Statement of Management's Responsibilities The management are responsible for preparing financial statements for each financial year that present fairly the state of affairs of the Bank and its subsidiaries as at the end of the financial year and of the profit or loss for that period. The management confirm that suitable accounting policies have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the financial statements for the year ended 31 December 2001. The management also confirm that applicable International Accounting Standards have been followed and that the financial statements have been prepared on the going concern basis. The management are responsible for keeping proper accounting records, for taking reasonable steps to safeguard the assets of the Bank and its subsidiaries and to prevent and detect fraud and other irregularities.
Audit Report Report of the Auditor to the Shareholders of Nova Ljubljanska banka d.d., Ljubljana We have audited the accompanying consolidated balance sheet of Nova Ljubljanska banka d.d. (Ôthe Group') as at 31 December 2001 and the related consolidated statements of income, cash flows and changes in shareholder's equity for the year then ended (collectively Ôthe consolidated financial statements'). The consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as promulgated by the International Federation of Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2001 and the results of its operations and its cash flows for the year then ended in accordance with International Accounting Standards adopted by the International Accounting Standards Board. Ljubljana, 26 April 2002 KPMG SLOVENIJA,
Consolidated Income Statement for the Year Ended 31 December 2001 The accompanying notes form an integral part of these consolidated financial statements. Consolidated Balance Sheet as at 31 December 2001 The accompanying notes form an integral part of these consolidated financial statements. The Management Board approved the financial statements and notes to the financial statements.
Consolidated Statement of Changes in Equity for the Year Ended 31 December 2001 The accompanying notes form an integral part of these consolidated financial statements. Consolidated Cash Flow Statement for the Year Ended 31 December 2001 Notes to the Consolidated Financial Statements 1. General information Nova Ljubljanska banka ('the Bank' or 'NLB') is incorporated in Slovenia
as a share company providing universal banking services. The address of
its registered office is: The increase of the general price index for the year 2001 was 7.0% (year 2000: 8.9%). The exchange rate changed from 108.1 tolars to the Deutschemark at 31 December 2000 to 113.2 tolars to the Deutschemark at 31 December 2001, from 227.4 tolars to the US dollar to 250.9 tolars to the US dollar, and from 211.5 tolars to the Euro at 31 December 2000 to 221.4 tolars to the Euro at 31 December 2001. All amounts are expressed in million of tolars except otherwise specified. 2. Summary of significant accounting policies The principal accounting policies adopted for the preparation of the financial statements are set out below: a) Basis of presentation of financial statements For the purposes of these financial statements, the statutory financial statements of the Bank and its subsidiaries (together: "the Group") have been adjusted, where necessary, for the purpose of fair presentation in accordance with International Accounting Standards. Assets and liabilities are categorised into short-term (up to one year) and long-term (more than one year) groups concerning their original maturity. b) Consolidation c) Associated undertakings Equity accounting involves recognising in the income statement the Group's share of the associates' profit or loss for the year. The Group's interest in the associate is carried in the balance sheet at an amount that reflects its share of the net assets of the associate and includes goodwill on acquisition. In respect of associates, negative goodwill is included in the carrying amount of investment in an associate over a period of five years. A listing of the Group's principal associated undertakings is shown in Note 22. d) Goodwill and negative goodwill Negative goodwill arising on acquisition represents the excess of the fair value of the net identifiable assets acquired over the cost of acquisition. Negative goodwill is amortised to the income statement over a period of five years. However in the case of significant acquisitions made by the Group to expand its product or geographical market coverage, such negative goodwill is amortised to the income statement over a period of not exceeding eight years. e) Foreign currencies Income and expenditure arising in foreign currencies are translated at the official rates of exchange as at the transaction date. Gains and losses resulting from foreign currency purchases and sales for trading purposes are included in the income statement as net gains or losses from dealing in foreign currencies. f) Interest and discount income and expense g) Fees and commission income Fees receivable that represent a return for services provided are credited to income when the related service is performed. h) Financial instruments i) Classification Originated loans and receivables are loans and receivables created by
the Group providing money to a debtor other than those created with the
intention of short-term profit taking. Originated loans and receivables
are stated in the balance sheet at the amount of principal outstanding,
less any provision for unrecoverable amounts. Available-for-sale assets are financial assets that are not held for trading purposes, originated by the Group, or held to maturity. Available-for-sale instruments include and certain debt and equity investments. ii) Measurement and recognition iii) Fair value measurement principles Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. iv) Gains and losses on subsequent measurement v) Derivative financial instruments Gains and losses on trading derivative instruments, together with any associated hedging thereof used in dealing activities, are included in net losses / gains arising from dealing in foreign currencies as they arise. i) Provisions for impairment of originated loans and
receivables j) Accounting for leases - where a group company is
the lessee When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. k) Accounting for leases - where a group company is
the lessor In the year 2001 the unearned finance income from finance leasing is not reported as deferred income as it was reported in the year 2000; the comparative figures for the year 2000 are restated accordingly. l) Offsetting m) Sale and repurchase agreements n) Property and equipment Assets in the course of transfer or construction are not depreciated until they are brought into use. Where the carrying amount of property and equipment is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. Maintenance and repairs are charged to the income statement when the expenditure is incurred and renewals capitalised. o) Intangible assets Amortisation is provided on a straight-line basis at rates designed to write off cost of software over their estimated useful lives. The current system software and the new information technology system are amortised over a period of ten years and other software over a period of five years. Assets in the course of transfer or construction/implementation are not amortised until they are brought into use. p) Investment property q) Cash and cash equivalents r) Provisions s) Taxation Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Tax rates currently enforced are used to determine deferred income tax. t) Managed funds u) Pensions 3. Risk management policies of the Group The strategy of the risk management system in the Group is to maintain stable performance in the future. The Risk Management Department has an independent and centralised role in controlling risks. The Bank prepares credit and market risks policies and strategies working closely with its subsidiaries. The Bank therefore has a centralised role over controlling the different risks regarding the data structure, methodologies adopted, reporting, and the limits placed within the decision-making process. The Group has an internal risk management model. The most important roles of the model are to decrease information asymmetry (between the Bank and its environment), and orient the process towards estimating the future ("marked to future") and not only the present. The most important tools and methods used by the internal risk management model are: diversification, internal credit grading system standard (for corporates, banks, countries etc.), migration matrices with internal credit rating system, collaterals, internal cover ratio provisions/bad debts, etc. The use of risk management tools has a great impact on asset quality, structural liquidity, performance ratios, early warning signals and they minimise the Group's exposure to all types of risks. a) Credit risk management The main goal of Group risk management is to maintain the highest possible asset quality. Asset quality ratios are consequently mentioned in all other Group risk management policies and measures. In structural liquidity policy, asset liquidity is defined as a key factor. Cash inflow from the maturity of existing assets is the first source of liquid funds. The credit portfolio includes loans (to corporates, retail and the public
sector), exposures to other banks and financial institutions, and corporate
bonds and other banking products, (such as guarantees, derivative instruments,
etc). Country risk is managed using maximum risk levels for investments in different countries, including emerging market limits. Assessment of the risk level of a given country is carried out by reviewing the country's major macroeconomic data, its political situation and the rating attributed by major international specialised companies. b) Foreign exchange risks The foreign exchange risk measurement model has following characteristics (VaR parameters): - VaR is calculated daily, based on the end of the previous working day's
exposure (whole trading and banking book); - the period of observation is 250 working days; the historical series is updated daily. Internal model is strictly used for internal purposes. Publicly the Group follows all Central Bank regulations. c) Interest rate risks - within gap analysis, assets, liabilities, and off-balance sheet instruments are categorised by interest rate sensitivity according to their maturities and/or repricing characteristics; consequently, data is sorted according to contractually conditioned parameters, i.e. type of interest rate (fixed vs. variable), rate index, or currencies; - an assessment of interest rate exposure based on the specific characteristics of different interest rates prevailing in different balance sheet segments; - duration of the bond portfolio. d) Structural liquidity With respect to solvency, the liquidity risk does not necessarily relate directly to financial loss or write-offs but is mostly a consequence of unbalanced cash flows. e) Securities The measurement and management of market risks of the portfolio are based on VaR and duration methodologies, limits and a stop-loss system. Both macro and micro hedges of those risks are used. f) Country risk 4. Merger of subsidiary banks On 1 October 2001 Banka Velenje d.d., Velenje (Banka Velenje), Pomurska
banka d.d., Murska Sobota (Pomurska Banka) and Dolenjska banka d.d., Novo
mesto (Dolenjska banka) were merged with the NLB. The purchase method
of accounting in which the merger is reflected in the consolidated financial
statements is explained as follows. Negative goodwill calculated for Banka Velenje and Pomurska Banka at
the time of their first consolidation is amortised through the income
statement for nine months and the unamortised negative goodwill was released
into reserves. 5. Change in the scope of consolidation In the financial statements of NLB Group for 2001 LHB Internationale
Handelsbank AG Group, Frankfurt/Main (LHB Bank), Tutunska Banka AD, Skopje
(Tutunska banka) and Commercebank d.d., Sarajevo (Commercebank) are consolidated
for the first time. Tutunska banka was also consolidated in the Group's financial statements. On consolidation, goodwill amounting to tolars 248 million was accounted for, which will be amortised over a period of five years. Due to its immateriality the subsidiary Tutunskabroker AD, Skopje is not included in the consolidated financial statements (its total assets accounts for 0.01% of the Group's total assets). Commercebank became a subsidiary bank of the NLB at the beginning of 2001, and in the financial statements of the NLB Group for 2001 both its balance sheet and income statement are fully consolidated. On consolidation, goodwill amounting to tolars 263 million was accounted for, which will be amortised over a period of five years. The consolidation of the new subsidiaries increased the Group's assets and liabilities as follows: 6. Changes in the accounting policies a) Additional provisions due to Bank of Slovenia regulations The additional provisions for the existing subsidiaries LBS Bank-New York,New York and LB InterFinanz AG, Zürich are recorded in the financial statements as a change in the accounting policy. In accordance with this, the provisions that refer to previous years adjusted the retained profits of the Group, and the provisions that refer to 2001 are shown in the income statement. The provisions which, in accordance with the Bank of Slovenia's regulations, the NLB had itself already set aside for its direct investments and loans to in Commercebank and Tutunska banka were also retained on a consolidated basis in accordance with the Bank of Slovenia's instructions, and they are shown as provisions for country risk on the liabilities side of the balance sheet. b) IAS 39 adoption c) IAS 40 adoption 7. Significant events after the balance sheet date In the privatisation process of the Bank an important progress has been achieved. The Republic of Slovenia's share in the Bank equity decreased by the merger of three banks on the 1 October 2001. On 19 April 2002 Government confirmed a sale of 34% equity share to KBC bank and Insurance Holding Company, that will further reduce the Republic of Slovenia's share. 8. Interest income/expense Interest relates to the following types of borrower and depositor: Interest relates to the following types of assets and liabilities: 9. Other operating income
11. Provisions for investments In the year 2001 investments are accounted in accordance with IAS 39 and no provisions are established accordingly. 12. General administrative expenses The number of persons employed by the Group as at 31 December 2001 was 5,379 (2000: 4,271) and increased mainly due to merger of Dolenjska banka and acquisitions of new subsidiaries. 13. Other operating expenses 14. Tax 15. Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue. Subordinated loans and debt securities in issue have no future conversion rights and consequently there are no dilutive potential ordinary shares. 16. Cash and balances with the Central Bank The Bank is required to maintain an obligatory reserve with the Bank
of Slovenia, relative to the volume and structure of its customer deposits.
The current requirement of the Bank of Slovenia regarding the calculation
of the amount to be held as obligatory reserve is as follows:
a) Analysis by type of loan
b) Geographical analysis c) Maturity analysis d) Movements in provisions 18. Securities held for trading 19. Loans and advances to customers a) Analysis by type of customer b) Analysis by sector c) Analysis by type of advance d) Analysis of movements e) Movements in provisions f) Finance leases The allowance for unrecoverable finance lease receivables included in the provision for loan losses amounted to tolars 942 million (2000: 487 million).
g) Guaranteed loans Loans and advances are further analysed in the following notes: Currency risk Note 46, Liquidity risk Note 47, Interest rate risk Note 48, Fair values of loans and deposits Note 40 and Related party transactions Note 44.
a) Analysis by type: available-for-sale portfolio At 31 December 2001 the Bank held tolars 83,142 million of bonds of the
Republic of Slovenia (rehabilitation bonds). The bonds are divided among
10 different series with maturities ranging from 2004 to 2010. These bonds
receive revaluation interest based on the revaluation index and interest
at rates of between 5.3% and 6.5% depending on maturity. Certain series
of these bonds allow the holder to elect to receive revaluation interest
based on the movement of the deutschemark (from 1 January 2002 euro) against
the tolar rather than the revaluation index. Such elections have to be
made by 15 October of the preceding year. The Bank did not make any such
elections for 2002. In 2001 the Bank opted for a further sale of these
bonds amounting to tolars 2,382 million and transferred them from the
available-for-sale portfolio to the trading portfolio. Pursuant to a law regulating the settlement of the liabilities of Slovenian Steelworks the Slovenian Steelworks bonds were exchanged on 31 December 2001 for Republic of Slovenia bonds denominated in euro with the maturity date on the 20 July 2022 and at the interest rate of 8%. They are included in other Bonds of Republic of Slovenia in foreign currency clause in amount of tolars 4,758 million (2000: 3,344 million). b) Analysis by type: held-to-maturity portfolio The bonds of the Republic of Slovenia in foreign currency were obtained as a result of the contracts of the Republic of Slovenia concerning the New Financial Agreement (NFA) during 1996. These eurobonds are listed on the Stock Exchange in Luxembourg and are due to mature on 27 December 2006. They were issued with a call option and interest is paid twice a year. The market value of bonds exceeds the carrying value in amount of tolars 26 million. The bonds of the Republic of Slovenia totalling tolars 26,922 million represent amounts taken over by the Republic of Slovenia under the law on the settlement of liabilities from paid foreign currency deposits. In 1996 the Republic of Slovenia issued the bonds with a maturity of 20 years and revaluation interest of 90% of the general price index and an interest rate of 3% per annum. The fair value of the bonds for paid foreign currency deposits is tolars 20,552 million. Their fair value has been calculated by discounting their cash flows considering expected (required) return of a compared market bonds. Due to their lower interest rate against expected market bonds return the fair value of these bonds is lower than the carrying value. This will not affect the Group's result as the Group has intent to hold them to maturity. 21. Investment property 22. Investments in associated companies The principal associated companies are: In December 2001 the Bank increased its capital share in LHB Bank over 50% and therefore no longer treated as an investment in associated company. Dolenjska Banka was merged with NLB. The investments in associated companies comprise: The movements on investments in associated companies comprise: The management considers that the fair value of the investments in associated companies is not less than the carrying value. 23. Other assets, including tax assets a) Analysis by type of asset b) Movements in provisions 24. Deferred income taxes The components of the net deferred tax asset at 31 December 2001 and 2000 are as follows: A deferred tax liability amounting to tolars 197 million which relates to the Republic of Slovenia Bonds (previously the Slovenian Steelworks bonds) has been charged directly to retained earnings according to the transitional provisions of IAS 39. In the disclosure above it is included in IAS 39 fair value revaluation. 25. Accrued income and deferred expenses Negative goodwill which arose on the acquisition of five Slovenian banks in the year 1997 and 1998 decreased in the year 2001 due to merger of Banka Velenje and Pomurska banka. The unamortised negative goodwill at the 1 October 2001 for these two banks was released directly to reserves. Movement on goodwill/negative goodwill account: 26. Property and equipment 27. Intangible assets 28. Deposits from banks 29. Borrowings from banks a) Analysis by type of borrowing
b) Maturity analysis
30. Deposits from other customers 31. Borrowings from other customers a) Analysis by type of customer b) Maturity analysis 32. Debt securities a) Analysis by type of liability b) Maturity analysis 33. Other liabilities 34. Accruals and deferred income 35. Provisions for liabilities and charges
36. Subordinated liabilities 37. Minority interest Minority interests were substantially affected by the consolidation of LHB Bank, Tutunska Banka and Commercebank in the year 2001. 38. Share capital At 31 December 2001 there were 883 entities having the status of Bank's shareholders. With a holding of 5,739,270 shares, being 74.71% of the share capital, the Republic of Slovenia remained the majority shareholder of the Bank. As at 31 December 2001 the capital was represented by 7,682,015 ordinary shares, each with a nominal value of tolars 2,000. Through the merger of the banks four subsidiaries became the shareholders of the Bank with a holding of 50,698 ordinary shares. 39. Reserves Dividends are accounted for in the period in which they were declared. A dividend of tolars 296.3 per share was declared at the Bank's Annual General Meeting in June 2001. 40. Fair values of loans and deposits The fair values of the following financial instruments differ from their carrying amounts shown in the balance sheet:
Due from other banks Loans and advances to customers Deposits and borrowings The estimated fair value of other deposits is based on discounted cash flows using interest rates for new debts with similar remaining maturity. 41. Capital ratios The capital adequacy ratios are calculated in accordance with Bank of International Settlements guidelines. These guidelines are intended to apply to major international banks based in OECD countries. In order to make comparisons with other major banks, Slovenia has been treated as a member of OECD. The principal effect of this is to apply counterparty risk weights of 0% to Slovenian government debt and 20% to debts of other Slovenian banks. 42. Contingent liabilities and commitments a) Legal proceedings. b) Credit related commitments. - if the credit provides for sight payment - to pay at sight - if the credit provides for deferred payment - to pay on the maturity date determinable in accordance with the stipulations of the credit. Such undertakings can be issued also for the credits received in the form of confirmation. It is usually done at the request or authorisation of the opening bank and constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank. Foreign exchange derivatives allow the Group and its customers to transfer, modify or reduce their foreign exchange risks. Foreign exchange exposure associated with derivatives are normally offset by entering into counterbalancing positions, thereby minimising the foreign exchange risk and cash amounts required to liquidate the contracts. The Group maintains strict control limits on net open positions, i.e. the difference between purchase and sale contracts, by both currency and term. Unless otherwise indicated, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets), which is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed by collateral (initial margin or good faith deposits) or as part of the overall borrowing limits granted to customers. c) Credit related commitments Derivative financial instruments Fair values of the above derivative financial assets and liabilities
are included in accrued income and deferred expenses, and accruals and
deferred income, respectively. d) Movements in provisions
e) Assets pledged
f) Operating lease commitments 43. Funds managed on behalf of third parties The Group manages assets totalling tolars 115,938 million (2000: 69,414 million) on behalf of third parties. Managed funds' assets are accounted for separately from those of the Group. Income and expenses of these funds are for the account of the respective fund and no liability falls on the Group in connection with these transactions. The Group is compensated for its services by fees chargeable to the funds. 44. Related party transactions A number of banking transactions are entered into with related parties in the normal course of business. These include loans and deposits. These transactions were carried out on commercial terms and conditions and at market rates. The volumes of related party transactions, outstanding balances at the year end, are as follows: 45. Subsidiaries 46. Currency risk The amount of consolidated assets and liabilities denominated in tolars and in foreign currency as at 31 December 2001 is analysed below:
47. Liquidity risk The amount of consolidated assets and liabilities analysed over the remaining period at 31 December 2001 to the contractual maturity date is as follows: The previous table analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks ever to be completely matched since business transacted is often of uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates. 48. Interest rate risk The period of notice required to change interest rates at 31 December
2001 is set out below: 48. Interest rate risk (continued) The period of notice required to change interest rates at 31 December
2000 is set out below: The previous tables summarise the Group's exposure to interest rate risks. Included in the tables are the Group's assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. The effective interest rates (EIR) for monetary financial instruments
are as follows: EIR are calculated on the net basis of NLB daily averages of each item and yearly averages for the rest of the Group. These averages are totalled and compared with income and expenses of each item of asset and liability balance. 49. Segmental analysis 49. Segmental analysis (continued) The Group is organised into three main business segments: - Private banking, including: loans to and deposits from private individuals, balances on their current accounts, credit and payment cards etc. - Corporate business, including: commercial loans given to business companies and state owned entities (Òpublic sectorÓ), deposits received from them, giro accounts etc. - Financial markets, including: relations with banks and other financial institutions, treasury activities, investment banking. Other operations of the Group comprise capital investments, institutional finance and providing computer services, none of which constitutes a separately reportable segment. Transactions between the business segments are on normal commercial terms and conditions. There are no material items of income or expense between the business segments. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet and excluding items such as taxation and borrowings. Geographical segments No individual country, apart from Slovenia, accounts for greater than 10% of the Group's total assets, total liabilities, credit commitments, operating income and capital expenditure. 50. Reconciliation of net profit, total assets and equity between Slovenian accounting standards (sas) and International accounting standards (ias) a) Revaluation of tangible and intangible assets,
investments, capital and general banking risks provision b) Negative goodwill Under SAS the negative goodwill arising from the merger of subsidiary banks is presented among provisions for liabilities and charges while under IAS both negative goodwill on consolidation and negative goodwill on mergers are presented as a deduction of accrued income and deferred expenses. c) General banking risks provision d) Measurement of the financial instruments e) Transfer of provisions from liabilities to assets f) Netting of suspended income against assets g) Transfer of unearned income on finance leases from
liabilities to assets h) Netting of own shares i) Minority interest j) Other Income Statement for the Year Ended 31 December 2001 (Parent Bank) Balance Sheet as at 31 December 2001 (Parent Bank) |