One Bank, One UniCredit....3 In May 2018 UniCredit Partner doo was merged to UniCredit Leasing Croatia. Zagrebačka banka dd · 2018 Annual Report 11 The central bank, the Croatian

Annual Report

One Bank, One UniCredit.One Bank, One UniCredit.

2018

Banking that matters.

Our strategy is clear and long-term. We are transforming the Group to build the bank of tomorrow for our extensive client franchise. Everything we do is designed to make UniCredit a true pan-European winner.

One Bank, One UniCredit.

5Zagrebačka banka dd · 2018 Annual Report

Contents

UniCredit’s Chief Executive Officer’s message 6

Ethics and respect: Do the right thing! 8

Introduction 10 Chairman of the Management Board message 12 Business description 25 Overview of the Croatian economy in 2018 29

Operating and financial review 35 Management and corporate governance 41 Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements 52

Independent auditor’s report 54

Financial statements 61Group financial statements 62 Bank financial statements 67 Significant accounting policies 72 Notes to the financial statements 100

Supplementary schedules for CNB 241

Supplementary EUR financial statements - unaudited 258

Other information 266

6

We are focused on sustainable business growth, based on ethics and respect, to ensure UniCredit remains a pan-European winner.

Jean Pierre Mustier Chief Executive Officer

UniCredit’s Chief ExecutiveOfficer’s message

2018 Annual Report · Zagrebačka banka dd


Jean Pierre MustierChief Executive Officer

UniCredit S.p.A.

Dear Shareholders,Thank you for your valuable, ongoing support. We have closed a second, successful year of our Transform 2019 strategic plan. UniCredit is a solid bank with strong capital ratios and an unstinting focus on value creation for all of its stakeholders through innovative commercial actions, digital transformation, enhanced risk management, transparent corporate governance and key social impact banking initiatives – based on ethics and respect. For us this means doing the right thing.

As the banking industry continues to evolve, UniCredit will stay focused on “what matters” – the changing needs of our customers – to protect the value of our business and ensure sustainability.

Our strategy is One Bank, One UniCredit: we are and will remain a simple, successful, pan European commercial bank, with a fully plugged in CIB, delivering a unique Western, Central and Eastern European network to our extensive and growing client franchise.

The combined energy, commitment and hard work of all UniCredit team members is what allows us to deliver tangible results. We confirm our Transform 2019 targets: net profit target of 4.7 billion Euro and a RoTE of above 9 per cent, with our Group Core RoTE above 10 per cent.

We will maintain a strong capital position by generating solid profits and ensure we have a comfortable MDA buffer. Our CET1 capital ratio is fully loaded and compliant with all regulatory requirements. The UniCredit Group fared well in the EBA stress test results, with one of the highest CET1 ratios compared to Eurozone peers.

In terms of asset quality, we have decisively continued to de-risk our balance sheet, completing the final phase of Project FINO. Our disciplined risk management strategy is ensuring improved asset quality as well as high quality origination across the Group. We are fully on track for the accelerated rundown of our Non Core portfolio, brought forward by four years to 2021.

We are leveraging on digitalisation to transform our operating model, with an improved cost reduction. We will continue to enhance the customer experience through simpler processes, ensuring greater efficiency and effectiveness.

We continue to maximise commercial bank value thanks to a renewed and dynamic focus on our clients, pursuing a multichannel strategy with best-in-class products and services. Our CIB is fully plugged into the Group’s strong commercial banking and focused on supporting the real economy.

Finally, I extend a warm welcome to Fabrizio Saccomanni, our new Chairman. Fabrizio’s significant experience in international monetary and financial cooperation, particularly in terms of supervisory and regulatory knowhow, brings great value to our Group.

Together we have started to actively prepare for the next strategic cycle. We will focus on the development of our business activities and the continued optimisation of our processes, while providing all colleagues with a best in class work environment and experience, to continue to attract the right people. This begins with an even more energised leadership team, and a changed leadership structure, that will bring this new strategy to fruition.

We will keep working hard to ensure that UniCredit remains a true pan-European winner.

Sincerely,

8 2018 Annual Report · Zagrebačka banka dd

UniCredit’s Board and Senior Management consider that the way in which results are achieved is as important as the actual results. Therefore, the following Group Principles1 should guide all employees’ decisions and behaviors irrespective of seniority, responsibility and geographical area: “Ethics and respect: Do the right thing!”

Group Principles are designed to help all UniCredit employees, to guide their decision-making and their behaviours towards all stakeholders in their day to day activities.

In particular, such Principles require:• compliance with the highest ethics standards - beyond banking regulation and beyond the law -

in relationships with clients, colleagues, environment, shareholders and any other stakeholders;• fostering a respectful, harmonious and productive workplace;

to best protect the Bank, its reputation and to be an employer and a counterparty of choice.

Group Principles underpin a set of core guidelines that further clarify expectations about the way to work as One Team, One UniCredit and support employees in the fulfillment of UniCredit Five Fundamentals. The spirit of each of these principles is extremely important and it will be the subject of more detailed policies that will be developed or updated in the coming months.

Ethics and respect: Do the right thing!

• Ethics as a guiding principle of fairness and respect towards all stakeholders in order to achieve sustainable results.

UniCredit colleagues, irrespective of seniority, responsibility and geographical area, are expected to do the right thing in their daily activities and to be fair towards all stakeholders to gain and retain their trust.

• “Ethics and respect” is a guiding principle which applies to all Group policies. The “Ethics and respect” principle is based on a long term view of the Group business activities

and relationships with stakeholders as well as a comprehensive view of the internal and external working environment. Business policies require care to ensure that responsible sales approach work in harmony with balanced, fair and respectful customer interactions, enabling the achievement of sustainable business success and long-term targets. Targets and other business results are not considered achieved if they are not met in compliance with the Group Principles, related policies and the requirements that flow from them.

• “Ethics and respect” is a guiding principle for interactions amongst all Group employees. UniCredit colleagues are expected to contribute in their daily activities toward creating and

maintaining a work environment that is as respectful and harmonious as possible, eliminating intimidating, hostile, degrading, humiliating or offensive behaviors and words. UniCredit must contribute to assuring the respect for the rights, value and dignity of people and the environment. All forms of harassment, bullying and sexual misconduct are unacceptable.

Group principles in day to day activities


1. Which substitute the former group values.

• “Ethics and respect” is a guiding principle for the promotion of diversity and work life balance which are considered valuable assets.

UniCredit colleagues are expected to assure a workplace where all kinds of diversity (e.g. age, race, nationality, political opinions, religion, gender, sexual orientation) are not only respected, but also proactively promoted as well as to contribute to an environment in which respect for, and attention to, colleagues’ needs, health, work-life balance and well being are deemed essential to achieving sustainable results.

• “Ethics and respect” is a guiding principle underpinning the reinforcement of a “Speak-up culture” and anti-retaliation protection.

UniCredit is firmly committed to promoting an environment in which colleagues and third parties feel comfortable engaging in open and honest communication. UniCredit encourages colleagues and third parties to speak up and raise promptly good-faith concerns without fear of retaliation relating to any situation that may involve unethical or illegal conduct or inappropriate interactions with others.


Introduction

Introduction

The Management Board of Zagrebačka banka dd is pleased to present its Annual Report. It comprises the Management Board’s report of condition of the Bank and the Bank’s subsidiaries, an operating and financial review, audited financial statements with an Independent auditors’ report, unaudited supplementary reports for the CNB and supplementary finan-cial statements for the Group and the Bank in EUR. The audited financial statements are presented for the Group and the Bank.

Croatian and English language versions This document comprises the Annual Report of Zagrebačka banka dd for the year ended 31 December 2018 in English language. This report is also published in Croatian language for presentation to shareholders at the Annual General Meeting.

Legal statusThe annual financial statements and the Report of Condition are hereby submitted to the Annual General Meeting, as required under the provisi-ons of Article 276, paragraph 3 of the Companies Act, while the Report of the Supervisory Board is submitted to the Annual General Meeting as a separate document.

The annual financial statements have been prepared in accordance with statutory accounting requirements for banks in Republic of Croatia and audited in accordance with International Standards on Auditing.

AbbreviationsIn this Annual Report, Zagrebačka banka dd is referred to as “the Bank” or “Zagrebačka banka”, and Zagrebačka banka dd together with its subsidiaries and associates are referred to collectively as “the Group” or “the Zagrebačka banka Group”.

In this Annual Report UniCredit Bank Austria AG is referred to as “UniCre-dit Bank Austria”, UniCredit Bank Austria AG Group is referred to as “UniCredit Bank Austria Group”, UniCredit S.p.A., Milano is referred to as “UniCredit” and UniCredit S.p.A. Group is referred to as “UniCredit Group”.

The Bank’s subsidiaries and associates are referred to as follows:

The Management Board of Zagrebačka banka dd is pleased to present its Annual Report.

“

”

SUBSIDIARIES ABBREVIATIONSUniCredit Bank dd, Mostar UniCredit Bank, MostarPRVA STAMBENA ŠTEDIONICA dd, Zagreb1 ŠtedionicaZB Invest doo, Zagreb ZB InvestCENTAR KAPTOL doo, Zagreb2 Centar Kaptol POMINVEST dd, Split PominvestZANE doo, Zagreb ZANEZANE BH doo, Sarajevo ZANE BHUniCredit Leasing Croatia doo, Zagreb UniCredit Leasing CroatiaLOCAT CROATIA doo, Zagreb Locat CroatiaBACAL ALPHA doo, Zagreb BACAL ALPHAALLIB NEKRETNINE doo, Zagreb ALLIB NEKRETNINEUniCredit Partner doo, Zagreb3 UniCredit PartnerZABA Partner doo, Zagreb ZABA Partner

1 In June 2018 Prva stambena štedionica dd was merged to Zagrebačka banka dd.2 In February 2018 the Group sold its stake in the company Centar Kaptol.3 In May 2018 UniCredit Partner doo was merged to UniCredit Leasing Croatia.


The central bank, the Croatian National Bank, is referred to as “the CNB”.

In this report, the abbreviations “kuna” and “HRK” are used for Croatian kuna. Further, the abbreviations “HRK thousand”, “HRK million” or “HRK m”, and “HRK bn” or “HRK billion”, “EUR thousand”, “EUR million” or “EUR m”, and “EUR bn” or “EUR billion”, “USD thousand”, “USD million” or “USD m” and “USD bn” or “USD billion” and “BAM thousand”, “BAM million” or “BAM m” and “BAM bn” or “BAM billion” represent thousands, millions and billions of Croatian kuna, Euro, US dollars and Bosnian Convertible Mark, respectively.

Exchange ratesThe following exchange rates ruling at 31 December 2018 have been used to translate balances into foreign currency at that date:

EUR 1 = HRK 7.418 (31 December 2017: 7.514 HRK)USD 1 = HRK 6.469 (31 December 2017: 6.270 HRK)

ASSOCIATES ABBREVIATIONSAllianz ZB doo, društvo za upravljanje obveznim mirovinskim fondom, Zagreb4 Allianz ZB, obligatory pension fund management companyAllianz ZB doo društvo za upravljanje dobrovoljnim mirovinskim fondovima, Zagreb5 Allianz ZB, voluntary pension funds management companyMULTIPLUS CARD doo, Zagreb MultiPlus CardUniCredit Broker doo, Sarajevo UniCredit Broker

4 In September 2018, a full legal merger was executed whereby Allianz ZB, voluntary pension fund management company was merged with Allianz ZB, obligatory pension fund management company. After the merger, the company Allianz ZB, obligatory pension fund management company changed its name into Allianz ZB doo obligatory and voluntary pension fund management company.

5 Refer to previous footnote.


We remain dedicated to the needs of our clients, achievement of sustainable results, transformation of the Bank and economic and social progress of the society in which we operate.

Miljenko Živaljić Chairman of the Management Board

2018 Annual Report · Zagrebačka banka dd12

Chairman of the Management Board message


Ladies and Gentlemen, esteemed Clients, Partners and Shareholders, dear Colleagues, It is my pleasure to present you the Annual Report and financial statements of the Zagrebačka banka Group. Zagrebačka banka Group realised a good financial result in 2018, given the balanced business model, a stable operating result and good risk management. The capital adequacy ratio is 21.3%. The Group has a solid potential to support the loan activity and development potentials of our clients, thus contributing to progress of the economy and the society in which we operate.

We have realized all Strategic Plan goals. Following positive trends in the environment, an increase was realized in loans to the retail, corporate and public sectors. The Group has the leading market position in all segments, both the number of clients and users of mobile and internet banking has increased. We have ensured an adequate return on capital to our shareholders.

We have continued to transform our operations. We are introducing the Agile methodology aiming at improving our clients’ experience and satisfaction, increasing operating efficiency, applying new technologies, introducing a new management model, developing our employees’ competencies and ensuring the long-term sustainability of our business results.

Business environment

At the global level, economic growth has been stimulated by the increase in personal consumption and investments, by expansive monetary policy, liquidity available and low interest rates. The US Federal Reserve continued to increase interest rates, while the European Central Bank retained the policy of low interest rates, which are still at their historic low in Europe. Following several years of such approach, the Eurozone and especially the countries of Central and Eastern Europe repeated solid GDP growth rates. At the same time, we are exposed to the risks of geopolitical movements,

protectionist measures, trade agreements and fragmented increase in interest rates, which can slow down the economies.

In the Republic of Croatia, the realised GDP growth was 2.8% in 2018, driven by personal and government spending, export of goods and services, positive surrounding environment conditions, good tourist season, utilisation of EU funds and moderate recovery in investments. We can be pleased with these developments as we are even more approaching peer economies in Central and Eastern Europe.

The Government of the Republic of Croatia and the Croatian National Bank adopted the Strategy for the Adoption of Euro as the official currency in the Republic of Croatia, thereby confirming the intention of joining the Eurozone, a strategic goal of the economic policy. The joining is enabled by an improved fiscal position, a decrease in general government’s deficit towards the level of 0.5% and a more favourable public debt ratio which is below 75% of GDP.

The credit rating of the Republic of Croatia has been improved, now is “BB+ positive” according to S&P and Fitch and “Ba2 stable” per Moody’s.

Such macroeconomic developments have lowered the risk premium of the Republic of Croatia, which significantly decreased interest rates and borrowing costs.

Banks have sufficient capital and available liquidity for the increase in loan activity which, coupled with the development of capital markets, the use of guarantee schemes and more efficient utilisation of EU funds may contribute to the increase in investments and economic growth.

Commercial banks in the Croatian market have realised good results, loans to households and companies have been increased. The trend of lowering both active and passive interest rates


Zagrebačka bank’s Chairman of the Management Board message

as well as the decrease in the total volume of non-performing loans continued. The return on capital employed is still lower than in comparable countries.

Financial highlights of the Group

Zagrebačka banka Group realised profit after tax of HRK 2,041 million in 2018.

Members of the Group offer integrated financial services to our clients in the markets of the Republic of Croatia and the Federation of Bosnia and Herzegovina.

The Group realised solid business results in majority of its members, the major contributors were Zagrebačka banka dd, UniCredit Bank dd Mostar and UniCredit Leasing Croatia doo.

During the year Prva stambena štedionica dd was merged to Zagrebačka banka dd.

Operating income amounted to HRK 5,638 million, increased by HRK 287 million (+5.4%):

• Net interest income amounted to HRK 3,415 million, it is under the influence of lower net interest margin.

• Net fee and commission income amounted to HRK 1,404 million, which is HRK 63 million (+4.7%) higher, due to the increase in payment transactions, credit card and other fees.

• Net trading and other income amounted to HRK 819 million, increased by HRK 280 million (+51.9%), due to higher trading result.

Operating expenses amounted to HRK 2,664 million, increased by HRK 62 million (+2.4%). Cost to income ratio equals 47.25%.

Profit before impairment and other provisions amounted to HRK 2,974 million. The increase of HRK 225 million (+8.2%) is a result of the previously described movements in Operating income and Operating expenses.

Impairment and other provisions amounted to HRK 646 million, they have decreased by HRK

859 million. Impairment losses on placements to companies have been significantly increased in 2017. In 2018 the ratio of non-performing loans decreased and the coverage of the non-performing loans increased.

Total assets of the Group amounted to HRK 138,531 million and have increased by HRK 11,638 million (+9.2%).

• Net loans to customers amounted to HRK 81,714 million, increased by HRK 3,433 million (+5.3%). Following positive environment trends the loan activity in retail, corporate and public sectors increased.

• Deposits from customers represent primary source of funding. They amounted to HRK 99,636 million and have increased by HRK 4,137 million (+4.3%). Loans to deposits ratio amounts to 82.01%.

• Deposits from banks and borrowings amounted to HRK 16,848 million. The increase of HRK 7,993 million (+90.3%) is a result of management of the balance sheet structure.

• Capital and reserves of the Group - at HRK 18,750 million. The capital adequacy rate - at 21.3% (31 December 2017: 22.9%).

Strategic Business Areas’ Results

Retail and SMEs

We have realised good results and confirmed the leading position in market share in loans and deposits. The number of active clients has increased. We emphasize the increase in the number of young clients and clients who receive income to an account held with us. We pay special attention to new clients, their satisfaction with service is monitored by regular communication.

Our “Client Obsession” approach to client attention and their satisfaction has been strengthened with our “Spend a day at Zaba’s branch office” initiative and Zaba’s eXperience training program focusing on client needs and increasing employee satisfaction. We are now


also collecting feedback through the “Tell Zaba” system implemented at branch offices and on web page www.recitezabi.hr.

Digitalisation and modernization

We further invest in digitalisation and modernisation of distribution channels in order to increase the availability of products and services.

The use of internet and mobile banking is 10% higher. Digital channel transactions have been growing continuously, with mobile banking is at the forefront with the annual increase of 41%.

The range of digitally signed, scanned, automatically stored and sent by email documents has been increased. The ATM network is continuously equipped with modern devices, over half of them has the contactless card acceptance option which makes disbursements and collections easier.

We have increased efficiency through sales network reorganisation. We fully refurbished six branch offices in line with the new standard, in a large number of branch offices there is a special children area.

In the retail lending business the demand continues with increase.

Clients have been traditionally relying on us in housing loans segment whereby are building a quality long-term relationship. A significant contribution to maintaining the largest market share in this segment is provided by Green Loans, loans for young, and the APN program of state-subsidized loans.

Cash loans with an automated 30-minute approval process are new in the market. Simple process and educated sales network make up a synergy that has resulted in client satisfaction and significant sales.

In conjunction with other UniCredit members of Central and Eastern Europe, we have signed long-term agreements on the distribution of insurance products with two major European insurers. This

collaboration enables even more appropriate solutions to clients.

We are the leading partner to small businesses, our market share is growing. Improvements in the loan process have supported the increase in placements with particular attention to delivery rate, but also focusing on credit risk.

Thanks to a stable depository base, we have maintained the leading market position. The market trend of low interest rates has increased the share of demand deposits, clients’ funds are directed to investment and pension funds and life insurance. To support clients in making investment decisions we have offered the Zaba Smart Invest service.

Card business operations have recorded positive trends. Card usage increased, in 2018 card contracting has significantly increased. We continue to upgrade card acceptance channels and lead by the number of contactless POS terminals. We significantly outperform the market average with realised turnover growth rates.

Corporate, investment and private banking

We have achieved a good result by increasing the volume and improving the quality of our portfolio. Our leading market position has been confirmed. Stable market shares of 30% in loans and 26% in corporate client deposits reflect business continuity.

We have retained the focus on SMEs and internationally owned enterprises. We are traditionally engaged in major business transaction operations with large corporate clients. We have funded important projects for clients and their development and proved ourselves as a trusted partner. We have significantly contributed to the resolution of a complex case of creditors’ settlement with respect to large domestic company and neutralized the negative effects.

We include clients in “Elite & UniCredit CEE Lounge” programme, enabling them a breakthrough in structuring of further growth. The initiative is an opportunity for presentation to a larger investor



community, for knowledge acquisition and exchange of experiences and good practices. In 2018 three of our clients joined the program.

Global transaction banking specializes in providing fast and simple realization of clients’ needs. In 2018 we affirmed the quality recognized by the clients and partners through awards: Euromoney - the market leader and best service provider in Cash Management, TradeFinance - market leader in Croatia and Global finance - the best provider of TradeFinance services in Croatia.

Project and Structured Financing had a leading roles in major transactions involving also the UniCredit Group. We are the subscription book entry keeper and the leading arranger of HRK 13 billion worth refinancing for Hrvatske ceste, Hrvatske autoceste and the Rijeka-Zagreb Motorway. As a global coordinator, entry keeper and arranger, we have participated in the funding of the Istrian Y expansion project. We have financed acquisitions in the takeover by debt model and renewable energy, hospitality and agriculture sectors projects.

EU funds and Special Banking Arrangements support the utilisation of EU funds by providing products tailored specifically to suit the terms and conditions of the tenders. We actively manage the MojEUfond web application, carry out training and advise clients on EU funding.

Financing Products Development has implemented non-binding framework loans. The new HAMAG-BICRO ESIF programme and cooperation agreements for SME clients have been signed and implemented successfully.

Investment banking maintained its position of the market leader in the Republic of Croatia and Southeast Europe. The excellence was acknowledged this year as well by the Global Banking & Finance review award for “Best investment bank in Croatia”. Zagrebačka banka is the only local joint leading agent bank of all issues of the Government of the Republic of Croatia on the domestic and international capital market in 2018, of HRK 16 billion total value.

In the Corporate finance sector, we are engaged in merger and acquisition transactions of

companies in the Republic of Croatia and the region. We were the exclusive financial advisor to the leading Greek banking group Piraeus Bank for the sale of the majority stake in their Albanian Tirana Bank branch.

Markets had good results in foreign currency sales and purchases. We continuously develop treasury services aimed at protecting clients from market risks. The number of users of ZB Trader HR and ZB Trader Global services continued to grow.

Private Banking was the first in the market to offer clients the “Guided Open Architecture” investment platform that distributes shares in funds of renowned management companies from the European Union. In the existing range of services and products, this is an additional differentiating advantage over the competition. Professional Wealth Management, The Banker and Euromoney have awarded us the “Best Private Banking in Croatia in 2018” title.

Social Responsibility

2018 My Zaba Start

For the fifth year in a row, we conducted the project My Zaba Start which rewards the most innovative and marketable ideas through three contest categories: Entrepreneurship, Culture and science and Society. Besides financial support, we have provided promotion and training to the best projects. This year, over 2000 applications have been received, the training was completed by 150 finalists and 51 projects were awarded. We allocated five million kuna over five cycles.

My Zaba Start remains a breakthrough in socially responsible business operations by providing expert and financial support in realisation for the best projects applied for the initiative.

Support for cultural projects

We have traditionally supported culture and art. With the general sponsorship of Zagrebačka banka, the Museum of Arts and Crafts has set up the exhibition “The Sixties in Croatia - Myth and Reality”, which provided a comprehensive insight into this period of recent history through various fields of social activity. With over 50,000 visitors,


the exhibition is deservedly a cultural event of the year.

3,2,1…go!

It has been another successful Month of Sports and Recreation. Over 500 employees participated in this year 3,2,1 ... go! project sport activities and promoted team spirit, care for health and recreation.

Activities for the academic community

We contribute to competitiveness and sustainability through partnership with student associations and educational institutions.

For the fifteenth consecutive year, we collaborate with the eSTUDENT association. We received the “Golden index” for contribution to the improvement of the quality of studies and student life in the categories of “Organization and participation in student projects” and “Internship”.

For technology students, we have provided “Zaba Future Academy” paid internship. We actively participated in projects on faculties and career fairs and we supported the development of the “Guide for Freshmen”. We solved business tasks within the Case Study Competition and App Start Contest framework. We contribute to the international academic community with the International Internship Programme.

Humanitarianly, we supported “Solidarity in the Field” (“Kopačka solidarnost”, an indoor football tournament organised by students) and the “Cageball” tournament organized by the Split Tech City association.

Employees - value ambassadors

By the Twelfth Joint Donation Programme (“Gift Matching Programme”) several hundred employees donated to selected non-profit organizations, while the UniCredit Foundation will then double employee donations.

Quality of Human Resources management practices

In the “People Survey” organisational climate survey, employees expressed a high work

satisfaction and a high level of commitment and dedication. The Commitment Index is at a high level of 82%.

In 2018, we held the status of MAMFORCE COMPANY, we were awarded the title of “Top Employer” at the local and European level, which confirms the high standards of human resources management.

We are continuously finding solutions that have a positive impact on employees’ satisfaction, motivation and loyalty. We strive towards a balance between the career and private life. We consider trainings and strengthening of competencies the key elements of success and corporate governance. We provide mobility programmes, encourage innovation, general cooperation and teamwork across functions and borders, we are building a culture of diversity and inclusion.

2018 Awards

In 2018, the Bank received the following awards for its operations:

- Euromoney – “Best Bank in Cash Management”- Euromoney – “Best Private Banking in Croatia“- Euromoney – “Best Trade and Export Finance

Bank in Croatia”- Global Finance – “Best Trade and Export Finance

Bank”- Global Finance – “Best Bank in Private Banking

Category”- The Banker and PWM – “Best Private Banking in

Croatia”- Top Employers Institute – “Best Employer in

Croatia” and - Top Employers Institute – “Best Employer in

Europe”.

Outlook for 2019

Following positive macroeconomic developments, we have solid prerequisites for further economic growth also in 2019. The encouraging trends present are in the level of public debt, in the budget deficit, in the reduction of risk premium, in the utilisation of EU funds, in the decrease in unemployment and increase in disposable income and consumer spending. The challenges ahead of us are for sure



the elimination of the remaining macroeconomic imbalances, increase of investments, demographic trends, investment in development and education, reduction of administrative burden and ensuring a stable and harmonized legal framework.

Our banking sector is stable, well capitalised, there are solid prerequisites for further increase in loan activity. Business banks are in the process of transformation to adapt to complex regulation and change of business models that require a more agile managing and application of digital technologies.

The increase in macroeconomic and geopolitical imbalances, coupled with the increase in risk premium of individual countries may increase interest rates and financing costs and restore the availability of liquidity back in focus.

With its results Zagrebačka banka Group confirms that it is part of a successful Pan-European commercial banking group UniCredit, with the simple business model and fully plugged in Corporate and Investment Banking, dedicated to its clients through a unique Western, Central and Eastern European network.

In the upcoming period we will consistently carry out our Transform 2019 strategy oriented to sustainable income generation, introduction of new technologies and increase in productivity. The Bank will be even more agile, dedicated to the needs of our clients leveraging on its market position and the existing competitive advantages. The strength and value of “One Bank, One UniCredit” is based on our employees, sustainability of the business model, responsible risk management and significant contribution to the development of the economy and the society in which we operate.

On behalf of the entire Management Board, I express my gratitude to all our clients, partners and shareholders for co-operation, wishing that it would continue in the years to come. I thank all the colleagues from UniCredit Group, the President and Members of the Supervisory Board for commitment to our joint success. My special appreciation goes to all the employees who enabled through their exceptional contribution and dedicated professional work the long-term sustainability and high reputation of Zagrebačka banka Group in financial market.

Miljenko Živaljić, MScChairman of the

Management Board



Management Board Report of Condition of the Bank’s subsidiaries

Management Board Report of Condition

UniCredit Bank dd, Mostar

Business review

UniCredit Bank dd Mostar (hereinafter in this business review section: „the Bank”) provides the full set of banking and financial services in the Federation of Bosnia and Herzegovina, including corporate banking, retail banking, financial institutions banking, international operations, investment banking and financial lease services. The business network at the end of 2018 covers the entire Federation of Bosnia and Herzegovina, within 10 regions, 75 branches and the largest network of 274 ATMs.

According to research conducted in 2018, the Banks’ clients have again demonstrated that they value a unique quality service and the Bank’s focus on improving clients’ satisfaction.

During 2018, a significant growth of the Bank’s volume of both loans and deposits has been recorded. The Bank is continuously adapting the offer of loan products to the needs of clients, with special orientation to improving and simplifying the loan approval process, as well as improving digital business channels.

The Bank retained its leading position in the market and additionally improved its position compared to competitors by improving the quality of services, recognising and meeting clients’ needs, simplifying products and improving process efficiency.

The ability to generate a stable operating profit and effectively manage costs is confirmed. According to the statutory financial statements, net profit amounted to HRK 368.5 million and has increased by HRK 27.3 million (+8.0%) compared to the previous year. Such result is driven by higher realized revenues, due to higher net interest income, higher net income from fees and commissions and higher foreign exchange income. Operating expenses slightly increased due to activities aimed at improving business efficiency and developing new products.

In 2018 the Bank’s operating income amounted to HRK 959.3 million, increased by HRK 43.9 million (+4.8%). Net interest income which represents 65.3% of the total income amounted to HRK 626.5 million and increased by HRK 7.5 million (+1.2%). Interest income decreased despite higher loan volumes, as interest rates were lower. The decrease in interest expense (-21.6%) is a result of funding optimisation. The Bank managed to retain clients’ confidence - volume of current accounts and deposits increased (+7.5%).

Net income from fees and commissions was HRK 266.7 million, increase of HRK 17.7 million (+7.1%) is realised mainly in payment transaction fees, credit card fees, product packages fees and internet banking fees.

The total operating expenses amounted to HRK 470.2 million, being HRK 3.3 million (+0.7%) higher.

In 2018, impairment losses and provisions amounted to HRK 71.6 million, increased by HRK 10.1 million (+16.4%).

The Bank’s assets amounted to HRK 22,574.0 million as at 31 December 2018. The increase of HRK 2,471.2 million (+12.3%) is a result of the increase in structural and liquidity management positions of HRK 1,438.7 million (+18.4%) and the increase in loans and receivables from customers of HRK 1,117.6 million (+9.5%).

Total current accounts and deposits from clients amounted to HRK 16,813.4 million at the end of 2018. The increase of HRK 1,174.0 million (+7.5%) was realised mainly in retail and corporate segments.

Current accounts and deposits from banks at the end of 2018 amounted to HRK 2,044.6 million (+184.5%).

The Bank’s equity was HRK 3,019.2 million. The capital adequacy ratio was 18.1% (+1.7%).

Exposure to risks

The most significant risks to which the Bank is exposed are credit risk, market risk and operational risk. Market risks are currency risk and interest rate risk. In 2018 the Bank upgraded the existing risk management system, policies and procedures, operational instructions and limits.

The Bank is exposed to credit risk through lending and placing of funds. Exposure to credit risk is regularly monitored per portfolios, individual clients, groups of related parties, and in relation to the limits which are set with respect to regulatory capital. The Bank regularly analyses the creditworthiness of borrowers, timely identifies potentially risky customers and manages commercial relationships with them in order to maximize collection. In order to mitigate credit risk, the Bank also actively contracts collaterals.

The Bank is exposed to liquidity risk within its asset and liability management. It has access to various funding sources that include retail deposits, corporate deposits and deposits from banks, borrowings, issuance of subordinated debt, bonds, share capital and


reserves. A variety of available funding sources enables flexibility, decreases funding limitations and in general enables lower financing costs.

Foreign currency risk is the risk of losses caused by the adverse exchange rate movements, arises from lending, funding, and trading activities. It is monitored daily, in accordance with regulations and internally set limits of UniCredit Group, for each currency and in total, for all assets and liabilities denominated in foreign currencies or indexed to foreign currencies. In Federation of Bosnia and Herzegovina, the currency is linked to the EUR, therefore there is no currency risk arising from movement of the domestic currency against EUR. The Bank’s operations are exposed to interest rate risk, to the extent to which interest-bearing assets and liabilities mature, or the interest rates are reset in different intervals, or in different patterns. Daily, the exposure to market risk is monitored by Value-at-Risk models and by monitoring of movements in the risk base.

In order to optimize the management of operational risk, the Bank has established its own system which is based on standards and principles defined by the local regulator, UniCredit Group and the Basel Committee. An adequate system for identifying, measuring, assessing and monitoring of operational risk has been established.

UniCredit Leasing Croatia doo

Business review

UniCredit Leasing Croatia doo (hereinafter under this heading: “the Company”) is the largest leasing company in the Republic of Croatia per size of assets. Its main activity is to provide finance and operating lease services for individuals and legal entities.

In 2018 the Company’s profit after tax was HRK 67.7 million (HRK 5.9 million or +9.6% increase compared to the previous year). Major statement of profit or loss items: net interest income from finance lease HRK 92 million (+13.2%), income from operating lease and other income HRK 289 million (+20.5%), depreciation and amortisation HRK 198 million (+32.8%), operating expenses HRK 116 million (+8.2%) and income tax expense HRK 15.9 million (-5.7%).

Growth in sales was strong (+20.5% compared to previous year), due to focus on the customers’ needs, good market positioning and adequate quality of services and products. The company maintained its portfolio quality, monitored net interest income realisation, increased efficiency, controlled expenses and set adequate provisions.

Total assets amounted to HRK 4,399 million (2017: HRK 3,823 million). The increase of HRK 576 million is a result of increase in sales (increase in volume of finance lease receivables and assets financed under operating leases).

In 2018 the Company concluded 14,892 new contracts (2017: 12,088 new contracts) with the total financing value of HRK 2,091 million (HRK 1,783 million). 54% relates to finance and 46% to operating lease. Vehicles and equipment represent major portion of the new volume with an emphasis on the tourism sector.

Development plan

Our target is to retain leading market position while preserving adequacy of risk, profitability and productivity. We will continue supporting SMEs within joint programs with Croatian Bank for Reconstruction and Development, European Bank for Reconstruction and Development, European Investment Fund and Croatian Agency for SMEs, Innovations and Investments. The Company will continue to provide financing through vendor channels, with specific focus on product development for strategic vendors in cooperation and commercial alignment of activities with Zagrebačka banka.

Development efforts steered constant improvements of internal processes and more efficient e2e processes, adequate level of automatization and better controls that have impact on company overall productivity. In the upcoming period the target will be getting closer to clients by developing online solutions and applications.

Special focus will also be on reducing levels of non-performing lease portfolio as well as on meeting the group and regulatory requirements. A further human resource development focus will be on increasing competences and motivation of our employees.

Exposure to risks

The most significant risks the Company is exposed to are market, liquidity and credit risk.

Significant market risks the Company is exposed to are currency and interest rate risk. Currency risk arises from financial and operating lease receivables linked to EUR. This risk is managed by obtaining funding in the same corresponding currency and by hedge accounting.

Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. In order to reduce the mismatch of interest positions, the Company manages its exposure to interest rate risk by monitoring its interest rate gap and by aligning maturities of assets with maturities of sources of finance.

In order to manage the liquidity risk, the Company continuously prepares cash flow projections i.e. forecasts its cash outflows and inflows. Liquidity risk management measures include prevention and elimination of potential causes of insolvency e.g. through short-term plans to bridge liquidity gaps or utilization of available overdraft.


Management Board Report of Condition of the Bank’s subsidiaries (Continued)

The Company is exposed to credit risk through finance and operating lease receivables. At origination, the Company analyses the creditworthiness of customers and seeks to conclude transactions with customers of sound credit rating. Furthermore, depending on the assessment of risk of each individual exposure, the Company is obtaining additional collateral and guarantees (in addition to the leased asset). Special attention is also placed on monitoring of the quality of leased assets until final settlement of lease contracts’ liabilities.

ZB Invest dooBusiness review

ZB Invest doo (hereinafter: ‘the Company’) is leading investment fund management company. It manages fifteen Open-Ended Investment Funds with Public Offering (“UCITS” funds), one privately offered Alternative Investment Fund (hereinafter under this heading: ‘AIF’) and considerable number of discretionary managed clients’ portfolios. The aim of the Company is to offer to its investors and clients a complete and contemporary range of instruments and services for savings and investments on capital markets. Besides aforementioned, its UCITSs funds represent the base for a number of Unit-Linked insurance policies.

Total assets under the management of the Company includes UCITS funds, one AIF and clients’ portfolios. At the end of 2018 total assets amounted to HRK 5.7 billion (2017: HRK 5.2 billion). The Company manages two largest equity UCITS funds, largest balanced fund, second largest bond fund and largest short term bond fund.

The structure of investors in UCITS funds: 63% individual, 8% corporate and 29% institutional investors (2017: 69% individual, 9% corporate and 22% institutional investors).

Despite unfavorable global and local market conditions which had a significant impact on sales dynamics, the Company managed to increase market share to over 26% (2017: 24.57%) and additionaly strengthen market leader position. The Company was named as the best investment fund management company in Croatia by the Association of investment fund management companies at Croatian Chamber of Economy and also received Top of the Funds professional award for the following investment funds: ZB eplus was named the best EUR money market UCITS fund and ZB Trend was named the best equity UCITS fund.

In cooperation with its main distributor Zagrebačka Banka, The Company developed an automated investment advisory service that will be applied in all branches of Zagrebačka banka and enable perosnalised financial advice to clients (“ZABA SMART Invest” service).

Financial markets overview

Financial markets in 2018 experienced high volatility throughout the year, in clear contrast to last year which was marked by extremely low volatility and harmonized global growth. Trade war between US and China, Fed increasing the rates, fears over slowdown of global growth and growth in the US reaching its peak this year were main causes of negative returns of all asset classes. Croatian stock market experienced very low liquidity after Agrokor restructuring, with negative Crobex stock index performance. Global bond prices, including US Treasury and European periphery markets, had negative performance amid Fed’s restrictive monetary policy and expectations that ECB will end its bond redemption programme next year. Domestic economic growth, positive regional surrounding and lack of supply influenced slow increase in prices of majority of domestic bonds. Domestic money market had a one more year of record liquidity.

The environment of relatively low interest rate was positive, while high volatility was a main negative contributor to net inflows in investment funds during the year. The main interest of investors were fixed income funds.

Realised result and main indicators

Again in 2018 the Company maintained high profitability with net profit after tax of HRK 12.1 million. During 2018 average assets under the management amounted to HRK 5.69 billion, 9.4% above 2017. Total revenues of the Company amounted to HRK 52 million. The Company’s revenue consists mainly of fund and portfolio management fees income with the most significant contribution to management fee from bond fund ZB bond and balanced fund ZB global. The expenses amounted to HRK 37 million, of which almost HRK 24 million relates to fund and portfolio fee and commission expenses (distribution fees), while HRK 13 million relates to other administrative expenses and financial expenses.

Total assets of the Company amounted to HRK 30 million at 2018 year-end. These were mainly short-term liquid assets: giro accounts with credit institutions HRK 21 million and receivables and other assets HRK 8 million.

Capital and reserves amounted to HRK 24 million and consisted of HRK 4 million of issued capital, HRK 8 million retained earnings from previous years and HRK 12 million profit for the year. The issued capital is fully paid in by the sole founder and owner Zagrebačka banka d.d. The liabilities in the amount of HRK 6 million are mostly short term liabilities, HRK 3 million are liabilities for distribution fees while the remaining are liabilities to suppliers, salaries and other liabilities.

Management Board Report of Condition


Development plan

As a one of the leading investment funds’ management companies, the Company will continue to be committed to professional asset management and high quality of services, to enable its clients and investors the best possible returns on financial investments in accordance with investment funds’ and individual portfolio strategies. In the long term, the Company aims to ensure an attractive range of funds and investment products and services. Professional asset management, transparent reporting and communication and clients’ and investors’ protection as well as full compliance with legal regulatory requirements is a basic and necessary precondition for operations of the Company.

Exposure to risks

The Company dedicates special attention to risk management in the course of its operations. Risk management system is based on UniCredit Group’s risk management standards. The most significant risks the Company is exposed to are credit risk, market risk, liquidity risk and operating risk (the Company exposures to liquidity and market risks were not significant at the reporting date). A major credit exposure of the Company relates to deposits to credit institutions.

Other members of the Group

Good results are also realised by the majority of the remaining Group’s members.

Miljenko Živaljić, MScChairman of the Management Board


Banking that matters.

We are dedicated to creating tangible value for all our clients, employees and stakeholders by providing real solutions to real needs. Everything we do is grounded on ethics and respect.


Business description




Zagrebačka banka dd is a licensed bank operating in the Republic of Croatia and the holding company for the Zagrebačka banka Group.

The Zagrebačka banka Group is a financial services group which provides a full range of corporate and retail banking services for customers in the Republic of Croatia and Federation of Bosnia and Herzegovina. The Group serves around 73,000 active corporate clients and small businesses and approximately 1.6 million active retail clients.

The Bank provides a full range of banking services, including corporate, retail banking, international financing, investment banking and corporate finance services.

Subsidiaries and associates

The Bank’s subsidiaries and associated companies as at 31 December 2018 and during 2018 are presented below:

Fully consolidated subsidiaries COMPANY ADDRESS COUNTRY OF DOMICILE INDUSTRY GROUP OWNERSHIP %

UniCredit Bank dd, Mostar Kardinala Stepinca bb Federation of Bosnia Banking 99.3 88000 Mostar and Herzegovina PRVA STAMBENA ŠTEDIONICA dd6 Samoborska 145 Republic of Croatia Banking 100.0 10000 Zagreb ZB Invest doo Samoborska 145 Republic of Croatia Fund management 100.0 10000 Zagreb CENTAR KAPTOL doo7 Nova Ves 17 Republic of Croatia Property investment 100.0 10000 Zagreb POMINVEST dd Gundulićeva 26a Republic of Croatia Property management 88.7 21000 Split ZANE doo Nova Ves 17 Republic of Croatia Real estate agency 100.0 10000 Zagreb ZANE BH doo Branilaca Sarajeva 20 Federation of Bosnia Real estate agency 100.0 71000 Sarajevo and Herzegovina ZABA Partner doo Augusta Cesarca 2 Republic of Croatia Insurance broker 100.0 10000 Zagreb UniCredit Leasing Croatia doo Heinzelova 33 Republic of Croatia Leasing 100.0 10000 Zagreb LOCAT CROATIA doo Damira Tomljanovića Gavrana 17 Republic of Croatia Real estate business 100.0 10000 Zagreb BACAL ALPHA doo Damira Tomljanovića Gavrana 17 Republic of Croatia Real estate business 100.0 10000 Zagreb ALLIB NEKRETNINE doo Damira Tomljanovića Gavrana 17 Republic of Croatia Real estate business 100.0 10000 Zagreb UniCredit Partner doo8 Damira Tomljanovića Gavrana 17 Republic of Croatia Trading activities 80.0 10000 Zagreb

6 In June 2018 Prva stambena štedionica dd was merged to Zagrebačka banka dd.7 In February 2018 the Group sold its stake in the company Centar Kaptol doo.8 In May 2018 UniCredit Partner doo was merged to UniCredit Leasing Croatia doo.


ZAGREBAČKA BANKA GROUP - NUMBER OF BRANCHES (END OF YEAR) 2018 2017Republic of Croatia 127 128Federation of Bosnia and Herzegovina 75 76Total 202 204

Branch network map

Equity accounted associated companies COMPANY ADDRESS COUNTRY OF DOMICILE INDUSTRY GROUP OWNERSHIP %

Allianz ZB doo društvo za upravljanje Heinzelova 70 Republic of Croatia Obligatory and voluntary pension 49.0 obveznim i dobrovoljnim 10000 Zagreb fund management mirovinskim fondovima9 MULTIPLUS CARD doo Trg Dražena Petrovića 3 Republic of Croatia Advertising and marketing services 25.0 10000 Zagreb UniCredit Broker doo Obala Kulina bana 15 Federation of Bosnia Insurance broker 48.7 71000 Sarajevo and Herzegovina

9 In September 2018, a full legal merger was executed whereby Allianz ZB, voluntary pension fund management company was merged with Allianz ZB, obligatory pension fund management company. After the merger, the company Allianz ZB, obligatory pension fund management company changed its name into Allianz ZB doo obligatory and voluntary pension fund management company.

Rijeka

Zadar

Šibenik

Split

Dubrovnik

Bjelovar

Karlovac

Bihać

Slavonski Brod

Osijek

Sisak

Varaždin

Pula

Jastrebarsko

Velika Kladuša

Cazin

Prijedor

Sanski Most

Bosanska Krupa

Opatija

Viškovo

Rovinj

PorečLabin

Krk

Crikvenica

Vodice

Omiš

Sinj

Imotski

Metković

Makarska

Trogir

Supetar - Brač

Umag

Dugo Selo

Ivanić Grad

Požega

Nova GradiškaOkučani

Slatina

Našice

Županja

OdžakOrašje

Vukovar

VinkovciĐakovo

Velika Gorica

VrbovecVirovitica

Križevci

KoprivnicaĐurđevac

Pitomača

Sv. Ivan Zelina

Marija Bistrica

Bedekovčina ZlatarZabok Konjšćina

Varaždinske toplice

Novi MarofHum na Sutli

Čakovec

IvanecLudbreg

Lepoglava

Vidovec

KrapinaPregrada

Klanjec

Donja StubicaOroslavje

SamoborZaprešić

Zagreb

Mostar

Čapljina

NeumStolac

Ljubuški

ČitlukGrude

Široki Brijeg

Posušje

Banja Luka

Tuzla

Zenica

Sarajevo

Brčko

KonjicTomislavgradLivno Rama

Bugojno

Donji Vakuf

JajceTravnik

VitezKakanj

Vogošća

Olovo

Vareš

Žepče

Tešanj

JelahDoboj Gračanica

SrebrenikGradačac

MaglajLukavac

ZavidovićiŽivnice

Kalesija

Bijeljina

BrezaVisoko

KiseljakFojnica

Novi Travnik

Gornji Vakuf - Uskoplje

HadžićiIlidža


We will maintain a strong capital position by generating solid profit. We confirm our MDA buffer. The Group fared well in the EBA stress test results, with the third highest CET1 ratio among systemic banks in the Eurozone.

Strengthen and optimise capital.


Overview of the Croatian economy in 2018




Macroeconomic indicators for the Republic of Croatia

2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008Gross domestic product. billion HRK. in current prices 382.0* 365.6 351.3 339.6 331.6 331.8 330.8 333.5 329.1 331.4 347.7Gross domestic product. % change 2.8* 2.9 3.5 2.4 (0.1) (0.5) (2.3) (0.3) (1.5) (7.3) 2.0GDP per capita. in EUR 12,598* 11,881 11,177 10,617 10,253 10,294 10,312 10,479 10,517 10,487 11,171Private consumption. % change 3.2* 3.6 3.4 1.0 (1.6) (1.9) (3.0) 0.3 (1.5) (7.5) 1.2Public consumption. % change 2.9* 2.7 0.7 (1.0) 1.8 0.6 (0.8) (0.4) (0.6) 2.1 (0.7)Investment. % change 4.1* 3.8 6.5 3.8 (2.8) 1.4 (3.3) (2.7) (15.2) (14.4) 9.2Exports of goods and services. % change 3.8* 6.4 5.6 9.4 6.0 3.1 (0.1) 2.2 6.2 (14.1) 0.8Imports of goods and services. % change 5.5* 8.1 6.2 9.2 3.1 3.1 (3.0) 2.5 (2.5) (20.4) 4.0Industrial production. % change (-1.0) 1.4 5.3 2.7 1.2 (1.8) (5.5) (2.0) (1.4) (9.2) 1.2Construction industry. % change 5.0* 1.8 2.7 (0.8) (7.3) (4.1) (11.8) (9.1) (15.9) (6.5) 11.8Tourism (night stays). % change 4.0 10.6 9.1 7.8 2.6 3.4 4.0 6.9 2.2 (3.7) 2.0Unemployment rate (ILO). (% of economically active population) 8.8* 11.2 13.1 16.3 17.3 17.2 15.8 13.5 11.8 9.1 8.4Consumer prices. % change 1.5 1.1 (1.1) (0.5) (0.2) 2.2 3.4 2.3 1.1 2.4 6.1General government budget balance (% GDP) (0.5)* 0.8 (0.9) (3.4) (5.1) (5.3) (5.2) (7.8) (6.5) (6.0) (2.8)Balance of payments current account balance (% GDP) 2.7* 4.0 2.6 4.5 2.0 0.9 (0.1) (0.7) (1.1) (5.1) (8.8)External debt (% GDP) 75.9* 81.8 89.3 101.7 108.4 105.6 103.0 103.7 104.2 101.1 84.3Money supply (M1). % change. end of period 20.7 19.1 18.2 11.4 9.6 11.5 0.9 7.3 1.5 (14.6) (4.6)Exchange rate HRK:EUR. year average 7.41 7.46 7.53 7.61 7.63 7.57 7.52 7.43 7.29 7.34 7.22Exchange rate HRK:EUR. end of period 7.42 7.51 7.56 7.64 7.66 7.64 7.55 7.53 7.39 7.31 7.32

Sources: State Bureau of Statistics. Croatian National Bank. Ministry of Finance* Crostat flash estimate and estimate by the Chief Economist of Zagrebačka banka

The Croatian economy continued to grow solidly in 2018

Positive trends in the Croatian economy which emerged since late 2014, continued in 2018. The estimated real increase in gross domestic product of 2.8% is almost the same as in 2017. The greatest contribution to growth continues to be strong personal consumption, and to a lesser extent exports of goods and services and investment. Tourist season was again excellent, and the revival of construction activity is noteworthy. The growth of the economy was achieved despite the further deleveraging of economic entities, thanks to the favourable international environment, and is accompanied by further decrease of public debt. There was also a significant increase in disposable household income and personal spending due to increased employment and wage and pension increases. However, the expected significant reform efforts have lagged again, largely due to the government’s focus on addressing the business-related difficulties of several large domestic companies.

The increase of investment was still weaker than expected, partly due to insufficient use of available funding sources within EU funds. Despite a significant emigration of labour force to EU countries, employment growth continued at a rate higher than 2%, with seasonally increased employment in the tourism, hospitality and construction sectors. The number of persons employed in legal entities increased by 2.5%, employment in crafts grew by 4.3%, while the number of employees in freelance professions and individual farmers continued to decrease (-3.7% and -0.3% respectively). The rate of registered unemployment fell much faster than expected due

to increased emigration to EU countries. The number of registered unemployed in 2018 was down by 20.5%, while at the same time the registered unemployment rate fell from 11.9% to 9.6%. Unemployment rate according to the ILO was down from 11.2% in 2017 to only 8.8% in 2018. The continued growth of the economy and consumption resulted in a significant increase in current public revenues and indirectly would led to the another general government surplus if there has no issue with the activation of government shipbuilding guarantees. The continuation of a fundamentally healthy financial situation has contributed to an additional reduction in public debt interest expenses. The current account balance accounted for a significant surplus (2.7% of GDP), for the sixth consecutive year, primarily due to an increase in surplus in services, especially in tourism, as well as a certain increase in inflows from EU funds and in remittance inflows.

Thanks to an increase in real disposable income of households in relatively low inflationary environment, and partly to the resuming of growth of their borrowing, personal consumption remained buoyant the fourth year in a row. This was significantly contributed by an increase of average net wages in real terms of almost 3%, as well as by a slight increase in pensions. Retail trade turnover by the end of 2018 has been growing for more than 50 consecutive months in real terms. This is partly due to the record consumption of foreign tourists as well.

Industrial production, in contrast to positive trends in other sectors of the economy, declined in 2018, due to insufficient increase in investment activity, sharp slowdown in commodity exports and the


outstanding problems in shipbuilding and the chemical industry. The revitalization of construction activity during 2018 is further accelerated (up 5.0%) thanks to the increased construction of buildings, despite the further delay in realization of some significant infrastructure projects.

Due to the absence of further public sector reforms, the public finances mostly depended on the revenue side. Revenue growth was higher than expected, induced by growing trend in employment, personal spending and investment activity. Therefore, despite the increase in public spending by 2.9% in real terms, the primary surplus of the consolidated general government has again been attained by approximately 2% of GDP. Such developments are strongly supported by a reduction in financial expenditures, given that the Republic of Croatia has used the advantage of historically low interest rates on international financial markets. Due to the unexpected activation of guarantees in the shipbuilding sector this did not result in a surplus, but a consolidated general government deficit of around 0.5% of GDP was achieved. In addition, the risk premium decreased during the year and rating agencies improved the outlook of sovereign credit ratings. The government was additionally favored by high liquidity and favourable financing conditions in the domestic market. However, the European Commission has again recommended radical structural reforms in the public sector, in particular public administration and health care system, in order that the positive fiscal situation becomes sustainable.

According to our assessment, the general government debt by the end of 2018 slightly increased in nominal terms, to around HRK 284 billion, but its share in GDP decreased from 77.5% to 74.4%. During the year, the Ministry of Finance has issued a bond in the domestic market with a maturity of 11 years in the amount of HRK 5 billion and increased previously issued five-year bond for additional HRK 5.5 billion at much more favourable conditions than in previous years. In the international markets it also issued one euro bond in the total value of EUR 750 million, with a maturity of 10 years and interest rate of 2.7%.

In 2018 consumer prices in the Republic of Croatia increased by 1.5% on average over the previous year, thanks to a significant increase in the prices of petroleum products. The current year-on-year increase in prices was lower in December (0.8%) due to a moderate decrease in prices of petroleum products as well as food products towards the end of a year. Core inflation (prices excluding the price of energy products and food products) was not higher than 1.0%, indicating the absence of significant inflationary pressures.

In 2018, the CNB continued to stimulate banks’ placements to the real sector without jeopardizing the stability of prices and the kuna exchange rate, pushing for expansive monetary policy to accelerate the pace of economic growth. The CNB carried out a single structural repurchase operation, which put almost HRK 1.4 billion on banks

over the five year period at an interest rate of 1.2%. Such a policy increased liquidity surplus on bank accounts at the CNB and supported the continued decline of interest rates at historically low levels.

The increase in kuna liquidity was further contributed by foreign exchange transactions of the CNB, mostly for the purchase of foreign currency by banks in order to weaken the appreciation pressures on the kuna exchange rate. In five interventions the CNB bought out a total of EUR 1.678 billion from banks and created nearly HRK 12.5 billion. Despite these efforts, the exchange rate of kuna / euro at the end of the year was slightly reduced to a level of 7.42 kuna compared to the end of 2017 (by 1.3%). However, during the year the appreciation of the kuna was occasionally more pronounced (especially during the summer months). Thus, according to the average exchange rate, the kuna appreciated by 0.7% in 2018. By buying foreign currency on the Croatian foreign exchange market the CNB international reserves reached the level of EUR 17.4 billion at the end of 2018 (an increase of EUR 1.7 billion or 11.0% from the end of the previous year).

Total loans of commercial banks in 2018 increased by 2.2% or 5.5 billion kuna. Loans to the state (central, local and social security funds) rose by HRK 0.7 billion or 1.8%. Loans to the nonfinancial corporate sector were down by HRK 0.9 billion or 1.1%, while loans to households increased by HRK 5.5 billion (+ 4.6%). These nominal changes were partially influenced by the decrease in the exchange rate, but more importantly, by sales of part of the non-performing loan portfolio that continued during the year.

Total deposits in the banking system in 2018 increased by HRK 15.5 billion (+ 5.3%). Thereby, corporate sector deposits grew by 7.2% and the state deposits by as much as 3.5%. Deposits from households rose most in the absolute terms, by HRK 8.3 billion (+ 4.2%), but the structure of deposits was also changed: sight deposits increased by as much as HRK 21.3 billion (+ 28.6%) and the term deposits fell by HRK 13.0 billion (-10.8%). The reduced propensity for term deposits is the consequence of declining trend in interest rates, and is also influenced by a psychological effect after the introduction of interest income tax. On the other hand, the strong growth of sight deposits was positively influenced by higher incomes of the population, especially during the record tourist season.

Banking sector developments

According to the preliminary aggregate CNB’s statistical report, in the first nine months of 2018 domestic banking sector recorded a net profit in the amount of HRK 4.4 billion. This is an increase of HRK 2.2 billion (+100.3%) compared to the same period of the previous year, mostly driven by significant decrease in loan provisions. Moreover, operating income was also higher (+1.0%), and in revenue structure


the share of net income from commissions and fees increased, while net interest income declined. The return on average equity was 10.0%, up from 5.9% in 2017.

Capital adequacy ratio of the Croatian banking sector decreased and as at 30 September 2018 amounts to 22.18% (23.80% as at 31 December 2017). The main reason for this is an increase in the risk weighted assets and the gradual application of new risk weights on a portion of the foreign currency exposure towards government.

By the end of September 2018, the share of non-performing loans decreased to 10.3% (11.4% at the end of 2017) mainly due to sales of non-performing loan portfolios. Non-performing loans coverage slightly decreased to 59.1% by the end of September 2018 (61.5% as at 31 December 2017), mostly due to the fact that sold portfolios had high coverage and the new inflows of non-performing loans are with relatively lower coverage rate.

Overview of the Croatian economy in 2018 (Continued)




We are continuing to improve our asset quality by de-risking our balance sheet, fully on track for the accelerated rundown of our Non Core portfolio by 2021. A disciplined risk management approach guarantees high quality origination across the Group.

Improveasset quality.


Operating and financial review




Group’s results

The overview of Group’s results and comments on major trends in financial statements is provided previously within this Annual Report.

Operating results of Zagrebačka banka dd

In 2018, Zagrebačka banka dd recorded a profit after tax of HRK 1,857 million.

Return on asset (ROA) of the Bank amounts to 1.64% (2017: 0.82%).

Operating income amounted to HRK 4,523 million, increased by HRK 281 million (+6.6%):

• Net interest income amounted to HRK 2,667 million, it is under the influence of lower net interest margin.

• Net fee and commission income amounted to HRK 1,099 million, it is HRK 54 million (+5.2%) higher, due to the increase in payment transaction and credit card fees.

• Net trading and other income amounted to HRK 757 million, increased by HRK 282 million (+59.4%), due to higher trading result and dividend income.

Operating expenses amounted to HRK 1,842 million, increased by HRK 40 million (+2.2%). Cost to income ratio equals 40.73%.

Profit before impairment and other provisions amounted to HRK 2,681 million. The increase of HRK 241 million (+9.9%) is a result of the previously described movements in Operating income and Operating expenses.

Impairment and other provisions amounted to HRK 570 million, they have decreased by HRK 864 million. Impairment losses on placements to companies have been significantly increased in 2017. In 2018 the ratio of non-performing loans decreased and the coverage of non-performing loans increased.

The Bank’s assets and liabilities

Total assets of the Bank amounted to HRK 113,243 million and have increased by HRK 11,059 million (+10.8%).

• Net loans to customers amounted to HRK 65,870 million, increased by HRK 3,545 million (+5.7%). Following positive environment trends the loan activity in retail, corporate and public sectors increased. The total volume also increased by the merger of Prva stambena štedionica d.d. to Zagrebačka banka d.d.

• Deposits from customers represent primary source of funding. They amounted to HRK 83,153 million and have increased by HRK 5,353 million (+6.9%), mostly following the merger of Prva stambena štedionica dd. Loans to deposits ratio amounts to 79.22%.

• Deposits from banks and borrowings amounted to HRK 11,066 million. The increase of HRK 6,031 million (+119.8%) is a result of management of the balance sheet structure.

Capital and reserves - at HRK 16,424 million. The capital adequacy ratio - at 26.26% (31 December 2017: 28.1%).

The structure of the Bank’s assets

For the purpose of analysis, the assets are broken down into four categories; their importance and trends in comparison to the previous year are presented below:

2018

Loans and receivables from customers, 58%

Structural and liquidity management assets, 39%

Investments in subsidiaries and associates, 1%

Other assets, 2%


Loans and receivables from customers represent the main portion of the Banks’s assets and account for 58.2% of total assets (2017: 60.5%).

Structure of loans and receivables from customers:

The total volume of gross loans is higher in all major segments.

The Bank continuously monitors quality of assets and continuously increases coverage ratio for impaired loans. It is strongly focused on early identification of problem loans, their collection, debt settlements and restructuring.

70,000

60,000

50,000

40,000

30,000

20,000

10,000

-

2018

2017

Loans and receivables

from customers

Investments in subsidiaries and associates

Other assets

65,87062,325

Structural and liquidity management

assets

44,070

35,858

1,537 1,637 2,3641,766

The structure of the Bank’s assets – comparison to the previous year (in HRK million)

HRK MILLION % HRK MILLION % 2018 2018 2017 2017

Gross loans to and receivables from Corporate entities and state and public sector 41,116 57.8% 40,893 60.0% Individuals and unincorporated businesses 29,989 42.2% 27,241 40.0% Total 71,105 100.0% 68,134 100.0%Impairment allowance Corporate entities and state and public sector (4,251) 81.2% (4,795) 82.5% Individuals and unincorporated businesses (984) 18.8% (1,014) 17.5% Total (5,235) 100.0% (5,809) 100.0%Net loans to and receivables from Corporate entities and state and public sector 36,865 56.0% 36,098 57.9% Individuals and unincorporated businesses 29,005 44.0% 26,227 42.1% Total 65,870 100.0% 62,325 100.0%


Operating and financial review (Continued)


Structural and liquidity management assets

Structural and liquidity management assets represent 38.92% of total assets (2017: 35.09%). Structure of these assets is as follows:

Current accounts and deposits from customers

Current accounts and deposits from customers represent 73.4% (2017: 76.1%) of the total equity and liabilities. They amounted to HRK 83,153 million at 2018 year-end (2017: HRK 77,800 million) which represents an increase of HRK 5,353 million (+6.9%). The increase in current accounts and deposits from corporate entities, state and public sector amounted to HRK 767 million (+2.7%), while the increase in current accounts and deposits from individuals and unincorporated businesses amounted to HRK 4,586 million (+9.3%).

Current accounts and deposits from individuals and unincorporated businesses represent 64.7% of total deposits from customers (2017: 63.2%).

Current accounts and deposits from banks and borrowings

Current accounts and deposits from banks and borrowings amounted to HRK 11,066 million, increased by HRK 6,031 million or 119.8%.

HRK MILLION 2018 2017Cash and cash equivalents 21,860 14,291Obligatory reserve with the CNB 5,684 5,525Loans and receivables from banks 4,853 6,509Investments in securities and derivatives 11,673 9,533 44,070 35,858

Throughout the year, the Bank maintained the necessary liquidity levels and complied with regulations.

The Bank’s equity and liabilities

The structure of Bank’s equity and liabilities as at 31 December 2018:

Current accounts and deposits from individuals and unincorporated bussines; 47%

Current accounts and deposits from corporate entities, state and public sector; 26%

Borrowings and current accounts and deposits from banks; 10%

Other liabilities; 2%

Equity; 15%

2018

2018

2017

Current accounts and deposits from individuals and unincorporated

bussines

53,783449,197

29,370 28,603

11,066

2,6005,035 3,651

15,69816,424

Current accounts and deposits from

corporate entities, state

and public sector

Borrowings and current

accounts and deposits from

banks

EquityOther liabilities

60,000

50,000

40,000

30,000

20,000

10,000

0

The structure of Bank’s equity and liabilities – comparison to the previous year (in HRK million)


Equity

The Bank’s share capital is denominated in HRK and comprises ordinary shares listed on the Zagreb Stock Exchange.

The equity of the Bank amounted to HRK 16,424 million on 31 December 2018. It represents 14.5% of total funding sources (2017: 15.4%).

Capital adequacy ratio - at 26.26% as at 31 December 2018 (31 December 2017: 28,06%).


We are leveraging on digitalisation to transform our operating model. We are ahead of schedule, with an improved cost reduction. The optimisation of the cost base will remain important to ensure our Group’s efficiency and effectiveness.

Transform operatingmodel.


Management and corporate governance




In accordance with Article 272p of the Companies Act, and Article 22 of the Accounting Act, the Management Board of Zagrebačka banka dd declares that the Bank applies the Code of Corporate Governance, as jointly prepared by the Croatian Financial Services Supervisory Agency (“HANFA”) and the Zagreb Stock Exchange (“ZSE”). The Code of Corporate Governance is published on the website of HANFA and ZSE.

The 2018 Annual Questionnaire which reflects the state and the practice of Corporate Governance is enclosed and forms an integral part of the Declaration, in relation to the recommendations contained in the Code of Corporate Governance, with explanations of certain discrepancies.

UniCredit S.p.A. is the largest shareholder in the Bank. The Bank is a member of the banking group UniCredit (Group), and as a Group member, it has to act, to the extent permitted by the applicable legal regulations, in line with the guidelines issued by UniCredit S.p.A., as the holding company, in meeting its supervisory and co-ordinating duties.

Information on the Bank’s shareholders can be found in this Annual Report, under the heading: Notes to the financial statements (Note 31a - Share capital).

In order to reduce the risks in the financial reporting process, the Group and the Bank established an adequate system of internal controls and risk management which is secured through a clear segregation of duties of the participating organizational units as it is regulated by internal policies and procedures. Adequate and effective internal controls that are integrated into the business processes and activities have been established.

Information regarding the internal control and risk management mechanisms relating to financial reporting are described within this Annual Report, under the heading: Notes to the financial statements (Note 38 - Risk review and management).

General MeetingThe Bank’s shareholders exercise their rights in the General Meeting of the Bank. The General Meeting of the Bank takes decisions on the issues regulated by the law and the Bank’s Articles of Association. The General Meeting is convened by the Bank’s Management Board and it has to be convened at the request of the Supervisory Board, the Bank’s Management Board or shareholders, in line with the law.

A shareholder intending to participate in the General Meeting either in person or through a proxy is required to file a written attendance application with the Bank Management Board on the fifth day prior to the date of the General Meeting at the latest. Share transfers made in the period from the fifth day prior to the General Meeting until the end of the General Meeting shall give no right to attend the General

Declaration of application of the Code of Corporate Governance

Meeting. Each HRK 20.00 of the nominal amount of a voting share, that is each ordinary share, shall carry one vote at the Bank’s General Meeting.

Management Board and Supervisory Board The authorities of the Management Board and the Supervisory Board of the Bank are regulated by the applicable legal regulations and the Bank’s Articles of Association.

The procedure of appointment, i.e. election, as well as the removal of the members of the Management Board and Supervisory Board is stipulated by the Companies Act, the Credit Institutions Act and the Bank’s Articles of Association.

Management Board

In line with the provisions of the Bank’s Articles of Association, the Bank’s Management Board is comprised of three to nine members, and the decision on the final number of the Management Board members is made by the Supervisory Board. The Chairman and members of the Bank’s Management Board are appointed by the Supervisory Board, their term of office being four years, subject to previous approval by the Croatian National Bank.

Composition, duties and responsibilities of the Management Board are stipulated by the Articles of Association, the Policy of the Target Structure of the Management Board of Zagrebačka banka dd, the Regulation on the Organisational Setup of Zagrebačka banka dd, the Decision on macro-organisation of Zagrebačka banka dd and the Decision on Distribution of Powers and Responsibilities of the Management Board Members of Zagrebačka banka dd.

Members of the Management Board of the Bank have to meet the requirements for performing the function of the member of the Management Board, as stipulated by the Companies Act, the Credit Institutions Act and the relevant subordinate regulations, global rules defined at the level of UniCredit Group and the Bank’s by-laws. The members of the Management Board have to possess adequate collective knowledge, skills and experience required to direct the business of the Bank independently without undue influence from other persons, and in particular to understand the Bank’s activities and the main risks.

The suitability of the individual member of the Management Board of the Bank for performing the respective function, represents the extent to which the relevant person meets the stipulated requirements, which should ensure professional, lawful, safe and stable performance of activities within his/her scope of competence.


The Management Board is responsible for the management of the Bank’s operations, and each member of the Management Board is responsible for a specific number of business functions and support functions. Each member of the Management Board has a scope of powers and responsibilities, which are granted to him/her by the special decision of the Management Board, in line with the law, the Bank’s Articles of Association, the Rules of Procedure of the Management Board and other Bank’s by-laws. The responsibilities and scope of competence of the Management Board members are legal, statutory and with supervisory and directional powers in respect of the area of the executive responsibility of the managers of the first hierarchical level who are under their direct competence.

The Bank’s Management Board conducts business operations of the Bank and manages its assets. It is responsible and authorised to undertake all the activities and take all the decisions which it considers necessary for successful conduct of the Bank’s business operations.

Members of the Bank’s Management Board are employed in the Bank on a full-time basis.The decision on the removal of a member of the Management Board is made by the Supervisory Board.

Members of the Management Board who served during 2018 and as of date of signing of this Report:

While the Management Board may not issue new shares of the Bank, it is authorised to approve the Bank’s acquisition of its own ordinary shares for the purpose of their allocation to the Bank’s employees.

Supervisory Board

In line with the provisions of the Bank’s Articles of Association, the Supervisory Board is composed of nine or eleven members. The decision on the number of the Supervisory Board members is made by the General Meeting.

The members of the Supervisory Board are appointed by the General Meeting, their term of office being four years, subject to previous approval by the Croatian National Bank.

Members of the Supervisory Board of the Bank have to meet the requirements for performing the function of the member of the

Miljenko Živaljić Chief Executive Officer, ChairmanClaudio Cesario General Manager, Vice-ChairmanDijana Hrastović Member (End of term of office on 06 February 2019)Lorenzo Ramajola MemberMarko Remenar Member (End of term of office on 01 September 2018)Albert Angersbach Member (End of term of office on 15 July 2018)Stefano Gison Member (End of term of office on 31 October 2018)Marco Lotteri Member (Beginning of the term of office as of 05 July 2018)Nikolaus Maximilian Linarić Member (Beginning of the term of office as of 07 February 2019)Eugen Paić-Karega Member (Beginning of the term of office as of 07 February 2019)

Supervisory Board, as stipulated by the Companies Act, the Credit Institutions Act and the relevant subordinate regulations, global rules defined at the level of UniCredit Group and the Bank’s by-laws. The members of the Supervisory Board have to possess adequate collective knowledge, skills and experience required to supervise the business of the Bank independently without undue influence from other persons, and in particular to understand the Bank’s activities and the main risks.

The suitability of the individual member of the Supervisory Board of the Bank for performing the respective function, represents the extent to which the relevant person meets the stipulated requirements, which should ensure professional, lawful, safe and stable conduct of operations within his/her scope of competence.

Within the Supervisory Board, the following committees have been founded: the Audit Committee, the Remuneration Committee, the Nomination Committee and the Risk Committee.


The members of the respective Committees are appointed from the members of the Supervisory Board to the term of office corresponding with the current term of office of the Supervisory Board members.

The scope of competence and work of the respective Committees is governed by the Rules of Procedures of individual Committee, in line with the relevant legal regulations.

The General Meeting of the Bank may remove the member of the Supervisory Board before the expiry of the current term of office to which he/she is appointed, provided that legal and statutory reasons to such effect are met. In line with the provisions of the Articles of Association, the proposal for removal may be made by the Supervisory Board or at least five of its members, or the Bank’s shareholders holding at least 10% of the total number of voting shares at the time of submitting the proposal.

Members of the Supervisory Board during 2018:

Description of the diversity policy

Zagrebačka banka dd, as a member of UniCredit Group applies the Group standards of diversity when selecting the members of the Management Board and the Supervisory Board, as stipulated by the Group policies on structure, composition and remuneration of managerial bodies of the UniCredit Group members and the Group policy on gender equality.

Among the key standards and responsibilities, of all the relevant functions and employees, stand continuous efforts to increase the number of women holding managerial functions, which is the reason why the Group fosters the role of women in managerial positions, as well as monitoring and reporting on the presence of women in processes of corporate governance. The standard of professional and age diversity is also present when performing assessment and selecting members of the Management and the Supervisory Board, as well as valuing international business experience.

Simone Marcucci Chairman (Chairman as of 21 December 2018) Danimir Gulin Deputy Chairman (Deputy Chairman as of 11 May 2018)Zeynep Nazan Somer Ozelgin Deputy Chairman (Deputy Chairman as of 11 May 2018)Erich Hampel Chairman (End of term office on 10 December 2018)Jakša Barbić Deputy Chairman (End of term office on 10 May 2018)Franco Andreetta Deputy Chairman (End of term office on 10 May 2018)Fabrizio Onida Member (End of term office on 10 May 2018)Emilio Terpin Member (End of term office on 10 May 2018)Christoph Metze MemberSavoula Demetriou MemberAurelio Maccario MemberRomeo Collina MemberWolfgang Schilk Member

Management and corporate governance (Continued)


Amendments to the Articles of Association

The procedure for making amendments to the Articles of Association is defined in Articles 79 and 80 of the Articles of Association. A proposal for amendment can be submitted by the Management Board, Supervisory Board or by a shareholders holding at least 10% of the Bank’s voting shares.

Proposals for amendments to the Articles of Association are submitted to the Supervisory Board which can adopt such proposals and pass them on to the General Meeting of the Bank for adoption.

Declaration of application of the Code of Corporate Governance (continued)


Code of Corporate Governance – Annual questionnaire

All questions contained in this Questionnaire pertain to the period of one year for which the annual financial statements are prepared.

1. Did the Company accept the application of the Corporate Governance Code of the Zagreb Stock Exchange?

Yes.

2. Does the Company have its own Code of Corporate Governance?

No.

3. Does the Company have adopted principles of corporate governance within its internal policies?

Yes.

4. Does the Company announce within its annual financial reports the compliance with the principles of corporate governance?

Yes.

5. Is the Company in a cross-shareholding relationship with another company or other companies? (If yes, explain)

No.

6. Does each share of the company have one voting right? (If not, explain)

Yes.

7. Are there cases when any of the shareholders is treated differently? (if yes, explain)

No.

8. Has the procedure for issuing power of attorney for voting at the general assembly been fully simplified and free of any strict formal requirements? (If not, explain)

Yes.

9. Has the company ensured that the shareholders of the company who, for whatever reason, are not able to vote at the assembly in person, have proxies who are obliged to vote in accordance with instructions received from the shareholders, with no extra costs for those shareholders? (If not, explain)

Yes.

10. Did the management or Management Board of the company, when convening the assembly, set the date for defining the status in the register of shares, which will be relevant for exercising voting rights at the general assembly of the company, by setting that date prior to the day of holding the assembly and not earlier than six days prior to the day of holding the assembly? (If not, explain)

Yes.

11. Were the agenda of the assembly, as well as all relevant data and documentation with explanations relating to the agenda, announced on the website of the company and put at the disposal of shareholders on the company’s premises as of the date of the first publication of the agenda? (If not, explain)

Yes.

12. Does the decision on dividend payment or advance dividend payment include information on the date when shareholders acquire the right to dividend payment, and information on the date or period during which the dividend will be paid? (If not, explain)

Yes.

13. Is the date of dividend payment or advance dividend payment set to be not later than 30 days after the date of decision making? (If not, explain)

Yes.

14. Are there cases when any of the shareholders are favoured while receiving their dividends or advance dividends? (If yes, explain)

No.

15. Are the shareholders allowed to participate and to vote at the general assembly of the company using modern communication technology? (If not, explain)

No, there was no recorded need for such form of participation and voting.


16. Have the conditions been defined for participating at the general assembly by voting through proxy voting (irrespective of whether this is permitted pursuant to the law and articles of association), such as registration for participation in advance, certification of powers of attorney etc.? (If yes, explain)

Yes, pursuant to the Companies Act, the Articles of Association prescribes that anyone intending to participate in the General Meeting has to advise the Company in advance of such his/her intention, which ensures better management of technical aspects of the General Meeting.

17. Did the management of the company publish the decisions of the general assembly of the company?

Yes.

18. Did the management of the company publish the data on legal actions, if any, challenging those decisions? (If not, explain)

No, as there were no legal actions.

19. Did the Supervisory or Management Board adopt a decision on the master plan of its activities, including the list of its regular meetings and data to be made available to Supervisory Board members, regularly and in a timely manner? (If not, explain)

Yes.

20. Did the Supervisory or Management Board pass its internal code of conduct?

Yes.

21. Does the company have independent members in its Supervisory Board and/or its Management Board? (if not, explain)

Yes.

22. Is there a long-term succession plan in the company? (If not, explain)

Yes.

The succession planning is important for the purpose of ensuring the continuity of operations and quality management of individual business areas within the company, while at the same time improving the quality of human resources. Management succession planning is carried out through timely recognition of needs for successors, their identification and preparation to assume the respective powers and duties through systematic implementation of development activities and acquisition of necessary experience.



Sound succession planning is based on:

a) permanent and structured management of performance and development of future managers;

b) employee segmentation based on performance and potentials for future development and promotion and management of this process in order to ensure consistent application of the relevant criteria;

c) on-going and structured executive development planning; d) co-operation of the Human Resources function with top

management in identifying future business needs and potential successors at all management levels;

The efficiency of such approach is reflected in the fact that in 2018 the Bank satisfied the major part of its succession needs for managerial levels from the defined internal resources.

23. Is the remuneration received by the members of the Supervisory or Management Board entirely or partly determined according to their contribution to the company’s business performance? (If not, explain)

No. In line with the rules of the Group of which the Company is a member, the majority shareholder’s representatives on the Supervisory Board waive their right to any kind of remuneration, while the remuneration for other members is established in an amount considered to be fair.

24. Is the remuneration to the members of the Supervisory or Management Board determined by a decision of the general assembly or in the articles of association of the company? (If not, explain)

Yes. It is established by a decision of the General Meeting.

25. Have detailed records on all remunerations and other earnings of each member of the Management Board, i.e. executive directors received from the company or from other persons related to the company, including the structure of such remuneration, been made public (in the annual financial report)? (If not, explain)

No. The annual report and public disclosure contain financial information on the Company’s aggregate costs in respect of the overall remuneration for the Management Board members.

26. Have detailed records on all remunerations and other earnings of each member of the Supervisory or Management Board received from the company and from other persons related to the company, including the structure of such remuneration, been made public (in the annual financial report)? (if not, explain)

Code of Corporate Governance – Annual questionnaire (continued)


No. Information on cost reimbursement and consideration paid by the Company is disclosed in the decision of the General Meeting. The data on collective remuneration for members of the Supervisory Board are available in Public Announcement.

27. Does every member of the Supervisory or Management Board inform the company of each change relating to their acquisition or disposal of shares of the company, or to the possibility to exercise voting rights arising from the company’s shares, immediately, and no later than three working days as of the date of transaction? (If not, explain)

Yes.

28. Were all transactions involving members of the Supervisory or Management Board or persons related to them and the company and persons related to it clearly presented in reports of the company? (If not, explain)

No. There are no transactions relevant in that respect.

29. Are there any contracts or agreements between members of the Supervisory or Management Board of the company and the company itself?

No.

30. Did they obtain prior approval of the Supervisory or Management Board? (If not, explain)

See the answer under 29.

31. Are important elements of all such contracts or agreements included in the annual report? (If not, explain)

See the answer under 29.

32. Did the Supervisory or Management Board establish the appointment committee?

Yes. The Nomination Committee has been established.

33. Did the Supervisory or Management Board establish the remuneration committee?

Yes. The Remuneration Committee has been established.

34. Did the Supervisory or Management Board establish the audit committee?

Yes. The Audit Committee has been established, as the Board of the Supervisory Board.

35. Was the majority of the audit committee members selected from the group of independent members of the Supervisory Board? (If not, explain)

No. All members of the Audit Committee are appointed from the composition of the Supervisory Board membership. In this regard, in accordance with Article 65, pharagraph 7 of the Audit Act, the Bank’s Audit Committee shall be exempt from the requirement of independence set forth in Article 65, paragraph 6 of the Audit Act.

36. Did the audit committee monitor the integrity of the financial information of the company, especially the correctness and consistency of the accounting methods used by the company and the group it belongs to, including the criteria for the consolidation of financial reports of the companies belonging to the group? (If not, explain)

Yes.

37. Did the audit committee assess the quality of the internal control and risk management system, with the aim of adequately identifying and publishing the main risks the company is exposed to (including the risks related to the compliance with regulations), as well as managing those risks in an adequate manner? (If not, explain)

Yes.

38. Has the audit committee been working on ensuring the efficiency of the internal audit system, especially by preparing recommendations for the selection, appointment, reappointment and dismissal of the head of internal audit department, and with regard to funds at his/her disposal, and the evaluation of the actions taken by the management after findings and recommendations of the internal audit? (If not, explain)

Yes, quarterly reports of the Internal Audit presented to the Audit Committee contain a section on professional improvement and training of the Internal Audit employees. Furthermore, the Audit Committee gives the recommendation to the Supervisory Board for the selection, appointment, reappointment and dismissal of the Head of Internal Audit based on the performed fit and proper procedure. Potential constraints and difficulties regarding the budget for those activities, if any, are indicated in the quarterly Internal Audit Report.



39. If there is no internal audit system in the company, did the committee consider the need to establish it? (If not, explain)

There is an internal audit function within the Bank. 40. Did the audit committee monitor the independence and impartiality of the external auditor, especially with regard to the rotation of authorised auditors within the audit company and the fees the company is paying for services provided by external auditors? (If not, explain)

Yes.

41. Did the audit committee monitor nature and quantity of services other than audit, received by the company from the audit company or from persons related to it? (If not, explain)

Yes.

42. Did the audit committee prepare rules defining which services may not be provided to the company by the external audit company and persons related to it, which services may be provided only with, and which without prior consent of the committee? (If not, explain)

No. Rules regarding non-audit services are stipulated by the Law and the rules of the Holding and therefore there is no need to define additional rules by the Audit Committee.

43. Did the audit committee analyse the efficiency of the external audit and actions taken by the senior management with regard to recommendations made by the external auditor? (If not, explain)

Yes, the Internal Audit continuously monitors the implementation of the external auditors’ recommendations. Through the quarterly reports, Internal Audit then reports to the Audit Committee and the Supervisory Board on the implementation of the external auditors’ recommendations.

44. Was the documentation relevant for the work of the Supervisory or Management Board submitted to all members on time? (If not, explain)

Yes.

45. Do Supervisory Board or Management Board meeting minutes contain all adopted decisions, accompanied by data on voting results? (If not, explain)

Yes.



46. Has the Supervisory or Management Board evaluated their work in the preceding period, including evaluation of the contribution and competence of individual members, as well as of joint activities of the Board, evaluation of the work of the committees established, and evaluation of the company’s objectives reached in comparison with the objectives set?

No.

47. Are detailed data on all earnings and remunerations received by each member of the management or each executive director from the company published in the annual report of the company? (If not, explain)

No. The annual report and public disclosure contain information on the Company’s aggregate costs in respect of the overall remuneration for the Management Board members.

48. Are all forms of remuneration to the members of the management, Management Board and Supervisory Board, including options and other benefits of the management, made public, broken down by items and persons, in the annual report of the company? (If not, explain)

No. In the Annual Report, section of the Annual financial statements, Notes to the financial statements, Related party transactions, the amount of pay for the business year is reported on an aggregate basis and it is split by the type of remuneration. The amount and the types of variable pay for the business year are reported separately divided by types of variable pay the Bank applies, i.e. cash and the Bank’s ordinary shares.

49. Are all transactions involving members of the management or executive directors, and persons related to them, and the company and persons related to it, clearly presented in reports of the company? (If not, explain)

No. Those could involve only standard day-to-day transactions performed on terms and conditions generally applicable to the bank’s customers; the transactions were not specifically referred to in the Company’s reports.

50. Does the report to be submitted by the Supervisory or Management Board to the general assembly include, apart from minimum information defined by law, the evaluation of total business performance of the company, of activities of the management of the company, and a special comment on its cooperation with the management? (If not, explain)



Yes.

51. Does the company have an external auditor?

Yes.

52. Is the external auditor of the company related with the company in terms of ownership or interests?

No.

53. Is the external auditor of the company providing to the company, him/herself or through related persons, other services?

Yes. Besides the legal obligations, the external auditor also provided non-audit services which, in accordance with EU Regulation 537/2014 (Article 5), are considered the allowed non-audit services.

54. Has the company published the amount of charges paid to the independent external auditors for the audit carried out and for other services provided? (If not, explain)

No, in pursuance with Regulation (EU) 537/2014; the introductory part, item 17) the audit fees paid by public-interest entities should be disclosed by the audit firms within their financial information. Furthermore, in pursuance of the Decision on the contents of audits of credit institutions, the company shall notify the Croatian National Bank of the total amount of fees paid to the audit firm.

55. Does the company have internal auditors? (If not, explain)

Yes.

56. Does the company have an internal audit system established? (If not, explain)

Yes.

57. Are the semi-annual, annual and quarterly reports available to the shareholders?

Yes.

58. Did the company prepare the calendar of important events?

Yes.

59. Did the company establish mechanisms to ensure that persons who have access to or possess inside

information understand the nature and importance of such information and limitations related to it?

Yes.

60. Did the company establish mechanisms to ensure supervision of the flow of inside information and possible abuse thereof?

Yes.

61. Has anyone suffered negative consequences for pointing out to the competent authorities or bodies in the company or outside, shortcomings in the application of rules or ethical norms within the company?

No.

62. Did the management of the company hold meetings with interested investors, in the last year?

No.

63. Do all the members of the management, Management Board and Supervisory Board agree that the answers provided in this questionnaire are, to the best of their knowledge, entirely truthful?

Yes.




Organisation chart

Organisation chart of the Bank as of February 2018:

Supervisory Board

Chairman of the Management Board & Chief Executive Officer

Vice-Chairman of the Management Board & General Manager

Internal Audit

Compliance

Corporate Affairs

Human resources

Legal Affairs

Customer Experience, Marketing,

Identity & Communcation

Complaints Management

Agile at Scale

Audit Commitee

Division

Department

Network

Unit

Team (exemption)

Technical structure

Corporate, Investment and Private Banking

(CIPB)

Retail Banking (RET)

Finance Management (CFO)

Global Banking Services (GBS)

Retail strategy and business development

Product Management

Card Business

Multichannel

Retail sales

Risk Management & Control (CRO)

Underwriting

Monitoring

Special Credits

Strategic Risk Management

and Risk Control

Operations

ICT

Organization & Logistics

Security

Procurement & General Services

Planning & Controlling

Accounting & Regulatory

Reporting

Finance

Shareholdings

Macroeconomic and Market

Analysis

Commercial Strategy

Financing

Markets

Investment Banking

GTB

BC Financial Institutions

Corporate Network

Private Banking

International Clients

Market, Liquidity, Operational

Risk and Risk Integration

Internal Validation


Shareholdings of the Supervisory and Management Board members

The table below presents shares in the Bank held by members of the Management Board and Supervisory Board and by companies whose interests are represented by members of the Supervisory Board as at 31 December 2018.

Corporate governance

The duties, responsibilities and authority of the members of the Management and Supervisory Boards are contained in the Companies Act and clarified within the Bank’s Articles of Association. The Management Board meets weekly, and the Supervisory Board meets as required, but at least once every quarter.

Employees

As at 31 December 2018 the Group had 5,326 employees - in head office, in the branch network and in subsidiaries (of which 4,072 are in the Republic of Croatia). The Bank has 3,845 employees. The practice of continuous learning and internal mobility of employees is in place in order to meet the changing requirements. In this way employees are encouraged to maximise their potential and improve their competencies, which ultimately increases efficiency. Employees of the Bank recognise the possibilities for the realisation of their professional careers, in return they demonstrate high levels of commitment, loyalty and professionalism.

NUMBER OF ORDINARY SHARES

Companies represented on the Supervisory Board UniCredit S.p.A. 270,523,430Allianz SE 37,523,195Members of the Supervisory Board Simone Marcucci -Danimir Gulin -Zeynep Nazan Somer Ozelgin -Romeo Collina -Christoph Metze -Aurelio Maccario -Savoula Demetriou -Wolfgang Schilk -Members of the Management Board Miljenko Živaljić 171,682 Claudio Cesario 5,642Marco Lotteri -Lorenzo Ramajola 2,327 Dijana Hrastović 31,580

Rewarding

The top management and key employees whose professional activities have a significant impact on the risk profile are included in the incentive system. Rewards for the business year are paid in instalments throughout a period of several years, in cash and financial instruments. The Bank’s and the Group’s strategy and long-term sustainable growth is supported in this way.

The annual incentive scheme is also available whereby all employees of the Bank have a right of participation, based upon pre-determined standards and criteria.

Employees are rewarded in accordance with results achieved in three levels: individual performance, the performance of the organisational unit and Zagrebačka banka Group/ UniCredit Group as a whole.

Reward schemes are continuously reviewed, improved and aligned with local and European regulatory requirements. The incentive schemes promote adequate and efficient risk management and they do not encourage risk-taking beyond the acceptable level for the Bank.

Substantial shareholdings

The following entities held more than 1.5% of the share capital of the Bank as at 31 December 2018:

Annual General Meeting

The audited financial statements will be presented to shareholders at the Annual General Meeting.

UniCredit S.p.A. 84.47% Allianz SE (Germany) 11.72%


Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements

Responsibilities of the Management and Supervisory Boards

The Management Board of the Bank is required to prepare unconsolidated and consolidated financial statements for each financial year which give a true and fair view of the financial position of the Bank and the Group and of the results of their operations and cash flows, in accordance with applicable accounting standards, and is responsible for maintaining proper accounting records to enable the preparation of such financial statements at any time. It has a general responsibility for taking such steps as are reasonably available to it to safeguard the assets of the Bank and the Group and to prevent and detect fraud and other irregularities. The Management Board is responsible for selecting suitable accounting policies to conform with applicable accounting standards and then apply them consistently; making judgements and estimates that are reasonable and prudent; and preparing the financial statements on a going concern basis unless it is inappropriate to presume that the Bank and the Group will continue in business.

The Management Board is responsible for the submission to the Supervisory Board of its annual report on the Bank and the Group together with the annual financial statements for acceptance. If the Supervisory Board approves the annual financial statements, they are deemed confirmed by the Management Board and Supervisory Board. The Management Board is responsible for the preparation and content of the Management Board Report of Condition of the Bank, Management Board Report of Condition of the Bank’s subsidiaries, Declaration of application of the Code of Corporate Governance and the rest of other information, in accordance with the Accounting Act (Official Gazette 78/15, 134/15, 120/16, 116/18). The unconsolidated and consolidated financial statements set out on pages 49 to 233 as well as the schedules prepared in accordance with the Decision of the Croatian National Bank on the Structure and Content of the Annual Financial Statements of Credit Institutions (Official Gazette 42/18), were authorised by the Management Board on 26 February 2019 for issuance to the Supervisory Board and are signed below to signify this.



Independent auditor’s report


To the Shareholders of Zagrebačka banka dd, Zagreb

Report on the Audit of the Financial StatementsOpinion

We have audited the financial statements of Zagrebačka banka dd (the Bank) and its subsidiaries (altogether: the Group) which comprise Bank and Group statements of financial position as at 31 December 2018, Bank and Group statements of profit or loss, Bank and Group statements of other comprehensive income, statements of changes in Bank’s and Group’s equity and Bank and Group statements of cash flows for the year then ended, including a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements present fairly, in all material respects, the Bank’s and the Group’s financial positions as at 31 December 2018, and their financial performances and their cash flows for the year then ended in accordance with statutory accounting requirements for banks in Croatia.

Basis for Opinion

We conducted our audit in accordance with the Audit Act and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank and the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and we have fulfilled our ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Impairment allowances for expected credit losses on loans and receivables from customers and related effects of IFRS 9 transition

Effective from 1 January 2018, the statutory accounting requirements for banks in the Republic of Croatia was amended in order to introduce IFRS 9 – Financial Instruments (‘IFRS 9’) which replaces IAS 39 - Financial Instruments: Recognition and Measurement. In order to align the statutory accounting requirements for banks to those of IFRS 9, Croatian National Bank (‘CNB’) issued “Decision on classification of exposures to risk classes and method to determine credit losses” (Official Gazette 114/2017), which provided additional guidance to impairment area of IFRS 9 within statutory reporting framework.

Related effects from IFRS 9 transition (first time adoption) on loans and receivables from customers as at 1 January 2018 are disclosed in Note I Basis of preparation, f) Transition disclosures.

Deloitte d.o.o.ZagrebTowerRadnička cesta 8010 000 ZagrebCroatiaTAX ID: 11686457780

Tel: +385 (0) 1 2351 900Fax: +385 (0) 1 2351 999www.deloitte.com/hr

The company was registered at Zagreb Commercial Court: MBS 030022053; paid-in initial capital: Kn 44,900.00; Board Members: Branislav Vrtačnik, Marina Tonžetić, Juraj Moravek and Dražen Nimčević; Bank: Zagrebačka banka d.d., Trg bana Josipa Jelačića 10, 10 000 Zagreb, bank account no. 2360000-1101896313; SWIFT Code: ZABAHR2X IBAN: HR2723600001101896313; Privredna banka Zagreb d.d., Radnička cesta 50, 10 000 Zagreb, bank account no. 2340009–1110098294; SWIFT Code: PBZGHR2X IBAN: HR3823400091110098294; Raiffeisenbank Austria d.d., Petrinjska 59, 10 000 Zagreb, bank account no. 2484008–1100240905; SWIFT Code: RZBHHR2X IBAN: HR1024840081100240905.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/hr/about to learn more about our global network of member firms.

© 2019. For information, contact Deloitte Croatia.


For the accounting framework refer to Note I, a) and for the accounting policies refer to Specific accounting policies Note II, 10. For the additional information regarding identified key audit matter, refer to Note 15, Note 38.1 and Note 40a to the financial statements.

Key audit matter How the matter was addressed in our auditCredit risk represents one of the most important types of financial risks to which the Bank is exposed to. Determining appropriate meth-ods and models by the Management to measure and manage credit risk is therefore one of the most important areas in safeguarding the Bank’s capital. As part of the credit risk management process, appropriate determination impairment allowances for expected credit losses on loans and receivables from customers represent key considerations for Bank’s Management.

Additionally, from 1 January 2018, the Bank, as a result of IFRS 9 implementation, introduced new model for impairment measurement which is based on the expected credit loss model and not on the in-curred loss, as previously used under IAS 39 - Financial Instruments: Recognition and Measurement.

In determining both the timing and the amount of impairment al-lowances for expected credit losses on loans and receivables from customers, the Management exercises significant judgement in relation to the following areas:

• Use of historic data in the process of determining risk param-eters

• Estimation of the credit risk related to the exposure • Assessment of stage allocation• Assessment on the significance of subsequent changes in

credit risk of an exposure for the purposes of identifying whether significant increase in credit risk has occurred, lead-ing to changes in stage allocation and the required measure-ment of lifetime expected credit losses

• Expected future cash flows from operations• Valuation of collateral and assessment of realization period

Since determination of appropriate impairment allowances for expected credit losses on loans and receivables requires use of complex models (generally dependent on IT elements) and significant judgement from the Management, process of measuring expected credit losses may be exposed to management bias. This fact, in addi-tion to the adoption of IFRS 9 within statutory reporting framework for banks in Republic of Croatia, led to the determination of impairment allowances for expected credit losses on loans and receivables from customers as key audit matter in our audit of the Bank’s financial statements for the year ended 31 December 2018.

In order to address the risks associated with impairment allowances for expected credit losses on loans and receivables from customers, identified as key audit matter, we have designed audit procedures that allowed us to obtain sufficient appropriate audit evidence for our conclusion.

We performed following audit procedures with respect to area of loans and receivables from customers:

• Reviewing the Bank’s methodology for recognizing impair-ment allowances for expected credit losses and comparing the reviewed methodology against the requirements of IFRS 9 within statutory reporting framework

• Obtaining understanding of control environment and internal controls implemented by the Management within the process of measuring impairment allowance for expected credit losses

• Evaluating design and inspecting implementation of identified internal controls relevant to the process of measuring impair-ment allowance for expected credit losses

• Testing identified relevant controls for operating effectiveness• Assessing quality of historical data used in determination of

risk parameters and evaluating the appropriateness of IT ele-ments and data processing

• Disaggregating loans and receivables from customers account balance based on stage allocation and relevant segments for the purposes of sample selection - for Stage 3, individually assessed loans and receivables, the criteria for selection included, but was not limited to, client’s credit risk assessment, industry risk, days past due, etc.

• Performing substantive tests over recognition and measure-ment of impairment allowance for expected credit losses on sample of loans and receivables allocated to Stage 1 and Stage 2, focusing on:i. models applied in stage allocationii. assumptions used by the Management in the expected

credit loss measurement modelsiii. criteria used for determination of significant increase in

credit risk iv. assumptions applied to calculate lifetime probability of

default v. methods applied to calculate loss given default vi. methods applied to incorporate forward-looking informa-

tion

Report on the Audit of the Financial Statements (continued)Key Audit Matters (continued)


Independent auditor’s report (Continued)


To the Shareholders of Zagrebačka banka dd, Zagreb (continued)

• Performing substantive tests over recognition and measure-ment of impairment allowance for expected credit losses on sample of individually assessed non-performing loans and receivables allocated to Stage 3, which included:i. Assessment of borrower’s financial position and perfor-

mance following latest credit reports and available informa-tion

ii. Critical assessment of judgements and assumptions applied in the calculation and measurement of expected future cash flows from operations taking into consideration borrower’s financial status and performance

iii. Reviewing and critically assessing estimated value of collateral and estimated realisation period

iv. Critical assessment of discount rates used in the estima-tion of the expected cash flows from operations and/or collateral

v. Re-performing calculation of expected credit losses by applying our own independent judgment and assumptions, based on our industry experience, on to calculation and comparing derived result of the impairment losses per cer-tain sampled loans and receivables with the ones provided by the Bank.

Report on the Audit of the Financial Statements (continued)Key Audit Matters (continued)


Other Information

Management is responsible for the other information. The other information comprises the information included in the Annual Report, but does not include the financial statements and our auditor’s report.

Our opinion on the financial statements does not cover the other information.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. With respect to the Management Board Report and the Declaration of application of the Code of Corporate Governance, which are included in the Annual Report, we have also performed the procedures prescribed by the Accounting Act. These procedures include examination of whether the Management Board Report and the Declaration of application of the Code of Corporate Governance include required disclosures as set out in the Articles 21, 22 and 24 of the Accounting Act and whether the Declaration of application of the Code of Corporate Governance includes the information specified in the Articles 22 and 24 of the Accounting Act.

Based on the procedures performed during our audit, to the extent we are able to assess it, we report that:

1) Information included in the other information is, in all material respects, consistent with the attached financial statements.

2) Management Board Report has been prepared, in all material respects, in accordance with the Articles 21 and 24 of the Accounting Act.

3) Declaration of application of the Code of Corporate Governance has been prepared, in all material aspects, in accordance with the Article 22, paragraph 1, items 3 and 4 of the Accounting Act, and includes also the information from the Article 22, paragraph 1, point 2, 5, 6 and 7 and the Article 24, paragraph 2.

Based on the knowledge and understanding of the Bank and the Group and its environment, which we gained during our audit of the financial statements, we have not identified material misstatements in the other information. Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with statutory accounting requirements for Banks in Croatia and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, Management is responsible for assessing the Bank’s and the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Bank or the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank’s and the Group’s financial reporting process.

Report on the Audit of the Financial Statements (continued)


Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s and the Group’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management.

• Conclude on the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s and the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank and the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Independent auditor’s report (Continued)


To the Shareholders of Zagrebačka banka dd, Zagreb (continued)



Report on Other Legal and Regulatory Requirements

We were appointed as the statutory auditor of the Bank by the shareholders on General Shareholders’ Meeting held on 11 April 2018 to perform audit of accompanying financial statements. Our total uninterrupted engagement has lasted 6 years and covers period 1 January 2013 to 31 December 2018.

We confirm that:

• our audit opinion on the accompanying financial statements is consistent with the additional report issued to the Audit Committee of the Bank on 28 February 2019 in accordance with the Article 11 of Regulation (EU) No. 537/2014 of the European Parliament and the Council;

• no prohibited non-audit services referred to in the Article 5(1) of Regulation (EU) No. 537/2014 of the European Parliament and the Council were provided.

There are no services, in addition to the statutory audit, which we provided to the Bank and its controlled undertakings, and which have not been disclosed in the Annual Report.

Pursuant to the Decision of the Croatian National Bank on the structure and Content of Annual Financial Statements of Banks (Official Gazette No. 42/18; hereinafter: “the Decision”), Management has prepared the supplementary schedules, as presented in the Appendix to these financial statements on pages 234 to 249, which comprise Bank and Group statements of financial position as at 31 December 2018, Bank and Group statements of profit or loss, Bank and Group statements of other comprehensive income, statements of changes in Bank’s and Group’s equity and Bank and Group statements of cash flows for the year then ended, as well as the reconciliation to the accompanying financial statements. These forms and the reconciliation to the accompanying financial statements are the responsibility of the Management and do not represent components of the accompanying financial statements prepared in accordance with statutory accounting requirements for banks in Croatia, which are set out on pages 49 to 233, but rather a requirement specified by the Decision. The financial information provided in those forms has been derived from the accompanying financial statements.

The engagement partner on the audit resulting in this independent auditor’s report is Vanja Vlak.

Deloitte d.o.o.

26 February 2019 Radnička cesta 80,10 000 Zagreb,Croatia


We continue to maximise commercial bank value by successfully focusing on our clients, delivering a positive experience through our multichannel strategy and best-in-class products and services. The fully plugged in CIB leverages on the Group’s strong commercial banking relationships to support the real economy.

Maximise commercial bank value.

Zagrebačka banka dd · 2018 Annual Report 61

Group financial statements 62 Bank financial statements 67 Significant accounting policies 72

Notes to the financial statements 100

Financial statements

62

Group financial statements



HRK MILLION NOTES 2018 2017

Interest income 1a,b 4,002 4,370Interest expense 1c,d (587) (899)Net interest income 3,415 3,471Fee and commission income 2a 1,624 1,529Fee and commission expense 2b (220) (188)Net fee and commission income 1,404 1,341Dividend income 3 17 12Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 4 373 83Net gains and losses on derecognition of financial assets at fair value through other comprehensive income 5 12 -Net gains and losses from available-for-sale securities 5 - 25Other operating income 6 417 419

Net trading and other income 819 539Operating income 5,638 5,351 Depreciation and amortisation 7 (422) (375) Other operating expenses 7 (2,242) (2,227)Operating expenses 7 (2,664) (2,602)Profit before impairment and other provisions 2,974 2,749 Impairment losses on financial instruments 15b (548) (1,198) Other impairment losses and provisions 8 (98) (307)Total impairment losses and provisions (646) (1,505)Profit from operations 2,328 1,244Share of profit from associates 18.2b 39 42Profit before tax 2,367 1,286Income tax 9a (326) (242)Profit for the year 2,041 1,044Attributable to: Equity holders of the Bank 2,038 1,042 Non-controlling interests 18b 3 2Profit for the year 2,041 1,044 HRK HRKBasic and diluted earnings per share 42 6.37 3.25

Group statement of profit or loss for the year ended 31 December 2018

I Group financial statements

The accounting policies and other notes on pages 72 to 238 form an integral part of these financial statements.


HRK MILLION 2018 2017

Profit for the year 2,041 1,044Other comprehensive income/(loss), net of tax - -Items not to be reclassified to profit or loss, net of tax: - -Actuarial gain on remeasurement of provisions for statutory severance payments 1 -Fair value changes of FVOCI equity instruments 1 -Net other comprehensive income not to be reclassified to profit or loss in subsequent periods 2 -Items to be reclassified to profit or loss, net of tax: Foreign currency differences on translation of foreign operations (37) (15)

Net change in fair value of debt securities (2) 102Net amount transferred to profit or loss (10) (21)Net changes in allowance for expected credit losses of FVOCI financial assets (13) -

Financial assets at fair value through other comprehensive income (25) 81Net other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods (62) 66Other comprehensive income/(loss) for the year, net of tax (60) 66Total comprehensive income for the year 1,981 1,110Attributable to:

Equity holders of the Bank 1,979 1,108Non-controlling interests 2 2

Total comprehensive income for the year 1,981 1,110


Group statement of other comprehensive income for the year ended 31 December 2018

64

Group financial statements (Continued)




Assets Cash and cash equivalents 11 24,651 17,836Obligatory reserve with the Croatian National Bank 12 5,684 5,525Due from banks 13 9,418 9,150Financial assets at fair value through profit or loss 14 1,468 1,179Loans and advances from customers 15a 81,714 78,281Financial assets at fair value through other comprehensive income 16 12,097 - Available-for-sale financial assets 16 - 10,995Investments in associates 18 93 94Investment property 19 202 262Property and equipment 20 2,204 1,961Intangible assets 21 336 311Deferred tax assets 9c 316 286Tax prepayment 89 267Non-current assets and disposal groups held for sale 22 2 452Other assets 23 257 294Total assets 138,531 126,893Liabilities and equity Liabilities Current accounts and deposits from banks 24 9,477 2,419Current accounts and deposits from customers 25 99,636 95,499Financial liabilities at fair value through profit or loss 26 965 812Borrowings 27 7,371 6,436Issued debt securities 28 54 54Provisions for liabilities and charges 29 885 870Non-current liabilities and disposal groups held for sale 22 - 68Other liabilities 30 1,375 2,604Income tax payable 13 5Deferred tax liabilities 9d 5 15Total liabilities 119,781 108,782Equity Issued share capital 31a 6,405 6,405Share premium 31b 3,504 3,504Treasury shares 31c (36) -Other reserves 31d 475 473Fair value reserve 31e 235 295Retained earnings 31f 8,144 7,411Total equity attributable to equity holders of the Bank 18,727 18,088Non-controlling interests 18.1b 23 23Total equity 18,750 18,111Total liabilities and equity 138,531 126,893

Group statement of financial position as at 31 December 2018

I Group financial statements



Statement of changes in Group’s equity as at 31 December 2018

HRK MILLION ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK ISSUED SHARE TREASURY OTHER FAIR VALUE RETAINED TOTAL NON- TOTAL SHARE PREMIUM SHARES RESERVES RESERVE EARNINGS CONTROLLING CAPITAL INTERESTS

Balance as at 1 January 2018 6,405 3,504 - 473 295 7,411 18,088 23 18,111Changes in equity in 2018Impact of adopting IFRS 9 - - - - (37) (425) (462) - (462)Restated opening balance under IFRS 9 6,405 3,504 - 473 258 6,986 17,626 23 17,649Merger of subsidiary - - - 4 - (4) - - -Equity-settled share-based payment - - - (2) - - (2) - (2) Purchase of treasury shares - - (53) - - - (53) - (53)Distribution of management bonus in shares - - 17 - - - 17 - 17Allocation to dividends in 2018 - - - - - (840) (840) (2) (842)Foreign currency differences on translation of foreign operations - - - - - (36) (36) (1) (37) Disposal of FVOCI financial assets - - - - (11) - (11) - (11)Change in fair value of FVOCI financial assets - - - - (1) - (1) - (1)Changes in allowance for expected credit losses on FVOCI financial assets - - - - (6) - (6) - (6)Deferred tax on movements in fair value reserve on FVOCI financial assets (Note 9g) - - - - (6) - (6) - (6)Change in Actuarial gains/losses - - - - 1 - 1 - 1Other comprehensive income/(loss) - - - - (23) (36) (59) (1) (60)Profit for the year - - - - - 2,038 2,038 3 2,041Total comprehensive income - - - - (23) 2,002 1,979 2 1,981Balance as at 31 December 2018 6,405 3,504 (36) 475 235 8,144 18,727 23 18,750

HRK MILLION ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK ISSUED SHARE TREASURY OTHER FAIR VALUE RETAINED TOTAL NON- TOTAL SHARE PREMIUM SHARES RESERVES RESERVE EARNINGS CONTROLLING CAPITAL INTERESTS

Balance as at 1 January 2017 6,405 3,370 - 604 213 8,080 18,672 22 18,694Changes in equity in 2017 Equity-settled share-based payment - - - (1) - - (1) - (1) Capital loss from allocation of own shares - 134 - (129) - - 5 - 5Allocation to dividends in 2017 - - - - - (1,696) (1,696) (1) (1,697)Foreign currency differences on translation of foreign operations - - - - - (15) (15) - (15) Disposal of available-for sale financial assets - - - - (25) - (25) - (25)Change in fair value of available-for sale financial assets - - - - 123 - 123 - 123Deferred tax on movements in fair value reserve on available-for sale financial assets (Note 9g) - - - - (17) - (17) - (17)Change in Actuarial gains/losses - - - (1) 1 - - - -Other comprehensive income/(loss) - - - (1) 82 (15) 66 - 66Profit for the year - - - - - 1,042 1,042 2 1,044Total comprehensive income - - - (1) 82 1,027 1,108 2 1,110Balance as at 31 December 2017 6,405 3,504 - 473 295 7,411 18,088 23 18,111


66

Group financial statements (Continued)


Financial statements I Group financial statements

Group statement of cash flows for the year ended 31 December 2018


Cash flow from operating activities Profit before tax 2,367 1,286Adjustments for:

Depreciation and amortisation 7 422 375Impairment losses on financial instruments 15c 548 1,198Other impairment losses and provisions 8 98 307Net interest income 1 (3,415) (3,471)Net losses/(gains) on FVTPL financial instruments (13) 371Net losses/(gains) on FVOCI financial instruments (12) -Net gains from available-for-sale securities 5 - (25)Net gains on disposals of property and equipment (27) (48)Other non-cash items (50) 75Dividend income 3 (17) (12)

(2,466) (1,230)Changes in:

Obligatory reserve with the Croatian National Bank (155) (201)Due from banks (331) 3,741Financial assets at fair value through profit or loss 109 (74)Loans and receivables from customers (5,190) 991Other assets 83 (199)Current accounts and deposits from banks 7,040 (3,048)Current accounts and deposits from customers 4,924 4,420Other liabilities and provisions 211 122

6,691 5,752Interest received 3,861 5,088Dividends received 57 48Interest paid (597) (2,335)Income taxes paid (166) (511) Net cash flows from operating activities 9,747 8,098Cash flows from investing activities Net acquisition of FVOCI securities (1,394) -Net acquisition of available-for-sale securities - (1,377)Net proceeds from sale of investment property 22 74Net acquisitions of property and equipment (523) (413)Net acquisitions of intangible assets (108) (75)Net proceeds from sale of held-for-sale assets 383 31 Net cash flows from investing activities (1,620) (1,760)Cash flows from financing activities Dividends paid (2,272) (296)Issued debt securities - 1Borrowings 972 (896) Net cash flows from financing activities (1,300) (1,191)Net increase in cash and cash equivalents 6,827 5,147Cash and cash equivalents at 1 January 17,836 12,813Effect of exchange rates fluctuations on cash and cash equivalents (12) (124)Cash and cash equivalents at 31 December 11 24,651 17,836




Interest income 1a,b 3,113 3,412Interest expense 1c,d (446) (690)Net interest income 2,667 2,722Fee and commission income 2a 1,299 1,213Fee and commission expense 2b (200) (168)Net fee and commission income 1,099 1,045Dividend income 3 354 279Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 4 309 58Net gains and losses on derecognition of financial assets at fair value through other comprehensive income 5 9 -Net gains and losses from available-for-sale securities 5 - 25Other operating income 6 85 113Net trading and other income 757 475

Operating income 4,523 4,242Depreciation and amortisation 7 (179) (180)Other operating expenses 7 (1,663) (1,622)

Operating expenses 7 (1,842) (1,802)Profit before impairment and other provisions 2,681 2,440 Impairment losses on financial instruments 15b (486) (1,162) Other impairment losses and provisions 8 (84) (272)Total impairment losses and provisions (570) (1,434)Profit before tax 2,111 1,006Income tax 9a (254) (167)Profit for the year 1,857 839 HRK HRKBasic and diluted earnings per share 42 5.81 2.62

Bank statement of profit or loss for the year ended 31 December 2018


Bank financial statements

68

Bank financial statements (Continued)


Financial statements I Bank financial statements

Bank statement of other comprehensive income for the year ended 31 December 2018


Profit for the year 1,857 839Other comprehensive income/(loss), net of tax - -Items not to be reclassified to profit or loss, net of tax: - -Fair value changes of FVOCI equity instruments 1 -Actuarial gain on remeasurement of provisions for statutory severance payments 1 -Net other comprehensive income not to be reclassified to profit or loss in subsequent periods 2 -Items to be reclassified to profit or loss, net of tax:

Net change in fair value of debt securities (2) 89Net amount transferred to profit or loss (7) (21)Net changes in allowance for expected credit losses of FVOCI financial assets (12) -

Financial assets at fair value through other comprehensive income (21) 68Net other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods (21) 68Other comprehensive income/(loss) for the year, net of tax (19) 68Total comprehensive income for the year 1,838 907



Bank statement of financial position as at 31 December 2018


Assets Cash and cash equivalents 11 21,860 14,291Obligatory reserve with the Croatian National Bank 12 5,684 5,525Due from banks 13 4,853 6,509Financial assets at fair value through profit or loss 14 1,442 1,156Loans and advances from customers 15a 65,870 62,325Financial assets at fair value through other comprehensive income 16 10,231 -Available-for-sale financial assets 16 - 8,377Investments in subsidiaries and associates 18 1,537 1,637Investment property 19 91 108Property and equipment 20 1,056 1,098Intangible assets 21 206 193Deferred tax assets 9c 276 248Tax prepayment 88 244Non-current assets and disposal groups held for sale 22 2 380Other assets 23 47 93Total assets 113,243 102,184Liabilities and equity Liabilities Current accounts and deposits from banks 24 7,474 2,031Current accounts and deposits from customers 25 83,153 77,800Financial liabilities at fair value through profit or loss 26 961 809Borrowings 27 3,592 3,004Issued debt securities 28 54 54Provisions for liabilities and charges 29 727 726Other liabilities 30 858 2,062Total liabilities 96,819 86,486Equity Issued share capital 31a 6,405 6,405Share premium 31b 3,504 3,504Treasury shares 31c (36) -Other reserves 31d 475 473Fair value reserve 31e 226 235Retained earnings 31f 5,850 5,081Total equity 16,424 15,698Total liabilities and equity 113,243 102,184


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Bank financial statements (Continued)


Financial statements I Bank financial statements

Statement of changes in Bank’s equity as at 31 December 2018

HRK MILLION ISSUED SHARE TREASURY OTHER FAIR VALUE RETAINED TOTAL SHARE PREMIUM SHARES RESERVES RESERVE EARNINGS CAPITAL

Balance as at 1 January 2018 6,405 3,504 - 473 235 5,081 15,698Changes in equity in 2018 Impact of adopting IFRS 9 - - - - (45) (406) (451)Restated opening balance under IFRS 9 6,405 3,504 - 473 190 4,675 15,247Merger of subsidiary - - - 4 55 157 216Equity-settled share-based payment - - - (2) - - (2)Purchase of treasury shares - - (53) - - - (53)Distribution of management bonus in shares - - 17 - - - 17Allocation to dividends in 2018 - - - - - (839) (839)

Disposal of FVOCI financial assets - - - - (9) - (9)Change in fair value of FVOCI financial assets - - - - (1) - (1)Changes in allowance for expected credit losses of FVOCI financial assets - - - - (4) - (4)Deferred tax on movement in fair value reserve on FVOCI financial assets (Note 9g) - - - - (6) - (6)Change in Actuarial gains/losses - - - - 1 - 1

Other comprehensive income - - - - (19) - (19) Profit for the year - - - - - 1,857 1,857Total comprehensive income - - - - (19) 1,857 1,838Balance as at 31 December 2018 6,405 3,504 (36) 475 226 5,850 16,424

HRK MILLION ISSUED SHARE TREASURY OTHER FAIR VALUE RETAINED TOTAL SHARE PREMIUM SHARES RESERVES RESERVE EARNINGS CAPITAL

Balance as at 1 January 2017 6,405 3,370 - 604 166 5,939 16,484Changes in equity in 2017 Equity-settled share-based payment - - - 5 - - 5Capital loss from allocation of own shares - 134 - (135) - - (1)Allocation to dividends in 2017 - - - - - (1,697) (1,697)

Disposal of available-for sale financial assets - - - - (25) - (25)Change in fair value of available-for sale financial assets - - - - 108 - 108Deferred tax on movement in fair value reserve on available-for sale financial assets (Note 9g) - - - - (15) - (15)Change in Actuarial gains/losses - - - (1) 1 - -

Other comprehensive income - - - (1) 69 - 68 Profit for the year - - - - - 839 839Total comprehensive income - - - (1) 69 839 907Balance as at 31 December 2017 6,405 3,504 - 473 235 5,081 15,698




Cash flow from operating activities Profit before tax 2,111 1,006Adjustments for:

Depreciation and amortisation 7 179 180Impairment losses on financial instruments 15c 486 1,162Other impairment losses and provisions 8 84 272Net interest income 1 (2,667) (2,722)Net losses/(gains) on FVTPL financial instruments (13) 369Net losses/(gains) on FVOCI financial instruments 5 (9) -Net gains from available-for-sale securities 5 - (25)Net gains on disposals of property and equipment (20) (47)Other non-cash items 49 71Dividend income 3 (354) (279)

(2,265) (1,019)Changes in:

Obligatory reserve with the Croatian National Bank (156) (201)Due from banks 1,875 3,884Financial assets at fair value through profit or loss 111 (75)Loans and receivables from customers (3,816) 1,570Other assets 16 (75)Current accounts and deposits from banks 5,347 (2,699)Current accounts and deposits from customers 3,780 2,180Other liabilities and provisions 285 152

7,442 4,736Interest received 2,988 4,405Dividends received 354 279Interest paid (440) (2,109)Income taxes paid (122) (423)Net cash flows from operating activities 10,068 6,875Cash flows from investing activities Net acquisition of FVOCI securities (1,086) -Net acquisition of available-for-sale securities - (1,398)Net proceeds from sale of investment property 22 82Net acquisitions of property and equipment (92) (111)Net acquisitions of intangible assets (70) (50)Net proceeds from sale of held-for-sale assets 383 34Net cash flows from investing activities (843) (1,443)Cash flows from financing activities Dividends paid (2,271) (260)Issued debt securities - 1Borrowings 588 (700)Net cash flows from financing activities (1,683) (959)Net increase in cash and cash equivalents 7,542 4,473Cash and cash equivalents at 1 January 14,291 9,923Effect of exchange rates fluctuations on cash and cash equivalents 27 (105)Cash and cash equivalents at 31 December 11 21,860 14,291

Bank statement of cash flows for the year ended 31 December 2018


72

Significant accounting policies


Financial statements I Significant accounting policies

Zagrebačka banka dd, Zagreb (“the Bank”) is a joint stock company incorporated and domiciled in the Republic of Croatia. The registered office is at Trg bana Jelačića 10, Zagreb. The Bank is the parent of the Zagrebačka banka Group (“the Group”), which has operations in the Republic of Croatia and in the Federation of Bosnia and Herzegovina. The Group is involved in retail, corporate and investment banking operations and is also active in leasing activities, asset management and investment property management. These financial statements comprise both the separate financial statements of the Bank and the consolidated financial statements of the Group (together: “financial statements”), as defined in International Accounting Standard 27 “Separate Financial Statements” and in International Financial Reporting Standard 10 “Consolidated Financial Statements”.

I Basis of preparation a) Accounting framework

The financial statements have been prepared in accordance with statutory accounting requirements for banks in the Republic of Croatia. The Group’s banking operations in the Republic of Croatia are subject to the Credit Institutions Law, in accordance with which the Group’s financial reporting is regulated by the Croatian National Bank (“the CNB”), the central monitoring institution of the banking system in the Republic of Croatia. These financial statements have been prepared in accordance with these banking regulations.

The principal accounting policies applied in the preparation of these financial statements are summarised below. Except as disclosed in Note I d), the Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements. Where specific accounting policies are aligned with accounting principles set out in International Financial Reporting Standards (“IFRS” or “Standards”), reference may be made to certain Standards in describing the accounting policies of the Group; unless otherwise stated, these references are to Standards as issued by the International Accounting Standards Board (“IASB”) and endorsed by the European Union (“EU”) applicable as at 31 December 2018.

The accounting regulations based on which these financial statements have been prepared differ from IFRS. The attention is drawn to the following main differences between the accounting regulations of the CNB and recognition and measurement requirements of IFRS:

− The CNB requires banks to recognise impairment losses in statement of profit or loss on performing exposures carried at amortised cost and on off-balance sheet exposures (including certain sovereign risk exposures), at least at a minial prescribed rate. In compliance with these regulations, the Group recorded collective impairment allowance on performing exposures of HRK 1,256 million in the statement of financial position (31 December 2017: HRK 1,142 million). In the Bank’s standalone statement of financial position, the impairment allowance on performing exposures as at 31 December 2018 amounted to HRK 882 million (31 December 2017: HRK 805 million). In accordance with CNB rules, the Group continues to recognise these provisions as a substitute for expected losses calculated in accordance with the requirements of IFRS.

− CNB prescribes minimum levels of impairment losses against certain impaired exposures, which may be different from the impairment losses required to be recognised in accordance with IFRS.

− CNB prescribes minimal collateral haircuts and collection periods for certain impaired exposures where future cash flows are collections from collaterals. Therefore, impairment losses calculated in accordance with IFRS might be lower for some impaired exposures.

These financial statements were authorised for issue by the Management Board on 26 February 2019 for approval by the Supervisory Board.

b) Basis of measurement

The financial statements are prepared on the fair value basis for financial assets and liabilities at fair value through profit or loss and financial assets at fair value through other comprehensive income (in 2017 at fair value also for financial assets available for sale, except available for sale assets for which reliable measure of fair value was not available). Other financial assets and liabilities and non-financial assets and liabilities are carried at amortised or historical cost.

c) Use of estimates and judgements

In preparing the financial statements, management has made judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities and disclosure of commitments and contingencies at the reporting date, as well as revenues and expenses and other comprehensive income for the period. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. The effects of revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of applicable standards that have significant effects on the financial statements and estimates with a significant risk of a possible material adjustment in future periods are discussed in Note 40.


d) Application of new and revised International Financial Reporting Standards

Except for the changes below, the Group has consistently applied the accounting policies as set out in the Notes below to all periods presented in these consolidated financial statements.

I Effective standards, amendments to standards and implementations – adopted in 2018

The Group has adopted the following new standards and amendments to standards and interpretations that became effective (and were endorsed by the European Union) for annual periods beginning on or after 1 January 2018:

IFRS 9 Financial Instruments

IFRS 9 replaces IAS 39 for annual periods on or after 1 January 2018. As allowed by the standard, the Bank has not restated comparative information for 2017 for financial instruments in the scope of IFRS 9. Therefore, the comparative information for 2017 is reported under IAS 39 and CNB accounting rules. The effects from adoption of IFRS 9 and CNB’s “Decision on classification of exposures to risk classes and method to determine credit losses” (Official Gazette 114/2017) have been recognised in retained earnings as of 1 January 2018 and are disclosed in Note I Basis of preparation, f) Transition disclosures.

Also effective from 1 January 2018, the framework for statutory accounting requirements for banks in the Republic of Croatia was amended following the efforts to align the statutory accounting requirements to those of IFRS. Several new regulatory decisions were issued, while major considerations in Impairment part were addressed by CNB’s “Decision on classification of exposures to risk classes and method to determine credit losses” (Official Gazette 114/2017).

Consequentially, the impact on Group’s financial statements and capital presented in these financial statements is derived from both: requirements of IFRS 9, as well as the new statutory accounting requirements as prescribed by new CNB’s regulations.

The summary of new requirements:

a) Classification and measurement

The new classification and measurement approach for financial assets in IFRS 9 is based upon the contractual cash flow characteristics of the financial asset and, for financial assets whose contractual cash flows are solely payments of principal and interest on the principal amount outstanding, the entity’s business model for managing them. Depending on the entity’s business model and SPPI test outcome, financial assets may be classified as “held to collect” contractual cash flows (measured at amortised cost and subject to the expected loss impairment), assets “held to collect and sale” (measured at fair value through other comprehensive income and subject to the expected loss impairment) or “held for trading” (measured at fair value through profit or loss).

IFRS 9 largely retains the requirements in IAS 39 for the classification of financial liabilities.

b) Impairment

IFRS 9 replaced the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. This requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. It is no longer necessary for a credit event to have occurred before credit losses are recognised.

c) Hedge accounting

IFRS 9 introduced significantly altered model of hedge accounting, with expanded information that should be disclosed about the activities of risk management. It should be noted that entities are allowed to use the possibility to continue to apply IAS39 hedge accounting rules. There is no significant impact on the financial statements of the Group out of hedge accounting requirements.

The application of Classification and measurement, Impairment and other IFRS 9 requirements is explained in these financial statements. The quantitative impact of applying IFRS 9 as at 1 January 2018 is disclosed in Note I Basis of preparation, f) Transition disclosures.

IFRS 7 R

To reflect the differences between IFRS 9 and IAS 39, IFRS 7 Financial Instruments: Disclosures was updated and the Group has adopted it, together with IFRS 9, for the year beginning 1 January 2018. Changes include transition disclosures as presented in Notes, detailed qualitative and quantitative information about the ECL calculations such as the assumptions and inputs used are set out in Notes.

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Significant accounting policies (Continued)



IFRS 15 Revenue from Contracts with Customers – the standard is effective for annual periods beginning on or after 1 January 2018, it is endorsed by the EU in September 2016. IFRS 15 establishes a five-step model that applies to revenue earned from a contract with a customer, with limited exceptions. Based on the analysis performed, no major impacts have been detected by the adoption of IFRS15 on current economic and financial volumes.

Several other new and altered Standards and Interpretations issued by the International Accounting Standards Board (“IASB”) and its International Financial Reporting Interpretations Committee were adopted as they also became effective (and were endorsed by the European Union) for annual periods beginning on or after 1 January 2018:

- IFRS 2 (Amendments): Classification and Measurement of Share-based Payment Transactions (issued on 20 June 2016);- Annual Improvements to IFRS Standards 2014-2016 Cycle (issued on 8 December 2016) - amendments to IFRSs relating to:

• IFRS 1 First-time Adoption of International Financial Reporting Standards - deletion of short-term exemptions for first-time adopters;• IAS 28 Investments in Associates and Joint Ventures - clarification that measuring investees at fair value through profit or loss is an

investment-by-investment choice;• IFRS 12 Disclosure of Interests in Other Entities - prescribes that the disclosure requirements for interests in other entities also apply to

interests that are classified as held for sale or distribution.- IAS 40 (Amendments): Transfers of Investment Property (issued on 8 December 2016);- IFRIC 22 (Interpretation): Foreign Currency Transactions and Advance Consideration (issued on 8 December 2016);- IFRIC 23 (Interpretation): Uncertainty over Income Tax Treatments (issued on 7 June 2017);- IFRS 4 (Amendments): Applying IFRS9 Financial Instruments with IFRS4 Insurance Contracts (EU Regulation 2017/1988);- IFRS 9 (Amendments): Prepayment Features with Negative Compensation (issued on 12 October 2017)

II Standards, amendments to standards and interpretations issued but not yet effective

The standards, amendments to standards and interpretations that are issued, but not yet effective, up to the date of issuance of the financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. When the adoption of the standard or interpretation is deemed to have an impact on the financial statements or performance of the Group, its impact is described below.

IFRS 16: Leases – the standard is effective for annual periods beginning on or after 1 January 2019, endorsed by the EU in October 2017. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases, for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). The standard requires lessees to account for all leases under a single on-balance sheet model in a similar way to finance leases under IAS 17, with certain exemptions. Lessor accounting remains substantially unchanged. According to the assessment performed, the Group does not expect a significant impact of application of IFRS 16 on the financial statements.

Until issuance of these financial statements several other new and altered Standards and Interpretations have been issued by the International Accounting Standards Board (“IASB”) and its International Financial Reporting Interpretations Committee:

- IFRS 14 Regulatory Deferral Accounts (issued on 30 January 2014)- IAS 28 (Amendments): Long-term Interests in Associates and Joint Ventures (issued on 12 October 2017);- Annual Improvements to IFRS Standards 2015-2017 Cycle (issued on 12 December 2017) - amendments to IFRSs relating to IAS 12 Income

Taxes, IAS 23 Borrowing Costs and IAS 28 Investments in Associates and Joint Ventures;- IFRS 17 Insurance contracts (issued on 18 May 2017); - IAS 19 (Amendments): Plan Amendment, Curtailment or Settlement (issued on 7 February 2018) - Amendments to References to the Conceptual Framework in IFRS Standards (issued on 29 March 2018) - IFRS 3 Business Combinations (Amendments) (issued on 22 October 2018) - IAS 1 and IAS 8 (Amendments): Definition of Material (issued on 31 October 2018)

These other standards, amendments to standards and interpretations are not significant to the Group’s operations and hence will not significantly affect its financial statements.


e) Reclassification of comparative information and presentational changes

i. Reclassification of comparative information - statement of financial position

In order to align certain financial statements items’ presentation to IFRS requirements, during 2018, the Group has reclassified certain items in statement of financial position. Consequentially, previously reported 31 December 2017 balances were reclassified, as presented below. As measurement rules did not change, these reclassifications did not have impact on profit or loss, other comprehensive income and retained earnings.

GROUP 31 DEC 2017 31 DEC 2017HRK MILLION AS PREVIOUSLY AS REPORTED RECLASSIFICATIONS RECLASSIFIED

Assets Cash and cash equivalents 17,837 (1) 17,836Due to banks 9,046 104 9,150Loans and advances from customers 77,626 655 78,281Other assets 1,052 (758) 294Liabilities Current accounts and deposits from banks 2,386 33 2,419Current accounts and deposits from customers 95,249 250 95,499Other liabilities 2,887 (283) 2,604Equity Share premium 3,370 134 3,504Other reserves 608 (135) 473Fair value reserve 294 1 295

BANK 31 DEC 2017 31 DEC 2017HRK MILLION AS PREVIOUSLY AS REPORTED RECLASSIFICATIONS RECLASSIFIED

Assets Cash and cash equivalents 14,292 (1) 14,291Due to banks 6,407 102 6,509Loans and advances from customers 61,893 432 62,325Other assets 626 (533) 93Liabilities Current accounts and deposits from banks 1.998 33 2,031Current accounts and deposits from customers 77,550 250 77,800Other liabilities 2,345 (283) 2,062Equity Share premium 3,370 134 3,504Other reserves* 608 (135) 473Fair value reserve 234 1 235

*Note: HRK 135 million of capital gains from transactions with treasury shares of the Bank from previous periods were reclassified from Other reserves to Share premium.

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ii. Reclassification of comparative information - statement of profit or loss

In order to align financial statements items’ presentation to IFRS requirements, since 2018, in statement of profit or loss, the interest income and expense from interest rate swaps is presented on net basis (under IFRS rules a single settlement of one transaction should be presented net – either as income or expense). Consequentially, previously reported 2017 gross amounts of interest income and expenses were reclassified, as presented below. As measurement rules did not change, these reclassifications did not have impact on overall net interest income, on profit or loss, on other comprehensive income and on retained earnings.

Group statement of profit and loss for the year ended 31 December 2017

HRK MILLION 2017 2017 AS PREVIOUSLY AS NOTES REPORTED RECLASSIFICATIONS RECLASSIFIED

Interest income – presentation in profit or loss by source 1 a Individuals and unicorporated business 2,057 - 2,057Corporate entities 1,357 (88) 1,269State and public sector 1,309 (455) 854Banks and other financial institutions 681 (507) 174Other 16 - 16Overall decrease in interest income 5,420 (1,050) 4,370Interest expense – presentation in profit or loss by recipient 1 c Individuals and unicorporated business (475) - (475)Corporate entities (196) 88 (108)State and public sector (585) 455 (130)Banks and other financial institutions (647) 507 (140)Other (46) - (46)Overall decrease in interest expense (1,949) 1,050 (899)The impact on net income (no impact) 3,471 - 3,471

e) Reclassification of comparative information and presentational changes (continued)


Bank statement of profit and loss for the year ended 31 December 2017

HRK MILLION 2017 2017 AS PREVIOUSLY AS NOTES REPORTED RECLASSIFICATIONS RECLASSIFIED

Interest income – presentation in profit or loss by source 1 a Individuals and unicorporated business 1,509 - 1,509Corporate entities 997 (88) 909State and public sector 1,269 (455) 814Banks and other financial institutions 672 (507) 165Other 15 - 15Overall decrease in interest income 4.462 (1,050) 3,412Interest expense – presentation in profit or loss by recipient 1 c Individuals and unicorporated business (334) - (334)Corporate entities (185) 88 (97)State and public sector (579) 455 (124)Banks and other financial institutions (596) 507 (89)Other (46) - (46)Overall decrease in interest expense (1,740) 1,050 (690)The impact on net income (no impact) 2,722 - 2,722

e) Reclassification of comparative information and presentational changes (continued)

ii. Reclassification of comparative information - statement of profit or loss (continued)

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The following note sets out the impact of adopting IFRS 9 and CNB’s “Decision on classification of exposures to risk classes and method to determine credit losses” (Official Gazette 114/2017) on the statement of financial position and equity, including the effect of replacing IAS 39’s incurred credit loss with IFRS 9’s expected credit losses.

The impact on the statement of financial position:

GROUPHRK MILLION NEW CLASSIFICATION AND MEASUREMENT CATEGORIES 31 DEC FAIR VALUE FVOCI - FVOCI - AMORTISED REME- NEW 1 2017* THROUGH DEBT EQUITY COST ASUREMENT JANUARY 2018 CARRYING PROFIT OR INSTRUMENTS INSTRUMENTS CARRYING AMOUNT* LOSS AMOUNT

Financial assets Cash and cash equivalents 17,836 - - - 17,836 (16) 17,820Obligatory reserve with the Croatian National Bank 5,525 - - - 5,525 (301) 5,224Financial assets at fair value through profit or loss

Debt securities held for trading 76 76 - - - - 76Equity securities held for trading 19 19 - - - - 19Derivative financial instruments 958 958 - - - - 958Units in investment funds 126 126 - - - - 126

Loans and receivables from banks and customers 87,431 - - - 87,431 (183) 87,248Available-for-sale financial assets

Debt securities A 10,780 - 10,780 - - - 10,780Equity securities B 215 210 - 5 - - 215

Other assets 294 - - - 294 - 294Total financial assets 123,260 1,389 10,780 5 111,086 (500) 122,760Non-financial assets 3,633 - - - - - 3,633Total assets 126,893 - - - - (500) 126,393Financial liabilities Current accounts and deposits from banks 2,419 - - - 2,419 - 2,419Current accounts and deposits from customers 95,499 - - - 95,499 - 95,499Financial liabilities at fair value through profit or loss 812 812 - - - - 812Borrowings 6,436 - - - 6,436 - 6,436Issued debt securities 54 - - - 54 - 54Total financial liabilities 105,220 812 - - 104,408 - 105,220Provisions for off balance sheet credit risk exposure 625 (18) 607Non-financial liabilities 2,937 (20) 2,917Total liabilities 108,782 (38) 108,744Total equity 18,111 (462) 17,649

* 31 December 2017 carrying amount is the amount after reclassification (as previously explained in section “Reclassification of comparative information and presentational changes”)A – The debt securities portfolio previously classified as AFS debt instruments is managed within a business model of collecting contractual cash flows and selling the financial assets. Accordingly, these investments were classified as debt instruments measured at FVOCI.B - The option was elected to irrevocably designate some of previous AFS equity instruments as Equity instruments at FVOCI.

f) Transition disclosures


* 31 December 2017 carrying amount is the amount after reclassification (as previously explained in section “Reclassification of comparative information and presentational changes”)A – The debt securities portfolio previously classified as AFS debt instruments is managed within a business model of collecting contractual cash flows and selling the financial assets. Accordingly, these investments were classified as debt instruments measured at FVOCI.B - The option was elected to irrevocably designate some of previous AFS equity instruments as Equity instruments at FVOCI.

BANKHRK MILLION NEW CLASSIFICATION AND MEASUREMENT CATEGORIES 31 DEC FAIR VALUE FVOCI - FVOCI - AMORTISED REME- NEW 1 2017* THROUGH DEBT EQUITY COST ASUREMENT JANUARY 2018 CARRYING PROFIT OR INSTRUMENTS INSTRUMENTS CARRYING AMOUNT* LOSS AMOUNT

Financial assets Cash and cash equivalents 14,291 - - - 14,291 (9) 14,282Obligatory reserve with the Croatian National Bank 5,525 - - - 5,525 (301) 5,224Financial assets at fair value through profit or loss

Debt securities held for trading 76 76 - - - - 76Equity securities held for trading 19 19 - - - - 19Derivative financial instruments 956 956 - - - - 956Units in investment funds 105 105 - - - - 105

Loans and receivables from banks and customers 68,834 - - - 68,834 (177) 68,657Available-for-sale financial assets

Debt securities A 8,163 - 8,163 - - - 8,163Equity securities B 214 210 - 4 - - 214

Other assets 93 - - - 93 - 93Total financial assets 98,276 1,366 8,163 4 88,743 (487) 97,789Non-financial assets 3,908 - - - - - 3,908Total assets 102,184 - - - - (487) 101,697Financial liabilities Current accounts and deposits from banks 2,031 - - - 2,031 - 2,031 Current accounts and deposits from customers 77,800 - - - 77,800 - 77,800 Financial liabilities at fair value through profit or loss 809 809 - - - - 809 Borrowings 3,004 - - - 3,004 - 3,004 Issued debt securities 54 - - - 54 - 54 Total financial liabilities 83,698 809 - - 82,889 - 83,698 Provisions for off balance sheet credit risk exposure 549 - - - - (16) 533Non-financial liabilities 2,239 - - - - (20) 2,219Total liabilities 86,486 - - - - (36) 86,450Total equity 15,698 - - - - (451) 15,247

f) Transition disclosures (continued)

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The following table presents carrying amounts as at 31 December 2017 (per IAS 39) and as at 1 January 2018 (per IFRS 9), as well as measurement categories and business models for Group’s financial instuments:

GROUPHRK MILLION CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTS 31 DEC 2017 IAS 39 NEW 1 IFRS 9 BUSINESS CARRYING MEASUREMENT JANUARY 2018 MEASUREMENT MODEL AMOUNT CATEGORY CARRYING CATEGORY AMOUNT

Financial assets Cash and cash equivalents 17,836 Amortised cost 17,820 Amortised cost n/aObligatory reserve with the Croatian National Bank 5,525 Amortised cost 5,224 Amortised cost n/aFinancial assets at fair value through profit or loss

Debt securities held for trading 76 FVTPL* 76 FVTPL Held for tradingEquity securities held for trading 19 FVTPL 19 FVTPL Held for tradingDerivative financial instruments 958 FVTPL 958 FVTPL Held for tradingUnits in investment funds 126 FVTPL 126 FVTPL Held for trading

Loans and receivables from banks and customers 87,431 Amortised cost 87,248 Amortised cost Hold to collectAvailable-for-sale financial assets

Debt securities 10,780 FVOCI** (AFS)*** 10,780 FVOCI Hold to collect and sellEquity securities 210 FVOCI (AFS) 210 FVTPL Held for tradingEquity securities 5 FVOCI (AFS) 5 FVOCI Hold to collect and sell

Other assets 294 Amortised cost 294 Amortised cost n/aTotal financial assets 123,260 122,760 Non-financial assets 3,633 3,633 Total assets 126,893 126,393 Financial liabilities Current accounts and deposits from banks 2,419 Amortised cost 2,419 Amortised cost n/aCurrent accounts and deposits from customers 95,499 Amortised cost 95,499 Amortised cost n/aFinancial liabilities at fair value through profit or loss 812 FVTPL 812 FVTPL n/aBorrowings 6,436 Amortised cost 6,436 Amortised cost n/aIssued debt securities 54 Amortised cost 54 Amortised cost n/aTotal financial liabilities 105,220 105,220 Provisions for off balance sheet credit risk exposure 625 Amortised cost 607 Amortised cost n/aNon-financial liabilities 2,937 2,917 Total liabilities 108,782 108,744 Total equity 18,111 17,649

* “FVTPL” stands for fair value through profit or loss** “FVOCI” stands for fair value through other comprehensive income*** “AFS” stands for available-for-sale



* “FVTPL” stands for fair value through profit or loss** “FVOCI” stands for fair value through other comprehensive income*** “AFS” stands for available-for-sale

The following table presents carrying amounts as at 31 December 2017 (per IAS 39) and as at 1 January 2018 (per IFRS 9), as well as measurement categories and business models for Bank’s financial instuments:

BANKHRK MILLION CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTS 31 DEC 2017 IAS 39 NEW 1 IFRS 9 BUSINESS CARRYING MEASUREMENT JANUARY 2018 MEASUREMENT MODEL AMOUNT CATEGORY CARRYING CATEGORY AMOUNT

Financial assets Cash and cash equivalents 14,291 Amortised cost 14,282 Amortised cost n/aObligatory reserve with the Croatian National Bank 5,525 Amortised cost 5,224 Amortised cost n/aFinancial assets at fair value through profit or loss

Debt securities held for trading 76 FVTPL* 76 FVTPL Held for tradingEquity securities held for trading 19 FVTPL 19 FVTPL Held for tradingDerivative financial instruments 956 FVTPL 956 FVTPL Held for tradingUnits in investment funds 105 FVTPL 105 FVTPL Held for trading

Loans and receivables from banks and customers 68,834 Amortised cost 68,657 Amortised cost Hold to collectAvailable-for-sale financial assets

Debt securities 8,163 FVOCI** (AFS)*** 8,163 FVOCI Hold to collect and sellEquity securities 210 FVOCI (AFS) 210 FVTPL Held for tradingEquity securities 4 FVOCI (AFS) 4 FVOCI Hold to collect and sell

Other assets 93 Amortised cost 93 Amortised cost n/aTotal financial assets 98,276 97,789 Non-financial assets 3,908 3,908 Total assets 102,184 101,697 Financial liabilities Current accounts and deposits from banks 2,031 Amortised cost 2,031 Amortised cost n/aCurrent accounts and deposits from customers 77,800 Amortised cost 77,800 Amortised cost n/aFinancial liabilities at fair value through profit or loss 809 FVTPL 809 FVTPL n/aBorrowings 3,004 Amortised cost 3,004 Amortised cost n/aIssued debt securities 54 Amortised cost 54 Amortised cost n/aTotal financial liabilities 83,698 83,698 Provisions for off balance sheet credit risk exposure 549 Amortised cost 533 Amortised cost n/aNon-financial liabilities 2,239 2,219 Total liabilities 86,486 86,450 Total equity 15,698 15,247


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The following table reconciles the aggregate opening loan loss provision allowances under IAS 39 and provisions for loan commitments and financial guarantee contracts in accordance with IAS 37 Provisions Contingent Liabilities and Contingent Assets to the ECL allowances under IFRS 9 and CNB’s “Decision on classification of exposures to risk classes and method to determine credit losses” (Official Gazette 114/2017):

GROUPHRK MILLION LOAN LOSS PROVISION UNDER IAS ECLS UNDER 39/IAS 37 AT 31 RE- IFRS 9 AT 1 DECEMBER 2017 MEASUREMENT JANUARY 2018

Impairment allowance for financial assets 7,193 500 7,693Expected loss on debt securities (AFS debt securities per IAS 39 reclassified to FVOCI under IFRS 9) -this ECL balance is recorded within equity as decrease in retained earnings and increase in equity fair value reserve - 53 53 7,193 553 7,746Impairment allowance for off-balance sheet items 625 (18) 607Total impairment allowance 7,818 535 8,353

BANKHRK MILLION LOAN LOSS PROVISION UNDER IAS ECLS UNDER 39/IAS 37 AT 31 RE- IFRS 9 AT 1 DECEMBER 2017 MEASUREMENT JANUARY 2018

Impairment allowance for financial assets 5,828 487 6,315Expected loss on debt securities (AFS debt securities per IAS 39 reclassified to FVOCI under IFRS 9) - this ECL balance is recorded within equity as decrease in retained earnings and increase in equity fair value reserve - 45 45 5,828 532 6,360Impairment allowance for off-balance sheet items 552 (16) 536Total impairment allowance 6,380 516 6,896



The impact on equity:

GROUPHRK MILLION RETAINED FAIR VALUE TOTAL IMPACT EARNINGS RESERVE ON EQUITY

Closing balance as at 31 December 2017 7,411 295 On 1 January 2018, the effects are: Increase in loss allowance - due to adoption of IFRS 9 and CNB’s “Decision on classification of exposures to risk classes and method to determine credit losses” (482) - (482)Expected loss on debt securities (AFS debt securities per IAS 39 reclassified to FVOCI under IFRS 9) - this ECL balance is recorded within equity as decrease in retained earnings and increase in equity fair value reserve (53) 53 -Reclassification of equity securities from IAS 39 “Available for sale” portfolio to IFRS 9 “Fair value through Profit and loss” portfolio 110 (90) 20Total effects of new requirements recorded on 1 January 2018 (425) (37) (462)New opening balance as at 1 January 2018 6,986 258

BANKHRK MILLION RETAINED FAIR VALUE TOTAL IMPACT EARNINGS RESERVE ON EQUITY

Closing balance as at 31 December 2017 5,081 235 On 1 January 2018, the effects are: Increase in loss allowance - due to adoption of IFRS 9 and CNB’s “Decision on classification of exposures to risk classes and method to determine credit losses” (471) - (471)Expected loss on debt securities (AFS debt securities per IAS 39 reclassified to FVOCI under IFRS 9) - this ECL balance is recorded within equity as decrease in retained earnings and increase in equity fair value reserve (45) 45 -Reclassification of equity securities from IAS 39 “Available for sale” portfolio to IFRS 9 “Fair value through Profit and loss” portfolio 110 (90) 20Total effects of new requirements recorded on 1 January 2018 (406) (45) (451)New opening balance as at 1 January 2018 4,675 190


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g) Functional and presentational currency

The consolidated and separate financial statements are presented in Croatian kuna (“HRK”) which is the Bank’s functional and presentational currency. Amounts are rounded to the nearest million, unless otherwise stated.

The most significant exchange rates used for translation as at 31 December 2018 amounted to: EUR 1 = HRK 7.418, USD 1 = HRK 6.470 (31 December 2017: EUR 1 = HRK 7.514, USD 1 = HRK 6.270). During 2018 and 2017 the Convertible Mark, official currency of the Federation of Bosnia and Herzegovina (“BAM”), was pegged to Euro at EUR 1 = BAM 1.956.

h) Consolidation

The consolidated financial statements comprise the financial statements of the Bank and entities controlled by the Bank and its subsidiaries (together “the Group”), together with the Group’s share in associates. Business combinations Since 1 April 2010 the Group applies IFRS 3 “Business Combinations” in accounting for business combinations and the accounting policies applicable to acquisitions before 1 April 2010 are set out below (the effects of business combinations that occurred before 1 April 2010 were not restated).

The existing accounting policy in respect of business combinations is as follows.

Acquisitions on or after 1 April 2010

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.

The Group controls an investee when it is exposed to, or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group reassesses whether it has control if there are changes in one or more of the elements of control. This includes circumstances in which protective rights held by the Group (for example, those resulting from lending activity) become substantive and lead to the Group having power over an investee. The Group measures goodwill at the acquisition date as:

- the fair value of the consideration transferred; plus - the recognised amount of any non-controlling interests in the acquiree; plus,- if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less - the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities.

When this total is negative, a bargain purchase gain is recognised immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. These amounts are regularly recognised in profit or loss.

Acquisition-related costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.

Acquisitions prior to 1 April 2010

For acquisitions prior 1 April 2010, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisitions.


Subsidiaries

Subsidiaries are investees controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. Where necessary, the accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. In the Bank's separate financial statements investments in subsidiaries are accounted for at cost less any impairment.

Changes in the Group’s ownership interests in existing subsidiaries

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Bank.

Loss of control

Upon the loss of control of the subsidiary, the Group derecognises the assets and liabilities of the subsidiary, any related non-controlling interest and the other components of equity related to subsidiary. Any resulting gain or loss is recognised in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill) and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). Any interest retained in the former subsidiary is measured at fair value when control is lost. Subsequently it is accounted for as an equity-accounted investee or in accordance with the Group’s accounting policy for financial instruments (refer to accounting policy II.10) depending on the level of influence retained.

Acquisition of entities under common control

Business combinations arising from transfers of interests in entities that are under the control of the shareholder that ultimately controls the Group are accounted for using the following principles:

- the assets and liabilities acquired are recognised at the carrying amounts recognised previously in the consolidated financial statements of the controlling shareholder of the Group,

- the difference between the consideration paid and the carrying value of transferred assets and liabilities is recognized in Group equity, - the components of equity of the acquired entities are added to the same components within Group equity (except any issued capital of the

acquired entities which is recognised as part of share premium),- any cash paid for the acquisition is recognised directly in equity.

Non-controlling interests

For each business combination, the Group elects to measure any non-controlling interests in the acquiree either at fair value or at their proportionate share of the acquiree’s identifiable net assets.

Changes in the Group’s interest in a subsidiary that do not result in a change of control are accounted for as transactions with equity holders in their capacity as owners and therefore no adjustments are made to goodwill and no gain or loss is recognised in profit or loss. The adjustments to non-controlling interests are based on the proportionate amount of the net assets of the subsidiary.

Transactions eliminated on consolidation

Intra-group balances and transactions, and unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Fund management

The Group manages and administers assets held in mutual funds on behalf of investors. The financial statements of mutual funds are not included in these consolidated financial statements except when the Group controls the entity (there were no such cases at the reporting date). Information about the Group’s fund management activities is set out in Note 34.

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Associates Associates are entities over which the Group has significant influence but no control. Investments in associates are accounted for using the equity method of accounting in the consolidated financial statements and are initially recognised at cost. The Group’s investments in associates include goodwill (net of any accumulated impairment loss) identified on acquisition. In the Bank’s separate financial statements investments in associates are accounted at cost less impairment.

The Group’s share of associates’ post-acquisition gains or losses is recognised in the statement of profit or loss and its share of their post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise any further losses, unless it has incurred obligations or made payments on behalf of the associate. Dividends received from associates are treated as a decrease of investment in associate in the Group’s consolidated statement of financial position and as a dividend income in the Bank’s separate statement of profit or loss.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associate. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the assets transferred. The accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

i) Foreign currency transactions

Transactions and balances

Transactions in foreign currencies are translated into the respective functional currencies of the operations at the spot exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are at the reporting date translated into the functional currency at the spot exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Foreign currency differences arising on translation are recognised in profit or loss, except for differences arising on the translation of available-for-sale equity instruments and differences on translation of foreign operations, which are recognised in other comprehensive income (refer below).Changes in the fair value of securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the cost of the security and other changes in the carrying amount of the security. Translation differences on monetary securities available for sale are recognised in profit or loss, while other changes in carrying amount are recognised in other comprehensive income. Translation differences on non-monetary securities denominated in foreign currency classified as available for sale are recognised in the statement of other comprehensive income along with other changes, net of deferred tax.

Foreign operations

The results and financial position of the Group entities in the Federation of Bosnia and Herzegovina, where the BAM is the functional currency, are translated into the presentation currency as follows:

(i) assets and liabilities for each statement of financial position presented are translated at the spot exchange rate as at reporting date;(ii) income and expenses for each statement of profit or loss presented are translated at the average exchange rate for the period; and (iii) all exchange differences arising on consolidation of foreign subsidiaries are recognised in translation reserve within retained earnings,

except to the extent that the translation difference is allocated to the non-controlling interests.

When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of one part of its interest in a subsidiary that includes a foreign operation and retains control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of one part of its investment in an associate that includes a foreign operation and retains significant influence, the relevant proportion of the cumulative amount is reclassified to profit or loss.

j) Discontinued operations

A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of, or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, whatever is earlier. When an operation is classified as a discontinued operation, the comparative statement of profit or loss is restated as if the operation had been discontinued from the start of the comparative period. When the criteria for presentation as a discontinued operation are no longer met, the Group reclassifies it and restates the comparative financial information in the statement of profit or loss accordingly. The comparative information in the statement of financial position is not restated.


II Specific accounting policies

1 Interest income and expense

Interest income and expense are recognised in the statement of profit or loss using the effective interest rate method for all interest-bearing financial instruments, including those measured at amortised cost and FVOCI debt financial instruments. Interest income on interest bearing financial assets measured at FVOCI under IFRS 9, similarly to interest bearing financial assets classified as available-for-sale or held to maturity under IAS 39 are also recorded by using the EIR method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to gross carrying amount of financial asset or to the amortised cost of a financial liability. The calculation of effective interest rate includes all fees and percentage points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Such income and expense is presented as interest income or interest expense in the statement of profit or loss.

Interest income and expense also include fee and commission income and expense in respect of loans and receivables from customers and banks, borrowings, finance leases, subordinated debt and issued debt securities, premium or discount amortisation as well as other differences between the initial carrying amount of an interest-bearing financial instrument and its value at maturity, recognised on an effective interest basis.

Interest income on debt securities at fair value through profit or loss is recognised using the nominal coupon rate and included in interest income. Interest income and expense on derivative financial instruments is also included in interest income and expense.

2 Fee and commission income and expense

Fee and commission income and expense mainly comprise fees and commissions related to domestic and foreign payments, the issue of guarantees and letters of credit, credit card business and asset management, and are recognised in the statement of profit or loss upon performance of the relevant service, unless they have been included in the effective interest calculation.

Loan commitment fees for loans and advances that are likely to be drawn down are deferred and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group has retained no part for itself, or has retained a part at the same effective interest rate as the other participants. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts. Asset management fees related to investment fund management are recognised on an accruals basis over the period in which the service is provided. The same principle is applied for custody services that are continuously provided over an extended period of time.

3 Dividend income

Dividend income is recognised when the right to receive the dividend is established. In the consolidated financial statements dividend income from subsidiaries is eliminated and dividend income from associates is credited to the carrying value of investment in associates in the consolidated statement of financial position.

4 Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities

This category comprises spreads earned from foreign exchange trading, realised and unrealised gains and losses from trading debt and equity securities and other financial instruments at fair value through profit or loss, from derivative financial instruments and net gains and losses from the translation of monetary assets and liabilities denominated in foreign currency.

5 Net gains and losses on derecognition of financial assets at fair value through other comprehensive income

This category includes gains and losses realised on disposal of financial assets (debt instruments) at fair value through other comprehensive income.

5A Net gains and losses from available-for-sale securities (applicable before 1 January 2018)

This category included gains and losses realised on disposal of available-for-sale debt and equity securities.

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6 Other operating income Revenues from the sale of goods and services rendered are related to the Group’s operating lease, investment property and other operations, they are recognised in the statement of profit or loss in the period when the goods are sold or the services are rendered.

7 Employee benefits

a) Defined contribution plans

For defined contribution plans, the Group pays contributions to state-owned institutions and obligatory and voluntary pension funds managed by privately owned management companies, in accordance with legal requirements or individual choice of employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as personnel expenses in the statement of profit or loss, as accrued.

b) Long-term employee rewards

Participants and amounts for each cycle of the Bank scheme for long-term employee rewards are defined based on clear criteria of contribution to long-term sustainable and increasing Group profitability.

Liabilities for long-term employee rewards in the statement of financial position are discounted using an appropriate discount rate.

c) Termination benefits

Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan either to terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting date, then they are discounted to their present value.

d) Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group 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 estimated reliably.

e) Share-based payment transactions

As part of Group’s long-term incentive plans, employees of the Group receive remuneration in the form of share-based payments whereby employees render services as consideration for equity instruments (equity-settled transactions). At the grant date, the fair value of equity-settled awards is recognised in personnel expenses, with a corresponding increase in equity, in the period in which the employees become unconditionally entitled to the awards. The expense reflects the portion of the total award for the related service and non-market performance conditions which are expected to be met. The cumulative amount recognised at the vesting date is based on the awards that meet the related conditions for service and non-market performance.

f) Other employee benefits

Liabilities based on other long-term employee benefits, such as jubilee awards and statutory termination benefits, are recorded as the net present value of the liability for defined benefits at the reporting date. The projected credit unit method is used for the calculation of the present value of the liability. A corresponding debit or credit on remeasurements is recognised immediately in the statement of profit or loss with an exception of actuarial gains and losses on remeasurements of defined retirement benefits which are recognised in other comprehensive income and which are not reclassified to profit or loss in subsequent periods.

8 Direct acquisition costs related to housing savings

Direct acquisition expenses related to housing savings contracts are deferred, to the extent that they are estimated to be recoverable, and amortised to the statement of profit or loss on a straight-line basis over the life of the related contracts.


9 Leases A lease is classified at the inception date as a finance lease or as an operating lease.

Group as a lessor - finance lease

Leases where the Group, as lessor, transfers substantially all the risks and rewards incidental to ownership of an asset are classified as finance leases. When assets are leased under finance lease arrangements, the present value of lease payments is recognised as a receivable (within loans to and receivables from customers). The difference between the gross finance lease receivable and present value of future collections per finance lease receivable represents unearned financial income. Initial direct costs incurred in negotiating and arranging a finance lease are added to the carrying amount of the leased asset and reduce the amount of income recognised over the lease term.

Group as a lessor – operating lease

Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Rental income from operating lease contracts is recognised on a straight-line basis over the lease term. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. For operating lease contracts in which the Group is a lessor, the corresponding asset is recognised as an item of Property and equipment (refer to accounting policy II.11). For operating leases of Group’s investment property the corresponding asset is recognised on the Group statement of financial position as an item of Investment property (accounting policy II.13). Group as a lessee – operating lease

For operating leases in which the Group is a lessee the related assets are not recognised on the Group’s statement of financial position and operating lease payments are recognised as an operating expense in the statement of profit or loss on a straight-line basis over the lease term.

Lease incentives received or granted are recognised as an integral part of the total lease expense or income, over the lease term.

10 Financial instruments

Classification and subsequent measurement

Financial assets

Before 1 January 2018, the Group classified its financial assets as loans and receivables (amortised cost), fair value through profit or loss (FVPL), available-for-sale (FVOCI) or held-to-maturity (amortised cost). From 1 January 2018, the Group has applied IFRS 9 and classifies its financial assets in the following measurement categories:

- Fair value through profit or loss (FVPL); - Fair value through other comprehensive income (FVOCI); or - Amortised cost.

FVTPL option and FVOCI option are also allowed by IFRS 9 (the latter one is in use for equity investments). The classification requirements for debt and equity instruments are described below. Debt instruments Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective, such as loans, government and corporate bonds and trade receivables purchased from clients in factoring arrangements without recourse. Classification and subsequent measurement of debt instruments depend on:(i) the Group’s business model for managing the asset; and(ii) the cash flow characteristics of the asset.

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Based on these factors, unless FVTPL option is elected, the Group classifies its debt instruments into one of the following three measurement categories: Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest (‘SPPI’), and that are not designated at FVPL, are measured at amortised cost. The gross carrying amount of these assets is decreased by any expected credit loss allowance. Interest income from these financial assets is included in Interest income using the effective interest rate method. Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent solely payments of principal and interest, and that are not designated at FVPL, are measured at fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of expected credit losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Net gains and losses on derecognition of financial assets at fair value through other comprehensive income’. Interest income from these financial assets is included in ‘Interest income’ using the effective interest rate method. Fair value through profit or loss: Assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented in the profit or loss statement within ‘Net trading and other income’ in the period in which it arises. Interest income from these financial assets is included in ‘Interest income’ using the effective interest rate method.

Business model: the business model reflects how the Group manages the assets in order to generate cash flows. That is, whether the Group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of ‘other’ business model and measured at FVPL. Factors considered by the Group in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and reported to key management personnel, how risks are assessed and managed and how managers are compensated. For example, the Group’s business model for the mortgage loan book is to hold to collect contractual cash flows. Another example is the liquidity portfolio of assets, which is held by the Group as part of liquidity management and is generally classified within the hold to collect and sell business model. Securities held for trading are held principally for the purpose of selling in the near term or are part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. These securities are classified in the ‘other’ business model and measured at FVPL SPPI: Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Group assesses whether the financial instruments’ cash flows represent solely payments of principal and interest (the ‘SPPI test’). In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at fair value through profit or loss. Financial assets are considered in their entirety when determining whether their cash flows are solely payment of principal and interest. Reclassification: The Group reclassifies debt investments when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period. Fair value option for financial assets: the Group may also irrevocably designate financial assets at fair value through profit or loss if doing so significantly reduces or eliminates a mismatch created by assets and liabilities being measured on different bases. Equity instruments Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments include basic ordinary shares. The Group subsequently measures all equity investments at fair value through profit or loss, except where the Group’s management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through other comprehensive income. The Group’s policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. When this election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal. Impairment losses (and reversal of impairment losses) are not identified and reported separately from other changes in fair value. Dividends, when representing a return on such investments, are recognised in profit or loss as other income when the Group’s right to receive payments is established. Gains and losses on equity investments at FVPL are included in the ‘Net trading and other income’ line in the statement of profit or loss.


Financial liabilities Financial liabilities, other than loan commitments and financial guarantees, are classified as subsequently measured at amortised cost, except for: − Financial liabilities at fair value through profit or loss: this classification is applied to derivatives, financial liabilities held for trading (e.g. short

positions in the trading booking) and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of the issuer, which is determined as the amount that is not attributable to changes in market conditions that give rise to market risk) and partially in profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk of the liability are also presented in profit or loss;

− Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition or when the continuing involvement approach applies. When the transfer of financial asset did not qualify for derecognition, a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Group recognises any expense incurred on the financial liability

Financial assets or financial liabilities held for trading The Group classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short-term profit making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in ‘Net trading and other income’. Interest and dividend income or expense is recorded in ‘Net trading and other income’ according to the terms of the contract, or when the right to payment has been established.

Recognition and derecognition Recognition of financial assets and liabilities.

The Group initially recognises loans and advances and other financial liabilities on the date at which they are originated, i.e. advanced to borrowers or received from lenders.

Regular way purchases and sales of financial assets are recognised on the settlement date. The settlement date is the date that an asset is delivered to or by the Group and while the underlying asset or liability is not recognised until the settlement date, changes in the fair value of the underlying financial assets and liabilities at fair value through profit or loss (other than derivatives) and FVOCI financial assets are recognised starting from the trade date. All other financial assets and liabilities (derivatives) are recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

Financial assets and liabilities are initially recognised at fair value plus transaction costs for all financial assets and liabilities not at fair value through profit or loss. Financial assets and liabilities at fair value through profit or loss are initially recognised at fair value, and transaction costs are immediately charged to the statement of profit or loss

Derecognition of financial assets due to substantial modification of terms and conditions

The Group derecognises a financial asset, such as a loan to a customer, when the terms and conditions have been renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognised as a derecognition gain or loss, to the extent that an impairment loss has not already been recorded. The newly recognised loans are classified as Stage 1 for ECL measurement purposes, unless the new loan is deemed to be POCI.

When assessing whether or not to derecognise a loan to a customer, amongst others, apart from quantitative factors, the Group considers the following: change in currency of the loan, introduction of an equity feature, change in counterparty, wether the modification is such that the instrument no longer meets the SPPI criterion.

Modifications of financial assets which do not result in substantially different cash flows

If the modification does not result in cash flows that are substantially different, the modification does not result in derecognition. Based on the change in cash flows discounted at the original EIR, the Group records a modification gain or loss, to the extent that an impairment loss has not already been recorded.

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Derecognition of financial assets other than for substantial modification

A financial asset (or, a portion thereof or part of a group of similar financial assets) is derecognised when the rights to receive cash flows from the financial asset have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control.

The Group considers control to be transferred if and only if, the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and withoutimposing additional restrictions on the transfer.

The Group enters into transactions where it retains the contractual righs to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks ans rewards. These transactions are accounted for as “pass-through” arrangements that result in derecogntion if the Group: (i) has no obligation to make payments unless it collects equivalent amounts from the assets, (ii) is prohibited from selling or pledging the assets and (iii) has an obligation to remit any cash it collects from the assets without material delay.

When the Group has neither transferred nor retained substantially all the risks and rewards and has retained control of the asset, the asset continues to be recognised only to the extent of the Group’s continuing involvement, in which case, the Bank also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration the Group could be required to pay.

Collaterals (e.g. shares and bonds) furnished by the Group under standard repurchase agreements and securities lending and borrowing transactions are not dereocognised because the Group retains substantially all the risks and rewards on the basis of the predetermined repurchase price and the criteria for derecognition are therefore not met.

Derecogntion of financial liabilities

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. If the terms of a financial liability are significantly modified, the Group will cease recognising that liability and will instantaneously recognise a new financial liability, with new terms and conditions.

Realised gains and losses from the disposal of financial instruments are calculated by using the weighted average cost method. Write-offs

Financial assets are written off either partially or in their entirety only when the Group has stopped pursuing the recovery. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited to statement of profit or loss.

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 the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity and, for financial assets, adjusted for loss allowance. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date.

When applicable, the Group measures the fair value of an instrument using the quoted prices in the principal market to which the Group has access (mark-to-market).

A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from a pricing service, dealer, broker or agency that determines prices or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If a published price quotation in an active market does not exist for a financial instrument in its entirety, but active markets exist for its component parts, fair value is determined on the basis of the relevant market prices for the component parts.

If a market for a financial instruments is not active, for unlisted securities, or, if for any reason, fair value cannot be reasonably measured by market price, then the Group establishes fair value using a valuation techniques (except for certain unquoted equity securities) that maximise the use of


relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist, Black-Scholes option pricing models and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads, bond and equity prices, foreign currency exchange rates, equity index prices as well as volatilities and correlations.

Valuation models are subject to revision both during their development and periodically in order to ensure their consistency with the objectives of the valuation.

Reference to these market parameters makes it possible to limit the discretionary nature of the valuation, and ensures that the resulting fair value can be verified.

Fair values include adjustments to take account of the credit risk of the Group entity, the credit risk of the counterparty and funding risk, where appropriate.

The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

Fair value hierarchy

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

• Level 3 inputs are unobservable inputs for the asset or liability. Impairment

The Group assesses on a forward-looking basis the expected credit losses (‘ECL’) associated with its debt instrument assets carried at amortised cost and FVOCI and with the exposure arising from loan commitments and financial guarantee contracts. The Group recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects:− an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; − the time value of money; and− reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and

forecasts of future economic conditions.

ECL measurement is s an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses).

A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as:− determining criteria for significant increase in credit risk;− choosing appropriate models and assumptions for the measurement of ECL;− establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL; and− establishing groups of similar financial assets for the purposes of measuring ECL.

Detailed information about how the expected credit loss allowance is measured, on the concept of staging, on the inputs, assumptions and estimation techniques, also on judgements and estimates made by the Group is set out in note 38.1 Credit risk.

Minimum provisions for performing financial assets not identified as impaired

In addition to the above described impairment losses on financial assets identified as impaired, the Group recognises a provision for impairment losses on balance-sheet and off-balance-sheet credit risk exposures not identified as impaired at a rate of 0.8%. This is in accordance with the CNB’s Decision on the classification of exposures into risk categories and the method of determining credit losses (Official Gazette, No 114/2017).

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Specific instruments a) Sale and repurchase agreements The Group enters into purchases and sales of securities under agreements to resell or repurchase substantially identical securities at a certain date in the future at a fixed price. Investments purchased subject to such commitments to resell them at future dates are not recognised in the statement of financial position. The amounts paid are recognised as loans receivables, either from banks or from customers. The receivables are presented as collateralised by the underlying security. Securities sold under repurchase agreements continue to be recognised in the statement of financial position and are measured in accordance with the accounting policy for the relevant financial asset at amortised cost or at fair value as appropriate. The proceeds from the sale of the securities are reported as collateralised liabilities to either banks or customers.

The difference between the sale and repurchase consideration is recognised on an accrual basis over the period of the transaction and is included in interest income or expense.

b) Derivative financial instruments The Group uses derivative financial instruments to economically hedge its exposure to foreign exchange and interest rate risks arising from operating, financing and investing activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for speculative trading purposes. No derivatives are accounted for as hedging instruments except in UniCredit Leasing Croatia doo where hedge accounting is applied with respect to exposure to foreign currency risk. All Group's derivatives are classified as financial instruments at fair value through profit or loss – held-for trading instruments.

Derivative financial instruments, including foreign exchange forward contracts, foreign exchange swaps, cross currency interest rate swaps and interest rate swaps, are initially recognised in the statement of financial position and subsequently remeasured at their fair value. Fair values are obtained from quoted market prices or discounted cash flow models as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when negative. Changes in the fair value of derivatives are included in the statement of profit or loss under “Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities”.

Some hybrid contracts contain both a derivative and a non-derivative component. Under IFRS 9, if the hybrid contract contains a host that is a financial asset, then the Group assesses the entire instrument as a whole for classification and measurement purposes. Financial assets with embedded derivatives are considered in their entirety when determining wether their cahs flows are solely payment of principal and interest.

Otherwise, for derivatives embedded in financial liabilities and for non-financial host contracts, the derivative component is termed an embedded derivative. When the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract and when the hybrid contract is not itself carried at fair value through profit or loss, the embedded derivative is treated as a separate derivative and classified at fair value through profit or loss with all unrealised and realised gains and losses recognised in the statement of profit or loss.

c) Debt securities

Debt securities are classified as financial assets at fair value through other comprehensive income (with recycling of gains or losses to profit or loss on derecognition), at fair value through profit or loss, or at amortised cost, depending on the business model and SPPI test results. d) Due from banks Placements with banks are classified as financial assets at amortised cost and measured accordingly.

e) Loans and receivables from customers Loans to and receivables from customers are presented net of expected credit loss impairment allowances to reflect the estimated recoverable amounts.

f) Equity securities Equity securities are either designated to FVOCI option (with no recycling of gains or losses to profit or loss on derecognition) or as financial assets at fair value through profit or loss. g) Investments in funds Investments in funds are classified as financial assets at fair value through profit or loss.


h) Investments in subsidiaries and associates

Investments in subsidiaries and associates are accounted at cost less impairment in the separate financial statements of the Bank. Investments in subsidiaries are fully consolidated in the consolidated financial statements whilst investments in associates are accounted for under the equity method. i) Cash and cash equivalents Cash and cash equivalents comprise cash in hand, items in the course of collection and current accounts with banks. j) Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between proceeds (net of transaction costs) and redemption value being recognised in the statement of profit or loss over the period of the borrowings on an effective interest basis.

k) Issued debt securities

Bonds issued by the Group are classified as other liabilities and are initially recorded at fair value. Subsequent to initial recognition they are stated at amortised cost. Any premium or discount on issue is debited or credited to interest expense on an effective interest rate basis.Repurchase of issued debt securities debt is considered as cancellation of that debt. Gains and losses arising from cancellation are recognised if the repurchase price is lower or higher than its carrying value.

l) Current accounts and deposits from banks and customers Current accounts and deposits are classified as other liabilities and initially measured at fair value plus transaction costs, and subsequently stated at their amortised cost using the effective interest method.

m) Financial guarantes, letters of credit and undrawn loan commitments

The Group issues financial guarantees, letters of credit and loan commitments.

Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the income statement, and – under IAS 39 – the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee, or – under IFRS 9 – an ECL provision. The premium received is recognised in the income statement in Net fees and commission income.

Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment, the Group is required to provide a loan with pre-specified terms to the customer. Similar to financial guarantee contracts, under IAS 39, a provision was made if they were an onerous contract. From 1 January 2018, these contracts are in the scope of the ECL model requirements.

The nominal contractual value of financial guarantees, letters of credit and undrawn loan commitments, where the loan agreed to be provided is on market terms, are not recorded on in the statement of financial position (presented off-balance sheet).

n) Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when, and only when, there is a currently legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting regulations, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity.

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11 Property and equipment

Property and equipment items are measured at cost less accumulated depreciation and any impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the items. Property and equipment are tangible items that are held for use in the provision of services, for rental or other administrative purposes.

Subsequent cost is included in the asset’s carrying amount or is recognised as a separate asset as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of profit or loss during the period in which they are incurred.

Depreciation is provided on all assets except land and assets not yet brought into use on a straight-line basis at prescribed rates designed to write off the cost over the estimated useful life of the asset. The estimated useful lives are as follows:

2018 2017

Buildings 50 years 50 yearsMotor vehicles 4 years 4 yearsEquipment 3 – 14.3 years 3 – 14.3 yearsOffice furniture 10 years 10 yearsComputers 3.3 years 3.3 years

The assets’ useful lives and residual values are reviewed, and adjusted if appropriate, at each reporting date.

When the use of property changes from owner-occupied to rented, the property is reclassified to investment property. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of profit or loss.

12 Intangible assets

a) Goodwill

Goodwill arising on acquisition represents the excess of the cost of acquisition over the fair value of the Group’s share of the underlying net identifiable assets including intangible assets, at the date of acquisition. Upon the legal merger of the Bank’s former subsidiaries, goodwill formerly arising on consolidation was transformed into purchased goodwill recognised in the Bank’s separate statement of financial position. Goodwill on acquisition of subsidiaries and purchased goodwill is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is tested for impairment at least annually. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

b) Other intangible assets

Other intangible assets acquired by the Group are measured at cost less accumulated amortisation and any impairment losses. Expenditure on development activities is capitalised if all of the features required by International Accounting Standard 38 “Intangible Assets” are satisfied. These intangible assets are amortised on a straight-line basis over their estimated useful lives as follows:


2018 2017

Software 5 years 5 yearsLeasehold improvements over the period of the lease over the period of the leaseOther intangible assets 10 years 10 years


13 Investment property

Investment property is carried at cost less accumulated depreciation and any impairment losses. Investment property is property held by the Group to earn rentals or for capital appreciation, or both, but not for sale in the ordinary course of business or for use for own administrative purposes. Depreciation is provided on all investment property, except for investment property not yet brought into use, on a straight-line basis at prescribed rates designed to write off the cost over the estimated useful life of the asset as follows:


Transfers are made to and from investment property, when there is a change in use, evidenced by the discontinuation or commencement of owner-occupation, respectively. Investment property is derecognised when either it has been disposed of or permanently withdrawn from use or no future economic benefits are expected from its disposal. Any gains or losses on the retirement or disposal of investment property are recognised in the income statement in the year of retirement or disposal.

14 Non-current assets and disposal groups classified as held for sale

Non-current assets (or disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in it’s present condition. Management must be committed to the sale and the sale should be expected to be completed within one year from the date of classification.

Immediately before classification as held for sale, the assets (or components of a disposal group) are remeasured in accordance with the Group’s accounting policies. Thereafter, the assets (or disposal group of assets and liabilities) are measured at the lower of their carrying amount and fair value less cost to sell. A non-current asset classified as held for sale is no longer depreciated.

Any impairment loss on a disposal group first is allocated to goodwill, and then to the remaining assets and liabilities on a pro-rata basis, except that no loss is allocated to financial assets and deferred tax assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. At reclassification back, on change of intent or if the conditions required by IFRS 5 cease to be applicable, the Group does not restate comparative information in the statement of financial position. Upon reclassification the valuation is adjusted in accordance with relevant standards, as if the reclassification had not occurred.

15 Impairment of property and equipment, investment property and intangible assets

Assets that have an indefinite useful life, such as goodwill, are not subject to amortisation and are tested for impairment whenever there are indications that these may be impaired or at least annually. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are not yet available for use are assessed at each reporting date. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the statement of profit or loss.

The recoverable amount of property and equipment, investment property and intangible assets is the higher of the asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). 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 risks specific to the asset or cash-generating unit.

An impairment loss in respect of goodwill is not reversed.

Other previously impaired non-financial assets, other than goodwill, are reviewed for possible reversal of the impairment at each reporting date. 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.

2018 2017

Buildings 33.3 - 50 years 33.3 - 50 years

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16 Inventories

Inventories are recognised at cost and measured at the lower of cost and net realisable value (“NRV”). Costs include purchase price (including taxes, transport and handling) net of trade discounts received and costs incurred in bringing the inventories to their present location and condition. NRV is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. Slow-moving and obsolete inventories are written down to their estimated realisable value and the expense is recognised in the statement of profit or loss.

17 Income tax

The income tax is based on taxable profit for the year and comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised either in other comprehensive income or directly in equity. Current tax is the expected tax payable on the taxable income for the year, using the tax rates enacted or substantially enacted at the reporting date, and any adjustments to tax payable in respect of previous years. Deferred taxes are calculated by using the statement of financial position liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which an entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities, based on tax rates enacted or substantially enacted at the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax assets and liabilities on a net basis or their tax assets and liabilities will be realised simultaneously.

Deferred tax assets and liabilities are not discounted and are classified as non-current in the statement of financial position. Deferred tax assets are recognised only to the extent that it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilised. At each reporting date, the Group reassesses unrecognised potential deferred tax assets and the recoverability of the carrying amount of recognised deferred tax assets. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.

18 Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made, or as required by law in the case of provisions for unidentified losses on off-balance-sheet credit risk exposures.

If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its 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 Group recognises any impairment loss on the assets associated with that contract.

Provisions for liabilities and charges are maintained at the level that the Group's management considers sufficient for absorption of losses. The management determines the sufficiency of provisions on the basis of insight into specific items, current economic circumstances, risk characteristics of certain transaction categories, as well as other relevant factors.

Provisions are released only for the expenditure in respect of which provisions are recognised at inception. If the outflow of economic benefits to settle the obligations is no longer probable, the provision is reversed.

19 Issued share capital

Issued share capital represents the nominal value of paid-in ordinary shares and is denominated in HRK.

Dividends are recognised as a liability in the period in which they are declared.


20 Treasury shares

When any Group company purchases the Bank’s equity share capital (treasury shares), the consideration paid is deducted from equity attributable to the Bank’s equity holders and classified as treasury shares until the shares are cancelled, reissued or disposed of. When such shares are subsequently sold or reissued, any consideration received, net of transaction costs, is included in equity attributable to the Bank’s equity holders.

21 Retained earnings

Any profit for the year retained after appropriations is classified as retained earnings.

22 Off-balance-sheet commitments and contingent liabilities

In the ordinary course of business, the Group enters into credit-related commitments which are recorded in off-balance-sheet accounts and primarily comprise guarantees, letters of credit, undrawn loan commitments and credit-card limits. Such financial commitments are recorded in the Group’s statement of financial position if and when they become payable.

23 Managed funds for and on behalf of third parties

The Group manages funds for and on behalf of corporate and retail customers. These amounts do not represent the Group's assets and are excluded from the statement of financial position. For the services rendered the Group charges a fee. For details please refer to Note 34.

24 Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Management Board of the Bank (being the chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available.

The Group and the Bank have identified four primary segments: Retail, Corporate, Leasing and Investment and Other. The primary segmental information is based on the internal reporting structure of business segments. Segmental results are measured by applying internal prices (Note 10).

25 Earnings per share

The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS are calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted EPS are determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

26 Assets acquired in lieu of uncollected receivables The Group assesses marketability of assets acquired in lieu of uncollected receivables and only marketable assets, the value of which can be measured reliably, are recognised as assets in the statement of financial position. Such assets are stated at the lower of the cost of related loans (or lease receivables) and the current fair value of that asset. The Group’s intention is mainly to sell such assets (such assets are not amortised and are disclosed within Note 23 Other assets - lease operations or within Note 22 Non-current assets and disposal groups held for sale - subject to meeting IFRS 5 criteria) which, however, in certain cases may end up being used by the Group (such assets are amortised and disclosed within Note 20 Property and equipment) or held by the Group to earn rentals or for capital appreciation or both (such assets are amortised and disclosed within Note 19 Investment property).

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Notes to the financial statements


Financial statements I Notes to the financial statements

a) Interest income - analysis by source

HRK MILLION GROUP BANK 2018 2017 2018 2017

Loans and advances 3,627 3,987 2,813 3,080Financial assets held for trading 157 180 157 180FVOCI financial assets (AFS until 1 January 2018) 218 203 143 152 4,002 4,370 3,113 3,412


Financial liabilities measured at amortised cost 466 759 325 550Financial liabilities at fair value through profit or loss 121 140 121 140 587 899 446 690

b) Interest income - analysis by class of financial instruments

1 Net interest income


Individuals and unincorporated businesses 1,946 2,057 1,447 1,509Corporate entities 1,217 1,269 861 909State and public sector 652 854 626 814Banks and other financial institutions 175 174 169 165Other 12 16 10 15 4,002 4,370 3,113 3,412


Banks and other financial institutions 105 140 61 89State and public sector 106 130 99 124Individuals and unincorporated businesses 300 475 218 334Corporate entities 60 108 52 97Other 16 46 16 46 587 899 446 690

c) Interest expense - analysis by recipient

d) Interest expense - analysis by class of financial instruments



Domestic payment transactions 624 598 548 525Credit cards 441 391 353 302Investment management, brokerage and consultancy 260 215 223 173Foreign payment transactions 93 96 33 50Guarantees 82 84 62 65Lending operations - 12 - 2Other 124 133 80 96 1,624 1,529 1,299 1,213

b) Fee and commission expense

2 Net fee and commission income

a) Fee and commission income


Credit cards 155 125 155 125Domestic payment transactions 43 38 34 31Foreign payment transactions 6 6 4 4Other 16 19 7 8 220 188 200 168

102

Notes to the financial statements (Continued)




Dividends from subsidiaries - - 298 231Dividends from associates (Note 18.2b) - - 40 38Dividends from other equity securities 17 12 16 10 17 12 354 279

4 Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities


Foreign exchange Foreign exchange spot trading 338 297 283 256Net foreign exchange gains/(losses) from translation of monetary assets and liabilities (16) 27 (26) 41Net trading gain/(loss) from currency derivatives 11 (53) 12 (51)Net trading gain/(loss) from cross-currency interest rate swaps 22 (186) 22 (186)

Other derivative financial instruments Net trading loss from interest rate swaps (2) (7) (2) (7)

Trading debt securities 1 3 1 3Trading equity securities (1) - (1) -Financial assets designated at fair value through profit or loss (1) 2 (1) 2Equity securities at fair value through profit or loss 21 - 21 - 373 83 309 58

The Group enters into economic hedges of its open FX position via various derivative financial instruments. Part of the effect on income (included in the table above) which the economic hedges are intended to mitigate is presented within net interest income.

3 Dividend income


5 Net gains and losses on derecognition of financial assets at fair value through other comprehensive income


Financial assets at fair value through other comprehensive income: Debt securities FVOCI 12 - 9 -Realised gain/(loss) on derecognition of financial assets at fair value through other comprehensive income 12 - 9 -Available-for-sale financial assets (policy applicable before 1 January 2018): Debt securities available for sale - 15 - 15Equity securities available for sale - 10 - 10Net gains and losses on available-for-sale securities - 25 - 25

6 Other operating income


Income from operating leases 282 218 - -Net gain on disposal of property and equipment 28 49 22 47Rental income from investment property 17 35 4 4Receipts from receivables previously written-off 3 18 3 17Property valuation services 12 14 - -Other 75 85 56 45 417 419 85 113

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7 Operating expenses


Depreciation and amortisation (Notes 19, 20, 21) 422 375 179 180Personnel expenses

Salaries and other personnel expenses 1,153 1,127 873 846Restructuring expenses 3 11 3 9Equity-settled share-based payments 8 8 8 8

Administration and marketing expenses 751 769 566 565Savings deposits’ insurance expenses 160 154 121 115Contributions to the Resolution Fund 70 61 70 61Operating lease expenses 56 42 - -Government contributions 15 16 6 5Repair and maintenance of investment property 5 12 - -Other 21 27 16 13 2,664 2,602 1,842 1,802

Personnel expenses include HRK 188 million (2017: HRK 183 million) and HRK 134 million (2017: HRK 132 million) of defined pension contributions payable to obligatory pension plans for the Group and the Bank, respectively. Contributions are calculated as a percentage of employees’ gross salaries. Depreciation of property and equipment for the Group includes HRK 195 million (2017: HRK 148 million) of depreciation of operating lease assets.

Non-audit services During the year, the external auditor has performed certain other services in addition to its statutory duties. The following non-audit services (attest related) have been provided in 2018: Review of the quarterly financial reports, statutory review and assessment of compliance of the general information technology controls and other agreed-upon procedures required to respond to or comply with financial, accounting or regulatory reporting matters. Services provided during 2018 represent allowed non-audit services in accordance with the EU Regulation.


8 Other impairment losses and provisions


Provisions for off-balance-sheet credit risk exposure (Note 29) (37) 130 (46) 123Impairment loss on investment property (Note 19) 16 61 16 46Impairment of assets held for sale (1) 32 - -Provisions for court cases (Note 29) 21 19 16 2Impairment/(reversal) of impairment loss on property and equipment (Note 20) 3 11 3 10Impairment loss on intangible assets (Note 21) - 5 - 5Reversal of impairment loss on available-for-sale financial assets - (5) - (5)Impairment of investment in joint ventures, associates and subsidiaries which are carried at cost - - - 25Restructuring provisions 96 54 93 17Other - - 2 49 98 307 84 272

9 Income tax

a) Income tax expense/(credit) recognised in the statement of profit or loss

HRK MILLION GROUP BANK NOTES 2018 2017 2018 2017

Current income tax expense 352 69 278 7Deferred tax expense/(credit) 9f (26) 174 (24) 161Adjustments in respect of current income tax of previous years - (1) - (1) 326 242 254 167

b) Reconciliation of income tax expense and the accounting profit (multiplied by the Group’s domestic tax rate of 18%)


Accounting profit (loss) before tax 2,367 1,286 2,111 1,006Tax calculated at rate of 18% (2017: 18%) 426 231 380 181Effect of different tax rates in the Federation of Bosnia and Herzegovina (34) (30) - -Impact of adopting IFRS 9 (74) - (73) -Income not subject to tax (76) (51) (72) (50)Expenses not deductible for tax purposes 20 48 7 29Tax allowances (reinvestment of profit and double deductions of eligible expenses) - (1) - -Income tax losses - 2 - -Utilisation of previously unrecognized tax losses - - (1) -Tax paid on receipts from abroad (dividend) 13 7 13 7Consolidation adjustments 51 36 - - 326 242 254 167Effective income tax rate 13.8% 18.8% 12.0% 16.6%

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GROUP HRK MILLION TEMPORARY DIFFERENCES TOTAL LOAN FINANCIAL LONG TERM TAX OTHER EFFECT OF ORIGINATION INSTRUMENTS LIABILITIES TO LOSS DEFERRED TAX FEES AT FAIR VALUE EMPLOYEES NETTING THROUGH PROFIT OR LOSS

Balance as at 1 January 2018 286 40 143 36 46 78 (57)Reversal of offset from previous year 57 - - - - - 57Increase credited to statement of profit or loss (Note 9f) 121 70 27 1 - 23 -Utilisation charged to statement of profit or loss (Note 9f) (95) (33) - - (46) (16) -Transfer from deferred tax liability (Note 9d) (53) - - - - - (53)Balance as at 31 December 2018 316 77 170 37 - 85 (53)

9 Income tax (continued)

c) Deferred tax assets

GROUP HRK MILLION TEMPORARY DIFFERENCES TOTAL LOAN FINANCIAL LONG TERM TAX OTHER EFFECT OF ORIGINATION INSTRUMENTS LIABILITIES TO LOSS DEFERRED TAX FEES AT FAIR VALUE EMPLOYEES NETTING THROUGH PROFIT OR LOSS

Balance as at 1 January 2017 474 44 361 23 - 87 (41)Reversal of offset from previous year 41 - - - - - 41Increase credited to statement of profit or loss (Note 9f) 95 25 - 13 46 11 -Utilisation charged to statement of profit or loss (Note 9f) (267) (29) (218) - - (20) -Transfer from deferred tax liability (Note 9d) (57) - - - - - (57)Balance as at 31 December 2017 286 40 143 36 46 78 (57)


BANK HRK MILLION TEMPORARY DIFFERENCES TOTAL LOAN FINANCIAL LONG TERM TAX OTHER EFFECT OF ORIGINATION INSTRUMENTS LIABILITIES TO LOSS DEFERRED FEES AT FAIR VALUE EMPLOYEES TAX NETTING THROUGH PROFIT OR LOSS

Balance as at 1 January 2018 248 31 143 35 46 47 (54)Reversal of offset from previous year 54 - - - - - 54Increase credited to statement of profit or loss (Note 9f) 109 68 26 1 - 14 -Utilisation charged to statement of profit or loss (Note 9f) (86) (33) - - (46) (7) -Merger of subsidiary 2 1 - - - 1 -Transfer from deferred tax liability (Note 9d) (51) - - - - - (51)Balance as at 31 December 2018 276 67 169 36 - 55 (51)


c) Deferred tax assets (continued)

BANK HRK MILLION TEMPORARY DIFFERENCES TOTAL LOAN FINANCIAL LONG TERM TAX OTHER EFFECT OF ORIGINATION INSTRUMENTS LIABILITIES TO LOSS DEFERRED FEES AT FAIR VALUE EMPLOYEES TAX NETTING THROUGH PROFIT OR LOSS

Balance as at 1 January 2017 424 36 361 22 - 43 (38)Reversal of offset from previous year 38 - - - - - 38Increase credited to statement of profit or loss (Note 9f) 85 22 - 13 46 4 -Utilisation charged to statement of profit or loss (Note 9f) (245) (27) (218) - - - -Transfer from deferred tax liability (Note 9d) (54) - - - - - (54)Balance as at 31 December 2017 248 31 143 35 46 47 (54)

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d) Deferred tax liability

GROUP HRK MILLION TEMPORARY DIFFERENCES TOTAL LOAN FVOCI/AFS DEBT OTHER EFFECT OF ORIGINATION FINANCIAL ASSETS SECURITIES DEFERRED FEES FAIR VALUE FVOCI TAX RESERVE IMPAIRMENT NETTING ALLOWANCE

Balance as at 1 January 2018 15 3 65 - 4 (57)Impact of adopting IFRS 9 (20) - (20) - - -Reversal of offset in previous year 57 - - - - 57Net increase from FVOCI financial assets (Note 9g) 6 - (2) 8 - -Utilisation credited to statement of profit or loss (Note 9f) - (1) - - 1 -Transfer to deferred tax assets (Note 9c) (53) - - - - (53)Balance as at 31 December 2018 5 2 43 8 5 (53)Balance as at 1 January 2017 12 1 48 - 4 (41)Reversal of offset in previous year 41 - - - - 41Net increase from change in fair value and on disposal of available-for sale financial assets charged to OCI (Note 9g) 17 - 17 - - -Utilisation credited to statement of profit or loss (Note 9f) 2 2 - - - -Transfer to deferred tax assets (Note 9c) (57) - - - - (57)Balance as at 31 December 2017 15 3 65 - 4 (57)

BANK HRK MILLION TEMPORARY DIFFERENCES TOTAL LOAN FVOCI/AFS DEBT EFFECT OF ORIGINATION FINANCIAL ASSETS SECURITIES DEFERRED FEES FAIR VALUE FVOCI TAX RESERVE IMPAIRMENT NETTING ALLOWANCE

Balance as at 1 January 2018 - 2 52 - (54) Impact of adopting IFRS 9 (20) - (20) - Reversal of offset in previous year 54 - - - 54Net increase from FVOCI financial assets (Note 9g) 6 - (2) 8 -Utilisation credited to profit or loss (Note 9f) (1) (1) - - - Merger of subsidiary 12 - 12 - -Transfer to deferred tax assets (Note 9c) (51) - - - (51) Balance as at 31 December 2018 - 1 42 8 (51) Balance as at 1 January 2017 - 1 37 - (38) Reversal of offset in previous year 38 - - - 38Net increase from change in fair value and on disposal of AFS financial assets recognised to OCI (Note 9g) 15 - 15 - -Utilisation credited to profit or loss (Note 9f) 1 1 - - - Transfer to deferred tax assets (Note 9c) (54) - - - (54) Balance as at 31 December 2017 - 2 52 - (54)

* “OCI” stands for statement of other comprehensive income




31 December 2018 - 531 December 2019 - 231 December 2020 - -31 December 2021 - 231 December 2022 8 26731 December 2023 - - 8 276The tax benefit of unused unexpired tax losses is as follows: Tax losses not recognised as deferred tax assets, (at 18%) in the Republic of Croatia and (at 10%) in the Federation of Bosnia and Herzegovina 1 4

e) Tax losses

As at 31 December 2018, subsidiaries of the Bank in Republic of Croatia and the Federation of Bosnia and Herzegovina have unused gross tax losses in the amount of HRK 8 million (2017: HRK 276 million). The tax losses are available for offsetting against future taxable profits of the companies in which these losses arose, within the five years following the year of tax loss recognition. The expiry dates for unused (gross) tax losses are as follows:

Deferred tax assets (at 18% in Republic of Croatia and at 10% in the Federation of Bosnia and Herzegovina) have not been recognised in respect of these losses, as they may not be used to offset taxable profits elsewhere in the Group. They arose in loss-making subsidiaries, and there are no other tax planning opportunities or other indication of recoverability of these items in the foreseeable future.

f) Net deferred tax benefit credit/(debit) to the statement of profit or loss

g) Net deferred tax (charge)/credit to OCI


Increase in deferred tax assets (Note 9c) 121 95 109 85Decrease in deferred tax assets (Note 9c) (95) (267) (86) (246)Increase in deferred tax liability (Note 9d) (1) (2) - -Decrease in deferred tax liability (Note 9d) 1 - 1 - 26 (174) 24 (161)


Decrease in deferred tax assets (Note 9c) - - - -Increase in deferred tax liability (Note 9d) (6) (17) (6) (15)Decrease in deferred tax liability (Note 9d) - - - - (6) (17) (6) (15)

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10 Financial information by segment

The Bank has four reportable segments. Customers are classified in operating segments and sub-segments according to their size and nature of operations. In measurement of segments’ results, the Bank applies internal prices, specific to appropriate currency and maturity, with further additional adjustments.

“Retail” segment includes: loans, deposits and other transactions and balances with individuals, unincorporated businesses and small corporate customers.

“Corporate and Investment” segment includes: loans, deposits and other transactions and balances with medium and large corporate customers and similar organisations, including publicly owned customers and the State, and high net worth individuals (private customers), as well as trading activities.

Segment” Leasing” includes equity, investments in subsidiaries and associates and other assets assigned to leasing segment, as well as asset and liability management activities. Subsidiaries included within segment “Leasing” are UniCredit Leasing Croatia, UniCredit Leasing, Sarajevo10, Locat Croatia, BACAL ALPHA, ALLIB NEKRETNINE and UniCredit Partner11.

Segment “Other” includes equity, investments in subsidiaries and associates and other assets not assigned to other segments, as well as asset and liability management activities. Subsidiaries which are not allocated to primary segments are included within segment “Other”. These subsidiaries are ZB Invest, Centar Kaptol12, Pominvest, ZANE, ZANE BH, and ZABA Partner.

Segmental analysis of the statement of financial position differs from presentation elsewhere in the financial statements, where retail customers, in addition to individuals and incorporated businesses, include private customers (for segmental analysis included within “Corporate and Investment” segment) and small business customers are included within corporate entities (for segmental analysis included within Retail segment).

Segmental statement of profit or loss and statement of financial position are based on management reporting rules to the parent company which use different criteria for loan portfolio valuation, as well as different classification rules and presentation differences as well as other differences. The reconciliations of differences between amounts presented as per managerial reporting and amounts presented in these statutory financial statements are also available in the tables within this note.

10 Included in segmental statement of profit or loss until merger to UniCredit Bank dd, Mostar in 2017 11 In May 2018 UniCredit Partner doo was merged to UniCredit Leasing Croatia doo12 In February 2018 the Group sold its stake in the company Centar Kaptol


10 Financial information by segment (continued)

a) Segmental statement of profit or loss – operating segments

GROUP2018 HRK MILLION RETAIL CORPORATE LEASING OTHER TOTAL RECONCILIATION FINANCIAL AND MANAGERIAL TO FINANCIAL STATEMENTS INVESTMENT REPORTING STATEMENTS

Net interest income 2,112 1,246 93 (36) 3,415 - 3,415Net fee and commission income 1,028 340 3 35 1,406 (2) 1,404Dividend income - - - 16 16 1 17Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 137 209 9 27 382 (9) 373Net gains and loses on derecognition of financial asset at fair value through other comprehensive income 2 1 - 7 10 2 12Other operating income/(loss) (6) 6 303 33 336 81 417Operating income 3,273 1,802 408 82 5,565 73 5,638Operating expenses (excluding depreciation and amortisation) (1,468) (433) (121) 18 (2,004) (238) (2,242)Depreciation and amortisation (133) (18) (202) (66) (419) (3) (422)Impairment losses and provisions (90) (895) (5) (96) (1,086) 440 (646)Segment result 1,582 456 80 (62) 2,056 272 2,328Share of profit from associates - - - 39 39 - 39Income tax (30) (13) (16) (218) (277) (49) (326)Profit/(loss) for the period 1,552 443 64 (241) 1,818 223 2,041Attributable to:

Equity holders of the Bank 1,552 443 64 (244) 1,815 223 2,038Non-controlling interest - - - 3 3 - 3

Profit/(loss) for the period 1,552 443 64 (241) 1,818 223 2,041

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a) Segmental statement of profit or loss – operating segments (continued)


Net interest income 2,148 1,331 97 (90) 3,486 (15) 3,471Net fee and commission income 948 360 2 34 1,344 (3) 1,341Dividend income - - - 11 11 1 12Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 148 (10) (14) (9) 115 (32) 83Net gains and losses from available-for-sale securities - 6 - (35) (29) 54 25Other operating income/(loss) (2) 18 268 35 319 100 419Operating income 3,242 1,705 353 (54) 5,246 105 5,351Operating expenses (excluding depreciation and amortisation) (1,462) (432) (137) 24 (2,007) (220) (2,227)Depreciation and amortisation (132) (18) (156) (69) (375) - (375)Impairment losses and provisions 33 (1,370) (25) 19 (1,343) (162) (1,505)Segment result 1,681 (115) 35 (80) 1,521 (277) 1,244Share of profit from associates - - - 41 41 1 42Income tax (32) (17) (19) (224) (292) 50 (242)Profit/(loss) for the period 1,649 (132) 16 (263) 1,270 (226) 1,044Attributable to:

Equity holders of the Bank 1,649 (132) 16 (265) 1,268 (226) 1,042Non-controlling interest - - - 2 2 - 2

Profit/(loss) for the period 1,649 (132) 16 (263) 1,270 (226) 1,044



BANK2018 HRK MILLION RETAIL CORPORATE OTHER TOTAL RECONCILIATION FINANCIAL AND MANAGERIAL TO FINANCIAL STATEMENTS INVESTMENT REPORTING STATEMENTS

Net interest income 1,634 1,091 (58) 2,667 - 2,667Net fee and commission income 818 280 1 1,099 - 1,099Dividend income - - 353 353 1 354Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 100 191 27 318 (9) 309Net gains and loses on derecognition of financial asset at fair value through other comprehensive income 2 1 4 7 2 9Other operating income/(loss) (7) 5 8 6 79 85Operating income 2,547 1,568 335 4,450 73 4,523Operating expenses (excluding depreciation and amortisation) (1,097) (366) 46 (1,417) (246) (1,663)Depreciation and amortisation (118) (15) (45) (178) (1) (179)Impairment losses and provisions (45) (873) (97) (1,015) 445 (570)Segment result 1,287 314 239 1,840 271 2,111Income tax - - (205) (205) (49) (254)Profit/(loss) for the period 1,287 314 34 1,635 222 1,857


a) Segmental statement of profit or loss – operating segments (continued)


Net interest income 1,657 1,186 (100) 2,743 (21) 2,722Net fee and commission income 743 304 (2) 1,045 - 1,045Dividend income - - 278 278 1 279Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 119 (20) (9) 90 (32) 58Net gains and losses from available-for-sale securities - 5 (34) (29) 54 25Other operating income/(loss) (2) 16 7 21 92 113Operating income 2,517 1,491 140 4,148 94 4,242Operating expenses (excluding depreciation and amortisation) (1,097) (364) 63 (1,398) (224) (1,622)Depreciation and amortisation (109) (15) (61) (185) 5 (180) Impairment losses and provisions 205 (1,348) 97 (1,046) (388) (1,434)Segment result 1,516 (236) 239 1,519 (513) 1,006Income tax - - (217) (217) 50 (167)Profit/(loss) for the period 1,516 (236) 22 1,302 (463) 839

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b) Segmental statement of financial position – operating segments


Segment’s assets 39,191 80,501 4,229 14,524 138,445 (412) 138,033Investments in associates - - - 91 91 2 93Tax prepayment - - - 89 89 - 89Deferred tax assets - - 39 185 224 92 316Total assets 39,191 80,501 4,268 14,889 138,849 (318) 138,531Segment’s liabilities 65,315 46,327 3,764 4,312 119,718 45 119,763Current tax liability - - 8 5 13 - 13Deferred tax liability - - - 12 12 (7) 5Total liabilities 65,315 46,327 3,772 4,329 119,743 38 119,781Capital expenditure - - 919 223 1,142 - 1,142


Segment’s assets 37,759 71,066 4,067 13,574 126,466 (220) 126,246Investments in associates - - - 92 92 2 94Tax prepayment - - 22 245 267 - 267Deferred tax assets - - 37 164 201 85 286Total assets 37,759 71,066 4,126 14,075 127,026 (133) 126,893Segment’s liabilities 61,227 39,749 3,285 4,295 108,556 206 108,762Current tax liability - - - 5 5 - 5Deferred tax liability 10 - - 13 23 (8) 15Total liabilities 61,237 39,749 3,285 4,313 108,584 198 108,782Capital expenditure - - 757 193 950 - 950



b) Segmental statement of financial position – operating segments (continued)


Segment’s assets 31,627 75,386 4,795 111,808 (466) 111,342Investments in subsidiaries and associates - - 1,225 1,225 312 1,537Tax prepayment - - 88 88 - 88Deferred tax assets - - 184 184 92 276Total assets 31,627 75,386 6,292 113,305 (62) 113,243Segment liabilities 53,461 41,789 1,524 96,774 45 96,819Total liabilities 53,461 41,789 1,524 96,774 45 96,819Capital expenditure - - 161 161 - 161


Segment’s assets 28,534 66,679 5,106 100,319 (264) 100,055Investments in subsidiaries and associates - - 1,325 1,325 312 1,637Tax prepayment - - 244 244 - 244Deferred tax assets - - 163 163 85 248Total assets 28,534 66,679 6,838 102,051 133 102,184Segment liabilities 47,858 35,781 2,642 86,281 205 86,486Total liabilities 47,858 35,781 2,642 86,281 205 86,486Capital expenditure - - 140 140 - 140

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c) Geographical segment information

GROUP 2018 HRK MILLION REPUBLIC OF FEDERATION TOTAL CROATIA OF BOSNIA AND HERZEGOVINA

External revenue 4,676 962 5,638Segment’s assets 115,992 22,539 138,531Capital expenditure 1,082 60 1,142

GROUP 2017 HRK MILLION REPUBLIC OF FEDERATION TOTAL CROATIA OF BOSNIA AND HERZEGOVINA

External revenue 4,421 930 5,351Segment’s assets 106,845 20,048 126,893Capital expenditure 895 55 950

Geographical segmentation is based on the domicile of Group subsidiaries. The majority of the Bank’s and Group’s operations and customers are in the Republic of Croatia.


11 Cash and cash equivalents GROUP

HRK MILLION 2018 2017 HRK FOREIGN TOTAL HRK FOREIGN TOTAL CURRENCY CURRENCY

Cash in hand 1,708 1,411 3,119 1,622 1,319 2,941Items in the course of collection - - - - 1 1Current accounts with other banks 23 3,003 3,026 23 2,152 2,175Current accounts with central banks 17,098 1,408 18,506 10,257 2,462 12,719 18,829 5,822 24,651 11,902 5,934 17,836

Current accounts with central banks include current accounts of a subsidiary in the Federation of Bosnia and Herzegovina with the Central Bank of Bosnia and Herzegovina in the amount of HRK 1,327 million (2017: HRK 2,357 million).

BANK HRK MILLION 2018 2017 HRK FOREIGN TOTAL HRK FOREIGN TOTAL CURRENCY CURRENCY

Cash in hand 1,696 767 2,463 1,615 764 2,379Items in the course of collection - - - - 1 1Current accounts with other banks - 2,217 2,217 - 1,547 1,547Current accounts with central banks 17,099 81 17,180 10,258 106 10,364 18,795 3,065 21,860 11,873 2,418 14,291

12 Obligatory reserve with the Croatian National Bank HRK MILLION GROUP BANK 2018 2017 2018 2017

Obligatory reserve, in kuna 5,684 5,525 5,684 5,525

The CNB determines the requirement for banks to calculate obligatory reserve which is required to be deposited with the CNB and has to be maintained in the form of liquid assets.

The obligatory reserve requirement as at 31 December 2018 was 12% (2017: 12%) of HRK and foreign currency deposits, borrowings and issued debt securities. As at 31 December 2018, the required rate for the HRK denominated part of the obligatory reserve to be deposited with the CNB amounted to 70% (2017: 70%), while the remaining 30% (2017: 30%) had to be maintained in the form of other liquid receivables. This includes the part of foreign currency obligatory reserve required to be held in HRK (see below).

In 2018, 100% of the foreign currency part of the obligatory reserve was held in the form of other liquid receivables (2017: 100%). 75% (2017: 75%) of the foreign currency obligatory reserve was required to be held in HRK, and this was added to the Croatian kuna portion of the obligatory reserve.

The obligatory reserve did not earn interest in 2018 (2017: nil).

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13 Due from banks


Placements with banks 5,206 6,710 1,460 4,071Loans to banks 4,221 2,459 3,396 2,457 9,427 9,169 4,856 6,528Impairment allowance - Placements with banks (6) (19) - (19) - Loans (3) - (3) - (9) (19) (3) (19)

Net due from banks 9,418 9,150 4,853 6,509

As at 31 December 2018 Loans and receivables from banks for the Group include obligatory reserve of HRK 1,836 million (2017: HRK 1,601 million) held with the Central Bank of Bosnia and Herzegovina (“CBBH”). The obligatory reserve represents amounts required to be deposited with CBBH. The obligatory reserve is calculated on deposits and borrowings, regardless of their currency. As at 31 December 2018, required obligatory reserve rate was 10% (2017: 10%) of deposits and borrowings with maturity of up to one year (short-term deposits and borrowings).


13 Due from banks (continued)

The table below shows the credit quality and the maximum exposure to credit risk for the Bank, based on the internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances:

BANK HRK HRK MILLION MILLION 2018 2017 STAGE 1 STAGE 2 STAGE 3 TOTAL TOTAL

Performing High grade 4,580 4 - 4,584 6,364Standard grade 270 - - 270 142Sub-standard grade - - - - -Non-performing - - 2 2 22

Total 4,850 4 2 4,856 6,528

An analysis of changes in the gross carrying amount and the corresponding ECL allowances:

BANK HRK MILLION 2018 STAGE 1 STAGE 2 STAGE 3 TOTAL

Gross carrying amount as at 1 January 2018 6,505 1 22 6,528New financing 4,760 3 - 4,763Assets derecognised (excluding write-offs) - - - -Transfer to Stage 1 - - - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Assets repaid (6,389) - (5) (6,394)Amounts written off - - (15) (15)Foreign exchange adjustments (26) - - (26)At 31 December 2018 4,850 4 2 4,856


ECL allowance as at 1 January 2018 - - 22 22Asset derecognised or repaid (excluding write-offs) - - - -Transfer to Stage 1 - - - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Write Downs/Write Backs 1 - (5) (4)Amounts written off - - (15) (15)Foreign exchange adjustments - - - -At 31 December 2018 1 - 2 3

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GROUP HRK HRK MILLION MILLION 2018 2017 STAGE 1 STAGE 2 STAGE 3 TOTAL TOTAL

Performing High grade 7,222 4 - 7,226 7,257Standard grade 2,199 - - 2,199 1,890Sub-standard grade - - - - -Non-performing - - 2 2 22

Total 9,421 4 2 9,427 9,169


GROUP HRK MILLION 2018 STAGE 1 STAGE 2 STAGE 3 TOTAL

Gross carrying amount as at 1 January 2018 9,146 1 22 9,169New financing 7,486 3 - 7,489Assets derecognised (excluding write-offs) - - - -Transfer to Stage 1 - - - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Assets repaid (7,156) - (5) (7,161)Amounts written off - - (15) (15)Foreign exchange adjustments (55) - - (55)At 31 December 2018 9,421 4 2 9,427


ECL allowance as at 1 January 2018 7 - 22 29Asset derecognised or repaid (excluding write-offs) - - - -Transfer to Stage 1 - - - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Write Downs/Write Backs - - (5) (5)Amounts written off - - (15) (15)Foreign exchange adjustments - - - -At 31 December 2018 7 - 2 9


The table below shows the credit quality and the maximum exposure to credit risk for the Group, based on the internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances:


HRK MILLION GROUP BANK 2017 2017

Balance as at 1 January 22 22Effect of foreign exchange differences (3) (3)

Balance as at 31 December 19 19


Movement in impairment allowance for loans and receivables from banks for 2017 (under IAS 39)

14 Financial assets at fair value through profit or loss HRK MILLION GROUP BANK 2018 2017 2018 2017

Debt securities held for trading 33 76 33 76Equity securities held for trading 23 19 23 19Derivative financial instruments – positive fair value 1,127 958 1,125 956Units in investment funds at fair value through profit or loss 52 126 29 105Equity securities at fair value through profit or loss 233 - 232 - 1,468 1,179 1,442 1,156

a) Debt securities held for trading HRK MILLION GROUP BANK 2018 2017 2018 2017

Republic of Croatia bonds 33 76 33 76Bonds issued by other domestic issuers, listed - - - -

33 76 33 76

b) Equity securities held for trading HRK MILLION GROUP BANK 2018 2017 2018 2017

Equity securities of domestic issuers, listed 23 19 23 19

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14 Financial assets at fair value through profit or loss (continued)

c) Derivative financial instruments – positive fair value

GROUP HRK MILLION 2018 2018 2017 2017 NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE AMOUNT AMOUNT

Derivatives classified as held for trading – OTC products Foreign exchange forward and swap contracts 5,050 13 3,316 29Cross-currency interest rate swaps 9,560 953 9,182 732Interest rate swaps 2,055 161 2,323 197 16,665 1,127 14,821 958

BANK HRK MILLION 2018 2018 2017 2017 NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE AMOUNT AMOUNT

Derivatives classified as held for trading – OTC products Foreign exchange forward and swap contracts 3,944 11 3,182 28Cross-currency interest rate swaps 9,560 953 9,182 731Interest rate swaps 2,055 161 2,323 197 15,559 1,125 14,687 956

The Group trades with simple interest rate and foreign exchange derivatives for two main purposes:

• balance sheet/liquidity management, managed by Asset and Liability Management (hereinafter: “ALM”) and • provision of solutions for clients’ needs, managed by Markets.

ALM activities are aimed at regulatory cost optimisation and liquidity management: ALM enters into derivatives in order to manage the foreign exchange and liquidity structure of the statement of financial position. The Bank did not implement hedge accounting and the derivatives are classified as financial instruments held for trading.

OTC derivatives traded with corporate customers include plain vanilla foreign exchange and interest rate derivatives and their main purpose is hedging. The counterparties for derivative transactions are financial institutions (including related parties) and corporate customers with adequate credit rating.

In accordance with IFRS 13 "Fair Value Measurement", in 2018, fair values of financial assets measured at fair value through profit or loss were adjusted for credit risk of the Group entity, credit risk of the counterparty and funding risk in the amount of HRK 55 million (positive effect), pre-tax (2017: negative effect of HRK 149 million, pre-tax).

d) Units in investment funds at fair value through profit or loss


Units in investment funds managed by related party, quoted 52 126 29 105


14 Financial assets at fair value through profit or loss (continued)

e) Equity securities at fair value through profit or loss


Equity securities at fair value through profit or loss 233 - 232 -

The major equity security in this category held by the Group as at 31 December 2018:

INDUSTRY DOMICILE EFFECTIVE EFFECTIVE HOLDING AT 31 HOLDING AT 31 DECEMBER 2018 DECEMBER 2017

Allianz Zagreb dd, Zagreb Insurance Republic of Croatia 16.84% 16.84%

Investment in Allianz Zagreb dd, Zagreb is carried at fair value, which was at 31 December 2018 determined at HRK 138 million (2017: HRK 129 million). Note that these investments were at the end of 2017 classified in available-for-sale portfolio. Following IFRS 9 adoption, as of 1 January 2018 these equity securities are reclassified to Equity securities at fair value through profit or loss (explained in more detail in Note: I Basis of preparation, in Transition disclosures section).

The total amount of dividends recognised in 2018 for equity securities at fair value through profit or loss amounts to HRK 15 million.

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15 Loans and receivables from customers

a) Loans and receivables from customers – overview HRK MILLION GROUP BANK 2018 2017 2018 2017

Corporate entities - in kuna 18,923 19,837 18,451 19,398- in foreign currency 14,989 13,497 6,049 5,160

Amounts due from subsidiaries - in kuna - - 168 126

Total corporate entities 33,912 33,334 24,668 24,684Impairment allowance (5,108) (5,665) (4,228) (4,785)Net loans to corporate entities 28,804 27,669 20,440 19,899State and public sector

- in kuna 13,161 5,865 13,151 5,859- in foreign currency 3,301 10,356 3,296 10,350

Total state and public sector 16,462 16,221 16,447 16,209Impairment allowance (23) (10) (23) (10)Net loans to state and public sector 16,439 16,211 16,424 16,199Individuals and unincorporated businesses

- in kuna 30,155 28,704 29,918 27,171- in foreign currency 7,779 7,196 72 70

Total individuals and unincorporated businesses 37,934 35,900 29,990 27,241Impairment allowance (1,463) (1,499) (984) (1,014)Net loans to individuals and unincorporated businesses 36,471 34,401 29,006 26,227Total gross loans 88,308 85,455 71,105 68,134Total impairment allowance (Note 15b) (6,594) (7,174) (5,235) (5,809)Total net loans and receivables from customers 81,714 78,281 65,870 62,325

Total impairment allowance, as a percentage of gross loans and receivables from customers 7.5% 8.4% 7.4% 8.5%

Included in the Group’s kuna loans are exposures linked to foreign currency, in the net amount of HRK 40,713 million (2017: HRK 27,737 million) which have a EUR, CHF or USD countervalue. Included within the Bank’s Croatian kuna denominated loans are amounts linked to foreign currency which have a EUR, CHF or USD countervalue, in the net amount of HRK 32,889 million (2017: HRK 24,661 million). Repayments of principal and interest are linked to foreign currency (and receivable in the Croatian kuna equivalent), using the foreign exchange rate applicable on the date of repayment. Loans and receivables from customers also include finance lease receivables. For more detailed analysis of finance lease receivables please refer to Note 35 Leases.


15 Loans and receivables from customers (continued)

a) Loans and receivables from customers – analysis by sector (continued)

For loans and receivables from customers, the table below presents the gross exposure to credit risk, impairment allowances and total net loans and receivables from customers, based on the year-end stage classification.

HRK HRK MILLION MILLION 2018 2017 STAGE 1 STAGE 2 STAGE 3 TOTAL TOTAL

BANK Total gross loans 57,234 5,446 8,425 71,105 68,134Impairment allowance (203) (256) (4,776) (5,235) (5,809)Total net loans and receivables from customers 57,031 5,190 3,649 65,870 62,325GROUP Total gross loans 69,632 8,741 9,935 88,308 85,455Impairment allowance (318) (455) (5,821) (6,594) (7,174)Total net loans and receivables from customers 69,314 8,286 4,114 81,714 78,281

126





b) Loans and receivables from customers – analysis by sector

Corporate entities - the Bank




Performing High grade 1,477 - - 1,477 1,102Standard grade 11,074 2,514 - 13,588 13,065Sub-standard grade 1,682 689 - 2,371 2,298Non-performing - - 7,232 7,232 8,219Total 14,233 3,203 7,232 24,668 24,684


Gross carrying amount as at 1 January 2018 13,113 3,352 8,219 24,684New financing 10,177 13 - 10,190Assets derecognised (excluding write-offs) - - (911) (911)Transfer to Stage 1 804 (718) (86) -Transfer to Stage 2 (2,225) 2,310 (85) -Transfer to Stage 3 (1,536) (208) 1,744 -Assets repaid (6,033) (1,514) (1,460) (9,007)Amounts written off - - (119) (119)Foreign exchange adjustments (82) (32) (70) (184)Business combination - PSŠ 15 - - 15At 31 December 2018 14,233 3,203 7,232 24,668


ECL allowance as at 1 January 2018 69 175 4,406 4,650Asset derecognised or repaid (excluding write-offs) - - (911) (911)Transfer to Stage 1 65 (49) (16) -Transfer to Stage 2 (5) 11 (6) -Transfer to Stage 3 (6) (13) 19 -Write Downs/Write Backs (20) 23 628 631Amounts written off - - (119) (119)Foreign exchange adjustments - - (23) (23)Business combination - PSŠ - - - -At 31 December 2018 103 147 3,978 4,228



b) Loans and receivables from customers – analysis by sector (continued)

Corporate entities - the Group




Performing High grade 1,594 - - 1,594 1,126Standard grade 16,478 3,975 - 20,453 19,866Sub-standard grade 1,924 1,592 - 3,516 2,900Non-performing - - 8,349 8,349 9,442Total 19,996 5,567 8,349 33,912 33,334


Gross carrying amount as at 1 January 2018 18,803 5,091 9,440 33,334New financing 14,982 13 - 14,995Assets derecognised (excluding write-offs) - - (911) (911)Transfer to Stage 1 876 (783) (93) -Transfer to Stage 2 (3,709) 3,799 (90) -Transfer to Stage 3 (1,569) (244) 1,813 -Assets repaid (9,274) (2,264) (1,591) (13,129)Amounts written off - - (149) (149)Foreign exchange adjustments (118) (46) (75) (239)Other changes 5 1 5 11At 31 December 2018 19,996 5,567 8,349 33,912


ECL allowance as at 1 January 2018 122 277 5,154 5,553Asset derecognised or repaid (excluding write-offs) - - (911) (911)Transfer to Stage 1 70 (51) (19) -Transfer to Stage 2 (6) 13 (7) -Transfer to Stage 3 (6) (14) 20 -Write Downs/Write Backs (18) 40 624 646Amounts written off - - (149) (149)Foreign exchange adjustments - (1) (31) (32)Other changes - - 1 1At 31 December 2018 162 264 4,682 5,108

128






State and public sector – the Bank




Performing High grade 7,962 - - 7,962 8,023Standard grade 8,469 16 - 8,485 8,168Sub-standard grade - - - - 18Non-performing - - - - -Total 16,431 16 - 16,447 16,209


Gross carrying amount as at 1 January 2018 16,208 1 - 16,209New financing 8,866 - - 8,866Assets derecognised (excluding write-offs) - - - -Transfer to Stage 1 - - - -Transfer to Stage 2 (16) 16 - -Transfer to Stage 3 - - - - Assets repaid (8,461) (1) - (8,462)Amounts written off - - - -Foreign exchange adjustments (166) - - (166)Business combination - PSŠ - - - -Other changes - - - -At 31 December 2018 16,431 16 - 16,447


ECL allowance as at 1 January 2018 16 - - 16Asset derecognised or repaid (excluding write-offs) - - - -Transfer to Stage 1 - - - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Write Downs/Write Backs 6 1 - 7Amounts written off - - - -Foreign exchange adjustments - - - -Business combination - PSŠ - - - -Other changes - - - At 31 December 2018 22 1 - 23




State and public sector – the Group




Performing High grade 7,972 - - 7,972 8,026Standard grade 8,474 16 - 8,490 8,177Sub-standard grade - - - - -Non-performing - - - - 18Total 16,446 16 - 16,462 16,221


Gross carrying amount as at 1 January 2018 16,219 2 - 16,221New financing 8,871 - - 8,871Assets derecognised (excluding write-offs) - - - -Transfer to Stage 1 1 (1) - -Transfer to Stage 2 (16) 16 - -Transfer to Stage 3 - - - -Assets repaid (8,463) (1) - (8,464)Amounts written off - - - -Foreign exchange adjustments (166) - - (166)At 31 December 2018 16,446 16 - 16,462


ECL allowance as at 1 January 2018 16 - - 16Asset derecognised or repaid (excluding write-offs) - - - -Transfer to Stage 1 - - - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Write Downs/Write Backs 6 1 - 7Amounts written off - - - -Foreign exchange adjustments - - - -At 31 December 2018 22 1 - 23

130






Individuals and unincorporated businesses – the Bank



BANK HRK HRK MILLION MILLION 2018 2017 STAGE 1 STAGE 2 STAGE 3 POCI TOTAL TOTAL

Performing High grade 8,066 19 - - 8,085 7,937Standard grade 18,288 1,411 - - 19,699 16,477Sub-standard grade 216 797 - - 1,013 1,180Non-performing - - 1,193 93 1,193 1,647Total 26,570 2,227 1,193 93 29,990 27,241

BANK HRK MILLION 2018 STAGE 1 STAGE 2 STAGE 3 POCI TOTAL

Gross carrying amount as at 1 January 2018 23,908 1,698 1,635 99 27,241New financing 8,218 10 - - 8,228Assets derecognised (excluding write-offs) - - (161) - (161)Transfer to Stage 1 867 (745) (122) - -Transfer to Stage 2 (1,662) 1,838 (176) - -Transfer to Stage 3 (220) (168) 388 - -Assets repaid (5,546) (433) (369) (5) (6,348)Amounts written off - - (26) - (26)Foreign exchange adjustments (153) (12) (9) (1) (174)Business combination - PSŠ 1,158 39 33 - 1,230At 31 December 2018 26,570 2,227 1,193 93 29,990

BANK HRK MILLION 2018 STAGE 1 STAGE 2 STAGE 3 POCI TOTAL

ECL allowance as at 1 January 2018 67 97 1,153 58 1,317Asset derecognised or repaid (excluding write-offs) - - (161) - (161)Transfer to Stage 1 105 (36) (69) - -Transfer to Stage 2 (5) 95 (90) - -Transfer to Stage 3 (3) (14) 17 - -Write Downs/Write Backs (87) (35) (36) 8 (158)Amounts written off - - (26) - (26)Foreign exchange adjustments (1) (1) (7) (1) (9)Business combination - PSŠ 2 2 17 - 21At 31 December 2018 78 108 798 65 984




Individuals and unincorporated businesses – the Group



GROUP HRK HRK MILLION MILLION 2018 2017 STAGE 1 STAGE 2 STAGE 3 POCI TOTAL TOTAL

Performing High grade 8,104 19 - - 8,123 8,593Standard grade 24,855 1,951 - - 26,806 23,739Sub-standard grade 231 1,188 - - 1,419 1,503Non-performing - - 1,586 93 1,586 2,065Total 33,190 3,158 1,586 93 37,934 35,900

GROUP HRK MILLION 2018 STAGE 1 STAGE 2 STAGE 3 POCI TOTAL

Gross carrying amount as at 1 January 2018 31,689 2,158 2,053 99 35,900New financing 11,500 11 - - 11,511Assets derecognised (excluding write-offs) - - (161) - (161)Transfer to Stage 1 928 (793) (135) - -Transfer to Stage 2 (2,405) 2,600 (195) - -Transfer to Stage 3 (290) (196) 486 - -Assets repaid (7,862) (600) (414) (5) (8,876)Amounts written off (124) (4) (34) - (162)Foreign exchange adjustments (246) (18) (14) (1) (278)At 31 December 2018 33,190 3,158 1,586 93 37,934

GROUP HRK MILLION 2018 STAGE 1 STAGE 2 STAGE 3 POCI TOTAL

ECL allowance as at 1 January 2018 122 165 1,491 58 1,778Asset derecognised or repaid (excluding write-offs) - - (161) - (161)Transfer to Stage 1 108 (39) (69) - -Transfer to Stage 2 (5) 103 (98) - -Transfer to Stage 3 (4) (21) 25 - -Write Downs/Write Backs (86) (16) (5) 8 (107)Amounts written off - - (32) - (32)Foreign exchange adjustments (1) (2) (12) (1) (15)At 31 December 2018 134 190 1,139 65 1,463

132





c) Impairment losses on financial instruments at amortised cost

The table below presents the expected credit loss charges on financial instruments at amortised cost recorded in profit or loss:

To arrive to a total impairment loss for the year recorded in profit and loss - the total impairment losses on financial instuments presented in the table above are increased for impairment losses on off-balance sheet exposures (which are in profit or loss statement presented within Other impairment losses and provisions, as presented also in Note 8):

BANK 2018 HRK MILLION STAGE 1 STAGE 2 STAGE 3 TOTAL

Financial instruments at amortised cost: Due from banks including cash and cash equivalents and obligatory reserve with the CNB (40) - 4 (36)Loans and receivables from customers including non-current assets and disposal groups held for sale 100 12 (566) (454)Total impairment losses on financial instruments at amortised cost 60 12 (562) (490)Debt securities FVOCI (2) 6 - 4Total impairment losses on debt securities FVOCI (2) 6 - 4Total impairment losses on financial instruments in statement of financial position 58 18 (562) (486)

BANK 2018 HRK MILLION STAGE 1 STAGE 2 STAGE 3 TOTAL

Off-balance sheet exposures: Guarantees 3 (7) 66 62Other risk off-balance sheet items (2) (5) (9) (16)Total impairment losses on off-balance sheet exposure (Note 8) 1 (12) 57 46Total impairment loss charges on financial instruments for the year recorded in profit and loss 59 6 (505) (440)



c) Impairment losses on financial instruments at amortised cost (continued)

To arrive to a total impairment loss for the year recorded in profit and loss - the total impairment losses on financial instruments presented in the table above are increased for impairment losses on off-balance sheet exposures (which are in profit or loss statement presented within Other impairment losses and provisions, as presented also in Note 8):

GROUP 2018 HRK MILLION STAGE 1 STAGE 2 STAGE 3 TOTAL

Financial instruments at amortised cost: Due from banks including cash and cash equivalents and obligatory reserve with the CNB (38) - 4 (34)Loans and receivables from customers including non-current assets and disposal groups held for sale 109 (38) (591) (520)Total impairment losses on financial instruments at amortised cost 71 (38) (587) (554)Debt securities FVOCI (1) 7 - 6Total impairment losses on debt securities FVOCI (1) 7 - 6Total impairment losses on financial instruments (statement of financial position) 70 (31) (587) (548)

GROUP 2018 HRK MILLION STAGE 1 STAGE 2 STAGE 3 TOTAL

Off-balance sheet exposure: Guarantees 2 (9) 65 58Other risk off-balance sheet items - (12) (9) (21)Total impairment losses on off-balance sheet exposure (Note 8) 2 (21) 56 37Total impairment loss charges on financial instruments for the year recorded in profit and loss 73 (52) (531) (510)

134





c) Impairment losses on financial instuments at amortised cost (continued)

Movement in impairment allowance for loans and receivables from customers as at 31 December 2017 (policy applicable before 1 January 2018)

GROUP 2017 HRK MILLION CORPORATE INDIVIDUALS AND TOTAL ENTITIES AND STATE UNINCORPORATED AND PUBLIC SECTOR BUSINESSES

Balance as at 1 January 7,124 2,779 9,903Charge for the year 2,268 311 2,579Reversal of impairment losses (137) (70) (207)Collection of amounts previously provided (985) (205) (1,190)Net charge/(reversal) of collective impairment on performing exposures 192 (176) 16Impairment losses recognised in the statement of profit or loss 1,338 (140) 1,198Amounts written-off (2,441) (1,055) (3,496)Effect of foreign exchange differences (78) (30) (108)Other (359) (57) (416)Balance as at 31 December 5,584 1,497 7,081

BANK 2017 HRK MILLION CORPORATE INDIVIDUALS AND TOTAL ENTITIES AND STATE UNINCORPORATED AND PUBLIC SECTOR BUSINESSES

Balance as at 1 January 6,140 2,332 8,472Charge for the year 2,134 227 2,361Reversal of impairment losses (2) (29) (31)Collection of amounts previously provided (967) (183) (1,150)Net charge/(reversal) of collective impairment on performing exposures 174 (192) (18)Impairment losses recognised in the statement of profit or loss 1,339 (177) 1,162Amounts written-off (2,333) (1,052) (3,385)Effect of foreign exchange differences (73) (28) (101)Other (280) (59) (339)Balance as at 31 December 4,793 1,016 5,809



d) Sale of loans

In 2018 (and 2017) the Bank sold one part of its non-performing loans granted to the companies and individuals. The gross balance sheet exposure of sold loans in 2018 was HRK 2,458 million (in 2017 HRK 3,483 million).

e) The Agrokor Group related events

The year 2017 was considerably marked with difficulties in business operations of the Agrokor Group and its related parties. As the Agrokor Group is the largest privately owned group of companies in the Republic of Croatia, the “Law on Compulsory Administration Procedure in Companies of Systemic Importance for the Republic of Croatia” was brought in 2017, whereby the extraordinary administration procedure was imposed over the operations of the Agrokor Group.

A settlement with respect to the creditors was reached in 2018. The implementation of the Settlement and the process of transferring business activities to the new Group is in progress.

Zagrebačka banka Group took the necessary steps to asses and appropriately address associated risks with respect to its exposures. Based on the most recent developments and available information, the provisioning level is assessed as adequate.

16 Financial asssets at fair value through other comprehensive income


Financial assets at fair value through other comprehensive income: Debt securities FVOCI 12,091 - 10,226 -Corresponding expected credit loss impairment allowance (recorded in equity fair value reserve) (47) - (44) -Equity securities FVOCI 6 - 5 -Total financial assets at fair value through other comprehensive income 12,097 - 10,231 -Available-for-sale financial assets (policy applicable before 1 January 2018): Debt securities available for sale - 10,780 - 8,163Impairment allowance - - - -Net debt securities available for sale - 10,780 - 8,163Equity securities available for sale - 360 - 359Impairment allowance - (145) - (145)Net equity securities available for sale - 215 - 214Total available-for-sale financial assets - 10,995 - 8,377

136




16 Financial asssets at fair value through other comprehensive income (continued)

a) Debt securities at fair value through other comprehensive income – the Bank

The table below shows the fair value of the Bank’s debt instruments measured at fair value through other comprehensive income by credit risk, based on the internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances:



Performing High grade 9,636 - - 9,636 7,564Standard grade - 586 - 586 593Sub-standard grade - 4 - 4 6Non-performing - - - - -Total 9,636 590 - 10,226 8,163


Gross carrying amount as at 1 January 2018 7,564 599 - 8,163New financing 3,090 25 - 3,115Assets derecognised (excluding write-offs) - - - -Transfer to Stage 1 29 (29) - -Transfer to Stage 2 (15) 15 - -Transfer to Stage 3 - - - -Assets repaid (2,064) (20) - (2,084)Amounts written off - - - -Foreign exchange adjustments (45) - - (45)Business combination - PSŠ 1,077 - - 1,077At 31 December 2018 9,636 590 - 10,226


ECL allowance as at 1 January 2018 6 39 - 45Asset derecognised or repaid (excluding write-offs) - - - -Transfer to Stage 1 1 (1) - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Write Downs/Write Backs 2 (6) - (4)Amounts written off - - - -Foreign exchange adjustments - - - -Business combination - PSŠ 2 - - 2Other changes 1 - - 1At 31 December 2018 12 32 - 44



a) Debt securities at fair value through other comprehensive income – the Group

The table below shows the fair value of the Group’s debt instruments measured at fair value through other comprehensive income by credit risk, based on the internal credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances:



Performing High grade 10,456 - - 10,456 10,181Standard grade - 1,631 - 1,631 593Sub-standard grade - 4 - 4 6Non-performing - - - - -Total 10,456 1,635 - 12,091 10,780


Gross carrying amount as at 1 January 2018 8,980 1,800 - 10,780New financing 3,585 145 - 3,730Assets derecognised (excluding write-offs) - - - -Transfer to Stage 1 29 (29) - -Transfer to Stage 2 (15) 15 - -Transfer to Stage 3 - - - -Assets repaid (2,073) (281) - (2,354)Amounts written off - - - -Foreign exchange adjustments (50) (15) - (65)At 31 December 2018 10,456 1,635 - 12,091


ECL allowance as at 1 January 2018 9 44 - 53Asset derecognised or repaid (excluding write-offs) - - - -Transfer to Stage 1 1 (1) - -Transfer to Stage 2 - - - -Transfer to Stage 3 - - - -Write Downs/Write Backs 1 (7) - (6)Amounts written off - - - -Foreign exchange adjustments - - - -At 31 December 2018 11 36 - 47

138





b) Impairment losses on debt securities at fair value through other comprehensive income

The table below presents the expected credit loss charges on debt securities at fair value through other comprehensive income for the year recorded in the income statement:

Movement in 2017 impairment allowance for debt securities available-for-sale (policy applicable until 1 January 2018)


Debt securities at fair value through other comprehensive income (2) 6 - 4Total impairment losses on debt securities FVOCI (recorded in equity fair value reserve) (2) 6 - 4


Debt securities at fair value through other comprehensive income (2) 6 - 4Total impairment losses on debt securities FVOCI (recorded in equity fair value reserve) (2) 6 - 4


Balance as at 1 January 5 5Reversal of impairment losses recognised in the statement of profit or loss (Note 8) (5) (5)Balance as at 31 December - -


As at 31 December 2018 and 31 December 2017, exposure to other EU member state governments refers to bonds issued by central government of Germany.As at 31 December 2018 and 31 December 2017, other securities issued by foreign issuers for the Group relate to debt securities issued by government of the Federation of Bosnia and Herzegovina.

Note that the majority of these investments were at the end of 2017 classified in available-for-sale portfolio. Following IFRS 9 adpotion, as of 1 January 2018 they were reclassified to Equity securities at fair value through other comprehensive income (explained in more detail in Note: I Basis of preparation, in Transition disclosures section).


c) Debt securities - analysis per issuer

d) Equity securities at fair value through other comprehensive income (available-for-sale policy until 1 January 2018)

e) Movement in impairment allowance for equity securities available-for-sale (policy applicable until 1 January 2018)


Ministry of Finance Treasury bills and Euro notes 4,262 4,351 4,262 4,351Bonds issued by other EU member state governments 303 58 58 58Republic of Croatia bonds 5,870 4,563 5,295 3,147Other securities issued by foreign issuers 1,045 1,201 - -Other securities issued by domestic issuers 611 607 611 607 12,091 10,780 10,226 8,163Listed 5,964 4,958 5,964 4,958Unlisted 6,127 5,822 4,262 3,205 12,091 10,780 10,226 8,163


Unlisted securities 4 214 3 213Listed securities 2 1 2 1


Balance as at 1 January 145 145Impairment losses recognised in the statement of profit or loss - -Balance as at 31 December 145 145

140




17 Concentration of assets and liabilities

The significant portion of assets and liabilities of the Group and the Bank represent amounts directly and indirectly due from and to the state and public sector:

HRK MILLION GROUP BANK NOTES 2018 2017 2018 2017

Assets Current account with the CNB 11 18,506 12,719 17,180 10,365Obligatory reserve with the CNB 12 5,684 5,525 5,684 5,525Ministry of Finance – Treasury bills and Euro notes 16c 4,262 4,351 4,262 4,351Republic of Croatia bonds 14a, 16c 5,903 4,639 5,328 3,223Cross currency interest rate swaps – positive fair value - 78 - 78Loans 16,264 15,993 16,264 15,993Tax prepayment 89 267 88 244Other assets 41 - - -Receivables from State for state subsidies for housing savings 23 - 9 - - 50,749 43,581 48,806 39,779Liabilities Current account, deposit and borrowings (6,300) (6,429) (5,977) (6,152)Cross currency interest rate swaps – negative fair value (710) (383) (710) (383)Current tax liabilities (9) (10) - - (7,019) (6,822) (6,687) (6,535)Off-balance-sheet commitments 451 222 440 210 44,181 36,981 42,559 33,454

Additionally, HRK 1,366 million (2017: HRK 1,337 million) of balance-sheet and HRK 73 million (2017: HRK 402 million) of off-balance-sheet credit exposure of the Group and the Bank at the reporting date is secured by government guarantees.

Direct and indirect exposure to the Republic of Croatia, excluding corporate exposures guaranteed by the Republic of Croatia (which are not included in the table above) represents 32% of the total assets of the Group (2017: 29%) and 38% of the total assets of the Bank (2017: 33%).


18 Investments in subsidiaries and associates


Subsidiaries - - 1,486 1,586Associates 93 94 51 51 93 94 1,537 1,637

18.1 Subsidiaries

a) Overview of subsidiaries

GROUP GROUP OWNERSHIP OWNERSHIP AS AT 31 AS AT 31 INDUSTRY DOMICILE DECEMBER 2018 DECEMBER 2017

UniCredit Bank dd, Mostar Banking Federation of Bosnia and Herzegovina 99.3% 99.3%Prva stambena štedionica dd* Banking Republic of Croatia - 100.0%ZB Invest doo Fund management Republic of Croatia 100.0% 100.0%Centar Kaptol doo** Property investment Republic of Croatia - 100.0%Pominvest dd Property management Republic of Croatia 88.7% 88.7%ZANE doo Real estate agency Republic of Croatia 100.0% 100.0%ZANE BH doo Real estate agency Federation of Bosnia and Herzegovina 100.0% 100.0%ZABA Partner doo Insurance brokerage activities Republic of Croatia 100.0% 100.0%UniCredit Leasing Croatia doo Leasing Republic of Croatia 100.0% 100.0%UniCredit Partner doo (subsidiary of UniCredit Leasing Croatia doo, Zagreb)*** Trade activities and services Republic of Croatia - 80.0%Locat Croatia doo Real estate activities Republic of Croatia 100.0% 100.0%BACAL ALPHA doo (subsidiary of Locat Croatia doo) Real estate activities Republic of Croatia 100.0% 100.0%ALLIB NEKRETNINE doo (subsidiary of Locat Croatia doo) Real estate activities Republic of Croatia 100.0% 100.0%

Changes in 2018:

− * On 1 June 2018 a full legal merger was completed whereby housing savings bank Prva stambena štedionica dd was merged to Zagrebacka banka dd.

− ** in February 2018, the Group sold its stake in the company Centar Kaptol doo, Zagreb.

− *** in May 2018, a full legal merger was completed whereby the company UniCredit Partner doo was merged to UniCredit Leasing Croatia doo.

The Bank applies discounted cash flow method for testing of impairment of investments in subsidiaries (trading and transaction multiple methods are also considered as alternative methods). Supported by the valuations performed on the reporting date, the Management is of the opinion that the carrying value of investments in subsidiaries is recoverable.




Summarised financial information in respect of Group’s subsidiary that had material non-controlling interest is presented below (the summarised financial information below represents amounts before intragroup eliminations).

18 Investments in subsidiaries and associates (continued)

18.1 Subsidiaries (continued)

b) Non-controlling interest in subsidiaries

The tables below show details of partially owned subsidiary of the Group that had a material non-controlling interest (“NCI”):

c) Significant restrictions

The Group does not have significant restrictions on its ability to access, or use its assets, and settle its liabilities, other than those resulting from the supervisory frameworks within which banking and leasing subsidiaries operate. The supervisory frameworks require certain subsidiaries to keep prescribed levels of regulatory capital and liquid assets and comply with other regulatory ratios.

HRK MILLION PROPORTION OF OWNERSHIP PROFIT ALLOCATED TO ACCUMULATED INTEREST AND VOTING RIGHTS NON-CONTROLLING NON-CONTROLLING HELD BY NON-CONTROLLING INTEREST INTEREST INTERESTNAME OF SUBSIDIARY 2018 2017 2018 2017 2018 2017

UniCredit Bank dd, Mostar 0.70% 0.70% 3 2 21 21Individually immaterial NCI - - - - 2 2 3 2 23 23

HRK MILLION UNICREDIT BANK DD, MOSTAR 2018 2017

NCI percentage 0.70% 0.70%Loans and advances 20,283 18,092Other assets 2,291 2,010Liabilities (19,555) (17,160)Net assets 3,019 2,942Carrying amount of NCI 21 21Operating income 959 915Profit 369 341Total comprehensive income 368 348Profit allocated to NCI 2 2Cash flows from operating activities (297) 1,514Cash flows from investing activities (53) (77)Cash flows from financing activities, before dividends to NCI (368) (807)Net increase in cash and cash equivalents (718) 630


18.2 Associates

a) Overview of associates:


18.1 Subsidiaries (continued)

d) Other changes in Group’s ownership interest in existing subsidiaries

Acquisition of subsidiaries outside the scope of IFRS 3 Business combinations in 2018:

UniCredit Leasing Croatia doo acquired company “HYPO ALPE-ADRIA-LEASING doo u likvidaciji” (hereinafter “HAAL”) in December 2018. HAAL was legally merged to UniCredit Leasing Croatia doo in January 2019. As of 31 December 2018 total assets of HAAL were HRK 25 million, mainly comprising of assets leased under operating lease contracts (HRK 17 million) and financial lease (HRK 6 million). Total equity of HAAL as of 31 December 2018 amounted to HRK 0.3 million.

Furthermore, except for mergers and disposals of controlling stakes as disclosed in Note 18.1a above, the Group did not have any other changes in ownership interest in subsidiaries and associates.

Note on Allianz ZB doo: in September 2018, a full legal merger was executed whereby Allianz ZB doo, voluntary pension fund management company was merged with Allianz ZB doo, obligatory pension fund management company. After the merger, the company Allianz ZB doo, obligatory pension fund management company changed its name into Allianz ZB doo obligatory and voluntary pension fund management company.

EFFECTIVE HOLDING INDUSTRY DOMICILE 31 DECEMBER 2018 31 DECEMBER 2017

Allianz ZB doo, društvo za upravljanje obveznim i dobrovoljnim Obligatory and voluntary Republic of Croatia 49.0% 49.0% mirovinskim fondovima (refer to note below) pension fund management Allianz ZB doo, društvo za upravljanje dobrovoljnim mirovinskim Voluntary pension Republic of Croatia - 49.0% fondovima (refer to note below) fund managementMultiPlus Card doo Advertising and Republic of Croatia 25.0% 25.0% marketing services UniCredit Broker doo Insurance broker Federation of Bosnia 48.7% 48.7% and Herzegovina

GROUP HRK MILLION 2018 2017

Balance as at 1 January 94 90Share of profit from associates 39 42Dividends collected from associates (Note 3) (40) (38) Balance as at 31 December 93 94

b) Movements in investments in associates





18.2 Associates (continued)

c) Details of material associates

Summarised financial information in respect of the Group’s material associates is set out below:

Note on Allianz ZB doo: in September 2018, a full legal merger was executed whereby Allianz ZB doo, voluntary pension fund management company was merged with Allianz ZB doo, obligatory pension fund management company. After the merger, the company Allianz ZB doo, obligatory pension fund management company changed its name into Allianz ZB doo obligatory and voluntary pension fund management company.

(i) Allianz ZB doo In 2017: obligatory pension fund management company Since September 2018: Obligatory and voluntary pension fund management company


Total assets 220 177Total liabilities (31) (9)Net assets 189 168Group’s share of net assets of associate 93 82Total income 163 146Total profit for the period 77 78Group’s share of profits of associate 38 38


Total assets - 40Total liabilities - (20)Net assets - 20Group’s share of net assets of associate - 9Total income - 49Total profit for the period - 4Group’s share of profits of associate - 2

(ii) Allianz ZB doo, voluntary pension funds management company


19 Investment property

GROUP HRK MILLION INVESTMENT ASSETS TOTAL PROPERTY ACQUIRED BUT NOT YET BROUGHT INTO USE

Cost Cost as at 1 January 2018 474 4 478Additions 3 - 3Disposals (24) - (24)Write-offs - - -Transfers to property and equipment during the year (Note 20) (33) - (33)Transfers from other assets during the year - - -Translation differences in respect of foreign operations (1) - (1)Cost as at 31 December 2018 419 4 423Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2018 216 - 216Charge for the year (Note 7) 7 - 7Impairment loss (Note 8) 16 - 16Disposals (15) - (15)Write-offs - - -Transfers to property and equipment during the year (Note 20) (3) - (3)Accumulated depreciation and impairment losses as at 31 December 2018 221 - 221Carrying value as at 1 January 2018 258 4 262Carrying value as at 31 December 2018 198 4 202

Information about the fair value hierarchy as at 31 December 2018 is as follows:

HRK MILLION FAIR VALUE AS AT LEVEL 1 LEVEL 2 LEVEL 3 31 DECEMBER 2017

- - 220 220

The fair value of the investment property for the Group and the Bank is determined by applying the income approach and it was determined based on the estimated rental values of individual properties. Valuation technique used in the model is based on discounting expected future cash flows from rental activities, using the discount rates that reflect the assessment of market uncertainty. Valuations reflect the actual rents and the type of tenants in occupation (or responsible for meeting lease commitments, or likely to be in occupation after renting vacant accommodation) and the remaining economic life of the property.




19 Investment property (continued)

GROUP HRK MILLION INVESTMENT ASSETS TOTAL PROPERTY ACQUIRED BUT NOT YET BROUGHT INTO USE

Cost Cost as at 1 January 2017 357 11 368Additions 6 - 6Disposals (34) - (34)Write-offs (3) - (3)Transfers from property and equipment during the year (Note 20) 92 - 92Transfers from other assets during the year 49 - 49Reclassifications to assets and disposal groups held for sale 7 (7) -Cost as at 31 December 2017 474 4 478Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2017 131 - 131Charge for the year (Note 7) 8 - 8Impairment loss (Note 8) 61 - 61Disposals (22) - (22)Write-offs (3) - (3)Transfers from property and equipment during the year (Note 20) 27 - 27Transfers from other assets during the year 14 - 14Accumulated depreciation and impairment losses as at 31 December 2017 216 - 216Carrying value as at 1 January 2017 226 11 237Carrying value as at 31 December 2017 258 4 262

Information about the fair value hierarchy as at 31 December 2017 is as follows: HRK MILLION FAIR VALUE AS AT LEVEL 1 LEVEL 2 LEVEL 3 31 DECEMBER 2017

- - 385 385



BANK HRK MILLION INVESTMENT

PROPERTY

Cost Cost as at 1 January 2018 258Disposals (24)Transfers from property and equipment during the year (Note 20) 29Cost as at 31 December 2018 263Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2018 150Charge for the year (Note 7) 1Impairment loss (Note 8) 16Disposals (15)Transfers from property and equipment during the year (Note 20) 20Accumulated depreciation and impairment losses as at 31 December 2018 172Carrying value as at 1 January 2018 108Carrying value as at 31 December 2018 91



- - 92 92





BANK HRK MILLION INVESTMENT

PROPERTY

Cost Cost as at 1 January 2017 157Disposals (3)Transfers from property and equipment during the year (Note 20) 104Cost as at 31 December 2017 258Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2017 63Charge for the year (Note 7) 2Impairment loss (Note 8) 46Disposals (1)Transfers from property and equipment during the year (Note 20) 40Accumulated depreciation and impairment losses as at 31 December 2017 150Carrying value as at 1 January 2017 94Carrying value as at 31 December 2017 108



- - 110 110


20 Property and equipment

GROUP HRK MILLION LAND AND COMPUTERS, ASSETS TOTAL BUILDINGS VEHICLES AND ACQUIRED, EQUIPMENT BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2018 1,500 2,360 76 3,936Additions - - 1,032 1,032Disposals (17) (606) - (623)Brought into use 24 1,003 (1,027) -Write-offs - (97) - (97)Transfers from investment property during the year (Note 19) 33 - - 33Transfers to/from other assets during the year - (70) 2 (68)Translation differences in respect of foreign operations - (4) - (4)Other - 45 - 45Cost as at 31 December 2018 1,540 2,631 83 4,254Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2018 537 1,438 - 1,975Charge for the year (Note 7) 30 303 - 333Impairment loss (Note 8) 4 (1) - 3Disposals (15) (176) - (191)Write-offs - (95) - (95)Transfers from investment property during the year (Note 19) 3 - - 3Translation differences in respect of foreign operations (1) (3) - (4)Other - 27 - 27Accumulated depreciation and impairment losses as at 31 December 2018 558 1,493 - 2,051Carrying value as at 1 January 2018 963 922 76 1,961Carrying value as at 31 December 2018 982 1,138 83 2,203

Property and equipment of the Group includes assets leased under operating lease with a carrying value of HRK 897 million (2017: HRK 655 million).

The carrying amount of non-depreciable land within land and buildings is HRK 9 million (2017: HRK 9 million). The Group did not pledge any property as collateral for borrowings.




20 Property and equipment (continued)

GROUP HRK MILLION LAND AND COMPUTERS, ASSETS TOTAL BUILDINGS VEHICLES AND ACQUIRED, EQUIPMENT BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2017 1,615 2,241 66 3,922Additions - - 864 864Disposals (24) (544) - (568)Brought into use 5 849 (854) -Write-offs - (117) - (117)Transfers to investment property during the year (Note 19) (92) - - (92)Transfers to other assets during the year - (67) - (67)Reclassifications to assets and disposal groups held for sale (3) - - (3)Translation differences in respect of foreign operations (1) (2) - (3)Cost as at 31 December 2017 1,500 2,360 76 3,936Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2017 544 1,459 - 2,003Charge for the year (Note 7) 30 256 - 286Impairment loss (Note 8) 10 1 - 11Disposals (19) (148) - (167)Write-offs - (117) - (117)Transfers to investment property during the year (Note 19) (27) - - (27)Transfers to other assets during the year - (11) - (11)Reclassifications to assets and disposal groups held for sale (1) - - (1)Translation differences in respect of foreign operations - (2) - (2)Accumulated depreciation and impairment losses as at 31 December 2017 537 1,438 - 1,975Carrying value as at 1 January 2017 1,071 782 66 1,919Carrying value as at 31 December 2017 963 922 76 1,961

The carrying amount of non-depreciable land within land and buildings was HRK 9 million (2016: HRK 10 million). The Group did not pledge any property as collateral for borrowings.



BANK HRK MILLION LAND AND COMPUTERS, ASSETS TOTAL BUILDINGS VEHICLES AND ACQUIRED, EQUIPMENT BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2018 1,250 1,266 52 2,568Additions - - 87 87Disposals - (40) - (40)Brought into use 22 65 (87) -Write-offs - (79) - (79)Transfers to investment property during the year (Note 19) (29) - - (29)Merger of subsidiary - 1 - 1Cost as at 31 December 2018 1,243 1,213 52 2,508Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2018 442 1,028 - 1,470Charge for the year (Note 7) 23 94 - 117Impairment loss (Note 8) 3 - - 3Disposals - (40) - (40)Write-offs - (78) - (78)Transfers to investment property during the year (Note 19) (20) - - (20)Accumulated depreciation and impairment losses as at 31 December 2018 448 1,004 - 1,452Carrying value as at 1 January 2018 808 238 52 1,098Carrying value as at 31 December 2018 795 209 52 1,056

The carrying amount of non-depreciable land within land and buildings is HRK 8 million (2017: HRK 8 million).





BANK HRK MILLION LAND AND COMPUTERS, ASSETS TOTAL BUILDINGS VEHICLES AND ACQUIRED, EQUIPMENT BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2017 1,369 1,267 49 2,685Additions - - 84 84Disposals (18) (3) - (21)Brought into use 3 78 (81) -Write-offs - (76) - (76)Transfers to investment property during the year (Note 19) (104) - - (104)Cost as at 31 December 2017 1,250 1,266 52 2,568Accumulated depreciation and impairment losses Accumulated depreciation and impairment losses as at 1 January 2017 454 1,016 - 1,470Charge for the year (Note 7) 25 92 - 117Impairment loss (Note 8) 10 - - 10Disposals (7) (4) - (11)Write-offs - (76) - (76)Transfers to investment property during the year (Note 19) (40) - - (40)Accumulated depreciation and impairment losses as at 31 December 2017 442 1,028 - 1,470Carrying value as at 1 January 2017 915 251 49 1,215Carrying value as at 31 December 2017 808 238 52 1,098

The carrying amount of non-depreciable land within land and buildings was HRK 8 million (2016: HRK 9 million).


21 Intangible assets

GROUP HRK MILLION SOFTWARE GOODWILL LEASEHOLD OTHER ASSETS TOTAL IMPROVEMENTS INTANGIBLE ACQUIRED, ASSETS BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2018 824 61 199 18 74 1,176Additions - - - - 108 108Brought into use 74 - 8 - (82) -Write-offs (49) - (3) - - (52)Translation differences in respect of foreign operations (3) - (1) - - (4)Other 1 - - - - 1Cost as at 31 December 2018 847 61 203 18 100 1,229 Accumulated amortisation and impairment losses Accumulated amortisation and impairment losses as at 1 January 2018 647 12 186 18 2 865Charge for the year (Note 7) 73 - 9 - - 82Impairment loss (Note 8) - - - - - -Write-offs (49) - (3) - - (52)Translation differences in respect of foreign operations (2) - (1) - - (3)Other 1 - - - - 1Accumulated amortisation and impairment losses as at 31 December 2018 670 12 191 18 2 893Carrying value as at 1 January 2018 177 49 13 - 72 311Carrying value as at 31 December 2018 177 49 12 - 98 336

Goodwill was recorded on the acquisition of UniCredit Bank dd, Mostar (previously, Zagrebačka banka BH dd and Universal banka dd, Sarajevo).




21 Intangible assets (continued)

GROUP HRK MILLION SOFTWARE GOODWILL LEASEHOLD OTHER ASSETS TOTAL IMPROVEMENTS INTANGIBLE ACQUIRED, ASSETS BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2017 786 61 200 17 50 1,114Additions - - - - 81 81Brought into use 45 - 5 1 (51) -Write-offs (6) - (5) - (6) (17)Translation differences in respect of foreign operations (1) - (1) - - (2)Cost as at 31 December 2017 824 61 199 18 74 1,176 Accumulated amortisation and impairment losses Accumulated amortisation and impairment losses as at 1 January 2017 584 12 181 17 3 797Charge for the year (Note 7) 70 - 10 1 - 81Impairment loss (Note 8) - - - - 5 5Write-offs (6) - (5) - (6) (17)Translation differences in respect of foreign operations (1) - - - - (1)Accumulated amortisation and impairment losses as at 31 December 2017 647 12 186 18 2 865Carrying value as at 1 January 2017 202 49 19 - 47 317Carrying value as at 31 December 2017 177 49 13 - 72 311

Goodwill was recorded on the acquisition of UniCredit Bank dd, Mostar (previously, Zagrebačka banka BH dd and Universal banka dd, Sarajevo).



BANK HRK MILLION SOFTWARE LEASEHOLD OTHER ASSETS TOTAL IMPROVEMENTS INTANGIBLE ACQUIRED, ASSETS BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2018 606 111 17 43 777Additions - - - 74 74Brought into use 55 3 - (58) -Write-offs (25) (3) - - (28)Merger of subsidiary 1 - - - 1Cost as at 31 December 2018 637 111 17 59 824Accumulated amortisation and impairment losses Accumulated amortisation and impairment losses as at 1 January 2018 466 101 17 - 584Charge for the year (Note 7) 57 4 - - 61Write-offs (24) (3) - - (27)Accumulated amortisation and impairment losses as at 31 December 2018 499 102 17 - 618Carrying value as at 1 January 2018 140 10 - 43 193Carrying value as at 31 December 2018 138 9 - 59 206





BANK HRK MILLION SOFTWARE LEASEHOLD OTHER ASSETS TOTAL IMPROVEMENTS INTANGIBLE ACQUIRED, ASSETS BUT NOT BROUGHT INTO USE

Cost Cost as at 1 January 2017 580 109 17 22 728Additions - - - 56 56Brought into use 27 3 - (30) -Write-offs (1) (1) - (5) (7)Cost as at 31 December 2017 606 111 17 43 777Accumulated amortisation and impairment losses Accumulated amortisation and impairment losses as at 1 January 2017 411 97 17 - 525Charge for the year (Note 7) 56 5 - 61Impairment loss (Note 8) - - - 5 5Write-offs (1) (1) - (5) (7)Accumulated amortisation and impairment losses as at 31 December 2017 466 101 17 - 584Carrying value as at 1 January 2017 169 12 - 22 203Carrying value as at 31 December 2017 140 10 - 43 193


22 Non-current assets and disposal groups held for sale

Non-current assets and disposal groups are classified as held for sale as the Group’s intention is to realise them through sale rather than through continuing use. At 31 December 2018 and 31 December 2017, the non-current assets and disposal groups stated at fair value less costs to sell comprised the following assets and liabilities:


Loans and advances from customers - 354 - 354Investments in subsidiaries and associates - - - 4Investment property - 90 - 20Property, plant and equipment 2 4 2 2Other assets - 4 - -Assets held for sale 2 452 2 380Current accounts and deposits from customers - 1 - -Borrowings - 64 - -Other liabilities - 3 - -Liabilities held for sale - 68 - -

There are no cumulative income or expenses included in other comprehensive income relating to the disposal group.




23 Other assets


Items in the course of collection 84 102 - -Accrued fees - 3 - -Assets acquired in lieu of uncollected receivables (lease operations) 39 36 - -Receivables from operating leases - 14 - -Inventories 13 12 8 8Receivables from State for housing savings subsidies - 9 - -Deferred fee and interest expense 3 8 3 8Other assets 136 145 37 77 275 329 48 93Impairment allowance for other assets (18) (35) - - 257 294 48 93

24 Current accounts and deposits from banks


Demand deposits - in kuna 699 777 702 776- in foreign currency 382 509 292 429

Term deposits - in kuna 1 57 1 57- in foreign currency 8,395 1,076 6,443 459

Amounts owed to subsidiaries - - 36 310 9,477 2,419 7,474 2,031


25 Current accounts and deposits from customers


Individuals and unincorporated businesses Demand deposits - in kuna 13,223 10,650 13,202 10,632 - in foreign currency 18,734 15,539 12,177 9,820Term deposits - in kuna 6,287 6,505 6,286 4,238 - in foreign currency 26,166 28,706 22,118 24,507 64,410 61,400 53,783 49,197Corporate entities and state and public sector Demand deposits - in kuna 16,242 12,751 16,198 12,720 - in foreign currency 13,892 12,293 8,256 7,102Term deposits - in kuna 2,498 2,084 2,498 2,084 - in foreign currency 2,594 6,971 2,090 6,486Amounts owed to subsidiaries - - 328 211 35,226 34,099 29,370 28,603 99,636 95,499 83,153 77,800

Included within the Group’s and the Bank’s Croatian kuna deposits from customers are amounts linked to foreign currency which have an EUR and CHF countervalue, in the amount of HRK 1,990 million and HRK 1,827 million (2017: HRK 2,020 million and HRK 177 million), respectively. Repayments of the principal and interest are determined in foreign currency and they are payable in the Croatian kuna equivalent, using the foreign exchange rate applicable on the date of repayment.





Derivative financial instruments – negative fair vale 964 812 961 809Hedge accounting (operating lease) 1 - - - 965 812 961 809

Derivative financial instruments – negative fair value

GROUP HRK MILLION 2018 2018 2017 2017 NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE AMOUNT AMOUNT

Derivatives classified as held for trading – OTC products Foreign exchange forward and swap contracts 2,346 14 3,178 28Cross currency interest rate swaps 8,294 808 8,485 608Interest rate swaps 1,362 142 1,968 176 12,002 964 13,631 812 BANK HRK MILLION 2018 2018 2017 2017 NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE AMOUNT AMOUNT

Derivatives classified as held for trading – OTC products Foreign exchange forward and swap contracts 2,319 11 3,064 22Cross currency interest rate swaps 8,294 808 8,485 611Interest rate swaps 1,362 142 1,968 176 11,975 961 13,517 809

The Group trades with simple interest rate and foreign exchange derivatives for two main purposes:

• balance sheet/liquidity management, managed by Asset and Liability Management (hereinafter: “ALM”) and • provision of solutions for clients’ needs, managed by Markets.

ALM activities are aimed at regulatory cost optimisation and liquidity management: ALM enters into derivatives in order to manage the foreign exchange and liquidity structure of the statement of financial position. The Bank did not implement hedge accounting and the derivatives are classified as financial instruments held for trading.

OTC derivatives traded with corporate customers include plain vanilla foreign exchange and interest rate derivatives and their main purpose is hedging. The counterparties for derivative transactions are financial institutions (including related parties) and corporate customers with adequate credit rating.

26 Financial liabilities at fair value through profit or loss


27 Borrowings HRK MILLION GROUP BANK 2018 2017 2018 2017

Foreign banks 4,517 3,773 1,084 700Domestic sources 2,789 2,514 2,465 2,181Foreign companies 65 149 43 123 7,371 6,436 3,592 3,004

As at 31 December 2018, borrowings from domestic and foreign sources included repurchase agreements in the amount of HRK 1,112 million for the Group and the Bank (as at 31 December 2017: borrowings from domestic sources in the amount of HRK 150 million) (Note 33).

28 Issued debt securities

On 23 December 2016 the Bank has issued EUR 7,645 thousand of zero-coupon bonds, with yield of 1.5%. The bonds mature on 23 December 2021. Net book value of issued debt securities as at 31 December 2018 amounted to HRK 54 million (31 December 2017: HRK 54 million).

29 Provisions for liabilities and charges

GROUP HRK MILLION TOTAL PROVISIONS FOR PROVISIONS FOR PROVISIONS FOR OFF-BALANCE COURT CASES OTHER ITEMS SHEET CREDIT RISK EXPOSURE

Balance as at 1 January 2018 852 607 78 167Net charge to statement of profit or loss 97 (37) 21 113Provisions used during the year (65) (2) (7) (56)Business combinations 3 - 3 -Effect of foreign exchange differences (2) (1) - (1)Balance as at 31 December 2018 885 567 95 223Balance as at 1 January 2017 701 496 64 141Net charge to statement of profit or loss 207 130 19 58Provisions used during the year (40) - (5) (35)Effect of foreign exchange differences 2 (1) - 3Balance as at 31 December 2017 870 625 78 167




29 Provisions for liabilities and charges (continued)

BANK HRK MILLION TOTAL PROVISIONS FOR PROVISIONS FOR PROVISIONS FOR OFF-BALANCE COURT CASES OTHER ITEMS SHEET CREDIT RISK EXPOSURE

Balance as at 1 January 2018 710 533 30 147Net charge to statement of profit or loss 75 (46) 16 105Provisions used during the year (65) - (6) (59)Business combinations 5 - 1 4Effect of foreign exchange differences 2 - - 2Balance as at 31 December 2018 727 487 41 199Balance as at 1 January 2017 579 429 32 118Net charge to statement of profit or loss 171 123 2 46Provisions used during the year (33) (3) (4) (26)Effect of foreign exchange differences 9 - - 9Balance as at 31 December 2017 726 549 30 147

Provisions for off-balance sheet credit risk exposure and provisions for court cases are recognised in other impairment losses and provisions in the statement of profit or loss (Note 8). Major other items for the Bank as at 31 December 2018 include:

− HRK 104 million (2017: HRK 35 million) for restructuring costs, − HRK 32 million (2017: HRK 35 million) of provisions for conversion of CHF loans, − HRK 32 million (2017: HRK 40 million) of provisions for long-term employee incentive schemes and− HRK 24 million (2017: HRK 24 million) of provisions for jubilee awards, and statutory severance payments, calculated in accordance with

International Accounting Standard 19 “Employee Benefits”.

Major other items for the Group as at 31 December 2018 include: − HRK 104 million (2017: HRK 41 million) for restructuring costs, − HRK 32 million (2017: HRK 35 million) of provisions for conversion of CHF loans, − HRK 45 million (2017: HRK 51 million) of provisions for long-term employee incentive schemes and− HRK 35 million (2017: HRK 34 million) of provisions for jubilee awards, and statutory severance payments, calculated in accordance with

International Accounting Standard 19 “Employee Benefits”.


31 Equity

a) Share capital ORDINARY SHARES AUTHORISED AND ISSUED 2018 2017

Issued share capital (HRK million) 6,405 6,405Number of shares as at 31 December 320,241,955 320,241,955Nominal value per share (HRK) as at 31 December 20.00 20.00

Ordinary shares carry voting rights at shareholders’ meetings, subject to a minimum shareholding of one share. The Bank does not have preference shares. The shareholder structure of the Bank as at 31 December was as follows: 2018 2017

UniCredit S.p.A. 84.47 84.47Allianz SE 11.72 11.72Other 3.81 3.81 100.00 100.00

UniCredit S.p.A. is the direct owner of 270,520,430 Bank’s shares or 84.475% in its share capital and voting rights. The Bank’s shares are listed on the Zagreb Stock Exchange. As at 31 December 2018, the average share price of the Bank’s ordinary shares quoted on the Zagreb Stock Exchange was HRK 57.20 (2017: HRK 54.63).

30 Other liabilities HRK MILLION GROUP BANK 2018 2017 2018 2017

Dividends 16 1,447 14 1,446Payables in respect of customers’ debit and credit cards 80 104 43 56Payables in the course of settlement 300 359 70 115Salaries 244 232 215 203Accrued expenses 187 158 70 70Payables to suppliers 29 29 21 21Other deferred income 202 22 187 1Deferred fee and interest income 21 14 16 11Liabilities to customers for State subsidies for housing savings - 9 - -Fees payable 2 4 - -Other liabilities 294 226 222 139 1,375 2,604 858 2,062




31 Equity (continued)

b) Share premium

The total share premium amounts to HRK 3,504 million: - as a result of a share issue in March 2007, the Bank recognised share premium in the amount of HRK 3,370 million, representing the excess

of the paid-in amount over the nominal value of the issued shares;- HRK 134 million of capital gains from transactions with treasury shares of the Bank from previous periods were reclassified from Other

reserves to Share premium in 2018 (reclassification explained in I Basis of preparation, section Reclassification of comparative information and presentational changes).

c) Treasury shares

As at 31 December 2018, the Group and the Bank held 580,126 treasury shares. As at 31 December 2017, the Group and the Bank did not hold treasury shares of the Bank. Own shares held as collateral As at 31 December 2018 the Bank holds 182,780 own shares as collateral for loans to third parties (2017: 182,780 shares). DividendsThe Bank has paid dividends in the amount of HRK 839 million or HRK 2.62 per share in 2018 (2017: the Bank paid dividends in the amount of HRK 1,697 million or HRK 5.30 per share).

d) Other reserves

GROUP AND BANK HRK MILLION 2018 2017

Legal reserve 68 64Redenomination reserve 283 283Treasury share reserve 110 110Equity-settled share-based payments reserve 14 16 475 473

Legal reserve

A legal reserve was originally created in accordance with Croatian law, which requires 5% of the profit for the year to be transferred to this reserve until the reserve reaches 5% of issued share capital. The legal reserve, in the amount of up to 5% of the issued share capital, can be used for covering current and prior years’ losses.

Redenomination reserve

The share capital of the Bank was originally denominated in DEM. In accordance with shareholders’ decision brought on extraordinary General Assembly in February 2002, the shareholder capital was converted into Euro. On extraordinary General Assembly held in December 2004, the share capital of the Bank was converted into Croatian kuna. The nominal value of Class I A, II B, III D and III E shares was converted from EUR 51.13 to HRK 380 each, and the nominal value of Class II C shares was converted from EUR 73.04 to HRK 540. The surplus of share capital arising on redenomination was recorded in the redenomination reserve. Treasury share reserve

The reserve was formed in previous periods and is available for acquisition of treasury shares.



d) Other reserves (continued) Equity-settled share-based payments reserve As of 31 December of 2017 and 2016, the Group had equity-settled share-based payment arrangements. Equity-settled share-based payment awards are limited to members of the Management Board of the Bank and the Group’s key employees (including former members of the Management Board and key employees based on work in previous years). As at 31 December 2018, equity-settled share-based payment arrangements comprise a total of 484,257 (31 December 2017: 709,013) shares of Zagrebačka banka granted and outstanding at the end of the current period, which will be paid over a period of up to five years. The fair value is determined as the market value of shares at the grant date. The related expenses are recognised within operating expenses (Note 7) with the respective increase recognised in Group’s equity presented within other reserves.

e) Fair value reserve Fair value reserve includes unrealised gains and losses on changes in the fair value of financial assets at fair value through other comprehensive income (available for sale untill 1 January 2018), translation differences on the fair value revaluation component of FVOCI financial assets (fair value revaluation component of available for sale assets untill 1 January 2018), as well as actuarial gains and losses on employee benefits’ remeasurements, all net of income tax. As at 31 December 2018, the total fair value reserve amounted to HRK 235 million (2017: HRK 295 million) and HRK 226 million (2017: HRK 235 million) for the Group and the Bank, respectively.

f) Retained earnings Retained earnings in the amount of HRK 8,144 million (2017: HRK 7,411 million) and HRK 5,850 million (2017: HRK 5,081 million) for the Group and the Bank, respectively, include accumulated profits from prior years and foreign currency differences on translation of foreign operations.





g) Regulatory capital Credit institutions in Republic of Croatia are obliged to calculate and report on prudential requirements in accordance with Capital Requirements Regulation (EU) No 575/2013 (“CRR”), Directive 2013/36/EU (“CRD IV”), Implementing technical standards and other relevant regulations prescribed by European Banking Authority (“EBA”) and national discretions prescribed by local regulator, Croatian National Bank (“CNB”). The Group and the Bank were obliged to calculate and report preliminary unaudited regulatory capital as at 31 December 2018 until 11 February 2019.

For the purposes of prudential consolidation, Zagrebačka banka Group comprises Zagrebačka banka dd, UniCredit Bank dd, Mostar, Prva stambena štedionica dd (until 1 June 2018), ZB Invest doo and UniCredit Leasing Croatia doo.

The regulatory capital of the Bank and the Group consists of Tier 1 capital (all qualifies as Common Equity Tier 1 (“CET1”) capital), which includes ordinary share capital, related share premium, capital gains from transactions with treasury shares, retained earnings, accumulated other comprehensive income, reserves and net profit for the period eligible for regulatory purposes (i.e. independently audited and after adjustment for the foreseeable dividends). In addition, the regulatory capital of the Group includes minority (non-controlling) interest given recognition in CET1 capital.

In accordance with CRR and the national discretions of the local regulator, own CET1 instruments, intangible assets, goodwill, unrealised fair value losses on financial instruments classified as FVOCI (available-for-sale) and adjustments to CET1 due to prudential filters are deducted from the regulatory capital of the Bank and the Group.

Prescribed minimal capital ratios, in accordance with Article 92 of the Directive (EU) No 575/2013 are as follows:• Common Equity Tier 1 capital ratio of 4.5% of the total risk exposure,• Tier 1 capital ratio of 6% of the total risk exposure,• Total capital ratio of 8% of the total risk exposure.

In addition to regulatory prescribed minimal capital adequacy ratios and in accordance with Articles 117, 118 and 130 of CNB’s Credit Institutions Act and Articles 129,130 and 133 of CRD IV, the Group and the Bank are also obliged to maintain the following capital buffers:

• capital conservation buffer, in the amount of 2.5% of the total risk exposure;• institution specific countercyclical capital buffer and • systemic risk buffer, in the amount of 3% of the total risk exposure.

As set in Article 126 of CNB’s Credit Institutions Act and paragraph 1 of Article 130 of CRD IV, institution specific countercyclical capital buffer is calculated as the institution’s total risk exposure amount calculated in accordance with paragraph 3 of Article 92 of CRR multiplied by the institution specific countercyclical capital buffer rate.

The Group’s and the Bank’s institution specific countercyclical capital buffer as at 31 December 2018 is 0.00% (31 December 2017: 0.00%).


31 Equity (continued) g) Regulatory capital (continued) Regulatory capital, total risk-weighted assets and capital adequacy for the Group and the Bank:

GROUP HRK MILLION (UNAUDITED) (AUDITED) 31 DECEMBER 2018 31 DECEMBER 2017 BASEL III BASEL III

Regulatory capital Tier 1 capital Common Equity Tier 1 (“CET1”) capital Issued share capital 6,405 6,405Share premium 3,504 3,370Retained earnings (excluding profit for the period) 6,002 6,256Net profit/(loss) for the period eligible for regulatory purposes - 213Accumulated other comprehensive income 191 -Legal, statutory and other reserves 461 607Non-controlling interest 14 13Deductions, in accordance with the CRR and national discretions of the local regulator (CNB)

- Own CET1 instruments (39) (4)- Intangible assets (287) (262)- Unrealised fair value losses on financial instruments classified as available-for-sale - -- Adjustment to CET1 due to prudential filters (16) 127- Goodwill (49) (49)

Total Common Equity Tier 1 capital 16,186 16,676Additional Tier 1 (“AT1”) capital - -Tier 1 Capital 16,186 16,676Tier 2 capital - -Total Own Funds 16,186 16,676Total risk-weighted assets 75,888 72,780Capital adequacy ratio 21.33% 22.91%




31 Equity (continued) g) Regulatory capital (continued)

BANK HRK MILLION (UNAUDITED) (AUDITED) 31 DECEMBER 2018 31 DECEMBER 2017 BASEL III BASEL III

Regulatory capital Tier 1 capital Common Equity Tier 1 (“CET1”) capital Issued share capital 6,405 6,405Share premium 3,504 3,370Retained earnings (excluding profit for the period) 3,993 4,242Net profit/(loss) for the period eligible for regulatory purposes - -Accumulated other comprehensive income 182 -Legal, statutory and other reserves 461 607Deductions, in accordance with the CRR and national discretions of the local regulator (CNB)

- Own CET1 instruments (39) (4)- Intangible assets (206) (192)- Unrealised fair value losses on financial instruments classified as available-for-sale - (2)- Adjustment of CET1 for prudential filters (15) 130

Total Common Equity Tier 1 capital 14,285 14,556Additional Tier 1 (“AT1”) capital - -Tier 1 capital 14,285 14,556Tier 2 capital - -Total Own Funds 14,285 14,556Total risk-weighted assets 54,389 51,884Capital adequacy ratio 26.26% 28.06%


32 Leverage ratio

In accordance with Article 429 of the CRR (EU) no. 575/2013, from 1 January 2014, credit institutions are obliged to calculate the leverage ratio as the institution’s capital measure (Tier 1 capital), divided by the institution’s total exposure measure, expressed as a percentage. A minimum requirement for the leverage ratio is 3%. Based on Delegated Regulation (EU) 2015/62 from 10 October 2014, on amending Regulation (EU) no. 575/2013 of the European Parliament and the Council with respect to the ratio of financial leverage, changes were introduced to Article 429 of Regulation (EU) no. 575/2013, and accordingly, the Bank and the Group’s leverage ratio is calculated and reported at the end of the reporting period (quarter). In order to present the ratio, exposure values and capital are presented as at the end of last quarter of 2018. Leverage ratio, based on the unaudited information, calculated and presented for the Bank and the Group, as at 31 December 2018:

HRK MILLION GROUP BANK

Exposure values Securities Financing Transactions (SFT) exposure 4,782 3,961Derivatives: Current replacement cost and Add-on under mark-to-market method 859 865Other off-balance sheet items (with credit conversion factor - CCF) 5,378 4,611Other assets 132,563 108,204Asset amount deducted - Regulatory adjustments of Tier 1 capital (352) (221) 143,230 117,420Capital Tier 1 capital 16,186 14,285Leverage ratio 11.30% 12.17%




33 Assets sold but not derecognised Sale and repurchase agreements

The Group enters into transactions in the ordinary course of business, which result in the transfer of financial assets (mainly debt securities) that, in accordance with Group’s accounting continue to be recognised in their entirety. The Group transfers these assets primarily through sale and repurchase agreements. As at 31 December 2018, the Group and the Bank had HRK 1,143 million of such assets sold but not derecognised (2017: HRK 160 million). These assets were classified as FVOCI debt securities (2017: available-for-sale debt securities).

Encumbered assets

The Group’s assets are encumbered if they have been pledged, or if they are subject to any form of arrangement to secure, collateralise or enhance, any on-balance-sheet or off-balance-sheet transaction from which the Group cannot freely withdraw (for instance, pledged for funding purposes). Assets pledged that are subject to any restrictions in withdrawal, such as assets that require preapproval before withdrawal, or replacement by other assets, are considered as encumbered. Financial assets are pledged as collateral as part of sales and repurchases and borrowing transactions under the terms that are usual and customary for such activities. The total financial assets recognised in the statement of financial position which have been pledged as collateral for liabilities at 31 December 2018 are presented in the following table.

31 DECEMBER 2018 HRK MILLION GROUP BANK ENCUMBERED UNENCUMBERED TOTAL ENCUMBERED UNENCUMBERED TOTAL

Obligatory reserve with the CNB 5,684 - 5,684 5,684 - 5,684Due from banks 3,270 6,148 9,418 1,399 3,454 4,853Loans and advances from customers 1,002 80,712 81,714 1,002 64,868 65,870Debt securities 1,143 10,981 12,124 1,143 9,116 10,259Other assets - 29,591 29,591 - 26,577 26,577Total assets 11,099 127,432 138,531 9,228 104,015 113,243 31 DECEMBER 2017 HRK MILLION GROUP BANK ENCUMBERED UNENCUMBERED TOTAL ENCUMBERED UNENCUMBERED TOTAL

Obligatory reserve with the CNB 5,525 - 5,525 5,525 - 5,525Due from banks 3,095 6,055 9,150 1,485 5,024 6,509Loans and advances from customers 894 77,387 78,281 894 61,431 62,325Debt securities 160 10,696 10,856 160 8,079 8,239Other assets - 23,081 23,081 - 19,586 19,586Total assets 9,674 117,219 126,893 8,064 94,120 102,184

Furthermore, the Group has received collateral that the Group is permitted to sell or repledge in the absence of default. At 31 December 2018, the fair value of financial assets accepted as collateral that the Group and the Bank are permitted to sell or re-pledge in the case of default was HRK 4,759 million (2017: HRK 2,658 million).


34 Managed funds for and on behalf of third parties and custody services

The Bank and the Group provide custody services to customers, including banks investment and pension funds, etc. The Group also manages regulated open-ended investment funds in Republic of Croatia, which are quoted over the counter. The Group and the Bank earn fee income related to these services. The Bank and the Group also provide portfolio management services to private customers, and also manage a number of loans on behalf of third parties. These assets are not assets of the Bank and the Group and are not recognised as the Bank’s or the Group’s assets.


Assets under custody 36,178 41,769 34,743 39,842Investment fund assets under management 5,117 4,554 - -Assets under portfolio management 570 645 - -Loans managed on behalf of third parties 538 640 399 487 42,403 47,608 35,142 40,329

Fees earned from custody services, assets under management in investment funds managed by the Group, portfolio management and loans managed on behalf of third parties amounted to HRK 84 million (2017: HRK 119 million). Custody fees are related to custody activities provided to companies, banks, individuals, and investment and pension funds. Portfolio management fees are related to portfolio management services for and on behalf of customers. Fees earned in relation to custody services and loans managed on behalf of third parties for the Bank amounted to HRK 27 million (2017: HRK 56 million).




35 Leases

The companies owned by the Group - UniCredit Leasing doo, ALLIB NEKRETNINE doo, BACAL ALPHA doo and Locat doo are engaged in providing finance and operating lease arrangements of various items, vehicles, vessels, real estate and equipment, to its clients. UniCredit bank dd, Mostar is engaged in providing finance lease arrangements. Net investment in finance leases as at 31 December 2018 amounted to HRK 2,964 million and it is included in loans and receivables from customers (Note 15) in the Group financial statements. The carrying value of leased property and equipment (under operating lease) as at 31 December 2018 amounted to HRK 897 million and these assets are classified within property and equipment (Note 20). Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are set presented below:

HRK MILLION MINIMUM PRESENT MINIMUM PRESENT PAYMENTS VALUE OF PAYMENTS VALUE OF PAYMENTS PAYMENTS 2018 2018 2017 2017

Less than one year 705 689 272 266Between one and five years 1,569 1,440 1,727 1,592More than five years 1,083 959 1,174 1,035Gross investment in finance lease 3,357 3,088 3,173 2,893Unearned finance income (270) - (286) - 3,087 3,088 2,887 2,893Impairment allowance (124) (124) (110) (110)Net investment in finance lease 2,963 2,964 2,777 2,783

Future minimum lease payments under non-cancellable operating leases where the Group is the lessor at undiscounted amounts:


Less than one year 360 202Between one and five years 767 600More than five years 17 23 1,144 825


36 Commitments and contingencies a) Off-balance-sheet exposure


Off-balance sheet exposure Guarantees 5,671 5,569 4,563 4,954Letters of credit 265 276 184 205Undrawn loans and loan commitments 14,150 14,350 13,160 12,109Other risk off-balance sheet items 1,645 52 237 51 21,731 20,247 18,144 17,319Other off-balance sheet items Swaps 50,275 52,037 51,937 51,572Forwards 3,266 4,875 3,115 4,833 53,541 56,912 55,052 56,405

Guarantees and letters of credit – the Bank



Performing High grade 863 53 - 916 1,141Standard grade 2,407 346 - 2,753 2,755Sub-standard grade 59 131 - 190 292Non-performing - - 888 888 971Total 3,329 530 888 4,747 5,159





Gross carrying amount as at 1 January 2018 3,691 301 1,167 5,159New exposures 1,727 200 245 2,172Exposures matured (1,631) (191) (749) (2,571)Transfer to Stage 1 41 (35) (6) -Transfer to Stage 2 (267) 267 - -Transfer to Stage 3 (221) (8) 229 -Foreign exchange adjustments (11) (4) 2 (13)At 31 December 2018 3,329 530 888 4,747


ECL allowance as at 1 January 2018 11 6 471 488Exposures matured - - - -Transfer to Stage 1 1 (1) - -Transfer to Stage 2 (1) 1 - -Transfer to Stage 3 - - - -Write Downs/Write Backs (3) 7 (66) (62)Foreign exchange adjustments - - - -At 31 December 2018 8 13 405 426


Performing High grade 960 53 - 1,013 1,227Standard grade 3,197 554 - 3,751 3,334Sub-standard grade 59 208 - 267 297Non-performing - - 905 905 987Total 4,216 815 905 5,936 5,845

36 Commitments and contingencies (continued) a) Off-balance-sheet exposure (continued) Guarantees and letters of credit – the Bank (continued)


Guarantees and letters of credit – the Group




Gross carrying amount as at 1 January 2018 4,137 525 1,183 5,845New financing 2,493 343 245 3,081Exposures matured (1,942) (273) (750) (2,965)Transfer to Stage 1 41 (35) (6) -Transfer to Stage 2 (271) 271 - -Transfer to Stage 3 (221) (9) 230 -Foreign exchange adjustments (21) (7) 3 (25)At 31 December 2018 4,216 815 905 5,936


ECL allowance as at 1 January 2018 24 22 489 535Exposures matured - - - -Transfer to Stage 1 1 (1) - -Transfer to Stage 2 (1) 1 - -Transfer to Stage 3 - - - -Write Downs/Write Backs (2) 9 (65) (58)Foreign exchange adjustments - - (2) (2)At 31 December 2018 22 31 422 475


Performing High grade 7,515 58 - 7,573 7,346Standard grade 4,727 666 - 5,393 4,667Sub-standard grade 346 51 - 397 128Non-performing - - 34 34 19Total 12,588 775 34 13,397 12,160

36 Commitments and contingencies (continued) a) Off-balance-sheet exposure (continued) Guarantees and letters of credit – the Group (continued)


Undrawn loans and loan commitments and other risk off-balance sheet items – the Bank






Gross carrying amount as at 1 January 2018 11,538 600 22 12,160New financing 4,134 357 11 4,502Exposures matured (2,892) (358) (12) (3,262)Transfer to Stage 1 177 (173) (4) -Transfer to Stage 2 (353) 355 (2) -Transfer to Stage 3 (17) (2) 19 -Foreign exchange adjustments (1) (4) - (5)Business combination - PSŠ 2 - - 2At 31 December 2018 12,588 775 34 13,397


ECL allowance as at 1 January 2018 22 14 9 45Exposures matured - - - -Transfer to Stage 1 4 (3) (1) -Transfer to Stage 2 - 1 (1) -Transfer to Stage 3 - - - -Write Downs/Write Backs 2 5 9 16Foreign exchange adjustments - - - -At 31 December 2018 28 17 16 61


Performing High grade 7,515 58 - 7,573 7,346Standard grade 6,857 828 - 7,685 6,888Sub-standard grade 347 153 - 500 148Non-performing - - 37 37 20Total 14,719 1,039 37 15,795 14,402

36 Commitments and contingencies (continued) a) Off-balance-sheet exposure (continued) Undrawn loans and loan commitments and other risk off-balance sheet items – the Bank (continued)


Undrawn loans and loan commitments and other risk off-balance sheet items – the Group




Gross carrying amount as at 1 January 2018 13,687 691 24 14,402New financing 5,360 568 11 5,939Exposures matured (4,086) (414) (13) (4,513)Transfer to Stage 1 181 (177) (4) -Transfer to Stage 2 (376) 378 (2) -Transfer to Stage 3 (19) (2) 21 -Foreign exchange adjustments (28) (5) - (33)At 31 December 2018 14,719 1,039 37 15,795


ECL allowance as at 1 January 2018 41 21 10 72Exposures matured - - - -Transfer to Stage 1 4 (3) (1) -Transfer to Stage 2 - 1 (1) -Transfer to Stage 3 - - - -Write Downs/Write Backs - 12 9 21Foreign exchange adjustments (1) - - (1)At 31 December 2018 44 31 17 92

36 Commitments and contingencies (continued) a) Off-balance-sheet exposure (continued) Undrawn loans and loan commitments and other risk off-balance sheet items – the Group (continued)


b) Litigation The Group and the Bank are subject to a number of legal actions initiated against them. In the opinion of the Management Board, the claims which are likely to be lost are adequately provided for (including principal and accrued interest) in the amount of HRK 95 million for the Group (2017: HRK 78 million) and HRK 41 million for the Bank (2017: HRK 30 million), as presented in Note 29.




37 Related party transactions The Bank is the parent of the Zagrebačka banka Group. The ultimate controlling party of the Group and the Bank’s ultimate parent is UniCredit S.p.A. The key shareholders of the Bank and of the Group are UniCredit S.p.A. and Allianz SE, with holdings of 84.47% (2017: 84.47%) and 11.72% (2017: 11.72%) of the Bank’s shares at year end, respectively. 3.63% (2017: 3.81%) of the shares are publicly held and 0.18% as of 31 December 2018 are treasury shares held by the Bank. The Bank considers that it has an immediate related party relationship with its key shareholders and their subsidiaries; its subsidiaries and associates; the investment funds managed by one of its subsidiaries, ZB Invest; the pension funds managed by its associates; Supervisory Board members, Management Board members and other executive management (together “key management personnel”); close family members of key management personnel; and entities controlled, jointly controlled or significantly influenced by key management personnel and their close family members, in accordance with the definitions contained in International Accounting Standard 24 “Related Party Disclosures” (“IAS 24”). Other immediate related parties mainly comprise UniCredit S.p.A. and its other affiliates.

a) Key transactions with immediate related parties The Bank had deposits of HRK 174 million (2017: HRK 177 million) and no borrowings from UniCredit Bank Austria AG as at 31 December 2018 (in 2017 the Bank did not record any borrowings). As a result, the Bank recorded HRK 1 million (2017: HRK 16 million) of interest expense in relation to deposits from UniCredit Bank Austria AG. The Bank had borrowings of HRK 466 million (in 2017 the Bank did not record any borrowings) and deposits of HRK 4,452 million (2017: HRK 1 million) from UniCredit S.p.A. as at 31 December 2018. As a result, the Bank recorded HRK 7 million (2017: HRK 1 million) of interest expense in relation to borrowings and deposits from UniCredit S.p.A. In 2018 and 2017, the Bank entered into derivative financial transactions in the form of interest rate swaps, cross-currency interest rate swaps and FX swaps with UniCredit Bank AG, resulting in the recognition of a loss of HRK 3 million (2017: gain of HRK 104 million) in the Bank’s statement of profit or loss. Also, the Bank entered into derivative financial transactions in the form of interest rate swaps, cross-currency interest rate swaps and FX swaps with UniCredit S.p.A. resulting in the recognition of a loss of HRK 486 million (2017: gain of HRK 1,459 million) in the Bank’s statement of profit or loss during 2018. The Bank had deposits from UniCredit S.p.A. received as collateral in cash in the amount of HRK 748 million (2017: HRK 278 million) in order to cover the derivative exposure based on ISDA Credit Support Annex (the “ISDA CSA”).


37 Related party transactions (continued)

a) Key transactions with immediate related parties (continued)

The Bank earned dividend income and income from distribution services provided to related parties engaged in insurance and pension fund management, as follows:

HRK MILLION INCOME FROM DISTRIBUTION DIVIDEND INCOME 2018 2017 2018 2017

Allianz Zagreb (insurance) 26 29 15 10Allianz ZB, obligatory pension fund management company - - 38 35Allianz ZB, voluntary pension fund management company 28 25 2 2 54 54 55 47

The above amounts are not eliminated on consolidation, but are presented either as income, or as a deduction against the carrying value of investments in the Group financial statements, and as income in the Bank’s separate financial statements.

The Bank also earned income and incurred expenses on transactions with its subsidiaries, which are eliminated on consolidation. These include distribution fee income earned from ZB Invest, which manages regulated investment funds in Republic of Croatia, and fees payable to ZANE for property valuations. In 2018 the Bank recognised dividend income from subsidiaries in the amount of HRK 298 million (2017: HRK 231 million). The majority of other income and expense with subsidiaries represents interest income and expense.

The majority of exposure to subsidiaries represents lending, and in the case of ZB Invest, includes investments into investment funds managed by ZB Invest.

Key management personnel held 251,699 shares in the Bank (2017: 201,949 shares) at year-end. Key management personnel were also granted an amount of HRK 21 million (2017: HRK 19 million) in respect of loans and receivables presented in loans and receivables from customers. During 2018, the Bank recognised HRK 1 million (2017: HRK 1 million) of interest income from loans to key management personnel granted at annual interest rates from 1.99% to 9.99% (2017: from 2.52% to 9.99%). Included in current accounts and deposits from customers are HRK 16 million of deposits from key management personnel (2017: HRK 24 million). During 2018 the Bank recognised interest expense of HRK 0.1 million (2017: HRK 0.2 million) on these liabilities at annual interest rates from 0.01% to 3.25% (2017: from 0.01% to 3.55%).





b) Amounts arising from transactions with immediate related parties (Bank)

Assets and liabilities and off-balance-sheet exposures and income and expenses as at and for the year ended 31 December 2018, arising from key transactions with related parties: 2018 HRK MILLION EXPOSURE* LIABILITIES INCOME EXPENSE

Immediate and ultimate parent companies UniCredit S.p.A. 3,945 5,790 629 28 Other shareholders or fellow subsidiaries UniCredit Bank Austria AG 45 176 2 3 UniCredit Group - other 62 55 11 11 UniCredit Bank AG 42 191 27 68UniCredit Bank AG Group - other 2 4 - -Allianz SE Group 9 50 110 -Total 4,105 6,266 779 110 Subsidiaries and associates Prva stambena štedionica - - - -UniCredit Bank, Mostar 950 37 4 - ZB Invest 6 21 25 -ZANE - 2 - 7Centar Kaptol - - 2 -Pominvest 17 3 - 3ZABA Partner 2 3 - -Locat Croatia 40 31 - -UniCredit Leasing Croatia 336 268 5 4MultiPlus Card 1 12 - 8Total subsidiaries and associates 1,352 377 36 22 Key management personnel** Supervisory Board members - 1 - -Other key management personnel 24 16 1 -Total key management personnel 24 17 1 -Total 5,481 6,660 815 132

*Exposure comprises loans, interest and other receivables and HRK 127 million (2017: HRK 413 million) of off-balance-sheet exposures, whereof HRK 3 million (2017: HRK 3 million) relates to key management personnel.

**Expense amounts relating to key management personnel do not include remuneration. Information on management remuneration is disclosed in Note 37c.

In addition to the direct exposure to ZB Invest, at year end, the Group and the Bank had investments of HRK 52 million and HRK 29 million (2017: HRK 126 million and HRK 105 million) in investment funds managed by ZB Invest.

In addition to direct exposure to subsidiaries, the Bank’s investment in subsidiaries (Note 18) at year-end amounted to HRK 1,486 million (2017: HRK 1,586 million).



b) Amounts arising from transactions with immediate related parties (Bank) (continued)

2017 HRK MILLION EXPOSURE* LIABILITIES INCOME EXPENSE

Immediate and ultimate parent companies UniCredit S.p.A. 2,780 1,958 177 1,478 Other shareholders or fellow subsidiaries UniCredit Bank Austria AG 31 179 5 18 UniCredit Group - other 108 6 6 12 UniCredit Bank AG 244 258 111 49 UniCredit Bank AG Group - other 2 3 - -Allianz SE Group - 12 101 -Total 3,165 2,416 400 1,557 Subsidiaries and associates Prva stambena štedionica 28 255 1 -UniCredit Bank, Mostar 40 55 3 - ZB Invest 2 9 23 -ZANE - 2 - 3 Centar Kaptol 27 3 1 25 Pominvest - 2 - 3ZABA Partner - 3 - -Locat Croatia - 27 - -UniCredit Leasing Croatia 110 165 5 4 MultiPlus Card 9 11 - -Total subsidiaries and associates 216 532 33 35 Key management personnel** Supervisory Board members - 11 - -Other key management personnel 22 25 1 -Total key management personnel 22 36 1 -Total 3,403 2,984 434 1,592

*Exposure comprises loans, interest and other receivables and HRK 413 million (2016: HRK 786 million) of off-balance-sheet exposures, whereof HRK 3 million (2016: HRK 3 million) relates to key management personnel.

**Expense amounts relating to key management personnel do not include remuneration. Information on management remuneration is disclosed in Note 37c.

In addition to the direct exposure to ZB Invest, at year end, the Group and the Bank had investments of HRK 126 million and HRK 105 million (2016: HRK 126 million and HRK 105 million) in investment funds managed by ZB Invest.

In addition to direct exposure to subsidiaries, the Bank’s investment in subsidiaries (Note 18) at year end amounted to HRK 1,586 million (2016: HRK 1,586 million).





c) Remuneration paid during the year to the Management Board and other key management personnel HRK MILLION 2018 2017

Management Board Short-term benefits - salaries paid during the current year for the current year 12 18Long-term benefits - paid in cash - paid during the current year in respect of earlier years 3 4Long-term benefits – paid in shares of the Bank - paid during the current year in respect of earlier years 4 2Total 19 24


Other key management personnel Short-term benefits - salaries paid during the current year in respect of current year 24 22Long-term benefits – paid in cash - insurance policies paid during the current year 2 1 - paid during the current year in respect of earlier years 5 5Long-term benefits – paid in shares of the Bank - paid during the current year in respect of earlier years 2 1Total 33 29

Other key management personnel included 43 key employees (2017: 39 key employees).

Remuneration paid to the Management Board and other key management personnel includes HRK 5 million (2017: HRK 4 million) of defined pension contributions payable into pension plans.

Remuneration paid to Supervisory Board members amounted to HRK 1 million (2017: HRK 1 million).

d) Shareholdings of the Supervisory and Management Board members The table below details shares in the Bank held by members of the Management Board and by companies whose interests are represented by members of the Supervisory Board at 31 December 2018. As at 31 December 2018 members of the Supervisory Board did not hold shares in the Bank.

NUMBER OF ORDINARY

SHARES

Companies represented on the Supervisory Board UniCredit S.p.A. 270,523,430Allianz SE 37,523,195Members of the Management Board Miljenko Živaljić 171,682Claudio Cesario 5,642Lorenzo Ramajola 2,327Dijana Hrastović 31,580Marco Lotteri -


38 Risk review and management

This section provides details of the Group’s exposure to risk and describes the methods used by management to identify, measure and manage risks in order to safeguard capital. The most important types of financial risk to which the Group is exposed are:

- credit risk (Note 38.1),- liquidity risk (Note 38.2),- market risk (Note 38.3) and - operational risk (Note 38.4).

Risk governance and risk management strategies and systems The Bank’s risk management competence line’s organisation:

An integrated system of risk management has been established at the Group level by introducing a set of policies and procedures, determining the limits of risk levels acceptable to the Group and monitoring its implementation. The limits are set according to the amount of regulatory capital and apply to all types of risk. Additionally, the Group sets limits for annual potential loss measured by Value-at-Risk techniques for interest rate, credit spread, exchange rate and equity price risk. The Group has also developed methodologies and models for operational risk management. Accepted principles of risk management have been implemented in all subsidiaries. The risk strategy is aligned with business management strategy; both are updated and synchronized at a yearly level. The Risk Appetite Framework is being updated yearly hence reflecting the conclusions of both the business and risk strategies. Stress tests are being conducted with respect to exceptional events. The Group reassess its risk appetite and tolerance thresholds within its overall constraints, building on appropriate scenarios reflective of its risk profile and vulnerabilities, based on internal assessments of capital needed to maintain viability, taking into account relevant Group-specific effects, risks and losses. Stress test considers the various impacts of the internally defined macroeconomic scenarios, on all risk and other significant risk types quantifiable in Economic Capital (EC) terms and identified by the Group. Impacts are considered with respect to regulatory capital adequacy (CET1 ratio, T1 ratio, TC ratio) and with respect to internal capital adequacy (Risk Taking Capacity – RTC). For stress testing, three macroeconomic scenarios are taken into account (UniCredit Group level scenario definition). Under the economic internal perspective, apart from these three scenarios, one local macroeconomic scenario relevant for credit risk was developed, assuming crisis specific to local markets only (Croatia and Bosnia and Herzegovina).

Risk Management & Control

Underwriting MonitoringMarket, Liquidity,

Operational Risk and Risk Integration

Internal ValidationStrategic Risk

Management and Risk Control

Special Credits




38 Risk review and management (continued)

38.1 Credit risk Credit risk is the risk that the Group will incur a loss because its clients or counterparties fail to discharge their contractual obligations. The Group is subject to credit risk through its lending and investing activities and in cases where it acts as an intermediary on behalf of clients or other third parties. The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits. Credit risk is monitored by the credit risk departments of independent Risk Units. It is their responsibility to review and manage credit risk, including environmental and social risk for all types of counterparties. Credit risk consists of line credit risk managers who are responsible for their business lines and manage specific portfolios and experts who support both the line credit risk manager, as well as the business with tools like credit risk systems, policies, models and reporting. The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process aims to allow the Group to assess the potential loss as a result of the risks to which it is exposed and take corrective actions. Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded on the statement of financial position. At the reporting date the Group credit risk exposure to derivative financial instruments classified at fair value through profit or loss is represented by the positive fair value of these instruments, as recorded in the statement of financial position. Notional amounts are disclosed in the notes to the financial statements. The amounts to be exchanged are based on the terms of the derivatives. The Group’s primary exposure to credit risk arises from loans and receivables from customers and banks. The amount of credit exposure in this respect, is represented by the carrying amounts of the assets in the statement of financial position. In addition, the Group is exposed to credit risk in respect of the off-balance-sheet commitments arising from unused facilities and guarantees issued.

Management of credit risk Exposure to credit risk is managed in accordance with the Group’s policies and with the regulatory requirements of the CNB. Credit exposures to portfolios and individual client/group exposures are reviewed on a regular basis taking into account limits set. Any proposed substantial increase in credit exposure is reviewed by Risk Management prior to the granting and during the monitoring phase and is authorised at an appropriate decision-making level. The Credit Committee is regularly informed of all significant changes in quantity and quality of the portfolio, including proposed impairment losses. Credit risk is continuously monitored and reported, thus facilitating the early identification of impairment in the credit portfolio. The Group continually develops methods and models in the process of credit risk assessment. The majority of credit risk exposures are secured with collateral in the form of cash, guarantees, mortgages and other forms of security.



38.1 Credit risk (continued)

Credit quality

Maximum credit risk exposure related to assets and off-balance sheet items was as follows:

HRK MILLION NOTES GROUP BANK 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 2018 2017 2018 2017

Current accounts with CNB and otherbanks 11 21,532 14,895 19,397 11,912Obligatory reserve with the CNB 12 5,684 5,525 5,684 5,525Due to banks 13 9,418 9,150 4,853 6,509Financial assets at fair value through profit or loss Debt securities held for trading 14a 33 76 33 76 Derivative financial instruments 14c 1,127 958 1,125 956Loans and advances from customers 15a 81,714 78,281 65,870 62,325Financial assets at fair value through other comprehensive income 16a 12,091 - 10,226 -Debt securities available for sale 16a - 10,780 - 8,163Other assets 205 236 13 51Total credit risk exposure relating to on-balance-sheet assets 131,804 119,901 107,201 95,517Guarantees and Letters of credit 36a 5,936 5,845 4,747 5,159Undrawn lending commitments, credit card limits and other items 36a 15,795 14,402 13,397 12,160Total credit risk exposure relating to off-balance-sheet items 21,731 20,247 18,144 17,319Total credit risk exposure 153,535 140,148 125,345 112,836

The table above presents the maximum credit risk exposure for the Group and the Bank as at 31 December 2018 and 31 December 2017, without taking into account collateral held. On-balance-sheet exposures are based on carrying amounts, as reported in the statement of financial position, net of impairment allowance. Off-balance-sheet items are based on the approved amount, except for undrawn lending commitments and credit cards’ limits, which are based on the unused approved amount. Information on the credit quality and the expected credit loss allowance for exposures is presented in respective notes in these financial statements. The information there contains an overview of gross exposures (an overview discloses credit quality per stages and per internal rating grades) as well as movements in the gross balances and in expected credit loss allowances. For understanding how credit quality is reported to CNB within A, B and C risk classes and their link to stages refer to this note further below, section “Classification of expsures for the purpose of reporting to CNB”.






Impairment and provisioning (applicable since 1 January 2018)

Refer also to the accounting policy in Note 10 within Specific accounting policies and Accounting estimates and judgments in applying accounting policies in Note 40. The Group applies the General three-stage model approach, as follows:

- Stage 1 - all new financial assets at initial recognition and instruments that have not significantly deteriorated in credit quality since initial recognition;

- Stage 2 - financial instruments that have significantly deteriorated in credit quality since initial recognition but there is no objective evidence of a credit loss event;

- Stage 3 - defaulted exposures (i.e. credit impaired), there is objective evidence of impairment at the reporting date.

Stages 1 and 2 refer to performing exposures, while Stage 3 refers to non-performing exposures.

For exposures which are not in default status, the loss allowance is equal to:- 12-month expected credit losses (if, at the reporting date, the credit risk has not increased significantly since initial recognition);- the lifetime expected credit losses (if, at the reporting date, the credit risk has increased significantly since initial recognition).

For exposures in default status (i.e. credit-impaired exposures) lifetime expected credit losses are recognised.

Definition of default and cure

The borrower is considered as defaulted and therefore Stage3 in cases when the borrower is 90 days past due or when the borrower is unlikely to pay its credit obligations to the institution, the parent undertaking or any of its subsidiaries in full, without recourse by the institution to actions such as realising security. It is the Group’s policy to consider a financial instrument as ‘cured’ and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least 3 consecutive months, or 12 months in case if Forbearance activities were previously made on the defaulted obligor. Once cured, the decision whether to classify in Stage 2 or Stage 1 depends on the updated credit rating and wether there has been a significant increase in credit risk since initial recognition. The Bank’s internal rating and PD estimation process Probability of default (PD) is an estimate of the likelihood of not collecting contractual amounts. It provides an estimate of the likelihood that a client will be unable to meet its debt obligations over a particular time horizon. Internal rating systems are used to assign an internal rating as unique measure of default probability to each counterparty and credit exposure. Assigned default probabilities (PD’s) reflect the 12-month probability of default based on long run averages of one-year default rates. Internal ratings are assigned considering the relevant information: financial statements, information on the groups of economically related parties, counterparty general information, socio-demographic information, payment behaviour, credit-bureau information, operating and market environment etc.




The internal rating and PD estimation process (continued)

With respect to internal rating systems, the two approaches are in place, for low and for high default portfolio. For low default portfolio (Sovereign, Banks, Multinationals and Global Project Finance) the Group (Group-wide rating tool) authorised ratings are applied. For high default portfolio (Retail, SME and Mid-Corporate) the internal ratings are developed on internal historical data. Internal rating models are developed by the specialized team in cooperation with risk managers, considering the Group-wide methodological standards and guidelines. Rating models are regularly monitored. A reporting is set up with respect to models’ performance (their accuracy in default prediction, model stability and model calibration); also with respect to model usage - through reports on proportion of outdated ratings, rating overrides and warning signals and the influence of these matters on the overall model results. In addition to the monitoring process, an annual comprehensive validation is performed by the validation unit in line with the Group-wide standard methodology. The results of validation process are reported to the management and to regulatory bodies. Internal ratings are used in credit approval process for determination of credit approval authority level and for the decision making, in assessment of required risk pricing, and, after being adjusted to ensure consistency with accounting regulation, as a PD parameter for the expected credit loss calculation. They are also used for Pillar 2 assessment of the economic capital requirement, in pre-scoring process for targeting better quality clients and for existing clients in monitoring process.

Corporate and small business lending

The assessment of a counterpart’s creditworthiness begins with an analysis of the financial statements and the qualitative data (competitive positioning, corporate and organisational structure, etc.). The available information including industry factors are summarized using a statistical function resulting in rating, i.e. the counterpart’s probability of default (PD) on a one-year time horizon.

Internal rating process assignment also includes a dedicated function which is separated from loan approval and business functions and which is responsible for the final rating assignment. This function is also responsible for management of rating overrides, i.e. any changes to the automatic rating calculated by the model which supported with the new external information, counterparty behaviour or other significant information not captured within the statistical model. Each counterparty is also assessed in the context of the economic group in which it belongs to (e.g. ceiling criteria). Credit ratings are reviewed at least annually (for riskier counterparties semi-annually), on the basis of the new and updated information. In case of outdated information ratings are prudentially treated through penalty system. The number and significance of outdated ratings is reported and monitored. Retail (consumer lending and retail mortgages)

For retail clients, internal ratings are based mainly on the payment behaviour within the Group, on credit bureau information (if available), on information provided by the respective client and on general demographic information. Internal rating model for retail clients is fully automated process without inclusion of expert judgement or possibility to manage the rating override. The classification of credit assets into risk grades is based on the UciGroup-wide rating scales and on the Group’s internal rating scale.




Exposure at defaultThe EAD (Exposure at Default) represents the measure of the exposure at the time of the event of default. The lifetime EAD has been obtained by considering expected changes in the future periods, based on the repayment schedule. For undrawn off-balance exposures, a full usage was assumed (CCF of 100%) in line with the CNB’s expectation.

Loss given defaultThe LGD (Loss Given Default) represents the percentage of the estimated loss, and thus the expected rate of recovery, at the date of occurrence of the default event for the credit exposure.

For the LGD estimation the Group segments its corporate and retail portfolio into smaller homogeneous portfolios based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (e.g., product type, wider range of collateral types and values) as well as borrowers’ characteristics and pre-defined work-out scenarios (cure, restructuring, write-off, cessions etc.).

The estimation of LGD values for defaulted exposures is consistent with LGD non-defaulted estimation, additionally taking into account the information on the time in default and recoveries realised so far. Assignment of LGD values is automated process based on key transaction and obligor characteristics, default status, time in default and workout scenario and is not subject to expert judgment or override process. The comprehensive validation process to the LGD estimates is applied by the validation unit based on the UciGroup-wide standard methodology. The results of validation process are reported to the management and to regulatory bodies.

On PD, LGD and EAD, specific adjustments are applied to parameters calculated for regulatory purposes, in order to ensure full consistency between regulatory and accounting treatment, net of different regulatory requirements. The main adjustments are such to:

− remove the conservatism required for regulatory purposes only,− introduce a “point-in-time” adjustment, instead of the “through-the-cycle” adjustment embedded in the regulatory parameters,− include forward-looking information,− extend the credit risk parameters in a multiyear perspective.

For lifetime PDs, the through-the-cycle PD curves obtained by fitting the observed cumulated default rates have been calibrated to reflect a point-in-time and forward-looking expectation about the portfolio default rates.Recovery rate embedded in the through-the-cycle LGD has been adjusted to remove the margin of conservatism and to reflect the most recent recovery rate trend, as well as expectation about future trend and discounted at the effective interest rate or its best approximation.



The internal rating and PD estimation process (continued)

For the purpose of aggregated portfolio reporting rating grades are grouped into the following PD categories:

INTERNAL RATING GRADE INTERNAL RATING DESCRIPTION 12 MONTHS PD RANGE

Performing: 1-4 low risk 0.03% - 0.43%5-13 medium risk 0.43% - 10.12%13-16 high risk 10.12% - 100%Non performing: 17 default 100%




Grouping financial assets measured on individual and collective basis

Depending on the amount of exposure to a single person or to a group of connected persons, clients are allocated to one of the following portfolios:− Individually significant exposure – for exposures over HRK 3 million;− Portfolio of small loans – for exposures below HRK 3 million.

Expected credit losses on defaulted exposures are calculated on an individual basis for “individually significant exposures” in default status. The calculation of specific provisions for defaulted non-significant exposures is based on portfolio estimation, by building homogeneous groups of clients/transactions with similar risk characteristics taking into consideration time in default and in line with developed LGD Best estimate models.

For all non-defaulted assets the Group calculates the ECL on the collective basis.

Significant increase in credit risk

A key aspect of the Expected Credit Loss calculation is represented by the Stage allocation model, aimed to allocate exposures between Stage 1 and Stage 2 (Stage 3 being equivalent to Impaired assets), whereas Stage 1 mainly includes:

− newly originated exposures, − intercompany exposures, − exposures with “no significant deterioration in credit quality since initial recognition” or − “low credit risk” exposures at the reporting date.

The stage allocation assessment includes a combination of relative and absolute triggers. The main triggers include:

− the relative comparison, at transaction level, between the PD at origination and the PD at each reporting date, both calculated through internal models, with thresholds set in such a way to consider all the key variables of each transaction that could affect the expectation on PD changes over time (e.g. age, maturity, level of PD at origination);

− absolute triggers, such as backstops required by the regulation (i.e. 30 days past due), when a 30 days past due status is reached (following Basel past due definition with materiality threshold) transaction is transferred into Stage2 and lifetime expected credit losses are recognized;

− Forborne performing classification forces classification to Stage 2 for 9 months (starting from the date of classification in Forborne Performing). After that period, if no other significant credit deterioration trigger applies, the transaction can be moved to Stage 1;

− on debt securities, the Bank has opted, fully in compliance with applicable standard, to apply the “low credit risk exemption” on investment grade securities;

− all intercompany exposures are allocated to Stage 1.

Provisions for performing portfolio (based on Expected Credit Losses) satisfy minimum values as prescribed by the CNB.

Also, impairment calculated on Credit Impaired Assets has been adjusted as required by the new regulation, in order to include adjustments on both collectively and individually assessed transactions, in terms of point-in-time, forward looking adjustments and multiple scenarios applicable to this class of assets.

In defining the perimeter of impaired assets, the Definition of Default currently applied within UniCredit Group has been adopted, already incorporating some of the key principles embedded in the Definition of Default guidelines issued by EBA, such as the assessment of impairment or default in vast majority of entities within the same group, by considering the overall exposure to a given debtor (so called “debtor approach”).






Forborne and modified loans

The Group sometimes makes concessions or modifications to the original terms of loans as a response to the borrower’s financial difficulties (referred to as ‘forbearance activities’) to maximise collection opportunities and minimise the risk of default rather than taking possession or to otherwise enforce collection of collateral.

The Group considers a loan forborne when concessions or modifications are provided as a result of the borrower’s financial difficulties and the Bank would not have agreed to them if the borrower had been financially healthy.

Forbearance activities may involve concessions such as refinancing, moratorium, extending the maturity, changing the timing of interest payments, interest rate reduction, etc.

If any of these concessions lead to a loss in relation to a loan, it is disclosed and managed as non-performing and therefore classified as Stage 3 for ECL calculations.

Overview of forborne loans (modified and refinanced):

HRK MILLION STAGE I STAGE II STAGE III TOTAL TOTAL TOTAL % FB IN TOTAL FB FB FB FB FB FB OUTSTANDING MODIFIED REFINANCED TOTAL FB OUTSTANDING LLP OUTSTANDING LLP OUTSTANDING LLP OUTSTANDING LLP

Households 37,934 351 438 2.1% (232) 290 (2) 206 (14) 293 (216)Non – financial companies 32,447 1,207 2,246 10.6% (1,218) 198 (23) 271 (31) 2,984 (1,164)Balance as at 31 December 2018 70,381 1,558 2,684 - (1,450) 488 (25) 477 (45) 3,277 (1,380)

HRK MILLION STAGE I STAGE II STAGE III TOTAL TOTAL TOTAL % FB IN TOTAL FB FB FB FB FB FB OUTSTANDING MODIFIED REFINANCED TOTAL FB OUTSTANDING LLP OUTSTANDING LLP OUTSTANDING LLP OUTSTANDING LLP

Households 29,990 348 435 2.6% (230) 289 (2) 203 (15) 291 (213)Non – financial companies 23,652 853 2,113 12.5% (1,083) 198 (23) 67 (18) 2,701 (1,042)Balance as at 31 December 2018 53,642 1,201 2,548 - (1,313) 487 (25) 270 (33) 2,992 (1,255)

Group overview of forborne loans (modified and refinanced) as at 31 December 2018:

Bank overview of forborne loans (modified and refinanced) as at 31 December 2018:




Forborne and modified loans (continued)

HRK MILLION PERFORMING NON PERFORMING TOTAL TOTAL TOTAL % FB IN TOTAL FB FB LLP FB FB LLP OUTSTANDING MODIFIED REFINANCED TOTAL FB OUTSTANDING OUTSTANDING OUTSTANDING LLP

Households 35,900 510 763 3.5% (156) 919 (28) 354 (128)Non – financial companies 32,141 2,659 2,297 15.4% (2,023) 1,758 (316) 3,199 (1,707)Balance as at 31 December 2017 68,041 3,169 3,060 (2,179) 2,677 (344) 3,553 (1,835)

HRK MILLION PERFORMING NON PERFORMING TOTAL TOTAL TOTAL % FB IN TOTAL FB FB LLP FB FB LLP OUTSTANDING MODIFIED REFINANCED TOTAL FB OUTSTANDING OUTSTANDING OUTSTANDING LLP

Households 27,241 500 758 4.6% (153) 909 (28) 349 (125)Non – financial companies 24,110 2,458 2,207 19.3% (1,926) 1,746 (315) 2,919 (1,611)Balance as at 31 December 2017 51,351 2,958 2,965 - (2,079) 2,655 (343) 3,268 (1,736)

Group overview of forborne loans (modified and refinanced) as at 31 December 2017:

Bank overview of forborne loans (modified and refinanced) as at 31 December 2017:






Collateral and other credit enhancements

The Group has implemented a credit risk mitigation system that aims to ensure optimal collateral management and to reduce credit loss in case of client’s default.

The Group has internal policies on the acceptability of specific classes of collateral or credit risk mitigation. The framework of the credit risk mitigation system is defined by internal acts and technological support that allows record of acceptable credit protection instruments and appropriate control of parameters affecting their evaluation. Such internal regulations define collateral eligibility, valuation and monitoring rules and ensure the soundness, legal enforceability and timely liquidation of valuable collateral.

The collateral comes in various forms, such as real estates, movables, cash deposits, securities, insurance policies, unfunded credit protection such as guarantees and other collaterals accepted and in line with EU and local regulation.

Collateral is accepted only to support loans and cannot serve as a substitute for the borrower’s ability to meet its obligations.

When applying a credit risk mitigation technique, the Group emphasises the importance of the processes and controls of the legal requirements of the protection, as well as the assessment of suitability of collateral. The Group prepares a valuation of the collateral obtained as part of the loan origination process. The assessment is reviewed regularly.

The tables on the following pages present the maximum exposure to credit risk by class of financial asset, the total fair value of collateral, any surplus collateral (the extent to which the fair value of collateral held is greater than the exposure to which it relates), and the maximum exposure after deduction of fair value of collaterals.


38 Risk review and management (continued) 38.1 Credit risk (continued)

Collateral and other credit enhancements (continued)

GROUP 2018 HRK MILLION FAIR VALUE OF COLLATERAL13 AND CREDIT ENHANCEMENTS HELD MAXIMUM GUARANTEES CREDIT REAL FINANCIAL OTHER OFFSETTING SURPLUS MAXIMUM EXPOSURE INSURANCE ESTATES INSTRUMENTS COLLATERALS AGREEMENTS COLLATERALS EXPOSURE TO CREDIT POLICIES (IN EXCESS OF AFTER RISK GROSS DEDUCTION OF (GROSS EXPOSURE) FAIR VALUE OF BEFORE COLLATERALS14

PROVISION)

Current accounts with CNB and other banks 21,535 - - - - - - - 21,535Obligatory reserve with the CNB 6,039 - - - - - - - 6,039 Due from banks 9,427 4 - - 3,180 2 - 24 6,241Financial assets at fair value through profit or loss - Debt securities held for trading 33 - - - - - - - 33 - Derivative financial instruments 1,127 - - - - - 846 15 281

Loans and advances from customers 88,308 11,188 364 28,439 2,482 4,841 - 27,923 40,994Financial assets at fair value through other comprehensive income 12,091 - - - - - - - 12,091Other assets 205 - - - - - - - 205Total credit risk exposure relating to on-balance-sheet assets 138,765 11,192 364 28,439 5,662 4,843 846 27,962 87,419Guarantees and Letters of credit 5,936 785 - 953 205 97 - 846 3,896Undrawn lending commitments, credit card limits and other items 15,795 613 - 643 28 39 - 552 14,472Total credit risk exposure relating to off-balance-sheet items 21,731 1,398 - 1,596 233 136 - 1,398 18,368Total credit risk exposure 160,496 12,590 364 30,035 5,895 4,979 846 29,360 105,787

13 Fair value of collaterals includes market value of collateral without haircuts and after deduction of prior creditors’ pledges.14 Surplus of collaterals not included. Surplus = in excess of Gross exposure.






BANK 2018 HRK MILLION FAIR VALUE OF COLLATERAL15 AND CREDIT ENHANCEMENTS HELD MAXIMUM GUARANTEES CREDIT REAL FINANCIAL OTHER OFFSETTING SURPLUS MAXIMUM EXPOSURE INSURANCE ESTATES INSTRUMENTS COLLATERALS AGREEMENTS COLLATERALS EXPOSURE TO CREDIT POLICIES (IN EXCESS OF AFTER RISK GROSS DEDUCTION OF (GROSS EXPOSURE) FAIR VALUE OF BEFORE COLLATERALS16

PROVISION)

Current accounts with CNB and other banks 19,399 - - - - - - - 19,399Obligatory reserve with the CNB 6,039 - - - - - - - 6,039Due from banks 4,856 4 - - 3,180 - - 24 1,672Financial assets at fair value through profit or loss

- Debt securities held for trading 33 - - - - - - - 33 - Derivative financial instruments 1,125 - - - - - 846 15 279

Loans and advances from customers 71,105 10,751 364 25,278 2,482 1,535 - 27,662 30,695Financial assets at fair value through other comprehensive income 10,226 - - - - - - - 10,226Other assets 13 - - - - - - - 13Total credit risk exposure relating to on-balance-sheet assets 112,796 10,755 364 25,278 5,662 1,535 846 27,701 68,356Guarantees and Letters of credit 4,747 760 - 913 205 41 - 828 2,828Undrawn lending commitments, credit card limits and other items 13,397 522 - 406 28 30 - 499 12,411Total credit risk exposure relating to off-balance-sheet items 18,144 1,282 - 1,319 233 71 - 1,327 15,239Total credit risk exposure 130,940 12,037 364 26,597 5,895 1,606 846 29,028 83,595





Collaterals held for stage 3 exposures:

GROUP 2018 STAGE 3 HRK MILLIONEXPOSURES FAIR VALUE OF COLLATERAL17 AND CREDIT ENHANCEMENTS HELD MAXIMUM GUARANTEES CREDIT REAL FINANCIAL OTHER OFFSETTING SURPLUS MAXIMUM EXPOSURE INSURANCE ESTATES INSTRUMENTS COLLATERALS AGREEMENTS COLLATERALS EXPOSURE TO CREDIT POLICIES (IN EXCESS OF AFTER RISK GROSS DEDUCTION OF (GROSS EXPOSURE) FAIR VALUE OF BEFORE COLLATERALS18

PROVISION)

Due from banks 2 - - - - - - - 2Loans and advances from customers 9,935 696 10 3,302 339 594 - 3,497 4,994Total credit risk exposure relating to on-balance-sheet assets 9,937 696 10 3,302 339 594 - 3,497 4,996Guarantees and Letters of credit 905 69 - 197 36 - - 203 603Undrawn lending commitments, credit card limits and other items 37 - - 16 - 2 - 41 19Total credit risk exposure relating to off-balance-sheet items 942 69 - 213 36 2 - 244 622Total credit risk exposure 10,879 765 10 3,515 375 596 - 3,741 5,618







Collaterals held for stage 3 exposures:

BANK 2018 STAGE 3 HRK MILLIONEXPOSURES FAIR VALUE OF COLLATERAL19 AND CREDIT ENHANCEMENTS HELD MAXIMUM GUARANTEES CREDIT REAL FINANCIAL OTHER OFFSETTING SURPLUS MAXIMUM EXPOSURE INSURANCE ESTATES INSTRUMENTS COLLATERALS AGREEMENTS COLLATERALS EXPOSURE TO CREDIT POLICIES (IN EXCESS OF AFTER RISK GROSS DEDUCTION OF (GROSS EXPOSURE) FAIR VALUE OF BEFORE COLLATERALS20

PROVISION)

Due from banks 2 - - - - - - - 2Loans and advances from customers 8,425 696 10 3,184 339 240 - 3,487 3,956Total credit risk exposure relating to on-balance-sheet assets 8,427 696 10 3,184 339 240 - 3,487 3,958Guarantees and Letters of credit 888 69 - 196 36 - - 203 587Undrawn lending commitments, credit card limits and other items 34 - - 16 - 2 - 41 16Total credit risk exposure relating to off-balance-sheet items 922 69 - 212 36 2 - 244 603Total credit risk exposure 9,349 765 10 3,396 375 242 - 3,731 4,561





GROUP 2017 HRK MILLION FAIR VALUE OF COLLATERAL21 AND CREDIT ENHANCEMENTS HELD MAXIMUM GUARANTEES CREDIT REAL FINANCIAL OTHER OFFSETTING SURPLUS MAXIMUM EXPOSURE INSURANCE ESTATES INSTRUMENTS COLLATERALS AGREEMENTS COLLATERALS EXPOSURE TO CREDIT POLICIES (IN EXCESS OF AFTER RISK GROSS DEDUCTION OF (GROSS EXPOSURE) FAIR VALUE OF BEFORE COLLATERALS22

PROVISION)

Current accounts with CNB and other banks 14,895 - - - - - - - 14,895 Obligatory reserve with the CNB 5,252 - - - - - - - 5,252Due from banks 9,169 - - - 2,272 2 - 11 6,895Financial assets at fair value through profit or loss - Debt securities held for trading 76 - - - - - - - 76 - Derivative financial instruments 958 - - - - - 575 40 383

Loans and advances from customers 85,455 10,197 601 25,423 2,178 4,782 - 24,360 42,274Financial assets at fair value through other comprehensive income 10,780 - - - - - - - 10,780Other assets 236 - - - - - - - 236Total credit risk exposure relating to on-balance-sheet assets 126,821 10,197 601 25,423 4,450 4,784 575 24,411 80,791Guarantees and Letters of credit 5,845 1,338 - 904 185 94 - 1,059 3,324Undrawn lending commitments, credit card limits and other items 14,402 149 - 634 18 49 - 536 13,552Total credit risk exposure relating to off-balance-sheet items 20,247 1,487 - 1,538 203 143 - 1,595 16,876Total credit risk exposure 147,068 11,684 601 26,961 4,653 4,927 575 26,006 97,667







BANK 2017 HRK MILLION FAIR VALUE OF COLLATERAL23 AND CREDIT ENHANCEMENTS HELD MAXIMUM GUARANTEES CREDIT REAL FINANCIAL OTHER OFFSETTING SURPLUS MAXIMUM EXPOSURE INSURANCE ESTATES INSTRUMENTS COLLATERALS AGREEMENTS COLLATERALS EXPOSURE TO CREDIT POLICIES (IN EXCESS OF AFTER RISK GROSS DEDUCTION OF (GROSS EXPOSURE) FAIR VALUE OF BEFORE COLLATERALS24

PROVISION)

Current accounts with CNB and other banks 11,912 - - - - - - - 11,912 Obligatory reserve with the CNB 5,525 - - - - - - - 5,525Due from banks 6,528 - - - 2,272 - - 11 4,256Financial assets at fair value through profit or loss

- Debt securities held for trading 76 - - - - - - - 76 - Derivative financial instruments 956 - - - - - 575 40 381

Loans and advances from customers 68,134 10,094 601 22,351 2,178 1,619 - 24,134 31,291Financial assets at fair value through other comprehensive income 8,163 - - - - - - - 8,163Other assets 51 - - - - - - - 51Total credit risk exposure relating to on-balance-sheet assets 101,345 10,094 601 22,351 4,450 1,619 575 24,185 61,655Guarantees and Letters of credit 5,159 1,325 - 840 185 51 - 1,032 2,758Undrawn lending commitments, credit card limits and other items 12,160 138 - 334 18 15 - 495 11,655Total credit risk exposure relating to off-balance-sheet items 17,319 1,463 - 1,174 203 66 - 1,527 14,413Total credit risk exposure 118,664 11,557 601 23,525 4,653 1,685 575 25,712 76,068




Credit exposure loan to value ratios of consumer lending and housing portfolios

The tables below summarise private individuals’ portfolios loan to value (LTV) ratios:

Private individuals

Notes:

− Overdrafts and credits cards are not included in Gross consumer loans.− LTV = LTVcurrent, i.e. the ratio between gross value of the loans and the market value of the real estates (market value after deduction of prior

charges placed by the Bank and other creditors and without haircuts applied).− LTV=0% - these are loans which do not require a pledge of collateral. For mortgage loans LTV=0% for loans bellow 15 TEUR.

GROUP 2018 HRK MILLIONLTV 0% 0,01-30% 30-60% 60-80% 80-100% >100% TOTAL

Gross housing loans 3,003 1,516 4,343 3,864 5,253 66 18,045Gross consumer loans 13,181 98 189 123 247 39 13,877Total 16,184 1,614 4,532 3,987 5,500 105 31,922

BANK 2018 HRK MILLIONLTV 0% 0,01-30% 30-60% 60-80% 80-100% >100% TOTAL


GROUP 2017 HRK MILLIONLTV 0% 0,01-30% 30-60% 60-80% 80-100% >100% TOTAL


BANK 2017 HRK MILLIONLTV 0% 0,01-30% 30-60% 60-80% 80-100% >100% TOTAL






Offsetting financial assets and financial liabilities

The disclosures in the tables below include financial assets and financial liabilities that are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position.

The similar agreements include the International Swaps and Derivatives Association (“ISDA”) master agreements, global master repurchase agreements, and deposit netting agreements. Similar financial instruments include derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and loans and deposits. The aforesaid master netting arrangements do not meet the criteria for offsetting in the statement of financial position. This is because they create a right of set-off of recognised amounts for the parties to the agreement that is enforceable only following an event of default, insolvency or bankruptcy of the Group or the counterparties, or following other predetermined events. Furthermore, the Group and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously.

The Group receives and gives collateral in the form of cash and marketable securities in respect of the following transactions:• derivatives;• sale and repurchase, and reverse sale and repurchase agreements.

Such collateral is subject to standard industry terms including, when appropriate, an ISDA Credit Support Annex. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral.

GROUP AND BANK HRK MILLION RELATED AMOUNTS NOT OFFSET IN THE STATEMENT OF FINANCIAL POSITION GROSS GROSS NET AMOUNTS FINANCIAL CASH NET AMOUNT AMOUNTS OF AMOUNTS OF OF FINANCIAL INSTRUMENTS COLLATERAL RECOGNISED RECOGNISED ASSETS (INCLUDING RECEIVED FINANCIAL FINANCIAL PRESENTED IN NON-CASH ASSETS LIABILITIES THE STATEMENT COLLATERAL) OFFSET IN THE OF FINANCIAL STATEMENT OF POSITION FINANCIAL POSITION 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017

Types of financial assets Derivatives – trading assets 1,124 953 - - 1,124 953 (112) (337) (734) (239) 278 377Repos 3,073 - - - 3,073 - (3,059) - - - 14 - 4,197 953 - - 4,197 953 (3,171) (337) (734) (239) 292 377

GROUP AND BANK HRK MILLION RELATED AMOUNTS NOT OFFSET IN THE STATEMENT OF FINANCIAL POSITION GROSS GROSS NET AMOUNTS FINANCIAL CASH NET AMOUNT AMOUNTS OF AMOUNTS OF OF FINANCIAL INSTRUMENTS COLLATERAL RECOGNISED RECOGNISED LIABILITIES (INCLUDING PLEDGED FINANCIAL FINANCIAL PRESENTED IN NON-CASH LIABILITIES ASSETS OFFSET THE STATEMENT COLLATERAL) IN THE OF FINANCIAL STATEMENT OF POSITION FINANCIAL POSITION 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017

Types of financial liabilities Derivatives – trading liabilities 961 809 - - 961 809 (112) (337) (6) (3) 843 469Repos 1,112 - - - 1,112 - (1,112) - - - - - 2,073 809 - - 2,073 809 (1,224) (337) (6) (3) 843 469




Concentration of credit risk by industry

The Group and the Bank monitor and manage concentrations of credit risk by business segments, industry sector (for corporate clients) and by geographic location (exposure to countries and regions of the Republic of Croatia).

Commercial lending is concentrated on corporate and retail clients (legal persons, and individuals). The loan portfolio is divided into business segments: large and medium corporate clients, unincorporated businesses and small corporate clients, individuals and private clients.

The loan portfolio, net of impairment allowance, presented by industry sector:


Public administration and defence, compulsory social security 9,505 9,032 9,035 8,492Transport and storage 8,598 8,674 7,725 8,201Manufacturing 4,995 5,756 3,530 4,322Wholesale and retail trade 5,748 5,783 3,237 3,513Accommodation and food service activities 3,144 2,734 2,803 2,437Financial and insurance activities 2,170 1,536 2,293 1,633Agriculture, forestry and fishing 2,022 2,107 1,772 1,831Real estate activities 2,012 2,195 1,446 1,077Electricity, gas, steam and air conditioning supply 1,487 1,042 1,226 873Professional, scientific and technical activities 1,063 957 810 675Construction 1,144 1,340 781 961Water supply 813 374 749 325Information and communication 674 793 519 583Education 323 369 309 354Human health services and social work activities 722 417 297 350Administrative and support service activities 412 267 173 142Arts, entertainment and recreation 94 111 81 101Mining and quarrying 167 135 8 11Activities of households as employers; undifferentiated goods – and services - producing activities of households for own use 8 166 8 166Other services 146 98 63 51Corporate 45,247 43,886 36,865 36,098Households 36,467 34,395 29,006 26,227Total loans and advances from customers 81,714 78,281 65,871 62,325

Concentration of credit risk by location

GROUP BANK 2018 2017 2018 2017

Republic of Croatia 81.5% 79.5% 93.6% 90.4%Federation of Bosnia and Herzegovina 13.2% 12.2% 0.1% 1.4%Italy 3.1% 2.4% 3.7% 2.8%Other countries 2.2% 5.9% 2.6% 5.4%Total exposure 100% 100% 100% 100%






Sensitivity/Impact of Multiple Scenarios

For the calculation of IFRS 9 ECL, three macroeconomic scenarios are considered: baseline, positive and contagious. Within the scenarios, credit risk parameters are stressed based on the changes in macroeconomic variables. Following variables are considered and taken into account: GDP, House price index, unemployment rate, short-term interest rate, monthly wage, inflation and FX rate. Overview of these scenarios for the Republic of Croatia, together with the assumed probabilities, is presented in the table below:

MACROECONOMIC VARIABLE SCENARIO PROBABILITY 2018 2019 2020 2021

Real GDP, yoy % change Baseline 65% 2.79 2.76 2.62 2.30 Positive 20% 2.79 2.86 2.62 2.30 Contagious 15% 2.79 0.46 0.32 1.15House Price Index, yoy % change Baseline 65% 2.43 2.96 1.50 0.00 Positive 20% 2.43 4.04 2.54 0.53 Contagious 15% 2.43 0.69 (0.77) (1.19)Unemployment rate, % Baseline 65% 9.60 8.70 8.00 7.50 Positive 20% 9.60 8.70 8.00 6.50 Contagious 15% 9.60 10.36 10.40 10.40Short term HRK rate Baseline 65% 0.50 0.55 0.75 0.90 Positive 20% 0.50 0.75 0.90 1.05 Contagious 15% 0.50 0.85 1.05 1.05Monthly Wage, nominal EUR Baseline 65% 1,142.06 1,186.94 1,235.13 1,286.44 Positive 20% 1,142.06 1,187.57 1,229.28 1,278.68 Contagious 15% 1,142.06 1,122.29 1,121.45 1,162.13Inflation (CPI) yoy Baseline 65% 1.90 1.40 1.50 2.50 Positive 20% 1.90 1.40 1.50 2.50 Contagious 15% 1.90 0.90 0.50 1.70EUR/HRK rate Baseline 65% 7.50 7.50 7.48 7.45 Positive 20% 7.50 7.50 7.48 7.45 Contagious 15% 7.50 7.65 7.63 7.53




Sensitivity/Impact of Multiple Scenarios (continued)

Considering these scenarios and their corresponding probabilities, ECL calculation based on baseline scenario is adjusted in order to consider multiple macroeconomic scenarios (positive and contagious in addition to baseline scenario). Impact of this adjustment on LLP is shown in the table below (positive figures imply increase in provisions as a result of multiscenario adjustment):

2018 HRK MILLION BANKS CORPORATE INDIVIDUALS AND STATE AND TOTAL ENTITIES UNINCORPORATED PUBLIC BUSINESSES SECTOR

Multiscenario adjustment 0.03 4.50 6.78 0.53 11.84

Classification of expsures for the purpose of reporting to CNB For the purpose of reporting to CNB, depending on overall performance status of counterparty (performing or non-performing) as well as the percentage of provision coverage for non-performing exposures, all exposures are classified into following categories:

− risk category A, consisting of risk sub-categories A-1 and A-2; − risk category B, consisting of risk sub-categories B-1, B-2 and B-3; and − risk category C.

Exposures that are not in default status are classified in risk category A, while allocation to subgroups depends on change in credit risk since initial recognition:

− if credit risk has not increased significantly since initial recognition, exposure is classified in A1 subgroup; − if credit risk has increased significantly since initial recognition, exposure is classified in A2 subgroup.

Impaired, defaulted exposures in non-performning status are classified in risk sub-category B-1 or worse. Depending on the expected credit loss allowance on the exposure, the exposures are classified in the following sub-categories:

− B-1, the loss does not exceed 30% of the exposure;− B-2, the loss exceeds 30% and does not exceed 70% of the exposure; and − B-3, the loss exceeds 70% and is lower than 100% of the exposure− C, the loss is 100% of the exposure and conditions for write-off have not been met

For placements classified in risk category A, the Group calculates the expected loss impairment allowance by using the internal model and compares it to the regulatory defined minimum (regulatory minimum defined as not lower than 0.80% of the total exposures rated A). As the amount of collective impairment calculated using the internal model is lower than 0.80% of the total exposures rated A, the Group recorded the collective impairment on performing exposures in the amount of 0.80% of total placements rated A. For placements categorised in risk categories B and C, the Group calculates specific impairment allowance, as prescribed in the internal Rulebook for classification and provisioning.





38.2 Liquidity risk

Liquidity risk is defined as the risk that the Group may find itself unable to fulfil its expected (or unexpected) payment obligations (by cash, or delivery), currently and in future, without jeopardizing its day-to-day operations or its financial condition. Bank is considered to be “sufficiently liquid” or has “sufficient liquidity” when it is in a position to effectively fulfil its payment obligations and when it is capable of generating positive cash flow over a certain period.

Management of liquidity risk The main goal of the Group’s liquidity management is to ensure a sufficient level of liquidity to honour its payment obligations not only on an on-going basis, but also under stressed conditions.

UniCredit Group is organized in Liquidity Reference Banks (LRB). LRB are defined as Legal Entities with a Treasury which is empowered to access to the wholesale/interbank market even on behalf of the LEs within their Country or reference perimeter. Legal entities operating in the same country share a unique payment system and bear the same country risk, being almost equally affected by the inflows/outflows of capital within the national borders. Some liquidity risk factors require an analysis at the country level in order to have a more complete picture of the bank’s liquidity situation. Under specific circumstances or when the country dimension is not relevant, the LRB could be identified with either the Parent company or another LRB, residing in a different country.

Zagrebačka banka d.d as Liquidity Reference Bank monitors and has oversight over the liquidity positions of the LEs it refers to and ensures that each Legal Entity falling within its perimeter has a sufficient level of liquidity to meet its individual and joint obligations as they come due. Zagrebacka banka Group has access to a diverse funding base. Funds are raised using a broad range of instruments including various types of retail and corporate deposits, borrowings, issued debt securities and equity. This enhances funding flexibility, limits dependence on limited source of funds and generally lowers the cost of funding. The Group strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Group continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Group strategy. Furthermore, the Group holds a portfolio of liquid assets as a part of its liquidity risk management strategy. The Group adjusts its business activities in compliance with liquidity risk according to legislation and internal policies for maintenance of liquidity reserves, for matching of assets and liabilities, set limits and preferred liquidity ratios. There are three main functions in the management of the liquidity as defined at the UniCredit Group level - the Finance function (Asset and Liability Management, Financial, Short term liquidity), the Market and Liquidity risk function and the Markets (Trading and Treasury) function. Going concern refers to the normal day-to-day activities performed by all involved functions in the liquidity management. Going-concern corresponds to the daily management of the liquidity which is usually determined by the absence of the activation of any of the phases of the Contingency Liquidity Policy. The main activities consist of the execution of usual market operations, within risk limits, in line with the predefined plans (e.g. the funding plan), and according to the decisions taken by the competent bodies and relevant operational functions. These activities are mainly based on the management of the short term position, the management of the structural position, the management of the execution of the funding plan, the regular monitoring and analysis of the liquidity stress test results, and the diligent application of the fund transfer price principles.

A set of standard risk reports serve as tools for the internal decision taking, the analysis of the situation, the evolution of the liquidity risk positions, and the compliance with limits.



38.2 Liquidity risk (continued)

Management of liquidity risk (continued) The short term liquidity management aims to maintain a sustainable balance between cash inflows and cash outflows representing the fundamental condition for the purpose of assuring the normal operational continuity of the Group’s banking operations. A particular focus is on the liquidity positions up to 12 months.

A regular stress test assessment is necessary in order to evaluate the liquidity position of Zagrebačka banka Group. Stress test is an additional tool for monitoring the risk associated to the short term positions. In case of a deteriorating position, liquidity stress tests are one of the main metrics to support management’s decisions before, and also during stress situations. In particular, liquidity stress test results are useful in order to assess the “right” sizing and composition of a liquidity buffer on a regular basis. As such, liquidity stress testing serves more as a tool of assessment of the liquidity risk in an on-going basis, rather than in a crisis situation itself.

The Group’s structural liquidity management aims at ensuring the financial stability of the financial position. The principal objective is to avoid excessive and unexpected pressures on the funding requirements in the short term position, and to optimize the funding sources and related costs. This may be achieved by maintenance of an adequate balance between the medium & long-term and stable assets and the respective stable sources of funding.

Risk measurement and reporting systems a) Short-term liquidity profile

The short-term position is measured by the operating maturity ladder, which is composed of a series of time buckets, and two main components which generate the cumulative gap. Cumulative primary gap consists of contractual interbank cash inflows and outflows covering interbank transactions, current accounts with other banks, cash, and treasury transactions settled with non-banking customers and adjustment for unexpected cash outflows. Counterbalancing capacity consists of central bank assets eligible for open market operations in accordance with Decision on monetary policy implementation.

Limits are applied on the cumulative liquidity gap (net flow, including the capacity to additionally increase debt).

Short-term limits are set both on a single currency level on total level, as well as for different short-term time buckets. Short-term liquidity profile is monitored on a daily basis.

b) Short term liquidity stress testing

Stress testing is a risk management technique used to evaluate the potential effects on an institution’s financial condition to a specific event, or movement in a set of financial variables.

The main outcome of the liquidity stress test is assessing the right size of the capacity to additionally increase debt in order for the Group, or any of its parts, to withstand a given scenario in an established timeframe. The selection of the scenario with a given timeframe represents an additional metric for the short-term liquidity position of the Group. Short-term liquidity stress testing profile is monitored on a weekly basis.

c) Structural liquidity profile

In order to implement more accurate and effective structural liquidity risk management practices, the Group has adopted internal (UniCredit Group’s) structural liquidity metrics to measure the mid/long term liquidity (Adjusted NSFR, Structural FX Gap, Maturity Match gap). For structural liquidity, gap limits and warning levels are defined for both single currencies (materially significant) and on total level, and for different time horizons, with the aim of limiting long-term assets that are not funded by long-term liabilities. Structural liquidity profile is monitored on a monthly basis.




38.2.1 Maturity analysis for financial liabilities

The table below provides an analysis of expected outflows (including future interest payments, at current rates where variable) per financial liabilities recorded as at 31 December 2018 and 31 December 2017.

GROUP HRK MILLION31 DECEMBER 2018 CARRYING GROSS UP TO 1 1 MONTH TO 3 MONTHS 1 YEAR TO 5 OVER 5 AMOUNT NOMINAL MONTH 3 MONTHS TO 1 YEAR YEARS YEARS OUTFLOW

LiabilitiesCurrent accounts and deposits from banks and borrowings 13,993 14,175 7,804 933 1,957 2,813 668 Current accounts and deposits from customers and borrowings 102,491 103,133 66,220 4,437 16,136 14,776 1,564 Debt securities issued 54 54 - - - 54 - Financial liabilities at fair value through profit or loss 965 965 3 1 10 647 304 Other liabilities 1,375 1,375 454 1 860 6 54 Total expected outflow 119,702 74,481 5,372 18,963 18,295 2,590

GROUP HRK MILLION31 DECEMBER 2017 CARRYING GROSS UP TO 1 1 MONTH TO 3 MONTHS 1 YEAR TO 5 OVER 5 AMOUNT NOMINAL MONTH 3 MONTHS TO 1 YEAR YEARS YEARS OUTFLOW

LiabilitiesCurrent accounts and deposits from banks and borrowings 6,192 6,316 1,443 887 1,784 1,791 411 Current accounts and deposits from customers and borrowings 98,162 99,126 56,665 4,768 18,413 17,050 2,230 Debt securities issued 54 54 - - - 54 - Financial liabilities at fair value through profit or loss 812 813 13 504 18 9 269 Other liabilities 2,604 2,615 473 5 2,070 9 58 Total expected outflow 108,924 58,594 6,164 22,285 18,913 2,968


38.2 Liquidity risk (continued)

Risk measurement and reporting systems (continued)

d) Regulatory liquidity risk metrics

Beside internal (UniCredit Group’s) liquidity risk metrics, regulatory liquidity risk metrics incorporated in liquidity risk management are: reserve requirements, minimum required amount of foreign currency claims, Liquidity coverage ratio (LCR), Net stable funding ratio (NSFR) and Additionally liquidity monitoring metrics (ALMM). Regulatory liquidly risk metrics are monitored according to the prescribed daily/ monthly dynamics.


38 Risk review and management (continued) 38.2 Liquidity risk (continued)

38.2.1 Maturity analysis for financial liabilities (continued)

The table below provides an analysis of expected outflows (including future interest payments, at current rates where variable) of financial liabilities recorded at 31 December 2018 and 31 December 2017.

BANK HRK MILLION31 DECEMBER 2018 CARRYING GROSS UP TO 1 1 MONTH TO 3 MONTHS 1 YEAR TO 5 OVER 5 AMOUNT NOMINAL MONTH 3 MONTHS TO 1 YEAR YEARS YEARS OUTFLOW

Liabilities Current accounts and deposits from banks and borrowings 8,558 8,647 7,737 - 63 538 309Current accounts and deposits from customers and borrowings 85,661 86,158 54,057 4,040 14,524 12,094 1,443Debt securities issued 54 54 - - - 54 -Financial liabilities at fair value through profit or loss 961 961 1 1 10 646 303Other liabilities 858 858 - - 858 - - Total expected outflow 96,678 61,795 4,041 15,455 13,332 2,055

BANK HRK MILLION31 DECEMBER 2017 CARRYING GROSS UP TO 1 1 MONTH TO 3 MONTHS 1 YEAR TO 5 OVER 5 AMOUNT NOMINAL MONTH 3 MONTHS TO 1 YEAR YEARS YEARS OUTFLOW

Liabilities Current accounts and deposits from banks and borrowings 2,731 3,008 1,520 17 347 1,006 118Current accounts and deposits from customers and borrowings 80,104 80,510 45,436 4,354 16,460 12,366 1,894Debt securities issued 54 54 - - - 54 -Financial liabilities at fair value through profit or loss 809 809 9 504 18 9 269Other liabilities 2,062 2,062 - - 2,062 - - Total expected outflow 86,443 46,965 4,875 18,887 13,435 2,281




38 Risk review and management (continued) 38.2 Liquidity risk (continued) 38.2.2 Structural liquidity The Group’s structural liquidity management aims at ensuring the financial stability of the Bank and the Group. The principal objective is to avoid excessive and unexpected pressures on the funding requirements in the short-term liquidity position and to optimize the funding sources and related costs. This may be achieved by the maintenance of an adequate balance between the medium and long-term stable assets, and the respective stable sources of funding.

The restrictions are expressed in the form of limits or triggers:

- the “limit” refers to the hard point which the metric should not exceed; in case of limit breach the launch of an escalation process is aimed at immediately steering the position back;

- the trigger level, refers to a point that, if breached, the activation of a process of review, analysis and recommendation starts. This process does not necessarily require an automatic steering of the position outside the trigger zone.

Structural liquidity and liquidity gap profiles are presented below.

Adjusted NSFR

Adjusted NSFR monitors the structural liquidity situation on the longer time buckets (over 3Y and over 5Y). The framework and mapping criteria of the NSFR are used. Assets and liabilities are mapped at their contractual maturities with following exceptions:

- short term-liabilities (multiplied by the related available stable funding weight) are netted by the portion of short term assets (multiplied by the related required stable funding weight), they are considered “stable” under the NSFR perspective and roll over 1 year according to the NSFR perspective;

- derivative assets and liabilities (liquidity relevant), covered by master netting agreement, are excluded from the calculation of the adjusted NSFR by bucket;

- for impaired instruments (provisions excluded), the net values are mapped on the undefined bucket.

ZAGREBAČKA BANKA DD OTHER MAJOR LE WITHIN GROUP*NSFR ADJUSTED 2018 2017 2018 2017 >3Y >5Y >3Y >5Y >3Y >5Y >3Y >5Y

Available Stable Funding 17,123 16,432 16,986 16,387 4,087 3,750 3,853 3,572Required Stable Funding 43,635 32,143 40,363 26,602 6,897 4,285 6,200 3,547Net STL* 55,644 55,644 50,531 50,531 9,640 9,640 9,162 9,162Available Stable Funding + Net STL 72,767 72,075 67,517 66,918 13,728 13,390 13,015 12,734Trigger (min) 106% 106% 106% 106% 106% 106% 106% 106%RATIO 167% 224% 167% 252% 199% 313% 210% 359%

* Apart from Zagrebačka banka dd, the major other legal entity within Zagrebačka banka Group for which adjusted NSFR is monitored is UniCredit Mostar.

Available stable funding and net of short-term liabilities are sufficient to cover required stable funding in respective buckets.


38 Risk review and management (continued) 38.2 Liquidity risk (continued) 38.2.2 Structural liquidity (continued)

Structural FX Gap

Structural FX Gap is calculated as the difference between the liabilities over 1 year in a material foreign currency (EUR, Other) and the assets over 1 year on the same currency, classified according to the criteria for calculation of the Adjusted NSFR, with following exceptions:

- all derivatives, liquidity relevant, have to be mapped at their remaining contractual maturity, - cash flows from currency clause agreement are mapped as cash flows in original currency.

HRK MILLION ZAGREBAČKA BANKA DD OTHER MAJOR LE WITHIN GROUP* EUR FX GAP >1Y 2018 2017 2018 2017

Liabilities by bucket >1Y 10,495 10,732 1,036 685Net STL* 30,411 29,482 3,851 3,996Assets by bucket >1Y 46,943 43,469 4,734 4,637Trigger (max) (10,385) (10,385) (2,314) (2,344)FX Gap (6,038) (3,255) 153 44

HRK MILLION ZAGREBAČKA BANKA DD OTHER MAJOR LE WITHIN GROUP* EUR FX GAP >1Y 2018 2017 2018 2017

Liabilities by bucket >1Y 9,600 30 4 23Net STL* 3,627 3,457 580 389Assets by bucket >1Y 9,943 391 9 15Trigger (max) (1,187) (1,202) (371) (376)FX Gap 3,283 3,097 575 396

* Apart from Zagrebačka banka dd, the major other legal entity within Zagrebačka banka Group for which Structural FX Gap for material currencies (EUR, Other) is monitored is UniCredit Mostar

Available stable funding in over one year buckets and net of short-term liabilities in material foreign currency (EUR, Other) are sufficient to cover required stable funding in over 1 year buckets.




38 Risk review and management (continued) 38.2 Liquidity risk (continued) 38.2.2 Structural liquidity (continued)

Maturity Match Gap (MMG)

Non-banking LEs, like leasing companies are funded under a matched approach per maturity. The MMG is relevant for non-banking legal entities qualified as significant in materiality assessment approach. In order to respect the maturity match principle the gaps in the same time buckets have to be minimized. This may be achieved by the maintenance of an adequate maturity balance between assets and the respective stable sources of funding. The maturity match gap is equal to the difference between liabilities and assets in respective bucket. In case this difference is negative, outflows could be covered from expected inflows in the same time bucket. In case difference is positive, it can be compensated by the cumulated gaps existing on the previous buckets if negative

HRK MILLIONUCLC 2018 <3M 3M-6M 6M-12M 1Y-2Y 2Y-3Y 3Y-4Y 4Y-5Y OVER 5Y

Liabilities 350 302 781 825 687 525 169 873Assets 795 321 830 881 613 405 240 426MM Gap (444) (19) (49) (57) 74 120 (71) 447MM Cumulative Gap (444) (19) (49) (57) (495) (375) (71) -Target (15) 45 (267) (52) 230 (111) (89) 260

HRK MILLIONUCLC 2017 <3M 3M-6M 6M-12M 1Y-2Y 2Y-3Y 3Y-4Y 4Y-5Y OVER 5Y

Liabilities 142 371 1,327 548 271 215 189 981Assets 457 409 467 1.170 509 367 274 391MM Gap (316) (38) 860 (622) (238) (151) (85) 590MM Cumulative Gap (316) (38) 506 (622) (238) (151) (85) -Target (15) 45 (270) (53) 233 (113) (90) 263



38.2 Liquidity risk (continued) 38.2.3 Regulatory metrics

Liquidity coverage ratio (LCR)

The Liquidity Coverage Ratio (LCR) is the ratio between high quality liquid assets (HQLA) and expected net cash outflows, implying that a ratio above 100% ensures that liquid assets are sufficient to cover net cash outflows estimated over the next 30 days.

High quality liquid assets (HQLA) include cash, withdrawable central bank reserves (available in time of stress) and securities (not pledged).

Net cash outflows represent the difference between cash outflows (balance and off-balance position) and inflows anticipated in upcoming 30 days. The amount of inflows that can offset outflows is capped at 75% of total expected outflows.

HRK MILLION ZAGREBAČKA BANKA DD OTHER MAJOR LE WITHIN GROUP* 2018 2017 2018 2017 AMOUNT WEIGHTED AMOUNT WEIGHTED AMOUNT WEIGHTED AMOUNT WEIGHTED AMOUNT AMOUNT AMOUNT AMOUNT

TOTAL HQLA 30,070 29,971 23,500 23,357 4,631 4,631 3,347 3,347Cash and CB reserves 17,054 17,054 12,743 12,743 1,978 1,978 2,980 2,980Level 1 and Level 2 Assets 13,016 12,917 10,757 10,614 2,652 2,652 366 366TOTAL NET CASH OUTFLOWS 100,153 23,127 87,215 14,543 14,113 940 20,969 562LIQUIDITY COVERAGE RATIO (%) 130% 161% 493% 596% CASH INFLOWS 6,858 2,434 7,083 3,813 4,516 4,040 2,041 1,953Customer inflows (from fully performing exposures) 995 551 1,376 740 1,021 545 176 88Other inflows 5,864 1,882 5,707 3,073 3,495 3,495 1,866 1,86675% of outflows - 19,171 - 13,767 - 2,820 - 1,685CASH OUTFLOWS 107,011 25,561 94,298 18,356 18,629 3,759 23,010 2,247Retail and SME deposits 57,527 5,630 52,399 5,004 8,754 979 9,633 685Unsecured wholesale funding (other counterparties) 31,339 18,881 24,581 12,359 6,318 2,572 5,180 1,109Credit and liquidity facilities 18,144 1,050 17,319 993 3,558 209 8,197 453Trigger 110% 105% 104% 105%Limit 101% 101% 101% 101%

*Apart from Zagrebačka banka d.d., the major other legal entity within Zagrebačka banka Group for which LCR is monitored in UniCredit Mostar.





38.2 Liquidity risk (continued) 38.2.3 Regulatory metrics (continued)

Net stable funding ratio (NSFR)

The net stable funding ratio (NSFR) is the ratio between available and required amount of stable funding. It establishes a minimum acceptable amount of medium-long term funding in front of the Group’s assets and activities. It aims to limit over-reliance on short-term wholesale funding during times of buoyant market liquidity and encourage better assessment of liquidity risk across all balance sheet and off-balance sheet items.

HRK MILLION ZAGREBAČKA BANKA D.D. OTHER MAJOR LE WITHIN GROUP* 2018 2017 2018 2017

Available stable funding 80,346 77,761 16,241 15,116Required stable funding 59,694 57,654 11,420 10,352Trigger 106% 105% 106% 105%Limit 101% 101% 101% 101%Net stable funding ratio (%) 135% 135% 142% 146%

*Apart from Zagrebačka banka d.d., the major other legal entity within Zagrebačka banka Group for which NSFR is monitored is UniCredit Mostar



38.3 Market risk

Market risk is defined as the risk of changes in market prices that will affect the value of positions on Group’s own book, including both trading and banking book positions, resulting in an effect on the statement of profit and loss or on Group’s financial instruments. Basic market risk factors include:

• currency risk, • interest rate risk, • credit spread risk and • equity risk.

The aim of the Group’s market risk management is to manage and control market risk exposures within acceptable parameters to ensure Group’s solvency, while optimising the return on risk. For the purpose of market risk management and control, daily market risk exposure reports are created (on both single legal entity level as well as Group level) and limits for market risk exposure are defined.

Management of market risk

Market risks the Group is exposed to are managed by Markets and Finance (ALM) units. Markets unit manages foreign exchange position and position in treasury products (including position in treasury products coming from transactions with clients), with the aim to ensure maximum returns on an acceptable risk base, in line with the defined risk appetite. Finance (ALM) unit manages the interest rate risk of the Bank coming from both own, as well as clients’ positions (loans and deposits), transferred to Finance through internal prices.

For the purpose of managing market risk, main limits are defined within Group’s Risk Appetite Framework approved by the Management and Supervisory Board, while more precise limits are approved by the Asset Liabilities Committee (“ALCO”) and aligned with the UniCredit Group. Market and Liquidity Risk unit is responsible for daily monitoring and reporting of market risk exposure as well as for verifying compliance with the defined limits. In case of a limit breach, escalation process is initiated.

Exposure to market risk – trading and non-trading portfolios

The Group separates its exposures to market risks between trading and non-trading portfolios. Trading portfolios are mainly held by Markets unit and include positions held with trading intent, or held in order to economically hedge positions held with trading intent. Most of the Group’s exposure to market risks is concentrated in non-trading portfolios.

Market risk measurement techniques

In order to monitor exposure to market risks, risk positions are aggregated on a daily basis by the independent risk management unit and compared with the defined risk limits. At Group level, market risk management includes ongoing reporting on the risk positions, limit utilisation and the daily presentation of results of all positions associated with market risk.

Market risk metrics used for measuring and internal reporting of Group’s market risks are aligned with UniCredit Group and encompass Value at Risk (supplemented with stressed Value at Risk and Incremental Risk Charge – IRC), sensitivity metrics (Basis Points Value – BPV, Credit Spread Basis Point Value – CPV, FX net open position, equity positions and other Greeks), loss-warning level (applied to accumulated result for specific time horizon), stress test results, Overall exposure to government and Maximum ratio of market risk Risk Weighted Assets over total RWA (hereinafter: “Max RWA of MR (%)”).





38.3 Market risk (continued)

a) Value at Risk

The Group applies a Value-at-Risk methodology (VaR) to its trading and non-trading portfolios to estimate the market risk of the positions held and the maximum loss expected. Limits are monitored on a daily basis by Market and Liquidity Risk.

VaR is a statistical and model-based estimate of the potential loss on the existing portfolio from adverse market movements. It expresses the expected maximum amount that the Group might lose, to a predefined level of confidence, and for a certain holding period until positions could be closed.

The Group uses a risk model, developed internally by UniCredit S.p.A, based on historical simulations.

Used model covers:

• general market risk for foreign currency positions; • general and specific market risk for debt instruments; • general and specific market risk for equities; • interest rate risk of banking book positions and • option risk.

VaR is calculated for a one-day holding period with a confidence level of 99%. The model uses historical simulation based on the most recent 500 observations of daily returns. The use of historical simulation allows the implicit incorporation of historically observed correlations between the individual risk categories into the model. The quality of the VaR model is continuously monitored by backtesting.

The VaR limit ensures uniform and comparable risk/income-oriented risk measurement tool. VaR limits are observed separately for Trading Book and Banking Book (i.e. trading and non-trading portfolio), as well as on the overall level. They are supplemented by position limits across risk categories (Basis Point Value, FX volume, issuer limit, etc.).

VaR development

Average Overall VaR for the Group in 2018 decreased by around 21% compared to 2017. This change is mostly driven by decreased exposure to interest rate risk. Overall VaR decreased in the Q4 of 2018 as a result of the update of historical sample used for VaR calculation, which takes into account last 500 observations.

Group VaR by risk type HRK MILLION 2018 2017 MINIMUM AVERAGE MAXIMUM YEAR-END MINIMUM AVERAGE MAXIMUM YEAR-END

Interest rate risk 9 13 29 12 13 23 31 13Credit spread risk 21 25 31 21 13 20 25 24Exchange rate risk - 1 11 1 - 1 3 -Equity risk 1 1 1 1 1 2 2 2Total VaR 20 27 31 20 25 34 44 30




a) Value at Risk (continued)

Backtesting results in 2018

Backtesting is performed by calculating the synthetic change of the portfolio value. All negative synthetic changes in market value (synthetic losses) which exceed the corresponding VaR-level are treated as backtesting violations.

During the observed period of one year (250 observations) two backtesting violations were recorded on the Group level.

Peak in Trading book stressed VaR at the beginning of January is driven by temporary increase in EUR net open position.

Zaba Group TB VaR

Zaba Group TB sVaR

Zaba Group total VaR

Backtesting result

mln HRK

60.050.040.030.020.010.0

0.0-10.0-20.0-30.0-40.0

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct-

18

Nov-

18

Dec-

18

0,0-1.0-2.0-3.0-4.0-5.0-6.0-7.0-8.0-9.0

-10.0

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct-

18

Nov-

18

Dec-

18

mln HRK






a) Value at Risk (continued)

Bank VaR by risk type

HRK MILLION 2018 2017 MINIMUM AVERAGE MAXIMUM YEAR-END MINIMUM AVERAGE MAXIMUM YEAR-END

Interest rate risk 8 12 27 11 9 19 26 10Credit spread risk 18 23 27 18 11 17 22 22Exchange rate risk - 1 12 - - 1 2 1Equity risk 1 1 1 1 1 2 2 1Total VaR 18 25 33 19 21 29 36 27

Backtesting results in 2018

During the observed period of one year (250 observations) three backtesting violations were recorded.

Movements in Trading book VaR and stressed VaR on Bank level are caused by the same drivers as on Group level.

100.090.080.060.040.020.0

0.0-20.0-40.0

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct-

18

Nov-

18

Dec-

18

0,0-1.0-2.0-3.0-4.0-5.0-6.0-7.0-8.0-9.0

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct-

18

Nov-

18

Dec-

18

Zaba Trading book VaR

Zaba Trading book stressed VaR

Zaba total VaR

Backtesting result

mln HRK

mln HRK




b) Stress tests

Stress-testing is used to evaluate the effect of market risks on the Group’s portfolio, total positions and limits in extraordinary circumstances (market shocks). Both stress test to individual risk factors and macro stress scenarios are observed, where macro scenarios show the potential adverse impacts of global developments with specific effects on the respective risk categories, while stress sensitivities of individual risk factors or groups of risk factors show the potential adverse impacts on partial market segments.

In the market-risk-related stress-testing process, the Group currently covers the following risk categories:

• foreign exchange risk for single currencies and currency groups - stress test includes 5%, 10% and 20% shocks (appreciation and depreciation) for single major currencies against HRK in terms of foreign exchange net open position;

• interest rate risk per currency for both, the Group’s total positions and portfolio positions - the scenarios used include parallel shifts of interest rates (scenarios assume different shocks on interest rates, spanning from 100 to 500 basis points), turns as well as scenarios of rises and decreases in the short term and long term interest rates.

In addition, the standard stress test report includes three macroeconomic stress scenarios defined on the UniCredit Group level.

Stress testing is performed on a monthly basis and the results form a part of regular Asset and Liability Committee (“ALCO”) reports. The results are discussed in ALCO meetings, or at least among the board members responsible for trading and risk management.

38.3.1 Currency risk

The Group is exposed to currency risk through transactions in foreign currencies and through its investment in foreign operations.

Foreign currency exposure arises from credit, deposit-taking, investment and trading activities. It is monitored daily in accordance with regulations and internally set limits, for each currency and for the total statement of financial position denominated in, or linked to foreign currency.

Currency risk is monitored in terms of net open position in each currency and managed by Markets unit.

The Group’s main foreign operations are performed in the Federation of Bosnia and Herzegovina. The functional currency of these operations is BAM, currently pegged to EUR. As the presentational currency of the consolidated financial statements is HRK, the Group financial statements are affected by movements in the exchange rates between HRK and BAM.

The Group manages its currency risk by setting limits for foreign currency exposures and monitoring against these limits. The Group directs its business activities simultaneously trying to optimise the gap between assets and liabilities denominated in or linked to foreign currency and maintaining daily business activities with information on daily potential loss limits measured by Value-at-Risk techniques.






38.3.1 Currency risk (continued)

a) FX net open position analysis

EUR open position overview (including both balance-sheet and off-balance-sheet exposures)

GROUP HRK MILLION 2018 2017 MINIMUM AVERAGE MAXIMUM YEAR-END MINIMUM AVERAGE MAXIMUM YEAR-END

Long 2 685 1,418 - 13 50 112 -Short 7 457 1,555 693 10 470 1,059 70

BANK HRK MILLION 2018 2017 MINIMUM AVERAGE MAXIMUM YEAR-END MINIMUM AVERAGE MAXIMUM YEAR-END

Long 8 901 1,886 1,082 2 193 548 407Short 7 280 929 - 5 112 405 -

FX net open position overview at year end (including both balance-sheet and off-balance-sheet exposures)

In the table below, long positions are presented as positive numbers and short positions are presented as negative numbers.


BAM (617) 55 (529) - CHF - - - - EUR 702 (70) 1,096 407 GBP - 1 - 1 HRK - - - - USD 2 15 2 15 Other (88) (1) (570) (422)

Stress test results for different foreign exchange rates’ change scenarios

POTENTIAL PROFIT/LOSS (HRK MILLION) - BANK31 DECEMBER 2018 5% 10% 20%CURRENCY APPRECIATION DEPRECIATION APPRECIATION DEPRECIATION APPRECIATION DEPRECIATION

EUR (54) 54 (108) 108 (216) 216USD - - - - - -





b) Currency risk analysis The Group and the Bank had the following foreign exchange positions as at 31 December 2018 and 31 December 2017. The Group has a number of contracts which are in domestic currency but are linked to foreign currencies. The domestic currency value of the principal and interest are therefore determined by reference to foreign currencies. These balances, which have foreign exchange risk are included as foreign currency in the tables below. The most significant currency to which such contracts are linked to is EUR.

GROUP 2018 HRK MILLION EUR, USD, CHF, OTHER FOREIGN HRK TOTAL AND EUR AND USD AND CHF CURRENCIES AND LINKED LINKED LINKED OTHER FOREIGN CURRENCIES LINKED

Assets Cash and cash equivalents 2,739 545 473 2,065 18,829 24,651Obligatory reserve with the Croatian National Bank - - - - 5,684 5,684Due from banks 5,663 637 40 2,794 284 9,418Financial assets at fair value through profit or loss 197 98 - 2 1,171 1,468Loans and advances from customers 48,856 623 123 7,511 24,601 81,714Financial assets at fair value through other comprehensive income 6,366 431 - 565 4,735 12,097Investments in associates - - - 2 91 93Investment property - - - 3 199 202Property and equipment 265 - - 249 1,690 2,204Intangible assets - - - 73 263 336Deferred tax assets - - - - 316 316Tax prepayment - - - - 89 89Non-current assets and disposal groups held for sale - - - - 2 2Other assets 3 - - 99 155 257Total assets 64,089 2,334 636 13,363 58,109 138,531Liabilities and equity Current accounts and deposits from banks and customers 56,506 3,401 1,085 10,999 37,122 109,113Financial liabilities at fair value through profit or loss 142 31 - 2 790 965Borrowings 6,478 8 3 - 882 7,371Issued debt securities 54 - - - - 54Provisions for liabilities and charges 130 1 - 147 607 885Other liabilities 237 8 3 359 768 1,375Current tax liability - - - 4 9 13Deferred tax liability - - - 5 - 5Equity - - - 1,874 16,876 18,750Total liabilities and equity 63,547 3,449 1,091 13,390 57,054 138,531Net foreign exchange position 542 (1,115) (455) (27) 1,055 -







b) Currency risk analysis (continued)

GROUP 2017 HRK MILLION EUR, USD, CHF, OTHER FOREIGN HRK TOTAL AND EUR AND USD AND CHF CURRENCIES AND LINKED LINKED LINKED OTHER FOREIGN CURRENCIES LINKED

Assets Cash and cash equivalents 1,681 673 532 3,028 11,922 17,836Obligatory reserve with the Croatian National Bank - - - - 5,525 5,525Loans and receivables from banks 3,985 2,285 1 2,633 246 9,150Financial assets at fair value through profit or loss 298 35 - 2 844 1,179Loans and receivables from customers 47,043 181 154 6,389 24,514 78,281 Available-for-sale financial assets 5,373 271 - 787 4,564 10,995Investments in associates - - - 2 92 94Investment property - - - 44 218 262Property and equipment - - - 202 1,759 1,961Intangible assets - - - 62 249 311Deferred tax assets - - - - 286 286Tax prepayment - - - - 267 267Non-current assets and disposal groups held for sale - - - - 452 452Other assets 173 1 - 29 91 294Total assets 58,553 3,446 687 13,178 51,029 126,893Liabilities and equity Current accounts and deposits from banks and customers 52,659 3,382 1,055 10,014 30,808 97,918Financial liabilities at fair value through profit or loss 176 20 - 4 612 812Borrowings 5,424 7 3 - 1,002 6,436Issued debt securities 54 - - - - 54Provisions for liabilities and charges 149 1 - 134 586 870Non-current liabilities and disposal groups held for sale 65 - - - 3 68Other liabilities 213 25 2 339 2,025 2,604Income tax payable - - - 5 - 5Deferred tax liabilities - - - 5 10 15Equity - - - 1,794 16,317 18,111Total liabilities and equity 58,740 3,435 1,060 12,295 51,363 126,893Net foreign exchange position (187) 11 (373) 883 (334) -






BANK 2018 HRK MILLION

EUR, USD, CHF, OTHER FOREIGN HRK TOTAL AND EUR AND USD AND CHF CURRENCIES AND LINKED LINKED LINKED OTHER FOREIGN CURRENCIES

LINKED

Assets Cash and cash equivalents 2,073 494 357 142 18,794 21,860Obligatory reserve with the Croatian National Bank - - - - 5,684 5,684Due from banks 3,148 551 - 901 253 4,853Financial assets at fair value through profit or loss 197 98 - - 1,147 1,442Loans and advances from customers 41,018 623 123 - 24,106 65,870Financial assets at fair value through other comprehensive income 5,389 107 - - 4,735 10,231Investments in subsidiaries and associates - - - - 1,537 1,537Investment property 91 91Property and equipment - - - - 1,056 1,056Intangible assets - - - - 206 206Deferred tax assets - - - - 276 276Tax prepayment - - - - 88 88Non-current assets and disposal groups held for sale - - - - 2 2Other assets - - - 6 41 47Total assets 51,825 1,873 480 1,049 58,016 113,243Liabilities and equity Current accounts and deposits from banks and customers 48,401 2,940 931 1,048 37,307 90,627Financial liabilities at fair value through profit or loss 143 31 - - 787 961Borrowings 3,023 8 3 - 558 3,592Issued debt securities 54 - - - - 54Provisions for liabilities and charges 117 - - 19 591 727Other liabilities 141 6 3 8 700 858Equity - - - - 16,424 16,424Total liabilities and equity 51,879 2,985 937 1,075 56,367 113,243Net foreign exchange position (54) (1,112) (457) (26) 1,649 -




BANK 2017 HRK MILLION

EUR, USD, CHF, OTHER FOREIGN HRK TOTAL AND EUR AND USD AND CHF CURRENCIES AND LINKED LINKED LINKED OTHER FOREIGN CURRENCIES

LINKED

Assets Cash and cash equivalents 1,221 629 389 179 11,873 14,291Obligatory reserve with the Croatian National Bank - - - - 5,525 5,525Loans and receivables from banks 3,380 1,992 1 855 281 6,509Financial assets at fair value through profit or loss 298 35 - - 823 1,156Loans and receivables from customers 38,584 181 154 - 23,406 62,325Available-for-sale financial assets 3,799 149 - - 4,429 8,377Investments in subsidiaries and associates - - - - 1,637 1,637Investment property - - - - 108 108Property and equipment - - - - 1,098 1,098Intangible assets - - - - 193 193Deferred tax assets - - - - 248 248Tax prepayment - - - - 244 244Non-current assets and disposal groups held for sale - - - - 380 380Other assets 32 1 - 8 52 93Total assets 47,314 2,987 544 1,042 50,297 102,184Liabilities and equity Current accounts and deposits from banks and customers 44,102 2,926 913 1,164 30,726 79,831Financial liabilities at fair value through profit or loss 176 20 - - 613 809Borrowings 2,269 7 3 - 725 3,004Issued debt securities 54 - - - - 54Provisions for liabilities and charges 142 1 - 10 573 726Other liabilities 126 18 2 9 1,907 2,062Equity - - - - 15,698 15,698Total liabilities and equity 46,869 2,972 918 1,183 50,242 102,184Net foreign exchange position 445 15 (374) (141) 55 -








38.3.2 Interest rate risk

Interest rate risk arises from the Group’s exposure to adverse changes in interest rates. Interest rate changes affect net present values of future cash flows and consequently net interest income and other cash flows which are sensitive to interest change.

Primary sources of risk of interest rate changes are:

• repricing risk - resulting from unfavourable changes in the fair value of assets and liabilities in the remaining period until the next interest rate change (fixed interest rate positions are classified according to their remaining maturity);

• yield curve risk - the risk of changes in the shape and slope of yield curve;

• basis risk - risk of different change in interest rates of corresponding asset and liabilities positions which have the same currency, repricing period and frequency of change, but different base rates (e.g. 3M EURIBOR and 3M LIBOR); and

• option risk - arises from option derivative positions or from the optional elements embedded in bank assets, liabilities and off-balance sheet items.

The risk is measured by calculating the change in the net present value of a portfolio in a scenario where the interest rate changes by 1 basis point, as a sensitivity measure with the basis point value (BPV) limit applied.The tables below present sensitivity to interest rate changes (BPV) for the Group and the Bank (including both trading and non-trading portfolios). In the following tables related to individual currency exposures and the combination of the basket of currencies, increases in the net present value of all future cash flows are presented as a positive number and decreases as a negative number.

The sensitivity analysis for every position is based on contractual dates of future interest rate changes. For positions without contractual dates for interest rate changes, or without contractual maturity, the Group uses assumptions which are considered as appropriate, i.e. which reflect actual interest rate sensitivity of the position.

a) Group Basis point values sensitivities (BPV) overview

HRK THOUSAND MINIMUM AVERAGE MAXIMUM YEAR END

2018 2,153 3,495 4,956 4,4952017 2,574 4,758 5,925 2,639

b) Group Basis point values sensitivities (BPV) per currency

31 DECEMBER 2018HRK THOUSAND UP TO 3 3 MONTHS 1 YEAR TO 3 YEARS TO OVER 10 TOTAL MONTHS TO 1 YEAR 3 YEARS 10 YEARS YEARS

CHF (2) 12 3 (6) (1) 7EUR 87 (472) (794) (644) (541) (2,363)HRK 66 242 (763) (620) (263) (1,338)USD - (18) 24 (69) - (63)Other 10 66 95 572 - 724Total 165 809 1,680 1,911 805 4,495






38.3.2 Interest rate risk (continued)

b) Group Basis point values (BPV) per currency (continued)


CHF (1) 12 8 (9) (1) 9EUR (40) (441) (1,233) 2,038 (561) (238)HRK 31 57 (596) (1,217) (241) (1,966)USD (6) 49 14 (51) - 6Other 10 54 49 325 2 420Total 88 613 1,900 3,639 805 2,639

c) Bank Basis point values (BPV) overview

HRK THOUSAND MINIMUM AVERAGE MAXIMUM YEAR END

2018 2,118 3,439 4,869 4,3242017 2,738 4,214 5,370 3,495

d) Bank Basis point values (BPV) per currency


CHF (2) 12 3 (6) (1) 6EUR 84 (296) (1,049) (1,117) (580) (2,958)HRK 66 249 (736) (612) (263) (1,295)USD (1) (2) 31 (47) - (18)Other 5 21 20 9 - 48Total 159 579 1,840 1,791 844 4,324


CHF (1) 11 7 (9) (1) 7EUR (15) (344) (1,259) 1,416 (768) (970)HRK 30 67 (536) (1,130) (124) (1,693)USD (5) 47 27 (51) - 18Other 4 24 25 6 - 59Total 56 493 1,854 2,613 893 2,738




38.3.3 Credit spread risk

Credit spread risk is measured for debt securities and represents the risk of changes in bond prices resulting from changes in credit risk of the issuer (i.e. markup for credit risk charged by the market).

The risk is quantified and limited by credit spread basis point value (CPV) limits, which are by nature similar to BPV, and measures the impact of a credit spread change by 1 basis point on the change in the value of the bond portfolio. BPV limits the total interest rate sensitivity of the Group, while CPV additionally limits bond investments by volume and duration.

38.3.4 Equity risk

Equity risk is the possibility that prices will fluctuate, affecting the fair value of investments and other instruments that derive their value from a particular investment.

The primary exposure to equity risk arises from the Group’s holding of equity investments at fair value through profit or loss and available-for-sale.

38.3.5 Overall exposure to government

Overall exposure to government represents the amount of total sovereign exposure within trading and banking book and is monitored in relation to set trigger and target levels in order to identify the optimum risk level for the Bank.

38.3.6 Maximum Market Risk RWA

Max RWA of MR (%) represents proportion of Market Risk RWA in total RWA.

Risk is monitored in relation to target, trigger and limit levels. Target is set up in line with projected Market Risk RWA, while trigger and limit are monitored in order to identify maximum deviation from the target.

38.4 Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors. Operational Risk includes legal risk, but excludes strategic and reputational risk.

Losses arising from the following can be considered as operational: internal or external fraud, employment practices and workplace safety, clients’ claims, product distribution, fines and penalties due to regulation breaches, damage to physical assets, business disruption and system failures, process management.

The Bank is managing the operational risk by controlling, mitigating and transferring the risk to third parties or avoiding it. The Group aligns its standards of operational risk management with UniCredit Group Guidelines and local regulatory requirements. This includes collection of loss data, monitoring of operational risk indicators, performing scenario analyses, performing operational risk assessment when introducing new products, business changes or projects.

Process of identification, evaluation and control system of operational risk adequacy reflects risk profile and allows a timely detection and communication to the top management.

The compliance of the Operational risk control and measurement system with external regulation and Group standards is assessed through internal validation process under responsibility of UniCredit Group Internal Validation department, independent from Operational Risk Management Function.





38.4 Operational risk (continued)

Operational risk management system is characterised by clear segregation of roles and responsibilities, ensuring adequate implementation of operational risk management system within the Group.

The Management Board is responsible for the effective supervision of Operational Risk, approval of all the material aspects of the Operational Risk Framework and verifying whether the Operational Risk measurement and control system is closely integrated in the day-to-day risk management process.

Management of the Group ensures that the Operational Risk control process is sound and fully communicated and implemented through specific policies, processes and procedures within the business units taking into account their appropriateness and effectiveness.

The Operational and Reputational Risk Committee (hereinafter: “ORR Committee”) is responsible for the continuous supervision of activities related to operational risk and its management. Furthermore, the ORR Committee ensures the exchange of relevant information on managing operational risk between diverse organisational units of the Bank and within the Group, adopts recommendations for risk mitigation between the Bank and the Group, and provides recommendations to the Management Board regarding the operational risk management system.

The Operational Risk control function ensures regular management and control of Operational Risks. In the Bank, the risk management and control tasks are performed by the Operational Risk Management and Control Unit, also covering the risk controlling activities for Legal entities of the Group.

Awareness of risk management culture is continuously improved by training of participants and by enhancing the reporting system. The reporting system has been introduced to inform management and relevant control bodies on operational risk exposure and risk mitigation actions.

Operational risk Strategies consist of: managerial framework, risk appetite framework and mitigation measures. Strategies are identified once a year, with an aim to prevent operational risk events (expected and unexpected) from occurring, and represent a business tool for reducing the operational risk losses.

UniCredit developed an internal model to measure the capital requirements. It is based on internal loss data, external loss data (group and public data), scenario analysis results and risk indicators. Capital is calculated at a confidence level of 99.9% on the overall loss distribution for regulatory purposes. Through the allocation mechanism, AMA legal entities capital requirement is allocated, reflecting each legal entity risk exposure.

The Bank uses the AMA model (Advanced Measurement Approach) for calculating operational risk capital requirements.



38.5 Other risks

The so-called Pillar 1 risk types (credit, market, operational risk, as described in dedicated chapters) are considered as primary risks. In addition to those, there are others the Group considers to be significant which include:

• business risk;• real estate risk;• reputational risk;• strategic risk;• macroeconomic risk;• risk of excessive leverage.

Business risk

Business risk is defined as adverse, unexpected changes in business volume and/or margins that are not due to credit, market and operational risks. Business risk can result, above all, from a serious deterioration in the market environment and changes in the competitive situation or consumer behaviour.

Real estate risk

Real estate risk is defined as the potential loss resulting from market value fluctuations of the Group’s real estate portfolio. It includes all real estate assets owned by the Group for direct use in business operations (head-offices, branches, etc) or used for rental or for price appreciation. Real estate assets refer to buildings, the underlying land, as well as undertaken assets which are not aimed for sale, but held for rent or other commercial purposes. It does not take into consideration properties held as collateral.

Reputational risk

Reputational risk is defined as the current or prospective risk to Group’s earnings, liquidity and capital arising from adverse perception of the image of the financial institution on the part of customers, counterparties, shareholders/investors, regulators or employees. Reputational risk exists throughout the organization, and exposure to reputational risk reflects the adequacy of the internal risk management processes of all other risk categories such as credit, market, operational and liquidity risk.

The reputational risk management process is defined by Group Reputational Risk Management Global Policy, and by Global rules which define procedures with transactions/projects in specific industries (Defence/Weapons Industry, Nuclear Energy, Coal-Fired Power Generation, Mining, Water Infrastructure/Dams).

Strategic risk

Strategic risk is the risk of suffering potential losses due to, among the other, decisions, improper implementation of decisions or adverse business decisions, and radical changes in the business environment, lack of responsiveness to changes in the business environment, with negative impact on the risk profile and consequently can have negative effects on capital, earnings as well as the overall direction and scope of a bank in the long run.

Macroeconomic Risk

Macroeconomic risk is defined as the risk stemming from changes in general macroeconomic conditions that might influence future capital requirements or the level of available financial resources.

Risk of Excessive Leverage

Risk of excessive leverage means the risk resulting from an institution’s vulnerability due to leverage or contingent leverage that may require unintended corrective measures to its business plan, including distressed selling of assets which might result in losses or in valuation adjustments to its remaining assets.




39 Average effective interest rates The average effective interest rates for interest-earning financial assets and interest-bearing financial liabilities during the year, calculated based on average quarterly balances for the Group and average monthly balances for the Bank are as follows:

GROUP BANK 2018 2017 2018 2017 EFFECTIVE EFFECTIVE EFFECTIVE EFFECTIVE INTEREST INTEREST INTEREST INTEREST RATE RATE RATE RATE

Cash and cash equivalents 0.00% 0.00% 0.00% 0.00%Obligatory reserve with the Croatian National Bank 0.00% 0.00% 0.00% 0.00%Loans and receivables from banks 0.79% 0.50% 1.06% 0.62%Debt securities 1.81% 1.98% 1.51% 1.50%Loans and receivables from customers 4.43% 4.95% 4.32% 4.77% Current accounts and deposits from banks 0.46% 0.67% 0.35% 1.14%Current accounts and deposits from customers 0.38% 0.66% 0.34% 0.60%Borrowings 1.12% 1.55% 1.50% 1.88%Issued debt securities 1.49% 1.49% 1.49% 1.49%

40 Accounting estimates and judgements in applying accounting policies

The management of the Group makes estimates and assumptions about uncertain events, including estimates and assumptions about the future. These assumptions and estimates are regularly evaluated, and are based on historical experience and other factors such as the expected evolution of future events that can be rationally assumed in the existing circumstances, but nevertheless, necessarily represent sources of uncertainty. The estimation of impairment losses in the Group’s credit risk portfolio and, estimation of the fair value of real estate collateral represents the major source of estimation uncertainty. This and other key sources of estimation uncertainty, that have a significant risk of causing a possible material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below.

a) Impairment losses on financial instruments

The Group monitors the creditworthiness of its customers on an ongoing basis. Value adjustments are assessed on a continuous basis, at least once a month. Impairment losses are made mainly against the carrying value of loans and receivables from customers (summarised in Note 15b), and as provisions for liabilities and charges arising from off-balance-sheet risk exposure to customers, mainly in the form of undrawn lending commitments, guarantees, letters of credit and unused credit card limits (summarised in Note 29). Impairment losses are also considered for credit risk exposures to banks (summarised in Note 13a), financial assets at fair value thorugh other comprehencive income and for other assets not carried at fair value.

The Group continuously monitors, calculates and recognises impairments on performing exposures. In estimating expected credit losses, the Group seeks to collect reliable data to produce appropriate provisioning calculation parameters based on historical experience related to and adjusted for current and anticipated conditions. With respect to performing exposures, the Group also complies with the minimal impairment loss rate of 0.8% prescribed by the CNB to be calculated on all credit risk exposures except those carried at fair value, including off-balance-sheet exposures and sovereign risk.

In estimating impairment losses on items individually or collectively assessed as impaired (or non-perfprming), the Group also complies with the range of specific impairment loss rates prescribed by the CNB.

The approach to expected credit losses calculation is explained in more detail in Note 38.1 Credit Risk.


40 Accounting estimates and judgements in applying accounting policies (continued) b) Taxation

The Group provides for tax liabilities in accordance with the tax laws of the Republic of Croatia and the Federation of Bosnia and Herzegovina. Tax returns are subject to the approval of the tax authorities, who are entitled to carry out subsequent inspections of taxpayers’ records.

c) Regulatory requirements

The CNB, the Banking Agency of the Federation of Bosnia and Herzegovina and the Croatian Financial Services Agency are entitled to carry out regulatory inspections of the Group’s operations and to request changes to the carrying values of assets and liabilities in accordance with the underlying regulations.

d) Litigation and claims The Group individually assesses of all court cases for which the value of the case is above HRK 70 thousand. All court cases below HRK 70 thousand are monitored and provided for on portfolio basis. The assessment is made by the Legal Departments in the Group. In certain cases, external lawyers are engaged. As stated in Notes 29 and 36b, the Group and the Bank provided HRK 95 million (2017: HRK 78 million) and HRK 41 million (2017: HRK 30 million), respectively, for principal and interest in respect of liabilities for court cases, which the management estimates as sufficient. e) Fair value of investment property

The Group uses the cost model for its investment property. Carrying values are at least once annually reviewed for impairment via discounted cash flow analyses. The management considers that there are no indications of impairment at the reporting date based on these analyses. f) Fair value of illiquid debt investments

The Group has developed internal models for estimating the fair value of illiquid debt investments. Such models use valuation techniques that include all parameters (with maximum use of observable market inputs) that market participants would take into account when pricing an instrument in usual market conditions.

g) Investment funds

The Group acts as fund manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of the aggregate economic interests of the Group in the fund (comprising any carried interests and expected management fees) and the investors’ rights to remove the fund manager. The Group has concluded that it acts as an agent for the investors in all cases, and therefore has not consolidated any funds.




41 Fair value of financial instruments

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices. For all other financial instruments, the Group 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, Black-Scholes option pricing models and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads, bond and equity prices, foreign currency exchange rates, equity index prices as well as volatilities and correlations. The objective of these valuation techniques is to arrive at a fair value that reflects the price of the financial instrument on the reporting date that would have been determined by market participants using the arm’s length principle.

When measuring fair values, the Group takes into account IFRS 13 fair value hierarchy that reflects the significance of the inputs used in making the measurements. Each instrument is evaluated in detail on a individual basis. The levels are determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety.

a) Valuation models

The financial instruments carried at fair value have been categorised in the three levels of the IFRS 13 fair value hierarchy, as follows:

• Level 1 – instruments valued by use of quoted prices in active markets. These are instruments where the fair value can be determined directly from prices which are quoted in active, liquid markets.

• Level 2 – instruments valued by use of valuation techniques which are based on observable market data. These are instruments where the fair value can be determined by reference to similar instruments traded in active markets, or where a technique is used to derive the value but where all inputs to the technique are observable.

• Level 3 – instruments valued by use of valuation techniques which are using market data which is not directly observable on an active market. These are instruments where the fair value cannot be determined directly by reference to market-observable information, therefore other pricing technique must be used. Instruments’ value classified in this category has an element which is unobservable and which has a significant impact on the fair value.

Fixed Income Securities Fixed Income Securities are priced in a two tier process, depending on the liquidity in the respective market. Liquid instruments in active markets are marked to market and consequently these instruments are disclosed in reference to Fair Value Hierarchy in Level 1. Instruments not traded in active markets are marked to model that maximises the use of observable input and minimizes the use of unobservable inputs. Depending on significance of unobservable inputs, these instruments are classified in Level 2 or Level 3.

OTC Derivatives Market value of OTC derivatives is calculated by use of widely accepted valuation models, which use inputs that are usually available in the market for simple over-the-counter derivatives, like FX outrights and interest rate swaps.

Availability of observable market prices and model inputs reduces the need for management’s judgement and estimation and also reduces the uncertainty associated with determination of fair values. Depending on the observability and availability of inputs, as well as on the general conditions in the financial markets, OTC derivatives are disclosed in Level 2 or Level 3.


41 Fair value of financial instruments (continued)

a) Valuation models (continued)

Equity Instruments

Equity instruments are assigned to Level 1 when a quoted price is available on a market, and to Level 3 when no quotations are available or quotations have been suspended indefinitely (equity instruments are disclosed as Level 2 only in the case when the market on which the equity is quoted is small). Investment Funds

The Group holds investments in investment funds that calculate net asset value (“NAV”) per share. Since NAV prices are calculated on a daily basis and are available via respective asset management companies, investments in open-ended investment funds are disclosed in Level 1.

b) Financial instruments measured at fair value – fair value hierarchy The following tables present Group’s and Bank’s financial instruments measured at fair value by the level of the fair value hierarchy. The amounts are based on the values recognised in the statement of financial position.

HRK MILLION 2018 GROUP BANK

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL

Financial assets at fair value through profit or loss Debt securities held for trading (Note 14a) 33 - - 33 33 - - 33Equity securities held for trading (Note 14b) 23 - - 23 23 - - 23Derivative financial instruments (Note 14c)

Forward and swap foreign exchange contracts - 11 2 13 - 10 1 11Cross currency interest rate swaps - 953 - 953 - 953 - 953Interest rate swaps - 161 - 161 - 161 - 161

Total derivative financial instruments - 1,125 2 1,127 - 1,124 1 1,125Units in investment funds at fair value through profit or loss (Note 14d) 52 - - 52 29 - - 29Equity securities at fair value through profit or loss (Note 14e) - 43 190 233 - 42 190 232 108 1,168 192 1,468 85 1,166 191 1,442Financial assets at fair value through other comprehensive income Debt securities at fair value through other comprehensive income (Note 16a) 2,207 9,818 66 12,091 1,387 8,773 66 10,226Equity securities at fair value through other comprehensive income (Note 16d) 2 - 4 6 2 - 3 5 2,209 9,818 70 12,097 1,389 8,773 69 10,231Total financial assets measured at fair value 2,317 10,986 262 13,565 1,474 9,939 260 11,673Financial liabilities at fair value through profit or loss Foreign exchange forward and swap contracts (Note 26) - 12 1 13 - 11 - 11Cross currency interest rate swaps (Note 26) - 808 - 808 - 808 - 808Interest rate swaps (Note 26) - 142 - 142 - 142 - 142Hedge accounting (operating lease) (Note 26) - 2 - 2 - - - -Total financial liabilities measured at fair value - 964 1 965 - 961 - 961




41 Fair value of financial instruments (continued) b) Financial instruments measured at fair value – fair value hierarchy (continued)

HRK MILLION 2017 GROUP BANK

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL

Financial assets at fair value through profit or loss Debt securities held for trading (Note 14a) 76 - - 76 76 - - 76Equity securities held for trading (Note 14b) 19 - - 19 19 - - 19Derivative financial instruments (Note 14c)

Forward and swap foreign exchange contracts - 26 3 29 - 25 3 28Cross currency interest rate swaps - 732 - 732 - 731 - 731Interest rate swaps - 197 - 197 - 197 - 197

Total derivative financial instruments - 955 3 958 - 953 3 956Units in investment funds designated at fair value through profit or loss (Note 14d) 126 - - 126 105 - - 105 221 955 3 1,179 200 953 3 1,156Available-for-sale financial assets Debt securities available for sale (Note 16a) 4,621 6,108 51 10,780 3,205 4,908 50 8,163Equity securities available for sale (Note 16c) 1 42 172 215 1 42 171 214 4,622 6,150 223 10,995 3,206 4,950 221 8,377Total financial assets measured at fair value 4,843 7,105 226 12,174 3,406 5,903 224 9,533Financial liabilities at fair value through profit or loss Foreign exchange forward and swap contracts (Note 26) - 28 - 28 - 22 - 22Cross currency interest rate swaps (Note 26) - 608 - 608 - 611 - 611Interest rate swaps (Note 26) - 176 - 176 - 176 - 176Total financial liabilities measured at fair value - 812 - 812 - 809 - 809


41 Fair value of financial instruments (continued) c) Transfers between Level 1 and Level 2

There was no level migrations for securities throughout 2018.

d) Level 3 fair value measurements

i. Reconciliation of movement in financial assets classified in Level 3 The following tables show reconciliations between the opening and closing balances for fair value measurements in Level 3 of the fair value hierarchy.

GROUP HRK MILLION FINANCIAL ASSETS AT FINANCIAL ASSETS AT FAIR VALUE FV THROUGH PROFIT OR LOSS THROUGH OTHER COMPREHENSIVE INCOME DEBT SECURITIES EQUITY DERIVATIVE DEBT EQUITY HELD FOR TRADING SECURITIES FINANCIAL SECURITIES SECURITIES INSTRUMENTS

Balance as at 1 January 2018 - 168 3 51 4Increases 6 22 1 26 - Purchases 6 - 1 25 - Gains recognised in statement of profit or loss - 22 - - - of which unrealised gains - 21 - - - of which interest income - 1 - - - Gains recognised in OCI - - - 1 -Decreases (6) - (2) (11) - Sales (6) - - (6) - Redemptions - - - (3) - Losses recognised in statement of profit or loss - - (2) - - Losses recognised in OCI - - - (2) -Balance as at 31 December 2018 - 190 2 66 4

GROUP HRK MILLION FINANCIAL ASSETS AT AVAILABLE-FOR-SALE FV THROUGH PROFIT OR LOSS FINANCIAL ASSETS DEBT SECURITIES DERIVATIVE DEBT EQUITY HELD FOR TRADING FINANCIAL SECURITIES SECURITIES INSTRUMENTS

Balance as at 1 January 2017 4 - 61 177Increases - 6 2 18 Purchases - 3 - - Gains recognised in statement of profit or loss - 3 2 5 of which unrealised gains - 3 - - of which interest income - - 2 - Gains recognised in OCI - - - 13Decreases (4) (3) (12) (23) Sales (4) - (2) (13) Redemptions - (3) (8) - Losses recognised in statement of profit or loss - - - - Losses recognised in OCI - - (2) (10) Transfer to Level 2 - - - -Balance as at 31 December 2017 - 3 51 172




41 Fair value of financial instruments (continued) d) Level 3 fair value measurements (continued)

i. Reconciliation of movement for financial assets classified in Level 3 (continued)

BANK HRK MILLION FINANCIAL ASSETS AT FINANCIAL ASSETS AT FAIR VALUE FV THROUGH PROFIT OR LOSS THROUGH OTHER COMPREHENSIVE INCOME DEBT SECURITIES EQUITY DERIVATIVE DEBT EQUITY HELD FOR TRADING SECURITIES FINANCIAL SECURITIES SECURITIES INSTRUMENTS

Balance as at 1 January 2018 - 168 3 50 3Increases 6 22 - 26 - Purchases 6 - - 25 - Gains recognised in statement of profit or loss - 22 - - - of which unrealised gains - 21 - - - of which interest income - 1 - - - Gains recognised in OCI - - - 1 -Decreases (6) - (2) (10) - Sales (6) - - (5) - Redemptions - - - (3) - Losses recognised in statement of profit or loss - - (2) - - Losses recognised in OCI - - - (2) -Balance as at 31 December 2018 - 190 1 66 3

BANK HRK MILLION FINANCIAL ASSETS AT AVAILABLE-FOR-SALE FV THROUGH PROFIT OR LOSS FINANCIAL ASSETS DEBT SECURITIES DERIVATIVE DEBT EQUITY HELD FOR TRADING FINANCIAL SECURITIES SECURITIES INSTRUMENTS

Balance as at 1 January 2017 4 - 61 177Increases - 3 2 17 Purchases - - - - Gains recognised in statement of profit or loss - 3 2 4 of which unrealised gains - 3 - - of which interest income - - 2 - Gains recognised in OCI - - - 13Decreases (4) - (13) (23) Sales (4) - (2) (13) Redemptions - - (9) - Losses recognised in statement of profit or loss - - - - Losses recognised in OCI - - (2) (10)Balance as at 31 December 2017 - 3 50 171


41 Fair value of financial instruments (continued) d) Level 3 fair value measurements (continued)

ii. Reconciliation of movement in financial liabilities at fair value through profit or loss classified in Level 3

FINANCIAL LIABILITIES AT FV THROUGH PROFIT OR LOSS HRK MILLION GROUP BANK 2018 2017 2018 2017

Balance as at 1 January - 1 - 1Increases 3 - - - Losses recognised in statement of profit or loss 3 - - - of which unrealised losses 2 - - -Decreases (2) (1) - (1) Redemptions (2) - - - Gains recognised in statement of profit or loss - (1) - (1)Balance as at 31 December 1 - - -

iii. Unobservable inputs used in fair value measurement

Although the Group believes that estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different fair values. Therefore, for fair value measurements in Level 3, sensitivity analysis is performed with respect to the following unobservable categories of models’ inputs:

• Credit spreads: for instruments exposed to issuer risk, the unobservable input is mainly the issuer credit spread. Sensitivity effects are calculated based on the assumption of increasing credit spreads by 100 bps.

• Interest rates: in the absence of certain liquid interest rate and FX swap markets, the term structure of the yield curve is linked to indicative quotations which, at the given moment, due to their indicative nature, do not have to accurately describe the market. Sensitivity analysis effects are calculated based on the assumption of negative change in interest rates (by 100 bps increase\decrease, depending on active or passive positions).

iv. The effect of unobservable inputs on fair value measurement

The table below presents the results of negative scenarios for Level 3 instruments.

HRK MILLION 2018 2017 EFFECTS ON PROFIT EFFECTS ON OTHER EFFECTS ON PROFIT EFFECTS ON OTHER OR LOSS COMPREHENSIVE OR LOSS COMPREHENSIVE INCOME INCOME

Level 3 instruments Fixed income securities - held for trading - - - -Fixed income securities - FVOCI - (2.0) - (1.4) - (2.0) - (1.4)

Derivatives HRK - - - - Other - - - - - - - - - (2.0) - (1.4)




GROUP HRK MILLION FAIR VALUE FAIR VALUE CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL 2018 2017 2018 2017

Financial assets Due from banks 13 9,418 9,150 - 111 9,312 9,423 - 539 8,656 9,195Loans and advances from customers 15a 81,714 78,281 - 22,790 59,580 82,370 - 23,938 54,950 78,888Financial liabilities Current accounts and deposits from banks 24 9,477 2,419 - 4,479 4,638 9,117 - 245 2,192 2,437Current accounts and deposits from customers 25 99,636 95,499 - 21,976 77,144 99,120 - 47,101 48,643 95,744Borrowings 27 7,371 6,436 - 1,735 5,470 7,205 - 247 6,803 7,050

41 Fair value of financial instruments (continued) e) Fair value of financial instruments not measured at fair value

The table below summarises management’s estimated fair values at year-end.

The methods used, and assumptions made by management in the assessment of fair values of financial assets and liabilities are further explained below. Assumptions used for estimates and measurement of fair values of particular financial instruments are based on requirements of IFRS 13, by applying the methodology developed on the UniCredit Group level.

BANK HRK MILLION FAIR VALUE FAIR VALUE CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL 2018 2017 2018 2017

Financial assets Due from banks 13 4,853 6,509 - 110 4,741 4,852 - 1,045 5,365 6,410Loans and advances from customers 15a 65,871 62,325 - 21,174 45,482 66,656 - 3,903 61,246 65,149Financial liabilities Current accounts and deposits from banks 24 7,208 1,998 - 4,479 2,702 7,182 - 434 1,568 2,002Current accounts and deposits from customers 25 83,419 77,550 - 22,310 60,890 83,199 - 37,624 40,387 78,011Borrowings 27 3,592 3,004 - 1,735 1,848 3,583 - 1,025 1,971 2,996


41 Fair value of financial instruments (continued) e) Fair value of financial instruments not measured at fair value (continued) Due from banks

Fair value of loans and receivables from banks measured on balance sheet at amortized cost is determined using a risk adjusted net present value approach. The approach is based on discounting expected future cash flows with risk-free interest rates increased by credit spread. Credit spread represents the excess return a market participant asks for a risky investment, regarding to credit and liquidity risk of the specific counterparty. Approach currently used to price the performing loans is extended to evaluate impaired loans and receivables. Loans and receivables from customers

Fair value of loans and receivables from customers measured on balance sheet at amortized cost is mainly determined using a risk adjusted net present value approach. The approach is based on discounting expected future cash flows with risk-free interest rates increased by credit spread. Approach currently used to price the performing loans is extended to evaluate impaired loans and receivables.

Held-to-maturity investments (Policy applicable until 1 January 2018)

Fair value for held-to-maturity assets is based on market prices or broker/dealer price quotations in case of securities, while a risk adjusted net present value approach is applied for other types of assets. The approach is based on discounting expected future cash flows with risk-free interest rates increased by spread (cost) that would normally be charged to a client when determining interest rate for the new placement (cost of client credit risk, regulatory cost and cost of equity).

Current accounts and deposits from banks The estimated fair value of current accounts and deposits from banks represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted with current risk-free interest rates, increased by own credit spread.

Current accounts and deposits from customers

The estimated fair value of current accounts and deposits from customers represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted with current risk-free interest rates increased by own credit spread.

Borrowings

The estimated fair value of borrowings represents the discounted amount of estimated future cash flows expected to be collected. Expected cash flows are discounted with current risk-free interest rates increased by own credit spread.




42 Basic and diluted earnings per share

For the purposes of calculating earnings per share, earnings are calculated as the profit after tax attributable to equity holders of the Bank. The number of ordinary shares is the weighted average number of ordinary shares outstanding during the year, after deducting the number of ordinary treasury shares. The weighted average number of ordinary shares used for basic earnings per share was 319,880,658.

43 Events after the reporting period There were no significant reportable events after the reporting period.

GROUP HRK MILLION 2018 2017

Profit after tax attributable to equity holders of the Bank 2,038 1,042Weighted average number of ordinary shares 319,880,658 320,233,319Basic and diluted earnings per share (expressed in HRK per share) 6.37 3.25

BANK HRK MILLION 2018 2017

Profit after tax attributable to equity holders of the Bank 1,857 839Weighted average number of ordinary shares 319,880,658 320,233,319Basic and diluted earnings per share (expressed in HRK per share) 5.81 2.62


We have created a lean but steering center to drive Group-wide performance and ensure accountability. Through leaner support functions and transparent cost allocation, we focus on efficiency and simplification.

Adopt lean but steering center.


Supplementary schedules for CNB




Supplementary financial statements of the Group and the Bank, prepared in accordance with the framework for reporting set out in the CNB’s Decision on the Structure and Content of Annual Financial Statements of Credit Institutions (Official Gazette 42/2018) are presented below.

Note: as already explained in financial statements (explanation under I Basis of preparation, section e) Reclassification of comparative information and presentational changes), certain 2017 amounts were reclassified to align financial statements presentation to IFRS requirements). The same reclassifications have also been done in preparation of supplementary financial statements presented below.

a) Statement of financial position - Balance sheet


Assets Cash, cash balances at central banks and other demand deposits 24,655 17,836 21,864 14,291- cash on hand 3,119 2,941 2,463 2,379- cash balances at central banks 18,506 12,719 17,180 10,364- other demand deposits 3,030 2,176 2,221 1,548Financial assets held for trading 1,183 1,053 1,181 1,051- derivatives 1,127 958 1,125 956- equity instruments 23 19 23 19- debt securities 33 76 33 76- loans and advances - - - -Non-trading financial assets mandatory at fair value through profit or loss 285 126 261 105- equity instruments 285 126 261 105- debt securities - - - -- loans and advances - - - -Financial assets designated at fair value through profit or loss - - - -- debt securities - - - -- loans and advances - - - -Financial assets at fair value through other comprehensive income 12,097 10,995 10,231 8,377- equity instruments 6 215 5 214- debt securities 12,091 10,780 10,226 8,163- loans and advances - - - -Financial assets at amortised cost 96,812 92,956 76,403 74,359- debt securities 180 238 180 238- loans and advances 96,632 92,718 76,223 74,121Derivatives – Hedge accounting - - - -Fair value changes of the hedged items in portfolio hedge of interest rate risk - - - -Investments in subsidiaries, joint ventures and associates 93 94 1,537 1,637Tangible assets 2,406 2,223 1,147 1,206Intangible assets 336 311 206 193Tax assets 405 553 364 492Other assets 257 294 47 93Non-current assets and disposal groups classified as held for sale 2 452 2 380Total assets 138,531 126,893 113,243 102,184



Liabilities and equity Financial liabilities held for trading 965 812 961 809- derivatives 965 812 961 809- short positions - - - -- deposits - - - -- debt securities issued - - - -- other financial liabilities - - - -Financial liabilities designated at fair value through profit or loss - - - -- deposits - - - -- debt securities issued - - - -- other financial liabilities - - - -Financial liabilities measured at amortised cost 116,538 104,408 94,273 82,889- deposits 116,110 104,340 93,845 82,821- debt securities issued 54 54 54 54- other financial liabilities 374 14 374 14Derivatives – Hedge accounting - - - -Fair value changes of the hedged items in portfolio hedge of interest rate risk - - - -Provisions 885 870 727 726Tax liabilities 18 20 - -Share capital repayable on demand - - - -Other liabilities 1,375 2,604 858 2,062Liabilities included in disposal groups classified as held for sale - 68 - -Total liabilities 119,781 108,782 96,819 86,486Equity Share capital 6,405 6,405 6,405 6,405Share premium 3,504 3,370 3,504 3,370Equity instruments issued other than capital - - - -Other equity - - - -Accumulated other comprehensive income 235 294 226 234Retained earnings 6,103 6,367 3,993 4,242Revaluation reserves - - - -Other reserves 475 608 475 608(-) Treasury shares (36) - (36) -Profit or loss attributable to owners of the parent 2,041 1,044 1,857 839(-) Interim dividends - - - -Minority interests (Non-controlling interests) 23 23 - -Total equity 18,750 18,111 16,424 15,698Total liabilities and equity 138,531 126,893 113,243 102,184

a) Statement of financial position - Balance sheet (continued)


Supplementary schedules for CNB (Continued)



Interest income 4,002 4,370 3,113 3,412(Interest expense) (587) (899) (446) (690)Net interest income 3,415 3,471 2,667 2,722(Expenses on share capital repayable on demand) - - - -Dividend income 17 12 313 241Fee and commission income 1,624 1,529 1,299 1,213(Fee and commission expense) (220) (188) (200) (168)Net fee and commission income 1,404 1,341 1,099 1,045Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net 12 25 9 25Gains or (-) losses on financial assets and liabilities held for trading, net 369 54 315 15Gains or (-) losses on non-trading financial assets mandatory at fair value through profit or loss, net 20 2 20 2Gains or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net - - - -Gains or (-) losses from hedge accounting, net - - - -Exchange differences [gain or (-) loss], net (16) 27 (26) 41Gains or (-) losses on derecognition of non-financial assets, net 22 49 15 47Other operating income 377 370 64 66(Other operating expenses) (263) (27) (212) (13)TOTAL OPERATING INCOME, NET 5,357 5,324 4,264 4,191(Administrative expenses) (1,965) (2,200) (1,450) (1,609)(Depreciation) (422) (365) (179) (180)Modification gains or (-) losses, net - - - -(Provisions or (-) reversal of provisions) (79) (209) (65) (181)(Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss) (573) (1,198) (511) (1,162)(Impairment or (-) reversal of impairment of investments in subsidiaries, joint ventures and associates) - - - (25)(Impairment or (-) reversal of impairment on non-financial assets) (20) (66) (19) (66)Negative goodwill recognised in profit or loss - - - -Share of the profit or (-) loss of investments in subsidaries, joint ventures and associates accounted for using the equity method 39 - 41 38Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations 30 - 30 -PROFIT OR (-) LOSS BEFORE TAX FROM CONTINUING OPERATIONS 2,367 1,286 2,111 1,006(Tax expense or (-) income related to profit or loss from continuing operations) (326) (242) (254) (167)PROFIT OR (-) LOSS AFTER TAX FROM CONTINUING OPERATIONS 2,041 1,044 1,857 839Profit or (-) loss after tax from discontinued operations - - - -Profit or (-) loss before tax from discontinued operations - - - -(Tax expense or (-) income related to discontinued operations) - - - -Profit or (-) loss for the year 2,041 1,044 1,857 839Attributable to minority interest (non-controlling interests) 3 2 - -Attributable to owners of the parent 2,038 1,042 - -

b) Statement of profit or loss



Profit/(loss) for the year 2,041 1,044 1,857 839Other comprehensive income (60) 66 (19) 68Items not to be reclassified to profit or loss 2 - 2 -Tangible assets - - - -Intangible assets - - - -Actuarial gains or (-) losses on defined benefit pension plans 1 - 1 -Non-current assets and disposal groups held for sale - - - -Share of other recognised income and expense of entities accounted for using the equity method - - - -Fair value changes of equity instruments measured at fair value through other comprehensive income 1 - 1 -Gains or (-) losses from hedge accounting of equity instruments at fair value through other comprehensive income, net - - - -Fair value changes of equity instruments measured at fair value through other comprehensive income (hedged item) - - - -Fair value changes of equity instruments measured at fair value through other comprehensive income (hedging instrument) - - - -Fair value changes of financial liabilities at fair value through profit or loss attributable to changes in their credit risk - - - -Income tax relating to items that will not be reclassified - - - -Items that may be reclassified to profit or loss (62) 66 (21) 68Hedges of net investments in foreign operations (effective portion) - - - -Foreign currency translation (37) (15) - -Cash flow hedges (effective portion) - - - -Hedging instruments (not designated elements) - - - -Debt instruments at fair value through other comprehensive income (19) 98 (15) 83Non-current assets and disposal groups held for sale - - - -Share of other recognised income and expense of investments in subsidiaries, joint ventures and associates - - - -Income tax relating to items that may be reclassifies to profit or (-) loss (6) (17) (6) (15)Total comprehensive income for the year 1,981 1,110 1,838 907Attributable to minority interest (non-controlling interest) 2 2 - -Attributable to owners of the parent 1,979 1,108 1,838 907

c) Statement of other comprehensive income





Operating activities – indirect method Profit/(loss) before tax 2,367 1,286 2,111 1,006Adjustments: Impairment and provisions 646 1,505 570 1,434Depreciation 422 375 179 180Net unrealised (gains)/losses on financial assets at fair value through statement of profit or loss (13) 371 (13) 369(Profit)/loss from the sale of tangible assets (27) (48) (20) (47)Other non-cash items (3,481) (3,390) (2,986) (2,934)Changes in assets and liabilities from operating activities Deposits with the Croatian National Bank (155) (201) (155) (201)Deposits with financial institutions and loans to financial institutions (331) 3,741 1,873 3,884Loans and advances to other clients (5,190) 991 (3,816) 1,570Securities and other financial instruments at fair value through other comprehensive income (1,406) (1,377) (1,086) (1,399)Securities and other financial instruments held for trading 37 (75) 37 (75)Securities and other financial instruments at fair value through statement of profit of loss, not traded - 1 - -Securities and other financial instruments at fair value through statement of profit or loss 72 - 75 -Securities and other financial instruments at amortized cost - - - -Other assets from operating activities 465 (219) 399 (114)Deposits from financial institutions 7,067 (2,948) 5,442 (2,699)Transaction accounts of other clients 6,919 7,437 6,016 5,660Savings deposits of other clients 1,556 1,953 1,148 1,516Time deposits of other clients (3,578) (5,070) (3,480) (4,996)Derivative financial liabilities and other traded liabilities - - - -Other liabilities from operating activities 211 99 290 148Interest received from operating activities [indirect method] 3,861 5,088 2,988 4,429Dividends received from operating activities [indirect method] 57 48 354 279Interest paid from operating activities [indirect method] (597) (2,335) (440) (2,109)(Income taxes paid) (166) (511) (122) (423)Net cash flow from operating activities 8,736 6,721 9,364 5,478Investing activities Cash receipts from the sale / payments for the purchase of tangible and intangible assets (609) (383) (139) (46)Cash receipts from the sale / payments for the purchase of investments in branches, associates and joint ventures - - - -Cash receipts from the sale / payments for the purchase of securities and other financial instruments held to maturity - - - -Dividends received from investing activities - - - -Other receipts/payments from investing activities - - -Net cash flow from investing activities (609) (383) (139) (46)Financing activities Net increase/(decrease) in loans received from financing activities 972 (896) 588 (700)Net increase/(decrease) of debt securities issued - 1 - 1Net increase/(decrease) of Tier 2 capital instruments - - - -Increase of share capital - - - -(Dividends paid) (2,272) (296) (2,271) (260)Other receipts/(payments) from financing activities - - - -Net cash flow from financing activities (1,300) (1,191) (1,683) (959)Net increase/(decrease) of cash and cash equivalents 6,827 5,147 7,542 4,473Cash and cash equivalents at the beginning of period 17,836 12,813 14,291 9,923Effect of exchange rate fluctuations on cash and cash equivalents (12) (124) 27 (105)Cash and cash equivalents at the end of period 24,651 17,836 21,860 14,291

d) Statement of cash flows


e) Statement of changes in equity for the Group

HRK MILLION2018 NON-CONTROLLING INTEREST CAPITAL SHARE EQUITY OTHER ACCUMULATED RETAINED REVALUATION OTHER (-) PROFIT OR (-) ACCUMULATED OTHER TOTAL PREMIUM INSTRUMENTS EQUITY OTHER EARNINGS RESERVES RESERVES TREASURY (-) LOSS INTERIM OTHER ITEMS ISSUED OTHER COMPREHENSIVE SHARES ATRIBUTABLE DIVIDENDS COMPREHENSIVE THAN CAPITAL INCOME TO OWNERS INCOME OF THE PARENT

Balance at 1 January 2018 (before restatement) 6,405 3,370 - 16 294 6,369 - 592 - 1,042 - 1 22 18,111Effects of corrections of errors - 134 - - 1 - - (135) - - - - - -Effects of changes in accounting policies - - - - (37) (425) - - - - - - - (462)Restated balance at 1 January 2018 6,405 3,504 - 16 258 5,944 - 457 - 1,042 - 1 22 17,649Issuance of ordinary shares - - - - - - - - - - - - - -Issuance of preference shares - - - - - - - - - - - - - -Issuance of other equity instruments - - - - - - - - - - - - - -Exercise or expiration of other equity instruments issued - - - - - - - - - - - - - -Conversion of debt to equity - - - - - - - - - - - - - -Capital reduction - - - - - - - - - - - - - -Dividends - - - - - (840) - - - - - - (2) (842)Purchase of treasury shares - - - - - - - - (53) - - - - (53)Sale or cancellation of treasury shares - - - - - - - - 17 - - - - 17Reclassification of financial instruments from equity to liability - - - - - - - - - - - - - -Reclassification of financial instruments from liability to equity - - - - - - - - - - - - - -Transfers among components of equity - - - - - 1,042 - - - (1,042) - - - -Equity increase or (-) decrease resulting from business combinations - - - - - (4) - 4 - - - - - -Share based payments - - - (2) - - - - - - - - - (2)Other increase or (-) decrease in equity - - - - - - - - - - - - - -Total comprehensive income for the year - - - - (23) (36) - - - 2,038 - (1) 3 1,981Balance at 31 December 2018 6,405 3,504 - 14 235 6,106 - 461 (36) 2,038 - - 23 18,750




e) Statement of changes in equity for the Group (continued)


Balance at 1 January 2017 6,405 3,370 - 11 213 6,394 - 593 - 1,686 - 1 21 18,694Effects of corrections of errors - - - - - - - - - - - - - -Effects of changes in accounting policies - - - - - - - - - - - - - -Restated balance at 1 January 2017 6,405 3,370 - 11 213 6,394 - 593 - 1,686 - 1 21 18,694Issuance of ordinary shares - - - - - - - - - - - - - -Issuance of preference shares - - - - - - - - - - - - - -Issuance of other equity instruments - - - - - - - - - - - - - -Exercise or expiration of other equity instruments issued - - - - - - - - - - - - - -Conversion of debt to equity - - - - - - - - - - - - - -Capital reduction - - - - - - - - - - - - - -Dividends - - - - - (1,696) - - - - - - (1) (1,697)Purchase of treasury shares - - - - - - - (1) - - - - - (1)Sale or cancellation of treasury shares - - - - - - - - - - - - - -Reclassification of financial instruments from equity to liability - - - - - - - - - - - - - -Reclassification of financial instruments from liability to equity - - - - - - - - - - - - - -Transfers among components of equity - - - - - 1,686 - - - (1,686) - - - -Equity increase or (-) decrease resulting from business combinations - - - - - - - - - - - - - -Share based payments - - - 5 - - - - - - - - - 5Other increase or (-) decrease in equity - - - - - - - - - - - - - -Total comprehensive income for the year - - - - 81 (15) - - - 1,042 - - 2 1,110Balance at 31 December 2017 6,405 3,370 - 16 294 6,369 - 592 - 1,042 - 1 22 18,111


f) Statement of changes in equity for the Bank


Balance at 1 January 2018 (before restatement) 6,405 3,370 - 16 234 4,242 - 592 - 839 - - - 15,698Effects of corrections of errors - 134 - - 1 - - (135) - - - - - -Effects of changes in accounting policies - - - - (45) (406) - - - - - - - (451)Restated balance at 1 January 2018 6,405 3,504 - 16 190 3,836 - 457 - 839 - - - 15,247Issuance of ordinary shares - - - - - - - - - - - - - -Issuance of preference shares - - - - - - - - - - - - - -Issuance of other equity instruments - - - - - - - - - - - - - -Exercise or expiration of other equity instruments issued - - - - - - - - - - - - - -Conversion of debt to equity - - - - - - - - - - - - - -Capital reduction - - - - - - - - - - - - - -Dividends - - - - - (839) - - - - - - - (839)Purchase of treasury shares - - - - - - - - (53) - - - - (53)Sale or cancellation of treasury shares - - - - - - - - 17 - - - - 17Reclassification of financial instruments from equity to liability - - - - - - - - - - - - - -Reclassification of financial instruments from liability to equity - - - - - - - - - - - - - -Transfers among components of equity - - - - - 839 - - - (839) - - - -Equity increase or (-) decrease resulting from business combinations - - - - 55 157 - 4 - - - - - 216Share based payments - - - (2) - - - - - - - - - (2)Other increase or (-) decrease in equity - - - - - - - - - - - - - -Total comprehensive income for the year - - - - (19) - - - - 1,857 - - - 1,838Balance at 31 December 2018 6,405 3,504 - 14 226 3,993 - 461 (36) 1,857 - - - 16,424




f) Statement of changes in equity for the Bank (continued)


Balance at 1 January 2017 (before restatement) 6,405 3,370 - 11 166 4,230 - 593 - 1,709 - - - 16,484Effects of corrections of errors - - - - - - - - - - - - - -Effects of changes in accounting policies Restated balance at 1 January 2017 6,405 3,370 - 11 166 4,230 - 593 - 1,709 - - - 16,484Issuance of ordinary shares - - - - - - - - - - - - - -Issuance of preference shares - - - - - - - - - - - - - Issuance of other equity instruments - - - - - - - - - - - - - -Exercise or expiration of other equity instruments issued - - - - - - - - - - - - - -Conversion of debt to equity - - - - - - - - - - - - - -Capital reduction - - - - - - - - - - - - - -Dividends - - - - - (1,697) - - - - - - - (1,697)Purchase of treasury shares - - - - - - - (1) - - - - - (1)Sale or cancellation of treasury shares - - - - - - - - - - - - - -Reclassification of financial instruments from equity to liability - - - - - - - - - - - - - -Reclassification of financial instruments from liability to equity - - - - - - - - - - - - - -Transfers among components of equity - - - - - 1,709 - - - (1,709) - - - -Equity increase or (-) decrease resulting from business combinations - - - - - - - - - - - - - -Share based payments - - - 5 - - - - - - - - - 5Other increase or (-) decrease in equity - - - - - - - - - - - - - -Total comprehensive income for the year - - - - 68 - - - - 839 - - 907Balance at 31 December 2017 6,405 3,370 - 16 234 4,242 - 592 - 839 - - - 15,698


HRK MILLION FINANCIAL STATEMENTS CASH OBLIGATORY DUE FINANCIAL LOANS AND FINANCIAL INVEST- INVESTMENT PROPERTY INTANGIBLE DEFERRED TAX NON- OTHER AND RESERVE FROM ASSETS AT ADVANCES ASSETS AT MENTS IN PROPERTY AND ASSETS TAX ASSET PREPAY- CURRENT ASSETS CASH WITH THE BANKS FAIR VALUE FROM FAIR VALUE SUBSIDI- EQUIPMENT MENT ASSETS AND EQUIVALENTS CROATIAN THROUGH CUSTOMERS THROUGH ARIES AND DISPOSAL NATIONAL PROFIT OTHER ASSOCIATES GROUPS BANK OR LOSS COMPREHEN- HELD FORSUPPLEMENTARY SCHEDULES FOR THE CNB SIVE INCOME SALE

Assets Cash, cash balances at central banks and other demand deposits 24.655 - cash on hand 3.119 3.119 - - - - - - - - - - - - - - cash balances at central banks 18.506 18.506 - - - - - - - - - - - - - - other demand deposits 3.030 3.030 - - - - - - - - - - - - -Financial assets held for trading 1.183 - derivatives 1.127 - - - 1.127 - - - - - - - - - - - equity instruments 23 - - - 23 - - - - - - - - - - - debt securities 33 - - - 33 - - - - - - - - - - - loans and advances - - - - - - - - - - - - - - -Non-trading financial assets mandatorily at fair value through profit or loss 285 - equity instruments 285 - - - 285 - - - - - - - - - - - debt securities - - - - - - - - - - - - - - - - loans and advances - - - - - - - - - - - - - - -Financial assets designated at fair value through profit or loss - - - - - - - - - - - - - - - - debt securities - - - - - - - - - - - - - - - - loans and advances - - - - - - - - - - - - - - -Financial assets at fair value through other comprehensive income 12.097 - - - - - - - - - - - - - - - equity instruments 6 - - - - - 6 - - - - - - - - - debt securities 12.091 - - - - - 12.091 - - - - - - - - - loans and advances - - - - - - - - - - - - - - -Financial assets at amortised cost 96.812 - debt securities 180 - - - - 180 - - - - - - - - - - loans and advances 96.632 (4) 5.684 9.418 - 81.534 - - - - - - - - -Derivatives – Hedge accounting - - - - - - - - - - - - - - -Fair value changes of the hedged items in portfolio hedge of interest rate risk - - - - - - - - - - - - - - -Investments in subsidiaries, joint ventures and associates 93 - - - - - - 93 - - - - - - -Tangible assets 2.406 - - - - - - - 202 2.204 - - - - -Intangible assets 336 - - - - - - - - - 336 - - - -Tax assets 405 - - - - - - - - - - 316 89 - -Other assets 2 - - - - - - - - - - - - - 2Non-current assets and disposal groups classified as held for sale 257 - - - - - - - - - - - - 257 - 138.531 24.651 5.684 9.418 1.468 81.714 12.097 93 202 2.204 336 316 89 257 2

Reconciliation of the financial statements a) Reconciliation of the statement of financial position as at 31 December 2018 – Assets (the Group)




HRK MILLION FINANCIAL STATEMENTS FINANCIAL LIABILITIES NON-CURRENT CURRENT CURRENT AT FAIR VALUE PROVISIONS LIABILITIES ACCOUNTS ACCOUNTS AND THROUGH ISSUED FOR AND DISPOSAL CURRENT DEFERRED AND DEPOSITS DEPOSITS FROM PROFIT DEBT LIABILITIES OTHER GROUPS TAX TAXSUPPLEMENTARY SCHEDULES FOR THE CNB FROM BANKS CUSTOMERS OR LOSS BORROWINGS SECURITIES AND CHARGES LIABILITIES HELD FOR SALE LIABILITY LIABILITY

Liabilities and equity Financial liabilities held for trading 965 - derivatives 965 - - 965 - - - - - - - - short positions - - - - - - - - - - - - deposits - - - - - - - - - - - - debt securities issued - - - - - - - - - - - - other financial liabilities - - - - - - - - - - -Financial liabilities designated at fair value through profit or loss - - deposits - - - - - - - - - - -- debt securities issued - - - - - - - - - - -- other financial liabilities - - - - - - - - - - -Financial liabilities measured at amortised cost 116.538 - deposits 116.110 9.477 99.262 - 7.371 - - - - - -- debt securities issued 54 - - - 54 - - - - -- other financial liabilities 374 - 374 - - - - - - - -Derivatives – Hedge accounting - - - - - - - - - - -Fair value changes of the hedged items in portfolio hedge of interest rate risk - - - - - - - - - - -Provisions 885 - - - - - 885 - - Tax liabilities 18 - - - - - - - - 13 5Share capital repayable on demand - - - - - - - - - Other liabilities 1.375 - - - - - - 1.375 - - -Liabilities included in disposal groups classified as held for sale - - - - - - - - - - - 119.781 9.477 99.636 965 7.371 54 885 1.375 - 13 5

HRK MILLION FINANCIAL STATEMENTS ISSUED FAIR SHARE SHARE TREASURY OTHER VALUE RETAINED MINORITYSUPPLEMENTARY SCHEDULES FOR THE CNB CAPITAL PREMIUM SHARES RESERVES RESERVE EARNINGS INTEREST

Equity Share capital 6.405 6.405 - - - - - -Share premium 3.504 - 3.504 - - - - -Equity instruments issued other than capital - - - - - - - -Other equity - - - - - - - -Accumulated other comprehensive income 235 - - - - 235 - -Retained earnings 6.103 - - - - - 6.103 -Revaluation reserves - - - - - - - -Other reserves 475 - - 475 - - -(-) Treasury shares (36) - - (36) - - - -Profit or loss attributable to owners of the parent 2.041 - - - - - 2.041 -(-) Interim dividends - - - - - - - -Minority interests [Non-controlling interests] 23 - - - - - - 23 18.750 6.405 3.504 (36) 475 235 8.144 23

Reconciliation of the financial statements (continued)

b) Reconciliation of the statement of financial position as at 31 December 2018 – Liabilities and Equity (the Group)



c) Reconciliation of the statement of financial position as at 31 December 2018 – Assets (the Bank)

HRK MILLION FINANCIAL STATEMENTS CASH OBLIGATORY DUE FINANCIAL LOANS AND FINANCIAL INVEST- INVESTMENT PROPERTY INTANGIBLE DEFERRED TAX NON- OTHER AND RESERVE FROM ASSETS AT ADVANCES ASSETS AT MENTS IN PROPERTY AND ASSETS TAX ASSET PREPAY- CURRENT ASSETS CASH WITH THE BANKS FAIR VALUE FROM FAIR VALUE SUBSIDI- EQUIPMENT MENT ASSETS AND EQUIVALENTS CROATIAN THROUGH CUSTOMERS THROUGH ARIES AND DISPOSAL NATIONAL PROFIT OTHER ASSOCIATES GROUPS BANK OR LOSS COMPREHEN- HELD FORSUPPLEMENTARY SCHEDULES FOR THE CNB SIVE INCOME SALE

Assets Cash, cash balances at central banks and other demand deposits 21.864 - cash on hand 2.463 2.463 - - - - - - - - - - - - - - cash balances at central banks 17.180 17.180 - - - - - - - - - - - - - - other demand deposits 2.221 2.221 - - - - - - - - - - - - -Financial assets held for trading 1.181 - derivatives 1.125 - - - 1.125 - - - - - - - - - - - equity instruments 23 - - - 23 - - - - - - - - - - - debt securities 33 - - - 33 - - - - - - - - - - - loans and advances - - - - - - - - - - - - - - -Non-trading financial assets mandatorily at fair value through profit or loss 261 - equity instruments 261 - - - 261 - - - - - - - - - - - debt securities - - - - - - - - - - - - - - - - loans and advances - - - - - - - - - - - - - - -Financial assets designated at fair value through profit or loss - debt securities - - - - - - - - - - - - - - - - loans and advances - - - - - - - - - - - - - - -Financial assets at fair value through other comprehensive income 10.231 - equity instruments 5 - - - - - 5 - - - - - - - - - debt securities 10.226 - - - - - 10.226 - - - - - - - - - loans and advances - - - - - - - - - - - - - -Financial assets at amortised cost 76.403 - debt securities 180 - 180 - - - - - - - - - - loans and advances 76.223 (4) 5.684 4.853 65.690 - - - - - - - - -Derivatives – Hedge accounting - Fair value changes of the hedged items in portfolio hedge of interest rate risk - - - - - - - - - - - - - - -Investments in subsidiaries, joint ventures and associates 1.537 - - - - - - 1.537 - - - - - - -Tangible assets 1.147 - - - - - - - 91 1.056 - - - - -Intangible assets 206 - - - - - - - - - 206 - - - -Tax assets 364 - - - - - - - - - - 276 88 Other assets 47 - - - - - - - - - - - - - 47Non-current assets and disposal groups classified as held for sale 2 - - - - - - - - - - - - 2 - 113.243 21.860 5.684 4.853 1.442 65.870 10.231 1.537 91 1.056 206 276 88 2 47





d) Reconciliation of the statement of financial position as at 31 December 2018 – Liabilities and Equity (the Bank)

HRK MILLION FINANCIAL STATEMENTS FINANCIAL LIABILITIES CURRENT CURRENT AT FAIR VALUE PROVISIONS ACCOUNTS ACCOUNTS AND THROUGH ISSUED FOR CURRENT DEFERRED AND DEPOSITS DEPOSITS FROM PROFIT DEBT LIABILITIES OTHER TAX TAXSUPPLEMENTARY SCHEDULES FOR THE CNB FROM BANKS CUSTOMERS OR LOSS BORROWINGS SECURITIES AND CHARGES LIABILITIES LIABILITY LIABILITY

Liabilities and equity Financial liabilities held for trading 961 - derivatives 961 - - 961 - - - - - -- short positions - - - - - - - - - -- deposits - - - - - - - - - -- debt securities issued - - - - - - - - - -- other financial liabilities - - - - - - - - - -Financial liabilities designated at fair value through profit or loss - deposits - - - - - - - - - -- debt securities issued - - - - - - - - - -- other financial liabilities - - - - - - - - - -Financial liabilities measured at amortised cost 94.273 - deposits 93.845 7.474 82.779 3.592 - - - -- debt securities issued 54 - - 54 - - - -- other financial liabilities 374 374 - - - - - -Derivatives – Hedge accounting - - - - - - - - - -Fair value changes of the hedged items in portfolio hedge of interest rate risk - - - - - - - - - -Provisions 727 - - - - - 727 - - -Tax liabilities - - - - - - - - - -Share capital repayable on demand - - - - - - - - - -Other liabilities 858 - - - - - - 858 - -Liabilities included in disposal groups classified as held for sale - - - - - - - - - - 96.819 7.474 83.153 961 3.592 54 727 858 - -

HRK MILLION FINANCIAL STATEMENTS ISSUED FAIR SHARE SHARE TREASURY OTHER VALUE RETAINED MINORITYSUPPLEMENTARY SCHEDULES FOR THE CNB CAPITAL PREMIUM SHARES RESERVES RESERVE EARNINGS INTEREST

Equity Share capital 6.405 6.405 - - - - - -Share premium 3.504 - 3.504 Equity instruments issued other than capital - - - - - - - -Other equity - - - - - - - -Accumulated other comprehensive income 226 - - - - 226 -Retained earnings 3.993 - - - - 3.993 Revaluation reserves - - - - - - - -Other reserves 475 - - 475 - - -(-) Treasury shares (36) - - (36) - - -Profit or loss attributable to owners of the parent 1.857 - - - - - 1.857 (-) Interim dividends - - - - - - - -Minority interests [Non-controlling interests] - - - - - - - - 16.424 6.405 3.504 (36) 475 226 5.850 -


HRK MILLION FINANCIAL STATEMENTS NET GAINS AND LOSSES ON FINANCIAL INSTRUMENTS AT FAIR VALUE NET THROUGH GAINS AND PROFIT OR LOSSES LOSS AND ON DERE- RESULT FROM COGNITION FOREIGN OF FINANCIAL EXCHANGE ASSETS AT TRADING AND FAIR VALUE TRANSLATION THROUGH DEPRE- OTHER FEE AND FEE AND OF OTHER OTHER CIATION OTHER IMPAIRMENT IMPAIRMENT COMMI- COMMI- MONETARY COMPRENH- OPERA- AND OPERA LOSSES ON SHARE OF LOSSES INCOME INTEREST INTERESTS SSION SSION DIVIDEND ASSETS AND ENSIVE TING AMORTI- TING- FINANCIAL PROFIT FROM AND TAX EX- SUPPLEMENTARY SCHEDULES FOR THE CNB INCOME EXPENSE INCOME EXPENSE INCOME LIABILITIES INCOME INCOME SATION EXPENSES INSTRUMENTS ASSOCIATES PROVISIONS PENSE

Interest income 4.002 4.002 - - - - - - - - - - - -

(Interest expense) (587) - (587) - - - - - - - - - - - -

Dividend income 17 - - - - 17 -

Fee and commission income 1.624 - - 1.624 - - - - - - - - - -

(Fee and commission expense) (220) - - - (220) - - - - - - - - - -

Gains or (-) losses on derecognition of

financial assets and liabilities not measu-

red at fair value through profit or loss, net 12 - - - - - - 12 - - - - - - -

Gains or (-) losses on financial assets

and liabilities held for trading, net 369 - - - - - 369 - - - - - - - -

Gains or (-) losses on non-trading

financial assets mandatorily at fair

value through profit or loss, net 20 - - - - - 20 - - - - - - - -

Gains or (-) losses on financial assets

and liabilities designated at fair

value through profit or loss, net - - - - - - - - - - - - - - -

Gains or (-) losses from hedge accounting, net - - - - - - - - - - - - - - -

Exchange differences [gain or (-) loss], net (16) - - - - - (16) - - - - - - - -

Gains or (-) losses on derecognition

of non-financial assets, net 22 - - - - - - - 22 - - - - - -

Other operating income 377 - - - - - - 377 - - - - - -

(Other operating expenses) (263) (263) -

(Administrative expenses) (1.965) - - - - - (1.965) - - -

(Depreciation) (422) - - - - - - - - (422) - - - -

Modification gains or (-) losses, net - - - - - - - - - - - - - - -

(Provisions or (-) reversal of provisions) (79) - - - - - - - - - - - - (79)

(Impairment or (-) reversal of impairment

on financial assets not measured

at fair value through profit or loss) (573) - - - - - - - - - - (573) - - -


of investments in subsidiaries,

joint ventures and associates) - - - - - - - - - - - - - - -


on non-financial assets) (20) - - - - - - - - - - - - (20) -

Negative goodwill recognised

in profit or loss - - - - - - - - - - - - -

Share of the profit or (-) loss of investments

in subsidaries, joint ventures and associates

accounted for using the equity method 39 - - - - - - - - - - - 39 - -

Profit or (-) loss from non-current assets and

disposal groups classified as held for sale

not qualifying as discontinued operations 30 - - - - - - - 18 - (14) 25 - 1 -

(Tax expense or (-) income related to profit

or loss from continuing operations) (326) - - - - - - - - - - - - - (326)

Profit (-) loss for the year 2.041 4.002 (587) 1.624 (220) 17 373 12 417 (422) (2.242) (548) 39 (98) (326)


e) Reconciliation of the statement of profit or loss for the year ended 31 December 2018 – the Group





f) Reconciliation of the statement of profit or loss for the year ended 31 December 2018 – the Bank

HRK MILLION FINANCIAL STATEMENTS NET GAINS AND LOSSES ON FINANCIAL INSTRUMENTS AT FAIR VALUE NET THROUGH GAINS AND PROFIT OR LOSSES LOSS AND ON DERE- RESULT FROM COGNITION FOREIGN OF FINANCIAL EXCHANGE ASSETS AT TRADING AND FAIR VALUE TRANSLATION THROUGH DEPRE- OTHER FEE AND FEE AND OF OTHER OTHER CIATION OTHER IMPAIRMENT IMPAIRMENT COMMI- COMMI- MONETARY COMPRENH- OPERA- AND OPERA LOSSES ON LOSSES INCOME INTEREST INTERESTS SSION SSION DIVIDEND ASSETS AND ENSIVE TING AMORTI- TING- FINANCIAL AND TAX EX- SUPPLEMENTARY SCHEDULES FOR THE CNB INCOME EXPENSE INCOME EXPENSE INCOME LIABILITIES INCOME INCOME SATION EXPENSES INSTRUMENTS PROVISIONS PENSE

Interest income 3.113 3.113 - - - - - - - - - - - -

(Interest expense) (446) - (446) - - - - - - - - - - -

Dividend income 313 313

Fee and commission income 1.299 - - 1.299 - - - - - - - - - -

(Fee and commission expense) (200) - - - (200) - - - - - - - - -


financial assets and liabilities not measured

at fair value through profit or loss, net 9 - - - - - 9 - - - - - -

Gains or (-) losses on financial assets and

liabilities held for trading, net 315 - - - - - 315 - - - - - - -

Gains or (-) losses on non-trading financial

assets mandatorily at fair value through

profit or loss, net 20 - - - - - 20 - - - - - - -

Gains or (-) losses on financial assets and

liabilities designated at fair value through

profit or loss, net - - - - - - - - - - - - - -

Gains or (-) losses from hedge accounting, net - - - - - - - - - - - - - -

Exchange differences [gain or (-) loss], net (26) - - - - - (26) - - - - - - -


non-financial assets, net 15 - - - - - - - 15 - - - - -

Other operating income 64 - - - - - - - 64 - - - - -

(Other operating expenses) (212) - - - - - - - - - (212) - - -

(Administrative expenses) (1.450) - - - - - - - - - (1.450) - - -

(Depreciation) (179) - - - - - - - - (179) - - - -

Modification gains or (-) losses, net - - - - - - - - - - - - - -

(Provisions or (-) reversal of provisions) (65) - - - - - - - - - - - (65) -


on financial assets not measured at fair

value through profit or loss) (511) - - - - - - - - - - (511) - -


of investments in subsidiaries, joint

ventures and associates) - - - - - - - - - - - - -


on non-financial assets) (19) - - - - - - - - - - - (19) -

Negative goodwill recognised in profit or loss - - - - - - - - - - - - - -

Share of the profit or (-) loss of investments

in subsidaries, joint ventures and associates

accounted for using the equity method 41 - - - - 41 - - - - - - - -

Profit or (-) loss from non-current assets and

disposal groups classified as held for sale

not qualifying as discontinued operations 30 - - - - - - - 6 - (1) 25 - -

(Tax expense or (-) income related to

discontinued operations) (254) - - - - - - - - - - - - (254)

Profit (-) loss for the year 1.857 3.113 (446) 1.299 (200) 354 309 9 85 (179) (1.663) (486) (84) (254)



g) Reconciliation of the statement of other comprehensive income for the year 31 December 2018

There are no differences between positions disclosed in the statutory financial statements and those prescribed by the CNB Decision.

h) Reconciliation of the statement of cash flows for the year ended 31 December 2018

Differences between the cash flows positions disclosed in the statutory financial statements, and those prescribed by the CNB Decision relate to the following categories:

a) Cash flows from operating activities

“Impairment losses on financial instruments” and “Other impairment losses and provisions” are disclosed separately in the statutory financial statements while in the CNB schedule they are presented as one category “Impairment and provisions”.

“Other non-cash items” in the CNB schedule includes “Net losses/(gains) on FVOCI financial instruments (AFS securities in 2017)” and “Net interest income” which are in the statutory financial statements disclosed separately.

“Other assets from operating activities” in the CNB schedule include “Net proceeds from sale of Held for sale assets” which are in financial statements presented in net cash flows from Investing activities.

b) Cash flows from investment activities

“Net acquisition of FVOCI securities (AFS securities in 2017)” and “Net proceeds from sale of Held for sale assets” are presented within cash flow from Investing activities in the statutory financial statements - in the CNB schedules these items are included within Operating activities.

c) Cash flows from financing activities

There are no differences between cash flows positions relating to financing activities disclosed in the statutory financial statements and those prescribed by the CNB Decision.

i) Reconciliation of statement of changes in equity for the year ended 31 December 2018

Retained earnings in 2018 and 2017 in the financial statements include “Current year profit/(loss)” which is presented in a separate column in the CNB’s Schedule.

Equity-settled share based payment reserve is presented within “Other reserves” in Financial statements while in CNB’s Schedules it is presented within “Other equity”.

2018 Annual Report · Zagrebačka banka dd258

Supplementary EUR financial statements - unaudited

Supplementary EUR financial statements - unaudited

Basis of preparation of supplementary EUR financial statements

The supplementary information is provided for illustrative purposes only and does not form an integral part of the audited financial statements.

The statements of profit or loss and statements of other comprehensive income for the Group and the Bank for 2018 and comparative information for 2017, have been translated into EUR at average foreign exchange rates for 2018 (EUR 1 = HRK 7.4137) and 2017 (EUR 1 = HRK 7.4609), respectively.

The statement of financial position for the Group and the Bank as at 31 December 2018 and comparative information as at 31 December 2017, have been translated into EUR at respective foreign exchange rates ruling at 31 December 2018 and 31 December 2017.


Group statement of profit or loss for the year ended 31 December

EUR MILLION 2018 2017

Interest income 540 586Interest expense (79) (121)Net interest income 461 465Fee and commission income 219 205Fee and commission expense (30) (25)Net fee and commission income 189 180Dividend income 2 2Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 50 11 Net gains and losses on derecognition of financial assets at fair value through other comprehensive income 2 -Net gains and losses from available-for-sale securities - 3Other operating income 56 56Net trading and other income 110 72Operating income 760 717 Depreciation and amortisation (57) (50) Other operating expenses (302) (298)Operating expenses (359) (348)Profit before impairment and other provisions 401 369 Impairment losses on financial instruments (74) (161) Other impairment losses and provisions (13) (41)Total impairment losses and provisions (87) (202)Profit from operations 314 167Share of profit from associates 5 6Profit before tax 319 173Income tax (44) (32)Profit for the year 275 141Attributable to: Equity holders of the Bank 275 141 Non-controlling interests - -Profit for the year 275 141


Supplementary EUR financial statements - unaudited (continued)

260


Group statement of other comprehensive income for the year ended 31 December


Profit for the year 275 141Other comprehensive income/(loss), net of tax Items not to be reclassified to profit or loss, net of tax: Fair value changes of FVOCI equity instruments - -Actuarial gain on remeasurement of provisions for statutory severance payments - -Net other comprehensive income not to be reclassified to profit or loss in subsequent periods - -Items to be reclassified to profit or loss, net of tax: Foreign currency differences on translation of foreign operations (5) (2) Net change in fair value of debt securities - 14 Net amount transferred to profit or loss (1) (3) Net changes in allowance for expected credit losses of FVOCI financial assets (2) -Financial assets at fair value through other comprehensive income (3) 11Net other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods (8) 9Other comprehensive income/(loss) for the year, net of tax (8) 9Total comprehensive income for the year 267 150Attributable to: Equity holders of the Bank 267 150 Non-controlling interests - -Total comprehensive income for the year 267 150


Group statement of financial position as at 31 December


Assets Cash and cash equivalents 3,323 2,374Obligatory reserve with the Croatian National Bank 766 735Due from banks 1,270 1,218Financial assets at fair value through profit or loss 198 157Loans and advances from customers 11,016 10,418Financial assets at fair value through other comprehensive income 1,631 -Available-for-sale financial assets - 1,463Investments in associates 13 13Investment property 27 35Property and equipment 297 261Intangible assets 45 41Deferred tax assets 43 38Tax prepayment 12 36Non-current assets and disposal groups held for sale - 60Other assets 35 39Total assets 18,676 16,888Liabilities Current accounts and deposits from banks 1,278 322Current accounts and deposits from customers 13,433 12,710Financial liabilities at fair value through profit or loss 130 108Borrowings 994 857Issued debt securities 7 7Provisions for liabilities and charges 119 116Non-current liabilities and disposal groups held for sale - 9Other liabilities 185 346Income tax payable 2 1Deferred tax liabilities 1 2Total liabilities 16,149 14,478Equity Issued share capital 863 853Share premium 472 466Treasury shares (5) -Other reserves 64 63Fair value reserve 32 39Retained earnings 1,098 986Total equity attributable to equity holders of the Bank 2,524 2,407Non-controlling interests 3 3Total equity 2,527 2,410Total liabilities and equity 18,676 16,888



262


Bank statement of profit or loss for the year ended 31 December


Interest income 420 457Interest expense (60) (92)Net interest income 360 365Fee and commission income 175 163Fee and commission expense (27) (23)Net fee and commission income 148 140Dividend income 48 37Net gains and losses on financial instruments at fair value through profit or loss and the result from foreign exchange trading and translation of monetary assets and liabilities 42 8Net gains and losses on derecognition of financial assets at fair value through other comprehensive income 1 -Net gains and losses from available-for-sale securities - 3Other operating income 11 15Net trading and other income 102 63Operating income 610 568 Depreciation and amortisation (24) (24) Other operating expenses (224) (217)Operating expenses (248) (241)Profit before impairment and other provisions 362 327Impairment losses on financial instruments (66) (156)Other impairment losses and provisions (11) (36)Total impairment losses and provisions (77) (192)Profit before tax 285 135Income tax (34) (22)Profit for the year 251 113


Bank statement of other comprehensive income for the year ended 31 December


Profit for the year 251 113Other comprehensive income/(loss), net of tax Items not to be reclassified to profit or loss, net of tax: Fair value changes of FVOCI equity instruments - -Actuarial gain on remeasurement of provisions for statutory severance payments - -Net other comprehensive income not to be reclassified to profit or loss in subsequent periods - -Items to be reclassified to profit or loss, net of tax: Net change in fair value of debt securities - 12 Net amount transferred to profit or loss (1) (3) Net changes in allowance for expected credit losses of FVOCI financial assets (2) -Financial assets at fair value through other comprehensive income (3) 9Net other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods (3) 9Other comprehensive income/(loss) for the year, net of tax (3) 9Total comprehensive income for the year 248 122



264


Bank statement of financial position as at 31 December


Assets Cash and cash equivalents 2,947 1,902Obligatory reserve with the Croatian National Bank 766 735Due from banks 654 866Financial assets at fair value through profit or loss 195 154Loans and advances from customers 8,880 8,295Financial assets at fair value through other comprehensive income 1,379 -Available-for-sale financial assets - 1,115Investments in subsidiaries and associates 207 218Investment property 12 15Property and equipment 142 146Intangible assets 28 26Deferred tax assets 37 33Tax prepayment 12 32Non-current assets and disposal groups held for sale - 51Other assets 7 12Total assets 15,266 13,600Liabilities Current accounts and deposits from banks 1,008 270Current accounts and deposits from customers 11,210 10,355Financial liabilities at fair value through profit or loss 130 108Borrowings 484 400Issued debt securities 7 7Provisions for liabilities and charges 98 97Other liabilities 116 274Total liabilities 13,053 11,511Equity Issued share capital 863 852Share premium 472 467Treasury shares (5) -Other reserves 64 63Fair value reserve 30 31Retained earnings 789 676Total equity 2,213 2,089Total liabilities and equity 15,266 13,600



Other information

Other information

Share information

The security code for the ordinary shares is as follows:

Shares (Class) Symbol ISIN CodeOrdinary Shares ZABA-R-A HRZABARA0009

Shares performance in 2018 on the Zagreb Stock Exchange:

ZABA-R-AHigh (HRK) 63.40Low (HRK) 52.00Last (HRK) 57.20Trading Volume / No. of Shares 1.051.458

Bank shareholders’ structure 31 December 2018 IInternational investors 96.21% - UniCredit S.p.A. 84.47% - Allianz SE 11.72% - Other 0.02%Companies in private ownership 1.77%Individuals 1.59%Public sector 0.25%Treasury shares 0.18% 100.00%

Ratings

31.12.2018 31.12.2017Standard & Poor’s Counterparty Credit Rating BB/Positive BB/PositiveFitch Ratings Ltd. Long Term Issuer Default Rating BBB- BBB- Short Term Rating F3 F3 bb+ bb Viability (in January 2018 updated to bb+) Support 2 2 Outlook Negative Stable


Contacts

Zagrebačka banka dd

HEADQUARTERS Trg bana Josipa Jelačića 10 10000 Zagreb Republic of Croatia Telephone: (+385 1) 6104 146 Fax: (+385 1) 6110 533 www.zaba.hr SWIFT: ZABA HR 2X IDENTITY AND COMMUNICATIONS Ulica Augusta Cesarca 2 10000 Zagreb Republic of Croatia Telephone: (+385 1) 6104 078 Fax: (+385 1) 6325 189 Public relations: [email protected]


Subsidiaries

REPUBLIC OF CROATIA ZB Invest doo Samoborska cesta 145 10090 Zagreb Telephone: (+385 1) 4803 399 Fax: (+385 1) 4803 349 www.zbi.hr ZANE doo Nova Ves 17 10000 Zagreb Telephone: (+385 1) 4860 111 Fax: (+385 1) 4860 222 www.zane.hr Pominvest dd Ivana Gundulića 26a 21000 Split Telephone: (+385 21) 390 300 Fax: (+385 21) 390 307 ZABA Partner doo Ulica Augusta Cesarca 2 10000 Zagreb Telephone: (+385 1) 4842 589 e-mail: [email protected] www.zaba.hr UniCredit Leasing Croatia doo Address of the headquarters: Heinzelova 33 Address of subsidiary: D. T. Gavrana 17 10000 Zagreb Telephone: (+385 1) 2447 100 e-mail: [email protected] www.unicreditleasing.hr Locat Croatia doo Address of the headquarters: D.T.Gavrana 17 10000 Zagreb Telephone: (+385 1) 2447 100

FEDERATION OF BOSNIA AND HERZEGOVINA UniCredit Bank dd, Mostar Kardinala Stepinca bb 88000 Mostar Telephone: (+387 36) 312 112 Fax: (+387 36) 356 227 www.unicredit.ba

Contacts (Continued)

Other information


The 2018 Zagrebačka Banka Annual Report was published within the period stipulated by law and its official text in Croatian can be found at the Zagreb Stock Exchange Internet site - www.zse.hr, as well as at the Internet site of Zagrebačka banka - www.zaba.hr. Compared to the text published, this edition has been translated into English, designed and illustrated.

Zagrebačka banka ddUniCredit GroupTrg bana J. Jelačića 10, 10000 Zagreb, Croatia, www.zaba.hrRegistered with the Commercial Court in Zagreb, by the resolution no Tt-95/1-2, of 17 March 1995, under the register number MBS 080000014, the share capital of the Bank amounts to HRK 6,404,839,100.00 and has been fully paid.The share capital of the Bank is divided into 320,241,955 ordinary shares, in the nominal amount of HRK 20.00 each maintained in the electronic records of the Central Depository Agency under the stock symbol ZABA-R-A as non-materialized registered securities.The Bank’s account opened with the Croatian National Bank, Trg hrvatskih velikana 3, 10000 Zagreb, IBAN: HR8823600001000000013, account no: 2360000-1000000013, OIB: 92963223473

Sorter pages: Zagrebačka banka dd

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Croatia 2019

Documents

One Bank, One UniCredit....3 In May 2018 UniCredit Partner doo was merged to UniCredit Leasing Croatia. Zagrebačka banka dd · 2018 Annual Report 11 The central bank, the Croatian