KEY TRENDS IN NLB GROUP AND NLB PROFIT PERFORMANCE

Profit before taxation

The NLB Group made a pre-tax profit of 15.6 billion tolars for the year 2002, an 8.6 per cent decrease in comparison to the previous year. This is however a solid result considering the challenging macroeconomic environment and the newly formed additional specific Group provisions totalling 0.86 billion tolars.

Table 10: Key profit and loss account items of the NLB Group

Profit before tax and provisions increased by 7.8 per cent however due mainly to the increase in provisions and tax, the net profit after tax was 21.8 per cent lower than in 2001. On a comparable basis where LHB and Tutunska banka are excluded the reduction would be 18 per cent.

The Parent Bank recorded 12.58 billion tolars in profit before tax. Almost all the Group's subsidiary banks showed an increase in profit. LB Maksima, investment fund, recorded a high increase of profit due to favourable movements in capital market prices.

Taxes on profit amounted to 8.4 billion tolars and exceeded the 50 per cent cap due to the methodology of tax calculation being different to the accounting calculation of profit. The effective tax rate of the Bank is the highest possible due the balance sheet tax levy and is significantly higher than the tax rates applied to subsidiaries.

Dividends payout

In June 2002, at the NLB Annual Shareholder meeting, a dividend payment of 3.3 billion tolars was declared, representing 45 per cent of payout ratio.

In June 2003 the Bank's Supervisory Board will, on the basis of Shareholder's agreement, propose a 40 per cent net profit divident payout, which presents a dividend payment of 2,512.1 million tolars or 327.00 tolars per ordinary share.

Net interest income

The NLB Group net interest income for the year was 53.0 billion tolars. A key feature in interest income is the decline in interest margins which is an issue facing the entire banking sector.

The Bank's share in the consolidated net interest income is 67.3 per cent set the pace for the increase in the net interest income of the NLB Group. The Banks interest margin was 3.21 per cent a decline of 0.46 percentage points on the same period in the previous year. The Bank's is taking action in its interest rate policy to offset the declining interest margin.

Net non-interest income

The low growth in net interest income has been offset by a more rapid increase in non-interest income that rose by 37.1 per cent and totalled 37.0 billion tolars in the Group.

Net fees and commissions income of 27.5 billion tolars grew by 48.6 per cent, while income from investments increased for 40 per cent to 9.9 billion. A major part of net income from investments is interest income from securities held for trading totalling of 8.2 billion tolars. The remaining income are capital investments income and dividends from securities held for trading.

Most of the non-interest income is generated in the Parent Bank, with fees and commissions in the twelve months totalling 20.9 billion tolars or an 8.4 billion tolars increase. Key features include an increase in income from domestic payments totalling 2.1 billion tolars and intermediation administrative services in the amount of 6.6 billion tolars. Net fees and commissions from intermediation services grew mainly due to sale of Lek to a pharmaceutical company Novartis. Net income from capital investments totalled 11.3 billion tolars up by twofold with a strong performance in revenues from interests from market securities.

Net income from financial operations of the Group showed a loss of 2.6 billion tolars of which there was a loss of 2.2 billion tolars in the Bank. The main reasons for this include net expenses relating to swap contracts with the Bank of Slovenia amounting to 1.9 billion tolars.

Operating expenses

NLB Group's expenses increased by 22.4 per cent, however on a comparable basis, excluding LHB and Tutunska banka the Group's expenses increased by 8.5 per cent.

The main components of the Group's expenses were labour costs and which rose by 22.5 per cent, or 12 per cent on a comparable basis and costs of materials and services that rose 29.8 per cent or 24 per cent on a comparable basis.

In the Bank labour costs amounted to 23.1 billion tolars, representing a 36.5 per cent increase reflecting primarily an increase of 994 employees due to the consolidation of the three daughter banks. Other operating expenses totalled 22.9 billion tolars.