UNITED IN TRUST. ANNUAL REPORT 2007

Austria

BosniaandHerzegovina

Croatia

CZECHREPUBLIC

Hungary

Romania

Serbia

Slovakia

Slovenia

Ukraine

UNITEDINTRUST. ANNUAL REPORT 2007

Lazarská8

CZ-12000Praha2

Tel.:+420221969911

Fax:+420221969951

VOLKSBANKCZ

[email protected]

www.volksbank.cz

ANNUALREPORT

ForewordfromtheBoardofDirectors 6

KeyFiguresinSummary 8

InternationalNetwork 9

GoverningBodies 11

OrganisationChart 14

GeneralEconomicBackground 15

BusinessActivities 16

RiskManagement 26

OtherInformations 30

ProfitandLossAccount 39

BalanceSheet 40

StatementofChangesinEquity 42

StatementofCashFlow 43

NotestotheFinancialStatements 46

QuantitativeIndicies 109

ReportofRelations 110

ReportofIndependentAuditors 112

ReportoftheSupervisoryBoard 114

SERVICE 117

OurNetwork 118

CONTENT

4

ANNUAL REPORT 2007

Austria


Croatia

CZECHREPUBLIC

Hungary

Romania

Serbia

Slovakia

Slovenia

Ukraine

UNITEDINTRUST.

DearLadiesandGentlemen,

DearClients,BusinessPartnersandShareholders,

Wearedelightedtoinformyouthattheyear2007wasexceptionallyprosperousforVolksbank

CZ.ThebusinessresultsachievedbytheBankmorethansuccessfullycontinuedthecourseset

inpreviousyearsandthusreaffirmedVolksbank’sstableperformance.

TheBankalsocontinuedthelongtrendofimprovingitsresults,andenormousincreaseswere

achievedinallkeybusinessindicators.ProfitonordinaryactivitiesbeforetaxreachedCZK440million,

whichrepresentsa73%increaseyear-on-year.Anotherreasonforthepastyear’ssuccessisseen

especiallyinthegainofmorethan43%inthetotalassets,whichendedtheyearatCZK36.45billion.

Theoutstandingsuccessachievedinthelendingareawassupportedaboveallbythedynamic

acquisitionactivities,whichlikewiseweremarkedby43%growth.Thevolumeofclientdepositsrose

bymorethan40%,whilethevolumeofsecuritiesmanagedbytheBankgrewbynearly38%.

Inrealestatefinancing,VolksbankCZextendedthegoodresultsoftheprevioustwoyears.

Thesegmentofresidentialprojectsconstructioncontributedsubstantiallytothe90%year-on-year

growthintheoverallvolumeofloanoriginations.TheBankmanagedinthepastyearalsotoestablish

itselfontherealestatemarketbeyondthecountry’scapitalcity.

TheexcellentresultachievedbytheInternationalDesk–anincreaseinprofitonordinary

activitiesof41%–canbecreditedespeciallytomoreactiveoperationsinreachingouttoSMEs

andtoexpandingtheofferingforprivateclientele.ThenumberofItalian,FrenchandSpanishclients

whochoseVolksbankastheirmainpartnergrewby10%comparedto2006.

Forthecorporateclientsdivision,asfortheentireBank,theyear2007wasthemostsuccessful

initshistoryasmeasuredbythebusinessresultsachieved.Themainindicator,grossprofitbefore

riskprovisions,endedtheyearat126%ofitsplannedtarget.BusinessvolumesincreasedbyCZK

4.58billionandincomesbyCZK122.6millioncomparedtotheendofthepreviousyear.

6

FOREWORDFROMTHEBOARDOFDIRECTORS

fromleft:

VáclavVitha,JohannLurf,TomášKořínek

7

Inretailbanking,too,VolksbankCZsignificantlysurpassedin2007theexcellentresultsofthe

previousyear.Bycontinuingtoexpandthesalesnetwork,theBankmanagedtoincreaseitsbusiness

volumeby45%and,atthesametime,toacquiremanynewretailclients.Inmortgagefinancing,

thegrowthinnewtransactionsexceeded300%andwasdrivenespeciallybytheexpandingprivate

residentialprojectssectorinthelocalmarket.

TheBank’sproductofferingwasexpandedforbothretailandcorporateclientele.Clientswere

presentedwithnewtypesofmortgageloans,thepaymentcardsrangewasenhancedwithanew

creditcard,andtheBankalsoopenedaseconddirectbankingchannel(Phonebanking).

Inthecorporateloansarea,theproductlinewasexpandedwithaturnover-basedoverdraftloan

andefficienttoolswerecreatedforevaluatingthecreditworthinessofclientsincasesofsmallerloans.

TheVolksbankShopsproductofferingwasalsoexpanded,andVolksbanksuccessfullycontinued

thecooperationwithitspartnercompanies.Inadditiontotheaforementionedinnovations,theBank

alsofocusedduringthepastyearonimprovingitsprocessesandprocedures.Byautomating

andsimplifyingthese,VolksbankCZwasabletoofferclientsitsservicesandproductswitheven

greaterqualityandspeedwhileavoidingunnecessaryadministrativedelays.

VolksbankCZincreaseditsnumberofpointsofsalefrom32to54during2007.TheBank

reachedouttoawidercircleofclientsthroughthetargetedacquisitionactivitiesofitshighly

educatedbankadvisorsandbyinitiatingcooperationwithexternalnetworks.

Toourvaluedclients,businesspartnersandshareholders,wewouldliketothankyouforthe

patronageandsupportyouhaveshownus.Wewishyougreatsuccessinyourworkthrough

thenextyear.

VáclavVitha JohannLurf TomášKořínek

CZK million 2007 2006

Totalassets 36,448 25,414

Liabilitiestoclients,includingdepositcertificates 23,685 16,842

Receivablesfromclients 30,161 21,020

Incomeonfinancialtransactionsbeforegeneralandspecificprovisions 1,342 907

Operatingexpenses 725 580

Profitonordinaryactivitiesbeforetax 440 255

Numberofemployees* 635 497

Numberofpointsofsale 54 32

*includingemployeesonmaternityleave

KEYFIGURESINSUMMARY

8

INTERNATIONALNETWORK

9

VolksbankCZhasprosperedontheCzechmarketsince1993.TheBank’smain

shareholderisVolksbankInternationalAG.

VolksbankAG(VBAG)wasfoundedin1922bycommerciallendingcooperativesandismajority

ownedbymorethan60independentAustrian“Volksbanken”(cooperativebanks).TheBank

isthecentralinstituteofoneofthemostimportantbankinggroupsinAustriaandisaninternational

commercialbank.Alreadyin1991,VBAGwasoneofthefirstbankstobeginitsexpansioninto

thechallengingmarketsofCentralandEasternEurope.

VolksbankInternationalAG(VBI)islocatedinVienna,Austria,andthemajorityofitsequity

isheldbyVBAG(51%),whiletheremainingstakesof24.50%eachareheldbytheGermanDZBANK/

WGZ-BankandtheFrenchBanqueFédéraledesBanquesPopulaires.VBIdirectsasuccessful

andexpandingnetworkofsome500branchesinnineCentralandEasternEuropean(CEE)countries:

Slovakia,theCzechRepublic,Hungary,Slovenia,Croatia,Bosnia-Herzegovina,Serbia,Romania

andUkraine.ThetotalassetsamounttomorethanEUR9.5billionin2007.Morethan5,000

employeesofferprivateandcorporateclientsawiderangeofmodernbankingproductsandservices.

In2007,VolksbankInternationalAGintensifiedcooperationwithitsAustrian,German,French

andItalianpartnersthroughthe“CEEUNLIMITED”programme.Withthegoalofsupporting

thereferralbusiness,thisservicebroadenstheofferforclientsofindividualpartnerbanksandprovides

bankerswiththeknow-howneededtoinitiateanddevelopbusinessactivitiesinCentralandEastern

Europeancountries.Theclients–mostlysmallandmediumenterprises–continuetobeserved

bytheparentbank.Inaddition,theycanaccessbankingservicesacrosstheentireCEEnetwork.

Thecooperationisefficient,professionaland–veryimportantly–conductedintheclient’smother

tongue.

OneofthemanyservicesofferedwithintheCEEUNLIMITEDprogrammeistheestablishment

ofa“CEEaccount”.AbilingualCEECONTRACT(inGerman,English,FrenchorItalianandinthe

client’smothertongue)allowsforeasilyestablishingtheaccount.Moreover,theclienthasimmediate

accesstotheaccountwithoutsuperfluousformalitiesanddelays.Thishighlyspecialisedcooperation

providesclientswithstraightforwardaccesstoinvestmentandrealestatefinancingservices,aswell

astothoserelatingtoinsuranceandleasing.

Becausesizeisn’teverything,westriveformorethanjustcreatinganextensivenetwork

ofbanks.Ourpriorityispersonalcontactwithclients,mutualtrustandreliability.Themostimportant

measuresforusareintheprofessionalqualityofourservicesandthelong-termrelationshipsthat

webuildwithourclientsinordertoensuretheirbusinesssuccess.Thus,ourinternationalclientsare

providedwithunrivalledcareintheirmothertonguesateachofourassociatedinternationalbanks

throughtheCEEUNLIMITEDprogramme.Thatmeanstheclientscanfeel“athome”evenwhenthey

aredoingbusinessabroad.

10

INTERNATIONALNETWORK

Shareholders Share in %

VolksbankInternationalAG,Vienna 97.78

BancaPopolarediVicenzaS.C.P.A.,Vicenza 1.11

EM.ROPopolareS.P.A.,Modena 1.11

Shareholdersstructurebyproportionoftotalsharecapitalasat31December2007.

11

VICE-CHAIRMAN

EngelbertBRAMERDORFERVice-ChairmanoftheSupervisoryBoardAppointedon:30May2005Experience:10yearsofbankingexperience,7yearsofmanagementexperience

Membershiponothercompanies’bodies:MagyarországiVolksbankZrt.,Hungary:Vice-ChairmanoftheSupervisoryBoard;VolksbankBHd.d.,BosniaandHerzegovina:Vice-ChairmanoftheSupervisoryBoard;ElectronBank,Ukraine:MemberoftheBoardofDirectors

SUPERVISORYBOARD

CHAIRMAN

FriedhelmBOSCHERTChairmanoftheSupervisoryBoardAppointedon:6December2004Experience:20yearsofbankingexperience,13yearsofmanagementexperience

Membershiponothercompanies’bodies:VolksbankInternationalAG,Austria:ChairmanoftheBoardofDirectors;VolksbankBHd.d.,BosniaandHerzegovina:ChairmanoftheSupervisoryBoard;VB-HoldingAG,Austria:MemberoftheSupervisoryBoard,Volksbank-InvestGmbH,Austria:MemberoftheSupervisoryBoard;IKInvestmentbankAG,Austria:MemberoftheSupervisoryBoard

GOVERNINGBODIES

GOVERNINGBODIES

12

SUPERVISORYBOARDMEMBERS

GabrieleUGOLINIMemberoftheSupervisoryBoardAppointedon:25May2004Experience:34yearsofbankingexperience,22yearsofmanagementexperience

Membershiponothercompanies’bodies:VolksbankBHd.d.,BosniaandHerzegovina:MemberoftheSupervisoryBoard

ThorstenPAULMemberoftheSupervisoryBoardAppointedon:6December2004Experience:15yearsofbankingexperience,9yearsofmanagementexperience

Membershiponothercompanies’bodies:GEFBeteiligungsAG,Austria:ChairmanoftheSupervisoryBoard;VentureforBusinessBeteiligungsAG,Austria:MemberoftheSupervisoryBoard;VBPartner-KapitalBeteiligungsAG,Austria:MemberoftheSupervisoryBoard;IKInvestmentbankAG,Austria:ChairmanoftheSupervisoryBoard;InvestEquityBeteiligungsAG,Austria:ChairmanoftheSupervisoryBoard;MezzanineManagement,Austria:ChairmanoftheAdvisoryBoard;AthenaWienBeteiligungenAG,Austria:Vice-ChairmanoftheSupervisoryBoard;LeadEquitiesMittelstandsfinanzierungAG,Austria:MemberoftheSupervisoryBoard;IKIBMittelstandsfinanzierungsAG,Austria:ChairmanoftheSupervisoryBoard

JindřichHORNÍČEKMemberoftheSupervisoryBoardAppointedon:18August2005Experience:7yearsofbankingexperience,1yearofmanagementexperience

Nomembershiponothercompanies’bodies.

LubošVLČEKMemberoftheSupervisoryBoardAppointedon:18August2005Experience:10yearsofbankingexperience,15yearsofmanagementexperience


13

BOARDOFDIRECTORS

CHAIRMAN

JohannLURFAppointedon:10December1996Experience:32yearsofbankingexperience,21yearsofmanagementexperience


MEMBERSOFTHEBOARDOFDIRECTORS

VáclavVITHAAppointedon:1March2002Experience:16yearsofbankingexperience,10yearsofmanagementexperience


TomášKOŘÍNEKAppointedon:30November2005Experience:15yearsofbankingexperience,11yearsofmanagementexperience


14

ORGANISATIONCHART

Section002

Corporate RiskManagement

036

BoardofDirectorsInformationSecurityOffice

153

Section001

Organisation, IT015

Section003

Corporate Banking030

Retail Risk Management

039

Treasury / TreasurySecurities & Sales

020

Public Sector031

Back Office055

International Desk032

Risk Controlling070

Retail Banking090

Real Estate Financing035

Sales Support040

HR Management160

Trade and StructuredFinances

260

Financial Management080

Facility Management190

Work Out andRestructuring

037

Compliance&AML175

Audit/Revision130

Organisationchartasat31.12.2007.

15

GENERALECONOMICBACKGROUND

ECONOMICDEVELOPMENTINTHECZECHREPUBLICIN2007

Againin2007,theCzecheconomymaintainedthestrongdynamicofpreviousyears.TheCzech

economyachieveditshighestgrowthratein2007sinceestablishmentoftheindependentCzech

Republic,asgrossdomesticproductroseby6.5%year-on-year.Inadditiontoone-offfactors,GDP

growthwasgreatlyinfluencedbygainsinfixedinvestments,householdconsumption,netexports,

andgovernmentconsumption.

ThelevelofinflationintheCzecheconomyalsorosein2007incomparisontopreviousyears,

reachinganaverageof2.8%forthefullyear.Risingpricesforfood,transport,foodserviceandhousing

especiallycontributedtotheinflation.TheCzechNationalBank(CNB)respondedtotheincreasing

pricesbyraisingitskeyinterestrate.TheCNBboostedits2weekreporateatotaloffourtimesduring

2007,fromthe2.50%rateatthestartoftheyearto3.50%bytheendof2007.Duetofurtherprice

shocksatthestartof2008,theCNBproceededtoboostthereferencerateonceagain,to3.75%.

Thepositivetrendinlabourmarketdevelopmentcontinuedagainin2007.Unemployment

hadfallento6.0%bytheendoftheyear,astheranksoftheunemployeddecreasedbymorethan

93,000during2007andthenumberofopenjobpositionsexceeded141,000.Theimproving

situationonthelabourmarketisespeciallyduetothestrongeconomicgrowthinrecentyearsthat

isgeneratingnewjobs.Unemploymentcanbeexpectedtocontinuedecreasingoverthelongterm,

albeitataneverslowerpace.

FavourableeconomicconditionsandthestabilityoftheCzechRepublicwerealsoreflected

inthedevelopmentoftheCzechcrown’sexchangerate.Thecrownstrengthenedagainsttheeuro

bymorethananother3.5%during2007.Theexchangerateattheendof2007stoodat26.62CZK/

EUR.Businessesmanagedtocopewiththecrown’sbriskriseespeciallythroughrapidproductivity

gains.

OUTLOOKFOR2008

Theyear’sfirstdataalreadyshowthattheCzecheconomy’sexpansioncanbeexpected

todecelerateduring2008incomparisontopreviousyears.ThereasonsfortheslowingGDPgrowth

willbeseenespeciallyinslowinghouseholdconsumptiongrowth,higherinflation,restrictivefiscal

reformsanddeceleratinggrowthintheeurozone.Inadditiontodomesticfactors,uncertainty

regardingtheexternalenvironment,whichmarkedlyaffectstheCzecheconomy,willalsohave

asignificantinfluence.

BUSINESSACTIVITIES

CORPORATECLIENTS

ForCorporateBanking,asfortheentireBank,theyear2007wasthemostsuccessfulinthat

division’shistoryasmeasuredbythebusinessresultsachieved.Themainindicator,grossprofit

beforeriskprovisions,endedtheyearat126%ofitsplannedtarget.Businessvolumesincreased

byCZK4.58billioncomparedtothepreviousyear’send,andincomesrosebyCZK122.6million.

Thesesuccessfulresultsareaconsequenceofthedivision’ssteadilypursuingitslong-term

salesstrategy,whichfocusesoncompanieswithturnoverofCZK30milliontoCZK1.5billionasits

targetclientsegment.CompanieswithturnoverofCZK30–150millionreceiveindividualattention.

Fortheseclients,wewereabletosignificantlyaccelerateandsimplifytheloanprocess,notonly

intheareasofworkingcapitalfinancingandinvestmentneedsbutalso,forexample,inthearea

ofdiscountingaccountsreceivable.

In2007,anewmediacampaignwasundertakenwiththeaimofpromotingsales.Earlyin2007,

adirectmailingcampaigngotunderwaywiththetheme“Minimisingexchangeandinterestraterisks”.

Attheendoftheyear,then,anadvertisingcampaigncommencedwiththetheme“Comprehensive

solutionsforfinancingworkingcapitalneeds,obtainingbankguarantees,andhedgingcurrencyrisks”.

Positivereferencesfromsatisfiedexistingclientswereanimportantmeansofobtainingnewclients.

ByexpandingcooperationwiththeTreasurySalesdepartment,considerablegrowthwas

achievedinsalesoftreasuryproducts.Thiswasparticularlytrueintheareaofhedgingexchangerate

risks,whichwasinfluencedbythechangingattitudeofclientstowardthoseproductsinrelation

tomarketdevelopments.Thisalsohadasignificantimpactontheresultsachieved.

Changesinownershipofcompanieswerefrequentlyseenonthemarketduring2007.

VolksbankCZ,too,participatedinanumberofacquisitionfinancetransactions.Thistrendisexpected

tocontinueintothefuture.

Theaforementionedresultscouldnothavebeenachieved,ofcourse,withoutcorresponding

growthinthenumberofqualifiedandexperiencedemployees.Mostofthenewstaffwent

tostrengtheningthedynamicallygrowingdepartmentsinPragueandNorthernMoravia.Allregions

thatheretoforehavehadonlyasingleemployeewillnowbefortifiedwithanadditionalsalesperson.

Particularlyinordertoimprovesalesmanagement,thelargedepartmentsinPragueandBrnowere

dividedintoseveralteamsandeachteamisledbythemostexperiencedsalesperson.Asignificant

changeinthemethodofremunerationalsocontributedtotheresultsfortheentiredivision,asithad

asubstantialimpactinmotivatingsuccessfulsalespersonnel.

16

17

Theresultstobeachievedin2008presentabigchallenge.Ourambitiousplancallsforfurther

acceleratinggrowthandtherebyfurtherboostingVolksbankCZ’sshareoftheoverallcorporateclients

marketintheCzechRepublic.

RETAILBANKING2007

During2007,VolksbankCZmanagednotonlytoreplicatetheexcellentbusinessresultsachieved

inthepreviousyear,buteventosurpassthembyalargemargin.TheBankcontinuedinbuildingnew

pointsofsale,and,bytheendof2007,retailclientshad54pointsofsaleattheirdisposal.This

expansionofthebranchnetworknotonlyhelpedtoincreasethesalesvolumeby45%,italso

contributedtoboostingthenumberofnewclientsbymorethan28%.

Theprivateresidentialbuildingsectorprovedtobeadrivingfactorin2007.Thankstoour

client-orientedapproachandindividualprocessing,newmortgagefinancingtransactionsrose

bymorethan300%.

Throughpersonalconsultationswithourhighlyqualifiedspecialists,weareablecompetently

andquicklytoexecutetransactionswithconditionsthatoptimallycorrespondtotheindividualneeds

anddemandsofprivateclients,businesspeople,andsmallandmediumenterprises(SMEs).

Intheinterestofcontinuingtoachievesuchgoodresults,VolksbankCZreliesonawide

spectrumofretailbankingservices.Inadditiontoindividualfinancialsolutions,secureinvestment

STRUCTURE OF DEPOSITS IN FOREIGN CURRENCIES(2006:CZK2.968bil.;2007:CZK3.519bil. )

STRUCTURE OF DEPOSITS IN CZK(2006:CZK10.503bil.;2007:CZK17.489bil.)

2006

0%

20%

40%

60%

80%

100%

2007 2006 2007

Current accounts Term deposits Bill of exchange Saving accounts

products,creativeproductpackages,andsecureandconvenientexecutionoffinancialtransactions,

wealsoofferdailyopeninghoursfrom8a.m.until8p.m.throughourVolksbankShopsandapersonal

approachatallourpointsofsale.

INTERNATIONALDESK

Theyear2007wasverysuccessfulfortheInternationalDeskintermsofboththenumber

ofclientsservedandtheresultsachieved.Comparedwith2006,thenumberofItalian,French

andSpanishclientswhochoseVolksbankastheirmainpartnergrewbymorethan1,500,which

representedanincreaseofapproximately10%andcontributedtothe41%growthinoperatingprofit.

Areorganisationofthedepartmentwascompletedduringtheyear,andtheemployeeranks

werestrengthened.Thisbroughtthepresentnumberofmultilingualspecialistsupto13.TheBank

willcontinuethistrendbymakingfurtherimprovementsinthequalityofservicesinthecomingyears.

Itisworthnotingthatduring2007,moresothaninpreviousyears,theactivityoftheInternational

DeskwasconcentratedonSMEsinvariousmarketsegments,aswellasonprivateclients.

CooperationwiththeBank’spartnersalsowasverypositive,resultinginaseriesofadvantageous

mergers(integrations)withsubsidiarycompaniesoftheVolksbankGroup.

REALESTATEFINANCING

TheRealEstateFinancingdepartmentextendedthegoodresultsoftheprevioustwoyears,

increasingthevolumeofloanoriginationsby90%year-on-year.Onceagain,asignificantpartofthis

increasewasattributabletoresidentialbuildingprojects.Whereasinthepastthemajorityoffinancing

hasbeendirectedtoinvestorsworkingonthePraguerealestatemarket,in2007thedepartment

succeededinclosingnewtransactionsintheamountofCZK2.2billionforpurchasingordeveloping

realestateoutsidethecapitalcity.Thus,forthefirsttime,thedepartmentachievedamajorpushinto

otherregions.

PUBLICSECTOR

In2007,VolksbankCZsetasatargettofurtherincreaseitsloanexposuretohousing

cooperativesandapartmentownersassociations.Incomparisonwiththesituationattheend

of2006,thevolumeofloansthattheBankhadprovidedtoclientsgrewbyalmost80%.Theseloans

weredirectedparticularlyattherepairandreconstructionofprefabricatedhousing.Thecloseof2007

wasmarkedbythestate’ssuspendingitsacceptanceofapplicationsforloan-interestgrantsunder

thePANELprogramme,andthatsomewhatslowedfurthergrowthinthissegment.

18

BUSINESSACTIVITIES

19

Inthemunicipalitiessegment,bycontrast,VolksbankCZ’slendingactivitiesweredecreased

asaconsequenceoftheBank’sdeliberatedecisiontolimititsparticipationinpublictenders

forfinancingmunicipalprojects.

ThevolumeofpublicsectorfundsdepositedattheBankincurrentaccountsorallocated

tovariousformsoftermdepositsincreasedbyone-thirdincomparisontothesameperiodof2006.

TRADEANDSTRUCTUREDFINANCE

During2007,thedepartmentfocusedonstructuredtransactions,andparticularlyinthearea

ofacquisitionfinancing.IntheSMEandsmallcorporateclientssegment,severalacquisitionfinance

transactionsweresuccessfullystructured.

Inthesyndicatedloansarea,theBankparticipatedsuccessfullyinpreparingandunderwriting

severalsyndicatedcreditsandclubloans.VolksbankCZ’sgoodnamealsoallowsforpotential

collaborationonthissecondarymarket.AlthoughtheBankdoesnotcurrentlyhavethecapacity

toarrangesyndicatedloansbyitself,ithasfoundopportunitiestoactasacrediblepartnerinthe

SMEsegment.

DiscountingofaccountsreceivableistraditionallyasuccessfulacquisitioninstrumentintheBank’s

portfolio.Basedonthevolumeofpurchasedreceivablesandthenumberofexecutedtransactions,

theBankisamarketplayerinleaguewiththesmallerfactoringcompanies.

Forreasonsofcapacity,atransactionapplicationwascreatedforprocessingreceivables

fordiscounting.Theresultisalargernumberoftransactionsfromthesamepersonnelandanimproved

abilitytomonitortheportfolio.Theapplicationshouldprovideclientsanddebtorsgreaterconvenience

incommunicatingwithVolksbankCZonthestatusofreceivablesintheBank’sportfolio.

TREASURY/SECURITIES

VolksbankCZtookadvantageofmacroeconomicconditionsandtheCzechmarketenvironment

tofurtherstrengthenitspositionintradingonfinancialandcapitalmarketsduring2007.Inaddition

totrading,thedepartment’sprincipalactivitywasinmanagingtheBank’sliquidityanditsportfolio

ofmoneymarket,foreigncurrency,andcapitalmarketsinstruments.VolksbankCZ’stradingactivity

onthefinancialandcapitalmarketscontributedsignificantlytotheitsoverallprofit.

20

In2007,VolksbankCZcontinueditssuccessfullyestablishedtrendinsellingfinancialmarket

products.ThroughitsTreasuryexperts,theBankofferedproductsandconsultingtocorporate,retail

andinstitutionalinvestors.Byconstantlyinnovatingitsofferedproductsandenhancingthequality

andcomprehensivenessofitsservices,theBanksignificantlyincreasedthevolumeoffinancingand

hedgingtransactionswithclients.Especiallyinthecurrencyhedgingarea,VolksbankCZachieved

significantgrowthinthenumberandvolumeofexecutedtransactions.

TheBankfocusedin2007onimprovingthequalityofitsservicesandexpandingtheoffering

ofinvestmentproductsforclients.Thedemandforinvestmentservicesandproductsofferinghigher

ratesofreturngrewthroughouttheyearinallclientsegments.VolksbankCZreactedtothisdemand

byintroducingnewproducts,andespeciallyincooperationwithothercompaniesfromtheVolksbank

Group.

Amongthesignificantsuccessesof2007weretheintroductionoffournewissuesofguaranteed

certificatesandanewbondmutualfundfromtheinvestmentcompanyVolksbankInvest.Inaddition

tomutualfunds,guaranteedcertificatesnowcomprisethebasisofVolksbankCZ’sinvestmentproducts

offeringfornewandexistingclients.Withawell-chosenstrategyfortheinvestmentsareaandfavourable

marketdevelopment,theBanksignificantlyincreaseditsvolumeofassetsundermanagement

andthenumberofclientsusingitsinvestmentservicesduring2007.

VolksbankCZ’spositiononthemarketforprimarybondissuesisalsoasubstantialsuccess

storyfor2007.TheBanksuccessfullyplacedtwoissuesofmortgage-backedsecuritieswithatotal

volumeofCZK1.50billion.Thesesecurities,whichweresubscribedbybothinstitutionalinvestors

andprivateclients,maturein2012and2017.

RISKMANAGEMENT

Intheareaofriskmanagementandcredittransactionssettlement,achangeintheBank’sinternal

structureandprocesseswascompletedin2007thatwasnecessarytosupportthesignificantgrowth

inloantransactions.Regardingriskmanagement,VolksbankCZsatisfiedalltherequirementsofnew

bankingregulationsapplicableforboththeBankitselfandfortheentiregroup.Atthesametime,

VolksbankCZmanagedsmoothlytoreduceprocessingtimesandincreasetheefficiencyofitscredit

processes.ThisenabledtheBanktosignificantlyincreasethevolumeofloantransactionswhile

continuingtodecreasethecost-incomeratio.

BUSINESSACTIVITIES

21

Newprocessesforretailbankingtransactions,inparticular,wereputthroughaloadingtest.

Averymarkedriseinthevolumeandnumberoftransactionsoccurredinthissegment,consequently

increasingdemandsonthespeedandqualityofprocessing.

Inthecorporateclientssegment,too,itwasnecessarytoprocessmoretransactionswhile

atthesametimesatisfyingclients’demandsforshorterprocessingtimes.Inthisspirit,theprocessing

proceduresfortransactionsrelatingtosmallandmediumenterprisesalsoweremodifiedinorder

tomaximiseefficiency.

Theyear2007confirmedthattheBankhadstartedoutintherightdirectioninthisarea,anditwill

continuealongthiscoursein2008.

PAYMENTSYSTEM

Justasinpreviousyears,thenumberofcashlesspaymentsexecutedin2007againshowed

anincreasingtrend.Inthedomesticpaymentsarea,thenumberofincomingpaymentsroseby16%

andthenumberofoutgoingpaymentsby14%incomparisonwiththepreviousyear.Amongforeign

payments,thenumberofincomingpaymentsroseby29%andthatofoutgoingpaymentsgrew

by26%comparedto2006.

Directbankingserviceswereprovidedtoclientsbymeansoftheapplications:Internetbanking,

HomebankingandMulticash.Inmid-2007,theBankintroducedanotherdirectbankingproduct,

Phonebanking,tothemarketwhichclientscanuseforenteringpaymentordersbytelephone.

ELECTRONIC BANKINGin%

86%

14%

90%

10%

internet banking

homebanking

DOMESTIC AND INTERNATIONAL PAYMENTSin%

electronic

other

86%

14%

90%

10%

22

InternetbankingcontinuestobethemostusedproductfromVolksbankCZ’sentireoffering.

Asattheyear’send,clientswereusing13,750stations,an86%increaseoverthepreviousyear.

Incomparisonwiththeotherapplications,thisproducthasan85%overallshare.

Thestrongusageofthelowercostservicesofferedthroughelectronicbankingisalsoevidenced

bythefactthat90%oftotaldomesticand84%ofallforeignpaymentsexecutedaresentbyclients

usingdirectbankingapplications.

IT/ORGANISATION

TheIT/Organisationdivisionwasfullyfocusedduring2007onsupportingtheBank’srapidgrowth.

Thebasichardwareinfrastructurewascompletelyrenewedtoenabletrouble-freeandswiftprocessing

oftheever-increasingvolumeofdata.FromanITstandpoint,thisgrowthwasimplementedvery

successfully.VolksbankCZisnowabletoserveclientsmorereliably,withoutinformationsystem

failures,anditstandsreadyforfurthergrowthinthenumberofclients,transactionsandproducts.

Inaddition,thedivisionparticipatedinaprojecttoquicklyexpandthebranchnetworkthrough

smallbranches,knownasVolksbankShops.

During2007,theBankbeganpreparationsforimplementingthegroup-wideCRMsystemsolution,

whichwillfullysupportthesalesfunctionandwillsimplifyandaccelerateservingclients.Thissystem

shouldbeginitstestoperationin2008.

TheIT/Organisationdivisionunderwentaregulatoryauditfocusedonoperationalrisk

andinformationsystemssecurity.TheBankcamethroughthisauditwithnoseriousfindings.Rather,

theinspectionfoundtheretobeaverygoodlevelofarchitecture,processes,andknowledgeamong

theBank’semployees.

SALESSUPPORT

ProductDevelopment

In2007,theactivitiesoftheProductDevelopmentdepartmentcontributedtofurtherexpansion

oftheBank’sproductoffering,bothforretailandcorporateclients.Moreover,thedepartment’s

activitiesweredirectedtoimprovingprocessesandprocedures.Throughautomationandsimplification,

theVolksbankCZwasabletoofferclientshigher-qualityservicesandproducts,morequickly,

andwithoutunnecessaryadministrativedelays.

BUSINESSACTIVITIES

23

Suchproductsasmortgageloansforrefinancing,amortgageloanandanAmericanmortgage

thatdonotrequireconfirmationofincome,aswellaspre-mortgageloansallbecamepartsoftherange

ofloanproductsservingespeciallyforhousingfinance.VolksbankCZreceivedapositiveevaluation

fromtheConsumersDefenceAssociationwithregardtoprovidingpre-contractualinformationabout

mortgagesinaccordancewiththeCzechBankingAssociation’sStandardNo.18/2005.TheBank

enhanceditsofferingofcreditpaymentcardswiththeintroductionofcreditcardsforindividuals,and

thisnewproductwaspromotedthroughadirectmailinginitiative.

Withtheaimofeliminatingmorerisk,attheendof2007,theBankbecameamemberofthe

Non-BankingClientInformationRegister.VolksbankCZalreadyhadjoinedtheBankingClient

InformationRegisterin2006.

Asinpreviousyears,theBank’sofferingwasexpandedwithanadditionalservicespackage–

thePROFITaccount,whichisintendedespeciallyforsmallandmediumenterprises.VolksbankCZ’s

clients,whethertheyareenterprisesorindividuals,canalsoarrangeaso-calledfeesrate(establishing

afixednumberofselecttransactionsforanyaccountatafavourableprice)fortheirpackage

oraccount.TheBankenhanceditsrangeofdirectbankingproductswithPhonebanking,anew

telephonebankingsystem.

Inthecorporate(business)loansarea,theproductlinewasimprovedwithanoverdraftloanthat

isbaseduponturnover,andefficientinstrumentswerecreatedforevaluatingclientcreditworthiness

forsmallercreditcases.Theyear2007wasalsosignificantforitsspecialofferstoexistingandpotential

clientsinthebusinessarea(forexample,the“ComprehensiveCreditProgrammeforCompanies”).

TheVolksbankShops’offeringwasaugmentedwithasavingsaccountthatisapartoftheAktiv

kontoPlusservicespackage,aswellaswiththeHouseholdLoanandSmallMortgagehousing

financeproducts.

Inthepastyear,theBankalsosuccessfullydevelopedcooperationwithitspartnercompanies.

TheseincludeČeskomoravskástavebníspořitelna,a.s.,withwhichVolksbankcollaboratesinproviding

buildingsocietyproducts;ČSOBPenzijnífondStabilita,a.s.andČSOBPenzijnífondProgres,a.s.,

inprovidingsupplementalpensioninsuranceintheVolksbankShopsnetwork;VICTORIA

VOLKSBANKENpojišťovna,a.s.,whichin2007preparedanewsingle-pensioninsurance,RAKETA,

fortheBank’sclients;AXApenzijnífond,a.s.(pensioninsurance);andVBLeasingCZ,spol.sr.o.

Moreover,theBankalsocollaborateswiththeEuropeanInvestmentBankonrefinancingofprojects

forsmallandmediumenterprises.

Externalsalesnetwork

ForVolksbankCZ,theyear2007wasoneofcontinuingtodevelopcooperationwithexternal

saleschannels.TheBankendeavourednotonlytoexpanditsportfolioofcollaboratingpartnersbut

alsotofocusonimprovingthequalityofthatcooperation.Thenumberofexternalpartnersgrewin2007,

andsotooespeciallydidthevolumesandnumberoftransactions.

ExternalsalespersonnelofferedproductsfromtheRetaildepartment,andparticularlythestandard

andAmericanmortgages,apre-mortgageloan,amortgagecombinedwithinvestmentlifeinsurance,

andaninvestmentloanforsmallcompaniesandentrepreneurs.Aresidentialrefinancingloanwas

includedforthefirsttimeintotheexternalnetwork’sproductoffering,anditattractedconsiderable

interestalreadyintheyearofitsrelease.TheBankconsidersthedistributionofselectedproducts

forhousingcooperativesandapartmentownersassociationstobeanotherareawithgreatpotential.

Paymentcards

Thetotalnumberofpaymentcardsinissuegrewby56%during2007andthusexceeded

the25,000cardsmark.Alongwithgrowthinthenumberofissuedcards,thevolumeofprocessed

transactionsincreasedyearonyearby52%.

Duringthesecondquarterof2007,theBank’sproductrangewasexpendedwithacreditcard.

Transitiontochiptechnologyforpaymentcardswasanongoingprocessthroughouttheyear,andby

thefourthquarterallVISAproductswereissuedwiththistechnology.Chiptechnologyprovidesahigher

degreeofdataprotectionforcardholdersbecauseofitshigherlevelofencryptionandthedirect

storageofinformationonthechip.EmbossedMasterCardpaymentcardswillalsobeprovidedwith

thistechnologyduringthesecondquarterof2008.

TheATMnetworkwasextendedin2007from36upto57machines.Therewasexpansion,

too,inthenumberofclientswhoaremerchantsacceptingVolksbankpaymentcardsattheirpoints

ofsale.ThevolumeofprocessedtransactionsexecutedbyVolksbankclientsatATMsandpoints

ofsalegrewby67%.AllATMsareoutfittedwithtechnologyforacceptingchipcards.Through

thecooperationwithČSOB,thatbank’snetworkof650ATMsisalsoavailabletoVolksbankclients

underveryfavourableconditions.

Throughout2007amaximumeffortwasdevotedtoseveralimprovementsintheITsystems

forpaymentcards.Thesebroughtgreaterflexibilityandtransparency,thusenablingVolksbankCZ

tobettermeetthedemandofclients.

24

BUSINESSACTIVITIES

25

Marketing&Communication

Fromamarketingstandpoint,2007wasayearmarkedbyimprovingtheBank’sconception

ofitsclient-orientedapproach,andthiswaspromotedespeciallybytwomajorcommunication

campaigns.

InMay2007,VolksbankCZintroducedthenew“MortgageLoansRefinancing”service.This

serviceenabledclientsofallbankstochangethemethodandconditionsofrepayingtheirexisting

mortgageloans.Advantageousparametersforobtainingthisproductandapreferentialinterestrate

foranewlyrefinancedmortgagewerepreparedaspartoftheoffer.VolksbankCZthusbroadened

theavailableoptionsontheCzechbankingmarketforfinancinghousingneedsand,atthesame

time,itconfirmeditspositiononthemortgageloansmarket.

Duringautumn2007,theBankpresentedanewserviceforsmallandmediumenterprises.

The“ComprehensiveCreditProgrammeforCompanies”,whichofferedfirmsanintegratedsolution

forshort-andmedium-termfinancingneeds,broughtnewcreditservicesforthesefirms.Inaddition

tobankguaranteesandsolutionsforcurrencyandinterestraterisks,thisintegratedsolutionincluded

inparticularaspecialinstrumentforworkingcapitalfinancing.Namedthe“Kontoúvěr”(short

foroverdraftloan),itprovidedarangeofinterestedfirmswithaveryfavourableprogrammeofservices

basedonanoverdraftloan.VolksbankCZregardstheSMEsegmentasakeyareawhichitwill

continuetosupport.

Othermarketingactivitiesweredirectedatpreparingandsupportinginnovativesolutions,

particularlyintheareasofinvesting,securities,andsupportofexternalbusinesspartners.

MarketingalsopursuedanactivecommunicationstrategytopromotetheVolksbankShop

network’sdynamicdevelopment.Throughout2007,expansionoftheproductrangewasemphasised

throughsupportintheformoffourspecialproduct-orientedschemes.Specialemphasiswasgiven

toconsumeranddepositproductsforindividuals.Inadditiontotheseinitiatives,theBankalso

developeditscooperationwithpartnercompaniesinusingsalesandinformationtools,which,among

otherthings,ledtothelaunchofitsownwebsite,www.volksbankshop.cz.

Duringthefirsthalfoftheyear,supportwasprovidedforlaunchingthenewinternalVolksbankCall

Centre,whichisnowfullyimplementedwithinboththeBank’spassiveandactiveprocesses.

RISKMANAGEMENT

VolksbankCZmaintainsaconservativeapproachtoriskmanagement.Thisapproachresults

fromtheapplicablelegalregulationsandriskstrategyoftheGroup.TheBankusesasystem

ofregulatoryandinternallimits.Thelimitsareset,andadherencetothemisregularlymonitored.

Theoverridinggeneralprinciplesintheprocessofriskmanagementareasufficientvolumeofcapital

forcoveringrisks,optimisationoftherelationshipbetweenriskandexpectedreturn,aneffective

internalcontrolsystem,thepropersegregationofduties,identificationandanalysisofrisks,portfolio

diversification,andaccuracyandcompletenessofthedataintheBank’ssystem.Themanagement

oftheBankisregularlyinformedwithregardtothelevelofriskundertaken,andtheriskmanagement

systemismonitoredandevaluated.

TheBank’sBoardofDirectorsplaysakeyroleinriskmanagement’sorganisationalstructure.

TheBoarddeterminestheriskmanagementstrategy;approvestheBank’scontroldocumentation,

includinglimitsandauthorisedguidelines;anddecidesuponthemostimportantriskpositions.

TheAssetandLiabilityManagementCommittee(ALCO)monitorsthebalancesheetstructure

andauthorisestherelevantriskpositionsorlimits.Departmentsdirectlysubordinatetotheboard

memberresponsibleforriskmanagementanalysetheBank’sriskpositions,monitorcompliance

withestablishedlimits,reportontheresultsoftheirfindings,and,asappropriate,approvetheirown

riskpositionswithinthescopeoftheirassignedauthorities.

Asfromthemiddleof2007,thenewCzechNationalBankDecreeNo.123/2007Coll.,Stipulating

thePrudentialRulesforBanks,CreditUnions,andSecuritiesDealersbecamevalid.Thisdecree

formulatesregulatoryrequirementsforriskmanagementandimplementstherulesproposedbythe

BaselIIinternationalaccordandestablishedbyaEuropeandirective.Inthoseaspectsofrisk

managementdefinedbytheDecree,theBankduring2007madeuseofthetransitionalperiod

toprepareforfullapplicationofnewregulatoryrulesstartingfrom2008.

InlightofVolksbankCZ’sresults,theriskmanagementsystemisconsideredtobeefficient

andeffective.

26

27

CREDITRISKMANAGEMENT

TheprovisionofloanproductsisoneoftheBank’smostimportantbusinessactivities,andthe

emphasisgiventomanagingcreditriskreflectsthatfact.Thisprocessisdefinedbyregulatory

requirementsaswellasbyrulesreflectingthestrategyoftheparentcompany.

Atthelevelofindividualloanexposures,inassessingacreditapplicationtheBankplaces

particularemphasis,amongotheraspects,onanalysingtheclient’sfinancialsituation,hisorher

abilitytorepaytheprovidedloanfromcashflow,thepurposeforexecutingthetransaction,

theexperiencewiththeclienttodate,andthequalityofthecollateral.Theassessmentandapproval

ofcreditproposalsisindependentfromthesellingunits.Authorisationpowersaredelegatedbythe

parentcompanyortheBoardofDirectorsandaresegmentedbyvalueintoseverallayers.

Forexistingexposures,theBankcarriesoutregularmonitoringofindividualclientsaswellas

forbroader,economicallysimilargroups.Thisprocessincreasestheprobabilityfortimelyrecognition

offutureclientdefaults.Itincludesassessingtheclient’scurrentfinancialsituation,alongwith

monitoringthecollateral’svalueandfulfilmentofthecontractualconditions.Forcasesofdebtor

defaults,theBankhasestablishedasystemtoaddressproblematicloansinatimelymanner.

Thisreducestheprobabilityofincurringlossesfromprovidingloans.

Attheloanportfoliolevel,moreover,theBankmaintainsasystemofmeasuringandmonitoring

itsquality.Ananalysisisconductedoftheportfolio’sconditionanddevelopment,includingtaking

intoaccounttheacceptedcollateral.Theobservanceofregulatoryandinternallimitsismonitored,

includinglimitsofconcentratingriskinindividualeconomicsectors.VolksbankCZisincompliance

withallregulatorylimitsforitsinvestmentportfolioexposure.Theprocessalsoincludesquantifying

thecreditrisklevelintheformofestimatedlossesfromdegradationattheportfoliolevel.

VolksbankCZispreparingitstransitiontocalculatingthecapitaladequacyforcreditriskofthe

investmentportfoliobasedontheinternalratings-based(IRB)approach.Thecreditqualityofeach

clientisassessedusinganinternalratingsystem.Intotal,sevenratingsystemsareavailable

forvarioustypesofclients.Withineachratingsystem,aclientisclassifiedatoneof20pointsonthe

internalratingscale(anotherfivepointscorrespondtothedefaultstatusofaclient).Eachpoint

correspondstoafixedone-yearprobabilityoftheclient’sdefault.Thisprobabilityisusedasone

oftheparametersinthedecision-makingprocess.Theratingtoolsareregularlytestedandadjusted

accordinglytoensurethattheestimatedprobabilitiesofdefaultarecontinuouslymademoreprecise.

MARKETRISKMANAGEMENT

Themaininstrumentformanagingmarketriskisasystemoflimitsforindividualtypesofmarket

risks.CompliancewiththeselimitsisregularlymonitoredandthefindingsarereportedtotheBoard

ofDirectors,theALCO,andtheappropriatebusinessunits.Thelimitsareestablishedinternally

incooperationwiththeparentcompanyorarebasedontherelevantCNBregulations.Stresstesting

ofthemarketrisksiscarriedoutregularly.

Animportantprincipleofthemarketriskmanagementsystemisthetimely,accurateandcomplete

recordingofalltransactions,aswellastheirpropervaluation.Forthesepurposes,theBankuses

thesupportoftheReutersKondor+software.

Withregardtocurrencyrisk,theBankmanagesitsriskpositionbytradingonthecurrencymarket.

Theriskpositionisdefinedasthedifferencebetweentheassetsandliabilitiesintherespective

currency.Italsoincludescurrencyderivativestradedwithclients.Theriskpositionismonitoreddaily

andcomparedwiththeapplicablelimits.

TheBank’sexposuretointerestrateriskisdefinedasthedifferencebetweenthevaluesofinterest-

bearingassetsandofinterest-bearingliabilities.Nevertheless,thekeyparameteristheremainingtime

beforethepossibilitytoadjusttheinterestratesofindividualinterestexposuresinresponsetochanges

inmarketinterestrates.Thetotalinterestrateexposureismonitoreddailyusinggapanalysis.This

isdoneseparatelyforeachcurrencybutalsoonanaggregatedbasisforallcurrencies.Thesensitivity

tochangesinmarketinterestratesismeasuredusingthePVBPindicator.Managementoftheinterest

rateexposureincludestheuseofinterestrateswapsandotherfixed-interestinstrumentssuch

asmortgage-backedsecuritiesorloanstaken.AstheresultofaprojectacrosstheVolksbankGroup,

anewapplicationisbeingimplementedthatwillenablemoredetailedsimulationsandstresstesting.

Exposuretosecuritiesmarketvolatilityoccursespeciallyinrelationtobondportfoliosheld.Bond

purchasesaresubjecttoapplicablelimits,andtheseespeciallyemphasisethecreditratingoftheissuer.

VolksbankCZisnotexposedtosharepricerisk,becauseitprimarilyoffersservicesrelatedtoequity

tradestoclientswhoaretradingfortheirownaccounts.

LIQUIDITYRISK

Managementofliquidityriskbeginswithdailyanalysisoftheactualresidualmaturitiesofassets

andliabilities,whichareexaminedbothinthemainindividualcurrenciesandonanaggregatebasis

forallcurrencies.Basedonthisanalysis,theBankmonitorsonadailybasisthecompliancewith

liquiditylimitsthatareestablishedinternally.Thestructureoflimitsisbaseduponaratioofassets

toliabilitieswithagivenperiodofresidualmaturity.

28

RISKMANAGEMENT

29

Inmanagingtheshort-termliquidityposition,theBankincludesplannedandexpectedcashflows

forfivebusinessdaysinadvance.Forthepurposeoflong-termforecasting,ascenarioforliquidity

riskmanagementisregularlypreparedthatincludesdataontheexistingaswellasplannedstructure

ofthebalancesheet.ThisscenarioissubmittedtotheALCO.

Acontingencyliquidityplanispreparedforthepossibilitythatextraordinarycircumstanceswould

threatentheBank’sliquidityposition.

OPERATIONALRISK

Aspartofitsinternalregulations,VolksbankCZhasaninternaldatabaseoftherequisite

regulationsforoperationalriskmanagement,includingthosefortheareasofinformationsecurity,

continuityofoperations,andanti-moneylaundering.TheBankhasalsoestablishedasystem

ofcontrolmechanismsforthoseindividualprocessesthatarebasicelementsofoperationalrisk

management.

AnOperationalRiskOfficehasbeenestablishedwithintheBank’sorganisationalstructure.

Thisunitisresponsibleformethodicaloperationalriskmanagementandprovidessupporttothe

specialisedunitsinthisarea.

Theoperationalriskmanagementprocessincludesidentificationandrecording,evaluation

andvaluationofrisks,designingmeasuresfortheirminimisation,alongwithcontrollingimplementation

ofthedesignedmeasuresandtheireffectiveness.TheBankappliestheoperationalriskmanagement

processatthelevelsofbothactualeventsandhypotheticalrisks.

Everyidentifiedeventisassessedandconsideredindividually,andthemeasurestobetaken

aredesignedinaccordancenotonlywiththefrequencyoftheevent’soccurrenceandtheamount

oftherealisedoranticipatedlossorprofit,butalsoitsseriousnessandoriginalcauseoforigin.

Theobjectiveistoensurethatthemeasurestakenwilleffectivelyminimiseoreliminateoccurrences

ofsimilareventsinfuture.

TheBankisinvolvedinaGroup-wideprojectformanagingandmonitoringoperationalrisk.

Startingin2008,VolksbankCZwillapplythestandardapproachincalculatingthecapital

requirementsforoperationalrisk.

INFORMATIONONRELATIONS

VolksbankInternationalAG(VBI)isthecontrollingentityofVolksbankCZ,a.s.andispartofthe

groupVolksbankAG.Thegroup’sstructureislaidoutinthefollowingdiagram:

30

OTHERINFORMATIONS


VBAG

VOBA-HoldingGmbH

VolksbankInternationalAG

Volksbanken-HoldingrGmbH + Verbund

DZ BANK Gruppe

Streubesitz

Raiffeisen ZentralbankAustria AG

BFBP

DZ Beteiligungs GmbHNr. 11

Phoenix BeteiligungsGmbH

VBI Beteiligungs GmbHDZ Beteiligungs GmbHNr. 11

DZ BANK AG

Phoenix BeteiligungsGmbH

WGZ BANK AG

BFBP

ERGO Versicherungsgruppe

100% 24.50%

16.36

%

8.14%

27.5

1%

11.86%

5.90%

51%

36.9

7%10

0%58

.2%

6.1%25%

0.7%10%

100%

17.76%

31


VBAG

VolksbankInternationalAG

VOLKSBANKEN-Verbund

DZ BANK-Gruppe VICTORIA-Gruppe

Magyarország Volksbank Rt.Ungarn

DZ BANK AG

BFBP

WGZ-BANK AG

16.36%

92.34%Volksbank BH d.d.Bosnien-Herzegowina

Volksbank CZ, a.s.Tschechien

95.46%

97.77%

Volksbank d.d.Kroatien

99.18%

Volksbank a.d.Serbien

96.90%

Volksbank a.d. Banja LukaSerbien

98.82%

Volksbank Romania S.A.Romänien

98.95%

Volksbank-Ljudska banka d.d.Slowenien

95.49%

Volksbank Slovensko, a.s.Slowakei

91.00%

OJSC Electron BankUkraine

99.73%

51%

59.0

2% 10%25%

24.50%

8.14%

Measuresthatshouldensurethatthecontrollingentitydoesnotabuseitspowersstemfromthe

CommercialCode.Themeasuresconcern,inparticular,theprohibitionagainstabusingthemajority

ofvotesinthecompany(Section56a,paragraph1oftheCommercialCode);theprohibitionagainst

abusingthecontrollingentity’sinfluenceinordertoforcetheadoptionofameasureortheconclusion

ofacontractfromwhichfinancialdamagemayarisetoacontrolledentity,unlessthecontrolling

entitycompensatesforthedamagesoarisingnolaterthanbytheendoftheaccountingperiod

withinwhichthedamageoccurred,orunlesswithinthesametimelimitanagreementisconcluded

establishingareasonableperiodandmethodforthedamage’sreimbursementbythecontrolling

entity(Section66a,paragraph8oftheCommercialCode);thecompany’sobligationtoprepare

areportonrelationshipsbetweenrelatedpartiesinaccordancewithSection66a,paragraph9nn

oftheCommercialCode(seepage110oftheAnnualReport–ReportonRelations);theobligation

ofthecontrollingentitytocompensatedamageincurredbythecontrolledentityinaccordancewith

Section66a,paragraph14oftheCommercialCode;andtheliabilityofmembersofthecontrolling

entity’sandcontrolledentity’sstatutorybodiesinaccordancewithSection66a,paragraph15ofthe

CommercialCode.

ContractsconcludedbetweenVBIAGandVolksbankCZ,a.s.:

Title of the contract Concluded with Subject of the contract

1 Rahmendienstleistungsvertrag VBI Provisionofadvisoryservices

2 TriangularInternational VBI,VBIemployee Delegatinganemployee AssigmentAgreement toworkinVBCZ

3 Vereinbarung ALBEDV-ServiceGmbH ProvisionofITservices

4 Stand-byLiquidityCommitment VBI LiquidityCommitment

5 Vereinbarung VBIT-ServicesGmbH ProvisionofITservices

6 Nutzungsvertrag VBManagementberatung RighttouseRiskwarehouse GmbH andratingsystems

32

OTHERINFORMATIONS

33

INFORMATIONONACQUISITIONOFTREASURYSHARES

During2007,VolksbankCZ,a.s.didnottradeorholdanyofitsownshares,nordiditownany

sharesofthecontrollingentity,VBIAG.

DATAONISSUEDSECURITIES

SharesofVolksbankCZ,a.s.

Kind:ordinaryandpreferenceshares

Sort:258,927registeredordinaryshares,77,633registeredpreferenceshares

Form:dematerialised

Quantity:336,560sharesintotal

Totalvolumeinissue:CZK1,682,800,000

Nominalvaluepershare:CZK5,000

Marketabilityofshares:Thesharesarenottradedonanypublicmarket.

Issuesofmortgage-backedsecurities(HZL)ofVolksbankCZ,a.s.

HZLVBCZ3.70%payablein2010

Identificationcode(ISIN):CZ0002000599

Date,sortandformofissue:18October2005,bearershares,dematerialised

Totalvolumeofissue:CZK0.5billion

Nominalvalue,quantity:CZK10,000,50,000

Coupons:fixedannualinterestrateof3.70%paideachyearinarrears

Thesecuritieshasnotbeentradedonanypublicmarket.

Maturity:Thesecuritieswillbepaidupintheirnominalvalueon18October2010.



Date,sortandformofissue:27June2006,bearershares,dematerialised





Maturity:Thesecuritieswillbepaidupintheirnominalvalueon27June2011.



Date,sortandformofissue:25September2007,bearershares,dematerialised




Tradedon:PragueStockExchange,officialopenmarket

Maturity:Thesecuritieswillbepaidupintheirnominalvalueon25September2012.



Date,sortandformofissue:18December2007,bearershares,dematerialised





Maturity:Thesecuritieswillbepaidupintheirnominalvalueon18December2017.

REMUNERATIONPAIDTOAUDITINGCOMPANYPRICEWATERHOUSECOOPERSAUDIT,S.R.O.FOR2007

Auditingservices CZK1.40million

Taxservices CZK0.45million

Others CZK1.64million

Total CZK3.49million

34

OTHERINFORMATIONS

35

PRINCIPLESOFREMUNERATINGMANAGERSANDSUPERVISORYBOARDMEMBERS

ManagingEntitiesoftheIssuer

ThemanagingentityoftheissuerVolksbankCZ,a.s.comprisestheChairmanoftheBoard

ofDirectors,whoisalsothegeneraldirector;themembersoftheBoardofDirectors;andcompany

secretaries.

Bylaw,theBoardofDirectorsisthestatutorybodydirectingthecompany’soperationsand

actingonitsbehalf.MembersoftheVolksbankCZBoardofDirectorsperformtheirfunctionswith

apropermanager’scareandactingoodfaith,withappropriatediligenceandcare,andinthebest

interestofthecompanyanditsshareholders.Theyareexpertsinmanaginglargecorporations

andhaveinternationalexperienceandabilitytoworkasateam.Theirofficerequiresongoing

developmentbothintheirfieldsofexpertiseandinthegeneraloperationandmanagement

ofcompanies;anactiveapproachtofulfillingtheirobligationsandtheabilitytocontributetothe

company’sstrategydevelopment;and,lastbutnotleast,loyaltytothecompany.Membersofthe

BoardofDirectorsadheretohighethicalstandardsandareresponsibleforthecompany’s

observanceoftheapplicablelaws.Theyarepersonallyliableforanydamagethattheymaycause

byviolatingtheirlegalobligations,andtheyalsoarefunctionallyresponsiblevis-á-visthecompany

representedbytheshareholders.

TheChairmanoftheBoardofDirectorsisremuneratedonthebasisofanemploymentcontract

concludedwithVBAGandacontractondelegationtoVolksbankCZ,a.s.

MembersoftheBoardofDirectorsareremuneratedonthebasisofa“ContractonDischarging

theOfficeofaMemberoftheBoardofDirectors”concludedinaccordancewiththerelevantprovisions

ofActNo.513/1991Coll.,theCommercialCode.TheContractonDischargingtheOfficeofaMember

oftheBoardofDirectorswasapprovedbythecompany’sSupervisoryBoard.

ThecompanypaysfixedmonthlyremunerationtotheChairmanandmembersoftheBoard

ofDirectorsfortheirmanagementactivity,attendanceatthebody’smeetings,duepreparation

forthosemeetings,andforotheractivitiesassociatedwithdischargingtheofficeofamemberofthe

BoardofDirectors.TheremunerationfortheChairmanoftheBoardofDirectorsispaidthrough

VBAGandistransferredbyVolksbankCZ,a.s.

Moreover,theChairmanandmembersoftheBoardofDirectorsareremuneratedinconsideration

ofaperformanceevaluationregardingtheiractivity,whichismeasuredonthebasisoftheirfulfilling

establishedperformancecriteria.Theperformancecriteriaaredrawnupeachcalendaryearandare

derivedfromthefinancialgoals(profitbeforetaxesofVBIAG,profitbeforetaxesofVolksbankCZ,

andprofitofthecontrolledorganisationalunit)andthefulfilmentofstructuralduties.Thevariable

componentoftheremunerationmaybeasmuchas35%ofthefixedcomponent.

Thegeneraldirectorandcompanysecretariesarenotadditionallyremuneratedduetotheir

positions.Thus,onlytheemploymentsalariesofcompanysecretariesarelistedforothermanagers.

Basedontheirmanagerialandprofessionalknowledgeandexperienceandtheircontributiontothe

company,theChairmanoftheBoardofDirectors,membersoftheBoardofDirectorsandcompany

secretariesreceive:

– allmonetaryandin-kindearningspertainingtomembersoftheBoardofDirectorsinthetotal

amountofCZK11.96million;

– allmonetaryandin-kindearningspertainingtoothermanagersinthetotalamountofCZK

3.64million.

Theseearningswerepaidonthebasisoffulfillingfinancial,qualitativeanddevelopmentcriteria,

aswellasonthebasisofefficiencycriteria.NeithertheChairmanoftheBoardofDirectors,members

oftheBoardofDirectors,companysecretariesnorpersonsclosetothemownsharesoroptions

topurchasesharesofVolksbankCZ.ThesharesofVolksbankCZ,a.s.arenotpubliclytradeable.

SupervisoryBoard

TheSupervisoryBoardisthecompany’scontrollingbodyandoverseestheperformance

oftheBoardofDirectorsincarryingoutthecompany’sbusinessoperations.TheSupervisoryBoard

inparticularmonitorswhethertheBoardofDirectorsisperformingitsdutiesinaccordancewithlegal

regulationsandthecompany’sstatutesandwhethermembersoftheBoardofDirectorsareacting

inaccordancewiththecompany’sinterestswhileexercisingapropermanager’scare.Members

oftheSupervisoryBoardperformtheirfunctionswithapropermanager’scare.Toperformtheduties

ofamemberoftheSupervisoryBoard,membersmustbeexpertlyqualifiedandmaintainloyalty

tothecompanyanddiscretionregardingconfidentialinformationandfacts.

36

OTHERINFORMATIONS

37

MembersoftheSupervisoryBoardareliableforanydamagethattheymaycausebyviolating

theirlegalobligations.Moreover,membersoftheSupervisoryBoardarefunctionallyresponsible

vis-á-visthecompanyrepresentedbytheshareholders.MembersoftheSupervisoryBoardare

remuneratedinaccordancewiththerelevantprovisionsofActNo.513/1991Coll.,theCommercial

Code.TheamountoftherelevantremunerationformembersoftheSupervisoryBoardisapproved

bythegeneralmeeting.NomonthlyremunerationispaidforactivitiesintheSupervisoryBoard

ofVolksbankCZ.

NeithermembersoftheSupervisoryBoardnorpersonsclosetothemownsharesoroptions

topurchasesharesofVolksbankCZ.ThesharesofVolksbankCZ,a.s.arenotpubliclytradeable.

NoremunerationduetomembershipintheSupervisoryBoard,includingthoseofanin-kind

nature,werepaidin2007tomembersoftheSupervisoryBoardofVolksbankCZfortheiractivities

inthatbody.

MARKETSITUATIONFORPRINCIPALACTIVITIES

VolksbankCZhassuccessfullyoperatedontheCzechmarketsince1993.In2007,theBank

helda0.99%shareinthetotalassetsofall37banksoperatingintheCzechRepublic.VolksbankCZ

hada43.42%shareinthetotalyear-on-yeargrowthrateofallbanks,makingitverysuccessful.Italso

achieveda0.69%shareintheoverallbankingsector’sprofit.TheBank’syear-on-yearprofitgrowth

amountedto45.61%,whiletheyear-on-yearprofitgrowthoftheoverallbankingsectorcame

to24.33%.TheshareofVolksbankCZ’sclientloansinthebankingsectoramountedto1.69%,

andtheshareofclientdepositsamountedto1%oftotalclientdepositsinthebankingsector.

38

INDEPENDENT AUDITOR’S REPORT AND FINANCIALSTATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007Prepared in accordance with International Financial Repor tingStandards as adopted by the European Union

VolksbankCZ,a.s.

Residence: Lazarská8,12000Praha2

Identificationnumber: 25083325

Legalform: joint-stockcompany

Primarybusiness: banking

Dateofpreparation: 25February2008

39

STATEMENTOFINCOMEFORTHEYEARENDED31DECEMBER2007PreparedinaccordancewithInternationalFinancialReportingStandardsasadoptedbytheEuropeanUnion

in CZK million Note 2007 2006

Interestandsimilarincome 1,476 944

Interestexpenseandsimilarcharges (507) (299)

Netinterestincome 3 969 645

Feeandcommissionincome 399 314

Feeandcommissionexpense (82) (71)

Netfeeandcommissionincome 4 317 243

Nettradingincome 5 56 19

Impairmentchargeforcreditlosses 13 (164) (63)

Provisions 25 - (3)

Administrativeexpenses 6 (725) (580)

Otheroperatingincome 7 7 9

Otheroperatingexpenses 8 (20) (15)

Operatingprofit 440 255

Profitbeforeincometax 440 255

Incometaxexpense 9 (120) (78)

Profitfortheyear 320 177

BALANCESHEETASAT31DECEMBER2007PreparedinaccordancewithInternationalFinancialReportingStandardsasadoptedbytheEuropeanUnion


ASSETS

Cashandbalanceswithcentralbanks 10 809 1,266

Loansandadvancestobanks 11 3,707 2,414

Loansandadvancestocustomers 12,13 30,161 21,020

Derivativefinancialinstruments 14 160 22

Financialassetsatfairvaluethroughprofitorloss 15 260 320

Investmentsecurities:

–Availableforsale 16 167 29

–Heldtomaturity 16 759 -

Intangibleassets 17 81 58

Propertyandequipment 18 266 217

Deferredincometaxassets 19 31 5

Otherassets 20 47 63

Totalassets 36,448 25,414

40


LIABILITIES

Depositsfrombanks 21 7,416 5,163

Duetocustomers 22 20,538 14,832

Derivativefinancialinstruments 14 154 24

Debtsecuritiesinissue 23 3,147 2,010

Otherliabilities 24 699 737

Provisions 25 8 8

Currentincometaxliabilities 77 47

Subordinateddebt 26 270 278

Totalliabilities 32,309 23,099

EQUITY

Sharecapital 27 1,683 1,145

Sharepremiumaccount 2,017 887

Statutoryreserve 37 26

Cumulativegainsnotrecognisedintheincomestatement 27 4 5

Retainedearnings 398 252

Totalequity 4,139 2,315

Totalequityandliabilities 36,448 25,414

41

Cumulative gains not Share recognised Share premium Statutory in the income Retained Total capital account reserve Statement earnings Equity

Asat1January2006 819 216 20 3 198 1,256

Netchangeinavailable-for-saleinvestments,netoftax - - - 2 - 2

Netincomerecogniseddirectlyinequity - - - 2 - 2

Netprofit - - - - 177 177

Totalrecognisedincomefor2006 - - - 2 177 179

Transfertostatutoryreserve - - 6 - (6) -

Dividendrelatingto2005 - - - - (117) (117)

Equityissue 326 671 - - - 997

Asat31December2006 1,145 887 26 5 252 2,315

Asat1January2007 1,145 887 26 5 252 2,315

Netchangeinavailable-for-saleinvestments,netoftax - - - (1) - (1)

Netincomerecogniseddirectlyinequity - - - (1) - (1)

Netprofit - - - - 320 320

Totalrecognisedincomefor2007 - - - (1) 320 319

Transfertostatutoryreserve - - 11 - (11) -

Dividendrelatingto2006 - - - - (163) (163)

Equityissue 538 1,130 - - - 1,668

Asat31December2007 1,683 2,017 37 4 398 4,139

42

STATEMENTOFCHANGESINEQUITYFORTHEYEARENDED31DECEMBER2007PreparedinaccordancewithInternationalFinancialReportingStandardsasadoptedbytheEuropeanUnion


Cashflowfrom/(usedin)operatingactivities

Profitbeforeincometax 440 255

Adjustmentfor:

Impairmentlossesonloansandadvances 149 (2)

Provisions - 3

Depreciationofpropertyandequipment 6 6959

Changeincumulativegainsnotrecognisedintheincomestatement (1) 2

(Increase)/decreaseinoperatingassets:

Duefrombanks,non-demand (1,969) 55

Financialassetsatfairvaluethroughprofitorloss (78) (109)

Loansandadvances (9,290) (4,486)

Otherassets (1) 2

Prepaymentsandaccruedincome 17 7

Increase/(decrease)inoperatingliabilities

Duetobanks,term 2,699 842

Financialliabilitiesatfairvaluethroughprofitandloss 130 16

Duetocustomers 5,706 2,528

Promissorynotesandcertificatesofdeposits 46 (159)

Otherliabilities (40) (42)

Accrualsanddeferredincome 2 22

Netcashflowusedinoperatingactivitiesbeforeincometax (2,121) (1,007)

Netincometaxpaid (115) (49)

Netcashflowusedinoperatingactivities (2,236) (1,056)

43

STATEMENTOFCASHFLOWFORTHEYEARENDED31DECEMBER2007

PreparedinaccordancewithInternationalFinancialReportingStandardsasadoptedbytheEuropeanUnion

STATEMENTOFCASHFLOWFORTHEYEARENDED31DECEMBER2007


Cashflowfrom/(usedin)investingactivities

Purchaseofinvestmentsecurities 16 (898) -

Purchaseofpropertyandequipment (142) (70)

Disposalofpropertyandequipment 1 1

Netcashflowusedininvestingactivities (1,039) (69)

Cashflowfrom/(usedin)financingactivities

Issueofbonds 1,091 502

Issueofshares 1,668 997

Decreaseinborrowings (8) (14)

Dividendspaid 34 (163) (117)

Netcashflowfromfinancingactivities 2,588 1,368

Netincrease/(decrease)incashandcashequivalents (687) 243

Cashandcashequivalentsatthebeginningoftheyear 30 1,478 1,235

Netincrease/(decrease)incashandcashequivalents (687) 243

Cashandcashequivalentsattheendoftheyear 30 791 1,478

44

45

46

1 GENERALINFORMATION

VOLKSBANKCZ,a.s.(hereinafterreferredtoas“theBank”)wasincorporatedon31October1996.TheBankhad55domesticregionalbranchesintheCzechRepublicasat31December2007(asat31December2006:33branches)andemployedonaverage540people(asat31December2006:423people).

TheultimateholdingcompanyisÖsterreichischeVolksbankenAG,whichisincorporatedinAustria.

TheBank’soperationsprimarilyconsistofthefollowing:• providingCzechandforeigncurrencyloansandguarantees;• acceptingandplacingdepositsinCzechandforeigncurrencies;• acceptingcurrentandtermaccountsdenominatedinCzechandforeigncurrencies;• renderingofgeneralbankingservicesthroughanetworkofbranchesandagencies;• providingforeignexchangetransactionsontheinter-bankmoneymarket;• providingforeigntradefinanceandrelatedbankingservices;and• tradinginsecuritiesandportfoliomanagement.

2 ACCOUNTINGPOLICIES(a) Basisofpreparation

Thefinancialstatements,comprisingabalancesheet,statementsofincomeandofchangesinequity,statementofthecashflowandaccompanyingnotes,oftheBankhavebeenpreparedinaccordancewithInternationalFinancialReportingStandardsasadoptedbytheEuropeanUnion(“EUIFRS”).Thepoliciessetoutbelowhavebeenconsistentlyappliedtoalltheyearspresented.

Thefinancialstatementshavebeenpreparedunderthehistoricalcostconventionasmodifiedbytherevaluationofavailable-for-salefinancialassets,financialassetsheldatfairvaluethroughprofitorloss,andallderivativecontracts.

ThepreparationoffinancialstatementsinconformitywithIFRSrequirestheuseofcertaincriticalaccountingestimates.ItalsorequiresmanagementtoexerciseitsjudgmentintheprocessofapplyingtheBank’saccountingpolicies.Theareasinvolvingahigherdegreeofjudgmentorcomplexity,orareaswhereassumptionsandestimatesaresignificanttothefinancialstatementsaredisclosedinNote2(aa).

ThefinancialstatementsareroundedtomillionsofCzechCrowns(“CZKmillion”or“CZKm”)unlessotherwisestated.

NOTESTOFINANCIALSTATEMENTSFORTHEYEARENDED31DECEMBER2007

47

(b) Segmentreporting

Abusinesssegmentisagroupofassetsandoperationsengagedinprovidingproductsorservicesthataresubjecttorisksandreturnsthataredifferentfromthoseofotherbusinesssegments.Ageographicalsegmentisengagedinprovidingproductsorserviceswithinaparticulareconomicenvironmentthataresubjecttorisksandreturnsdifferentfromthoseofsegmentsoperatinginothereconomicenvironments.

(c) Foreigncurrenciestranslation

Functionalandpresentationcurrency ItemsincludedinthefinancialstatementsoftheBankaremeasuredusingthecurrencyoftheprimaryeconomicenvironmentinwhichtheBankoperates(“thefunctionalcurrency”).

ThefinancialstatementsarepresentedinCZK,whichistheBank’sfunctionalandpresentationcurrency.

Transactionsandbalances Foreigncurrencytransactionsaretranslatedintothefunctionalcurrencyusingtheexchangeratesprevailingatthedatesofthetransactions.Foreignexchangegainsandlossesresultingfromthesettlementofsuchtransactionsandfromthetranslationatyear-endexchangeratesofmonetaryassetsandliabilitiesdenominatedinforeigncurrenciesarerecognisedintheincomestatement.

Translationdifferencesonnon-monetaryitems,suchasequitiesheldatfairvaluethroughprofitorloss,arereportedaspartofthefairvaluegainorloss.Translationdifferencesonnon-monetaryitems,suchasequitiesclassifiedasavailable-for-salefinancialassets,areincludedinthefairvaluereserveinequity.

(d) Financialassets

TheBankclassifiesitsfinancialassetsinthefollowingcategories:financialassetsatfairvaluethroughprofitorloss,loansandreceivables,held-to-maturityinvestmentsandavailable-for-salefinancialassets.Theyareclassifiedbasedonmanagement’sintentionatinception.

Financialassetsatfairvaluethroughprofitorloss Thiscategoryhastwosub-categories:financialassetsheldfortrading,andthosedesignatedatfairvaluethroughprofitorlossatinception.

Afinancialassetisclassifiedasheldfortradingifitisacquiredorincurredprincipallyforthepurposeofsellingorrepurchasingintheneartermorifitispartofaportfolioofidentifiedfinancialinstrumentsthataremanagedtogetherandforwhichthereisevidenceofarecentactualpatternofshort-termprofit-taking.Derivativesarealsocategorisedasheldfortradingunlesstheyaredesignatedashedginginstruments.

48

Financialassetsandfinancialliabilitiesaredesignatedatfairvaluethroughprofitorlosswhen:

• doingsosignificantlyreducesmeasurementinconsistenciesthatwouldariseiftherelatedderivativesweretreatedasheldfortradingandtheunderlyingfinancialinstrumentswerecarriedatamortisedcostforloansandadvancestocustomersorbanksanddebtsecuritiesinissue;

• certaininvestments,suchasequityinvestments,aremanagedandevaluatedonafairvaluebasisinaccordancewithadocumentedriskmanagementorinvestmentstrategyandreportedtokeymanagementpersonnelonthatbasisaredesignatedatfairvaluethroughprofitandloss;

• financialinstruments,suchasdebtsecuritiesheld,containingoneormoreembeddedderivativessignificantlymodifythecashflows,aredesignatedatfairvaluethroughprofitandloss;and

Gainsandlossesarisingfromchangesinthefairvalueoftradingderivativesthataremanagedinconjunctionwithdesignatedfinancialassetsorfinancialliabilitiesareincludedin“nettradingincome”.

Loansandreceivables oansandreceivablesarenon-derivativefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinanactivemarket,otherthan:(a)thosethattheentityintendstosellimmediatelyorintheshortterm,whichareclassifiedasheldfortrading,andthosethattheentityuponinitialrecognitiondesignatesasfairvaluethroughprofitorloss;(b)thosethattheentityuponinitialrecognitiondesignatesasavailableforsale;or(c)thoseforwhichtheholdermaynotrecoversubstantiallyallofitsinitialinvestment,otherthanbecauseofcreditdeterioration.

Held-to-maturityfinancialassets Held-to-maturityinvestmentsarenon-derivativefinancialassetswithfixedordeterminablepaymentsandfixedmaturitiesthattheBank’smanagementhasthepositiveintentionandabilitytoholdtomaturity.IftheBankwastosellotherthananinsignificantamountofheld-to-maturityassets,theentirecategorywouldbereclassifiedasavailableforsale.

Held-to-maturityinvestmentsaremeasuredatamortisedcost.

Available-for-salefinancialassets Available-for-saleinvestmentsarethoseintendedtobeheldforanindefiniteperiodoftime,whichmaybesoldinresponsetoneedsforliquidityorchangesininterestrates,exchangeratesorequityprices.


49

Regular-waypurchasesandsalesoffinancialassetsatfairvaluethroughprofitorloss,heldtomaturityandavailableforsalearerecognisedontrade-date–thedateonwhichtheBankcommitstopurchaseorselltheasset.

Financialassetsareinitiallyrecognisedatfairvalueplustransactioncostsforallfinancialassetsnotcarriedatfairvaluethroughprofitorloss.Financialassetscarriedatfairvaluethroughprofitandlossareinitiallyrecognisedatfairvalue,andtransactioncostsareexpensedintheincomestatement.FinancialassetsarederecognisedwhentherightstoreceivecashflowsfromthefinancialassetshaveexpiredorwheretheBankhastransferredsubstantiallyallrisksandrewardsofownership.Financialliabilitiesarederecognisedwhentheyareextinguishedthatis,whentheobligationisdischarged,cancelledorexpires.

Available-for-salefinancialassetsandfinancialassetsatfairvaluethroughprofitorlossaresubsequentlycarriedatfairvalue.Loansandreceivablesandheld-to-maturityinvestmentsarecarriedattheamortisedcostusingtheeffectiveinterestmethod.Gainsandlossesarisingfromchangesinthefairvalueofthe“financialassetsatfairvaluethroughprofitorloss”categoryareincludedintheincomestatementintheperiodinwhichtheyarise.Gainsandlossesarisingfromchangesinthefairvalueofavailable-for-salefinancialassetsarerecogniseddirectlyinequity,untilthefinancialassetisderecognisedorimpaired.Atthistime,thecumulativegainorlosspreviouslyrecognisedinequityisrecognisedinprofitorloss.However,interestcalculatedusingtheeffectiveinterestmethodandforeigncurrencygainsandlossesonmonetaryassetsclassifiedasavailableforsalearerecognisedintheincomestatement.Dividendsonavailable-for-saleequityinstrumentsarerecognisedintheincomestatementwhentheentity’srighttoreceivepaymentisestablished.

Thefairvaluesofquotedinvestmentsinactivemarketsarebasedoncurrentbidprices.Ifthereisnoactivemarketforafinancialasset,theBankestablishesfairvalueusingvaluationtechniques.Theseincludetheuseofrecentarm’s-lengthtransactions,discountedcashflowanalysis,optionpricingmodelsandothervaluationtechniquescommonlyusedbymarketparticipants.

(e) Offsettingfinancialinstruments

Financialassetsandliabilitiesareoffsetandthenetamountreportedinthebalancesheetwhenthereisalegallyenforceablerighttooffsettherecognisedamountsandthereisanintentiontosettleonanetbasis,orrealisetheassetandsettletheliabilitysimultaneously.

50

(f) Derivativefinancialinstrumentsandhedgeaccounting

Derivativesincludingforeignexchangecontracts,currencyandinterestrateswapsareinitiallyrecognisedatfairvalueonthedateonwhichaderivativecontractisenteredintoandaresubsequentlyre-measuredattheirfairvalue.Fairvaluesareobtainedfromquotedmarketpricesinactivemarkets,includingrecentmarkettransactions,andvaluationtechniques,includingdiscountedcashflowmodelsandoptionspricingmodels,asappropriate.Allderivativesarecarriedasassetswhenfairvalueispositiveandasliabilitieswhenfairvalueisnegative.

TheBankoccasionallypurchasesorissuesfinancialinstrumentscontainingembeddedderivatives.Certainderivativesembeddedinotherfinancialinstruments,suchastheconversionoptioninaconvertiblebond,aretreatedasseparatederivativeswhentheireconomiccharacteristicsandrisksarenotcloselyrelatedtothoseofthehostcontractandthehostcontractisnotcarriedatfairvaluethroughprofitorloss.TheseembeddedderivativesaremeasuredatfairvaluewithchangesinfairvaluerecognisedintheincomestatementunlesstheBankchoosestodesignatethehybridcontactsatfairvaluethroughprofitandloss.

TheBankdoesnotapplyhedgeaccounting.(g) Recognitionofdeferreddayoneprofitandloss

Thebestevidenceoffairvalueatinitialrecognitionisthetransactionprice(i.e.thefairvalueoftheconsiderationgivenorreceived),unlessthefairvalueofthatinstrumentisevidencedbycomparisonwithotherobservablecurrentmarkettransactionsinthesameinstrument(i.e.withoutmodificationorrepackaging)orbasedonavaluationtechniquethevariablesofwhichincludeonlydatafromobservablemarkets.

(h) Interestincomeandexpense

Interestincomeandexpenseforallinterest-bearingfinancialinstruments,exceptforthoseclassifiedasheldfortrading,arerecognisedwithin“interestincome”and“interestexpense”intheincomestatementusingtheeffectiveinterestmethod.

Theeffectiveinterestmethodisamethodofcalculatingtheamortisedcostofafinancialassetorafinancialliabilityandofallocatingtheinterestincomeorinterestexpenseovertherelevantperiod.Theeffectiveinterestrateistheratethatexactlydiscountsestimatedfuturecashpaymentsorreceiptsthroughtheexpectedlifeofthefinancialinstrumentor,whenappropriate,ashorterperiodtothenetcarryingamountofthefinancialassetorfinancialliability.Whencalculatingtheeffectiveinterestrate,theBankestimatescashflowsconsideringallcontractualtermsofthefinancialinstrument(forexample,prepaymentoptions)butdoesnotconsiderfuturecreditlosses.Thecalculationincludesallfeesandpointspaidorreceivedbetweenpartiestothecontractthatareanintegralpartoftheeffectiveinterestrate,transactioncostsandallotherpremiumsordiscounts.


51

Onceafinancialassetoragroupofsimilarfinancialassetshasbeenwrittendownasaresultofanimpairmentloss,interestincomeisrecognisedusingtherateofinterestusedtodiscountthefuturecashflowsforthepurposeofmeasuringtheimpairmentloss.

(i) Feeandcommissionincomeandfeeexpense

Feesandcommissionsaregenerallyrecognisedonanaccrualbasiswhentheservicehasbeenprovided.Loancommitmentfeesforloansthatarelikelytobedrawndownaredeferred(togetherwithrelateddirectcosts)andrecognisedasanadjustmenttotheeffectiveinterestrateontheloan.LoansyndicationfeesarerecognisedasrevenuewhenthesyndicationhasbeencompletedandtheBankhasretainednopartoftheloanpackageforitselforhasretainedapartatthesameeffectiveinterestrateastheotherparticipants.Commissionandfeesarisingfromnegotiating,orparticipatinginthenegotiationof,atransactionforathirdparty–suchasthearrangementoftheacquisitionofsharesorothersecuritiesorthepurchaseorsaleofbusinesses–arerecognisedoncompletionoftheunderlyingtransaction.Portfolioandothermanagementadvisoryandservicefeesarerecognisedbasedontheapplicableservicecontracts,usuallyonatime-apportionatebasis.Assetmanagementfeesrelatedtoinvestmentfundsarerecognisedrateablyovertheperiodinwhichtheserviceisprovided.Thesameprincipleisappliedforwealthmanagement,financialplanningandcustodyservicesthatarecontinuouslyprovidedoveranextendedperiodoftime.Performancelinkedfeesorfeecomponentsarerecognisedwhentheperformancecriteriaarefulfilled.

( j) Dividendincome

Dividendsarerecognisedintheincomestatementwhentheentity’srighttoreceivepaymentisestablished.

(k) Saleandrepurchaseagreements

Securitiessoldsubjecttorepurchaseagreements(“repos”)arereclassifiedinthefinancialstatementsaspledgedassetswhenthetransfereehastherightbycontractorcustomtosellorre-pledgethecollateral;thecounterpartyliabilityisincludedinamountsduetootherbanks,depositsfrombanks,otherdepositsordepositsduetocustomers,asappropriate.Securitiespurchasedunderagreementstoresell(“reverserepos”)arerecordedasloansandadvancestootherbanksorcustomers,asappropriate.Thedifferencebetweensaleandrepurchasepriceistreatedasinterestandaccruedoverthelifeoftheagreementsusingtheeffectiveinterestmethod.Securitieslenttocounterpartiesarealsoretainedinthefinancialstatements.

52

(l) Impairmentoffinancialassets

Assetscarriedatamortisedcosts TheBankassessesasateachbalancesheetdatewhetherthereisobjectiveevidencethatafinancialassetorgroupoffinancialassetsisimpaired.Afinancialassetoragroupoffinancialassetsisimpairedandimpairmentlossesareincurredonlyifthereisobjectiveevidenceofimpairmentasaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionoftheasset(a“lossevent”)andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsofthefinancialassetorgroupoffinancialassetsthatcanbereliablyestimated.

ThecriteriathattheBankusestodeterminethatthereisobjectiveevidenceofanimpairmentlossincludethefollowing:• Delinquencyincontractualpaymentsofprincipalorinterest;• Cashflowdifficultiesexperiencedbytheborrower;• Breachofloancovenantsorconditions;• Initiationofbankruptcyproceedings;• Deteriorationoftheborrower’scompetitiveposition;• Deteriorationinthevalueofcollateral;and• Downgradingbelowinvestmentgradelevel.

Theestimatedperiodbetweenalossoccurringanditsidentificationisdeterminedbylocalmanagementforeachidentifiedportfolio.Ingeneral,theperiodsusedvarybetweenthreemonthsandtwelvemonths;inexceptionalcases,longerperiodsarewarranted.

TheBankfirstassesseswhetherobjectiveevidenceofimpairmentexistsindividuallyforfinancialassetsthatareindividuallysignificant,andindividuallyorcollectivelyforfinancialassetsthatarenotindividuallysignificant.IftheBankdeterminesthatnoobjectiveevidenceofimpairmentexistsforanindividuallyassessedfinancialasset,whethersignificantornot,itincludestheassetinagroupoffinancialassetswithsimilarcreditriskcharacteristicsandcollectivelyassessesthemforimpairment.Assetsthatareindividuallyassessedforimpairmentandforwhichanimpairmentlossisorcontinuestoberecognisedarenotincludedinacollectiveassessmentofimpairment.

Theamountofthelossismeasuredasthedifferencebetweentheasset’scarryingamountandthepresentvalueofestimatedfuturecashflows(excludingfuturecreditlossesthathavenotbeenincurred)discountedatthefinancialasset’soriginaleffectiveinterestrate.Thecarryingamountoftheassetisreducedthroughtheuseofanallowanceaccountandtheamountofthelossisrecognisedintheincomestatement.Ifaloanorheld-to-maturityinvestmenthasavariableinterestrate,thediscountrateformeasuringanyimpairmentlossisthecurrenteffectiveinterestratedeterminedunderthecontract.


53

Asapracticalexpedient,theBankmaymeasureimpairmentonthebasisofaninstrument’sfairvalueusinganobservablemarketprice.

Thecalculationofthepresentvalueoftheestimatedfuturecashflowsofacollateralisedfinancialassetreflectsthecashflowsthatmayresultfromforeclosurelesscostsforobtainingandsellingthecollateral,whetherornotforeclosureisprobable.

Forthepurposesofacollectiveevaluationofimpairment,financialassetsaregroupedonthebasisofsimilarcreditriskcharacteristics(i.e.,onthebasisoftheBank’sgradingprocessthatconsidersassettype,industry,geographicallocation,collateraltype,past-duestatusandotherrelevantfactors.Thosecharacteristicsarerelevanttotheestimationoffuturecashflowsforgroupsofsuchassetsbybeingindicativeofthedebtors’abilitytopayallamountsdueaccordingtothecontractualtermsoftheassetsbeingevaluated.

FuturecashflowsinagroupoffinancialassetsthatarecollectivelyevaluatedforimpairmentareestimatedonthebasisofthecontractualcashflowsoftheassetsintheBankandhistoricallossexperienceforassetswithcreditriskcharacteristicssimilartothoseintheBank.Historicallossexperienceisadjustedonthebasisofcurrentobservabledatatoreflecttheeffectsofcurrentconditionsthatdidnotaffecttheperiodonwhichthehistoricallossexperienceisbasedandtoremovetheeffectsofconditionsinthehistoricalperiodthatdonotcurrentlyexist.

Estimatesofchangesinfuturecashflowsforgroupsofassetsshouldreflectandbedirectionallyconsistentwithchangesinrelatedobservabledatafromperiodtoperiod(forexample,changesinunemploymentrates,propertyprices,paymentstatus,orotherfactorsindicativeofchangesintheprobabilityoflossesintheBankandtheirmagnitude).ThemethodologyandassumptionsusedforestimatingfuturecashflowsarereviewedregularlybytheBanktoreduceanydifferencesbetweenlossestimatesandactuallossexperience.

Whenaloanisuncollectible,itiswrittenoffagainsttherelatedallowanceforimpairment.Suchloansarewrittenoffafterallthenecessaryprocedureshavebeencompletedandtheamountofthelosshasbeendetermined.Theseproceduresmainlyincludecessionofaloan,filingalawsuitinordertorecovertheloanthroughdemandforpaymentandfilingadistraintorbankruptcypetition.

If,inasubsequentperiod,theamountoftheimpairmentlossdecreasesandthedecreasecanberelatedobjectivelytoaneventoccurringaftertheimpairmentwasrecognised(suchasanimprovementinthedebtor’screditrating),thepreviouslyrecognisedimpairmentlossisreversedeitherdirectlyorbyadjustingtheallowanceaccount.Thereversalshallnotresultinacarryingamountofthefinancialassetthatexceedswhattheamortisedcostwouldhavebeenhadtheimpairmentnotbeenrecognisedatthedatetheimpairmentisreversed.Theamountofthereversalisrecognisedintheincomestatementinimpairmentchargeforcreditlosses.

Assetsclassifiedasavailableforsale TheBankassessesasateachbalancesheetdatewhetherthereisobjectiveevidencethatafinancialassetoragroupoffinancialassetsisimpaired.Inthecaseofequityinvestmentsclassifiedasavailable-for-sale,asignificantorprolongeddeclineinthefairvalueofthesecuritybelowitscostisconsideredindeterminingwhethertheassetsareimpaired.Ifanysuchevidenceexistsforavailable-for-salefinancialassets,thecumulativeloss–measuredasthedifferencebetweentheacquisitioncostandthecurrentfairvalue,lessanyimpairmentlossonthatfinancialassetpreviouslyrecognisedinprofitorloss–isremovedfromequityandrecognisedinthestatementofincome.Impairmentlossesrecognisedintheincomestatementonequityinstrumentsarenotreversedthroughthestatementofincome.If,inasubsequentperiod,thefairvalueofadebtinstrumentclassifiedasavailableforsaleincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognisedinprofitorloss,theimpairmentlossisreversedthroughtheincomestatement.

Renegotiatedloansandadvances Sincethemomentofrenegotiation,suchloansaretreatedasimpairedfortheperiodofsixmonths.Ifaloanperformsaccordingtotherenegotiatedschedule,itbecomestreatedaswatchedduringthesubsequent18months,andasstandardstartingthethirdyearsincetherenegotiation.

(m) Intangibleassets

Computersoftware Acquiredcomputersoftwarelicencesarecapitalisedonthebasisofthecostsincurredtoacquireandbringthespecificsoftwaretouse.Thesecostsareamortisedonthebasisoftheexpectedusefullives(threetofouryears).

Costsassociatedwithdevelopingormaintainingcomputersoftwareprogramsarerecognisedasanexpenseasincurred.CoststhataredirectlyassociatedwiththeproductionofidentifiableanduniquesoftwareproductscontrolledbytheBank,andthatwillprobablygenerateeconomicbenefitsexceedingcostsbeyondoneyear,arerecognisedasintangibleassets.Directcostsincludesoftwaredevelopmentemployeecostsandanappropriateportionofrelevantoverheads.

Computersoftwaredevelopmentcostsrecognisedasassetsareamortisedusingthestraight-linemethodovertheirusefullives(notexceedingthreeyears).

(n) Property,premisesandequipment

Landandbuildingscomprisemainlybranchesandoffices.Allproperty,premisesandequipmentisstatedathistoricalcostlessdepreciation.Historicalcostincludesexpenditurethatisdirectlyattributabletotheacquisitionoftheitems.

54


55

Subsequentcostsareincludedintheasset’scarryingamountorarerecognisedasaseparateasset,asappropriate,onlywhenitisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtotheBankandthecostoftheitemcanbemeasuredreliably.Allotherrepairsandmaintenancearechargedtotheotheroperatingexpensesduringthefinancialperiodinwhichtheyareincurred.

Landisnotdepreciated.Depreciationonotherassetsiscalculatedusingthestraight-linemethodtoallocatetheircosttotheirresidualvaluesovertheirestimatedusefullives,asfollows:

Buildingsandconstructions 30Administrativebuildings 30Hardwareandequipment 4Fixturesandfittings 6Safes 12Motorvehicles 4

Theleaseholdimprovementsaredepreciatedoverthetermofthelease.

Theassets’residualvaluesandusefullivesarereviewed,andadjustedifappropriate,asateachbalancesheetdate.Assetsthataresubjecttoamortisationarereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.Anasset’scarryingamountiswrittendownimmediatelytoitsrecoverableamountiftheasset’scarryingamountisgreaterthanitsestimatedrecoverableamount.Therecoverableamountisthehigheroftheasset’sfairvaluelesscoststosellandvalueinuse.

Gainsandlossesondisposalsaredeterminedbycomparingproceedswiththecarryingamount.Theseareincludedinotheroperatingexpensesintheincomestatement.

(o) Impairmentofnon-financialassets

Assetsthataresubjecttoamortisationarereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.Animpairmentlossisrecognisedfortheamountbywhichtheasset’scarryingamountexceedsitsrecoverableamount.Therecoverableamountisthehigherofanasset’sfairvaluelesscoststosellandvalueinuse.Forthepurposesofassessingimpairment,assetsaregroupedatthelowestlevelsforwhichthereareseparatelyidentifiablecashflows(cash-generatingunits).Non-financialassetsthatsufferedimpairmentarereviewedforpossiblereversaloftheimpairmentateachreportingdate.

(p) Leases

TheleasesenteredintobytheBankareprimarilyoperatingleases.Thetotalpaymentsmadeunderoperatingleasesarechargedtootheroperatingexpensesintheincomestatementonastraight-linebasisovertheperiodofthelease.

Whenanoperatingleaseisterminatedbeforetheleaseperiodhasexpired,anypaymentrequiredtobemadetothelessorbywayofpenaltyisrecognisedasanexpenseintheperiodinwhichterminationtakesplace.

(q) Cashandcashequivalents

Forthepurposesofthecashflowstatement,cashandcashequivalentscomprisebalanceswithlessthanthreemonths’maturityfromthedateofacquisition,includingcashandbalanceswithcentralbanks(includingMandatoryMinimumReserves),tradingassets,debtsecurities,amountsduefrombanksrepayableondemandandduetobanksrepayableondemand.

(r) Provisions

ProvisionsforlegalclaimsorfinancialguaranteecontractsarerecognisedwhentheBankhasapresentlegalorconstructiveobligationasaresultofpastevents,itismorelikelythannotthatanoutflowofresourceswillberequiredtosettletheobligation,andtheamounthasbeenreliablyestimated.

Provisionsaremeasuredatthepresentvalueoftheexpendituresexpectedtoberequiredtosettletheobligationusingapre-taxratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheobligation.Theincreaseintheprovisionduetothepassageoftimeisrecognisedasinterestexpense.

(s) Financialguaranteecontracts

Financialguaranteecontractsarecontractsthatrequiretheissuertomakespecifiedpaymentstoreimbursetheholderforalossitincursbecauseaspecifieddebtorfailstomakepaymentswhendue,inaccordancewiththetermsofadebtinstrument.Suchfinancialguaranteesaregiventobanks,financialinstitutionsandotherbodiesonbehalfofcustomerstosecureloans,overdraftsandotherbankingfacilities.

Financialguaranteesareinitiallyrecognisedinthefinancialstatementsatfairvalueonthedatetheguaranteewasgiven.Subsequenttoinitialrecognition,theBank’sliabilitiesundersuchguaranteesaremeasuredatthehigheroftheinitialmeasurement,lessamortisationcalculatedtorecogniseintheincomestatementthefeeincomeearnedonastraightlinebasisoverthelifeoftheguaranteeandthebestestimateoftheexpenditurerequiredtosettleanyfinancialobligationarisingasatthebalancesheetdate.Theseestimatesaredeterminedbasedonexperiencesimilartransactionsandhistoryofpastlosses,supplementedbythejudgmentofmanagement.

56


(t) Staffcosts,pensionsandsocialfund

Staffcosts StaffcostsareincludedinAdministrativeexpenseandtheyalsoincludeboardemoluments.

Pensions TheBankcurrentlyexecutesadefinedcontributionplanforitsemployees.AdefinedcontributionplanisapensionplanunderwhichtheBankpaysfixedcontributionsintoaseparateentity.TheBankhasnolegalorconstructiveobligationstopayfurthercontributionsifthefunddoesnotholdsufficientassetstopayallemployeesthebenefitsrelatingtoemployeeserviceinthecurrentandpriorperiods.

Fordefinedcontributionplans,theBankpayscontributionstoprivatelyadministeredpensioninsuranceplansonacontractualorvoluntarybasis.TheBankhasnofurtherpaymentobligationsoncethecontributionshavebeenpaid.Thecontributionsarerecognisedasemployeebenefitexpensewhentheyaredue.

Socialfund TheBankcreatesasocialfundtofinancethesocialneedsofitsemployeesandemployeebenefitprogrammes.Theallocationtothesocialfundisrecognisedintheincomestatement.

(u) Taxationanddeferredincometax

Incometax Incometaxpayableonprofits,basedonCzechtaxlaw,isrecognisedasanexpenseintheperiodinwhichprofitsarise.

Deferredtax Deferredincometaxisprovidedinfull,usingtheliabilitymethod,ontemporarydifferencesarisingbetweenthetaxbasesofassetsandliabilitiesandtheircarryingamountsinthefinancialstatements.Deferredincometaxisdeterminedusingtaxratesandlawsthathavebeenenactedorsubstantiallyenactedbythebalancesheetdateandareexpectedtoapplywhentherelateddeferredincometaxassetisrealisedorthedeferredincometaxliabilityissettled.

Theprincipaltemporarydifferencesarisefromdepreciationofproperty,plantandequipment,revaluationofcertainfinancialassetsandliabilitiesincludingderivativecontracts,provisionsandtaxlossescarriedforward.Theratesenactedorsubstantivelyenactedasatthebalancesheetdateareusedtodeterminedeferredincometax.However,thedeferredincometaxisnotaccountedforifitarisesfrominitialrecognitionofanassetorliabilityinatransactionotherthanabusinesscombinationthatatthetimeofthetransactionaffectsneitheraccountingnortaxableprofitnorloss.

57

58

Deferredtaxassetsarerecognisedwhereitisprobablethatfuturetaxableprofitwillbeavailableagainstwhichthetemporarydifferencescanbeutilised.

Thetaxeffectsofincometaxlossesavailableforcarry-forwardarerecognisedasanassetwhenitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichtheselossescanbeutilised.

Deferredtaxrelatedtofairvaluere-measurementofavailable-for-saleinvestments,whichischargedorcrediteddirectlytoequity,isalsocreditedorchargeddirectlytoequityandsubsequentlyrecognisedintheincomestatementtogetherwiththedeferredgainorloss.

(v) Valueaddedtax

TheBankisregisteredforvalueaddedtax(“VAT”).IntangibleandtangiblefixedassetsarestatedatacquisitioncostincludingtheappropriateVAT.TheBankdoesnotclaiminputVATastheratioofthetaxableincometothetotalincomeoftheBankissuchthatitisnoteconomicalfortheBanktoclaimtheinputVAT.

(w) Borrowings

Borrowingsarerecognisedinitiallyatfairvaluenetoftransactioncostsincurred.Borrowingsaresubsequentlystatedatamortisedcost;anydifferencebetweenproceedsnetoftransactioncostsandtheredemptionvalueisrecognisedintheincomestatementovertheperiodoftheborrowingsusingtheeffectiveinterestmethod.

(x) Sharecapitalandreserves

Shareissuecosts Incrementalcostsdirectlyattributabletotheissueofnewsharesareshowninequityasadeduction,netoftax,fromtheproceeds.

Dividendsonshares DividendsonsharesarerecognisedinequityintheperiodinwhichtheyareapprovedbytheBank’sshareholders.

Dividendsfortheyearthataredeclaredafterthebalancesheetdatearedealtwithinthesubsequenteventsnote.

Statutoryreserve InaccordancewiththeCommercialCode,theBankisrequiredtosetasideastatutoryreserveinequity.

Thestatutoryreserverepresentsaccumulatedtransfersfromretainedearnings.Fivepercentofnetprofitshallbeallocatedtothestatutoryreserveuntilthevalueof20%ofsharecapitalisachieved.Thisreserveisnotdistributableandcanbeusedexclusivelytocoverlosses.


59

(y) Fiduciaryactivities

TheBankactsastrusteeandinotherfiduciarycapacitiesthatresultintheholdingorplacingofassetsonbehalfofindividuals,andotherinstitutions.Theseassetsandincomearisingthereonareexcludedfromthesefinancialstatements,astheyarenotassetsoftheBank.

(z) IFRS/IASaccountingandreportingdevelopments

CertainnewstandardsandinterpretationshavebeenpublishedthataremandatoryfortheBank’saccountingperiodsbeginningonorafter1January2008orlaterperiodsandwhichtheBankhasnotearlyadopted:

IFRS8,OperatingSegments(effectiveforannualperiodsbeginningonorafter1January2009).

Thestandardappliestoentitieswhosedebtorequityinstrumentsaretradedinapublicmarketorthatfile,orareintheprocessoffiling,theirfinancialstatementswitharegulatoryorganisationforthepurposeofissuinganyclassofinstrumentsinapublicmarket.IFRS8requiresanentitytoreportfinancialanddescriptiveinformationaboutitsoperatingsegmentsandspecifieshowanentityshouldreportsuchinformation.ManagementiscurrentlyassessingwhatimpactthestandardwillhaveonsegmentdisclosuresintheBank’sfinancialstatements.

IAS32andIAS1Amendment–Puttablefinancialinstrumentsandobligationsarisingonliquidation(effectivefrom1January2009).

Theamendmentrequiresclassificationasequityofsomefinancialinstrumentsthatmeetthedefinitionofafinancialliability.TheBankiscurrentlyassessingtheimpactoftheamendmentonitsfinancialstatements.

IAS23,BorrowingCosts(revisedMarch2007;effectiveforannualperiodsbeginningonorafter1January2009).

TherevisedIAS23wasissuedinMarch2007.ThemainchangetoIAS23istheremovaloftheoptionofimmediatelyrecognisingasanexpenseborrowingcoststhatrelatetoassetsthattakeasubstantialperiodoftimetogetreadyforuseorsale.Anentityis,therefore,requiredtocapitalisesuchborrowingcostsaspartofthecostoftheasset.Therevisedstandardappliesprospectivelytoborrowingcostsrelatingtoqualifyingassetsforwhichthecommencementdateforcapitalisationisonorafter1January2009.TheBankiscurrentlyassessingtheimpactoftheamendedstandardonitsfinancialstatements.

IAS1,PresentationofFinancialStatements(revisedSeptember2007;effectiveforannualperiodsbeginningonorafter1January2009).

60

ThemainchangeinIAS1isthereplacementoftheincomestatementbyastatementofcomprehensiveincomewhichwillalsoincludeallnon-ownerchangesinequity,suchastherevaluationofavailable-for-salefinancialassets.Alternatively,entitieswillbeallowedtopresenttwostatements:aseparateincomestatementandastatementofcomprehensiveincome.TherevisedIAS1alsointroducesarequirementtopresentastatementoffinancialposition(balancesheet)atthebeginningoftheearliestcomparativeperiodwhenevertheentityrestatescomparativesduetoreclassifications,changesinaccountingpolicies,orcorrectionsoferrors.TheBankexpectstherevisedIAS1toaffectthepresentationofitsfinancialstatementsbuttohavenoimpactontherecognitionormeasurementofspecifictransactionsandbalances.

IAS27,ConsolidatedandSeparateFinancialStatements(revisedJanuary2008;effectiveforannualperiodsbeginningonorafter1July2009).

TherevisedIAS27willrequireanentitytoattributetotalcomprehensiveincometotheownersoftheparentandtothenon-controllinginterests(previouslyminorityinterests)evenifthisresultsinthenon-controllinginterestshavingadeficitbalance.Thecurrentstandardrequiresexcesslossestobeallocatedtotheownersoftheparent,excepttotheextentthatthenon-controllinginterestshaveabindingobligationandareabletomakeanadditionalinvestmenttocoverthelosses.Therevisedstandardalsospecifiesthatchangesinaparent’sownershipinterestinasubsidiarythatdonotresultinthelossofcontrolmustbeaccountedforasequitytransactions.Italsospecifieshowanentityshouldmeasureanygainorlossarisingonthelossofcontrolofasubsidiary.Anyinvestmentretainedintheformersubsidiarywillhavetobemeasuredatitsfairvalueatthedatewhencontrolislost.ThecurrentstandardrequiresthecarryingamountofaninvestmentretainedintheformersubsidiarytoberegardedasitscostoninitialmeasurementofthefinancialassetinaccordancewithIAS39,FinancialInstruments:RecognitionandMeasurement.TheBankiscurrentlyassessingtheimpactoftheamendedstandardonitsfinancialstatements.

IFRS3,BusinessCombinations(revisedJanuary2008;effectiveforbusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafter1July2009).

TherevisedIFRS3willallowentitiestochoosetomeasurenon-controllinginterestsusingtheexistingIFRS3method(proportionateshareoftheacquiree’sidentifiablenetassets)oronthesamebasisasUSGAAP(atfairvalue).TherevisedIFRS3ismoredetailedinprovidingguidanceontheapplicationofthepurchasemethodtobusinesscombinations.Therequirementtomeasureatfairvalueeveryassetandliabilityateachstepinastepacquisitionforthepurposesofcalculatingaportionofgoodwillhasbeenremoved.Instead,goodwillwillbemeasuredasthedifferenceatacquisitiondatebetweenthefairvalueofanyinvestmentinthebusinessheldbeforetheacquisition,theconsiderationtransferredandthenetassetsacquired.Acquisition-relatedcostswillbeaccountedforseparatelyfromthebusinesscombinationandthereforerecognisedasexpensesratherthan


includedingoodwill.Anacquirerwillhavetorecogniseattheacquisitiondatealiabilityforcontingentpurchaseconsideration.ChangesinthevalueofthatliabilityaftertheacquisitiondatewillberecognisedinaccordancewithotherapplicableIFRSs,asappropriate,ratherthanbyadjustinggoodwill.Thedisclosuresrequiredtobemadeinrelationtocontingentconsiderationwillbeenhanced.TherevisedIFRS3bringsintoitsscopebusinesscombinationsinvolvingonlymutualentitiesandbusinesscombinationsachievedbycontractalone.TheBankiscurrentlyassessingtheimpactoftheamendedstandardonitsfinancialstatements.

VestingConditionsandCancellations–AmendmenttoIFRS2,Share-basedPayment(issuedinJanuary2008;effectiveforannualperiodsbeginningonorafter1January2008).

Theamendmentclarifiesthatvestingconditionsareserviceconditionsandperformanceconditionsonly.Otherfeaturesofashare-basedpaymentarenotvestingconditions.Theamendmentspecifiesthatallcancellations,whetherbytheentityorbyotherparties,shouldreceivethesameaccountingtreatment.TheBankiscurrentlyassessingtheimpactoftheamendmentonitsfinancialstatements.

IFRIC13,‚Customerloyaltyprogrammes‘(issuedinJune2007;effectiveforannualperiodsbeginningonorafter1July2008).

IFRIC13clarifiesthatwheregoodsorservicesaresoldtogetherwithacustomerloyaltyincentive(forexample,loyaltypointsorfreeproducts),thearrangementisamultiple-elementarrangementandtheconsiderationreceivablefromthecustomerisallocatedbetweenthecomponentsofthearrangementusingfairvalues.TheBankiscurrentlyassessingtheimpactoftheInterpretationonitsfinancialstatements.

OthernewstandardsorinterpretationsTheBankhasnotearlyadoptedthefollowingothernewstandardsorinterpretations:• IFRIC11,IFRS2–GroupandTreasuryShareTransactions(effectiveforannualperiods

beginningonorafter1March2007);• IFRIC12,ServiceConcessionArrangements(effectiveforannualperiodsbeginningonorafter

1January2008);• IFRIC14,IAS19–TheLimitonaDefinedBenefitAsset,MinimumFundingRequirements

andtheirInteraction(effectiveforannualperiodsbeginningonorafter1January2008).

Unlessotherwisedescribedabove,thenewstandardsandinterpretationsarenotexpectedtosignificantlyaffecttheBank’sfinancialstatements.

61

(aa) Criticalaccountingestimatesandjudgments

TheBankmakesestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitieswithinthenextfinancialyear.Estimatesandjudgmentsarecontinuallyevaluatedandbasedonhistoricalexperienceandotherfactors,includingexpectationsoffutureeventsthatarebelievedtobereasonableunderthecircumstances.

Impairmentlossesonloansandadvances TheBankreviewsitsloanportfoliostoassessimpairmentatleastonamonthlybasis.Indeterminingwhetheranimpairmentlossshouldberecordedintheincomestatement,theBankmakesjudgmentsastowhetherthereisanyobservabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsfromaportfolioofloansbeforethedecreasecanbeidentifiedwithanindividualloaninthatportfolio.

Thisevidencemayincludeobservabledataindicatingthattherehasbeenanadversechangeinthepaymentstatusofborrowersinagroup,ornationalorlocaleconomicconditionsthatcorrelatewithdefaultsonassetsinthegroup.

Managementusesestimatesbasedonhistoricallossexperienceforassetswithcreditriskcharacteristicsandobjectiveevidenceofimpairmentsimilartothoseintheportfoliowhenschedulingitsfuturecashflows.Themethodologyandassumptionsusedforestimatingboththeamountandtimingoffuturecashflowsarereviewedregularlytoreduceanydifferencesbetweenlossestimatesandactuallossexperience.Totheextentthatthenetpresentvalueofestimatedcashflowsdiffersby+/-5%,theprovisionwouldbeestimatedCZK16millionlowerorCZK26millionhigher.

Impairmentofavailable-for-saleequityinvestments TheBankdeterminesthatavailable-for-saleequityinvestmentsareimpairedwhentherehasbeenasignificantorprolongeddeclineinthefairvaluebelowitscost.Thisdeterminationofwhatissignificantorprolongedrequiresjudgment.Inmakingthisjudgment,theBankevaluatesamongotherfactors,thenormalvolatilityinshareprice.Inaddition,impairmentmaybeappropriatewhenthereisevidenceofdeteriorationinthefinancialhealthoftheinvestee,industryandsectorperformance,changesintechnology,andoperationalandfinancingcashflows.

Fairvalueofderivatives Thefairvalueoffinancialinstrumentsthatarenotquotedinactivemarketsaredeterminedbyusingvaluationtechniques.Wherevaluationtechniques(forexample,models)areusedtodeterminefairvalues,theyarevalidatedandperiodicallyreviewedbyqualifiedpersonnelindependentoftheareathatcreatedthem.

62


63

Allmodelsarecertifiedbeforetheyareused,andmodelsarecalibratedtoensurethatoutputsreflectactualdataandcomparativemarketprices.Totheextentpractical,modelsuseonlyobservabledata;however,areassuchascreditrisk(bothownandcounterparty),volatilitiesandcorrelationsrequiremanagementtomakeestimates.Changesinassumptionsaboutthesefactorscouldaffectthereportedfairvalueoffinancialinstruments.

Deferredtax Significantestimatesarerequiredindeterminingdeferredincometax.Therearemanytransactionsforwhichtheultimatetaxdeterminationisuncertainduringtheordinarycourseofbusiness.Wherethefinaltaxoutcomeoftemporarydifferencesisdifferentfromtheamountsthatwereinitiallyrecorded,suchdifferenceswillimpactthecurrentincometaxprovisionanddeferredtaxintheperiodinwhichsuchdeterminationismade.

(ab) Reclassificationsofcomparativefigures

TheBankchangedclassificationorpresentationofthefollowingcomparativeamountsinordertoensuretheircomparabilitywithcurrentyear:• NetinterestincomefromFVPLsecuritiesofCZK10millionin2006wasreclassifiedfromNet

interestincometoNettradingincome(Notes3and5);• RepoloanofCZK600millionasat31December2006withCNBwasreclassifiedfromLoans

andadvancestobankstoCashandbalanceswithcentralbanks(Notes10and11);• Amortisation/depreciationchargeinthestatementofcashflowwaspresentedongrossbasis

(beforeaccumulatedamortisation/depreciationondisposals),whichledtoincreaseofDepreciationofpropertyandequipmentfromCZK54milliontoCZK59millionanddecreaseofDisposalofpropertyandequipmentfromCZK6milliontoCZK1millionin2006;

• Insegmentreportingdisclosure(Note31)theBanksplitImpairmentchargetocreditlossesofCZK72millionin2006toitsRetailandCorporatesegments;

• Fairvaluesoffinancialassetsandliabilitiesasat31December2006(Note33)wererestated,ascurrentmarketratesusedfordiscountingtheirfuturecashflowswereadjustedforappropriateriskpremium.

3 NETINTERESTINCOME

Interestandsimilarincome

(CZKm) 2007 2006

Loansandadvancestocustomers 1,339 828

Duefrombanks 97 110

Mandatoryminimumreserveswithcentralbanks 10 6

Loansandadvancestobanks 107 116

Investmentsecuritiesheldtomaturity 30 -

1,476 944

Interestincomefromloansandadvancestocustomers

(CZKm) 2007 2006

Receivablesfromcompaniesandindividualsincludingconsumerloans 1,265 772

Receivablesfrommunicipalities 29 42

Receivablesfromgovernmentalbodies 1 2

Otherreceivablesfromcustomers 44 12

1,339 828

Interestincomefrominvestmentsecuritiesheldtomaturity

(CZKm) 2007 2006

Receivablesfromcompanies 30 -

30 -

ManagementestimatesthatapproximatelyCZK53millionofinterestincomewasrecognisedonimpairedreceivablesin2007(2006:CZK35million).

Interestandsimilarexpense

(CZKm) 2007 2006

Duetocustomers 216 127

Duetobanks 224 124

Debtsecuritiesinissue 67 48

507 299

64


4 NETFEEANDCOMMISSIONINCOME

(CZKm) 2007 2006

Feeandcommissionincome 399 314

Feeandcommissionexpense (82) (71)

317 243

Feeandcommissionincome

(CZKm) 2007 2006

Internationalpaymenttransactions 194 165

Domesticpaymenttransactions 93 76

Lendingbusiness 47 22

Foreignexchange,foreignnotesandcoinstransactions 34 31

Securitiesandcustodybusiness 24 16

Other 7 4

399 314

FeeandcommissionincomefromsecuritiesandcustodybusinessincludesCZK1millionoffeeincomefromcustodyactivities(2006:CZK1million).

5 NETTRADINGINCOME

(CZKm) 2007 2006

Netinterestincome–FVPLsecurities 13 10

Nettradingincome–FVPLsecuritiesandtradingderivatives 43 9

56 19

Fixed-incomesecuritiesandmoneymarket 12 10

Netforeignexchangegains 41 9

Interestratecontracts 3 -

56 19

Netforeignexchangegainsincluderesultsarisingfrombothcustomerandproprietaryactivitiesinforeignexchangecash,spot,forward,swapandoptionoperations.IncludedinNettradingincomeofCZK56million(2006:CZK19million)ischangeinfairvalueofCZK16million(2006:CZK9million)estimatedusingavaluationtechnique.

65

6 ADMINISTRATIVEEXPENSE

(CZKm) 2007 2006

Personnelexpenses 388 300

Depreciationofpropertyandequipmentandamortisationofintangibleassets 69 59

Othergeneraladministrativeexpenses 268 221

725 580

Personnelexpenses

(CZKm) 2007 2006

SalariesandbonusesofBoardofDirectorsmembers 12 10

Salariesandbonusesofseniormanagement 24 19

SalariesandbonusesofSupervisoryBoardmembers 2 3

Salariesandbonusesoftheemployees 246 186

Socialsecuritycosts 94 70

Otherpersonnelcosts 10 12

388 300

Socialsecuritycostsalsoincludethecontributiontothestatepensionscheme.

Managementbonusscheme SalariesandremunerationoftheMembersoftheBoardofDirectors,aswellastheremunerationprinciplesandstructure,aresubjecttoapprovaloftheSupervisoryBoard.ThekeyperformanceindicatoroftheAnnualperformancebonusisbasedonthegrowthofthenetprofitbeforetaxes.

Retirementbenefits TheBankprovidesitsemployeeswithavoluntarydefinedcontributionretirementscheme.Participatingemployeescancontributesomepercentageoftheirsalariestoapensionfund.TheBankcontributesuptoCZK2,000amonthperpersonaccordingtotheleveloftheemployeecontribution.TotalBankexpensefortheretirementschemein2007wasCZK0.7million(2006:CZK0.5million).

66


Othergeneraladministrativeexpenses

(CZKm) 2007 2006

Rentandleasing 76 56

Informationtechnology 57 48

Marketingandpublicrelations 27 35

Materialconsumption 24 19

Audit,tax,legalconsultancy 21 7

Taxandfees 3 2

Other 60 54

268 221

7 OTHEROPERATINGINCOME

(CZKm) 2007 2006

Rentalincome 1 1

Other 6 8

7 9

8 OTHEROPERATINGEXPENSES

(CZKm) 2007 2006

Depositinsurance 18 14

Other 2 1

20 15

9 INCOMETAXEXPENSE

(CZKm) 2007 2006

Currenttaxexpense 145 81

Deferredtaxincomerelatingtotheoriginationandreversaloftemporarydifferences(Note19) (25) (3)

120 78

67

ThefollowingtableshowsthetaxontheBank‘sprofitbeforetaxdiffersfromthetheoreticalamountthatwouldariseusingthebasictaxrate:

(CZKm) 2007 2006

Profitbeforetaxation 440 255

Applicablerates 24% 24%

Taxationatapplicabletaxrates 106 61

Taxeffectofnon-taxableincome - (13)

Taxeffectofnon-deductibleexpenses 8 26

Other 6 4

120 78

Theeffectivetaxratewas27.27%(2006:30.59%).

10 CASHANDBALANCESWITHCENTRALBANKS

TheBankclassifiesitscashandbalanceswithcentralbanks,exceptforcashinhand,inthecategoryoffinancialassets“loansandreceivables”.

(CZKm) 31.12.2007 31.12.2006

Loanstocentralbank 300 600

Mandatoryminimumreserveswithcentralbanks 124 396

Cashinhand 351 262

Balanceswithcentralbanks 34 8

809 1,266

MandatoryminimumreserveswiththeCzechNationalBank(“CNB”)aregenerallynotavailableforuseintheBank’sday-to-dayoperations.ThesedepositsbearinterestattheCZKreporate,whichwas3.5%asat31December2007(31December2006:2.5%).

CashandbalanceswithcentralbankincludeCZK300million(31December2006:CZK600million)recognisedasaresultofthecashcollateralplacementsinrespectofsecuritiespurchasedunderreverserepos.ThefairvalueofthesecuritiescollateralheldamountedtoCZK293million(31December2006:CZK601million).

68


11 LOANSANDADVANCESTOBANKS

TheBankclassifiesitsloansandadvancestobanksinthecategoryoffinancialassets“loansandreceivables”.

(CZKm) 31.12.2007 31.12.2006

Analysedbyproductandbankdomicile

Currentaccounts

Domestic 37 6

Foreign 13 28

Termdeposits

Domestic 2,839 1,332

Foreign 818 1,048

3,707 2,414

Allowancesforcreditlosses - -

Netduefrombanks 3,707 2,414

12 LOANSANDADVANCESTOCUSTOMERS

Bankclassifiesitsloansandadvancestocustomersinthecategoryoffinancialassets“loansandreceivables”.

(CZKm) 31.12.2007 31.12.2006

Analysedbyproduct

Investmentloans 18,408 12,636

Workingcapitalfinancing 7,542 6,729

Mortgages 3,737 1,346

Consumerloans 880 566

Grossloansandadvances 30,567 21,277

Allowanceforimpairment(Note13) (406) (257)

Netloansandadvances 30,161 21,020

Qualityofreceivablesportfolio

Neitherpastduenorimpaired 28,719 19,725

Pastduebutnotimpaired 1,081 907

Impaired: -substandard 395 362

-doubtful 160 72

-loss 212 211

30,567 21,277

69

ForthedefinitionsofindividualcategoriesofloansandadvancestocustomersaccordingtotheircreditqualityseeNote32(b).

13 IMPAIRMENTCHARGEFORCREDITLOSSES

Themovementinallowanceforimpairmentofloansandadvancestocustomerscanbeanalysedasfollows:

(CZKm) Retail Corporate Total

Asat1January2006 186 73 259

Netadditiontoprovisionforloanimpairment (33) 104 71

Loanswrittenoffduringtheyearasuncollectible (7) (58) (65)

Unwindofdiscountofallowance - - -

Exchangedifferences - (8) (8)

Asat31December2006 146 111 257

Netadditiontoprovisionforloanimpairment 34 131 165

Loanswrittenoffduringtheyearasuncollectible (16) (1) (17)

Unwindofdiscountofallowance 2 - 2

Exchangedifferences - (1) (1)


14 DERIVATIVEFINANCIALINSTRUMENTS

TheBank’stradingactivitiesprimarilyinvolveprovidingvariousderivativeproductstoitscustomersandmanagingpositionsforitsownaccount.Tradingderivativesalsoincludethosederivativeswhichareusedforassetandliabilitymanagement(ALM)purposestomanageinterestratepositionandwhichdonotmeetthecriteriaofhedgeaccounting.

ThecontractornotionalamountsandpositiveandnegativefairvaluesoftheBank’soutstandingderivativetradingpositionsasat31December2007and31December2006aresetoutinthetablebelow.Thecontractornotionalamountsrepresentthevolumeofoutstandingtransactionsatapointintime;theydonotrepresentthepotentialforgainorlossassociatedwithmarketriskorcreditriskofsuchtransactions.

70


Derivativefinancialinstruments

Tradingderivatives

31.12.2007 31.12.2006

Contract/ Fair value Fair value Contract/ Fair value Fair value(CZKm) notional positive negative notional positive negative

Interestratederivatives

Swaps 277 3 1 39 - 3

277 3 1 39 - 3

Foreignexchangederivatives

Swaps 731 3 9 490 - 3

Forwards 6,523 138 128 1,242 22 18

Options 1,284 16 16 - - -

8,538 157 153 1,732 22 21

Total 8,815 160 154 1,771 22 24

Fairvaluegainslesslossesoftradingderivativesarerecognisedintheincomestatement.

Certainderivativetransactions,whileprovidingeffectiveeconomichedgesundertheBank’sriskmanagementpositions,donotqualifyforhedgeaccountingandarethereforepresentedaboveastradingderivativeswithfairvaluegainsandlossesrecognisedintheincomestatement.

15 FINANCIALASSETSATFAIRVALUETHROUGHPROFITORLOSS

Securitiesheldfortrading

(CZKm) 31.12.2007 31.12.2006

Debtsecurities 260 320

71

16 INVESTMENTSECURITIES

TheBankclassifiesitsinvestmentsecuritiesinthecategoriesoffinancialassets“availableforsale”and“heldtomaturity”.

(CZKm) 31.12.2007 31.12.2006

Securitiesavailableforsale

Debtsecuritiesthereof:

–Unlisted 140 -

Equitysecuritiesthereof:

–Unlisted 27 29

167 29

Securitiesheldtomaturity

Debtsecuritiesthereof:

–Listed 255 -

–Unlisted 504 -

759 -

TheBankhelda9.72%shareofVictoriapojišťovnaa.s.atavalueofCZK27million(31December2006:CZK29million).TheBankdoesnotexertsignificantinfluenceinVictoriapojišťovnaa.s.

Securities Securities(CZKm) available for sale held to maturity Total

Asat1January2006 26 - 26

Gainsfromchangesinfairvalue 3 - 3

Asat31December2006 29 - 29

Additions 139 759 898

Lossesfromchangesinfairvalue (1) - (1)


72


17 INTANGIBLEASSETS Development(CZKm) Software in progress Other Total

Costs

Asat1January2006 147 12 6 165

Additions 12 6 - 18

Transfer 12 (12) - -

Disposal (7) - (5) (12)

Asat31December2006 164 6 1 171

Additions 29 19 - 48

Transfer 6 (6) - -

Disposal - - - -

Asat31December2007 199 19 1 219

Accumulatedamortisation

Asat1January2006 (101) - (5) (106)

Amortisationcharge (18) - - (18)

Disposals(accumulatedamortisation) 7 - 4 11

Asat31December2006 (112) - (1) (113)

Amortisationcharge (25) - - (25)

Disposals(accumulatedamortisation) - - - -

Asat31December2007 (137) - (1) (138)

Netbookvalue

Asat1January2006 46 12 1 59

Asat31December2006 52 6 - 58

Asat31December2007 62 19 - 81

73

18 PROPERTYANDEQUIPMENT

Land and Leasehold Construction buildings improvement Equipment Other in progress Total

Costs

Asat1January2006 166 56 223 131 3 579

Additions - 13 21 14 4 52

Transfer - - - 3 (3) -

Disposal - (7) (21) (8) - (36)

Asat31December2006 166 62 223 140 4 595

Additions 2 5 68 15 4 94

Transfer - 1 1 2 (4) -

Disposal - - (6) (8) - (14)

Asat31December2007 168 68 286 149 4 675

Accumulateddepreciation

Asat1January2006 (64) (17) (178) (114) - (373)

Depreciationcharge (4) (8) (17) (9) - (38)

Disposals(accumulateddepreciation) - 6 19 8 - 33

Asat31December2006 (68) (19) (176) (115) - (378)

Depreciationcharge (4) (6) (23) (11) - (44)

Disposals(accumulateddepreciation) - - 5 8 - 13

Asat31December2007 (72) (25) (194) (118) - (409)

Netbookvalue

Asat1January2006 102 39 45 17 3 206

Asat31December2006 98 43 47 25 4 217

Asat31December2007 96 43 92 31 4 266

In2007therewasnotanydepreciationchargerelatedtolowvaluefixedassets(2006:CZK3million).

74


75

19 DEFERREDINCOMETAXASSETS

Deferredincometaxesin2007arecalculatedonalltemporarydifferencesundertheliabilitymethodusingthe21%incometaxrateenactedfor2008(24%for2006).

Themovementonthedeferredincometaxaccountisasfollows:

(CZKm) 2007 2006

Asat1January 5 3

Incomestatement(debit)/credit(Note9) 25 3

Available-for-salesecurities

Fairvaluere-measurement 1 (1)

Asat31December 31 5

Deferredincometaxassetandliabilityareattributabletothefollowingitems:

(CZKm) 31.12.2007 31.12.2006

Allowanceforimpairment 41 13

Available-for-salesecurities (1) (1)

Depreciationofthefixedassets (12) (10)

Othertemporarydifferences 3 3

31 5

Thedeferredtax(debit)/creditinthestatementofincomecomprisethefollowingtemporarydifferences:

(CZKm) 2007 2006

Allowanceforimpairment 27 5

Depreciationoffixedassets (2) (3)

Othertemporarydifferences - 1

Total(Note9) 25 3

TheBank‘smanagementbelievesitisprobablethattheBankwillfullyrealiseitsgrossdeferredincometaxassetsbasedupontheBank‘scurrentandexpectedfutureleveloftaxableprofitsandtheexpectedoffsetfromgrossdeferredincometaxliabilities.

20 OTHERASSETS

(CZKm) 31.12.2007 31.12.2006

Prepaymentsandaccruedincome 25 42

Otherdebtors,netofprovisions 15 16

Itemsinthecourseofcollection - 3

Anticipatedreceivables 3 2

Other 4 -

47 63

21 DEPOSITSFROMBANKS

TheBankclassifiesitsdepositsfrombanksinthecategoryoffinancialliabilities“measuredatamortisedcost”.

(CZKm) 31.12.2007 31.12.2006

Analysedbyproductandbankdomicile

Currentaccounts

domestic 25 9

foreign 79 139

Termdeposits

domestic 769 1,657

foreign 98 88

Borrowings

domestic 2,271 602

foreign 4,155 2,656

Other

foreign 19 12

7,416 5,163

76


22 DUETOCUSTOMERS

TheBankclassifiesitsduetocustomersinthecategoryoffinancialliabilities“measuredatamortisedcost”.

(CZKm) 31.12.2007 31.12.2006

Analysedbyproduct

Currentaccounts 14,199 10,205

Termdeposits 6,190 4,453

Savingsaccountswithnoticeperiod 146 161

Savingsaccounts 3 13

20,538 14,832

Analysedbycustomertype

Privatecompanies 11,063 7,536

Individual-households 5,512 4,283

Individual-entrepreneurs 1,701 1,508

Governmentbodies 1,792 1,179

Non-profitinstitutions 301 245

Insurancecompaniesandpensionfunds 32 51

Otherfinancialinstitutions 137 30

20,538 14,832

TheBankhasnotgivenanycollateralforitsliabilities.

23 DEBTSECURITIESINISSUE

TheBankclassifiesitsdebtsecuritiesinissueinthecategoryoffinancialliabilities“measuredatamortisedcost”. Cur- 31.12.2007 31.12.2006 Issue date rency Maturity date CZKm CZKm

Issuedmortgagebonds

Mortgagebondemission3.70/10 18.10.2005 CZK 18.10.2010 516 514

Mortgagebondemission4.60/11 27.6.2006 CZK 27.6.2011 528 506

Mortgagebondemission5.40/12 25.9.2007 CZK 25.9.2012 746 -

Mortgagebondemission5.30/17 18.12.2007 CZK 18.12.2017 321 -

2,111 1,020

77

Promissorynotesandcertificatesofdeposits

(CZKm) 31.12.2007 31.12.2006

Promissorynotesandcertificatesofdepositsshort-term 900 942

Promissorynotesandcertificatesofdepositslong-term 136 48

1,036 990

Debtsecuritiesinissue 3,147 2,010

TheBankissuedtwomortgagebondsinthenominalamountofCZK700millionandCZK300millionrespectivelyin2007.Thesebondswereissuedat105.51%and106.68%ofnominalamount.

IssuedmortgagebondsarecollateralisedbytheBank’sreceivablesarisingfromthegrantedmortgagesinlinewithCzechregulatoryrequirements.

24 OTHERLIABILITIES

(CZKm) 31.12.2007 31.12.2006

Paymentsintransit 237 384

Otherclearingaccounts 201 151

Othercreditors 145 109

Accrualsanddeferredincome 68 66

PayablestoDepositinsurancefund 18 14

Anticipatedpayables 16 8

VATandothertaxpayables 2 4

Other 4 1

Auxiliarycreditaccounts 8 -

699 737

25 PROVISIONS

(CZKm) Provisions for guarantees Other operating provisions Total provisions

Asat1January2006 3 2 5

Additions - 3 3


Additions - - -



78

Otheroperatingprovisionscoveralsopossiblelossesregardinglegalproceedings.TheprovisionofCZK3millionasat31December2007(31December2006:CZK3million)forlitigationisnotdiscountedtoitsnetpresentvalue,asthetimingofitsutilisationcouldnotbepredictedwithsufficientcertainty.

26 SUBORDINATEDDEBT

TheBankclassifiesitssubordinateddebtinthecategoryoffinancialliabilities“measuredatamortisedcost”.

TheBankreceivedasubordinatedliabilityofEUR10millionfromtheEuropeanBankforReconstructionandDevelopmenton24December2004,whichispayableinoneinstalmenton26January2015.Thisdebtbears6MEURIBORinterestof4.725%plusamarginof0.8%p.a.untilthefifthyearfromthedateoftheagreementand1.50%p.a.inthesubsequentyearswhichispayablesemi-annually.ThisliabilityofCZK270million,includingaccruedinterest,(31December2006:CZK278million)issubordinatedtoallotherliabilitiesoftheBankandformsapartofthetier2capitaloftheBankasdefinedbytheCNBforthepurposesofdeterminationofitscapitaladequacy(Note32(g)).

27 EQUITY

Theextraordinarygeneralmeetingheldon19February2007decidedonanincreaseofsharecapitalbyCZK181milliontoCZK1,326million.Increaseofthesharecapitalwasperformedbysubscriptionofthe27,804ordinarysharesand8,336non-votingshares;bothofnominalvalueCZK5,000.Sharecapitalwassubscribedwithsharepremiumof310%ofthenominalvalueoftheshares.Subscribedshareswerepaidupbythemajorityshareholderson9March2007.RegistrationbytheRegionalCourtinBrnoregardingsharecapitalcameintoforceon16March2007.

Theextraordinarygeneralmeetingheldon29October2007decidedonanincreaseofsharecapitalbyCZK357milliontoCZK1,683million.Increaseofthesharecapitalwasperformedbysubscriptionofthe54,992ordinarysharesand16,488non-votingshares;bothofnominalvalueCZK5,000.Sharecapitalwassubscribedwithsharepremiumof310%ofthenominalvalueoftheshares.Subscribedshareswerepaidupbythemajorityshareholderon30October2007.RegistrationbytheRegionalCourtinBrnoregardingsharecapitalcameintoforceon20November2007.

Sharecapital

(CZKm) 31.12.2007 31.12.2006

Votingshares 1,295 881

Non-votingshares 388 264

Issued,paidandregisteredbytheCommercialregister 1,683 1,145

79

80

Issuesofshares

Date Nominal Number NominalISIN of issue value of share of shares value CZK CZK m

770980001406 23.10.1998 5,000 30,000 150

770980001414 23.10.1998 5,000 100,000 500

770980001406 7.8.2002 5,000 4,600 23

770980001414 7.8.2002 5,000 15,400 77

770980001406 23.11.2005 5,000 3,165 16

770980001414 23.11.2005 5,000 10,555 53

770980001406 31.7.2006 5,000 6,565 33

770980001414 31.7.2006 5,000 21,895 109

770980001406 20.12.2006 5,000 8,479 42

770980001414 20.12.2006 5,000 28,281 142

770980001406 16.5.2007 5,000 8,336 42

770980001414 16.5.2007 5,000 27,804 139

770980001406 21.12.2007 5,000 16,488 82

770980001414 21.12.2007 5,000 54,992 275

336,560 1,683

Non-votingsharesarenotallowedtovoteandbeara1%higherdividendpaymentthanvotingshares.

Cumulativegainsnotrecognisedintheincomestatementmaybeanalysedasfollows:

(CZKm) 2007 2006

Asat1January 5 3

Netgains/(losses)fromchangesinfairvalue (2) 3

Changeindeferredincometaxes 1 (1)

Asat31December 4 5


28 CONTINGENTLIABILITIESANDCOMMITMENTS

Commitmentstoprovidealoan,loanguaranteestothirdpartiesandguaranteesfromacceptanceoflettersofcreditexposetheBanktocreditriskandtolossintheeventofaclient’sinabilitytomeethisobligations.Variouscommitmentsandcontingentliabilitiesariseinthenormalcourseofbusinessinvolvingelementsofcredit,interestrateriskandliquidityrisk.

Contingentliabilitiesinclude:

31.12.2007 31.12.2006(CZKm) Contract amount Contract amount

Documentarycredits 355 138

Financialguarantees 1,044 765

Provisionforguarantees(Note25) (3) (3)

Netfinancialguarantees 1,041 762

Un-drawnformalstandbyfacilities,creditlines 9,034 6,721

Total 10,433 7,624

Un-drawncreditlinesareirrevocable.

29 OTHERCONTINGENTLIABILITIES(a) Litigation

Apartfromlitigationforwhichprovisionshavealreadybeenraised(Note25),theBankisnotinvolvedinanyotherlitigationwithmaterialimpactonitsposition.

(b) Taxation

Czechtaxlegislation,interpretationandguidancearestillevolving.Consequently,underthecurrenttaxationenvironment,itisdifficulttopredicttheinterpretationstherespectivetaxauthoritiesmayapplyinanumberofareas.Asaresult,theBankhasuseditscurrentunderstandingofthetaxlegislationinthedesignofitsplanningandaccountingpolicies.Theeffectoftheuncertaintycannotbequantified.

Czechtaxauthoritiesareauthorisedtoperformtaxinspectionforthreeyearsretrospectively.Thelasttaxinspectionwasforyear2003.

81

(c) Assetsundermanagementandcustody

(CZKm) 31.12.2007 31.12.2006

Assetsheldundercustody 938 859

Assetheldundercustodyareshownattheirnominalvalue.

(CZKm) 31.12.2007 31.12.2006

Assetsheldundermanagement 6,644 4,641

Assetsheldundermanagementareshownattheirfairvalue.

Managementconsidersthatnopresentobligationswereassociatedwiththesefiduciarydutiesasat31December2007and31December2006.

(d) Operatingleasecommitments

Futureminimumleasepaymentsunderland,buildingandequipmentoperatingleasesareasfollows:

(CZKm) 31.12.2007 31.12.2006

Notlaterthan1year 56 47

Laterthan1yearandnotlaterthan5years 190 159

Laterthan5years 102 78

348 284

30 CASHANDCASHEQUIVALENTS

Analysisofthebalancesofcashandcashequivalentsasshowninthebalancesheets:

(CZKm) 31.12.2007 31.12.2006 1.1.2006

Cashandbalanceswithcentralbanks 809 1,266 396

Duefrombanksdueupto3months 1,362 2,038 1,957

Duetobanksdueupto3months (1,380) (1,826) (1,118)

791 1,478 1,235

82


83

31 SEGMENTREPORTING

TheBank’sprimarysegmentreportingisbycustomersegment.

Segmentreportinginformationbycustomersegmentsfor2007

(CZKm) Retail Corporate Treasury Other Total

Netinterestincome 295 548 126 - 969

Non-interestincome 144 226 3 - 373

Segmentexpenses (316) (126) (25) (271) (738)

Segmentresult 123 648 104 (271) 604

Impairmentchargetocreditlosses (52) (112) - - (164)

Operatingprofit 71 536 104 (271) 440

Incometax(expense)/benefit (17) (129) (25) 51 (120)

Profitfortheyear 54 407 79 (220) 320

Assets 7,638 23,155 5,413 242 36,448

Liabilities 10,814 10,001 13,635 1,998 36,448

Capitalexpenditure 44 4 2 92 142

Depreciation 23 3 2 41 69

Segmentreportinginformationbycustomersegmentsfor2006

(CZKm) Retail Corporate Treasury Other Total

Netinterestincome 220 372 53 - 645

Non-interestincome 120 170 (28) - 262

Segmentexpenses (245) (103) (17) (221) (586)

Segmentresult 95 439 8 (221) 321

Impairmentchargetocreditlosses 3 (66) - - (63)

Provisions - - - (3) (3)

Operatingprofit 98 373 8 (224) 255

Incometax(expense)/benefit (23) (90) (2) 37 (78)

Profitfortheyear 75 283 6 (187) 177

Assets 3,890 16,686 4,752 86 25,414

Liabilities 8,747 6,988 8,633 1,046 25,414

Capitalexpenditure 33 3 1 33 70

Depreciation 23 3 1 32 59

84

Definitionsofcustomersegments:– Retail:PrivateindividualsandentrepreneursandcompanieswithaturnoverlessthanCZK

30million.– Corporate:CompanieswithturnovergreaterthanCZK30millionandnon-bankinginstitutions

inthefinancialsector.– Treasury:Assetandliabilitymanagement,Dealing.– Other:Headquarters,unallocatedexpensesandeliminatingandreconcilingitems.

TheBankoperatesonlyintheCzechRepublic;therefore,thereisnosecondarysegmentreporting.

32 FINANCIALRISKS(a) Strategyinusingfinancialinstruments

TheBank’sactivitiesareprincipallyrelatedtotheuseoffinancialinstruments.TheBankacceptsdepositsfromcustomersatbothfixedandfloatingratesandforvariousperiodsandseekstoearnabove-averageinterestmarginsbyinvestingthesefundsinhighqualityassets.TheBankseekstoincreasethesemarginsbyconsolidatingshort-termfundsandlendingforlongerperiodsathigherrateswhilstmaintainingsufficientliquiditytomeetallclaimsthatmightfalldue.

TheBankalsoseekstoraiseitsinterestmarginsbyobtainingabove-averagemargins,netofprovisions,throughlendingtocommercialandretailborrowerswitharangeofcreditstandings.Suchexposuresinvolvenotjuston-balancesheetreceivablesandadvancesbuttheBankalsoentersintoguaranteesandothercommitmentssuchaslettersofcreditandothersimilarcontingentliabilities.

TheBankalsotradesinfinancialinstrumentswhereittakespositionsintradedandover-the-counterinstrumentsincludingderivativestotakeadvantageofshort-termmarketmovementsinthedebtsecuritiesmarkets,incurrencyandinterestrate.TheBoardofDirectorsplacestradinglimitsonthelevelofexposurethatcanbetakeninrelationtorelevantmarketpositions.

(b) Creditrisk

TheBankdefinescreditriskastheriskthatacounterpartywillcauseafinanciallossfortheBankbyfailingtodischargeacontractualobligation.

Creditriskmanagementisperformedinacloseco-operationwiththeBank’sparentcompany,thusreflectingtheriskstrategyandrisk-appetiteofshareholders,aswellastheentireVolksbankGroup.

Overall,thecredit-riskpolicyisconservative.Consideredwithinthegeneralcontextoftheoverallbusinessrelationsexistingwiththerespectivecustomer,eachtransactionforwhichtheBankknowinglyundertakesriskshouldyieldacontributionmarginthatiscommensuratewiththespecificriskincurred.


85

TheBankstructuresthelevelsofacceptedcreditriskbyregularmeasurementoftheriskexposure,monitoringofthelimitsandtakingappropriateproceduresleadingtothedecreaseoftheacceptedlevelofcreditrisk.Thisprocessisperformedonthelevelofeachindividualborrowerandthewholeloanportfolio.Whendecidingaboutacceptanceofanewexposure,ananalysisofcustomer’scashflowandoverallfinancialsituationisakeyfactor,aswellastheexistingexperiencewiththecustomertogetherwiththequalityofreceivedcollateral.Thedecision-makingisperformedindependentlyfromsalesunits.

In2008,theBankwillfullyapplyBaselIIregulatoryframework.ThecapitalrequirementforcreditriskinbankingportfoliowillbecalculatedusingthestandardisedapproachastheBankcontinuesitspreparationforgainingregulatoryapprovalforthetransitiontointernalratingbasedapproach.

Thetablebelowsummarisesmaximumexposuretocreditriskbeforecollateralheldorothercreditenhancements.IncludedinthetablearetheBank’sassetsandliabilitiesatcarryingamounts.

Maximumexposuretocreditriskbeforecollateralheldorothercreditenhancements

(CZKm) 31.12.2007 31.12.2006

Creditriskexposuresrelatingtoon-balancesheetassets

Loansandadvancestobanks 3,707 2,414

Loansandadvancestocustomers:

–Corporateloans



Mortgages 141 34


–Retailloans



Mortgages 3,573 1,309


Derivativefinancialinstruments 160 22

Tradingassets

Debtsecurities 260 320

Investmentsecurities

Debtsecurities 899 -

Otherassets 47 59

86

(CZKm) 31.12.2007 31.12.2006

Creditriskexposuresrelatingtooff-balancesheetitems(nominalamount)

Financialguarantees 1,044 765

Loancommitmentsandothercreditrelatedliabilities 9,389 6,859

45,667 31,459

CorporateloansincludeloansandadvancestocustomerswiththetotalexposureaboveEUR1millionorwithannualturnoverofatleastEUR50million.SegmentsCorporate/RetailaredeterminedinaccordancewithBaselIIstandardisedapproachasopposedtoNote31,wherethesegmentsaredefinedbasedontheBank’sorganisationalstructure.

Collateralheldandothercreditenhancements Collateralheldandothercreditenhancementsmaybesummarisedbycollateraltypeasfollows:

(CZKm) Fair value

Asat31December2007

Bankandsimilarguarantees 3,951

Mortgagerightonrealestate 16,378

Financialcollateral 4,811

Other 597

Total 25,737

Asat31December2006

Bankandsimilarguarantees 4,807

Mortgagerightonrealestate 10,851

Financialcollateral 5,515

Other 338

Total 21,511


87

Loansandadvances TheBank’sexposuretocreditriskfromloansandadvancesissummarisedasfollows:

31.12.2007 31.12.2006

Loans and Loans and Loans and Loans and advances to advances advances to advances(CZKm) customers to banks customers to bank

Neitherpastduenorimpaired 28,719 3,707 19,725 2,414

Pastduebutnotimpaired 1,081 - 907 -

Impaired 767 - 645 -

Loansandadvances–gross 30,567 3,707 21,277 2,414

Allowancesforimpairment(Note13) (406) - (257) -

Loansandadvances–net 30,161 3,707 21,020 2,414

FromthetotalloansandadvancestocustomerswhichareneitherpastduenorimpairedrepresentCZK17,867million(31December2006:CZK12,810million)CorporateloansandadvancesandCZK10,852million(31December2006:CZK6,915million)belongtoRetailloansandadvances.

Thetotalimpairmentprovisionforloansandadvancesasat31December2007isCZK406million(31December2006:CZK257million)ofwhichCZK244million(31December2006:CZK226million)representstheindividuallyimpairedloansandtheremainingamountofCZK162million(31December2006:CZK31million)representstheportfolioprovision.

Loansandadvancesneitherpastduenorimpaired TheBankiscollectingstatisticaldatanecessaryfortheallocationofloansandadvancesneitherpastduenorimpairedintoindividualcreditqualitygrades.ThisprocessiscontinuinginclosecooperationwiththeBank’sparentcompanytowardsestablishinganinternalratingsystemwhichcomplieswiththeregulatoryrequirementsforapplicationofinternalratingbasedapproach(IRB)forthecalculationofcapitalrequirementforcreditriskintheBank’sbankingportfolio(Note32(g)).

Loansandadvancespastduebutnotimpaired Loansandadvancesfrom31upto90daysoverduearegenerallynotconsideredtobeimpaired.Theycorrespondtothecategoryofwatchloansandreceivablesinaccordancewithregulatoryclassification.

ThetablebelowsummarisesthegrossamountofloansandadvancestocustomerspastduebutnorimpairedbybusinesssegmentalongwiththefairvalueofrelatedcollateralheldbytheBankassecurity.

88

Asat31December2007 Total loans and advances(CZKm) Retail Corporate to customers

Loansandadvancespastduebutnotimpaired 426 655 1,081

Fairvalueofcollateral 253 276 529

Fromthetotalloansandadvancespastduebutnotimpairedasat31December2007morethan99%wereoverdueupto1month.


Loansandadvancespastduebutnotimpaired 289 618 907


Fromthetotalloansandadvancespastduebutnotimpairedasat31December2006morethan98%wereoverdueupto1month.

Individuallyimpairedloansandadvances TheBankperformsassessmentforindividualimpairmentforloansandadvancesthatareabovematerialitythresholdandmorethan90daysoverdue.Theseincludeexposurescorrespondingtothecategoriesofsubstandard,doubtfulandlossloansandreceivablesinaccordancewithregulatoryclassification.Remainingloansandadvancesareconsideredwithincollectiveevaluationofimpairmentandforcalculationofportfolioprovision.

ThetablebelowsummarisesgrossamountofindividuallyimpairedloansandadvancestocustomersbybusinesssegmentalongwiththefairvalueofrelatedcollateralheldbytheBankassecurity.



Individuallyimpairedloansandadvances 357 410 767



Individuallyimpairedloansandadvances 359 286 645


Classificationofindividuallyimpairedloansandadvances

Loansandadvancesareclassifiedasfollows:• substandardwhentheirfullrepaymentisuncertainortheyareoverduefor91to180days,• doubtful,whentheirfullrepaymentishighlyimprobableortheyareoverduefor181to360days,• loss,whenthefullrepaymentisimpossibleorthereceivableisoverdueformorethan360days

orunderbankruptcyproceedings.

Loansandadvancesrenegotiated RestructuringofloansandadvancesoccurswhentheBankprovidesrelieftothecustomerduetoitsadversefinancialorlegalsituationsinceotherwiseitwouldprobablysufferafinancialloss.Restructuringmainlyincludesmodificationofrepaymentschedule,reductionofinterest,forgivenessofoverdueinterestanddeferralofprincipal,interestandfeesrepayment.TheBankrenegotiatedCZK26millionofitsreceivablesin2007(2006:CZK85million).

Debtsecurities Thetablebelowpresentsananalysisofdebtsecuritiesbyratingagencydesignationat31December2007,basedonMoodysexternalratings.

Trading Investment(CZKm) assets securities Total

AaatoA3 30 - 30

Unrated 230 899 1,129

Total 260 899 1,159

89

90

Concentrationofrisksoffinancialassetswithcreditriskexposure Diversificationisoneofkeyprinciplesinmanagingcreditrisk.TheBankfullyadherestoregulatorylimitsforanexposuretosingleeconomically-linkedgroupsofcustomers.Additionally,theBankplacesandmonitorslimitsontheamountofriskacceptedinrelationtobothgeographicalandindustrysectors.

GeographicalsectorsAsat31December2007 European Other

(CZKm) Domestic Union Europe Other Total

Assets

Loansandadvancestobanks 2,876 789 40 2 3,707

Loansandadvancestocustomers 29,658 462 8 33 30,161

Financialassetsatfairvaluethroughprofitandloss 260 - - - 260

Investmentsecurities 606 293 - - 899

Otherassets 204 2 - 1 207

Totalassets 33,604 1,546 48 36 35,234

Asat31December2006 European Other

(CZKm) Domestic Union Europe Other Total

Assets

Loansandadvancestobanks 1,338 1,033 41 2 2,414

Loansandadvancestocustomers 20,732 274 6 8 21,020

Financialassetsatfairvaluethroughprofitandloss 320 - - - 320

Investmentsecurities - - - - -

Otherassets 78 - - 3 81

Totalassets 22,468 1,307 47 13 23,835

Concentrationofrisksoffinancialassetswithcreditriskexposure


91

IndustrysectorsAsat31December2007 Trade Financial Other Real and Manu- institu- Public indu-(CZKm) estate servoies facturing House tions sector stries Total

Assets

Loansandadvancestobanks - - - - 3,707 - - 3,707

Loansandadvancestocustomers 11,670 4,193 4,242 4,659 1,545 705 3,147 30,161

Financialassetsatfairvaluethroughprofitandloss - 58 - - 171 31 - 260

Investmentsecurities 153 - - - 746 - - 899

Otherassets - - - - 198 - 9 207

Totalassets 11,823 4,251 4,242 4,659 6,367 736 3,156 35,234

Asat31December2006 Trade Financial Other Real and Manu- institu- Public indu-(CZKm) estate servoies facturing House tions sector stries Total

Assets

Loansandadvancestobanks - - - - 2,414 - - 2,414

Loansandadvancestocustomers 8,655 3,179 3,032 1,825 1,975 873 1,481 21,020

Financialassetsatfairvaluethroughprofitandloss - 60 40 - 165 55 - 320

Investmentsecurities - - - - - - - -

Otherassets - - - 3 67 - 11 81

Totalassets 8,655 3,239 3,072 1,828 4,621 928 1,492 23,835

Derivatives TheBankmaintainsstrictcontrollimitsonnetopenderivativepositions(i.e.,thedifferencebetweenpurchaseandsalecontracts),bybothamountandterm.Atanyonetime,theamountsubjecttocreditriskisgenerallylimitedtothecurrentfairvalueofinstrumentsthatarefavourabletotheBank(i.e.,assetswheretheirfairvalueispositive),whichinrelationtoderivativesisonlyasmallfractionofthecontract,ornotionalvaluesusedtoexpressthevolumeofinstrumentsoutstanding.Thiscreditriskexposureismanagedaspartoftheoveralllendinglimitswithcustomers,togetherwithpotentialexposuresfrommarketmovements.Collateralorothersecurityisnotusuallyobtainedforcreditriskexposuresontheseinstruments,exceptwheretheBankrequiresmargindepositsfromcounterparties.

92

Settlementriskarisesinanysituationwhereapaymentincash,securitiesorequitiesismadeintheexpectationofacorrespondingreceiptincash,securitiesorequities.DailysettlementlimitsareestablishedforeachcounterpartysoastocovertheaggregateofallsettlementriskarisingfromtheBank’smarkettransactionsonanysingleday.

Credit-relatedcommitments Theprimarypurposeoftheseinstrumentsistoensurethatfundsareavailabletoacustomerasrequired.Guaranteesandstandbylettersofcreditcarrythesamecreditriskasloans.Documentaryandcommerciallettersofcredit–whicharewrittenundertakingsbytheBankonbehalfofacustomerauthorisingathirdpartytodrawdraftsontheBankuptoastipulatedamountunderspecifictermsandconditions–arecollateralisedbytheunderlyingshipmentsofgoodstowhichtheyrelateandthereforecarrylessriskthanadirectloan.

Commitmentstoextendcreditrepresentunusedportionsofauthorisationstoextendcreditintheformofloans,guaranteesorlettersofcredit.Withrespecttocreditriskoncommitmentstoextendcredit,theBankispotentiallyexposedtolossinanamountequaltothetotalunusedcommitments.However,thelikelyamountoflossislessthanthetotalunusedcommitments,asmostcommitmentstoextendcreditarecontingentuponcustomersmaintainingspecificcreditstandards.TheBankmonitorsthetermtomaturityofcreditcommitmentsbecauselonger-termcommitmentsgenerallyhaveagreaterdegreeofcreditriskthanshorter-termcommitments.

(c) Currencyrisk

TheBankdefinescurrencyriskasariskoffinanciallossbecauseofchangesinforeignexchangerates.

TheBanktakesonexposureresultingfromfluctuationsintheprevailingforeigncurrencyexchangeratesonitsfinancialpositionandcashflows.TheBankismanagingitsopenforeignexchangepositionusingforeignexchangedeals(forwardsandswaps).Foreignexchangederivativesmadeonbehalfofclientsareincludedintradingportfolio.TheBoardofDirectorssetslimitsonthelevelofcurrencypositionbycurrencyandintotalforallcurrencies,whicharemonitoreddaily.

Sensitivityanalysis ThetablesbelowsummarisetheBank’sexposuretocurrencyrisk.ItisexpressedbythesensitivityanalysisshowingeffectofchangeinEURandUSDforeignexchangeratesby10%(appreciationofCZK)and-10%(depreciationofCZK)ontheBank’sannualnetprofitandothermovementsinequity.IntheBank’smanagementjudgmentsuchanannualchangeinforeignexchangeratesmaybereasonablypossiblebasedonhistoricaldevelopment.IncludedinthetableistherespectivechangeintheBank’sannualnetprofitandothermovementsinequityfromassetsandliabilitiessensitivetocurrencyrisk.


As at 31 December 2007 10% -10%

(CZKm) Annual net profit

Assets

Cashandbalanceswithcentralbanks (4) 4

Loansandadvancestobanks (61) 61

Loansandadvancestocustomers (458) 458

Otherassets (60) 60

(583) 583

Liabilities

Depositsfrombanks 147 (147)

Duetocustomers 372 (372)

Debtsecuritiesinissue 9 (9)

Subordinateddebt 27 (27)

Otherliabilities 25 (25)

580 (580)

Total (3) 3

ChangeinEURandUSDforeignexchangeratesdoesnothaveanyeffectontheBank’smovementsinequityotherthanannualnetprofit.

As at 31 December 2006 10% -10%


Assets

Cashandbalanceswithcentralbanks (5) 5

Loansandadvancestobanks (80) 80

Loansandadvancestocustomers (412) 412

Otherassets (30) 30

(527) 527

Liabilities

Depositsfrombanks 165 (165)

Duetocustomers 283 (283)

Debtsecuritiesinissue 9 (9)

Subordinateddebt 28 (28)

Otherliabilities 38 (38)

523 (523)

Total (4) 4

93

94

ChangeinEURandUSDforeignexchangeratesdoesnothaveanyeffectontheBank’smovementsinequityotherthanannualnetprofit.

Currencyposition ThetablesbelowsummarisetheBank’sexposuretocurrencyriskexpressedbyopencurrencyposition.IncludedinthetablearetheBank’sassets,liabilitiesandequityatcarryingamounts,categorisedbycurrency.

Asat31December2007

(CZKm) CZK EUR USD SKK Other Total

Assets

Cashandbalanceswithcentralbanks 747 36 8 6 12 809

Loansandadvancestobanks 3,042 357 251 32 25 3,707

Loansandadvancestocustomers 25,473 4,371 213 2 102 30,161

Financialassetsatfairvaluethroughprofitorloss 260 - - - - 260

Investmentsecurities 926 - - - - 926

Otherassets 576 9 - - - 585

31,024 4,773 472 40 139 36,448

Liabilitiesandequity

Depositsfrombanks 5,844 1,333 140 - 99 7,416

Duetocustomers 16,749 3,288 435 31 35 20,538

Debtsecuritiesinissue 3,058 18 71 - - 3,147

Provisions 8 - - - - 8

Subordinateddebt - 270 - - - 270

Otherliabilities 679 203 43 2 3 930

Equity 4,139 - - - - 4,139

30,477 5,112 689 33 137 36,448

Netassets/(liabilitiesandequity) 547 (339) (217) 7 2 -

Netassets/(liabilities)fromunsettledtransactionswithcurrencyinstruments (519) 371 220 - 2 74

Netopencurrencyposition 28 32 3 7 4 74


95

Asat31December2007


Off-balancesheetitems

Financialguarantees (478) 413 62 3 - -

Loancommitmentsandothercreditrelatedliabilities (794) 746 33 - 15 -

Netopencurrencypositionfromoff-balancesheetitems (1,272) 1,159 95 3 15 -

Asat31December2006


Assets

Cashandbalanceswithcentralbanks 1,204 36 9 6 11 1,266

Loansandadvancestobanks 1,573 462 334 8 37 2,414

Loansandadvancestocustomers 16,811 3824 298 - 87 21,020

Financialassetsatfairvaluethroughprofitorloss 320 - - - - 320

Investmentsecurities 29 - - - - 29

Otherassets 349 16 - - - 365

20,286 4,338 641 14 135 25,414

Liabilitiesandequity

Depositsfrombanks 3,430 1,470 176 - 87 5,163

Duetocustomers 11,949 2,380 450 15 38 14,832

Debtsecuritiesinissue 1,917 11 82 - - 2,010

Provisions 8 - - - - 8

Subordinateddebt - 278 - - - 278

Otherliabilities 419 373 8 - 8 808

Equity 2,315 - - - - 2,315

20,038 4,512 716 15 133 25,414

Netassets/(liabilitiesandequity) 248 (174) (75) (1) 2 -

Netassets/(liabilities)fromunsettledtransactionswithcurrencyinstruments (283) 207 75 - 1 -

Netopencurrencyposition (35) 33 - (1) 3 -

96

Asat31December2006


Off-balancesheetitems

Financialguarantees (390) 366 22 1 1 -

Loancommitmentsandothercreditrelatedliabilities (443) 292 151 - - -

Netopencurrencypositionfromoff-balancesheetitems (833) 658 173 1 1 -

(d) Interestraterisk

TheBankdefinesinterestrateriskasariskoffinanciallossbecauseofchangesinmarketinterestrates.

TheBanktakesonexposureresultingfromfluctuationsintheprevailinglevelsofmarketinterestratesonitsfinancialpositionandcashflows.Bankexposuretointerestrateriskismonitoreddailyusinggapanalysisineachforeigncurrencyandisaggregatedforallcurrencies.Sensitivitytothechangeinthemarketinterestrateismeasuredviachangeofthepresentvalueoftheinterestcashflowsfromindividualinterestinstrumentsincaseofinterestrateincrease,asexpectedbytheBank’smanagement.Interestrateswapsareusedtomanageinterestratepositions.

Sensitivityanalysis ThetablebelowsummarisestheBank’sexposuretointerestraterisks.Itisexpressedbythesensitivityanalysisshowingeffectofchangeinmarketinterestratesby50basispoints(b.p.)ontheBank’sannualnetprofitandothermovementsinequity.TwoweekreporateasakeyinterestrateoftheCzechNationalBank’s(“CNB”)monetarypolicyisusuallychangedbyastepof25b.p.Havingobservedthisrate‘saverageannualchangeoverthelast5years,intheBank’smanagementjudgmentachangeinannualmarketinterestratesby50b.p.mayreasonablybepossible.IncludedinthetableisrespectivechangeintheBank’sannualnetprofitandothermovementsinequityfrom:• interest-bearingfinancialassetsandliabilitiesatfairvaluethroughprofitorlossandinterest-

bearingavailable-for-salefinancialassetsand• loansandreceivables,interest-bearingfinancialliabilitiesandheld-to-maturityinvestments

carriedatamortisedcostwithcontractual,re-pricingormaturitydatesnotexceedingoneyear.


97

Asat31December2007 50 b.p. -50 b.p.


Assets

Cashandbalanceswithcentralbanks 4 (4)

Loansandadvancestobanks 16 (16)

Loansandadvancestocustomers 111 (111)

Financialassetsatfairvaluethroughprofitandloss (2) 2

Investmentsecurities 3 (3)

132 (132)

Liabilities

Depositsfrombanks (23) 23

Duetocustomers (88) 88

Debtsecuritiesinissue (5) 5

Subordinateddebt (1) 1

(117) 117

Derivativefinancialinstruments (1) 1

Total 14 (14)

ChangeinmarketinterestratesdoesnothaveanyeffectontheBank’smovementsinequityotherthanannualnetprofit.

98

Asat31December2006 50 b.p. -50 b.p.


Assets

Cashandbalanceswithcentralbanks 6 (6)

Loansandadvancestobanks 11 (11)

Loansandadvancestocustomers 77 (77)

Financialassetsatfairvaluethroughprofitandloss (2) 2

Investmentsecurities - -

92 (92)

Liabilities

Depositsfrombanks (20) 20

Duetocustomers (64) 64

Debtsecuritiesinissue (4) 4

Subordinateddebt (1) 1

(89) 89

Derivativefinancialinstruments - -

Total 3 (3)

ChangeinmarketinterestratesdoesnothaveanyeffectontheBank’smovementsinequityotherthanannualnetprofit.

(e) Liquidityrisk

TheBankdefinesliquidityriskasariskthatitwillencounterdifficultyinmeetingobligationsassociatedwithfinancialliabilitiesortheriskoflossofabilitytofinanceitsassets.

TheBankisexposedtodailycallsonitsavailablecashresourcesfromovernightdeposits,currentaccounts,maturingdeposits,loandrawdowns,guaranteesandfrommarginandothercallsoncashsettledderivatives.Liquidityriskmanagementisbasedontheplanningofthecashinflowsandcashoutflowsbasedontheremainingmaturityoftheassetsandliabilitiesandontheexperiencefromprogressanalysisfromthepreviousyears.TheBankpreparesaliquidityplan,whichisapprovedbytheBoardofDirectorstogetherwiththebusinessplanandboththeseplansarecloselyinterconnected.

Cashflowsfrombalancesheetfinancialinstruments ThetablebelowpresentsthecontractualundiscountedcashflowsfromtheBank’sfinancialliabilitiesbasedontheremainingperiodasatthebalancesheetdatetothecontractualmaturitydate.


99

Asat31December2007 Total

Undis- Within 3 - 12 1 - 5 Over counted Nominal(CZKm) 3 months months years 5 years cash flows value

Financialliabilities

Depositsfrombanks 1,824 560 4,885 1,248 8,517 7,416

Duetocustomers 19,902 416 96 147 20,561 20,538

Debtsecuritiesinissue 959 178 2,110 405 3,652 3,147

Subordinateddebt - 15 288 - 303 270

Totalfinancialliabilities(remainingcontractualmaturities) 22,685 1,169 7,379 1,800 33,033 31,371

Totalfinancialassets(remainingcontractualmaturities) 9,131 6,679 13,312 22,436 51,558 35,863

Netfinancialassets/(liabilities) (13,554) 5,510 5,933 20,636 18,525 4,492




Depositsfrombanks 2,555 371 1,649 1,200 5,775 5,163

Duetocustomers 14,355 262 71 178 14,866 14,832

Debtsecuritiesinissue 942 69 1,187 - 2,198 2,010

Subordinateddebt - 15 305 - 320 278

Totalfinancialliabilities(remainingcontractualmaturities) 17,852 717 3,212 1,378 23,159 22,283

Totalfinancialassets(remainingcontractualmaturities) 6,050 3,981 8,740 10,562 29,333 25,049

Netfinancialassets/(liabilities) (11,802) 3,264 5,528 9,184 6,174 2,766

AlthoughDuetocustomersisstrictlydividedintomaturitytimebandsaccordingtotheirremainingcontractualmaturities(e.g.currentaccountsarecontainedwithinthe„Within3months“column),statisticalevidenceshowsitisunlikelyamajorityofthosecustomerswillactuallywithdrawtheirdepositsfromtheBankonmaturity.

Negativenetfinancialliabilitywithremainingmaturitywithinthreemonthsiscoveredbyreceivedcommitmentsfromtheparentcompany,OesterreichischeVolksbankenAG(Note36).

100

Cashflowsfromderivativefinancialinstruments

Derivativessettledonanetbasis TheBank’sderivativesthatwillbesettledonanetbasisincludeinterestrateswaps.ThetablebelowanalysescontractualundiscountedcashflowsfromtheBank’sderivativefinancialliabilitiessettledonanetbasisbasedontheremainingperiodasatthebalancesheetdatetothecontractualmaturitydate.



Tradingderivatives

-Interestratederivatives - - 1 1 2 36

Totalfinancialliabilities - - 1 1 2 36

Totalfinancialassets - 1 - - 1 241

Netfinancialassets/(liabilities) - 1 (1) (1) (1)



Tradingderivatives

-Interestratederivatives - 1 3 2 6 39

Totalfinancialliabilities - 1 3 2 6 39

Totalfinancialassets - - - - - -

Netfinancialassets/(liabilities) - (1) (3) (2) (6)

Derivativessettledonagrossbasis TheBank’sderivativesthatwillbesettledonagrossbasisincludeforeignexchangeforwards,foreignexchangeswapsandforeignexchangeoptions.ThetablebelowanalysescontractualundiscountedcashflowsfromtheBank’sderivativefinancialinstrumentssettledonagrossbasisbasedontheremainingperiodasatthebalancesheetdatetothecontractualmaturitydate.


101



Tradingderivatives

–Foreignexchangederivatives

Outflow 2,142 3,426 2,965 - 8,533 8,533

Inflow 2,142 3,426 2,970 - 8,538 8,538



Tradingderivatives

–Foreignexchangederivatives

Outflow 791 872 69 - 1,732 1,732

Inflow 789 873 70 - 1,732 1,732

Off-balancesheetitems Thetablebelowanalysesoff-balancesheetitemsoftheBankexposedtoliquidityriskintorelevantmaturitybucketsbasedontheremainingperiodasatthebalancesheetdatetothecontractualmaturitydate.

Asat31December2007 Within 3 - 12 1 - 5 Over (CZKm) 3 months months years 5 years Total

Financialguarantees 243 298 452 51 1,044

Loancommitmentsandothercreditrelatedliabilities 7,246 335 1,212 596 9,389

Capitalcommitments 67 155 - - 222

Total 7,556 788 1,664 647 10,655

Asat31December2006 Within 3 - 12 1 - 5 Over (CZKm) 3 months months years 5 years Total

Financialguarantees 427 223 81 34 765

Loancommitmentsandothercreditrelatedliabilities 3,457 403 2,405 594 6,859

Capitalcommitments 58 122 - - 180

Total 3,942 748 2,486 628 7,804

FutureminimumleasepaymentsunderoperatingleasecommitmentsareanalysedinNote29(d).

102

(f) Operationalrisk

TheBankdefinesoperationalriskastheriskofafinanciallossresultingfrominadequateorfailedinternalprocesses,peopleandsystemsorfromexternaleventsincludinglegalrisks.Incaseofbreakdownofbusinessprocessesitalsoincludesreputationrisk.

InaccordancewithCNBmeasures,theBankhasaninternaldatabaseofallrequisiteregulationsforoperationalriskmanagement,includingthosefortheareasofinformationsecurity,continuityofoperationsandanti-moneylaundering.TheBankhasalsoestablishedasystemofcontrolmechanismsforthoseindividualprocessesthatarebasicelementsofoperationalriskmanagement.

AnOperationalRiskOfficehasbeenestablishedwithintheBank’sorganisationalstructurefortheareaofoperationalriskmanagement.Thisunitisresponsibleforsettingupthemethodologyorframeworkconditionsforoperationalriskmanagement,aswellasforprovidingsupporttothespecialisedunitswithintheoperationalriskmanagementprocess.BothInternalauditandCompliancedepartmentsparticipateonthisprocessalsoinasignificantway.

Theoperationalriskmanagementprocessincludesidentificationandrecording,evaluationandvaluation,measuresandrisksminimisation,alongwithcontrollingimplementationofthedesignedmeasuresandtheireffectiveness.TheBankappliestheoperationalriskmanagementprocessatthelevelsofbothactualeventsandhypotheticalrisks.

Everyidentifiedeventisassessedandconsideredindividually,andthemeasurestobetakenaredesignedinaccordancewiththefrequencyoftheevent’soccurrence,amountoftherealisedoranticipatedlossorprofit,aswellasitsseriousnessandcause.Theobjectiveistoensurethatthemeasurestakenwilleffectivelyminimiseoreliminateoccurrencesofsimilareventsinfuture.

TheBankisinvolvedinaGroup-wideprojectforacomprehensivesolutiontomanagingandmonitoringoperationalriskinaccordancewiththeregulatoryrules.Theaimistoimplementthestandardisedmethodforcalculatingthecapitalrequirementforoperationalrisksince2008.

(g) Capitalmanagement

ThecapitalmanagementprocessiscoordinatedwithinVolksbankGroupinclosecommunicationwiththeBank’sshareholders.Itisaimedat:• EnsuringoftheBank’slong-termstabilityinrelationtoexistingrisks,• Compliancewiththesupervisorycapitalrequirements(capitaladequacy)and• Maintainingastrongcapitalbasetosupportthedevelopmentofthebusinessexpansion


103

TheBankfulfilstherequirementofCNBDecreeNo.123/2007(“theDecree“)forongoingcompliancewiththecapitaladequacylimitbydailymonitoringofrisk-weightedassets.RequiredregulatorycapitaladequacyreportsarefiledwiththeCNBonamonthlybasis.TheBankalsoinformstheparentcompanyoncompliancewiththeregulatorycapitalrequirementswiththesamefrequency.

ThemethodologyforcalculationofcapitalisdefinedbytheDecree.TheBankensuresthatthecapitallevelexceedsregulatorycapitalrequirementsincoordinationwiththeparentcompany.

In2007,theBankestimatedcapitalrequirementsforcoverageofindividualrisksincompliancewiththevalidregulatorylegislationaccordingtocurrentrules(BaselI).

ThetablebelowsummarisesthecompositionoftheBank’scapitalandrisk-weightedassets.Duringbothyears,theBankcompliedwiththeregulatorycapitaladequacylimitof8%.

(CZKm) 31.12. 2007 31.12. 2006

Tier1

Sharecapital(netoftreasuryshares) 1,683 1,145

Sharepremiumaccount 2,017 887

Obligatoryreservefunds 37 26

Retainedearningsfrompreviousperiod 78 32

Less:Intangibleassetsotherthangoodwill (81) (58)

Otherdeductibleitems - (47)

Tier1capital 3,734 1,985

Tier2

SubordinateddebtA 266 275

Tier2capital 266 275

Totalcapital 4,000 2,260

Risk-weightedassets

Creditriskinbankingportfolio 31,397 19,964

Creditriskintradingportfolio 336 277

Generalinterestraterisk 100 54

Currencyrisk - 14

Totalrisk-weightedassets 31,833 20,309

Capitaladequacy 12.57% 11.13%

104

Thesignificantincreaseofthecapitalintheyearof2007ismainlyduetotheincreaseoftheBank’ssharecapitalbyshareholders(Note27).Theconsiderableincreaseoftherisk-weightedassetsreflectsthecontinuingexpansionoftheloanportfolio.

33 FAIRVALUEOFFINANCIALASSETSANDLIABILITIES

ThefollowingtablesummarisesthecarryingamountsandfairvaluesofthosefinancialassetsandliabilitiesnotpresentedontheBank’sbalancesheetattheirfairvalue:

Fairvalueoffinancialassetsandliabilities

31.12.2007 31.12.2006 restated

(CZKm) Carrying value Fair value Carrying value Fair value

Financialassets

Loansandadvancestobanks 3,707 3,705 2,414 2,413

Loansandadvancestocustomersthereof: 30,161 28,584 21,020 20,694

Retail 11,406 10,509 13,614 13,630

Corporate 18,755 18,075 7,406 7,064


Depositsfrombanks 7,416 7,313 5,163 5,127

Duetocustomersthereof: 20,538 20,291 14,832 14,704

Retail 16,000 15,874 12,536 12,411

Corporate 4,538 4,417 2,296 2,293

Debtsecuritiesinissuethereof: 3,147 3,130 2,010 2,007

Retail 414 412 271 269

Corporate 2,733 2,718 1,739 1,738

ThefollowingmethodsandassumptionswereusedinestimatingfairvaluesoftheBank’sfinancialassetsandliabilities:

Loansandadvancestobanks Thecarryingvaluesofcurrentaccountbalancesare,bydefinition,equaltotheirfairvalues.Thefairvaluesoftermplacementswithbanksareestimatedbydiscountingtheirfuturecashflowsusingcurrentinter-bankmarketrates.Amajorityoftheloansandadvancesre-pricewithinrelativelyshorttimespans;therefore,itisassumedtheircarryingvaluesapproximatetheirfairvalues.


105

Loansandadvancestocustomers Asubstantialmajorityoftheloansandadvancestocustomersre-pricewithinrelativelyshorttimespans;therefore,itisassumedthattheircarryingvaluesapproximatetheirfairvalues.Thefairvaluesoffixed-rateloanstocustomersareestimatedbydiscountingtheirfuturecashflowsusingcurrentmarketratesadjustedforappropriateriskpremium.Fairvalueincorporatesexpectedfuturelosses,whileamortisedcostandrelatedimpairmentincludeonlyincurredlossesasatthebalancesheetdate.

Depositsfrombanks Thecarryingvaluesofcurrentaccountbalancesare,bydefinition,equaltotheirfairvalues.Forotheramountsduetobankswithequaltoorlessthanoneyearremainingmaturity,itisassumedtheircarryingvaluesapproximatetheirfairvalues.Thefairvaluesofotheramountsduetobanksareestimatedbydiscountingtheirfuturecashflowsusingcurrentinter-bankmarketrates.

Duetocustomers Thefairvaluesofcurrentaccountsaswellastermdepositswithequaltoorlessthanoneyearremainingmaturityapproximatetheircarryingvalues.Thefairvaluesofothertermdepositsareestimatedbydiscountingtheirfuturecashflowsusingratescurrentlyofferedfordepositsofsimilarremainingmaturities.

Debtsecuritiesinissue Mortgagebondsissuedarenotpubliclytradedandtheirfairvaluesarebaseduponquotedmarketpricesofthedebtsecuritieswithsimilarcharacteristics.Thecarryingvaluesofpromissorynotesandcertificatesofdepositapproximatetheirfairvalues.

34 DIVIDENDS

FinaldividendsarenotaccountedforuntiltheyhavebeenratifiedattheAnnualGeneralMeeting.Atthemeetingon25April2007,adividendofCZK700perordinaryshareandCZK750pernon-votingsharewasapprovedinrespectof2006netprofit.ThisdividendrepresentedatotalamountofCZK163million(2005:CZK117million).Thedividendfortheyear2007hasnotbeendeclaredyet.

106

35 SHAREHOLDERS

TheshareholderstructureofVolksbankCZasat31December2007wasasfollows:

Votingshareholders

Name and registered office Share in %

VolksbankInternationalAG,Vienna 98.22

BancaPopolarediVicenza,Vicenza 0.89

EM.RO.PopolareS.p.a.,Modena 0.89

100.00

36 RELATEDPARTIES

Amountsoftheincome,expenseandassetsandliabilitiesbalancesregardingrelatedpartieswereasfollows:

Asat31December2007andyearthenended Other Parent Manage- related (CZKm) Note Company ment Parties Total

Interestincome 3 8 1 90 99

Commissionandfeeincome 4 3 - 7 10

Otheroperatingincome 7 - - 1 1

Interestexpense 3 79 - 4 83

Commissionandfeeexpense 4 14 - 31 45

Administrativeexpenses 6 - - 34 34

Duefrombanks 11 61 - 72 133

Loansandadvances 12 - 22 1,834 1,856

Investmentsecurities(availableforsale) 16 - - 167 167


Duetobanks 21 1,644 - 13 1,657

Duetocustomers 22 - 12 262 274

Otherliabilities 24 - - 25 25

Guaranteesgrantedandcommitmentsgiven 28 15 8 507 530

Guaranteesgrantedandcommitmentsreceived 8,076 27 219 8,322

Assetsundercustody 1,136 11 1,265 2,412

OtherrelatedpartiesrepresentcompanieswithinVolksbankGroupwithexceptionofparentcompany.


Asat31December2006andyearthenended Other Parent Manage- related (CZKm) Note Company ment Parties Total

Interestincome 3 12 - 81 93

Commissionandfeeincome 4 - - 4 4

Otheroperatingincome 7 - - 1 1

Interestexpense 3 74 - 1 75

Commissionandfeeexpense 4 14 - 32 46

Administrativeexpenses 6 - - 39 39

Duefrombanks 11 152 - 380 532

Loansandadvances 12 - 13 1,986 1,999

Investmentsecurities(availableforsale) 16 - - 29 29


Duetobanks 21 1,943 - 8 1,951

Duetocustomers 22 - 8 231 239

Otherliabilities 24 - - 5 5

Guaranteesgrantedandcommitmentsgiven 28 - 2 345 347

Guaranteesgrantedandcommitmentsreceived 18,344 5 209 18,558

Assetsundercustody - 12 689 701

Loansandadvancestocustomersandindividualsincludethefollowingreceivablesfromrelatedparties:(Note12).

Receivablesfromrelatedparties

(CZKm) 31.12.2007 31.12.2006

VBLeasing,s.r.o. 299 400

ManagementoftheBank 16 11

MembersofSupervisoryBoardandBoardofDirectors 6 2

Otherrelatedparties(companiesinthegroup) 1,535 1,586

Totalreceivablesfromrelatedparties 1,856 1,999

Intheopinionofmanagement,allreceivablesfromrelatedpartiesweremadeintheordinarycourseofbusinessonsubstantiallythesametermsandconditions,includinginterestrates,asthoseprevailingatthesametimeforcomparabletransactionswithothercustomers,anddidnotinvolvemorethannormalcreditriskorpresentotherunfavourablefeatures.

107

108

Duetocustomersincludethefollowingpositionwithrelatedparties:

Depositsfromrelatedparties

(CZKm) 31.12.2007 31.12.2006

ManagementoftheBank 11 7

MembersofSupervisoryBoardandBoardofDirectors 1 1

Otherrelatedparties(companiesinthegroup) 262 231

Depositsfromrelatedparties 274 239

Intheopinionofmanagement,depositsfromrelatedpartieswereacceptedonsubstantiallythesametermsandconditions,includinginterestrates,asthoseprevailingatthesametimeforcomparabletransactionswithothercustomers,anddidnotinvolvemorethannormalinterestrateandliquidityriskorpresentotherunfavourablefeatures(Note22).

37 SUBSEQUENTEVENTS

Therewerenoevents,whichhaveoccurredsubsequenttotheyear-enduntilthedateofpreparationofthefinancialstatements,whichwouldhaveamaterialimpactonthefinancialstatementsoftheBankasat31December2007.

ThesefinancialstatementshavebeenapprovedforsubmissiontothegeneralmeetingofshareholdersbytheBoardofDirectors.

DateofpreparationoftheFinancialStatements: 25February2008

Signatureofthestatutoryrepresentative Personresponsible Personresponsible foraccounting forthefinancial statementspreparation

JohannLurf TomášKořínek AlenaSládková LiborHolub


QUANTITATIVEINDICES

109

CZK thousand 2007 2006 2005 2004

Returnonaverageassets(ROAA) 1.06% 0.97% 0.60% 0.31%

Returnonownaverageequity(ROAE) 12.18% 16.23% 12.10% 7.22%

Assetsperemployee 57,399 51,134 43,878 41,793

Administrativecostsperemployee 1,033 1,048 1,041 1,230

Netprofitperemployee 504 442 261 135

CAPITALSTRUCTURE

Tier1 3,734,200 1,984,846 1,037,315 868,640

Paid-upsharecapital 1,682,800 1,144,700 818,600 750,000

Paidupsharepremium 2,017,210 887,200 216,620 100,000

Legalreservefunds 36,867 25,882 21,456 18,618

Retainedearningsfrompreviousyears 78,144 32,318 40,760 37,957

Tier2 266,200 274,950 290,050 315,988

Provisionsforgeneralrisks 0 0 0 11,338

Deductibleitems (80,822) (105,254) (58,636) (36,208)

Intangibleassets (80,822) (58,189) (58,636) (36,208)

Capital 4,000,400 2,259,796 1,327,365 1,184,629

CAPITALREQUIREMENTS

Capitalrequirement 2,546,597 1,624,666 1,069,982 824,819

Capitalrequirementrelatingtocreditriskuoftradingportfolio 26,842 22,121 10,315 10,473

CAPITALADEQUACY 12.57% 11.13% 9.92% 11.49%

THERELATIONSHIPBETWEENTHECONTROLLEDANDCONTROLLINGENTITY

ThecompanyVolksbankCZisapartoftheinternationalfinancialgroupÖsterreichische

Volksbanken-AG(VBAG).VolksbankCZoperatesintheCzechmarketasabankasdefinedbyAct

No.21/1992Coll.,theBankingAct,anditisacontrolledentityasdefinedbytheCommercialCode.

ThecontrollingentityisVBAG,whichcontrolsVolksbankCZindirectlythroughVolksbank

InternationalAG(VBIAG),whichisadirectlycontrollingentityinrelationtoVolksbankCZ.

VBAG,astheindirectlycontrollingentityofVolksbankCZ,providedbankguaranteesin2006

forloansgrantedbyVolksbankCZ.VolksbankCZpaysfeesforthoseguaranteesinamountsthatare

commonwithintheVBAGGroup.In2003,VolksbankCZconcludedtheISMAGlobalMaster

RepurchaseAgreementwithVBAG,onthebasisofwhichindividualrepotransactionsareconcluded

withVBAGaccordingtostandardtermsandconditions.Withrespecttoindividualrepoandreverse

repotransactions,VolksbankCZpaidorreceivedtheusualinterestwithintheVBAGGroup.

InOctober2004,VolksbankCZconcludedanagreementwiththeEuropeanBank

forReconstructionandDevelopment(EBRD)andVBAGregardingthegrantingofasubordinated

debttoVolksbankCZ.Furthermore,VolksbankCZconcludedthefollowingtypesofagreements

(withVBAG):agreementsoninter-bankdeposits,forwhichVolksbankCZreceives/paysusualmarket

interest;currentaccountagreementsbasedonstandardtermsandconditionsdulyreflectingthe

relatedparty-relationshipwithVBAG,onthebasisofwhichVolksbankCZpaysfeesandreceives/

paysinterest;aswellasagreementsconcerningspotandderivativedealsconcludedunderstandard

termsandconditions.VolksbankCZalsoconcludesdepositsecurityagreementsonbehalf

ofVolksbankCZ(withVBAG).Theseagreementswereconcludedunderstandardtermsand

conditions.

In2005,VolksbankCZconcludedaframeworkco-operationagreementwiththedirectly

controllingentityVBIAG,onthebasisofwhichVBIAG,supportedbyVBAG,providestoVolksbankCZ

professionalservicesofanadvisorycharacteraccordingtotheneedsofVolksbankCZ.Forthe

provisionoftheseservices,VolksbankCZpaysfeesatmarketamount.In2005,VolksbankCZ

furthermoreconcludedaStandbyLiquidityAgreementwithVBIAGtoensurenecessaryliquidity

forVolksbankCZ.

NodetrimentorlosshasresultedforVolksbankCZfromthebusinessrelationshipsbetween

VolksbankCZanditscontrollingentities.

110

REPORTONRELATIONS

Prague,27February2008

TomášKořínek JohannLurf VáclavVitha

RELATIONSHIPWITHOTHERCONTROLLEDENTITIES

VolksbankCZalsohasbusinessrelationshipswithseveralcommercialorfinancialentitiesthat

arelikewisecontrolledindirectlybyVBAGordirectlybyVBIAG.Theseincludeinparticularbanks

inSlovakia,Hungary,Croatia,Slovenia,Romania,BosniaandHerzegovinaaswellasSerbiathatare

membersoftheVBAGGroup.VolksbankCZmaintainsstandardbankingconnectionsandconcludes

routinebankingdealswiththeaforementionedbanks.Nodetrimentorlosshasresulted

forVolksbankCZfromthebusinessrelationshipswiththeaforementionedentities.

VolksbankCZalsohasbusinessrelationshipswithVBLeasingCZ,spol.sr.o.,

NiederösterreichischeLandesbank–HypothekenbankAG,VolksbankenKapitalanlagegesellschaft

m.b.H.,ImmoconsultLeasinggesellschaftm.b.H.Group,VBManagementBeratungGmbHand

DZBankAG.Theseinvolvenormalbankingandcreditservices.Interestratesonloansprovided

totheaforementionedcompaniesincludethefinancingcostsofsuchloansandacertainmargin.

NodetrimentorlosshasresultedforVolksbankCZfromthebusinessrelationshipswiththe

aforementionedentities.

NeitherVBAGnorVBIAGrequiredVolksbankCZtoadoptanymeasureortoenterintoany

contractthatwouldbetothelatter’sdetriment,asdefinedby§66a(14)oftheCommercialCode.

AFFIDAVIT

VolksbankCZ,a.s.,havingitsregisteredofficeatLazarská8,Prague2,NovéMěsto,PostalCode

12000,isresponsibleforthedatainits2007AnnualReport.

Theundersignedherebydeclarethat,inexercisingallduecare,thedatacontainedintheAnnual

ReportofVolksbankCZ,a.s.,for2007isaccurateandthatnosubstantialfactsthatcouldchange

themeaningfulnessoftheAnnualReportofVolksbankCZ,a.s.,wereconcealed.

111

112

REPORTOFINDEPENDENTAUDITORS

PricewaterhouseCoopers Audit, s.r.o., registered seat Kate inská 40/466, 120 00 Prague 2, Czech Republic, Identification Number: 40765521, registered with the Commercial Register kept by the Municipal Court in Prague, Section C, Insert 3637, and in the Register of Audit Companies with the Chamber of Auditors of the Czech Republic under Licence No 021.

2008 PricewaterhouseCoopers Audit, s.r.o. All rights reserved. "PricewaterhouseCoopers" refers to the Czech firm of PricewaterhouseCoopers Audit, s.r.o. or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

PricewaterhouseCoopers Audit, s.r.o. Kate inská 40/466 120 00 Prague 2 Czech Republic Telephone +420 251 151 111 Fax +420 251 156 111 ENGLISH TRANSLATION

INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF VOLKSBANK CZ, A.S. Report on the Annual Report We have audited the annual report of VOLKSBANK CZ, a.s. (the “Bank”) for consistency with the financial statements for the year ended 31 December 2007 which are included in this Annual Report on pages 38 - 108. The Board of Directors is responsible for the accuracy of the annual report. Our responsibility is to express an opinion on the consistency of the annual report and the financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing and the related application guidance of the Chamber of Auditors of the Czech Republic. Those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the information included in the annual report describing matters that are also presented in the financial statements is, in all material respects, consistent with the relevant financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the information included in the annual report of the Company for the year ended 31 December 2007 is consistent, in all material respects, with the financial statements referred to above. The maintenance and integrity of the Company’s website is the responsibility of its Board of Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Report on review of the Report on Relations In addition we have also reviewed the accompanying report on relations between the Company and its controlling party and between the Company and the other persons controlled by the same controlling party for the year ended 31 December 2007 (the “Report”). The completeness and accuracy of the Report is the responsibility of the Board of Directors of the Company. Our responsibility is to review the accuracy of information included in the Report.

113

Shareholders of Volksbank CZ, a.s. Independent auditor’s report

Translation note This version of our report is a translation from the original, which was prepared in Czech language. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

(2)

Report on review of the Report on Relations (continued) We conducted our review in accordance with the International Standard on Review Engagements 2400 and related application guidance of the Chamber of Auditors of the Czech Republic for review of the report on relations. These standards require that we plan and perform the review to obtain moderate assurance as to whether the Report is free of material misstatement. A review is limited primarily to inquiries of Company personnel, analytical procedures and examination, on a test basis, of factual accuracy of data. A review therefore provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying Report has not been properly prepared, in all material respects, in accordance with the requirements of Article 66a of the Commercial Code. 22 April 2008 PricewaterhouseCoopers Audit, s.r.o. represented by Paul Cunningham Eva Loulová Partner Auditor, Licence No. 1981

REPORTOFTHESUPERVISORYBOARD

Initstwomeetingsheldduringthe2007businessyear,on25Apriland28November2007,

theSupervisoryBoardreviewedthecorrectness,appropriatenessandeconomicefficiency

ofthemanagementofVolksbankCZ.TheSupervisoryBoardfurtheracknowledgedtheongoing

reportsoftheBoardofDirectorsandissuedresolutionsasnecessaryforthe2007businessyear.

Atits23rdmeeting,heldinApril2008,theSupervisoryBoardapprovedaresolutionacknowledging

thereportpresentedbytheBoardofDirectorsandapprovedthefinancialstatementsfor2007.These

includedthebalancesheetasat31December2007,aswellastheincomestatementfortheyear

ended31December2007.TheBoardalsoreviewedtheReportonRelationsinaccordancewith

section66a,paragraph9oftheCommercialCode.

Theclosingfinancialstatementsfortheyearended31December2007wereexaminedbythe

auditcompanyPricewaterhouseCoopersAudit,s.r.o.Theauditorissuedanunqualifiedopinion.

OnthebasisofthereportoftheBoardofDirectors,theSupervisoryBoardstatesitsaffirmative

appraisaltothegeneralshareholders’meetingandrecommendsthatappropriateresolutions

beapproved.

TheSupervisoryBoardwouldliketothanktheBoardofDirectorsandalloftheBank’s

employeesfortheirexcellentcooperationandtheeffortsthattheymadethroughout2007.

Dr.FriedhelmBoschert

ChairmanoftheSupervisoryBoard

Prague,24April2008

114

115

156

SERVICE

Austria


Croatia

CZECHREPUBLIC

Hungary

Romania

Serbia

Slovakia

Slovenia

Ukraine

UNITEDINTRUST.

OURNETWORK

158

HEADOFFICE

Praha

Lazarská8

CZ-12000Praha2

Tel.:+420221969911

Fax:+420221969951

REGIONALHEADOFFICE

Brno

M-Palác,Heršpická5

CZ-65826Brno

Tel.:+420543525111

Fax:+420543525555

BRANCHES

Brno

M-Palác,Heršpická5

CZ-65826Brno

Tel.:+420543525222

Fax:+420543525553

Brno

Palackého38

CZ-61200Brno

Tel.:+420549122611

Fax:+420549122619

Brno

Panská2/4

CZ-60200Brno

Tel.:+420542424911

Fax:+420542424919

Brno

GalerieVaňkovka,VeVaňkovce1

CZ-60200Brno

Tel.:+420543552211

Fax:+420543552219

Brno

Veveří6

CZ-60200Brno

Tel.:+420549522421

Fax:+420549522429

ČeskéBudějovice

nám.PřemyslaOtakaraII.č.27

CZ-37001ČeskéBudějovice

Tel.:+420386105811

Fax:+420386105829

159

Praha

Strossmayerovonám.

11/966

CZ-17000Praha7

Tel.:+420220410611

Fax:+420220410619

Praha

Valentinská20/10

CZ-11000Praha1

Tel.:+420221778711

Fax:+420221778719

Praha

Vinohradská40

CZ-12000Praha2

Tel.:+420222922811

Fax:+420222922819

Zlín

Štefánikova5293

CZ-76001Zlín

Tel.:+420577002111

Fax:+420577002155

Znojmo

Mariánskénám.6

CZ-66902Znojmo

Tel.:+420515282511

Fax:+420515282519

HradecKrálové

NaKropáčce30(Velkénáměstí)

CZ-50003HradecKrálové

Tel.:+420495000361

Fax:+420495000351

Jihlava

Benešova15

CZ-58601Jihlava

Tel.:+420567584511

Fax:+420567584519

Kaplice

Náměstí206

CZ-38241Kaplice

Tel.:+420380309011

Fax:+420380309019

Liberec

1.máje59/5

CZ-46001Liberec

Tel.:+420482428341

Fax:+420482428355

Olomouc

Křížkovského5

CZ-77111Olomouc

Tel.:+420585208311

Fax:+420585208355

Olomouc

Hornínáměstí17

CZ-77200Olomouc

Tel.:+420585202711

Fax:+420585202755

Ostrava

28.října3138/41

CZ-70200Ostrava

Tel.:+420595133411

Fax:+420595133419

Plzeň

Anglickénábřeží12

CZ-30100Plzeň

Tel.:+420377350211

Fax:+420377350219

Praha

Lazarská8

CZ-12000Praha2

Tel.:+420221969981

Fax:+420221969951

Praha

KarlaEngliše1(Anděl)

CZ-15000Praha5

Tel.:+420257257301

Fax:+420257257319

Praha

Moskevská32

CZ-10100Praha10

Tel.:+420267267111

Fax:+420267267119

Praha

Soukenická2(Revolučníulice)

CZ-11000Praha1

Tel.:+420221722611

Fax:+420221722619

VOLKSBANKINTERNATIONALAGINCENTRALANDEASTERNEUROPE

Austria

Volksbank

InternationalAG

Kolingasse19

A-1090Vienna

Tel.:00431/31340-3182

Fax:00431/31340-3905

www.vbi.at

160

CZECH REPUBLIC

SLOVAKIA

AUSTRIAHUNGARY

SLOVENIA

CROATIA

BOSNIA-HERZEGOVINA

SERBIA

ROMANIA

Bosnia-Herzegovina

VolksbankBHd.d.

FraAndela

Zvizdovi´ca1

BH-71000Sarajevo

Tel.:00387/33295601

Fax:00387/33295603

www.volksbank.ba

CzechRepublic

VolksbankCZ,a.s.

Lazarska8/13

CZ-12000Prague

Tel.:00420/221969911

Fax:00420/221969951

www.volksbank.cz

Hungary

Magyarországi

VolksbankRt.

Rákócziút7

H-1088Budapest

Tel.:00361/3286666

Fax:00361/3286604

www.volksbank.hu

Serbia

Volksbanka.d.,

BulevarMihailaPupina

165g

SCG-11070Belgrade

Tel.:00381/11/2013259

Fax:00381/11/2013270

www.volksbank.co.yu

Croatia

Volksbankd.d.

Varsavska9

HR-10000Zagreb

Tel.:00385/1/4801300

Fax:00385/1/4801365

www.volksbank.hr

Volksbanka.d.BanjaLuka

Jevrejskaulica,

Poslovnicentar

BanjaLuka

Tel.:00387/51241100

Fax:00387/51213391

www.volksbank-bl.ba

Romania

VolksbankRomaniaS.A.

MihaiBravu171

RO-030244Bucharest

Tel.:00402/12094400

Fax:00402/12094490

www.vbr.ro

Slovakia

VolksbankSlovensko,a.s.

Vysoká9

SK-81000Bratislava

Tel.:00421/2/59651111

Fax:00421/2/54412453

www.volksbank.sk

Slovenia

Volksbank-LjudskaBankad.d.

Dunajska128a

SLO-1000Ljubljana

Tel.:00386/1/5307400

Fax:00386/1/5307555

www.volksbank.si

Ukraine

JSElectronBank

Grabovskogostreet,11

Ukraine,79000,Lviv

www.elbank.com.ua

UKRAINE

161

Publishedby:

VolksbankCZ,a.s.

Lazarská8

CZ-12000Praha2

Producedby:

Ing.KarelSláma

(KEIESGRAPHICS)

Moldavská532/13

CZ-62500Brno

162

Documents

UNITED IN TRUST. ANNUAL REPORT 2007