Financial Markets

Asset and Liability Management

Liquidity Management

The NLB Group performs liquidity risk management at both the operative and the structural levels. In order to ensure the Bank and the NLB Group’s liquidity, liquidity reserves were of the utmost importance. In 2009, despite the financial crisis, the Bank succeeded in increasing such reserves (at the end of 2008: 26.3% of total assets, at the end of 2009: 28.2% of total assets), thus ensuring a high security level of business operations despite the extraordinary stressful situation. The Bank may use secondary liquidity reserves, which include adequate (ECB-eligible) securities and appropriate bank loans to insure receivables when borrowing via ECB instruments or when concluding REPO business transactions on the inter-bank market. Despite the crisis, the Bank succeeded in issuing its own government-guaranteed bonds abroad, which, apart from the ECB’s changed monetary policy with unrestricted quotas for allocating liquid assets and the Bank’s interest rate policy, which was adapted to the conditions, contributed to the Bank’s and the entire NLB Group’s success in liquidity management.

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 regulates currency exposure by concluding business on the foreign exchange market or with established currency derivatives.

Interest Rate Risk Management

The Bank regulates exposure to interest rate risks using balance-sheet and off-balance-sheet items in compliance with the objectives and restrictions stipulated by its internal Interest Rate Risk-Management Policy. The Bank monitors exposure to interest rate risks using the methodology of interest rate sensitivity gap reports. Furthermore, the Bank analyses sensitivity on the basis of the BPV (Basis Point Value) method to estimate the change in the market value of the bankbook position as the result of the parallel movement of the yield curve. In managing securities in the bankbook, great attention was paid to ensuring quality securities enabling unproblematic acquisition of liquid assets at any time, which, considering the financial crisis, was of even greater importance. The Bank ensured fulfilling this objective by almost exclusively purchasing EMU debt securities, which are ECB-eligible. NLB regularly monitored exposure to interest rate risks at the Group level in compliance with the adopted risk development and management program of the NLB Group. It intensified its activities of interest rate risk monitoring and management in individual NLB Group members and gradually implemented the same basic interest rate risk-management principles as applied by NLB, while always considering the respective local business environment. The Bank monitored exposure to interest rate risks using the methodology of interest rate sensitivity gap reports.

Funding

Long-Term Funding

2009 was characterized by continued tough conditions on the financial markets. Nevertheless, with the support of key foreign banks, NLB concluded several important transactions on the international financial markets. NLB’s solid business operations during the times of crisis, its first-rate reputation, and outstanding relationships with international financial institutions certainly contributed to the success.

In 2009, NLB, together with a group of international commercial banks, concluded a one-year renewal of the syndicated loan to cover general financing needs and refinancing in the amount of €405 million, thus confirming its successful business operations. NLB also coordinated NLB Group members’ operations in the international financial markets. In its efforts to harmonize NLB Group operations, NLB provided expert advice to its members in their international borrowings. In 2009, members of the NLB Group took out loans totaling €36.9 million.

In borrowing, NLB cooperated with several multilateral financial institutions: the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the Council of Europe Development Bank (CEB), Kreditanstalt für Wiederaufbau (KfW), the International Financial Corporation (IFC), the European Fund for Southeast Europe (EFSE), and the Slovenian Export and Development Bank (SID). The loans were intended to finance SMEs, municipalities, and both major Slovenian projects and projects of NLB Group member countries. In 2009, NLB raised €250.7 million long-term credit lines from the Slovenian Export and Development Bank, €50 million from the CEB, and €20 million form the EIB. The total amount of loans borrowed from multilateral financial institutions in 2009 equaled €320.7 million. In 2009, financing of NLB Group members by international financial institutions was also quite extensive. NLB Group members took out loans from them totaling to €91 million: €10 million from the IFC, €22 million from the EFSE, €16 million from the KfW, €3 million from the EBRD, €20 million from the EIB, and €20 million from the SID Bank.

In July 2009, NLB was the first Slovenian bank to issue extraordinarily successful three-year maturity bonds guaranteed by the Republic of Slovenia on the international financial markets in the amount of €1.5 billion with a coupon of 3.25% p.a. The bonds are listed on the Luxembourg Stock Exchange. The issue attracted various investors from all over Europe. NLB thereby diversified its creditor base and confirmed its reputation on the international financial markets. The majority of investors were from Germany, investors from Slovenia amounted to approximately 6%. Institutionally, the largest share of the bond was allocated to institutions (i.e., banks and funds), followed by insurance companies, pension funds, and other investors.

Trading

In trading, the Bank was very successful despite the difficult conditions on the financial markets. The turnover for most products and the collective business volume increased, and the previous years’ economic result also improved. In retail banking, the somewhat more difficult year was reflected in the real sector. Companies generated less international business. However, the companies’ revenue loss was successfully compensated for by adequately responding to the crisis and trading on its own account, where the Bank succeeded in improving the result.

Currency Trading

In 2009, NLB concluded over 16,522 exchanges totaling over €6.2 billion. The volume increased by 17%. Most transactions took place in the most important global currencies, such as the euro, US dollar, Swiss franc, Japanese yen, and British pound. In addition to these, NLB is increasing its transactions in SE European currencies, such as the Croatian kuna, Serbian dinar, Bosnian convertible mark, and Macedonian denar.

Money Market

In 2009, the turnover in inter-bank deposits totaled €34.6 billion. The majority of transactions were made in euros and dollars with a majority of up to one month. The volume of currency swaps amounted to €2.0 billion; the most important currency pairs were EUR/USD, EUR/CHF, EUR/CZK, and EUR/RSD. The Bank was also active in concluding temporary sales of debt securities (i.e., REPO transactions), generating a turnover of €880 million, and in trading short-term debt securities (ECP purchases), totaling €450 million.

Trading with Clients

The competition in financial instruments became even tougher in 2009. The financial crisis, which hit companies to the full extent and reduced their business, strongly influenced the number of potential customers and their business volume. Nevertheless, the Bank continued the course it embarked on in 2008 and focused on the quality of its services with special attention to individual customer treatment and maintaining personal relationships with its clients. Due to the difficult situation, clients became more careful and mainly used “plain vanilla” financial instruments to hedge interest and foreign exchange rate risks. The business of clients that we accompanied during the crisis somewhat recovered, which was also apparent from the business volume, which doubled compared to the first quarter.

Debt Securities Trading

In 2009, the debt securities portfolio was restructured and decreased by approximately €100 million to €21 million. In part, this concerned the redistribution of two bonds (DRS2 and BCE11) in the bankbook, in the group of loans, and in part the sales of some government and some less liquid bonds. The bonds that remained in the portfolio were illiquid and the Bank will hold the majority of these bonds until maturity. Therefore, the debt securities portfolio became truly tradable because only liquid bonds and, above all, futures are traded.

NLB is one of twelve primary dealers of the Ministry of Finance (there are another seven liquidity custodians) participating in the MTS Slovenia trading platform. The 19 banks (apart from NLB, there are another two Slovenian banks) function as liquidity custodians for six government bonds, meaning that NLB is prepared to buy and sell €2 million of all six bonds at any time. Listing and trading on this platform represents competing with the world’s biggest banks.

Derivatives Trading

In 2009, the market for derivatives was quite difficult. The 2008 trend involving an increased demand for simple possibilities to hedge foreign exchange rate risks (futures contracts and currency options), and interest rate risks (especially the instrument of interest rate swap) were even stronger in 2009.

Compared to the previous year, in 2009 NLB strengthened trading in its own name and on its own account, especially in currency trading, and in standardized futures the Bank expanded its portfolio in order to prepare a sound basis for business operations with companies in this area.

Stockbrokerage and Investment Banking

Stockbrokerage

Following last year’s fall in share rates, 2009 saw fresh growth in the rates on the Ljubljana Stock Exchange. The SBI20 stock exchange index increased by 10.24% from the beginning of the year to the end of the year. From January to December 2009, NLB’s transactions concluded on the Ljubljana Stock Exchange totaled €227.5 million, representing a market share of 13%. In the same period, the Bank concluded transactions in the amount of €230.7 million on foreign capital markets, and the volume on the over-the-counter market totaled €237.7 million.

Asset Management

NLB has a long tradition of providing asset management services. It offers its current and potential clients a broad portfolio corresponding to their investment objectives and risk profile, and provides investment counseling services for institutional investors. The key criteria for the Bank’s work and services are a long-term investment horizon, transparency, and cost-effective customer services. 2009 was marked by improved capital market conditions, facilitating a broader portfolio of services, successful marketing in cooperation with the Bank’s business network and, as a consequence, increased managed assets. At the end of 2009, the volume of managed assets amounted to €74.4 million, which represents a 23% increase in assets compared to the end of 2008, and the average value of individual assets management accounts increased by 25.9%. In the future, the Bank intends to maintain its efforts to enhance its selection and quality of services in order to raise customer satisfaction and increase growth in this promising segment.

Custody Services

In spite of the harsh financial market conditions in the previous year, the Bank achieved excellent results in custody services. At the end of the year, the volume of assets in custody exceeded €5.6 billion, which is a 35% increase compared to the same period in 2008. The regional services established in 2008 were complemented by NLB’s and the NLB Group’s comprehensive custody service portfolio, both in custody services for financial instruments and in custody services for investment and pension funds. Although the net asset value of funds fell slightly at the beginning of the year, their value grew in the second half of the year. Furthermore, in 2009, the Bank’s administrative services for investment funds, for which it had received a license at the end of 2008, were well received. In 2010, further development of custody services, especially regarding quality and IT revamping, is to be expected.

Corporate Finance

Issuing Securities of NLB and for Other Issuers

In 2009, NLB issued a series of bonds, coded NLB25, with a nominal value of €12.5 million. NLB also organized the issue of bonds for Petrol d.d. in the total amount of €50.0 million, for the Italian issuer KB1909 in the total amount of €10.3 million, for the insurance company Zavarovalnica Triglav in the total amount of €30.0 million and for SID Bank in the total amount of €250.0 million. Furthermore, apart from issuing its own shares, in 2009, NLB was involved in the sale of new shares of the company Adria Airways d.d. and the French issuer Lafarge to employees in the subsidiary company in Slovenia, and also organized the issue of shares in the process of capital increase in the company Unior Zreče d.d.

Acquisitions

In 2009, NLB acted as the intermediate in three acquisition offers. The value of these offers totaled €11.1 million. The value of realized purchases of these offers reached as much as €6.0 million. NLB not only acted as the acquisitions intermediate, but also as a consultant in organizing and implementing acquisitions.

Borrowing in One’s Own Name and for Another Person’s Account

In 2009, together with the banks of the NLB Group and other Slovenian banks, NLB ensured financial resources for major Slovenian companies. The value of these approved syndicated loans and granted syndicated guarantees to residents of Slovenia amounted to €172.9 million. NLB also played the role of agent. Moreover, NLB together with other banks organized syndicated loans to non-resident companies in the total amount of €64.5 million. NLB also played the role of agent.

NLB Group
Annual Report 2009