TEB Annual Report 2011

TEB Sh.A ANNUAL REPORT 2011 THE BANK FOR A CHANGING WORLD Annual Report 2011 / 1

CONTENT

INTRODUCTION Board’s Statement Annual Report’s Compliance Opinion Corporate Profile Our Mission, Vision and Strategy Key Pillars of Strategy and Our Core Values Shareholder Structure Macroeconomic Overview Chairman’s Foreword From the CEO

5 6 7 8 9-10 11-12 13-14 15-16 17-20

TEB IN 2011

21-22

TEB in Figures Key Financial Indicators Individual Banking SME Banking Commercial and Corporate Banking Cash Management and Payments Card Business and Call Center Trade Finance Treasury Human Resources Information Technology

23-25 26 27-30 31-32 33-34 35-36 37-38 39-40 41-42 43-44 45-46

MANAGEMENT

49-50

Board of Directors Committees Internal Audit, Internal Control, Risk Management Compliance

FINANCIAL INFORMATION Independent Audit Report for 31 December 2011, and Notes to the Financial Accounts

DIRECTORY

1 / Annual Report 2011

3-4

51-54 55-56 57-60 61-62

63

Annual Report 2011 / 2

We work for our customers and their ambitions to build a better tomorrow.

INTRODUCTION

We encourage our clients in their endeavors and support them with all the resources at our disposal. Banks don’t change the world; people do. This is why we want to serve our customers in the best way we can. Our only measure of success is how much we have been able to help our customers to achieve their goals, and we believe that we can achieve this by providing them with the best possible quality of service.

We understand it takes everyone to move the world forward so let’s keep trying, let’s keep dreaming and let’s keep reaching.

Every day holds promises and challenges to be met.

We move together with our clients to move the world forward.

We themed our 2011 Annual Report around movement, aiming to show our deepest efforts to grow together by constantly moving forward.

“If we are facing the right direction, all we have to do is keep on moving.”

3 / Annual Report 2011

We keep moving forward, opening new doors, and doing new things, because we’re curious and curiosity keeps leading us down new paths Walt Disney

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BOARD’S STATEMENT

STATEMENT CONCERNING THE 2011 ANNUAL REPORT OF TEB Sh.A The Annual Report of TEB Sh.A has been prepared in accordance with the ‘Amendment of Rule 11 - Reporting of Banks and Kosovar Branches of Foreign Banks authorized

by Article 36 of UNMIK Regulation’, dated 1999.

Musa Erden Chairman of the Board of Directors

Ayşe Aşardağ Board Member and Chairman of the Audit Committee

Didier A.N Van Hecke Board Member and Vice-Chairman of the Audit Committee

Dr. İsmail Yanık Vice-Chairman of the Board of Directors and Chairman of the ALM Committee

Alp Yılmaz Board Member and Chief Executive Officer

Nagip Krasniqi Chief Financial Officer

5 / Annual Report 2011

ANNUAL REPORT COMPLIANCE OPINION

ANNUAL REPORT COMPLIANCE OPINION To the shareholder of TEB Sh.a.

We have audited the accompanying financial statements of TEB sh.a. (the “Bank”), which comprise the statement of financial position as at December 31, 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2011, and of its financial performance and its cash flows for the year then ended in accordance with the International Financial Reporting Standards.

Annual Report 2011 / 6

TEB aims to generate the best outcomes for its clients through financial solutions that are creative and responsible.

CORPORATE PROFILE

TEB operates according to well-defined principles.

Corporate values have been derived from these principles based on responsibility to society as a whole and to the environment.

TEB has already established a reputation for trust, leadership and innovation – these values are reflected in all our activities.

In 2005, TEB A.Ş. entered into a joint venture with BNP Paribas. BNP Paribas is one of the five strongest banks in the world and the largest bank in the eurozone*. A leading banking and financial services provider, it has a global reach with strong retail and corporate banking activities. BNP Paribas also has a major presence in all major financial markets: New York, London, Hong Kong and Paris.

It has one of the largest international networks with operations in more than 85 countries and employs more than 200,000 professional bankers around the world. Turk Ekonomi Bankasi A.Ş. (TEB) is among the oldest and most reputable players in the Turkish financial sector. Established in 1927, it has built up 84 years of in-depth knowledge and expertise in banking. TEB today remains one of the strongest banks in Turkey. Following the merger into TEB Holding A.Ş., the Group began to grow rapidly in the Turkish Market. The first subsidiary to emerge from the joint venture was in Kosovo and TEB Sh.A entered the Kosovo market in 2008.

Supported by the global banking experience of these two strong Groups, TEB Sh.A has quickly demonstrated the Group’s ability to adapt rapidly to the local banking market. We are making major progress on our mission to bring the combined BNP Paribas and TEB A.Ş.’s banking culture to Kosovo.

In addition to core banking operations, TEB Sh.A

offers a wide range of banking services and foreign trade financing. We operate in every segment of the banking sector: Corporate, Commercial, SME and Individual Banking.

Providing innovative and practical products and services, we distinguish our activities in the market place through our customer-centric approach, driven by a dynamic business model and advanced technological infrastructure.

After only four years of operation in Kosovo, in 2011 we have achieved an 11% market share in loans and 9% market share in deposits. As a result, we have become one of the major players in the national financial sector. As in previous years, we have maintained our leading position in the credit-card business. Through Starcard, the first installmentbased credit card in Kosovo, we have changed the spending behaviors of individual customers in the consumer market. Moreover, we have launched some of the most advanced and unique products in the market, including secure e-banking; advanced and fastest payment systems; innovative loans and deposits products.

We provide our broad range of financial services in the Kosovo market through 22 branches and 379 dedicated employees, including Head Office Staff in Prishtina. In addition to the traditional branch network, TEB Sh.A also meets client needs through all delivery channels: Retail and Corporate E-Banking, Call Center, 43 ATMs and more than 2,400 POSs. We are committed to protecting the environment and have introduced programs aimed at reducing our footprint.

TEB Sh.A strives to attract the best employees to serve clients and to create long-term value for shareholders. *Global 2000 Forbes 2011, ranked by market value.

7 / Annual Report 2011

OUR VISION To be the best bank in Kosovo.

OUR MISSION To continually create and increase outstanding value for our customers, shareholders, employees and society.

OUR STRATEGY In line with our vision and mission, our strategy is to provide an outstanding and efficient banking experience for all our customers. We achieve this by offering innovative and practical products and services to achieve continuous and sustainable growth.

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KEY PILLARS OF STRATEGY

Our strategy comprises a number of key pillars Customer focus

Sustainable revenue streams

Sound risk management and audit

A customer-centric, solution-oriented business culture allows TEB to understand and anticipate customer behavior that in turn enhances the Bank’s revenues.

TEB Sh.A is constantly working to improve income sources and profitability. We focus on high-return products and profitable business segments.

Flexibility

Efficiency

TEB Sh.A’s strong focus on risk management and audit is a pillar of its strategy. We work continually to manage and mitigate risk, with special focus on market risk, including interest-rate risk, liquidity risk, and operational risk. Our audit system is proactive.

Based on our customer-centric approach, TEB Sh.A offers flexible banking so that clients can manage their needs, such as financial position and accounts, at their own convenience. This flexibility means clients save time while enjoying a full range of banking services.

Wide range of service channels adapted to client needs We are solution-oriented, so TEB Sh.A provides a wide variety of financial services in the Kosovo market through a broad range of service channels. We have a strong presence throughout Kosovo: 22 branches, 43 ATMs, 2,400 POSs, call center, mobile banking platforms and e-banking.

9 / Annual Report 2011

Efficient and effective utilization of resources are key objectives at TEB Sh.A. Our strategy is to continually increase the quality of financial and other banking services, also through technological innovation, so that we can focus real attention on controlling banking costs and providing services and products efficiently.

Advanced technological infrastructure TEB Sh.A’s banking system has proved a major leap forward in Kosovo. We have brought advanced banking-system technological architecture to the business and individual market.

Dedicated staff TEB Sh.A’s success and reputation in Kosovo’s banking sector have been achieved thanks to the hard work of our dynamic employees.

Creative working environment

Banking professionals search for environments where they can use and grow their skills to express their values and abilities. TEB Sh.A offers this environment to employees and is continually investing in a working environment where employees can grow.

OUR CORE VALUES Responsiveness Speed in the assessment of new situations and developments, and in identifying opportunities and risks.

Efficiency in decision making and in action.

Commitment Commitment to the service of clients and collective accomplishment.

Exemplary behavior.

Ambition Aspiration for challenge and leadership.

Desire to obtain team success in a competition where the referee is the client.

Creativity Encouraging initiatives and new ideas.

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SHAREHOLDER STRUCTURE

BNP Paribas Group

Çolakoğlu Group 50%

50%

TEB Holding

TEB Cetelem

TEB (Bank)

TEB Investment

100%

TEB NV (The Netherlands)

TEB A RVAL

BNPP Leasing

TEB Factoring

11 / Annual Report 2011

TEB Sh.A (Kosovo)

TEB Asset Management

Shareholder Structure Shareholder As at December 31, 2011

Shares Ownership

TEB Holding A.Ş.

2,150,000 100%

2,150,000 100%

Paid in Capital (€) 21,500,000 21,500,000

All Shares (100%) are issued to TEB Holding A.Ş. with Turkish Business Registration Number 176711.

The share capital of the Bank is €21,500,000 issued shares each with a par value of €10.

Number of shares relates to ordinary shares with no rights, preferences or restrictions attached to them.

Share capital was paid in cash.

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MACROECONOMIC OVERVIEW

Financial institutions such as the International Monetary Fund (IMF) and the European Union (EU) with its central bank (ECB) have developed financing programs aimed at peripheral European countries.

The financial system in Kosovo remained well capitalized, liquid and profitable as the capital adequacy ratio in the banking sector in 2011 was

17.6%,

and the loan to deposit ratio was

81%.

During 2011, governments worldwide and financial institutions have worked continuously to prevent the double dip that seemed inevitable last summer.

Measures taken include expansionary monetary policy and the injection of capital to keep banks afloat. So far, these measures have been relatively successful.

However, the global economy is not yet out of the woods. Structural problems are at the root cause of the current crisis and these, plus the challenges that have emerged from it, must still be addressed.

Financial institutions such as the International Monetary Fund (IMF) and the European Union (EU) with its central bank (ECB) have developed financing programs aimed at peripheral European countries. Through these programs and additional capital injections from the ECB, the aim was to prevent the spread of economic disarray to the smaller countries surrounding the Eurozone. The EU and ECB adopted measures, especially significant cash injections through LTROs, to peripheral countries and subsequently drove Greece’s debt restructuring. All these actions have helped stabilize the European playing field, at least in the short term. Much still has to be done.

Eurozone countries are meeting regularly to develop further action. During the most recent summit, the majority of EU country leaders reached consensus on major

13 / Annual Report 2011

actions. A fiscal compact has been agreed that will toughen regulation on debt for all EU countries. At the same time, the US Federal Reserve (FED) has maintained its soft monetary policy, also on the back of comparatively positive growth forecasts for the US in 2012. This has contributed to more global certainty.

Throughout the present crisis that began in mid-2008, the banking sector has been severely impacted. One main reason is that banks are a major buyer of government bonds. Pumping liquidity into banks and forcing them to increase their capital base are just two moves by EU authorities aimed at future-proofing the banking sector against recession. The new capital adequacy requirements, similar to those already in effect in the US, are more stringent than ever before and banks must meet these by the middle of 2012.

The global crisis also negatively impacted the Balkan region, with Greece at the epicenter. Kosovo, the last country to emerge from the war in Former Yugoslavia, is trying to establish a sound economic base. The IMF has revised down real GDP projected growth for 2011 from 5.3% to 5%. Despite the revision, Kosovo’s GDP growth exceeds the estimated growth of neighboring countries. The main components of the growth are domestic demand supported by the rise of private

Pumping liquidity into banks and forcing them to increase their capital base are just two moves by EU authorities aimed at future-proofing the banking sector against recession. consumption and investment supported by public investments, mainly in highway infrastructure.

Financial institutions became more active in financing and supporting economic activity.

Total outstanding loans increased by 16.4% year-on-year to €€1.7 billion in 2011. Loans to households increased by 17.7% to €€0.5 billion (26.4% year-on-year in 2010) whereas loans to enterprises increased by 13% to €€1.2 billion (7.3% year-on-year in 2010). Overall, the financial system remained well capitalized, liquid and profitable as the capital adequacy ratio in 2011 was 17.6%, the loan to deposit ratio was 81%, and non-performing loans decreased to 5.7% in 2011 from 5.9% in 2010.

The increase in private and public consumption affected the trade balance as imports increased at a growing pace whereas the rise in exports remained limited. Exports were €€312.5 million in 2011 and continued to be dominated by base metals (61% of total exports). On the other hand, imports increased by 16% and reached €€2.5 billion. Consequently, the trade deficit widened and reached €2.2 billion. The current account deficit is mainly financed by remittances and foreign direct investments, which the IMF expects to be €€550 million and €€408 million, respectively. Challenges remain for the policy makers to improve the trade balance.

Kosovo’s inflation is highly sensitive to changes in global food prices. The first half of 2011 was characterized by significant price increases, while in the second half of the year, inflationary pressures softened. Accordingly, inflation declined to 3.6% in December 2011, following a rise to double-digit figures towards mid-2011, and finished the year at an average rate of 7.3%. Minimizing Kosovo’s vulnerability to fluctuations in food prices would imply prioritizing agricultural reforms.

The eurozone crisis is expected to reduce foreign direct investment and remittances, and could affect GDP growth through weaker domestic demand. The government is targeting a primary budget deficit of €€159 million by the end of 2012 and plans to finance the deficit with a set of measures including the issuance of government paper for the first time in Kosovo’s history. The introduction of government paper would deepen the financial sector and diversify investors’ options. The budget contains a clause retaining €€60 million in unallocated spending in order to safeguard the budget balance in case of the delay in telecom privatization beyond 2012. On the monetary policy side, Central Bank legislation was introduced in 2010, and banking and microfinance legislation is on the way that aims to reduce banks’ exposure limits to single borrowers from 20% of Tier 1 capital to 15%.

The fiscal and monetary measures are aimed at safeguarding economic stability.

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CHAIRMAN’S FOREWORD

Musa Erden

Chairman of the Board of Directors

15 / Annual Report 2011

For the future, I expect positive results from the synergy between a stable financial system and implementation of reforms and also the emergence of strategic sectors which will be the pillars of future economic growth for the country.

Since 2008, the world economy has been facing a financial crisis. Governments and central banks of developed countries have taken active measures and injected liquidity to prevent the global economy from falling into recession. During 2011, expansionary monetary policy and recapitalization of banks through the injection of capital by governments prevented a double dip.

in 2011, around 1%-point lower than the budget target of 2.9%. While many countries injected capital and additional liquidity into the banking sector in order to keep their economies out of recession, the financial sector in Kosovo remained well capitalized, liquid and profitable. A set of rules and regulations was introduced to strengthen the stability of the financial system. The aim was both to improve risk management practices and decision-making processes of A number of actions have reduced the probability of a bank banks. Emergency Liquidity Assistance (ELA) is close to being or, with the exception of Greece, sovereign failure in Europe. fully operational and will offer additional safeguards to the These include the International Monetary Fund (IMF) and system.

European Union (EU) financing programs for the periphery countries in Europe coupled with the European Central Bank’s Another step forward for the country’s financial system is the three-year repo operation with low yields and the US Federal issuance of government paper to finance the budget deficit Reserve’s commitment to maintain low rates for another for the first time in the history of the country. In line with the three years. In addition, during the latest euro summit, country’s strategy of development, a reform package has been governments have also taken important steps towards the prepared with a view to attracting more foreign investors. For resolution of the eurozone crisis. EU leaders (25 of the bloc’s the future, I expect positive results from the synergy between 27 countries) agreed on the fiscal compact ensuring common a stable financial system and implementation of reforms and debt rules among the member countries. As a result, the also the emergence of strategic sectors that will form the European roller-coaster on financial uncertainty slowed down pillars of future economic growth for the country. at the end of the year.

Using our customer-centric and innovative approach to The banking sector was one of the major sectors adversely forge deep relationships with our clients and with the aim of affected by the global financial crisis, especially in developing expanding our customer base through an extensive product countries. European authorities, while providing liquidity to portfolio, TEB Sh.A will continue to create high added value the financial system, are also forcing banks to increase their for its stakeholders and the economy in general. By carefully capital base. The European Banking Authority is requiring following and analyzing economic trends in both foreign and banks to meet new capital regulations by mid-2012; US domestic markets, TEB Sh.A will seek to create a sustainable authorities took measures at an early stage of the global crisis base of growth and profit, also through prudent management. to recapitalize the financial system.

We have no doubt that in the building of customer trust and loyalty, we will be accompanied by the exceptional expertise As to Kosovo, the economy has remained relatively unaffected and commitment of our employees. As we move forward, I by the financial crisis in the eurozone partly because of the would like to take a moment to reflect on the past year and country’s limited integration into global financial markets. to thank our customers, employees, business partners and Growth in imports, tax revenues and credit to the private shareholders. sector all point to robust domestic demand. Inflation is declining rapidly, following a rise to double-digit figures Musa Erden towards mid-2011. Significant over-performance has been achieved on fiscal targets, with an overall deficit of 1.8% Chairman of the Board of Directors

Annual Report 2011 / 16

Alp Y覺lmaz

FROM THE CEO

Chief Executive Officer

17 / Annual Report 2011

Our client base grew once again to over 135,000 customers in every segment at the end of 2011; we believe this shows market confidence in our operations and serves as proof of the quality of our services.

Before evaluating TEB Sh.A’s operations in 2011, let me first positive growth as well. The sector’s total assets rose by review the main fundamentals and outlook for Kosovo’s 8.3% to€€2.7 billion compared to 2010. Total outstanding economy. loans rose by 16.4% to €€1.7 billion. Moreover, clients again benefited due to intense (pricing) competition in the sector The eurozone crisis has dominated the news in 2011. throughout the year.

However, in Kosovo, the economy has continued its growth trend, supported by encouraging growth rates and stability in As one of the newest entrants in the banking sector, TEB monetary and fiscal policies. Inflation declined sharply after Sh.A made considerable strides in its business activities and a spike to double-digit figures in early 2011. Remittances we are now a major player in the market. Backed by the that have long been a permanent source of incoming funds international financial strength and network of the BNP remained relatively stable despite financial turmoil across Paribas Group and TEB A.Ş., TEB Sh.A is part of a strong global many countries in Europe. Consumer consumption and family. Our customers in Kosovo benefit from that direct private-sector investment are the main drivers and have relationship through the transfer of and access to knowhow, played a huge role in economic development. solidity and worldwide connections.

In addition to driving the overall growth trend by stimulating the private sector and investment, the buoyancy of domestic demand has also contributed positively to the government purse. Furthermore, tax collection is increasing. Increasing tax revenues aligned with cost cutting enabled the government to maintain fiscal balance. As a result, in 2011 there was an increased allocation of funds from the budget to capital investments. As part of Kosovo’s strategic development, more public investment went in to the modernization of infrastructure.

The reporting year, 2011, was a milestone year for us with every business line generating healthy and sustainable growth performance. Through our organizational flexibility and responsiveness to the market, we were able to capitalize on market opportunities, increasing our total assets by 25.2% to €€212.6 million. Our strategy of supporting the real sector and households led to a 52% increase in lending to €179.8 million. We now have an 11% market share in this segment.

One of our aims is to be the best and most trusted bank in Kosovo. By pursuing that goal in 2011, we managed to Kosovo’s financial sector is one of the most important increase the deposit base by 24% to €182.8 million, achieving sources of financing for private consumption. This well- a 9% market share. capitalized financial sector represents the most important and primary driver of the country’s economy. The banking Our client base grew once again to over 135,000 customers system is at the core of the financial sector. And it is stable in every segment at the end of 2011; we believe this shows in Kosovo with non-performing loans (NPL) at the lowest in market confidence in our operations and serves as proof of the the region. This illustrates the adequacy and prudency of the quality of our services. Judging by the results and reactions risk policies implemented by commercial banks in Kosovo of existing and new clients, sales and marketing strategies that also contribute to positive economic development; the have proved to be equally successful. Moreover, through the International Monetary Fund (IMF) puts GDP growth at 5.0% professional services of dedicated staff and the introduction for 2011, up from 4% of 2010. of tailor-made products to the market, TEB Sh.A managed to create a brand that stands for more than just the numbers In line with Kosovo’s positive development and satisfactory and distinguishes us strongly from the competition. growth figures, the banking’s sector balance sheet showed

Annual Report 2011 / 18

As we concentrate on sound and sustainable growth, our efforts and the energy we dedicated to our operation resulted in net profit of €€2.4 million at year-end 2011.

Consequently, Return on Equity reached 18.2% compared to 2.1% in 2010, while Return on Assets reached 1.1% compared to 0.2% in 2010.

Despite our success in implementing our strategy and vision we have not taken irrational decisions and actions that would jeopardize the future sustainability of the Bank. In addition to our core businesses, other departments such as treasury, cards, trade finance and cash management delivered satisfactory results.

Our efforts were also recognized internationally. TEB Sh.A won ‘the excellence award’ for payments from Germany’s Deutsche Bank.

Apart from the positive growth in the balance sheet, qualitative developments in products and services reinforced customer satisfaction. By placing priority on efforts to enhance the quality of our operations, we succeeded in reaching our customers through a wider range of products in 2011. We continue to generate added value by carefully analyzing customer needs and through our technological advantage are able to offer customizable solutions that make a difference and enhance customer satisfaction.

2012 could prove a challenging year as the financial crisis in Europe is slowly resolved. For Kosovo, this could mean a reduction in foreign direct investment and remittances. This may translate into weaker domestic demand. However, fiscal and monetary policies are in place or in the pipeline to safeguard economic stability.

In 2012, TEB Sh.A plans to continue our growth momentum in every business line and we are anticipating further milestones by constantly building on our core values. We will remain alert and responsive to all internal and external developments affecting Kosovo’s economy and through proper allocation of funds stimulate sectors that contribute sustainably to employment and economic growth. In implementing our strategy, we will rely on the superior efforts of our employees, the customer loyalty we have been able to acquire and the support of our shareholders.

I would like to take this opportunity to express our gratitude to all our stakeholders, specifically our devoted employees who know no boundaries in providing service, our shareholders who consistently support us, and most of all, our customers who inspire us to innovate and differentiate TEB Sh.A in the market place.

Alp Yılmaz Chief Executive Officer

19 / Annual Report 2011

TEB Sh.A AT A GLANCE Robust growth in business Net profit:

€ 2.4 million Net banking income:

€ 16.5 million

Cost/income ratio:

67% ROE:

18.2%

Annual Report 2011 / 20

“Move, and the way will open”.

TEB IN 2011 TEB in Figures Key Financial Indicators

Individual Banking

SME Banking

Commercial and Corporate Banking

Cash Management and Payments

Card Business and Call Center

Trade Finance Treasury

Human Resources

Information Technology

BALANCE SHEET INDICATORS 25.2%

169,734

17.6%

13,454

212,553

2011

TEB IN FIGURES

2011

SHAREHOLDER’S EQUITY 23.5% 52%

147,985

118,312

182,754

179,822 2011

2011

TOTAL LOANS

TOTAL DEPOSITS

(GROSS)

ALL AMOUNTS ARE IN THOUSAND EURO

23 / Annual Report 2011

15,817

2011

2010

NPL / TOTAL LOANS

3.85%

1.45%

LOANS / TOTAL ASSETS

84.6%

69.70%

NPL COVERAGE RATIO

59.1%

75%

INCOME STATEMENT INDICATORS 55.9%

53.8%

10,770

7,971

16,564

12,429 2011

2011

NET INTEREST INCOME

NET BANKING INCOME 53.7%

2,541

3,906

264

794.2% 2,363 2011

2011

NET PROFIT FOR THE YEAR

NET NON INTEREST INCOME ALL AMOUNTS ARE IN THOUSAND EURO

COST / INCOME RATIO

2011

2010

67%

85%

Annual Report 2011 / 24

Profitability Ratios 2.1% 2010

2010

2011 RETURN ON EQUITY

NET INTEREST / AVARAGE

2011 RETURN ON ASSETS

2011 INTEREST EARNING ASSETS 2010

1.1%

18.2%

TEB IN FIGURES

5.7%

0.2%

6.4%

Solvency & Liquidity Ratios 16.8%

28.74%

2011 CAPITAL ADEQUACY 2010

LIQUID ASSETS / TOTAL ASSETS

2011

RATIO

13.1%

2010

15.72%

134,621 2011

RISK WEIGHTED ASSETS

2010

183,927

ALL AMOUNTS ARE IN THOUSAND EURO

25 / Annual Report 2011

2011

2010

BRANCHES

22

21

EMPLOYEES

379

342

KEY FINANCIAL INDICATORS

The growth trend in assets continued and was accompanied by increased profits. Total assets reached €212.6 million, up by €42.8 million or 25.2%, while the Total loan portfolio grew to €179.8 million. Net growth in the Loan portfolio was €61.5 million or 52% compared to 2010.

As we pursue better service for customers, we are working tirelessly on further expanding the Bank’s network and infrastructure. In doing so, we have remained committed to our core values and financial performance goals.

As a result, in 2011 we generated positive results. The growth trend in assets continued and was accompanied by increased profits. Total assets reached €212.6 million, up by€€42.8 million or 25.2%, while the Total loan portfolio grew to€€179.8 million. Net growth in the Loan portfolio was €61.5 million or 52% compared to 2010.

On the Liabilities side, Customer deposits reached €182.8 million. Net growth of deposits was €€34.7 million or 23.5% more than in the previous year. The € 6.5 million IFC subordinated loan contracted in 2010 with a 10year tenor remained at the same level while Shareholder equity increased to €2.4 million or 17.6% due to the addition of the current year’s profit to retained earnings.

At the end of 2011, the Non-performing Loans (over 60 days) to Total Loans ratio was 3.9%; compared to 1.5% at the end of 2010, the ratio showed a variance of 2.4% during 2011. The growth in Non-performing Loans (NPL) is due primarily to worsening market liquidity conditions as TEB Sh.A’s NPL ratio was amongst the lowest in the sector. In terms of asset utilization, the structure of Total assets shows that 85% is comprised of loans and advances to customers. This ratio in 2010 was 70%.

At the same time, the overall growth of the balance sheet in 2011 resulted in increased profitability for the Bank. Net interest income rose to €€12.4 million from €€8.0 million in 2010. The increase of €€4.5 million represents an increase of 55.9% compared to 2010. Net Non-interest Income was at€€ 3.9 million, increasing€€1.4

million or 53.7% compared to the previous year. The Cost to Income ratio in 2011 decreased to 67% from 85% in 2010, reflecting the Bank’s increased banking income-generation capacity through its controlled operational expense structure. Net Banking Income was up to €16.6 million compared to € 10.8 million in 2010 driven by a significant increase in loan volumes during the year. Remarkable growth and profitability in 2011 resulted in Profit of € 2.4 million for the year which is about eight times the € 0.3 million profit achieved in 2010.

Return on Equity (ROE) yielded 18.2% compared to 2.1% in 2010 while Return on Assets (ROA) increased to 1.1% compared to 0.2% in the previous year. The Net Interest over Average Interest Earning Assets ratio was 6.4%, up from 5.7% in 2010.

In terms of the Bank’s stability and liquidity management, the Capital Adequacy Ratio (CAR) at the end of 2011 was13.1%, a decrease from 16.8% in 2010 driven mainly by considerable loan portfolio growth during the year. In line with Bank’s strategy for asset optimization in maintaining stability, the Liquid Assets to Total Assets ratio was 15.7% in 2011, down from 28.7% in 2010.

The NPL Coverage Ratio at year-end 2011 was 59.1% decreasing from 75.0% in 2010. This was as a result of new non-performing loans with lower provisioning rate.

The Bank’s Risk Weighted Assets (RWA) reached €183.9 million up from € 134.6 million in the previous year as a consequence of growth in the loan portfolio.

The number of branches increased from 21 to 22 and the number of employees increased from 342 in 2010 to 379 at the end of 2011.

Annual Report 2011 / 26

INDIVIDUAL BANKING

Reach for the stars and make your dreams come true.

27 / Annual Report 2011

Our strategy is to provide customers with a variety of different solutions that meet all their banking and financial needs. We want to make banking easier and convenient for them so we offer a one-stop solution.

100,000 Individual Banking currently serves more than 100,000 individuals in different regions of Kosovo.

80% Through Individual Banking innovative consumer loan solutions, loans outstanding increased by 80% in 2011.

40% Our personalized portfolio management approach has been rewarded emphatically in the market by 40% growth in deposit base in 2011.

Based on our customer-centric strategy, TEB Individual Banking aims to continuously provide unique opportunities to individual clients through innovative products supported by advanced technical and technological infrastructure.

Our strategy is to provide customers with a variety of different solutions that meet all their banking and financial needs.

We want to make banking easier and convenient for them so we offer a onestop solution. This drives our objective of becoming the customer’s only bank throughout their life.

Due to high standards of service, we are able to offer a unique banking experience to many targeted groups of individual customers. We are building that experience on the long-standing expertise of our parent companies, BNP Paribas and TEB Turkey. We are a very active player in the Kosovo market and have already changed individual banking behaviors.

Individual Banking customers are welcomed by a dedicated Portfolio Manager who specializes in relevant products and advice on best practice. This means our customers get the best to meet their particular needs. The specialized

Portfolio Manager first identifies the client’s needs by taking into account where they are in their lifecycle. Individual portfolio management, as applied by TEB Sh.A, increases customer satisfaction by combining core banking products with practical products and services.

Constant innovation in retail products, technological accessibility and our widespread infrastructure made 2011 a year of high achievement. Individual Banking currently serves more than 100,000 individuals in different regions of Kosovo. In 2011, our loan portfolio had grown further to € 44 million through our broad and ever-growing range of products developed for the Kosovo market. One product that fully reflects our innovative approach is the ’Loan with Pause’ which takes into account unexpected events and expenses during the course of the loan. This structure makes it possible for customers to pause for two months. Another feature that offers flexibility to loan clients is the ‘grace period’ that takes into account the time needed to complete plans. Through these and other innovative consumer loan solutions, loans outstanding increased by 80% in 2011.

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Having established a solid customer base in the Kosovo market through our range of innovative products, high quality service, advanced technology and qualified staff, our retail banking team is confident we will be able to extend the same growth dynamic to 2012.

TEB Sh.A is aware that despite the success achieved in past years, more challenges and opportunities lie ahead that will require absolute commitment and responsiveness.

At TEB Sh.A, we recognize the importance of proper planning during a client’s lifetime and we are prepared to assist them in getting the best wealth management products. Planning individual base saving with the portfolio manager has proved very popular and increases customer satisfaction. Our approach has been rewarded emphatically in the market by 40% growth in deposit base in 2011. TEB Individual Banking now holds a total of ₏108 million in deposits. This success is the result of reliability, quality service, customer satisfaction and innovative products, such as planned accounts and flexi-accounts.

Starcard is a unique credit card that enables clients to buy on installment at 0% interest and at the same time offers the opportunity to earn bonus points on each transaction within the TEB Kosovo merchant network. Starcard is a Visa-licensed credit card. In 2011, the number of Starcard-holders reached 79,000 clients with an outstanding of â‚Ź13.4 million.

We save clients time by providing them with different solutions through SMS banking. This service allows clients to check their account statement and Starcard debt, and exchange currencies. Customers can also pay for their internet and cable-TV connections using SMS banking.

The TEB SMS Top UP is another of our innovations. It enables customers to top

29 / Annual Report 2011

up mobile phones through SMS on every network in Kosovo. 20,000 costumers used SMS Banking services during 2011. We have the most advanced e-banking service in the market and constantly develop and upgrade it by introducing new features. Since its introduction in the market, we have attracted 5,000 e-banking users.

TEB Sh.A provides 24/7 call-center service for its individual clients so that they can do their banking when and where they want. 36,000 individual clients used this service during 2011.

Having established a solid customer base in the Kosovo market through our wide range of products, high quality services, and qualified staff, our individual banking team is confident we will be able to extend the same growth dynamic to 2012. We will do this by seeking to increase the customer base by targeting all potential banking and Starcard customers. We have already identified various target groups and will focus specific campaigns on these groups. In line with past developments, we will continue to offer services and solutions that will anticipate and match the evolving needs of our customers and their changing lifestyles.

TEB Sh.A is aware that despite the success achieved in past years, more challenges and opportunities lie ahead that will require absolute commitment and responsiveness.

TEB and our individual clients – making life easier – together…

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SME BANKING

53% growth in loans

42%

growth in deposits We provide a complete range of banking solutions to empower our SME customers by facilitating the cash-flow cycle.

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TEB SME Banking offers clients rapid and result-oriented services through an approach that prioritizes customer satisfaction and ensures customers feel the Bank is always working with them.

When it comes to serving small and medium-sized enterprises (SMEs), TEB Sh.A aims to be the first bank that comes to mind. Our objective is to be the primary bank for this economically crucial customer group. We achieve that goal not only by offering a full, high-quality range of relevant banking products and services. But also by pioneering and developing solutions for the non-financial needs of SMEs. We serve enterprises from different sectors with an annual turnover of up to â‚Ź1.2 million and their shareholders and owners using our customer-centric approach. The main principle in SME Banking is to develop long-term relationships and to contribute more to the development and the growth of these clients using specialist Portfolio Managers.

TEB SME banking was the first in Kosovo to establish a customer-centric approach. Our Portfolio Managers concentrate exclusively on specific client and sector segments so that they are both expert and have a better understanding of customer needs. This means they can provide marketbased, tailor-made solutions. Our Portfolio Managers are highly trained and bring extensive market experience to the customer.

We provide a complete range of banking solutions to empower our SME customers by facilitating the cash-flow cycle. Cashmanagement products are marketed intensely through the implementation of Direct Debiting System (DDS), Point of Sales (POS) systems and others.

TEB Sh.A has an advanced infrastructure that enables us to offer core-banking products, alternative distribution channels and payment solutions to customers – when and where they need them.

Our best practice of evaluating loan applications using customer-specific and fundamental analyses has generated

a healthy and high-quality asset portfolio. Throughout 2011, our Portfolio Managers worked intensely with customers resulting in an increase in the loan portfolio of 53% and by 42% in the deposit portfolio in SME Banking.

By providing SME clients with working capital and investment financing, we have supported the expansion of their business and made them more competitive.

With the product and service packages provided to the market, in 2011 we increased our SME banking client base by 54%. Customized products were developed taking into consideration maturity structure, regional specifications and sector-specific demands and needs.

All of the achievements of 2011 came as a result of employees embracing the portfolio-management concept, extensive support from Head Office in offering services at the right time, teamwork and synergies between departments which increased productivity.

Agriculture is a strategically important sector in Kosovo.

This sector is currently in a process of rapid restructuring, consolidation and modernization. That is why it has become a growing priority for TEB Sh.A. Working in cooperation with USAID, we have launched a project that will inject the essential liquidity this sector needs for growth.

In 2012, SME banking’s main goal is to increase market share, both in loans and deposits. We aim to maintain our customercentric approach and sustain any support necessary to assist our SME customer base in their development, along with achieving profitable and healthy growth by winning new customers. We will achieve these goals by focusing on further strengthening of our customer relations, cooperation with local/sector organizations and research to better understand the needs of SMEs.

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COMMERCIAL & CORPORATE BANKING

Our customer-centric and solution-oriented banking approach brings tailored products and services to an evolving Kosovo market place. We continue to invest in strategic sectors that will drive economic growth and employment.

By combining our domestic market expertise with the international know-how of BNP Paribas and TEB A.Ĺž., we have already grown a reputation for our sophisticated concept for commercial and corporate clients. Our customer-centric and solution-oriented banking approach brings tailored products and services to an evolving Kosovo market place. We continue to invest in strategic sectors that will drive economic growth and employment.

In developing and implementing our solutionoriented approach, we have created a full range of tailor-made products for commercial and corporate clients. Our aim is to continuously grow market share. We do that by building longterm relationships based on our high-quality service and high-tech systems. In addition to core banking products, TEB Sh.A further offers cash management products, import loans for trade financing, working capital loans, investment loans, letters of guarantee, letters of credit, financing for domestic receivables and supplier financing. All these solutions aim to strengthen the foundations of local corporates that are essentially important to the country’s economic development.

All our corporate banking products and services are provided to customers by specialized professionals. These Portfolio Managers

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develop and maintain relationships with clients.

Each Portfolio Manager strives for long-term relationships with clients based on tailor-made solutions and sophisticated service. Our intention is that our clients are more competitive in the market and better equipped to capitalize on growth opportunities.

Commercial and Corporate clients are served at 17 branches in Kosovo by dedicated Portfolio Managers. In addition, in 2010 we opened a special Commercial and Corporate Center to provide even better service and further improve our client relationships. Through our branches, we offer our customers the opportunity for new business perspectives, not only in Kosovo but also in other parts of the world through the BNP Paribas/TEB A.Ĺž. global network.

Part of our goal of becoming the best bank in Kosovo is to be the preferred and reliable bank for Commercial and Corporate clients. That is why we invest significantly in customer satisfaction.

We seek to earn customer loyalty from this demanding group of customers through our client-centric and competitive approach, through functional and flexible cash management solutions, and on-time response to customer requests. As a Bank, we see corporate customer loyalty as the ultimate test of our principle of long-term relationships.

In line with this strategy, Commercial & Corporate Banking has set the following objectives in this segment: Increasing the loan and deposit portfolio; and Growing the volume of transactions.

To achieve these objectives, we invest heavily in training Portfolio Managers and all support staff in maximum customer focus with a high emphasis on quality service. In lending, we take into consideration macroeconomic and industry studies as well as each individual company’s business volume, financial performance and existing relationship with TEB Sh.A. It is clear that customers have embraced our banking approach.

In recent years, we have financed business projects and plans for more than 300 commercial and corporate clients. In 2011, our Loan portfolio grew 26% and Trade Finance volume was up 53%.

Looking ahead and in line with sentiment across Europe, we anticipate that 2012 will be a year of challenges for Kosovo’s economy. Commercial & Corporate Banking will stand by its customers and share knowledge on how to prosper in turbulent and volatile times. Once again, we will demonstrate our loyalty and our aim to be a major support for economic development. Our clients will continue to receive the best possible service as new innovations and solutions will be provided in our quest for mutual success. At TEB Sh.A success is measured based on the success that our customers achieve.

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CASH MANAGEMENT AND PAYMENTS

We are committed to providing our business customers with a complete range of payment and cash management products and services by offering a comprehensive range of solutions to manage their company’s liquidity.

TEB Sh.A aims to set new standards and achieve excellence in Payments and Cash Management Solutions in Kosovo. By utilizing our advanced technology-supported infrastructure, we launched innovative solutions for our customers and achieved a number of ‘firsts’ in cash management and payments.

Through efficient internal operations and expansion of our correspondent banking network, we offer the best, fastest and most reliable services in the payments market. Moreover, all payment operations, treasury operation transactions and securities are also handled and processed successfully. We have an extensive network of correspondent banks with more than 130 correspondent relationships and over 30 placement banks.

As a member of the SWIFT network and through bilateral infrastructure with 130 banks worldwide, our customers enjoy a clear advantage, especially in International Outgoing Transfers. In 2011, we handled more than 20,000 transactions, an increase of 17% compared to 2010.

The increase in transfer volume, also as a result of more straight-through transactions, shows a growing level of customer appreciation for our services. However, we also received recognition from Deutsche Bank AG in Frankfurt, Germany. TEB Sh.A was given the ‘STP Excellence Award’ for International Outgoing Transfers for 2010 with the extraordinary rate of 99.96%.

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We have adapted our system for direct debiting, a payment instrument administered by the Central Bank of Kosovo (CBK). This allows customers to authorize us to automatically debit (withdraw) funds directly from their bank account to make various monthly payments to different public and private companies. This instrument represents a standardized and automated method of making recurring, monthly payments and is suitable for any kind of periodic and regular payments with fixed or variable amounts.

We pioneered an Invoice Payment System (IPS) in the Kosovo market. IPS is an automatic payment system providing a wide range of possibilities for periodic invoice payments from our customers’ bank accounts to different service-providers. This service is very flexible in adapting to customer needs as it can be used through various channels: Automatic Invoice Payments (Standing Order), Transfer Account Invoice Payments, Cash Invoice Payments and e-banking Invoice Payments. We began implementation of this service in the Insurance sector and will roll it out to other sectors in the near future.

Through our innovative and solution-oriented payment solutions, we have achieved increases in both the number and the volume of transactions for a variety of domestic payments for individuals and businesses. In 2011, the volume of customs payments increased by 56% and the volume of tax payments by 40%. In individual-related activities, the highest increase was in the volume of pension payments - 86%, while the volume of utility payments increased by 82% compared to 2010.

The increase in transaction numbers and volumes led to an increase in non-interest income.

By offering flexible and functional cash management products, we are helping our business customers to cut operational costs and are creating cost advantages through the reduction of collection risks.

We are committed to providing our business customers with a complete range of payment and cash management

products and services by offering a comprehensive range of solutions to manage their company’s liquidity. Solutions include payments, transfers, receivables and payable collection, accounts and information requirements.

Our vision is to be the best bank in Kosovo. This is why we are investing heavily in alternative distribution channels by developing and upgrading e-banking for business customers. This provides clients with an ultra-modern service platform as it employs the most advanced security systems and gives access to banking services 24 hours a day and 7 days a week. An important development in business e-banking during 2011 was the introduction of TAX online payments through which businesses can pay their taxes from their office at any time, 24/7. TEB was the first bank to implement “tax online payment” project in cooperation with Tax Administration of Kosovo.

One of TEB Sh.A‘s key contributions in Kosovo is the Direct Debiting System (DDS). DDS is a unique product in the Kosovo market that is designed to support B2B commercial cooperation. Its core function is to improve financial liquidity of business customers by offering complete management of receivables and payables. It is considered the most effective cash-flow management system as it is supported by cutting-edge technology and interfaces to facilitate complete automatic invoice payment processing.

DDS has a dedicated credit line granted by TEB Sh.A. This facilitates payments to suppliers and guarantees that invoice payment terms are always fully respected. In 2011, the number of contracts with supplier companies increased to 33 while 4,500 buyers now have the possibility to manage their purchases through DDS. Receivable collection with DDS increased by 397% in terms of volume, and by 147% in terms of invoice numbers. Customers using DDS as their commercial payment method to suppliers increased by 142% in 2011.

In 2012, TEB Sh.A will concentrate on further upgrading alternative delivery channels, reducing cash usage among customers and introducing a higher level of automation in payments. There will be even greater focus on brand-new, tailor-made solutions in the cash management.

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CARD BUSINESS AND CALL CENTER

Changing spending habits by combining a variety of promotional strategies with strong, customer focused service By transferring to Kosovo the deep knowledge and long experience of BNP Paribas and TEB A.S in their respective markets, TEB Sh.A has been very successful in smoothly establishing our payment network. By combining this knowhow with our customer-centric approach, we have made available payment system products to all customer groups in Kosovo. TEB A.Ş. has been very active in supporting the establishment of our network and infrastructure. And we have managed to change payment habits and make life easier for our customers. At the end of 2011, we had built a portfolio of 93,000 debit cards, 79,000 credit cards, 43 ATMs nationwide in Kosovo and more than 2,400 POSs. This makes banking convenient, flexible and offers more opportunities for our customers.

Currently, TEB Sh.A has an issuing and acquiring license from one of the most reputable brands in the Card business – VISA. Due to changing habits and advancing technology, debit cards are slowly starting to gain comparable importance to cash. TEB Sh.A Visa-licensed debit cards enable clients to make withdrawals or use them for payments through internet and POSs all around the world. This is just one of the full range of services we offer to both individual and business customers as we pursue our goal of being the best bank in Kosovo.

Starcard is the product that has truly revolutionized consumer spending in Kosovo. This credit card also offers customers a variety of financing options for their purchases. It has been crucial in our development and rapid growth in the Kosovo market. Through Starcard, we have been able to build a solid customer base and push market penetration. Our customer base also represents a strong foundation for cross-selling. Starcard was introduced in the market by carefully analyzing customer needs for a revolving credit card. The Starcard platform presents a win – win situation for all involved. Starcard is the first installment-based credit card in Kosovo that also gives its holder a bonus on each transaction done within the TEB merchant network in Kosovo. The accumulated bonus can be used for purchases from TEB’s merchant network. In addition, it is very advantageous for online shopping as no fee is charged on purchases. All

37 / Annual Report 2011

of the features of this card were highly appreciated in the market as our (potential) customers quickly grasped the day-to-day advantages. Regular and frequent campaigns, such as deferred payments of statements, additional installments on purchases and additional bonuses during holidays, served as tools to further promote the card. The different promotional strategies in combination with our customer-focused service approach enabled us to grow in this segment. Three years after Starcard’s launch, with more than 79,000 cards in the market, we have become market leader in the credit-card segment.

We are continually increasing the quality of our service and service network. At the end of 2011, TEB Sh.A had 43 ATMs installed all over Kosovo. Of these, 24 are offsite ATMs (away from bank premises). The offsite ATMs were installed at convenient and strategic locations after careful analysis of where customers would best benefit from cover. In line with our strategy of offering secure products, TEB Sh.A was the first bank to implement antiskimming devices at ATMs, equipment that protects customer cards from data theft.

In pursuing full service cover and market presence, we have further expanded the merchant member network so that our customers have ever-greater choice. TEB Sh.A POS has become a key contributor to merchant revenues and it has changed the competitive dynamic in the market.

Furthermore, by pioneering GPRS POS in the market, we have set new benchmarks and improved the performance of better and faster service to card-holders and merchant members. The number of TEB POS terminals installed at the end of 2011 reached 2,417, the numbers of merchant members enrolled in the system reached 1,549 while turnover through POS increased 111% compared to 2010.

We aim to continually enhance customer satisfaction and product utilization. This is why we have established and developed a call center for our customers that offers 24/7 services provided by trained professional staff. In line with the expansion of the Bank and our product portfolio, call-center services have expanded as well. Clients can obtain debit and credit card information, POS support,

exchange-rate information and SMS banking information simply by dialing in to the call center. However, there is more.

They can also check the status of their application for a credit card and, most recently, customers can make payments on their credit-card balance through the call center. By maximizing the customer’s advantage and striving to stimulate further sales activities, our call-center staff is focused specifically on the quality of service. We monitor customer calls for training and quality-control purposes. As our customer base grows, during 2011 the number of calls we answered also increased.

The positive momentum achieved in 2011 will certainly continue during 2012 as we are continually working on new products and services to make the Bank even more competitive. TEB Sh.A will be the first bank in Kosovo to introduce installment-based credit card with bonus features for businesses. The aim is for our corporate and commercial customers to integrate the Starcard Business into their daily purchasing processes. Furthermore, customer loyalty benefits will be reinforced as projects on the launch of new credit cards that will reward the most frequent users are in the final phase of development. We will also conduct more frequent campaigns and will provide more opportunities to collect bonuses as we integrate even more state-of-theart technology into customer relationship management.

Campaign management will be coordinated internally as we strive for greater efficiency. In offering secure products, debitcard security will be upgraded as the magnetic-strip cards will be replaced with the latest ‘EMV Chip – DDA (Dynamic Data Authentication)’ features.

We are convinced that we can sustain our dynamic growth through the quality of our services and achieve our goal of becoming the first bank of choice for an ever greater number of card customers.

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TRADE FINANCE 39 / Annual Report 2011

In 2012, focusing on the effective and productive structuring of foreign trade transactions, TEB Sh.A anticipates that the role of documentary business will increase as market conditions will demand added security in different business deals.

Professionalism and expertise will be our guidance as we consider them to be the difference in a moving world.

In Trade Finance, we provide financial solutions tailored to customer demand and market developments. TEB Sh.A brings the long tradition and extensive expertise of parents BNP Paribas and TEB A.Ş. to our customers, enabling them to conduct business using best international practices. We offer a wide range of Trade Finance products for documentary operations, including import and export letters of credit, national and international guarantees, stand-by letters of credit and collections.

Moreover, our broad expertise means we can tailor specific products to market needs.

broadening our geographic cover and product range. In 2011, we further expanded our correspondent banking network to 130 around the world. Moreover, in order to meet import and export financing needs, in 2011 we joined the World Bank International Finance Corporation’s (IFC) trade facilitation program.

By signing the agreement with the IFC, we have become even more flexible in responding to demand related to confirmed Letters of Credit and Counter Guarantees and have further expanded our relationships with new foreign banks.

We are operating in a competitive market. Our strategy is to offer our customers real expertise and know-how. Expert and highly trained Portfolio Managers provide our customers with innovative, flexible products and services that minimize both risk and costs. Through this approach, we have already grown a strong reputation for reliability and as a credible partner for our clients. This is clear from the steady growth of our customer base.

In 2011, trade finance transactions increased by 57% compared to 2010. There was an increase of 31% in international letters of guarantees.

TEB Sh.A understands that international business in a globalized world is a challenge; success requires extensive professional knowledge and an effective network.

By constantly expanding our networks, strengthening relationships with other banks, and growing our already high standards of professionalism and competence, we aim to support our customers by adapting finance and banking solutions to their specific needs.

In 2012, we will be focusing on the effective and productive structuring of foreign trade transactions. We anticipate that the role of documentary business will increase as market conditions will demand added security on business deals. TEB Sh.A aims to increase the number of correspondent banks in our network.

We will continue to support our clients by providing a safe bridge to new opportunities.

Professionalism and expertise will be our guideline as we consider these as differentiators in a fast-moving world.

Using BNP Paribas and TEB A.Ş.’s expertise in international trade, we are continually

Annual Report 2011 / 40

TREASURY 41 / Annual Report 2011

Our primary goal in treasury is to maximize risk-adjusted returns over the longer term. Within treasury, we create investment and funding strategies based on prevailing market conditions, interest rates and volume trends of the balance sheet items and risk parameters.

Strong and comprehensive treasury and asset and liability management is key for all banks. It is essential for sustainable and secure financial services to customers. Our primary goal in treasury is to maximize risk-adjusted returns over the longer term.

Within treasury, we create investment and funding strategies based on prevailing market conditions, interest rates and volume trends of the balance sheet items and risk parameters. Treasury is also responsible for managing the Bank’s liquidity and its benchmark price in the markets, operational and structural foreign-exchange risk and interest-rate risks in the balance sheet.

We manage assets and liabilities by continually analyzing potential risks and market opportunities within the framework of rules established by the Board of Directors and Assets and Liability Committee (ALCO). For the day-to-day management of liquidity and risk related to our asset-liability structure, the Board has delegated responsibility to ALCO members. ALCO meets every two weeks to discuss recent market developments and take decisions in accordance with set principles of risk reduction and mitigation. It monitors and guides all our treasury activities and operations on an ongoing basis working within established standards and policies.

We constantly monitor and manage liquidity, foreign currency and interest-rate risks that could arise from our routine operations. TEB Sh.A works closely with TEB A.Ĺž., benefiting from accurate market projections, especially in interest-rate and liquidity-gap management.

Stringent internal control is key to all our treasury activities. We have developed and put in place prudent practices that reduce and mitigate risk in our asset management activities.

Asset management activities are conducted in accordance with the Bank’s strategy and general business with the primary purpose of maximizing the risk-adjusted return-on-capital of TEB Sh.A. Some of our corporate customers also come to us directly for pricing of treasury products; others are served through our branch network. This means our clients can also benefit from the comprehensive international experience the Bank brings to its own treasury operations.

Annual Report 2011 / 42

We are well aware that customer satisfaction is strongly related to employee satisfaction.

That is why dedicated and loyal employees are viewed as our most important assets.

HUMAN RESOURCES

In today’s highly competitive service environment, where customer expectations are increasing and technology is evolving at a rapid pace, having highly qualified and motivated human resources is essential in implementing corporate strategies and goals. In recognition of this competitive environment and in line with TEB Sh.A’s vision and strategy, we aim to attract highly-qualified and high-potential individuals to serve our customers.

We offer our professionals essential support and training so that they can help us set service standards in the sector. We work hard on retention.

TEB Sh.A offers career opportunities, performancebased appraisal and an environment that is flexible and encourages our people to fully develop special skill sets and achieve their potential.

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Henry Ford

If everyone is moving forward together, then success takes care of itself.

The integration of Human Resources policies in corporate culture and strategies enables us to create a competitive advantage in the financial sector. By recruiting and relying on employees who are well-educated, open to innovation and change, possess potential for self-development, are team players and who can adopt corporate values and commit to them, we have managed to strengthen our market position and enhance our profitable growth path by providing qualitative and innovative products to the market.

Our Human Resources team dedicates significant effort and time to the creation of a rewarding corporate culture that encourages superior performance among employees and gives them a sense of personal achievement in their work. By effectively disseminating employee results and achievements, we ensure that employee initiative and contribution is valued by other management.

In recognition of this competitive environment and in line with TEB Sh.A’s vision and strategy, we aim to attract highly-qualified and high-potential individuals to serve our customers.

By circulating achievements and contributing to a collaborative corporate culture, we encourage employees to be proactive and fulfill their potential.

We are well aware that customer satisfaction is strongly related to employee satisfaction. That is why dedicated and loyal employees are viewed as our most important assets. All strategies and goals are devised with them as centerpiece. In enhancing and rewarding loyalty among employees, we have embedded a reward structure that is based on fair performance management. It is a system that ensures further professional education through a variety of training and prioritizes internal promotion through career advancement opportunities. In creating a strong bond and contributing to both their personal and professional satisfaction, we continuously organize social events and activities, such as parties, appreciation dinners and lunches, football and basketball tournaments, bowling, paintball, trips and picnics.

Employee training and appropriate investments in our people are closely aligned with corporate objectives and are complementary to other Human Resources practices. Training programs are designed to prepare personnel for their assigned duties and tasks, and to provide them with the necessary knowledge and competences. We contribute to enhancing employee skills so that they are continuously updated on internal changes, new products and services, and changes in the market and legislation and regulation.

Human Resources works closely and continuously with the heads of other departments to develop, plan and organize necessary training programs, both internally and externally. We utilize internal staff as ‘Voluntary Trainers’ so that their experience and range of expertise is retained for the Bank and shared with co-workers.

Using their efforts, knowledge, skills and energy, our people have been instrumental in expanding the Bank’s corporate reputation and market share. In the first four years of operations, TEB Sh.A has achieved a sound growth pattern in market share. We believe this is due to our 379 (2010: 342) dedicated and highly-qualified employees. By presenting themselves to the market as reliable and resourceful professionals who possess communication skills that adapt to various customer groups and segments, our employees added value to the corporate brand and further enhanced banking as a reputable profession. Through our people’s own strong reputation, the Bank has been able to establish very healthy and productive relations with customers and the market as we translate our strategy into action in Kosovo.

In 2012, TEB Sh.A Human Resources will continue to work in compliance with labor laws and make efficient and appropriate investments in improving the reward structure.

NUMBER OF EMPLOYEES

2010 2011

342 379 Annual Report 2011 / 44

INFORMATION TECHNOLOGY 45 / Annual Report 2011

TEB Sh.A strives to be a leader in introducing secure automatized services that will increase our market presence by employing current and updated technology.

Information technology (IT) is one of the most crucial tools in the banking sector, not only for developing new services and products for customers, but also for keeping customer data confidential in a secure environment. We work in accordance with ITIL processes and COBIT and CMMI standards.

Our IT professionals understand fully just how important these tools are, especially for our competitive position. That is why the IT department’s activities are geared to the Bank’s vision and strategy, ensuring that we have secure and reliable information systems.

TEB Sh.A strives to be a leader in introducing secure automatized services that will increase our market presence by employing current and updated technology. We recognize that technology is becoming highly influential in the provision of banking services and as that influence grows, there is a strong correlation with customer satisfaction. In recent years, customers’ banking behaviors have changed as more services are moving from the traditional delivery point – the branches - to alternative channels such as e-banking, SMS banking and ATMs. By ensuring leadership in introducing these new channels, providing safe and secure systems and making available uninterrupted services 24/7, we aim to enrich our clients’ banking experience.

In dealing with changes in technology, our IT team is continually engaged in providing ongoing support in securing the effectiveness of our day-to-day services. In addition, by aligning activities with the Bank’s strategic position, our IT organizational structure is designed to anticipate and adapt easily to changes and secure a rapid response to future changes.

In terms of IT, TEB Sh.A is focused on: • Investing in our IT employees; • Ensuring the financial investments in IT improve the effectiveness and efficiencies of programs used in the Bank; • Ensuring that information is secure and protected; • Identifying the areas where optimized solutions can be realized at the Bank; • Ensuring that IT projects are performed on time within planned budget and produce the expected outcome and results.

In line with our customer-centric approach in developing solutions according to customer needs and the demands of our business, TEB Sh.A has achieved a number of very important milestones in terms of innovation and contribution to the banking sector in Kosovo. Our IT is highly focused on development of new products and services that will enable us to remain close to our customers.

The Starcard-system and SMS-banking system products were some of the main innovations that we have launched in Kosovo.

In line with our business goals, we were the first to offer the Starcard, a credit card with installment capability and the possibility of earning star points on sales transactions.

In adapting to the needs of customers who want banking services everywhere and at all times, we have invested in and upgraded our e-banking and SMS-banking infrastructure as we set new standards of service. We were the first bank in Kosovo to offer SMS banking. Our SMS Top-up (Mobile) was developed and launched in 2010. In the meantime, this service has been expanded and now allows customers access to pay-TV and internet services. In terms of e-banking, One-time PIN (OTP) was also pioneered in the Kosovo market with additional security features introduced for commercial customers. To meet customer needs for ease and efficiency in paying their taxes, we also introduced Online Tax Payments. Moreover, our Direct Debit System (DDS) has been integrated and implemented through e-banking.

During 2011, 59 projects that increase the effectiveness of the management information system and risk management infrastructure were implemented while system security was enhanced and is fully compliant with legal regulations.

We are aware that information technologies represent the essence of innovation and differentiation. That is why TEB Sh.A will continue to invest in IT capabilities. As services become more automated, we will seek to employ them to better understand and serve customer needs. We will be further able to offer more alternative banking channels, maintain the quality and security levels of our services and optimize management decision-making.

During 2012, we intend to drive changes in the market and make banking an easy, convenient and pleasurable experience.

Annual Report 2011 / 46

THE BANK FOR A CHANGING WORLD

47 / Annual Report 2011

Annual Report 2011 / 48

“The greatest thing in this world is not so much where we are, but in what direction we are moving”.

MANAGEMENT

Oliver Wendell Holmes, Jr.

49 / Annual Report 2011

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BOARD OF DIRECTORS 51 / Annual Report 2011

Annual Report 2011 / 52

BOARD OF DIRECTORS 53 / Annual Report 2011

Audit Committee Member of TEB NV. From 2007, Dr.Yanık is a parttime lecturer at the Economics Department of the Social Sciences Faculty at Istanbul University.

He is currently Board Advisor of TEB A.Ş., Board Member of TEB CELETEM and Vice-Chairman of BANTAS. From December 2007, Dr. Yanik is a Board Member (ViceChairman) and Chairman of the ALM Committee of TEB Sh.A.

MUSA ERDEN Chairman Born in Hatay, Turkey in 1950, Musa Erden graduated from the Ankara Academy of Economic and Commercial Sciences, Banking Department. He started his career at Yapi Kredi Bank in 1972. He joined Osmanli Bank in 1973 where he held various posts until 2001, including Assistant General Manager, Deputy General Manager (BD/CM), and Coordinator. He served as Arbitration Committee Member of the Turkish Banking Association from 2002 to 2003; as Director of MNG Bank in 2003; as Chairman of all four Ottoman Structure Construction Tourism’s companies; and as Director of the Ottoman Fund Ltd between 2006 and 2008.

He joined TEB Group in 2005 as Auditor of TEB A.Ş. and TEB Financial Investments and served as consultant from 2006 until his current appointment as Executive Board Member of TEB A.Ş. in 2008. Mr. Erden was appointed Chairman of the Board of Directors of TEB Sh.A in December 2010.

From March 2011, he is also Acting Chairman of TEB Factoring and, from 2010, a Board Member of BNP Paribas Leasing.

İSMAİL YANIK, PhD Born in Istanbul, Turkey in 1956.

After graduating from the Industrial Engineering Department of the Middle East Technical University (1979), İsmail Yanık received his MSc in Industrial Engineering (1981)from Bogazici University and his PhD in Economics (2007) from Istanbul University. Dr. Yanık is a graduate of the Advanced Management Program at Harvard University(1999). He started his career at Pamukbank in1980.

He joined Citibank NA in 1984 where he held various posts until 1992, including Assistant General Manager, Financial Controller, Manager of Forfeiting & Structured products and Coordinator of Citicorp International Trading Co., London. He joined TEB A.Ş. in 1992 as Assistant General Manager and Treasurer of the Bank. He was assigned as Executive Board Member in 2002 and Audit Committee Member in 2005.

He also served as Board Member of Forex Club Turkey, Risk Managers Association, TEB NV, TEB Investment Securities, as Chairman of TEB Precious Metals, as ViceChairman of the Istanbul Gold Exchange, and as

AYŞE AŞARDAĞ Board Member Born in Ankara, Turkey in 1964, Ayşe Aşardağ graduated from the Business Administration Department of Bogazici University in 1987. She is a certified chartered accountant from the Institute of Chartered Accountants of England and Wales, ACA, 1992. She started her professional career at Price Waterhouse and worked at the Audit Unit of both the Istanbul and London offices between 19871994. Ms. Aşardağ was a Lecturer in Accounting at the University of Glamorgan from 1994 to 1995. In 1995, she joined the TEB Budget and Financial Control Unit until 2001.

Since then, she has been the TEB Group Chief Financial Officer at TEB Holding. Ms. Aşardağ currently also serves as Board member of TEB A.Ş., Board member and Audit Committee member of TEB NV, Board Member of TEB Factoring and Board Member of TEB Asset Management. She was appointed as Vice-Chairman of TEB Sh.A in 2007. From December 2007, Ms. Aşardağ is a Board Member and Chairman of the Audit Committee of TEB Sh.A.

Credit Derivatives, Chief Credit Risk Officer (Fortis Asia) and Chief Risk Officer (Fortis A.Ş.

Turkey). He joined TEB A.Ş. as Chief Risk Officer in 2011.

As of April 2011, Mr. Van Hecke is a Board member and Vice-Chairman of the Audit Committee at TEB Sh.A.

He joined Türk Ekonomi Bankası as Chief Advisor to the CEO in 2008 and, from 2011, is the Assistant General Manager of Fixed Income Turkey. He is also the Chairman of the TEB Asset Management Board and the Deputy-Chairman of the TEB Investment Board. From November 2009, Mr. Özçay has been a Member of the Board and from March 2010, a member of the Audit Committee at TEB Sh.A.

ALP YILMAZ Board Member Chief Executive Officer

AKIL ÖZÇAY Board Member DIDIER A.N. VAN HECKE Board Member Born in Brussels, Belgium in 1970, Didier Van Hecke graduated in Business Engineering at the Catholic University of Leuven. He started his professional career as Management Trainee at Generale Bank in 1992. He served as Credit Analyst (Corporate Credits) from 1993 to 1996, as Head of Credit Analysis (Corporate Credits) from 1996 to 1999 at Generale Bank. After the merger into Fortis Bank, he held various posts until 2011, including Assistant Head of Credit Analysis - Central Credit Department, Trader Credit Derivatives, Head of Trading

Born in Afyon, Turkey, in 1959, Akil Özçay has a BA in Business Administration from Ankara University and an MA in Economics from Rutgers, the State University of New Jersey.

He started his professional career as Assistant Inspector at the Ministry of Industry and Commerce in 1981. He held various posts at the Central Bank of the Republic of Turkey (CBRT) for 24 years, including Banking Supervision Manager, Foreign Exchange Transactions Manager and Open Markets Operations Manager. From 2001 to 2004, he was the General Director of CBRT Markets Department and from 2004 to 2007, CBRT’s Chief Representative at the New York Representative Office.

AYŞE KORKMAZ Born in Aydin, Turkey in 1973, Ayşe Korkmaz graduated from the Faculty of Political Sciences, Department of Business Administration, of Ankara University. She started her professional career at the Under Secretariat of the Treasury as certified bank auditor. She served as certified bank auditor at the Banking Regulation and Supervision Agency from 2000 to 2003. She joined TEB Financial Investments A.Ş. as Audit Coordinator in 2003. She was assigned as Chairman of Group Compliance, Internal Control and Operation Risk in 2006. From April 2011, Ms. Korkmaz is a Board Member of TEB Sh.A.

Born in Istanbul, Turkey in 1965, Alp Yılmaz graduated from the Business Administration Faculty of Dokuz Eylul University, and received his MA from the Faculty of Administrative Science (Business Administration) at Istanbul University. He started his professional career at the Turkish Industrial Development Bank as Financial Analyst in 1991. He served as Auditor in Kocbank A.Ş. from 1992 to 1995.

He joined TEB A.Ş. in 1997 and worked at various departments, including Sales & Marketing, Budget and Financial Control and Cash Management.

In 2007, Mr. Yılmaz was appointed as a Board Member and Chief Executive Officer of TEB Sh.A. Currently, he is also Deputy-Chairman of the Kosovo & Turkish Chamber of Commerce, Board Member of the Kosovo and French Chamber of Commerce and Board Member of the Kosovo Bankers` Association.

Annual Report 2011 / 54

COMMITTEES

Board of Directors

Credit Risk Management Committee

The Board of Directors’ duties and responsibilities are set out in both the TEB Sh.A Charter and the Board of Directors By-laws. These are fully in accordance with applicable laws of Kosovo and banking regulations.

The Board of Directors of TEB Sh.A (the Bank) has clearly formulated the vision and mission and the short and long-term strategic goals of the Bank. The Board of Directors determines the business policy of the Bank, establishes banking structure and exposure levels, reviews and approves necessary adjustments and measures. The Board of Directors meets once every three months. The Audit Committee, Credit Risk Management Committee and the Asset and Liability Management (ALM) Committee report to the Board of Directors.

The Credit Risk Management Committee is responsible for:

Chairman Vice-Chairman Member Member Member Member Member

: Musa Erden : İsmail Yanık, PhD : Ayşe Aşardağ : Akil Özçay : Ayşe Korkmaz : Didier A.N Van Hecke : Alp Yılmaz

Audit Committee The Audit Committee is responsible for: • Establishing appropriate accounting procedures and accounting controls for the Bank; • Supervising compliance with such procedures, and as deemed appropriate; • Commissioning audits at the expense of the Bank of some or all of the Bank records; • Monitoring compliance with regulations of the Banking and Payments Authority in Kosovo and with legislation and regulations applicable to the Bank and reporting to the Board of Directors thereon; • Delivering opinions on any matters submitted to it by the Board of Directors or on matters it wishes to address.

The Audit Committee meets at least once a quarter or more frequently if deemed necessary or appropriate by the Board of Directors or by any member of the Audit Committee. Decisions shall be taken by a majority of those eligible to vote.

Chairman : Ayşe Aşardağ Vice-Chairman : Didier A.N Van Hecke Member : Akil Özçay

55 / Annual Report 2011

• Establishing and monitoring the implementation of policies and procedures for credit appraisal, loan administration and loan collection; • Delegating lending authority up to pre-determined loan amounts to the credit committees at the Bank’s branches and other sub-committees, as deemed necessary; • Taking loan decisions exceeding the branches’ lending authority; • Monitoring compliance with the Regulations of the Central Banking Authority of Kosovo, and with legislation and regulations applicable to the Bank in relation to credit, and reporting to the Board of Directors thereon; • Delivering opinions on any matters submitted to it by the Board of Directors or on matters it wishes to address.

The Credit Risk Management Committee meets weekly or whenever business so requires.

Chairman Vice-Chairman Member Member Member

: Jean-Milan Givadinovitch : Murat Akşam : Alp Yılmaz : Haluk Kırcalı : Ali İhsan Arıdaşır

ALM – Asset and Liability Committee The Asset and Liability Committee is responsible for establishing and monitoring the implementation of policies and procedures for projecting funding needs and for appropriately matching the maturities and interest rates of assets and liabilities.

Chairman Vice-Chairman Member Member Member

: İsmail Yanık, PhD : Tolga Gürdem : Alp Yılmaz : Dukagjin Shylemaja : Arianit Dehiri

Annual Report 2011 / 56

INTERNAL AUDIT, INTERNAL CONTROL, RISK MANAGEMENT

The organizational structure of Internal Control, Internal Audit and Risk Management at TEB Sh.A was implemented in accordance with Banking Rule Number 30 and BNP Paribas Group policies. This structure is appropriate in view of the scope and nature of TEB Sh.A activities and can effectively respond to changing conditions.

TEB Sh.A has a comprehensive and prudent approach to risk, its identification and management. The Board and Audit Committee play a significant role in the risk management process.

INTERNAL AUDIT TEB Sh.A has outsourced its internal audit function to Türk Ekonomi Bankası A.Ş. based on the ‘Service Level Agreement’ signed in 2008. The scope of internal auditing work, as stated in TEB Sh.A’s ‘SLA’, encompasses a systematic, disciplined approach to evaluating and improving the adequacy and effectiveness of risk management, control and governance processes and the quality of performance in carrying out assigned responsibilities. Internal Audit carries out full audits covering all measurable areas of operations with a view to ensuring the proper implementation of internal policies and procedures of TEB Sh.A or separate audits limited to one or more departments, branches, functions or business procedures.

Annual planning for Internal Audit is prepared by TEB A.Ş.’s General Inspection Group in line with requests from the Audit Committee. Management and the Audit Committee provide general and/or specific direction as to the scope of work and the activities to be audited based on annual risk evaluations. The Head of Internal Audit at TEB A.Ş. prepares and submits the annual Audit Plan to the Audit Committee for approval.

The Audit plan establishes the priorities of internal audit

57 / Annual Report 2011

activity, consistent with TEB Sh.A’s goals and objectives.

The Internal Audit Plan is approved by the Audit Committee.

The internal audit function currently uses the risk-based approach to decide which audit activities are to be selected for inclusion in the annual Audit Plan. In the same manner, the responsible internal auditor develops and records a riskfocused plan for each audit task, which analyzes the inherent risk items and includes the objectives, scope, timing and resource allocation. The internal audit function conducts its activities in compliance with the International Standards for the Professional Practice of Internal Auditing developed

by The Institute of Internal Auditors, which is the governing body for the internal audit profession worldwide, and TEB Group audit practices.

In line with the Internal Audit Plan for 2011, Compliance Audit, Operations Audit (Card Systems, Credit Operations and Support Services) and Treasury & ALM Audit were conducted. These departments were audited with respect to whether operations were performed in line with banking law and other laws and regulations as well as the Bank’s internal strategies, policies, principles and targets.

INTERNAL CONTROL Internal Control is exercised through procedures, principles and methods embedded in the internal control system. The goal of the internal control system is to promote efficiency and effectiveness of activities and measures that protect the Bank from financial and operational losses. It also aims to create conditions for better decision-making by ensuring the completeness and timeliness of financial and management information.

The system’s structure is designed to maintain control of all kind of risks related to the Bank’s activities. Within the Internal Control System, policies and procedures are continuously revised and renewed so as to reflect current operational banking regulations. Within this scope, the mission of Internal Control is to provide an independent appraisal function on the adequacy and effectiveness of the Bank’s internal control system against the risk to which we may be exposed in performing banking activities.

Internal Control activities are organized as an inseparable part of daily activities and cover all areas of basic control.

Within the scope of internal control, daily, weekly, monthly and quarterly controls of critical activities at branches and head-office departments are carried out. The Internal Control Department provides information, analyses and recommendations concerning the activities reviewed.

In view of the Bank’s priorities, internal controllers with the necessary skill and qualifications carry out these activities.

Internal Control conducts risk-focused analysis at the Bank’s head-office units and branches, monitoring banking activities in order to ensure the sound functioning of the internal system and in line with legislation. The Audit Committee can assign internal Control following decisions by the Board of Directors or it may also undertake assignments at the request of the Chief Executive Officer. The results of Internal Control activities are periodically reviewed and assessed by the Bank’s Audit Committee and by the Board of Directors.

RISK MANAGEMENT TEB Sh.A has a comprehensive and prudent approach to risk, its identification and management. TEB Sh.A measures and monitors market, credit and operational risks using methods that are in line with International standards. The risk management process is organized within the framework of TEB and BNPParibas risk-management methodologies and favors a common risk management culture. The process is composed of risk definition and measurement, establishing risk policies and procedures, risk analysis and monitoring, reporting, and auditing phases, all in accordance with the principles of risk management. Interest-rate risk is monitored closely through Gap and Duration analyses.

GRM reports to the Board of Directors and the Audit Committee on a regular basis presenting risk concentrations, a breakdown of the Bank’s loan portfolio by ratings, specific segments of the loan portfolio, large exposures, large nonperforming accounts and impairment allowances.

Interest-Rate Risk Interest-rate risk arises from the possibility that changes in interest rates will affect future profitability or the value of financial instruments. At TEB, the Assets and Liabilities Committee manages interest-rate risk. Protection against fluctuations in interest rates is a top priority for TEB. Interestrate risk is determined by measuring the rate of sensitivity of assets, liabilities and off-balance sheet items.

Simulations on interest income are performed in connection with the forecasted economic indicators used in the Bank’s budget. In addition, stress testing by applying interestrate shocks to the balance sheet is also used to assess and understand this risk. Possible negative effects of interestrate fluctuations on financial position and cash flow are minimized by means of prompt decisions.

When determining short, medium and long-term pricing strategies, TEB’s Assets and Liabilities Committee manages maturity incongruity and adopts the principle of working with positive balance-sheet margins as its pricing policy.

Group Risk Management (GRM) supervises the overall risk management process within the TEB Group. The function of GRM is to work in cooperation with executive management in order to ensure that the risks assumed by TEB Sh.A are in accordance with the GRM’s policies and are compatible with its profitability and credit-rating objectives.

Annual Report 2011 / 58

INTERNAL AUDIT, INTERNAL CONTROL, RISK MANAGEMENT

Market Risk Market risk involves possible losses a bank may incur as a result of the exposure of its balance sheet and off-balance sheet accounts to interest-rate risk, equity-position risk or exchange-rate risk resulting from fluctuations in the financial markets. The objective of the TEB Group’s marketrisk management is to manage and control market-risk exposures in order to optimize returns while maintaining the TEB Group’s conservative risk profile.

Liquidity Risk Liquidity risk occurs when there is insufficient cash or cash inflows to meet net funding requirements when due.

Liquidity risk may also occur when open positions cannot be closed quickly at suitable prices. The Bank’s policy is to establish an asset structure that is sufficiently liquid to meet all kinds of liabilities as they fall due.

The Board of Directors regularly monitors and determines liquidity ratios and the relevant standards for maintaining high liquidity at all times. TEB Sh.A has in place an effective management reporting system for the timely reporting of the liquidity position to the Board of Directors, senior management and all related units.

Credit Risk Credit risk is the loss that may be incurred if the other party of the loan relationship fails, partially or entirely, to fulfill its obligations on time.

The TEB Group is exposed to credit risk through its lending, trade finance, treasury and leasing activities but credit risk may arise in other circumstances.

The Board of Directors has the final authority in the allocation of loan facilities. This power is delegated to the Credit Committee and the Chief Executive Officer on certain conditions. The exercise of these delegated powers is regularly monitored and reported by internal audit and risk management.

TEB Sh.A’s primary exposure to credit risk arises through

59 / Annual Report 2011

its loans and advances to customers. The amount of credit exposure in this regard is a function of carrying assets on the consolidated balance sheet. Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographical region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.

Branch officers visit loan applicants and obtain financial statements and information related to the potential customer’s activities and plans. A loan proposal is prepared containing a commentary on the company’s financial position, an industry analysis, information about the partners and managers, as well as references from other banks and companies with which the applicant is doing business. This information is then submitted to the Credit Allocation Division that assesses the applicant’s creditworthiness and sends its report to the Credit Committee for approval.

In accordance with the Bank’s lending policy, overall credit risk is assessed.

TEB Sh.A executes bank level and business-unit level internal risk assessments at least twice a year. These risk assessments assist the portfolio officers in periodically analyzing their business processes and associated fundamental risks. The bank-level analysis has to be revised whenever there is a significant change in the operating environment that can affect TEB Sh.A. Developments in the marketplace are closely monitored to minimize credit risk. As a result of the prudent policy the Bank adopts, the maximum loan that can be granted to a customer is kept below legal limits, thus minimizing the risk of loan concentration. Limits set by the Board of Directors are regularly monitored and reported.

The Credit Allocation and Monitoring Division makes assessments of the loan portfolio for the Credit & Risk Management Committee and reports high-risk cases and non-performing loans. After a loan facility is offered, the Credit Monitoring Department monitors the customer’s repayment capability and the sufficiency and adequacy of

the collateral. In this way, any problematic loan is identified at an early stage. Should the credit rating and/or the quality of the collateral raise any doubts, the customer will then be closely reviewed.

Operational Risk Operational risk is defined as the risk of loss that may result from inappropriate or malfunctioning practices, or from human and system errors or external reasons. Operational risk can occur along the entire spectrum of banking activities as a result of human and system errors or inappropriate practices. Compliance with legal requirements, adherence to the ethical values of the banking profession, information security, prevention of internal and external fraud, contingency and business continuity plans and ‘know-your-customer’ policies are all fundamental controls in the reduction of operational risk. TEB’s main objectives in operational risk management is identifying the risk profile of the potential and existing customers and subsequently developing strategiesto minimize the risk, integrating them in banking processes, and timely reporting so that action plans can to be done on time. All strategies and their results are regularly reported to related departments and senior management while all actions taken are monitored.

Exchange-Rate Risk Exchange-rate risk is defined as a possible loss that a bank may incur with all of its currency assets and liabilities in the event of changes in exchange rates.

Position limits determined by the Board of Directors are monitored on a daily basis and possible changes in the Bank’s monetary positions that may come about as a result of routine foreign currency transactions are also examined.

Annual Report 2011 / 60

COMPLIANCE POLICY

COMPLIANCE Banking should be built on trust, credibility and stability. We strive at all times to protect the Bank’s reputation, to implement the Bank’s rules of conduct, to fight against money laundering, terrorist financing and corruption, and we fight for the primacy of customer’s interest. In pursuing these objectives, TEB Sh.A adheres to laws, regulations, professional and ethical standards and the instructions of the Board of Directors.

Compliance control reports to the Audit Committee and Board of Directors. Its purpose is to manage and control compliance risk in an appropriate manner and to ensure the Bank’s activities are continuously in compliance with relevant laws, regulations and standards.

In order to protect the Bank from risks and possible prejudice to its credibility, the compliance department works to implement and monitor several customer-related banking principles. The procedures used ensure that the Bank does not become involved in or is used for money laundering and terrorist financing activities. Controls are applied in the customer-acquisition phase by adhering to the Know your Customer (KYC) principle.

TEB Sh.A has a code of conduct that includes principles and regulatory requirements to which staff members must adhere. In providing adequate financial services to its customers, TEB Sh.A employees adhere to the professional confidentiality principle.In enhancing the employee’s ethical awareness and behavior, the compliance department provides continuous training on topics such as Conflict of Interest, Code of Conduct, procedures on gifts and Whistle Blowing.

The compliance department constantly takes advantage of new technological developments and integrates these in its activities. For example, in order to prevent money laundering and terrorism financing, it monitors and sets limits on banking services or transactions with customers not known to the Bank.

61 / Annual Report 2011

Annual Report 2011 / 62

INDEPENDENT AUDITORS’S STATEMENT

TEB Sh.A Independent Auditor’s Report and financial statements Prepared in accordance with International Financial Reporting Standards For the year ended December 31, 2011

63 / Annual Report 2011

CONTENTS

PAGE

STATEMENT OF FINANCIAL POSITION STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY STATEMENT OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS

3 4 5 6 7 - 38

Annual Report 2011 / 1

INDEPENDENT AUDITORS’S STATEMENT

Deloitte Kosova sh.p.k.

St. Bedri Pejani, no.3 10030 Prishtinë 3 Kosova Tel: +381 38 245 582/3 Fax: +381 38 245 584 www.deloitte.com

INDEPENDENT AUDITOR’S REPORT To the shareholder of TEB Sh.a.

We have audited the accompanying financial statements of TEB sh.a. (the “Bank”), which comprise the statement of financial position as at December 31, 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2011, and of its financial performance and its cash flows for the year then ended in accordance with the International Financial Reporting Standards.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.

Please see deloitte.com\about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

2 / Annual Report 2011

TEB Sh.A Statement of Financial Position • As at December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

As at December 31, 2011 Note

As at December 31, 2011

As at December 31, 2010

ASSETS Cash on hand and at banks

4

15,872

27,672

Balances with the CBK

4

17,550

21,104

Loans to customers

5

174,357

116,155

Tangible and intangible assets

6

3,606

4,315

Deferred tax asset

13

294

-

Other assets

874

488

Total assets

212,553

169,734

LIABILITIES Due to customers

7

184,036

148,914

Borrowings

10

11,019

6,421

Other Liabilities Total liabilities

8

1,681

945

196,736

156,280

21,500 (5,683)

21,500 (8,046)

15,817

13,454

212,553

169,734

SHAREHOLDERS’ EQUITY Share capital Accumulated loss

9

Total shareholders’ equity

Total liabilities and shareholders’ equity

Authorised for issue by management on March 19, 2012.

Mr. Alp Yilmaz General Manager

Mr. Nagip Krasniqi Head of Finance

The notes set out on pages 7 to 38 form an integral part of these financial statements.

Annual Report 2011 / 3

TEB Sh.A Statement of Comprehensive Income • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

Year ended December 31, 2011

Year ended December 31, 2010

Interest income: From loans to customers From deposits and balances with banks Total interest income

17,518 199 17,717

12,060 41 12,101

Interest expenses Net interest income

(5,288) 12,429

(4,130) 7,971

4,784 (878) 3,906

3,279 (738) 2,541

258 (29) 229

250 8 258

16,564

10,770

(11,190) (3,305) (14,495)

(9,256) (1,250) (10,506)

2,069 294 2,363

264 264

-

-

2,363

264

Note

Fee and commission income Fee and commission expense Net fee and commission income

11

Other operating income Net foreign exchange gain/(loss) Net income/(expense) from other activities Total other operating income Total income Other operating expenses Impairment losses on loans Total operating expenses Profit/(loss) for the year before taxation Income tax (expense)/ credit Net profit/(loss) for the year Other comprehensive income Total comprehensive income/(loss) for the year

4 / Annual Report 2011

12 5

13

The notes set out on pages 7 to 38 form an integral part of these financial statements.

TEB Sh.A Statement of Changes in Shareholders' Equity • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

Share capital

Accumulated Loss

Total Shareholders’ equity

Balance as at January 1, 2010 Additional capital contribution Loss for the year

17,500 4,000 -

(8,310) 264

9,190 4,000 264

Balance as at December 31, 2010

21,500

(8,046)

13,454

-

2,363

2,363

21,500

(5,683)

15,817

Additional capital contribution Profit for the year Balance as at December 31, 2011

The notes set out on pages 7 to 38 form an integral part of these financial statements.

Annual Report 2011 / 5

TEB Sh.A Statement of Cash Flows • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

Note

Cash flows from operating activities Profit before tax Adjustments for non cash items: Adjustment for property and equipment Depreciation Amortization Net impairment losses on loans Change in restricted balances with the CBK Increase in loans and advances to customers Decrease/(increase) in other assets Increase in due to customers Increase in other liabilities Net cash (used in)/ from operating activities Cash flows from investing activities Purchase of property and equipment Purchase of intangible assets Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of share capital Proceeds from borrowings Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 Cash on hand and at banks (note 4) Unrestricted balance with CBK Cash and cash equivalents at December 31

6 / Annual Report 2011

Year ended December 31, 2011

Year ended December 31, 2010

2,069

264

32 1,562 286 3,305 7,254 (5,462)

57 1,431 310 1,250 3,312 (5,551)

(61,507) (385) 35,122 736 (31,496) (24,242)

(40,783) (83) 42,480 15 (3,922) (610)

(885) (287) (1,172)

(1,713) (457) (2,170)

4,598 4,598

4,000 6,421 10,421

(20,816) 37,132 16,316

7,641 29,491 37,132

15,872

27,672

444

9,460

16,316

37,132

The notes set out on pages 7 to 38 form an integral part of these financial statements.

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

1.

PRINCIPAL ACTIVITIES

In accordance with the Central Bank of Kosovo (“CBK”), regulations, TEB Sh.a. (The “Bank”) obtained a license for banking activities on December 19, 2007 and commenced operations during January 2008. The Bank’s registered head office is located in Prishtina, Kosovo. The Bank operates as a commercial and savings bank to all categories of customers within Kosovo, through its network of 22 (December 31, 2010: 21) branches in Prishtina, Gjakova, Peja, Prizren, Ferizaj, Mitrovica and Gjilan.

2.

ADOPTION OF NEW AND REVISED STANDARDS

2.1

Standards and Interpretations effective in the current period

The following amendments to the existing standards issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period: • Amendments to IFRS 1 “First-time Adoption of IFRS”- Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (effective for annual periods beginning on or after 1 July 2010), • Amendments to IAS 24 “Related Party Disclosures” - Simplifying the disclosure requirements for government-related entities and clarifying the definition of a related party (effective for annual periods beginning on or after 1 January 2011), • Amendments to IAS 32 “Financial Instruments: Presentation” – Accounting for rights issues (effective for annual periods beginning on or after 1 February 2010), • Amendments to various standards and interpretations “Improvements to IFRSs (2010)” resulting from the annual improvement project of IFRS published on 6 May 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily with a view to removing inconsistencies and clarifying wording (amendments are to be applied for annual periods beginning on or after 1 July 2010 or 1 January 2011 depending on standard/interpretation), • Amendments to IFRIC 14 “IAS 19 — The Limit on a defined benefit Asset, Minimum Funding Requirements and their Interaction” - Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011), • IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” (effective for annual periods beginning on or after 1 July 2010).

The adoption of these amendments to the existing standards and interpretations has not led to any significant changes in the Bank’s accounting policies.

Annual Report 2011 / 7

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

2.

ADOPTION OF NEW AND REVISED STANDARDS (CONTINUED)

2.2

Standards and interpretations in issue not yet adopted

At the date of authorisation of these financial statements the following standards, revisions and interpretations were in issue but not yet effective: • IFRS 9 “Financial Instruments” (effective for annual periods beginning on or after 1 January 2013), • IFRS 10 “Consolidated Financial Statements” (effective for annual periods beginning on or after 1 January 2013), • IFRS 11 “Joint Arrangements” (effective for annual periods beginning on or after 1 January 2013), • IFRS 12 “Disclosures of Involvement with Other Entities” (effective for annual periods beginning on or after 1 January 2013), • IFRS 13 “Fair Value Measurement” (effective for annual periods beginning on or after 1 January 2013), • IAS 27 (revised in 2011) “Separate Financial Statements” (effective for annual periods beginning on or after 1 January 2013), IAS 28 (revised in 2011) “Investments in Associates and Joint Ventures” (effective for annual periods beginning on or after 1 January 2013), • Amendments to IFRS 1 “First-time Adoption of IFRS”- Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for annual periods beginning on or after 1 July 2011), • Amendments to IFRS 7 “Financial Instruments: Disclosures”- Transfers of Financial Assets (effective for annual periods beginning on or after 1 July 2011), • Amendments to IAS 1 “Presentation of financial statements” -Presentation of Items of Other Comprehensive Income (effective for annual periods beginning on or after 1 July 2012), • Amendments to IAS 12 “Income Taxes” - Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after 1 January 2012), • Amendments to IAS 19 “Employee Benefits” - Improvements to the Accounting for Post-employment Benefits (effective for annual periods beginning on or after 1 January 2013).

The Bank has elected not to adopt these standards, revisions and interpretations in advance of their effective dates. The Bank anticipates that the adoption of these standards, revisions and interpretations will have no material impact on the financial statements of the Bank in the period of initial application.

8 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)

Currency of presentation

In accordance with IAS 21 the Bank’s functional currency used in preparing the financial statements is EUR as it is the currency of the primary economic environment in which the Bank operates and it reflects the economic substance of the underlying events (“functional currency”). These financial statements are presented in EUR. b)

Statement of compliance and basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting standards (IFRS). The financial statements have been prepared on the historical cost basis except for the revaluation of certain financial instruments. The principal accounting policies are set out below: c)

Income and expense recognition

Interest income and expense are recognised in the profit or loss for all interest bearing instruments on an accrual basis using the effective yield method based on the actual purchase price.

Fees, commissions and other income and expense items are generally recorded on an accrual basis over the period for which the service has been provided. d)

Mandatory liquidity reserves

In accordance with the CBK rules and regulations, the Bank has to meet the minimum average liquidity requirement. The liquidity requirement is calculated on a weekly basis as 10% of the deposit base, defined as the average total deposit liabilities (for 2011, deposits with less than one year maturity) to the non-banking public in Euro and other currencies over the business days of the maintenance period. The assets with which the Bank may satisfy its liquidity requirement are Euro deposits with the CBK and 50% of the Euro equivalent of cash denominated in readily convertible currencies. Deposits with the CBK must not be less than 5% of the applicable deposit base.

As the respective liquid assets are not available to finance the Banks’ day-to-day operations, they were excluded from cash and cash equivalents for the purpose of the cash flow statement. e) Financial assets i) Measurement Financial instruments are measured initially at fair value, including transaction costs subsequently. All originated loans and receivables are measured at amortized cost less impairment losses, if any and available for sale investments are measured at fair value. Amortized cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument, when applicable.

Annual Report 2011 / 9

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

e)

Financial assets (continued)

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. ii)

Specific instruments

Cash and cash equivalents Cash and cash equivalents are items which can be converted into cash at short notice and which are subject to an insignificant risk of changes in value. Amounts which relate to funds that are of a restricted nature are excluded from cash and cash equivalents.

Investments Held-to-maturity Investments held-to-maturity, are deposit investments with correspondent banks that the Bank has the intent and ability to hold to maturity. As a result they are classified as held-to-maturity assets.

Loans and advances to customers Loans and advances originated by the Bank are classified as originated loans and receivables. Loans and advances are reported net of allowances for loans impairment to reflect the estimated recoverable amounts. iii) De-recognition A financial asset is derecognized when the Bank loses control over the contractual rights that comprise that asset. This occurs when the rights are realized, expired or surrendered. A financial liability is derecognized when it is extinguished. The Bank uses the specific identification method to determine the gain or loss on de-recognition. Originated loans and receivables are derecognized on the day they are repaid to the Bank.

10 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

e) iv)

Financial assets (continued) Impairment and uncollectability of financial assets

An assessment is made at each balance sheet date to determine whether there is objective evidence that a financial asset or group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount and any impairment loss of that asset is determined, based on the net present value of future anticipated cash flows, and is recognized for the difference between the recoverable amount and the carrying amount as follows: For loans originated by the Bank – loans and advances to customers are reported at amortized cost net of provision (allowances) to reflect the estimated recoverable amounts.

A credit risk provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect the amounts due according to original contractual terms. The amount of the provision is the difference between the carrying amount and estimated recoverable amount, calculated as the present value of expected cash flows including amounts recoverable from guarantees and collateral, discounted at the instrument’s original effective interest rate.

The allowances are made against the carrying amount of loans and advances that are identified as being impaired based on regular reviews of outstanding balances to reduce these loans and advances to their recoverable amounts. The allowance for loan impairment also covers losses where there is objective evidence that probable losses are present in components of the loan portfolio at the balance sheet date. These have been estimated based upon historical patterns of losses in each component and the credit ratings assigned to the borrowers reflect the current economic environment in which the borrowers operate.

In the current year, in order to establish appropriate provision for loan losses and assessment of the recoverable amount of the assets, the Bank has tried to take in consideration a number of factors and specifics of the Kosovo business environment. In order to be more realistic and establish an objective approach and appropriate application of IAS 39 we have used combination approaches towards the provisioning in order to result in the best estimate of the provision and its impact on our financial assets. The main factors or limitations towards the establishment of provisions/impairment, considered are: the general financial discipline/nondiscipline prevailing in the Kosovo business environment, lack of appropriate economical statistics of different segments of the industry, lack of historical information, latest developments of the global financial and economical markets. The above mentioned factors have had a significant impact on the Bank’s approach towards the establishment of the provision for loan losses.

When a loan is considered to be uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the profit or loss.

Annual Report 2011 / 11

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

e)

Financial assets (continued)

If the amount of the provision for loan impairment subsequently decreases due to an event occurring after the write down, the release of the provision is credited to the profit or loss.

For financial assets available for sale – the carrying amount of the asset is reduced to its estimated recoverable amount either directly or through the use of an allowance accounts and the amount of the loss is included in the profit or loss. f)

Fee and commission income

Fees and commission income are recorded on an accrual basis over the period for which the service has been provided. g)

Foreign currencies

Transactions denominated in currencies other than Euro are recorded at the exchange rate ruling on the transaction date. Exchange differences resulting from the settlement of transactions denominated in currencies other than the Euro are included in the profit or loss using the exchange rate ruling on that date.

Monetary assets and liabilities denominated in currencies other than Euro are translated into Euro at the mid market exchange rate at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates ruling at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Foreign currency gains and losses arising from the translation of assets and liabilities are reflected in the profit or loss as foreign exchange translation gains less losses. h)

Tangible assets

Property, plant and equipment are stated at cost less accumulated depreciation and provision for impairment, where required. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.

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

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Lease hold improvements are depreciated over the shorter of the lease term and their useful lives. The estimated useful lives for the current and comparative periods are as follows:

12 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3. 3.

SUMMARY OFOF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

h)

Tangible assets (Continued)

Category of assets Leasehold improvements Computers and related equipment ATM Motor vehicles Plant and equipment i)

Depreciation rates used 5 years or lease term, whichever is shorter 3-5 years 5 years 5 years 3-5

Intangible assets

Intangible assets acquired by the Bank are stated at cost less accumulated amortisation and accumulated impairment losses, when required. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

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

Impairment of assets

Impairment of the Bank’s assets is assessed based on the provisions of International Accounting Standard No. 36 “Impairment of Assets”.

This standard requires that an impairment loss to be recognized whenever the carrying value of an asset exceeds its recoverable amount.

Recoverable amount of an asset is the higher of its net selling price and value in use. Value in use of an asset is the present value of estimated future cash flows expected from the continuing use of an asset and from its disposal. k) Borrowings Borrowings are recognized initially at cost, being the fair value of consideration received net of transaction costs incurred. Borrowings are subsequently stated at amortized cost. Any interest or fee related to the borrowed funds is expensed and presented in the profit or loss for the period. l) Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.

13 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

m) Taxation Taxation is provided for in the financial statements in accordance with Kosovo tax regulations currently in force. Income tax charge in the profit or loss for the year includes current tax which is calculated on the basis of the expected taxable profit for the year, using the tax rates enacted at the balance sheet date.

Deferred income tax is accounted for using the balance sheet liability method for all temporary differences arising between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax liabilities are recognised for all taxable temporary differences to the extent that it is probable that the taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled based on tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are offset when there is legally enforceable right to offset current tax assets against tax liabilities and when they relate to income levied by the same taxation authority and the Bank intends to settle its current tax assets and liabilities on a net basis.

Under Law nr. 03/L-113 dated December 18, 2008 on corporate taxes, income tax rate is10% for corporate entities from January 1, 2009 onward. n)

Off-balance sheet commitments and contingencies

In the ordinary course of its business, the Bank has entered into off-balance sheet commitments such as guarantees, commitments to extend credit and letters of credit and transactions with financial instruments. The provision for losses on commitments and contingent liabilities is maintained at a level adequate to absorb probable future losses. Management determines the adequacy of the provision based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors.

The Bank recognises a provision when it has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation. o)

Employees benefits

(i)

Defined contribution plans

The Bank makes only compulsory social security contributions that provide pension benefits for employees upon retirement. The local authorities are responsible for providing the legally set minimum threshold for pensions in Kosovo under a defined contribution pension plan. The Bank’s contributions to the benefit pension plan are charged to the profit or loss as incurred.

14 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(ii)

Short-term benefits

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

A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. p) Provisions Provisions are recorded when the Bank has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are measured at the management’s best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect is material. q)

Critical judgements in applying the accounting policies and key sources of estimation uncertainty

In the application of the Bank’s accounting policies, the management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

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

Impairment losses on loans In determining, whether the loans to customers are impaired on individual basis, requires the estimation of the present value of expected cash flows from loans to customers including amounts recoverable from guarantees and collateral. In the current year, as the Bank has not sufficient past experience and accordingly has used experience in the market in determining level of group provisions. The management of the Bank is using judgment in estimating portfolio provision rates and actual results could differ from those.

15 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

3.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

t)

Adjustment of error

For the year ended December 31, 2010 an error has been identified at the calculation of accumulated tax losses. The adjustment was made as per requirements of the Law No. 03/L-162 for corporate income tax for recognition of interest expenses. This error was adjusted and new tax declarations were filed from management. Prior to adjustment for the year ended December 31, 2010 a deferred tax asset has been disclosed in amount of EUR 677 thousand, while after adjustment the value of deferred tax asset is in the amount of EUR 582 thousand. Deferred tax asset last year was only disclosed in a note and the adjustment made has no financial impact. s) Reclassification Deferred disbursement fee for the year ended December 31, 2010 in the amount of EUR 946 thousand has been reclassified from liabilities to loans. Provision for non cash loans as at 31 December 2010 in the amount of EUR 98 thousand has been reclassified from impairment losses on loans to category of other liabilities in order to have a more accurate matching and to ensure appropriate measurement of provisions. Further for the year ended December 31, 2010 there has been a reclassification of unrestricted balance with CBK to restricted balance at statement of cash flows. The reclassifications made have no financial impact.

4.

CASH ON HAND AND AT BANKS

Cash on hand

Current accounts with banks Overnight deposits Subtotal Current account with Central Bank

Total cash on hand and at banks

As at December 31, As at December 31, 2011 2011 11,363 877 3,632 15,872 17,550 33,422

As at December 31, As at December 31,2010 2010

9,513 377 17,782 27,672 21,104 48,776

Overnight deposits maintained at non-domestic banks earned annual interest in the range of Euro 0.08% to 2.90% per annum (As at December 31, 2010; 0.10% to 0.74%).

Overnight deposits maintained at non-domestic banks earned annual interest in the range of USD 0.01 % to 0.30 % (As at December 31, 2010; 0.02% to 0.22%).

Overnight deposits maintained at non-domestic banks earned annual interest in the range of GBP 0.40 % to 0.70 % (As at December 31, 2010; 0.30% to 0.37%).

4.1

BALANCES WITH THE CENTRAL BANK OF KOSOVO

Balances with the Central Bank of Kosovo (“CBK”) represent obligatory reserve. Obligatory minimum reserve required under CBK regulations, was set at rate 10% of monthly average of customers accounts and deposits with up to one year maturity. The obligatory minimum reserve balance with the CBK earns annual interest as at December 31, 2011 and 2010 of 0.10% per annum whilst amount exceeding the mandatory minimum liquidity reserve balance earns no interest.

16 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

5.

LOANS TO CUSTOMERS

As at December 31, 2011

As at December 31, 2011

Loans outstanding Long-term loans Short-term loans Overdraft facilities

120,584 20,854 38,384 179,822 1,261 (1,347) 179,736 (5,379) 174,357

Accrued interest on loans Deferred fee income Impairment losses on loans Loans to customers

78,850 11,275 28,187 118,312 863 (946) 118,229 (2,074) 116,155

Long term loans have maturity from 1 to 5 years. During the year ended December 31, 2011 the Bank charged interest to the customers on long term loans with effective interest rate in the range of 3.24% to 24% p.a.(year ended December 31, 2010; 3.84% to 24.00% p.a), on short term loans in the range of 4.80% to 24% p.a. (year ended December 31, 2010; 4.80% to 24.00% p.a) and on overdrafts in the range of 5.64% to 19.2% p.a.( year ended December 31, 2010; 5.64% to 19.20% p.a) The movement in the impairment losses on loans is as follows:

Year ended December 31, 2011

Year ended December 31, 2010

2,074 3,305 5,379

824 1,250 2,074

Impairment losses on loans at January 1 Charge made during the yeart Impairment losses on loans as at December 31

An industry analysis of the gross portfolio of loans to business customers before provisions and accrued interest is as follows:

Industry sector Commercial Wholesale Manufacturing Consumption Service Hotel and restaurants Agriculture Construction Other

As at December 31,2011 55,193 17,349 15,455 5,148 3,899 376 10,011 72,391 179,822

% 30.69 9.65 8.59 2.86 2.17 0.21 5.57 40.26 100%

As at December 31,2011 38,040 12,410 14,122 4,220 3,208 188 8,184 37,940 118,312

% 32.2 10.5 11.9 3.6 2.7 0.2 6.9 32 100%

As at December 31, 2011, the 10 major borrowers accounted for 9% of the total loan portfolio (December 31, 2010; 11%).

As at December 31, 2011 there were 5 active loans amounting to Eur 305 thousand with effective date of agreements in 2011 which were agreed between bank and corporate clients but not yet disbursed (December 31, 2010; Eur 2,255 thousand).

17 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

5. LOANS TO CUSTOMERS (CONTINUED)

Included in the loans to customers are individually impaired loans to customers with a balance of Euro 323 thousand as at December 31, 2011 (December 31, 2010: 1,442 thousand). The impairment recognised against these loans represents the difference between the carrying amounts of these loans to customers and the discounted value of the expected cash flows, including the amounts recoverable from guarantees and collaterals.

Ageing of individually impaired loans to customers is as follows:

0-30 days 31-90 days 91-180 days 181+ days

18 / Annual Report 2011

As at December 31, 2011

As at December 31, 2010

272 527 675 2,849 4,323

156 38 255 993 1,442

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

6.

TANGIBLE AND INTANGIBLE ASSETS Lasehold Furniture, improvements fixtures and equipment

Computers and related equipment

Plant and Equipment

ATM

Intagible assets

Total

462

1,083

364

790

6,558

As at January 1, 2010

2,037

380

Additions during the year

390

90

304

192

282

455

457

2,170

Disposals during the year

-

(287)

(197)

(47)

(24)

(35)

(13)

(603)

2,427

183

1,549

607

1,341

784

1,234

8,125

Additions during the year

316

10

178

123

238

20

287

1,172

Adjustment during the year

(60)

-

-

(43)

(3)

-

-

(106)

As at December 31, 2011

2,683

193

1,727

687

1,576

804

1,521

9,191

665

266

643

141

356

92

452

2,615

467

101

338

102

319

104

310

1,741

Change for the year

-

(287)

(197)

(23)

(23)

(14)

(2)

(546)

Eliminated on disposals

-

-

-

-

-

-

-

-

As at January 1, 2011

1,132

80

748

220

652

182

760

3,810

Change for the year

559

26

335

131

344

168

287

1,850

Eliminated on disposals

(43)

-

-

(29)

(3)

-

-

(75)

1,648

106

1,119

322

993

350

1,047

5,585

As at December 31, 2011

1,035

87

608

365

583

454

474

3,606

As at December 31, 2010

1,295

103

765

387

689

602

474

4,315

As at January 1, 2011

1,442

Motor vehicles

Accumulated depreciation/amortization As at January 1, 2010

As at December 31, 2011 Net book Value

19 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

7.

DUE TO CUSTOMERS As at December 31, 2011

As at December 31, 2010

Current accounts Current accounts

86,729

66,601

Sub total

86,729

66,601

9,653 9,653

6,450 6,450

2,269 11,932 5,821 35,992 30,359 1,281 87,654

16,522 4,068 4,753 26,742 22,849 929 75,863

184,036

148,914

Saving account Saving account Sub total Time deposits: Up to 1 month 1-3 months 3-6 months 6-12 months More than 12 months Accrued interest Sub total Total due to customers

Current accounts are non-interest bearing.

For time deposits, the effective interest rates during 2011 were as follows: 1 month

3 month

6 month

1 year

18 months

2 year

3 year

5 year

1.86%

2.49%

2.99%

4.26%

4.29%

4.4%

4.65%

5.19%

For time deposits, the effective interest rates during 2010 were as follows: 1 month

3 month

6 month

1 year

18 months

2 year

3 year

5 year

2.09%

2.75%

3.14%

4.17%

4.51%

4.49%

4.59%

5.32%

20 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

8.

OTHER LIABILITIES

As at December 31, 2011

As at December 31, 2010

31 608 63 229 750

27 297 85 98 438

1,681

945

Pension payable on salaries Transitory liability accounts Deferred fee income from off balance sheet items Provisions for non-cash loans Miscellaneous payables Totals

9. SHARE CAPITAL The authorised and paid up share capital of the Bank comprises 2,150 thousand ordinary shares with par value of Euro 10 each as at December 31, 2011 and 2010, amounting to Euro 21,500 thousand.

In accordance with Rule XXI for ‘Increase in Minimal Capital of Banks’ authorized under Section 5 of the Regulation No. 1999 / 21 issued by the CBK, the minimum share capital for banks operating in Kosovo should be 5 million Euro.

A summary of share ownership of the Bank is as follows:

Shareholder TEB Holding A.Ş.

As Pertcentage at December 31, 2011 Amount ownership

Percentage As at December 31, 2010 Amount ownership

100%

21,500

100%

21,500

100%

21,500

100%

21,500

The shares are ordinary in nature and have no rights, preferences or restrictions attached thereto. Share capital was paid in cash.

10. BORROWINGS During the year 2010 TEB sh.a entered into a loan agreement with International Finance Corporation (the “IFC”) in amount of EUR 6,500 thousand. The purpose of the Loan is to provide Bank with Tier 2 Capital, and enable to use the proceeds for financing its general lending activities. The loan will be repaid in one bullet payment on the 10-th anniversary from the date of the disbursement.

Interest will be paid semi-annually. The balance outstanding as at December 31, 2011 was EUR 6,419 thousand (December 31, 2010: EUR 6,421 thousand). The guarantor for this subordinated loan is TEB Holding A.Ş.During the year 2011 the bank entered into a borrowing agreement with TEB N.V. Netherland in amount of EUR 4,600 thousand for a period of 5 days (December 31, 2010: NIL). The purpose of the borrowing is to have liquidity funds for year end.

Annual Report 2011 / 21

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

11.

FEE AND COMMISSION INCOME Year ended December 31, 2011

Year ended December 31, 2010

Money transfer Lending activities Guarantees Maintenance fee Commission from merchants Other banking services

1,061 1,135 474 991 860 263

824 934 266 377 456 422

Totals

4,784

3,279

12.

OTHER OPERATING EXPENSES Year ended December 31, 2011

Personnel Rent Depreciation Amortization Utilities and fuel Communication Travel Advertising and marketing Office materials Service expense, credit cards POS expenses Repair and maintenance Security Consultancy and professional fees Other Totals

22 / Annual Report 2011

Year ended December 31, 2010

4,352 917 1,562 286 254 591 215 803 388 122 26 167 283 263 961

3,635 806 1,431 310 203 490 178 503 278 150 20 154 285 50 763

11,190

9,256

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

13. TAXATION Year ended December 31, 2011

Year ended December 31, 2010

(in Euro ‘000’)

(in Euro ‘000’)

Current tax expense Deferred tax income

294

-

Total tax expense

294

-

The table below shows the calculation of current deferred tax asset arising from accumulated tax losses.

Year ended December 31, 2011

Year ended December 31, 2010

2,069

264

809 -

241 776

2,878

1,281

Tax losses as at January 1,

(5,818)

(7,099)

Total tax losses as at December 31, At income tax rate of 10% Deferred tax asset booked

(2,940) 294 294

(5,818) 582 -

Accounting profit/ (loss) before tax for the year Adjustment as per tax regulations Add back non-deductible expenses (net) Adjustment as per revised tax declaration Taxable profit /(losses) for the year

Effective tax losses available for carrying forward are EUR 2,940 thousand (2010: EUR 5,818 thousand). As at December 31, 2010 a deferred tax asset has not been recorded for the net deductible temporary differences due to uncertainty that sufficient taxable profit will be available to allow the benefit of that deferred tax asset to be utilized.As per tax regulations, the Bank can carry forward tax losses for seven years.

Annual Report 2011 / 23

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

13.

TAXATION (CONTINUED)

Following is the deferred tax asset arising from unused accumulated tax losses.

Deferred tax movement

Year ended December, 2011

Year ended December, 2010

(in Euro ‘000’)

(in Euro ‘000’)

Opening balance as of January 1, Charge for the year

294

-

Total deferred tax asset

294

-

14.

COMMITMENTS AND CONTINGENCIES

Commitments and contingencies include guarantees and letters of credit extended to customers. The balance is comprised of the following:

As at December 31, 2011

As at December 31, 2010

Guarantees: Secured by cash deposits Secured by other collateral

445 12,294

271 4,900

Subtotal

12,739

5,171

Letters of credit: Secured by cash deposits Secured by other collateral

157 1,424

421 635

Subtotal

1,581

1,056

14,320

6,227

Totals

The Bank issues guarantees for its customers. These instruments bear a credit risk similar to that of loans granted. Based on management’s estimate, no material losses related to guarantees outstanding at December 31, 2011 will be incurred.

24 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

14.

COMMITMENTS AND CONTINGENCIES (CONTINUED)

Operating lease commitments The Bank has outstanding commitments under rental contracts which fall due as follows:

As at December 31, 2011

As at December 31, 2010

Within one year Within two to five years

368 2,902

54 3,196

Total

3,270

3,250

Guarantee agreement with USAID During the year 2011 the bank entered into Guarantee Agreement with USAID in amount of USD 2,500 thousand for a period of 7 years. The purpose is to provide loans to businesses in the agriculture sector in Kosovo. The total amount of disbursed loans under this agreement must not exceed the EUR equivalent of USD 2,500 thousand, 50% of this amount is the maximum contingent liability for USAID. Litigations From time to time and in the normal course of business, claims against the Bank are received. As at December 31, 2011, the Bank had no legal claims against it that were not both minor and in the ordinary course of business. On the basis of internal advice, management is of the opinion that no material losses will be incurred and accordingly no provision has been made in these financial statements.

15.

RELATED PARTY DISCLOSURES

A party is related to an entity if, directly or indirectly through one or more intermediaries, the party controls, is controlled by, or is under common control with the entity, the party has an interest in the entity that gives it significant influence over the entity, the party has joint control over the entity, the party is an associate or the party is a member of the key management personnel of the entity or its parent.

Following are the balances with related parties as at the year end and transactions during the year ended December 31, 2011.

Annual Report 2011 / 25

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

15.

RELATED PARTY DISCLOSURES (CONTINUED)

Related Parties TEB A.S. Nostro account Time deposit Interest income Interest expense Consultancy expenses Payables to TEB A.S. Total TEB Holding A.S. Consultancy expenses Payables to TEB Holding A.S. Total BNP Paribas Nostro account Interest income Total TEB N.V. Money market borrowings Interest expense money Market Borrowing Total

26 / Annual Report 2011

YTL

USD

CHF

GBP

EUR

-

554 2 556

178 178

101 101

37 2 27 14 70 150

156 42 198

-

-

-

-

-

2 1 3

-

-

1 1

-

-

-

-

4,600

-

-

-

-

1 4,601

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

15. RELATED RELATEDPARTY PARTYDISCLOSURES DISCLOSURES(CONTINUED) (CONTINUED) 15.

Following are the balances with related parties as at the year end and transactions during the year

Related Parties TEB A.S. Nostro account Time deposit Interest income Total TEB Holding A.S. Intangible assets Consultancy expenses Payables to TEB Holding A.S. Total BNP Paribas Nostro account Time deposit Interest income Total TEB N.V. Interest income Total

YTL

USD

CHF

GBP

EUR

-

195 1 196

25 25

20 20

92 2 94

145 38 183

205 205

-

-

340 340

-

6 1,871 2 1,879

-

-

5 5

-

-

-

-

11 11

Transactions with key management personnel Total remuneration to the Bank’s key management personnel, included in “personnel expenses”.

Year ended December 31, 2011

Year ended December 31, 2010

Short-term employee benefits for BOD Short-term employee benefits for top-management

143 109

134 101

Total

252

235

Annual Report 2011 / 27

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT

a.

Capital risk management

The Bank manages its capital to ensure that the Bank will be able to continue as a going concern while maximizing the return to shareholders through the optimization of the debt and equity balance. The Bank’s overall strategy remains unchanged from 2009.

The equity structure of the Bank comprises issued capital, general risk reserve and retained earnings.

Gearing ratio The Bank’s risk management committee reviews the capital structure on a continuous basis. As part of this review, the committee considers the cost of capital and the risk associated with each class of capital. As at December 31, 2011, the Bank has borrowing of EUR 6,419 thousand from IFC (December 31, 2010 EUR 6,421 thousand), and a borrowing of EUR 4,600 thousand from TEB N.V. Netherland (December 31, 2010 Nil). b.

Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognized, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3 to the financial statements. c.

Categories of financial instruments

As at the year end the bank has following financial instruments Financial assets:

As at December 31, 2011

As at December 31, 2010

Cash on hand and at banks Balances with CBK Loans and receivables

15,872 17,550 174,357

27,672 21,104 116,155

Financial assets at amortised cost:

207,779

164,931

As at December 31, 2011

As at December 31, 2010

Borrowings Due to customers Other Liabilities

11,019 184,036 1,681

6,421 148,914 945

Financial assets at amortised cost:

196,736

156,280

Financial liabilities:

28 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

d.

Financial risk management objectives

The Bank’s corporate treasury function provides services to the business, coordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Bank through internal risk reports which analyze exposures by degree and magnitude of risks. These risks include market risk (including currency risk, interest rate risk), credit risk and liquidity risk.

Compliance with policies and exposure limits is reviewed by the management committees and internal auditors on a continuous basis. The Bank does not enter into or trade derivative financial instruments. e.

Market risk

The Bank’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The market risk is not significantly concentrated to currency risk or interest rate risk, as major transactions of the Bank are in local currency and majority of the interest rates are fixed. f.

Foreign currency risk

The Bank undertakes transactions in both Euro and foreign currencies.

The Bank has not entered into any forward exchange or embedded derivative transactions during the year ended December 31, 2011. The Bank is exposed to currency risk through transactions in foreign currencies. As the currency in which the Bank presents its financial statements is the Euro, the Bank’s financial statements are effected by movements in the exchange rates between the Euro and other currencies.

The Bank’s transactional exposures give rise to foreign currency gains and losses that are recognized in the income statement. These exposures comprise the monetary assets and monetary liabilities of the Bank that are not denominated in the measurement currency of the Bank.

Foreign currency sensitivity analysis The Bank is mainly exposed to US Dollar (USD) and Swiss Franc (CHF). The following table details the Bank’s sensitivity to the respective increase and decrease in the value of EUR against the foreign currencies. The percentage used is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a respective change in foreign currency rates. The sensitivity analysis includes placements with other banks, cash with correspondent banks as well as customer deposits where the denomination of the amounts is in a currency other than the currency of the lender or the borrower. A negative number below indicates an exchange loss where the EUR strengthens with respective percentages against the relevant currency. For the respective weakening of the EUR against the relevant currency, there would be approximately equal and opposite impact on the profit, and the balances below would be positive.

Annual Report 2011 / 29

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT

Sensitivity rates Income statement

US Dollar (USD) 2011 2010

Swiss Franc (CHF) 2011 2010

Great Britain Pound (GBP) 2011 2010

5% (7)

5% (9)

5% (1)

5% (2)

5% (6)

5% -

In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure does not reflect the exposure during the year.

The following table summarises the bank’s currency position as at December 31, 2011: EUR Assets Cash on hand and at banks Balances with CBK Loans and advances to customers-net Other assets Liabilities Due to customers Accrued interest Borrowings Other liabilities Net currency position

As at December 31, 2011 USD CHF GBP

Total

8,597 17,550 174,357 805 201,309

5,499 28 5,527

1,419 37 1,456

357 4 361

15,872 17,550 174,357 874 208,653

175,838 1,278 11,019 1,676 189,811 11,499

5,344 3 5 5,352 175

1,228 1,228 228

345 345 16

182,755 1,281 11,019 1,681 196,736 11,917

The following table summarises the bank’s currency position as at December 31, 2010: EUR Assets Cash on hand and at banks Balances with CBK Loans and advances to customers-net Other assets Liabilities Due to customers Accrued interest Borrowings Other liabilities Net currency position

30 / Annual Report 2011

As at December 31, 2010 USD CHF GBP

Total

21,877 21,104 116,155 475 159,611

5,097 9 5,106

522 3 525

176 1 177

27,672 21,104 116,155 488 165,419

142,345 924 6,421 931 150,621 8,990

5,057 5 14 5,076 30

410 410 115

173 173 4

147,985 929 6,421 945 156,280 9,139

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

The table below summarizes the effective interest rates by major currencies for major monetary financial instruments for 2011. The analysis has been prepared using year-end effective rates.

EUR

USD

CHF

GBP

-

0.15%

-

-

0.10%

-

-

-

11.83%

-

-

-

4.71%

1.1%

0.61%

0.53%

Assets Placements on call with other banks Term deposits with other banks Loans and advances to customers-net Liabilities Term deposits

The table below summarizes the effective interest rates by major currencies for major monetary financial instruments for 2010. The analysis has been prepared using year-end effective rates.

EUR

USD

CHF

GBP

Placements on call with other banks

0.33%

0.15%

-

-

Term deposits with other banks

0.10%

-

-

-

12.30%

-

-

-

4.56%

1.48%

1.10%

0.65%

Assets

Loans and advances to customers-net Liabilities Term deposits

The exchange rates applied for principal currencies against the Euro were as follows: As at December 31, 2011 United Stated Dollar (USD) British Pound (GBP) Swiss Franc (CHF)

As at December 31, 2010

1.2889

1.3362

0.836

0.8608

1.2186

1.2504

Annual Report 2011 / 31

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

Interest rate risk is comprised of the risk that the value of a financial instrument will fluctuate due to changes in market interest rates and the risk that the maturities of interest bearing assets differ from the maturities of the interest bearing liabilities used to fund those assets. The length of time for which the rate of interest is fixed on a financial instrument therefore indicates to what extent it is exposed to interest rate risk. The assets and customer term deposits of the Bank carry fixed interest rates.

Interest rates applicable to financial assets and liabilities are disclosed in relevant note to these financial statements.

The Bank’s operations are subject to the risk of interest rate fluctuations to the extent that interest-bearing assets and liabilities mature or reprise at different times or in differing amounts. The Bank attempts to mitigate this risk by monitoring the reprising dates of its assets and liabilities. In addition, the actual effect will depend on a number of other factors, including the extent to which repayments are made earlier or later than the contracted dates and variations in interest rate sensitivity within reprising periods and among currencies.

Following table shows the interest bearing and non-interest bearing financial instruments.

As at December 31, 2011 Interest – bearing

Non – interest

As at December 31, 2010 Total

Interest bearing

Non – interest

Total

(in Euro 000’s) Assets Cash on hand and at banks Balances with CBK Loans to customers

3,632 17,106 179,822

12,240 444 -

15,872 17,550 179,822

17,782 11,643 118,312

9,890 9,461 -

27,672 21,104 118,312

Total financial assets

200,560

12,684

213,244

147,737

19,351

167,088

Liabilities Due to customers Other Liabilities

139,113 -

43,642 1,681

182,755 1,681

112,117 -

35,868 945

147,985 945

Total financial liabilities

139,113

45,323

184,436

112,117

148,930

61,447

(32,639)

28,808

35,620

36,813 36,813 (17,462)

Net interest risk

32 / Annual Report 2011

18,158

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

g.

Interest rate risk (continued)

(a)

Interest rate reprising analysis

The following table presents the interest rate reprising dates for the Bank’s monetary assets and liabilities. Fixed-rate assets and liabilities have been reported according to their scheduled principal repayment dates As at December 31, 2011

Assets: Cash on hand and at banks: Interest bearing Non-interest bearing Restricted balances with CBK Interest bearing Non-interest bearing Loans and advances to customers Interest bearing Other assets Non-interest bearing Total Liabilities: Deposits from customers: Interest bearing Non-interest bearing Borrowings Interest bearing Other liabilities: Non-interest bearing Total Gap Cumulative gap

Up to 1 month

1-3 months

3-6 months

6-12 months

Over 1 year

Total

3,632 12,240

-

-

-

-

3,632 12,240

17,106 444

-

-

-

-

17,106 444

9,755

15,504

19,718

46,750

88,095

179,822

874 44,051

15,504

19,718

46,750

88,095

874 214,118

60,553 43,643

19,120 -

21,411 -

26,989 -

11,039 -

139,112 43,643

4,600

-

169

169

6,081

11,019

1,681 110,477 (66,426) (66,426)

19,120 (3,616) (70,042)

21,580 (1,862) (71,904)

27,158 19,592 (52,312)

17,120 70,975 18,663

1,681 195,455 18,663

Annual Report 2011 / 33

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

As at December 31,2010 Assets Cash on hand and at banks: 17,782

-

-

-

-

17,782

9,890

-

-

-

-

9,890

11,643

-

-

-

-

11,643

9,461

-

-

-

-

9,461

6,034

11,240

14,280

35,973

50,785

118,312

488

-

-

-

-

488

55,298

11,240

14,280

35,973

50,785

167,576

Interest bearing

62,921

8,131

15,203

19,037

6,826

112,118

Non-interest bearing

35,867

-

-

-

-

35,867

-

-

-

-

6,421

6,421

945

-

-

-

-

945

99,733

8,131

15,203

19,037

13,247

155,351

Gap

(44,435)

3,109

(923)

16,936

37,538

12,225

Cumulative Gap

(44,435)

(41,326)

(42,249)

(25,313)

12,225

Interest bearing Non-interest bearing Restricted balances with CBK Interest bearing Non-interest bearing Loans and advances to customers Interest bearing Other assets Non-interest bearing Total Liabilities: Deposits from customers:

Borrowings Interest bearing Other liabilities: Non-interest bearing Total

34 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

h.

Credit risk

The Bank is subject to credit risk through its lending activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees. In this respect, the credit risk for the Bank stems from the possibility that different counterparties might default on their contractual obligations. The management of the credit risk exposures to borrowers is conducted through regular analysis of the borrowers’ credit worthiness. Exposure to credit risk is also managed in part by obtaining collateral and guarantees.

The Bank’s primary exposure to credit risk arises through its loans and advances to customers. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the balance sheet. In addition, the Bank is exposed to off-balance sheet credit risk through guarantees issued.

Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The major concentrations of credit risk arise by type of customer in relation to the Bank’s loans and advances, and guarantees issued.

The collaterals taken in consideration for the mitigation of the credit risk consists of cash, immovable properties such as land and buildings and pledge on moveable properties such as stocks and any other moveable property which could be converted in to liquid assets on an arm’s length transaction. The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Bank’s maximum exposure to credit risk without taking account of the value of any collateral obtained.

Maximum exposure to credit risk:

Placements with other banks Loans to customers Guarantees and commitments Total

As at December 31, 2011

As at December 31, 2010

4,509

18,159

174,357

116,155

14,320

8,253

193,186

142,567

As at December 31, 2011

As at December 31, 2010

Loans and advances neither past due nor impaired:

Loans and advances to customers, net

165,999

114,833

Annual Report 2011 / 35

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16. i.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED) Liquidity risk

Liquidity risk arises in the general funding of the Bank’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturity and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liability obligations. The Bank monitors its liquidity on a daily basis in order to manage its obligations as and when they fall due.

Funds are raised using a broad range of instruments including deposits, borrowings and share capital. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Bank makes its best efforts to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturity. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the Bank’s overall strategy. In addition the Bank holds a portfolio of liquid assets as part of its liquidity risk management strategy.

The following table provides an analysis of the financial assets and liabilities of the Bank into relevant maturity groupings based on the remaining periods of repayment.

As at December 31, 2011 Up to 1 month

1 to 3 months

3 to 6 months

6 to 12 months

Over 1 year

Total

(in Euro 000’s) Assets Cash on hand Cash at banks Balances with the CBK Loans and advances to customers Other assets Total

11,363 4,509 17,550 9,967 874 44,263

15,488 15,488

19,674 19,674

46,656 46,656

87,951 87,951

11,363 4,509 17,550 179,736 874 214,032

Liabilities Deposits from customers Accrued interest on deposits Borrowings Other liabilities Total

104,196 47 4,600 1,681 110,524

19,120 42 19,162

21,411 51 169 21,631

26,989 868 169 28,026

11,039 273 6,081 17,393

182,755 1,281 11,019 1,681 196,736

Liquidity gap at December 31, Cumulative gap at December 31,

(66,261) (66,261)

(3,674) (69,935)

(1,957) (71,892)

18,630 (53,262)

70,558 17,296

17,296

36 / Annual Report 2011

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

16.

FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

As at December 31,2010 Up to 1 month

1-3 months

3-6 month

6-12 month

Over 1 year

Total

(in Euro 000’s)

Assets Cash on hand

9,513

-

-

-

-

9,513

Cash at banks

18,159

-

-

-

-

18,159

Balances with the CBK

21,104

-

-

-

-

21,104

6,217

11,238

14,262

35,945

50,567

118,229

488

-

-

-

-

488

55,481

11,238

14,262

35,945

50,567

167,493

98,788

8,131

15,203

19,037

6,826

147,985

48

22

45

672

142

929

-

-

-

-

6,421

6,421

945

-

-

-

-

945

99,781

8,153

15,248

19,709

13,389

156,280

Liquidity gap at December 31,

(44,300)

3,085

(986)

16,236

37,178

11,213

Cumulative gap at December 31,

(44,300) (41,215) (42,201)

(25,965)

11,213

Loans and advances to customers Other assets Total

Liabilities Deposits from customers Accrued interest on deposits Borrowings Other liabilities Total

j.

Fair value of financial instruments

Management of the Bank considers that the carrying amounts of financial assets and financial liabilities recorded at amortized cost in the financial statements approximate their fair values.

Annual Report 2011 / 37

TEB Sh.A Notes to the IFRS Financial Statements • For the year ended December 31, 2011 • All amounts are in thousand euro, unless otherwise stated

17.

DISCLOSURES AND CONCENTRATION OF EXPOSURE

Loans Following shows the concentration of exposure for loans to 15 major customers.

As at December 31, 2011

As at December 31, 2010

21,124

15,879

Total loans to customer

179,822

118,312

% in to total loans to customers

11.75%

13.42%

15 major customers

Deposits Following shows the concentration of exposure due to 15 major customers.

As at December 31, 2011

As at December 31, 2010

33,021

38,103

Total due to customers

182,755

147,985

% in to total loans to customers

18.07%

25.75%

15 major customers

18. EVENTS AFTER BALANCE SHEET DATE Management is not aware of any events subsequent to the reporting period that would require adjustment or additional disclosures in the financial statements of the Bank.

38 / Annual Report 2011

Directory HEAD OFFICE: 15, Agim Ramadani Street , 10000 Prishtina (Kosovo ) Tel.: + 381 (0) 38 230 000 E-mail: info@teb-kos.com www.teb-kos.com

Annual Report 2011 / 39

40 / Annual Report 2011

Annual Report 2011 / 41