bdif_annual_report_2012

ANNUA L R E P O R T

Š Bulgarian Deposit Insurance Fund Published by the Bulgarian Deposit Insurance Fund, 2013 27 Vladayska Street, 1606 Sofia Telephone: +359 2 917 2049, 2 953 1217, 2 953 1318 Fax: +359 2 952 1100 www.dif.bg Contact person: Roumyana Markova, Corporate Communications and International Cooperation Department ISSN 1314-8370 Information published in the 2012 Annual Report of the Bulgarian Deposit Insurance Fund may be quoted or reproduced without further permission. Due acknowledgement 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 2012.

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

BULGARIAN DEPOSIT INSURANCE FUND

Management Board:

Chairman:

Vice Chairman:

Members:

Bisser Manolov

Borislav Stratev

Svetla Kostova

Chief Accountant:

Svetla Suvandjieva

Head office:

27 Vladayska Street, 1606 Sofia, Bulgaria

Auditor:

PricewaterhouseCoopers Audit OOD

9-11 Maria Louisa Blvd., 1000 Sofia, Bulgaria

Rossen Nikolov Nelly Kordovska

Contents

Mission, Vision, Objectives and Mandate

7

A Short Historical Overview of BDIF

9

Chairman’s Address

10

Annual Activity Report of the Bulgarian Deposit Insurance Fund Management for 2012

11

Timely access of depositors to their guaranteed amounts

11

Alternative methods for bank resolution

13

Management of the risks for the deposit guarantee scheme

15

Adequate funding. Safe and transparent asset management

16

Effective communication. Maintaining depositors’ confidence

17

Good corporate practices. Transparent and effective governance

19

Appendices

1. Major Financial Indicators

22

2. Overview of Economic Environment

25

3. Deposit Guarantee

29

4. Investment Policy and Asset Management

38

5. Technical Seminar of the Europe Regional Committee of the International Association of Deposit Insurers, April 2012, Sofia

44

Annual Financial Statements for 2012

45

List of Abbreviations

APS – Automated Payout System

BDIF – Bulgarian Deposit Insurance Fund

BNB – Bulgarian National Bank

CEE – Central and Eastern Europe

DGS – Deposit Guarantee Scheme

EC – European Commission

ECB – European Central Bank

EFDI – European Forum of Deposit Insurers

EU – European Union

FSB – Financial Stability Board

G-20 – Group of Twenty

IADI – International Association of Deposit Insurers

IMF – International Monetary Fund

LBDG – Law on Bank Deposit Guarantee

MB – Management Board

NPISH – Non-profit Institutions Serving Households

NSI – National Statistical Institute

PR – Public Relations

SCPI – Supplementary Compulsory Pension Insurance

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

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 1999.

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 trustees’ 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 BNB’s special supervision and in danger of becoming insolvent.

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A Short Historical Overview of BDIF The Bulgarian Deposit Insurance Fund is an independent public legal entity established in January 1999 under the Law on Bank Deposit Guarantee. BDIF protects the deposits of individuals and legal entities in member banks and repays the deposit amounts guaranteed under the Law on Bank Deposit Guarantee in case of bankruptcy. In its 13-year history BDIF has repaid the guaranteed deposit amounts to depositors of Credit Bank (1999), Balkan Universal Bank (2000) and International Bank for Trade and Development (2005).

BDIF administers bankruptcy proceedings to ensure a fair satisfaction of creditors and transparency of proceedings. In executing its mandate under the Law on Bank Bankruptcy BDIF controls trustees’ exercise of power by appointing and dismissing them, determining their remuneration, approving asset liquidation plans, monitoring expenses and transactions, performing off-site and on-site examinations, and issuing instructions on their performance. Upon the entry into force of the Law on Bank Bankruptcy BDIF took the control over four banks which went bankrupt between 1996 and 2000 (Crystal Bank, CB Slavyani, Capital Bank and Balkan Universal Bank) and by end-August 2005 successfully completed the bankruptcy proceedings. International Bank for Trade and Development was sold as an enterprise in August 2007.

Under the Law on Credit Institutions the BDIF may participate in the increase of capital of a credit institution under BNB’s special supervision and in danger of becoming insolvent provided that BDIF estimates that heavier expenditures on reimbursement of depositors may be prevented in this way.

BDIF is a key participant in the financial safety net contributing to the stability of and confidence in the banking system by guaranteeing depositors funds with banks and protecting creditors’ interests in bank bankruptcy proceedings. To better perform its functions and tasks in 2011 BDIF Management Board adopted a Strategy for BDIF Governance for the period 2011–2014, which outlines its key strategic goals, namely: – to continue winning recognition as a key player in the financial stability system; – 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.

These strategic goals were reflected in the following main areas: – 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 effective governance.

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Chairman’s Address Dear Ladies and Gentlemen,

Pursuant to its mission to guarantee the safety of deposits with banks and contribute to maintaining financial stability, BDIF continued its activities in the field of its institutional building as a deposit guarantee scheme in compliance with the best practices. In 2012 BDIF focused its efforts on several main areas with a view to international developments and national particularities.

In European context, the key initiative for restoring the confidence in the European banking system and stability in Europe was to build a comprehensive crisis management framework in the light of the establishment of a single banking union. A responsible and competent body, as it is, BDIF supported national institutions charged with the design of the financial architecture, while elaborating a position tailored to national interests and particularities. Work in this area proved that BDIF would merit its position in the financial stability system.

From operational perspective BDIF worked on projects to elaborate the deposit guarantee scheme and improve depositor protection. Some of these projects concerning IT infrastructure development and testing the Automated Payout System were completed while others are at a halt as final European decisions are expected. Due attention was paid to the deposit guarantee scheme risk management. Work on these projects involves close cooperation with our financial safety net partners and the active support of member banks.

BDIF traditionally pursues an active policy to raise public awareness. We believe that our efforts in this direction over the past year have contributed to increase depositor confidence and hence, the deposits in the banking system.

BDIF was actively involved in intensive exchange of information and experience worldwide, sharing knowledge and expertise on ever globalising issues and practices.

I would like herewith to say that we clearly acknowledge the challenges to safeguarding financial system stability and stand ready to take the necessary actions. I believe that the joint efforts of BDIF and its partners, both institutions and professional organisations, will bring about the desired result.

Finally, I would like to thank BDIF’s experts and all partners who have worked with us for the successful year and to express my confidence that we will continue to enjoy fruitful cooperation in the future.

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 2012

The global financial crisis underlined the importance of the deposit guarantee schemes and their role in boosting public confidence.

and objectives of its Governance Strategy giving due consideration to the changes in economic environment and to European initiatives. BDIF key priorities over the review year were as follows:

In 2012 BDIF continued to implement the tasks

TIMELY ACCESS OF DEPOSITORS TO THEIR GUARANTEED AMOUNTS Good Corporate Practices.

Transparent and Effective Governance

Effective Communication.

Maintaining Depositors’ Confidence

Alternative Methods for Bank Resolution

BDIF GOVERNANCE STRATEGY

Management of the Risks for the Deposit Guarantee Scheme

Adequate Funding.

Safe and Transparent Asset Management

Deposit payout safety and effectiveness are the foundation of depositors’ confidence, which is an important prerequisite to preserve financial stability. To this end, deposit guarantee schemes need to avail of enough financial and technical resources to perform their functions.

As part of the technical support BDIF developed a project of an Automated Payout System for guaranteed deposits to ensure that banks participating in the deposit guarantee scheme in Bulgaria will be able to provide data input to BDIF/BNB in case of bank license revocation and for

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testing the deposit guarantee scheme within three business days from the requested date pursuant to Article 23 of the Law on Bank Deposit Guarantee. In 2012 work on the development of the specialized software of the Automated Payout System was completed. Prior to the final approval of the software BDIF made three pilot tests in member banks to find out whether banks can provide the necessary data within the legal deadline.

When launching the APS all components and work processes were considered in order to take the necessary action to safeguard their security.

Information protection both with a view to the physical access to working stations related to APS and to the data transfer is ensured as required by the most stringent operational standards.

The system matches the existing Bulgarian legislative requirements, but gives room for quick and flexible adaptation to future changes in the field of EU deposit insurance.

At the same time, BDIF together with the Association of Banks in Bulgaria had a discussion on the draft instructions to banks in order to define the format and contents of the data that banks should provide for the performance of regular tests of the deposit guarantee scheme and for the payout of guaranteed deposits. The notes of the Association of Banks in Bulgaria were reflected into the draft and discussions continued with the Bulgarian National Bank.

To optimise the overall process of guaranteed deposit payouts a procedure on the selection of servicing banks was elaborated and approved.

It sets out the criteria a bank should fulfil to

effectively operate as a servicing bank. As part of the approved criteria relate to the APS, BDIF foresees to perform pre-selection after the preparation of instructions to banks for the implementation of APS. A survey on bank deposit products that have an investment element was made in 2012 to find out whether they fall within the scope of the LBDG. The results of this survey will be used to help depositors make informed choices.

The year saw the preparation of the Manual on Guaranteed Deposit Payout and the Manual on Bank Bankruptcy covering processes on payment and control over the activities of BDIF appointed trustees in bankrupt banks. A draft of contingency plan measures was prepared and is to be updated with a view to the new functions entrusted with the DGS by the draft directive on the deposit guarantee schemes (recast) and the proposal for a directive establishing a framework for the recovery and resolution of credit institutions and investment firms.

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ALTERNATIVE METHODS FOR BANK RESOLUTION Management of the Risks for the Deposit Guarantee Scheme

Timely Access of Depositors to Their Guaranteed Amounts

Good Corporate Practices.

Transparent and Effective Governance

BDIF GOVERNANCE STRATEGY

Adequate Funding.

Safe and Transparent Asset Management

Effective Communication.

Maintaining Depositors’ Confidence

Distress in the global financial system showed that when a bank experiences problems they are likely to go well beyond the borders of a country and affect the entire financial sector. It also became evident that most countries lack a legislative framework and the bodies do not have the necessary tools to deal with crisis and manage failing financial institutions. Hence, the cost of the crisis turned out to be too high and taxpayers paid the price. The amount of government aid to financial institutions for the 2008–2011 period was EUR 4.5 trillion or 37% of the EU’s GDP. This plainly showed the need for clear and stringent financial crisis management rules at both national and cross-border level. To respond to these concerns, the European Commission made a proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms. The aim of this comprehensive framework is achieving long-term financial stability and minimising public costs in the event of future crisis. The Proposal was published on 6 June 2012 and offers the establishment of a legislative framework for the recovery and resolution of credit institutions and outlines measures at three stages: prevention, early intervention and resolution. Expert discussions between member states within the European Council focused on

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the scope of the directive and the principle of proportionality, relationship between the host and home country, the role of the European Banking Authority, the powers of relevant authorities at the early intervention stage, bail-inable instruments, intra-group support and financing. Intensive negotiations on the Proposal will continue in 2013.

Due to the interconnectedness of EU financial markets, it is of high importance for Bulgaria to harmonise its crisis management regulatory framework, regardless of the fact that the financial system is stable and Bulgaria, alongside Estonia, Malta, Romania and the Czech Republic, is one of the five countries that have not provided any form of financial assistance to their banking systems since the start of the crisis.

The framework proposed by the European Commission gives member states the possibility to decide, at their own discretion, on the resolution authorities and on whether the future resolution fund will be merged with the deposit guarantee fund. BDIF is of the opinion that, for utmost synergy, the DGS capacity should be used to achieve the objectives of the future resolution fund. This would contribute to a lower administrative burden, greater flexibility in the use of funds and boosted deposit guarantees.

The flexible use of crisis management tools and follow-up help minimise losses of bank bankruptcy and enhance financial stability.

The directive on deposit guarantee schemes was not finalised in 2012 as it is related to the proposal for a directive establishing a framework for the recovery and resolution of credit institutions and investment firms in the part concerning the role of DGSs in crisis management.

Being aware of the need for a timely implementation of an effective national regime for recovery and resolution of credit institutions, BDIF in 2012 focused its efforts on several areas: • studied international experience and legislation and exchanged information along BDIF membership in the International Association of Deposit Insurers and the European Forum of Deposit Insurers;

• expressed opinion and was active in discussing the proposal of the European Commission for establishing a framework for the recovery and resolution of credit institutions and investment firms; • analysed the impact of the implementation of a bank resolution regime; • drafted amendments to the Law on Bank Deposit Guarantee and other related legislation; and • improved the administrative capacity for contingency and bank crisis management.

Along with the finalization of the European acts, some important decisions on key issues such as the institutional architecture of the new resolution regime, the financing mechanism, etc. should be taken at national level.

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MANAGEMENT OF THE RISKS FOR THE DEPOSIT GUARANTEE SCHEME Alternative Methods for Bank Resolution

Timely Access of Depositors to Their Guaranteed Amounts

Adequate Funding.

Safe and Transparent Asset Management

BDIF GOVERNANCE STRATEGY

Effective Communication.

Maintaining Depositors’ Confidence

Good Corporate Practices.

Transparent and Effective Governance

Risk assessment is a dynamic system setting out the risk areas and the significance of risks to BDIF.

responsibilities of all participants in the process remained in place over the review year.

The risk management framework comprises 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 followup assessment. Risk is defined as an event that represents a threat of non-accomplishment of BDIF’s objectives or exposes BDIF to material or immaterial losses.

Furthermore, for the purpose of the efficient management of the risk of triggering the deposit guarantee scheme, BDIF established a system to manage risks (early identification and monitoring of external risks) evolving from the banking sector and the macroeconomic environment. 2012 saw the development and testing of models for riskbased premium contributions for Bulgaria in the light of the future directive on deposit guarantees.

The European Banking Authority is expected to provide further methodological notes on the harmonisation of the approach for determination of risk-based premium contributions.

Risk management is based on the good corporate practices in the field of risk management, including Risk Management Standard issued and endorsed by the Institute of Risk Management in the United Kingdom, and was supplemented by a number of internal procedures in 2012. In order to define and assess the significant risks BDIF had, at an earlier stage, made a detailed analysis of work processes and factors boosting the level of risk exposure, updated the Register of Risks and defined new measures and actions to reduce significant risks.

To this end, a number of control mechanisms to prevent, reduce or dampen risks to BDIF were introduced, thus reducing the overall risk level in 2012.

The unified risk management approach with clear and transparent definition of the objectives and

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Other 2012 measures referring to risk management involved the performance of stress tests of the system with regard to the adequate capitalisation and liquidity of BDIF. BDIF developed a business continuity plan which is expected to be launched in 2013.

The objectives laid down by BDIF for 2013 include implementation of approved control mechanisms to reduce BDIF’s risk exposure, more comprehensive assessment of risks stemming from external factors including the banking system and macroeconomic environment.

ADEQUATE FUNDING. SAFE AND TRANSPARENT ASSET MANAGEMENT Management of the Risks for the Deposit Guarantee Scheme

Alternative Methods for Bank Resolution

Effective Communication.

Maintaining Depositors’ Confidence

BDIF GOVERNANCE STRATEGY

Good Corporate Practices.

Transparent and Effective Governance

Timely Access of Depositors to Their Guaranteed Amounts

The major responsibility of BDIF is to safeguard and invest the funds, which are managed in line with the following principles: • safety and protection of assets; • liquidity maintenance for execution of liabilities; • minimisation of risks and optimisation of income, taking due account of the specific features of the internal financial market.

In accordance with LBDG, the target ratio of BDIF funds to eligible deposits is 5%. At 31 December

2012 BDIF funds amounted to BGN 1,580,090 thousand, which represented 3.06% of the total amount of eligible deposits of BGN 51,581,508 thousand. The percentage of covered deposits to the coverage level (BGN 196,000) was 4.39%.

In 2012 BDIF fund management was based on the Investment Strategy updated by the Investment Committee on a quarterly basis.

For detailed information on the BDIF investment activity in 2012 see Appendix 4. Investment Policy and Asset Management.

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EFFECTIVE COMMUNICATION. MAINTAINING DEPOSITORS’ CONFIDENCE Adequate Funding.

Safe and Transparent Asset Management

Management of the Risks for the Deposit Guarantee Scheme

BDIF GOVERNANCE STRATEGY

Good Corporate Practices.

Transparent and Effective Governance

Timely Access of Depositors to Their Guaranteed Amounts

Alternative Methods for Bank Resolution

Interinstitutional cooperation Over the past year BDIF continued its cooperation with national authorities responsible for the maintenance of financial stability. BDIF representatives participate in Financial Services Working Group 26 to the Council for European Affairs established by an order of the Minister of Finance.

The joint working group of representatives of the Ministry of Finance, the Bulgarian National Bank and BDIF is expecting the endorsement of the directive on deposit guarantee schemes and the directive establishing a framework for the recovery

and resolution of credit institutions and investment firms in order to restart work on the preparation of amendments to legislation transposing the requirements of these directives in national legislation.

In relation to the proposal of the European Commission for a directive establishing a framework for the recovery and resolution of credit institutions and investment firms BDIF was actively involved in formulating Bulgaria’s position and participated in the meetings of the Financial Services Working Party in Brussels.

International activities BDIF followed up on its commitments to the committees and the Executive Council of the International Association of Deposit Insurers.

BDIF representatives attended different meetings, took part in discussions and conferences and were actively involved in the research projects of the Association. The latter’s Annual General Meeting discussions focused on the IMF-IADI cooperation under the Financial Sector Assessment Program with regard to the involvement of the deposit insurers in respective jurisdictions for the

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assessment in accordance with the Core Principles for Effective Deposit Insurance Systems.

BDIF contributed to IADI activities by hosting a technical seminar on Key Legal Modalities for Assisting Cooperation among DGSs in Europe, organised by the IADI Europe Regional Committee on 20–21 April 2012 in Sofia.

As a member of the European Forum of Deposit Insurers BDIF was involved in drafting the Forum’s

comments on the European Commission’s proposal for a directive establishing a framework for the recovery and resolution of credit institutions and investment firms. BDIF representatives sat on the meetings of the EFDI EU Committee and the new Crisis Resolution Working Group, and attended the annual conference all focusing mainly on the role of DGS in crisis management. Furthermore, experts of BDIF are part of the new Public Relations Working Group, as well as of the Research Working Group established at end-2012. The latter will focus its work on determining the risk-based contributions and regular tests of the deposit guarantee schemes.

BDIF enhanced the exchange of experience with counterpart institutions. In January its representatives visited the Savings Deposit Insurance Fund of Turkey in Istanbul and in May attended a bilateral seminar on Early Warning Systems organised by the Bank Guarantee Fund of Poland in Warsaw.

In the framework of the exchange of information with European DGSs, BDIF consulted the members of the Forum on the scope of information needed when carrying out tests of the DGS.

Meetings with representatives of the IMF missions were held during their visits in Bulgaria in May and December 2012.

In June 2012 BDIF hosted a one-week training for representatives of the Deposit Insurance Board of Tanzania. Technical assistance was provided within the framework of the ongoing reforms for the establishment of an autonomous deposit insurance body in Tanzania.

Maintaining depositors’ confidence Maintenance of depositors’ confidence is a top priority of BDIF. The Fund regularly informed the media and the general public about its functions and activities throughout the year. Real and prospective depositors were provided with information about the main features of the deposit guarantee scheme and its operation, the procedure for deposit reimbursement in failed banks, as well as with answers to specific questions about deposit protection. The information was provided by telephone and e-mail messages, via the BDIF website, and by visiting BDIF office. As from early 2012 BDIF maintains a Register of Depositors’ Enquiries intended to monitor depositors’ awareness and attitudes. To improve the awareness of BDIF’s website visitors a new section related to EU initiatives on deposit guarantee and bank restructuring is planned to be launched.

To improve the communication with all parties concerned and in line with the objectives

laid down in the BDIF Governance Strategy, a Communication Policy was adopted. The adoption of a Communication Strategy and a Crisis Communication Strategy with a plan to it is forthcoming.

To improve the awareness of depositors BDIF updated its ‘Questions and Answers about Deposit Insurance’ brochure and provided it to banks for distribution through their branch network in April.

The e-version in Bulgarian and English is published on member banks’ websites. The leaflets containing key information about deposit guarantee and bank bankruptcy were also updated. BDIF disseminates its information materials via its website and on its premises.

Interviews and articles regarding the activities of BDIF were featured during the year in print and electronic media.

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GOOD CORPORATE PRACTICES. TRANSPARENT AND EFFECTIVE GOVERNANCE Effective Communication.

Maintaining Depositors’ Confidence

Adequate Funding.

Safe and Transparent Asset Management

Timely Access of Depositors to Their Guaranteed Amounts

BDIF GOVERNANCE STRATEGY

Alternative Methods for Bank Resolution

Management of the Risks for the Deposit Guarantee Scheme

Since its establishment BDIF has made efforts to recruit, keep and develop its expert staff, as the success of an organisation depends on the expertise and commitment of its employees.

In line with BDIF policy intended to improve the administrative capacity and to strengthen professional and personal competences, BDIF experts attended various training courses, seminars and conferences.

As a result of the IT audit carried out in 2011 an Information Safety Policy was adopted establishing the management of BDIF information resources.

As regards technical back-up BDIF is guided by the principle that to establish an effectively operating institution its work needs to be supported by advanced information technologies. On the one hand, this ensures the effective performance of tasks conferred on BDIF by law, and minimises the likelihood of mistakes, on the other hand.

Long-term benefits from the improvement of information systems as a consistent policy are as follows: • minimisation of a number of risks for BDIF; • optimisation of operations.

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Currently BDIF has fully completed and functioning systems and systems in development or design phase. In 2012 the software for the Automated Payout System for Guaranteed Deposits was completed. It aims at ensuring safe and correct provision of data for the timely and effective payout of guaranteed amounts to depositors. Risk management systems were also implemented.

The implementation of a B-analyzer information system started in 2008. The system is an aggregation of systems for data collection, data import and maintenance of a unified and centralized database for the purposes of BDIF. By the end of 2009 the functioning modules are as follows: Banking Statistics, Banking System, Deposit Base, Macro Data and Markets. The B-analizer was further developed to extend the scope of statistical information and to allow generation of automatic reports and analysis for the purposes of risk management and development of models for risk based premium contributions.

The work on the Unified Information System was started over the year. It aims at organising and managing BDIF documents in order to ensure that respective documents are available and updated in a single system.

The implementation of an Integrated Information System in 2014 is the next step in BDIF information back-up. It will integrate all systems currently operating at BDIF, including the finance and accounting system, the dealership system, the B-analyzer, the Automated Payout System, Risk Management Systems and Integrated Information System.

Administrative Expenses Budget for 2013 The accomplishment of strategic and immediate operational objectives is the basis for the Administrative Expenses Budget of BDIF for 2013, approved by Resolution No. 91 of 4 December 2012 of the BNB Governing Council, totalling BGN 1,674,960.

In mid-2012 the unified corporate design for paper and electronic publications was approved and BDIF materials were produced in compliance with it.

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BDIF Organisation Chart

Management Board

Chairman of the Management Board

Treasury Department

Bank Bankruptcy and Early Intervention Department

Risk Assessment and Analysis Department

Corporate Communications and International Cooperations Department

Experts

Legal Department

Finance and Accounting Department

This Report was approved by the Management Board of the Bulgarian Deposit Insurance Fund on 20 March 2013 and signed on its behalf by:

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

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HR and Administration Department

Appendix 1. Major Financial Indicators BGN’000

Statement of financial position as at 31 December 2012

TOTAL ASSETS – Cash and cash equivalents – Receivables from banks – Available-for-sale securities – Property and equipment

31 December 31 December 2012 2011 1,580,969 1,325,340 848,696 558,357 366 731,395 765,737 802 828

– Intangible and other assets

76

52

49

63

1,580,920

1,325,277

TOTAL ASSETS NET ASSETS

Statement of BDIF results from operations for the year ended 31 December 2012

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 – Other income/(losses), net

· Net gains/(losses) from revaluation and foreign currency transactions · Penalty interest for delay – 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

BGN’000

31 December 2012 243,351 218,713 27,231

31 December 2011 225,476 195,448 31,063

27,032

26,796

3

2,857

196

1,410

(1,134)

366

(1,141)

339

7

27

(1,459)

(1,401)

12,292

(1,139)

12,400

(176)

(108)

(963)

255,643

224,337

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Statement of cash flows for the year ended 31 December 2012

Cash and cash equivalents

1 January 2011 372,169

31 December 2011 558,357

BGN’000

1 January 2012 558,357

Statement of changes in net assets Balance as at 1 January 2011 Total comprehensive result for the year Balance as at 31 December 2011 Total comprehensive result for the year Balance as at 31 December 2012

31 December 2012 848,696

BGN’000 1,100, 940 224,337 1,325,277 255,643 1,580,920

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

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31 December 2012 BGN’000

31 December 2011 BGN’000

848,696 -

558,357 366

731,395 1,580,091

765,737 1,324,460

11

12

11

12

Major financial ratios

Return on net assets of BDIF Net income earned Ratio of BDIF liquid assets to total assets Ratio of BDIF high liquid assets to total assets

The return on total assets was determined as a 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.

31 December 2012 1.56% BGN 24,638,000 66.30% 65.8%

31 December 2011 2.27% BGN 30,028,000 56.46% 51.53%

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

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

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Appendix 2. Overview of Economic Environment 2.1. Global economy

Following long debates in the Congress, finally an agreement was reached on the last day of the year.

The past 2012 was globally characterised by slowly normalising but still turbulent economic and financial environment. The most serious risks to growth and stability of the global economy and the financial system were avoided and did not materialise. Over the year the global economy posted a 3.2% growth1. However, there is a high degree of heterogeneity across individual countries and regions. Real GDP of advanced economies exhibited growth of 1.3%, while growth in developing countries reached 5.1%. Economic activity in the euro area continued to slow down and contract by Ń 0.6%2 in 2012. The Central and Eastern European countries posted higher growth than that reported in the euro area: 1.8%.

Developing countries from the Asian region recorded the strongest growth compared with all other regions: 6.6%. The 2012 real GDP in Latin American and Caribbean countries increased by 3.0%, in the Middle East and North Africa by 5.2% and in Sub-Saharan Africa by 4.8%.

The past 2012 was a hard but important year for euro area countries. Over the year a number of measures were initiated to tackle euro area and EU problems as a whole. EU Member States, excluding the Czech Republic and the United Kingdom, signed on 2 March the Fiscal Stability Agreement under which the total budget deficit of the Member States, which have ratified the Agreement, must stay under 3%, the structural deficit under 1% and public debt up to 60% of GDP of the respective Member State. In 2012 it was also decided to establish a single European banking supervision to the ECB, which will start its work on 1 January 2014. On 2 August 2012 the ECB announced an Outright Monetary Transactions (OMTs) Programme and it will be applied to countries for which programmes for providing financial assistance from the European Financial Stability Fund or the European Stability Mechanism and the IMF have been approved.

The announcement of the programme calmed participants in government securities markets and led to a decrease in the debt yield of some EU periphery Member States. Despite the initiated measures the slowdown of economic growth as a result of the public debt crisis continued. In the third quarter of 2012 a recession in the euro area was officially announced after the average euro area GDP growth decreased by 0.1% in the third quarter and by 0.2% in the second quarter. Fiscal deficits contraction seriously hampered growth in periphery economies despite improved financing conditions in some of them. This led to a slowdown in growth of other countries. Reductions in private sector debts also continued to put pressure on growth. The heterogeneity across individual euro area countries were sustained with some countries like Germany posting growth, while other reporting a GDP decline. Spain and Italy facing a recession in the second half of 2011 again reported negative economic growth of about 1.4% and 2.3% respectively, followed by Austria and the Netherlands. France managed to avoid the

The US economic growth in 2012 outstripped that in 2011. The real GDP of the largest economy worldwide rose by 2.3% in 2012 against 1.8% in 2011. However, the economic growth is still not resilient enough and unemployment remained at relatively high levels. Household consumption growth moderated in 2012 but for the first time after the onset of the crisis positive developments were observed in the real estate sector: unsold houses in the market went down, residential construction increased and real estate prices edged upwards. The presidential elections were one of the most important events in the USA in 2012. The elections did not change the political situation of previous years. Barack Obama was elected for a second term. The seats in the congress remained divided between the two major parties. By the end of the year the focus shifted to the so-called fiscal cliff: a simultaneous release of several tax relief and support programmes which would have lead to an increase in tax burden by about 4% of GDP.

1 IMF data for 2012 (IMF World Economic Outlook, Update January 2013).

2 Eurostat data as at early March 2013.

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recession but economic growth was mere 0.2%.

Euro area investments and final consumption posted a decline. Household income went down as a result of increasing unemployment and lower wages, as well as higher price levels. Euro area inflation reached 2.5% in 2012 and 2.6% in the EU against the ECB target of 2%. Facing the deteriorating demand and unfavourable growth prospects firms reduced their investments. Euro area unemployment rose from 10.8% in early 2012 to 11.8% in December, reaching historically the highest levels. In France unemployment rose from 9.9% to 10.5%, and in Spain by 3.1 percentage points to 26.1%. Concurrently, the unemployment rate in Germany reported a slight decline from 5.6% to 5.3%. Austria and Luxembourg exhibited the lowest unemployment rate at 4.7% and 5.2% respectively.

In the short run the euro area remained the major challenge to the global economy irrespective of the eased debt crisis after the middle of the year.

The political and economic measures initiated for crisis resolution in Europe were accompanied by a recession. If the economic activity continues to weaken and unemployment to increase, economic

conditions will remain complicated.

In 2013 the global economy is unlikely to enjoy a significant improvement. The growth rate in most economies will be close to that in 2012. The reason is that the continuing restructuring of economic agents’ balance sheets in advanced economies will further dampen growth and this will also affect developing countries. The major issues include: • The reduction of budget deficits in a number of countries will continue in 2013.

• The main interest rates in developing countries will be kept at low levels and inflation will remain moderate.

• The decrease in private sector debts in developed countries is likely to continue, although at slower rates.

• The uncertainty, though at a lower degree, still remains a factor which will continue to weigh on making investment decisions.

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26

2.2. The Bulgarian economy Against the background of negative growth in the EU and in euro area in 2012, Bulgaria’s economy continued to increase, though at a lower rate of 0.8%. Although the decline in 2009 was followed by three consecutive years of economic growth, Bulgaria’s real GDP has not yet reached the precrisis levels of 2008.

In 2012 the major factor behind real GDP growth was domestic demand supported by EU structural funds. The contribution of net exports to growth was negative due to moderate exports as a result of an economic slowdown of Bulgaria’s major trading partners (EU Member States) and the increase in imports. Domestic demand entirely offset the declined exports and contracted collective consumption and became the main driver of economic growth in the past year. Gross fixed capital formation exhibited low growth in 2012 following three years of a significant decline.

was positive amounting to EUR 39.2 million (about 0.1% of the GDP for 2011). The major reason behind this is the increase in trade deficit reflecting both the slower export growth and higher import growth in 2012. The trade balance in 2012 is negative in the amount of EUR 3,622.1 billion (-9.1% of GDP). The balance of payments financial account in 2012 ended in a surplus amounting to EUR 2,231.3 million (5.6% of GDP) compared with a deficit of EUR 968.2 million in 2011 (-2.5% of GDP).

The major factors contributing to the financial account positive balance were the inflow of foreign direct investments and receipts from the sale of a government global bonds issue with a nominal value of EUR 950 million in international markets.

Weak economic growth was achieved in the context of increasing economic efficiency affecting adversely the labour market. Based on NSI data the unemployment rate in 2012 rose by 1.0 percentage point to 12.3% against 11.3% in 20113. The Employment Agency also reported an increase in registered unemployed by the end of the year. As a result the rate of registered unemployment rose to 11.4% against 10.4% by the end of 2011.

Bulgaria’s gross foreign debt5 in 2012 rose by EUR 2 billion and reached EUR 37.85 billion (95.4% of nominal GDP for 2012). Approximately half of the increase was attributable to the issue of government global bonds with a nominal value of EUR 950 million intended to provide resources for payment of maturing government global bonds in January 2013. By the end of the year the share of the private gross external debt accounted for 87.83% of gross external debt (EUR 33.24 billion or 83.8% of the nominal GDP for 2012). The share of public and publicly guaranteed gross external obligations comprised 12.17% of the total debt (EUR 4.61 billion or 11.6% of GDP). In 2012 official foreign currency reserves rose by EUR 2.2 billion (or by 16.51% on the end of 2011) and reached EUR 15.55 billion (39.2% of GDP).

The slowdown of Bulgaria’s exports in 2012 affected the balance of payments current account4, reporting a deficit of EUR 528.2 million (about 1.3% of the nominal GDP for 2012). By comparison, in 2011 the current account balance

In 2012 inflation in Bulgaria measured by consumer price index6 reached 4.25% compared with 2.75% in 2011. Foods contributed most sizeably to inflation (2 percentage points), followed by administratively set prices (1.34 percentage prices)

3 NSI labour force survey data conducted by the NSI on a quarterly basis.

4 Based on balance of payments preliminary data as at 15 March 2013.

5 Based on preliminary data on gross external debt by end-February 2013. Data are subject to revision.

6 The consumer prices index is the official measure of inflation in the Republic of Bulgaria. It evaluates the general relative change of goods and services prices used by households for personal (non-production) consumption and is calculated by applying the structure of final consumption expenditure of Bulgarian households. The major source of information about expenditure is the household budget survey conducted in the country. CPI in t year is calculated on the basis of expenditure structure from year t - 1.

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and energy products (0.63 percentage points).

Inflation in Bulgaria for 2012 as measured by harmonised index of consumer prices7 reached 2.76%.

By the end of December 2012 the budget balance on the Consolidated Fiscal Programme was negative in the amount of BGN 350.2 million formed by a deficit on the national budget in the

amount of BGN 680.4 million and a surplus on EU funds in the amount of BGN 330.2 million. The fiscal reserve as at 31 December 2012 amounted to BGN 6.1 billion, with the payment in January 2013 on government global bonds issued in international capital markets in 2002 amounted to approximately BGN 1.8 billion (principal and interest).

7

The harmonised index of consumer prices is a comparable measure of inflation in EU countries. It is one of criteria for price stability and Bulgaria’s accession to the euro area. HICP and CPI measure the total relative change in goods and services price levels. Both indices are calculated by one and the same basket of goods and services and one and the same prices but the weights used differ. HICP is based on weights representing the relative shares by group of goods of individual and collective consumption of all households (including institutional and non-resident) on the territory of Bulgaria. The national accounts data are the main source of information about weights. HICP in t year is calculated by weights from year t - 2.

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28

Appendix 3. Deposit Guarantee 3.1. Bulgaria’s Banking System The banking system in Bulgaria remained stable and well capitalized in 2012. By the end of the year tier 1 capital adequacy was 15.14% at the banking system level and total capital adequacy 16.64% against a statutory requirement of 12%. Bank assets increased by 7.40% in 2012, mainly reflecting the growth in household deposits and attracted funds from credit institutions. Balance sheet equity grew by 4.60% as a result of a reserve increase, including retained profits (BGN 216.67 million or 3.90%), issued capital (BGN 99.67 million or 2.66%) and revaluation reserves (BGN 106.60 million or 42.85%). Banking system audited profit for 2012 accounted for BGN 529.68 million, up 11.78% compared with 2011.

Attracted funds of the banking system continued to rise throughout 2012, posting growth of 7.56% or BGN 4.97 billion to reach BGN 70.70 billion.

Deposits of individuals and households again posted the highest growth at BGN 3.97 billion (12.44%). Deposits of non-credit institutions grew

by BGN 504.61 million (2.34%). Funds attracted from credit institutions increased by BGN 704.24 million (7.03%) at the end of 2011 and reached BGN 10.72 billion (15.17% of all attracted funds).

Lending remained weak over the review period.

The total amount of gross loans (excluding those to credit institutions) rose by mere BGN 1.79 billion (3.2%) in 2012, mainly due to the growth in corporate loans (BGN 2.05 billion or 5.67%), loans extended to non-credit institutions (BGN 169.14 million or 20.24%) and to a lesser extent housing loans. Reflecting mainly the weaker demand for new loans, housing mortgage loans extended to individuals posted a slight increase of BGN 73.64 million (0.79%) in 2012, while gross consumer

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loans decreased by BGN 171.60 million (1.88%).

Loans to central governments recorded the largest decline of BGN 325.38 million in the volume of loans extended at the banking system level. In 2012 claims on credit institutions decreased by BGN 1.42 billion (17.12%). Preliminary data show a EUR 806 million (14.27%) increase in gross external obligations of banks mainly reflecting their growth in November (EUR 919 million), with the increase since early 2012 concentrated primarily in the short-term component of gross external obligations (EUR 748 million) and to a lesser degree in the long-term component (EUR 58 million).

Bad and restructured loans continued to increase in 2012. Based on BNB data, by end-December 2012 loans past-due over 90 days reached BGN 9.62 billion or 16.63% of gross loans (excluding those to credit institutions) before impairment. The growth rate of bad loans slowed down after the middle of the year, turning negative in the last quarter of 2012.

In 2012 securities portfolios increased by 30.78% (BGN 1.8 billion), occupying 9.4% of total banking assets by the end of the year. On the asset side of the banking system balance sheet, an increase of 24.18% (BGN 1.84 billion) in cash and cash balances with central banks was registered in 2012.

Major risks to the banking system stem from the assumption that if the economic growth remains weak and unemployment continues to grow, this may exert additional upward pressure on the amount of non-performing loans. Nonetheless, the high capital adequacy of Bulgaria’s banking sector and existing buffers along with the ample liquidity and banks’ ability to generate profits have ensured the stability of the Bulgarian banking sector.

3.2. BDIF Member Banks as at 31 December 2012 • Allianz Bank Bulgaria

• Investbank

• Bulgarian Development Bank

• MKB Unionbank

• Bulgarian-American Credit Bank

• Municipal Bank

• Central Cooperative Bank

• Piraeus Bank Bulgaria

• CIBANK

• ProCredit Bank (Bulgaria)

• Citibank, N.A. – Sofia Branch

• Raiffeisenbank (Bulgaria)

• Corporate Commercial Bank

• Societe Generale Expressbank

• Crédit Agricole Bulgaria

• TBI Bank

• D Commerce Bank

• T. Ç. Ziraat Bank – Sofia Branch

• DSK Bank

• Teximbank

• Eurobank Bulgaria

• Tokuda Bank

• First Investment Bank

• UniCredit Bulbank

• International Asset Bank

• United Bulgarian Bank

The credit institutions listed below 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

3.3. 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. Deposits of physical persons and legal entities in both national and foreign currency are covered by the guarantee. Deposits of banks and non-bank financial institutions, except for supplementary compulsory pension insurance funds, of the Government and government bodies, of municipalities, preferential deposits, deposits of members of the managing bodies of banks and persons related thereto, 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 BDIF Management Board.

The total amount of eligible deposits in the banking system was BGN 51,581,508 thousand as of 31 December 2012 (31 December 2011: BGN 46,339,251 thousand). The total number of deposits was 10,166,310 (31 December 2011: 10,347,385). The average deposit amount was BGN 5,074 and for 2011: BGN 4,478.

In 2012 the amount of the deposits guaranteed

by BDIF increased by 11.31%, and their number decreased by 1.75% compared to the previous year.

An increase in the average deposit amount was observed, which in 2012 grew by 13.30% or BGN 596 compared with that in 2011.

60,000 51,582 50,000

46,339

40,000

30,000 20,000 10,347 10,166

10,000

4,478 5,074

,0 Amount of deposits (BGN million)

Number of deposits (thousand) 2011

Source: BDIF

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2012

Average deposit (BGN)

2012

BGN 55.57% EUR 36.47% In 2012 BGN-denominated deposits posted the Other currencies 7.96%

Breakdown of deposits by currency Deposits in BGN guaranteed by BDIF amounted to BGN 28,664,470 thousand (55.57%) and were held by 8,259,414 depositors (81.24%).

Deposits in EUR guaranteed by BDIF accounted for BGN 18,810,182 thousand (36.47%) and were held 2012 by 1,390,499 depositors (13.68%).

BGN 55.57% EUR

36.47%

The amountOther of deposits foreign currencies currencies in other 7.96% guaranteed by BDIF was BGN 4,106,856 thousand (7.96%), their number reaching 516,397 (5.08%).

2011

highest growth at 19.19%, followed by foreign currency deposits at 6.75% per cent and EURdenominated deposits at 1.99%.

2011

Compared to the51.90% number of deposits, subject BGN to the guarantee 39.80% scheme, deposits in the three EUR Other currencies 8.30% negative growth, with currency groups posted

other foreign currency deposits recording the most significant decline (-3.49%), followed by EUR Currency Depositand Breakdown, 2011 deposits (-3.27%) BGN deposits (-1.38%).

8.30%

51.90%

39.80%

BGN 51.90% EUR 39.80% Currency8.30% Deposit Other currencies

BGNCurrency EUR Deposit Other currencies

Breakdown, 2011

Breakdown, 2012

Currency Deposit Breakdown, 2012

Currency Deposit Breakdown, 2011

7.96%

8.30%

51.90%

39.80%

55.57%

36.47%

BGN

EUR

Other currencies

BGN

EUR

Other currencies

Source: BDIF Currency Deposit Breakdown, 2012

7.96%

Breakdown 36.47% of deposits by source

55.57%

The amount of non-financial corporations deposits BGN EUR Other currencies was BGN 14,911,177 thousand (28.91%) and their number came to 419,588 (4.13%). In 2012 these deposits posted growth in their amount (7.10%) and in number (3.44%) compared to 2011.

9,746,606 (95.87%). In 2012 their volume grew by 12.65%, while their number declined by 1.96%.

Deposits of supplementary compulsory pension insurance funds8 amounted to BGN 903,252 thousand (1.75%) and numbered 116 (0.001%), posting growth in amount at 35.78% and in number at 12.62% compared to 2011.

Household deposits totalled BGN 35,767,079 thousand (69.34%), their number reaching

8

According to the amendments to the Law on Bank Deposit Guarantee of 18 November 2008, deposits of these funds are guaranteed by BDIF.

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32

68.5% Non-financial corporations

2011 Non ancial corporations Households SCPI funds*

30.0% Households 68.5% SCPI funds 1.4%

Breakdown of Deposits by Source, 2011

Breakdown of Deposits by Source, 2012 1.8%

1.5%

28.9%

30.0%

69.3%

68.5% Non-financial corporations

Non-financial corporations

Households

Households

SCPI funds

SCPI funds

Source: BDIF

1.8%

28.9%

Breakdown of deposits by and above the level 69.3% of the guarantee Non-financial corporations Households

Deposits of up to BGN 196,000, i.e. backed by a SCPI funds

35,000

30,000

28,921

full guarantee, totalled BGN 31,620,519 thousand (61.30%) and were 10,144,207 (99.78%) in number.

The average amount of a deposit within this group was BGN 3,117.

31,621

25,000 20,000 15,000

10,329 10,144

10,000

2,800 3,117

5,000 0

Amount of full guarantee Number of full guarantee Average amount of a full deposits deposits guarantee deposit (BGN million) (thousand) (BGN) 2011

Source: BDIF

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2012

Over 2012 the increase in the amount of full guarantee deposits was 9.34% compared to 2011 against the negative growth in their number (-1.79%). Household deposits (9.46%) posted the largest relative growth in the amount of deposits within this group, followed by non-financial corporations deposits (7.97%).

The average amount of household deposits of up to BGN 196,000 was BGN 2,977, up BGN 312 on 2011.

The average amount of these deposits in 2012 increased by BGN 317, or 11.33% on 2011.

The average amount of SCPI fund deposits of up to BGN 196,000 was BGN 60,000, up BGN 16,700 on 2011.

The average amount of non-financial corporations deposits of up to BGN 196,000 was BGN 6,437, up BGN 277 on 2011.

Full Guarantee Deposits: Structure and Dynamics, number in thousand, amount in BGN million Full Guarantee Deposits: Structure and Dynamics, number in thousand, amount in BGN million 35,000 30,000

26,470

28,975

25,000

20,000 15,000

9,932

10,000 5,000 0

398

2,449

9,733

2,645

411

Number

0 Amount

Number

Non-financial corporations

Amount

0

Number

Households 31 December 2011

1

1

Amount

SCPI funds 31 December 2012

Source: BDIF

Deposits exceeding BGN 196,000 came to BGN 19,960,989 thousand (38.70%), their number

reaching 22,103 (0.22%). The average amount of a deposit within this group was BGN 903,090.

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25,000

20,000

22,103 19,961 18,049

17,419

15,000

10,000

5,000 965

903

0 Amount of deposits exceeding BGN 196,000 (BGN million)

Number of deposits exceeding BGN 196,000 (thousand)

2011

Average amount of a deposit exceeding BGN 196,000 (BGN thousand)

2012

Source: BDIF

Over 2012 the increase in the amount of deposits of over 196,000 was 14.60% on 2011 and in their number 22.46%.

The average amount of a household deposit of over BGN 196,000 was BGN 511,032, down BGN 18,000 on 2011.

Household deposits rose both in terms of amount (28.60%) and number (33.20%). Deposits of non-financial corporations ranked second, their amount and number rising by 6.92% and 9.05% respectively. SCPI fund deposits grew by 35.82% in amount and 21.18% in number.

The average amount of a non-financial corporations deposit exceeding BGN 196,000 was BGN 1,408,500, a decline of BGN 28,000 on 2011.

Over 2012 the average amount of a deposit in this group decreased by 6.42% or BGN 62 thousand in absolute value.

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The average amount of a SCPI fund deposit exceeding BGN 196,000 was BGN 8,762 thousand, up BGN 944,615 on 2011.

Deposits Exceeding BGN 196,000: Deposits Exceeding BGN 196,000: Breakdown and Breakdown Dynamics, and Dynamics, number in thousand, number in thousand, amount in BGN million amount in BGN million 14,000

11,473

12,000

12,266

10,000 8,000

6,792

6,000

5,282

4,000 2,000

mln.

0

8

Number

Amount

0

13

10

9

Number

Non-financial corporations

Amount

Households

31 December 2011

0

Number

664 902 Amount

SCPI funds

31 December 2012

Source: BDIF

Guaranteed amount of deposits up to the coverage level (BGN 196,000) As of 31 December 2012 the guaranteed amount of deposits up to the coverage level was BGN 35,952,707 thousand against BGN 32,458,258 thousand as of 31 December 2011 (10.77%

growth). By 31 December the guarantee coverage ratio, i.e. the ratio between the guaranteed amount of deposits up to the coverage level and the overall amount of deposits subject to the guaranteed scheme was 69.7% compared to 70.0% for 2011.

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250,000

75%

200,000

70%

65%

150,000

60%

100,000

55% 50%

50,000

Guarantee amount

9/2012

12/2012

6/2012

3/2012

9/2011

12/2011

6/2011

3/2011

9/2010

12/2010

6/2010

3/2010

9/2009

12/2009

3/2009

6/2009

9/2008

12/2008

3/2008

6/2008

12/2007

6/2007

9/2007

45%

3/2007

0

40%

Coverage ratio

Source: BDIF

Entry and annual premium contributions from banks for 2012 In 2012 annual premium contributions from banks were BGN 218,713 thousand against BGN 195,448 thousand for 2011. As far as the number of member banks in the deposit guarantee scheme remained unchanged at 26, the increase in the total amount of premium contributions was due to the increased amount of the 2011

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deposit base (eligible deposits) used as a basis for calculating the premium contribution in 2012 (BGN 43,739 million) compared to the deposit base for 2010 (BGN 39,090 million), a basis for calculating the premium contribution for 2011.

In 2012 there were no newly established banks in Bulgaria to be included in the deposit guarantee scheme; hence, no additional entry contributions were made.

Appendix 4. Investment Policy and Asset Management

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

government: securities issued in the domestic market; bonds issued in external markets (global and Eurobonds); short-term deposits with banks under Article 2, paragraph 5 of the Law on Credit Institutions, and deposits with the BNB. Investment Portfolio

• safety and protection of assets; • liquidity maintenance for execution of liabilities; • minimisation of risks and optimisation of income.

The investment portfolio of BDIF by 31 December 2012 amounted to BGN 1,580,090 thousand compared to BGN 1,324,092 thousand at the end of 2011. BDIF portfolio increased by BGN 255,998 thousand in 2012.

In accordance with the LBDG, BDIF funds are invested in securities issued or guaranteed by the

BDIF Investment Portfolio

mln. BGN 1,800 1,600 1,400

1,575.42

1,558.77

1,510.07

1,580.09

1,200 1,000 800 600

748.48

770.64 765.94

538.88

538.76

335.06

400 222.83

200 0

844.43 731.39

701.47

22.19 Q1'2012 Bonds

Q2'2012 Deposits with the BNB

4.26 Q3'2012 Account with the BNB

Q4'2012 Portfolio

Source: BDIF

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Financial Instruments In 2012 BDIF assets were invested in bonds issued by the Bulgarian government and in deposits with the BNB; no deposits were placed with banks. Over the review year the share of bonds in the overall portfolio declined from 57.83% by end-2011 to 49.56% at the end of March of 2012. 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 the BNB increased from 42.17% at the end of 2011

to 50.44% at the end of the first quarter of 2012.

Over the review year BDIF pursued a conservative strategy, while maintaining a balanced portfolio structure by instrument. Reflecting this strategy and the maturing government securities issues, the share of bonds decreased and at the end of the year deposits increased and occupied 53.71%, while bonds comprised 46.29% of the overall portfolio. BDIF’s bid to purchase securities of issue XS0802005289 traded in international markets upon its issuance in July 2012 was not satisfied by the Ministry of Finance, similarly to the bids submitted by other Bulgarian investors.

Instrument Breakdown PortfolioPortfolio Instrument Breakdown 60% 50%

53.44% 49.44%

49.56%

40%

49.14%

46.29%

44.52% 35.68%

34.21%

30% 21.27% 20%

14.76%

10% 1.42% 0%

Q1'2012 Bonds

Source: BDIF

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Q2'2012 Deposits with the BNB

0.27% Q3'2012

Q4'2012

Account with the BNB

Profitability of Investment Portfolio The downward trend in the yield of Bulgarian Доходност на активите governmentВидове bonds continued in 2012 and atQ2'2012 инструменти Q1'2012 Bonds 4.03% the end of the year the average weighted yield3.98% to maturity of the bonds in BDIF portfolio was 0.00% 0.00% 4.00% compared to with 4.16% the end of 2011. 0.00% Deposits the at BNB Account with the BNB Portfolio

0.00% 2.34%

The profitability of BDIF’s deposits with the BNB followed the respective quotations of the Bank for International Settlements, Basel. Throughout 2012 deposit Q4'2012 interest rates in BGN and EUR accounted Q3'2012 for 0%. Interest 4.10% 4.00%rates on deposits in USD fluctuated 0.00% 0.00% within a narrow range at levels close to 0%.

0.00% 2.00%

0.00% 0.00% 0.00% 2.32%

0.00% 0.00% 0.00% 1.86%

Portfolio Profitability Portfolio Profitability 6% 5% 4%

4.03%

4.10%

3.98%

3%

2.34%

0.00%

0.00%

0.00%

1.86%

0.00%

0%

2.32%

2.00%

2% 1%

4.00%

Q1'2012

Q2'2012

Q3'2012

Q4'2012

Bonds

Deposits with the BNB

Portfolio

Source: BDIF

Currency Breakdown of Investment Portfolio At the end of 2011 the euro exposure share reached 47.96% of the total portfolio. However, after receipt of the annual premium contributions from banks by the end of the first quarter of 2012, the share of BGN-denominated assets in BDIF portfolio increased to 55.49%, while the share of EUR-denominated assets decreased to 43.70%.

As a result of purchases of government bonds denominated mainly in BGN, the whole year was marked by this dynamics. Hence, portfolio currency composition changed gradually, with the lev exposure comprising 61.41% and the euro exposure reaching 36.38% by end-December. The share of USD-denominated assets in the overall portfolio rose from 1.04% by end-2011 to 2.21% by end-2012.

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Q1'2012 55.49% 43.70% 0.81%

BGN EUR USD Портфейл

100.00%

Q2'2012

Q3'2012

100.00%

100.00%

56.65% 42.51% 0.84%

Q4'2012

61.67% 36.10% 2.24%

61.41% 36.38% 2.21%

100.00%

Portfolio Currency Breakdown 80%

70% 60% 50%

61.67%

56.65%

55.49% 43.70%

61.41%

42.51% 36.38%

36.10%

40% 30% 20%

10%

0.81%

0%

Q1'2012

2.24%

0.84% Q2'2012

BGN

Q3'2012

EUR

2.21% Q4'2012

USD

Source: BDIF

Interest Breakdown of Bond Portfolio

the market allowed no significant changes in their share over the year. From 10.30% at the end of 2011, their share fell to 9.31% at the end of 2012.

Partial maturing of floating-coupon securities in circulation was another reason for this fall. Relative to the investment portfolio, fixed yield securities at year-end represented 41.98%, while those with a floating yield – 4.31%.

In 2012 the interest structure of BDIF bond portfolio retained its 2011 characteristics. Fixed coupon securities dominated the bond portfolio, occupying approximately 91%. The limited offering of floating coupon government bonds and the lack of new issues with such coupons in

Bond Portfolio Breakdown 100%

91.06%

90.96%

90.69%

90.48%

80%

60%

40%

20%

0%

9.04%

Q1'2012

8.94% Q2'2012

Fixed interest rate securities

Source: BDIF

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9.52% Q3'2012 Floating interest rate securities

9.31% Q4'2012

Maturity Breakdown and Modified Duration of Investment Portfolio

three years. Over the year instruments with a maturity of up to one year decreased moderately their share, reaching 66.3% of the total portfolio by end-2012. Bonds with a maturity from one to three BDIF maintained a low modified duration of below years registered just the opposite dynamics as their 1 over 2012. This indicator declined throughout share rose to 16.7% by end-December. The share the year, reaching 0.76 in the third quarter and of bonds within the maturity segment from three 0.70 at the end of the year. This dynamics reflects to five years also increased gradually throughout a decrease in the residual term of BDIF portfolio the year reaching 10.4% of the portfolio by endsecurities and purchases of bonds with a relatively December. of moreQ2'2010 than lower modified duration.

Q1'2012 Q2'2012 Q3'2012 Q4'2012Bonds with a maturityQ1'2010 Q3'2010 five years maintained a до relatively constant share of Up to 3М 51.06% 58.71% 55.47% 65.00% 3М 3М - 6М 8.39% 0.00% 11.31% 0.00% 3М - 6М around 6% of BDIF portfolio.

The main 6М portion of the BDIF portfolio comprised - 1Y 11.69% 11.40% 1.34% 1.34% 6М - 1Y deposits and with a maturity to Up to securities 1 year 71.13%of up 70.11% 68.12% 66.34% до 1 г.

0.0% 0.0% 0.0% 15.26% 7.93% 5.68% 0.00% 100.0%

1 to 3 years 3 to 5 years 5 to 10 years Over 10 years

15.82% 8.42% 5.65% 0.00% 100.0%

15.59% 10.15% 6.14% 0.00% 100.0%

16.67% 10.44% 6.55% 0.00% 100.0%

0.0%

0.0%

0.0%

66.34%

68.12%

70.11%

71.13%

70% 60% 50%

Up to 1 year

1 to 3 years Q1'2012

Q2'2012

Q3'2012

5 to 10 years

0.00%

0.00%

0.00%

6.55%

6.14%

5.65%

5.68%

10.44%

10.15%

3 to 5 years

0.00%

0%

8.42%

10%

7.93%

16.67%

15.59%

15.26%

20%

15.82%

40% 30%

0.

над 1 до 3 г. над 3 до 5 г. над 5 до 10 г. над 10 г.

Portfolio Maturity Breakdown

80%

Q4'20

Over 10 years

Q4'2012

Source: BDIF

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0.

0.02 0.00 0.79

Депозити в БНБ Cметкa БНБ Total Portfolio

0.02 0.00 0.71

0.02 0.00 0.76

0.02 0.00 0.70

Portfolio Modified Duration 1.80 1.60 1.40

1.69

1.59

1.49

1.42

1.20 1.00 0.80 0.60

0.79

0.71

0.76

0.70

0.40 0.20 0.00

Q1'2012

Q2'2012 Bond Portfolio

Q3'2012

Q4'2012

Total Portfolio

Source: BDIF

Financial Results BDIF investment income for 2012 amounted to BGN 27,231 thousand compared to

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BGN 31,063 thousand for 2011. The net change in the fair value of available-for-sale financial assets for 2012 was BGN 12,292 thousand compared to BGN -1,139 thousand for 2011.

Appendix 5. Technical Seminar of the Europe Regional Committee of the International Association of Deposit Insurers, April 2012, Sofia

On 19-21 April 2012 BDIF hosted the technical seminar Key Legal Modalities for Assisting Cooperation among DGSs in Europe, organized by the Europe Regional Committee of the International Association of Deposit Insurers.

The seminar was intended for deposit guarantee schemes, members of IADI and of EFDI, providing a platform for exchange of views and discussions on subjects related to the proposals for the recast directive on deposit guarantee schemes and the framework for crisis management.

Over forty participants attended the seminar: representatives of deposit guarantee schemes, the Bulgarian National Bank, the Ministry of Finance and leading Bulgarian jurists in the area of international law.

Discussions were split into four panels on: – Key issues of lending/borrowing and mutual claims handling agreements among DGSs Presentations focused on the possible structure of borrowing handling agreements among DGSs: applicable law, jurisdiction, major provisions of the arrangement. The multilateral memorandum of understanding of the European Forum and its major characteristics (information, cooperation and representation) were also presented at the seminar.

The obligations of the host and home deposit guarantee schemes, as well as other outstanding issues were discussed.

Presented topics included: insolvency proceedings participants; requirements to liquidators and trustees along with their duties and responsibilities; the role of deposit guarantee schemes in insolvency proceedings.

– Backup funding agreement with the state/ central bank and repurchase agreements for government securities in the event of market disruption According to the Core Principles for Effective Deposit Insurance Systems, Principle 11, Funding, panel participants consolidated around the opinion of the importance of availability of an additional funding mechanism. Repo arrangements were shown as an optimal instrument for cross-border funding due to their international standartisation.

– Selected legal issues of resolution framework This panel included the main elements of the pending proposal on the crisis management framework and the role of deposit guarantee schemes in it. The experience and practice approaches of non-EU countries, such as the USA and Turkey, were also shared at the seminar.

Presentations and discussions raised issues on finding a balance between the harmonised approach and the specificity of a particular jurisdiction.

– Country solutions to insolvency

regimes with focus on appointment of liquidator This panel focused on legal insolvency regimes in Romania, Hungary, Switzerland and Bulgaria.

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FINANCIAL STATEMENTS

ФОНД ЗА ГАРАНТИРАНЕ НА ВЛОГОВЕТЕ В БАНКИТЕ

Bulgarian Deposit Insurance Fund – 2012 Annual Financial Statements

Contents

Independent Auditor’s Report

47

Statement of Operations

49

Statement of Financial Position

50

Statement of Cash Flows

51

Statement of Changes in Net Assets

52

Notes to the Annual Financial Statements for 2012

1. General Information

53

2. Summary of the Significant Accounting Policies of BDIF

54

3. Premium Contributions

65

4. Investment Income

66

5. Other Income and Losses, Net

66

6. General Administrative Costs

67

7. Cash and Cash Equivalents

68

8. Receivables from Banks

68

9. Available-for-Sale Securities

69

10. Property and Equipment

71

11. Intangible and Other Assets

72

12. Other Liabilities

73

13. Financial Risk Management

73

14. Relations and Transactions with Government Institutions, Bodies and Enterprises

83

STATEMENT OF OPERATIONS for the year ended 31 December 2012

Notes Premium contributions income Investment income Other income/(losses), net General administrative expenses Result for the year

2012 BGN’000

2011 BGN’000

3 4 5 6

218,713 27,231 (1,134) (1,459) 243,351

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

4

12,292

(1,139)

Other components of net assets Net change in fair value of available-for-sale financial assets TOTAL COMPREHENSIVE REUSULT FOR THE YEAR

255,643

The accompanying notes on pages 53 to 83 form an integral part of these financial statements.

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224,337

STATEMENT OF FINANCIAL POSITION as at 31 December 2012

Notes

31.12.2012 BGN’000

31.12.2011 BGN’000

ASSETS Cash and cash equivalents Receivables from banks Available-for-sale securities Property and equipment

7 8 9 10

848,696 731,395 802

558,357 366 765,737 828

Intangible and other assets

11

76

52

1,580,969

1,325,340

49 49 1,580,920

63 63 1,325,277

TOTAL ASSETS LIABILITIES Other liabilities Total liabilities NET ASSETS

12

The accompanying notes on pages 53 to 83 form an integral part of these financial statements.

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STATEMENT OF CASH FLOWS for the year ended 31 December 2012 2012 BGN’000

2011 BGN’000

Cash flows from operating activities Cash receipts from banks as premium contributions Cash paid to employees and for social security Taxes paid

219,079 (844) (93)

195,109 (837) (90)

Other proceeds/(payments) from operating activities, net Net cash flows from operating activities

(442) 217,700

(432) 193,750

2

2,863

Proceeds related to available-for-sale securities

250,462

195,391

Payments related to available-for-sale securities Purchases of equipment and other assets Net cash flows from / (used in) investing activities

(177,761) (59) 72,644

(205,902) (50) (7,698)

Cash flows from financing activities Payments of finance lease liabilities Net cash flows used in financing activities

-

-

Increase in cash flows during the year

290,344

186,052

558,357

372,169

15

136

848,696

558,357

Notes

Cash flows from investing activities Proceeds from interest on term deposits with banks

Cash and cash equivalents at 1 January

7

Foreign exchange gains/(losses) Cash and cash equivalents at 31 December

7

The accompanying notes on pages 53 to 83 form an integral part of these financial statements.

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STATEMENT OF CHANGES IN NET ASSETS for the year ended 31 December 2012 Accumulated result

Revaluation reserve: available-forsale securities

Net assets

BGN’000 Balance as at 1 January 2011

217,146

883,794

1,100,940

225,476

-

225,476

Net change in fair value of available-for-sale financial assets

-

(1,139)

(1,139)

TOTAL COMPREHENSIVE RESULT

225,476

(1,139)

224,337

442,622

882,655

1,325,277

243,351

-

243,351

-

12,292

12,292

243,351

12,292

255,643

685,973

894,947

1,580,920

Result for the year

Balance as at 31 December 2011 Result for the year Net change in fair value of available-for-sale financial assets Total comprehensive result Balance as at 31 December 2012

The accompanying notes on pages 53 to 83 form an integral part of these financial statements.

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NOTES TO THE ANNUAL FINANCIAL STATEMENTS FOR 2012

1. General Information Information on BDIF The Bulgarian Deposit Insurance Fund was established under the Law on Bank Deposit Guarantee in 1999. BDIF was established to protect depositors’ savings with banks, participating in the scheme and repay the insured deposit amounts in case of bank license revocation. According to the Law on Bank Deposit Guarantee, BDIF’s core activity involves determining and collecting annual and entry contributions from banks licensed by the Bulgarian National Bank and investing 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. 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, the BNB may order а bank subject to special supervision to increase its capital, provided that the new shares will be acquired by BDIF. In such a case, the Management Board of BDIF shall take a decision for the acquisition of a bank’s shares as well as for their transfer.

BDIF address and headquarters: 27 Vladayska Street, 1606 Sofia The personnel as at 31 December 2012 comprised 19 employees (31 December 2011: 22).

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:

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– 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.

The term of office of the Management Board of BDIF is four years. As at 31 December 2012 the members of the Management Board of BDIF were as follows: – Rossen 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; – Nelly Kordovska – Vice Chairman of the MB of the BDIF, assigned by Decision No. 1 of the BNB Governing Council dated 13 January 2011; – Bisser Manolov – member, assigned by Decision dated 23 March 2011 of the MB of the Association of Banks in Bulgaria; – 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; – 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.

2. Summary of the Significant Accounting Policies of BDIF Accounting policies The financial statements were drawn up following the accounting policies listed below. The adopted accounting policies are consistent with those applied in the previous reporting period, unless noted otherwise.

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 the International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements have been prepared on a historical cost basis, modified to include derivative financial instruments and financial assets and liabilities, reported at fair value through profit or loss.

The financial statements are presented in Bulgarian levs (BGN) and all items are rounded to the nearest thousand (BGN’000), unless specified otherwise.

standards approved by BDIF to be applied for the financial year starting on 1 January 2012. b. New and amended standards and IFRS improvements mandatorily applied for the fist time for the financial year starting on or after 1 January 2012, but currently not applicable to BDIF (although they may affect the reporting of transactions and events in the future) ‘Disclosures – Transfers of financial assets’: Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011). The amendment requires additional disclosures with a view to risk exposures related to transfers of financial assets. The amendment requires disclosures by class of assets of the nature, carrying amount and descriptions of risks and rewards of financial assets transferred to the other side, but still in the entity’s balance sheet. It also requires that information disclosed enables the interested party to find out what is the quantity of all related liabilities and the relation between financial assets and related liabilities. Where financial assets have been written off, but the entity is still exposed to certain risks and rewards related to the transferred asset, additional disclosure is required to understand the effects from these risks.

The preparation of financial statements in compliance with IFRS requires the use of estimates and assumptions. Hence, the management has to make its own assumptions on BDIF accounting policy. A separate disclosure is required for items in the financial statements presuming a higher level of subjective assessment and complexity or where the assumptions and accounting estimates have a material effect on the financial statements.

The said changes did not result in additional or changed disclosures and had no material impact on the assessment or the recognition of transactions and balances herein.

New and amended standards and interpretations to the reporting periods ending on 31 December 2012

Amendments to IAS 1 ‘Presentation of Financial Statements’ (issued in June 2011 effective for annual periods beginning on or after 1 July 2012) change the disclosure of items presented in other comprehensive income (OCI) in the statement of comprehensive income. The amendment requires entities to separate items presented in OCI into two groups, based on whether or not they may

а. New and amended standards approved by BDIF There are no new and amended accounting

c. New standards and interpretations effective for annual periods beginning on or after 1 January 2013 or later which have not been adopted by BDIF prior this date

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be reclassified (recycled) to profit or loss in the future. The proposed title used by IAS 1 has changed to ‘statement of profit or loss and other comprehensive income’.

The amended IAS 19 ‘Employee Benefits’ (issued in June 2011 and effective for annual periods commencing on or after 1 January 2013) requires significant changes in the presentation and measurement of certain pension income and termination benefits, as well as in the disclosures of all employee benefits. According to the standard, where changes in the net defined benefit liability (asset) occur, they shall be recognised as follows: а) past-service cost and net interest cost recognised in profit or loss; and b) remeasurements in other comprehensive income.

‘Offsetting of Financial Assets and Financial Liabilities’ – Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added guidance on the application of IAS 32 to address the inconsistencies identified with certain offsetting requirements. This includes clarification of the meaning of ‘currently has a legally enforceable right to offset’ and states clearly that gross settlement mechanisms are effectively equivalent to net settlement.

‘Disclosures – Offsetting of Financial Assets and Financial Liabilities’ – Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 July 2013). The amendment requires offsetting disclosures to allow users of the entity’s financial statements to assess better the effect or potential effect of netting arrangements, including rights of set-off.

The amendment addresses disclosures, but will not affect measurement and recognition of financial instruments.

Improvements in the International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning on or after 1 January 2013).

IFRS 13 ‘Fair Value Measurement’ (issued in May

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2011 and effective for annual periods commencing on or after 1 January 2013) aims to improve consistency and make the process less complex by giving a precise definition of fair value and a single measurement source of the fair value and disclosure requirements applicable to IFRS. The requirements which, to a large extent, have reached consistency between the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (USGAAP), do not expand the fair value reporting, but give guidance on how to use it when needed or allowed under other IFRS or GAAP standards.

BDIF Management considers the impact that the above stated amendments to the standards could have on BDIF’s financial result, as well as when it will approve them.

Other new and amended standards and interpretations, which are not likely to have any impact on these financial statements: The amendment to IAS 12 ‘Income Tax’ – Return on Investment Assets (issued in December 2010 and effective for annual periods commencing on or after 1 January 2013) expresses a rebuttable presumption that investment property measured at fair value will be recovered through sale.

The amendment to IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ regarding hyperinflation and removal of references to fixed dates of some exceptions and releases (issued in December 2010 and effective for annual periods commencing on or after 1 January 2013).

IFRS 10 ‘Consolidated Financial Statements’ issued in May 2011 and effective for annual periods beginning on or after 1 January 2014).

IFRS 11 ‘Joint Agreements’ (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013).

IFRS 12 ‘Disclosing of Interest in Other Entities’ (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013).

IAS 27 ‘Consolidated and Separate Financial Statements’ (revised in May 2011 and effective for annual periods beginning on or after 1 January 2014) was amended to give accounting disclosure requirements related to investments in subsidiaries, jointly controlled entities, and associates when the entity prepares its separate financial statements.

IFRS 10 ‘Consolidated Financial Statements’ replaced those parts in IAS 27 giving guidance on control and consolidated financial statements.

The amended IAS 28 ‘Investments in Associates and Joint Ventures’ (revised in May 2011 and effective for annual periods beginning on or after 1 January 2014) applies the equity method in the assessment of investments in associates and joint ventures.

IFRIC 20 ‘Stripping Costs in the Production Phase of a Surface Mine’ (issued in October 2011 and effective for annual periods beginning on or after 1 January 2013). d. New or amended standards and interpretations not yet endorsed by the European Union IFRS 9 ‘Financial Instruments: Classification and Measurement’. IFRS 9 issued in November 2009 and replacing IAS 39 in the part related to the classification and measurement of financial assets.

Consequently, IFRS 9 was amended again in October 2010 in relation to the classification and measurement of financial liabilities. In December 2011 the standard was amended to: a) change the effective date for annual periods beginning on or after 1 January 2015 and b) add transitional disclosures. The main characteristics of the standard are: • It requires that financial assets are classified in two measurement categories: those that shall be subsequently measured at fair value and those that shall be subsequently measured at amortized cost. That determination is made at initial recognition. The classification depends on the business model used by the entity to manage financial instruments and on the contractual cash

flows of the instrument.

• Most of the IAS 39 requirements regarding the classification and measurement of financial liabilities were not changed in IFRS 9. The main change is that the entity shall be required to present the changes in the fair value of financial liabilities attributable to changes in credit risk in other comprehensive income.

BDIF Management considers the impact that the above stated amendments to the standards could have on BDIF’s financial result, as well as when it will approve them.

Other amendments to the standards and interpretations not likely to have any impact on these financial statements: Amendment to IFRS 1 ‘First-time Adoption of IFRS – Government Loans’ (issued in December 2010 and effective for annual periods beginning on or after 1 January 2013) focuses on below-market rate government loans and provides relief to entity’s adopting the IFRS for the first time to apply IFRS retrospectively when reporting such loans.

The transition guidance amendments for IFRS 10, IFRS 11 and IFRS 12 (issued on 28 June 2012 and effective for annual periods beginning on or after 1 January 2013) set forth the guidance for transition to IFRS 10 ‘Consolidated financial statements’ and limit the requirement to provide adjusted comparative information to the immediately preceding period only.

Amendments to IFRS 10, IFRS 12 and IAS 27 – ‘Investment entities’ (issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014) define ‘investment entity’ and require that these entities measure their investments in those subsidiaries at fair value through profit or loss, as well as consolidate only subsidiaries providing services that relate to the investment entity’s investment activities.

The financial statements have been prepared on

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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 are 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 2.11.

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

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is the Bulgarian lev. 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 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 Bulgarian levs at the closing exchange rate of the 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 revalued at the closing exchange rate.

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 having a license granted by the 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 (Articles 15 and 16, paragraph 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 date 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. It is calculated on a statutory interest basis.

2.5. Investment income Investment income includes interest on deposits of BDIF with the BNB and on government securities held, realised gains and losses from sales and revaluation of financial instruments carried at fair value through profit and the accumulated effects from revaluation of sold or written-off financial assets classified as available-for-sale. The effects from net change in the fair value of available-forsale financial assets (change in available-for-sale financial assets revaluation reserve) are reported as a 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 a time 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. Financial instruments Classification BDIF classifies its financial instruments 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’ (including cash and cash equivalents) and ‘available-forsale 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 acquisition or origination, financial assets and liabilities are measured at their fair value equal to the 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 the 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’ item for the respective period (Note 2.5). In case

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of a 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’.

• receives economic benefits from its contractual rights; or

Gains and losses on revaluation to fair value

• loses control over the right to receive economic benefits from its contractual rights; or

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 available-forsale financial assets’, while in case of a sale and/or write-off the accumulated effects are recognised within the current result for the year under ‘investment income’.

• the term of such a right has expired; or

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 value of the asset and its recoverable value, which represents its current fair value.

Derecognition Financial assets or parts of them are derecognised from the statement of financial position where

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• waives such a right.

Financial liabilities are derecognised from the statement of financial position where: • 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, bank time deposits with original maturity of up to three months in Bulgarian levs and in foreign currency. Cash in hand and at current accounts is presented at nominal value. Cash on time 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 interest due.

For the purposes of the statement of cash flows, special purpose blocked deposits and accrued interest on non-matured time deposits are not treated as cash and cash equivalents. 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 definite time determined by the capital market and laws regulating transactions 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 those of actively trading Bulgarian banks and/or Bulgarian and foreign banks for the issues of Bulgarian securities traded in international markets. Where the market of particular securities is not active or these assets are not quoted, BDIF establishes their fair value through other valuation methods. They include: ‘reference prices’ by comparison with the market price of 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 specified amount includes also the interest accrued at the date of the BNB decision for revoking the bank’s license (Article 4 of the Law on Bank Deposit Guarantee). The amounts due 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.

2.7. 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

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fees for people involved in the project, nonrefundable 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

Depreciation methods BDIF applies the straight-line depreciation method for tangible fixed assets. Land is not depreciated. The useful life by group of assets has been determined considering: the physical wear, the characteristic features of the equipment, the intentions for future use and the expected obsolescence, and is as follows:

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

Useful life (years)

61

Buildings

25

Machinery and equipment (computers)

4

Motor vehicles

4

Fixtures and fittings

7

Other tangible fixed assets

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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 prospectively.

Subsequent expenditure 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 restructuring.

Impairment of assets BDIF performs a review for impairment of property and equipment when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. If any such indications exist that the estimated recoverable amount of an asset is lower than its carrying value, the latter is adjusted to the recoverable amount of the asset. The recoverable amount of assets within the ‘property and equipment’ group is higher than the fair value less costs to sell or the value in use. In assessing the 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 reported 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 are sold.

The gains or losses arising from the sale of an item from the ‘property and equipment’ group 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.

2.8. Intangible assets Intangible assets are stated in the financial statements at acquisition cost (cost) less accumulated amortisation and any impairment losses in value. These 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 value of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying value might exceed their recoverable amount.

Impairment losses are then included in the statement of operations (within the result for the year).

2.9. 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, the General Diseases and Maternity Fund, the Unemployment Fund, the

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Labour Accident and Professional Diseases 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.

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 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 conditions) 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

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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.

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 for 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 longterm government bonds denominated in Bulgarian levs.

Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments.

Those exceeding the 10-percentage 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 the 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 an 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.

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

2.11. 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. Domestic government securities are measured at the average bid price based on the quotations of actively trading banks for the purposes of BDIF revaluation of domestic government securities on a monthly basis (Level 1), with the quotations outside the 95 per cent confidence interval eliminated, while foreign government securities are revalued at the average bid price calculated on the basis of quotations actively trading banks for the purposes of BDIF revaluation of foreign government securities on a monthly basis (Note 2.6).

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The negative changes in the prices of government securities held by BDIF are treated as temporary and presented in the changes of other components of net assets of BDIF. Provisions Since as of the Report date there are no banks with a revoked license, there is no need for provisions to be allocated in the balance sheet (statement of financial position) of BDIF.

3. Premium Contributions In 2012 BDIF accrued contributions from 26 banks at the amount of BGN 218,713 thousand

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(2011: BGN 195,448 thousand from 26 banks). The total amount of eligible deposits (of year 2011) used for defining the contributions for 2012 amounted to BGN 43,739 million (2011: BGN 39,090 million – calculated on the basis of eligible deposits of 2010).

The amount of BGN 218,713 thousand was the result of the annual premium contributions of 26 banks for 2012.

The amount of BGN 195,448 thousand was generated from the annual premium contributions of 26 banks for 2011 amounting to BGN 195,109 thousand and the additional payments to the annual premium contributions of BGN 339 thousand.

4. Investment Income

Interest income from government securities Interest income from deposits Net gains/(losses) from sale/maturity of government securities

2012 BGN’000

2011 BGN’000

27,032 3 196 27,231

26,796 2,857 1,410 31,063

12,400 (108)

(176) (963)

12,292

(1,139)

2012 BGN’000

2011 BGN’000

Other components of BDIF net assets – 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 Penalty interest for delay

(1,141) 7 (1,134)

339 27 366

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6. General Administrative Expenses

2012 BGN’000

2011 BGN’000

Salaries and social security contributions for personnel Remuneration and social security contributions under management contracts Remuneration for temporarily hired personnel

654

674

253 4

213 12

Office maintenance Subscription to information publications and networks Depreciation and amortisation Business trips Hospitality expenses

143 106 76 56 20

157 115 61 46 29

12 8 1 126 1,459

15 12 6 61 1,401

Telecommunication and postal services Training and qualification Rentals Other

Salaries and social security contributions of the personnel amounting to BGN 654 thousand (2011: BGN 674 thousand) include remuneration and social security contributions for the personnel under employment contracts amounting to BGN 525 thousand (2011: BGN 525 thousand) and social benefits and social security contributions at the amount of BGN 129 thousand (2011: BGN 149 thousand).

Remunerations under management contracts include the remunerations and related social security payments for the members of the Management Board of BDIF.

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Expenses on office maintenance include mainly expenses on local taxes and charges, insurance, energy costs (electricity 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, Bloomberg.

Other costs include consulting services, bank and other charges.

7. Cash and Cash Equivalents

31 December 2012 BGN’000 1 2,073 2,188 598,000 246,434 848,696

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

31 December 2011 BGN’000 2 1,884 1,369 310,000 245,102 558,357

The existing cash as at 31 December 2012 and 31 December 2011 was on current accounts and term deposits with the Bulgarian National Bank.

Interest rates on current and deposit accounts are as follows: Interest rates on deposit accounts in original currency

2012

2011

BGN

0%

from 0% to 1.09%

EUR

0%

from 0% to 1.09%

USD

from 0% to 0.15%

from 0% to 0.17%

8. Receivables from Banks

of BGN 27 thousand.

As at 31 December 2012 no receivables from banks were reported.

According to the statement of cash flows, premium contributions income differs from that reported in the 2012 statement of operations by BGN 366 thousand. This sum was received in 2012 in the form of additional annual premium contributions paid by a bank after a BNB supervisory inspection for 2011.

As at 31 December 2011 receivables from banks amounting to BGN 366 thousand included additionally accrued annual premium contributions from a bank as a result of a supervisory inspection performed by the Bulgarian National Bank, including penalty interest for delay at the amount

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

31 December 2012

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

31 December 2011

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

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Nominal value

Fair value Interest rate (coupon)

Effective interest rate

Maturity

BGN’000

BGN’000

%

%

303,820

320,222

2.25-4.45

0.51-6.81

2013-2017

383,961

411,173

0.06-8.25

0.77-8.81

2013-2019

687,781

731,395 Fair value Interest rate (coupon)

Effective interest rate

Maturity

Nominal value

417,305

424,593

2.00-4.45

2.40-6.81

2012-2016

322,709

341,144

0.19-7.50

0.46-8.81

2012-2019

740,014

765,737

B) Classification of securities based on residual maturity 31 December 2012

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

31 December 2011

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

Nominal value

Fair value

Interest rate (coupon)

Maturity

%

Effective interest rate %

BGN’000

BGN’000

187,715

199,519

4.25-7.50

1.74-8.81

2013-2013

410,809

440,231

0.06-8.25

0.51-6.81

2014-2017

89,257

91,645

0.13-6.00

0.77-6.71

2018-2019

687,781

731,395

Nominal value

Fair value

Interest rate (coupon)

Effective interest rate

Maturity

187,654

189,931

2.00-7.50

2.16-6.50

2012

452,030

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

BDIF has opened securities 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 Bulgaria AD and Citibank N.A., Sofia Branch.

As at 31 December 2012 and 31 December 2011 BDIF had open exposures only to Bulgarian sovereign debt (Bulgarian government bonds).

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10. Property and Equipment Land and buildings

Book value as at 1 January 2011

Motor vehicles

Total

BGN’000 1,005

Office equipment and furniture BGN’000 314

BGN’000 51

BGN’000 1,370

-

26

-

26

1,005

340

51

1,396

-

42

-

42

1,005

382

51

1,438

201

278

29

508

34

16

10

60

235

294

39

568

34

24

10

68

269

318

49

636

770

46

12

828

736

64

2

802

Additions Book value as at 31 December 2011 Additions Book value as at 31 December 2012 Accumulated depreciation as at 1 January 2011 Depreciation charge for the year Accumulated depreciation as at 31 December 2011 Depreciation charge for the year Accumulated depreciation as at 31 December 2012 Carrying amount as at 31 December 2011 Carrying amount as at 31 December 2012

As at 31 December 2012 BDIF owned land at the amount of BGN 163 thousand (31 December 2011: BGN 163 thousand) and a building with a carrying amount of BGN 573 thousand (31 December 2011: BGN 607 thousand).

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As at 31 December 2012 and 31 December 2011 there were no established encumbrances (mortgages and pledges) on BDIF’s property and equipment.

11. Intangible and Other Assets A) Intangible assets

Software BGN’000 99

Book value as at 1 January 2011 Additions

24

Book value as at 31 December 2011

123

Additions

30

Book value as at 31 December 2012

153

Accumulated amortisation as at 1 January 2011

88

Depreciation charge for the year

1

Accumulated amortisation as at 31 December 2011

89

Depreciation charge for the year

8

Accumulated amortisation as at 31 December 2012

97

Carrying amount as at 31 December 2011

34

Carrying amount as at 31 December 2012

56

B) Other assets Other assets include:

Prepayments Advances granted

31 December 2012 BGN’000 9

31 December 2011 BGN’000 7

11

11

20

18

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12. Other Liabilities

Payables to personnel Payables to suppliers

31 December 2011

BGN’000 38

BGN’000 51

11

12

49

63

Payables to personnel represent current obligations on unused paid annual leave of BDIF employees at the amount of BGN 27 thousand (31 December 2011: BGN 41 thousand) and long-term payables as indemnities on retirement amounting to BGN 11 thousand (31 December 2011: BGN 10 thousand). Payables to suppliers amounted to BGN 11 thousand (31 December 2011: BGN 12 thousand) and include all expenses incurred in December 2012 but actually paid in January 2013 on receipt of the respective invoices.

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.

13. Financial Risk Management

The investment policy approved by BDIF 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. Investments in instruments denominated in USD should not exceed the maximum amount which is determined periodically in accordance with the Currency Risk Management Methodology.

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. General risk management is focused on the difficulty to forecast 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 to improve the methods

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

BDIF’s management 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 as at 31 December by category is presented in the table below.

31 December 2012

31 December 2011

BGN’000

BGN’000

848,696

558,357

-

366

731,395

765,737

1,580,091

1,324,460

11 11

12 12

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

BDIF had no outstanding contingent financial commitments as at 31 December 2012 and 31 December 2011.

Market risk а. Currency risk The currency risk is related to the adverse movements of exchange rates of other currencies towards the reporting currency, the Bulgarian lev, in future business transactions on foreign currency assets and liabilities recognised in the statement of financial position. BDIF is exposed to currency risk of changes in the exchange rate of the US

dollar to the Bulgarian lev with a view of its open exposures denominated in US dollars. As far as the existing exposures are short-term ones and there is a set maximum limit for the exposure in US dollars according to the investment policy, the management is of the opinion that the risk is under control. BDIF has no other outstanding currency risks because the remaining operations and deals are denominated in BGN and/or in EUR, while the Bulgarian lev is fixed to the euro by law.

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The tables below represent a summary of BDIF’s exposure to currency risk.

Currency structure analysis As at 31 December 2012

USD BGN’000

EUR BGN’000

BGN BGN’000

Total BGN’000

252

248,371

600,073

848,696

34,660

326,477

370,258

731,395

-

-

-

-

34,912

574,848

970,331

1,580,091

-

-

11

11

-

-

11

11

USD

EUR

BGN

Total

BGN’000

BGN’000

BGN’000

BGN’000

Cash and cash equivalents

5,285

241,186

311,886

558,357

Available-for-sale securities

8,516

393,810

363,411

765,737

-

-

366

366

13,801

634,996

675,663

1,324,460

-

-

12

12

-

-

12

12

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

Financial liabilities Other liabilities

As at 31 December 2011 Financial assets

Receivables from banks Financial liabilities Other liabilities

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Foreign currency sensitivity analysis The table below demonstrates the sensitivity to a 10 per cent increase/decrease in the current exchange rate of BGN against USD based on the structure of foreign currency denominated assets

and liabilities of BDIF as at 31 December with an assumption that the influence of all other variables is ignored. The effect is measured and presented as an impact on the result and directly on the net assets with all other conditions held constant.

USD 2012 BGN’000 3,491

2011 BGN’000 1,380

Net assets (through the financial result) – increase

3,491

1,380

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

(3,491) (3,491)

(1,380) (1,380)

Financial result (profit or loss) – increase

On a 10 per cent increase in the rate of USD against BGN, the final effect on the financial result of BDIF for a one-year period would be an increase by BGN 3,491 thousand (31 December 2011: BGN 1,380 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 a 10 per cent 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 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 procedures for ongoing monitoring of price changes, yields and maturity structure of government securities and respectively for undertaking timely measures and actions when indicators exist for more lasting adverse trends, especially at present, in the context of the global economic crisis.

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The analysis of BDIF’s sensitivity to the prices of debt securities held thereby is based on the state and structure of investments as at 31 December. If these prices were changed by a 3 per cent increase/ decrease, the effect as at this 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. This 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

c. Interest rate 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 value of financial instruments.

BDIF has a significant portion of interest-bearing assets. Nevertheless, income and operating

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2012 BGN’000

2011 BGN’000

21,942

22,972

(21,942)

(22,972)

cash flows are largely independent from market interest rate fluctuations because the assets are mainly with fixed interest rates. The profitability of BDIF’s deposits with the 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 2012

With floating interest % BGN’000

With fixed interest %

Interest-free

Total

BGN’000

BGN’000

BGN’000

-

844,435

4,261

848,696

68,065

663,330

-

731,395

68,065

1,507,765

4,261

1,580,091

-

-

11

11

-

-

11

11

With floating interest %

With fixed interest %

Interest-free

Total

BGN’000

BGN’000

BGN’000

BGN’000

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

Financial liabilities

-

-

12

12

Other liabilities

-

-

12

12

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

31 December 2011

Financial assets

Available-for-sale securities

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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 a contractual interest change or maturity dates.

31 December 2012

Up to 1 month

1-3 months

3-6 months

6-12 months

over 1 year

Interest-free

Total

BGN’000 BGN’000

BGN’000

BGN’000

BGN’000

BGN’000

BGN’000

4,261

848,696

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

844,435

-

-

-

215,739

30,421

-

21,425

463,810

-

731,395

1,060,174

30,421

-

21,425

463,810

4,261

1,580,091

Financial liabilities

11

-

-

-

-

-

11

Other liabilities

11

-

-

-

-

-

11

6-12 over 1 months year BGN’000 BGN’000

Interest-free

Total

BGN’000

BGN’000

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

3-6 months BGN’000

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

79

www.dif.bg

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 yields – debt securities and term deposits, while deposits are with original maturity of up

Currency

to seven 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. The effect of sensitivity to interest risk on net assets is calculated by revaluing fixed-coupon interest rate securities as at the end of the reporting period as a result of a possible change in interest rates, with the assumption that this change would lead to a relevant change in the yield of these instruments.

Increase/(decrease) in percentage points 2012

Sensitivity of net assets 2012

BGN

+1

BGN’000 (5,875)

EUR

+1

(4,520)

USD

+1

(507)

BGN

-1

5,875

EUR

-1

4,520

USD

-1

507

Increase/(decrease) in percentage points 2011

Sensitivity of net assets 2011

Currency

BGN’000 BGN

+1

(6,654)

EUR

+1

(5,126)

USD

+1

-

BGN

-1

6,654

EUR

-1

5,126

USD

-1

-

www.dif.bg

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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 the BNB, recognised in the structure of assets in the statement of financial position as at 31 December, is as follows:

31 December 2012

31 December 2011

Cash and cash equivalents

54%

42%

Available-for-sale government securities

46%

58%

The credit risk stemming from concentration in Bulgarian government securities, classified as available-for-sale, 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 rating of an issuer is an assessment of its

31 December 2012 Standard & Poor's Moody's

31 December 2011 Standard & Poor's Moody's

ability to meet the obligations upon maturity and is prepared by a specialised rating agency based on a profound financial analysis. The table below displays the credit rating of Bulgaria’s long-term obligations, as defined by two internationally recognised rating agencies.

In foreign currency Rating Outlook BBB Stable Baa2 Stable

In local currency Rating Outlook BBB Stable Baa2

In foreign currency Rating Outlook BBB Stable Baa2 Stable

In local currency Rating Outlook BBB Stable Baa2

BDIF management monitors and assesses the exposure to credit risk on a regular basis.

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www.dif.bg

Liquidity risk

its activities. In addition, according to the Law on Bank Deposit Guarantee, BDIF has the right to request an advance payment of the annual fees from guaranteed banks, an increase of the annual premium contribution and use of loans under the terms and according to a procedure specified by BDIF Management Board (Article 18 of the Law on Bank Deposit Guarantee).

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 a constant optimal liquid cash reserve to secure a good capability for funding

The table below includes BDIF’s financial instruments classified by their residual term to maturity on the basis of undiscounted contractual cash flows.

Maturity analysis 31 December 2012

Financial assets Cash and cash equivalents 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

848,696

-

-

-

-

848,696

221,010 1,069,706

34,595 34,595

33,071 33,071

614,645 614,645

61,936 61,936

965,257 1,813,953

11

-

-

-

-

11

11

-

-

-

-

11

Financial liabilities Other liabilities

www.dif.bg

82

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

147,769 706,492

5,242 5,242

143,073 143,073

714,134 714,134

82,843 82,843

1,093,061 1,651,784

12

-

-

-

-

12

12

-

-

-

-

12

Financial liabilities Other liabilities

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 prices).

14. Relations and Transactions with Government Institutions, Bodies and Enterprises

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 as at the end of the reporting period.

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

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 financial assets and liabilities presented in the statement of financial position are

83

as reliable, adequate and trustworthy as possible for financial reporting purposes under the existing circumstances.

www.dif.bg

The Ministry of Finance and the Bulgarian National Bank are the government institutions with which BDIF has established regular relations in accordance with its special status and functions, as well as in line with the legal requirements.

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 shortterm deposits with the Bulgarian National Bank (Notes 7 and 9). Securities in which BDIF invests are acquired in both the primary market (by participating in auctions organised and carried out by the Bulgarian National Bank) and the secondary market.

BULGARIAN DEPOSIT INSURANCE FUND 27 Vladayska Street, 1606 Sofia, Bulgaria T: +359 2 953 1217, 2 953 1318; F: +359 2 952 1100

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