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Poshtenska Banka AD Skopje

Financial Statements for the year ended 31 December

2007

Poshtenska Banka AD Skopje Financial Statements

Contents

Auditors' report

Financial Statements

Balance sheet 2

Income statement 3

Statement of changes in equity 4

Statement of cash flows 5

Notes to the financial statement 6


3

Income statement

For the year ended 31 December In thousands of denars Note 2007 2006 Interest income 7 53,420 60,986Interest expense 7 (23,699) (24,645)Net interest income 29,721 36,341 Fee and commission income 8 239,651 103,870Fee and commission expense 8 (39,972) (35,942)Net fee and commission income 199,679 67,928 Net foreign exchange gain 125 -Other operating income 9 22,196 16,104 22,321 16,104 Operating income 251,721 120,373 Net impairment loss on financial assets 14,15,18 (145,931) 5,617Personnel expenses 10 (41,311) (47,244)Depreciation and amortisation 16,17 (14,165) (12,158)Other expenses 11 (73,179) (65,948) (Loss)/profit before income taxes (22,865) 640 Income tax expense 12 (1,492) (471)(Loss)/profit for the period (24,357) 169

The notes on pages 6 – 52 are an integral part of these financial statements.


4

Statement of changes in equity

For the year ended 31 December

In thousands of denars Share

capitalStatutory

reservesRetained earnings Total

Balance at 1 January 2006 439,959 51,888 8,384 500,231Net profit for the period - - 169 169Total recognised income and expense - - 169 169Balance at 31 December 2006 439,959 51,888 8,553 500,400 Balance at 1 January 2007 439,959 51,888 8,553 500,400Loss for the period - - (24,357) (24,357)Total recognised income and expense - - (24,357) (24,357)Appropriation to statutory reserve - 169 (169) -Balance at 31 December 2007 439,959 52,057 (15,973) 476,043

The notes on pages 6 - 52 are an integral part of these financial statements.


5

Statement of cash flows

For the year ended 31 December In thousands of denars Note 2007 2006 Cash flows from operating activities (Loss)/Profit for the period (24,357) 169Adjustments for: Depreciation and amortisation 16,17 14,165 12,158Net losses / (releases) due to impairment 14,15,18 145,931 (5,617)Impairment losses/ (releases) on off-balance sheet

items 11 2,482 (29)Net interest income (29,721) (36,341)Dividend income (2,562) (278)Income tax (income)/expense 1,492 471 107,430 (29,467) Change in loans and advances to customers 14 (299,113) (13,630)Change in other assets (21,785) 45,119Change in deposits from banks and other financial

institutions 19 807 33,728Change in deposits from customers 20 (347,109) (100,668)Change in other liabilities and provisions and

impairment provision related to off balance sheet items 22 (2,285) (12,918)

(562,055) (77,836) Interest received 55,204 61,688Interest paid (23,699) (20,630)Income tax received / (paid) (1,632) 14,942Net cash used in operating activities (532,182) (21,836)

Cash flows from investing activities Purchase of property and equipment 16 (14,459) (16,991)Purchase of intangible assets 17 (2,617) (143)Proceeds from investment securities 15 303,330 (403,292)Dividends received 2,562 278Net cash used in investing activities 288,816 (420,148) Net increase / (decrease) in cash and cash

equivalents (243,366) (441,984)Cash and cash equivalents at 1 January 629,098 1,071,082Cash and cash equivalents at 31 December 13 385,732 629,098

The notes on pages 6 - 52 are an integral part of these financial statements.


6

Notes to the financial statements

1. Reporting entity

Poshtenska Banka AD Skopje (“the Bank”) is a joint stock company incorporated and domiciled in the Republic of Macedonia.

The address of the Bank’s registered office is as follows:

St. 27 Mart b.b. (Mal Ring) 1000 Skopje Republic of Macedonia

The main activities of the Bank are payment operation services in the country, commercial lending and receiving of deposits. For the purpose of providing payment operation services in the country the Bank has concluded contract with AD Makedonska Posta for utilising its branch network.

2. Basis of preparation

(a) Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs).

During the period the Bank adopted IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Financial Statements – Capital Disclosures, which increased the level of disclosure in respect of financial instruments and capital, but had no impact on the reported profits or financial position of the Bank. In accordance with the transitional requirements of the standards, the Bank has provided full comparative information.

(b) Basis of measurement

The financial statements have been prepared on the historical cost basis except for the following:

• financial instruments at fair value through profit or loss are measured at fair value;

• available-for-sale financial assets are measured at fair value;


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2. Basis of preparation (continued)

(c) Functional and presentation currency

These financial statements are presented in Macedonian denars (“MKD”), which is the Bank’s functional currency. Except as indicated, financial information presented in MKD has been rounded to the nearest thousand.

(d) Use of estimates and judgments

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in note 5.

3. Significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these financial statements.

Transactions in foreign currencies are translated to the respective functional currencies of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments.


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3. Significant accounting policies (continued)

(a) Foreign currency transactions

The foreign currencies the Bank deals with are predominantly Euro (EUR). The exchange rates used for translation at 31 December 2007 and 2006 were as follows:

2007 2006 MKD MKD 1 EUR 61.20 61.17

(b) Interest

Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently.

The calculation of the effective interest rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability.

Interest income and expense presented in the income statement include:

• interest on financial assets and liabilities at amortised cost on an effective interest rate basis;

• interest on available-for-sale investment securities on an effective interest basis;

Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank’s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income.

(c) Fees and commission

Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income, including financial services provided by the Bank in respect of foreign currency settlements, domestic payment operations, issuance of MKD guarantees and other services, are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period.


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(c) Fees and commission (continued)

Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received.

(d) Net trading income

Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realised and unrealised fair value changes, interest, dividends and foreign exchange differences.

(e) Dividends

Dividend income is recognised when the right to receive income is established. Dividends are reflected as a component of net trading income, or dividend income based on the underlying classification of the equity instrument.

(f) Rental income

Rental income from leased property is recognised in profit or loss on a straight-line basis over the term of the lease.

(g) Income tax expense

Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.


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(g) Income tax expense (continued)

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(h) Financial assets and liabilities

(i) Recognition

The Bank initially recognises loans and advances, deposits and borrowings on the date that they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.

(ii) Derecognition

The Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets, if any that is created or retained by the Bank is recognised as a separate asset or liability.

The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

(iii) Offsetting

Financial assets and liabilities are set off and the net amount is presented in the balance sheet when, and only when, the Bank has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading activity.

(iv) Amortised cost measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.


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(h) Financial assets and liabilities (continued)

(v) Fair value measurement

The determination of fair values of financial assets and financial liabilities is based on quoted market prices for financial instruments traded in active markets. For all other financial instruments fair value is determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable prices exist, and valuation models.

(vi) Identification and measurement of impairment

At each balance sheet date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably.

The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics.

Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group.

In assessing collective impairment the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate.

Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets’ original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount.


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(h) Financial assets and liabilities (continued)

(vi) Identification and measurement of impairment (continued)

When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss.

Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and current fair value out of equity to profit or loss. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through profit or loss.

However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. Changes in impairment provisions attributable to time value are reflected as a component of interest income.

(vii) Designation at fair value through profit or loss

The Bank has designated financial assets and liabilities at fair value through profit or loss when either:

• the assets or liabilities are managed, evaluated and reported internally on a fair value basis;

• the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or

• the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract.

Financial assets that have been designated at fair value through profit or loss include financial assets held-for-trading.

(i) Cash and cash equivalents

Cash and cash equivalents include cash balance on hand, demand deposits with banks, cash deposited with the National Bank of the Republic of Macedonia (“NBRM”) and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments, including treasury bills that can be traded on the secondary market.

Cash and cash equivalents are carried at amortised cost in the balance sheet.


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(j) Trading assets and liabilities

Trading assets and liabilities are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking.

Trading assets and liabilities are initially recognised and subsequently measured at fair value in the balance sheet with transaction costs taken directly to profit or loss. All changes in fair value are recognised as part of net trading income in profit or loss. Trading assets and liabilities are not reclassified subsequent to their initial recognition.

(k) Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term.

Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method, except when the Bank chooses to carry the loans and advances at fair value through profit or loss as described in accounting policy (h)(vii).

(l) Investment securities

Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held-to-maturity, fair value through profit or loss, or available-for-sale.

(i) Held-to-maturity

Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, and which are not designated at fair value through profit or loss or available-for-sale.

Held-to-maturity investments are carried at amortised cost using the effective interest method. Any sale or reclassification of a significant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Bank from classifying investment securities as held-to-maturity for the current and the following two financial years.

(ii) Available-for-sale

Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Available-for-sale financial instruments include investments in equity securities.


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(l) Investment securities (continued)

Unquoted equity securities whose fair value cannot be reliably measured are carried at cost, less impairment losses. All other available-for-sale investments are carried at fair value.

Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in profit or loss.

Other fair value changes are recognised directly in equity until the investment is sold or impaired and the balance in equity is recognised in profit or loss.

(m) Property and equipment

(i) Recognition and measurement

Items of property and equipment are measured at cost less accumulated depreciation and impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.

When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.

(ii) Subsequent costs

The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred.

(iii) Depreciation

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment.


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(m) Property and equipment (continued)

Depreciation rates, based on the estimated useful lives for the current and comparative periods, are as follows:

% Computers 25Furniture and equipment 10-25

(n) Intangible assets

(i) Recognition and measurement

Software acquired by the Bank is stated at cost less accumulated amortisation and accumulated impairment losses.

(ii) Subsequent expenditure

Subsequent expenditure on software is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

(iii) Amortisation

Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use.

The amortisation rates based on the estimated useful lives for the current and comparative periods are as follows:

% Software 25

(o) Impairment of non-financial assets

The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses in respect of cash-generating units are allocated to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.


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(o) Impairment of non-financial assets (continued)

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(p) Deposits, debt securities issued and subordinated liabilities

Deposits, debt securities issued and subordinated liabilities are the Bank’s sources of debt funding.

The Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument.

Deposits, debt securities issued and subordinated liabilities are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective interest method, except where the Bank chooses to carry the liabilities at fair value through profit or loss.

(q) Provisions

A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract.


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(r) Employee benefits

(i) Defined contribution plans

The Bank contributes to its employees' post retirement plans as prescribed by the national legislation. Contributions, based on salaries, are made to the national organisations responsible for the payment of pensions.

There is no additional liability in respect of these plans. Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss when they are due.

(ii) Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(s) Share capital and reserves

(i) Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity.

(ii) Repurchase of share capital

When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, and is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently the amount received is recognised as an increase on equity, and the resulting surplus or deficit of the transaction is transferred to/from share premium.

(iii) Dividends

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


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(t) New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2007, and have not been applied in preparing these consolidated financial statements:

• Revised IFRS 2 Share-based Payment (effective from 1 January 2009). The revised Standard will clarifies the definition of vesting conditions and non-vesting conditions. Based on the revised Standards failure to meet non-vesting conditions will generally result in treatment as a cancellation. Revised IFRS 2 is not relevant to the Bank’s operations as the Bank does not have any share-based compensation plans.

• Revised IFRS 3 Business Combinations (effective for annual periods beginning on or after 1 July 2009). The scope of the revised Standard has been amended and the definition of a business has been expanded. The revised Standard also includes a number of other potentially significant changes including:

• All items of consideration transferred by the acquirer are recognised and measured at fair value as of the acquisition date, including contingent consideration.

• Transaction costs are not included in the acquisition accounting. • The acquirer can elect to measure any non-controlling interest at fair value at the

acquisition date (full goodwill), or at its proportionate interest in the fair value of the identifiable assets and liabilities of the acquiree.

• Acquisitions of additional non-controlling equity interests after the business combination must be accounted for as equity transactions.

Revised IFRS 3 is not relevant to the Bank’s operations as the Bank does not have any interests in subsidiaries that will be affected by the revisions to the Standard.

• IFRS 8 Operating Segments (effective from 1 January 2009). The Standard requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Bank has not yet completed its analysis of the impact of the standard.

• Revised IAS 1 Presentation of Financial Statements (effective from 1 January 2009). The revised Standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. Items of income and expense and components of other comprehensive income may be presented either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). The Bank is currently evaluating whether to present a single statement of comprehensive income, or two separate statements.


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(t) New standards and interpretations not yet adopted (continued)

• Revised IAS 23 Borrowing Costs (effective from 1 January 2009). The revised Standard will require the capitalization of borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. Revised IAS 23 is not relevant to the Bank’s operations as the Bank does not have any qualifying assets for which borrowing costs would be capitalised.

• Revised IAS 27 Consolidated and Separate financial statements (effective for annual periods beginning on or after 1 July 2009). In the revised Standard the term minority interest has been replaced by non-controlling interest, and is defined as "the equity in a subsidiary not attributable, directly or indirectly, to a parent". The revised Standard also amends the accounting for non-controlling interest, the loss of control of a subsidiary, and the allocation of profit or loss and other comprehensive income between the controlling and non-controlling interest. The Bank has not yet completed its analysis of the impact of the revised Standard.

• IFRIC 11 IFRS 2 – Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). The Interpretation requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity-instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. It also provides guidance on whether share-based payment arrangements, in which suppliers of goods or services of an entity are provided with equity instruments of the entity’s parent should be accounted for as cash-settled or equity-settled in the entity’s financial statements.The Interpretation is not relevant to the Bank’s operations

• IFRIC 12 Service Concession Arrangements (effective from 1 January 2008) The Interpretation provides guidance to private sector entities on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. The Interpretation is not relevant to the Bank’s operations.

• IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). The Interpretation explains how entities that grant loyalty award credits to customers who buy other goods or services should account for their obligations to provide free or discounted goods or services (‘awards’) to customers who redeem those award credits. Such entities are required to allocate some of the proceeds of the initial sale to the award credits and recognise these proceeds as revenue only when they have fulfilled their obligations. The Bank does not expect the Interpretation to have any impact on the unconsolidated financial statements.


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(t) New standards and interpretations not yet adopted (continued)

• IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interactions (effective for annual periods beginning on or after 1 January 2008). The interpretation addresses when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available, how a minimum funding requirements (MFR) might affect the availability of reductions in future contributions and when a MFR might give rise to a liability. No additional liability need be recognised by the employer under IFRIC 14 unless the contributions that are payable under the minimum funding requirement cannot be returned to the company. The Bank does not operate in country that has a minimum funding requirement where there are restrictions on the employer company’s ability to get refunds or reduce contributions.


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4. Financial risk management

(a) Introduction and overview

The Bank has exposure to the following risks from its use of financial instruments:

• credit risk

• liquidity risk

• market risks.

This note presents information about the Bank’s exposure to each of the above risks, the Bank’s objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital.

Risk management framework

The Supervisory Board has overall responsibility for the establishment and oversight of the Bank’s risk management framework. Managing Board of the Bank is responsible for developing and monitoring of Bank’s risk management policies in their specified areas and report regularly to the Supervisory Board on their activities.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.

The Bank’s Audit Committee is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The Bank’s Audit Committee is assisted in these functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.


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4. Financial risk management (continued)

(b) Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances to customers and other banks and investment securities. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk).

Management of credit risk

The Supervisory Board has delegated responsibility for the management of credit risk to its Credit committee that approve all credit exposures up to 10% of Bank’s own funds. All credit exposures over 10% of the Bank’s own funds are approved by the Risk Management committee. Separate Bank’s Credit departments (Corporate Lending Department, Retail Lending Department), are responsible for oversight of the Bank’s credit risk, including:

• Formulating credit policies, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements.

• Reviewing and assessing credit risk. Credit departments assess all credit exposures prior to facilities being committed to customers. Renewals and reviews of facilities are subject to the same review process.

• Limiting concentrations of exposure to counterparties, geographies and industries (for loans and advances), and by issuer, credit rating band, market liquidity and country (for investment securities).

• Developing and maintaining the Bank’s credit risk grindings in order to categorise exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The risk grading system is used in determining where impairment provisions may be required against specific credit exposures. The current risk grading framework consists of six grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation.


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(b) Credit risk (continued)

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

Credit departments are required to implement credit policies and procedures and are responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios.

Regular audits of Credit departments’ processes are undertaken by Internal Audit.

Exposure to credit risk

Note Loans and advances to

customers Investment securities In thousands of denars 2007 2006 2007 2006 Carrying amount 14,15 270,514 119,187 113,493 416,752 Individually impaired

Grade A 257,455 99,168 - -Grade B 6,110 14,433 - -Grade C 3,164 1,480 - -Grade D 15,763 14,088 - -Grade E 233,556 90,817 - 351Gross amount 516,048 219,986 - 351Allowance for impairment (245,534) (100,799) - (351)Carrying amount 270,514 119,187 - -

Neither past due nor impaired Grade A - - 113,493 416,752Carrying amount - - 113,493 416,752

Total carrying amount 270,514 119,187 113,493 416,752


24




Impaired loans and securities

Impaired loans and securities are loans and securities for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan / securities agreement(s). These loans are graded A to E in the Bank’s internal credit risk grading system.

Past due but not impaired loans

Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collection of amounts owed to the Bank.

Allowances for impairment

The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.

Write-off policy

The Bank writes off a loan / security balance (and any related allowances for impairment) when the Supervisory Board determines that the loans / securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower / issuer’s financial position such that the borrower / issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.

Set out below is an analysis of the gross and net (of allowances for impairment) amounts of individually impaired assets by risk grade.


25




Loans and advances to

customers In thousands of denars Gross Net 31 December 2007 Individually impaired

Grade A 257,455 254,760Grade B 6,110 5,499Grade C 3,164 2,373Grade D 15,763 7,882Grade E 233,556 -Total 516,048 270,514

31 December 2006 Individually impaired

Grade A 99,168 98,043Grade B 14,433 12,990Grade C 1,480 1,110Grade D 14,088 7,044Grade E 90,817 -Total 219,986 119,187

The Bank holds collateral1 against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing. Collateral generally is not held over loans and advances to banks and investment securities.


26




The Bank monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk at the reporting date is shown below:

Note

Loans and advances to customers Investments Investment securities

In thousands of denars 2007 2006 2007 2006 Carrying amount 14,15 270,514 119,187 113,493 416,752 Concentration by sector

Corporate 40,274 19,927 - -Government - - 99,484 403,292Financial institutions - - 14,009 13,460Retail 230,240 99,260 - - 270,514 119,187 113,493 416,752

Concentration by location Republic of Macedonia 270,514 119,187 113,493 416,752 270,514 119,187 113,493 416,652

Concentration by location for loans and advances is measured based on the location of the borrower. Concentration by location for investment securities is measured based on the location of the issuer of the security.

(c) Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities.

Management of liquidity risk

The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.

Department for treasury, MKD liquidity and payment operations receives information from other departments regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Department for treasury, MKD liquidity and payment operations then maintain a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank.


27



(c) Liquidity risk (continued)

The daily liquidity position and market conditions are regularly monitored. All liquidity policies and procedures are subject to review and approval by Managing Board of the Bank. Daily reports cover the liquidity position of the Bank. Monthly reports on Bank’s liquidity are regularly submitted to NBRM.

Exposure to liquidity risk

The Bank has access to a diverse funding base. Funds are raised using a broad range of instruments including deposits, borrowings and share capital. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Bank strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Bank strategy.

In addition the Bank holds a portfolio of liquid assets as part of its liquidity risk management strategy.


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(c) Liquidity risk (continued)

Residual contractual maturities of financial liabilities

In thousands of denars Note Carrying

amount

Gross nominal inflow /

(outflow)Less than 1

month1-3

months

3 months

to 1 year 1-5

years

More than 5 years

31 December 2007 Non-derivative liabilities Deposits from banks and

other financial institutions 19 45,051 (45,051) (29,910) (2,000) (13,141) - -

Deposits from customers 20 633,351 (633,351) (536,468) (26,676) (40,904) (29,303

) -Other liabilities 22 13,873 (13,873) (11,646) - (2,227) - -

692,275 (692,275) (578,024) (28,676) (56,272) (29,303

) -Undrawn overdraft

facilities 24 243,223 (243,223) (243,223) - - - -

935,498 (935,498) (821,247) (28,676) (56,272) (29,303

) -

31 December 2006 Non-derivative liabilities Deposits from banks and

other financial institutions 19 44,244 (44,244) (42,244) - (2,000) - -

Deposits from customers 20 980,460 (980,460) (834,936) (81,242) (36,697) (27,585

) -Other liabilities 22 16,158 (16,158) (16,158) - - - -

1,040,862 (1,040,862) (893,338) (81,242) (38,697) (27,585

) -Undrawn overdraft facilities 24 214,558 (214,558) (214,558) - - - -

1,255,420 (1,255,420) (1,107,896) (81,242) (38,697) (27,585

) -

The previous table shows the undiscounted cash flows on the Bank’s financial liabilities and unrecognised loan commitments on the basis of their earliest possible contractual maturity. The Bank’s expected cash flows on these instruments vary significantly from this analysis. For example, demand deposits from customers are expected to maintain a stable or increasing balance.

The Gross nominal inflow / (outflow) disclosed in the previous table is the contractual, undiscounted cash flow on the financial liability or commitment.


29



(d) Market risks

Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s / issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

Exposure to interest rate risk – non-trading portfolios

The Bank’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. In the case of floating rate assets and liabilities, the Bank is also exposed to basis risk, which is the difference in reprising characteristics of the various floating rate indices, such as the savings rate, LIBOR and different types of interest.

Risk management activities are aimed at optimising net interest income, given market interest rate levels consistent with the Bank’s business strategies.

Asset-liability risk management activities are conducted in the context of the Bank’s sensitivity to interest rate changes. In general, the Bank is asset sensitive because of the majority of the interest-earning assets and liabilities, the Bank has the right simultaneously to change the interest rates. In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rates. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation.

A summary of the Bank’s interest rate gap position on non-trading portfolios is as follows:


30



(d) Market risks (continued)

In thousands of denars NoteCarrying

amountLess than

1 month1- 3

months3-12

months 1-5 years

More than 5 years

31 December 2007 Cash and cash equivalents 13 385,732 385,732 - - - -Loans and advances to

customers 14 270,514 54,194 28,369 70,286 117,665 -Investment securities 15 113,493 99,484 - - 14,009 -Other assets 18 51,070 50,922 - - 148 - 820,809 590,332 28,369 70,286 131,822 - Deposits from banks and

other financial institutions 19 (45,051) (29,910) (2,000) (13,141) - -Deposits from customers 20 (633,351) (536,468) (26,676) (40,904) (29,303) -Other liabilities 22 (13,873) (11,646) - (2,227) - -

(692,275) (578,024) (28,676) (56,272) (29,303) - 128,534 12,308 (307) 14,014 102,519 -

31 December 2006 Cash and cash equivalents 13 629,098 629,098 - - - -Loans and advances to

customers 14 119,187 74,865 1,631 21,897 20,794 -Investment securities 15 416,752 308,927 - 94,365 13,460 -Other assets 18 29,285 26,549 - 2,736 - -

1,194,322 1,039,439 1,631 118,998 34,254 -

Deposits from banks and other financial institutions 19 (44,244) (42,244) - (2,000) - -

Deposits from customers 20 (980,460) (838,419) (80,732) (35,476) (25,833) -Other liabilities 22 (16,158) (16,158) - - - - (1,040,862) (896,821) (80,732) (37,476) (25,833) - 153,460 142,618 (79,101) 81,522 8,421 -

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios include a 1% parallel fall or rise in all yield curves.

An analysis of the Bank’s sensitivity to an increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows:


31




In thousands of denars Gain/loss for the

period 2007 At 31 December Interest income (1% increase) 5,380Interest income (1% decrease) (5,380)Interest expense (1% increase) 3,053Interest expense (1% decrease) (3,053) 2006 At 31 December Interest income (1% increase) 6,389Interest income (1% decrease) (6,389)Interest expense (1% increase) 4,579Interest expense (1% decrease) (4,579)

Exposure to currency risk – non-trading portfolios

The Bank is exposed to currency risk through transactions in foreign currencies. The Bank ensures that the net exposure is kept to an acceptable level by buying or selling foreign currency at spot when necessary to address short-term imbalances. The Denar is pegged to the Euro and the monetary projections envisage stability of the exchange rate of the Denar against Euro.

In December 2004 the Bank received a restraint order from the NBRM that stopped it from performing foreign currency exchange operations, thus terminating its further exposure to currency risk. In February 2007 the restraint order was withdrawn.


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MKD EUR USD TotalMonetary assets Cash and cash equivalents 384,905 760 67 385,732Loans and advances to customers 155,750 114,764 - 270,514Investment securities 113,493 - - 113,493Other assets 51,070 - - 51,070 705,218 115,524 67 820,809Monetary liabilities Deposits from banks and other financial institutions 45,051 - - 45,051Deposits from customers 633,351 - - 633,351Other liabilities 13,873 - - 13,873 692,275 - - 692,275Net position 12,943 115,524 67 128,534

(e) Capital management

Regulatory capital

The Bank’s lead regulator NBRM sets and monitors capital requirements for the Bank as a whole. The Bank is directly supervised by the local regulators.

In implementing current capital requirements NBRM requires the Bank to maintain a prescribed ratio of 8% of own funds to sum of total risk-weighted assets. Total risk-weighted assets are sum of credit risk-weighted assets and sum of capital requirements for currency risk.

Bank’s own funds are a sum of core capital, supplementary capital, less deductions, as follows:

• Core capital, which includes ordinary and non cumulative preference shares, share premium, bank reserves allocated from net profit that serve for covering losses arising from risks the Bank faces in its operations, retained earnings not encumbered by any future obligations, stated in the balance sheet and confirmed by a Decision of the Bank's Shareholders’ Assembly or accumulated loss from previous year, profit for the year if confirmed by the certified auditor, after deductions for loss for the year, licenses, patents, goodwill and other trademarks, treasury shares and the difference between the amount of the required allowance for impairment in accordance with the risk classification and allocated allowance for impairment.


33



(e) Capital management (continued)

• Supplementary capital, which includes cumulative preference shares, share premium less the amount of purchased treasury cumulative preference shares, hybrid capital instruments and subordinated liabilities.

• The total of core capital and supplementary capital is reduced by the Bank’s capital investments in banks and financial institutions exceeding 10% of the capital of such institutions, subordinated instruments and other investments in other banks or other financial institutions where the Bank holds more than 10% of the capital and other deductions.

When determining the amount of own funds, the bank shall observe the following restrictions:

• The amount of the supplementary capital cannot exceed the amount of the core capital.

• The sum of the nominal value of subscribed and paid-in ordinary shares, the share premium of such shares and the amount of reserves and the retained earnings, less the deductions from the core capital and supplementary capital previously described, should exceed the sum of other positions which are part of the bank's core capital.

The amount of subordinated instruments which are part of the supplementary capital may not exceed 50% of the amount of core capital.

The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

The Bank and its individually regulated operations have complied with all externally imposed capital requirements throughout the period.

In December 2007 a new methodology for capital adequacy entered into force. The presentation of prior year own funds position has been changed in accordance with the new methodology.

There have been no material changes in the Bank’s management of capital during the period.


34




The Bank’s own funds position at 31 December was as follows:

In thousands of denars 2007 2006 Core capital Ordinary share capital 439,959 439,959Reserves 52,057 51,888Retained earnings 8,384 8,384(Loss)/gain for the current year (24,357) 169Less patents, licenses, goodwill and other trademarks (77) -Total 475,966 500,400 Supplementary capital Revaluation reserve - -Total - - Gross guarantee capital 475,966 500,400Less Bank’s capital investments in banks and other

financial institutions (11,656) (11,224)Other - (121)Guarantee capital 464,310 489,055 Risk-weighted assets Risk-weighted assets 676,110 499,785Risk-weighted off-balance sheet items 125,346 109,279Total risk-weighted assets 801,456 609,064Aggregate open foreign currency position 113,954 - 915,410 609,064Capital ratios Total guarantee capital expressed as a percentage of sum

of total risk-weighted assets and aggregate open foreign currency position 51% 80%


35




Capital allocation

The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily upon the regulatory own funds. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation, by Managing Board.

5. Use of estimates and judgements

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

These disclosures supplement the commentary on financial risk management (see note 4).

Key sources of estimation uncertainty

Allowances for impairment losses on loans and advances

Assets accounted for at amortised cost are evaluated for impairment on a basis described in accounting policy 3(h)(iv).

The Bank reviews its loan portfolio to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the profit and loss the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in a group.


36


5. Use of estimates and judgements (continued)

Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Collectively assessed impairment allowances cover credit losses inherent in portfolios of claims with similar economic characteristics when there is objective evidence to suggest that they contain impaired claims, but the individual impaired items cannot yet be identified. In assessing the need for collective loan loss allowances, management considers factors such as credit quality, portfolio size, concentrations, and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on how well these estimate future cash flows for specific counterparty allowances and the model assumptions and parameters used in determining collective allowances.

Allowance for impairment of available for sale equity investments

The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgement, the Bank evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

Determining fair values

The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy 3(h)(v). For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.


37


5. Use of estimates and judgements (continued)

Critical accounting judgments in applying the Bank’s accounting policies

Critical accounting judgements made in applying the Bank’s accounting policies include:

Financial asset and liability classification

The Bank’s accounting policies provide scope for assets and liabilities to be designated on inception into different accounting categories in certain circumstances:

• In classifying financial assets as “trading”, the Bank has determined that it meets the description of financial assets held for trading set out in accounting policy 3(j).

• In designating financial assets or liabilities at fair value through profit or loss, the Bank has determined that it has met one of the criteria for this designation set out in accounting policy 3(h)(vii).

• In classifying financial assets as held-to-maturity, the Bank has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by accounting policy 3(l)(i).


38


6. Financial assets and liabilities Accounting classifications and fair values

The table below sets out the Bank’s classification of each class of financial assets and liabilities, and their fair values.

In thousands of denars Note

Loans and receivables

Available-for-sale

Other amortised cost

Total carrying amount Fair value

31 December 2007 Cash and cash equivalents 13 385,732 - - 385,732 385,732Loans and advances to customers 14 270,514 - - 270,514 270,514Investment securities 15 - 14,009 99,484 113,493 113,493Other assets 18 51,070 - - 51,070 51,070 707,316 14,009 99,484 820,809 820,809Deposits from banks and other financial institutions 19 - - 45,051 45,051 45,051

Deposits from customers 20 - - 633,351 633,351 633,351Other liabilities 22 - - 13,873 13,873 13,873 - - 692,275 692,275 692,27531 December 2006 Cash and cash equivalents 13 629,098 - - 629,098 629,098Loans and advances to customers 14 119,187 - - 119,187 119,187Investment securities 15 - 13,460 403,292 416,752 416,752Other assets 18 29,285 - - 29,285 29,285 777,570 13,460 403,292 1,194,322 1,194,322 Deposits from banks and other financial institutions 19 - - 44,244 44,244 44,244

Deposits from customers 20 - - 980,460 980,460 980,460Other liabilities 22 - - 16,158 16,158 16,158 - - 1,040,862 1,040,862 1,040,862


39


7. Net interest income In thousands of denars Note 2007 2006 Interest income Cash and cash equivalents 13 8,382 13,571 Loans and advances to customers 14 29,899 25,268 Investment securities 15 15,139 22,147 Total interest income 53,420 60,986

Interest expense Deposits from banks and other financial

institutions 19 (1,652) (1,037) Deposits from customers 20 (22,047) (23,608) Total interest expense (23,699) (24,645) Net interest income 29,721 36,341

Included within interest income on investment securities for the year ended 31 December 2007 is MKD 15,139 thousand (2006: MKD 22,147 thousand) relating to debt securities held-to-maturity.

8. Net fee and commission income In thousands of denars 2007 2006 Fee and commission income Payment operations in the country 239,295 103,676 Other 356 194 Total fee and commission income 239,651 103,870 Fee and commission expense Payment operations in the country NBRM 24,709 24,588 Clearing House 15,263 11,354 Total fee and commission expense 39,972 35,942 Net fee and commission income 199,679 67,928

Included within fee and commission income from payment operations in the country for the year ended 31 December 2007 is MKD 51,100 thousand (2006: MKD 51,346 thousand) representing fee and commission income from the contract with AD Makedonska Poshta. Remaining part of the fee and commission income from payment operations in the country in total amount of MKD 137,374 thousand relates to fee and commission income for services performed for Ministry of Labour and Social Policy, Ministry of Agriculture, Forestry and Water Supply and Department for Hydro-meteorological Affairs (“Ministries”). Fee and commission income refers to services rendered in 2004, 2005, 2006 and 2007 which are not recognized in the accounting records of the Bank in the appropriate year of their occurrence.


40


8. Net fee and commission income (continued)

Namely, above mentioned Ministries, have signed Agreement for payments and distribution of cash with AD Makedonska Posta, which according to the Law for Payment Operations does not have the authorization to perform payment operations services. Consequently these services are performed by Poshtenska Banka AD Skopje, as authorized participant in the payment operations. In the above mentioned years the Bank did not recognise any fee because these were services for which no compensations were received, due to the fact that the Bank has not signed contracts with the respective Ministries for performing payment operation services and due to the fact that invoices issued by the Bank in relation to these services were not accepted by the Ministries. As a result of unpaid compensations for performed services in 2004 the Bank started a court process against above mentioned Ministries. During 2007 Public Revenue Office made a control of the Banks income tax for 2006 and concluded that there is no basis for not recognizing fee and commission income in the records and issued a decision for correction of the income tax base for these services. The Bank recorded this income as fee and commission income, but due to the fact that there is a court dispute with the Ministries and is uncertainty of the outcome, the Bank has recorded allowance for impairment in the full amount of MKD 137,374 thousand (see note 13).

9. Other operating income In thousands of denars Note 2007 2006 Dividends on available-for-sale equity securities 15 2,562 278Rental income 11,580 5,652Income from collected written-off receivables 2,663 6,095Release of provision for off-balance sheet items - 29Other 5,391 4,050 22,196 16,104

10. Personnel expenses In thousands of denars 2007 2006 Wages and salaries 26,289 30,737Compulsory contributions 11,618 13,130Other staff costs 3,404 3,377 41,311 47,244

Other staff costs comprise of allowances for food, transportation of employees etc.


41


11. Other expenses In thousands of denars 2007 2006 Material and services 24,206 17,439Telephone expenses 19,909 17,531Expenses to AD Makedonska Posta 9,142 12,428Marketing costs 6,578 1,170Payments to members of the Management Board 4,485 3,728Insurance premiums 3,281 3,305Impairment provision for off-balance sheet items 2,482 -Taxes and contributions 383 1,482Rents 303 6,432Other 2,410 2,433 73,179 65,948

As at 31 December 2007 expenses relating to a lost court case in the amount of MKD 506 thousand represent expenses from lost court case against Pakom, Skopje. As at 31 December 2006 expenses relating to a lost court case in the amount of MKD 676 thousand represent expenses upon lost court case against Makedonija Turist AD Skopje.

12. Income tax expenses

Recognised in the income statement In thousands of denars 2007 2006 Current tax expense Current year 1,492 471 1,492 471

Reconciliation of effective tax rate In thousands of denars 2007 2007 2006 2006 (Loss)/Profit before income tax % (22,865) % 640Income tax using the domestic corporation tax rate 12.0 (2,743) 15.0 96Non-deductible expenses (19.8) 4,543 65.2 417Tax exempt income 1.3 (308) (6.6) (42)Total income tax expense in income statement (6.5) 1,492 73.6 471


42


13. Cash and cash equivalents In thousands of denars 2007 2006 Cash on hand 157,423 177,300Balances with the National Bank of Republic of Macedonia 108,434 400,634Current accounts with local banks - 1,297Treasury bills 119,875 49,867 385,732 629,098

At 31 December 2007 cash and cash equivalents included MKD 89,065 thousand (2006: MKD 82,042 thousand) as obligatory reserve requirement in MKD. These funds are kept as cash on hand or as balances with NBRM. Funds from obligatory reserve in foreign currency are not available for the Bank’s daily business.

14. Loans and advances to customers In thousands of denars 2007 2006 Loans and advances to customers at amortised cost 270,514 119,187 270,514 119,187

Loans and advances to customers at amortised cost

Gross Impairment Carrying Gross Impairment Carrying amount allowance Amount amount allowance amountIn thousands of denars 2007 2006 Retail customers:

Consumer loans 145,723 (4,737) 140,986 30,066 (364) 29,702Credit cards 65,423 (654) 64,769 - - -

Overdrafts on current accounts 36,755 (12,270) 24,485 81,959 (12,400) 69,559Corporate customers:

Mortgage lending 50,968 (40,115) 10,853 40,005 (40,005) -Other loans 47,638 (18,217) 29,421 35,789 (15,863) 19,926Government 169,541 (169,541) - 32,167 (32,167) - 516,048 (245,534) 270,514 219,986 (100,799) 119,187


43


14. Loans and advances to customers (continued)

Allowances for impairment

In thousands of denars 2007 2006 Specific allowances for impairment Balance at 1 January 100,799 105,634Impairment loss for the year

Charge for the year 144,735 -Release of provision - (4,835)

Balance at 31 December 245,534 100,799

Part of allowance for impairment in the amount of MKD 137,374 thousand represents allowance for impairment on fee and commission receivables from Ministry of Finance (see note 8).

15. Investment securities In thousands of denars 2007 2006 Held-to-maturity investment securities 99,484 403,292Available-for-sale investment securities 14,009 13,460

113,493 416,752

Held-to-maturity investment securities

In thousands of denars 2007 2006 Government Bills 99,484 403,292 99,484 403,292


44


15. Investment securities (continued)

Available-for-sale investment securities

In thousands of denars 2007 2006 Unquoted equity securities at cost 14,009 13,811Less specific allowances for impairment - (351) 14,009 13,460 Specific allowances for impairment In thousands of denars 2007 2006 Balance at 1 January 351 351Impairment loss for the year

Release for the year (71) -Write-offs (280) -Balance at 31 December - 351


45


16. Property and equipment

In thousands of denars BuildingsFurniture &

equipment Assets under construction

Total

Cost Balance at 1 January 2006 28,514 87,926 1,431 117,871Acquisitions 327 5,922 10,742 16,991Transfer from assets under

construction 9,256 1,650

(10,906)

-Transfer from assets held for

sale 283,499 -

-

283,499Disposals and write-offs - (1,502) - (1,502)Balance at 31 December 2006 321,596 93,996 1,267 416,859 Balance at 1 January 2007 321,596 93,996 1,267 416,859Acquisitions 642 3,561 10,256 14,459Transfer from assets under

construction - 8,977

(8,977)

-Disposals and write-offs - (1,462) - (1,462)Balance at 31 December 2007 322,238 105,072 2,546 429,856 Depreciation Balance at 1 January 2006 2,408 74,969 - 77,377Depreciation for the period 1,926 9,749 - 11,675Disposals and write-offs - (1,502) - (1,502)Balance at 31 December 2006 4,334 83,216 - 87,550 Balance at 1 January 2007 4,334 83,216 - 87,550Depreciation for the period 8,054 5,840 - 13,894Disposals and write-offs - (1,462) - (1,462)Balance at 31 December 2007 12,388 87,594 - 99,982 Carrying amounts Balance at 1 January 2006 26,106 12,957 1,431 40,494Balance at 31 December 2006 317,262 10,780 1,267 329,309Balance at 31 December 2007 309,850 17,478 2,546 329,874

As at 31 December 2007 the Bank does not have any property pledged as collateral (2006: none).


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17. Intangible assets In thousands of denars Software Total Cost Balance at 1 January 2006 2,163 2,163Acquisitions 143 143Balance at 31 December 2006 2,306 2,306 Balance at 1 January 2007 2,306 2,306Acquisitions 2,617 2,617Balance at 31 December 2007 4,923 4,923 Amortisation Balance at 1 January 2006 1,645 1,645Amortisation for the period 483 483Balance at 31 December 2006 2,128 2,128 Balance at 1 January 2007 2,128 2,128Amortisation for the period 271 271Balance at 31 December 2007 2,399 2,399 Carrying amounts Balance at 1 January 2006 518 518Balance at 31 December 2006 178 178Balance at 31 December 2007 2,524 2,524


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18. Other assets In thousands of denars 2007 2006 Fee and commission receivables 3,820 5,108Assets acquired through foreclosure procedures 2,736 2,736Receivables from AD Makedonska Poshta 33,836 12,474Advances given 668 4,714Trade receivables 2,525 -Other assets 8,785 4,286Less specific allowances for impairment (1,300) (33) 51,070 29,285

Specific allowances for impairment In thousands of denars 2007 2006 Balance at 1 January 33 815 Impairment loss for the year

Charge for the year 1,267 - Release of provision - (782)

Balance at 31 December 1,300 33

The assets received in exchange for non-performing loans include apartments which are not used by the Bank for its core operations.

As at 31 December 2007 receivables from AD Makedonska Poshta in the amount of MKD 33,836 thousand (2006: MKD 12,474 thousand) represent receivables from performed payment operations services in the country according to the agreement for cooperation.

19. Deposits from banks and other financial institutions In thousands of denars 2007 2006 Domestic banks

Current deposits 1,435 29,861Other financial institutions

Term deposits 36,399 11,370Current deposits 7,217 3,013

45,051 44,244


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20. Deposits from customers In thousands of denars 2007 2006 Retail customers:

Term deposits 315,649 300,932Current deposits 169,939 185,114

Corporate customers: Term deposits 137 146Current deposits 53,681 35,826

Public sector Term deposits 15,062 15,062Current deposits 78,883 443,380

633,351 980,460

21. Impairment provisions related to off balance sheet items In thousands of denars 2007 2006 Balance at 1 January 2,000 2,029Provisions made during the year 2,482 -Release of provisions - (29)Balance at 31 December 4,482 2,000

22. Other liabilities In thousands of denars 2007 2006 Suppliers payable 11,112 13,993Other taxes and contributions 534 1,067Other 2,227 1,098 13,873 16,158

23. Capital and reserves

Share capital Ordinary shares In number of shares 2007 2006 On issue at 1 January 38,490 38,490On issue at 31 December 38,490 38,490


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23. Capital and reserves (continued)

At 31 December 2007 the authorised share capital comprised 38,490 ordinary shares (2006: 38,490 ordinary shares). Ordinary shares have a par value of EUR 188.09. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Bank. All shares rank equally with regard to the Bank’s residual assets.

Republic of Macedonia holds a golden share in Poshtenska Banka. In case of privatization of at least 51% of the capital of AD Makedonska Poshta, Republic of Macedonia retains the right arising from the golden share for a period of 12 months after the privatization.

The golden share provides a dominant voting right to the Government of the Republic of Macedonia on the following issues:

- change of ownership in the Bank;

- merger, division and cessation of the operations of the Bank;

- quotation of the shares of the Bank on the Stock Exchange;

- assuming liabilities for the account of the Bank exceeding 10% of the Bank’s own funds;

- establishing units of the Bank abroad;

- investments abroad;

- investment policy of the Bank.

The following shareholders have an interest exceeding 5% of the Bank’s issued voting share capital:

% of voting share capital

EUROSTANDARD Banka AD Skopje 66.66%

AD Makedonska Posta 33.33%


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23. Capital and reserves (continued)

Statutory reserve

Under local statutory legislation, the Bank is required to set aside 15 percent of its net profit for the year in a statutory reserve until the level of the reserve reaches 1/5 of the court registered capital. Until achieving the minimum required level the statutory reserve could only be used for loss recovery. When the minimum level is reached the statutory reserve can also be used for distribution of dividends, based on a decision of the shareholders’ meeting, but only if the amount of the dividends for the current business year has not reached the minimum for distribution as prescribed in the Trade Company Law or by the Bank’s Statute.

Dividends Subsequent to the balance sheet date as at 31 December 2007 there were no dividends proposed by the Supervisory Board (2006: none).

24. Contingencies

The Bank provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year. Expirations are not concentrated in any period.

The contractual amounts of commitments and contingent liabilities are set out in the following table by category.

In thousands of denars Note 2007 2006 Payment guarantees

in MKD 7,000 2,000Undrawn overdrafts facilities 243,223 214,558Provisions 21 (4,482) (2,000) 245,741 214,558

These commitments and contingent liabilities have off balance-sheet credit risk because only organisation fees and accruals for probable losses are recognised in the balance sheet until the commitments are fulfilled or expire. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows.


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25. Compliance with local requirements

As at 31 December 2007 the Bank is not in compliance with local banking regulations with regard to the limit for the Bank’s property, equipment and equity investments to own funds.

Namely, the Bank exceeds the prescribed limit of 60% for its property, equipment and equity investments to own funds, and as at 31 December 2007 the exposure is 72% (2006: 72%). Upon this, the Bank received a decision from the National Bank of the Republic of Macedonia (“NBRM”) for compliance with the prescribed limit up to 31 March 2008.

As a result of non-compliances with the law requirements identified in previous years and inappropriate actions taken by the Bank, in December 2004 the NBRM imposed restriction on the Bank for approval of loans to legal entities, except for loans covered with first class instruments. The restriction was withdrawn by NBRM as at 28 December 2007.

26. Related parties

According to the Banking Law persons related to the Bank are the following: persons with special rights and responsibilities and persons related thereto, shareholders with qualified holding in the Bank (direct or indirect ownership of at least 5% of the total number of shares or the issued voting shares in a Bank or which makes it possible to exercise a significant influence over the management of the Bank) and entities related thereto and responsible persons of those shareholders – legal entities, bank subsidiaries and other entities the Bank has close links with.

The volumes of related-party transactions, outstanding balances at the year-end, and relating expense and income for the year are as follows:

(i) Deposits from related parties

Entities related with entities

with joint control over the Bank In thousands of denars 2007 2006 Deposits at 1 January 70,293 133,738Deposits received during the year 3,104,960 3,237,544Deposits repaid during the year (3,139,422) (3,300,989)Deposits at 31 December 35,831 70,293Interest expense on deposits 1,141 4,235


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26. Related parties (continued)

(ii) Other transactions with related parties

In thousands of denars 2007 2006 Other assets 44,306 13,261Fee end commission income 51,280 51,685Rental income 12,436 4,944Other expenses 9,232 12,431Operating lease expenses 53 3,676Other income 1,634 -

(iii) Key management personnel compensation

In thousands of denars 2007 2006 Short-term employee benefits 17,026 18,081 17,026 18,081

27. Subsequent events

As of 1 January 2008 the tax rates for the Income Tax as well as for the Personnel Income Tax is 10% in accordance with the amendments to the Income Tax Law and Personnel Income Tax Law published on 30 December 2006 in the Official Gazette Number 139 (2006: Income tax and Personal Income tax using 12%).

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