2013 ANNUAL REPORT WorldReginfo - ff7c6b15-8550-4e1f-a05d-b57417ede920 WorldReginfo - ff7c6b15-8550-4e1f-a05d-b57417ede920 NLB, Ljubljana Number of branches 143 Number of employees 3.425 Market share (in %) 23,5 Number of clients 882.980 NLB Vita, Ljubljana Total assets (in EUR million) 9.507 Number of employees 40 Market share (in %) 7.4 Value of investments of long-term business funds 275 excluding own funds NLB Skladi, Ljubljana (in EUR million) Number of employees 29 Market share (in %) 23.9 Assets under management 352 (in EUR million) NLB Razvojna banka, Banja Luka NLB Banka, Tuzla Number of branches 68 38 Number of employees 488 442 Market share (in %) 18.5* 5.4** Number of clients 313,916 304,809 Total assets (in EUR million) 607 407 * Market share in the Republic of Srpska. ** Market share in the Federation of Bosnia and Herzegovina. NLB banka, Belgrade Number of branches 56 Number of employees 561 Market share (in %) 1.5 NLB Prishtina, Prishtina Number of clients 182,258 Number of branches 66 Total assets (in EUR million) 342 Number of employees 525 Market share (in %) 16.3 NLB Tutunska banka, Skopje Number of clients 226,713 Number of branches 51 Total assets (in EUR million) 464 Number of employees 777 Market share (in %) 16.5 NLB Nov penzionski fond, Skopje Number of clients 561,973 Number of employees 29 Total assets (in EUR million) 958 Market share of compulsory pension 47.5 insurance (in %) Market share of voluntary pension 33.6 insurance (in %) Net value of pension funds 205 (in EUR million) NLB Montenegrobanka, Podgorica Number of branches 17 Number of employees 320 Market share (in %) 17.7 Number of clients 77,399 Total assets (in EUR million) 507 WorldReginfo - ff7c6b15-8550-4e1f-a05d-b57417ede920 LIst OF AbbrEVIATIOns USED AFS - available for sale AQR - asset quality review BAMC - Bank Assets Management Company BAS - Bank Association of Slovenia BS - Bank of Slovenia CEO - chief executive officer CFO - chief financial officer CIR - cost to income ratio CMO - chief marketing officer COO - chief operating officer CRO - chief risk officer EBA - European Banking Authority EBRD - European Bank for Reconstruction and Development EC - European Commission ECB - European Central Bank EFSF - European Financial Stability Facility EMU - European Monetary Union ESM - European Stability Mechanism EU - European Union GDP - gross domestic product HICP - harmonised index of consumer prices ICAAP - internal capital adequacy assessment process IFI - international financial institutions IFRS - International Financial Reporting Standards ILO - International Labour Organization IMAD - Institute of Macroeconomic Analysis and Development IMF - International Monetary Fund JV - joint venture KDD - Central Securities Clearing Corporation KPI - key performance indicator LTD - loan to deposit ratio LTRO - long-term refinancing operations MF - Ministry of Finance MSE - micro and small-sized enterprises NPL - non-performing loan P&L - profit and loss account ROA - return on assets ROE - return on equity RS - Republic of Slovenia SEPA - Single Euro Payments Area SME - small and medium-sized enterprises SORS - Statistical Office of the Republic of Slovenia ZBan-1 - Banking Act ZPPOGD - Act Governing the Remuneration of Managers of Companies with Majority Ownership Held by the Republic of Slovenia or Self-Governing Local Communities ZUKSB - Act Defining the Measures of the Republic of Slovenia to Strengthen Bank Stability WorldReginfo - ff7c6b15-8550-4e1f-a05d-b57417ede920 TabLE OF CONTENTS Presentation ........................................................................................................................................... 2 BUSINESS REPORT ................................................................................................................................ 12 Macroeconomic environment ............................................................................................................... 14 Key events ........................................................................................................................................... 18 Statement by the Management Board of the NLB ................................................................................ 22 Report of the Supervisory Board of the NLB .......................................................................................... 27 Strategy ............................................................................................................................................... 32 Reorganisation and the NLB Transformation Programme ...................................................................... 34 Extraordinary measures to ensure the capital adequacy and state aid procedure ................................... 36 Overview of the financial performance of the NLB Group in 2013 ........................................................ 38 Retail banking in Slovenia .................................................................................................................... 46 Corporate banking in Slovenia ............................................................................................................. 49 Financial Markets ................................................................................................................................. 51 Core foreign markets ........................................................................................................................... 53 Non-core markets and activities ........................................................................................................... 55 Risk management ................................................................................................................................ 56 Funding and liquidity management ...................................................................................................... 60 Human resource management ............................................................................................................. 62 Information technology, process management and operations ............................................................. 66 Internal audit ....................................................................................................................................... 68 Compliance ......................................................................................................................................... 69 Corporate governance ......................................................................................................................... 70 FINANCIAL STATEMENTS .................................................................................................................... 82 1 WorldReginfo - ff7c6b15-8550-4e1f-a05d-b57417ede920 2013 Annual Report PrESENTATION The NLB Group is the largest Slovenian banking and financial group consisting of the NLB as the parent bank as well as another 8 banks and 36 companies as at 31/12/2013. It operates in 13 countries, covering 14 markets. TabLE 1: STRUCTURE OF THE NLB GROUP Core activities Non-core activities 7 banks 2 banks* 3 insurance companies 7 leasing companies 1 asset management company 9 factoring companies 5 companies performing other activities 11 companies performing other activities * Associates. The NLB Group’s most important activity is banking, complemented by some other financial activities, mainly insurance and asset management. FigURE 1: STRUCTURE OF TOTAL assETS OF THE NLB GROUP IN TErms OF CORE AND NON-CORE acTiviTIES See accounting disclosures under Item 5.12. From 2000 to 2008 the NLB Group focused its attention on expanding business in the SE European markets, followed by the harmonisation procedure in 2009 and an even more intensive consolidation procedure after 2011. To ensure long-term sustainable results, the NLB Group (for the first time in 2011 and again in 2013) defined the activities it considered core in the medium term, namely those where it wanted to develop its competitive position and improve its performance, while gradually withdrawing from other (non-core) activities. A clear definition of both enables the NLB Group to focus on the intrinsically different goals for both groups of activities and thus achieve better results. The classification of individual members between core and non-core is based on the following principles: • a realistic outlook to achieve a market position which places the member among leading providers in the relevant market o r segment, • the ability to sustainably ensure liquidity sources of the member on the market, not overly depending on the parent bank NLB, 2 WorldReginfo - ff7c6b15-8550-4e1f-a05d-b57417ede920 Business Report • the complementarity of products with the standard banking products and the possibility of the better servicing of clients, • market development potential and the possibility to create value and appropriate returns while assuming acceptable risks. Based on these principles, the core activities of the NLB Group mainly include banking, asset management as well as life and pension insurance. The key core market of the NLB Group is Slovenia as the domestic market of the NLB, where the NLB Group generates the bulk of its income. Other core markets include those where the Group is present with banking operations, namely: Bosnia and Herzegovina, Montenegro, Kosovo, Macedonia and Serbia. In these markets, the Group continues to search for synergies, along with the consolidation and streamlining of the operations