FINANCIAL REVIEW OF NLB GROUP AND NLB IN 2002

NLB and NLB Group marks 2002 with a sound financial performance

The year 2002 was noted for an increasingly competitive environment, declining interest rates and a less favourable macroeconomic environment due to a gradual slowdown in economic activity. Consequently there was less demand for lending products from the personal and corporate sectors and a slower growth in net interest income due to declining margins.

Despite this background the NLB Group and the NLB Parent Bank turned in a solid performance in 2002 and in particular reflected their growing interdependence on each other. Positive synergetic effects are expected to continue in the future resulting from further integration and co-operation within the Group.

Considering the competitive and economic environment, NLB Group and the Bank recorded sound results in 2002 that were influenced by the following three key factors:

• declining interest margins,
• significant increase in non-interest income,
• the beginning of a cost management process.

NLB achieved all its growth targets in balance sheet growth in 2002 with the exception of growth in lending to the nonbanking sector. Less favourable economic conditions weakened demand in the private sector, which inevitably limited growth in the credit portfolio.

However, the Group maintains its largest market share in total Slovene banking system assets.

NLB Group experienced a decline in interest margin in the face of increased competition resulting in pressure on growth in net interest income. To manage the impact of the above pressures, NLB introduced a number of measures and programmes, focused on managing income growth and cost management in 2002:

• Adapting a flexible interest rate policy, focused on maximising profitable growth through interest rate management of both loans and deposits.
• The programme of increasing non-interest income represents a cornerstone of a continued sound operation of NLB and NLB Group. The aim of the programme is to enhance non-interest income, to compensate for the pressures on growth in interest income.
• A more aggressive marketing approach, that required more intensive activity in introducing a wide range of customised banking products and services focused on specialised segments, as well as development and improvement of state-of-the-art distribution channels.
• The cost reduction programme provides for restricting the increase in expenses and is aimed at reducing the costs of materials, fixed assets, maintenance and services by stepping up control, and by staff reduction and restructuring.
• Disinvestment programme, which will contribute to more effective operations and partially offset the restricted investment activity.
• The introduction of a new, less hierarchic organisation structure at the beginning of 2003 will facilitate a successful implementation of the cost reduction programme with a more flexible and more transparent operation in five business areas of the Bank. Each business area is headed up by an individual member of the Management Board. It also provides for the facility of measuring performance and remuneration of NLB's top management.

Within the Group, NLB and members of the Group are becoming increasingly interdependent and this has an increasingly significant positive influence on the Group's results. Going forward, mutual co-operation will lead to the strengthening of synergies and result in the Group's additional comparative advantage.

Trends in the operation of Group members may be summarised in three points:

• Among the Groups' domestic banks, the financial results of almost all banks in Slovenia in 2002 improved on 2001.
• Among Groups' foreign banks, the solid performance of Tutunska banka stood out.
• Results of other affiliates are in line with target.