Profile of NLB Group and NLB
NLB Group and NLB financial highlights
Supervisory Board Members
Statement of the President and Chief Executive Officer
Financial Review of NLB Group and NLB in 2002
NLB Group and NLB risk management
Human Resources Management
Audited Consolidated Financial Statements for NLB Group under Slovenian Accounting Standards
Financial data and figures of NLB according to Bank of Slovenia Methodology
Audited Financial Statements for NLB d.d. under Slovenian Accounting Standards
Audited Consolidated Financial Statements for the NLB Group according to International Financial Reporting Standards
Audited Financial Statements for the NLB d.d. according to International Financial Reporting Standards
NLB GROUP AND NLB RISK MANAGEMENT
The goal of the Group's Risk management is to sustain and
continue stable performance and to maintain the highest
asset quality. The Group achieves these goals by uniformed
and constant ex ante and ex post assessment and monitoring
of clients and by using the standard Group risk management
tools (migration matrices, diversification, Value at
Risk, Marking to Future). The use of these tools improves
asset quality, structural liquidity, and performance ratios,
enables early warning signals and minimises exposure of the
Group to all types of risks.
CREDIT RISKS MANAGEMENT
The Group reviews credit risks from three aspects: specific
counter-party risk, portfolio risk and country risk. Credit risk
management includes constantly analysing the loan portfolio
and providing credit analysis by considering adverse
selection and moral hazard problems regarding client
behaviour before and after signing of the contract.
The credit portfolio includes loans to corporate, retail, and the public sector, exposures to other banks and financial institutions, corporate bonds and other credit risk bank products, such as guarantees, derivative instruments etc. Part of the portfolio (capital investments, investments in securities etc.) is evaluated under fair value, while the quality of the portfolio is analysed by classifying clients and assets into five credit grades (A to E), A being the highest quality credit risk. The "performing" part of the total Group portfolio (A and B) represents 93.5 per cent of the banking group and 95.6 per cent in NLB. The credit portfolio of the Group amounted to 1.642 billion tolars of which 1.218 billion tolars is the portfolio of the NLB.
Table 15: Credit rating migration matrix weighted with exposure for year 2002
The tables show a variant of migration matrix weighted with exposure, which also reflects the size of migrating exposure. The computation of average rating is enabled by means of assigning numerical codes to credit rating grades (A=5, B=4, C=3, D=2, E=1). The average rating indicates the credit quality of the Bank's clients with a particular rating grade after one year. The conclusions from table 15 are as followed:
By comparing year 2002 with weighted averages, we can drive the following conclusion:
Table 16: Average credit rating migration matrix weighted with exposure (1995 - 2002)
NLB and the Group comply with all regulatory requirements,
and all Group members must also comply with the internal
NLB credit risk system that is oriented towards future creditworthiness
of our clients. Migration matrices for the past
32 quarters from 1994 to 2001 for NLB, show that the Bank
has relative strong stability in the quality of assets.
MARKET RISKS MANAGEMENT
Basic market risks that the Group faces are foreign exchange, interest rate, securities portfolio and liquidity risks. These risks are analysed and managed on three levels. Firstly, business departments are responsible for managing of market risks within their authorities determined by the Management Board. Secondly, on the NLB level these risks are analysed and managed in accordance with internal policies and domestic central bank standards. Thirdly, the Risk Management Centre of the Bank controls market risk exposures of each bank and of the Group as a whole.
Foreign exchange risk
The NLB's foreign exchange risk emanates from both tradingbook
and structural positions, while the foreign exchange risk
of the Group is concentrated in structural positions.
Internally NLB manages foreign currency risk in line with policy
that sets limits on currency positions, dealer limits and
VAR calculation. In VAR calculations the Basle Committee
amendment criteria for internal approach to measure foreign
currency risk capital charge is applied. In September 2002 it
was decided to implement a historical simulation method
instead of the previously selected parametrical VAR. The
approach provides for a daily revaluation of the Bank's foreign
exchange portfolio on the basis of the historical trend in
market prices and their correlation over the past year. VAR
methodology is therefore one of the most important tools in
the active management of open foreign currency positions.
The model is supplementary to the requirements of the Bank
Interest rate risk
The measurement of interest rate risk exposure means quantifying the potential loss, resulting from an adverse movement in interest rates. In the Bank and Slovene subsidiaries, gap methodology and duration is used, while foreign subsidiaries are using their own models, making different scenarios for interest rate movements.
Management of liquidity risk includes effective control
processes and fulfilment of Bank of Slovenia regulating
requirements on the liquidity area. The Bank regulates operative
liquidity on the basis of planned cash flows, on tolar
side at least for 30 days ahead and on foreign for 10 days.
Adequate information system enables connection between
business sectors, administration and treasury, that asures
data on liabilities due and new accounts approved, thus
enabling a sufficient management system. Liquidity scale
with the information on all known cash flows from bank's
operations presents the basis for daily reports on liquidity in
advance for up to 45 days daily, for up to one year monthly
and for more than one year annually.
Securities portfolio management
Treasury manages an extensive debt securities portfolio for
foreign and local issuers. Trading is performed in cooperation
with foreign and domestic banks, and investment banking
and other customers.
Banks of NLB Group form special provisions for potential
losses arising from credit, country and other known risks
exposures. Regarding the growth and structure of loan portfolio
the Group assigned 12.4 billion tolars from net income
to provisions. In the same period the Bank formed additional
provisions in amount of 0.75 billion tolars. Write-offs
amounted to 2.2 billion tolars and 0.9 billion tolars recoveries
from assets previously written off were realized.