Financial Markets

Asset and Liability Management

Liquidity Management

NLB regularly settled all its accounts concerning sufficient liquid reserves in compliance with the regulations of the Bank of Slovenia. The structure and quality of liquid reserves was based on the criteria of the investments list, sufficient for insuring ECB receivables. The liquidity management was modified to the adoption of the Euro and the transition to the Euro zone. It became a counterparty to the ECB in implementing monetary policies, and occasionally also participated in auctions. On the operational level, the Bank regulated its liquidity by signing contracts in the inter-bank market. Structural liquidity, through regular monitoring of the balance structure, was regulated by assuming long-term funding through syndicated loans in the international market, by issuing bonds on the domestic market, and indirectly, also by interest rate policy.

Foreign Exchange Risk Management

The Bank controlled exposure to foreign exchange risks by taking positions in individual currencies compliant with the set limits. The Bank adjusted its exchange rate positions in accord with established currency derivatives.

Interest Rate Risk Management

In 2007, the Bank intensified its activities by insuring interest rate book exposure against risk. Simultaneously, it began the process of consolidating interest rate risk management, so it can be applied to the whole NLB Group. In the area of managing securities in the banking book, great attention was focused on strengthening the strategy and criteria for business operations in 2007. Because the Bank of Slovenia’s instruments (e.g. T-bills) matured during first few months of 2007, NLB successfully restructured its securities portfolio and continued the process of further developing a portfolio following strict internal guidelines and criteria for risk management. At the same time, the Bank also coordinated the restructuring of the portfolio of domestic banks of the NLB Group and developed basic guidelines for setting up securities portfolios for some of its foreign banks as well.

Funding

Issuing NLB Securities and Bonds for Other Issuers

In 2007, NLB issued a series of bonds, designated series NLB 23, with a face value of €54.2 million. The bonds were issued as a private placement and are traded on the organized market of the Ljubljana Stock Exchange. Along with this, NLB listed the bonds of a foreign obligor, an Italian bond issuer, to trade on the organized market of the Ljubljana Stock Exchange.

Long-term Loans

In addition, NLB long-term borrowing in foreign financial markets represented one of the most important segments of its international activities and 2007 was a record year for long-term foreign exchange indebtedness. Despite the crisis in the international market, NLB was able to maintain favorable borrowing conditions, due to its longstanding collaboration with foreign banks and its excellent international credit rating, which once again demonstrated the NLB’s excellent reputation in international circles.

NLB also assists in NLB Group members’ operations in the international financial markets. In its efforts to harmonize NLB Group operations, NLB provides expert advice to its members in their international borrowing operations.

In borrowing from commercial banks, the deal of the year 2007 was, without a doubt, the syndicated loan of €850 million to cover the general financing needs in the first quarter of the year. This was the largest loan ever given to a Slovenian bank, as well as the largest ever approved for any financial institution in Central and Eastern European markets. NLB’s longstanding relationship with the international banks, its successful business performance, good credit standing, the banking industry’s confidence in the NLB operations, as well as the successful transition to the Euro, all contributed to the foreign banks’ high interest in participating in the loan. In fact, the final amount of the loan greatly exceeded NLB’s initial request. This loan reaffirms the respect NLB commands in international markets.

In November 2007, NLB raised a second syndicated loan, amounting to €750 million, to cover general financing needs. In spite of the crisis in the financial markets, NLB’s business success and its active role in the borrowing process made foreign banks genuinely interested in participating in funding the loan. The final amount of the loan was more than double the initial amount NLB requested.

NLB also raised five bilateral loans totaling €205.5 million to cover its general financing needs.

To improve its capital adequacy ratio, NLB raised a subordinated loan of €190 million and a hybrid instrument of €120 million. Both loans were included in the Tier 2 capital of the bank.

In 2007, the NLB Group members were also successful in taking out loans totaling €268 million.

In borrowing from multilateral institutions, NLB has a longstanding relationship with the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the Council of Europe Development Bank (CEB), and the International Financial Corporation (IFC), to finance Slovenian SMEs, municipalities, and larger Slovenian projects.

NLB signed a contract with the CEB for a €20 million credit line to finance projects for SMEs and micro-size companies.

The EIB, because of its excellent relationship with the NLB, approved a new credit line of €50 million. This was already the fourth contract signed by the EIB and the NLB. The previous three credit lines totaled €150 million and were used to finance municipal, SME and projects of companies providing public municipal services. Also this time, the European Commission approved funds from the PHARE program, which provides free grants for municipal projects and public works projects that stimulate development. Of course, these projects have to comply with conditions set by the EU.

Trading

Currency Trading

In 2007, NLB concluded over 13,000 exchanges totaling over €5 billion. The number of transactions was somewhat lower than expected because of the introduction to the euro in Slovenia and the consequent loss of the domestic currency. Most transactions took place in the most important global currencies, such as the euro, US dollar, Swiss franc, Japanese yen and the British pound. Besides these, the transactions in currencies such as the Serbian dinar, Bosnian convertible mark, Macedonian denar and the Croatian kuna are steadily on the rise due to NLB’s active operations in the markets of SE Europe. Over 6,700 transactions, totaling €198 million were concluded in foreign exchange trading. Most of this forex trade was concluded in US dollars, Swiss francs and Croatian kunas.

Money Market

In 2007, NLB, by contract with the Ministry of Finance, provided the primary listing of Treasury bills listing and the official and active maintenance of the liquidity of these securities. By the Ministry of Finance criteria, the NLB was in first place among official custodians of liquidity. Somewhat lower was the transactions volume of temporary sales of securities – REPO transactions. This turnover amounted to €630 million. The highest volume of completed REPO transactions reached €500 million. The NLB used this instrument to borrow funds in financial markets, in part to balance its liquid assets and also for trading purposes. The volume of currency swaps amounted to €3.4 billion, the most important currency pairs were EUR/USD and EUR/CHF. The turnover in completed interbank deposits increased to € 61.8 billion in 2007. The NLB signed inter-bank deposit agreements with the domestic and foreign banks in all major currencies, but above all in EUR, USD and CHF.

Debt Securities Trading

In 2007, NLB, in order to safeguard its portfolios, started to use its interest rate and IRS (Interest Rate Swaps) futures more actively. In 2007, NLB actively pursued the primary subscription and redemption of Republic of Slovenia bonds, while successfully managing to maintain bond liquidity in the secondary market. The NLB became the official custodian of liquidity of Slovenian Eurobonds in MTS Slovenia, while at the same time in March acted as the Co Lead Manager in issuing of the 11 year Eurobonds totaling €1 billion. The Republic of Slovenia bonds, or government guaranteed bonds, represented the largest segment in the NLB Debt Securities portfolio. There was also very active trading in bonds issued abroad. Also on the rise was trading in government bonds from the territory of former Yugoslavia. NLB participated in issuing NLB Montenegro bonds in the local market.

Derivatives Trading

The growth trend for interest rate derivatives for businesses did not continue in 2007. The reason was that with relatively high interest rates, there was no longer the expectation on the part of the businesses that the interest rates would increase significantly. It was precisely because of such expectations that the demand for more structured interest rate swaps and protected interest rate options grew. In the area of currency-transacted instruments, there was noticeable growth in currency options. Aside from regular and combination options, NLB also traded barrier and digital, or binary, options. In 2007, the trading in one’s own name and for one’s own account increased significantly (interest rate futures contracts, interest rate swaps) as did the volume of trade with other organizational units of the Bank. Last year, NLB also started trading commodity futures, shares and share indexes.

Stockbrokerage and Investment Banking

Stockbrokerage

2007 was a very successful year for trading stocks. The stock exchange index SBI20 grew by 78%, the PIX index by 45%. NLB transactions in securities quoted in the Ljubljana Stock Exchange, not counting the NLB transactions in the TUVL (the official liquidity custodians for the government securities), totaled €279 million which represented 6.3% of the volume of its stock broking business. Bond brokerage shrank considerably on the Ljubljana Stock Exchange due to low interest rates and trading through the official custodians of government bond liquidity. There was significant growth in the volume of transactions in foreign markets, by both individual and corporate accounts. Transactions totaling €466 million were brokered by NLB in foreign organized markets.

Acquisitions

In 2007, NLB acted as the broker in ten acquisition offers. The value of these offers reached a record €256.9 million (73% more than in 2006 and 300% over 2005). The value of realized purchases of these offers reached as much as €76.5 million (67% more than in 2006, and 208% over 2005). NLB not only act as the acquisitions broker, but also as a consultant in organizing and implementing acquisitions.

Asset Management

NLB has provided individual asset management services since 1993, but in December 2007, it dramatically expanded these services. Managing more than €112 million of client assets with individual accounts, made NLB the leader among Slovenian providers of such services (banks and stock brokering companies) with a more than 25% market share.

Favorable conditions in capital markets, well suited and appropriate management and ever-increasing customer confidence were the key factors that contributed to the growing volume of assets managed. The average value of individual assets management accounts increased by 22%.

Despite current unfavorable conditions, dynamic growth in asset management is forecast for the future as well, with the Bank continuing to provide more cost effective services for customers as well as improving clients’ return on investment. With the introduction of new products, NLB expects to consolidate its market position to an even greater degree and offer its clients a wide range of diverse portfolios as well as different investment approaches.

Custody Services

The upward trend in the number of transactions and the volume of assets in custody continued in 2007. Compared to 2006, the volume of assets grew by 36%, net income by over 59%. In order to meet prospective investors’ needs, NLB expanded its securities portfolio to 23 global markets. This enriched portfolio provides investors with investment opportunities in over 100 different global markets. The custody services portfolio will continue to expand, particularly in the NLB Group banks in the Balkan markets.

In the area of custodial banks, the trend of setting up new funds continued, with the number of custodial funds growing from 36 to 50. The volume of assets in these funds grew by 35%. The Bank expects even further increases in fund assets next year with the addition of a number of new funds that are more regional and oriented along specific lines.

NLB Group
Annual Report 2007