Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 1

Transcription

1 Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 1

2 Management Independent 3 Report 36 auditor s Report 50 Notes to financial statements 4 Key financial data 42 Financial Report of the Bank and the Group General information 6 Statement of the President of the Management Board of Gorenjska banka, d. d., Kranj 43 Statement of management s responsibilities Summary of significant accounting policies 7 Report of the Supervisory Board of Gorenjska banka, d. d., Kranj 44 Income statement Critical accounting estimates and judgements 10 Organizational Chart of the Bank 45 Statement of comprehensive income Notes to the income statement 11 Organizational Chart of the Group 46 Statement of financial position Notes to the statement of financial position 11 Top Management Strucure 47 Statement of changes in equity Other notes to the financial statements 12 Business Network 49 Cash flow statement Risk management 13 The economic environment and the banking sector 15 About the Gorenjska banka Group 17 Shareholders information 18 Strategic Orientations of the Bank and Group 20 Operations in Risk Management 30 IT Upgrades 31 Changes to Organisation and HR 32 Corporate Social responsibility 33 Data and explanations pursuant to Paragraph 6 of Article 70 of the Companies act 35 Statement on Internal Governance Arrangements

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4 Key financial data Amounts in thousands of EUR Bank Group Statement of financial position, as at 31 December Total assets 1,512,629 1,451,179 1,440,472 1,513,694 1,451,959 1,440,967 Total deposits from the non-banking sector: 1,226,988 1,118,512 1,059,966 1,225,563 1,117,993 1,059,959 - corporates and other entities 348, , , , , ,558 - individual clients 878, , , , , ,402 Total amount of loans to the non-banking sector: 854, , , , , ,674 - corporates and other entities 669, , , , , ,149 - individual clients 185, , , , , ,525 Total equity 200, , , , , ,905 Impairment of financial assets and provisions 107, , , , , ,221 Total off-balance sheet operations 228, , , , , ,567 Income statement: Net interest income 28,500 30,992 34,964 27,849 30,418 34,340 Net non-interest income 14,576 11,099 23,732 15,939 12,543 24,971 Labour costs, general and administrative costs 27,935 24,574 23,454 27,985 24,867 23,957 Depreciation 1,760 1,737 2,159 1,872 1,738 2,580 Impairment and provisioning 5,910 11,619 30,481 5,985 11,473 29,053 Profit before income tax 7,471 4,161 2,602 7,947 4,883 3,290 Tax related to profit/loss from continuing operation 1, ,372 1, Statement of comprehensive income Other comprehensive gains/losses (1,443) (5.623) 20,135 (1,443) (5.623) 20,135 Tax related to other comprehensive gains/losses (331) 66 (1,380) (331) 66 (1,380) Number of employees, as at 31 December Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

5 Bank Group Shares: Number of shareholders Number of shares 387, , , , , ,416 Nominal share value or an amount belonging to non-par share in registered capital (in EUR) Book value per non-par share (in EUR) In the calculation of the book value per non-par share, treasury shares are not considered. Ratios (in %): Capital: - CET1 Capital ratio ,64 - T1 Capital ratio ,64 - Total Capital ratio ,64 Assets quality: - Impairment of financial assets at amortised cost and provisions / on-balance and off-balance sheet items classified Profitability: - Interest margin (net interest income to total assets) Financial mediation margin (net interest income and net non-interest income to total assets) Return on assets before tax Return on assets after tax Return on equity before tax Return on equity before tax (before impairment) Return on equity after tax Operational costs: - Operational costs / average assets Operational costs / income Liquidity: - Average liquid assets / average sight deposits from non-banking sector Average liquid assets / average assets Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 5

6 Statement of the President of the Management Board of Gorenjska banka, d.d., Kranj In 2016, Gorenjska banka strengthened the foundations for realising its strategic ambitions of controlled and sustainable growth, transforming into an effective and all-slovenian bank. It was profitable and increased its capital strength, improving its market share in all operational segments. It also became one of the leading Slovenian vehicle and equipment leasing providers, significantly strengthening its activities linked to factoring receivables. In the 2016 financial year, the Bank increased the balance sheet total to EUR 1.51 billion. It generated a profit of EUR 13.4 million from regular operations, made impairment losses and provisions worth EUR 5.9 million, earning EUR 6.3 million in net profit. The entire Bank equity increased by EUR 16.6 million and now stands at EUR million. The volume of operations, measured with the balance sheet total, increased by 4.2 percentage points at the end of 2016 compared to the year before. This was mainly aided by growth in lending for the non-banking sector, which was 18 percent higher at the end of the year compared to the previous year; growth in 2016 was additionally recorded in all business segments. In 2016, the scope of deposits from legal and other entities surpassed the numbers from the previous year by 19 percent, while deposits from the general populace increased by a good 6 percent compared to When it comes to crediting companies, 2016 saw an increase in the number of clients and concluded business deals; the amount of profitable loans also increased. Our market share in this segment was also higher compared to the year before. Compared to 2015, we increased the scope of our business dealings by almost 13 percent. The growth in crediting activities was especially apparent in the area of factoring; here, the scope of our portfolio was more than tripled compared to In the retail lending segment, the several-year-long trend of growth and market share increase also continued in Compared to the previous year, the scope of retail crediting was increased by 39.1 percent; we also managed to achieve high growth in marketing complementary insurance services. In the area of vehicle and equipment leasing, we managed to become one of the leading Slovenian providers by the end of 2016 after only six months of operational business. Leasing was included in our business activities at the start of 2016 when we established the GB Leasing company; the service became operational in June 2016, following approval from the Bank of Slovenia. We managed to establish a wide and country-wide network of sales points by the end of the year; we also became the exclusive financial partner for the BMW Slovenia brand and took over the portfolio of contracts from the formerly largest leasing company in Slovenia. Non-performing exposures were resolved highly efficiently and successfully in In 2016, we succeeded in reducing their share in the Bank's assets by an additional 6 percentage points, meaning the total share amounted to 11.3 percent at the end of the year. In 2016, we increased the Bank's capital by 9 percent, meaning that capital adequacy amounted to 17.9 percent at the end of the year. Following the successful 13 million euro recapitalisation, carried out in January 2016, we managed to fully comply with the requirements of the Bank of Slovenia regarding capital adequacy with no negative effects on business operations. During the 2017 business year, we will therefore focus even more on business growth and development. The goals we have set are extremely ambitious, especially when it comes to crediting; however, they are completely in the realm of the possible, considering our new offers, the planned sales channels, and the process optimisation and technological upgrades to operational support. In addition to organic growth, we also see opportunities to increase business by purchasing assets and portfolios in line with our developmental and investment policy. The business priorities and objectives remain clear. Gorenjska banka will gradually become a country-wide bank while our key competitive advantage will lie in organisational and process flexibility, as well as in effectiveness. I would like to sincerely thank the owners and the Supervisory Board for lending their support to this developmental strategy; I would also like to thank our clients, partners and employees, without whom, such a strategy would not be possible. Thank you. Andrej Andoljšek Management Board President 6 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

7 Report of the Supervisory Board of Gorenjska banka, d.d., Kranj Composition of the Supervisory Board in 2016 At the end of 2016, the Supervisory Board of Gorenjska banka, d.d., Kranj operated with six members: Mr. David Benedek, Chairman, Mr. Aleš Aberšek, Deputy Chairman, and Members Mr. Miran Kalčič, Mr. Matej Podlipnik, Ms. Jelena Galić and Mr. Gregor Rovanšek. The composition of the Supervisory Board changed more than once in Having tendered their resignations from the position of Supervisory Board Members, the terms of office of Mr. Primož Karpe and Mr. Tibor Šimonka terminated on 10/02/2016 and 14/04/2016, respectively. The terms of office of Supervisory Board Members Ms. Mojca Globočnik and Mr. Matej Podlipnik, who were elected at the bank s General Meeting of 12/06/2012, expired at the General Meeting of 23/05/2016. In light of the expected expiration of the terms of office of two Supervisory Board Members and the two unfilled positions, the Remuneration, HR and Organisational Affairs Committee, which assumed the role of the Nomination Committee, launched the procedure of documenting possible candidates. At the bank s General Meeting of 23/05/2016, all four of the candidates put forth were elected for a five-year term of office starting on the date of their appointment; they were Ms. Jelena Galić, Mr. Aleš Aberšek, Mr. Domen Trobec, PhD, and Mr. Matej Podlipnik. The Supervisory Board thus operated with seven members as of the date of the bank s General Meeting and up to 04/11/2016, when Supervisory Board Member Mr. Domen Trobec tendered his resignation from the position of the bank s Supervisory Board Member. To perform in-depth supervision over the bank s individual areas of business, the following committees were appointed: the Audit Committee, the Risk Monitoring and Balance Sheet Management Committee and the Remuneration, HR and Organisational Affairs Committee. Pursuant to their powers, these committees also prepared expert groundwork and draft resolutions for the Supervisory Board. At the end of 2016, the Audit Committee had the following members: Mr. Gregor Rovanšek, Chairman and Members Mr. Miran Kalčič and Ms. Jelena Galić. The latter has been a member of the Committee since 23/05/2016. In 2016, the Audit Committee held five meetings. At the end of 2016, the Remuneration, HR and Organisational Affairs Committee had the following members: Mr. David Benedek, Chairman and Members Mr. Miran Kalčič, Ms. Jelena Galić and Mr. Aleš Aberšek. The latter two have been members of the Committee since 23/05/2016. The Committee held eight meetings. The Risk Monitoring and Balance Sheet Management Committee had the following members: Mr. Aleš Aberšek, Chairman (Committee Member since 23/05/2016 and Committee Chairman since 24/01/2017) and Members Mr. Matej Podlipnik and Mr. Miran Kalčič. The latter was appointed to the Committee upon the resignation of Member Mr. Domen Trobec on 13/01/2017. In 2016, the Committee held eight regular meetings and one correspondence meeting. Overview of the Supervisory Board s Activities in 2016 In 2016, the Supervisory Board met in eight regular meetings and ten correspondence meetings. It monitored and supervised the bank s operations and the activities of the bank s Management Board pursuant to its powers, competencies and responsibilities set out in the Banking Act, the Regulation on Internal Governance Arrangements, the Management Body and the Internal Capital Adequacy Assessment Process for Banks and Savings Banks, the Companies Act and the bank s Articles of Association. In 2016, the Supervisory Board initially focused on the adoption of the Development Strategy of the Bank and the Group for comprising the Investment Policy, Risk Management Strategy and Policy and the Policy on Managing Risky Receivables. The key strategic objectives are therefore to maintain trust in the bank, develop new services and sales units, efficiently manage non-performing assets and increase the bank s efficiency and profitability through sustainable development and corporate social responsibility. The Supervisory Board monitored the takeover of the leasing business activity, which was conducted via the purchase of the business knowledge and the equipment of VBS Leasing, which is in liquidation proceedings. The bank founded the service company GB Leasing d.o.o., which is in charge of producing the documentation the bank needs to conclude leasing transactions. The bank received authorisation for performing these activities from the Bank of Slovenia at the end of May To ensure compliance of the Remuneration Policy with the legal requirements and orientations of the regulator, the Supervisory Board coordinated and reorganised the existing Remuneration Policy during 2016 by editing the variable remuneration determination criteria for the Management Board, the senior management Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 7

8 and the directors and the procurators of the subsidiaries. Owing to this, the regulation of the interconnected variable remuneration system was ensured, and with it, the harmonisation of the individual employee contracts with the legal requirements for variable remuneration. The Supervisory Board also dedicated a lot of effort to making suitability assessments of the Members and of the candidates for new members since the terms of office of two Members expired and there were two empty positions. The suitability assessments were made by the Remuneration, HR and Organisational Affairs Committee after collecting objective data from completed questionnaires and other submitted supporting documents. At the beginning of the year, the Supervisory Board Members also submitted to the Bank of Slovenia questionnaires containing all the data necessary to update the information on meeting the conditions for being a Supervisory Board Member. Additionally, the increased activities of the Supervisory Board in 2016 were primarily focused on: adopting the Bank Recovery Plan; familiarisation with the implementation of due diligence on Hranilnica LON d.d., Kranj; familiarisation with the purchase of the portfolio of leasing contracts from Hypo Alpe Adria Leasing d.o.o. and the issuance of consent for the acquisition of Hypo Alpe Adria Leasing d.o.o.; familiarisation with the introduction of own IT support for the field of retail banking support. In 2016, the Supervisory Board also considered and adopted: materials for the bank s 30 th General Meeting, whereby it verified, confirmed and adopted the audited Annual Report of the bank and the Group for 2015, adopted and approved the Certified Auditor s Report for the 2015 financial year, approved the Internal Auditing Report for 2015, approved the determination of the distributable profits and put forth candidates for new Supervisory Board Members to the General Meeting; a performance assessment of the Supervisory Board s activities in 2015; the Rules of Procedure of the Supervisory Board; quarterly reports on the activities of the Internal Audit Service; half-yearly reports of the Business Compliance Service; the additions to the membership in Supervisory Board committees pursuant to the provisions of the ZBan-2 in light of the election of new Supervisory Board Members; supplementations to the Remuneration Policy; the termination of the Resolution on the Management Board s Work and of the Bank s Optional Plan; the substance of the employment contracts for the Chairman and for one of the Members of the Management Board; a tentative meeting schedule for In 2016, the Supervisory Board approved: the Internal Capital Adequacy Assessment Process (ICAAP); the tentative annual work programme of the Internal Audit Service for 2017; the tentative annual work plan of the Business Compliance Service for 2017; the increase of large exposures and the exposures to persons in a special relationship with the bank; the Gorenjska banka Group Management and Supervision Policy; the bank s Development Strategy and Investment Policy; the Risk Management Strategy and Policy and the Policy on Managing Risky Receivables; the amendments to the Rules on Implementing the Compliance Service in the Bank; the Business and Financial Plan of the bank and the Group for ; the acquisition and disposal of the bank s capital investment in FMR d.d.; the business relations constituting significant business relationships; the sale of certain non-performing loans; the conclusion of legal transactions constituting transactions with persons in a special relationship with the bank. In 2016, the Supervisory Board was familiarised with: quarterly reports on the balance and management of risky receivables; quarterly reports on risk management; the additional disclosures that the bank made public along with its Annual Report; quarterly reports on the bank s operations; the activities that the bank carried out in compliance with the Further Procedures Plan under Item 2.3 of the Order on Additional Measures for the Implementation of Risk Management Rules, and with the Bank of Slovenia s decision stating that all measures were indeed carried out. The Supervisory Board monitored the activities of the Internal Audit Service through regular three-monthly reports. Based on the Internal Auditing Report for 2015, the Supervisory Board determined that the Service operated independently and in line with the 8 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

9 adopted work programme and the Internal Audit Rules of Operation. In the beginning of the year, the Supervisory Board launched a self-assessment of its work / evaluation of its effectiveness in The aim of the evaluation of effectiveness was to ensure effective control over risk management and greater transparency, improve relationships and communication between the Supervisory Board and the Management Board, set priorities and define improvement measures and measures for streamlining work. On the basis of the activities performed in previous years and the self-assessment of work, the Supervisory Board found that the work was done professionally, correctly and effectively and that there were no derogations from best practices of supervisory bodies. Gorenjska banka Operations in 2016 The bank is focused on business collaboration with non-banks whose deposits represent a reliable, stable, dispersed and permanent source of finance. Gorenjska banka dedicates special attention to maintaining a high level of current liquidity and to ensuring secondary liquidity in the form of gilt-edged government securities and loans. In 2016, the bank generated EUR 7.5 million of profit before tax, which equals EUR 6.3 million of net profit. The successful operations also resulted in increased balance sheet total, which in 2016 rose by 4.2%, to EUR 1.5 billion. In 2016, EUR5.9 million of impairments and provisions were made, of which EUR 3.7 million are loan portfolio impairments. At the end of 2016, the cumulative amount of the impairments of financial assets and provisions equalled EUR million. Of this, EUE 99.2 million of impairments are related to the loan portfolio whose coverage with provisions and impairments was 7.63%. The positive P&L and the decrease in capital requirements resulting from the successful implementation of internal measures have increased the bank s capital adequacy, which was 17.86% at the end of At the end of 2015, the bank underwent a recapitalisation that was successfully completed in January All 56,522 of the newly issued shares were sold, which raised EUR 13,000,060 of additional capital. With this, the bank fulfilled all of the requirements of the Bank of Slovenia in regard to ensuring adequate internal capital. On 31/03/2016, the Bank of Slovenia issued a decision to the bank stating that all of the violations were remedied. Information on the Confirmation and Adoption of the 2016 Annual Report The bank s Management Board first submitted the 2016 Annual Report to the Audit Committee, which issued a favourable opinion on it. Within the statutory deadline, the audited 2016 Annual Report was then submitted for verification to the Supervisory Board along with the audited financial statements of the bank and of the Group and with the two Certified Auditor s Reports produced by the auditing firm Deloitte revizija, d.o.o., Ljubljana. Having audited the unconsolidated financial statements of Gorenjska banka, d.d., Kranj (bank) and the consolidated financial statements of Gorenjska banka, d.d., Kranj and its subsidiaries (Group) as at 31/12/2016, which include the statement of financial position, the profit and loss statement, the statement of comprehensive income, the statement of changes in equity and the cash flow statement, and the summary of the major accounting policies and other explanatory notes, the auditing firm has issued two opinions (separately for the unconsolidated and for the consolidated statements), both stating that the financial statements provide a true and fair view of the situation of the bank and of the Group as at 31/12/2016 and of the profit or loss and the cash flows of the bank and of the Group for the year then ended in compliance with the International Financial Reporting Standards as adopted by the EU. The auditing firm s two reports contain a favourable opinion on conformity of the statements made in the business report with the audited financial statements. The Supervisory Board believes that in the 2016 financial year the bank s Management Board and Supervisory Board have fulfilled all of their legal requirements. On the basis of the above, the Supervisory Board confirmed and adopted the Annual Report of Gorenjska banka, d.d., Kranj and of the Gorenjska banka Kranj Group for 2016, and adopted and approved the two Certified Auditor s Reports for the 2016 financial year. David Benedek Supervisory Board Chairman Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 9

10 Organisational Chart of the Bank Management of the Bank Management Board President: Andrej Andoljšek Management Board Member: Mojca Osolnik Videmšek Internal Audit Marija Hejja Compliance Božo Jašovič Legal Office Dejan Kmetec Administrative & Human Vesna Pungeršek Žalig Market division Risk division Support division Executive Director: Executive Director: Executive Director: Miha Resman Marko Ninčević Irena Šest 2 Commercial Banking Credit Risk Assessment Accounting & Operating Support Mojca Peternelj Stanka Šarc Majdič Irena Šest 3 Retail Banking Risk Controlling Information Systems Igor Poljšak Katarina Knapič Lapajne 4 Jure Vehovec 2 As of 1 January 2017, the Director of Support Division is Katarina Knapič Lapajne. Treasury Mladen Jovandić Leasing Aleš Zrinski Marketing communications Irena Čebulj Risk Claim Management Marko Ninčević Middle-office Matej Zajec 3 As of 1 January 2017, the Director of the Accounting and Operating Suppport Department is Marjana Hočevar. 4 As of 6 March 2017, the Director of Risk Controlling is Nataša Veselinovič. 5 As of 1 January 2017, the Department of International Business and Project Financing was broken down into two separate services and transferred to the Commercial Banking Department. 10 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

11 Organisational Chart of the Group Gorenjska banka, d.d., Kranj Subsidiaries 6 Imobilia-GBK, d.o.o., Kranj 100 % Mersteel nepremičnine, d.o.o., Naklo 100 % GB Leasing, d.o.o., Ljubljana 100 % Top Management Structure General Meeting of Shareholders Supervisory Board Audit Committee Management Board David Benedek President Aleš Aberšek Deputy President Jelena Galić Member Miran Kalčič Member Matej Podlipnik Member Gregor Rovanšek Member Domen Trobec 8 Member Gregor Rovanšek President Jelena Galić Member Miran Kalčič Member Risk Monitoring and Assets and Liabilities Committee 7 Domen Trobec 8 President Matej Podlipnik Member Aleš Aberšek 9 Member Nomination and Remuneration Committee David Benedek President Jelena Galić Member Miran Kalčič Member Aleš Aberšek Member Andrej Andoljšek Management Board President Mojca Osolnik Videmšek Management Board Member 6 On 1 February 2017, the Bank obtained a 100% shareholding in the company Hypo-Alpe- Adria-Leasing d.o.o., Ljubljana. 7 As of 13 January 2017, Miran Kalčič is a member of the Risk Monitoring and Assets/ Liabilities Committee. 8 As of 4 November 2016, Domen Trobec is no longer a Member of the Supervisory Board and the President of the Risk Monitoring and Assets/ Liabilities Committee. 9 As of 23 January 2017, Aleš Aberšek is the chairman of the Risk Monitoring and Assets/ Liabilities Committee. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 11

12 Business Network Agency Address Telephone Bleiweisova cesta Bleiweisova cesta 1, Kranj Globus Koroška cesta 4, Kranj Šenčur Kranjska cesta 4, Šenčur Cerklje Trg Davorina Jenka 10, Cerklje Primskovo Cesta Staneta Žagarja 69, Kranj Savski otok Stara cesta 25 b, Kranj Jesenice Cesta maršala Tita 8, Jesenice Plavž Cesta Cirila Tavčarja 8, Jesenice Kranjska Gora Borovška cesta 95, Kranjska Gora Ljubljana - Center Dalmatinova ulica 4, Ljubljana Ljubljana - Celovška Celovška cesta 268, Ljubljana Kamnik Domžalska cesta 3, Kamnik Radovljica Gorenjska cesta 16, Radovljica Bled Kajuhova cesta 1, Bled Bohinjska Bistrica Trg svobode 2b, Bohinjska Bistrica Lesce - Rožna dolina Rožna dolina 51, Lesce Škofja Loka Kapucinski trg 7, Škofja Loka Gorenja vas Poljanska cesta 65a, Gorenja vas Železniki Na Kresu 26, Železniki Žiri Trg svobode 1, Žiri Grenc Grenc 54, Škofja Loka Tržič Trg svobode 1, Tržič Bistrica pri Tržiču Ste Marie aux Mines 36, Tržič info@gbkr.si Website 12 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

13 The economic environment and the banking sector Economic environment According to the initial assessment made by the Institute of Macroeconomic Analysis and Development, gross domestic product in 2016 increased by 2.3% and did not deviate from the autumn forecast. In 2016, the export of goods increased by 4.0% and import increased by 3.3% compared to The import to export ratio was at 103.5%. According to the data provided by the Statistical Office of the Republic of Slovenia, the value of industrial production increased by 6.6% in 2016, compared to The increase was largely contributed by companies engaged in processing activities, with the value of industrial production in these activities increasing by as much as 8.0%. According to the latest data provided by the Employment Service of Slovenia, there were 99,615 unemployed persons registered at the end of December 2016, which is 11.9% less than in December In 2016, the Employment Office had an average of 103,152 unemployed persons registered, which is 8.5% less than in In the same year, there were 89,970 newly registered unemployed persons, which is 7.4% less than in 2015, and a total of 103,431 unemployed persons signed out, 74,856 of them due to employment, which is 5.5% more than in The annual price growth in 2016, measured using the harmonised index of consumer prices, was at 0.6% (compared to -0.6% year over year), while the average 12-month growth of prices was at -0.2% (compared to -0.8% year over year). In 2016, the annual inflation rate was at 0.5%. The average annual inflation rate was, however, negative (-0.1%). In 2015, both the annual and average annual inflation rates were negative, i.e. at -0.5%. The table below illustrate macroeconomic indicators for Slovenia in the periods Gross domestic product, in % (F) 2.3 Private consumption (in %) (F) 2.3 Gross fixed capital formation (in %) (F) -4.0 Export of goods and services, in % (F) 5.7 Unemployment rate, ILO, in % (F) 8.2 Inflation, annual average, in % 0.2 (0.5) (0.1) Current account balance (as % of GDP) (F) 6.7 The key interest rate of the European Central Bank did not change in 2016 and remained at the same level of 0.05%. In 2016, the value of 6-month EURIBOR decreased by 18.1 basis points. In the same year, the Slovenian stock exchange index SBI TOP increased by 3.1%. The Fitch credit ratings firm improved the credit rating for Slovenia's long-term debt in 2016 from BBB plus to A minus, with stable outlooks. (F) - forecast Source: Autumn economic trends for the year 2016, September 2016, Analysis and Development of the Republic of Slovenia; The Statistical Office of the Republic of Slovenia. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 13

14 Banking environment Changes in the investment structure of Slovenian banks slowed down in 2016, but the structure has not yet stabilised. Banks kept a major share of their investments in the most liquid forms of assets, securities and claims on the central bank. The share of loans to the non-banking sector in the balance sheet total decreased to a level comparable to that achieved before the banks' balance sheets started growing rapidly. The credit squeeze for the non-banking sector came to a stop. A slight growth in lending was recorded, primarily due to the growth in lending to households, which was boosted in This was contributed to by low interest rates for loans, low household debt and relatively favourable real estate prices, and also to the fact that banks have paid increased attention to households following the credit squeeze for the corporate sector. Corporate lending cut down in 2016, although at a slower rate than in past years; however, the situation has improved due to the preservation of the same restrictive factors in supply and demand. An important restrictive factor on the part of supply is the preservation of credit standards at high levels. On the part of demand, positive developments were observed towards an increased demand for investment loans on account of restructuring loans, which reflected a healthier structure of corporate demand. In current operating conditions, banks are faced with a major challenge in the search for and definition of optimal and long-term sustainable business models, and in the provision of an adequate level of profitability. The situation is particularly demanding due to the conditions formed by the European Central Bank with its non-standard monetary policy on the one hand, and due to uncertainty regarding future prospects for the economy on the other. Additional challenges lie in process and cost efficiency, investments in commercial purposes in order to improve customer satisfaction and in increasing the importance of services affecting non-interest income. The requirements for improved data processing, together with extensive and constantly changing regulatory requirements, are costly and have a major effect on performance indicators. According to the assessment made by the Financial Stability and Macroprudential Policy Department at the Bank of Slovenia, the key risks in the banking sector reduced in the second half of 2016, except for the interest rate risk and a tendency for a possible increase in income risk. In credit risk, both the volume and the share of non-performing receivables decreased. The bank financing structure was based increasingly on domestic rather than wholesale sources; however, its stability was reduced due to the shortened maturity of sources. The interest rate risk stayed at a relatively high level. The opened gap between the maturity of investments and sources increased the importance of adequate liquidity at banks. Secondary bank liquidity was high, with a large share of government securities. Increased risk for bank operations derived from persistently low interest rates, which may again increase income risk, particularly upon a continuing credit squeeze for the non-banking sector and the maturity of performing investments into securities. The capital adequacy of the banking system improved on one side due to generated profits and increased reserves, which increased equity, and on the other side due to the optimisation of operations and the improved quality of the credit portfolio, resulting in reduced capital requirements. Among banking groups with a sound capital position, major domestic banks stand out, while minor domestic banks remain more vulnerable in terms of capital. 14 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

15 About the Gorenjska banka Group Composition of the group The Gorenjska banka Group (hereinafter»group«) includes 3 subsidiaries in addition to Gorenjska banka d.d., Kranj, namely: Imobilia-GBK d.o.o., Kranj, Mersteel nepremičnine d.o.o., Naklo, and GB Leasing d.o.o., Ljubljana. In November 2016, the Bank sold off its share in the affiliated company Ecoporto Koper d.o.o., Koper, which it obtained in February 2015 through a debt-to-equity swap. In January 2016, it established the subsidiary GB Leasing d.o.o, Ljubljana. The table below shows data on the shares of Gorenjska banka d.d., Kranj, in the capital of subsidiaries and affiliate, and on the Company s share capital as at 31 December Company Equity holdings (in %) Nominal amounts (in thousands of EUR) Imobilia-GBK, d.o.o., Kranj 100 4,498 Mersteel nepremičnine, d.o.o., Naklo GB Leasing, d.o.o., Ljubljana 100 1,300 Gorenjska banka d.d., Kranj, has no controlling company. About the Bank Gorenjska banka, d. d., Kranj (hereinafter: the Bank) is an independent public limited company with its registered office at Bleiweisova cesta 1, Kranj (statistics number: , tax number SI , share capital EUR 16,188,366.33). The Bank's roots stretch back to the 19th century, when organised banking was first established in the Gorenjska region. On 25 March 1955, the first municipal bank in the Gorenjska region was established in Kranj, followed by banks in Škofja Loka, and the following year in Radovljica, Tržič, and Bled. Over time, a single bank emerged, which was included in the Ljubljanska banka system in 1972, initially as a branch, and as a public limited company in the system of Ljubljanska banka subsidiary banks as of 27 December The process of separation from the Ljubljanska banka system began in 1994 with the purchase of shares of Gorenjska banka, d.d., Kranj held by Nova Ljubljanska banka, d. d., Ljubljana. The process was completed in June 1996, when the Bank withdrew these shares. The Bank has an authorisation to perform banking services pursuant to Article 5 of the Banking Act (Official Gazette of the Republic of Slovenia, No. 25/15; hereinafter: the ZBan-2). Banking services are the acceptance of deposits and other repayable funds from the public and the granting of credits for its own account. The bank has an authorisation to perform mutually recognised and addtional financial services. The bank may perform the following mutually recognised financial services, pursuant to Article 5 of the ZBan-2: 1. Acceptance of deposits and other repayable funds; 2. Granting of credits, including: consumer credits, mortgage credits, factoring (with or without recourse), financing of commercial transactions, including forfeiting; 3. Leasing; 4. Payment services; 5. Issuance and management of other payment instruments (i.e. travellers' cheques and bankers' drafts) in the part in which this service is not included in service of former point 4; 6. Issuance of guarantees and other commitments; 7. Trading for own account or for account of customers in: foreign exchange, including exchange transactions, financial futures and options, exchange and interest-rate instruments and transferable securities; 8. Other services related to safekeeping of securities; 9. Renting of safe deposit boxes; The bank may also perform the additional financial services, pursuant to Article 6 of the ZBan-2, namely insurance brokerage in accordance with the law governing the insurance business. During the period covered by this business report, the Bank provided the banking services and extra financial services for which it has the Bank of Slovenia's authorisation. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 15

16 About subsidiaries Imobilia-GBK, d.o.o., Kranj Gorenjska banka, d.d, Kranj, is 100% owner of the subsidiary Imobilia-GBK, promet z nepremičninami in hipotekarnimi posli, d.o.o., Kranj, with registered office at Bleiweisova cesta 1, Kranj. Basic activities of the company are management of the real estate portfolio and implementation of market procedures for the founder's real estate trading, the movable property portfolio (predominantly equipment and machinery) and of the securities and shares portfolio. The company is classified as an ancillary services undertaking as per Article 4(1)(18) of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (UL L 176, , UL L 208, , UL L 321, ; hereinafter CRR Regulation ). Based on the permit issued by the regulatory body, the subsidiary is not included in supervision on a consolidated basis. For the purposes of credit rating requirements or equity calculation, the company is considered as a financial sector entity as per the provisions of Article 4(1)(27) of CRR Regulation. The company has no full time employees possessing specialised knowledge and competences in the field of real estate trade and operations in the area of real estate development and preparation of project documentation. The company will hire external contractors for the abovementioned. Mersteel nepremičnine, d.o.o., Naklo Gorenjska banka, d.d., Kranj is a 100% owner of the subsidiary Mersteel nepremičnine, d.o.o., Naklo with registered office at Cesta na Okroglo 7 in Naklo. The company Mersteel nepremičnine, d.o.o., Naklo was established as a result of the confirmed repeated compulsory composition of Mersteel, d.o.o., Naklo, which envisaged the spin-out of the healthy core through the establishment of two new companies as part of its financial restructuring plan (hereinafter: FRP). The spin-out plan forms an integral part of the FRP and shows that the real estate was to be transferred to the newly established Mersteel nepremičnine, d.o.o., Naklo. The company lets real estate for rent, which is its only activity. GB Leasing, d.o.o., Ljubljana At the beginning of 2016, Gorenjska banka d.d., Kranj, established the subsidiary GB Leasing d.o.o., Ljubljana, and became its 100% owner. The company operates at the address Dunajska cesta 152, 1000 Ljubljana, and has branches in Koper and Maribor. The company renders non-financial services for the Bank in financial leasing for movable property. It started operating in June 2016, when the Bank obtained the consent of the Bank of Slovenia for rendering financial leasing activities. 16 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

17 Shareholders information The Bank's capital stock was divided into 387,938 ordinary shares at the end of As at 31 December 2016, 461 shareholders were entered in the Bank's share register (as at 31 December 2015: 482). The ten largest shareholders had 75.7% of the Bank's capital stock registered (31 December 2015: 67.4%). The Bank was informed in a letter by the Bank of Slovenia dated 18 September 2015 that the company Sava d.d., Ljubljana, was issued a Decision on the withdrawal of the authorisation to acquire a qualifying holding and an Order on the disposal of shares to the company Sava d.d., Ljubljana. With the Decision, Sava d.d. lost the authorisation to acquire a qualifying holding in Gorenjska banka d.d., Kranj, i.e. the entire portion of voting rights and the shareholding in the Bank. At the same time, the Bank of Slovenia, in its decision and based on the Order issued to the company Sava d.d., Ljubljana, ordered the Bank to dispose of shares that were in its possession contrary to the provisions of the Banking Act within 6 months of receiving the Bank of Slovenia s decision, which did not take place until the end of Shareholders of Gorenjska banka, d.d., Kranj, as at 31 December 2016: Name of shareholder Number of ordinary shares Share in capital, in % Share in voting rights, in % Sava, d.d., Ljubljana 146, AIK banka ad 75, DUTB, d.d., Ljubljana 26, Zavarovalnica Triglav, d.d., Ljubljana 15, Iskratel, d.o.o., Kranj 7, Telekom Slovenije, d. d., Ljubljana 5, Domel, Elektromotorji in gospodinjski aparati, d.d., Železniki 5, Turistično društvo Lesce 4, Hipotekarna banka ad 3, G skupina d.d., v stečaju 3, TOTAL top ten major shareholders 293, * Of the total of 146,060 shares owned by the company Sava d.d., Ljubljana, the latter transferred 34,287 to the fiduciary ownership of fiduciary Abanka Vipa d.d., Ljubljana, which keeps them to the benefit of the holders of bonds issued by Sava d.d., Ljubljana, as security for liabilities deriving from bonds. Other shareholders 62, Gorenjska banka, d.d., Kranj own shares 32, TOTAL 461 shareholders 387, According to the balance as at 31 December 2016, 52.3% of shareholders had shares of domestic companies engaged in financial and insurance activities, 6.8% had shares of domestic companies engaged in other various business activities, 6.0% had shares of domestic companies engaged in processing activities, while other activities were represented in a minor scope. The shareholder structure included 20.3% of foreign entities. Net profit for 2016 amounting to EUR 6,299 thousand was used for legal reserves, i.e. in the amount of EUR 315 thousand, and for statutory reserves, i.e. in the amount of EUR 598 thousand. The net profit for the year after its use for the legal and statutory reserves amounts to EUR 5,385, Profit for appropriation, which in addition to net profit in 2016 includes retained earnings in the amount of 1,398, euro, amounts to 6,784, euro. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 17

18 Strategic orientations of the Bank and Group In the years of the economic and financial crisis, which shrank economic activities and made conditions on financial markets difficult, the fundamental guidance in the development of strategic policies of Gorenjska banka was the provision of safe and stable operations. Numerous activities in the previous years were intended to strengthen the bank in terms of capital and aimed at eliminating a potential deficit in internal capital, established on the basis of stress tests. With the successful recapitalisation of the Bank amounting to EUR 13 million completed in January 2016, the last measure to eliminate a potential capital deficit was realised, thus providing the Bank with further growth and development upon the safe operations and management of all types of risks. The Bank s vision Using a wide range of services, the Bank will strengthen its presence and visibility across Slovenia, and will continue to be robust, reliable, and flexible for its clients, business partners, and owners. The Bank s strategy in the coming 5-year strategic period ( ) is to pursue the strategy of accelerated growth through organic growth, asset and portfolio acquisition, and capital integration with other banks and financial institutions, thus becoming a pan-slovenian bank. The Bank s mission The Bank provides quality banking services with its expertise and modern technology which are constantly improved and tailored to the needs and wishes of its clients. It provides a high level of security throughout its operations. The Bank s values The expectations of clients, business partners, and owners are realised by the Bank through its motivated employees, while taking into account the fundamental legal and moral rules of the society. The fundamental values are: responsibility and cooperation; fairness and trust; courtesy and patience; sincerity and truthfulness; the Bank s reputation and success; care and diligence. 18 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

19 The Bank's strategic goals until 2020 The Bank's strategic frame comprises interconnected and interdependent elements strategic goals, a balance between risks, liquidity, business efficiency and sources that the bank needs for its operations capital, financing, human resources and technology. The key strategic goals of the Bank for the medium term are: transformation from a regional into a pan-slovenian bank; gradual change of the portfolio structure reducing the portfolio concentration, growth in the segments of small and medium enterprises and retail; The development of new products and sales channels in corporate and retail operations (leasing, trade financing). The key performance indicators for the implementation of the strategy have been defined for the market position in Slovenia, the rate of return and cost efficiency. In 2016, the Bank took some important steps towards the realisation of the goals set. By recapitalising, the Bank met all the requirements set forth by the regulator and established conditions for further growth and development, while important developments were achieved towards improving the quality and structure of the portfolio through the successful resolution of the issue of non-performing loans. The key strategic project of the Bank in 2016 was the introduction of leasing services. To that end, the Bank obtained a suitable authorisation from the Bank of Slovenia in June and started marketing financial leasing, whereby the volume of leasing transactions additionally increased at the end of the year with the purchase of the portfolio of Hypo-Alpe-Adria-Leasing d.o.o., Ljubljana. The portfolio transfer was completed in December 2016 and the Bank obtained a 100% capital share in the company Hypo Alpe-Adria-Leasing d.o.o., which will render auxiliary services relating to the acquired portfolio for the Bank, in February Sustainable development and corporate social responsibility The key links in the value chain constituting our ongoing responsibility and, hence, our corporate identity are: financial capital or economic strength as a prerequisite for fulfilling sustainability commitments and facing sustainable challenges; human capital or, rather, qualified, healthy, satisfied, motivated, and engaged associates with all competences and responsibilities as the only assurance for the sustainable success of Gorenjska banka; social capital, which makes us deeply rooted in our living and economic environment through local, social, intergenerational, and business integration; intellectual capital, which drives our quality, efficiency, responsiveness, and, most of all, development dynamics and thus long-term existence; environmental capital, which may lead to immense development opportunities through efforts for a more efficient utilisation of natural resources. Policies of subsidiaries The subsidiary, Imobilia GBK, d.o.o., Kranj, will manage the real estate, which it has acquired or will acquire from debtors in bankruptcy that sell the real estate in order to meet their obligations to the bank, on its own behalf and for its own account and shall in doing so observe the principle of economy and pursue the objective of maximisation of the Group's profit, which includes the preservation and increasing of the value of properties. The subsidiary, Mersteel nepremičnine, d.o.o., Naklo, will also pursue the objective of maximisation of the Group's profit, i.e. by letting properties. The GB Leasing, d.o.o., Ljubljana subsidiary will continue with its aggressive market coverage. 95% of the business will be generated through credit intermediaries and other partners involved with supplying vehicles and equipment. It will continue to pursue cost effectiveness. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 19

20 Operations in 2016 New services In 2016, the Bank supplemented its portfolio of products and services with the services of financial leasing for movable property for legal entities and natural persons. Support activities for the Bank are rendered by the subsidiary GB Leasing d.o.o., which has operated since June At the end of 2016, Gorenjska banka d.d., Kranj, was among the most important entities on the Slovenian leasing market and is now available to potential users at over 500 points of sale across Slovenia, including all authorised BMW dealers. Namely, since June 2016, Gorenjska banka and GB Leasing have been exclusive financial agents for the BMW Slovenia brand. An important novelty is also an upgrade of products and services in documentary and international operations and project financing. Thorough support for companies in their operations on foreign markets and in the implementation of major infrastructural projects, which the Bank provided through the reinforcement of its marketing team, resulted in new cooperation and the conclusion of new transactions at the end of the year. The Bank took an additional step towards small and medium enterprises at the beginning of 2016 by establishing the portal»banka Za Podjetnike,«where it provides topical information, advice and instructions in corporate finance, labour law, taxes, HR management, marketing and accounting online and at regular monthly workshops together with another five partners. This service, which makes the pursuit of backoffice operations easier, has been very well received among companies and entrepreneurs, which has reflected in the positive perception of Gorenjska banka among small and medium enterprises. In March 2016, the Bank put into service the online Link c bank, which had been updated in terms of content, technical features and graphics. The renewed Link c is distinguished by a more modern and transparent appearance, a number of new functionalities, improved navigation and an upgrade pursuant to the most demanding security criteria. Upon the expiry of 2016, the Halcom online bank, which will make operations easier particularly for companies cooperating with several banks, was put into pilot production and is already in service. In September 2016, the Bank supplemented the existing forms of saving with the possibility of saving in Triglav funds and investment combinations, while savers were at the same time given the chance to enrich their savings through a combined investment composed of a long-term deposit and the selected Triglav fund. The alternative forms of saving proved very welcome under the given conditions of extremely low interest rates. 20 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

21 Financial operations In 2016, the Bank disclosed a profit before tax in the amount of EUR 7,471 thousand (2015: EUR 4,162 thousand of profit before tax). It achieved a 3.72% return on equity before tax and a 0.51% return on assets before tax. The table below shows the key elements of the Bank and the Group's income statements. (in thousands of EUR) Bank Group Net interest income 28,500 30,992 27,849 30,418 Net non-interest income 14,576 11,099 15,940 12,543 Total income 43,076 42,091 43,789 42,961 Labour costs, general and administrative costs 27,935 24,574 27,985 24,867 Depreciation 1,760 1,737 1,872 1,738 Total operational cost 29,695 26,311 29,857 26,605 Impairment and provisioning 5,910 11,619 5,985 11,473 Profit before income tax 7,471 4,161 7,947 4,883 Tax related to profit 1, ,373 1,142 Net profit 6,299 3,239 6,574 3,741 The Bank achieved a net profit of EUR 28,500 thousand, which is 8.0% less than in The drop in net interest is primarily the result of decreased active interest rates and the resulting drop in interest income, which amounted to EUR 34,740 thousand and decreased by 14.5% compared to The loss of income was partly, but not fully, compensated with reduced interest expenses, i.e. by 35.4%. The Bank does not recognise the accounted and recovered interest on non-performing exposures under interest income, whereby it consistently takes into account the adopted accounting policy in this area. Non-interest income amounted to EUR 14,576 thousand and increased by 31.3% compared to The growth of non-interest income is related to the growth of income from financial assets. In that segment, the Bank generated a profit of EUR 4,089 thousand. This primarily includes profit from the sale of shares that the Bank acquired in the procedure of resolving non-performing receivables. The most important share of non-interest income at the Bank is accounted for by severance pay. The net severance pay reached EUR 9,634 thousand, which is 6.2% less than in Income from severance pay amounted to EUR 10,242 thousand, which is 5.4% less than in 2015, while expenses for severance pay amounted to EUR 608 thousand, which is 9.4% more than in The total operating costs reached EUR 29,695 thousand, which is 12.9% more than in The largest, 50% share of the latter is accounted for by labour costs, while the costs of material and services accounts for 44.1% and depreciation costs account for 5.9%. Labour costs increased by 6.8% compared to The cost of material and services also increased by 22.6%, while depreciation costs decreased by 1.3%. Increased costs are primarily related to the Bank's development activities (the introduction of new products, IT upgrade) and personnel restructuring at the Bank. Compared to the average assets, the operating costs achieved 2.03%. Due to increased costs, the indicator increased by 0.18 percentage points compared to Expenses for provisions and credit portfolio impairments, investment property and capital shares exceeded revenues from the cancellation of provisions Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 21

22 and impairments by EUR 5,909 thousand in 2016 (2015: EUR 11,619 thousand). The share of impairments and provisions in classified assets, which includes credits and therewith related receivables, decreased from 10.53% at the end of 2015 to 7.63% at the end of 2016, primarily due to write-offs and reduced non-performing receivables. The total comprehensive income, i.e. net profit or loss and other comprehensive income after tax, disclosed EUR 4,525 thousand of profit in 2016 (in 2015: a loss of EUR 2,317 thousand). This includes EUR 6,299 thousand of net profit (2015: a net profit of EUR 3,240 thousand), a loss deriving from a revaluation surplus in the amount of EUR 1,374 thousand (2015: a profit of EUR 5,644 thousand), a net actuarial loss of EUR 69 thousand (2015: a profit of EUR 21 thousand), and tax assets amounting to EUR 331 thousand (2015: tax liabilities amounting to EUR 66 thousand). In 2016, the Group disclosed a profit before tax in the amount of EUR 7,947 thousand; the latter is 6.4% higher than the Bank's. The positive difference in the Group's financial results compared to those of the Bank was mostly due to revenues from the rents of subsidiaries. The Bank's balance sheet total increased by EUR 61,450 thousand or 4.2% in 2016 and amounted to EUR 1,512,629 thousand at the end of The increased balance sheet total is the result of an increased volume of operations with the non-banking sector, both on the part of sources and investments. The table below shows the key elements of the Bank s and the Group's statements of financial position. (in thousands of EUR) Bank Group 31/12/ /12/ /12/ /12/2015 Cash, balances at central banks and other demand deposits 141, , , ,818 Loans to banks 62,646 87,767 62,646 87,767 Investments in securities 392, , , ,999 Loans to non-banking sector 854, , , ,280 Fixed assets 10,408 10,297 13,434 10,297 Investment property 24,371 19,315 48,048 41,072 Investments in subsidiaries 4, Other assets 21,428 21,507 25,230 21,726 Total assets 1,512,629 1,451,179 1,513,694 1,451,959 Due to non-banking sectro 1,226,988 1,117,885 1,225,563 1,117,366 Borrowings from banks and central banks 63, ,038 63, ,038 Other liabilities 20,893 13,058 22,216 13,466 Equity 200, , , ,089 Total liabilities and equity 1,512,629 1,451,179 1,513,694 1,451, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

23 The placement of assets The balances of cash in hand, at the central bank and sight deposits at banks decreased by EUR 33,177 thousand or 19.0%. Their share in assets stood at 9.4% at the end of Credits to banks including bank deposits decreased by EUR 25,120 thousand or 28.6%. Their share in the asset structure was at 4.1% at the end of December The total value of the Bank's securities portfolio as at the last day of 2016 amounted to EUR million and decreased by EUR 14.2 million with respect to the end of 2015, when it amounted to EUR million. 72.9% of securities were classified as available-for-sale financial assets. The majority of investments in securities (EUR million) are classified as suitable financial assets for securing liabilities at ECB. In 2016, the Bank disposed of its capital stakes at companies in the amount of EUR 13.8 million or impaired them in the amount of EUR 0.3 million. It received EUR million from the sold principals or due debt securities, and EUR 14.7 million from the due or sold accrued interest in debt securities. The Bank earmarked EUR 165 million for the purchase of securities and stakes in 2016, EUR 4.2 million of which was for the recapitalisation of subsidiaries and EUR 10 million was for equity investments. The business policy for the management of the securities portfolio is focused on providing a balanced portfolio, with an emphasis on safety, liquidity, diversification, predictability and return on investments, as well as on the possibility of securing the operations of the European Central Bank. The figure below shows the credit rating structure of investments in debt securities (rating scale by Fitch Rating Ltd.). At the end of 2016, the Bank held participating interests in 14 companies. In addition to investments in subsidiaries, these are mostly investments that the Bank obtained in the procedure of resolving non-performing loans or investments that are related to the pursuit of the Bank's activities (SWIFT, Bankart, SIS- BON, Bank Resolution Fund). Participation in the capital, 31 December 2016: Company % in equity GB Leasing, d. o. o Imobilia-GBK, d. o. o., Kranj Mersteel nepremičnine, d. o. o., Naklo Intereuropa, d. d., Koper Merkur nepremičnine, d. d., Naklo Istrabenz, d. d., Koper Cimos, d. d., Koper Bankart, d. o. o., Ljubljana Informatika, d. d., Ljubljana Kreditni biro SISBON, d. o. o., Ljubljana Sklad za reševanje bank Košaki TMI, d. d., Maribor Zavarovalnica Triglav, d. d., Ljubljana SWIFT, La Hulpe, Belgija BB; 1% BBB; 21% AAA; 6% AA; 7% A; 62% Brez ocene; 3% Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 23

24 Loans to corporates Loans to SME Loans to government Loans to individuals Loans to banks Credits to non-bank clients increased by EUR 128,914 thousand or 17.8%. Their share in the Bank's asset structure amounted to 56.5% at the end of December The figure below shows the structure of the Bank's credits by client. The volume of the gross credit portfolio increased by 3.9% in 2016, i.e. to EUR 1,043.4 million, whereby the volume of credits to the non-banking sector increased by 9.3% to EUR million. A major part of the increase (EUR million) refers to leasing transactions, which also include the purchase of the Hypo- Alpe-Adria Leasing portfolio. The figure below shows the structure of the Bank's credits by type of credit. In 2016, lending to non-bank legal entities was characterised by particularly fierce price competition, which resulted in substantially reduced interest rates and extremely harsh competition for clients in the corporate and retail sectors upon excess bank liquidity and a simultaneous low demand for investment loans. In the segment of corporate operations, Gorenjska banka nevertheless managed to increase both the number of clients and transactions concluded, as well as the volume of performing loans in Furthermore, it increased its market share in lending to legal entities, where the volume of transactions increased by almost 13% compared to In addition to the optimisation of the credit process and reinforcements in the marketing team, this was largely the result of efficient customer relationship management. Companies were extremely pleased with the expanded portfolio of products and services in project financing, documentary operations and support for operations on foreign markets. In retail lending, the several-year-long trend of growth and increased market share also continued in Credits to households increased by 39.1% compared to the year before and the Bank also achieved extremely high growth rates in marketing complementary insurance services. This was largely the result of competitive products and services, partnerships established with the providers of complementary services, the launch of new products, more efficient communication and marketing channels, and continuing professional training for credit consultants. At the end of 2016, the Bank had investment property worth EUR 24,371 thousand and EUR 48,047 thousand at the Group level. This includes real estate that the Bank obtained in the procedure of drawing securities for bad loans. Credit, unless syndicated Repurchased receivables Deposits Finance lease receivables Syndicated loans 24 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

25 Due to corporates and other customers Due to individuals Due to banks Obtaining sources of financing Debts to non-bank clients increased by EUR 108,476 thousand or 9.7 %. Their share in the Bank's liability structure amounted to 81.1% at the end of The composition of non-banking sector deposits predominantly includes household deposits, which increased by EUR 52,842 thousand or 6.4%. These account for 58.1% of the liabilities structure. Debts to non-bank legal entities covered 23.0% of assets at the end of December 2016 and had increased by EUR 55,634 thousand or 19.0% compared to the end of the previous year. The figure below shows the structure of due to customers. in September Furthermore, the Bank used no credit line instruments at the ECB in In order to provide secondary liquidity, it has extensive marketable financial assets fit for drawing funds at the ECB. As at the last day of 2016, the value of the Bank's marketable financial assets to secure ECB receivables amounted to EUR million. An amount of EUR 5.4 million of marketable financial assets was pledged for the purposes of the Bank Resolution Fund upon the expiry of In 2016, the Bank hired new purpose long-term loans from commercial banks amounting to EUR 8.0 million and at the same time repaid EUR 30.4 million of long-term loans, thus reducing its long-term debt with commercial banks to EUR 63.8 million in Due to the ECB's continuing expansive monetary policy and a shortage of a sufficient volume of primary investments, excess liquidity, the provision of adequate levels of structural liquidity indicators and the preservation of a competitive position, Gorenjska banka decreased its interest rates for deposits made by its clients several times in Despite that, it recorded a high growth in clients' assets, particularly sight deposits, in In the same year, the Bank did not borrow on the wholesale debt securities market. Debts to banks, which include commercial bank deposits and credits and liabilities to the central bank, decreased by EUR 72,123 thousand or 53.0% in At the end of 2016, they accounted for a 4.2% share in the liabilities structure. The Bank reduced its longterm liabilities to commercial banks by EUR 21,862 thousand, short-term liabilities stayed almost the same, while deposits to the central bank decreased by EUR 50,079 thousand. At the end of 2016, there were no short-term liabilities to commercial banks, while long-term liabilities included EUR 63,915 thousand of credit hired. Upon the expiry of 2016, the Bank had no debt at the ECB. Namely, it had made an early repayment of EUR 50 million under the operations of target long-term financing by the ECB, which would otherwise fall due Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 25

26 Capital and capital adequacy The total equity increased by EUR 16,635 thousand or 9.0% in An increase of EUR 13,000 thousand was the result of recapitalisation and an increase of EUR 6,299 thousand was the result of net profit. It decreased by EUR 1,761 thousand due to a negative effect from the revaluation of financial assets and reduced actuarial gains, and by EUR 903 thousand due to recapitalisation costs. The book value of a share, calculated from the total equity, amounted to EUR at the end of 2016 (as at 31 December 2015: EUR ). The risk management capital amounted to EUR 171,662 thousand at the end of December 2016 (2015: EUR 156,962 thousand). It is fully composed of top quality Common Equity Tier 1 (CET1). Capital adequacy ratio and top quality Common Equity Tier 1 (CET1) ratio decreased by 0.01 percentage points in 2016 and amounted to 17.86% at the end of December 2016 despite recapitalisation (2015: 17.87%). The reduction primarily derives from an increased capital requirement for credit risk, which is the result of an increased volume of the credit portfolio. The Bank applies the standardised approach to calculate capital requirements for credit risk. The calculation of capital requirements was also positively affected by the reduced capital requirements for operational risks, where the Bank applies the simple approach (2016: EUR 6,360 thousand, 2015: EUR 6,423 thousand). The picture below shows the trends of the Bank s capital adequacy ratios. Total Capital ratio CET 1 Capital ratio The Group s balance sheet total exceeded that of the Bank by EUR 1,065 thousand (0.1%). Within the scope of the Group s assets, the increased balance sheet total primarily refers to the investment property of subsidiaries. The Group s liabilities and capital exceed the Bank s liabilities and capital primarily in capital items. 26 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

27 Payment services and payment instruments In 2016, the value of the payment transactions made through Gorenjska banka notably surpassed the volume it achieved in The total value of domestic payment transactions, which amounted to EUR 5.4 billion in 2016, increased by 18% compared to the previous year. The value of international payment transactions, which amounted to EUR 2.0 billion, exceeded the 2015 volume by 24%. Such positive developments were primarily the result of the enhanced solvency of the economy or, rather, the improved economic climate. Also higher was the number of payment orders effected by Gorenjska banka in Domestic payment transactions increased by 11% compared to 2015, while the number of effected payment orders in international payment transactions exceeded the realisation from 2015 by 25%. The major reason for the reduced number of personal and business accounts is most certainly further optimisation of bank costs among users. This is indicated in both a general reduction in the number of accounts in the retail segment, as well as extreme sensitivity to the price of payment services among legal entities, particularly newly established companies and sole proprietors who, as a rule, see a low price as the key criterion in the selection of a bank. In 2016, the Bank was again successful in marketing services related to personal and business accounts. Sales promotion and cross-selling activities reflected in a growing number of users of the Link online bank for the retail segment, which increased by 7.5% compared to The number of gradual savings concluded increased by 22% and the number of SMS service users rose by 30% compared the year before. In 2016, the Bank was particularly successful in marketing a pre-pay card, where it managed to nearly triple the number of its holders compared to Upon the expiry of 2016, 5,360 legal entities, sole proprietors and other entities with legal personality had a business account opened with the Bank, which is slightly less than the year before, and represents 2.4% of all the business accounts opened in Slovenia. The number of personal accounts also decreased compared to 2015, i.e. by 2.5%, but the Bank nevertheless maintained its 4.5% market share. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 27

28 Risk management In line with the business strategy and policies of the Bank, risk management is vital in the adoption of business decisions. Risk management is integrated into all the business processes at the Bank and has two main aspects. The first is the aspect of the risk-taking assessment at the Bank and the optimisation of decisions in terms of risk taking, while the other aspect is related to a quantitative assessment of the risks taken. With respect to the business model (universal commercial bank), the risks the Bank is exposed to are primarily traditional bank risks. The most important is credit risk, followed by liquidity risk, while exposures to other types of risks are minor. Following the successful 13 million euro recapitalisation, carried out in January 2016, we managed to fully comply with the requirements of the Bank of Slovenia regarding capital adequacy with no negative effects on business operations. Below is a detailed description of the key elements of the Bank's credit and liquidity risks in Detailed information on the Bank's management of risks and exposures to individual risks are disclosed in the Bank's financial report (Chapter 7) and in a separate document entitled»gorenjska baka d.d. Disclosures of additional information for 2016,«which include disclosures pursuant to Part 8 of Regulation EU 575/2013 and the provisions of the Banking Act. Credit risks Credit risk is the most important risk at the Bank. In past years, the risk increased primarily due to the reduced solvency of debtors, which increased the rate of non-performing loans and losses deriving from credit risk. By adjusting operations, carrying out strategic marketing activities and restructuring the non-performing portfolio, the Bank managed to reduce the volume and share of non-performing exposures. The positive trends in credit portfolio indicators, which started in 2015, continued in The table below reveals the key credit risk indicators at the Bank. p.p. Percentage point. 1 Gross loan portfolio: Gross loans to banks and to non-banking sector, deposits with banks and central banks. 2 Nonperforming loans by individual claim. 3 The base for the calculation of the NPE share is exposure under EBA definition. 4 Balance of impairments for NPE compared to NPE. In EUR thousand 31/12/ /12/2016 Change in the year In EUR thousand In %, p.p. Gross loan portfolio 1 1,004,702 1,043,389 38, % Loans to non-banking sector 871, ,926 81, % Non-performing loans (NPL) 2 277, (82,362) -29.7% Portfolio coverage by impairments and provisions 10.5% 5.7% -4.8 p.p. Share of non-performing exposures (NPE) % 11.3% -6.0 p.p. Coverage rate of non-performing exposures (NPE) % 42.6% -3.5 p.p. The volume of non-performing exposures amounted to EUR million at the end of 2016, which is 28.8% or EUR 79.9 million less than at the end of Claims on companies undergoing insolvency proceedings account for a good third of the non-performing exposures. There is EUR 1.1 million in non-performing exposures among leasing transactions. In 2016, the Bank improved the structure of its credit portfolio, considering both the client segment, where the share of investments to small and medium enterprises and households increased, and the credit rating. The share of loans with D and E rating reduced by 12.5 percentage points in Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

29 The figure below shows the credit rating structure of loans to non-bank clients as at 31 December Liquidity risks The Bank is exposed to outflows and inflows of monetary assets on a daily basis. Liquidity risk management not only represents activities to provide adequate cash flows, but also the availability of suitable liquidity reserves. In 2016, the Bank operated under conditions of excess liquidity. It regulated it primarily by approving shortterm liquidity credits on the interbank money market, with high balances in accounts, net outflows on the wholesale funding market and by investing in securities. The Bank did not borrow on the short-term interbank money market in 2016 and was a net creditor as on the last day of The Bank has the possibility of using central bank liquidity operations, where it can obtain the short-term and long-term assets required for the daily coordination of inflows and outflows based on the pledge of securities that have the status of suitable financial assets. At the end of 2016, the Bank had no debt after short-term and long-term financing operations at the ECB. All the regulatory requirements related to liquidity were substantially surpassed. Throughout 2016, the Bank significantly exceeded the minimum reserve requirement and the level of ratios of the uniform liquidity scale in the group of up to 30 days above 1, which has been laid down by the Bank of Slovenia with its Decision on minimum requirements regarding the calculation of an adequate liquidity position. It also notably surpassed the regulatory level of LCR and provided adequate values of NSFR. Upon the expiry of 2016, the Bank also fulfilled requirements relating to the GLTDF ratio. Market risks The Bank's most important market risk is interest rate risk. The Bank monitors and manages exposure to interest rate risks based on the methodology of interest intervals and a stress test for different scenarios of interest rate trends. The Bank's interest rate risk in 2016 was low and controlled all exposures by bucket were within the scope of the limits, while stress tests for unfavourable changes in interest rates show effects that are within the scope of the limits set. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 29

30 IT upgrade In 2016, Gorenjska banka's development projects were mostly related to IT support updates. These focused primarily on providing support for the new bank reporting system, an early warning system and the integration of newly introduced leasing services into the existing banking system. The Bank earmarked a major share of its resources to a project for the selection and gradual replacement of the existing technical support system for retail transactions. A tender for the selection of a new provider was carried out and a gap analysis was performed. To that end, the application for reporting to the Sisbon system was replaced and has already been connected to all the existing systems at the Bank. At the same time, the server infrastructure for the Oracle databases was upgraded, thus establishing the conditions for the initial adjustments to the new technical support. Several updates, mostly related to payment system requirements, were made in the area of payment transactions. Upon the expiry of 2016, the Halcom corporate online bank for domestic payment transactions was put into pilot production. The latter will make operations substantially easier for large enterprises that cooperate with several banks and already use the Halcom online bank. A series of minor updates was also made to the online and mobile bank for natural persons. Upgrades to reporting systems due to the continuing requirements of the regulator are a constant in IT support updates. Gorenjska banka successfully realises this part of development with its own know-how or, rather, its own resources. In 2016, the Bank successfully implemented an early warning system. In the same year, it also completed the refurbishment of the department switches and fire barriers. Hence, the Bank's entire network at the central location was renewed. It also included the subsidiaries of Gorenjska banka in order to make hardware operations more efficient. 30 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

31 Changes to organisation and HR Organisational changes In parallel with process and product updates, the Bank continued its organisational rearrangements in It established a new Middle Office, which performs a part of the analytical and all the administrative tasks within the sales process to legal entities and natural persons. The corporate sector gained a Department of International Operations and Project Financing, which specialises in support for companies that operate abroad or companies engaged in large infrastructural projects. Considerable changes in the method and organisation of work in 2016 also dictated the reorganisation of General Affairs, which now operates through two departments, i.e. Organisation and HR, and General Affairs and Purchasing. Major organisational changes or reassignments of HR and other resources are planned by the Bank for 2017, i.e. after the project to optimise business processes, which was put into operation at the end of 2016, is completed. Number and structure of employees On the last day of 2016, Gorenjska banka employed 405 persons, which is 2% more than upon the expiry of 2015, when the Bank employed 397 persons. The Bank recruited 23 associates in 2016, primarily due to the newly introduced leasing services, but also due to the increased load in risk management. In the same year, 15 associates left the Bank. Most departures were the result retirement, while a few employees left the Bank for a new employer. Within the scope of the project to optimise business processes, the Bank also started a process of personnel restructuring, which is partly reflected in the number of employees at the end of 2016, but mostly in The employee education structure, which has somewhat improved in recent years, remained practically unchanged in The share of employees with level VI formal education remained the same. The average number of employees in 2016, broken down into groups with respect to the education acquired: Level of education IX VIII VII VI V IV Total Average number of employees The average age of employees somewhat increased in 2016, i.e. it rose from 45.2 years to 46.5 years. There are 39 employees working in subsidiaries. Education In 2016, each employee at the Bank spent an average of 1.91 days on education, while the average investment in education amounted to EUR per participant or EUR per employee. In education, the Bank continued to focus on increasing the efficiency of sales or, rather, implementing target-adjusted sales training courses. It continued a series of classic and interactive workshops, which it already started implementing in In 2016, these education and training courses included 142 employees or, rather, most of the employees working at bank counters. In 2016, 63 employees attended a training course to obtain a licence for marketing investment funds. All 63 employees now have the relevant licence. Furthermore, 60 employees from various organisational units attended training courses relating to IFRS and balance sheet reading. At the same time, employees attended other individual training courses that included different areas of expertise, particularly auditing, information security and safety at work, risk receivables and labour legislation. In 2016, each employee at the Bank spent an average of 1.91 days on education, while the average investment in education amounted to EUR per participant or EUR per employee. Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 31

32 Corporate social responsibility The support of the wider community in which the Bank operates has a major impact on the operations and development of Gorenjska banka, which is why the Bank has been involved in a range of donation and sponsorship projects, through which it contributes to a quality lifestyle in its environment. In doing so, it remains faithful to sports, the development of entrepreneurship and humanitarian projects. Furthermore, the Bank continued to build a long-term relationship with sponsorship partners in 2016, which had already proved successful. It intended almost 18% of its marketing funds in 2016 for investments in the wider social environment or relations with key stakeholders. In sports and recreation, the Bank has had a longterm partnership with the Radovljica Swimming Club and has also entered into a new long-term partnership with the Planica Nordic Centre. The latter, in particular, brings a number of business opportunities to the Bank in addition to participation in a project of national importance. As a gold sponsor of the Slovenska Gazela project, the Bank supported the exposure of positive entrepreneurial examples for the second time in a row in By engaging in events, such as the Small Business Summit, the Conference of the Slovenian Association of Corporate Treasurers and other, it has strengthened its position among small and medium enterprises. Cooperation with the latter has also been strengthened through the»banka Za Podjetnike«online community, where the Bank provides free access to the know-how that is most needed by companies in their day-to-day operations. As an important co-developer of social image in the wider region, the Bank also engaged in numerous activities intended to help socially disadvantaged people by cooperating with hospitals and other non-profit organisations in Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

33 Data and explanations pursuant to Paragraph 6 of Article 70 of the Companies Act Gorenjska banka, d.d., Kranj is a privately held company with over 250 shareholders and more than EUR 4 million in total equity, and is therefore bound by the law which governs acquisitions. Banks that are bound by the law which governs acquisitions must include in their annual reports data and explanations stated in point 6 of Article 70 of the Companies Act (Official Gazette of the Republic of Slovenia, No. 65/09 - official consolidated text, 83/09 Decision of the Constitutional Court: U-I-165/08-10, Up- 1772/08-14, Up-379/09-8, 33/11, 91/11, 100/11 Order of the Constitutional Court: U-I-311/11-5, 32/12, 57/12, 44/13 Decision of the Constitutional Court: U-I-311/11-16, 82/13 and 55/15). Share capital structure The Bank s share capital comprises 387,938 ordinary shares (2015: 331,416). Ordinary shares confer voting rights, whereby each share confers one vote at the general meeting of shareholders. Shareholders exercise their voting rights at the Bank s general meeting of shareholders with respect to the proportion of their shares in the share capital and with respect to the type of shares and in accordance with the Bank s articles of association. Treasury shares have no voting rights. Restrictions to share transfers Bank shares are transferable in accordance with the regulations that govern dematerialised securities. Current shareholders have pre-emptive rights to new share issues corresponding to their proportion of share capital held. The Bank has no other restrictions on shareholding, while approval from the Bank of Slovenia is required for the acquisition of a qualifying holding. There is no requirement of obtaining the consent of the Bank or other shareholders for the transfer of shares. Significant direct and indirect holdings of securities by the Bank The significant direct and indirect holdings of securities by the Bank in terms of achieving a qualifying holding as laid down by the act regulating acquisitions (5% of voting rights) was achieved by three companies at the Bank in 2016 (2015: 4 companies). Sava d.d., Ljubljana, which holds 146,060 shares of the Bank, has no voting rights. Restrictions of voting rights Shareholders voting rights are exercised with respect to the number of shares and are not restricted by the Articles of Association to a certain proportion or a certain number of votes. Shareholders who are the holders of registered shares with voting rights, who are entered in the central register of book-entry securities and who notify their participation at a General Meeting of Shareholders by the end of the fourth day preceding the meeting (cut-off date) are entitled to participate and exercise the voting right at the meeting. Bank rules on the appointment and replacement of members of management and supervisory bodies and on amendments to the articles of association The Bank s rules on the appointment and replacement of members of management and supervisory bodies and on amendments to the articles of association are defined in the articles of association of Gorenjska banka, d.d., Kranj. The supervisory board appoints and recalls members of the Bank s general meeting of shareholders. Persons who do not fulfil the conditions for membership of the Bank s supervisory board pursuant to the Companies Act or the Banking Act may not be appointed to the supervisory board. Members of the supervisory board are appointed for a five year term and may be reappointed. Members of the supervisory board may terminate their terms early through recall or on the basis of a written resignation from the member. The president and members of the Bank s management board appoint and discharge or recall the supervisory board. Only persons who fulfil the conditions for appointment pursuant to the Companies Act or the Banking Act may be appointed president of the Bank s management board. The president of the management board and the members of the management board are appointed for a five year term and may be reappointed. Shareholder 31 December December 2015 Number of ordinary shares Share in voting rights, in % Number of ordinary shares Share in voting rights, in % AIK banka, a. d., Beograd 75, DUTB, d. d., Ljubljana 25, , Zavarovalnica Triglav, d. d., Ljubljana 15, , Sparkasse, d. d., Ljubljana , Erste Group Bank AG, Celovec , Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 33

34 The articles of association may be amended through a resolution of the Bank s general meeting of shareholders. The Bank s general meeting of shareholders may authorise the supervisory board to make amendments to the articles of association, which comprise the harmonisation of the wording with currently adopted resolutions. Management authorisations The Companies Act prescribes the limitation of authorisations of the management board by the general meeting of shareholders for the acquisition of treasury shares such that the general meeting of shareholders defines the duration of validity of the authorisation, price limitations and the proportion of shares that can be purchased on the basis of the authorisation. The last authorisation of the management board for the acquisition of treasury shares was conferred at the general meeting of shareholders of Gorenjska banka, d.d., Kranj on 14 May 2014 (valid 18 months). The Bank may acquire and dispose of treasury shares pursuant to the Companies Act. The Bank s management board decides on the conditions for acquisition and disposal of treasury shares, and must notify the Bank s general meeting of shareholders about transactions involving treasury shares. The Bank s management board may increase the Bank s share capital up to a total amount of EUR 4,556, within five years from the day of entry of thirteen amendments to the articles of association of Gorenjska banka, d.d., Kranj in the court register. Preference shares without voting rights may also be issued within the scope of this capital increase, and the management board may, with the consent of the supervisory board, fully or partially exclude the shareholders pre-emptive right to new shares. Thirteenth amendments and supplements to the Articles of Association were entered in the Court Register on 9 September Diversity policy and representation in management and supervisory bodies The Bank has certain elements of diversity policy built into its Policy of Professional and Ethical Standards and of Assessing the Adequacy of Management and Supervisory Board Members and Key Office-Holders in Gorenjska banka d.d., Kranj. In 2017, it is planning on expanding its policy regarding diversity within the management body in regard to gender and other characteristics, taking into account guidelines set by the European Banking Authority concerning internal management and guidelines used in assessing adequacy, which are currently still being discussed. The basic requisites for these positions remain expertise and the knowledge necessary for managing banking risks. In its management body (Management and Supervisory Board), Gorenjska banka d.d., Kranj currently has a balanced gender ratio in the Management board (1:1), while the ratio on the Supervisory Board is tilted toward men (5:1). Significant events after the date of the statement of financial position On 1 February 2017, the Bank acquired a 100% shareholding in the company Hypo Alpe-Adria-Leasing d.o.o., Ljubljana, as all suspensive conditions for the transfer of the shareholding were met. In February 2017, the consortium of the holders of the majority share of the Bank s stock informed the latter on the start of a procedure to sell the majority share of Gorenjska banka d.d., Kranj. In March 2017, AIK banka a.d., Belgrade acquired another 1,019 shares and the proportion of shares of Gorenjska banka d.d., Kranj increased to 20.10%. There were no other significant events after the balance sheet date. Other explanations Shareholders in Gorenjska banka, d.d., Kranj do not have any special controlling rights. Bank is not known is there are any agreements between shareholders which may result in restrictions on the transfer of securities and voting rights. The Bank have agreements between the Bank and management board or Bank employees which foresee compensation if they were dismissed without grounds or their employment relations terminated because of a bid as defined by the law that governs acquisitions. In the event of a recall or termination of the employment contract without good reason, management board, executive directors and directors are entitled to severance pay. In the event that the term of office of the President of the management board terminates on his request (resignation), the severance pay can be paid based on a positive assessment of its work by the Supervisory Board. A Code of Business Ethics is put in place at the Bank that represents a set of fundamental values and principles guiding our conduct in relation to associates, partners, and clients. The Code is available on the Bank s website: pdf. 34 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Management Report

35 Statement on internal governance arrangements In order to achieve a high level of transparency in governance and based on the exception from point 2 of paragraph 5 of Article 70 of the Companies Act, Gorenjska banka d.d., Kranj, provides within the scope of the business section of its Annual Report the following STATEMENT ON INTERNAL GOVERNANCE ARRANGEMENTS Gorenjska banka d.d., Kranj, realises internal governance arrangements, including corporate governance, in line with the legislation applicable in the Republic of Slovenia, while observing its internal acts, especially the Policy of Professional and Ethical Standards and of Assessing the Adequacy of Management and Supervisory Board Members and Key Office-Holders in Gorenjska banka d.d., Kranj and the Employee Business Ethics Code for Gorenjska banka d.d., Kranj. In doing so, Gorenjska banka d.d., Kranj, fully observes the acts from paragraph 2 of Article 9 of the Banking Act 10. In order to strengthen the internal governance arrangements, the Bank observes in particular: 1) the provisions of the applicable Banking Act laying down internal governance arrangements, particularly the provisions of chapter 3.4 (Bank governance system) and chapter 6 (Internal governance arrangements and adequate internal capital), in the part of the requirements applicable to the bank/savings bank or to members of the management body, 2) the Decision on internal governance arrangements, the management body and the internal capital adequacy assessment process for banks and savings banks 11, and 3) the EBA guidelines regulating internal governance, assessment of the suitability of members of the management body and key function holders, and the remuneration policy and practice based on the relevant decisions adopted by the Bank of Slovenia on the use of the guidelines 12. At the same time, we also strive to observe non-binding recommendations from the Bank of Slovenia letter (No /15-TR as of 23 October 2015). The Bank provides the description of the main features of internal control and risk management systems in the Bank, information on the functioning of the general meeting, management and supervisory bodies and their committees in additional disclosures in accordance with Part 8 of Regulation 575/2013 and Article 88 of the Banking Act 2, which are available on the Bank s website. 10 The Banking Act (ZBan-2), Official Gazette of the Republic of Slovenia, No. 25/15 and 44/16; 11 The Bank of Slovenia s Decision on internal governance arrangements, the management body and internal capital adequacy assessment process for banks and savings banks, Official Gazette of the Republic of Slovenia, No. 73/15 and 49/16; 12 bsi.si/zakoni-in -predpisi.asp? MapaId=1906 The Bank keeps books and other records, which enable financial reporting and ongoing monitoring of the Bank s effectiveness and the compliance of risk management. The Bank keeps books and other records in accordance with the legislation and internal regulations governing this area. By signing this Statement, we also undertake to proactively strengthen and promote suitable internal governance arrangements and corporate integrity in the wider expert, financial, economic and other public. Kranj, 23 March 2017 Mojca Osolnik Videmšek Management Board Member Andrej Andoljšek Management Board President David Benedek Supervisory Board Chairman Management Report Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 35

36 36 Gorenjska banka, d.d., Kranj in Skupina Gorenjske banke Kranj Letno poročilo 2016 Poročilo neodvisnega revizorja

37 Poročilo neodvisnega revizorja Letno poročilo 2016 Gorenjska banka, d.d., Kranj in Skupina Gorenjske banke Kranj 37

38 38 Gorenjska banka, d.d., Kranj in Skupina Gorenjske banke Kranj Letno poročilo 2016 Poročilo neodvisnega revizorja

39 Poročilo neodvisnega revizorja Letno poročilo 2016 Gorenjska banka, d.d., Kranj in Skupina Gorenjske banke Kranj 39

40 40 Gorenjska banka, d.d., Kranj in Skupina Gorenjske banke Kranj Letno poročilo 2016 Poročilo neodvisnega revizorja

41 Poročilo neodvisnega revizorja Letno poročilo 2016 Gorenjska banka, d.d., Kranj in Skupina Gorenjske banke Kranj 41

42 42 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Financial Report of the Bank and the Group

43 Statement of management s responsibilities The Management Board of the bank hereby confirms the Financial Statements of Gorenjska banka, d.d., Kranj and the Gorenjska banka Group for the year ended on 31 December 2016 as well as the accounting policies applied and the Notes to the Financial Statements. The Management Board is responsible for the preparation of the Annual Report so that it presents a true and fair view of the bank s and Group s financial position and operating results for the year ended on 31 December The Management Board hereby confirms that they have consistently applied the accounting policies and made the accounting estimates according to the principles of prudence and due diligence. The Management Board also confirms that the Financial Statements have been prepared on the basis of the assumption of going concern of the company and in line with the applicable legislation as well as the International Financial Reporting Standards adopted by the EU. The Management Board is also responsible for the appropriate keeping of accounting records, implementation of suitable measures for the protection of assets, and for the prevention and detection of abuse and other irregularities or illegal acts. The Tax Office may review the books of account of Group companies at any time within the period of five years of the day the tax needed to be levied, which can subsequently cause the imposition of an additional tax liability or penalty. The Bank s Management Board is not aware of any fact or circumstance that could cause significant liabilities of this type. Kranj, 23 March 2017 Andrej Andoljšek Management Board President Mojca Osolnik Videmšek Management Board Member Financial Report of the Bank and the Group Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 43

44 Income statement The notes are an integral part of these financial statements. (in thousands of EUR) Notes Bank Group Interest income 34,740 40,645 34,088 40,072 2 Interest expense 6,240 9,653 6,239 9,654 3 Net interest income (1-2) ,500 30,992 27,849 30,418 4 Dividend income Fee and commission income 10,242 10,822 10,240 10,820 6 Fee and commission expense Net fee and commission income (5-6) ,634 10,266 9,632 10,264 8 Net gains/losses on financial assets and liabilities not measured at fair value through profit and loss ,783 (789) 2,783 (789) 9 Net gains/losses on financial assets and liabilities held for trading ,306 (191) 1,306 (191) 10 Net gains on financial assets and liabilities designated at fair value through profit or los ,673-1, Exchange differences (46) 171 (46) 12 Net gains on disposals of assets other than held for sale Other operating net loss/profit 4.8. (60) , Administration costs ,935 24,574 27,984 24, Depreciation ,760 1,737 1,872 1, Provisions Impairment ,351 11,266 5,427 11, TOTAL PROFIT BEFORE TAX ( ) 7,471 4,162 7,947 4, Tax , ,372 1, TOTAL PROFIT AFTER TAX (18-19) 6,299 3,240 6,575 3, PROFIT FOR THE YEAR (20) 6,299 3,240 6,575 3, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Financial Report of the Bank and the Group

45 Statement of comprehensive income The notes are an integral part of these financial statements. (in thousands of EUR) Bank Group PROFIT FOR THE YEAR AFTER TAX 6,299 3,240 6,575 3,741 2 OTHER COMPREHENSIVE INCOME AFTER TAX (3+4) (1,774) (5,557) (1,774) (5,557) 3 ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS (69) 21 (69) Actuarial gains/losses on defined benefit pension plans (69) 21 (69) 21 4 ITEMS THAT MAY BE RECLASSIFIED TO PROFIT OR LOSS (1,705) (5,578) (1,705) (5,578) 4.1 Available-for-sale financial assets (1,374) (5,644) (1,374) (5,644) Valuation gains/losses taken to equity 483 (410) 483 (410) Transferred to profit of loss (10) 19 (10) Other reclassifications (1,847) (5,253) (1,847) (5,253) 4.2 Income tax relating to items that may be reclassified to profit or loss (331) 66 (331) 66 5 TOTAL COMPREHENSIVE INCOME FOR THE YEAR AFTER TAX (1+2) 4,525 (2,317) 4,801 (1,816) Financial Report of the Bank and the Group Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 45

46 Statement of financial position The notes are an integral part of these financial statements. (in thousands of EUR) Notes Bank Group 31/12/ /12/ /12/ /12/ Cash, balances at central banks and other demand deposits , , , ,818 2 Financial assets held for trading Available-for-sale financial assets , , , ,740 4 Loans and receivables 923, , , ,104 - loans and receivables to banks ,646 87,767 62,646 87,767 - loans and receivables to customers , , , ,280 - other financial assets ,286 5,057 6,655 5,057 5 Held-to-maturity investments , ,221 95, ,221 6 Property and equipment ,764 7,138 9,594 7,139 7 Investment property ,371 19,315 48,048 41,072 8 Intangible assets ,644 3,159 3,840 3,159 9 Investments in subsidiaries, associates , Deferred income tax assets ,479 15,666 14,058 15, Other assets ,517 1, Total assets (from 1 to 11) 1,512,629 1,451,179 1,513,694 1,451, Financial liabilities held for trading Financial liabilities measured at amortised cost 1,303,087 1,258,899 1,302,615 1,258,295 - due to banks due to customers ,226,988 1,117,885 1,225,563 1,117,366 - borrowings from banks and central banks , ,856 63, ,856 - borrowings from other customers other financial liabilities ,184 4,348 13,137 4, Provisions ,065 2,317 3,065 2, Tax liabilities ,146 1,831 2,189 1,878 - current income tax liabilities deferred income tax liabilities 2,146 1,831 2,146 1, Other liabilities ,498 3,405 3,825 3, Total liabilities (from 13 to 17) 1,311,796 1,266,981 1,311,694 1,266, Paid up capital 16,188 13,830 16,188 13, Share premium 20,023 9,381 20,023 9, Accumulated other comprehensive income 13,124 14,897 13,124 14, Reserves from profit 170, , , , Treasury shares (26,007) (26,007) (26,007) (26,007) 26 Retained earnings (including income from the current year) 6,784 2,770 7,951 3, Total equity (from 19 to 24) , , , , Total equity and liabilities (18+25) 1,512,629 1,451,179 1,513,694 1,451, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Financial Report of the Bank and the Group

47 Statement of changes in equity The notes are an integral part of these financial statements. Bank (in thousands of EUR) Notes Paid up capital Share premium Accumulated other comprehensive income (AFS) Accumulated other comprehensive income (HTM) Accumulated other comprehensive income (actuarial gains on pension schemes) Reserves from profit Retained earnings (including income from the current year) Treasury shares Total equity 1 1 January ,830 9,381 8,427 11, ,107 1,750 (26,007) 186,514 2 Total comprehensive income for the year (325) (5,253) 21-3,240 - (2,317) 3 Transfer from net profit to reserves ,220 (2,220) Other (rounding) December ,830 9,381 8,103 6, ,327 2,770 (26,007) 184,198 6 Profit for appropriation for the year ended 31 December ,385-1, January ,830 9,381 8,103 6, ,327 2,770 (26,007) 184,198 2 Total compre hensive income for the year (2,088) (69) - 6,299-4,525 3 Subscription (payingup) of fresh capital 2,359 10, ,000 4 Transfer from net profit to reserves (913) Other (1) (1,372) - (890) 5.1 The cost of recapitalization (903) - - (903) 5.2. Transfer of actuarial gains to retained earnings Allocation of net profit of the previous year ,385 (1,385) Rounding (1) (1) (1) - (1) 4 31 December ,188 20,023 8,487 4, ,721 6,784 (26,007) 200,833 6 Profit for appropriation for the year ended 31 December ,784-6,784 Financial Report of the Bank and the Group Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 47

48 The notes are an integral part of these financial statements. Group (in thousands of EUR) Notes Paid up capital Share premium Accumulated other comprehensive income (AFS) Accumulated other comprehensive income (HTM) Accumulated other comprehensive income (actuarial gains on pension schemes) Reserves from profit Retained earnings (including income from the current year) Treasury shares Total equity 1 1 January ,830 9,381 8,427 11, ,107 2,140 (26,007) 186,904 2 Total comprehensive income for the year (325) (5,253) 21-3,741 - (1,816) 3 Transfer from net profit to reserves ,220 (2,220) Other (rounding) December ,830 9,381 8,103 6, ,327 3,661 (26,007) 185, January ,830 9,381 8,103 6, ,327 3,661 (26,007) 185,089 2 Total compre hensive income for the year (2,088) (69) - 6,575-4,801 3 Subscription (payingup) of fresh capital 2,359 10, ,000 4 Transfer from net profit to reserves (913) Other (1) (1,372) - (890) 5.1 The cost of recapitalization (903) - - (903) 5.2. Transfer of actuarial gains to retained earnings Allocation of net profit of the previous year ,385 (1,385) Rounding (1) (1) (1) - (1) 4 31 December ,188 20,023 8,487 4, ,721 7,951 (26,007) 202, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Financial Report of the Bank and the Group

49 Cash flow statement The notes are an integral part of these financial statements. (in thousands of EUR) Notes Bank Group A. Operating activities a) Interest received 37,685 42,570 37,033 41,996 Interest paid (6,240) (9,653) (6,241) (9,653) Dividend received Fee and commission receipts 10,242 10,822 10,240 10,820 Fee and commission paid 4.3. (608) (556) (608) (556) Realised gains on financial assets not measured at fair value through profit or loss , , Realised losses on financial assets not measured at fair value through profit or loss (4) (2) (4) (2) Net trading incomes 1, , Cash payments to employees and suppliers 4.9. (27,935) (24,574) (27,984) (24,867) Other incomes 1,480 1,358 2,846 2,804 Other expenses (1,541) (1,222) (1,541) (1,222) Cash flows from operating profits before changes in operating assets and liabilities (a) 18,389 19,377 19,051 19,954 b) (Increase)/decrease in operating assets (185,380) 28,717 (184,318) 34,224 Decrease in financial assets designated at fair value through profit or loss - 45,668-45,668 Increase in financial assets available for sale (108,781) (36,360) (108,781) (36,360) (Increase)/decrease in loans (76,623) 12,303 (72,030) 18,337 Decreasse in non-current assest classified as held for sale - 2,897-2,897 Decrease in other assets 24 4,209 (3,507) 3,682 c) Increase/(decrease) in operating liabilities 40,426 9,730 40,440 9,467 Decrease in financial liabilities held for trading (431) - (431) - Decrease in deposits and borrowed funds, measured at amortised cost 42,431 8,920 42,563 8,252 Increase/(decrease) in other liabilities (1,574) 810 (1,692) 1,215 č) Cash flow from operating activities (a+b+c) (126,565) 57,824 (124,827) 63,645 d) Income tax refund e) Net cash flow from operating activities (č+d) (126,565) 57,824 (124,827) 63,645 B. Investing activities a) Cash proceeds related to investing activities 130,764 4, ,764 4,975 Cash receipt from the sale of held-to-maturity investments 130,764 4, ,764 4,975 b) Cash payments related to investing activities (18,655) (25,737) (20,393) (31,558) Cash payment to acquire property and equipment (5,566) (4,390) (11,308) (10,211) Cash payment to acquire intangible assets (1,139) (875) (1,335) (875) Cash payment to acquire investment in subsidiaries (4,200) (408) - (408) Cash payment to purchase held-to-maturity investments (7,750) (20,064) (7,750) (20,064) c) Net cash flow from investing activities (a-b) 112,109 (20,762) 110,371 (26,583) C. Financing activities a) Cash proceeds related to financing activities 13,000-13,000 - Proceeds from issued shares and other equity instruments 13,000-13,000 - b) Cash payments related to financing activities c) Net cash flow from financial activities (a-b) 13,000-13,000 - D. Effect of exchange rate changes on cash and cash equivalents 1,395 (50) 1,395 (50) E. Net increase / (decrease) in cash and cash equivalents (Ae+Bc+Cc) (1,456) 37,062 (1,456) 37,062 F. Cash and cash equivalents at beginning of year 196, , , ,487 G. Cash and cash equivalents at end of year (D+E+F) , , , ,499 Financial Report of the Bank and the Group Annual Report 2016 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 49

50 50 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2016 Notes to financial statements