Competencia Científica 4 Competencia tecnológica.

Operational risk is the risk of loss arising from fraud, unauthorised activities, error, omission, inefficiency or system failure. It arises from all the Group’s activities and is a risk faced by all business organisations. Operational risk includes legal risk.

The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and avoid control procedures that would restrict initiative and creativity.

The primary responsibility for the implementation of controls to address operational risk is assigned to management within each subsidiary. This responsibility is supported by the development of overall standards within the Group for the management of

operational risk which is done by the Risk Management Department and which cover the following areas: – Requirements for the reconciliation and monitoring of transactions.

– Identification of operational risk within the framework of each subsidiary’s control system and development of conditions for decreasing and limiting operational risk (while the required level of activities is secured), as well as its impacts and consequences; recommendations for appropriate solutions in this area.

– Reporting of operational risk events by entering the corresponding information into the Group’s database of operational risk events

– This overview of the Group’s operational risk events allows the Group to specify the direction of the steps and processes to take in order to limit these risks, as well as to make decisions with regard to:

– accepting the individual risks that are faced;

– initiating processes leading to limitation of possible impacts; or

– decreasing the scope of the relevant activity or discontinuing it entirely. 46. CAPITAL MANAGEMENT

The Group policy is to hold strong capital base in order to maintain the confidence of creditors and the market, while ensuring the future development of her business.

Starting 1 January 2014 the consolidated capital adequacy ratios are calculated in accordance with the Regulation (EU) no. 575/2013 of the European Parliament and Council Regulation (the “CRR”) of 26 June 2013. Until 31 December 2013 the capital adequacy ratio was calculated in accordance with the Czech National Bank (“CNB”) decree no. 123/2007 Coll.

Own funds (regulatory capital) of the Group are analysed in two parts: – Tier 1 capital, which consist of:

– Common Equity Tier 1 capital (CET1), which includes paid-up ordinary share capital, share premium, retained earnings (profit for the period is not included), accumulated other comprehensive income, net of goodwill, intangible assets and additional value adjustments;

– Additional Tier 1 capital (AT1), which includes capital instruments (subordinated income certificates) issued in accordance with CRR (See note 23 Other capital instruments).

– Tier 2 capital, which consists of eligible subordinated debt approved by Czech National Bank in the amount of CZK 1 932 million (31 December 2014: CZK 1 857 million).

Until 31 December 2013, the capital adequacy ratio was calculated as the ratio of regulatory capital to capital requirements multiplied by 8 % according to regulatory requirements. The capital adequacy ratio had to be a minimum value of 8 %.

From 1 January 2014 the capital adequacy ratios are calculated for CET1, Tier 1 capital and total regulatory capital. The value represents the ratio of capital to risk weighted assets (RWA). CNB also requires every institution to hold additional capital conservation buffer of 2.5 % on all the levels of regulatory capital.

Minimum requirements for capital ratios are as follows:

Minimum requirement

Capital conservation

buffer requirementTotal Common Equity Tier 1 capital (CET1) 4.5% 2.5% 7.0% Tier 1 capital 6.0% 2.5% 8.5%

Total regulatory capital 8.0% 2.5% 10.5%

Regulatory capital and equity reconciliation

The tables below summarize the composition of own funds (regulatory capital) and equity and capital ratios for 31 December 2015 and 31 December 2014, providing a complete reconciliation of individual items of regulatory capital to equity items. 31 December 2015

in MCZK Regulatory capital Equity Paid-up capital registered in the Commercial Register 10,638 10,638 Retained earnings 2,953 3,192 Profit for the period – 1,967 Accumulated other comprehensive income (1,371) (1,425)

Reserve funds 15 88

Non-controlling interest 87 743 (-) Additional value adjustments (AVA) (19) – (-) Intangible assets other than goodwill (157) – Deferred tax liabilities associated with intangible assets other than goodwill 12 –

(-) Goodwill (30) –

Paid-in AT1 instruments, share premium 1,742 1,742

Total Tier 1 capital 13,870 n/a

Total Tier 2 capital 1,932 –

31 December 2014

in MCZK Regulatory capital Equity Paid-in capital registered in the Commercial Register 9,558 9,558 Retained earnings 2,949 3,102 Profit for the period – 1,330 Accumulated other comprehensive income (576) (535)

Reserve funds 83 163

Non-controlling interest 107 826 (-) Additional value adjustments (AVA) (10) – (-) Intangible assets other than goodwill (189) – Deferred tax liabilities associated with intangible assets other than goodwill 10 –

(-) Goodwill (95) –

Paid-in AT1 instruments 899 899

Total Tier 1 capital 12,736 n/a

Total Tier 2 capital 1,857 –

Total regulatory capital/equity 14,593 15,343

RWA and capital ratios

in MCZK 31 December 2015 31 December 2014

Total risk weighted assets (RWA) 113,600 108,573

Capital adequacy ratios

In percentage 31 December 2015 31 December 2014 Common Equity Tier 1 capital (CET1) 10.68% 10.90% Tier 1 capital 12.21% 11.73%

Total regulatory capital 13.91% 13.44%

Based on the opinion of the Czech National Bank, retained earnings were reduced by the amount of the anticipated payment from subordinated income certificates (AT1 instruments) in the next four quarters not covered by a special-purpose fund for the payment of the income from those certificates before their inclusion in regulatory capital.

The key goal of capital management of the Group is to ensure that the risks faced do not threaten the solvency of the Group and capital adequacy regulatory limit compliance. In addition, within the strategic framework of the Group the board stipulated the value above 12% for mid-term capital adequacy goal as a reflection of the risk appetite of the Group.

The purpose for setting the minimum value for capital adequacy requirements is to establish a trigger mechanism, which provides a guarantee that the capital adequacy will not decrease to the regulatory minimum.

The compliance of the Group capital with established limits and goals for the capital adequacy is evaluated regularly by the ALCO committee and the Group’s management.

The decision making power with regard to eventual measures that should be implemented to decrease the level of exposed risk (e.g., decreasing the size of risks, acquiring additional capital, etc.) is given to the Board of Directors.

47. FAIR VALUES INFORMATION