Nova Ljubljanska Banka Annual Report 2016

Plain-text annual report

Annual Report 2016 NLB Group Annual Report 2016 ЗаједноЗаедноSë bashkuSkupajZajednoTogetherЗаједноZajednoNLB Group Annual Report 2016 ЗаједноЗаедноSë bashkuSkupajZajednoTogetherЗаједноZajednoContents 6 Key Financial And Operating Data Chapter 1. Chapter 2. Chapter 3. Engaged Modern 10 Statement by the Management 20 Business Report Board of NLB 14 Report of the Supervisory Board of NLB 20 Key highlights of NLB Group 22 Overview of 2016 Results 28 NLB Group Strategy 32 Macroeconomic and Regulatory Environment Innovative 42 Retail Banking in Slovenia 54 Corporate and Investment Banking in Slovenia Chapter 4. Efficient 66 Core Foreign Markets 90 Financial Markets 100 Non-core Markets and Activities NLB Group 2016 Annual ReportChapter 5. Chapter 7. Chapter 9. Trustworthy Commited Professional 106 Risk Management 132 Overview of NLB Group’s 112 Human Resources Chapter 6. Digital 120 IT and Processing Operations Financial Performance 2016 176 Audited Financial Statements of NLB Group and NLB d.d. 144 Corporate Governance Chapter 8. Responsible 162 Events After the End of the 340 Regulatory Part 352 Risk and Capital Management 410 GRI Standards Disclosure for NLB 126 Internal Audit 2016 Financial Year 416 NLB Group directory 128 Compliance and Integrity 164 NLB Group Chart as at 31 December 2016 167 Organizational Structure of NLB as at 31 December 2016 168 Corporate and Social Responsibility NLB Group 2016 Annual ReportBosnia and Herzegovina NLB Banka, Banja Luka NLB Banka, Beograd NLB Banka, Podgorica 634 Total assets (in EUR million) 18.9% Market share3 by total assets 498 Total assets (in EUR million) 5.3% Market share4 by total assets Slovenia NLB, Ljubljana 113 Number of branches 700,917 Number of active clients 63.8 Result after tax (in EUR million) 8,778 Total assets (in EUR million) 23.7% Market share by total assets 60 Number of branches 209,254 Number of active clients 14.1 Result after tax (in EUR million) NLB Skladi, Ljubljana NLB Banka, Sarajevo 37 Number of branches 139,524 Number of active clients 5.4 Result after tax (in EUR million) 27.2% Market share1 (mutual funds) 1,035 Assets under management (in EUR million) 2.9 Result after tax (in EUR million) NLB Vita, Ljubljana 401 Assets of covered funds without own resources (in EUR million) 11.1% Market share 2 7.4 Result after tax (in EUR million) Serbia 31 Number of branches 133,095 Number of active clients 2.2 Result after tax (in EUR million) 276 Total assets (in EUR million) 1.0% Market share by total assets Macedonia NLB Banka, Skopje 51 Number of branches 1,153 Total assets (in EUR million) 370,842 Number of active clients 16.2% Market share by total assets 25.0 Result after tax (in EUR million) Montenegro 18 Number of branches 57,853 Number of active clients 5.3 Result after tax (in EUR million) NLB Banka, Prishtina Kosovo 45 Number of branches 185,315 Number of active clients 11.3 Result after tax (in EUR million) 473 Total assets (in EUR million) 12.5% Market share by total assets 516 Total assets (in EUR million) 14.9% Market share by total assets Note: The result after tax data in the ﬁgure above show NLB Group members’ standalone result and not their contribution to the consolidated result after tax.1. Market share of assets under management in mutual funds.2. Market share in traditional life insurances.3. Market share in the Republic of Srpska.4. Market share in the Federation of Bosnia and Herzegovina. NLB Skladi, Ljubljana NLB Banka, Sarajevo Slovenia NLB, Ljubljana 113 Number of branches 700,917 Number of active clients 63.8 Result after tax (in EUR million) 1,035 Assets under management (in EUR million) 2.9 Result after tax (in EUR million) 8,778 Total assets (in EUR million) 23.7% Market share by total assets 27.2% Market share1 (mutual funds) NLB Vita, Ljubljana 401 Assets of covered funds without own resources (in EUR million) 11.1% Market share 2 7.4 Result after tax (in EUR million) 634 Total assets (in EUR million) 18.9% Market share3 by total assets 498 Total assets (in EUR million) 5.3% Market share4 by total assets 60 Number of branches 209,254 Number of active clients 14.1 Result after tax (in EUR million) 37 Number of branches 139,524 Number of active clients 5.4 Result after tax (in EUR million) Bosnia and Herzegovina Serbia Montenegro NLB Banka, Banja Luka NLB Banka, Beograd NLB Banka, Podgorica 276 Total assets (in EUR million) 1.0% Market share by total assets 31 Number of branches 133,095 Number of active clients 2.2 Result after tax (in EUR million) 473 Total assets (in EUR million) 12.5% Market share by total assets 18 Number of branches 57,853 Number of active clients 5.3 Result after tax (in EUR million) Macedonia NLB Banka, Skopje 51 Number of branches 1,153 Total assets (in EUR million) 370,842 Number of active clients 16.2% Market share by total assets 25.0 Result after tax (in EUR million) Kosovo NLB Banka, Prishtina 45 Number of branches 185,315 Number of active clients 11.3 Result after tax (in EUR million) 516 Total assets (in EUR million) 14.9% Market share by total assets Note: The result after tax data in the ﬁgure above show NLB Group members’ standalone result and not their contribution to the consolidated result after tax.1. Market share of assets under management in mutual funds.2. Market share in traditional life insurances.3. Market share in the Republic of Srpska.4. Market share in the Federation of Bosnia and Herzegovina. 6 Table 1: Key financial caption for NLB Group and NLB 2016 2015 2014 NLB Group NLB NLB Group NLB NLB Group NLB Income statement indicators (in EUR million) Net interest income Net non-interest income Regular net non-interest income Total costs Provisions and impairments Net gains/losses from subsidiaries, associates and JV Result before tax Minority interest Result after tax Financial position statement indicators (in EUR million) Total assets Loans and advances to non-banking sector (net) Deposits from non-banking sector Equity Impairments of loans to non-banking sector Minority interest Total off-balance sheet items Key financial indicators a) Capital adequacy Total capital ratio Tier 1 ratio CET 1 ratio Total risk weighted assets (in EUR million) Risk weighted assets / total assets b) Asset quality NPL coverage ratio (Coverage of gross non- performing loans with impairments for all loans) NPL coverage ratio (Coverage of gross non-performing loans with impairments for non-performing loans) Non-performing loans (NPL) / total loans Net non-performing loans (NPL) / total net loans Non-performing exposure (NPE) - EBA Definition Credit impairments and provisions / risk weighted assets 317 158 145 290 61 5 131 6 110 12,039 6,997 9,439 1,495 -903 30 2,922 17.0% 17.0% 17.0% 7,862 65.3% 175 109 96 181 64 29 68 - 64 8,778 4,929 6,617 1,265 -505 - 2,502 23.4% 23.4% 23.4% 4,882 55.6% 340 143 150 298 83 4 107 3 92 11,822 7,088 9,026 1,423 -1,263 28 3,181 16.2% 16.2% 16.2% 7,927 67.1% 208 105 102 187 88 14 52 - 44 8,707 5,221 6,298 1,242 -695 - 2,779 22.6% 22.6% 22.6% 5,028 57.7% 330 181 146 304 141 3 69 3 62 11,909 7,415 8,949 1,343 -1,638 26 3,915 17.6% 17.6% 17.6% 7,038 59.1% 227 137 99 193 93 5 83 - 82 8,886 5,700 6,300 1,205 -998 - 3,607 22.7% 22.7% 22.7% 4,962 55.8% 76.1% 71.7% 72.2% 67.9% 68.7% 70.4% 64.6% 13.8% 5.4% 10.0% 0.3% 60.8% 11.9% 5.1% 8.5% 0.3% 62.8% 19.3% 8.3% 14.3% 0.6% 59.1% 16.5% 7.6% 12.1% 0.6% 61.7% 25.1% 10.7% 18.8% 1.7% 57.0% 21.2% 10.1% 15.6% 1.7% NLB Group 2016 Annual Report 7 c) Profitability Interest margin* Financial intermediation margin Return on equity before tax (ROE b.t.) Return on assets before tax (ROA b.t.) Return on equity after tax (ROE a.t.) Return on assets after tax (ROA a.t.) d) Business costs Operating costs / average total assets Costs / net income (CIR) Costs w/o restructuring costs / regular net income (CIR normalized) Total costs / risk weighted assets Total costs / total assets e) Liquidity Liquidity assets / short-term financial liabilities to non-banking sector Liquidity assets / average total assets f) Other Market share in terms of total assets Loans to non-banking sector / deposits from non-banking sector (LTD)** Revenues / risk weighted assets (RWA) *** Key indicators per share Shareholders Shares Book value (in EUR) International credit ratings S&P Fitch Employees 2016 2015 2014 NLB Group NLB NLB Group NLB NLB Group NLB 2.7% 4.0% 8.6% 1.1% 7.4% 0.9% 2.4% 60.9% 61.8% 3.7% 2.4% 55.7% 40.7% - 74.2% 5.9% 2.0% 3.6% 5.3% 0.8% 5.0% 0.7% 2.1% 57.9% 59.2% 3.7% 2.1% 63.3% 45.6% 23.7% 74.5% 6.1% 2.9% 4.1% 7.6% 0.9% 6.6% 0.8% 2.5% 61.6% 60.0% 3.8% 2.5% 57.3% 39.3% - 75.1% 6.2% 2.4% 3.8% 4.2% 0.6% 3.6% 0.5% 2.2% 57.2% 56.8% 3.7% 2.2% 61.0% 41.4% 23.3% 78.0% 6.4% 2.7% 4.2% 5.2% 0.6% 4.8% 0.5% 2.5% 59.4% 62.1% 4.3% 2.5% 57.2% 44.1% - 75.9% 6.8% 2.5% 4.1% 7.2% 0.9% 7.0% 0.9% 2.1% 52.4% 56.1% 3.9% 2.2% 63.6% 44.0% 22.9% 80.7% 6.7% - - 1 20,000,000 - - 1 20,000,000 - - 1 20,000,000 74.8 63.2 71.1 62.1 67.2 60.3 BB- BB- BB- B+ BB- BB- Number of employees 6,175 2,885 6,372 3,028 6,448 3,093 * Calculated on the basis of average total assets ** Without BAMC bond *** Recurring income only NLB Group 2016 Annual Report Chapter 1. Engaged Chapter 1 АнгажираниAngažovaniTë Angazhuar AngažovaniAngažovaniАнгажованиZavzetiEngaged Chapter 1 АнгажираниAngažovaniTë Angazhuar AngažovaniAngažovaniАнгажованиZavzetiChapter 1. 1: Statement by the Management Board of NLB A clear path going forward In 2016 NLB Group (hereinafter: the Group) continued to deliver strong performance. We defined and initiated implementation of our new comprehensive strategy. We progressed in developing new solutions, offered improved user experience, and eased accessibility of our services and advisory capacity to our clients. We remained committed to our customers, employees, shareholders, and society as well. The Group’s 12 consecutive positive quarters, and the third solidly profitable business year in a row had an improving trend of both profitability and business operations that underscored the fact that 2016 confirmed our powerful presence in the South Eastern Europe (SEE) region. This year’s highlights include: further improvements in our services and market position; a motivational year introducing contemporary human talent management practices and processes; and a breakthrough effort in setting the new business and information technology (IT) strategy through 2020. The banking system in and beyond the Eurozone in 2016 faced record low interest rates and general overliquidity, causing a significant impact on business performance of commercial banks. The combination of increasing regulatory pressure, strong NLB Group 2016 Annual Report11 competition on relevant markets for the Group, still relatively modest loan demand, and compliance with strict commitments to the European Commission (EC) represented a challenging period. Despite this, the Group worked to successfully overcome these developments, and the rating agencies acknowledged this by upgrading of our rating and/or the improved outlook. Our continuous focus on intensive customer relationships was reflected in NLB Group’s solid commercial and financial performance. The group’s net profit amounted to EUR 110.0 million, the highest since 2007. We accomplished this through decisive implementation of a transformative programme, lasting seven years. Nowadays we have been proactively seeking new business opportunities. We have once again taken an innovative track (as the first on the market) and introduced new services, but have also successfully resolved significant legacy challenges by continuing the enhancement of risk management practices/processes, and very decisively applying the entire toolbox of reducing non-performing and non-core exposures/portfolios/entities. In doing so we have set very firm foundations for a sustainably profitable and value-creating future for our stakeholders. All core banking members in and outside Slovenia showed profitable and improving operations in 2016, whereby subsidiary banks posted EUR 57.7 million in net profit, thus contributing an increasingly important part (52.4%) to the Group’s results. Some Group members delivered a record-setting performance. We enjoyed high brand recognition, trust, and reputation on all of our key markets. We are strengthening our regional presence with dynamic pervasiveness on SEE markets as a distinctive advantage for the future. We have been further strengthening our market position with a special focus on upgrading client experience and satisfaction, improvement of services, tailor-made solutions, proactive sales, and increasing emphasis on online banking channels and digitalisation. In 2016 NLB was awarded the “Top Employer” certificate by an independent Dutch institute. The award honors innovations and improvements in the field of human resources processes. We committed to develop highly-skilled, professional, and engaged employees. Our remarkable co-workers ensure that we will be able to manage the challenges of the future. We also continued to responsibly and comprehensively comply with commitments to the European Commission regarding State Aid. Future economic and geopolitical changes will create new challenges, but also additional opportunities for our further growth. Technological development and digitalisation will considerably reshape banking and other businesses. We believe we are well-focused and positioned to cope with it in our new strategy. One of our biggest advantages is that we understand key trends and are committed to the future. We are satisfied with NLB Group’s achievements in 2016. Our clear vision, financial performance, and strong capital base position us well for future challenges. Our strategic direction is concrete and comprehensive, and will be supported by taking important steps to transform our organisation and behaviour to foster a performance culture. We develop our position as an innovative bank, creating simple customer-oriented solutions with an exclusive strategic focus on countries in SEE. We will continuously positively contribute to the well-being of our stakeholders and society in our markets with our commitment to responsibility and sustainability. Now and in the future. László Pelle Member of the Management Board Archibald Kremser Member of the Management Board Andreas Burkhardt Member of the Management Board Blaž Brodnjak Chief Executive Officer NLB Group 2016 Annual ReportBlaž Brodnjak Chief Executive Officer A ndrea s Bur khar dt Member of the Management Board Arc hibal d Kremser Member of the Management Board Lás z ló Pelle Member of the Management Board Chapter 1. 2: Report of the Supervisory Board of NLB Dedicated to oversight, detailed monitoring, and steering of the Bank towards effective implementation of its’ transformative strategy and clear value generation-focused future. Commercial banking industry has experienced a reshaping of the industry faster than anyone would have imagined a few years ago. A negative interest rate environment, changing and ever more demanding regulatory requirements, stiff competition, general over-liquidity, and increased commoditisation of core banking products require an innovative and focused approach towards the added-value banking services NLB Group can offer to its wide regional client base. We on the NLB Supervisory Board are convinced that step-by-step, the Group will achieve its goals over the next five years’ time. There are no shortcuts, but the combination of remaining committed to persistency, a clear vision, and hard work should and will yield positive results. NLB Group 2016 Annual ReportPrimož K arpe Chairman of the Supervisory Board 15 2016 has been an active year for NLB’s Supervisory Board NLB’s Supervisory Board monitors and supervises the management and operations of the Group and in so doing, it resolves to utilise uncompromised principles of professionalism and expertise on one side, as well as a strong dedication to integrity, ethics, and honesty on the other. The Supervisory Board represents a balanced, complementary team of experts focused on the effectiveness of performing its core functions. The delivery of critical and assertive opinions has been and will remain at the core of our decision-making principles through the expected engaged participation of all the members at all times. Throughout the year, the Supervisory Board maintained a well-balanced professional relationship with the Management Board, and enjoyed timely, comprehensive, and data-supported information inputs from the latter, enabling the Supervisory Board to adopt all its decisions in line with the professional interests of the Bank, adhering at all times to banking regulations and its statutory powers. The Supervisory Board has assessed the functioning of the Management Board in 2016 as successful. In the framework of operations, 2016 was indeed a busy year from the corporate governance perspective, with the Supervisory Board holding 10 regular and eight correspondence sessions. However, I personally consider that as of lesser importance. The true value of active supervision is at the end reflected NLB Group 2016 Annual ReportIn accordance with article 34 of the Articles of Association of NLB d.d., the Supervisory Board verified the submitted Annual Report and a proposal for use of distributable profit, and shall give a report for the General Meeting. The Supervisory Board had no objections about the report of the audit company Ernst & Young, Ljubljana. Following a careful examination of the Annual Report for the Business Year 2016, the Supervisory Board had no objections, and unanimously approved it. Yours truly, The Supervisory Board of NLB d.d. Primož Karpe Chairman of the Supervisory Board 16 only through a set of milestones, which we targeted and also achieved. Apart from surpassing 2016 budgeted financial performance targets, the Group has adopted a new transformational Strategy for the 2016-2020 period, a positive risk/return that is balanced, and as well with concrete operational project plans supported by the business development roadmap of the Group that is focused on the delivery of future results and targets. The projected targets reflect a commitment to achieve business excellence, and are to be shared among all the Group’s stakeholders, in various output formats, more specifically in a commitment to: the satisfaction of our clients, to an increase in employee satisfaction, to sustainable and long-term profit growth and a dividend payout to the shareholders, and to the society in which we operate. Throughout the year, we have been challenged by a myriad of operational decisions that needed to be adopted, starting from the long-term stabilisation and strengthening of the Management Board, strategic initiatives in the field of digital transformation, truly active reductions of the NPL portfolio, various risk policy adoptions, as well as the adoption of the 2017 budget. Finally, NLB Supervisory Board also adopted information on the NLB d.d.’s sales process, which was initiated and led by the Slovenian Sovereign Holding as the sole shareholder. I am personally proud of what the Group achieved in 2016, but I’m also well aware that there is absolutely no room for complacency if the trend of the Group’s value growth is to continue. Pursuant to the second paragraph of Article 282 of the Companies Act, the Supervisory Board has compiled this written report on the findings of the verification of the 2016 Annual Report of NLB Group, and of the proposal submitted by the Management Board to use the distributable profit for the general meeting with the aim of accurately and authentically presenting the activities of the Supervisory Board during the year. In 2016 The Supervisory Board received expert assistance from its four operational committees, namely the: Audit, Risk, Nomination, and Remuneration Committees. Review and approval of the 2016 Annual Report On 7 April 2017 the Management Board of NLB d.d. submitted the 2016 Annual Report to the Supervisory Board, including the Business Report with audited financial statements of NLB, the audited financial statements of NLB, the audited consolidated financial statements of NLB Group and the auditor’s opinion. According to the auditor, the financial statements with notes give a true and fair view of the financial position of the Bank and NLB Group as at 31 December 2016 and of their financial performance and their cash flows for the year then ended in accordance with the International Financial Reporting Standards as adopted by the European Union. It was also established on the basis of the assessment of the Business Report that the information contained in the business section of the Annual Report is consistent with the audited financial statements of the Bank and NLB Group. NLB Group 2016 Annual ReportModern Chapter 2 СавремениСовремениSavremeniBashkëkohoreSodobniSavremeniSavremeniModern Chapter 2 СавремениСовремениSavremeniBashkëkohoreSodobniSavremeniSavremeniChapter 2. 1: Key highlights of NLB Group NLB Group is the largest banking and financial group in Slovenia with a strategic focus on selected markets in SEE. It covers markets with a population of approximately 17.4 million people. NLB Group (hereinafter: the Group) is comprised of NLB d.d. (hereinafter: NLB or the Bank) as the main entity in Slovenia, six subsidiary banks in SEE, several companies for ancillary services (asset management, insurance, real estate management, etc.), and a limited number of non-core subsidiaries in a controlled wind-down. NLB is 100% owned by the Republic of Slovenia (RoS). NLB Group 2016 Annual Report21 The largest banking and financial group in Slovenia Proven track record of stable and Demonstrated progress profitable Group operations with asset quality • The largest bank in Slovenia with 113 branches and a 24% market share by total assets • Increased profitability for a third • Substantially improved structure of the consecutive year with 12 consecutive positive quarters credit portfolio with new NPL formation at consistently low levels • Very strong retail deposit-taking • 2016 ROE of 7.4% at a CET 1 • Non-performing exposures (NPE) as franchise with a market share of 30.4% ratio of 17% • Market leader across banking products and flagship provider of asset management and life insurance products • Revenue evolution driven by stable net interest margin and resilient fee income • Successful cost-cutting and very defined by European Banking Authority (EBA) significantly reduced from 14.3% in 2015 to 10.0% in 2016 while a coverage ratio remained very strong at 64.6% • Rating improvement in 2016; upgrade low realised cost of risk • Further decisive and comprehensive from B+ to BB- by Fitch, outlook changed to positive by Standard and Poorʼs • Strong increase in contribution of international operations to revenue and profit growth Leading position in selected SEE markets with significant growth potential Self funded, and well capitalised • SEE markets recording solid GDP growth above the Eurozone average • Profitable and independent operations on six markets in five countries (Macedonia, Kosovo, two entities in Bosnia and Herzegovina, Montenegro, and Serbia), with market shares on four markets exceeding 10% • 242 branches (in SEE) and 1.1 million active clients of SEE banking members • Independent, well capitalised, and self-funded subsidiaries • Strong dividend upflow payout from core subsidiaries to parent bank franchise, supporting attractive future dividend payout • Strong liquidity position, stable and diversified funding structure with loan-to-deposit ratio (LTD) of 74.2% • Robust Common Equity Tier 1 (CET 1) ratio of 17.0% and strong capital generation supporting growth in dividends • 100% of 2015 net profit of the Bank paid out as a dividend to the RoS in 2016; 2016 net profit to be paid out in 2017 organic and inorganic NPE reduction strategy • Disposal of EUR 597 million non-performing credit portfolio in the last 12 months with a portfolio sale of non-performing portfolio and other measures • Determined exit from non-core Group members and non-core loan portfolios Clear path going forward • The new strategy foresees enhancement of the Bank’s commercial proposition, rightsizing of costs, and increased digitalization. Implementation expected to drive significant efficiency and profitability improvements • Mid-term financial targets include ROE > 10%, CIR at approximately 50%, NPE ratio < 5%, and a 70% dividend payout ratio of the Group profit NLB Group 2016 Annual ReportChapter 2. 2: Overview of 2016 Results NLB Group increased its profit after NPL levels were strongly reduced tax for the third consecutive year to by 31%, thus, the NPL ratio came EUR 110 million, up 20% from 2015 down to 13.8% (from 19.3% in (EUR 91.9 million) in a challenging 2015); the NPE ratio is already at interest rate environment. 10% - very low new NPL formation from new business (2014 onwards). • All core subsidiaries solidly profitable – some with record results The Bank remains a stronghold of • Non-core related losses substantially reduced • Strong loan growth in key business activities profitability with the core foreign banks catching up rapidly, and collectively coming almost even in terms of their contribution to the Group profits. Liquidity and capital ratios are very strong and a solid basis for • Continued improvement on costs further growth – fully anticipating a 100% (EUR 63.8 million) of the Bank profit dividend payout to shareholders. ROE stands at 7.4% whereas the after tax RORAC (on a normalised capital requirement of 14.75% of RWA) stands at 9.7%. NLB Group 2016 Annual Report 23 n o i l l i m R U E n i +10 +58 ROE 4.8% 62 2015 impact 2016 impact 6.6% +6 92 -5 +23 +8 +15 -38 -7 -23 ROE 7.4% 110 ∆ ∆ ∆ ∆ 2014 PAT Impairments Net interest income Non interest income ∆ OpEx ∆ Other / Tax ∆ ∆ ∆ ∆ 2015 PAT Impairments Net interest income Non interest income ∆ OpEx ∆ Other / Tax ∆ 2016 PAT Figure 1: Three consecutive years of increased profitability (in EUR million) International rating agencies have acknowledged strong progress by upgrading the Bank to BB- (S&P outlook Positive). NLB Group has defined a new medium- term strategy to reinforce its regional specialist leadership position and ambitious plans for further profitable growth based on better services to its clients by leveraging on digital channels, improved efficiency, and enhanced client experience, Group synergies, and the dedication to be a regional solutions innovation champion – aiming to achieve above 10% ROE, a CIR of 50%, while maintaining a strong dividend flow of approximately 70% of the Group profits. NLB Group 2016 Annual Report 24 Profitable core part of the Group, Core markets and activities: 1 improved operations in non-core members The Bank contributed the largest share to the Group’s positive performance with a net profit of EUR 65.6 million, other banks in SEE markets EUR 57.7 million, while non-core members contributed negatively, but with improving trends. a significant improvement in operations in strategic foreign markets In 2016, the main commercial activities of the Group, comprising: Corporate banking – Slovenia,2 Retail banking – Slovenia and Strategic foreign markets, collectively showed positive evolution with profit before tax increasing from EUR 134.8 million to EUR 151.6 million normalised by the non-recurring effects of divesting a larger Slovenian non-performing portfolio sale. Both the retail and corporate segments in Slovenia show solid performance, with the retail segment in particular – normalised for the non-performing portfolio sale – revealing healthy growth with a positive outlook for the future. The highest growth in profitability resulted from the strong development of strategic foreign markets with record results in Macedonia and 1 Corporate banking in Slovenia, Retail banking in Slovenia, Financial markets in Slovenia, Foreign strategic markets 2 Corporate banking in Slovenia includes Key, Mid and Small Corporate and Restructuring and Workout 67.6 60.9 51.5 42.9* 13.4 29.5 38.7 41.0* 44.7 38.1 9.5 31.5 -18.9 7.0 -11.9* -18.9 -17.2 Corporate banking in Slovenia Retail banking in Slovenia Strategic foreign markets Financial markets in Slovenia Non-core markets and activities Other activities -70.1 2015 2016 Non-performing portfolio sale effects * Normalised for non-performing sale effects Figure 2: Profit before tax of NLB Group by segments (in EUR million) NLB Group 2016 Annual Report 25 3.98% 2.59% 2.03% 2016 3.06% 2.47% 2.37% 3.64% 2.70% 2.33% 2014 2015 NIM (NLB d.d.) NIM (NLB Group) NIM (NLB Group core foreign banks) Figure 3: Net interest margin (in %) EUR 24 million (of which approximately EUR 20 million is in non-core subsidiaries). In addition, the result of the segment was burdened by EUR 7 million effect of the non-performing portfolio sale. The decline in the interest margin in Slovenia and the euro area was partly compensated by the improved margins in SEE markets Other activities Other activities include categories in the Bank whose operating results cannot be allocated to individual segments, restructuring costs, and expenses from the vacant business premises. In 2016, the segment was burdened by the HR provisions in the Bank for strategy implementation in the amount of EUR 9.4 million and other restructuring charges in the amount of approximately EUR 7 million on top of the regular contributions to the European Single Resolution Fund (SRF) and Slovenian Deposit Guarantee Scheme (DGS) payments for a total amount of EUR 8.5 million. The non-recurring effect of the Visa EU share transaction, amounting to EUR 7.8 million, increased the result of the segment. The net interest margin (NIM) on the Group level decreased from 2.70% to 2.59% YoY, mostly as a result of the rapidly falling market interest rates in international bond markets and ongoing repricing of the securities investment book, respectively, and the very competitive environment of the Slovenian banking market which in the corporate segment is still in a deleveraging process. However, a slight reversal of this trend occurred towards the end of 2016. Retail lending growth has especially picked up in Slovenia, due to the improved macro environment helping to stabilise margins in this segment. Foreign strategic subsidiaries still showed growth in margins thanks to the increased efforts to manage the cost of funding and the strong performance of higher yielding activities in consumer lending throughout the region. the strong performance of the entities in Bosnia and Herzegovina and Kosovo. The solid growth of retail lending with still-attractive margins was recorded in all markets, providing support for implementation of the strategy. The financial markets segment reflects the rapid decline in yields on investments in securities which get reinvested, and so are repriced over a 3–4 year cycle. In addition, the higher yielding bonds received in 2013 as compensation for the transfers to the Bank Asset Management Company (BAMC; the Slovenian ‘bad bank’) matured (EUR 300 million as at end of 2015, the rest with the end of 2016). With the Bank maintaining a conservative investment profile in mostly Sovereigns and Financial Institutions, yields on reinvestments have considerably declined in recent years, including 2016. However, a slight reversal of this trend was seen towards the end of 2016. Non-core markets and activities: a controlled wind down The process of an intensive reduction in non-core members and business activities continued successfully throughout the year. In most of the remaining non-core members, liquidation processes were initiated in 2016 in compliance with the EC stipulations. Nonetheless, collection activities from all these entities continue with full dedication. The loss of this segment was substantially lower compared to 2015 thanks to the much strengthened collection ability, and already quite high coverage ratios. However, the segment still accounts for a sizable cost base of some NLB Group 2016 Annual Report26 CIR normalised CIR 62.1% 59.4% 303.5 35.8 104.8 60.0% 61.6% 61.8% 60.9% -1.2% 297.8 -2.8% 289.5 31.9 102.8 28.3 95.8 162.9 163.2 165.4 Depreciation and amortisation Other general administrative costs Employee costs The highest growth in profitability resulted from the strong development of strategic foreign markets with record results in Macedonia and the strong performance of the entities in Bosnia and Herzegovina and Kosovo. 2014 2015 2016 Figure 4: Total costs of NLB Group (in EUR million) Cost optimisation is one of the important pillars of improved profitability Costs continue to be a focus of management attention. Costs declined overall by 3% YoY in 2016. Special attention was given in 2016 to general and administrative expenses with substantial savings achieved (-7% or EUR 7.0 million YoY). The cost-reduction trend is present in most members of the Group, especially the non-strategic ones. Employee costs were higher mainly due to the reintroduced payment of supplementary pension insurance for employees, the higher holiday allowance paid in the Bank, and one-off costs incurred with HR redundancies in NLB Banka Beograd for a total amount of EUR 0.9 million. The Group also created provisions totalling EUR 10.6 million in anticipation of future HR redundancies envisaged in Slovenia (shown in ‘Other Provisions’ in the Financial Statements). As a result, the cost-to-income ratio (CIR) amounted to 60.9%, namely a slight improvement (0.8 percentage point) compared to 2015. Efficient and proactive risk management of operations 2016 was an exceptional year due to the decrease in the volume of NPLs by more than 30% to just below EUR 1.3 billion (2015: EUR 1.9 billion) – a reduction of the NPL ratio to 13.8% (2015: 19.3%), while the internationally more comparable NPE ratio (based on EBA guidelines) already dropped to 10% (2015: 14.3%). This strong performance in reducing NPLs was enabled by the strong results in collection and the continued divestment of exposures at the asset and portfolio level. The Group Real Estate Management function (GREAM) continues to be an important facilitator/back-stop investor/ NLB Group 2016 Annual Report27 17.0% Strong capital ratio (CET 1) 7.4% Group ROE 9.7% normalised after-tax Group RORAC EUR 4.9 billion of unencumbered liquidity reserves in cash and securities Strong liquidity and capital position The Group ended 2016 with a very strong capital ratio (CET 1) of 17.0% – this figure already assumes the envisaged dividend payout of EUR 63.8 million (100% of the 2016 result of the Bank and 58% of the Group result) to the shareholders, and is still well above regulatory requirements. The Group ROE stands at 7.4%, while the normalised after-tax Group RORAC (calculated on 14.75% of RWAs) stands at 9.7%. Liquidity remains extremely strong, with sizable amounts (EUR 4.9 billion) of unencumbered liquidity reserves in cash and securities. Consequently, attention is placed on the structure and concentration, as well as the yield generated from liquidity reserves. The Group’s exposure to interest rate risk is within the targeted, low-risk appetite profile. asset manager for real estate in foreclosures, respectively, transacting on exposures backed up with real estate collateral, and holds approximately EUR 128 million in foreclosed assets under professional, dedicated real estate management. Coverage ratios were further improved to 64.6% (impairments for NPL portfolio/ NPL portfolio stock, 2015: 62.8%) and 76.1% (total impairments/NPL portfolio stock, 2015: 72.2%). In 2016, the Group saw the conclusion of a benchmark sale of part of the non- performing portfolio (non-performing portfolio sale) of EUR 500 million in gross exposures – reducing NPL balances by EUR 233 million (the difference of having already been taken off of the balance sheet). The transaction resulted in realising a one-off negative effect on the profit and loss account in the amount of EUR 29.9 million, of which minus EUR 4.1 million was shown in interest income. This effect can largely be attributed to the difference in external investors’ yield expectations compared to those of the Bank. New production since 2014 has been underwritten according to the much improved credit standards, as evidenced by the NPL formation from these vintages being cumulatively very low. NLB Group 2016 Annual ReportChapter 2. 3: NLB Group Strategy A clear strategy to address current and future challenges The Group has been successfully Mission, values, and the Group vision implementing necessary restructuring measures over the last three years, thereby stabilising its business and returning to profit in all of its core markets. Furthermore, after years of turmoil, the Group is facing more benign macroeconomic conditions across SEE markets and improving banking sector performance. Nevertheless, the Group is fully conscious of future challenges to sustain/further enhance its profitability and achieve growth. To address these challenges, the Group has reconfirmed its mission and values, and adopted a new comprehensive strategy. The Group is committed to developing a culture of client focus, risk awareness, integrity, efficient organisation, and social responsibility. The trust of the Group’s clients, employees, shareholders, and the society in which it works is seen by the Group as a profound responsibility. The Group also strives to honour this trust by working together with its stakeholders for positive change, mutual benefit, and growth. By incorporating the Group’s values into its activities, NLB aims to contribute to positive change in its environment. NLB Group 2016 Annual Report29 The Group defines its key values as follows: Strategy of the Group through 2020 Optimise client offering Responsibility towards clients, employees, and the social environment A clear path going forward The Group’s new strategy puts forward strategic initiatives with short- and medium-term impact that aim to modernise and improve the Group’s operations, enhance revenues, reduce costs, and improve its growth prospects. Key priorities of the Group’s new strategy are as follows: • Through pricing optimisation, list price levels will be aligned with product value, pricing levels will be differentiated, and price realisation will be improved • Improvements to the Group’s customer value proposition and approach to sales should develop, bundle, and combine products and services to boost lending across all segments Commitment to deliver on promises and objectives Innovation for customers • Support to large corporate clients, Open communication and cooperation • An omnichannel product distribution initiative focuses on customer activities enabled across multiple digital and traditional channels in order to reduce costs by encouraging excellent-user-experience-based migration to lower cost remote channels requiring financial services across SEE, will be significantly enhanced • Focus on fee-based products will be intensified including the exploration of additional asset management and insurance products sales within the Group Seeking win-win solutions in its activities Simplicity champion Efficiency in the fulfilment of its commitments Vision: The Group’s 2020 Vision is to become innovative bank creating simple customer-oriented solutions with an exclusive strategic focus on Slovenia and countries in SEE. • Partnership programmes are intended to be implemented in order to establish impactful and long-standing partnerships, which should strengthen customer relationships by creating additional products and services for customers • End-to-end customer solutions will differentiate the Bank from its competition by increasing the Bank cross-selling potential, and transforming it from a stand-alone product provider to a platform offering comprehensive solutions within an ecosystem of services • Stricter procurement practices, efficiency improvements in facility management, and other cost rationalisation measures should optimise the operations of the Group • Redesigning of end-to-end processes and elimination of manual workload through automation of back office activities will simplify and appropriately scale the Group’s operations • Transformation and modernisation of the Group’s IT operations will allow IT to more effectively support business initiatives within the Group’s overall strategy NLB Group 2016 Annual Report 30 Smart banking Medium-term strategic and financial targets • Pricing incentives, improvements to the client’s digital experience, and a focus on advisory rather than transaction services in branches will promote customer migration to digital channels • Through effective steering of sales tasks, revisions to incentives and profitability targets for sales staff, staff-wide trainings and knowledge-sharing programs, the sales processes of the Group will be enhanced • By extracting value-creating insights derived from customer data, more targeted cross-selling, up-selling, and customer acquisition will be enabled Measured risk-taking • Improvements to risk governance, risk modelling, collection efficiency, and credit processes will accelerate and enhance decision-making in risk-taking, thereby improving customer experience Engaged employees • Fostering a cooperative and engaging working environment should better motivate the talents and stimulate their participation in the Group’s evolution • Skills and capabilities of the talents will be upgraded • A culture of cooperation and collaboration will be promoted across the Group Delivering growth, sustainable returns, and attractive dividend payout Based on the above-mentioned measures and improvement potential, the Group’s management team set the following medium-term financial targets: > 2.7% Net interest margin < 95% Loans-to-deposits ratio ~ 16% Total capital ratio ~ 50% CIR < 100 bps Cost of risk < 5% NPE ratio > 10% ROE > 70% Dividend payout (as a percentage of the Group profits) 31 The future is digital. That’s why we have renewed the strategy of NLB Group – to improve customer experience, optimise our range of products, to simplify the Bank’s operations, and enhance its distribution channels and capabilities. NLB Group – to improve customer experience, optimise our range of Luka Repanšek General Manager, Strategy and Business Development “ The world of banking is changing rapidly. We are faced with an environment of ever-increasing competition, low products, to simplify the Bank’s interest rates, and more demanding operations, and enhance its distribution and knowledgeable customers. Our channels and capabilities. In addition customers’ needs and preferences to supporting target business for digital channels on the one hand, improvements, NLB aspires for a and regulatory interventions and leaner, more agile, and cost-effective high costs of operations on the other, IT systems architecture to be able to challenge us to change our mind-set. better respond to digital challenges The future is digital. That’s why we of the future banking. Together we have renewed the strategy of are committed to that future. NLB Group 2016 Annual ReportChapter 2. 4: Macroeconomic and Regulatory Environment Following a prolonged period of disinflationary pressure, weak fundamental data, extraordinary monetary policy, and depressed expectations, global activity improved in the second half of the year. The global economy remained unwavering in the face of events that carried with them considerable potential for market disruption throughout the year. From terrorist attacks, worries regarding China’s economy, Europe’s banking system, Britain’s referendum vote, the United States (US) presidential election, and Italy’s referendum in December, 2016 has certainly been turbulent. The assurance of central bank response rescuing markets in case of elevated instability calmed market participants, and resulted in surprisingly muted reactions to the significant events that occurred. Though it could also be argued that following the steady stream of potentially disruptive events in past years, markets have grown somewhat accustomed, almost complacent, to the intensive media coverage that usually accompanies them. Against this turbulent background, the macroeconomic picture in the US NLB Group 2016 Annual Report33 improved markedly by the end of the year, and resulted in another federal funds rate increase by the Federal Reserve. Towards the end of the year a distinct uptick in inflationary dynamics and macroeconomic expectations occurred buoyed by promises of fiscal spending, an output cut agreement amongst energy producers, and rising commodity prices. The improved inflation outlook together with expectations of an acceleration of rate increases in the US, and an improving macroeconomic picture, resulted in a market euphoria that lasted through the remainder of the year. With continuing support from the European Central Bank’s (ECB) monetary policies, which remained accommodative and were twice expanded in the year, the Euro area’s economy expanded by 1.7% in 2016. Economic growth was supported by improved domestic demand, as continuing labour market improvement, the unemployment rate fell to a five-year low, and resilient consumer confidence, led to robust private consumption growth in spite of rising uncertainties within the region. Monetary policy measures from the ECB, with support from global developments, resulted in improving inflationary dynamics and an acceleration of credit growth dynamics in the region. With expectations that monetary policy will remain accommodative, the macroeconomic outlook for the Euro area remains positive. Positive global inflationary dynamics are expected to continue into 2017, supported by elevated energy costs, fiscal spending, and an improving macroeconomic picture. Signals from the major central banks indicating that the era of extraordinary measures may slowly be coming to an end, and the prospect of significant fiscal policy stimulus in the US, should be supportive of an improved rate and yield environment. There can be no denying that the baseline macroeconomic outlook has improved, however, simultaneously numerous sources of potentially disruptive risk have arisen, among them: growing political risks in Europe, together with Britain’s departure proceedings; significant uncertainty regarding US policy; pressure on emerging markets from rising interest rates; and growing geopolitical tensions. The aforementioned downside risks could potentially lead to a reversal of the positive trends from 2016 and result in a continuation of the low rate environment, should they materialise. Slovenia Slovenia’s economy continued expanding at a steady pace throughout the year, achieving economic growth of 2.5%. The economic revival continued building momentum throughout the year, with several key metrics showing considerable progress. Industrial production expanded by 6.6%, among the fastest expansions in the Euro area, with manufacturing again contributing significantly to economic growth. Bolstered by the recovering labour market, LFS unemployment levels decreased by 1.1 percentage points to 7.9%, improved consumer sentiment, and another year of positive economic progress, private consumption growth accelerated to 2.8% – an increase of 2.3 percentage points when compared with 2015. The year also marked the first time since mid 2012 that the retail sales index expanded above 2010 levels. Trade dynamics remained supportive through the year, decelerating only slightly on a yearly basis. After recording deflation in 2015, consumer prices remained negative, measuring -0.2%. The year also marked the first decrease of Slovenia’s government debt levels as a percentage of gross domestic product (GDP) since the start of the global financial crisis in 2008, while the government deficit further decreased to 82.6% of GDP, as at the third quarter. Following a credit rating upgrade from Fitch, Slovenia now enjoys an A-level credit rating from two of the three major rating agencies, while remaining one notch below A with a positive outlook from Moody’s. The prospect of a continued recovery in the country’s main trading partners, and early signs of a revival for the construction sector means the outlook for the country remains positive, with the potential for further economic acceleration in the coming year. Banking System in Slovenia The profitability of Slovenia’s banking system expanded in the year, achieving an aggregate profit of EUR 344.3 million, corresponding to a return on equity of 8.3%. In spite of falling interest income, the banking system achieved operating profit growth in the year, while falling reservation requirements added to the system’s profitability. Considerable progress with the credit portfolio cleanup was achieved in the year, with non-performing loans (NPLs) decreasing to 6.5% as of November, a drop of 3.4 percentage points. Bolstered by the pickup of private consumption and the nascent revival of the real estate market, household loan growth accelerated from 1.2% in 2015, to 4.6%. The corporate loan portfolio continued contracting, ending the year NLB Group 2016 Annual Report34 Table 2: Movement of key macroeconomic indicators in Slovenia and the Economic and Monetary Union 2016 2015 2014 2013 2012 2.5 -0.2 7.9 (2) 6.7 (1) 82.6 (2) -1.6 1.7 0.2 10.0 3.4 (1) 90.1 (2) -1.8 2.3 -0.8 9.0 5.2 83.1 -2.7 2.0 0.0 10.9 3.1 90.4 -2.1 3.1 0.4 9.7 6.2 80.9 -5.0 1.2 0.4 11.6 2.4 92.0 -2.6 -1.1 1.9 10.1 4.8 71.0 -15.0 -0.3 1.3 12.0 2.2 91.3 -3.0 -2.7 2.8 8.9 2.6 53.9 -4.1 -0.9 2.5 11.4 1.4 89.5 -3.6 Slovenia GDP (real growth in %) Average annual inflation rate - HICP (in %) Surveyed unemployment rate - LFS (in %) Current account of balance of payments (% of GDP) Public debt (% of GDP) Budgetery deficit/surplus (% of GDP) Euro-area GDP (real growth in %) Average annual inflation rate - HICP (in %) Surveyed unemployment rate - LFS (in %) Current account of balance of payments (% of GDP) Public debt (% of GDP) Budgetery deficit/surplus (% of GDP) 1 Data as at Q3 2016 2 Trailing twelve month average Q4 2015-Q3 2016 Sources: Eurostat, SURS, ECB 120 115 110 105 100 95 90 2011 2012 2013 2014 2015 2016 Index of retail sales Index of industrial production 100 = 2010 Figure 5: Slovenia: Growth of retail sales and industrial production indicies Source: Slovenian Statistical Office NLB Group 2016 Annual Report 35 Slovenia’s economy continued expanding at a steady pace throughout the year, achieving economic growth of 2.5%. The economic revival continued building mo-mentum throughout the year, with several key metrics showing considerable progress. Loans to corporate sector Loans to households Basel committee, would positively impact banking system profitability, should they materialise in the coming year. While the Euribor futures indicate a gradual recovery from current low rates, risks from abroad carry the potential to result in a postponement of the recovery from the current rate environment, due to potential additional reactionary measures from the ECB. In coming years, continuing high levels of competitive pressure and excess liquidity will continue to impart downward pressure on interest rates, while money market rates are expected to remain low for some time. The tough earning environment will force banks to continue focusing on increasing non-interest income and decreasing costs. Further consolidation of the banking system is expected following a series of acquisitions and mergers within the banking system throughout the year. 1.0% lower – a significant improvement when compared with the previous year’s contraction of 10.8%. Despite another year of contraction, the revival of retail trade to pre-crisis levels, improving sentiment in the construction sector and strong industrial production performance, have resulted in an improved outlook for the portfolio’s recovery. Overall, total loans to the non- financial sector grew 1.3% in the year. The continuing contraction of the loan portfolio and a growing deposit base resulted in another contraction of the system’s non- financial loan-to-deposit ratio, though at a diminished pace, to 78.6% from 80.6% at the start of the year. With support from the improving macroeconomic picture, the banking system’s outlook continues to improve. Expectations of steepening in the European government bond yield curve, as a result of the events that occurred in the second half of the year, as well as the possibility of lower capital requirements, following protests from non-US members of the 5% 0% -5% -10% -15% -20% -25% -30% 2011 2012 2013 2014 2015 2016 Figure 6: Annual loan growth in the Slovenian banking system Source: Bank of Slovenia NLB Group 2016 Annual Report36 Table 3: Trends in the key macroeconomic indicators for selected countries in SEE GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) Current account of the balance of payments (as % of GDP) Budget deficit / surplus (as % of GDP) 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 2014 BiH Montenegro Macedonia Serbia Kosovo (1) 1.8 (1) 2.1 2.4 2.8 (1) 3.6 3.1 3.4 3.8 0.8 4.1 1.1 1.8 3.6 -1.8 1.2 -1.1 -0.3 -0.2 1.1 0.3 -1.0 1.5 -0.3 1.4 -0.6 -0.9 -0.7 -0.3 25.4 27.7 27.5 n.a. -5.7 -7.4 n.a. 17.1 17.3 18.2 n.a. -13.4 -15.2 (3)-2.9 23.8 26.1 28.0 (2)-2.5 2.1 15.3 17.7 19.2 -4.0 -2.0 -4.7 -0.6 -6.0 -0.7 -0.2 n.a. 0.4 (1) 27.5 32.9 35.3 n.a. (4)-8.6 (4)-6.9 0.7 -8.1 -3.5 -2.8 -1.3 -2.0 -3.0 -4.2 -6.3 -2.2 Source: Statistical offices, Central banks. 1 Growth in the first three quarters of 2015; 2 Trailing twelve month average Q4 2015-Q3 2016; 3 Growth in the first half of 2016; 4 Own calculation SEE Markets Developments within the Euro area continue to positively impact the region’s economies, through positive external demand and growing tourism, while rising employment and positive economic developments have resulted in the return of positive domestic consumption dynamics. After returning to economic growth in 2015, following the flood-induced economic contraction of 2014, Serbia’s economic growth accelerated to 3.2% in 2016. The government solidified its position in the April elections, ensuring the necessary stability for continued reform implementation. Investments made a significant contribution to growth in the year, as did strong external demand. Improved economic growth dynamics combined with labour market reforms resulted in employment growth, while unemployment levels decreased to 15.3%, from 17.7% at the start of the year. Continued labour market improvements and positive economic developments are expected to be supportive of the nascent private consumption recovery. The banking system’s profitability improved in the year, with a return on equity of 6.9% in the first nine months of the year. The economic recovery resulted in a revival of the corporate credit portfolio, which expanded by 1.8%, and loans to households grew 10.5%. The fall of high NPL levels accelerated through the year, they ended the third quarter 2.1 percentage points lower at 19.5%. Kosovo’s economy continued the strong economic expansion from the previous year, growing 3.6% in the first three quarters of 2016. In the mid-term, further growth will be supported by private consumption and private investment. Due to the importance of remittances in Kosovo’s economy, it has generally remained stable and resilient to regional downturns. In spite of strong economic performance, unemployment levels remained elevated due to structural issues, however, notable progress was made in 2016, with the unemployment figure decreasing by 5.4 percentage points to NLB Group 2016 Annual Report 37 Developments within the Euro area continue to positively impact the region’s economies, through positive external demand and growing tourism, while rising employment and positive economic developments have resulted in the return of positive domestic consumption dynamics. 27.5%. The banking system achieved a return on equity of 22.4%, slightly lower than in the previous year, primarily due to a drop of interest income. Credit growth accelerated from the previous year, with corporate loans increasing 9.1%, while household loans expanded by 14.7%. NPL levels remain the lowest within the region at 4.9%. Economic growth in Montenegro will be driven by considerable public investment stemming from the Bar Boljare highway project, this will result in further fiscal strain and rising public debt in the mid-term. Tourism has shown notable growth, while further growth is expected as hotel capacity and investments increase. Following a deceleration in the first half of the year, stemming from highway permit issuance delays, economic growth accelerated and amounted to 2.1% in the first nine months of the year. Tempered growth in the first two quarters resulted in a slight deterioration in the labour market, which reversed in the second half as the economy picked up. The banking system achieved a return on equity of 6.6% as of the end of the third quarter, a notable improvement compared with the previous year, loans to households grew by 10.5% in the year, while the corporate loan portfolio grew by 1.9%. NPLs continued decreasing through the year and amounted to 10.2% of the credit portfolio at the end of third quarter, a notable decrease from the 16.4% figure at the start of 2014. Continuing political uncertainty proved restrictive for Macedonia’s economy, impacting private investment, and resulting in a tapering of economic growth to 2.4% from 3.7% in the prior year. Despite the noted uncertainty, household consumption remained robust and was the primary driver of growth, and it was supported by increasing employment and household lending. The banking system’s profitability increased in the year, rising to a return on equity of 13.6%. While consumer loans experienced growth of 7.0% in the year, political tension negatively impacted corporate loans, which decreased by 3.7%. NPLs decreased by 3.4 percentage points to 7.4% at the end of the third quarter. The country has a strong economic base and potential, however, strong growth projections are predicated on a resolution of lingering political issues, which the December elections failed to achieve. The economy of Bosnia and Herzegovina grew at a strong pace of 1.8% in the first three quarters of the year, where net exports and resurgent private consumption were the main drivers of growth, and with a notable contribution from manufacturing. Economic growth is expected to accelerate to 4.0% in the mid-term, supported by consumption, which will in turn be supported by continued remittance inflows. Modest export gains are also expected, while investment in energy, construction, and tourism will support investment growth. The banking system was profitable in the year, achieving a return on equity of 7.1% in the first three quarters of the year, and profitability increased 6.0 percentage points compared with the previous year. Modest credit growth was recorded, with both household and corporate loans finishing higher for the year. The quality of the credit portfolio improved throughout the year, and NPLs fell by 1.6 percentage points to 12.1% at the end of the third quarter. NLB Group 2016 Annual Report38 Regulatory environment During 2016 many changes in the EU and Slovenian regulatory requirement were adopted which the Bank implemented in its daily business. This chapter focuses on the material ones. In January 2016, the Regulation 806/2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism (SRM) and a Single Resolution Fund (SRF) Regulation entered into force. The Single Resolution Board (SRB) thereby undertook the bank resolution powers, setting of minimum requirement for own funds and eligible liabilities (MREL), and preparation of resolution plans of banks that fall under its direct responsibility, i.e. also NLB. The SRM Regulation also established the SRF, which will be gradually built up to reach the target level of at least 1% of the amount of covered deposits of all credit institutions within the Banking Union by 31 December 2023. Further, in June 2016, the Resolution and Compulsory Dissolution of Credit Institutions Act (ZRPPB) entered into force, transposing the BRRD Directive (Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms) into Slovenian national law. The new Deposit Guarantee Scheme Act (ZSJV), transposing the Directive 2014/49/ EU on deposit guarantee schemes entered into force in April 2016. It introduced ex ante contributions to the Slovenian deposit guarantee scheme, extends the scope of guaranteed deposits and depositor information requirements, as well as the payout procedures, and thus imposes on the bank several requirements regarding financing the scheme as well as reporting obligations. The Prevention of Money Laundering and Terrorist Financing Act (ZPPDFT-1) was amended in November to transpose the 4th AML Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. These changes present a major step forward in improving the effectiveness within the EU to combat the laundering of money from criminal activities, and countering the financing of terrorist activities, inter alia, through implementation of an approach based on risk (hence the ‘risk-based approach’), which will lead to increased efficiency of the implementation of measures at the person level, as well as at the national and European levels. The approach introduces a broader definition of politically exposed persons, in addition to those from foreign countries it includes domestic politically exposed persons (PEPs), reducing the threshold for reporting cash transactions from EUR 30,000 to EUR 15,000, introduction of the national central register of beneficial owners to ensure transparency of ownership structures of business entities, and by improving the system of supervision and sanctioning with new inspection powers for the Office for Money Laundering Prevention. At the beginning of July, Regulation (EU) No. 596/2014 on market abuse (Market abuse regulation, MAR), with implementing regulations which unified the legislation to prevent trading based on inside information for the entire EU, entered into force. Since the Bank is an issuer of financial instruments the members of the Management Board (MB) and the Supervisory Board (SB) are subject to the new requirements. Article 19 of the MAR states that the members of the MB and SB and persons related to them must report to the supervisory authority (SMA) and the Bank on all transactions in the Bank financial instruments when the total value of transactions in the calendar year exceeds the amount of EUR 5,000 (the sum of purchases and sales). The information is reported no later than three business days after the transaction. In accordance with the fifth paragraph of Article 19 persons discharging managerial responsibilities must notify the persons closely associated with them of their reporting obligations in writing and must keep a copy of this notification. The MAR also determines sanctions for natural and legal persons in the event of infringements. The Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data and repealing Directive 95/46/EC (General Data Protection Regulation, GDPR) was also published in May 2016 and is applicable from May 2018. The GDPR is reforming the data protection area in the EU to follow the intense development of information and communication technologies, the extent, intensity, and transfers of personal data (e.g. the development and expansion of the use of cloud computing, social networking, and smart phones) which all requires adaptation and modernisation NLB Group 2016 Annual Report39 of payment services and their providers, defines more clearly the exceptions to these rules, improves cooperation and the exchange of information between authorities, and introduces stricter safety requirements for electronic payments. The Bank will need to implement the requirements of the national legislation implementing the PSD2, as well as several directly applicable regulatory technical standards which will further regulate the PSD2 requirements. During 2016 many changes in the EU and Slovenian regulatory requirement were adopted which the Bank implemented in its daily business. of the EU legislative framework. Unique and updated legislation on data protection is essential to ensure the fundamental rights of individuals to the protection of personal data, the development of the digital economy, and the strengthening of the fight against international crime and terrorism. The GDPR regulates the rights of natural persons whose personal data are processed. It also establishes the obligation of persons responsible for data processing regarding the provision of transparent and easily accessible information to individuals about the processing of their data. The GDPR also specifies the general obligations of the operators and persons who process personal data on behalf of processors. These obligations include the obligation to implement appropriate security measures and the obligation to notify personal data breaches. Inter alia, the GDPR also gives greater emphasis to (preliminary) analysis of the effects on the protection of personal data in the event of incidents, such as loss of personal data, and establishes the obligation of reporting to the supervisory authority and, in some cases, all affected individuals. In December, the new Central Credit Register Act was adopted, according to which starting from January 2017 the Central Credit Register (CCR) will be established, a centralised national database of the debt of private individuals and business entities. The purpose of CCR is in improving the processes of assessing and managing lenders’ credit risks, encouraging policies and measures for responsible lending, and sustainable borrowing to prevent excessive borrowing by both private individuals and business entities, and aiding in the performance of the Bank of Slovenia’s (BoS) tasks (risk management, macroprudential supervision, administration of monetary policy, maintenance of financial stability, etc.). The establishment of a central credit register in Slovenia also follows actions in European banking. In conjunction with the central banks of the Euro area and certain central banks of countries that are not members of the Euro area, in 2011 the ECB launched the project to establish a dataset with detailed information on individual bank loans in the Euro area, ‘The Analytical Credit Datasets’ (AnaCredit). It will combine new data and existing national credit registers into a harmonised database to support central banking functions, such as decision-making in monetary policy and macroprudential supervision. It will also improve the cross border comparability and interoperability of credit risk databases. At the end of June the National Assembly adopted the amended Payment Services and Systems Act (ZPlaSS E), which transposes the Directive 2014/92/EU on the comparability of fees related to payment accounts, payment account switching, and access to payment accounts with basic features (Payments Account Directive, PAD). The main novelties include changes in the calculation of fees for consumers and adjustment of the process of ensuring a payment account with basic features for all customers. Regarding the Payment Services area, further changes of national legislation are expected in next year regarding the implementation of the Directive 2015/2366 on payment services in the internal market (Payments Services Directive, PSD2). PSD2 needs to be transposed to national laws by 13 January 2018 and, inter alia, extends the scope NLB Group 2016 Annual ReportInnovative Chapter 3 ИновативниInovativniInovativInovativniInovativni ИновативниInovativniInnovative Chapter 3 ИновативниInovativniInovativInovativniInovativni ИновативниInovativniChapter 3. 1: Retail Banking in Slovenia #1 position and strong brand enabling future growth The retail banking segment has clients’ experience and satisfaction always been a solid anchor for with investments made particularly the Bank, maintaining the leading in its mobile banking offering. The position in the Slovenian market with Bank’s branch network – which still a comprehensive, yet simple service is by far the largest in the country – offering. It remains the key pillar of continues to be the main distribution the Group’s operations and performed channel, thus the Bank continued its well in 2016 despite challenging reshaping and modernisation effort of market conditions in Slovenia, as branch locations. Market shares of the well as in other EMU countries. In Bank remained stable in a gradually 2016 the Bank continued to focus on consolidating market environment. NLB Group 2016 Annual Report43 Retail operations Private banking 716,551 individuals hold a personal account at NLB 6.7% more clients in private banking than in 2015 755,120 of clients in total 660,790 active clients 26,171 new clients joined NLB in 2016 1,077 private banking clients 16.8% increase in the volume of assets managed by private banking EUR 554 million managed by the private banking Contact Centre Cards 1,266,367 contacts were processed 81,178 written replies were prepared 333,800 orders and requests by clients were executed 536,853 incoming phone calls were processed 170,723 outgoing phone calls were processed * Data as per 30 June 2016. 1,098,096 payment cards used by the NLB’s clients. Card structure: BaMaestro (805,292), followed by MasterCard (171,750), Karanta, and Visa 4.7% more purchases were made cumulatively using cards in 2016 36% Debit cards market share * POS terminals 12,459 terminals, of which 60% enabling contactless payments NLB Group 2016 Annual Report44 Highlights: NLB clients are satisfied clients • Scale advantage Customer survey ³ Satisfaction with attitude towards clients index • Strong brand recognition, local and trusted bank perception and deeply-rooted customer relationships • Optimally positioned to benefit from lending growth in the retail market given its largest customer base Competitors average Satisfaction with user experience index • Strategic focus on upgrading customer experience and delivering the best products to clients • Strong presence and high accessibility for clients with largest branch (113) and ATM (558 units) accross Slovenia and 24/7 Contact Centre Competitors average Trusted brand in Slovenia for 10 consecutive years 84 76 80 75 2 0 1 6 2 0 1 5 2 0 1 4 2 0 1 3 2 0 1 2 2 0 1 1 2 0 1 0 2 0 0 9 2 0 0 8 2 0 0 7 Figure 7: Retail banking leader in Slovenia 3 GfK Slovenia, NLB Client Satisfaction Measurement, 2016 NLB Group 2016 Annual Report45 Retail banking in Slovenia in EUR million consolidated 2016* 2015 Growth** 73.2 66.5 139.8 -101.1 38.6 -2.7 5.2 41.0 78.3 72.5 150.7 -106.8 44.0 -9.8 4.5 38.7 1,890.9 1,959.0 1,199.2 489.7 4,901.8 -6% -8% -7% -5% -12% -72% 15% 6% 3% 2% 2% -1% 7% 2016 71.2 66.5 137.8 -101.1 36.6 -10.2 5.2 31.5 1,952.7 1,992.1 1,227.4 486.8 5,224.3 Table 4: Performance of the retail banking segment in Slovenia Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Net gains from investments in subsidiaries, associates and JV Result before tax Net loans to NBS Gross loans to NBS Housing loans Consumer loans Deposits from NBS * Normalised for the effect of non-performing portfolio sale ** Growth for P&L calculated based on the normalised data Loans to retail clients in Slovenia rose by EUR 33.1 million. Normalised by the effects of the sale of part of non- performing portfolio (non-performing portfolio sale) the increase would have been EUR 87.4 million (+ 4.2% YoY) in line with the market evolution. Especially noticeable was a pickup in activities in the housing loans segment. In 2016, profit before tax amounted to EUR 31.5 million, normalised by the effects of a non-performing portfolio sale, the before tax profit increased 6% YoY on the basis of further cost improvements and a very moderate cost of risk. Net interest income was under pressure given the continued low interest environment with signs of pricing bottoming out noticed towards the year-end. NLB Group 2016 Annual Report 46 #1 Retail net loans (September 2016) #1 Retail deposits (September 2016) #1 Branch network (Latest) 2 23.4% 30.4% 113 Nova KBM 1 SKB Banka 12.8% 11.5% Nova KBM 1 Abanka Abanka 9.9% SKB Banka 17.3% 12.2% 8.7% Nova KBM 1 Abanka SKB Banka UniCredit Bank 8.9% Banka Koper 8.1% Banka Koper 70 58 56 52 Note: ¹ Includes PBS and KBS Bank; ² NLB d.d., Nova KBM as of Dec-16; Abanka as of Jun-16; SKB and UniCredit as of Dec-15 Source: Bank Association of Slovenia, Financial reports of individual banks Figure 8: Overview of the market shares in Slovenian banking sector Segment Loans (in EUR million) Deposits (in EUR million) ¹ Assets under management (in EUR million) ² Private banking 8.1 8.5 9.9 132 182 197 377 474 554 Personal Premium personal Personal Mass Active population Children/students Seniors Small Business 2014 2015 2016 2014 2015 2016 2014 2015 2016 1,051 1,232 1,338 1,376 1,815 2,094 1,728 2,268 2,637 2014 2015 2016 2014 2015 2016 2014 2015 2016 894 717 643 3,009 2,633 2,652 3,193 2,792 2,815 2014 2015 2016 2014 2015 2016 2014 2015 2016 1.7 1.7 1.9 260 272 281 260 272 281 2014 2015 2016 2014 2015 2016 2014 2015 2016 Total 1,955 1,959 1,992 4,776 4,902 5,224 5,558 5,806 6,287 2014 2015 2016 2014 2015 2016 2014 2015 2016 Note: ¹ Term + Sight deposits; ² Includes deposits, life insurance, and mutual funds Figure 9: Evolution of business volumes/segment NLB Group 2016 Annual Report47 The Bank clearly remains the market leader in deposit-taking, providing a key strategic funding pool, valuable source of client insight and cross-selling opportunities. Facts and figures – Retail banking in Slovenia Market leader in retail banking in Slovenia The Bank maintained a strong and leading market position while not compromising on the profitability of new business. The Bank’s market share in gross loans slightly increased to 24.0% (2015: 23.9%), normalised by the effect of the non-performing portfolio sale. Compared to 2015, the market share in deposits increased by 0.2 percentage point to 30.4%. Business volumes have been growing overall with strong performance in private banking and solid results in the mass and personal banking segment. The Bank maintains a well-diversified portfolio of secured and unsecured loans with both segments showing growth in 2016. Loan production has been picking up, especially in the second half of 2016 – with demand strongly growing for housing lending resulting in a record increase in housing loans segment benefitting from the improved economic situation and increase in consumer confidence. The Bank clearly remains the clear market leader in deposit-taking, providing a key strategic funding source valuable source of client insight and cross-selling opportunities. Overdrafts 8% Cards 3% Purchase of receivables 3% Consumer loans 25% Housing loans 61% Figure 10: NLB’s structure of retail loan book NLB Group 2016 Annual Report 48 Segment Criteria Number of clients ¹ Service model Private banking Assets ≥ EUR 300,000 or income ≥ EUR 6,000 monthly Personal Premium personal Assets ≥ EUR 30,000 or income ≥ EUR 1,500 monthly Personal Assets ≥ EUR 30,000 and income ≥ EUR 1,000 monthly Mass Active population Children/students Seniors Below income / assets criteria for Personal Banking Small Business No credit exposure Revenues < EUR 2.5 million 858 1,009 1,077 2014 2015 2016 98,665 129,960 144,541 2014 2015 2016 687,172 635,852 609,502 Large drop in Mass clients driven by migration to Personal Segment 2014 2015 2016 35,260 33,857 30,441 2014 2015 2016 Dedicated private banker Dedicated personal banker Branch network Branch network P e r s o n a l i s e d t r e a t m e n t B a s i c s e r v i c e s Note: ¹ "Private banking" and "Mass" clients charts based on alternative scales Figure 11: Tailored product offerings and servicing models Innovation in Client Servicing Simplified and streamlined procedures and product offering in the Mass and Personal segments Retail banking in Slovenia serves over 755,000 clients. Offerings tailored to our client segments Retail banking in Slovenia serves over 755,000 clients. More than a quarter of the Bank’s clients have a dedicated personal adviser specialised in tailoring our product offering and services to meet specific client needs. The remaining clients are classified according to their life cycle and being offered standard services catering to their respective needs (children, students, pensioneers, small entrepreneurs, etc.). The Bank started to concentrate on simplifying its service offering and streamlining its procedures, and so substantially improving the client experience. As one of the first banks in Slovenia to do so, the Bank introduced the ePero (E-pen) solution throughout the branch network, enabling digital signing via tablets and access to signed documents in ‘NLB Klik,’ thus significantly simplifying and speeding up the process of closing transactions with clients. Figure 12: E-pen NLB Group 2016 Annual Report 49 1,200 1,000 800 600 400 200 0 30% 25% 20% 15% 10% 5% 0 #1 in private banking with best-in class-advisory and asset management services NLB is by far the market leader in private banking with the largest team of private banking consultants in Slovenia and over 1,000 clients. Assets under management have been continuously growing since inception of the service helped by our first-class asset management product range from individual portfolio management to pre-packaged funds and standard portfolios. Complementing banking services with asset management and insurance products NLB Skladi - Asset Management NLB Asset Management is the leading Slovenian asset management company, with its products distributed exclusively by the Bank with assets under management increasing in 2016 by 14% to just over EUR 1 billion. About two thirds (EUR 671 million) are invested in mutual funds and approximately a third (EUR 364 million) in discretionary portfolio management products. In 2016 it had positive inflows of almost EUR 60 million in a very difficult market, which saw all other competitors experience substantial outflows, which helped increase our market share to 27%. NLB has invested 12 years of continuous effort into educating the salesforce and client base with this relatively new product in Slovenia, providing a strong platform for growth and cross-selling into the client base. 2016/13 +41.3% 2016/13 +80.6% 600 550 500 450 400 350 300 250 2013 2014 2015 2016 Total assets under management (in EUR million) Number of clients Figure 13: Assets in management and number of private banking clients 700 600 500 400 300 200 100 0 2012 2013 2014 2015 2016 Market share Assets under management (in EUR million) Figure 14: Assets in mutual funds under management of NLB Asset Management and their market share NLB Group 2016 Annual Report 50 NLB Vita – Life insurance NLB Vita is a life insurance company distributing its products exclusively via the Bank. In 2016 in Slovenia NLB Vita was ranked fourth among the classic life insurance companies, with gross written premium in excess of EUR 63 million, achieving 11.1% market share. In 2016 a record net profit exceeded EUR 7.4 million, while total assets exceeded EUR 400 million. The product range covers the whole risk/ reward spectrum in life insurance including variants with portfolio linked performance and guaranteed principal, as well as complementary travel and health insurance products. Cooperation with GENERALI Zavarovalnica d.d. – non-life insurance In cooperation with insurance company GENERALI Zavarovalnica d.d. the Bank provides non-life insurance products to the clients including car and home insurances. In 2016 22.28% more policies were acquired. Gross written premiums for 2016 amounted to EUR 2.2 million, presenting 29.54% more than in 2015. 450 400 350 300 250 200 2016/15 +3.1 p.p. 2016/15 +10.5% 12% 11% 10% 9% 8% 7% 6% 5% 2012 2013 2014 2015 2016 Market share Total assets (in EUR million) Figure 15: NLB Vita total assets and market share in traditional life insurances NLB Group 2016 Annual Report51 Strong delivery capabilities across all channels – the future is digital The Bank continues to be a leading provider of banking services, a market leader in terms of client accessibility and market coverage with a comprehensive network of 113 branch offices, 558 ATMs, online banking services, and the Bank’s Contact Centre operating 24/7. • Branch offices continue to be a key area for maintaining existing and creating new client relationships. In 2016 the Bank continued to modernise our branch locations according to the ‘open space’ concept, enabling simpler and more convenient interaction with clients. • NLBs mobile bank ‘Klikin’ – introduced in 2015 – has already attracted more than 50,000 users. • Online banking solution NLB Klik is used by a third of the Bank’s clients. • Mobile bankers’ team was established to enable the Bank higher degree of flexibility to provide its services at the time and place of clients’ choice in a professional, efficient, and discreet manner. • With its Contact Centre, NLB is the only bank in Slovenia to provide clients with 24/7 access to banking services. As a first in Slovenia the Bank will introduce a video call and facility allowing for individualised service on a 24/7 basis. Distribution network Description Migration from branches to alternative channels to boost efﬁciency Branch network and ATMs 113 branches 1,158 dedicated employees 558 ATMs (33% market share) 219,000 active online retail users 55,000 mobile users within 18 months 1 contact centre 91 specialised agents Internet and mobile Call Centre • • • • • • • • • • Branches remain an important distribution channel for all NLB products and third party providers, focusing on advisory services # of branches and clients per branch (k)¹ 6.0 143 6.8 121 6.6 121 7.0 113 Nationwide network with balanced coverage across region Team of 10 mobile bankers offering services outside branches NLB’s ATMs have cash-in and bill-pay functionality 2013 2014 2015 2016 Wide range of functionalities on Internet banking with primary focus on payments % Klik penetration 32% 33% 34% Customers can receive, view and pay electronic invoices Functionality allows customers to open new deposit accounts 2014 2015 2016 Contact centre primarily focuses on helping clients with transactions and providing advice # of calls (k) 619 675 708 Contact centre is also used to conduct sales campaigns Key support channel for future online and multichannel functionalities² 2014 2015 2016 Note: ¹ Includes Small Business segment ² Online chat and video call to be introduced in H1 2017 Figure 16: Distribution overview NLB Group 2016 Annual Report 52 The Bank is continuously improving its client experience through innovative ways to approach various segments tuned to their respective expectations. • The Bank opened a mini-bank branch office in the creative playing centre for children, Mini-city in BTC in Ljubljana. Through play, children can learn about bank operations, the daily work of a banker, as well as gain basic financial literacy. • The Bank continued to share knowledge with its clients in the areas of personal finances and banking. All over Slovenia, 505 local professional and educational events were organised for retail clients. The Bank uses various media platforms and formats to cater to specific client preferences – including award winning magazines and e-newsletters. Customers’ satisfaction and loyalty The Bank aims to build and maintain long lasting relationships with customers, earning their loyalty so that they consider NLB as the first bank with which they conduct their financial business. The last customers’ satisfaction survey was carried out in December 2016. The Bank remains the best in attitude towards clients in retail banking and it is ahead of the competition in user experience, comprehensive product range and service range. Compared to 2015 survey the reputation of the Bank further improved. Clients are showing increased trust into the Bank and remain very loyal. 50 40 60 30 20 10 70 80 78 78 76 90 0 100 NLB result 2016 NLB result 2015 Result for competitors (average) 2016 Figure 17: The Bank overall satisfaction index for retail customers’ in Slovenia NLB Group 2016 Annual Report53 We want to be market innovator and leader in retail banking. In technology progressive environment the evolution of digitalised products is our first priority. Tanja Piškur General Manager, Product Range Management Our ambition is clear. We want to be We were the first bank in Slovenia During the first half of 2016, we market innovator and leader in retail to roll-out contactless credit cards. developed a new data strategy to banking. In technology progressive We launched NFC contactless stickers consistently govern and manage data environment the evolution of for prepaid cards, and we are across NLB Group. We see the data digitalised products is our first priority. planning to launch virtualisations as an essential part of successfully We understand digitally supported of cards in the future. enhancing the customer experience. processes to the retail business as a Managing data properly and using data must-have. For us, the future is digital. In year 2016 we launched ‘Klikpro’, in a smart way will help us innovate the first mobile bank for companies and serve our customers better. In year 2016 we started to implement on the Slovenian market. Similarly, the first milestones on the path we are ‘Klikin’, a mobile banking platform for We are implementing all our efforts planning to walk in the future. As a private individuals, was upgraded and in digitalisation with one single aim: market pioneer we introduced digital user-friendly functionalities added. to offer our clients the best service innovations in our lending process. We We completed the implementation experience in the market. Improving 0 100 established increased automation of the of E-signature in our branches. the experience is therefore paramount loan origination process for the private Our branches entered a modern, and enjoys the highest priority. individual segment, and an effective digitalised era with this huge step. scoring system for Small Enterprises. We today enable our clients loan in minutes with an extremely quick process. ” 50 40 60 30 20 10 80 78 78 76 70 90 NLB result 2016 NLB result 2015 Result for competitors (average) 2016 NLB Group 2016 Annual ReportChapter 3. 2: Corporate and Investment Banking in Slovenia Corporate Banking in Slovenia Market leader in corporate banking Highlights: • Highly professional and specialised • The bank of choice for corporate staff, firmly committed to the business in SEE region, with an ever- clients, their needs, and requests growing level of customer satisfaction • User-friendly, innovative, and • Broad product coverage of corporate digitalised banking platforms for and institutional clients with providing customers constant advisory and capital markets services availability of our service, whenever and wherever as well as treasury solutions • Increasing focus on mid-corporate and • Unique international desk, leveraging SME segment despite lower yields still on NLB Group presence in the region obvious leader in large corporate • Extensive range of financing products • Very strong and growing position supported by flexible, tailor-made in trade finance business products and professional service NLB Group 2016 Annual Report55 Table 5: Performance of the corporate banking segment in Slovenia Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Result before tax Net loans to NBS Gross loans to NBS Deposits from NBS * Normalised for the effect of non-performing portfolio sale ** Growth for P&L calculated based on the normalised data Corporate banking in Slovenia in EUR million consolidated 2016* 2015 Growth** 48.0 30.9 78.9 -44.6 34.3 8.6 42.9 55.8 29.4 85.1 -44.0 41.1 10.4 51.5 2,133.6 2,429.3 1,172.8 -14% 5% -7% 1% -17% -17% -17% 8% 3% -2% 2016 45.9 30.9 76.8 -44.6 32.2 -2.7 29.5 2,307.4 2,511.3 1,152.0 NPL portfolio sale, otherwise – as in the bank overall – the cost of risk was even negative (i.e. impairments and provisions have been released on a net-basis) mostly due to continued success in restructuring and work-out of the still material, although largely reduced NPL portfolio in this segment. The Bank continues to maintain its leading position as the key bank and advisor for Slovenian corporates of all sizes, offering a full spectrum of financial services to its clients, including lending, cash management, payment services, trade finance, as well as advisory on capital market transactions. Excellent partnership relationships are based on a deep and genuine understanding of our clients businesses. The Bank continues to be a reliable partner to all segments of enterprises. The strategic focus is to increase support for small and micro enterprises – of which our Innovative Entrepreneurship Centre (IEC) in Ljubljana is a successful showcase of the ability to innovate and create unique opportunities in engaging with our client base in this segment. Very strong loan growth was realised in key, mid, and small corporate segments in 2016, showing an increase of EUR 302.3 million (+15.3% YoY), while the restructuring and work-out portfolio was reduced by EUR 158.7 million. Corporate deposits slightly decreased in 2016, with the Bank introducing an asset management fee on larger corporate deposits (>1 million as of November). In 2016, the corporate banking segment in Slovenia realised a profit before tax in the amount of EUR 29.5 million, normalised for the effect of the non-performing portfolio sale the profit before tax would be EUR 42.9 million. The result was affected by the low interest environment and the generally very high liquidity in the market. The cost of risk was dominated by the NLB Group 2016 Annual Report 56 21.6% 22.6% 23.6% 23.8% 39.2% 34.5% 32.6% 32.7% 39.2% 43.0% 43.8% 43.5% 2013 2014 2015 2016 NLB Bank 2 – 5 Other banks Figure 18: Market share resilient despite deleveraging of the sector and competition (corporate and state net loans)* * Includes PBS and KBS Bank; Excluding the effect of the non performing portfolio sale of EUR 54 million net Source: Bank of Slovenia, Company information Facts and figures – Corporate banking in Slovenia Market leader in corporate banking with the largest client base in the country and robust market share dynamics NLB is the leading corporate bank in Slovenia with the largest client base by far, servicing more than 48,000 companies, and maintaining its stronghold in all client segments. It is especially active and successful with key clients/large corporates given the depths and scale of services on offer and the tailored service model for mid and small corporates based on a simplified and more standardised offer. Companies are supported throughout their business life cycle with the full range of banking services and with help of the Banks experts. Despite strong competition the Bank maintained its leading position with a market share of 22.6%. Pick up in lending and syndicated facilities activities Growing optimism on the Slovenian market and pick-up of economic growth – especially strong in the export-oriented corporate segment-lead to strong volume growth in this segment. The loan book is well balanced in short- and long-term instruments, with a visible pick-up in long-term and syndicated facilities in the amount of EUR 1.1 billion, many of which NLB was leading as agent, co-arranger, and direct participation of over EUR 360 million. NLB Group 2016 Annual Report57 2,511 265 374 107 378 2,429 175 276 95 382 2,511 57 175 97 442 +5.7% 15.3% 2,281 Key business 1,387 1,872 1,501 1,978 1,742 2014 2015 2016 Large corporates Mid corporates Small enterprises Restructuring Workout Figure 19: Evolution of business volumes/segment (in EUR million) 26% 30% 40% Investment Loans Syndicated Loans Working Capital Loans 40% 30% 26% Purchase of Loans and Receivables 2% Account - overdraft Other 1% 1% Note: Balance of loan portfolio of key, mid, and small corporate sales Figure 20: Loans purpose structure NLB Group 2016 Annual Report58 The product offerings for the segment of micro and small enterprises, as well as sole proprietors are standardised and streamlined to ensure fast and simple solutions. Most common products are grouped in product packages. The Bank has invested specifically in the higher availability and ease of access to its services for small- and medium-sized companies, including: • With the automation of the loan approval process including creditworthiness check, ‘Quick financing’ up to EUR 100,000 is provided to small enterprises within 24 hours with reasonable documentation needed; • The Bank introduced – as the first on the Slovenian market to do so – the ‘All in One POS’ that allows companies to easily comply with changes in tax legislation with a direct connection to the fiscal register, as well as offering connectivity to all card providers and the printing of invoices. Innovation in Client Servicing and product offering Offerings tailored to our client segments The Bank is present in all Slovenian regions and is servicing its corporate clients through its network of business centres, as well as mobile client managers. In 2016 NLB’s corporate bank staff held over eight thousand meetings, two thirds of which were on client’s premises. With a special international desk the Bank ensures seamless service for Slovenian clients present in the region where NLB Group is present. For large corporates our product range is comprehensive and client offerings tailor-made to the more sophisticated needs of this client segment. The product range includes lending, payment services, trade finance and treasury sales products, as well as the whole range of capital markets advisory services. Special attention is given to support the Slovenian export industry – a stronghold of the Slovenian economy. NLB supported their activities with a comprehensive range of trade finance products and solutions, such as guarantees, letters of credit, documentary collection, bank payment obligations, and supply chain financing. NLB has shown continued growth in this service segment with its market share at almost 27%. The improved rating of NLB has helped to sustain its large network of correspondent banks all over the world. NLB Group 2016 Annual Report59 Segment Criteria Number of clients ² Customer proﬁle Service model Large corporates Credit exposure > EUR 10m Revenue > EUR 50m 632 638 686 Mid corporates EUR 10m > credit exposure > EUR 0.5m EUR 50m > revenue > EUR 2.5m 2,612 2,560 2,580 2014 2015 2016 Small enterprises ¹ EUR 0.5m > credit exposure > EUR 0m Revenue > EUR 2.5m Restructuring Primarily D and E rated, sometimes C rated clients Workout Primarily D and E rated, sometimes C rated clients Total ³ Note: 2014 2015 2016 13,780 13,170 13,449 2014 288 2015 2016 249 164 2014 2015 2016 1,453 1,328 860 2014 2015 2016 19,289 18,434 18,115 2014 2015 2016 • • • • • • • Large international and domestic businesses State, central government Ministries, city municipalities HQ + Client managers Medium-sized Slovenian businesses Rural municipalities Business centres + Client managers Small-sized businesses looking at expansion and customised banking services Business centres + Client managers + Mobile bankers Non- and sub-performing exposures identiﬁed as viable, focus on resolution Restructuring department Non-viable exposures, focus on collection and collateral liquidation Workout and legal department Tailor-made service model according to client proﬁle ¹ Micro businesses or standard sub-segment of small enterprises (deﬁned as small enterprises without lending exposure) are served through the retail (branch) network; ² Refers to active clients only; Active client is deﬁned as a client who has either loan guarantee, trade ﬁnance, hedge or deposit transaction for a duration of at least 1 month or a customer who executed at least 6 transactions (credit / debit) on a business account over the last 3 months or executed at least 1 transaction via a payment card over the last 3 months; ³ Also includes other clients: ﬁnancial institutions, state, investment funds, foreign companies. Figure 21: Tailored product offerings and servicing models NLB Group 2016 Annual Report60 Focused on client service Educational events For mid-sized enterprises regional events in cooperation with the local Chamber of Commerce have been organised. Educational events have been attended by over 500 business partners. For the third consecutive year the Bank organised in different regions traditional business breakfast client meetings, with topics on management of liabilities, assets, working capital, business ethics, and promotion of good practises of regionally recognised enterprises. The Bank has continuously invested substantial effort in improving its standing and perception not just among large corporates – a traditional stronghold – but also among SMEs and small businesses. Support to innovative entrepreneurship As a unique innovation of engaging with existing and prospective clients from the entrepreneurial segment, the so-called Innovative Entrepreneurship Centre (IEC) was established already in 2015. The IEC is a physical space and will also become a virtual community space in the centre of Ljubljana with flexible facilities for meeting and organising events – both for the Bank as well as the entrepreneurial ecosystem. In this hub the Bank will be connecting entrepreneurs with investors, off-takers, and suppliers to deliver practical value and build a real value chain community, in addition to offering a physical space in which companies can be set up in one stop and even more importantly, organise know-how sharing, and trainings. In 2016, the concept was very positively accepted, as proven by 188 educational and business events in IEC premises, attended by 5,895 participants, and visited by over 9,000 people. NLB Group 2016 Annual Report61 As the largest Slovenian bank our exclusive strategic interest in the future remains supporting good business stories in the region and strengthening them with a solid financial foundation. loan in the history of Slovenian banking. We enhanced our business operations Andrej Lasič General Manager, Large Corporates “ 2016 was one of the most successful years for NLB’s corporate division. Our qualified experts’ close monitoring of with a full spectrum of financial services the Slovenian corporate sector, and our including: lending, cash management, understanding of the distinctive needs payment services, guarantees, and also of our clients as well as the sector at advisory experience in capital market large, helped us increase NLB’s loan transactions. We have continually proven portfolio by almost 16% compared to ourselves to be a responsible strategic the previous year. Once again, we played partner to the vital part of the Slovenian a leading role in organising domestic economy. As the largest Slovenian bank and international loan syndicates, with our exclusive strategic interest in the a total volume of EUR 800 million that future remains supporting good business includes a benchmark transaction for stories in the region and strengthening Telekom Slovenia – the largest syndicated them with a solid financial foundation. NLB Group 2016 Annual Report62 Investment Banking and Securities Service 4 Table 6: Performance of the investment banking and custody services in Slovenia Net non-interest income Total costs Result before tax in EUR million consolidated Investment banking and Custody services 2016 2015 Growth 6.8 -5.6 1.6 5.8 -5.5 0.8 18% 2% 90% Note: The result of the Investment banking and Custody services in Slovenia is included under the segment result of Financial markets in Slovenia in the Audited Financial Statements of NLB and NLB Group part of the Annual Report The result before tax grew strongly in 2016 and reached EUR 1.6 milllion (2015: EUR 0.8 million). The largest contribution to the results derives from custody services fees and derivatives. NLB is a leading provider of Investment Banking and Securities Services in Slovenia. In close cooperation with other business segments, the Bank continued its successful coverage of corporate and institutional clients with offerings in debt and equity capital markets, mergers and acquisitions (M&A), advisory, and treasury solutions. The Bank has traditionally played the role of a gateway in and out of Slovenia for capital markets, and is offering the whole range of Brokerage and Custody Services for both domestic and international clients. 4 As included in segment Financial markets in Slovenia NLB Group 2016 Annual Report 63 Custody The Bank is one of the top players in custodian services for Slovenian and international customers. Based on excellent service and quality the Bank was able to win new clients, and grew its assets under custody by approximately EUR 2.5 billion to a total of EUR 12 billion. The Bank also acts as a gateway into the region using its own network and partner institutions for seamless service to its customers. The Bank continued to invest in the highest client service and execution – successfully managing the transition to the new Target2-Securities (T2S) standard. Investment Banking – Capital markets/M&A advisory The Bank has a very effective team to provide our largest customers the whole range of corporate finance solutions. The Slovenian market is – although small – quite active in capital market instruments, and was helped by the low interest environment in 2016. A number of companies chose to broaden their funding base and issued both long-term and short-term instruments – most of which listed on the Ljubljana Stock Exchange. In 2016 NLB led again in total issue volumes and number of transactions, helping to raise a total of EUR 192 million in debt capital markets, or 80% of total issued volume. The Bank has by far largest penetration in terms of ability to adress issuers and domestic investors – where appropriate the Bank partners with international counterparties to work on the most complex and largest transactions to the benefit of our clients. The Bank also led the syndication market with a total syndicated volume of almost EUR 800 million (2015: EUR 364 million), a significant increase in activities. Amongst others, the Bank organised a benchmark transaction as co-lead manager of a EUR 400 million refinancing facility for Telekom Slovenija with a mix of a syndicated loan (MLA standard) and bond instruments. The Bank was also active in M&A and other financial advisory engagements. As financial advisor it successfully closed the sales process of shares and bank receivables of Trimo Group, which was among the largest and most complex M&A transactions in 2016 in Slovenia and the largest organised by Slovenian financial advisors. Brokerage and Treasury Sales The Bank is the market leader in brokerage services to both retail and institutional clients with an excellent network in domestic and international markets. The total brokerage turnover in 2016 amounted to EUR 997 million, which represents a 30% growth compared to 2015 on the back of increased activities globally. In 2016 a substantial number of new retail clients joined the Bank due to changes in the set-up of the domestic central depository to trading accounts at the Bank offering further opportunities for growth. The Bank provides standard treasury products to corporate and institutional clients for currency and interest exposures. The volume of transactions in derivatives and foreign exchange (FX) spot transactions exceeded EUR 1.3 billion. NLB Group 2016 Annual ReportChapter 4 ЕфикасниEfikasniEfikasEfikasniEfikasniЕфикасниUčinkovitiChapter 4 ЕфикасниEfikasniEfikasEfikasniEfikasniЕфикасниUčinkovitiChapter 4. 1: Core Foreign Markets South Eastern Europe (SEE) is the Group’s core market Highlights • Top market position across targeted • Unique network of 242 branches SEE countries with EUR 65.6 billion and 1.1 million clients GDP and 17.4 million population • Independent, well capitalised, • Leading franchise in the region, and profitable subsidiaries high brand recognition (unified NLB Banka branding), and client loyalty • Increased profit before tax by almost on SEE market with an attractive and 51% to EUR 67.6 million, contributing positive growth markets outlook. The 52% to the NLB Group result 2.6% real GDP growth of SEE region outpaces the Eurozone average • Market innovator with focus on delivering best service experience in • The only international banking the market and with the ambition group with an exclusive focus on the SEE region to lead the digital transformation of the banking industry in the region NLB Group 2016 Annual Report67 in EUR million consolidated Strategic foreign markets 2016 136.9 42.5 179.4 -95.5 83.9 -16.3 67.6 5.6 2,148.0 2,457.2 2,824.4 2015 125.2 40.7 165.9 -93.4 72.5 -27.8 44.7 3.5 1,967.3 2,309.1 2,737.1 Growth 9% 4% 8% 2% 16% -41% 51% 62% 9% 6% 3% Table 7: Results of the strategic foreign markets segment Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Result before tax of which Result of minority shareholders Net loans to NBS Gross loans to NBS Deposits from NBS The core part of the Group in foreign Macedonia, and Kosovo, as well as markets consists of six banks, one the exceptionally low risk results in all pension insurance company and two entities. All entities have been showing SPVs. They are distinguished by their positive dynamics in business evolution strong reputation and recognised for – operating in markets that also show their state of the art products, services, higher GDP and loan growth compared and distribution channels. In four out of to Slovenia, as well as still substantially six markets the Group subsidiaries have higher margins. Subsidiaries implement market shares exceeding 10%. Despite a Group-wide initiatives while ensuring competitive market environment, 2016 locally anchored organic growth was successful for all core members strategy. Within the corporate identity of the Group in foreign markets – all renewal of the Group, all banks unified of them posted a profit before tax, their brand and corporate image under contributing in total EUR 67.6 million the ‘NLB Banka’ brand, facilitating (2015: EUR 44.7 million) of the profit the full exploitation of the brand and before tax of the Group representing activity synergies on the Group level. an increase of almost 51% compared to 2015. This is a result of strong loan production, especially in Serbia, NLB Group 2016 Annual Report 68 CAGR 14% 125 14 23 15 16 17 41 137 15 24 17 17 18 46 106 10 18 12 14 16 35 61% 86 17 10 12 13 12 21 CIR 54% 88 15 11 13 14 13 22 51% 89 17 11 13 14 13 22 2014 2015 2016 2014 2015 2016 ROE a.t. 3.5% 10.5% 14.1% 63 2 11 5 5 14 25 43 1 8 6 4 10 13 2015 2016 13 5 4 3 8 11 -18 2014 Macedonia BiH - Republic of Srpska Federation of BiH Montenegro Kosovo Serbia Source: Company disclosure Note: Figures represent simple sum of individual ﬁnancials from core foreign banks only (SPV in Serbia and Montenegro are excluded) excluding consolidation adjustments Figure 22: Net interest income (in EUR million) Figure 23: Operating expenses Figure 24: Profit after tax (in EUR million) (in EUR million) Strategic foreign markets continued their positive trend, all core members operated with a profit in 2016. The profit before tax amounted to EUR 67.6 million, including the result of minority shareholders. The contribution to the Group result of the core foreign banks thus increased to 52% (2015: 42%). Compared to 2015, the operating result improved mainly due to higher operating income and lower impairments and provisions. All core foreign banks intensified their loan activities in the non-banking sector with an increase in gross loans by 6%. NLB Banka, Banja Luka; NLB Banka, Skopje and NLB Banka, Prishtina have continued their successful stories. These banks and NLB Banka, Sarajevo achieved the highest net profit ever. NLB Banka, Podgorica and NLB Banka, Beograd posted a profit for the second year in a row, and laid down solid foundations for long- term profitable growth after introducing changes to improve business efficiency and completing the implementation of a restructuring plan aimed at reducing costs, NPL ratios, and refreshing the team. In 2016, members responded to market needs in highly competitive local markets by cost rationalisation of their business. In 2016, the Bank received dividends from SEE Group members in the total gross amount of EUR 23.0 million. Banking members of the Group in SEE (in Macedonia, Bosnia and Herzegovina (two markets), Kosovo, Montenegro, and Serbia) primarily focus on the retail and SME and micro enterprise segments. In 2016 the members streamlined and modernised the distribution networks, and improved their digital offering. NLB Group 2016 Annual Report69 +27% 952 45 104 148 152 124 1,074 64 124 156 167 142 379 422 847 38 89 144 140 111 325 +7% 993 48 185 105 149 179 1,054 95 206 100 145 186 326 322 984 51 164 129 155 195 290 2014 2015 2016 2014 2015 2016 Macedonia BiH - Republic of Srpska Federation of BiH Montenegro Kosovo Serbia Source: Company disclosure Note: Figures represent simple sum of individual ﬁnancials from core foreign banks only (SPV in Serbia and Montenegro are excluded) excluding consolidation adjustments Figure 25: Net retail loans to Figure 26: Net corp. loans to customers (in EUR million) customers (in EUR million) The future strategic directions will be the basis for the future approach and answer to the requirements of the economic environment on the SEE markets, where strategic shifts relating to market consolidation and further optimisation of operations have already begun. Strategic foreign markets continued their positive trend. All core members operated with a profit in 2016. The achieved results and efforts made in 2016 therefore created the solid and sound basis to focus on healthy new business opportunities, and to respond to client needs with contemporary up-to-date solutions. The aim for 2017 is to capitalise on synergies among the Group members in the areas of HR and business development, client centricity, introduction of modern technologies and digitalisation, increased operational excellence, cost efficiency, and profitability, as well as to assure tight and effective internal control systems. NLB Group 2016 Annual Report71 Excellent results of core Group bank members contributed approximately 67.6 million € to the Group’s profits in 2016 – an increase of almost 51% from the previous year – and fills us with pride and confidence. of Group synergies, to share our best practices, and to work even more intently Jana Benčina Henigman General Manager, Core Group Steering and Country Manager for Serbia and Montenegro “ The presence of NLB Group on various markets in the South Eastern European region is definitely one of our main together in the future under the “NLB assets. Excellent results of core Group Bank” brand. We see a lot of positive bank members (from Bosnia and dynamics in business evolution and the Herzegovina, Kosovo, Macedonia, resulting unexplored possibilities and Montenegro, and Serbia) contributed opportunities for new achievements. approximately EUR 67.6 million to the That is why NLB Group has already Group’s profits in 2016 – an increase of defined a new medium-term strategy almost 51% from the previous year – to reinforce its regional specialist and fill us with pride and confidence. leadership position, and set ambitious At the same time, these results inspire plans for further profitable growth. us to be even better, to take advantage NLB Group 2016 Annual Report72 NLB Banka, Skopje Antonio Argir President of the Management Board 2016 has been a historic year for our bank. We achieved the highest ever annual profit of EUR 25 million, accompanied by a growth in sales, increased client satisfaction, and best brand reputation on the market, with a market share in retail of 21% and 16% in the corporate segment. Our core business, lending, increased by 5% and we realised excellent initial results in sale of non-banking products such as insurance and pension schemes, while the number of customers grew by 8%. It was the year that gave us confidence and confirmation that with the new business strategy and the organisational culture we are walking the right path. Our ambition and dedication also motivates us to continue the trail in the future. NLB Group 2016 Annual Report73 network that consists of modern branches organised as small banks, and also through investments in modern access channels to the bank and its products and services. Constant implementation of educational and training programmes, as well as assessment and development of managerial and professional potential of employees resulted in enhancement of employee engagement in delivering the bank’s results. In 2016 the bank received the award National Champion in Macedonia granted by European Business Network for the second time in a row for its achievements and successful work. With the retirement of Gjorgji Janchevski as long-term chief executive officer (CEO), as of 1 January 2016, Antonio Argir started as the President of the Management Board of NLB Banka, Skopje. Also, Ljube Rajevski and Damir Kuder were appointed as members of the Management Board for the new four-year mandate. Highlights: • #3 largest bank (based on total assets) with 51 branches • Despite the international financial crisis, the bank has been continuously very profitable • Large active client base of 371,000 • Very high 29% market share in debit cards • NLB holds ~87% shareholding Key strengths and strategic actions: • High brand awareness among the Macedonian population • Strong upside potential from country’s future EU entry • High market concentration (top 3 players control ~60% of total assets) • Consumer lending, upgraded with instant loans through credit intermediaries, remains the driver of new production • Substantial dividend payout capacity NLB Banka, Skopje is the third largest bank in Macedonia with a market share of 16.2% in terms of total assets on its local market and the most successful subsidiary of the Group in terms of the result after tax. The bank ended the year 2016 with a net profit of EUR 25 million (2015: 13.1 million), a 90% increase compared to the previous year on the back of the strong net income growth (11% YoY), normalised cost of risk of 73 bps (2015: 218 bps), while cost efficiency (CIR) improved and reached excellent 38%. Very solid growth of highly diversified retail lending at stable attractive margins has been the basis for further strong positioning in the market. The bank, with a tradition going back over 30 years, grew from a small bank to one of the most recognised banking brands in Macedonia. The success is a result of the bank’s established corporate culture and tradition supported by modern information technology, professional personnel, and a successful market strategy, boosted by the NLB brand. Faced with a strong banking competition, the bank improved its competitive edge with excellent technical support for digital services. Investments in upgrading the information system were made, which resulted in improvement of the quality of services and automatisation of the processes. The bank dedicated special attention to the enrichment and adjustment of its offering of products and services according to the needs of the different market segments and clients, as well as facilitation of the access to them by investing in the business NLB Group 2016 Annual Report 74 Table 8: Key performance indicators of NLB Banka, Skopje Income statement indicators (in EUR thousand) Net interest income Net non-interest income Total costs Provisions and impairments Result after tax Financial position statement indicators (in EUR thousand) Total assets Loans and advances to non-banking sector (net) Deposits from non-banking sector Equity Key financial indicators Capital adequacy ratio Interest margin Return on equity after tax (ROE a.t.) Return on assets after tax (ROA a.t.) Costs/net income (CIR) Market share in terms of total assets* Loans to non-banking sector (net)/deposits from non-banking sector (LTD) * as at 31 December 2016 EUR 743m Retail 57% EUR 422m Corporate 43% EUR 322m Figure 27: Net non-banking sector loan book split 2016 2015 Growth 46,327 12,297 22,250 8,747 24,997 41,344 11,651 22,369 16,044 13,129 1,153,091 1,119,678 743,341 704,657 938,496 918,934 12.1% 5.5% -0.5% -45.5% 90.4% 3.0% 5.5% 2.1% 129,083 113,977 13.3% 13.9% 4.7% 20.8% 2.3% 38.0% 16.2% 79.2% 14.7% 4.3% 11.8% 1.2% 42.2% 16.4% 76.7% -0.8 p.p. 0.4 p.p. 9.0 p.p. 1.1 p.p. -4.2 p.p. -0.2 p.p. 2.5 p.p. NLB Group 2016 Annual Report 75 NLB Banka, Banja Luka Radovan Bajić President of the Management Board I am very proud of the remarkable financial performance that our bank, with great support from NLB d.d. and in synergy within the Group, delivered in 2016. I am delighted of the value we created for our shareholders, customers, society at-large and employees. Despite difficult market conditions such as decreasing interest rates, modest economic growth, increasing regulatory requirements, rapidly evolving customer needs and expectations, as well as strong competition, we managed to achieve a net profit in the amount of EUR 14.1 million, ROE of 20%, and loan growth of 8%. We committed ourselves to developing a culture of clear focus on the customers, risk awareness, integrity, efficiency of organisation, and social responsibility. We committed ourselves to the future. NLB Group 2016 Annual Report76 Highlights: • #3 largest bank in the Republic of Srpska (based on total assets) with universal product offering • High RoE and low CIR • Large network of 60 branches • 99.9% owned by NLB • 9% market share and third position in the market in Bosnia and Herzegovina (based on total assets), combined with NLB Banka, Sarajevo • Despite the international financial crisis, the bank has been continuously profitable • Large active client base of over 209,000 Key strengths and strategic actions: • Solid brand reputation reflected in stable deposit base, despite decreasing deposit interest rates • High customer satisfaction ratings above competitors (86% retail clients, 89% corporate clients) (Customer satisfaction study for NLB Group. Source: GFK Slovenia, Dec-2016) • Substantial dividend payout capacity The bank offers a wide range of banking products and services designed for individuals, small to medium enterprises (SMEs) and large corporates to over 209,000 active clients with a growth focus on retail lending and card operations. In 2016 special attention was paid to optimising its branch network, reducing the number of branches by five, reaching 60 throughout the Republic of Srpska territory at the year end. The bank invested in digitalisation as well and launched mobile banking, while additional improvements were made in e-banking services, providing new functionalities and improving customer experience. It maintains a sizable network of ATMs. A highly-trained work force in its IT department and developed core information system provide support for customised solutions and improvements to existing services to attend the market needs. The bank is the third largest bank on the market with the largest banking distribution network in the Republic of Srpska, with a 18.9% market share in total assets representing a growth of 80 basis points compared to 2015. Despite difficult market conditions, the bank managed to achieve a net profit of EUR 14.1 million (2015: EUR 9.9 million), a 43.1% increase compared to 2015. Net interest income increased by 9.6% due to active interest rate policy and efficient management of balance sheet positions. Net non-interest income grew by 7.2%, representing over 30% of net income. Maintaining the level of costs under control resulted in an improved CIR at 47.2%. The share in net loans in the Republic of Srpska market increased by 100 basis points and now amounts to 15.2%. The bank’s lending and payment activities are based on the broad domestic deposit base, out of which retail deposits represent a 70% share. NLB Group 2016 Annual Report77 2016 2015 Growth 18,255 8,819 12,788 -1,994 14,117 16,656 8,223 12,651 1,473 9,863 634,501 611,748 327,430 303,041 495,438 474,323 74,607 68,058 16.3% 2.9% 20.0% 2.3% 47.2% 18.9% 66.1% 17.5% 2.7% 14.7% 1.6% 50.7% 18.1% 63.9% 9.6% 7.2% 1.1% - 43.1% 3.7% 8.0% 4.5% 9.6% -1.2 p.p. 0.2 p.p. 5.3 p.p. 0.7 p.p. -3.5 p.p. 0.8 p.p. 2.2 p.p. EUR 327m Retail 43% EUR 142m Corporate 57% EUR 186m Figure 28: Net non-banking sector loan book split Table 9: Key performance indicators of NLB Banka, Banja Luka Income statement indicators (in EUR thousand) Net interest income Net non-interest income Total costs Provisions and impairments Result after tax Financial position statement indicators (in EUR thousand) Total assets Loans and advances to non-banking sector (net) Deposits from non-banking sector Equity Key financial indicators Capital adequacy ratio Interest margin Return on equity after tax (ROE a.t.) Return on assets after tax (ROA a.t.) Costs/net income (CIR) Market share in terms of total assets* Loans to non-banking sector (net)/deposits from non-banking sector (LTD) * Market share in Republic of Srpska, as at 31 December 2016 NLB Group 2016 Annual Report 78 NLB Banka, Sarajevo Lidija Žigić President of the Management Board Although 2016 was marked by strong competition in our country, we managed to keep focusing our ambitions on retail business and an intense commitment to our clients. We put special emphasis on ensuring tailored offers to clients’ needs, as well as to improved corporate on-site presence with a clear focus on corporate clients. Every client counts. Acquisition of new clients, mainly in regions with growth potential and insufficient bank presence – i.e. Herzegovina, Sarajevo, and Zenica helped us strengthen our position in the Federation. We’ve become a reliable competitor to other banks present on the market. We have ambition, knowledge, and the will to turn market challenges into our opportunities. We are pursuing this goal with the highest commitment each day. NLB Group 2016 Annual Report79 The marketing strategy focused on new and innovative channels such as internet and mobile, including social networks and the more traditional marketing communications. The bank is paying special attention to the development of managerial and professional employee potential which combined with the introduction of performance management contributed to the enhanced performance. Personnel and talent management, as well as a succession planning process was initiated using the performance potential assessment. As of 1 January 2017 a new Management Board was appointed, consisting of Lidija Žigić as president, Denis Hasanić and Jure Peljhan as members. Highlights: • #6 largest bank in the Federation of Bosnia and Herzegovina (based on total assets) with 37 branches • 9% market share and third position in the market in Bosnia and Herzegovina (based on total assets), combined with NLB Banka, Banja Luka • 97% owned by NLB • Continously profitable since NLB has entered into the ownership of the bank • Increasing cost efficiency and profitability • Improved net interest income despite growing deposits volume and decreasing interest rates Key strengths and strategic actions: • Market leader in the northern part of the Federation with potential for growth in the Sarajevo, Zenica, and Mostar regions • Perceived as a local, trusted bank The bank currently holds sixth place in the Federation of Bosnia and Herzegovina in terms of market share in total assets. In 2016 the highest ever net profit of EUR 5.4 million (2015: EUR 4.2 million) was recorded, and the bank further improved cost efficiency (CIR of 57.1%). The net interest income and net non- interest income of the bank grew by 7.7% and 6.0%, respectively compared to the previous year, while a substantial growth in loan and deposit portfolios was achieved. The bank kept its strong focus on retail banking, being the main gear in the achievement of the bank’s overall results. After moving its headquarters from Tuzla to Sarajevo in 2015, the bank continued to upgrade its branch network; opening a new one in Sarajevo and redesigning offices in Tuzla, Cazin, Široki Brijeg and Ljubuški to reinforce a client-centric model and raise the quality of services. The bank further strengthened its presence and appearance in the Federation of Bosnia and Herzegovina, helping retail operations to show especially encouraging trends. The loan portfolio to private individuals increased by 6% compared to 2015, and the bank reached excellent results in credit card sales and utilisation. The main goal of the bank is continuous growth and development, with a strong focus on achieving synergies within the Group. Communication channels and services were additionally improved with particular attention devoted to the development of client relations. By doing this the bank managed to gain over 4,500 new clients and enriched its offer by launching additional products and services. NLB Group 2016 Annual Report80 Table 10: Key performance indicators of NLB Banka, Sarajevo Income statement indicators (in EUR thousand) Net interest income Net non-interest income Total costs Provisions and impairments Result after tax Financial position statement indicators (in EUR thousand) Total assets Loans and advances to non-banking sector (net) Deposits from non-banking sector Equity Key financial indicators Capital adequacy ratio Interest margin Return on equity after tax (ROE a.t.) Return on assets after tax (ROA a.t.) Costs/net income (CIR) Market share in terms of total assets* Loans to non-banking sector (net)/deposits from non-banking sector (LTD) * Market share in Federation of Bosnia and Herzegovina, as at 30 September 2016 EUR 312m Retail 53% EUR 167m Corporate 47% EUR 145m Figure 29: Net non-banking sector loan book split 2016 2015 Growth 16,927 7,026 13,670 4,286 5,357 15,710 6,626 13,631 3,979 4,182 497,861 476,110 312,012 300,715 406,940 390,491 60,780 55,313 14.2% 13.5% 3.4% 9.1% 1.1% 57.1% 5.3% 76.7% 3.3% 8.1% 0.9% 61.0% 5.5% 77.0% 7.7% 6.0% 0.3% 7.7% 28.1% 4.6% 3.8% 4.2% 9.9% 0.7 p.p. 0.1 p.p. 1.0 p.p. 0.2 p.p. -3.9 p.p. -0.2 p.p. -0.3 p.p. NLB Group 2016 Annual Report 81 NLB Banka, Prishtina Albert Lumezi President of the Management Board 2016 was the most successful year since our establishment, especially in the aspect of profitability, growth, and new products. Net profit amounted to EUR 11.3 million in 2016 and was 37% higher than in 2015. An increase of our loans to non-banking sector was the highest growth in the banking system of Kosovo. Our reduction of NPL ratio of the non-banking sector to 4.4% (local methodology) was 50 basis point below average of the Kosovo banking system. We proved we are an outstanding market performer. We are also committed to proving that in every step in the future. NLB Group 2016 Annual Report82 Highlights: • #3 largest bank (based on total assets) with 45 branches • Despite the international financial crisis, the bank has been continuously very profitable • NLB holds 81% shareholding • Highly profitable with RoE reaching 19% in 2016 • Consistently lowest NPL ratio in NLB Group Key strengths and strategic actions: • Increased use of alternative business channels (POS, contactless cards, M-banking, E-banking) • Substantial dividend payout capacity The bank is the 3rd largest bank in Kosovo with a market share of 14.9% in total assets, and enjoys exceptional credit quality with the lowest NPL ratio in the Group. 2016 was another very successful year after ending it with a record profit of EUR 11.3 million (2015: EUR 8.2 million), the highest since it was established in 2008. In 2016 net interest and non-interest income grew compared to 2015, and already low CIR ratio improved even further and stood at 40.1%, while having the lowest NPL ratio in the Group. The bank operates across nine major regions with a branch network of 45 offices and 68 ATM’s. The bank managed to retain a good client base while facing strong market competition, utilising its successful business model and strategy. It aims to remain innovative and keep pace with its clients’ demands and expectations through regular assessments of local market conditions, demands, and client suitability. The main activities of the bank have been focused on achieving the Group standards regarding development of products and services. In 2016 the bank implemented several new products and services such as introduction of POS terminals (the most important sales project of the year), mobile banking M-klik, and a further upgrade of the e-banking solution E-Klik, being the major ones. The bank will continue upgrades of e-banking and other banking services, focusing on integral solutions to properly address client needs. On the other hand, the bank will continue to strengthen the skills and competencies of its staff through training, in order to provide even more complex financial advice and solutions to our clients. The approach of recognising differences and divergences between clients has been one of the key components of competitive advantage. Operating actively with clients enabled the bank to be closer to them and deliver client-tailored services. In 2016, the bank continued to build strong relationships with domestic and international financial institutions: • In cooperation with the IFC, the bank has developed a SME product for financ- ing projects in energy efficiency. • With Kosovo Credit Guarantee Fund (KCGF) the bank signed the Loan Portfolio Guarantee Agreement. The KCGF Guarantee is intended to facilitate increased lending by the Guaranteed Party to MSMEs in Kosovo, improving both the conditions of, and increasing the quantity of MSME loans, thereby stimulating economic growth. • With EBRD the bank signed EUR 5 million credit facility under the EBRDʼs Trade Facilitation Programme (TFP). NLB Banka Prishtina will use the programme to help small- and medium-sized enterprises (SMEs) trade across borders. This is the first EBRD cooperation with NLB Banka Prishtina. NLB Group 2016 Annual Report83 2016 2015 Growth 23,545 4,213 11,118 4,088 11,263 22,736 3,611 10,781 6,282 8,242 516,115 464,692 329,608 289,339 442,095 400,245 62,845 59,725 16.6% 5.0% 18.9% 2.4% 40.1% 14.9% 74.6% 17.5% 5.3% 14.9% 1.8% 40.9% 14.5% 72.3% 3.6% 16.7% 3.1% -34.9% 36.7% 11.1% 13.9% 10.5% 5.2% -0.9 p.p. -0.3 p.p. 4.0 p.p. 0.6 p.p. -0.8 p.p. 0.4 p.p. 2.3 p.p. EUR 330m Retail 38% EUR 124m Corporate 62% EUR 206m Figure 30: Net non-banking sector loan book split Table 11: Key performance indicators of NLB Banka, Prishtina Income statement indicators (in EUR thousand) Net interest income Net non-interest income Total costs Provisions and impairments Result after tax Financial position statement indicators (in EUR thousand) Total assets Loans and advances to non-banking sector (net) Deposits from non-banking sector Equity Key financial indicators Capital adequacy ratio Interest margin Return on equity after tax (ROE a.t.) Return on assets after tax (ROA a.t.) Costs/net income (CIR) Market share in terms of total assets* Loans to non-banking sector (net)/deposits from non-banking sector (LTD) * as at 31 December 2016 NLB Group 2016 Annual Report 84 NLB Banka, Podgorica Martin Leberle President of the Management Board In 2016 we persuasively continued with our optimisation process of the bank’s organisation. The first results confirm we are taking the right path. The bank ended the year with EUR 5.3 million of net profit and increased its cost efficiency by six percentage points. We are determined to lead the changes in the financial industry on the Montenegro market. Therefore, we put a lot of effort in the training and development of our team. We started launching new and innovative products on the market. With the finalisation of the restructuring process, we are prepared for future challenges to achieve our ambitious development goals. NLB Group 2016 Annual Report85 E-banking for private persons was advanced with the aim to further enhance customer experience. In corporate and SME segments, the bank improved its relationship with customers by introducing new ways of reporting and models of communication, which led to better results in the client satisfaction index (CSI) for this segment to 85 points (increased from 83 in 2015). Martin Leberle took over as the bank’s President of the Management Board on 1 February 2016 after the previous President of the Management Board retired. Highlights: • #2 largest bank (based on total assets) with 18 branches • 99% owned by NLB • Recently introduced bancassurance offering Key strengths and strategic actions: • High brand awareness among Montenegrin population • Efficient business network in Montenegro • Upside potential from selectively increasing credit activity in the tourism industry, highway construction and energy industries The bank is the 2nd largest bank in Montenegro with a market share of 12.5% in total assets. After implementation of the restructuring plan, the main objectives for 2016 were increased efficiency and a reduction of the NPL portfolio, while providing a solid foundation for future business. The bank recorded a net profit of EUR 5.3 million (2015: EUR 6.2 million) and the share of NPLs decreased by 4.7 percentage points to 14.7% (2015: 19.4%), while contributing to the bank’s net income at the same time. An important impact on the result had a creation of additional provisions and impairments. In a very competitive market, even seeing new entries in 2016, the bank confirmed its ability for the qualitative development of its business model. Supported by a strong strategic partner and as member of NLB Group, it provides a complete range of traditional and modern banking services to retail and corporate clients, as well as other entities engaged in development projects in Montenegro. In 2016, several new products were launched. The bank successfully finished its participation in approving household loans in the governmental project 1000+, by offering household loans to retail customers. In addition, a new loan facility for SME’s operating in the tourism sector and loans for enrolment of students to the ‘Work and Travel in USA’ programme were launched. In a very competitive environment the bank has been focusing on operational efficiencies and will mainly explore growth opportunities in the retail segment. NLB Group 2016 Annual Report86 Table 12: Key performance indicators of NLB Banka, Podgorica Income statement indicators (in EUR thousand) Net interest income Net non-interest income Total costs Provisions and impairments Result after tax Financial position statement indicators (in EUR thousand) Total assets Loans and advances to non-banking sector (net) Deposits from non-banking sector Equity Key financial indicators Capital adequacy ratio Interest margin Return on equity after tax (ROE a.t.) Return on assets after tax (ROA a.t.) Costs/net income (CIR) Market share in terms of total assets* Loans to non-banking sector (net)/deposits from non-banking sector (LTD) *as at 31 December 2016 EUR 256m Retail 61% EUR 156m Corporate 39% EUR 100m Figure 31: Net non-banking sector loan book split 2016 2015 Growth 17,162 4,243 12,570 3,505 5,318 14,866 4,916 12,783 731 6,240 473,058 484,543 255,888 253,710 361,201 379,832 75,787 68,624 15.4% -13.7% -1.7% 379.5% -14.8% -2.4% 0.9% -4.9% 10.4% 15.0% 15.9% -0.9 p.p. 4.3% 7.3% 1.1% 58.7% 12.5% 70.8% 3.3% 9.6% 1.2% 64.6% 14.0% 66.8% 1.0 p.p. -2.3 p.p. -0.1 p.p. -5.9 p.p. -1.5 p.p. 4.0 p.p. NLB Group 2016 Annual Report 87 NLB Banka, Beograd Branko Greganović President of the Management Board Year 2016 was an exciting year of accelerated growth in all key business segments for our bank. We have significantly increased lending and loan outstanding amounts in all key segments of our business: retail, SMEs, and in particular in the agricultural producers segment. We continued to improve our processes to embrace and exploit the potential of the rapid development of digital trends in the banking industry. The successes of year 2016 are the result of the dedication and commitment of our high quality team of professionals. On the basis of a common vision and shared devotion to create a truly positive experience for our clients, we set the foundation for our prosperous future. We are ready for the challenges of tomorrow. NLB Group 2016 Annual Report88 Highlights: • Strong focus on agrobusiness, consumer finance, and SMEs, as well as cooperation with large corporates from Slovenia • ~100% owned by NLB • New management in place since 2014 with a strong restructuring mandate Key strengths and strategic actions: • Demonstrated organic growth potential, being #3 bank in 2016 by gross loans increase (Source: NBS – Banking sector in Serbia) • Strong brand name and recognition as a credible partner • Ongoing digitalisation of the bank (new IT platform) • Development of lean and efficient processes The bank recorded a net profit of EUR 2.2 million in 2016 (2015: EUR 1.2 million) and continued the positive performance trend for the second consecutive year, which represents a solid basis for future growth. After finishing its turnaround and comprehensive restructuring efforts, which is also supported by investment in processes optimisation, improved IT solutions, etc., the bank is increasing and repositioning its presence on the Serbian market with the opening of new branch offices. All that led to a temporary increase of CIR, with a strong awareness of cost efficiency in the future. With a low market share, the bank is strictly focusing on select target segments for the time being, especially in agrobusiness and consumer finance. In 2016, the bank significantly increased its loan production and also expects to continue its accelerated growth in 2017. Operating as a universal bank, it provides a full range of banking products and services to retail and corporate customers in Serbia. By offering different types of payment cards, current accounts, and financing products, the bank constantly adapts its services to specific demands and requirements of its clients. During 2016 ‛onlineʼ loans requests were launched, and additionally preparations for an omnichannel concept were completed. The 2016 business year was a year of significant growth of loan production and portfolio, the opening of new sales channels, digitalisation initiatives, and a strengthening of the market position, in particular in the segment of agricultural producers. Overall, in 2016 the bank placed new loans in the amount of EUR 155 million, which is almost three times more than in 2015. In the retail segment, the bank achieved excellent results in cash loans production reaching a YoY growth of portfolio of 44%. Following the trend of increasing digitalisation in the banking sector, the bank enabled its clients to process their loan applications online. Outstanding results were also achieved in the corporate segment. In 2016, the bank doubled its portfolio of loans outstanding and placed three times more loans than in 2015. However, the absolute outperformer in 2016 was the segment of agricultural producers. By using an innovative approach to customer relationship the bank reached EUR 22 million in the outstanding amount at the end of 2016, and gained a market share of 5% in this growing segment of the market. The accelerated growth in loans produced and outstanding amounts in 2016 was made possible with a new loan process and credit risk methodology introduced in 2016, which enabled efficient and fast processing of clients’ applications. This big step marked an introduction of the omnichannel concept and IT environment. The main task will continue to be further improvement of the customer experience. Emphasis will be placed on cooperation with market segments where the bank can develop competitive advantages, such as agrobusiness, and on pursuing a more distinct strategy based on digital distribution. NLB Group 2016 Annual Report89 2016 2015 Growth 14,748 2,612 16,980 -1,808 2,152 13,760 3,197 15,470 270 1,181 275,798 235,617 159,363 92,895 189,962 179,788 45,525 44,121 7.2% -18.3% 9.8% - 82.2% 17.1% 71.6% 5.7% 3.2% 19.1% 28.0% -8.9 p.p. 6.0% 4.7% 0.9% 97.8% 1.0% 83.9% 6.2% 2.7% 0.5% 89.9% 0.9% 51.5% -0.2 p.p. 2.0 p.p. 0.4 p.p. 7.9 p.p. 0.1 p.p. 32.4 p.p. EUR 159m Retail 40% EUR 64m Corporate 60% EUR 95m Figure 32: Net non-banking sector loan book split Table 13: Key performance indicators of NLB Banka, Beograd Income statement indicators (in EUR thousand) Net interest income Net non-interest income Total costs Provisions and impairments Result after tax Financial position statement indicators (in EUR thousand) Total assets Loans and advances to non-banking sector (net) Deposits from non-banking sector Equity Key financial indicators Capital adequacy ratio Interest margin Return on equity after tax (ROE a.t.) Return on assets after tax (ROA a.t.) Costs/net income (CIR) Market share in terms of total assets* Loans to non-banking sector (net)/deposits from non-banking sector (LTD) * Market share as at 31 December 2016 (preliminary data) NLB Group 2016 Annual Report Chapter 4. 2: Financial Markets 5 Simple balance sheet, supported by stable funding and robust liquidity reserves Simple balance sheet structure reflects sustainable and transparent business model. Strong customer franchise provides stable and price-insensitive deposit base, in addition, wholesale market access remains available if needed. The liquidity risk profile of the Group remains conservative due to low LTD and a strong liquidity buffer that can provide funding of future core growth. 5 As included in segment Financial markets in Slovenia This segment includes income generated by the liquidity reserves, as well as the surplus from fund transfer pricing to other business segments in Slovenia. Financial markets in Slovenia recorded a profit before tax of EUR 36.5 million, in spite of challenging macroeconomic conditions, a negative interest rate environment, and low returns on the international bonds market. Net interest income in financial markets in Slovenia decreased by 19% in 2016 due to decreasing yields in the securities portfolio, the maturity of the high yield assets and lower net interest income resulting from the high level of excess liquidity. The majority of this negative effect came from maturity of the BAMC bonds (in December 2015 and December 2016) since reinvestment yields were much lower. Decreasing LTD contributed to increased cash equivalent positions with negative carry. Management NLB Group 2016 Annual Report91 in EUR million consolidated Financial markets Slovenia 2016 2015 Growth 48.3 -5.2 43.0 -6.6 36.4 0.0 36.5 254.7 70.5 59.9 6.9 66.8 -6.8 60.0 0.0 60.1 606.4 110.4 -19% -175% -36% -3% -39% - -39% -58% -36% Table 14: Performance of the Financial markets segment in Slovenia Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Result before tax Gross loans to NBS Deposits from NBS Note: Investment banking and Custody services as a part of Financial markets in Slovenia segment is represented in a separate chapter. with Risk Management to manage the balance sheet in line with the Group’s conservative risk profile. In 2016 further improvements in the governance process of Group ALCO have been implemented by upgrading the balance sheet steering function in terms of a more holistic and forward-looking simulation. of the structure and volume of banking book securities and hedging derivatives portfolio is aimed at optimisation of net interest income that should benefit from potential improvements of macroeconomic conditions. Net non-interest income in financial markets in Slovenia in 2015 included the profits from non-recurring event of selling RoS bonds (EUR 5.2 million), while the 2016 result includes the negative effects from unwinding hedging derivatives and fees related to prepayment of selected wholesale funding in the total amount of EUR 3.0 million, which will benefit net interest income in the following years. NLB Group asset and liability management (ALM) The purpose of the Group ALM process is to manage the Group’s balance sheet with respect to interest rate, currency, and liquidity risk. In accordance with the Group policy, ALM is centrally managed to support the Group’s business lines and enables them to fully focus on their commercial tasks and credit risk management. By applying a funds transfer pricing methodology, the Group’s business lines transfer assets and liabilities risks to ALM so that they are not affected by market movements in interest rates or liquidity spreads. The Group ALM performs long-term liquidity and interest rate risk planning, taking into account expected market and regulatory developments, while liaising NLB Group 2016 Annual Report 92 The Group’s balance sheet is very solid with low LTD (74%), a high share of liquid assets (44% of total assets), and strong capital adequacy (17%). In spite of a low interest rate environment, the Group managed to maintain a strong deposit base which proved to be extremely price insensitive and well-diversified. In order to keep a conservative risk profile, the Group invested predominately in high quality liquidity reserves. Total liabilities remained broadly unchanged; an increase of customer deposits was compensated by regular repayments and prepayment of certain more expensive wholesale borrowings. Total loans to the non-banking sector did not meet non-banking sector deposit dynamics, mostly due to the reduction of the non-performing portfolio. Regarding the interest rate risk management, a conservative position in terms of duration has been kept in response to market expectations and balance sheet structure. Exposure to interest rate risk is being monitored carefully from earnings, as well as from economic value perspective. The duration gap between interest-sensitive assets and liabilities slightly increased to 1.85 years compared to 1.76 years in 2015. However, positions are in line with the Group risk profile and within the internal and regulatory limits. Exposure to interest rate risk and basis risk is managed via responsive fund transfer prices and external pricing policy. When necessary, derivatives are also used, mainly plain vanilla interest rate swaps with an application of Hedge Accounting rules. 411.5 - 0.2 75.3 14.2 - 12.1 11,821.6 - 231.6 - 27.2 - 12.5 12,039.0 5 1 0 2 c e D 1 3 s t i s o p e d l i a t e R y t i u q E t b e d d e t a n d r o b u S i s t i s o p e d e t a t S s t i s o p e d e t a r o p r o C i s g n w o r r o b e l a s e l o h W e u s s i n i s e i t i r u c e s t b e D s e i t i l i b a i l r e h t O 6 1 0 2 c e D 1 3 Figure 33: Key changes of NLB Group liabilities and capital in 2016 (in EUR million) 137.0 11,821.6 200.3 3.7 -90.8 - 32.8 12,039.0 5 1 0 2 c e D 1 3 s t n e m t s e v n i l a i c n a n i F B C h t i w s e c n a l a b d n a h s a C s k n a b o t s e c n a v d a d n a s n a o L r o t c e s g n i k n a b - n o n o t s n a o L s t e s s a r e h t O 6 1 0 2 c e D 1 3 Figure 34: Key changes of NLB Group assets in 2016 (in EUR million) NLB Group 2016 Annual Report 93 Liquidity has been actively managed with a diversified funding structure and a solid buffer framework. The Group maintained a strong liquidity position with liquidity reserves, accounting for more than 40% of total assets which can provide the funding of future core growth. In 2016 further optimisation of the liability structure was done as a strong and resilient deposit base enabled the early repayment of certain more expensive funding sources (ECB Targeted Long Term Refinancing Operations (TLTRO 1), wholesale funding, etc). The same strategy applied to all Group banking members as they are fully self-sufficient in terms of funding. Active profitability management has been supported by a highly disciplined deposit pricing policy, enabling the response to a very competitive loan market all over the Group home countries. FVPL 0.2% HFT 3% HTM 22% EUR 2,778m AFS 75% Cash 15% EUR 1,735m EUR 6,997m CB reserves 45% Retail loans 44% Placements with banks 25% Demand deposits at banks 15% State loans 11% Corporate loans 45% Total balance sheet (Dec-2016): EUR 12,039m Other assets 4% | EUR 529m Financial investments 23% EUR 2,778m Cash equivalents and placements with banks 14% EUR 1,735m Equity 13% EUR 1,526m Other liabilities 2% | EUR 272m Funding 7% | EUR 803m Subordinated debt 3% Debt securities in issue 35% EUR 803m State deposits 4% Loans / deposits 74% EUR 9,439m Corporate deposits 23% Loans / deposits ratio Deposits from banks 5% Wholesale borrowings 57% - sight 68% - term 32% Retail deposits 73% Loans to non-banking sector 58% EUR 6,997m1 Deposits from non-banking sector 78% EUR 9,439m 100 80 60 40 20 0 76% 75% 74% 2014 2015 2016 Encumbered assets EUR490m (for deposit guarantee scheme, collateral managment, service agreement, national resolution fund, reserve requirment) Note: ¹ Including EUR 849 million loans eligible with ECB as collateral (liquid assets) Figure 35: NLB Group balance sheet structure as of 31 December 2016 Assets Liabilities NLB Group 2016 Annual Report94 Discipline in pricing has helped to reduce interest rates for customer deposits to the historically low levels; however, the Group still managed to increase its customer deposit base, which presented 78% of the Group’s total liabilities and equity as of 31 December 2016, compared to 76% as of 31 December 2015. Driven by a low interest rate environment, the main change in the funding structure was the transformation of term deposits to sight deposit, to which the Group responded with a conservative liquidity reserves management approach. The share of sight deposits in the total balance sheet increased to 53%, however proved to be very stable according to the internal methodology for sight deposit stability. The Group funding structure is predominantly driven by deposits and complemented by established wholesale market access. LtD ratio 104% 85% 76% 75% 74% 14,176 1,145 364 3,549 12,490 1,271 285 2,677 11,909 1,369 305 1,291 11,822 1,450 289 1,062 12,039 1,526 274 803 9,118 8,257 8,944 9,021 9,437 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 Deposits from non-banking sector Wholesale funding Other liabilities Equity Figure 36: Evolution of funding structure confirms stable deposit base in NLB Group (in EUR million) NLB Group 2016 Annual Report95 kept a constant dialogue with the regulator regarding future regulatory requirements, especially the MREL requirement. In 2016 the Bank and the Group continued to maintain an active dialogue with its existing investor base and with a wider international capital markets community, also with its fully operative and professional Investor Relations function. Measures for the optimisation of long term liabilities by improvement of financial conditions were undertaken within the Group as well. The Group liquidity buffer acts as a safety cushion in case of severe market stress The Group liquid assets mainly comprise of cash equivalents, transactional money, a banking book securities portfolio, and credit claims eligible for central bank secured funding operations. The liquidity buffer consists of liquid assets which are not encumbered for operational and regulatory purposes. 1.6% 1.4% 1.3% 1.1% 1.0% 1.0% 0.9% 0.9% 0.6% 0.5% 0.4% 0.3% 0.3% 0.3% 0.2% 0.2% Wholesale funding Wholesale funding activities in the Group are conducted with the aim of achieving diversification, improvement of structural liquidity, and fulfilment of regulatory requirements. Due to a solid liquidity position in 2016, the Bank was not active on the international financial markets with borrowing or issuing debt instruments. Nevertheless, the Bank undertook an active management approach with the optimisation of its long-term liabilities by selected prepayments and improvement of financial conditions, and analysed capital structure for potential future optimisation. The bank regularly monitors new regulatory developments and has also 2.4% 2.2% 1.2% 1.1% 2.1% 0.9% 1.8% 0.7% Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Slovenia International Figure 37: Decreasing deposit interest rates environment in NLB Group NLB Group 2016 Annual Report96 portfolio is well-diversified in terms of asset class and geography to avoid risk concentration. Attitude to investments remained conservative focused on prudent tenors and rating structure. The necessary volume of the liquidity buffer is determined by the internal liquidity risk stress test methodology. The liquidity gaps remained largely positive in order to fund larger repayments coming due in 2017. Low interest rates and an extensive liquidity environment throughout 2016 put some pressure on the financial performance of the Group. The focus was therefore on the optimisation of the composition of the liquidity buffer and positive carry. The Group banking book securities Liquid assets in total assets 32% 6,000 5,000 4,000 3,000 2,000 1,000 0 4,541 19% 52% 0% 9% 20% 44% 5,495 15% 58% 1% 9% 17% 45% 5,413 16% 44% 5,248 15% 44% 5,346 16% 57% 50% 50% 2% 13% 13% 5% 16% 14% 1% 13% 19% n o i l l i m R U E n i 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 Cash and CB reserves Placements with banks Trading book debt securities Banking book debt securities ECB eligible credit claims Encumbered assets Figure 38: Evolution of NLB Group liquid assets structure reflects robust liquidity position (in EUR million) NLB Group 2016 Annual Report 97 Other 18% AAA 10% AA 13% BBB 5% A 54% Figure 39: Banking book securities by Fitch rating as of 31 December 2016 for NLB Group Covered bond 1% GGB 5% Agency 3% Senior Unsecured 21% Government sector 70% SEE 15% SI 39% DE 9% FR 8% NL 5% AT 3% BE 2% FI 1% ES 1% Other 17% a.) Banking book debt securities by asset class b.) Banking book debt securities by geographical structure Figure 40: Well-diversified NLB Group banking book securities portfolio as of 31 December 2016 NLB Group 2016 Annual Report 98 By nurturing strong relationships with global partners the Bank helps maintain its competitive advantage to provide high quality service in the field of financial instruments. Fixed income and FX Sales With many years of experience in trading with financial instruments the Bank has a high level of expertise and is constantly learning and adapting to the changing market environment and customers’ needs. By nurturing strong relationships with global partners the Bank helps maintain its competitive advantage to provide high quality service in the field of financial instruments. The Bank offers a variety of financial instruments, from simple money market instruments to more demanding derivatives for hedging foreign exchange or interest rate risk. Besides trading with financial instruments, the Bank provides banknotes service to all Slovenian banks and savings. Yearly turnover is around EUR 350 million and represents a stable source of income. The Bank acts as a primary dealer of treasury bills and bonds for the Ministry of Finance of the Republic of Slovenia, enabling the Bank’s customers to purchase securities on the primary market. In 2016, the Bank participated in seven auctions for eighteen emissions of 3, 6, 12, and 18-month treasury bills. The Bank participated in the new issues and swaps of bonds of the Republic of Slovenia, and acted as co-lead in issuing government bond RS78. All these activities confirm the role of the Bank as the primary dealer and official liquidity provider of Eurobonds of the RoS on the MTS Slovenia market. As the only bank in Slovenia it also acts as a co-lead for ESM/EFSF. In 2016 the Bank actively participated in six bond issues, two taps, and sixteen treasury bills auctions. NLB Group 2016 Annual ReportChapter 4. 3: Non-core Markets and Activities NLB Group is following its strategy and objectives of the Restructuring Plan which define non-core markets and activities, and forsee the controlled and gradual wind down of the non-core segment. This process entails a wind down of all portfolios and consequent reduction of costs. The implementation of the strategy is pursued by a variety of measures, including the sales of entities, portfolios, individual assets, and the collection or restructuring of assets, as well as the closing of subsidiaries by liquidation proceedings. The result of non-core markets and activities of the Group improved significantly in 2016 compared to 2015. The segment still recorded a loss of EUR 18.9 million, though normalised by the effects of the non-performing portfolio sale the loss would amount to EUR 11.9 million. Overall, the result was substantially reduced compared to the loss of EUR 70.1 million in 2015. The result of 2016 includes additional impairments due to the non-performing portfolio sale in the amount of EUR 7.0 million, and the positive effects of the sale of an equity investment amounting to EUR 4.9 million. One of the main achievements of the non-core segments in 2016 was a substantial decrease of their cost of operations which was reduced by as much as 19% YoY to the level of EUR 24.2 million (2015: EUR 29.8 million). NLB Group 2016 Annual Report101 Non-core markets and activities in EUR million consolidated 2016 15.4 10.9 26.3 -24.2 2.1 -20.9 -18.9 325.1 675.9 26.5 2016* 15.4 10.9 26.3 -24.2 2.1 -13.9 -11.9 2015 21.6 -11.6 9.9 -29.8 -19.8 -50.1 -70.1 481.6 1,038.2 28.1 Growth** -29% -194% 164% -19% -111% -72% -83% -32% -35% -6% Table 15: Results of the non-core foreign markets and activities segment Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Result before tax Net loans to NBS Gross loans to NBS Deposits from NBS * Normalised for the effect of non-performing portfolio sale ** Growth for P&L calculated based on the normalised data Total assets in the segment of non-core markets and activities of the Group in 2016 amounted to EUR 502.6 million. Compared to the end of 2015, the figure was reduced by EUR 249.5 million as a result of the Restructuring Plan, and in line with the strategy of non-core divestment. The non-core portfolio includes assets booked in the Bank (non-strategic portfolios of Slovenian and international exposures) as well as the portfolios of non-strategic subsidiaries (funded almost entirely by the Bank). The large majority of the non-strategic assets comprise loan exposures (approximately 65%), and a smaller share of investment properties (approximately 14%), repossessed real estate (approximately 9%), equity exposures (approximately 4%), and others. The result of non-core markets and activities of the Group improved significantly in 2016 compared to 2015. NLB Group 2016 Annual Report 102 Reduction of the Bank’s credit Table 16: The Group entities in which liquidation was initiated in 2016 business with foreign clients The Bank refrains from undertaking any new credit activities with corporate clients incorporated outside Slovenia, and who are not members of the groups whose headquarters or final beneficiary is in Slovenia. An important contribution to reducing the exposure in 2016 came from assets collected in pre-court and court proceedings, lowering guarantees exposures and regular repayments. Divestment of non-strategic Group members With regards to closing the Group non- core members (most of which operate in leasing, factoring/trade finance, and real estate), new business has been stopped in most non-core subsidiaries, and the total portfolio has been decreasing through regular repayments, collections, restructurings, sales, etc. In 2016 the liquidation of the leasing subsidiary in Sofia (Bulgaria) was completed, while the liquidation proceedings were initiated in most of the remaining non-strategic entities, with the exception of the leasing companies in Slovenia and Bosnia and Herzegovina, and a few other non-material subsidiaries. An important contribution to reducing the exposure in 2016 came from assets collected in pre-court and court proceedings, lowering guarantees exposures and regular repayments. Leasing Factoring/Forefaiting Real estate NLB Leasing Beograd NLB InterFinanz Zürich NLB Leasing Podgorica Prvi faktor Ljubljana OL Nekretnine Zagreb NLB Lizing Skopje Prvi faktor Zagreb PRO-REM Ljubljana Optima Leasing Zagreb Prvi faktor Sarajevo 326 247 194 172 350 300 250 200 150 100 50 0 137 120 76 53 124 91 119 110 51 36 47 5 31 26 11 7 NLB Leasing Ljubljana NLB InterFinanz Other leasing subsidiaries Real estate subsidiaries Other non-core subsidiaries* 2013 2014 2015 2016 * NLB Factoring - in liquidation, NLB Propria, Prospera Plus, LHB AG Figure 41: Asset evolution by activity (in EUR million) NLB Group 2016 Annual Report 103 Sale of NLB’s equity participations The Bank is also divesting its equity participations, and consequently by the end of 2016 the overall asset volume of equity participations had been further reduced to EUR 21.7 million. Active management of real estate assets A large portion of NPL in the portfolio is secured by real estate, and so the Group has set up a specialised team for repossessing, managing, and selling real estate. Management entities were established in three relevant markets: Croatia, Serbia, and Montenegro (REAM Zagreb, REAM Beograd, and REAM Podgorica). In Slovenia PRO-REM in liquidation was carved out from NLB Leasing, Ljubljana, including assets, real estate management, and staff. The main task of these management teams is to ensure value-preserving strategies for the management of real estate, respectively the collateral value of NPL claims by either temporarily repossessing real estate or ensuring a value-preserving divestment process of the real estate or a claim. In 2016 the team supported 236 transactions with a real estate value of approximately EUR 95 million. NLB Group 2016 Annual ReportTrustworthy Chapter 5 ДоверливиTë BesueshëmPouzdaniVredni poverenjaДостојни поверењаVredni zaupanjaPouzdaniTrustworthy Chapter 5 ДоверливиTë BesueshëmPouzdaniVredni poverenjaДостојни поверењаVredni zaupanjaPouzdaniChapter 5. 1: Risk Management Strong capital and liquidity position Risk management in NLB Group is in charge of assessing, monitoring, and managing risks within NLB as the main entity in Slovenia, and the competence centre for six subsidiary banks. Furthermore, it is also responsible for several ancillary services companies and a number of non-core subsidiaries which are in a controlled wind down. During 2016 the focus was on improving the quality of the credit portfolio with appropriate portfolio diversification in order to avoid large concentration, and to further decrease the volume of NPE towards average EU banking levels. In this very low interest rate environment, the Group is facing large excess liquidity and putting a lot of attention to the structure and concentration of the liquidity reserves, also having in mind potential adverse negative market movements. Excess liquidity and market demand for fixed interest rates products have an important influence on the potential increase in interest rate risk exposure. In this sense a lot of attention was put on interest rate risk limits for each Group member, whereby low tolerance toward this risk is reflected. The Group concluded 2016 well within its target-risk appetite, with a strong capital and liquidity position. NLB Group 2016 Annual Report107 Risk management principles The Bank is, as a systemic bank, involved in the Single Supervisory Mechanism (SSM), whereby the supervision is under the jurisdiction of the Joint Supervisory Team of the ECB and the BoS. ECB regulations are followed by all Group members, whereby the Group subsidiaries operating outside Slovenia are also compliant with the rules set by the local regulators. Across the Group, assessments are made and risks managed in a uniform fashion, taking into account the specifics of the markets in which individual Group members are operating in line with the Group’s risk management standards. The Group pays great attention and importance to the risk culture and awareness of all relevant risks within the entire organisation. The main principles are part of the Group Risk Strategy, where special focus is put on risk appetite, the inclusion of risk analysis into the decision- making process on strategic and operating levels, focusing on diversification in order to avoid a large concentration, optimal capital usage and its allocation, appropriate risk-adjusted pricing, and the assurance of overall compliance with internal policies/ rules and relevant regulations. Proactive risk management in 2016 In 2016 fundamental risk management documents representing the Group’s Risk Appetite Statement and Risk Strategy were updated. Moreover, the Group further enhanced its risk management system in order to support the business decision- making process by upgrading its Internal Capital Adequacy Assessment Process (ICAAP), introducing the Internal Liquidity Adequacy Assessment Process (ILAAP), enhancing internal stress testing capabilities and further upgrading comprehensive steering processes within the revised risk management framework. One of the key aims of Risk Management is to preserve a prudent level of the Group’s capital adequacy. The Group monitors its capital adequacy at the Group and individual subsidiary bank level within the established ICAAP process under both normal conditions (regulatory capital adequacy) and stressed conditions. As at 31 December 2016, the Group had a strong level of capital adequacy (CET 1) of 17%, which is well within the stated risk appetite limit, and above the EU average as published by the European Banking Authority (EBA). In line with the Supervisory Review and Evaluation Process (SREP), CET 1 and the total capital requirement for the Group in 2017 are currently fulfilled in the current and fully-loaded requirement. The second key aim is to maintain a solid level and structure of liquidity. The Group holds a strong liquidity position at the Group and individual subsidiary bank level, which is well above the risk appetite with the liquidity coverage ratio (LCR) (according to the delegated act) of 332% and unencumbered eligible reserves in the amount of EUR 4,856 million. Even if the stress scenario were to be realised, the Group has sufficiently high liquidity reserves in place in the form of placements at the ECB, prime debt securities, and money market placements. The main funding base of the Group at the Group and individual subsidiary bank level predominately entails customer deposits with a comfortable level of LTD in the amount of 74%, giving the Group the potential for further customer loan placements. The improving quality of the credit portfolio represents the third and still the most important key aim, with a focus on the quality of new placements leading to a diversified portfolio of customers. The Group is actively present on the market, financing existing and new creditworthy clients. The lower indebtedness of companies in Slovenia and their successful restructuring has had a positive influence on the approval of new loans. In the retail segment, positive trends were shown throughout the region in clients’ greater trust in economic developments and the related consumption and selective recovery of the real estate market. The Group puts considerable emphasis on new corporate and retail financing, the sustainability of the credit risk volatility, and the sustainable size of the subsidiary banking members. On the Slovenian market, the focus is on providing appropriate solutions for retail, medium-sized, and small enterprise segments, while on the corporate segment the Bank is reinforcing the cooperation with selected corporate clients (through different types of lending/investments instruments). All other banking members in SEE region, where the Group is present are universal banks, mainly focusing on the segment of medium-sized and small enterprises, and the retail segment. The Group puts considerable emphasis on new corporate and retail financing, sustainability of the credit risk volatility, and the sustainable size of the subsidiary banking members. NLB Group 2016 Annual Report108 Their primary goal is to provide comprehensive services to clients by taking prudent risk management principles into account. The current structure of gross exposures (on- and off-balance sheet) consists of 33.8% of retail clients, 21.0% of large corporate clients, 27.3% of SMEs and micro companies, while the remainder of the portfolio entails other liquid assets. The efforts resulted in the moderate formation of new NPLs and a sustainable cost of risk in 2016, also partly related to the positive macroeconomic environment conditions. The Group developed capacities to gradually introduce a wide range of advanced approaches supported by mathematical and statistical models in the area of credit risk assessment, while in the area of stress testing, markets, and liquidity risk internally-developed models were also additionally enhanced in connection with relevant expected macroeconomic factors. The restructuring, work-out capacities, and approaches built in the past are largely still occupied by the legacy of NPE, although increasingly focused on actively resolving new cases with a faster and more active approach to restructuring and work-out. The structured approach from the past and successful application of various restructuring tools resulted in numerous clients being cured in 2016, and their transfer to the front office. The Bank has made substantial progress in retail restructuring by focusing on a systematic approach and proactively using standardised tools for the timely restructuring of exposures to private individuals. Institutions 7% State 11% SME 27% Mortgages 17% Consumer 17% Corporates 21% Note: Gross exposures include also reserves at Central Banks and demand deposits at banks Figure 42: NLB Group structure of the credit portfolio (gross loans and advances) by segment 56% 57% 58% 23% 18% 12% 7% 6% 5% 25% 19% 14% A (Highest quality) B C D and E (Default) 2014 2015 2016 Figure 43: Structure of NLB Group credit portfolio by client credit ratings as at year end NLB Group 2016 Annual Report109 Strong commitment to reduce the NPE legacy on the Group level continued in 2016. Precisely set targets and constant monitoring of the realisation enabled a further substantial reduction in the volume of the non-performing portfolio to be achieved. The existing non-performing credit portfolio stock in the Group was reduced from EUR 1,896 million to EUR 1,299 million, which does not include the restructured exposures in the last year, which hold good potential to be cured in 2017. The realised sale of the non- performing portfolio to investors in two tranches (corporate and retail) resulted in an NPE reduction of EUR 233.3 million. The combined result of all effects was that the share of NPLs decreased from 19.3% to 13.8%, while the share of NPE by the EBA methodology was reduced from 14.3% to 10.0%. An important Group strength is the coverage ratio, which remains high at 76.1% (an increase of 3.9 percentage points). Further, the Group’s NPL coverage ratio grew to 64.6%, which is well above the EU average as published by the EBA (44.3%). As such, it enables a further reduction in NPLs without significantly influencing the cost of risk in the next years. 19% 14% 10% 2014 2015 2016 Figure 44: NLB Group NPE ratio (year-end NPE% by the the EBA) 69% 72% 76% 62% 63% 65% 2014 2015 2016 2014 2015 2016 Note: Note: The coverage of the gross non-performing loan portfolio with impairments on all of the loan portfolio The coverage of the gross non-performing loan portfolio with impairments on the non-performing loan portfolio Figure 45: NLB Group Coverage Figure 46: NLB Group NPL ratio (year-end %) Coverage ratio (year-end %) When considering market risks, the Group pursues the orientation that such risks should not significantly affect a single Group subsidiary or the whole operations of the Group. Moreover, the Group operates its main business activities in euros, while in the case of the banking subsidiaries, beside their domestic currencies, they also partly operate in euros. Consequently, the Group’s exposure to interest rate risk is relatively low, but has recently increased moderately as a result of an excess liquidity position and a low interest rate environment. The Bank’s net interest income sensitivity in the case of the Euribor increase by 50 bps would amount to EUR 14.9 million, while in the case of a decreased exposure would be lower due to zero floor clauses. Moreover, the basis point value (BPV) sensitivity of 200 bps equals 14.8% of capital. with low risk appetite and mainly limited to Euro currency. Exposure towards trading is allowed only in the Bank as the main entity of the Group, and is very limited. As such it does not represent a material risk to the Group’s operations. In the area of operational risks, additional efforts were made with regard to proactive prevention and the minimisation of potential damage in the future. Special attention was paid to developing the stress- testing system, based on modelling data on loss events and scenario analysis referring to potential high severity, low frequency events. Furthermore, key risk indicators as an early warning system for the broader field of operational risks were established with the aim of improving the existing internal controls and reacting on time when necessary. The net open FX position is very low and amounts to less than 5.7% of capital. In the Group’s banking subsidiaries in SEE the net positions are generally a bit more open than on the group level, but still in line In addition, the Group was also diligently managing other, non-financial risks as a part of the ICAAP process, including strategic risk, reputation risk, capital risk, and profitability risk. NLB Group 2016 Annual Report110 Andreas Burkhardt Member of the Management Board We reached a decisive point of the determined, focused, and responsible path we began taking three years ago. We put heathly foundations for our future operations in place. NLB Group 2016 Annual Report111 “ The year 2016 will be remembered as a Our high coverage ratio, which remains year when we reached a groundbreaking at a level of 76.1% (an increase of 3.9 point in managing our NPL. In this percentage points from 2015) represents exceptional year we dramatically additional strength to the Group’s reduced NPL volume by 31% to a level performance and stability. The Group’s of just below EUR 1.3 billion. As a result NPL coverage ratio grew in 2016 to our NPL ratio came down from 25.1% 64.6%, which is well above the EU in 2014 to a much more moderate average as published by the EBA (44.3%). 13.8%, and the NPE ratio by the EBA is As such, it enables further reduction of already at 10%. We reached a decisive NPLs without significantly influencing point of the determined, focused, and the cost of risk in the following periods. responsible path we began taking three years ago. We put heathly foundations In the future, our focus remains for our future operations in place. on monitoring the performance of restructured clients and their upgrade This strong performance on NPL to the ‘Cured’ status. We are committed reduction was possible due to strong to accompany our clients throughout results in collection and continued their life-cyle. We are devoted to be a divestment of exposures at the asset and partner in their successes and a helping portfolio levels. In 2016, NLB concluded hand in the times of challenges. two landmark transactions by selling non-performing portfolios towards Slovenian corporate clients and towards Slovenian retail clients. Disposal of these non-performing portfolios largely contributed to the improvement of the NPE ratio, and at the same time freed up resources for an even faster work-out of the remaining non-performing exposures. Chapter 5. 2: Human Resources NLB maintains a Labour Council and Labour Union, and also cooperates with the Slovenian Banking Union. NLB has established a cooperative relationship with, and is not currently in conflict with any labour unions. There are currently no material lawsuits, legal disputes, or other conflicts with employees. On a pervasive path toward a leaner and more efficient organisation In the past few years, NLB has made substantial progress in improving its HR management function by introducing a system for management by objectives, development plans, promotion schemes, objective performance assessment, remuneration schemes, and an active talent management programme, that benefits employees with relevant and regular trainings and qualifications. Since 2012, the NLB Group made determined and complex efforts to gradually reduce its number of employees in connection with efforts undertaken as part of the reorganisation. In last five years the Group reduced the number of employees by 17.1% and NLB alone by 22.3%. This strategically important step was implemented with the highest responsibility towards employees and in dialog with workers representatives. NLB Group 2016 Annual Report113  100% 47% 74% 26% 57% 6,175 employees in NLB Group 2,885 employees in NLB d.d. 73.8% women in NLB Group 26.2% men in NLB Group 57% of employees in NLB Group with VI. level of education or more In the past few years, NLB has made substantial progress in improving its HR management function. = 1 employee Table 17: NLB Group employees by countries Country Slovenia* Serbia Bosnia and Herzegovine (Republic of Srpska, Federation of Bosnia and Herzegovina) Montenegro Macedonia Kosovo Other Total (NLB Group) Total (NLB d.d. only) * Note: without Bankart, Prvi Faktor, NLB Vita, Skupna PD and Sisbon. Number of employees (on 31 December 2016) 3,065 (NLB: 2,885, other: 180) 424 942 342 891 489 22 6,175 2,885 NLB Group 2016 Annual Report114 Becoming a finely-tuned orchestra with new HR and Organisation strategy In 2016 the Group adopted new business strategy and initiated key strategic initiatives, aiming among others towards a leaner organisation, an optimisation of processes, and an implementation of a new IT strategy that focuses on digitalisation, simplification, and an adjustment of the organisational structure. These initiatives will also result in a decreased number of employees in the coming years. Based on this, a new HR strategy was adopted, and further HR strategies for each organisational unit (OU) aimed at employee restructuring, in particular their knowledge and skills, were adjusted for future needs and trends. The Strategy defines nine key basic areas with their current status, the means on how to improve and achieve set goals for the end period (2021), and defines KPIs for each area with which the progress will be measured. Proud to be the first company in Slovenia to receive ‘Top Employer’ certificate In 2016, NLB was the first Slovenian company to receive the ‘Top Employer’ certificate. A survey conducted among employees in 2016 showed a better organisational climate and engagement in all the segments compared to 2015. NLB pays close attention to talent management, as well as social responsibility towards employees. NLB also received the certificate in 2017, implementing more than 60 relevant improvements in HR. HR strategy process Organizational Capability Development Leadership Culture Organization Competence Stafﬁng Employee development Talent management Performance management Reward & recognition Figure 47: HR strategy process Continuing our longstanding tradition of education The Bank has a long tradition in the field of education, as the Training Centre of NLB (Training Centre) has been operating for more than 40 years. Systematical employee education, a curiosity for new knowledge areas to support new processes, and combining them with new methods for knowledge transfer from coaching, mentoring, traineeship, e-education, etc. is being promoted. Through education, the Bank creates a new organisational culture and help shape new business practices since there is a direct correlation between education and business strategy. The purpose of all these activities of the Training Centre is to empower all employees to achieve business objectives and thereby strengthen their personal development, and to act socially responsibly towards all stakeholders. Employees are included in education consistently based on the current and future development needs of their working area, based on yearly development plans or individual career plans. The Bank policy aims to develop employees to the greatest extent possible, and with its internal experts this is the most efficient (easier adoption to banking practice and specific needs of the workplace and work processes) and most economical way (flexible time, dedicated to a large number of employees at a lower cost). In 2016, the Bank had more than 96.2% of education opportunities conducted internally and in cooperation with approximately 120 in-house experts. 583 employees from the Group were involved in various forms of education and training in 2016. NLB Group 2016 Annual Report115 The purpose of the intensive talent development is targeted career development of the best individuals in the Bank, so that they will be ready in the future to take on the most demanding positions in the Group. In contrast, facilitating career development of talents, aims to retain the best staff. With a view to always have highly-skilled leadership successors for all management positions, employees were identified to take part in the development programme in 2017, where they will work on their leadership competencies. Renumeration system as a motivation for engaged and committed employees Employees’ salaries in NLB are defined by a fixed amount, while collective agreements also offer a variable component which allows NLB to reward high-performers on a quarterly basis. NLB’s business strategy and the goals of the organisational unit are defined by the head of the organisational unit using a top-down approach, and are the basis for setting an employee’s goals. The planning of quarterly or semi-annual goals of each employee is based on the plan of the organisational unit, presented to the employees by the head of the organisational unit, which serves as the basis for: Building the foundations for the future successes with talent management The Bank made the greatest progress in 2016 in the area of talent management. It carried out the entire process of identification and calibration of talents, and officially launched the programme of talent development. The on-boarding process was also launched systematically, HR strategies that were prepared for all organisational units were optimised, and new academies covering specific educational needs of individual organisational units were developed and organised. Upon identification of the talents of the employees by General Managers, a calibration of talents was carried out in cooperation with the Management Board members and General Managers. Identified talents were divided into three groups: talent - leadership; talent – experts; and young talents. The final list of talents was formally approved by the Management Board. For the purpose of developing talents the Bank designed development programmes that are content specific and cover the needs of all three talent groups. All programmes combine development activities to gain knowledge and skills of strategic management, strategic planning, and achievement of goal objectives, project management, wider ‘out of the box’ thinking, creative thinking, English learning, etc. This will be achieved by using various development activities: education, training, project work, coaching, and mentoring. • Semi-annual or quarterly employee performance assessments; • Conversations between employees and their superiors about the achievement, exceeding and non-achievement of goals; • Setting of action plans for improvements; and • Payment of part of the salary based on personal performance. The head of the organisational unit checks the achievement of the set goals of the organisational unit and the employee quarterly or semi-annually, and establishes any surpassing or lack of achievement or deviations, of which the superiors are informed. All of the above serves as the basis for appropriate planning and setting of goals for the next assessment period. The goals are set according to the ‘SMART’ method, meaning that they have to be (a) specific (the goal shall be defined briefly and understandably), (b) measurable (the head of the organisational unit shall specifically define the result), (c) challenging (referring to the scope and ability of attainment of the goal), and (d) realistic, and timely (with a defined time frame). Being family-friendly company The Full Family-Friendly Company certificate was granted to the Bank in December 2014 by the non-profit and independent organisation Ekvilib Institute, together with the Ministry of Labour, Family, Social Affairs, and Equal Opportunities. The aim of the certificate is easier coordination of the private and professional lives of employees. NLB Group 2016 Annual Report116 A total of 72.36% of NLB’s employees participated in this survey, which is considered an above-average participation level in Slovenia. 71% of employees responded to the last survey conducted in NLB in 2015 and 61% in 2014. > 980 participants in the ‘Healthy Bank’ activities for improvements of health in the workplace and quality of life > 118,000 hours of education in 2016 > 1,000 educational programmes implemented in 2016 Key benefits for the employees: • A free weekday off to escort children on their first day of school; escort kids in the last year of elementary school or high school to the information open day in high schools or colleges; move into their new place; escort a family member in case of serious illness • The potential of flexible working hours or paid leave hours to introduce children into pre-school • Paid absence from work due to extraordi- nary family reasons • Organisation of childcare activities during the summer and winter holidays (NLB Happy holidays) by the Bank • An offer of additional benefits on bank- ing services, including financial assistance for employees • New Years gifts for children and gifts for newborns, as well as social aid for children of deceased employees of the Bank to aid their studies • A full day off from work due to the utilisation of excess working hours even if they attained them with overtime work that was not mandatory. The management staff is annually informed of the activities and measures of a family- friendly company and needs to complete a mandatory e-learning programme. The respective activities and measures are also taught in the Bank’s School for leaders. Managers and directors are assessed by subordinates with the 360 degrees method, part of which also includes the evaluation of the ability of a manager to reconcile the work and private lives of employees. Group members need to uphold their implemented measures and activities that have been set through the certification process. Throughout the process, the work is accompanied by the evaluator/ consultant, on the basis of annual reports and audited by Ekvilib Institute. The number of employees benefitting from measures increases each year. In 2016, 7,974 employees benefitted from the measures, meaning that on average each employee benefitted from the measures 2.6 times per year. The Bank also adds new measures each year. Improving organisational climate and employee engagement The effects of NLB’s HR Strategy are measured with an organisational climate and employee engagement survey, which assesses the motivation level of its employees and their willingness to invest effort above expectations, with both contributing to a successful corporate performance. The survey showed that the share of engaged employees in 2016 grew by 7% compared to 2015. The share of those actively disengaged decreased by as much. When measuring the organisational climate, NLB focused on individual perceptions and descriptions of the social environment. NLB evaluated 16 different categories, where the highest scores were achieved in the following categories: quality, management, and motivation. The greatest positive change was seen in these categories: affiliation to the organisation, organisation, and motivation. Compared to 2015 the situation improved in all 16 categories. NLB Group 2016 Annual Report117 As we evaluate the positive results of 2016, we must not forget to praise those who deserve it – our employees. Such results can only be achieved with engaged workers, who are experts in their fields, and who constantly invest in their knowledge. as well, which is why our bank was proud to accept this certificate that Vesna Vodopivec General Manager, Human Resources and Organisation Development “ As we evaluate the positive results of 2016, we must not forget to praise those who deserve it – our employees. recognises that the conditions employers Such results can only be achieved with create for their people do matter. engaged workers, who are experts in We will continue to support further their fields, and who constantly invest development of our employees, and in their knowledge. This is something enhance our Talent programme in the that our bank and the entire NLB Group entire NLB Group. We are convinced firmly support. In 2016 NLB d.d. obtained that strategic goals are more easily the ‘Top Employer’ certificate for the achieved through the nurturing of first time. We are committed to helping hard-working, dedicated experts. our employees do excellent work, and to their continued development NLB Group 2016 Annual ReportDigital Chapter 6 ДигиталниДигиталниDigitalniDigjitalDigitalniDigitalniDigitalniDigital Chapter 6 ДигиталниДигиталниDigitalniDigjitalDigitalniDigitalniDigitalniChapter 6. 1: IT and Processing Operations Information Technology Building our competitive advantage on the basis of a new IT strategy Technology is the essence of the modern social and business environment. Therefore, information technology presents the cornerstone of all operations in NLB. An agile IT function plays crucial role in ensuring high levels of information security and availability, as well as building a sustained competitive advantage on the market. NLB is on the way to taking one of its most important transformational steps in its history. With implementation of new banking services and functionalities, based on digitalisation of products, processes, and customer experience, the Bank is implementing significant business changes that will considerably change its operations, as well as its culture. The cornerstone of this transformation process is and will be in IT. In 2016 the Bank confirmed its new IT strategy. It includes the following major aspects: Enterprise Architecture, Governance & Processes, Financials, Sourcing, Innovation, and Group Synergies. The future governance addresses key points in the existing governance model, as well as the changes necessary for successful implementation of IT and business strategies through 2020. NLB Group 2016 Annual Report121 Infrastructure overview in Slovenia = 10 units Infrastructure in foreign bank subsidiaries 2 data centres with disaster recovery capability 800 TB of disk storage 2 IBM mainframes 150 physical servers 450 active network devices International subsidiaries operating independently based on right-sized solutions for the market 330 virtual servers 558 ATMs To achieve its goals defined in the new strategy, NLB Group plans to initiate a top-down review of its current technology architecture and define a transition path towards a simplified, less complex IT landscape, which will be able to support the high demands of a real-time/data- driven /omnichannel environment. Such a transition will likely involve long-term efforts spanning several years in order to realise anticipated benefits such as the reduction of certain costs and a defending the NLB Group’s position as a market leader. More actively identifying and pursuing group synergies are also high on the agenda. The year of introduction of innovative products and maintenance of high security standards An agile IT function continues to be seen as the key to a sustained competitive advantage. In 2016 the Bank retained high levels of information security and availability, with the current bank reliability standing at 99.97%. To maintain a high level of information security and ensure compliance with applicable data protection and privacy laws, NLB pursues the continued improvement of its technology and operations. One of the most important tasks IT performed in 2016 was the introduction of ‘Klikpro,’ a mobile bank for companies. The first version, which was “live” in July, enabled users to review their accounts’ balances, details of the payments orders, manual entry of UPN, and as well “take a photo and pay” functionality, with a value- added tax (VAT) calculator, and more. The graphical layout was refreshed as well. Upgrade of the application in December 2016 additionally enabled payments to foreign countries, exchange offices, and certain other new functionalities. The Bank already had 3,403 users of Klikpro by the end of 2016. NLB Group 2016 Annual Report 122 Similarly, ‘Klikin,’ a mobile banking platform for private individuals, was upgraded and user-friendly functionalities such as “take a photo and pay,” automatic filing of the receiver’s data in a Universal Payment Form (UPN), and the sending of payment details to an e-mail address were enabled. Here as well, the graphical layout was changed and modernised. Klikin enjoyed a great client response, and already had 55,433 users by the end of 2016. The other significant project the Bank completed was the implementation of E-signature in all branches. Beside the E-signature itself, credit flow processes were optimised, and all entry documents are now only available in electronic format. All documents are stored in a central archive in real time and are immediately available to all authorised Bank employees through the front end systems. This is yet another step towards advancing digitalisation as a cornerstone of keeping up and creating a competitive edge on the market in the future. The Bank successfully emphasises its position as market innovator with the introduction of unique mobile and online platforms which enable its clients’ services such as the “take a photo and pay” function, the ability to transfer funds through a phone address book, and the introduction of video calls and chat features on the Bank’s website. We are planning to be the first bank to offer an end-to-end loan process. Modern infrastructure for Today’s projects are the future challenges foundations for the digital era Our IT department is putting large effort in introducing the synergies in the NLB Group wherever this is applicable. So far, three areas are defined, CRM, Omnichannel (Users Experience), and BI (Business Intelligence). Products which suit all banks in the Group will be centrally procured and a support group with a high level of knowledge will be established in various banks with the tasks to support specific areas for all Group members. The Bank will focus on customer- oriented scenarios (customer relationship management (CRM), BPM, or Customer experience platform) in sourcing the target architecture components. Tangible synergies can be achieved across the Group with strong governance and unified solutions in the areas of digital frontends, data management, and CRM. The Bank’s commitment to following a path of digitalisation is putting full attention on establishing modern infrastructure. In year 2016 we ensured successful digital support to the largest Slovenian vault. As a sole financial institution we achieved the largest market share in an issued certificate in Slovenia, and we are planning to introduce the cloud technology for remote signature in 2017. We provide an effective outsource of payment processing at the national and regional levels. NLB is in the process of setting up a new data infrastructure and data management practices which will, over time, provide standardised global data infrastructure services to all NLB bank’s core subsidiaries. This new data ecosystem will allow the NLB Group to take advantage of synergies in various areas of banking operations and business. The Bank’s commitment to following a path of digitalisation is putting full attention on establishing modern infrastructure. NLB Group 2016 Annual Report123 Through further optimisation of processing and by following the trends of digitalisation, the Bank is striving to provide improved customer experience. Processing operations Retaining the position of leader and Through process optimisation most trusted payment service provider towards agile and dynamic operations of financial instruments In 2016, the Bank continued with rationalisation and optimisation of operations and implemented a number of improvements and automations for back office processes. Most important were in the process of a supporting brokerage, where the Bank increased the number of clients by 150%, due to the mandatory transfer of client assets from registry accounts at Central Securities Clearing Corporation (KDD) to trading accounts. With engagement and dedication the Bank provides a comprehensive and professional service to clients, ensuring effective operational and settlement risk management and optimising costs. As integration of the Slovenian capital market into TARGET2-Securities (T2S), a single pan European platform for securities settlement in central bank money is taking place in the beginning of 2017, the majority of adaptations had to be ensured already in 2016. Beside adaptations of services for the Bank’s own securities settlement operations, services for the clients in the context of T2S Payment Bank were newly developed (the Bank will be the only bank in Slovenia offering access to Dedicated Cash Accounts in T2S to other clients). In 2016 the Bank succeeded in retaining its market position as the leading and most trusted payment service provider. Special attention was dedicated to quality, reliability, and security of payments services to adequately accommodate ever-demanding and changing needs of the Bank’s retail and corporate clients. In the field of payment processing further improvements of efficiency and automation resulted in a higher rate of Straight through Processing (STP) transactions. The Bank’s partners are the leading industry providers offering the highest level of expertise, even as much as regional banks that know profoundly well about the markets important for clients. The Bank account network was additionally streamlined in 2016, and the Bank currently holds 46 accounts with 36 leading providers. It is likely that this trend shall continue, not only from a compliance, but also profitability perspective. In line with the digitalisation trends and anticipated regulatory changes, the Bank has initiated a number of different development activities (internally and with stakeholders) in order to timely respond to new challenges and to make necessary adaptations. In this respect two projects were introduced in 2016, namely The Instant Payments Project and the project to introduce a quick response (QR) code on UPN. The objective is to advance customer experience by faster execution of their payments (instantly, i.e. in less than 10 seconds) and simplified initiation of payment orders and their processing (using QR code). NLB Group 2016 Annual ReportIn 2016 NLB’s Cash Processing team completed a substantial investment project, which was the Bank’s largest investment project in recent years. The largest cash processing centre in Slovenia has been constructed in Ljubljana. 124 Establishing the largest cash processing centre in Slovenia Cash Processing supplies branches and ATMs of the Bank with cash, and ensures constant availability of high quality banknotes and coins for the whole branch network. In addition, the Bank’s central vault supplies cash for branch and ATM networks of 12 other banks in Slovenia. In 2016 NLB’s Cash Processing team completed a substantial investment project, which was the Bank’s largest investment project in recent years. The largest cash processing centre in Slovenia has been constructed in Ljubljana. It has enabled automation of processes and consequently a reduction of costs in this area. To cover all specifics of cash processing, NLB has developed its own IT application. This enables appropriate support for automated processing of cash, as well as automated capturing and transfer of data. NLB has also developed an online environment in which information about cash orders can be exchanged with its clients. As a result, NLB’s clients (banks and companies) are able to send orders for cash services and monitor statuses of their orders. The Bank is continuously developing internal processes and relationships with customers. Consequently, in 2016 the majority of paper work related to cash transportation was digitalised through implementation of a mobile phone application. 125 We want to offer novel approaches and never-before- seen solutions that facilitate operations through every channel. The modern world is becoming extremely mobile. We want to be with our customers every step of the way. We are rapidly adapting our In addition to supporting target information technology to trends in business improvements, we aspire for a László Pelle Member of the Management Board “ The banking industry is facing real challenges. Developing new technologies brings new methods of operations and banking digitalisation. In 2016 we leaner, more agile, and cost-effective IT cutting-edge business models, while introduced several innovative digital architecture, so we’ll be able to respond regulatory institutions keep setting new product solutions, such as the mobile to the main digital challenges of the rules to stay current with that rapid application ‘NLB Klikpro’ that enables industry. Through digital technologies, development. NLB wants customers companies, entrepreneurs, and private utilisation of our data warehouse, who need and seek innovative services. individuals with small businesses simple and an agile delivery organisation We want to offer novel approaches ‘Check – pay – order’ services at their we are building a solid foundation and never-before-seen solutions that fingertips. The incentives set in our toward being in a more competitive facilitate operations through every ambitious 2016 - 2020 strategy are mid- to long-term position, as well as channel. The modern world is becoming essentially based on upgrading and simplifying our client’s daily business. extremely mobile. We want to be with delivering modernised IT capabilities by our customers every step of the way. establishing or updating key elements of our IT application architecture. NLB Group 2016 Annual ReportChapter 6. 2: Internal Audit Internal Audit monitors decision-making process in all areas of NLB Group, reviews key risks in its operations, advises management at all levels, and deepens understanding of the Bank’s operations. Furthermore, it provides independent and impartial assurances regarding the management of key risks, management of the Bank, operation of internal controls, and thereby strengthens and protects the value of the Bank. Internal Audit is an independent, objective, and advisory control body responsible for a systematic and professional assessment of the effectiveness of risk management procedures, completeness and functionality of internal control systems, and the management of the Group operations on an ongoing basis. Internal Audit reports to the Management Board and directly to the Supervisory Board. It provides impartial assurance to the Management Board and the Supervisory Board that risks in key areas of the Bank i.e. risk management, lending, restructuring and NPL, IT and IT security, divestment of non-core activities, compliance, corporate governance, and others are managed properly. The best practice examples and international guidelines provided by the Committee of Sponsoring Organisations of the Treadway Commission (COSO), Internal Control (IC) and Enterprise Risk Management (ERM) represent the main criteria for the Bank’s internal controls system and effective risk management. NLB Group 2016 Annual Report127 24,454 hours were spent in reviews 57 experts worked on 12 internal audit services of the Group 42 planned and extraordinary audit assignments were conducted by Internal Audit of the Bank in 2016 = 8 hours Active in the entire Group Implementation of uniform rules The highest standards were followed Internal Audit performs its tasks and responsibilities based on its own discretion and in compliance with the annual audit plan as approved by the Management Board and confirmed by the Supervisory Board. Based on its internal methodology and comprehensive risk analysis plan for 2016 intended 40 audit reviews, out of which 36 were conducted. The number also includes a quality review of Internal Audit function in all six banking members of the Group. Furthermore, six extraordinary audits were conducted, mainly on the request by the regulator and the Management Board of the Bank. In its activities Internal Audit puts a lot of focus on monitoring the implementation of the audit recommendations; updating the internal audit manual, training, and education; advising management; and ensuring high quality and professional operations of the internal audit function within the Group. Internal audit also introduces uniform rules of operation of the internal audit function and regularly monitors the compliance with these rules within the Group. Internal Audit and other internal audit services in the Group operate in accordance with the: • International Standards for the Professional Practice of Internal Auditing • Banking Act or other relevant law which regulates the operations of a Group member • Code of Ethics of Internal Auditors and • Code of Internal Auditing Principles. NLB Group 2016 Annual Report Chapter 6. 3: Compliance and Integrity A key element for long-term success is to follow reasonably set rules and agreed values. Therefore, the Group is strengthening the compliance function and diligence of its operations. This is a commitment of all employees of the Group. The Bank is constantly building, strengthening, and supporting a culture of compliance and diligence. Banking is a highly regulated industry, which makes the business operations more and more demanding. An institution can cope with this challenge with a systemic approach toward compliance risk mitigation. It is important to ensure that employees and decision-makers know and understand the purpose and goals of regulations. Systematically monitoring the legal and regulatory environment and evaluating its effects on the Bank has therefore become a significant part of everyday life and work. One of the most important tasks in this area in 2016 was further successful alignment of the Bank to a new law on banking which was adopted in 2015, as well as to other applicable regulations. To ensure sound information flow and issue addressing, Compliance function is reporting to the Management Board and to the Supervisory Board of the bank. NLB Group 2016 Annual Report129 The new compliance policy, which was adopted in 2016, is based on the framework of internationally recognised standards of compliance management. In 2016 the BoS closed the order from 2013 under which the Bank had to review and assess the reasons for past losses. The Bank has successfully fulfilled the task and implemented a variety of improvements in the system and organisation of the Bank, including the ones that are eliminating shortcomings identified in the systematic review of NPL. By completing this chapter of the past, the Bank is able to be fully committed to the future. about issues of compliance, be it from a regulatory perspective or about ethics and integrity and prepared workshops and mandatory e-trainings about business ethics, prevention of corruption, personal data protection, and other relevant topics connected to everyday work. Special attention is dedicated to advisory support for employees who have dilemmas about issues from the compliance field – mainly connected to regulatory questions, conflict of interests, acceptance of gifts, etc. Compliance and Integrity dedicated over 1,000 working hours for advisory support to employees in 2016. An anonymous reporting line for whistle blowers has been established and an internal investigation process is in place and running. A new methodology and process for assessing enterprise compliance risks were developed. The assessment is enabling the Bank to continuously reduce the compliance risks with already prepared mitigation measures. The same procedure for enterprise compliance risk assessment is being used for other members of the Group with a goal to identify, assess, and mitigate compliance risks on the Group level. 6 Directive (EU) 2015/849 of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. The Bank complies with national regulations on Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF), including the Guidelines of the BoS. The RoS is a member of EU and thus subject to the standards of the Financial Action Task Force (FATF) and the European legislation based on them, i.e. the fourth EU directive in the area of Money Laundering and Terrorist Financing Prevention (MLTFP).6 Pursuant to the Slovenian MLTFP Act, the bank is obliged to ensure that its branches and majority-owned subsidiaries with head offices in third countries apply the same measures. The Group members must fully comply with the Slovenian legislation on MLTFP (the basis for establishing compliance in the Group are Minimum Standards for Compliance and Integrity). The coordination of the implementation of the MLTFP system in the Group also includes the oversight and review of the MLTFP system. Every strong compliance programme reaches beyond pure regulatory issues and deals also with ethics and integrity within the organisation. Such a programme encourages the employees and other stakeholders to business behaviour that is aligned with a strong positive organisational culture. The new compliance policy, which was adopted in 2016, is based on the framework of internationally recognised standards of compliance management. There is a great emphasis on prevention, namely preventing the harmful conducts and incidents in the Bank. In 2016 employees of all levels were informed and trained on non-acceptance of violations of rules and other obligations. Periodically, Compliance and Integrity distributed news NLB Group 2016 Annual ReportCommited Chapter 7 ПосветениPosvećeniTë Përkushtuar PosvećeniPosvećeniПосвећениPredaniCommited Chapter 7 ПосветениPosvećeniTë Përkushtuar PosvećeniPosvećeniПосвећениPredaniChapter 7. 1: Overview of NLB Group’s Financial Performance 2016 Income statement The net profit for 2016 was EUR 110.0 million, which is 20% higher than 2015. The Bank contributed EUR 65.6 million, other strategic Group banks EUR 57.7 million, while non-core members contributed negatively, but with lower loss compared to the previous year. This result is based on the following key drivers: • A successful cost-reduction process with substantial savings achieved specifically in general and administrative expenses (-7% YoY) • A very solid performance in the cost of risk, being substantially lower than last year although fully accommodating the effects of the non-performing portfolio sale • Solid performance in key business areas • Resilient fee and commission income and positive results from asset disposals (Visa shares, Trimo). with very positive profit evolution, especially in foreign strategic subsidiaries, and solid recovery in loan demand in all key business areas resulting in 8% asset growth YoY over all key business segments (retail/corporate Slovenia, foreign strategic markets) NLB Group 2016 Annual ReportTable 18: Income statement of NLB Group and NLB NLB Group NLB d.d. 133 in EUR million Net interest income Net fee and commission income Dividend income Net income from financial transactions Net other income Net non-interest income Total net operating income Employee costs Other general and administrative expenses Depreciation and amortisation Total costs Result before impairments and provisions Impairments of AFS and HTM financial assets Credit impairments and provisions Investments in ass.&JV - using the equity method Other impairments and provisions Impairments and provisions Gains less losses from capital investments in subsidiaries, associates and joint ventures1 Profit before income tax Income tax Result of non-controlling interests Profit for the period 2016 317.3 145.7 1.2 19.9 -8.3 158.4 475.7 -165.4 -95.8 -28.3 -289.5 186.2 -0.3 -26.1 -12.3 -22.0 -60.6 5.0 130.6 -15.0 5.6 110.0 2015 Change YoY 340.2 147.1 1.3 3.8 -9.1 143.2 483.4 -163.2 -102.8 -31.9 -297.8 185.6 -4.7 -50.9 - -27.6 -83.1 4.3 106.8 -11.4 3.5 91.9 -7% -1% -8% 417% -8% 11% -2% 1% -7% -11% -3% 0% -94% -49% - -20% -27% 16% 22% 32% 62% 20% 2016 174.9 95.3 1.1 13.3 -0.9 108.8 283.7 -103.2 -58.9 -18.9 -181.0 102.7 -0.3 -15.2 -37.6 -10.8 -64.0 28.9 67.7 -3.9 0.0 63.8 2015 Change YoY 208.0 98.1 1.3 8.9 -2.9 105.3 313.3 -101.8 -64.0 -21.4 -187.2 126.1 -2.6 -28.1 -50.3 -7.0 -88.0 13.7 51.8 -8.0 0.0 43.9 -16% -3% -9% 50% -70% 3% -9% 1% -8% -12% -3% -18% -89% -46% -25% 55% -27% 110% 31% -51% - 45% Note: 1 NLB d.d. includes dividends from subsidiaries, associates and joint ventures ROE a.t. 6.6% 91.9 + 15.3 + 8.3 - 22.9 + 22.5 + 0.7 - 3.6 - 2.1 7.4% 110.0 2015 Net interest income Net non-interest income Total costs Net impairments and provisions Gains and losses * Income tax Result of non-controling interests 2016 Note: * Gains less losses from capital investments in subsidiaries, associates and joint ventures Figure 48: Profit after tax of NLB Group – evolution YoY (in EUR million) NLB Group 2016 Annual Report 134 63.8 43.9 n o i l l i m R U E n i 25.0 13.1 14.1 9.9 11.3 8.2 6.2 5.3 4.2 5.4 NLB NLB Banka Skopje NLB Banka Banja Luka NLB Banka Prishtina NLB Banka Podgorica NLB Banka Sarajevo 2015 2016 Figure 49: Profit after tax of the NLB Group banks (on a stand alone basis) - evolution YoY (in EUR million) 1.2 2.2 NLB Banka Beograd cially in the corporate segment (-14.0% YoY) with more stable results in retail (-6.5% YoY normalised by the impact of the non-performing portfolio sale), where high growth of new loans in last quarter of 2016 was recorded and • The rapid decline in interest income from financial markets (mostly invested in medium-term investment grade securities) and the expiry of higher yielding bonds received by the BAMC in 2013. Most of the banks in the Group increased their profit after tax compared to 2015 in spite of an unfavourable market situation with an extremely low and partially negative interest rate environment, a high level of excess liquidity, and fierce competition for good investment projects. The result of the Bank increased by 45% compared to 2015, and includes dividends from core subsidiaries, associates, and joint ventures in the amount of EUR 28.7 million. In August 2016, the Bank paid a dividend of EUR 43.9 million to owner, the first time since 2009. Profit before impairments and provisions of the Group totalled to EUR 186.2 million, which is EUR 0.7 million higher than 2015. Non-recurring results turned out to be EUR 19.9 million higher YoY, of which EUR 9.4 million is attributable to non- recurring effects in 2016. The Bank divested a non-core equity stake (Trimo) at a profit of EUR 5.5 million (comprising of a realised gain on equity investment and fee received as a financial consultant for the bank syndicate), Visa shares at a profit of EUR 7.8 million, and recognised a restructuring charge of EUR 3.8 million. The recurring results were mainly influenced by a solid improvement in costs (-3% YoY) and strong dynamics in the composition of interest income: • The stable performance in interest income in key business activities at EUR 243.0 million (2015: EUR 244.4 million) – strong growth in strategic foreign mar- kets (+9.4% YoY to EUR 136.9 million) offset by lower interest income due to higher margin pressure in Slovenia, espe- NLB Group 2016 Annual Report 135 n o i l l i m R U E n i 311.4 363.6 Non-recurring effects EUR +19.9 million Net effects from reccuring activities EUR -19.3 million +9.4 -2.0 +8.7 +10.5 -22.9 -2.0 -1.0 -0.1 185.6 186.2 2015 Non-recurring effects 2015 Non-recurring effects 2016 Net proﬁt from ﬁnancial transaction Total costs Net interest income Fees and commissions Other regular net income Dividends received 2016 Figure 50: Profit before impairments and provisions of NLB Group – evolution YoY (in EUR million) Net interest income Net interest income of the Group accounted for 66.8% of the Group’s total net revenues, decreasing by 6.7% YoY to EUR 317.3 million, mostly due to falling interest income in Slovenia – especially in the financial markets segments given the historically low yield environment. The Group continued with the very active management of its interest expenses, repaying or repricing some funding lines and continuously adjusting deposit pricing to the prevailing low interest rate environment, thereby substantially reducing interest expenses (-30.9% YoY). As a reaction to the negative deposit rates quoted by the ECB, the NLB partially introduced asset management fees for larger deposits placed by corporates in Slovenia. 340.2 317.3 443.2 388.5 -103.0 2015 -71.2 2016 Interest expenses Interest income Figure 51: Net interest income of NLB Group (in EUR million) NLB Group 2016 Annual Report 136 Key business activities 2016: 243.0 (2015: 244.4) 136.9 125.2 78.3 73.2* 2.0 71.2 Key/Mid/Small corporates 40.9 34.9 + 14.9 2.8 13.1* 1.9 11.0 2.1 Restructuring and work-out 2015 2016 Non-performing portfolio sale effects * Normalised for non-performing portfolio sale effects -0.8 -0.7 60.2 48.5 21.6 15.4 Corporate banking in Slovenia Retail banking in Slovenia Strategic foreign markets Financial markets in Slovenia Non-core markets and activities Other activities Figure 52: Net interest income of NLB Group by segments (in EUR million) Net non-interest income in financial markets in Slovenia was EUR 11.1 million lower as the 2015 result included profits from the non-recurring event of selling RoS bonds (EUR 5.2 million), while the 2016 result includes the negative effects in the amount of EUR 3.0 million from the prepayment of wholesale funding. Net interest income in key business activities remained very stable overall, with the higher pressure from business in Slovenia being offset by the higher growth in Strategic Foreign Markets. Net interest income in financial markets decreased predominantly due to the continuous reinvestment of the securities portfolio at lower yields, and the expiry of higher yielding securities received from the BAMC (EUR 300 million expiring already in 2015, EUR 300 million expiring at the end of 2016). In line with the strategy of the Group, non-core markets and activities decreased and consequently net interest income was lower. Non interest income Net non-interest income of the Group was EUR 15.3 million higher than 2015 at the level of EUR 158.4 million (2015: EUR 143.2 million), primarily due to the positive non-recurring effects from asset disposals in 2016 (Visa, Trimo), while the negative non-recurring effects incurred in 2015. The net non-interest income of Key business activities continues to be resilient in both Slovenia and in strategic foreign markets. Some decline was noted in retail banking in Slovenia, largely explained by the new regulation on card pricing. NLB Group 2016 Annual Report137 2015 2016 12.7 1.6 10.9 10.1 3.5 -11.7 Key business activities 2016: 138.0 (2015: 139.8) 72.5 66.5 Key/Mid/Small corporates 29.0 26.6 40.7 42.5 + 2.8 1.9 Restructuring and recovery Corporate banking in Slovenia Retail banking in Slovenia Strategic foreign markets Financial markets in Slovenia Non-core markets and activities Other activities Figure 53: Net non-interest income by segments of NLB Group (in EUR million) Non-core markets and activities in 2016 include the positive non-recurring income from the sale of non-strategic equity investments, while in 2015 the result was burdened by the non-recurring FX charge. The other activities segment includes income from non-bank services for external customers (EUR 8.8 million), the non-recurring income from the VISA EU share transaction (EUR 7.8 million), and payments to the SRF and the DGS in the amount of EUR 8.5 million, as well as restructuring charges recognised in the Bank (2016: EUR 3.8 million). NLB Group 2016 Annual Report138 Net fees and commissions The most important source of net non- interest income is net fees and commissions, which remained very resilient at the level of EUR 145.7 million (2015: EUR 147.1 million) with the Group making increased efforts to grow its ancillary revenue base with fee-based products such as insurance and asset management. Some decline in cards and ATM operations was notably due to the negative effects of the EU Directive in the area of card operations (MiFiD). Lower operating costs Costs continue to be a focus of management attention. Costs declined overall by 3% YoY in 2016. Special attention was given in 2016 to general and administrative expenses with substantial savings achieved (-7% or EUR 7.0 million YoY). The cost-reduction trend is present in most members of the Group, especially the non-strategic ones. Employee costs were higher mainly due to the reintroduced payment of supplementary pension insurance for employees, the higher holiday allowance paid in the Bank, and one-off costs incurred with HR redundancies in NLB Banka Beograd in a total amount of EUR 0.9 million. The Group also created provisions totalling EUR 10.6 million in anticipation of future HR redundancies envisaged in Slovenia (shown in Other Provisions in the Financial Statement). 147.1 1.2 2.9 13.5 3.8 12.7 39.7 145.7 0.8 3.3 13.8 5.0 11.9 39.9 24.0 21.3 Other Bancasurrance Asset management Investment banking Guarantees Basic accounts 49.3 49.6 Cards and ATM operations Payment transactions 2015 2016 Figure 54: Structure of net fees and commissions of NLB Group (in EUR million) CIR 61.6% 297.8 2.2 -7.0 -3.5 163.2 102.8 31.9 2015 Employee costs Other general and administrative expenses Depreciation and administration 60.9% 289.5 165.4 95.8 28.3 2016 Employee costs Other general and administrative expenses Depreciation and administration Figure 55: Total costs of NLB Group – evolution YoY (in EUR million) NLB Group 2016 Annual Report139 As a result, the CIR amounted to 60.9%, namely a slight improvement (0.8 percentage point) compared to 2015. Going forward, NLB Group will aim to significantly improve operational efficiency by focusing on the transition to STP processing via online channels with the consequent further rationalisation of the traditional network, employee, and other general and administrative costs, while ensuring a reduction of the remaining non- core cost base in an accelerated manner. Low net impairments and provisions in EUR million in bps 60 50 40 30 20 10 0 75 51 2015 80 70 60 50 40 30 20 10 0 38 26 2016 Net credit impairments and provisions Cost of risk (in bps) Figure 56: NLB Group credit impairments and provisions, costs of risk (in bps) Net impairments and provisions amounted to EUR 60.6 million, which is 27% less than in 2015 due to the improvement in the quality of the credit portfolio’s structure, the positive effects from the successful restructuring, and the resolution of non-performing receivables. Accordingly, the net cost of risk decreased from 75 basis points to 38 basis points despite the additional impairments related to the non- performing portfolio sale in the amount of EUR 25.8 million. Other impairments and provisions were established in a net amount of EUR 22.0 million, of which most material were HR provisions (EUR 10.6 million) and impairments of real-estate assets (EUR 3.3 million). Figure 54: Structure of net fees and commissions of NLB Group (in EUR million) Figure 55: Total costs of NLB Group – evolution YoY (in EUR million) NLB Group 2016 Annual Report140 Statement of financial position Table 19: Statement of financial position of NLB Group and NLB NLB Group NLB d.d. in EUR million 31 Dec 2016 31 Dec 2015 Change 31 Dec 2016 31 Dec 2015 Change Cash, cash balances at central banks and other demand deposits at banks 1,299.0 1,162.0 Loans to banks Loans to customers Gross loans - corporate - individuals - state - BAMC bonds Impairments Financial assets - Held for trading - Available-for-sale, held to maturity and designated at fair value through income statement Investments in subsidiaries, associates and joint ventures Property and equipment, investment property Intangible assets Other assets Total assets Deposits from customers - corporate - individuals - state Deposits from banks and central banks Debt securities in issue Borrowings Other liabilities Subordinated liabilities Equity Non-controlling interests Total liabilities and equity 435.5 6,997.4 7,900.8 3,917.4 3,190.7 792.7 - 431.8 7,088.2 8,351.0 4,282.3 3,050.8 708.3 309.6 -903.4 -1,262.8 2,778.0 2,577.7 87.7 267.4 2,690.3 2,310.3 43.2 280.5 34.0 171.4 39.7 301.2 39.3 181.7 12,039.0 11,821.6 9,439.2 2,182.6 6,905.1 351.5 42.3 277.7 455.4 271.6 27.1 9,025.6 2,168.5 6,493.5 363.6 58.0 305.0 671.3 284.1 27.3 1,495.3 1,422.8 30.3 27.6 12,039.0 11,821.6 12% 1% -1% -5% -9% 5% 12% -100% -28% 8% -67% 16% 9% -7% -14% -6% 2% 5% 1% 6% -3% -27% -9% -32% -4% -1% 5% 10% 2% 617.0 408.1 4,928.9 5,433.7 2,769.1 1,990.2 674.4 - -504.7 2,295.2 87.7 496.8 345.2 5,220.7 5,915.4 3,063.0 1,957.9 585.0 309.6 -694.7 2,086.7 267.9 2,207.6 1,818.8 346.7 98.6 23.3 60.0 8,778.0 6,617.4 1,442.3 4,943.5 231.7 75.0 277.7 342.7 200.3 - 353.1 103.2 29.6 71.5 8,706.8 6,298.3 1,416.0 4,630.1 252.1 96.7 305.0 536.1 228.6 - 1,264.8 1,242.2 - - 8,778.0 8,706.8 24% 18% -6% -8% -10% 2% 15% -100% -27% 10% -67% 21% -2% -4% -21% -16% 1% 5% 2% 7% -8% -22% -9% -36% -12% - 2% - 1% NLB Group 2016 Annual Report 141 Total assets increased by EUR 217.4 million in 2016 due to excess liquidity in all core markets and the continued inflow of deposits. In Slovenia the Bank benefits from a particularly strong deposit franchise with a market share in excess of our market share on total assets. Gross loans in Key business activities increased by EUR 483.5 million, or 7.7% compared to the end of 2015. Very strong volume growth was shown in the corporate segment in Slovenia with an increase of EUR 302.3 million (+15.3% YoY), followed by growth in strategic foreign markets (+EUR 148.2 million or 6.4%). This represents a very solid basis for the future evolution of the core performing client portfolios. Loans to Retail clients in Slovenia rose by EUR 33.1 million, normalised by the effects of the non-performing portfolio sale the increase would have been EUR 87.4 million (+4.2% YoY) in line with the market evolution a noticeable pickup in activities in the housing loans segment. 11,909.5 530.3 2,529.3 11,821.6 561.9 2,577.7 12,039.0 529.1 2,778.0 7,451.1 7,088.2 6,997.4 n o i l l i m R U E n i 1,398.8 1,593.8 1,734.6 31-Dec-14 31-Dec-15 31-Dec-16 Cash, CB at central banks, demand deposits at banks and loans to banks Loans to customers Net Financial Assets Other Figure 57: Total assets of NLB Group – structure (in EUR million) Key business activities in loan book 1,872.4 1,978.3 2,280.7 1,955.0 6,078.1 1,959.0 6,246.3 + 3% YoY 1,992.1 6,730.0 + 8% YoY 2,250.7 639.0 954.0 2,309.0 451.0 606.0 2,457.2 230.7 254.7 31-Dec-14 31-Dec-15 31-Dec-16 Restructuring and workout Financial markets in Slovenia Strategic foreign markets Retail banking in Slovenia Key/mid/small corporates n o i l l i m R U E n i Figure 58: NLB Group gross loans to customers by core segments (in EUR million) NLB Group 2016 Annual Report 142 1,038.2 555.8 482.4 311.4 363.6 2,168.5 675.9 363.7 312.2 31-Dec-15 31-Dec-16 Non core members Non core Bank Figure 59: Group gross loans to customers by non-core segment (in EUR million) L/D ratio 75.9% 10,540.2 318.1 580.3 2,031.3 75.1% 10,371.2 311.4 363.6 2,168.5 74.1% 10,513.4 298.7 351.5 2,182.6 6,336.9 6,493.5 6,905.1 359.9 793.7 120.0 31-Dec-14 305.0 609.0 120.2 31-Dec-15 277.7 497.7 31-Dec-16 ECB funding Bank borrowings Debt securities Retail deposits Corporate deposits State deposits Other liabilities Figure 60: Total liabilities of NLB Group – structure (in EUR million) Thanks to the continuous efforts to wind down non-core exposures with a dedicated taskforce, gross loan volumes continued to decline to the level of EUR 675.9 million (-34.9% YoY), now representing 8.5% of total gross loans outstanding. The non-core segment assets continued to decline substantially to a level of EUR 503 million (2015: EUR 755 million, -33% YoY). Total liabilities increased to EUR 10,513.4 million, chiefly due to an increase in customer deposits. Deposits from customers rose, accounting for 90% of the total funding of the Group. The retail segment deposits were 6% higher, the corporate ones remained stable, while government deposits decreased. Given the negative ECB deposit rate, the Bank introduced a fee on larger corporate deposits, with the threshold being adjusted gradually. At the end of December 2016, the LTD (net) was 74% on the Group level, having decreased by 1.0 percentage point compared to the end of December 2015. The Group thus shows a robust self-funding capacity, also supporting the planned growth predominantly in retail lending. NLB Group 2016 Annual Report143 Capital and Capital Adequacy 17.6% 16.2% 17.0% Currently applicable legislation prescribes three capital ratios which express different levels of capital quality: • CET 1 ratio (between CET 1 capital and RWA), which must be at least 4.5%; • Tier 1 ratio (between Tier 1 capital and 1,240 1,283 1,336 31-Dec-14 31-Dec-15 31-Dec-16 RWA), which must be at least 6%; Figure 61: NLB Group CET 1 capital (in EUR million) and CET 1 ratio (in %) CET 1 capital CET 1 ratio • Total Capital Ratio (between Total capital and RWA), which must be at least 8%. In addition to the aforementioned ratios, the Bank must meet other requirements that are being imposed by the supervisory institutions or by the legislation: • Pillar 2 (or SREP Process) requirements: bank specific, obligatory requirements; • Capital buffers: system of buffers to be added on top of capital adequacy requirement – not obligatory, however breaching of the buffers triggers limitations in payment of dividends and other distributions from capital. Some of the buffers are prescribed by law for all banks and some of them are bank specific (for the Group, other systemically important institutions buffer (O-SII buffer) of 1% is prescribed as of 2019); • Pillar 2 Guidance: bank specific, not obligatory, and not affecting dividends or other distributions from capital. At the end of 2016, the total requirement regarding CET 1 capital amounted to 12.75% RWA on a consolidated basis. It consisted of the following requirements: • SREP requirement of 12.75% RWA (including Pillar 1 requirement, Pillar 2 requirement and – in line with then applicable SREP methodology – also the capital conservation buffer of 0.625% RWA); and • Combined buffer requirement of 0% RWA; as the O-SII buffer is not yet in force, it consisted only of: Countercyclical buffer: 0% RWA. In 2017, a total capital ratio of 12.75% RWA is required on consolidated basis, consisting of: • SREP requirement of 11.50% RWA (including Pillar 1 and Pillar 2 requirements); and • Combined buffer requirement estimated at 1.25% RWA; as the O-SII buffer is not yet in force, it consists of: - Capital conservation buffer: 1.25% RWA, and - Countercyclical buffer: estimated to 0% RWA. The Group capital is currently exclusively comprised of CET 1 capital, i.e. capital of the highest quality, therefore all three capital ratios (CET 1 ratio, Tier1 ratio, and Total capital ratio) are the same. At the end of 2016, the three capital adequacy ratios for the Group stood at 17.0% (or 0.8 percentage point higher than at the end of 2015) and for the Bank at 23.4% (or 0.8 percentage point higher than at the end of 2015). The improvement of the Group’s capital adequacy derives mainly from retained earnings and to a lesser degree from drop in RWA. The capital adequacy of the Group remains at a level which covers all current and announced regulatory capital requirements, including capital buffers and other currently known requirements. NLB Group 2016 Annual Report Chapter 7. 2: Corporate Governance The General Assembly of the Bank The shareholders exercise their rights related to the Bank’s affairs at General Assembly of the Bank. The 100% shareholder of the Bank is the Republic of Slovenia, which is represented at the General Assembly by the Slovenian Sovereign Holding (SSH). The Bank’s General Assembly adopts decisions in compliance with the legislation and the Bank’s Articles of Association. The authorisations of the Bank’s General Assembly are stipulated in the Companies Act, the Banking Act, and the Articles of Association of the Bank. The decisions adopted by the Bank’s General Assembly include among other: adopting and amending the Articles of Association, the use of distributable profit, granting of a discharge from liability to the Management and Supervisory Board, changes in the Bank’s share capital, appointing and discharging members of the Supervisory Board, remuneration and profit-sharing by members of the Supervisory and Management Boards and the employees, annual schedules and characteristics of the issues of securities convertible to shares, and equity securities of the Bank. On 10 February 2016 the 26th General Assembly of the Bank was held, where rights of the Republic of Slovenia as the only shareholder of the Bank were represented by SSH. The General Assembly adopted amendments to the Articles of Association of the Bank. Significant changes included an increase in the number of Supervisory Board members from seven to nine. NLB Group 2016 Annual Report145 of ‘country managers’ was introduced in 2016 with the main goal to support and steer the members, as well as to be a strong link between members and the Bank and to facilitate best practice sharing on different levels. Currently, one country manager is covering Serbia and Montenegro, another covers both entities in Bosnia and Herzegovina. Competences of the management bodies, the Articles of Association, and other data related to corporate governance is available on the following site: https://www.nlb.si/ corporate-governance. As the parent bank, the Bank implements corporate governance of the Group members in compliance with the legislation of the RoS and of the countries in which the Group members operate, while also considering internal rules, the commitments made to the EC, and the regulations of the ECB. The 100% shareholder of the Bank is the Republic of Slovenia, which is represented at the General Assembly by the Slovenian Sovereign Holding (SSH). At the 27th General Meeting dated 4 August 2016 the General Assembly acknowledged the Annual Report 2015 and decided on profit distribution for the year 2015 in the amount of EUR 43.9 million, which was allocated to the sole shareholder of the Bank (EUR 2.194 per share). The General Assembly also confirmed the election of four new members of the Supervisory Board after four of the previous members of the Supervisory Board handed in their resignations. With this action Supervisory Board of the Bank was complete. The Group is governed: a) In accordance with fundamental corporate rules through various bodies of the Group members: • by voting at general meetings of the Group members • with proposals for appointing the man- agements of the Group members • with proposals for appointing representa- tives of the Bank to supervisory bodies • by exercising supervision through the su- pervisory bodies of the Group members • through participation of representatives of the Bank in various committees and commissions of the Group members; b) By mechanisms providing efficient business control in all business lines, harmonisation of the operating standards, and exchange of information Corporate Governance of the Group between the Group members according As the parent bank, the Bank implements corporate governance of the Group members in compliance with the legislation of the RoS and of the countries in which the Group members operate, while also considering internal rules, the commitments made to the EC, and the regulations of the ECB. The roles, authorisations, and responsibilities of individual bodies and organisational units, as well as the ensuring of their coordinated operations to achieve the set business goals are stipulated comprehensively in the Corporate Governance Policy of the Group. In the Bank, these tasks are the responsibility of Core Group Steering Department and Non-strategic Equity Investments Department. to the Business Line principle; c) By additional supervision of the Group members by Internal Audit of the Bank and Compliance and Integrity of the Bank, as well as external supervisors (e.g. the ECB, the Bank of Slovenia, external auditors, and local regulators). In recent years the concept of corporate governance of the Group was upgraded and the role of members of the Management Board of the Bank and management of the Group members strengthened. The target composition of supervisory bodies in the Group members was established, the functioning of the supervisory bodies optimized, and the reporting and standards related to the harmonisation of operations simplified. In line with strategic aspirations, the concept NLB Group 2016 Annual Report146 Ph.D. – Deputy Chairwoman; Uroš Ivanc; Andreas Klingen; László Urbán, Ph.D.; David Eric Simon; David Kastelic; Matjaž Titan; and Alexander Bayr (members). In accordance with the two-tier governance system and the authorisations for supervising the Management Board, the Bank’s Supervisory Board among other issues approvals to the Management Board related to the Bank’s business policy and financial plan, approves the strategy of the Bank and the banking group, organisation of the internal control system, draft audit plan of the Internal Audit and all financial transactions (e.g. issuing of own securities, equity stakes in companies, and other legal entities), and supervises the work of the Internal Audit. The Supervisory Board acts in accordance with the highest ethical standards of management, considering the prevention of conflict of interests. The highest objectives include solid operations and following of strategic guidelines, as well as the trust of the owners and business partners in the functioning of the Bank. Supervisory Board The highest objectives include solid operations and following of strategic guidelines, as well as the trust of the owners and business partners in the functioning of the Bank. The Supervisory Board of the Bank implements its tasks in compliance with the provisions of the laws governing the operations of banks and companies, as well as with the Articles of Association of the Bank. Pursuant to the Articles of Association, the Supervisory Board of the Bank was composed of seven members in 2015 that were appointed and recalled by the General Meeting of the Bank from the persons nominated by shareholders or the Supervisory Board. Owing to an enlarged scope of tasks and the expectations of the ECB, the Supervisory Board was expanded to nine members at the 26th General Meeting held on 10 February 2016. The General Meeting dismissed the previous members of the Supervisory Board of the Bank Gorazd Podbevšek and Miha Košak, and appointed the following new members to fill in the vacated positions: Janko Gedrih, Anton Macuh, and Anton Ribnikar. Sergeja Slapničar, Ph.D., Tit A. Erker, Uroš Ivanc, and Andreas Klingen have remained members of the Bank’s Supervisory Board. In view of the above amendment to the Articles of Association (i.e. increased number of the members of the Supervisory Board of the Bank to nine), the General Meeting appointed two additional members, namely Primož Karpe and László Urbán, Ph.D. The Supervisory Board of the Bank held its 31st regular meeting on 19 February 2016. The Supervisory Board members elected Janko Gedrih as their Chairman and Sergeja Slapničar, Ph.D. as his Deputy. On 15 April 2016, the Bank’s Supervisory Board acknowledged the resignation statements of the president and two members of the Supervisory Board: Janko Gedrih, Anton Macuh, and Anton Ribnikar, and agreed to a shorter notice period entering into force on the same day. Pursuant to the Bank’s Articles of Association, the Supervisory Board then appointed Primož Karpe as the new chairman, and elected members of committees of the Supervisory Board and committee’s chairmen and their deputies. The Supervisory Board at the time had six members (Primož Karpe – Chairman, Sergeja Slapničar, Ph.D. – Deputy Chairwoman, Tit A. Erker, Uroš Ivanc, Andreas Klingen, and László Urbán, Ph.D. (members)). In August 2016 Tit A. Erker offered his resignation from post. The Supervisory Board of the Bank acknowledged his resignation statement on the session dated 3 August 2016, and agreed with his proposal to discontinue the function as member of the Supervisory Board of the Bank entering into force on the same day. As already metioned in the section of the General Meeting of the Bank at the 27th General Meeting dated 4 August 2016, four new members of the Supervisory Board were elected. Therefore, from the mentioned date the composition of the Supervisory Board is as follows: Primož Karpe – Chairman; Sergeja Slapničar, NLB Group 2016 Annual Report147 P r i m o ž K a r p e Other important positions Chairman of the Supervisory Board and achievements: Term of office: 2016 to 2020 Education: • Obtained a master’s degree from San Diego State University (Master of Science – Business Administration) • Graduated from the Faculty of Economics in Ljubljana (majoring in Finance) Career: • Managing Director of Angler Ltd. Koprivnica, Croatia (since 2015), • Partner (passive – investor) at Blue Sea Capital SCSp, Luxembourg (2011 – to date) • Partner (active – operational manager) at Blue Sea Capital SCSp, Luxemburg/ Zagreb (2011-2015) • Partner in a private equity fund investing in small- and medium-sized companies operating in traditionally stable or fast developing industries in the region of the former Yugoslavia (primary health care, nutrition, and niche production) • His specialities are the preparation, assessment, negotiating, and structuring of complex equity and debt transactions, and restructuring/business management Membership in the Supervisory Board committees: • Nomination Committee (Chairman) • The Audit Committee (Member) Membership in management bodies of related or unrelated companies: • Co-founder and the leading partner in • Angler d.o.o. – Director. company Vafer Ltd. (2008-2010) • Managing Director of company Publikum Korpfin d.o.o. (2007-2008) • Head of the business development (M&A) department at Telekom Slovenija d.d. (2006-2007) • Assistant to CEO of Mobitel d.d. (2002-2006) • Chief Operating Officer at Eon d.o.o. (2000-2002) • FX trader/head of the assets and liabilities management department at SKB banka d.d. (1996-2000) NLB Group 2016 Annual Report148 S e r g e j a S l a p n i č a r, P h . D . Deputy Chairwoman of the Supervisory Board Term of office: 2013–2017 Education: • Ph.D. 2001 (Faculty of Economics, University of Ljubljana) • Further training during her master’s, doctoral, and postdoctoral studies at the University of Bristol, University of Glasgow, and the London School of Economics and majority shareholders at squeeze-outs and delisting • She trains executives at the Business Excellence Centre of the Faculty of Economics, the Slovenian Directors’ Association, the Bank Association, and the SIQ • Deputy Head of Large Corporates Department, Deutsche Bank, Austria (1997-1998) • Key Customer Account Manager, Österreichische Volksbanken Ag (1987-1997) • Sales Manager, Unilever (1985-1987) Membership in the Supervisory Other important functions Board committees: and achievements: • Audit Committee (Chairwoman), • Risk Committee (Member) • Master of Science in management and Membership in management bodies organisation (MScBA) in 1998 of related or unrelated companies: • Asperia d.o.o., Lesce (Director). Career: • Associate Professor of Accounting and Auditing at the Faculty of Economics of the University of Ljubljana A l e x a n d e r B a y r Member of the Supervisory Board Accounting and Auditing • Chairwoman of the Academic Unit for Accounting and Auditing (2007-2013) Education: • Faculty of Economics in Innsbruck Other important functions and achievements: (1985) Career: • She published a number of papers in • Director of Corporates and Real Estate, • Coordinator of postgraduate Studies of Term of office: 2016–2020 U r o š I v a n c • Member of the Management Board of the Chamber of Commerce of Slovakia- Austria (2000-2012) • Member of the Supervisory Board of WKBG Bank from Austria (since 2016) Membership in the Supervisory Board committees: • Audit Committee (Member) Member of the Supervisory Board Term of office: 2013–2017 Education: • Master of Science in management and organisation (MScBA), IMB study programme (Faculty of Economics, University of Ljubljana) renowned international scientific journals on the effect of performance measurement and remuneration of managers on their decision-making; • A member of the European and American Academic Accounting Associations, and Society for Neuroeconomics • Was a member of the Supervisory Board of Krka d.d. between 2010 and 2015, • A member of the Council of the Agency for Public Oversight of Auditing from 2008 to 2010, and since 2007 she has been the chairwoman of the settlement committee for disputes between minority BAWAG, Vienna (since 2013) • CEO, BAWAG banka d.d., Ljubljana • Since 2004 CFA – Chartered Financial (2009-2012) Analyst (CFA Institute) • Real Estate Projects, BAWAGPSK, Vienna (2008-2012) Career: • Management Board Member, Istrobanka a.s. Bratislava, Slovakia (BAWAG) (2004-2008) • Management Board Member, Ludova banka a.a., Bratislava, Slovakia (Volksbank) (2000-2004) • Member of the Management Board of Zavarovalnica Triglav d.d. (since July 2014), • CFO Executive Director for Finance of Zavarovalnica Triglav d.d (2006-2014 July) • Sales Manager, Ascom Austria • Director General of Slovenijales d.d. (1998-2000) (in 2008; position held temporarily for a period of five months) NLB Group 2016 Annual Report 149 • Portfolio manager of the pension fund D a v i d K a s t e l i c Other important functions Triglav Group in the Republic of Serbia (2007-2012) • started to gain experience in leading positions as head of corporate finance (2004) Other important functions and achievements: • Member of the Management Board of Triglav INT d.d. and member of the Board of Directors Trigal d.o.o., • Since 2005 member of many Supervisory Boards of the companies in the Triglav Group and outside (Triglav Skladi d.o.o.; Lovčen Osiguranje, a.d., Podgorica; Triglav Osiguranje, a.d.o., Beograd; Triglav Osiguruvanje, a.d., Skopje, Skupna pokojninska družba d.d., and others) Member of the Supervisory Board and achievements: Term of office: 2016–2020 Education: • Master of Science at the Faculty of Economics and Business in Maribor (2010) • Bachelor of Science in Mechanical Engineering at the Faculty of Mechanical Engineering in Maribor (1994) Career: • President of the Management Board, • Member of the Management Board of Sava osiguranje in Serbia and in the same period also a member of the Management Board of Sava Tabak in Macedonia (2007-2012) • Chairman of the Supervisory Board of Velebit životno osiguranje in Croatia (2007-2008) • Member of the Council of the Slovenian Insurance Association, a member of the Supervisory Board of the Jedrski pool and Chairman of the Audit Committee of the Jedrski pool (since 2014) Zavarovalnica Sava (since 2016) • Honorary Consul of the Republic of • President of the Management Board, Zavarovalnica Maribor (2013-2016) • Member of the Management Board, Zavarovalnica Maribor (2006-2013) Brazil in Slovenia (since 2013) Membership in the Supervisory • President of the CFA Society of Slovenia • Executive Director of Property Board committees: Membership in the Supervisory Board committees: Insurances, Zavarovalnica Maribor (2004-2006) • Nomination Committee (Deputy Chairman) • Assistant Executive Director, • Remuneration Committee (Member) • Remuneration Committee (Chairman) • Audit Committee (Deputy Chairman) Zavarovalnica Maribor (2002-2004) • Head of Damages Assessment and Membership in management bodies Liquidation (PE Maribor), Zavarovalnica Maribor (2000-2002) Membership in management bodies of related or unrelated companies: • Jedrski pool, member of the Supervisory of related or unrelated companies: • Head of Car Damage, Zavarovalnica Board; • Zavarovalnica Triglav d.d., Ljubljana – member of the Management Board; • Triglav INT, holdinška družba d.d., Ljubljana – member of the Board of Directors; Maribor (1998-2000) • Zavarovalnica Sava d.d., president of the • Supervisor of Key Account Managers, Philip Morris Ljubljana (1996-1998) • Supervisor of Sales Promoters, Philip Morris Ljubljana (1994-1996) Management Board. • Trigal d.o.o. – member of the Board • Sales Promoter, Philip Morris Ljubljana of Directors. (1993-1994) NLB Group 2016 Annual Report 150 A n d r e a s K l i n g e n D a v i d E r i c S i m o n Other important functions Member of the Supervisory Board Member of the Supervisory Board and achievements: Term of office: 2015-2019 Term of office: 2016–2020 Education: Education: • Primary expertise in credit, restructuring and NPLs • Master of Business Administration, Rotterdam School of Management, Rotterdam, The Netherlands • Master of Science in Physics, Techniche • City of London College, UK (1970) • IFS School of Finance (1974) Membership in the Supervisory Board committees: • Risk Committee (Member) • Remuneration Committee (Member) Universität, Berlin, Germany Career: Career: • Independent Banking consultant, entre- preneur, Berlin, Germany (since 2014) • Deputy CEO, CFO PC, Erste Bank, • Chief Restructuring Officer and Advisor to the General Manager, Czech Export Bank a.s. (2013-2014) Membership in management bodies of related or unrelated companies: • Jihlavan a.s., President of the • Advisor, PricewaterhouseCoopers, Supervisory Board; Prague (2012-2013) • Czech Aerospace industries sro, legal Kiev, Ukraine (2010-2013) • Advisor (1994-2004), Head of representatives; • Central Europe Industry Partners a.s., sole member of the Supervisory Board. Restructuring (2004-2007), Head of Central Europe Bad Debts Unit (2007 onwards) and Senior Restructuring Officer (2007-2014), Ceskoslovenska Obchodni Banka a.s. • Independent Banking Consultant, cooperating with USAID and EBRD (1992-1994) • International Banking Consultant, Morgan Grenfell & Co (1993-1994) • Assistant General Manager Tijari Finance Limited (wholly owned subsidiary Commercial Bank of Kuwait), (1988-1992) • Joint Branch Manager, Byblos Bank Sal, London (1986-1988) • Assistant Vice President, American Express Bank, London (1980-1986) • Senior Credit Analyst, Manufacturers Hanover Trust, London (1978-1980) • National Westminster Bank, London (1971-1977) • Head of Strategic Group Development in Erste Group Bank, Vienna, Austria (2005-2010) • Senior Vice President, Investment Banking, Financial institutions in JP Morgan, London, UK (1998-2005) • Senior Associate in Lazard, Frankfurt/ Paris/London (1993-1998) Other important functions and achievements: • Member of Supervisory Board of Kyrgyz Investment and Credit Bank (since December 2016) • Member of Supervisory Board of Credit Bank of Moscow (since November 2016) • Member of the Board of Directors of Komercialna banka Beograd a.d. (since November 2014) • Member of Supervisory Boards of Banks in Central and Eastern Europe and Russia (2005-2013) Membership in the Supervisory Board committees: • Nomination Committee (Member) • Risk Committee (Chairman) NLB Group 2016 Annual Report 151 M a t j a ž T i t a n Member of the Supervisory Board integration of the Slovenian capital market into T2S (since 2013) Term of office: 2016-2020 • Member of the working group in Education: Eurosystem in relation with the finality of settlement and insolvency (2015-2016) • Faculty of Law in Ljubljana, • Contributor of Market in Financial Bachelor of Law (2005) Career: Instruments Act, Book Entry Securities Act, Companies Act and Takeover Act. • Vice President, Business Planning Director at Citigroup, New York (2000-2005) • Deputy CEO and member of the Board of Directors at Postabank, Hungary (1998-2000) • Director of Planning and Chief Economist at ABN-AMRO Bank, Hungary (1996-1998) • Owner and Consultant, Licet, naložbe in Membership in the Supervisory svetovanje d.o.o. (since 2012) Board committees: Other important functions • Advisor to the Management Board, KDD Centralna klirinško depotna družba d.d. (2009-2012) • Head of Legal Consulting Department, KDD - Centralna klirinško depotna družba d.d. (2007-2008) • Remuneration Committee (Deputy and achievements: Chairman) • Nomination Committee (Member) • Visiting Fellow, Economist at The World Bank, Washington DC (1995-1996) • Member of Parliament, Hungary (1993-1994) L á s z l ó U r b á n , P h . D . • Associate Professor at Eotvos University • Intern, Higher Court of Ljubljana Member of the Supervisory Board of Budapest (1985-1992) (2006-2007) Term of office: 2016–2020 • Lawyer, KDD - Centralna klirinško depotna družba d.d. (2005-2007) • Legal practice, Law Firm Miro Senica in odvetniki, Ljubljana (2003-2005) Education: • Completed Advanced Management Program, Harvard Business School, Cambridge, MA (2000) Membership in the Supervisory Board committees: • Risk Committee (Member) Other important functions and achievements: • Univ. Doctorate at Budapest University Membership in management bodies of Economics, Hungary (1985) of related or unrelated companies: • Member of the Supervisory Board of • Master of Arts, Budapest University of • none KDD d.d. (2010-2014) Economics, Hungary (1982) • Member of NUG (National User Group) at the Bank of Slovenia for the integration of the Slovenian capital market into T2S • Arbiter for the Investment Fund Association and substitute member of the Committee for the issue of the licenses to stockbrokers (since 2012) • has been cooperating with the Ministry of Finance in the area of transposing the EU Directives concerning the area of clearing and settlement, and has been a member of the High Stakeholder Group at the Bank of Slovenia supervising the Career: • Adjunct Professor at Central European University Business School (since 2012) • Member of the Supervisory Board at European Bank for Reconstruction and Development (EBRD; 2010-2011) • Chief Financial Officer and Member of the Board of Directors at OTP Bank (2007-2009) • Director, General Secretariat at National Bank of Hungary (2005-2006) NLB Group 2016 Annual Report Composition of the Committee is as follows: Uroš Ivanc (Chair), Matjaž Titan (Deputy Chair), David Kastelic, and David Eric Simon (Members). 152 Committees of the Bank’s The Nomination Committee Supervisory Board The Supervisory Board appoints committees that prepare proposals for resolutions of the Supervisory Board, ensure their implementation, and perform other expert tasks. At the end of 2016 the Bank had four operational committees. The Audit Committee monitors and prepares draft resolutions for the Supervisory Board on accounting reporting, internal control and risk management, internal audit, compliance, external audit, and supervises the implementation of regulatory measures. Composition of the Committee is as follows: Sergeja Slapničar, Ph.D. (Chair), Uroš Ivanc (Deputy Chair), Primož Karpe, and Alexander Bayr (Member). The Risk Committee monitors and drafts resolutions for the Supervisory Board in all areas of risk relevant to the Bank’s operations. In consults on the current and future risk appetite and the risk management strategy, this Committee helps conduct control over senior management as regards implementation of the risk management strategy. Composition of the Committee is as follows: Andreas Klingen (Chair), László Urbán, Ph.D. (Deputy Chair), Sergeja Slapničar, Ph.D., and David Eric Simon (Members). There were five sessions of the Risk committee in 2016. drafts proposed resolutions for the Supervisory Board concerning the appointment and dismissal of the Management Board members; recommends candidates for Supervisory Board members to the General Meeting of the Bank; recommends to the Supervisory Board the dismissal of members of the Management Board and the Supervisory Board; prepares the content of executive employment contracts for the President and members of the Management Board; evaluates the performance of the Management Board and the Supervisory Board; and assesses the knowledge, skills, and experience of individual members of the Management Board and Supervisory Board and the bodies as a whole. The Committee proposes amendments to the Management Board’s policy on the selection and appointment of suitable candidates for senior management of the Bank. Composition of the Committee is as follows: Primož Karpe (Chair), David Kastelic (Deputy Chair), Anderas Klingen, and Matjaž Titan (Members). The Remuneration Committee carries out expert and independent assessments of the remuneration policies and practices; and gives initiatives for measures related to improving the management of the Bank’s risks, capital, and liquidity; prepares proposals for decisions of the Supervisory Board in relation to remuneration; and supervises the remuneration of senior management performing the risk management and compliance functions. NLB Group 2016 Annual Report153 We are aware of our tasks in managing and representing the Bank. We direct its operations to make it even more successful not only today, but also tomorrow. We are responsible to the company, its stakeholders, and clients, and we fulfill promises and achieve goals. Blaž Brodnjak was unanimously appointed as the President of the Management Board of the Bank at the Supervisory Board meeting held on 4 July 2016. In addition, the Supervisory Board appointed László Pelle as the Chief Operating Officer (COO), who started to perform his function on 26 October 2016. In the same session the President and members of the Management Board (Chief Financial Officer (CFO), Chief Risk Officer (CRO), and Chief Operating Officer (COO)) were appointed for a new five-year term, effective 6 July 2016. The Management Board of the Bank consists of Blaž Brodnjak (member since 1 December 2012, Deputy President since 5 February 2016, and president/ Chief Executive Officer (CEO) since 6 July 2016) and members Archibald Kremser as acting CFO (since 31 July 2013), Andreas Burkhardt as acting CRO (since 18 September 2013), and László Pelle as acting COO (since 26 October 2016). Management Board of the Bank The Management Board of the Bank performs daily operations and represents and acts on behalf of the Bank – independently and at its own discretion as provided for by the law and the Bank’s Articles of Association. The decisions within the scope of powers of the Management Board are adopted by members of the Management Board of the Bank as a rule unanimously or, failing that, unless otherwise provided in the Articles of Association, with a majority of votes cast. In the case of a tie, the President of the Management Board of the Bank has the decisive vote. The President and members of the Management Board of the Bank are appointed by the Supervisory Board for a period of five years. The Supervisory Board may also recall them. The selection is not based only on the legal conditions, but also the internal acts and the recommended national and European guidelines on good practice. Every member has to fit the professional profile prepared before the selection procedure. As a result of certain differences in views with the Bank’s owner, Janko Medja, the chief executive officer submitted his letter of resignation on 5 February 2016. The Supervisory Board of the Bank adopted on 5 February 2016 the resolution on mutually agreed early termination of the term of office of the President of the Management Board entering into force on the same day. Until 6 July 2016, the three member Management Board of the Bank had been chaired by Blaž Brodnjak as the Deputy President of the Management Board. NLB Group 2016 Annual Report 154 Blaž Brodnjak President and CEO / CMO Term of office: 2016-2021 Education: • MBA, IEDC Bled School of Management (2009) • Faculty of Economics, University of Membership in management or supervisory bodies related or unrelated companies: Ljubljana (1998) Chairman of the Supervisory Board: Career: • Head of Group Corporate and Public Finance Division in the Hypo Alpe Adria Group in Klagenfurt (2010-2012) • Proxy of the Management Board of Zavarovalnica Triglav (2009-2010) • NLB Banka, Sarajevo • NLB Banka, Banja Luka • NLB Banka, Skopje Member of the Supervisory Board: • NLB Skladi, Ljubljana (until 10 January 2017) • Member of the Management Board of • NLB Vita, Ljubljana Bawag banka (2005-2009) • Head of Corporate Banking at Raiffeisen Krekova banka (2004–2005) Other important functions and achievements: • Was a chairman or member of the supervisory boards of 11 banking, 3 insurance, and 1 production company Direct responsibility: Executive area of the Bank, for CEO: • Corporate Communication and Strategy • Legal and Secretariat • Human Resources and Organisation • Core Group Steering Retail and Private Banking and Corporate Banking (CMO) NLB Group 2016 Annual Report155 Education: • MBA degree, University of Dayton (1999) • University of Augsburg, School of Business Administration and Economics, graduation (“Diplom-Kaufmann”) (1999) Career: • Head of risk management at Volksbank in Hungary, involved in the upgrade and rationalisation of collection and company restructuring procedures (until January 2013) • Member of the Management Board of Volksbank, Romania, in charge of finance, restructuring and collection (2010–2011) • Member of the Management Board of Volksbank Bosnia and Herzegovina in Sarajevo, in charge of the financial part of operations and risks (2003–2009) Andreas Burkhardt Member of the Management Board, CRO Term of office: 2016-2021 • Since 2000 he has occupied other functions in the aforementioned bank. Other important functions and achievements: • 16 years of experience in the area of banking, especially in the area of Central Europe Direct responsibility: • Internal Audit • Compliance and Integrity • Risk (CRO) Membership in management or supervisory bodies related or unrelated companies: Chairman of the Board of Directors: • NLB Banka, Podgorica Member of the Supervisory Board: • NLB Banka, Sarajevo • NLB Banka, Banja Luka NLB Group 2016 Annual Report156 Archibald Kremser Member of the Management Board, CFO Term of office: 2016-2021 Education: Other important functions • MBA (INSEAD, France), specialising in and achievements: • More than 18 years of experience in the financial services industry in Austria, Central Eastern Europe, and SEE focus- ing on finance and asset management, strategy and corporate development as well as performance improvement assignments Direct responsibility: • Accounting • Controlling • Financial Markets • Investment Banking and Custody • Global Real Estate Asset Management • Non-Core Equities and Subsidiaries • Accounts Administration and Payroll Membership in management or supervisory bodies related or unrelated companies: Chairman of the Board of Directors: • NLB Banka, Beograd • NLB Banka, Prishtina bank management and corporate finance (2004) • MSc Engineering, University of Technology in Vienna (1997) Career: • Eight years in various senior man- agement functions/directorships within Dexia/Kommunalkredit Group (previously owned by Dexia SA and Volksbanken Austria AG) - Supervised the establishment and operation of subsidiaries of Dexia Kommunalkredit Bank in Central Eastern Europe with total assets of approximately EUR 10 billion (2005–2008) - Leading efforts to restructure Kommunalkredit Group with establishment of a “bad-bank” and winding-down/divestment of non-core assets and businesses (2008–2011) - Leading efforts to reposition Kommunalkredit Austria as an advisory-based specialised infrastructure bank in preparation for its subsequent privatisation (2011–2013) • Worked in leading international consult- ing firms Ernst & Young (1997–2004), Bain & Company (2004–2005), manag- ing IT and performance improvement projects for leading financial institutions in Austria, Germany, Switzerland, and the entire Central Eastern Europe NLB Group 2016 Annual Report157 Education and training: • Head of Card Department, Project leader of VISA implementation, initiated VISA card programme in Hungary. Rolled-out ATM and POS networks in branches of Postabank and Savings Bank Corporation, Hungary (1992-1994) Other important functions and achievements: • 23 years of experience in the management of banking operations and IT in various countries of Central and SEE Direct responsibility: Chief Operating Officer: • Business Analysis • Procurement and Corporate Real Estate Management • Information Technology • Payments Processing • Cash Processing • Treasury and Financial Markets Processing • Corporate Banking Processing • Retail Banking Processing • Master’s degree in electrical engi- neering at the Budapest University of Technology (1991) • Bachelors’s degree in electrical engineering, Kandó Kálmán College of Electrical Engineering in Budapest (1988) Career: • COO, responsible for IT, operations, premises, and procurement services in ERSTE Bank Zrt., Hungary (2009-2015) • COO, HSBC CEE (PL, CZ, SK, HU), responsible for regional operations of HSBC Premier in Central and East Europe. Roll-out of regional platform for OneBank IT and Operations. HSBC CEE, Czech Republic (2007-2009) • Operations and Technology Director, Corporate and Consumer Bank, responsible for the management of overall operations, IT processes, and client services. Started Citi Shared Service Centre in Budapest in Citibank Rt, Budapest, Hungary (2002-2007) • Operations and Technology Director, Consumer Bank, responsible for operations and technology. Set up of the initial banking infrastructure for credit cards and consumer banking in Citibank Handlowy Warszawie, Poland (1997-2002) • Regional Business Planning and Analysis Manager for Card Products, heading the business planning and analysis function (Pacific & CEEMEA countries) in Citibank N.A. Asia Pacific CEEMEA Regional Office, Singapore (1996-1997) • Card Operations Manager, Systems Development and Application Support, start up the retail bank and card product platforms (Diners Club) in Citibank Budapest Rt, Global Consumer Bank, Hungary (1994-1996) László Pelle Member of the Management Board, COO Term of office: 2016-2021 NLB Group 2016 Annual Report158 Collective decision-making bodies Different committees, commissions, boards, and working bodies may be appointed by the Management Board of the Bank for execution of individual tasks within powers of the Management Board of the Bank. The Sub Committee meetings are convened once a week. The Sub Committee has four members. The Chairman of the Committee is the member of the Management Board responsible for the area of risk (CRO). NLB Group Assets and The Corporate Credit Committee Liabilities Committee determines credit ratings and makes decisions on the reclassification of clients, and approves commercial banking investment transactions and limits that exceed the competencies of the Credit Sub Committee. The Committee adopts decisions that exceed the powers of the directors or subcommittee, as well as decisions on investment transactions in commercial banking within the statutory powers in the areas of corporate banking in the Bank (all companies, banks and financial institutions), operations with clients in intensive care and NPL and operations with non-core clients. As a rule, Committee meetings are convened once a week. The Committee has seven members. The Chairman of the Committee is the member of the Management Board responsible for the area of risk (CRO). The Corporate Credit Sub Committee determines credit ratings and makes decisions on the reclassification of clients and approves commercial banking investment transactions and limits that exceed the competences of B-1 level directors. The Sub Committee adopts decisions in the scope of the Bank’s investment policy and business plan, as well as statutory powers. monitors conditions in the macroeconomic environment and analyses the balance, changes to, and trends in the assets and liabilities of NLB and the Group companies, drafts resolutions, and issues guidelines for achieving the structure of the Bank’s and the Group’s balance sheet. As a rule, Committee meetings are convened once a month. The Committee has four members. The Chairman of the Committee is the member of the Management Board responsible for the area of finance (CFO). The Group Real Estate Asset Management Committee is in charge of giving opinions on acquisition/purchase price of real property and additional investments in real property provided as collateral for NPL, the selling price of own real property, and the acquisition/purchase price for the real property mortgaged in the sale of receivables. As a rule, Committee meetings are convened once a week. The Committee has three members. The Chairman of the Committee is the member of the Management Board responsible for the area of finance (CFO). The Development Council adopts decisions related to the portfolio of development with an IT element. As a rule, the meetings of the Committee are convened once a month. The Committee has six members. The Chairman is the member of the Management Board in charge of operations (COO). The Sales Board adopts decisions on the management of the range of products and services and the relations with the clients in the area of sales. As a rule, Committee meetings are convened once a week. The Committee has 10 members. The Chairman of the Board is the member of the Management Board in charge of Retail and Private Banking and Corporate Banking (CMO). NLB Operational Risk Committee is responsible for monitoring, guiding, and supervising operational risk management in NLB, and for transferring this methodology to the Group members. As a rule, the Committee meets once every two months. The Committee has 15 members. The Chairman of the Committee is the member of the Management Board responsible for the area of risk (CRO). NLB Retail Credit Committee decides on the approval of loans and other investment proposals, the conditions of which deviate from standard banking products and services, and which represent additional risks for the Bank. As a rule, meetings are convened when necessary. The Committee has five members. The Chairman of the Committee is the Director of Credit Analysis – Corporate and Retail. NLB Group 2016 Annual Report159 Advisory bodies of the Bank’s Management Board The Watch List Committee is an advisory body which acknowledges the activities related to the clients on the Watch List. As a rule, Committee meetings are convened quarterly. The Committee has seven members. The Chairman of the Committee is the member of the Management Board responsible for the area of risk (CRO). Risk Committee monitors and periodically reviews matters related to risk and commercial risk and prepares materials for the Management Board in order to obtain decisions. The Committee has 12 members. The Chairman of the Committee is the member of the Management Board responsible for the area of risk (CRO). The Management Board is to perform individual tasks of the Management Board appointed a working body that operates at the lowest level, namely: • The Committee for new and existing products • The Group Real Estate Asset Management Sub Committee. NLB Group 2016 Annual ReportResponsible Chapter 8 ОдговорниOdgovorniPërgjegjësOdgovorniOdgovorni ОдговорниOdgovorniNLB Group 2016 Annual Report161 Responsible Chapter 8 ОдговорниOdgovorniPërgjegjësOdgovorniOdgovorni ОдговорниOdgovorniNLB Group 2016 Annual ReportChapter 8. 1: Events After the End of the 2016 Financial Year In February 2017, NLB d.d. concluded a sale transaction of its major non-core equity participation by which the value of the remaining non-core equity portfolio was reduced to EUR 0.9 million. In 2017 activities for the potenctial sale of the company NLB Nov penziski fond, Skopje were initiated. Any such sale will be pursued only upon receipt of an adequate offer. NLB received 24 actions for damages from erased bondholders with a mark NLB26 and ISIN code SI0022103111 in balance sheet date from the end of year 2016 until now in total principal amount of EUR 2,116,189.31. Among these, only one exceeds EUR 1 million. NLB believes that there are not grounds for such claims. Sergeja Slapničar, a member of NLB Supervisory Board tendered her resignation on 13 March 2017; based on the agreement of the Supervisory Board her function terminated on 20 March 2017. NLB Group 2016 Annual Report164 NLB Group Chart as at 31 December 2016 Nova Ljubljanska banka d.d., Ljubljana Core members Non-core members Banks Financial institutions Foreign countries Slovenia Companies Slovenia NLB Banka, Beograd 99.997% 99.997% NLB Skladi, Ljubljana Conet - in bankruptcy 84.68% NLB Vita, Ljubljana 84.68% 100% 100% 50% 50% Bankart, Ljubljana Kreditni biro Sisbon, Ljubljana in liquidation 39.44% 39.44% 29.68% 29.68% NLB Banka, Podgorica 97.999% NLB Banka, Prishtina NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Skopje 97.999% 81.21% 81.21% 99.85% 99.85% 97.35% 97.35% 86.97% 86.97% NLB Tutunska broker in liquidation 100% 100% Skupna pokojninska družba, Ljubljana 28.13% 28.13% Foreign countries Foreign countries NLB Nov penziski fond, Skopje 51% NLB Srbija, Beograd 100% NLB Crna Gora, Podgorica 100% 100% 100% 100% 49% The chart shows voting rights shares. The Group includes entities according to the deﬁnition in the Financial Conglomerates Act (Article 2). Subsidiary Associate Joint venture Company Name % % direct share indirect share at the Group level * chart includes percentage share in voting rights Companies Slovenia NLB Propria, Ljubljana Prospera plus, Ljubljana ICJ – in bankrupcy, Domžale PRO REM, Ljubljana in liquidation BH-RE, Sarajevo OL Nekretnine, Zagreb in liquidation ARG Nepremičnine, Horjul Foreign countries CBSinvest, Sarajevo REAM, Beograd REAM, Zagreb SR-RE, Beograd Tara Hotel, Budva 12.71% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 50% 100% 100% 75% 75% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Financial institutions Slovenia NLB Leasing, Ljubljana 100% 100% Optima Leasing, Zagreb in liquidation 100% 100% Prvi faktor, Ljubljana in liquidation 50% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Prvi faktor, Beograd Prvi faktor, Sarajevo in liquidation Prvi faktor, Zagreb in liquidation Foreign countries NLB Factoring in liquidation NLB InterFinanz, Zurich in liquidation NLB InterFinanz Praha, Prague NLB Lizing, Skopje in liquidation NLB Leasing, Sarajevo NLB Leasing, Beograd in liquidation NLB Leasing Podgorica, Podgorica in liquidation LHB AG, Frankfurt Sophia Portfolio BV, Soﬁa * 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 0% 0% NLB InterFinanz, Beograd REAM, Podgorica NLB Group 2016 Annual ReportNLB Group Chart as at 31 December 2016 Nova Ljubljanska banka d.d., Ljubljana Core members Non-core members Banks Financial institutions Foreign countries Slovenia Companies Slovenia NLB Banka, Beograd NLB Skladi, Ljubljana Bankart, Ljubljana Conet - in bankruptcy 84.68% NLB Vita, Ljubljana Kreditni biro Sisbon, Ljubljana in liquidation NLB Banka, Podgorica 97.999% Skupna pokojninska družba, Ljubljana 28.13% 28.13% NLB Banka, Prishtina Foreign countries Foreign countries NLB Banka, Banja Luka NLB Nov penziski fond, Skopje 51% NLB Srbija, Beograd NLB Banka, Sarajevo NLB Crna Gora, Podgorica 100% 100% 50% 50% 100% 39.44% 39.44% 29.68% 29.68% 100% 100% 100% 100% 99.997% 99.997% 84.68% 97.999% 81.21% 81.21% 99.85% 99.85% 97.35% 97.35% 86.97% 86.97% NLB Banka, Skopje 49% NLB Tutunska broker in liquidation 100% 100% The chart shows voting rights shares. The Group includes entities according to the deﬁnition in the Financial Conglomerates Act (Article 2). Subsidiary Associate Joint venture Company Name direct share % % indirect share at the Group level * chart includes percentage share in voting rights Financial institutions Slovenia NLB Leasing, Ljubljana 100% 100% Optima Leasing, Zagreb in liquidation 100% 100% Prvi faktor, Ljubljana in liquidation 50% 50% Prvi faktor, Beograd Prvi faktor, Sarajevo in liquidation Prvi faktor, Zagreb in liquidation Foreign countries 100% 100% 100% 100% 100% 100% NLB Factoring in liquidation NLB InterFinanz, Zurich in liquidation 100% 100% 100% 100% NLB InterFinanz, Beograd NLB InterFinanz Praha, Prague 100% 100% 100% 100% NLB Lizing, Skopje in liquidation NLB Leasing, Sarajevo NLB Leasing, Beograd in liquidation NLB Leasing Podgorica, Podgorica in liquidation LHB AG, Frankfurt Sophia Portfolio BV, Soﬁa * 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 0% 0% 165 Companies Slovenia NLB Propria, Ljubljana Prospera plus, Ljubljana ICJ – in bankrupcy, Domžale PRO REM, Ljubljana in liquidation BH-RE, Sarajevo OL Nekretnine, Zagreb in liquidation ARG Nepremičnine, Horjul Foreign countries CBSinvest, Sarajevo REAM, Podgorica REAM, Beograd REAM, Zagreb SR-RE, Beograd 100% 100% 100% 100% 50% 50% 100% 100% 100% 100% 100% 100% 75% 75% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Tara Hotel, Budva 12.71% 100% NLB Group 2016 Annual ReportOrganizational Structure of NLB as at 31 December 2016 CEO Management Board Legal and Secretariat Corporate Communication and Strategy Human Resources and Organization Development Internal Audit Compliance and Integrity Core Group Steering CRO CFO CMO COO Global Risk Credit Risk Corporate and Retail Group Real Estate Asset Managment Customer Relationship Managment and Marketing Communication Business Analysis and Project Support Controlling Product Range Managment Procurement and CREM Evaluation and Control Financial Accounting Sales Performance Monitoring Information Technology Restructuring Financial Markets Small Enterprises Accounts Administration and Payroll * Workout and Legal Support Investment Banking and Custody Non-Strategic Equity Investments Non-Strategic Corporate Mid Corporates Cash Processing Large Corporates Payments Processing Trade Finance Services Treasury and Financial Markets Processing Corporate Banking Processing Retail Banking Processing Private Banking Distribution Network Customer Support and Contact Centre Area Branch Osrednjeslovenska - Jug Area Branch Osrednjeslovenska - Sever Area Branch Domžale, Kamnik in Zasavje Area Branch Savinjsko - Koroška Area Branch Podravsko - Pomurska Understanding of the tasks and responsibilities of Global Risk, Compliance and Integrity and Internal Audit is taken into account in acccordance to the deﬁnitions of the (currently valid) Banking Act-Zban * According to the responsibilities of the MB members, the organizational unit falls under the member of the MB, responsible for Finance (CFO) Area Branch Dolenjska, Bela krajina in Posavje Area Branch Primorska, Goriška in Notranjska 167 Organizational Structure of NLB as at 31 December 2016 CEO Management Board Legal and Secretariat Corporate Communication and Strategy Human Resources and Organization Development Internal Audit Compliance and Integrity Core Group Steering CRO CFO CMO COO Global Risk Credit Risk Corporate and Retail Group Real Estate Asset Managment Customer Relationship Managment and Marketing Communication Business Analysis and Project Support Controlling Product Range Managment Procurement and CREM Evaluation and Control Financial Accounting Sales Performance Monitoring Information Technology Restructuring Financial Markets Small Enterprises Accounts Administration and Payroll * Workout and Legal Support Non-Strategic Corporate Investment Banking and Custody Non-Strategic Equity Investments Large Corporates Payments Processing Mid Corporates Cash Processing Trade Finance Services Treasury and Financial Markets Processing Corporate Banking Processing Retail Banking Processing Private Banking Distribution Network Customer Support and Contact Centre Area Branch Osrednjeslovenska - Jug Area Branch Osrednjeslovenska - Sever Area Branch Domžale, Kamnik in Zasavje Area Branch Savinjsko - Koroška Area Branch Podravsko - Pomurska Understanding of the tasks and responsibilities of Global Risk, Compliance and Integrity and Internal Audit is taken into account in acccordance to the deﬁnitions of the (currently valid) Banking Act-Zban * According to the responsibilities of the MB members, the organizational unit falls under the member of the MB, responsible for Finance (CFO) Area Branch Dolenjska, Bela krajina in Posavje Area Branch Primorska, Goriška in Notranjska NLB Group 2016 Annual Report Chapter 8. 2: Corporate and Social Responsibility Responsible to clients, employees, society The Bank has the important social responsibility mission – in addition to creating good operating results, it is actively involved in the environment of operations in order to contribute to a higher quality of life for all residents. The Bank is responsible to the clients, employees, society as a whole, and to the environment. Special attention is given to knowledge and lifelong learning, which has become a way of life. By helping young people on their path to financial independence, various incentives are directed to act responsibly for a prosperous future. One such initiative is the long-lasting support of sports – with an emphasis on sports for young people. The Bank is very active in promoting entrepreneurship, and so the establishment of NLB IEC in 2015 has actively contributed to the business climate and financial mentoring in Slovenia. Simultaneously, the Bank remains a supporter of the arts and promotes the preservation of cultural heritage. We take special pride in the tradition of being involved in numerous humanitarian projects which are supported in cooperation with clients and employees. NLB Group 2016 Annual Report169 Promoting Entrepreneurship Caring for Employees Supporting professional sport and In 2016, IEC, which was established to improve the business climate and financial mentoring in Slovenia, hosted close to 200 events organised on its own initiative or in cooperation with recognised Slovenian partners. Various business themes were presented to over 9,000 event participants. IEC is a premise which is conducive to socialising and business creation – and also received the jury award from Zavod Big for the ‘Best Interior of 2016’. Promoting Financial Literacy In January 2016 a mini-bank branch for children was opened in BTC, called ‘MiniCity Ljubljana.’ There were 10 events, where young children are being taught about the banking business. The Bank is expanding a programme called “Financial Literacy for Young People” in Slovenian primary and secondary schools. The Bank’s experienced lecturers teach about the extremely important skill, how to wisely deal with money, which is one of the most important prospect in personal and business life. In 2016 there were more than 40 lectures of this nature. The same initiative is an ongoing practice in NLB Banka, Podgorica, which besides donations for school equipment, also gives recurrent lectures to help young people on the path toward financial independence. Project ‘Healthy Bank’ was established years ago to promote health awareness and encourage a healthy lifestyle among employees. The emphasis is on prevention, identification of potential disease symptoms, and lifestyle changes. In June 2016 an e-book with instructions and a calendar of ongoing workshops was released. In 2016 over 986 employees were included in the programme and participated in more than 37 lectures and 18 whole-day workshops. The Bank is also highly involved in the education of its employees, and committed to high quality standards as an ever- learning organisation. Within the NLB Training Centre, it educates its employees to the greatest extent with experts from their own fields, and transfers the knowledge to other employees. The Bank owned a Full Certificate of a ‘Family-Friendly Company’ for the second full year. It strives to ensure that employees have a better balance between work and family obligations, offering numerous activities. All these measures were expressed in the increased satisfaction and motivation of employees. In 2016 satisfaction of employees increased by 3% compared to 2015, and 8% compared to 2014. Significantly encouraging results are also recorded in other areas of the organisational climate, which is reflected in the increasing share of dedicated employees. In 2016, the figure was 51%, while in 2015 it was 44%. encouraging Sports for Youth The Bank continues to support top Slovenian athletes, who are the greatest ambassadors of Slovenia in the world. As a Golden sponsor of the Slovenian Alpine Ski Team’s for the nineteenth year now, the Bank enhanced the sponsorships in the past three years to other important sport federations in Slovenia as well: handball, sailing, and table tennis. Together with the federations, the Bank and its employees shared the excitement of great success at the 2016 Olympic Games in Rio. The initiative ‘NLB Sports for Youth’ was successfully expanded in 2016 in order to encourage and responsibly educate young people. The Bank connected and financially supported more than 70 sports clubs of various disciplines and regions in Slovenia. This initiative supports content of the programme that is rich in fair play education, promotes responsible behaviour, and emphasises the importance of recreation in general. The programme was also established to connect various local communities in Slovenia and raise the level of sports participation, as well as socially responsible practices among youths. NLB Banka, Podgorica actively supports Montenegrin athletes in basketball, football, and tennis. The tennis NLB Royal Cup 2016 traditionally brings together athletes, business partners, and the local community. NLB Group 2016 Annual ReportThe Bank connected and financially supported more than 70 sports clubs of various disciplines and regions in Slovenia. This initiative supports content of the programme that is rich in fair play education, promotes responsible behaviour, and emphasises the importance of recreation in general. 170 Humanitarian projects raised funds from donors. The total amount raised exceeded EUR 64,000. NLB Banka Prishtina in September 2016 organised the event “Dance for Mothers and Children” in order to raise funds for pediatric equipment of not yet born children. Together with a number of donors almost EUR 40,000 were collected. Concern for Art and Cultural Heritage Throughout 2016 five broadly visited exhibitions were organised and displayed in NLB Gallery Avla. For the 45th anniversary of the Bank’s headquarters in Ljubljana, the Bank in cooperation with the Museum of Architecture and Design Centre organised a high profile international event with prominent representatives of the design profession, social sciences, economics, and education, entitled “Development Potentials and Strategies - The Way Forward?” The event symbolically took place in IEC. The Group has the most recognisable art gallery in NLB Banka, Skopje. In 2016 a total of 13 high profile exhibitions of local and foreign artists were organised. In June 2016 the Bank successfully carried out the campaign to raise funds for the purchase of essential medical equipment at Slovenian maternity hospitals. By connecting clients and humanitarian aspect, the Bank donated funds for each housing loan sold in June, and raised in total EUR 55,400. The amount was donated to six maternity hospitals where it was cheerfully accepted by staff, mothers, and their families. A similar campaign continued in December 2016. Funds were collected for children patients with cancer of the Pediatric Clinic in the main Medical Centre in Ljubljana. The Bank branches installed contribution boxes where together with other donations more than EUR 20,000 accumulated during a month-long period. The Bank is proud that employees take part in socially responsible activities. Entering the summer season it began with NLB Sports Games with a social touch. Employees, in addition to sports activities, took part in renewing the external and internal premises of local sports and recreation facilities in Martjanci, thereby pleasing the village community which has more than 5,000 inhabitants. In cooperation with the Red Cross, a traditional successful blood donor campaign was conducted, attended by 78 employees. The Bank also participated in another traditional campaign in the organisation by the Red Cross called “Take them to the Sea” and “It’s Nice to Share.” The NLB Call Centre, with bank employees and many Slovenian celebrities, NLB Group 2016 Annual Report172 List of Figures Figure 1: Three consecutive years of increased profitability (in EUR million) Figure 2: Profit before tax of NLB Group by segments (in EUR million) Figure 3: Net interest margin (in %) Figure 4: Total costs of NLB Group (in EUR million) Figure 5: Slovenia: Growth of retail sales and industrial production indicies Figure 6: Annual loan growth in the Slovenian banking system Figure 7: Retail banking leader in Slovenia Figure 8: Overview of the market shares in Slovenian banking sector Figure 9: Evolution of business volumes/segment Figure 10: NLB’s structure of retail loan book Figure 11: Tailored product offerings and servicing models Figure 12: E-pen Figure 13: Assets in management and number of private banking clients Figure 14: Assets in mutual funds under management of NLB Asset Management and their market share Figure 15: NLB Vita total assets and market share in traditional life insurances Figure 16: Distribution overview Figure 17: The Bank overall satisfaction index for retail customers’ in Slovenia Figure 18: Market share resilient despite deleveraging of the sector and competition (corporate and state net loans)* Figure 19: Evolution of business volumes/segment (in EUR million) Figure 20: Loans purpose structure Figure 21: Tailored product offerings and servicing models Figure 22: Net interest income (in EUR million) Figure 23: Operating expenses (in EUR million) Figure 24: Profit after tax (in EUR million) Figure 25: Net retail loans to customers (in EUR million) Figure 26: Net corp. loans to customers (in EUR million) Figure 27: Net non-banking sector loan book split Figure 28: Net non-banking sector loan book split Figure 29: Net non-banking sector loan book split Figure 30: Net non-banking sector loan book split Figure 31: Net non-banking sector loan book split Figure 32: Net non-banking sector loan book split Figure 33: Key changes of NLB Group liabilities and capital in 2016 (in EUR million) Figure 34: Key changes of NLB Group assets in 2016 (in EUR million) Figure 35: NLB Group balance sheet structure as of 31 December 2016 Figure 36: Evolution of funding structure confirms stable deposit base in NLB Group (in EUR million) Figure 37: Decreasing deposit interest rates environment in NLB Group Figure 38: Evolution of NLB Group liquid assets structure reflects robust liquidity position (in EUR million) Figure 39: Banking book securities by Fitch rating as of 31 December 2016 for NLB Group Figure 40: Well-diversified NLB Group banking book securities portfolio as of 31 December 2016 a.) Banking book debt securities by asset class b.) Banking book debt securities by geographical structure Figure 41: Asset evolution by activity (in EUR million) 23 24 25 26 34 35 44 46 46 47 48 48 49 49 50 51 52 56 57 57 59 68 68 68 69 69 74 77 80 83 86 89 92 92 93 94 95 96 97 97 97 97 102 NLB Group 2016 Annual Report173 108 108 109 109 109 114 133 134 135 135 136 137 138 138 139 141 141 142 142 143 6 34 36 45 55 62 67 74 77 80 83 86 89 91 101 102 113 133 140 Figure 42: NLB Group structure of the credit portfolio (gross loans and advances) by segment Figure 43: Structure of NLB Group credit portfolio by client credit ratings as at year end Figure 44: NLB Group NPE ratio (year-end NPE% by the the EBA) Figure 45: NLB Group Coverage ratio (year-end %) Figure 46: NLB Group NPL Coverage ratio (year-end %) Figure 47: HR strategy process Figure 48: Profit after tax of NLB Group – evolution YoY (in EUR million) Figure 49: Profit after tax of the NLB Group banks (on a stand alone basis) - evolution YoY (in EUR million) Figure 50: Profit before impairments and provisions of NLB Group – evolution YoY (in EUR million) Figure 51: Net interest income of NLB Group (in EUR million) Figure 52: Net interest income of NLB Group by segments (in EUR million) Figure 53: Net non-interest income by segments of NLB Group (in EUR million) Figure 54: Structure of net fees and commissions of NLB Group (in EUR million) Figure 55: Total costs of NLB Group – evolution YoY (in EUR million) Figure 56: NLB Group credit impairments and provisions, costs of risk (in bps) Figure 57: Total assets of NLB Group – structure (in EUR million) Figure 58: NLB Group gross loans to customers by core segments (in EUR million) Figure 59: Group gross loans to customers by non-core segment (in EUR million) Figure 60: Total liabilities of NLB Group – structure (in EUR million) Figure 61: NLB Group CET 1 capital (in EUR million) and CET 1 ratio (in %) List of Tables Table 1: Key financial caption for NLB Group and NLB Table 2: Movement of key macroeconomic indicators in Slovenia and the Economic and Monetary Union Table 3: Trends in the key macroeconomic indicators for selected countries in SEE Table 4: Performance of the retail banking segment in Slovenia Table 5: Performance of the corporate banking segment in Slovenia Table 6: Performance of the investment banking and custody services in Slovenia Table 7: Results of the strategic foreign markets segment Table 8: Key performance indicators of NLB Banka, Skopje Table 9: Key performance indicators of NLB Banka, Banja Luka Table 10: Key performance indicators of NLB Banka, Sarajevo Table 11: Key performance indicators of NLB Banka, Prishtina Table 12: Key performance indicators of NLB Banka, Podgorica Table 13: Key performance indicators of NLB Banka, Beograd Table 14: Performance of the Financial markets segment in Slovenia Table 15: Results of the non-core foreign markets and activities segment Table 16: The Group entities in which liquidation was initiated in 2016 Table 17: NLB Group employees by countries Table 18: Income statement of NLB Group and NLB Table 19: Statement of financial position of NLB Group and NLB NLB Group 2016 Annual ReportChapter 9. Professional Chapter 9 ПрофесионалниProfesionalniProfesionalStručniProfesionalni ПрофесионалниStrokovniProfessional Chapter 9 ПрофесионалниProfesionalniProfesionalStručniProfesionalni ПрофесионалниStrokovniNova Ljubljanska banka d.d., Ljubljana Audited Financial Statements of NLB Group and NLB d.d. Pursuant to the International Financial Reporting Standards as adopted by the European Union 2016 178 Contents Independent Auditor’s Report Statement of Management’s Responsibility Income Statement Statement of comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows 1. 2. General information Summary of significant accounting policies 2.1. Statement of compliance 2.2. Basis for presenting the financial statements 2.3. Comparative amounts 2.4. Consolidation 2.5. Investments in subsidiaries, associates, and joint ventures 2.6. Goodwill and bargain purchases 2.7. A combination of entities or businesses under common control 2.8. Foreign currency translation 2.9. Interest income and expenses 2.10. Fee and commission income 2.11. Dividend income 2.12. Financial instruments 2.13. Impairment of financial assets 2.14. Forborne loans 2.15. Repossessed assets 2.16. Offsetting 2.17. Sale and repurchase agreements 2.18. Property and equipment 2.19. Intangible assets 2.20. Investment properties 2.21. Non-current assets and disposal groups classified as held for sale 2.22. Accounting for leases 2.23. Cash and cash equivalents 2.24. Borrowings with characteristics of debt 2.25. Other issued financial instruments with characteristics of equity 2.26. Provisions 2.27. Contingent liabilities and commitments 2.28. Taxes 2.29. Fiduciary activities 2.30. Employee benefits 2.31. Share capital 2.32. Segment reporting 2.33. Critical accounting estimates and judgments in applying accounting policies 2.34. Implementation of the new and revised International Financial Reporting Standards 3. 4. Changes in subsidiary holdings Notes to the income statement 4.1. Interest income and expenses 4.2. Dividend income 4.3. Fee and commission income and expenses 180 185 186 187 188 190 191 193 193 193 193 193 193 194 194 194 194 195 195 195 195 198 199 199 200 200 200 200 200 200 201 201 201 201 202 202 202 202 203 204 204 204 206 211 212 212 212 213 NLB Group 2016 Annual Report4.4. Gains less losses from financial assets and liabilities not classified at fair value through profit or loss 4.5. Gains less losses from financial assets and liabilities held for trading 4.6. Foreign exchange translation gains less losses 4.7. Other operating income 4.8. Other operating expenses 4.9. Administrative expenses 4.10. Depreciation and amortisation 4.11. Provisions for other liabilities and charges 4.12. Impairment charge 4.13. Gains less losses from capital investments in subsidiaries, associates, and joint ventures 4.14. Income tax 4.15. Earnings per share 5. Notes to the statement of financial position 5.1. Cash, cash balances at central banks, and other demand deposits at banks 5.2. Trading assets 5.3. Financial instruments designated at fair value through profit or loss 5.4. Available-for-sale financial assets 5.5. Derivatives for hedging purposes 5.6. Loans and advances 5.7. Held-to-maturity financial assets 5.8. Non-current assets classified as held for sale 5.9. Property and equipment 5.10. Investment property 5.11. Intangible assets 5.12. Investments in subsidiaries, associates and joint ventures 5.13. Other assets 5.14. Movements in allowance for the impairment of banks, loans, and advances to customers and other financial assets 5.15. Trading liabilities 5.16. Financial liabilities, measured at amortised cost 5.17. Provisions 5.18. Deferred income tax 5.19. Income tax relating to components of other comprehensive income 5.20. Other liabilities 5.21. Share capital 5.22. Accumulated other comprehensive income and reserves 5.23. Capital adequacy ratios 5.24. Off-balance sheet liabilities 5.25. Funds managed on behalf of third parties 6. 7. Events after the reporting date Risk management 7.1. Credit risk management 7.2. Market risk 7.3. Liquidity risk 7.4. Information regarding the quality of debt securities 7.5. Management of non-financial risks 7.6. Fair value hierarchy of financial and non-financial assets and liabilities 7.7. Offsetting financial assets and financial liabilities 8. 9. Analysis by segment for NLB Group Related-party transactions 179 214 215 215 216 216 217 218 218 219 220 220 221 221 221 222 223 224 226 228 232 233 233 235 236 237 242 243 245 246 248 252 254 255 255 255 256 258 259 261 261 263 286 299 314 315 316 325 326 330 NLB Group 2016 Annual Report180 NLB GROUP 2016 ANNUAL REPORT NLB GROUP 2016 ANNUAL REPORT 181 182 182 NLB GROUP 2016 ANNUAL REPORT NLB Group 2016 Annual ReportNLB GROUP 2016 ANNUAL REPORT 183183 NLB Group 2016 Annual Report185 Statement of Management’s Responsibility The Management Board hereby confirms its responsibility for preparing the financial statements of NLB and the consolidated financial statements of NLB Group for the year ending on 31 December 2016, and for the accompanying accounting policies and notes to the financial statements. The Management Board is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards as adopted by the European Union, and with the requirements of the The Management Board Slovenian Companies Act and Banking Act so as to give a true and fair view of the financial position of NLB Group and NLB as at 31 December 2016, and their financial results and cash flows for the year then ended. The Management Board also confirms that the appropriate accounting policies were consistently applied, and that the accounting estimates were prepared according to the principles of prudence and good management. The Management Board further confirms that the financial statements of NLB Group and NLB, together with the accompanying notes, have been prepared on a going-concern basis for NLB Group and NLB, and in line with valid legislation and the International Financial Reporting Standards as adopted by the European Union. The Management Board is also responsible for appropriate accounting practices, the adoption of appropriate measures for safeguarding assets, and the prevention and identification of fraud and other irregularities or illegal acts. László Pelle Member of the Management Board Archibald Kremser Member of the Management Board Andreas Burkhardt Member of the Management Board Blaž Brodnjak Chief Executive Officer NLB Group 2016 Annual Report186 Income Statement Interest and similar income Interest and similar expense Net interest income Dividend income Fee and commission income Fee and commission expense Net fee and commission income Gains less losses from financial assets and liabilities not classified as at fair value through profit or loss Gains less losses from financial assets and liabilities held for trading Gains less losses from financial assets and liabilities designated at fair value through profit or loss Fair value adjustments in hedge accounting Foreign exchange translation gains less losses Gains less losses on derecognition of assets Other operating income Other operating expenses Administrative expenses Depreciation and amortisation Provisions for other liabilities and charges Impairment charge Gains less losses from capital investments in subsidiaries, associates and joint ventures Net gains or losses from non-current assets held for sale Profit before income tax Income tax Profit for the year Attributable to owners of the parent Attributable to non-controlling interests Notes 4.1. 4.1. 4.2. 4.3. 4.3. 4.4. 4.5. 5.5.a) 4.6. 4.7. 4.8. 4.9. 4.10. 4.11. 4.12. 4.13. 4.14. NLB Group NLB in EUR thousand 2016 388,494 (71,189) 317,305 1,238 194,371 (48,706) 145,665 2015 443,203 (103,001) 340,202 1,346 195,710 (48,640) 147,070 14,788 10,659 6,921 235 (3,239) 1,158 867 24,442 (33,204) (18,877) (3) 231 11,831 (624) 27,329 (35,083) 2016 215,550 (40,672) 174,878 1,144 123,014 (27,728) 95,286 14,639 336 - (2,437) 738 252 12,267 (13,176) 2015 269,000 (60,993) 208,007 1,264 128,896 (30,828) 98,068 10,685 (25,304) - 231 23,251 (450) 13,234 (15,133) (261,160) (265,984) (162,083) (165,813) (28,345) (4,357) (56,288) 5,006 (432) 130,600 (14,975) 115,625 110,017 5,608 (31,856) (18,880) 696 482 (83,801) (64,433) 28,915 (220) 67,708 (3,925) 63,783 4,312 (690) 106,758 (11,380) 95,378 91,914 3,464 (21,410) 5,153 (93,114) 13,747 (567) 51,849 (7,968) 43,881 63,783 43,881 - 3.2 - 2.2 Earnings per share/diluted earnings per share (in EUR per share) 4.15. 5.5 4.6 The notes are an integral part of these financial statements. NLB Group 2016 Annual Report 187 Statement of comprehensive income NLB Group NLB in EUR thousand Notes Net profit for the year after tax Other comprehensive income after tax Items that will not be reclassified to income statement Actuarial gains/(losses) on defined benefit pensions plans Share of other comprehensive income/(losses) of entities accounted for using the equity method Income tax relating to components of other comprehensive income 5.19. Items that may be reclassified subsequently to income statement Foreign currency translation Translation gains/(losses) taken to equity Cash flow hedges (effective portion) Net valuation gains/(losses) taken to equity Transferred to profit or loss Available-for-sale financial assets Valuation gains/(losses) taken to equity Transferred to profit or loss 5.5.d) 5.5.d) 5.4.c) 4.4. and 4.12. 2016 115,625 6,331 1,515 (6) (191) (1,910) (1,910) 2,703 (343) 3,046 3,899 18,529 (14,630) 2015 95,378 (12,859) (1,975) 69 738 (2,685) (2,685) 509 (78) 587 (8,496) (2,316) (6,180) 2016 63,783 2,740 1,466 - (191) - - 2,703 (343) 3,046 171 14,652 (14,481) 2015 43,881 (6,650) (706) - 740 - - 509 (78) 587 (8,562) (314) (8,248) Share of other comprehensive income/(losses) of entities accounted for using the equity method 2,731 (2,804) - - Income tax relating to components of other comprehensive income 5.19. (2,410) 1,785 (1,409) 1,369 Total comprehensive income for the year after tax Attributable to owners of the parent Attributable to non-controlling interests 121,956 116,383 5,573 82,519 79,032 3,487 66,523 66,523 - 37,231 37,231 - The notes are an integral part of these financial statements. NLB Group 2016 Annual Report 188 Statement of financial position Cash, cash balances at central banks, and other demand deposits at banks Trading assets Financial assets designated at fair value through profit or loss Available-for-sale financial assets Derivatives - hedge accounting Loans and advances - debt securities - loans and advances to banks - loans and advances to customers - other financial assets Held-to-maturity financial assets Fair value changes of the hedged items in portfolio hedge of interest rate risk Non-current assets classified as held for sale Property and equipment Investment property Intangible assets Investments in subsidiaries Investments in associates and joint ventures Current income tax assets Deferred income tax assets Other assets Total assets Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - due to customers - borrowings from other customers - debt securities in issue - subordinated liabilities - other financial liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Equity and reserves attributable to owners of the parent Share capital Share premium Accumulated other comprehensive income Profit reserves Retained earnings Non-controlling interests Total equity Total liabilities and equity The notes are an integral part of these financial statements. NLB Group NLB in EUR thousand Notes 31.12.2016 31.12.2015 31.12.2016 31.12.2015 5.1. 5.2. 5.3. 5.4.a) 5.5. 5.6.a) 5.6.b) 5.6.c) 5.6.d) 5.7. 5.8. 5.9. 5.10. 5.11. 5.12.a) 5.12.b) 5.18. 5.13. 5.15. 5.3. 5.5. 5.16.a) 5.16.b) 5.16.a) 5.16.b) 5.16.c) 5.16.d) 5.16.e) 5.17. 5.18. 5.20. 5.21. 5.22. 5.22. 5.22. 5.22. 1,299,014 1,161,983 87,699 6,694 267,413 7,595 617,039 87,693 2,011 496,806 267,880 4,913 2,072,153 1,737,191 1,594,094 1,248,359 217 1,083 217 1,083 85,315 435,537 394,579 431,775 85,315 408,056 394,579 345,207 6,912,067 6,693,621 4,843,594 4,826,139 61,014 611,449 678 4,263 196,849 83,663 33,970 - 43,248 2,888 7,735 94,558 69,521 565,535 741 4,629 207,730 93,513 39,327 - 39,696 929 9,400 95,354 36,151 611,449 678 1,788 90,496 8,151 23,345 48,944 565,535 741 1,776 94,570 8,613 29,627 339,693 346,001 7,031 2,124 10,622 8,419 7,094 - 9,139 9,779 12,039,011 11,821,615 8,777,966 8,706,785 18,791 2,011 29,024 42,334 371,769 29,920 4,912 33,842 57,982 571,029 18,787 2,011 29,024 74,977 338,467 29,909 4,912 33,842 96,736 519,926 9,437,147 9,020,666 6,615,390 6,293,339 83,619 277,726 27,145 110,295 100,914 3,146 727 8,703 100,267 304,962 27,340 75,307 122,639 7,514 313 14,539 4,274 277,726 - 68,784 79,546 - - 4,186 16,168 304,962 - 47,346 105,137 6,681 - 5,676 10,513,351 10,371,232 7,513,172 7,464,634 200,000 871,378 29,969 13,522 380,444 200,000 871,378 23,603 13,522 314,307 200,000 871,378 34,581 13,522 145,313 200,000 871,378 31,841 13,522 125,410 1,495,313 1,422,810 1,264,794 1,242,151 30,347 27,573 1,525,660 1,450,383 12,039,011 11,821,615 - 1,264,794 8,777,966 - 1,242,151 8,706,785 NLB Group 2016 Annual Report The Management Board has approved the release of the financial statements and the accompanying notes. 189 László Pelle Member of the Management Board Archibald Kremser Member of the Management Board Andreas Burkhardt Member of the Management Board Blaž Brodnjak Chief Executive Officer Ljubljana, 28 March 2017 NLB Group 2016 Annual Report190 Statement of changes in equity NLB Group Share capital Share premium Accumulated other comprehensive income Profit reserves Retained earnings in EUR thousand Equity attributable to owners of the parent Equity attributable to non-controlling interests Total equity Balance as at 1 January 2015 200,000 871,378 36,485 13,522 221,676 1,343,061 26,234 1,369,295 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid Transactions with non-controlling interests - - - - - - - - - - - (12,882) (12,882) - - - - - - - 91,914 91,914 3,464 95,378 - (12,882) 23 (12,859) 91,914 79,032 3,487 82,519 - 717 - 717 (1,048) (1,048) (1,100) (383) Balance as at 31 December 2015 200,000 871,378 23,603 13,522 314,307 1,422,810 27,573 1,450,383 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid - - - - - - - - - 6,366 6,366 - - - - - 110,017 110,017 - 6,366 110,017 116,383 5,608 (35) 5,573 115,625 6,331 121,956 (43,880) (43,880) (2,799) (46,679) Balance as at 31 December 2016 200,000 871,378 29,969 13,522 380,444 1,495,313 30,347 1,525,660 NLB Share capital Share premium Accumulated other comprehensive income Profit reserves Retained earnings Total equity in EUR thousand 200,000 871,378 38,491 13,522 81,529 1,204,920 Balance as at 1 January 2015 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Balance as at 31 December 2015 200,000 871,378 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid - - - - - - - - - - - - - - - (6,650) (6,650) 31,841 - 2,740 2,740 - - - - 43,881 - 43,881 43,881 (6,650) 37,231 13,522 125,410 1,242,151 - - - - 63,783 - 63,783 63,783 2,740 66,523 (43,880) (43,880) Balance as at 31 December 2016 200,000 871,378 34,581 13,522 145,313 1,264,794 The notes are an integral part of these financial statements. NLB Group 2016 Annual ReportStatement of cash flows Cash flows from operating activities Interest received Interest paid Dividends received Fee and commission receipts Fee and commission payments Realised gains from financial assets and financial liabilities not at fair value through profit or loss Realised losses from financial assets and financial liabilities not at fair value through profit or loss Net gains/(losses) from financial assets and liabilities held for trading 191 NLB Group NLB in EUR thousand 2016 2015 2016 2015 413,337 (78,401) 1,233 192,295 (51,996) 467,091 (121,143) 1,346 194,133 (48,713) 240,789 (44,510) 1,139 119,296 (27,056) 13,296 10,964 13,147 294,113 (72,613) 1,264 126,371 (30,993) 10,886 (40) 3,246 (234) (40) (234) (23,110) (2,785) (28,335) Payments to employees and suppliers (262,202) (271,456) (165,579) (174,051) Other income Other expenses Income tax paid Cash flows from operating activities before changes in operating assets and liabilities (Increases)/decreases in operating assets Net (increase)/decrease in trading assets Net (increase)/decrease in financial assets designated at fair value through profit or loss Net (increase)/decrease in available-for-sale financial assets Net (increase)/decrease in loans and advances Net (increase)/decrease in other assets Increases/(decreases) in operating liabilities Net increase/(decrease) in financial liabilities designated at fair value through profit or loss Net increase/(decrease) in deposits and borrowings measured at amortised cost Net increase/(decrease) in securities measured at amortised cost Net increase/(decrease) in other liabilities Net cash used in operating activities Cash flows from investing activities Receipts from investing activities Proceeds from sale of property and equipment and investment property Proceeds from dividends from subsidiaries and associates Proceeds from non-current assets held for sale Proceeds from disposals of held-to-maturity financial assets Payments from investing activities Purchase of property and equipment and investment property Purchase of intangible assets Purchase of subsidiaries and increase in subsidiaries' equity Increase in associates and joint ventures' equity Purchase of held-to-maturity financial assets Net cash flows used in investing activities Cash flows from financing activities Proceeds from financing activities Issue of subordinated debt Payments from financing activities Dividends paid Net cash from financing activities Effects of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The notes are an integral part of these financial statements. 26,352 (26,132) (19,991) 210,997 (139,839) 163,609 1,026 (344,588) 37,715 2,399 197,351 (2,801) 227,842 (26,913) (777) 268,509 77,903 5,536 3,587 128 68,652 (153,178) (17,896) (6,981) - (12,250) (116,051) (75,275) - - (46,655) (46,655) (46,655) 693 146,579 1,302,003 1,449,275 31,129 (28,935) (4,980) 206,092 (143,429) (135,235) (880) (45,544) 33,155 5,075 (200,359) - (146,993) (53,469) 103 (137,696) 178,923 3,718 35 170 175,000 (51,377) (11,404) (7,685) (404) - (31,884) 127,546 9,900 9,900 (977) (977) 8,923 10,246 (1,227) 1,292,984 1,302,003 13,256 (14,857) (14,489) 118,311 30,540 164,609 2,795 (353,677) 214,615 2,198 101,342 (2,801) 130,815 (26,913) 241 250,193 98,095 400 28,915 128 68,652 (161,064) (10,990) (4,466) (17,307) (12,250) (116,051) (62,969) - - (43,880) (43,880) (43,880) 1,507 143,344 525,831 670,682 14,136 (16,487) (678) 123,379 (34,116) (135,235) - (88,304) 189,680 (257) (208,931) - (155,700) (53,469) 238 (119,668) 188,913 68 13,747 98 175,000 (70,863) (5,672) (5,577) (27,730) - (31,884) 118,050 - - - - - 8,226 (1,618) 519,223 525,831 NLB Group 2016 Annual Report 192 Statement of cash flows Cash and cash equivalents comprise: Cash, cash balances at central banks, and other demand deposits at banks Loans and advances to banks with original maturity up to 3 months Trading assets with original maturity up to 3 months Available for sale financial assets with original maturity up to 3 months NLB Group NLB in EUR thousand Notes 2016 2015 2016 2015 5.1. 5.6. 5.2. 5.4. 1,299,014 1,161,983 85,103 - 65,158 64,137 4,575 71,308 617,039 53,643 - - 496,806 24,450 4,575 - Total 1,449,275 1,302,003 670,682 525,831 NLB Group 2016 Annual Report 193 Notes to the Financial Statements 1. General information Nova Ljubljanska banka d.d. Ljubljana (hereinafter: NLB) is a joint-stock entity providing universal banking services. NLB Group consists of NLB and its subsidiaries located in 10 countries. NLB is incorporated and domiciled in Slovenia. The address of its registered office is Trg Republike 2, Ljubljana. NLB’s shares are not listed on the stock exchange. The ultimate controlling party of NLB is the Republic of Slovenia, which was the sole shareholder as at 31 December 2016 and 31 December 2015. All amounts in the financial statements and in the notes to the financial statements are expressed in thousands of euros unless otherwise stated. 2. Summary of significant accounting policies The principal accounting policies adopted for the preparation of the separate and consolidated financial statements are set out below. The policies have been consistently applied to all the years presented. 2.1. Statement of compliance The principal accounting policies applied in the preparation of the separate and consolidated financial statements were prepared in accordance with the International Financial Accounting Standards (hereinafter: the IFRS) as adopted by the European Union (hereinafter: EU). Additional requirements under the national legislation are included where appropriate. The separate and consolidated financial statements are comprised of: the income statement and statement of comprehensive income, the statement of financial position, the statement of changes in equity, the statement of cash flows, significant accounting policies, and the notes. 2.2. Basis for presenting the financial statements The financial statements have been prepared on a going-concern basis, under the historical cost convention as modified by the revaluation of available-for-sale financial assets and financial assets, and the financial liabilities at fair value through profit or loss, including all derivative contracts and investment property. The preparation of financial statements in accordance with the IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and activities, actual results may ultimately differ from those estimates. Accounting estimates and underlying assumptions are reviewed on an ongoing basis. Revisions of accounting estimates are recognised in the period in which the estimate is revised. Critical accounting estimates and judgements in applying accounting policies are disclosed in note 2.33. 2.3. Comparative amounts Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed in comparative amounts. Where IAS 8 applies, comparative figures have been adjusted to conform to changes in presentation in the current year. In 2016 the presentation of deposit guarantees changed, and the data for 2015 were adjusted. Before the change, deposit guarantees were included in the item ‘Fee and Commission Expenses’, in the amount of EUR 8,259 thousand (note 4.3.) while after the change it is included in the item ‘Other Operating Expenses’ (note 4.8.). The change only affects the presentation of the financial statements. 2.4. Consolidation In the consolidated financial statements subsidiaries which are directly or indirectly controlled by NLB have been fully consolidated. Subsidiaries are consolidated from the date on which effective control is transferred to NLB Group. NLB controls an entity when all three elements of control are met: • it has power over the entity; • it is exposed or has rights to variable returns from its involvement with the entity; and • it has the ability to use its power over the entity to affect the amount of the entity’s returns. NLB reassesses whether it controls an entity if facts and circumstances indicate there are changes to one or more of the three elements of control. If the loss of control of a subsidiary occurs, the subsidiary is no longer consolidated from the date that control ceases. Where necessary, the accounting policies of subsidiaries have been amended to ensure consistency with the policies adopted by NLB. The financial statements of consolidated subsidiaries are prepared as at the parent entity’s reporting date. Non-controlling interests are disclosed in the consolidated statement of changes in equity. Non-controlling interest is that part of the net results, and of the equity of a subsidiary attributable to interests which NLB Group 2016 Annual Report194 NLB does not own, directly or indirectly. NLB Group measures non-controlling interest on a transaction-by-transaction basis, either at fair value, or the non-controlling interest’s proportionate share of net assets of the acquiree. Joint ventures are those entities over whose activities NLB Group has joint control, as established by contractual agreement. In the consolidated financial statements, investments in joint ventures are accounted for using the equity method of accounting. Inter-company transactions, balances, and unrealised gains on transactions between NLB Group entities are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. NLB Group treats transactions with non-controlling interests as transactions with equity owners of NLB Group. For purchases of subsidiaries from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from the equity. Gains or losses on sales to non-controlling interests are recorded in the equity. For sales to non-controlling interests, the differences between any proceeds received and the relevant share of non-controlling interests are also recorded in the equity. All effects are presented in the item ‘Equity Attributable to Non-controlling Interest’. 2.5. Investments in subsidiaries, associates, and joint ventures In the separate financial statements, investments in subsidiaries, associates, and joint ventures are accounted for with the cost method. Dividends from subsidiaries, joint ventures, or associates are recognised in the income statement when NLB’s right to receive the dividend is established. In the consolidated financial statements, investments in associates are accounted for using the equity method of accounting. These are generally undertakings in which NLB Group holds between 20% and 50% of voting rights, and over which NLB Group exercises significant influence, but does not have control. NLB Group’s share of its associates’ and joint ventures’ post-acquisition profits or losses is recognised in the consolidated income statement, and its share of other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When NLB Group’s share of losses in an associate and joint venture equals or exceeds its interest in the associate and joint venture, including any other unsecured receivables, NLB Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the associate and joint venture. NLB Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised (note 5.12.b). NLB Group’s subsidiaries, associates, and joint ventures are presented in note 5.12. 2.6. Goodwill and bargain purchases Goodwill is measured as the excess of the aggregate of the consideration measured at fair value and transferred to the acquiree, the amount of any non-controlling interest in the acquire, and the fair value of an interest in the acquiree held immediately before the acquisition date over the net amounts of the identifiable assets acquired and the liabilities assumed. Any negative amount, a gain on a bargain purchase, is recognised in profit or loss after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews the appropriateness of their measurement. The consideration transferred is measured at the fair value of the assets transferred, equity interest issued, and liabilities incurred or assumed, including the fair value of assets or liabilities from contingent consideration arrangements. However, this excludes acquisition-related costs such as advisory, legal, valuation, and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from the equity and all other transaction costs associated with the acquisition are expensed. The goodwill of associates and joint ventures is included in the carrying value of investments. 2.7. A combination of entities or businesses under common control A merger of entities within NLB Group is a business combination involving entities under common control. For such mergers, members of NLB Group apply merger accounting principles and use the carrying amounts of merged entities as reported in the consolidated financial statements. No goodwill is recognised on mergers of NLB Group entities. Mergers of entities within NLB Group do not affect the consolidated financial statements. 2.8. Foreign currency translation Functional and presentation currency Items included in the financial statements of each of NLB Group’s entities are measured using the currency of the primary economic environment in which the entity operates (i.e. the functional currency). The financial statements are presented in euros, which is NLB Group’s presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated NLB Group 2016 Annual Reportin foreign currencies are recognised in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges. Translation differences resulting from changes in the amortised cost of monetary items denominated in foreign currency and classified as available-for-sale financial assets are recognised in the income statement. Translation differences on non-monetary items, such as equities at fair value through profit or loss, are reported as part of the fair value gain or loss in the income statement. Translation differences on non-monetary items, such as equities classified as available for sale, are included together with valuation reserves in the valuation (losses)/gains taken to other comprehensive income and accumulated in the equity. Gains and losses resulting from foreign currency purchases and sales for trading purposes are included in the income statement as gains less losses from financial assets and liabilities held for trading. NLB Group entities The financial statements of all NLB Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each statement of financial position presented are translated at the closing rate on the reporting date; • income and expenses for each income statement are translated at average exchange rates; and • components of equity are translated at the historical rate. Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. In the consolidated financial statements, exchange differences arising from the translation of the net investment in foreign operations are transferred to other comprehensive income. When control over a foreign operation is lost, the previously recognised exchange differences on translations to a different presentation currency are reclassified from other comprehensive income to profit and loss for the year as part of the gain or loss on disposal. On the partial disposal of a subsidiary without loss of control, the related portion of accumulated currency translation differences is reclassified as a non-controlling interest within the equity. 2.9. Interest income and expenses Interest income and expenses are recognised in the income statement for all interest-bearing instruments on an accrual basis using the effective interest rate method. The effective interest rate method is used to calculate the amortised cost of a financial asset or financial liability, and to allocate the interest income or interest expense over the relevant period. The effective interest rate is the rate that precisely discounts estimated future cash payments or receipts over the expected life of the financial instrument, or a shorter period (when appropriate) on the net carrying amount of the financial asset or financial liability. Interest income includes coupons earned on fixed-yield investments and trading securities, and accrued discounts and premiums on securities. The calculation of the effective interest rate includes all fees and points paid or received by parties to the contract and all transaction costs, but excludes future credit risk losses. Once a financial asset or a group of similar financial assets has been impaired, interest income is recognised by the rate of interest used to discount future cash flows for the purpose of measuring the impairment loss. 2.10. Fee and commission income Fees and commissions are generally recognised when the service has been 195 provided. Fees and commissions mainly consist of fees received from credit cards and ATMs, customer transaction accounts, payment services, investment funds, and commissions from guarantees. Fees and commissions that are integral to the effective interest rate of financial assets and liabilities are presented within interest income or expenses. 2.11. Dividend income Dividends are recognised in the income statement when NLB Group’s right to receive payment is established and an inflow of economic benefits is probable. Dividend income from subsidiaries, associates, and joint ventures is included in the item ‘Gains Less Losses from Capital Investments in Subsidiaries, Associates, and Joint Ventures’, while other dividend income is included in the item ‘Dividend Income’. In the consolidated financial statement, dividends received from associates and joint ventures reduce the carrying value of the investment. 2.12. Financial instruments a) Classification The classification of financial instruments upon initial recognition depends on the instrument’s characteristics and management’s intention. In general, the following criteria are taken into account: Financial instruments at fair value through profit or loss This category has two sub-categories: financial instruments held for trading and financial instruments designated at fair value through profit or loss at inception. A financial instrument is classified in this group if acquired principally for the purpose of selling it in the short term, or if so designated by management. NLB Group designates financial instruments at fair value through profit or loss if: • it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise NLB Group 2016 Annual Report196 from measuring assets or liabilities on a different basis; • a group of financial assets, financial liabilities, or both is managed and its performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to NLB Group’s key management; or • a financial instrument contains one or more embedded derivatives that could significantly modify the cash flows otherwise required by the contract. Derivatives are categorised as held for trading unless they are designated as hedging instruments. Loans and advances Loans and advances are non-derivative financial instruments with fixed or determinable payments that are not quoted on an active market, other than: (a) those that NLB Group intends to sell immediately or in the short term and which are classified as held for trading, and those that NLB Group, upon initial recognition, classifies at fair value through profit or loss; (b) those that NLB Group, upon initial recognition, classifies as available for sale; or (c) those for which NLB Group may not recover substantially all of its initial investment for reasons other than a deterioration in creditworthiness. Held‑to‑maturity financial assets Held-to-maturity financial assets are non-derivative financial instruments that are traded on an active market with fixed or determinable payments and a fixed maturity that NLB Group has both the intention and ability to hold to maturity. An investment is not classified as a held-to-maturity financial asset if NLB Group has the right to require the issuer to repay or redeem the investment before its maturity, because paying for such a feature is inconsistent with expressing an intention to hold the asset until maturity. Available‑for‑sale financial assets c) Day one gains or losses Available-for-sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to liquidity needs or changes in interest rates, exchange rates, or prices. b) Measurement and recognition Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Regular way purchases and sales of financial assets at fair value through profit or loss, and assets held-to-maturity and available-for-sale, are recognised on the trade date. Loans and advances are recognised when cash is advanced to the borrowers. Financial assets at fair value through profit or loss and available-for-sale financial assets are subsequently measured at fair value. Gains and losses from changes in the fair value of financial assets at fair value through profit or loss are included in the income statement in the period in which they arise. Gains and losses from changes in the fair value of available-for-sale financial assets are recognised in other comprehensive income until the financial asset is derecognised or impaired, at which time the cumulative amount previously included in other comprehensive income is recycled in the income statement. Interest calculated using the effective interest rate method, and foreign currency gains and losses on monetary assets classified as available-for-sale are recognised in the income statement. Loans and held-to-maturity financial assets are carried at an amortised cost. The best evidence of fair value at initial recognition is the transaction price (i.e. the fair value of the consideration given or received), unless the fair value of that instrument is evidenced by a comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging), or based on a valuation technique whose variables only include data from observable markets. If the transaction price on a non-active market is different than the fair value from other observable current market transactions in the same instrument, or is based on a valuation technique whose variables only include data from observable markets, the difference between the transaction price and fair value is recognised immediately in the income statement (“day one gains or losses”). In cases where the data used for valuation are not fully observable in financial markets, day one gains or losses are not recognised immediately in the income statement. The timing of recognition of deferred day one gains or losses is determined individually. It is either amortised over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable inputs, or realised through settlement. d) Reclassification Financial assets that are eligible for classification as loans and advances can be reclassified out of the held-for-trading category if they are no longer held for the purpose of selling or repurchasing them in the near term. Financial assets that are not eligible for classification as loans and receivables may be transferred from the held-for-trading category only in rare circumstances. In addition, instruments designated at fair value through profit and loss cannot be reclassified. NLB Group 2016 Annual Reporte) Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset is transferred and the transfer qualifies for derecognition. A financial liability is derecognised only when it is extinguished, i.e. when the obligation specified in the contract is discharged, cancelled, or expires. instrument and, if so, the nature of the item being hedged. NLB Group designates certain derivatives as either: • hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge); • hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly probable forecasted transaction (cash flow hedge); or f) Fair value measurement principles • hedges of a net investment in a foreign The fair value of financial instruments traded on active markets is based on the price that would be received to sell the assets or transfer liability (exit price) being measured at the reporting date, excluding transaction costs. If there is no active market, the fair value of the instruments is estimated using discounted cash flow techniques or pricing models. If discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates; and the discount rate is a market-based rate at the reporting date for an instrument with similar terms and conditions. If pricing models are used, inputs are based on market-based measurements at the reporting date. operation (net investment hedge). Hedge accounting is used for derivatives designated in this way provided certain criteria are met. At the inception of the transaction NLB Group documents the relationship between hedged items and hedging instruments, as well as its risk management objective and strategy for undertaking various hedge transactions. NLB Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The actual results of a hedge must always fall within a range of 80-125%. g) Derivative financial instruments and hedge accounting Fair value hedge Derivative financial instruments, including forward and futures contracts, swaps, and options, are initially recognised in the statement of financial position at fair value. Derivative financial instruments are subsequently re-measured at their fair value. Fair values are obtained from quoted market prices, discounted cash flow models or pricing models, as appropriate. All derivatives are carried at their fair value within assets when the derivative position is favourable to NLB Group, and as well within liabilities when the derivative position is unfavourable to NLB Group. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Effective changes in the fair value of hedging instruments and related hedged items are reflected in “fair value adjustments in hedge accounting” in the income statement. Any ineffectiveness from derivatives is recorded in “Gains Less Losses on Financial Assets and Liabilities held for Trading.” The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging If a hedge no longer meets the hedge accounting criteria, the adjustment to the carrying amount of the hedged item for 197 which the effective interest rate method is used is amortised to profit or loss over the remaining period to maturity. The adjustment to the carrying amount of a hedged equity security is included in the income statement upon disposal of the equity security. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement in “Gains less losses on financial assets and liabilities held for trading.” Amounts accumulated in equity are recycled as a reclassification from other comprehensive income to the income statement in the periods when the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets hedge accounting criteria, any cumulative gain or loss existing in other comprehensive income and previously accumulated in equity at that time remains in other comprehensive income and in equity, and is recognised in profit or loss only when the forecasted transaction is ultimately recognised in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the income statement in line with fair value adjustments in hedge accounting. Hedge of a net investment in a foreign operation Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised directly in equity. The gain or loss relating to the ineffective portion is recognised NLB Group 2016 Annual Report198 immediately in the consolidated income statement in “Gains Less Losses on Financial Assets and Liabilities Held for Trading.” Gains and losses accumulated in other comprehensive income are included in the consolidated income statement when the foreign operation is disposed of as part of the gain or loss on the disposal. In the separate financial statements, the hedge of the net investment in a foreign operation is accounted for as a fair value hedge. 2.13. Impairment of financial assets a) Assets carried at amortised cost NLB Group assesses impairments of financial assets separately for all individually significant assets where there is objective evidence of impairment. All other financial assets are impaired collectively. According to the Regulation on credit risk loss assessment of the Bank of Slovenia, a financial asset or off-balance sheet liability is individually significant if total exposure to a customer exceeds 0.5% of a bank’s equity. In 2016, all exposures to banks, all exposures to other legal entities exceeding EUR 100 thousand and all exposures to individuals exceeding EUR 100 thousand were deemed individually significant assets requiring individual assessment. If NLB Group determines that no objective evidence exists for an individually assessed financial asset, the asset is included in a group of related financial assets with similar credit risk characteristics and collectively assessed for impairment. At each reporting date NLB Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that event has an impact on the future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria NLB Group uses to determine whether objective evidence of an impairment loss exists include: • delays in the payment of contractual interest or principal; • a breach of other contractual covenants or conditions; • difficulties in the financial condition of the borrower; • restructuring of a borrower’s financial liabilities, whereby a material loss is recognised; • initiation of bankruptcy or insolvency proceedings; and • other arrangements having an adverse effect on the bank’s or company’s position. If there is objective evidence that an impairment loss on loans and advances or held-to-maturity financial assets has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced through an allowance account and the loss is recognised in the income statement. With regard to impairments for customers in default, where the payment of existing liabilities is only possible through the redemption of collateral, the expected payment from the collateral is taken into account. This value is calculated from the appraised market value of the collateral and the discount used as defined in the Collateral Manual. Off-balance sheet liabilities are also assessed individually and, where necessary, related provisions are recognised as liabilities. For the purpose of the collective assessment of impairment, NLB Group uses transition matrices which illustrate the expected transition of customers between internal rating categories. The probability of transition is assessed on the basis of past years’ experience, i.e. the annual transition matrices for different types or segments of customers. This data may be adopted for projected future trends as historical experience does not necessarily reflect actual economic movements. Exposures to individuals are further analysed with regard to the type of product. Based on the expected transition of customers to D and E credit-rating categories, and an assessment of the average repayment rate for D- and E-rated customers (treated as customers in default), NLB Group recognises collective impairments. If the amount of impairment decreases subsequently due to an event occurring after the impairment was recognised (e.g. repayment in the collection process exceeds the assessed expected payment from collateral), the reversal of the loss is recognised as a reduction in the allowance for loan impairment. NLB Group writes off financial assets measured at amortised cost if during the collection process it assesses that the assets in question will not be repaid and that the conditions for derecognition have been met. b) Assets classified as available for sale NLB Group assesses at each reporting date whether there is objective evidence that available-for-sale financial assets are impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of an investment below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss is reclassified from other comprehensive income and recognised in the income statement as an impairment loss. Impairment losses recognised in the income statement on equity investments are not reversed through the income statement; subsequent increases in their fair value after impairment are recognised in other comprehensive income. NLB Group 2016 Annual ReportIf, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the income statement. The following factors are considered in determining impairment losses on debt instruments: • default or delinquency in interest or principal payments; • liquidity difficulties of the issuer; • a breach of contract covenants or conditions; • bankruptcy of the issuer; • deterioration of economic and market conditions; and • deterioration in the credit rating of the issuer below an acceptable level. Impairment losses recognised in the income statement are measured as the difference between the carrying amount of the financial asset and its current fair value. The current fair value of the instrument is its market price or discounted future cash flows when the market price is not obtainable. 2.14. Forborne loans A forborne loan (or restructured financial asset) arises as a result of a debtor’s inability to repay a debt under the originally agreed terms, either by modifying the terms of the original contract (via an annex) or by signing a new contract (refinancing) under which the contracting parties agree the partial or total repayment of the original debt. If receivables due from the client have the status of restructuring, the debtor must be classified in the rating group C, D, or E. The definitions of forborne loans closely follow definitions that were developed by the European Banking Authority (EBA). These definitions aim to achieve comprehensive coverage of exposures to which forbearance measures have been extended. Accounting treatment of forborne loans depends on the type of restructuring. When NLB Group is embarking on a forborne loan via modified terms of repayment proceeding from extending the deadline for the repayment of the principal and/ or interest and/or a forbearance of the repayment of the principal and/or interest or a reduction in the interest rate and/ or other expenses, it adjusts the carrying amount of the forborne loan on the basis of the discounted value of the estimated future cash flows under the modified terms, and recognises the resulting effect in profit or loss as an impairment. In the event of the reduction of a claim against the debtor via the reduction in the amount of the claims as a result of a contractually agreed debt waiver and ownership restructuring or debt to equity swap, NLB Group derecognises the claim in the part relating to the write-down or the contractually agreed debt waiver. The new estimate of the future cash flows for the residual claim, not yet written down, is based on an updated estimate of the probability of loss. NLB Group takes into account the debtor’s modified position, the economic expectations and the collateral of the forborne loan. When NLB Group is embarking on the forborne loan by taking possession of other assets (property, plant and equipment, securities, and other financial assets), including investments in the equity of debtors obtained via debt-to-equity swaps, it recognises the acquired assets in the statement of financial position at fair value, recognising the difference between the disclosed fair value of the asset and the carrying amount of the eliminated claim in profit or loss. Forborne exposures may be identified in both the performing and non-performing parts of the portfolio. Where the forborne loan is classified in the non-performing part of the portfolio, it can be reclassified to the performing part if forbearance does 199 not lead to a recognition of impairment or non-performance, if one year has passed since the forbearance has been introduced and after the introduction of forbearance there have been no overdue amounts or doubts concerning the repayment of the entire exposure, under the terms and conditions after the forbearance. The absence of doubt is confirmed by analysis of the financial situation of the debtor. The forborne status is withdrawn when: • an analysis of the debtor’s financial position shows that the conditions to deem the exposure a non-performing exposure are no longer met; • at least a 2-year probation period has passed since the forborne exposure was deemed performing; • regular payments of the principal or interest were made, in a substantial total amount, during at least half the probation period; and • no exposure to the debtor is more than 30 days in default at the end of the probation period. 2.15. Repossessed assets In certain circumstances, assets are repossessed following the foreclosure on loans that are in default. Repossessed assets are initially recognised in the financial statements at their fair value and classified in the appropriate category according to their purpose and are sold as soon as practical in order to reduce exposure (note 7.1.n). After initial recognition, repossessed assets are measured and accounted for in accordance with the policies applicable to the relevant asset categories. Repossessed assets mainly represent items of real estate that NLB Group classifies within investment properties measured in accordance with IAS 40 Investment property (note 2.20), and other assets, measured in accordance with IAS 2 Inventories. Real estate obtained from the foreclosure of loans and receivables within other assets NLB Group 2016 Annual Report200 are initially recognised at fair value less costs to sell (realisable value) wherein only the direct costs of sales can be taken into account. At subsequent measurement the realisable value is verified at least annually. Valuations of the fair value of real estate are performed by certified real-estate appraisers. The real estate is impaired when the carrying value exceeds the realisable value. The effect of impairment is presented as the impairment of other assets and the reversal of impairment as income from the reversal of the impairment of other assets. 2.16. Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. 2.17. Sale and repurchase agreements Securities sold under sale and repurchase agreements (repos) are retained in the financial statements and the counterparty liability is included in financial liabilities associated with the transferred assets. Securities sold subject to sale and repurchase agreements are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the collateral. Securities purchased under agreements to resell (reverse repos) are recorded as loans and advances to other banks or customers, as appropriate. The difference between the sale and repurchase price is in the financial statements treated as interest and accrued over the life of the repo agreements using the effective interest rate method. 2.18. Property and equipment All items of property and equipment are initially recognised at cost. They are subsequently measured at cost less accumulated depreciation and any accumulated impairment loss. Each year, NLB Group assesses whether there are indications that property and equipment may be impaired. If any such indication exists, the recoverable amounts are estimated. The recoverable amount is the higher of the fair value less costs to sell and value in use. If the recoverable amount exceeds the carrying value, the assets are not impaired. If the carrying amount exceeds the recoverable amount, the difference is recognised as a loss in the income statement. Items of property and equipment which do not generate cash flows that are largely independent are included in the cash-generating unit and later tested for possible impairment. Depreciation is calculated on a straight-line basis over the assets’ estimated useful lives. The following annual depreciation rates were applied: NLB Group and NLB Buildings Leasehold improvements Computers Furniture and equipment Motor vehicles in % 2 - 5 5 - 25 14.3 - 50 10 - 33.3 12.5 - 25 Depreciation does not begin until the assets are available for use. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, on each reporting date. Gains and losses on the disposal of items of property and equipment are determined as the difference between the sale proceeds and their carrying amount, and are recognised in the income statement. Maintenance and repairs are charged to the income statement during the financial period in which they are incurred. Subsequent costs that increase future economic benefits are recognised in the carrying amount of an asset and the replaced part, if any, is derecognised. 2.19. Intangible assets Intangible assets include software licenses and goodwill (note 2.6.). Intangible assets are stated at cost, less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis at rates designed to write down the cost of an intangible asset over its estimated useful life. The core banking system is amortised over a period of 10 years, and other software over a period of three to five years. Amortisation does not begin until the assets are available for use. 2.20. Investment properties Investment properties include buildings held for leasing and not occupied by NLB Group or to increase the value of a long-term investment. Investment properties are stated at fair value determined by a certified appraiser. Fair value is based on current market prices. Any gain or loss arising from a change in fair value is recognised in the income statement. 2.21. Non-current assets and disposal groups classified as held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is deemed to be met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets and disposal groups classified as held for sale are measured at the lower of the assets’ previous carrying amount and fair value less costs to sell. NLB Group 2016 Annual ReportDuring subsequent measurement, certain assets and liabilities of a disposal group that are outside the scope of IFRS 5 measurement requirements are measured in accordance with the applicable standards (e.g. deferred tax assets, assets arising from employee benefits, financial instruments, investment property measured at fair value, and contractual rights under insurance contracts). Tangible and intangible assets are not depreciated. The effects of sale and valuation are included in the income statement as a gain or loss from non-current assets held for sale. Liabilities directly associated with disposal groups are reclassified and presented separately in the statement of financial position. 2.22. Accounting for leases A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Lease agreements are accounted for in accordance with their classification as finance leases or operating leases at the inception of the lease. The key classification factor is the extent to which the risks and rewards incidental to ownership of a leased asset lie with the lessor or lessee. NLB Group as a lessee Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which the termination takes place. the present value of the minimum lease payments. Leased assets are depreciated in accordance with NLB Group’s policy over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that NLB Group will obtain ownership by the end of the lease term. Lease payments are apportioned between interest expenses and the reduction of the outstanding liability so as to produce a constant periodic rate of interest on the remaining balance of the liability. NLB Group as a lessor Payments under operating leases are recognised as income on a straight-line basis over the period of the lease. Assets leased under operating leases are presented in the statement of financial position as investment property or as property and equipment. NLB Group classifies a lease as a finance lease when the risks and rewards incidental to ownership of a leased asset lie with the lessee. When assets are leased under a finance lease, the present value of the lease payments is recognised as a receivable. Income from finance lease transactions is amortised over the lifetime of the lease using the effective interest rate method. Finance lease receivables are recognised at an amount equal to the net investment in the lease, including the unguaranteed residual value. Sale‑and‑leaseback transactions NLB Group also enters into sale-and-leaseback transactions (in which NLB Group is primarily a lessor) under which the leased assets are purchased from and then leased back to the lessee. These contracts are classified as finance leases or operating leases, depending on the contractual terms of the leaseback agreement. Finance leases are recognised as an asset and liability at amounts equal to the fair value of the leased asset or, if lower, 2.23. Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise 201 cash and balances with central banks and other demand deposits at banks, debt securities held for trading, loans to banks, and debt securities not held for trading with an original maturity of up to 90 days. Cash and cash equivalents are disclosed under the cash flow statement. 2.24. Borrowings with characteristics of debt Loans and deposits received and issued debt securities are initially recognised at fair value, which is typically equal to historical cost less transaction costs. Borrowings are subsequently measured at the amortised cost. The difference between the value at initial recognition and the final value is recognised in the income statement as interest expense, applying the effective interest rate. Repurchased own debt is disclosed as a reduction in liabilities in the statement of financial position. The difference between the book value and the price at which own debt was repurchased is disclosed in the income statement. 2.25. Other issued financial instruments with characteristics of equity Upon initial recognition, other issued financial instruments are classified in part or in full as equity instruments if the contractual characteristics of the instruments are such that NLB Group must classify them as equity instruments in accordance with IAS 32 Financial Instruments: Disclosure and Presentation. An issued financial instrument is only considered an equity instrument if that instrument does not represent a contractual obligation for payment. Issued financial instruments with characteristics of equity are recognised in equity in the statement of financial position. Transaction costs incurred for issuing such instruments are deducted from equity reserves. The corresponding interest is recognised directly in profit reserves. NLB Group 2016 Annual Report202 The carrying value of an issued financial instrument with characteristics of equity is presented in the statement of changes in equity in the item ‘Other Equity Instruments.’ 2.26. Provisions Provisions are recognised when NLB Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. 2.27. Contingent liabilities and commitments Financial and non‑financial guarantees Financial guarantees are contracts that require the issuer to make specific payments to reimburse the holder for a loss it incurs because a specific debtor fails to make payments when due, in accordance with the terms of debt instruments. Such financial guarantees are given to banks, financial institutions, and other bodies on behalf of the customer to secure loans, overdrafts and other banking facilities. The issued guarantees covering non-financial obligations of the clients represent the obligation of the Bank (guarantor) to pay if the client fails to perform certain works in accordance with the terms of the commercial contract. Financial and non-financial guarantees are initially recognised at fair value, which is normally evidenced by the fees received. The fees are amortised to the income statement over the contract term using the straight-line method. NLB Group’s liabilities under guarantees are subsequently measured at the greater of: • the initial measurement, less amortisation calculated to recognise fee income over the period of guarantee; or • the best estimate of the expenditure required to settle the obligation. Documentary letters of credit Documentary (and standby) letters of credit constitute a written and irrevocable commitment of the issuing (opening) bank on behalf of the issuer (importer) to pay the beneficiary (exporter) the value set out in the documents by a defined deadline: • if the letter of credit is payable on sight; and • if the letter of credit is payable for deferred payment, the bank will pay according to the contractual agreement when and if the beneficiary (exporter) presents the bank with documents that are in line with the conditions and deadlines set out in the letter of credit. A commitment may also take the form of a letter of credit confirmation, which is usually done at the request or authorisation of the issuing (opening) bank and constitutes a firm commitment by the confirming bank, in addition to that of the issuing bank, which independently assumes a commitment to the beneficiary under certain conditions. Other contingent liabilities and commitments Other contingent liabilities and commitments represent commitments to extend credit, uncovered letters of credit, and other commitments. 2.28. Taxes Income tax expense comprises current and deferred income tax. carrying amounts for financial reporting purposes. Deferred tax assets are recognised if it is probable that future taxable profit will be available in the foreseeable future against which the temporary differences can be utilised. Deferred tax related to the fair value re-measurement of available-for-sale investments, cash flow hedges, and actuarial gains and losses on defined benefit pension plans is charged or credited directly to other comprehensive income. Deferred tax assets and liabilities are measured at tax rates enacted or substantively enacted at the end of the reporting period that are expected to apply to the period when the asset is realised or the liability is settled. At each reporting date, NLB Group reviews the carrying amount of deferred tax assets and assesses future taxable profits against which temporary taxable differences can be utilised. Deferred tax assets for temporary differences arising from investments in subsidiaries, associates, and joint ventures are recognised only to the extent that it is probable that: • the temporary differences will be reversed in the foreseeable future; and • taxable profit will be available. Current corporate income tax in NLB Group is calculated on taxable profits at the applicable tax rate in the respective jurisdiction. The corporate income tax rate for 2016 in Slovenia was 17% (2015: 17%). In accordance with the change of tax legislation, the corporate income tax rate from 2017 onwards will be 19%. A tax on financial services, which imposes a tax on fees paid for prescribed financial services rendered, is paid in Slovenia. The tax rate is 8.5% (2015: 8.5%) and the tax is paid monthly. Given that the tax on financial services is classified as a sales tax, it reduces accrued revenues in the financial statements. Deferred income tax is calculated using the balance sheet liability method for temporary differences arising between the tax bases of assets and liabilities and their 2.29. Fiduciary activities NLB Group provides asset management services to its clients. Assets held in a fiduciary capacity are not reported in NLB Group’s financial statements as they NLB Group 2016 Annual Report203 gains and losses from the effect of changes in actuarial assumptions and experience adjustments (differences between the realised and expected payments) are recognised in other comprehensive income under the item ‘Actuarial Gains/(Losses) on Defined Benefit pensions plans’ and will not be recycled to the income statement. NLB Group pays contributions to the state pension schemes according to the local legislation. NLB contributes 8.85% of gross salaries. Once contributions have been paid, NLB Group has no further obligation. Contributions constitute costs in the period to which they relate and are disclosed in employee costs in the income statement. do not represent assets of NLB Group. Fee and commission income charged for this type of service is broken down by items in note 4.3.b. Further details on transactions managed on behalf of third parties are disclosed in note 5.25. According to legislation, employees retire after 35-40 years of service when, if they fulfil certain conditions, they are entitled to a lump-sum severance payment. Employees are also entitled to a long-service bonus for every 10 years of service in NLB Based on the requirements of Slovenian legislation, NLB Group has additionally disclosed in note 5.25. assets and liabilities on accounts used to manage financial assets from fiduciary activities, i.e. information related to the receipt, processing, and execution of orders and related custody activities. 2.30. Employee benefits Employee benefits include jubilee long-service benefits and retirement indemnity bonuses. Provisions for employee benefits are calculated by an independent actuary. The main assumptions included in the actuarial calculation are as follows: These obligations are measured at the present value of future cash outflows considering future salary increases and other conditions, and then apportioned to past and future employee service based on benefit plan terms and conditions. Service costs are included in the income statement in the item administrative expenses as defined benefit costs, while interest expenses on the defined benefit liability are recognised in the item interest and similar expenses. These interest expenses represent the change during the period in the defined benefit liability that arises from the passage of time. Actuarial Actuarial assumptions Discount factor Wage growth based on inflation, promotions and wage growth based on past years of service Other assumptions NLB Group 2016 2015 0.8% - 6.0% 1.7% - 7.0% 1.6% - 4.0% 2.0% - 3.0% NLB 2016 0.8% 2.5% 2015 1.7% 3.0% Number of employees eligible for benefits 5,584 5,658 2,876 2,915 Sensitivity analysis of significant actuarial assumptions 31.12.2016 Discount rate Future salary increases Discount rate Future salary increases Impact on employee benefits provisions - post-employment benefits (in %) (5.6) 6.1 6.1 (5.6) (5.8) 6.3 6.2 (5.7) +0.5 b.p. -0.5 b.p. +0.5 b.p. -0.5 b.p. +0.5 b.p. -0.5 b.p. +0.5 b.p. -0.5 b.p. NLB Group NLB NLB Group 2016 Annual Report 204 2.31. Share capital 2.33. Critical accounting estimates and Stress testing for credit risk predicting the Dividends on ordinary shares judgments in applying accounting policies impact of unfavourable macroeconomic Dividends on ordinary shares are recognised in equity in the period in which they are approved by NLB’s shareholders. Treasury shares If NLB or another member of NLB Group purchases NLB’s shares, the consideration paid is deducted from total shareholders’ equity as treasury shares. If such shares are subsequently sold, any consideration received is included in equity. If NLB’s shares are purchased by NLB itself or other NLB Group entities, NLB creates reserves for treasury shares in equity. Share issue costs Costs directly attributable to the issue of new shares are recognised in equity as a reduction in the share premium account. 2.32. Segment reporting Operating segments report in a manner consistent with internal reporting to the Management Board which is the executive body that makes decisions regarding the allocation of resources and assesses the performance of a specific segment. All transactions between business segments are conducted as part of the normal course of business. Interest income is reallocated between sub-segments of the Bank (NLB) on the basis of multiple transfer prices (fund transfer prices hereinafter: FTP). The amount of net interest income arising from transactions between segments is disclosed in the item intersegment net interest income. Net income from external customers corresponds to the consolidated net income of NLB Group. Income taxes are not allocated to segments (note 8.a). In accordance with IFRS 8, NLB Group has the following reportable segments: Corporate Banking in Slovenia, Retail Banking in Slovenia, Financial Markets in Slovenia, Foreign Strategic markets, Non-strategic Markets and Activities, and Other Activities. NLB Group’s financial statements are influenced by accounting policies, assumptions, estimates and management’s judgment. NLB Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. All estimates and assumptions required in conformity with the IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgments are evaluated on a continuing basis, and are based on past experience and other factors, including expectations with regard to future events. a) Impairment losses on loans and advances NLB Group monitors and checks the quality of the loan portfolio at the individual and portfolio levels to continuously estimate the necessary impairments. NLB Group creates individual impairments for individually significant financial assets where objective evidence of impairment exists. Such evidence is based on information regarding the fulfilment of contractual obligations or other financial difficulties of the debtor and other important facts defined in note 2.13. Individual assessments are based on the expected discounted cash flows from operations and/or the assessed expected payment from collateral, as verified by the Credit Analyses and Control Division. Impairments are assessed collectively for financial assets for which no objective evidence of impairment exists, or for financial assets with lower exposure amounts. The future cash flows in this group of assets are estimated on the basis of past experience and losses from assets with a similar credit risk as the assets in the group. The methodology and assumptions used to estimate future cash flows are reviewed regularly in order to make loss estimations as realistic as possible. conditions on default and loss rates Stress testing is structured to take into account a probable scenario and a stress scenario in the testing of each stress situation. It is assumed that the risk in the probable scenario is covered by regulatory capital, while the stress scenario assumes a deteriorating stress exceeding expectations. The stress scenario predicts a slowdown of economic conditions, which results in an increase of the default rate (DR), as well as the loss rate (LR). Based on the historic experience the connection between the macroeconomic factors and the risk factors is assessed and benchmarks are applied to the existing exposures to assess the additional impairments and provisions required to cover the risk. For the purpose of ICAAP the scenario predicts two levels of severity consequently, we have results for the Baseline and Adverse scenario. The difference between the two scenarios is the amount of additionally required impairments that must be created by the Bank in the event of their realisation. The assumption in these scenarios is that exposure does not change over one year. The results of the stress scenario for NLB Group shows an increase of impairments of EUR 84.2 million (2015: EUR 90.4 million) and an increase in the coverage of the credit portfolio by impairments by 1.01 percentage points (2015: 1.03 percentage points). The methodology for this stress scenario is referring to the ICAAP methodological approach, which was renewed in 2016 accordingly NLB Group adjusted the comparative amounts for 2015. b) Fair value of financial instruments The fair values of financial investments traded on the active market are based on current bid prices (financial assets) or offer prices (financial liabilities). NLB Group 2016 Annual ReportThe fair values of financial instruments that are not traded on the active market are determined by using valuation models. These include a comparison with recent transaction prices, the use of a discounted cash flow model, valuation based on comparable entities, and other frequently used valuation models. These valuation models pretty much reflect current market conditions at the measurement date, which may not be representative of market conditions either before or after the measurement date. Management reviewed all applied models as at the reporting date to ensure they appropriately reflect current market conditions, including the relative liquidity of the market and applied credit spread. Changes in assumptions regarding these factors could affect the reported fair values of financial instruments held for trading and available-for-sale financial assets. The fair values of derivative financial instruments are determined on the basis of market data (mark-to-market), in accordance with NLB Group’s methodology for the valuation of derivative financial instruments. The market exchange rates, interest rates, yield, and volatility curves used in valuation are based on the market snapshot principle. Market data are saved daily at 4 p.m. and later used for the calculation of the fair values (market value, NPV) of financial instruments. NLB Group applies market yield curves for valuation, and fair values are additionally adjusted for credit risk of the counterparty. The fair value hierarchy of financial instruments is disclosed in note 7.6. c) Available-for-sale equity instruments Available-for-sale equity instruments are impaired if there has been a significant or prolonged decline in their fair value below historical cost. The determination of what is significant or prolonged is based on assessments. In making these assessments, NLB Group takes several factors into account, including share price volatility. Impairment may also be indicated by evidence regarding deterioration in the financial position of the instrument issuer, deterioration in sector performance, changes in technology, and a decline in cash flows from operating and financing activities. If all the declines in fair value below cost had been considered significant or prolonged, NLB Group would have incurred additional impairment losses of EUR 257 thousand (2015: EUR 221 thousand) from the reclassification of the negative valuation from the statement of comprehensive income to the income statement for the current year, while NLB would not have additional impairment losses in 2016 (2015: EUR 15 thousand). d) Held-to-maturity financial assets NLB Group classifies non-derivative financial assets with fixed or determinable payments and a fixed maturity as held-to-maturity financial assets. Before making this classification, NLB Group assesses its intention and ability to hold such investments to maturity. If NLB Group is unable to hold these investments until maturity, it must reclassify the entire group as available-for-sale financial assets. The investments would therefore be measured at fair value, resulting in an increase in the value of investments of EUR 59,895 thousand (31 December 2015: an increase by EUR 59,442 thousand) and corresponding other comprehensive income. e) Impairment of investments in subsidiaries, associates, and joint ventures The process of identifying and assessing the impairment of goodwill and other intangible assets is inherently uncertain, as the forecasting of cash flows requires the significant use of estimates, which themselves are sensitive to the assumptions used. The review of impairment represents management’s best estimate of the facts and assumptions such as: 205 • Future cash flows from individual investments present the estimated cash flow for periods for which adopted plans are available. For core members, estimated cash flows are based on a five-year business plan. For non-core members, estimated cash flows are based on a period in line with the strategy of divestment. The business plans of individual entities are based on an assessment of future economic conditions that will impact an individual member’s business and the quality of the credit portfolio. • The growth rate in cash flows for the period following the adopted business plan is between 1 and 1.5%. • A target capital adequacy ratio of an individual bank is between 13 and 17%. • The discount rate derived from the capital asset pricing model and that is used to discount future cash flows is based on the cost of equity allocated to an individual investment. The discount rate reflects the impact of a range of financial and economic variables, including the risk-free rate and risk premium. The value of variables used is subject to fluctuations outside management’s control. A pre-tax discount rate is between 9.52 and 18.78% (31 December 2015: between 10.31 and 18.94%). For strategic NLB Group members in 2016 and 2015 there were no indications of impairment for equity investments. In 2016, NLB impaired equity investments in non-core members which are in the process of divestment in the amount of EUR 37.65 million – of which EUR 26.13 million refers to the immediate impairment of recapitalisation to cover the operating losses and EUR 11.52 million refers to impairments on the basis of the net present value of the future cash flows. If the discount rate in the discounted cash flows model differs by +/- 1 percentage point, the net present value in use of the equity investments would be lower in the NLB Group 2016 Annual Report206 case of the increased discount rate by a maximum of EUR 0.6 million. In the case of a decreased discount rate the net present value in use of equity investments would be higher by a maximum of EUR 0.6 million. If the forecasted cash flows in the discounted cash flows model differ by +/- 10%, the estimated value in use of the equity investments would be higher in the case of increased forecasted cash flows by a maximum of EUR 2.4 million. In the case of decreased forecasted cash flows, the value in use of equity investments would be lower by a maximum of EUR 2.4 million. f) Goodwill In the consolidated financial statements goodwill is allocated to cash-generating units (hereinafter: CGUs), which represent the lowest level within NLB Group at which these assets are monitored by management. Each NLB Group entity presents a separate CGU. The recoverable amount of each CGU was determined based on value-in-use calculations. NLB Group performed a test for the impairment of goodwill at the end of the year for all subsidiaries. The review of the impairment of goodwill is based on the same facts and assumptions as the review of impairment of investments in subsidiaries, associates, and joint ventures (note 2.33.e). g) Taxes NLB Group operates in countries governed by different laws. The deferred tax assets recognised as at 31 December 2016 are based on profit forecasts and take the expected manner of recovery of the assets into account, i.e. whether the value will be recovered through use, sale, or liquidation. Changes in assumptions regarding the likely manner of recovering assets could lead to the recognition of currently unrecognised deferred tax assets or derecognition of previously created deferred tax assets. NLB Group will adjust deferred tax assets accordingly in the event of changes to assumptions regarding future operations (notes 4.14. and 5.18.). h) Classification of issued financial instruments as debt or equity NLB Group issues non-derivative financial instruments where a specific judgment is required to determine whether these instruments are classified as a liability or as equity. When the delivery of cash depends on the outcome of uncertain future events that are beyond the control of NLB Group, and management anticipates that these future events are extremely rare, highly abnormal, and unlikely to occur, these instruments are classified as equity. 2.34. Implementation of the new and revised International Financial Reporting Standards During the current year, NLB Group adopted all new and revised standards and interpretations issued by the International Accounting Standards Board (hereinafter: the IASB) and the International Financial Reporting Interpretations Committee (hereinafter: the IFRIC), and that are endorsed by the EU that are effective for annual accounting periods beginning on 1 January 2016. Accounting standards and amendments to existing standards effective for annual periods beginning on 1 January 2016 that were endorsed by the EU and adopted by NLB Group • IAS 19 (amendment) – Employee Benefits (effective for annual periods beginning on or after 1 February 2015). The amendment applies to contributions from employees or third parties to defined benefit plans. The objective of the amendment is to simplify the accounting for contributions that are independent of the number of years of employee service. The amendment does not have an impact on NLB Group’s consolidated financial statements. • Annual Improvements to IFRSs 2010–2012 Cycle. The improvements are comprised of a mixture of substantive changes and clarifications, and are effective for annual periods beginning on or after 1 February 2015. The amendment to IFRS 2 – Share-based Payment includes the definitions of vesting conditions and market conditions, and adds definitions for performance conditions and service conditions. The amendment to IFRS 3 – Business Combinations clarifies that a contingent consideration classified as an asset or liability shall be measured at fair value through profit and loss, irrespective of whether the contingent consideration is a financial instrument within the scope of IAS 39 and IFRS 9 or not. The amendment to IFRS 8 – Operating Segments requires the disclosure of judgments made by management in applying aggregation criteria to operating segments, and also a reconciliation of the total of the reportable segments’ assets if the segment assets are reported regularly to the chief operating decision-maker. The amendment to IAS 16 – Property, Plant, and Equipment, and IAS 38 – Intangible Assets clarifies that when an item of property, plant, and equipment or an intangible asset is revaluated, the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount. The amendment to IAS 24 – Related Party Disclosures clarifies that an entity providing key management personnel services to the reporting entity is a related party of the reporting entity. The amendments do not have a significant impact on NLB Group’s consolidated financial statements. • Annual Improvements to IFRSs 2012–2014 Cycle. The improvements comprise a mixture of substantive changes and clarifications, and are effective for annual periods beginning on or after 1 January 2016. The amendment to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations NLB Group 2016 Annual Report207 clarifies that when the asset or disposal group is reclassified from ‘held for sale’ to ‘held for distribution,’ or vice versa, the change of the original plan of disposal or distribution is not needed. The amendments to IFRS 7 Financial Instruments: Disclosures clarify whether a servicing contract for a transferred financial asset leads to continuing involvement, and remove the requirement of disclosing offsetting financial assets and liabilities in condensed interim financial statements. The amendment to IAS 19 Employee Benefits requires usage of market yields on government bonds for the discount rate for a post-employment benefit obligation in currency in which the post-employment benefit obligation is denominated, if for the currency there is no deep market of highly quality corporate bonds. The amendment to IAS 34 Interim financial reporting clarifies that interim disclosures must be included in interim financial statements or cross-referenced between interim financial statements and other parts of interim reports (management commentary or risk report). The amendments do not have a significant impact on NLB Group’s consolidated financial statements. • IAS 27 (amendment) - Equity Method in Separate Financial Statements is effective from annual periods beginning on or after 1 January 2016. The amendments include the option for an entity to account for its investments in subsidiaries, joint ventures, and associates using the equity method in its separate financial statements. The amendment does not have an impact on NLB Group’s consolidated financial statements. • IAS 16 and IAS 38 (amendment) – Clarification of Acceptable Methods of Depreciation and Amortisation is effective from annual periods beginning on or after 1 January 2016. The amendment clarifies that a revenue-based method should not generally be used as a basis for the depreciation of property, plant, and equipment, and may only be used in very limited circumstances to amortise intangible assets. The amendment does not have an impact on NLB Group’s consolidated financial statements. • IFRS 11 (amendment) – Accounting for Acquisition of Interests in Joint Operations is effective from annual periods beginning on or after 1 January 2016. The amendment requires that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not re-measured upon the acquisition of an additional interest in the same joint operation while joint control is retained. The amendment does not have an impact on NLB Group’s consolidated financial statements. • IFRS 10, IFRS 12, and IAS 28 (amendment) - Investment Entities: Applying the Consolidation Exception is effective from annual periods beginning on or after 1 January 2016. The amendments address issues arising in practice in the application of the investment entities consolidation exception. The amendments clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value. The amendments also clarify that only a subsidiary that is not an investment entity itself and provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. The amendments do not have an impact on NLB Group’s consolidated financial statements. • IAS 1 (amendment) - Disclosure Accounting standards and Initiative is effective from annual periods beginning on or after 1 January 2016. The amendments further encourage companies to apply professional judgment in determining what information to disclose and how to structure it in their financial statements. The narrow-focus amendments to IAS clarify, rather than significantly change, the existing IAS 1 requirements. The amendments relate to materiality, order of the notes, subtotals and disaggregation, accounting policies, and presentation of items of other comprehensive income arising from equity accounted Investments. The amendments do not have significant impact on the presentation of NLB Group’s consolidated financial statements. amendments to existing standards that were endorsed by the EU, but not adopted early by NLB Group • IFRS 9 Financial Instruments In July 2014, the IASB issued IFRS 9 Financial Instruments to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces a new approach to financial instruments classification and measurement, a new more forward-looking expected loss model, and amends the requirements for hedge accounting. IFRS 9 is mandatorily effective for annual periods beginning on or after 1 January 2018 with early application permitted. NLB and NLB Group will apply the new standard on 1 January 2018. NLB Group 2016 Annual Report208 Classification and measurement of financial instruments From a classification and measurement perspective, the new standard will require all debt financial assets to be assessed based on a combination of the Group’s business model for managing the assets and the instruments’ contractual cash flow characteristics. The IAS 39 measurement categories will be replaced by: • fair value through profit or loss (FVPL), • fair value through other comprehensive income (FVOCI), • amortised cost, and • financial instruments designated as FVPL Equity instruments that are not held for trading may be irrevocably designated as FVOCI, with no subsequent reclassification of gains or losses to the income statement. The accounting for financial liabilities will be the same as the requirements of IAS 39, except for the treatment of gains or losses arising from an entity’s own credit risk relating to liabilities designated at FVPL. Having completed the initial assessment of business model and cash flow characteristics test, NLB and NLB Group assess the following: • the majority of loans and advances to banks and customers that are classified as loans and receivables under IAS 39 are expected to be measured at the amortised cost under IFRS 9, • financial assets held for trading and financial assets designated as FVPL are expected to continue to be measured at FVPL, • debt securities classified as available for sale under IAS 39 are expected to be measured at the amortised cost or FVOCI and • debt securities classified as held to maturity are expected to continue to be measured at the amortised cost. Hedge accounting IFRS 9 allows entities to continue with the hedge accounting under IAS 39 even when other elements of IFRS 9 become mandatory on 1 January 2018. Based on performed analysis, NLB Group has decided to continue to apply hedge accounting under IAS 39. Impairment of financial instruments IFRS 9 requires the movement from an incurred loss in model to an expected loss model, requiring NLB Group to recognise not only credit losses that have already occurred, but also losses that are expected to occur in the future. An allowance for expected credit losses (ECL) is required for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts. The allowance is based on the expected credit losses associated with the probability of default in the next 12 months unless there has been a significant increase in credit risk since initial recognition, in which case, the allowance is based on the probability of default over the life of the financial asset (LECL). When determining whether the risk of default increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical data, experience, and expert credit assessment and incorporation of forward-looking information. Classification into stages NLB Group prepared a methodology for ECL defining the criteria for classification into stages, transition criteria between stages, risk indicators calculation, and validation of models. The Group will classify financial instruments into stage 1, stage 2, and stage 3, based on the applied impairment methodology as described below: • stage 1 – performing portfolio: no significant increase of credit risk since initial recognition, Group recognises an allowance based on 12-month ECL, • stage 2 – underperforming portfolio: significant increase in credit risk since initial recognition, Group records an allowance for LECL, and • stage 3 – impaired portfolio: Group recognises LECL for these financial instruments. A significant increase in credit risk is assumed: • when a credit rating decreases at the reporting date, in comparison to the credit rating at initial recognition, • when a financial asset has material delays over 30 days (days-past due are also included in credit rating assessment), • if NLB and NLB Group expects to grant the borrower forbearance or • if the facility is placed on the watch list. ECL for stage 1 financial instruments is calculated on the basis of 12-month PDs or shorter period PDs, if the maturity of the financial asset is shorter than 1 year. The 12-month PD already includes macroeconomic impact effect. Impairment losses in stage 1 are designed to reflect impairment losses that had been incurred in the performing portfolio, but have not been identified. LECL for stage 2 financial instruments is calculated on the basis of lifetime PDs (LPD) because their credit risk has increased significantly since their initial recognition. This calculation is also based on forward-looking assessment that takes into account number of economic scenarios in order to recognise the probability or losses associated with the predicted macro-economic forecasts. For financial instruments in stage 3 the same treatment as those considered to be credit impaired in accordance with IAS 39 is expected. Financial instruments will be transferred out of stage 3 if they no longer meet the criteria of credit-impaired after a probation period. Special treatment applies NLB Group 2016 Annual Reportfor purchased or originated credit-impaired financial instruments (POCI), where only the cumulative changes in the lifetime expected losses since initial recognition will be recognised a loss allowance. Interest income recognition Interest income on financial assets in stage 1 and stage 2 are recognised on a gross basis (amortised costs before allowance), whereas interest income for financial assets in stage 3 are recognised on amortised costs net of allowances. Forward looking information The Group will incorporate forward-looking information in both the assessment of significant increase in credit risk and the measurement of ECL. The Group considers forward-looking information such as macroeconomic factors (e.g., unemployment rate, GDP growth, interest rates, and housing prices) and economic forecasts. The baseline scenario represents the more likely outcome resulting from the Group’s normal financial planning and budgeting process, while the better and worse case scenarios represent more optimistic or pessimistic outcomes (similar as by ICAAP). Recalculation of all parameters is performed annually or more frequently, if the macro environment changes more than it was incorporated in previous forecasts, in such a case all the parameters are recalculated according to new forecasts. Implementation strategy and progress update Taking into account the dimensions of the IFRS 9 requirements and its impact on the overall banking system, implementation of the standard is organised as a project on the level of NLB Group. The project is divided into sub-projects with clear work streams for classification and measurement of financial instruments, impairment of financial instruments, and disclosures. Sub-projects for classification and measurement are run by Financial Accounting, while the impairment is run by Global Risk. Other relevant departments are involved in a supporting role. The Project is sponsored by the Chief Financial and Risk officers. A project Steering Committee has been nominated for internal monitoring of progress in the implementation and adoption of relevant decisions, meeting on at least a quarterly basis. Gap analysis in current methodologies, processes, accounting and business policies, IT systems, and identified disclosure requirements are completed. Currently, NLB Group is in the implementation phase. In second half of the year 2017 NLB Group will finish the implementation phase, testing and parallel run. This includes accounting and business policies for classification and measurement of financial instruments, recognition of expected credit losses, disclosures, and reporting. • IFRS 15 (new standard) – Revenue from Contracts with Customers is effective from annual periods beginning on or after 1 January 2018. IFRS 15 replaces all existing revenue requirements in the IFRS (IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving Advertising Services) and applies to all revenue arising from contracts with customers. The standard specifies the principles an entity must apply to measure and recognise revenue. The core principle is that an entity will recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. NLB Group does not expect a material impact on its consolidated financial statements. 209 Accounting standards and amendments to existing standards, but not endorsed by the EU • IFRS 14 (new standard) - Regulatory Deferral Accounts is an optional standard, effective for annual periods beginning on or after 1 January 2016. The European Commission has decided not to launch the endorsement process of this interim standard and to wait for the final standard. The standard allows an entity whose activities are subject to rate-regulation to continue applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption of IFRS. Existing IFRS preparers are prohibited from adopting this standard. The amendment does not have an impact on NLB Group’s consolidated financial statements. • IFRS 16 (new standard) – Leases is effective from annual periods beginning on or after 1 January 2019. IFRS 16 replaces the old lease accounting Standard IAS 17 Leases. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases, and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets and short-term leases. At the commencement date of a lease, a lessee will recognise a liability to make lease payments, and an asset representing the right to use the underlying asset during the lease. The term ‘Lessor Accounting’ under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. NLB Group is evaluating the impact of the standard on NLB Group’s consolidated financial statements. • IFRS 10 and IAS 28 (amendment) – The IASB has deferred the effective dates of Sale or Contribution of Assets NLB Group 2016 Annual Report210 between an Investor and its Associate or Joint Venture amendments indefinitely. The amendments address a conflict between the requirements of IFRS 10 Consolidated financial statements and IAS 28 Investments in associates and joint ventures. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. NLB Group does not expect an impact on its consolidated financial statements. • IAS 12 (amendment) – Recognition of Deferred Tax Assets for Unrealised Losses is effective from annual periods beginning on or after 1 January 2017. The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. NLB Group does not expect an impact on its consolidated financial statements. • IAS 7 (amendment) – Disclosure Initiative - the amendment to IAS 7 Statement of Cash Flows is effective from annual periods beginning on or after 1 January 2017. The amendments require companies to provide information about changes in their financing activities, including changes from cash flows and non-cash changes (such us foreign exchange gains or losses). The amendments will impact the presentation of NLB Group’s consolidated financial statements. • IFRS 15 (amendment) – Clarifications to Revenue from Contracts with Customers are effective from annual periods beginning on or after 1 January 2018. The amendments to the Revenue Standard do not change the underlying principles of the Standard, but clarify how those principles should be applied. They also clarify how to identify a performance obligation in a contract, determine whether a company is a principal, and determine whether the revenue from granting a licence should be recognised at a point in time or over time. In addition to the clarifications, the amendments include two additional reliefs to reduce cost and complexity for a company when it first applies the new Standard. NLB Group does not expect a material impact on its consolidated financial statements. • IFRS 2 (amendment) – Classification and Measurement of Share-based Payment Transactions is effective from annual periods beginning on or after 1 January 2018. The amendments clarify how to account for certain types of share-based payment transactions. They provide requirements that address three main areas: the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, the classification of share-based payment transactions with a net settlement feature for withholding tax obligations, and accounting where a modification to the terms and conditions of a share-based payment transactions changes its classification from cash-settled to equity-settled. NLB Group does not have share-based payments transactions. • IFRS 4 (amendment) – Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts is effective from annual periods beginning on or after 1 January 2018. The amendments address concerns arising from implementing the new financial instruments Standard, IFRS 9, before implementing the new replacement Standard IFRS 4. The amendments introduce two approaches: an overlay approach and a temporary exemption from applying IFRS 9. NLB Group does not expect an impact on its consolidated financial statements. • Annual Improvements to IFRSs 2014–2016 Cycle. The improvements are minor amendments that clarify, correct, or remove redundant wording in a Standards. The amendments refer to three Standards: IFRS 12 Disclosure of Interests in Other Entities effective from annual periods beginning on or after 1 January 2017, and IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 28 Investments in Associates and Joint Ventures effective from annual periods beginning on or after 1 January 2018. • IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration is effective from annual periods beginning on or after 1 January 2018. The interpretation addresses the exchange rate to use in transactions that involve advance consideration paid or received in a foreign currency. It covers foreign currency transactions when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense, or income. It does not apply when an entity measures the related asset, expense, or income on initial recognition at fair value. NLB Group is evaluating the impact of the amendments on NLB Group’s consolidated financial statements. • IAS 40 (amendment) – Transfers of Investment Property is effective from annual periods beginning on or after 1 January 2018. The amendments clarify the requirements on transfers to, or from, investment property. An entity shall transfer a property to, NLB Group 2016 Annual Reportor from, investment property when, and only when, there is evidence of a change in use. A change of use occurs if property meets, or ceases to meet, the definition of ‘investment property.’ A change in management’s intentions for the use of a property by itself does not constitute evidence of a change in use. NLB Group is evaluating the impact of the amendments on NLB Group’s consolidated financial statements. 3. Changes in subsidiary holdings Changes in 2016 Capital changes: • An increase in share capital in the form of cash contributions in the amount of EUR 2,503 thousand in SR-RE d.o.o., Beograd; REAM d.o.o., Podgorica; and REAM d.o.o., Beograd due to an increase of business operations. • An increase in share capital in the form of cash contributions in the amount of EUR 13,050 thousand in NLB Leasing Podgorica, Podgorica; NLB Lizing, Skopje; and Prvi Faktor, Ljubljana to ensure capital adequacy until the end of liquidation. • An increase in share capital in the form of a loan conversion in the amount of EUR 1,719 thousand in NLB Leasing, Beograd to ensure capital adequacy until the end of liquidation. • An increase in share capital in the form of cash contributions in the amount of EUR 7,004 thousand in NLB Leasing, Ljubljana to cover the loss from selling the portfolio of non-performing loans (“Project Pine”), and in the amount of EUR 7,000 thousand to ensure capital adequacy until the end of liquidation in Optima Leasing, Zagreb. 211 Other changes: Other changes: • REAM d.o.o., Zagreb; REAM d.o.o., Beograd; REAM d.o.o., Podgorica; PRO-Avenija d.o.o., Ljubljana; and SR-RE d.o.o., Beograd were established and will manage certain real estate in NLB Group. NLB’s ownership is 100%. • LHB Trade d.o.o., Zagreb was liquidated in accordance with a court order, and the company was removed from the court register. • NLB Group became a 100% owner of Tara Hotel d.o.o., Budva upon realisation of the collateral. • NLB Banka, Beograd sold its 100% ownership in Convest d.o.o., Novi Sad. • FIN-DO d.o.o., Domžale and PRO-Avenija d.o.o., Ljubljana are merged with PRO-REM d.o.o., Ljubljana. The merger was formally registered on 1 July 2016, with the accounting date of merger as at 31 December 2015. • BH-RE d.o.o., Sarajevo was established and will manage certain real estate in NLB Group. PRO-REM d.o.o., Ljubljana’s ownership is 100%. • Kreditni biro SISBON d.o.o., Ljubljana; Optima Leasing, Zagreb; NLB Leasing, Beograd; NLB Lizing, Skopje; PRO-REM, Ljubljana; OL Nekretnine, Zagreb; NLB Leasing Podgorica, Podgorica; and NLB Interfinanz Zürich are formally in liquidation; and also NLB Propria, Ljubljana from 1 January 2017. • Prvi faktor, Skopje and NLB Leasing Sofia were liquidated. In accordance with a court order, the companies were removed from the court register. Changes in 2015 Capital changes: • An increase in share capital in the form of cash contributions in the amount of EUR 7,669 thousand in NLB Banka, Sarajevo due to stricter regulatory requirements for capital adequacy. Ownership interest increased from 96.30% to 97.34%. • On the basis of an option contract, NLB acquired shares of NLB Banka, Podgorica and thereby increased its ownership from 98.00% to 99.36%. The increase in the capital investment was recognised in the amount of EUR 364 thousand. NLB has no voting rights regarding the newly acquired shares. • NLB Leasing, Ljubljana increased its ownership interest in Optima Leasing, Zagreb from 99.97% to 100%. Consideration was paid in the amount of EUR 40 thousand. NLB Group 2016 Annual Report212 4. Notes to the income statement 4.1. Interest income and expenses Analysis by type of assets and liabilities Interest and similar income Loans and advances to customers Available-for-sale financial assets Held-to-maturity financial assets Financial assets held for trading Loans and advances to banks and central banks Derivatives - hedge accounting Deposits with banks and central banks Other assets Total Interest and similar expenses Due to customers Debt securities in issue Financial liabilities held for trading Derivatives - hedge accounting Borrowings from banks and central banks Borrowings from other customers Subordinated liabilities Negative interest from deposits with banks and central banks Provisions for defined employee benefits (note 2.30. and 5.17.c) Deposits from banks and central banks Other financial liabilities Total Net interest NLB Group NLB in EUR thousand 2016 2015 2016 2015 327,055 372,604 166,718 211,250 31,426 17,997 9,180 1,249 831 755 1 33,232 21,656 11,663 1,302 1,487 1,215 44 17,881 17,997 9,273 2,407 831 442 1 19,692 21,656 11,792 2,437 1,487 642 44 388,494 443,203 215,550 269,000 40,797 9,376 5,923 5,688 3,699 1,857 1,840 1,429 357 75 148 65,425 10,454 8,420 5,952 7,501 2,271 1,548 381 751 105 193 15,281 9,376 5,923 5,688 2,713 10 - 1,307 205 70 99 29,426 10,454 8,420 5,952 5,546 109 - 361 550 39 136 71,189 103,001 40,672 60,993 317,305 340,202 174,878 208,007 In 2016, interest income on individually impaired loans amounted to EUR 31,059 thousand (2015: EUR 47,853 thousand) for NLB Group, and to EUR 15,940 thousand for NLB (2015: EUR 28,783 thousand). 4.2. Dividend income Available-for-sale financial assets Total NLB Group 2016 1,238 1,238 2015 1,346 1,346 in EUR thousand 2015 1,264 1,264 NLB 2016 1,144 1,144 NLB Group 2016 Annual Report 4.3. Fee and commission income and expenses a) Fee and commission income and expenses relating to activities of NLB Group and NLB 213 Fee and commission income Fee and commission income relating to financial instruments not at fair value through profit or loss Credit cards and ATMs Customer transaction accounts Other fee and commission income Payments Investment funds Guarantees Agency of insurance products Other services Total Fee and commission expenses Fee and commission expenses relating to financial instruments not at fair value through profit or loss Credit cards and ATMs Other fee and commission expenses Payments Insurance for holders of personal accounts and golden cards Investment banking Guarantees Other services Total Net activity fee and commission income NLB Group NLB in EUR thousand 2016 2015 2016 2015 55,798 39,878 54,987 13,831 12,225 3,321 6,008 59,427 39,668 54,274 13,534 13,322 2,873 5,501 37,568 31,015 44,139 31,638 28,149 28,278 3,615 8,250 3,302 4,399 4,235 8,687 2,873 3,187 186,048 188,599 116,298 123,037 34,539 35,415 21,430 24,457 5,363 2,108 1,018 354 3,038 46,420 139,628 4,970 1,757 941 592 2,545 46,220 142,379 775 1,427 279 290 1,361 25,562 90,736 788 1,449 263 541 1,020 28,518 94,519 Income from other services includes income from servicing of non-performing loans sold in Project Pine in the amount of EUR 1,543 thousand, income from deposit valuables, administrative services and safe custody, and other agency services. NLB Group 2016 Annual Report 214 b) Fee and commission income and expenses relating to fiduciary activities Fee and commission income related to fiduciary activities Receipt, processing, and execution of orders Management of financial instruments portfolio Initial or subsequent underwriting and/or placing of financial instruments without a firm commitment basis Custody and similar services Management of clients’ account of non-materialised securities Safe-keeping of clients’ financial instruments Advice to companies on capital structure, business strategy, and related matters, advice, and services relating to mergers and acquisitions of companies NLB Group NLB in EUR thousand 2016 2015 2016 2015 1,250 1,502 184 4,190 549 - 648 781 1,527 444 3,791 553 5 10 1,231 - 184 4,104 549 - 648 859 - 444 4,003 553 - - Total 8,323 7,111 6,716 5,859 Fee and commission expenses related to fiduciary activities Fee and commission related to Central Securities Clearing Corporation and similar organisations Fee and commission related to stock exchange and similar organisations Total Net fee income related to fiduciary activities Total fee and commission income Total fee and commission expenses Total a) and b) 2,241 45 2,286 6,037 194,371 48,706 145,665 2,368 52 2,420 4,691 195,710 48,640 147,070 2,121 45 2,166 4,550 123,014 27,728 95,286 2,267 43 2,310 3,549 128,896 30,828 98,068 4.4. Gains less losses from financial assets and liabilities not classified at fair value through profit or loss Available-for-sale financial assets - gains - losses Financial liabilities measured at amortised cost - gains - losses Total NLB Group NLB in EUR thousand 2016 2015 2016 2015 14,861 (33) - (40) 10,964 (125) 54 (234) 14,712 (33) - (40) 10,886 (21) 54 (234) 14,788 10,659 14,639 10,685 In April 2016, NLB Group successfully disinvested a non-strategic equity investment and realised a gain in the amount of EUR 4,803 thousand. In June 2016 Visa Inc. completed its acquisition of Visa Europe to create a single global payments business under the Visa brand. In this transaction, NLB Group realised a gain in the amount of EUR 7,753 thousand as a result of the disposal of its investment in Visa Europe shares. This represents the difference between the cost of the Visa Europe shares derecognised and the fair value of the consideration received. The latter comprises the received cash consideration, the present value of the deferred cash consideration receivable in year 2019, and fair value of the received 2,246 preferred Visa Inc. Class C shares. At a future date and under certain conditions these shares are convertible into Class A shares. NLB Group 2016 Annual Report 4.5. Gains less losses from financial assets and liabilities held for trading Equity instruments - gains - losses Foreign exchange trading - gains - losses Debt instruments - gains - losses Derivatives - currency - interest rate - cross currency interest rate - securities Total 4.6. Foreign exchange translation gains less losses Financial assets and liabilities not classified as at fair value through profit or loss Financial assets designated at fair value through profit or loss Other Total 215 NLB Group NLB in EUR thousand 2016 2015 2016 2015 26 (26) 23,023 (13,244) 4,474 (6,862) 506 (1,238) (29) 291 - (12) 34,009 (23,355) 2,008 (3,223) (7,083) (4,334) (16,794) (93) 6,921 (18,877) 26 (26) 15,767 (12,415) 4,474 (6,862) 288 (1,178) (29) 291 336 - (12) 25,935 (21,850) 2,005 (3,223) (6,844) (4,428) (16,794) (93) (25,304) NLB Group NLB in EUR thousand 2016 1,449 (246) (45) 1,158 2015 11,153 752 (74) 11,831 2016 1,014 (246) (30) 738 2015 22,579 753 (81) 23,251 NLB Group 2016 Annual Report 216 4.7. Other operating income Income from non-banking services - IT services - cash transportation - operating leases of movable property - other Rental income from investment property Revaluation of investment property to fair value (note 5.10.) Other operating income Total 4.8. Other operating expenses Deposit guarantee Revaluation of investment property to fair value (note 5.10.) Single Resolution Fund Other taxes and compulsory public levies Expenses related to issued service guarantees Membership fees and similar fees Other operating expenses Total NLB Group NLB in EUR thousand 2016 14,552 5,208 3,608 3,132 2,604 5,942 155 3,793 2015 15,657 6,013 3,823 3,477 2,344 6,399 1,342 3,931 24,442 27,329 2016 9,911 5,208 3,608 484 611 260 22 2,074 12,267 2015 11,061 6,013 3,823 508 717 86 171 1,916 13,234 NLB Group NLB in EUR thousand 2016 13,134 8,067 3,894 3,055 1,728 889 2,437 2015 8,259 8,262 4,340 2,327 6,376 1,397 4,122 2016 4,567 484 3,894 1,026 1,728 317 1,160 2015 - 52 4,340 1,001 6,376 740 2,624 33,204 35,083 13,176 15,133 In April 2016, the Law on the deposit guarantee scheme entered into force in Slovenia, according to which the Bank of Slovenia sets up and operates the deposit guarantee scheme in Slovenia. The target fund level is 0.8% of the sum of all guaranteed deposits in the Republic of Slovenia as at 31 December of the previous year, and until the Fund reaches this level, banks are obliged to pay regular annual contributions. In other banking members of the NLB Group, which operate outside the EU, similar schemes had already been in place in previous years. Item “Deposits Guarantee” also includes the amount of EUR 359 thousand which relates to NLB’s payment of guaranteed investors’ claims at a brokerage company against which bankruptcy proceedings started. NLB Group 2016 Annual Report 4.9. Administrative expenses Employee costs - gross salaries, compensations and other short-term benefits - defined contribution scheme - social security contributions - defined benefit expenses (note 5.17.c) - post-employment benefits - other employee benefits Total Other general and administrative expenses - other services - maintenance - intellectual services - materials - rents - property - software - movable property - advertising - insurance - education, scholarships and tuition fees - travel costs - other costs Total 217 NLB Group NLB in EUR thousand 2016 2015 2016 2015 140,961 11,460 9,028 3,930 379 3,551 138,283 11,124 9,093 4,683 319 4,364 88,277 86,800 6,639 5,441 2,843 473 2,370 6,570 5,592 2,813 312 2,501 165,379 163,183 103,200 101,775 36,978 15,557 14,116 9,501 7,934 5,347 2,104 483 4,999 3,112 1,384 1,384 816 38,961 16,124 16,635 11,031 7,790 5,398 1,773 619 5,288 3,321 1,420 1,449 782 25,127 11,547 9,429 4,359 2,636 940 1,396 300 2,386 1,510 999 619 271 27,144 12,271 9,689 5,729 2,876 1,193 1,403 280 2,700 1,578 1,124 637 290 95,781 102,801 58,883 64,038 Total administrative expenses 261,160 265,984 162,083 165,813 Number of employees 6,175 6,372 2,885 3,028 Costs of other services include asset protection costs, asset management costs, archiving services, postal services, and communication costs. NLB Group 2016 Annual Report 218 In 2016, NLB Group paid EUR 566 thousand (2015: EUR 716 thousand) and NLB EUR 200 thousand (2015: EUR 208 thousand) to a statutory auditor for auditing the annual report. In addition, NLB Group and NLB paid the following expenses to the statutory auditor: Other audit services Tax and other consulting Other non-audit services Total 4.10. Depreciation and amortisation Amortisation of intangible assets (note 5.11.) Depreciation of property and equipment (note 5.9.) Total 4.11. Provisions for other liabilities and charges Guarantees and commitments (note 5.17.b) Restructuring provisions (note 5.17.d) Provisions for legal issues (note 5.17.e) Other provisions (note 5.17.f) Total NLB Group NLB in EUR thousand 2016 236 - - 236 2015 29 88 24 141 2016 236 - - 236 2015 7 - - 7 NLB Group NLB 2016 11,694 16,651 28,345 2015 14,334 17,522 31,856 2016 9,657 9,223 18,880 NLB Group NLB 2016 2015 (10,432) 10,644 4,252 (107) 4,357 (10,847) 4 7,475 2,672 (696) 2016 (9,897) 9,377 145 (107) (482) in EUR thousand 2015 12,400 9,010 21,410 in EUR thousand 2015 (11,219) (15) 3,409 2,672 (5,153) NLB Group 2016 Annual Report 4.12. Impairment charge Impairment of financial assets Available-for-sale financial assets (note 5.4.b) Held-to-maturity financial assets (note 5.7.b) Loans and advances to banks (note 5.14.b) Loans to government (note 5.14.b) Loans to financial organisations (note 5.14.b) Loans to individuals (note 5.14.a) Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers (note 5.14.b) Loans to large corporate customers Loans to small and medium size enterprises Other financial assets (note 5.14.c) 219 NLB Group NLB in EUR thousand 2016 2015 2016 2015 198 83 74 (2,604) (14,842) 12,800 2,587 4,436 3,261 2,516 40,526 (16,052) 56,578 625 4,659 - 2,557 1,285 7,780 14,766 4,889 3,241 3,016 3,620 29,120 (6,598) 35,718 6,220 198 83 (196) (163) (5,005) 10,245 2,303 5,495 1,930 517 19,909 5,065 14,844 356 2,617 - 67 1,359 15,446 10,583 4,675 2,440 2,305 1,163 10,114 (29,283) 39,397 1,721 Total 36,860 66,387 25,427 41,907 Impairment of investments in subsidiaries, associates and JV Investments in subsidiaries Investments in associates and joint ventures Total Impairment of other assets Property and equipment (note 5.9.) Other assets Total Total impairment - 12,250 12,250 3,307 3,871 7,178 - - - 1,122 16,292 17,414 25,334 12,313 37,647 1,127 232 1,359 50,271 33 50,304 344 559 903 56,288 83,801 64,433 93,114 In 2016, NLB impaired equity investments in non-core subsidiaries and joint ventures in a total amount of EUR 37,647 thousand. Of that, EUR 7,004 thousand relates to the recapitalisation of subsidiary participating in a sale of a package of non-performing loans (‘Project Pine’). The funds from the capital increases were used to repay the loan obligations to NLB. Due to a release of the loan loss impairments, the net effect of impairments on profit or loss was EUR 14,127 thousand lower. Impairments of investments in subsidiaries and joint ventures are included in the segment Non-core markets and activities. NLB Group and NLB recorded additional impairments of principal due to a sale of non-performing loans (‘Project Pine’) in the amount of EUR 25.817 thousand and EUR 4,102 thousand impairment of interest (note 4.1.). The total negative effect from a sale of non-performing loans amounted to EUR 29,919 thousand. NLB Group 2016 Annual Report 220 4.13. Gains less losses from capital investments in subsidiaries, associates, and joint ventures Dividends from investments in subsidiaries, associates, and joint ventures Gains less losses on derecognition of subsidiaries Share of net gains less losses of associates and joint ventures accounted for using the equity method (note 5.12.c) Total 4.14. Income tax Current income tax Deferred tax (note 5.18.) Total NLB Group NLB in EUR thousand 2016 - (153) 5,159 5,006 2015 - (173) 4,485 4,312 2016 28,915 - - 2015 13,747 - - 28,915 13,747 NLB Group NLB 2016 14,758 217 14,975 2015 12,767 (1,387) 11,380 2016 7,008 (3,083) 3,925 in EUR thousand 2015 8,260 (292) 7,968 Income tax differs from the amount of tax determined by applying the Slovenian statutory tax rate as follows: Profit before tax Tax calculated at prescribed rate of 17% Effect of change in tax rate in the reconciliation Income not assessable for tax purposes Expenses not deductible for tax purposes Effect of unrecognised deferred tax assets on impairment of subsidiaries and associates Tax allowances Effect of unrecognised deferred tax assets on tax losses Effects of different tax rates in other countries Changes in recognition and measurement of deferred taxes Withholding tax suffered in other countries for which no tax credit was available in Slovenia Adjustment to tax in respect of prior periods Other Adjustment of deferred tax assets Total NLB Group NLB in EUR thousand 2016 2015 130,600 22,202 (1,666) (2,900) 2,930 (2,083) (1,391) 3,906 (4,543) (6,870) 974 842 2 3,572 14,975 106,758 18,149 - (2,781) 3,885 (25,276) (1,456) 6,477 (2,965) 32,827 771 (210) 201 (18,242) 11,380 2016 67,708 11,510 (2,006) (5,796) 816 3,375 (1,032) - - (7,077) 974 842 2 2,317 3,925 2015 51,849 8,814 - (2,929) 734 4,557 (1,040) - - 73 771 (210) 201 (3,003) 7,968 Income tax rates within NLB Group range from 9-30%. A tax rate of 17% was applied in Slovenia in 2015 and 2016. In accordance with the change of tax legislation, the corporate income tax rate from 2017 onwards will be 19%. NLB Group 2016 Annual Report 221 The majority of non-taxable income relates to dividends and income deemed to be dividends. NLB excluded EUR 29,592 thousand in dividend income and income deemed to be dividends from its tax base in 2016 (2015: EUR 16,968 thousand). NLB recognised deferred tax assets accrued on the basis of temporary differences in an amount that, given future profit estimates, is expected to be reversed in the foreseeable future (i.e. within five years). Due to some uncertainties regarding external factors (regulatory environment, market situation, etc.), as well as not yet defined tax treatment of transition to IFRS 9, a lower range of expected outcomes was considered for purposes of deferred tax assets calculation. Other NLB Group members did not recognise deferred tax assets for tax losses where there is uncertainty about whether the tax losses can be utilised, because it is not probable that future taxable profits will be available against which the deferred tax assets can be utilised and where the utilisation of unused tax losses is limited to five years. Deferred tax assets were not recognised on temporary differences arising from the impairment of investments in subsidiaries, where it is not probable that the temporary difference will reverse in the foreseeable future amounting in NLB to EUR 530,302 thousand as at 31 December 2016 (31 December 2015: EUR 542,989 thousand). In November 2016 the tax inspection of corporate income tax for the period from 2009 till 2014 in NLB was finished. In this respect EUR 841 thousand in expenses for income tax were recorded, and EUR 39,434 thousand deferred tax assets for tax losses were reduced. A reduction of deferred tax assets has no impact on statement of financial position, as the bank recognised deferred tax assets based on future profit estimates only on temporary differences that were envisaged to be utilised in the foreseeable future. 4.15. Earnings per share Earnings per share are calculated by dividing the net profit by the weighted average number of ordinary shares in issue, less treasury shares. Diluted earnings per share are the same as basic earnings per share for NLB Group and NLB, since subordinated loans and issued debt securities have no future conversion options, and consequently there are no dilutive potential ordinary shares. NLB Group NLB 2016 110,017 20,000 5.5 5.5 2015 91,914 20,000 4.6 4.6 2016 63,783 20,000 3.2 3.2 2015 43,881 20,000 2.2 2.2 Net profit attributable to the owners of the parent (in EUR thousand) Weighted average number of ordinary shares (in thousand) Basic earnings per share (in EUR per share) Diluted earnings per share (in EUR per share) 5. Notes to the statement of financial position 5.1. Cash, cash balances at central banks, and other demand deposits at banks Cash Balances and obligatory reserves with central banks Demand deposits at banks Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 260,612 776,648 261,754 228,156 527,156 406,671 1,299,014 1,161,983 128,519 375,561 112,959 617,039 128,682 155,160 212,964 496,806 Slovenian banks are required to maintain a compulsory reserve with the Bank of Slovenia relative to the volume and structure of their customer deposits. Other banks in NLB Group maintain a compulsory reserve in accordance with local legislation. NLB and other banks in NLB Group fulfil their compulsory reserve deposit requirements. NLB Group 2016 Annual Report 222 5.2. Trading assets Derivatives, excluding hedging instruments Swap contracts - currency swaps - interest rate swaps - currency interest rate swaps Options - currency options - securities options Forward contracts - currency forward Total derivatives Securities Bonds - Republic of Slovenia - other issuers Shares Treasury bills - Republic of Slovenia Commercial papers - foreign banks Total securities Total - quoted securities of these equity instruments of these debt instruments - unquoted securities of these debt instruments NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 15,185 397 14,551 237 405 - 405 3,352 3,352 18,942 19,735 19,735 - - 30,012 19,010 68,757 26,855 191 26,421 243 151 37 114 3,035 3,035 30,041 43,555 39,460 4,095 10 42,636 151,171 237,372 15,179 391 14,551 237 405 - 405 3,352 3,352 18,936 19,735 19,735 - - 30,012 19,010 68,757 27,322 191 26,888 243 151 37 114 3,035 3,035 30,508 43,555 39,460 4,095 10 42,636 151,171 237,372 87,699 267,413 87,693 267,880 49,747 - 49,747 19,010 19,010 85,208 10 85,198 152,164 152,164 49,747 - 49,747 19,010 19,010 85,208 10 85,198 152,164 152,164 The notional amounts of derivative financial instruments are disclosed in note 5.24.b. During 2009, NLB Group and NLB reclassified certain bonds from the trading category to loans and receivables. NLB Group and NLB reclassified high quality corporate bonds that are not traded on the active market, and for which it has a positive intent and ability to hold for the foreseeable future - or until maturity rather than trade in the short term. Reclassified bonds meet the definition of loans and receivables. NLB Group 2016 Annual Report 223 Carrying amount in EUR thousand Fair value The following table illustrates the carrying values and fair values of the assets reclassified: NLB Group and NLB the date of reclassification as at 31 December 2009 as at 31 December 2010 as at 31 December 2011 as at 31 December 2012 as at 31 December 2013 as at 31 December 2014 as at 31 December 2015 as at 31 December 2016 72,030 75,928 84,429 86,501 80,218 87,667 85,009 85,315 The effective interest rates, determined on the day the bonds were reclassified, range from 4.15-4.23%. NLB Group and NLB Interest income in period Financial assets held for trading reclassified to loans and receivables 2016 2015 2014 2013 2012 2011 2010 2,079 2,053 2,103 2,153 2,449 3,446 4,471 NLB Group and NLB Gains/(losses) that would have been recognised if the assets had not been reclassified Financial assets held for trading reclassified to loans and receivables 2016 2015 2014 2013 2012 2011 2010 2009 2,695 3,272 17,726 1,302 (52) (11,078) 1,722 (4,647) 5.3. Financial instruments designated at fair value through profit or loss a) Financial assets designated at fair value through profit or loss Private equity fund Other investments Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 2,011 4,683 6,694 4,913 2,682 7,595 2,011 - 2,011 4,913 - 4,913 69,766 65,278 67,000 55,922 53,958 55,260 72,986 76,258 78,953 in EUR thousand 2009 2,836 in EUR thousand NLB Group 2016 Annual Report 224 b) Financial liabilities designated at fair value through profit or loss Structured deposit Total in EUR thousand NLB Group and NLB 31.12.2016 31.12.2015 2,011 2,011 4,912 4,912 In NLB, financial assets in the amount of EUR 2,011 thousand (31 December 2015: EUR 4,913 thousand) are designated at fair value through profit or loss to reduce the accounting mismatch that would otherwise arise. Financial liability, designated at fair value through profit or loss in the amount of EUR 2,011 thousand (31 December 2015: EUR 4,912 thousand) is the structured deposit from customers from which the returns depend on the returns from private equity funds, classified as financial assets, that are measured at fair value through profit or loss. In NLB Group, in addition to the aforementioned, financial assets that are designated at fair value through profit or loss represent investments in other funds that are managed and evaluated on a fair value basis. 5.4. Available-for-sale financial assets a) Analysis by type of available-for-sale financial assets NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Bonds - governments - Republic of Slovenia - other EU members - non-EU members - banks - other issuers Cash certificates Shares National Resolution Fund Treasury bills - Republic of Slovenia - other EU members - non-EU members Commercial bills Total - quoted securities of these equity instruments of these debt instruments - unquoted securities of these equity instruments of these debt instruments 1,619,228 1,350,942 1,262,363 1,146,150 1,050,770 401,405 343,295 306,070 284,141 16,031 77,939 30,943 44,519 81,680 24,997 2,001 54,682 789,285 380,411 405,655 3,219 453,179 19,899 - 22,737 44,570 55,093 55,093 - - 999,781 699,609 354,406 340,628 4,575 284,141 16,031 - 25,893 44,519 26,998 24,997 2,001 - 442,802 405,655 297,693 453,179 19,899 199 29,050 44,570 104,617 57,096 - 47,521 274,489 151,168 209,331 151,168 2,072,153 1,737,191 1,594,094 1,248,359 1,533,697 1,263,070 1,334,925 1,045,797 24,312 21,334 20,927 19,018 1,509,385 1,241,736 1,313,998 1,026,779 538,456 49,308 489,148 474,121 54,128 419,993 259,169 46,380 212,789 202,562 51,394 151,168 NLB Group 2016 Annual Report b) Movements of available-for-sale financial assets 225 NLB Group NLB in EUR thousand 2016 2015 2016 2015 Balance as at 1 January 1,737,191 1,672,952 1,248,359 1,182,748 Effects of translation of foreign operations to presentation currency (2,048) (54) - - Additions Disposals and maturity Interest income (note 4.1.) Exchange differences on monetary assets Changes in fair values Impairment (note 4.12.) - impairment of equity securities - impairment of debt securities Disposal of subsidiary Balance as at 31 December 1,766,455 1,661,860 666,304 437,390 (1,463,553) (1,612,917) (336,736) (375,407) 31,426 1,260 1,620 (198) (198) - - 33,232 1,867 (15,004) (4,659) (4,788) 129 (86) 17,881 594 (2,110) (198) (198) - - 19,692 1,554 (15,001) (2,617) (2,746) 129 - 2,072,153 1,737,191 1,594,094 1,248,359 As at 31 December 2016, the value of equity instruments obtained by NLB Group taking possession of collateral held as security and recognised in the statement of financial position is EUR 24,162 thousand (31 December 2015: EUR 21,277 thousand), and by NLB it amounted to EUR 20,832 thousand (31 December 2015: EUR 18,977 thousand) (note 7.1.n). By selling equity securities available for sale, NLB Group realised a net gain in the amount of EUR 13,478 thousand (2015: EUR 731 thousand), and NLB a net gain in the amount of EUR 13,472 thousand (2015: EUR 748 thousand). This gain is included in ‘Gains Less Losses from Financial Assets and Liabilities not Classified at Fair Value through Profit or Loss (note 4.4.).’ c) Accumulated other comprehensive income related to available-for-sale financial assets Balance as at 1 January Effects of translation of foreign operations to presentation currency Net gains/(losses) from changes in fair value Gains/losses transferred to net profit on disposal or impairment Deferred income tax (note 5.18.) Share of other comprehensive income of associates and joint ventures Balance as at 31 December - debt securities - equity securities NLB Group NLB in EUR thousand 2016 48,321 (3) 18,532 (14,630) (1,207) 1,988 53,001 41,989 11,012 2015 57,750 (19) (2,297) (6,180) 1,413 (2,346) 48,321 36,984 11,337 2016 37,996 - 14,652 (14,481) (949) - 2015 45,103 - (314) (8,248) 1,455 - 37,218 37,996 28,574 8,644 27,950 10,046 NLB Group 2016 Annual Report 226 5.5. Derivatives for hedging purposes NLB Group entities measure exposure to interest rate risk using a repricing gap analysis and by calculating the sensitivity of the statement of financial position and off-balance-sheet items in terms of the economic value of equity. Portfolio duration is used as a measure of risk in the management of securities in the banking book. NLB Group entities use various derivatives such as interest rate swaps (IRS) and currency interest rate swaps (CIRS) to close open positions in an individual maturity bucket. Micro and macro fair value hedges are used for that purpose, i.e. the swapping of a fixed interest rate on a hedged item for a variable interest rate. Micro cash flow hedges are also used, i.e. the swapping of a variable interest rate on a hedged item for a fixed interest rate. All cash flow hedges were made on liability items, while fair value hedges were used on both liability and asset items. Hedge accounting rules (fair value and cash flow hedging) were applied in the hedging of interest rate risk using interest rate swaps. These hedge relationships are created in such a way that the characteristics of the hedge instrument and those of the hedged item match (i.e. the principal terms match), while the dollar-offset method is used to regularly measure hedge effectiveness retrospectively. Prospective testing of hedge effectiveness is carried out regularly for macro hedges where the characteristics of both items in the hedge relationship do not fully match by comparing the change in the fair value of both items with the shift in the yield curve. Hedge accounting rules were not applied in economic hedges using CIRS. Thus, the effects of valuation are disclosed in the income statement in the line ‘Gains Less Losses from Financial Assets and Liabilities Held for Trading.’ a) Fair value adjustment in hedge accounting recognised in profit or loss Fair value hedge Net effects from hedging instruments Net effects from hedged items Cash flow hedge Transfer from other comprehensive income Total NLB Group NLB in EUR thousand 2016 (770) 715 (1,485) (2,469) (2,469) (3,239) 2015 231 7,698 (7,467) - - 231 2016 32 715 (683) (2,469) (2,469) (2,437) 2015 231 7,698 (7,467) - - 231 In 2016 NLB Group terminated a fair value hedge of fix interest rate loan due to expected early repayment. The net effects from hedged items include a reversal of the previously accumulated positive effect in the amount of EUR 802 thousand. In 2016 NLB terminated a cash flow hedge of borrowing with a variable interest rate due to expected prepayment in the amount of EUR 37,234 thousand. Negative valuation effects, previously accumulated in other comprehensive income were transferred in the income statement. Prepayment of funding was realised in January 2017. As of December 2016 NLB Group and NLB have no relationships designated for cash flow hedge accounting. NLB Group 2016 Annual Report 227 b) Notional amounts of interest rate swaps Notional amount Fair value in EUR thousand NLB Group and NLB Asset Liability Fair value hedge 31.12.2016 31.12.2015 Cash flow hedge 31.12.2015 Total 31.12.2016 31.12.2015 108,554 159,259 217 1,083 29,024 31,065 12,964 - 2,777 108,554 172,223 217 1,083 29,024 33,842 c) Future cash flows of interest rate swaps for cash flow hedge NLB Group and NLB Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years in EUR thousand 31.12.2015 - Outflow - Inflow - - (166) - (407) 1 (1,772) 81 (889) 263 d) Accumulated other comprehensive income related to cash flow hedging Balance as at 1 January Net losses on hedging instruments Transfer to income statement Deferred income tax (note 5.18.) Balance as at 31 December in EUR thousand NLB Group and NLB 2016 (2,243) (343) 3,046 (460) - 2015 (2,666) (78) 587 (86) (2,243) There was no hedge ineffectiveness that neither NLB nor NLB Group should have recognised in the income statement. NLB Group 2016 Annual Report 228 5.6. Loans and advances Analysis by type of loans and advances Debt securities Loans to banks NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 85,315 435,537 394,579 431,775 85,315 408,056 394,579 345,207 Loans and advances to customers 6,912,067 6,693,621 4,843,594 4,826,139 Other financial assets Total a) Debt securities Analysis of debt securities by sector Government Companies Total b) Loans and advances to banks Analysis by type of loans and advances Loans Time deposits Purchased receivables Allowance for impairment (note 5.14.b) Total 61,014 69,521 36,151 48,944 7,493,933 7,589,496 5,373,116 5,614,869 in EUR thousand NLB Group and NLB 31.12.2016 31.12.2015 - 85,315 85,315 309,570 85,009 394,579 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 945 433,883 1,058 435,886 (349) 435,537 3,825 427,195 997 432,017 (242) 431,775 19,399 387,599 1,058 408,056 - 408,056 29,391 315,016 997 345,404 (197) 345,207 NLB Group 2016 Annual Report c) Loans and advances to customers Analysis by type of loans and advances Loans Finance lease receivables Overdrafts Credit card business Called guarantees Reverse sale and repurchase agreements 229 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 7,198,486 7,254,266 5,098,336 5,266,143 192,923 298,351 112,106 13,577 25 253,205 320,514 111,673 16,773 25 - - 178,899 183,406 60,338 10,744 25 59,820 11,463 25 7,815,468 7,956,456 5,348,342 5,520,857 Allowance for impairment (note 5.14.) (903,401) (1,262,835) (504,748) (694,718) Total 6,912,067 6,693,621 4,843,594 4,826,139 Analysis of loans and advances by sector Government Financial organisations Companies Individuals Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 775,986 74,344 688,474 139,852 668,300 273,310 578,184 391,911 2,970,229 2,957,304 1,950,869 1,966,361 3,091,508 2,907,991 1,951,115 1,889,683 6,912,067 6,693,621 4,843,594 4,826,139 NLB Group 2016 Annual Report 230 Finance leases Loans and advances to customers in NLB Group include finance lease receivables: NLB Group The gross investment in finance leases by maturity - not later than 1 year - later than 1 year and not later than 5 years - later than 5 years Unearned future finance income on finance leases Net investment in finance leases - present value of minimum lease payments The net investment in finance leases by maturity - not later than 1 year - later than 1 year and not later than 5 years - later than 5 years Total in EUR thousand 31.12.2016 31.12.2015 71,291 127,319 12,808 211,418 (18,495) 192,923 121,065 137,575 19,011 277,651 (24,446) 253,205 192,923 253,205 64,337 116,944 11,642 192,923 111,965 124,104 17,136 253,205 Finance and operating lease transactions are carried out by NLB Group through specialised subsidiaries that offer car leasing, leasing of commercial and production equipment, and others. The majority of the lease agreements entered into by NLB Group as lessor contracts are finance lease agreements (operating leases account for less than 10% of all lease agreements). The majority of agreements are concluded for a non-cancellable period of between 48 and 60 months, with an unguaranteed residual value representing a purchase option typically between 1 and 2% of the gross investment. Finance and operating leases of motor vehicles and operating leases of business premises represent the majority of agreements in which NLB Group acts as a lessee. As at 31 December 2016 the allowance for unrecoverable finance lease receivables included in the allowance for loan impairment amounted to EUR 42,511 thousand (31 December 2015: EUR 75,386 thousand). NLB Group 2016 Annual Reportd) Other financial assets Analysis by type of other financial assets Credit card receivables Receivables in the course of collection Debtors Fees and commissions Prepayments Receivables from purchase agreements for equity securities Other financial assets Allowance for impairment (note 5.14.c) Total 231 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 21,961 13,235 11,934 7,311 2,217 164 19,645 76,467 (15,453) 61,014 11,739 15,416 20,415 7,548 4,289 16,920 20,272 96,599 (27,078) 69,521 17,375 11,481 929 5,699 - 164 4,274 39,922 (3,771) 36,151 8,346 13,033 1,213 5,384 - 16,920 9,171 54,067 (5,123) 48,944 Receivables in the course of collection are temporary balances which will be transferred to the appropriate item in the days following their occurrence. Other financial assets include receivables to pension funds for prior pension payments, receivables from insurance companies, deposit facilities, claims and enforcement procedures, paid duties, and legal costs. Analysis of other financial assets by sector Banks Government Financial organisations Companies Individuals Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 14,058 13,708 10,969 6,632 15,647 61,014 9,170 12,181 1,923 30,242 16,005 69,521 8,377 1,753 8,364 3,168 14,489 36,151 3,565 1,748 5,470 23,424 14,737 48,944 NLB Group 2016 Annual Report 232 e) Movement of called non-financial guarantees Balance as at 1 January Effects of translation of foreign operations to presentation currency Called guarantees Paid guarantees Write-offs Balance as at 31 December 5.7. Held-to-maturity financial assets a) Analysis by type of held-to-maturity financial assets Bonds - governments - Republic of Slovenia - other EU members - banks - other issuers Treasury bills of Republic of Slovenia Allowance for impairment Total - quoted b) Movements of held-to-maturity financial assets Balance as at 1 January Additions Decreases Interest income (note 4.1.) Change of interest income due to reclassification of available-for-sale to held-to-maturity financial assets Impairment (note 4.12.) Balance as at 31 December NLB Group NLB in EUR thousand 2016 5,678 (13) 2,520 (1,525) (2,431) 4,229 2015 8,494 1 8,663 (9,999) (1,481) 5,678 2016 4,838 - 1,595 (493) (2,431) 3,509 2015 5,648 - 7,881 (7,210) (1,481) 4,838 in EUR thousand NLB Group and NLB 31.12.2016 31.12.2015 611,532 591,468 411,914 179,554 16,729 3,335 - 611,532 (83) 545,561 532,235 363,566 168,669 13,326 - 19,974 565,535 - 611,449 565,535 611,449 565,535 in EUR thousand NLB Group and NLB 2016 565,535 116,897 (88,897) 17,997 - (83) 2015 711,648 32,224 (199,926) 21,656 (67) - 611,449 565,535 NLB Group 2016 Annual Report 5.8. Non-current assets classified as held for sale Balance as at 1 January Effects of translation of foreign operations to presentation currency Transfer from property and equipment (note 5.9.) Transfers into other assets Disposals Valuation Balance as at 31 December 233 NLB Group NLB in EUR thousand 2016 4,629 (53) 481 - (217) (577) 4,263 2015 5,643 (14) - (140) (167) (693) 4,629 2016 1,776 - 418 - (128) (278) 1,788 2015 2,580 - - (140) (98) (566) 1,776 In 2016 and 2015, NLB Group did not recognise any repossessed assets as non-current assets classified as held for sale. 5.9. Property and equipment 2016 Cost NLB Group NLB in EUR thousand Land & Buildings Computers Other equipment Total Land & Buildings Computers Other equipment Total Balance as at 1 January 2016 329,096 73,285 123,775 526,156 202,303 51,279 65,307 318,889 Effects of translation of foreign operations to presentation currency Additions Disposals Impairment (note 4.12.) Transfer to/from non-current assets held for sale (note 5.8.) (674) (91) (207) (972) - - - - 1,845 7,260 3,528 12,633 1,548 4,168 1,245 6,961 (949) (754) (1,324) (6,929) (19,028) (26,906) - - - - (823) (150) (754) (1,324) (1,260) (4,788) (7,276) (12,887) - - - - (150) (1,260) Balance as at 31 December 2016 327,240 73,525 108,068 508,833 201,618 50,659 59,276 311,553 Depreciation and impairment Balance as at 1 January 2016 153,877 63,148 101,401 318,426 122,884 45,059 56,376 224,319 Effects of translation of foreign operations to presentation currency Disposals Depreciation (note 4.10.) Impairment (note 4.12.) Transfer to/from non-current assets held for sale (note 5.8.) (205) (71) (172) (448) - - - - (606) (10,733) (13,016) (24,355) 4,662 4,310 16,651 - - - - 2,553 (843) (842) (572) 5,263 977 (8,601) (3,447) (12,620) 3,122 838 - - - - 9,223 977 (842) 7,679 2,553 (843) Balance as at 31 December 2016 162,455 57,006 92,523 311,984 127,710 39,580 53,767 221,057 Net carrying value Balance as at 31 December 2016 164,785 16,519 15,545 196,849 73,908 11,079 5,509 90,496 Balance as at 1 January 2016 175,219 10,137 22,374 207,730 79,419 6,220 8,931 94,570 NLB Group 2016 Annual Report 234 2015 Cost NLB Group NLB in EUR thousand Land & Buildings Computers Other equipment Total Land & Buildings Computers Other equipment Total Balance as at 1 January 2015 334,570 74,658 125,725 534,953 205,866 53,270 65,269 324,405 Effects of translation of foreign operations to presentation currency Additions Disposals (88) 13 82 7 - - - - 2,810 4,618 14,098 21,526 2,272 2,882 4,789 9,943 (1,186) (5,983) (16,130) (23,299) (65) (4,873) (4,751) (9,689) Transfer to/from investment property (note 5.10.) Disposal of subsidiary (note 3.) (6,788) (222) - (21) - - (6,788) (5,770) (243) - - - - - (5,770) - Balance as at 31 December 2015 329,096 73,285 123,775 526,156 202,303 51,279 65,307 318,889 Depreciation and impairment Balance as at 1 January 2015 148,823 64,679 106,276 319,778 119,872 47,217 59,986 227,075 Effects of translation of foreign operations to presentation currency Disposals Depreciation (note 4.10.) Impairment (note 4.12.) (42) (977) 7,739 1,122 Transfer to/from investment property (note 5.10.) (2,758) Disposal of subsidiary (note 3.) (30) (16) 12 70 40 - - - - (5,923) (10,332) (17,232) (49) (4,849) (4,635) (9,533) 4,396 5,387 17,522 - - 5,294 344 1,122 (2,758) (2,577) (46) - - - - 2,691 1,025 - - - - - - 9,010 344 (2,577) - Balance as at 31 December 2015 153,877 63,148 101,401 318,426 122,884 45,059 56,376 224,319 Net carrying amount Balance as at 31 December 2015 175,219 10,137 22,374 207,730 79,419 6,220 8,931 94,570 Balance as at 1 January 2015 185,747 9,979 19,449 215,175 85,994 6,053 5,283 97,330 Assets leased under finance leases in NLB Group as at 31 December 2016 amounted to EUR 6 thousand for motor vehicles (31 December 2015: EUR 21 thousand). NLB had no assets held under finance leases as at 31 December 2016 and 31 December 2015. The value of assets received by taking possession of collateral and included in property and equipment by NLB Group amounted to EUR 1,523 thousand (31 December 2015: EUR 1,839 thousand) and in NLB amounted to EUR 7 thousand (31 December 2015: EUR 7 thousand) (note 7.1.n). The net carrying value of assets leased out by NLB Group under operating leases was EUR 2,842 thousand as at 31 December 2016 (31 December 2015: EUR 5,250 thousand). A total of 61.9% of assets leased out relates to motor vehicles (31 December 2015: 62.8%). NLB Group 2016 Annual Report5.10. Investment property Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries Additions Disposals Transfer (to)/from property and equipment (note 5.9.) Transfer from/(to) other assets Net valuation to fair value (note 4.7. and 4.8.) Balance as at 31 December 235 in EUR thousand 2015 1,458 - - 3,843 - 3,193 - 119 8,613 NLB 2016 8,613 - - - - - - (462) 8,151 NLB Group 2016 93,513 - - 2,632 (4,661) - 91 (7,912) 83,663 2015 41,472 8 22,290 6,295 (478) 4,030 26,816 (6,920) 93,513 The value of assets received by taking possession of collateral and included in investment property by NLB Group amounted to EUR 48,658 thousand (31 December 2015: EUR 57,599 thousand). The value of assets received by taking possession of collateral and included in investment property by NLB amounted to EUR 3,750 thousand (31 December 2015: EUR 3,750 thousand) (notes 5.13. and 7.1.n). NLB Group has no interests in properties held under operating leases that were classified and accounted for as investment property. NLB Group incurred operating expenses arising from investment properties leased to others in the amount of EUR 15 thousand (2015: EUR 58 thousand), and operating expenses arising from investment properties not leased to others in the amount of EUR 0 (2015: EUR 23 thousand). NLB Group earned rental income arising from investment properties in the amount of EUR 5,942 thousand (2015: EUR 6,399 thousand) and NLB in the amount of EUR 260 thousand (2015: EUR 86 thousand). NLB Group 2016 Annual Report 236 5.11. Intangible assets 2016 Cost NLB Group in EUR thousand NLB Software licenses Goodwill Total Software licenses Balance as at 1 January 2016 216,723 32,336 249,059 193,080 Effects of translation of foreign operations to presentation currency Additions Write-offs (124) 6,418 (412) - - - (124) 6,418 (412) - 3,375 - Balance as at 31 December 2016 222,605 32,336 254,941 196,455 Amortisation and impairment Balance as at 1 January 2016 Effects of translation of foreign operations to presentation currency Amortisation (note 4.10.) Write-offs 180,925 28,807 209,732 163,453 (90) 11,694 (365) - - - (90) 11,694 (365) - 9,657 - Balance as at 31 December 2016 192,164 28,807 220,971 173,110 Net carrying value Balance as at 31 December 2016 Balance as at 1 January 2016 2015 Cost 30,441 35,798 3,529 3,529 33,970 23,345 39,327 29,627 NLB Group in EUR thousand NLB Software licenses Goodwill Total Software licenses Balance as at 1 January 2015 210,137 32,336 242,473 188,851 Effects of translation of foreign operations to presentation currency Additions Disposals Write-offs (9) 12,809 (1,293) (4,921) - - - - (9) 12,809 (1,293) (4,921) - 10,149 (1,293) (4,627) Balance as at 31 December 2015 216,723 32,336 249,059 193,080 Amortisation and impairment Balance as at 1 January 2015 Effects of translation of foreign operations to presentation currency Amortisation (note 4.10.) Write-offs 170,915 28,807 199,722 155,108 (7) 14,334 (4,317) - - - (7) 14,334 (4,317) - 12,400 (4,055) Balance as at 31 December 2015 180,925 28,807 209,732 163,453 Net carrying value Balance as at 31 December 2015 Balance as at 1 January 2015 35,798 39,222 3,529 3,529 39,327 29,627 42,751 33,743 NLB Group 2016 Annual Report In 2016 and 2015 NLB Group did not record an impairment of goodwill. Information regarding the impairment testing of goodwill is disclosed in note 2.33.f. 5.12. Investments in subsidiaries, associates and joint ventures a) Analysis by type of investment in subsidiaries NLB Banks Other financial organisations Enterprises Total 237 in EUR thousand 31.12.2016 31.12.2015 267,071 267,071 19,900 52,722 26,595 52,335 339,693 346,001 In 2016 the subsidiary NLB Leasing Sofia, Sofia was liquidated. A loss in the amount of EUR 153 thousand was recognised, and is included in the item ‘Gains Less Losses from Capital Investments in Subsidiaries, Associates, and Joint Ventures’ (2015: a loss in the amount of EUR 183 thousand due to lost control in the subsidiary LHB Trade, Zagreb and sell of the subsidiary Convest, Novi Sad). NLB Group 2016 Annual Report238 Data on subsidiaries as included in the consolidated financial statements of NLB Group as at 31 December 2016: Nature of Business Country of Incorporation Equity as at 31 December 2016 Profit/(loss) for 2016 NLB’s shareholding % NLB’s voting rights% NLB Group’s shareholding % NLB Group’s voting rights% in EUR thousand Core members NLB Banka a.d., Skopje Banking Republic of Macedonia 129,083 24,997 NLB Banka a.d., Podgorica Banking Republic of Montenegro 75,787 5,318 86.97 99.36 86.97 98.00 86.97 99.36 86.97 98.00 NLB Banka a.d., Banja Luka Banking Republic of Bosnia and Herzegovina 74,607 14,117 99.85 99.85 99.85 99.85 NLB Banka sh.a., Prishtina Banking Republic of Kosovo 62,845 11,263 81.21 81.21 81.21 81.21 NLB Banka d.d., Sarajevo Banking Republic of Bosnia and Herzegovina 60,780 5,357 97.34 97.35 97.34 97.35 NLB Banka a.d., Beograd Banking Republic of Serbia 45,526 2,152 99.997 99.997 99.997 99.997 NLB Srbija d.o.o., Beograd Real estate Republic of Serbia 27,906 NLB Skladi d.o.o., Ljubljana Finance Republic of Slovenia NLB Nov penziski fond a.d., Skopje Insurance Republic of Macedonia NLB Crna Gora d.o.o., Podgorica Real estate Republic of Montenegro 7,948 6,155 1,238 555 2,951 979 305 Non-core members NLB Leasing d.o.o., Ljubljana Finance Republic of Slovenia 10,112 (18,316) Optima Leasing d.o.o., Zagreb - "u likvidaciji" Finance Republic of Croatia 4,716 (3,115) NLB Leasing Podgorica d.o.o., Podgorica - "u likvidaciji" Finance Republic of Montenegro 853 NLB Leasing d.o.o., Beograd - u likvidaciji Finance Republic of Serbia 4,495 NLB Leasing d.o.o., Sarajevo Finance Republic of Bosnia and Herzegovina NLB Lizing d.o.o.e.l., Skopje - vo likvidacija Finance Republic of Macedonia (724) 873 (754) (215) (150) 8 100 100 51 100 100 - 100 100 100 100 100 100 51 100 100 - 100 100 100 100 Tara Hotel d.o.o., Budva Real estate Republic of Montenegro 16,899 (5,946) 12.71 12.71 PRO-REM d.o.o., Ljubljana - v likvidaciji Real estate Republic of Slovenia 19,812 OL Nekretnine d.o.o., Zagreb - u likvidaciji Real estate Republic of Croatia BH-RE d.o.o., Sarajevo Real estate Republic of Bosnia and Herzegovina REAM d.o.o., Zagreb Real estate Republic of Croatia REAM d.o.o., Podgorica Real estate Republic of Montenegro REAM d.o.o., Beograd Real estate Republic of Serbia 653 3 37 443 105 SR-RE d.o.o., Beograd Real estate Republic of Serbia 1,837 NLB Propria d.o.o., Ljubljana - v likvidaciji Real estate Republic of Slovenia CBS Invest d.o.o., Sarajevo Real estate Republic of Bosnia and Herzegovina 880 12 (216) (173) (9) (90) (83) (104) (163) 67 (40) NLB InterFinanz AG, Zürich in Liquidation NLB InterFinanz Praha s.r.o., Prague Finance Finance Czech Republic Switzerland 8,976 (4,716) NLB InterFinanz d.o.o., Beograd Finance Republic of Serbia Prospera plus d.o.o., Ljubljana Tourist and catering trade Republic of Slovenia LHB AG, Frankfurt Finance Republic of Germany 2,316 NLB Factoring a.s. - “v likvidaci,” Brno Finance Czech Republic 93 (94) 1 373 23 (40) 6 (428) (280) 100 100 - - 100 100 100 100 100 100 100 - - 100 100 100 - - 100 100 100 100 100 100 100 - - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 NLB Group 2016 Annual ReportData on subsidiaries as included in the consolidated financial statements of NLB Group as at 31 December 2015: 239 in EUR thousand Nature of Business Country of Incorporation Equity as at 31 December 2015 Profit/(loss) for 2015 NLB’s shareholding % NLB’s voting rights% NLB Group’s shareholding % NLB Group’s voting rights% Core members NLB Banka a.d., Skopje Banking Republic of Macedonia 113,977 13,129 NLB Banka a.d., Podgorica Banking Republic of Montenegro 68,624 6,240 86.97 99.36 86.97 98.00 86.97 99.36 NLB Banka a.d., Banja Luka Banking Republic of Bosnia and Herzegovina 68,058 9,863 99.85 99.85 99.85 NLB Banka sh.a., Prishtina Banking Republic of Kosovo 59,725 8,242 81.21 81.21 81.21 NLB Banka d.d., Sarajevo Banking Republic of Bosnia and Herzegovina 55,313 4,182 97.34 97.35 97.34 86.97 98.00 99.85 81.21 97.35 NLB Banka a.d., Beograd Banking Republic of Serbia 44,121 1,181 99.997 99.997 99.997 99.997 NLB Srbija d.o.o., Beograd Real estate Republic of Serbia 27,891 NLB Skladi d.o.o., Ljubljana Finance Republic of Slovenia NLB Nov penziski fond a.d., Skopje Insurance Republic of Macedonia NLB Crna Gora d.o.o., Podgorica Real estate Republic of Montenegro 7,112 6,015 933 822 2,455 789 416 100 100 51 100 100 100 51 100 Non-core members NLB Leasing d.o.o., Ljubljana Finance Republic of Slovenia 14,402 (3,672) 100 100 NLB Leasing Sofija E.o.o.d., Sofia Finance Republic of Bulgaria Optima Leasing d.o.o., Zagreb Finance Republic of Croatia NLB Leasing Podgorica d.o.o., Podgorica Finance Republic of Montenegro NLB Leasing d.o.o., Beograd Finance Republic of Serbia (85) 856 1,106 3,063 (77) (3,806) (825) (2,599) NLB Leasing d.o.o., Sarajevo Finance Republic of Bosnia and Herzegovina (575) (3,271) NLB Lizing d.o.o.e.l., Skopje Finance Republic of Macedonia 567 (1,470) - - 100 100 100 100 - - 100 100 100 100 Tara Hotel d.o.o., Budva Real estate Republic of Montenegro 22,845 555 12.71 12.71 PRO-REM d.o.o., Ljubljana Real estate Republic of Slovenia 11,273 (14,583) OL Nekretnine d.o.o., Zagreb Real estate Republic of Croatia REAM d.o.o., Zagreb Real estate Republic of Croatia REAM d.o.o., Podgorica Real estate Republic of Montenegro REAM d.o.o., Beograd Real estate Republic of Serbia SR-RE d.o.o., Beograd Real estate Republic of Serbia 817 126 126 112 3 (126) (66) (71) (130) (4) PRO-Avenija d.o.o., Ljubljana Real estate Republic of Slovenia 8,609 (1,385) NLB Propria d.o.o., Ljubljana Real estate Republic of Slovenia FIN-DO d.o.o., Domžale Real estate Republic of Slovenia CBS Invest d.o.o., Sarajevo Real estate Republic of Bosnia and Herzegovina 741 126 49 (120) (814) (2,062) NLB InterFinanz AG, Zürich NLB InterFinanz Praha s.r.o., Prague Finance Finance Switzerland 12,734 (5,030) Czech Republic (119) NLB InterFinanz d.o.o., Beograd Finance Republic of Serbia Prospera plus d.o.o., Ljubljana Tourist and catering trade Republic of Slovenia 41 506 LHB AG, Frankfurt Finance Republic of Germany 2,841 NLB Factoring a.s. - "v likvidaci", Brno Finance Czech Republic 374 (1,649) (65) 4 24 243 100 - 100 100 100 100 100 100 100 100 100 - - 100 100 100 100 - 100 100 100 100 100 100 100 100 100 - - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Changes in ownership interest in subsidiaries of NLB Group in 2016 and 2015 are presented in note 3. Significant effects of changes in ownership interests are presented in the statement of changes in equity in the item Equity attributable to non-controlling interest. NLB Group 2016 Annual Report240 Data on subsidiaries with significant non-controlling interests, before intercompany eliminations NLB Banka, Skopje NLB Banka, Prishtina in EUR thousand Non-controlling interest in equity in % Non-controlling interest's voting rights in % Income statement and statement of comprehensive income Revenues Profit/(loss) for the year Atributable to non-controlling interest Other comprehensive income Total comprehensive income Atributable to non-controlling interest Statement of financial position Current assets Non-current assets Current liabilities Non-current liabilities Equity Atributable to non-controlling interest b) Analysis by type of investment in associates and joint ventures Other financial organisations Enterprises Total NLB Group’s associates 2016 13.03 13.03 80,036 24,997 3,257 (427) 24,570 3,201 574,520 578,569 810,619 213,387 129,083 16,820 2015 13.03 13.03 76,394 13,129 1,711 118 13,247 1,726 574,807 544,871 787,045 218,656 113,977 14,851 2016 18.79 18.79 32,815 11,263 2,116 88 11,351 2,133 297,485 218,630 363,590 89,680 62,845 11,809 2015 18.79 18.79 32,117 8,242 1,549 28 8,270 1,554 276,495 188,197 333,350 71,617 59,725 11,222 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 43,008 240 43,248 39,402 294 39,696 6,600 431 7,031 6,600 494 7,094 2016 2015 in EUR thousand Nature of Business Country of Incorporation Shareholding % Voting rights % Shareholding % Voting rights % Bankart d.o.o., Ljubljana Card processing Republic of Slovenia Skupna pokojninska družba d.d., Ljubljana Insurance Republic of Slovenia Kreditni biro SISBON, d.o.o., Ljubljana - v likvidaciji Credit bureau Republic of Slovenia ARG - Nepremičnine d.o.o., Horjul Real estate Republic of Slovenia 39.44 28.13 29.68 75.00 39.44 28.13 29.68 75.00 39.44 28.13 29.68 75.00 39.44 28.13 29.68 75.00 By contractual agreement between the shareholders, NLB does not control ARG-Nepremičnine, Horjul, but does have a significant influence. Therefore, the entity is accounted as an associate. NLB Group 2016 Annual Report Carrying amount of interests in associates included in the consolidated financial statements of NLB Group: NLB Group Carrying amount of the NLB Group's interest NLB Group's share of: - Profit for the year - Other comprehensive income - Total comprehensive income 241 2016 13,009 1,462 (234) 1,228 in EUR thousand 2015 11,825 935 (54) 881 In 2016 NLB Group did not recognise a share of profit of an associate in the amount of EUR 48 thousand (31 December 2015: unrecognised profit EUR 56 thousand), as it still has the cumulative unrecognised share of losses of an associate that as at 31 December 2016 amounted to EUR 2,402 thousand (31 December 2015: EUR 2,450 thousand). NLB Group’s joint ventures NLB Vita d.d., Ljubljana Prvi Faktor Group, Ljubljana 2016 2015 Nature of Business Country of Incorporation Voting rights% Voting rights% Insurance Republic of Slovenia Finance Republic of Slovenia 50 50 50 50 Data on material joint venture NLB Vita, Ljubljana as included in the consolidated financial statements of NLB Group: NLB Vita d.d., Ljubljana Revenues Interest income Interest expense Depreciation and amortisation Income tax Profit for the year Other comprehensive income Total comprehensive income NLB Group's share of: - Profit for the year - Other comprehensive income Total assets Cash and cash equivalents Total liabilities Financial liabilities Equity NLB Group's ownership interest in joint venture Carrying amount of the NLB Group's interest in joint venture 2016 74,342 7,038 (1) (241) (1,422) 7,394 4,434 11,828 3,697 2,216 in EUR thousand 2015 72,903 6,800 (2) (253) (1,365) 7,089 (4,450) 2,639 3,545 (2,225) 31.12.2016 31.12.2015 409,513 2,541 349,035 1,606 60,478 30,239 30,239 370,586 915 314,847 2,921 55,739 27,870 27,870 NLB Group 2016 Annual Report242 c) Movements of investments in associates and joint ventures NLB Group Balance as at 1 January Share of results before tax Share of tax Net gains/(losses) not recognised in the income statement Dividends received Other Balance as at 31 December 5.13. Other assets Assets, received as collateral (note 7.1.n) Inventories Deferred expenses Claim for taxes and other dues Prepayments Total 2016 39,696 6,097 (938) 1,982 (3,587) (2) 43,248 in EUR thousand 2015 37,525 5,299 (814) (2,279) (35) - 39,696 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 79,059 8,913 4,597 1,305 684 75,652 10,497 5,133 2,453 1,619 94,558 95,354 4,263 460 3,096 389 211 8,419 3,371 390 3,392 1,385 1,241 9,779 Assets received as collateral and inventories on NLB Group in the amount of EUR 76,416 thousand (31 December 2015: EUR 72,433 thousand) and on NLB in the amount of EUR 4,263 thousand (31 December 2015: EUR 3,371 thousand) consists of real estate, and the rest are other assets received as collateral. NLB Group 2016 Annual Report 5.14. Movements in allowance for the impairment of banks, loans, and advances to customers and other financial assets a) Impairment of loans and advances to individuals 243 in EUR thousand NLB Group Granted overdrafts Loans for houses and flats Consumer loans Other loans Total Balance as at 1 January 2015 19,468 47,191 59,151 28,849 154,659 Effects of translation of foreign operations to presentation currency Impairment (note 4.12.) Write-offs Repayments of written-off receivables Exchange differences Other Balance as at 31 December 2015 Effects of translation of foreign operations to presentation currency Impairment (note 4.12.) Write-offs Repayments of written-off receivables Exchange differences Other (2) 4,889 (5,799) - - - 18,556 (32) 2,587 (4,973) - - - 3 3,241 (1,421) - 337 - (2) 3,016 (8,896) 139 3 (10) 915 3,620 (12,112) 487 (216) (32) 914 14,766 (28,228) 626 124 (42) 49,351 53,401 21,511 142,819 (49) 4,436 (123) 3,261 (21,900) (20,369) - 29 - 199 2 (5) 3 2,516 (10,241) 1,143 (87) - (201) 12,800 (57,483) 1,342 (56) (5) Balance as at 31 December 2016 16,138 31,867 36,366 14,845 99,216 NLB Balance as at 1 January 2015 Impairment (note 4.12.) Write-offs Exchange differences Balance as at 31 December 2015 Impairment (note 4.12.) Write-offs Exchange differences Balance as at 31 December 2016 Granted overdrafts Loans for houses and flats Consumer loans Other loans 16,063 4,675 (5,778) - 14,960 2,303 (4,509) - 12,754 31,541 2,440 (790) 241 33,432 5,495 (20,513) 8 18,422 22,589 2,305 (7,087) 1 17,808 1,930 (13,527) - 6,211 4,613 1,163 (4,126) 326 1,976 517 (811) - 1,682 in EUR thousand Total 74,806 10,583 (17,781) 568 68,176 10,245 (39,360) 8 39,069 NLB Group 2016 Annual Report244 b) Impairment of loans and advances to legal entities NLB Group Loans and advances to government Loans and advances to banks Loans and advances to financial organisations Loans and advances to large corporate customers Loans and advances to small- and medium-sized enterprises in EUR thousand Total Balance as at 1 January 2015 18,916 24,722 38,481 484,374 941,874 1,508,367 Effects of translation of foreign operations to presentation currency Impairment (note 4.12.) Write-offs Repayments of written-off receivables Exchange differences Other Balance as at 31 December 2015 Effects of translation of foreign operations to presentation currency Impairment (note 4.12.) Write-offs Repayments of written-off receivables Exchange differences Other 14 1,285 (371) 32 1 (5) 19,872 (7) (2,604) (690) 110 - (5) 2,932 2,557 (28,957) 130 (1,142) - 242 (1) 74 (1) 35 - - 1 7,780 (754) - 1 (126) 45,383 8,712 (6,598) 10,943 35,718 22,602 40,742 (151,230) (264,221) (445,533) 774 (6,808) - 4,795 (3,546) (26) 5,731 (11,494) (157) 329,224 725,537 1,120,258 - (318) (703) (14,842) (16,052) 56,578 (1,029) 23,154 (710) (72,990) (273,891) (348,282) - 4 (2) 3,354 (719) - 7,581 241 (166) 11,080 (474) (173) Balance as at 31 December 2016 16,676 349 29,833 242,499 515,177 804,534 NLB Balance as at 1 January 2015 Impairment (note 4.12.) Write-offs Repayments of written-off receivables Exchange differences Balance as at 31 December 2015 Impairment (note 4.12.) Write-offs Repayments of written-off receivables Exchange differences Balance as at 31 December 2016 in EUR thousand Total 924,258 26,986 Loans and advances to government Loans and advances to banks Loans and advances to financial organisations Loans and advances to large corporate customers Loans and advances to small- and medium-sized enterprises 5,779 1,359 (371) 32 - 6,799 (163) (689) 110 - 6,057 682 67 (737) 130 55 197 (196) (1) - - - 164,213 15,446 308,658 (29,283) 444,926 39,397 (126,379) (80,757) (123,313) (331,557) - 2,951 56,231 (5,005) (446) - 17 774 608 200,000 5,065 1,402 1,100 363,512 14,844 2,338 4,714 626,739 14,545 (39,415) (138,831) (179,382) 1,486 6 2,149 9 3,745 32 50,797 167,142 241,683 465,679 NLB Group 2016 Annual Reportc) Impairment of other financial assets Balance as at 1 January 2015 Effects of translation of foreign operations to presentation currency Impairment (note 4.12.) Write-offs Exchange differences Repayments of written-off receivables Balance as at 31 December 2015 Effects of translation of foreign operations to presentation currency Impairment (note 4.12.) Write-offs Exchange differences Repayments of written-off receivables Other Balance as at 31 December 2016 5.15. Trading liabilities Derivatives, excluding hedges Swap contracts - currency swaps - interest rate swaps - currency interest rate swaps Options - currency options - interest rate options Forward contracts - currency forward Total 245 NLB Group 42,680 31 6,220 in EUR thousand NLB 17,521 - 1,721 (22,158) (14,271) 137 168 27,078 43 625 - 152 5,123 - 356 (12,417) (1,726) (39) 165 (2) (1) 19 - 15,453 3,771 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 15,555 328 15,227 - - - - 3,236 3,236 18,791 26,929 169 24,460 2,300 47 37 10 2,944 2,944 29,920 15,552 325 15,227 - - - - 3,235 3,235 18,787 26,929 169 24,460 2,300 47 37 10 2,933 2,933 29,909 The notional amounts of derivative financial instruments are disclosed in note 5.24.b. NLB Group 2016 Annual Report 246 5.16. Financial liabilities, measured at amortised cost Analysis by type of financial liabilities, measured at amortised cost Deposits from banks and central banks Borrowings from banks and central banks Due to customers Borrowings from other customers Debt securities in issue Subordinated liabilities Other financial liabilities Total a) Deposits from banks and amounts due to customers Deposits on demand - banks and central banks - other customers - governments - financial organisations - companies - individuals Other deposits - banks and central banks - other customers - governments - financial organisations - companies - individuals Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 42,334 371,769 57,982 571,029 74,977 338,467 96,736 519,926 9,437,147 9,020,666 6,615,390 6,293,339 83,619 277,726 27,145 110,295 100,267 304,962 27,340 75,307 4,274 277,726 - 16,168 304,962 - 68,784 47,346 10,350,035 10,157,553 7,379,618 7,278,477 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 34,828 55,599 74,434 95,962 6,415,927 5,544,323 4,781,616 4,092,767 200,629 124,918 180,746 72,282 83,745 101,536 79,848 45,127 1,584,892 1,542,725 1,015,371 993,058 4,505,488 3,748,570 3,580,964 2,974,734 7,506 2,383 543 774 3,021,220 3,476,343 1,833,774 2,200,572 150,835 122,401 350,431 182,804 109,122 444,365 147,914 78,767 246,584 172,290 74,616 303,226 2,397,553 2,740,052 1,360,509 1,650,440 9,479,481 9,078,648 6,690,367 6,390,075 NLB Group 2016 Annual Report b) Borrowings from banks and other customers Loans - banks and central banks - other customers - governments - financial organisations - companies Total 247 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 371,769 83,619 20,063 56,728 6,828 571,029 100,267 29,982 61,335 8,950 455,388 671,296 338,467 4,274 - - 4,274 342,741 519,926 16,168 10,009 - 6,159 536,094 As at 31 December 2016, NLB Group and NLB had EUR 347,434 thousand in undrawn borrowings (31 December 2015: EUR 345,762 thousand). c) Debt securities in issue Carrying amount of issued securities - traded on active markets Bonds (in %) - fixed rated d) Subordinated liabilities NLB Group NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 277,726 304,962 277,726 304,962 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 31.12.2016 in EUR thousand 31.12.2015 Currency Due date Interest rate Carrying amount Nominal value Carrying amount Nominal value Subordinated loans Total EUR EUR EUR 30/6/2018 6 months EURIBOR + 6.3% p.a. to 22.09.2016, thereafter 6 months EURIBOR +5% p.a. 30/6/2020 6 months EURIBOR + 7.7% p.a. 26/6/2025 6 months EURIBOR + 7.5% p.a. to 15.12.2016, thereafter 6 months EURIBOR + 6.25% p.a. 12,103 12,000 12,219 12,000 5,151 9,891 27,145 5,000 10,000 27,000 5,176 9,945 27,340 5,000 10,000 27,000 NLB Group 2016 Annual Report 248 e) Other financial liabilities Debit or credit card payables Items in the course of payment Accrued expenses Suppliers Accrued salaries Fees and commissions due Other financial liabilities Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 32,704 28,671 13,382 11,781 8,537 1,440 13,780 110,295 15,502 13,835 12,695 14,515 8,274 1,341 9,145 29,350 8,499 5,593 8,393 6,583 1,398 8,968 14,231 4,580 4,615 11,371 6,913 1,305 4,331 75,307 68,784 47,346 Other financial liabilities mainly include liabilities to insurance companies, liabilities to employees, received warranties and temporary accounts. 5.17. Provisions a) Analysis by type of provisions Provisions for financial guarantees (note 5.24.a) Provisions for non-financial guarantees (note 5.24.a) Provisions for other credit commitments (note 5.24.a) Employee benefit provisions Restructuring provisions Provisions for legal issues Other provisions Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 25,327 22,745 5,609 19,758 10,014 15,194 2,267 47,737 31,034 3,228 21,265 3,477 13,465 2,433 23,131 21,777 4,957 15,384 8,750 3,282 2,265 44,583 29,863 3,197 16,559 3,429 5,075 2,431 100,914 122,639 79,546 105,137 Provisions for legal issues are recognised based on expectations regarding the probable outcome of legal disputes. As at 31 December 2016, NLB Group was involved in 43 (31 December 2015: 45) legal disputes with material claims against group members in the total amount of EUR 646,639 thousand, excluding accrued interest (31 December 2015: EUR 627,917 thousand). As at 31 December 2016, NLB was involved in 19 (31 December 2015: 21) legal disputes with material monetary claims against NLB. The total amount of these claims, excluding accrued interest, was EUR 417,041 thousand (31 December 2015: EUR 419,277 thousand). The biggest amount within material monetary claims relates to civil claims filed by Privredna banka Zagreb (the PBZ) and Zagrebačka banka (the ZaBa) against NLB, referring to the old savings of LB Branch Zagreb savers, which were transferred to these two banks in the principal amount of EUR 172,212 thousand. Due to the fact the proceedings have been pending for such a long time, the penalty interest already exceeds the principal amount. As NLB is not liable for the old foreign currency savings, based on numerous process and content-related reasons, NLB has all along objected to these claims. Two key reasons NLB is no longer liable for the old foreign currency savings are that it was only founded on the basis of the Constitutional Act on 27 July 1994 (at the time the savings were deposited with LB Branch Zagreb, NLB did not exist yet), and NLB did not assume any of its obligations. Moreover, this is a former Yugoslavia succession matter as the governments of the Republic of Slovenia and the Republic of Croatia agreed in a Memorandum of Understanding signed in 2013 to find a solution to the transferred foreign currency savings of Ljubljanska banka in Croatia (LB) on the basis of the Agreement on Succession Issues and that the Republic of Croatia NLB Group 2016 Annual Report 249 would stay all the proceedings commenced by the PBZ and the ZaBa in relation to the transferred foreign currency savings until the issue is finally resolved. Despite the agreement in the Memorandum of Understanding (Memorandum) to stay all the proceedings commenced, in May 2015 the Court of Appeal, the County Court of Zagreb, ruled in one claim to reject the complaints raised by the LB and NLB. NLB then filed a constitutional appeal against the aforementioned final judgement. In this case the ruled claim was enforced in the enforcement proceeding from the account of NLB with the Croatian bank. In the other cases, with respect to the court procedures described above, are still pending, and final judgments have not yet been issued. Conversely, in another case, a claim filed by the PBZ became final in favour of NLB. In the last case on 29 March 2016, the court of second instance allowed the appeal and returned the case to the Court of first instance, which initially decided in favour of the ZaBa. The appeal court explained in its decree that the Court of first instance will have to assess what the position of the Memorandum is in the hierarchy of legal acts of the Republic of Croatia, and if it notices that the Memorandum in the specific case takes precedence, it will have to determine what was the intention of the parties in concluding the Memorandum. Provisions for these claims are not formed since NLB believes there are no legal grounds for them. b) Movements in provisions for guarantees and commitments Financial guarantees Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions/provisions released (note 4.11.) Utilised during year Exchange differences Balance as at 31 December Non‑financial guarantees Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions/provisions released (note 4.11.) Exchange differences Balance as at 31 December NLB Group NLB in EUR thousand 2016 47,737 (16) (4,521) (17,894) 21 25,327 2015 48,733 (3) (1,000) - 7 2016 44,583 - (3,565) (17,894) 7 2015 46,023 - (1,445) - 5 47,737 23,131 44,583 NLB Group NLB in EUR thousand 2016 31,034 (2) (8,295) 8 22,745 2015 32,876 (1) (1,865) 24 31,034 2016 29,863 - (8,093) 7 21,777 2015 31,568 - (1,727) 22 29,863 NLB Group 2016 Annual Report 250 Other credit commitments Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions/provisions released (note 4.11.) Exchange differences Balance as at 31 December c) Movements in employee benefit provisions Post‑employment benefits Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions (note 4.9.) Provisions released (note 4.9.) Interest expenses (note 4.1.) Utilised during year (payments) Actuarial gains and losses Balance as at 31 December Other employee benefits Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions (note 4.9.) Provisions released (note 4.9.) Interest expenses (note 4.1.) Utilised during year Balance as at 31 December NLB Group NLB in EUR thousand 2016 3,228 (1) 2,384 (2) 5,609 NLB Group 2016 14,205 (2) 594 (215) 274 (210) (1,516) 13,130 2015 11,190 (1) (7,982) 21 3,228 2015 12,275 (2) 543 (224) 576 (938) 1,975 14,205 2016 3,197 - 1,761 (1) 4,957 NLB 2016 11,786 - 473 - 171 (78) (1,466) 10,886 2015 11,212 - (8,047) 32 3,197 in EUR thousand 2015 10,925 - 334 (22) 431 (588) 706 11,786 NLB Group NLB in EUR thousand 2016 7,060 (2) 4,065 (514) 83 (4,064) 6,628 2015 6,720 (1) 4,379 (15) 175 (4,198) 7,060 2016 4,773 - 2,628 (258) 34 (2,679) 4,498 2015 4,816 - 2,509 (8) 119 (2,663) 4,773 Other employee benefits include NLB Group’s obligations for jubilee long-service benefits and unused annual leave. NLB Group 2016 Annual Report d) Movements in restructuring provisions Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions (note 4.11.) Provisions released (note 4.11.) Utilised during year Balance as at 31 December 251 NLB Group NLB in EUR thousand 2016 3,477 (3) 10,644 - (4,104) 10,014 2015 5,871 - 19 (15) (2,398) 3,477 2016 3,429 - 9,377 - (4,056) 8,750 2015 5,824 - - (15) (2,380) 3,429 NLB Group has adopted a new business strategy and initiated key strategic initiatives, aiming among others towards a leaner organisation, optimisation of processes, implementation of a new IT strategy with focus on digitalisation and simplification, and adjustment of the organisational structure. These initiatives will result in a decreased number of employees in the coming years, therefore the Group formed restructuring provisions in the amount of EUR 10,644 thousand (NLB EUR 9,377 thousand) , which are expected to be used for redundancy payments in the next two years. e) Movements in provisions for legal issues Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions (note 4.11.) Provisions released (note 4.11.) Utilised during year Exchange differences Balance as at 31 December f) Movements in other provisions Balance as at 1 January Additional provisions (note 4.11.) Provisions released (note 4.11.) Utilised during year Balance as at 31 December NLB Group NLB in EUR thousand 2016 13,465 (74) 5,291 (1,039) (2,462) 13 15,194 2015 6,774 (21) 8,176 (701) (765) 2 13,465 2016 5,075 - 401 (256) (1,949) 11 3,282 2015 1,666 - 3,409 - (2) 2 5,075 NLB Group NLB in EUR thousand 2016 2,433 - (107) (59) 2,267 2015 2,535 2,928 (256) (2,774) 2,433 2016 2,431 - (107) (59) 2,265 2015 2,531 2,928 (256) (2,772) 2,431 NLB Group 2016 Annual Report 252 5.18. Deferred income tax a) Analysis by type of deferred income taxes Deferred income tax assets Valuation of financial instruments and capital investments 75,917 59,683 75,895 59,534 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Impairment provisions Employee benefit provisions Depreciation and valuation of non-financial assets Tax losses Reduction of deferred tax assets Total deferred income tax assets Deferred income tax liabilities Valuation of financial instruments Depreciation and valuation of non-financial assets Impairment provisions Other 3,956 3,208 1,113 4,219 2,385 1,130 3,571 2,736 175 3,673 2,246 182 206,866 229,229 208,678 232,371 (267,051) (275,098) (268,718) (278,020) 24,009 21,548 22,337 19,986 12,233 1,278 3,471 19 11,249 1,056 129 27 11,463 252 - - 10,608 239 - - Total deferred income tax liabilities 17,001 12,461 11,715 10,847 Net deferred income tax assets Net deferred income tax liabilities Included in the income statement for the current year - valuation of financial instruments and capital investments - impairment provisions - employee benefit provisions - depreciation and valuation of non-financial assets - tax losses - adjustment of deferred tax assets - other Included in other comprehensive income for the current year - valuation of available-for-sale financial assets - cash flow hedges - actuarial assumptions and experience 7,735 (727) NLB Group 2016 (217) 16,915 (3,601) 1,016 (239) 17,071 (31,387) 8 (1,858) (1,207) (460) (191) 9,400 (313) 2015 1,387 6,742 (28,299) (261) (181) 5,167 18,242 (23) 2,067 1,413 (86) 740 10,622 - NLB 2016 3,083 16,915 (102) 681 (20) 15,741 (30,132) - (1,600) (949) (460) (191) 9,139 - 2015 292 6,741 (201) (212) (107) (8,925) 3,003 (7) 2,109 1,455 (86) 740 Slovenian law does not set limits or deadlines by which uncovered tax losses must be utilised. As at 31 December 2016, NLB recognised EUR 22,337 thousand deferred tax assets (31 December 2015: EUR 19,986 thousand). Unrecognised deferred tax assets amounts to EUR 268,718 thousand (31 December 2015: EUR 278,020 thousand) of which the majority relates to unrecognised deferred tax assets from tax losses in the amount of EUR 208,678 thousand (31 December 2015: EUR 232,371 thousand) and to unrecognised deferred tax assets from impairments of capital investments. NLB Group 2016 Annual Report 253 b) Movements in deferred income taxes Deferred income tax assets NLB Group Valuation of financial instruments and capital investments Depreciation and valuation of non-financial assets Employee benefit provisions Impairment provisions Tax losses Reduction of deferred tax assets Other Total in EUR thousand Balance as at 1 January 2015 1,906 53,865 1,364 32,452 224,062 (293,340) Effects of translation of foreign operations to presentation currency (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income - (261) 740 - - 1 - - 6,660 (842) (234) (28,234) 5,167 18,242 - - - - Balance as at 31 December 2015 2,385 59,683 1,130 4,219 229,229 (275,098) Effects of translation of foreign operations to presentation currency Write-offs (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Balance as at 31 December 2016 (2) - 1,016 (191) 3,208 (1) - 16,900 (665) (1) - (16) - (4) - - - (39,434) 39,434 (259) 17,071 (31,387) - - - 75,917 1,113 3,956 206,866 (267,051) 35 - (35) - - - - - - - 20,344 1 1,305 (102) 21,548 (8) - 3,325 (856) 24,009 Valuation of financial instruments and capital investments Depreciation and valuation of non-financial assets Employee benefit provisions Impairment provisions Tax losses Reduction of deferred tax assets Other Total in EUR thousand NLB Balance as at 1 January 2015 (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income 1,718 53,819 (212) 740 6,657 (942) Balance as at 31 December 2015 2,246 59,534 Write-offs (Charged)/credited to profit or loss (Charged)/credited to other comprehensive income - 681 (191) - 16,900 (539) 295 (113) - 182 - (7) - 3,874 241,296 (281,023) (201) (8,925) 3,003 - - - 3,673 232,371 (278,020) - (39,434) 39,434 (102) 15,741 (30,132) - - - Balance as at 31 December 2016 2,736 75,895 175 3,571 208,678 (268,718) 7 (7) - - - - - - 19,986 202 (202) 19,986 - 3,081 (730) 22,337 NLB Group 2016 Annual Report254 Deferred income tax liabilities NLB Group Balance as at 1 January 2015 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2015 Effects of translation of foreign operations to presentation currency Charged/(credited) to profit and loss Charged/(credited)to other comprehensive income Balance as at 31 December 2016 NLB Balance as at 1 January 2015 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2015 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2016 Impairment provisions Valuation of financial instruments and capital investments Depreciation and valuation of non-financial assets 64 65 - 129 - 3,342 - 3,471 13,500 (82) (2,169) 11,249 (3) (15) 1,002 12,233 1,109 (53) - 1,056 (1) 223 - 1,278 Other 39 (12) - 27 - (8) - 19 Valuation of financial instruments and capital investments Depreciation and valuation of non-financial assets 13,003 (84) (2,311) 10,608 (15) 870 11,463 245 (6) - 239 13 - 252 in EUR thousand Total 14,712 (82) (2,169) 12,461 (4) 3,542 1,002 17,001 in EUR thousand Total 13,248 (90) (2,311) 10,847 (2) 870 11,715 5.19. Income tax relating to components of other comprehensive income 2016 Actuarial gains and lossess Available-for-sale financial assets Cash flow hedge Share of associates and joint ventures Total 10,842 (2,601) NLB Group NLB in EUR thousand Before tax amount Tax expense Net of tax amount Before tax amount Tax expense Net of tax amount 1,515 3,899 2,703 2,725 (191) (1,207) (460) (743) 1,324 2,692 2,243 1,982 8,241 1,466 171 2,703 - (191) (949) (460) - 4,340 (1,600) 1,275 (778) 2,243 - 2,740 NLB Group 2016 Annual Report255 in EUR thousand 2015 Actuarial gains and lossess Available-for-sale financial assets Cash flow hedge Share of associates and joint ventures NLB Group NLB Before tax amount Tax expense Net of tax amount Before tax amount Tax expense Net of tax amount (1,975) (8,496) 509 (2,735) 740 1,413 (86) 456 (1,235) (7,083) 423 (2,279) (706) (8,562) 509 - 740 1,455 (86) - 34 (7,107) 423 - Total (12,697) 2,523 (10,174) (8,759) 2,109 (6,650) 5.20. Other liabilities Taxes payable Deferred income Payments received in advance Total 5.21. Share capital NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 3,699 2,964 2,040 8,703 4,982 7,579 1,978 14,539 3,049 661 476 4,186 3,817 1,693 166 5,676 The share capital of NLB amounts to EUR 200,000 thousand and did not change during 2016. It comprises of 20,000,000 no-par-value ordinary registered shares, with the corresponding value of EUR 10.0 for one share. All issued shares are fully paid and there are no un-issued authorised shares. As at 31 December 2016 and 31 December 2015, the Republic of Slovenia was the only shareholder of NLB. NLB Group does not own treasury shares. The book value of a NLB share on a consolidated level as at 31 December 2016 was EUR 74.8 (31 December 2015: EUR 71.1) and on solo level was EUR 63.2 (31 December 2015: EUR 62.1). It is calculated as the ratio of net assets’ book value without other equity instruments issued and the number of shares. Distributable profit as at 31 December 2016 amounts to EUR 145,313 thousand (31 December 2015: EUR 125,410 thousand) and consists of a net profit for 2016 in the amount of EUR 63,783 thousand and retained earnings from previous years in the amount of EUR 81,530 thousand. Its allocation will be subject to a decision by the Bank’s Annual General Meeting. In 2016 NLB paid dividends for previous year in the amount of EUR 2,194 per share (2015: 0 EUR) which decreased retained earnings for EUR 43,880 thousand. 5.22. Accumulated other comprehensive income and reserves a) Reserves The share premium account as at 31 December 2016 and 31 December 2015 comprises paid-up premiums in the amount of EUR 822,173 thousand and the revaluation of share capital from previous years in the amount of EUR 49,205 thousand. As at 31 December 2016 and 31 December 2015 profit reserves in the amount of EUR 13,522 thousand relate entirely to legal reserves in accordance with the Companies Act. NLB Group 2016 Annual Report 256 b) Accumulated other comprehensive income Available-for-sale financial assets - debt securities Available-for-sale financial assets - equity securities Actuarial defined benefit pension plans Foreign currency translation Hedge of a net investment in a foreign operation Cash flow hedging Total 5.23. Capital adequacy ratios Paid up capital instruments Share premium Retained earnings - from previous years Profit or loss eligible - from current year Accumulated other comprehensive income Other reserves Minority interest Prudential filters: Cash flow hedge reserve Prudential filters: Value adjustments due to the requirements for prudent valuation (-) Goodwill (-) Other intangible assets (-) Deferred tax assets that rely on future profitability and do not arise from temporary differences net of associated tax liabilities NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 41,954 11,017 (3,617) 36,982 11,342 (4,935) (20,139) (18,297) 754 - 29,969 754 (2,243) 23,603 28,574 8,644 (2,637) - - - 34,581 27,950 10,046 (3,912) - - (2,243) 31,841 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 200,000 871,378 246,656 49,890 (6,053) 13,522 - - (2,213) (3,529) 200,000 871,378 207,004 39,599 (4,090) 13,522 - 897 (3,134) (3,529) 200,000 871,378 81,530 - 5,205 13,522 - - 200,000 871,378 81,529 - 2,815 13,522 - 897 (1,734) (2,649) - - (30,397) (35,745) (23,345) (29,627) (3,013) (2,755) (4,626) (2,886) (-) Investments in CET1 instruments of financial sector - significant share - - - - Common Equity Tier 1 Capital (CET1) 1,336,241 1,283,147 1,141,930 1,134,979 Additional Tier 1 capital Tier 1 capital Tier 2 capital Total capital (own funds) RWA for credit risk RWA for market risks RWA for credit valuation adjustment risk RWA for operational risk Total risk exposure amount (RWA) Common Equity Tier 1 Ratio Tier 1 Ratio Total Capital Ratio - - - - 1,336,241 1,283,147 1,141,930 1,134,979 - - - - 1,336,241 1,283,147 1,141,930 1,134,979 6,864,737 6,849,633 4,292,262 4,353,619 104,175 463 892,753 137,351 9,313 930,688 27,975 463 68,988 9,313 561,091 596,127 7,862,128 7,926,985 4,881,791 5,028,047 17.0% 17.0% 17.0% 16.2% 16.2% 16.2% 23.4% 23.4% 23.4% 22.6% 22.6% 22.6% NLB Group 2016 Annual Report 257 European capital legislation, comprising the CRR regulation and CRD IV directive is based on the Basel III guidelines. Legislation defines three capital ratios reflecting a different quality of capital: • Common Equity Tier 1 ratio (ratio between common or CET1 capital and weighted risk exposure amount or RWA), which must be at least 4.5%; • Tier 1 capital ratio (Tier 1 capital to RWA), which must be at least 6%; and • Total capital ratio (total capital to RWA), which must be at least 8%. In addition to the aforementioned ratios, the Bank must meet other requirements and recommendations that are being imposed by the supervisory institutions or by the legislation: • Pillar 2 Requirement (SREP requirement): bank specific, obligatory requirement; • Capital buffers: system of buffers to be added on top of capital adequacy requirement – not obligatory, however breaching of the buffers triggers limitations in payment of dividends and other distributions from capital. Some of the buffers are prescribed by law for all banks and some of them are bank specific • Pillar 2 Guidance: bank specific, not obligatory, and not affecting dividends or other distributions from capital. The capital adequacy of the NLB Group and NLB remains at a level which covers all current and announced regulatory capital requirements, including capital buffers and other currently known requirements. In 2016, the capital of the Bank and the Group consists merely of the components of top quality CET1 capital (no subordinated instruments that would rank in lower capital categories) which is why all three capital ratios are the same. In the scope of regulatory risks, which include credit risk, operational risk, and market risk, NLB Group uses the standardised approach for credit and market risks, while the calculation of capital requirement for operational risks is made according to the basic indicator approach. The same approaches are used for calculating the capital requirements for NLB on a standalone basis, except for the calculation of the capital requirement for operational risks where the standardised approach is used. In preparation of the internal capital adequacy assessment, bank members of NLB Group and NLB identify risks not included in the calculation under the regulatory approach (Pilar 1) which have a significant impact on their operation. The scope of additional credit risks also includes the concentration risk – to individual clients and groups of related parties, at the level of activity – and collateral concentration risk. NLB Group calculates the capital requirement for non-financial risks (which include capital risk, profitability risk, strategic risk, divestment risk and reputation risk) if it assesses that an individual risk is crucial for NLB Group. In addition, the non-regulatory risks include the effects of stress scenarios for credit (deterioration of the credit-rating structure, decrease in real-estate market prices), currency, liquidity, interest rate risk in the banking book, credit spread risks, and market risks arising from securities. NLB Group 2016 Annual Report258 5.24. Off-balance sheet liabilities a) Contractual amounts of off-balance sheet financial instruments Short-term guarantees - financial - non-financial Long-term guarantees - financial - non-financial Commitments to extend credit Letters of credit Other Provisions (note 5.17.b) Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 162,535 109,412 53,123 586,895 222,869 364,026 190,705 124,080 66,625 599,865 233,706 366,159 1,075,940 1,101,241 17,485 8,329 19,402 7,289 87,957 49,611 38,346 447,125 140,031 307,094 881,198 3,761 118 97,543 50,844 46,699 489,163 162,973 326,190 923,755 3,567 117 1,851,184 1,918,502 1,420,159 1,514,145 (53,681) (81,999) (49,865) (77,643) 1,797,503 1,836,503 1,370,294 1,436,502 Fee income from all issued non-financial guarantees amounted to EUR 5,643 thousand (2015: EUR 5,665 thousand) in NLB Group, and to EUR 5,224 thousand (2015: EUR 5,192 thousand) at NLB. b) Analysis of derivative financial instruments by notional amounts Swaps - currency swaps - interest rate swaps - currency interest rate swaps Options - currency options - interest rate options - securities options Forward contracts - currency forward Futures - currency futures Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Short-term Long-term Short-term Long-term Short-term Long-term Short-term Long-term 57,188 810,972 90,258 1,023,123 57,188 810,972 90,258 1,026,002 57,188 - 90,258 3,312 57,188 - 90,258 3,312 - - 10,703 - - 808,898 2,074 1,495 - - 997,810 22,001 - - 15,085 4,763 10,703 808,898 2,074 1,495 - - 1,000,689 22,001 15,085 4,763 - 7,093 - 1,495 - 4,763 - - - 7,093 - 1,495 - 4,763 10,703 - 7,992 - 10,703 - 7,992 - 192,950 7,468 114,030 12,188 191,280 7,468 114,393 12,188 192,950 7,468 114,030 12,188 191,280 7,468 114,393 12,188 2,400 2,400 - - 2,500 2,500 - - 2,400 2,400 - - 2,500 2,500 - - 263,241 819,935 221,873 1,040,074 261,571 819,935 222,236 1,042,953 1,083,176 1,261,947 1,081,506 1,265,189 The notional amounts of derivative financial instruments that qualify for hedge accounting at NLB Group and NLB amount to EUR 108,554 thousand (31 December 2015: EUR 172,223 thousand). Derivatives that qualify for hedge accounting are used to hedge interest rate risk. The fair values of derivative financial instruments are disclosed in notes 5.2., 5.5., and 5.15. NLB Group 2016 Annual Report 259 c) Operating lease commitments The future minimum lease payments under non-cancellable operating leases are as follows: NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Real estate Not later than one year Later than one year and not later than five years Later than five years Other Not later than one year Later than one year and not later than five years Total d) Operating lease income Future minimum operating lease income: NLB Group Not later than one year Later than one year and not later than five years Later than five years Total 1,775 6,283 1,666 383 772 10,879 1,833 5,977 1,921 399 1,085 11,215 957 3,668 1,709 259 373 6,966 2016 3,775 6,004 197 9,976 980 3,802 1,842 251 454 7,329 in EUR thousand 2015 6,619 14,069 35,957 56,645 In 2016 the expected future operating lease income is lower due to the expected sale of investment properties. e) Capital commitments Capital commitments for purchase of: - property and equipment - intangible assets Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 179 1,363 1,542 1,193 2,408 3,601 92 1,260 1,352 1,099 2,285 3,384 5.25. Funds managed on behalf of third parties Funds managed on behalf of third parties are accounted separately from NLB Group’s funds. Income and expenses arising with respect to these funds are charged to the respective fund, and no liability falls on NLB Group in connection with these transactions. NLB Group charges fees for its services. NLB Group 2016 Annual Report 260 Funds managed on behalf of third parties Fiduciary activities Settlement and other services Total Fiduciary activities Assets NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 21,511,615 11,056,208 20,518,240 10,167,040 1,509,864 1,110,667 1,482,693 1,079,281 23,021,479 12,166,875 22,000,933 11,246,321 NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Clearing or transaction account claims for client assets 21,452,329 11,006,524 20,463,466 10,124,884 - from financial instruments 21,444,586 10,999,108 20,456,016 10,117,536 - receipt, processing, and execution of orders 9,292,661 1,261,293 8,786,845 808,071 - management of financial instruments portfolio 380,344 339,607 - - - custody services 11,771,581 9,398,208 11,669,171 9,309,465 - to Central Securities Clearing Corporation or bank settlement account for sold financial instrument - to other settlement systems and institutions for bought financial instrument (debtors) Clients' money - at settlement account for client assets - at bank transaction accounts Liabilities 820 6,923 59,286 33,940 25,346 191 7,225 49,684 20,715 28,969 527 6,923 54,774 29,428 25,346 123 7,225 42,156 13,187 28,969 Clearing or transaction liabilities for client assets 21,511,615 11,056,208 20,518,240 10,167,040 - to client from cash and financial instruments - receipt, processing, and execution of orders 21,500,968 11,041,371 20,508,917 10,152,750 9,297,620 1,263,851 8,791,804 810,629 - management of financial instruments portfolio 383,825 346,656 - - - custody services 11,819,523 9,430,864 11,717,113 9,342,121 - to Central Securities Clearing Corporation or bank settlement account for bought financial instrument - to other settlement systems and institutions for bought financial instrument (creditors) - to bank or settlement bank account for fees and costs, etc. 75 10,030 542 126 14,363 348 75 8,706 542 126 13,816 348 Fee income for funds managed on behalf of third parties Fiduciary activities (note 4.3.b) Settlement and other services Total NLB Group NLB 2016 8,323 796 9,119 2015 7,111 966 8,077 2016 6,716 633 7,349 in EUR thousand 2015 5,859 848 6,707 NLB Group 2016 Annual Report 6. Events after the reporting date There were no events after 31 December 2016 that could materially significant influence the presented financial statements. 7. Risk management a) Risk management strategies and processes The key goal of NLB Group’s Risk Management Department is to assess, monitor, and manage risks within the group. NLB Group proactively develops methodologies and models to evaluate, monitor, and define mitigation criteria for all relevant risk types. Sound and holistic understanding of risk management is embedded into the entire organisation, to proactively monitor and mitigate risks, and to ensure the prudent and economic use of its capital. Key risk guidelines of NLB Group are defined by its Risk Appetite and Risk Strategy, which are regularly revised and enhanced. The Strategy of NLB Group, the Risk Appetite and Risk Strategy guidelines and the key internal policies of NLB Group - which are approved by the Management Board and by the Supervisory Board - specify the strategic goals, risk appetite guidelines, approaches, and methodologies for monitoring, measuring, and managing all types of risk. The management of credit risk, which is the most important risk category in NLB Group, concentrates on taking moderate risks and ensuring an optimal return given the risks assumed, beside the continuity of a strong commitment to reduce the legacy of non-performing exposures towards average EU levels. As regards liquidity risk, the activities are geared towards constantly ensuring an appropriate level of liquidity, both short- and long-term. Concerning market and operational risks, NLB Group follows the orientation that such risks must not significantly impact its operations. The tolerance for other risk types is low, and focuses on minimising their possible impacts on NLB Group’s entire operations. NLB regularly monitors its target Risk Appetite profile, both for NLB Group and NLB, representing the key component of the risk mitigation process. Risk profile enables detailed monitoring and proactive management of exposure to credit, market, interest, liquidity, operational risk, while non-financial and other risks are managed within ICAAP process. The usage of risk profile limits and potential deviations from limits and target values are reported regularly to the respective committees and/ or the Management Board of the Bank, a comprehensive Risk Report is reviewed quarterly both by the Management Board, the Risk Committee of the Supervisory Board, and the Supervisory Board of the Bank. The banking subsidiaries within NLB Group have adapted a corresponding approach to monitor their target risk profiles. Additionally, the Group has set up early warning systems in different risk areas with the intention of strengthening existing internal controls and timely responses when necessary. For the purpose of an efficient risk mitigation process, NLB Group applies a single set of standards to retail and corporate loan collateral, representing a secondary source of repayment with the aim of efficient credit risk management and consuming capital economically. The Group has a system for monitoring and reporting collateral at fair (market) value in accordance with the International Valuation Standards (IVS). When hedging market risks NLB Group follows the principle of natural hedge or using derivatives in line with hedge accounting principles. NLB Group pays great attention and importance to the risk culture and awareness of all relevant risks within the entire organisation. Pursuant to the new EBA guidelines, the Group is 261 constantly upgrading the existing ICAAP process by enhancing its inclusion into the decision-making process at strategic and operating levels, and the formally established ILAAP process that refers to the comprehensive assessment of liquidity risk. The internal risk management policies of NLB Group members include aligned key risk management guidelines at the level of the Group, along with the requirements arising from the local regulations. The policies are approved by the members’ management and also discussed by their supervisory boards. They define in detail the approaches and methodologies for monitoring, measuring and managing all types of risks, with an emphasis on: • monitoring the credit portfolio and minimising losses arising from credit risk, which considering its business model is the principal risk of NLB Group; • ensuring a sufficient level of liquidity; • minimising negative income effects arising from market risks; and • minimising potential losses arising from operational risks. b) Risk management structure and organisation Risk management in NLB Group is in charge of assessing, monitoring and managing risks within NLB as the main entity in Slovenia, and the competence centre for six banking subsidiary banks. Furthermore, NLB Group is also responsible to several companies for ancillary services, and a number of non-core subsidiaries which are in a controlled wind-down. Risk monitoring in NLB Group is centralised within the specialised Business-line Risk, encompassing several organisational units of NLB. This business line is in charge of formulating and controlling the risk management policies, coordinating activities related to the harmonisation of risk management in NLB Group, monitoring NLB Group’s exposure to all types of business risk, NLB Group 2016 Annual Report262 and preparation of external and internal reports. Credit ratings of materially important clients and the issuing of credit risk opinions (credit advice as part of the co-decision principle) are centralised via the Credit Committee of NLB. All members of NLB Group which are included in the consolidated financial statements of NLB Group report their exposure to risks to the competent organisational units in NLB. These report all the relevant information to the Assets and Liabilities Committee (ALCO) of NLB Group, the Management Board, and the Risk Committee of the Supervisory Board, which adopt the required measures or decisions. The primary responsibility for managing the risks assumed by NLB Group members within the framework of their business strategy lies with their management teams, which are obliged to pursue the strategic goals and implement the planned business results as well as monitor and manage risks in accordance with the guidelines at the NLB Group level. For this purpose, the members must adopt appropriate risk management policies. The supervisory board of a member gives approval to objectives and policies, and within its competence monitors their implementation as well as assesses their effectiveness. The member’s management or the management board and its committees may in accordance with their authorisations delegate certain tasks, particularly operating responsibilities in risk management, to lower management levels. Risk monitoring in NLB Group members is centralised within an independent and/or separate organisational unit. The centralised monitoring of risks ensures the establishment of standardised and systemic approaches to risk management, and thus a comprehensive overview of events in the Group’s and each member’s statement of financial position. In compliance with the Risk Management Standards of NLB Group, this is organised in all members in such a manner that risk measurement and monitoring is separated from its management and/or business function, which is important due to the objectivity required when assessing business decisions. The organisational unit for managing risks is directly responsible to the Management Board or its committees (Credit Committee, ALCO and Operational Risk Committee), which report to the Supervisory Board (Risk Committee of the Supervisory Board or Board of Directors). The organisation and delimitation of competencies in the risk management area are designed to prevent conflicts of interest and ensure a transparent and documented decision-making process, subject to an appropriate upward and downward flow of information. c) Risk measurement and reporting systems NLB is as a systemic bank involved in the Single Supervisory Mechanism, whereby the supervision is under the jurisdiction of the Joint Supervisory Team of the European Central Bank and the Bank of Slovenia. ECB regulations are followed by all NLB Group members, while NLB Group subsidiaries operating outside Slovenia are also compliant with the rules set by the local regulators. The measurement systems and the risk management principles are crucial elements of the risk management policies which, for the purpose of consolidated control, are aligned with all regulatory requirements of the Bank of Slovenia and the European Central Bank, taking into account the provisions of the Directive (CRD), Decision (CRR), and EBA guidelines. Referring to capital adequacy, NLB Group applies the standardised approach to credit and market risk, and the basic approach to operational risks - with the exception of NLB which applies the standardised approach. NLB Group performs a uniform assessment and management of risks across the entire Group, taking into account the specifics of the markets in which individual Group members are operating in line with the Group’s Risk management standards. For the internal needs of measuring of exposure to credit, market, interest, operational, and non-financial risks in NLB Group, besides the prescribed regulations internal methodologies and approaches are used that enable more detailed monitoring and management of risks. Moreover common group guidelines for ICAAP and ILAAP process are established. All of them are aligned with the Basel and EBA guidelines as well as the best methodological approaches in banking practice. A more detailed description of the methodologies for monitoring individual types of risks is provided in the following sections related to each individual risk separately. In NLB Group, reporting complies with the internal guidelines which, in terms of the substance and frequency of reporting and, besides internal requirements, take into account the requirements of the Bank of Slovenia and the European Central Bank. At the individual level, members of NLB Group also comply with the requirements of the local regulations. Reporting is carried out in the form of standardised reports. This is enabled by risk management policies reasonably aligned with the methodologies for measuring and harmonising exposure to risks, appropriately established databases and the automation of report preparation at the NLB Group level, which also ensures their quality and reduces the possibility of errors. d) Main emphasis of risk management in 2016 NLB Group was further strengthening the robustness of its risk management system in all respective risk categories in order to manage them comprehensively and prudently. In 2016 NLB Group upgraded Risk Appetite Statement and Risk Strategy, NLB Group 2016 Annual Report263 representing NLB Group’s fundamental risk management documents. NLB Group further enhanced its risk management system by additional upgrading of comprehensive steering processes within the revised risk management framework. Furthermore, the ICAAP process was upgraded with the aim of supporting the business decision-making process, ILAAP was introduced and internal stress testing capabilities were enhanced. To support these activities internally, developed models were additionally upgraded, also in connection with relevant expected macroeconomic factors. The most important risk in NLB Group, in line with strategic orientations, remains the credit risk category. NLB Group gives great emphasis to constantly improving the credit portfolio quality, where the quality of new financing of corporate and retail clients, and a well-diversified portfolio structure represent the key goals. Such efforts have so far resulted in a sustainable cost of risk, and the modest formation of new non-performing exposures in the year 2016, partially also due to the positive macroeconomic conditions. The Group managed to further reduce the volume of non-performing exposures towards average EU banking levels with a wide range of tools, while at the same time actively participated in the restructuring of clients in the past has brought additional positive results. The emphasis is on the development of internal scoring models for different client segments in order to consistently detect risks and achieve better responsiveness in relations with clients. In a very low interest rate environment, with severe competition on the market, NLB Group is faced with excess liquidity. Consequently, a lot of attention is being put on the structure and concentration of liquidity reserves, while keeping in mind potential adverse negative market movements. The Group has sufficient liquidity reserves even in the event of possible realisation of liquidity stress scenarios. NLB Group maintains a conservative policy for market risks. The Group’s exposure towards interest rate risk has recently slightly increased as a result of an excess liquidity position and a low interest rate environment, but remains within the targeted low risk appetite profile. in accordance with NLB Group’s risk management standards in order to ensure meaningfully uniform procedures at the consolidated level. NLB Group manages credit risk at two levels: There is also a large emphasis on the management of operational risks, where NLB Group follows the guideline that such risk may not considerably influence its operations. Special attention has been paid to the development of a stress testing system, based on modelling data on loss events and a scenario analysis referring to high severity/low frequency events. Furthermore, key risk indicators were established as an early warning system for the broader field of operational risks, with the aim of improving existing internal controls and timely responding when necessary. Nevertheless, NLB Group places great importance on regularly monitoring novelties in the regulations, effective approaches in banking practice, and their implementation so as to further improve supervision over the assumption of risks and their management in practice. • At the level of the individual customer/ group of customers, where appropriate procedures are followed in various phases of the relationship with a customer prior to, during, and after the conclusion of an agreement. Prior to concluding an agreement, a customer’s performance, financial position, and past cooperation with NLB are assessed. It is also important to secure high-quality collateral that does not affect a customer’s credit rating. This is followed by various forms of monitoring a customer, in particular an assessment of its ability to generate sufficient cash flows for the regular settlement of its liabilities and contractual obligations. As regards this detection of risks, regular monitoring of clients within the Early Warning System (EWS) is important. For the purpose of objectively assessing a client’s operation comprehensively, internal scoring models for particular client segments have been developed. 7.1. Credit risk management • The quality of the credit portfolio, a) Introduction In its operations, NLB Group is exposed to credit risk or the risk of losses due to the failure of a debtor to settle its liabilities to NLB Group. For that reason, it proactively and comprehensively monitors and assesses the aforementioned risk. In that process, NLB Group follows the International Financial Reporting Standards, regulations issued by the Bank of Slovenia, and the EBA guidelines. This area is governed in greater detail by the internal methodologies and procedures set out in internal acts. Through regular reviews of the business practices and the credit portfolios of NLB entities, NLB ensures that the credit risk management of those entities functions including on-balance and off-balance sheet exposures, is actively monitored and analysed at the level of the overall portfolio of NLB Group and NLB. Comprehensive analyses are regularly performed in terms of client segmentation (depending on the client type and size), credit rating structure, arrears and/or volume of non-performing/past due and restructured receivables, coverage with impairments and provisions, collateral received, concentrations arising from a group of related clients and concentrations within an industry, currency exposure, and other indicators of risks in the credit portfolio. A lot of attention is put on regular monitoring NLB Group 2016 Annual Report264 of new deals and other changes or trends, with the emphasis on the early detection of increased risks and their optimisation in relation of profitability. NLB Group appropriately diversifies its portfolio to mitigate specific components of credit risk (i.e. the risk deriving from operations with a specific customer, sector, positions in financial instruments, or other specific events). Increasing emphasis is also placed on stress tests that forecast the effects of negative movements in the portfolio on the level of impairments and provisions, and on capital adequacy within the second pillar. Capital requirements for credit risk at NLB Group level within the first pillar are calculated according to the standardised approach, while within the second pillar stress testing and concentration risk assessment are carried out. NLB and other NLB Group members assess the level of credit risk losses on an individual basis for material claims, which are reviewed individually, and at the group level for the rest of the portfolio. The primary aim of an individual review is to determine whether objective evidence of impairment exists. Such evidence includes information regarding significant financial problems encountered by a customer, regarding actual breaches of contractual obligations such as arrears in the settlement of liabilities, whether financial assets will be restructured for economic or legal reasons, and the likelihood that a customer will enter into bankruptcy or a financial reorganisation. Expected future cash flows (from ordinary operations and the possible redemption of collateral) are assessed following an individual review. If their discounted value differs from the book value of the financial asset in question, impairment must be recognised. If objective evidence of impairment does not exist, losses are assessed at the group level. Collective impairments are made for the remainder of the portfolio, which is not assessed on an individual basis. To that end, the portfolio is broken down into groups of similar claims, and then further into sub-groups with respect to their credit rating. Here, impairments are created regarding the probability of default (PD) and regarding the average rate of default or loss given default (LGD) associated with non-performing claims. The probability of default is determined by transition matrices which illustrate the migration of customers between rating categories, using an unweighted moving average. The average rate of default or loss given default, which indicates how much we will lose on average when a claim becomes non-performing, is determined based on the amount of impairments created for non-performing loans as the non-weighted average of loss given a default. When creating collective provisions for commitments, on the basis of empirical data regarding the redemption of guarantees in the past, the probability of the redemption of guarantees is taken into account when creating collective provisions. Activities related to meeting the IFRS 9 requirements, which will enter into force at the beginning of 2018, including quantitative impact study and foreseen methodological adaptations, are underway (note 2.34.). b) Main emphasis in 2016 In the process of constantly enhancing credit risk management NLB Group focuses on taking moderate risks and simultaneously ensuring an optimal return considering the risks assumed. To ensure long-term profitable operations, NLB Group endeavours for a gradual improvement in the quality of the credit portfolio with a new, sound portfolio, and simultaneously focuses on a proactive resolving of non-performing exposures, including established structured approaches in restructuring and work-out areas. Constant improvement of credit portfolio quality represents the most important key aim, with a focus on the quality of new placements leading to a diversified portfolio of customers. NLB Group puts considerable emphasis on new corporate and retail financing. The lower indebtedness of companies and their successful restructuring had a positive influence on the approval of new loans. In the retail segment, positive trends were shown in the larger trust of clients in economic developments and the related consumption, the reduced unemployment rate and partial recovery of the real-estate market. In comparison with the previous period, a larger volume of new loans was approved to this segment of clients. Beside the structure of the credit portfolio (the share of the portfolio with an A or B rating) is constantly improving. Efforts resulted in sustainable cost of risk and modest formation of new non-performing exposures in the current year, also partially due to the positive macroeconomic conditions. The restructuring and work-out capacities and approaches built in the past are partly still occupied with the legacy of non-performing loans, although increasingly focused on actively resolving new cases with a faster and more active approach to restructuring and work-out. In addition to the organic reduction of non-performing exposures, NLB Group was able to sell off part of the receivables due to investors in two tranches (corporate and retail) resulted in a non-performing exposure reduction of EUR 233.3 million. As at 31 December 2016 the share of non-performing exposure by EBA methodology was 10.0%. Moreover the coverage ratio remains high at 64.6%, which is well above the EU average published by EBA (44.3%). NLB Group 2016 Annual Reportc) Internal rating system and authorisations 265 in EUR thousand 31.12.2016 31.12.2015 Gross loans and advances Loans and advances (%) Impairment provision Impairment provision (%) Gross loans and advances Loans and advances (%) Impairment provision Impairment provision (%) 4,872,072 1,852,289 410,975 1,201,333 58.4 22.2 4.9 14.4 23,763 60,619 64,451 0.5 3.3 4,816,101 1,564,895 15.7 650,739 54.8 17.8 7.4 22,773 54,140 106,585 754,917 62.8 1,751,317 19.9 1,079,579 8,336,669 100.0 903,750 10.8 8,783,052 100.0 1,263,077 0.5 3.5 16.4 61.6 14.4 31.12.2016 31.12.2015 in EUR thousand Gross loans and advances Loans and advances (%) Impairment provision Impairment provision (%) Gross loans and advances Loans and advances (%) Impairment provision Impairment provision (%) 3,581,311 1,087,449 454,477 718,476 61.3 18.6 7.8 12.3 11,653 24,464 45,873 0.3 2.2 3,540,605 934,586 10.1 737,199 422,758 58.8 1,048,450 56.5 14.9 11.8 16.8 11,727 20,643 64,653 597,892 5,841,713 100.0 504,748 8.6 6,260,840 100.0 694,915 0.3 2.2 8.8 57.0 11.1 NLB Group A B C D and E Total *Other financial assets are not included. NLB A B C D and E Total *Other financial assets are not included. NLB Group 2016 Annual Report266 The basis for the client credit rating classification in NLB Group is an internally developed methodology. It is based on internal statistical analyses, good banking practices, as well as regulations of the Bank of Slovenia (Decision of the Bank of Slovenia on the Assessment of Credit Risk Losses of Banks and Savings Banks) and requirements of the European Banking Authority (EBA). The rating methodology is used across the entire NLB Group. A uniform credit grade scale of 12 rating classes was implemented in 2015, while before other members of NLB Group were using a narrower credit grade scale. The rating methodology consists of 12 credit rating classes for classifying legal persons, whereby nine of the credit rating classes represent a going concern, i.e. performing clients, and three of them non-performing clients, i.e. ‘defaulters.’ Grade A (AAA-A) includes the best clients with a low degree of default probability, and which is characterised by high capital adequacy and a high coverage of financial liabilities with free cash flow. Grade B (BBB-B) includes clients with a low credit risk, one class lower than A-grade clients. The clients operate successfully, have a sufficient cash flow to settle their obligations, but some are more sensitive to changes in the industry or the economy. C (CCC-C) grade clients are exposed to a higher and above-average level of credit risk. The Bank reasonably restricts cooperation with such clients and decreases its exposure. For some of these clients, the specialised restructuring unit must participate in the process. The D-, DF- and E-grades represent defaulters or clients with a high probability of default. Besides clients in insolvency proceedings and with arrears of over 90 days, this category includes clients where the Bank, based on past operations and future projections, assesses a high probability of default (“unlikely to pay”). D- and E-grade clients are ordinarily handled by the specialised units for restructuring or workout and legal support or by the specialised working groups. Authorisations, procedures, and the detailed rating methodology, as well as the setting of a maximum borrowing limit and the impairment of claims, are formalised in NLB Group’s internal acts. A standard customer rating methodology, with the prescribed set and quality of input data and elements of a rating analysis, applies to all NLB Group entities. Here it should be noted that decisions regarding the limits and internal ratings of materially-significant customers of NLB Group are harmonised and performed in line with the responsibility of centralised credit analysis function and NLB Credit Committee. NLB regularly reviews the business practices and credit portfolios of NLB Group entities to make sure they are operating in accordance with the minimum risk management standards of NLB Group. This ensures appropriate standard processes for managing and reporting credit risks at the consolidated level. NLB Group 2016 Annual Report267 d) Maximum exposure to credit risk NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Cash, cash balances at central banks, and other demand deposits at banks 1,299,014 1,161,983 Debt securities classified as loans and receivables Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers 85,315 775,986 435,537 74,344 394,579 688,474 431,775 139,852 617,039 85,315 668,300 408,056 273,310 496,806 394,579 578,184 345,207 391,911 3,091,508 2,907,991 1,951,115 1,889,683 182,322 185,912 147,779 152,042 1,589,762 1,503,814 1,208,996 1,165,800 1,090,120 229,304 962,884 255,381 480,626 113,714 471,889 99,952 2,970,229 2,957,304 1,950,869 1,966,361 1,534,628 1,645,169 1,296,126 1,263,055 Loans to small- and medium-sized enterprises 1,435,601 1,312,135 654,743 Other financial assets Trading assets Financial assets designated at fair value through profit or loss 61,014 87,699 734 69,521 267,403 753 36,151 87,693 - 703,306 48,944 267,870 - Available-for-sale financial assets Held-to-maturity financial assets Derivatives - hedge accounting Total net financial assets Guarantees Financial guarantees Non-financial guarantees Loan commitments Other potential liabilities Total contingent liabilities Total maximum exposure to credit risk 1,998,533 1,661,729 1,526,787 1,177,947 611,449 217 565,535 1,083 611,449 217 565,535 1,083 11,491,579 11,247,229 8,216,301 8,124,110 749,430 332,281 417,149 790,570 357,786 432,784 1,075,940 1,101,241 25,814 26,691 535,082 189,642 345,440 881,198 3,879 586,706 213,817 372,889 923,755 3,684 1,851,184 1,918,502 1,420,159 1,514,145 13,342,763 13,165,731 9,636,460 9,638,255 Maximum exposure to credit risk is a presentation of NLB Group’s exposure to credit risk separately by individual types of financial assets and conditional obligations. Exposures stated in the above table are shown for the balance sheet items in their net book value as reported in the statement of financial position, and for off-balance sheet items in the amount of their nominal value. NLB Group has 92.9% (31 December 2015: 85.8%) of loans and advances that are neither past due nor impaired, 1.7% (31 December 2015: 5.4%) of loans and advances past due but not impaired, 5.4% (31 December 2015: 8.8%) of impaired loans. NLB has 94.5% (31 December 2015: 86.6%) of loans and advances that are neither past due nor impaired, 0.5% (31 December 2015: 0.6%) of loans and advances past due but not impaired, 5.0% (31 December 2015: 12.8%) of individually impaired loans. NLB Group 2016 Annual Report 268 e) Collateral from loans and advances 31.12.2016 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total 31.12.2015 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total NLB Group in EUR thousand Fully/over collateralised loans and advances Loans and advances not or not fully covered with collateral Net value of loans and advances Fair value of collateral Net value of loans and advances Fair value of collateral 85,315 251,551 6 19,431 85,315 317,715 14 71,350 - 524,435 435,531 54,913 1,908,266 3,568,947 1,183,242 - - 1,372,758 2,759,543 479,756 55,752 710,314 99,090 182,322 217,004 610,364 173,552 1,782,319 4,175,647 1,187,910 898,439 883,880 659 1,659,912 2,515,735 7,634 636,189 551,721 60,355 - 33 532 296 82,845 958 60,596 9,643 11,648 403,571 155,478 248,093 355 4,047,547 8,226,622 3,446,386 487,632 NLB Group in EUR thousand Fully/over collateralised loans and advances Loans and advances not or not fully covered with collateral Net value of loans and advances Fair value of collateral Net value of loans and advances Fair value of collateral 394,579 106,460 29 31,724 394,579 175,914 106 79,141 1,964,725 3,919,693 - - 1,283,725 2,827,096 623,828 57,172 970,322 122,275 - 582,014 431,746 108,128 943,266 185,912 220,089 339,056 198,209 1,874,743 5,130,963 1,082,561 1,081,843 2,455,629 792,900 2,675,334 2,965 38,713 563,326 519,235 66,556 - 7 610 7,145 150,360 - 95,683 16,820 37,857 683,433 304,934 378,499 417 4,375,225 9,739,109 3,214,271 841,972 NLB Group 2016 Annual Report269 NLB in EUR thousand Fully/over collateralised loans and advances Loans and advances not or not fully covered with collateral Net value of loans and advances Fair value of collateral Net value of loans and advances Fair value of collateral 85,315 223,474 - 85,315 230,986 - 18,826 68,974 1,491,043 2,463,534 - - 1,089,934 2,018,702 401,096 444,816 13 16 1,128,371 2,196,939 745,588 382,783 1,188,052 1,008,887 82 2,429 - 444,826 408,056 254,484 460,072 147,779 119,062 79,530 113,701 822,498 550,538 271,960 36,069 - - 77 - 41,862 - 41,214 648 - 320,580 139,999 180,581 285 2,947,111 5,048,177 2,426,005 362,804 NLB in EUR thousand Fully/over collateralised loans and advances Loans and advances not or not fully covered with collateral Net value of loans and advances Fair value of collateral Net value of loans and advances Fair value of collateral 394,579 70,046 - 394,579 76,041 - 28,274 74,746 1,411,275 2,342,930 - - 1,013,194 1,895,187 398,047 447,701 34 42 1,164,744 2,473,144 796,995 367,749 294 1,360,792 1,112,352 3,403 - 508,138 345,207 363,637 478,408 152,042 152,606 73,842 99,918 801,617 466,060 335,557 48,650 - - 153 6,791 67,162 - 63,388 3,774 - 498,112 225,583 272,529 412 3,069,212 5,364,843 2,545,657 572,630 31.12.2016 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total 31.12.2015 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total NLB Group 2016 Annual Report270 f) Credit protection policy NLB Group applies a single set of standards to retail and corporate loan collateral, as developed by the members through the collateral harmonisation project. The master document regulating loan collateral in NLB Group is the Loan Collateral Policy in NLB Group and NLB. The Policy has been adopted by the Management Board of NLB and by the supervisory bodies of respective members for other members of NLB Group. The Policy represents the basic orientations bank employees must take into account when signing, evaluating, monitoring, and reporting collateral, with the aim of reducing credit risk. NLB Group primarily accepts collateral complying with the Basel II requirements with the aim of improving credit risk management and consuming capital economically. In accordance with Basel II, collateral may consist of pledged deposits, government guarantees, bank guarantees, debt securities issued by central governments and central banks, bank debt securities, and real-estate mortgages (the real estate must be located in the European Economic Area for the effect on capital to be recognised). Loans made to companies and sole proprietors may be secured by other forms of collateral as well (for example, a lien on movable property, a pledge of an equity stake, collateral by pledged/assigned receivables, etc.) if it is assessed that the collateral could generate a cash flow if it were needed as a secondary source of payment. In the case of a lower probability that such an item of collateral would generate a cash flow, a conservative approach is followed, namely, such collateral can be taken, but for reporting purposes the value is zero. g) The processes for valuing collateral Pursuant to the law, NLB Group has set up a system for monitoring and reporting collateral at fair (market) value. The market value of real estate or movable property used as collateral is obtained from valuation reports of licensed appraisers or, for low contract amounts, from sales agreements not older than one year. The market value of financial instruments held by NLB Group is obtained from the organised market – the stock exchange – for listed financial instruments or determined in accordance with the internal methodology for unlisted financial instruments (such collateral is used exceptionally and on a small scale in loans granted to companies and sole proprietors). NLB has compiled a reference list of licensed appraisers. All appraisals must be made for the purpose of secured lending and in accordance with the International Valuation Standards (IVS). Appraisals related to retail loans are generally ordered only from appraisers with whom the Bank has a contract for real-estate valuations. For corporate loans, appraisals are usually submitted by clients. If a client submits an appraisal not made by an appraiser included on the Bank’s reference list, the expert department employing licensed appraisers (certified appraisers in construction with licences granted by the Ministry of Justice, and certified real-estate value appraisers with licences granted by the Slovenian Institute of Auditors) will verify the appraisal. The expert department is also responsible for reviewing valuations of real estate serving as collateral for large loans. Other NLB Group members obtain valuations from in-house appraisers and outsourced appraisers, all having the necessary licences. NLB Group has compiled a reference list of appraisers for valuations of real estate located outside Slovenia. Appraisals must be made in accordance with the IVS. For larger loans, real-estate evaluations must be reviewed by an internal licensed appraiser with knowledge of the local real-estate market. When assuring collateral, NLB Group follows the internal regulations which define the minimum security or pledge ratios. NLB Group strives to obtain collateral with a higher value than the underlying exposure (depending on the borrower’s rating, loan maturity etc.) with the aim of reducing negative consequences resulting from any major swings in market prices of the assets used as collateral. In the case of a reduced value of collateral and/or deteriorated debtor credit rating, additional collateral is sought as necessary and in accordance with the contractual provisions. If real estate, movable property, and financial instruments serve as collateral, the Bank’s lien should be entered as top ranking. Exceptionally, where the value of the mortgaged real estate is large enough, the lien can be entered with a different priority order. NLB Group monitors the value of collateral during the loan repayment period in accordance with the mandatory periods and internal instructions. For example, the value of collateral using mortgaged real estate is monitored annually by either preparing individual assessments or using the internal methodology for preparing an own value appraisal of real estate (which applies to Slovenia, Serbia, and Montenegro) based on public records and indexes of real-estate value published by the relevant government authorities (the Surveying and Mapping Authority in Slovenia). NLB Group 2016 Annual Report271 h) The main types of collateral taken by the Bank NLB Group accepts different forms of material and personal security as loan collateral. Material loan collateral gives the right in case of the debtor (borrower) defaulting on their contractual obligations to sell specific property to recover claims, keep specific non-cash property or cash, or reduces or offsets the amount of exposure against the counterparty’s debt to the Bank. NLB Group accepts the following material types of loan collateral: • asset-backed collateral: - collateral backed by business and residential real estate; - collateral backed by movable property; - cash receivable collateral; • collateral by a pledge of financial assets (bank deposits or cash-like instruments, debt securities of different issuers, investment fund units, equity securities, or convertible bonds); • pledge of an equity stake; • pledge or assignment of receivables as collateral; and • other material forms of loan collateral (life insurance policies pledged to the Bank, etc.). Personal loan collateral is a method for reducing credit risk whereby a third party undertakes to pay the debt in case of the primary debtor (borrower) defaulting. NLB Group accepts the following types of personal loan collateral: • joint and several guarantees by retail and corporate clients; • bank guarantees; • government guarantees (e.g. of the Republic of Slovenia); • guarantees by national and regional development agencies; and • insurance with an insurance company, etc. Loans are very often secured by a combination of collateral types. The general recommendations on loan collateral are specified in the internal instructions and include the elements specified below. The decision on the type of collateral and the coverage of loan by collateral depends on the analysis of data on the debtor (the debtor’s credit rating and creditworthiness) and loan maturity; the difference arises from whether the loan is granted to retail or a corporate client. Corporate clients (companies and sole proprietors) must submit bills of exchange with written authorities for the creditor to fill them in for every loan. NLB has also created, in the area of real-estate loan collateral, an ‘on-line’ connection with the Surveying and Mapping Authority in Slovenia which allows direct and immediate verification of the existence of property. NLB Group strives to ensure the best possible collateral for long-term loans, namely mortgages in most cases. Thus, the mortgaging of real estate is the most frequent form of loan collateral of corporate and retail clients. In corporate loans, it is followed by government and corporate guarantees. In retail loans, it is followed by insurance companies and guarantors. i) Evaluation risk of collateral Client/counterparty credit risk is the key decision parameter when approving exposures. Collateral is a secondary source of repayment, and therefore decisions on approvals of exposures should not primarily be based on the provided collateral. However, collateral is an important comfort element in the approval process and, depending on the credit rating of the client, a prerequisite. NLB Group has prescribed the minimum ratios between the value of collateral and the loan amount, depending on the type of collateral and the client rating. The ratios are based on experience, regulatory guidelines, and are prescribed in the Collateral Manual. NLB Group pays particular attention to closely monitoring the fair value of collateral, and to receiving regular and independent revaluations by applying the International Valuation Standards. Through a detailed examination of all collateral received, NLB has ensured that only collateral is taken into account from which payment can be realistically expected if it is liquidated. NLB Group has the largest concentration on collaterals arising from mortgages on real-estate, which is a comparatively reliable and quality type NLB Group 2016 Annual Report272 of collateral; however, among others due to the falling real-estate market prices in recent history, the Bank is closely monitoring the real-estate collateral values and, where required, is establishing higher amounts of impairments and provisions for non-performing loans secured by real estate, based on estimated discounts of the real-estate value (specified in the Collateral Manual) which are expected to be achieved in a sale (expected payment from collateral). Collateral consisting of securities entails market risk, specifically the risk of changes in the prices of securities on capital markets. To limit such risks and restrict the possibility of the value of instruments received as collateral falling below approved limits, the Rules determine minimum pledge ratios for securing loans on the basis of pledged securities and equity shares in NLB. Any deviation from the Rules is subject to the prior approval of the respective decision bodies of the Bank. The ratio between the loan amount and the securities’ value is determined with regard to the securities’ liquidity, maturity, correlation with changes in market indexes, i.e. by considering the key features reflecting the level of volatility of market prices, and the ability to sell the securities at the market price. For certain types of securities, the ratio is also determined by considering the issuer’s credit rating, which reflects the credit risk entailed in collateral-using securities. In the case of adverse changes in the capital markets, the loan-to-collateral ratio may fall below the prescribed limit; in such a case, the debtor will be asked to provide additional securities or another type of collateral. Collateral consisting of sureties of corporate clients, sureties of private individuals, and bank guarantees entail the credit risk of the provider of the collateral. NLB Group includes the amount of the guarantees received in the exposure limit of the guarantor, and guarantees are only taken into account as collateral if the guarantor has sufficient overall creditworthiness. The Collateral Manual regulates which forms of collateral are acceptable, and which preconditions a type of collateral needs to fulfil to be able to be considered. NLB Group 2016 Annual Report273 in EUR thousand D and E Total - - - - - - - - - 85,315 662,177 408,056 272,510 1,896,633 141,534 1,181,625 469,532 103,942 j) Net loans and advances neither past due nor impaired 31.12.2016 Debt securities Loans to government Loans to banks NLB Group A 85,315 B - C - D and E Total A - 85,315 85,315 NLB B - C - 566,017 186,441 15,020 20 767,498 541,763 117,206 3,208 Loans to financial organisations 38,473 4,562 30,300 337,639 97,798 81 - - 435,518 320,201 87,774 81 73,335 33,873 2,096 236,541 Loans to individuals Granted overdrafts 2,922,528 31,441 24,684 90 2,978,744 1,878,392 2,710 15,531 168,673 1,576 3,844 - 174,093 137,655 221 3,658 Loans for houses and flats 1,529,074 7,563 12,389 3 1,549,029 1,169,230 2,003 10,392 Consumer loans Other loans 1,028,158 18,250 196,624 4,052 5,539 2,912 11 1,051,958 468,478 76 203,664 103,029 128 358 926 555 Loans to other customers 853,188 1,433,753 241,794 33,353 2,562,089 689,070 850,513 148,625 30,146 1,718,354 Loans to large corporate customers 622,397 689,474 77,223 15,493 1,404,587 603,429 546,134 27,984 13,920 1,191,467 Loans to small- and medium-sized enterprises 230,792 744,279 164,571 17,860 1,157,502 85,641 304,379 120,641 16,226 526,887 Other financial assets Total 44,634 9,996 1,847 56 56,533 25,229 7,629 1,602 - 34,460 4,847,794 1,763,991 313,726 33,519 6,959,030 3,573,843 1,067,928 405,588 30,146 5,077,505 31.12.2015 Debt securities Loans to government Loans to banks NLB Group A 394,579 B - C - D and E Total A - 394,579 394,579 NLB B - C - 445,382 190,291 33,936 29 669,638 439,997 125,097 3,662 300,464 126,084 - - 426,548 202,097 141,694 - in EUR thousand D and E Total - - - 394,579 568,756 343,791 Loans to financial organisations 27,101 1,889 75,339 48 104,377 23,629 189 99,422 48 123,288 Loans to individuals Granted overdrafts 2,575,773 14,822 25,400 61 2,616,056 1,781,889 5,230 19,333 157,312 466 2,599 - 160,377 141,486 309 2,538 Loans for houses and flats 1,364,783 6,508 16,569 3 1,387,863 1,100,006 4,402 14,893 Consumer loans Other loans 864,481 7,163 5,246 58 876,948 450,740 189,197 685 986 - 190,868 89,657 192 327 1,552 350 - - - - - 1,806,452 144,333 1,119,301 452,484 90,334 Loans to other customers 854,318 1,066,181 294,123 26,904 2,241,526 663,035 638,834 258,197 21,041 1,581,107 Loans to large corporate customers 681,411 574,717 158,243 19,348 1,433,719 595,135 415,879 121,089 15,927 1,148,030 Loans to small- and medium-sized enterprises 172,907 491,464 135,880 7,556 807,807 67,900 222,955 137,108 5,114 433,077 Other financial assets Total 55,480 3,142 1,287 21 59,930 38,455 2,371 1,162 1 41,989 4,653,097 1,402,409 430,085 27,063 6,512,654 3,543,681 913,415 381,776 21,090 4,859,962 * The loans and advances disclosed in the above tables are not individually impaired since they are fully or over collateralised. NLB Group 2016 Annual Report274 k) Net loans and advances past due but not individually impaired 31.12.2016 Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total NLB Group NLB in EUR thousand Up to 30 days Up to 90 days Over 90 days Total Up to 30 days Up to 90 days Over 90 days Total 401 19 207 1,345 - - - - 2 1,746 19 209 - - - 56,097 10,782 1,216 68,095 21,758 3,856 10,040 22,567 19,634 40,889 5,361 35,528 2,136 1,141 2,212 4,850 2,579 8,203 474 7,729 46 26 174 549 467 5,600 323 5,277 170 5,023 12,426 27,966 22,680 54,692 6,158 48,534 2,352 2,204 4,889 6,028 8,637 2,378 124 2,254 54 - - - 4,229 1,057 1,115 1,484 573 106 - 106 2 99,749 20,376 6,988 127,113 24,190 4,337 - - - - - - - - 24 24 - 1 25 - - - 25,987 3,261 6,004 7,512 9,210 2,508 148 2,360 57 28,552 31.12.2015 Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans NLB Group NLB in EUR thousand Up to 30 days Up to 90 days Over 90 days Total Up to 30 days Up to 90 days Over 90 days Total 8,468 29 79 56 - 28 - - 34 8,524 29 141 1 - - - - - 203,459 14,770 1,957 220,186 28,005 1,867 20,055 66,899 64,930 51,575 840 2,905 1,725 9,300 69 591 413 884 20,964 70,395 67,068 61,759 2,591 7,689 9,452 8,273 1,508 - 1,508 88 743 389 133 602 177 - 177 1 - 275 33 - - - - - 1,888 24 1,864 18 1 275 33 29,872 3,334 8,078 9,585 8,875 3,573 24 3,549 107 365,236 28,781 15,838 409,855 29,602 2,045 2,214 33,861 Loans to other customers 149,789 13,698 13,464 176,951 Loans to large corporate customers 40,384 1,842 2,179 44,405 Loans to small- and medium-sized enterprises 109,405 11,856 11,285 132,546 3,412 229 383 4,024 Other financial assets Total * The loans and advances disclosed in the above tables are not individually impaired since they are fully or over collateralised. NLB Group 2016 Annual Reportl) Individually impaired loans and advances 31.12.2016 Loans to government Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total 31.12.2015 Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total NLB Group Gross value Impairment provision Net value Gross value 12,556 26,261 113,027 10,974 50,730 35,351 15,972 1,008,733 323,493 685,240 14,225 (5,814) (25,461) (68,358) (7,768) (22,423) (25,155) (13,012) (655,285) (199,610) (455,675) (12,096) 1,174,802 (767,014) 6,742 800 44,669 3,206 28,307 10,196 2,960 353,448 123,883 229,565 2,129 407,788 NLB Impairment provision (3,137) (25,429) (23,564) (4,941) (13,785) (3,902) (936) (370,629) (148,337) (222,292) (3,112) 9,260 26,229 52,059 7,925 35,152 7,484 1,498 600,636 252,848 347,788 4,746 692,930 (425,871) NLB Group Gross value Impairment provision Net value Gross value 16,836 5,439 72,282 (6,524) (241) (36,948) 184,308 (112,559) 15,182 85,150 62,339 21,637 1,475,971 438,867 1,037,104 31,711 (10,611) (39,594) (43,471) (18,883) (937,144) (271,822) (665,322) (26,144) 10,312 5,198 35,334 71,749 4,571 45,556 18,868 2,754 538,827 167,045 371,782 5,567 12,754 1,338 314,078 105,041 11,984 66,093 24,940 2,024 895,611 285,868 609,743 11,340 NLB Impairment provision (3,327) (197) (45,488) (51,682) (7,609) (27,672) (15,120) (1,281) (513,930) (170,867) (343,063) (4,492) 1,786,547 (1,119,560) 666,987 1,340,162 (619,116) 275 in EUR thousand Net value 6,123 800 28,495 2,984 21,367 3,582 562 230,007 104,511 125,496 1,634 267,059 in EUR thousand Net value 9,427 1,141 268,590 53,359 4,375 38,421 9,820 743 381,681 115,001 266,680 6,848 721,046 NLB Group 2016 Annual Report276 m) Net loans analysis 31.12.2016 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total 31.12.2015 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total NLB Group in EUR thousand Loans and advances neither past due nor impaired Loans and advances past due but not impaired Individually impaired loans and advances 85,315 767,498 435,518 73,335 2,978,744 174,093 1,549,029 1,051,958 203,664 2,562,089 1,404,587 1,157,502 56,533 6,959,032 - 1,746 19 209 68,095 5,023 12,426 27,966 22,680 54,692 6,158 48,534 2,352 127,113 - 6,742 - 800 44,669 3,206 28,307 10,196 2,960 353,448 123,883 229,565 2,129 407,788 Total 85,315 775,986 435,537 74,344 3,091,508 182,322 1,589,762 1,090,120 229,304 2,970,229 1,534,628 1,435,601 61,014 7,493,933 NLB Group in EUR thousand Loans and advances neither past due nor impaired Loans and advances past due but not impaired Individually impaired loans and advances 394,579 669,638 426,548 104,377 2,616,056 160,377 1,387,863 876,948 190,868 2,241,526 1,433,719 807,807 59,930 6,512,654 - 8,524 29 141 220,186 20,964 70,395 67,068 61,759 176,951 44,405 132,546 4,024 409,855 - 10,312 5,198 35,334 71,749 4,571 45,556 18,868 2,754 538,827 167,045 371,782 5,567 666,987 Total 394,579 688,474 431,775 139,852 2,907,991 185,912 1,503,814 962,884 255,381 2,957,304 1,645,169 1,312,135 69,521 7,589,496 NLB Group 2016 Annual ReportNLB Loans and advances neither past due nor impaired Loans and advances past due but not impaired Individually impaired loans and advances 85,315 662,177 408,056 272,510 1,896,633 141,534 1,181,625 469,532 103,942 1,718,354 1,191,467 526,887 34,460 5,077,505 - - - - 25,987 3,261 6,004 7,512 9,210 2,508 148 2,360 57 28,552 - 6,123 - 800 28,495 2,984 21,367 3,582 562 230,007 104,511 125,496 1,634 267,059 277 in EUR thousand Total 85,315 668,300 408,056 273,310 1,951,115 147,779 1,208,996 480,626 113,714 1,950,869 1,296,126 654,743 36,151 5,373,116 NLB in EUR thousand Loans and advances neither past due nor impaired Loans and advances past due but not impaired Individually impaired loans and advances 394,579 568,756 343,791 123,288 1,806,452 144,333 1,119,301 452,484 90,334 1,581,107 1,148,030 433,077 41,989 4,859,962 - 1 275 33 29,872 3,334 8,078 9,585 8,875 3,573 24 3,549 107 33,861 - 9,427 1,141 268,590 53,359 4,375 38,421 9,820 743 381,681 115,001 266,680 6,848 721,046 Total 394,579 578,184 345,207 391,911 1,889,683 152,042 1,165,800 471,889 99,952 1,966,361 1,263,055 703,306 48,944 5,614,869 31.12.2016 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total 31.12.2015 Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total NLB Group 2016 Annual Report278 n) Repossessed assets NLB Group and NLB received the following assets by taking possession of collateral held as security and held them at the reporting date: Nature of assets Securities (note 5.4.b) Investment property (note 5.10.) Property and equipment (note 5.9.) Investments in subsidiaries and associates Other assets (note 5.13.) Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Net value Net value 24,162 48,658 1,523 - 79,059 153,402 21,277 57,599 1,839 - 75,652 156,367 20,832 3,750 7 2,484 4,263 18,977 3,750 7 3,248 3,371 31,336 29,353 Other assets on NLB Group in the amount of EUR 76,416 thousand (31 December 2015: EUR 72,433 thousand) and on NLB in the amount of EUR 4,263 thousand (31 December 2015: EUR 3,371 thousand) consist of real estate, and the rest are other assets received as collateral. o) Analysis of loans and advances by industry sectors 31.12.2016 31.12.2015 in EUR thousand Gross loans Impairment provisions Net loans (%) Gross loans Impairment provisions Net loans 435,886 (349) 435,537 132,156 (27,863) 104,293 176,230 (19,754) 156,476 260,537 (109,189) 151,348 852,257 (168,205) 684,052 15,314 43,309 (696) (9,515) 14,618 33,794 364,764 (12,270) 352,494 5.81 1.39 2.09 2.02 9.13 0.20 0.45 4.70 432,017 (242) 431,775 202,661 (38,300) 164,361 134,658 (29,576) 105,082 319,901 (164,532) 155,369 911,548 (241,932) 669,616 18,036 (1,263) 67,071 (24,400) 16,773 42,671 424,955 (15,831) 409,124 (%) 5.69 2.17 1.38 2.05 8.82 0.22 0.56 5.39 3,190,724 (99,216) 3,091,508 41.25 3,050,810 (142,819) 2,907,991 38.32 31,913 99,715 (6,300) (6,642) 25,613 93,073 0.34 1.24 86,915 (14,202) 103,205 (16,617) 72,713 86,588 962,743 (156,285) 806,458 10.76 1,208,684 (246,164) 962,520 0.96 1.14 12.68 10.41 8.98 0.31 0.92 Transport and communications 869,779 (39,908) 829,871 11.07 829,706 (39,330) 790,376 Trade industry 873,406 (242,743) 630,663 27,936 (4,815) 76,467 (15,453) 23,121 61,014 8.42 0.31 0.81 964,366 (282,832) 681,534 28,519 (5,037) 96,599 (27,078) 23,482 69,521 8,413,136 (919,203) 7,493,933 100.00 8,879,651 (1,290,155) 7,589,496 100.00 NLB Group Industry sector Banks Finance Electricity, gas, and water Construction industry Heavy industry Education Agriculture, forestry, and fishing Public sector Individuals Mining Entrepreneurs Services Health care and social security Other financial assets Total NLB Group 2016 Annual Report 279 in EUR thousand 31.12.2016 31.12.2015 Gross loans Impairment provisions Net loans (%) Gross loans Impairment provisions Net loans 408,056 - 408,056 341,644 (45,910) 295,734 112,083 (6,279) 105,804 136,071 (71,294) 64,777 569,022 (88,472) 480,550 10,643 15,437 (54) (1,223) 10,589 14,214 248,993 (2,265) 246,728 7.59 5.50 1.97 1.21 8.94 0.20 0.26 4.59 345,404 (197) 345,207 461,704 (48,575) 413,129 86,984 (16,559) 163,190 (91,144) 70,425 72,046 652,104 (138,005) 514,099 13,342 (402) 27,611 (10,492) 12,940 17,119 301,481 (2,647) 298,834 (%) 6.15 7.36 1.25 1.28 9.16 0.23 0.30 5.32 1,990,184 (39,069) 1,951,115 36.31 1,957,859 (68,176) 1,889,683 33.65 25,332 46,148 (5,297) (2,587) 20,035 43,561 782,110 (91,419) 690,691 11,439 39,922 (1,223) (3,771) 10,216 36,151 0.37 0.81 12.85 14.15 4.37 0.19 0.67 30,910 (5,860) 64,181 (10,502) 25,050 53,679 988,569 (144,690) 843,879 756,836 (26,859) 729,977 393,574 (127,080) 266,494 17,091 54,067 (3,727) (5,123) 13,364 48,944 0.45 0.96 15.03 13.00 4.75 0.24 0.87 5,881,635 (508,519) 5,373,116 100.00 6,314,907 (700,038) 5,614,869 100.00 NLB Industry sector Banks Finance Electricity, gas, and water Construction industry Heavy industry Education Agriculture, forestry, and fishing Public sector Individuals Mining Entrepreneurs Services Health care and social security Other financial assets Total Transport and communications 777,964 (17,903) 760,061 Trade industry 366,587 (131,753) 234,834 p) Analysis of net loans and advances by geographical sectors Country Republic of Slovenia Other European Union members Other countries Total NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 4,633,952 4,752,525 4,663,239 4,869,768 468,887 439,839 2,391,094 2,397,132 393,858 316,019 357,823 387,278 7,493,933 7,589,496 5,373,116 5,614,869 NLB Group 2016 Annual Report280 q) Analysis of debt securities and derivative financial instruments by geographical sectors in EUR thousand 31.12.2016 NLB Group NLB Country Loans and advances Trading assets Financial assets designated at fair value through profit or loss Available- for-sale financial assets Held-to- maturity financial assets Derivative financial instruments Loans and advances Trading assets Available- for-sale financial assets Held-to- maturity financial assets Derivative financial instruments Republic of Slovenia 85,315 49,747 - 544,187 415,165 13,347 85,315 49,747 479,792 415,165 13,347 Other members of European Union - Italy - Ireland - France - Belgium - Netherlands - Austria - Germany - Finland - Sweden - Denmark - Luxembourg - Great Britain - Slovakia - Spain - Other United States of America Other countries - Macedonia - Serbia - Bosnia and Herzegovina - Montenegro - Kosovo - Other Total - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 19,010 - - - - - - - - - - - - - - - - - 19,010 734 1,031,073 196,284 5,399 - 42,203 35,935 160 64,610 67,722 - - - - 149,327 48,720 45,511 16,031 102,420 26,123 29,609 40,878 200,358 43,533 39,220 3,247 57,222 16,729 113,675 20,583 25,930 - - - 36,748 1,023 9,074 414,199 159,993 54,568 72,384 54,765 65,641 6,848 - - - - - - - - 471 103 - - - - - - - - - - - - - - - - - - - - - 10 98 240 1 146 - - - - 4,904 - - - - 413 - 6 - - 405 2 - - - - - - - - - - - - - - - - - - - - - - - - 19,010 1,031,073 196,284 5,399 - - - - - 42,203 35,935 - - 149,327 48,720 45,511 16,031 102,420 26,123 19,010 29,609 40,878 - - - - - - - - - - - - - - - - - 200,358 43,533 39,220 3,247 64,610 67,722 - - 57,222 16,729 113,675 20,583 25,930 - - - 36,748 1,023 9,074 6,848 - - - - - 6,848 - - - - - - - - - - 10 98 240 1 146 - - - - 4,904 - - - - 407 - - - - 405 2 85,315 68,757 734 1,998,533 611,449 19,159 85,315 68,757 1,526,787 611,449 19,153 NLB Group 2016 Annual Report281 in EUR thousand 31.12.2015 NLB Group NLB Country Loans and advances Trading assets Financial assets designated at fair value through profit or loss Available- for-sale financial assets Held-to- maturity financial assets Derivative financial instruments Loans and advances Trading assets Available- for-sale financial assets Held-to- maturity financial assets Derivative financial instruments Republic of Slovenia 394,579 82,096 - 470,881 383,540 10,172 394,579 82,096 423,884 383,540 10,639 154,273 753 740,851 181,995 20,835 Other members of European Union - Italy - Ireland - France - Belgium - Netherlands - Austria - Germany - Finland - Sweden - Denmark - Luxembourg - Great Britain - Slovakia - Spain - Other United States of America Other countries - Macedonia - Serbia - Bosnia and Herzegovina - Montenegro - Kosovo - Other Total - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 20,007 73,156 - - 25,001 - 33,008 3,101 - - - 993 - - - - - 993 - 23,333 6,933 5,064 5,161 78,656 21,958 58,054 3,527 1,083 73,039 36,494 14,357 52,914 37,592 161,928 52,519 38,928 3,273 163 37,036 6,450 - - - - 1 - 597 - - - - 99,102 - 4,797 15,801 2,059 14,745 - 5,755 1,022 15,879 434,118 175,366 81,491 59,712 49,786 67,763 - - - - - - - - - - - - - 117 3 - - - 114 - 486 104 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 154,273 738,184 181,995 20,835 - - - - - 23,333 6,933 5,064 5,161 78,656 21,958 - - 1 55,388 3,527 1,083 73,039 36,494 14,357 20,007 52,914 37,592 73,156 161,928 52,519 38,928 3,273 - - 37,036 - - 25,001 6,450 - 597 - - - - 33,008 99,102 - 4,797 3,101 15,801 2,059 - - - 993 - - - - - 993 14,745 - 5,754 1,022 15,879 - - - - - - - - - - - - - - - - - - - 117 - 1 - - 116 - 68,177 13,326 - 68,177 13,326 394,579 237,362 753 1,661,729 565,535 31,124 394,579 237,362 1,177,947 565,535 31,591 NLB Group 2016 Annual Report282 r) Internal rating of derivatives counterparties NLB Group and NLB A B C D and E Total 31.12.2016 31.12.2015 in % 76.66 22.17 0.11 1.06 100.00 in % 81.27 15.84 1.24 1.65 100.00 All derivatives in the banking book are entered into with counterparties with an external investment-grade rating. When derivatives are entered into on behalf of NLB Group’s customers, such customers usually do not have an external rating, but all such transactions are covered through back-to-back transactions involving third parties with an external investment-grade rating. s) Debt securities in NLB’s and NLB Group’s portfolio that represent subordinated liabilities for the issuer 31.12.2016 Internal rating Available-for-sale financial assets Loans and advances - loans and advances to banks - loans and advances to customers Total 31.12.2015 Internal rating Available-for-sale financial assets Loans and advances - loans and advances to banks - loans and advances to customers Total NLB Group B - - - - NLB Group B - - - - C - - - - C - 1,136 132 1,268 A 583 - - 583 A 601 - - 601 Total 583 A 583 NLB B - - - 10,961 3,989 - - 583 11,544 3,989 NLB B - A 601 10,946 3,982 - - 11,547 3,982 Total 601 1,136 132 1,869 in EUR thousand Total 583 14,950 5,898 21,431 in EUR thousand Total 601 16,064 6,435 23,100 C - - 5,898 5,898 C - 1,136 6,435 7,571 NLB Group 2016 Annual Reportt) Presentation of net financial instruments by measurement category NLB Group 31.12.2016 Trading assets Financial assets designated at fair value through profit or loss Available-for-sale financial assets Loans and receivables Financial leases Held-to-maturity financial assets Derivatives for hedge accounting Cash and obligatory reserves with central banks, and other demand deposits at banks - - - 1,299,014 Securities - Bonds - Shares - Commercial bills - Cash certificates - Treasury bills - Private equity fund - Reverse sell and repurchase agreements - Other investments Derivatives Loans and receivables - Loans to government - Loans to banks - Loans to financial organisations - Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans - Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets 68,757 19,735 - 19,010 - 30,012 - - - 18,942 - - - - - - - - - - - - - 6,694 2,072,153 734 1,619,228 85,340 85,315 - - - - - - - - - - - - - - - - 25 - - 7,197,167 150,412 765,154 10,832 435,537 74,312 - 32 3,027,652 63,856 182,322 1,589,762 1,090,120 165,448 2,894,512 1,530,194 - - - 63,856 75,692 4,409 1,364,318 71,283 61,014 - - 611,449 611,449 - - - - - - - - - - - - - - - - - - - - - - - - 2,011 - 3,949 - - - - - - - - - - - - - - 73,620 274,489 199 104,617 - - - - - - - - - - - - - - - - - 283 in EUR thousand Total 1,299,014 2,844,393 2,336,461 73,620 293,499 199 134,629 2,011 25 3,949 - - - - - - - - - - 217 19,159 - - - - - - - - - - - - - 7,347,579 775,986 435,537 74,344 3,091,508 182,322 1,589,762 1,090,120 229,304 2,970,204 1,534,603 1,435,601 61,014 Total financial assets 87,699 6,694 2,072,153 8,642,535 150,412 611,449 217 11,571,159 NLB Group 2016 Annual Report284 NLB Group in EUR thousand 31.12.2015 Trading assets Financial assets designated at fair value through profit or loss Available-for-sale financial assets Loans and receivables Financial leases Held-to-maturity financial assets Derivatives for hedge accounting Cash and obligatory reserves with central banks, and other demand deposits at banks - - - 1,161,983 237,372 7,595 1,737,191 394,604 43,555 753 1,350,942 394,579 Securities - Bonds - Shares - Commercial bills - Certificates of deposits - Treasury bills - Private equity fund - Reverse sell and repurchase agreements - Other investments Derivatives Loans and receivables - Loans to government - Loans to banks - Loans to financial organisations - Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans - Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets - - - - - - - - - - - - - - - - 25 - - 6,947,552 177,819 675,094 13,380 431,775 139,559 - 293 2,843,107 64,884 185,912 1,503,814 962,884 190,497 2,858,017 1,615,919 - - - 64,884 99,262 29,225 1,242,098 70,037 69,521 - - 565,535 545,561 - - - 19,974 - - - - - - - - - - - - - - - - - 10 151,171 - 42,636 - - - 30,041 - - - - - - - - - - - - - - - - - 4,913 - 1,929 - - - - - - - - - - - - - - 75,462 151,168 77,939 81,680 - - - - - - - - - - - - - - - - - Total 1,161,983 2,942,297 2,335,390 75,472 302,339 77,939 144,290 4,913 25 1,929 - - - - - - - - - - 1,083 31,124 - - - - - - - - - - - - - 7,125,371 688,474 431,775 139,852 2,907,991 185,912 1,503,814 962,884 255,381 2,957,279 1,645,144 1,312,135 69,521 Total financial assets 267,413 7,595 1,737,191 8,573,660 177,819 565,535 1,083 11,330,296 NLB Group 2016 Annual Report31.12.2016 Trading assets Financial assets designated at fair value through profit or loss Available-for-sale financial assets Loans and receivables Held-to-maturity financial assets Derivatives for hedge accounting NLB Cash and obligatory reserves with central banks, and other demand deposits at banks Securities - Bonds - Shares - Commercial bills - Treasury bills - Private equity fund - Reverse sell and repurchase agreements Derivatives Loans and receivables - Loans to government - Loans to banks - Loans to financial organisations - Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans - Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets Total financial assets - 68,757 19,735 - 19,010 30,012 - - 18,936 - - - - - - - - - - - - - - - 617,039 - 2,011 1,594,094 - - - - 2,011 - - - - - - - - - - - - - - - 1,262,363 67,307 209,331 55,093 - - - - - - - - - - - - - - - - 85,340 85,315 611,449 611,449 - - - - 25 - 5,251,625 668,300 408,056 273,285 1,951,115 147,779 1,208,996 480,626 113,714 1,950,869 1,296,126 654,743 36,151 - - - - - - - - - - - - - - - - - - 87,693 2,011 1,594,094 5,990,155 611,449 217 8,285,619 285 in EUR thousand Total 617,039 2,361,651 1,978,862 67,307 228,341 85,105 2,011 25 - - - - - - - - 217 19,153 - - - - - - - - - - - - - 5,251,625 668,300 408,056 273,285 1,951,115 147,779 1,208,996 480,626 113,714 1,950,869 1,296,126 654,743 36,151 NLB Group 2016 Annual Report286 NLB in EUR thousand 31.12.2015 Trading assets Financial assets designated at fair value through profit or loss Available-for-sale financial assets Loans and receivables Held-to-maturity financial assets Derivatives for hedge accounting Cash and obligatory reserves with central banks, and other demand deposits at banks - - - 496,806 - Securities - Bonds - Shares - Commercial bills - Treasury bills - Private equity fund - Reverse sell and repurchase agreements Derivatives Loans and receivables - Loans to government - Loans to banks - Loans to financial organisations - Loans to individuals Granted overdrafts Loans for houses and flats Consumer loans Other loans - Loans to other customers Loans to large corporate customers Loans to small- and medium-sized enterprises Other financial assets 237,372 43,555 10 151,171 42,636 - - 30,508 - - - - - - - - - - - - - 4,913 1,248,359 394,604 565,535 - - - - 4,913 - - - - - - - - - - - - - - - 999,781 394,579 545,561 70,412 151,168 26,998 - - - - - - - - - - - - - - - - - - - - 25 - 5,171,321 578,184 345,207 391,911 1,889,683 152,042 1,165,800 471,889 99,952 1,966,336 1,263,030 703,306 48,944 - - 19,974 - - - - - - - - - - - - - - - - Total 496,806 2,450,783 1,983,476 70,422 302,339 89,608 4,913 25 - - - - - - - - 1,083 31,591 - - - - - - - - - - - - - 5,171,321 578,184 345,207 391,911 1,889,683 152,042 1,165,800 471,889 99,952 1,966,336 1,263,030 703,306 48,944 Total financial assets 267,880 4,913 1,248,359 6,111,675 565,535 1,083 8,199,445 As at 31 December 2016 and 31 December 2015, all of NLB Group’s financial liabilities, except for derivatives designated as hedging instruments, trading liabilities and financial liabilities designated at fair value through profit or loss, were carried at amortised cost. 7.2. Market risk NLB defines market risk as the risk of potential financial losses due to changes in rates and/or market prices (exchange rates, credit spreads, and equity prices) or in parameters that affect prices (volatilities and correlations). Losses may impact profit or loss directly, for example in the case of trading book positions. However, for the banking book positions they are reflected in the revaluation reserve. The exposure to the market risk is to a certain degree integrated into the banking industry and offers an opportunity to create financial results and value. The Global Risk Department of NLB is independent from the trading activities and reports to the bank’s committee ALCO. They also monitor and manage exposure to market risks separately for the banking and the trading book. Exposures and limits are monitored daily and reported to the ALCO committee on a regular basis. The bank uses a wide selection of quantitative and qualitative tools for measuring, managing, and reporting market risks such as value-at-risk (VaR), sensitivity analysis, stress testing, back-testing, scenarios, other market risk mitigants (concentration of exposures, gap limits, stop-loss NLB Group 2016 Annual Report287 limits, etc.), net interest income sensitivity, economic value of equity, and economic capital. Stress testing provides an indication of the potential losses that could occur in severe market conditions. In the area of currency risk, NLB Group pursues the goal of low exposure. NLB monitors the open position of NLB Group on an ongoing basis. The orientation of NLB Group in interest rate risk management is to prevent negative effects on the net revenues arising from changed market interest rates. In line with this, the tolerance for this risk is low. The conclusion of transactions involving derivatives at NLB is limited to the servicing of the clients’ and hedging of the Group’s own open positions. In accordance with the provisions of the Strategy on trading in financial instruments in NLB Group, the trading activities in other NLB Group members are very restricted. Thus, NLB is the only Group member with a trading book in accordance with CRR requirements. Monitoring and managing NLB Group’s exposure to market risks is decentralised. However, uniform guidelines and exposure limits for each type of risk are set for individual NLB Group entities. The methodologies are in line with regulatory requirements on individual and consolidated levels, while reporting to the regulator on the consolidated level is carried out using the standardised approach. Pursuant to the relevant policies, NLB Group entities must monitor and manage exposure to market risks and report to NLB accordingly. The exposure of an individual NLB Group entity is regularly monitored and reported to the Assets and Liabilities Committee of NLB Group (NLB Group ALCO). 7.2.1. Currency risk (FX) Foreign currency risk (FX) is a risk of the potential losses from the open FX positions due to the changes of the foreign currency rates. The exposures of NLB to the movement of the FX rates have impact on the financial position and cash flows of the bank. The bank measures and manages the FX risk with a usage of combination of sensitivity analysis, VaR, scenarios and stress testing. In the trading book, similar to the other market risks, risk is managed on the basis of VaR limits which are approved by the Management Board and in accordance to the adopted Policy of managing market risk in the trading book of NLB. NLB monitors and manages FX risk in the banking book according to the Policy of managing FX risk in NLB. The policy is primarily composed to protect Common Equity Tier 1 against the negative effects of the volatility of the FX rates. Currency risk management in NLB Group is decentralised. Each member is responsible for its own currency risk policy, which also includes a limit system and is in line with local regulatory requirements as well as the parent Bank’s guidelines and standards. Policies are confirmed by local committees. NLB monitors and manages NLB Group currency risk exposure on a monthly basis for each member and on the consolidated level. The positions of all currencies in the statement of financial position of NLB, for which a daily limit is set, are monitored daily. Exposure to currency risks is managed by the Financial Markets Department on the basis of a report obtained from the Global Risk Department. The Financial Markets Department manages FX positions on the currency level so that they are always within the limits or close. Exposure to currency risks is discussed at daily liquidity meetings and monthly meetings of the Assets and Liabilities Committee of NLB Group. NLB Group 2016 Annual Report288 a) The amount of financial instruments denominated in euros and in foreign currency 31.12.2016 Financial assets Cash, cash balances at central banks, and other demand deposits at banks Trading assets Financial assets designated at fair value through profit or loss NLB Group in EUR thousand EUR USD CHF Other Total 855,746 63,403 38,516 341,349 1,299,014 87,693 6,694 - - - - 6 - 87,699 6,694 Available-for-sale financial assets 1,824,890 30,151 3,330 213,782 2,072,153 Derivatives - hedge accounting Loans and advances - debt securities - loans and advances to banks - loans and advances to customers - other financial assets Held-to-maturity financial assets Fair value changes of the hedged items in portfolio hedge of interest rate risk 217 85,315 322,404 6,013,998 42,037 611,449 678 - - 79,204 55,829 91 - - - - - 90,670 28 - - - - 33,929 751,570 18,858 - - 217 85,315 435,537 6,912,067 61,014 611,449 678 Total financial assets 9,851,121 228,678 132,544 1,359,494 11,571,837 Financial liabilities Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 18,788 2,011 29,024 18,835 328,348 - - - 6,798 25,285 - due to customers 8,110,708 192,654 - borrowings from other customers - debt securities in issue - subordinated liabilities - other financial liabilities Total financial liabilities Net on-balance sheet financial position Derivative financial instruments Net financial position 31.12.2015 Total financial assets Total financial liabilities Net on-balance sheet financial position Derivative financial instruments 83,619 277,726 27,145 90,732 8,986,936 864,185 26,519 890,704 9,688,316 8,871,950 816,366 53,173 - - - 1,454 226,191 2,487 2,077 4,564 204,996 208,203 (3,207) 1,998 - - - 8,800 18,130 73,334 - - - 3 - - 7,901 6 18,791 2,011 29,024 42,334 371,769 1,060,451 9,437,147 - - - 83,619 277,726 27,145 110,295 1,873 16,236 102,137 1,084,597 10,399,861 30,407 274,897 1,171,976 (21,417) (13,954) (6,775) 8,990 260,943 1,165,201 151,560 103,304 48,256 (45,057) 1,286,165 11,331,037 1,042,770 10,226,227 243,395 (16,964) 1,104,810 (6,850) Net financial position 869,539 (1,209) 3,199 226,431 1,097,960 NLB Group 2016 Annual Report289 in EUR thousand NLB EUR USD CHF Other Total 531,072 36,647 11,289 38,031 617,039 31.12.2016 Financial assets Cash, cash balances at central banks, and other demand deposits at banks Trading assets Financial assets designated at fair value through profit or loss 87,693 2,011 - - Available-for-sale financial assets 1,563,577 28,148 Derivatives - hedge accounting Loans and advances - debt securities - loans and advances to banks - loans and advances to customers - other financial assets Held-to-maturity financial assets Fair value changes of the hedged items in portfolio hedge of interest rate risk 217 85,315 335,806 4,693,213 36,060 611,449 678 - - 52,274 51,882 65 - - - - - - - 377 88,281 1 - - - - 87,693 2,011 2,369 1,594,094 - - 19,599 10,218 25 - - 217 85,315 408,056 4,843,594 36,151 611,449 678 Total financial assets 7,947,091 169,016 99,948 70,242 8,286,297 Financial liabilities Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 18,787 2,011 29,024 30,443 295,052 - - - 22,030 25,285 - due to customers 6,415,472 120,909 - borrowings from other customers - debt securities in issue - other financial liabilities 4,274 277,726 67,301 - - 960 Total financial liabilities 7,140,090 169,184 Net on-balance sheet financial position Derivative financial instruments Net financial position 31.12.2015 Total financial assets Total financial liabilities Net on-balance sheet financial position Derivative financial instruments 807,001 26,519 833,520 7,839,819 7,057,066 782,753 53,260 (168) 2,077 1,909 157,334 158,946 (1,612) 1,998 - - - 12,112 18,130 47,802 - - 94 78,138 21,810 - - - 10,392 - 18,787 2,011 29,024 74,977 338,467 31,207 6,615,390 - - 429 4,274 277,726 68,784 42,028 7,429,440 28,214 856,857 (21,417) (13,954) (6,775) 393 14,260 850,082 123,931 82,194 41,737 (44,678) 79,102 48,934 30,168 (17,427) 8,200,186 7,347,140 853,046 (6,847) Net financial position 836,013 386 (2,941) 12,741 846,199 NLB Group 2016 Annual Report290 b) Sensitivity analysis for currency risk NLB Group and NLB Scenarios USD CHF CZK RSD MKD JPY AUD HUF HRK 31.12.2016 Appreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income Depreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income Total 31.12.2016 31.12.2015 +/-8% +/-4% +/-1% +/-2% +/-1% +/-13% +/-4% +/-1% +/-3% +/-0.4% +/-12.5% +/-10.5% +/-11% +/-5% +/-2% +/-15% +/-7% +/-1% NLB Group NLB in EUR thousand Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income 271 (205) (8) (3) 1 (16) 40 (229) 187 7 2 (1) 23 (11) 29 - 227 23 1,567 - 2,053 3,870 - (208) (22) (1,506) - (2,001) (3,737) 133 72 13 2 2 1 70 160 (61) (12) (2) (2) (1) (60) (138) 22 7 - - - - - 7 (6) - - - - - (6) 1 NLB Group 2016 Annual Report291 in EUR thousand NLB Group NLB Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income (11) (434) (7) (5) 1 (27) (483) 8 397 6 5 (1) 35 450 (33) - 384 38 2,391 782 718 4,313 - (351) (37) (2,235) (771) (709) (4,103) 210 45 (9) 9 1 1 65 112 (35) 8 (9) (1) (1) (52) (90) 22 10 - - - - - 10 (8) - - - - - (8) 2 31.12.2015 Appreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income Depreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income Total c) Value at Risk analysis The methodology for measuring currency risk at NLB Group level is based on the net open foreign exchange position principle and monitoring of the nominal limits (for the total open position by currency), related to the capital size of an NLB Group member. The internal CVaR method described above is used for the illustration below of exposure to currency risk which derives from the quarterly net open positions of NLB Group entities. CVaR was the result of exchange rate volatility, which affected the potential loss or the level of CVaR. NLB Group CVaR 2016 2015 in EUR thousand Average Maximum Minimum Average Maximum Minimum Currency risk (trading book and banking book) 1,291 1,495 1,034 6,019 21,564 3,480 NLB uses an internal ‘Conditional Value at Risk’ (CVaR) model to calculate currency risk arising from open positions. The calculation of the CVaR value is adjusted to Basel standards (99% confidence interval, monitored period of 300 business days, 10-day holding position period), and based on the historical simulation method. CVaR is calculated for currency risk for the whole open bank position (e.g. the position of the trading and banking book together) as NLB’s total open position is managed by the Treasury Department. NLB CVaR 2016 2015 in EUR thousand Average Maximum Minimum Average Maximum Minimum Currency risk (trading book and banking book) 157 414 52 307 4,353 7 NLB Group 2016 Annual Report292 7.2.2. Managing market risks in the trading book Market risk exposure in the trading book arises mostly as a result of the changes in interest rates, credit spreads, FX rates, and equity prices. The Management Board determines total risk appetite and limits by the risk type. The limits are monitored daily by the Global Risk Department. NLB uses an internal VaR model based on the variance-covariance method for other market risks. The daily calculation of the VAR value is adjusted to Basel standards (99% confidence interval, monitored period of 250 business days, 10-day holding position period). In 2016, FX risk in the trading book amounted to an average of EUR 104 thousand (2015: EUR 182 thousand). Compared to the previous year, the average VaR ratio is lower. An occasionally higher VaR mainly arises from SPOT deals with companies with the trading date t+0, and a closing deal with the trading date t+2. In 2016, interest rate risks in the trading book amounted to an average of EUR 232 thousand (2015: EUR 346 thousand), and is lower compared to the previous year. At the end of 2016, the market value of the debt securities portfolio amounted to EUR 68,757 thousand (2015: EUR 237,372 thousand). NLB Group and NLB VaR FX risk trading book Interest rate risk in trading book 2016 2015 in EUR thousand Average Minimum Maximum Average Minimum Maximum 104 232 5 63 771 538 182 346 18 151 893 717 The average, maximum, and minimum values in the upper table are calculated on the basis of daily VaR calculations, which are based on daily open positions and movements in market data during the past monitored period (250 working days). The “average” value represents the arithmetic mean of daily VaR values in 2016, while the “maximum” and “minimum” values represent the highest and lowest values of daily VaR calculations in 2016, respectively. NLB Group 2016 Annual Report293 7.2.3. Managing interest rate risk The management of interest rate risks in the NLB banking book is separated from the measurement and monitoring of those risks. In the past, NLB implemented an interest rate risk management policy that reflects a conservative strategy for assuming interest rate risks and is based on general Basel risk management standards and EBA guidelines. NLB manages interest rate risk in conjunction with credit, currency foreign exchange, and liquidity risks as there is a close correlation between those risks that can have a significant impact on the stability of the interest rate margin. NLB also stabilises its interest rate margin through an appropriate pricing policy, a fund transfer pricing policy, and the securities portfolio of the banking book. The management of interest rate risk arising from banking book transactions is facilitated by managing the interest rate maturity of all on- and off-balance sheet items in individual maturity buckets. It takes into account the positions in each currency, adjusted to credit risk. The maturity calculation model for interest-insensitive liability items and interest-sensitive items without maturity (e.g. available capital and stable sight deposits) was approved by the national regulator. An important part of managing interest rate risk is the securities portfolio of the banking book, which is subject to strict internal rules and policies. The primary purpose of the portfolio is to maintain adequate liquidity reserves, while it also contributes to the stability of the interest rate margin. Several analyses are performed in the management of interest rate risks (limited positions in individual maturity buckets, modified duration, BPV limits, and interest rate margin). The BPV (basis point value) method helps to estimate changes in the market value of a banking book position due to a parallel shift in the yield curve. The BPV is calculated for different segments of the banking book and for the banking book as a whole. NLB also prepares calculations of the impact of changes in interest rates on net interest income. The basic tool for managing interest rate risk in the banking book is the management of items from NLB’s statement of financial position. The strategies that foresee appropriate adjustments to items from the statement of financial position are discussed and adopted at the executive level of NLB, or within the scope of NLB’s Assets and Liabilities Committee. If the management of interest rate risk using items from the statement of financial position is not possible, NLB manages risk by using the following derivative financial instruments: • interest rate swaps, • overnight index swaps, • cross currency swaps, and • forward rate agreements. The management of NLB Group’s interest rate exposure is not performed at the consolidated level. However, NLB monitors the risk positions of individual members of NLB Group on a regular basis in accordance with the Standards for Risk Management in NLB Group. The aforementioned document comprises guidelines for uniform and effective interest rate risk management. NLB Group measures Interest Rate Risk in the Banking Book (IRRBB) from an economic view of, as well as earnings sensitivity. Exposure is monitored weekly on the NLB solo level and monthly on the Group level. Measurement and management is done on the basis of maturity gaps, BPV analyses, NII sensitivity stress tests, and limits. Guidelines regarding the limitation and management of interest risks within individual NLB Group members are approved by the ALCO. Beside the prescribed scenario of parallel 200 bp shock on market interest rates, NLB Group also performs other relevant stress scenarios. IRRBB measurement includes interest-sensitive performing assets and liabilities. Measurement and management of IRRBB include assumptions about non-maturing deposits in line with the valid regulation. The Bank regularly monitors effects of prepayment and early redemption risk on IRRBB exposure, and includes results in stress testing. Beside this hypothesis, banks in monitoring of IRRBB also include other relevant behavioural assumptions. NLB Group 2016 Annual Report294 a) Analysis of financial instruments according to the exposure to interest rate risk Illustrated below are the carrying amounts of financial instruments categorised by the earlier of contractual reprising or residual maturity. NLB Group in EUR thousand Non-interest bearing Total Interest bearing Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years 31.12.2016 Financial assets Cash, cash balances at central banks, and other demand deposits at banks 1,299,014 450,644 848,370 848,370 - - - Trading assets 87,699 6 87,693 19,220 49,085 9,168 10,220 Financial assets designated at fair value through profit or loss 6,694 5,960 734 - - - 734 Available-for-sale financial assets 2,072,153 73,620 1,998,533 110,145 267,093 494,924 759,436 366,935 Derivatives - hedge accounting 217 217 - Loans and advances - debt securities - loans and advances to banks 85,315 435,537 - 7 85,315 - - - - - 1,891 - - - 83,424 435,530 114,962 42,138 276,794 1,636 - - loans and advances to customers 6,912,067 54,612 6,857,455 1,816,432 1,387,083 2,524,693 840,204 289,043 - other financial assets 61,014 61,014 - - - - - - Held-to-maturity financial assets 611,449 - 611,449 37,691 63,047 16,866 264,360 229,485 Fair value changes of the hedged items in portfolio hedge of interest rate risk 678 678 - - - - - - Total financial assets 11,571,837 646,758 10,925,079 2,946,820 1,808,446 3,324,336 1,876,590 968,887 Financial liabilities Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting 29,024 29,024 Financial liabilities measured at amortised cost 18,791 - 18,791 18,791 2,011 2,011 - - - - - - - - - - - - - - - - deposits from banks and central banks 42,334 332 42,002 41,439 563 - borrowings from banks and central banks 371,769 - 371,769 6,779 134,777 203,215 26,381 - due to customers 9,437,147 61,672 9,375,475 7,035,752 572,913 1,342,213 417,065 - borrowings from other customers - debt securities in issue - subordinated liabilities 83,619 277,726 27,145 - - - 277,726 27,145 - other financial liabilities 110,295 110,295 - 83,619 1,298 8,769 26,878 40,966 - 200 - - 277,726 11,938 15,007 - - - - - Total financial liabilities 10,399,861 203,334 10,196,527 7,104,259 728,960 1,865,039 484,412 13,857 Total interest repricing gap (4,157,439) 1,079,486 1,459,297 1,392,178 955,030 - - - - - - - 617 7,532 5,708 - - - NLB Group 2016 Annual Report295 in EUR thousand NLB Group Non-interest bearing Total Interest bearing Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years 31.12.2015 Financial assets Cash, cash balances at central banks, and other demand deposits at banks 1,161,983 505,720 656,263 656,263 - - - 1 - - - Trading assets 267,413 10 267,403 40,184 32,940 194,278 Financial assets designated at fair value through profit or loss 7,595 4,913 2,682 1,929 - - 753 Available-for-sale financial assets 1,737,191 75,462 1,661,729 140,587 110,575 293,237 809,994 307,336 Derivatives - hedge accounting 1,083 1,083 - Loans and advances - debt securities - loans and advances to banks 394,579 431,775 - 25 394,579 - - - - - 311,466 - - - 83,113 431,750 61,550 46,699 322,784 717 - - loans and advances to customers 6,693,621 51,431 6,642,190 1,969,369 1,345,506 2,463,505 662,116 201,694 - other financial assets 69,521 69,521 - - - - - - Held-to-maturity financial assets 565,535 - 565,535 46,620 17,440 51,696 263,554 186,225 Fair value changes of the hedged items in portfolio hedge of interest rate risk 741 741 - - - - - - Total financial assets 11,331,037 708,906 10,622,131 2,916,502 1,553,160 3,636,966 1,737,135 778,368 Financial liabilities Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting 33,842 33,842 Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 57,982 571,029 60 - 29,920 - 29,920 29,920 4,912 4,912 - - - - 57,922 56,986 - - - - - - - - - - 722 214 - - - - 571,029 5,517 176,629 349,694 36,254 2,935 - due to customers 9,020,666 79,603 8,941,063 6,244,768 666,622 1,563,576 428,403 37,694 - borrowings from other customers - debt securities in issue - subordinated liabilities - other financial liabilities 100,267 304,962 27,340 - - - 304,962 27,340 75,307 75,307 - 100,267 1,323 3,019 21,284 46,637 28,004 - - - - 29,917 275,045 12,219 15,121 - - - - - - - Total financial liabilities 10,226,227 193,724 10,032,503 6,338,514 858,489 1,980,314 786,553 68,633 Total interest repricing gap (3,422,012) 694,671 1,656,652 950,582 709,735 NLB Group 2016 Annual Report296 31.12.2016 Financial assets Cash, cash balances at central banks, and other demand deposits at banks NLB in EUR thousand Non-interest bearing Total Interest bearing Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years 617,039 128,519 488,520 488,520 - - - Trading assets 87,693 - 87,693 19,220 49,085 9,168 10,220 Financial assets designated at fair value through profit or loss 2,011 2,011 - - - - - Available-for-sale financial assets 1,594,094 67,307 1,526,787 27,709 195,730 371,601 569,219 362,528 Derivatives - hedge accounting 217 217 - Loans and advances - debt securities - loans and advances to banks 85,315 408,056 - 7 85,315 - - - - - 1,891 - - - - 83,424 - 408,049 77,061 28,596 302,392 - loans and advances to customers 4,843,594 43,021 4,800,573 1,422,972 1,316,675 1,682,375 227,870 150,681 - other financial assets 36,151 36,151 - - - - - - Held-to-maturity financial assets 611,449 - 611,449 37,691 63,047 16,866 264,360 229,485 Fair value changes of the hedged items in portfolio hedge of interest rate risk 678 678 - - - - - - Total financial assets 8,286,297 277,911 8,008,386 2,073,173 1,653,133 2,384,293 1,071,669 826,118 Derivatives - hedge accounting 29,024 29,024 Financial liabilities Trading liabilities Financial liabilities designated at fair value through profit or loss Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - due to customers - borrowings from other customers - debt securities in issue - other financial liabilities 18,787 - 18,787 18,787 2,011 2,011 - - - - 74,977 74,977 - - - - - - - - - - - - 74,977 338,467 6,615,390 4,274 277,726 - - - - - 68,784 68,784 - 338,467 4,708 133,117 186,846 13,796 6,615,390 5,281,645 408,851 744,327 174,193 6,374 4,274 277,726 - - - - - - - 4,265 277,726 - - - 9 - - Total financial liabilities 7,429,440 99,819 7,329,621 5,380,117 541,968 1,208,899 192,254 6,383 Total interest repricing gap (3,306,944) 1,111,165 1,175,394 879,415 819,735 - - - - - - - - NLB Group 2016 Annual Report297 in EUR thousand Non-interest bearing Total Interest bearing Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years NLB 31.12.2015 Financial assets Cash, cash balances at central banks, and other demand deposits at banks Trading assets 267,880 10 267,870 40,651 32,940 194,278 Financial assets designated at fair value through profit or loss 4,913 4,913 - - - - 496,806 128,682 368,124 368,124 - - - 1 - - - - Available-for-sale financial assets 1,248,359 70,412 1,177,947 39,489 60,220 184,845 590,844 302,549 Derivatives - hedge accounting 1,083 1,083 - Loans and advances - debt securities - loans and advances to banks 394,579 345,207 - 10 394,579 - - - - - 311,466 - - - 83,113 345,197 20,507 23,904 300,626 160 - - loans and advances to customers 4,826,139 41,199 4,784,940 1,595,772 1,263,047 1,659,100 178,044 88,977 - other financial assets 48,944 48,944 - - - - - - Held-to-maturity financial assets 565,535 - 565,535 46,620 17,440 51,696 263,554 186,225 Fair value changes of the hedged items in portfolio hedge of interest rate risk 741 741 - - - - - - Total financial assets 8,200,186 295,994 7,904,192 2,111,163 1,397,551 2,702,011 1,032,603 660,864 Derivatives - hedge accounting 33,842 33,842 Financial liabilities Trading liabilities Financial liabilities designated at fair value through profit or loss Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - due to customers - borrowings from other customers - debt securities in issue - other financial liabilities 29,909 - 29,909 29,909 4,912 4,912 - - - - 96,736 96,731 - - - - - - - 5 - - - - - - - - 96,736 519,926 6,293,339 16,168 304,962 - - - - - 47,346 47,346 - 519,926 1,821 174,298 327,414 14,853 1,540 6,293,339 4,719,557 505,119 865,732 191,889 11,042 16,168 304,962 - - - - - - 10,009 6,149 29,917 275,045 - - 10 - - Total financial liabilities 7,347,140 86,100 7,261,040 4,848,018 679,417 1,233,077 487,936 12,592 Total interest repricing gap (2,736,855) 718,134 1,468,934 544,667 648,272 NLB Group 2016 Annual Report298 b) Net interest income sensitivity analysis and an economic view of interest rate risk in the banking book The analysis of interest income sensitivity assumes a move in interest rates by 50 basis points in the short term. The analysis is based on the assumption that the positions used remain unchanged, and that the yield curve shift is parallel. The assessment of the impact of a change in interest rates of 50 basis points on the amount of net interest income of the banking book position: 2016 Interest income sensitivity EUR USD CHF Other 2015 Interest income sensitivity EUR USD CHF Other NLB Group NLB in EUR thousand Average (assessment) Minimum (assessment) Maximum (assessment) Average (assessment) Minimum (assessment) Maximum (assessment) 12,009 11,154 13,121 12,025 11,155 12,699 417 161 1,238 319 78 1,058 507 247 1,390 311 166 45 182 83 31 407 248 50 NLB Group NLB in EUR thousand Average (assessment) Minimum (assessment) Maximum (assessment) Average (assessment) Minimum (assessment) Maximum (assessment) 11,788 10,481 12,763 11,408 10,247 12,316 120 282 1,112 9 95 1,000 296 608 1,310 107 171 47 13 68 36 212 277 61 The values in the table are calculated on the basis of monthly calculations of short-term interest rate gaps, where the applied parallel shift of the yield curve by 50 basis points represents a realistic and practical scenario. The “average” value represents the arithmetic mean of monthly calculations, while the “maximum” and “minimum” values represent the highest and lowest values calculated during the period. The BPV (Basis Point Value) method is a measure of sensitivity of financial instruments to market interest rates, i.e. changes of the required return. The BPV method is used to assess the change in the value of a position in case market interest rates change by +/- 200 basis points. In this method, a parallel shift of the yield curve is assumed. The basis point value is the measurement of the change in the market value of a position in the case of an assumed change in market interest rates by a certain number of basis points, which is expressed in monetary units. NLB weekly calculates the absolute value of potential negative economic effects that would result from a parallel shift in interest rates by 200 bp. NLB Group 2016 Annual Report299 The assessment of the impact of a change in interest rates of 200 basis points on the economic value of the banking book position: 2016 Average (assessment) Minimum (assessment) Maximum (assessment) Average (assessment) Minimum (assessment) Maximum (assessment) NLB Group NLB in EUR thousand Interest risk in banking book - BPV 162,224 145,727 198,017 120,515 105,469 Interest risk in banking book - BPV, as % of equity 12.59% 11.36% 14.82% 10.60% 9.29% 153,501 13.48% in EUR thousand 2015 Average (assessment) Minimum (assessment) Maximum (assessment) Average (assessment) Minimum (assessment) Maximum (assessment) Interest risk in banking book - BPV 134,423 127,415 146,900 103,878 Interest risk in banking book - BPV, as % of equity 10.80% 10.24% 11.79% 9.27% 89,619 7.90% 115,005 10.39% NLB Group NLB The values in the table have been calculated on the basis of weekly calculations of interest rate gaps for NLB and monthly on the Group level. The applied parallel shift of the yield curve is by 200 basis points. The “average” value represents the arithmetic mean of monthly calculations, while the “maximum” and “minimum” values represent the highest and lowest values calculated during the period. The calculation does not take the allocation of the stable part of sight deposits into account. Exposure to interest rate risk mainly arises from investments in high quality debt securities, which are held primarily for liquidity risk management purposes. Due to low/negative interest rate environment in 2016 the bank has also recorded an increase of fixed interest rate mortgage loans. Long-term interest positions of other members in NLB Group, from which present a majority of their exposure to interest-rate risk (economic point of view), mainly arise from a portfolio of mortgage loans with a fixed interest rate. 7.2.4. Risk of changes in prices in the portfolio of equity securities in the banking book NLB Group’s financial instruments trading strategy includes guidelines for the effective management of risks associated with equity investments. Trading with equity securities is not permitted in subsidiaries. Only stock broking services are provided. The majority of the equity securities portfolio in the banking book derives from NLB’s position, while smaller positions are also held by certain NLB Group entities. In terms of equity security investments, NLB has adopted policies for managing these investments that were approved by the Management and the Supervisory Board. The policies relate to the investment structure of the portfolio, its diversification, and the monitoring and measurement of risks. In addition to a standardised methodology, NLB also uses an internal model, which has been adapted in accordance with the requirements of the Basel standards for monitoring and measuring risks related to the equity portfolio. The carrying value of the equities portfolio in the banking book of NLB Group and NLB is represented in note 5.4. 7.3. Liquidity risk Liquidity risk is the risk that the bank is unable to meet all of its payment obligations, as well as the risk that the bank is unable to fund the growth of assets at reasonable prices, or at all. Risk tolerance for liquidity risk is low, therefore NLB Group maintains an adequate level of liquidity to provide sufficient funds for settling its liabilities at all times, even if a specific stress scenario is realised. The Bank measures and manages its liquidity in three stages: • Current exposure and compliance, • Forward-looking and stress testing, • Liquidity in exceptional circumstances. NLB Group 2016 Annual Report300 Overall assessment of the liquidity position of NLB Group is assessed in Internal Liquidity Adequacy Assessment Process (ILAAP) at least once per year for NLB Group, and it includes a clear formal statement on liquidity adequacy, supported by an analysis of ILAAP outcomes. NLB Group maintains a sufficient amount of liquidity reserves in the form of high credit quality debt securities that are eligible for refinancing via the ECB or on the interbank market. In the current situation, NLB Group also strives to follow as closely as possible the long-term trend of diversification on both the liability and asset sides of the balance sheet. NLB Group regularly performs stress tests with the aim of testing the liquidity stability and availability of liquidity reserves in various stress situations. In addition, special attention is given to the fulfilment of the liquidity regulation (CRR/CRD), with monitoring and reporting of the liquidity coverage ratio (LCR) according to the Delegated Act (DA) and net stable funding ratio (NSFR). This also includes monitoring and reporting of Additional Liquidity Monitoring Metrics (ALMM) on solo and consolidated levels. In accordance with the Commission Implementing Regulation (EU), NLB Group regularly monitors and issues quarterly reports on asset encumbrance (AE). Increase in the volume of encumbered assets boosts liquidity risk and the risk of financing, since the Bank has fewer available assets as a liquidity reserve for unexpected liquidity needs. NLB prepares a monthly static liquidity mismatch table by residual maturity and dynamic liquidity projections taking several cash-flow scenarios into account, to ensure monitoring over the liquidity position of each NLB Group member. NLB manages its liquidity position (liquidity within one day) daily, for a period of several days or weeks, based on the planning and monitoring of cash flows. Each NLB Group member is responsible for its own liquidity position and carries out the following activities: • managing intraday liquidity; • planning and monitoring cash flows; • monitoring and complying with the liquidity regulations of the central bank; • adopting business decisions; • managing liquidity reserves; and • performing intraday liquidity stress test to define liquidity buffer for smooth functioning of payment system in stressed circumstances. The Bank actively manages liquidity over the course of a day, taking into account the characteristics of payment settlements to ensure the timely settlement of liabilities in normal and stressed circumstances. NLB Group has defined a liquidity management plan for exceptional circumstances that lays down guidelines and a plan of activities for recognising problems, searching for solutions, and handling exceptional circumstances. It also provides for the establishment of a system of liquidity management that ensures the maintenance of NLB Group’s liquidity and protects the commercial interests of its customers and shareholders. Liquidity risk management in NLB Group is decentralised under strict monitoring by NLB as a parent bank. Standardised reporting to NLB by all group members is done on a monthly basis. Global Risk gives guidelines and defines minimal standards for group members regarding liquidity risk management in NLB Group Risk Management Standards. Each group member is responsible for ensuring adequate liquidity via the necessary sources of funding and their appropriate diversification and maturity, and by managing liquidity reserves and fulfilling the requirements of regulations governing liquidity. The exposure of an individual NLB Group entity is regularly monitored and reported to the Assets and Liabilities Committee of NLB Group (NLB Group ALCO). The objectives of monitoring and managing liquidity risk in NLB Group are as follows: ensuring a sufficient level of liquid assets; • minimising the costs of maintaining liquidity; • optimising the amount of liquidity reserves; • ensuring an appropriate level of liquidity for different situations and stress scenarios; and • anticipating emergencies or crisis conditions, and implementing contingency plans in the event of extraordinary circumstances. • preparing dynamic projections of liquidity taking several cash-flow scenarios into account; • preparing proposals for establishing additional financial assets as collateral for sources of funding NLB Group 2016 Annual Report301 a) Managing NLB Group’s liquidity reserves NLB Group has liquidity reserves available to cover liabilities that fall or may become due. Liquidity reserves must become available on short notice following the realisation of a stress scenario (immediately, i.e. within one week). Liquidity reserves comprise cash, the settlement account at the central bank, sight deposits and short-term deposits at banks, debt securities and loans eligible as collateral for Eurosystem claims, on the basis of which the Bank may generate the requisite liquidity at any time. Available liquidity reserves are liquidity reserves decreased by the reserve requirement, required balances for the continuous performance of payment transactions, encumbered securities, and credit claims for different purposes (secured funding). The structure of liquidity reserves is shown in the following table. Structural liquidity reserves NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Liquidity reserves Cash, cash balances at central banks, and other demand deposits at banks 1,299,014 1,161,983 Placements with banks Trading book securities Banking book securities ECB eligible loans Total liquid assets Encumbered liquid assets Unencumbered liquid assets 433,883 68,757 427,195 237,362 617,039 387,599 68,757 496,806 315,016 237,362 2,695,297 2,621,843 2,223,551 2,138,061 849,080 799,757 849,080 799,757 5,346,031 5,248,140 4,146,026 3,987,002 489,775 588,333 161,786 345,398 4,856,256 4,659,807 3,984,240 3,641,604 As at 31 December 2016, 75.8% (31 December 2015: 87.5%) of debt securities in the banking book of NLB Group were government securities and 24.2% (31 December 2015: 12.5%) were bonds from financial organisations. On 15 December 2016, the second of the two GGB securities issued by BAMC in 2013 matured in the amount of EUR 309 million. The purpose of banking book securities is to provide liquidity, along with stabilisation of the interest margin and interest rate risk management simultaneously. When managing the portfolio, NLB Group uses conservative principles, particularly with respect to the portfolio’s structure in terms of issuers’ ratings and asset class. The framework for managing the banking book securities are the Policy for managing debt securities in the Financial markets’ banking book and the Policy for the management of domestic (Slovenian) corporate debt securities by the Large Corporate Division, which clearly define the objectives and characteristics of the associated portfolio. The ECB-eligible credit claims comprise loans which fulfil the high eligibility criteria set by the ECB itself and for domestic loans are specified in the Resolution about general rules on Eurosystem monetary policy instruments and procedures (Chapter 4) adopted by the Bank of Slovenia. NLB is the only member of NLB Group that complies with the conditions set by the Eurosystem to classify as an eligible counterparty. This is why these ECB credit claims are included among liquidity reserves. NLB has encumbered liquid assets for different purposes; the biggest proportion represents ECB-eligible loans and debt securities encumbered for secured funding at the ECB. Members of NLB Group manage their liquidity reserves on a decentralised basis in compliance with the local liquidity regulation and valid policies of NLB Group. NLB Group 2016 Annual Report 302 b) Encumbered liquid assets 2016 NLB Group NLB in EUR thousand Carrying amount of encumbered assets Fair value of encumbered securities Carrying amount of unencumbered assets Fair value of unencumbered securities Carrying amount of encumbered assets Fair value of encumbered securities Carrying amount of unencumbered assets Fair value of unencumbered securities Loans on demand Equity instruments Debt securities - - - - 1,038,402 - 79,580 79,580 - - - - 488,520 - 69,318 69,318 94,340 102,049 2,670,448 2,712,588 94,340 102,049 2,197,968 2,243,792 Loans and advances other than loans on demand 44,557 Other assets Total - 138,897 - - 7,364,061 747,623 11,900,114 - - 37,987 - 132,327 - - 5,249,814 640,019 8,645,639 - - 2015 NLB Group NLB in EUR thousand Carrying amount of encumbered assets Fair value of encumbered securities Carrying amount of unencumbered assets Fair value of unencumbered securities Carrying amount of encumbered assets Fair value of encumbered securities Carrying amount of unencumbered assets Fair value of unencumbered securities Loans on demand Equity instruments Debt securities - - - - 933,827 - 82,314 82,314 - - - - 368,124 - 75,335 75,335 158,700 166,533 2,701,258 2,755,369 158,700 166,533 2,216,723 2,270,834 Loans and advances other than loans on demand 169,180 Other assets Total - 327,880 - - 7,025,737 750,599 11,493,735 - - 169,180 - 327,880 - - 5,051,110 667,613 8,378,905 - - NLB Group 2016 Annual Reportc) Collateral received - unencumbered The nominal amount of collateral received or own debt securities issued not available for encumbrance is shown in the table below: 303 NLB Group NLB in EUR thousand 2016 2015 2016 2015 174,680 168,393 161,636 150,419 - 106 - 46 50,627 Equity instruments Debt securities Loans and advances other than loans on demand 127,851 148,303 39,846 Other assets Total 7,380,987 8,016,021 3,755,558 4,222,727 7,683,518 8,332,823 3,957,040 4,423,819 Neither NLB Group nor NLB has collateral received or own debt securities issued available for encumbrance. d) Source of encumberance NLB Group NLB in EUR thousand 2016 2015 2016 2015 Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral Derivatives Deposits and loans 35,755 37,987 32,519 29,087 35,755 37,987 32,519 29,087 5,099,974 94,340 4,899,112 298,793 5,099,974 94,340 4,899,112 298,793 Other securities of encumbrance 6,570 6,570 - - - - - - Total 5,142,299 138,897 4,931,631 327,880 5,135,729 132,327 4,931,631 327,880 As at 31 December 2016, NLB Group and NLB had a large share of unencumbered assets. On the NLB Group level the amount of encumbered assets equalled EUR 138.9 million, relating to the deposit guarantee scheme and to secure funding received from international financial organisations. Due to a very good liquidity position NLB repaid total secured funding in January 2017, therefore encumbered assets decreased even more. The difference between encumbered liquidity reserves and encumbered assets is presented by a deposit placed as collateral for derivative instruments transactions in accordance with CSA contracts. This deposit does not constitute part of the liquidity reserves. Other sources of encumbrance also represent deposits placed as collateral for issued counter-guarantees. NLB Group 2016 Annual Report 304 e) Non-derivative cash flows The tables below illustrate the cash flows from non-derivative financial instruments by residual maturities at the end of the year. The amounts disclosed in the table are the undiscounted contractual cash flows determined on the basis of spot rates at the end of the reporting period. 31.12.2016 Financial liabilities and credit-related commitments NLB Group in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total Financial liabilities designated at fair value through profit or loss - - 1,457 Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 41,947 4,984 167 7,015 554 222 - 172,540 137,280 - due to customers 6,912,469 461,621 1,349,330 704,753 - borrowings from other customers 1,343 3,276 10,960 45,228 - - 56,492 59,223 30,170 2,011 42,336 378,311 9,487,396 90,977 - debt securities in issue - subordinated liabilities - other financial liabilities - - - 532 98,829 3,522 282,348 - - 282,348 2,193 7,668 23,569 12,013 38,307 276 - 110,295 Credit risk related commitments 511,700 185,749 402,635 242,572 Non-financial guarantees 17,217 38,617 103,531 191,815 91,378 65,970 1,434,034 417,150 Total 7,588,489 700,499 2,332,662 1,346,269 315,246 12,283,165 Total financial assets 2,422,252 744,482 2,308,621 4,488,567 2,782,468 12,746,390 31.12.2015 Financial liabilities and credit related commitments NLB Group in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total Financial liabilities designated at fair value through profit or loss - 1,390 1,460 2,062 Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 57,046 3,189 - 738 214 21,433 166,225 310,960 - due to customers 6,198,264 590,519 1,519,765 712,502 - borrowings from other customers 1,346 3,119 - debt securities in issue - subordinated liabilities - other financial liabilities - - - 597 60,622 5,620 21,493 35,409 1,524 4,291 47,840 282,986 17,772 4,774 - - 83,358 55,571 28,077 - 18,341 - 4,912 57,998 585,165 9,076,621 101,875 318,395 38,234 75,307 Credit risk related commitments 518,261 170,080 444,414 217,214 135,749 1,485,718 Non-financial guarantees 14,718 41,207 107,763 196,183 72,913 432,784 Total 6,853,446 833,965 2,303,082 1,792,507 394,009 12,177,009 Total financial assets 2,446,251 554,541 2,538,232 4,358,254 2,610,207 12,507,485 NLB Group 2016 Annual Report31.12.2016 Financial liabilities and credit-related commitments Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total NLB 305 in EUR thousand Financial liabilities designated at fair value through profit or loss - Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 74,977 3,173 - - 1,457 554 - - 5,211 161,423 118,333 - due to customers 5,205,105 314,863 780,567 270,662 - borrowings from other customers - debt securities in issue - other financial liabilities - - - - 282,348 - 4,265 65,854 2,930 - - - Credit risk-related commitments 437,335 165,656 274,160 166,079 Non-financial guarantees 14,225 32,702 83,194 171,579 - - 55,868 55,392 9 - - 31,489 43,740 2,011 74,977 344,008 6,626,589 4,274 282,348 68,784 1,074,719 345,440 Total 5,800,669 521,362 1,583,149 731,472 186,498 8,823,150 Total financial assets 1,250,372 534,380 1,614,007 3,317,296 2,248,475 8,964,530 31.12.2015 Financial liabilities and credit-related commitments NLB in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total Financial liabilities designated at fair value through profit or loss - 1,390 1,460 2,062 Financial liabilities measured at amortised cost - deposits from banks and central banks 96,732 - 5 - - borrowings from banks and central banks 173 19,361 151,090 279,229 - due to customers 4,640,241 412,545 912,190 298,736 - borrowings from other customers - debt securities in issue - other financial liabilities - - - - 42,098 5,248 10,019 35,409 - 6,149 282,986 - Credit risk-related commitments 472,311 126,881 317,253 155,197 Non-financial guarantees 12,771 32,335 86,952 181,766 - - 81,949 47,663 10 - - 69,614 59,065 4,912 96,737 531,802 6,311,375 16,178 318,395 47,346 1,141,256 372,889 Total 5,264,326 597,760 1,514,378 1,206,125 258,301 8,840,890 Total financial assets 1,291,636 349,793 1,872,826 3,350,224 2,048,505 8,912,984 When determining the gap between the financial liabilities and financial assets in the maturity bucket of up to one month, it is necessary to take account of the fact that financial liabilities include total demand deposits, and that NLB may apply a stability weight of 60% to demand deposits when ensuring compliance with the central bank’s regulations concerning calculation of the liquidity position. To ensure NLB Group’s and NLB’s liquidity, and based on its approach to risk, in previous years NLB Group compiled a substantial amount of high-quality liquid investments, mostly government securities and selected loans, which are accepted as adequate financial assets by the ECB. Liabilities and credit-related commitments are included in maturity buckets based on their residual contractual maturity. NLB Group 2016 Annual Report306 f) An analysis of the statement of financial position by residual maturity 31.12.2016 Cash, cash balances at central banks, and other demand deposits at banks Trading assets Financial assets designated at fair value through profit or loss NLB Group in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 1,299,014 - - - 19,226 3,949 49,085 9,168 10,220 - - 734 2,011 - - 1,299,014 87,699 6,694 Available-for-sale financial assets 200,080 243,215 454,698 735,882 438,278 2,072,153 Derivatives - hedge accounting Loans and advances - debt securities 217 - - - - 1,891 - - - 217 - 83,424 85,315 - loans and advances to banks 115,030 42,157 276,758 1,592 - 435,537 - loans and advances to customers 682,223 301,455 1,372,325 2,858,422 1,697,642 6,912,067 - other financial assets Held-to-maturity financial assets Fair value changes of hedged in portfolio hedge of interest rate risk Non-current assets classified as held for sale Property and equipment Investment property Intangible assets Investments in associates, and joint ventures Current income tax assets Deferred income tax assets Other assets Total assets Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - debt securities in issue - subordinated liabilities - other financial liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 58,801 4,471 164 - - - - - 490 - 40,419 281 63,056 - - - - - - 244 - 655 1,460 17,200 - 4,263 - - - 240 2,124 - 23,257 472 - 61,014 297,206 229,516 611,449 180 - 23,368 43,999 10,818 - 30 7,553 27,314 334 - 678 4,263 173,481 196,849 39,664 23,152 43,008 - 182 83,663 33,970 43,248 2,888 7,735 2,913 94,558 2,424,084 700,148 2,163,384 4,017,790 2,733,605 12,039,011 18,791 29,024 41,947 4,855 - - 165 6,920 - 1,457 - - - 554 - 222 171,008 133,715 - - - 166 98,829 3,522 912 1,522 - 6,975 827 284 - 152 277,726 177 7,668 35,886 1,340 - 1,093 - 16,938 276 62,474 - 614 483 - - - 55,271 57,677 27,850 18,791 2,011 29,024 42,334 371,769 9,437,147 83,619 - 277,726 9,864 - 815 - 113 - 27,145 110,295 100,914 3,146 727 8,703 7,113,830 471,748 1,838,219 937,964 151,590 10,513,351 476,421 114,272 273,914 173,064 64,082 1,101,753 17,217 38,617 103,531 191,815 65,969 417,149 - due to customers 6,909,677 456,725 1,331,996 681,072 - borrowings from other customers 1,298 2,987 9,868 41,616 Total liabilities and credit-related commitments 7,607,468 624,637 2,215,664 1,302,843 281,641 12,032,253 NLB Group 2016 Annual Report307 in EUR thousand NLB Group 31.12.2015 Cash, cash balances at central banks, and other demand deposits at banks Trading assets Financial assets designated at fair value through profit or loss Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 1,161,983 - - 39,191 1,929 32,940 194,278 - - - 994 753 - 10 4,913 1,161,983 267,413 7,595 Available-for-sale financial assets 209,965 105,128 293,249 750,640 378,209 1,737,191 Derivatives - hedge accounting Loans and advances - debt securities 1,083 - - - - 311,466 - - - loans and advances to banks 61,556 45,394 322,216 2,609 - 1,083 83,113 - 394,579 431,775 - loans and advances to customers 900,979 305,796 1,159,058 2,691,095 1,636,693 6,693,621 - other financial assets Held-to-maturity financial assets Fair value changes of hedged in portfolio hedge of interest rate risk Non-current assets classified as held for sale Property and equipment Investment property Intangible assets Investments in associates, and joint ventures Current income tax assets Deferred income tax assets Other assets Total assets Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - debt securities in issue - subordinated liabilities - other financial liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Credit risk-related commitments Non-financial guarantees 52,531 7,573 - - - - - - 423 - 705 822 15,463 - 69,521 17,440 57,916 296,381 186,225 565,535 187 - - - - - 475 - - 4,629 - - - - 31 4,876 46,815 - - 20,835 90,598 12,819 294 - 4,524 10,100 554 - 741 4,629 186,895 207,730 2,915 26,508 39,402 - - 93,513 39,327 39,696 929 9,400 2,990 95,354 32,988 2,461 2,470,201 510,526 2,395,356 3,897,105 2,548,427 11,821,615 29,920 - 33,842 57,045 3,050 - 1,390 - - - 1,460 - - 2,062 - 723 214 21,047 163,144 303,381 - - 60,622 616 - - 11,234 - 212 5,620 240 512 - 480 21,124 29,917 33 4,291 34,330 7,002 251 1,750 46,828 275,045 12,184 4,774 86,006 - 62 1,075 - - - - 80,407 53,909 27,992 - 14,911 - 29,920 4,912 33,842 57,982 571,029 9,020,666 100,267 304,962 27,340 75,307 1,447 122,639 - - - 7,514 313 14,539 6,392,164 616,789 1,761,587 1,422,026 178,666 10,371,232 518,261 14,718 170,080 41,207 444,414 107,763 217,214 196,183 135,749 1,485,718 72,913 432,784 - due to customers 6,194,532 584,268 1,497,562 690,395 - borrowings from other customers 1,303 3,020 Total liabilities and credit-related commitments 6,925,143 828,076 2,313,764 1,835,423 387,328 12,289,734 NLB Group 2016 Annual Report308 31.12.2016 Cash, cash balances at central banks, and other demand deposits at banks NLB in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 617,039 - - - Trading assets 19,220 49,085 9,168 10,220 Financial assets designated at fair value through profit or loss - - - - 2,011 Available-for-sale financial assets 27,709 195,730 371,601 569,219 429,835 1,594,094 Derivatives - hedge accounting Loans and advances - debt securities 217 - - - - 1,891 - - - loans and advances to banks 76,786 28,708 289,795 1,816 - 217 83,424 10,951 85,315 408,056 - loans and advances to customers 481,337 177,014 832,452 2,080,704 1,272,087 4,843,594 - - 617,039 87,693 2,011 - other financial assets Held-to-maturity financial assets Fair value changes of hedged in portfolio hedge of interest rate risk Non-current assets classified as held for sale Property and equipment Investment property Intangible assets Investments in subsidiaries, associates, and joint ventures Current income tax assets Deferred income tax assets Other assets Total assets Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - borrowings from other customers - debt securities in issue - other financial liabilities Provisions Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 35,400 4,471 164 - - - - - - - 3,423 29 492 230 - 36,151 63,056 17,200 297,206 229,516 611,449 - - - - - - - - - - 1,788 - - - 79 2,124 180 - 334 - 16,588 73,908 8,151 9,883 - 13,462 678 1,788 90,496 8,151 23,345 38,361 308,284 346,724 - 10,622 4,996 - 1,265,766 513,622 1,531,586 3,043,180 2,423,812 8,777,966 - - - - - - 2,124 10,622 8,419 - - - - 54,653 54,165 9 - - - - 18,787 2,011 29,024 74,977 338,467 6,615,390 4,274 277,726 68,784 79,546 4,186 18,787 - 29,024 74,977 3,167 - - - - - 1,457 - - - 554 - - 5,140 160,295 115,212 - - - - 277,726 - 4,265 65,854 2,930 - 166 3,626 475 7 25,730 53,175 70 483 5,400,219 321,707 1,241,951 440,468 108,827 7,513,172 437,335 165,656 274,160 166,079 31,489 1,074,719 14,225 32,702 83,194 171,579 43,740 345,440 - due to customers 5,204,618 313,155 776,673 266,779 Total liabilities and credit related commitments 5,851,779 520,065 1,599,305 778,126 184,056 8,933,331 NLB Group 2016 Annual Report309 in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total NLB 496,806 - - 31.12.2015 Cash, cash balances at central banks, and other demand deposits at banks Trading assets 39,658 32,940 194,278 Financial assets designated at fair value through profit or loss Available-for-sale financial assets Derivatives - hedge accounting Loans and advances - debt securities - 39,489 1,083 - - - - - - 311,466 - - - loans and advances to banks 19,645 21,290 283,551 9,790 - 994 - - 10 4,913 496,806 267,880 4,913 - 1,083 83,113 10,931 394,579 345,207 60,220 184,845 590,844 372,961 1,248,359 - loans and advances to customers 677,932 195,689 726,807 2,057,805 1,167,906 4,826,139 - other financial assets Held-to-maturity financial assets Fair value changes of hedged in portfolio hedge of interest rate risk Non-current assets classified as held for sale Property and equipment Investment property Intangible assets Investments in subsidiaries, associates, and joint ventures Deferred income tax assets Other assets Total assets Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from other customers - debt securities in issue - other financial liabilities Provisions Current income tax liabilities Other liabilities Total liabilities Credit risk-related commitments Non-financial guarantees 33,764 7,573 - - - - - - - 6,017 45 5 15,130 - 48,944 17,440 57,916 296,381 186,225 565,535 187 - - - - - - - - 1,776 - - - - 4,692 3,762 - - 15,151 8,613 11,681 34,420 4,447 - 554 - 79,419 - 17,946 741 1,776 94,570 8,613 29,627 318,675 353,095 - - 9,139 9,779 1,321,967 327,811 1,769,098 3,045,256 2,242,653 8,706,785 29,909 - 33,842 96,731 - 1,390 - - - 1,460 - 5 - 2,062 - - - - - - 42,098 5,248 - - 3,989 - - 78 10,009 29,917 - 6,149 275,045 - 27,494 77,643 6,681 570 - 1,039 - - - - 79,012 46,403 10 - - - - - 29,909 4,912 33,842 96,736 519,926 6,293,339 16,168 304,962 47,346 105,137 6,681 5,676 4,846,270 436,060 1,129,641 927,238 125,425 7,464,634 472,311 12,771 126,881 32,335 317,253 86,952 155,197 181,766 69,614 59,065 1,141,256 372,889 - borrowings from banks and central banks 166 19,194 148,818 272,736 - due to customers 4,639,535 410,150 904,687 292,564 Total liabilities and credit-related commitments 5,331,352 595,276 1,533,846 1,264,201 254,104 8,978,779 NLB Group 2016 Annual Report310 g) Derivative cash flows The table below illustrates cash flows from derivatives, broken down into the relevant maturity buckets based on residual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows prepared on the basis of spot rates on the reporting date. 31.12.2016 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow - Futures - Outflow - Inflow Interest rate derivatives - Interest rate swaps and cross-currency swaps - Outflow - Inflow Total outflow Total inflow NLB Group in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (118,175) (11,542) (70,553) 118,256 11,541 70,625 (52,543) 52,656 (2,386) 2,400 (3,205) 3,202 (1,329) 1,330 - - - - - - - - - - - - - - - - (200,270) 200,422 (57,077) 57,188 (2,386) 2,400 (809) 348 (1,411) 957 (9,409) 6,205 (29,866) (18,562) (60,057) 13,729 10,018 31,257 (173,913) (16,158) (81,291) (29,866) (18,562) (319,790) 173,660 15,700 78,160 13,729 10,018 291,267 NLB Group 2016 Annual Report311 in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total NLB Group (38,548) (42,424) (45,561) 38,572 42,477 45,610 (67,211) (25,255) 67,157 25,256 (1,156) 1,157 (1,833) 1,833 - - (5,515) 5,260 (2,518) 2,500 - - - - - - - - - - - - - - - - - - - - (126,533) 126,659 (93,622) 93,570 (7,348) 7,093 (2,518) 2,500 (1,469) (1,412) (32,516) (44,167) (35,015) (114,579) 474 923 27,624 27,686 24,198 80,905 (109,061) (77,124) (79,233) (44,167) (35,015) (344,600) 108,036 76,416 74,391 27,686 24,198 310,727 31.12.2015 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow - Options - Outflow - Inflow - Futures - Outflow - Inflow Interest rate derivatives - Interest rate swaps and cross-currency swaps - Outflow - Inflow Total outflow Total inflow NLB Group 2016 Annual Report312 31.12.2016 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow - Futures - Outflow - Inflow Interest rate derivatives - Interest rate swaps and cross-currency swaps - Outflow - Inflow Total outflow Total inflow NLB in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (116,500) (11,542) (70,553) 116,581 11,541 70,625 (52,543) 52,656 (2,386) 2,400 (3,205) 3,202 (1,329) 1,330 - - - - - - - - - - - - - - - - (198,595) 198,747 (57,077) 57,188 (2,386) 2,400 (809) 349 (1,411) 957 (9,409) 6,205 (29,866) (18,562) (60,057) 13,729 10,018 31,258 (172,238) (16,158) (81,291) (29,866) (18,562) (318,115) 171,986 15,700 78,160 13,729 10,018 289,593 NLB Group 2016 Annual Report313 in EUR thousand Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total NLB (37,951) (42,944) (45,558) 37,972 42,999 45,610 (67,211) (25,255) 67,157 25,256 (1,156) 1,156 (1,833) 1,833 - - (5,515) 5,260 (2,518) 2,500 - - - - - - - - - - - - - - - - - - - - (126,453) 126,581 (93,622) 93,569 (7,348) 7,093 (2,518) 2,500 (1,469) (1,412) (32,516) (44,178) (35,069) (114,644) 483 943 27,707 28,010 24,368 81,511 (108,464) (77,644) (79,230) (44,178) (35,069) (344,585) 107,445 76,958 74,473 28,010 24,368 311,254 31.12.2015 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow - Options - Outflow - Inflow - Futures - Outflow - Inflow Interest rate derivatives - Interest rate swaps and cross-currency swaps - Outflow - Inflow Total outflow Total inflow NLB Group 2016 Annual Report314 7.4. Information regarding the quality of debt securities The portfolio of debt securities in the banking book is intended to provide liquidity and manage NLB Group’s interest rate risk. When managing the portfolio, NLB Group uses conservative principles, particularly with respect to issuers’ ratings and the maturity of the portfolio. a) Geographical analysis of the debt securities portfolio in the banking book NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Carrying value in % Carrying value in % Carrying value in % Carrying value 70,487 198,047 243,891 128,543 61,542 2.6 7.3 9.0 4.8 2.3 90,506 100,718 214,447 109,533 61,581 3.5 3.9 8.2 4.2 2.4 70,487 198,047 243,891 128,543 61,542 3.2 8.9 90,506 100,615 11.0 214,447 5.8 2.8 109,533 58,914 1,044,751 38.8 1,248,999 47.6 980,357 44.1 1,202,003 159,995 54,566 5.9 2.0 172,807 81,110 6.6 3.1 - - - - - - in % 4.3 4.7 10.0 5.1 2.8 56.2 - - 733,475 27.2 542,142 20.6 540,684 24.3 362,043 16.9 2,695,297 100.0 2,621,843 100.0 2,223,551 100.0 2,138,061 100.0 Country Austria France Germany Netherlands Belgium Slovenia Macedonia Serbia Other Total *The analysis includes all debt securities in the banking book regardless of their measurement category (note 7.1.t). b) Structure of the banking book according to the Fitch credit rating agency NLB Group NLB in EUR thousand 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Carrying value in % Carrying value in % Carrying value in % Carrying value 271,157 349,839 1,455,401 10.1 13.0 54.0 349,987 249,074 232,667 138,366 5.1 1,278,201 480,534 17.8 511,914 13.3 271,157 9.5 8.9 48.7 19.5 349,839 1,455,401 132,254 14,900 12.2 15.7 65.5 5.9 0.7 349,987 245,718 232,667 1,271,873 37,816 in % 16.4 11.5 10.9 59.5 1.7 2,695,297 100.0 2,621,843 100.0 2,223,551 100.0 2,138,061 100.0 Rating AAA AA A BBB Other Total NLB Group 2016 Annual Report c) Structure of the trading book according to the Fitch credit rating agency NLB Group and NLB Rating A BBB Other Total 315 31.12.2016 31.12.2015 in % in % 72.3 - 27.7 100.0 36.7 36.3 27.0 100.0 7.5. Management of non-financial risks a) Operational risk When assuming operational risks, NLB Group follows the guideline that such risks may not materially impact its operations and, therefore, the risk appetite for operational risks is low to moderate. Currently, the complexity of NLB Group operations is on a moderate level, although it is constantly reducing through the divestment of non-core activities. The Group has set up a system of collecting loss events, identification, assessment, and management of operational risks, all with the aim of ensuring quality management of operational risks. All core members of NLB Group monitor the upper limit of tolerance to operational risk, defined as the limit amount of net loss that an individual member still allows in its operations. If the sum of net loss exceeds the tolerance limit, a special treatment of major loss events is required and, if necessary, taking of additional measures for the prevention of the same or similar loss events. The critical limit of loss events is also defined, representing the limit above which the member considers a possible increase in the capital requirement for operational risk within ICAAP and other possible risk management measures. The key risk indicators are regularly monitored (at least quarterly) within NLB Group’s Risk Profile. In addition, the Bank has developed special methodology for monitoring key risk indicators, which could indicate increasing of operational risk. Indicators are defined at the level of the Bank. As the highest authority in the area of operational risk management, NLB appointed an Operational Risk Committee. Relevant operational risk committees were also appointed at other NLB Group banks. The management board serves in this role at other subsidiaries. The main task of the aforementioned bodies is to discuss the most significant operational risks and loss events, and to monitor and support the effective management of operational risks within an individual entity. All NLB Group entities included in the consolidation have adopted relevant documents that are in line with NLB standards. In core members, these documents are in line with the development of operational risk management and regularly updated. The whole NLB Group uses uniform software support, which is also regularly upgraded. In NLB Group, the reported incurred net loss arising from loss events in 2016 was considerably lower than in the previous year, and represents a relatively small part of the capital requirement for operational risk. In general, considerable attention is paid to reporting loss events and defining operational risks in all segments. To treat major loss events appropriately and as soon as possible, the Bank has introduced an escalation scale for reporting loss events to the top levels of decision-making at NLB and the Supervisory Board of NLB. Additional attention is paid to the reporting of potential loss events in order to improve the internal controls, and thus minimise those and similar events. Through comprehensive identification of operational risks, possible future losses are identified, estimated, and appropriately managed. The major operational risks are actively managed with the measures taken to reduce them. An operational risk profile is prepared once a year on the basis of the operational risk identification. Special emphasis is put on the most topical risks, among which in particular are those with a low probability of occurrence and very high potential financial influence. For this purpose the Bank has developed the methodology of stress testing for operational risk. The methodology is a combination of modelling loss event data and scenario analysis for exceptional, but plausible events. Scenario analysis will be made based on experience and knowledge of experts from various critical areas. The capital requirement for operational risk is calculated using the basic indicator approach at NLB Group and using the standardised approach at the NLB level. NLB Group 2016 Annual Report316 b) Business Continuity Management (BCM) In NLB Group, business continuity management is carried out to protect lives, goods, and reputation. Business continuity plans are prepared to be used in the event of natural disasters, IT disasters, and undesired effects of the environment to mitigate their consequences. The concept of the action plan, prepared each year, is such that the activities contribute to the upgrading or improvement of the system of business continuity management. The basis for modernising the business continuity plans is the regular annual analysis of the impact on operations (BIA). On its basis, the adequacy of the plans for office buildings and IT plans is checked. The best indicator of the adequacy of the business continuity plans is testing. In 2016, 44 tests were carried out at NLB (37 internal ones and 7 with external business partners). No major deviations were discovered. In NLB Group, know-how and methodologies are transferred to the members (except small members). The members have adopted appropriate documents which are in line with the standards of NLB and revised in accordance with the development of business continuity management. The activity of the members is monitored throughout the year, and expert assistance is provided if necessary. For more efficient functioning of the business continuity management system in NLB Group, training courses and visits to individual banking members are also provided. In 2016, NLB thus carried out e-education for all NLB employees, a training course for members of the Crisis Management Team and the Crisis Teams of office buildings. Upon IT disasters/failures, the Bank successfully used the IT plans and instructions for manual procedures, and thus also ensured business operations in emergency situations. c) Management of other types of non-financial risks – capital risk, strategic risks, reputation risk and profitability risk Risks not included in the calculation of capital requirements by the regulatory approach but which are also important for NLB Group are adequately discussed in the context of the internal capital adequacy assessment process (ICAAP). NLB has established the relevant methodologies for identifying and assessing specific types of risk (capital, strategic, reputation and profitability risk); the methodologies are subject to regular review. The calculation of internal capital requirements for non-financial risks is made quarterly at NLB Group level. If a certain risk is assessed as a key risk, capital requirements are created. Individual capital requirements for non-financial risks are calculated by certain NLB Group banks in accordance with their national regulations. Significant and material changes in the calculation of capital requirements for individual NLB Group entities could discretionarily result in an increase in relevant capital requirements at NLB Group level. 7.6. Fair value hierarchy of financial and non-financial assets and liabilities Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. NLB Group uses various valuation techniques to determine fair value. IFRS 13 specifies a fair value hierarchy with respect to the inputs and assumptions used to measure financial and non-financial assets and liabilities at fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the assumptions of NLB Group. This hierarchy gives the highest priority to observable market data when available, and the lowest priority to unobservable market data. NLB Group considers relevant and observable market prices in its valuations, where possible. The fair value hierarchy comprises the following levels: • Level 1 – Quoted prices (unadjusted) on active markets. This level includes listed equities, debt instruments, derivatives, units of investment funds, and other unadjusted market prices of assets and liabilities. When an asset or liability may be exchanged in multiple active markets, the principal market for the asset or liability must be determined. In the absence of a principal market, the most advantageous market for the asset or liability must be determined. • Level 2 – A valuation technique where inputs are observable, either directly (i.e. prices) or indirectly (i.e. derived from prices). Level 2 includes prices quoted for similar assets or liabilities in active markets and prices quoted for identical or similar assets, and liabilities in markets that are not active. The sources of input parameters for financial instruments, such as yield curves, credit spreads, foreign exchange rates, and the volatility of interest rates and foreign exchange rates, are Reuters and Bloomberg. • Level 3 – A valuation technique where inputs are not based on observable market data. Unobservable inputs are used to the extent that relevant observable inputs are not available. Unobservable inputs must reflect the assumptions that market participants would use when pricing an asset or liability. This level includes non-tradable shares and bonds, and derivatives associated with these investments and other assets and liabilities for which fair value cannot be determined with observable market inputs. Wherever possible, fair value is determined as an observable market price in an active market for an identical asset or liability. An active market is a market in which transactions for an asset or liability are executed with sufficient frequency and volume to provide pricing information on an ongoing basis. Assets and liabilities measured at fair value in active markets are determined as the market price of a unit (e.g. share) at the measurement date, multiplied by the quantity of units owned by NLB Group. The fair value of assets and liabilities whose market is not active is determined using valuation techniques. These techniques bear a different intensity level of estimates and assumptions, depending on the NLB Group 2016 Annual Report317 availability of observable market inputs associated with the asset or liability that is the subject of the valuation. Unobservable inputs shall reflect the estimates and assumptions that other market participants would use when pricing the asset or liability. For non-financial assets measured at fair value and not classified at Level 1, fair value is determined based on valuation reports provided by certified valuators. Valuations are prepared in accordance with the International Valuation Standards (IVS). a) Financial and non-financial assets and liabilities measured at fair value in the financial statements 31.12.2016 Financial assets NLB Group NLB in EUR thousand Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value Financial instruments held for trading 49,747 37,547 Debt instruments Derivatives Derivatives - hedge accounting Financial assets designated at fair value through profit or loss Debt instruments Equity instruments 49,747 19,010 - - 6,694 734 5,960 18,537 217 - - - 405 - 405 - - - - 87,699 49,747 37,541 68,757 49,747 19,010 18,942 217 - - 18,531 217 6,694 2,011 734 5,960 - 2,011 - - - 405 - 405 - - - - 87,693 68,757 18,936 217 2,011 - 2,011 Financial assets available-for-sale 1,648,721 417,527 5,903 2,072,151 1,330,150 262,134 1,810 1,594,094 Debt instruments Equity instruments Financial liabilities Financial instruments held for trading Derivatives Derivatives - hedge accounting Financial liabilities designated at fair value through profit or loss Non-financial assets Investment properties Non-current assets classified as held for sale Non-financial assets impaired during the year Recoverable amount of property, plant, and equipment Recoverable amount of investments in subsidiaries, associates, and joint ventures 1,627,608 370,924 - 1,998,532 1,309,223 217,564 - 1,526,787 21,113 46,603 5,903 73,619 20,927 44,570 1,810 67,307 - - - - - - - - 18,791 18,791 29,024 2,011 83,662 4,263 4,762 - - - - - - - - - 18,791 18,791 29,024 2,011 83,662 4,263 4,762 - - - - - - - - - 18,787 18,787 29,024 2,011 8,151 1,788 967 - - - - - - - 18,787 18,787 29,024 2,011 8,151 1,788 967 16,663 20,198 36,861 NLB Group 2016 Annual Report318 31.12.2015 Financial assets NLB Group NLB in EUR thousand Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value Financial instruments held for trading 85,208 181,098 1,107 267,413 85,208 181,565 1,107 267,880 Debt instruments Equity instruments Derivatives Derivatives - hedge accounting Financial assets designated at fair value through profit or loss Debt instruments Equity instruments 85,198 151,171 993 237,362 85,198 151,171 993 237,362 10 - - 7,595 753 6,842 - 29,927 1,083 - - - - 114 - - - - 10 30,041 1,083 10 - - 7,595 4,913 753 6,842 - 4,913 - 30,394 1,083 - - - - 114 - - - - 10 30,508 1,083 4,913 - 4,913 Financial assets available-for-sale 1,344,175 383,056 9,960 1,737,191 1,037,876 203,609 6,874 1,248,359 Debt instruments Equity instruments Financial liabilities Financial instruments held for trading Derivatives Derivatives - hedge accounting Financial liabilities designated at fair value through profit or loss Non-financial assets Investment properties Non-current assets classified as held for sale Non-financial assets impaired during the year Recoverable amount of property, plant, and equipment Recoverable amount of investments in subsidiaries, associates, and joint ventures 1,324,978 336,751 - 1,661,729 1,018,857 159,090 - 1,177,947 19,197 46,305 9,960 75,462 19,019 44,519 6,874 70,412 - - - - - - - - 29,920 29,920 33,842 4,912 93,513 4,629 13,296 - - - - - - - - - 29,920 29,920 33,842 4,912 93,513 4,629 13,296 - - - - - - - - - 29,909 29,909 33,842 4,912 8,613 1,776 - - - - - - - - 29,909 29,909 33,842 4,912 8,613 1,776 - - 23,146 11,273 34,419 NLB Group 2016 Annual Report319 b) Significant transfers of financial instruments between levels of valuation NLB Group’s policy of transfers of financial instruments between levels of valuation is illustrated in the table below. Fair value hierarchy Equities Equity stake Funds Fixed income Equities Currency Interest 1 2 3 market value from exchange market regular valuation by fund management company market value from exchange market valuation model valuation model valuation model valuation model valuation model valuation model (underlying in level 1) valuation model (underlying in level 3) valuation model valuation model Derivatives Transfers from level 1 to level 3 from level 1 to level 3 from level 1 to level 2 from level 2 to level 3 equity excluded from exchange market fund management stops publishing regular valuation fixed income excluded from exchange market underlying excluded from exchange market from level 1 to level 3 from level 3 to level 1 from level 1 to level 2 from level 3 to level 2 companies in insolvency proceedings from level 3 to level 1 equity included to exchange market fund management starts publishing regular valuation fixed income not liquid (no trading for 6 months) underlying included into exchange market from level 1 to level 3 and from level 2 to level 3 companies in insolvency proceedings from level 2 to level 1 and from level 3 to level 1 start trading with fixed income on exchange market from level 3 to level 2 until valuation parameters are confirmed on ALCO (at least on quarterly basis) For 2016 and 2015, neither NLB Group nor NLB had any significant transfers of financial instruments between levels of valuation. c) Financial and non-financial assets and liabilities at Level 2 regarding the fair value hierarchy Financial instruments on Level 2 of the fair value hierarchy at NLB Group and NLB include: • debt securities: bonds not quoted on active markets and valuated by a valuation model; • equities; • derivatives: derivatives except forward derivatives and options on equity instruments that are not quoted on active markets; • the National Resolution Fund; and • structured deposits. When valuing bonds classified on Level 2, NLB Group primarily uses the income approach based on an estimation of future cash flows discounted to the present value. The input parameters used in the income approach are the risk-free yield curve and the spread over the yield curve (credit, liquidity, country). Fair values for derivatives are determined using a discounted cash flow model based on the risk-free yield curve. Fair values for options are determined using valuation models for options (Garman and Kohlhagen model, binomial model, and Black-Scholes model). NLB Group 2016 Annual Report320 At least three valuation methods are used for the valuation of investment property. The majority of investment property is valued using the income approach where the present value of future expected returns is assessed. When valuing an investment property, average rents at similar locations and capitalisation ratios such as: the risk-free yield, risk premium, liquidity premium, risk premium to account for the management of the investment, and the risk premium to account for capital preservation are used. Rents at similar locations are generated from various sources, like data from lessors and lessees, web databases, and own databases. NLB Group has observable data for all investment property at its disposal. If observable data for similar locations are not available, NLB Group uses data from wider locations and appropriately adjusts such data. Non-current assets held for sale represent property, plant, and equipment that are measured at fair value less costs to sell because it is lower than the previous carrying amount of those assets. d) Financial and non-financial assets and liabilities at Level 3 of the fair value hierarchy Financial instruments on Level 3 of the fair value hierarchy in NLB Group and NLB include: • debt securities: structured debt securities from inactive emerging markets; • equities: mainly Slovenian corporate and financial equities that are not quoted on active markets; and • derivative financial instruments: forward derivatives and options on equity instruments that are not quoted on an active organised market. Fair values for forward derivatives are determined using the discounted cash flow model. Fair values for equity options are determined using valuation models for options (Garman and Kohlhagen model, binomial model and Black-Scholes model). Unobservable inputs include the fair values of underlying instruments determined using valuation models. The source of observable market inputs is the Reuters information system. NLB Group uses three valuation methods for the valuation of equity financial assets: the income approach, market approach, and cost approach. The most commonly used valuation technique is the income approach. The income approach is based on an estimation of future cash flows discounted to the present value. One of the key elements of the valuation is the projection of the cash flows the company is able to generate in the future. Based on that, the projection of the future cash flow is generated. The key variables that affect the amount of cash flows, and thus the estimated fair value of the financial asset also include an assumption regarding the long-term EBITDA margin. A discount rate that is appropriate for the risks associated with the realisation of these benefits is used to discount cash flows. The discount rate is determined as the weighted average cost of capital. A forecast of future cash flows and a calculation of the weighted average cost of capital is prepared for an accurate forecasting period (usually 10 years from the date of the prediction value), and for a period following the period of accurate forecasting. Assumptions of long-term stable growth in the amount of 2.5% are used for the period following the period of accurate forecasting. NLB Group can select values of unobservable input data within a reasonable possible range, but uses those input data that other market participants would use. NLB Group 2016 Annual ReportMovements of financial assets and liabilities at Level 3 NLB Group Debt instruments Derivatives Equity instruments Financial instruments held for trading Financial assets available-for-sale Total financial assets Balance as at 1 January 2015 Exchange differences Disposal of subsidiary Valuation: - through profit or loss - recognised in other comprehensive income Increases Decreases Transfer out of level 3 Balance as at 31 December 2015 Exchange differences Valuation: - through profit or loss - recognised in other comprehensive income Increases Decreases Balance as at 31 December 2016 892 101 - - - - - - 993 (37) - - - (956) - 120 - - (6) - - - - 114 - 291 - - - 405 6,742 (32) (48) (4,732) 3,584 4,357 (22) 111 9,960 29 (178) 1,431 1,066 (6,405) 5,903 7,754 69 (48) (4,738) 3,584 4,357 (22) 111 11,067 (8) 113 1,431 1,066 (7,361) 6,308 321 in EUR thousand Financial liabilities held for trading Derivatives 4,171 - - 87 - - (4,258) - - - - - - - - Financial instruments held for trading Financial assets available-for-sale Total financial assets in EUR thousand Financial liabilities held for trading NLB Debt instruments Derivatives Equity instruments Balance as at 1 January 2015 Exchange differences Valuation: - through profit or loss - recognised in other comprehensive income Decreases Balance as at 31 December 2015 Exchange differences Valuation: - through profit or loss - recognised in other comprehensive income Increases Decreases Balance as at 31 December 2016 892 101 - - - 993 (37) - - - (956) - 120 - (6) - - 114 - 291 - - - 405 5,925 - 6,937 101 (2,705) (2,711) 3,676 (22) 6,874 - (178) 453 1,066 (6,405) 1,810 3,676 (22) 7,981 (37) 113 453 1,066 (7,361) 2,215 Derivatives 4,171 - 87 - (4,258) - - - - - - - NLB Group 2016 Annual Report322 NLB Group and NLB recognise the effects from the valuation of trading instruments in the income statement item ‘Gains Less Losses from Financial Assets and Liabilities not classified at Fair Value through Profit or Loss’ and exchange differences recognised in the income statement item ‘Foreign Exchange Translation Gains Less Losses.’ Effects from the valuation of available-for-sale financial assets are recognised in the income statement item ‘Impairment Charge’ and in the accumulated other comprehensive income item ‘Available-for-sale Financial Assets.’ In 2016, NLB Group and NLB recognised the following unrealised gains or losses for financial instruments that were at Level 3 as at 31 December 2016: 31.12.2016 Items of Income statement Gains/(losses) from financial assets and liabilities held for trading Impairment charge Item of Other comprehensive income Available-for-sale financial assets 31.12.2015 Items of Income statement Gains/(losses) from financial assets and liabilities held for trading Impairment charge Foreign exchange translation gains/(losses) Item of Other comprehensive income Available-for-sale financial assets NLB Group NLB in EUR thousand Trading assets Available-for-sale financial assets Trading assets Available-for-sale financial assets 291 - - - 178 1,364 291 - - - 178 386 NLB Group NLB in EUR thousand Trading assets Available-for-sale financial assets Trading assets Available-for-sale financial assets (6) - 101 - 4,732 - (6) - 101 - 2,705 - - 3,584 - 3,676 NLB Group 2016 Annual Reporte) Fair value of financial instruments not measured at fair value in financial statements 323 in EUR thousand NLB Group NLB 31.12.2016 31.12.2015 31.12.2016 31.12.2015 Carrying value Fair value Carrying value Fair value Carrying value Fair value Carrying value Fair value Loans and advances - debt securities 85,315 78,953 394,579 397,079 85,315 78,953 394,579 397,079 - loans and advances to banks 435,537 434,958 431,775 431,736 408,056 415,771 345,207 354,369 - loans and advances to customers 6,912,067 6,962,419 6,693,621 6,685,798 4,843,594 4,884,828 4,826,139 4,838,561 - other financial assets 61,014 61,014 69,521 69,521 36,151 36,151 48,944 48,944 Held-to-maturity investments 611,449 671,344 565,535 624,977 611,449 671,344 565,535 624,977 Financial liabilities measured at amortised cost - deposits from banks and central banks 42,334 42,314 57,982 58,008 74,977 74,977 96,736 96,736 - borrowings from banks and central banks 371,769 377,037 571,029 566,144 338,467 348,331 519,926 513,719 - due to customers 9,437,147 9,461,925 9,020,666 9,036,023 6,615,390 6,626,851 6,293,339 6,299,181 - borrowings from other customers 83,619 83,851 100,267 101,197 4,274 4,258 16,168 15,783 - debt securities in issue - subordinated liabilities - other financial liabilities 277,726 280,278 304,962 308,989 277,726 280,278 304,962 308,989 27,145 28,777 27,340 27,585 - - - - 110,295 110,295 75,307 75,307 68,784 68,784 47,346 47,346 Loans and advances to banks The estimated fair value of deposits is based on discounted cash flows using prevailing money market interest rates for debts with similar credit risk and residual maturities. The fair value of overnight deposits equals their carrying value. Loans and advances to customers Loans and advances are the net of the allowance for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates for debts with similar credit risk and residual maturities to determine their fair value. Deposits and borrowings The fair value of sight deposits and overnight deposits equals their carrying value. However, their actual value for NLB Group depends on the timing and amounts of cash flows, current market rates, and the credit risk of the depository institution itself. A portion of sight deposits is stable, similar to term deposits. Therefore, their economic value for NLB Group differs from the carrying amount. The estimated fair value of other deposits and borrowings from customers is based on discounted cash flows using interest rates for new deposits with similar residual maturities. Held‑to‑maturity financial assets and issued debt securities The fair value of held-to-maturity financial assets and issued debt securities is based on their quoted market price, or value calculated by using a discounted cash flow method and prevailing money market interest rates. Other financial assets and liabilities The carrying amount of other financial assets and liabilities is a reasonable approximation of their fair value as they mainly relate to short-term receivables and payables. NLB Group 2016 Annual Report 324 Fair value hierarchy of financial instruments not measured at fair value in financial statements NLB Group NLB in EUR thousand Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Total fair value 31.12.2016 Loans and advances - debt securities - loans and advances to banks - loans and advances to customers - other financial assets - - - - 78,953 434,958 6,962,419 61,014 Held-to-maturity investments 671,344 - Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - due to customers - borrowings from other customers - debt securities in issue - subordinated liabilities - other financial liabilities - - - - 42,314 377,037 9,461,925 83,851 280,278 - - - 28,777 110,295 31.12.2015 Loans and advances - debt securities - loans and advances to banks - loans and advances to customers - other financial assets - - - - 397,079 431,736 6,685,798 69,521 Held-to-maturity investments 624,977 - Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - due to customers - borrowings from other customers - debt securities in issue - subordinated liabilities - other financial liabilities - - - - 58,008 566,144 9,036,023 101,197 308,989 - - - 27,585 75,307 Total fair value 78,953 434,958 6,962,419 61,014 - - - - 78,953 415,771 4,884,828 36,151 671,344 671,344 - 42,314 377,037 9,461,925 83,851 - - - - 280,278 280,278 28,777 110,295 - - 74,977 348,331 6,626,851 4,258 - - 68,784 Total fair value 397,079 431,736 6,685,798 69,521 - - - - 397,079 354,369 4,838,561 48,944 624,977 624,977 - 58,008 566,144 9,036,023 101,197 - - - - 308,989 308,989 27,585 75,307 - - 96,736 513,719 6,299,181 15,783 - - 47,346 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 78,953 415,771 4,884,828 36,151 671,344 74,977 348,331 6,626,851 4,258 280,278 - 68,784 in EUR thousand - - - - - - - - - - - - 397,079 354,369 4,838,561 48,944 624,977 96,736 513,719 6,299,181 15,783 308,989 - 47,346 NLB Group NLB Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Total fair value NLB Group 2016 Annual Report325 7.7. Offsetting financial assets and financial liabilities NLB Group has entered into foreign exchange netting arrangements with certain banks and companies. Cash flows from all FX derivatives with counterparties that are due on the same day are settled on a net basis, i.e. a single cash flow for each currency. Assets and liabilities related to these FX netting arrangements are not presented in a net amount in the statement of financial position because netting rules apply to cash flows and not to an instrument as a whole. In accordance with the European Market Infrastructure Regulation (EMIR), NLB Group also novated certain standardised derivative financial instruments to a central counterparty in 2013. A system of daily margins assures the mitigation and collateralisation of exposures, as well as the daily settlement of cash flows for each currency. 31.12.2016 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31.12.2015 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31.12.2016 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31.12.2015 Financial assets/liabilities Derivatives - assets Derivatives - liabilities NLB Group Amounts not set-off on the statement of financial position Gross amounts of recognised financial assets/liabilities Impact of master netting agreements Financial instruments collateral 18,746 39,663 5,335 5,335 300 31,180 Gross amounts of recognised financial assets/liabilities 29,918 47,454 Gross amounts of recognised financial assets/liabilities 18,746 39,663 NLB Group Amounts not set-off on the statement of financial position Impact of master netting agreements Financial instruments collateral 7,844 22,882 10,100 10,100 NLB Amounts not set-off on the statement of financial position Impact of master netting agreements Financial instruments collateral 300 31,180 5,335 5,335 NLB Amounts not set-off on the statement of financial position Gross amounts of recognised financial assets/liabilities Impact of master netting agreements Financial instruments collateral 30,385 47,454 10,100 10,100 7,844 22,881 in EUR thousand Net amount 13,111 3,148 in EUR thousand Net amount 11,974 14,472 in EUR thousand Net amount 13,111 3,148 in EUR thousand Net amount 12,441 14,473 NLB Group and NLB have no financial assets/liabilities set off in the statement of financial position. NLB Group 2016 Annual Report326 8. Analysis by segment for NLB Group a) Segments 2016 Total net income NLB Group in EUR thousand Corporate banking in Slovenia Retail banking in Slovenia Financial markets in Slovenia Foreign strategic markets Non-core markets and activities Other activities Unallocated Total 76,768 137,757 50,171 179,370 26,293 Net income from external customers 85,060 130,120 43,997 180,629 26,173 Intersegment net income (8,292) 7,637 6,174 (1,259) 120 Net interest income 45,891 71,222 48,536 136,909 15,404 Net interest income from external customers 54,183 63,918 42,416 139,240 17,854 Intersegment net interest income (8,292) 7,304 6,120 (2,331) (2,450) 9,415 9,765 (350) (657) (306) (351) Administrative expenses (40,159) (90,794) (11,118) (87,477) (21,884) (13,758) Depreciation and amortisation (4,394) (10,350) (1,036) (8,013) (2,290) (2,262) 32,214 36,612 38,017 83,880 2,119 (6,604) Reportable segment profit/(loss) before impairment and provision charge Other net gains/(losses) from equity investments in subsidiaries, associates and joint ventures Impairment and provisions charge (2,680) (10,245) - 5,159 - 53 - (153) - (16,290) (20,857) (10,626) Profit/(loss) before income tax 29,534 31,527 38,070 67,590 (18,891) (17,230) Owners of the parent Non-controlling interests Income tax Profit for the year 29,534 31,527 38,070 61,982 (18,891) (17,230) - - - - - - 5,608 - - - - - Reportable segment assets 2,338,698 2,074,736 3,375,667 3,540,474 502,610 163,578 Investments in associates and joint ventures - 43,248 - - - - Reportable segment liabilities 1,198,058 5,229,761 907,159 3,038,921 57,935 81,517 Additions to non-current assets 2,305 7,286 363 7,882 2,928 463 - - - - - - - - - - - - - - 479,774 475,744 4,030 317,305 317,305 - (265,190) (28,345) 186,238 5,006 (60,645) 130,600 124,992 5,608 (14,975) (14,975) 110,017 11,995,763 43,248 10,513,351 21,227 - - - - NLB Group 2016 Annual Report327 in EUR thousand NLB Group Corporate banking in Slovenia Retail banking in Slovenia Financial markets in Slovenia Foreign strategic markets Non-core markets and activities Other activities Unallocated Total 2015 Total net income 85,149 150,746 72,909 165,946 10,025 Net income from external customers 95,627 136,337 65,944 168,818 13,853 Intersegment net income (10,478) 14,409 6,965 (2,872) (3,828) Net interest income 55,783 78,253 60,192 125,208 21,579 Net interest income from external customers 66,261 59,210 57,583 128,858 28,816 Intersegment net interest income (10,478) 19,043 2,608 (3,650) (7,237) 2,526 2,812 (286) (813) (527) (286) Administrative expenses (39,211) (94,818) (11,068) (85,396) (26,404) (12,997) Depreciation and amortisation (4,833) (11,934) (1,192) (8,036) (3,423) (2,438) Reportable segment profit/(loss) before impairment and provision charge Other net gains/(losses) from equity investments in subsidiaries, associates and joint ventures 41,105 43,994 60,649 72,514 (19,802) (12,909) - 4,486 - - (174) - Impairment and provisions charge 10,351 (9,795) 218 (27,807) (50,103) (5,969) Profit/(loss) before income tax 51,456 38,685 60,867 44,707 (70,079) (18,878) Owners of the parent Non-controlling interests Income tax Profit for the year 51,456 38,685 60,867 41,243 (70,079) (18,878) - - - - - - 3,464 - - - - - Reportable segment assets 2,160,440 2,015,459 3,350,804 3,389,032 752,137 114,047 Investments in associates and joint ventures - 39,696 - - - - Reportable segment liabilities 1,193,660 4,906,699 1,139,738 2,942,463 114,111 74,561 Additions to non-current assets 4,673 12,127 762 10,129 8,747 4,104 - - - - - - - - - - - - - - 487,301 483,391 3,910 340,202 340,202 - (269,894) (31,856) 185,551 4,312 (83,105) 106,758 103,294 3,464 (11,380) (11,380) 91,914 11,781,919 39,696 10,371,232 40,541 - - - - Segment reporting is presented in accordance with the strategy on the basis of the organisational structure used in management reporting of NLB Group’s results. NLB Group’s segments are business units that focus on different customers and markets. They are managed separately because each business unit requires different strategies and service levels. Other NLB Group members are, based on their business activity, included in only one segment. The business activities of NLB are divided into several segments. Interest income is reallocated between segments on the basis of multiple internal transfer rates (fund transfer pricing – FTP). Description of NLB Group’s segments: • Retail banking in Slovenia represents banking with individuals in NLB and assets management – NLB Skladi. It also includes the contribution to the financial result of the joint venture NLB Vita and the associates Skupna pokojninska družba and Bankart; • Corporate banking in Slovenia, which includes: operations with large (key), medium-sized (mid-market), micro and small businesses, and Intensive Care and Non-performing loans; • Financial markets in Slovenia, which include treasury activities, asset liability management, trading in financial instruments, brokerage, and custody of securities, as well as financial advisory; • Foreign strategic markets represent all business activities of NLB Group members in strategic markets of NLB Group (Bosnia and Herzegovina, Montenegro, Kosovo, Macedonia and Serbia), except leasing entities; • Non-strategic markets and activities represent total activities of NLB Group members in non-strategic markets of NLB Group (Croatia, Germany, Switzerland, and Czech Republic) and all leasing entities. It also includes the operating result of non-financial entities (NLB Propria, Prospera Plus) and the performance of the Internal restructuring unit of NLB; and • Other represents items of NLB income statement not related to reportable segments. NLB Group 2016 Annual Report328 NLB Group is primarily a financial group, and net interest income represents the majority of its net revenues. NLB Group’s main indicator of a segment’s efficiency is net profit before tax. There was no income from transactions with a single external customer that amounted to 10% or more of NLB Group’s income. b) Geographical information Geographical analysis includes a breakdown of items with respect to the country in which individual NLB Group entities are located. Revenues Net income Profit/(loss) before income tax Income tax in EUR thousand NLB Group Slovenia 2016 2015 2016 2015 2016 2015 2016 2015 348,961 405,711 297,495 322,343 70,094 95,721 (7,854) (7,198) South East Europe 234,014 231,515 176,148 171,269 60,900 33,749 (7,115) (4,188) Macedonia Serbia Montenegro Croatia 83,364 79,578 61,824 55,944 28,533 13,927 (2,755) (1,549) 21,585 22,463 18,822 19,025 30,186 30,986 16,484 21,661 1,733 (794) (1,199) 6,414 181 840 (125) 707 (3,250) (4,321) (152) (116) (1) (35) (126) - Bosnia and Herzegovina 65,882 65,531 51,698 47,865 22,098 9,759 (2,802) (1,436) Bulgaria Kosovo Western Europe Germany Switzerland Czech Republic Total - - - (1) 84 (77) - - 32,816 32,117 27,445 26,068 12,496 9,246 (1,289) (1,042) 1,127 3,033 2,105 (10,185) 19 2 474 250 (137) (248) (20,997) 243 1,108 3,031 1,631 (10,435) 111 (21,240) 1 - (4) (36) (257) (1,715) (6) - (6) - 5 - 5 1 584,103 640,259 475,744 483,391 130,600 106,758 (14,975) (11,380) The column ‘Revenues’ includes interest and similar income, dividend income, and fee and commission income. The column ‘Net Income’ includes net interest income, dividend income, net fee and commission income, the net effect of financial instruments, foreign exchange translation, effect on derecognition of assets, and net operating income. NLB Group 2016 Annual Report329 in EUR thousand Non-current assets Total assets Number of employees 31.12.2016 31.12.2015 31.12.2016 31.12.2015 31.12.2016 31.12.2015 225,643 240,592 8,393,754 8,289,804 130,949 138,513 3,602,358 3,469,279 3,065 3,104 3,225 3,136 33,448 24,822 29,476 2,568 27,222 - 33,919 1,147,375 1,117,708 24,778 35,580 3,623 316,023 280,274 478,682 495,044 27,164 33,032 27,031 1,116,169 1,077,299 1 - 333 13,413 13,581 516,945 465,589 247 222 25 891 296 240 56 865 39,742 2,782 36,960 3,157 58,961 3,273 55,688 3,571 891 424 342 16 942 - 489 6 1 5 - 875 480 341 16 930 2 492 11 2 9 - 357,730 380,266 12,039,011 11,821,615 6,175 6,372 NLB Group Slovenia South East Europe Macedonia Serbia Montenegro Croatia Bosnia and Herzegovina Bulgaria Kosovo Western Europe Germany Switzerland Czech Republic Total The table below presents data on NLB Group members before intercompany eliminations and consolidation journals. Revenues Net income Profit/(loss) before income tax Income tax in EUR thousand NLB Group Slovenia 2016 2015 2016 2015 2016 2015 2016 2015 390,240 435,691 333,099 342,489 52,829 34,302 (4,554) (8,516) South East Europe 234,257 231,869 179,677 167,159 66,530 34,943 (7,083) (4,057) Macedonia Serbia Montenegro Croatia 83,422 79,638 61,078 54,737 28,739 13,997 (2,755) (1,549) 21,748 22,685 19,235 19,005 30,199 30,887 21,073 20,267 2,304 4,456 (686) 6,292 152 813 (695) (383) (3,378) (4,015) (119) (116) (1) (53) 23 - Bosnia and Herzegovina 65,921 65,729 51,228 47,187 22,087 10,148 (2,803) (1,436) Bulgaria Kosovo Western Europe Germany Switzerland Czech Republic Total - - - (1) (230) (77) - - 32,815 32,117 27,758 26,347 12,552 9,284 (1,289) (1,042) 1,197 4,036 1,455 5,534 (4,958) (4,792) 20 1,177 107 3 4,033 108 466 989 2 242 5,292 (217) (247) 243 (4,711) (5,035) (257) (1,715) (6) - (6) - 5 - 5 1 625,801 671,704 514,233 514,965 114,144 62,738 (11,643) (12,567) NLB Group 2016 Annual Report330 9. Related-party transactions A related party is a person or entity that is related to NLB Group in such a manner that it has control or joint control, has a significant influence, or is a member of the key management personnel of the reporting entity. Related parties of NLB Group and NLB include: key management personnel (Management Board, other key management personnel and their family members); the Supervisory Board; companies in which members of the Management Board, key management personnel or their family members have control, joint control, or a significant influence; the ultimate parent; subsidiaries, associates, and joint ventures. A number of banking transactions are entered into with related parties in the normal course of business. The volume of related-party transactions and the outstanding balances are as follows: Management Board and other Key management personnel Family members of the Management Board and other key management personnel in EUR thousand Companies in which members of the Management Board, key management personnel or their family members have control, joint control or a significant influence Supervisory Board NLB Group and NLB 2016 2015 2016 2015 2016 2015 2016 2015 Loans issued Balance as at 1 January Increase Decrease Balance as at 31 December Interest income Deposits received Balance as at 1 January Increase Decrease Balance as at 31 December Interest expense Other financial liabilities Guarantees issued and credit commitments Fee income Other income Other expenses 1,953 1,367 2,102 1,046 468 445 347 326 375 368 451 89 (1,210) (1,195) (421) (205) (372) (165) 2,110 1,953 41 44 2,158 3,038 1,958 3,042 (3,117) (2,842) 2,079 (14) 1,536 248 13 2 (2) 2,158 (20) 794 223 11 - - 492 9 729 725 (757) 697 (4) - 83 6 - - 468 12 1,136 971 (1,378) 729 (10) - 83 6 - - 371 9 106 464 (90) 480 - 2 147 9 - - 375 10 199 191 (284) 106 - 1 14 7 - - 2 - (2) - - 223 146 (239) 130 (1) - 3 - - - 18 30 (46) 2 - 115 485 (377) 223 (1) - 17 1 - - NLB Group 2016 Annual Report331 in EUR thousand NLB Group NLB Ultimate parent Ultimate parent 2016 2015 2016 2015 227,341 7,520 (56,272) 178,589 5,896 233,895 32,384 (38,938) 227,341 7,648 220,646 7,355 (54,841) 173,160 5,732 225,971 32,177 (37,502) 220,646 7,441 Ultimate parent company of NLB is the Republic of Slovenia. Loans issued Balance as at 1 January Increase Decrease Balance as at 31 December Interest income Deposits received Balance as at 1 January 110,001 375,102 110,001 375,102 Increase Decrease Balance as at 31 December Interest expense Investments in securities Balance as at 1 January Exchange difference on opening balance Increase Decrease Valuation Balance as at 31 December Interest income Other financial assets Other financial liabilities Guarantees issued and credit commitments Fee income Fee expense Other income Other expense 12,803,693 47,400,068 12,803,693 47,400,068 (12,843,689) (47,665,169) (12,843,689) (47,665,169) 70,005 (5) 891,576 - 390,860 (345,457) (2,643) 934,336 28,019 153 6 849 129 (39) 5 (1) 110,001 (43) 1,094,826 (1) 405,541 (594,698) (14,092) 891,576 28,889 168 9 824 113 (55) 32 (2) 70,005 (5) 845,039 - 366,845 (339,544) (2,399) 869,941 27,224 1 6 849 129 (39) 5 (1) 110,001 (43) 1,015,263 - 343,435 (499,873) (13,786) 845,039 28,602 16 9 824 113 (55) 32 (2) NLB Group 2016 Annual Report332 NLB Group and NLB disclose all transactions with the ultimate controlling party. For transactions with other government-related entities, NLB Group discloses individually significant transactions. NLB Group and NLB Amount of significant transactions concluded during the year Number of significant transactions concluded during the year in EUR thousand Loans Borrowings, deposits and business accounts Commitments to extend credit 2016 158,136 - 140,004 2015 200,000 48,669 - 2016 2015 1 - 2 1 1 - Year-end balance of all significant transactions Number of significant transactions at year-end 2016 2015 2016 2015 Loans Debt securities classified as loans and advances Borrowings, deposits and business accounts Commitments to extend credit 770,407 85,315 135,020 140,000 617,185 394,579 134,798 - 5 1 3 2 5 1 3 - Interest income from loans Interest income from debt securities classified as loans and receivables Interest expense from borrowings, deposits and business accounts Interest income from commitments to extend credit Effects in income statement during the year 2016 3,796 16,425 (225) 894 2015 3,291 25,066 (517) 294 NLB Group 2016 Annual Report333 in EUR thousand Associates Joint ventures 2016 1,625 124 (331) 1,418 48 16 1,179 - 6,945 (2,286) 5,838 - - (17) 30 - 927 - 40 - 126 (11,502) 233 (1,092) 2015 2016 2015 1,942 1,453 (1,770) 1,625 65 (23) 1,642 - 6,503 (6,966) 1,179 (1) 569 (23) 32 - 1,025 - 43 - 113 (9,903) 367 (1,119) 93,823 109,548 (183,514) 19,857 932 9,730 6,036 (37) 182,990 (183,791) 5,198 (25) - - 141 (1) 92 - 28 - 3,689 (2,055) 580 (89) 104,590 37,215 (47,982) 93,823 2,681 (5,794) 4,116 (17) 138,099 (136,162) 6,036 (139) - - 208 (1) 203 (132) 29 776 3,301 (1,905) 560 - NLB Group Loans issued Balance as at 1 January Increase Decrease Balance as at 31 December Interest income Impairment Deposits received Balance as at 1 January Exchange difference on opening balance Increase Decrease Balance as at 31 December Interest expense Debt securities in issue Interest expense Other financial assets Impairment Other financial liabilities Interest expense Guarantees issued and credit commitments Income provisons for guaranties and commitments Fee income Fee expense Other income Other expense NLB Group 2016 Annual Report334 NLB Loans issued Balance as at 1 January Increase Decrease Balance as at 31 December Interest income Impairment Deposits Balance as at 1 January Increase Decrease Balance as at 31 December Interest income Impairment Deposits received Subsidiaries Associates Joint ventures in EUR thousand 2016 2015 2016 2015 2016 2015 381,746 608,748 105,439 289,100 (166,461) (516,102) 320,724 381,746 7,453 (9,272) 10,679 (18,626) 3,438 12,328 298,795 193,746 (273,802) (202,636) 28,431 9 - 3,438 251 6,796 1,625 124 (331) 1,418 48 16 - - - - - - 1,179 6,945 (2,286) 5,838 - - (17) - - 30 - 849 - 40 - - 126 1,942 1,453 93,799 103,972 109,508 33,985 (1,770) (183,485) (44,158) 1,625 19,822 65 (23) 931 9,730 93,799 2,679 (5,794) - - - - - - 1,642 6,503 (6,966) 1,179 (1) 569 (23) - - 28 - 948 - 43 - - 113 - - - - - - - - - - - - 3,438 77,034 770 45,232 (76,029) (42,564) 4,443 - - - - - 140 (1) 1 - 27 - - 3,419 (1,427) 540 (89) 3,438 (2) - - - - 207 (1) 176 (132) 28 776 - 3,040 (1,413) 481 - (10,182) (9,903) 233 (845) 367 (1,119) Balance as at 1 January 59,407 48,380 Increase Decrease 11,271,052 8,128,118 (11,275,903) (8,117,091) Balance as at 31 December 54,556 59,407 Interest expense Debt securities in issue Interest expense Derivatives Fair value Contractual amount Other financial assets Impairment Other financial liabilities Interest expense (29) - - - - 723 11 296 - (20) - - 469 3,836 5,054 (11) 357 - Guarantees issued and credit commitments 34,451 38,660 Income/(expense) provisons for guaranties and commitments Received loan commitments and financial guarantees Fee income Fee expense Other income Other expense 442 500 4,336 (75) 527 46 750 4,935 (109) 478 (2,830) (2,914) NLB Group 2016 Annual Report335 Key management compensation The performance of key management is defined by financial and non-financial criteria. They are entitled to the annual variable part of the salary based on their achievement of the financial and non-financial performance criteria, which encompass the goals of NLB Group or NLB, the goals of the organisational unit, and the personal goals of the employee performing special work. Members of the Management Board are entitled to contractual gross salary considering the limitations of the Slovenian and European legislation. Simultaneously, under the contract, members of the Management Board are entitled to a performance bonus based on criteria set by the Supervisory Board. Each year, the Supervisory Board determines the criteria of remuneration upon the adoption of the Bank’s annual business plan. The Supervisory Board determines the performance bonuses with the conclusion of each business year. In accordance with the legislation, the annual performance bonus cannot in any case exceed 30 percent of gross salaries in a business year of members of the Management Board. In addition, members of the Management Board are entitled to performance bonuses only proportionally, depending on their actual employment in the Bank for the period for which the performance bonus relates. The first 50 percent of the performance bonus is due for payment within 15 days of the General Meeting of Shareholders that voted on use of the previous year’s profit and the discharge of the Management Board. Payment of the remaining 50 percent of the performance bonus is deferred. Upon the conclusion of the General Meeting of Shareholders, members of the Supervisory Board receive payment for their performance and attendance, while the previously mentioned amounts are limited to a decision of the General Meeting of Shareholders, and are in full compliance with the applicable recommendations of corporate governance. NLB Group and NLB Short-term benefits Cost refunds Long-term bonuses: - severance pay - other benefits - variable part of payments Total Management Board Other key management personnel Supervisory Board in EUR thousand 2016 504 4 - 5 78 591 2015 579 7 - 3 77 666 2016 4,866 112 - 76 499 2015 4,372 113 36 40 536 2016 245 74 - - - 2015 182 77 - - - 5,553 5,097 319 259 Short-term benefits include: • monetary benefits (gross salaries, supplementary insurance, holiday allowances, other bonuses); and • non-monetary benefits (company cars, health care, apartments etc.). The reimbursement of cost comprises food allowances and travel expenses. NLB Group 2016 Annual Report336 Payments to individual members of the Management Board Member Blaž Brodnjak 01.12.2012 Andreas Burkhardt 18.09.2013 Archibald Kremser 31.07.2013 Laszló Pelle 26.10.2016 Janko Medja 2.10.2012 - 5.2.2016 Short-term benefits: - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - other benefits - variable part of payments Total Short-term benefits: - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - other benefits - variable part of payments Total Short-term benefits: - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - other benefits - variable part of payments Total Short-term benefits: - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - other benefits Total Short-term benefits: - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - other benefits - variable part of payments Total 2016 137,586 3,049 1,267 1,410 19,621 162,933 137,586 26,148 1,157 1,410 19,621 185,922 137,586 19,150 1,151 1,410 19,621 178,918 13,570 3,278 115 470 17,433 25,033 166 538 235 19,621 45,593 in EUR 2015 131,601 4,109 1,230 763 19,246 156,949 131,601 27,364 1,169 763 19,246 180,143 131,601 20,037 1,187 763 19,246 172,834 - - - - - 131,601 1,652 3,299 763 19,246 156,561 The above table shows earnings paid to individuals in the year when they were members of the Management Board. NLB Group 2016 Annual ReportPayments to individual members of the Supervisory Board Member Sergeja Slapničar 12.06.2013 Uroš Ivanc 12.06.2013 Andreas Klingen 22.06.2015 Primož Karpe 11.02.2016 László Zoltan Urbán 11.02.2016 Matjaž Titan 04.08.2016 David Kastelic 04.08.2016 Alexander Bayr 04.08.2016 David Eric Simon 04.08.2016 Janko Gedrih 10.2.2016 - 15.4.2016 Anton Macuh 10.2.2016 - 15.4.2016 Anton Ribnikar 10.2.2016 - 15.4.2016 Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds 337 in EUR 2015 6,600 21,619 1,562 6,655 21,619 214 2,420 10,365 8,051 - - - - - - - - - - - - - - - - - - - - - - - - - - - 2016 7,370 27,547 898 6,930 25,096 404 7,370 25,744 13,833 6,600 28,585 5,591 5,280 16,563 5,341 1,430 8,750 - 1,155 8,750 - 1,650 7,440 3,564 1,375 8,750 1,958 1,045 6,261 180 1,485 3,324 60 1,705 4,499 267 NLB Group 2016 Annual Report338 Member Miha Košak 12.6.2013 - 10.2.2016 Gorazd Podbevšek 12.6.2013 - 10.2.2016 Tit A. Erker 12.6.2013 - 3.8.2016 Peter Groznik 4.11.2014 - 27.8.2015 Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds 2016 1,210 3,950 3,536 1,210 3,362 - 5,720 14,826 38,598 - - - in EUR 2015 7,931 26,749 22,955 6,886 24,894 1,306 6,831 25,556 42,262 2,915 11,085 616 The above table shows earnings paid to individuals in the year when they were members of the Supervisory Board. NLB Group 2016 Annual ReportRegulatory Part 342 Statement of Management’s Responsibility The Management Board hereby confirms the statements made in the business report, which are in accordance with the attached financial statements as at 31 December 2016, and represent the actual and fair financial standing of the Bank and the NLB Group as well as their operating results in the year that ended 31 December 2016. The Management Board confirms that the business report includes a fair view of developements and operating results of the Bank and the Group and their financial standings, including a description of the key types of risks and the companies under consolidation are exposed as a whole. Managmenet Board of the NLB d.d. László Pelle Member of the Management Board Archibald Kremser Member of the Management Board Andreas Burkhardt Member of the Management Board Blaž Brodnjak Chief Executive Officer NLB Group 2016 Annual Report343 The Bank may perform the following additional financial services pursuant to Article 6 of the ZBan-2: 1. Insurance policy brokerage in accordance with the act governing the insurance sector, 2. Custodian services in accordance with the act governing investment funds and management companies, 3. Credit brokerage for consumer and other credits. Types of Services for Which NLB d.d. Holds Authorisation Pursuant to the provisions of Article 14 of the Regulation on the Books of Account and Annual Reports of Banks and Savings Banks, which the Bank of Slovenia adopted on the basis of the authorisation from Article 93 of the ZBan-2, NLB lists all types of financial services it performed in the period for which the business report has been compiled in accordance with the authorisation of the Bank of Slovenia. NLB d.d., Ljubljana holds the authorisation to perform banking services pursuant to Article 5 of the Banking Act (Official Gazette of the RS, no. 25/12; hereinafter: ZBan-2). The banking services include the services of accepting deposits and other repayable funds from the public, and lending for its own account. 3. Payment services; 4. Issuing and managing other payment instruments (e.g. travellers cheques and bank bills of exchange) in the part where this service is not included in the service from item 4 of this Article; 5. Issuing of guarantees and other sureties; 6. Trading for own account or for account of customers in: • money market instruments, • foreign exchange, including currency exchange transactions, • standard futures contracts and options, • currency and interest-rate instruments, and • transferable securities, cooperation in the issue of securities and services related thereto, The Bank is also authorised for provision of mutually-recognised financial services and additional financial services. 7. Participation in the issuing of securities and related services; 8. Offering advice to companies The Bank may perform the following mutually recognised financial services pursuant to Article 5 of the ZBan-2: concerning capital structure, business strategy and related matters, as well as advice and services related to mergers and acquisitions; 9. Monetary intermediation on inter-bank markets, 1. Accepting deposits and other repayable 10. Consultancy related to asset funds; management; 2. Lending, which also includes: 11. Safekeeping of securities and other • consumer loans, • mortgage loans, • factoring, with or without recourse, • financing of commercial transactions, including export financing on the basis of discount, non-recourse purchase of long-term outstanding receivables secured with a financial instrument (forfeiting); services related thereto, 12. Ratings services: collection, analysis, and provision of information on credit-worthiness; 13. Safe custody services; 14. Investment and ancillary investment services and operations under the law on Financial Instruments Market. NLB Group 2016 Annual Report 344 Corporate Governance Statement of NLB d.d. Pursuant to the fifth paragraph of Article 70 of the Companies Act1, Nova Ljubljanska banka d.d., Ljubljana (hereinafter: NLB) hereby gives the following Corporate Governance Statement as a part of the Business Report of the Annual Report. 1. References to the two codes, the recommendations, and other internal regulations on corporate governance In 2016 NLB abided by the following recommended standards in its conduct of business: • Corporate Governance Code for Joint-Stock companies, 8 December 2009, available on http://www.ljse.si; • Corporate Governance Code for Companies with a State Capital Investment, 19 December 2014 and March 2016, available on the website of the Slovenian Sovereign Holding d.d. (hereinafter: SSH) http://www.sdh.si and • Recommendations and Expectations of the Slovenian Sovereign Holding, adopted by SSH on 19 December 2014 and February 2016, available on the SSH website http://www.sdh.si. In implementation of corporate governance in 2016 NLB also respected the Catalogue of Commitments made by the Republic of Slovenia to the European Commission in relation to the state aid procedure concerning NLB (the public version dated 18 December 2013 is available on the website of the European Commission http://ec.europa.eu/competition/ state_aid/cases/245268/ 245268_1518816_267_7.pdf). Corporate governance of NLB is also defined by the Articles of Association of NLB (adopted by the General Assembly on 4 August 2016) and NLB Management Policy (approved by the Supervisory Board of NLB on 18 December 2015). Corporate governance of the NLB Group in 2016 NLB and NLB Group members is regulated by the Corporate Governance Policy of the NLB Group (Version 10, December 2015). The Corporate Governance system is explained on the NLB website (http:// www.nlb.si/ corporate-governance). The documents referred to in this paragraph are published there. In subsidiaries of the NLB Group, NLB mostly follows the principles and recommendations of both mentioned codes through the Corporate Governance Policy of the NLB Group (minimum standards by particular business area), depending on the local legislation and the organisational possibilities in the companies. 2. The corporate governance of nlb deviates from the following provisions: Particular deviations from the aforementioned codes and recommendations, and the underlying reasoning for them are disclosed below. a) Corporate Governance Code for Joint-Stock Companies Item 12: In our opinion, the Bank is not providing payment to the Supervisory Board members that would correspond to their responsibilities and the fines threatened by the new banking law. Items 16 and 16.1. NLB deviates from the proposed provision in the Code because the Act Regulating the Incomes of Managers of Companies Owned by the Republic of Slovenia and Municipalities (“ZPPOGD”) restricts executive pay, which has posed a severe impediment to the winning over, and retaining of suitable staff. It results in a high level of operational risk and poses, in the Bank’s opinion, one of the main obstacles to a suitable restructuring of Slovenian businesses (and state-owned enterprises). The Bank will therefore continue to promote public discussion and the abolishment of restrictions. 1 The Companies Law (ZGD- 1; Official Gazette of the RS, No. 65/09 – official consolidated text, 33/11, 91/11, 32/12, 57/12, 44/13 – decision of the Constitutional Court, 82/13 and 55/15); NLB Group 2016 Annual Report345 Item 20.4: NLB deviates from the proposed provision of the Code by not publishing in advance the dates of General Meetings. The method and rules of convocations of general meetings are laid down by the Articles of Association of NLB. committee members for the performance of the office in accordance with a resolution of the General Meeting of NLB. Based on a resolution of the General Meeting of NLB, payments have been supplemented by a meal allowance. Item 6.10: Item 22.7: NLB discloses net and gross receipts, but does not disclose all elements in item 22.7 of the Code. The recommendation of the Supervisory Board of NLB does not specify the extent to which the self-assessment has contributed to changes. b) Corporate Governance Code for Companies with a State Capital Investment Item 5.1.1. The recommendation is implemented in full in the part relating to operations. Nevertheless, we wish to point out the anomaly and the deprivileged position of NLB, since we believe that the Code recommendation on the arm’s length conditions for NLB as for the other non-state-owned companies is not met, since NLB is subject to numerous limitations or additional obligations that do not apply to privately-owned companies (limited receipts of the management bodies and the obligation to report certain confidential information in accordance with the provisions of the (ZDIJZ-1) Law on Access to Public Information). Item 6.5.1: A competence profile is prepared by the Supervisory Board but is not published. Item 6.9: The recommendations under items 6.9.1. is followed only partly, as no restriction applies to additional payments to Item 6.11: Due to the fact that in 2016 considerable changes were made to the composition of the Supervisory Board, the assessment of the new composition of the Supervisory Board in the year 2016 was not done. Namely, considerable changes were made from last year’s composition of the Supervisory Board as only three members still perform the function. Apart from that, the term in office of the four new members of the Supervisory Board has been short, as they started to perform function from 4 August 2016 on. The Supervisory Board will take all necessary steps to fulfill this recommendation in due time. Item 7.3: So far, the Bank had not approved the Policy on the Remuneration of the Members of the Management Board at the General Meeting of Shareholders. In accordance with the provisions of the Slovenian Sovereign Holding Act, the Management Board and the Supervisory Board of the NLB will strive to obtain approval of the Policy at the General Meeting of Shareholders. Item 8.3: Remunerations of the NLB Group members are not published in the Annual Report of the NLB Group. Item 9.2.7: As a rule, recommendations are being implemented in line with the set deadlines. The Management Board and the Supervisory Board monitor the status of audit recommendations and the reasons for late implementation quarterly. c) Recommendations and Expectations of the Slovenian Sovereign Holding NLB also takes a position on the adopted Recommendations and Expectations of the SSH. Recommendation no. 1.1: NLB tries to meet expectations in this recommendation in due time, while also observing valid legislation. Recommendation no 1.2: NLB tries to meet expectations in this recommendation in due time, while also observing valid legislation. Recommendation no 1.3: NLB tries to meet expectations in this recommendation in due time, while also observing valid legislation. Recommendation no. 3.7: NLB has signed some flat-rate agreements with the outsourced contractors for various needs, following the agreed cost optimisation and continuous reduction of the costs of outsourced providers. NLB Group 2016 Annual Report346 Recommendation no. 4.3: NLB did not disclose the information on the planned holiday allowance payment on intranet site. For NLB Group members a system of reporting on realised payments from 4.2.2. was set in the COGNOS system, however information on realised payments was not published on NLB’s intranet site. Recommendation no. 4.4: The Bank does not publish the text of collective agreements on its website because the two applicable collective agreements are available on the website of the NLB Trade Union representing the Bank’s employees. Recommendation no. 5.1: Due to the activities of refreshing the Business and IT/digital strategies, self-assessment using the recognised European excellence model was not carried out in 2016. With the aim of achieving higher quality the new strategy is introducing a new initiative on lean organisation and processes. The bank started with introduction of the ownership of the processes and achievements of KPI in the direction of optimisation, and with the goal to achieve higher quality. Recommendation no. 6.2: SSH Expectations were sent to NLB Group members. There also might be local regulations requesting a discharge in d.o.o. (in Croatia). 3. The main features of internal control and risk management systems in relation to financial reporting NLB is governed by the Companies Act and the Banking Act regulating, among other, the Bank’s obligation to set up and maintain appropriate internal control and risk management systems. Concerning this subject, the Bank of Slovenia as the supervisory authority of banks issues specific implementing regulations by which the NLB abides as applicable. The Bank also complies with the commitments made to the European Commission, in accordance with the Commission Decision of 18 December 2013 on state aid SA.33229(2012/C) – NLB Restructuring – Slovenia. Due to the above, the NLB maintains a steady and reliable corporate governance system encompassing the following: • well-defined organisation with clear-cut, transparent, and consistent internal relations in the area of responsibility; • efficient procedures to determine, measure or assess, control, and monitor risks to which the NLB is exposed or could be exposed in its operations; • immediate action of the competent departments towards eliminating any established irregularities, particularly in the area of credit risk management; • an appropriate system of internal controls comprising exact accounting procedures (reporting, work procedures, responsibilities, and automatic and manual controls in all stages of the accounting process). Moreover, in compliance with the legislation, NLB also has an independent internal audit department which conducts audits, issues recommendations, and draws up reports in line with its authorisations in addition to reporting to the General Meeting of Shareholders about its work. The NLB devotes special attention to the internal control and risk management systems in the scope of the NLB Group and its members. Corporate governance of the Group is separately presented in the chapter NLB Corporate Governance, subchapter Corporate Governance of the NLB Group, page 144 The risk profile of the NLB Group in conjunction with the business strategy is presented in detail under the Risk Management section in the financial report of the Annual Report, page 261 3.1. Financial reporting With the aim of ensuring appropriate financial reporting procedures, NLB pursues the adopted Policy on Accounting Controls. The accounting controls are provided through the operation of the complete accounting function with the purpose of ensuring quality and reliable accounting information, and thereby accurate and timely financial reporting. The principal identified risks in this area are managed with an appropriate system of authorisations, a segregation of duties, compliance with accounting rules, documenting of all business events, custody system, posting on the day of a business event, in-built control mechanisms in source applications, and archiving pursuant to the laws and internal regulations. Furthermore, the policy precisely defines primary accounting controls, performed in the scope of analytical bookkeeping, and secondary accounting controls, i.e. checking the efficiency of implementation of primary accounting controls. With efficient mechanism of controls in the area of accounting reporting, NLB ensures: • a reliable decision-making and operation support system, • accurate, complete, and timely accounting data and the resulting accounting and other reports of the Bank, • compliance with legal and other requirements. 4. Information concerning takeover legislation All data concerning the takeover legislation can be found in the chapter Corporate Governance, sub-chapter General Meeting, page 145, and in other chapters of the Annual Report. NLB Group 2016 Annual Report347 violations, and taking the necessary measures. In the framework of the preventive and development pillar of the compliance function, we consolidated the: (i) management of regulatory compliance, (ii) the procedure of preventive reviews of processes, and set up the (iii) general assessment of integrity and compliance risk system (SOTIS), including (iv) the second in the row survey of compliance and ethics and implementation of workshops with groups of employees with the topic of the renewed NLB Group Code. We continued with the activities of investigations, information protection, and money laundering prevention. The Bank compiles an annual self-assessment of corporate identity which contains a comparison, a progress report, and a description of the current situation. This Corporate Governance Statement of the NLB is publicly available also on NLB’s web page (http://www.nlb.si/ corporate-governance). 5. Information on the work and key 7. Corporate integrity powers of the general meeting and a description of shareholders’ rights and the means to exercise them All data concerning the functioning and key authorisations of the General Meeting of Shareholders and description of shareholders’ rights can be found in the chapter Corporate Governance, sub-chapter General Meeting, on page 144 and under point 3.3. (Capital instruments included in the capital) on page page 365. 6. Data on the composition and functioning of the management or supervisory bodies and their committees All data concerning the composition and functioning of the management or supervisory bodies or their committees can be found in the chapter NLB Corporate Governance, in the sections Supervisory Board and Management Board, on page 146 and page 145 Ljubljana, 7 April 2017 In accordance with the provisions of Item 3.4.1 of the Corporate Governance Code for Companies with a State Capital Investment the NLB included a description of the company’s corporate integrity in the Corporate Governance Statement. Within a year of adopting the Slovenian corporate integrity guidelines (adopted in January 2014), the Bank further upgraded its compliance and integrity program. From this point of view, the focus was on the establishment and consolidation of the system of identifying, monitoring, and assessing the risks in this area including adoption of new Compliance Policy, renewal of the Code of Ethics, and execution of Enterprise Compliance Risk Assessment. Therefore, NLB can identify itself with all statements in the preamble and can adopt the general commitment about the corporate integrity and zero tolerance to illegal and non-ethical conduct by appropriately handling the perceived NLB Supervisory Board NLB Management Board Primož Karpe Chairman of the Supervisory Board László Pelle Member of the Management Board Archibald Kremser Member of the Management Board Andreas Burkhardt Member of the Management Board Blaž Brodnjak Chief Executive Officer NLB Group 2016 Annual Report 348 Statement on the Management of Risk NLB d.d.’s Management Board and Supervisory Board provide herewith a concise statement of risk management according to Article 17 of the Regulation on Internal Governance Arrangements, the Management Body and the Internal Capital Adequacy Assessment Process for Banks and Savings Banks (Official Gazette of the RS, no. 73/2015 and 49/2016), Regulation (EU) 575/2013 (date of publication 21 December 2015), article 435 (Risk Management Objectives and Policies), point (e) and (f), as well as EBA Guidelines on Disclosure requirements (EBA GL/2016/11). Risk management at NLB d.d. and in the NLB Group is implemented in accordance with established internal policies and procedures which take into account European banking regulations, the regulations adopted by the Bank of Slovenia, the current EBA guidelines, and relevant good banking practices. Furthermore, NLB’s risk management framework is defined and organised with regard to the Group’s risk profile, business, and the risk strategy of the Group. The NLB Group plans for a prudent risk appetite and optimally profitable operations in the long run, considering the risks assumed, while at the same time meeting all regulatory requirements. The Strategy of NLB Group, the risk appetite, the risk strategy, and the key internal risk policies of NLB Group approved by the Management Board and the Supervisory Board of NLB d.d. specify the strategic objectives and guidelines concerning: risk assumption; and the approaches and methodologies for monitoring, measuring, mitigating, and managing all types of risk. NLB Group regularly monitors its target risk appetite profile, representing the key component of the risk mitigation process. The risk profile enables detailed monitoring and proactive management. The usage of risk profile limits and potential deviations from limits and target values are reported regularly to the respective committees and/or the Management Board of the Bank, the Risk Committee of the Supervisory Board, and the Supervisory Board of the Bank. Additionally, NLB Group has set up early warning systems in different risk areas in order to strengthen the existing internal controls and timely responding when necessary. In accordance with the Risk Appetite Statement, NLB Group, as the largest Slovenian banking and financial group, intends to be a sustainably profitable banking group, predominantly working with clients in those core markets. Management of credit risk, which is the most important risk in the NLB Group, focuses on the taking of moderate risks, and also ensuring an optimal return considering the risks assumed. Moreover, the Group’s liquidity risk tolerance is low. The NLB Group must maintain an appropriate level of liquidity at all times to meet its short-term liabilities, even if a specific stress scenario is realised. Further, with the aim of minimising this risk, the Group pursues an appropriate structure of sources of financing. In the area of currency risk, the NLB Group thus pursues the goals of low to moderate exposure. The NLB Group’s basic orientation in the management of interest rate risk is to prevent negative effects on revenues that would arise from changed market interest rates and, therefore, a low tolerance for this risk is stated. The conclusion of transactions in derivative financial instruments at NLB d.d. is primarily limited to servicing customers and hedging NLB d.d.’s own positions. When assuming operational risk, the NLB Group pursues the orientation that such risk must not significantly impact its operations and, therefore, the risk appetite for operational risks is low to moderate. The tolerance for all other risk types (for example, reputation risk, profitability risk, and others) is low, and focuses on minimising their possible impacts on the Group’s operations. These also include non-financial risks. The main NLB Group risk appetite points include: • Preservation of a prudent level of capital adequacy, including regulatory requirements and capital buffers; • Maintenance of a solid level and structure of liquidity minimising potential shortfalls; • Customers’ deposits as the main funding base; • A gradual improvement in the quality of the credit portfolio by reducing non-performing exposures and preservation of adequate level of provisions; • Ensuring sustainable and limited credit risk volatility; • Stable income by increasing share of non-interest income; • Ensuring sustainable profitability; • Ensuring sustainable and limited size of subsidiary banks. NLB Group 2016 Annual Report349 The values of the most important risk appetite indicators of the NLB Group as at the end of 2016, reflecting the interconnection between business strategy and targeted risk profile, were the following: • Capital adequacy ratio (CET1) 17.0%, • Loan-to-deposit ratio (LTD) 74%, • LCR: 332%, • NSFR:147%, • The share of non-performing exposure by EBA 10.0%, • Return on equity (ROE) after tax 7.4%. Consequently, NLB Group concluded the year 2016 within its target risk appetite, with a strong capital and liquidity position. The Condensed Statement of the management of risk is also published on the NLB intranet with the aim of strict adherence of the Banks’ employees in daily operations of the Bank, as regards the definition and importance of a consistent tendency of the adopted risks, and ways to take into account when adopting its daily business decisions. Ljubljana, 7 April 2017 NLB Supervisory Board NLB Management Board Primož Karpe Chairman of the Supervisory Board László Pelle Member of the Management Board Archibald Kremser Member of the Management Board Andreas Burkhardt Member of the Management Board Blaž Brodnjak Chief Executive Officer NLB Group 2016 Annual Report 350 Statement on the Arrangement of Internal Governance NLB d.d. pursues internal governance, including corporate governance, according to the legislation applicable in the Republic of Slovenia, adhering also to its internal acts. NLB d.d. fully complies with the acts referred to in Article 9, paragraph two of the Banking Act.2 With the aim of strengthening internal governance, the Bank operates especially in compliance with: 1. The provisions of the Banking Act defining the internal governance arrangements, especially the provisions of Chapter 3.4 (Governance System of a Bank) and Chapter 6 (Internal Governance Arrangements and Internal Capital Adequacy), in the part referring to bank/savings bank or members of a management body; 2. Regulation on internal governance arrangements, the management body, and the internal capital adequacy assessment process for banks and savings banks,3 and 3. EBA Guidelines on internal governance, on the assessment of the suitability of members of the management body and key function holders, and the remuneration policies and practices, based on the relevant regulations of the Bank of Slovenia on the application of these Guidelines.4 By signing this statement we undertake to continue with proactive activities to strengthen and promote further internal governance arrangement and corporate integrity in wider professional, financial, corporate, and other publics. Ljubljana, 7 April 2017 NLB Supervisory Board NLB Management Board Primož Karpe Chairman of the Supervisory Board László Pelle Member of the Management Board Archibald Kremser Member of the Management Board Andreas Burkhardt Member of the Management Board Blaž Brodnjak Chief Executive Officer 2 Banking Act (ZBan-2), Official Gazette of the RS, no. 25/15 and 44/16; 3 Regulation of the Bank of Slovenia on internal management arrangements, management body, and the internal capital adequacy assessment process for banks and savings banks, Official Gazette of the RS, no. 73/15 and 49/16; 4 http://www.bsi.si/zakoni-in-predpisi.asp?MapaId=1906 NLB Group 2016 Annual Report Risk and Capital Management (Disclosures in Accordance with Pillar 3 of the Basel Standards) Contents 1. 2. 3. Introduction Scope of application Capital 3.1. Capital adequacy 3.2. Reconciliation of items with financial statements 3.3. Capital instruments included in the capital 3.4. Detailed presentation of capital elements 4. 5. Capital buffers Capital requirements 5.1. Summary of the approach to assessing the internal capital needed for current and planned activities 5.2. Capital requirements 6. Exposure to counterparty credit risk 6.1. The methodology used to assign internal capital and credit limits for counterparty credit exposures, and the measures for exposure value under the method used 6.2. Policies for collateralisation and the establishment of credit reserves, and impact of the amount of collateral the institution would have to provide in case of a downgrading of its credit rating 6.3. Discussion of policies with respect to wrong-way risk exposures 6.4. Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held, and net derivatives credit exposure 7. Credit risk adjustments 7.1. Breakdown of exposures and loan collaterals by exposure category 7.2. Geographical distribution of exposures broken down in significant areas by material exposure classes 7.3. Distribution of exposures by counterparty type or industry broken down by exposure classes 7.4. Residual maturity breakdown of all exposures broken down by exposure classes 7.5. Past due exposures and the volume of impairments for significant industries and significant geographical areas 8. 9. Use of ratings by external rating institutions (ECAI) Leverage 10. Remuneration policy 10.1. Information on the decision-making process used for determining the Remuneration Policy 10.2. Information on the link between pay and performance 10.3. The essential components of the policy of remuneration for employees performing special work 10.4. The ratio between fixed and variable remuneration 10.5. Information on the performance criteria on which the entitlement to shares, options, or variable components of remuneration are based 10.6. Main parameters and rationale for any variable component scheme and any other non-cash benefits 10.7. Quantitative information on remuneration 11. Information regarding governance arrangements 353 354 355 360 360 361 365 367 372 373 373 374 376 376 376 376 377 377 377 382 384 388 389 391 391 395 395 396 398 400 401 401 403 404 11.1. The recruitment policy for the selection of members of the management body and their actual knowledge, skills, and expertise 404 11.2. The policy on diversity with regard to selection of members of the management body, its objectives and any relevant targets set out in that policy, and the extent to which these objectives and targets have been achieved 12. List of all disclosures required under Part 8 of Regulation (EU) No 575/2013 404 406 NLB Group 2016 Annual Report354 1. Introduction The European legislation on capital requirements, based on the Basel II and III principles, introduced, among other items, requirements regarding the transparency of bank operations. European banks are bound to disclose certain information which should provide sufficient information for potential investors about the risks assumed by banks in their operations. The requirements for mandatory disclosures from the sphere of risks and capital adequacy are listed in Part Eight of the European Regulation on prudential requirements for credit institutions and investment firms (Regulation (EU) No 575/2013), which is directly binding in all member states. When preparing the disclosures, the Bank considered relevant implementing and regulatory technical standards, as well as guidelines from the European bank authority (EBA): • Commission Implementing Regulation (EU) No 1423/2013 of 20 December 2013 laying down implementing technical standards with regard to disclosure of own funds requirements for institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council; • Commission Delegated Regulation (EU) No 2015/1555 of 28 May 2015 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for the disclosure of information in relation to the compliance of institutions with the requirement for a countercyclical capital buffer in accordance with Article 440; • Commission Implementing Regulation (EU) 2016/200 of 15 February 2016 laying down implementing technical standards with regard to disclosure of the leverage ratio for institutions, according to Regulation (EU) No 575/2013 of the European Parliament and of the Council; • Guidelines EBA/GL/2014/03 on disclosure of encumbered and unencumbered assets; • Guidelines EBA/GL/2014/14 on materiality, proprietary, and confidentiality and on disclosure frequency under Articles 432(1), 432(2) and 433 of Regulation (EU) No 575/2013; and • Guidelines EBA/GL/2015/22 on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No 575/2013. In accordance with the capital legislation, NLB d.d. has the position of an “EU parent bank” and is therefore obliged to disclose information on a consolidated basis. The table in Chapter 12 presents the entire list of necessary disclosures by article of the Regulation, together with an indication of the part of the Annual Report in which the relevant contents are disclosed. The numerical data disclosed in the accounting part of the Annual Report (Audited Financial Statements) is based on a different consolidation method as envisaged by the Regulation on these disclosures. Nevertheless, some information is not disclosed according to both consolidation methods as owing to the immateriality of the differences (shown in the table under Chapter 2), their duplication would not improve transparency in terms of the risks involved. This concerns the following information: • disclosures in relation to exposures in equities not included in the trading book (Article 447 a, b, c, and d), and • disclosures in relation to impairments of financial assets measured at amortised cost (Article 442 a, b and i). Some of the prescribed disclosures are not relevant for NLB Group as they relate to alternative approaches for calculation of capital requirements, or since they relate to types of transactions that NLB Group is currently not involved in. NLB Group uses the following approaches for the calculation of capital requirements: • credit risk – standardised approach, • market risk – standardised approach, and • operational risk – basic indicator approach. Thus, the disclosures relating to other approaches not used by NLB Group are not applicable: • disclosures related to the IRB approach in relation to credit risk (Articles 452 and 438 d), • disclosures related to the advanced measurement approach for operational risk (Article 454), and • disclosures related to internal models for the calculation of market risk capital requirements (Article 455). NLB Group 2016 Annual Report355 In addition, the following disclosures are also not relevant for NLB Group because they relate to types of transactions currently not performed by NLB Group, or for other reasons (a consolidation method that is not used, disclosures only upon request of the competent authority, etc.): • disclosures related to securitisation (Article 449), • disclosures related to credit derivatives (Article 439 g, h, and i), • disclosures related to on- and off-balance sheet netting (Article 453 a), • disclosures related to the application of the provisions of Articles 7 and 9 of the Regulation (concerning the application of prudential requirements on an individual basis and the individual consolidation method) (Article 436 e), • disclosures related to a capital buffer for global systemically important institutions (G-SII buffer) (Article 441), • disclosures related to the result of the institution’s internal capital adequacy assessment process (Article 438 b), and • disclosures related to capital instruments issued prior to 31 December 2011 which, in accordance with the new legislation, are no longer eligible to be included in the capital and must be gradually excluded from the capital in the transitional period (Article 492(4)). The figures in this part of the Annual Report have been prepared based on the COREP reports submitted to the supervisory authorities. As amounts are rounded off to one thousand Euros, minimum deviations can occur in the sums of individual categories and between tables. 2. Scope of application (Articles 436 a, b, c, and d of Regulation (EU) No 575/2013) In accordance with the capital legislation, NLB d.d. has the position of an “EU parent bank” and is therefore obliged to disclose information regarding risk and capital management (pursuant to Part Eight of Regulation (EU) No 575/2013) only on a consolidated basis. Disclosures are thus prepared and published for NLB Group using a prudential consolidation pursuant to the provisions of Regulation (EU) No 575/2013, Part One, Title II, Chapter 2. The differences between consolidation for prudential purposes and consolidation for accounting purposes (pursuant to the IFRS) are in the list of included companies, based on activity and in the method of consolidation: • List of companies: The consolidation for accounting purposes comprises all subsidiaries (i.e. entities controlled by the Bank or the banking group), all associated companies (in which it directly or indirectly holds between 20% and 50% of voting rights, has a material impact but does not control them), and jointly controlled companies (i.e. jointly controlled by NLB Group based on a contractual agreement). From among the subsidiaries, associated companies, and jointly controlled companies, the prudential consolidation only includes credit institutions, financial institutions, ancillary service undertakings, and asset management companies (in accordance with the definitions under Article 4 of Regulation (EU) No 575/2013). As regards NLB Group, this means that the prudential consolidation does not include companies operating in the area of insurance. • Consolidation method: In consolidation for accounting purposes, subsidiaries are consolidated according to the method of full consolidation, while associated companies and jointly controlled companies are consolidated according to the capital method. Prudential consolidation requires a different treatment of jointly controlled companies, which have to be consolidated in line with the proportional method. The table below shows the list of NLB Group companies (subsidiaries, associated companies, and jointly controlled companies), their main characteristics, and the consolidation method. More details about individual companies are given in the accounting part of the Annual Report (Audited Financial Statements) under Chapter 5.12. NLB Group 2016 Annual ReportNLB Group members as at 31 December 2016 and method of their inclusion in consolidated reports Nature of business NLB Group's voting rights Country of incorporation Accounting consolidation method Prudential consolidation method 357 Finance 100.00% Republic of Germany Subsidiaries: LHB AG, Frankfurt NLB Banka a.d., Skopje NLB Banka a.d., Podgorica NLB Banka a.d., Beograd NLB Banka d.d., Sarajevo NLB Banka a.d., Banja Luka NLB Banka sh.a., Prishtina NLB Leasing d.o.o., Ljubljana Optima Leasing d.o.o., Zagreb in liquidation PRO-REM d.o.o., Ljubljana in liquidation OL Nekretnine d.o.o., Zagreb in liquidation BH-RE d.o.o., Sarajevo NLB Leasing Podgorica d.o.o. in liquidation NLB Leasing d.o.o., Beograd in liquidation NLB Leasing d.o.o., Sarajevo NLB Lizing d.o.o.e.l., Skopje in liquidation NLB InterFinanz AG, Zürich in liquidation NLB InterFinanz Praha s.r.o., Praga NLB InterFinanz d.o.o., Beograd NLB Factoring a.s., Brno in liquidation Banking Banking Banking Banking Banking Banking Finance Finance Real estate Real estate Real estate Finance Finance Finance Finance Finance Finance Finance Finance NLB Skladi d.o.o., Ljubljana Asset management NLB Nov penziski fond a.d., Skopje NLB Crna gora d.o.o., Podgorica NLB Propria d.o.o., Ljubljana in liquidation NLB Srbija d.o.o., Beograd CBS Invest d.o.o., Sarajevo REAM d.o.o., Beograd REAM d.o.o., Podgorica REAM d.o.o., Zagreb SR-RE d.o.o., Beograd Tara Hotel d.o.o., Budva Insurance Real estate Real estate Real estate Real estate Real estate Real estate Real estate Real estate Real estate Prospera plus d.o.o., Ljubljana Tourist and catering trade Associates: Bankart d.o.o., Ljubljana Skupna pokojninska družba d.d., Ljubljana Kreditni biro SISBON d.o.o., Ljubljana in liquidation ARG - Nepremičnine d.o.o., Horjul Joint ventures: NLB Vita d.d., Ljubljana Skupina Prvi faktor, Ljubljana in liquidation Card processing Insurance Credit bureau Real estate Insurance Finance 86.97% 98.00% 99.997% Republic of Macedonia Republic of Montenegro Republic of Serbia 97.35% Republic of Bosnia and Herzegovina 99.85% Republic of Bosnia and Herzegovina 81.21% 100.00% 100.00% 100.00% 100.00% Republic of Kosovo Republic of Slovenia Republic of Croatia Republic of Slovenia Republic of Croatia 100.00% Republic of Bosnia and Herzegovina 100.00% 100.00% Republic of Montenegro Republic of Serbia 100.00% Republic of Bosnia and Herzegovina 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Republic of Macedonia Switzerland Czech Republic Republic of Serbia Czech Republic Republic of Slovenia Republic of Macedonia Republic of Montenegro Republic of Slovenia Republic of Serbia 100.00% Republic of Bosnia and Herzegovina 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 39.44% 28.13% 29.68% 75.00% 50.00% 50.00% Republic of Serbia Republic of Montenegro Republic of Croatia Republic of Serbia Republic of Montenegro Republic of Slovenia Republic of Slovenia Republic of Slovenia Republic of Slovenia Republic of Slovenia Republic of Slovenia Republic of Slovenia Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full - Full Full Full Full Full Full Full Full Full Full Equity Equity Equity Equity Equity Equity Equity - Equity Equity - Proportional None of NLB Group’s investments in subsidiaries, associated companies, and jointly controlled companies represents a deduction from capital. The total amount of investments that could become deductions from capital is relatively low and remains under the statutory thresholds. Below a comparison is given of financial statements of NLB Group according to both consolidation methods. NLB Group 2016 Annual Report358 Statement of financial position of NLB Group – comparison of the two consolidation methods 31.12.2016 31.12.2015 in EUR thousand Accounting consolidation Prudential consolidation Difference Accounting consolidation Prudential consolidation Difference Cash, cash balances at central banks and other demand deposits at banks 1,299,014 1,299,313 -299 1,161,983 1,162,931 -948 Trading assets Financial assets designated at fair value through profit or loss Available for sale financial assets Derivatives - hedge accounting Loans and advances Debt securities Loans and advances to banks Loans and advances to customers Other financial assets Held to maturity financial assets Fair value changes of hedged items in portfolio hedge of interest rate risk Non-current assets classified as held for sale Property and equipment Investment property Intangible assets Investments in associates and joint ventures Current income tax assets Deferred income tax assets Other assets Total assets Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting 0 0 2,555 0 -9,154 0 -789 668 87,699 6,694 87,699 6,694 0 0 267,413 267,413 7,595 7,595 2,072,153 2,068,470 3,683 1,737,191 1,734,636 217 217 0 1,083 1,083 7,493,933 7,489,784 4,149 7,589,496 7,598,650 85,315 85,315 435,537 434,597 6,912,067 6,904,216 61,014 65,656 611,449 611,449 678 4,263 678 4,263 196,849 196,869 83,663 33,970 43,248 2,888 7,735 84,206 33,926 16,024 3,942 7,740 94,558 94,438 0 940 7,851 -4,642 0 0 0 -20 -543 44 27,224 -1,054 -5 120 394,579 431,775 394,579 432,564 6,693,621 6,692,953 69,521 78,554 -9,033 565,535 565,535 741 4,629 741 4,629 207,730 207,801 93,513 39,327 39,696 929 9,400 94,205 39,274 14,988 1,602 9,543 95,354 95,159 0 0 0 -71 -692 53 24,708 -673 -143 195 12,039,011 12,005,712 33,299 11,821,615 11,805,785 15,830 18,791 2,011 29,024 18,791 2,011 29,024 0 0 0 29,920 4,912 33,842 29,920 4,912 33,842 0 0 0 Financial liabilities measured at amortized cost 10,350,035 10,358,105 -8,070 10,157,553 10,197,456 -39,903 Deposits from banks and central banks 42,334 42,334 0 57,982 57,982 0 Borrowings from banks and central banks 371,769 380,732 -8,963 571,029 611,214 -40,185 Fair value changes of the hedged items in portfolio hedge of interest rate risk 0 0 Due to customers Borrowings from other customers Debt securities in issue Subordinated liabilities Other financial liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Share capital Share premium Other equity instruments issued Accumulated other comprehensive income Profit reserves Retained earnings Treasury shares Non-controlling interests Total equity 9,437,147 9,436,195 952 9,020,666 9,020,104 562 83,619 83,619 277,726 277,726 27,145 27,145 110,295 110,354 0 0 0 -59 0 100,267 304,962 27,340 75,307 0 100,267 304,962 27,340 75,587 0 0 0 0 -280 0 100,914 89,716 11,198 122,639 98,784 23,855 3,146 727 8,703 3,117 711 8,764 29 16 -61 7,514 313 7,534 289 14,539 14,602 -20 24 -63 10,513,351 10,510,239 3,112 10,371,232 10,387,339 -16,107 200,000 871,378 0 29,969 13,522 200,000 871,378 0 20,102 13,522 0 0 0 9,867 0 200,000 871,378 0 23,603 13,522 200,000 871,378 0 15,693 13,522 380,444 360,329 20,115 314,307 290,484 0 0 30,347 30,142 0 205 0 0 27,573 27,369 1,525,660 1,495,473 30,187 1,450,383 1,418,446 0 0 0 7,910 0 23,823 0 204 31,937 15,830 Total liabilities and total equity 12,039,011 12,005,712 33,299 11,821,615 11,805,785 NLB Group 2016 Annual Report359 Income statement of NLB Group – comparison of the two consolidation methods 31.12.2016 31.12.2015 in EUR thousand Accounting consolidation Prudential consolidation Difference Accounting consolidation Prudential consolidation Difference Interest and similar income Interest and similar expense Net interest income Dividend income Fee and commission income Fee and commission expenses Net fee and commission income Gains less losses from financial assets and liabilities not classified as at fair value through profit or loss 388,494 389,422 -71,189 -71,593 317,305 317,829 1,238 1,238 194,371 191,383 -48,706 -48,210 145,665 143,173 14,788 14,788 Gains less losses from financial assets and liabilities held for trading 6,921 6,920 -928 404 -524 0 2,988 -496 2,492 0 1 0 0 443,203 446,962 -103,001 -104,136 340,202 342,826 1,346 1,346 195,710 193,010 -56,899 -56,309 138,811 136,701 10,659 10,659 -18,877 -18,882 -3 231 -3 231 -468 -25 11,831 12,383 -624 -622 Gains less losses from financial assets and liabilities designated at fair value through profit or loss Fair value adjustments in hedge accounting Foreign exchange translation gains less losses Gains less losses on derecognition of assets Other operating income Other operating expenses Administrative expenses Depreciation and amortization Provisions for other liabilities and charges 235 235 -3,239 1,158 867 -3,239 1,626 892 24,442 26,022 -1,580 27,329 27,432 -33,204 -33,772 -261,160 -262,070 -28,345 -28,344 -4,357 -4,488 568 910 -1 131 -26,824 -26,902 -265,984 -267,232 1,248 -31,856 -31,870 696 247 Impairment charge -56,288 -51,416 -4,872 -83,801 -87,867 Gains less losses from capital investments in subsidiaries, associates, and joint ventures Net losses from non-current assets held for sale 5,006 -432 5,282 -432 -276 0 4,312 -690 1,145 -690 Profit or loss before income tax 130,600 134,244 -3,644 106,758 98,902 Income tax Profit or loss for the year Attributable to owners of the parent Attributable to non-controlling interests -14,975 -14,975 0 -11,380 -11,964 115,625 119,269 110,017 113,673 5,608 5,596 -3,644 -3,656 12 95,378 91,914 3,464 86,938 83,480 3,458 In NLB Group, there are no substantial practical or legal impediments to the prompt transfer of capital or repayment of liabilities between the parent undertaking and its subsidiaries. In the case of a capital transfer, it is necessary to follow the provisions regarding the minimum capital. Also, for subsidiary banks, provisions regarding liquidity, capital adequacy, and the level of capital to cover all risks are taken into account, all in accordance with the local legislature. In an asset management company (NLB Skladi), provisions regarding capital adequacy and level of capital to cover arise from the Law on Investment Funds and Management Companies, while in pension company (Nov penziski fond) provisions regarding capital adequacy and the level of capital to cover arise from the Law on Pension Insurance. -3,759 1,135 -2,624 0 2,700 -590 2,110 0 5 0 0 -552 -2 -103 78 14 449 4,066 3,167 0 7,856 584 8,440 8,434 6 NLB Group 2016 Annual Report360 For several non-core leasing companies that are in the liquidation process there is a restriction according to a local Companies Law stipulating that over the duration of the liquidation process dividends are not paid out, nor are assets disbursed to stakeholders until all claims are paid. The liquidation process cannot be concluded until all the court disputes are brought to an end. There are also contractual restrictions that are to be taken into account and arise from subordinated loans that NLB d.d. granted to two of the subsidiary banks, namely NLB Banka, Skopje and NLB Banka, Podgorica. According to the nature of the subordinated loan, in the event of a bankruptcy or liquidation procedure of the above mentioned subsidiary banks, such a loan cannot be repaid on the due date but only after claims arising from all unsubordinated obligations are settled, and to the extent permitted by the rest of the bank’s assets in the bankruptcy or liquidation procedure. All subsidiaries of the NLB Group not included in the prudential consolidation met the minimum capital requirements as at 31 December 2016. The total amount of capital deficit was EUR 0. 3. Capital 3.1. Capital adequacy Pursuant to Regulation (EU) No 575/2013, banks and banking groups must within the scope of regulatory calculations (Pillar 1) monitor three different capital adequacy ratios. The capital is divided into three subcategories that differ according to their quality in terms of their ability to cover risks. The system of three minimum ratios ensures an appropriate qualitative structure of these elements, i.e. their mutual proportions. The minimum ratios banks must achieve within the scope of Basel Pillar 1 (regulatory requirements) are the following: • Common Equity Tier 1 (CET1) capital ratio: 4.5%, • Tier 1 capital ratio: 6%, and • Total capital ratio: 8%. The needed level of capital ratios is also influenced by other requirements and recommendations that are being imposed to each bank by the supervisory institutions or by the legislation: • Pillar 2 Requirements (SREP requirement): bank/group specific, set by supervisory authority, obligatory; • Capital buffers: some are prescribed by law for all banks and some are bank-specific; not obligatory, but their breaching triggers limitations in payment of dividends and other distributions from capital (more details in Chapter4); • Pillar 2 Guidance: set by the supervisory authority for the individual bank/group, not obligatory, and not affecting dividends or other distributions from capital. According to SREP decision, at the end of 2016, NLB was obliged to maintain a CET1 ratio on a consolidated basis on the level of 12.75% (covering Pillar 1 and Pillar 2 requirement and also capital conservation buffer). From 1 January 2017, the new SREP decision applies, prescribing NLB to maintain a total capital ratio on a consolidated basis on the level of 11.5% (Pillar 1 + Pillar 2 requirement; before capital buffers). In 2016, the capital adequacy ratios of NLB Group remained at a level which exceeded all current and announced regulatory capital requirements, including capital buffers and Pillar 2 Guidance. NLB Group calculates capital and capital ratios fully in line with the EU legislation, which also includes discretionary measures prescribed by the Bank of Slovenia. In 2016, the capital of NLB d.d. and NLB Group consists merely of the components of top-quality CET1 capital (no subordinated instruments that would rank in lower capital categories), which is why all three capital ratios are the same. At the end of 2016, the three capital adequacy ratios for NLB Group stood at 17.0% (or 0.8 percentage point higher than at the end of 2015), and for NLB d.d. at 23.4% (or 0.8 percentage point higher than at the end of 2015). The improvement of NLB Group’s capital adequacy derives mainly from retained earnings, and to a lesser degree from a drop in risk-weighted assets. NLB Group 2016 Annual ReportCapital adequacy of NLB Group: Paid up capital instruments Share premium Retained earnings - from previous years Current result Accumulated other comprehensive income Other reserves Minority interest Prudential filters: Cash flow hedge reserve Prudential filters: Additional Valuation Adjustments (AVA) (-) Goodwill (-) Other intangible assets (-) Deferred tax assets that rely on future profitability and do not arise from temporary differences net of associated tax liabilities Common Equity Tier 1 Capital (CET1) Additional Tier 1 capital Tier 1 capital Tier 2 capital Total capital Risk exposure amount for credit risk Risk exposure amount for market risks Risk exposure amount for CVA Risk exposure amount for operational risk Total risk exposure amount (RWA) Common Equity Tier 1 Ratio Tier 1 Ratio Total Capital Ratio 361 in EUR thousand 31.12.2016 31.12.2015 200,000 871,378 246,656 49,890 -6,053 13,522 0 0 -2,213 -3,529 -30,397 -3,013 200,000 871,378 207,004 39,599 -4,090 13,522 0 897 -3,134 -3,529 -35,745 -2,755 1,336,241 1,283,147 0 0 1,336,241 1,283,147 0 0 1,336,241 1,283,147 6,864,737 6,849,633 104,175 463 892,753 137,351 9,313 930,688 7,862,128 7,926,985 17.0% 17.0% 17.0% 16.2% 16.2% 16.2% 3.2. Reconciliation of items with financial statements (Articles 437 a and f, and 447 e of Regulation (EU) No 575/2013) Calculations of the capital and capital ratios are based on the financial statements of NLB Group prepared according to prudential consolidation as described in Part One, Title II, Chapter 2 of Regulation (EU) No 575/2013. Essentially, the capital of NLB Group consists of the elements of equity of the balance sheet (not all elements and not fully) and, in addition, it is reduced by deduction items and prudential filters. The table below shows to what extent individual balance sheet items are included in the calculation of capital and capital adequacy. In addition to the amounts actually included in the capital calculation for the end of the year (second column), the amounts of these items in their full extent are also presented, i.e. the amounts that would have been taken into account in the calculation of capital adequacy had there been no transitional period arrangements (third column). Because of the gradual introduction of certain provisions, the capital actually taken into account in the calculation of capital adequacy for the end of 2016 is EUR 25,940 thousands lower than it would have been had all the requirements fully entered into force. The difference primarily arises from accumulated comprehensive income, where temporarily we excluded more unrealised gains than losses, and also partially from the deduction item for deferred taxes. NLB Group 2016 Annual Report362 Mapping of the balance sheet items (statement of financial position items) and capital for the purpose of capital adequacy of NLB Group in EUR thousand 31.12.2016 31.12.2015 Prudential consolidation Included in capital (CAR) as reported Fully-loaded capital (transitional agreements not applied) Prudential consolidation Included in capital (CAR) as reported Fully-loaded capital (transitional agreements not applied) Cash, cash balances at central banks and other demand deposits at banks 1,299,313 1,162,931 Trading assets Financial assets designated at fair value through profit or loss 87,699 6,694 -88 -7 -88 267,413 -267 -267 Prudential filter; Article 34 - AVA, 0.1% of book value -7 7,595 -8 -8 Prudential filter; Article 34 - AVA, 0.1% of book value Available for sale financial assets 2,068,470 -2,068 -2,068 1,734,636 -1,735 -1,735 Prudential filter; Article 34 - AVA, 0.1% of book value Derivatives - hedge accounting Loans and advances 217 7,489,784 Held to maturity financial assets 611,449 Fair value changes of hedged items in portfolio hedge of interest rate risk Non-current assets classified as held for sale Property and equipment Investment property Intangible assets Goodwill 678 4,263 196,869 84,206 1,083 7,598,650 565,535 741 4,629 207,801 94,205 33,926 -33,926 -33,926 39,274 -39,274 -39,274 3,529 -3,529 -3,529 3,529 -3,529 -3,529 Deduction item, Article 36.b - total amount Other intangible assets 30,397 -30,397 -30,397 35,745 -35,745 -35,745 Deduction item, Article 36.b - total amount Investments in associates and joint ventures Current income tax assets 16,024 3,942 14,988 1,602 Deferred income tax assets 7,740 -3,013 -5,021 9,543 -2,755 -6,888 That do not rely on future profitability 0 0 That rely on future profitability and do not arise from temporary differences That rely on future profitability and arise from temporary differences Other assets Total assets Trading liabilities Financial liabilities designated at fair value through profit or loss Derivatives - hedge accounting Financial liabilities measured at amortized cost Fair value changes of the hedged items in portfolio hedge of interest rate risk Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities 5,021 -3,013 -5,021 6,888 -2,755 -6,888 Deduction item, Article 36.c - 60% of the amount in 2016 (40% in 2015) (transitional period) -30 Prudential filter; Article 34 - AVA, 0.1% of book value -5 Prudential filter; Article 34 - AVA, 0.1% of book value 2,719 94,438 2,655 95,159 12,005,712 11,805,785 18,791 2,011 29,024 -30 -5 -30 -5 -30 -5 29,920 4,912 33,842 10,358,105 10,197,456 0 89,716 3,117 711 8,764 0 98,784 7,534 289 14,602 10,510,239 10,387,339 NLB Group 2016 Annual Report363 in EUR thousand 31.12.2016 31.12.2015 Prudential consolidation Included in capital (CAR) as reported Fully-loaded capital (transitional agreements not applied) Prudential consolidation Included in capital (CAR) as reported Fully-loaded capital (transitional agreements not applied) Share capital Share premium Accumulated other comprehensive income 200,000 200,000 200,000 200,000 200,000 200,000 Included in total amount, Article 26 871,378 871,378 871,378 871,378 871,378 871,378 Included in total amount, Article 26 20,102 -6,053 21,895 15,693 -4,090 15,693 From debt securities 32,063 1,124 33,856 29,065 1,259 29,065 AFS exposures to central governments - positive effectss AFS exposures to central governments - negative effectss 30,190 0 30,190 29,070 -1,793 -1,076 -1,793 -3,152 0 0 29,070 Not included in capital according to BoS dis- cretion, Article 467 (in transitional period) -3,152 In 2016 only 60% of book value is included (0% in 2015), Article 467 (transitional period) Other exposures 3,666 2,200 3,666 3,147 1,259 3,147 From equity securities 11,017 6,610 11,017 11,342 4,537 11,342 In 2016 only 60% of book value is included (40% in 2015), Articles 467 and 468 (transitional period) In 2016 only 60% of book value is included (40% in 2015), Articles 467 and 468 (transitional period) From consolidation capital adjustment From cashflow hedges From hedge of net investment in foreign operation 0 0 0 0 0 0 0 0 0 In 2016 only 60% of book value is included (40% in 2015), Articles 467 and 468 (transitional period) -2,243 -897 -2,243 60% of value is included in 2016 (40% in 2015) (Article 467) and then exclud- ed as deduction item (Article 33 a) 754 452 754 754 302 754 In 2016 only 60% of book value is included (40% in 2015), Articles 467 and 468 (transitional period) Other -23,732 -14,239 -23,732 -23,225 -9,290 -23,225 In 2016 only 60% of book value is included (40% in 2015), Articles 467 and 468 (transitional period) Profit reserves Retained earnings Retained earnings - from previous years 13,522 13,522 13,522 13,522 13,522 13,522 Included in total amount, Article 26 360,329 296,546 296,546 290,484 246,603 246,603 Included in total amount, Article 26 246,656 246,656 246,656 207,004 207,004 207,004 Retained earnings - current results 113,673 49,890 49,890 83,480 39,599 39,599 Included only remaining sum after dividends, Article 26 Treasury shares Non-controlling interests Total equity 0 30,142 1,495,473 0 0 Total liabilities and equity 12,005,712 0 0 0 0 0 27,369 1,418,446 11,805,785 0 0 Not eligible for inclusion in capital (Articles 81 to 84) 1,336,270 1,362,210 1,283,339 1,298,990 Sum of balance sheet items -29 -29 -1,090 -1,090 Prudential filter; Article 34 - AVA for off-bal- ance items, 0.1% of book value 1,336,241 1,362,181 1,283,147 1,300,143 Capital NLB Group 2016 Annual Report 364 Differences between the accounting capital and the capital for the calculation of capital adequacy of NLB Group as at 31 December 2016 Exclusion of 100% of unrealised profits from exposures to central governments (in transitional period) Exclusion of 40% of unrealised losses from exposures to central governments (in transitional period) Exclusion of 40% of unrealised losses from exposures to central governments (in transitional period) Exclusion of minority interests not eligible according to CRR requirements -30,190 717 3,318 Equity in balance sheet (prudential consolidation) Dividends 200,000 871,378 20,102 13,522 246,656 113,673 -63,783 31.12.2016 Share capital Share premium Accumulated other comprehensive income Profit reserves Retained earnings - from previous years Rretained earnings - current results Non-controlling interests 30,142 -30,142 in EUR thousand Prudential filters and deduction items from capital Capital (included in calculation of capital adequacy) Capital item (in capital adequacy calculation) 200,000 Paid in capital instruments 871,378 Share premium -6,053 Accumulated other comprehensive income 13,522 Other reserves 246,656 Retained earnings - from previous years 49,890 Current results 0 0 Minority interest 0 Prudential filter: Cash flow hedges reserve (Article 33.a) -2,213 -2,213 -3,529 -3,529 -30,397 -30,397 -3,013 -3,013 Total equity 1,495,473 -63,783 -30,142 -30,190 717 3,318 -39,152 1,336,241 Prudential filter: Additional valuation adjustment (AVA) (Article 34) Deduction item: Goodwill (Article 36.b) Deduction item: Other intangible assets (Article 36.b) Deduction item: Deferred tax assets that rely on future profitability and do not arise from temporary differences net of associat- ed liabilities (Article 36.c) Common Equity Tier 1 (CET1) capital 0 Additional Tier 1 capital 1,336,241 Tier 1 capital 0 Tier 2 capital 1,336,241 Total capital NLB Group 2016 Annual ReportDifferences between the accounting capital and the capital for the calculation of capital adequacy of NLB Group as at 31 December 2015 365 Exclusion of 100% of unrealised profits from exposures to central governments (in transitional period) Exclusion of 60% of unrealised losses from exposures to central governments (in transitional period) Exclusion of minority interests not eligible according to CRR requirements -25,918 6,135 31.12.2015 Share capital Share premium Accumulated other comprehensive income Profit reserves Retained earnings - from previous years Rretained earnings - current results Equity in balance sheet (prudential consolidation) Dividends 200,000 871,378 15,693 13,522 207,004 83,480 -43,881 Non-controlling interests 27,369 -27,369 in EUR thousand Prudential filters and deduction items from capital Capital (included in calculation of capital adequacy) Capital item (in capital adequacy calculation) 200,000 Paid in capital instruments 871,378 Share premium -4,090 Accumulated other com- prehensive income 13,522 Other reserves 207,004 Retained earnings - from previous years 39,599 Current results 0 Minority interest 897 897 Prudential filter: Cash flow hedges reserve (Article 33.a) -3,134 -3,134 Prudential filter: Additional valuation adjustment (AVA) (Article 34) -3,529 -3,529 Deduction item: Goodwill (Article 36.b) -35,745 -35,745 Deduction item: Other intan- gible assets (Article 36.b) Total equity 1,418,446 -43,881 -27,369 -25,918 6,135 -44,266 1,283,147 -2,755 -2,755 Deduction item: Deferred tax assets that rely on future prof- itability and do not arise from temporary differences net of associated liabilities (Article 36.c) Common Equity Tier 1 (CET1) capital 0 Additional Tier 1 capital 1,283,147 Tier 1 capital 0 Tier 2 capital 1,283,147 Total capital 3.3. Capital instruments included in the capital (Article 437 b and c of Regulation (EU) No 575/2013) In 2016 the capital of NLB Group solely consisted of Common Equity Tier 1 capital; the only instruments included in Common Equity Tier 1 capital were the ordinary shares of the parent company NLB d.d. In 2016 NLB Group had no capital instruments issued that would be eligible for inclusion in Additional Tier 1 capital or Tier 2 capital. Some subsidiary banks in NLB Group do have subordinated instruments which they themselves use as a capital component, but because of the non-comparability of the legislation these instruments do not meet the conditions for inclusion in the capital of NLB Group. NLB Group 2016 Annual ReportIssuer NOVA LJUBLJANSKA BANKA d.d., Ljubljana Amount recognised in regulatory capital (Currency in million, as of most recent reporting date) Paid up capital and related share premium: 1.071.377 Nominal amount of instrument N/A – No par value shares (20,000,000 shares) 366 The main characteristics of the ordinary shares of NLB Group: Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement) Governing law(s) of the instrument Regulatory treatment Transitional CRR rules Post-transitional CRR rules Eligible at solo/(sub-)consolidated/ solo&(sub-)consolidated Instrument type (types to be specified by each jurisdiction) Issue price Redemption price Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Optional call date, contingent call dates and redemption amount Subsequent call dates, if applicable Coupons / dividends 17 18 19 Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper 20a Fully discretionary, partially discretionary or mandatory (in terms of timing) 20b Fully discretionary, partially discretionary or mandatory (in terms of amount) Existence of step up or other incentive to redeem Noncumulative or cumulative Convertible or non-convertible If convertible, conversion trigger(s) If convertible, fully or partially If convertible, conversion rate If convertible, mandatory or optional conversion If convertible, specify instrument type convertible into If convertible, specify issuer of instrument it converts into Write-down features If write-down, write-down trigger(s) If write-down, full or partial If write-down, permanent or temporary If temporary write-down, description of write-up mechanism 1 2 3 4 5 6 7 8 9 9a 9b 10 11 12 13 14 15 16 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 SI0021116502 Slovene Common Equity Tier 1 Common Equity Tier 1 Solo and Consolidated Ordinary share EUR 77.55 N/A Shareholders’ equity 18.12.2013 Perpetual No maturity N/A N/A N/A N/A N/A N/A Fully discretionary Fully discretionary N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) First loss absorbent instrument subordinated to all instruments Non-compliant transitioned features If yes, specify non-compliant features No N/A N/A – not relevant for this instrument NLB Group 2016 Annual Report367 The ordinary shares are fully included in the Common Equity Tier 1 capital of NLB Group as the only source. The shares meet all the conditions for inclusion in the capital as stated under the relevant provisions of Regulation (EU) No 575/2013. 3.4. Detailed presentation of capital elements (Article 437 d and e, and 492.3 of Regulation (EU) No 575/2013) The table below shows in detail the elements of the calculation of the capital of NLB Group at the end of the years 2016 and 2015 in the form prescribed by the EBA implementing technical standards, published as Commission Implementing Regulation (EU) No 1423/2013 of 20 December 2014 (Annex VI – presentation of items in the transitional period). A summarised substantive presentation of the elements relevant for NLB Group is given in Chapter 3.1. In line with the instructions, the second column includes amounts that are temporarily excluded from the calculation of capital adequacy according to the provisions on the transitional period (residual amounts). Had the provisions applied fully, i.e. without the transitional period, the calculation would include the amount from the first column added by the difference in the second column. NLB Group does not have any capital instruments that would no longer be eligible for inclusion and that would be subject to pre-Regulation treatment. NLB Group 2016 Annual Report368 Transitional own funds (capital) template for NLB Group 31.12.2016 31.12.2015 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 Common equity Tier 1 (CET1) capital: instruments and reserves 1 Capital instruments and the related share premium accounts of which: ordinary shares Retained earnings Accumulated other comprehensive income (and other reserves) 2 3 3a Funds for general banking risk 5 Minority interest (amount allowed in consolidated CET1) 1,071,378 1,071,378 246,656 33,624 0 0 5a Independently reviewed interim profits net of any foreseeable charge or dividend 49,890 0 0 0 26,155 0 0 0 1,071,378 1,071,378 207,004 29,215 0 0 39,599 0 0 0 19,783 0 0 0 6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 1,401,548 26,155 1,347,196 19,783 Common Equity Tier 1 (CET1) capital: regulatory adjustments 7 8 10 Additional value adjustments (negative amount) Intangible assets (net of related tax liability) (negative amount) Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability where the conditions in Article 38(3) are met) (negative amount) 11 Fair value reserves related to gains or losses on cash flow hedges 12 Negative amounts resulting from the calculation of expected loss amounts 13 Any increase in equity that results from securitised assets (negative amount) 14 Gains or losses on liabilities valued at fair value resulting from changes in own credit standing 15 Defined-benefit pension fund assets (negative amount) 16 Direct and indirect holdings by an institution of own CET1 Instruments (negative amount) 17 18 19 Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) 20a Exposure amount of the following items which qualify for a RW of 1250%, where the institution opts for the deduction alternative 20b of which: qualifying holdings outside the financial sector (negative amount) 20c of which: securitisation positions (negative amount) 20d of which: free deliveries (negative amount) 21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability where the conditions in Article 38(3) are met) (negative amount) 22 Amount exceeding the 15% threshold (negative amount) 23 of which: direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities -2,213 -33,926 0 -13,570 -3,134 -39,274 -5,021 -2,008 -6,888 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,243 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -23,564 -4,133 1,346 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NLB Group 2016 Annual Report369 31.12.2016 31.12.2015 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 25 of which: deferred tax assets arising from temporary differences 25a Losses for the current financial year (negative amount) 25b Foreseeable tax charges relating to CET1 items (negative amount) 26 Regulatory adjustments applied to Common Equity Tier 1 in respect of amounts subject to pre-CRR treatment 26a Regulatory adjustments related to unrealised gains and losses pursuant to Articles 467 and 468 of which: filter for unrealised loss - exposures to central governments of which: filter for unrealised loss - other exposures of which: filter for unrealised gains - exposures to central governments of which: filter for unrealised gains - other exposures 26b Amount to be deducted from or added to Common Equity Tier 1 capital with regard to additional filters and deductions required pre CRR of which: intangible assets (including goodwill) of which: deferred tax assets that rely on future profitability and do not arise from temporary differences net of associated tax liabilities 27 Qualifying AT1 deductions that exceed the AT1 capital of the institution (negative amount) 28 Total regulatory adjustments to Common Equity Tier 1 (CET1) 0 0 0 0 -26,155 717 9,788 -30,190 -6,470 15,578 13,570 2,008 -13,570 -65,307 29 Common Equity Tier 1 (CET1) capital 1,336,241 Additional Tier 1 (AT1) capital: instruments 30 Capital instruments and the related share premium accounts 33 Amount of qualifying items referred to in Article 484(3) and the related share premium account subject to phase out from AT1 Public sector capital injections grandfathered until 1 January 2018 34 Qualifying Tier 1 capital included in consolidated AT1 capital (including minority interest not included in row 5) issued by subsidiaries and held by third parties 36 Additional Tier 1 (AT1) capital before regulatory adjustments Additional Tier 1 (AT1) capital: regulatory adjustments 37 Direct and indirect holdings by an institution of own AT1 Instruments (negative amount) 38 39 40 41 Direct, indirect, and synthetic holdings of the AT1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) Direct, indirect and synthetic holdings by the institution of the AT1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) Direct, indirect and synthetic holdings by the institution of the AT1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) Regulatory adjustments applied to Additional Tier 1 in respect of amounts subject to pre-CRR treatment and transitional treatments subject to phase out as prescribed in Regulation (EU) no 575/2013 (i.e. CRR residual amounts) 41a Residual amounts deducted from Additional Tier 1 capital with regard to deduction from Common Equity Tier 1 capital during the transitional period pursuant to Article 472 of Regulation (EU) no 575/2013 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -15,578 10,577 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -21,129 3,152 14,399 -29,070 -9,610 27,697 23,564 4,133 -23,564 -64,049 1,283,147 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -26,351 -6,568 0 0 0 0 0 0 0 0 0 0 of which: intangible assets (including goodwill) 13,570 13,570 23,564 23,564 41b Residual amounts deducted from Additional Tier 1 capital with regard to deduction from Tier 2 capital during the transitional period pursuant to Article 475 of Regulation (EU) no 575/2013 0 0 0 0 13,570 13,570 23,564 23,564 NLB Group 2016 Annual Report370 41c Amount to be deducted from or added to Additional Tier 1 capital with regard to additional filters and deductions required pre- CRR 42 Qualifying T2 deductions that exceeded the T2 capital of the institution 43 Total regulatory adjustments to Additional Tier 1 (AT1) 44 Additional Tier 1 (AT1) capital 45 Tier 1 capital (T1= CET1 + AT1) Tier 2 (T2) capital: instruments and provisions 46 Capital instruments and the related share premium accounts 47 Account of qualifying items referred to in Article 484(5) and the related share premium accounts subject to phase out from T2 Public sector capital injections grandfathered until 1 January 2018 48 Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties 50 Credit risk adjustment 51 Tier 2 (T2) capital before regulatory adjustments 52 53 54 55 56 Direct and indirect holdings by an institution of own T2 Instruments and subordinated loans (negative amount) Holdings of the T2 instruments and subordinated loans of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) Direct and indirect holdings of the T2 instruments and subordinated loans of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) Regulatory adjustments applied to Tier 2 in respect of amounts subject to pre-CRR treatment and transitional treatments subject to phase out as prescribed in Regulation (EU) no 575/2013 (i.e. CRR residual amounts) 56a Residual amounts deducted from Tier 2 capital with regard to deduction from Common Equity Tier 1 capital during the transitional period pursuant to Article 472 of Regulation (EU) no 575/2013 56b Residual amounts deducted from Tier 2 capital with regard to deduction from Additional Tier 1 capital during the transitional period pursuant to Article 475 of Regulation (EU) no 575/2013 56c Amount to be deducted from or added to Tier 2 capital with regard to additional filters and deductions required pre- CRR 57 Total regulatory adjustments to Tier 2 (T2) capital 58 Tier 2 (T2) capital 59 Total capital (TC = T1 + T2) 59a Risk weighted assets in respect of amounts subject to pre-CRR treatment and transitional treatments subject to phase out as prescribed in Regulation (EU) No 575/2013 (i.e. residual amounts) Items not deducted from T2 items (Regulation (EU) No 575/2013 residual amounts) (items to be detailed line by line, e.g. Indirect holdings of own T2 instruments, indirect holdings of non-significant investments in the capital of other financial sector entities, indirect holdings of non-significant investments in the capital of other financial sector entities, etc.) 31.12.2016 31.12.2015 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 0 -13,570 0 0 1,336,241 0 0 13,570 13,570 24,147 0 -23,564 0 0 1,283,147 0 0 23,564 23,564 16,996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,336,241 24,147 1,283,147 16,996 0 0 0 0 0 0 0 0 NLB Group 2016 Annual Report371 31.12.2016 31.12.2015 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 Amount at disclosure date (transitional arrangements as prescribed for this date) Amounts subject to pre-Regulation (EU) No 575/2013 or prescribed residual amount of Regulation (EU) No 575/2013 7,862,128 -21,002 7,926,985 -22,031 17.0% 17.0% 17.0% 5.125% 0.625% 0.0% 0.0% N/A 9.0% 2,138 16,236 2,719 0 N/A 0 N/A N/A 0 N/A 0 N/A 0 16.2% 16.2% 16.2% N/A N/A N/A N/A N/A N/A 2,215 15,243 2,655 0 N/A 0 0 N/A 0 N/A 0 N/A 0 0 0 0 0 N/A 0 N/A N/A 0 N/A 0 N/A 0 0 0 0 0 N/A 0 0 N/A 0 N/A 0 N/A 0 60 Total risk weighted assets Capital ratios and buffers 61 Common Equity Tier 1 (as a percentage of total risk exposure amount) 62 Tier 1 (as a percentage of total risk exposure amount) 63 Total capital (as a percentage of total risk exposure amount) 64 Institution specific buffer requirement (CET1 Requirement in accordance with Article 92(1)(a) plus capital conservation and countercyclical buffer requirements, plus systemic risk buffer, plus systemically important institution buffer expressed as a percentage of risk exposure amount) 65 of which: capital conservation buffer requirement 66 of which: countercyclical buffer requirement 67 of which: systemic risk buffer requirement 67a of which: Global Systemically Important Institution (G-SII) or Other Systemically Important Institution (O-SII) buffer 68 Common Equity Tier 1 available to meet buffers (as a percentage of total risk exposure amount) Amounts below the threshold for deduction (before risk weighting) 72 73 75 Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions) Direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions) Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability where the conditions in Article 38(3) are met Applicable caps on the inclusion of provisions in Tier 2 76 Credit risk adjustments included in T2 in respect of exposures subject to standardised approach (prior to the application of the cap) 77 Cap on inclusion of credit risk adjustments in T2 under standardised approach 78 Credit risk adjustments included in T2 in respect of exposures subject to internal ratings-based approach (prior to the application of the cap) 79 Cap on inclusion of credit risk adjustments in T2 under internal ratings-based approach Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2014 and 1 Jan 2022) 80 Current cap on CET1 instruments subject to phase out arrangements 81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) 82 Current cap on AT1 instruments subject to phase out arrangements 83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) 84 Current cap on T2 instruments subject to phase out arrangements 85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) N/A – not relevant NLB Group 2016 Annual Report372 4. Capital buffers (Article 440 of Regulation (EU) No 575/2013) In 2016, the European capital legislation introduced a system of capital buffers in order to provide the adequate capital accumulation from a bank’s operational results. Next to the Pillar 1 and Pillar 2 requirements, banks must cover with their highest quality capital (CET1) also the requirements arising from capital buffers. However, these requirements are less binding as their breaching will result at most in restrictions on distributions of the operational result with the aim of strengthening the capital base. The combined buffer requirement is a combination of the following elements: • Capital conservation buffer • Countercyclical buffer • Global systemically important institutions (G-SII) buffer – not relevant for NLB Group • Other systemically important institutions (O-SII) buffer • Systemic risk buffer (SRB) – not anticipated at the moment. In 2016, following capital buffer requirements were relevant for NLB: • Capital conservation buffer: in 2016 prescribed at the level of 0.625% of RWA, but according to an ECB decision part of the Pillar 2 (SREP) requirement and therefore not again part of the combined buffer requirement • Countercyclical buffer: in 2016 requirement for NLB d.d. and NLB Group amounted to 0% RWA; in more details described below. NLB Group was identified by the Bank of Slovenia decision from 17 December 2015 as »Other systemically important institution«, so the following buffer is also relevant: Other systemically important institutions (O‑SII) buffer: in line with the Bank of Slovenia’s decision, the NLB on the consolidated level must provide CET1 capital in the amount of 1% of RWA on top of the Pillar 1 and Pillar 2 requirements from 1 January 2019 on. Countercyclical buffer On 1 January 2016 the Bank of Slovenia introduced a macro-prudential measure: a countercyclical capital buffer intended to protect the banking sector from losses potentially caused by cyclical risks in the economy. The purpose of the countercyclical capital buffer is to ensure that the bank has a sufficient capital base in periods of credit growth, to be used in stress periods or when the conditions for lending are less favourable, i.e. to absorb losses. When the defined buffer rate is more than 0%, or when the already established rate is increased, the new buffer rate applies 12 months after publication (except for extraordinary cases). The buffer value may fluctuate between 0% and 2.5% of the amount of total risk exposure (in exceptional cases also more) and depends on the amount of risk in the system. The buffer value for exposures in Slovenia, in force from 1 January 2016, is 0%. To define the buffer rate, the Bank of Slovenia followed the methodology of the BCBS, ESRB, and the credit cycle assessment for Slovenia. The buffer rates applicable to exposures in other countries of the European Economic Area are those defined on the ESRB website, refreshed quarterly, while the buffer rate applying to credit exposures to countries not listed on that page nor prescribed by the Bank of Slovenia or a competent authority of that country are 0%. Countercyclical capital rates have generally been set at 0%, except for Sweden and Norway, which have as at 31 December 2016 a countercyclical capital rate of 1.5%. The obligation to disclose information with regard to the geographic distribution of credit exposures, appropriate to calculate the countercyclical capital buffer, capital requirements, and the rates of the bank-specific countercyclical capital buffer is quarterly, or must be made public at least once a year, depending on the date of publication of financial statements, and applies from 1 January 2016. A calculation of the bank-specific countercyclical capital buffer is made on an individual, as well as consolidated level. The bank defines the geographic distribution of exposures which are subject to the calculation of capital requirement for credit risk using the standardised approach and the special risk or risk of non-payment, and migrations for exposures from the trading book and capital requirements from securitisation. If the bank’s exposures represent less than 2% of its total risk-weighted exposures, these exposures may be presented at the geographic location of the bank and additionally explained. NLB Group 2016 Annual Report373 The rate of the bank-specific countercyclical capital buffer is composed of the weighted average of countercyclical capital buffer rates used in those countries where the relevant credit exposures of this institution are located. According to transitional regime granted by the Bank of Slovenia, for the period from 1 January 2016 until 31 December 2016, the bank-specific countercyclical buffer should have been no more than 0.625% of the total risk-weighted exposure amounts of the bank. Amount of bank-specific countercyclical capital buffer for NLB Group: Total risk exposure amount Bank-specific countercyclical buffer rate Bank-specific countercyclical buffer requirement 5. Capital requirements in EUR thousand NLB d.d. NLB Group 269,837 409,213 0% 0 0% 0 5.1. Summary of the approach to assessing the internal capital needed for current and planned activities (Article 438 a of Regulation (EU) No 575/2013) The internal capital adequacy assessment process (ICAAP) of NLB Group meets the requirements of the Regulation (EU) No 575/2013, the recommendations of the Bank of Slovenia and the European Central Bank, the European Banking Authority, and follows good banking practices. The main purpose of implementation of the ICAAP and ILAAP processes is to provide following: • an assurance of adequate identification and measurement of risks, • adequate capital, funding, and liquidity of the Group in connection with the risk appetite, • an assured robust risk management process (from the organisational and methodological point of view) on an on-going basis. The ICAAP process in NLB Group is integrated into the decision-making process at the strategic and operating levels, including the budgeting process. With the active role of the Management and Supervisory Boards of NLB d.d., it represents one of the key components of the Group’s proactive management, with the aim to ensure stable, long-time operations. Pursuant to the EBA guidelines, NLB Group is constantly upgrading the ICAAP and ILAAP processes (Internal Liquidity Adequacy Assessment Process). The ILAAP process involves a comprehensive assessment of liquidity risk control including qualitative and quantitative elements of assessment. NLB Group plans a prudent risk appetite and optimally profitable operations in the long run, considering the risks assumed, while at the same time meeting all regulatory requirements. The strategy of NLB Group, the risk appetite, the risk strategy, and the key internal risk policies of NLB Group approved by the Management Board and the Supervisory Board of NLB d.d. specify the strategic objectives and guidelines concerning risk assumption, and the approaches and methodologies of monitoring, measuring, mitigating and managing all types of risk. The Group is regularly monitoring its target risk appetite profile, representing the key component of the risk mitigation process. A risk profile enables detailed monitoring and proactive management. The usage of risk profile limits and potential deviations from limits and target values are reported regularly to the respective committees and/or the Management Board of the Bank, the Risk Committee of the Supervisory Board, and the Supervisory Board of the Bank. Additionally, NLB Group has set up early warning systems in different risk areas with the intention to strengthen the existing internal controls, as well as the ability to respond in a timely manner when necessary. When considering the ICAAP process, risk identification and assessment are carried out on the basis of internal methodologies. They take into account the complexity of the structure of NLB Group’s operations with a tendency to upgrade in terms of advanced approaches to risk management. The ICAAP process includes at least regular quarterly monitoring and reporting at the level of the Management and Supervisory Boards of NLB d.d., and defines a set of corrective measures for managing and mitigating risks. The internal assessment of NLB Group’s capital requirements consists of the following steps: • the identification of all risks, the definition of materially significant risks, and their treatment in the context of the ICAAP process, • selection of the approach to the calculation of regulatory capital requirements (Pillar 1), • definition of the internal methodology for the identification, measurement, and calculation of capital requirements for risks not covered within the scope of Pillar 1 (Pillar 2), NLB Group 2016 Annual Report374 • implementing stress scenarios for key material risks, • methodology for preparation of an aggregate assessment of capital requirements for all material risks using the baseline and adverse scenarios, • definition of ICAAP limits from the aspect of capital consumption for materially significant risks, • planning the volume of available capital, defining the target capital adequacy ratio, and • regular monitoring and definition of the measures to manage and mitigate risks. In the scope of regulatory (Pillar 1) risks, which include credit risk, operational risk, and market risk, NLB Group uses the standardised approach for credit and market risks, while the calculation of the capital requirement for operational risks is made according to the basic indicator approach. The same approaches are used for calculating the capital requirements for NLB d.d. on a standalone basis, except for calculation of the capital requirement for operational risks, where the standardised approach is used. In the preparation of the internal capital adequacy assessment, NLB Group identifies risks not included in the calculation under the regulatory approach (Pillar 1) which have a significant impact on its operation. The scope of additional credit risks also includes concentration risk – to individual clients and groups of related parties, at the level of activity – and collateral concentration risk. NLB Group calculates the capital requirement for non-financial risks (which include capital risk, profitability risk, strategic risk, divestment risk, and reputation risk) if it assesses that an individual risk is crucial for NLB Group. In addition, non-regulatory risks include the effects of stress scenarios for credit (deterioration of the credit rating structure, decrease in real-estate market prices), currency, liquidity risk, interest rate risk in the banking book, credit spread risk, and market risk arising from securities. The comprehensive performance of the ICAAP and ILAAP processes in NLB Group is defined in an internal document in line with the EBA guidelines which are described in detail in the document “Guidelines on ICAAP and ILAAP information collected for SREP purposes.” Besides, bank members of NLB Group have set up their own ICAAP process in line with the common Group’s guidelines, including the specifics of their operations, the investment portfolio structure, strategic guidelines, regulatory framework, and the relevant macroeconomic environment. 5.2. Capital requirements (Article 438 c, e and f and 445 of Regulation (EU) No 575/2013) NLB Group uses the following approaches to calculate the regulatory capital requirements on a consolidated basis: • credit risk – standardised approach, • market risk – standardised approach, and • operational risk – simple approach. In the calculation of capital ratios, risk is expressed as a risk exposure amount or a capital requirement. The capital requirement for an individual risk amounts to 8% of the total exposure to the individual risk. The table below shows the detailed composition of the capital requirements and risk exposure amounts of NLB Group at the end of 2016 and at the end of the previous year. NLB Group 2016 Annual Report375 Capital requirements and risk exposure amounts of NLB Group 31.12.2016 31.12.2015 in EUR thousand Risk exposure amount (RWA) Capital requirement (8% RWA) Risk exposure amount (RWA) Capital requirement (8% RWA) Central governments or central banks Regional governments or local authorities Public sector entities Multilateral Development Banks International Organisations Institutions Corporates Retail Secured by mortgages on immovable property Exposures in default Items associated with particular high risk Covered bonds Claims on institutions and corporates with a short-term credit assessment Collective investments undertakings (CIU) Equity Other items Credit risk Position risk - Traded debt instruments Position risk - Equity Large exposures exceeding the limit Foreign exchange risk Settlement / delivery risk Commodities risk Specific interest rate risk of securitisation positions Market risks Credit valuation adjustment (CVA) Operational risk Total risk exposure amount / capital requirements 864,356 58,175 54,385 0 0 540,002 1,745,284 2,328,862 214,583 566,336 9,061 7,416 0 5,794 75,829 394,654 6,864,737 27,975 0 0 69,148 4,654 4,351 0 0 43,200 139,623 186,309 17,167 45,307 725 593 0 464 6,066 31,572 549,179 2,238 0 0 856,959 65,507 62,390 0 0 507,900 1,642,243 2,163,645 205,434 853,645 9,191 8,989 0 2,671 57,517 413,542 6,849,633 69,013 25 0 68,557 5,241 4,991 0 0 40,632 131,379 173,092 16,435 68,292 735 719 0 214 4,601 33,083 547,971 5,521 2 0 76,200 6,096 68,313 5,465 0 0 0 104,175 463 892,753 7,862,128 0 0 0 8,334 37 71,420 628,970 0 0 0 137,351 9,313 930,688 7,926,985 0 0 0 10,988 745 74,455 634,159 For NLB Group there were no materially important methodological changes in the calculation of the capital requirements within the year 2016. The differences come from the Group’s regular business operations. NLB Group 2016 Annual Report 376 6. Exposure to counterparty credit risk 6.1. The methodology used to assign internal capital and credit limits for counterparty credit exposures, and the measures for exposure value under the method used (Article 439 a and f of Regulation (EU) No 575/2013) NLB Group monitors counterparty credit risk exposure by using the method of current exposure in compliance with Regulation (EU) No 575/2013. Credit replacement value (CRV) is the sum of current and potential exposure. For repo transactions, the exposure equals the current value of the investment (comprising the nominal value and accrued interest) less the current value of collateral (market price of the security) where the highest exposure may equal the agreed amount not being transferred within the margin call. The credit exposure is monitored by applying a limit to individual clients (according to the principle of sustainable debt). The limit is set within the scope of credit advice (opinion regarding risk assumption, taking the principle of co-decision into account). It is carried out in line with the Criteria and Procedures for Granting Loans, and the currently applicable regulations in the area. The calculation of internal capital for the above-mentioned financial instruments is analogous to that made for other types of investments by using a standardised approach for credit risks. The consumption of capital is relatively low owing to relatively small transaction volumes and the low exposure arising from these financial instruments as a share of all transactions. In accordance with the Directive 2013/36/EU, the Bank transferred the settlement of some transactions to the so-called ‘suitable central counterparty.’ Therefore, there is no material effect on the consumption of capital. The new legislation on capital requirements brought changes concerning exposure to counterparty credit risk and the related capital requirements. In the valuation of these financial instruments, the fair value calculation must be adjusted by including counterparty credit risk (CVA – credit valuation adjustment) unless the settlement is made via a central counterparty or clearing house. 6.2. Policies for collateralisation and the establishment of credit reserves, and impact of the amount of collateral the institution would have to provide in case of a downgrading of its credit rating (Article 439 b and d of Regulation (EU) No 575/2013) The conclusion of financial derivatives transactions in NLB Group is defined in detail in its internal documents (policies, strategies). The conclusion of transactions involving derivatives at NLB d.d. is limited to the servicing of clients and hedging of its own open positions against risk. In accordance with the provisions of the Strategy on trading in financial instruments in NLB Group, the trading activities in other NLB Group members are very restricted. These documents represent the framework within which the Bank may trade in derivatives, including the level of acceptable risk. Thus, NLB d.d. is the only member of the Group with a trading book in accordance with the requirements of Regulation (EU) No 575/2013. For operations on the interbank market, NLB d.d. has signed ISDA agreements with the relevant annexes, such as CSA, which regulates the exchange of collateral to cover for market exposure for all transactions under an ISDA agreement. If NLB d.d. was downgraded, the counterparties, financial institutions in particular, with whom the Bank had or has entered into transactions could ask the Bank to increase the collateral or decide to terminate the transactions early. In accordance with the EU directive, the Bank transferred the monitoring and settlement of some transactions to a suitable central counterparty (CCP – qualifying central counterparty), thus avoiding the risk of negative effects from the early termination of a transaction or the necessary provision of additional collateral. NLB has signed CSA annex with the most of the banks with a threshold at 0 EUR. The total minimum transfer amount for an open position is EUR 4 million, but in most cases there is no contractual provision to decrease the amount in the case of a bank’s downgrade. 6.3. Discussion of policies with respect to wrong-way risk exposures (Article 439 c of Regulation (EU) No 575/2013) If a counterparty which has been asked to provide additional prime collateral necessary due to adverse changes in financial markets fails to do so, the Bank may close synthetic forward deals and liquidate the existing collateral in accordance with the applicable Master agreement for trading in derivatives or through clearing at the daily level. On the interbank market, the Bank performs derivatives transactions in accordance NLB Group 2016 Annual Report377 with the signed ISDA agreement and pertaining annexes (CSA). The Bank transferred the monitoring and settlement of the majority of these transactions made with financial institutions to the suitable CCP. 6.4. Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held, and net derivatives credit exposure (Article 439 e of Regulation (EU) No 575/2013) NLB Group uses contractual offsets (such as a CSA Agreement and Margin call) to a very limited extent and only for internal needs of monitoring. NLB Group does not use the contractual offset provisions in regulatory reporting (exposure and credit risk capital requirement calculation). In accordance with Article 432 of Regulation (EU) No 575/2013, the Bank does not disclose details considering the low volume of transactions and their effect on the Bank’s business performance, it is not material information which, if omitted or misstated, would alter or affect the assessment or decision of the person using the information to take economic decisions. 7. Credit risk adjustments For calculating the capital requirement for credit risk, NLB Group uses the standardised approach as prescribed by Regulation (EU) No 575/2013. Calculation of the capital requirement takes into account the effect of loan collaterals as a secondary source of receivable repayment; NLB uses the simple calculation method for collaterals. According to this methodology, the capital requirement is calculated depending on the segment and credit quality of clients (as determined by external credit rating), and the quality of collaterals which must be adequately evaluated and at the same time satisfy the prescribed minimum requirements. 7.1. Breakdown of exposures and loan collaterals by exposure category (Article 442 c, 444 e and 453 d, f and g of Regulation (EU) No 575/2013) NLB Group 2016 Annual Report378 Distribution of exposures, credit collaterals, risk-weighted assets, and capital requirement of NLB Group based on exposure categories: • as at 31 December 2016: Category of exposure pre-conversion factor Share of each category Net value of exposure Guarantees Credit derivatives simple method credit protection Net exposure conversion factors Exposure value exposure amount Capital requirement Original exposure Financial collateral: Other funded Value of CRM / effects pre Risk weighted Credit risk mitigation techniques (CRM) Credit risk mitigation techniques (CRM) Unfunded credit protection: adjusted values (GA) Funded credit protection Net exposure after CRM substitution Central governments or central banks 2,907,905 19.71% 2,907,773 1 2=1/sum(1) 3 Regional governments or local authorities Public sector entities Multilateral development banks International organisations Institutions Corporates Retail Secured by mortgages on immovable property Exposures in default Items associated with particular high risk Covered bonds Collective investments undertakings (CIU)* Equity Other items Total 126,957 134,276 41,318 0 1,334,516 3,453,647 3,905,429 598,932 1,442,729 7,129 50,418 44,570 49,547 659,581 0.86% 0.91% 0.28% 0.00% 9.04% 23.40% 26.47% 4.06% 9.78% 0.05% 0.34% 0.30% 0.34% 4.47% 117,800 128,420 41,318 0 1,333,779 3,375,387 3,852,314 593,010 541,761 6,709 50,418 44,570 49,547 654,396 4 0 0 59,296 0 0 60,030 770,062 660 0 520 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund 14,756,954 100.00% 13,697,202 890,568 8=(4+5+6+7)/3 10 11 12 13=12/sum(12) 3,898,945 3,867,093 864,356 117,800 116,848 169 745 25,687 64,335 9,387 338 6 4 0 0 0 0 0 0 0 0 1,273,062 1,251,612 540,002 23.58% 2,579,638 1,951,898 1,745,284 3,787,319 3,243,648 2,328,861 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.00% 0.00% 46.31% 0.00% 0.00% 4.56% 1.69% 0.00% 1.83% 5.04% 0.00% 0.00% 0.00% 0.00% 7.24% 9 0 68,955 41,318 593,010 531,854 6,371 50,418 44,570 49,547 63,166 41,318 0 584,136 470,679 6,040 50,418 44,570 49,547 58,175 54,385 0 0 214,583 566,336 9,060 7,416 5,794 75,829 394,655 100,665 13,697,203 11,904,514 6,864,736 549,179 100.00% 654,396 654,386 in EUR thousand Share of capital requirement 12.59% 0.85% 0.79% 0.00% 0.00% 7.87% 25.42% 33.92% 3.13% 8.25% 0.13% 0.11% 0.08% 1.10% 5.75% 69,148 4,654 4,351 0 0 43,200 139,623 186,309 17,167 45,307 725 593 464 6,066 31,572 NLB Group 2016 Annual ReportCategory of exposure pre-conversion factor Share of each category Net value of exposure Guarantees Credit derivatives Financial collateral: simple method Other funded credit protection Value of CRM / Net exposure Credit risk mitigation techniques (CRM) Credit risk mitigation techniques (CRM) Unfunded credit protection: adjusted values (GA) Funded credit protection Net exposure after CRM substitution effects pre conversion factors Exposure value exposure amount Capital requirement Risk weighted Share of capital requirement 379 in EUR thousand 6 4 0 169 0 0 745 25,687 64,335 0 9,387 338 0 0 0 0 100,665 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8=(4+5+6+7)/3 9 10 11 12 13=12/sum(12) 0.00% 0.00% 46.31% 0.00% 0.00% 4.56% 3,898,945 3,867,093 864,356 117,800 116,848 68,955 41,318 0 63,166 41,318 0 58,175 54,385 0 0 1,273,062 1,251,612 540,002 23.58% 2,579,638 1,951,898 1,745,284 1.69% 0.00% 1.83% 5.04% 0.00% 0.00% 0.00% 0.00% 7.24% 3,787,319 3,243,648 2,328,861 593,010 531,854 6,371 50,418 44,570 49,547 584,136 470,679 6,040 50,418 44,570 49,547 654,396 654,386 214,583 566,336 9,060 7,416 5,794 75,829 394,655 69,148 4,654 4,351 0 0 43,200 139,623 186,309 17,167 45,307 725 593 464 6,066 31,572 12.59% 0.85% 0.79% 0.00% 0.00% 7.87% 25.42% 33.92% 3.13% 8.25% 0.13% 0.11% 0.08% 1.10% 5.75% 13,697,203 11,904,514 6,864,736 549,179 100.00% Distribution of exposures, credit collaterals, risk-weighted assets, and capital requirement of NLB Group based on exposure categories: • as at 31 December 2016: Central governments or central banks 2,907,905 19.71% 2,907,773 Original exposure 1 2=1/sum(1) 126,957 134,276 41,318 0 1,334,516 3,453,647 3,905,429 598,932 1,442,729 7,129 50,418 44,570 49,547 659,581 0.86% 0.91% 0.28% 0.00% 9.04% 23.40% 26.47% 4.06% 9.78% 0.05% 0.34% 0.30% 0.34% 4.47% 3 0 117,800 128,420 41,318 1,333,779 3,375,387 3,852,314 593,010 541,761 6,709 50,418 44,570 49,547 654,396 59,296 60,030 770,062 660 520 4 0 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Regional governments or local authorities Public sector entities Multilateral development banks International organisations Secured by mortgages on immovable property Exposures in default Items associated with particular high risk Collective investments undertakings (CIU)* Institutions Corporates Retail Covered bonds Equity Other items Total * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund 14,756,954 100.00% 13,697,202 890,568 NLB Group 2016 Annual Report380 • as at 31 December 2015: Category of exposure pre-conversion factor Share of each category Net value of exposure Guarantees Credit derivatives simple method credit protection Net exposure conversion factors Exposure value exposure amount Capital requirement Original exposure Financial collateral: Other funded Value of CRM / effects pre Risk weighted Credit risk mitigation techniques (CRM) Credit risk mitigation techniques (CRM) Unfunded credit protection: adjusted values (GA) Funded credit protection Net exposure after CRM substitution Central governments or central banks 2,543,630 17.14% 2,543,135 1 2=1/sum(1) 3 Regional governments or local authorities Public sector entities Multilateral development banks International organisations Institutions Corporates Retail Secured by mortgages on immovable property Exposures in default Items associated with particular high risk Covered bonds Collective investments undertakings (CIU)* Equity Other items Total 140,785 131,121 58,347 23,883 1,331,157 3,505,014 3,666,417 576,060 2,077,082 7,624 49,183 44,519 33,276 648,118 0.95% 0.88% 0.39% 0.16% 8.97% 23.62% 24.71% 3.88% 14.00% 0.05% 0.33% 0.30% 0.22% 4.37% 129,780 127,239 58,347 23,883 1,330,174 3,402,453 3,610,945 568,162 788,663 7,048 49,183 44,519 33,276 640,671 4 0 0 61,112 0 0 82,212 929,867 137 0 2,764 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14,836,216 100.00% 13,357,478 1,076,092 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund At the end of 2016, none of the net exposures entered the calculation of capital requirements as a deduction from capital; they entered the calculation of capital requirements in their total amount. In 2016, the original value of exposure fell by EUR 79.3 million, while the net exposure increased by EUR 339.7 million and the risk-adjusted exposure increased by EUR 15.1 million. Lower original exposure value is primarily a result of the Bank’s efforts to decrease exposures in default (the value in this segment was reduced by EUR 634.4 million). In contrast, the exposure value increased in the Retail segment (by EUR 239.0 million) and in the segment of Central government and central bank (by EUR 364.3 million). The impact of reduced exposures in default on the net exposure value only amounts to EUR 246.9 million, as the exposure was highly covered by provisions. The highest exposure values are in the segments of Retail and Corporate (26.5% and 23.4% compared to the total original exposure). If the categories of exposures secured by real-estate mortgages, items associated with particularly high risk and exposures in default, which are also related to corporate and retail clients, are added to the above, all five categories of exposures account for 63.8% of the total original exposure (2.5 p.p. less than at the end of 2015), and 70.9% of the total capital requirement for credit risks (71.1% at the end of 2015). The categories of exposure to governments and institutions considerably contribute to the total exposure; the total capital requirement in these two categories is 20.5% of the total capital requirement (in 2015 only 19.9%). To reduce the risk exposure, the Bank accepts loan collaterals, of these personal guarantees prevail; almost the entire amount of personal guarantees are guarantees of the Republic of Slovenia. 8=(4+5+6+7)/3 9 10 11 12 13=12/sum(12) 3,732,066 3,692,711 856,959 129,780 127,702 187 30,672 70,491 11,802 407 6 1 0 0 0 0 0 0 0 0 0 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.00% 0.00% 48.18% 0.00% 0.00% 6.18% 1.96% 0.00% 1.85% 5.77% 0.00% 0.00% 0.00% 0.00% 8.91% 1,248,681 1,165,439 507,900 28.23% 2,441,914 1,841,199 1,642,243 3,540,317 3,015,997 2,163,645 65,940 58,347 23,883 568,162 774,097 6,641 49,183 44,519 33,276 62,764 58,347 23,883 558,861 712,518 6,129 49,183 44,519 33,276 65,507 62,390 0 0 205,434 853,645 9,191 8,989 2,671 57,517 413,542 113,560 13,357,477 11,904,514 6,849,633 547,971 100.00% 640,671 640,669 in EUR thousand Share of capital requirement 12.51% 0.96% 0.91% 0.00% 0.00% 7.41% 23.98% 31.59% 3.00% 12.46% 0.13% 0.13% 0.04% 0.84% 6.04% 68,557 5,241 4,991 0 0 40,632 131,379 173,092 16,435 68,292 735 719 214 4,601 33,083 NLB Group 2016 Annual Report• as at 31 December 2015: Regional governments or local authorities Public sector entities Multilateral development banks International organisations Secured by mortgages on immovable property Exposures in default Items associated with particular high risk Collective investments undertakings (CIU)* Institutions Corporates Retail Covered bonds Equity Other items Total Category of exposure pre-conversion factor Share of each category Net value of exposure Guarantees Credit derivatives Original exposure Financial collateral: simple method Other funded credit protection Value of CRM / Net exposure Credit risk mitigation techniques (CRM) Credit risk mitigation techniques (CRM) Unfunded credit protection: adjusted values (GA) Funded credit protection Net exposure after CRM substitution effects pre conversion factors Exposure value exposure amount Capital requirement Risk weighted Share of capital requirement 381 in EUR thousand 8=(4+5+6+7)/3 9 10 11 12 13=12/sum(12) 0.00% 0.00% 48.18% 0.00% 0.00% 6.18% 3,732,066 3,692,711 856,959 129,780 127,702 65,940 58,347 23,883 62,764 58,347 23,883 65,507 62,390 0 0 1,248,681 1,165,439 507,900 28.23% 2,441,914 1,841,199 1,642,243 1.96% 0.00% 1.85% 5.77% 0.00% 0.00% 0.00% 0.00% 8.91% 3,540,317 3,015,997 2,163,645 568,162 774,097 6,641 49,183 44,519 33,276 558,861 712,518 6,129 49,183 44,519 33,276 640,671 640,669 205,434 853,645 9,191 8,989 2,671 57,517 413,542 68,557 5,241 4,991 0 0 40,632 131,379 173,092 16,435 68,292 735 719 214 4,601 33,083 12.51% 0.96% 0.91% 0.00% 0.00% 7.41% 23.98% 31.59% 3.00% 12.46% 0.13% 0.13% 0.04% 0.84% 6.04% 13,357,477 11,904,514 6,849,633 547,971 100.00% Central governments or central banks 2,543,630 17.14% 2,543,135 1 2=1/sum(1) 3 140,785 131,121 58,347 23,883 1,331,157 3,505,014 3,666,417 576,060 2,077,082 7,624 49,183 44,519 33,276 648,118 0.95% 0.88% 0.39% 0.16% 8.97% 23.62% 24.71% 3.88% 14.00% 0.05% 0.33% 0.30% 0.22% 4.37% 129,780 127,239 58,347 23,883 1,330,174 3,402,453 3,610,945 568,162 788,663 7,048 49,183 44,519 33,276 640,671 61,112 82,212 929,867 137 2,764 4 0 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6 1 0 187 0 0 0 30,672 70,491 0 11,802 407 0 0 0 0 113,560 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund 14,836,216 100.00% 13,357,478 1,076,092 At the end of 2016, none of the net exposures entered the calculation of capital requirements as a deduction from capital; they entered the calculation of capital requirements in their total amount. In 2016, the original value of exposure fell by EUR 79.3 million, while the net exposure increased by EUR 339.7 million and the risk-adjusted exposure increased by EUR 15.1 million. Lower original exposure value is primarily a result of the Bank’s efforts to decrease exposures in default (the value in this segment was reduced by EUR 634.4 million). In contrast, the exposure value increased in the Retail segment (by EUR 239.0 million) and in the segment of Central government and central bank (by EUR 364.3 million). The impact of reduced exposures in default on the net exposure value only amounts to EUR 246.9 million, as the exposure was highly covered by provisions. The highest exposure values are in the segments of Retail and Corporate (26.5% and 23.4% compared to the total original exposure). If the categories of exposures secured by real-estate mortgages, items associated with particularly high risk and exposures in default, which are also related to corporate and retail clients, are added to the above, all five categories of exposures account for 63.8% of the total original exposure (2.5 p.p. less than at the end of 2015), and 70.9% of the total capital requirement for credit risks (71.1% at the end of 2015). The categories of exposure to governments and institutions considerably contribute to the total exposure; the total capital requirement in these two categories is 20.5% of the total capital requirement (in 2015 only 19.9%). To reduce the risk exposure, the Bank accepts loan collaterals, of these personal guarantees prevail; almost the entire amount of personal guarantees are guarantees of the Republic of Slovenia. NLB Group 2016 Annual Report382 7.2. Geographical distribution of exposures broken down in significant areas by material exposure classes (Article 442 d of Regulation (EU) No 575/2013) The distribution of exposures by significant geographical area, broken down by material category of exposure • as at 31 December 2016: Category of exposure in EUR thousand Exposures to central governments and central banks Exposures to institutions Exposures to corporates Retail exposures Past due items Other Total 1,473,044 58,499 2,528,949 2,252,457 515,382 1,132,396 7,960,727 11,255 332,268 589,045 63,530 121,063 1,355,165 6,034 212,164 462,651 225,560 139,882 1,325,212 22 899 52,311 200,940 200,025 180,249 233,148 17,101 6,064 46,364 163,187 168,483 238,003 278,922 137,876 107,895 83,179 82,655 94,623 59,793 248 65,976 350,557 201,689 156,506 7,033 54,283 0 103,967 61,542 20,854 0 35,891 0 7 167,397 53,891 58,334 69,279 7,781 71,837 22,844 93,743 95,022 32,508 57,212 13,917 4,422 4,784 29,673 20,172 1,219 1,103 0 501 30,493 0 8,296 686,196 571,800 524,489 447,721 300,804 232,392 217,410 162,874 132,828 128,601 85,647 84,768 81,822 71,860 68,617 241 0 7,306 10,793 0 26,712 10,516 107 18 7,643 0 37,372 635 169 70 247 183 0 3,756 1,280 168,383 36 487 7 200 426 13 22 97 22,408 443 1,541 6,153 14,544 0 0 2 2,907,905 1,334,516 3,453,647 3,905,429 1,442,729 1,712,729 14,756,956 946 35,235 20,067 318,023 Country Slovenia Macedonia Bosnia and Herzegovina Montenegro Republic of Kosovo Serbia Germany France Austria Croatia Netherlands Great Britain Belgium Italy Switzerland Luxemburg Denmark United States of America Other countries Total NLB Group 2016 Annual Report383 in EUR thousand Category of exposure Exposures to central governments and central banks Exposures to institutions Exposures to corporates Retail exposures Past due items Other Total 1,199,977 65,794 2,620,104 2,164,602 840,478 1,128,541 8,019,496 6,690 329,009 551,905 96,309 107,551 1,332,587 14,227 202,839 431,270 231,591 144,371 1,271,991 241,123 247,694 131,177 113,342 741 80,932 60,912 70,820 14,858 61,581 0 22,449 0 4,575 38,012 61,788 21 4,020 1,267 9,207 254,219 85,248 38,869 63,293 52,657 76,504 55,605 56,681 45,110 300 69,782 58,178 34,481 987 192,045 241,663 103,920 263,106 12,638 16,569 41,916 7,532 0 0 0 10,015 28,307 480 297 5,787 0 949 12,975 257,665 254 870 113 1 91 752 852 143 143 1 3,973 0 23,376 337 6,789 444 16,816 14,582 1 0 2,001 50,745 83,740 49,451 24,025 23,108 32,273 574 4,381 16,087 66,656 1,062 6,947 20 575 11,701 4,190 7,664 706,824 568,320 556,111 516,407 354,776 347,484 151,412 149,264 145,145 132,195 112,954 96,223 72,277 67,317 42,503 192,929 2,543,630 1,331,157 3,505,014 3,666,417 2,077,082 1,712,916 14,836,216 • as at 31 December 2015: Country Slovenia Macedonia Bosnia and Herzegovina Montenegro Serbia Germany Croatia Austria France Netherlands Luxemburg Belgium Great Britain Italy Switzerland United States of America Finland Other countries Total Republic of Kosovo 107,252 164,134 204,077 86,396 431,665 400 The above tables show the geographical distribution of material categories of exposures, which represented 88.4% of total exposure as at 31 December 2016 (88.5% at the end of 2015). The exposure of NLB Group is geographically concentrated in the markets where bank members of the Group are based (core markets – in addition to Slovenia also Bosnia and Herzegovina, Macedonia, Serbia, Montenegro, and the Republic of Kosovo). The exposure in Slovenia accounts for 53.9% of the total exposure (54.1% at the end of 2015), whereas 84.2% of the total exposure (83.7% at the end of 2015) is concentrated in the said core markets of NLB Group. In other markets, material exposure is only in the segment of governments and central banks and institutions (arising from liquidity reserves), whereas exposure to corporate and retail clients is smaller. NLB Group 2016 Annual Report384 7.3. Distribution of exposures by counterparty type or industry broken down by exposure classes (Article 442 e of Regulation (EU) No 575/2013) Exposures by category of exposure and counterparty type • as at 31 December 2016: Category of exposure CG NP Central governments or central banks 2,907,378 Regional governments or local authorities Public sector entities Multilateral development banks International organisations Institutions Corporates Retail Secured by mortgages on immovable property 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3,124,069 454,497 Exposures in default 32 115,391 Items associated with particular high risk Covered bonds Collective investments undertakings (CIU)* Equity Other items Total 0 0 44,570 0 94 0 0 0 PS CO LARGE CO SME MDB IN 183 0 0 0 0 1,334,516 0 0 0 461 85 50,418 0 23 330 0 134,276 0 0 0 0 0 0 0 0 0 0 0 0 12 0 0 0 0 0 2,183,759 1,269,888 0 781,360 60,727 83,709 12,162 442,754 868,847 23 0 0 2,385 4,543 0 0 0 0 2,135 27,748 19,642 in EUR thousand RG 0 126,957 0 0 0 0 0 0 0 3,083 0 0 0 0 Other 2 0 0 0 0 0 0 0 0 0 0 0 0 0 11 299,187 0 0 0 41,318 0 0 0 0 0 0 0 0 0 0 0 248 21,740 166,068 52 1,092 171,183 2,952,229 3,715,792 1,551,752 148,977 2,718,464 3,199,184 41,318 130,051 299,189 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund NLB Group 2016 Annual Report385 in EUR thousand RG 208 140,785 0 0 0 0 0 0 0 2,556 0 0 0 0 Other 0 0 0 0 23,883 0 632 0 0 0 0 0 0 0 19 348,730 0 0 0 58,347 0 0 0 0 0 0 0 0 0 0 0 • as at 31 December 2015: Category of exposure CG NP Central governments or central banks 2,543,165 Regional governments or local authorities Public sector entities Multilateral development banks International organisations Institutions Corporates Retail Secured by mortgages on immovable property 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,919,205 436,401 IN 245 0 0 0 0 1,331,156 0 0 0 PS CO LARGE CO SME MDB 0 0 131,121 0 0 0 0 0 0 0 0 0 0 0 0 13 0 0 0 0 0 2,130,309 1,374,073 0 747,212 59,617 80,042 Exposures in default 243 194,097 536 14,281 585,467 1,279,901 Items associated with particular high risk Covered bonds Collective investments undertakings (CIU)* Equity Other items Total 0 0 44,519 0 556 0 0 0 0 49,183 0 52 9 0 0 2,898 4,161 0 0 0 0 2,135 23,551 7,539 306 20,593 136,974 8 1,521 139,966 2,588,233 3,570,852 1,518,147 147,554 2,803,362 3,632,907 58,347 143,568 373,244 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund LEGEND: CG – central government NP – natural persons IN – institutions PS – public sector CO LARGE – large companies (pursuant to the Companies Act) CO SME – small- and medium-sized enterprises (pursuant to the Companies Act) MDB – multilateral development banks RG – regional government The distribution of exposure categories by type of client reveals that exposures in default mainly included corporates (90.9%, at the end of 2015: 89.8%), of which SMEs accounted for 60.2% and large companies 30.7%, followed by natural persons (8.0%). A material reduction of exposure value in this segment is evident in all aforementioned types of counterparties. Retail exposure includes receivables from natural persons (80.0%, at the end of 2015: 79.6%) and SMEs (20.0%, at the end of 2015: 20.4%). NLB Group 2016 Annual Report386 Exposures by category of exposure and industry: • as at 31 December 2016: Category of exposure Individuals Central governments or central banks Regional governments or local authorities Public sector entities Multilateral development banks International organisations Institutions Corporates Retail Secured by mortgages on immovable property 0 0 0 0 0 0 0 3,124,069 454,497 Public sector (including state) 2,907,378 0 0 0 0 0 0 0 0 Heavy industry Trade Finance Transport and storage Other business activities Construction 0 0 0 0 513 0 0 0 4,746 27 61,548 6,938 0 0 0 0 0 0 41,318 0 1,334,516 0 0 0 0 41 10 0 0 0 0 0 8 0 0 0 in EUR thousand Other Total 14 2,907,905 126,917 126,957 60,998 134,276 0 0 0 41,318 0 1,334,516 759,281 543,805 93,267 644,611 387,868 201,075 823,740 3,453,647 165,092 238,891 5,082 73,862 26,142 85,326 186,965 3,905,429 46,587 29,636 1,380 19,490 1,062 6,874 39,405 598,932 Exposures in default 115,391 32 229,546 435,831 44,234 47,237 9,773 233,843 326,841 1,442,729 Items associated with particular high risk Covered bonds Collective investments undertakings (CIU)* Equity Other items Total 639 2,385 552 221 12 395 2,831 7,129 0 0 44,570 94 0 0 0 0 0 0 0 50,418 0 0 75 20,534 15,776 21,740 248 34,591 1,780 195,194 0 0 283 475 0 0 0 47 0 0 0 6 0 0 50,418 44,570 12,879 49,547 405,501 659,581 3,715,792 2,952,229 1,240,556 1,272,890 1,843,799 793,118 424,955 527,526 1,986,091 14,756,956 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund NLB Group 2016 Annual Report387 • as at 31 December 2015: Category of exposure Individuals Central governments or central banks Regional governments or local authorities Public sector entities Multilateral development banks International organisations Institutions Corporates Retail Secured by mortgages on immovable property 0 0 0 0 0 0 0 2,919,205 436,401 Public sector (including state) 2,543,165 0 0 0 0 0 0 0 0 Heavy industry Trade Finance Transport and storage Other business activities Construction 0 0 0 0 453 35 0 0 2,581 40 68,003 13,647 0 0 0 0 0 0 58,347 7,508 1,331,156 0 0 0 0 125 63 0 0 0 0 0 9 0 0 0 in EUR thousand Other Total 12 2,543,630 140,626 140,785 46,778 131,121 0 58,347 16,374 23,883 0 1,331,156 744,347 627,265 151,166 680,258 528,071 160,320 613,587 3,505,015 164,171 236,653 4,390 63,168 22,444 82,594 173,792 3,666,417 51,431 23,645 3,725 18,137 906 2,888 38,927 576,060 Exposures in default 194,097 243 407,629 475,283 67,049 62,845 20,056 323,206 526,673 2,077,081 Items associated with particular high risk 556 Covered bonds Collective investments undertakings (CIU)* Equity Other items Total 0 0 44,519 0 306 239 2,039 1,084 182 26 1,095 2,403 7,624 0 0 0 0 78 16,162 49,183 0 0 3,042 873 162,994 0 0 127 450 0 0 0 2,167 0 0 0 7 0 0 49,183 44,519 16,908 33,276 457,687 648,118 0 0 0 20,593 3,570,852 2,588,233 1,373,517 1,381,960 1,905,094 838,815 573,858 570,120 2,033,767 14,836,216 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund Significant in terms of exposure are individuals (25.2 %, at the end of 2015: 24.1%) and the public sector (including state) (20.0%, at the end of 2015: also 17.5%), whereas in industries the largest concentration is that in heavy industry, trade, and finance. The major portion of exposures in default is accounted for by Construction (44.3%, reduced by 12.4 p.p. compared to the end of 2015), followed by trade with 34.2 % (0.2 % less than at the end of 2015). In 2016, the volume of exposures in default decreased by EUR 634.4 million (by 30.5% compared to the end of the 2015 value). NLB Group 2016 Annual Report388 7.4. Residual maturity breakdown of all exposures broken down by exposure classes (Article 442 f of Regulation (EU) No 575/2013) Overview of exposures, the amount in default for more than 90 days and the amount of provisions by category of exposure: Category of exposure Remaining maturity Exposure value Amount in delay over 90 days Amount of established impairments and provisions Exposure value Amount in delay over 90 days 31.12.2016 31.12.2015 in EUR thousand Amount of established impairments and provisions up to 1 year 1,313,763 Central governments or central banks from 1 to 5 years over 5 years up to 1 year Regional governments or local authorities from 1 to 5 years Public sector entities from 1 to 5 years over 5 years up to 1 year Multilateral development banks from 1 to 5 years over 5 years up to 1 year International organisations Institutions over 5 years up to 1 year from 1 to 5 years over 5 years up to 1 year 1,050,210 from 1 to 5 years over 5 years 244,777 39,529 up to 1 year 1,124,838 Corporates from 1 to 5 years 1,245,903 Retail over 5 years 1,082,906 up to 1 year 915,564 from 1 to 5 years 1,138,519 over 5 years 1,851,346 Secured by mortgages on immovable property from 1 to 5 years up to 1 year over 5 years up to 1 year Exposures in default from 1 to 5 years Items associated with particular high risk from 1 to 5 years over 5 years up to 1 year Covered bonds over 5 years up to 1 year from 1 to 5 years over 5 years up to 1 year Collective investments undertakings (CIU)* from 1 to 5 years Equity Other items Total over 5 years up to 1 year from 1 to 5 years over 5 years up to 1 year from 1 to 5 years over 5 years 952,516 641,626 736 25,488 100,733 72,740 33,936 27,599 3,822 26,258 11,238 0 0 0 24,023 83,144 491,765 682,703 388,327 371,700 3,074 3,788 268 21,639 28,779 0 44,570 0 0 47,412 0 2,135 637,391 40 22,150 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 41 0 0 45 0 0 189 35 16 0 0 0 596,241 48,682 57,253 20 5 0 0 0 0 0 0 0 0 0 0 131 0 1 35 2,349 6,773 492 3,997 1,366 0 0 0 0 0 0 590 147 0 19,018 34,723 24,519 15,293 17,847 19,975 432 2,299 3,191 501,980 182,977 216,012 244 166 10 0 0 0 0 0 0 0 0 0 883,566 1,122,077 537,987 3,469 22,236 115,080 35,508 72,017 23,596 23,347 27,187 7,814 0 5,174 18,709 1,097,757 178,112 55,288 1,273,231 1,065,486 1,166,297 924,569 1,055,413 1,686,435 25,485 76,202 474,373 12 0 0 1 0 0 12 0 0 0 0 0 0 0 0 189 0 0 719 4 0 323 37 14 0 0 0 1,146,767 1,045,350 457,693 472,621 2,140 2,848 2,636 20,561 28,136 486 44,519 0 0 30,661 0 2,615 58,858 55,809 30 0 0 0 0 0 0 0 0 0 0 0 175 318 1 98 2,418 8,488 882 1,328 1,672 0 0 0 0 0 0 729 254 0 32,978 31,934 37,649 16,497 18,324 20,652 903 2,781 4,212 816,268 227,920 244,231 201 255 121 0 0 0 0 0 0 0 0 0 4,467 5,140 616,677 5,696 7,424 17 0 18 28 21 31,420 0 0 1 22 * The exposure from Collective investment undertakings also includes the exposure to the Bank Resolution Fund 14,756,956 707,012 1,059,755 14,836,216 1,167,053 1,478,735 NLB Group 2016 Annual Report389 Due to a material decrease of exposures in default in 2016, the amount of defaults for over 90 days decreased by EUR 460.0 million and the volume of provisions by EUR 419.0 million. As evident from the above table, receivables more than 90 days in default are practically entirely classified as exposures in default. In this category, defaults are recorded in both short- and long-term exposures. Further, 85.0% of all impairments and provisions are created for this category (at the end of 2015: 87.1%). In 2016 the largest increase of exposure was recognised in the retail segment with mid- and long-term maturity, and in the segment of central government and central banks with short-term maturity. 7.5. Past due exposures and the volume of impairments for significant industries and significant geographical areas (Article 442 g and h of Regulation (EU) No 575/2013) The tables below present the amount of exposures with the amount of past due exposures for significant industries/significant geographical areas and, in this scope, the amount of value adjustment to impairments and provisions. All value adjustments belong to the group of special adjustments. NLB Group does not establish general value adjustments. An overview of exposures, the amount in default for more than 90 days, and the amount of provisions by industry: Institutional sector Individuals Public sector (including state) Finance Trade Heavy industry Transport and storage Construction Other business activities Unclassified* Professional, scientific and technical activities Real-estate operations Electricity, gas and water Information and communication services General government and defence, compulsory social security Services - accommodation and food Agriculture, forestry and fishing Services Cultural, entertainment and recreation activities Water supply Mining Health care and social security Education Activities of households with employees Activities of exterritorial organisations and bodies 31.12.2016 31.12.2015 Exposure value Amount in delay over 90 days Amount of established impairments and provisions Exposure value Amount in delay over 90 days in EUR thousand Amount of established impairments and provisions 3,715,792 2,952,229 1,843,799 1,272,890 1,240,556 793,118 527,526 424,955 351,130 272,745 269,175 247,867 237,011 162,071 117,496 80,137 53,869 52,054 46,484 44,533 34,008 17,425 85 2 60,089 1 9,026 198,154 99,104 20,219 171,572 9,028 73 30,561 50,396 4,937 2,750 447 21,925 13,112 652 4,798 6,232 1,127 2,304 505 0 0 104,019 3,570,852 126,151 156,023 132 2,588,233 47,980 1,902,214 299,238 195,290 36,541 136,916 10,142 117 42,908 86,432 13,239 9,544 12,597 19,162 14,161 2,712 7,390 8,580 6,951 4,950 753 0 0 1,381,960 1,373,517 838,815 570,120 573,858 399,285 264,342 312,465 242,742 172,745 162,686 157,539 77,329 42,989 33,678 51,741 57,078 39,473 22,509 0 45 70 21,790 263,798 196,973 29,927 246,352 20,729 72 44,209 113,018 14,850 16,495 633 39,482 10,774 1,746 5,679 7,122 2,109 3,522 1,549 0 2 695 70,265 355,248 283,281 44,876 200,144 16,900 116 58,655 135,430 26,808 16,696 13,626 37,883 24,591 3,052 9,049 8,131 7,321 8,526 1,416 0 2 Total 14,756,956 707,012 1,059,755 14,836,216 1,167,053 1,478,735 * In addition to other industries, “Unclassified” includes the category “Other exposure categories” and offsets At the end of 2016, the amount in delay for over 90 days was the highest in trade, construction, and heavy industry, and consequently the biggest impairments and provisions were made for those sectors. The amount of delays over 90 days decreased by EUR 460 million, most in NLB Group 2016 Annual Report 390 the industries mentioned above and in the segment of private individuals. Compared to the previous year, the volume of impairments and provisions went down by EUR 419 million, largely the result of the write-off and other approaches to NPL reduction. An overview of exposures, the amount in default for more than 90 days and the amount of provisions by country: Country Slovenia Macedonia Bosnia and Herzegovina Montenegro Republic of Kosovo Serbia Germany France Austria Croatia Netherlands Great Britain Belgium Italy Switzerland Luxemburg Denmark United States of America Sweden Finland Czech Republic Ireland Spain Slovakia Canada Other countries Total 31.12.2016 31.12.2015 Exposure value Amount in delay over 90 days Amount of established impairments and provisions Exposure value Amount in delay over 90 days in EUR thousand Amount of established impairments and provisions 288.634 8.019.496 96,939 1,332,587 7.960.727 1,355,165 1,325,212 686,196 571,800 524,489 447,721 300,804 232,392 217,410 162,874 132,828 128,601 85,647 84,768 81,822 71,860 68,617 67,277 42,483 37,718 36,511 26,073 22,285 19,259 66,416 89.628 35,350 110,049 135,425 4,899 92,968 7 0 905 195,632 2 443 0 4,283 36 0 0 2 0 0 213,021 119,233 29,135 113,555 153 0 3,787 123,247 22,407 413 1,585 5,039 13,051 0 0 219 0 0 18,955 17,506 0 0 2,651 0 15,774 0 0 1,172 2 10,656 1,271,991 706,824 516,407 568,320 556,111 151,412 347,484 354,776 149,264 112,954 132,195 96,223 72,277 145,145 9,961 67,317 40,270 42,503 33,246 12,717 15,031 19,564 7,129 55,012 338.959 64,652 110,498 154,756 2,486 144,855 14,022 0 1,025 261,588 0 444 0 12,581 10,063 162 0 1 0 0 494.265 127,571 211,294 140,256 25,290 173,600 12,350 5 3,278 196,399 23,375 140 3,090 14,155 10,333 337 0 45 0 0 21,181 19,539 0 0 2,378 0 27,398 0 0 1,171 1 22,241 14,756,956 707,012 1,059,755 14,836,216 1,167,053 1,478,735 At the end of 2016, the amount of receivables over 90 days past due accounted for 4.8% of total exposure (7.9% at the end of 2015), and the exposure is 7.2% covered by provisions (a decrease by 2.8 p.p. compared to the end of 2015). In terms of delays over 90 days, the highest amount is in Croatia (EUR 195.6 million), followed by Montenegro (EUR 135.0 million). Accordingly, the coverage of exposure by provisions is high in these areas (Croatia 56.7%, Montenegro 17.4%). In comparison to the previous year, the balance of receivables in delay for more than 90 days decreased the most in Slovenia (by EUR 249.3 million), followed by Croatia (EUR 66.0 million). NLB Group 2016 Annual Report391 8. Use of ratings by external rating institutions (ECAI) (Article 444 a, b, c and d of Regulation (EU) No 575/2013) For the calculation of the capital requirement for credit risk, NLB Group appointed the Fitch Ratings credit rating agency, which is considered an eligible external credit assessment institution, and applied the credit quality steps according to the prescribed mapping. The credit assessments of this agency are used for the categories of exposure to: • the central government or central bank, and • institutions, including the exposure to institutions with a short-term credit assessment. The weight for each category of exposure is determined based on Article 136 of Regulation (EU) No 575/2013, while the selection of eligible institutions is performed in accordance with Article 138 of the same regulation. In exposure categories for which a credit assessment institution was designated, the weight is assigned based on the financial instrument’s rating. If such a rating is not available, the higher of the weights applying to the long-term credit rating of the debtor or other financial instruments of the same debtor or country is used. Weights are assigned to non-assessed financial instruments based on the prescribed increase in weight linked to the weight of other short-term instruments of the same debtor. For categories of exposure for which a credit assessment institution was not appointed, the risk weight is assigned according to the prescribed legislation, meaning it is assigned based on the rating of the debtor’s country or specific rules applying to the respective exposure category. 9. Leverage (Article 451 of Regulation (EU) No 575/2013) The leverage ratio is calculated after January 2014 in line with the enforcement of provisions from the Regulation (EU) No 575/2013 and Directive 2013/36/EU, or as of January 2015 pursuant to the amendments in relation to the calculation published in Commission Delegated Regulation (EU) 2015/62. As of 1 January 2015, the additional requirement to disclose information concerning the leverage is in force. In February 2016 Regulation (EU) 2016/200 was adopted, laying down implementing technical guidance with regard to disclosure of the leverage ratio. In March 2016 the Implementing Regulation (EU) 2016/428 was adopted, setting out guidelines for supervisory reporting of the leverage ratio. The purpose of the leverage ratio is to limit the size of bank balance sheets with a special emphasis on exposures which are not weighted within the framework of the existing capital requirement calculations. So the leverage calculation uses Tier 1 as the numerator, and the denominator is the total exposure of all active balance sheet and off-balance-sheet items after the adjustments are made, in the context of which the exposures from individual derivatives, exposures from transactions of security funding and other off-balance sheet items are especially pointed out. According to the discretionary right of the Bank of Slovenia and the changes to the calculation brought about by Commission Delegated Regulation (EU) 2015/62, the leverage ratio in the transition period is calculated quarterly and not based on the simple arithmetic mean of monthly leverage ratios for the quarter. The leverage ratio of NLB Group, amounted to 9.68% (transitional) or 9.86% (fully phased in) and is above the 3% threshold defined by the Basel Committee on Banking Supervision (BCBS). In the so-called transitional period from 1 January 2014 to end of 2017, the leverage ratio is monitored together with its constituent parts and its interaction. As of 1 January 2018, the leverage ratio is expected to become one of the binding minimum capital requirements. Since the minimum requirement was exceeded so significantly, the risk of excessive leverage is not material. Leverage risk is assessed and monitored quarterly as part of the internal assessment of capital requirements process (ICAAP) and monitored in the context of the system of early warning regarding risk indicators. In this monitoring system, the leverage ratio has certain limits, or as well in the case of any exceeding of defined triggers and defined notification system. The leverage ratio is regularly, quarterly reported to the Management and Supervisory boards of NLB Group. The monitoring of excess leverage is also included in stress tests and recovery plan measures if and whenever a bank would be required to maintain an adequate capital level. The testing for any case of extraordinary circumstances is especially important as it is future-oriented: if the leverage ratio also remains stable in extraordinary, stress conditions, the risk of a forced decrease in the Bank’s assets is low. NLB Group 2016 Annual Report392 Leverage ratio calculated according to the transitional definition as at 31 December 2016 amounted to 9.68%, and decreased by 0.8 percentage points compared to the previous year. The decrease occurred primarily due to the higher value of the total leverage exposure calculated in accordance with Article 111 of the Regulation (EU) No 575/2013. The impact of capital increase on the leverage ratio was relatively minor. Leverage ratio of NLB Group Tier 1 capital Total leverage exposures Leverage ratio 31.12.2016 in EUR thousand 31.12.2015 Transitional definition Fully phased in definition Transitional definition Fully phased in definition 1,336,241 13,804,603 9.68% 1,360,388 13,802,595 9.86% 1,283,147 12,192,660 10.52% 1,300,143 12,192,660 10.66% NLB Group 2016 Annual Report 393 Leverage ratio common disclosure Table LRCom: Leverage ratio common disclosure On-balance sheet exposures (excluding derivatives and SFTs) 31.12.2016 31.12.2016 31.12.2015 31.12.2015 in EUR thousand CRR leverage ratio exposures CRR leverage ratio exposures CRR leverage ratio exposures CRR leverage ratio exposures 1 2 3 On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral) 13,284,338 13,284,338 11,583,686 11,583,686 (Asset amounts deducted in determining Tier 1 capital) -39,152 -41,160 -6,888 -6,888 Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets) (sum of lines 1 and 2) 13,245,186 13,243,178 11,576,798 11,576,798 Derivative exposures 4 5 Replacement cost associated with all derivatives transactions (ie net of eligible cash variation margin) Add-on amounts for PFE associated with all derivatives transactions (mark-to-market method) EU-5a Exposure determined under Original Exposure Method Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the applicable accounting framework (Deductions of receivables assets for cash variation margin provided in derivatives transactions) (Exempted CCP leg of client-cleared trade exposures) Adjusted effective notional amount of written credit derivatives (Adjusted effective notional offsets and add-on deductions for written credit derivatives) 6 7 8 9 10 11 19,153 11,755 19,153 11,755 31,591 13,461 31,591 13,461 -3,342 -3,342 Total derivative exposures (sum of lines 4 to 10) 27,985 27,985 41,710 41,710 Securities financing transaction exposures 12 13 14 Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions (Netted amounts of cash payables and cash receivables of gross SFT assets) Counterparty credit risk exposure for SFT assets EU-14a Derogation for SFTs: Counterparty credit risk exposure in accordance with Article 429b (4) and 222 of Regulation (EU) No 575/2013 15 Agent transaction exposures EU-15a (Exempted CCP leg of client-cleared SFT exposure) 16 Total securities financing transaction exposures (sum of lines 12 to 15a) Other off-balance sheet exposures 17 18 19 Off-balance sheet exposures at gross notional amount 1,851,195 1,851,195 1,919,195 1,919,195 (Adjustments for conversion to credit equivalent amounts) -1,319,763 -1,319,763 -1,345,043 -1,345,043 Other off-balance sheet exposures (sum of lines 17 to 18) 531,432 531,432 574,152 574,152 Exempted exposures in accordance with CRR Article 429 (7) and (14) (on and off balance sheet) EU-19a EU-19b (Exemption of intragroup exposures (solo basis) in accordance with Article 429(7) of Regulation (EU) No 575/2013 (on and off balance sheet)) (Exposures exempted in accordance with Article 429 (14) of Regulation (EU) No 575/2013 (on and off balance sheet)) Capital and total exposures 20 21 Tier 1 capital 1,336,241 1,360,388 1,283,147 1,300,143 Total leverage ratio exposures (sum of lines 3, 11, 16, 19, EU-19a and EU-19b) 13,804,603 13,802,595 12,192,660 12,192,660 Leverage ratio 22 Leverage ratio Choice on transitional arrangements and amount of derecognised fiduciary items 9.68% 9.86% 10.52% 10.66% EU-23 Choice on transitional arrangements for the definition of the capital measure Transitional Fully phased in Transitional Fully phased in NLB Group 2016 Annual Report394 Summary reconciliation of accounting assets and leverage ratio exposures in EUR thousand 31.12.2016 31.12.2015 Table LRSum: Summary reconciliation of accounting assets and leverage ratio exposures Aplicable amount Aplicable amount Total assets as per published financial statements 12,005,712 11,821,615 Adjustment for entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation -33,299 -15,830 (Adjustment for fiduciary assets recognised on the balance sheet pursuant to the applicable accounting framework but excluded from the leverage ratio total exposure measure in accordance with Article 429(13) of Regulation (EU) No 575/2013) Adjustments for derivative financial instruments Adjustment for securities financing transactions (SFTs) 0 8,832 0 0 10,119 0 Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off-balance sheet exposures) 531,432 574,152 (Adjustment for intragroup exposures excluded from the leverage ratio total exposure measure in accordance with Article 429(7) of Regulation (EU) No 575/2013) (Adjustment for exposures excluded from the leverage ratio total exposure measure in accordance with Article 429(14) of Regulation (EU) No 575/2013) Other adjustments Leverage ratio total exposure measure Split-up of on balance sheet exposures Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures), of which: 13,284,338 11,583,686 Trading book exposures Banking book exposures, of which: Covered bonds Exposures treated as sovereigns 68,756 237,371 13,215,582 11,346,315 50,418 49,183 2,906,237 2,541,649 Exposures to regional governments, MDB, international organisations and PSE not treated as sovereigns 276,523 306,712 Institutions Secured by mortgages of immovable properties Retail exposures EU-10 Corporate EU-11 Exposures in default EU-12 Other exposures (eg equity, securitisations, and other non-credit obligation assets) 0 0 0 0 1,291,926 -197,396 13,804,603 12,192,660 in EUR thousand 31.12.2016 31.12.2015 1,299,266 1,226,722 579,765 554,792 3,121,571 2,900,536 2,419,208 2,465,089 450,108 2,112,486 681,901 619,731 1 2 3 4 5 6 EU-6a EU-6b 7 8 EU-1 EU-2 EU-3 EU-4 EU-5 EU-6 EU-7 EU-8 EU-9 NLB Group 2016 Annual Report395 10. Remuneration policy 10.1. Information on the decision-making process used for determining the Remuneration Policy (Article 450 a of Regulation (EU) No 575/2013) The decision-making process concerning amendments and supplements to the Remuneration Policy involves the expert organisation units, Management Board of the Bank, the Appointment and Remuneration Committee, and the Supervisory Board, which also approve the Remuneration Policy. No outsourced staff participated in formulating the policy. The Policy of Remuneration for Employees Performing Special Work (hereinafter: the Remuneration Policy) entered into force on 1 January 2012. The adequacy of the Remuneration Policy is annually checked and updated. In 2016 the proposed amendments to the Remuneration Policy for employees performing special work arise from the amended Banking Act (ZBan-2) and the orientations of the Supervisory Board. The amendments includes implementation of financial instruments, public announcement of the requirements in the Policy, and changes in decision regarding the variable payments. In addition, the Remuneration Policy also includes guidelines concerning the application of the principle of proportionality in the implementation of Remuneration Policy issued on 22 November 2016 by the Bank of Slovenia. The Remuneration Committee met three times in 2016. The members of the Remuneration Committee changed throughout 2016 and were: Until 10 February 2016 Tit A. Erker (Chairman), Gorazd Podbevšek (Deputy Chairman) and Miha Košak (member) From 19 February 2016 until 15 April 2016 Janko Gedrih (Chairman), Tit A. Erker (Deputy Chairman from 4 March 2016) and Anton Ribnikar (member) From 15 April 2016 until 26 August 2016 Uroš Ivanc (Chairman), Tit A. Erker (Deputy Chairman) and Primož Karpe (member) From 26 August 2016 Uroš Ivanc (Chairman), Matjaž Titan (Deputy Chairman), David Kastelic (member) and David E. Simon (member) Pursuant to Article 52 of ZBan-2, the Remuneration Committee has the following tasks: • preparing proposals of general principles of remuneration policies, including the formulating of opinions on individual aspects of remuneration policies; • assessing the adequacy of established methodologies, based on which the remuneration system promotes adequate risk, capital, and liquidity management; • preparing recommendations for the Supervisory Board on implementation of remuneration policies; • preparing draft decisions about remuneration of employees, including those affecting the Bank’s risks and their management; • assessing the appropriateness of the outsourced adviser whose services the Supervisory Board commissioned to determine the remuneration policy of the Bank; • examining the adequacy of general principles of the remuneration policies and their implementation; • examining the compliance of remuneration policies with the business policy of the Bank over a long period; • direct supervision over remuneration of the categories of employees performing special work within the internal control system and other control functions. NLB Group 2016 Annual Report396 10.2. Information on the link between pay and performance (Article 450 b of Regulation (EU) No 575/2013) In accordance to the Banking Act, the Regulation on Risk Management and Implementation of the Internal Capital Adequacy Assessment Process for Banks and Savings Banks, the Regulation on Diligence of Members of Management and Supervisory Boards of Banks and Savings Banks, the Regulation on Disclosures by Banks and Savings Banks, and the Regulation on Reporting on the Facts and Circumstances by Banks and Savings Banks, the Bank is obliged to establish a Remuneration Policy on the group level. The Remuneration Policy entered into force on 1 January 2012 and is annually updated. In 2016, the policy was changed once; the new version became active on 2 December 2016. The Policy provides clear orientations for prudent remuneration of employees performing special work in accordance with the above regulations, and with the aim of ensuring prudent and efficient risk management. The Remuneration Policy supports the business strategy of the Bank as well as its goals, organisational culture, and long-term interests. The Remuneration Policy does not stimulate the employees performing special work to assume non-proportionally high risks or risks that exceed the ability of the Bank to assume risks. The Bank ensures that the Remuneration Policy is compatible with adequate and efficient risk management, and that it stimulates such management. In terms of payment of the variable part of the salary, the Remuneration Policy takes into account the fulfilment of obligations or achievement of goals referring to capital or liquidity. The Remuneration Policy applies to the Management Board of the Bank1, the senior management, and other employees performing special work in NLB d.d. The following financial and non-financial performance criteria shall be defined for assessing the performance of employees carrying out special work. A financial criterion consists of NLB d.d. goals, which are confirmed by the Supervisory Board and are valid for all employees performing special jobs. The performance criteria for employees performing special work who are included in the supervisory function are established on the basis of the goals of the supervisory function, and are independent from the efficiency of the organisational work they supervise. The table below shows the variations in payment of the variable part which depend on the achievement of targets by the employees performing special work, and the amount of the variable part to which employees carrying out special work are entitled in case the following are achieved: • the targets of NLB d.d. (or NLB Group), • the targets of the organisational unit, or • personal targets of the employee performing special work. 1 Remunerations of president and other members of the Management Board are set in line with provisions of Act Governing the Remuneration of Managers of Companies with Majority Ownership held by the Republic of Slovenia or Self-Governing Local Communities (ZPPOGD) in the period when this law is still in force. NLB Group 2016 Annual Report397 Presentation of possible variants for payment of the variable part Performance criterion 1. Targets of NLB Group (for the Management Board) and targets of NLB d.d. 2. Targets of the organisational units 3. Personal targets Entitlement to the variable part of salary Amount of the variable part of salary related to: - Targets of NLB Group /NLB d.d. - Targets of the organisational units - Personal targets Achieved or exceeded targets Achieved or exceeded targets Achieved or exceeded targets Achieved or exceeded targets Achieved or exceeded targets Yes Yes Yes Yes No Yes Yes Yes Yes No Yes Yes No No Yes Yes Yes / No Yes / No No No For the Management Board and the business function For the Management Board and the business function For the Management Board and the business function For the Management Board and the business function No payment of the variable part up to 2 salaries + up to 2 salaries + up to 1 salary = up to 5 salaries in total up to 2 salaries + up to 1 salary up to 2 salaries + up to 1 salary up to 1 salary = up to 1 salary in total = up to 3 salaries in total = up to 3 salaries in total Amount of the variable part of salary related to: - Targets of NLB Group /NLB d.d. - Targets of the organisational units - Personal targets For other employees For other employees For other employees For other employees No payment of the variable part up to 1 salary + up to 1 salary+ up to 1 salary = up to 3 salaries in total up to 1 salary+ up to 1 salary up to 1 salary+ up to 1 salary up to 1 salary = up to 1 salary in total = up to 2 salaries in total = up to 2 salaries in total The table below defines the maximum possible remuneration of an employee based on an assessment of the achievement of individual targets. Definition of the amount of remuneration Assessment of performance grade 5 – all targets exceeded 4 – targets mostly exceeded 3 – targets achieved 2 – targets partly not achieved 1 – targets not achieved Business function Other than business function Business function and other Targets of NLB d.d. and organisational units Targets of NLB d.d. and organisational units Personal targets up to 2 salaries up to 1 salary up to 1 salary up to 1.5 salaries up to 0.75 salary up to 0.75 salary up to 1 salary up to 0.5 salary up to 0.5 salary 0 0 0 0 0 0 The Remuneration Policy stipulates that a decision on whether the performance criteria have been achieved and the decision to pay the annual variable part of salary to Management Board members are adopted by the Supervisory Board, whereas for other employees performing special work they are adopted by the Bank’s Management Board. An employee is not entitled to the annual variable part of salary if they failed to achieve their personal targets, regardless of whether the targets of NLB d.d. and the targets of the organisational unit have been achieved or not. In amendments of the Remuneration Policy has been added a provision when assessing the performance of the Management Board the Supervisory Board also takes into account the interim situation on the local, regional, as well as global banking and economic market, and the achievement of the Management Board’s goals, taking into account their activities in pursuing the Bank’s best interest. For 2015, employees performing special work received the annual variable part of their salary based on their assessed achievement of the financial and non-financial performance criteria, and taking into account the duration of their mandate. NLB Group 2016 Annual Report 398 10.3. The essential components of the policy of remuneration for employees performing special work (Article 450 c of Regulation (EU) No 575/2013) Pursuant to the Remuneration Policy, the salary of an employee performing special work consists of: • a fixed part of the salary, and • a variable part of the salary which depends on: - performance of NLB Group (for the Management Board) and NLB d.d. (for other employees performing special work) - performance of the organisational unit of the employee performing special work - individual performance of the employee performing special work. The financial and non-financial criteria are applied to measuring the performance of employees carrying out special work, and have to be implemented in at least one of these goals. On an annual assessment goals are set for each employees performing special work based on the Bank’s strategy, Bank’s goals, and project goals. 1. Targets of NLB d.d. and NLB Group: The Management Board sets the targets for NLB d.d. and NLB Group for each business year and the Supervisory Board approves them. The targets defined for NLB Group apply to the Management Board. For other employees performing special work, the targets set for NLB d.d. shall apply. The maximum possible amount of the variable part of salary, subject to achievement of the NLB d.d. or NLB Group targets, shall be two salaries for the Management Board and employees performing special work who are included in the business function, and one salary for other employees performing special work. NLB Group targets consist of financial and non-financial criteria. For the year 2016, these criteria were: - Financial performance indicators (achievement of planned levels): - Net profit after tax - Return on equity (ROE) after tax - Total income - Total costs - Cost-to-income (CIR) ratio - Net cost of risk2 - Non-financial indicators: - Achievement of planned level of share of non-performing loans (NPL ratio) - Reduction in volume of non-performing loans - Compliance with EC commitments - Preparation of Business and IT strategies (approval at Supervisory board) - Implementation of activities regarding privatisation (according to plan) 2. Targets of the organisational unit of the employee performing special work: From the objectives of the NLB Group and NLB d.d. derive objectives of organisational units, determined for the employees performing special work by a competent member of the Management Board, including both financial and non-financial criteria (mainly in the non-business organisational unit). In determining the objectives of the organisational unit, objectives related to different organisational units are taken into account (cross-functional goals), participation in projects, etc. The maximum amount of the variable part of salary, subject to achievement of the organisational unit’s targets, shall be two salaries for the Management Board and the employees performing special work who are included in a business function, and one salary for other employees performing special work. 2 Net cost of risk = net established credit impairments and provisions in a period / average net loans no non-banking sector without BAMC bond NLB Group 2016 Annual Report399 3. Personal targets of an employee performing special work (development, project, and other targets) Personal targets of the employee mainly represent non-financial criteria and include personal development which can be measured with the organisational climate and improvement of personal competencies (measured by 360°). The maximum amount of the variable part of salary shall be one salary for other employees performing special work. Deferred payment of the variable part In line with the European Commission’s decision on the state aid procedure, in the restructuring period until the end of December 2017, the variable part of salary of employees performing special work shall be paid according to the following model: • 50% is payable upon confirmation of business results at the Bank’s General Meeting, and • 50% is payable three years later. The deferred part of the variable part of the salary is aligned with growth in the consumer price index during the period of deferment. After the period of deferment, the payment is made within three months of confirmation of the performance results at the Bank’s General Meeting. Prior to payment of the deferred variable part of salary, NLB d.d. must check if all conditions for payment of the deferred variable part of salary have been met. The Management Board of the Bank may adopt a unilateral decision on the amount of payment of the deferred variable part of salary, namely: • An employee performing special work is paid 100% of the deferred variable part of their salary in the case there are no negative trends in the Bank’s operations during the deferment period that result from decisions made by the employee performing special work and in the case there were no serious violations of the regulations and the Bank’s internal regulations, abuses, and inefficient acts by the employee performing special work during their work. When assessing these acts, NLB will act according to a zero-tolerance principle and consider as a serious violation of the regulations acts showing signs of: criminal offences, violations, breach of obligations arising from employment, and/or those acts that constitute a conflict of interest with the Bank’s business interests, as well as corruptive acts that constitute or reinforce non-transparency in adopting business decisions while performing functions in the Bank. All acts that are committed intentionally or from gross negligence and cause damage to the Bank are considered as inefficient conduct; • An employee performing special work is not paid the deferred variable part of salary in case the Bank’s performance in the period of the deferred payment shows material negative trends that result from decisions adopted by the employee performing special work. Amount of payment of the variable part of remuneration for 2015 Pursuant to Item 7 of Article 170 of the ZBan-2, the Bank’s remuneration policy must stipulate that at least 50% of the variable part of the remuneration of each individual who performs special work should be composed of ordinary or preference shares of the Bank, or of instruments related to shares or equal non-cash instruments when the Bank’s shares are not listed on the regulated market; the person obtaining the shares or instruments may only transfer them upon the Bank’s approval, which may only be issued after at least two years of the obtaining. Pursuant to the second paragraph of the above Article, like the other principles of the remuneration policy, this principle must be also followed by the Bank in a way and to the extent compliant with its size, internal organisation, and nature, as well as the volume and complexity of the activities it carries out. As the NLB shares are not listed on the stock exchange a proportion of the variable part of the salary should be paid out in financial instruments. With the resolution from 29 July 2016 the Management Board confirmed that the employees performing special work are paid the pertaining variable part based on actual assessments of the employees entitled to variable part, so that of 50%, which is paid immediately, 25% of the variable part is paid in cash after the business results for 2015 are approved at the General Meeting of the Bank, and 25% after the relevant financial instrument is constructed. The 50% of the variable part which is deferred and will be paid after three years is also paid 25% in cash and 25% in the relevant financial instrument. For the employees whose employment contracts in 2015 defined trial employment, 50% of the pertaining variable part is calculated, according to the provisions of the Remuneration Policy. Due to the changed method of payment of the variable part, the expert organisational unit prepared a statement to be submitted for signing to all employees performing special work who are entitled to variable part for 2015, saying that they agree that 25% of the pertaining variable part and 25% of the pertaining deferred variable part is paid in financial instruments. NLB Group 2016 Annual Report400 According to new Bank of Slovenia Guidelines (issued on 22 November 2016), the second variable part of remuneration was also paid in cash in December 2016. Defining the targets of employees performing special work in 2016 The planning of targets and assessment of employees performing special work are conducted once a year; the planning of targets is carried out by the end of January and performance assessments by the end of March or until the results of operations are known. In 2016, the targets of NLB d.d. were approved by the Supervisory Board and included in the forms for monitoring the performance of all employees carrying out special work. The targets for individual organisational units were defined top-down, meaning that each member of the Management Board set targets for their directly subordinate employees performing special work and in turn they set targets down the line of management. The targets of the organisational unit can be financial or non-financial and must be defined according to the SMART method, which means they have to be clear (specific), measurable (or verifiable), real, defined in terms of time and be worth the effort (acceptable). Development targets for all employees performing special work were set on an individual basis for each employee, depending on the assessment of the superior director or member of the Management Board regarding which field covered by the employee performing special work needs developing and depending on the DNLA test results, results of organisational climate measurement, and personal development orientations. 10.4. The ratio between fixed and variable remuneration (Article 450 d of Regulation (EU) No 575/2013) The ratio between the variable and fixed parts of salary depends on the function performed by each individual, namely: • for employees performing special work who are included in a business function, the ratio between the fixed and variable parts of the salary can be 60%:40% at a maximum; and • for employees performing special work who are included in a joint and supervisory function, the ratio between the fixed and variable parts of the salary can be 80% : 20% at a maximum. An employment contract can stipulate a predetermined variable part of the salary of an employee performing special work only for the first year of their employment. The Supervisory Board may request from a member of the Management Board, and the Management Board can request from other employees performing special work to return the already paid variable part of salary or its proportionate part (the third paragraph of Article 270 of the Companies Act (ZGD-1)): • if the nullity of the annual report is established with a binding effect and the grounds for nullity are connected to the items or facts serving as a basis for the performance bonus, or • based on a special auditor’s report establishing that the criteria for defining remuneration were applied incorrectly or that the critical accounting, financial, and other data and indicators were incorrectly established or applied. The maximum amount of the variable part of salary for the annual distribution of the variable part of salary is defined as follows: • for employees performing special work who are included in a business function, the maximum amount of the variable part of the salary can be five (5) salaries of the employee performing special work; and • for other employees performing special work, the maximum amount of the variable part of the salary can be three (3) salaries of the employee performing special work. Targets of NLB d.d. (or NLB Group for Core Group Steering) Targets of organisational unit Development (personal) targets of employee performing special work Maximum amount of the variable part of salary Business function up to 2 salaries up to 2 salaries up to 1 salary up to 5 salaries Common and supervisory function up to 1 salary up to 1 salary up to 1 salary up to 3 salaries NLB Group 2016 Annual Report401 During the period when NLB is using the redeemable extraordinary aid granted by the Republic of Slovenia to overcome the extraordinary financial situation, the maximum amount of the variable part of salary may be lower than that defined in the Remuneration Policy (which is 5 salaries for the business part and 3 salaries for the non-business part), in accordance with the rules defined by the Bank of Slovenia in its secondary legislation. Pursuant to the European Commission’s decision in relation to the state aid procedure3, the maximum possible amount of the total income of an employee performing special work is limited to 15-times the average gross salary of employees in the Republic of Slovenia or 10-times the average gross salary of employees in NLB d.d. for the period of the Bank’s restructuring, i.e. until the end of December 2017. The maximum amount of income is limited to the higher of the two indicated amounts. The last known data of the Statistical Office of the Republic of Slovenia in the month of payment of the variable part of the salary to an employee performing special work is used to calculate the maximum amount of payment. To calculate the maximum amount of the variable part in 2016, we used the following data: MAX 15 average gross salaries4 in the RS: EUR 1,584.66 x 12 months x 15 = EUR 285,238.80 MAX 10 average gross salaries5 in NLB d.d.: EUR 2,258.98 x 12 months x 10 = EUR 271,077.60 10.5. Information on the performance criteria on which the entitlement to shares, options, or variable components of remuneration are based (Article 450 e of Regulation (EU) No 575/2013) In accordance with the new Guidelines of the Bank of Slovenia regarding the application of the principle of proportionality in the implementation of remuneration policy issued on 22 November 2016, it sets the amount of EUR 50,000 as a amount of variable part which shall not be used for the purpose of point 7 of paragraph 1 Article 170 of the ZBan-2. The same amount is determined on the Group level, taking into account the proportionality principle. Accordingly, the Bank does not pay a variable part of salary in financial instruments. 10.6. Main parameters and rationale for any variable component scheme and any other non-cash benefits (Article 450 f of Regulation (EU) No 575/2013) The main parameters of variable components are specified in the employment contract according to the Act Governing the Remuneration of Managers of Companies with Majority Ownership Held by the Republic of Slovenia or Self-Governing Local Communities (ZPPOGD) and ZBan-2. Variable pay is limited by ZPPOGD. Pursuant to the Remuneration Policy, the amount of variable pay is limited to 5 salaries for the Management Board and the business line, and 3 salaries for the non-business sphere. Pursuant to the European Commission’s decision in relation to the state aid procedure, the maximum possible amount of the total income of an employee performing special work is limited to 15-times the average gross salary of employees in the Republic of Slovenia, or 10-times the average gross salary of employees in NLB d.d. for the period of the Bank’s restructuring, i.e. until the end of December 2017. The maximum amount of income is limited to the higher of the two indicated amounts. Other non-cash benefits are determined in the Rules on determining other rights under management employment contracts and other acts of the Bank. 3 Commission Decision on State Aid SA.33229(2012/C) (ex 2011/N) – Restructuring of NLB Slovenia 4 Data for period January – December 2016 5 Data for period January – December 2016 NLB Group 2016 Annual Report402 The Rules regulate the list and limitations of any other rights of managers, which can be defined in the employment contract, while in accordance with the provisions of ZPPOGD such rights are regulated with special documents or rules of the Bank’s Supervisory Board. The list of other rights encompasses: • a company car for both business and private purposes • a company car with a driver • a company mobile phone • air travel • residence in Ljubljana • family separation allowance • reimbursement of educational cost of minors of the members of the Management Board. • an NLB MasterCard business card • entertainment allowance • accident insurance • health insurances • voluntary collective supplementary pension insurance • managers’ medical examination • training • membership fees • parking space • accommodation while on a business trip • third-party liability insurance • holiday allowance. NLB Group 2016 Annual Report403 10.7. Quantitative information on remuneration (Article 450 g, h and i of Regulation (EU) No 575/2013) The table below shows the remuneration for 2016, combined with operating segment MB Supervisory function MB Management function Investment banking Retail banking Asset management Corporate functions Independent control functions All other Members (Headcount) 36 48 Number of identified staff in FTE Number of identified staff in senior management positions 6.00 174.00 12.92 38.09 30.36 409.94 6 174 13 39 32 421 Total fixed remuneration (in EUR) 368,307 4,298,684 298,164 4,078,815 467,699 800,813 1,064,994 9,389,126 Of which: fixed in cash 368,307 4,298,684 298,164 4,078,815 467,699 800,813 1,064,994 9,389,126 Of which: fixed in shares and share-linked instruments Of which: fixed in other types instruments Total variable remuneration (in EUR) 0.00 823,467.00 47,215.00 646,185.00 75,132.00 150,505.00 141,981.00 882,040.00 Of which: variable in cash 0.00 746,445.00 47,215.00 646,185.00 75,132.00 150,505.00 141,981.00 882,040.00 Of which: variable in shares and share-linked instruments Of which: variable in other types instruments Total amount of variable remuneration awarded in year N which has been deferred (in EUR) Of which: deferred variable in cash in year N Of which: deferred variable in shares and share-linked instruments in year N Of which: deferred variable in other types of instruments in year N 25,674 51,348 0 0 380,689 23,226 300,633 34,366 42,810 68,564 372,398 358,524 23,226 298,955 32,327 40,481 65,514 353,871 22,165 0 1,678 2,039 2,329 3,050 18,527 Additional information regarding the amount of total variable remuneration 0 267,553 21,176 247,626 31,029 25,509 70,817 264,859 Total amount of outstanding deferred variable remuneration awarded in previous periods and not in year N (in EUR); Art 450 h(iii)CRR; Total amount of explicit ex post performance adjustment applied in Year N for previously awarded remuneration (in EUR); Art 450 h(iv)CRR; Number of beneficiaries of guaranteed variable remuneration (new sign on payments); Art 450 h(iv)CRR; Total amount of guaranteed variable remuneration (new sign on payments) (in EUR); Art 450 h(v)CRR; Number of beneficiaries of severance payments; Art 450 h(vI)CRR Total amount of severance payments paid in year N (in EUR); Art 450 h(vi)CRR; Art 450 h(v) Highest severance payment to a single person (in EUR); Art 450 h(vi)CRR; Number of beneficiaries of contributions to discretionary pension benefits in year N Total amount of discretionary pension benefits (in EUR) in year N Total amount of variable remuneration awarded for multi-year periods under programmes which are not revolved annually (in EUR) No individual received more than EUR 1 million by way of remuneration. NLB Group 2016 Annual Report404 11. Information regarding governance arrangements 11.1. The recruitment policy for the selection of members of the management body and their actual knowledge, skills, and expertise (Article 435.2 b of Regulation (EU) No 575/2013) According to the Slovenian Banking Act, the Supervisory Board sets the framework for the selection and appointment of suitable Management Board candidates. The framework is defined with the selection process policy, with the goal of the Management Board as a whole to possess the whole spectrum of relevant knowledge, skills, and experience required for the in-depth understanding of the Bank’s activities and the risks to which it is exposed. The Management Board selection policy determines the professional standards of the selection process, as well as the professionally-run candidate selection, which gives the Supervisory Board a solid ground for their selection as well as fulfills their duty of care in line with the highest ethical standards and diligence in the selection process. By this approach it is ensured the Management Board will consist of individuals with a different base of knowledge and experience, so the Management Board will dispose of a balanced set of skills, relevant knowledge, and experience in regard to the Bank’s size, complexity, and risk-profile. Professionally-led operations are not only in best interest of the Bank, but also in the best interest of the selected candidates by deterring all possible doubts with regard to their expertise, references, and the appropriateness of their selection. Beside all legal and statutory set conditions, the Management Board member candidates need to have adequate experience, skills, expertise, and competences, including their individual personal integrity and ability to dedicate adequate time to carry out their duties in view of possible other candidate’s activities outside the Bank. By this the candidates are able to carry out their duties diligently, responsibly, effectively, as well as define and determine the values of the Bank and strategy of its operations in the way of following the objectives of its long-term success and coherent with the Bank’s best interests and highest ethical standards of its management. Management Board candidates need to demonstrate the ability of constructively-critical cooperation when addressing the most important issues of the Bank with the objective of the continuous pursuit of the Bank’s best interest, and with this the ability of active involvement in Bank’s operations and its risk management. Management Board candidates must subordinate their personal interests, partial interest of third parties, as well as the interests which could arise from the candidate’s past functions or other activities, economic, professional, and private relationships (including the Management Board and Supervisory Board members), which could by any mean influence the decision-making in the Bank’s best interest. In case of any circumstances, which could lead to conflict of interest and consequently jeopardise the adopting of independent decisions in best interest of the Bank, such conflicts should be disclosed in the selection process, and a member should accept full responsibility to take timely measures to eliminate such conflicts of interest. At the Management Board member selection process the recommendation of both genders being appropriately represented is followed. The selection of the Management Board Members should strive for Management Board as a whole to have all necessary expertise, knowledge, skills, and experience at their disposal for successfully managing the Bank. Besides meeting all conditions for their work, Members of the Management Board need to act complementarily in line with the Bank’s objectives, strategies, and policies in order to follow the Bank’s best interest. The Management Board comprises of 4 (four) members; namely the Chairman of the Board (CEO) – who is also responsible for the Large Corporates area, Retail banking and Private banking; CRO; CFO; and COO – who is besides the IT area, also responsible for the Procurement and CREM area, as well the Back office area. With regard to the wide range of relevant knowledge, skills, and experience from international environment, as well as a number of successfully completed projects, the Management Board as a whole has the appropriate expertise, skills, and experience to effectively and successfully lead the Bank. 11.2. The policy on diversity with regard to selection of members of the management body, its objectives and any relevant targets set out in that policy, and the extent to which these objectives and targets have been achieved (Article 435.2 c of Regulation (EU) No 575/2013) The Bank has accepted the Policy of Supervisory Board diversity on 8 August 2016 and published it on its internet page. NLB Group 2016 Annual Report405 With the policy of assuring diversity of the Supervisory Board, based on Article 34 of Slovenian Banking Act (ZBan-2), Nova Ljubljanska banka, d.d. sets the framework which enables the composition of the Supervisory Board in a way it, as a whole, possesses the relevant knowledge, skills, and experience that are required for the in-depth understanding of the Bank’s operations and the risks to which it is exposed, as well as the realisation of the objectives of its strategy. The policy is focused on the selection of the Supervisory Board members, who primarily fulfill the requirements of the highest ethical and professional standards, exercise the highest level of diligence, as well as form the most competent governing body as a whole. Taking into account the policy, the Supervisory Board shall be composed in a way that it, as a whole, possesses the relevant knowledge, skills, and experience that are required with regard to the size, complexity, and risk-profile of the Bank. Diversity of the Supervisory board is recognised as one of the key business advantages of the Bank. A member of the Supervisory Board can only be a person who fulfills all set of the conditions for the Supervisory Board member in the Bank, according to the Banking Act and other grounds, as covered by the Policy. Beside these qualifications, the Supervisory Board Members need to possess adequate experience, skills, knowledge, and competences, including personal integrity and the possibility of dedication of the adequate time to perform the Supervisory Board member functions, regardless their possible external activities. All listed requirements need to enable the Supervisory Board Members to monitor the Bank’s operations diligently, responsibly and effectively with which, together with Management Board, the values and the strategy of the Bank are defined in the way they assure the Bank’s long-term success, and are coherent with its best interests and general ethical standards of the Bank’s governance. Supervisory Board members need to demonstrate the ability of constructively-critical cooperation when addressing the most important issues of the Bank, with the objective of the continuous pursuit of the Bank’s best interest, and with this the ability of active involvement in the monitoring of the Bank’s management. Supervisory Board members must subordinate their personal interests, partial interest of third parties, as well as the interests which could arise from the candidate’s past functions or other activities, and economic, professional and private relationships (including Management Board and Supervisory Board members), which could by any means influence their decisions in monitoring the Bank. At the composition of the Supervisory Board the recommendation of both genders being appropriately represented is followed. The Supervisory Board annually assesses its structure, activities, potential conflict of interests of individual members, as well the operations of individual members, and the Supervisory Board as a whole. In addition, the efficiency and performance of the Supervisory Board’s cooperation with the Management Board is assessed. If the Supervisory Board establishes that: (1) the number of members is not appropriate, (2) it is necessary to add an additional member, (3) the members of the Supervisory Board are no longer qualified for performing the function due to non-compliance with the prescribed conditions, (4) if due to inappropriateness of a single or more Supervisory Board member(s) in the aspect of duties of an individual member, the current structure doesn’t assure the diversity of qualifications, knowledge, and experience for monitoring the Bank, the Supervisory Board notifies Slovenian Sovereign Holding (SDH) – as a single Bank’s shareholder – for the general shareholder’s meeting to appoint new member(s). The Supervisory Board is comprised of 9 (nine) members, of which there is one female, and as a whole fulfills the objective of representation of both genders. The diversity of expertise, experience, and skills is ensured in the following areas: strategy and development, privatisation, finance, financial investments, investment banking, accounting and auditing, corporate banking, risk control and risk management, retail banking, banking legislation, general legislation, and HRM. The goals of the diversity policy and the policy for selection of appropriate candidates for Supervisory Board members and Management Board members are: (1) to establish a transparent process of searching and nominating, (2) to ensure adequate knowledge and skills, as well as (3) to ensure the appropriate representation of both genders under, (4) the assumption of fulfilling the set requirements for the membership. The Supervisory and Management Boards as a whole have a broad range of knowledge, skills, and experience from Slovenian and international banking environments, and the recommendation for the representation of both genders in governing bodies is taken into account as well. NLB Group 2016 Annual Report406 12. List of all disclosures required under Part 8 of Regulation (EU) No 575/2013 Article Requirement 435 Risk management objectives and policies 1 Objectives and policies regarding the relevant risks (a) the strategies and processes to manage those risks; (b) the structure and organisation of the relevant risk management function, including information on its authority and statute, or other appropriate arrangements; (c) the scope and nature of risk reporting and measurement systems; (d) the policies for hedging and mitigating risk, and the strategies and processes for monitoring the continuing effectiveness of hedges and mitigants; (e) a declaration approved by the management body on the adequacy of risk management arrangements of the institution providing assurance that the risk management systems put in place are adequate with regard to the institution’s profile and strategy; (f) a concise risk statement approved by the management body succinctly describing the institution’s overall risk profile associated with the business strategy. This statement shall include key ratios and figures providing external stakeholders with a comprehensive view of the institution’s management of risk, including how the risk profile of the institution interacts with the risk tolerance set by the management body. 2 Information, including regular, at least annual updates, regarding governance arrangements (a) the number of directorships held by members of the management body; (b) the recruitment policy for the selection of members of the management body and their actual knowledge, skills, and expertise; (c) the policy on diversity with regard to selection of members of the management body, its objectives and any relevant targets set out in that policy, and the extent to which these objectives and targets have been achieved; (d) whether or not the institution has set up a separate risk committee and the number of times the risk committee has met; (e) the description of the information flow on risk to the management body. 436 Scope of application (a) the name of the institution to which the requirements of this Regulation apply; (b) an outline of the differences in the basis of consolidation for accounting and prudential purposes, with a brief description of the entities therein, explaining whether they are: fully consolidated, proportionally consolidated, deducted from own funds, neither consolidated nor deducted; (c) any current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities among the parent undertaking and its subsidiaries; (d) the aggregate amount by which the actual own funds are less than required in all subsidiaries not included in the consolidation, and the name or names of such subsidiaries; (e) if applicable, the circumstance of making use of the provisions laid down in Articles 7 and 9. 437 Capital (Own funds) (a) a full reconciliation of Common Equity Tier 1 items, Additional Tier 1 items, Tier 2 items and filters and deductions applied pursuant to Articles 32 to 35, 36, 56, 66 and 79 to own funds of the institution and the balance sheet in the audited financial statements of the institution; (b) a description of the main features of the Common Equity Tier 1 and Additional Tier 1 instruments and Tier 2 instruments issued by the institution; (c) the full terms and conditions of all Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments; (d) separate disclosure of the nature and amounts of the following: (i) each prudential filter applied pursuant to Articles 32 to 35; (ii) each deduction made pursuant to Articles 36, 56 and 66; (iii) items not deducted in accordance with Articles 47, 48, 56, 66 and 79; (e) a description of all restrictions applied to the calculation of own funds in accordance with this Regulation and the instruments, prudential filters and deductions to which those restrictions apply; (f) where institutions disclose capital ratios calculated using elements of own funds determined on a basis other than that laid down in this Regulation, a comprehensive explanation of the basis on which those capital ratios is calculated. 438 Capital requirements (a) a summary of the institution’s approach to assessing the adequacy of its internal capital to support current and future activities; (b) upon demand of the relevant competent authority, the result of the institution’s internal capital adequacy assessment process including the composition of the additional own funds requirements based on the supervisory review process as referred to in point (a) of Article 104(1) of Directive 2013/36/EU; (c) (SA approach:) for institutions calculating the risk-weighted exposure amounts in accordance with Chapter 2 of Part Three, Title II, 8% of the risk-weighted exposure amounts for each of the exposure classes specified in Article 112 (= SA categories); Section of Annual Report Chapter AFS AFS AFS AFS RP RP 7.a 7.b 7.c 7.a Statement on man- agement, point 3 Statement on man- agement, point 3 BR Corporate governance, Management Board RCM RCM 11.1 11.2 BR Corporate governance, Supervisory Board AFS RCM RCM RCM RCM / RCM RCM RCM RCM RCM RCM RCM / RCM 7.a 2 2 2 2 / 3.2 3.3 3.3 3.4 3.4 3.1 5.1 / 5.2 NLB Group 2016 Annual ReportArticle Requirement Section of Annual Report Chapter 407 (d) (IRB approach:) for institutions calculating risk-weighted exposure amounts in accordance with Chapter 3 of Part Three, Title II, 8% of the risk-weighted exposure amounts for each of the exposure classes specified in Article 147. The institutions calculating the risk-weighted exposure amounts in accordance with Article 153(5) or Article 155(2) shall disclose the exposures assigned to each category in Table 1 of Article 153(5), or to each risk weight mentioned in Article 155(2); (e) (market risks:) own funds requirements calculated in accordance with points (b) and (c) of Article 92(3); (1) position risk; (2) large exposures exceeding the limits specified in Articles 395 to 401, to the extent an institution is permitted to exceed those limits; (3) foreign-exchange risk; (4) settlement risk; (5) commodities risk; (f) (operational risk:) own funds requirements calculated in accordance with Part Three, Title III, Chapters 2, 3 and 4 and disclosed separately. 439 Exposure to counterparty credit risk (a) a discussion of the methodology used to assign internal capital and credit limits for counterparty credit exposures; (b) a discussion of policies for securing collateral and establishing credit reserves; (c) a discussion of policies with respect to wrong-way risk exposures; (d) a discussion of the impact of the amount of collateral the institution would have to provide given a downgrade in its credit rating; (e) gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held, and net derivatives credit exposure. Net derivatives credit exposure is the credit exposure on derivatives transactions after considering both the benefits from legally enforceable netting agreements and collateral arrangements; (f) measures for exposure value under the methods set out in Part Three, Title II, Chapter 6, Sections 3 to 6, whichever method is applicable; (g) the notional value of credit derivative hedges, and the distribution of current credit exposure by types of credit exposure; (h) the notional amounts of credit derivative transactions, segregated between use for the institution’s own credit portfolio, as well as in its intermediation activities, including the distribution of the credit derivatives products used, broken down further by protection bought and sold within each product group; (i) the estimate of α if the institution has received the permission of the competent authorities to estimate α. Capital buffers 1. Countercyclical capital buffer: (a) the geographical distribution of its credit exposures relevant for the calculation of its countercyclical capital buffer; (b) the amount of its institution specific countercyclical capital buffer. 2. G-SII buffer: 1. Institutions identified as G-SIIs in accordance with Article 131 of Directive 2013/36/EU shall disclose, on an annual basis, the values of the indicators used for determining the score of the institutions in accordance with the identification methodology referred to in that Article. 440 441 442 Credit risk adjustments (a) the definitions for accounting purposes of ‘past due’ and ‘impaired’; (b) a description of the approaches and methods adopted for determining specific and general credit risk adjustments; (c) the total amount of exposures after accounting offsets and without taking into account the effects of credit risk mitigation, and the average amount of the exposures over the period broken down by different types of exposure classes; (d) the geographic distribution of the exposures, broken down in significant areas by material exposure classes, and further detailed if appropriate; (e) the distribution of the exposures by industry or counterparty type, broken down by exposure classes, including specifying exposure to SMEs, and further detailed if appropriate; (f) the residual maturity breakdown of all the exposures, broken down by exposure classes, and further detailed if appropriate; (g) by significant industry or counterparty type, the amount of: (i) impaired exposures and past due exposures, provided separately; (ii) specific and general credit risk adjustments; (iii) charges for specific and general credit risk adjustments during the reporting period; (h) the amount of the impaired exposures and past due exposures, provided separately, broken down by significant geographical areas including, if practical, the amounts of specific and general credit risk adjustments related to each geographical area; (i) the reconciliation of changes in the specific and general credit risk adjustments for impaired exposures, shown separately. The information shall comprise: / RCM RCM RCM RCM RCM RCM RCM RCM / / / RCM RCM RCM AFS AFS RCM RCM RCM RCM RCM RCM / 5.2 5.2 6.1 6.2 6.3 6.2 6.4 6.1 / / / 4 4 4 2.13.a 2.13.a 7.1 7.2 7.3 7.4 7.5 7.5 (i) a description of the type of specific and general credit risk adjustments; (ii) the opening balances; (iii) the amounts taken against the credit risk adjustments during the reporting period; (iv) the amounts set aside or reversed for estimated probable losses on exposures during the reporting period, any other adjustments including those determined by exchange rate differences, business combinations, acquisitions and disposals of subsidiaries, and transfers between credit risk adjustments; (v) the closing balances. AFS 5.14 Specific credit risk adjustments and recoveries recorded directly to the income statement shall be disclosed separately. AFS 7.1 j,k,l, 5.14 443 Unencumbered assets EBA shall issue guidelines specifying the disclosure of unencumbered assets by 30 June 2014. EBA shall develop draft regulatory technical standards to specify disclosure of the balance sheet value per exposure class broken down by asset quality and the total amount of the balance sheet value that is unencumbered. AFS 7.3 NLB Group 2016 Annual Report408 Article Requirement 444 Use of ECAIs (a) the names of the nominated ECAIs and ECAs and the reasons for any changes; (b) the exposure classes for which each ECAI or ECA is used; (c) a description of the process used to transfer the issuer and issue credit assessments onto items not included in the trading book; (d) the association of the external rating of each nominated ECAI or ECA with the credit quality steps prescribed in Part Three, Title II, Chapter 2, taking into account that this information needs not be disclosed if the institution complies with the standard association published by EBA; (e) the exposure values and the exposure values after credit risk mitigation associated with each credit quality step prescribed in Part Three, Title II, Chapter 2 as well as those deducted from own funds. 445 Exposure to market risk Separately for each risk + the own funds requirement for specific interest rate risk of securitisation positions. 446 Operational risk Institutions shall disclose the approaches for the assessment of own funds requirements for operational risk that the institution qualifies for; a description of the methodology set out in Article 312(2), if used by the institution, including a discussion of relevant internal and external factors considered in the institution’s measurement approach, and in the case of partial use, the scope and coverage of the different methodologies used. 447 Exposures in equities not included in the trading book (a) the differentiation between exposures based on their objectives, including for capital gains relationship and strategic reasons, and an overview of the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation and any significant changes in these practices; (b) the balance sheet value, the fair value and, for those exchange-traded, a comparison to the market price where it is materially different from the fair value; (c) the types, nature and amounts of exchange-traded exposures, private equity exposures in sufficiently diversified portfolios, and other exposures; (d) the cumulative realised gains or losses arising from sales and liquidations in the period; and (e) the total unrealised gains or losses, the total latent revaluation gains or losses, and any of these amounts included in the original or additional own funds. 448 Exposure to interest rate risk on positions not included in the trading book (a) the nature of the interest rate risk and the key assumptions (including assumptions regarding loan prepayments and behaviour of non-maturity deposits), and frequency of measurement of the interest rate risk; 449 450 1 (b) the variation in earnings, economic value, or other relevant measure used by the management for upward and downward rate shocks according to management’s method for measuring the interest rate risk, broken down by currency. Exposure to securitisation positions Remuneration policy For those categories of staff whose professional activities have a material impact on its risk profile: (a) information concerning the decision-making process used for determining the remuneration policy, as well as the number of meetings held by the main body overseeing remuneration during the financial year including, if applicable, information about the composition and the mandate of a remuneration committee, the external consultant whose services have been used for the determination of the remuneration policy and the role of the relevant stakeholders; (b) information on link between pay and performance; (c) the most important design characteristics of the remuneration system, including information on the criteria used for performance measurement and risk adjustment, deferral policy and vesting criteria; (d) the ratios between fixed and variable remuneration set in accordance with Article 94(1)(g) of Directive 2013/36/EU; (e) information on the performance criteria on which the entitlement to shares, options or variable components of remuneration is based; (f) the main parameters and rationale for any variable component scheme and any other non-cash benefits; (g) aggregate quantitative information on remuneration, broken down by business area; (h) aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the institution, indicating the following: (i) the amounts of remuneration for the financial year, split into fixed and variable remuneration, and the number of beneficiaries; (ii) the amounts and forms of variable remuneration, split into cash, shares, share-linked instruments, and other types; (iii) the amounts of outstanding deferred remuneration, split into vested and unvested portions; (iv) the amounts of deferred remuneration awarded during the financial year, paid out and reduced through performance adjustments; (v) new sign-on and severance payments made during the financial year, and the number of beneficiaries of such payments; (vi) the amounts of severance payments awarded during the financial year, number of beneficiaries and highest such award to a single person; Section of Annual Report Chapter RCM RCM RCM RCM RCM RCM 8 8 8 8 7.1 5.2 AFS 7.5.a AFS 5.4.b, 2.12.b, 7.6. AFS AFS AFS RCM AFS AFS / RCM RCM RCM RCM RCM RCM RCM 2.12.b, 5.4. 5.4.a 5.4.b, 5.8. 3.2 7.2.3 7.2.3 / 10,1 10,2 10,3 10,4 10,5 10,6 10,7 RCM 10,7 NLB Group 2016 Annual ReportArticle Requirement Section of Annual Report Chapter 409 (i) the number of individuals being remunerated with EUR 1 million or more per financial year, for remuneration between EUR 1 million and EUR 5 million broken down into pay bands of EUR 500,000 and for remuneration of EUR 5 million and above broken down into pay bands of EUR 1 million; (j) upon demand from the Member State or competent authority, the total remuneration for each member of the management body or senior management. 451 Leverage (a) the leverage ratio and how the institution applies Article 499(2) and (3); (b) a breakdown of the total exposure measure, as well as a reconciliation of the total exposure measure with the relevant information disclosed in published financial statements; (c) where applicable, the amount of derecognised fiduciary items in accordance with Article 429(11); (d) a description of the processes used to manage the risk of excessive leverage; (e) a description of the factors that had an impact on the leverage ratio during the period to which the disclosed leverage ratio refers. 452 453 Use of the IRB Approach to credit risk Use of credit risk mitigation techniques (a) the policies and processes for, and an indication of the extent to which the entity makes use of, on- and off- balance sheet netting; (b) the policies and processes for collateral valuation and management; (c) a description of the main types of collateral taken by the institution; (d) the main types of guarantor and credit derivative counterparty and their creditworthiness; (e) information about market or credit risk concentrations within the credit mitigation taken; (f) for institutions calculating risk-weighted exposure amounts under the Standardised Approach or the IRB Approach, but not providing own estimates of LGDs or conversion factors in respect of the exposure class, separately for each exposure class, the total exposure value (after, where applicable, on- or off-balance sheet netting) that is covered — after the application of volatility adjustments — by eligible financial collateral, and other eligible collateral; (g) for institutions calculating risk-weighted exposure amounts under the Standardised Approach or the IRB Approach, separately for each exposure class, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees or credit derivatives. For the equity exposure class, this requirement applies to each of the approaches provided in Article 155. Use of the Advanced Measurement Approaches to operational risk Use of Internal Market Risk Models Transitional provisions for disclosure of own funds During the period from 1 January 2014 to 31 December 2017, institutions shall disclose the following additional information about their own funds: (a) the nature and effect on Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital and own funds of the individual filters and deductions applied in accordance with Articles 467 to 470, 474, 476 and 479; (b) the amounts of minority interests and Additional Tier 1 and Tier 2 instruments, and related retained earnings and share premium accounts, issued by subsidiaries that are included in consolidated Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital and own funds in accordance with Section 4 of Chapter 1; (c) the effect on Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital and own funds of the individual filters and deductions applied in accordance with Article 481; (d) the nature and amount of items that qualify as Common Equity Tier 1 items, Tier 1 items and Tier 2 items by virtue of applying the derogations specified in Section 2 of Chapter 2. 454 455 492 3 RCM AFS RCM RCM / RCM RCM / / AFS AFS RCM AFS RCM RCM / / 10,7 8.2. 9 9 / 9 9 / / 7.1. f, g 7.1. h 7.1 7.1. i 7.1 7.1 / / RCM 3.4 4 During the period from 1 January 2014 to 31 December 2021, institutions shall disclose the amount of instruments that qualify as Common Equity Tier 1 instruments, Additional Tier 1 instruments and Tier 2 instruments by virtue of applying Article 484 (capital instruments that are not eligible under new legislation, but can be gradually excluded). / / Section of the Annual Report AFS = Audited Financial Statements RCM = Risk and Capital Management RP = Regulatory Part BR = Business Report NLB Group 2016 Annual ReportGRI 6 Standards Disclosure for NLB Report for 2016 6 Global reporting initiative NLB Group 2016 Annual Report411 Economic GRI Topic GRI Disclosure Value 201-1: Direct economic value generated and distributed a. Direct economic value generated and distributed (EVG&D) on an accruals basis, including the basic components for the organisation’s global operations as listed below. If data are pre- sented on a cash basis, report the justification for this decision in addition to reporting the following basic components: SRS 201 - Economic Performance i. Direct economic value generated: revenues; ii. Economic value distributed: operating costs, employee wag- es and benefits, payments to providers of capital, payments to government by country, and community investments; iii. Economic value retained: ‘direct economic val- ue generated’ less ‘economic value distributed’. 202-2: Proportion of senior management hired from the local community a. Percentage of senior management at significant locations of operation that are hired from the local community. SRS 202 - Market Presence b. The definition used for ‘senior management.’ c. The organisation’s geographical definition of ‘local.’ d. The definition used for ‘significant locations of operation.’ See the section Support to Entrepreunership in CSR Annual Report 2016 (https://www.nlb.si/corporate-social-responsibility-report-2016). See the section Support to Entrepreunership in CSR Annual Report 2016 (https://www.nlb.si/corporate-social-responsibility-report-2016). EUR 475,744,000 (included: net interest income, net fee and commission income, effects from financial result, foreign exchange translaton gains less losses, gains less losses on derecognition of assets, other operating income and expenses, and Net gains or losses from non-current assets from held sale) See the section Support to Entrepreunership in CSR Annual Report 2016 (https://www.nlb.si/corporate-social-responsibility-report-2016). EUR -261,160,000 (included only Employee costs and other administra- tive expenses) See the section Support to Entrepreunership in CSR Annual Report 2016 (https://www.nlb.si/corporate-social-responsibility-report-2016). EUR 214,584,000 See the section Support to Entrepreunership in CSR Annual Report 2016 (https://www.nlb.si/corporate-social-responsibility-report-2016). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 7.1% See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). Republic of Slovenia (NLB d.d.) See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). Slovenia and locations of Group Members See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 205-2: Communication and training about an- ti-corruption policies and procedures See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). a. Total number and percentage of governance body mem- bers that the organisation’s anti-corruption policies and proce- dures have been communicated to, broken down by region. Management board: 4 members (100%), supervisory board: n/a See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). b. Total number and percentage of employees that the organisa- tion’s anti-corruption policies and procedures have been commu- nicated to, broken down by employee category and region. 2.882 (100%) See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). d. Total number and percentage of governance body members that have received training on anti-corruption, broken down by region. SRS 205 - Anti-corruption e. Total number and percentage of employees that have received training on anti-corruption, broken down by employee category and region. 205-3: Confirmed incidents of corruption and actions taken a. Total number and nature of confirmed incidents of corruption. b. Total number of confirmed incidents in which employ- ees were dismissed or disciplined for corruption. Management board: 5 members (100%), supervisory board: n/a. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 2.272 (79%) including long term absence. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 10 employees: fraud (including the violation of internal acts). Two cases are not included, because they fall under statute of limitation. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 8 employees: 1 employee has been dismissed, 7 employees received written/verbal warning. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). d. Public legal cases regarding corruption brought against the organisation or its employees during the re- porting period and the outcomes of such cases none See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). NLB Group 2016 Annual Report412 Environmental GRI Topic GRI Disclosure Value SRS 301 - Materials 301-1: Materials used by weight or volume a. Total weight or volume of materials that are used to produce and package the organisation’s primary prod- ucts and services during the reporting period, by: i. non-renewable materials used; ii. renewable materials used. 302-1: Energy consumption within the organisation SRS 302 - Energy i. electricity consumption in kWh SRS 306 - Effluents and Waste 306-2: Waste by type and disposal method See the section Environment in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). n/a n/a 39.62 (data is related to used A4 paper per employee) See the section Environment in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). See the section Environment in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 13,620,000 See the section Environment in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 432,925 kg of municipal waste, 42,514 kg of cardboard and paper, 1,660 kg of wood, 45,672 kg of electronic equipment, 500 kg of textile lining, 200 kg of hydrofluorids, 1,400 kg of grease oil, 243 kg of batteries See the section Environment in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). SRS 307 - Environmental Compliance 307-1: Non-compliance with environmental laws and regulations See the section Environment in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). NLB Group 2016 Annual Report413 Social GRI Topic GRI Disclosure Value 401-1: New employee hires and employee turnover See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). a. Total number and rate of new employee hires during the reporting period, by age group, gender, and region. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). b. Total number and rate of employee turnover during the re- porting period, by age group, gender, and region. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 401-2: Benefits provided to full-time employees that are not provided to temporary or part-time employees See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). SRS 401 - Employment 401-3: Parental leave a. Total number of employees that were en- titled to parental leave, by gender. b. Total number of employees that took parental leave, by gender. c. Total number of employees that returned to work in the re- porting period after parental leave ended, by gender. e. Return to work and retention rates of employ- ees that took parental leave, by gender. SRS 402 - Labour/ Management Relations 402-1: Minimum notice periods regarding operational changes See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 2.17% male; 3.04% female See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 2.17% male; 3.04% female See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 2.17% male; 3.04% female See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 2.17% male; 3.04% female See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 403-1: Workers representation in formal joint man- agement - worker health and safety committees See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). b. For organisations with collective bargaining agreements, re- port whether the notice period and provisions for consultation and negotiation are specified in collective agreements. Same as 402-1 b. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 403-2: Types of injury and rates of injury, occupational diseases, lost days, and absenteeism, and number of work-related fatalities See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). a. Types of injury, injury rate (IR), occupational disease rate (ODR), lost day rate (LDR), absentee rate (AR), and work-re- lated fatalities, for all employees, with a breakdown by: SRS 403 - Occupational Health and Safety ii. gender. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). Number of injuries at work: 2 males, 8 females. See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 403-3: Workers with high incidence or high risk of diseases related to their occupation See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). a. Whether there are workers whose work, or workplace, is con- trolled by the organisation, involved in occupational activities who have a high incidence or high risk of specific diseases. 1% See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 403-4: Health and safety topics covered in for- mal agreements with trade unions See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). b. If so, the extent, as a percentage, to which various health and safety topics are covered by these agreements. 404-1: Average hours of training per year per employee a. Average hours of training that the organisation’s employ- ees have undertaken during the reporting period, by: SRS 404 - Training and Education i. gender; 100% See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 40 hours See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 41 hours female/37 hours male employee See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 404-2: Programmes for upgrading employee skills and transition assistance programmes See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). a. Type and scope of programmes implemented and as- sistance provided to upgrade employee skills. 1,028 training programmes (597 programmes in-house, 431 pro- grammes in the market) See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). NLB Group 2016 Annual Report414 GRI Topic GRI Disclosure Value 405-1: Diversity of governance bodies and employees See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). a. Percentage of individuals within the organisation’s gover- nance bodies in each of the following diversity categories: See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). i. Gender; ii. Age group: under 30 years old, 30-50 years old, over 50 years old; See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). iii. Other indicators of diversity where relevant (such as minority or vulnerable groups). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). b. Percentage of employees per employee catego- ry in each of the following diversity categories: See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). SRS 405 - Diversity and Equal Opportunity ii. Age group: under 30 years old, 30-50 years old, over 50 years old; i. Gender; See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). iii. Other indicators of diversity where relevant (such as minority or vulnerable groups). See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). 405-2: Ratio of basic salary and remuneration of women to men See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). a. Ratio of the basic salary and remuneration of women to men for each employee category, by significant locations of operation. b. The definition used for ‘significant locations of operation.’ Male by age group: under 30 years old (ratio 12.87%), 30-50 years old (ratio 7.44%), over 50 years old (ratio 3.39%); Female by age group: under 30 years old (ratio 12.41%), 30-50 years old (ratio 7.03%), over 50 years old (ratio 4.37%). (Data for employees with Collective Agreement only.) See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). Republic of Slovenia (NLB d.d.) See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). SRS 411 - Indigenous Rights 411-1: Incidents of violations involv- ing rights of indigenous peoples See the section Employees in CSR Annual Report 2016 (https:// www.nlb.si/corporate-social-responsibility-report-2016). NLB Group 2016 Annual Report416 NLB Group directory Nova Ljubljanska banka d.d., Ljubljana Podravsko-Pomurska Branch Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 39 00, +386 1 477 20 00 Fax: +386 1 252 24 22 E-mail: info@nlb.si www.nlb.si Blaž Brodnjak, Chief Executive Officer Andreas Burkhardt, Member of the Management Board Archibald Kremser, Member of the Management Board László Pelle, Member of the Management Board Slovenian network Osrednjeslovenska - Jug Branch Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 23 30 Fax: +386 1 252 26 45 Osrednjeslovenska - Sever Branch Celovška 89 1000 Ljubljana, Slovenia Tel: +386 1 476 57 02 Fax: +386 1 519 53 16 Domžale, Kamnik and Zasavje Branch Ljubljanska cesta 62 1230 Domžale, Slovenia Tel: +386 1 724 55 01 Fax: +386 1 724 53 09 Savinjsko-Koroška Branch Rudarska cesta 3 3320 Velenje, Slovenia Tel: +386 3 899 52 56 Fax: +386 3 899 51 40 Titova cesta 2 2000 Maribor, Slovenia Tel: +386 2 234 45 04 Fax: +386 2 234 45 34 Dolenjska, Bela krajina and Posavje Branch Seidlova cesta 3 8000 Novo mesto, Slovenia Tel: +386 7 339 14 56 Fax: +386 7 339 13 84 Primorska, Goriška in Notranjska Branch Pristaniška 45 6000 Koper, Slovenia Tel: +386 5 610 30 10 Fax: +386 5 627 65 08 Private Banking Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 23 66 Fax: +386 1 476 23 33 Small Enterprises Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 21 02 Fax: +386 1 476 23 26 Mid corporates Central Region Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 26 11 Fax: +386 1 251 05 72 North East Region Ljubljanska cesta 62, 1230 Domžale, Slovenia Tel: +386 1 724 54 75 Fax: +386 1 724 54 74 South West Region Pristaniška ulica 45 6000 Koper, Slovenia Tel: +386 5 610 30 33 Fax: +386 5 610 30 75 Podravsko-Pomurska Region Titova cesta 2 2000 Maribor, Slovenia Tel: +386 2 234 45 00 Fax: +386 2 234 45 55 Savinjsko - Koroška Region Kocenova 1 3000 Celje, Slovenia Tel: +386 3 424 01 11 Fax: +386 3 544 24 66 Large corporates Institutional Investors Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 24 92 Fax: +386 1 252 24 61 Large Corporates Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 26 92 Fax: +386 1 425 51 90 Members of NLB Group NLB Banka a.d., Beograd Bulevar Mihajla Pupina 165 v 11070 Beograd, Serbia Tel: +381 11 22 25 100 Fax: +381 11 22 25 194 E-mail: info@nlb.rs www.nlb.rs Branko Greganović, President of the Executive Board Vlastimir Vuković, Member of the Executive Board Dejan Janjatović, Member of the Executive Board NLB Group 2016 Annual Report417 NLB Banka a.d., Podgorica NLB Banka d.d., Sarajevo NLB Leasing d.o.o. Sarajevo Bulevar Stanka Dragojevića 46 81000 Podgorica, Montenegro Tel: +382 20 402 000 Fax: +382 20 402 038 E-mail: info@nlb.me www.nlb.me Martin Leberle, Chief Executive Officer Robert Kleindienst, Executive Officer Dino Redžepagić, Executive Officer Džidžikovac 1 71000 Sarajevo, Bosnia and Herzegovina Tel: +387 33 720 300 Fax: +387 35 302 802 E-mail: info@nlb.ba www.nlb.ba Senad Redžić, Director (till 31 December 2016) Lidija Žigić, Executive Director NLB Banka sh.a., Prishtina Rr. Ukshin Hoti nr. 124 10000 Prishtina, Kosovo Tel: +381 38 240 230 100 Fax: +381 38 610 113 E-mail: info@nlb-kos.com http://nlb-kos.com/ Albert Lumezi, President of the Management Board Bogdan Podlesnik, Member of the Management Board Lavdim Koshutova, Member of the Management Board NLB Banka a.d., Banja Luka Milana Tepića 4 78000 Banja Luka, Republic of Srpska, Bosnia and Herzegovina Tel: +387 51 248 588 Fax: +387 51 221 623 E-mail: helpdesk@nlbbl.com www.nlbbl.com Radovan Bajić, Director Marjana Usenik, Deputy Director Dragan Injac, Executive Director NLB Banka AD, Skopje Majka Tereza 1 1000 Skopje, Macedonia Tel: +389 2 5 100 600 Fax: +389 2 3 105 681 E-mail: info@nlb.mk www.nlb.mk Antonio Argir, President of the Management Board Ljube Rajevski, Member of the Management Board Damir Kuder, Member of the Management Board as at 1 January 2017 Lidija Žigić, Director Denis Hasanić, Deputy Director Jure Peljhan, Executive Director NLB Leasing d.o.o. Ljubljana Šlandrova ulica 2 1000 Ljubljana, Slovenia Tel: +386 1 586 29 10 Fax: +386 1 586 29 40 E-mail: info@nlbleasing.si www.nlbleasing.si Andrej Pucer, President of the Management Board Janez Saje, Member of the Management Board NLB Leasing d.o.o. Beograd – u likvidaciji Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 222 01 01 Fax: +381 11 222 01 02 E-mail: info@nlbleasing.rs www.nlbleasing.rs Dušan Stankov, Liquidator NLB Leasing Podgorica d.o.o., Podgorica - u likvidaciji Bulevar Stanka Dragojevića 44a 81000 Podgorica, Montenegro Tel: +382 81 667 655 Fax: +382 81 667 656 E-mail: info@nlbleasing.me www.nlbleasing.me Milan Marković, Liquidator Trg solidarnosti 2a 71000 Sarajevo, Bosnia and Herzegovina Tel: +387 33 789 345 Fax: +387 33 789 346 E-mail: info@nlbleasing.ba Denis Silajdžić, Director Tanja Ibišbegović, Executive Director NLB Lizing dooel, Skopje - vo likvidacija Majka Tereza No. 1 1000 Skopje, Macedonia Tel: +389 2 329 05 50 Fax: +389 2 329 05 51 E-mail: info@nlblizing.com.mk www.nlblizing.com.mk Maja Lape Trajkova, Liquidator Optima Leasing d.o.o. u likvidaciji, Zagreb Miramarska 24 10000 Zagreb, Croatia Tel: +385 1 61 77 225 Fax: +385 1 61 77 228 E-mail info@optima-leasing.hr Vjekoslav Budimir, Liquidator Vito Cigoj, Procurator Prvi faktor d.o.o., v likvidaciji, Ljubljana Slovenska cesta 17 1000 Ljubljana, Slovenia Tel: +386 1 200 54 10 Fax: +386 1 200 54 30 E-mail: info@prvifaktor.si Klemen Hauko, Liquidator Marcel Mišanović Osti, Liquidator Prvi faktor - faktoring d.o.o., Beograd Ulica Omladinskih brigada broj 86 11070 Novi Beograd, Serbia Tel: +381 11 222 54 00 Fax: +381 11 222 54 44 E-mail: info@prvifaktor.rs Željko Atanasković, Director NLB Group 2016 Annual Report418 Prvi faktor d.o.o. u likvidaciji, Sarajevo NLB Vita d.d., Ljubljana Mis Irbina 26/1 71000 Sarajevo, Bosnia and Herzegovina Tel: +387 33 564 500 Fax: +387 33 564 501 E-mail: info@prvifaktor.ba Đenan Bogdanić, Liquidator Prvi faktor d.o.o. u likvidaciji, Zagreb Hektorovičeva 2 10000 Zagreb, Croatia Tel: +385 1 6177 805 Fax: +385 1 6176 629 E-mail: info@prvifaktor.hr Jure Hartman, Liquidator Vesna Lončar, Liquidator Marko Ugarković, Liquidator NLB Factoring a.s. »v likvidaci« Čechyňská 361/16, Trnitá 602 00 Brno, Czech Republic +420 59 61 56 834 E-mail: info@nlbfactoring.cz Barbara Šink, Liquidator NLB InterFinanz AG in liquidation, Zürich Beethovenstrasse 48 8002 Zürich, Switzerland Tel: +41 44 283 17 17 Fax: +41 44 283 17 29 E-mail: info@nlbi.ch Jean-David Barnezet Llort, Liquidator Polona Žižmund, Liquidator NLB InterFinanz d.o.o., Beograd Bulevar Mihajla Pupina 165 v 11070 Beograd, Serbia Tel: +381 11 22 25 350 Fax:+381 11 22 25 354 Vladan Tekić, General Manager NLB InterFinanz Praha s.r.o., Prague Muchova 240/6, Dejvice 160 00 Prague 6, Czech Republic CZECH DTMR Partners s.r.o. (Director) Trg republike 3 1000 Ljubljana, Slovenia Tel: +386 1 476 58 00 Fax: +386 1 476 58 18 E-mail: info@nlbvita.si www.nlbvita.si Barbara Smolnikar, President of the Management Board Irena Prelog, Member of the Management Board Bankart d.o.o., Ljubljana Celovška cesta 150 1000 Ljubljana, Slovenia Tel: +386 1 583 42 02 Fax: +386 1 583 41 96 E-mail: info@bankart.si www.bankart.si Aleksander Kurtevski, Managing Director Miran Vičič, Managing Director Skupna pokojninska družba LHB Aktiengesellschaft, Frankfurt d.d., Ljubljana Trg republike 3 1000 Ljubljana, Slovenia Tel: +386 1 470 08 40 Fax: +386 1 470 08 53 E-mail: info@skupna.si www.skupna.si Aljoša Uršič, President of the Management Board Peter Krassnig, Member of the Management Board NLB Nov penziski fond AD, Skopje Majka Tereza 1 1000 Skopje, Macedonia Tel: +389 2 5100 285 Fax: +389 2 3236 989 E-mail: kontakt@npf.com.mk www.npf.com.mk Davor Vukadinović, President of the Management Board Mira Šekutkovska, Member of the Management Board NLB Skladi, upravljanje premoženja, d.o.o., Ljubljana Tivolska cesta 48 1000 Ljubljana, Slovenia Tel: +386 1 476 52 70 Fax: +386 1 476 52 99 E-mail: info@nlbskladi.si www.nlbskladi.si Kruno Abramovič, President of the Management Board Aleksandra Brdar Turk, Member of the Management Board Grosse Bockenheimer Str. 33-35 60313 Frankfurt, Germany Tel: +49 69 21 06 816 Fax: +49 69 21 06 201 E-mail: info@lhb.de www.lhb.de Markus Buzov, Management Board NLB Propria d.o.o., Ljubljana (in liquidation from 1 January 2017) Železna cesta 18 1000 Ljubljana, Slovenia Tel: +386 1 470 08 00 Fax: +386 1 470 08 87 E-mail: info@nlbpropria.si Elvira Kalkan, Director (till 31 December 2016) Mateja Uršič, Liquidator Boris Anže Dugar, Liquidator Prospera plus d.o.o., Ljubljana Šmartinska cesta 132 1000 Ljubljana, Slovenia Tel: +386 1 524 82 91 E-mail: info@prospera-plus.si Urban Smerkolj, Director ICJ, d.o.o. – v stečaju, Domžale Ljubljanska cesta 62 1230 Domžale, Slovenia Tel: +386 1 724 53 18 Matjaž Nanut, bankruptcy trustee NLB Group 2016 Annual ReportKreditni biro SISBON d.o.o. OL Nekretnine d.o.o. u likvidaciji, Zagreb NLB Crna Gora d.o.o., Podgorica 419 Miramarska 24/6 10000 Zagreb, Croatia Tel: +385 1 56 25 914 Fax: +385 1 56 25 918 E-mail: lamija.hadziosmanovic@ream-cro.com E-mail: ivan.strek@ream-cro.com Lamija Hadžiosmanović, Liquidator Ivan Štrek, Liquidator Bulevar Džordža Vašingtona 102, I sprat/20 81000 Podgorica, Montenegro Tel: +382 20 675 900 E-mail: Gligor.Bojic@nlb.me E-mail: Goran.Lalicevic@nlb.me Gligor Bojić, Executive Director Goran Lalićević, Deputy Director SR-RE d.o.o., Beograd – Novi Beograd of NLB Group members outside Branches and representative offices their country of residence NLB InterFinanz AG - in liquidation Ljubljana Branch Čopova 3 1000 Ljubljana, Slovenia Tel: +386 1 200 06 43 Fax: +386 1 200 06 46 Mateja Strašek, Director (till 31 December 2016) Marko Čelebić, Director Bulevar Mihaila Pupina 165 v 11070 Beograd, Serbia Tel: +381 60 34 96 923 E-mail: office@ream-srb.com Vladimir Vasilijević, Director Veljko Tanić, Director Hotel Tara d.o.o., Budva Official postal address: Bulevar Džordža Vašingtona 102 81000 Podgorica, Montenegro Tel: +382 20 675 900 E-mail: gligor.bojic@nlb.me Gligor Bojić, Director BH-RE d.o.o., Sarajevo Ul. Danijela Ozme 2 71000 Sarajevo, Bosnia and Herzegovina Tel: +387 33 720 304, F: +387 35 302 802 E-mail: admir.pejkusic@nlb.ba Admir Pejkušić, Director NLB Srbija d.o.o., Beograd Bulevar Mihajla Pupina 165 v 11070 Beograd, Serbia Tel: +381 11 22 25 369 Fax: +381 11 22 25 365 E-mail: office@nlbsrbija.co.rs www.nlbsrbija.co.rs Vladan Tekić, Director – in liquidation Trg republike 3 1000 Ljubljana, Slovenia Tel: +386 8 20 57 110 Fax: +386 8 20 57 111 E-pošta: info@sisbon.si www.sisbon.si CBSinvest d.o.o., Sarajevo Džidžikovac 1 71000 Sarajevo, Bosnia and Herzegovina Tel: +387 61 162 618 Eldin Teskeredžić, Director PRO-REM d.o.o., Ljubljana - v likvidaciji Čopova 3 1000 Ljubljana Tel: +386 1 586 29 16 E-mail: info@prorem.si www.g-ream.si Jovica Jakovac, Liquidator Sebastian Trajkovski, Liquidator REAM d.o.o., Podgorica Bul. Džordža Vašingtona br. 102 81000 Podgorica, Montenegro Tel: +382 20 674 900 E-mail: gligor.bojic@nlb.me Gligor Bojić, Director REAM d.o.o., Beograd – Novi Beograd Bulevar Mihaila Pupina 165 v 11070 Beograd, Serbia Tel: +381 60 34 96 923 E-mail: office@ream-srb.com Vladimir Vasilijević, Director Veljko Tanić, Director REAM d.o.o., Zagreb Miramarska 24/6 10000 Zagreb, Croatia Tel: +385 1 56 25 914 Tel: +385 1 56 25 918 E-mail: lamija.hadziosmanovic@ream-cro.com E-mail: klemen.fajmut@ream-cro.com Lamija Hadžiosmanović, Director Klemen Fajmut, Director NLB Group 2016 Annual ReportNLB Group Annual Report 2016 ЗаједноЗаедноSë bashkuSkupajZajednoTogetherЗаједноZajedno

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