CONTENTS

1 INTRODUCTION .............................................................................................................. 1

2 BANK DESCRIPTION ...................................................................................................... 2

2.1 BANK LOGO .............................................................................................................. 2

2.2 OUR VISION .............................................................................................................. 3

2.3 OUR OBJECTIVE ...................................................................................................... 3

2.4 OUR MISSION ........................................................................................................... 4

2.5 OUR VALUES ............................................................................................................ 4

2.6 MANAGEMENT ........................................................................................................ 4

2.7 COMPANY GOALS ................................................................................................... 6

3 THE OVERALL SIMULATION ....................................................................................... 6

3.1 INITIAL REMARKS AND INFORMATION OVERALL ........................................ 6

3.2 OBJECTIVE 1: NET INCOME PER QUARTER ...................................................... 7

3.2.1 Game start and Quarter 1 ..................................................................................... 7

3.2.2 Quarter 2 ............................................................................................................... 8

3.2.3 Quarter 3: Income Per Quarter Problems ............................................................. 8

3.2.4 Quarter 4: Income Per Quarter Problems ............................................................. 8

3.2.5 Quarter 5 ............................................................................................................... 9

3.2.6 Quarter 6: Income per Quarter Problems ............................................................. 9

3.2.7 Quarter 7: The greatest loss .................................................................................. 9

3.2.8 Game finale: Quarters 8-11 Income per Quarter ................................................ 10

3.3 OBJECTIVE 2: MARKET VALUE GROWTH ....................................................... 11

3.4 OBJECTIVE 3: PRICE PER SHARE GROWTH .................................................... 12

3.5 OBJECTIVE 4: RETURN ON ASSETS................................................................... 12

3.6 OBJECTIVE 5: RETURN ON EQUITY .................................................................. 13

3.7 OBJECTIVE 6: NET INTEREST MARGIN ............................................................ 13

4 CONCLUSION ................................................................................................................ 14
TABLE OF FIGURES
Figure 1: Net Income Per Quarter .............................................................................................. 7
Figure 2: Market Value Growth ............................................................................................... 11
Figure 3: Price Per Share Changes ........................................................................................... 12
Figure 4: Return on Assets ....................................................................................................... 12
Figure 5: Return on Equity ....................................................................................................... 13
Figure 6: Net Interest Margin ................................................................................................... 13
1 INTRODUCTION

During this semester, for the purpose of stimulation of the learning process by offering a
simulation of a real-life experience, our colleagues and ourselves were a part of a bank market
simulation, created by ProBanker, and implemented by the team of professors on the Bank
Management Course.

ProBanker game is a learning software that offers a simulation of a banking market, comprised
of banks managed by students, which is based on their decisions on core elements of the
banking business. The aforementioned game required the formation of four member groups,
each of which was given a task of creating bank that will compete with other banks for the
supremacy on the imaginary banking market. The professor team, including both the team of
professors on the Bank Management course and the creators of the ProBanker system, were
leading the simulation of the market. The market was simulated quarterly, and relevant
economic indicators that can be used to compare and evaluate the rate of success for the quarter
were being posted.

From the student perspective, the aim of the game was to choose the goals for 'their bank' and
to try to achieve them through an 11 quarter simulation.

The following sections will offer a description of the bank chosen by our group, summary of
decisions and consequences made by its members, and will serve as a report on our activities
throughout the semester.

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2 BANK DESCRIPTION

Smart Fund d.d., founded on July 13, 1999., is one of the institutions leading the process of
social and economic recovery of Bosnia and Herzegovina, after the signing of the Dayton Peace
Treaty. Headquartered in Sarajevo, the bank was created by higher-class citizens, who saw the
opportunity to make profit in the long-run by influencing the market development and
establishing itself as its leader. The initial goal of Smart Fund d.d. was the stabilization of the
economic growth of the country for the purpose of raising the life standard, purchasing power
of the population, and consequently the marginal propensity to save.

Striving to achieve the revitalization of the society in Bosnia and Herzegovina, Smart Fund d.d.
was involved in many governmental and non-governmental initiatives throughout the years of
its existance, ranging from donations for feeding the poor and improvement of education, to
larger projects, such as the restoration of Vijećnica and development of the V-C route.

Building its business around the principles set by the modern marketing approach to doing
business, in combination with a high level of corporate social responsibility, enabled Smart
Fund d.d. to establish a reputation of a 'friend' to the client: a reliable and resourceful partner
ready to finance any personal or business venture. To confirm and verbalize its business
philosophy, Smart Fund d.d. chose the following slogan: 'Nurturing Progress.'

Currently, the bank has offices in all of the major cities in Bosnia and Herzegovina (Sarajevo,
Mostar, Banja Luka, Tuzla, Zenica, Foča, Sanski Most, Konjic, Visoko and Višegrad).

2.1 BANK LOGO

The current logo of the Smart Fund brand was carefully designed, and the message it is trying
to send is: The only way to earn funds (the white letter 'F', standing for 'Funds', in the center of
the logo) is a smart investment (the letter 'S', standing for 'Smart', surrounding the white letter
'F' in the center of the logo).

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The blue and red colors chosen for the letter 'S' state that smart investment means achieving a
balance between safety (blue) and risk-taking (red). The style and design chosen for the logo
should emphasize the brand values of the Smart Fund d.d.:

- Security, trust and tradition, all of which are important to establish our reputation as
reliable partneres for both employees and clients,
- Solid, crisis-resistent business model of a strong and successful bank,
- Economically successful concept that follows the principles of social responsibility

2.2 OUR VISION

To become the leading investing and funding institution in the country, by building an image of
the most reliable, stable and trusted investing and funding partner available on the market.

2.3 OUR OBJECTIVE

Smart Fund d.d. has one strategic objective:

- To stimulate the economic growth of Bosnia and Herzegovina to a degree that will lead
it to become a concurrent economic force in the European market by 2050.

We in Smart Fund d.d. believe that active contribution to the development of the economy of
Bosnia and Herzegovina will reduce the strength of the external market forces of our immidiate
environment, making it easier for us to develop our business and maintain our position of the
leader on the market.

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2.4 OUR MISSION

Maximization of the utility of our stakeholders by competently and constantly improving our
services.

2.5 OUR VALUES

The organizational culture of the Smart Fund d.d. is founded on the following values:

- Responsibility – we take responsibility and consider the success of our clients,

employees and contribution to the society as our own responsibility,
- Reliability – we believe that reliability creates friendships, and we respect business
ethics. Partner relationshisp with clients and employees are the foundation of long-term
loyalty
- Innovativeness – our team is guided by principles of self-initiative, acceptance of new
ideas, challenges and ambition in the realization of own objectives.
- Adaptibility – there are no universal solutions – each and every one of our clients has
the right to a product specifically designed to satisfy his needs. Therefore, we pay
attention, time and commitment to our clients.
- Fairness – we communicate openly and honestly and always stick to our word.
- Safety – protection of our clients and employees is our imperative, and we use every
tool in our disposal to achieve it

2.6 MANAGEMENT

The Chief Executive Officer of the Smart Fund d.d. is currently Nermin Džajić. He is
responsible for developing and implementing the overall strategy the bank is going to use to
achieve its stated objectives.

Nermin is directly involved and responsible for:

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 - General Management,
- Human Resource Management (HRM), and
- Treasury

Tarik Hajdarpašić is the Chief Financial Officer of the bank, and his area of responsibility is
within the fields of:

- Retail and Corporate Loan Management,

- IT and Organization management,
- Property management,
- Accounting and controlling

Risk management department is led by Idna Mulamehić, who is the Chief Risk Assesment
Officer. She is responsible for:

- Security Management,
- Risk Management,
- Asset and Liabilities Management, and
- Legal Operations

The responsibility of creating and maintaining a positive public image and presenting the
information to the general public lies with the Marketing Manager, Haris Fadžan. Haris is
responsible for:

- Development and implementation of marketing plan,

- Creating and maintaining the brand of 'Smart Fund' d.d.
- Allocating funds to various forms of advertising and promotion,
- Market research and reporting on eventual changes that need to be undertaken to satisfy
the needs of the bank stakeholders in the most efficient way possible

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2.7 COMPANY GOALS

In order to evaluate and monitor the degree of achievement of the corporate mission and vision,
and the overall performance of the ocmpany on the market, the management of Smart Fund d.d.
has decided to set the following objectives for the next three years:

- A minimum of 50% yearly market value growth,

- An increase in a Price per share to $ 81,76 in a three-year period,
- Maintaining the Current Net income per quarter higher than $ 500.000,00
- Maintaining the ROA above 0,05%
- Maintaining the ROE above 1%
- Maintaining the NIM above 0,90%

3 THE OVERALL SIMULATION

3.1 INITIAL REMARKS AND INFORMATION OVERALL

The ProBanker software offered no information on the market in the initial quarter so we chose
not to change the default variables, in order to 'test the market'. Since the majority of our
competitors chose to act and modify the aforementioned variables, with limited information
available, we were able to get a head start, and had the potential to remain the market leader.

However, since our predefined values included stability, and our goals were defined in the
direction of achieving it, we were not as focused on maintaining our position in the simulated
three-year period. Our strategy of becoming a market leader is a much longer process and
maintaining the trust of the market was our 3-year goal.

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3.2 OBJECTIVE 1: NET INCOME PER QUARTER

Figure 1: Net Income Per Quarter

Maintaining the Current Net income per quarter higher than $ 500.000,00
Q1 Q2 Q3 Q4 Q5 Q6
1.554.220,00 1.591.260,00 181.020,00 -860.970,00 1.552.080,00 206.270,00
Q7 Q8 Q9 Q10 Q11 Q12
-1.884.050,00 665.770,00 807.260,00 1.587.090,00 2.096.950,00 /

Figure 1 shows that the goal of maintaing the current net income per quarter on a level above $
500.000,00 was achieved, and even surpassed (the most positive overachievement of 319,39%
being in Quarter 11) in the majority of the simulated quarters. The problems were experienced
in Quarters 3, 4, 6 and 7.

3.2.1 Game start and Quarter 1

After the simulation of quarter zero, and making the first decisions, we were faced with the first
wave of performance reports. Since the information about the market was scarce, we have
decided that the first thing that needs to be done is to test the market. Therefore, we made no
changes to the existing variables. As a consequence of the cautious approach, Smart Fund d.d.
was one of two banks on the market that did not have to activate the discount window option
with the central bank. Also, considering the income per quarter, this policy enabled us to
become the market leader in this quarter.

The majority of sources of funding were the retail CDs, which amounted to $ 256.416.940,00
or 28,29% of the total liabilities structure of the company balance sheet. These sources of
funding were used mostly for financing mortgages, which in the first quarter amounted to $
256.416.100,00 or 25,66% of the total asset structure at the time. The detailed information can
be found in the Appendix 1: Balance Sheet and Appendix 2: Income Statement of this report.

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3.2.2 Quarter 2

After the first quarter, we had at our disposal more information about both our bank and the
entire simulated industry. We were able to conduct comparative analysis of the competition and
conduct analysis of the different scenarios that would take place if different decisions were
made. Also, our success in the first quarter gave us confidence and we wanted to increase
earnings even further by increasing the number of our loan-taking clients. The decision made
was to reduce the interest rates on different loans offered. However, we were aware that changes
of these rates need to be gradual, so that a long-term problem of loss of the public trust could
be avoided.

The result was an additional raise of all the indicators we have chosen to be our reference for
business performance evaluation (market value, price per share, net income per quarter, ROA,
ROE and NIM).

3.2.3 Quarter 3: Income Per Quarter Problems

Due to the advertising efforts of our competitors, and a poor asset-liability management
decision, regarding the sources of funding of our loan program, we were forced to borrow funds
from the central bank (discount window function). The net income of $ 181.020,00 bears
witness that asset-liability management policy based on providing the sources of funding
primarily from retail demand and corporate demand deposits was lacking.

Furthermore, our management was overlly-confident in the loyalty of our current clients,
disregarding the fact that advertising has a significant effect on luring the clients away, which
resulted in a lack of response on such 'client-takeover' threat.

All of these factors contributed to the displayed underperformance of Smart Fund d.d. in the
aforementioned Quarter 3.

3.2.4 Quarter 4: Income Per Quarter Problems

Since Smart Fund d.d. was forced to borrow funds from the central bank, due to the poor asset-
liability management decisions, in this quarter the management started looking for ways to
make up for the experienced losses.

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The new strategy was to try and increase the sources of funding through purchases of federal
funds. However, our poor Total Assets/Net Worth and Retained Earnings leverage ratio of
10,81% in the Quarter 3 led to our disqualification of borrowing funds in the way suggested.

Our inability to borrow funds and accumulate the adequate level of sources of funding led to
an another loan from the central bank, causing Smart Fund d.d. to experience its first quarterlly
loss.

3.2.5 Quarter 5

Smart Fund d.d. was able to recover from the losses achieved in the third and fourth quarter, by
focusing on advertising of retail demand and corporate demand deposits, while maintaining the
Asset/Net Worth and Retained Earnings and Risk/Weighted Assets/Net Worth and Retained
Earnings leverage ratios above 12% and 8%, respectively. This led to a net income $
1.552.080,00 and was a correction of the poor results in the previous two quarters.

3.2.6 Quarter 6: Income per Quarter Problems

To keep up with a positive growth trend, the managment attempted to decrease the asset side
of the balance sheet, by raising up the interest rates on all loans, while increasing the advertising
of deposits to increase the liability side of the balance sheet.

However, our efforts were followed by the competitors, which went to greater lengths in both
raising the interest rates on loans given and raising the advertising budget for the deposits taken.
Furthermore, our leverage was still in a 'red-zone', and the confidence of clients in our stability
was shaken because of the negative results in the past quarter.

All of these factors contributed to our inability to make a proper structure of the sources of
funding of loans, leading to yet another loan from the central bank, causing our net income to
fall below the expected values.

3.2.7 Quarter 7: The greatest loss

The negative trend started in quarter 3, which continued through quarters 4 and 6, culminated
in the quarter 7. Management of Smart Fund d.d. has decided on using retail demand deposits
and corporate demand deposits as sources of funding an expanding number of loan-takers.

9
However, the management disregarded the volatility and risk associated with RDD and CDD's,
arising from the competitive and customer pressure.

In addition, the government was still unwilling to borrow funds to Smart Fund d.d., due to the
poor leverage ratio levels. Not being able to fund our loans through RDD's and CDD's, and not
being able to purchase federal funds, led to another discount window loan, and the greatest loss
that Smart Fund d.d. has experienced in this simulated industry.

3.2.8 Game finale: Quarters 8-11 Income per Quarter

We were able to recover from the quarter 7 until the end of the game by minimizing the
advertising costs and reducing the percent of operating costs charged to customers to 0.
Minimization of advertising costs directly affects net worth and retained earnings, causing our
leverage ratios to improve. On the other hand, cancelling the operating costs charged to
customers, especially in our case, since Smart Fund d.d. became the only bank on the market
implementing such a decision, we were able to increase both RDD's and CDD's.

Increase of RDD's and CDD's in our bank, caused a decrease of those deposits in the balance
sheets of competitors. Other banks in the market were forced to lend from the central bank,
making them experience losses. Being one of the two banks that achieved a positive net income
in the eighth quarter enabled us to return the confidence of our clients, improve our leverage
ratios, solidify the sources of funding and start working on a positive trend.

We built on that confidence and continued decreasing the leverage ratio in the ninth quarter, by
increasing the interest rates on loans for the purpose of reducing the leverage ratio. Many clients
have moved their business to the competitors. However, they were unable to generate enough
deposits to fund those loans, since clients preferred depositing their funds in our bank.

In the following sections, Figures 4-6 will show the changes through the period of simulation,
of three important indicators: ROA (Return on Assets), ROE (Return on Equity) and NIM (Net
Profit Margin). It can be observed that when these indicators perform under the expectations
we have set for them in the objectives prior to the beginning of the game, it is due to the
performance of the figures depicting the net income per quarter.

Consequently, the reasons for their underperformance are one and the same.

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3.3 OBJECTIVE 2: MARKET VALUE GROWTH

Figure 2: Market Value Growth

Goal Description Initial Value Reference Value Changes

A minimum of 50% Q0: $ 20.746.970,00 Q4: $ 28.370.770,00 Y1: + 36,75%
yearly market value Q4: $ 28.370.770,00 Q8: $ 24.529.310,00 Y2: - 13,54%
growth Q8: $ 24.529.310,00 Q11: $ 49.003.870,00 Y3: + 99,78%
Average: + 41%

The duration of the simulation of the banking market was 11 quarters, or 2 years and 9 months,
which is why the reference value for the calculation for the third year was Quarter 11.

It can be noted that the stated objective was not completed, but a strong possibility exists that
its definition was too ambitious, and that all the information needed was not taken into
consideration, especially the information on the external forces of competition and customers.

However, when compared to other competitors, Smart Fund d.d. has achieved the third greatest
average market value growth in the industry, lagging only behind Vučko Bank (+579,83%) and
New Horizons Bank (+237,89%), making Smart Fund d.d. the third most valuable bank in the
simulated industry.

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3.4 OBJECTIVE 3: PRICE PER SHARE GROWTH

Figure 3: Price Per Share Changes

Goal Description Initial Value Reference Value Changes

An increase in a
Price per share to $ Q0: $ 20,75 Q11: $ 49,00 Total: + 136,14%
81,76 in a three-year
period,

Figure 2 shows the degree of completion of the second objective that was set for Smart Fund
d.d. prior to the simulation. Again, the objective was not completed, but the fact that the highest
price per share in the industry is for the shares of New Horizons Bank ($ 56,53), followed by
the price per share of our own Smart Fund d.d., we can conclude that the definition of this goal
was not realistic either.

3.5 OBJECTIVE 4: RETURN ON ASSETS

Figure 4: Return on Assets

Maintaining the ROA above 0,05% ; Simulation Average = 0,062 %

Q1 Q2 Q3 Q4 Q5 Q6
0,15% 0,15% 0,02% -0,08% 0,13% 0,02%
Q7 Q8 Q9 Q10 Q11 Q12
-0,16% 0,06% 0,07% 0,14% 0,18% /

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3.6 OBJECTIVE 5: RETURN ON EQUITY

Figure 5: Return on Equity

Maintaining the ROE above 1% ; Simulation average = 0,72 %

Q1 Q2 Q3 Q4 Q5 Q6
1,69% 1,70% 0,19% -0,91% 1,64% 0,22%
Q7 Q8 Q9 Q10 Q11 Q12
-1,99% 0,71% 0,85% 1,66% 2,15% /

3.7 OBJECTIVE 6: NET INTEREST MARGIN

Figure 6: Net Interest Margin

Maintaining the NIM above 0,90% ; Simulation average = 1,01 %

Q1 Q2 Q3 Q4 Q5 Q6
1,02% 1,05% 0,79% 0,70% 0,99% 0,78%
Q7 Q8 Q9 Q10 Q11 Q12
0,64% 1,07% 1,27% 1,34% 1,44% /

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4 CONCLUSION

The game has ended in a way that Smart Fund d.d. can be considered as one of the top three
banks in the industry, regardless of the economic indicator you wish to consider. We have used
a combination of already collected knowledge, trial-and-error attempts, and consultations with
the professor team to make the best use of the experience offered.

The game has proven to be a very challenging, realistic experience of the conditions that
managers are facing in the banking sector on a daily basis. We believe that our cautious
approach in the beginning, mistakes from over-confident approach in the mid-game period, and
proper use of competitive advantage in the end have all been lessons to savor.

We now understand the consequences of a superficial approach to doing business in general,

and understand how a mismanagement of both assets and liabilites can have dire consequences
on the company profits.

In the end, we would like to emphasize that we are satisfied with the game we have played. We
had both ups and downs, but were able to learn from our mistakes and take risks as the end of
the simulation drew near. If Smart Fund d.d. could run for additional 3 years, we are sure that
our mission and vision would look even more realistic to accomplish.

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