VOLUME OF OPERATIONS OF NLB GROUP AND NLB

Total assets

The Group's total assets as at 31 December 2002 were 1,981.0 billion tolars, which represented a 249.1 billion tolars or 14.4 per cent increase on 2001.

Table 5: Main asset items in the Group's and NLB's balance sheet

The NLB Parent Bank remains the dominant part of the Group with a share in total assets of 76 per cent. The shares of other major affiliates are shown in the following chart:

As at 31 December 2002, NLB total assets amounted to 1,619.2 billion tolars up 17.6 per cent on the previous year. The key factor of increase in the Bank's total assets was the increase in customer loans and securities, while liability growth was influenced by the growth in customer deposits.

Asset activities

NLB and other affiliated banks within the Group experienced similar levels of growth. NLB Group's balance sheet in 2002 comprises of 45.6 per cent in loans and 36.6 per cent investments in securities.

The Bank's balance sheet structure by geographic areas shows the focus on the Slovene market with over 88 per cent, while EU and ex - Yugoslavia markets present around 10 per cent of the balance sheet.

Loans to non-bank customers

The customer lending activity of NLB Group totalling 902.4 billion tolars showed a 10 percent increase in the year. The parent bank accounts for 78 per cent of the loan portfolio. Affiliated banks continue to contribute to growth where LHB Bank has the biggest volume of customer loans after the Bank.

Table 6: The Bank's Balance sheet structure by geographic areas in 2002

The volume of customer loans of Commercebank and Tutunska banka grew by more than 50 per cent. NLB loans grew by 10.8 per cent with all business client segments recording growth.

The largest part of the Group's customer loan portfolio is loans to corporates totalling 651.9 billion tolars and this sector grew by 61.3 billion or 10.4 per cent in the past year.

There was a slower growth in lending to households in 2002, with just a 5.3 per cent growth. This sector is expected to pick up with the Bank taking a series of measures in proactive marketing, including bridging loans for customers participating in the national housing construction scheme.

The volume of public sector lending is the smallest part of the customer loan portfolio however it recorded the highest growth rate of 18.1 per cent. We however see a shift of the public sector from borrowing based on conventional banking products to sources of finance through issuing securities. NLB's balance sheet reflects this with the purchase of securities issued mainly by the Ministry of Finance and the Bank of Slovenia.

The currency structure of loans at the end of 2002 shows a growing trend in demand for foreign currency loans with more favourable financing costs.

Investments in securities and other investments

The structure of the balance sheet by asset type changed as the share of investments in securities has increased whereas the percentage of loans and equity investments has decreased.

The Group's investment in securities rose by more than 30 per cent and at the end of the last year and totalled 724.2 billion tolars. Investments in securities of NLB showed a significant increase to 601.2 billion tolars, a 37.7 percentage increase. The increase mainly reflects the increase in investments in Bank of Slovenia's treasury bills.

Equity investments recorded a 3.3 billion tolars increase, totalling 41.6 billion tolars. The slowdown in growth of equity investments in affiliated and non-affiliated entities is in line with the Bank's policy.

Sources of funds

In 2002, the NLB Group had a successful performance in financing its investment activity through good growth in deposits, issuing debt securities and maintaining capital.

Customer deposits

Customer deposits and borrowings making up 67 per cent of funding remain the primary source of funds. With 1,319.8 billion tolars at year end this is a 12.8 per cent increase primarily due to two reasons: a wide range of deposit products and the impact from the sale the Lek pharmaceutical company to Novartis that provided additional savings to the market.

In the structure of the Parent Bank's total liabilities customer deposits make up 67.8 per cent, while the other main sources of funds accounted for considerably less, borrowings 11.2 per cent and other deposits 5.2 per cent. Although lower in volume in absolute terms, debt securities issued recorded the highest increase in 2002.

By the year-end, the Group's customer deposits increased by 13.5 per cent and totalled 1,260.3 billion tolars. This included:

Deposits of households and sole traders totalling 839.4 billion tolars grew by 14.6 per cent the share of these deposits in the structure of total customer is 66.6 per cent and accounted for 42.4 per cent of the Bank's total liabilities.

Deposits of the corporates and other financial institutions account for 27 per cent of total customer deposits and these grew by 5.4 per cent.

Public sector deposits rose by 6 per cent and totalled 75.4 billion tolars. The balances of these government deposits fluctuate from month to month.

The currency structure of deposits shows that the share of foreign currency deposits is decreasing, with the higher Slovene tolar interest rate environment triggering the demand for tolar deposits.

Other sources of funds

The highest increase among other sources of funds was debt securities, which showed a twofold increase and totalled 76.8 billion tolars. Their share in the structure of sources of funds increased from 1.3 per cent to 3.9 per cent. The Bank's debt securities increased by 54.3 billion tolars and more than tripled on the year-end 2001 and now make up 4.7 per cent of funding. Following the sale of Lek to Novartis, NLB issued three series of tolar-denominated bonds and 15-month certificate of deposits.

The Bank and the Group also obtained borrowings. The Bank's increase for 37 billion tolars compared to last year, included a major subordinated loan of 90 million euros and a 95 million euros syndicated loan in November 2002. Nevertheless, there was a slight drop in the total Group's exposure as a result of smaller amount of borrowings with banks and other customers.

In the structure of the NLB sources of financing, the increase in securities and borrowings was offset by a decline in deposits by banks and capital.

Table 7: The Group's balance sheet maturity structure

The balance sheet maturity structure reflects efficient liquidity management with adaquate investment financing, based primarily on short - term sources of funds.

Off-balance sheet transactions

The NLB Group's volume of risk off-balance sheet transactions rose by more than twofold as a result of an increase in all major off-balance items. The biggest increase was in transactions in derivative financial instruments.

The total volume of NLB risk off-balance sheet amounted to 325.4 billion tolars at year-end influenced mainly by the larger volume of derivatives of which more than 90 per cent were swap transactions with the Bank of Slovenia.

Capital and capital adequacy

The Group's total capital reached 107,3 billion tolars at 2002 year-end, up by 3.1 per cent, mainly due to growth in revenue reserves from profit. The supervisory board confirmed the appropriation of net profit to reserves in the amount of 2.65 billion tolars. Dividend pay-out is described on page 20.

The NLB Group ended the financial year 2002 with a capital adequacy ratio of 11.5 per cent. This compares with 11.1 per cent in 2001 and the increase is largely attributable to obtaining a subordinated loan of 90 million euros.

Table 8: Capital adequacy ratio of the NLB Group and NLB according to the Bank of Slovenia's methodology and BIS guidelines

As at 31 December 2002, the Bank's risk capital totalled 136.4 billion tolars, representing an almost 13 per cent increase on 2001. This had the effect of increasing the capital adequacy ratio and demonstrates effective capital management, ensuring more than adequate provision with regard to the risk level in the Bank's operations considering credit, currency and market risks.

According to BIS standards the capital adequacy ratio improved to 13.7 per cent, compared to 12.8 per cent in the previous period.

Ownership structure

At the year-end the Bank's nominal capital amounted to 15,364,030 thousand tolars, which represents 7,682,015 ordinary shares with a nominal price of 2,000 tolars. They were held by 959 shareholders of which 92.2 per cent was held by the 10 largest shareholders.

Table 9: The largest NLB Shareholders as at 31 December 2002