On December 31, 2001 the NLB Group's consolidated total assets were 1,742.4 billion tolars, 49.5 percent above the 2000 year end figure. The Bank's total assets rose by 50.4 to 1,382.3 billion tolars.

Key factors influencing the assets growth were those related to customer lending on the asset side of the balance sheet and customer deposits and acquisitions on the liabilities side.
The Bank's balance sheet also experienced significant growth in many of the customer related items due to the merger of the three daughter banks and also the consolidation of LHB Bank, Frankfurt, Commercebank, Sarajevo and Tutunska banka, Skopje.

Sources of Funds

Customer deposits

Throughout the NLB Group customer deposits again represented the main source of funding for financing, lending and investment activities. At the Group level customer deposits and borrowings grew by 46.6 per cent to 1,170.5 billion tolars by the 2001 year end. As a result, 67.2 per cent of total consolidated assets were financed from non-bank customer deposits.

There was a substantial increase in deposits from retail and corporate customers. Retail deposits again increased its share in the total non-banking customer deposit, from 63.9 per cent as at 31 December 2000 to 66.0 per cent as at the 2001 year end. Retail deposits increased by 54.8 per cent to 733 billion tolars. The mentioned increase in share could be ascribed in particular to the exceptional increase in foreign currency deposits recorded in the last two to three months of the past year, in expectation of the introduction of euro in 2002. At the Group level retail foreign currency deposits recorded a 66.1 per cent increase, compared to a 47.7 per cent increase in tolar deposits. Corporate deposits reached 29.5 per cent of non-bank customer deposits. The volume of corporate deposits increased by 41.0 per cent to 327.8 billion tolars. The level of state deposits continued to fall and accounted for 4.5 per cent of non-bank customer deposits at 2001 year end.

The Bank saw a substantial rise in its customer deposit base, mainly due to the consolidation of the daughter banks on 1 October 2001. At the 2001 year end customer deposits and borrowings held with the Bank amounted to 979.5 billion tolars, up 71.2 per cent over the previous year.

Borrowings from banks and subordinated liabilities

The Group's high credit ratings and strong long-term relationships with many international banks continue to provide good conditions for generating medium and long-term sources of funds on favourable terms. Borrowings from banks show an 80.9 per cent increase over the 2000 year-end figure. However, most of the increase is attributable to the inclusion, for the first time, of LHB Bank's 113 billion tolars balance sheet figure in the consolidated Group financial accounts. Out of the total figure of 311.3 billion tolars (the balance on 31 December 2001) the Bank contributed a further 193.3 billion tolars.

In November 2001 NLB raised a 100 million euros (22 billion tolars) syndicated loan in the international money market. The proceeds of the loan were partly used for refinancing some more expensive long-term borrowings secured under the NFA foreign debt-rescheduling program dating back to the 1980's. Another part of the proceeds was used as a long-term funding source for providing favourable currency loans to the corporate clients of both the Bank and some of its domestic banking subsidiaries. In addition a number of bilateral loan agreements with foreign banks were concluded to meet the specific needs of corporate clients for financing in foreign currency.

During the past year no new subordinated loans were raised, consequently capital requirement needs were successfully met from internally generated means.

Credit rating

Further improvements in NLB's credit rating occurred during the year. In July 2001 the FITCH credit rating agency improved its long-term F/X debt credit rating to A-. The announcement by Standard & Poor's in February 2002 to shift the credit outlook from stable to positive was welcomed.

The table below shows the Bank's long-term currency debt credit ratings (counterparty risk) assigned by the leading rating agencies and also includes the sovereign credit rating assigned to the Republic of Slovenia.

Shareholders' equity and ownership structure

At the 2001 year end the Bank's shareholders' equity was distributed among 7,682,015 ordinary shares with a nominal price of 2,000 tolars each. The number of shareholders increased from 137 in 2000 to 883, among which 91.11 percent of equity was held by 10 largest shareowners. On October 1, 2001 the Bank issued 776,894 new shares that were swapped for the shares of Dolenjska banka d.d., Banka Velenje d.d. and Pomurska banka d.d. The structure of the share register can be seen in the table below.

Own shares

In compliance with Slovenian legislation the Bank sold its own shares in 2001, which it had purchased in 2000. At 2001 year end the Bank owned 3,944 own shares, in nominal value 7,888,000 tolars, accounting for 0.05 per cent of total shareholders' equity.

Application of funds

Loans and advances to customers

Non-banking customer loans recorded a strong increase in the year reaching 825.7 billion tolars, a rise of 37.5 per cent. As a result of the very rapid increase in customer deposits, particularly in the final two months of the year, investment in securities rose by 61.5 per cent over 2001; the share of customer loans in the Group's consolidated total assets fell from 51.5 to 47.4 per cent.

The breakdown of customer loans by business segment remained virtually unchanged over the year. The biggest share in the Group's customer loans to the corporate sector represented 67.6 per cent of total customer loans in 2001. Corporate lending increased by 52.2 per cent over the year.

Loans to retail customers provided through the branch network rose 19.8 per cent and reached 209 billion tolars by the 2001 year end. In absolute terms the highest growth was recorded in the area of long-term lending (maturities exceeding one year). As at 31 December 2001 their balance stood at 172.3 billion tolars and was up by 26 billion tolars (17.8 per cent) over the previous year.

Although lower in absolute terms, the growth of short-term lending to retail customers reached 30 per cent of the total. Both growth figures indicate that private individuals requirement for Bank financing remained high despite the fact that their borrowing capacity was somewhat suppressed following the peak in term borrowing in 1999, before VAT introduction.

The Bank's rate of customer lending was even higher than that of the Group. By the 2001 year end the Bank's total loans to non-banking customers reached 636.7 billion tolars, an increase of 43.7 percent. Loans to the corporate sector grew by 48.6 per cent and accounted for 63.4 per cent of total customer loans. The Bank loans to retail customers also showed a significant increase. At the end of 2001 they had reached 175.1 billion tolars, up by 57 billion tolars or 46.5 per cent. The growth in the Bank's lending includes both the organic growth and a contribution from the former daughter banks.

The quality of credit portfolio and provisioning policy

The quality of the Group's loan portfolio improved further despite the considerable growth in lending and investments in securities, mainly short-term Treasury bills issued by the Bank of Slovenia and the Ministry of Finance. This demonstrates prudent risk management policies. The Group's risk management policy is further described in the section on pages from 27 to 29 and in the Notes to the Financial Report on pages from 130 to 132.
As at 31 December 2001 94.6 per cent of the Group's customer loans were graded high-quality A and B credit grade, which qualify them to be considered as performing portfolio. At the same time the level of specific provisions (B, C, D, E provisions) has been grown faster than the level of non-performing loans (C, D, E exposures). Consequently the coverage of such loans increased by 0.4 per cent and reached 105.7 per cent.

Investment portfolio

An important change in the balance sheet structure was recorded this year as a result of the strong increase in investments in securities and LHB Bank consolidation. The share of investments in securities in the NLB Group's consolidated total assets increased from 29.1 to 31.4 per cent and to 31.6 per cent, in the Bank's balance sheet, up by 4 per centage points.

Investments were mainly in risk-free Republic of Slovenia (i.e. Ministry of Finance) and the Bank of Slovenia (the Central Bank) short-term treasury bills and similar securities. Total investments in securities, i.e. investment securities and trading securities, reached 547.9 billion tolars and were up by 61.5 per cent over the preceding year. Out of the 208 billion tolars absolute increase, 56.2 billion were contributed by LHB Bank on consolidation.

Liquidity management

Liquidity management is the most important function of treasury departments throughout the NLB Group. The coordination of treasury activities at the Group level was performed by the Group Treasury department, organized within the Bank's Financial Markets and International Division.

The treasury is responsible for ensuring that the financial commitments of the individual companies are fulfilled as well as in maintaining sufficient domestic and foreign currency reserves above the minimum requirements set by the Bank of Slovenia.

The treasury department supervised many transactions, particularly those that included purchasing of foreign exchange from corporate clients (net exporters of goods and services) and its simultaneous sale to the Bank of Slovenia under the continuing repurchase agreements. These transactions with the Central Bank represented also an important source of tolar short-term funding for the Bank and other members of the NLB Group. At the same time, more than 50 per cent of all tolar inter-bank placements were transacted among the banks belonging to the NLB Group.
The Bank's treasury department also managed a significant portfolio of foreign exchange investments, totalling 304 billion tolars at the 2001 year end. Certificates of Deposit of the Bank of Slovenia in foreign currencies represent over 50 per cent of all foreign exchange (FX) investments, which could be partly explained by the existing monetary regulations.

Compared to the previous year the volume of investments in foreign first grade debt securities yielding attractive returns grew significantly in 2001. The domestic securities portfolio consisted mainly of Republic of Slovenia government bonds. The active management of this portfolio, within the market limitations, included transferring its smaller part on the trading book and its ultimate sale on the secondary market. These activities went in line with the strategy of helping build and maintain the market for Treasury Bills, approved towards the 2001 year end.