1. Albanian approach to adaption to IFRS for loan loss provisions Indrit Banka Bank of Albania October 2014 1

2. CONTENT Albanian banking system context Current legal & regulatory framework on financial reporting Key differences between IFRS and regulatory reporting Current regulatory provision approach Our approach on IFRS approximation 2

3. Albanian Banking System Context Banks and other financial institutions supervised by BoA: – 16 banks – 21 non-bank financial institutions – 2 unions of SLA-s (121 SLA-s) – 333 foreign-exchange bureaus Two tier banking system created in 1992: – Banking system’s capital structure dominated by foreign capital: 92% of paid-in capital of the banking system is of foreign origin, out of which 74% of EU origin – No state owned banks – Two banks with predominantly local capital Key indicators (as of June 2014) Banking system assets to GDP: 89.6% Outstanding loans to GDP: 40.5% Non-performing loans ratio: 24.1% Loan loss provisions to non-performing loans: 66.9% Restructured loans to outstanding loans: 12.5% Loans under foreclosure to outstanding loans: 19.2% 3

4. Current legal & regulatory framework on financial reporting The law “On accounting” required IFRS reporting from 2008. This was applied to banks, other financial institutions and other big companies. Reporting of banks to the central bank is based on a “local reporting methodology” – based mostly on 1998 IFRS. The local reporting methodology is continuously updated aiming approximation to best supervisory standards and to the latest IFRS version. 4

5. Key differences between IFRS and regulatory reporting 1. Loan provisions - This is considered the main factor influencing in quantitative terms the difference between standards. - In some cases the provisions as per local methodology may be double to impairments created as per IFRS Other less relevant items contributing in the difference are: 2. Accounting treatment for “available for sale assets” 3. Accounting treatment for “shareholder’s capital” 4. Accrued interest for NPL-s 5. Fees and commissions 5

6. Current regulatory provision approach The current methodology requires categorization of loans in 5 classes/categories Each class is referred a provisioning rate Categorization is based on certain criteria: -Days past due -Financial position -Collateralization -Restructuring status 6

7. Our approach on IFRS approximation 7 NoItemsMoving to IFRS treatment Keeping local treatment 1Loan provisionsX 2Treatment of available for sale assets X 3Treatment of shareholder’s capital X 4Accrued interests for NPL-s X 5Fees and commissions X The approach: Gradual implementation of IFRS in the local reporting methodology The rationale: Keeping the regulatory/local treatment for items that present relevant gaps between standards.

8. …Our approach on IFRS approximation BoA will keep its local treatment for provisions. However, we aim to reduce the gap by developing the regulatory provision with IFRS requirements in terms of: - collateral recognition - better combination of excepted & incurred loss methodologies 8

9. Thank you! 9