ANNUAL REPORT 2008 - Banking with Citi | Citi.com ended 31 December 2008 (English translation) Citibank (Slovakia) a.s. Balance sheet at 31 December 2008 10 2008 2007 Notes Sk ‘000

Citibank (Slovakia) a.s.

ANNUAL REPORT 2008

Citibank (Slovakia) a. s.

5

Contents Letter by the Chairman of the Board of Directors 7 Balance sheet 10 Income statement 11 Statement of changes in shareholder’s equity 12 Cash flow statement 13 Notes to the financial statements 14 Independent auditors’ report 71

7

Dear Customer and Shareholder, It is my pleasure to inform you about our accomplishments of last year and about some of our key priorities for 2009 and beyond. Citibank (Slovakia) a.s. was ultimately 100% owned by Citibank N.A. one of the largest financial services company in the world, through the direct 100% shareholder Citibank Overseas Investment Corporation, USA (each and all referred to as Citi). As per January 1, 2009, our legal vehicle status has changed through a cross border merger. All rights and responsibilities have been transferred to Citibank Europe plc with its registered seat in the Republic of Ireland which is conducting its business activity in the Slovak Republic through Citibank Europe plc, pobočka zahraničnej banky also ultimately 100% owned by Citibank N.A. through Citibank Holdings Ireland Limited and Citibank Overseas Investment Corporation. This provides tremendous advantages for our Customers, including access to the latest products and services, the most modern technology, strong risk taking capabilities, and a counterparty with even more financial strength. This is very relevant in today’s market environment. We very much recognize the new realities and intend to support our stakeholders wherever we can with advice and financial services, leveraging Citi global experience of over 200 years. The smooth Euro adoption as per beginning of 2009 was the result of good preparation of us in coordination with Regulators and Customers and we anticipate that Slovakia’s economy and population will benefit from being part of Euro-land. For 2009 results the adoption of Euro will cause the reduction of net trading income, which the Bank will seek to offset partially through increased focus on Global Transaction Services and Corporate Finance, combined with expense optimizations. Citi’s goal is to become the most respected global financial services company. To achieve this, we aspire to further develop our three shared responsibilities, as a clear statement of how we should think about and govern our behavior: responsibility to our Client, responsibility to Each Other, and responsibility to our Franchise. To continue to be competitive, we must continue to meet the ever-changing demands of Clients. I am particularly proud that Citi in Slovakia has been awarded by Global Finance the Best Corporate/Institutional Internet Bank Award for 4 consecutive years. In addition to having significant successes in Global Transactions Services, we also had important successes in Treasury and Corporate Finance. More and more, our success will be measured by our ability to provide the quality of service that inspires confidence in our Client so they entrust Citi with their business. While building our local franchise we continue to make a difference in the environment where we live and operate. With our strong participation in key local volunteerism events such as Naša Bratislava, Naše Kosice and Citi’s Global Community Day, the bank is more devoted than ever to improving society. Our local philanthropic programs include financial education, alternative teaching, small enterprises, social enterprises and microfinance initiatives. I was very pleased to learn that Slovak environment recognized our CSR leadership by two awards: Philanthropy Prize 2008 and Family Friendly Employer 2008 Award. Special thanks go to all our Employees and their supportive families. Their professional and personal commitment has been exemplary and has allowed us to provide our esteemed Customer, the service level they expect and absolutely deserve from Citi. Eric H. J.M.A. Lemmens Chief Executive Officer Board of Directors (until 31 December 2008): Henricus J.M.A. Lemmens, Chairman Roman Kováč Marcela Tupá Supervisory Board (until 31 December 2008): Zdeněk Turek, Chairman Kevin A. Murray Branislav Sandtner

8

9

Citibank (Slovakia) a. s.

Financial statements Prepared in accordance with

International Financial Reporting Standards as adopted by the European Union

Year ended 31 December 2008

(English translation)

Citibank (Slovakia) a.s. Balance sheet at 31 December 2008

10

2008

2007

Notes Sk ‘000 Sk ‘000 Assets Cash and cash equivalents

6 21,949,423 9,043,773

Trading assets 8 2,287,668 4,067,702 Loans and advances to banks 9 578,144 10,088 Loans and advances to customers 10 14,317,774 17,001,695 Investment securities 12 3,034,573 3,062,577 Property and equipment 13 56,780 88,490 Deferred tax asset 25 37,858 - Other assets 14 36,673 70,220 42,298,893 33,344,545 Liabilities Trading liabilities 8 1,695,032 2,944,474 Deposits by banks 15 9,176,771 3,241,921 Customer accounts 16 25,825,909 22,004,511 Loans received 17 - 210,326 Subordinated debt 18 1,137,446 1,269,361 Corporate income tax payable 19 62,312 19,269 Deferred tax liability 25 - 5,500 Provisions 20 12,971 6,866 Other liabilities 21 928,279 588,535 38,838,720 30,290,763 Share capital and reserves Share capital 22 1,650,000 1,650,000 Reserves 23 1,810,173 1,403,782 Share capital and reserves

3,460,173 3,053,782

42,298,893 33,344,545

The financial statements, which include the notes on pages 14 to 70, were approved on 27 March 2009 and signed by: Henricus Joseph Maria Alexander Lemmens Pavel Bubeliny Head of the Branch Chief Financial Officer


Income statement Year ended 31 December 2008

11

2008

2007

Notes Sk ‘000 Sk ‘000 Interest income

26 1,530,249

1,629,784 Interest expense 27 (809,766) (955,512) Net interest income

720,483

674,272

Fee and commission income 258,421 236,682 Fee and commission expense (137,515) (121,485) Net fee and commission income 28 120,906 115,197 Net trading income 29 603,394 553,759 Other operating income 16,766 22,684 620,160 576,443 Operating income 1,461,549 1,365,912 Administrative expenses

30 (603,943)

(699,869)

Depreciation 13 (30,510) (37,009) Operating expenditure

(634,453)

(736,878)

Operating profit before impairment

losses and provisions

827,096

629,034 Impairment losses on loans and advances 11 (272,761) (55,835)Impairment losses on investment securities 12 - (3,010)Provisions 20 1,515 (1,524) Profit before taxation

555,850

568,665

Income tax expense

31 (148,044)

(121,051)

Profit after taxation

407,806

447,614

The notes on pages 14 to 70 are an integral part of these financial statements.


Statement of changes in shareholder’s equity Year ended 31 December 2008

12

Share

Retained)

Legal

reserve

Reval- uation

capital earnings) fund reserve Total Sk ‘000 Sk ‘000) Sk ‘000 Sk ‘000 Sk ‘000

At 1 January 2007 1,650,000 649,564) 304,644 12,015 2,616,223

Transfers - (25,356) 25,356 - -

Net loss on available for-sale assets, net of tax - - - (10,055) (10,055)

Profit for 2007 - 447,614 - - 447,614 At 31 December 2007 1,650,000 1,071,822 330,000 1,960 3,053,782

Net loss on available for-sale assets, net of tax - - - (1,415) (1,415)

Profit for 2008 - 407,806 - - 407,806

At 31 December 2008 1,650,000 1,479,628 330,000 545 3,460,173

See also notes 22 and 23 for details of movements in shareholder’s equity accounts during the year. The notes on pages 14 to 70 are an integral part of these financial statements.

Citibank (Slovakia) a.s. Cash flow statement Year ended 31 December 2008

13

2008

2007

Notes Sk ‘000 Sk ‘000 Cash flows from operating activities Profit before changes in operating assets and liabilities 32 856,186 619,171 Decrease in trading assets 1,780,034 3,826,164(Increase)/decrease in loans and advances to banks (567,536) 450,915 Decrease/(increase) in loans and advances to customers

2,417,808 (3,041,014)

Decrease/(increase) in other assets 33,547 (25,631)Decrease in trading liabilities (1,249,442) (4,140,038)Increase/(decrease) in deposits by banks 5,934,838 (794,351)Increase/(decrease) in customer accounts 3,821,272 (2,363,116)Increase/(decrease) in other liabilities 339,744 (379,656)Income tax paid (148,026) (127,406) Net cash from/(used in) operating activities 13,218,425 (5,974,962) Cash flows from investing activities Acquisition of investment securities (288,811) (1,635,692)Disposal of investment securities 311,953 695,571 Proceeds from sale of property and equipment 13,787 2,941 Purchase of property and equipment (8,969) (15,347) Net cash used from/(used in) investing activities 27,960 (952,527) Cash flows from financing activities Loans paid (210,000) -Subordinated debt paid (130,735) (36,472) Net cash used in financing activities (340,735) (36,472) Net increase/(decrease) in cash and cash equivalents 12,905,650 (6,963,961)Cash and cash equivalents at beginning of year

9,043,773

16,007,734

Cash and cash equivalents at end of year

6 21,949,423

9,043,773

The notes on pages 14 to 70 are an integral part of these financial statements.

Citibank (Slovakia) a.s. Notes to the financial statements Year ended 31 December 2008

14

1. General information Effective 1 January 2009, the Bank became a branch of Citibank Europe plc, based in Ireland, when its legal status was changed from joint stock company to branch of a foreign bank. The branch conversion was implemented in the form of a cross-border merger, and was approved by both, the Irish and Slovak financial regulators. The name of the new entity is Citibank Europe plc, pobočka zahraničnej banky (‘the Branch’). The previous entity, Citibank (Slovakia) a.s. had its registered office at Mlynské Nivy 43, 825 01 Bratislava; IČO: 31401295; DIČ: 2020927271 (hereinafter referred to as ‘Bank’) was established and registered with the Commercial Register in 1995. The Bank was a wholly-owned subsidiary of Citibank Overseas Investment Corporation with registered office at One Penn’s Way, New Castle, 19720 Delaware, U.S.A. The ultimate parent company is Citigroup Inc. 399 Park Avenue, 1043 New York, U.S.A. The members of the Board of Directors at 31 December 2008 were as follows: Henricus Joseph Maria Alexander Lemmens Roman Kováč Marcela Tupá The members of the Supervisory Board at 31 December 2008 were as follows: Branislav Sandtner Zdeněk Turek Kevin Anthony Murray The Bank did not have any subsidiaries or associates. The principal activities of the Bank are the provision of banking and financial services to commercial and private customers resident mainly in the Slovak Republic. Based on the decision of the management of the Bank from 17 December 2007, the Bank ceased to extend consumer loans (CitiFinancial) in 2008 and released the associated staff. Restructuring costs amounted to Sk 17 million. All necessary controls and procedures relating to the consumer loan portfolio remain in place. The Bank operates through its head office located in Bratislava and a network of 5 marketing offices. There are marketing offices located in Nitra, Banská Bystrica, Žilina, Trenčín and Košice. The financial statements of Citibank (Slovakia) a. s. for the preceding accounting period, the year ended 31 December 2007, were approved by the General Assembly on 28 March 2008. The financial statements of the Bank prepared in accordance with accounting principles generally accepted in the United States of America are included in the consolidated financial statements of Citigroup Inc. U.S.A. These financial statements are available at 399 Park Avenue, New York, NY 10043, U.S.A.


15 15

2. Basis of preparation (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union and as required by Section 17a of the Slovak Act on Accounting 431/2002 as amended. (b) Basis of measurement The financial statements have been prepared on the historical cost basis except for the following: • derivative financial instruments are measured at fair value; • financial instruments at fair value through profit or loss are measured at fair value; • available-for-sale financial assets are measured at fair value. (c) Functional and presentation currency These financial statements are presented in Slovak crowns, which is the Bank’s functional currency. Except as indicated, financial information presented in Slovak crowns has been rounded to the nearest thousand. (d) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is provided in notes 4 and 5. (e) Comparative figures The comparative figures have been regrouped or reclassified, where necessary, on a basis consistent with the current period. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Foreign currency Transactions denominated in foreign currencies are translated into Slovak crowns at the exchange rates ruling on the date of the transaction. Monetary assets and liabilities are translated at the rates of exchange ruling on the balance sheet date. All resulting gains and losses are recorded in Net trading income in the income statement.


16 16

3. Significant accounting policies continued (b) Interest income and expense Interest income and expense are recognised in the income statement using the effective interest 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 liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees paid or received, transaction costs and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank’s trading operations and are presented, together with all other changes in the fair value of trading assets and liabilities, in Net trading income. Interest income and expense in the income statement include: • interest on financial assets and liabilities at amortised cost calculated on an effective interest basis • interest on available-for-sale investment securities calculated on an effective interest basis. (c) Fees and commissions Fee and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fee and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognised as the related services are performed. When a loan commitment is not expected to result in the drawn-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. Other fee and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. (d) Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realised and unrealised fair value changes, interest and foreign exchange differences. (e) Dividends Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity securities. (f) Lease payments made Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.


17 17

3. Significant accounting policies continued (f) Lease payments made continued Minimum lease payments made under the finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. (g) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. 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. (h) Financial assets and liabilities (i) Recognition The Bank initially recognises loans and advances, deposits by banks, customer accounts, loans received and debt securities in issue on the date that they are originated. All other financial assets and liabilities (including assets and liabilities designated at fair value though profit or loss) are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is initially measured at fair value plus (for an item not subsequently measured at fair value through profit or loss) transaction costs that are directly attributable to its acquisition or issue. (ii) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Bank is recognised as a separate asset or liability. The Bank derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.


18 18

3. Significant accounting policies continued (h) Financial assets and liabilities continued The Bank enters into transactions whereby it transfers assets recognised on its balance sheet, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised from the balance sheet. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. The Bank also derecognises certain assets when it writes off balances deemed to be uncollectible. (iii) Offsetting Financial assets and liabilities are set off and the net amount presented in the balance sheet when, and only when, the Bank has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the reporting standards, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading activity. (iv) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. (v) Fair value measurement The determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations for financial instruments traded in active markets. For all other financial instruments, fair value is determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable-prices exist and valuation models. The Bank uses widely recognised valuation models for determining the fair value of the more common financial instruments like options and interest rate and currency swaps. For these financial instruments, inputs into models are market observable. (vi) Identification and measurement of impairment At each balance sheet date, the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be reliably estimated. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the Bank, or economic conditions that correlate with defaults in the group.


19 19

3. Significant accounting policies continued (h) Financial assets and liabilities continued The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are also collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics. In assessing collective impairment, the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in the income statement and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the income statement. Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and the current fair value out of equity to the income statement. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through the income statement. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. Changes in impairment provisions attributable to time value are reflected as a component of interest income. (i) Cash and cash equivalents Cash and cash equivalents comprises cash, unrestricted balances held with the National Bank of Slovakia and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value and are used by the Bank in the management of short-term commitments. Cash and cash equivalents are carried at amortised cost in the balance sheet. (j) Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the balance sheet with transaction costs taken directly to income. All changes in fair value are recognised as part of Net trading income in the income statement. Trading assets and liabilities are not reclassified subsequent to their initial recognition.


20 20

3. Significant accounting policies continued (k) Derivatives held for risk management purposes Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. Derivatives held for risk management purposes are measured at fair value in the balance sheet. The treatment of changes in their fair value depends on their classification into the following categories: (i) Fair value hedge When a derivative is designated as a hedge of the change in fair value of a recognised asset or liability or a firm commitment, changes in the fair value of the derivative are recognised immediately in income together with the changes in the fair value of the hedged item that are attributable to the hedged risk (in the same income statement line item as the hedged item). If the derivative expires or is sold, terminated, or exercised, no longer meets the criteria for fair value hedge accounting, or the designation is revoked, hedge accounting is prospectively discontinued. Any adjustment up to that point to a hedged item for which the effective interest method is used is amortised to income as part of the recalculated effective interest rate of the item over its remaining life. (ii) Cash flow hedge When a derivative is designated as a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect income, the effective portion of changes in the fair value of the derivative are recognised directly in equity. The amount recognised in equity is removed and included in income in the same period as the hedged cash flows affect the income statement under the same income statement line as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in the income statement. If the derivative expires or is sold, terminated, or exercised, or no longer meets the criteria for cash flow hedge accounting, or the designation is revoked, then hedge accounting is discontinued and the amount recognised in equity remains in equity until the forecast transaction affects income. If the forecast transaction is no longer expected to occur, then hedge accounting is discontinued and the balance in equity is recognised immediately in the income statement. (iii) Other non-trading derivatives When a derivative is not held for trading and is not designated in a qualifying hedge relationship, all changes in its fair value are recognised immediately in income as a component of net income on the other financial instruments carried at fair value. (iv) Embedded derivatives Derivatives may be embedded in another contractual arrangement (a ‘host contract’). The Bank accounts for embedded derivatives separately from the host contract when the host contract is not itself carried at fair value through income, and the characteristics of the embedded derivative are not clearly and closely related to the host contract. Separated embedded derivatives are accounted for depending on their classification and are presented in the balance sheet together with the host contract. (l) 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.


21 21

3. Significant accounting policies continued (l) Loans and advances continued When the Bank is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of an asset to the lessee, the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognised and presented within loans and advances. When the Bank purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date (‘reverse repo or stock borrowing’), the agreement is accounted for as a loan or advance, and the underlying asset is not recognised in the Bank’s financial statements. 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. (m) Investment securities Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held-to-maturity or available-for-sale. (i) Held-to-maturity Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity and which are not designated at fair value through profit or loss or available-for-sale. Held-to-maturity investments are carried at amortised cost using the effective interest method. Any sale or reclassification of a significant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale and prevent the Bank from classifying investments securities as held-to-maturity for the current and the following two financial years. (ii) Available-for-sale Available-for-sale investments are non-derivative investments that are designated as available for sale or are not classified a another category of financial assets. Unquoted equity securities whose fair value cannot be reliably measured are carried at cost. All other available-for-sale investments are carried at fair value. Interest income is recognised in income using the effective interest method. Dividend income is recognised in income when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are then recognised in income. Other fair value changes are recognised directly in equity until the investment is sold or impaired and the balance in equity is recognised in income. (n) Property and equipment (i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.


22 22

3. Significant accounting policies continued (n) Property and equipment continued When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. (ii) Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be reliably measured. The costs of the day-to-day servicing of property and equipment are recognised in income as incurred. (iii) Depreciation Depreciation is recognised in income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The depreciation rates for the current and comparative periods are as follows: Rates Leasehold improvements 10% Furniture, fittings and equipment 12.5% - 33% Motor vehicles 25% Depreciation methods, useful lives and residual values are reassessed at the reporting date. (o) Intangible assets Software Software is stated at cost less accumulated amortisation and impairment losses. Amortisation is recognised on a straight line basis over the 2 to 5 years estimated useful life of the software. (p) Leased assets Leases under which the Bank assumes substantially all the risks and rewards of ownership, are classified as finance leases. On initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. All other leases are operating leases and the leased assets are not recognised on the Bank’s balance sheet. (q) Impairment of non-financial assets The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups.


23 23

3. Significant accounting policies continued (q) Impairment of non-financial assets continued Impairment losses are recognised in income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less cost to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (r) Deposits, customer accounts, loans received and subordinated debt Deposits, customer accounts, loans received and subordinated debt are the Bank’s sources of debt funding. When the Bank sells a financial asset and simultaneously enters into a ‘repo’ or ‘stock lending’ agreement to repurchase the asset (or a similar asset) at a fixed price on future date, the arrangement is accounted for as a deposit, and the underlying asset continues to be recognised in the Bank’s financial statements. Deposits, customer accounts, loans received and subordinated debt are initially measured at fair value plus directly attributable transaction costs, and subsequently measured at their amortised cost using the effective interest method. (s) Provisions A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting the obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract.


24 24

3. Significant accounting policies continued (t) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due. (ii) Termination benefits Termination benefits are recognised as an expense when the Bank is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date. (iii) Short-term benefits Short-term employee benefits obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be reliably estimated. (iv) Share-based payment transactions The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognised as an expense, with a corresponding increase in liabilities, over the period in which the employees become unconditionally entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as personnel expense in the income statement. (u) New standards and interpretations not yet adopted The following recently issued standards, amendments to standards and interpretations are not effective for the year ended 31 December 2008, and have not been applied in preparing these financial statements: • IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate or

otherwise participate in customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13 becomes mandatory for the Bank’s 2009 financial statements and will be applicable retrospectively. The Bank is currently in the process of evaluating the potential effect of this interpretation.

• Amendment to IFRS 2 Share-based Payment – Vesting Conditions and Cancellations clarifies

the definition of vesting conditions, introduces the concept of non-vesting conditions, requires non-vesting conditions to be reflected in grant-date fair value and provides the accounting treatment for non-vesting conditions and cancellations. The amendments to IFRS 2 will become mandatory for the Bank’s 2009 financial statements, with retrospective application. The Bank does not expect this amendment to have a significant impact on the financial statements.


25 25

3. Significant accounting policies continued

(u) New standards and interpretations not yet adopted continued • Revised IFRS 3 Business Combinations (2008) incorporates the following changes that are

likely to be relevant to the Bank’s operations: - The definition of a business has been broadened, which may result in more acquisitions being

treated as business combinations. - Contingent consideration will be measured at fair value, with subsequent changes in fair

value recognised in profit or loss. - Transaction costs, other than share and debt issue costs, will be expensed as incurred. - Any pre-existing interest in an acquiree will be measured at fair value, with the related gain

or loss recognised in profit or loss. - Any non-controlling (minority) interest will be measured at either fair value, or at its

proportionate interest in the identifiable assets and liabilities of an acquiree, on a transaction-by-transaction basis.

Revised IFRS 3, which becomes mandatory for the Bank’s 2010 financial statements, will be applied prospectively and therefore there will be no impact on prior periods in the Bank’s 2010 financial statements.

• IFRS 8 Operating Segments introduces the “management approach” to segment reporting. IFRS

8, which becomes mandatory for 2009 financial statements, will require presentation and disclosure of segment information based on the internal reports that are regularly reviewed by an entity’s “chief operating decision maker” in order to assess each segment’s performance and to allocate resources to them. This standard will have no effect on the Bank’s reported total profit or loss or equity. The Bank is currently in the process of determining the potential effect of this standard on the Bank’s segment reporting.

• Revised IAS 1 Presentation of Financial Statements (2007) introduces the term “total

comprehensive income,” which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the income statement and all non-owner changes in equity in a single statement), or in an income statement and a separate statement of comprehensive income. Revised IAS 1, which becomes mandatory for the Bank’s 2009 financial statements, is expected to have a significant impact on the presentation of the financial statements.

• Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires

that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Revised IAS 23 will become mandatory for the Bank’s 2009 financial statements but is not expected to have a significant impact on those statements.

• Amended IAS 27 Consolidated and Separate Financial Statements (2008) requires accounting

for changes in ownership interests in a subsidiary that occur without loss of control, to be recognised as an equity transaction. When the Bank loses control of a subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognised in profit or loss. The amendments to IAS 27, which become mandatory for the Bank’s 2009 financial statements with prospective application, are not expected to have a significant impact on the financial statements.


26 26

3. Significant accounting policies continued

(u) New standards and interpretations not yet adopted continued • Amendments to IAS 32 and IAS 1 Presentation of Financial Statements – Puttable Financial

Instruments and Obligations Arising on Liquidation require puttable instruments and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation to be classified as equity if certain conditions are met. The amendments, which become mandatory for the Bank’s 2009 financial statements with retrospective application required, are not expected to have any significant impact on the financial statements.

• The International Accounting Standards Board made certain amendments to existing standards

as part of its first annual improvements project. The effective dates for these amendments vary by standard and most will be applicable to the Bank’s 2009 financial statements. The Bank does not expect these amendments to have any significant impact on the financial statements.

• Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible

Hedged Items clarifies the application of existing principles that determine whether specific risks or portions of cash flows are eligible for designation in a hedging relationship. The amendments will become mandatory for the Bank’s 2010 financial statements, with retrospective application required. The Bank is currently in the process of evaluating the potential effect of this amendment.

4. Use of estimates and judgements These disclosures supplement the commentary on financial risk management (see note 5). Key sources of estimation uncertainty Allowances for credit losses Assets accounted for at amortised cost are evaluated for impairment on a basis described in accounting policy 3 (h)(vi). The specific counterparty component of the total allowances for impairment applies to claims evaluated individually for impairment and is based on management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about a counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits and the workout strategy and estimate of cash flows considered recoverable are independently approved by Credit Risk Management. Collectively assessed impairment allowances cover credit losses inherent in portfolios of claims with similar economic characteristics when there is objective evidence to suggest that they contain impaired claims, but the individual impaired items cannot yet be identified. In assessing the need for collective loan loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters based on historical experience and current economic conditions. The accuracy of the allowances depends on how well future cash flows are estimated for specific counterparty allowances and on the model assumptions and parameters used in determining collective allowances.


27 27

4. Use of estimates and judgements continued Key sources of estimation uncertainty continued Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy 3 (h)(v). For financial instruments that trade infrequently and have little price transparency, fair value is less objective and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Critical accounting judgements in applying the Bank’s accounting policies Critical accounting judgements made in applying the Bank’s accounting policies include: Valuation of financial instruments The Bank’s accounting policy on fair value measurements is discussed under note 3(h)(v). The Bank measures fair values using the following hierarchy of methods: • Quoted market price in an active market for an identical instrument. • Valuation techniques based on observable inputs. This category includes instruments valued

using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

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

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 valuation techniques. Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist, and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm’s length. The Bank uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like interest rate and currency swaps that use only observable market data and require little management judgement and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, exchange-traded derivatives and simple over the counter derivatives like interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.


28 28

4. Use of estimates and judgements continued Critical accounting judgements in applying the Bank’s accounting policies continued For more complex instruments, the Bank uses proprietary valuation models, which usually are developed from recognised valuation models. Some or all of the significant inputs into these models may not be observable in the market, and are derived from market prices or rates or are estimated based on assumptions. Example of instruments involving significant unobservable inputs include certain over-the-counter structured derivatives, certain loans and securities for which there is no active market and retained interests in securitisations. Valuation models that employ significant unobservable inputs require a higher degree of management judgement and estimation in determination of fair value. Management judgement and estimation are usually required for selection of the appropriate valuation model to be used, determination of expected future cash flows on the financial instrument being valued, determination of probability of counterparty default and prepayments and selection of appropriate discount rates. The Bank has an established control framework with respect to the measurement of fair values. This framework includes a Product Control function, which is independent of front office management and reports to the Chief Financial Officer, and which has overall responsibility for independently verifying the results of trading and investment operations and all significant fair value measurements. Specific controls include: verification of observable pricing inputs and reperformance of model valuations; a review and approval process for new models and changes to models involving both Product Control and Bank Market Risk; calibration and back testing of models against observed market transactions; analysis and investigation of significant daily valuation movements; review of significant unobservable inputs and valuation adjustments by senior Product Control personnel; and reporting of significant valuation issues to the Bank ALCO Committee. The reported amounts of financial instruments stated at fair value analysed according to valuation methodology were as follows:

Quoted market

prices in active

markets

Valuation techniques -

observable inputs

Total 31 December 2008 Note Sk ‘000 Sk ‘000 Sk ‘000 Assets Trading assets 8 25,219 2,262,449 2,287,668 Investment securities 12 3,034,573 - 3,034,573

3,059,792 2,262,449 5,322,241 Liabilities Trading liabilities 8 - 1,695,032 1,695,032

At 31 December 2008, there were no financial instruments included in the financial statements at fair values established using valuation techniques employing unobservable inputs (2007: Nil).


29 29

4. Use of estimates and judgements continued Critical accounting judgements in applying the Bank’s accounting policies continued

Quoted market

prices in active

markets

Valuation techniques -

observable inputs

Total 31 December 2007 Note Sk ‘000 Sk ‘000 Sk ‘000 Assets Trading assets 8 990,145 3,077,557 4,067,702 Investment securities 12 3,062,577 - 3,062,577

4,052,722 3,077,557 7,130,279 Liabilities Trading liabilities 8 - 2,944,474 2,944,474

Financial asset and liability classification The Bank’s accounting policies provide scope for assets and liabilities to be designated on inception into different accounting categories in certain circumstances: • In classifying financial assets or liabilities as ‘trading’, management has determined that the

Bank meets the description of trading assets and liabilities set out in accounting policy 3 (j). • In classifying financial assets as available-for-sale, management has determined that the Bank

meets the description of available-for-sale assets set out in accounting policy 3 (m)(ii). 5. Financial risk management (a) Introduction The Bank has exposure to the following risks from its use of financial instruments: • credit risk • liquidity risk • market risk • operational risk Information on the exposure to each of the above risks; the objectives, policies and processes for measuring and managing risk; and on the management of the Bank’s capital is set out below. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board has established the Asset and Liability Committee (ALCO), Credit and Operational Risk committees, which are responsible for developing and monitoring the Bank’s risk management policies in their specified areas. All Board committees have both executive and non-executive members and report regularly to the Board of Directors on their activities.


30 30

5. Financial risk management continued (a) Introduction continued The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The Risk and Compliance Committee (RCC) is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The RCC is assisted in these functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the RCC and the Management Committee. (b) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arise principally from the Bank’s loans and advances to customers and other financial instruments. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, economic group, geography and industry risk). For risk management purposes, credit risk arising on trading securities is managed independently, and reported as a component of market risk exposure. Management of credit risk The Board of Directors delegated responsibility for the management of credit risk to the Credit Committee. Management of credit risk is performed by the Portfolio Management department, headed by the Country Risk Manager. Additionally, an independent Credit Risk Management Services department is responsible for the maintenance and monitoring of credit exposures and the custody of documentation. Credit risk management consists of the following components: • Formulating local credit policies in consultation with business units, covering collateral

requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements.

• Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to the Credit Officers. Credit facilities require approval of at least two credit officers, one of them being from the Independent Risk Department, who have to have a credit delegation sufficient for the facility on question.

• Reviewing and assessing credit risk. All extensions of credit are subject to at least an annual review cycle, whereupon all facilities have to be re-approved at the appropriate level. All new facilities in the interim period, prior to being committed to customers are subject to the same review process.

• Limiting concentrations of exposure to counterparties, geographies and industries.


31 31

5. Financial risk management continued (b) Credit risk continued • Implementation of the risk rating models, in order to categorise exposures according to the

degree of risk of financial loss faced and to focus management on the attendant risks. The current risk rating framework consists of grades reflecting varying degrees of risk of default. At facility level, the model reflects collateral or other credit risk mitigation. The responsibility for setting risk ratings lies with the final approvers as appropriate. Risk ratings models are reviewed periodically at the headquarter level (Citibank NY).

• Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports are provided to the senior risk management on the credit quality of local portfolios and appropriate corrective action is taken.

• Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

Each business unit is required to implement corporate credit policies and procedures, with credit approval authorities delegated from the Senior Credit Officers as appropriate. Each business unit is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to central approval. Regular audits of business units and Group Credit processes are undertaken by Internal Audit.


32 32

5. Financial risk management continued (b) Credit risk continued Exposure to credit risk

Loans and advances to

customers Loans and advances to

banks

Investment securities 2008 2007 2008 2007 2008 2007 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000

Individually impaired Grade 5-7: Impaired 151,903 50,067 - - - - Grade 8-10: Impaired 145,305 48,169 - 3,010 3,010 Gross amount 297,208 98,236 3,010 3,010 Allowance for

impairment (159,539) (41,076) - - (3,010) (3,010)Carrying amount 137,669 57,160 - - - - Collectively impaired Non-performing loans 3,627 2,384 - - - - Allowance for

impairment (2,105) (1,442) - - - - Carrying amount 1,522 942 - - - -

Past due but not impaired Grade 5-7: - 183 - - - - Carrying amount - 183 - - - - Past due but not

impaired comprises: - 30-60 days - 14 - - - - 60-90 days - 47 - - - - 90-180 days - 13 - - - - 180 days + - 109 - - - - Carrying amount - 183 - - - -

Neither past due nor impaired Performing loans 366,463 575,886 Grade1-4: 9,445,183 7,619,695 578,144 10,088 3,034,573 3,062,577 Grade 5-7: 4,340,268 8,549,375 - - - - Unrated 136,363 205,088 - - - - Gross amount 14,288,277 16,950,044 578,144 10,088 3,034,573 3,062,577 Collective assessment (109,694) (6,634) - - - - Carrying amount 14,178,583 16,943,410 578,144 10,088 3,034,573 3,062,577

Total carrying amount 14,317,774 17,001,695 578,144 10,088 3,034,573 3,062,577


33 33

5. Financial risk management continued (b) Credit risk continued Impaired loans and securities Impaired loans and securities are loans and securities for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan/securities agreement(s). The table with internal ratings (relating to exposures individually assessed for impairment) is as follows:

Internal rating (grade)

1-year Probability of Default Range

(%) S & P

* Moody’s

* 1 0.0 ) - 0.01 AAA Aaa

2+ >0.01 - 0.02 AA+ Aa1 2 >0.02 - 0.03 AA Aa2

2- >0.03 - 0.04 AA- Aa3 3+ >0.04 - 0.05 A+ A1

3 >0.05 - 0.06 A A2 3- >0.06 - 0.09 A- A3 4+ >0.09 - 0.14 BBB+ Baa1

4 >0.14 - 0.26 BBB Baa2 4- >0.26 - 0.63 BBB- Baa3 5+ >0.63 - 1.38 BB+ Ba1

5 >1.38 - 2.64 BB Ba2 5- >2.64 - 4.48 BB- Ba3 6+ >4.48 - 7.04 B+ B1

6 >7.04 - 10.32 B B2 6- >10.32 - 14.40 B- B3 7+ >14.40 - 19.37 CCC+ Caa1

7 >19.37 CCC Caa2 7- >19.37 CCC- Caa3 8 N/A

9+ Default 9 Default 10 Default SD

Internal ratings from 1 up to 4 represent investment group grade, from 5 up to 7 sub-investment group grade and 8 and higher default group grade. Past due but not impaired loans Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of security/collateral available and/or the stage of collection of amounts owed to the Bank. Unrated loans Unrated loans mainly comprise loans extended to employees.


34 34

5. Financial risk management continued (b) Credit risk continued Allowances for impairment The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Write-off policy The Bank writes off a loan/security balance (and any related allowances for impairment losses) when Group Credit determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardised loans, charge-off decisions generally are based on a product-specific past due status. Set out below is an analysis of the gross and net of allowance for impairment amounts of individually impaired assets by risk grade.

Loans and advances

to customers

Investment securities Gross Net Gross Net

Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 31 December 2008

Grade 5-7: Individually impaired 151,903 136,804 - - Grade 8-10: Individually impaired 145,305 865 3,010 - 297,208 137,669 3,010 -

31 December 2007

Grade 5-7: Individually impaired 50,067 43,919 - - Grade 8-10: Individually impaired 48,169 13,241 3,010 -

98,236 57,160

3,010

-


35 35

5. Financial risk management continued (b) Credit risk continued The Bank holds collateral against loans and advances to customers in the form of pledges over property, notarial pledges over movable assets and guarantees. Estimates of fair values are based on the value of collateral assessed at the time of borrowing, and periodically updated in accordance with the collateral management policy. An estimate of the fair value of collateral and other security enhancement held against financial assets is shown below:

Loans and advances

to customers 2008 2007 Sk ‘000 Sk ‘000 Against individually impaired

Real estate 97,267 45,872 Equipment, inventory and receivables 131,714 39,370

Against neither past due nor impaired Pledged accounts and pledged term deposits 1,958,190 2,187,360 Guarantees 6,309,849 7,134,846 Securities 3,683,755 1,439,897

12,180,775

10,847,345

The Bank monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk is shown below: Loans and advances

to customers Loans and advances

to banks

Investment securities 2008 2007 2008 2007 2008 2007 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Concentration

by sector

Government - - - - 3,034,573 3,062,577 Corporate 13,823,309 16,269,902 - - - - Bank - - 578,144 10,088 - - Retail 494,465 731,793 - - - - 14,317,774 17,001,695 578,144 10,088 3,034,573 3,062,577


36 36

5. Financial risk management continued (b) Credit risk continued Loans and advances

to customers Loans and advances

to banks

Investment securities 2008 2007 2008 2007 2008 2007 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Concentration

by location

Slovak Republic 14,125,212 16,686,597 550,779 6,509 3,034,573 3,062,577 Turkey 126,384 159,120 - - - - Luxembourg 48,220 102,651 - - - - Bosnia and

Herzegovina 11,783

12,826

- - - - Czech Republic 4,342 6,349 - - - - U.S.A. 873 5,066 - - - - Switzerland 1 14,876 - - - - Germany - 8,417 - - - - Other 959 5,793 27,365 3,579 - - 14,317,774 17,001,695 578,144 10,088 3,034,573 3,062,577 Concentration by location for loans and advances is measured based on the location of the entity holding the assets, which has a high correlation with the location of the borrower. Concentration by location of the investment securities is measured based on the location of the issuer of the security. Loans and advances were made to customers in the following sectors: 2008 2007 Sk ‘000 Sk ‘000

Non-financial 11,604,162 13,155,905 Financial 2,022,773 2,759,728 Resident individuals 494,470 731,793 Non-resident 191,691 315,097 Self-employed 4,676 38,606 Insurance - 564 Non-profit organisations 2 2 14,317,774 17,001,695 Settlement risk The Bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a company to honour its obligations to deliver cash, securities or other assets as contractually agreed. For certain types of transactions the Bank mitigates this risk by conducting settlements through a settlement/clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual obligations. Alternatively, some customer trades are executed on a payment versus delivery basis, which eliminates settlement risk. Settlement limits form part of the credit approval/limit monitoring process.


37 37

5. Financial risk management continued (c) Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities. Management of liquidity risk The Bank’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. Treasury Department receives daily information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank. The liquidity requirements of business units and subsidiaries are met through short-term loans from Treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. There is a combination of liquidity ratios and limits which is used to manage the liquidity position of the Bank. Monitoring and reporting of these ratios and limits is performed by the Independent unit, and Treasury is obliged to comply with these requirements. Any exceptions are reviewed and addressed by country ALCO and properly documented in the minutes. The structure of limits is derived from the forecast balance sheet and behavioural assumptions associated with each balance sheet category. The liquidity position is further tested by a set of different scenarios which cover business as usual as well as stress situations estimating the different level of severity of market conditions and its impact on the liquidity position of the Bank.


38 38

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity of monetary assets and liabilities at 31 December 2008 are set out in the following table, which shows the undiscounted cash flows on the basis of their earliest contractual maturity. The Bank’s expected cash flows may vary significantly from this analysis. For example, customer account liabilities are expected to maintain a stable or increasing balance:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Not

specified Sk ‘000

Total Sk ‘000

Monetary assets Cash and cash

equivalents 21,949,423 - - - 21,949,423 Trading assets 2,020,401 267,267 - - 2,287,668 Loans and advances

to banks 578,144 - - - 578,144 Loans and advances

to customers 11,226,748 2,529,092 517,024 44,910 14,317,774 Investment securities 1,336,898 1,664,957 29,087 3,631 3,034,573 Deferred tax asset - 37,858 - - 37,858 Other assets 36,673 - - - 36,673 37,148,287 4,499,174 546,111 48,541 42,242,113

Monetary liabilities

Trading liabilities 1,516,298 178,734 - - 1,695,032 Deposits by banks 7,218,581 1,958,190 - - 9,176,771 Customer accounts 25,825,909 - - - 25,825,909 Subordinated debt 4,708 - 1,132,738 - 1,137,446 Corporate income tax

payable 62,312 - - - 62,312 Other liabilities 904,268 6,403 - 17,608 928,279 35,532,076 2,143,327 1,132,738 17,608 38,825,749


39 39

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity of monetary assets and liabilities at 31 December 2007 was as follows:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Not

specified Sk ‘000

Total Sk ‘000

Monetary assets Cash and cash

equivalents 9,043,773 - - - 9,043,773 Trading assets 2,653,893 1,412,567 1,242 - 4,067,702 Loans and advances

to banks 10,088 - - - 10,088 Loans and advances

to customers 12,986,242 3,313,126 664,845 37,482 17,001,695 Investment securities 219,706 2,591,260 251,611 - 3,062,577 Other assets 70,220 - - - 70,220 24,983,922 7,316,953 917,698 37,482 33,256,055

Monetary liabilities

Trading liabilities 2,558,161 386,313 - - 2,944,474 Deposits by banks 1,057,726 - 2,184,195 - 3,241,921 Customer accounts 22,004,511 - - - 22,004,511 Loans received 210,326 - - - 210,326 Subordinated debt 5,888 - 1,263,473 - 1,269,361 Corporate income

tax payable 19,269 - - - 19,269 Deferred tax liability - - - 5,500 5,500 Other liabilities 559,514 11,252 - 17,769 588,535 26,415,395 397,565 3,447,668 23,269 30,283,897


40 40

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity on off balance sheet items at 31 December 2008 are set out in the following table, which shows the undiscounted cash flows on the basis of their earliest contractual maturity:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Total Sk ‘000

Off balance sheet Guarantees 1,812,978 1,879,997 23,493 3,716,468 Irrevocable letters of

credit

36,400

-

-

36,400 Committed unused lines 1,649,548 578,194 115,777 2,343,519 Contract/notional

amount of derivative instruments

Currency derivatives

Forward exchange contracts 12,857,189 367,155 - 13,224,344

Currency and cross -currency swaps 71,551,234 360,750 - 71,911,984

Options 3,457,447 - - 3,457,447 Interest rate derivatives

Interest rate swaps 2,854,510 9,350,493 - 12,205,003 Interest rate options 95,000 71,250 - 166,250 - 94,314,306 12,607,839 139,270 107,061,415


41 41

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity of off balance sheet items at 31 December 2007 was as follows:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Total Sk ‘000

Off balance sheet Guarantees 2,518,696 1,195,276 10,466 3,724,438 Irrevocable letters of credit 150,795 11,892 - 162,687 Committed unused lines 770,000 1,736,548 179,052 2,685,600 Contract/notional amount

of derivative instruments

Currency derivatives

Forward exchange contracts 8,172,592 3,457,955 - 11,630,547

Currency and cross- currency swaps 80,832,160 3,038,137 - 83,870,297

Options 46,889,835 18,638,512 - 65,528,347 Interest rate derivatives

Interest rate swaps 1,260,000 11,837,472 - 13,097,472 Interest rate options 560,000 261,250 - 821,250 141,154,078 40,177,042 189,518 181,520,638

(d) Market risk Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. Management of market risks The Bank separates its exposure to market risk between trading and banking portfolios. Overall authority for market risk is vested in ALCO. Market Risk Management is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation. The Country Risk Manager provides an independent oversight.


42 42

5. Financial risk management continued (d) Market risk continued Exposure to market risks - trading portfolios The Bank holds trading positions in various financial instruments including financial derivatives. The majority of the Bank’s business activities are conducted based on the requirements of its customers. In accordance with the estimated demand of its customers, the Bank holds a certain supply of financial instruments and maintains access to the financial markets through the quoting of bid and ask prices and by trading with other market makers. These positions are also held for the purpose of speculation on the expected future developments of financial markets. The speculative expectation and market making thus affect the Bank’s business strategy, and its goal is to maximise net income from trading. The Bank manages the risks associated with its trading activities on the level of individual risks and individual types of financial instruments. The basic instruments used for risk management are volume limits for individual transaction types, stop loss limits and Value at Risk (VaR) limits. The quantitative methods applied to risk management are described below. Risk management methods Market risk is the risk of a change in a product portfolio value arising from changes in market conditions (i.e. changes in interest rates, exchange (FX) rates, prices of commodities, equity instruments and changes in volatility of market factors) that impact the value of the portfolio. The Bank monitors market risks by modelling the result of a fixed change in the monitored market factor while keeping other factors constant. The potential change in the portfolio value is then defined depending on the current sensitivity of the opened position to the changes in the market factors. The fixed changes in the market factors used by the Bank for the respective open positions to monitor the market risk are: • FX rate – 1 % relative change in exchange rate, • Interest rates – a simultaneous change at all points of the yield curve by 1 basis point (0.01 %)

for the trading portfolio and 100 basis points for the banking portfolio, • Commodity price – 1 % relative change in the commodity price, • Equity instrument price – 1 % relative change in the share price. The Bank sets limits for the individual sensitivities of the portfolio value to the fixed changes in market factors. These limits are regularly reassessed. Interest rate risk of the trading portfolio is measured by analysing the change in the value of the portfolio for a given modification of the yield curve. The Bank simulates changes to the yield curve of 1 basis point at particular points of the curve with unchanged values of the yield curve at non-tested periods. Finally, the sensitivity of the portfolio present value as a result of an increase of the whole yield curve by 1 basis point is performed. A more complex view is obtained by calculating the Value at Risk (VaR).


43 43

5. Financial risk management continued (d) Market risk continued Value at Risk (VaR) Value at Risk represents a statistical estimate of the potential loss from an unfavourable market development within a certain time period and at a certain significance level. The Bank determines VaR using the stochastic simulation of a large number of scenarios of potential developments in the financial markets. The VaR is measured based on a one-day holding period and a confidence level of 99 %. Although VaR is an important tool for measuring market risk, the assumptions on which the model is based do give rise to some limitations, including the following: • A 1-day holding period assumes that it is possible to hedge or dispose of positions within that

period. This is considered to be a realistic assumption in almost all cases but may not be the case in situations in which there is severe market illiquidity for a prolonged period.

• A 99 percent confidence level does not reflect losses that may occur beyond this level. Even within the model used there is a one percent probability that losses could exceed the VaR.

• VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day.

• The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature.

• The VaR measure is dependent on the Bank’s position and the volatility of market prices. The VaR of an unchanged position reduces if the market price volatility declines and vice versa.

The Bank uses VaR limits for total market risk of the whole portfolio (interest rate risk together with foreign exchange risk) and also VaR limits for ALM and Trading desk. The overall structure of VaR limits is subject to review and approval by ALCO. VaR is measured daily. Daily reports of utilisation of VaR limits are submitted to Market Risk Management and regular summaries are submitted to ALCO. A summary of the VaR position of the Bank’s trading portfolios at 31 December 2008 and 31 December 2007 and during the period is as follows: At 31 Dec Average Maximum Minimum Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 2008 Foreign currency risk 10,568 4,888 18,030 375 Interest rate risk 671 2,188 8,406 347 Overall 11,239 7,076 At 31 Dec Average Maximum Minimum Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 2007 Foreign currency risk 727 2,734 7,753 240 Interest rate risk 3,729 2,653 7,195 708 Overall 4,456 5,387


44 44

5. Financial risk management continued (d) Market risk continued The limitations of the VaR methodology are recognised by supplementing VaR limits with other position and sensitivity limit structures. The Bank also carries out stress testing of the interest rate risk of the trading portfolio. These tests are based on the same methodology, but using the changes in interest rates defined for the purpose of stress testing instead of the changes in yield curves by 1 basis point. Exposure to interest rate risk – non trading portfolio The Bank is exposed to an interest rate risk as its interest-bearing assets and liabilities have different maturity dates, periods of interest rate changes and volumes during these periods. For variable interest rates, the Bank is exposed to a basis risk due to the different mechanisms of setting different interest rates, such as LIBOR (BRIBOR), announced interest on deposits, etc. The Bank’s interest rate risk management activities are aimed at optimising net interest income in accordance with the Bank’s strategy. The interest rate risk of the banking portfolio is measured using a gap analysis. From the results of this analysis, the value of the Interest Rate Exposure (IRE) is calculated. IRE shows the potential change in net interest income before taxation if interest rates for the monitored currency change by 100 basis points during the fixed period. The measurement of the banking portfolio risk also uses the calculation of Total Return (TRT), which shows the change in value of a hypothetically immunified banking portfolio at current levels of interest rates during the fixed period. The Bank also carries out stress testing of the banking portfolio. This testing is performed using the same methodology as the IRE calculation, but using the change in interest rates defined for the purpose of the stress testing instead of the change by 100 basis points. A summary of the IRE position of the Bank’s banking portfolios at 31 December 2008 and 31 December 2007 and during the period is as follows: At 31 Dec Average Maximum Minimum Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 2008 SKK 12M IRE (17,016) (23,314) (7,742) (36,041) EUR 12M IRE (4,388) (7,159) (2,152) (12,279) USD 12M IRE (1,169) (1,134) 692 (2,934) 2007 SKK 12M IRE (35,017) (17,760) (9,517) (37,581) EUR 12M IRE (8,578) (6,352) (937) (11,601) USD 12M IRE (1,078) (654) 83 (1,466)


45 45

5. Financial risk management continued (d) Market risk continued At 31 Dec Average Maximum Minimum Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 2008 SKK 5Y IRE (3,841) (25,776) 3,154 (56,130)EUR 5Y IRE (5,230) (8,511) (3,037) (14,421)USD 5Y IRE (1,163) (1,123) 694 (2,905) 2007 SKK 5Y IRE (55,206) (34,329) (23,184) (58,899)EUR 5Y IRE (10,953) (10,309) (5,225) (17,286)USD 5Y IRE (1,067) (648) 82 (1,450) Overall non-trading interest rate risk positions are managed by ALM, which uses investment securities, advances to banks, deposits from banks and derivative instruments to manage the overall position arising from the Bank’s non-trading activities. Foreign exchange risk Foreign exchange risk arises from the impact on the value of financial assets and liabilities from changes in foreign exchange rates. The policy of the Bank is to maintain minimal net exposures to foreign exchange risk. Limits are set for individual foreign currencies and the Bank also uses forward foreign currency contracts to hedge balance sheet positions.


46 46

5. Financial risk management continued (d) Market risk continued The Bank had the following foreign exchange positions at 31 December 2008:

Euro Sk ‘000

US dollar

Sk ‘000

Other

Sk ‘000

Slovak crown

Sk ‘000

Total

Sk ‘000 Assets Cash and cash equivalents 78,896 114,827 259,343 21,496,357 21,949,423 Trading assets - - - 2,287,668 2,287,668 Loans and advances

to banks 16,619 10,746 - 550,779 578,144 Loans and advances

to customers 5,377,478 837,233 5,613 8,097,450 14,317,774 Investment securities - - - 3,034,573 3,034,573 Deferred tax asset - - - 37,858 37,858 Other assets 16 2,968 10 33,679 36,673 5,473,009 965,774 264,966 35,538,364 42,242,113 Liabilities

Trading liabilities - - - 1,695,032 1,695,032 Deposits by banks 2,006,094 1,603,992 216,046 5,350,639 9,176,771 Customer accounts 5,001,097 1,765,450 500,047 18,559,315 25,825,909 Subordinated debt 1,137,446 - - - 1,137,446 Corporate income tax

payable - - - 62,312 62,312 Other liabilities 537,519 63,906 31,460 295,394 928,279

8,682,156 3,433,348 747,553 25,962,692 38,825,749


47 47

5. Financial risk management continued (d) Market risk continued The Bank had the following foreign exchange positions at 31 December 2007:

Euro Sk ‘000

US dollar

Sk ‘000

Other

Sk ‘000

Slovak crown

Sk ‘000

Total

Sk ‘000 Assets Cash and cash equivalents 14,226 1,817,378 46,849 7,165,320 9,043,773 Trading assets - - - 4,067,702 4,067,702 Loans and advances

to banks - 3,579 - 6,509 10,088 Loans and advances

to customers 6,503,250 897,675 10,815 9,589,955 17,001,695 Investment securities - - - 3,062,577 3,062,577 Other assets 2,488 4,755 321 62,656 70,220 6,519,964 2,723,387 57,985 23,954,719 33,256,055 Liabilities

Trading liabilities - - - 2,944,474 2,944,474 Deposits by banks 2,443,268 157,591 33,024 608,038 3,241,921 Customer accounts 4,153,437 2,116,396 533,247 15,201,431 22,004,511 Loans received - - - 210,326 210,326 Subordinated debt 1,269,361 - - - 1,269,361 Corporate income tax

payable - - - 19,269 19,269 Deferred tax liability - - - 5,500 5,500 Other liabilities 62,915 67,980 13,788 443,852 588,535

7,928,981 2,341,967 580,059 19,432,890 30,283,897 (e) Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. It includes reputation and franchise risks associated with Citi’s business practices or market conduct. It also includes the risk of failing to comply with applicable laws, regulations, Regulatory Administrative Actions or Citi policies.


48 48

5. Financial risk management continued (e) Operational risk continued The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Bank standards for the management of operational risk in the following areas: • requirements for appropriate segregation of duties, including the independent authorisation of

transactions • requirements for the reconciliation and monitoring of transactions • compliance with regulatory and other legal requirements • documentation of controls and procedures • requirements for the periodic assessment of operational risks faced, and the adequacy of

controls and procedures to address the risks identified • requirements for the reporting of operational losses and proposed remedial action • development of contingency plans • training and professional development • ethical and business standards • risk mitigation, including insurance where this is effective. The Operational Risk Process is made up of the following components: 1. Identify and Assess Key Operational Risks

Key Operational Risks are derived from a judgmental assessment of the Important Risks identified through the Risk Compliance Self Assessment Processes (RCSA), as well as other relevant factors that can include internal operational risk loss data, industry events, and other forms of scenario analysis. The identification of Key Operational Risks benefits from a collaborative effort, with the input of business and functional experts. 2. Establish Key Risk Indicators

Key Risk Indicators (KRIs) are management tools that can be used to monitor exposure to a risk, or to monitor the control of a risk. They may be quantitative in nature, or they may be judgmental so far as possible, KRIs should:

• Recognise both improvements and deterioration in operational risk exposures on a timely basis;

• Provide forward-looking information to management; • Translate into quantifiable measures that lend themselves to monitoring and verification;

and • Be identified through a collaborative effort, with the input of business and functional

experts.


49 49

5. Financial risk management continued (e) Operational risk continued 3. Comprehensive Quarterly Operational Risk Reporting

• Internal Operational Risk Events • RCSA and ARR Results • Key Operational Risks and KRI’s • Operational Risk Capital Results • Management Summary

The internal audit function is exercising independent control over management of operational risk by checking for compliance with statutes, other generally binding legal regulations, and the Bank’s internal regulations and procedures; in particular, examining and evaluating the functionality and effectiveness of the Bank’s management and control system, risk management system, and internal capital adequacy assessment process, the fulfillment of requirements for own funds and liquidity, and compliance with exposure limits; examining and evaluating the Bank’s preparedness in terms of risk management for performing new types of transactions. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the senior management of the Bank and the Supervisory Board. (f) Capital management The Bank’s regulator, the National Bank of Slovakia (‘NBS’) sets and monitors capital requirements. With effect from 1 January 2008, the Bank is required to comply with the provisions of the Basel II framework in respect of regulatory capital. The Bank uses the standardised approaches to credit and operational risk management. The Bank’s regulatory capital is analysed into two tiers: • Tier 1 capital includes ordinary share capital, legal reserve fund and retained earnings, after

deductions for intangible assets, and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes.

• Tier 2 capital includes qualifying subordinated liabilities. Various limits are applied to elements of the capital base. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. The Bank’s policy is to maintain a strong capital base so as to maintain shareholder, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholder’s return is taken into account as the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Bank has complied with all externally imposed capital requirements throughout the year. There have been no material changes in the Bank’s management of capital during the year.


50 50

5. Financial risk management continued (f) Capital management continued The Bank’s regulatory capital position at 31 December was as follows:

2008 2007 Sk ‘000 Sk ‘000

Regulatory capital Tier 1 capital Ordinary share capital (note 22) 1,650,000 1,650,000 Reserve funds and other funds created from profit (note 23) 330,000 330,000 Retained earnings less profit for the year (note 23) 1,071,822 624,208 Less: certain intangible assets (956) (1,947) Total 3,050,866 2,602,261 Tier 2 capital Subordinated debt less accrued interest (note 18) 1,132,738 1,263,473 Total 4,183,604 3,865,734 Risk-weighted assets (RWA) RWA - weight 20% 180,329 821,327 RWA - weight 50% 585,105 - RWA - weight 75% 369,711 - RWA - weight 100% 15,918,366 18,944,763 Risk weighted assets in the banking book 17,053,511 19,766,090 Risk weighted assets in the trading book 1,252,225 1,237,039 Foreign exchange risk 1,267,909 138,131 Operational risk 2,551,888 - 22,125,533 21,141,260 Capital ratios Total regulatory capital expressed as a percentage of total risk-weighted assets 18.91% 18.29% Total tier 1 capital expressed as a percentage of risk weighted assets 13.79% 12.31%

For the year ended 31 December 2008, the calculation of regulatory capital and capital adequacy is based on NBS decree No. 4/2007 as amended concerning own funds and capital requirements for banks and own funds and capital requirements for investment firms.


51 51

5. Financial risk management continued (f) Capital management continued Management uses regulatory capital ratios in order to monitor its capital base, and these capital ratios remain the international standards for measuring capital adequacy. The NBS’s approach to such measurement based upon Basel II is now primarily based on monitoring the relationship of the Capital Resources Requirement (measured as 8 percent of risk-weighted assets) to available capital resources. Capital allocation The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily upon the regulatory capital, but in some cases the regulatory requirements do not reflect fully the varying degree of risk associated with different activities. In such cases the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required for regulatory purposes. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation, by Bank Risk and Bank Credit, and is subject to review by ALCO. Although maximisation of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Bank to particular operations or activities, it is not the sole basis used for decision-making. Account also is taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Bank’s longer term strategic objectives. The Bank’s policies in respect of capital management and allocation are reviewed regularly by the Board of Directors. (g) International financial and economic conditions Measures implemented during 2008 in order to minimise the impact of the international financial and economic crisis on the credit portfolio, among others, include: • regular portfolio reviews / stress tests, • identification of high risk groups of obligors (type/size of business, geography, industry), • strengthened monitoring, • strengthening of collateral and/or other risk mitigants, • adjustment of target market, in order to elevate credits with risky profile to higher approval

level. 6. Cash and cash equivalents

2008 2007 Sk ‘000 Sk ‘000

Cash and balances at the central bank (note 7) 21,498,942 7,139,170 Loans and advances to banks with contractual maturity up to 3 months (note 9) 450,481

1,904,603

21,949,423 9,043,773


52 52

7. Cash and balances at the central bank

2008 2007 Sk ‘000 Sk ‘000

Balances with the National Bank of Slovakia: Compulsory minimum reserve 550,779 6,509 Receivables from repurchase agreements 9,986,953 4,975,832 Other 11,454,271 2,124,735 21,992,003 7,107,076 Balances with other central banks Other 816 111 21,992,819 7,107,187 Cash in hand 56,902 38,492 22,049,721 7,145,679 Less compulsory minimum reserve (note 9) (550,779) (6,509)| 21,498,942 7,139,170

The compulsory minimum reserve balance is maintained in accordance with the requirements of the National Bank of Slovakia and is not available for day-to-day use.

At 31 December 2008, the fair value of NBS treasury bills accepted as collateral in repurchase agreements was Sk 9,984,133 thousand (2007: Sk 4,975,585 thousand).

8. Trading assets and liabilities 2008 2007

Sk ‘000 Sk ‘000

Trading assets Debt securities (a) 25,219 990,145 Derivative instruments (b) 2,262,449 3,077,557 2,287,668 4,067,702 Trading liabilities Derivative instruments (b) 1,695,032 2,944,474 (a) Debt securities 2008 2007 Sk ‘000 Sk ‘000 Slovak government bonds 25,219 990,145


53 53

8. Trading assets and liabilities continued (b) Derivative instruments Contract/

notional 2008

Fair value Contract/

notional 2007

Fair value amount Assets Liabilities amount Assets Liabilities Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Currency derivatives Forward exchange

contracts 13,224,344 114,123 313,105 11,630,547 89,142 694,801 Currency and cross-

currency swaps 71,911,984 1,909,737 1,143,338 83,870,297 2,401,790 1,663,048 Options 3,457,447 79,997 79,997 65,528,347 528,222 528,222 Interest rate

derivatives Interest rate swaps 12,205,003 158,583 158,583 13,097,895 58,070 58,070 Interest rate options 166,250 9 9 821,250 333 333 100,965,028 2,262,449 1,695,032 174,948,336 3,077,557 2,944,474 9. Loans and advances to banks 2008 2007 Sk ‘000 Sk ‘000

Repayable on demand 446,480 100,885 Other loans and advances by contractual maturity: - 3 months or less 4,001 1,803,718 - over 3 month 27,365 3,579 Compulsory minimum reserve (note 7) 550,779 6,509 1,028,625 1,914,691 Less amounts with contractual maturity up to 3 months (note 6) (450,481) (1,904,603)| 578,144 10,088


54 54

10. Loans and advances to customers 2008 2007 Sk ‘000 Sk ‘000

Repayable on demand 5,251,601 5,607,294 Other loans and advances to customers by contractual maturity: - 3 months or less 2,082,732 2,531,992 - 1 year or less but over 3 months 2,994,008 3,269,912 - 5 years or less but over 1 year 2,473,388 3,579,332 - over 5 years 1,787,383 2,062,317

14,589,112 17,050,847 Allowances for impairment (note 11) (271,338) (49,152) 14,317,774 17,001,695 The exposure to the various business segments of loans and advances to customers according to main product types is as follows:

31 December 2008 31 December 2007

Gross

amount Impairment

allowance Carrying

amount Gross

amount Impairment

allowance Carrying

amount Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Retail customers Personal loans 376,005 (11,115) 364,890 587,743 (8,076) 579,667 Staff loans 126,664 - 126,664 147,469 - 147,469 Credit cards 2,911 - 2,911 4,650 - 4,650 Corporate customers Large 11,090,390 (100,684) 10,989,706 13,030,409 - 13,030,409 Small business 2,993,142 (159,539) 2,833,603 3,280,576 (41,076) 3,239,500

14,589,112 (271,338) 14,317,774 17,050,847 (49,152) 17,001,695


55 55

11. Impairment losses on loans and advances The movements on impairment losses on loans and advances to customers were as follows: 2008 2007 Sk ‘000 Sk ‘000 Specific allowances for impairment: At 1 January 41,076 1,867 Charge for the year 118,463 39,209 At 31 December 159,539 41,076 Collective allowances for impairment: At 1 January 8,076 8,409 Charge for the year 103,723 (333) At 31 December 111,799 8,076 Total allowances for impairment 271,338 49,152 2008 2007 Sk ‘000 Sk ‘000 Charge for the year (222,186) (38,876) Expenses related to transfer of receivables (58,751) (26,112)Income related to transfer of receivables 8,176 9,153 (50,575) (16,959) (272,761) (55,835) 12. Investment securities 2008 2007 Sk ‘000 Sk ‘000

Debt securities available for sale (a) 3,031,614 3,062,577 Equity shares available for sale (b) 2,959 - 3,034,573 3,062,577 (a) Debt securities available for sale 2008 2007 Sk ‘000 Sk ‘000

Slovak government securities 3,031,614 3,062,577


56 56

12. Investment securities continued Slovak government bonds totalling Sk 327,396 thousand were provided as collateral to the National Bank of Slovakia for euro currency delivery as at 31 December 2008. The total amount of the euro delivery was repaid in three equal installments ending on 4 February 2009, on which date the collateral was returned. (b) Equity shares available for sale 2008 2007 Name Activity Sk ‘000 Sk ‘000 RVS, a.s. Conference and leisure 3,010 3,010 VISA, Inc. Financial services 2,959 -

5,969 3,010 Specific allowance for impairment (3,010) (3,010) 2,959 - The Bank holds 1.29% (2007: 1.29%) share in RVS, a.s. - a company registered in the Slovak Republic. In 2007, a full impairment loss was recognised for the investment in RVS. In October 2008, the Bank received 2,682 shares of VISA Incorporated. The Bank’s share on registered capital of VISA Inc. is less than 1%. The company is incorporated in the UK. The movements on available-for-sale securities during the year were as follows:

2008 2007 Sk ‘000 Sk ‘000 As at 1 January 3,062,577 2,119,306

Additions 283,949 1,641,852 Disposals (310,206) (683,157)Losses from changes in fair value (note 24) (1,747) (12,414)Specific allowance for impairment - (3,010)

As at 31 December 3,034,573 3,062,577 The movements on specific allowances for impairment on investment securities were as follows:

2008 2007 Sk ‘000 Sk ‘000 As at 1 January 3,010 - Charge for the year - 3,010 As at 31 December 3,010 3,010


57 57

13. Property and equipment

At 31 December 2007 and 2008, no assets were held under finance leases. The Bank’s property is not pledged. The Bank’s leasehold improvements and equipment are insured against fire, burglary, floods and storms for the replacement value as at 31 December of the preceding period. The Bank has motor hull and compulsory motor car insurance.

Leasehold improve-

ments Sk ‘000

Furniture, fittings

and equipment

Sk ‘000

Motor vehicles Sk ‘000

Software Sk ‘000

Assets not yet in use

Sk ‘000 Total

Sk ‘000 Cost At 1 January 2007 35,309 183,206 48,878 38,563 1,407 307,363 Additions 904 4,102 9,082 335 15,347 29,770 Disposals - (16,440) (5,387) - (14,423) (36,250)

At 31 December 2007 36,213 170,868 52,573 38,898 2,331 300,883

At 1 January 2008 36,213 170,868 52,573 38,898 2,331 300,883 Additions 574 1,251 4,050 1,623 8,969 16,467 Disposals (15,000) (12,921) (13,573) - (7,498) (48,992)

At 31 December 2008 21,787 159 198 43,050 40,521 3,802 268,358

Depreciation and impairment losses

At 1 January 2007 11,537 135,726 16,791 30,411 - 194,465 Charge for the year 3,582 16,105 13,025 4,297 - 37,009 Disposals - (16,435) (2,646) - - (19,081)

At 31 December 2007 15,119 135,396 27,170 34,708 - 212,393

At 1 January 2008 15,119 135,396 27,170 34,708 - 212,393 Charge for the year 3,009 12,877 12,010 2,614 - 30,510 Disposals (8,732) (11,244) (11,349) - - (31,325)

At 31 December 2008 9,396 137,029 27,831 37,322 - 211,578

Net book value:

At 31 December 2008 12,391 22,169 15,219 3,199 3,802 56,780

At 31 December 2007 21,094 35,472 25,403 4,190 2,331 88,490


58 58

14. Other assets 2008 2007 Sk ‘000 Sk ‘000 Prepaid expenses 9,225 10,938 Other 27,448 59,282

36,673 70,220 15. Deposits by banks 2008 2007 Sk ‘000 Sk ‘000

Repayable on demand 3,016,897 837,060 Other deposits by banks with contractual maturity: - 3 months or less 4,193,189 210,340 - 5 years or less but over 1 year 1,966,685 2,194,521 9,176,771 3,241,921 16. Customer accounts 2008 2007 Sk ‘000 Sk ‘000

Repayable on demand 19,561,857 17,246,935 Other deposits with agreed maturity dates or periods of notice, by contractual maturity:

- 3 months or less 6,243,819 4,707,384 - 1 year or less but over 3 months 20,233 50,192 25,825,909 22,004,511 17. Loans received 2008 2007 Sk ‘000 Sk ‘000

Exportno-importná banka SR, a.s. - 210,326


59 59

18. Subordinated debt 2008 2007 Sk ‘000 Sk ‘000

Citigroup Netherlands B.V. 1,137,446 1,269,361 The subordinated loan was provided under a contract entered into on 9 November 2005. The loan is denominated in Euro and principal debt amounts to EUR 37,600 thousand. The interest rate was set as three-month EURIBOR plus 0.5% p.a. The original debt’s tenor is 10 years. In case of bankruptcy or similar the Bank is obliged to repay the debt with related interest after settling all other creditors’ claims. 19. Corporate income tax 2008) 2007) Sk ‘000) Sk ‘000)

Tax payable for the current period (note 31) 190,993 128,697 Tax prepayments (128,681) (109,428) Corporate income tax payable 62,312 19,269 20. Provisions The movements on provisions were as follows: Restruc-

turing Sk ‘000

Other

Sk ‘000

Total

Sk ‘000 At 1 January 2007 3,660

1,682 5,342

Increase for the year - 1,524 1,524 At 31 December 2007 3,660

3,206 6,866

At 1 January 2008 3,660 3,206 6,866 Created through ‘Employee costs’ 7,620 - 7,620 Decrease for the year - (1,515) (1,515) At 31 December 2008 11,280

1,691 12,971

Restructuring The provision mainly relates to redundancy expenses for CitiFinancial personnel.


60 60

21. Other liabilities 2008 2007 Sk ‘000 Sk ‘000 Items in course of settlement 782,268 338,430 Expense accruals 69,059 90,049 Social fund 120 109 Other 76,832 159,947

928,279 588,535 The movements on the Social fund were as follows: 2008 2007 Sk ‘000 Sk ‘000 At 1 January 109 79 Creation 3,561 3,900 Drawings (3,550) (3,870) At 31 December 120 109 22. Share capital

2008 Sk ‘000

2007 Sk ‘000

Authorised, issued and fully paid:

1,650,000 ordinary shares of Sk 1,000 each 1,650,000 1,650,000 The holder of ordinary shares was entitled to receive dividends as declared from time to time and was entitled to one vote per share at general meetings of the Bank. 23. Reserves

Retained) earnings) Sk ‘000)

Legal) reserve)

fund) Sk ‘000)

Reval-) uation)

reserve) Sk ‘000)

Total) Sk‘000)

At 1 January 2008 1,071,822 330,000 1,960 1,403,782 Net loss on available-for- sale assets, net of tax (c) - - (1,415) (1,415) Profit for 2008 (d) 407,806 - - 407,806 At 31 December 2008 1,479,628 330,000 545 1,810,173


61 61

23. Reserves continued (a) Dividends During 2008 no dividend was paid from the profit for the year ended 31 December 2007. (b) Legal reserve fund There was no transfer to legal reserve fund during the year 2008. Under the Slovak Commercial Code, all companies are required to maintain a legal reserve fund to cover future adverse financial conditions. The Bank is obliged to contribute an amount to the fund each year, which is not less than 10% of its annual net profit until the aggregate amount reaches a minimum level equal to 20% of the issued share capital. The legal reserve fund is not distributable to the shareholder. (c) Revaluation reserve The revaluation reserve includes the cumulative net change in the fair value of available-for-sale investment securities until the investment is derecognised or impaired. (d) Proposed allocation of profit The Management will propose to transfer the profit for the year ended 31 December 2008 of Sk 407,806 to retained earnings. 24. Off balance sheet items 2008

Sk ‘000 2007

Sk ‘000 Contingent liabilities: Guarantees 3,716,468 3,724,438 Irrevocable letters of credit 36,400 162,687 Commitments: Committed unused lines 2,343,519 2,685,600 Uncommitted unused lines 21,524,399 23,849,453 Derivative instruments: Trading assets and liabilities (note 8) 100,965,028 174,948,336

128,585,814 205,370,514 25. Deferred tax Deferred tax assets and liabilities are attributable to the following: Assets/

(liabilities) Assets/

(liabilities) 2008

Sk ‘000 2007

Sk ‘000 Write-off of loans 2,765 2,190 Property and equipment (2,231) (1,439)Allowances for impairment on loans and advances 30,311 (6,533)Revaluation of available-for-sale securities (127) (460)Items tax deductible upon remittance 6,819 - Other 321 742

37,858 (5,500)


62 62

25. Deferred tax continued The deferred tax assets and liabilities have been calculated using a corporate income tax rate of 19% (2007: 19%). The movements on deferred tax were as follows: 2008 2007 Sk ‘000 Sk ‘000 Deferred tax: Charge to income statement (note 31) 43,025 8,269 Charge to equity 333 2,359

43,358 10,628 26. Interest income 2008

Sk ‘000 2007

Sk ‘000 Loans and advances to banks 418,801 583,772 Loans and advances to customers 957,040 951,253 Investment securities 154,408 94,759 1,530,249 1,629,784 Interest income for the year ended 31 December 2008 includes interest of Sk 19,202 thousand accrued on impaired financial assets (2007: Sk 5,675 thousand). 27. Interest expense 2008

Sk ‘000 2007

Sk ‘000 Deposits by banks 183,354 144,964 Customer accounts 561,774 746,550 Loans received 2,959 3,833 Subordinated debt 61,679 60,165 809,766 955,512


63 63

28. Net fee and commission income 2008 2007

Fee and commission income: Sk ‘000 Sk ‘000

Payment services income 195,968 155,920 Corporate banking credit related fees 8,943 22,523 Retail banking customer fees 13,355 14,509 Guarantee and letter of credit contracts issued 37,206 38,302 Other 2,949 5,428 Total fee and commission income 258,421 236,682 Fee and commission expense: Payment services (110,392) (89,306)Inter bank transaction fees (4,952) (4,772)Brokerage (5,852) (5,485)Other (16,319) (21,922) Total fee and commission expense (137,515) (121,485) Net fee and commission income 120,906

115,197

Net fee and commission income above excludes amounts included in determining the effective interest rate on financial assets and liabilities that are not at fair value through profit or loss but includes income of Sk 32,276 thousand (2007: Sk 44,985 thousand) and expense of Sk 12,110 thousand (2007: Sk 11,174) relating to such financial assets and liabilities. 29. Net trading income 2008

Sk ‘000 2007

Sk ‘000 Net income from foreign exchange operations 392,735 978,475 Net income from derivative instruments Net income/(loss) relating to currency derivatives 165,072 (578,864) Net income from options 37,211 133,659 Net income from trading with securities 8,376 20,489 603,394 553,759


64 64

30. Administrative expenses 2008

Sk ‘000 2007

Sk ‘000 Employee costs: Wages and salaries 228,272 296,379 Social insurance 39,570 43,465 Restructuring 7,620 - Other 18,205 23,178

293,667 363,022 Operating lease rentals 24,975 29,076 Audit of statutory financial statements (including regulatory assurance services) 3,732

3,958

Other operating expenses 281,569 303,813

603,943 699,869 At 31 December 2008, the average number of employees was 170 (2007: 238). The Bank granted shares of Citibank N.A., New York within the Capital Accumulation Program (‘CAPs’) to certain employees that entitle these employees to obtaining the shares of Citibank N.A., New York. There were 32,640 CAPs granted as at 31 December 2008 (2007: 32,662) with 4 years vesting period. The amount of CAPs being charged to income statement during 2008 amounts to Sk 241 thousand (2007: Sk 9,273 thousand) and is included in the ‘Wages and salaries’ line. 31. Income tax expense

2008 2007

Income tax recognised in the income statement: Sk ‘000 Sk ‘000

Current tax expense Current year (note 19) (190,993) (128,697)Adjustments in respect of prior years (76) (623) (191,069)

(129,320)

Deferred tax expense Origination and reversal of temporary differences (note 25) 43,025 8,269 Total income tax expense (148,044) (121,051)


65 65

31. Income tax expense continued The effective tax rate was calculated as follows: Tax at Tax at Tax base 19% Tax base 19% 2008 2008 2007 2007 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Profit before taxation 555,850 105,612 568,665 108,046 Tax non-deductible expenses Severance payments 20,759 3,944 6,234 1,185 Capital Accumulation Program related

expenses 7,284 1,384 26,630 5,059 Marketing related expenses 82 16 3,688 701 Loans write-off 61,852 11,752 26,051 4,950 Taxation of 2003 loan impairment allowance - - 34,386 6,532 Difference between accounting and tax

depreciation 5,791 1,100 3,920 745 Loan impairment allowances 100,684 19,129 - - Other 44,486 8,452 332 63 Non-taxable income Tax adjustments due to IFRS adoption (4,083) (776) (7,618) (1,447) Provisions - - (1,775) (337) Recoveries from written-off loans (8,176) (1,553) (9,153) (1,739) Other (5,750) (1,092) (17,531) (3,330) 147,968 120,428Underprovision in respect of previous year 76 623 Total tax expense 148,044 121,051 Effective tax rate 26.63% 22.74%


66 66

32. Profit before changes in operating assets and liabilities 2008

Sk ‘000 2007

Sk ‘000 Profit before taxation 555,850 568,665 Adjustments for non-cash items: Depreciation 30,510 37,009 Gain on disposal of property and equipment (3,618) (195) Interest income (1,530,249) (1,629,784) Interest received 1,526,195 1,590,468 Interest expense 809,766 955,512 Interest paid (811,134) (962,873) Impairment losses on loans and advances 272,761 55,835 Impairment losses on investment securities - 3,010 Provisions 6,105 1,524

856,186 619,171 33. Lease commitments 2008

Sk ‘000 2007

Sk ‘000 Less than one year 21,058 27,925 Between one to five years 94,262 105,251 More than five years 7,742 27,930 Non-cancellable commitments under operating leases 123,062 161,106 The Bank leases its business premises under operating leases. 34. Related party transactions In the normal course of business, the Bank is engaged in transactions with other members of Citigroup. These transactions, which include the taking and placing of deposits, foreign currency operations and the provision of management and technology services, are conducted on an arm’s length basis.


67 67

34. Related party transactions continued (a) Enterprises related to the shareholder 2008)

Sk ‘000) 2007

Sk ‘000 Assets Cash and cash equivalents 403,250 32,061 Trading assets 1,955,133 2,557,006 Other assets 1,179 1,284 Liabilities Trading liabilities 1,040,905 1,648,639 Deposits by banks 8,707,250 3,003,858 Subordinated debt 1,137,446 1,269,361 Other liabilities 1,498 11,697 Transactions during the year were as follows: Interest income 21,192 25,037 Interest expense (226,278) (177,923)Fee and commission income 15,110 13,460 Fee and commission expense (40,802) (52,864)Net trading income 1,920,775 8,360,524 Other operating income 14,518 19,311 Administrative expenses (118,919) (108,875) (b) Key management personnel Amounts due from and to directors, senior management or close relatives or companies in which they have a substantial interest, of the Bank were as follows: 2008

Sk ‘000 2007

Sk ‘000 (i) Board of Directors Assets Loans and advances to customers - 2,170 Liabilities Customer accounts 19,126 32,705 Other liabilities (CAPs) 2,166 3,360 Transactions during the year were as follows: Interest income 28 58 Interest expense 1,124 1,206


68 68

34. Related party transactions continued (b) Key management personnel continued

2008 Sk ‘000

2007 Sk ‘000

(ii) Supervisory Board Assets Loans and advances to customers 638 568 Liabilities Customer accounts 215 4 Other liabilities (CAPs) 99 - Transactions during the year were as follows: Interest income 28 58 Interest expense 2 1 (iii) Senior management Liabilities Customer accounts 5,302 871 Other liabilities (CAPs) 173 505 Transactions during the year were as follows: Interest income 245 128 Interest is charged on loans and advances at more favourable rates than current market rates. The loans are primarily secured by promissory notes. During the period, the Bank did not record impairment losses for loans and advances provided to related parties and no specific allowances have been made for impairment losses to related parties. Key management personnel compensation for the period comprised:

2008 Sk ‘000

2007 Sk ‘000

(i) Board of Directors Employee benefits Wages and salaries 12,880 26,988 Other liabilities (CAPs) 1,781 1,314 (ii) Supervisory Board Employee benefits Wages and salaries 3,948 4,122 Other liabilities (CAPs) 108 - (iii) Senior management Employee benefits Wages and salaries 4,823 4,838 Other liabilities (CAPs) 117 193


69

35. Custodial services The Bank administers securities and other valuables totalling Sk 4,328 million (2007: Sk 6,853 million), which have been received from customers into the Bank’s custody. 36. Fair values Fair value is the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The estimated fair values of the Bank’s financial assets and liabilities at year end were as follows: Carrying

value Fair

value Carrying

value Fair

value 2008

Sk ‘000 2008

Sk ‘000 2007

Sk ‘000 2007

Sk ‘000 Financial assets Cash and cash

equivalents 21,949,423 21,949,423

9,043,773 9,043,773 Trading assets 2,287,668 2,287,668 4,067,702 4,067,702 Loans and advances

to banks 578,144 578,144

10,088 10,088 Loans and advances

to customers 14,317,774 14,299,780

17,001,695 16,938,643 Investment securities 3,034,573 3,034,573 3,062,577 3,062,577 Financial liabilities

Trading liabilities 1,695,032 1,695,032 2,944,474 2,944,474 Deposits by banks 9,176,771 9,176,771 3,241,921 3,241,921 Customer accounts 25,825,909 25,825,909 22,004,511 22,004,511 Loans received - - 210,326 206,671 Subordinated debt 1,137,446 1,137,446 1,269,361 1,269,321 The following methods and assumptions were used in estimating the fair values of the Bank’s financial assets and liabilities: Trading assets The fair values of trading assets are calculated using quoted market prices or theoretical prices determined by discounting future cash flows by reference to the relevant interest rate for the maturity period. Loans and advances to banks The fair value of current accounts with other banks approximates to book value. For amounts with a remaining maturity of less than three months, it is also reasonable to use book value as an approximation of fair value. Loans and advances to customers Loans and advances are stated net of impairment losses. For loans and advances to customers with a remaining maturity of less than three months, it is reasonable to use book value as an approximation of fair value. The fair values of other loans and advances to customers are calculated by discounting the future cash flows using current market rates.


70 70

36. Fair values continued Investment securities Investment securities are stated at quoted market prices. Trading liabilities The fair values of trading liabilities are calculated using quoted market prices or theoretical prices determined by discounting future cash flows by reference to the relevant interest rate for the maturity period. Deposits by banks The fair value of current accounts with other banks approximates to book value. For other amounts owed to banks with a remaining maturity or repricing period of less than three months, it is also reasonable to use book value as an approximation of fair value. Deposits with remaining maturity above three months are being repriced usually on quarterly basis and therefore their fair value approximates their carrying amount. Customer accounts The fair values of current accounts and term deposits with a remaining maturity of less than three months approximate their carrying amounts. Loans received The fair values of loans received with a remaining maturity of less than three months approximate their carrying amounts. The fair values of other loans received are calculated by discounting the future cash flows using current market rates. Subordinated debt The fair value of subordinated debt approximates to book value as the debt is being repriced on quarterly basis (3-month EUR LIBOR). 37. Subsequent events Change of the Bank to a branch of a foreign bank Effective 1 January 2009, the Bank became a branch of Citibank Europe plc, based in Ireland, when its legal status was changed from joint stock company to branch of a foreign bank. The branch conversion was implemented in the form of a cross-border merger, and was approved by both, the Irish and Slovak financial regulators. The name of the new entity is Citibank Europe plc, pobočka zahraničnej banky. Euro conversion On 1 January 2009, the Slovak Republic became part of the Eurozone and the Slovak crown was replaced by the euro (€). Consequently, beginning on this date, the Bank has converted its accounting records to euro, and the financial statements for 2009 and subsequent years will also be presented in euro. Comparative data will be recalculated using the conversion exchange rate of 30.1260 Sk/€.

Citibank (Slovakia) a.s. www.citibank.sk BRATISLAVA Mlynské nivy 43, 825 01 Bratislava © 2009 Citibank (Slovakia) a.s.

Documents

ANNUAL REPORT 2008 - Banking with Citi | Citi.com ended 31 December 2008 (English translation) Citibank (Slovakia) a.s. Balance sheet at 31 December 2008 10 2008 2007 Notes Sk ‘000