bdif_annual_report_2011

Š Bulgarian Deposit Insurance Fund Published by the Bulgarian Deposit Insurance Fund, 2012 27 Vladayska Street, 1606 Sofia, Bulgaria T: +359 2 917 2049, 2 953 1217, 2 953 1318 F: +359 2 952 1100 www.dif.bg For contacts: Roumyana Markova, Corporate Communications and International Cooperation Department ISSN 1313-0811 Information published in the 2011 Annual Report of the Bulgarian Deposit Insurance Fund may be quoted or reproduced without further permission.

Due acknowledgment is requested.

The Prime Minister of the Republic of Bulgaria The Governor of the Bulgarian National Bank The President of the National Audit Office

Sirs,

In compliance with the requirements of the Law on Bank Deposit Guarantee, I have the pleasure to present to your attention herewith the Annual Report of the Bulgarian Deposit Insurance Fund for 2011.

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

BULGARIAN DEPOSIT INSURANCE FUND

Management Board:

Chairman:

Vice Chairman:

Members:

Rossen Nikolov Nelly Kordovska Bisser Manolov Borislav Stratev Svetla Kostova

Chief Accountant:

Svetla Suvandjieva

Address of Management:

27 Vladayska Street 1606 Sofia, Bulgaria

Auditor:

AFA OOD 38 Oborishte Street 1504 Sofia, Bulgaria

Bulgarian Deposit Insurance Fund – Annual Report 2011

CONTENTS

Mission, Vision, Objectives and Mandate

7

Overview

9

Chairman’s Address

11

Annual Activity Report of the Bulgarian Deposit Insurance Fund Management for 2011 12

Timely access of depositors to their guaranteed amounts

12

Alternative methods for bank resolution

13

Management of the risks for the deposit guarantee scheme

13

Adequate funding. Safe and transparent asset management

14

Effective communication. Interinstitutional cooperation

15

Effective communication. International activities

16

Effective communication. Maintaining depositors’ confidence

17

Good corporate practices. Transparent and efficient governance

17

Appendices:

1. Main Financial Ratios

21

2. Deposit Guarantee

24

3. Investment Policy and Asset Management

35

4. Application of Core Principles for Effective Deposit Insurance Systems

42

Annual Financial Statements for 2011

44

List of Abbreviations

BDIF – Bulgarian Deposit Insurance Fund

BNB – Bulgarian National Bank

DGS – Deposit Guarantee Scheme

EFDI – European Forum of Deposit Insurers

EU – European Union

FSB – Financial Stability Board

G-20 – Group of Twenty

IMF – International Monetary Fund

LBDG – Law on Bank Deposit Guarantee

NPISH – Non Profit Institutions Serving Households

NSI - National Statistical Institute

WB – World Bank

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BDIF Mission

To protect depositors’ funds in banks as well as creditors’ interests in bank bankruptcy proceedings, thus contributing to the stability of and confidence in the banking system

BDIF Vision

Competent and active participant in the financial stability system

Objectives Maintaining depositors’ confidence Maintaining financial stability

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Mandate The Bulgarian Deposit Insurance Fund is a legal entity established by the Law on Bank Deposit Guarantee.

In accordance with the Law on Bank Deposit Guarantee BDIF repays the guaranteed amount of deposits, determines and collects annual and entry premiums from banks, and invests its assets in government securities, short-term deposits with banks and deposits with the Bulgarian National Bank.

In compliance with the Law on Bank Bankruptcy BDIF protects the interests of creditors and oversees the lawful and appropriate exercise of trustee’s powers in the bankruptcy proceedings of a bank.

Under certain provisions spelled out in the Law on Credit Institutions BDIF may participate in the increase of capital of a credit institution under special supervision and in danger of becoming insolvent.

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Overview

Against the backdrop of slowly stabilizing, but still turbulent economic and financial situation worldwide, the role of deposit guarantee schemes remain pivotal to maintaining the depositors’ confidence. Good coordination and cooperation with other participants in the financial safety net with a view to maintain financial stability remain focal for DGS activities.

In European aspect 2011 passed in the expectance of adopting the recast DGS directive along with the following amendments: still shortened payout timeframes and optimization of the payout process, enhanced depositors’ awareness, ex-ante and sufficient DGS funding and furthered cooperation among DGSs. Forthcoming is the European regulation for crisis management, which is likely to redefine the role and responsibilities of DGS. In 2012 pending are the adoption of the Directive on deposit-guarantee schemes and the publication of the proposal for crisis management framework.

From global perspective the lessons learnt from the financial crisis started in 2008 lead to the issuance of the Core Principles for Effective Deposit Insurance Systems aimed at setting international standards in the field. Following the elaboration of the Methodology and Handbook for the Assessment of Compliance and the outcome of the pilot tests in 2010, the Financial Stability Board included the Core Principles in its Compendium of 12 Key Standards for Sound Financial Systems.

With a view of preparedness to face challenges ensuing from international developments and national characteristics, mid-year BDIF adopted a Strategy for BDIF Governance for the period 2011-2014, which outlines the key strategic goals for the organization, namely:

9

– BDIF to continue winning recognition as a key player in the financial stability system;

– BDIF to become an institution operating under the highest standards, meeting up-to-date requirements for effective deposit insurance systems in accordance with the Core Principles for Effective Deposit Insurance Systems issued by the Basel Committee on Banking Supervision and the International Association of Deposit Insurers, as well as the EU directives.

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This in turn resulted in the operational objectives, which have emerged as:

– Timely access of depositors to their guaranteed amounts

– Alternative methods for bank resolution

– Management of the risks for the deposit guarantee scheme

– Adequate funding. Safe and transparent asset management

– Effective communication. Maintaining depositors’ confidence

– Good corporate practices. Transparent and efficient governance.

2011 Annual Report gives account of what BDIF completed during the year past, as well as the objectives and tasks which lie ahead in 2012.

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Chairman’s Address

Dear Ladies and Gentlemen,

The past 2011 was another year in which the Bulgarian banking system remained stable, despite the troubled financial situation across the globe.

For the deposit insurers across Europe 2011 was a year of anticipation of the recast DGS directive.

BDIF made the most of the preceding year so as to best prepare for the expected amendments – a separate unit for risk management was set, in the offing is the deployment of an automatic payout system for swift payout and stress tests, developed in cooperation with the banking industry and the central bank, the internal regulatory framework was updated and further elaborated.

International financial institutions included the Core Principles for Effective Deposit Insurance Systems in their standards for assessment and throughout the year a number of DGSs, BDIF inclusive, performed self-assessment. Peer reviews were also conducted.

BDIF continued to consolidate its international reputation through the exchange of experience and membership in international professional organisations.

I would like to thank BDIF experts for their initiative and conscientious work during the year and express my confidence that with such dedication and willingness to work BDIF will continue to maintain credibility in both the institution itself and the banking system.

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

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Annual Activity Report of the Bulgarian Deposit Insurance Fund Management for 2011 In 2011 the Bulgarian Deposit Insurance Fund continued to exercise the powers assigned thereto by law, thus strengthening its position of a modern and efficiently functioning organisation.

In executing the operational objectives set in the Governance Strategy BDIF focused its efforts on the following:

Timely access of depositors to their guaranteed amounts

Ensuring safe and timely payout of guaranteed deposits continued to be a major factor in maintaining depositors’ confidence.

In this direction, BDIF continued its work on the implementation and start-up of the Automatic Payout System for guaranteed deposits, which besides the performance of regular tests of the deposit insurance system ensures the timely access of depositors to their guaranteed amounts.

The factors defining this line of business are as follows: on the one hand, the significantly reduced deadlines for payout of guaranteed deposits as a result of the amendments to Directive 2009/14/EC as well as the possible further shortening of payout terms in the expected recast EU directive on deposit guarantee schemes, and on the other hand, providing the safety of deposits and general public with regard to deposit payout, including the functions of BDIF in the process of disbursement of guaranteed deposits.

In 2011 the work on the project sped and the consultations with the Bulgarian National Bank and the Association of Banks in Bulgaria were completed. After the performance of the necessary technical steps software development was finalised in December 2011 within the set terms.

Despite the initial plans under which the pilot tests should have been carried out by the end of 2011, their final timeline was extended till the end of March 2012. Until then two pilot tests with banks should be performed as a prerequisite for the ultimate acceptance of the software and its implementation by BDIF. The reason for the delay was the banks’ inability to participate in the respective tests due to their work load in relation with the annual closing and the commencement of the next calendar year.

The technical back-up for the safety and protection of the system has been planned for 2012.

The first regular tests of the deposit guarantee scheme have been scheduled for the second half of 2012.

Bank Bankruptcy and Early Intervention Policy was developed and approved by the Management Board in the past year so that BDIF could react adequately in the event of crisis situations. www.dif.bg

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The work on contingency planning started with research of international experience and good practices. The action plan will outline the crisis situations, the regulatory framework on the actions to be performed by BDIF for their resolution, and will describe the persons responsible and their functions. Detailed manuals containing procedures for the performance of activities for resolution of crisis situations will be developed as an integral part of the plan. The basic manual to the plan, the Manual on Bank Bankruptcy, including payout of guaranteed deposits, is currently in a process of elaboration.

Alternative methods for bank resolution

The optimal resolution of an ailing bank is a guarantee for maintaining financial stability.

The expansion of the deposit guarantee schemes functions towards problem bank resolution is a major issue of the new financial architecture.

In the past year BDIF continued to work towards research and analysis of international practices and the possible implementation of alternative methods for bank resolution in the national legislation – early intervention, purchase and assumption.

BDIF members in the expert interinstitutional working group, established in 2009 with the aim of working up a proposal for regulatory changes and introducing new methods for bank resolution, prepared and sent a position statement along with the annexes developed thereto for discussion at expert level by the participants from BNB. The working group is going to draft a joint report, which shall be used for the introduction of the expected new European framework for the recovery and resolution of credit institutions into the national legislation.

Management of the risks for the deposit guarantee scheme

Risk assessment is a key element of the good and efficient governance of an organisation.

In this area BDIF undertook the necessary actions to set up a separate department and develop internal regulatory risk assessment framework which to be put into practice.

In the adopted framework risk management is defined as a process with the following components: risk identification, assessment and monitoring and introduction of the necessary control activities for the purpose of mitigating risks to an acceptable level and follow-up assessment. Risk is defined as an event that represents a threat of non-accomplishment of BDIF’s

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objectives. Risk management follows a unified approach, clear and transparent definition of objectives as well as the responsibilities of all participants in the process.

The basis for the creation of the risk management framework incorporated the good corporate practices in the field of risk management, including risk management standards issued and endorsed by the Institute of Risk Management in the United Kingdom.

The approved overall framework for risk management was introduced both in the investmentrelated and operative activities alike. On the basis of the internal risk assessment and the self-assessment made under the Core Principles for Effective Deposit Insurance Systems BDIF identified the strengths and weaknesses in its operations. Register of risks was also created and measures for reducing significant risks were defined. In addition, for the purpose of efficient risk management of triggering the deposit guarantee scheme, BDIF took on establishing a system for early identification and monitoring of external risks evolving from the banking sector. The individual components of this system were completed.

With the view for a more adequate reflection of the risk profile of banks, the plan for 2012 includes the development and testing of a model for risk-based premium contributions, whereas the model itself and the system implementation would also depend on the version of the expected new directive on deposit guarantee schemes. Experts of the BDIF participated in international forums and visited counterpart organisations in order to get acquainted on site with the good practices.

Other measures referring to risk management and planned for 2012 involve the performance of stress tests of the system with regard to the adequate capitalisation and liquidity of BDIF, as well as a business continuity plan.

Adequate funding. Safe and transparent asset management

The adequate funding and reasonable asset management of the deposit guarantee scheme is the foundation of depositors’ confidence.

The major responsibility of BDIF is to safeguard and guarantee the funds, which are managed in line with the following principles:

• safety and protection of assets;

• liquidity maintenance for execution of obligations;

• minimisation of risks and optimisation of income,

by taking into account the specific features of the internal financial market.

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In accordance with LBDG, the target level of BDIF funds to the total amount of guaranteed deposits is 5%. At 31 December 2011 BDIF funds amounted to BGN 1,324,094 thousand, which represented 2.86% of the total amount of eligible deposits of BGN 46,339,251 thousand. The percentage of covered deposits to the coverage level (BGN 196,000) was 4.08%.

Investment Committee was established in 2011 to prepare and update the investment strategy of BDIF and to follow-up its execution on a quarterly basis.

In addition, international experience and practices were studied with the aim of developing and implementing methods for alternative external financing.

Risk management procedures were drawn and approved for the purpose of continuous monitoring of the investment process.

On the grounds of a request sent to the National Audit Office recommendations based on good practices were proposed for the building of Financial Management and Control System. A team was assigned and most of the internal regulations were prepared and approved.

Effective communication.

Interinstitutional cooperation

The deposit guarantee scheme is an active member of the financial safety net.

During the year BDIF was actively involved in the formation of the official position of Bulgaria in the field of deposit guarantee by participating in the joint discussions with the Ministry of Finance and the Bulgarian National Bank regarding the new directive on deposit guarantee schemes held in Sofia, and also through meetings in Brussels.

Interinstitutional working group with representatives of BNB, the Ministry of Finance and BDIF was established in June 2011 following an order of BNB Governor, taking into account the current proposals for changes in the regulatory framework of the financial sector of the EU. The BDIF representatives continued their work in the chaired by the Ministry of Finance Financial Services Working Group No 26 at the Council for European Affairs.

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Effective communication.

International activities

The exchange of experience and information with international organisations contribute to capacity strengthening.

In the past year BDIF continued to strengthen its role in the international community and increase its professional capacity through an exchange with various international organisations.

In addition to its current work in the Standing and Regional Committees of the International Association of Deposit Insurers BDIF participated in all major forums of the organisation. At the Annual Meeting held in October 2011 the Chairman of BDIF Management Board Rossen Nikolov was elected a member of the Executive Council of the Association with a term of office of three years.

Current exchange of information related to the forthcoming amendments to the directive on deposit guarantee schemes, the expected new regulatory framework for crisis management and other current issues represented a large part of the operational work at the European Forum of Deposit Insurers. EFDI EU Committee actively cooperated with the EU authorities in the discussions on the new directive. In June the Management Board of BDIF took a decision for BDIF subscribing to the Multilateral Memorandum of Understanding of the European Forum of Deposit Insurers. The Multilateral Memorandum is a self-regulatory framework focused on facilitating and encouraging good relations, exchange of information and active cooperation and interaction between members of the European Forum.

2011 was plentiful in international seminars and conferences. Part of them was related to training courses regarding the assessment of compliance with the Core Principles for Effective Deposit Insurance Systems as well as presentation of the results of self-assessments of certain deposit insurance schemes. Others were focused on crisis management, banks restructuring and defining the contributions to the scheme.

BDIF hosted several working visits along the line of its well-developed bilateral cooperation with foreign deposit insurance schemes. Delegations from Mongolia, the Czech Republic and Serbia visited BDIF for the purpose of experience exchange. Memorandum of Understanding was signed in October with the Deposit Guarantee Fund of Ukraine.

Meetings were held with representatives of International Monetary Fund missions in the course of their visits to Bulgaria in February, May and December 2011.

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Effective communication.

Maintaining depositors’ confidence

The balanced and timely information defines the successful communication.

BDIF regularly informed the media and the general public about its activities and the new proposals concerning the European regulatory framework of the deposit guarantee schemes.

Depositors received general information about the operations and main features of the deposit guarantee scheme, and answers to specific questions about deposit protection were also provided by telephone and e-mail messages, on the premises and on the website of BDIF. The new website of BDIF was launched in December with a view of raising depositors’ awareness about BDIF operations and optimising the usability of the information thereon through Internet. A unified national number 0700 144 03 was launched to facilitate depositors’ contact with BDIF. Printing of the ‘Questions and Answers about Deposit Insurance’ brochure and its free distribution to the branch network of member banks is forthcoming.

Interviews and articles regarding the activities of BDIF were released during the year in various specialised publications.

Good corporate practices.

Transparent and efficient governance

Governance grounded on good practices is a promise for successful operation of the deposit guarantee scheme.

For the purpose of achieving BDIF’s strategic objectives BDIF employees attended various training courses locally and abroad, including courses for development of complex professional skills.

BDIF experts took part in international forums on topical issues reflecting the developments in the field of deposit guarantee.

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A new organisational structure of BDIF was approved and the changes were made in line with BDIF strategic objectives and the newly adopted human resources management policy. These are based on analysis of operations, the necessity to relocate resources as per the specific objectives of BDIF and to maintain highly qualified personnel. A new performance evaluation procedure was introduced and the results of it served for assessment of employees’ performance and defining the specific needs in upgrading their qualification. Work plans for 2012 were drawn for BDIF’s employees.

Continuously during the year BDIF updated the existing and developed new policies and procedures for the various lines of its business, and the Code of Ethics was revised as well.

The development of the information systems for the purpose of ensuring their higher efficiency is also among the priorities of BDIF. Finance and accounting as well as dealing software systems are currently functioning at BDIF. The B-analyzer or the Unified Information System of BDIF is in the pipeline. The B-analyzer is an aggregation of systems used by BDIF for data collection, data import and maintenance of a unified and centralized database of BDIF. The other system, the completion of which is pending in 2012, is the Automatic Payout System for guaranteed deposits intended for secure and proper data handling for the purpose of timely and efficient payout of guaranteed amounts to depositors.

The development of Risk Management Systems is forthcoming in the period of 2012 – 2013 and of an Integrated Information System – in 2014, the latter being intended to integrate all systems in place as of date in BDIF, including the finance and accounting system, the dealership system, the B-analyzer, the Automatic Payout System and Risk Management Systems.

The IT audit performed at the end of the year was intended to check whether the information systems at BDIF had been managed in compliance with internal and external regulations and good practices, IT-related risks had been adequately managed and the information systems had been capable of providing services in accordance with the requirements of BDIF management.

The development of Information Safety Policy is also pending.

A new web-based software solution for team work and project management TeamLab is under development. This is a system for project management, work in teams and improvement of internal communications and information exchange. The implementation of the system is planned for the end of April 2012 with the aim of improving the organisation of work and for real-time performance monitoring and control by the management.

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Administrative Expenses Budget for 2012 The execution of the strategic and immediate operational objectives is the basis for the Administrative expenses budget of BDIF for 2012, approved by the BNB Governing Council on 20 December 2011:

BGN I. Operating expenses І. 1. Expenses on materials

74,000

І. 2. Hired services expense

389,048

І. 3. Expenses on salaries

800,000

І. 4. Expenses on social security and benefits

234,000

І. 5. Other expenses

119,074

II. Total finance costs

33,000

III. Extraordinary expenses IV. Expenses on acquisition of fixed tangible and intangible assets TOTAL (І+II+III+IV)

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1,616,122

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65,900 1,715,022

BDIF ORGANISATIONAL STRUCTURE as at 1 January 2012

Management Board

Chairman of the Management Board

Treasury Department

Bank Bankruptcy and Early Intervention Department

Risk Assessment and Analysis Department

Corporate Communications and International Relations

Experts

Legal Department

Finance and Accounting Department

HR and Administration Department

This Report was approved by the Management Board of the Bulgarian Deposit Insurance Fund on 28 March 2012 and signed on its behalf by:

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

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Appendix 1: Main Financial Ratios Statement of financial position as at 31 December 2011

TOTAL ASSETS – Cash and cash equivalents: – Receivables from banks – Available-for-sale securities – Property and equipment – Intangible and other assets TOTAL LIABILITIES NET ASSETS OF BDIF

BGN’000

31.12.2011 1,325,340 558,357 366 765,737 828 52 63 1,325,277

Statement of BDIF operations as at 31 December 2011 Result for the year – Premium contributions income – Investment income · Investment income from government securities · Interest income from deposits · Net gains/(losses) from sales/maturity of government securities – less gains/ (losses) from revaluation · Net gains/(losses) from sales/maturity of government securities – gains/(losses) from revaluation – Other operating income/(losses), net · Net gains/(losses) from revaluation and foreign currency transactions · Derecognised payables on deposit guarantees · Penalty interest for delay received – General administrative costs Other components of net assets – Change in the fair value of available-for-sale financial assets · Gains/(losses) occurred from revaluations during the year · Less: Reclassification adjustment of (gains)/losses, included in the current year result TOTAL COMPREHENSIVE RESULT FOR THE YEAR

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31.12.2010 1,101,024 372,175 – 727,957 862 30 84 1,100,940

BGN’000 31.12.2011 225,476 195,448 31,063 26,796 2,857

31.12.2010 209,788 179,797 29,211 27,982 667

447

477

963 366 339 27 (1,401)

85 2265 1804 434 27 (1,485)

(1,139) (176)

7,358 7,443

(963) 224,337

(85) 217,146

Statement of cash flows for the year ended 31 December 2011 at 1 January

at 1 January

at 31 December

at 31 December

2011 372,169

2010 232,440

2011 558,357

2010 372,169

Cash and cash equivalents

For the purposes of the Statement of cash flows, special purpose blocked deposits and interest accrued on not yet matured term deposits, existing at 31 December 2010 (BGN 6 thousand), are not treated as cash and cash equivalents.

Statement of changes in net assets Balance at 1 January 2010 Total comprehensive result for the year Balance at 31 December 2010 Total comprehensive result for the year Balance at 31 December 2011

883,794 217,146 1,100,940 224,337 1,325,277

The structure of BDIF’s financial assets and liabilities as at 31 December by category is presented in the table below:

Financial assets ‘Loans and receivables’ category Cash and cash equivalents Receivables from banks ‘Available-for-sale financial assets’ category Available-for-sale government securities Financial liabilities ‘Other financial liabilities’ category Other liabilities

31 December 2011 BGN’000

31 December 2010 BGN’000

558,357 366

372,175 -

765,737 1,324,460

727,957 1,100,132

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6

12

6

At 31 December 2011 the receivables from banks amounting to BGN 366 thousand (31 December 2010: none) included additionally accrued annual premium contributions from a bank as a result of a supervisory inspection performed by the Bulgarian National Bank, including interest for delay at the amount of BGN 27 thousand.

BDIF had no outstanding contingent financial commitments at 31 December 2011 and 31 December 2010. www.dif.bg

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The tables below represent a summary of BDIF’s exposure to currency risk: Currency structure analysis At 31 December 2011 Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities Financial liabilities Other liabilities

At 31 December 2010 Financial assets Cash and cash equivalents Available-for-sale securities Financial liabilities Other liabilities

USD BGN’000

EUR BGN’000

BGN BGN’000

Total BGN’000

5,285 8,516 13,801

241,186 393,810 634,996

311,886 366 363,411 675,663

558,357 366 765,737 1,324,460

-

-

12 12

12 12

USD BGN’000

EUR BGN’000

BGN BGN’000

Total BGN’000

5,141 9,533 14,674

229,501 316,434 545,935

137,533 401,990 539,523

372,175 727,957 1,100,132

-

-

6 6

6 6

Main Financial Ratios Return on net assets of BDIF Net income earned Ratio of BDIF liquid assets to total assets Ratio of BDIF quick liquid assets to total assets

31 December 2011 2.27% BGN 30,028 thousand 56.46% 51.53%

31 December 2010 2.72% BGN 29,991 thousand 42.09% 38.42%

The return on net assets of BDIF was determined as the ratio between the BDIF net income (net of premium contributions) and BDIF total assets at the end of the reporting period. The net income earned was calculated by deducting premium contributions from the financial result.

The ratio of liquid assets to total assets of BDIF was calculated as the ratio of liquid assets with maturity of up to 1 year to BDIF total financial assets.

The ratio of quick liquid assets to total assets of BDIF was determined as a ratio between cash in current accounts, one-week deposits with BNB and the market value of bonds in BDIF’s portfolio, issued by the government in foreign markets, and the total assets of BDIF.

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Appendix 2: Deposit Guarantee 2.1. Dynamics overview of attracted funds and eligible deposits with banks in Bulgaria Attracted Funds The amount of attracted funds1 in the banking system of the country increased by 4.12% in 2011 on an annual basis and totalled BGN 65.607 billion at year-end.

The following changes occurred in the structure of attracted funds:

• A change is observed in the funds from credit institutions with other type of financing.

The funds from credit institutions decreased by BGN 3.564 billion (-26.24%) compared with the figures at the end of 2010 and reached BGN 10.019 billion (15.27% of all funds).

• Funds from individuals and households showed largest growth of 13.78% reaching BGN 31.902 billion or 48.63% of all funds.

• A significant increase is also noted in funds from institutions other than financial institutions. They increased by 11.46% on an annual basis and reached BGN 21.443 billion or 32.68% of all funds.

With regard to currency structure, the trend of increase in the relative share of funds in BGN (13.82% on an annual basis) and in foreign currencies other than Euro (5.94% on an annual basis) observed in 2010 was continued and meanwhile the share of funds in EUR was decreased (-3.83% on an annual basis). Despite the registered decrease in the funds in EUR they still held the largest share of all funds – 48.02% followed by these in BGN – 45.18%. The funds in other currencies held a share of 6.80% at the end of 2011.

1

The attracted funds include deposits, repo deals and financing from credit institutions, households and other institutions, including enterprises, as well as subordinated term debt and debt-capital (hybrid) instruments.

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Figure 1 Attracted Funds Breakdown

BGN'000 70,000,000

Debt-capital (hybrid) instruments Subordinated term debt

60,000,000

50,000,000 Individuals and households 40,000,000

30,000,000

20,000,000

10,000,000

0 Q4 2007

Q4 2008

Q4 2009

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Period

Source: BNB

Table 1 Breakdown of Attracted Funds Q4 2007

Q4 2008

Q4 2009

Q4 2010

Q4 2011

Share

∆QoQ

∆ YoY

Credit institutions

11,502,666

16,561,757

15,179,206

13,582,450

10,018,514

15.27%

-13.20%

-26.24%

Institutions other than credit institutions

20,151,175

19,881,755

18,696,261

19,238,454

21,442,981

32.68%

0.57%

11.46%

Individuals and households

18,986,492

22,164,745

24,836,988

28,037,365

31,901,545

48.63%

4.49%

13.78%

1,139,689

1,734,567

1,708,684

1,760,373

1,806,077

2.75%

3.05%

2.60%

416,365

532,534

412,220

392,498

437,467

0.67%

1.33%

11.46%

52,196,387

60,875,358

60,833,359

63,011,140

65,606,584

100.00%

0.04%

4.12%

Subordinated term debt Debt-capital (hybrid) instruments Total attracted funds

Source: BNB

Table 2 Currency Breakdown of Attracted Funds Q4 2007

Q4 2008

Q4 2009

Q4 2010

Q4 2011

Total

52,196,387

60,875,358

60,833,359

63,011,140

65,606,584

100.00%

0.04%

4.12%

in BGN

21,528,423

24,247,436

21,551,287

26,040,195

29,640,026

45.18%

3.83%

13.82%

in EUR

27,075,648

32,793,819

35,726,691

32,761,879

31,507,556

48.02%

-3.57%

-3.83%

3,592,316

3,834,103

3,555,381

4,209,066

4,459,002

6.80%

2.31%

5.94%

in other currencies

Share

∆QoQ

∆ YoY

Source: BNB

The data on the gross external debt of Bulgaria, published by BNB, show that the banks in the country decreased their external liabilities, thus continuing the trend from the beginning of 2009. In the past year 2011 the banks settled external liabilities at the amount of BGN 2.394 billion (EUR 1.224 billion)2 , the decrease being due to the short-term component of their external liabilities (Figure 2).

2

According to BNB data at 31 December 2011 with latest revision published on 23 March 2012.

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Figure 2 Gross External Liabilities of Banks

12,000.0

10,000.0

EUR, mln.

8,000.0

6,000.0

4,000.0

2,000.0

December-11

September-11

June-11

March-11

December-10

September-10

June-10

March-10

December-09

September-09

June-09

March-09

December-08

September-08

June-08

March-08

December-07

September-07

June-07

March-07

December-06

September-06

June-06

March-06

0.0

Period Gross external liabilities of banks

Short-term external liabilities of banks

Long-term external liabilities of banks

Source: BNB

Deposits The bank deposits of the business and households showed a growth in 2011 and their amount reached BGN 44.561 billion at year-end – a growth of 13.08%. The main share of 69.31% belongs to deposits from households and non-profit institutions serving households amounting to BGN 30.886 billion (12.95% growth on an annual basis). Deposits of non-financial entities amounted to BGN 13.675 billion at the end of 2011 or a growth of 13.38% on an annual basis.

In the last six years – from 2006 through the end of 2011 – the amount of deposits, excluding those from financial institutions, decreased more than twice (Figure 3). In the period from the beginning of 2008 to the beginning of 2011 the increase in the amount of deposits was due mostly to the increase in the deposits from households and NPISHs while the level of deposits from non-financial entities remained relatively constant after 2008. From the beginning of 2011 the deposits of non-financial entities started to grow but showed a dropdown in the last quarter of 2011.

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26

Figure 3 Dynamic of Deposits of Non-Financial Institutions 50,000,000 45,000,000 40,000,000

Amount, BGN '000

35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000

December-11

August-11

October-11

April-11

June-11

February-11

December-10

August-10

October-10

April-10

June-10

February-10

December-09

August-09

October-09

April-09

June-09

February-09

December-08

August-08

October-08

April-08

June-08

February-08

December-07

August-07

October-07

April-07

June-07

February-07

December-06

August-06

October-06

April-06

June-06

February-06

December-05

-

Period

Total deposits

Non-financial entities

Household and NPISHs

Source: BNB

With regard to the growth rate of deposits in the past six years the following is worth noting: • the growth rates of deposits from non-financial entities and households were the highest from 2006 till the summer of 2007 and then started to decrease (approximately with the

breakup of the crisis). Despite that decrease, the growth rate of deposits from households and NPISHs still remained positive in contrast to that of non-financial entities, which had negative values from March 2008 to March 2010.

• in the second half of 2009 the growth rates of deposits from non-financial entities and households on an annual basis started to increase again (Figure 4).

• the growth rate of deposits on prior quarter basis showed well-expresses seasonal

fluctuations – a negative growth rate was observed in the first quarters of 2006, 2007, 2008 and 2009 compared with the previous quarter (Figure 5).

• in the forth quarter of 2011 the growth rate of deposits from non-financial entities and households was slowed down but still remained a double-digit figure (13.08% on an annual basis). This was due to the component of non-financial entities, which showed a decline of 2.03% on a quarterly basis.

27

www.dif.bg

Total deposits growth rate

Deposits from non-financial entities growth rate

www.dif.bg

December-11

October-11

August-11

June-11

April-11

February-11

December-10

October-10

August-10

June-10

April-10

February-10

Deposits from non-financial entities growth rate

December-09

October-09

August-09

June-09

April-09

February-09

December-08

October-08

August-08

June-08

April-08

February-08

December-07

Total deposits growth rate

October-07

Figure 5

August-07

June-07

April-07

February-07

December-06

October-06

August-06

June-06

April-06

February-06

December-05

Growth, %

December-11

October-11

August-11

June-11

April-11

February-11

December-10

October-10

August-10

June-10

April-10

February-10

December-09

October-09

August-09

June-09

April-09

February-09

December-08

October-08

August-08

June-08

April-08

February-08

December-07

October-07

August-07

June-07

April-07

February-07

December-06

October-06

August-06

June-06

April-06

February-06

December-05

Growth, %

Figure 4 Deposits Growth Rate (YoY)

50%

40%

30%

20%

10%

0%

-10%

-20%

Period

Deposits from households growth rate

Source: BNB

Deposits Growth Rate (QoQ)

20%

15%

10%

5%

0%

-5%

-10%

Period

Source: BNB

Deposits from households growth rate

28

In 2011 the banks succeeded in attracting additional resources from external markets whereby they preserved their stability regardless of the decrease in the attracted funds from EU member state banks. The main factors for the increase of savings in 2011 include the growing economic uncertainty as well as the positive actual interest rate on deposits during the year. The lack of sufficiently attractive projects for the companies and the additional depositing options for the population also contributed to the significant deposit growth in the past year. In addition, the deepening debt crisis in the Eurozone made a number of local companies start allocating supplementary liquid reserves.

As a result of the decreased demand of new credits and the increased requirements for the approval of new loans the borrowings of households and non-financial entities showed a meagre growth in 2011. Since deposits growth left behind the growth of credits the banks were able to reduce their dependence on external financing to the levels from the beginning of 2008.

Besides, the ratio of granted loans to attracted funds was significantly improved.

Despite the preserved trend of credit quality deterioration, the high capital adequacy of the banking sector in Bulgaria and the existence of other buffers, including the opportunity for the majority of banks to generate profits in 2011, ensure good options for retaining the stability of the banking system in the country. The banking system closed the past year with a profit of BGN 586 million. The adequacy of Tier 1 capital of the banking system at the end of 2011 was 15.74% and the total capital adequacy was 17.53%. The requirement for capital adequacy ratio of Bulgarian banks is 12% and is higher than the minimum required in the EU – 8%.

29

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2.2 List of BDIF Member Banks

· Allianz Bank Bulgaria · Bulgarian Development Bank · Bulgarian-American Credit Bank · Central Cooperative Bank · CIBANK · Citibank, N.A. – Sofia Branch · Corporate Commercial Bank · D Commerce Bank · DSK Bank · Emporiki Bank (Bulgaria) · Eurobank EFG Bulgaria (Post Bank) · First Investment Bank · International Asset Bank

· Investbank · MKB Unionbank · Municipal Bank · Piraeus Bank Bulgaria · ProCredit Bank (Bulgaria) · Raiffeisenbank (Bulgaria) · Societe Generale Expressbank · TBI Bank · T. Ç. Ziraat Bank – Sofia Branch · Teximbank · Tokuda Bank · UniCredit Bulbank · United Bulgarian Bank

Note: The listed below credit institutions are branches of banks from EU member states and they do not participate in the Bulgarian deposit-guarantee scheme since they are protected by the applicable home country scheme:

· Alpha Bank – Bulgaria Branch · BNP Paribas S.A. – Sofia Branch · ING Bank N.V. – Sofia Branch · Işbank GmbH – Sofia Branch · Regional Investment bank – Bulgaria Branch

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30

2.3 Information on Deposit Guarantee The deposit guarantee scheme covers depositors’ funds with a bank with revoked license up to the statutory amount of BGN 196,000, per depositor per bank. The deposits of physical persons and legal entities in both national and foreign currency are covered by the guarantee.

The deposits of banks and non-banking financial institutions (except for the funds for supplementary mandatory pension insurance), of the Government and government institutions, of municipalities, preferential deposits, deposits of members of the managing bodies of the bank and related thereto persons, as well as deposits associated with ‘money laundering’ are excluded from BDIF coverage. Disbursement starts not later than 20 business days from the date of BNB revocation of a bank’s license. Foreign currency deposits are repaid at their BGN equivalent at the BNB exchange rate for the initial day of payment. Payout is made via a servicing bank designated by the Management Board of BDIF.

Deposit composition information – breakdown, amounts and number, in national and foreign currency The total amount of eligible deposits in the banking system was BGN 46,339,251 thousand as at 31 December 2011 (31 December 2010: BGN 40,806,593 thousand). The total number of deposits was 10,347,385 (31 December 2010: 11,217,887). The average deposit amount was BGN 4,478 and for 2010: BGN 3,638.

46,339 40,807

11,218

10,347 3,638 4,478

Amount of deposits (BGN’mln.)

2010

Source: BDIF

31

www.dif.bg

2011

Number of deposits (BGN’000)

Average deposit amoun t (BGN)

In 2011 the amount of the deposits guaranteed by BDIF increased by 14%, and their number decreased by 8% compared to the previous year. Increase in the average deposit amount was observed, which in 2011 grew up by 23% compared with that in 2010.

The amount of deposits up to the coverage level of BGN 196,000 provided for as per the Law on Bank Deposit Guarantee was BGN 28,920,654 thousand (62.41%) and their number was 10,329,336 (99.83%). The average deposit amount within this range was BGN 2,800.

28,920,654 26,040,759

11,203,901

10,329,336

2,574 Amount of deposits with full guarantee (BGN’000) 2010 2011

Number of deposits with full guarantee

2,800

Average deposit amount i n the group with full guarantee (BGN)

Source: BDIF

The amount of deposits over the coverage level of BGN 196,000 was BGN 17,418,597 thousand (37.59%) and their number was 18,049 (0.17%). The average deposit amount within this range was BGN 965,073.

17,418,597

11,968,631

855,758 13,986 Amount of deposits exceeding BGN 196,000 (BGN’000) 2010

965,073

18,049

Number of deposits exceeding BGN 196,000

Average deposit amount in the group exceeding BGN 196,000 (BGN)

2011

Source: BDIF

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32

Deposits in BGN, guaranteed by BDIF, amounted to BGN 24,057,463 thousand (51.92%) and were held by 8,374,822 depositors (80.94%).

Deposits in EUR, guaranteed by BDIF, amounted to BGN 18,432,584 thousand (39.78%) and were held by 1,437,436 depositors (13.89%).

Deposits in other currencies, guaranteed by BDIF, amounted to BGN 3,849,204 thousand (8.31%) and were held by 535,127 depositors (5.17%).

Deposits structure by currency 2011

51.92%

60% 50% 40% 30% 20% 10% 0%

39.78% 8.31% Other currencies

BGN

EUR

Source: BDIF

33

www.dif.bg

Other currencies

Deposits structure by currency 2010

60% 50% 40% 30% 20% 10% 0%

BGN

49.25%

42.10%

8.65% Other currencies EUR

Other currencies

Funding – information on entry and annual premium contributions for 2011 The annual premium contributions from banks amounted to BGN 195,448 thousand in 2011 compared to BGN 179,797 thousand in 2010. As far as the number of member banks in the deposit guarantee system remained unchanged – 26, the increase in the total amount of premium contributions was due to the increased total amount of eligible deposits in 2010 serving as a base for the calculation of the premium contribution in 2011 (amounting to BGN 39,090 million) compared to the deposit base for 2009 (amounting to BGN 35,939 million) – a base for the calculation of the premium contribution for 2010.

The amount of BGN 195,448 thousand was the result of the annual premium contributions of 26 banks for 2011 amounting to BGN 195,109 thousand and the additional amounts payable to the annual premium contributions at the amount of BGN 339 thousand.

In 2011 there were no newly established banks in Bulgaria to be included in the deposit guarantee scheme and, respectively, no entry contributions were made.

39,090

40,000

300

35,939 35,000

250

30,000

180

195 200

25,000 20,000

150

15,000

100

10,000 50

5,000 0

2010 Eligible deposits (on average daily basi s), (left scale, in mln BGN) Annual premium contributions (right scale, in mln BGN)

Source: BDIF

34

www.dif.bg

2011

0

Appendix 3: Investment Policy and Asset Management The leading principle of investment activities as laid down in LBDG and the internal regulations is the management of BDIF’s assets in line with the public interest. The major responsibility of BDIF is to safeguard and guarantee the funds, which are managed according to the following principles:

• safety and protection of assets;

• liquidity maintenance for execution of obligations;

• minimisation of risks and optimisation of income.

In accordance with LBDG, the resources of BDIF are invested in securities issued or guaranteed by the State: securities issued to the domestic market; bonds issued to external markets (global and eurobonds); short-term deposits with banks under Art. 2, para 5 of the Law on Credit Institutions, and deposits with BNB.

Investment Portfolio The investment portfolio of BDIF as at 31 December 2011 amounted to BGN 1,324,094 thousand compared to BGN 1,100,132 thousand at the end of 2010. The portfolio increased by BGN 223,962 thousand in 2011.

BDIF Investment Portfolio 1,400 1,200

1,302.92

1,308.41

1,317.24

1,324.09

1,000 800 mln.

BGN 600

630.65

668.84

682.85

622.75

699.01

765.74 616.90

555.10

400 200 0

3.43

2.80

1.34

3.25

Q1'2011

Q2'2011

Q3'2011

Q4'2011

Bonds

Source: BDIF

35

www.dif.bg

Deposits with BNB

BNB account

Portfolio

Financial Instruments In 2011 the assets of BDIF were invested in bonds, issued by the Bulgarian government, and deposits with BNB and no deposits were placed with banks. The share of bonds in the total portfolio for the year changed from 66.17% at the end of 2010 to 48.41% at the end of March of 2011. This decline was due to the significant amount of government securities maturing at the beginning of the year as well as to the premium contributions from banks received at the end of March. For the same reasons, the share of deposits and current account with BNB increased from 33.83% at the end of 2010 to 51.33% at the end of first quarter of the year. By the year-end the share of bonds gradually increased as a result of funds investment and at the end of the year the share of deposits decreased to 42.17% while the share of bond represented 57.83% of the total portfolio.

Portfolio Breakdown by Instrument 70% 57.83%

60% 48.41%

50%

51.33%

52.19%

53.07% 47.60%

46.83% 41.92%

40% 30% 20% 10% 0.26%

0%

Q1'2011 Bonds

Deposits with BNB

0.21% Q2'2011

0.25%

0.10% Q3'2011

Q4'2011

BNB account

Source: BDIF

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36

Profitability of Investment Portfolio The trend of decrease in the yield of Bulgarian government securities continued in 2011 and at the end of the year the weighted average yield to maturity of bonds in BDIF portfolio was 4.16% compared to 4.48 at the end of 2010 and 4.87% at the end of 2009. The yield from deposits with BNB followed the reference quotations of the Bank for International Settlements, Basel. In the first half of the year the interest on deposits in BGN and EUR increased reaching levels above 1% on an annual basis. Subsequently these dynamics changed and the interest rates on deposits in BGN and EUR became 0%. Except for the first quarter of the year, the interest on deposits in USD was 0% as well.

Portfolio Profitabilit y 6% 5%

4.31%

4.31%

4.28%

4.16%

4%

0%

Q1'2011 Bonds

Deposits with BNB

Source: BDIF

www.dif.bg

Q2'2011 Portfolio

2.43%

Q3'2011

2.41%

0.00%

1%

0.72%

0.39%

2%

37

2.58%

2.29%

0.31%

3%

Q4'2011

Currency Breakdown of Investment Portfolio At the end of 2010 the share of the euro-exposure reached 49.63% of the total portfolio but after the receipt of the annual premium contributions of banks in the end of the first quarter of 2011 the share of the assets denominated in BGN in the portfolio increased to 57.31% and the share of assets denominated in EUR decreased to 41.72%. Throughout the year the Ministry of Finance continued issuing government securities denominated in euro to the local market and part thereof was purchased by BDIF. As a result the currency breakdown of the portfolio changed gradually and in the end of December the BGN exposure represented 51% while the euroexposure – 47.96% of the total portfolio. The share of assets denominated in USD decreased from 1.33% at the end of 2010 to 1.04% – in the end of 2011.

Portfolio Currency Breakdown

80% 70% 57.31%

60% 50%

55.94%

54.82% 43.11%

41.72%

51.00% 44.19%

47.96%

40% 30% 20% 10%

0.98%

0%

Q1'2011 BGN

EUR

Q2'2011

1.04%

1.00%

0.95% Q3'2011

Q4'2011

USD

Source: BDIF

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38

Interest Breakdown of Bond Portfolio In 2011 the interest structure of BDIF bond portfolio retained the characteristics of 2010. The prevailing portion of securities was with fixed coupon and hold between 87% and 89% of the bond portfolio. The limited offering of government bonds with a floating coupon in the market and the lack of new such issues resulted in a gradual decrease in their share of BDIF portfolio in the year. From 12.26% in the end of 2010 they decreased to 10.30% at the end of 2011. The partial maturing of floating-coupon securities in circulation were another reason for that. With regard to the investment portfolio, the fixed-yield securities at year-end represented 51.88% while those with a floating yield – 5.95%, respectively.

Bond Portfolio Breakdown

100%

89.70%

88.82%

88.57%

87.63%

80% 60% 40% 20%

12.37%

0%

Q1'2011 Fixed interest rate securities

Source: BDIF

39

www.dif.bg

11.43%

Q2'2011

11.18%

Q3'2011

Floating interest rate securities

10.30%

Q4'2011

Maturity Breakdown and Duration of Investment Portfolio In 2011 BDIF maintained a low modified duration of the portfolio – below 1. The indicator is relatively stable and only in the last quarter of the year it slightly increased – to 0.90. The modified duration of the securities portfolio was 1.54 at 31 December 2011 – 1.83 for the securities denominated in BGN and 1.58 for those denominated in EUR. The main part of BDIF portfolio was in deposit and securities with maturity of up to 1 year and securities with maturity from 1 to 3 years. At the end of the third quarter of the year the instruments with maturity of up to 1 year increased significantly their share reaching 63.6% of the total portfolio.

The dynamics of the securities with maturity from 1 to 3 years was the opposite as their share dropped to 22.8% in the end of the third quarter but then increased again to 26.4%. The share of securities within the maturity segment from 3 to 5 years increased gradually throughout the year reaching 9.4% of the portfolio at year-end. The securities with maturity of more than 5 years maintained a relatively constant share of just above 7% of BDIF portfolio. The portfolio of BDIF did not include securities with maturity exceeding 10 years over the year.

Q1’2011

Q2’2011

Q3’2011

0.0%

0.0%

0.0%

7.6%

7.6%

0.0%

0%

7.3%

7.4%

9.4%

10%

6.0%

4.4%

20%

4.9%

30%

26.4%

40%

22.8%

28.6%

50%

31.4%

60%

56.5%

70%

56.3%

59.6%

80%

63.6%

Portfolio Maturity Breakdown

Q4’2011

Source: BDIF

www.dif.bg

40

Modified Portfolio Duration

1.80 1.60 1.40

1.71

1.61

1.57

1.54

1.20 1.00 0.80 0.60

0.84

0.85

0.84

0.90

0.40 0.20 0.00 Q1’2011 Bond portfolio

Q2’2011

Q3’2011

Q4’2011

Total portfolio

Financial Results BDIF investment income for 2011 amounted to BGN 31,063 thousand compared to BGN 29,211 thousand for 2010. The net change in the fair value of the available-for-sale financial assets for 2011 was BGN (1,139) thousand compared to BGN 7,358 thousand for 2010.

41

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Appendix 4: Application of Core Principles for Effective Deposit Insurance Systems I. Historical Overview The International Association of Deposit Insurers started in 2008 the work on the development of Core Principles for Effective Deposit Insurance Systems. In June 2009 the Basel Committee on Banking Supervision and the International Association issued the Core principles for Effective Deposit Insurance Systems and then in December 2010 and May 2011 the Methodology for Assessing Compliance with the Core Principles and a Handbook for the Methodology Application were respectively approved. The Financial Stability Board added the Core Principles to its Compendium of 12 Key Standards for Sound Financial Systems. The Executive Board of the International Monetary Fund and the World Bank approved the use of the Core Principles in the reviews under the Financial Sector Assessment Program.

II. Implementation of the Core Principles

• in the individual states – for self-assessment

• IMF/WB – in their reviews under the Financial Sector Assessment Program

• FSB/G-20 – for peer reviews and thematic reviews

A number of deposit guarantee schemes performed self-assessments under the Core Principles in 2011. The Financial Stability Board performed peer reviews for compliance with the Core Principles within G-20 in order to assess the effectiveness of the reforms undertaken in response to the crisis and where necessary to make recommendations for subsequent actions by local authorities and international standard-setting organisations.

III. Main Assessment Components

– Data and documents

– Questionnaire

– Interviews with the main participants in the financial safety net

– Analysis and conclusions

– Feedback

– Final report, including assessment and action plan for reforms.

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42

IV. Training A lot of training courses were carried out in 2011 with the involvement of participants from international financial institutions (the World Bank, the Basel Committee on Banking Supervision and the Financial Stability Institute), seminar for trainers in the Federal Deposit Insurance Corporation, regional trainings for members of the International Association of Deposit Insurers and the European Forum of Deposit Insurers – simulations and practical tests.

V. The Core principles in Bulgaria

43

May 2010

Translation of an excerpt (only the Core Principles) into Bulgarian language and display on BDIF website in Bulgarian and in English

Appendix to the Annual Financial Statements of BDIF for 2009

November 2011

Self-assessment of the compliance with the Core Principles.

www.dif.bg

www.dif.bg

44

Bulgarian Deposit Insurance Fund – Annual Report 2011

CONTENTS

Independent Auditor’s Report

46

Statement of Operations

48

Statement of Financial Position

49

Statement of Cash Flows

50

Statement of Changes in Net Assets

51

Notes to the Annual Financial Statements

45

1. General information

52

2. Summary of the significant accounting policies of the BDIF

54

3. Premium contributions

67

4. Investment income

68

5. Other income and losses, net

68

6. General administrative costs

69

7. Cash and cash equivalents

70

8. Receivables from banks

70

9. Available-for-sale securities

71

10. Property and equipment

73

11. Intangible and other assets

74

12. Other liabilities

75

13. Financial risk management

75

14. Relations and transactions with government institutions, bodies and enterprises

84

www.dif.bg

STATEMENT OF OPERATIONS for the year ended 31 December 2011

2011 BGN’000

2010 BGN’000

3 4 5 6

195,448 31,063 366 (1,401) 225,476

179,797 29,211 2,265 (1,485) 209,788

4

(1,139)

7,358

224,337

217,146

Notes Premium contributions income Investment income Other income/(losses), net General administrative costs Result for the year Other components of net assets Net change in fair value of available-for-sale financial assets TOTAL COMPREHENSIVE RESULT FOR THE YEAR

The accompanying notes on pages 52 to 84 form an integral part of these financial statements.

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48

STATEMENT OF FINANCIAL POSITION as at 31 December 2011 31 December 2011 Notes BGN’000 ASSETS Cash and cash equivalents Receivables from banks Available-for-sale securities Property and equipment

7 8 9 10

558,357 366 765,737 828

372,175 727,957 862

Intangible and other assets

11

52

30

1,325,340

1,101,024

63 63 1,325,277

84 84 1,100,940

TOTAL ASSETS LIABILITIES Other liabilities TOTAL LIABILITIES NET ASSETS

12

The accompanying notes on pages 52 to 84 form an integral part of these financial statements.

49

31 December 2010 BGN’000

www.dif.bg

STATEMENT OF CASH FLOWS for the year ended 31 December 2011 Notes Cash flows from operating activities Cash receipts from banks as premium contributions Cash paid to employees and for social security Taxes paid Released cash blocked on outstanding guaranteed deposits Other proceeds/(payments) from operating activities, net Net cash flows from operating activities Cash flows from investing activities Proceeds from interest on term deposits with banks Proceeds related to available-for-sale securities Payments related to available-for-sale securities Purchases of equipment and assets Net cash flows used in investing activities

2011 BGN’000

2010 BGN’000

195,109

179,797

(837) (90) -

(901) (104) 434

(432)

(395)

193,750

178,831

2,863

662

195,391

285,167

(205,902)

(325,887)

(50) (7,698)

(14) (40,072)

-

(5) (5)

186,052 372,169 136 558,357

138,754 232,440 975 372,169

Cash flows from financing activities Payments of finance lease liabilities Net cash flows used in financing activities Increase in cash flows during the year Cash and cash equivalents at 1 January Foreign exchange gains/(losses) Cash and cash equivalents at 31 December

7 7

The accompanying notes on pages 52 to 84 form an integral part of these financial statements.

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50

STATEMENT OF CHANGES IN NET ASSETS for the year ended 31 December 2011 Net assets BGN’000 Balance at 1 January 2010 Total comprehensive result for the year Balance at 31 December 2010 Total comprehensive result for the year Balance at 31 December 2011 The accompanying notes on pages 52 to 84 form an integral part of these financial statements.

51

www.dif.bg

883,794 217,146 1,100,940 224,337 1,325,277

NOTES TO THE ANNUAL FINANCIAL STATEMENTS 1. General Information Information on BDIF The Bulgarian Deposit Insurance Fund (BDIF) was established under the Law on Bank Deposit Guarantee in 1999. The objective of establishing the BDIF is to protect depositors’ funds in bankrupt banks. BDIF’s core activity involves determining and collecting annual and entry contributions from banks licensed by the Bulgarian National Bank and investment of the accumulated funds. Upon the revocation of a bank’s license BDIF disburses up to BGN 196 thousand of deposits to individuals and legal entities – amount in force as of 31 December 2010 (from 18 November 2008 until 31 December 2010: BGN 100 thousand).

Along with these functions BDIF also performs the functions set out in the Law on Bank Bankruptcy.

In accordance with the Law on Credit Institutions, in force as of 1 January 2007, BNB may order а bank subject to special supervision to increase its capital, provided that the new shares will be acquired by the BDIF. In such a case, the Management Board of BDIF shall take a decision for acquisition of bank’s shares as well as for their transfer.

The address and headquarters of BDIF are in Sofia, 27 Vladayska Street.

The personnel at 31 December 2011 comprised 22 employees (31 December 2010: 23).

Regulatory framework of BDIF operations BDIF operations are regulated by the Law on Bank Deposit Guarantee. This Law requires that cash accumulated from banks shall be invested solely into securities issued or guaranteed by the government, or into deposits with the BNB and short-term deposits with banks. BDIF is governed by a Management Board consisting of five members designated as follows:

– the Chairman of the Management Board – by the Council of Ministers of the Republic of Bulgaria;

– the Vice Chairman of the Management Board – by the BNB Governing Council;

– one member – by the Association of Banks in Bulgaria;

– two members – jointly by the Chairman and the Vice Chairman of the

Management Board of BDIF.

The Chairman of the Management Board organizes and manages the daily operations of BDIF and the administrative personnel and represents BDIF at home and abroad.

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52

The term of office of the Management Board of BDIF is four years. At 31 December 2011 the members of Management Board of BDIF were as follows:

– Rosen Nikolov – Chairman of the Management Board of the Bulgarian Deposit Insurance Fund, assigned by Decision No. 153 of the Council of Ministers dated 17 March 2011 (Bisser Manolov – until 17 March 2011);

– Nelly Kordovska – Vice Chairman of the MB of the BDIF, assigned by Decision No. 1 of the Governing Council of BNB dated 13 January 2011 (Nelly Kordovska – until 13 January 2011);

– Bisser Manolov – member, assigned by Decision dated 23 March 2011 of the MB of the Association of Banks in Bulgaria (Anna Sabeva – until 23 March 2011);

– Borislav Stratev – member, assigned by Decision No. 92-0005 of the Chairman and the Vice Chairman of the MB of BDIF dated 24 March 2011 (Lalko Dulevski – until 24 March 2011);

– Svetla Kostova – member, assigned by Decision No. 92-0005 of the Chairman and the Vice Chairman of the MB of BDIF dated 24 March 2011 (Teodora Yakimova-Drenska – until 24 March 2011).

Main indicators of the economic environment The main economic indicators of the business environment that have affected the Company’s activities throughout the period 2009-2011, are presented in the table below: Indicator GDP in million levs (end-use costs, current prices) Actual growth of GDP Year-end inflation Average exchange rate of USD for the year Exchange rate of the USD at the year-end Basic interest rate at the year-end Unemployment (at year-end) 15 and more years

* – preliminary data for 2011, source: NSI, BNB

53

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2009

2010

2011

68,322 (5.48%) 1.64% 1.4055 1.3641 0.55%

70,511 0.39% 4.45% 1.4774 1.4728 0.18%

75,265* 1.67%* 2.05% 1.4065 1.5116 0.22%

6.8%

10.2%

11.2%*

2. Summary of the Significant Accounting Policies of BDIF 2.1. Basis for the preparation of the financial statements The financial statements of the Bulgarian Deposit Insurance Fund have been prepared in accordance with all International Financial Reporting Standards (IFRS), which comprise Financial Reporting Standards and the International Financial Reporting Interpretations Committee (IFRIC) interpretations, approved by the International Accounting Standards Board (IASB), as well as the International Accounting Standards (IAS) and the Standing Interpretations Committee (SIC) interpretations, approved by the International Accounting Standards Committee (IASC), which are in force as of 1 January 2011 and have been accepted by the European Commission.

For the current financial year (2011) BDIF adopted all new and/or revised standards and interpretations, issued by IASB and respectively, by IFRIC that were appropriate for its activity. The adoption of these standards and/or interpretations, effective as of 1 January 2011, did not result in changes in BDIF’s accounting policies. The management considered their possible effect and concluded that that they would not have an impact on the accounting policies of BDIF since the latter did not possess/operate such items and/or perform similar deals and transactions except for related party transactions:

• IAS 24 (amended) ‘Related Party Disclosures (in force for annual periods beginning on or after 1 January 2011 – endorsed by EC). The amendments are focused on improvement of the definition for the scope and types of related parties and introduce a specific rule for a partial exemption from full disclosure regarding related parties, controlled by or under significant influence by government bodies at international, national and local level and other entities owned thereby – with regard to the types of relations, accounts and balances and transactions with them. BDIF continued its policy of full disclosing.

The remaining standards and interpretations include:

• IFRS Improvements (May 2010) – improvements in IAS 1, 27, 28, 34, IFRS 1, 3 and 7 and IFRIC 13 (in force for annual period beginning on or after 1 January 2011 (or 1 July 2010) – endorsed by EC). These improvements introduce partial amendments to the respective standards primarily with a view of removing existing inconsistency in the rules and requirements of individual standards as well as rendering more precise terminology regarding:

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(a) presentation of the analysis of other comprehensive result (by item – in a separate note or in the statement of changes in net assets);

(b) the approach for a measurement choice of the non-controlling interest, the presentation of the contingent consideration and all share-based payment transactions, which are part of business combinations – from the amendment of IFRS 3 (2008);

(c) improvement of the qualitative disclosures on the risks associated with financial instruments together with the quantitative ones and the disclosures on the collateral held;

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(d) enhanced disclosure requirements for interim financial reporting regarding all significant events and transactions, including changes in fair values, transfers and classification of financial instruments, and financial information update compared to the most recent annual financial statements;

(e) corresponding changes for prospective application in associates and joint ventures according to the amendments to IAS 27 (2008);

(f) clarification of the term ‘fair value’ for the purpose of measuring the award credits in customer loyalty programmes;

• IAS 32 (amended) ‘Financial Instruments: Presentation’ (in force for annual periods beginning on or after 1 February 2010 – endorsed by EC as of 1 February 2010) – on the classification of issued rights. This amendment clarifies the treatment of rights, options and warrants entitling their holder to acquire a fixed number of the equity instruments of the entity for a fixed amount in any currency as equity instruments, provided they are applied pro rata to all existing holders of the same class non-derivative equity instruments;

• IFRIC 14 (amended) ‘Prepayments of a Minimum Funding Requirement under IAS 19’ (in force for annual periods beginning on or after 1 January 2011 – endorsed by EC as of 1 January 2011). The amendment provides clarifications on defining the economic benefit available as a reduction in future contributions in the two cases of existence or non-existence of a minimum funding requirement for contributions relating to future service;

• IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ (in force for annual periods beginning on or after 1 July 2010 – endorsed by EC as of 1 July 2010). This interpretation provides for explanation on the accounting treatment of transactions related to settlement, in full or in part, of financial liabilities to creditors through the issue of equity instruments by debtor – measurement of the equity instruments as consideration and treatment of the differences between their measurement and the measurement of the financial liability, and certain restrictions on the application.

At the date of approval for issue of these financial statements there were several new standards, amended/revised standards and interpretations issued but not yet in force (and/or not yet endorsed by EC) for annual periods beginning on or after 1 January 2011, which were not adopted by BDIF for early application. Some of them were accepted as effective for 2011 but for annual periods starting after 1 January 2011 while others – for annual periods beginning on or after 1 January 2012.

The management judged that part of these would have a potential impact in the future that could cause changes in BDIF’s accounting policies and financial statements for subsequent periods as follows:

• IAS 1 (amended) ‘Presentation of Financial Statements’ (in force for annual periods beginning on or after 1 July 2012 – not endorsed by EC). The amendment introduces a requirement for entities to present the other components of net assets in the statement of operations in two separate categories depending on whether they could be subsequently reclassified or not to current profit or loss (within the result for the year) in the statement of operations;

• IAS 19 (amended) ‘Employee Benefits’ (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC). The amendment changes the accounting for defined benefit plans and termination benefits. The fundamental change is the elimination of the ‘corridor’ approach

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and the introduction of the rule that all subsequent remeasurements (referred to so far as actuarial gains or losses) of defined benefit obligations and plan assets shall be recognised when occurred through other component of net assets in BDIF’s statement of operations, as well as the accelerated recognition of past service costs;

• IFRS 7 (amended) ‘Financial Instruments: Disclosures’ – on the relief from the requirement to restate comparatives and the related thereto disclosures when applying IFRS 9 (in force for annual periods beginning on or after 1 January 2015 – not endorsed by EC);

• IFRS 9 (issued in November 2009 and October 2010) ‘Financial Instruments: Classification and Measurement’ (in force for annual periods beginning on or after 1 January 2013 and revised effective date – for annual periods beginning on or after 1 January 2015 – not endorsed by EC). This standard replaces parts of IAS 39 by establishing principles, rules and criteria for classifying, measuring and derecognising financial assets and liabilities, including hybrid contracts. It introduces a requirement that financial assets are to be classified based on entity’s business model for their managing and the contractual cash flow characteristics of the respective assets. It introduces two primary measurement categories for financial assets – at amortised cost and at fair value. The new rules will lead to possible changes mainly in the accounting for financial assets as debt instruments and financial liabilities designated at fair value through current profit or loss (for credit risk);

• IFRS 13 ‘Fair Value Measurement’ (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC). This standard establishes a single source of methodological guidance by providing a precise definition of ‘fair value’, rules and methods for its measurement as well as more extensive disclosure requirements for fair value and its measurement for the purposes of all IFRSs. It applies to both financial instruments and non-financial assets and liabilities when fair value is required or permitted by IFRS.

Furthermore, the management concluded that the listed below new standards, amended/ revised standards and new interpretations, issued but not yet in force for annual periods beginning on or after 1 January 2011, would not have a potential impact that could cause changes in BDIF’s accounting policies and financial statements for subsequent periods:

• IAS 12 (amended) ‘Income Taxes’ (in force for annual periods beginning on or after 1 January 2012 – not endorsed by EC). The amendment clarifies explicitly that the assessment of deferred tax (asset or liability) on an underlying asset should be based on the manner in which BDIF intends to recover the investment in the carrying amount of the asset – though a sale or through a continuous use. It provides specific rules for cases of non-current assets measured by applying the revaluation model in IAS 16 but mostly for investment properties measured by applying the fair value model in IAS 40, including those acquired in a business combination, i.e. a rebuttable presumption is introduced that deferred tax should be determined on the basis that the carrying amount will normally be recovered through a sale. SIC 21 has been incorporated in IAS 12 and therefore, cancelled as of the effective date of the IAS 12 amendment;

• IAS 27 (as revised in 2011) ‘Separate Financial Statements’ (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC). The standard was reissued with a changed title as the part of it referring to consolidated financial statement was entirely separated in a new standard – IFRS 10 ‘Consolidated Financial Statements’. Thus the standard now includes only the rules on accounting for investments in subsidiaries, associates and joint ventures at the level of separate financial statements; www.dif.bg

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• IAS 28 (as revised in 2011) ‘Investments in Associates and Joint Ventures’ (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC). The title of the standard has been changed and the standard sets out rules for application of the equity method when accounting for investments in associates as well as in joint ventures, which were previously included in the scope of IAS 31 ‘Interests in Joint Ventures’ in line with the new IFRS 11 and IFRS 12. IAS 31 becomes inapplicable starting from 1 January 2013;

• IAS 32 (amended) ‘Financial Instruments: Presentation’ (in force for annual periods beginning on or after 1 January 2014 – not endorsed by EC) – on the offsetting of financial assets and financial liabilities.

These amendments relate to a clarification as to the application of the rules on offsetting financial instruments. They are mainly in four directions: (a) clarification of the meaning of ‘current legally enforceable right of set-off’; (b) the application of the simultaneous realisation and settlement criterion; (c) offsetting of cash provided as collateral; (d) the unit of account for the application of the offsetting requirements;

• IFRS 7 (amended) ‘Financial Instruments: Disclosures’ – on the offsetting of financial assets and financial liabilities (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC).

These amendments are related to the enhanced disclosures for all financial instruments, which will be netted (offset) in accordance with IAS 32 (par. 42) as well as additional arrangements for offsetting outside the scope of IAS 32;

• IFRS 10 ‘Consolidated Financial Statements’ (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC). This standard replaces a significant part of IAS 27 (‘Consolidated and Separate Financial Statements’) and SIC-12 (‘Consolidation – Special Purpose Entities’). Its main objective is to establish the principles and methods for the preparation and presentation of financial statements when an entity controls one or more other entities. It gives a new definition of control that contains three elements and establishes control as the sole basis for consolidation. The standard also sets out the main mandatory rules for the preparation of consolidated financial statements;

• IFRS 11 ‘Joint Arrangements’ (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC). This standard replaces IAS 31 ‘Interests in Joint Ventures’, including SIC-13 ‘Jointly Controlled Entities – Non-monetary Contributions by Venturers’. It introduces only two types of joint arrangements – joint operations and joint ventures – whereas the classification criterion used is not the legal form but rather the rights and obligations of each party to an arrangement, i.e. whether they represent rights to the assets and liabilities and respectively, to the expenses and revenue from the joint arrangement (joint operation) or rights to the net assets of the joint arrangement (joint venture).

The standard removes the option for proportionate consolidation and requires application of the equity method for consolidation of jointly controlled entities;

• IFRS 12 ‘Disclosing of Interest in Other Entities’ (in force for annual periods beginning on or after 1 January 2013 – not endorsed by EC). This standard introduces obligations for disclosure in the financial statements and requirements to the information included therein with regard to all forms of interests of the reporting entity in other companies and entities, including both the effects and the risks of those interests;

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The financial statements have been prepared on historical cost basis except for available-for-sale financial instruments, which are measured at fair value.

BDIF maintains its accounting books in Bulgarian lev (BGN), which is accepted as being its presentation currency. The data in the financial statements and the notes thereto is presented in thousands of Bulgarian levs (BGN’000) except where it is explicitly stated otherwise.

The presentation of the financial statements in accordance with International Financial Reporting Standards requires the management to make best estimates, accruals and reasonable assumptions that affect the reported values of assets and liabilities, income and expenses and the disclosure of contingent receivables and payables at the date of the financial statements. These estimates, accruals and assumptions are based on the information, which is available at the date of the financial statements, and therefore, the future actual results might be different from them (in the conditions of financial crisis the uncertainties are more significant). The items presuming a higher level of subjective assessment or complexity or where the assumptions and accounting estimates are material for the financial statements, are disclosed in Note 2.12.

2.2. Comparatives In these financial statements BDIF presents comparative information for one prior year.

Where necessary, comparative data is reclassified (restated) in order to achieve compatibility in view of the current year presentation changes.

2.3. Functional currency and recognition of exchange differences The functional and presentation currency of BDIF is the Bulgarian lev (BGN). As of 1 July 1997 the Bulgarian lev was fixed under the Law on the Bulgarian National Bank to the German mark at the ratio of BGN 1 : DEM 1, and with the introduction of the euro as the official currency of the European Union, it was fixed to the euro at a ratio of BGN 1.95583 : EUR 1.

Upon its initial recognition, a foreign currency transaction is recorded in the functional currency whereas the exchange rate to BGN at the date of the transaction or operation is applied to the foreign currency amount. Cash, receivables and payables, as monetary reporting items, denominated in foreign currency, are recorded in the functional currency by applying the exchange rate as quoted by the Bulgarian National Bank for the last working day of the respective month. At 31 December, these amounts are presented in BGN at the closing exchange rate of BNB. The non-monetary items in the statement of financial position, which are initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the date of the transaction and are not subsequently re-valued at the closing exchange rate.

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Foreign exchange gains or losses arising on the settlement or recording of foreign currency transactions at rates different from those at which they were converted on initial recognition, are recognised in the statement of operations (within the result for the year) in the period in which they arise and are treated as ‘other income/(losses)’ and presented net.

2.4. Premium contributions income Premium contributions income represents the entry and annual contributions to BDIF from banks possessing a license issued by BNB. The payment deadline for the entry contribution is thirty days after a bank is entered in the Commercial Register while for the annual contributions of licensed banks, it is 31 March of the current year (Art. 15 and Art. 16, para 5 of the Law on Bank Deposit Guarantee). Premium contributions income is recognised in the statement of operations (within the result for the year) on the day when the contributions become due under law. After this date, penalty interest for delay is charged and presented as ‘other income / (losses), net’ on the face of the statement of operations. They are calculated on statutory interest basis.

2.5. Investment income Investment income includes interest from deposits of BDIF with BNB and from government securities held, realised gains and losses from sales and remeasurement of financial instruments carried at fair value through profit and the accumulated effects from remeasurement of sold or disposed of financial assets classified as available-for-sale. The effects from net change in the fair value of available-for-sale financial assets (change in available-for-sale financial assets revaluation reserve) are reported as change in other component of BDIF’s net assets in the statement of operations.

Interest income is recognised in the statement of operations (within the result for the year) for all financial instruments and is accrued currently on timely basis by applying the effective interest method. They also include premium/discount amortisation and any other difference between the original cost and the settlement value (repayment or disposal) of the financial instrument.

2.6. Deposit subrogation income BDIF shall assume the rights of depositors to a bank with a revoked license for banking activities from the date of license revocation and up to the amount of the deposit guarantee it provides. This is an activity by virtue of the Law on Bank Deposit Guarantee. As a result of the incurred obligation of BDIF to pay the guarantee, it becomes a creditor of the bank with a revoked license with regard to the assumed thereby deposits for payment and they are recognised on its statement of financial position up to the amount assessed by the management as collectable.

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2.7. Financial instruments Classification BDIF classifies its financial assets depending on the nature and purpose (designation) of the financial assets and liabilities at the date of their acquisition. The management determines the classification of the financial assets of BDIF at the time of their initial recognition in the statement of financial position.

BDIF usually classifies its financial assets in two basic categories: ‘loans and receivables’ (which includes cash and cash equivalents) and ‘available-for-sale securities’. Financial liabilities arise mostly in relation with the obligations assumed by BDIF to depositors in connection with the guaranteed amounts on their deposits with banks with revoked licenses. The common liabilities to counterparts arising in the course of the ordinary activities of BDIF are classified as other financial liabilities.

Initial recognition Financial instruments are recognised in the statement of financial position at the time when BDIF becomes a party to a financial instrument related contract, on ‘the date of settlement’. Under this approach, the instrument is recognised on the date when it is transferred to BDIF. Initial measurement Upon initial recognition or origination, financial assets and liabilities are measured at acquisition cost. With regard to the available-for-sale financial assets it represents the fair value and all directly attributable transaction costs.

Subsequent measurement Following initial recognition, financial assets held by BDIF are measured at fair value or amortised cost depending on their classification while financial liabilities – at amortised cost determined under the effective interest rate method.

The effects of revaluation of available-for-sale financial assets are recognised as other component of net assets in the statement of operations of BDIF and are included in the ‘comprehensive result’ for the respective period (Note 2.5). In case of sale and/or write-off of financial assets, the accumulated effects are recognised currently in the statement of operations (within the result for the year) as ‘investment income’.

Gains and losses on revaluation to fair value Gains or losses arising from a change in the fair value of a financial asset classified as availablefor-sale are components of the net assets of BDIF and are initially recognised in the statement of operations under other components of net assets in the item ‘net change in fair value of availablefor-sale financial assets’ while in case of sale and/or write-off the accumulated effects are recognised within the current result for the year under ‘investment income’.

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Gains and losses from a revaluation of a financial asset measured at fair value are included currently in the statement of operations (within the result for the year) for the period when they arise.

Impairment At the end of each reporting period, BDIF assesses whether objective circumstances exist representing indicators for permanent impairment of each individual financial asset, which is not measured at fair value through the statement of operations (within the result for the year). Where a significant and/or permanent decrease in the fair value of a certain asset exists compared to its acquisition cost it is assumed that impairment has occurred. The impairment amount is equal to the difference between the carrying amount of the asset and its recoverable amount, which represents its current fair value.

Derecognition Financial assets or parts of them are derecognised from the statement of financial position when: – BDIF receives economic benefits from its contractual rights; or – BDIF loses control over the right to receive economic benefits from its contractual rights; or – the term of such a right has expired; or – BDIF waives such a right.

Financial liabilities are derecognised from the statement of financial position when: – the liability is settled; or – the liability is dropped off; or – the term for settlement has expired.

Types of financial instruments

a. Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and at current accounts, term bank deposits with maturity of up to three months in Bulgarian levs and in foreign currency. Cash in hand and at current accounts is presented at nominal amount. Cash in term deposits is presented on the statement of financial position at amortised cost determined by applying the effective interest method, i.e. together with the accrued due interest.

For the purposes of the statement of cash flows, special purpose blocked deposits and accrued interest on non-matured term deposits are not treated as cash and cash equivalents.

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b. Available-for-sale investments

Available-for-sale securities are recognised in and derecognised from the statement of financial position on the date of settlement when the purchase or sale is performed by virtue of a contract providing submission (transfer) of securities within a definite time determined by the capital market and laws regulating the dealing in securities. They are initially valued at cost, comprising their purchase price and all directly attributable transaction costs.

Available-for-sale investments are subsequently measured at fair value. The fair value of securities quoted in active markets is determined on the basis of bid price published quotations in the active market or that of actively trading Bulgarian banks and/or Bulgarian and foreign banks for the emissions of Bulgarian securities traded in international markets. Where the market of particular securities is not active or these securities are not quoted, BDIF establishes their fair value through other valuation methods. They include: ‘reference prices’ by comparison with another similar financial instrument in recently realised arm’s length transactions; discounted cash flow calculations and analysis of such instrument; fair value determination on the basis of options of expected yield from the asset and other valuation techniques usually used by capital market participants.

c. Receivables from counterparts

Receivables from counterparts are presented at cost less the allowance for bad debts. An estimate of allowances for doubtful and bad debts is made when significant uncertainty exists as to the collection of the full amount or a part of it. Bad debts are written-off when the legal grounds for this are available.

d. Payables to counterparts

Payables to counterparts are presented at the original invoice amount (cost) which is assumed to be the fair value of the transaction, which will be paid in the future against the goods and services received.

e. Payables to depositors of banks with revoked licenses under guaranteed deposit amounts

Payables to depositors of banks with revoked licenses under guaranteed deposit amounts are presented as fair estimates on statutory payable amount at the date of license revocation of the respective bank for each individual entity regardless of the number and deposit amounts thereof.

The set amount includes also the interest accrued at the date of the BNB decision for revoking the bank’s license (Art. 4 of the Law on Bank Deposit Guarantee). The due amounts are determined on the basis of lists, assessments and data, provided by the conservator, liquidator or trustee of the respective bank with revoked license, regarding its depositors and deposit accounts.

The management assumes that these payables represent financial liabilities because the underlying initial obligation is resultant from the contractual relation and its settlement is connected with cash payment.

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2.8. Property and equipment Property and equipment (tangible fixed assets) are presented in the financial statements at historical cost of acquisition (cost) less the accumulated depreciation and any impairment losses in value.

Initial measurement Upon their initial acquisition, property and equipment are valued at acquisition cost (cost), which comprises the purchase price, including customs charges and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include the cost of site preparation, initial delivery and handling costs, installation costs, professional fees for people involved in the project, non-refundable taxes etc.

BDIF has determined a value threshold of BGN 700 under which the acquired assets regardless of their non-current asset character are written out as a current expense at the moment of their acquisition.

Subsequent measurement The approach chosen by BDIF for subsequent measurement of property and equipment, is the cost model under IAS 16, i.e. cost less any accumulated depreciation and any accumulated impairment losses in value.

Depreciation methods BDIF applies the straight-line depreciation method for tangible fixed assets. Land is not depreciated. The useful life per group of assets has been determined considering: physical wear, the characteristic features of the equipment, the intentions for future use and the expected obsolescence, and is as follows: Useful life Buildings Machinery and equipment (computers) Motor vehicles Furniture and fixtures Other tangible fixed assets

25 2–4 4 7 3

The useful life, set for any tangible fixed asset, is reviewed at each year-end and in case of any material deviation from the future expectations of their period of use, the latter is adjusted prospectivel

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Subsequent costs Repair and maintenance costs are recognised as current expenses as incurred. Subsequent expenses incurred in relation to property and equipment having the nature of replacement of certain components, significant parts and aggregates or improvements and restructuring, are capitalised in the carrying amount of the respective asset whereas the residual useful life is reviewed at the capitalisation date. At the same time, the non-depreciated part of the replaced components is derecognised from the carrying amount of the assets and is recognised in the current expenses for the period of restructure.

Impairment of assets BDIF performs review for impairment of property and equipment when events or changes in circumstances indicate that the carrying amount of the assets might be not recoverable. If any such indications exist that the estimated recoverable amount of an asset is lower than its carrying amount, the latter is adjusted to the recoverable amount of the asset. The recoverable amount of assets within the ‘property and equipment’ group is the higher of the fair value less costs to sell or the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market conditions and assessments of the time value of money and the risks specific to the particular asset. Impairment losses are recognised in the statement of operations (within the result for the year).

Gains and losses on disposal (sale) Tangible fixed assets are derecognised from the statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or on sale.

The gains or losses arising from the sale of an item of property and equipment are determined as the difference between the consideration received and the carrying amount of the asset at the date of sale. They are stated net under ‘other income/(losses)’ on the face of the statement of operations.

2.9. Intangible assets Intangible assets are stated in the financial statements at acquisition cost (cost) less accumulated amortisation and any impairment losses in value. They include software licenses.

BDIF has adopted the straight-line amortisation method for the intangible assets at set useful life of two to four years. The carrying amount of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying amount might exceed their recoverable amount. Impairment losses are then included in the statement of operations (within the result for the year).

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2.10. Pensions and other payables to personnel under the social security and labour legislation The employment and social security relations with the employees of the Bulgarian Deposit Insurance Fund are based on the provisions of the Labour Code and the effective social security legislation in Bulgaria.

The major duty of BDIF in its capacity as employer is to make the mandatory social security contributions for the hired employees to the Pensions Fund, the Supplementary Mandatory Pension Security (SMPS) Fund, to the General Diseases and Maternity (GDM) Fund, the Unemployment Fund, the Labour Accident and Professional Diseases (LAPD) Fund, and for health insurance. The rates of the social security and health insurance contributions are defined under the Law on the Budget of State Social Security and the Law on the Budget of National Health Insurance Fund for the respective year. The contributions are split between the employer and employee in line with rules of the Social Security Code (SSC).

The social security and pension plans, applied by BDIF in its capacity as employer, are based on the Bulgarian legislation and are defined contributions plans. Under these plans, the employer pays defined monthly contributions to the government funds as follows: Pensions Fund, General Diseases and Maternity Fund, Unemployment Fund, Labour Accident and Professional Diseases Fund as well as to universal and professional pension funds – on the basis of rates fixed by law, and has no legal or constructive obligation to pay any additional amounts to the funds in cases where the latter do not hold sufficient assets to pay the respective individuals the benefits they have worked-out over the period of their service. The obligations referring to health insurance are analogous.

There is no established and functioning private voluntary social security scheme at BDIF. Short-term benefits Short-term employee benefits in the form of remuneration, bonuses and social payments and benefits (payable within 12 months after the end of the period when the employees have rendered the service or has met the required terms and requirements) are recognised as an expense in the statement of operations (within the result for the year) in the period when the service thereon has been rendered or the requirements for their receipt have been met and as a current liability (less any amounts already paid and deductions due) at their undiscounted amount. BDIF payables for social security and health insurance are recognised as a current expense and liability at their undiscounted amount together with the respective benefits they relate to and within the period of their accrual.

At each financial statements date BDIF measures and recognises the expected costs on the accumulating compensated absences, which amount is expected to be paid as a result of the unused entitlement. The measurement includes the estimated expenses on the employee’s remuneration and the statutory social security and health insurance contributions due by the employer thereon.

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Long-term retirement benefits In accordance with the requirements of the Labour Code, the employer is obliged to pay to its personnel upon retirement an indemnity, which depending on the length of service with the entity varies between two and six gross monthly salaries at the termination date of the employment. In their nature these are defined benefit schemes.

The calculation of the amount of these liabilities necessitates the participation of qualified actuaries to determine their present value at the date of the financial statements, at which they are included in the statement of financial position, adjusted with the amount of the unrecognised actuarial gains and losses, and respectively, the change in their value including the recognised actuarial gains and losses – in the statement of operations (within the result for the year).

Past service costs are recognised immediately in the statement of operations (within the result for the year).

At each financial statements date, BDIF assigns certified actuaries who provide their report with calculations regarding the long-term retirement benefit obligations. For this purpose, they apply the Projected Unit Credit Method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows, which are expected to be paid within the maturity of this obligation, and using the interest rates of long-term government bonds, denominated in Bulgarian levs.

Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments. Those exceeding the 10% corridor of the present value of the defined benefit obligations at the end of the year, are recognised immediately in the statement of operations (within the result for the year) for the period in which they arise.

The changes in the amount of BDIF’s liabilities to personnel for indemnities upon retirement, including the interest from unwinding of the present value and the recognised actuarial gains or losses, are recognised as expenses on personnel in the statement of operations (within the result for the year).

Termination benefits In accordance with the provisions of the Labour Code, BDIF in its capacity as employer is obliged, upon termination of the employment contracts prior to retirement, to pay certain types of indemnities.

BDIF recognises employee benefit obligations on employment termination before the normal retirement date when it is demonstrably committed, based on announced plan, to terminating the employment contract with the respective individuals without possibility of withdrawal or in case of formal issuance of documents for voluntary redundancy. Termination benefits due more than 12 months are discounted and presented in the statement of financial position at their present value.

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2.11. Income taxes BDIF is exempt from income tax and local taxes and charges on the deposit guarantee transactions under the Law on Bank Deposit Guarantee.

2.12. Critical accounting judgments on applying BDIF’s accounting policies. Key estimates and assumptions of high uncertainty.

Measurement of available-for-sale financial instruments The government securities, held by BDIF, acquired for the purpose of additional income from cash accumulated on the basis of guaranteed banks contributions and for maintenance of the needed high liquidity, are classified as available-for-sale financial assets because the management is of the opinion that its intentions towards these assets as well as their functionality are best reflected in this way. The government securities are measured at the average bid price calculated based on the quotations of actively trading banks in Bulgaria with government securities (Level 1) stated on the last working day of the reporting period (year) while the highest and lowest quotations (extreme values) are eliminated (Note 2.7).

The negative changes in the prices of the government securities held by BDIF are treated as temporary and are presented to the changes of ’other components of net assets’.

3. Premium Contributions In 2011 BDIF accrued contributions from 26 banks at the amount of BGN 195,448 thousand (2010: BGN 179,797 thousand from 26 banks). The total amount of eligible deposits (of year 2010) used for defining the contributions for 2011 amounted to BGN 39,090 million (2010: BGN 35,939 thousand – calculated on eligible deposits of 2009).

The amount of BGN 195,448 thousand was the result of the annual premium contributions of 26 banks for 2011 amounting to BGN 195,109 thousand and the additional amounts payable to the annual premium contributions at the amount of BGN 339 thousand.

For 2010 the amount of BGN 179,797 thousand was based on annual premium contributions for 2010 amounting to BGN 179,697 thousand, additional payments of annual premium contributions for 2009 – BGN 157 thousand and amounts from annual premium contributions for 2009 recovered by BDIF to two banks – BGN 57 thousand.

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4. Investment Income

Investment income from government securities Interest income from deposits Net gains/(losses) from sale/maturity of government securities – without gains/(losses) from revaluation Net gains/(losses) from sale/maturity of government securities – gains/(losses) from revaluation

2011 BGN’000

2010 BGN’000

26,796 2,857

27,982 667

447

477

963 31,063

85 29,211

(176)

7,443

(963) (1,139)

(85) 7,358

Other components of the net assets of BDIF – income recycling Change in the fair value of available-for-sale financial assets: (Losses)/gains from revaluation during the year Less: Adjustment from reclassification of (gains)/losses, included in the result for the current year

5. Other Income and Losses, Net

Net gains/(losses) from revaluation and foreign currency transactions Deposit insurance liabilities written off Penalty interest for delay received

2011 BGN’000

2010 BGN’000

339

1,804

27 366

434 27 2,265

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6. General Administrative Costs

Salaries and social security contributions for personnel Remuneration and social security contributions under management contracts Remuneration for temporarily hired personnel Office maintenance Subscription to information publications and networks Depreciation and amortisation Business trips Hospitality expenses Telecommunication and postal services Training and qualification Rentals Other

2011 BGN’000

2010 BGN’000

674 213

706 244

12 157 115 61 46 29 15 12 6 61 1,401

16 179 122 71 41 23 30 10 6 37 1,485

Salaries and social security contributions of personnel amounting to BGN 674 thousand (2010: BGN 706 thousand) include remuneration and social security contributions for personnel under employment contracts amounting to BGN 525 thousand (2010: BGN 463 thousand) and social benefits and social security contributions at the amount of BGN 149 thousand (2010: BGN 243 thousand).

Remunerations under management contracts include the remunerations and the related social security payments for members of the Management Board of BDIF. Expenses on office maintenance include mainly expenses on local taxes and charges, insurance, energy costs (electric energy and heating), security services, water, stationery and sanitary and hygienic materials, etc.

Expenses on subscription to information publications and networks include mainly subscriptions for database access to the main rating agencies – REUTERS, Moody’s, Fitch.

Other costs include consulting services, bank and other charges, while the expenses on services provided by the auditor amount to BGN 12 thousand (exclusive of VAT) for 2011 (2010: BGN 12 thousand, exclusive of VAT) of total other costs.

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7. Cash and Cash Equivalents

Cash in hand Current accounts in BGN Current accounts in foreign currency One-week term deposits in BGN One-week term deposits in foreign currency including interest accrued on non-matured short-term deposits

31.12.2011 BGN’000 2 1,884 1,369 310,000 245,102 558,357

31.12.2010 BGN’000 7 524 1,388 137,000 233,256 6 372,175

The existing cash at 31 December 2011 and 31 December 2010 were at current accounts and term deposits with the Bulgarian National Bank.

Interest accrued on non-matured deposits amounting to BGN 6 thousand 31 December 2010 was excluded from the amount of the cash and cash equivalents in the statement of cash flows.

The interest rates on current and deposit accounts were as follows:

Interest rates on deposit accounts in original currency

2011

2010

BGN

from 0% to 1.09%

from 0% to 0.52%

EUR

from 0% to 1.09%

from 0% to 0.52%

USD

from 0% to 0.17%

from 0.07% to 0.17%

8. Receivables from Banks At 31 December 2011 the receivables from banks amounting to BGN 366 thousand (31 December 2010: none) included additionally accrued annual premium contributions from a bank as a result of a supervisory inspection performed by the Bulgarian National Bank, including interest for delay at the amount of BGN 27 thousand.

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9. Available-for-Sale Securities Đ?) Classification of securities based on original maturity

31 December 2011

Nominal amount

Medium-term interestbearing government securities Long-term interest-bearing government securities

417,305

424,593

322,709

341,144

740,014

765,737

31 December 2010 Short-term discount securities Medium-term interestbearing government securities Long-term interest-bearing government securities

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Nominal amount 5,050

Fair value Interest rate (coupon)

Effective interest rate

Maturity

2.00-4.45

2.40-6.81

2012-2016

0.19-7.50

0.46-8.81

2012-2019

Fair value Interest rate (coupon) 4,950 0

Effective interest rate 2.10-2.36

Maturity 2011

372,866

377,355

2-4.45

2.58-6.81

2011-2014

328,995

345,652

0.17-7.50

0.54-8.81

2011-2019

706,911

727,957

B) Classification of securities based on remaining term to maturity

31 December 2011

Nominal amount

Short-term interest-bearing government securities Medium-term interestbearing government securities Long-term interest-bearing government securities

187,654

189,931

452,030

31 December 2010 Short-term interest-bearing government securities Medium-term interestbearing government securities Long-term interest-bearing government securities

Effective interest rate

Maturity

2.00-7.50

2.16-6.50

2012

474,650

3.45-7.50

2.40-8.81

2013-2016

100,330

101,156

0.19-6.00

0.46-6.71

2017-2019

740,014

765,737

Fair value Interest rate (coupon)

Effective interest rate

Maturity

Nominal amount

Fair value Interest rate (coupon)

90,046

91,236

0-4.75

1.54-5.22

2011

464,754

485,443

2-7.50

2.58-8.81

2012-2015

152,111

151,278

0.17-6.00

0.54-7.10

2016-2019

706,911

727,957

BDIF has opened security registers with the following primary dealers – sub-depositories of securities: DSK Bank EAD, Corporate Commercial Bank AD, United Bulgarian Bank AD, First Investment Bank AD, Raiffeisenbank (Bulgaria) EAD, Societe Generale Expressbank AD, UniCredit Bulbank AD, Eurobank EFG Bulgaria AD. At 31 December 2011 and 31 December 2010 BDIF had open exposures only to Bulgarian sovereign debt (Bulgarian government securities).

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10. Property and Equipment Land and buildings BGN’000

Office equipment and furniture BGN’000

Motor vehicles BGN’000

BGN’000

1,005

310

51

1,366

-

4

-

4

Book value at 31 December 2010 Additions

1,005 -

314 26

51 -

1,370 26

Book value at 31 December 2011

1,005

340

51

1,396

167

254

19

440

34

24

10

68

201

278

29

508

34

16

10

60

Book value at 1 January 2010 Additions

Accumulated depreciation at 1 January 2010 Depreciation charge for the year Accumulated depreciation at 31 December 2010

Total

Depreciation charge for the year Accumulated depreciation at 31 December 2011 Carrying amount at 31 December 2010

235

294

39

568

804

36

22

862

Carrying amount at 31 December 2011

770

46

12

828

At 31 December 2011 BDIF owned land at the amount of BGN 163 thousand (31 December 2010: BGN 163 thousand) and a building with carrying amount BGN 607 thousand (31 December 2010: BGN 641 thousand).

At 31 December 2011 and 31 December 2010 there were no established encumbrances (mortgages and pledges) on BDIF’s property and equipment.

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11. Intangible and Other Assets A) Intangible assets Software BGN’000 89 10

Book value at 1 January 2010 Additions Book value at 31 December 2010

99

Additions

24

Book value at 31 December 2011

123

Accumulated amortisation at 1 January 2010

85

Amortisation charge for the year

3

Accumulated amortisation at 31 December 2010

88

Amortisation charge for the year

1

Accumulated amortisation at 31 December 2011

89

Carrying amount at 31 December 2010

11

Carrying amount at 31 December 2011

34

B) Other assets Other assets include:

Prepayments Advances granted

31 December 31 December 2011 2010 BGN’000 BGN’000 7 15 11 18

4 19

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12. Other Liabilities 31 December 31 December 2011 2010 BGN’000

BGN’000

Payables to personnel

51

78

Payables to suppliers

12

6

63

84

Payables to personnel represent the current obligations on unused paid annual leave of BDIF employees at the amount of BGN 41 thousand (31 December 2010: BGN 63 thousand) and long-term payables as indemnities on retirement amounting to BGN 10 thousand (31 December 2010: BGN 15 thousand).

Payables to suppliers amount to BGN 12 thousand (31 December 2010: BGN 6 thousand) and include all expenses incurred in December 2011 but actually paid in January 2012 on the receipt of the respective invoices.

13. Financial Risk Management In the ordinary course of its business activities, BDIF is exposed to a variety of financial risks the most important of which are market risk (including currency risk, risk of a change in the fair value and price risk), credit risk, liquidity risk and risk of interest-bearing cash flows. The general risk management is focused on the difficulty to forecast the financial markets and to achieve minimisation of the potential negative effects that might affect the financial results and position of BDIF. Financial risks are currently identified, measured and monitored through various control mechanisms introduced to assess adequately the market circumstances of its investments and the ways for maintenance of free liquid funds through preventing undue risk concentration.

The management strives for improving the methods for assessment and management of risks related to the investment portfolio: credit, liquidity, interest and currency risks, while performing one of its major functions – the secure investment of funds and payment of the guaranteed deposits with banks.

With the objective of minimizing risks, BDIF maintains modified portfolio duration of no longer than 2.5 and determines limits for deposits and security dealings with a repurchase clause (repo agreements) with banks.

The investment policy approved by the Management Board includes a Currency Risk Management Methodology for payment of guaranteed deposits denominated in currencies other than BGN and EUR. With the aim of limiting currency risks while covering guaranteed deposits in foreign currency, it has been decided a currency exposure in USD to be maintained.

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The investments in instruments denominated in USD should not exceed the maximum amount, which is determined periodically in accordance with the Currency Risk Management Methodology.

The management of BDIF considers the investment strategy on a regular basis and monitors the structure of financial assets and liabilities on the basis of information provided regularly by the Risk Assessment and Analysis Department, Treasury Department and Bank Bankruptcy and Early Intervention Department.

The structure of BDIF’s financial assets and liabilities at 31 December by category is presented in the table below: 31 December 2011

31 December 2011

BGN’000

BGN’000

Cash and cash equivalents Receivables from banks

558,357 366

372,175 -

'Available-for-sale financial assets' category Available-for-sale government securities

765,737

727,957

1,324,460

1,100,132

12

6

12

6

Financial assets 'Loans and receivables' category

Financial liabilities 'Other financial liabilities' category Other liabilities

BDIF had no outstanding contingent financial commitments at 31 December 2011 and 31 December 2010.

Market risk a. Currency risk The currency risk is related to the adverse movement of exchange rates of other currencies towards the reporting currency – BGN in future business transactions by the assets and liabilities denominated in foreign currency recognised in the statement of financial position. BDIF is exposed to currency risk of changes in the exchange rate of USD to BGN for its open exposures denominated in USD. As far as the existing exposures are short-term ones and there is a set maximum limit for the exposure in USD according to the investment policy, the management is of the opinion that the risk is under control. BDIF has no other outstanding currency risks

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because the remaining operations and deals are denominated in BGN and/or in EUR, while the Bulgarian lev is pegged to the euro by law.

The tables below represent a summary of BDIF’s exposure to currency risk: Currency structure analysis At 31 December 2011

USD BGN’000

EUR BGN’000

BGN BGN’000

Total BGN’000

5,285

241,186

311,886

558,357

-

-

366

366

8,516

393,810

363,411

765,737

13,801

634,996

675,663

1,324,460

-

-

12

12

-

-

12

12

USD

EUR

BGN

Total

BGN’000

BGN’000

BGN’000

BGN’000

Cash and cash equivalents

5,141

229,501

137,533

372,175

Available-for-sale securities

9,533

316,434

401,990

727,957

14,674

545,935

539,523

1,100,132

-

-

6

6

-

-

6

6

Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities Financial liabilities Other liabilities

At 31 December 2010 Financial assets

Financial liabilities Other liabilities

Foreign currency sensitivity analysis The table below demonstrates the sensitivity to a 10% increase/decrease in the current exchange rate of BGN against USD based on the structure of foreign currency denominated assets and liabilities of BDIF at 31 December with assumption that the influence of all other variables is ignored. The effect is measured and presented as impact on the result and directly on the net assets with all other conditions held constant.

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USD

Financial result (profit or loss) – increase Net assets (through the financial result) – increase Financial result (profit or loss) – decrease Net assets (through the financial result) – decrease

2011 BGN’000 1,380

2010 BGN’000 1,467

1,380 (1,380) (1,380)

1,467 (1,467) (1,467)

On 10% increase in the rate of USD against BGN the final effect on the financial result of BDIF for one-year period would be an increase by BGN 1,380 thousand (31 December 2010: 1,467 thousand) mostly due to the impact of the exposure of securities denominated in USD. Respectively, the impact on net assets would be the same.

On 10% decrease in the exchange rate of USD against BGN the final effect on the result of BDIF would be equal and reciprocal to the increase described above.

In management’s opinion, the presented above currency sensitivity analysis based on the structure of foreign currency denominated assets and liabilities in the statement of financial position is representative for the currency sensitivity of BDIF for the reporting year. b. Price risk BDIF is exposed to a price risk related to the securities held thereby and classified as ‘availablefor-sale’. As mentioned above, in order to minimise this risk BDIF invests liquid funds in Bulgarian government securities. The management has established current monitoring procedures for price changes, yield and maturity structure of the government securities and respectively, undertaking timely measures and actions when indicators exist for more permanent adverse trends especially at present, in the context of the global economic crisis.

The analysis of BDIF’s sensitivity to the price of debt securities held thereby is based on the state and structure of investments at 31 December. If these prices were changed by 3% in increase/ decrease, the effect at that date would impact directly the net assets as far as debt securities are classified as available-for-sale and their revaluation is carried directly to a component thereof. That effect would be as follows:

Net assets (through another component of the other comprehensive result – financial assets revaluation reserve) increase Net assets (through another component of the other comprehensive result – financial assets revaluation reserve) decrease

2011 BGN’000

2010 BGN’000

22,972

21,839

(22,972)

(21,839)

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c. Interest risk Interest risk arises from the possibility that changes in interest rates might result in changes in the future cash flows or in the fair values of financial instruments.

BDIF has a significant portion of interest-bearing assets. Nevertheless, income and operating cash flows are largely independent from market interest rate fluctuations because the assets are mainly with fixed interest rate. The profitability of BDIF’s deposits with BNB follows the respective quotations of the Bank for International Settlements, Basel. In addition, BDIF is not exposed to interest risk related to its liabilities because they are usually interest-free.

The table below presents the structure of financial instruments depending on the type of contractual interest rates.

31 December 2011

With floating interest % BGN’000

With fixed interest % BGN’000

Interestfree BGN’000

BGN’000

Financial assets Cash and cash equivalents

-

555,102

3,255

558,357

Receivables from banks

-

339

27

366

78,838

686,899

-

765,737

78,838

1,242,340

3,282

1,324,460

-

-

12

12

-

-

12

12

With floating interest % BGN’000

With fixed interest % BGN’000

Interestfree BGN’000

Total BGN’000

-

370,256

1,919

372,175

89,212

633,795

4,950

727,957

89,212

1,004,051

6,869

1,100,132

-

-

6

6

-

-

6

6

Available-for-sale securities

Total

Financial liabilities Other liabilities

31 December 2010

Financial assets Cash and cash equivalents Available-for-sale securities

Financial liabilities Other liabilities

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The table below summarises interest risk. It includes BDIF’s financial instruments presented at carrying amount, categorised by the earlier of contractual interest change or maturity dates.

31 December 2011

up to 1 1-3 3-6 6-12 month months months months BGN’000 BGN’000 BGN’000 BGN’000

over 1 year BGN’000

interestfree BGN’000

BGN’000

Total

Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities

555,102

-

-

-

-

3,255

558,357

339

-

-

-

-

27

366

136,209

-

9,342

123,218

496,968

-

765,737

691,650

-

9,342 123,218

496,968

3,282

1,324,460

12

-

-

-

-

-

12

12

-

-

-

-

-

12

Financial liabilities Other liabilities

31 December 2010 Financial assets Cash and cash equivalents Available-for-sale securities

up to 1 month BGN’000

1-3 3-6 months months BGN’000 BGN’000

6-12 months BGN’000

over 1 year BGN’000

interestfree BGN’000

BGN’000

Total

370,256

-

-

-

-

1,919

372,175

153,168

21,994

-

336

547,509

4,950

727,957

523,424

21,994

-

336

547,509

6

-

-

-

-

-

6

6

-

-

-

-

-

6

6,869 1,100,132

Financial liabilities Other liabilities

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Sensitivity to interest risk The table below demonstrates BDIF’s sensitivity to possible changes in interest rates based on the structure of assets and liabilities at the end of the reporting period and with the assumption that the influence of all other variables is ignored.

Since BDIF has mainly financial instruments with fixed yield – debt securities and term deposits, while the deposits are with original maturity of up to 7 days, the change in interest rates would affect mainly the yield of securities classified as available-for-sale, i.e. the statement of operations and respectively, directly net assets.

Currency

Sensitivity of net assets 2011

BGN

+1%

BGN’000 (6,654)

EUR

+1%

(5,126)

USD

+1%

-

BGN

-1%

6,654

EUR

-1%

5,126

USD

-1%

-

Increase/(decrease) in percentage points 2010

Sensitivity of net assets

BGN

+1%

(8,265)

EUR

+1%

(4,683)

USD

+1%

-

BGN

-1%

8,265

EUR

-1%

4,683

USD

-1%

-

Currency

81

Increase/(decrease) in percentage points 2011

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2010 BGN’000

Credit risk Credit risk is mainly the risk that BDIF might be unable to collect its receivables within the ordinary envisaged terms. The management of BDIF purposefully aims at distributing the credit risk within the frames of existing legal opportunities for investment of accumulated funds: part of the investments is in government securities and another part – in deposit accounts with the Bulgarian National Bank. The ratio of investments in government securities and in deposit accounts with BNB, recognised in the in the structure of assets in the statement of financial position at 31 December, is as follows: 31 December 2011

31 December 2010

Cash and cash equivalents

42%

34%

Available-for-sale government securities

58%

66%

The credit risk of concentration in Bulgarian government securities, classified as available-forsale, is assessed as minimum and manageable as far as these are government securities issued and guaranteed by the Bulgarian state, which serves regularly its debt liabilities.

The credit risk exposure is monitored and assessed on a regular basis by the management of BDIF. Liquidity risk Liquidity risk is the adverse situation where BDIF encounters difficulty in meeting unconditionally all its obligations within their maturity. The liquidity management policy of BDIF is conservative maintaining constant optimal liquid cash reserve to secure a good capability for funding its activities. In addition, according to the Law on Bank Deposit Guarantee, BDIF has the right to request advance payment of the annual fees from guaranteed banks.

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Maturity analysis 31 December 2011

Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities

up to 1 month BGN’000

1-3 months BGN’000

3-12 months BGN’000

1 -5 years BGN’000

over 5 years BGN’000

Total BGN’000

558,357

-

-

-

-

558,357

366

-

-

-

-

366

57,665 616,388

-

132,266 132,266

474,650 474,650

101,156 101,156

765,737 1,324,460

12

-

-

-

-

12

12

-

-

-

-

12

up to 1 month BGN’000

1-3 months BGN’000

3-12 months BGN’000

1 -5 years BGN’000

over 5 years BGN’000

Total BGN’000

372,175

-

-

372,175

64,292 436,467

21,994 21,994

4,950 4,950

485,443 485,443

151,278 151,278

727,957 1,100,132

6

-

-

-

-

6

6

-

-

-

-

6

Financial liabilities Other liabilities

31 December 2010

Financial assets Cash and cash equivalents Available-for-sale securities Financial liabilities Other liabilities

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Fair values Fair value is generally the amount for which an asset could be exchanged, or a liability settled in an arm’s length transaction between independent, willing and knowledgeable parties. The policy of BDIF is to disclose in its financial statements the fair value of these financial assets and liabilities, mostly those for which market quotations are available. The fair value of financial instruments traded in active markets is based on the prices quoted at the end of the reporting period. The quoted market prices are the current bid prices (purchase price).

The fair value of financial instruments, which are not traded in active markets, is determined through valuation methods based on various valuation techniques and management assumptions made in accordance with the market circumstances at the end of the reporting period.

The financial assets and liabilities are either current in their nature (deposits placed, receivables from banks, other current liabilities) and their fair value approximates their carrying amount, or are presented in the statement of financial position at market value (investments in securities).

The management of BDIF believes that the estimates of the financial assets and liabilities presented in the statement of financial position are as reliable, adequate and trustworthy as possible for financial reporting purposes under the existing circumstances.

14. Relations and Transactions with Government Institutions, Bodies and Enterprises The Ministry of Finance and the Bulgarian National Bank are the government institutions with whom BDIF has regular relations in accordance with its special status and functions, as well as in line with the legal requirements.

BDIF is governed by a Management Board designated in accordance with the Law on Bank Deposit Guarantee (Note 1).

The funds accumulated by BDIF from bank contributions in accordance with the legal requirements are invested in securities issued or guaranteed by the Bulgarian state and in short-term deposits with the Bulgarian National Bank (Notes 7 and 9). The securities in which BDIF invests are acquired both in the primary market by participating in tenders organised and carried out by the Bulgarian National Bank and in the secondary market.

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ANNUAL REPORT 2011 Bulgarian Deposit Insurance Fund 27 Vladayska Street, 1606 Sofia, Bulgaria T: +359 2 953 1217, 2 953 1318 F: +359 2 952 1100 www.dif.bg