Statement by the President of the Management Board of NLB

Dear shareholders, business partners and employees,

NLB faced one of the most difficult years in its history in 2010. The Bank was hit hard, as the leading banking and financial institution in Slovenia, by the extraordinarily difficult financial conditions that affected the country and the markets where NLB operates. The global recession resulted in low growth in lending and an increase in the proportion of bad claims, as our clients and their ability to repay loans were also severely hampered.

Despite forecasts that the worsening of conditions would ease, this did not occur. The deterioration in the quality of the portfolio was even more evident than in 2009, with NLB recording a loss after taxes in the amount of EUR 183.4 million. The negative result was mainly due to the exceptionally high provisions and impairments that the Bank was forced to create. Despite achieving poor results, however, the Bank ensured its own security and the security of its operations.

The extent and structure of provisions and impairments were primarily the result of one-time events, such as the impairment of claims arising from the Bank's own portfolio, capital investments and securities, and the impairment of claims assumed from subsidiaries. NLB created additional provisions and impairments in the amount of EUR 376.8 million in 2010.

The Bank and NLB Group actually generated profits before provisions of EUR 170.5 million and EUR 250 million, respectively. This was slightly better than the previous year owing to an improving interest margin and cost controls. After falling for two consecutive years, a higher interest margin (of 1.88%) was achieved. This was the result of higher interest income in the amount of EUR 267 million. Although the interest margin improved, it remains one of the lowest among comparable European banks, indicating stiff competition and the effectiveness of the Slovenian banking system. Non-interest income was down 14% in 2010. However, net fees and commissions, which make up the majority of non-interest income, were up on the previous year. In addition, NLB reduced operating costs by 2% compared with 2009 through measures aimed at streamlining operations.

NLB amended its strategy in 2010 in line with international regulatory changes, capital requirements and different possible scenarios of developments in the macroeconomic environment. NLB's capital adequacy ratio is lower than that of competitive European banks, the majority of which increased their capital in 2010. The Bank's new strategy therefore envisioned a capital increase in the amount of EUR 250 million, which was carried out in the first quarter of 2011 and will facilitate the implementation of NLB's strategy as a regional bank, as well as its adaptation to higher regulatory capital requirements and its capital strength, which was weak in the previous period.

Operations are also being consolidated in line with the aforementioned new strategy, which was reflected in lower total assets in 2010. Deposits by the non-banking sector were down by 6%, while household deposits were down 1%. Lending to the non-banking sector was down 3% as was lending to the corporate sector, while household lending was up 3%.

The Bank's key long-term financial objectives were also revised in the new strategy, and the Bank's strategic markets redefined. The Bank will withdraw from certain markets and increase its presence on others. A clear strategic focus is crucial for the Bank's successful operations in an environment where strategic resources, such as capital, primary sources of funding and a skilled workforce, represent a limiting factor. In terms of assuming risks, the new strategy also sets a clearer strategic focus of increased conservatism. The NLB Group's target risk profile will thus focus on mitigating risks arising from large exposures, on improving the structure of capital and on reducing dependence on bank funding. Comprehensive and centralized risk management within the NLB Group will contribute significantly to such a risk profile.

Another difficult year, which will bring new challenges and opportunities, is before us. A high level of projected new impairments will continue to have the most significant impact on the Bank's results in 2011, while a slow economic recovery will be also reflected in low growth in revenues. Reducing large exposures and the intense restructuring and enhanced collection of claims will be crucial to improving the quality of the portfolio. The management of risks and liquidity must be more stringent. Reducing the scope of activities owing to divestment and the reduction of high-risk claims will also require the adjustment of costs. This is one of the most difficult tasks before us. The adjustment of costs is necessary, not only due to the reduction in the scope of operations, but also to make the Bank more efficient. This will place it among the most successful banks against whom NLB is benchmarked. Despite the adverse conditions, the Bank plans to improve its operating results and once again prove that it is capable of creating added value for its shareholders.

Two factors are crucial to the operations of the Bank and Group in 2011: the restructuring of the Group and trends in the external environment. The banking environment is changing and requires that banks employ more innovative and transparent business models and be able to recognize the needs of their clients.

Given the Bank's long tradition of successful operations, NLB does not fear new challenges, despite the difficult year it faced in 2010. We will face even the most difficult tasks, together with employees possessing invaluable knowledge and experiences. I believe that NLB will successfully weather the current crisis.

Božo Jašovič
President of the
Management Board of NLB