Financial markets In 2003 the first issue of subordinated bonds, 12% market share in securities dealing, increase in foreign exchange and derivatives dealings, 70% growth in asset management services. Issue and trading with securities NLB Bank issued six new bond series in 2003 In 2003, NLB Bank issued six bond series on the primary market (namely NLB9 to NLB14). Four were senior bond issues totalling 56 billion tolars, and two were subordinated bond issues totalling 15.8 billion tolars. Subordinated bonds were used for the first time in 2003 for the purpose of raising Tier 2 capital. All NLB Bank bonds were sold in private placement and are listed on the official market on the Ljubljana Stock Exchange. The last issue is in preparation for quotation. NLB Bank was involved in another deal new to Slovenian market, which involved underwriting bonds issued by a foreign issuer, a Dutch company KBC Ifima for 3 billion tolars. The entire issue was underwritten by NLB Bank, with the purpose of selling on to Slovenian investors. This transaction represents the first cooperation with KBC Bank on the securities issue area. Debt securities operations The domestic securities portfolio, the majority of which are government bonds, increased by 7.4% in 2003 to 385 billion tolars. This is due to the fact that the state is more active in the bond market in its management of long-term debt. Consequently, NLB Bank focused on acquiring government bonds in the primary market and selling them gradually in the secondary market. NLB Bank manages a portfolio of securities that include dollar denominated debt securities, euros denominated debt securities and Slovenian eurobonds, which are secured against interest risk by means of forward sales of German eurobonds. The portfolio comprises of first-class bonds of governments, state institutions, banks and financial organizations with Investment grade BBB- or above. The returns achieved were above the targeted benchmark, the Lehman Brothers index. Dealing with securities NLB Bank maintained its position among the leading members on the Ljubljana Stock Exchange with 79 billion tolars in turnover and 11.6% market share, a 20% increase on 2002. The Slovenian equity index SBI 20 rose by 17.7%, while the declining interest rate environment drove up the value of Slovenian bonds. Under such circumstances trading on foreign markets became more attractive. NLB Bank's turnover in foreign securities was 38.5 billion tolars, which resulted in revenues of nearly 124 million tolars, a 70% increase over 2002. Despite a general downward pressure on brokerage commissions NLB Bank managed to achieve its targets. The increase in the volume of trading activities resulted in over 366 million tolars of fees and commissions and NLB Bank earned 440 million tolars of capital profit in selling securities. Growth in assets under management In 2003, NLB Bank recorded strong growth in asset management fees through selling standardized products through the branch network. Favourable circumstances on the domestic and foreign markets, options to invest in assets in Slovenia and abroad as well as low interest rates on deposits, resulted in numerous investors turning towards alternative investments, and were the main reasons for growth in 2003. Custody services The enforcement of the new Act on Investment Funds and Management Companies at the beginning of 2003 represents a significant movement in the development of custody services. The act brings about some major novelties on the area of custody services for investment funds. A crucial feature presents the implementation of a mandatory custody bank, performing custody services for individual funds, mutual and pension, as well as supervisory function of the overall management of the funds. Throughout the year intensive preparations were taking place within the project Custody Bank in NLB Bank, with the aim of developing custody services for investment funds in compliance with the new act. The year-end was marked by marketing activities and presentation of Custody Bank services to pension and management companies. The positive performance of other custody services is reflected in total assets under custody reaching the amount of 104 billion tolars. In the forthcoming year closing of the Custody Bank project and implementation of the new service is envisaged, thus setting forth a new turning point in development of securities services on the Slovenian capital market. Trading with securities within NLB Group In Slovenia securities trading for the Group is done through the investment banking unit of NLB Bank that holds the brokerage licence, however Banka Celje also offers securities trading services. In SE Europe Tutunska banka established a brokerage-agent company Tutunskabroker, Skopje. Currency trading Surpluses in foreign exchange inflows increased temporary sales of foreign exchange swap's with Bank of Slovenia from 815 million euros in January 2002 to 1,701 million euros at the end of August 2003. Additional surplus foreign exchange was also sold in the interbank market. Turnover in currency trading increased by 18% in 2003, with the number of deals rising by 63% on 2002 to 10,772. From that, the number of foreign exchange purchases for companies almost tripled, while the number of selling deals rose by 32%. Trading in derivative financial instruments In 2003, a system of trading in interest rate forward transactions, interest rate swaps and interest rate options was developed. A number of transactions with new interest-related derivative financial instruments were also made: forward deposits (forward/forward) and agreements involving forward interest rate (FRA) in order to improve the liquidity scale required by Bank of Slovenia's regulations. As a result of volatility in foreign markets, trading in forward transactions and synthetic forward transactions increased. Several interest rate swaps (IRS) were made in order to secure interest risk for clients who had taken foreign exchange loans with variable interest rates. The number of transactions involving derivative financial instruments in 2003 was 5,901, up 39%. The volume of business increased by 45% to 4.8 billion euros. Syndicated loans placed In 2003 NLB Bank, together with the Group and other Slovenian banks as participants arranged several significant syndicated loans for major Slovenian companies. Arranging of syndicated facilities represents an important source of fee income for NLB Bank. The total amount of syndicated loans arranged in 2003 was 47 billion tolars, a 30% increase over value in 2002. More than half of the facilities were arranged in tolars, the remainder in euros. Compliance with Bank of Slovenia's regulations In 2003, NLB Bank complied with the regulation on statutory reserve since the percentage of compliance ranged between 100.3% (November) and 101.5% (July). The year 2003 saw the introduction of two changes relating to the meeting of statutory reserve requirement, which represent a major step towards adjusting to the statutory reserves of the European Central Bank: the possibility of meeting statutory reserves by means of cash in hand was cancelled, as regards tolar obligations with a maturity of up to 90 days which are included in the basis for statutory reserve, the rate of statutory reserve fell from 7 to 4.5%. Subject to the decision on the minimum liquidity (liquidity scale), banks must monitor their operations by taking into account certain prescribed items, which define various aspects of operations. These are broken down by type of client according to the remaining maturity and divided into three periods of time. On the basis thereof, banks must calculate liquidity ratios, as a ratio between assets and liabilities (on-balance sheet and off-balance sheet) according to criteria separately for foreign exchange operations and tolar operations and by maturity from 0 to 30 days and from 0 to 180 days and in terms of records from 181 days and more. NLB Bank complied with the prescribed measure for liquidity ratio of a minimum of 1. In addition to these liquidity ratios, banks must also comply with a measure of achieved foreign exchange liquid investments. Banks must ensure, on a daily basis, that their foreign exchange liquid investments excluding loans in the second class of the foreign exchange section equal at least 80% of the monthly average of their balance sheet obligations for the preceding calendar month (since March 1, 2003). Of this, at least 45% of the said balance sheet obligations must be kept in the Bank of Slovenia's bills denominated in foreign currencies. NLB Bank complied with this regulation throughout the period. NLB Group liquidity management is based on the treasury formal agreement between NLB Bank and subsidiaries. All banks fulfilled Bank of Slovenia's liquidity requirements as NLB Bank is offering adequate instruments in case of disproportions. The Group's treasury activities also include monthly control over compliance of non-Slovenian subsidiary banks with their central bank's regulation.