Business Report
Financial Statements
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DomovAngleško

NLB Group

Liquidity and funding

Liquidity and funding

Liquidity

The NLB Group has available primary and secondary liquidity reserves to cover liabilities. Primary liquidity reserves must be available very soon following the realization of a stress test scenario (immediately, i.e. within one week). This is the ability to generate and secure rapidly realizable and highly liquid assets in the short term. The majority of primary liquidity reserves is represented by cash, funds on settlement accounts at central banks and sight and shortterm funds at other banks. The Bank's secondary liquidity reserves are of exceptional importance in meeting liquidity needs and complying with regulations governing this area. These mainly comprise prime debt securities issued by EU countries and eligible for ECB transactions, while one third of secondary liquidity reserves are accounted for by loans that meet ECB eligibility criteria in full. ECB eligible loans are loans secured by a government guarantee and loans to government agencies.

The Group also gives a great deal attention to the monitoring and compliance of structural liquidity indicators, which indicate the appropriate maturity and structure of sources of funding in connection with the credit portfolio. A more detailed overview of the Group's structural liquidity is facilitated by liquidity gaps and their short-, medium- and long-term projections of relevant cash flows. The NLB Group's sources of funding are appropriately diversified in the current conditions, and ensure an appropriate proportion of long-term sources of funding with respect to its credit portfolio.

The debt securities portfolio of the banking book is used simultaneously for providing secondary liquidity, stabilizing the interest margin and managing the NLB Group’s interest-rate risk. Conservative principles of operations are applied in managing the portfolio, particularly with respect to issuers’ ratings and portfolio duration. The framework for managing the securities of the banking book is the Policy for Managing Debt Securities in the Banking Book, which clearly defines the objectives and characteristics of the portfolio of securities of the banking book. The majority of the portfolio is comprised of prime debt securities. As at December 31, 2010, the portfolio was comprised of 80.4% of government securities, 12.6% of governmentgranted bank bonds, 0.7% of bonds from multilateral institutions and 6.3% of bank and corporate bonds. The largest proportion of securities is accounted for by Slovenian government securities (31.2%), followed by French securities (11.8%), Belgian securities (10.3%), Dutch securities (10.3%), Austrian securities (6.2%), German government securities (3.8%) and non-government securities with a Republic of Slovenia guarantee (10.8%).

 

Funding

The year 2010 was again characterized by high volatility and a lack of confidence and unpredictability on the financial markets, primarily owing to the fiscal crisis and problems in the banking sector in Portugal, Ireland, Italy, Greece and Spain. The market was mainly open to the largest and regular issuers, well known to investors. Issuers from weaker economies and those less known to investors faced considerably more difficulties in accessing new sources of funding. Despite the adverse conditions on the financial markets, yields were down slightly on average in 2010 compared with the previous year.

The volume of trading on the bond market was down slightly with respect to 2009. While the market is characterized by an increased lack of confidence and little appetite for risk, investors primarily seek safer investments such as covered bonds (secured instruments). This form of debt accounts for more than 45% of all bank bonds issued in 2010. The second most important instrument for securing long-term funding were unsecured "senior" bonds. However, the volume of such issues was down in relative terms on the previous year. There was a partial recovery in the asset-backed securities market in 2010, while banks issued government-backed instruments in exceptional cases.

The syndicated loan market remained relatively closed, similar to 2009. Borrowing opportunities were very limited, and transactions were executed on the basis of cooperation with key partner banks. Nevertheless, the volume of transactions was up slightly on 2009. Primarily Turkish and Russian banks were active as borrowers on this market.

Deposits from non-banking sector represented the highest proportion of the NLB Group's funding as at December 31, 2010, accounting for 63.2% of all sources. The proportion of funding accounted for by deposits from nonbanking sector was up 0.8 percentage points on 2009, while the proportion of borrowings raised was down 1.3 percentage points to stand at 19.0% at the end of 2010. The dynamic demonstrated by both categories with regard to total funding indicates a shift to deposits from non-banking sector as a source of funding. The proportion of funding accounted for by nonsubordinated debt securities and subordinated instruments stood at 11.0% and 5.5%, respectively, at the end of 2010 at the NLB Group level, while the proportion of deposits from banks stood at 1.4%.

 

Despite the extremely demanding conditions affecting the financial markets, NLB was the first bank in Slovenia to raise a new syndicated loan in 2010, in the amount of EUR 440 million with a maturity of three years. The transaction, organized by a consortium of 11 foreign banks, was aimed at refinancing and financing the NLB Groups operations.

In 2010, NLB also completed the issue of 7-year NLB26 bonds with an annual coupon rate of 6.25%. Proceeds of more than EUR 61.4 million, raised through the Bank's business network, were included in Tier II capital. The Bank offered all interested parties a new investment opportunity, while identifying an alternative method for raising capital. The bonds were listed on the securities market of the Ljubljana Stock Exchange after the conclusion of the public offering.

The NLB Group has worked for several years with multilateral financial institutions and development banks in securing sources of funding. In 2010, NLB raised funds at SID banka, the European Investment Bank (EIB) and at KfW in the total amount of EUR 256 million (EUR 176 million at SID banka, EUR 30 million at the EIB and EUR 50 million at KfW).NLB used the funds raised through credit lines at multilateral financial institutions and development banks to finance more than 420 projects in Slovenia in 2010. The funds were primarily used to purchase property, plant and equipment, land, intangible assets and operating assets.

Multilateral financial institutions, in particular the International Finance Corporation (IFC), the European Fund for Southeast Europe (EFSE) and SID banka, played a key role in financing Group companies in 2010. In an effort to harmonize the NLB Group, all borrowings by Group members on the international financial markets were centralized through NLB, which as parent bank coordinated and advised companies in their international on these markets.

Borrowings by NLB Group companies on the international financial markets reached EUR 67 million in 2010, broken down as follows: EUR 25 million from the IFB, EUR 17 million from SID banka and EUR 25 million from the EFSE. Funds raised through credit lines were used to finance SMEs. In the scope of borrowing from the EFSE, a subordinated loan in the amount of EUR 5 million was raised to improve the capital adequacy of NLB Montenegrobanka.

Group companies borrowed a total of EUR 217 million from commercial banks in 2010. Of the aforementioned amount, EUR 44 million in new funding was secured at commercial banks for NLB Group companies, while existing loans in the amount of EUR 173 million were rolled over in agreement with creditor banks.

Short-term bilateral loans from commercial banks represent the majority of sources of funding, together with credit lines from multilateral financial institutions for the financing of SMEs.

NLB Group
Annual Report 2010