1 1

ANNUALREPORT

2010

Annual Report

2010

6 Whoweareandwhatwedo

8 Introduction

9 Fiveyearsummaryandfinancialhighlights

10 ReportfromthePresidentoftheSupervisory Board

13 ManagementBoardreportoftheStatus oftheBank

17 ManagementBoardreportoftheStatusofthe Bank’ssubsidiariesandfinancialhighlights oftheGroup

22 ReviewoftheCroatianeconomyin2009

32 Organisationalchart

34 BusinessdescriptionoftheBank

42 TheGroup

48 OverviewofActivitiesinPBZ’sSocial ResponsibilityProgram

52 Corporategovernance

53 Statementontheimplementation oftheCodeofCorporateGovernance atPrivrednaBankZagreb 64 Statementofresponsibilitiesofthe ManagementBoard

65 Independentauditors’report

68 FinancialstatementsfortheBankand theGroup

75 Accountingpolicies

85 NotestotheBankandtheGroupfinancial statements

148 Appendix1-Supplementaryformsrequired bylocalregulation

161 Appendix2:Supplementaryfinancialstatements inEUR(unaudited)

Tableofcontents

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2010

Whoweareandwhatwedo

*Comprisescustomersdeposits,assetsundermanagementandincustody

WearetheleadingCroatianfinancialservicesGroupengagedinretailandcorporatebanking,creditcards,investmentbanking,assetmanagement,privatebanking,leasingandrealestateactivitiesandinvestmentmanagementservices.WeoperateinentireareaofCroatiaandemployover4thousandpeople.Ourmissionistomakeapermanentandeffectiveuseofallresourcesatourdisposaltocontinuouslyimproveallaspectsofourbusinessactivities,includinghumanresources,thetechnologyandthebusinessprocesses.Ourvisionistobethemodelcompanyandthecentreofexcellenceincreatingnewvalues,aswellasinprovidinghigh-qualityserviceinallofouractivitiestothebenefitofourclients,thecommunity,ourstakeholdersandemployees.

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2010

1,554thousandTOTALCUSTOMERS

HRK2.6billionASSETSUNDERMANAGEMENT

220TOTALBRANCHES

698thousandCURRENTACCOUNTS

HRK63.8billionTOTALCUSTOMERFUNDS*

296thousandINTERNETBANKINGUSERS

643ATMMACHINES

HRK10.4billionTOTALHOUSINGLOANS

23,797EFTPOS

HRK51.3billionTOTALCUSTOMERLOANS

2,222thousandTOTALCARDS ISSUED

94DAYANDNIGHTVAULTS

TheManagementBoardofPrivrednaban-kaZagrebd.d.hasthepleasureofpresen-tingitsAnnualreporttotheshareholdersoftheBank.Thiscomprisessummaryfinancialinformation,managementrevi-ews,theauditedfinancialstatementsandaccompanyingauditreport,supplementaryformsrequiredbylocalregulationanduna-uditedsupplementarystatementsinEUR.AuditedfinancialstatementsarepresentedfortheBankandtheGroup.

Croatian and English versionThisdocumentcomprisestheAnnualRe-portofPrivrednabankaZagrebd.d.fortheyearended31December2010expressedinEnglish.ThisreportisalsopublishedinCroatianforpresentationtoshareholdersattheAnnualGeneralMeeting.

Introduction

Legal statusTheAnnualReportincludestheannualfinancialstatementspreparedinaccordan-cewithInternationalFinancialReportingStandardsandauditedinaccordancewithInternationalStandardsonAuditing.TheAnnualReportispreparedinaccordan-cewiththeprovisionsoftheCompaniesActandtheAccountingLaw,whichrequiretheManagementBoardtoreporttosha-reholdersofthecompanyattheAnnualGeneralMeeting.

AbbreviationsInthisAnnualReport,PrivrednabankaZagrebd.d.isreferredtoas“theBank”or“PBZ”oras“PrivrednabankaZagreb”,andPrivrednabankaZagrebd.d.,togetherwithitssubsidiaryundertakingsarereferredtocollectivelyas“theGroup”or“thePrivred-nabankaZagrebGroup”.Thecentralbank,theCroatianNationalBank,isreferredtoas“theCNB”.TheEuropeanBankforReconstructionandDevelopmentisreferredtoas“EBRD”.Inthisreport,theabbreviations“HRKthousand”,“HRKmillion”,“USDthou-sand”,“USDmillion”and“EURthousand”or“EURmillion”representthousandsandmillionsofCroatiankunas,USdollarsandEurosrespectively.

Exchange ratesThefollowingmidexchangeratessetbytheCNBrulingon31December2010havebeenusedtotranslatebalancesinforeigncurrencyonthatdate:

CHF1 = HRK5.929961USD1 = HRK5.568252EUR1 = HRK7.385173

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2010Fiveyearsummaryandfinancialhighlights(inHRKmilion)

Group 2010 2009 2008 2007 2006

Income statement and statement of financial position

Totalgrossrevenue 5,356 5,888 6,001 5,350 4,519

Netinterestincome 2,200 2,060 2,185 1,918 1,714

Netoperatingincome 3,555 3,607 3,697 3,405 3,039

Netprofitfortheyear 1,022 960 1,242 1,141 963

Totalassets 74,409 71,541 71,227 67,550 61,974

Loansandadvancestocustomers 49,403 47,356 46,032 40,147 36,910

Duetocustomers 47,054 45,049 44,591 43,099 36,843

Shareholders’equity 11,334 10,600 9,611 8,503 7,625

Otherdata(aspermanagementaccounts)

Returnonaverageequity 9.38% 10.09% 14.84% 15.45% 18.79%

Returnonaverageassets 1.35% 1.29% 1.71% 1.73% 1.72%

Assetsperemployee 18.3 17.2 15.7 15.3 14.8

Costincomeratio 47.45% 47.18% 49.78% 50.51% 50.96%

Bank 2010 2009 2008 2007 2006

Income statement and statement of financial position

Totalgrossrevenue 4,365 4,921 4,851 4,263 3,652

Netinterestincome 1,962 1,799 1,941 1,697 1,535

Netoperatingincome 2,789 2,800 2,774 2,474 2,270

Netprofitfortheyear 860 927 1,100 932 847

Totalassets 67,352 64,519 63,740 61,974 55,906

Loansandadvancestocustomers 44,563 42,271 41,715 36,436 33,572

Duetocustomers 43,602 41,903 40,935 39,875 33,491

Shareholders’equity 10,346 9,802 8,870 7,847 7,114

Otherdata(aspermanagementaccounts)

Returnonaverageequity 8.61% 10.45% 13.94% 13.35% 17.28%

Returnonaverageassets 1.28% 1.41% 1.69% 1.56% 1.66%

Assetsperemployee 19.4 18.1 17.1 17.1 16.2

Costincomeratio 46.02% 44.49% 46.79% 48.90% 48.79%

Moreover,asofMarch2010,creditinstitu-tionsinCroatiaarestipulatedtomeetaddi-tionalprescribedliquidityratioscalculatedbasedonexpectedinflowsandoutflowsofliquidfundsasperdifferentmaturitybucketsfordomesticaswellasforforeigncurrencies.IampleasedtoannouncethatPBZ,togetherwithMeimurskabankaandPBZStambenaštedionicahasbeenwelloverminimumliquiditycoefficientsincetheimplementationofthisregulatorymeasure.Inthatcontext,IamcompelledtosaythatthePBZGroupmaintainsacomfortablestructuralliquidityposition,owingtoitswideandstablecustomerdepositbase,anappropriatesourcesofthelong-termfunding,anditsshareholders’equity.Irrespectiveofthechallengingenvi-ronment,thePBZGroupmanagedtoachievepositiveresultsin2010.Wecanbetrulyproudonthestrengthandresiliencywehaveproveninsuchcircumstances.Wesucceededinmeetingourgoalsandincrea-singthevalueofourbank.TotalgrossrevenueforPBZGroupexcee-dedHRK5.3billion.ConsolidatednetoperatingincomeamountedtoHRK3.6billionwhilstanetprofitrecordedHRK1.02billion.Ourcost/incomeratio,akeymeasureofourefficiency,againclosedbelow50percent,whiletheROAEreached9.38percent.Thesearesatisfactoryfiguressincetheyrepresentaconsistentlystrongperformanceoverthelastfiveyears.In2010,thePBZGrouphasfurtherreinforceditspositionasoneofCroatia’sforemostbanksintermsofproductivity,returnsandvaluecreationforitssharehol-ders.Wearethesecondlargestgroupinthecountrywithstrongcustomerbaseofover1.5million,withover698thousandcurrentaccountsand220branches.AsIhavebeenreportinginmypastannualletterswithinthisReportconcerningthedevelopmentsandprogressesachievedinrelationtotheCroatianaccessiontotheEuropeanUnion,therecentnewsindi-catethatCroatiamaypossiblyconcludemembershipnegotiationsduring2011.Thiswouldcertainlyallowafullaccession

ReportfromthePresidentoftheSupervisoryBoard

OnbehalfoftheSupervisoryBoardofPrivrednabankaZagreb,itismyhonourtopresentthebusinessresultsoftheBankandtheGroupfor2010.ItwasasolidyearforPrivrednabankaZagrebanditsGroupintermsoffinancialresults.Wedemon-stratedthatwehaveasustainablebusinesswhichshowsresponsibilitytoshareholders,employees,customersandsocietyatlarge.Ontheglobalfront,followingturbulentperiodsin2008and2009resultingindeepcontractionsintheworldeconomy,2010sawaloweringofuncertaintyandprogressivelymorestabilisedmarketsandinvestmentclimate.Asaconsequence,globalGDPincreasedby5.0percent(asestimatedbytheInternationalMonetaryFund)andtheworldtradingvolumeretur-nedtonormallevels.However,therecentcrisisleftastrongimpactontheCroatianeconomywhichexperiencedthenegativegrowthforthesecondconsecutiveyear.GDPisestimatedtohaveshrunkby1.4percentduring2010,whichrepresentsaslowingofcontractionsince2009whenGDPcontractedby5.8percent.Forecastgrowthfor2011isamodest1.4percent.Growthwasmainlynegativeduetoaweakconsumption,whichwasaffectedbytheerosioninpurchasingpowergiventhepriceincreasesandtotheworseningoffinancialconditionsingeneral.Furthermo-re,constructionindustry,secondimportantcontributortotheGDPregistereddeclinewhilstretailtradeandindustrialproductionhavestalled.Onthepositiveside,tradeexport,althoughstilllowerthanimport,hasincreasedby18.2percentcomparedto2009,whereastouristactivity,obser-vedthroughanumberofovernightstays,showedagrowthof3.2percent.Notwithstandingtheharshmacroeconomicconditionsinthecountry,monetarypolicyremainedmostlyunchangedthroughout2010.TheonlynotablechangemadebytheCroatianNationalBankwasevidencedbyfurthereasingoftheobligatoryreserveratefrom14percentto13percentwhereasforeignexchangeliquidityratiocontinuedtobefixedat20percent.

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assoonasalltheEUcountriesratifytheagreementonaccessionwithCroatia.Suchanoutcomewouldindeedbearewardandpraiseforallthelong-lastingeffortsoftheCroatianGovernmentssince2004whenthecountrywasgivenacandidatestatusforthemembership.Lookingahead,thefurthergrowthoftheglobaleconomyandthelikelyrecoveryofthedomesticmacroeconomicconditionssuggesttheenvironmentin2011inCroatiatobemorefavourablethanin2010,albeiteverythingpointstoalongertimeneededtoreachapaceofgrowthsimilartothatbeforethecrisis.Therefore,weexpectthemarketsinwhichweoperatetoremainca-utiousforsometime.Accordingly,aconti-nuedfocusbymanagementandtheBoardonmanagingassetquality,enhancingandstrengtheningtheBank’sliquidityaswellasanactivemonitoringofoperatingcostswillbecrucial.OurfutureatPrivrednabankaZagreb,asintheentirePBZGroup,dependsondevelo-pingourbusinessforthebenefitofeveryo-ne:clients,investors,employeesandotherstakeholders.Wehighlyregardinterestsofourshareholders,customersandcommuni-tywearepartof.Ourcustomerserviceandabilitytoprovideeffectiveandefficientservicewillhelpusmeettheneedsofourretail,SMEandlargecorporatecustomers.ThemanagementofPrivrednabankaZa-grebenjoysfullconfidenceofthesharehol-ders.OnbehalfoftheSupervisoryBoard,Iwouldliketothankthemfortheirstrongleadershipandoutstandingperformance.IwouldalsoliketoexpressmygratitudeandappreciationtoallemployeesoftheGroupfortheircommitmentandvaluedcontri-bution.Finally,IwanttoexpressmygreatappreciationoftheworkofmyformerandnewcolleaguesontheSupervisoryBoard,aswellasoftheAuditCommitteemem-bers,fortheirwisecounselandcontribu-tion.

Report on the performed supervision in the year 2010In2010theSupervisoryBoardoftheBankperformeditsdutiesinconformitywiththelaw,theArticlesofAssociationoftheBankaswellastheRulesofProcedureoftheSupervisoryBoardoftheBank.Duringtheyear2010,theSupervisoryBoardheldregularfourmeetingsandtenmeetingsbyletterinordertomakeasquicklyaspossiblethedecisionsontheissuesthathadtoberesolvedwithoutde-lay.Forthepurposeofpreparationofthedecisionsthatfallwithinitscompetenceandsupervisionoftheimplementationofalreadyadopteddecisions,theSupervisoryBoardoftheBankwasprovidedwiththeassistanceoftheExecutiveCommitteeandtheAuditCommittee,whichregularlyreportedontheirworkatthemeetingsoftheSupervisoryBoard.In2010theAuditCommitteeheld4meetingsatwhichitmonitoredprocessesunderitsresponsibi-lity.Inconformitywithislegalobligation,theSupervisoryBoardoftheBankhasexami-nedtheAnnualfinancialstatementsandconsolidatedAnnualfinancialstatementsoftheBankfor2010,thereportontheoperationoftheBankanditssubsidiaries,anddraftdecisionontheallocationoftheBank’sprofitearnedin2010,thatwereallsubmittedtoitbytheManagementBoardoftheBank.TheSupervisoryBoardmadenoremarksonthereportssubmitted.Inthatrespect,theSupervisoryBoardestablishedthattheAnnualfinancialstate-mentsandtheconsolidatedAnnualfinanci-alstatementswerepreparedinaccordancewiththebalancesrecordedinthebusinessbooksandthattheyfairlydisclosedtheassetsandthefinancialconditionoftheBankandthePBZGroup,aswasconfirmedalsobytheexternalauditorErnst&Youngd.o.o.,Zagreb,whichauditedthefinancialstatementsfor2010.SincetheSupervisoryBoardhasgivenitsconsentregardingtheAnnualfinan-cialstatementsandconsolidatedAnnualfinancialstatementsoftheBankfor2010,

theafore-mentionedfinancialstatementsareconsideredasbeingconfirmedbytheManagementBoardandbytheSupervisoryBoardofPrivrednabankaZagrebpursu-anttotheprovisionsofArt.300.doftheCompaniesAct.TheSupervisoryBoardoftheBankacceptedthereportoftheManagementBoardontheoperationofPrivrednabankaZagrebanditssubsidiariesanditagreedthatHRK301,310,000.00oftheBank’snetprofittotallingHRK859,589,263.98,earnedintheyearendedon31December2010,shouldbedistributedbyapay-outofdividends(orHRK15.85pershare)whereastheremindershouldbeallocatedtoretainedearnings.

Respectfully,

18March2011Dr.GyörgySurányi

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2010ManagementBoardreportoftheStatusoftheBank

Consolidated financial results of the BankOurconsolidatednetprofitsfor2010amo-untedtoHRK1,022million,anincreaseof6.5percentcomparedto2009.Theresultachievedwasinfluencedbyhighernetinterestincomeandalsonetcommi-ssionandfees,whichgrewonsomewhatlargervolumesoftransactions,especiallypaymentsaswellascreditanddebitcards,butalsoduetohigherincomefrominves-tmentmanagementandconsultancyfees.Inadditiontothis,goodcostcontainmentaccompaniedwithlowercostoffundingcontributedtoanincreaseofnetprofitaftertax.Asaconsequence,earningspershareoftheGrouprosetoHRK53.8fromHRK50.5in2009.TheGroupreturnonaverageequityin2010was9.38percent,whilereturnonaverageassetswas1.35percent,bothindi-catorsatlevelssimilartoprioryear.AssetsperemployeeshowedconstantgrowthbyreachingHRK18.3million,whereasthecosttoincomeratio,onthebasisoftheconsolidatedfinancialstatements,remai-nedbelowthe50percentthreshold(47.5percent).ThebalancesheetofthePBZGroupincre-asedby4percentandamountedtoHRK74.4billion.Thisreflectsgrowthoftheloanportfolio,whichroseby4.3percentduetosteadyfinancingofsmallandmedi-um-sizedcompaniesbyvirtueofloans,fac-toringandleasingaswellasretailclientsbyextendingnewquantitiesofhousingloans.Ourloanportfolioiswelldiversifiedandalmostequallyspreadbetweenretailclientsononesideandcorporateandpublicentitiesontheother.

Dear shareholders,IampleasedtopresenttoyoutheAnnualreportandfinancialstatementsofthePrivrednabankaZagrebfortheyearended31December2010.ThisreportoutlinestheachievementsoftheBankandthePBZGroupin2010,thechallengeswefacedduringtheyearaswellasoutlookforthefuture.2010wasanotherdifficultyearfortheCroatianeconomyandthishascontinuedtoimpactnotjustthebankingindustryinthecountry,butalsoourcustomersandourclients.DespitesomewhatrelaxedmonetaryrequirementsaswellascertainstimulusprogrammesintroducedbytheCroatianGovernment,consumerandbusinessconfidencegenerallycontinuedtodeclinethroughouttheyear.Whilegeneralconditionsimprovedinternationally-suchastheoverallgrowthoftheworldGDPaswellaspickupincross-bordertradeandinvestment,especiallyintheEUcountri-es-theresultingimpactontheCroatianeconomyisstillbeingfelt.Inthischallengingenvironment,PrivrednabankaZagrebanditssubsidiariesachievedsoundresults.Iamparticularlyproudofthefactthatwedemonstratedstrengthandenduranceasconditionscontinuedtobetoughduringtheyear.Togetherwithourstrategicpartners,IntesaSanpaoloandtheEuropeanBankforReconstructionandDevelopment,thePBZGroupmain-taineditsstrongpositionanditsimageofaninnovativefinancialgroupcapableofofferingcomprehensive,first-classfinancialservices.

Growthinassetswassupportedbyanin-creaseincustomers’deposits,largelyretail.Totaldepositsin2010roseby4.5percent.Ifweconsiderthetotalstructureofthebalancesheet,customerdepositsaccountfor64.7percent.ThetotalloantodepositratiooftheBankequals102.2percentattheendof2010,whichoutlinesthestabili-tyandconservativenatureofourbusiness.Shareholders’equityamountstoHRK10.3billion,whichisanincreaseofmorethanHRK540millioncomparedto2009.Ourtotalcapitalratioattheendoftheyearstandsat18.87percentanddemonstratesthegoodfinancialstandingoftheBank.

Thegrowthofthebalancesheetwasma-inlyfinancedbythecustomers’deposits,mostlyretail.Inthatcontext,Iampleasedtoreportgainsinmarketsharesoftotalcu-stomers’depositsandparticularlydepositsofourfaithfulretailclients.Shareholders’equityincreasedby6.9percenttoHRK11.3billion,whichprovidesstableandsubstantialcushionforfutureactivities.Theseresultswereachievedinanenvi-ronmentmarkedbydifficultmacroeco-nomicandfinancialconditions.Inthesecircumstances,Iammorethanpleasedwithourperformancein2010.

Unconsolidated financial results of the BankIn2010,PBZBankrecordedanetprofitofHRK860million.Bothnetinterestincomeandnetcommissionincomeproducedincreasescomparedto2009butwereatsimilarlevelstothoserecordedin2008.Netinterestincomeincreasedmainlyduetoagoodcontainmentofcostoffunding,i.e.interestexpense,whereasnetcommi-ssionwasupduetohigherincomefrominvestmentmanagementandconsultancyfees,creditrelatedandothercustomerfeesaswellasnotablereductionofexpensesinpaymentservices.Onthecostsideoftheincomestatement,ouroperatingexpensesandothercostswerealsowellcontained.Throughcarefullymanagingcostsinlinewithourstrategicplanwewereabletomaintainourcosttoincomeratiowellbelow50percent(46.02percent).ThetotalbalancesheetoftheBankincreasedby4.4percenttoHRK67.4billion.Loansandreceivablescontributedthemosttothisincrease,risingmorethan5.4percentandthussurpassedHRK44.5billion.Inthisregard,keyareaofourfocuswassmallandmedium-sizedbusinessestowhomweplacedmorethanHRK3.3billionin2010.

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Briefly on the Bank’s subsidiariesAlmostallsubsidiariesorassociatesofthePBZBankin2010alsorecordedsoundfinancialresults.Inthatview,MeimurskabankaachievedanetprofitofHRK37.2million,PBZCard220.7million,PBZLeasingHRK21.8million,PBZStambenaštedionicaHRK15.2million,PBZInvestHRK8million,PBZNekretnine3.6million,whereasPBZCroatiaosiguranje,ourpensi-onfundmanagementcompany,earnedanetprofitofHRK26.2million.ISPCard,anassociatedcompanyestablishedin2009,endedtheyearwithanetlossofHRK16.3millionduetocontinuousinvestmentinitsnetworkanddevelopmentofthebusinessoperations.

OutlookWhilstthelong-termprospectsofCroati-aneconomyremainsolid,theoutlookfor2011persisttobechallenging.Conditionsremaindifficultbothinthefinancialmar-ketsandthewidereconomy,whichmakesfinancialplanningandforecastingdifficult.Theeconomicslowdownoflasttwoyearsimpactedallbusinesssegmentsweoperatein.Asaconsequence,westrengthenedourcapitalposition,maintainedliquidityandensuredthatwekeptsoundassetquality.For2011wehavefourpriorities:stayingclosetocustomersandclients,managingourrisks,adequatecostcontainmentandmaintainingstrategicpositiononthemarket.Weseefurthersynergiesinsharingrelati-onshipmanagementandsectorexpertiseacrossourbusinesssegments;retail,largecorporateandpublicinstitutions,smallandmedium-sizedbusinesses,andfinance.Successfulimplementationofthisstrategymayincreaserevenuegrowthpotentialinyearsahead.

ConclusionFinally,Iwouldliketotakethisopportunitytoexpressmygratitudetoallmycollea-gues,thenewandformermembersoftheManagementBoardandallemployeesofthePrivrednabankaZagrebGroupfortheirexcellentperformanceanddedicationin2010.Also,Iwouldliketothankourdistinguishedclientsandbusinesspartnersfortheirloyaltyandtrusttheyhaveplacedinus.IwouldparticularlyliketoexpressmymostsinceregratitudetoallthemembersoftheSupervisoryBoardoftheBankfortheirguidanceandsupport.

BožoPrka,M.S.PresidentoftheManagementBoard

18March2011

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2010ManagementBoardreportoftheStatusoftheBank’ssubsidiariesandfinancialhighlightsoftheGroup

PursuanttotheCapitalMarketAct,Article407andRulesoftheZagrebStockExc-hangeapprovedbytheCroatianAgencyforSupervisionofFinancialServices,theManagementBoardstatesthatbesttoitsknowledgetheReportoftheStatusoftheGroupandtheBankfor2010containstrueviewofoperations,risksandfinancialresultsaswellasfinancialpositionsofPri-vrednabankaZagrebanditssubsidiaries.

Privredna banka ZagrebIntheeconomythatwascharacterisedbysecondconsecutiveyearofeconomiccrisisPrivrednabankaZagrebrecordedsolidbusinessresults.Belowweprovideanover-viewoftheseresultstogetherwithresultsachievedbyBank’ssubsidiaries.WerecordedprofitbeforetaxesofHRK1,034million,whilenetprofitfortheyearofHRK860millionrepresentsadecreaseof7.2percentcomparedtothepreviousyear.Mainreasonofthereducedprofitcomesfromlowerdividendincomefromthesu-bsidiariesduringtheyear,whichwaslowerbyHRK50millioncomparedto2009.TheBankrealisedagrossrevenueofHRK4,365million,whichincludesHRK3,426millionofinterestincome,HRK622millionoffeesandcommissionsandHRK317millionofotheroperatingincome.Netinterestincomewashigherthaninayearbefore(HRK1,962millionin2010vs.HRK1,799millionin2009)duetostrongerreductionincostoffunding.In2010theBankrecordedHRK1,494millionofinterestexpenseswhichrepresentsa23.7percentdropcomparedtothepreviousyear.Innovativeofferingsofnon-interestrelatedproductsandefficientbusinessprocessesincreasedthenetfeeandcommissionincomebyHRK116millioncomparedto2009,reachingthelevelofHRK510million.Growthinfeesoncustomers’loansandotherbankingservicesraisedthefeeandcommissionincomebyHRK14millionin2010.Additionally,investmentmanagement,brokerageandconsultancyfeesincreasedbyHRK18million,whichindicatessomewhatpositivedevelopmentsonthecapitalmarkets.Feeandcommission

Net profit for the year - BankinHRKmillion

2006 2007 2008 2009 2010

1,200

1,000

800

600

400

200

0

Net operating income - BankinHRKmillion

Otheroperatingincome

Netfeeandcommissionincome

Netinterestincome

2006 2007 2008 2009 2010

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

Cost income ratio - Bankin%

Costincomeratio

2006 2007 2008 2009 2010

52.0

50.0

48.0

46.0

44.0

42.0

40.0

incomewasjustshortbelow2009(HRK675.2millionin2010vs.HRK684.1millionin2009).Maincontributorwasstillfeeandcommissionincomeoncardacquiring,whichtotalledHRK521million.Althoughthisincomewaslowerby2.2percentthanin2009,itstillshowshealthyperforman-ceandgoodrealisationofsynergywithotherretailoperationsofPrivrednabankaZagreb.NetprofitfortheyearwasHRK220.7million,whichmakestheCompanysecondmostprofitablesegmentofthePBZGroup.Totalassetsin2010amountedto2billion,whichrepresentsa4.6increasecomparedto2009.TheCompanyiswellcapitalisedandonexcellentfooting.Itsvarietyofcardbrandsandproductsmakesitversatile,welldiversifiedandcapableofsurpassingallthechallengesinyearstocome.Currentoutlookremainssoundalthoughpersistenteconomicchallengesofthecountrymayimpactthefinancialperformance.Never-theless,PBZCardappliesprudentmarketapproach,vigilantriskmanagementandappropriatecostcontainment,whichensu-rescontinuationofgoodresults.

PBZ LeasingPBZLeasingistheleadingCroatiancom-panyengagedinleasetransactionswithclients.TheCompanyhadagoodyearintermsofassetoptimisationandtherevenuegrowth.ItsnetprofitfortheyearamountedtonearlyHRK22million,whichisa15.8percentincreasecomparedtothepreviousyear.Thisgrowthwasmainlydrivenbyhigherrevenuesfromoperatingleases,lowerinterestexpenseandexcellentcostcontrolmeasures.TotalportfoliooftheCompanycomprisesofassetsinoperatingleasesofHRK288.8millionandreceivablesfromfinanceleasesHRK900.4millionatyearend2010.ThebusinessactivitiesofPBZLeasingin2011willbefocusedonensuringbalancedandsteadygrowthofitsbalancesheet.PBZLeasingiscommittedinmaintainingitsmarketshareandexcellingitsofferofproductsandservices.

expenseswereHRK112millionfortheyearend.Inspitedifficultmarketcondition,PBZ’smanagementstrategy,combininggoodrevenuedriveandcostcontainment,ena-bledtheBanktorecordHRK2,789millioninoperatingincome,justslightlybelowtheyearbefore.Moreover,macro-economicconditionsandliquiditypressuresevidencedintheCroatianeconomyledtoanincreaseofprovisionsforrisksandcharges.ProvisionchargeamountedtoHRK388million,whi-chrepresentsa7.5percentincreasethanin2009.ThisresultstemsfromtheapplicationoftheprecautionaryprincipleinevaluatingBank’sloanportfolioandconservativemethodologyofrecognisingprovisionsforlosses.OtheroperatingexpensesamountedtoHRK1,211million,slightlyabove2009.Costincomeratiowas46.02percent,andconstantlybelow50percentthreshold.For2010theBankrecordeda4.4percentincreaseintotalassets,whichatyear-endamountedtoHRK67,352million.Loansandadvancestocustomersrepresentthemostsignificantcomponentofthefinancialpositionwith66.2percentofthetotalbalance.Otherimportantitemsincludeduefrombankswith11.5percentofthetotalassets,aswellasbalanceswiththeCNB,cashandcurrentaccountswithotherbankswith10.9percentshareofthetotalassets.Attheyearend,PBZheldHRK9,321millionofcashandcashequivalents,whichindica-tesarobustliquiditypositionoftheBank.TotalliabilitieswereHRK57,006millionattheendof2010.Customers’depositsrepresentthemainsourceoffundingwith76.5percentofthetotalliability,where-asotherborrowedfundsrepresent14.7percentofthetotalliabilityoftheBank.Customerdepositsincreasedduring2010byHRK1.7billiontoatotalamountofHRK43.7billion.

Meimurska bankaMeimurskabankaearnedanetprofitofHRK37.2million,whichisa21percentdeclinecomparedtothepreviousyear.

Decreaseinnetprofitwasaresultoflowernetinterestincomeby14percentthatwasdrivenbylowervolumesofloansandrecei-vablestocustomers.However,Meimurskabankastillshowsapatternofsolidprofi-tabilityandsoundcompetitivenessinthenorthofCroatiawhereitoperates.Returnonequityin2010was11.2percent,whilereturnonassetsgrewto1.3percent.Costincomeratioof56.2percentshowsgoodcostcontainment.Totalnetassetsincreasedby3.3percentor94.2million,amountingtoHRK2,916.7million.Despitethedecreaseinaverageinterestratesondeposits,theyincreasedby5.7percent,ofwhichtheretailsectorgrewby4.2percentandcorporatesectorby3.1percent.Thisindicatestheconfidenceofclientstothebank’seffortstopreservethesafetyandvalueoftheircapital.MarketshareofassetsintheCroatianbankingsystemroseby0.1percentagepointscomparedtothepreviousyearandequalled0.75percent.MeimurskabankafirmlyholdsthepositionofaleaderinMeimurjeCountydespitestrongcompetition.ThenetworkiswidelydiversifiedthroughouttheCountyandduetocontinuousimprovementinqualityofservice,thebankmanagedtoachievegoodbusinessrelationshipstheclientsandsta-keholders.OutlookforMeimurskabankaappearssolid.Thebankiswellcapitalisedandliquidandthusstabletodealwiththechallenges.Moreover,thebankintendstomaintainitsprominentroleintheregionandprovidereliableservicetoitsclients.PBZ CardOneyearafterthedemergerofthepro-cessingunitfromtheCompanyandtheestablishmentofIntesaSanpaoloCardinthecountry,PBZCardfocusedentirelyonthedomesticmarket.Inthatregard,theCompany’sattentionwastomaintainitsmarketshareofcardissuingandacquiringbusiness,excelcustomercareandstrengt-hentheassetquality.Giventhecircumstances,PBZCardachievedremarkableresultsin2010.Totaloperating

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ANNUALREPORT

2010

PBZ NekretninePBZNekretninein2010wasstillaffectedbyeconomicdevelopmentsinCroatia,especiallyinrealestatemarket.Neverthele-ss,PBZNekretninemaintaineditspresenceontherealestatemarketbyrealisingmorethan4.9thousandappraisalswhichwas16.7percenthigherthantheprioryear.PBZNekretnineachievedasignificantincreaseofnetprofitthatamountedtoHRK3.6millionattheendof2010duetooneoffeventlinkedtodisposalofassetpreviouslyintendedforsale.During2011,PBZNekretninewillcontinuetopromoteitsactivitieswiththeaimofbecomingthecentreofexcellenceforrealestateoperationsnotonlywithinthePBZGroupbutinentirecountry.PBZ InvestPBZInvestiswell-recognisedandhighlyrespectablefundmanagementcompanyinCroatia.Lastyearbroughtmuchbetterinvestmentenvironmentcomparedto2009,althoughitwasstillaccompaniedwithvolatilitythatimpactedinvestmentsentimentduringthesummerandneartheyearend2010.PBZInvest’snetprofitfortheyearreachedmorethanHRK8millionshowingevidenceofrebound,butwellbelowthepre-crisislevels.Totalamountofassetsinvestedthro-ughinvestmentfundsundertheCompany’smanagementreachedmorethanHRK2.5billion,whichistheincreaseof27.7per-cent.MaindriverofthisgrowthofassetsininvestmentfundswasPBZNovËaniFundandPBZEuroNovËaniFund,allmoneymar-ketfunds,whichpointstostillcautioussen-timentoftheinvestors.Furthermore,totalnumberofclientsincreasedby23percentto8.8thousandclients.Asaconsequence,themarketshareofPBZInvestgrewby2.1percentandreached19.7percentoftheoverallmarket.Itsdevelopmentstrategyfor2011willbeorientedatmaintainingitsstatuswithininvestmentpublicinthecountryaswellasattractingnewinvestors.Outlookfor2011stillappearschallengingandthusdifficult

toforecastprecisely.However,theCompa-nyexpectstoretainallthefundsunderitsmanagement,maintainappropriateliquiditylevelandfurtherexploitsynergieswithinPBZGroup.Finally,itisimportanttostressthatPBZInvestwillparticipateintheproject“RegionalHub”ofIntesaSanpaoloaimedatinternationalpartnershipofinvestmentfundmanagementcompanieswithintheISPGroupintheregion.

PBZ Stambena ŠtedionicaIn2010netprofitofPBZStambenaŠtedio-nicareachedHRK15million,whichrepre-sentsa15.4percentincreasewithrespecttopreviousyear.Componentsthatdrovethisstronggrowthofnetprofitwerehighernetinterestincomeduetolowerinterestra-tesandhighernetcommissionincomeduetoexpensecontainment.TakingadvantageofPBZ’slargestbranchnetworkandthroughitsownsalescha-nnels,PBZStambenaŠtedionicahasmorethan120thousandsclientsattheendof2010.Asat31December2010,PBZStambenaŠtedionicareachedHRK1.442millionintotalassets.ThebusinessactivitiesofPBZStambenaŠtedionicathroughout2011willcontinuebeorientedatmaintainingthosedeposi-torswhosesavingscontractsexpireandbyattractingnewclients.Thecompanyalsoexpectslargenumberofpresentcustomerswhomeetdesiredcriteriatotakehousingloansin2011aspercontractconditions.Finally,thecompanywillbefocusedatma-intainingpreferredprofitabilitylevels.

PBZ Croatia OsiguranjePBZCroatiaOsiguranjecontinuestoachieveapositivefinancialresult.In2010companyreachedarespectablegrowthinnetprofitofHRK26million,whichis9.5percenthigherthantheresultin2009.Atthesametime,costincomeratiostandsat33.4per-centwhichisinlinewith2009.During2010,PBZCroatiaOsiguranjeincreaseditsnumberofmembersofthefundfrom270thousandin2009to278

thousandin2010,whichisanincreaseof3percent.PBZCroatiaOsiguranjeiswell-recognisedandhighlyrespectablepensionfundma-nagementcompanyinCroatia.Itsdevelo-pmentstrategyfor2011willbeorientedatmaintainingitsstatuswithingeneralpublicinthecountryaswellasattractingnewmembers.

Intesa Sanpaolo Card ZagrebIn2010IntesaSanpaoloCardZagrebonaconsolidatedlevelearnedHRK198millionintotalrevenues.However,giventhefactthatISPCardisstillinastartupmodeit,therefore,endedwithnetlossfortheyearoftotalHRK16.3million.Thecompanyisstillengagedindevelopmentandoptimisa-tionofitsoperationsfromwhichitplanstobuildfuturerevenuestreams.Totalassetsasat31December2010wereHRK409million.

Financial highlights of the PBZ GroupOnaconsolidatedlevelPBZrecordedinco-mebeforetaxesofHRK1,274million,whilenetprofitfortheyearofHRK1,022millionrepresentsanincreaseof6.5percentcom-paredtothepreviousyear.Group’sgrossrevenuesstandatHRK5,356millionandrefertoHRK3,787millioninterestrevenu-es,HRK1,304millionfeesandcommissionrevenuesandHRK265otheroperatingrevenues.NetinterestincomeincreasedfromHRK2,060millionin2009toHRK2,200millionin2010duetoadecreaseofinterestexpense.Driverofthisgrowthwasasafore-mentionedastrongdropofinterestratesondepositscomparedtothelevelofratesoninterestbearingliabilitiesin2009.NetfeeandcommissionincomereachedHRK1,090millionwhichrepresentsa4.3percentincreasecomparedto2009duetothegrowthrealisedoninvestmentmana-gement,brokerageandconsultancyfees,paymentfeesandotherbankingservicefees.Additionally,theGroupwasabletomakesignificantcostreductionsonfeeandcommissionexpenses.

Group results by business segment inHRKmillion 2010 2009

Banking 2,915 2,940

Cardservices 610 691

Leasing 140 145

Otherfinancialservices 54 48

Non-financialservices 14 10

Consolidationadjustments -178 -227

Operating income 3,555 3,607

NetoperatingincomeofPBZGroupin2010reachedHRK3,555million,slightlybelow2009.Additionally,aforementionedmacro-eco-nomicconditionsandgeneralliquiditypre-ssurespersistentintheCroatianeconomyaffectedtheGroup’sprovisionsforrisksandcharges.ProvisionchargefortheyearamountedtoHRK404million,whichisHRK159millionlowerthan2009butstillsignificantlyhighcomparedtopre-crisisyears.ThisresultstemsfromtheapplicationoftheprecautionaryprincipleinevaluatingGroup’sloanportfolioandconservativemethodologyofrecognisingprovisionsforlosses.OtheroperatingexpensesamountedtoHRK1,648million,5.3percenthigherthanpreviousyear.Costincomeratiowas47.45percentandpersistentlylowerthan50percentthreshold.BelowweprovideanoverviewofbusinesssegmentsofthePBZGrouppreparedbycorebusinessoftheGroupmembers.Asapparentfromtheabovetable,BankingisthemainsourceoftheGroup’sprofit(PrivrednabankaZagrebandMeimurskabankacollectively).Bankingsegment,onaggregate,continuestomakestrongestcontributiontotheconsolidatedresults.ItsoperatingincomereachedHRK2,915million.ThelargestindividualcontributionoftheGroupresultswasaccountedforbyPrivrednabankaZagreb.NetprofitbytheBankamountedtoHRK860million(2009:HRK927million).Subsidiariesandassocia-tedcompaniescontributedHRK306million(2009:HRK235million)totheconsolidatedprofitoftheGroup.

BožoPrka,M.S.PresidentoftheManagementBoard18March2011

Net operating income - GroupinHRKmillion

Otheroperatingincome

Netfeeandcommissionincome

Netinterestincome

2006 2007 2008 2009 2010

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

Cost income ratio - Groupin%

Costincomeratio

2006 2007 2008 2009 2010

54.0

52.0

50.0

48.0

46.0

44.0

42.0

40.0

Net profit for the year - GroupinHRKmillion

2006 2007 2008 2009 2010

1,400

1,200

1,000

800

600

400

200

0

ReviewoftheinternationalandCroatianeconomyin2010

PrimarygoalofthispartofthePBZannualreportistogivetoshareholders/readersanassessmentofinternationalanddomesticmacroeconomicenvironmentinwhichPBZandtheGroupoperatedduring2010.Thisshouldhelpunderstandtheresultsfromamoreobjectiveperspective.

2010 was the year of recovery of the world economy and of continuing fall of the Croatian economyIn2010therewasasignificantrecoveryoftheworldeconomy.AsaresultofthecrisisthatculminatedinSeptember2008(withthebankruptcyofLehmanBrothersInvestmentBank),in2009therewasadec-lineoftheworldGDP(by0.6%),butevenmorenotablewasthedropofworldtradingvolumebyasmuchas10.7%.In2010thosetrendshavesignificantlychanged.Firstly,GDPincreasedby5.0%(asestimatedbytheInternationalMonetaryFund),andworldtradingvolumeroseby12.0%1.Sincetheworldeconomygrowthratesinboth2011and2012areexpectedtoexceed4%,itissafetosaythatthecrisisatthegloballevelisbehindus.However,economicpolicymakersarenotinforacarefreetime.Specifically,thepreviousperiodwascharacterisedbyanunprecedentednumberofgovernmentinterventions,involvingeverythingfromthefinancialsectortosubsidiestocertainindustries.ThiswasallmadepossiblebyextremelyexpansionarymonetaryandfiscalpoliciesespeciallyintheU.S.,butalsointheUK,euroareaandmanyotherdevelopedcountries.Suchstateinterventionsjustifiablyraisethequestionofcreatingnewbubblesandinflationarypressuresinthefuture.Ontheotherhand,therecoveryisstillnotsuchthatitwouldenablecarefreewithdrawalofthoseincentiveswithoutriskingfallingintoanotherrecession,adoubledip.Therefore,itwillbenecessarytomanagetherisksinthefutureverycarefullyandfindawaytotimelywithdrawallsurplusliquidityandre-ducefiscaldeficitsandpublicdebtwithoutgeneratingfutureinflation(asmeasuredbyconsumerpricesorthepricesofvario-

usassetclasses,whichweusuallycalledbubbles)orendangeringrecovery.Anotherinterestingfeatureof2010wasthedifferenceingrowthratesofdevelopedcountries(wheregrowthwasestimatedat3%)anddevelopingcountries,i.e.emer-gingmarketswheretheexpectedgrowthexceeds7%.ItisestimatedthatChinawillrecorddouble-digitgrowthrates,andIndiaonlyslightlylowerrates.Itisreasonabletosaythattherecoveryatthegloballevelistakingplaceattwodifferentpaces.Atthegloballevel,2010wascharacterisedbyatleastthreeotherphenomena:•Firstly,onceagain(after2008)therewas

ariseinoilpricesandotherrawmateri-als.Thistrendwasinterruptedin2008duetofinancialcrisisandrecession.However,in2010thepricesofcommodi-tieswentuponceagain,notonlyduetotherecoveryofworldeconomy,butalsobecauseofreducedsupplyofsomerawmaterialsduetoadverseweathercondi-tionsandincreasedpoliticalrisksintheregionwithsig-nificantoilproduction(MiddleEast).Thesephenomena,toge-therwiththealreadymentionedsurplusliquidity,couldproveveryrisky,especiallybecauseitisdifficulttodistinguishthecyclicalcomponentofgrowthfromthepotentiallylong-termtrendofdemandgrowth,inparticularofenergy.

•Secondly,aftertenyearsofeurobeinginexistence,forthefirsttimeitsfuturewasbroughtintoquestion.Thepublicdebtandbankingcrisisinseveraloftheso-calledeuroperipherycountries(itstartedwithGreece,butitquicklyspreadovertoIreland,andthemarketalsoquestionstheabilityofPortugalandSpaintotimelypaytheirdebts,bothpublicandprivate,inthecomingperiod)hasledtoamajordiffer-entiationintheeuroareaandrevealedthattheconceptofacommoncurrencyforseveralcountries-theeuro-wasactuallyunpreparedforsuchsitua-tions.Therefore,eventhoughtemporarymechanismsaimedatassistingthecoun-triesincrisiswerecreated,investorskeepincludingtheriskofeuroareacollapsein

theircalculations(small,butgreaterthanzero),whichincreasesthecostofnewborrowingsinthosecountries.Thereisnodoubtthattheanalysisofpublicdebtsustainabilitywillkeepmanyeconomistsreallybusyforalongtime,andthatEu-ropewillhavetodealwiththesolvencyoftheirbanksforawhilelonger.

•Thirdly,eventhoughnumerouscountriesandinternationalgroupshaveinvestedtremendouseffortsinthepastthreeyearsintodesigningnewfinancialregu-lations(whichwouldmakeitimpossibleforthiscrisistohappenagain,whichisthegoalbehindBaselIII),therearestillnocompletesolutionsthatwouldguaran-teeit.Itbecameevidentthatthecomplexfinancialsystemsalsobringtogetherverycomplexissueswithnoeasysolutions.Itisthereforereasona-bletoexpectthattherewillbemanyadditionaleffortstowardsnewfinancialregulationsinthecomingperiod,whichalsomeanspossiblechangesinregulati-onsattheglobalandalsoEUlevel,withclearimplicationsforus.Thereremainstheoldproblemthatthelargestfinancialinstitutionsintheworldareglobal(ormultinational),whilethecontroloverthemislimitedtonationalbordersofasinglecountry.Althoughmuchhasbeendonetoimprovecoordinationofnationalregulatoryandsupervisoryagencies,theproblemhasnotbeensolved.

Wehavealreadymentionedthatthegrowthatthegloballevelistakingplaceattwodifferentpaces.Unfortunately,thereshouldbeathirdcategoryforoureconomyintermsofglobalassessments.Specifically,in2010weregisteredanewdeclineinGDPbyapproximately1.4percentandin2011wepredictaverymodest1.4percentgrowth.Asalways,forecastuncertaintyishigh,butunfortunatelywedonotseeanyopportunitiesthatcouldacceleratethisgrowthduring2011.Onthecontrary,ifsomeriskspresentonaglobalscaleatthebeginningoftheyearbecomematerialised(riotsintheMiddleEast,increasingpricesofoilandotherrawmaterials),itispossible

1Data on world GDP and trade by World Economic Outlook - update, January 2011, www.imf.org

22 23

ANNUALREPORT

2010

itwouldleadtoadropinbothforeignanddomesticdemandduetoarisinginflationwithnegativeimplicationsforouralreadymodestgrowthforecast.InadditiontobeingthesecondconsecutiveyearofGDPdrop,intheeconomic,financi-alandbankinghistoryofourcountry,2010mightberememberedastheyearof:•continuedincreaseofunemployment

andcontinueddeclineofsomesectorssuchasconstructionindustryalongwiththedefactostagnationinindustrialproductionandretailtrade.

•averymodestgrowthoftheloanport-folioofcommercialbanks(intheretailportfolio,itwasinparttriggeredbya20percentappreciationoftheSwissfranc),despitetheabolitionoflimitsonthegrowthofloanstobanks(inlate2009),withretaildepositsgrowingatslightlyhigherrates.

•continuedgrowthofnon-performingbankingloans(theso-calledBandCcategories).Nevertheless,banksremai-nedhighlycapitalisedandthebankingsystemasawholeverystable,survivingthecrisisverywell.Whileanumberofdevelopedcountrieshadtousetheirtaxpayers’moneytohelpailingbanksintheircountries,theoppositehappenedinCroatia.Bankssecuredadditionallendingtohelpgovernmentfinance.

•veryhighliquidityofbanks,whichiswhytherewasnoneedforrepooperations(thelastrepooperationtookplaceinOctober2009),andinterestratesonthemoneymarketremainedrelativelystableandlow.Banks’lendinginterestratesdidnotrecordanysignificanttrendsofchangein2010.

•remarkablestabilityoftheHRKtoEURexchangerate,sothattheCroatianNationalBankhadtointerveneonthemarketonlytwotimesintheentireyear(bothtimesinJune,whenapurchaseofeuroswasmadeduetoappreciationpressures).

•verylittlechangeinthemonetaryregulation.InFebruary,therequiredreserveratioforbankswaslowered

GDP, real growth ratessource:Eurostat,DZS

in%

2009.

2010.

Croatia Slovenia Slovakia CzechR Hungary EU27

-1.4

-5.8

-8.1

1.1

-4.8

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

-10.0

4.1

2.4

-4.1

-6.7

1.1

-4.2

1.8

GDP, real growth ratesin%

source:CBS

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

2004 2005 2006 2007 2008 2009 2010

4.1 4.34.9 5.1

2.4

-5.8

-1.4

Personal consumption, constant prices (2000 referent year)source:CBS

in%

q/q-4

Annualgrowthrate

200420052006200720082009

4,3 4,4 3,5

6,2

0,81,9

-8,5

-4,1-2,5

10.08.06.04.02.00.0

-2.0-4.0-6.0-8.0

-10.0-12.0

Retail trade, except of motor vehicles and motorcycles; 2005=100source:Eurostat

Grossdata

Seasonallyadjusteddata

Trendcycle

200

0M

0120

00

M0

520

00

M0

920

00

M01

200

0M

05

200

0M

09

200

0M

0120

00

M0

520

00

M0

920

00

M01

200

0M

05

200

0M

09

200

0M

0120

00

M0

520

00

M0

920

00

M01

200

0M

05

200

0M

09

200

0M

0120

00

M0

520

00

M0

920

00

M01

200

0M

05

200

0M

09

200

0M

0120

00

M0

520

00

M0

920

00

M01

200

0M

05

200

0M

09

200

0M

0120

00

M0

520

00

M0

9

130120110100908070605040

from14%downbyoneindexpointinordertoreleasetheliquidityofbanks,whichwouldstimu-latelendingactivitytowardscompanies(i.e.insupportoftheCroatianGovernmentandCroatianBankforReconstructionandDevelopment’sprogrammetostimulatelendingactivityandeconomicrecovery).Inaddition,theCroatianNationalBankhasreducedtheinterestpayable(i.e.feestheypaytobanksforthefundsthatbankskeepattheCNB)andprescribedtheopenforeignexchangepositionat30%oftheregu-latorycapital(sinceMarch2010).

Insummary,2010willprobablybere-memberedastheyearinwhichwemissedtheopportunitytocarryoutsignificantstructuralreformsinthecountry.BesidestheeffortstocompletenegotiationswiththeEU,therewereunfortunatelynoothermajorreforms.Crisisisaperiodwhenonecandoalotofthingsforone’slong-termprosperityandraisingthepotentialgrowthrateoverthemediumterm.Hopefully,thecomingperiod(especiallytheoneafterthescheduledparliamentaryelectionsinlate2011)willbringabouttheaccelerationofreforms,andaccessiontotheEUwilltakeplaceattheexpectedpace.

The second (long) year of economic crisisAfteranearly6percentdeclineinecono-micactivityin2009,thesecondconsecu-tiveyearofeconomiccrisishasbroughtanew1.4percentreductionofthegrossdomesticproduct.Croatiain2010,unlikemostcountriesinCentralandEasternEu-rope,failedtostopthenegativeeconomicdevelopmentsandfurtherdeteriorationofbusinessoperationsspilledoverintoalmostalleconomicsectorsinthecountry.ThemostsignificantcomponentofthegrossdomesticproductandabasisforeconomicgrowthinpreviousperiodsinCroatia-personalconsumption-recordedapositiverateofgrowthinthethirdqu-arterof2010forthefirsttimeaftersevenconsecutivenegativequarters.Takingintoaccountthestrongseasonalimpactthat

Imports of goods and services, constant prices (2000 referent year) source:CBS

in%

q/q-4

Annualgrowthrate200420052006200720082009

4,7 3,9 7,4 6,5 3,6 3,1

-4,8

-20,7

20.015.010.05.00.0

-5.0-10.0-15.0-20.0-25.0-30.0

Gross fixed capital formation, constant prices (2000 referent yearsource:CBS

in%

q/q-4

Annualgrowthrate200420052006200720082009

5,0 4,910,9

6,5 8,2

-13,9-11,8

-13,4

-9,5

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

-15.0

-20.0

Construction works, 2005=100source:CBS

Originalindex

SA

TC

I20

00

. V IXI2

001

. V IXI2

002

. V IXI2

003

. V IXI2

00

4. V IX

I20

05

. V IXI2

00

6. V IX

I20

07. V IX

I20

08

. V IXI2

00

9. V IXI2

010

. V IX

160.0

140.0

120.0

100.0

80.0

60.0

40.0

24 25

ANNUALREPORT

2010

thethirdquarterhasonthemovementofeconomicindicatorsbecauseofthetouristseasonandanewslowdownofpositivetrendsrecordedinretailtrade,webelievethattheendoftheyearbroughtonceagainaslightdeclineinpersonalconsump-tion.Forthemostpartoftheyear,deve-lopmentsinretailtradehavebeenunderthenegativeimpactofdevelopmentsinthelabourmarketandincreasingunem-ployment,aswellasanegativeimpactonhouseholdconsumptionoftheapplicationoftheso-calledcrisistaxonsalaries,andalsothingssuchasthestrengtheningoftheSwissfranc,whichhasfurtherreducedthedisposableincomeofhouseholdswithdebtsinthatcurrency.Themainfeaturesof2010werenegativeexpectationsofconsumersandbusinesses,andthereforeitisnotsurprisingthatinves-tmentactivityhasbeenalmostcompletelysuspended.Basedonavailabledataatthetimeofwriting,itappearsthatinvestmentactivityreachedthebottominthefirsthalfof2010,butsomemorenotablepositivedevelopmentsarestillnotinsight.Extremelylowdomesticandsomewhatawakenedforeigndemandhasbeenkeydeterminantsofdevelopmentsintradeflowsin2010.Partlyduetoalowbasein2009,butalsothankstoincreasedforeigndemandandagoodtouristseason,exportsofgoodsandservicesinthefirstthreequartersrecordedmorethansolidgrowthrates.Unfortunately,theywerealsomerethaninsufficienttocharacterisetheeconomicrecoveryinthecountrywithincreasedexportorientationandthelikelyfallingtrendintheperiodaheadofus,giventhelimitedexportcapacity.However,sinceimportssimultaneouslycontinuedtorecorddeclineandonlyabriefperiodofslightgrowthinthethirdquarter,thepositiveimpactofnetforeigndemandthatcontinuedin2010hasmadeadecisiveimpactontheoverallgrowthratedevelo-pments.Andwhiletheeconomyandpeopleweretryingtoadapttonegativeeconomictrends,thepublicsectormainlyreliedon

Exports of goods and services, constant prices (2000 referent year)source:CBS

in%

q/q-4

Annualgrowthrate200420052006200720082009

5,4 3,76,5 4,3

1,7

5,73,6

-16,2

7,0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

-15.0

-20.0

-25.0

Government consumption, constant prices (2000 referent year)source:CBS

in%

q/q-4

Annualgrowthrate200420052006200720082009

2,6

1,22,2

3,41,9

0,2

-1,1-1,8

-0,9

5.0

4.0

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

General government debt (% of GDP, incl. HBOR and guaranteesSource:MOF

2006

42.7

2005

45.4

2007

41.3

2008

42.3

2009

50.6

IX2010

57.660.0

50.0

40.0

30.0

20.0

10.0

0.0

cosmeticadjustmentsandreachingoutforadditionalsourcesofrevenuei.e.newloans.Continuedfallinrevenuesandina-dequateadjustmentofexpenseshaveledtothegrowthofbudgetdeficitto4.6%ofGDP(ourestimateisalmost7%atthegeneralgovernmentlevel,includingHAC,CBRDanddebttopensioners),whilethepublicdebtreachedthelevelofalmost60%ofGDP(withstateguarantees).Negativetrendsinthelabourmarket,whi-chstartedin2009,haveescalatedinthepastyear,whenemploymentwasdownbyanaverageof5.3%yearonyearandtheaverage(registered)unemploymentratesurgedto17.6%.Thesedevelopmentsweretheresultofthelabourmarketslackthatreactedtothereducedvolumeofeconomicactivitywithatimelag,whichiswhythatsharpdropinGDPin2009wasreflectedonthelabourmarketonlyin2010,whichhasfurthercontributedtobycontinuedrecessionarytrends.Inlate2010theregisteredunemploy-mentrateapproachedthelevelof19%(socalledsurveyrateinthefirstthreequarterswas11.7%onaverage),andwithinaperiodoftwoyearstheactiveworkforcehasdecre-asedbyalmost5%.ComparedwiththetransitioncountriesoftheEuropeanUnionandtheperipherycountriesoftheeuroareathatwereseriouslyaffectedbythecrisis,surveyunemploymentrateinCroatiainthethirdquarterof2010maynotseemdisturbinglyhigh(itis8b.p.lowerthantherateinSpainand6b.p.lowerthantherateinLatviaorLithuania),butitsrelative-lymoderatelevelisaconsequenceofaneconomicallyandsociallydevastatingandinthelongrununsustainablelowactivityrateoftheworkforce.Lastyear,netsalaries(takingaccountofthecrisistax)fellby0.5%inrealterms(estimate)yearonyear,andtheirmove-ment,ontopoftherecession,wasalsoaffectedbytwolegislativechangesthatreducedtheintensityofthefallofsalaries:abolitionofthe2%crisistaxratestar-tingwithlowerlevelsalariesforJulyandthe4%ratewithhigherlevelsalariesfor

Prices, average annual rate of change in%

source:CBS

PPI

CPI

PPI,10Yaverage

CPI,10Yaverage

9.08.07.06.05.04.03.02.01.00.0-1.0

2001 20032002 2004 2005 2006 2007 2008 2009 2010

Survey Unemployment Rate, Q3 2010, 15-64 years, selected countriesin%

source:Eurostat

20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

Spai

n

Latv

ia

Lith

uan

ia

Esto

nia

Slo

vaki

a

Irel

and

Gre

ece

Cro

atia

Port

ug

al

Hu

ng

ary

Bu

lgar

ia

EU27

Pola

nd

Ro

man

ia

Slo

ven

ia

Cze

chR

.

Net Wages, real rate of change, yoy*in%

source:CBS,PBZ

*adjustedforsolidaritytax

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

I/0

5 III V VII IX XI

I/0

6 III V VII IX XI

I/07 I

II V VII IX XI

I/0

8 III V VII IX XI

I/0

9 III V VII IX XI

I/01

0 III V VII IX XI

26 27

ANNUALREPORT

2010

October,aswellasamendmentstotheIncomeTaxActthatenteredintoforceinJulyandintroducedchangesintaxratesandtaxbrackets.Thisyearweexpectthebaseeffectthatwouldleadtoyearonyearsalaryincreasestobereducedbyincreasedinflationarypressuresandhighunem-ployment,andweestimatethat2011willbringanotherrealwagecut.Theprolongedrecessionandweakdome-sticdemandwerethemainfactorsthatlimitedthepricegrowthin2010.Despitetheincreaseinpricesofpetrol,fuelsandutilities,aswellasasignificantpriceincrea-seinmanufacturingexpenses(+4.3%yearonyear),thestrengtheningofthekunaandadropinfoodpricesduetoalowerpurchasingpowerofhouseholdshaveledtoapricegrowthofonly1.1%onaverage,comparedtotheyearbefore.Thisyearwillbringthereawakeningofthetrendofrisingpricesoffoodandfuelsonglobalmarkets,whichtogetherwiththespilloverofapartofincreasedmanufactu-ringcostshouldboostinflationarypre-ssures,whichareevenmorepronouncedduetoalowbaselastyear.However,thedepressingsituationonthelabourmarketandlowerrealincomesshouldrepresentabarriertoanysignificantpriceincreases,whichiswhyweexpecttheaverageinfla-tionratetobeattheaveragelevelofmanypreviousyears(i.e.around3%).Recovery of lending to enterprises, increased tendency towards retail savingsLastyearbroughtaboutanotablerecoveryinlendingtoprivatesector,asomewhatstrongergrowthinconsolidatedbankassetsascomparedwith2009,andamo-derategrowthindepositsduetoreluctan-ceofpeopletospendandtheirincreasedtendencytosave.Totaldepositsinlate2010weretherefore4.8%higheryearonyear,withretaildepositsrecordingan8.1%growthrate,andcorporatedeposits1.6%.Afteradropinkunadepositsin2009,in2010therewastheirgradualrecovery,andthehighestrateofgrowthwasonceagain

Bank Deposits, HRK mill.source:CNB

SightHRK

SavingsHRK

SavingsFX

250.000

200.000

150.000

100.000

50.000

0

I/0

8II III

IV

V

V

IV

IIV

III

IX

X

XI

XII

I/0

9II III

IV

V

V

IV

IIV

III

IX

X

XI

XII

I/10

II III

IV

V

VI

VII

VIII

IX

X

X

IX

II

Banking Loans, yoy rate of change and amountin%andHRK

source:CNB

Total,HRKmill(rhs)

Enterprises

Total

Household

270.000

260.000

250.000

240.000

230.000

220.000

210.000

I/0

8

III

V

VII

IX

XI

I/0

9

III

V

VII

IX

XI

I/10

III

V

VII

IX

XI

20.0

15.0

10.0

5.0

0.0

-5.0

Share of NPLs in Total Loansin%

source:CNB

2008

2009

Q32010

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

Total Companies Retail

recordedbyforeigncurrencydepositsthankstoincreasedretailsavings.Totalloansin2010increasedby8.2%,withthegrowthattributedthemosttoincreasedlendingtoenterprises,whichaccountsfornearly50%ofgrowthintotalloans.Loanstoenterprisesincreasedby9.6%yearonyear,withthelargestportionofloansmadebybanksdirectly,andonlyasmallportionwasrealisedwithintheModelAincollaborationwiththeCroatianBankforReconstructionandDevelopment.Retailloansgrewby3.8%;however,theiractualrateisnegative,re-volvingaroundnegative1%change,whilethenominalfigureislargelyaresultofthestrengtheningoftheSwissfranc,whichisboundtoabout40%ofhousingloansandaboutaquarteroftotalretailloans.Thelatterisalsoevidentfromthefactthatcreditcardloansin2010decreasedby12.5%,andcarloansby18%,whichrevealsthefactthathouseholdcontinuedtoreducetheirpersonalconsumptionforthesecondyearinarow.Thequalityofbanks’loanportfoliocontinuedtodeterioratein2010duetoareducedvolumeofeconomicactivitythatledtoproblemswithliquidityofcompani-es,especiallysmallandmediumenterpri-ses,andlowerincomeofhouseholds.TheshareofloansclassifiedincategoriesBandCincreasedfrom7.8%inlate2009to10.2%inthethirdquarterof2010,withtheretailsharereaching7.5%andcorporateshare15.9%(itisestimatedthattheSMEsharegoesaround20%).Thedeterioratingqualityofloanshasledtoasignificantgrowthinexpensesforbankvalueadjustments,butaccordingtopreliminarydatafromtheCNBbanksmanagedtoincreasetheirnetprofitbyalmost18%yearonyearbyconsolidatingtheirincomeandotherexpenses.In2011weexpectaslightlymoredynamicgrowthinloansanddepositsandstabili-sationofthegrowthofnon-performingloans.Simultaneouslywiththegrowthofdomesticbankloanstoenterprises,

CDS Spread, 5Y, bps source:Bloomberg

Croatia

Bulgaria

Hungary

Romania

Poland

01.0

9.20

10

11.0

9.20

10

21.0

9.20

10

01.1

0.2

010

11.1

0.2

010

21.1

0.2

010

31.1

0.2

010

10.1

1.20

10

20.1

1.20

10

30

.11.

2010

10.1

2.20

10

20.1

2.20

10

30

.12.

2010

09.

01.2

011

19.0

1.20

11

450400350300250200150100

500

Interest Rates on Newly Approved Loans, monthly averagein%

source:CNB

HRKwithfcc

HRK

13.0

12.0

11.0

10.0

9.0

8.0

7.0

6.0

I/0

8II III

IV

V

V

IV

IIV

III

IX

X

XI

XII

I/0

9II III

IV

V

V

IV

IIV

III

IX

X

XI

XII

I/10

II III

IV

V

VI

VII

VIII

IX

X

X

IX

II

Composition of Gross External Debt by Sectors (% of GDP)* in%

source:CNB,PBZcalculation

*roundtrippingexcluded

Government

Banks

Other

100.0

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0

2001200220032004200520062007200820092010e

28 29

ANNUALREPORT

2010

theirborrowingabroadhassignificantlysloweddown,whichiswhythelargestcontributiontothegrowthofexternaldebtin2010camefromincreasedgover-nmentborrowings.InOctober,thegrossexternaldebtwasonly0.1%higherthaninlate2009,andweestimatethatitsshareinGDPin2010increasedbyabout1percentagepoint,amountingto96%.Anegativeimpactonloangrowthrateswasalsoaresultofhighlendinginterestrates,whichdespiteastablespreadonCDSandlowreferenceinterestrates(three-monthEuriborandLibortiedtotheSwissfranc)werearound8%onloanswithaforeigncurrencyclauseandjustabove10%onkunaloans,whichisaresultofincreasedborrower-relatedrisks.The kuna was stableExchangerateofthekunaagainsttheeuroin2010,withtheusualseasonalfluctuations,wasstableandonaverageitstoodat7.29kunastotheeuro,whichisabout1%lowerthantheyearbefore.Unlikeexchangerateofthekunatotheeuro,thestrengtheningoftheSwissfrancagainsttheeuroduetoagrowinglackofinvestors’confidenceinthesustainabilityofpublicfinancesofperipherycountriesoftheeuroareahasledtoastrongde-preciationofthekunaagainstthefranc,whichiswhythatexchangeratewas20.8%higherthanattheendoftheyear2009.Thestrengtheningofthefranchascreatedproblemstoborrowerswhoarerepayingtheirloanstiedtothefranc,whi-chisalsooneofthecausesofincreaseinbadloans,especiallyintermsofhousingloans.TheU.S.dollarhasappreciatedmoderatelyagainstthekunaandisstrengthenedbyanaverageof4.1%yearonyear,withexchangeraterisingto5.50kunastothedollar.Weakeconomicactivityinconditionsofanextremelygoodliquidityofbankshasresultedinlowandstableinterestratesonthemoneymarket.Interestrateonovernightloansontheinterbankmarketamountedtoanaverageof1%.

The stock exchange woke up only late in the yearNegativetrendsontheZagrebStockExc-hangehavecontinuedthroughout2010,whichintheabsenceofanysignificantnewsthatwouldstimulateinvestorswascharacterisedbythestagnationofstocksandtheCrobexstockindexforthebetter

partoftheyear.ThegrowthofsharevaluesandreturnofoptimismtothestockmarketwasrecordedonlyinDecember,resultingfromapublicbidmadebyMOLtobuyINAsharesfromsmallsharehold-ers.Lateintheyear,theCrobexreached2,110points,whichis5.3%moreyearonyear.

HRK Middle Exchange Rate source:CNB

USD/HRK

CHF/HRK

EUR/HRK(rhs)

6.20

6.00

5.80

5.60

5.40

5.20

5.00

4.80

7.45

7.40

7.35

7.30

7.25

7.20

7.15

7.10

04

.I15

.I27

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8.II

18.II

02.II

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24.II

I0

6.IV

16.IV

28.IV

10.V

20.V

01.V

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28.V

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8.V

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30

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12.V

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.VIII

03.IX

15.IX

27.IX

07.X

20.X

02.X

I12

.XI

24.X

I0

6.X

II16

.XII

28.X

II

CROBEX source:SZE

2,2502,2002,1502,1002,0502,0001,9501,9001,8501,8001,7501,700

04

.I14

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Zibor O/Nin%

source:Reuters

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retail,corporateandinvestmentbankingservices.ThebusinessactivitiesoftheBankareorganizedintothreeprincipalclient-ori-entedbusinessgroups.

RetailBankingGroupWithrespecttotheretailbankingsegment,PBZholdsacomparativeadvantageoveritscompetitorsgivenitswidespreadbranchnetworkinCroatia,consistingof204or-ganisationalunitsin5regionswhichcovertheentireterritoryofthecountry.Moreo-ver,thebankingsubsidiaryintheGroup,MeimurskabankacoverstheMeimurskaCountyandprovidesaneffectivepresenceinthatparticularregion.Inaccordancewithitsbusinessphilosophyoffocusingonclientneedsanddemands,eightyearsagotheBankintroducedperso-nalbankersandthe0-24hourself-servicebankingzonestothebranchnetworks,whileincreasingthequalityofservicesthroughcontinuedstafftrainingandundertakingqualitycontrolmeasuressuchasthe“MysteryShopper”project.Theseactivitiesareconstantlyindevelopmentwiththeemphasisbeingplacedonthestandardisationofbusinessprocesses.Toillustratethisorientationwewouldliketomentionthepackageofproducts(namedInnovation)bywhichtheBankrewardsitsclientswhoareownersofseveralgroupsofproducts,givingthemdiscountoncertainformsoffeesandawardingthemanincen-tiveinterestrateiftheyhaveplacedtheirfundsontimedeposits.Ontopofthat,PBZhasintroducedPrivatebanking,aspeciallydesignedserviceaimedatVIPclients.Inadditiontorestructuringandrepositio-ningthetraditionaldistributionchannelofthebusinessnetwork,PBZalsocontinuestodevelopandimprovethedistributionchannelofdirectbanking.IthasextendeditsnetworkofATMswhichacceptMaestro,MasterCard,VisaClassicandVisaElectronaswellasAmericanExpresscards(atotalof643ATM’shavebeeninstalled).ThenumberofEFTPOS’s(pointsofsale)hasincreasedfrom3,500attheendof2000tothepresent23,797.

PrivrednabankaZagrebd.d.isoneofthelargestandamongtheoldestfinancialinstitutionsintheRepublicofCroatia,withalongcontinuityofbankingoperations.Itwasfoundedin1962asauniversalbankonthebasisandbankingtraditionofTheFirstCroatianSavingsBankwhichwasinitiallyestablishedin1846inZagrebbythemembersoftheFarmingAssociationofCroatiaandSlavonia.Duringallperiodsofitshistory,PBZsuppor-tedthelargestinvestmentprogramsintou-rism,agriculture,industrialisation,shipbuil-ding,electrificationandroadconstruction.PBZhasbecomeasynonymforeconomicvitality,continuityandtheCroatianidentity.PrivrednabankaZagrebtodayisamodernanddynamicfinancialinstitution,whichhasactivelysoughtandwontheroleofmarketleaderonthefinancialmarketsinCroatia.Itisafullylicensedbankwithnationwi-debranchnetwork.Withitsnationwidenetworkofbranchesandoutlets,aswellasabroadgroupofbankingandnon-bankingsubsidiaries,PBZisoneoftheuniversalbanksthatcoverthewholeterritoryoftheRepublicofCroatia.

Organisational Structure and Business ActivitiesNowadays,PBZistheleadingbankinCroa-tiaintermsofsubscribedsharecapitalandthesecondbankintermsoftotalassets.IthasconsistentlybeenaleadingfinancialinstitutionontheCroatianmarketwithanestablishedbusinessbaseandrecognisednationalbrandname.UponsuccessfulprivatisationinDecember1999,PBZbecameamemberofGruppoIntesaSanpaolo-thelargestItalianbankinggroupandoneofthemostsignificantfinancialinstitutionsinEurope.Withthispartnership,supportedbytheEBRDthrou-ghitsnon-controllingshareholdingstake,PBZhasretaineditsbusinessstrategyaimedatmodernformsofbankingandnewpro-ducts,confirmingitsimageofadynamicandmodernEuropeanbank,whichmeetsthedemandsofthemarketanditsclients.Thebenefitsofstrategicpartnershipareclearlyvisibleinthecontinuouslyimproving

BusinessdescriptionoftheBank

financialresultsoftheBank,aswellasofthePBZGroup.Alongwiththeadoptionofthebusinessandcorporategovernancestandardssetbyitsparentbank,PrivrednabankaZagrebhasmaintainedthestrategicdevelopmentorientationofamodern,clientoriented,technicallyinnovativeuniversalfinancialinstitution.PBZisfocusedonthecontinuedadvancementofitseconomicperformancewellintothefuture,aswellassolidifyingitspositionasaproductleaderinofferingthemostprogressivebankingproducts,throughtheoptimalmixoftraditionalandmoderndistributionchannels.ThisensuresthatPBZwillcontinuetobeabletosetstandardsofthehighestqualityforproductinnovationsandservicesofferedtobothitsdomesticandinternationalclients.ThiscommitmenttoqualityandadvancedbankingpracticesisclearlyseeninthefactthatPrivrednabankaZagrebreceivedtheBestBankinCroatiaawardfromEuro-moneyin2001,2002,2004,2005,2007,2008and2009.During2006PBZreceivedTheBestDebtHouseinCroatiaawardbyEuromoney.PBZalsoreceivedTheBanker’sAwardfortheCroatianBankoftheYearin2005.Additionally,PBZ’squalitywasconfir-medbyGlobalFinance’smagazinein2003,2004,2005,2006,2007,2008,2009and2010whenitreceivedAwardfortheBestBankinCroatia.In2003,2004,2005andin2006PBZreceivedthedomesticprestigeawards-theGoldenShareAwardfortheBestBankingShareinthecountry,andtheGoldenKunaAwardin2004,2005and2010forthepreviousyear.BankalsoreceivedacknowledgementfromCentralEuropean,FinanceCentralEurope,AdriaZeitungandothers.Inaddition,Privrednabankawaslistedamongtheworld’stop500financialbrandsfor2007byGlobal500FinancialBrandsIndex.Thisreport,initiallypublishedin2006,wasthefirstpubliclyavailabletableanalysingthefinancialvalueoftheworld’sleadingbankingbrands.PrivrednabankaZagrebcurrentlyemployssome3,473employeesandprovidesafullrangeofspecializedservicesintheareasof

34 35

ANNUALREPORT

2010

sedonclients’needsanddeterminedgoalsoftheBankandcarriesoutapermanentanalysisandmonitoringofclientdemandsaswellascompetitivedepositandcreditproducts.Drawingonconductedanalyses,itdevelopsandimplementsnewproductsandmodifiesexistingproducts,anditalsoensuresthetechnologicalsupportofdepo-sitandcreditproducts.ItsareaofactivityalsoincludescooperationwithothermembersofPBZGroup(PBZCard,PBZInvestandPBZStambenašte-dionica)inthefieldofdevelopingdepositandcreditproducts,aswellascooperationwithstrategicpartnersinthefieldofbankinsurance.

Analysis and Client Relationship Development DivisionThisDivisionisresponsibleforanalysinganddevelopingmodelsofsupervisionandimplementationofmeasurementofkeyindicatorsusedforassessmentofthedistributionnetworkandretailproducts.Activitiesrelatedtotheanalysisandclientrelationshipdevelopmententailmonitoringtheprofitabilityofsegmentedclientdatabases,analysingexistingproductsandser-vicesintendedforcertainclientsegmentsandtheirrequirements,developingmodelsofmeasurementofclientservicequalitythroughMysteryshopping,structuredmar-ketresearch,monitoringclients’complaintsandgenerallevelofourclients’satisfactiontopredictvariouseventsinclientrelationswiththeBank,thedevelopmentofsupportforbetterrelationshipmanagementwithclientsandcalculationofkeyindicatorsofsuccessinmanagingrelationsbetweentheclientandtheBank.ThisDivisionexpandsitsactivitiestoothermembersofPBZGroupwiththepurposeofanalysinganddevelopingCRMactivitiesrelatedtotheclientsofGroupmembersandotherorganisationalparts.

Competitive Intelligence DivisionTheactivitiesofthisDivisionincludemo-nitoringcompetitivemarketingcampaignsaswellasdefiningandimplementingtheoverallmarketingapproachtoproductsand

Asaleaderinmoderntechnologies,PBZhasalsoexpandeditsdistributionchannelsandproductsbyapplyingthemostadvan-cedtechnologyinordertoimplementitsPBZ365services;PBZ365NETInternetban-kingservice,PBZ365TELtelephonebankingservice,mPBZmobilebankingserviceandPBZ365SMSservice.WithInternetbankingPBZ365servicesaclientcanaccesshis/heraccounts24hoursadayfromanylocati-onintheworld.In2004,PBZintroducedmPay-asystemofpaymentusingmobilephones,asthefirstbankinCroatiaofferingsuchaservice,withover124,071clientstoday.TheseachievementshavefirmlyestablishedPBZasthemarketleaderinelectronicbankingaswellasthetechno-logicalleaderonthefinancialmarketinthecountry.PBZisthefirstbankinCroatiawhichhasimplementedsecuree-commercebasedon3DSecuretechnology(verifiedbyVisa).Atpresent,morethanhalfofalltran-sactionswithretailcustomersareexecutedthroughelectronicchannels.TheBankisconstantlymodifyingandsupplementingitswiderangeofretailproductsandservices.Thus,ithasintrodu-cedseveraltypesofnewloansonthebasisofcreditscoring.BesidestheconsumerandcashloansforPBZCardcard-holders,from2002to2010theBanklaunchedeightverysuccessfultranchesofsocalledquickloans(cashloansatdemandtocustomerswithsoundcreditscoring).Overallintheperiodfrom2000untilpresenttime,PBZestablisheditselfasthemarketleaderinretailloanswithan18.9percentshareoftheloanmarket.Intheareaofretaildeposits,PBZhasincreaseditsdepositstomorethanHRK32.7billiontodate,whichis20.1percentoftheCroatianretaildepositmarket.Onaconsolidatedlevel,PBZGroupholds21.3percentoftheoverallCroatianretaildeposits.Inthecardproductssegment,PBZ,asacardissuerandacceptor,replacedallchequecardsofretailcurrentaccountswiththeinternationallyacceptedCirrusMaestrodebitcard;itofferedinternatio-nallyvalidVisaElectrondebitcardlinkedtoaforeigncurrencyaccountandissued

internationallyvalidVisaBusinessElectrondebitcardslinkedtogyroaccountofprivatepersons,craftsmenandcorporates,aswellasMasterCardandVisarevolvingcreditandchargeproducts,anditistheonlyBankinCroatiaofferingMaestroprepaidgiftcards.TogetherwithPBZCard,theBankhasissu-edover2.2millioncardstoitsclientswhichaccountsfor24.2percentofthedomesticcardmarket.RetailoperationsinPrivrednabankaZagrebcomprisethefollowingdivisions:OfficeforGroupSupport,DistributionChannelMa-nagementDivision,ProductDevelopmentDivision,CompetitiveIntelligenceDivision,AnalysisandClientRelationshipDevelo-pmentDivisionand5RetailRegions.Distribution Channel Management DivisionThisDivisionisresponsiblefordefining,structuring,implementingandmonito-ringdifferentdistributionchannelsoftheBankforthedeliveryofretailproductsandservices(branchnetwork,ATMandEFTPOSnetwork,PBZ365services-Inter-netbanking,telephonebanking,mobilebanking,SMSbanking,WAPbanking,mPay,personalbankersandsaleagents).Itpreparesandcoordinatesbudget-relatedactivitiesinfrontofRetailBankingGroupforthepurposeofbothclassicalanddirectdistributionchannels.Inthefieldofretailsalesoperations,itcoordinatesallactivitiesbetweentheRegions/Centres,CustomerCallCentreandothersaleparticipants.IncooperationwiththeProductDevelopmentDivisionandtheCompetitiveIntelligenceDivision,itdistributesmodifiedandnewproductsandservicesthroughtheBank’sexistingandnewdistributionchannelsanditisresponsi-bleforinformingandupdatingalldistribu-tionchannels.

Product Development DivisionThisDivisionisresponsiblefordevelopingproductsandservicesforclientsoftheBankinthefieldofretailoperationsandmonitoringtheirimplementationinsales.Itsetsguidelinesfordevelopingproductsba-

typesandformsofshort-termandlong-termfinancing,purchaseofreceivables,B/Ediscounting,factoring,lettersofguaran-tees,lettersofcredit,andrendersservicesinvolvingtheopeningofbusinessaccounts,cashpooling,contractingInternetbanking,multi-purposefacilities,providingfinancialsupporttoexportbusinesses,activepar-ticipationintheconclusionofdealsofitsclientsabroad,aswellasdifferentmodelsofdeposittransactionsandotherinnovativesolutionsadjustedtotherequirementsofeachsingleclient.Apartfromtheopera-tionsmentioned,itisalsoimportanttohighlighttheservicesinagencybusiness-transactionsperformedonbehalfandfortheaccountoftheorderingparty,andco-mmissionbusiness-dealsmadeinitsownnameandfortheaccountoftheorderingparty.Weparticularlywishtobringintofocusourfinancialadvisingservices,applicabletowhateverlineofbusiness/branchalegalen-tityisassociatedwith,andthecreationofthebestpossiblesolutionfortherespectiveentity.IncoordinationwithotherunitsoftheBank,weparticipateincrosssellingofallthePBZGroupproducts.BymanagingtheoverallbusinessrelationshipbetweentheBankandtheclient,throughasynergiceffectwestriveforthecreationofnewsupplementaryvalueforourclients.Appreciatingthediversityofitsclients’businessactivities,employeesofthePublicSector(Entities)Division,throughtheirindividualapproachtoeachclient,aswellasinteamwork,providesupporttoclientsinallaspectsoftheirbusinessactivitiesbyaffordingthemtheuseofawiderangeoftheBank’sservicesandproducts,thusdevelopinglong-termbusinessrelationsandpartnerships.Ineverysegmentofitsbusinessactivities,operationsandservicerendering,theDivi-sionendeavourstopromotethehighestqu-alitybankingstandards,firstandforemostinbeingprofessionallyandflexiblyoriented,bothtoitspresent,andtoitspotentialclients.

servicesaimedatretailandcorporate(SME)operations,bothfortheBankandothermembersofPBZGroup.ThisDivisionisalsoresponsibleforcarryingoutmarketingcampaignsforproductsandservicesoftheBankandGroupmembers,inaccordancewithprescribedmarketingstandardsofIntesaSanpaolo.Itsotheroperationsegmentsincludedirectmarketing,positioningofproductsandservices,productbrandmanagementandeventplanningandmanagement.TheDivisionalsotakespartinarrangingandupdatingallinternalandexternalcommu-nicationchannelssuchastheBankandGroupwebsite,multimediachannelsandpromotionalprogrammesinaccordancewithcurrentmarketingneedsandactivities.

Corporate,TreasuryandInvestmentBankingGroupPrivrednabankaZagrebisoneoftheleadingCroatianbankswhenitcomestocorporatebanking.Withawiderangeofproductsandservicesofferedtoitscorpo-rateclientsbothlocallyandinternationallyitishardtofindamajorcompanyinCroatiatodaythatdoesnotbankwithPrivrednabankaZagreb.Supportedbypowerfulelec-tronicdistributionchannels,ournetworkofwell-organisedbranchesisthekeydrivingforceinservingourclientseffectively.Westrivetocreateadditionalvaluebyprovidingintegratedfinancialsolutionstomeettheindividualrequirementsofourclients.PBZhasthoroughlydevelopedaplatformforsupportingclassiccashandnon-cashtransactionsforcorporateclientswithintheBank’snetwork.Duetoitswidenetworkofcorrespondentbanks,PrivrednabankaZagreboffersitsclientsfastandafforda-bleservicesintheareaofinternationalpayments.Also,PBZhassignificantlychangedtheprocessofhandlingdomesticpayments.TheBankdirectlyparticipatesin

theCroatianRTGSsystem(HSVP)andinthenationalclearingsystem(NKS)andthushastheabilitytoprocessanypaymentthroughthemostappropriatechannel.Improvedwiththenewfunctionality,Internetban-kingforcorporateclients-PBZCOM@NETservice-isavailableforbothdomesticandinternationalpayments.Intermsoffinancebanking,Privrednaban-kaZagrebisadominantparticipantontheCroatianmarket.PBZhasoriginatedmanycontemporaryproductsandhaslargelyinitiatedthedevelopmentofthefinancialmarketinthecountry.Consequently,PBZ,withitsactiveroleintheforeignexchangemarket,moneymarketandprimaryandsecondarycapitalmarket,hasearnedthetitleofmarketleader.Wearedeterminedtoberecognizedasthebestfinancialservicescompanyintheregion.Wehaveachievedthisrecognitionfromourclientsthroughourabilitytodeliverthebestqualityineverythingwedo.Followingtheadoptionoftheneworga-nisationofPrivrednabankaZagreb,theCorporateBankingGroupandtheFinanceBankingGroupcreatedtheCorporate,Tre-asuryandInvestmentBankingGroupwithparticularemphasisonbankingwithlargecompanies,financialinstitutionsandtheGovernmentinstitutionsandagencies.Corporate,TreasuryandInvestmentBankingGroupconsistofthefollowingdivisions:OfficeoftheCorporate,TreasuryandInvestmentBankingGroup,PublicSector(Entities)Division,LargeCompaniesandForeignCompaniesDivision,FinancialInstitutionsandSpecialFinancingDivision,TreasuryDivision,InvestmentBankingDivi-sionandSupportDivision.

Public Sector (Entities) DivisionPublicSector(Entities)Divisionisrespon-sibleforperformingtransactionswithgo-vernmentinstitutions,localandself-gover-nmentunits,publicenterprisesandpublicutilitycompanies,insurancecompanies,largecompanies,affiliatesandinstitutions.Recognisingandtakingintoaccounttherequirementsofitsclientsforbankingproductsandservices,theDivisionoffersall

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nancing.OneofthemostnotablefinancialservicesprovidedbythisDivisionhasbeenarrangingandparticipatinginsyndicatedloanfacilitiesonbehalfoftheBankanditsclients(PBZisthemarketleaderinCroatiainarrangingsyndicatedloans).ThroughthisDivisionPBZisanactiveparticipantinthesecondaryloanmarketandforfeitingtransactions.ThePBZ’sGroupfundinghasalsobeenapartofthisDivision’sresponsibilities.

Treasury DivisionThePBZTreasuryDivisionisanimportantandamongthetopplayersontheCroatianmarketwithabroadspectrumoffinancialsolutionsforlargecorporateandinstitutio-nalinvestors.TheTreasuryDivisionoffersacomprehensiverangeofservices,invol-vingtransactionsontheinternationalanddomesticmoneymarkets,capitalmarkets,foreigncurrencymarketsandalsomanagestheliquidityoftheBank.ThePBZTreasuryDivisionisareliablefinancialpartnerandhasanactiveroleintradingsecuritiesissu-edbytheMinistryofFinance,currencyandshort-termcashderivativesonthemoneymarket.TheTreasuryDivisionconsistsofthreedepartments:LiquidityDepartment,TradingDepartmentandSalesDepartment.Liqui-dityDepartmentnegotiateandentersintoagreementswithdepositorybanksandot-herdepositoryfinancialinstitutions.Itdealswithcurrencyswapswithbanksandotherfinancialinstitutions,buysandsellssecuri-tiesandrepurchaseagreementsandlendssecuritiesfromtheclients.Additionally,itsobligationistomonitorcurrencyliquiditythroughtheBank’sprescribedmeasuresoftheCroatianNationalBank.Salesdepar-tmentoperateswithforeigncurrenciesonspotandforward,optionsandbanknotes.Thebanknotessegmentcoversdelivering,dispatching,processingandwarehousingvariousshipmentsofforeigncurrencies.Pri-vrednabankaZagrebactsonthedomesticmarketasoneoftheleadingbanksinthisparticularbankingarea.Wearethemarketmaker,especiallyinsecurities,commercialpapers,government,

Large Companies and Foreign Companies DivisionTheLargeCompaniesandForeignCompa-niesDivisionareresponsibleforbusinesstransactionswithlargedomesticcompa-nies,companiesinforeignownership,aswellaswithforeignlegalentities-non-re-sidents.TheDivisionoffersalltypesofbankingpro-ductsandservicesrenderedincooperationwithotherBank’sorganisationunits-ope-ningbusinessaccounts,offeringInternetbankingaccounts,approvingloanfacilities,purchaseofreceivables,B/Ediscounting,issuingoflettersofguaranteesandopeningoflettersofcredit,cashhandlingservices(organising,transporting,collectingandtransferringcash,cashpooling,globalcashmanagement),cardoperations,leasing,retailproductsandother.Majordomesticclientsarebuildingcom-panies(buildingconstructionandcivilen-gineering),companiesengagedintourism,andlargetradingcompanies.Tocompaniesengagedintheconstructionofresidentialandbusinesspremisesinten-dedforsaleweofferthecompleteprojectimplementationservice-fromthecontrolofprojectdocumentationandbuildingsupervisiontothefinancingofconstruc-tionandofthesaleofrealestatestofinalbuyers.Inviewofthewell-developedbusinessnetworkofPrivrednabankaZagrebwithasmanyas204branchesandbranchoffices,wehavesuccessfullyorganisedthecom-pleteconductandmanagementofcashtransactionsforsomeofourclients,whoarealsosomeofthelargestchainstores,andcompaniesengagedintourism.TheInternationalDeskformspartoftheDivision,andisinchargeofperformingtransactionswithdomesticcompaniesinforeignownershipandofcoordinatingactivitiesofPrivrednabankaZagrebanditsparentbank-IntesaSanpaolo.AllbankingandadvisoryservicesareprovidedbytheInternationalDesktoIntesaSanpaoloGro-upclientspresentontheCroatianmarket,aswellastoothercompaniesinforeignownership.Apartfromconductingbusi-

nessrelations,thisunitalsoassistsforeigninvestorsintheprocessofsettingupanewcompanyinCroatia,providesadvisoryser-vicesandgeneralinformationonbusinesstermsandconditionsinCroatia,contactsclientsandputsthemintouchwithinstitu-tionsexigentintheperformanceofregularbusinessactivities.Thenonresidentdepartmentisresponsibleforestablishinganddevelopingco-operati-onwithforeignentities(foreigncompaniesandprivateindividualsengagedinbusinessactivities,foreigndiplomaticandconsularrepresentativeofficesandrepresentativeof-ficesofforeignlegalentities,foreignasso-ciations,foundationsandothernon-profitorganisations,internationalmissions).Co-operationincludesopeningandmanagingofaccounts,depositingfunds,providingtheclientswithallnecessaryin-formationrequiredforconductingbusinessinCroatia,whichrequirestheconstantmo-nitoringofallnationalcurrencyregulations(closeco-operationwithCNBandMinistryofFinance-ForeignExchangeInspectorateinmoneylaundrypreventionissues).

Financial Institutions and Special Financing DivisionThekeyresponsibilitiesofthisDivisionareestablishing,monitoringandpromotingthecompleterangeofbusinessrelationswithdomesticandinternationalbanksandfinancialinstitutions.InordertoprovidebetterservicestoPBZclientsandfullyutilizeitsinternalsynergies,theDocumentaryBusiness(i.e.GuaranteesandDocumen-taryCredits)becamepartoftheFinancialInstitutionsandSpecialFinancingDivisionin2006.Aspartofthespecialfinancingservices,thisDivisionoffersalltheBank’sclientstailormadefinancingsolutionsincludingtradeandprojectfinancing,creditandspe-cialarrangementswithfinancialinstitutions(bothdomesticandinternational)aswellaswithsupranationalorganizations(e.g.EBRD,etc.),buyer’screditsforthepro-motionofCroatianexports,openlinesofcreditguaranteedbystateexportagencies,commodityloansforexportandimportfi-

theirrisktolerances,westrivetoensurethateachclientachievescompetitivereturnsandmaximumvalueaddedonassetsinvested.Inadditiontothepurchaseandsaleofsecuritiesondomesticandforeig