annual report - otp banka srbija · retail bank, developing many synergies in the various countries...

2015.

ANNUAL REPORT

1. SOCIETE GENERALE GROUP 4

2. WORD OF MANAGEMENT 6

3. SOCIETE GENERALE BANKA SRBIJA A.D. BEOGRAD 10

4. MACROECONOMIC OVERVIEW FOR 2015 12

5. RETAIL BANKING 14

6. CORPORATE BANKING 16

7. FINANCIAL MARKETS SERVICES 20

8. HUMAN RESOURCES 22

9. CORPORATE SOCIAL RESPONSIBILITY 26

10. RISK MANAGEMENT 28

11. LIQUIDITY MANAGEMENT AND INTEREST RATE RISK 34

12. CAPITAL MANAGEMENT AND CAPITAL ADEQUACY INDICATORS 38

13. FINANCIAL INDICATORS 40

14. EXPECTED FUTURE DEVELOPMENT 44

15. BANK’S FINANCIAL REPORT AS OF DECEMBER 31, 2015 46

TABLE OF CONTENTS

3ANNUAL REPORT 2015

4 SOCIETE GENERALE BANKA SRBIJA A.D. BEOGRAD

Societe Generale is one of the leading

financial services groups in Europe. Based

on a universal banking model, the Group

combines financial strength with a strategy

of sustainable growth, putting its resources

to work to finance the economy and its

clients’ projects.

The Group ambition is to be the relationship-

focused bank, a reference in its markets,

close to clients, chosen for the quality and

commitment of its teams.

Present in 76 countries and benefiting from a

solid foundation in Europe and in high-potential

regions across the globe, the 148,300

employees of the Group and its subsidiaries

support over 30 million individual customers,

large corporates and institutional investors

worldwide. They offer a wide range of advisory

services and tailored financial solutions that

rely on three complementary core businesses:

SOCIETE GENERALE GROUP1

Societe Generale was founded on May 4th, 1864 in France by a decree signed by Napoleon III. Initially, the bank was founded by its shareholders with the aim to improve the economy, initiate growth, stimulate industrial investment and develop communication and social spirit.

5ANNUAL REPORT 2015

French Retail Banking

Retail banking in France consists of three complementary brands: Societe Generale, a leading national bank; Credit du Nord, a group of regional banks; and Boursorama, France’s leading online bank. These brands serve a diverse clientele, which comprises over 11 million individual customers and nearly 777,000 professional, corporate and non-profit clients. The Group's goal for French retail banking is to be the leading bank in terms of customer satisfaction and protection.

The Societe Generale network supports a diverse clientele of individual customers, professionals, businesses, communities and not-for-profit organisations. Customer satisfaction is our top priority: our network has been named “Service client de l’année 2015”, or Customer Service of the Year 2015 (Viseo Conseil), and deploys an offer that is customised to its customers’ new requirements. It employs an innovative and effective multi-channel platform: a dense network of branches, online tools, dedicated advisors, and a comprehensive and diversified range of products and services.

Across France, the eight regional banks of the Crédit du Nord Group operate with a high level of independence and have a perfect knowledge of the local economic fabric. Customers enjoy all the advantages of a regional bank on a human scale coupled with those of a nationwide banking group.

The Boursorama Group offers a complete range of online banking products and services. Established in 1995 and present in three European countries, Boursorama is a pioneer and French leader in its three businesses: online banking, brokerage and financial information. Boursorama, France’s leading online bank, offers a wide range of innovative products and services, such as "Easy Cheque" (a cheque you create online) and a budgeting tool in one's personal banking page (where a customer can manage all his accounts, including thoses he has in other banks). Boursorama online banking is fully mobile. From opening an account to providing an e-signature to raising credit limits, Boursorama customers can now access all major banking products and services from a smartphone or tablet.

International Retail Banking, Financial Services and Insurance

The Group’s international retail banking and consumer

credit network serves over 28 million clients across 64

countries. In each of these countries, Group implement

its universal banking model, while adapting it to the

specificities of local markets.

Financial Services offering is built on Group’s expertise

in three businesses: Insurance, Vehicle Leasing and

Fleet Management, and Equipment and Vendor Finance.

These specialized businesses complement universal

retail bank, developing many synergies in the various

countries in which Group operates.

Global Banking and Investor Solutions: Corporate and Investment Banking, Private Banking, Asset & Wealth Management and Securities Services

Societe Generale Corporate & Investment Banking (SG

CIB) plays a key role as an intermediary between issuers

and investors in three major activities: investment

banking, financing and market activities.

One of the leading private banks worldwide, Societe

Generale Private Banking offers tailor-made wealth

planning: strategy and expertise in asset allocation,

portfolio management, funds, markets and wealth

management solutions.

Group’s subsidiary Lyxor Asset Management offers asset

management and advisory solutions in all asset classes.

With a strong culture of risk management and research,

Lyxor stands among the leaders in innovative, flexible

and transparent asset management.

Societe Generale Securities Services offers a full range of

securities services adapted to the latest financial markets

and regulatory trends.


Another year of attempts to revive aggregate demand and growth, both on international and local level, is behind us. In spite of the expansive monetary policy of the Central Bank (The EURIBOR has slipped into the negative zone), Serbia’s main trade partner – the European Union – continues to struggle with deflation pressure and to search for the right economic policy measures to ensure long-term sustainable growth. The exchange rates on the world market, the Chinese slowdown, the plummeting of oil prices and of many other products, the migrant crisis and economic sanctions against Russia, have all put pressure on international relations and hampered the recovery of the Serbian economy.

Still, the Serbian economy however did record a mild growth in 2015. The inflation target regime contributed to reducing inflation expectations, as well as to the drop of inflation itself to 1.5%, which gave room to the NBS to lower the key policy rate during the year. Serious improvements were made in the fiscal consolidation, as confirmed by the successfully completed IMF stand-by arrangement revisions. The initial negotiation chapters with the EU have been opened. Serbia significantly climbed on the World Bank’s Doing List, thanks primarily to the adoption of a number of pro-reform laws. Nevertheless, the credit potential on the market continues

Goran Pitic President of the Board of Directors

WORD OF MANAGEMENT 2

7ANNUAL REPORT 2015

to stagnate, with no hint of significant recovery in sight and with the lack of long-term investment demand being a particular cause for concern. Problems remain with inefficient public companies, court system; lingering public administration reform, restructuring of problematic companies and slow improvement of business environment, especially the strengthening of competition.

In 2015, the banking sector in Serbia was primarily characterized by intense work on diagnostic studies and the focusing of attention on the high level of non-performing loans. Regulatory requirements, pressure from the competition, interest rate declining trends, lack of fresh demand and NPLs-related issues, have all reduced the profit potential of the banking sector and have put pressure on managements and employees of all banks to adapt to such situation by reexamining certain business policies and even models.

The business model of Societe Generale Srbija has proven resilient in these circumstances, and provided the opportunity to achieve a few of remarkable results. Efforts made in the previous couple of years in assessing the quality of credit portfolio and the levels of risk have resulted in good financial standing in 2015. By focusing on strengthening the quality of its services, on efficiency and innovation in creating new products, the Bank has

succeeded in increasing the number of its clients and in responding to challenges of a demanding market, as well as demanding new, digital age. The year was marked by the ongoing construction of the new office building, as well as numerous projects from the area of social corporate responsibility.

Ahead of us is another year full of challenges and uncertainties. Those who understand the market requirements and client needs will succeed. They will strengthen the innovation culture, good expertise, team work, openness to share good news, and willingness to face challenges together.

We have all the prerequisites to be part of those who succeed!


Maria Rousseva President of the Executive Board

2015 was a good year for the financial and commercial performance of the bank whose main priority remained to be close to the clients, to better understand their needs and provide them with adequate products and services.

Following this strategy, in a complex environment characterized by slow economic growth, Societe Generale Srbija managed to improve its financial results by growing the commercial activity with reasonable risk approach.

Rapid development of digital trends is one of the main challenges that marked the year, a common one for the banks at both global and local level.

The main focus in our activity in 2015 was to anticipate this increasing importance of digitalization by developing services that will respond to the clients’ needs to perform their financial operations quickly and easily online.

We are very satisfied to be the first bank on the market in 2015 to introduce the online branch within an improved e-banking platform.

This innovative service introduces the digital electronic certificate in banking and enables the clients to perform complex services, such as cash loans, savings, overdraft, term deposit, standing orders and direct debit,

WORD OF MANAGEMENT 2

9ANNUAL REPORT 2015

completely online without a single visit to the bank with the possibility of having a video call with our staff.

Strong growth in retail lending, in cash and consumer segment, but also in housing loans is yet another confirmation of the confidence the clients show towards our bank, which, for nearly four decades, has been operating on the local market.

We are satisfied with the performance achieved in the small business segment, including entrepreneurs. This is primarily a result of our improved understanding of their needs and offering proper services in line with clients’ activities through a segmented approach unique on the Serbian market.

The introduction of innovative products and services and high quality expertise yielded also good results in the corporate sector. Despite the challenging economic environment our bank succeeded to remain focused on further growth based on stabilized financing sources, consolidation of the loan portfolio and balanced business model. In 2015 we put special emphasis on the factoring offer by introducing an innovative supply chain finance platform, which simplifies communication between customers and their suppliers. The achievements in corporate sector encouraged us even more to continue

to support the business while focusing on deep knowledge of client needs.

The commitment of the bank to the development on the local market is confirmed by the construction of the new head office building, which is scheduled to be inaugurated in 2016. During last year, we were also involved in the development of the society and the local community, applying the principles of corporate social responsibility towards our employees, clients, community and the environment, supporting various projects in the fields of culture, professional integration of young people, development of entrepreneurship, as well as those who are dealing with socially vulnerable groups of population.

All these achievements would not have been possible without our employees who have shown that team spirit, responsibility, commitment and innovation are not only a part of our vision and strategy, but that they form an integral part of our daily activities. These results represent for us the motivation to set even higher goals, to continue to improve our business and to further contribute to the local community during the coming years as well.


Present in Serbia as of 1977, at first as a representative office, and as of 1991 as the first bank

with foreign capital, Societe Generale banka Srbija AD Beograd operates as an universal bank,

which through its 103 branches and with its 1,349 employees, offers, with full commitment, high

quality services and broad range of products to its clients, both individuals and legal entities – large

privately held and state-owned companies, domestic and foreign multinational companies, financial

institutions, as well as to SMEs, micro segment and entrepreneurs.

SOCIETE GENERALE BANKA SRBIJA A.D. BEOGRAD

3

11ANNUAL REPORT 2015

In the local banking market, Societe Generale banka Srbija AD Beograd is constantly

among the leading banks, being in the top 5 by the size of its balance sheet, as

well as its loan and deposit portfolio. Also, over the last few years, bank is a leader

in mortgage, cash and consumer loans segment, in providing cash management

services for its clients, by the volume of turnover on the foreign exchange market, as

well as in providing custody services to the pension fund industry.

In 2015, despite challenging macroeconomic and regulatory ambient, Societe

Generale banka Srbija AD Beograd has managed to further improve its

performance, recording increase in its balance sheet sum by 3.7% yoy to 230.5

RSD billion. The bank was successful in its efforts to further expand its client

base, with the number of active retail clients recording 4% growth. Total loan

portfolio recorded 3.7% growth in 2015, while deposits base expanded by 9.2%,

reflecting high level of confidence that clients have in Societe Generale bank and

their satisfaction with the quality of services provided. The bank has finished the

year with operating revenues higher by 11.5%, whereas net result of 2.1 RSD

billion is far better vs. 2014.

In 2015, Societe Generale bank has continued with the enhancement of its

products and services, as well as its processes optimization. At the same time, the

bank has positioned itself as the leader in digitalization, after the continuous work

on improvement of electronic and mobile banking resulted in launching first Digital

(online) branch in Serbia.

This is one more confirmation of the innovative approach of the Bank which tries

to offer best possible service to its clients, at the same time nurturing long term

relationship with them.

Mutual trust, respecting contractual liabilities, readiness for cooperation, as well

as the capability to offer innovative solutions that meet clients ‘needs are only

some of the characteristics of the relationship that the bank nurtures with its

clients and partners for decades.


After having some of the strongest economic growth

figures in the beginning of the 2000s, the Serbian

economy remained relatively unchanged in the 2009

to 2014 period. After contracting by 1.8% in 2014,

the economy shrank by 2.0% in Q1 2015, however, it

returned to growth in Q2, rising by 0.9% and by another

2.2% in Q3 2015. Negative growth in the second half

of 2014 was a direct result of the May Floods, which to

an extent set a ground work for the H2 2015 rebound

based on low base effect, among other things.

Along with the floods, negative growth resulted from low

government spending and lack of investment in fixed

capital and with the strong rise in imports. However,

import growth has cooled off somewhat while growth

in exports of goods and services has been increasing

once again, which is a trend that we expect to continue

in coming years. This will result in a narrowing

trade deficit, improved export/import coverage ratio,

improved current account figures and finally greater

macroeconomic and currency stability leading to lower

inflation and in turn interest rates.

The rebound in industrial production was almost based

on growth in mining and electrify production, however,

growth levels are expected to return to more normal in

the future as the post flood effects pass. Meanwhile,

construction activity is also rising, which is something

we expected but at a slower pace that which was

reported in Q2 and Q3 2015. A significant rise in issued

building permits rose in H1 2015 will help sustain future

economic growth.

MACROECONOMIC OVERVIEW FOR 2015

4


Ultra-loose monetary policy in the Euro area will benefit

local borrowers as historically low interest rates and

considerable Euro liquidity, a result of the monetary

stimulus program of Quantitative Easing, is expected

to continue into 2017. The possibility for further easing

will be beneficial for both the corporate and household

sectors. Lower borrowing costs will improve corporate

profits and increase disposable income for retail

borrowers in years to come.

However, QE is a direct result of very low inflation and

slower economic growth in the Euro area, which could

slow the Serbian economy as the EU is Serbia’s largest

export market, with 2/3 of the country’s exports being

shipped to there. Another potential risk is the possibility

of further hikes of interest rates by the US’s Federal

Reserve, an event which would negatively affect most

emerging markets, including Serbia.

Even though some analysts expected a significant

decrease in consumer spending in Serbia due to

the decrease in salaries and wages of state sector

employees, to go along with the decrease in pensions

as part of the IMF program, that was not the case. The

12 month moving average of salaries in November 2015

compared to a year earlier was virtually unchanged,

underscoring that there was a considerable increase in

salaries and wages of private sector employees.

We feel that this is one of the major factors behind the

positive, however sluggish, upturn in retail borrowing

at the end of 2015. Higher private sector salaries and

increased borrowing helped stabilize retail spending,

which together with the increase in industrial production,

exports and foreign direct investment will support the

economy in the next few years.

A continuation of economic reforms and the IMF

arrangement are expected to help the local economy

become more efficient and investor friendly thereby

lowering the risk perception. In December and January,

Serbia’s credit outlook was improved by credit rating

agencies, Fitch and Standard and Poor’s.

We feel that the improved outlook for Serbia will be

beneficial in further attracting foreign investment, which

has increased significantly in the January to November

period of 2015, yoy. Increased FDI should further

increase exports in the next few years, causing the

trade deficit to decline further, improving employment,

company earnings and therefore tax receipts resulting

from a growing economy, which will help push the debt/

gdp and deficit down, another step which should further

improve the countries rating.

Finally, only a continuation of the integration and

harmonization with EU legal standards and economic

environment, including significantly reforming and

decreasing the local bureaucracy, will Serbia be a better

investment and business destination, whereby insure

long-term, sustainable, economic growth.


In 2015, the Retail business continued to be

focused on the needs of its clients, as well as

developing long-term relationships with them.

This sector is continuously working on improving

processes, products and services, responding to

the needs of its clients. One of the key indicators

that mirrors the support that the Bank, together

with its associated companies, provides to its

individual clients, is the strong net loans growth,

of 8.4% compared to 2014 to RSD 71.1 billion,

increasing the Bank's market share in this

segment, to 9.9% (from 9.7%). Also, after the

strong growth of the number of active retail clients

in the last few years, the Bank managed to further

expand client base by 4%.

When we talk about cash and consumer loans

Societe Generale Bank Srbija a.d. Beograd

has achieved growth of outstanding of 15.6%

compared to the previous year, while growth

in mortgage loan outstanding was at 5.65%

compared to 2014, enabling the Bank to reaffirm

its leadership position on the market, once again.

In 2015, Societe Generale Bank Srbija a.d. Beograd

has further expanded its deposits base regardless

of implementation of moderate interest rate policy,

reflecting increased customer base and high level

of confidence of the clients in the Bank. The total

amount of deposits in Retail reached 68.4 billion

dinars, an increase of 3.6% compared to 2014.

RETAIL BANKING5


The most important project for Societe Generale

Srbija in 2015 was improving of e-banking platform,

with brand new design and innovative service. By

launching of the online branch on December 7th we

have positioned ourselves as the first bank in Serbia in

which individuals can finalize entire process of buying

certain products and services completely online. The

Bank’s clients can also video chat with bank officers

through the platform, even outside the regular working

hours. We are proud of the fact that this option is also a

complete novelty in the Serbian banking sector.

Products and services which are currently available to

our clients through e-banking services are cash loans,

savings, overdraft, time deposit, standing orders and

direct debits, and review and prepayment of one or more

installments related to usage of Masterata credit card.

Specially formed Digital team of Societe Generale Srbija

is available to provide assistance to the bank’s clients

via video calls, chat, co-browsing and voice call, for

88 hours per week, responding on each question and

enabling easy access to users of online services through

the setup process or the request. New e-banking

platform will have significant impact on daily activities

of SGS branch network as simple banking products and

transactions will be respectfully reduced i.e. transferred

into digital domain, being conducted by online branch.

New e-banking platform, including the service of

“Online Branch” is a project on which the teams of

Societe Generale Srbija worked intensively for a long

time lead by conviction that it will bring technological

and innovation primacy to the Bank on Serbian

market. Project of re-designing e-banking platform for

individuals started in the beginning of 2014 and it’s

a result of joint efforts of almost every business and

support unit in the Bank.

Since a respectful period of time, both in Serbia and globally,

Affluent clients are in the focus of the banking sector.

Those clients are not numerous, but are very influential

in the business world, familiar with new technologies and

requiring efficiency, flexibility, confidentiality and high

professionalism from the bank. Besides the commercial

benefit, providing services for this client segment

contributes to the overall reputation of the bank.

Small business

Good results were also achieved in the Small Business

Department, which recorded strong increase in

customer base. The loan portfolio grew by 19% while

deposits grew by 27% compared to 2014. The growth

in portfolio is a result of the unique market approach

to this client segment, as the Bank reviews the activity

of individual companies and entrepreneurs, and adapts

its offer to specific needs in the areas of production,

transport, trade and professional services. The network

of 103 branches of Societe Generale Banka has 41

personal bankers, specialized in providing services to

Small business and entrepreneurs.

Societe Generale banka is committed to the

development of this segment and believes that Small

Businesses have great potential for the national

economy, which is also reflected in participation of the

Bank in the initiative of the daily newspaper Blic, called

"Blic Entrepreneur, enabling the winner of the contest,

the company declared the best in SME segment to

receive significant funds for business improvement.


The focus of the Corporate sector in Societe Generale Serbia, during 2015, was to provide higher value added service to our clients, assure stronger synergies across all the segments of our universal bank, with a special emphasis on pursuing balanced growth and promoting bank’s strong expertise in full range of services. Year 2015 was still marked by an economy that was slowly recovering during the year and the Bank has managed to successfully support its clients through their growth and their business plans for coming period.

6


CORPORATE BANKING


At the first place, after several years of invested effort in

managing difficult cases, the Bank in 2015 significantly

reduced its portfolio of sensitive clients, and assured not

only the stability but growth of the activity despite the

overall drop of the lending market.

In this context, the main drivers of this balanced lending

approach remained re-concentration of part of the activity

on less risky products such as factoring and leasing.

Moreover the Banking channel of contribution to Leasing

activity grew by more than 128% in 2015, reaching

more than 14 MEUR of new production, which was one

of the main levers of overall excellent achievements of

Sogelease this year. In loans to customers the Bank has

finished the year with total net outstanding of 85.1 RSD

billion, which is additional proof of stability bearing in

mind that the market was in decline throughout the year.

The Bank has also continued to strongly develop its

Global Transaction Business, through several stages.

Organization has been moved closer to commercial

services and special accent has been put on the

animation of the specialized sales, and more presence

in contact with the clients. This has resulted in visibly

better achievements across all GTB business lines.

Trade Finance business has significantly increased by

14% during 2015 comparing to 2014. and the Bank has

been declared as the best Trade Finance bank in Serbia

in 2016 according to Euromoney Survey implemented

from September until November 2015.

Leading position of Factoring on the market has been

reconfirmed also in 2015 where factoring achieved

total turnover of 187 MEUR, which represented growth

of more than 78% comparing to 2014. The average

outstanding funds increased by 20% (EUR 41.5mln),

the number of assigned invoices by 146%. One of the

outstanding accomplishments of this year was final

deployment of first Supply Chain Finance platform in

Serbia that only after several months of functioning

started showing more than satisfactory results in

terms of client on-boarding and overall turnover. This

platform has proven its position as a true innovation on

the market that has simplified and made more efficient

communication and exchange between clients and their

suppliers in otherwise rather administrative process. It is

expected that the Bank will continue growing customer

base for this particular product in following year. In

Cash Management the Bank has also kept its position

among leading players on the market in all product lines,

which is particularly reflected through a high number of

won international RfPs. The Bank has managed to keep

high quality of service among all lines with growth of

domestic payments by 14% and international payments

by 33% and top position both in cash collection and

cheques processing.

In line with its funding strategy the Bank has maintained

steady level of customer deposits during the year with

deposits of 70.3 RSD billion and market share of 11.5%

despite high volatility of liquidity on the market in certain

periods. The bank has also succeeded to grow its

customer base by 2.1% comparing to beginning of the

year, as a sign of continuously high quality of service

and reputation on local market.

Finally, The Bank has it strong commitment in

supporting the growth of the medium size and small

business in the country through partnerships with

International Financial Institutions. Through International

Financial Institutions financing the Bank particularly

supported development in energy efficiency programs,

environmental protection, agriculture development and

others. During 2015, the Bank has also participated in

the program of support to small and mid size companies

for purchasing of equipment, (as one of the five

commercial banks that have taken participation in this

program), with significant share in overall lending.


Custody Services

In 2015 Societe Generale Banka Srbija a.d. Beograd

kept absolute Market leader position as the Custody

Bank for all existing Serbian Voluntary Pension

Funds. High level and quality of custody services

provided by the experts were once again recognized

and appreciated, so for the newest established local

Voluntary Pension Fund, its Asset Management

Company in July 2015 decided also to use Custody

Bank services of Societe Generale Srbija. Asset

under Custody belonging to Voluntary Pension Funds

increased by 22% (comparing Net Asset Value at the

end of 2015 with the same indicator at the end of

2014). Significant experience and knowledge were

presented in servicing of local Investment Funds and

other local professional investors too.

Foreign Custody Clients (Professional Investors) in

2015 continued to use custody services with and a

slight growth of volume of transactions was recorded.

Their investments were mainly in government bonds

(debt securities) on primary, but also on secondary

market.

Capability for providing of standardized high level

quality of custody services abroad is additional driver

of success and achieved good position on market.

Custody services on global markets are provided

indirectly, through Global Custodian or Sub Custodians

in accordance with agreements signed.

19ANNUAL REPORT 2015 19ANNUAL REPORT 2015


FINANCIAL MARKETS SERVICES

7

Since 2004, Investment Services Unit operates as a separate

organizational unit of the Bank, with the authorization of the Securities

Commission to provide to its clients services related to the financial

instruments and capital market:

Brokerage services in trading with financial instruments on regulated

and OTC market,

Corporate agent services,

Services in the privatization process,

Agent and/or underwriter services in the issuance of securities.

In the previous year, in addition to current operations, Unit was focused

on the further development and improvement of its services, so it could

offer to its clients, until the end of the first quarter of 2016, investment

advisory service, as well as brokerage service in trading with financial

instruments in foreign markets.

In 2015, investors' focus was kept on the government debt securities,

that is, Treasury bills. More and more private individuals showing interest

in trading with these financial instruments. The impetus was given by

the recent decision of the Republic of Serbia (November 2015) to list

Treasury bills on the Belgrade Stock Exchange (Prime Listing of the BSE

Regulated Market) and thereby provide potential investors with additional

liquidity in secondary trading.

In last year, Investment Services Unit has participated in the stock

exchange trading with nearly 1,450 transactions and with realized

annual turnover of more than RSD 69 million. When it comes to realized

turnover with Treasury bills the Investment Services Unit in 2015 has

remained among the five most active market participants.


Foreign Exchange Market

Societe Generale Bank Srbija a.d. Beograd

strongly supported its Corporate clients on local

FX market and managed to remain among the

top four banks on the local market in terms of

total volume of transactions in 2015. According

to the official statistics of National Bank of

Serbia, the Bank reached a market share of

10.18% and was ranked 4th in trading with

Corporate clients. Besides providing support to

the local Corporate clients, the Bank was an

important partner for International Corporate

clients and financial institutions. Societe

Generale Bank Srbija a.d. Beograd reached

a market share of 17.5%, and was ranked

2nd by transaction volume. Another very

important segment is trading with domestic

banks where the Bank reached market share of

8.93%, ranking the Bank on the 2nd position.

In all three business segments in the foreign

exchange market, Societe Generale Bank

managed to maintain high positions that also

had in the previous period. The results achieved

in the foreign exchange market in 2015,

despite the large and strong competition shows

the stability of operations in this segment in

comparison to the previous period.


Societe Generale Bank Serbia ad Belgrade has ended 2015 with 1,349 employees, while

our team joined 82 new colleagues. In accordance with the requirements of the market and

new trends, the most frequent profiles in the recruitment process were experts in the field of

information technology, small business, product development and marketing.

During 2015, the Bank conducted a survey "Barometer" employee survey that was aimed to

examine employee satisfaction and to identify key directions of development of Societe Generale

Group, as well as each of its entities. This survey is organized every two years, and this year for

the first time in the promotion of the survey were included employees from different divisions

of the Bank that best represent new values of our Group: Team spirit, Innovation, Responsibility

and Commitment. After receiving results of the survey, throughout Focus groups, in the drafting

of the action plan were included 70 colleagues from different organizational units of bank.

This way we managed interpretation of the survey results in a team oriented and transparent

manner. The results are at all comparable items better than in 2013.

By listening employees needs, and in order to make a balance between business and private

life, as well as the need to minimize daily stress, we introduced flexible working hours, as well

as the "Casual Friday". Bank enabled its employees from the Head Office of the Bank possibility

to attend Yoga and Pilates classes.

During 2015, we developed the sales and communication skills of our colleagues from the

Corporate and Retail Divisions. We developed cooperation between front and support functions

through workshops and shadowing process, in order to improve understanding of the processes

and activities carried out by colleagues from different departments, and are part of the same

process. We worked on improving presentation skills, to facilitate colleagues to present their ideas

and projects in a simple and interesting way. We've improved the process of induction of new

colleagues to ease their learning on the new position and to integrate within the organization.

The bank has introduced a new leadership model this year and organized workshops for

our employees in order to meet with the new values and expectations. We have included an

innovative approach during workshops delivery in order to support and show in practice values

that leadership model is about model.

HUMAN RESOURCES8


EMPLOYER BRANDING

Societe Generale Bank of Serbia is committed to the education of young people and very seriously approaches to educational programs, which is confirmed with large list of educational institutions we cooperate with: FON, Faculty of Economics in Belgrade, Faculty of Economics in Subotica, FEFA, College of Information Technology, Belgrade Banking Academy, Secondary school of Economics in Nis, Subotica and Uzice, School of Economics in Belgrade, Singidunum University.

The Bank continually participate in financial education of young people through lectures of experts on various topics, through practical training in various departments of the bank for about a hundred students annually. The Bank also includes young people on various projects on which they have the opportunity to cooperate with the experts from the bank and apply their knowledge in practice, but also their fresh ideas to contribute to the improvement of the bank's operations. Students from four different faculties in Belgrade form Youth Advisory team of the bank and work on the development of banking products for young people together with experts of the bank. During 2015, the Bank organized case study on the topic of small business where students from FON gave their suggestions for improving the supply and access to small business customers. During process of creating their answer to case study they had continuous mentoring by employees and university professors. Those who have made the best solution will have the opportunity to work with colleagues from the department of small business to acquire new knowledge and experiences. The Bank organizes competitions where students from different faculties propose solution for real business situations by clients of the bank, and the bank rewards them.

This year Societe Generale Bank of Serbia has received an award for the best "Employer branding" in the Serbian market by the Serbian Association of Managers and marketing agency DNA communications, and is also recognized by the business social network LinkedIn as one of the ten most desirable employers in Serbia.

INCLUSIVE ACADEMY

Following good practice

that we begin in 2011,

Bank continues to

organize a project related

to social inclusion and

improvement of the

educational profile of

people with disabilities -

Inclusive Academy. This

year program has been

enriched with topics

that are in line with new

business trends, and

we had new external

partners on the project.

Again, Bank received an

award for this project:

Innovation Award from

the French-Serbian

Chamber of Commerce.

23GODIŠNJI IZVEŠTAJ 2015


General Secretariat

Special AffairsAssets Liability Management

Macroeconomic Research and

Analysis

Tax

Maria Rousseva President of Executive Board

Sonja Miladinovski

Pierre Boscq

Stanislas Tertrais Vice-President of Executive Board

Miroslav RebićHuman

Resources

Risk direction Accounting

Financial Control

Compliance BOARD OF DIRECTORS

RESOURCES DIVISION

Support Functions

Client Services

RISK DIVISION FINANCIAL DIVISION

EXECUTIVE BOARDAML & KYC

Societe Generale Banka Srbija a.d. Beograd organization chart 31.12.2014.


Small Business

Sales Unit - POS Consumer Finance

Corporate Large International clients

Corporate Large Domestic clients

Mid Market

Internal Audit

Direction for Individuals

Credit Analysis

Project and Network

Animation

RETAIL DIVISION CORPORATE DIVISIONStrategy and

MarketingSG Insurance

SoGeLease

DIVISION

DIRECTION

DEPARTMENT

UNIT

Retail Efficiency and Process

Market Activities GTB


Societe Generale bank has been present in Serbia for almost

four decades and during this time has continually been

increasing its business, while being equally dedicated to

development of local society and communities through its

corporate social responsibility strategy.

As part of a large global banking group, present in 76

countries around the world, Societe Generale Serbia applies

high standards in its policies towards employees, clients, local

community, and environment. The Bank is a founding member

of the UN Global Compact for Serbia and the Business Leaders

Forum, two most important initiatives for gathering socially

responsible companies.

Following the principles of social responsibility that are

integrated in its core business approach, has supported

various projects in the field of culture, professional integration

of youth, development of entrepreneurship, and supporting

social sensitive groups as well.

Through cooperation with Junior Achievement Serbia, the

“Student Companies” program has been implemented to

promote development of youth entrepreneurship. In the

area of social inclusion, Societe Generale Bank established

partnership with Food Bank and a humanitarian organization

“Mali veliki ljudi”, which takes care of the children with

developmental disabilities. Through a humanitarian action

in cooperation with Food Bank, the employees of Societe

Generale Bank in Serbia collected four tons of food for people

with disabilities that live in hard material conditions.

CORPORATE SOCIAL RESPONSIBILITY

9


As part of Societe Generale Group, Societe

Generale Serbia supports a large number

of projects in area of culture, and supports

youth to advance their talents on their

path of becoming affirmed artists. A large

number of musical events across Serbia

have been organized or supported in

partnership with Belgrade Dance Festival,

Institut français de Serbie, Young Talents

Association “ArtLink”, Kraljevo Strings of St.

George, and many others.

As an official bank of the Rugby World

Cup in London 2015, Societe Generale

Bank was promoting rugby in various ways

in Serbia. On this occasion, a traditional

Touch Rugby Corporate League evolved

into a three-week long humanitarian

action. Under a slogan “Playing for the

Winners” Societe Generale Serbia donated

funds to the rugby section of the Sports

Club of Persons with Disabilities “Winners”.

Besides involving the Bank’s partners

who regularly take part in this league, the

Bank also motivated other stakeholders to

join, including journalists, bloggers, and

promoters of recreational sports.


Risk Management Policy

Risk exposure is an integral part of the banking

business, given that banks operate assuming a

certain level of risk. In this sense, risk exposure

cannot be eliminated completely. However, with

adequate management, risk exposure can be

mitigated and reduced to a level that is acceptable to

the Bank from the standpoint of available capital and

the uninterrupted functioning of its business. In order

to establish an effective system of risk management

the Bank continuously identifies, assesses,

measures, evaluates, prevents, controls and internally

communicates its risk exposure. Such an integrated

risk management system is a guarantor of stability of

the Bank and its successful performance.

Key goals in risk management are related to

protection and optimization of the structure of capital,

as well as increase of its economic value.

In its operations the Bank is primarily exposed to the

following risks: credit risk, exposure to a single entity or

group of related entities (concentration risk), liquidity risk,

interest rate risk, market risks and operational risk.

Organization of Risk Management Process

Risk management is organized in accordance with the

provisions of the Law on Banks, the relevant decisions of

the National Bank of Serbia which define the field of risk

management and capital adequacy of banks, as well as

the best banking practice and international standards.

Management of the Bank has an significant role in

this process. In this sense, the Board of Directors

is in charge of establishing the risk management

strategy, capital management strategy of the

Bank, as well as risk management policies for

individual risks. The Executive Board is responsible

for implementing strategies and policies for risk

management, as well as for the strategy for

managing capital. The Executive Board is in charge

of adopting procedures for the identification,

measurement, assessment and risk management.

It also reports to the Board of Directors on the

adequacy of the risk management process.

Key principle in risk management process is

independence of the risk management function in

relation to functions that assume risks. Therefore a

central role in the process of risk management is played

by a separate and independent organizational unit of the

Bank that specializes in risk management - Risk Division.

10 RISK MANAGEMENT


Credit Risk

Credit risk is the risk that the Bank will incur a loss

because its borrowers will not be able to fully or partially

fulfill its obligations according to contractually defined

deadlines. Credit risk mainly originates from loans

disbursed to clients of the Bank and similar exposures.

Credit Risk Management

The Bank manages its credit risk exposure on the level

of individual counterparties as well as on the level of

its portfolio.

At the level of individual customers the Bank adheres to

rules not to approve loans or other placements unless

having enough information to be able to adequately

assess the financial position and creditworthiness of

borrowers as well as all risks associated with a specific

transaction with the client. The Bank also does not

engage itself in approving loans and similar exposures

whose characteristics deviate from the Bank’s credit risk

management policies.

At the level of the total portfolio the Bank manages the

credit risk by matching loan maturities with the purpose

of the loan, type of loan or client as well as by using

appropriate instruments of collateral.

By analyzing the individual debtors of the Bank and their

business activities as well as macroeconomic trends Risk

Division provides guidance to management of the Bank to

direct the business activities towards customers, markets

and products whose risk profile is acceptable to the Bank.

Collateral Policy

The Bank seeks to secure all its placements with

appropriate collateral. By using collaterals the Bank reduces

exposure to credit risk. The Bank pays special attention to

marketability and adequate appraisal of the collateral value.

Impairment and Provisioning Policy

Under impaired loans the Bank includes all exposures

for which it was determined that in total or partially

cannot be collected due to significant deterioration in

the financial condition of the debtor.

With its procedures, the Bank has provided adequate

identification and measurement of the amount of

impairment of receivables that are accounting-wise

covered through the allowance for impairment of

balance sheet assets and off-balance sheet provisions.

Allowance for impairment of balance sheet assets and

off-balance sheet provisions are determined based

on available historical data on losses arising from

placements with similar characteristics in terms of credit

risk, as well as on the basis of individual assessments of

debt collection from defaulted clients.


Credit Risk Management Achievements

In macroeconomic environment characterized by still slow economic

growth, the Bank has significantly improved its risk management

processes, in order to prevent negative consequences for its

business. Among major changes are automatization of the risk

identification and reporting process, as well as improvements in

the process of approving loans and other exposures to corporate

customers. Additionally the Bank significantly improved the impairment

calculations as well as forecasts related to credit risk exposure.

The mentioned improvements led to a slowdown in increase of non-

performing loans during 2015. Participation of non-performing loans in

total portfolio of the Bank as of end of 2015 was at the level of 18.9%,

which is lower compared to the average indicator on the banking

sector of 22.0%1.

Conservative policy of credit risk management provides a sound basis

for further development of the business model and obtaining positive

results in the future. This is further supported by the appropriate capital

base with the capital adequacy ratio at the end of 2015 of 16.80%,

which is well above the minimum regulatory requirements of 12%.

During 2015, National Bank of Serbia launched special diagnostic

research (AQR – asset quality review) modeled according to approach

used by the European Central Bank and the European Banking Authority

which lasted from June till November 2015 and included 14 banks

which make around 85% of the assets in Serbian banking sector. The

aim of the AQR was to increase transparency to banking operations

from the angle of valuation and identification of problem loans in line

with International Financial Reporting Standards. The results of AQR

indicated that Societe Generale Banka Srbija a.d. Belgrade is among

the top domestic banks. This demonstrated that the Bank is promoting

responsible policy of managing risks and adequate valuation of its

impairment of its exposure, resulting in small decrease of capital

adequacy ratio as published on National Bank’s official web presentation.

Detailed overview and analysis of the process of credit risk

management is given in the notes to financial statements for 2015.

1 Source of data Report of the National Bank of Serbia “Serbian Banking Sector” for III quarter of 2015, page 17


Operational risk

Operational risk shall be the risk of possible

adverse effects on financial result and capital of

the bank caused by omissions (unintentional and

intentional) of employees, inadequate internal

procedures and processes, inadequate management

of information and other bank’s systems, as well

as by unforeseeable external events, including low

probability events with risk of high losses. With

exception of strategic risk, operational risk shall also

include legal risk, noncompliance and reputation

risks, in accordance with SG Group standards.

With the purpose of successful management of

operational risk, Societe Generale Banka Srbija a.d.

Beograd has implemented permanent system of

identification, measurement, monitoring and control/

mitigation of operational risk.

Operational risk management encompasses:

Activities aiming to identify, monitor and

measure operational risk:

- Internal loss collection

- Key Risk Indicators

- Risk and Control Self Assessment

- Scenario Analysis

Preventive activities:

- Permanent Supervision as a base for internal

control system

- Business Continuity planning which protect us

from extreme risks

Operational risk is inherent to all products,

activities, procedures and systems of the Bank.

Dealing with operational risk is an integral part of

management positions at all levels. It is based in

large part on internal control system, which notably

includes the Permanent Supervision carried out

at all levels and the periodic controls performed

through audits. This system implies that operational

risk shall be considered a risk category in its own

right and thus subject to special detection and

assessment methods, follow-up and controls, all

contributing to the development of appropriate risk

reduction measures, and possibility to determine the

Bank's overall risk profile.

To be effective, management of operational risk

needs the settlement of an adapted governance,

leaded particularly through Operational Risk

Committee; the implementation system of internal

controls, i.e. Permanent Supervision, used to ensure

that each operational unit implements the necessary

day-to-day controls and verifies their effectiveness;

appropriate organisation structure, cornerstone

being Operational Risk unit that proposes

policies, methodologies, plans and procedures for

operational risk management, and the deployment

of appropriate tools (loss collection, RCSA etc.).

For the purpose of calculation of capital requirement for

operational risk the Bank uses Basic Indicator Approach

in line with NBS Decision on Capital Adequacy by

Banks. Internal capital requirement for operational

risk is quantified using the special approach based on

expected losses and scenario analyses.

Considering, among other elements, the fact that

operational risk is the second largest source of

risks in banks after credit risks, and in order to

ensure that proper management of such risk is

well developed and understood by all employees

of the bank, the bank established Operational Risk

Committee (ORCO).


The Committee responsibilities:

To coordinate with all necessary parties the

management of operational risk.

To inform Management about respective operational

risk issues.

To formalize issues linked to operational risks,

and through ORCO members, spread knowledge

and information on such issues throughout the

organization of the Bank.

Business Continuity Plan

To ensure continuity of its operation, the Bank adopted

Business Continuity Plan, which ensures smooth and

continuous functioning of all important systems and

processes of the bank, as well as limitation of losses in

emergency situations.

Market Risk

Market risk arises as the consequence of the possibility

of occurrence of adverse effects on the bank’s financial

result and capital due to changes in the value of balance

sheet positions and off-balance sheet items arising from

changes of market parameters. Market risks include

foreign exchange risk, price risk on debt securities, price

risk on equity securities and commodities.

Foreign exchange risk is risk of occurrence of

adverse effect on the bank’s result and capital due to

unfavorable movements of exchange rates and price

of gold on the market. Price risk is risk of occurrence

of adverse effect on the bank’s result and capital

due to changes of the market prices of the securities

portfolio (debt securities or stocks) or commodities. In

the process of market risk identification, measurement,

mitigation an monitoring the Bank respects local

regulation set out by the National bank of Serbia as

well as SG Group directives guidelines, principles and

strategies for market risk management.

The Bank applies the following principles in the market

risk management:

Approach to managing market risks is conservative,

Universal rule governing market risk management

is to „match“ (minimizing of open positions) and to

„centralize“ (managing positions in one place) positions.

The Bank has established separate organizational

parts for concluding transactions that are bearing

market risk (front-office) and separate for the

activities of control, recording and reporting on these

transactions (middle office and back office) as well

as for controlling and managing market risk (risk)

thereby implementing independent supervision system

structure for market risks.

The general principle of the Bank regarding mitigation of

foreign exchange exposure is to hedge this risk whenever


possible by taking the opposite position compared to the

one that caused opening of the position.

In accordance with the Societe Generale Group

normative bank rules, the Bank is not allowed to

invest in equities, commodities nor commodity based

derivatives. Investment in debt securities is done only

for liquidity management purposes, respecting local

regulation and Societe Generale Group rules.

Limits are used as a main instrument for the control of

risks. Several types of limits are applied: limits on the

FX net open position, counterparty limits, product limits

and dealers’ limits.

Internal Audit

Through performance of planned audit missions and

special engagements / investigations, Internal Audit

assesses adequacy and reliability of Bank’s internal

control system and compliance of its business operations.

The Internal Audit communicates the results of its work

to the Bank's management, thus ensuring that risks are

appropriately identified and controlled. The Internal Audit

regularly prepares reports on its activities and submits

them to the Board of Directors and the Audit Committee.

Compliance

Compliance unit is established in SGS in line with Law in

banks (article 83 and 84) and comprises following risks:

regulatory risk

financial loss risk

reputation risk

The Bank’s compliance risk arises as the repercussion

of the Bank’s failure to comply with:

the laws and other regulations,

professional standards, best practices and business

ethics Bank

internal acts regulating the Bank’s operations

The risk of financial loss can be significant due to the risk

of regulatory sanction that may still affect the reputation

risk. Reputational risk in addition to the above causes

can occur disrespect banking codes of professional

conduct, which includes primarily fairness, transparency

in operation, avoidance and prevention of conflicts of

interest, corruption and bribery and abuse of market.

Compliance unit monitors the compliance of internal

Bank acts, in particular those relative to:

If the banks activities are compliant with regulative

observance of bank secrecy

abuse of market and privileged information

proceeding from special authorizations

conflicts of interest, which may proceed from a

Management position or ownership status of the

client and/or the Bank, as well as other conflicts in

accordance with the Law

Code of professional banking conduct and

whistleblowing rights

transparency of offer of services (products) to Bank’s

clients

anti corruption and bribery activities

internal rules relative to the development/change

of existing and approval of new services (products)

of the Bank relations/conduct of Bank in providing

consultations and advisory services.

New activities and organization of work is developed

in order to monitor the implementation in the field of

harmonization of internal acts, in order to strengthen

internal controls, standards and good business practices

that are the responsibility of the Compliance Unit.

Compliance unit is in charge to raise awareness of

employees about the need to act in accordance with the

legislation, internal acts of the bank, standards and best

business practices through training of staff from certain

areas during the year especially on the topic of raising

awareness about the risks in the business, preventing

conflicts of interest and bribery and corruption.


Liquidity management represents a continuous process

of perceiving liquidity needs in a various business

scenarios, including business as usual and contingency

planning. It implies securing and maintaining a

satisfactory level of liquid assets based on the analysis

of liquidity demand and changes of balance and off-

balance sheet structure of the Bank.

Liquidity represents an ability to provide sufficient liquid

assets in order to unconditionally meet all matured

obligations arising from balance sheet liabilities

(withdrawal of deposits and other funding sources),

assets (financing of new loans), as well as engagement

of off-balance sheet items.

ALM Department within the financial sector is

responsible for the liquidity management of the Bank.

ALM Operational Unit of ALM Department is responsible

for management of daily liquidity and short term liquidity

with time horizon up to 30 days. Daily or operational

liquidity is managed with the objective to meet all

payment and settlement obligations in timely manner

by providing sufficient liquidity in each currency under

both normal and stressed conditions. ALM Reporting

Unit within the ALM Department is responsible for

the assessment of Bank’s liquidity position in longer

terms that arises from overall on and off-balance sheet

structure. ALM Department is on regular basis reporting

to Assets and Liability Committee (ALCO) which is

responsible for monitoring of Bank's exposure to risks

arising from the structure of assets and liabilities of

the balance sheet of the Bank, i.e. the structure of its

claims, liabilities and off-balance sheet items. ALCO

Committee is obliged to ensure adequate organizational

and procedural infrastructure for continuous monitoring

of structural risk to which the Bank is exposed in

the ordinary course of business and in unforeseen

circumstances, to ensure mechanisms and procedures

for adequate management, i.e. timely identification,

measurement and monitoring of Bank's exposure

11 LIQUIDITY MANAGEMENT AND INTEREST RATE RISK


towards liquidity risk, interest rate risk and exchange

rate risk in the structural part of the balance sheet and

to adopt measures to mitigate the structural risks.

The main objectives in process of liquidity management

of the Bank are:

Providing diversified funding sources;

Ensuring the optimal current daily liquidity by

providing sufficient funds in the amount and

currency structure needed for the smooth settlement

of all transactions, by taking into consideration an

assessment of expected cash flows for the period of

up to 30 days, as well as the medium and long term

liquidity projections;

Maintaining a sufficient liquidity buffer consisted

of high quality liquid assets which can be easily

converted into cash with minimum loss of value, such

as portfolio of securities having the highest credit

rating, i.e. treasury bills and bonds issued by the

Republic of Serbia Ministry of Finance, in accordance

with the Investment portfolio policy of the Bank;

To provide available credit lines that can be used at

any time, for the purpose of liquidity management;

Maintaining mandatory dinar and foreign currency

reserves, in accordance with the regulations of the

National Bank of Serbia;

Planning of inflow and outflow of funds; analyzing

structure, stability and concentration of deposits;

establishing, measuring and monitoring of liquidity

ratios.

The level of liquidity is shown by the liquidity ratio,

which represents a ratio of the sum of liquid assets of

first and second order (cash, funds held in the accounts

with banks with appropriate credit rating, deposits

with the National Bank of Serbia, claims in process of

realization, irrevocable credit lines granted to the Bank,

financial instruments listed on stock exchanges and

other receivables that are due within one month) and

the sum of liabilities, both a vista deposits in the defined

percentage and contractual obligations with maturities

within the next 30 days.

The Bank is obliged to manage the liquidity in such a

manner to ensure that level of liquidity ratio is:

at least 1.0 when calculated as an average of

liquidity ratios for all business days in a month

not lower than 0.9 for more than three consecutive

business days

at least 0.8 when calculated for a single business day

Liquidity ratio for 2015 was always within the prescribed

level and varied in relation to 2014:

2015 2014Average for the period 2.05 2.03Highest 2.56 2.55Lowest 1.43 1.40


Bank is also calculating and following "narrow" liquidity

ratio prescribed by the Central Bank, which was in

accordance with the defined limits as well.

Besides the local regulatory liquidity ratios, the Bank is

calculating and analyzing the Liquidity Coverage Ratio

(LCR) in accordance with BASEL III criteria. Liquidity

Coverage Ratio was developed in order to promote the

short-term resilience of the liquidity risk profile of banks.

The objective of LCR is to measure the Bank’s ability to

meet its liquidity needs during a significant stress scenario

lasting 30 calendar days, by ensuring an adequate stock

of unencumbered high quality liquid assets (HQLA) that

consists of cash or assets that can be converted into cash

at little or no loss of value in financial markets.

Long term or structural liquidity is managed through the

analyses of balance and off-balance sheet structure,

projection of cash flows and liquidity gaps separately

for each of the main currencies. Forecast of liquidity

gaps is done on the basis of contractual maturity

and amortization plans, but taking also into account

behavioral assumptions, i.e. modeling of cash flows

for items without the defined maturity or amortization

schedule, like current accounts, a vista savings, etc.

Within the process of liquidity risk monitoring, the Bank

has established a system of early warning indicators

for the recognition of potential liquidity crisis in timely

manner. In order to perform the assessment of cash

flows and adequacy of liquidity buffer in the event of

unforeseen, adverse events, the Bank has developed

stress scenarios for specific, systemic and combined

liquidity crisis for the purpose of stress testing in

accordance with Liquidity contingency plan.

Diversification of funding sources and optimization

of funding costs is managed through the collection

of commercial deposits, both retail and corporate,

entering the credit arrangements with International

Financial Institutions and credit lines with mother

company, utilization of all available capacities for

interbank money market.

Cooperation with the International Financial Institutions

(IFIs) has been extended in the first quarter of 2015

by concluding a new credit arrangement with the

European Investment Bank (EIB) in the amount of EUR

80 million. Of this amount, EUR 60 million is related

to the Bank and EUR 20 million to its affiliated leasing

company, SoGe Lease. The funds are intended for

long-term financing and development of small and

medium enterprises.

The Bank has continued to use the existing credit

facilities from the European Investment Bank (EIB), the

European Bank for Reconstruction and Development

(EBRD), line concluded with Council of Europe

Development Bank (CEB) primarily intended to support

sustainable growth, job creation and preservation in

small and medium-sized enterprises, credit facility from

KfW Development Bank intended for financing of micro,

small and medium enterprises in the field of primary

agricultural production and the agricultural industry in

Serbia, including the purchase of land, as well as APEX

lines concluded with the National Bank of Serbia in order

to attain financial agreements between the European

Investment Bank, Republic of Serbia and the National

Bank of Serbia.


Interest rate risk

Interest rate risk is defined as exposure of Bank’s

financial condition to adverse movements of market

rates. In order to manage interest rate risk appropriately,

the Bank is:

Conducting the process of identification,

assessment, mitigation and monitoring of interest

rate risk on regular basis

Producing and analyzing interest rate gap report

on at least quarterly basis in order to identify and

measure this risk;

Regularly reports to Assets and Liability Committee

about interest rate risk exposure;

Interest rate risk is measured and analyzed both from

the earnings perspective and economic value of equity

perspective (EVE).

Earnings perspective refers to interest rates changes

that cause the variations in net interest income of the

Bank. Measurement is carried out based on cash flow

projections for the interest sensitive positions of the

banking book and certain off-balance sheet items,

i.e. projection of interest rate gap on which different

scenarios of interest rate changes are applied in order

to measure the impact of different types of interest rate

risk on the financial result of the Bank, such as repricing

risk, basis risk, yield curve risk, etc. Cash flows for the

purposes of assessing interest rate risk are determined

based on the earlier of the following two dates:

The date of the next change of interest rates and

The maturity date, including the projection based on

other assumptions for the conversion of balance and

off-balance sheet items without the contractually

defined maturity and amortization schedule in cash

flows (demand deposits, etc).

Economic value perspective focuses to interest rates

changes that cause movement of the present value of

Bank’s assets, liabilities and economic value of equity.

Results of the interest rate risk measurement are

reported to the ALCO Committee on a regular basis.


The main strategic goal in terms of capital management

is tendency to ensure that available sources of capital

are used carefully and in accordance with defined

perspectives of the Bank’s business development. In

Capital management policy, covering of potential negative

effects from exposure to risks have priority over return

of equity. Focus of Capital management process is on

permanent supervision of capital adequacy. Bank may

consider its own capital as adequate if it covers all risk

that Bank is exposed to performing its business activities.

Capital management is based on following principles:

Process of identifying, measurement risk and risk

assessment.

Providing an adequate level of capital in accordance

with Bank’s risk profile.

Adequate incorporation of capital management in the

management system and decision-making system of

the Bank.

Regular analysis, monitoring and checking of Bank’s

Capital management process.

Main role in Capital management process is delegated

to Bank’s management - Shareholders assembly, Board

of Directors and Executive Board.

The Shareholder assembly is in charge for making decision

on capital increase, as well as for approving Business policy

and strategy of Bank that presents a source for all inputs

necessary for following year capital planning.

The primary responsibility of the Board of Director in

terms of risks is to set the risk management strategy

of the Bank and supervise the risks taken by the bank

from its operations and that reflects to level of Bank’s

Capital adequacy.

The primary responsibility of the Board of Directors in

terms of risks is:

to set the risk management strategy of the Bank and

supervise the risks taken by the bank from its operations

and that reflects to level of Bank’s Capital adequacy.

to set strategy of Capital management process.

Within the frame of strategic risk management,

Executive Board of Bank prepares proposals to Board

of Directors regarding Business policy and strategy

of Bank, strategy of capital management process,

Risk management strategy and policies, conduct all

these policies and strategies and approves procedures

for identifying, measurement, assessment and

monitoring of risks that Bank is exposed to, and that

have influence on Capital adequacy level and future

business decisions. In scope of the capital management

process, Executive Board of the Bank is obliged to

incorporate capital planning in every business decision

and procedures related to business planning, to inform

Board of Directors of capital needs and ensure adequate

informing of Bank’s external controlling institutions

regarding level of capital adequacy.

Since capital management process is strongly related to

Bank’s risk profile, apart from organizational part of Bank

that are components of common management hierarchy,

several Boards were established to be responsible for

monitoring Bank’s exposure to existing risk as well as for

monitoring possibilities of exposure to new risks.

12 CAPITAL MANAGEMENT AND CAPITAL ADEQUACY INDICATORS


Capital of Bank in 2015

Capital of Bank presents a sum of core capital and additional capital, reduced by capital deductions.

Core capital of Bank represents sum of share capital, share premium and reserves from Bank`s profit reduced by deduction from core capital such as: intangible assets, unrealized losses in respect of securities available for sale and needed reserve for estimated losses regarding balance sheet assets and off balance sheet positions.

Additional capital represents sum of subordinated liabilities and part of positive revalorization reserves as effect of changes in fair value of securities disclosed according to IFRS/IAS.

Capital deductions are shares in capital of other related entities of Bank.

Decision on capital adequacy of Bank prescribed that level of Capital adequacy ratio, as relation between capital of Bank and risk weighted assets of Bank, could not be lower than 12%.

In quarterly review, during 2015, Capital level and capital adequacy ratios were as follows:

In thousands EUR

Capital MAR 15 JUN 15 SEP 15 DEC 15Tier 1 143,329 147,231 158,587 163,796Core capital 276,580 278,743 280,734 276,401Share Capital (including emission premium) 197,348 196,712 198,117 195,059Reserves from earnings 79,231 82,032 82,617 81,342Tier 1 deductibles 133,250 131,512 122,147 112,605Needed reserve as deductible from Core capital 129,468 127,682 118,387 108,355Other Tier 1 deductibles 3,782 3,830 3,760 4,250Tier 2 52,633 54,313 54,614 52,349Subloans 50,000 50,000 50,000 45,000Revalorizacione rezerve 2,633 4,313 4,614 7,349Total deductables 3,858 3,845 3,873 3,813Deductibles from Tier 1 1,929 1,923 1,936 1,906Deductibles from Tier 2 1,929 1,923 1,936 1,906Total Tier 1 141,401 145,308 156,651 161,890Total Tier 2 50,705 52,391 52,678 50,442Regulatory capital 192,105 197,699 209,329 212,332Total RWA for credit risk and foreign currency risk 1,055,465 1,012,202 1,075,756 1,144,902Total RWA for operational risk 109,050 108,699 109,475 118,806Total RWA 1,164,515 1,120,901 1,185,231 1,263,708Total NBS needed provisions 129,468 127,682 118,387 108,355Needed provisions to be deducted from Tier 1 100% 100% 100% 100%Needed provisions to be deducted from Tier 2 0% 0% 0% 0%Tier 2 / Tier 1 (max 50%) 36% 36% 34% 31%Capital adequacy ratio 16.50% 17.64% 17.66% 16.80%

During 2015 capital of Bank remain in scope of regulatory prescribed limits.

In 2015, there was no need for capital increase by issuing new shares.


Result Analysis

1. Income Statement

RSD 000

2015 2014 % changed 15/14Net banking income 12,655,628 11,346,188 11.5% Interest income 14,311,082 14,432,880 -0.8% Interest expenses (3,885,021) (5,636,584) -31.1%Net interest income 10,426,061 8,796,296 18.5% Fees and commissions income 3,654,424 3,349,805 9.1% Fees and commissions expense (1,658,278) (1,369,326) 21.1%Net fees and commissions income 1,996,146 1,980,479 0.8% Net gains (losses) from financial assets held for trading 615,248 133,334 Net exchange rate gains and gains from effects of foreign currency clause (550,172) 74,193 Other operating revenues 168,345 361,886 -53.5%Operating expenses (7,594,137) (6,558,782) 15.8% Salaries, wages and other personal expenses (3,287,987) (3,165,464) 3.9% Amortization expenses (432,282) (453,168) -4.6% Other expenses (3,873,868) (2,940,150) 31.8%Gross operating income 5,061,491 4,787,406 5.7%Net charge for imairment of financial assets and offbalance sheet credit risk items (2,903,324) (4,611,317) -37.0%Profit / loss before tax 2,158,167 176,089 Income tax - - Profit from deffered tax - 192,433 Loss from deffered tax (94,706) - Profit / loss after tax 2,063,461 368,522

Last year was another year with economic ambient

burdened by slower than expected growth (after 2014

recession) and very modest credit demand and constant

over-liquidity, what impacted decrease of interest rates

both on the loan and deposit markets, followed by high

competition among the banks.

However, the bank’s business policy focusing on

retail dynamism, along with the efforts to simplify and

enhance processes and maintain strict cost control, as

well as to further optimize funding has led to further

improvement in its financial performance. Net banking income has reached 12.7 RSD billion in 2015, which

is higher by 11.5% compared to the year before, mainly as net interest income rose due to lower interest

expenses coming from optimization of deposits base in

terms of its stability and re-pricing.

Gross operating income amounted to 5.1 RSD billion

in 2015, rising by 5.7% vs. 2014, whereas along with moderation of net charge for impairment of financial assets and off balance sheet credit risk itmes this contributed to the significant increase in profit of the bank to 2.1 RSD billion at the end of 2015 (vs. 369 RSD million in the year before).

FINANCIAL INDICATORS OF THE BANK13


2. Balance Sheet

RSD 000

Assets 31.12.2015. 31.12.2014. % changed 15/14Cash and balance with central banks 32,006,916 32,329,563 -1.0%Financial assets at fair value through profit or loss held for trading 4,793 6,637 -27.8%Financial assets available for sale 27,977,460 23,705,967 18.0%Loans and receivables to banks and other financial institutions 9,103,262 10,198,273 -10.7%Loans and receivable to costumers 156,144,282 150,536,414 3.7% Retail 71,078,606 65,586,770 8.4% Corporate 85,065,676 84,949,645 0.1%Investments in associates and joint ventures 149,649 149,649Investments in subsidiaries 314,098 314,098Intangible investments 516,843 468,640 10.3%Property, plant and equipment 1,803,088 1,825,926 -1.3%Investments immovable 74,007 80,245 -7.8%Current tax assets 234,594 234,594Deferred tax assets 422,811 623,590 -32.2%Other assets 1,785,670 1,837,205 -2.8%Total Assets 230,537,473 222,310,801 3.7%

RSD 000

Liabilities 31.12.2015. 31.12.2014. % changed 15/14Financial liabilities at fair value through income statement held for trading 2,085 3,972 -47.5%Deposits and other liabilities to banks , other financial organisations and central bank 42,526,968 41,472,236 2.5%Deposits and other liabilities to other customers 138,714,929 127,042,019 9.2% Retail 68,397,023 66,047,489 3.6% Corporate 70,317,906 60,994,530 15.3%Issued own securities and other borrowed assets - 1,745,291 -Subordinated liabilities 9,125,592 14,548,352 -37.3%Provisions 1,075,726 1,142,653 -5.9%Other liabilities 2,509,418 2,438,065 2.9%Total Liabilities 193,954,718 188,392,588 3.0%

RSD 000

Capital 31.12.2015. 31.12.2014. % changed 15/14Share capital 23,724,274 23,724,274Profit 2,063,461 368,522 Loss - - Reserves 10,795,020 9,825,417 9.9%Total Capital 36,582,755 33,918,213 7.9%Total Liabilities 230,537,473 222,310,801 3.7%


The bank increased its balance sheet by 3.7% to 230.5 RSD billion at the end of 2015 from 222.3 RSD billion in 2014.

Regarding loans portfolio, 2015 was another

consecutive year since 2012 marked by the

stabilization in terms of its de-concentration, adequate

collateralization and proper risk provisioning. Overall loans to customers ended at 156.1 RSD billion in 2015, which is 3.7% growth in annual terms. This growth is mainly supported by continued dynamic activity in Retail segment, where loans rose by 8.4% y/y to RSD 71.1 billion as a result of bank’s efforts

towards consolidation of its client base and continued

acquisition of new ones (+3.7% y/y), along with

significant annual growth both in mortgage and cash

and consumers loans, where the bank preserves its

leading positions. On Corporate, loan outstanding at slightly over 85 RSD billion at the end of 2015 remained stable in comparison with the year before.

The deposit base rose to 138.7 RSD billion in 2015, which is higher by +9.2% vs. 2014. Retail deposits showed growth of 3.6% in annual terms to RSD 68.4 RSD billion coming both as a consequence of increase in customer base but also as a clear proof of confidence in SGS and satisfaction with relationship with the bank. Corporate deposits posted strong growth in 2015 (to 70.3 RSD billion, +15.3% vs. 2014), whereas strong efforts were put

to optimize their structure towards transactional ones,

balancing carefully between their volumes on one side

and pricing and stability on another.


In 2016, the expected acceleration of economic activity, driven by export

and investment growth and gradual recovery of consumption, will result in

a stable GDP growth. Depending on the economic growth rate in the EU

and low interest rates duration period, economic growth in Serbia in 2016

could be stronger than anticipated.

In this context, Societe Generale business strategy is based on the

following postulates:

Clients remain in the focus of the business strategy of the bank. Bank wants to further improve image of institution which fosters long-term

relationship with clients and wh

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