In the year to 31 December 2001, the Group generated net after tax income of 7.3 billion tolars, a 25.1 per cent increase over the previous year. The pre-tax income, including 913 million tolars attributable to the minority shareholders, reached 17.1 billion tolars, up by 27.6 per cent over 2000.

The major contributor to the Group's total income was the Bank. It made a net after tax income of 6.05 billion tolars, up by 21.3 per cent over 2000. The domestic daughter banks also increased their net income, as did LHB Bank and LB Leasing and LB Maksima.

It should also be noted that the Bank's effective tax rate of 50 per cent, which is the highest due to balance sheet levy, is considerably higher than the effective tax rate applicable to other daughter banks and subsidiaries. For most of them the balance sheet levy, due to the structure of their investments is almost insignificant, which means that their tax charge is calculated by applying the ordinary income (corporate) tax at the rate of 25 per cent. The effect of the different tax position of the Bank and the remaining subordinated companies is clearly evident when comparing the pre-tax income figures and their per cent increase over the preceding year.
At the Group level, net interest income grew by 30.2 per cent. In this context, note that in accordance with the Slovene Accounting Standards and the Slovene regulatory reporting scheme, the interest income earned on loans and other investments and the interest paid on deposits and borrowing include only the real part of the total (nominal) interest rate.

The revaluation part (TOM), calculated by using the rolling Slovenian inflation index, is shown separately under the other operating income heading. The total amount found within this item (23.3 billion tolars) includes both the net figure for the revaluation interest (received less paid), the balance of the revaluation account (showing the revaluation of fixed assets and capital investments as income items and revaluation of capital as a charge to the income account) and the net F/X gains/losses (see Notes 9b on page 56 and 7b on page 91).

During the year, as a result of the tapering of the indexation system and the introduction of the interest nominalism, as recommended by the Slovenian Central Bank, the interest rate charged on certain short-term investments, including short-term inter-bank deposits and investments in Treasury bills issued by the Slovenian Central Bank, has been quoted as a nominal interest rate. As a consequence, the interest calculated by applying the nominal rate of interest, both received and paid, were booked as a real interest income/expense. The inconsistency caused by this Slovenian regulation will be abolished in 2002 [2].

Based on the net income attributable to shareholders, diluted earnings per share increased to 953.2 tolars per share from 847.4 tolars per share in 2000, a 12.5 per cent increase, although it does not include the charge made for the obligatory revaluation of capital 3. In June 2001, at the Bank's Annual Shareholder meeting, a dividend payment of 2 billion tolars or 296.3 tolars per ordinary (common) share was declared, representing a 41 per cent payout ratio. In April 2002, at the Bank's Supervisory Board meeting, a dividend payment of 3,292 million tolars or 428.5 tolars per ordinary share was proposed.

Net interest income

Customer loans and advances and investment securities are the key generators of interest income. A rise in net interest income, as a result of an increase in business volumes, more than compensated for the lower net interest margin. Falling interest margins were directly related to a decrease in the indexed component of the aggregate net interest margin. Interest charged on tolar loans and other interest bearing investments, as well as interest paid on deposits with maturities exceeding 30 days, are calculated as a combination of the 'real' interest rate and the 'revaluation' rate. The real spread component of the aggregate net interest margin remained almost unchanged during 2001 compared to 2000.

The net revaluation interest margin calculated as the TOM interest income divided by the average tolar investments on which TOM rate is applied less the TOM interest divided by the average tolar denominated sources of funds narrowed by 0.49 percentage points, i.e. from 4.16 per cent in 2000 to 3.67 per cent in 2001. The drop in the TOM rate from 9.06 per cent on the average annual basis recorded in 2000 to an average 8.61 per cent during 2001 had direct impact on the net interest margin. Due to the fact that the average TOM earning liabilities exceeded the average TOM assets the Bank's net revaluation interest income decreased.

The negative effect of the falling TOM rate was further exaggerated by the higher rate at which the term deposits, i.e. deposits over 30 days to maturity grew in comparison to the growth of sight tolar deposits which are not indexed.

Net non-interest income

Non-interest income, which include both net fees and commissions as net gains arising from dealing operations, reached 24.7 billion tolars, 34 per cent above the level of the previous year.

Net fees and commissions increased by 35.2 per cent to 18.5 billion tolars, and this growth was a key element in the rise in non-interest income. All fee generating items attributable to the core activities, i.e. lending and guarantee issuance fees, fees from international payment services, fees from credit card business, surpassed levels achieved in 2000. Fees generated from domestic tolar payments and settlements made notable progress during the past year, due to the payments system reform.

The total net non-interest income earned by the Bank was 17.2 billion tolars, up 26.5 per cent over 2000. Fee income from the core business remained the most important contributor of non-interest earnings although the net income from dealing in securities recorded a 70.0 per cent growth over the previous year.

Operating expenses

Consolidated total operating expenses, including material, services and labour costs and depreciation, rose by 31.4 per cent to 52.5 billion tolars. The Bank's general administrative expenses were 29.3 billion tolars, an increase of 26.8 per cent over 2000. The percentage of increase would have been only 16.2 per cent if the daughter banks had been included on a like to like basis.

The cost of labour, the most important single cost item for practically every company within the NLB Group, reached 25.7 billion tolars on consolidated basis, up by 27.3 per cent over 2000. A significant element of this increase relates to the additional labour costs attributable to the three daughter banks, which were consolidated for the first time in 2001.

The other important cost items in 2001 continued to be the development projects which included the IT modernization and integration-project Sigma, and a newly launched Data Warehouse project. The growth in electronic banking transaction volumes was resulting in higher telecommunication costs. Costs, related to the introduction of the euro (principally exchange transaction costs) also contributed to the overall increase in operating costs.

The rise in labour costs, after adjusting for inflation, was below the volume growth rate. Total costs, as a percentage of average consolidated total assets dropped from 3.72 to 3.61 per cent. Other operating cost levels were in line with our expectations.