QUANTITATIVE INDICES

CZK’000 2002 2001 2000

Return on average assets ROAA 0.25% 0.34% 0.57%

Return on average equity ROAE 4.41% 5.71% 6.97%

Assets per employee in CZK’000 47,573 38,759 46,842 Administration costs per employee in CZK’000 1,382 1,241 1,468 Net profit per employee in CZK’000 104 124 221 Capital structure

Tier 1 886,721 677,122 659,214

Paid up share capital 750,000 650,000 650,000 Share premium paid up 100,000 0 0 Statutory reserve funds 10,377 8,472 6,177 Retained profits 26,344 18,650 3,037

Tier 2 36,294 48,392 48,392

General risk reserve 36,294 48,392 48,392 Deductible items 23,130 17,047 20,787 Intangible fixed assets 23,130 17,047 20,787

Capital 899,885 708,467 686,819

Capital requirements

A Capital requirement 637,911 450,881 495,341 B Capital requirement 8,642 4,370 6,614 Capital requirement for trading portfolio credit risk 4,795 57 236

Capital adequacy 11,13% 12,45% 10,95%

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In the process of risk management the Bank follows the legislation in force, principles laid down by the group headquarters, and the group companies’ of sales and risk management. The strategy is also in compliance with the Basle Committee rules. It operates a quality control system based on the ‘four eyes principle’ and in compliance with criteria for include a definition of target client groups and limits set for the individual sectors.

Furthermore, approval powers and responsibilities in the credit process are clearly defined. In the credit process the principle of clear organisational

In the area of collateral valuation the Bank applies a prudent approach, in particular in real estate

valuation.

In 2002 the Bank started in co-operation with the group headquarters to implement the corporate internal rating system, the so-called VB-Corporate Rating System. This is one of projects of the Basel Committee rules application and it will help to improve risk management in the area of risk procedures and identification of probable loan the total loan value to CZK 12.672 bil., which compared with the previous period is an increase

Market risk represents the risk of a loss resulting from changing prices, FX rates and financial market

93 The objectives of the market risk management

process include:

• the Bank’s ability to cope with economic and market changes;

• maintain a positions structure which will not expose the Bank to excessive market risks;

• development and set up of GAP-analysis systems which enable to react to the changes in the market development quickly and flexibly;

• identification of weak points, where the Bank has to cope with excessive market risks.

The main instrument for market risks management is a set of limits for individual types of market risks.

Limit compliance is monitored on an ongoing basis

The Bank deals with currencies in both Czech and international markets. All limits are included in the Group’s structure of limits. In the FX area the Bank concentrates on client trading. In the inter-bank market the Bank’s transactions focus on hedging of positions resulting from trading with clients and further, to a limited extent, the Bank makes transactions to hedge its own positions.

• derivatives are used exclusively for hedging of clients’

The aim in the interest rate risk management is to ensure that the interest rate structure is optimal for the Bank considering the daily interest rate fluctuations.

• the Bank monitors the risk daily using GAP analysis;

• for the year 2003 the Bank is preparing accession to the direct interest rate risk management using a wide-spread GAP method (a set of limits), stress scenarios and models, a system for simulation of the impact of changes in market conditions on the level of risk to face;

• the Bank uses internally developed

applications for interest rate risk assessment and monitoring;

• the trading and banking portfolio is monitored as a whole, operational management is performed on a case-by-case basis;

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• interest risk is monitored by key currencies (CZK, EUR);

• to hedge interest rate positions, the Bank uses derivative transactions.

Equity market risk

The Bank has introduced and approved limits for equity trading in Czech and international markets.

All limits are included in the Group’s structure of limits.

The Bank did not hold any equities in its portfolio in 2002 and was not therefore exposed to this risk.

Liquidity risk

Liquidity risk is the risk of loss arising from the Bank’s inability to meet its financial obligations. of future inflows and outflows of funds based on clients’ pay-off agreements, based on signed contract loans that oblige the bank to certain activities and also based on experience acquired from analysis of past developments.

The Bank monitors every day net cash flows for the period of five business days in advance for each main currency in its management information system.

An estimated cash flow, actual liquidity report, basic and alternate scenarios are processed for each main currency. The Bank sets limits for each main currency separately and in the aggregate for all currencies.

Limit compliance is monitored on a daily basis:

• ratio of quick liquid assets to client deposits up to 3 months plan. It is approved by the Board of Directors together with the business plan and the two plans are closely linked.

The Bank’s internal regulations clearly define the process of emergency plan development and steps to be taken to increase liquidity for the purpose of liquidity management in an emergency threatening Bank’s risk policy. It may be defined as the risk of a loss incurred as a result of inadequacy or failure of internal procedures, people or systems, or due to external circumstances. The Bank is going to take part in a project for comprehensive management and monitoring of operational risks, applying the Basel Committee rules and directed by the group headquarters.

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