position at 31 December 2016 71,552 (4,419) (2,020) - 65,113

Amounts presented in EUR ‘000 EURO USD CHF Other Total Financial assets Cash on hand and balances with CBK 69,859 364 2,107 546 72,876 Loans and advances to banks 5,004 - - - 5,004 Loans and advances to customers 313,744 - - - 313,744 Financial assets available for sale 10,288 - - - 10,288 Other financial assets 1,920 - - - 1,920 Total assets 400,815 364 2,107 546 403,832 Financial liabilities Due to customers 331,764 7,100 3,331 683 342,878 Borrowings 10,975 - - - 10,975 Other financial liabilities 2,166 - - - 2,166 Total liabilities 344,905 7,100 3,331 683 356,019 Net currency position at 31 December 2015 55,910 (6,736) (1,224) (137) 47,813


27

28. Financial instruments: fair values and risk management (continued) e. Foreign Currency Risk (continued) Based on the Group policies, the individual open currency positions should not be greater than 5% of Tier 1 capital and the aggregate exposures in all currencies not greater than 10% of Tier 1 capital at any specific point of time, while as per CBK requirements, the open currency position for any single currency should not be more than 15% of Tier 1 capital and the aggregate exposure not more than 30% of Tier 1 capital. As at 31 December 2016 and 31 December 2015 the Bank has complied with these ratios. The Bank holds derivative financial instruments to hedge its foreign currency risk exposures towards USD. The exchange rates applied for the principal currencies against the Euro were as follows: 31 December 2016 31 December 2015 United States Dollar (USD) 1.0541 1.0887 Swiss Franc (CHF) 1.0739 1.0835

f. Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates and the risk that the maturities of interest bearing assets differ from the maturities of the interest bearing liabilities used to fund those assets (re-pricing risk). The length of time for which the rate of interest is fixed on a financial instrument therefore indicates to what extent it is exposed to interest rate risk. The assets and customer term deposits of the bank carry fixed interest rates while borrowings are at variable interest rate. The interest rate risk management policy of the Bank defines the method of identification, measurement, monitoring and controlling the risk in the event of interest rate modification. The purpose of the policy is to manage the exposure to interest rate risk and limit the potential losses, as a result of the modification of levels of interest rates in the market and the effect of such changes on the business results and the market value of the Bank’s capital. The risk management department monitors exposure to interest rate risk using the interest rate gap analysis methodology. TEB Sh.a defines a set of input data that are based on cash flows by individual time intervals. The principle of residual maturity is applied to agreements with a fixed interest rate, while the interest rate repricing date is taken into account for agreements with a variable interest rate. All instruments and positions which are sensitive to interest rate risk are classified in the banking book and trading book. Positions are observed pursuant to these segments: • Interest rate sensitive positions in Euros • Interest rate sensitive positions in other currencies (aggregate base and as per each currency). Management believes that the Bank is not exposed to interest rate risk on its financial instruments except for the borrowings which are at variable interest rates. Loans and deposits have fixed interest rates. Sensitivity analysis Interest rate risk management is supplemented by monitoring the sensitivity of the Bank’s net banking income and equity, to various floating interest rate scenarios. The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. The analysis assumes a parallel increase of interest rates by 100 basis points (±1%) on the level of net banking income. Exposure to interest rate risk and its impact on the Bank’s statement of changes in equity and profit or loss is measured through the Basis Point Value methodology. Results presented below represent the changes in profit or loss and equity, which would occur if interest rates will increase or decrease by 100 basis points within one year. The analysis of the sensitivity of profit or loss and equity to changes in interest rates is as follows:

Sensitivity of the profit or loss 2016 2015 Increase in basis points +100 bps parallel shift (112) (667) Decrease in basis points-100 bps parallel shift (535) (188)


28

28. Financial instruments: fair values and risk management (continued) f. Interest rate risk (continued) Sensitivity analysis

31 December 2016

Less than

1 month 1–3

months 3-12

months 1–5

years

More than

5 years Total Financial assets Cash and balances with the central bank 60,862 - - - - 60,862 Loans and advances to banks 14,699 - - - - 14,699 Loans to customers 42,525 10,395 37,512 178,200 59,823 328,455 Financial assets available for sale 10 12,479 610 1,628 - 14,727 Other financial assets 2,643 - - - - 2,643 Total financial assets 120,739 22,874 38,122 179,828 59,823 421,386 Financial liabilities Due to customers 273,978 5,113 30,977 24,368 31 334,467 Borrowings 33 3,000 714 9,335 4,440 17,522 Other financial liabilities 4,284 - - - - 4,284 Total financial liabilities 278,295 8,113 31,691 33,703 4,471 356,273 Interest sensitivity gap (157,556) 14,761 6,431 146,125 55,352 65,113

31 December 2015

Less than

1 month 1–3

months 3-12

months 1–5

years

More than

5 years Total Financial assets Cash and balances with the central bank 72,876 - - - - 72,876 Loans and advances to banks 5,004 - - - - 5,004 Loans to customers 62,861 23,089 96,840 120,315 10,639 313,744 Financial assets available for sale 50 9,285 269 684 - 10,288 Other financial assets 1,920 - - - - 1,920 Total financial assets 142,711 32,374 97,109 120,999 10,639 403,832 Financial liabilities Due to customers 284,504 2,952 30,411 25,006 5 342,878 Borrowings - - 1,643 9,332 - 10,975 Other financial liabilities 2,166 - - - - 2,166 Total financial liabilities 286,670 2,952 32,054 34,338 5 356,019 Interest sensitivity gap (143,959) 29,422 65,055 86,661 10,634 47,813


29

28. Financial instruments: fair values and risk management (continued) g. Credit risk The Bank is subject to credit risk through its lending activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees. In this respect, the credit risk for the Bank stems from the possibility that different counterparties might default on their contractual obligations. The management of the credit risk exposures to borrowers is conducted through regular analysis of the borrowers’ credit worthiness. Exposure to credit risk is also managed in part by obtaining collateral and guarantees. Credit risk policies and procedures are reviewed and updated on a yearly basis in order to be in line with CBK regulations and Group standards. The Bank’s primary exposure to credit risk arises through its loans and advances to customers. The amount of credit exposure in this regard is represented by the carrying amounts of the assets at the reporting date. In addition, the Bank is exposed to off-balance sheet credit risk through commitments and guarantees issued. First level credit risk is evaluated through the Credit Allocation and Monitoring Department, whilst the second level credit risk is monitored through the Risk Management Department and Internal Control report to the Board of Directors (“BoD”). The Credit Power Delegation authority is assigned and reviewed by BoD on a regular basis. Loans credit proposals beyond certain thresholds are subject to approvals by the Credit Committee, while exposures higher than EUR 250 thousand are subject to approval by the Upper Credit Committee Level. All credit exposures are reviewed at least on an annual basis, whilst large exposures are monitored more frequently. The Bank has established the Corporate Monitoring Unit and Credit Quality Unit, with the mandate to observe and monitor large corporate exposures on a monthly basis, and to report to the Credit Committee in case of any observed credit deterioration. The monitoring process considers but is not limited to cash-flow and sales performance, credit covenants, payment behavior, profitability, liquidity, solvency and debt ratio. Concentrations of credit risk (including off balance sheet exposures) that arise from financial instruments exist for counterparties when they have similar economic characteristics that would lead to inability to meet contractual obligations affected by changes in economic or other conditions. For subsequent measurement and impairment of assets, the Bank assesses whether objective evidence of impairment exists. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The Bank has established the Provision Committee which consists of the CEO of the Bank, Risk Manager and Head of Credit Risk. This committee is responsible for the observation of the monthly assessment process and for the individual assessment for impairment. The individual assessment is performed for exposures that bear individually significant risk and is also based on the feedback and observations received from field departments, such as the Credit Allocation and Monitoring. Allowances for loan impairment at 31 December 2016, decreased primarily as a result of the decrease in non-performing loans, to which additional resources were assigned. The Bank has established a monitoring structure aiming to manage the exposures at the early stages of loan delinquency. In addition, the introduction of the local Private Executor Agents (PEA) and outsourcing of debt collection companies, led to increased collections from non-performing loans.


30

28. Financial instruments: fair values and risk management (continued) g. Credit risk (continued) Maximum exposure to credit risk:

As at 31 December 2016

Gross maximum exposure

Allowance for

impairment

Net maximum

exposure Fair value of

collateral

Cash and balances with the central bank 60,862 - 60,862 - Loans and advances to banks 14,699 - 14,699 - Loans to individuals 172,593 (7,233) 165,360 98,418

Loans to customers 139,716 (4,000) 135,716 98,375 Overdrafts 2,241 (197) 2,044 43 Credit cards 30,636 (3,036) 27,600 - Loans to legal entities 180,102 (17,007) 163,095 130,130

Loans to legal entities 140,610 (14,360) 126,250 108,002 Overdrafts 35,958 (2,353) 33,605 22,128 Credit Cards 3,534 (294) 3,240 - Total loans and advances to customers 352,695 (24,240) 328,455 228,548 Financial assets available for sale 14,727 - 14,727 - Letters of credit 1,022 (4) 1,018 - Letters of guarantees 6,934 (33) 6,901 - Other guarantees and indemnities 23 - 23 - Loan commitments 69,818 - 69,818 - Contingent liabilities 77,797 (37) 77,760 -

As at 31 December 2015

Gross maximum

exposure

Allowance for

impairment

Net maximum

exposure Fair value of

collateral Cash and balances with the central bank 72,876 - 72,876 - Loans and advances to banks 5,004 - 5,004 - Loans to individuals 158,703 (7,013) 151,690 87,128

Loans to customers 126,819 (3,930) 122,889 86,900 Overdrafts 2,020 (209) 1,811 228 Credit cards 29,864 (2,874) 26,990 - Loans to legal entities 181,512 (19,458) 162,054 131,719

Loans to legal entities 138,383 (16,265) 122,118 107,604 Overdrafts 39,437 (2,896) 36,541 24,115 Credit Cards 3,692 (297) 3,395 - Total loans and advances to customers 340,215 (26,471) 313,744 218,847 Financial assets available for sale 10,288 - 10,288 - Letters of credit 775 (1) 774 - Letters of guarantees 7,828 (48) 7,780 - Other guarantees and indemnities 40 (20) 20 - Loan commitments 63,958 (50) 63,908 - Contingent liabilities 72,601 (119) 72,482 -


31

28. Financial instruments: fair values and risk management (continued) g. Credit risk (continued) Loans and advances Loans and advances are summarized as follows: 2016 2015

Loans and advances to

customers

Loans and advances to banks


customers


banks Neither past due nor impaired 318,845 14,699 304,758 5,004 Past due but not impaired 12,163 - 11,210 - Impaired 21,687 - 24,247 - Gross loans 352,695 14,699 340,215 5,004 Less: Allowances for impairment Individual (20,438) - (22,511) - Collective (3,802) - (3,960) - Net loans 328,455 14,699 313,744 5,004

Loans to customers 2016 2015 Individuals Entities Total Individuals Entities Total Neither past due nor impaired 161,525 157,320 318,845 149,056 155,702 304,758 Past due but not impaired: 1 to 30 days 2,565 2,910 5,475 1,951 5,815 7,766 31 to 90 days 1,626 5,062 6,688 881 2,563 3,444

4,191 7,972 12,163 2,832 8,378 11,210 Impaired loans 6,841 14,846 21,687 6,814 17,433 24,247 Total 172,557 180,138 352,695 158,702 181,513 340,215 Allowance for impairment (7,233) (17,007) (24,240) (7,013) (19,458) (26,471)

Net loans 165,324 163,131 328,455 151,689 162,055 313,744 Fair value of collaterals 2016 2015 Individuals Entities Total Individuals Entities Total Neither past due nor impaired 94,291 114,362 208,653 82,286 111,212 193,498 Past due but not impaired 1,764 6,156 7,920 2,658 8,244 10,902 Impaired loans 2,363 9,612 11,975 2,184 12,263 14,447

98,418 130,130 228,548 87,128 131,719 218,847 Types of Collateral 2016 2015 Individuals Entities Total Individuals Entities Total Mortgages 14,744 76,183 90,927 14,921 69,493 84,414 Cash collateral 3,042 3,639 6,681 4,151 4,181 8,332 Merchandise and equipment pledged

73,105 29,486 102,591 59,104 33,761 92,865

Cars pledged 7,527 20,822 28,349 8,952 24,284 33,236 Total 98,418 130,130 228,548 87,128 131,719 218,847

The fair value of collaterals disclosed above is determined by the Bank’s internal and external local certified valuers and aims to represent the market value realisable by the legal owners of the assets. Due to local circumstances in Kosovo where the market is not active, the Bank seeks to adopt a prudent approach in determining the value of such collaterals. The Bank aims to use collaterals that could be converted into liquid assets within a reasonably short period of time.


32

28. Financial instruments: fair values and risk management (continued) g. Credit risk (continued) Loans and advances (continued) Loans with renegotiated terms Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s financial position and where the Bank has made concessions that it would not otherwise consider. A decision to restructure is subject to the following: • the restructuring increases the probability that the borrower will be able to repay the exposure; • the new payment plan is in line with the actual and expected future payment capacity of the borrower; • the borrower offers additional collateral, if possible and appropriate. Loans with renegotiated terms 2016 2015 Neither past due nor impaired 1,428 748 Past due but not impaired 3,225 2,011 Impaired 5,913 7,815 Total gross amount 10,566 10,574 Individual impairment (5,183) (7,079) Collective impairment (1,417) (858) Net loans 3,966 2,637

Loans and advances to banks Loans and advances to banks are neither past due nor impaired and are granted without collateral. The table below presents the credit grade assigned by Moody’s, Fitch and Standard and Poor’s credit rating agencies: Ratings 2016 2015 AAA 547 775 A+ - 6 A 207 - A1 - 811 A3 8,720 - Aa3 1,195 - Baa1 2,672 3 Baa2 9,506 2,626 Baa3 - 5,014 BBB+ - 1,004 Not rated (local banks) 4,087 11 Total 26,934 10,250

The table above does not include balances with the CBK (see note 5), which are not rated. Financial assets available for sale 2016 2015 Kosovo Government debt: Not-rated 14,727 10,288

Concentration by geography The following presents the Bank’s main credit exposures by geographical region as at 31 December 2016 and 2015. The Bank has allocated exposures to regions based on the country of domicile of its counterparties. OECD

countries Kosovo Total 2016

OECD countries Kosovo

Total 2015

Cash and balances with the CBK 12,235 48,627 60,862 5,246 67,630 72,876 Loans and advances to banks 14,699 - 14,699 - 5,004 5,004 Loans and advances to customers - 328,455 328,455 - 313,744 313,744 Financial assets available for sale - 14,727 14,727 - 10,288 10,288 Other financial assets 309 2,334 2,643 189 1,731 1,920


33

28. Financial instruments: fair values and risk management (continued) g. Credit risk (continued) Concentration by sector Industry concentration 31 December 2016 31 December 2015

Net loans % Net loans % Banks 14,699 4 % 5,004 2% Individuals 165,605 48% 148,792 47% Electricity, gas, water 28 0% 1,630 1% Industry 23,319 7% 9,847 3% Agriculture 4,286 1% 3,703 1% Services and other 31,386 9% 94,138 30% Hotels and restaurants 7,566 2% 4,122 1% Transport and communication 4,533 1% 2,931 1% Construction 34,315 10% 28,687 9% Trading 57,417 17% 19,894 6% Net loans to banks and to customers 343,154 100% 318,748 100%

Write-offs Write-offs are defined as the accounting reduction of a debt, which does not mean waiving the legal claim against the debtors and, hence, the debt may be revived. Proposals for (full or partial) write-offs on the debts may be submitted to the competent committee on the condition that certain procedures have been carried out. The Central Bank of Kosovo (“CBK”) has published a new regulation on Credit Risk Management that will be effective from 30 June 2017. The regulation sets the criteria for writing off loans that are classified as loss. The Bank has amended its internal policy to ensure compliance with the new requirements starting from 2017. Based on an initial estimate of the impact of the new requirements prepared by the Risk Management Unit a total of EUR 5.6 million will be written off in 2017, representing loans that are fully provided as at 31 December 2016. For certain exposures included in this total, there is an expectation that the Bank will be able to recover part of the exposure. h. Liquidity risk Liquidity risk arises in the general funding of the Bank’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturities and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liability obligations. The Bank monitors its liquidity on a daily, monthly and quarterly basis in order to manage its obligations as and when they fall due. The following reports are used by the Bank for liquidity management purposes: • Cash flow report and the liquidity ratios provided by the CBK regulation (>25% and >20%): daily basis • ALCo Liquidity Coverage Ratio and Liquidity GAP reports: monthly basis • ALCo and Board level reporting: quarterly basis. The Liquidity GAP report is prepared by the Risk Department in Turkey using data received from the Bank. The Bank also uses the CBK Liquidity GAP reports (where no assumptions are applied). Funding limits of EUR 35 million are available from TEB AS to cover the Bank’s liquidity needs. Funds are raised using a broad range of instruments including deposits, borrowings and share capital. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Bank makes its best efforts to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required for meeting business goals and targets set in terms of the overall Bank strategy. In addition the Bank holds a portfolio of liquid assets as part of its liquidity risk management strategy. The Management is monitoring liquidity ratios against internal and regulatory requirements on a daily, weekly and monthly basis. As a result, Management believes that the Bank has no short term liquidity gap.


34

28. Financial instruments: fair values and risk management (continued) h. Liquidity risk (continued) The amount disclosed in tables below is contractual undiscounted cash flows:

31 December 2016 Carrying

amount

Gross inflow/

(outflow)

Less than

1 month 1–3

months 3 -12

months 1–5

years

More than

5 years Financial assets Cash and balances with CBK 60,862 60,862 60,862 - - - - Loans and advances to banks 14,699 14,699 14,699 - - - - Loans to customers 328,455 364,629 47,208 11,540 41,643 197,826 66,412 Financial assets AFS 14,727 15,023 306 12,479 610 1,628 - Other financial assets 2,643 2,643 2,643 - - - - Total financial assets 421,386 457,856 125,718 24,019 42,253 199,454 66,412 Financial liabilities Due to customers 334,467 345,121 282,705 5,276 31,964 25,144 32 Borrowings 17,522 19,449 33 3,000 714 9,335 6,367 Other financial liabilities 4,284 4,284 4,284 - - - - Total financial liabilities 356,273 368,854 287,022 8,276 32,678 34,479 6,399 Unused loan commitments 69,818 69,818 50,109 3,824 9,763 169 5,953 Total financial liabilities and commitments 426,091 438,672 337,131 12,100 42,441 34,648 12,352 Positive/(negative) gap (4,705) 19,184 (211,413) 11,919 (188) 164,806 54,060

31 December 2015 Carrying

amount

Gross inflow/

(outflow)

Less than

1 month 1–3

months 3 -12

months 1–5

years

More than

5 years Financial assets Cash and balances with CBK 72,876 72,876 72,876 - - - - Loans and advances to banks 5,004 5,004 5,004 - - - - Loans to customers 313,744 351,767 46,919 24,891 102,005 161,573 16,379 Financial assets AFS 10,288 10,495 50 9,423 271 751 - Other financial assets 1,920 1,920 1,920 - - - - Total financial assets 403,832 442,062 126,769 34,314 102,276 162,324 16,379 Financial liabilities Due to customers 342,878 344,316 284,511 3,361 28,465 27,974 5 Borrowings 10,975 15,213 - - 1,797 13,416 - Other financial liabilities 2,166 2,166 2,166 - - - - Total financial liabilities 356,019 361,695 286,677 3,361 30,262 41,390 5 Unused loan commitments 63,908 63,908 50,109 3,824 9,763 169 43 Total financial liabilities and commitments 419,927 425,603 336,786 7,185 40,025 41,559 48 Positive/(negative) gap (16,095) 16,459 (210,017) 27,129 62,251 120,765 16,331 For liquidity purposes, the Bank classifies demand and savings deposits as due on demand and maturing within one month. As a result, the contractual liquidity gap of up to twelve months is increased. However, the possibility that large amounts of customer deposits will leave the Bank is unlikely. Therefore the Bank does not consider having any liquidity gap in the short term.


35

28. Financial instruments: fair values and risk management (continued) i. Fair value of financial instruments

Financial instruments not measured at fair value

The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorized.

2016 Fair Value 2015 Fair Value

Financial assets Carrying

value Level 2 Level 3 Carrying

value Level 2 Level 3 Cash and balances with CBK 60,862 60,862 - 72,876 72,876 - Loans and advances to banks 14,699 14,699 - 5,004 5,004 - Loans and advances to customers 328,455 - 327,111 313,744 - 312,276 Other financial assets 2,334 - 2,334 1,731 - 1,731 Financial liabilities Due to customers 334,467 - 336,006 342,878 - 343,848 Borrowings 17,522 - 17,522 10,975 - 10,975 Other financial liabilities 4,284 - 4,284 2,166 - 2,166

Where available, the fair value of loans and advances is based on observable market transactions. Where observable market transactions are not available, fair value is estimated using valuation models, such as discounted cash flow techniques. Input into the valuation techniques includes expected lifetime credit losses, interest rates and prepayment rates. To improve the accuracy of the valuation estimate for retail and smaller commercial loans, homogeneous loans are grouped into portfolios with similar characteristics. Loans and advances to banks, and other financial assets and liabilities, include inter-bank placements and items in the course of collection. As such balances are short term, their fair value is considered to approximate their carrying amount. The fair value of deposits and borrowings from banks and customers is estimated using discounted cash flow techniques, applying the rates that are offered for deposits of similar maturities and terms. The fair value of deposits payable on demand is the amount payable at the reporting date. There were no purchases or sales in level 3 financial assets and the change in the carrying value of the balance is a results of the change in the fair value. Financial instruments measured at fair value – Fair value hierarchy The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorized. The amounts are based on the values recognised in the statement of financial position. 2016 Fair Value Level 2 2015 Fair Value Level 2 Non-derivative financial assets Financial assets available for sale 14,727 14,727 10,288 10,288 Derivative financial assets Derivative foreign exchange swaps 309 309 189 189 15,036 15,036 10,477 10,477

Financial assets available for sale are interest-bearing assets. Because no active market exists for treasury bills and bonds, the fair value has been estimated using a discounted cash flow model based on a current yield curve appropriate for the remaining term to maturity and they are classified as Level 2.

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