Nova Ljubljanska Banka Annual Report 2020

Plain-text annual report

This is Our Home Annual Report 2020 Annual Report 2020 Contents Statement by the Management Board of NLB Statement by the Chairman of the Supervisory Board of NLB Strategic Members Overview Key Highlights Key Events Macroeconomic Environment Regulatory Environment Business Report Acquisition of Komercijalna banka a.d. Beograd Strategy Risk Factors and Outlook Sustainability Overview of Financial Performance Segment Analysis Retail Banking in Slovenia Corporate and Investment Banking in Slovenia Strategic Foreign Markets Financial Markets in Slovenia Non-Core Members 5 8 11 13 17 18 22 24 25 26 28 30 32 42 43 47 51 53 56 Risk Management IT and Cyber Security Human Resources Corporate Governance Compliance and Integrity Internal Audit Corporate Governance Statements Disclosure on Shares and Shareholders of NLB Events after the end of the 2020 financial year Financial Report Alternative Performance Indicators NLB Group Chart Organisational Structure of NLB NLB Group Directory Definitions and Glossary of Selected Terms 58 69 71 73 80 81 83 92 93 95 180 189 190 191 193 Report format Forward-looking statements The Annual Report in PDF format The expectations, forecasts and statements represents its unofficial version. The regarding future developments that are Annual Report in ESEF format is pursuant contained in this report are based on to Commission Delegated Regulation assumptions and are contingent on a (EU) 2019/815 and paragraph one of number of factors that will come into play Article 134 of the Market in Financial in the future. Consequently, the actual Instruments Act (ZTFI-1) and represents situation may turn out to be different. its official version published on SEOnet. Further information on sustainability is available in the NLB Group Sustainability Report 2020. 2 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Home is where people who matter the most are. Our home is here in this region. With you, among you. Who we are Vision Mission Our strategic focus Enablers Sustainable banking The Group, headquartered in The Group will take Ljubljana, is the largest banking care of the financial and financial group in Slovenia needs of its clients and with a strategic focus on selected improve the quality of The Group values and understands its home region, and strives to improve and develop • Become regional champion • Investments in NLB brand NLB is the first bank in Slovenia that has signed the UN Principles of Responsible Banking and has • Putting clients first • Availability and also made decisive steps on the markets in SEE – our home region. life in its home region. it for all generations. support anytime/ path of sustainable banking by It covers markets with a population of approximately 17 million people. The Group is comprised of NLB as the main entity in Slovenia and nine subsidiary banks in SEE, several companies providing ancillary services (asset management, real estate management, leasing, etc.), and a limited number of non-core subsidiaries in a controlled wind- down. NLB has an investment grade rating by S&P and is a publicly listed company owned by a diversified investor base and whose largest shareholder is the RoS with a 25% plus one share. With the acquisition of Komercijalna Banka, Beograd in December 2020, the Group further strengthened its strategic and systemic position in the region and now holds a top 3 position in six out of seven markets where it has a banking presence. • Defend our market anywhere position undertaking commitments to EBRD and MIGA on the Group • Robust cyber security level. With the sustainability • Exploit opportunities ambition anchored in the purpose and synergies • Improved human of our functioning, the Group talent management ensures products and services meet the needs of this generation • Simplification and and simultaneously preserve quality of services the opportunities of future generations. • Benefiting from emerging opportunities • Prudent risk management The Group employees operate in a family-friendly environment. The Bank received the ‘Top Employer’ certificate already for the 6th consecutive year. The Group has one of the broadest • Capital optimisation social responsibility programmes in the region. It supports many • Cost and investment humanitarian and cultural projects, optimization as well as promotes sports among young people – all this to ensure a better quality of life in the region it calls and treats as its home. 3 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 A new boost for sustainable development The COVID-19 pandemic caused a downturn in the economy, but on the other hand it also brought us some positives. We pay more attention to what is happening in the environment and wonder how we influence it with our actions. In doing so, we have become enthusiastic about finding sustainable, especially local solutions. One of the most recognised projects of 2020 in the entire region of SEE is certainly the #HelpFrame project. With the #HelpFrame project, we offered our own advertising space to 274 entrepreneurs, farmers, and micro and small businesses – which would be difficult for them to afford in these times – and thus helped them to reach potential customers, thereby making an important contribution to strengthening the domestic small business. 4 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Statement by the Management Board of NLB Dear Stakeholders, 2020 was an extremely challenging and, yet in many ways, a ground-breaking year, not soon to be forgotten. In more ways than one it was also very memorable for the Group, although by far not only due to the COVID-19 pandemic and its consequences as one might think. The pandemic has, of course, had an impact on our business operations and day-to-day work, but even more notable were the lessons learned and new practices we have since adopted. Also notable are a couple of essential milestones. In the middle of the year we managed to complete a divestment of insurance company NLB Vita as the last commitment to the EC, by which a highly limiting state aid process was officially completed and after many years the Group could resume Contact Centre with a closing capacity for the majority of services. With that, NLB has already surpassed the client experience levels of majority of FinTech challengers. We have a clear plan for further enhancements and consistent replication of this delivery model in all our markets. After witnessing economic hibernation during a substantial part of the first half-year, various factors contributed to a robust revival of especially industrial activities by the end of the year. As a result, in the second half of the year the Group recorded a normalisation of revenues to pre-COVID-19 levels and generated a sound net profit of EUR 141.31 million, with all SEE subsidiary banks reporting solidly positive net earnings and contributing 36%1 to the result. This outcome was clearly strongly supported by a quick and determined response from governments and regulators with measures that helped stabilise the economic environment, but also by a very proactive response of our whole Group. We have learnt our lessons in the period from 2008-2014 and we are fully aware that concrete actions speak the loudest, especially in times of crisis. That is why we decisively addressed clients’ needs as soon as the pandemic hit, and its potential consequences were assessed. We have, for instance, secured stable liquidity by instituting significant working capital lines to vital businesses, maintaining regular lending activity and releasing eventual liquidity squeeze to all client segments through moratoria. High responsibility, supported by knowledge, experience, professionalism, and finally strong market position of NLB Group as a regional player proved once again to be especially effective in times of crisis, brought by the COVID-19 pandemic. A divestment of insurance company NLB Vita fulfilled the last commitment to the EC, by which a highly limiting state aid process was officially completed and after many years the Group could resume its full business capacity. its full business capacity. This enabled us to again address eventual value We enhanced relationships and maintained the high quality of portfolios accretive business opportunities, and we very proudly ended the year with very limited NPL migration by intensified daily contacts with clients with the game-changing acquisition of Komercijalna banka a.d. Beograd and prompt reactions. During the first wave of epidemic we anticipated (Komercijalna Banka, Beograd). With this transaction, we further solidified material impacts to credit quality, resulting in significant pool impairments the Group’s presence in all our markets in SEE, our home region. and provisions and cautious guidance regarding the cost of risk. However, High responsibility, supported by knowledge, experience, professionalism, and finally the strong market position of NLB Group as a regional player proved once again to be especially effective in times of crisis, brought by the COVID-19 pandemic. We have responded successfully and effectively in the second half of the year the economy and clients proved to be more resilient and actual cost of risk did not follow the initial estimates. This is clear proof that the underwriting criteria and practices we introduced in 2013 have been very robust across economic cycles. to the new circumstances, maintaining as a priority the concern for the Structural profitability challenges, in contrast, escalated further. Due to health of our employees. We provided protective equipment in our lockdowns, prohibiting consumption, along with governmental measures, offices, while enabling as many of them as possible to work from home. defending employment and boosting household income, and the influx In the meantime, the latter has also been supported as the regular of predominantly retail deposits introduced further significant drag on working mode, wherever applicable and mutually acceptable. As the interest income. We managed to partially mitigate this impact by strongly utmost priority, we also protected the health of our customers by securing focusing on additional fee and commission income, thus defending the preventive measures in our branches, while at the same time providing financial intermediation margin, though it has become obvious that in the significantly enhanced accessibility and quality of our key services through EUR-denominated Slovenian market there is no alternative to following online channels. Clients of NLB in Slovenia can now get cash loans, the logic of corporate deposits and also introducing charges for household overdrafts, credit cards and can order any other services 24/7 via a mobile balances. Given that a decision was taken to start charging fees from bank without direct personal interaction, and as unique experience can 1 April 2021 on for the balances exceeding EUR 250 thousand with the sign any contract with the Bank digitally through our mobile bank Klikin. ambition to reduce the threshold to EUR 100 thousand in the second half All of that is supported by 24/7 chat and the video chat service from our of 2021. Significantly enhanced accessibility and quality of our key services through online channels. 1. Without the effect of the acquisition of Komercijalna Banka, Beograd. 5 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Blaž Brodnjak CEO & CMO Petr Brunclík COO Archibald Kremser CFO Andreas Burkhardt CRO 6 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020269.7 million EUR net profit including EUR 137.9 million negative goodwill from acquisition of Komercijalna Banka, Beograd, while net profit would be 141.3 million EUR without the effect of acquisition of Komercijalna Banka, Beograd. With the implementation of capital relief measures, the inclusion of two we are in the position to truly influence the environment and the quality successfully issued subordinated Tier 2 bonds and undistributed profit of life. We know that sustainability is an ongoing series of decisions and for the year 2019 into capital (due to the BoS restricted dividend payout in actions. We thus aim to create a regional sustainability platform with an 2020 following ECB recommendation) the Group even after the sizeable important positive impact on the environment and society, while being acquisition concluded the year with a diversified capital structure and solid recognised as a role model in governance. By that we strive to become one capital position above the regulatory requirements and management buffer. of the most meaningful businesses and the most desirable employers in our This besides very high liquidity reserve balances provides a solid foundation region. We wish to partner in these endeavours with like-thinking clients, for our further business operations and resumed targeted dividend payouts associations and other entities to create an ecosystem of relevant services, as soon as supported by regulators. This position has been also shared by delivered in a sustainable way. Moody’s rating agency when upgrading the long-term local and foreign currency deposit ratings of the Bank from Baa2 to Baa1. All this cannot be secured without a dedicated team of colleagues who truly care about our customers and our mission and go the extra mile when Despite the pandemic and numerous related challenges, measures, needed. Year 2020 was truly an exceptional year and colleagues deserve key activities and achievements, we positioned the Group in the most clear recognition of extraordinary efforts and a resounding gratitude. We important growth market through the successfully completed acquisition of have learnt that in times of great uncertainty and concern, things that Komercijalna Banka, Beograd. Consequently, we have assumed a unique top once seemed unfeasible, undesirable, or even unacceptable, can become 3 banking positions with more than a 10% market share in six out of seven possible. of our markets. Moreover, we further improved our international footprint by supporting selected cross-border corporate projects, we reintroduced leasing services in Slovenia through the subsidiary NLB Lease&Go with the firm ambition of a regional roll-out, we adopted a consistent and decisive IT strategy with the aim to build the best digital bank and IT team in the SEE with cyber security being at its core, and we undertook several strategic initiatives and measures for strategic cost optimisation and boosting sales - among them an ambitious channel strategy with further swift digitization, paperless operations, corporate real-estate optimisation, etc. The Group closed 2020 in a very good shape. We realised that this crisis offered us many opportunities to differentiate in the market and above all by being relevant and further strengthening our relationships with clients. One of these insights resulted in the first Group-wide CSR project that has In 2020 the Supervisory Board of NLB added members, appointed by the Workers’ Council, enabling the inclusion of employees in the strategic steering of the Group. The Supervisory Board acknowledged the team’s efforts and demonstrated trust in the Management Board by extending the mandates of the CEO/CMO, CFO and CRO until July 2026. Our plan for 2021 is to continue to act prudenly to leave COVID-19 behind us as soon as possible, while in parallel to further enhance our capabilities in the field of knowing our clients, in order to provide even more relevant, personalised services, whenever and wherever necessary. Our goal is no longer to just be an excellent distributor of universal financial services, but also one of the most ambitious, technologically-driven banking groups in our home region providing top quality experience to our existing and a clearly defined sustainability component, #HelpFrame project, with which prospective clients. we further demonstrated our genuine interest in improving the quality of life in our region we call and therefore treat as home. We have been supporting people with an entrepreneurial spirit and creative ideas who have introduced products and services with a sustainable local footprint. In the Group, we acknowledged their efforts and provided almost 274 entrepreneurs, farmers, and micro and small businesses from all our markets, not only with our financial mentorship and professional support, but also with advertising space that they would otherwise not have been able to afford. We consciously and decisively committed to sustainability by signing the UN Principles for Responsible Banking and commitments toward EBRD and MIGA. NLB Group decided to discontinue any financing support to coal- based technologies and has been actively seeking and supporting energy efficiency improvement and renewable energy production projects. We are genuinely focusing on the sustainability of our business decisions and actions, as well as customers’ needs and expectations. As a systemic player, We truly believe that the best for the Group is yet to come and we confidently look forward to the challenges in front of us. We are convinced that we will not only overcome them, but also learn from them and become even stronger. With full motivation and energy we will take the Group to another level as one of the most meaningful businesses in the region with great positive impact in the environment and society we live in. This is our home, we respect it and we will support it, nurture it, invest in it, and make sure that it is ready – for whatever may come. Yours truly, Management Board of NLB Archibald Kremser Andreas Burkhardt Petr Brunclík Blaž Brodnjak CFO CRO COO CEO & CMO Normalisation of revenues to pre- COVID-19 levels. The acquisition of Komercijalna Banka, Beograd further solidified the Group’s presence in all our markets in SEE. We aim to create a regional sustainability platform with an important positive impact on environment and society. 7 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Statement by the Chairman of the Supervisory Board of NLB To Our Shareholders, A simple statement, like ‘Not only we have survived, but we came out leaner, fitter, and readier to run . . . for the ride that is ahead of us, and for whatever may come,’ would probably fit well into the Darwinism of the moment. But it actually describes the year 2020 and our banking business model, as run by your bank, our NLB. Primož Karpe Chairman of the Supervisory Board As McKinsey rightfully points out, unlike many past shocks, the COVID-19 We grew our capital base and acquired Komercijalna banka a.d. Beograd crisis is not a banking crisis; it is a crisis of the real economy, caused by a (Komercijalna Banka, Beograd), in what we believe will be a major value tiny virus particle. Banks will naturally be affected, as credit losses cascade accretive transaction, increasing both our DPS and EPS potentials by down their balance sheets. Still, the problems are not self-made. The Group more than 30% and 20%, respectively, over the course of the next few entered the crisis extremely well-capitalised and is far more resilient than it years. Furthermore, we see opportunities on both the numerator and was 12 years ago. I dare to say we are actually in the best shape ever, when denominator of our ROE: not only in the capital management exercises it comes to regulatory capital robustness. However, the road ahead is not so much the road of credit impairments and loan loss provisions, it’s the road that tackles the real issue of the forgone banking revenue years down the line – the foregone revenue for those we regularly promote, such as RWA consumption and optimisation, but predominantly on the side of an increased productivity. But most of all, we are transitioning towards the core of our strategy, to be the talent magnet for tech and consumer behaviour savvy job-seekers. not adapted. And I wholeheartedly believe that the traditional banks that We will remain and further strengthen our unique banking play allow their cost bases to evolve quickly, and digitize their service delivery proposition. We will stay focused on our core region, where fragmented efficiently, will win. The incumbency of multi-product relationship sales geographies sometimes represent some challenges for us, but also performs better than monoline product-based businesses. The seemingly provides solid protection from most other regional bank players. In the never-ending cash burn rate of banking FinTechs proves this point. aftermath of the Komercijalna Banka, Beograd acquisition, we will hold Rest assured, the Group responded extraordinarily well to the first phases of meaningful market shares in all our core markets. We now simply have to continue focusing on our dividend capacity as the main shareholder value the crisis, keeping employees and customers safe and keeping the financial proposition. system operating well across all our core markets. Not only that, 2020 was a year marked by our strong pursuit of our strategic goals, a set of promises we made in order to deliver for you, our employees, and our society. 8 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020If I tell you that we know we have to: (i) speed up our going-to-digital 2020 – a year that will never be forgotten – and a year NLB Group maintains its corporate governance transformation, (ii) take costs out faster, (iii) place a focus on a ‘charge or that brought new energy into our business story principles in line with the highest standards change’ commercial policy at the retail level, (iv) further increase of our fee vs. net interest ratio with an alternative business mix on the corporate level, (v) quickly integrate Komercijalna Banka, Beograd and optimise this joint market undertaking, and (vi) last but not least, further increase the productivity of our employees, then you know we are aware of the challenges ahead. Even more, we are aware of our focus in value creation efforts. Additionally, Supervisory Board is committed to promote and monitor the implementation of sustainability governance in the Group, as well as giving special focus on raising the overall level of cyber security resilience. That said, I believe the Group will deliver on its promises to all of its key constituencies (shareholders, clients, employees, and society), not only in the year of 2021, but over the mid- to long- term cycle as well. In the financial year 2020, we all faced a challenging environment, due The Supervisory Board performed its work in accordance with applicable to the already mentioned challenges of the COVID-19 pandemic and laws (predominantly, but not exclusively the Companies Act (ZGD-1) following economic hibernation, but for us it was also a year that brought and the Banking Act (ZBan-2)), as well as powers and procedures as set new energy into our business story. The Group has further strengthened by the Articles of Association of NLB and the Rules of Procedure of the the position in SEE market with acquisition of Komercijalna Banka, Supervisory Board of NLB. It carried out its function of assuring efficient Beograd, that increased the Group’s total assets to almost EUR 20 billion supervision over the management of NLB and the Group in its duty of and to a more than 12% market share in the Serbian market. The Group careful and scrupulous performance, while adhering to the internal acts of also managed to defend a stable level of profit before impairments and the Bank. provisions of EUR 210.5 million, supported by non-recurring income from the sale of NLB Vita and debt securities. In performing its duties, the Supervisory Board followed the recommendations of the Corporate Governance Code for Listed Companies, Profit after tax amounted to an impressive EUR 269.7 million, and was exclusively. The Corporate Governance Statement of NLB adopted by the strongly affected by the acquisition of Komercijalna Banka, Beograd, with Supervisory Board on its session dated 18 February 2021 reveals deviations positive impact of negative goodwill in the amount of EUR 137.9 million. from the mentioned code, as well as explains key aspects of the Bank’s 2020 business developments Without this acquisition the profit after tax of the Group would amount corporate governance, particularly the composition and work of the The course of the global economy in 2020 was determined by the COVID-19 pandemic, and consequently the Group’s region was not able to remain intact because of the pandemic and its economic implications. The Group’s region recorded a substantial drop in economic growth, although the implications of the COVID-19 pandemic hit countries of the Group’s region disproportionally due to underlying differences in exposure to the hardest hit sectors. For instance, countries with a strong reliance on the to a solid EUR 141.3 million, lower than a year before due to additional Bank’s Management Board and Supervisory Board and its committees, impairments and provisions related to the COVID-19 pandemic. The Bank internal control mechanisms, and internal control functions (Internal reached a profit after tax in the amount of EUR 114.0 million, lower than Audit, Risk Management, Compliance, Information Security Function and a year before, but mostly due to retained dividends in the Group member AML/CTF Function). It also provides a description of the implementation banks and established impairments and provisions, both related to the of the Diversity Policy related to representation in the management and COVID-19 pandemic. All SEE subsidiaries finished the year with a profit supervisory bodies and senior management. This statement is published in and significantly contributed to the Group’s result. the business report of this annual report. tourism sector were particularly more affected by the imposed COVID-19 The operations of the Group were underpinned by strong liquidity In 2020, there were seven regular and 12 correspondence sessions. The containment measures. and capital positions, with the TCR reaching 16.6%, which is above the Supervisory Board received expert assistance from its five operational In general, economic contraction was driven by a reduction in demand, with restrictive containment measures negatively affecting all demand components except government consumption that partially offset the reduction. Fiscal measures aimed at mitigating COVID-19 economic regulatory requirements, demonstrating the Group’s financial resilience. committees, namely Audit, Risk, Nomination, Remuneration, Operations, In these COVID-19 circumstances, the Group has been perceived as a safe and IT. The committees of the Supervisory Board met at its regular meetings heaven, and therefore faced growing excess liquidity. The impacts of the and discussed topics and adopted decisions related to the areas that they pandemic did not cause any material liquidity outflows. oversee. implications weighed on fiscal balances and public debts, while external The overall risk appetite profile of the Group continues to be moderately The Supervisory Board issued approvals to the Management Board related sector was influenced by restrictive measures abroad. conservative. Despite the crises, the NPL ratio (EBA definition) of the to the Bank’s business policy and financial plan, adopted NLB Group Annual Nevertheless, the pandemic also initiated or accelerated some structural shifts, most notably the digitization of work and consumption which was reflected in an increase of online purchases and working from home. Thereby, the world became much more digital due to the COVID-19 pandemic. But digital or non-digital, what we could not avoid were the restrictions of regulators (ECB and BoS) regarding dividend payments, therefore the General Meeting of shareholders on 15 June 2020 adopted the decision that the total distributable profit for 2019 in the amount of EUR 228.04 million would remain undistributed, representing the profit carried forward. We do aim to reverse no-dividend trend with meaningful dividend distribution subject to regulatory approval during this year. Group remained below 5%, which shows the strong resilience of the Report, adopted decisions with regards to the convocation of the General Group. The acquired Komercijalna Banka group has a similar business Meeting of shareholders, adopted decisions related to management of risk, model to the existing NLB Group, and its impact on the Group’s risk adopted the annual Internal Audit Plan and annual Plan of Compliance and profile was moderate. The overall slow-down of the economy caused by Integrity, and reported on their activities. pandemic, had some negative impacts on the loan portfolio, though its quality remained solid and well diversified. The cost of risk increased due to the impact of the downturn in the macroeconomic environment, still, it remains within the set outlook. The Supervisory Board also adopted decisions on establishment of new companies, cross-border financing and international syndicated financing, large exposures, sale of receivables, claim write-offs, the divestment of the Group companies, legal proceedings involving NLB and the Group members, transactions with persons in special relations with the Bank, etc. Supervisory Board endorsed Sustainability programme together with roadmap with key milestones in the mid-term period. 9 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Additionally, the Supervisory Board approved achievements of the Throughout the year, the Supervisory Board has maintained a well- Review and approval of the NLB Group Annual Report 2020 Management Board and proposed new goals for the Management Board, balanced professional relationship with the Management Board and adopted decisions on succession planning for members of the Management enjoyed timely, comprehensive, and data-supported inputs from the latter, Board, and acknowledged new candidates for members of the Supervisory enabling the Supervisory Board to adopt all its decisions in line with the Board. In addition to the already appointed Petr Brunclík, the Supervisory professional interests of the Bank, whilst adhering at all times to banking Board in its session in November 2020, also reappointed Blaž Brodnjak as regulations and its statutory powers. CEO & CMO, Archibald Kremser as CFO, and Andreas Burkhardt as CRO of the Bank. The Supervisory Board continued to act in accordance with the highest The NLB Group Annual Report 2020 and unaudited financial statements of NLB Group were examined by the Supervisory Board at the meeting on 18 February 2021. The external audit firm, Ernst & Young d.o.o., Ljubljana, reported to the Audit Committee on the findings and 2020 audit procedures on session of the Supervisory Board held on 11 March 2021. ethical standards of management, considering the prevention of conflict Within the legal deadline, the Management Board of NLB submitted Through the year the Supervisory Board acknowledged regular reports on of interest. Throughout the year, there were some potential conflicts of documents received from the regulator(s), namely BoS and ECB, and on the interest identified and all were handled with due care. Supervisory Board implementation of the requirements of mentioned regulators, adopted members took precautionary measures to avoid any conflicts of interest changes to the Corporate Governance Policy of the NLB, and adopted other that might have influenced their decisions. amendments to the internal policies. to the Supervisory Board the NLB Group Annual Report 2020, including the Business Report and Financial Report, with the audited financial statements of the Bank, the audited consolidated financial statements of the Group and the auditor’s opinion. The Supervisory Board considered mentioned reports on 8 April 2021. According to the auditor, the Despite extremely demanding times during the COVID-19 pandemic, the financial statements with accompanying notes present fairly, in all The year 2020 was remarkably challenging also from the corporate Supervisory Board members assess NLB’s operations in 2020 as strong and material respects, the financial position of the Bank and the Group as of governance perspective, as NLB, as the first bank in Slovenia, implemented solid and performance of the NLB Management Board as successful and 31 December 2020, and their financial performance and cash flows for Constitutional Court’s decision dated June 2019 that enabled workers’ trustworthy. As per that special appreciation needs to be extended to that year in accordance with the IFRS as adopted by the EU. It was also participation in the management bodies. To that extent, amendments to the Management Board and the employees for their contributions and established that the information contained in the business section of the the Articles of Association of NLB were adopted on the General Assembly achievements. Additionally, it has to be highlighted that due to COVID-19 Annual Report is consistent with the audited financial statements of the of shareholders in June 2020 that changed the composition of the and its impact on the performance the voluntary solidaritary salary Bank and the Group. Supervisory Board, that now consists of 12 members, out of which eight reduction was introduced for the Supervisory Board, Management Board, are representatives of the capital and four are employee representatives. and employees holding service contracts. At the end of 2020, the Supervisory Board was composed of 11 members, of which eight were representatives of shareholders (in addition to Primož Karpe and Andreas Klingen, members were also Gregor Rok Kastelic, Mark William Lane Richards, Shrenik Dhirajlal Davda, Peter Groznik, David Eric Simon, and Verica Trstenjak) and three were representatives of employees (Sergeja Kočar, Bojana Šteblaj, and Janja Žabjek Dolinšek). The procedure for election of another member of the Supervisory Board – worker representative was still ongoing at the end of December 2020. While members of the Supervisory Board have proper and complementary knowledge, experience and skills to perform their duties, they all have different professional, national, and educational backgrounds. All the members of the Supervisory Board have the necessary personal integrity and professional ethics to hold their positions, which was confirmed by the positive Fit & Proper assessment. This provides the assurance that they can carry out their supervisory roles in a responsible manner and make decisions that benefit NLB and add value to the Group. The delivery of critical and assertive opinions has been and will always remain at the core of our decision-making principles through the expected engaged participation of all the members. For the session dated 8 April 2021, the Supervisory Board also prepared a written report on the verification results for the General Meeting of shareholders. This report was made in accordance with Article 34 of the Articles of Association of NLB and the second paragraph of Article 282 of the Companies Act (ZGD-1). At the end of its report, the Supervisory Board indicated that as a result of completion of its verification it does not have any comments in relation to the NLB Group Annual Report 2020, and gave its approval to it, therefore it is considered adopted. Yours truly, Supervisory Board of NLB Primož Karpe Chairman 10 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020298 (i) 269.7 1,874,804 (ii) Number of branches in NLB Group Result after tax in EUR million Total active clients of NLB Group We are from this region and understand business environment, customs and, most of all, its people. With our commitment, knowledge, and innovative solutions, the Group takes superior care of its customers and creates a better life, a better future for us all. Welcome to our home. Strategic Members Overview Presentation of the NLB Group NLB, Ljubljana Slovenia NLB Banka, Banja Luka Komercijalna Banka, Banja Luka Bosnia and Herzegovina NLB Banka, Sarajevo Slovenia North Macedonia Bosnia and Herzegovina Kosovo Montenegro Serbia NLB Group NLB, Ljubljana NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo Komercijalna Banka, Banja Luka NLB Banka, Prishtina NLB Banka, Podgorica Komercijalna Banka, Podgorica NLB Banka, Beograd Komercijalna Banka, Beograd Market position in 2020 Branches(i) Active clients (ii) 298(i) 80 50 51 36 19 34 19 19 28 203 1,874,804(ii) 668,270 417,298 214,634 136,511 46,173 231,490 64,735 15,491 141,866 849,488 Total assets (in EUR million) 19,566 11,027 Net loans to customers (in EUR million) 9,645 4,595 Deposits from customers (in EUR million) 16,397 8,851 1,586 957 1,289 796 431 634 Result after tax (in EUR million) 269.7 114.0 19.2 10.1 647 399 522 5.9 236(viii) 155(viii) 153(viii) 879 559 748 0.7(viii) 13.3 538 367 432 1.4 155(viii) 104(viii) 687 472 3,907(viii) 1,630(viii) 120(viii) 496 3,194(viii) 0.5(viii) 2.6 24.9(viii) Market share by total assets - 24.7% 16.5% 18.6%(v) 5.3%(vi) 5.5%(v,ix) 17.2% 11.7% 3.4%(vii, ix) 1.9%(vii) 10.2%(vii, ix) NLB Banka, Beograd Komercijalna Banka, Beograd Serbia Macroeconomic indicators for 2020 GDP (real growth in %) Average inﬂation (in %) Unemployment rate (in %) Current account of the balance of payments (as a % of GDP) Budget deﬁcit/surplus (as a % of GDP) -6.0 0.2 15.5 -4.7 -7.7 -5.5 -0.3 4.9 7.3 -8.5 -4.5 1.2 16.4 -3.5 -8.1 -5.2 -1.0 18.0 -4.9 -4.6 -7.0 0.2 26.5 -7.5 -6.7 -13.0 -0.3 18.0 -15.4 -9.9 -1.0 1.6 9.0 -4.3 -8.1 Montenegro NLB Banka, Podgorica Komercijalna Banka, Podgorica NLB Banka, Prishtina Kosovo NLB Banka, Skopje North Macedonia 11 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020(i) Branch offices of Komercijalna Banka, Banja Luka, Komercijalna Banka, Podgorica and Komercijalna Banka, Beograd not included in total number of NLB Group branches.(ii) Number of active clients of Komercijalna Banka, Banja Luka, Komercijalna Banka, Podgorica and Komercijalna Banka, Beograd not included in total number of NLB Group active clients due to different definitions.(iii) Assets under management.(iv) Market share of assets under management in mutual funds.(v) Market share in the Republic of Srpska as at 30 September 2020.(vi) Market share in the Federation of BiH as at 30 September 2020.(vii) Market share as at 30 September 2020.(viii) Data from internal reports of Komercijalna Banka group.(ix) Data from CBs and own calculations.-1.11,626(iii)5.534--------------24NLBLease&Go,LjubljanaNLBSkladi,LjubljanaKombankINvest,Beograd1(viii)34.9%(iv)Shift to local and regional market Grandfather of Samra Čomor CoolTour, Bosnia and Herzegovina Business ceased to exist for Vedran Grebo and Samra Čomor, owners of the touristic agency CoolTour Sarajevo, as it absolutely stopped with borders closing during the COVID-19 pandemic. The focus was shifted to local and regional market through offering of the hiking tours to Lukomir Village. The benefit of the tour is in establishing personalised experience through offering knowledgeable local guides and whose roots originate from the village, with family members still living in the area. The new situation considerably decreased their assets and required investments in promotion. The #HelpFrame project significantly helped Vedran and Samra reach a wider audience and be recognised as an authentic provider of touristic experiences locally and regionally. 12 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Key Highlights Financial Performance Business Overview Asset Quality Capital & Liquidity Response to COVID-19 Pandemic Robust performance given Strengthened market challenging environment position in Serbia Well diversified asset portfolio Well-capitalised, well Quick adaptation of business above regulatory requirements operations, proactive response to clients Strategy & Outlook Committed to pursue its strategic objectives Very solid year with core The divestment of insurance Large share of retail in the credit Capital position comfortably Instant adaptation of processes Integration of Komercijalna Banka revenues from lending and company NLB Vita (on 29 May the portfolio structure – positively above regulatory requirements to ensure higher availability and group enabling synergy extraction. fee and commission business Bank sold its 50% stake in the share contributing to the diversification (TCR of 16.6%, 0.3 p.p. higher use of digital channels – a wider at pre-COVID-19 levels. capital of the company in a joint and credit portfolio quality. YoY). Due to acquisition of range of 24/7 accessible digital Defending a stable level of profit before impairments and provisions (EUR 210.5 million, -1% YoY), supported by non- sales process together with the KBC) fulfilled the last commitment to the EC, by which state aid process was officially completed. The COVID-19 pandemic impacted the realised cost of risk (62 bps2), however, remaining within TCR was reduced by 5.7 p.p. Adequate capitalisation Supporting clients through the downturn by offering Komercijalna Banka, Beograd solutions offered to clients. the set outlook. throughout 2020 due to inclusion moratoriums (EUR 2.4 billion), recurring income (the sale of Acquisition of Komercijalna NLB Vita and debt securities). Banka, Beograd added EUR 4.3 Profit after tax (EUR 269.7 million) strongly affected by the acquisition of Komercijalna Banka, Beograd billion to the Group’s balance sheet, becoming top 3 market player on the Serbian market. with positive impact of negative Although business in 2020 has goodwill in the amount of EUR been marked by COVID-19, the 137.9 million and additional Group’s results demonstrated impairments and provisions in the the robustness and resilience of amount of EUR 71.4 million, mostly its sustainable business model. related to COVID-19 outbreak. Continuing focus on the cost client confidence in the Group. Strong deposit base demonstrating Stable NPE (EBA def.) of 2.3% with confident coverage ratio of 57.3%. Proactive workout approaches and other precautionary measures to minimise potential future losses; NPL reduction recorded. 2. Komercijalna Banka group is excluded from calculation. of subordinated Tier 2 bonds and new financing (EUR 148.9 into capital, undistributed profit million), of which majority is from 2019, minority capital and subject to public guarantee other capital relief measures. schemes (EUR 134.6 million). Liquidity position of the Group remains very strong, with high level Most of approved moratoria (81%) already expired. of unencumbered liquidity reserves. Due to positive experience and effects during the COVID-19, the Bank will continue with work-from- home initiative in the future. Special focus on stable revenues and cost sustainability. Dividend payout in 2021 will be conditional on regulatory requirements and in line with NLB’s capacity. Striving to become regional champion, whereby clients remain the first priority. Continue to serve the community aiming to improve the quality of life in the region. Meeting stakeholder needs and expectations and driving business value through sustainability. discipline (4% lower costs YoY; CIR 58.3%). Costs remain well contained through all cost categories and geographies. Wider array of digital solutions (increased number of digital users and number of digital payments) and improved customer experience. Healthy generation of housing loans. New business opportunities pursued to generate additional revenues. 13 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20202020 2019 2018 NLB Group NLB NLB Group NLB NLB Group 2020 2019 2018 Key performance indicators Table 1a: Key financial indicators for NLB Group and NLB Income statement data (in EUR million) Net interest income Net non-interest income(i) Net non-interest income (BoS)(i) Total costs(i) Operating costs (BoS)(i) Result before impairments and provisions(ii) Impairments and provisions Gains less losses from capital investments in subsidiaries, associates, and joint ventures Result before tax Result of non-controlling interests Result after tax Financial position statement data (in EUR million) Total assets Gross loans to customers Impairments and deviations from FV Net loans to customers Financial assets Deposits from customers Equity Non-controlling interests Total off-balance sheet items Key financial indicators a) Capital adequacy Total capital ratio Tier 1 ratio CET 1 ratio Total RWA (in EUR million) RWA / Total assets b) Asset quality NLB Group NLB NLB Group NLB NLB Group NLB 300 205 360 -294 -311 211 -71 1 278 3 270 19,566 10,033 -388 9,645 5,120 16,397 1,953 170 4,671 16.6% 14.2% 14.1% 12,421 63.5% 139 173 180 -180 -188 131 -17 - 114 - 114 318 199 219 -305 -321 212 -1 4 215 8 194 11,027 14,174 4,753 -158 4,595 3,017 8,851 1,451 - 3,684 27.1% 22.3% 22.3% 6,029 54.7% 7,938 -334 7,605 3,830 11,612 1,686 45 4,222 16.3% 15.8% 15.8% 9,186 64.8% 158 197 204 -191 -198 164 14 - 178 - 176 9,802 4,718 -129 4,589 3,169 7,761 1,333 - 3,644 22.6% 21.8% 21.8% 5,225 53.3% 313 184 206 -292 -309 205 23 5 233 8 204 12,740 7,627 -479 7,148 3,399 10,464 1,616 41 3,996 16.7% 16.7% 16.7% 8,678 68.1% 158 167 175 -180 -189 144 33 - 177 - 165 8,811 4,704 -226 4,478 2,869 7,033 1,295 - 3,473 24.1% 24.1% 24.1% 5,024 57.0% NPL coverage ratio 1 (coverage of gross non- performing loans with impairments for all loans) NPL coverage ratio 2 (coverage of gross non-performing loans with impairments for non-performing loans) NPL coverage ratio (EBA definition)(iii) NPL coverage ratio (EBA definition) (BoS)(iv) NPL volume (in EUR million) NPL ratio (internal def.; NPL/ Total loans) Net NPL ratio (internal def.; net NPL / Total net loans) NPL ratio (EBA definition)(iii) NPL ratio (EBA definition) (BoS)(iv) 81.8% 76.0% 89.2% 76.2% 77.1% 65.8% 57.3% 57.9% 65.0% 56.7% 64.6% 57.1% 56.9% 56.9% 475 3.5% 1.5% 4.5% 3.4% 55.3% 55.3% 208 3.0% 1.3% 4.0% 2.8% 64.5% 64.5% 375 3.8% 1.4% 4.6% 3.8% 55.5% 55.5% 169 2.8% 1.3% 3.3% 2.7% 63.7% 63.7% 622 6.9% 2.6% 7.9% 6.8% 55.0% 55.0% 343 6.3% 2.8% 6.8% 6.0% NPE ratio (EBA definition) Received collaterals / NPL NPL Collateral received / NPL (EBA definition) Credit impairments and provisions / RWA c) Profitability Net interest margin (BoS)(v) Financial intermediation margin (BoS)(i) Operational business margin(vi) ROE b.t. ROA b.t. ROE a.t. ROA a.t. d) Business costs Operating costs / Average total assets (BoS)(i) CIR(i) Total costs / RWA(i) Total costs / Total assets(i) e) Liquidity Liquidity assets / Short-term financial liabilities to non-banking sector 2.3% 60.7% 42.4% 0.5% 2.0% 4.4% 3.2% 15.4% 1.8% 15.4% 1.8% 2.1% 58.3% 2.4% 1.5% 1.9% 65.8% 43.5% 0.1% 1.3% 3.1% 2.5% 8.2% 1.1% 8.2% 1.1% 1.8% 57.9% 3.0% 1.6% 2,7% 66.6% 35.4% -0.1% 2.4% 4.0% 3.8% 12.7% 1.6% 11.7% 1.5% 2.4% 59.0% 3.3% 2.2% 2.0% 72.0% 33.6% -0.3% 1.7% 3.9% 2.9% 13.4% 1.9% 13.3% 1.9% 2.2% 53.9% 3.7% 2.0% 4.7% 67.4% 41.2% -0.3% 2.5% 4.1% 3.9% 13.2% 1.9% 11.8% 1.6% 2.5% 58.8% 3.4% 2.3% 56.1% 65.8% 54.7% 63.8% 54.1% Liquidity assets / Average total assets 51.8% 54.9% 44.7% 52.1% 38.0% f) Other Market share in terms of total assets LTD Total revenues / RWA(i) Key indicators per share Shareholders(vii) Shares The corresponding value of one share (in EUR) Book value (in EUR) International credit ratings S&P Fitch Moody's(viii) Employees 24.7% 51.9% 5.2% 2,455 20,000,000 10 72.5 - 58.8% 4.1% - - - 97.6 BBB- BB+ Baa1 23.8% 59.1% 6.8% 2,100 20,000,000 10 66.7 - 65.5% 5.6% - - - 84.3 BBB- BB+ Baa2 - 68.3% 5.7% - - - 80.8 BB+ BB+ Baa2 NLB 3.9% 71.1% 39.9% -0.6% 1.8% 3.8% 3.0% 12.4% 2.0% 11.6% 1.9% 2.1% 55.5% 3.6% 2.0% 48.2% 42.5% 22.7% 63.7% 6.5% 1,716 20,000,000 10 64.8 Number of employees 8,792 2,591 5,878 2,659 5,887 2,690 Further details on the definition of certain indicators in this table are available in chapter Alternative Performance Indicators. (i) Data for 2019 and 2018 are adjusted to the changed schemes as prescribed by the BoS (relocation of some items from net other income to other general and administrative expenses). More details are available in note 2.3. of the Audited Financial Statements of NLB Group and NLB d.d. of this report. (ii) Result before impairments and provisions of NLB Group for the year 2020 does not include Negative Goodwill. (iii) Loans and advances without loans and advances classified as held for sale, cash balances at CBs and other demand deposits. (iv) Loans and advances including cash balances at CBs and other demand deposits. (v) Calculated on the basis of average total assets. (vi) Calculated as Net income from operational business (NII - Tier 2 bonds expenses + Net fee and commission income + Recurring net income from financial operations) / Average total assets. (vii) As per share register of KDD. The shares are listed on Ljubljana Stock Exchange. The Bank of New York Mellon (the ‘GDR Depositary’) represented in the share register of KDD as one holder is not the beneficial owner of shares, it holds shares in its capacity as the depositary for the GDR holders. The GDRs representing shares are issued against the deposit of shares and are listed on London Stock Exchange. Therefore, the number in the share register of KDD does not represent all final beneficial owners of the Bank shares. The rights under the deposited shares can be exercised by the GDR holders only through the GDR Depositary and individual GDR holders do not have any direct right to either attend the general meeting of bank’s shareholders or to exercise any voting rights under the deposited shares. (viii) Unsolicited rating. 14 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Table 1b: Selected indicators presenting performance with and without inclusion of Komercijalna Banka group Table 3: Market performance and outlook for the period 2021-2023 Outlook 2020 2019 NLB Group NLB Group (w/o Komercijalna Banka group) NLB Group Regular income Costs ROE a.t. Loan growth Cost of risk Dividend payout Performance in 2020 Outlook 2021 Outlook 2023 EUR 504.5 million EUR 293.9 million > EUR 600 million ~ EUR 430 million(i) > EUR 700 million < EUR 400 million 8.1%(ii) 3%(ii) 62 bps(ii) / High single digit > 10% (RORAC(iii) > 12%) Mid single digit number High single digit CAGR (2021-2023) 70-90 bps 40-60 bps EUR 92.2 million > EUR 300 million(iv) (i) Initial increase in cost base in 2021; projected costs include restructuring charges. (ii) Komercijalna Banka group is excluded from calculation to ensure comparability with previous years. (iii) RORAC calculated as Result after tax excl. Tier 2 bonds expenses divided by average RWA at 15.25% capital requirement. (iv) Cumulative in the period 2021-2023. Net loans to customers (in EUR million) Financial assets (in EUR million) Deposits from customers (in EUR million) ROE a.t. NPL coverage ratio 1 (coverage of gross non-performing loans with impairments for all loans) NPL coverage ratio 2 (coverage of gross non-performing loans with impairments for non-performing loans) NPL volume (in EUR million) NPL ratio (internal def.; NPL/ Total loans) NPE ratio (EBA definition) Table 2: Information on the LCR(i) (in EUR thousands) 9,645 5,120 16,397 15.4% 81.8% 57.3% 475 3.5% 2.3% 7,778 3,755 12,954 8.1% 86.9% 62.6% 435 3.9% 2.6% 7,605 3,830 11,612 11.7% 89.2% 65.0% 375 3.8% 2.7% Q1 2020 Q2 2020 Q3 2020 Q4 2020 NLB Group NLB NLB Group NLB NLB Group NLB NLB Group NLB Liquidity Coverage Ratio (LCR) 333.4% 381.5% 321.3% 370.1% 311.4% 357.8% 302.9% 351.2% High Quality Liquid Assets (HQLA) 3,538,373 3,274,751 3,853,203 3,553,904 4,187,441 3,857,502 4,493,341 4,119,661 Net Liquidity Outflows 1,066,212 864,163 1,208,445 967,226 1,353,319 1,083,882 1,495,611 1,177,269 (i) Table 2 illustrates the values and data for each of the four calendar quarters. They are calculated as a simple average of observations on the last calendar day of each month for a period of 12 months before the end of each quarter. 15 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Shareholder structure of NLB The Bank shares are listed on the Prime Market sub-segment of the Ljubljana Stock Exchange (ISIN SI0021117344, Ljubljana Stock Exchange trading symbol: NLBR) and the GDRs, representing shares, are listed on the Main Market of the London Stock Exchange (ISIN: US66980N2036 and US66980N1046, London Stock Exchange GDR trading symbol: NLB and 55VX). Five GDRs represent one share of NLB. Table 4: NLB’s main shareholders as at 31 December 2020(i) Jan 2020 Feb 2020 M ar 2020 A pr 2020 M ay 2020 Ju n 2020 Jul 2020 A u g 2020 Sep 2020 O ct 2020 N ov 2020 D ec 2020 Source: Ljubljana Stock Exchange. Shareholder Number of shares Percentage of shares Figure 1: NLB shares’ price movement on the Ljubljana Stock Exchange (in EUR) Bank of New York Mellon on behalf of the GDR holders (ii) 11,769,972 58.85 of which Brandes Investment Partners, L.P. (iii) of which EBRD(iii) of which Schroders plc(iii) Republic of Slovenia (RoS) Other shareholders Total / / / 5,000,001 3,230,027 20,000,000 >5 and <10 >5 and <10 >5 and <10 25.00 16.15 100.00 (i) Information is sourced from NLB’s shareholders book accessible at the web services of CSD (Central Security Depository, Slovenian: KDD - Centralna klirinško depotna družba) and available to CSD members. Information on major holdings is based on the self- declarations by individual holders pursuant to the applicable provisions of Slovenian legislation, which requires that the holders of shares in a listed company notify the company whenever their direct and/or indirect holdings pass the set thresholds of 5%, 10%, 15%, 20%, 25%, 1/3, 50%, or 75%. The table lists all self-declared major holders whose notifications have been received. In reliance of this obligation vested with the holders of major holdings, the Bank postulates that no other entities nor any natural person holds directly and/or indirectly 10 or more percent of the Bank’s shares. (ii) The Bank of New York Mellon holds shares in its capacity as the depositary (the GDR Depositary) for the GDR holders, and is not the beneficial owner of such shares. The GDR holders have the right to convert their GDRs into shares. The rights under the deposited shares can be exercised by the GDR holders only through the GDR Depositary and individual GDR holders do not have any direct right to either attend the shareholder’s meeting or to exercise any voting rights under the deposited shares. (iii) The information on GDR ownership is based on self-declarations by individual GDR holders as required pursuant to the applicable provisions of Slovenian law. Market performance of NLB’s securities (shares and GDRs) The COVID-19 pandemic weighed heavily on banking sector stocks in 2020. After reaching an annual peak in the middle of February 2020, European banking sector stocks dropped significantly as the COVID-19 pandemic spread. A moderate pick-up in value followed during the summer, but with the arrival of autumn, banking sector stocks returned to levels observed in the middle of March 2020. Despite rising at the end of the year, banking sector stocks still recorded an annual decrease in value of around 25%. Jan 2020 Feb 2020 M ar 2020 A pr 2020 M ay 2020 Ju n 2020 Jul 2020 A u g 2020 Sep 2020 O ct 2020 N ov 2020 D ec 2020 Source: Bloomberg. Figure 2: NLB GDR’s price movement on the London Stock Exchange (in EUR) Table 5: NLB share information Share information Total number of shares issued Highest closing price (in 2020) Lowest closing price (in 2020) Closing price as at 30 December 2020(i) NLB Group book value per share NLB Group earnings per share (EPS) Price / NLB Group book value (P/B) Dividend per share (for the previous business year) 31 December 2020 20,000,000 EUR 65.0 EUR 34.1 EUR 45.8 EUR 97.6 EUR 13.5 0.47 / 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Indices The Bank’s shares are included in several indices: the SBITOP index and ADRIA prime index of the Ljubljana Stock Exchange, the FTSE Frontier Index, MSCI Frontier and MSCI Slovenia, S&P Eastern Europe BMI, S&P Emerging Frontier Super Composite BMI, S&P Extended Frontier 150, S&P Frontier BMI, S&P Frontier Ex-GCC BMI, S&P Slovenia BMI, STOXX All Europe Total Market, STOXX Balkan Total Market, STOXX Balkan Total Market ex-Greece & Turkey, STOXX EU Enlarged Total Market, STOXX Eastern Europe 300, STOXX Eastern Europe 300 Banks, STOXX Eastern Europe Large 100, STOXX Eastern Europe Total Market, STOXX Eastern Europe Total Market Small, STOXX Global Total Market and STOXX Slovenia Total Market. Investor Relations’ function Since the listing of the Bank’s shares and GDRs in November 2018, the importance of the Investor Relations (IR) function has increased substantially, requiring engagement with investors and the broader community. The Bank participated in varied forms of engagement, such as investor meetings, calls, and conferences, reflecting the diverse nature of the Bank’s ownership structure. Open and regular communication with investors and analysts allowed for dialogue promotion on strategic developments, as well as on the recent financial performance of the Group. The Bank promoted greater awareness and understanding of operating businesses, developments, and events which have an influence on the performance of the Bank’s share price. The IR section of the Bank’s website is an important communication channel that provides comprehensive information on the Group and share price performance of the Bank. In addition, it enables the effective distribution of information to the market in a clear and consistent manner. IR presentations, financial reports, and important information are uploaded to the Bank’s website in line with IR’s Financial Calendar. Since the listing, four analysts released research reports about the Group. The Bank’s share is covered by analysts from JP Morgan, Deutsche Bank, Wood & Company, Citi, InterCapital, and Raiffeisen Bank International. The price movement of the Bank’s stocks did not differ substantially in Market capitalisation(i) EUR 916,000,000 comparison to European banking sector stocks. The Bank stocks experienced (i) No market on 31 December 2020. approximately a 25% drop in value in 2020. The difference was that the Bank’s stocks decreased at a higher pace over the summer and reached levels similar to March 2020 already by the end of August 2020. Nevertheless, a subsequent uptick in value caused that by the beginning of September 2020. The Bank’s stocks price movement was relatively synchronized with the price movement of European banking sector stocks. Similar to those stocks, the price of the Bank’s stocks rose in the last couple of months in 2020. However, it should be noted that the substantial drop in price in the February–March period was not offset. 16 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Key Events Signed SPA for Komercijalna Banka, Beograd Top Employer certificate COVID-19 outbreak Sale of NLB Vita completed NLB Lease&Go founded 35th General Meeting NLB joined UN Principles for Responsible Banking Moody’s upgrade to Baa1 Acquisition of Komercijalna Banka, Beograd JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER February April June October On 4 February, the Bank announced that for the fifth On 9 April, the Bank disclosed the amended decision on the On 9 June, the Workers’ Council of NLB elected and On 6 October, Moody’s upgraded the long-term local and consecutive year it is ranked among the best employers composition of Pillar 2 additional own funds requirement appointed Petra Kakovič Bizjak, Sergeja Kočar, and foreign currency deposit ratings of NLB from Baa2 to Baa1. in the world. Top Employers Institute, an independent (P2R) of the currently applicable decision establishing Bojana Šteblaj as members of the Supervisory Board – and international certification company, has once again awarded prudential requirements (SREP). The decision was applied representatives of the employees. November the Bank the acclaimed ‘Top Employer’ Slovenia certificate. retroactively from 12 March 2020. On 20 November, the Bank received information from the On 15 June, the shareholders of the Bank gathered at the Workers’ Council of NLB that they elected Janja Žabjek On 5 February, the Bank issued 10NC5 subordinated Tier On 9 April, the Bank received the decision of the BoS 35th General Meeting of NLB where 56.85% shares with Dolinšek as member of the Supervisory Board of the Bank - 2 bonds in the amount of EUR 120 million (ISIN code relating to the MREL requirement, which amounts to 15.56% voting rights were present. Primož Karpe and David Eric and representative of the workers. Her term of office shall XS2113139195) on international debt capital markets to of TLOF on a sub-consolidated level of the NLB Resolution Simon were re-elected for a new term of office; additionally, run from 20 November 2020 and will last until the conclusion strengthen and optimise its capital structure. On 25 March, Group (consisting of the Bank and non-core part of the Verica Trstenjak was elected as a new member of the of the Annual General Meeting of NLB that decides on the the Bank obtained the ECB’s permission for the instrument’s Group). The MREL requirement shall be reached by 31 Supervisory Board. inclusion in the calculation of Tier 2 capital. December 2021 and shall be met at all times from that date allocation of distributable profit for the fourth financial year after her election, counting the year in which she was onwards. On 26 June, the members of the Supervisory Board of the appointed as the first one. On 26 February, NLB entered into a share purchase Bank elected Primož Karpe as their Chairman for the second agreement with the Republic of Serbia for the acquisition The NLB Cultural Heritage Management Institute, Ljubljana time in a row. Andreas Klingen remains his deputy. On 12 November, the existing members of the Bank’s of an 83.23% ordinary shareholding in Komercijalna Banka, (entered in the register of companies on 16 April 2020) was Management Board were reappointed for another term in Beograd for EUR 387 million. established based on the concept of the Bank art collection On 30 June, the Bank entered into contracts with MIGA office; Blaž Brodnjak as the CEO & CMO, Archibald Kremser management. (part of the World Bank Group) in the amount of EUR 303.1 as the CFO; and Andreas Burkhardt as CRO of the Bank, all March On 4 March, NLB obtained the ECB’s permission to include May million for the purpose of risk-weighted assets optimisation. for a period of five years from the end of their term on 6 July, 2021. the 10NC5 subordinated Tier 2 bonds in the amount of EUR On 13 May, the ECB gave its consent to the appointment August 120 million the Bank issued on 19 November 2019 (ISIN code of Petr Brunclík as a member of the Management Board of Between 14 and 18 August, the Management Board December XS2080776607) in the calculation of Tier 2 capital. the Bank and COO. Petr Brunclík, who was appointed by the members of NLB, Blaž Brodnjak, CEO & CMO; Andreas In relation to the completion of the transaction In March, the COVID-19 pandemic became a global joined NLB in February 2020. COO together acquired 1,382 ordinary shares of NLB, ISIN: to 83.23% of the ordinary shares of Komercijalna Banka, phenomenon with wide and far-reaching consequences SI0021117344, LJSE ticker NLBR, in the total amount of EUR Beograd, dated 26 February, 2020 (the ‘SPA’), concluded Supervisory Board of the Bank at the end of November 2019, Burkhardt, CRO; Archibald Kremser, CFO; and Petr Brunclík, contemplated in the Sale and Purchase Agreement relating including implications for the global and regional banking On 29 May, having met all the suspensive conditions under 51,031.20. sector and therefore for the Group as well. the sales agreement of 27 December 2019, the Bank sold its 50% stake in the share capital of NLB Vita in a joint sales September between the Republic of Serbia as the Seller, and NLB as the Buyer, the Bank announced on 22 December that it has obtained all the required regulatory approvals contemplated process together with the KBC. On 1 September, the Bank received a letter of resignation by the SPA, while on 30 December the Bank completed the On 29 May, the Bank announced that the newly founded Board (the workers’ representative). company, NLB Lease&Go, provider of leasing services, has entered the Slovenian market and joined the Group. The At the end of September, NLB as the first bank in Slovenia, company offers leasing for personal vehicles and lorries, joined more than 180 banks from all over the world as a buses, and agricultural and construction machinery. signatory of the UN Principles for Responsible Banking. from Petra Kakovič Bizjak, a member of the Supervisory acquisition. 17 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 -6.6% economic growth in the Euro-area in 2020. -5.5% economic growth in Slovenia in 2020. -6.0% economic growth in the Group’s region in 2020. Macroeconomic Environment Global and European Economy and recalibrated existing and new monetary policy instruments several times over 2020. Key interest rates remained unchanged, though. Most importantly, the ECB introduced and recalibrated the Pandemic Emergency Purchases Programme (PEPP). The envelope of PEPP was increased over the year to a total of EUR 1,850 billion, and the duration of the programme was extended to March 2022. The ECB recalibrated Temporary Long-Term Refinancing Operations (TLTRO-III) and introduced Pandemic Emergency Long-Term Refinancing Operations (PELTRO). In the US, the Fed ramped up its asset purchases programme to prevent financial tightening in the markets and introduced a monetary policy shift by allowing for a temporary overshoot in inflation after a period of undershooting the inflation target. European governments in particular managed to achieve that the COVID-19 The course of the global economy in 2020 was determined by the COVID-19 shock had only a very moderate effect on the unemployment rate, mainly pandemic, causing unprecedented contraction. Governments were forced due to jobs retention schemes masking the real impact of the crisis on the to implement drastic measures to contain the pandemic despite significant labour market. The downward pressures on prices amplified over the year. economic implications. The COVID-19 shock disrupted production chains Nevertheless, a significant part of the downward pressure on prices could around the world when manufacturing in China came to a standstill. This be credited to temporary factors, e.g. energy prices and the German VAT caused supply-side disruptions while containment measures disrupted the reduction. demand side by weighing heavily on private consumption. Supported by the Chinese recovery, world trade and industrial production recovered after a The global economy is expected to rebound in 2021. However, countries significant decline in Q2 2020. A clear divergence between manufacturing all over the world are likely to continue with the alternating relaxations and and services sectors was observed as measures for containing the spread of restrictions until the broad vaccine rollout enables a sustainable easing of the virus hit sectors disproportionally. The manufacturing sector remained containment measures. The Euro area economy is expected to grow 4.0% somehow resilient to further waves while the services sector contracted on the in 2021. The rebound in the Euro area should be underpinned by fiscal back of re-introduced containment measures. To mitigate adverse negative measures on the national, as well as European levels and the accommodative impacts of the pandemic, governments and CBs provided fiscal support and monetary policy. The revival of private consumption and pent-up demand, monetary policy easing which mutually reinforced. Large-scale fiscal support underpinned by preserved stable incomes and households gradually releasing and liquidity assistance have been extended to economies to avoid mass accumulated savings, should be important drivers of the rebound in the Euro lay-offs, preserve incomes, and protect businesses. They could be categorised area. Inflation is expected to rise in 2021, as drivers of deflation in 2020 are into (i) jobs retention schemes, (ii) household and self-employed income set to become drivers of reflation in 2021. The economic recovery should support, (iii) tax and loans forbearance and deferment, and (iv) liquidity and also play its part as an upward pressure on prices. Nevertheless, inflation guarantees. is expected to remain in check due to the substantial output gap, as well as elevated unemployment in comparison to pre-crisis levels. The cost of In the EU, fiscal measures adopted on the national level were complemented mitigating the pandemic will continue to be felt in 2021, although pressures on by a common European rescue package, which included (i) precautionary public finances are expected to ease. Fiscal deficits are expected to narrow due credit lines for member states, (ii) a programme to finance loans to businesses, to a growth-induced rise in budget revenues, gradual unwinding of pandemic- and (iii) a jobs support programme. The agreement on a recovery plan, Next related emergency measures, and the projected rebound in economic activity. Generation EU, and the EU’s long-term budget is set to ensure support to Public debts are expected to move in line with narrowing fiscal deficits and the the hardest hit member states and underpin growth in subsequent years. economic rebound. National authorities also implemented capital, liquidity, and borrower-based macroprudential measures to support banks facilitating the real economy. The ECB provided abundant liquidity and conducted large-scale asset purchases with the objective to keep favourable financing conditions and to maintain the smooth working of the transmission mechanism. The ECB introduced 18 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The Economy in the Group’s region In Montenegro, the COVID-19 pandemic had devastating implications for the economy due to its underlying features of being particularly vulnerable to The Group’s region was not able to circumvent the COVID-19 pandemic external shocks and being exposed to hardest hit sectors. The pandemic and and its economic implications. As a consequence, the Group’s region recorded travel restrictions weighed heavily on Montenegro’s tourism sector. The latter a substantial drop in economic growth. However, economic implications of had spillover effects on domestic consumption and investment, which together the COVID-19 pandemic differed between countries of the Group’s region with the weakened external demand weighed heavily on economic growth. due to underlying differences in features of economies. Countries with the strong reliance on the tourism sector were severely affected by restrictions In North Macedonia, notable economic contraction was recorded as output on domestic and international travel. The disruption to global supply chains contracted on the back of decreased private consumption with household and a decline in remittances and FDI inflows weighed on economies as well. spending being adversely affected by a drop in remittances and with the The lowest annual contraction was registered by Serbia, while the highest external sector being influenced by containment measures abroad. Despite contraction was experienced by Montenegro. In general, inflation fell fiscal measures and the toned-down effect on the labour market, domestic mainly because of downward pressure on consumer prices due to depressed demand was suppressed. domestic demand and a drop in oil prices. Fiscal balances and public debts were affected by implementation of fiscal measures aimed at cushioning In Serbia, the economy experienced a moderate contraction as a consequence COVID-19 economic implications. Current accounts worsened and deficit of a swift and sizeable fiscal and monetary support measures. Another factor financing needed to be complemented by external loans due to a decrease in was the underlying feature of the economy being less exposed to sectors regular sources of financing, i.e., FDIs and remittances. Table 6: Movement of key macroeconomic indicators in the Euro area and NLB Group region GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Euro area Slovenia BiH Montenegro N. Macedonia Serbia Kosovo 1.9 4.4 3.1 5.1 2.8 4.5 3.8 1.3 3.2 2.9 4.1 3.2 4.2 4.9 -6.6 -5.5 -5.2 -13.0 -4.5 -1.0 -7.0 4.0 4.5 3.5 6.5 4.5 4.5 5.0 3.5 4.0 3.5 4.5 3.5 4.0 5.0 1.8 1.9 1.4 2.6 1.4 2.0 1.1 1.2 1.7 0.6 0.4 0.8 1.9 2.7 0.3 -0.3 -1.0 -0.3 1.2 1.6 0.2 1.2 1.3 0.7 1.0 1.5 2.0 1.4 1.3 1.7 1.0 1.5 1.8 2.3 1.7 8.2 5.1 7.6 4.5 8.0 4.9 9.0 5.5 8.5 5.0 18.4 15.7 18.0 17.5 16.0 15.2 15.1 18.0 18.0 16.0 20.7 17.3 16.4 17.5 16.5 12.7 10.4 9.0 9.0 8.5 29.6 25.7 26.5 26.0 25.0 Source: Statistical offices, Focus Economics. Note: NLB Forecasts are highlighted in grey. hardest hit by the pandemic in relation to their peers in the Group’s region. The contraction was mostly driven by a reduction in private consumption, which was only partially offset by increased government consumption and net exports. In BiH, the COVID-19 pandemic has pushed the country into a recession underpinned by the drop in domestic and external demand, and a drop in remittances. In Kosovo, the COVID-19 pandemic had severe implications for the economy due to shortcomings in its consumption-based growth model. The economy contracted on the back of a decline in services exports due to lower diaspora visits, and a drop in private consumption and investment due to uncertainty and containment measures. Strong remittances inflows managed to offset some of the pandemic impact. In Slovenia, the economic growth had a similar path as other Euro area economies throughout 2020. After a significant contraction in H1 2020 due to containment measures negatively affecting all demand components except government consumption, the economy experienced a strong rebound in Q3 2020. However, re-imposed stringent containment measures due to a surge in COVID-19 infections interrupted the recovery in Q4 2020. The labour market was supported by policy measures, so, losses in employment were protected from a large drop in GDP, and much smaller than expected. The measures taken have also avoided a surge in insolvencies. Sizeable fiscal measures taken to support the economy and lost revenues reflected in a large deficit of public finances and elevated public debt. Table 7: Movement of the balance of payment and fiscal indicators in the Euro area and NLB Group region Current account balance (% GDP) Fiscal balance (% GDP) Public debt (% GDP) 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Euro area Slovenia BiH 2.9 5.8 2.3 6.5 2.2 7.3 2.4 5.3 2.4 5.3 -3.3 -3.0 -4.9 -4.6 -3.9 Montenegro -17.0 -15.0 -15.4 -14.0 -12.4 N. Macedonia Serbia Kosovo -0.1 -4.8 -7.6 -2.8 -6.9 -5.7 -3.5 -4.3 -7.5 -3.0 -5.6 -6.1 -2.8 -5.4 -5.8 -0.5 -0.6 0.7 2.3 -3.6 -1.8 0.6 -2.6 0.5 1.9 -2.9 -2.0 -0.2 -2.9 -9.1 -8.5 -4.6 -9.9 -8.1 -8.1 -6.7 -6.2 -4.7 -2.9 -4.7 -4.4 -3.2 -5.1 -3.8 -3.0 -1.7 -3.4 -3.3 -1.7 -3.7 85.8 84.0 100.7 101.4 99.9 70.3 65.6 79.6 78.8 77.6 34.3 32.8 38.4 38.6 37.5 70.1 76.5 90.6 90.7 87.7 40.4 40.7 51.0 51.2 50.9 53.6 52.0 56.8 58.7 57.0 16.9 17.5 24.4 28.7 31.0 Source: Statistical offices, Focus Economics. Note: Consensus Forecasts are highlighted in grey. 19 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020In Slovenia, in 2021 economic activity is expected to rebound, backed The Banking System in the Group’s region by growth in private consumption. However, the household saving rate is expected to remain elevated in 2021 with households only gradually releasing The banking systems in the Group’s region were not able to remain intact by accumulated savings. Investment growth is expected to be supported by the overall pandemic implications. Nevertheless, lending exhibited diverging large public investments and the recovery of private investment. Net exports degrees of resilience to the adverse effects of weakened economies on the are also expected to have a positive contribution to growth. However, a banking systems in the Group’s region. The highest corporate loans growth sustainable recovery is conditional on the vaccine rollout and containment of was recorded in Serbia and Kosovo, while BiH and Slovenia recorded the pandemic. negative growth in corporate loans. The highest surge of household loans was registered by Serbia, North Macedonia, and Kosovo, while BiH recorded a In Montenegro, the economy should rebound in 2021 on the back of slight decrease in household loans, as well. With the exception of Montenegro, investments supporting construction works and the revival of private where corporate and household deposits registered negative annual growth, consumption driven by remittances and bank lending. all countries of the Group’s region recorded high growth in corporate and In North Macedonia, the rebound in 2021 is expected to be underpinned by Slovenia and BiH. Household deposits recorded the highest annual growth by strengthening domestic demand with remittances inflow boding well for in Kosovo, which was closely followed by Serbia and Slovenia. The net household deposits. Corporate deposits increased the most in Serbia, followed consumption. interest margin was the highest in Kosovo and Montenegro. In Slovenia, the decrease in net interest margin was driven by the decline in credit growth and In Serbia, a recovery to pre-crisis levels is expected already in 2021. The falling returns on assets. The NPL ratio as a measure of the quality of bank rebound is projected to be driven by investment and private consumption, portfolio improved in Slovenia, BiH, North Macedonia, and Serbia, while while a positive contribution from net exports depends on the recovery in the it deteriorated in Montenegro and Kosovo. The improvement in the NPL EU. In BiH, the economy is expected to rebound in 2021 as a consequence of a revival in domestic demand and the gradual easing of COVID-19 ratio could be deceiving due to macroprudential measures put in place by regulatory and supervisory institutions, e.g. moratoria. The capital adequacy of the banking systems remains solid and resilient to the increased risks, with banking systems remaining well-capitalised. The capital adequacy either containment measures in main export markets – which bodes well for the improved or stagnated in almost all countries of the Group’s region, with external sector. Serbia being an exception in this regard. In Kosovo, the economy should rebound in 2021 on the back of pent-up Table 8: Movement of key banking systems indicators in the NLB Group region, 2020 underpinned by a revival in consumer and investment spending, assuming that BiH 4,392 -4.9 5,059 -0.8 2,407 16.1 7,036 demand following the easing of domestic restrictions, while the external sector should be supported by gradual reopening of economies. The economic growth in the Group’s region could be around 4.8% in 2021. The return to growth of the economies of the Group region should be consumer and business confidence are restored when the pandemic is under control. Gradual easing of COVID-19 restrictions across the globe should boost external demand and release travel restrictions, resulting in tourism- dependent countries experiencing a more robust rebound. Nevertheless, lingering uncertainty regarding the course of the pandemic and the vaccine rollout cloud the outlook, in general. The economic growth in the Group’s region also depends on the pace of the recovery in the EU because it affects the external trade and determines the remittance inflows, underpinning a significant part of consumption in several countries of the Group’s region. Corporate loans Household loans Corporate deposits Household deposits Net interest margin NPL CAR in million in million in million in million EUR ∆ % YoY EUR ∆ % YoY EUR ∆ % YoY EUR ∆ % YoY 2018, in % 2019, in % in % ∆ pp YoY in % ∆ pp YoY Slovenia 8,750 -1.4 10,712 0.1 8,031 18.8 22,437 10.2 Montenegro 1,186 N. Macedonia 2,761 1.7 1.1 1,411 3,021 2.7 8.0 1,277 -5.5 1,750 2,004 10.1 4,638 Serbia Kosovo 14,856 10.9 9,544 13.8 9,600 26.3 14,897 2,055 7.2 1,180 7.1 943 15.1 2,844 Source: Statistical offices, CBs, NLB. Note: Net interest margin calculated on interest-bearing assets; Net interest margin calculated on average total assets for Serbia; (i) Data in Q3 2020. 1.8 2.6 4.5 3.4 3.3 4.8 1.6 2.4(i) 4.3(i) 3.2(i) 3.0 4.5 2.6 6.6(i) 5.5 3.4(i) 3.7 2.7 -0.3 18.3 -0.2 -1.1 18.3 (i) 0.7 -1.6 -0.4 0.7 18.5 16.9(i) 22.4(i) 16.5 0.2 0.8 0.0 -1.2 0.8 3.9 -1.3 4.6 12.4 13.2 20 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Kosovo Montenegro N. Macedonia BiH Serbia Slovenia Euro area Kosovo Montenegro N. Macedonia BiH Serbia Slovenia Euro area 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 3% 6% 9% 12% 15% 18% 21% 2020 2019 Source: ECB, National CBs, NLB. Note: Q3 2020 data for Serbia. 2020 2019 Source: ECB, National CBs. Note: Return on average equity (ROAE) used for BiH; Q3 2020 data for BiH, N. Macedonia, and Euro area. Figure 3: LTD ratio in the Euro area and NLB Group region Figure 4: ROE ratio in the Euro area and NLB Group region The LTD ratio increased in Montenegro, while in other countries of the Group’s region the LTD ratio registered a decrease. The profitability of banking systems in the Group’s region was not immune to the economic implications of the pandemic, hence the ROE ratio decreased in all countries of the Group’s region with North Macedonia being an exception. Kosovo Montenegro N. Macedonia BiH Serbia Slovenia Euro area 0% 10% 20% 30% 40% 50% 60% 70% Households loans, % GDP Loans to non-financial corporations, % GDP Source: National CBs, National Statistical Offices. Note: Q3 2020 annualised data for BiH and Kosovo. Figure 5: Loans to non-financial corporations and households’ loans in the Euro area and the NLB Group region in 2020 Looking at the loans to non-financial corporations and households’ loans as a percentage of GDP, it can be observed that the whole Group has the potential for further growth compared to the levels in the Euro area. The expected return of economies in the Group’s region to growth in 2021 bode well for loans potential. The economic recovery should be underpinned by the revival in private consumption and fixed investments, both important components of loans potential, and both expected to exhibit growth in 2021 after the pandemic-induced drop in 2020. Private consumption, as the strongest part of the GDP, is forecasted to increase somewhere between 3.3%, as is the case for BiH, and 6.2%, as is the case for Montenegro. Fixed investment is forecasted to increase somewhere between 5.3%, as is the case for Montenegro, and 8.9%, as is the case for Serbia. The projected government consumption growth, although lower than in 2020, should support the expected return to economic growth in 2021 as well. 21 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Regulatory Environment During 2020, more than 100 changes in the EU and Slovenian The Group also takes into account and complies with the regulations in the Regulatory Environment in the Group’s region regulatory environment were adopted with material effects field of preventing money laundering and terrorist financing. In 2020, an on the Bank and its Group. The Group strives to be fully amendment to the Prevention of Money Laundering and Terrorist Financing The regulatory environment in the rest of the region where the Group compliant with the existing and new requirements. Disclosure Act was adopted that transposed the AMLD 5 into the Slovenian legislation. operates was dominated by legislative and regulatory changes related to of the most relevant changes of legislation and regulation At the end of 2020, a new amendment to the law was proposed. COVID-19 pandemic and minimising its consequences in the financial which has an effect on the Group is presented herein. sector and economies. There were also local regulatory (prudential and Compliance with the Payments Act (PSD2) and regulatory technical standards, macroeconomic) measures adopted to ensure stable functioning of the which brought open banking into the financial environment, required major financial systems. The Regulatory Environment in Slovenia changes to the Bank’s information systems. The Bank is constantly monitoring The Bank is subject to capital adequacy and liquidity rules imposed by the them, taking into account the best user experience. factoring, as well as changes to the DGS and labour law. The local regulator EU (CRR/CRD), which govern the activities in which banks may engage, also adopted a number of regulations related to changes of regulatory reporting and are designed to maintain the safety and soundness of banks as well as Due to the COVID-19 epidemic in 2020, the RoS adopted several intervention and risk management rules (liquidity, operational risk, collateral valuation, new regulatory requirements imposed by the regulator and is adapting to In BiH, there were important changes related to introduction of the law on limit their exposure to risk. Even though the majority of the new provisions laws and measures which mainly affected the Bank in the area of credit outsourcing, ICAAP/ILAAP, LCR). will apply from June 2021, the Bank started its implementation activities to moratoriums. The Bank was also involved in economic measures as a lender ensure the timely implementation of CRR2 provisions. The CRD V, which with state guarantees on loans. will be further transposed into the Banking Act (ZBan-2), will also regulate the Montenegro was, adding to the COVID-19 related changes, highly active, changing banking laws (together with a number of by-laws) and bank recovery participation of employees in the management of the Bank, which the Bank An ongoing activity from 2019 included the amendment of policies and and resolution law (together with a number of by-laws), which were later already encourages. contracts due to EBA Guidelines on outsourcing arrangements, that provide a postponed to come into force on 1 January 2022, bankruptcy and liquidation law, As a financial institution offering benchmark-based products, the Bank meets an outsourced activity, service, process, or function (or part of it) is critical or its obligations under the Regulation 2016/1011 (BMR) and regularly monitors important. developments in this area by adapting its operations to the requirements of In Kosovo, the local CB adopted a number of regulatory rules on reporting, IT management, the advertising of financial services, electronic regulators and industry. In the EU’s policy context under the European Green Deal, ‘sustainable money issuance and electronic payment systems, credit risk management, clear definition of outsourcing and specify the criteria to assess whether or not law on DGS (together with a number of bylaws), and the law on companies. finance’ is understood as finance to support economic growth while reducing NPL, and restructuring prudential treatment. Due to the constant care for the interests of its customers, especially the pressures on the environment, and taking into account social and governance protection of their data, the legislation in the field of personal data protection aspects. The Bank is approaching the development of a comprehensive policy Serbia made important legislative steps towards implementation of FATCA, is also important for the Bank. The Bank strictly adheres to its obligations on sustainable finance, comprising the action plan on financing sustainable additionally there were changes to CB’s rules on regulatory reporting and risk imposed on it by GDPR in both Slovenia and the Group. As the Slovenian growth and the development of a renewed sustainable finance strategy in the management rules (liquidity, operational risk, collateral valuation, outsourcing, law, which would further supplement the regulation, was not adopted either in ESG EU regulatory framework as well. 2020, further obligations for the Bank may arise when the law will be adopted. ICAAP/ILAAP, LCR, FX transactions). Serbia also made changes to the corporate and personal income tax law, law on VAT, and introduced digital Regarding upcoming legislation in the corporate governance area, an property law and amended the AML law related to the treatment of digital assets. As a provider of services and products in the field of financial markets, the amendment to the Companies Act (ZGD-1) is in the process of adoption, Bank complies with the provisions of MIFIR / MIFID 2 regarding financial which will have an impact on the Bank, mainly in the area of relations with markets transactions, enhanced investor protection, transparency, and shareholders and the exercise of shareholders’ rights, as well as information on reporting obligations. corporate actions (following SRD2). In North Macedonia, COVID-19 pandemic-related laws focused mostly on social support for vulnerable social groups, loan restructuring, and write-offs, but there were also important EU-accession activities in legislation, introducing new rules for trade companies (in line with EU laws on cross-border mergers). AML law was amended to transpose the EU legislation in the relevant area, the law on classified information, the law on personal data protection, harmonising with GDPR regime in the EU, and last but also important were CB decisions on risk management rules and on the use of banking laws in emergency situations. 22 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Combining ancient techniques with modern aesthetics increasing in popularity Bogdan Darmanović SHIMMPO, Montenegro SHIMMPO is a team of young people, led by sculptor Bogdan Darmanović, gathered around the idea of applied sculpture.Their starting point is to combine ancient techniques with modern aesthetics, offering a new dimension of ceramic products, for full enjoyment around the table. All plates and cups are made in a studio in Podgorica, from 100 % natural materials. Each piece is hand sculpted, baked and glazed to a most beautiful shine. Thanks to NLB Banka, Podgorica and the #HelpFrame project, their products are becoming increasingly popular in restaurants and hotels. The team is grateful for such generous support. 23 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Business Report 24 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Acquisition of Komercijalna banka a.d. Beograd Table 9: Market shares of Komercijalna Banka group(i) Total assets Loans Deposits Serbia Republic of Srpska Montenegro 10.2% 7.5% 12.0% 5.5% 5.9% 4.9%(ii) 3.4% 3.6% 3.7% (i) Data from CBs and own calculations as at 30 September 2020. (ii) Includes deposits from banks. By acquiring the most attractive target in the region, NLB Group became the third largest bank on the promising Serbian market. On 30 December 2020, NLB Group achieved another key milestone by of approximately 1.9% to over 12% (measured by total assets). Komercijalna balance: EUR 10,033.3 million) and deposits by EUR 3,443.5 million (NLB successfully concluding the acquisition process of an 83.23% shareholding Banka, Beograd adds more than 800,000 active retail customers and 203 Group year-end balance: EUR 16,397.2 million). The acquired Komercijalna in Komercijalna banka a.d. Beograd (Komercijalna Banka, Beograd) on the branches, the largest distribution network in Serbia to NLB Group’s existing Banka, Beograd with a similar business model to the existing NLB Group, has Serbian market. The final purchase price was EUR 394.7 million. As a result operations. The business operations of NLB Group in Serbia will be (besides moderate impact on the Group’s risk profile and cost of risk. The Group’s of the acquisition of Komercijalna Banka, Beograd the Group obtained four the Slovenian market) the largest and the most important one. Through the TCR after acquisition (16.6%) remained above regulatory requirements and new members – Komercijalna Banka group: subsidiary banks of Komercijalna Banka, Beograd in BiH and Montenegro, management TCR target. The acquisition is expected to positively contribute NLB Group further solidified its already strong position in those two markets. to the achievement of NLB Group’s outlook. • three banks in Serbia, BiH and Montenegro: Komercijalna banka a.d. Beograd (Komercijalna Banka, Beograd), Komercijalna Banka a.d., The enlarged Group will benefit from the diversification of its portfolio Banja Luka (Komercijalna Banka, Banja Luka), Komercijalna Banka a.d. and given the improved product offering of Komercijalna Banka, Beograd Podgorica (Komercijalna Banka, Podgorica); and combined with NLB Group staff local expertise, cost, and capability-related business synergies derived from its integration within the Group. It is • one investment fund company in Serbia: Kombank INvest a.d. estimated that synergy effects could be over EUR 20 million p.a. from 2023. Beograd (Kombank INvest, Beograd). In addition to classic banking products, the Group will also be able to extend the number of products and services on the Serbian market by distributing The acquisition further strengthened the Group’s long-standing presence insurance products and asset management as well. Besides that, greater cross- in the SEE region and ensured strategic and systemic position on all the border activity within the Group could be achieved by using the untapped markets where the Group operates. NLB Group now consists of nine potential for enhanced intra-regional trade in the Western Balkans. banking members, locally even more firmly embedded as important financial institutions and market leader in various business segments. Going forward, Since the transaction was closed on 30 December 2020, only negative the strategy for the next two years is to merge three pairs of banks that goodwill in the amount of EUR 137.9 million and 12-month expected credit operate on the same market and by that simplify the Group’s steering and losses on the performing portfolio in the amount of EUR 13.4 million are provide benefit for clients and shareholders. included in the NLB Group income statement for 2020 (partial influence also on income tax and result of non-controlling interests). This contributed to the Serbia has long been a strategically important market for the Group in the strong result of NLB Group in 2020 (EUR 269.7 million of net profit). context of its strategy to be the leading international bank headquartered in and focused on the SEE region. The acquisition has significantly increased Komercijalna Banka group contributed EUR 4,252.2 million to the balance NLB Group’s presence in Serbia whose market is among the fastest growing sheet of NLB Group which reached EUR 19,565.9 million as at 2020 YE. in the region and will offer opportunities for long-term growth, profitability, This is close to the EUR 20 billion, the mark NLB Group once already and regional contribution due to stable core deposits and strong capital achieved, this time, however, with substantially better dispersed risk and position. Following the acquisition, NLB became the third largest banking stronger capital and liquidity positions. The acquisition increased gross loans group in Serbia, with the market share increasing from pre-acquisition share to customers of NLB Group by EUR 1,877.3 million (NLB Group year-end 25 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Strategy Despite the challenging and uncertain economic environment caused by COVID-19 pandemic, the Group has not changed its course and continues to pursue its strategy, putting focus on protecting and strengthening its market position in its home region, and actively participating in the growth and consolidation of the market. Digitalization, client centricity and cost efficiency remain some of key strategic orientations in order to deliver the Group’s mission and vision. Strategic focus For us, this region is not just a point on the map, it is our home. Become regional champion Defend our market position The Group aims to further strengthen its role as a systemically important The Group is working to protect and strengthen its market position as a financial institution in SEE region and strives to become a market leader in all systemic player in its home region. It also works to actively participate in of its core markets. With the completion of the acquisition of Komercijalna the expected growth and consolidation of the market, while focusing on Banka, Beograd in 2020, the Group made an important step in this direction. increasing profitability through a more customer-centric approach and The Group believes there is a significant potential from the deal for the whole digitalization. region given the complementing product offerings of Komercijalna Banka, Beograd combined with cost- and capability-related business synergies derived from its integration within the Group. It is estimated that synergy effects could be over EUR 20 million p.a. from 2023. As a leading Putting clients first Exploit opportunities and synergies player, the Bank would like to best serve its clients’ financial needs. In retail banking, the Bank continues to strive to get closer to its clients by Significant strategic business efforts are undertaken to achieve business offering anchor products and personalised, most accessible digital services (e.g. synergies across the Group, both in costs and operational efficiency. The omnichannel, marketplace) that suit their lifestyles. In corporate banking, the Group believes these can help offset significant negative economic effects of Bank is looking to provide more complex, cross-border products and services, the COVID-19 pandemic on the Group’s future business results. The Bank and find new entry points in order to suit all its clients’ financial needs. The is pursuing growth through entering/expanding its presence into selected whole Group strives to have a prominent role in the region’s development. adjacencies (e.g. leasing, bancassurance) and diversifying its services on a horizontal level. By publishing takeover bid for the remaining regular and One of the key efforts is improved availability for all clients. The Group has priority shares of Komercijalna Banka, Beograd, we reaffirmed our belief made itself available anywhere and anytime by building a strong customer in the bank and confirmed strong investment case aimed at securing all centre and upgrading its portfolio of digital sales channels. These now offer synergy potential. The Bank is simultaneously monitoring additional M&A a growing set of banking products and services, both for retail and corporate opportunities (within consolidation processes in banking sectors in the SEE), clients. This has also become a very important issue due to the COVID-19 which are not part of the immediate strategic plan. outbreak. As a systemic bank, it is our responsibility to keep and protect our current strong market position. One of the more important strategic topics for the Group is the full exploitation of potential synergies within the Group. 26 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Continuing transformation delivering our vision and mission. The deal was completely in line with Brexit’s impact on the Group’s performance Group’s strategic focus and has enabled the Group to reinforce and strengthen To facilitate the aforementioned strategic focus and support continuous its strategic position as a market leader in the SEE region. Also, the Group will Due to the limited focus of the Group’s operations beyond the SEE region, transformation in an everchanging environment, the Group is following an be able to extend the number of products and services in the Serbian market, the estimation is that Brexit will not have any significant impact on the elaborated, comprehensive, and detailed program plan to deliver its mission and allow greater cross-border activity within the Group. Group’s business performance. and financial targets. The Group has identified a series of projects and initiatives and has also dedicated considerable investment funds for their Further information is available in the chapter Other strategic priorities implementation. With the projects, all major running change efforts are Acquisition of Komercijalna banka a.d. Beograd. channelled into one overall strategic transformation program. The backbone of the strategy is strengthening customer-centricity Digitalization by establishing customer-based market management, improving the Due to the positive effects from working remotely during the pandemic, the Bank will continue the work-from-home initiative in the future, thus offering more flexibility to its workforce and achieving cost benefits at the same time. understanding of the clients, reimagining digital client journeys, and Highly correlated with the COVID-19 pandemic, the Group continues to Following the lifting of EC State Aid constraints, the Group is now fully accelerating innovation to provide lifestyle and value chain services to lock implement comprehensive and substantial strategic efforts toward digital engaged in re-establishing some of the key financial services that were subject relationships. transformation. The new circumstances related to the pandemic and the to restrictions (leasing, factoring, etc.). The transformation program also focuses some efforts into increased channels by our customers. The Group was prepared for such a market trend, The Group is also putting more efforts into cross-border loan activity. operational efficiency, cost management and the improved utilisation of the since it was already the leading provider and innovator in its core markets The Group’s knowledge of the region and its presence are opening new economic uncertainty continue to affect the growth and acceptance of digital Group’s capital. Simultaneously, overall operational capabilities are being before the outbreak. possibilities. enhanced by improving human capital, optimising IT, digitalizing internal processes, and leveraging information capital. To drive transformation, a new At the same time, the Group is striving to simplify and automate processes in change management platform was set up. COVID-19 response order to minimise costs and uses digitalization as the main tool. The focus on digitalization is to enable quicker and better customer service, a higher level of internal processes efficiency, and consequently additional cost savings. COVID-19 pandemic resurfaced in the second part of 2020, on an even The Group will continue to invest substantially in IT infrastructure and its larger scale than during the first wave in H1. This reignited economic capabilities. The focus will be on improving the speed IT can deliver results uncertainty across Europe. However, the Group entered the crisis well by adopting agile methodology principles, the provision and implementation capitalised and prepared and has managed to exhibit profit resilience of the best online experience for customers in the SEE, and how to enhance in 2020 results. capabilities for processing data, modelling, and the relevance of services to The Bank responded successfully to the COVID-19 pandemic, maintaining a concern for the health of our employees and customers as a top priority. Sustainable development vision clients. Customers have been offered an even wider range of 24/7 accessible digital The Group has an important social responsibility mission, which is to solutions, while also providing uninterrupted branch operations and cash contribute to a higher quality of life for all inhabitants in the environment services. The Bank was continuously supporting its customers and their vital where it operates. The Bank recognises its responsibility toward clients, its businesses and households by offering them moratoria and liquidity lines employees, the environment, and society as a whole. Further information is available in the NLB Group Sustainability Report 2020. where needed. Acquisition of Komercijalna Banka, Beograd Sustainability became a Group-wide initiative. In 2020, we developed the basis for the intensive integration of ESG factors into the Group’s business model. Moreover, NLB became the first bank from Slovenia to commit to the After receiving all relevant regulatory approvals, at the end of December UN Principles for Responsible Banking. By meeting stakeholder needs and 2020, the Bank successfully completed the formal process of acquiring expectations and driving business value through sustainability, the Bank will Komercijalna Banka, Beograd. This represents an important step toward reinforce its efforts towards delivering the 2025 strategy. 27 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Risk Factors and Outlook Risk Factors at the end of March 2020, a drop in market yields resulted in positive Outlook valuation effects. Respectively, the related investment strategy of the Group adapts to the expected market trends in accordance with the set The indicated outlook constitutes forward-looking statements which are risk appetite. The liquidity position of the Group is expected to remain subject to a number of risk factors and are not guarantees of future financial very solid; the pandemic did not result in any material liquidity outflows. performance. In this regard, the Group closely follows the macroeconomic indicators The Group is pursuing a range of strategic activities to enhance its business relevant to its operations: • GDP trends and forecasts Risk factors affecting the business outlook are (among others): the economies’ • Economic sentiment sensitivity to a potential slowdown in the Euro area or globally, widening • Unemployment rate credit spreads, potential liquidity outflows, worsened interest rate outlook, • Consumer confidence regulatory and tax measures impacting the banks, and other geopolitical • Construction sentiment uncertainties. • Deposit stability and growth of loans in the banking sector • Credit spreads and related future forecasts The economic momentum in the region where the Group operates has • Interest rate development and related future forecasts worsened due to the COVID-19 pandemic that started at the end of Q1 • FX rates performance. The economic environment has visibly changed, especially in the eurozone. Interest rate outlook is uncertain given the possible changes of the ECB deposit rates. The main ambition is that despite deteriorating market conditions, the Bank is committed to delivering sound financial performance. The measures and potentials outlined in the above strategy are reflected in the Group’s outlook for the 2021 to 2023 period: 2021 2023 2020. The governments in the region implemented different measures to • Other relevant market indicators Regular income > EUR 600 million > EUR 700 million mitigate its adverse negative impacts. In 2021, the Group region is expected to return to growth on the back of revival in private and investment The Group developed a set of new macroeconomic scenarios, based on the consumption assuming that consumer and investment confidence are restored ECB baseline, of mild and severe scenarios for the initial period from 2020 to Costs ~ EUR 430 million(i) < EUR 400 million when the pandemic is successfully curbed. 2022. For the two-year period from 2023 to 2024, the normal pre-COVID-19 methodology and IMF projections were used. These scenarios, which are Based on the measures taken by the governments in Slovenia and other based on the expected U-crisis (severe deterioration of macroeconomic ROE a.t. High single digit > 10% (RORAC(ii) > 12%) countries, the Group is granting an option of moratoriums on the payment indicators in 2020 and moderate positive growth in the following years), are of obligations to all eligible borrowers due to COVID-19, which is not treated included in the calculation of expected credit losses in accordance with IFRS 9. as a trigger for a significant increase in the credit risk. In accordance with EBA guidelines, all the clients requiring the moratorium are closely monitored The Group established a comprehensive internal stress-testing framework as their financial situation and identification of credit deterioration will and early warning systems in various risk areas with built-in risk factors lead to a downgrade and will impact the IFRS 9 staging. Those clients will relevant to the Group’s business model. The stress-testing framework Loan growth Mid-single digit High-single digit growth rate CAGR (2021-2023) not automatically fall into the forbearance category. The Group regularly is integrated into Risk Appetite, ICAAP, ILAAP, and Recovery Plan Cost of risk 70–90 bps 40–60 bps assesses the credit quality of the exposures benefiting from these measures and to determine how severe and unexpected changes in the business and identifies any situation in which payment is unlikely. During the year 2020, the macro environment might affect the Group’s capital adequacy or liquidity Group additionally reviewed IFRS 9 provisioning by testing a set of relevant position. Both the stress-testing framework and recovery plan indicators Dividend payout EUR 92.2 million > EUR 300 million(iii) macroeconomic scenarios to adequately reflect the current circumstances and support proactive management of the Group’s overall risk profile in these the related impacts in the future. circumstances, including capital and liquidity positions from a forward- looking perspective. The economic slowdown had some negative impacts on the existing loan portfolio quality, namely as an increase of Stage 2 and Stage 3 exposures,and Risk Management actions that might be used by the Group are determined the related cost of risk. Furthermore, it also impacted new loan generation. by various internal policies and applied when necessary. Moreover, the In the initial stage of outbreak in Q1 2020, credit spread expansion arising selection and application of mitigation measures follows a three-layer from the Group’s bond portfolio kept for liquidity purposes negatively approach, considering the feasibility analysis of the measure, its impact on influenced on the valuation. Following the intervention of the ECB the Group’s business model, and the strength of available measure. (i) Initial increase in cost base in 2021; projected costs include restructuring charges. (ii) RORAC calculated as Result after tax excl. Tier 2 bonds expenses divided by average RWA at 15.25% capital requirement. (iii) Cumulative in the period 2021-2023. 28 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Outlook 2021 The commitment to cost containment remains strong and the Group will Due to the ECB recommendations on dividend distributions during the continue to pursue a strong cost agenda addressing both labour and non-labour COVID-19 pandemic for European banks, and also the BoS restriction on The global economy is expected to rebound in 2021. However, economies are cost elements. Nevertheless, costs are expected to moderately increase in 2021, dividend distributions applicable for Slovenian banks with the aim to lower likely to continue to be faced with the alternating relaxations and restrictions given pressure on labour cost inflation throughout the region and continued the impact and consequences of the COVID-19 pandemic, the Bank did not until the broad vaccine rollout enables a sustainable easing of containment investment activities into information technology upgrades, amid the growing pay out any dividends in 2020. measures. According to the Bank’s estimation, the Eurozone economy is seen relevance of digital banking and, last but not least, integration cost associated expanding 4.0%, while GDP in Slovenia could grow by around 4.5% and in with the acquisition of Komercijalna Banka, Beograd. Pursuant to the ECB recommendation of 15 December 2020 the dividend the SEE where the Group operates by around 4.8% in 2021. The rebound distribution in 2021 should remain prudent and below 15% of the cumulated should be backed by fiscal policies at national and EU levels, accommodative After a few years of a negative cost of risk, the NPL stopped its multi-year profit for the year 2019 and 2020 and not higher than a 20 b.p. CET1 ratio monetary policy, and the gradual reopening of economies. The main driver declining trend in the Group. Similar to last year, the cost of risk in 2021 for the year 2020 on consolidated basis, whichever is lower, and for which the of the growth should be the revival in consumer and investment spending. should remain within the set outlook at least in the regular course of business, distribution is subject to prior ECB approval. The prudent level of distribution The return to growth of the economies of the Group’s region should be since one-off effects are difficult to predict. The main circumstances influencing for NLB on consolidated level amounts to approximately EUR 25 million, and underpinned by revival in consumer and capital spending as well as the cost of risk shall be the length and severity of disruptions of COVID-19 on JST does not object to such a distribution plan. According to the BoS decision gradual easing of COVID-19 restrictions across the globe that boosts external corporate operations and consumer spending, and the impact of off-setting of April 2020 on macroprudential restriction on profit distribution, banks in demand and releases travel restrictions. Nevertheless, lingering uncertainty measures by governments. regarding the course of the pandemic and the vaccine rollout cloud the Slovenia are restricted to dividend payouts until April 2021. Based on the new BoS decision on macroprudential restriction on profit distribution of February outlook, in general. The pace of the recovery in the EU trading partners is yet Further uncertainties and the related economic slowdown might have an 2021, the Bank is allowed to distribute dividends only in the case of a positive another important factor expected to weigh on the recovery of the Group’s additional negative impact on the existing loan portfolio quality, namely as cumulative profit achieved in Q1 2021, whereas the amount of distribution region. a potential increase of Stage 2 and Stage 3 exposures. However, due to the may not exceed 15% of the bank’s cumulative profit for years 2019 and 2020 quite stable quality of the portfolio in the year 2020, and other precautionary on an individual basis or 0.2% of the Bank’ CET1 ratio on an individual During the COVID-19 pandemic, the Group has taken the necessary measures to minimise potential future losses, including paying special attention basis as at the end of 2020, whereas distribution is also subject to prior BoS measures to protect its customers and employees by ensuring the relevant to continuous provision of services to clients and their monitoring, this impact notification. In consequence this would mean the split of the envisaged safety conditions and making sure services offered by the Group are provided should not be excessive. without disruptions. As the COVID-19 situation continues, it is challenging to approved dividend portion as per ECB recommendation into two tranches, the second one being paid upon expiry of the BoS decision and taking into predict the full extent and duration of its business and economic implications. From a liquidity perspective, the Group did not register any material liquidity account applicable regulation. In addition to the currently allowed distribution To adjust to such circumstances, the Group is aiming to further support its outflows, on the contrary, deposits at the Group level are still increasing (in the plan, the Bank envisages, subject to regulatory requirements, additional clients, also by constant development of its digital channels and adjusted scope Bank and in subsidiary banks). The liquidity position of the Group is expected incremental dividends in 2021 to reach a cumulative payout ratio of 70% of of services offered to our clients. to remain solid even if a highly unfavourable liquidity scenario materialises, as the 2020 Group result (without considering the impact of negative goodwill) the Group holds sufficient liquidity reserves in the form of placements at the totaling EUR 92.2 million. The Bank in the period 2021-2023 envisages the Following stagnation in 2020, and in line with the economic rebound, ECB, prime debt securities, and money market placements. Significant deposit cumulative amount of dividends payout in excess of EUR 300 million. moderate loan growth in Retail Banking in Slovenia is expected in 2021, with inflows are putting an additional strain on profitability. an emphasis on mortgage lending and a slow recovery in consumer lending. The distributable profit of the Bank as at 31 December 2020 amounts to Corporate and Investment Banking in Slovenia is also expected to grow The capital position represents a strong base to cover all regulatory EUR 341,992,219.43, which consists of net profit for the year 2020 in the with the predominance of cross-border lending. Growth in Strategic Foreign capital requirements, including capital buffers and other currently known amount of EUR 113,952,339.70 and retained earnings from previous years in Markets will remain robust and will greatly improve with the acquisition requirements, as well as the Pillar 2 Guidance, also in the aggravated the amount of EUR 228,039,879.73. of Komercijalna Banka, Beograd. The customer deposit base will remain circumstances during the COVID-19 pandemic. Also, in 2021 the Group high. Revenues are expected to improve, with fee business growth returning will continue with the activities for further strengthening the capital position, Once the ECB and BoS restrictions cease to apply, the Bank would resume to pre-COVID-19 levels. However, net interest income will continue to be predominantly by measures to reduce RWAs. with regular dividend payouts in line with its capacity and regulatory under pressure due to shrinking margins in all markets and high balance of low-yield liquidity sources. The Group continues to strive for increasing Dividend policy margins over time by stimulating loan growth (especially retail) and pursuing requirements. new opportunities. In addition, the Bank as at 1 April, 2021 started charging The Bank’s general intention with regards to the dividend policy is to distribute retail deposits with balances exceeding EUR 250 thousand; consequently, it dividends in excess of the Group’s target TCR, which currently amounts is expected that certain portion of retail deposits will be transferred into asset to 15.75%. The Bank’s dividend policy envisages a yearly distribution of management and insurance products. dividends in the approximate amount of 70% of the Group’s result, while fulfilling all regulatory requirements, including the Pillar 2 Guidance. 29 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Sustainability In 2020, the Group embarked on a path of more intensive integration of sustainability into banking operations. If until this year it was possible to detect the activities of banks in the Slovenian financial sector in the direction of more ecologically and socially acceptable operations, the COVID-19 pandemic strengthened banking agendas related to environmental and social risk management, and thus more comprehensive implementation of the ESG factors. The Group’s social role is stipulated in its Social and Environmental Policy,3 which has paved the way for more than a decade’s work on sustainability. However, the Bank’s ambition is to increasingly focus on sustainability integration and translate it into real value-added. The transition to NLB Group records sustainable financial performance and actively contributes to a more balanced and inclusive economic and social system. sustainable banking requires the adaptation of most processes in the Group, as well as changes in the banking culture. In Sept. NLB Group became a signatory to the UN PRB. Contribution to the Society Sustainable Operations Sustainable Finance Key impact areas: Environmental Climate Mitigation & Adaptation Biodiversity Resource Efficiency & Circular Economy Social Gender Equality Human Rights Financial Inclusion Decent Employment Internal Change Strategy Alignment Impact and Targets Clients and Customers Stakeholders Governance and Culture Transparency and Accountability Implementation of sustainability into the Group business model Throughout the year, the Group systematically followed the emerging EU One of the major CSR projects in the Bank was to provide help to young families regulations in the field of sustainability, and at the same time regularly on their road to their first home with professional advice and material incentives With the adoption of the Group’s Sustainability programme at the end of monitored recommendations and guidelines from leading financial institutions given to hundreds of borrowers. One hundred young families were randomly 2020, the Bank has moved from the raising awareness phase to the phase of and authorities, such as the ECB and the EBA. Plans, how to integrate the new chosen and helped to take out a housing loan, and repaid them three monthly actively implementing sustainability elements into the business model. The regulation into the Group’s operations, are prepared to meet the expectations instalments in a total amount of a maximum of EUR 1,000 for each family. At the goal of this organisation-wide initiative is to ensure sustainable financial of key stakeholders. end of the year, the Bank also distributed EUR 140,000 to young borrowers below performance of the Bank by considering social and environmental risks and the age of 40. opportunities in its operations, and to actively contribute to a more balanced Corporate social responsibility and inclusive economic and social system. Despite a drastic decline in public life, the Group maintained most of the agreed The Group’s CSR has been continuously upgraded with projects that follow sponsorships and donor partnerships in the field of culture and sports. By The Bank in recent years signed Framework Agreements with EBRD and the UN Sustainable Development Goals (UN SDG). The Group’s first such supporting virtual festivals and events, the Group helped affected artists who were in 2020 Contract of Guarantees with MIGA. Based on this, the Bank and/ regional project was launched in spring 2020. #HelpFrame project intensively left without income almost overnight. In the field of sports, the Bank remained or Group subsidiaries are obliged to develop ESMS and comply with certain addresses the Bank’s environmental and social role in all markets of the among the main supporters of all sports federations and E&S requirements. In 2020, considerable progress was made in the area of Group, as the goal is to establish a regional sustainability platform. The clubs, with which we have been cooperating for many years. establishing a basic mechanism for E&S screening. Also, the ESMS Officers project provides advertising space to selected local entrepreneurs, farmers, as were appointed in the Group banking subsidiaries. Further actions to well as micro and small companies, thus helping their business to recover from strengthen ESMS are in progress. the COVID-19 pandemic. On 4 September, the Bank became a signatory to the UN Principles for Most of the Bank’s CSR financial budget was used to mitigate the Responsible Banking (and UNEP FI member), which is a unique framework for consequences of the COVID-19 pandemic. Since March 2020, medical teams ensuring that signatory banks’ strategy and practice align with the vision society have been working around the clock to save the lives of patients infected with has set out for its future in the Sustainable Development Goals and the Paris the virus, which has spread rapidly to all regions where the Group operates Climate Agreement. More than 200 banks, which represent around a third of and all of the Group banks participated with financing or procurement of More information on the corporate social responsibility and the implementation of sustainability into the Group business model (together with information on the GRI standards) is available in the NLB Group Sustainability Report 2020. the global banking industry have joined, leading the way towards a future in medical supplies. which the banking community makes a positive contribution to people and the planet that society expects. 3. Published on www.nlb.si. 30 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Helping hand in crisis means a lot Emire Duraku B.K.M Agro Krusha, Kosovo The company Agro Krusha comes from the agricultural village Krusha e Madhe in the municipality of Rahovec, Kosovo. It is led by Emire Duraku, an entrepreneur who together with her family cultivated about 15 hectares planted with vegetables for the production of ajvar and pickles. When COVID-19 hit the country, the company suffered a major fallback due to decrease in demand even though the company had reserves from good performance in the past. Knowing the importance of advertising Emire decided to join #HelpFrame project presented to her by her banking advisor and has received many offers for cooperation since. 31 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Overview of Financial Performance ROE a.t. 7.4% 14.4% 11.8% 11.7% 8.1%(i) The Group achieved a profit in the amount of EUR 269.7 million, 39% more than the year before 110.0 225.1 203.6 193.6 128.4(i) 141.3 (2019: EUR 193.6 million). The strong result was affected by the acquisition of Komercijalna Banka, Beograd,4 with positive impact of negative goodwill in the amount of EUR 137.9 million. Without this acquisition, the profit of the Group would amount to EUR 141.3 million, a 27% lower YoY, 2016 2017 2018 2019 2020 (i) Acquisition of Komercijalna Banka, Beograd’s contribution to the result after tax; the acquisition effects are excluded from ROE calculation. affected mostly by additional impairments and provisions related to the COVID-19 outbreak. Figure 6: Profit after tax of NLB Group (in EUR million) / ROE after tax (in %) The Group’s result is based on the following key drivers: • Additional net impairments and provisions were established in the amount of EUR 71.4 million, out of which EUR 18.4 million due to changed • The acquisition of Komercijalna Banka, Beograd with a positive impact macroeconomic parameters, that incorporate estimated impacts of the of negative goodwill in the amount of EUR 137.9 million and a negative COVID-19 outbreak and EUR 13.4 million for expected credit losses on impact of the expected credit losses on the performing portfolio for Komercijalna Banka group5 in the amount of EUR 13.4 million; the performing portfolio for Komercijalna Banka group; • Continued loan growth, especially to individuals, despite the COVID-19 • Lower net interest income YoY (EUR 18.9 million or 6%), mostly related outbreak and the negative impact of macroprudential measures on the to lower yields due to reinvestment of debt securities, higher volume of consumer loans introduced in November 2019, causing an adverse effect on cash and balances with the CB, the raised subordinated Tier 2 bonds, and the new production of loans to individuals. An increase was recorded also continued pressure on interest margins in the Bank and banking members in the corporate loan book YoY exclusively as a result of COVID-19 impact in SEE continues; on ensuring liquidity to clients; 269.7 million EUR net profit including EUR 137.9 million negative goodwill from acquisition of Komercijalna Banka, Beograd, while net profit would be 141.3 million EUR without the effect of acquisition of Komercijalna Banka, Beograd. • Net fee and commission income on the same level YoY, influenced by • A strong TCR of 16.6% while ROE a.t. dropped to 8.1%6 (2019: 11.7%); the COVID-19 outbreak and its negative impact on card operations and payment transactions, but was compensated by increased package fees, • As a consequence of the COVID-19 outbreak the NPL credit portfolio higher assets management and bancassurance fees, and achieved discounts stock stopped its multi-year declining trend. Besides, changed treatment on card operations; of excluded interest and acquisition of Komercijalna Banka, Beograd contributed additionally to its increase, while different workout measures • Sale of NLB Vita with a positive effect of EUR 11.0 million and sale of positively influenced the stock of NPL. Nevertheless, the gross NPL ratio debt securities in the Bank with a realised non-recurring profit of EUR (EBA def.) decreased from 4.6% to 4.5% YoY, while the NPE ratio (EBA 17.1 million; def.) decreased by 0.4 p.p. YoY to 2.3%; • Lower costs YoY due to lower employee costs and positive effects of cost • Liquid assets portfolio amounted to EUR 9,751 million management projects, which remain well contained through all cost (50% of total assets). categories and geographies; 4. More information is available in the chapter ‘Acquisition of Komercijalna banka a.d. Beograd’. 5. Komercijalna Banka, Beograd; Komercijalna Banka, Banja Luka; Komercijalna Banka, Podgorica; Kombank INvest, Beograd. 6. Komercijalna Banka group is excluded to ensure comparability with previous years. 32 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Income statement Table 10: Income statement of NLB Group and NLB(i) 2020 2019 Change YoY Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 Change QoQ NLB Group in EUR million Net interest income 299.6 318.5 -18.9 Net fee and commission income 170.3 170.3 Dividend income 0.1 0.2 Net income from financial transactions 32.0 33.8 Net other income 2.6 -5.7 Net non-interest income 204.9 198.7 -0.1 -0.1 -1.9 8.3 6.2 -6% 0% -47% -6% - 3% 75.1 45.1 0.0 2.0 -1.0 46.1 74.4 43.7 0.0 5.7 -0.5 48.9 72.7 39.0 0.1 20.5 3.9 63.5 77.4 42.4 0.0 3.8 0.2 79.7 43.5 0.0 5.8 0.8 46.4 50.1 Total net operating income 504.5 517.2 -12.7 -2% 121.2 123.3 136.2 123.8 129.8 Employee costs -165.0 -171.2 Other general and administrative expenses -97.3 -102.8 Depreciation and amortisation -31.7 -31.0 Total costs -293.9 -305.0 6.2 5.6 -0.8 11.0 4% 5% -2% 4% -42.0 -40.2 -39.8 -42.9 -48.0 -27.6 -23.5 -22.5 -23.7 -32.3 -4.2 -18% -8.0 -7.8 -7.9 -8.1 -7.7 -77.7 -71.4 -70.2 -74.6 -88.0 -0.2 -6.2 -2% -9% Result before impairments and provisions Impairments and provisions for credit risk 210.5 212.2 -1.7 -1% 43.5 51.9 66.0 49.2 41.9 -8.4 -16% -62.3 13.3 -75.6 -13.2 -16.3 -4.6 -28.2 -2.3 3.0 19% o/w-KB -13.4 -13.4 -13.4 Other impairments and provisions -9.1 -14.3 5.2 37% -7.9 -0.7 Impairments and provisions -71.4 -1.0 -70.4 - -21.1 -17.0 -0.3 -4.9 -0.2 -8.4 -28.3 -10.7 -13.4 -7.2 -4.1 - - -24% - - Gains less losses from capital investments in subsidiaries, associates, and joint ventures 0.9 4.2 -3.3 -79% 0.0 0.5 0.2 0.2 0.0 -0.5 Negative goodwill 137.9 137.9 - 137.9 -137.9 Result before tax 277.9 215.4 62.5 29% 160.2 35.4 61.3 21.0 31.2 124.9 Income tax Result of non-controlling interests -5.2 3.0 -13.6 8.2 8.4 -5.2 62% -63% 3.8 -1.1 Result after tax 269.7 193.6 76.1 39% 165.1 Result after tax w/o KB 141.3 193.6 -52.3 -27% 36.6 -3.4 1.0 31.0 31.0 -3.9 2.0 55.4 55.4 -1.6 1.2 18.3 18.3 2.2 2.0 31.3 31.3 (i) Data for 2019 are adjusted to the changed schemes as prescribed by the BoS (relocation of some items from net other income to other general and administrative expenses). More details are available in note 2.3. of the Audited Financial Statements of NLB Group and NLB d.d. 0.6 1.5 0.0 1% 3% -50% -3.7 -65% -0.5 -2.8 -2.2 -1.9 -99% -6% -2% -5% - - - - - - 7.2 -2.1 134.1 5.6 18% 36.3 29.7 24.1 159.3 19.0 4.2 4.6 Restructuring and Workout 89.0 81.4 Key/SME/Cross Border Corporates & Investment Banking 178.8 NGW 137.9 42.0 41.2 42.4 34.0 49.8 30.8 23.5 16.2 Retail Banking in Slovenia Corporate and Investment Banking in Slovenia Strategic Foreign Markets Financial Markets in Slovenia 1.2 4.2 7.7 0.2 -4.6 Non-Core Members -11.5 Other Net interest income Net non-interest income Result before tax Figure 7: Segment results of NLB Group (in EUR million) Strong result achieved in all Core segments of the Group The Core segments achieved a result before tax of EUR 282.5 million. Strategic Foreign Markets contributed the largest share to result before tax in the amount of EUR 178.8 million due to acquisition of Komercijalna Banka, Beograd and its positive effect of negative goodwill in the amount of EUR 137.9 million. Corporate and Investment Banking in Slovenia recorded a profit before tax in the amount of EUR 42.4 million, Retail Banking in Slovenia EUR 42.0 million, and Financial Markets in Slovenia EUR 30.8 million. The Other segment recorded a loss before tax in the amount of EUR 11.5 million, mostly due to establishment of provisions for legal risk (EUR 3.8 million) and HR provisions (EUR 3.5 million). Strategic Foreign Markets achieved the highest net interest income in the amount of EUR 159.3 million, followed by Retail Banking in Slovenia and Corporate and Investment Banking in Slovenia, with EUR 81.4 million and EUR 34.0 million, respectively. Financial Markets in Slovenia contributed EUR 23.5 million to the net interest income of the Group. The net non-interest income was the highest in the segment Retail Banking in Slovenia, EUR 89.0 million, followed by Strategic Foreign Markets and Corporate and Investment Banking in Slovenia, EUR 49.8 million and EUR 41.2 million, respectively. Non-core Members: Negative result due to continuing divestments Total assets of Non-core Members decreased by EUR 38.3 million and the segment realised a loss before tax of EUR 4.6 million, which is in line with the restructuring plan. 33 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20202020 2019 Change YoY Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 Change QoQ NLB in EUR million Result reflects solid revenues despite COVID-19 negative impact on business operations Net interest income 138.9 158.1 -19.2 -12% Net fee and commission income 104.5 104.0 0.5 0% Dividend income 6.3 71.2 -65.0 -91% Net income from financial transactions 28.1 24.0 4.2 17% Net other income 33.9 -2.6 36.6 - Net non-interest income 172.8 196.5 -23.7 -12% Total net operating income 311.7 354.7 -43.0 -12% Employee costs -102.6 -108.6 Other general and administrative expenses -60.0 -64.5 Depreciation and amortisation -17.8 -18.0 6.0 4.5 0.2 Total costs -180.5 -191.1 10.7 5% 7% 1% 6% Result before impairments and provisions Impairments and provisions for credit risk Other impairments and provisions Impairments and provisions -9.0 -8.3 -17.4 17.1 -26.1 - -2.8 14.2 -5.5 -193% -31.6 - Result before tax 113.9 177.7 -63.9 -36% Income tax 0.1 -1.6 1.7 - Result after tax 114.0 176.1 -62.2 -35% 34.5 27.3 5.5 3.0 1.5 37.4 72.0 33.6 26.9 0.7 3.6 0.8 31.9 65.5 33.6 24.2 0.0 18.3 30.0 72.5 106.1 37.2 26.1 0.0 3.2 1.6 31.0 68.1 39.1 25.9 0.0 2.6 1.4 29.9 69.1 1.0 0.5 4.8 3% 2% - -0.5 -14% 0.8 5.5 6.5 104% 17% 10% -1% -25.4 -25.1 -24.9 -27.1 -31.2 -0.3 -17.0 -14.4 -14.1 -14.5 -21.8 -2.7 -18% -4.3 -4.4 -4.5 -4.7 -4.6 -46.8 -43.8 -43.5 -46.3 -57.6 0.0 -2.9 0% -7% 8.5 -7.9 0.6 25.8 2.6 28.4 -2.8 0.1 -2.7 18.9 -1.2 17.7 -0.6 -14.2 2.2 11.3 -0.5 -1.1 61.5 -1.2 60.3 0.0 -14.2 7.6 -0.1 7.5 -6.2 -4.0 7.4 5.7 -8.0 3.3 6.8 3.9 - - - 36% - 13.2 10.7 61% 131.2 163.5 -32.3 -20% 25.2 21.6 62.6 21.8 11.5 3.5 16% (i) Data for 2019 are adjusted to the changed schemes as prescribed by the BoS (relocation of some items from net other income to other general and administrative expenses). More details are available in note 2.3. of the Audited Financial Statements of NLB Group and NLB d.d. -27% YoY w/o KB 269.7 -9.4 193.6 -18.9 -0.1 6.3 11.0 -56.9 -3.3 6.6 141.3 3.0 137.9 2019 Net interest income Net fee & commission income Other net non-interest income Total costs Impairments and provisions Gains and losses(i) Income tax Result of non- controlling interests 2020 w/o KB Negative goodwill 2020 KB expected credit losses(ii) (i) Gains less losses from capital investments in subsidiaries, associates, and joint ventures. (ii) Effect partially also shown on Income tax and Non-controlling interests. Figure 8: Profit after tax of NLB Group (in EUR million) – evolution YoY The Group generated EUR 269.7 million of profit after tax, EUR 76.1 million or 39% more YoY and was based on the following key drivers and YoY evolution: • Lower net interest income, EUR 18.9 million YoY (6%), mostly related to lower yields due to reinvestment of debt securities (realised non- recurring profit of EUR 17.1 million in the Bank), a higher volume of cash and balances with the CB, and the raised subordinated Tier 2 bonds. The pressure on interest margins in the Bank and banking members in SEE continues. The decline was partially compensated with loan volume growth and growth in net interest income in some members (NLB Banka, Prishtina, NLB Banka, Podgorica and NLB Banka, Beograd); • Net fee and commission income on the same level YoY, influenced by the COVID-19 outbreak and its negative impact on card operations and payment transactions however, was compensated by increased package fees, higher assets management and bancassurance fees, and achieved discounts on card operations; • Non-recurring net income from financial transactions was affected by the One-off effects from the sale of debt securities in the Bank (EUR 17.1 million); in 2019 by partial repayment of large exposure measured at fair value through profit and loss sale of NLB Vita in the amount of EUR 5.1 million and revaluation of non-core equity stake and in the amount of EUR 6.3 million. Non-recurring net other income was affected by the sale of NLB Vita with a positive effect of EUR 11.0 million debt securities in the Bank. 71.4 million EUR established impairments and provisions mostly due to COVID-19 outbreak. in May 2020; • Total costs were EUR 11.0 million lower (4%) YoY, mostly due to lower employee costs and positive effects from cash management and paperless projects, and cost of services (consulting). Costs remain well contained through all cost categories and geographies; • Negative goodwill in the amount of EUR 137.9 million due to acquisition of Komercijalna Banka, Beograd at the end of the year; • Additional net impairments and provisions were established in the amount of EUR 71.4 million, out of which EUR 18.4 million due to changed macroeconomic parameters, that incorporate estimated impacts of COVID-19 outbreak and EUR 13.4 million for expected credit losses on the performing portfolio for Komercijalna Banka group. 34 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 -35% -42% -41% -35% -32% -82% -37% Net interest income 176.1 114.0 -6% YoY 318.5 299.6 32.9 19.2 17.1 10.1 9.0 5.9 19.5 13.3 7.6 1.4 4.1 2.6 364.8 355.2 NLB NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd 2019 2020 Figure 9: Profit after tax of NLB Group banks (on a stand-alone basis, in EUR million) Despite the COVID-19 outbreak, all banks in the Group reported a profit. Lower profit YoY was recorded in all the banks, mainly due to establishment of credit impairments and provisions related to COVID-19 outbreak. The result of the Bank decreased by 35% YoY to EUR 114.0 million from EUR 176.1 million achieved in 2019. Banking subsidiaries refrained from paying out dividends due to COVID-19 restrictions, and additional impairments and provisions related to COVID-19 outbreak were formed which materially lowered the final result. Sale of NLB Vita and debt securities, as well as an efficiently managed cost base partially neutralised the COVID-19 effects. +4% QoQ 66.0 45.7 29.8 -9.5 51.9 50.9 3.4 -2.4 43.5 47.1 -1.2 -2.4 41.9 40.2 4.0 -2.4 49.2 49.8 1.7 -2.4 -6% QoQ +1% QoQ 79.7 92.1 -12.4 74.4 88.6 -14.2 75.1 89.3 -14.2 Q4 2019 Q3 2020 Q4 2020 3.59% 2.48% 1.85% 3.43% 2.29% 1.65% 3.37% 2.19% 1.54% 3.35% 3.33% 2.14% 1.47% 2.11% 1.44% 1-12 2019 1-3 2020 1-6 2020 1-9 2020 1-12 2020 NLB NLB Group Strategic foreign banks (i) Calculated on the basis of average interest bearing assets; without the effect of acquisition of Komercijalna Banka, Beograd for NLB Group and Strategic foreign banks in the period 1-12 2020. -46.3 2019 -55.6 2020 Interest income Interest expenses Figure 11: Net interest income of NLB Group (in EUR million) Figure 13: Net interest margin(i) of NLB Group (in %) 318.5 299.6 -5.5 -0.8 -1.6 3.7 -0.6 -9.6 2.6 -6.8 -0.3 2019 Balance with CB Loans to banks Loans to corporate Loans to individuals Loans to state Securities Deposits from customers Refinancing Other 2020 Figure 12: Effects on net interest income change (in EUR million) – evolution YoY Net interest income of the Group accounted for 59% of the Group’s total net Net interest margin in the Group decreased 0.37 p.p. YoY and amounted revenues (2019: 62%), decreasing by 6% YoY to EUR 299.6 million. The decrease to 2.11%. The interest margin for the Bank and the Group banking members in interest income was mostly related to lower income from financial assets related in the SEE region decreased YoY, totalling 1.44% and 3.33%, respectively. Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 to reinvestment of debt securities with lower yields, higher cash volumes and A substantial YoY decrease in the interest margin was recorded due to: Result before impairments and provisions w/o non-recurring income and regulatory costs Non-recurring net non-interest income Regulatory costs balances with the CB (bearing negative interest in line with the expansionary monetary policy), and continued pressure on interest rates achieved on the loan • the sale of debt securities in H1 2020 (realised one-off effect in the amount portfolio in the Bank and Group banking members in the SEE region. Higher of EUR 17.1 million) and their reinvestment at lower yields, mostly in Q3 Figure 10: Result before impairments and provisions of NLB Group (in EUR million) interest expenses are related to the subordinated Tier 2 bonds raised by the Bank 2020, in the Bank; Profit before impairments and provisions of the Group totalled EUR 210.5 decreased. million, EUR 1.7 million or 1% lower YoY. In Q2 2020, the result before (EUR 7.3 million); • higher cash volumes and balances with the CB bearing negative interest; impairments and provisions was higher due to non-recurring net non-interest Net interest income was negatively affected by lower yields on securities, excess • continued pressure on interest rates in the Bank and banking members to optimize the capital structure, while interest expenses for customer deposits were • higher cost of funding due to subordinated Tier 2 bonds raised by the Bank income (sale of NLB Vita and debt securities in the Bank), but partially offset liquidity at CB, and higher volume of liabilities, especially subordinated debt. In in SEE. by regulatory costs in the Bank (EUR 1.7 million for SRF and EUR 5.5 contrast, there was a positive effect from the increase of interest income from loans million for DGS). to individuals (due to volume growth, despite lower interest rates), and the decrease of expenses for deposits (due to lower interest rates, despite increased volume). 35 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Net non-interest income +3% YoY 198.7 24.1 4.0 0.2 204.9 33.7 0.8 0.1 170.3 170.3 -8% QoQ -6% QoQ 4.0 2.6 50.1 43.5 3.4 1.8 48.9 43.7 46.1 45.1 2.1 -1.1 Operating costs -4% YoY 305.0 31.0 102.8 293.9 31.7 97.3 171.2 165.0 -12% QoQ +9% QoQ 71.4 7.8 23.5 40.2 77.7 8.0 27.6 42.0 88.0 7.7 32.3 48.0 2019 2020 Q4 2019 Q3 2020 Q4 2020 2019 2020 Q4 2019 Q3 2020 Q4 2020 Net fee and commission income Recurring other net non-interest income Employee costs Other general and administrative expenses Depreciation and amortisation Dividend income Non-recurring other net non-interest income (i) Please refer to note (i) under Table 10. (i) Please refer to note (i) under Table 10. Figure 14: Net non-interest income of NLB Group (in EUR million)(i) Figure 15: Total costs of NLB Group (in EUR million)(i) Net non-interest income reached EUR 204.9 million and increased by EUR Total costs amounted to EUR 293.9 million and are thus by EUR 11.0 million 6.2 million or 3% YoY. The YoY dynamic was influenced by the following or 4% lower YoY. The overall decrease was achieved due to lower employee Establishment of net impairments and provisions -8.4 -2.3 -10.7 -0.7 -16.3 -17.0 0.2 -7.9 -13.4 -21.1 e s a e l e R t n e m h s i l b a t s E 13.3 -14.3 -1.0 -9.1 -13.4 -48.9 -71.4 2019 2020 Q4 2019 Q3 2020 Q4 2020 Impairments and provisions for credit risk KB expected credit losses Other impairments and provisions factors: costs (lower number of branches and employees, mainly in the Bank), positive Figure 16: NLB Group impairments and provisions (in EUR million) effects from cash management and paperless projects, and the lower cost of • Net fee and commission income on the same level YoY. COVID-19 services (consulting). Conversely, the Group recorded higher IT costs, costs of The Group established EUR 71.4 million of net impairments and provisions, outbreak had negative impact mostly on card operations and payment material (mostly due to COVID-19 protection material), and supervisory costs out of which EUR 18.4 million due to changed macroeconomic parameters, transactions, but was compensated by increased package fees, higher assets in the Bank. management and bancassurance fees, and achieved discounts on card that incorporate estimated impacts of COVID-19 outbreak. In addition, expected credit losses on the performing portfolio for Komercijalna Banka operations; CIR stood at 58.3%, a 0.7 p.p. decrease YoY. group in the amount of EUR 13.4 million were created. • A decrease in the last quarter mainly related to the modification losses caused by changes of contractual cash flows for loans subject to COVID-19 moratoria in a total amount of EUR 3.6 million (o/w EUR 2.1 million in NLB Banka, Skopje and EUR 1.1 million in NLB Banka, Beograd); • Net non-interest income was positively impacted by non-recurring income. Non-recurring net income from financial transaction was affected by the sale of debt securities in the Bank (EUR 17.1 million) and non-recurring net other income by the sale of NLB Vita with a positive effect of EUR 11.0 million in May 2020; • In 2019, non-recurring net income was affected by partial repayment of a larger exposure measured at fair value through profit and loss in the amount of EUR 5.1 million and revaluation of a non-core equity stake in the amount of EUR 6.3 million. The Group’s cost of risk was positive (62 bps7), as it was in all Group bank members as well. This can mostly be attributed to established provisions related to the COVID-19 outbreak, although partially neutralised with the successful resolution of business cases in restructuring and workout (net release of approximately EUR 18 million in the Bank). Other impairments and provisions were established in the amount of EUR 9.1 million, of which there were provisions for legal disputes (EUR 4.2 million in the Bank and EUR 1.3 million in NLB Banka, Podgorica) and HR provisions (EUR 3.5 million in the Bank). 7. Komercijalna Banka group is excluded from calculation to ensure comparability with previous years (excluded expected credit losses on the performing portfolio for Komercijalna Banka group and loans to customers acquired from Komercijalna Banka group). 36 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Statement of financial position Table 11: Statement of financial position of NLB Group and NLB NLB Group in EUR million NLB in EUR million 31 Dec 2020 31 Dec 2019 Change YoY 31 Dec 2020 30 Sep 2020 30 Jun 2020 31 Mar 2020 31 Dec 2019 Change QoQ 31 Dec 2020 31 Dec 2019 Change YoY 31 Dec 2020 30 Sep 2020 30 Jun 2020 31 Mar 2020 31 Dec 2019 Change QoQ ASSETS Cash, cash balances at central banks, and other demand deposits at banks 3,961.8 2,101.3 1,860.5 89% 3,961.8 3,010.9 3,084.6 2,095.4 2,101.3 950.9 32% Loans to banks 197.0 93.4 103.6 111% 197.0 112.5 94.9 93.6 93.4 84.5 Net loans to customers 9,644.9 7,604.7 2,040.3 27% 9,644.9 7,749.0 7,686.7 7,759.8 7,604.7 1,895.9 Gross loans to customers 10,033.3 7,938.3 2,095.0 26% 10,033.3 8,111.1 8,048.9 8,125.6 7,938.3 1,922.2 - Corporate - Individuals - State Impairments and valuation of loans to customers 4,631.7 3,646.3 985.5 27% 4,631.7 3,702.4 3,751.7 3,823.6 3,646.3 929.3 5,027.6 4,013.5 1,014.1 25% 5,027.6 4,119.4 4,002.6 4,016.1 4,013.5 908.2 374.0 278.6 95.5 34% 374.0 289.3 294.7 286.0 278.6 84.7 ASSETS Cash, cash balances at central banks, and other demand deposits at banks 2,261.5 1,292.2 969.3 75% 2,261.5 2,179.3 2,239.9 1,355.9 1,292.2 82.2 4% Loans to banks 158.3 144.4 14.0 10% 158.3 187.8 214.2 160.3 144.4 -29.5 -16% Net loans to customers 4,595.1 4,589.2 Gross loans to customers 4,753.1 4,718.0 5.9 35.0 14.0 35.2 0% 4,595.1 4,554.0 4,526.2 4,682.7 4,589.2 1% 4,753.1 4,697.5 4,671.4 4,834.1 4,718.0 1% 2,168.5 2,143.7 2,178.3 2,303.4 2,154.5 1% 2,411.9 2,381.0 2,317.6 2,354.2 2,376.8 2,168.5 2,154.5 2,411.9 2,376.8 172.6 186.8 -14.2 -8% 172.6 172.8 175.5 176.4 186.8 41.1 55.6 24.8 31.0 -0.2 1% 1% 1% 1% 0% - Corporate - Individuals - State Impairments and valuation of loans to customers -388.4 -333.6 -54.8 -16% -388.4 -362.1 -362.2 -365.8 -333.6 -26.3 -7% -158.0 -128.9 -29.1 -23% -158.0 -143.5 -145.3 -151.4 -128.9 -14.5 -10% Financial assets 5,119.5 3,829.7 1,289.8 34% 5,119.5 3,783.8 3,504.8 3,711.2 3,829.7 1,335.8 35% Financial assets 3,017.2 3,168.6 -151.4 -5% 3,017.2 3,123.4 2,847.6 3,053.2 3,168.6 -106.2 - Trading book 84.9 24.0 60.8 - 84.9 16.8 22.6 25.6 24.0 68.1 - - Trading book 18.8 24.1 -5.3 -22% 18.8 17.0 22.7 25.6 24.1 1.9 - Non-trading book 5,034.7 3,805.7 1,229.0 32% 5,034.7 3,767.0 3,482.2 3,685.6 3,805.7 1,267.7 34% - Non-trading book 2,998.4 3,144.5 -146.1 -5% 2,998.4 3,106.5 2,824.9 3,027.6 3,144.5 -108.1 -3% 11% -3% Investments in subsidiaries, associates, and joint ventures Property and equipment, investment property Intangible assets Other assets 8.0 7.5 0.5 7% 8.0 7.7 7.9 7.7 7.5 0.3 3% 304.0 247.9 56.0 23% 304.0 240.0 243.6 245.4 247.9 63.9 27% 61.7 39.5 268.9 250.0 22.1 19.0 56% 61.7 37.5 37.6 37.9 39.5 8% 268.9 204.2 231.7 337.2 250.0 24.2 64.7 Investments in subsidiaries, associates, and joint ventures Property and equipment, investment property Intangible assets Other assets 750.7 353.2 397.5 113% 750.7 356.3 356.3 353.2 353.2 394.5 111% 100.0 99.2 28.1 26.0 0.8 2.1 1% 8% 100.0 95.6 97.5 98.5 99.2 28.1 23.7 24.2 24.4 26.0 4.4 4.4 115.6 128.8 -13.2 -10% 115.6 118.7 142.8 217.6 128.8 -3.1 TOTAL ASSETS 19,565.9 14,174.1 5,391.8 38% 19,565.9 15,145.7 14,891.9 14,288.3 14,174.1 4,420.1 LIABILITIES Deposits from customers 16,397.2 11,612.3 4,784.9 41% 16,397.2 12,408.8 12,190.8 11,652.9 11,612.3 3,988.4 3,949.1 2,772.0 1,177.2 42% 3,949.1 2,915.0 2,781.2 2,641.7 2,772.0 1,034.1 12,023.5 8,582.9 3,440.6 40% 12,023.5 9,197.2 9,146.9 8,728.6 8,582.9 2,826.3 424.5 257.4 167.1 65% 424.5 296.5 262.7 282.5 257.4 128.0 72.6 42.8 29.8 70% 72.6 49.7 54.3 63.1 42.8 23.0 46% Subordinated liabilities 288.3 210.6 249.8 234.8 434.9 342.6 14.9 92.3 77.8 6% 249.8 218.6 220.9 232.5 234.8 27% 434.9 359.0 360.1 328.4 342.6 37% 288.3 290.0 287.4 286.6 210.6 31.2 76.0 -1.7 Equity 1,952.8 1,685.9 266.9 16% 1,952.8 1,770.8 1,730.6 1,678.9 1,685.9 182.0 Non-controlling interests 170.3 45.0 125.2 - 170.3 48.9 47.7 45.9 45.0 121.3 - Corporate - Individuals - State Deposits form banks and central banks Borrowings Other liabilities TOTAL ASSETS 11,026.6 9,801.6 1,225.0 12% 11,026.6 10,638.8 10,448.5 9,945.9 9,801.6 387.8 LIABILITIES Deposits from customers 8,850.8 7,760.7 1,090.0 14% 8,850.8 8,405.6 8,266.3 7,834.7 7,760.7 445.2 5% - Corporate - Individuals - State Deposits form banks and central banks Borrowings Other liabilities 1,916.6 1,674.9 241.7 14% 1,916.6 1,750.0 1,640.7 1,576.0 1,674.9 166.6 10% 6,812.4 5,985.0 827.4 14% 6,812.4 6,529.6 6,516.5 6,146.1 5,985.0 282.7 121.8 100.9 20.9 21% 121.8 125.9 109.2 112.7 100.9 -4.1 4% -3% 41.6 89.8 -48.2 -54% 41.6 110.6 89.5 102.3 89.8 -69.0 -62% 143.5 164.1 -20.6 -13% 143.5 151.6 152.7 163.6 164.1 -8.1 251.4 243.1 8.3 3% 251.4 266.5 263.5 239.8 243.1 -15.1 Subordinated liabilities 288.3 210.6 77.8 37% 288.3 290.0 287.4 286.6 210.6 Equity 1,451.0 1,333.2 117.8 9% 1,451.0 1,414.4 1,389.2 1,318.9 1,333.2 -1.7 36.5 TOTAL LIABILITIES AND EQUITY 11,026.6 9,801.6 1,225.0 12% 11,026.6 10,638.8 10,448.5 9,945.9 9,801.6 387.8 75% 24% 24% 25% 22% 29% 65% 32% 29% 32% 35% 31% 43% 14% 21% -1% 10% - 5% 19% -3% 4% -5% -6% -1% 3% 4% TOTAL LIABILITIES AND EQUITY 19,565.9 14,174.1 5,391.8 38% 19,565.9 15,145.7 14,891.9 14,288.3 14,174.1 4,420.1 29% 37 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 12: Effects of Komercijalna Banka group acquisition on selected balance sheet items of NLB Group Assets 31 Dec 2020 consolidated 31 Dec 2020 w/o KB 31 Dec 2020 KB contribution 31 Dec 2019 in EUR million Change YoY w/o KB Loans to banks 197.0 150.1 46.9 93.4 56.7 61% 2% 3% 2% 4% Net loans to customers 9,644.9 7,777.9 1,867.0 7,604.7 173.3 Gross loans to customers 10,033.3 8,156.0 1,877.3 7,938.3 217.7 - Corporate 4,631.7 3,712.7 - Individuals 5,027.6 4,178.2 - State 374.0 265.1 919.0 849.4 108.9 3,646.3 66.4 4,013.5 164.7 278.6 -13.4 -5% Impairments and valuation of loans to customers -388.4 -378.0 -10.3 -333.6 -44.4 -13% Financial assets 5,119.5 3,755.5 1,364.1 3,829.7 -74.2 - Trading book 84.9 18.5 66.4 24.0 -5.5 - Non-trading book 5,034.7 3,737.0 1,297.7 3,805.7 -68.7 Deposits from customers 16,397.2 12,953.7 3,443.5 11,612.3 1,341.4 - Corporate 3,949.1 3,110.5 838.6 2,772.0 338.6 - Individuals 12,023.5 9,577.2 2,446.3 8,582.9 994.3 - State 424.5 265.9 158.6 257.4 8.5 -2% -23% -2% 12% 12% 12% 3% 51.8% 66.0% 25.4% Slovenia Serbia 4.5% N. Macedonia BiH Kosovo Montenegro 10.2% 8.1% 9.7% 7.3% 5.6% 4.5% 3.8% 2.9% Other 0.2% 0.1% 31 Dec 2019 31 Dec 2020 +38% YoY +11% YoY w/o KB 19,565.9 642.6 18% 5,119.5 34% 9,644.9 27% 15,708.4 504.5 -7% 3,755.5 -2% 7,777.9 2% 4,158.8 89% 3,670.4(i) 67% 12,740.0 485.3 3,399.2 7,148.4 1,707.0 14,174.1 544.9 3,829.7 7,604.7 2,194.7 (i) Geographical analysis based on the location of NLB Group entities. Figure 17: NLB Group total assets by location of NLB Group entities (in %)(i) 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2020 w/o KB Cash equivalents, placements with banks and loans to banks Net loans to customers Financial Assets Other Assets 51.8% of the total assets were related to Group members located in Slovenia (i) Including cash for the purchase of Komercijalna Banka, Beograd. (2019: 66.0%). The change of the structure is due to increased share of assets Figure 18: Total assets of NLB Group (in EUR million) – structure in Serbia (from 4.5% to 25.4%), due to acquisition of Komercijalna Banka, Beograd. +28% YoY +3% YoY w/o KB Balance sheet volume of the Group increased by EUR 5,391.8 million The Group recorded 26% growth in gross loans to customers to EUR YoY totaling to EUR 19,565.9 million, with substantial increase related 10,033.3 million, of which EUR 1,877.3 million due to the Komercijalna to acquisition of Komercijalna Banka, Beograd. Without its inclusion, the Banka, Beograd acquisition. Despite the COVID-19 outbreak and the balance sheet volume of the Group would also increase, mainly due to the negative impact of macroprudential measures on consumer loans introduced continued inflow of deposits from individuals (EUR 994.3 million YoY) and in November 2019, this caused an adverse effect on the new production of corporate (EUR 338.6 million) and higher subordinated debt (EUR 77.8 loans to individuals, the retail loan book without Komercijalna Banka group million). Excess liquidity was deposited on the account with the CB, while the loans would increase YoY (EUR 164.7 million or 4%), especially housing net loans to customers would increase by EUR 173.3 million, predominantly loans. The Group without the inclusion of Komercijalna Banka group, would to individuals. Substantial deleveraging of banking book securities in H1 recorded a EUR 66.4 million or 2% increase of the corporate loan book YoY 7,019.6 1,843.5 2,243.4 7,559.6 1,987.3 2,410.2 9,673.7 1,988.2 0% 2,450.7 2% 5,234.8 66% 2020 (EUR 323.5 million) was already reinvested in Q3 (EUR 284.8 million), exclusively as a result of the pandemic’s impact on ensuring liquidity (working 2,932.7 3,162.1 followed by modest deleverage in Q4 (EUR 30.0 million). capital loans, revolving loans and overdraft facilities for daily liquidity) in Q1 and Q4 2020, while decreases in outstanding loans were recorded in Q2 and 31 Dec 2018 31 Dec 2019 31 Dec 2020 Q3. 7,796.4 1,988.2 0% 2,450.7 2% 3,357.4 6% 31 Dec 2020 w/o KB Key business activities recorded an 28% increase of gross loans to customers (i) Including Gross loans to Corporate and to State. YoY to EUR 9,673.7 million, mostly in Strategic Foreign Markets due to Figure 19: NLB Group gross loans to customers by Key business activities (in EUR million) Key/SME/Cross Border Corporates(i) Retail Banking in Slovenia Strategic Foreign Markets the Komercijalna Banka, Beograd acquisition. Without it, the Key business activities would record 3% increase YoY, still mostly due to an increase in Strategic Foreign Markets (EUR 195.3 million or 6%). Retail Banking in Slovenia recorded an increase of EUR 40.5 million (2%), and the Key/SME/ Cross Border Corporates stayed on the same level, with a slight EUR 0.9 million increase. 38 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 NLB Group w/o KB banks NLB Group after acquisition of KB banks Liabilities Institutions 299 3% SME 2,045 State(ii) 3,290 Institutions 446 3% 24% 18% 24% 20% SME 2,687 State(ii) 2,661 Retail consumer 1,907 17% EUR 11.1 billion 21% EUR 13.7 billion 17% Corporates 1,876 17% Retail consumer 2,300 20% 16% Corporates 2,235 Retail mortgages 2,273 Retail mortgages 2,729 by segment(iv) 12,740.0 256.5 1,657.4 15.1 347.0 261.1 2,337.3 14,174.1 1,730.9 342.6 210.6 277.7 257.4 2,772.0 +38% YoY +11% YoY w/o KB 19,565.9 2,123.1 23% 65% 3,949.1 42% 434.9 288.3 322.4 424.5 12,023.5 40% 15,708.4 1,872.7 8% 3% 3,110.5 12% 345.1 288.3 248.5 265.9 NLB Group w/o KB banks NLB Group after acquisition of KB banks 7,865.6 8,582.9 9,577.2 12% Other(iii) 478 Serbia 660 4%6% 7% Kosovo 736 Other(iii) 604 4% Serbia 2,771 5% 10% 10% EUR 11.1 billion 58% Kosovo 745 Montenegro 656 20% 5% 5% EUR 13.7 billion Montenegro 518 N. Macedonia 1,156 BiH 1,100 47% Slovenia 6,412 8% 10% BiH 1,345 Slovenia 6,412 N. Macedonia 1,156 by geography Floating 40% Other 2% BAM 5% MKD 5% RSD 8% EUR 13.7 billion EUR 80% Currency EUR 13.7 billion Fixed 60% Interest rate (i) Loan portfolio also includes reserves at CBs and demand deposits at banks. (ii) State includes exposures to CBs. (iii) The largest part represents EU members. (iv) Segmentation in accordance with the company size defined in the Companies Act of an individual country in the region. Figure 20: Loan portfolio(i) by segment, geography, currency, and rate type (in EUR million) 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2020 w/o KB Total equity Other liabilities Suboridnated liabilities Borrowings and Deposits from banks and centra banks State deposits Coroporate deposits Deposits from individuals Figure 21: Total liabilities of NLB Group – structure (in EUR million) Total liabilities of the Group increased and amounted to EUR 17,442.8 million. The Group’s funding base is dominated by customer deposits accounting for 84% in which sight deposits prevail (85%, compared to 81% as at 2019 YE). The majority of customer deposits (73%) were from individuals. 54% of deposits were collected in Slovenia (67% at 2019 YE), 24% in Serbia (substantial increase due to Komercijalna Banka, Beograd), and the rest in other Group banking members in SEE. 8.2% 27.0% 91.8% 73.0% Slovenia International Deposits from customers increased by 41% YoY, 12% without inclusion of Term deposits Sight deposits deposits from Komercijalna Banka group. An increase without inclusion of Komercijalna Banka group was recorded in deposits from individuals (EUR 994.3 million or 12%), corporate (EUR 338.6 million or 12%), and state (EUR 8.5 million or 3%). The Komercijalna Banka group increased the Figure 22: Deposits from customers by type deposit base of NLB Group by EUR 3,443.5 million, of which EUR 2,446.3 68.3% 65.5% million was from individuals. 58.8% 16,397.2 Wholesale funding activities in the Group are conducted with the aim of achieving diversification, improving structural liquidity and capital position, 10,464.0 11,612.3 7,148.4 7,604.7 9,644.9 As at 31 December 2020, with acquisition of Komercijalna Banka, Beograd, and fulfilling regulatory requirements. The Bank in February raised the there were no major changes in the corporate and retail credit portfolio structure. subordinated Tier 2 bonds in the amount of EUR 120.0 million to strengthen 2018 2019 2020 Credit portfolio remains well diversified, and there is no large concentration in any and optimise the capital position. Two Group banking subsidiaries raised specific industry or client segment. The share of retail portfolio in the whole credit funds in a total amount of EUR 10 million. portfolio is quite substantial, with the segment of mortgage loans still prevailing. LTD Deposits (in EUR million) Net loans (in EUR million) Figure 23: LTD ratio movement The majority of the loan portfolio refers to euro currency, while the rest originates The LTD ratio (net) was 58.8% at the Group level; a decrease of 6.7 p.p., of from local currencies of the Group banking members. From interest rate type, which the Komercijalna Banka group contributed 1.2 p.p. of LTD decrease. more than 60% of the loan portfolio is linked to the fixed interest rate, and the rest to floating rate (mostly to the Euribor reference rate). 39 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Capital and capital adequacy Table 13: NLB Group Capital Requirements and buffers 2,065 297 1,768 1,453 1,496 45 1,453 1,451 16.75% 16.75% 16.28% 15.80% 15.75% 14.75% 13.75% 14.75% 16.63% 15.25% 14.25% 14.12% Pillar 1 (P1R) Pillar 2 (P2R) 31 Dec 2018 31 Dec 2019 31 Dec 2020 Tier 1 Tier 2 31 Dec 2018 31 Dec 2019 31 Dec 2020 Total capital ratio CET1 ratio OCR = MDA threshold (Total capital) OCR+P2G (Total capital) Figure 24: NLB Group capital (in EUR million) Figure 25: NLB Group capital ratios and regulatory thresholds (in %) Total SREP Capital Requirement (TSCR) Combined Buffer requirement (CBR) Conservation buffer O-SII buffer Countercyclical buffer From 1 January 2020, NLB is required to maintain the OCR at the level of Overall capital requirement (OCR) = MDA threshold from 12 March 2020 onwards as at 1 January till 11 March 2020 CET1 AT1 T2 Total Capital CET1 Tier 1 4.5% 1.5% 2.0% 2.75% 6.05% 8.06% 4.5% 1.5% 2.0% 2.75% 7.25% 8.75% 2019 4.5% 1.5% 2.0% 3.25% 7.75% 9.25% 2018 4.5% 1.5% 2.0% 3.5% 8.0% 9.5% Total Capital 10.75% 10.75% 11.25% 11.5% CET1 CET1 CET1 CET1 Tier 1 Total Capital CET1 CET1 2.5% 1.0% 0.0% 9.55% 11.56% 14.25% 1.0% 2.5% 1.0% 0.0% 10.75% 12.25% 14.25% 1.0% 2.5% 1.0% 0.0% 11.25% 12.75% 14.75% 1.0% 1.875% 0.0% 0.0% 9.875% 11.375% 13.375% 1.5% 10.55% 11.75% 12.25% 11.375% Total SREP (TSCR) CET1: 6.05% Tier 1: 8.06% Total capital: 10.75% Pillar 2 Total capital (to incl: CET1: 1.55% and Tier 1: 2.06%): 2.75% Tier 2: 2.00% AT1: 1.50% CET1: 4.50% Pillar 1 Figure 26: NLB Group capital requirements as at 31 December 2020 14.25% on a consolidated basis, consisting of: • 10.75% TSCR (8% Pillar 1 Requirement and 2.75% Pillar 2 Requirement); and • 3.5% CBR (2.5% Capital Conservation Buffer, 1% O-SII Buffer and 0% Countercyclical Buffer). Pillar 2 Guidance (P2G) OCR + P2G (10NC5) issued in November 2019 in the amount of EUR 120 million. Non- controlling interest (minority capital) was included in the capital – as of June The Pillar 2 Requirement decreased by 0.5 p.p. to 2.75%, as a result of better 2020 in the amount of EUR 31.7 million, and as of December 2020 in the total overall SREP assessment. Pillar 2 Guidance (P2G) amounts to 1.0% of CET1. amount of EUR 99.0 million (of which EUR 66.1 million due to acquisition of In 2021 NLB is required to maintain the same level of OCR at 14.25% on a RWA on consolidated basis were concluded with MIGA in the total amount of consolidated basis, with unchanged structure. up to EUR 303.1 million and became effective as of 31 July 2020. Komercijalna Banka, Beograd). In addition, risk mitigation contracts to reduce Several measures have been taken by the ECB in relation to COVID-19. The The TCR for the Group stood at 16.6% (or 0.3 p.p. higher than at the 2019 ECB has effectively, as of 12 March 2020, amended the applicable decision for YE), and for NLB at 27.1% (or 4.4 p.p. higher than at the 2019 YE). As at 31 NLB in relation to the Pillar 2 Requirement composition, whereby the Pillar 2 December 2020, the CET1 ratio stood at 14.1% (1.7 p.p. YoY decrease). The Requirement shall be held in the form of 56.25% of CET1 capital and 75% higher NLB Group total capital adequacy compared to the end of 2019 derives of Tier 1 capital as a minimum, and not entirely as CET1 capital as required from higher capital (increase of EUR 569.7 million YoY) which compensated in the previous years. Additionally, the CRR ‘quick fix,’ as of 26 June 2020, RWA increase of EUR 3,235.5 million YoY for the Group. Higher RWA derives allowed the Group to benefit from lower capital requirements. from the acquisition of Komercijalna Banka, Beograd. Total capital increased mainly due to inclusion of the subordinated Tier 2 bonds (EUR 240.0 million), The Bank and Group’s capital covers all the current and announced regulatory inclusion of undistributed profit for the year 2019 (EUR 157.5 million), partial capital requirements, including capital buffers and other currently known inclusion of 2020 profit (EUR 63.6 million), and inclusion of minority interest requirements, as well as the P2G. in capital calculation from June 2020 onwards (EUR 99.0 million as at 31 The Bank continued to strengthen and optimise its capital structure. On 5 February 2020, the Bank issued subordinated Tier 2 bonds (10NC5) in the The RWA for credit risk increased by EUR 2,502.7 million YoY mainly due amount of EUR 120 million. On 25 March 2020, the Bank obtained the ECB’s to completion of the acquisition process of Komercijalna Banka, Beograd. permission to include them in the capital, and the subordinated notes have been Excluding the purchase of Komercijalna Banka, Beograd, RWA decreased by included as of 31 March 2020. On 4 March 2020, the Bank also obtained the EUR 173.9 million as the result of changes in regulation CRR and implemen- ECB’s permission to include in the capital subordinated Tier 2 bonds tation of MIGA guarantee for obligatory reserves in NLB Group banks. December 2020). 40 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202066 19 n.a. 2,065 CRR QF brought more favourable treatment of SME (changes in the 1,496 240 221 33 27 n.a. 2,018 22.4% 0.4% 0.3% 0.4% 0.7% -0.2% 16.3% 2.4% 2.6% 16.6% -6.3% 31 Dec 2019 New T2 notes Profit inclusion NCI inclusion Other RWA impact Pre-KB acquisition NCI inclusion KB Other KB RWA impact KB 31 Dec 2020 Figure 27: Capital of NLB Group (in EUR million) – evolution YoY Table 14: Total risk exposure for NLB Group prescribed SME supporting factor) and temporary treatment of public debt issued in the currency of another Member State. Furthermore, the inclusion of Serbia in the list of third countries whose supervisory and regulatory requirements are considered equivalent as to EEA countries contributed significantly to RWA reduction at the beginning of 2020 (EUR 100.0 million). RWA declined also due to the NLB Vita sale and due to the higher volume of impairments and provisions formed on the performing portfolio due to the worse macro forecasts related with COVID-19. In contrast, new production on the corporate and retail segment, including new project financing loans, resulted in RWA increase. New defaults also contributed to the RWA increase as well as the changed treatment of intangible assets. The increase in RWA for market risks and CVA (EUR 727.1 million YoY) is mainly due to completion of the acquisition process of Komercijalna Banka, Total risk exposure amount (RWA) 12,421.0 9,014.6 8,863.2 9,185.5 3,235.5 3,557.8 CRR, which represents the basis for the calculation. RWA for credit risk 10,222.9 7,546.3 7,374.4 7,720.2 2,502.7 2,848.6 31 Dec 2020 31 Dec 2020 w/o KB 30 Sep 2020 31 Dec 2019 YoY QoQ The increase in the RWA for operational risks (EUR 5.7 million) derives from the higher three-year average of relevant income, as defined in Article 316 of Central governments or central banks 1,892.2 977.9 Balance at in EUR million Change Beograd. Regional governments or local authorities Public sector entities Institutions Corporates Retail Secured by mortages on immovable property Exposures in default Items associated with particulary high risk Covered bonds Claims in the form of CU Equity exposures Other items RWA for market risk + CVA RWA for operational risk 135.5 248.8 311.7 64.1 99.6 243.4 878.3 62.6 101.8 235.5 1,234.6 58.9 102.1 208.1 2,224.2 1,898.3 1,869.3 2,044.9 3,891.8 3,067.9 3,055.5 2,934.4 355.7 231.5 344.2 40.9 18.7 47.1 480.9 1,250.8 947.3 355.7 170.7 230.5 40.9 13.0 29.5 354.9 520.9 947.3 349.2 156.9 256.0 41.6 12.5 25.0 330.2 534.7 954.1 363.8 140.0 204.3 39.6 13.3 35.4 340.9 523.7 941.6 657.6 76.5 146.7 103.6 179.4 957.4 -8.1 91.5 139.9 1.3 5.4 11.7 140.0 727.1 5.7 1,013.9 72.9 147.0 76.1 354.9 836.2 6.4 74.6 88.2 -0.7 6.2 22.1 150.7 716.0 -6.8 Further information on capital and capital adequacy is available in the Note 5.22 to the Audited Annual Financial Statements and in Pillar 3 Disclosures. Liquidity position 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 n o i l l i m R U E 324.9% 303.8% 297.2% 303.1% 3,985 3,974 4,738 4,710 1,226 1,308 1,594 1,554 257.5% 5,003 1,943 31 Dec 2019 31 Mar 2020 30 Jun 2020 30 Sep 2020 31 Dec 2020 Stock of HQLA Net liquidity outﬂow LCR Figure 28: LCR quarterly dynamic of NLB Group The Group’s liquidity remains strong, with a high level of liquid assets in total assets (49.8%) that is reflected in the LCR ratio standing at 257.5%, compared to 324.9% as at 31 December 2019 (the acquisition of Komercijalna Banka group contributed to decrease of LCR, due to high increase of outflows on account of extremely higher amounts of National Bank of Serbia deposits). The Group holds a comfortable liquidity position at both the Group and subsidiary bank levels, standing well above the targeted risk appetite limit. 41 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Segment Analysis Core Segments Non-core Segments Retail Banking in Slovenia includes banking with individuals and micro companies, asset management (NLB Skladi), and one part of the new Corporate and Investment Banking in Slovenia Strategic Foreign Markets includes the operations of strategic Group banks in the strategic markets (North Macedonia, BiH, Kosovo, Montenegro, and Serbia). As a result of the acquisition of Komercijalna Banka, Beograd at the subsidiary NLB Lease&Go that deals with includes banking with Key corporate end of the year 2020, the NLB Group retail clients as well as the contribution to clients, SMEs, and Cross Border corporates, obtained three banks: Komercijalna Financial Markets in Slovenia Other accounts for the Banks categories Non-core NLB Group (in EUR million) the result from the associated company Investment Banking and Custody, Banka, Beograd, Komercijalna Banka, covers treasury activities and trading whose operating results cannot be includes the operations of non-core Bankart (in 2019 also from the joint Restructuring and Workout, and one part Podgorica, and Komercijalna Banka, in financial instruments, while they allocated to specific segments as well Group members, namely REAM and venture NLB Vita(ii) and in 2020 the gains of the new subsidiary NLB Lease&Go that Banja Luka as well as an investment fund also present the results of asset and as a new subsidiary The NLB Cultural leasing entities – except NLB Lease&Go, made from the sale of this investment). renders services to corporate clients. company Kombank INvest, Beograd. liabilities management (ALM). Heritage Management Institute. NLB Srbija and NLB Crna Gora. Profit b.t. 277.9 42.0 Contribution to Group’s profit b.t. 100% 15% Total assets 19,566 2,554 % of total assets 100% 13% CIR 58.3% 67.0% 42.4 15% 2,043 10% 55.6% Cost of risk (bps) 62(i) 63 -44 178.8 30.8 -11.5 64% 11% 9,346 5,218 48% 27% -4% 273 1% -4.6 -2% 131 1% 52.1% 140(i) 19.2% 147.4% 236.2% -396 The data for 2019 are adjusted to the changed schemes as prescribed by the BoS (relocation of some items from the net other income to other general and administrative expenses), so there may be certain differences between the previously reported numbers and those presented below. Consequently, the CIR may also be different than the one published in 2019. More details are available below in note 2.3. of the Audited Financial Statements of NLB Group and NLB d.d. (i) Komercijalna Banka group is excluded from calculation. (ii) In 2019, the segment also included the result of the JV company NLB Vita. In December 2019, the NLB and KBC Insurance NV, in a joint process, agreed to sell their respective stakes. The sale was completed in May 2020. 42 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 effectiveness and knowledge of its customers, who turned to digital channels which are available in Total costs Retail Banking in Slovenia With knowledge and professionalism, the Bank continues to have a leading position in market shares in loans and deposits. In retail banking, the Bank is striving to get closer to its clients through anchor products and by offering personalised digital services to suit their lifestyles. With a successful response to circumstances in the time of the COVID-19 pandemic, the Bank once again proved its various channels 24/7. If customers wish to do business in the traditional way and stay in personal contact, the Bank continues to be available through its branch office network and new mobile branch. Contribution to NLB Group 15% 27% 43% Result b.t. Net interest income Net non-interest income Figure 29: Contribution to NLB Group (result b.t., net interest income, net non-interest income) The segment’s profit before tax amounted to EUR 42.0 million, a 12% decrease YoY; this decrease is mostly related to higher impairments for credit losses and lower deposit margin from deposits, which was partially compensated by effects from NLB Vita sale.8 Net interest income was 7% lower YoY. Due to overliquidity of the Bank, the policy to de-stimulate the deposit collection triggered the reduction of retail deposits margin after transfer price (FTP) in the amount of EUR 8.5 million YoY. The interest income from loans to individuals was EUR 2.5 million higher YoY due to higher volumes and higher interest margin. In 2020 COVID-19 outbreak affected the new production of loans to individuals, as well as change of legislation that tightened the measures in consumer lending. The production of new consumer loans in 2020 amounted to EUR 196.7 million and was lower than in 2019 (EUR 368.6 million). The YoY decline in the balance of consumer loans (EUR 36.6 million) is largely due to a lower production of new consumer loans in H1 2020, while the H2 recorded a recovery (as a result of several activities – marketing campaigns, individualised preapproved loan campaigns, process improvements). The decrease was recorded also in the portfolio of overdrafts and cards (EUR 32.2 million YoY). The production of new housing loans amounted to EUR 303.1 million 8. In 2019, the segment also included the result of the JV company NLB Vita. In December 2019, the NLB and KBC Insurance NV, in a joint process, agreed to sell their respective stakes. The sale was completed in May 2020. 22.5% market share in housing loans. Over 1 billion EUR of assets under management as an important milestone for Private banking. -7% 3% -74% 14% 1% 3% 3% 18% -79% -12% 1% 2% 8% Table 15: Performance of the Retail Banking in Slovenia segment 2020 2019 Change YoY in EUR million consolidated Net interest income Net interest income from Assets(i) Net interest income from Liabilities(i) Net non-interest income o/w Net fee and commmission income Total net operating income Result before impairments and provisions Impairments and provisions Net gains from investments in subsidiaries, associates, and JVs’ Result before tax’ 81.4 78.4 3.0 89.0 82.7 170.4 -114.1 56.2 -15.1 0.9 42.0 87.4 75.9 11.5 78.3 81.9 165.7 -118.0 47.7 -4.4 4.2 47.5 -6.0 2.5 -8.5 10.7 0.8 4.7 3.9 8.5 -10.7 -3.3 -5.5 31 Dec 2020 31 Dec 2019 Change YoY Net loans to customers 2,415.4 2,385.1 Gross loans to customers 2,450.7 2,410.2 30.3 40.5 Housing loans 1,534.7 1,425.0 109.6 Interest rate on housing loans Consumer loans Interest rate on consumer loans Other 2.51% 651.7 6.43% 264.3 2.54% 688.3 6.33% 296.9 Deposits from customers 7,356.8 6,456.2 -0.03 p.p. -36.6 -5% 0.10 p.p. -32.6 900.6 -11% 14% Interest rate on deposits 0.04% 0.05% -0.01 p.p. Non-performing loans (gross) Cost of risk (in bps)(ii) CIR Interest margin 52.4 2020 63 67.0% 1.75% 40.8 2019 19 71.2% 2.04% 11.6 28% Change YoY 44 -4.2 p.p. -0.29 p.p. (i) Net interest income from assets and liabilities with the use of FTP. (ii) Cost of risk for 2019 is adjusted to new methodology. 43 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Video call service 24/7 NLB is the only bank in Slovenia offering video calls; the number of which increased 132% YoY. M-bank Klikin now, with an extended set of products and services available, allows digital signing of all documents, becoming a true branch office. (2019: EUR 242.6 million) as a result of a more attractive offer for clients and Digital sales channels are gaining prominence, and the Bank can also be intensive marketing campaigns and led to an increase in the portfolio (EUR reached through Slovenia’s market-leading 24/7 NLB Contact Centre. 109.6 million YoY). The segment recorded the net non-interest income of EUR 89.0 million, providers in Slovenia for almost 20 years, with increasing assets under EUR 10.7 million (14%) increase YoY, due to the sale of NLB Vita with management, complementing the asset management of the market-leading Private banking has positioned itself as a leader among private banking positive effect of EUR 11.0 million. NLB Skladi, whose market share and annual net inflows have increased every year. With 2020 bancassurance volumes, the Bank once again proved to be the Net impairments and provisions were established in the amount of EUR best insurance retailer among banks. 15.1 million due to additional credit impairments and provisions related to COVID-19 outbreak. The Bank is retaining its role as a market leader in payments by being a reliable and trustworthy provider of payments services with a focus on Deposits from customers increased substantially by EUR 900.6 million (14%) providing a positive user experience. This is reflected in the Bank’s achieved YoY, driven mostly by uncertain macroeconomic environment which led high market share in recent years. The competition on this market is fierce, to lower consumption and also affected by received social transfers due to and users require an ever-increasing flexibility of services. COVID-19 measures taken. In the segment exposures subject to COVID-19 moratorium were concluded joined the national alliance for a green, smart, and technologically advanced in the amount of EUR 123.3 million, with 20.0% already expired by the Slovenia. The Bank’s offer reflects this path, following its new sustainability In line with the UN Principles for Responsible Banking, the Bank also 2020 YE. The market leader in retail banking in Slovenia strategy, by gradually transitioning to the most possible paperless banking being one of the measures to a sustainable environment. Further information is available in the NLB Group Sustainability Report 2020. 30.3% 25.2% 23.2% 22.2% 30.5% 26.2% 23.1% 21.8% 31.3% 26.4% 23.4% 22.5% 33% 31% 29% 27% 25% 23% 21% 19% 17% 15% Response to COVID-19 In spite of the COVID-19 pandemic, the Bank managed to provide 24/7 client support by enhancing the availability of digital channels and adjusting operations in the period of the lock-down. The Bank quickly adapted the sales process to the situation by introducing changes to its offer, namely the approval of new extraordinary overdrafts was made possible via digital channels, the prolongation of extraordinary overdrafts with no personal presence of the client necessary, and allowing clients to onboard to m- and e-bank via video call. The number of payments via e- and m-bank increased and indicates that clients are opting for digital payments over in-person 31 Dec 2018 31 Dec 2019 31 Dec 2020 payments via branch offices. Market share in housing loans Market share in loans to customers Market share in consumer loans Market share in deposits from customers Figure 30: NLB’s market share in Retail Banking in Slovenia The Bank’s main sales channel remains its branch network in Slovenia with 80 branches,9 and is supported with the largest ATM network (552 or a 39.2% market share in Slovenia) of which 74% are contactless. To improve customer In order to maintain continuous 24/7 operations, the NLB Contact Centre was moved ‘overnight’ to several locations to split operational risk. In response to the circumstances, clients were more prone to use online and mobile banking services. An Intervention Act adopted at the end of March and prolonged at the end of December, allowing borrowers to defer payment obligations with a experience, the refurbishment of branch offices continued, including as well moratorium of up to 12 months, helped clients mitigate the effects of the the relocation of two branches. Furthermore, the Bank introduced a different lock-down. The Bank prepared the relevant measures with all the necessary type of branch – the first mobile branch in Slovenia – bringing banking instructions and processes. services to local residents who don’t have the ability to contact the Bank through modern channels. 9. As of 1 January 2021 79 branches. 44 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Distribution channels Digitalisation and improved client experience Digitalisation trends place an emphasis on the use of mobile phones, which is why the Bank focuses on improving user experience through mobile devices. Changed client habits affected the visits of the Bank’s branch offices, and this The Bank remains the leader in the Slovenian market because of the For many tasks, where until recently there was no permissible alternative is also expected to have effects in the future. So, the Bank further optimised knowledge, experience, and understanding of customers’ needs, resulting in to a physical visit to the branch, effective, user-friendly solutions have the branch office network by closing 10 branch offices. many solutions that pave the way for new customers and changing customer quickly emerged. It is not just about signing forms, but above all about the habits. Every year, customer experience is confirmed by the customer comprehensive placement of business in the digital world, which enables Just before the period of the second lock-down, the Bank introduced the first satisfaction index (6 points higher YoY). In the context of COVID-19 remote business, especially from home. An extensive upgrade of m-bank mobile branch in Slovenia – NLB Bank & Go, which will enable the Bank to pandemic, the Bank has become even closer to customers and improved their Klikin resulted in new functionalities for ordering services and distance- get closer to residents in the local environment. The new mobile branch is a satisfaction in all monitored areas. Customers are especially satisfied with signing of all opening documents, financial transactions, and loans. This is an ‘branch on wheels,’ equipped with everything that ‘static’ branches have, and attitudes toward customers, modern banking products and products included, important milestone in furthering digitalisation processes. Klikin is becoming its advantage is that the Bank will also be able to be present in the areas where and user experience, which also includes digital services. The reputation of and more and more like a true branch office. no bank office is available. trust in the Bank also increased and exceeded the average of the competition. With the improvement in satisfaction, the level of loyalty and the share of NLB is the only bank in Slovenia that has offered video call service 24/7 for recommendations also increased (2020 Valicon Client Satisfaction Survey). the last three years. With video call, the digital experience is getting closer to the classic branch office, which can also be noticed in the large pick-up in the use of this channel. In 2020, the Bank experienced extensive growth across all digital channels of communication and significant change in the structure of the channels used by customers occurred. This is mostly evident by the extensive growth of video call and chat. A YoY comparison shows increases of 4% in inbound calls, 53% in chats, and even 132% in video call usage. The NLB Contact Centre has successfully remained a customer service channel, NLB 2020 Competitor banks' average 2020 NLB 2019 NLB 2018 87 79 83 80 but also intensively fosters the role as an important sales channel by adding a Source: 2020 Valicon Client Satisfaction Survey. range of products and services that can be executed on the spot, and a contact channel with an increasingly important role in efficient client relationship Figure 32: Satisfaction with the attitude towards customers management. 501,453 481,464 The purchase, new construction, or renovation of a home is a demanding 34.5% financial venture, therefore the involvement of an experienced adviser is important. To help young families toward independence, the Bank introduced the #HelpFrame project also to individuals by granting 100 borrowers of housing loans three free monthly instalments up to EUR 1,000. Record sales results of new housing loans supported by successful campaigns were recorded 8.6% in the second half of 2020. 30.4% 16.4% In 2020, the WEBSI web champions project,10 Klikin also won two first places for digital achievement, one awarded by the expert jury composed of jurors from the financial sector and the other, most importantly, by the public. The number of digital users (unique users of e-bank and m-bank) continued to increase, stopping roughly at 9% YoY. The number of m-bank Klikin and e-bank NLB Klik users recorded a YoY increase, 17% (+38,300 users) and 5% (+10,655 users) respectively. The YoY increase of the total volume and number of payments processed in the e-bank and m-bank was 13% and 15%, respectively, again proving that the clients more and more prefer digital payments over in-person payments in branch offices. 34.6% 27.4% 35.9% 35.4% 41.7% 37.9% 115,071 75,247 100,397 43,289 In line with the new sustainability strategy, the NLB Green housing loan with special benefits in financing the purchase or building of a passive house was Klikin NLB Klik introduced. Figure 33: Online and mobile banking penetration 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 Inbound calls Chat Video call The packages offer, which has been modified based on customer feedback and The mobile wallet, NLB Pay app was downloaded by over 18 thousand 2019 2020 needs, customers transparent and simple daily banking services. In June, the Android users and additionally over 8 thousand iOS users, who carried out new ‘NLB Digital Package’ was introduced as a response to clients’ feedback 33% more transactions YoY with the total volume increasing by 55% YoY. Figure 31: NLB Contact Centre no. of contacts based on measures undertaken by the Bank due to pandemic, followed by the The number of digitised cards grew 46% YoY and the number of users also new NLB Package ‘My World’ (Moj svet), primarily intended for young by 43.5% YoY (+5,575 users). The implementation of NLB Pay is almost customers. finished in other Group banking subsidiaries. 10. Organized by WEBSI, Digital excellence institute. 45 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Volume (in 000 EUR) 7,357 2,879 142,286 # of transactions 2020 2019 2018 348,529 10,883 457,780 Private banking Ancillary businesses complementing banking products Private banking has positioned itself among the leading private banking The market share of NLB Skladi increased to 34.9% (31 December 2019: providers in Slovenia for almost 20 years. In 2020, its leading position even 34.0%). The company ranked first among its peers in Slovenia, accounting strengthened as an important milestone was reached, namely over EUR 1 for 69.6% of net inflows in the market with EUR 101.9 million in net inflows billion of assets under management. By adding relevant products and services, in 2020. The company remains the largest asset management company and it proves that the Bank knows their customers, their lifestyles, habits, goals, and the second largest mutual funds management company in Slovenia. The total challenges, and take care of their wealth with dedication and knowledge. With assets under management amounted to EUR 1,625.5 million (31 December the increased assets under management (18% YoY), the number of clients also 2019: EUR 1,513.8 million) of which EUR 1,125.5 million consisted of Figure 34: NLB Pay purchases in numbers increased (21% YoY). NLB Pay offers a new instant based payment method ‘Flik,’ facilitating payments from personal accounts between different bank clients using the contacts stored in the mobile device. A special version of NLB Pay with the Flik functionality is available to iOS users. To follow the PSD2 requirements, NLB Pay’s functionality enables confirming e-commerce purchases which will replace the SMS OTP authentication. If the NLB Pay user’s device has the right kind of functionality, confirmation can be done with biometric recognition. The Bank’s card market share remained at 26.5% (2019: 27.2%) of the Slovenian market. Individuals’ debit and credit card volumes of payment transactions and cash withdrawals, despite two lock-down periods, remained approximately at 2019 levels. As the first bank in Slovenia, clients receive an SMS message with their PIN for all new NLB cards (Maestro, Mastercard, and Visa). Clients are also no longer receiving new PIN numbers upon renewal of the NLB cards to a contactless card, since their existing PIN number remains valid. The period for instalment purchases using pay-later payment cards was prolonged from 24 months to 60 months. The Bank adhered to European and Slovenian payments infrastructure in order to be able to provide crossborder, as well domestic instant payments and improve the user experience of their customers. On the domestic market, instant payments Flik, i.e. payments which are executed in only few seconds were successfully introduced with the volumes increasing. By meeting PSD2 requirements, more efficient fraud prevention and higher protection of user payments is provided. 1,168 1,231 746.9 752.5 1,309 911.1 1,077 554.0 1,580 mutual funds (31 December 2019: EUR 1,023.8 million), and EUR 500.0 million in the discretionary portfolio (31 December 2019: EUR 490.0 million). The insurance company Vita remains the Bank’s strategic partner. Their products are sold through the Bank’s distribution network, such as savings and investment insurance products, risk, and health insurance products. 1,075.1 Non-life insurance products, including car and home insurance, are provided to clients in cooperation with the GENERALI Zavarovalnica. Despite challenging circumstances, encouraging results were achieved, namely gross written premiums increased YoY by 5%, and the number of car insurance and home insurance policies by 6% and 5%. 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 Assets under management (EUR million) # of clients 14.9% 15.2% Figure 35: Assets under management and the number of private banking clients 12.9% 13.4% 14.0% 6.5% 4.9% 7.5% 8.3% 1.5% 1.5% 1.7% 1.9% 3.7% 1.2% 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 Vita NLB Skladi Generali Figure 36: Customers’ penetration of ancillary business 46 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Corporate and Investment Banking in Slovenia The Bank wants to strengthen its market position as a systemic player in its home region, and actively participate in the growth of the market by supporting a large infrastructure projects with sustainability being the focus of the future business model. As a leading player, the Bank is looking to cover more complex, cross-border needs of clients and find entry points to suit their needs. The Bank would also like to accelerate growth through its presence on international financial markets, and thus diversify services for its clients. To overcome and mitigate the impact of COVID-19, responsive measures were taken that prove the Bank’s full spectrum of services is also available to clients in such circumstances. Table 16: Performance of the Corporate and Investment Banking in Slovenia segment in EUR million consolidated 2020 2019 Change YoY Net interest income Net interest income from Assets(i) Net interest income from Liabilities(i) Net non-interest income o/w Net fee and commmission income) Total net operating income 34.0 36.8 -2.8 41.2 33.2 75.2 37.3 37.4 -0.1 43.0 32.4 80.2 Total costs -41.8 -44.5 Result before impairments and provisions Impairments and provisions Result before tax 33.4 9.0 42.4 35.8 21.0 56.8 -3.3 -0.6 -2.7 -1.8 0.8 -5.0 2.7 -2.4 -12.1 -14.4 31 Dec 2020 31 Dec 2019 Change YoY Contribution to NLB Group Net loans to customers 2,047.1 2,049.6 Gross loans to customers 2,167.5 2,150.9 Corporate 2,006.4 1,976.8 15% 11% 20% Key/SME/Cross Border Corporates 1,827.6 1,819.3 -2.5 16.7 29.5 8.2 Interest rate on Key/SME/ Cross Border Corporates loans Investment Banking Restructuring and Workout NLB Lease&Go State Interest rate on State loans 1.79% 1.82% -0.03 p.p. 0.2 160.8 17.8 160.7 2.20% 0.1 157.4 - 173.6 1.88% 0.1 3.4 17.8 -12.9 0.32 p.p. Deposits from customers 1,487.4 1,299.1 188.3 14% Interest rate on deposits Non-performing loans (gross) Cost of risk (in bps) (ii) CIR Interest margin 0.06% 156.0 2020 -44 55.6% 1.90% 0.07% 128.7 2019 -102 55.4% 2.20% -0.01 p.p. 27.4 21% Change YoY 59 0.2 p.p. -0.30 p.p. (i) Net interest income from assets and liabilities with the use of FTP. (ii) Cost of risk for 2019 is adjusted to new methodology. Result b.t. Net interest income Net non-interest income Figure 37: Contribution to NLB Group (result b.t., net interest income, net non-interest income) Corporate and investment banking in Slovenia The segment’s profit before tax was EUR 42.4 million, EUR 14.4 million (25%) lower YoY. The decrease was mostly due to lower release of credit impairments and provisions as well as lower net operating income. Net interest income decreased by EUR 3.3 million YoY, mostly due to reduction of corporate deposits margin after transfer price (FTP), despite higher deposit base (EUR 188.3 million). Key, SME and Cross Border clients recorded a growth in gross loans of EUR 8.2 million YoY, due to substantial growth in Cross Border (EUR 67.3 million) and in SME (17.8 million) segment, while Key segment recorded substantial decrease (EUR 76.9 million), due to maturity of few larger loans. The newly established company NLB Lease&Go also contributed significantly to the increase of the gross loans portfolio of the segment (EUR 17.8 million). Net fee and commission income recorded slight, 3% increase YoY, while total costs decreased by EUR 2.7 million (6%) YoY. 31.4% market share in guarantees and letters of credit. Arranging of 178.9 million EUR in syndicated loans. Arranging of 191.4 million EUR of instruments issuances on debt capital markets. -9% -2% - -4% 3% -6% 6% -7% -57% -25% 0% 1% 1% 0% 57% 2% - -7% 47 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Successful Net impairments and provisions were released in the amount of EUR 9.0 The economy and society can be transformed and steered towards greater #HelpFrame project for the small and micro segment. million due to substantial release in Restructuring and Workout that offset sustainable growth. Following the Bank’s sustainability strategy, the business additional credit impairments and provisions related to COVID-19 outbreak. model is changing and a sustainable product portfolio is emerging. Business The Investment Banking and Custody recorded net non-interest income in business where gas technology will replace the existing coal, only underscore the amount of EUR 9.4 million and increased by EUR 0.5 million YoY. The the sense of cooperation in engaging the economy and the state in the total income growth was the result of a larger volume of transactions and direction of sustainable development. opportunities, such as energy renovations of buildings and the financing of a Supporting the fund administration services, increased to EUR 16.2 billion (2019 YE: EUR Response to COVID-19 higher margins. The total value of assets under custody, together with the largest infrastructure project 14.8 billion). In the segment exposures subject to COVID-19 moratorium were concluded and prepared adequate responsive measures by approving measures for the in the amount of EUR 366.5 million, with 34.8% already expired by the 2020 prevention of clients’ financial problems and liquidity issues. The Bank also Following the development of the COVID-19 outbreak, the Bank envisaged YE. fully implemented relevant intervention acts by adopting special processes, while the moratorium of payments by clients is also possible under the Bank’s in Slovenia. Market leader focusing on customers’ needs regular offer. The Bank remains the leading bank servicing corporate clients in Slovenia, Micro and small enterprises, which present an important pillar of the with by far the largest client base, whereas it has maintained its stronghold Slovenian economy, are expected to be the most affected by the economic cool in all client segments. It has a 17.3% market share in corporate loans (2019 down due to the COVID-19 pandemic. The Bank supported them through YE: 17.5%), and 31.4% (2019 YE: 30.0%) in guarantees and letters of credit the #HelpFrame project. This is a project of the Bank and its partners aimed (including guarantee lines). The Bank is increasingly focused on small and at giving the initiative to these enterprises and helping them restart. Further information is available in the NLB Group Sustainability Report 2020. mid-sized enterprises. 35% 30% 25% 20% 15% 10% 24.5% 18.2% 14.9% 30.0% 17.5% 16.5% 31.4% 17.3% 17.0% 31 Dec 2018 31 Dec 2019 31 Dec 2020 Market share in guarantees and letters of credit Market share in loans to customers Market share in deposits from customers Figure 38: NLB’s market share in Corporate Banking in Slovenia The positive experience from digital signing during the first lock-down was implemented as a regular process, which enabled paperless, faster, and simpler client treatment. Diversified product mix The Bank’s offer of financial services, including lending, cash management, payment services, as well as capital markets’ advisory services supports various clients’ needs. The Bank is a leading Slovenian bank in the field of trade finance with products that also support the export economy, representing an important part of the Slovenian economy. The trade finance product range and tailor- made solutions are comprehensive from traditional trade finance products, to other modern structures which provide safe financing throughout the supply chains. As a member of the Factor Chain International, the Bank aims to The Bank maintains its relationship with different Slovenian institutions, such offer exporters and importers international purchase of receivables, thus as SID Bank and the Slovenian Enterprise Fund, among them in the long- providing them with a modern, fast, and easy way of financing, which is an term lending to micro companies, SMEs, and the issuance of guarantees. additional incentive for international business. Special attention is given to Large infrastructural projects are extremely important for the economy due in Slovenia and the wider home region. The stronger market position reflects to their multiplying effects. The Bank participated in the financing of the an active advisory approach to the Group customers. letter of guarantees by which the Bank supports major infrastructure projects construction of the second rail track in Slovenia with a long-term loan of EUR 112.5 million. 48 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Business Account for private individuals was implemented to support The Bank also enriched its offering in domestic payments with the Investment banking and securities services clients with unregistered activity, especially in the segment of farmers. The introduction of a P2M (peer-to-merchant) instant payments service Bank would like to position itself in the agricultural segment, especially with which enables corporations to improve their liquidity management and The Bank, as a mandated lead arranger, successfully organised syndicated loans in young farmers investing in digitalisation and automation (flexible loans up to reconciliation, and at the same time offers a more cost-effective service. the amount of EUR 178.9 million, and as a lead manager or joint-lead manager 10 years). International corporate business successfully organised issuance of financial instruments in the amount of EUR 191.4 million on the domestic and international debt capital markets. The Bank is a leader in merchant-acquiring by accepting all major cards, with modern contactless POS network, with market share in merchants acquiring In addition, the Group’s goal is to build up clients’ trust and satisfaction on the Within brokerage services the Bank executed clients’ buy and sell orders in a total of 37.9%. basis of proactive support and collaboration among the banking members in amount of EUR 941.3 million (2019: EUR 979.5 million), while in the area of +33% 2,054 1,803 1,894 the Group. Such teamwork creates added-value opportunities that support the dealing in financial instruments the Bank executed foreign exchange spot deals clients’ plans across the Group’s home region in SEE. totalling EUR 724.0 million (2019: EUR 777.8 million) and for transactions involving derivatives in the amount of EUR 242.6 million (2019: EUR 309.6 2,261 2,395 Since 2019, when the Bank re-entered financing of international corporate million). Shrinking world trade and recession resulted in lower volumes of FX spot businesses, a total of EUR 170.5 million loan facilities (in 2020: EUR 54.5 and FX derivatives deals, conversely extremely low and even negative interest rates million) were approved for projects in the home region, of which the Bank proved to be unattractive for concluding interest rate derivatives. participated in the amount of EUR 142.0 million (in 2020: EUR 33.0 million), and other Group members in the amount of EUR 28.5 million The Bank remains one of the top Slovenian players in custodian services for (in 2020: EUR 21.5 million). Slovenian and international customers. The total value of assets under custody was, together with the fund administration services, EUR 16.2 billion (2019: EUR 2016 2017 2018 2019 2020 The Bank’s entering into large European syndicated corporate loan market 14.8 billion). Figure 39: Transaction volume at NLB POSes (in EUR million) (via secondary market) increased its visibility among international banks and boosted the possibility of new collaboration in similar transactions. The Bank also successfully debuted on the schuldschein loan market. The Bank also welcomed a rising demand from merchants for e-commerce card acceptance. Together with Bankart, the Bank introduced a new, modern Digitalisation of product offering online platform (i.e., Payment Gateway - PGW), which enables e-commerce merchants modern and competitive support for online business of card A fully digitised and user-friendly online application NLB factoring (‘Odkup payments, while providing a friendlier user experience for card payments. terjatev’) provides the Bank’s clients with a digitised receivables finance However, market conditions and restrictive measures are increasingly solution (including working capital financing option, financing domestic encouraging retailers to expand their business online, thus enabling their and cross-border receivables, import and export). This solution is well customers to make easy, secure, and cashless purchases in the safe shelter incorporated in the framework of easing potential liquidity problems faced by of their home. The latter is also proved in YoY growth in the number and clients. volume of transactions, namely by 156% or 230%, respectively, and in a larger average amount of the purchase (increased by 29% YoY). The number of m-bank Klikpro users is constantly rising (by 10% YoY), which indicates that clients are getting more used to digital banking. Constant In order to meet the growing needs and requirements of its corporate clients upgrades also improve clients’ experience, and Klikpro app being now in the area of payments, the Bank embarked on Global Payments Innovation available also in the Huawei App Gallery. (GPI) service which enables higher transparency of costs, faster payment execution, and easier tracking of international payment transactions. The The Bank’s mobile wallet NLB Pay app enables clients to make contactless, Bank is the only Slovenian bank that offers such a service for customers simple, fast, and safe payments on the contactless POS (in Slovenia and in the area of international payments. Despite the special situation due abroad) with the NLB Business Mastercard and NLB Business Maestro cards, to COVID-19, the volume of operations remained stable, as the Group and also enables instalment payments. processed 154 million transactions with a total value of EUR 304.5 billion. In terms of fees from payments and cash operations, the Group gained more After the first lock-down period, many companies had to adapt their than EUR 50 million. business practices to the changed behaviour, habits, and expectations of their customers. Digital transformation is bringing new opportunities to address customers’ needs and adapt sales channels accordingly. 49 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Customers recognised us as a reliable and proven manufacturer Marko Vrhovac Domaćinstvo Vrhovac, Republic of Srpska, BiH ‘Domaćinstvo Vrhovac’ (The Vrhovac household) is located in the village of Mravica, near Prnjavor, Republic of Srpska and is engaged in the production of juices. The production started with pear juice, considering that the household had an orchard with over 3,000 trees. After excellent reactions to pears, apple, quince, chokeberry, blackberry, raspberry, grape and dogwood juices were soon added to the array of products. The basic idea is to create a quality domestic product using only top quality raw materials and thus start a successful family business in a completely natural environment.The #HelpFrame project immediately attracted their attention. As a developing business that does not yet have the possibility of serious promotion through traditional and digital channels, they managed to reach a large number of potential customers. By participating in the project, people recognised them as a reliable manufacturer, which gave their story the necessary boost. 50 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202064% 53% 24% o/w Result of minority shareholders Strategic Foreign Markets With the acquisition of Komercijalna Banka, Beograd at the end of 2020, which added three banks and investment fund company, the core part of the Group in foreign markets now consists of nine banks and investment fund company. They are locally even stronger embedded as important financial institutions and market leaders in various business segments. All Group subsidiary banks have a stable market position and have earned a strong reputation. The market shares by total assets of subsidiary banks exceed 10% in five out of six markets. Contribution to NLB Group Result b.t. Net interest income Net non-interest income Figure 40: Contribution to NLB Group (result b.t., net interest income, net non-interest income) Strategic foreing markets The profit before tax was EUR 178.8 million, 92% higher YoY. The most important positive effect on the result had negative goodwill from Komercijalna Banka, Beograd acquisition (EUR 137.9 million), while the established impairments and provisions (EUR 59.1 million), to a large extent related to COVID-19 outbreak, had a negative effect. The result before impairments and provisions was 4% lower YoY. Net interest income increased by EUR 1.7 million (1%) YoY due to higher volumes (gross loans to customers 6% higher YoY, without inclusion of loans from Komercijalna Banka group) and despite the falling trend of interest margins. Net non-interest income decreased by EUR 4.7 million or 9% YoY, mostly due to modification losses caused by changes of contractual cash flows for loans subject to COVID-19 moratoria (EUR 2.1 million in NLB Banka, Skopje and EUR 1.1 million in NLB, Banka Beograd). Net fee and commission income decreased slightly YoY (EUR 0.9 million), due to COVID-19 negative impact on card operations and payment transactions. Total costs decreased YoY (EUR 1.2 million or 1%). Further information is available in the document NLB Group Strategic Foreign Markets - further information, which includes a detailed report on: • NLB Banka, Skopje • NLB Banka, Banja Luka • NLB Banka, Sarajevo • NLB Banka, Prishtina • NLB Banka, Podgorica • NLB Banka, Beograd • Komercijalna Banka, Beograd • Komercijalna Banka, Banja Luka • Komercijalna Banka, Podgorica • Kombank INvest, Beograd Table 17: Results of the Strategic Foreign Markets segment in EUR million consolidated The market shares (by total assets) Change YoY of subsidiary banks exceed 1% 0% 6% -9% 0% -1% -1% -4% - - 92% -63% 5% 6% 9% 10% in five out of six markets. Nine subsidiary banks and One investment fund company. Profit before tax 178.8 million EUR 92% higher YoY, mostly due to acquisition of Komercijalna Banka, Beograd (EUR 137.9 million of negative goodwill). Net interest income Interest income Interest expense Net non-interest income o/w Net fee and commmission income Total net operating income Total costs Result before impairments and provisions Impairments and provisions o/w KB Negative goodwill (KB) Result before tax 2020 159.3 182.6 -23.3 49.8 54.1 209.1 -109.0 100.1 -59.1 -13.4 137.9 178.8 3.0 2019 157.5 182.5 -24.9 54.5 55.0 212.1 -107.8 104.2 -11.3 - 92.9 8.2 1.7 0.1 1.6 -4.7 -0.9 -3.0 -1.2 -4.2 -47.8 137.9 85.9 -5.2 31 Dec 2020 31 Dec 2020 w/o KB 31 Dec 2019 Change YoY w/o KB Net loans to customers 5,052.4 3,185.4 Gross loans to customers 5,234.8 3,357.4 Individuals 2,592.9 1,743.5 3,024.6 3,162.1 1,603.8 160.7 195.3 139.6 Interest rate on retail loans - 6.28% 6.71% -0.43 p.p. Corporate 2,443.7 1,524.7 1,470.3 54.4 4% Interest rate on corporate loans - 4.15% 4.49% -0.34 p.p. State 198.1 89.2 88.0 1.3 1% Interest rate on state loans - 3.53% 4.00% -0.47 p.p. Deposits from customers 7,552.2 4,108.8 3,856.7 252.1 7% Interest rate on deposits Non-performing loans (gross) - 0.43% 0.53% -0.10 p.p. 195.0 155.1 111.6 43.5 39% Cost of risk (in bps)(i, ii) 2020 140 2019 17 CIR 52.1% 50.9% Interest margin 3.33% 3.59% Change YoY 123 1.3 p.p. 0.26 p.p. (i) Cost of risk for 2019 is adjusted to new methodology. (ii) Komercijalna Banka, Beograd is excluded from calculation. 51 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020+66% YoY +6% YoY w/o KB +96% YoY +7% YoY w/o KB 5,235 2,593 62% 2,642 70% 1,843.5 2,864 1,434 1,430 3,162 1,604 1,558 31 Dec 2018 31 Dec 2019 31 Dec 2020 7.09% 3,357 1,743 9% 4.88% 6.71% 4.46% 1,614 4% 31 Dec 2020 w/o KB 2018 2019 6.28% 4.11% 2020 w/o KB 7,552 101% 5,211 86% 2,341 1,843.5 3,438 2,343 1,095 3,857 2,598 1,259 31 Dec 2018 31 Dec 2019 31 Dec 2020 0.71% 0.58% 4,109 2,765 6% 0.41% 0.41% 7% 1,344 31 Dec 2020 w/o KB 2018 2019 0.47% 0.35% 2020 w/o KB Individuals Corporate & state Individuals Corporate & state Figure 41: Gross loans volume and interest rates in Strategic Foreign Markets Figure 42: Deposit volume and interest rates in Strategic Foreign Markets Net impairments and provisions in the amount of which EUR 59.1 million Banks in Strategic Foreign Markets have approved EUR 1,941.4 million In order to help micro and small enterprises as an important pillar of the were formed, mostly related to COVID-19 outbreak, while additional EUR moratorium, more than half of them by Serbian banks as a result of local economies and as most affected by the consequences of COVID-19 13.4 million impairments were established for expected credit losses on the COVID-19 related measures taken at the state level. 93.1% of the pandemic, in 2020 all Group banking members started the #HelpFrame performing portfolio for the Komercijalna Banka group. Gross loans to customers increased in all Group subsidiary banks in total by moratoriums approved by banking members of the Group in SEE have already expired by the 2020 YE.11 Moratorium maturity is normally 3-9 months of cumulative period. Following the EBA reactivation of guidelines on project as a part of an ESG campaign. Sustainability EUR 2,072.7 million or 195.3 million (6%) YoY without inclusion of acquired moratoria in December, new legislative moratorium measures were introduced loans from Komercijalna Banka group; the largest YoY increases were by Serbian Central Bank as well with 11 months of cumulative allowed Active engagement in social responsibility activities in the Group further recorded in NLB Banka, Beograd (EUR 63.0 million), NLB Banka, Skopje period. (EUR 52.1 million), NLB Banka, Prishtina (EUR 29.0 million), and NLB Banka, Podgorica (EUR 27.3 million). Without inclusion of Komercijalna Response to COVID-19 and digitalisation Banka group the loans to individuals recorded a solid 9% increase YoY, mostly strengthened the relationship with employees, clients, and the community. All member banks12 made decisive steps on the path of sustainable banking, which is a Group-wide initiative driven by commitments to EBRD and MIGA and the UN Principles for responsible banking. In July 2020, the banks due to double digit growth in housing loans (18%), while consumer loans grew Digital innovation helped the banks adapt during the COVID-19 pandemic appointed ESMS Officers with responsibility for the overall administration by 5% YoY. A lower but still moderate increase of 4% YoY was recorded in by accelerating efficiency improvements and achieving profitable growth and oversight of the Environmental and Social Management System. loans to corporate and state. in regular business. Despite the COVID-19 outbreak, all the banks marked strong growth in loans production volume, especially in the retail housing Due to the inclusion of the Komercijalna Banka group in the segment, total segment, where a double digit-growth was achieved. The Group banking gross loans to customers of the segment increased by EUR 1,877.3 million members improved their client-centric digital solutions, talent management, (EUR 1,616.3 million from Komercijalna Banka, Beograd, EUR 155.4 and active engagement in the Group sustainability agenda and social million from Komercijalna Banka, Banja Luka, and EUR 105.7 million from responsibility initiatives. Komercijalna Banka, Podgorica). Deposits from customers increased by EUR 3,695.6 million, of which 3,443.5 and capital indicators were above minimum requirements. The introduction million was due to the inclusion of the acquired banks. Without this inclusion, of modern technologies enabled the banks to swiftly adapt to the new normal deposits would increase by 7%, distributed equally between individuals and environment and ensure undisturbed continuance of all banking activities. corporate and state, 6% and 7%, respectively. All the banks implemented protective measures for customers in branches, Despite the turbulent environment, a strong liquidity position was maintained Further information is available in the NLB Group Sustainability Report 2020. organised work from home where possible, and adapted the rules for safe business operations. Focusing on clients’ health and achieving a positive customer experience were a part of the focal point of the banks’ activities. 11. Further details are available in Table 34. 12. Banks acquired on 30 December 2020 are excluded. 52 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Financial Markets in Slovenia The segment is focused on the Group’s activities on international financial markets, including treasury operations. In the challenging environment of low interest rates on financial markets, the continuous focus was on prudent liquidity reserves management. Wholesale funding activities contributed to the Group’s funding, and were mainly Result before impairments and provisions conducted with the aim of strengthening the capital position of the Group. Impairments and provisions Result before tax Table 28: Performance of the Financial Markets in Slovenia segment in EUR million consolidated 2020 2019 Change YoY Net interest income o/w ALM(i) Net non-interest income Total net operating income Total costs 23.5 16.5 16.2 39.6 -7.6 32.0 -1.3 30.8 33.6 29.3 2.0 35.6 -7.5 28.1 -0.5 27.6 -10.1 -12.8 14.1 4.0 -0.1 3.9 -0.8 3.1 -30% -44% - 11% -1% 14% -167% 11% 91% -5% 49.8% liquid assets (% of total assets). 78% government securities in the Group’s banking book portfolio. 3.65 years average maturity of the Group’s banking book securities portfolio. Contribution to NLB Group Balances with Central banks 1,998.1 1,044.1 953.9 31 Dec 2020 31 Dec 2019 Change YoY 11% 8% 8% Banking book securities 2,945.8 3,093.6 -147.8 Result b.t. Net interest income Net non-interest income Interest rate on banking book securities 0.77% 1.03% -0.26 p.p. Wholesale funding 143.5 161.6 -18.1 -11% Interest rate on wholesale funding 0.54% 0.50% 0.04 p.p. Subordinated liabilities 288.3 210.6 77.8 37% Interest rate on subordinated liabilities 3.64% 4.03% -0.39 p.p. Figure 61: Contribution to NLB Group (result b.t., net interest income, net non-interest income) Financial markets (i) Net interest income from assets and liabilities with the use of FTP. The segment includes income generated by the liquidity reserves, as well as The Group’s ALM the surplus from fund transfer pricing (FTP) to other business segments in Slovenia. Financial Markets in Slovenia recorded a profit before tax of EUR The purpose of the Group ALM process is to manage the Group’s balance 30.8 million, a 11% increase YoY. sheet with respect to the interest rate, currency, and liquidity risk considering the macroeconomic environment and financial markets development. Net interest income was EUR 10.1 million (30%) lower YoY, mainly due to Monitoring and management of the Group’s exposure to market risk is the capitalisation of high yielding securities either as they were due or (and in decentralised. Uniform guidelines and limits for each type of risk are set for particular) as they were sold because of higher risk perceived towards some individual Group members. The methodologies are in line with regulatory exposures during the COVID-19 pandemic in H1 2020. Later, these funds requirements on individual and consolidated levels, while reporting to regulator were reinvested at lower yields in different asset classes to further diversify the on the consolidated level is carried out using a standardised approach. portfolio. Pursuant to the relevant policies, the Group members must monitor and manage exposure to market risks and report to the Bank accordingly. The Following the H1 2020 sale of high yielding securities net non-interest income exposure of an individual Group member is regularly monitored and reported was higher, EUR 14.1 million YoY. The total effect on the income statement to the Group Asset and Liability Committee (Group ALCO). from the sold securities in H1 amounted to EUR 17.1 million. Increase in balances with CBs (EUR 953.9 million YoY), while banking Group contributed to further growth of fixed interest rate loans, mostly book securities decreased by EUR 147.8 million due to lack of attractive housing loans, and investments in high quality debt securities. In terms of and profitable short-term investments at the end of the year (T-bills auction funding, non-banking sector deposits continued to increase in the form of cancellation by RoS). sight deposits and savings accounts. The development of the COVID-19 From the interest rate risk perspective, the surplus liquidity position of the 53 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020pandemic contributed to a substantial increase in the propensity to save, and consequently to an increase in an already strong deposit base. The Group manages interest rate positions and stabilises its interest margin by actively adjusting pricing policy and by charging maintenance fees, whereas for managing interest rate risk exposure the Group keeps outstanding plain vanilla derivatives in line with the Group’s conservative risk appetite. Additionally, the exposure to interest rate risk has been managed via fund transfer pricing and external pricing policy. 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’s strategic markets. The Group’s FX risk is measured and managed with the use of a combination of a sensitivity analysis, VaR, and stress test scenarios. In terms of the liquidity risk management, each Group member is responsible for ensuring adequate liquidity via the necessary sources of funding and their appropriate diversification, and for managing liquid assets and fulfilling the 44.6% 40.6% 45.8% 49.2% Liquid assets in total assets n o i l l i m R U E 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 5,454.6 5,172.3 53.4% 1.1% 12.7% 19.6% 13.2% 63.4% 0.9% 6.1% 26.8% 2.7% 6,487.6 57.7% 0.1% 4.4% 29.4% 8.4% 31 Dec 2017 31 Dec 2018 31 Dec 2019 49.8% 9,750.5 51.4% 0.7% 4.4% 37.5% 7,523.6 49.5% 0.0% 3.8% 38.9% 7.7% 6.0% 31 Dec 2020 w/o KB 31 Dec 2020 ECB eligible credit claims Cash & CB reserves Placements with banks Trading book debt securities Banking book debt securities Encumbered assets requirements of regulations governing liquidity. Figure 62: Evolution of NLB Group liquid assets structure (in EUR million) Based on due-diligence and the initial communication, acquisition of Banking book debt securities constituted 51.4% of the Group’s liquid assets. Komercijalna Banka, Beograd is not altering the current balance sheet The purpose of the banking book securities is to provide liquidity, along with concept of NLB Group. Liquidity reserves management stabilisation of the interest margin, and interest rate risk management. When managing the portfolio, the Group uses conservative principles, particularly with respect to the portfolio’s structure in terms of asset classes. The Group’s liquidity management focuses on ensuring a sufficient level of The portfolio is well diversified from the geographical and asset class liquid assets to settle all due liabilities, minimising the cost of maintaining perspective, while the prudent tenors of the investments also reflect the liquidity, optimising the structure of liquidity reserves, ensuring an appropriate conservative risk appetite of the Group. In 2020, the Group turned its level of liquidity for different situations and stress scenarios, as well as attention to the new and fast-developing market of ESG bonds. These bonds anticipating emergencies and crisis conditions and implementing appropriate currently have a small share in the whole portfolio (EUR 56.9 million) and is contingency plans. expected to grow in the future. Liquidity reserves management in the Group is decentralised. Each Group member is responsible for its own portfolio, while Financial Markets in Slovenia manages the liquid assets of the Bank. The liquidity position of Komercijalna Banka group is very strong and the management of liquidity reserves will be embedded into the Group’s existing framework. The Group’s liquid assets as at year-end were comprised of a cash equivalent (EUR 4,089.9 million), a debt securities portfolio (EUR 5,077.6 million), and credit claims eligible for CB-secured funding operations (EUR 583.0 million). The liquid assets portfolio represents 49.8% of total assets corresponding to EUR 9,750.5 million (2019: 45.8%). A small part of liquid assets (EUR 1,030.0 million) was encumbered for operational and regulatory purposes. Liquidity reserves represent liquid assets which are not encumbered and can provide funding of the future core growth. 54 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 3% 3% 3% 4% 4% 6% 7% Austria BiH Germany Netherlands Belgium France N. Macedonia Slovenia Serbia Other Geographical structure Asset class distribution Corporate 0% Agency 2% GGB 3% Covered bond 7% Table 29: Maturity profile of NLB Group’s banking book securities as at 31 December 2020 (in EUR million) 16% Senior Unsecured 8% Domestic securities (the Group strategic markets) 26% 27% Government sec. 78% - Slovenia - Other SEE International securities Total 2021 2022-2023 2024-2025 2026+ Total 579.2 252.6 326.6 268.3 847.5 923.6 57.3 866.3 651.9 647.9 227.6 420.3 558.3 602.5 298.1 304.4 777.2 1,575.5 1,206.2 1,379.7 2,753.2 835.6 1,917.6 2,255.7 5,008.8 0% 5% 10% 15% 20% 25% 30% 0% 10% 20% 30% 40% 50% 60% 70% 80% Figure 63: Banking book securities portfolio of NLB Group by asset class and geographical structure as at 31 December 2020 Distribution of asset classes in banking book securities portfolio shows The maturity profile of the Group’s banking book securities decreased mostly government securities (including government guaranteed bonds GGB) have due to acquisition at 2020 YE. Excluding Komercijalna Banka group maturity a share of 82% (excluding Komercijalna Banka group: 76%), while banking profile substantially differs only in ‘other SEE’ item, where in 2021 it matures senior unsecured and covered bonds have 8% and 7%, respectively (excluding EUR 175 million, in 2022–2023 EUR 248 million, in 2024–2025 EUR 129 Komercijalna Banka group: 11% and 10%). From a geographical structure million, and in 2026 and beyond EUR 92 million. point of view, the nine highest exposures excluding Komercijalna Banka group are towards Slovenia (22%), North Macedonia (9%), France (8%), The average yield on the Group’s securities without Komercijalna Banka Belgium (5%), the Netherlands (5%), Germany (5%), Austria (4%), BiH (3%) group securities was 0.9% (1.2% at 2019 YE). and Finland (3%). Other contributed 35%. The average maturity of banking book securities was approximately 3.65 Wholesale funding years (excluding Komercijalna Banka group: 2020: 3.98 years and 2019: 4.09 Wholesale funding activities in the Group are conducted with the aim of years). achieving diversification, improving structural liquidity and capital position, and fulfilling regulatory requirements. The Bank raised EUR 120 million in wholesale funding in the form of a subordinated Tier 2 bonds on international capital markets to strengthen and optimise its capital position. The ECB’s permission to include the instrument in the calculation of Tier 2 capital was received in March. Two Group banking subsidiaries raised funds in a total amount of EUR 10 million. 55 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Non-Core Members Table 30: Results of the Non-Core Members segment in EUR million consolidated 2020 2019 Change YoY The Non-Core Members segment includes the operations of non-core Group members and the non- core part of the Bank’s portfolio, which consists of non-performing loans to foreign clients and a limited number of remaining Bank’s equity participations, which are to be terminated. The main objective in the Non-Core segment remains a rigorous wind-down of all non-core portfolios and the consequent reduction of costs. The implementation of the wind-down has been pursued with a variety of measures, including the sales of portfolios, sales of non-core entities, sales of individual assets, the collection or restructuring of individual assets, and active management of real-estate assets. The segment recorded a EUR 4.6 million loss before tax. Lower net non- interest income also due to the positive effect from contractual penalty (EUR 1.3 million) in 2019. Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Result before tax Segment assets Net loans to customers Gross loans to customers Investment property and property & equipment received for repayment of loans The wind-down of the Non-Core segment in 2020 included: A decrease of the total assets of the segment YoY (EUR 38.3 million) in line Other assets with the divestment strategy of the non-core segment, hence a EUR 6.0 million Non-performing loans (gross) decrease in the net operating income. -56% -51% -53% 11% -148% - -47% -23% -33% -31% 1.2 4.2 5.4 -12.9 -7.4 2.9 -4.6 2.7 8.7 11.5 -14.5 -3.0 -0.1 -3.1 -1.5 -4.5 -6.0 1.6 -4.4 3.0 -1.5 31 Dec 2020 31 Dec 2019 Change YoY 131.2 169.5 45.0 95.0 70.2 16.0 71.3 67.4 137.2 75.6 26.5 93.6 -38.3 -22.4 -42.2 -5.4 -7% -10.5 -22.4 -40% -24% 42.2 million EUR reduction of gross loans to customers in 2020. 29.6 million EUR the total sales value of real-estate transactions executed or supported by the real-estate team in 2020. • A reduction of the Reduction of the Bank’s credit business with foreign clients Cost of risk (in bps)(i) CIR 2020 2019 Change YoY -396 -231 236.2% 126.0% -165 110.2 p.p Bank’s loan exposure with foreign clients • Divestment of non- core Group members • Sale of the Bank’s equity participations • Active management of real-estate assets The decreasing of non-core loan exposure is ongoing. The Bank resolved (i) Cost of risk for 2019 is adjusted to new methodology. (whole or partly) several exposures in Croatia, Bulgaria, Slovakia, Serbia, and Montenegro, thus contributing to NPL and other off-balance wind-down Sale of NLB’s equity participations processes with a positive effect on P&L. Divestment of non-core Group members million (2019: EUR 0.31 million). At the 2020 YE, the overall asset volume of equity participations is at EUR 0.28 During 2015 – 2020, a liquidation process was initiated in all non-core leasing Active management of real estate assets and trade finance subsidiaries and some real estate subsidiaries; in 2020 for NLB Leasing d.o.o., Sarajevo and BH-RE d.o.o., Sarajevo. The divestment The divestment process of still remaining NPL exposures at the Bank or at process has been running with thoughtful cost management and well-established the non-core subsidiaries’ level is being facilitated through a specialised team collection procedures leading to a successful divesture in 2020 of NLB Leasing for repossessing, managing, and divesting collateral real estate. Real estate Sarajevo – in liquidation, NLB Leasing Podgorica – in liquidation and NLB expertise and services are offered to the Group members assisting them in Vita d.d., Ljubljana (which was also subject to EC commitments). implementation of the most efficient divestment manner of the remaining non- New business has been suspended in all non-core Group members which are in the process of being wound-down. The decrease of the cumulative non- The main task is to ensure value-preserving strategies for the real estate core subsidiaries’ portfolio remains ongoing through regular repayments and management, respectively the collateral value of NPL claims by either performing portfolio or the repossession of the collateral real-estates. collection measures. temporarily repossessing real-estate or ensuring a value-preserving divestment process of the real-estate or a claim. From 2015 to 2020, real-estate transactions with a total sales value of over EUR 168.7 million were executed or supported, and directly or indirectly contributed to a EUR 500.1 million of NPL reduction, of which EUR 29.6 million in 2020 alone. 56 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Finding way to own a brand with help of scholarship Tina Turk Skripsi, Slovenia There are many young people who want to actively contribute to the environment. If there is any entrepreneurial spirit in them, interesting entrepreneurial ideas are born. Tina Turk, a 21-year- old economics student, designed the sustainable Skripsi brand. Her basic idea is that by buying Skripsi, customers not only get a nice wooden pen, but a tree is planted in their name. Tina is so passionate about her idea, that she even invested her scholarship in its development. Just at the time of entering the market, the young businesswoman suffered a major blow - an epidemic was declared. In the new situation, she was forced to reduce the necessary investment in advertising, but she kept on going and became even more active on social networks. The #HelpFrame project helped her to further conquer the market. 57 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Risk Management The stock of NPE volume moderately increased, mainly as a result of COVID-19 impacts and acquisition of Komercijalna Banka group, while further reduction resulted from active workout activities. In addition, the coverage ratio remains high above the EU average, on slightly lower level due to acquisition impacts, enabling further NPE reduction without significant Proactive Risk Management The self-funded model, strong liquidity, and a solid capital position continued in 2020, influence on the cost of risk in the years ahead. demonstrating the Group’s financial resilience. Efficient management of risks and capital is crucial for the Group to sustain long-term profitable operations. A robust Risk Management framework is comprehensively integrated into decision-making, steering, and mitigation In the COVID-19 environment the Group is perceived as safe heaven and therefore faced growing excess liquidity, and impacts of the pandemic did in 2020. 2.3% processes within the Group, with the aim of proactively supporting its business operations. not cause any material liquidity outflows. Significant attention was put into NPE (EBA def.). Risk Management in the Group is in charge of managing, assessing, and market movements. Excess liquidity and market demand for fixed interest monitoring risks within the Bank as the main entity in Slovenia, and the rate products resulted in moderately increased interest rate risk exposure, competence centre for nine banking subsidiaries. Following the acquisition of which stayed within the risk appetite tolerance toward this risk. Moreover, Komercijalna Banka, Beograd, integration process is underway, which is in the Group’s capital and liquidity position remained strong in both the Group the area of Risk Management primarily focused on the implementation of and subsidiary bank levels, including the newly acquired Komercijalna Banka uniform Group’s Standards. group. the structure and concentration of liquidity reserves by incorporating early warning systems, while keeping in mind the potential adverse negative 80.6% of the granted moratoria expired by the 2020 YE. Credit risk Interest rate risk Liquidity risk Operational risk Other risks Risk Management principles The Bank 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 ECB and the BoS. ECB regulations are followed by the Group, where the Group subsidiaries operating outside Slovenia are Based on the Group’s business strategy, credit risk is the dominant risk compliant with the rules set by the local regulators. Across the Group, risks are category, followed by interest rate risk in the banking book, liquidity, and assessed, monitored, managed, or mitigated in a uniform manner, as defined operational risk. Management of credit risk focuses on the taking of moderate in the Group’s Risk management standards, also considering the specifics risks. The Group has limited exposure to other aforementioned risks, while of the markets in which individual Group members operate. Following the liquidity risk tolerance is low. Market risk and other non-financial risks are less acquisition of Komercijalna Banka group, the harmonisation process in the important from materiality perspective. area of Risk Management is underway. 16.6% 14.1% 257.5% 165.7% 62 bps(i) 4.5% 2.3% -7.3% The overall slow-down of the economy, caused by the COVID-19 pandemic Risk Management and control is performed through a clear organisational at the end of Q1 2020, had some negative impacts on the existing loan structure with defined roles and responsibilities. The organisation and portfolio quality and new loan generation. The Group’s credit portfolio delineation of competencies is designed to prevent conflicts of interest, quality remained solid with quite stable rating structure and portfolio ensure a transparent and documented decision-making process, subject to an diversification. The increased loan volume of the Group is primarily a appropriate upward and downward flow of information. Business line Risk result of the acquisition of the Komercijalna Banka group. The cost of Management in NLB is, by encompassing several professional areas, in charge risk increased due to the impact of negatively affected macroeconomic of formulating and controlling the Group’s Risk Management policies, setting environment, where its materiality and impacts on the risk profile of the limits, overseeing the harmonisation, regular monitoring of risk exposures and loan portfolio in the future will mostly depend on the length and severity of limits based on centralised reporting at the Group level. Table 31: NLB Group’s Key Risk Appetite indicators (KRIs) as at 31 December 2020 TCR CET1 ratio LCR NSFR Cost of Risk NPL (EBA def.) NPE (EBA def.) Interest rate risk (EVE) (i) Komercijalna Banka group is excluded from calculation. disruption in corporate operations and average income of private individuals (further details are available under the Risk Factors and Outlook). The Group puts great emphasis on the risk culture and awareness across the entire Group. The Group’s Risk Management framework is forward-looking During the year 2020, the Group reviewed IFRS 9 provisioning on an and tailored to its business model and corresponding risk profile. The main ongoing basis by testing a set of relevant macroeconomic scenarios to risk principles and limits are set forth by the Group’s Risk Appetite and Risk adequately reflect the current circumstances and related future impacts. 58 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Strategy, designed in accordance with business strategy. Special focus is placed The uniform stress-testing programme, which includes internally developed on the inclusion of risk analysis into the decision-making process at strategic models, stress scenarios, and sensitivity analysis, was further complemented. and operating levels, diversification to avoid large concentration, optimal capital Such a stress-testing framework is the subject of a regular internal validation usage and allocation, appropriate risk-adjusted pricing, and overall compliance cycle and related procedures where the Group established comprehensive with internal rules and regulations. validation framework. Namely, the Group supports a strong validation governance process and controls over applied selected risk approaches and Risk Management focuses on managing and mitigating risks in line with the internal models. Group’s Risk Appetite and Risk Strategy, representing the foundation of the Group’s Risk Management framework. Within these frameworks, the Group The business and operating environment, relevant for the Group operations monitors a range of risk metrics in order to assure the Group’s risk profile is in is changing, with trends such as changing customer behaviour, emerging new line with its Risk Appetite. In addition, the Group is constantly enhancing its technologies and competitors, and increasing new regulatory requirements. It Risk Management system, where consistent incorporation of ICAAP, ILAAP, should be noted that Risk Management is continuously adapting with the aim Recovery plan, and other internal stress-testing capabilities into the Risk of detecting and managing new potential emerging risks. Management system is essential. Moreover, the Group puts great emphasis on their integration into the overall Risk Management system in order to assure Proactive Risk Management in 2020 proactive support for informed decision-making. Figure 64: NLB Group’s Risk Management P A A L I & P A A C I s t u p n i Business strategy Risk identiﬁcation Risk Appetite (Limit system) Capital and Financial planning ILAAP ICAAP • Economic and normative- assessment of liquidity • Stress tests • Liquidity contingency plan (LCP) • Economic and normative assessment of capital • Stress tests Results Recovery plan Assessment of liquidity and capital (significant deterioration) Prudent level of capital position and MREL requirement One of the key aims of Risk Management is to preserve a prudent level of the 3.50% 3.50% 3.25% 2.75% 2.75% Group’s capital position. The Group monitors its capital position at the Group and individual subsidiary bank level in accordance with the Risk Appetite, also incorporating normative and economic perspective as part of the established ICAAP process. As at 31 December 2020, the Group had a very solid capital position and TCR of 16.6%. The capital increased mostly due to the inclusion of subordinated Tier 2 bonds (EUR 240 million), undistributed profit from 2019 (EUR 157.5 million), and the minority capital (EUR 99.0 million), also for the purpose of acquisition. Despite the implementation of CRR ‘quick fix’ 2017 2018 2019 2020 2021 and other capital relief measures, an increase of risk-weighted assets arising Figure 65: NLB Group’s Pillar 2 from the acquired Komercijalna Banka group, resulted in a drop of the Group’s Requirement evolution TCR at the end of the year 2020. The CET1 ratio, representing the capital of highest quality, stood at 14.1%. As at 31 December 2020, the Group meets all fully loaded regulatory requirements. Moreover, enhanced overall corporate governance led in the past two years to a lower Pillar 2 Requirement (P2R), which decreased from 3.5% in 2018 to 2.75% applicable in 2020 and 2021, while Pillar 2 Guidance remains at low level of 1%. The MREL requirement for the Group is based on the Multiple Point of Entry (MPE) approach. For the time being it is set as the percentage of TLOF at the sub-consolidated level of the NLB Resolution Group (the Bank and non-core part of the Group). The currently valid MREL decision issued by the BoS defines the MREL requirement at the level of 15.56% of TLOF at the sub- consolidated level of the NLB Resolution Group which needs to be met as of 31 December 2021 onward. In accordance with the revised methodology for MREL requirements TLOF will no longer represent the basis for calculating the requirement, instead TREA (based on risk-weighted assets and leverage ratio) will be used. The new period for fulfilling the requirement is expected 59 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 to be from 1 January 2022 onwards (as binding intermediate target) with transition period until 2024. The Group expects to receive a new MREL Maintaining the adequate credit portfolio quality decision in H1 2021, consequently the new MREL requirement will be Maintaining the adequate credit portfolio quality is the most important goal, implemented as part of Group’s risk appetite. Otherwise, the MREL with the focus on cautious risk-taking and quality of new loans leading to a requirement is regularly analysed and monitored by the Group. diversified portfolio of customers. The Group is constantly developing a wide Maintaining a solid level and structure of liquidity 450% 400% 350% 300% 250% 200% 150% 100% 31 D ec 2019 31 Jan 2020 29 Feb 2020 31 M ar 2020 30 A pr 2020 31 M ay 2020 30 Ju n 2020 31 Jul 2020 31 A u g 2020 30 Sep 2020 31 O ct 2020 30 N ov 2020 31 D ec 2020 LCR NLB Group LCR NLB Group w/o KB Figure 66: NLB Group’s LCR range of advanced approaches in the segment of credit risk assessment in line with best banking practices to further enhance the existing risk management tools, while at the same time enabling greater customer responsiveness. The restructuring approach in the Group is focused on the early detection of clients with potential financial difficulties and their proactive treatment. From the beginning of the COVID-19 pandemic, the Group fully respected EBA guidelines on payment moratoria regarding forborne exposures, frequently performing the assessment of borrowers and ensuring effective early warning systems. Respectively monitoring systems were upgraded with the intention to detect any significant increase in credit risk at an early stage. All relevant information was available to management bodies with higher frequency than before crisis to assure adequate and timely oversight over the critical elements of credit Risk Management and executing mitigation measures if needed. The Group’s lending strategy focuses on its core markets of retail, SME, State(iii) 3,290 SME 2,687 Institutions 446 Maintaining a solid level and structure of liquidity represents the next very and selected corporate business activities within the region and EU. On the important risk target. The liquidity position of the Group remained very Slovenian market, the focus is on providing appropriate solutions for retail, solid, and the impacts of the pandemic did not cause any material liquidity medium-sized companies, and small enterprise segments, whereas on the outflows. The Group holds a very strong liquidity position at the Group and corporate segment, the Bank established cooperation with selected corporate individual subsidiary bank levels. Also, the liquidity position of Komercijalna clients (through different types of lending or investment instruments). Banka group is very comfortable. Due to the acquisition, LCR decreased to 257.5% (by 45 p.p. in comparison to Q3 2020), but remained well above the risk appetite. Although the Group gained EUR 1.5 billion of high-quality liquid Highest quality assets (HQLA) with the acquisition of Komercijalna Banka, Beograd, only a part of them of each banking member can be included in the consolidated 57 58 60 61 63 65 60 LCR calculation (only the amount of HQLA that covers net liquidity outflows incurred in the same currency). In addition, HQLA also decreased on the Bank % n I level due to paid purchase price. Nevertheless, the level of the unencumbered eligible liquid assets increased up to EUR 8,720.5 million, representing 44.6% of total assets. Even if the event of the combined adverse stress scenario would be realised, the Group has sufficient liquidity reserves in place in the form of placements at the ECB, prime debt securities, and money market placements. All banking members satisfy the minimum liquidity reserve criteria and would survive at least three months in such stress scenario. The main funding base of the Group at the Group and individual subsidiary bank levels predominately entails customer deposits, namely in the retail segment, representing a very stable and constantly growing base. By acquiring Komercijalna Banka, Beograd, LTD decreased from 62.4% (Q3 2020) to 58.8% (YE 2020), remaining at very comfortable level. 28 30 28 33 23 25 18 A B C D 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 w/o KB 31 Dec 2020 6 5 5 4 3 3 4 7 6 5 3 2 2 2 Figure 67: NLB Group structure of the credit portfolio(i) (gross loans) by segment (in EUR million) and rating(ii) (i) Loan portfolio also includes reserves at CBs and demand deposits at banks. (ii) Rating A, B and C are performing exposures. Rating A: investment grade clients with high financial stability; Rating B: clients with high ability to repay their obligations, a significant aggravation of the economic environment would cause problems to them; Rating C: performing clients with increased level of risk who may encounter problems with settlement of liabilities in the future; Ratings D and E are NPLs: Default clients (article 178 of CRR), including clients in delay >90days and other clients considered ‘unlikely to pay’ with delays below 90 days. The numbers may not add up to 100% due to rounding. (iii) State includes exposures to CBs. Retail consumer 2,300 EUR 13.7 billion Retail housing 2,729 Corporates 2,235 Default NPL 12 8 5 2 2 2 4 E 60 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Table 32: Overview of NLB Group loan portfolio by industry as at 31 December 2020 Retail sector after acquisition of KB Banks Corporate credit portfolio (in EUR million) Corporate sector by industry NLB Group w/o KB NLB Group % % ∆ All other banking members in the SEE region, where the Group is present, are universal banks, mainly focused on the retail, medium-sized companies, and small enterprise segments. Their primary goal is to provide comprehensive services to clients by applying prudent Risk Management principles. Currently, Accommodation and food service activities 112.6 2.9% 141.2 2.9% Administrative and support service activities 108.5 2.8% 121.8 2.5% 28.6 13.3 the acquired Komercijalna Banka, Beograd is predominantly focused on retail and large companies, however its future strategy will be more focused on retail Stage 1 92% Agriculture, forestry and fishing 164.1 4.2% 288.7 5.9% 124.6 and SME segments. Retail consumer 46% EUR 5.0 billion Retail mortgages 54% The current structure of credit portfolio (gross loans) consists of 36.7% retail clients, 16.3% large corporate clients, 19.6% SMEs and micro companies, while the remainder of the portfolio consists of other liquid assets. As at 31 December 2020, with the acquisition of Komercijalna Banka, Beograd, there were no major changes in the corporate and retail credit portfolio structure. Credit portfolio remains well diversified, there is no large concentration in any specific industry or client segment. The share of retail portfolio in the whole credit portfolio is quite substantial with still prevailing segment of mortgage loans. State 26% Retail 38% Stage 2 4% Stage 3 3% FVTPL 0% Institutions 3% Corporate 33% Figure 68: NLB Group loan portfolio (measured at amortised cost) by stages as at 31 December 2020 Arts, entertainment and recreation 18.1 0.5% 21.0 0.4% 2.9 Construction industry 267.8 6.8% 373.8 7.6% 106.0 Retail sector w/o KB Banks Education 13.5 0.3% 14.1 0.3% Retail consumer 46% EUR 4.2 billion Electricity, gas, steam and air conditioning 170.9 4.4% 258.1 5.2% Finance 150.1 3.8% 167.7 3.4% Human health and social work activities 38.9 1.0% 50.0 1.0% Information and communication 164.4 4.2% 233.9 4.8% 0.6 87.2 17.6 11.1 69.5 Retail mortgages 54% Manufacturing Mining and quarrying 873.8 22.3% 986.1 20.0% 112.3 32.4 0.8% 80.0 1.6% Professional, scientific and techn. act. 148.8 3.8% 171.6 3.5% Public admin., defence, compulsory social. 132.8 3.4% 219.4 4.5% Real estate activities 182.4 4.7% 221.6 4.5% Services 12.1 0.3% 13.9 0.3% Transport and storage 555.2 14.2% 592.1 12.0% Water supply 28.3 0.7% 41.1 0.8% 47.6 22.9 86.5 39.1 1.9 36.9 12.8 Wholesale and retail trade 744.5 19.0% 923.1 18.8% 178.6 Other 1.2 0.0% 1.8 0.0% 0.7 Total Corporate sector 3,920.3 100.0% 4,921.0 100.0% 1,000.7 61 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The majority of the Group’s loan portfolio is classified as Stage 1 (92.4%), of Stage 1 exposures increased. Impacts of the COVID-19 pandemic caused the remaining portfolio as Stage 2 (4.1%), and Stage 3 and FVTPL (3.5%). moderate credit quality deterioration, namely as an increase of Stage 2 and Under IFRS 3 rules, all assets of the acquired Komercijalna Banka, Beograd Stage 3 exposures. The highest increase in Stage 3 exposures arises from the were initially recognised at fair value in the Group financial statements. accommodation and food service activities, while an increase in Stage 2 largely Respectively all loans were classified either in Stage 1 (performing portfolio) refers to manufacturing. An increase in both stages also occurred in the segment or in Stage 3 (non-performing portfolio). For Stage 3 loans special rules apply, of private individuals. Additionally, part of increase of Stage 3 exposures also since they are NPLs already at initial recognition and recognised at fair value refers to the acquisition of Komercijalna Banka, Beograd and the changed without any additional credit loss allowances. On this basis, the percentage treatment of excluded interest. Table 33: NLB Group loan portfolio (measured at amortised cost) by stages as at 31 December 2020 NLB Group after acquisition of KB banks Stage1 Credit portfolio Stage2 Stage3 & FVTPL Stage1 Stage2 Stage3 & FVTPL Provisions and FV changes for credit portfolio (in EUR million) Credit portfolio Share of Total YTD change Credit portfolio Share of Total YTD change Credit portfolio Share of Total YTD change Provision Volume Provision Coverage Provision Volume Provision Coverage Provisions & FV changes Coverage with provisions and FV changes Total NLB Group o/w Corporate o/w Retail o/w State 12,650.8 4,135.7 4,779.2 92.4% 84.0% 95.0% 3,703.1 928.5 957.0 3,290.1 100.0% 1,658.0 o/w Institutions 445.8 100.0% 159.6 560.1 426.8 133.3 - - 4.1% 8.7% 2.7% - - 89.0 59.5 29.6 - - 475.7 358.6 117.1 - - 3.5% 7.3% 2.3% - - 101.0 73.0 29.6 -1.7 - 75.7 49.0 25.2 1.3 0.2 0.6% 1.2% 0.5% 0.0% 0.1% 40.8 32.7 8.2 - - 7.3% 7.7% 6.1% - - 271.9 210.8 61.2 - -- 57.2% 58.8% 52.2% - - NLB Group w/o KB banks Stage1 Credit portfolio Stage2 Stage3 & FVTPL Stage1 Stage2 Stage3 & FVTPL Provisions and FV changes for credit portfolio (in EUR million) Credit portfolio Share of Total YTD change Credit portfolio Share of Total YTD change Credit portfolio Share of Total YTD change Provision Volume Provision Coverage Provision Volume Provision Coverage Provisions & FV changes Coverage with provisions and FV changes Total NLB Group w/o KB 10,065.6 o/w Corporate o/w Retail o/w State 3,169.6 3,935.5 91.0% 80.9% 94.1% 1,117.9 -37.6 113.3 2,661.2 100.0% 1,029.0 o/w Institutions 299.4 100.0% 13.2 560.1 426.8 133.3 - - 5.1% 10.9% 3.2% - - 89.0 59.5 29.6 - - 435.3 324.0 111.4 - - 3.9% 8.3% 2.7% - - 60.6 38.4 23.9 -1.7 - 65.3 41.0 23.0 1.1 0.2 0.6% 1.3% 0.6% 0.0% 0.1% 40.8 32.7 8.2 - - 7.3% 7.7% 6.1% - - 271.9 210.7 61.2 - - 62.5% 65.0% 54.9% - - 62 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Moratoriums and new financings as a response to COVID-19 Based on the measures taken by the governments in Slovenia and other In December 2020, after the impact of the second COVID-19 wave, the countries, the Group made moratoriums available to all eligible borrowers for EBA decided to reactivate its guidelines on legislative and non-legislative payment of obligations due to COVID-19, which were not treated as a trigger moratoria. This reactivation ensured that loans, which had previously not for a significant increase of the credit risk. Nevertheless, all clients requiring benefitted from payment moratoria, could afterwards also benefit from them. the moratorium are closely monitored as their financial situation and The revised EBA guidelines will apply until 31 March 2021. In some markets identification of credit deterioration will lead to downgrade and will impact where Group members operate, the local government or regulator renewed or the IFRS 9 staging. prolonged payment moratoriums. However, the Group members shall follow EBA guidelines on moratoria. In accordance with these guidelines, moratoria The moratorium applies to a large group of obligors predefined on the basis granted after period defined by EBA, should be classified on a case-by-case of broad criteria, and envisages only changes to the schedule of payments, basis, evaluating each client’s forbearance status. either by postponing or suspending the payments of principal amounts, interest or full instalments, for a predefined and limited period of time. Moratoriums were granted for the period between 3 to 12 months, subject to applicable government measures. Table 34: NLB Group COVID-19 Related Transactions (Moratoriums and New Financings); in EUR thousands NLB Group member Number of clients Exposure Of which: EBA Compliant moratoria Of which: expired by 31 Dec 2020 % of Exposure % of Exposure (exc. expired moratoriums) Number of clients Exposure Of which: expired by 31 Dec 2020 Of which: subject to public guarantee schemes % of Exposure Exposure Of which: expired by 31 Dec 2020 COVID-19 Moratorium COVID-19 New Financing Total COVID-19 Related Transactions NLB, Ljubljana Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other NLB Banka, Beograd Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other NLB Leasing d.o.o. - v likvidaciji, Ljubljana Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other 3,915.0 3,553.0 1,279.0 2,625.0 360.0 200.0 202.0 2.0 39,227.0 38,633.0 489,950.9 390,262.6 152,108.6 123,330.9 106,749.4 79,519.8 43,811.1 69,654.8 37,094.5 24,613.3 14,595.9 10,017.5 366,536.3 283,429.6 127,495.2 305,803.8 224,577.6 60,732.5 58,852.0 83.7 83.7 86,796.2 40,699.0 0.0 251,797.6 251,797.6 251,797.6 159,486.4 159,486.4 159,486.4 825.0 28,645.6 28,645.6 28,645.6 38,159.0 130,840.8 130,840.8 130,840.8 592.0 132.0 508.0 2.0 159.0 94.0 0.0 94.0 65.0 65.0 1.0 0.0 92,294.6 41,427.5 50,867.2 16.6 3,615.2 1,084.4 0.0 1,084.4 2,530.9 2,529.8 1.1 0.0 92,294.6 41,427.5 50,867.2 16.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 92,294.6 41,427.5 50,867.2 16.6 3,331.9 952.2 0.0 952.2 2,379.7 2,378.6 1.1 0.0 7.2% 1.8% 1.2% 0.7% 5.4% 4.5% 0.9% 0.0% 41.7% 26.4% 4.7% 21.7% 15.3% 6.9% 8.4% 0.0% 14.6% 4.4% 0.0% 4.4% 10.2% 10.2% 0.0% 0.0% 5.0% 1.5% 1.0% 0.5% 3.5% 3.2% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.1% 0.5% 0.0% 0.5% 0.6% 0.6% 0.0% 0.0% 96.0 20.0 0.0 20.0 76.0 25.0 52.0 0.0 248.0 29.0 0.0 29.0 219.0 219.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20,766.1 396.0 0.0 396.0 20,370.1 14,067.0 6,303.2 0.0 56,935.7 1,958.7 0.0 1,958.7 54,977.0 54,977.0 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 12,722.7 471.9 0.0 471.9 12,250.8 12,250.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12,766.9 50.2 0.0 50.2 12,716.8 12,716.8 0.0 0.0 56,935.7 1,958.7 0.0 1,958.7 54,977.0 54,977.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3% 0.0% 0.0% 0.0% 0.3% 0.2% 0.1% 0.0% 7.3% 0.3% 0.0% 0.3% 7.1% 7.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 510,717.0 152,108.6 123,726.9 79,519.8 44,207.1 24,613.3 14,595.9 10,017.5 386,906.4 127,495.2 319,870.8 67,035.6 83.7 86,796.2 40,699.0 0.0 308,733.4 264,520.4 161,445.0 159,958.3 28,645.6 28,645.6 132,799.5 131,312.7 147,271.7 104,545.4 96,404.5 50,867.2 16.6 3,615.2 1,084.4 0.0 1,084.4 2,530.9 2,529.8 1.1 0.0 53,678.3 50,867.2 16.6 3,331.9 952.2 0.0 952.2 2,379.7 2,378.6 1.1 0.0 63 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Group member Number of clients Exposure Of which: EBA Compliant moratoria Of which: expired by 31 Dec 2020 % of Exposure % of Exposure (exc. expired moratoriums) Number of clients Exposure Of which: expired by 31 Dec 2020 Of which: subject to public guarantee schemes % of Exposure Exposure Of which: expired by 31 Dec 2020 COVID-19 Moratorium COVID-19 New Financing Total COVID-19 Related Transactions NLB banka, Podgorica Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other NLB Banka, Banja Luka Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other NLB Banka, Skopje Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other NLB Banka, Sarajevo Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other NLB Banka, Prishtina Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other 7,601.0 7,373.0 1,758.0 6,200.0 226.0 136.0 130.0 2.0 155.0 126.0 33.0 99.0 28.0 23.0 6.0 1.0 76,912.0 76,328.0 2,126.0 75,291.0 583.0 177.0 443.0 1.0 1,431.0 1,363.0 73.0 1,322.0 67.0 33.0 39.0 1.0 5,883.0 4,646.0 2,024.0 3,884.0 1,232.0 1,218.0 26.0 5.0 165,046.9 165,046.9 165,046.9 118,981.7 118,981.7 118,981.7 69,147.7 49,833.9 42,853.2 36,508.3 6,344.9 3,212.1 20,946.1 2,200.7 1,221.3 979.4 11,730.5 11,682.4 48.0 7,015.0 69,147.7 49,833.9 42,853.2 36,508.3 6,344.9 3,212.1 8,673.6 359.4 217.0 142.4 1,299.2 1,254.6 44.6 7,015.0 69,147.7 49,833.9 42,853.2 36,508.3 6,344.9 3,212.1 17,443.6 1,939.8 1,075.2 864.7 8,488.8 8,440.7 48.0 7,015.0 347,350.6 347,350.6 292,042.4 282,459.2 282,459.2 236,966.0 83,408.3 83,408.3 65,578.9 199,050.9 199,050.9 171,387.0 64,884.7 50,472.3 14,412.4 6.6 35,157.2 12,564.3 1,728.3 10,836.0 20,770.3 16,027.8 4,742.5 1,822.6 64,884.7 50,472.3 14,412.4 6.6 35,152.3 12,564.3 1,728.3 10,836.0 20,765.4 16,027.8 4,737.6 1,822.6 55,069.8 42,872.5 12,197.3 6.6 26,799.2 11,852.3 1,681.5 10,170.8 13,124.3 10,105.7 3,018.5 1,822.6 249,283.2 249,283.2 190,121.7 49,594.5 37,530.7 12,063.8 49,594.5 37,530.7 12,063.8 48,881.0 36,897.2 11,983.9 199,623.9 199,623.9 141,175.9 199,536.1 199,536.1 141,088.4 87.8 64.7 87.8 64.7 87.6 64.7 35.1% 25.3% 14.7% 10.6% 9.1% 7.8% 1.4% 0.7% 3.6% 0.4% 0.2% 0.2% 2.0% 2.0% 0.0% 1.2% 27.6% 22.5% 6.6% 15.8% 5.2% 4.0% 1.2% 0.0% 6.5% 2.3% 0.3% 2.0% 3.8% 3.0% 0.9% 0.3% 32.3% 6.4% 4.9% 1.6% 25.9% 25.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.6% 0.0% 0.0% 0.0% 0.6% 0.6% 0.0% 0.0% 4.4% 3.6% 1.4% 2.2% 0.8% 0.6% 0.2% 0.0% 1.5% 0.1% 0.0% 0.1% 1.4% 1.1% 0.3% 0.0% 7.7% 0.1% 0.1% 0.0% 7.6% 7.6% 0.0% 0.0% 7.0 0.0 0.0 0.0 7.0 2.0 5.0 0.0 36.0 15.0 0.0 15.0 21.0 8.0 13.0 0.0 3.0 0.0 0.0 0.0 3.0 3.0 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 0.0 492.4 0.0 0.0 0.0 492.4 100.0 392.4 0.0 2,722.9 353.3 0.0 353.3 2,369.6 1,760.1 609.4 0.0 123.9 0.0 0.0 0.0 123.9 123.9 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 0.0 168.6 14.7 0.0 14.7 153.9 0.0 153.9 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 0.0 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 0.0 0.0 0.1% 0.0% 0.0% 0.0% 0.1% 0.0% 0.1% 0.0% 0.4% 0.1% 0.0% 0.1% 0.4% 0.3% 0.1% 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% 165,539.3 165,046.9 118,981.7 118,981.7 69,147.7 49,833.9 43,345.6 36,608.3 6,737.3 3,212.1 69,147.7 49,833.9 42,853.2 36,508.3 6,344.9 3,212.1 23,669.0 17,612.2 2,554.0 1,221.3 1,332.7 14,100.0 13,442.6 657.5 7,015.0 1,954.5 1,075.2 879.3 8,642.7 8,440.7 202.0 7,015.0 347,474.5 292,042.4 282,459.2 236,966.0 83,408.3 65,578.9 199,050.9 171,387.0 65,008.7 50,596.3 14,412.4 6.6 35,157.2 12,564.3 1,728.3 10,836.0 20,770.3 16,027.8 4,742.5 1,822.6 55,069.8 42,872.5 12,197.3 6.6 26,799.2 11,852.3 1,681.5 10,170.8 13,124.3 10,105.7 3,018.5 1,822.6 249,283.2 190,121.7 49,594.5 37,530.7 12,063.8 48,881.0 36,897.2 11,983.9 199,623.9 141,175.9 199,536.1 141,088.4 87.8 64.7 87.6 64.7 64 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Group member Number of clients Exposure Of which: EBA Compliant moratoria Of which: expired by 31 Dec 2020 % of Exposure % of Exposure (exc. expired moratoriums) Number of clients Exposure Of which: expired by 31 Dec 2020 Of which: subject to public guarantee schemes % of Exposure Exposure Of which: expired by 31 Dec 2020 COVID-19 Moratorium COVID-19 New Financing Total COVID-19 Related Transactions Komercijalna Banka, Beograd 143,880.0 798,057.7 798,057.7 798,057.7 Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other Komercijalna Banka, Podgorica Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other Komercijalna Banka, Banja Luka Retail o/w Housing o/w Consumer Non-financial corporations o/w Secured loans o/w Unsecured loans Other Total NLB Group 141,509.0 542,859.1 542,859.1 542,859.1 9,827.0 234,781.0 234,781.0 234,781.0 136,737.0 308,078.1 308,078.1 308,078.1 2,334.0 328.0 2,112.0 254,366.5 254,366.5 254,366.5 117,414.8 117,414.8 117,414.8 136,951.8 136,951.8 136,951.8 37.0 935.0 783.0 271.0 600.0 152.0 0.0 152.0 0.0 183.0 124.0 48.0 78.0 51.0 28.0 29.0 8.0 832.0 41,664.3 18,398.9 10,594.4 7,804.5 23,265.5 0.0 832.0 41,253.6 18,361.2 10,594.4 7,766.8 22,892.4 0.0 832.0 38,050.2 17,656.3 10,406.1 7,250.2 20,394.0 0.0 23,265.5 22,892.4 20,394.0 0.0 32,073.8 2,658.1 1,531.9 1,126.1 14,999.0 7,382.0 7,617.0 14,416.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 27,604.8 2,658.1 1,531.9 1,126.1 10,529.9 4,303.7 6,226.3 14,416.7 34.3% 23.3% 10.1% 13.2% 10.9% 5.0% 5.9% 0.0% 34.3% 15.1% 8.7% 6.4% 19.1% 0.0% 19.1% 0.0% 16.3% 1.4% 0.8% 0.6% 7.6% 3.8% 3.9% 7.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.0% 0.6% 0.2% 0.5% 2.4% 0.0% 2.4% 0.0% 2.3% 0.0% 0.0% 0.0% 2.3% 1.6% 0.7% 0.0% 3.5% 1,736.0 897.0 0.0 897.0 838.0 813.0 26.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.0 0.0 0.0 0.0 4.0 4.0 0.0 0.0 64,893.3 16,523.3 0.0 16,523.3 48,357.3 48,119.7 237.6 12.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20,406.5 5,262.1 0.0 5,262.1 15,131.7 15,131.7 0.0 12.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2,976.5 1,346.1 0.0 0.0 0.0 2,976.5 2,976.5 0.0 0.0 0.0 0.0 0.0 1,346.1 1,346.1 0.0 0.0 64,893.3 16,523.3 0.0 16,523.3 48,357.3 48,119.7 237.6 12.7 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 2,130.0 148,910.9 34,644.0 134,596.0 1.9% 0.5% 0.0% 0.5% 1.4% 1.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.8% 0.0% 0.0% 0.0% 0.8% 0.8% 0.0% 0.0% 0.8% 862,951.0 818,464.2 559,382.4 548,121.2 234,781.0 234,781.0 324,601.3 313,340.1 302,723.8 269,498.3 165,534.4 132,546.5 137,189.4 136,951.8 844.8 41,664.3 18,398.9 10,594.4 7,804.5 23,265.5 0.0 844.8 38,050.2 17,656.3 10,406.1 7,250.2 20,394.0 0.0 23,265.5 20,394.0 0.0 0.0 35,050.4 28,950.8 2,658.1 1,531.9 1,126.1 17,975.6 10,358.6 7,617.0 14,416.7 2,658.1 1,531.9 1,126.1 11,876.0 5,649.7 6,226.3 14,416.7 2,583,854.5 1,997,048.5 280,281.0 2,434,943.6 2,286,878.1 1,962,404.6 17.8% On the Group level EUR 2,434.9 million moratorium have been approved Serbian banks as a result of COVID-19-related measures taken at the state so far, 44.9% to non-financial corporations and 53.9% to households. The level. A total of 93.1% of the moratoriums approved by strategic banking amount represents 17.8% of the total gross book value. Moratoria were members of the Group in SEE have already expired by the 2020 YE. granted for the period between 3 to 12 months. Moreover, 80.6% of the granted moratoria expired by the 2020 YE, whereas by the end of Q3 2020 The Group is actively present on SEE markets by financing the existing and already 51.8% of them expired. Since the expiration of moratorium, 93.5% new creditworthy clients. Lending growth in the corporate segment remained of exposure has performed without any material delays, while non-expired relatively moderate, especially in the current specific circumstances. Besides moratoriums were already appropriately reclassified in 2020 based on future that, the COVID-19 situation contributed to a temporary slowdown in expectations. From the non-expired moratoria, 55.2% will expire in the next the growth of retail segment. Apart from moratoriums, the Group is also three months. providing additional liquidity by granting new loans to creditworthy clients to help with the specific situation due to COVID-19 crisis. The volume of such In Slovenia EUR 493.6 million moratorium have been approved with loans was EUR 20.8 million in the Bank and EUR 128.1 million in other outstanding amount of EUR 338.1 million at the 2020 YE which represents less than 4.8% of the total portfolio. Banks in Strategic Foreign Markets have approved EUR 1,941.4 million moratorium, more than half of them by banking members of the Group. EUR 134.6 million of the new COVID-19 loans are subject to public guarantee schemes in Serbia and Slovenia. 65 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020New NPLs formation and NPL management The combination of a high-quality portfolio, COVID-19 legislative options and uncertain macroeconomic conditions led to cumulative new NPLs formation in the amount of EUR 148 million, which is 1.1% of the total portfolio. These figures do not include the newly acquired Komercijalna Banka, Beograd, however, their NPLs as of 2020 YE are included in the Group’s NPLs stock. Additionally, the macroeconomic situation across the region, affected by the economic slowdown in the current year, resulted in an increased cost of risk. Its further development refers to a large extent to the economic circumstances caused by COVID-19 pandemic. Formation / gross loans (stock) 1.2% 1.4% 0.7% 0.7% 0.6% 128 31 32 64 123 15 77 31 60 37 21 2 64 36 16 12 56 35 20 1.1% 148 78 60 10 2015 2016 2017 2018 2019 2020 Corporate SME Retail/Other Figure 69: NLB Group gross NPL formation (in EUR million) Precisely set targets in the Group’s NPL Strategy and various proactive workout approaches facilitated the management of the non-performing portfolio. The Group’s approach to NPL management puts a strong emphasis on restructuring and use of other active NPL management tools, such as foreclosure of collateral, the sale of claims, and pledged assets. The non- 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,684 59.3% 2,798 69.7% 2,623 68.7% 72.2% 1,896 89.2% 76.1% 77.5% 81.8% 77.1% 28.2% 25.6% 25.1% 1,299 13.8% 19.3% 844 9.2% 622 6.9% 375 475 3.8% 3.5% 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 100 90 80 70 60 50 40 30 20 10 0 Coverage ratio 1 NPL ratio NPLs Figure 70: NLB Group NPL, NPL ratio and Coverage ratio(i) (in EUR million) (i) By internal definition. Table 35: NPL, NPL ratio and Coverage ratio by NLB Group members (in EUR thousands) NLB Group member NLB, Ljubljana NLB Banka, Skopje NLB Banka, Podgorica NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Banja Luka NLB Banka, Beograd Komercijalna Banka, Beograd Komercijalna Banka, Banja Luka Komercijalna Banka, Podgorica Total NLB Group banks Total NLB Group NPL 31 Dec 2020 208,426.1 63,177.1 27,279.5 24,690.8 17,518.9 13,702.8 8,718.3 35,219.8 1,165.9 3,558.9 403,458.1 474,748.9 % NPL 31 Dec 2020 NPL CR 2 31 Dec 2020 3.0% 5.1% 5.8% 4.5% 2.3% 2.3% 1.4% 1.5% 0.6% 2.7% 2.9% 3.5% 57.9% 69.0% 50.9% 68.9% 81.2% 63.6% 59.8% 0.0% 0.0% 0.0% 55.4% 57.3% performing credit portfolio stock stopped its multi-year declining trend as a Due to extensive experience gained in the last few years in dealing with consequence of COVID-19 outbreak. The non-performing credit portfolio clients with financial difficulties, resulting primarily from legacy portfolios, the stock in the Group increased at 2020 YE in comparison with 2019 YE to Group has developed an extensive knowledge base both in the prevention of EUR 474.7 million (2019 YE: EUR 374.7 million). The increase of NPLs financial difficulties for clients, to restructure viable clients in case of need, mainly occurred due to the deterioration of asset quality related to the and to efficiently work out exposures with no realistic recovery prospects. COVID-19 pandemic, changed treatment of accrued interest and acquisition This extensive knowledge base is available throughout the Group, and risk of Komercijalna Banka, Beograd, while different workout measures (namely units as well as restructuring and workout teams are properly staffed and repayments, collection and recovery from legacy portfolios) positively have the capacity to deal, if needed, with considerably increased volumes influenced on the stock of NPLs. The combined result of all the effects lead to in a professional and efficient manner. Due to this fact, as well as due to 3.5% of NPLs, while the internationally more comparable NPE ratio, based implemented early warning tools, and due to efficient analysis and reporting on the EBA methodology, stood at 2.3%. The Group’s indicator gross NPL mechanisms, which allows the Group to proactively identify and engage with ratio, defined by the EBA, is equal to 4.5% and is below the regulatory defined potentially distressed borrowers, the Group estimates that it is well prepared threshold for establishment of NPL strategy framework. to deal proactively with potentially distressed debtors also in the context of 66 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020COVID-19, while properly differentiating between viable and non-viable The Group carries its main business activities in euros, and the subsidiary Robust operational Risk Management clients, in order to minimise the impact on the quality of its credit portfolio. banks, in addition to their domestic currencies, also operate in euros, which is the reporting currency of the Group. The Group’s net open FX position In the area of operational Risk Management, where the Group has An important Group’s strength is the NPL coverage ratio 1 (coverage of from transactional risk is low, and at less than 1.7% of capital. Regarding established robust operational risk culture, the main qualitative activities refer gross NPLs with impairments for all loans), which remains high at 81.8%. structural FX positions on a consolidated level, assets and liabilities held in to the reporting of loss events and identification, assessment, and management Furthermore, the Group’s NPL coverage ratio 2 (coverage of gross NPLs foreign operations are converted into euro currency at the closing FX rate of operational risks. On this basis, constant improvement of control activities, with impairments for NPL) stands at 57.3%, which is well above the EU on the balance sheet date. FX differences of non-euro assets and liabilities processes, and/or organisation are performed. Besides that, the Group also average as published by the EBA (44.9% for Q4 2020). As such, it enables a are recognised in the other comprehensive income, and therefore affect focuses on proactive mitigation, prevention, and minimisation of potential further reduction in NPLs without significantly influencing the cost of risk shareholder’s equity and CET1 capital. By acquiring Komercijalna Banka, damage. Special attention is dedicated to the stress-testing system, based on a in the coming years. The decrease in coverage indicators in 4Q 2020 was Beograd, the Group’s structural FX positions increased, resulting in an scenario analysis referring to the potential high severity, low frequency events, influenced by the special treatment of NPLs from the acquired entities. NPLs increase of Group’s RWA for market risk. of Komercijalna Banka group are initially recognised at fair value, without and modeling data on loss events. Furthermore, key risk indicators, servicing as an early warning system for the broader field of operational risks (such as any additional credit loss allowances. The Group’s exposure to interest rate risk is moderate and arises mainly from HR, processes, systems, and external conditions) are regularly monitored, banking book positions. In the last three years, the Group recorded the growth analysed, and reported, with the aim to improve the existing internal controls The Group strives to ensure the best possible collateral for long-term loans, of fixed interest rate loans and the long-term banking book securities on the and enabling reacting on time. namely mortgages in most cases. Thus, the real-estate mortgage is the most assets side, and the transformation of deposits from term to sight as a result of frequent form of loan collateral for corporate and retail clients. In the the low interest rate environment and excessive liquidity. Following the indications of the outbreak of the COVID-19 pandemic in corporate loans, it is followed by government and corporate guarantees. Slovenia and SEE, the Group has taken necessary measures to protect its In retail loans, the other most frequent types of loan collateral are loan The Group’s interest rate positions were slightly affected by moratoriums customers and employees by ensuring the relevant safety conditions and insurances by insurance companies and guarantors. during the year 2020, which were mostly short-term, from 3 to 6 months, and making sure that the services offered by the Group are provided without any consequently not very material. The Group places excess liquidity mainly disruption. The Group continuously offered necessary services to clients, The Group is following the ECB guidelines to banks on NPLs with regards to into banking book securities with fixed IR, while in current negative interest especially through digital channels (mobile banking, video calls, telebanking), the evaluation of collateral. The establishment of market values for collateral rate environment there is also higher demand for products with fixed IR. which the Group continues to develop at an accelerated pace. A crisis for NPLs is by means of individual evaluation when NPL status is established. The interest rate exposure to interest rate risk remains modest, within the risk management team was established in the Bank and other banking members The value of collateral is then regularly monitored on a yearly level and appetite limits. If market interest rates would increase, the net interest income with full engagement of the Management Board members. Special attention updated by either independent evaluation (over prescribed threshold) or with of the Group would be positively affected, whereas if they decreased, negative was paid to continuous provision of services to clients, their monitoring, the use of statistical re-evaluation for smaller values of NPL. For statistical effects would be lower due to zero floor clauses included in a number of loan health protection measures, and the prevention of cyber fraud. re-evaluation the indexes from the government agency or other relevant contracts. When assessing EVE sensitivity, the Group members apply different official data sources are used. The value of collateral is with statistical scenarios. For most members, the worst case regulatory scenario is in the case In addition, the Group was also diligently managing other, non-financial approach always updated only downwards, never upwards. Only if the of increase of IR by 200 bps. From the EVE perspective, the estimated capital risks, referring to the Group’s business model or arising from other external individual appraisal shows a higher value of collateral, the upwards re- sensitivity of 200 bps equals -7.3% of the Group’s capital (including acquired circumstances, within the established ICAAP process. evaluation would be performed. If the data from statistics would show Komercijalna Banka group). significant decline in the real estate market, individual evaluations for such types of real estate would be performed and values corrected accordingly. -8.0% -7.0% -7.2% -7.2% Low market risk in the trading book Regarding market risks in the trading book, the Group pursues a low- risk appetite for market risk in the trading book. The exposure to trading (according to the CRR) is only allowed to be carried by the parent Bank as the main entity of the Group and is very limited. With the 2020 YE acquisition, the position of trading book increased due to position of Komercijalna Banka -6.0% -4.0% -2.0% 0.0% -5.5% -6.1% -4.8% -3.7% -7.3% -6.1% -6.3% Incorporating ESG risks The Group is engaged in contributing to sustainable finance by incorporating environmental, social, and governance (ESG) risks into its business strategies, Risk Management framework and internal governance arrangements. Thus, the management of ESG risks follows ECB and EBA guidelines and will be comprehensively integrated into all relevant processes. 31 Dec 2018 31 Mar 2019 30 Jun 2019 30 Sep 2019 31 Dec 2019 31 Mar 2020 30 Jun 2020 30 Sep 2020 31 Dec 2020 31 Dec 2020 w/o KB Further information on risk management is available in the Note 6 to the Audited Annual Financial Statements and Pillar 3 Disclosures. group, mostly referring to the liquid debt securities of the Republic of Serbia. Figure 71: NLB Group’s EVE evolution Nevertheless, the Bank intends to further maintain a small trading portfolio, mainly to monitor market signals in the global markets. Respectively, it does not constitute a material risk to the Group’s operations, while its tolerance for interest rate and credit spread risk in trading book is very low. 67 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The right support at the right time Sergej Ivanov PG MAGI, Serbia A veterinarian and a great lover of autochthonous breeds of domestic animals, Sergej Ivanov started breeding Balkan donkeys on Stara Planina 15 years ago. He wanted to preserve this breed whose number has greatly decreased due to the extinction of villages in this part of Serbia. On the farm, where the whole family works, he produces donkey’s milk, which is extremely healthy, especially for respiratory diseases, and is most similar to mother’s milk. The #HelpFrame project, realised in period when a large number of people started to search for natural sources of immunity due to the COVID-19 epidemic, brought him an increase in visits to the website, increased interest and sales of this healthy milk, and ultimately enabled farm improvement by increasing his herd. 68 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020IT and Cyber Security Information Technology The Group continues to provide its clients with sustainable and efficient services supported through highly reliable and secure technology platforms. The Bank is very actively pursuing a technology transformation programme, where two new large platforms were introduced in 2019. In 2020, a new IT Strategy was introduced including a core banking strategy. The team started 12.8% 15.0% delivering on outlined roadmaps. The Group is aiming to centralise and unify governance, applications, and infrastructure. The Bank also introduced effective online collaboration solution and enabled the majority of employees to work from home without interruption to operations. Due to the general cyber security risks increase, special focus was on raising overall level of cyber security resilience. IT infrastructure and reliability 55.2% 45.1% 16.1% 8.3% 7.2% NLB Banka, Beograd NLB Banka, Sarajevo NLB Banka, Podgorica NLB Banka, Prishtina NLB Banka, Banja Luka NLB Banka, Skopje NLB Figure 72: Digital penetration of Group’s banks (w/o Komercijalna Banka group) 948,645 digital users in the Group. IT performance is monitored through a set of relevant indicators that are Additionally, the ongoing projects were revised with the aim to ensure timely linked to the Balanced Scorecard (BSC) system. The indicators show the high delivery, while the relationships with key vendors were reviewed in order to performance of IT operations and successful risk management in this area. improve costs. The availability of the information system in the Bank is at very high level of 99.92% (2019: 99.93%), and the share of unplanned interruptions is very Application architecture on the Group level was assessed in terms of solutions low, 0.08% (2019: 0.02%). In 2020, the number of days without system/ GAPs/maturity, and as well as the Group’s synergy potential which then was service interruptions were at 78.5% (2019: 83%). Harmonised Service Level included in the Group IT strategy. Agreements (SLA) are in place with users of the information system, which the Bank managed to fulfil in a very high proportion. High IT operational Group-wide capabilities were significantly extended (mainly in the Group performance was also recorded in the Group members. competence centre in Belgrade, Serbia) for the new digital banking platform, Main IT initiatives enterprise integration platform, and business process management platform development within the region, and cyber security and infrastructure group. Further developments are also planned in the future. The main focus was the transformation of IT in terms of organisation, processes, people, and technology. IT supported a more agile way of delivery, The Bank achieved several new milestones in the implementation of a to better partner with business and thus be more efficient and effective. It also Group-wide data management platform which encompasses an enterprise hired new experts in strategic positions. data warehouse, advanced analytics, risk management analytics, profitability, data governance, and consolidated Group regulatory reporting. The approach of delivery was changed with an emphasis on insourcing and keeping strategic knowledge and resources ‘in-house.’ Also, several initiatives In the coming years, the Bank is expected to continue investing in newly were started, from mainframe to distributed systems, from on-premise to the adopted technologies to support the business strategy, and to achieve superior cloud, from paid to open-source where possible, and moving resources from client experience in terms of quality, innovation, reliability, and security. back-end to front delivery. 69 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020IT Strategy 2020-2024 Cyber security 99.92% the availability in NLB. At the end of the year, a refreshed IT Strategy was adopted which also The Group is giving special focus to cyber security, and consequently incorporates the Group dimension. assuring confidentiality, integrity, and the availability of data, information, and IT systems that support banking services and products for customers. The Vision statement emphasises to build the best digital bank IT team in the Cyber security in the Group is constantly tested and upgraded by security SEE region. assessments, independent reviews, and penetration testing. Cyber security is regularly discussed at the Bank’s Information Security Steering Committee, The Mission statement of the IT Strategy emphasises to enable the best client Operational Risk Committee, and Management Board meetings. In 2020, the and employee experiences through reliable, effective, secure, accessible, and Security stream in the Bank was additionally enhanced with the Information scalable IT solutions. The Main principles are to: Technology Asset Management, Document Classification and protection, Web Application Firewalls, Multi Factor Authentication and Mobile Device Management implementation. The Bank will further enhance usage of security tools and roll them out to the Group in the future. • increase customers satisfaction in all segments with new digital omnichannel platform, digitizing customer journeys and interactions All employees in the Group are also being continually educated about the (CRM) and operational excellence; importance of information/cyber security, as well as social engineering • have an effective IT architecture, which will use cloud solutions and open techniques. The Group banks are providing employees and customers with source software where ever is possible; security notifications, especially for the occurrence of threats in the (global) • introduce a new way of agile development and DevOps transformation environment with potential impact on the banks’ IT systems, services, leading to shorter releases cycles, automated testing and less manual tasks; products, and customers. The Bank is also testing the awareness of its • ensure the necessary development capacity - hire right talents with the employees with social engineering attack simulations. digital skills and looking forward to execute change; • introduce modern collaboration tools and digitize internal processes; • leverage investment made in Data platform and treat data as an asset; • assure IT quality, security, and availability of the systems and applications; • have a highly motivated, effective and satisfied IT team which will work closely and cooperate with business side. 70 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Human Resources Due to the COVID-19 pandemic, business operations were organised in a way that all employees, if their job description or other circumstances ‘Top Employer’ allowed it, could work from home (remotely). The Group ensured business for the 6th consecutive year. HR drives improvements and innovative practices to enable the best possible employee engagement and strong business results. The Group sees investments in its employees as a key change enabler. Acting as a strategic partner to the business, HR is focused on the needs of continuity by performing key business functions and processes intact despite the sudden change in the way banks perform their business. All health and safety environment decisions were made on time and in accordance with the organisational and cultural development. Due to the COVID-19 pandemic, activities connected epidemiological circumstances. to health and safe environment had the highest priority. During the periods of pandemic, on average 43% employees of the Bank worked from home, and safety environment and equipment Strive to Be ‘Top Employer’ were provided to employees working at their work place. Development activities were moved mainly to the online environment. Certain programmes were focused at the new reality; remote leadership, MS Teams, health and mental well-being, while others aimed to develop knowledge and skills related to management and sales profiles, lean processes, social learning activities, and implementation of practices to enhance employee efficiency. The Group believes that investments in its employees are crucial for the successful introduction of changes. Employee Headcount The Group is continuing to strengthen its HR practises based on feedback from reputable institutions and benchmarks with best-in-class HR practises. The Bank was once again recognised as the ‘Top Employer’ by the Dutch Top Employer Institute for already the 6th consecutive year. The Bank will continue to ensure an even more stimulating work environment also in the future. Continuing a longstanding tradition of investing in employees Caring about our employees is the key value reflected in several activities and The Group continued with optimisation of processes and right-sizing opportunities intended for all the employees. The organisational culture is its staffing level. In the last five years, the Group reduced the number of changing by engaging in various fields, integrating the member companies, employees by 13.5% to 5,807 however, due to the acquisition of Komercijalna enabling staff rotation, and changing the work environment, promoting out- Banka, Beograd and its subsidiaries in December, the number of staff at the of-the-box thinking and personal development. As a result, by changing the 2020 YE rose to 8,792. behaviour, the organisational culture is being changed. Table 36: NLB Group headcount by countries as of 31 December 2020 and 2019 Country Slovenia Serbia(i) BiH(i) (Republic of Srpska, Federation of BiH) Montenegro(i) North Macedonia Kosovo Germany Switzerland Croatia 31 December 2020 31 December 2019 2,691 (NLB: 2,591, other: 100) 2,750 (NLB: 2,659, other: 91) 3,198 1,086 467 877 463 1 2 7 494 934 312 903 474 1 3 7 A crucial part of this process is motivation and engagement of employees, which is constantly being improved. In the H2 2020 engagement on the Group level was measured. A total of 72.3% of employees participated in the survey. An above average percentage of employees (43%) are engaged (loyal and psychologically committed to the organisation). Engaged Not engaged Actively disengaged 15% 43% 42% Total (the Group) 8,792 5,878 Figure 73: NLB Group Employee Engagement 2020 (i) Acquisition of Komercijalna Banka, Beograd and its subsidiaries in December 2020. 71 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Prepared to Tackle Future Challenges Remuneration system as a motivation for engaged and committed employees The Group strives for high quality and compliance with the standards of a modern learning organisation. Various training activities are aimed to raise For an employee working in the companies within the Group, salary is awareness and encourage employees to embrace changes and 2020 was full composed of a fixed and a variable part. The fixed part of the salary is of new challenges. Purpose of these activities was to train the employees to determined according to the complexity of the work for which the employee organise themselves in new COVID-19-driven circumstances, complete their has concluded a contract of employment, while the variable amount business objectives, and thus meet their personal expectations by showing depends on the employee’s performance. Apart from quarterly or half-yearly social responsibility in interactions with all the stakeholders. compensation, the employees are awarded with annual rewards related to Due to COVID-19, most of the trainings (from March on) were conducted assessment is done by the head of the employee’s organisational unit using online. The emphasis was on programmes focused on remote work (work a top-down approach to evaluate the employee’s achievements in relation to from home), distance leadership, physical and mental health, and others. The goals set for a particular assessment period (quarter or half-year). The goals aim was to improve employee’s knowledge about the digitalisation, to explore are set according to the ‘SMART’ method, meaning that they have to be and understand contemporary tech trends, as well as to adapt to new ways of specific, measurable, achievable, relevant, and time-bound. the business performance of the bank in which they work. Performance working and learning in the digital world. At the end of the year, additional efforts were put in the direction of online measures to award employees who were exposed in this period and gave them learning by laying out the groundwork to enable all employees to have access an extra workload allowance as additional variable salary. Given the extremely difficult environment in 2020, the Bank has taken some to 7,000+ courses to cover their needs for development of knowledge and skills. Well-being & Health For employees performing special work, a Remuneration Policy is implemented on the Group level. The policy also contains provisions regarding payment of the variable part and defines the circumstances for subsequent adjustment to the risks that mandatory reduce the deferred On average The Group was committed to offering knowledge on good health, creating variable part of the salary to zero (holdback) or circumstances that potentially a work environment that enables quality interpersonal relationships, and reduce the deferred part of the variable salary to zero (clawback). 43% of NLB’s employees worked from home in the periods of pandemic. promoting activities that enhance the good health and satisfaction of employees. Due to the aggravated business situation in 2020, the Bank’s Management Board decided that, in the period from 1 May 2020 to 31 December 2020, the During the pandemic, emphasis was placed on developing healthy salary of the Management Board members is reduced by 15% and the salary habits which were communicated daily to all employees through internal of employees with service contracts by 10%. The Supervisory Board members communication portal NLB Net. Due to the changed work environment, also reduced their remuneration by 15% for the period from 1 May till 31 8,792 employees adapted to new health and safety measures. The Bank provided December 2020. all the necessary protective equipment (masks, gloves, disinfectants) and made employees in the Group family. sure proper social distancing. Remote work and work from home were enabled The BoS also adopted the Decision on Macroprudential Restrictions for to the majority of the employees in the Group. Banks’ profit distribution with the aim of making the resilience of the financial system more robust, preventing any disturbances in the financial system and lowering the systematic risks, and imposed a temporary restriction for distribution of banks’ profits. A temporary prohibition of variable salary payments or the establishment of a variable salary payment liability or discretional pension benefits for the employees performing special work have been laid down. The macroprudential measure imposed by the BoS Decision will be in force one year (from April 2020 to April 2021). Considering those measures, the Bank was unable to pay out to the employees performing special work the deferred part of variable salary for 2016, neither could pay off the variable part of the salary for 2019 or paid-out its non-deferred part. Information on sustainability aspect of HR area can be found in the NLB Group Sustainability Report 2020. 72 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Corporate Governance The Bank’s governing bodies are: The corporate governance of the Bank is based on legislation of the RoS, particularly (but not exclusively) the provisions of the Companies Act (ZGD-1) and the Banking Act (ZBan-2), the Decision of the BoS on Internal Governance, the Management Body and the Adequate Internal Capital Assessment Procedure for Banks and Savings Banks, the relevant EBA Guidelines on internal governance, the EBA Guidelines on the assessment of the suitability of members of the management body and key function holders, as well as the EBA Guidelines on remuneration practices. General Meeting of Shareholders Supervisory Board Management Board Apart from the mentioned binding legal framework, the Bank also follows In addition to good and stable business results as a systemic player in the the Corporate Governance Code for Listed Companies (valid since 1 January SEE markets, NLB also considers the environmental and social impacts of its 2017). Deviations from the recommendations of the mentioned code are business, with the aim of ensuring sustainable development of the Bank and published in the Corporate Governance Statement of NLB, prepared the Group. In 2020, the Bank upgraded the Corporate Social Responsibility according to Article 70 (paragraph 5) of the Companies Act (ZGD-1) and (CSR) activities with more consistent adherence to the 2030 Agenda of the is part of the Business Report in the NLB Group Annual Report. This UN Sustainable Development, that is the most comprehensive development statement is also published on www.nlb.si/corporate-governance. call to action so far, as it defines 17 concrete goals that should be achieved by 2030. CSR activities in the Bank will gradually be upgraded so that any The corporate governance framework of the Bank is designed jointly by the socially responsible activity will pursue at least one of the 17 UN Sustainable Management Board and the Supervisory Board of the Bank with the Corporate Development Goals and will consequently have a long-term impact on society Governance Policy of NLB (November 2020), wherein they commit to and and the environment. publicly disclose to shareholders, clients, creditors, employees, and other stakeholders as a whole, how they will supervise and manage the Bank, as At the end of September, NLB was the first bank in Slovenia that joined well as decide which corporate governance code the Bank should follow. The more than 180 banks from all over the world that signed the UN Principles mentioned policy was amended in November 2020 (published on www.nlb.si/ for Responsible Banking. Further information on sustainable development corporate-governance), due to the termination of validity of the commitments and sustainable banking is incorporated in the NLB Group 2020 by the EC as a result of receipt of the state aid in December 2013, changes to Sustainability Report published on the banks web page (www.nlb.si). the Articles of Association of NLB (Articles of Association), as well as changes of the regulation governing corporate and social responsibility. The Corporate The Bank’s corporate governance is based on a two-tier system in which Governance Policy of NLB should be read together with the NLB Group the Management Board manages the Bank, while its daily operations are Corporate Governance Policy, in which the corporate governance principles and supervised by the Supervisory Board. mechanisms of the Group members (except for NLB) are defined and governed. More information on the corporate social responsibility and the implementation of sustainability into the Group business model (together with information on the GRI standards) is available in the NLB Group Sustainability Report 2020. In 2020 NLB as the first bank in RoS implemented the decision passed by the Constitutional Court of the RoS regarding participation of employees in the bank’s managing bodies. Namely, on 13 June 2019, the Constitutional Court established an inconsistency of the fourth section of the Banking Act (ZBan-2), which excluded workers’ participation in the managing bodies of the bank. Therefore, on 15 June 2020, the General Meeting adopted amendments to the Articles of Association, which allow the Workers’ Council to appoint four representatives to the Supervisory Board and grant the possibility to appoint a worker director. 73 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The General Meeting of Shareholders The General Meeting of Shareholders (General Meeting) is the highest body of the Bank through which shareholders exercise their rights, which include among others: decisions on corporate changes (amendments of the Articles of Association, increase or decrease of share capital) and legal restructuring (mergers, acquisitions); decisions on all statutory issues with respect to appointing and discharging members of the Supervisory Board (representatives of capital) and appointment of an auditor; use of distributable profit; and granting of a discharge from liability to the Management Board and Supervisory Board. Competences of the General Meeting are stipulated in the Companies Act (ZGD-1), the Banking Act (ZBan-2), and the Articles of Association. The General Meeting met on 15 June 2020 and took note of the NLB Group Since the mandate of four members of the Supervisory Board expired in Annual Report 2019 approved by the Supervisory Board, the Report of the 2020, the General Meeting elected members of the Supervisory Board. Supervisory Board of NLB on the Results of the Examination of the NLB The terms of office for László Urbán and Alexander Bayr were terminated, Group Annual Report 2019, took note of the adopted Internal Audit’s Report while Primož Karpe and David Eric Simon were re-elected for a new term for 2019 and adopted the Information on the Income of Members of the of office. Additionally, Verica Trstenjak was elected as a new member of Management Board and Supervisory Board of NLB for the last year. The the Supervisory Board (more information on election of members of the shareholders also decided on the allocation of distributable profit for 2019. Supervisory Board is in the following sub-chapter on the Supervisory Board). The distributable profit for 2019 in the amount of EUR 228,039,879.73, The General Meeting also adopted a decision that allows the Management which consisted of net profit for 2019 in the amount of EUR 176,148,615.15 Board to convene the General Meeting by electronic means thereby allowing and retained earnings from previous years in the amount of EUR shareholders to participate without a physical presence in the meeting. 51,891,264.58 remained undistributed representing the profit carried over, due to the restriction introduced by the BoS on the macroprudential All adopted resolutions together with voting results are available to interested restrictions on the distribution of banks’ profits, with the aim to lower the parties at the Ljubljana Stock Exchange website SEOnet (https://seonet.ljse.si). impact and consequences of the COVID-19 epidemaic. The purpose of the measure is to preserve capital so that the banking system can more easily withstand potential losses and continue to provide the economy and citizens with credits. In continuation, the General Meeting granted discharge to the members of the management and supervisory bodies for the 2019 financial year. In accordance with the Decision passed by the Constitutional Court of the RoS in June 2019 the General Meeting adopted the proposed amendments to the Articles of Association with regard to participation of workers in the governing bodies of banks. The Amendments to the Articles of Association allow the Works Council to appoint four representatives to the Supervisory Board and grant the possibility to propose the appointment of a worker director. As a result, the Articles of Association were amended also in the article governing the number of members of the Management Board. 74 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The Supervisory Board The Supervisory Board of NLB (Supervisory Board) carries out its tasks in compliance with the provisions of the above mentioned laws governing the operations of banks and companies, as well as the Articles of Association. In accordance with the two-tier governance system and the authorisations for supervising the Management Board, the Supervisory Board is, among other tasks, responsible for: appointing and dismissing the president and members of the Management Board and deciding on their remuneration, issuing approvals to the Management Board in relation to the Bank’s business policy and financial plan, the strategy of the Bank and the Group, organising the internal control system, giving consent to the Audit Plan of the Internal Audit, all financial transactions (e.g. issuance of own securities, and equity stakes in companies and other legal entities), and supervising the performance of the Internal Audit. The Supervisory Board acts in accordance with the highest ethical standards, preventing any conflict of interest. In 2020, the Bank implemented the Decision of the Constitutional Court with respect to participation of workers in a bank’s managing bodies. In accordance with the already mentioned changes to the Articles of Association, adopted on the General Meeting held on 15 June 2020 the Supervisory Board now consists of 12 members, out of which eight are representatives of the capital and four are employee representatives elected and appointed by the Workers’ Council of NLB. For four members of the Supervisory Board, the term of office expired in 2020. At the General Meeting held on 15 June 2020, Primož Karpe and David Eric Simon were re-elected for a new term of office, additionally, Verica Trstenjak was elected as a new member of the Supervisory Board. On 9 June 2020, Worker Council of NLB elected and appointed Petra Kakovič Bizjak, Sergeja Kočar, and Bojana Šteblaj as members of the Supervisory Board – representatives of employees. Their four-year term of office began on the day of the registration of changes to the Articles of Association into the court register (17 June 2020). On 1 September 2020, the Bank received a letter of resignation from Petra Kakovič Bizjak. Her mandate was terminated on 10 September 2020. On 20 November 2020, the Bank received information that the Workers’ Council elected Janja Žabjek Dolinšek as member of the Supervisory Board – and representative of the workers. Her term of office started on 20 November 2020.13 Further information about the work and composition of the Supervisory Board is available in the chapter Corporate Governance Statement of NLB. 13. Further developments are available in the chapter Events after 31 December 2020. At 31 December 2020, the Supervisory Board included the following members: Representatives of capital Representatives of employees Primož Karpe, M.Sc. Andreas Klingen Sergeja Kočar, M.Sc. Chairman Deputy Chair Member Shrenik Dhirajlal Davda Member David Eric Simon Bojana Šteblaj, M.Sc. Member Member Mark William Lane Richards Member Peter Groznik, Ph.D. Member Janja Žabjek Dolinšek, M.Sc. Member Gregor Rok Kastelic Member Verica Trstenjak, Ph.D. Member 75 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Primož Karpe, M.Sc. David Eric Simon Shrenik Dhirajlal Davda Chairman Member Member Term of office: 2016-2020, Term of office: 2016-2020, Term of office: 2019-2023 Gregor Rok Kastelic Member Term of office: 2019-2023 Verica Trstenjak, Ph.D. Sergeja Kočar, M.Sc. Member Member Term of office: 2020–2024 Term of office: 2020–2024 renewed term 2020-2024 renewed term 2020-2024 Link to CV Link to CV Membership in NLB Membership in NLB Supervisory Board committees: Supervisory Board committees: • Nomination Committee (Chairman) • Audit Committee (Chairman) • Audit Committee (Member) • Risk Committee (Member) • Operations and IT (Member) Membership in management bodies of related or unrelated companies: of related or unrelated companies: • Jihlavan a.s., President of • Angler d.o.o. - Director the Supervisory Board Membership in management bodies Andreas Klingen Deputy Chair Term of office: 2015-2019, renewed term 2019-2023 Link to CV Membership in NLB Supervisory Board committees: • Nomination Committee (Deputy Chairman) • Risk Committee (Chairman) Membership in management bodies of related or unrelated companies: • None • Czech Aerospace industries sro, legal representative • Central Europe Industry Partners a.s., sole Member of the Supervisory Board Peter Groznik, Ph.D. Member Term of office: 2017-2021 Link to CV Membership in NLB Supervisory Board committees: • Nomination Committee (Member) • Remuneration Committee (Member) • Risk Committee (Member) Membership in management bodies of related or unrelated companies: • MSIN • CETIS Link to CV Link to CV Link to CV Link to CV Membership in NLB Supervisory Board committees: • Operations and IT Committee (Deputy Chairman) • Remuneration Committee (Member) Membership in NLB Membership in NLB Membership in NLB Supervisory Board committees: Supervisory Board committees: Supervisory Board committees: • Remuneration Committee (Chairman) • Nomination Committee (Member) • Nomination Committee (Member) • Audit Committee (Member) • Remuneration Committee (Member) Membership in management bodies • Audit Committee (Member) Membership in management bodies of related or unrelated companies: Membership in management bodies of related or unrelated companies: • None of related or unrelated companies: Membership in management bodies • Triglav Group, Slovenia, Deputy • None of related or unrelated companies: • Managing Director, Meghraj Capital Ltd, Kenya (since 2020) Mark William Lane Richards Member Term of office: 2019-2023 Link to CV Membership in NLB Supervisory Board committees: • Operations and IT Committee (Chairman) • Nomination Committee (Member) • Risk Committee (Member) Membership in management bodies of related or unrelated companies: • None Chairman of the Supervisory Board (2012-2017) • SID Banka, Slovenia, Member of the Supervisory Board (2009-2012) Bojana Šteblaj, M.Sc. Member • Komercijalna Banka, Beograd, Serbia, Term of office: 2020–2024 Member of the Supervisory Board (2006) • NLB Montenegrobanka, Podgorica, Montenegro, Member of the Supervisory Board (2006) • Komercijalna Banka, Skopje, North Macedonia, Member of the Supervisory Board (2005-2006) • ABN Amro Bank N.B., Uzbekistan, Member of the Supervisory Board (2004-2006) Janja Žabjek Dolinšek, M.Sc. Member Term of office: 2020–2024 Link to CV Link to CV Membership in NLB Supervisory Board committees: Membership in NLB • Operations and IT (Member) Supervisory Board committees: • None Membership in management bodies of related or unrelated companies: Membership in management bodies • None of related or unrelated companies: • None 76 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Committees of the Supervisory Board The Supervisory Board appoints committees that prepare proposals for resolutions passed by the Supervisory Board, ensures their implementation, and performs other expert tasks. The Bank’s Supervisory Board has five collective decision-making and advisory committees, namely: Audit Committee Risk Committee Nomination Committee Remuneration Committee David Eric Simon President Andreas Klingen President Primož Karpe President Gregor Rok Kastelic President Operations and Information Technology (IT) Committe Mark William Lane Richards President Shrenik Dhirajlal Davda Deputy president Primož Karpe Member Peter Groznik Deputy president Andreas Klingen Deputy president Mark William Lane Richards Deputy president Shrenik Dhirajlal Davda Deputy president Mark William Lane Richards Member Verica Trstenjak Member Shrenik Dhirajlal Davda Member Andreas Klingen Member Gregor Rok Kastelic Member David Eric Simon Member Peter Groznik Member Peter Groznik Member Primož Karpe Member Gregor Rok Kastelic Member Sergeja Kočar Member Sergeja Kočar Member Bojana Šteblaj Member Further information about the work and composition of the Committees of the Supervisory Board is available in the chapter Corporate Governance Statement of NLB. 77 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The Management Board At the end of 2020 the composition of the Management Board was as follows: The Management Board of NLB (Management Board) leads, represents, and acts on behalf of the Bank, independently and at its own discretion, as provided for by the law and Articles of Association. In accordance with above mentioned recent changes to the Articles of Association, the Management Board has three to seven members (the President and up to six members, of which one may be the worker director), which are appointed and dismissed by the Supervisory Board. The President and members of the Management Board are appointed for a five- year term of office and may be reappointed or dismissed early Blaž Brodnjak CEO & CMO Petr Brunclík COO Andreas Burkhardt Archibald Kremser CRO CFO in accordance with the law and Articles of Association. Term of office: 2016-2021, Term of office: 2020-2025 Term of office: 2016-2021, Term of office: 2016-2021, renewed term 2021-2026 renewed term 2021-2026 renewed term 2021-2026 At the beginning of 2020, the Management Board consisted of Blaž Brodnjak, CEO & CMO; Archibald Kremser, CFO; Andreas Burkhardt, CRO; and László Pelle, COO. László Pelle and the Supervisory Board agreed on the termination of his office as of 31 January 2020. In order to assure continuation of the function of COO, the Supervisory Board appointed Petr Brunclík as member of the Management Board. Petr Brunclík assumed his function as Link to CV Link to CV Link to CV Link to CV Other important functions Other important functions Other important functions Other important functions and achievements: and achievements: and achievements: and achievements: • More than 20 years of experience • Almost 20 years of diverse banking, • 19 years of experience in the • More than 20 years of experience in the at managerial positions on all levels business, customer service, area of banking, especially in financial services industry in Austria, of international banking groups. process improvement, online, the area of Central Europe. CEE, and SEE focusing on finance COO on 18 May 2020, upon receiving a consent by the ECB on 13 May 2020. supervisory boards of 13 commercial On 12 November 2020, the Supervisory Board reappointed Blaž Brodnjak as CEO & CMO, Archibald Kremser as CFO, and Andreas Burkhardt as CRO of the Bank for a period of five years from the end of their term on 6 July 2021. banks in 6 countries, 3 insurance Direct responsibility: companies in 3 countries, leading asset • IT Architecture management company in Slovenia • IT Delivery and multinational production group. • Data Management Direct responsibility: • Internal Audit • Compliance and Integrity • Global Risk and Credit Risk – Corporate and Retail • Was a chairman or member of the and technology experience. Further information about the work and composition of the Management Board is available in the chapter Corporate Governance Statement of NLB. Direct responsibility: • NLB Group IT Security Governance • Restructuring • IT Shared Service Centre • Workout and Legal Support • Strategy and Business Development • IT Infrastructure • Legal and Secretariat • Communications • Procurement • Payment Processing • HR and Organisation Development • Cash Processing Membership in management or • Group Steering supervisory bodies of related or unrelated companies: Membership in management or and asset management, strategy and corporate development, as well as performance improvement assignments. Direct responsibility: • Financial Accounting • Controlling • Financial Markets • Group Real Estate Management • Investment Banking and Custody • Financial Markets Processing • Chairman of the Board of Directors: supervisory bodies of related • Retail and Private Banking, • Corporate Banking Processing NLB Banka, Prishtina or unrelated companies: and Corporate Banking • Retail Banking Processing NLB Lease&Go (since 15 May 2020) • Chairman of the Board of Directors: Membership in management or Membership in management or supervisory bodies of related supervisory bodies of related or unrelated companies: or unrelated companies: • Chairman of the Supervisory Board: • None NLB Banka, Beograd (until 11 December 2020) NLB Banka, Podgorica Komercijalna Banka, Beograd (from 30 December 2020) NLB Banka, Sarajevo NLB Banka, Banja Luka NLB Banka, Skopje • Member of the Board of Directors: Komercijalna Banka, Beograd (from 30 December 2020) • President of the Association of Banks in Slovenia (from 1 November 2017) • President of the Board of Governors: AmCham Slovenia (from 15 September 2020) • Member of Executive Committee of the Handball Federation of Slovenia 78 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Advisory bodies of the Bank’s Management Board The Management Board also appointed working bodies that operate at a lower level: • Committee for New and Existing Products • Group Real Estate Asset Management Sub Committee • Committee for Business IT Architecture • Data Management Committee • Anti - Money Laundering Commission The Watch List Committee The Risk Committee Chairman: CRO Chairman: CRO The Watch List Committee is an The Risk Committee monitors and advisory body which acknowledges periodically reviews matters related to the activities related to the clients on risk and commercial risk and prepares the Watch List. As a rule, committee materials for the Management meetings are convened quarterly. The Board to obtain decisions. The committee has seven members. Committee has eleven members. Collective decision-making bodies Different committees, commissions, boards, and working bodies may be appointed by the Management Board for execution of individual tasks within powers of the Management Board. Corporate Credit Committee Chairman: CRO NLB Operational Risk Committee Chairman: CRO The Sales Board Chairman: CMO The Committee determines credit ratings The Committee is responsible for The Sales Board adopts decisions on the and makes decisions on the reclassification monitoring, guiding, and supervising management of the range of products and of clients and approves commercial banking operational risk management in the Bank, services and the relations with the clients investment transactions and limits that are and for transferring this methodology in the area of sales. As a rule, Committee beyond the competencies of the Directors. to the Group members. As a rule, the meetings are convened once a week. The Committee adopts decisions that are Committee meets once every two months. The Committee has eleven members. outside of the powers of the directors, as The Committee has fifteen members. NLB Retail Credit Committee Chairman: The General Manager of Credit Risk – Corporate and Retail The 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. 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. As a rule, committee meetings are convened once a The Change the Bank Committee Chairman: CEO week. The Committee has eight members. The Committee is responsible for adopting Assets and Liabilities Committee of the NLB Group Chairman: CFO The Committee monitors conditions in the macroeconomic environment and analyses the balance, changes to and trends in the assets and liabilities of the Bank and the Group companies, drafts resolutions and issues guidelines for achieving the structure of the Bank’s and the Group’s balance sheet. Committee meetings are generally convened once a month and this Committee has four members. decisions related to the development portfolio with the aim of transforming the Bank and decisions related to adopting the development guidelines. As a rule, the Committee meetings are convened once a month. The Committee has four members. The Group Real Estate Asset Management Committee Chairman: CFO The 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. 79 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Compliance and Integrity The Group addresses the challenges of high regulation and strict regulatory requirements with a systematic approach to mitigating compliance risks. It is important to ensure that employees and decision-makers know and understand the purpose and objectives of the regulations. The Group is continuously strengthening the compliance function and diligence of its operations. A Culture of compliance is integrated into the day-to day business of the Bank to support its operations, to contribute to its strong internal control environment, and to ensure that compliance risks are mitigated. In 2020 Compliance and Integrity employed 10 additional colleagues with the aim to further enhance its capability. Fraud prevention and investigation Physical / technical security AML / CTF Business ethics and corporate integrity Oversight, monitoring, steering, and managing the Group compliance function and programme(i) The Compliance and Integrity in the Bank addresses the following risk areas: Identification, assessment, and management of compliance, and integrity risks at the Bank and the Group levels (i) Established by standards for compliance and integrity for the Group and implementation of monitoring by off-site data analysis and onsite visits. Fit and proper assessment procedures (as part of assessing reputation, financial strength, time availability, and conflict of interests) Conflict of interests, gifts and hospitality management Privacy data protection and information security Regulatory compliance Corruption prevention Group-wide ethics and integrity standards Preventing Money Laundering and Terrorism Financing Within the framework of the programme of ensuring business compliance, The Bank complies with national regulations on Anti-Money Laundering and the Group also deals with the ethics and integrity of the organisation. Such a Counter-Terrorism Financing (AML/CTF), including the Guidelines of the programme encourages employees and other stakeholders to conduct business BoS. The RoS is a member of EU, and thus is subject to the standards of the which is consistent with a strong positive organisational culture. The values Financial Action Task Force (FATF) and the European legislation based on of the Group, embedded in the Group Code of Conduct, provide guidance them. For the Group, it is of paramount importance to effectively mitigate and principles of expected behaviour regarding ethical conduct and require the risk of money laundering and terrorism financing. This is why rules, 426 new laws, draft laws, regulations and other information regarding regulatory environment of the Bank reviewed. 10 appropriate conduct from all employees at any level of the organisation, procedures, and technology in the area of AML/CTF are the subject of strict additional new employees onboarded including its contractors. and unified policies/standards. The same approach is applied for sanctions in Compliance and Integrity. The regime on inside information (MAR) and embargo screening. Group AML Team upgraded and introduced further enhancements of Group AML governance in line with directions set by the BoS. The headquarters exercises constant onsite and off-site monitoring of the In line with the Financial Instruments Market Act (ZTFI-1), MAR, and other implementation and execution of standards throughout the Group. relevant regulations, the Bank has a system in place on the level of the Bank and its entire Group for managing and publicly disclosing inside information The Bank monitors AML/CTF indicators and whenever necessary in a manner that enables it to comply with the obligations related to inside transactions are reported to competent national authority, pursuant to AML/ information identification and disclosure in accordance with the rules and CTF legislation. Furthermore, business relationships were terminated where regulations applicable at any time. Also, the Bank has a system in place criteria were met. The Bank has adopted additional measures to prevent the implementing the market abuse prevention regime in accordance with onboarding of clients with new types of AML/CTF indicators. Following MAR to prevent insider trading, market manipulation, and illegal disclosure the 2018 and 2020 increase in the AML/CTF team, the Bank dedicated of inside information. additional resources to the team. 66 cases investigated. 80 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Information security and personal data protection The information security area, inter alia, focused on implementation of measures for increasing the level of information/cyber security, as well testing the resilience of systems took place (pen-tests). Furthermore, in line with the plan, several internal assessments/compliance checks were made on the basis of ISO 27001:2013 and ISO 27002:2013 standard, including related to external (service) providers (i.e., data processors and external software providers). Special obligatory e-training for all employees in the area of information security was prepared and was followed by testing of awareness related to social engineering; all as part of prevention measures in this area. The Bank runs its operations in line with GDPR requirements, including the retention and processing of personal data, dedicated Data Privacy Officer, education, and training of employees. The new Slovenian Personal Data Protection Act (ZVOP-2) was not adopted in 2020 as expected. If necessary, further alignments will be made when the national legislation is in place. Prevention An internal periodical survey on Ethics and Compliance was conducted again in 2020 to understand the pulse and perception of these topics among employees. Conclusions were made and decisions for enhancing adopted based on response findings. In combination with assessment of compliance risks (so-called ECRA – Enterprise Compliance Risk Assessment) the management of the Bank and Compliance and Integrity in particular can plan its activities; all with the aim to reduce or mitigate the compliance and integrity risks. As part of compliance programme, Compliance and Integrity is also involved, inter alia, in risk assessments regarding new and changed products, fit and proper assessments for key function holders, outsourcing, and other changes materially affecting the Bank’s business. As a standard Compliance function, several workshops and compulsory e-education on ethics, the prevention of corruption, conflicts of interest, protection of personal data, AML/CTF, Information Security, Physical Security, and other relevant topics related to everyday work were prepared. For all employees, yearly e-trainings are mandatory on subjects such as prevention of insider trading and market manipulation, ethics, anti- corruption, mitigation of conflict of interests, personal data protection, information security, and similar themes. The Group seeks to promote a corporate culture that facilitates compliance, and by continuously raising awareness, for example through communication via its monthly compliance newsletter, detailing not only important regulatory changes, but also current information and case studies on different compliance and ethics topics. Internal Audit Internal Audit reviews key risks in the Group’s operations, advises management at all levels, and deepens understanding of the Bank’s operations. It provides independent and impartial assurance regarding the management of key risks, management of the Bank, operation of internal controls, and thereby strengthens and protects the value of the Bank. 50 planned and extraordinary audits conducted in the Bank. 26 Internal Audit is the 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 provided impartial assurance to the Management Board and Supervisory Board on the management of risks in key areas, i.e., cyber security, IT project assurance, retail and corporate moratoria process and Internal Audit experts. control activities, customer data and data quality management, IT organisation and IT outsourcing, RWA calculation for credit and operational risk, credit risk management (early warning system, individual provisioning, ratings and loan collateral management), cash management in branches, and others. The highest standards Performed audits were followed 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 (ZBan-2) or Internal Audit performs its tasks and responsibilities 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 for 2020, Internal Audit of NLB conducted 50 audit assignments (out of that four audits on a Group level), four were postponed due to objective reasons. Furthermore, auditors conducted 32 branch inspections, three joint audits with the local auditors and two internal audit quality reviews, both in the Group. Auditors also conducted two unplanned audits and were involved in several strategic projects as advisor. The majority of the recommendations given in 2020 were implemented within the agreed deadlines. other relevant laws which Implementation of uniform rules regulate the operations of a Group member • Code of Ethics of an Internal Auditor • Code of Internal Auditing Principles Internal Audit increases efficiency. It focuses on monitoring the implementation of audit recommendations, training and education, updating the internal audit charter and manual, 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. 81 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020To know you have someone to rely on Toni Gerasimovski TERMONET, North Macedonia TERMONET is a leading company in the sale of products for a wide range of integrated systems and products for solar power, plumbing, and heating systems. TERMONET is not only aware of the complexity and different demands of the market, they also provide service that transfers technical expertise and know-how with decades of experience. As for many, the past year has been full of challenges and difficulties. Customer interest has been significantly reduced, sales did not even come close to the desired results, and they faced difficulties in day-to-day operations. When they found out about the NLB #HelpFrame project, they recognised an opportunity to improve the situation, and thanks to the project they received support at a time when it was needed the most. Through the ads, they made contacts with clients for future cooperation. Also, the project confirmed their belief that we are stronger together, and that true partners are recognised in a crisis. 82 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Corporate Governance Statements Statement of Management’s Responsibility Authorisation to Perform Banking Services In accordance with the provisions of Article 14 (1st paragraph) of the It may perform the following additional financial services, pursuant to Regulation on Books of Accounts and Annual Reports of Banks and Savings Article 6 of the Banking Act (ZBan-2): Banks (Official Gazette of the RS, No. 69/17, 73/19 and 164/20) adopted by the Bank of Slovenia on the basis of the authorisation from Article 93 of 1. brokerage in the sale of insurance policies pursuant to the law governing the Banking Act (Official Gazette of the RS, no. 25/15 with Amendments, the insurance industry hereinafter ‘ZBan-2’), NLB hereby lists all types of financial services which, 4. custodian services according to the law governing investment funds and in accordance with the authorisation of the Bank of Slovenia, took place management companies during the period for which the business report was prepared. NLB has 5. credit brokerage for consumer and other loans In accordance with the provisions of Article 134 of the Financial The Management Board confirms that the business report includes a fair an authorisation to perform banking services pursuant to Article 5 of the Instruments Market Act, the Management Board hereby confirms the view of developments and operating results of the Bank and the Group and Banking Act (ZBan-2). Banking services are the acceptance of deposits and Authorisation to perform banking services is published on the official web statements made in the business report, which are in accordance with the their financial standings, including a description of the key types of risks and other repayable funds from the public and the granting of credits for its own page of the BoS (https://www.bsi.si/en/financial-stability/institutions- attached financial statements as at 31 December 2020, and represent the the companies under consolidation are exposed as a whole. account. under-supervision/banks-in-slovenia/8/nova-ljubljanska-banka-dd- 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 2020. Ljubljana, 23 March 2021 Management Board of NLB Archibald Kremser CFO Andreas Burkhardt CRO Petr Brunclík COO Blaž Brodnjak CEO & CMO ljubljana). The bank has an authorisation to perform mutually recognised and additional financial services. It may perform the following mutually recognised financial services, pursuant to Article 5 of the Banking Act (ZBan-2), namely: 1. accepting deposits and other repayable funds from the public 2. granting of loans, including: • consumer loans • mortgage loans • purchase of receivables with or without recourse (factoring) • financing of commercial transactions, including export financing based on the purchase of non-current non-past-due receivables at a discount and without recourse, secured by financial instruments (forfeiting) 4. payment services 5. issuing and managing other payment instruments (e.g., travellers’ cheques and bank bills of exchange), insofar as such services are not included in the services referred to in the previous point 6. issuing of guarantees and other sureties 7. trading for own account or for the account of clients: • • • • • in money-market instruments in foreign legal tender, including currency exchange transactions in standardized futures and options in currency and interest-rate instruments in transferable securities 8. participation in securities issues and the provision of associated services 9. corporate consultancy regarding capital structure, operational strategy and related matters, and consultancy and services in connection with corporate mergers and acquisitions 10. monetary intermediation on interbank markets 11. advice on portfolio management 12. safekeeping of securities and other related services 13. credit rating services: collecting, analysing and disseminating information regarding creditworthiness 14. leasing of safe deposit boxes 15. investment services and transactions, and ancillary investment services in accordance with the Financial Instruments Market Act (ZTFI) 83 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Corporate Governance Statement of NLB Recommendation no. 29.3: NLB does not have a programme of acquisition of own shares (in 2020 NLB didn’t buy any own shares and In the event of deficiencies, irregularities of breaches identified in the process of implementation of internal controls the breaches are discussed at Pursuant to Article 70, paragraph 5, of the Companies Act (ZGD-1)14 NLB hereby gives the following Corporate Governance Statement as a part of the Business Report of the NLB Group Annual Report 2020. 2. COMPLIANCE WITH THE CORPORATE GOVERNANCE therefore didn’t need a programme of acquisition of own shares). Should the Operational Risk Committee and appropriate actions are taken. In the CODE FOR LISTED COMPANIES NLB need to buy its own shares (e.g. for the purpose of paying variable events of intentional breaches of the Bank’s rules as defined by the Group remuneration in the form of own shares to its Identified Staff), it will draw Code of Conduct, the events are handled according to the Integrity and The Bank does not follow (or implements partially) the following it up. Compliance Policy of NLB and NLB Group. 1. STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE recommendations: Information contained in this point represents a ‘Statement of Compliance Recommendation no. 10.1: In assessing candidate’s eligibility for the position of Supervisory Board member, statutory criteria are applied. Recommendation no. 29.9: NLB does not publish the rules of procedure of its bodies (Management Board and Supervisory Board and 3.1.2. Internal Control Functions The internal control functions are part of the system of the internal the General Meeting) on its website. However, each year the Bank discloses governance in the Bank. Internal control functions include: with the Corporate Governance Code’ as defined in the Ljubljana Stock However, candidates don’t have a certificate evidencing their specialised the composition, competences, and work of its managing bodies in the Exchange Rules, dated 27 April 2020 (Article 24). professional competence for membership on a Supervisory Board, such as ‘Corporate Governance Statement of NLB’ and publishes it in the NLB 1.1. REFERENCES TO THE CODE ON CORPORATE GOVERNANCE certificate. That said, all of the strict conditions have to be fulfilled according The Internal Audit function is organised according to the Charter on the Apart from binding legal framework (primarily but not exclusively to banking legislature. 3. MAIN FEATURES OF INTERNAL CONTROL AND RISK MANAGEMENT Internal Audit of NLB adopted by the Management Board on 13 November the Certificate of the Slovenian Directors’ Association, or any other relevant Group Annual Report as well on Bank’s website. a) The Internal Audit Department Companies Act (ZGD-1), Banking Act (ZBan-2), EBA Guidelines), the Bank SYSTEMS IN RELATION TO FINANCIAL REPORTING as a public company, also follows best corporate practice recommendations of the Corporate Governance Code for Listed Companies, adopted by the Recommendation no. 12.2: The Rules of Procedure of the Supervisory Board of NLB do not include the list of all types of transactions for which NLB is governed by the provisions of the Banking Act (ZBan-2) and the 2019). 2018 (and supplemented on 13 August 2019), to which the Supervisory Board of NLB gave its approval (30 November 2018 and 6 September Ljubljana Stock Exchange and Slovene Directors’ Association, adopted on the Management Board needs prior approval of the Supervisory Board, Regulation on Internal Governance Arrangements, the Management Body 27 October 2016 (came in force on 1 January 2017). The recommended but refer to Article 24 of the Articles of Association. These rules also do and the Internal Capital Adequacy Assessment Process for Banks and The Charter of the Internal Audit of NLB is the umbrella document best corporate governance practices contribute to a transparent and not include the Supervisory Board evaluation, education, and training of Savings Banks regulating, among other, the Bank’s obligation to set up, about the understanding and role of the Internal Audit in the Bank, which understandable corporate governance system, which promotes both the members of the Supervisory Board. These provisions are part of other maintain appropriate internal control, and risk management systems. As a defines the purpose, powers, responsibilities, and tasks of the Internal Audit domestic and foreign investor confidence, as well as the confidence of internal documents or decisions of the managing bodies. result of this, NLB has developed a steady and reliable internal governance in line with the International Standards for the Professional Practice of employees, other stakeholders (regulators, suppliers, etc.) and the general public. This code is published on the Ljubljana Stock Exchange’s website (http://www.ljse.si). A decision on which code the Bank will follow is made Recommendation no. 12.3: The Rules of Procedure of the Supervisory Board of NLB do not include the scope of topics and timeframe to be system encompassing the following: Internal Auditing. The mentioned Charter lays down the position of the Internal Audit in the organisation, including the nature of the relationship • A clear organisational structure with precisely defined, transparent, and between the functional responsibility of the Head of the Internal Audit to jointly by the Management Board and the Supervisory Board of the Bank respected by the Management Board in its periodic reporting of the consistent internal relations in the area of responsibility; the supervisory body, grants authorisations to internal auditors for accessing by adopting the Corporate Governance Policy of NLB (November 2020). Supervisory Board. However, the scope of topics and time frames of • Effective risk management processes for identifying; measuring or records, employees, premises, and equipment relevant for performing their periodic reporting to the Supervisory Board are included in annual Action assessing; and managing and monitoring risks – including risk appetite, tasks, and defines the area and activities of the Internal Audit. Compliance with the aforementioned code is explained in the Corporate Plan of the Supervisory Board and Articles of Association. Professional risk strategy, ICAAP, ILAAP, recovery plan and the reporting of risks to Governance Statement of NLB on ‘comply or explain basis,’ in which the services of the Bank take care that timely information is provided to the which the Group is exposed or could be exposed in its operations; The Management Board has set up an independent internal audit function Bank provides explanation on deviations or reasoning for non-compliance Supervisory Board. • Incorporating the main strategic risk guidelines into the annual business which gives assurances and advice about risk management, internal controls with certain recommendation. The statement refers to the Bank’s system of corporate governance from the beginning to the end of financial year, which also corresponds to the beginning and the end of the calendar year Recommendation no. 15.3: NLB does not follow this recommendation because the President of the Supervisory Board is at the same time President • Suitable internal control mechanisms that include appropriate of the Internal Audit is to consolidate and secure the value of the Bank administrative and accounting procedures; by issuing objective assurances based on risk assessment, with consultancy plan review, budgeting process, and other relevant decision-making; system, and management of the Bank. The mission and the principal task (from 1 January until 31 December). Corporate Governance Statement of of the Nominations Committee. • The appropriate remuneration policies and practices that are in line and deep understanding of the Bank’s operations. In addition to that, the NLB is, according to Article 70 (paragraph 5) of the Companies Act (ZGD- with prudent and effective risk management, and thus promote risk Internal Audit carries out regular control of the quality of operation of the 1), included in the Business Report of the NLB Group Annual Report (published on (https://www.nlb.si/financial-reports), and is also published Recommendation no. 17.1: Members of the Supervisory Board don’t receive attendance fees, but are entitled to payment for performing their management. on the Bank’s website under the chapter on Corporate Governance (https:// function. 3.1. Internal control mechanisms other internal audit departments in the Group and takes care of constant development of the internal auditing function. www.nlb.si/corporate-governance). Suitability of the internal control mechanisms are determined by the Pursuant to the provisions of the law, the Bank has organised the internal NLB strives to increase the level of its business transparency and informs Recommendation no. 25.3: The Bank does not follow the recommendation on rotation of audit companies (at least once every seven independence, quality, and validity of: audit as an independent organisational unit, primary responsible to the Supervisory Board of NLB and secondary to the Management Board of the shareholders and other expert community based on Guidelines on years), however, the Bank complies with the Banking Law (ZBan-2) that • The rules for and controls of the implementation of the Bank’s NLB. Disclosure for Listed Companies (Ljubljana Stock Exchange, valid from 23 allows a longer period. Still, the audit firm did replace the audit partner organisational, business, and work procedures (internal controls), and November 2020) on electronic communications system of the Ljubljana responsible for the audit of NLB and the Group financial statements for • The internal control functions and departments (internal control The Supervisory Board of NLB must issue its approval of the appointment, Stock Exchange (SEOnet), in line with Rules and Regulation of the year 2020. Luxembourg Stock Exchange, as well as in line with Rules of the London Stock Exchange through Regulatory News Services (RNS) of the London Stock Exchange. Recommendation no. 27.4: NLB draws up its financial calendar which is published on its website (https://www.nlb.si/financial-calendar) and functions). 3.1.1. Internal Controls Internal controls should be put in place at all levels of the Bank’s remuneration, and dismissal of the Director of the Internal Audit, which ensures their independence and thus the independence of the work of the Internal Audit. The Corporate Governance system of the Bank and all relevant information provide information on the dividend payment date, which is announced in and support functions, and at the level of each of the Bank’s financial b) The Risk Management Function on Bank’s management that exceeds the requirements of article 70 of the the publication of the Agenda and Proposed Resolutions to be passed at the services. In daily operations, the Bank follows the internal act System of The Risk Management Function is organised according to the Charter Companies Act (ZGD-1) are published in the Corporate Governance Policy Annual General Meeting (both documents published on https://www.nlb. Internal Controls, which sets the system of internal controls in NLB and of the Risk Management Function of NLB adopted by the Management of NLB (November 2020) and other documents that are communicated to the stakeholders and other interested persons by being published on the si/general-meetings). The dividend payment date is determined based on KDD Operations Rules (Central Securities Clearing Corporation). responsibilities for its establishment, continuous performance, and its upgrading. On the organisational level, the Bank established middle-offices Board on 6 November 2015, in agreement with the Supervisory Board of NLB. The Charter on Functioning of the Risk Management Function includes the date of the Annual General Meeting, even though it doesn’t organisational structure, especially the levels of commercial, control, NLB’s website (http://www.nlb.si/corporate-governance). and back offices. 14. The Companies Act (ZGD- 1; Official Gazette of the RoS, No. 42/06 and consecutive changes). of NLB is the framework document on understanding and role of the risk management function; it defines the purpose, validity, and method 84 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020of operation, as well as the authorisations and responsibilities of the risk • Anti-money laundering and counter-terrorist financing (separately for • A reliable decision-making and operation support system An explanation regarding significant direct and indirect management function according to the requirements of the Banking Act NLB and the Group) • Accurate, complete, and timely accounting data, the resulting accounting, ownership of the company’s securities in the sense of (ZBan-2) and the Regulation on Internal Management Arrangements, • Information security and data protection Management Body, and Internal Capital Adequacy Assessment Process for • Personal data protection and other reports of the Bank and the Group • Compliance with legal and other requirements achieving a qualified stake as determined by the act regulating acquisitions (Point 3 of the sixth paragraph of Article 70 of the Banks and Savings Banks. • Regulatory compliance management • Prevention of fraud and internal investigations 4. INFORMATION ON POINT 4, PARAGRAPH 5, OF THE ARTICLE 70 OF THE ZGD-1) The risk management function represents an important part of overall • Security ZGD-1 regarding points 3, 4, 6, 8, and 9 of paragraph 6 in the same article Significant direct and indirect ownership of the company’s securities in management and governance system in the Group. This function in • Development of compliance risk methodologies, and setting and NLB is organised within the Risk stream, covered by the member of the monitoring ethics and integrity standards Management Board in charge of risk (CRO). The risk stream covers the • Harmonisation of policies and practices within the Group (Competence following organisational units: line Compliance and Integrity) • Global Risk Compliance and Integrity is an organisational unit of the Bank, placed • Corporate and Retail Credit Analysis Department directly under the Bank’s Management Board in the organisational • Evaluation and Control • Restructuring structure. The Bank adopted Integrity and Compliance Policy of the NLB and the NLB Group (Version 1, December 2016), which regulates the • Non-Performing Loan Management Department and Recovery method and scope of the activities of the compliance function in the Bank. Separate policies regulate different areas which are organised within the Shareholder RoS Brandes Investment Partners, L.P.(i) EBRD(i) Schroders plc(i) terms of achieving a qualifying holding as defined in the Takeovers Act (as at 31 December 2020): Number of shares Percentage of shares Nature of ownership 5,000,001 / / / 25.00 >5 and <10 >5 and <10 >5 and <10 shares GDRs GDRs GDRs The risk management function is performed by the Global Risk. In Compliance and Integrity in NLB. (i) In the form of GDRs. accordance with the competences, authorisations, and responsibilities, Global Risk is represented by its General Manager. The Global Risk is in Supervision over compliance of operations is within the competence of More information on the Bank’s Share Capital is available on the website: and that this person is not, directly or indirectly, a holder of more than 25% functional and organisational terms separate from other functions where the Compliance and Integrity. This enables the Compliance and Integrity https://www.nlb.si/shares. of the Bank’s voting rights. business decisions are adopted and where potential conflict of interest may to operate independently from other Bank’s departments. The director of arise with the risk management function. The head of the risk management Compliance and Integrity does not perform any other function at the Bank An explanation regarding the holders of securities that carry The acquirer who exceeds the share of 25% of the Bank’s shares with function has direct access to the Management Board of the NLB and at the that could possibly lead to conflict of interests. To ensure his independence, special control rights voting rights, and does not require the issuance of approval for the transfer same time unhindered and independent access to the Supervisory Board of the director reports to the Management Board and to a specific member of (Point 4 of the sixth paragraph of Article 70 of the ZGD-1) of shares, or does not receive the approval of the Bank, may exercise the NLB and the Risk Committee of the Supervisory Board of the NLB. the Bank’s Management Board responsible for compliance area (including voting right from 25% of the shares with the voting rights. information security and AML/CTF functions), which additionally ensures The Bank did not issue any securities carrying special controlling rights. In members of the Group, the risk management function is organised independence of operation of the Compliance and Integrity. There are no restrictions other than those mentioned and those that are according to the local legislation, taking into account the bases for set-up, An explanation regarding restrictions related to voting rights, regulatory. organisation, and activities in the area of risk management in the members, As information security, AML/CTF and Group AML functions are in particular: (i) restrictions of voting rights to a certain stake as defined in the document ‘Risk Management Standards in the NLB organised within Compliance and Integrity, CISO, head of AML/CTF or certain number of votes, (ii) deadlines for executing voting An explanation of the (i) company’s rules on appointment or Group.’ The described standards on risk management provide the members area for NLB and head of the Group AML are ensured full independence rights, and (iii) agreements in which, based on the company’s replacement of members of the management of supervisory of the Group the bases with which they have to align their organisation, through equal reporting lines as the director of Compliance and Integrity, cooperation, the financial rights arising from securities are bodies, and (ii) changes to company’s Articles of Association strategic risk-taking guidelines, internal policies, methodologies, and and have direct access and separate reporting line to the Bank’s Supervisory separated from the rights of ownership of such securities (Point 8 of the sixth paragraph of Article 70 of the ZGD-1) reporting system. Board. Following NLB’s model, the compliance function has been (Point 6 of the sixth paragraph of Article 70 of the ZGD-1) established in the core members of the Group as well based on the Group The appointment or replacement of members of Risk management and control is performed through a clear organisational standards for compliance and integrity area. Through specific binding The shares of the Bank are freely transferable, subject to the provisions the management or supervisory bodies structure with defined roles and responsibilities. The organisation and standards in the area of compliance and integrity, there is a harmonised of the Articles of Association of the Bank which require the approval of The Management Board of the Bank is comprised of three to seven delineation of competencies is designed to prevent conflicts of interest, system of standards and practices in the area of compliance and integrity in the Supervisory Board, namely for the transfer of shares of the Bank by members, one of whom is appointed President of the Management Board and to ensure a transparent and documented decision-making process that place in the entire NLB Group, in core and non-core members. which the acquirer, together with the shares held by the holder before such of the Bank, and one member may be a Worker Director. The number of is subject to an appropriate upward and downward flow of information. an acquisition and the shares held by third parties for the account of the Management Board members is determined by a resolution of the Bank’s Business line Risk Management in NLB, encompassing several professional 3.2. Financial reporting acquirer, exceeds a 25% share of the Bank’s voting shares. Approval for the Supervisory Board. The President and other members of the Management areas, is in charge for formulating and controlling the Group’s risk With the aim of ensuring appropriate financial reporting procedures, the transfer of shares is issued by the Supervisory Board. Board are appointed and recalled by the Supervisory Board of the Bank; management policies, setting limits, overseeing the harmonisation, regular Group pursues the adopted Policy on Accounting Controls. The accounting the President of the Management Board may propose to the Chair of the monitoring of risk exposures and limits based on centralised reporting at controls are provided through the operation of the complete accounting The Bank rejects the request for approval of transfer shares if the acquirer, Supervisory Board of the Bank to appoint or recall an individual member or the Group level. In contrast, the primary responsibility for managing the function with the purpose of ensuring quality and reliable accounting together with the shares held by the acquirer before the acquisition and the the remaining members of the Management Board of the Bank. However, assumed risks in the Group members within centralised set limits lies with information, and thereby accurate and timely financial reporting. The shares held by third parties for the account of the acquirer, exceed the 25% it is the Workers’ Council of the Bank that may propose to the Supervisory each Group member’s management board. principal identified risks in this area are managed with an appropriate share of the Bank with voting rights, increased by one share. Board of the Bank to appoint or recall a Worker Director. system of authorisations, a segregation of duties, compliance with The Group puts great emphasis on the risk culture and awareness across the accounting rules, documenting of all business events, a custody system, Notwithstanding the provision mentioned in the first paragraph, approval The President and members of the Management Board shall be appointed entire Group. The Group’s Risk management framework is forward-looking posting on the day of a business event, in-built control mechanisms in source for the transfer of shares is not required if the acquirer of the shares has for a period of five years and may be re-appointed for another term and tailored to its business model and corresponding risk profile. applications, and archiving pursuant to the laws and internal regulations. acquired them for third parties. So, it is not entitled to exercise voting rights of office. The President and members of the Management Board may c) The Compliance, Information Security, and AML/CTF Functions Furthermore, the policy precisely defines the primary accounting controls, from these shares at its sole discretion, while at the same time committing to be recalled prior to the expiry of their term of office in accordance performed in the scope of analytical bookkeeping, and secondary accounting controls, i.e., checking the efficiency of implementation of the Bank that it will not exercise voting rights on the basis of the instructions of an individual third party for whose account it has acquired the shares with applicable laws and Articles of Association. Each member of the Management Board of the Bank may prematurely resign her/his term of Compliance and Integrity in the Group in its role as internal control primary accounting controls. With an efficient mechanism of controls in the if, together with the instructions for voting, it does not receive a written office with a period of notice of three months. A written notice shall be function performs control activities with respect to the main following areas: area of accounting reporting, the Group ensures: guarantee from that person that this person has shares for his own account delivered to the Chair of the Supervisory Board of the Bank. The notice 85 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020term may be shorter than three months if requested by the resigning treasury shares, while the total percentage of shares acquired on the basis 6. INFORMATION ABOUT THE COMPOSITION AND WORK OF THE banks and companies, the Bank’s Articles of Association, and its Rules of member of the Management Board of the Bank in his/her notice and is of this authorisation, together with the treasury shares already in possession MANAGEMENT AND SUPERVISORY BODY AND ITS COMMITTEES Procedure of the Supervisory Board of NLB. The Supervisory Board may subject to the approval of the Supervisory Board of the Bank. of NLB, may not exceed 10% of NLB’s share capital (2,000,000 shares). engage legal and other consultants and institutions required by itself or its When disposing its treasury shares which NLB acquired on the basis of this 6.1. The Management Board committees to perform their tasks. A member of the Bank’s Management Board may only be a person who authorisation, the pre-emptive right of the existing shareholders to acquire Composition of the Management Board fulfils the legally prescribed conditions for a management board member shares is excluded in full in case treasury shares are disposed of for the The Management Board is the decision-making and representation body of Composition of the Supervisory Board under the law on banking, and who obtained a licence from the BoS or the purpose of paying the variable part of remuneration to the employees of the Bank. It manages the Bank, makes business decisions autonomously and As the term of office of four members of the Supervisory Board of NLB ECB – if executing the competences and tasks from Item (e) of paragraph 1 NLB in the form of NLB’s shares. independently, adopts the development strategy, ensures sound and effective expired in 2020, the General Meeting of Shareholders on 15 June 2020 of Article 4 of Regulation (EU) no. 1024/2013 for the performance of the risk management, acts with the highest professional integrity, protects adopted the decision to elect new members. Primož Karpe and David function of a bank’s management board member under the law regulating 5. INFORMATION ON THE WORK AND KEY POWERS OF THE business secrets, and is held accountable for the legality of the Bank’s Eric Simon were re-elected for a new term of office, while the term of banking. The Bank assesses every candidate following the Bank’s Policy SHAREHOLDERS’ MEETING AND OF ITS KEY POWERS, AND A DESCRIPTION operations within the limits set by the relevant regulations. office of László Urbán and Alexander Bayr expired. Additionally, Verica governing a Fit & Proper assessment prior to the appointment. OF SHAREHOLDERS’ RIGHTS AND THE METHOD OF THEIR EXERCISING Trstenjak was elected as a member of the Supervisory Board. All three At the beginning of 2020, the Management Board of the Bank consisted of members were appointed for a four-year term, which began on the day of The Supervisory Board of the Bank consists of a total of 12 members, Competences of the Bank’s General Meeting are stipulated in the Blaž Brodnjak, CEO; Archibald Kremser, CFO; Andreas Burkhardt, CRO; their appointment and shall last until the conclusion of the Annual General of which eight members represent the interests of shareholders and four Companies (ZGD-1), Banking Act (ZBan-2) and the Articles of Association. and László Pelle, COO. László Pelle and the Supervisory Board agreed Meeting of NLB that decides on the allocation of distributable profit for members represent the interests of employees. Members representing the The General Meeting is a body of the Bank through which shareholders on the termination of his office as at 31 January 2020. In order to assure the fourth financial year after their election, counting the year in which they interests of shareholders shall be elected and recalled by the Bank’s General exercise their rights, which include among others: decisions on corporate continuation of the function of COO, the Supervisory Board appointed were appointed as the first one. Meeting from persons proposed by shareholders or the Supervisory Board changes (amendments of the Articles of Association, increase or decrease of Petr Brunclík as member of the Management Board, who joined NLB on of the Bank and members representing the interests of employees shall be share capital) and legal restructuring (mergers, acquisitions), adopt decisions 2 February 2020 in a function of Executive Assistant to the Management At the same General Meeting, the shareholders also adopted amendments to elected and recalled by the Workers’ Council of the Bank. Members of the on all statutory issues with respect to appointing and discharging members Board. He assumed his function as COO on 18 May 2020, upon receiving the Articles of Association, which based on Constitutional Court’s decision Supervisory Board representing the interests of shareholders are elected by of the Supervisory Board (representatives of shareholders) and appointment a consent by the ECB on 13 May 2020. On 12 November 2020, the adopted in June 2019, enabled workers’ participation in the management an ordinary majority of votes cast by shareholders. of an auditor, distribution decisions (appropriation of distributable Supervisory Board reappointed Blaž Brodnjak as the CEO, Archibald bodies. With the mentioned decision, the Constitutional Court annulled The members of the Supervisory Board of the Bank are elected for the Supervisory Board. period lasting from the day of their election until the end of the Bank’s Following the already mentioned decision of the Constitutional Court of the Workers in Management with respect to employee representatives in a stipulated that the provisions of the Law Governing the Participation of annual general meeting of shareholders, which decides on the use of The General Meeting is convened by the Management Board. The General RoS in June 2019, the Bank was required to enable workers participation bank’s managing bodies would not apply to banks. In accordance with accumulated profit for the fourth business year since they have been elected, Meeting may be convened by the Supervisory Board in cases where the in its governing bodies. For that purpose, an amendment to its Articles of changes made to the Articles of Association, the Supervisory Board consists unless otherwise stipulated at the time of appointment of individual Management Board fails to convene the General Meeting or where when Association was adopted at General Meeting of Shareholder on 15 June of 12 members, out of which eight are representatives of the capital and members. a convocation is necessary to ensure unhindered operations of the Bank. 2020 that enables a right of the Bank’s employees to one member of the four are employee representatives (elected and appointed by the Workers’ profit), and granting of a discharge from liability to the Management and Kremser as the CFO, and Andreas Burkhardt as CRO of NLB. the fourth paragraph of Article 33 of the Banking Act (ZBan-2), which The Supervisory Board may amend the agenda of the General Meeting Management Board (the Worker Director). Council of NLB). The general meeting of the Bank may dismiss an individual or all members convened in line with the Articles of Association. of the Supervisory Board (representatives of shareholders) even before the Work of the Management Board In June 2020, the Workers’ Council of NLB elected and appointed Petra expiration of their term of office. A resolution on a dismissal shall be valid if As a rule, the General Meeting of the Bank shall be convened at the After the successfully completed privatisation process of NLB and the Kakovič Bizjak, Sergeja Kočar, and Bojana Šteblaj as members of the adopted with at least a three-quarter majority of all votes cast. registered office of the Bank, yet it may also be convened at another fulfilment of the highly limiting commitments to the EC by the end of Supervisory Board of NLB – representatives of employees. Their four-year The Supervisory Board of the Bank shall at its first meeting after an resolutions by simple majority of the votes cast, unless the applicable laws for future growth so that the Bank intensified activities on digitalisation Articles of Association into the court register (17 June 2020). appointment elect from among its members a Chair and at least one Deputy or the Bank’s Articles of Association stipulate a larger majority or other and modernisation of processes and services of the entire NLB Group, Chair of the Supervisory Board of the Bank. A member representing the conditions. interests of employees cannot be elected Chair or Deputy Chair of the increasing the range of customer services and the improvement of efficiency. On 26 June 2020, members of the Supervisory Board of NLB elected From February 2020, the Management Board took all necessary actions Primož Karpe as Chairman of the Supervisory Board for the second Supervisory Board of the Bank. All the supervisory board members shall be The shareholders have the right to participate at the general meeting of the in order to lower the impact and consequences of COVID-19 pandemic. consecutive time, while Andreas Klingen was re-elected as Deputy. At that independent professionals as defined by the Articles of Association. Bank, the voting right, pre-emptive right to subscribe for new shares in case Through the year, the Management Board worked on activities that resulted point, the Supervisory Board of NLB consisted of 11 members, of which venue specified by the convenor. The Shareholders’ Meeting shall adopt 2019, the Management Board in 2020 began creating new opportunities terms of office began on the day of the registration of the changes to the of share capital increase, the right to profit participation (dividends) and the in purchase of Komercijalna banka a.d. Beograd (Komercijalna Banka, eight were representatives of shareholders (in addition to Primož Karpe and Amendments to Articles of Association: right to a share in surplus in the event of liquidation or bankruptcy of the Beograd) in December 2020. Detailed information on the composition and amount of remuneration of and Verica Trstenjak) and three were representatives of employees (Petra Andreas Klingen, members were also Gregor Rok Kastelic, Mark William Lane Richards, Shrenik Dhirajlal Davda, Peter Groznik, David Eric Simon, A qualified majority of at least 75% of the votes cast by shareholders at the Bank and the right to be informed. general meeting of the Bank’s shareholders is required for the adoption of any amendments of the Articles of Association. Based on Article 296 of the Companies Act (ZGD-1), NLB informs the Management Board is contained in Appendices C.1 and C.3 of this Kakovič Bizjak, Sergeja Kočar, and Bojana Šteblaj). Due to the changed shareholders on their rights as shareholders in an Information on the statement. membership, the Supervisory Board also appointed members to its five An explanation regarding the authorisation of the members Rights of Shareholders that is published among documents for convocation committees. of the management, particularly authorisations to issue or of each General Meeting (i.e., on expansion of the agenda, proposals by 6.2. The Supervisory Board purchase own shares shareholders, voting proposals by shareholders, and the shareholders right to In accordance with the two-tier governance system, the Bank’s Supervisory Given the fact that the changed Articles of Association allowed up to (Point 9 of the sixth paragraph of Article 70 of the ZGD-1) be informed). Board issues approvals to the Management Board related to the Banks’ four employee representatives to the Supervisory Board of the NLB, the business policy and financial plan, approves the strategy of the Bank and the Workers’ Council published a call for the election and appointment of one The General Meeting of Shareholders of NLB on 10 June 2019 authorised With recent changes in the Articles of Association at the General Meeting, Group, the internal control system organisation, gives consent to the Annual more member – an employee representative. While this process was still the Management Board for redeeming treasury shares in the period of an amendment was adopted that enables the shareholders to attend the Plan of the Internal Audit, as well as financial transactions defined in the ongoing, on 1 September 2020, the Bank received a letter of resignation 36 months from the adoption of the resolution at the General Meeting. Pursuant to the provisions of the Banking Act (ZBan-2), NLB is required to pay out the variable remuneration of certain employees (in part) in NLB’s shares. The authorisation is valid for acquiring up to 36,542 NLB General Meeting without physical presence. Articles of Association. The Supervisory Board acts in accordance with the highest ethical standards of management, considering the prevention of from Petra Kakovič Bizjak, member of the Supervisory Board – the employee representative. Her mandate was terminated by agreement with conflicts of interest. The Supervisory Board performs its tasks in accordance the Supervisory Board on 10 September 2020. The procedure for one with the provisions of the applicable legislation governing the operations of 86 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020member of the Supervisory Board – the worker representative was still • Final Monitoring Trustee Report for the Reporting Period July – The Audit Committee’s tasks are defined by law, the Bank’s Articles of • NLB Group Risk Strategy, Amendment to Risk Appetite, NLB Group ongoing at the end of December 2020. December 2019; Association, Rules of Procedure of the Audit Committee of the Supervisory Risk Appetite, Internal Liquidity Adequacy Process (ILAAP), The • Amendments to the Corporate Governance Policy of the NLB; Changes Board of NLB, resolutions of the Supervisory Board, and other regulations Internal Capital Adequacy Assessment Process (ICAAP) in NLB Group, On 20 November 2020, the Bank received information that the Workers’ in Rules and Procedures of the Risk Committee; Changes in Rules and from which the Committee especially monitors and prepares proposals of NLB Group Non-performing Exposure and Foreclosed Assets Strategy for Council elected Janja Žabjek Dolinšek as member of the Supervisory Procedures of Operations and IT Committee; resolutions for the Supervisory Board for the area: 2020 -2024, NLB Group Recovery Plan 2020; Board – the worker representative. Her term of office started on 20 • IT Strategy; CBS Strategy; Data Centre Strategy update; NLB Group • COVID-19 – Initial Credit Risk impact analysis and quarterly November 2020 and will run until the conclusion of the Annual General Data Management Project; HR status in IT, Information on activities • Accounting and financial reporting information update; Meeting of NLB that decides on the allocation of distributable profit for the for information security assurance in NLB, Plan for KB, Subsidiaries IT • Internal control and risk management fourth financial year after her election, counting the year in which she was landscape; • Internal audit • Quarterly Information on status of information security in NLB; • Report on Top 50 groups of clients by exposure in the NLB Group; appointed as the first one. Procedure for election of another member of the • Decisions on concluding legal transactions with MIGA, Washington, • Compliance of operations • Report on Top 20 largest restructuring cases; Supervisory Board – the worker representative was still ongoing at the end establishment of new companies (NLB Cultural Heritage Management • External audit of December 2020. Institute), large exposures, sale of receivables, write-offs of claims, • Proposal for the issuance of prior consent of the Supervisory Board of NLB, in accordance with the first paragraph of article 164 of Banking Act divestment of NLB (Vita d.d., company BH-RE d.o.o., Sarajevo), major There were seven regular sessions and three correspondence sessions of the (ZBan-2), for a legal transaction based on which the Bank’s total exposure Work of the Supervisory Board legal proceedings involving NLB and NLB Group members, approval of Audit Committee in 2020. Following is a summary of key topics considered to individual client or a group of related clients would reach or exceed In 2020, the Supervisory Board met at seven regular and 12 correspondence transactions with persons in special relations with the Bank, etc. by the Audit Committee: sessions and took note of or adopted the following major decisions: 10% of the Bank’s eligible capital (or if it increases by each subsequent 5% of the Bank’s eligible capital), consents to early repayments and final Composition and the amount of remuneration of the Supervisory Board • Confirmation of NLB Group 2019 Annual Report, Overall Opinion write-offs; • Annual NLB Group Report for 2019; Report of the Supervisory Board members is described in the Appendices C.2 and C.4 of this statement. of Internal Audit for 2019, Corporate Governance Statement of NLB, • Report on the material court proceedings for NLB and NLB Group of NLB on the Results of Examining the Annual NLB Group Report Statement on Management of Risk of the NLB, NLB Group Annual members; for 2019; Corporate Governance Statement of NLB; Risk Management 6.3. The Supervisory Board Committees CSR Report for 2019; • Proposed changes in Rules and Procedures of Risk Committee of the Statement of NLB; Annual Report of Internal Audit for 2019; All five Committees for the Supervisory Board function as consulting bodies • Annual Report on the Work of Compliance and Integrity, Annual Supervisory Board of NLB. • Corporate Social Responsibility Report for 2019 with a Statement on of the Supervisory Board of NLB and discuss the material and proposals of Assessment on Risks in the Area of Compliance and Integrity; non-financial operations of the NLB Group for 2019; Management Board of NLB for the Supervisory Board meetings related to a • Regular interim reports on the operations of the NLB Group, quarterly Responsibilities of the committee are defined in Rules of Procedure of the • Proposal to convene the regular General Meeting of NLB for 15 June particular area. The Supervisory Board has the following committees. Internal Audit Reports, Compliance and Integrity Reports, Reports on Risk Committee of the Supervisory Board of NLB. 2020; • NLB Group Budget 2021 and financial projections 2022-25; Interim Reports on the NLB Group Operations; • Acquisition of the Komercijalna Banka, Beograd; • The Audit Committee • The Risk Committee • The Nomination Committee Information security assurance in NLB; • Re-plan of Internal Audit Plan 2020, Internal Audit Plan (2021), Work 6.3.3. The Nomination Committee of the Supervisory Board of NLB Plan of the Compliance and Integrity for 2021, Regular reports on The Nomination Committee drafts proposed resolutions for the Supervisory overdue material recommendations of the Internal Audit, Reports on the Board concerning the appointment and dismissal of the Management • COVID-19 – Initial Credit Risk Impact Analysis; NLB Group wide • The Remuneration Committee documents received from BoS and ECB and on the implementation of Board members; recommends candidates for Supervisory Board members; COVID-19 implications with regulatory and governmental measures; • The Operations and IT Committee the requirements of the BoS and ECB; recommends to the Supervisory Board the dismissal of members of the • NLB Group Risk Appetite; NLB Group Risk Strategy; Regular risk • Amendments to the Internal Auditing Manual, Rules on the relations of Management Board and the Supervisory Board (representatives of capital); reports for NLB and NLB Group; Regular Risk and Capital Management Committees are composed of at least three members of the Supervisory NLB and the Audit Committee with the audit firm, Audit Committee prepares the content of executive employment contracts for the President - Pillar III disclosures, NLB Group Recovery plan 2020; Report on the Board. The Works Council can nominate one Supervisory Board Self-Evaluation for 2019. Top 50 groups of clients by exposure in the NLB Group, Restructuring member – representative of workers into each committee. The Chair of and members of the Management Board; evaluates the performance of the Management Board and the Supervisory Board; and assesses the knowledge, TOP 20; Management of largest restructuring cases; Overview of the the Committee may only be appointed from among the members of the Responsibilities of the committee are defined in Rules of Procedure of the skills, and experience of individual members of the Management Board and recommendations issued to external providers; Information on status Supervisory Board. The term of office of Chair, the Deputy Chair, and Audit Committee of the Supervisory Board of NLB. Supervisory Board and the bodies as a whole. of information security in NLB; Rules on the Relations of NLB and members of the Committee should not exceed their term of office as the Audit Committee with the Audit Firm; ILAAP – Internal liquidity Supervisory Board members. 6.3.2. The Risk Committee of the Supervisory Board of NLB From 1 January 2020, the composition of the committee was as follows: adequacy process; The Risk Committee monitors and drafts resolutions for the Supervisory Primož Karpe (Chairman), Andreas Klingen (Deputy Chairman), • Internal Audit Plan (2021 & long - term plan), Re-plan of Internal Audit Composition of the aforementioned Committees in 2020 is described in Board in all risk areas relevant to the Bank’s operations. It is consulted on Alexander Bayr, Peter Groznik, and Mark William Lane Richards Plan 2020, Overall Opinion of Internal Audit for 2019, Action Plan for detail in the Appendix C.2 of this statement. the current and future risk appetite and the risk management strategy, and (members). From 26 June 2020, the composition of the committee was as the Compliance and Integrity for 2021, Annual Assessment on Risks in helps carry out control over senior management concerning implementation follows: Primož Karpe (Chairman), Andreas Klingen (Deputy Chairman), the Area of Compliance and Integrity for NLB and NLB Group; Regular 6.3.1. The Audit Committee of the Supervisory Board of NLB of the risk management strategy. Verica Trstenjak, Peter Groznik, and Sergeja Kočar (members). periodic reports on Internal Audit; Compliance and Security and on The Audit Committee monitors and prepares draft resolutions for the Information Security Assurance in NLB; Supervisory Board on accounting reporting, internal control and risk From 1 January 2020, the composition of the committee was as follows: There were eight regular sessions and one correspondence session of the • Reports on the Documents received from the BoS and the ECB; Reports management, internal audit, compliance, and external audit, and as well Andreas Klingen (Chairman), László Urbán (Deputy Chairman), Peter Nomination Committee in 2020. Following is a summary of key topics on the implementation of the requirements of the BS and ECB and on monitors the implementation of regulatory measures. Groznik, Mark William Lane Richards and David Eric Simon (members). considered by the Nomination Committee: the implementation of the requirements; From 26 June 2020, the composition of the committee was as follows: • Achievements of the goals of the Management Board in 2019 and From 1 January 2020, the composition of the committee was as follows: Andreas Klingen (Chairman), Peter Groznik (Deputy Chairman), Mark • Assessment of suitability of the candidates for members of the Defined goals of the Management Board for 2020, Management Board David Eric Simon (Chairman), Alexander Bayr (Deputy Chairman), Primož William Lane Richards, Gregor Rok Kastelic and David Eric Simon Supervisory Board of NLB Evaluation – Method 360; Fit & Proper list of candidates for members Karpe, Shrenik Dhirajlal Davda, and Gregor Rok Kastelic (members). (members). • NLBs MB evaluation – Method 360 of the Supervisory Board; Fit & Proper Assessment of candidate for From 26 June 2020, the composition of the committee was as follows: David • Proposal for the reappointment of the president and two members of the the member of the Supervisory Board – Workers Representative; Self- Eric Simon (Chairman), Shrenik Dhirajlal Davda (Deputy Chairman), There were five regular sessions of the Risk Committee in 2020. Following is Management Board of NLB. assessment of the employees performing special work; Training Plan for Primož Karpe, Gregor Rok Kastelic, Verica Trstenjak (resigned from Audit a summary of key topics considered by the Risk Committee: 2020; • NLB Workers’ Council Status Report on workers’ cooperation in managing proposed measures; Committee function on 18 December 2020) and Petra Kakovič Bizjak (until 20 September 2020) – as members. • Risk report for 2019, a Statement of Management of Risk of the NLB; • Regular quarterly risk reports of NLB and the NLB Group; • Risk and Capital Management - Pillar III quarterly disclosures; Responsibilities of the committee are defined in Rules of Procedure of the Nomination Committee of the Supervisory Board of NLB. 87 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20206.3.4. The Remuneration Committee of the Supervisory Board of NLB 6.3.5. The Operations and IT Committee of the Supervisory Board of NLB 7. DESCRIPTION POLICY ON THE PROVISION OF DIVERSITY OF there were no female representatives in the composition of the Supervisory The Remuneration Committee carries out expert and independent The Committee monitors and prepares draft resolutions for the THE MANAGEMENT BODY AND SENIOR MANAGEMENT Board in the first half of 2020. Even though selection process for four new assessments of the remuneration policies and practices, and formulates Supervisory Board, whereby the main tasks are the following: it monitors members of the Supervisory Board was open to candidates of both genders, initiatives for measures related to improving the management of the Bank’s the implementation of the IT Strategy, Information Security Strategy, Second version of Policy on the Provision of Diversity of the Management at the regular General Meeting of Shareholders on 15 June 2020, only one risks, capital, and liquidity; prepares proposals for remuneration-related as well as Operations Strategy; it monitors key operations and IT KPI’s Body and Senior Management was adopted by the General Meeting female representative was elected as member of the Supervisory Board decisions of the Supervisory Board; and supervises the remuneration of and service quality indicators; monitors key operations and IT projects of Shareholders on 10 June 2019. With the mentioned Policy, NLB sets of NLB. However, with recent changes regarding workers participation senior management performing the risk management and compliance and initiatives; monitors operating risks in the area of Operations, IT and the framework in the area of diversity of an adequate representation of in managing bodies of banks, three female worker’s representatives were functions. Security; monitors the recommendations for ensuring and increasing the both genders, with regard to education, range of knowledge, skills and elected to the position by the Workers Council on 17 June 2020. Since From 1 January 2020, the composition of the committee was as follows: on potential violations, events and incidents in the area of IT security; and on the Provision of Diversity of the Members of the Supervisory Board was female representative on 20 November 2020 (and after the business year Alexander Bayer (Chairman), László Urbán (Deputy Chairman), Shrenik monitors the Target Operating Model implementation in the areas of IT, extended on the members of the Management Board, while the goals of the 2020, on 22 January 2021, yet another female representative was selected). Dhirajlal Davda, and Gregor Rok Kastelic (members). From 26 June 2020, the Security Operating System, Competence Centre and Operations. Policy shall also be reasonably applied to the provision of diversity of the Currently, out of 12 members of the Supervisory Board, five representatives the composition of the committee was as follows: Gregor Rok Kastelic senior management. are females. level of information/cyber security issued by CISO, addresses the report experience, age, gender, and international experience. The Provisions Policy one worker’s representative resigned, the Workers Council elected another (Chairman), Mark William Lane Richards (Deputy Chairman), Shrenik From 1 January 2020, the composition of the committee was as follows: Dhirajlal Davda, Sergeja Kočar and Peter Groznik (members). Mark William Lane Richards (Chairman), Shrenik Dhirajlal Davda The Bank implements the principles of this policy through other policies At the beginning of 2020, the Management Board of the Bank consisted of (Deputy Chairman), Primož Karpe, Andreas Klingen, and László Urbán and procedures, namely the Policy on the selection of suitable candidates four male representatives. Even though one member resigned from his post, There were five sessions of the Remuneration Committee in 2020. Following (members). From 26 June 2020, the composition of the committee was as for members of the Supervisory Board and the Policy on the selection and the selection process was open to both genders, he was replaced with is a summary of key topics considered by the Remuneration Committee: follows: Mark William Lane Richards (Chairman), Shrenik Dhirajlal Davda of suitable candidates for members of the Management Board, as well another male representative in May 2020. In 2021, the selection process for (Deputy Chairman), Primož Karpe, Andreas Klingen, and Bojana Šteblaj as procedures of the Nomination Committee of the Supervisory Board. a worker’s representative in the Management Bord is planned, according to • Realisation of goals of Management Board of NLB for 2019 and (members). Key criteria for selection of candidates were supplemented by criteria the agreement between the Management Board and the Workers Council information on proposed goals for 2020 that include experience, reputation, management of potential conflict of that will be open to candidates of both genders. • Self-assessment of the employees performing special work There were five sessions of the Operations and IT Committee 2020. The interests, independence, time availability, and conditions for achieving • Information on salary raise of the members of the Management Board in Operations and IT Committee took note of: collective suitability of the Supervisory Board. NLB Group and senior management in NLB The diversity policy is reviewed by the Nomination Committee of the Supervisory Board, while the Management Board reviews the diversity • Proposal regarding salaries and benefits of the members of the • IT Strategy, CBS Strategy In practice, diversity is ensured through the procedures for nominating and policy of the senior management. Management Board • ECB Action plan, ECB recommendations appointing members to the management and supervisory bodies. While • Assessment of performance and proposed variable part of remuneration • NLB Group Data Management Project other criteria of diversity were met, as far as gender criteria is concerned, Ljubljana, 8 April 2021 for directors of Internal Audit, Compliance and Integrity and Global • Regular HR status in IT Risk. • Quarterly Information on activities for information security Supervisory Board of NLB Responsibilities of the committee are defined by Rules of Procedure of the • IT Security Dashboard, OPS Dashboard, Business Dashboard Remuneration Committee of the Supervisory Board of NLB. • Subsidiaries IT landscape assurance in NLB • Proposed changes in Rules of Procedures of Operations and IT Committee. Primož Karpe Chairman Responsibilities of the committee are defined by Rules of Procedure of the Operations and IT Committee of the Supervisory Board of NLB. Management Board of NLB Archibald Kremser CFO Andreas Burkhardt CRO Petr Brunclík COO Blaž Brodnjak CEO & CMO 88 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 37: Composition of Management in financial year 2020 (C.1) Name and Surname Position held (president, member) Area of work covered within the Management Board First appointment to the position Conclusion of the position/term of office Citizenship Year of birth Qualification Professional profile Blaž Brodnjak Andreas Burkhardt Archibald Kremser Petr Brunclík László Pelle President Member Member Member Member CEO CRO CFO COO COO 6 July 2016 5 July 2021(i) Slovene 18 September 2013 31 July 2013 18 May 2020 5 July 2021(i) 5 July 2021(i) 17 May 2025 German Austrian Czech 26 October 2016 31 January 2020 Hungarian 1974 1971 1971 1979 1966 MBA Banking/Finance MBA MBA MSc MSc Banking/Finance Banking/Finance Information technologies and applied informatics Banking Operations and IT Management Membership in supervisory bodies in companies not related to the company Banks' Association of Slovenia AMCham Slovenia Handball Federation of Slovenia (i) On 12 November 2020, the Supervisory Board extended the mandate by a period of five years until 2026. Table 38: Composition of Supervisory Board and Committees in financial year 2020 (C.2) Position held (president, deputy president, member) First appointment to the position Conclusion of the position / term of office Representative of the company's capital structure /employees Attendance at SB session in regard to the total number of SB session (for example 5/7) applicable on his/her mandate Gender Citizenship Year of birth Qualification Professional profile Independence under Article 23 of the Code (YES/NO) Existence of conflict of interest, in the business year (YES/NO) Membership in supervisory bodies in other companies or institutions Name and Surname Primož Karpe President 10 February 2016 Andreas Klingen Deputy President 22 June 2015 2024 2023 Alexander Bayr Member 4 August 2016 15 June 2020 David Eric Simon Member 4 August 2016 2024 László Urbán Member 10 February 2016 15 June 2020 Peter Groznik Member 8 September 2017 Mark William Lane Richards Member 10 June 2019 Shrenik Dhirajlal Davda Member 10 June 2019 Gregor Rok Kastelic Member 10 June 2019 Verica Trstenjak Member 15 June 2020 2021 2023 2023 2023 2024 Petra Kakovič Bizjak Member 17 June 2020 10 September 2020 Sergeja Kočar Bojana Šteblaj Member 17 June 2020 Member 17 June 2020 Janja Žabjek Dolinšek Member 20 November 2020 2024 2024 2024 Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company's capital structure Representative of the company’s employees Representative of the company’s employees Representative of the company’s employees Representative of the company’s employees 7/7 6/7 4/4 7/7 3/4 7/7 7/7 7/7 7/7 3/3 2/2 3/3 3/3 0/0 male Slovene 1970 MSc Banking/Finance male German 1964 University Degree Banking/Finance male Austrian 1960 University Degree Banking/Finance male British 1948 Higher National Diploma in Business Studies Banking/Finance male Hungarian 1959 PhD Banking/Finance male Slovene 1971 PhD Finance, industry, investment banking male British 1966 MSc Banking/Finance male British 1960 MSc Finance male Slovene 1968 MSc Banking/Finance female Slovene 1962 PhD female Slovene 1985 University Degree Law IT female Slovene female Slovene female Slovene 1968 1962 1957 MSc MSc MSc Management Management IT YES YES YES YES YES YES YES YES YES YES YES YES YES YES Kyrgyz Investment and Credit Bank CISC, Credit Bank of Moscow PJSC, Nepi Rockcastle plc WKBG Bank, Vienna Jihlavan a.s., Central Europe Industry Partners a.s. Ukreximbank, Ukraine MSIN d.o.o., Ljubljana, CETIS d.d., Ljubljana CIB Bank Egypt, Sheffield Haworth Ltd, Vencap International Ukrgasbank, Kyiv, Ukraine, Meghraj Capital Ltd, Kenya EU Agency for Fundamental Rights, Vienna YES NO NO NO NO NO NO NO NO NO NO NO NO NO 89 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Name and Surname Membership in committees (audit, nominal, income committee, etc.) First appointment to the position Conclusion of the position/term of office President/Member Attendance at sessions of SB's Committees in regard to the total number of SB's session (applicable on his/her mandate) 15 June 2020 Member/Deputy President 15 June 2020 2023 2023 2024 2024 2024 2024 2023 15 June 2020 2021 26 June 2020 2024 2024 2024 President Member Member/President Deputy President Member Member President Deputy President Member Member Member Member Member President 2024 Member 2023 Member/Deputy President 2023 Member Member Member President László Urbán Remuneration Committee Alexander Bayr Remuneration Committee Shrenik Dhirajlal Davda Remuneration Committee Gregor Rok Kastelic Remuneration Committee Mark William Lane Richards Remuneration Committee Peter Groznik Sergeja Kočar Primož Karpe Remuneration Committee Remuneration Committee Nomination Committee 6 October 2017 1 March 2019 28 June 2019 28 June 2019 26 June 2020 26 June 2020 26 June 2020 15 April 2016 Andreas Klingen Nomination Committee 19 February 2016 Alexander Bayr Peter Groznik Nomination Committee Nomination Committee Mark William Lane Richards Nomination Committee Verica Trstenjak Nomination Committee Sergeja Kočar Nomination Committee David Eric Simon Audit Committee Alexander Bayr Primož Karpe Audit Committee Audit Committee Shrenik Dhirajlal Davda Audit Committee Gregor Rok Kastelic Audit Committee 6 October 2017 6 October 2017 28 June 2019 26 June 2020 26 June 2020 7 April 2016 15 April 2016 28 June 2019 28 June 2019 26 August 2016 15 June 2020 Deputy President Petra Kakovič Bizjak Audit Committee 26 June 2020 10 September 2020 Verica Trstenjak Audit Committee 26 June 2020 18 December 2020 Andreas Klingen Risk Committee 19 February 2016 2023 László Urbán Peter Groznik Risk Committee Risk Committee David Eric Simon Risk Committee Mark William Lane Richards Risk Committee Gregor Rok Kastelic Risk Committee Mark William Lane Richards Operational and IT Committee Shrenik Dhirajlal Davda Operational and IT Committee László Urbán Operational and IT Committee Andreas Klingen Operational and IT Committee Primož Karpe Bojana Šteblaj Operational and IT Committee Operational and IT Committee 26 August 2016 15 June 2020 Deputy President 06 October 2017 7 April 2016 28 June 2019 26 June 2020 28 June 2019 28 June 2019 28 June 2019 28 June 2019 15 April 2016 26 June 2020 2021 Member/Deputy President 2024 2023 2023 2023 2023 15 June 2020 2023 2024 2024 Member Member Member President Deputy President Member Member Member Member 3/3 3/3 6/6 6/6 3/3 3/3 3/3 8/8 7/8 4/4 8/8 4/4 4/4 4/4 7/7 3/3 7/7 7/7 7/7 1/2 3/4 4/5 3/3 5/5 5/5 5/5 2/2 5/5 5/5 3/3 4/5 5/5 2/2 Table 39: Composition and amount of remuneration of the Management Board members in the financial year 2020 (C.3) Variable income - gross Position held (president/ member) Fixed income -gross (1) on the basis of quantity criteria on the basis of quality criteria Total (2) Deferred income (3) Severance pay (4) Bonuses (5) ‘Draw- back’ (6) Total gross (1+2+3+ 4+5-6) Total net(i) President 384,734.20 Member 366,483.83 Member 352,795.83 0.00 2,250.22 0.00 386,984.42 166,906.55 0.00 24,331.19 0.00 390,815.02 169,095.43 0.00 17,861.15 0.00 370,656.98 161,243.90 Name and Surname Blaž Brodnjak Archibald Kremser Andreas Burkhardt László Pelle Member 57,623.68 Petr Brunclík Member 170,516.86 258,750.00 4,343.14 0.00 61,966.82 178,294.80 0.00 20,647.48 0.00 191,164.34 82,200.15 (i) This chart does not include other benefits and cost refunds Table 40: Composition and amount of remuneration of members of the Supervisory Board and committee members in the financial year 2020 (in EUR) (C.4) Position held (president, deputy president, member, external member of a Committee) Payment for the performance of services - gross per year (1) Attendance fees for SB and committees - gross per year (2) Name and Surname Total gross (1+2) Total net(i) Travel expenses Primož Karpe President Andreas Klingen Deputy President László Urbán Alexander Bayr David Eric Simon Peter Groznik Mark William Lane Richards Member Member Member Member Member Shrenik Dhirajlal Davda Member Gregor Rok Kastelic Member Verica Trstenjak Sergeja Kočar Bojana Šteblaj Member Member Member Janja Žabjek Dolinšek Member Petra Kakovič Bizjak Member 89,583.34 84,000.00 31,875.00 36,000.00 75,000.00 66,000.00 75,000.00 66,000.00 70,625.00 33,933.34 5,661.92 5,255.08 169.48 7,302.20 89,583.34 84,000.00 31,875.00 36,000.00 75,000.00 66,000.00 69,427.09 84,000.00 20,997.65 27,900.00 49,406.24 48,001.76 75,000.00 49,406.24 66,000.00 70,625.00 33,933.34 5,661.92 5,255.08 169.48 7,302.20 43,477.52 46,524.21 22,353.60 4,117.91 3,822.01 123.26 5,310.88 8,234.86 2,690.20 1,455.56 2,799.18 6,455.10 429.26 3,617.40 3,917.12 4,239.12 0.00 152.70 457.20 0.00 177.51 (i) After the prepayment of income taxes which is not taken into account in potential subsequent balancing payments of personal income taxes. External member in committees (audit, nominal, income committee, etc.) - The Banking Act (ZBan-2) that came into effect on 13 May 2015 contains provision stipulating that, irrespective of provision of Companies Act (ZGD-1) only members of the Supervisory Board can be appointed to Supervisory committees. Attendance at sessions of SB's Committees in regard to the total number of SB's session (for example 5/7) Name and Surname none Gender Qualification Year of birth Professional profile Membership in supervisory bodies in companies not related to the company 90 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Statement of Management of Risk Managing risks and capital efficiently at all levels is crucial for the Group • Limited exposure to FX risk sustained long-term profitable operations. Management of credit risk, • Sustainable tolerance to net losses from operational risk NLB’s Management Board and Supervisory Board provide herewith a concise environmental, social and governance (ESG) risks into its business strategies, representing the Group’s most important risk, focuses on the taking of moderate statement of the Risk Management according to Article 17 of the Regulation risk management framework and internal governance arrangements. Thus, risks – diversified credit portfolio, adequate credit portfolio quality, sustainable Values of the most important risk appetite indicators of the Group, also on Internal Governance Arrangements, the Management body and the the management of ESG risks follows ECB and EBA guidelines and will cost of risk and ensuring an optimal return considering the risks assumed. The including the also acquired Komercijalna Banka group as at the end of year Internal Capital Adequacy Assessment Process for Banks and Savings banks comprehensively integrated into all relevant processes. liquidity risk tolerance is low. The Group must maintain an appropriate level 2020, reflecting interconnection between strategic business orientations, risk (Official Gazette of the RoS, no. 73/15, 49/16, 68/17, 33/18 and 81/18) and of liquidity at all times to meet its short-term liabilities, even if a specific stress strategy, and targeted risk appetite profile, were the following: Regulation (EU) 575/2013 (date of publication 21 December 2015), article The Group plans a prudent risk profile, optimal capital usage, and profitable scenario is realised. Further, with the aim of minimising this risk, the Group 435 (Risk management objectives and policies), points (e) and (f), and related operations in the long run, considering the risks assumed. The Business pursues an appropriate structure of sources of financing. The Group limited • Total capital ratio (TCR) 16.6% amendments to the Capital Requirements Regulation and Second Capital strategy, the Risk appetite, the Risk strategy, and the key internal risk policies of exposure to credit spread risk, arising from the valuation risk of debt securities • Tier 1 capital ratio 14.2% Requirements Regulation (Regulation (EU) 2020/873), as well as the EBA the Group that are approved by the Management Board and the Supervisory portfolio servicing as liquidity reserves, to the moderate level. The Group’s • Common Equity Tier 1 ratio (CET1) 14.1% Guidelines on Disclosure requirements (EBA GL/2016/11). Board of NLB, specify the strategic objectives and guidelines concerning risk basic orientation in the management of interest rate risk is to limit unexpected assumption, the approaches, and methodologies of monitoring, measuring, negative effects on revenues and capital that would arise from changed market Risk Management in the Group, representing an important element of the mitigating, and managing all types of risk at different relevant levels. Moreover, interest rates and, therefore, a moderate tolerance for this risk is stated. When Group’s overall corporate governance, is implemented in accordance with the the main strategic risk guidelines are consistently integrated into regular assuming operational risk, the Group pursues the orientation that such risk must set strategic guidelines, established internal policies, and procedures which take business strategy review, the budgeting process, and other strategic decisions, not significantly impact its operations. Risk appetite for operational risks is low • Leverage ratio 7.8% • Cost of risk 62 bps15 • The share of non-performing exposure (NPE %) by EBA 2.3% • Non-performing loans coverage ratio (NPL CR) 57.3%16 • Loan-to-deposit ratio (LTD) 58.8% into account the European banking regulations, the regulations adopted by the whereby informed decision-making is assured. The Group is regularly to moderate, with a focus on mitigation actions for important risks and key risk • LCR 257.5% BoS, the current EBA guidelines, and the relevant good banking practices. EU monitoring its target risk appetite profile and internal capital allocation, indicators servicing as an early warning system. The conclusion of transactions regulations are followed by the Group, where the Group subsidiaries operating representing the key component of proactive management. Risk limits usage in derivative financial instruments at NLB is primarily limited to servicing outside Slovenia are also compliant with the rules set by the local regulators. and potential deviations from limits or target values are regularly reported to customers and hedging Bank’s own positions. In the area of currency risk, the • NSFR 165.7% • EVE sensitivity17 (of 200 bps) -7.3% of capital • Transactional FX risk 1.2% of capital The Group gives high importance to the risk culture and awareness of all the respective committees and/or the Management Board of the Bank, the Group thus pursues the goals of low to moderate exposure. The tolerance for all • Net losses from operational risk 8.0% of capital requirement relevant risks within the entire Group. Maintaining risk awareness is engrained Risk Committee of the Supervisory Board, and the Supervisory Board of the other risk types, including non-financial risks, is low with a focus on minimising for operational risk in the business strategy of the Group. The business and operating environment Bank. relevant for the Group’s operations, is changing with trends such as changing their possible impacts on the Group’s operations. ESG risks do not represent a new risk category, but rather an aggravating factor for the types of risks already Consequently, the Group (including Komercijalna Banka group) concluded customer behaviour, emerging new technologies and competitors, sustainable Additionally, the Group established a comprehensive stress testing framework managed through the established risk management framework. the year 2020 as self-funded, with strong liquidity and solid capital position, financing, and increasing new regulatory requirements. Respectively, Risk and other early warning systems in different risk areas, with the intention to demonstrating the Group’s financial resilience. The acquired KB Group has Management is continuously adapting with aim to detect and manage new contribute to setting and pursuing the Group’s business strategy, to support The main NLB Group Risk Appetite Statement objectives are following: similar business model to the existing NLB Group, respectively its impact on potential emerging risks. decision-making on an ongoing basis, to strengthen the existing internal controls, and to enable a timely response when necessary. The stress- testing The overall slow-down of the economy, caused by the COVID-19 epidemic, framework includes all material types of risk and different relevant stress • Preservation of regulatory capital adequacy • Preservation of internal capital adequacy had some negative impacts on the loan portfolio quality and new loan scenarios or sensitivity analysis, according to the vulnerability of the Group’s • Fulfilment of MREL requirement the Group’s risk profile was moderate. Beside the acquisition there were no other transactions of sufficiently material nature to impact on NLB Group’s risk profile or distribution of the risks on the Group level. generation. From the beginning of the COVID-19 pandemic the Group business model. Stress testing has an important role when assessing the Group’s • Maintenance of low leverage The Condensed Statement of the management of risk is also published on the complies with EBA guidelines on payment moratoria regarding forborne resilience to stressed circumstances, namely from profitability, capital adequacy, • Improvement in the quality of the credit portfolio, sufficient NPL coverage, NLB intranet with the aim of strict adherence of the Banks’ employees at daily exposures, namely by frequently performing the assessment of borrowers and liquidity with a forward-looking perspective. As such, it is embedded into sustainable credit risk volatility, sustainable cost of risk across the economic operations of the Bank, as regards the definition and importance of a consistent and ensuring effective early warning systems. All relevant information was Group’s Risk Management system, namely Risk appetite, ICAAP, ILAAP, and cycle, sustainable industry concentration, sustainable exposure to project tendency of the adopted risks, and ways to take into account when adopting its available to management bodies with higher frequency than before crises to the Recovery plan, as an important component of sound Risk Management. financing assure adequate and timely oversight over the critical elements of credit risk Besides internal stress testing, the Group as a systemically important bank also • Maintenance of a solid liquidity position, maintaining stable customers’ management and executing mitigation measures if needed. In contrast, the participates in the regulatory stress test exercises carried out by the ECB. deposits as the main funding base daily business decisions. Ljubljana, 8 April 2021 Group faced growing excess liquidity, and the impacts of the pandemic did not cause any material liquidity outflows. The Group is the largest Slovenian banking and financial group with important presence in the SEE region. As of 30th December 2020, the acquisition of • Limited exposure to credit spread risk • Limited exposure to interest rate risk • Diversification of risk in exposures to banks and sovereigns The Group uses the ‘three lines of defence framework’ as an important Komercijalna Banka, Beograd was completed. The harmonisation in the area element of its internal governance, whereby the Risk Management function of the Group’s risk management framework and uniform data flow, based on Supervisory Board of NLB 15. Komercijalna Banka group is excluded from calculation. 16. At initial recognition NPLs of Komercijalna Banka group were recognised at fair value, without any additional credit loss allowances (in accordance with IFRS 3). 17. An estimated value on consolidated level as per 31 December 2020. acts as a second line of defence. The Group’s enhanced overall corporate Group’s Risk management standards, is ongoing. governance reflects in the lowering of the SREP requirement in the past years. A robust and comprehensive Risk Management framework is defined The Group has a well-diversified business model. In accordance with its and organised with regard to the Group’s business and risk profile, based on strategic orientations, the Group intends to be a sustainably profitable, a forward-looking perspective to meet internally set strategic objectives and predominantly working with clients on its core markets, providing innovative, all external requirements. A proactive Risk Management and control system but simple customer-oriented solutions. Efficient managing of risks and capital Primož Karpe Chairman is primarily based on Risk appetite and Risk strategy, which are consistent is crucial for the Group to sustain long-term profitable operations. Based on with the Group’s Business strategy, and focused on early risk identification and the Group’s business strategy credit risk is the dominant risk category, followed Management Board of NLB efficient Risk Management. Set governance and different Risk Management by credit spread risk on banking book portfolio, interest rate risk in the banking tools enable adequate oversight of the Group’s risk profile, proactively support book, operational risk, liquidity risk, market risk, and other non-financial its business operations and its management by incorporating escalation risks. Regular risk identification and their assessment is performed within the procedures, and use different mitigation measures when necessary. In this respect, the Group is constantly enhancing and complementing the existing ICAAP process with an aim to assure their overall control and effective Risk Management on an ongoing basis. methods and processes in all Risk Management segments. Additionally, the Group is engaged in contributing to sustainable finance by incorporating Archibald Kremser CFO Andreas Burkhardt CRO Petr Brunclík COO Blaž Brodnjak CEO & CMO 91 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Statement of Non-financial Information The Bank has changed the way it reports Environmental, Social, and Governance (ESG) matters, in order to better respond to its stakeholders needs. In line with Article 70.c of the Companies Act (ZGD-1), the Bank reports on non-financial information separately from the NLB Group Annual Report 2020. The Bank’s disclosures of non-financial information are prepared in a form of the NLB Group Sustainability Report 2020, which accompanies the annual report and provides the first efforts in the direction of a data-driven summary of the Bank’s sustainability performance. The NLB Group Sustainability Report 2020 is published on the Bank’s website. Further information on sustainability is available in the NLB Group Sustainability Report 2020. Disclosure on Shares and Shareholders of NLB 1. Information pursuant to the Companies Act (ZGD-1), Article 70, paragraph 6 There are no restrictions other than those mentioned and those that are regulatory. 1.1. Structure of the Bank’s share capital 1.3. Qualifying holdings The Bank has issued only ordinary registered no-par value shares, the holders of which have a voting right and the right to participate at the General Meeting of the Bank’s shareholders, the pre-emptive right to This information is included in the chapter ‘Corporate Governance Statement of NLB.’ subscribe for new shares in case of a share capital increase, the right to profit 1.4. Securities carrying special controlling rights participation (dividends), the right to a share in the surplus in the event of liquidation or bankruptcy of the Bank, and the right to be informed. All This information is included in the chapter ‘Corporate Governance Statement of NLB.’ shares belong to a single class and are issued in book-entry form. Information regarding the shareholder structure of NLB (as at 31 December 2020) is available under the title ‘Shareholder Structure of NLB’ in the chapter ‘Key Highlights.’ 1.5. The employee share scheme, if used by the company, for shares to which the scheme relates and about the method of exercising control over this scheme, if the controlling rights are not exercised directly by employees The Remuneration policy for employees performing special work defines the 1.2. All restrictions relating to the transfer of shares payments with financial instruments according to the applicable banking law and the restrictions on voting rights (ZBan-2), however, due to the regulatory restrictions imposed by BoS, there The shares of the Bank are freely transferable, subject to the provisions was no payout in 2020. of the Articles of Association of the Bank which require the approval of the Supervisory Board, namely for the transfer of shares of the Bank by 1.6. Explanation regarding restrictions related to voting rights which the acquirer, together with the shares held by the holder before such an acquisition and the shares held by third parties for the account of the This information is included in the chapter ‘Corporate Governance Statement of NLB.’ acquirer, exceeds the share of 25% of the Bank’s voting shares. Approval for the transfer of shares is issued by the Supervisory Board. 1.7. All agreements among shareholders which are known to the company and could result in restrictions relating The Bank rejects the request for approval of transfer shares if the acquirer, to the transfer of securities or voting rights together with the shares held by the acquirer before the acquisition and the The Bank is not aware of such agreements. shares held by third parties for the account of the acquirer, exceeded the 25% share of the Bank with voting rights, increased by one share. 1.8. The company’s rules on the appointment or replacement of management and supervisory board Notwithstanding the provision mentioned in the first paragraph, approval members and changes of the articles of association for the transfer of shares is not required if the acquirer of the shares has acquired them on the account of third parties, so that it is not entitled to This information is included in the chapter ‘Corporate Governance Statement of NLB.’ exercise voting rights from these shares at its sole discretion, while at the same time committing to the Bank, it will not exercise voting rights on the 1.9. Authorisations given to management, particularly basis of the instructions of an individual third party for whose account it has authorisations to issue or purchase own shares acquired the shares if, together with the instructions for voting, it does not receive a written guarantee from that person that this person has shares on This information is included in the chapter ‘Corporate Governance Statement of NLB.’ his own account and that this person is not, directly or indirectly, a holder of more than 25% of the Bank’s voting rights. 1.10. All major agreements to which the company is a party and which take effect, are changed or cancelled following a change The acquirer who exceeds the share of 25% of the Bank’s shares with in control over the company resulting from a bid, as laid down by voting rights, and does not require the issuance of approval for the transfer of shares, or does not receive the approval of the Bank, may exercise the the Act governing M&A, and the effects of such agreements There are no major agreements to which the Bank is a party, and which voting right from 25% of the shares with the voting rights. would take effect, be changed, or cancelled following a change in control over the Bank resulting from a bid. 92 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20201.11. All agreements between the Bank and its management the Management Board of NLB is entitled to compensation for early or supervision bodies or its employees which envisage termination of his term of office. The member of the Management Board compensation if, due to a bid as laid down by the Act governing shall not be entitled to compensation for early termination of the term of M&A, these persons resign, are dismissed without a well- office if he is employed in the Bank or in the Group after the termination founded reason, or their employment is terminated of the term of office. In the event of resignation, the member of the In line with the employment contracts of the members of the Management Management Board shall not be entitled to any compensation for early Board, in case the Supervisory Board recalls a member of the Management discontinuation of the term of office, unless otherwise decided by the Board ‘for other business and economic reasons,’ such a member of Supervisory Board. 2. Number of shares held by members of the Supervisory Board and Management Board Table 41: Number of shares held by members of Supervisory Board and Management Board (as at 31 December 2020) Shares held as at 31 December 2020 Name of member of Supervisory Board Primož Karpe Andreas Klingen David Eric Simon(i) Peter Groznik(ii) Gregor Rok Kastelic Shrenik Dhirajlal Davda Mark William Lane Richards Verica Trstenjak Sergeja Kočar Bojana Šteblaj Janja Žabjek Dolinšek Name of member of Management Board Blaž Brodnjak Archibald Kremser Andreas Burkhardt Petr Brunclík Number 936 1,198 582 1,210 — — — — — — — 1,400 691 451 278 % 0.005% 0.006% 0.003% 0.006% — — — — — — — 0.007% 0.003% 0.002% 0.001% (i) David Eric Simon holds 2,910 GDRs, which is equal to 582 shares (as 1 share represents 5 GDRs). (ii) Peter Groznik holds Bank’s shares indirectly through a company wholly owned by Peter Groznik. Application of Double Tax Treaties Events after the end of the 2020 financial year In January 2021, the Workers’ Council of NLB elected Tadeja Žbontar Rems as member of the Supervisory Board of the Bank - representative of workers. Her term of office shall run from 22 January 2021 and will last until the conclusion of the Annual General Meeting of NLB that decides on the allocation of distributable profit for the fourth financial year after her election, counting the year in which she was appointed as the first one. In January 2021, international independent the Top Employers Institute awarded the Bank with the prestigious certificate the ‘Top Employer’ for the 6th consecutive year. From April 1, 2021, the Bank charges a monthly fee of 0.04% for average monthly balances of customers assets above EUR 250,000 – the sum of balances on NLB Personal Accounts and Packages, NLB Savings Accounts, NLB Gradual Savings and NLB Term Deposits will be taken into account (at savings accounts, gradual savings and term deposits only opened after 27 July 2020 will be considered). On 10 March 2021 NLB has announced a Takeover Bid in the Republic of Serbia in accordance with applicable Serbian legislation for the acquisition of: (i) all remaining regular shares of Komercijalna Banka, Beograd; ISIN RSKOBBE16946 at the point of publishing not in NLB’s ownership (2,820,270 regular shares or 16.77% of this class of shares) at RSD 3,315.47 per one share; and (ii) all priority shares of Komercijalna Banka, Beograd; ISIN RSKOBBE19692 (373,510 priority shares or 100% of this class of 3. Stock option agreements the application of a lower tax rate specified in the double tax treaty between (‘Bidding Period’) for 30 days, beginning from 11 March 2021. If the payee is not an intermediary, Slovenian tax authorities may approve shares) at 934.72 RSD per one share. Takeover Bid is open for acceptance The Bank has no stock option agreements in relation with listed shares. provides certain information on the payee and a confirmation that the the RoS and the country of residence of the payee if the Slovenian payer payee is a resident for taxation purposes in such a country, issued by the tax 4. Dividend taxation Withholding tax authorities of such a country. Refund of Withholding Tax A Slovenian payer is required to deduct and withhold the amount of If the Slovenian tax was deducted and withheld at a higher tax rate than Slovenian corporate or personal income tax from dividend payments made it would be paid if a Slovenian payer would make the dividend payment to the certain categories of payees: • Individuals: 27.5%18 • Intermediaries: 27.5% • Legal entities (other than Intermediaries): 15% directly to such person as a payee or higher tax rate, than the one specified in the double tax treaty, the payee of the dividend is entitled to the refund of the overpaid tax. The tax refund is enforced by filing a claim to the Financial Administration of the RoS. Legal persons There are some exemptions if dividends are paid Dividends with respect to the shares received by a legal person who is a to intermediaries and legal entities Slovenian resident are exempt from Slovenian corporate income tax (davek For the purposes of Slovenian tax legislation, the GDR depositary will od dohodkov pravnih oseb). qualify as an intermediary. Therefore, the dividends paid by the custodian to the GDR depositary will be subject to the deduction and withholding of Slovenian tax at the rate of 27.5 per cent. A holder, an owner of a GDR or Individuals The amount of tax withheld from a dividend payment received by an a beneficial owner will be entitled, if and to the extent applicable, to claim a individual constitutes the final amount of Slovenian Personal Income Tax refund of the withholding tax. (dohodnina) with respect to such a dividend payment. 18. The tax rate for individuals and intermediaries in amount of 27.5% applies from 1 January 2020 onwards. 93 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Bosnia and Herzegovina 76 20 submitted clients selected clients 1 new client, as focus was on existing ones Different industries - majority operates in production, sales, education and tourism Serbia #HelpFrame project Due to its inherently sustainable nature, #HelpFrame project has become the first NLB Group‘s ESG project that brings business value to our clients and also to whole NLB Group. The results of #HelpFrame project exceeded expectations – for the NLB Group and for our clients. So, this is not the end, rather the beginning of new era. The next phase will benefit from the experience and accomplishments achieved along the way and will start in spring 2021. Slovenia submitted clients 171 83 selected clients 43 new clients 37 different industries Highest share from services, tourism and agriculture Montenegro 80 20 submitted clients selected clients 2 new clients 15 different business activities submitted clients 115 30 selected clients 17 new clients 15 different industries Highest share from food production, transport and services Kosovo 37 20 submitted clients selected clients 5 new clients 14 different business activities Mostly services, agriculture and trade North Macedonia 223 101 6 new clients submitted clients selected clients Different industries - majority from retail, catering and restaurant services 94 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Financial Report 95 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Contents Independent auditor’s report Report on compliance with the ESEF Regulation Statement of management’s responsibility Income statement for the annual period ended 31 December Statement of comprehensive income for the annual period ended 31 December Statement of financial position as at 31 December Statement of changes in equity for the annual period ended 31 December Statement of cash flows for the annual period ended 31 December Notes to the financial statements 1. General information 2. 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. Business combinations, goodwill and bargain purchases 2.6. Investments in subsidiaries, associates and joint ventures 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. Allowances for 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, deposits, and issued debt securities 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. Changes in subsidiary holdings 4. Notes to the income statement 4.1. Interest income and expenses 4.2. Dividend income 4.3. Fee and commission income and expenses 4.4. Gains less losses from financial assets and liabilities not measured at fair value through profit or loss 4.5. Gains less losses from financial assets and liabilities held for trading 4.6. Gains less losses from non-trading financial assets mandatorily at fair value through profit or loss 97 100 101 101 102 102 103 104 105 105 105 105 105 105 106 106 106 106 106 107 107 107 107 108 110 110 110 110 110 110 110 110 111 111 111 111 111 111 111 112 112 112 112 112 113 114 115 115 115 115 4.7. Foreign exchange translation gains less losses 4.8. Other net operating income 4.9. Administrative expenses 4.10. Cash contributions to resolution funds and deposit guarantee schemes 4.11. Depreciation and amortisation 4.12. Gains less losses from modification of financial assets 4.13. Provisions 4.14. Impairment charge 4.15. Gains less losses from non-current assets held for sale 4.16. Income tax 4.17. 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. Financial instruments held for trading 5.3. Non-trading financial instruments measured at fair value through profit or loss 5.4. Financial assets measured at fair value through other comprehensive income 5.5. Derivatives for hedging purposes 5.6. Financial assets measured at amortised cost 5.7. Non-current assets held for sale 5.8. Property and equipment 5.9. Investment property 5.10. Intangible assets 5.11. Leases 5.12. Investments in subsidiaries, associates and joint ventures 5.13. Other assets 5.14. Movements in allowance for the impairment of financial assets 5.15. Financial liabilities, measured at amortised cost 5.16. Provisions 5.17. Deferred income tax 5.18. Income tax relating to components of other comprehensive income 5.19. Other liabilities 5.20. Share capital 5.21. Accumulated other comprehensive income and reserves 5.22. Capital adequacy ratios 5.23. Off-balance sheet liabilities 5.24. Funds managed on behalf of third parties 6. Risk management 6.1. Credit risk management 6.2. Market risk 6.2.1. Currency risk (FX) 6.2.2. Managing market risks in the trading book 6.2.3. Interest rate risk 6.3. Liquidity risk 6.4. Management of non-financial risks 6.5. Fair value hierarchy of financial and non-financial assets and liabilities 6.6. Offsetting financial assets and financial liabilities 7. Analysis by segment for NLB Group 8. Related-party transactions 9. Events after the reporting date 116 116 116 116 117 117 118 118 118 118 118 119 119 119 120 120 120 120 121 122 123 124 124 126 126 127 128 132 132 135 136 138 140 140 140 140 141 142 142 143 144 154 154 156 156 158 164 165 170 170 172 176 96 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Independent auditor’s report 97 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202098 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202099 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Report on compliance with the ESEF Regulation 100 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Statement of management’s responsibility Income statement for the annual period ended 31 December The Management Board hereby confirms its responsibility for preparing The Management Board also confirms that the appropriate accounting the consolidated financial statements of NLB Group and the financial policies were consistently applied, and that the accounting estimates were statements of NLB for the year ending on 31 December 2020, and for the prepared according to the principles of prudence and good management. accompanying accounting policies and notes to the financial statements. The Management Board further confirms that the financial statements of NLB Group and NLB, together with the accompanying notes, have been The Management Board is responsible for the preparation and fair prepared on a going-concern basis for NLB Group and NLB, and in line presentation of these financial statements in accordance with the with valid legislation and the International Financial Reporting Standards as International Financial Reporting Standards as adopted by the European adopted by the European Union. Union, and with the requirements of the Slovenian Companies Act and the Banking Act so as to give a true and fair view of the financial position of The Management Board is also responsible for appropriate accounting NLB Group and NLB as at 31 December 2020, and their financial results practices, the adoption of appropriate measures for safeguarding assets, and and cash flows for the year then ended. the prevention and identification of fraud and other irregularities or illegal acts. Management Board of NLB Archibald Kremser CFO Andreas Burkhardt CRO Petr Brunclík COO Blaž Brodnjak CEO & CMO Interest income, using the effective interest method Interest income, not using the effective interest method 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 measured as at fair value through profit or loss Gains less losses from financial assets and liabilities held for trading Gains less losses from non-trading financial assets mandatorily at fair value through profit or loss Fair value adjustments in hedge accounting Foreign exchange translation gains less losses Net gains or losses on derecognition of investments in subsidiaries, associates and joint ventures Gains less losses on derecognition of non-financial assets Other net operating income Administrative expenses Cash contributions to resolution funds and deposit guarantee schemes Depreciation and amortisation Gains less losses from modification of financial assets Provisions for credit losses Provisions for other liabilities and charges Impairment of financial assets Impairment of non-financial assets Negative goodwill Share of profit from investments in associates and joint ventures (accounted for using the equity method) Gains less 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. 4.6. 5.5.a) 4.7. 4.8. 4.9. 4.10. 4.11. 4.12. 4.13. 4.13. 4.14. 4.14. 5.12.b) 5.12.d) 4.15. 4.16. NLB Group NLB in EUR thousands 2020 347,639 7,549 355,188 (55,615) 299,573 111 232,432 (62,152) 170,280 17,689 9,794 6,598 720 739 (471) 1,300 7,549 2019 357,412 7,406 364,818 (46,331) 318,487 208 234,979 (64,640) 170,339 4,643 10,465 18,765 (555) 706 (111) 3,355 7,851 2020 167,616 7,488 175,104 (36,217) 138,887 6,259 136,691 (32,234) 104,457 16,970 4,741 6,815 720 (1,108) - 12 2019 175,598 7,310 182,908 (24,782) 158,126 71,231 137,898 (33,943) 103,955 4,512 3,335 16,289 (555) 396 (1) 432 5,794 4,544 (262,226) (274,014) (162,613) (173,098) (16,674) (31,715) (3,577) (482) (8,077) (61,799) (996) 137,858 874 10,853 277,921 (5,165) 272,756 269,707 3,049 (16,223) (30,964) (182) (312) (11,135) 13,630 (3,177) - 4,197 (576) 215,397 (13,579) 201,818 193,576 8,242 (7,103) (17,848) - 599 (7,645) (9,633) (685) - - 35,234 113,853 99 113,952 (7,034) (18,046) - 368 (5,586) 16,661 2,795 - - (578) 177,746 (1,597) 176,149 113,952 176,149 - 5.7 - 8.8 Earnings per share/diluted earnings per share (in EUR per share) 4.17. 13.5 9.7 The notes are an integral part of these financial statements. 101 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Statement of comprehensive income for the annual period ended 31 December Statement of financial position as at 31 December in EUR thousands Notes 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 NLB Group NLB in EUR thousands NLB Group NLB Notes 2020 2019 2020 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 Fair value changes of equity instruments measured at fair value through other comprehensive income Share of other comprehensive income/(losses) of entities accounted for using the equity method 5.4.c) Income tax relating to components of other comprehensive income 5.18. Items that have been or may be reclassified subsequently to income statement Foreign currency translation Translation gains/(losses) taken to equity Debt instruments measured at fair value through other comprehensive income Valuation gains/(losses) taken to equity 5.4.c) 272,756 (2,147) 878 3,809 (41) (534) (703) (703) 6,555 7,733 Transferred to income statement 4.4., 4.14. (1,178) Share of other comprehensive income/(losses) of entities accounted for using the equity method Income tax relating to components of other comprehensive income 5.18. Total comprehensive income for the year after tax Attributable to owners of the parent Attributable to non-controlling interests The notes are an integral part of these financial statements. (11,026) (1,085) 270,609 266,907 3,702 201,818 19,040 (1,777) 284 1,233 (146) 1,299 1,299 13,129 16,526 (3,397) 8,440 (3,422) 220,858 212,266 8,592 113,952 3,817 700 202 - (171) - - 3,810 7,522 (3,712) - (724) 117,769 117,769 - 2019 176,149 4,446 (1,523) 213 - 104 - - 6,977 11,202 (4,225) - (1,325) 180,595 180,595 - Cash, cash balances at central banks, and other demand deposits at banks Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities - loans and advances to banks - loans and advances to customers - other financial assets Derivatives - hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Investments in subsidiaries Investments in associates and joint ventures Tangible assets Property and equipment Investment property Intangible assets Current income tax assets Deferred income tax assets Other assets Non-current assets held for sale Total assets Financial liabilities held for trading Financial liabilities measured 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 - subordinated liabilities - other financial liabilities Derivatives - hedge accounting 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. 5.1. 5.2.a) 5.3.a) 5.4. 5.6.a) 5.6.b) 5.6.c) 5.6.d) 5.5.b) 5.5.c) 5.12.a) 5.12.c) 5.8.a) 5.9. 5.10. 5.17. 5.13. 5.7.a) 5.2.b) 5.3.b) 5.15.a) 5.15.b) 5.15.a) 5.15.b) 5.15.c) 5.15.d) 5.5.b) 5.16. 5.17. 5.19. 5.20. 5.21.a) 5.21.b) 5.21.a) 3,961,812 2,101,346 2,261,533 1,292,211 84,855 42,393 24,038 25,359 18,831 35,106 24,085 23,287 3,514,290 2,141,428 1,716,351 1,656,657 1,503,087 197,005 9,619,860 113,138 - 13,844 - 7,988 1,653,848 93,403 7,589,724 97,415 788 8,991 - 7,499 249,117 195,605 54,842 61,668 4,369 31,789 97,140 8,658 52,316 39,542 6,284 29,500 63,811 43,191 1,277,880 158,320 4,564,178 54,503 - 13,844 749,060 1,662 91,675 8,300 28,105 1,923 29,214 11,664 4,454 1,485,166 144,352 4,568,599 67,279 788 8,991 351,883 1,366 89,904 9,303 25,980 5,463 29,569 11,142 5,532 19,565,855 14,174,088 11,026,603 9,801,557 15,485 - 72,633 158,225 17,903 7,998 42,840 170,385 16,397,167 11,612,317 91,560 288,321 207,300 61,161 125,059 1,002 4,475 20,427 64,458 210,569 158,484 49,507 88,414 2,271 2,833 15,212 17,442,815 12,443,191 200,000 871,378 21,127 13,522 846,762 1,952,789 170,251 2,123,040 19,565,855 200,000 871,378 26,493 13,522 574,489 1,685,882 45,015 1,730,897 14,174,088 15,500 - 41,635 143,464 8,850,755 13 288,321 101,273 61,161 63,790 - - 9,697 9,575,609 200,000 871,378 24,102 13,522 341,992 17,892 7,746 89,820 161,564 7,760,737 2,537 210,569 98,342 49,507 60,384 - - 9,234 8,468,332 200,000 871,378 20,285 13,522 228,040 1,450,994 1,333,225 - 1,450,994 11,026,603 - 1,333,225 9,801,557 102 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The Management Board has authorised for issue the financial statements and the accompanying notes. Archibald Kremser CFO Andreas Burkhardt CRO Petr Brunclík COO Blaž Brodnjak CEO & CMO Ljubljana, 23 March 2021 Statement of changes in equity for the annual period ended 31 December Accumulated other comprehensive income Fair value reserve of financial assets measured at FVOCI Foreign currency translation reserve Share capital Share premium Other Profit reserves Retained earnings Equity attributable to owners of the parent Equity attributable to non- controlling interests Total equity in EUR thousands 5.20. 5.21.a) 5.21.b) 5.21.b) 5.21.b) 5.21.a) NLB Group Notes Balance as at 1 January 2020 200,000 871,378 47,880 (17,055) (4,332) 13,522 574,489 1,685,882 45,015 1,730,897 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Acquisition of subsidiaries Transfer of fair values reserve - - - - - - - - - - - (2,833) (2,833) - (2,551) - (669) (669) - - - 702 702 - (15) - - - - - 269,707 269,707 3,049 272,756 - (2,800) 653 (2,147) 269,707 266,907 3,702 270,609 - 2,566 - - 121,534 121,534 - - Balance as at 31 December 2020 200,000 871,378 42,496 (17,724) (3,645) 13,522 846,762 1,952,789 170,251 2,123,040 Accumulated other comprehensive income Fair value reserve of financial assets measured at FVOCI Foreign currency translation reserve Share capital Share premium Other Profit reserves Retained earnings Equity attributable to owners of the parent Equity attributable to non- controlling interests Total equity in EUR thousands 5.20. 5.21.a) 5.21.b) 5.21.b) 5.21.b) 5.21.a) NLB Group Notes Balance as at 1 January 2019 200,000 871,378 28,702 (18,275) (2,604) 13,522 523,493 1,616,216 41,228 1,657,444 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid Transfer of actuarial gains - - - - - - - - - - - - - 19,178 1,220 (1,708) 19,178 1,220 (1,708) - - - - - (20) - - - - - 193,576 193,576 8,242 201,818 - 18,690 350 19,040 193,576 212,266 8,592 220,858 (142,600) (142,600) (4,805) (147,405) 20 - - - Balance as at 31 December 2019 200,000 871,378 47,880 (17,055) (4,332) 13,522 574,489 1,685,882 45,015 1,730,897 103 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Accumulated other comprehensive income in EUR thousands Statement of cash flows for the annual period ended 31 December NLB Notes Share capital Share premium Fair value reserve of financial assets measured at FVOCI 5.20. 5.21.a) 5.21.b) Balance as at 1 January 2020 200,000 871,378 24,444 - Net profit for the year - Other comprehensive income Total comprehensive income after tax - - - - - - - 3,250 3,250 Other 5.21.b) (4,159) - 567 567 Profit reserves Retained earnings Total equity 5.21.a) 5.20. 13,522 228,040 1,333,225 - - - 113,952 113,952 - 3,817 113,952 117,769 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 Net gains/(losses) from financial assets and liabilities held for trading Balance as at 31 December 2020 200,000 871,378 27,694 (3,592) 13,522 341,992 1,450,994 Payments to employees and suppliers in EUR thousands Other receipts Other payments Income tax (paid)/received Accumulated other comprehensive income NLB Notes Share capital Share premium Fair value reserve of financial assets measured at FVOCI 5.20. 5.21.a) 5.21.b) Balance as at 1 January 2019 200,000 871,378 18,620 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid - - - - - - - - - 5,824 5,824 - Other 5.21.b) (2,781) - (1,378) (1,378) - Profit reserves Retained earnings Total equity 5.21.a) 5.20. 13,522 194,491 1,295,230 - - - - 176,149 176,149 - 4,446 176,149 180,595 (142,600) (142,600) 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 non-trading financial assets mandatorily at fair value through profit or loss Net (increase)/decrease in financial assets measured at fair value through other comprehensive income Net (increase)/decrease in loans and receivables measured at amortised cost Net (increase)/decrease in other assets Increases/(decreases) in operating liabilities Net increase/(decrease) in deposits and borrowings measured at amortised cost Net increase/(decrease) in other liabilities Net cash flows from operating activities Balance as at 31 December 2019 200,000 871,378 24,444 (4,159) 13,522 228,040 1,333,225 CASH FLOWS FROM INVESTING ACTIVITIES The notes are an integral part of these financial statements. Receipts from investing activities Proceeds from sale of property, equipment, and investment property Proceeds from sale of subsidiaries Proceeds from non-current assets held for sale Proceeds from disposals of debt securities measured at amortised cost Payments from investing activities Purchase of property, equipment, and investment property Purchase of intangible assets Purchase of subsidiaries, net of cash acquired and increase in subsidiaries' equity 5.12.b) Increase in associates and joint ventures' equity Purchase of debt securities measured at amortised cost Net cash flows from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from financing activities Issue of subordinated debt Payments from financing activities Dividends paid Repayments of subordinated debt Net cash flows 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. 5.15.c) 5.15.c) NLB Group Notes 2020 2019 372,903 (52,921) 787 232,607 (65,728) 17,993 10,919 (260,301) 13,642 (20,629) (6,645) 242,627 407,372 (44,062) 2,985 232,860 (68,000) 4,644 10,776 (265,572) 18,378 (23,126) (34,225) 242,030 NLB 2020 207,188 (31,881) 6,261 133,743 (32,972) 17,274 5,634 in EUR thousands 2019 228,618 (21,335) 71,229 134,530 (34,041) 4,513 4,072 (164,600) (170,530) 8,627 (9,490) 3,779 143,563 7,859 (11,375) (23,283) 190,257 (366,831) (575,987) (105,859) (229,476) 1,838 (12,667) 44,214 29,084 1,838 (12,564) 44,214 25,948 (150,006) (250,506) (77,098) (126,152) (207,260) 1,264 1,338,820 1,338,633 187 1,214,616 478,251 5,341 - 39,078 433,832 108,232 (27,626) (15,020) 452,770 (326) (411,170) 12,391 1,067,045 1,067,440 (395) 733,088 251,424 6,556 8 269 244,591 (500,106) (19,257) (13,311) - - (301,566) 586,483 (467,538) (248,682) 119,222 119,222 (45,000) - (45,000) 74,222 (2,176) 1,875,321 2,263,267 4,136,412 208,321 208,321 (162,246) (147,244) (15,002) 46,075 3,693 530,481 1,729,093 2,263,267 (18,357) (173,964) 322 1,044,033 1,044,297 (264) 478 679,366 679,366 - 1,081,737 640,147 402,729 2,258 - 39,078 361,393 (602,939) (15,089) (10,663) (397,729) (326) (179,132) (200,210) 119,222 119,222 (45,000) - (45,000) 74,222 (2,080) 955,749 1,308,122 2,261,791 224,834 3,684 3,437 269 217,444 (448,106) (10,787) (9,125) (1,744) - (426,450) (223,272) 208,321 208,321 (142,600) (142,600) - 65,721 1,189 482,596 824,337 1,308,122 104 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Statement of cash flows for the annual period ended 31 December Notes to the financial statements NLB Group NLB in EUR thousands 1. General information 2.2. Basis for presenting the financial statements The financial statements have been prepared on a going-concern basis, Notes 2020 2019 2020 2019 Nova Ljubljanska banka d.d. Ljubljana (hereinafter: ‘NLB’) is a Slovenian under the historical cost convention as modified by the revaluation of Cash and cash equivalents comprise: Cash, cash balances at central banks, and other demand deposits at banks 5.1. 3,962,686 2,101,871 2,261,791 1,292,345 Loans and advances to banks with original maturity up to three months Debt securities measured at amortised cost with original maturity up to three months Debt securities measured at fair value through other comprehensive income with original maturity up to three months 146,223 - 85,369 10,007 27,503 66,020 - - - 5,770 10,007 - Total 4,136,412 2,263,267 2,261,791 1,308,122 joint-stock entity providing universal banking services. NLB Group consists financial assets measured at fair value through other comprehensive income, of NLB and its subsidiaries located in nine countries, mainly in Slovenia financial assets and financial liabilities at fair value through profit or loss, and the SEE market. Information on NLB Group’s structure is disclosed in including all derivative contracts, hedged items in fair value hedge accounting note 5.12. Information on other related party relationships of NLB Group is relationships, non-current assets held for sale and investment property. provided in note 8. The preparation of financial statements in accordance with the IFRS NLB is incorporated and domiciled in Slovenia. The address of its requires the use of estimates and assumptions that affect the reported registered office is Trg Republike 2, Ljubljana. NLB’s shares are listed on amounts of assets and liabilities, the disclosure of contingent assets and the Ljubljana Stock Exchange, and the global depositary receipts (‘GDR’), liabilities on the date of the financial statements, and the reported amounts representing ordinary shares of NLB, are listed on the London Stock of revenue and expenses during the reporting period. Although these Exchange. Five GDRs represent one share of NLB. estimates are based on management’s best knowledge of current events As at 31 December 2020 and as at 31 December 2019, the largest Accounting estimates and underlying assumptions are reviewed on an shareholder of NLB with significant influence is the Republic of Slovenia, ongoing basis. Revisions of accounting estimates are recognised in the and activities, actual results may ultimately differ from those estimates. owning 25.00% plus one share. period in which the estimate is revised. Critical accounting estimates and judgements in applying accounting policies are disclosed in note 2.33. All amounts in the financial statements and in the notes to the financial statements are expressed in thousands of euros unless otherwise stated. This document contains both, the separate financial statements of NLB and 2. Summary of significant accounting policies the consolidated financial statements of NLB Group. Presented accounting policies apply to both sets of financial statements, with exception of policies described in notes 2.4. and 2.5. which apply only to consolidated The principal accounting policies adopted for the preparation of the financial statements and policies described in note 2.6., where differences separate and consolidated financial statements are set out below. The in accounting treatment for investments in subsidiaries, associated and policies have been consistently applied to all the years presented, except joint ventures between separate and consolidated financial statements are for changes in accounting policies resulting from the application of new described. Data relating to separate financial statements is marked ‘NLB’, standards or changes to standards. while data relating to consolidated financial statements is marked ‘NLB 2.1. Statement of compliance Group.’ The principal accounting policies applied in the preparation of the separate 2.3. Comparative amounts and consolidated financial statements were prepared in accordance with Except when a standard or an interpretation permits or requires otherwise, the International Financial Accounting Standards (hereinafter: ‘the all amounts are reported or disclosed in comparative amounts. Where IAS IFRS’) as adopted by the European Union (hereinafter: ‘EU’). Additional 8 applies, comparative figures have been adjusted to conform to the changes requirements under the national legislation are included where appropriate. in presentation in the current year. The separate and consolidated financial statements are comprised of the Compared to the presentation of the financial statements for the year ended income statement and statement of comprehensive income, the statement of 31 December 2019, the schemes for presentation of the Income Statement financial position, the statement of changes in equity, the statement of cash changed due to changed schemes prescribed by the Bank of Slovenia. flows, significant accounting policies, and the notes. Comparative amounts have been adjusted to reflect these changes in the presentation. Cash contributions to resolution funds and deposit guarantee schemes - (16.223) (16.223) - (7.034) Other operating income Other operating expenses Other net operating income Administrative expenses 16.270 (28.214) - - (16.270) 8.508 28.214 (12.347) - - - 7.851 7.851 - 4.544 (270.442) (274.014) (3.572) (171.749) (173.098) 105 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report 31 Dec 2019 Net gains or losses on derecognition of investments in subsidiaries, associates and joint ventures Gains less losses from non-current assets held for sale NLB Group NLB in EUR thousands Old presentation Current presentation Change Old presentation Current presentation Change - (687) (111) (576) (111) 111 - (579) (1) (578) (1) 1 (7.034) (8.508) 12.347 4.544 (1.349) Annual Report 2020The effects from derecognition of investments in subsidiaries, associates and relevant share acquired of the carrying value of net assets of the subsidiary held immediately before the acquisition date over the net amounts of the 2.7. A combination of entities or businesses under common control joint ventures (outside the scope of IFRS 5 measurement requirements) are is deducted from the equity. Gains or losses on sales to non-controlling identifiable assets acquired, as well as the liabilities assumed. Any negative A merger of entities within NLB Group is a business combination involving included in the income statement as a separate item; before changing the interests are recorded in the equity. For sales to non-controlling interests, the amount, a gain on a bargain purchase (or ‘negative goodwill’), is recognised entities under common control. For such mergers, members of NLB Group schemes, the effects were disclosed under the item titled ‘Net gains or losses differences between any proceeds received and the relevant share of non- in profit or loss after management reassesses whether it has identified all the apply merger accounting principles, and use the carrying amounts of from non-current assets held for sale.’ controlling interests are also recorded in the equity. All effects are presented assets acquired and all the liabilities and contingent liabilities assumed and merged entities as reported in the consolidated financial statements. No in the item ‘Equity Attributable to Non-controlling Interest.’ reviews the appropriateness of their measurement. goodwill is recognised on mergers of NLB Group entities. Costs associated with cash contributions to resolution funds and deposit guarantee schemes are included in the income statement as a separate item; 2.5. Business combinations, goodwill and bargain purchases Goodwill is tested annually for impairment. For the purpose of impairment Mergers of entities within NLB Group do not affect the consolidated before changing the schemes, those costs were included under the item NLB Group accounts for business combinations using the acquisition testing, goodwill arising from a business combination is, from the acquisition financial statements. ‘Other operating expenses.’ method when the acquired set of activities and assets meets the definition of date, allocated to the Group’s cash-generating units (CGUs) or groups of a business and control is transferred to the Group. In determining whether CGUs that are expected to benefit from the synergies of the combination. 2.8. Foreign currency translation Expenses related to taxes, compulsory public levies, membership fees and a particular set of activities and assets is a business, the Group assesses Where goodwill has been allocated to a cash-generating unit (CGU) and Functional and presentation currency similar fees are recognised under the item ‘Administrative expenses’; before whether the set of assets and activities acquired includes, at a minimum, an part of the operation within that unit is disposed of, the goodwill associated Items included in the financial statements of each of NLB Group’s entities changing those expenses were disclosed under the item ‘Other operating input and substantive process and whether the acquired set has the ability with the disposed operation is included in the carrying amount of the are measured using the currency of the primary economic environment expenses.’ to produce outputs. The acquired process is considered substantive if it is operation when determining the gain or loss on disposal. Goodwill disposed in which the entity operates (i.e., the functional currency). The financial critical to the ability to continue producing outputs; and the inputs acquired in these circumstances is measured based on the relative values of the statements are presented in euros, which is NLB Group’s presentation ‘Other operating income’ and ‘Other operating expenses’ are included include an organised workforce with the necessary skills, knowledge, or disposed operation and the portion of the cash-generating unit retained. currency. under the item ‘Other net operating income’; before changing the schemes, experience to perform that process or it significantly contributes to the those items were reported on a separate line item in the income statement. ability to continue producing outputs and is considered unique or scarce or The goodwill of associates and joint ventures is included in the carrying Transactions and balances 2.4. Consolidation continue producing outputs. In the consolidated financial statements (NLB Group), subsidiaries which cannot be replaced without significant cost, effort, or delay in the ability to value of investments. In a business combination achieved in stages, NLB Group remeasures its exchange gains and losses resulting from the settlement of such transactions, Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign are directly or indirectly controlled by NLB have been fully consolidated. The consideration transferred is measured at the fair value of the assets previously held equity interest in the acquiree at its acquisition-date fair and from the translation of monetary assets and liabilities denominated in Subsidiaries are consolidated from the date on which effective control is transferred, equity interest issued, liabilities incurred or assumed, including value and recognises the resulting gain or loss, if any, in profit or loss. foreign currencies, are recognised in the income statement, except when transferred to NLB Group. the fair value of assets or liabilities from contingent consideration deferred in other comprehensive income as qualifying cash flow hedges. arrangements and fair value of any pre-existing equity interest in subsidiary. 2.6. Investments in subsidiaries, associates and joint ventures NLB controls an entity when all three elements of control are met: However, this excludes amounts related to the settlement of pre-existing In the separate financial statements (NLB), investments in subsidiaries, Translation differences resulting from changes in the amortised cost of • it has power over the entity; such as advisory, legal, valuation, and similar professional services are also Dividends from subsidiaries, joint ventures, or associates are recognised in assets and measured at fair value through other comprehensive income are • it is exposed or has rights to variable returns from its involvement with the recognised in profit or loss. Transaction costs incurred for issuing equity the income statement when NLB’s right to receive the dividend has been recognised in the income statement. relationships which are recognised in profit or loss. Acquisition-related costs associates and joint ventures are accounted for with the cost method. monetary items denominated in foreign currency and classified as financial entity; and instruments are deducted from the equity, and all other transaction costs established. • it has the ability to use its power over the entity to affect the amount of associated with the acquisition are expensed. Translation differences on non-monetary items, such as equity instruments the entity’s returns. In the consolidated financial statements, investments in associates are at fair value through profit or loss, are reported as part of the fair value gain NLB reassesses whether it controls an entity if facts and circumstances are, with limited exceptions, measured initially at their fair values at the undertakings in which NLB Group holds between 20% and 50% of the items, such as equity instruments classified as financial assets, measured indicate there are changes to one or more of the three elements of control. acquisition date. voting rights, and over which NLB Group exercises significant influence, but at fair value through other comprehensive income, are included together If the loss of control of a subsidiary occurs, the subsidiary is no longer does not have control. consolidated from the date that the control ceases. A contingent consideration classified as equity is not remeasured and with valuation reserves in the valuation (losses)/gains taken to other comprehensive income and accumulated in the equity. Identifiable assets acquired and liabilities assumed in a business combination accounted for using the equity method of accounting. These are generally or loss in the income statement. Translation differences on non-monetary Where necessary, the accounting policies of subsidiaries have been amended consideration classified as an asset or liability that is a financial instrument joint control, as established by contractual agreement. In the consolidated Gains and losses resulting from foreign currency purchases and sales for to ensure consistency with the policies adopted by NLB. The financial and within the scope of IFRS 9 Financial Instruments, is measured at fair financial statements, investments in joint ventures are accounted for using trading purposes are included in the income statement as gains less losses statements of consolidated subsidiaries are prepared as at the parent entity’s value at each reporting date and changes in fair value are recognised in the the equity method of accounting. from financial assets and liabilities held for trading. reporting date. Non-controlling interests are disclosed in the consolidated statement of profit or loss in accordance with IFRS 9. Other contingent statement of changes in equity. Non-controlling interest is that part of the consideration that is not within the scope of IFRS 9 is measured at fair value NLB Group’s share of its associates’ and joint ventures’ post-acquisition NLB Group entities its subsequent settlement is accounted for within equity. A contingent Joint ventures are those entities over whose activities NLB Group has net results, and of the equity of a subsidiary, attributable to interests which at each reporting date and changes in fair value are recognised in profit or 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 presentation currency as follows: The financial statements of all NLB Group entities that have a functional currency different from the presentation currency are translated into the NLB does not own, either directly or indirectly. NLB Group measures non- loss. controlling interest on a transaction-by-transaction basis, either at fair value, or by the non-controlling interest’s proportionate share of net assets of the For each business combination, NLB Group elects whether to measure the carrying amount of the investment. When NLB Group’s share of losses acquiree. the non-controlling interests in the acquiree at fair value or at the present in an associate and joint venture equals or exceeds its interest in the associate • assets and liabilities for each statement of financial position presented are ownership instruments’ proportionate share in the recognised amounts and joint venture, including any other unsecured receivables, NLB Group translated at the closing rate on the reporting date; Inter-company transactions, balances, and unrealised gains on transactions of the acquiree’s identifiable net assets at the date of acquisition. All does not recognise further losses unless it has incurred obligations or made • income and expenses for each income statement are translated at average between NLB Group entities are eliminated. Unrealised losses are also other components of non-controlling interests are measured at their payments on behalf of the associate and joint venture. NLB Group resumes exchange rates; and eliminated unless the transaction provides evidence of impairment of the acquisition-date fair values, unless another measurement basis is required by recognising its share of those profits only after its share of the profits equals • components of equity are translated at the historical rate. asset transferred. IFRSs. the share of losses not recognised (note 5.12.c). NLB Group treats transactions with non-controlling interests as transactions Goodwill is measured as the excess of the aggregate of the consideration NLB Group’s subsidiaries, associates and joint ventures are presented in 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 with equity owners of NLB Group. For purchases of subsidiaries from non- transferred measured at fair value, the amount of any non-controlling note 5.12. at the closing rate. controlling interests, the difference between any consideration paid and the interest in the acquiree, and the fair value of an interest in the acquiree 106 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020In the consolidated financial statements, exchange differences arising from provided at a point in time. When service is provided over time, losses, and impairment are recognised separately in the income statement. and losses are recognised in the line item ‘Gains less losses from financial the translation of the net investment in foreign operations are recognised in consideration is invoiced and due in line with contractual provisions. Other net gains and losses are recognised in other comprehensive income, assets and liabilities not classified at fair value through profit or loss.’ Gains other comprehensive income. When control over a foreign operation is lost, until the instrument is derecognised. At derecognition of the debt financial and losses on disposals of financial liabilities designated as measured at fair the previously recognised exchange differences on translations to a different The Group has generally concluded that it is the principal in its revenue instrument, the cumulative gains and losses previously recognised in other value through profit or loss are also presented separately from those held for presentation currency are reclassified from other comprehensive income to arrangements because it typically controls the services before transferring comprehensive income are reclassified to the income statement under line trading. profit and loss for the year. On the partial disposal of a subsidiary without them to the customer. item ‘Gains less losses from financial assets and liabilities not classified at fair loss of control, the related portion of accumulated currency translation value through profit or loss.’ Assessment of NLB Group’s business model differences is reclassified as a non-controlling interest within the equity. Fees and commissions that are integral to the effective interest rate of NLB Group has determined its business model separately for each reporting financial assets and liabilities are presented within interest income or Equity instruments that are not held for trading may be irrevocably unit within NLB Group, and is based on observable factors for different 2.9. Interest income and expenses expenses. Interest income and expenses for all financial instruments measured at designated as FVOCI, with no subsequent reclassification of gains or losses portfolios that best reflect how the Group manages groups of financial assets to the income statement. Dividends are recognised as income in profit or loss to achieve its business objective, such as: amortised cost, and financial assets measured at fair value through other 2.11. Dividend income unless the dividend clearly represents a recovery of part of the cost of the comprehensive income are recognised in the income statement for all Dividends are recognised in the income statement within the line ‘Dividend investment, in which case, such gains are recorded in other comprehensive • how the performance of the business model and the financial assets held interest-bearing instruments on an accrual basis using the effective interest income’ when NLB Group’s right to receive payment has been established income. Other net gains and losses are recognised in other comprehensive within that business model are evaluated and reported to key management rate method. Interest income on all trading assets and financial assets and an inflow of economic benefits is probable. In the consolidated financial income and are never reclassified to profit or loss. In NLB Group, the most personnel; mandatorily required to be measured at fair value through profit or loss statement, dividends received from associates and joint ventures reduce the material equity instrument irrevocably designated as FVOCI is investment • the risks that affect the performance of the business model and, in is recognised using the contractual interest rate. The effective interest carrying value of the investment. in National Resolution Fund (note 5.4.a). NLB Group decided to use this particular, the way those risks are managed; rate method is used to calculate the amortised cost of a financial asset or presentation alternative due to the fact that the fund was founded based on • how the managers of the business are compensated (e.g., whether the financial liability, and to allocate the interest income or interest expense 2.12. Financial instruments the law and that its investment strategy is highly regulated, so to assure the compensation is based on the fair value of the assets or on collection of over the relevant period. The effective interest rate is the rate that exactly a) Classification and measurement safety, low risk and high liquidity of the fund. contractual cash flows); and discounts estimated future cash payments or receipts over the expected life Financial instruments are initially measured at fair value plus or minus, in • the expected frequency, value, and timing of sales. of the financial instrument, or a shorter period (when appropriate) to the the case of a financial instrument not measured at fair value through profit All other financial assets are mandatorily measured at FVTPL, including gross carrying amount of the financial asset or to the amortised cost of a or loss, transaction costs that are directly attributable to the acquisition or financial assets within other business models such as financial assets The business model assessment is based on reasonably expected scenarios financial liability. Interest income includes coupons earned on fixed-yield issue of the financial instrument. Subsequent measurement depends on the managed at fair value or held for trading and financial assets with without taking worst-case and stress case scenarios into account. In general, investments and trading securities, and accrued discounts and premiums on classification of the instrument. contractual cash flows that are not solely payments of principal and interest the business model assessment of the Group can be summarised as follows: 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, Financial assets on the principal amount outstanding. Net gains and losses, including any interest or dividend income, are recognised in profit or loss. • Loans and deposits given are included in a business model ‘held to collect’ but excludes future credit risk losses. All debt financial assets need to be assessed based on a combination of since the primary purpose of NLB Group for the loan portfolio is to Interest income is calculated by applying the effective interest rate to the contractual cash flow characteristics. Measurement categories of financial profit or loss if doing so eliminates or significantly reduces a measurement or • Debt securities are divided into three business models: gross carrying amount of financial assets other than credit-impaired assets. assets are as follows: recognition inconsistency that would otherwise arise from measuring assets - the first group of debt securities presents ‘held for trading’ category; the Group’s business model for managing the assets and the instruments’ IFRS 9 includes an option to designate financial assets at fair value through collect the contractual cash flows; When a financial asset becomes credit-impaired and is, therefore, regarded • Financial assets, measured at amortised costs (AC); as Stage 3, interest income is calculated by applying the effective interest • Financial assets at fair value through other comprehensive income Financial liabilities ‘held to collect and sale’ with the aim of collecting the contractual cash flows and sale of financial assets, and forms part of the Group’s rate to the net amortised cost of the financial asset. If the financial assets (FVOCI); Financial liabilities are subsequently measured at the amortised cost or at liquidity reserves; cures and is no longer credit-impaired, interest income is again calculated • Financial assets held for trading (FVTPL); and fair value through profit or loss, when they are held for trading, derivative - the third part of debt securities is held within the business model for on a gross basis. • Non-trading financial assets, mandatorily at fair value through profit or instruments, or the fair value designation is applied. holding them in order to collect contractual cash flows. or liabilities or recognising the gains or losses on them on different bases. - debt securities in the second group are held under a business model loss (FVTPL). In case of purchased or originated credit-impaired financial assets, credit- Upon initial recognition, financial liability may be irrevocably designated as With regard to debt securities within the ‘held to collect’ business model, adjusted effective interest rate is applied to the amortised cost of the Financial assets are measured at AC if they are held within a business measured at fair value through profit or loss if that eliminates or significantly the sales which are related to the increase of the issuers’ credit risk, financial asset from initial recognition. The credit-adjusted effective interest model for the purpose of collecting contractual cash flows (‘held to collect’), reduces a measurement or recognition inconsistency that would otherwise concentrations risk, sales made close to the final maturity, or sales in order rate is the interest rate that, at initial recognition, discounts the estimated and if cash flows are solely payments of principal and interest on the arise from measuring assets or liabilities or recognising the gains or losses on to meet liquidity needs in a stress case scenario are permitted. Other sales, future cash flows (including credit losses) to the amortised cost of the principal amount outstanding. After initial recognition, they are measured them on different bases, or if the liabilities are part of a group of financial which are not due to an increase in credit risk may still be consistent with purchased or originated credit-impaired financial asset. at the amortised cost using the effective interest method and are subject to instruments which are managed and their performance evaluated on a a held to collect business model if such sales are incidental to the overall impairment. Interest income calculated using the effective interest method, fair value basis in accordance with a documented risk management or business model, and: 2.10. Fee and commission income foreign exchange gains and losses, and impairment are recognised in profit investment strategy. Fees and commissions mainly consist of fees received from credit cards or loss. Each of them is presented as separate line item in the income • are insignificant in value both individually and in aggregate, even when and ATMs, customer transaction accounts, payment services, investment statement. Any gain or loss on derecognition is recognised in profit or loss in Changes in the fair value of financial liabilities designated as measured at such sales are frequent; funds, and commissions from guarantees. Fee and commission income line item ‘Gains less losses from financial assets and liabilities not classified at fair value through profit or loss are recognised in profit or loss, with the • are infrequent even when they are significant in value. are recognised at an amount that reflects the consideration to which the fair value through profit or loss.’ exception of movement in the fair value due to changes of NLB Group’s Group expects to be entitled in exchange for providing the services. The own credit risk. Such changes are presented in other comprehensive income A review of instruments’ contractual cash flow characteristics performance obligations, as well as the timing of their satisfaction, are Debt financial instruments are measured at FVOCI if they are held within with no subsequent reclassification to the income statement. (the SPPI test – solely payment of principal and interest identified, and determined, at the inception of the contract. The Group’s a business model for the purpose of both collecting contractual cash flows on the principal amount outstanding) revenue contracts do not include multiple performance obligations. and selling (‘held to collect and sell’), and if cash flows are solely payments Other financial liabilities are subsequently measured at amortised cost The second step in the classification of the financial assets in portfolios When the Group provides a service to its customers, consideration is of principal and interest on the principal amount outstanding. FVOCI results in the debt instruments being recognised at fair value in the statement using the effective interest method. Interest expense and foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on being ‘held to collect’ and ‘held to collect and sell’ relates to the assessment of whether the contractual cash flows are consistent with the SPPI test. invoiced and generally due immediately upon satisfaction of a service of financial position and at AC in the income statement. Interest income derecognition of financial liability is recognised in profit or loss. In the event The principal amount reflects the fair value at initial recognition less any calculated using the effective interest method, foreign exchange gains and of derecognition of a financial liability measured at amortised cost, gains subsequent changes, e.g. due to repayment. The interest must represent 107 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020only the consideration for the time value of money, credit risk, other basic instrument or is based on a valuation technique whose variables only include nature of the item being hedged. NLB Group designates certain derivatives recognised in the income statement. When a forecasted transaction is no lending risks, and a profit margin consistent with basic lending features. If data from observable markets, the difference between the transaction price as either: the cash flows introduce more than de minimis exposure to risk or volatility and fair value is recognised immediately in the income statement (‘day one longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the income that is not consistent with basic lending features, the financial asset is gains or losses’). • hedges of the fair value of recognised assets or liabilities or firm statement. mandatorily measured at FVTPL. commitments (fair value hedge); In cases where the data used for valuation are not fully observable in • hedges of highly probable future cash flows attributable to a recognised Hedge of a net investment in a foreign operation NLB Group reviews the portfolio within ‘held to collect’ and ‘held to financial markets, day one gains or losses are not recognised immediately in asset or liability, or a highly probable forecasted transaction (cash flow Hedges of net investments in foreign operations are in consolidated financial collect and sale’ for standardised products on a level of a product and the income statement. The timing of recognition of deferred day one gains hedge); or statements accounted for similarly to cash flow hedges. Any gain or loss for non-standardised products on a single exposure level. The Group has or losses is determined individually. It is either amortised over the life of the • hedges of a net investment in a foreign operation (net investment hedge). on the hedging instrument relating to the effective portion of the hedge established a procedure for SPPI identification as part of regular investment transaction, deferred until the instrument’s fair value can be determined is recognised directly in equity. The gain or loss relating to the ineffective process with defined responsibilities for primary and secondary controls. using market observable inputs, or realised through settlement. Hedge accounting is used for derivatives designated in this way provided portion is recognised immediately in the consolidated income statement in Special emphasis is put on new and non-standardised characteristics of loan agreements. d) Derecognition certain criteria are met. NLB Group and NLB elected, as a policy ‘Gains Less Losses on Financial Assets and Liabilities Held for Trading.’ choice permitted under IFRS 9, to continue to apply hedge accounting Gains and losses accumulated in other comprehensive income are included A financial asset is derecognised when the contractual rights to the requirements in accordance with IAS 39. However, disclosures that in the consolidated income statement when the foreign operation is disposed Accounting policy for modified financial assets cash flows from the financial asset expire, or when the financial asset is are required by the IFRS 9 related amendments to IFRS 7 ‘Financial of as part of the gain or loss on the disposal. When contractual cash flows of a financial asset are modified, NLB Group transferred, and the transfer qualifies for derecognition. A financial liability Instruments: Disclosures’ are implemented. assesses if the terms and conditions have been modified to the extent that, is derecognised only when it is extinguished, i.e., when the obligation 2.13. Allowances for financial assets substantially, it becomes a new financial asset. The following factors are, specified in the contract is discharged, cancelled, or expires. At the inception of the transaction, NLB Group documents the relationship a) Expected credit losses for collective allowances amongst others, considered when making such assessment: e) Write-offs between hedged items and hedging instruments, as well as its risk IFRS 9 applies an expected loss model that provides an unbiased and management objective, valuation methodology and strategy for undertaking probability-weighted estimate of credit losses by evaluating a range of • reason for modification of cash flows (commercial or client’s financial NLB Group writes off financial assets in their entirety or a portion thereof various hedge transactions. NLB Group also documents its assessment, both possible outcomes that incorporates forecasts of future economic conditions. difficulties); • change in currency of the loan; • introduction of an equity feature; when it has exhausted all practical recovery efforts and has no reasonable at the hedge inception and on an ongoing basis, of whether the derivatives The expected loss model requires NLB Group to recognise not only credit expectations of recovery. Criteria indicating that there is no reasonable used in hedging transactions are highly effective in offsetting changes in fair losses that have already occurred, but also losses that are expected to occur expectation of recovery include default period, quality of collateral, and values or cash flows of hedged items. The actual results of a hedge must in the future. An allowance for expected credit losses (ECL) is required for • replacement of initially agreed debtor with a new debtor that is not different stages of enforcement procedures. NLB Group may write off always fall within a range of 80–125%. all loans and other debt financial assets not held at FVTPL, together with related party to initial debtor; and financial assets that are still subject to enforcement activities, but this does loan commitments and financial guarantee contracts. • if the modification is such that it changes the result of the SPPI test. not affect its rights in the enforcement procedures. NLB Group still seeks Fair value hedge to recover all amounts it is legally entitled to in full. A write-off reduces Changes in the fair value of derivatives that are designated and qualify as In the general model, the allowance is based on the expected credit losses If the modification results in derecognition of a financial asset, the new the gross carrying amount of a financial asset and allowance for the fair value hedges are recognised in the income statement together with any associated with the probability of default in the next 12 months unless financial asset is initially recognised at fair value, with the difference impairment. Any subsequent recoveries are credited to credit loss expense. changes in the fair value of the hedged asset or liability that are attributable there has been a significant increase in credit risk since initial recognition, recognised as a derecognition gain or loss, to the extent that an impairment Write-offs and recoveries are disclosed in note 5.14.a). to the hedged risk. Effective changes in the fair value of hedging instruments in which case, the allowance is based on the probability of default over the loss has not already been recorded. If the modification does not result in and related hedged items are reflected in ‘Fair value adjustments in Hedge life of the financial asset (LECL). When determining whether the risk of cash flows that are substantially different, the modification does not result f) Fair value measurement principles Accounting’ in the income statement. Any ineffectiveness from derivatives is default increased significantly since initial recognition, the Group considers in derecognition. In such cases NLB Group recalculates the gross carrying The fair value of financial instruments traded on active markets is based on recorded in ‘Gains Less Losses on Financial Assets and Liabilities Held for reasonable and supportable information that is relevant and available amount of the financial asset and recognises modification gain or loss in the price that would be received to sell the assets or transfer liability (exit Trading.’ the income statement. The gross carrying amount is recalculated as the price) being measured at the reporting date, excluding transaction costs. If without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical data, experience, present value of the renegotiated or modified contractual cash flows that are there is no active market, the fair value of the instruments is estimated using If a hedge no longer meets the hedge accounting criteria, the adjustment expert credit assessment, and incorporation of forward-looking information. discounted at the financial asset’s original effective interest rate (or credit- discounted cash flow techniques or pricing models. to the carrying amount of the hedged item for which the effective interest In 2020, due to the COVID-19 pandemic, the Group broadened the adjusted effective interest rate for purchased or originated credit impaired rate method is used is amortised to profit or loss over the remaining period number of indicators to strengthen the likelihood of detection of significant financial assets). b) Reclassification If discounted cash flow techniques are used, estimated future cash flows are to maturity. The adjustment to the carrying amount of a hedged equity increase of credit risk for clients with COVID-19 moratoria. based on management’s best estimates; and the discount rate is a market- security is included in the income statement upon disposal of the equity based rate at the reporting date for an instrument with similar terms and security. Classification into stages Financial assets can be reclassified when and only when NLB Group’s conditions. If pricing models are used, inputs are based on market-based business model for managing those assets changes. The reclassification takes measurements at the reporting date. Cash flow hedge place from the start of the reporting period following the change. Such changes are expected to be very infrequent, and none occurred during the g) Derivative financial instruments and hedge accounting The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other NLB Group prepared a methodology for ECL defining the criteria for classification into stages, transition criteria between stages, models for risk indicators calculation, forward-looking scenarios, and the validation of models. The Group classifies financial instruments into Stage 1, Stage 2, presented periods. Financial liabilities shall not be reclassified. Derivative financial instruments – including forward and futures contracts, comprehensive income. The gain or loss relating to the ineffective portion is and Stage 3, based on the applied ECL allowance methodology as described swaps, and options – are initially recognised in the statement of financial immediately recognised in the income statement. below: c) Day one gains or losses position at fair value. Derivative financial instruments are subsequently The best evidence of fair value at initial recognition is the transaction re-measured at their fair value. Fair values are obtained from quoted market Amounts accumulated in equity are recycled as a reclassification from other • Stage 1 – performing portfolio: no significant increase of credit risk price (i.e., the fair value of the consideration given or received), unless prices, discounted cash flow models, or pricing models, as appropriate. All comprehensive income to the income statement in the periods when the since initial recognition, NLB Group recognises an allowance based on the fair value of that instrument is evidenced by a comparison with other derivatives are carried at their fair value within assets when the derivative hedged item affects profit or loss. 12-month period; observable current market transactions in the same instrument (i.e., without position is favourable to NLB Group, and as well within liabilities when the • Stage 2 – underperforming portfolio: significant increase in credit risk modification or repackaging), or based on a valuation technique whose derivative position is unfavourable to NLB Group. When a hedging instrument expires or is sold, or when a hedge no longer (SICR) since initial recognition, NLB Group recognises an allowance for variables only include data from observable markets. The method of recognising the resulting fair value gain or loss depends on meets hedge accounting criteria, any cumulative gain or loss existing in other comprehensive income and previously accumulated in equity at lifetime period; and • Stage 3 – impaired portfolio: NLB Group recognises lifetime allowances If the transaction price on a non-active market is different than the fair whether the derivative is designated as a hedging instrument and, if so, the that time remains in other comprehensive income and in equity, and is for these defaulted financial assets. value from other observable current market transactions in the same recognised in profit or loss only when the forecasted transaction is ultimately 108 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The Bank has aligned its definition of credit impaired assets under IFRS 9 For financial instruments in Stage 3, the same treatment is applied as for Management Board. Scenarios and statistical models are the same for all In the situation of the COVID-19 pandemic, NLB Group kept up with to the new European Banking Authority (EBA) definition of non-performing those considered to be credit impaired. Exposures below the materiality NLB Group members, local specifics for subsidiaries are captured by the the latest institutional projections that kept changing throughout 2020. loans (NPLs) as at 31 December 2020. The Bank uses a unified definition of threshold obtain collective allowances using a PD of 100%. Financial process of scenarios results calibration. past due and default exposures; defaulted clients are rated D, DF, or E based instruments will be transferred out of Stage 3 if they no longer meet the Due to the extraordinary state of the COVID-19-ridden global economy, the early official forecasts were discarded in favour of the ECB June 2020 on the internal rating system and contains the clients with material delays criteria of being credit-impaired after a probation period. Special treatment The IFRS 9 scenario framework is based on institutional forecasts projections which were deemed more realistic. In spite of the ever-changing over 90 days, as well as the clients that were assessed as unlikely to pay. All applies for purchased or originated credit-impaired financial instruments (IMAD, EC, IMF, ECB), from which three forward-looking scenarios of COVID-19 situation, IFRS 9 projections remain in line with NLB Group’s the facilities of the retail clients obtain a unified credit rating. (POCI), where only the cumulative changes in the lifetime expected losses macroeconomic development are created (i.e. baseline, optimistic, and economic outlook. We use the ECB baseline, mild, and severe scenarios for since initial recognition are recognised as a loss allowance. severe scenarios). The probability-weighted expected scenario is used Slovenia for the initial period ranging from 2020 to 2022. For the two-year A significant increase in credit risk is assumed: as a base for IFRS 9 expected credit losses calculations. Currently, NLB period from 2023 to 2024 we resort to established methodology and use The calculation of collective allowances is performed by multiplying the Group applies GDP growth rates for probability of default (PD) estimates IMF projections. The latter represents the baseline scenario. We use our • when a credit rating significantly deteriorates at the reporting date EAD (exposure at default) at the end of each month with an appropriate and House prices growth for loss given default (LGD) forward-looking internally developed deviations from the baseline to obtain the severe and in comparison to the credit rating at initial recognition (which is PD and LGD (loss-given default). The obtained result for each month is projections. accompanied with the increase of Probability of default (PD) indicator); discounted to the present time using the original effective interest rate of the • when a financial asset has material delays over 30 days (days past due are facility. For Stage 1 exposures, the ECL only takes a 12-month period into also included in the credit rating assessment); account, while for Stage 2 or 3 all potential losses until the maturity date are Macroeconomic scenarios for Risk parameters explanatory variables: optimistic scenarios. Real estate price growth is estimated on the basis of an internal econometric model, using GDP forecasts as an explanatory variable. • if NLB Group grants the forbearance to the borrower; included. • if the facility is placed on the watch list or intensive care list; • if a retail client obtained COVID-19 moratoria and is placed on the EWS The EAD represents the anticipated outstanding amount owed by the list. obligor, which is determined as the sum of on-balance exposure and expected future drawings of the off-balance exposure. The drawings are Based on the EBA Guidelines for COVID-19 legislative and non- assessed by applying the CCF (credit conversion factor) based on the Bank’s legislative moratoria, the Bank did not consider COVID-19 moratoria historic experience with similar types of facilities. PD as a forbearance measure if granted before 30 September 2020 or if granted after that date, but the cumulative moratoria period did not exceed The PD is the estimation of likelihood of default over a given time horizon. 9 months. Nevertheless, any moratoria granted due to the COVID-19 The estimation is performed separately for each unique product group or situation not aligned with the legislative or non-legislative standards, was segment of clients. Through the cycle, the PD is supplemented with the checked for forbearance status on a case-by-case basis. Additionally, the forward-looking aspect using multiple possible scenarios. clients who were granted COVID-19 moratoria or new financing on the basis of the COVID-19 circumstances, were analysed as part of the regular The LGD parameter reflects the expected loss the facility will incur in case credit process using a wide variety of financial and non-financial indicators of the event of default. The LGD value is assessed based on the Bank’s and were downgraded or placed on the watch list if an increase in credit risk historic data on repayments from different types of collateral, as well as was identified. other types of repayments such as regular/partial repayments, repayments Risk parameter Scenario Scenario weight* Baseline Optimistic Adverse Weighted average 60% 20% 20% - GDP percentage growth 5Y projection 2020 -6.50 -3.90 -10.00 -6.68 2021 4.90 6.70 0.40 5.31 2022 3.60 4.60 4.00 3.88 House prices growth 5Y projection 2023 2.80 2.88 2.33 2.67 2023 7.36 2024 2.50 2.58 1.76 2.37 2024 6.96 Risk parameter LGD** Scenario Scenario weight* Weighted average - 2020 -5.20 2021 10.90 2022 8.99 The methodology of credit rating for banks and sovereign classification cycle, the LGD is supplemented with the forward-looking aspect to reflect ** Weighted average GDP scenario was used in internal econometric model for House prices growth forecasting. from legal proceedings, the sale of receivables, and others. Through the * Scenario weights change to 60% - 35% - 5% in year 2021 and return to the original weight partitioning in the following years. depends on the existence or non-existence of a rating from international the expected changes in the macroeconomic parameters. credit rating agencies Fitch, Moody’s, or S&P. Ratings are set on a basis of the Recalculation of all parameters is performed annually or more frequently if b) Individual assessment of allowances for impaired financial assets average international credit rating. If there are no international credit ratings, Risk parameter calculations are based on the data from each subsidiary, the macro environment changes more than it was incorporated in previous NLB Group assesses impairments of financial assets separately for all the classification is based on the internal methodology of NLB Group. while the calculations and modelling are performed centrally. In the case forecasts. In such a case all the parameters are recalculated according to individually significant assets classified in Stage 3. The materiality threshold where the data samples are not sufficiently large, hurdle rates are applied new forecasts. In 2020, due to the changing macroeconomic predictions, a is set at EUR 0.5 million exposure for legal entities and EUR 0.1 million for The classification into stages is based on the facility level, nevertheless based on the regulatory or other benchmarks. second calculation was performed as at 30 September 2020. private persons on the level of NLB, while the Group members apply lower occurring delays on one facility may trigger the Stage deterioration of other facilities of the same client. When the SICR criteria no longer exist, Expected Life The largest impact on expected credit losses in 2020 is due to the collective allowances. thresholds applicable to their portfolio size. All other financial assets obtain the facility may be transferred to a more favourable stage subject to the When measuring ECL, the Bank must consider the maximum contractual deterioration of the macroeconomic environment due to the COVID-19 prescribed holding period. period over which the Bank is exposed to credit risk. For certain revolving crisis. This change in macroeconomic scenarios has an impact on the new The amount of the loss is measured as the difference between the asset’s credit facilities that do not have a fixed maturity, the expected life is values of risk parameters which incorporate the estimated influence of the carrying amount and the present value of estimated future cash flows, The ECL for Stage 1 financial assets is calculated based on 12-month PDs estimated based on the period over which the Bank is exposed to credit risk COVID-19 outbreak. or shorter period PDs, if the remaining maturity of the financial asset is and where the credit losses would not be mitigated by management actions. which are discounted to the estimation date. The scenario of expected cash flows can be based on the ‘going concern’ assumption, where the cash flow shorter than 1 year. The 12-month PD already includes the macroeconomic Due to the COVID-19 crisis NLB Group has introduced a COVID-19 from operations is considered along with the sale of collateral that is not impact effect. Allowances in Stage 1 are designed to reflect expected credit Forward-looking information mark-up on LGD (up to 10%). COVID-19 mark-up can be applied by crucial for future business. In the case of the ‘gone concern’ principle, the losses that had been incurred in the performing portfolio but have not been The Group incorporates forward-looking information in both the a NLB Group member as a measure of conservativeness or due to the repayments are based on expected cash flows from the sale of collateral. identified. assessment of significant increase in credit risk and the measurement of particularities of the local market. The COVID-19 mark-up applied in 2020 The expected payment from the collateral is calculated from the appraised The ECL for Stage 2 financial assets is calculated based on lifetime PDs Methodology, and discounted. Off-balance sheet liabilities are also assessed (LPD) because their credit risk has increased significantly since their initial The macroeconomic scenarios used by NLB Group for IFRS 9 are based on Effects of changed risk parameters on the amount of expected credit losses individually and, where necessary, related allowances are recognised as ECL. has no major impact on the increase of expected credit losses. market value of the collateral, the haircut used as defined in the Haircut recognition. This calculation is also based on a forward-looking assessment that takes into account a number of economic scenarios in order to existing Group’s stress-testing framework. Scenarios under the Stress-testing framework are regularly presented, challenged, and discussed by the Capital recognise the probability of losses associated with the predicted macro- Management Group (CMG), the Liquidity Management Group (LMG), economic forecasts. respective Committees (ALCO, RICO, and OpRisk Committee), and the are disclosed in notes 5.14. and 5.16.b). liabilities. The carrying amount of financial assets measured at an amortised cost is reduced through an allowance account and the loss is recognised in the 109 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020income statement item ‘Impairment of financial assets.’ If the amount of by taking possession of other assets (i.e., property, plant and equipment, 2.17. Sale and repurchase agreements 2.19. Intangible assets allowances for ECL decreases subsequently due to an event occurring after securities, and other financial assets), including investments in the equity Securities sold under sale and repurchase agreements (repos) are retained Intangible assets include software licenses, goodwill (note 2.5.), and the impairment was recognised (e.g. repayment in the collection process of debtors obtained via debt-to-equity swaps, it recognises the acquired in the financial statements, and the counterparty liability is included in identifiable intangible assets acquired in a business combination. Intangible exceeds the assessed expected payment from collateral), the reversal of the assets in the statement of financial position at fair value, recognising the financial liabilities measured at an amortised cost. Securities sold subject to assets except goodwill, have a finite useful life and are in the statement loss is recognised as a reduction in the allowance account, and the gain is difference between the fair value of the asset and the carrying amount of sale and repurchase agreements are reclassified in the financial statements of financial position stated at cost, less accumulated amortisation and recognised in the same income statement item. For off-balance exposures, the eliminated claim in profit or loss. as pledged assets when the transferee has the right by contract or custom impairment losses. Amortisation is calculated on a straight-line basis at rates the amount of ECL is recognised in the statement of financial position in to sell or re-pledge the collateral. Securities purchased under agreements to designed to write-down the cost of an intangible asset over its estimated the ‘Provisions’ item and in the income statement in the item ‘Provisions for Forborne exposures may be identified in both the performing and non- resell (reverse repos) are recorded as loans to other banks or customers, as useful life. The core banking system is amortised over a period of 10 years, credit losses.’ performing parts of the portfolio. Where the forborne loan is classified appropriate. in the non-performing part of the portfolio, it can be reclassified to and other software over a period of three to five years. Amortisation does not begin until the assets are available for use. The ECLs for debt instruments measured at fair value through other the performing part if exposure is no longer considered as impaired or In financial statements, the difference between the sale and repurchase price comprehensive income do not reduce the carrying amount of these financial defaulted, if determined amounts were repaid, if one year has passed from is treated as interest and accrued over the life of the repo agreements using The identifiable intangible assets acquired in a business combination and assets in the statement of financial position, which remains at fair value. the latest of the events defined (introduction of forbearance, classification the effective interest rate method. Instead, an amount equal to the allowance that would arise if the assets were in the non-performing part, repayment of the last overdue amount, end measured at an amortised cost is recognised in other comprehensive income of the grace period) and after the introduction of forbearance there have 2.18. Property and equipment recognised separately from goodwill, are recorded at fair value on the acquisition date if the intangible asset is separable or arises from contractual or other legal rights. After initial recognition, intangible assets acquired in a as an accumulated impairment amount, with a corresponding charge to been no overdue amounts or doubts concerning the repayment of the All items of property and equipment are initially recognised at cost. They business combination are measured in accordance with IAS 38 Intangible profit or loss. The accumulated loss recognised in other comprehensive entire exposure, under the terms and conditions after the forbearance. The are subsequently measured at cost less accumulated depreciation and any Assets. Additionally identified intangible assets acquired in a business income is recycled to the profit or loss upon derecognition of the assets, absence of doubt is confirmed by analysis of the financial situation of the accumulated impairment loss. combination in December 2020 (note 5.12.b) relate to core deposits and or when the amount of allowances for ECL decreases due to an event debtor. occurring after the impairment was recognised. Each year, NLB Group assesses whether there are indications that property trade name. Their useful life is assessed to be 5 years. The forborne status is withdrawn when: and equipment may be impaired. If any such indication exists, the 2.20. Investment properties 2.14. Forborne loans recoverable amounts are estimated. The recoverable amount is the higher Investment properties include buildings held to earn rentals, or to increase A forborne loan (or restructured financial asset) arises as a result of a • at least a 2-year probation period has passed since the latest of: of the fair value less costs to sell and value in use. If the recoverable amount the value of a long-term investment, rather than to be used by NLB Group. debtor’s inability to repay a debt under the originally agreed terms, either - the moment of extending the restructuring measures or exceeds the carrying value, the assets are not impaired. If the carrying Investment properties are stated at fair value determined by a certified by modifying the terms of the original contract (via an annex) or by signing - the forborne exposure was deemed performing; amount exceeds the recoverable amount, the difference is recognised as a appraiser. Fair value is based on current market prices. Any gain or loss a new contract under which the contracting parties agree the partial or • regular payments of the principal or interest were made, in a substantial loss in the income statement. arising from a change in the fair value is recognised in the income statement. total repayment of the original debt. Loans with deferral of payment total amount, during at least half the probation period; approved in line with the national legislation on intervention measures • no exposure, in the probation period, is more than 30 days in default of Items of a largely independent property and equipment which do not 2.21. Non-current assets and disposal groups classified as held for sale in response to SARS-CoV-2 (COVID-19) pandemic until 30 September more than EUR 100. generate cash flows are included in the cash-generating unit and later tested Non-current assets and disposal groups are classified as held for sale if their 2020 are not forborne loans. Loans with deferrals of payment, under COVID-19 measures approved after 30 September 2020 are subject of 2.15. Repossessed assets for possible impairment. carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is deemed to be met only when assignment of forbearance status, except in cases, where detailed review and In certain circumstances, assets are repossessed following the foreclosure Depreciation is calculated on a straight-line basis over the assets’ estimated the sale is highly probable, and the asset is available for immediate sale in analysis sufficiently justify that the client is not in financial difficulties. If to on loans that are in default. Repossessed assets are initially recognised in useful lives. The following annual depreciation rates were applied: its present condition. Management must be committed to the sale, which receivables due from the client the status of restructuring is introduced, the the financial statements at their fair value and classified in the appropriate debtor must be classified in the rating group C or lower. category according to their purpose and are sold as soon as is practical in order to reduce exposure (note 6.1.l). After initial recognition, repossessed NLB Group and NLB The definitions of forborne loans closely follow definitions that were assets are measured and accounted for in accordance with the policies Buildings developed by the European Banking Authority (EBA). These definitions applicable to the relevant asset categories. Repossessed assets mainly aim to achieve comprehensive coverage of exposures to which forbearance represent items of real estate that NLB Group classifies within investment measures have been extended. properties measured in accordance with an IAS 40 Investment property (note 2.20.), and other assets measured in accordance with IAS 2 The accounting treatment of forborne loans depends on the type of Inventories. restructuring. When NLB Group embarks on a forborne loan via the Leasehold improvements Computers Furniture and equipment Motor vehicles 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 measures an acquired non-current asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations at fair value less costs to sell. in % 2 - 5 5 - 25 14.3 - 50 10 - 33.3 12.5 - 25 modified terms of repayment proceeding from extending the deadline Real estate obtained from the foreclosure of loans and receivables within During subsequent measurement, certain assets and liabilities of a disposal for the repayment of the principal and/or interest, and/or a forbearance other assets are initially recognised at fair value less costs to sell (realisable Depreciation does not begin until the assets are available for use. group that are outside the scope of IFRS 5 measurement requirements of the repayment of the principal, and/or interest or a reduction in the value), wherein only the direct costs of sales can be considered. At are measured in accordance with the applicable standards (e.g., deferred interest rate, and/or other expenses, it adjusts the carrying amount of the subsequent measurement, the realisable value is verified at least annually. The assets’ residual values and useful lives are reviewed and adjusted if tax assets, assets arising from employee benefits, financial instruments, forborne loan on the basis of the discounted value of the estimated future Valuations of the fair value of real estate are performed by certified real appropriate on each reporting date. Gains and losses on the disposal of investment property measured at fair value, and contractual rights under cash flows under the modified terms, and recognises the resulting effect in estate appraisers. The real estate is impaired when the carrying value items of property and equipment are determined as the difference between insurance contracts). Tangible and intangible assets are not depreciated. The profit or loss. In the event of the reduction of a claim against the debtor exceeds the realisable value. The effect of impairment is presented as the the sale proceeds and their carrying amount and are recognised in the effects of sale and valuation are included in the income statement as a gain via the reduction in the amount of the claims as a result of a contractually impairment of other assets and the reversal of impairment as income from income statement. or loss from non-current assets held for sale. agreed debt waiver and ownership restructuring or debt to equity swap, the reversal of the impairment of other assets. NLB Group derecognises the claim in the part relating to the write-down or the contractually agreed upon debt waiver. The new estimate of the 2.16. Offsetting Maintenance and repairs are charged to the income statement during the Liabilities directly associated with disposal groups are reclassified and financial period in which they are incurred. Subsequent costs that increase presented separately in the statement of financial position. future cash flows for the residual claim, not yet written down, is based on an updated estimate of the probability of loss. NLB Group considers the 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 future economic benefits are recognised in the carrying amount of an asset, and the replaced part, if any, is derecognised. debtor’s modified position, the economic expectations, and the collateral of offset the recognised amounts, and there is an intention to settle on a net the forborne loan. When NLB Group is embarking on the forborne loan basis, or to realise the asset and settle the liability simultaneously. 110 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20202.22. Accounting for leases NLB Group classifies a lease as a finance lease when the risks and rewards The carrying value of an issued financial instrument with characteristics of Other contingent liabilities and commitments A lease is a contract, or part of a contract, which creates enforceable rights incidental to ownership of a leased asset lie with the lessee. When assets equity is presented in the statement of changes in equity in the item ‘Other Other contingent liabilities and commitments represent undrawn loan and obligations and conveys the right to control the use of an identified asset are leased under a finance lease, the present value of the lease payments Equity Instruments.’ commitments to extend credit, uncovered letters of credit, and other for a period of time in exchange for consideration. Thus, IFRS 16 requires is recognised as a receivable. Income from finance lease transactions is commitments. determination whether a contract is, or contains, a lease. amortised over the lifetime of the lease using the effective interest rate 2.26. Provisions NLB Group as a lessee net investment in the lease, including the unguaranteed residual value. constructive obligation as a result of past events, and it is probable that an loan commitments where the loan agreed to be provided is on market terms, NLB Group recognises a liability to make lease payments and an asset outflow of resources embodying economic benefits will be required to settle are not recorded in the statement of financial position. representing the right to use the underlying asset (i.e., the right-of-use Sale-and-leaseback transactions the obligation, and a reliable estimate of the amount of the obligation can asset) during the lease term for all leases, except for short-term leases and NLB Group also enters into sale-and-leaseback transactions (in which NLB be made. They are recognised in the amount that is the best estimate of Contingent liabilities recognised in a business combination leases of low-value. Short-term leases are defined as those which at the Group is primarily a lessor) under which the leased assets are purchased the expenditure required to settle the present obligation at the end of the A contingent liability recognised in a business combination is initially commencement date have a lease term of 12 months or less without the from, and then leased back to the lessee. These contracts are classified as reporting period. When the effect of the time value of money is material, measured at its fair value. After initial recognition, it is measured at the method. Finance lease receivables are recognised at an amount equal to the Provisions are recognised when NLB Group has a present legal or The nominal contractual value of guarantees, letters of credit, and undrawn option to purchase the underlying asset. Leases of underlying assets with finance leases or operating leases, depending on the contractual terms of the NLB Group determines the level of provision by discounting the expected higher of: a value, when new, lower or equal to EUR 5 thousand are defined as low leaseback agreement. cash flows at a pre-tax rate reflecting the current rates specific to the liability. value leases, and are thus recognised as an expense on a straight-line basis over the lease term. Right-of-use assets Leases recognised in a business combination 2.27. Contingent liabilities and commitments In all leases acquired in a business combination, the acquiree is the lessee. Financial and non-financial guarantees • the amount that would be recognised in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; or • the amount initially recognised less, if appropriate, the cumulative For such leases, NLB Group applies the IFRS 16 initial measurement Financial guarantees are contracts that require the issuer to make specific amount of income recognised in accordance with the principles of IFRS At the commencement date, NLB Group measures the right-of-use asset provisions (with exceptions for leases with remaining term of 12 months payments to reimburse the holder for a loss it incurs because a specific 15 Revenue from Contracts with Customers. This requirement does not at cost, reduced by any accumulated depreciation and impairment losses, or less and low value leases) and recognises the acquired lease liability as if debtor fails to make payments when due, in accordance with the terms of apply to contracts accounted for in accordance with IFRS 9. and adjusted for any remeasurement of lease liabilities. The cost of right- the lease contract was a new lease at the acquisition date. The right-of-use debt instruments. Such financial guarantees are given to banks, financial of-use assets consists of the amount of lease liabilities recognised, initial asset is measured at an amount equal to the recognised liability. There are institutions, and other bodies on behalf of the customer to secure loans, 2.28. Taxes direct costs incurred, an estimate of costs to be incurred by the lessee in no favourable or unfavourable terms of the leases relative to market terms, overdrafts, and other banking facilities. Income tax expense comprises current and deferred income tax. dismantling, and removing the underlying asset to the condition required which would require the adjustment of the right-of-use assets. by the terms and conditions of the lease and lease payments made at or The issued guarantees covering non-financial obligations of the clients Current corporate income tax in NLB Group is calculated on taxable before the commencement date less any lease incentives received. After the 2.23. Cash and cash equivalents represent the obligation of the Bank (guarantor) to pay if the client fails profits at the applicable tax rate in the respective jurisdiction. The corporate commencement date, NLB Group measures the right-of-use asset using For the purpose of the statement of cash flows, cash and cash equivalents to perform certain works in accordance with the terms of the commercial income tax rate for 2020 in Slovenia was 19% (2019: 19%). a cost model and recognises depreciation of the right-of-use assets, on a comprise cash and balances with central banks and other demand deposits contract. straight-line basis over the lease term, and (separately) interest on the lease at banks, debt securities held for trading, loans to banks, and debt securities Current and deferred taxes are recognised in profit or loss, except to liabilities. In the statement of financial position, right-of-use assets are not held for trading with an original maturity of up to three months. Cash Financial and non-financial guarantees are initially recognised at fair value, the extent that they relate to a business combination or taxes related to presented in item ‘Property and equipment’. and cash equivalents are disclosed under the cash flow statement. which is normally evidenced by the fees received. The fees are amortised to effects recognised directly in equity (deferred tax related to the fair value the income statement over the contract term using the straight-line method. re-measurement of financial assets measured at fair value through other Lease liabilities 2.24. Borrowings, deposits, and issued debt securities with characteristics NLB Group’s liabilities under guarantees are subsequently measured at the comprehensive income, cash flow hedges, and actuarial gains and losses At the commencement date, NLB Group measures the lease liability at of debt greater of: on defined benefit pension plans is charged or credited directly to other the present value of the lease payments that are not paid at that date. The Loans and deposits received and issued debt securities are initially comprehensive income). lease payments consist of fixed payments, variable lease payments that recognised at fair value. Borrowings are subsequently measured at the • the initial measurement, less amortisation calculated to recognise fee depend on an index or a rate, amounts expected to be paid under residual amortised cost. The difference between the value at initial recognition and income over the period of guarantee; or Deferred income tax is calculated using the balance sheet liability method value guarantees, the exercise price of a purchase option if there exists the final value is recognised in the income statement as an interest expense, • an ECL provision as set out in note 2.13. a reasonable certainty for it to be exercised, and payments of penalties applying the effective interest rate. for terminating the lease, if the lease term reflects exercising the option Documentary letters of credit for temporary differences arising between the tax bases of assets and liabilities, and their carrying amounts for financial reporting purposes. to terminate. Subsequently (after the commencement date), NLB Group Repurchased own debt is disclosed as a reduction in liabilities in the Documentary (and standby) letters of credit constitute a written and Deferred tax assets are recognised if it is probable that future taxable profit measures the lease liability by: statement of financial position. The difference between the book value and irrevocable commitment of the issuing (opening) bank on behalf of the will be available in the foreseeable future against which the temporary the price at which own debt was repurchased is disclosed in the income issuer (importer) to pay the beneficiary (exporter) the value set out in the differences can be utilised. • increasing the carrying amount to reflect interest on the lease liability; statement. • reducing the carrying amount to reflect the lease payments made; documents by a defined deadline: Deferred tax assets and liabilities are measured at tax rates enacted or • remeasuring the carrying amount to reflect any reassessment or lease 2.25. Other issued financial instruments with characteristics of equity • if the letter of credit is payable on sight; and substantively enacted at the end of the reporting period that are expected modifications. Upon initial recognition, other issued financial instruments are classified • if the letter of credit is payable for deferred payment, the bank will pay to apply to the period when the asset is realised, or the liability is settled. At in part or in full as equity instruments if the contractual characteristics according to the contractual agreement when and if the beneficiary each reporting date, NLB Group reviews the carrying amount of deferred In the statement of financial position, lease liabilities are presented in item of the instruments are such that NLB Group must classify them as equity (exporter) presents the bank with documents that are in line with the tax assets and assesses future taxable profits against which temporary taxable ‘Other financial liabilities’. NLB Group as a lessor instruments in accordance with IAS 32 Financial Instruments: Presentation. conditions and deadlines set out in the letter of credit. differences can be utilised. An issued financial instrument is only considered an equity instrument if that instrument does not represent a contractual obligation for payment. A commitment may also take the form of a letter of credit confirmation, Deferred tax assets for temporary differences arising from impairments of Payments under operating leases are recognised as income on a straight-line which is usually done at the request or authorisation of the issuing investments in subsidiaries, associates and joint ventures are recognised only basis over the period of the lease. Assets leased under operating leases are Issued financial instruments with characteristics of equity are recognised (opening) bank and constitutes a firm commitment by the confirming bank, to the extent that it is probable that: presented in the statement of financial position as investment property or as property and equipment. in equity in the statement of financial position. Transaction costs incurred for issuing such instruments are deducted from equity reserves. The in addition to that of the issuing bank, which independently assumes a commitment to the beneficiary under certain conditions. corresponding interest is recognised directly in profit reserves. • the temporary differences will be reversed in the foreseeable future; and • taxable profit will be available. 111 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Slovenian law does not set deadlines by which uncovered tax losses must be the defined benefit liability are recognised in the item ‘Interest and similar 2.33. Critical accounting estimates and judgments in applying accounting flow model, valuation based on comparable entities, and other frequently utilised. expenses.’ These interest expenses represent the change during the period policies used valuation models. These valuation models pretty much reflect in the defined benefit liability that arises from the passage of time. For post- NLB Group’s financial statements are influenced by accounting policies, current market conditions at the measurement date, which may not be In the case of business combination deferred tax balances are recognised if employment benefits, actuarial gains and losses from the effect of changes assumptions, estimates, and management’s judgment. NLB Group makes representative of market conditions either before or after the measurement related to temporary differences and carry-forwards of an acquiree that exist in actuarial assumptions and experience adjustments (differences between estimates and assumptions that affect the reported amounts of assets and date. Management reviewed all applied models as at the reporting date to at the acquisition date or if they arise as a result of the acquisition. Income the realised and expected payments) are recognised in other comprehensive liabilities within the next financial year. All estimates and assumptions ensure they appropriately reflect current market conditions, including the taxes are measured in accordance with IAS 12 Income Taxes. income under the item ‘Actuarial Gains/(Losses) on Defined Benefit required in conformity with the IFRS are best estimates undertaken in relative liquidity of the market and the applied credit spread. Changes in A tax on financial services, which means a tax on fees paid for prescribed gains and losses that relate to other employment benefits are recognised in evaluated on a continuing basis, and are based on past experience and other financial instruments held for trading, and financial assets measured at fair financial services rendered (financial services, exempt from value added the income statement as defined benefit costs. In the statement of financial factors, including expectations with regard to future events. value through other comprehensive income. Pensions Plans,’ and will not be recycled to the income statement. Actuarial accordance with the applicable standard. Estimates and judgments are assumptions regarding these factors could affect the reported fair values of tax (with the exception of securities transactions) and the services of position, liabilities for short-term employee benefits are included in item insurance brokers and agents), is paid in Slovenia. The tax rate is 8.5% ‘Other financial liabilities’, while liabilities for post-employment benefits a) Allowances for expected credit losses on loans and advances In year 2020, the volatility of prices on various markets has increased as (2019: 8.5%) and the tax is paid monthly. Given that the tax on financial and other employment benefits (jubilee long-service benefits) are included in NLB Group monitors and checks the quality of the loan portfolio at the a result of the spread of COVID-19. Therefore, NLB Group decided to services is classified as a sales tax, it reduces accrued revenues in the financial item ‘Provisions’. individual and portfolio levels to continuously estimate the necessary sell some securities with increased credit spreads as part of its strategy to statements. 2.29. Fiduciary activities In the case of a business combination employee benefits are recognised individually significant financial assets attributed to Stage 3. Such an at fair value through other comprehensive income (EUR 250,297 thousand and measured in accordance with IAS 19 Employee Benefits, i.e. not at fair assignment is based on information regarding the fulfilment of contractual at NLB Group and EUR 222,586 thousand at NLB), while EUR 120,131 allowances for ECL. NLB Group creates individual allowances for manage the credit risk. Most of these securities were classified as measured NLB Group provides asset management services to its clients. Assets held in value. a fiduciary capacity are not reported in NLB Group’s financial statements as they do not represent assets of NLB Group. Fee and commission income 2.31. Share capital and expenses relating to fiduciary activities are generally recognised in the Dividends on ordinary shares obligations or other financial difficulties of the debtor, and other important thousand of sold securities were measured at amortised cost. The total facts. Individual assessments are based on the expected discounted cash realised gains due to sales of securities amount to EUR 17,815 thousand at flows from operations and/or the assessed expected payment from collateral. NLB Group and EUR 17,096 thousand at NLB (note 4.4). income statement when the service has been provided (see also note 2.10.). Dividends on ordinary shares are recognised in equity in the period in which Allowances are assessed collectively for financial assets assigned to Stage 1 Due to increased frequency and values of sales of securities measured at Fee and commission income charged for this type of service is broken down they are approved by NLB’s shareholders. or 2, or for financial assets in Stage 3 with exposure below the materiality amortised cost, NLB Group reassessed whether there has been a change in by items in note 4.3.b). Further details on transactions managed on behalf of third parties are disclosed in note 5.24. Treasury shares threshold. The ECL in this group of assets are estimated based on expected its business model for managing financial assets. Sales were made due to an value of risk parameters combining the historic movements with the future increase in the assets’ credit risk, and are therefore consistent with a held If NLB or another member of NLB Group purchases NLB’s shares, macroeconomic predictions. The models used to estimate future risk to collect business model because the credit quality of financial assets is Based on the requirements of Slovenian legislation, NLB Group has, in the consideration paid is deducted from the total shareholders’ equity as parameters are validated and back-tested on a regular basis to make loss relevant to NLB Group’s ability to collect contractual cash flows. Credit risk note 5.24., additionally disclosed the assets and liabilities on accounts used treasury shares. If such shares are subsequently sold, any consideration estimations as realistic as possible. management activities that are aimed at minimising potential credit losses to manage financial assets from fiduciary activities, i.e. information related received is included in equity. If NLB’s shares are purchased by NLB itself due to credit deterioration are integral to such a model. to the receipt, processing, and execution of orders and related custody or other NLB Group entities, NLB creates reserves for treasury shares in NLB Group performs regular stress-testing as part of the ICAAP process activities. 2.30. Employee benefits Employee benefits include: equity. Share issue costs normative approach, where the 3-year budget is tested for adverse Furthermore, the sales were made as a response to COVID-19 situation and circumstances. The selected stress scenario predicts adverse economic the increased volume of sales is not expected to persist. It is expected, that circumstances as a result of the COVID-19 pandemic. future sales volumes will be lower in frequency and value. So, no change in Costs directly attributable to the issue of new shares are recognised in equity our business model has been made. as a reduction in the share premium account. In terms of credit risk, the scenario has an unfavourable impact on default • short-term employee benefits (such as salaries, social security rates (transfer of assets from performing to default) and loss rates (expected The fair values of derivative financial instruments are determined on the contributions, compensations, and non-monetary benefits); 2.32. Segment reporting losses after occurrence of default). Furthermore, a transfer of assets within basis of market data (mark-to-market), in accordance with NLB Group’s • retirement indemnity bonuses (post-employment benefits); and Operating segments are reported in a manner consistent with internal the performing sub-portfolio to rating classes with worse default probabilities methodology for the valuation of financial instruments. The market • jubilee long-service benefits (other employment benefits). reporting to the Management Board, which is the executive body that makes is envisaged. Based on the existing exposures (static balance sheet exchange rates, interest rates, yield, and volatility curves used in valuations Short-term employee benefits are recognised in the period to which they of a specific segment. existing default exposures and new default flows, as well as on the remaining 4 p.m., and later used for the calculation of the fair values (market value, relate and included in the income statement line ‘Administrative expenses.’ performing portfolio. Among others they include the payment of contributions for pension and Transactions between organisational units (OU) are managed under normal NPV) of financial instruments. NLB Group applies market yield curves for valuation, and fair values are additionally adjusted for credit risk of the decisions regarding the allocation of resources and assesses the performance assumption), additional allowances for expected credit losses are assessed on are based on the market snapshot principle. Market data are saved daily at disability insurance, which according to local legislation (for employer) operating conditions. Interest income among individual OU in the parent The results of the stress scenario for NLB Group shows an increase of credit counterparty. amount to 8.85% of the gross salaries. bank (NLB) is allocated using a fund transfer pricing method and shown risk impairments in the first year of stress by EUR 97.7 million, of which within the net interest income of each OU. Net non-interest income is EUR 20.4 million applies to the newly acquired Komercijalna banka group The fair value hierarchy of financial instruments is disclosed in note 6.5. According to legislation, employees retire after 35-40 years of service when, allocated to the OU that actually provides the service that generates income. (a comparable scenario in 2019: EUR 68.1 million), and an increase in the if they fulfil certain conditions, they are entitled to a lump-sum severance Direct costs are attributed to the segment that is directly related to the coverage of the credit portfolio by impairments by 0.71 percentage points c) Impairment of investments in subsidiaries, associates and joint ventures payment. Employees are also entitled to a long-service bonus for every 10 provided service and indirect costs (costs which service centres provide for (2019: 0.70 percentage points). years of service in NLB. profit centres) are attributed to the segment for which the service is provided, whereas overhead costs are allocated according to general keys. External b) Fair value of financial instruments The process of identifying and assessing the impairment of investments in subsidiaries, associates and joint ventures is inherently uncertain, as the forecasting of cash flows requires the significant use of estimates, which These obligations are measured at the present value of future cash net income is the net income of NLB Group from the consolidated income The fair values of financial investments traded on the active market are themselves are sensitive to the assumptions used. The review of impairment outflows considering future salary increases and other conditions, and then statement. Income tax is not allocated between segments (note 7.a). based on current bid prices (financial assets) or offer prices (financial represents management’s best estimate of the facts and assumptions such as: apportioned to past and future employee service based on the benefit plan’s terms and conditions. In accordance with IFRS 8, NLB Group has the following reportable segments: Retail Banking in Slovenia, Corporate and Investment Banking The fair values of financial instruments that are not traded on the active • Future cash flows from individual investments present the estimated cash flow for periods for which adopted plans are available. For core members, liabilities). Service costs are included in the income statement in the item in Slovenia, Strategic Foreign Markets, Financial Markets in Slovenia, Non- market are determined by using valuation models. These include a estimated cash flows are based on a five-year business plan. For non- ‘Administrative expenses’ as defined benefit costs, while interest expenses on core members, and Other Activities. comparison with recent transaction prices, the use of a discounted cash core members, estimated cash flows are based on a period in line with 112 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020the strategy of divestment. The business plans of individual entities are of financial and economic variables, including the risk-free rate and risk e) Taxes • Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39 and based on an assessment of future economic conditions that will impact an premium. The value of variables used is subject to fluctuations outside NLB Group operates in countries governed by different laws. The deferred IFRS 7 (the Phase 1 amendments) issued in September 2019 are effective individual member’s business and the quality of the credit portfolio; management’s control. The pre-tax discount rate is between 9.66 and tax assets recognised as at 31 December 2020 are based on profit forecasts from 1 January 2020 or later. NLB Group has early adopted the Phase • The growth rate in cash flows for the period following the adopted 15.88% (31 December 2019: between 9.66 and 15.18%). and take the expected manner of recovery of the assets into account. 1 amendments for annual periods beginning on 1 January 2019. The business plan is between 2.9 and 4.4%; Changes in assumptions regarding the likely manner of recovering assets amendments modify some specific hedge accounting requirements to • The target capital adequacy ratio of an individual bank is between 14 and For strategic NLB Group members in 2020 and 2019, there were no or changes in profit forecasts can lead to the recognition of currently provide relief from potential effects of the uncertainty caused by the 17%; indications of impairment for equity investments. unrecognised deferred tax assets or derecognition of previously created IBOR reform. Meaning, that the IBOR reform should not generally cause • The discount rate derived from the capital asset pricing model that is used deferred tax assets. If NLB profit projections used for estimation of hedge accounting to terminate. As indicated in the accounting policies, to discount future cash flows is based on the cost of equity allocated to an In 2020, NLB impaired equity investments in non-core members in the the amount of deferred tax assets which are expected to be reversed in NLB Group elected, as a policy choice permitted under IFRS 9 Financial individual investment. The discount rate reflects the impact of a range amount of EUR 582 thousand. foreseeable future (i.e., within 5 years) would change by 10%, the estimated Instruments, to continue to apply hedge accounting in accordance with d) Employee benefits Liabilities for certain employee benefits are calculated by an independent actuary. The main assumptions included in the actuarial calculation are as follows: Actuarial assumptions Discount factor Wage growth based on inflation, promotions, and wage growth based on past years of service Other assumptions NLB Group 2020 2019 NLB 2020 0.3% - 4.0% 0.2% - 3.2% 0.3% 2019 0.2% 1.0% - 4.0% 1.8% - 3.7% 2.6% - 3.0% 3.0% - 3.3% Number of employees eligible for benefits 7,996 5,010 2,572 2,608 Sensitivity analysis of significant actuarial assumptions for post-employment benefit NLB Group NLB 31 Dec 2020 Discount rate Future salary increases Discount rate Future salary increases Impact on employee benefits provisions - post-employment benefits (in %) The minimum discount rate is considered to be 0%. +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. (4.9) 3.8 5.3 (4.8) (5.2) 3.4 5.6 (5.3) Individual analysis is done by changing one assumption for + / - 0.5 percentage points, while all other assumptions stay the same. The breakdown of actuarial gains and losses for post-employment benefit by causes Actuarial gains and losses due to changed financial assumptions Actuarial gains and losses due to changes in demographic assumptions Actuarial gains and losses due to experience Total actuarial gains and losses for the year The weighted average duration of liabilities in years NLB Group 2020 606 134 138 878 NLB Group 2020 2019 (1,425) (86) (266) (1,777) 2019 Post-employment benefit 10.5 - 18.7 10.7 - 19.1 NLB 2020 473 200 27 700 NLB 2020 11.1 in EUR thousands 2019 (1,160) (129) (234) (1,523) 2019 11.5 amount of deferred tax assets would change by approximately EUR 6 IAS 39 Financial Instruments: Recognition and Measurement. IAS 39 million (notes 4.16. and 5.17.). requires that for cash flow hedges, a forecast transaction must be highly probable. IAS 39 also requires that a hedging relationship only qualifies 2.34. Implementation of the new and revised International Financial for hedge accounting if the hedging relationship is highly effective in Reporting Standards achieving offsetting changes in fair value or cash flows attributable to the During the current year, NLB Group adopted all new and revised standards hedged risk. The assessment of hedge effectiveness is made prospectively and interpretations issued by the International Accounting Standards and retrospectively. As a result of interest rate benchmark reform, there Board (hereinafter: ‘the IASB’) and the International Financial Reporting may be uncertainties about the timing and or amount of benchmark- Interpretations Committee (hereinafter: ‘the IFRIC’), and that are endorsed based cash flows of the hedged item or the hedging instrument during by the EU that are effective for annual accounting periods beginning on 1 the period before the replacement of an existing interest rate benchmark January 2020. with an alternative nearly risk-free interest rate. This may lead to uncertainty whether a forecast transaction is highly probable and whether Accounting standards and amendments to existing standards prospectively the hedging relationship is expected to be highly effective. effective for annual periods beginning on 1 January 2020 that Additional information about interest rate benchmark reform is provided were endorsed by the EU and adopted by NLB Group in note 5.5.d). • IAS 1 and IAS 8 (amendments) – ‘Definition of Material’ are effective for annual periods beginning on or after 1 January 2020 (with earlier • IFRS 16 (amendment) – ‘Leases COVID-19-Related Rent Concessions’ application permitted) and relate to a revised definition of ‘material,’ is effective for annual periods beginning on or after 1 June 2020. The namely: “Information is material if omitting, misstating, or obscuring amendment provides lessees with an exemption from assessing whether it could reasonably be expected to influence decisions that the primary rent concessions that occur as a direct consequence of the COVID-19 users of general purpose financial statements make on the basis of those pandemic and meet specified conditions, are lease modifications. Lessees financial statements, which provide financial information about a specific that apply the exemption are required to account for COVID-19-related reporting entity.” Three new aspects of the new definition are particularly rent concessions as if they were not lease modifications. An entity emphasised and defined – “obscuring,” “could reasonably be expected applying the exemption must disclose this fact, whether the exemption to influence,” and “primary users.” The new definition of material has been applied to all qualifying rent concessions or, if not, information and the accompanying explanatory paragraphs are contained in IAS about the nature of the contracts to which it has been applied, as well 1 Presentation of Financial Statements. The definition of material in IAS as the amount recognised in profit or loss arising from the COVID-19 8 Accounting Policies, Changes in Accounting Estimates and Errors has related rent concessions. There is no impact on NLB Group’s consolidated been replaced with a reference to IAS 1, thus the Amendments ensure financial statements. that the definition of ‘material’ is consistent across all IFRS Standards. There is no impact on NLB Group’s consolidated financial statements. Accounting standards and amendments to existing standards that were endorsed by the EU, but not adopted early by NLB Group • ‘Amendments to References to the Conceptual Framework in IFRS New and revised accounting standards and interpretations endorsed by the Standards’ are effective for annual periods beginning on or after 1 EU that are not mandatory for annual accounting periods beginning on 1 January 2020. Amendments were issued to support transition to the January 2020, were not adopted early by NLB Group. These standards and revised Conceptual Framework for companies that develop accounting amendments are not expected to have a material impact on the consolidated policies using the Conceptual Framework when no IFRS Standard financial statements of NLB Group in the future reporting periods and on applies to a particular transaction. There is no impact on NLB Group’s foreseeable future transactions. NLB Group plans to adopt the accounting consolidated financial statements. standards and amendments listed below for reporting periods commencing • IFRS 3 (amendment) – ‘Business Combinations’ is effective for annual on or after the effective date. periods beginning on or after 1 January 2020. It aims to resolve entities’ • IFRS 4 (amendment) – ‘Insurance Contracts’ – deferral of IFRS 9’ difficulties which arise when determining whether they have acquired a is effective for annual periods beginning on or after 1 January 2021. business or a group of assets. Among others, the Amendment clarifies and Currently IFRS 4 requires insurance entities to apply IFRS 9 Financial narrows the definitions of a business and of outputs, provides additional guidance, and illustrative examples. There is no impact on NLB Group’s Instruments from 1 January 2021, and amendments allow them to defer the application of IFRS 9 until the annual period beginning on consolidated financial statements. or after 1 January 2023. The amendment will not impact NLB Group’s consolidated financial statements. 113 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Accounting standards and amendments to existing standards, • Annual Improvements (amendments) 2018-2020 are effective for annual 3. Changes in subsidiary holdings but not endorsed by the EU periods beginning on or after 1 January 2022. The amendments to IFRS • IFRS 17 (new standard) – ‘Insurance Contracts’ is effective for annual 9 clarify which fees and costs should be included in the “10 per cent” periods beginning on or after 1 January 2023. The new standard provides test for derecognition of a financial liability. The amendment to IFRS 16 a comprehensive principle-based framework for the measurement and Leases removes from the example the illustration of the reimbursement Changes in 2020 Capital changes: Changes in 2019 Capital changes: presentation of all insurance contracts. The new standard will replace of leasehold improvements by the lessor in order to resolve any potential • In December 2020, NLB acquired an 83.23% ordinary shareholding • In January 2019, decrease of share capital in the amount of EUR 3,324 IFRS 4 Insurance Contracts and requires insurance contracts to be confusion regarding the treatment of lease incentives. The amendments in Komercijalna banka a.d. Beograd, which represents 81.42% of total thousand was registered in NLB Leasing d.o.o. Sarajevo. Since March measured using current fulfilment cash flows, and for revenue to be to IFRS 1 First-time Adoption of International Financial Reporting shareholding in the bank. 2019 the company has been formally in liquidation. recognised – as the service is provided over the coverage period. NLB Standards permits a subsidiary that becomes a first-time adopter of • In December 2020, NLB acquired 1 ordinary share of Komercijalna • An increase in share capital in the form of a cash contribution in the Group does not expect an impact on its consolidated financial statements. IFRS Standards later than its parent to measure cumulative translation banka a.d. Banja Luka which represents a 0.002% share of their capital. amount of EUR 1,740 thousand in REAM d.o.o., Podgorica to ensure • IAS 1 (amendment and deferral of effective date) – ‘Presentation of of the parent, based on the parent’s date of transition to IFRS Standards. Ljubljana and thereby increased its ownership from 39.44% to 40.08%. Financial Statements: Classification of Liabilities as Current or Non- The amendments to IAS 41 Agriculture remove the requirement to • An increase in share capital in the form of a debt to equity conversion in Other changes: current’ is effective for annual periods beginning on or after 1 January exclude cash flows for taxation when measuring fair value under IAS 41. the amount of EUR 1,800 thousand in NLB Leasing Podgorica d.o.o. – u differences at amounts included in the consolidated financial statements • In December 2020, NLB acquired additional shares of Bankart d.o.o., regular business operations. 2023. The amendments clarify that liabilities are classified as either This amendment is intended to align with the requirement in the standard likvidaciji. current or non-current, depending on the rights that exist at the end of to discount cash flows on a post-tax basis. NLB Group does not expect an • In January 2019, REAM d.o.o., Beograd merged with SR-RE d.o.o., Beograd. In April 2019, SR-RE d.o.o., Beograd was renamed ‘REAM the reporting period. Classification is unaffected by the expectations of impact on its consolidated financial statements. Other changes: d.o.o., Beograd.’ the entity or events after the reporting date. The amendment also clarifies • From 1 January 2019 NLB Srbija d.o.o., Beograd and NLB Crna Gora what IAS 1 means when it refers to the ‘settlement’ of a liability. NLB • IFRS 9 (amendment), IAS 39 (amendment), IFRS 7 (amendment), IFRS • In April 2020, NLB established the nonfinancial cultural heritage institute d.o.o., Podgorica were transferred from core to non-core members. Group does not expect an impact on its consolidated financial statements. 4 (amendment) and IFRS 16 (amendment) – ‘Interest Rate Benchmark named ‘NLB Zavod za upravljanje kulturne dediščine, Ljubljana.’ • In June 2019, Prospera plus d.o.o., Ljubljana – v likvidaciji and NLB Reform – Phase 2’ are effective for annual periods beginning on or • In May 2020, NLB established financial company named ‘NLB Interfinanz Praha s.r.o., Prague – vo likvidaci were liquidated. In • IFRS 3 (amendment) – ‘Business Combinations – Reference to the after 1 January 2021 with earlier application permitted. Unlike Phase Lease&Go, leasing, d.o.o., Ljubljana.’ accordance with a court order, companies were removed from the court Conceptual Framework’ is effective for annual periods beginning on or 1, which focused on issues of the impact of the reform on financial • In May 2020, all the suspensive conditions under the joint NLB and register. after 1 January 2022. The amendments update a reference in IFRS 3 to reporting in the period before the replacement of the existing interest KBC Insurance NV sale agreement signed in December 2019 where met, • In June 2019, NLB sold its subsidiary CBS Invest d.o.o., Sarajevo. the Conceptual Framework for Financial Reporting without changing rate benchmark with a risk-free interest rate, Phase 2 focused on issues therefore the sale of NLB’s 50% stake in the share capital of NLB Vita • In December 2019 NLB and KBC Insurance NV, in a joint process, the accounting requirements for business combinations. Further, the that affect financial reporting when an existing interest rate benchmark d.d., Ljubljana was completed (note 4.14.). agreed to sell their respective stakes in the life insurance company NLB amendments add an exception to the recognition principle for liabilities is replaced with a risk-free rate. The Phase 2 amendments include a • In December 2020, BH-RE d.o.o., Sarajevo – beginning of the Vita d.d., Ljubljana. As the sale is expected to qualify for recognition as and contingent liabilities within the scope of IAS 37 Provisions, practical expedient to require contractual changes, or changes to cash liquidation procedure entered in the court register. a completed sale within one year from the end of the reporting period, Contingent Liabilities and Contingent Assets or IFRIC 21 Levies. The flows that are directly required by the reform, to be treated as changes • In December 2020, NLB sold its subsidiaries NLB Leasing d.o.o., investment in joint venture NLB Vita d.d., Ljubljana was transferred from amendments also clarify existing guidance for contingent assets. to a floating interest rate equivalent to a movement in a market rate of Sarajevo - u likvidaciji and NLB Leasing Podgorica d.o.o., Podgorica - u the line ‘Investments in associates and joint ventures’ into line ‘Non- interest. The practical expedient is also required for entities applying likvidaciji. current assets held for sale.’ • IAS 16 (amendment) – ‘Property, Plant and Equipment: Proceeds IFRS 4 Insurance Contracts that are using the exemption from IFRS 9 before Intended Use’ is effective for annual periods beginning on or Financial Instruments (and therefore, apply IAS 39 Financial Instruments: after 1 January 2022. The amendment prohibits the deduction from Recognition and Measurement) and for IFRS 16 Leases, to lease the cost of an item of property, plant and equipment of any proceeds modifications required by the IBOR reform. The amendments permit from the sale of produced items while the assets is being prepared for changes required by the IBOR reform to be made to hedge designations its intended use. The proceeds from selling such items, and the cost of and hedge documentation under both IFRS 9 and IAS 39 without producing those items, are recognised in profit or loss. It also clarifies the hedging relationship being discontinued. Under IFRS 7 Financial that an entity is ‘testing whether the asset is functioning properly’ when instrument: Disclosures amendments an entity will be required to disclose it assesses the technical and physical performance of the asset. The information about new risks arising from the reform and how it manages financial performance of the asset is not relevant to this assessment. the transition to alternative benchmark rates. The Phase 2 amendments The amendment further requires separate disclosure of the amounts apply only to changes required by the interest rate benchmark reform to of proceeds and costs relating to items produced that are not an output financial instruments and hedging relationships. NLB Group does not of the entity’s ordinary activities. It is also necessary to disclose the line expect material impact on its consolidated financial statements. item in the statement of comprehensive income where the proceeds are included. NLB Group does not expect an impact on its consolidated financial statements. • IAS 37 (amendments) – ‘Provisions, Contingent Liabilities and Contingent Assets: Onerous Contracts – Cost of Fulfilling a Contract’ is effective for annual periods beginning on or after 1 January 2022. The amendments modify the standard regarding costs a company should include as the cost of fulfilling a contract when assessing whether a contract is onerous. The amendments specify that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract.’ The costs that relate directly to a contract can either be incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling contracts. NLB Group does not expect an impact on its consolidated financial statements. 114 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20204.2. Dividend income NLB Group NLB Financial assets measured at fair value through other comprehensive income 2020 2019 2020 2019 - related to investments held at the end of reporting period in EUR thousands 4. Notes to the income statement 4.1. Interest income and expenses Analysis by type of assets and liabilities Interest and similar income Interest income, using the effective interest method Loans and advances to customers at amortised cost Securities measured at amortised cost Financial assets measured at fair value through other comprehensive income Loans and advances to banks measured at amortised cost Deposits with banks and central banks Interest income, not using the effective interest method Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Derivatives - hedge accounting Other Total Interest and similar expenses Interest expenses, using the effective interest method Due to customers Borrowings from banks and central banks Borrowings from other customers Subordinated liabilities Deposits from banks and central banks Lease liabilities (note 5.11.a) Derivatives - hedge accounting Negative interest Financial liabilities held for trading Interest expenses on defined employee benefits (note 2.30., 5.16.c) Other Total 347,639 312,695 16,165 18,180 386 213 7,549 5,408 1,800 - 341 357,412 311,541 23,215 20,606 1,235 815 7,406 6,097 1,300 9 - 167,616 140,203 12,736 10,704 3,887 86 7,488 5,408 1,739 - 341 175,598 141,345 19,119 11,656 3,065 413 7,310 6,097 1,204 9 - 355,188 364,818 175,104 182,908 41,208 20,541 880 941 10,040 78 294 32,072 23,111 1,285 940 2,716 216 316 9,439 8,434 4,789 100 79 8,969 3,488 5,100 184 6 21,883 3,835 774 - 10,040 27 39 14,334 9,439 7,168 4,789 30 76 10,612 4,317 1,110 - 2,271 298 38 14,170 8,969 2,578 5,100 96 5 55,615 46,331 36,217 24,782 Interest expenses, not using the effective interest method 14,407 14,259 Net interest income 299,573 318,487 138,887 158,126 The item ‘Negative interest’ includes the interest from deposits with banks due to the purchase with a premium in the amount of EUR 845 thousand and central banks in the amount of EUR 7,178 thousand for NLB Group for NLB Group and NLB (2019: EUR 518 thousand). (2019: EUR 2,970 thousand), and EUR 5,912 thousand for NLB (2019: EUR 2,060 thousand). It also includes interest from deposits with financial Other interest income in the amount of EUR 341 thousand relates to organisations in the amount of EUR 411 thousand for NLB Group and refund of corporate income tax from Italian Tax Authority (note 4.16.). NLB (2019: EUR 0) and also interest from securities with a negative yield Investments in subsidiaries Investments in associates and joint ventures Non-trading financial assets mandatorily at fair value through profit or loss Total 4.3. Fee and commission income and expenses a) Fee and commission income and expenses relating to activities of NLB Group and NLB 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 gold cards Investment banking Guarantees Other services Total NLB Group NLB in EUR thousands 2020 83 83 - - 28 111 2019 111 111 - - 97 208 2020 2019 - - 5,561 670 28 6,259 - - 68,353 2,781 97 71,231 NLB Group NLB in EUR thousands 2020 2019 2020 2019 63,940 66,311 50,325 19,286 11,781 6,338 4,639 69,423 60,686 54,697 17,621 11,282 6,384 5,619 35,634 49,566 39,369 45,606 21,109 23,477 5,931 7,282 5,241 3,434 5,506 7,192 4,832 4,141 222,620 225,712 128,197 130,123 46,473 49,685 25,581 28,261 6,134 1,034 2,272 778 2,528 6,605 955 1,989 114 2,529 909 760 524 712 817 875 771 487 30 753 59,219 61,877 29,303 31,177 Net fee and commission income related to banking activities 163,401 163,835 98,894 98,946 115 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020b) Fee and commission income and expenses relating to fiduciary activities 4.5. Gains less losses from financial assets and liabilities held for trading NLB Group NLB in EUR thousands NLB Group NLB in EUR thousands 2020 2019 2020 2019 2020 2019 2020 2019 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 Advice to companies on capital structure, business strategy, and related matters and advice, and services relating to mergers and acquisitions of companies Total 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 1,583 1,237 327 4,842 1,797 26 9,812 2,876 57 2,933 6,879 1,281 1,513 256 4,877 1,162 178 9,267 2,711 52 2,763 6,504 1,435 - 327 4,909 1,797 26 8,494 2,874 57 2,931 5,563 1,227 - 256 4,953 1,162 177 7,775 2,714 52 2,766 5,009 232,432 62,152 234,979 64,640 136,691 32,234 137,898 33,943 Total a) and b) 170,280 170,339 104,457 103,955 4.4. Gains less losses from financial assets and liabilities not measured at fair value through profit or loss Foreign exchange trading - gains - losses Debt instruments - gains - losses Derivatives - currency - interest rate - securities Total 31,628 (21,139) 24,102 (12,574) 23,022 (18,623) 16,058 (11,338) 797 (392) (170) (909) (21) 9,794 1,455 (1,459) 363 (1,900) 478 10,465 797 (392) 867 (909) (21) 4,741 1,455 (1,459) 41 (1,900) 478 3,335 Interest income is included in the income statement line ‘Interest and similar income’ and interest expense in line ‘Interest and similar expense’ (note 4.1.). 4.6. Gains less losses from non-trading financial assets mandatorily at fair value through profit or loss NLB Group 2020 2019 2020 5,244 (178) 4,528 (1) 4,525 (178) in EUR thousands NLB 2019 4,397 (1) 12,749 116 12,749 116 Equity securities - gains - losses Debt securities - gains - losses Loans and advances to customers - gains Total (126) 17,689 - 4,643 (126) 16,970 - 4,512 income’ (note 4.1.). Interest income is included in the income statement line ‘Interest and similar 4.7. Foreign exchange translation gains less losses Financial assets and liabilities not measured as at fair value through profit or loss Disposal of a subsidiary Financial assets measured at fair value through profit or loss Other Total NLB Group NLB in EUR thousands 2020 2019 2020 2019 4,003 (2,656) 14 (49) 5,286 6,598 9,277 (945) 6 (66) 10,493 18,765 3,043 (1,587) - - 5,359 6,815 8,061 (945) - - 9,173 16,289 NLB Group NLB in EUR thousands 2020 836 - (131) 34 739 2019 662 19 39 (14) 706 2020 (1,011) - (131) 34 (1,108) 2019 372 - 39 (15) 396 Debt instruments measured at fair value through other comprehensive income - gains - losses Debt instruments measured at amortised cost - gains Financial liabilities measured at amortised cost - losses Total During 2020, NLB Group and NLB sold securities measured at amortised cost in the amount of EUR 120,131 thousand due to increased credit risk caused by COVID-19 (note 2.33.b). 116 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20204.8. Other net operating income Other operating income Income from non-banking services - cash transportation - operating leases of movable property - IT services - other Rental income from investment property Revaluation of investment property to fair value (note 5.9.) Sale of investment property Other operating income Total Other operating expenses Expenses related to issued service guarantees Revaluation of investment property to fair value (note 5.9.) Other operating expenses Total Other net operating income Other operating expenses mainly include expenses associated with donations, damages, and licences. 6,390 2,994 1,003 438 1,955 2,572 1,006 234 2,728 12,930 1,328 136 3,917 5,381 7,549 6,605 3,170 985 455 1,995 4,124 849 361 4,331 16,270 2,477 541 5,401 8,419 7,851 5,595 2,994 470 891 1,240 471 884 164 1,508 8,622 1,328 87 1,413 2,828 5,794 5,694 3,170 455 863 1,206 697 11 220 1,886 8,508 2,477 86 1,401 3,964 4,544 NLB Group NLB in EUR thousands 4.9. Administrative expenses NLB Group NLB in EUR thousands 2020 2019 2020 2019 2020 2019 2020 2019 Employee costs Gross salaries, compensations, and other short-term benefits 145,878 151,634 Defined contribution scheme Social security contributions Defined benefit expenses (note 5.16.c) Post-employment benefits Other employee benefits Total Other general and administrative expenses Material Services Intellectual services Costs of supervision Costs of other services Tax expenses Membership fees and similar Business travel Marketing Buildings and equipment Electricity Rents and leases Maintainance costs Costs of security Insurance for tangible assets Other costs related to buildings and equipment Technology Maintainance of software and hardware Licences Data assets and subscription costs Other technology costs Communications Postal services Telecommunication and internet Other communication costs Other general and administrative costs Total 10,297 8,236 545 423 122 10,484 8,317 741 447 294 90,063 6,689 5,546 304 239 65 95,934 6,826 5,591 218 54 164 164,956 171,176 102,602 108,569 4,529 28,136 10,176 3,926 14,034 2,688 852 399 8,131 20,996 4,045 1,916 6,500 3,599 930 4,006 21,979 10,184 7,961 1,998 1,836 8,259 4,027 2,152 2,080 1,301 4,562 31,082 13,516 3,494 14,072 2,757 815 1,205 9,625 20,818 4,113 1,899 6,975 3,669 631 3,531 2,117 18,484 6,194 2,257 10,033 1,002 337 136 5,086 11,952 2,277 390 4,714 1,791 167 2,613 1,834 21,402 9,502 1,931 9,969 1,027 322 512 5,985 12,189 2,230 528 5,049 1,619 240 2,523 20,466 14,655 13,765 9,526 7,061 2,096 1,783 9,305 5,215 2,002 2,088 2,203 7,164 5,054 1,383 1,054 5,509 3,581 724 1,204 733 6,740 4,514 1,503 1,008 6,002 4,001 751 1,250 1,491 97,270 102,838 60,011 64,529 Total administrative expenses 262,226 274,014 162,613 173,098 Number of employees 8,792 5,878 2,591 2,659 117 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Costs of other services include costs for cash transport, archiving services, In the presented years, NLB Group and NLB paid the following expenses personal insurance costs, and legal costs and fees. related to the services of the statutory auditor: NLB Group External audit services Audit of annual report Other audit services Other non-audit services Total NLB Group NLB in EUR thousands 2020 2019 2020 2019 542 55 42 639 570 10 - 580 211 55 42 308 211 10 - 221 Additionally, to the services included in the table above, the statutory thousand). These expenses are included in the calculation of the effective auditor performed also some services related to the issue of subordinated interest rate of the issued subordinated instruments. instruments in 2020 in the amount of EUR 75 thousand (2019: EUR 330 4.10. Cash contributions to resolution funds and deposit guarantee schemes Financial assets modified since initial recognition Gross carrying amount of financial assets for which loss allowance has changed to 12-month measurement during the period 4.13. Provisions Guarantees and commitments (note 5.16.b) Restructuring provisions (note 5.16.d) Provisions for legal risks (note 5.16.e) Other provisions (note 5.16.f) Total NLB Group NLB 4.14. Impairment charge in EUR thousands Cash contributions to deposit guarantee schemes Cash contributions to resolution funds Total 4.11. Depreciation and amortisation Amortisation of intangible assets (note 5.10.) Depreciation of property and equipment: - own property and equipment (note 5.8.b) - right-of-use assets (note 5.11.a) Total 4.12. Gains less losses from modification of financial assets 2020 15,022 1,652 16,674 NLB Group 2020 10,112 17,062 4,541 31,715 2019 14,173 2,050 16,223 2019 9,994 16,393 4,577 30,964 2020 5,451 1,652 7,103 NLB 2020 6,908 10,092 848 17,848 2019 7,348 9,922 776 18,046 2019 4,984 2,050 7,034 Impairment of financial assets Cash balances at central banks, and other demand deposits at banks Loans and advances to individuals measured at amortised cost (note 5.14.a) Loans and advances to legal entities measured at amortised cost (note 5.14.a) in EUR thousands Debt securities measured at fair value through other comprehensive income (note 5.14.b) Debt securities measured at amortised cost (note 5.14.b) Other financial assets measured at amortised cost (note 5.14.a) Impairment of investments in subsidiaries, associates and joint ventures Investments in subsidiaries Investments in associates and joint ventures Total Impairment of other assets NLB Group 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired Total 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired 2020 2019 Financial assets modified during the period Amortised cost before modification 416,341 27,798 Net modification gains/(losses) (3,094) (357) 8,756 (126) 452,895 (3,577) 734 (24) 1,821 (49) 3,861 (109) Total 6,416 (182) Other assets Total Total impairment in EUR thousands Property and equipment (note 5.8.) 31 Dec 2020 in EUR thousands 31 Dec 2019 1,690 - NLB Group NLB in EUR thousands 2020 482 3,500 4,696 (119) 8,559 2019 312 5,478 5,696 (39) 11,447 2020 (599) 3,500 4,230 (85) 7,046 2019 (368) 5,500 191 (105) 5,218 NLB Group NLB in EUR thousands 2020 2019 2020 2019 344 29,007 26,019 3,888 547 1,994 63 8,010 (23,856) 1,130 237 786 124 13,219 (4,597) 635 224 28 46 3,772 (21,606) 171 293 663 - - - 204 792 996 - - - 171 3,006 3,177 552 30 582 - 103 103 (2,843) 1 (2,842) - 47 47 62,795 (10,453) 10,318 (19,456) Total 61,799 (13,630) 9,633 (16,661) Impairment of financial assets includes EUR 13,447 thousand of 12-month In 2020, NLB impaired equity investments in non-core subsidiaries and an expected credit losses for Stage 1 financial assets, acquired through a associate in total amount of EUR 582 thousand (2019: EUR 591 thousand). business combination (note 5.12.b). Of that EUR 10,434 thousand relates In 2020 NLB did not release any impairments of equity investments (2019: to financial assets measured at amortised cost, EUR 2,932 thousand to financial assets measured at fair value through other comprehensive income, EUR 3,433 thousand, mainly due to decrease of share capital in non-core subsidiary and consequential repayment of funds to NLB). and EUR 81 thousand to cash balances at central banks and other demand deposits at banks. 118 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Impairments of investments in subsidiaries and associates are included in the segment ‘Non-core members.’ 4.15. Gains less losses from non-current assets held for sale Gains less losses on derecognition of subsidiaries, associates and joint ventures Gains less losses from property and equipment Total Each member of NLB Group (disclosed in note 5.12.) is taxable as required a reversal is expected within five years. The deferred tax assets with respect by local tax legislation. Income tax rates within NLB Group range from to which simultaneously deferred tax liabilities are recognised are excluded 9–32%. from this calculation (e.g., deferred tax assets for temporary non-deductible expenses for impairment of debt securities measured at fair value through in EUR thousands A tax rate of 19% was applied in Slovenia in 2020 (2019: 19%). other comprehensive income and deferred tax assets related to fair value NLB Group NLB 2020 11,006 (153) 10,853 2019 - (576) (576) 2020 35,454 (220) 35,234 2019 - (578) (578) hedge accounting). In 2020 NLB received EUR 3,569 thousand corporate income tax refund and EUR 341 thousand interest from the Italian Tax Authority. The refund Other NLB Group members did not recognise deferred tax assets for tax is related to the closing of Trieste Branch (officially closed in 2017) and is losses as there is uncertainty about whether the tax losses can be utilised, the consequence of tax non-deductible impairments of financial assets, because it is not probable that future taxable profits will be available against recognised by the Trieste Branch in the year 2013. The refund procedure which the deferred tax assets can be utilised. started in 2016 and was successfully concluded in 2020. Non-taxable income of NLB Group mostly relates to the gain from a general rule, a tax inspection, which could result in additional tax liability, The tax authorities may audit operations of NLB Group entities. As a In May 2020, all the suspensive conditions under the joint NLB and was completed. Effect of sale is included in the segment ‘Retail banking in bargain purchase (negative goodwill) of Komercijalna banka Beograd. default interest, and fines for tax, may be initiated at any time within 4 to 6 KBC Insurance NV sale agreement signed in December 2019 where met, Slovenia.’ therefore, the sale of NLB’s 50% stake in the share capital of NLB Vita 4.16. Income tax Current income tax Income related to previous period Deferred income tax (note 5.17.) Total 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 19% Income not assessable for tax purposes Expenses not deductible for tax purposes Effect of unrecognised deferred tax assets on impairments of subsidiaries and associates Tax reliefs 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 Total Non-taxable income of NLB relates mostly to income from sale of NLB years from the date of tax statement or from the year in which tax should Vita, which is according to Slovenian tax legislation 50% non-taxable and to have been assessed. NLB is not aware of any circumstances that could give dividends. NLB excluded from its taxable base EUR 16,841 thousand from rise to a potential material tax liability in this respect. NLB Vita sale and EUR 5,947 thousand dividend income in 2020 (2019: in EUR thousands EUR 67,605 thousand). In 2018, the Financial Administration of the Republic of Slovenia (FURS) granted NLB special tax status for a period of three years. The purpose of NLB Group NLB 2020 11,972 (3,569) (3,238) 5,165 2019 21,620 - (8,041) 13,579 2020 4,010 (3,569) (540) (99) 2019 10,153 - (8,556) 1,597 The effect of unrecognised deferred tax assets on impairments of the status is to establish cooperation between FURS and the taxpayers, with subsidiaries and associates represents mainly a decrease of the tax base the aim of encouraging voluntary compliance and reduce administrative of NLB due to utilisation of previously tax non-deductible expenses for burdens on financial supervision. FURS cooperates with NLB and responds impairments of subsidiaries that were divested during the presented years. quickly to resolve NLB’s tax compliance issues, which reduces NLB’s tax risks and uncertain tax positions. NLB recognised deferred tax assets accrued on the basis of temporary differences in an amount that, given future profit estimates, is expected to The effective tax rate of NLB Group relating to operations in 2020, be reversed in the foreseeable future (i.e., within five years). Due to some calculated as a ratio of the tax expense and profit before tax is 1.9% (2019: uncertainties regarding external factors (regulatory environment, market 6.3%). NLB Group profit before tax includes non-taxable gain from a situation, etc.), a lower range of expected outcomes was considered for the bargain purchase (negative goodwill) of EUR 137,858 thousand. Without purposes of deferred tax assets calculation. this one-off event, the effective tax rate of NLB Group would be 3.7 %. The effective tax rate for NLB is -0.1% (2019: 0.9%). in EUR thousands foreseeable future, was not changed in 2020 and stays the same as in 2019, 4.17. Earnings per share The estimated amount of deferred tax assets, expected to be reversed in NLB Group NLB 2020 2019 2020 277,921 52,805 (26,300) 3,838 (9,016) (1,902) (4,351) (6,273) - 114 (3,457) (293) 5,165 215,397 113,853 40,925 (3,102) 3,829 (2,112) (2,929) (8,531) (9,110) (8,393) 2,870 113 19 13,579 21,632 (4,359) 1,662 (8,652) (1,649) (4,985) - - 114 (3,569) (293) (99) 2019 177,746 33,772 (13,632) 627 (2,650) (1,864) (9,155) - (8,393) 2,870 3 19 1,597 when NLB increased recognised deferred tax assets by EUR 6,739 thousand Earnings per share are calculated by dividing the net profit by the weighted (included in Changes in recognition and measurement of deferred taxes). average number of ordinary shares in issue, less treasury shares. NLB did not recognise deferred tax assets arising from tax losses. NLB Diluted earnings per share are the same as basic earnings per share for NLB recognised deferred tax assets on all temporary differences, except for Group and NLB, since subordinated loans and issued debt securities have no impairments of non-strategic capital investments where deferred tax assets future conversion options, and consequently there are no dilutive potential are recognised in the amount that, taking into account other recognised ordinary shares. deferred tax assets reaches the total amount of deferred tax assets, for which Net profit attributable to the owners of the parent (in EUR thousands) Weighted average number of ordinary shares (in thousands) Basic earnings per share (in EUR per share) Diluted earnings per share (in EUR per share) NLB Group NLB 2020 2019 2020 269,707 20,000 13.5 13.5 193,576 20,000 9.7 9.7 113,952 20,000 5.7 5.7 2019 176,149 20,000 8.8 8.8 119 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20205. Notes to the statement of financial position b) Financial liabilities held for trading 5.1. Cash, cash balances at central banks, and other demand deposits at banks NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Derivatives, excluding hedging instruments Balances and obligatory reserves with central banks 3,149,775 1,569,753 1,998,297 1,044,255 Cash Demand deposits at banks Allowance for impairment Total 507,970 304,941 339,897 192,221 192,405 71,089 164,725 83,365 3,962,686 2,101,871 2,261,791 1,292,345 (874) (525) (258) (134) 3,961,812 2,101,346 2,261,533 1,292,211 Swap contracts - currency swaps - interest rate swaps Options - interest rate options Forward contracts - currency forward Total Slovenian banks are required to maintain a compulsory reserve with the accordance with local legislation. NLB and other banks in NLB Group fulfil The notional amounts of derivative financial instruments are disclosed in Bank of Slovenia relative to the volume and structure of their customer their compulsory reserve deposit requirements. note 5.23.b). deposits. Other banks in NLB Group maintain a compulsory reserve in 5.2. Financial instruments held for trading a) Financial assets held for trading Derivatives, excluding hedging instruments Swap contracts - currency swaps - interest rate swaps Options - interest rate options - securities options Forward contracts - currency forward Total derivatives Securities Bonds - Republic of Slovenia - other EU members - Republic of Serbia - other non-EU members Total securities Total - quoted securities of these debt instruments The notional amounts of derivative financial instruments are disclosed in note 5.23.b). NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 13,597 400 13,197 786 - 786 1,666 1,666 16,049 68,806 - - 66,356 2,450 68,806 18,169 2,056 16,113 810 3 807 734 734 19,713 4,325 1,041 40 - 3,244 4,325 13,932 735 13,197 786 - 786 1,663 1,663 16,381 2,450 - - - 2,450 2,450 18,216 2,103 16,113 810 3 807 734 734 19,760 4,325 1,041 40 - 3,244 4,325 84,855 24,038 18,831 24,085 68,806 68,806 4,325 4,325 2,450 2,450 4,325 4,325 5.3. Non-trading financial instruments measured at fair value through profit or loss a) Financial assets mandatorily at fair value through profit or loss Assets Shares Investment funds Bonds Loans and advances to companies Total - quoted securities of these equity instruments of these debt instruments - unquoted securities of these equity instruments b) Financial liabilities measured at fair value through profit or loss Liabilities Loans and advances to companies NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 13,932 777 13,155 - - 1,553 1,553 15,485 17,238 1,983 15,255 3 3 662 662 17,903 13,947 792 13,155 - - 1,553 1,553 15,500 17,238 1,983 15,255 3 3 651 651 17,892 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 4,171 10,989 2,157 25,076 42,393 2,157 - 2,157 15,160 15,160 3,167 5,475 1,756 14,961 25,359 2,207 451 1,756 8,191 8,191 4,171 2,716 - - 30,935 35,106 - - - 4,171 4,171 - - 20,571 23,287 - - - 2,716 2,716 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 - 7,998 - 7,746 120 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20205.4. Financial assets measured at fair value through other comprehensive income a) Analysis by type of financial assets measured at fair value through other comprehensive income in EUR thousands NLB Group NLB b) Movements of financial assets measured at fair value through other comprehensive income in EUR thousands NLB Group NLB 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Balance as at 1 January 2,141,428 1,898,079 1,656,657 1,528,314 2020 2019 2020 2019 1,598,760 1,509,559 Effects of translation of foreign operations to presentation currency Bonds - governments - Republic of Slovenia - other EU members - Republic of Serbia - other non-EU members - banks - other issuers Shares National Resolution Fund Treasury bills - Republic of Slovenia - other EU members - Republic of Serbia - other non-EU members Commercial bills Total Allowance for impairment - quoted securities of these equity instruments of these debt instruments - unquoted securities of these equity instruments of these debt instruments The credit quality analysis for financial assets and contingent liabilities is disclosed in note 6.1.j) and movements in allowance for the impairment of debt securities in note 5.14.b). 3,260,940 2,527,240 417,238 384,474 1,258,775 466,753 716,459 17,241 22,925 44,874 135,102 57,531 24,015 8,483 45,073 50,449 1,913,623 1,330,137 434,168 557,783 84,118 254,068 561,596 21,890 4,936 44,687 112,162 93,184 14,982 - 3,996 66,020 879,856 334,819 370,484 - 174,553 701,663 17,241 273 44,874 72,444 45,007 7,011 - 20,426 - 930,561 362,694 528,359 9,801 29,707 561,596 17,402 259 44,687 102,152 87,170 14,982 - - - 3,514,290 2,141,428 1,716,351 1,656,657 (9,482) 3,307,103 703 (5,597) 1,952,920 3,288 (3,141) 1,671,204 - (2,512) 1,611,711 - Acquisition of subsidiaries (note 5.12.b) Additions Disposals and maturity Net interest income Exchange differences on monetary assets Changes in fair values Balance as at 31 December (312) 1,284,895 1,856,445 977 - 1,958,648 (1,793,394) (1,767,198) 17,370 (10,895) 18,753 20,142 1,135 29,645 - - 1,045,700 (999,844) 9,894 (11,007) 14,951 - - 802,625 (711,020) 11,192 1,268 24,278 3,514,290 2,141,428 1,716,351 1,656,657 As at 31 December 2020, NLB Group and NLB do not have any equity of the bankruptcy proceedings were not met. At the time of conversion, instruments measured at fair value through other comprehensive income NLB Group transferred EUR 1,002 thousand from accumulated other obtained by taking possession of collateral in the statement of financial comprehensive income into retained earnings. position (NLB Group 31 December 2019: EUR 3,289 thousand) (note 6.1.l). Equity investment obtained by taking possession of collateral in amount selling equity securities measured at fair value through other comprehensive In 2020 and 2019, NLB Group and NLB did not realise any gain or loss by of EUR 3,289 thousand was during year 2020 converted back to the income. item ‘Financial assets measured at amortised cost’ because the conditions c) Accumulated other comprehensive income related to financial assets measured at fair value through other comprehensive income NLB Group NLB in EUR thousands 3,306,400 1,949,632 1,671,204 1,611,711 Balance as at 1 January 207,187 67,096 140,091 188,508 46,335 142,173 45,147 45,147 - 44,946 44,946 - 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 (note 4.4.) Impairment (note 4.14.) Transfer of gains/losses to retained earnings Deferred income tax (note 5.17.) Share of other comprehensive income of associates and joint ventures Balance as at 31 December - debt securities - equity securities 2020 48,316 48 11,526 (5,066) 3,888 (1,002) (1,486) (12,574) 43,650 39,924 3,726 2019 28,861 29 16,782 (4,527) 1,130 - (1,859) 7,900 48,316 43,933 4,383 2020 24,444 - 7,724 (4,347) 635 - (762) - 27,694 27,242 452 2019 18,620 - 11,415 (4,396) 171 - (1,366) - 24,444 24,156 288 121 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20205.5. Derivatives for hedging purposes instrument and those of the hedged item match (i.e. the principal terms c) Accumulated fair value adjustments arising from the of financial position as a hedged item, except for macro fair value hedges. In NLB Group entities measure exposure to interest rate risk using repricing match), while the dollar-offset method is used to regularly measure hedge corresponding continuing hedge relationships such relationships, hedged items are presented in the item ‘Financial assets gap analysis and by calculating the sensitivity of the statement of financial effectiveness retrospectively. Prospective testing of hedge effectiveness is The table below presents accumulated fair value adjustments arising from measured at amortised cost,’ while the accumulated fair value adjustment position and off-balance-sheet items in terms of the economic value carried out regularly for macro hedges where the characteristics of both the corresponding continuing hedge relationships, irrespective of whether is presented in a separate item ‘Fair value changes of the hedged items in of equity. The portfolio duration is used as a measure of risk in the items in the hedge relationship do not fully match by comparing the change there has been a change in the hedge designation during the year. The portfolio hedge of interest rate risk.’ management of securities in the banking book. in the fair value of both items to the shift in the yield curve. accumulated fair value adjustment is presented in the same line of statement NLB Group entities use various derivatives such as interest rate swaps Hedge accounting rules were not applied in economic hedges using CIRS. (IRS) and currency interest rate swaps (CIRS) to close open positions in an Thus, the effects of valuation are disclosed in the income statement in the individual maturity bucket. Micro and macro fair value hedges are used for item ‘Gains less losses from financial assets and liabilities held for trading.’ 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 Sources of hedge ineffectiveness may arise, but are not limited to the swapping of a variable interest rate on a hedged item for a fixed interest discount rates used for valuation of derivatives at fair value, and notional rate. All cash flow hedges were made on liability items, while fair value and timing differences, as well differences in the amortising plan between NLB Group and NLB Micro fair value hedges hedges were used on both liability and asset items. hedged items and hedging instrument. Hedge effectiveness is assessed Fixed rate corporate loans measured at AC Hedge accounting rules (fair value and cash flow hedging) were applied in the hedging of interest rate risk using interest rate swaps. These hedge attributable to a hedged risk with changes in the fair value of the hedging instrument. relationships are created in such a way that the characteristics of the hedge monthly, by comparing changes in the fair value of the hedged item that are a) Fair value adjustment in hedge accounting recognised in profit or loss Fixed rate bonds measured at AC Fixed rate bonds measured at FVOCI Macro fair value hedges Fixed rate retail loans 2020 2019 in EUR thousands Carrying amount of hedged items Accumulated amount of FV adjustments on the hedged item Carrying amount of hedged items Accumulated amount of FV adjustments on the hedged item 498,397 2,667 117,839 377,891 154,050 154,050 43,571 165 14,182 29,224 13,844 13,844 479,098 3,582 117,811 357,705 149,198 149,198 35,668 293 13,378 21,997 8,991 8,991 NLB Group and NLB Fair value hedge Net effects from hedging instruments - interest rate swap for micro hedge - interest rate swap for macro hedge Net effects from hedged items - loans measured at amortised cost - micro hedge - bonds measured at amortised cost - micro hedge - bonds measured at fair value through OCI - micro hedge - loans measured at amortised cost- macro hedge 2020 720 (12,348) (7,537) (4,811) 13,068 (128) 1,116 7,227 4,853 in EUR thousands 2019 (555) (19,482) (12,968) (6,514) 18,927 (153) (257) 12,864 6,473 d) IBOR reform The Article 28(2) of Regulation (EU) 2016/1011 requires EU supervised NLB Group closely monitors the development of Benchmark Interest entity users of a benchmark to nominate in their contingency plans suitable Rate Reform and is actively preparing for the changes imposed by the benchmark alternative(s). The inclusion of robust and suitable fallback regulation. In 2018, NLB formed a special working group which deals with mechanisms in contractual documentation is also expected. NLB identified the preparation for the discontinuation of some important reference interest potential €STR-based fallbacks for EURIBOR, in line with the current rates and reports on this to NLB Group ALCO. market consensus on those fallbacks and intends to proceed with the activities for inclusion on EURIBOR fallbacks into all new EURIBOR- NLB Group no longer offers new products that would be tied to reference based contracts. rates in termination. The exception are products related to EURIBOR, which is not scheduled for discontinuation. Therefore, NLB Group’s In the next step, the Bank is expected to include fallback provisions also attention in this phase is focused on the modification of new contractual in legacy contracts with clear focus on LIBOR exposures first. The exact relationships with customers in which EURIBOR occurs and the timing depends on regulatory development as the amendment of the interest amendment of existing contractual relationships with customers in which rate benchmark reform is still in the legislative process. other benchmarks in termination appear. As regulations in the field of interest rate reform are still changing and as good banking practice has not NLB Group planned activities for implementation of fallback provisions in In both of the presented years all fair value hedges were effective, with net investment in a foreign operation. NLB Group applied a hedge of a yet been fully established, NLB Group is preparing proactively and adapting legacy IBOR contracts with clients are as follows: actual results of the hedge within a range of 80–125%, therefore, no net investment in a foreign operation in years 2011 and 2012, and at that to changing circumstances. discontinuation of the hedge accounting was required. time it recognised a EUR 754 thousand gain on the hedging instrument in • review of outstanding IBOR referencing loans, other comprehensive income (note 5.21.b). This gain will be included in the Next to the timeline and industry building blocks, NLB Group’s key focus • identification of alternative reference rate to be used for loan portfolio, As at 31 December 2020 and 2019, NLB Group and NLB had no consolidated income statement when the foreign operation is disposed of as areas remain: relationships designated for cash flow hedge accounting or for hedge of a a part of the gain or loss on the disposal. b) Notional amounts of interest rate swaps NLB Group and NLB Fair value hedge 31 Dec 2020 31 Dec 2019 Notional amount Fair value in EUR thousands Asset Liability 573,753 561,500 - 788 61,161 49,507 • Developing new products strategy, • Managing legacy portfolio, • Executing operational infrastructure changes, • Mitigating customer and conduct risk, and • Performing contract identification and change. NLB as a supervised entity, is required to comply with the Benchmark regulation and, as a user of benchmarks, must produce and maintain a robust written plan setting out the actions NLB would take in the event that a benchmark materially changes or ceases to be provided. NLB has prepared a plan, which sets out an inexhaustive/summary action list, and will continue to closely follow market standards to identify alternative benchmarks that could be referenced in substitute of existing benchmarks. • analysis of how the alternative reference rate will be calculated and how to calculate any economic difference between IBORs and the selected alternative reference rates, • consideration of IT system accommodation with alternative reference rates, • documentation of the transition of the loans. 122 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The table below indicates the nominal amount and weighted average instruments provide a close approximation to the extent of the risk exposure b) Loans and advances to banks maturity of derivatives in hedging relationships that will be affected by the NLB Group manages through hedging relationships. IBOR reform, analysed on an interest rate basis. The derivative hedging NLB Group NLB in EUR thousands in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Interest rate swaps EURIBOR (3 months) EURIBOR (6 months) USD LIBOR (6 months) 2020 2019 Nominal amount (in EUR thousands) Weighted average maturity (years) Nominal amount (in EUR thousands) Weighted average maturity (years) 186,471 374,254 13,028 5.18 7.83 1.99 186,472 375,028 - 6.23 8.95 - Loans Time deposits Reverse sale and repurchase agreements Purchased receivables Allowance for impairment (note 5.14.a) Total As it can be seen from the table, the majority of long term derivatives in at 31 December 2020, derivatives with remaining maturity of five or more c) Loans and advances to customers hedging relationships are exposed to EURIBOR, therefore, the uncertainty years amount to EUR 310,730 thousand (31 December 2019: EUR 441,189 arising from interest rate benchmark reform derives mainly from derivatives thousand). with longer maturities, when a change of EURIBOR could be expected. As 5.6. Financial assets measured at amortised cost Analysis by type NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 1,503,087 1,653,848 1,277,880 1,485,166 197,005 93,403 158,320 144,352 9,619,860 7,589,724 4,564,178 4,568,599 113,138 97,415 54,503 67,279 11,433,090 9,434,390 6,054,881 6,265,396 Loans Overdrafts Finance lease receivables (note 5.11.b) Credit card business Called guarantees Allowance for impairment (note 5.14.a) Total Analysis of loans and advances to customers by sector Debt securities Loans and advances to banks Loans and advances to customers Other financial assets Total The credit quality analysis for financial assets and contingent liabilities is disclosed in note 6.1.j). a) Debt securities Government Companies Banks Financial organisation NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 1,173,718 1,285,540 86,946 220,988 25,120 81,350 264,323 25,775 953,881 79,732 220,988 25,120 1,115,335 81,350 264,323 25,775 1,506,772 1,656,988 1,279,721 1,486,783 Government Financial organisations Companies Individuals Total 9,809 128,074 59,263 - 197,146 (141) 197,005 2,213 91,076 - 209 93,498 (95) 93,403 95,070 63,405 - - 158,475 (155) 158,320 81,633 62,651 - 209 144,493 (141) 144,352 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 9,490,734 7,408,374 4,501,991 4,446,843 322,622 49,517 125,725 3,542 9,992,140 (372,280) 9,619,860 328,947 49,017 122,730 3,100 7,912,168 (322,444) 7,589,724 152,487 179,381 - 52,156 916 4,707,550 (143,372) 4,564,178 - 60,688 452 4,687,364 (118,765) 4,568,599 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 368,400 158,871 4,159,496 4,933,093 9,619,860 271,389 100,054 3,280,246 3,938,035 7,589,724 170,742 177,198 1,838,468 2,377,770 4,564,178 182,582 131,442 1,901,950 2,352,625 4,568,599 Allowance for impairment (note 5.14.b) (3,685) (3,140) (1,841) (1,617) Total 1,503,087 1,653,848 1,277,880 1,485,166 123 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020d) Other financial assets Analysis by type of other financial assets 5.7. Non-current assets held for sale a) Analysis by type of non-current assets held for sale Receivables in the course of collection and other temporary accounts Credit card receivables Debtors Fees and commissions Receivables to brokerage firms and others for the sale of securities and custody services Accrued income Dividends Prepayments Other financial assets Allowance for impairment (note 5.14.a) Total NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 32,484 20,260 6,316 6,563 611 1,327 - 447 50,683 118,691 (5,553) 113,138 28,697 18,497 6,360 5,315 612 515 46 38 42,241 102,321 (4,906) 97,415 15,906 11,383 1,307 2,871 610 1,296 - - 22,460 55,833 (1,330) 54,503 25,825 12,194 1,525 3,524 610 529 46 - 24,867 69,120 (1,841) 67,279 Property and equipment Investment in joint venture Total non-current assets held for sale NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 8,658 - 8,658 4,308 38,883 43,191 4,454 - 4,454 2,123 3,409 5,532 Item ‘Property and equipment’ includes business premises and assets 2020, all the suspensive conditions under the joint NLB and KBC Insurance received as collateral that are in the process of being sold. NV sale agreement signed in December 2019 where met, therefore the sale In 2019 NLB Group and NLB classified joint venture NLB Vita as non- investment in NLB Vita as at 31 December 2019 and effect of sale in year current assets held for sale, due to its expected sale in 2020 (note 3.). In May 2020 are included in the segment ‘Retail banking in Slovenia.’ of NLB’s 50% stake in the share capital of NLB Vita was completed. The b) Analysis of movements of non-current assets held for sale in EUR thousands Receivables in the course of collection are temporary balances which will be Other financial assets include receivables to pension funds for prior pension Effects of translation of foreign operations to presentation currency transferred to the appropriate item in the days following their occurrence. payments, receivables from insurance companies, claims in enforcement procedures, claims for sold securities and trust services, claims from refunds, paid duties, and legal costs. Acquisition of subsidiaries (note 5.12.b) Additions Transfer from/(to) property and equipment (note 5.8.) Balance as at 1 January Analysis of other financial assets by sector Banks Government Financial organisations Companies Individuals Total NLB Group NLB 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Transfer from investments in associates and joint ventures Transfer from/(to) investment property (note 5.9.) in EUR thousands Transfer from/(to) other assets 35,431 41,576 14,488 3,912 17,731 113,138 21,749 25,500 10,810 3,857 35,499 97,415 8,069 22,537 7,257 580 16,060 54,503 14,994 24,905 6,920 1,506 18,954 67,279 Disposals Valuation Balance as at 31 December 5.8. Property and equipment a) Analysis by type e) Movement of called non-financial guarantees in EUR thousands Own property and equipment 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 NLB Group NLB 2020 1,859 (2) 2,376 (1,932) (463) 1,838 2019 683 2 1,828 (397) (257) 1,859 2020 365 - 2,261 (1,723) (463) 440 2019 548 - 278 (204) (257) 365 Right-of-use assets (note 5.11.) Total NLB Group 2020 43,191 (3) 1,969 89 2,779 - - (17) (39,089) (261) 8,658 2019 4,349 21 - - 1,328 85 38,883 (550) (320) (605) 43,191 NLB 2020 5,532 - - - 2,626 - - - (3,484) (220) 4,454 2019 1,720 - - - 1,249 - 3,409 - (248) (598) 5,532 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 223,598 25,519 249,117 179,060 16,545 195,605 88,495 3,180 91,675 87,120 2,784 89,904 124 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020b) Movement of own property and equipment in EUR thousands NLB Group NLB in EUR thousands NLB Group NLB Land & Buildings Computers Other equipment Total Land & Buildings Computers Other equipment Total for own use in operating lease for own use in operating lease Cost Land & Buildings Computers Other equipment Total Land & Buildings Computers Other equipment Total for own use in operating lease for own use in operating lease Cost Balance as at 1 January 2019 312,458 64,026 99,521 6,804 482,809 198,180 41,813 55,414 5,208 300,615 Balance as at 1 January 2020 313,168 70,744 95,673 6,186 485,771 198,313 44,635 51,628 5,441 300,017 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additions Disposals Impairment (note 4.14.) Transfer to/from investment property (note 5.9.) Transfer to/from non-current assets held for sale (note 5.7.) (101) (20) (40) 40,173 1,773 3,249 - - (161) 45,195 - - - - - - - - - - 5,888 10,254 6,945 1,255 24,342 5,299 5,378 3,356 104 14,137 (5,843) (961) (6,955) (3,132) (16,891) (13) (433) (5,629) (2,031) (8,106) (43) (756) (6,717) - - - - - - - - - - (43) (756) - - (6,717) (6,556) (95) - - - - - - - - - - - - - - - (6,556) - Disposal of subsidiary (note 3.) - (61) (34) Balance as at 31 December 2020 345,769 81,729 98,838 4,309 530,645 197,043 49,580 49,355 3,514 299,492 Depreciation and impairment Balance as at 1 January 2020 173,763 48,808 79,515 4,625 306,711 135,328 29,440 43,762 4,367 212,897 Effects of translation of foreign operations to presentation currency (25) (17) (40) - (82) Disposals (2,427) (948) (6,651) (2,349) (12,375) - - - - - - (431) (5,600) (2,031) (8,062) Depreciation (note 4.11.) 6,271 6,040 4,103 648 17,062 3,945 3,896 1,782 469 10,092 Impairment (note 4.14.) Transfer to/from investment property (note 5.9.) Transfer to/from non-current assets held for sale (note 5.7.) 161 (401) (3,938) - - - - - - Disposal of subsidiary (note 3.) - (61) (30) - - - - 161 (401) - - (3,938) (3,930) (91) - - - - - - - - - - - - - - - (3,930) - Balance as at 31 December 2020 173,404 53,822 76,897 2,924 307,047 135,343 32,905 39,944 2,805 210,997 Net carrying value Balance as at 31 December 2020 172,365 27,907 21,941 1,385 223,598 61,700 16,675 9,411 709 88,495 Effects of translation of foreign operations to presentation currency Additions Disposals Transfer to/from investment property (note 5.9.) Transfer to/from non-current assets held for sale (note 5.7.) 222 56 122 - 400 - - - - - 4,561 11,453 4,732 363 21,109 2,952 6,251 1,851 363 11,417 (700) (4,751) (8,361) (981) (14,793) (473) (2,900) - - - - - - - (473) (2,900) (2,819) (381) - - - (3,429) (5,637) (130) (9,196) - - - - - - - - - - (2,819) - Disposal of subsidiary (note 3.) - (40) (341) Balance as at 31 December 2019 313,168 70,744 95,673 6,186 485,771 198,313 44,635 51,628 5,441 300,017 Depreciation and impairment Balance as at 1 January 2019 168,665 47,427 84,843 4,470 305,405 132,296 29,646 47,818 3,921 213,681 Effects of translation of foreign operations to presentation currency 80 44 108 - 232 Disposals (241) (4,738) (7,604) (604) (13,187) - (1) - - (3,422) (5,631) Depreciation (note 4.11.) 7,010 6,115 2,509 759 16,393 4,603 3,216 1,575 Impairment (note 4.14.) Transfer to/from investment property (note 5.9.) Transfer to/from non-current assets held for sale (note 5.7.) 171 (350) (1,572) - - - - - - Disposal of subsidiary (note 3.) - (40) (341) - - - - 171 (350) - - (1,572) (1,570) (381) - - - - - - - - - - (82) 528 - - - - - (9,136) 9,922 - - (1,570) - Balance as at 31 December 2019 173,763 48,808 79,515 4,625 306,711 135,328 29,440 43,762 4,367 212,897 Net carrying value Balance as at 31 December 2019 139,405 21,936 16,158 1,561 179,060 62,985 15,195 7,866 1,074 87,120 Balance as at 1 January 2019 143,793 16,599 14,678 2,334 177,404 65,884 12,167 7,596 1,287 86,934 Balance as at 1 January 2020 139,405 21,936 16,158 1,561 179,060 62,985 15,195 7,866 1,074 87,120 of collateral and included in property and equipment by NLB Group thousand) (note 6.1.l). amounted to EUR 13,268 thousand (31 December 2019: EUR 1,440 As at 31 December 2020, the value of assets received by taking possession thousand), and in NLB to EUR 7 thousand (31 December 2019: EUR 7 125 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20205.9. Investment property in EUR thousands 5.10. Intangible assets Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additions Disposals Transfer from/(to) property and equipment (note 5.8.) Transfer from/(to) non-current assets held for sale (note 5.7.) Transfer from/(to) other assets Net valuation to fair value (note 4.8.) Balance as at 31 December NLB Group 2020 52,316 (24) 19,643 717 (2,493) 355 17 (16,559) 870 54,842 2019 58,644 84 - 1,024 (8,417) 123 550 - 308 52,316 NLB 2020 9,303 - - - (2,031) - - 231 797 8,300 2019 12,026 - - 923 (3,571) - - - (75) 9,303 The value of assets received by taking possession of collateral and included (31 December 2019: EUR 32,465 thousand), and in NLB amounted to EUR in investment property by NLB Group amounted to EUR 36,130 thousand 4,079 thousand (31 December 2019: EUR 3,464 thousand) (note 6.1.l). Operating expenses arising from investment properties: Leased to others Not leased to others Total NLB Group NLB in EUR thousands 2020 1,157 242 1,399 2019 1,135 235 1,370 2020 383 194 577 2019 456 175 631 NLB Group in EUR thousands NLB Software licenses Other intangible assets Goodwill Total Software licenses Cost Balance as at 1 January 2020 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additions Write-offs Disposal of subsidiary (note 3.) 228,692 (34) 4,921 14,150 (844) (198) - - 13,200 - - - 32,336 261,028 192,581 - - - - - (34) 18,121 14,150 (844) (198) - - 9,033 - - Balance as at 31 December 2020 246,687 13,200 32,336 292,223 201,614 Amortisation and impairment Balance as at 1 January 2020 Effects of translation of foreign operations to presentation currency Amortisation (note 4.11.) Write-offs Disposal of subsidiary (note 3.) Balance as at 31 December 2020 Net carrying value 192,679 (22) 10,112 (826) (195) 201,748 - - - - - - 28,807 221,486 166,601 - - - - (22) 10,112 (826) (195) - 6,908 - - 28,807 230,555 173,509 Balance as at 31 December 2020 44,939 13,200 Balance as at 1 January 2020 36,013 - 3,529 3,529 61,668 28,105 39,542 25,980 Other intangible assets in the amount of EUR 13,200 thousand represent additionally identified intangible assets in a business combination, namely core deposits and trade name (note 5.12.b). Useful life is assessed to be 5 years. 126 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Group in EUR thousands NLB The income statement shows the following amounts relating to leases: Software licenses Goodwill Total Software licenses Cost Balance as at 1 January 2019 Effects of translation of foreign operations to presentation currency Additions Write-offs Disposal of subsidiary Balance as at 31 December 2019 Amortisation and impairment Balance as at 1 January 2019 Effects of translation of foreign operations to presentation currency Amortisation (note 4.11.) Write-offs Disposal of subsidiary 214,343 32,336 246,679 182,708 109 14,534 (69) (225) - - - - 109 14,534 (69) (225) - 9,937 (64) - 228,692 32,336 261,028 192,581 182,904 28,807 211,711 159,317 75 9,994 (69) (225) - - - - 75 9,994 (69) (225) - 7,348 (64) - Balance as at 31 December 2019 192,679 28,807 221,486 166,601 Depreciation of right-of-use assets (note 4.11.) Land and buildings Vehicles Furniture and equipment Total Interest expenses on lease liabilities (note 4.1.) Expenses relating to short-term leases (included in administrative expenses) Expenses relating to leases of low-value assets that are not shown above as short-term leases (included in administrative expenses) Income from sub-leasing right-of-use assets (included in other operating income) NLB Group NLB in EUR thousands 2020 2019 2020 2019 3,299 571 671 4,541 3,446 522 609 4,577 441 391 16 848 425 349 2 776 NLB Group NLB in EUR thousands 2020 (294) (719) (771) 92 2019 (316) (506) (787) 114 2020 (39) (266) (151) - 2019 (38) (375) (151) - Net carrying value Balance as at 31 December 2019 Balance as at 1 January 2019 5.11. Leases a) NLB Group as a lessee Right-of-use assets Land and buildings Vehicles Furniture and equipment Total Lease liabilities 36,013 31,439 3,529 3,529 39,542 25,980 34,968 23,391 The total cash outflow for leases in 2020 in NLB Group was EUR 4,865 For calculation of the net present value of the future lease payments, NLB thousand (2019: EUR 4,914 thousand) and in NLB EUR 897 thousand Group applies the internal transfer price for retail deposits as a discount rate. (2019: EUR 752 thousand). NLB Group and NLB do not have expenses relating to variable payments NLB Group NLB have lease terms between 5 to 20 years, while some contracts are made A maturity analysis of lease liabilities is disclosed in note 6.3.f). in EUR thousands used in its business. Rental contracts for offices and branches generally NLB Group leases various offices, branches, vehicles, and other equipment and gains or losses arising from sale and leaseback transactions. 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 for indefinite periods. Contracts for indefinite periods are included in measurement of the liability in accordance with planning projections. b) NLB Group as a lessor 22,758 959 1,802 25,519 26,359 13,481 1,256 1,808 16,545 16,713 2,240 912 28 3,180 3,212 1,691 1,049 44 2,784 2,784 Normally, a lease term between 3 and 5 years is assumed, with the Finance and operating leases of motor vehicles and operating leases of exemption of business premises on strategic locations where management business premises and POS terminals represent the majority of agreements assesses a different (longer) lease term. Vehicles and other equipment in which NLB Group acts as a lessor. generally have lease terms between 1 to 5 years. There are several lease contracts that include extension and termination options. These options Most of the lease agreements entered into by NLB Group as lessor contracts are negotiated by management to align with the Group’s business needs. are finance lease agreements (operating leases account for less than 10% of Lease payments to be made under reasonably certain extension options are all lease agreements). Most of the finance lease agreements are concluded included in measurement of the liability. for a non-cancellable period of between 48 and 60 months. By paying the last instalment at the end of the contract, the leasing object becomes the Lease terms are negotiated on an individual basis and contain a range of lessee’s property. The financial leasing receivables are secured by the object In the statement of financial position, right-of-use assets are included in the Additions to the right-of-use assets during 2020 in NLB Group amounted different terms and conditions. The lease agreements do not impose any of financing. NLB Group does not have finance lease contracts with variable item ‘Property and equipment’ and lease liabilities are included in the item to EUR 4,736 thousand (2019: EUR 3,650 thousand) and in NLB EUR covenants other than the security interests in the leased assets that are payments. ‘Other financial liabilities.’ 1.808 thousand (2019: EUR 1,114 thousand). Due to the acquisition of held by the lessor. Leased assets may not be used as security for borrowing subsidiaries in 2020, the right-of-use assets in NLB Group increased by EUR purposes. 9,576 thousand. The investment properties are leased to lessee under operating leases with rentals payable monthly. There are no variable lease payments that depend NLB Group also has certain leases of other equipment with lease term of on an index or rate. The investment properties generally have lease terms 12 months or less, and equipment with low value. For these leases, NLB between 2 to 10 years. Some contracts are made for indefinite period. Group applies the short-term lease and lease of low-value assets recognition exemptions. Lease payments on short-term leases and leases of low-value As at 31 December 2020, the allowance for unrecoverable finance lease assets are recognised as an expense on a straight-line basis over the lease term. receivables included in the allowance for loan impairment amounted to EUR 884 thousand (as at 31 December 2019 EUR 4,505 thousand). 127 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Nature of Business Country of Incorporation Equity as at 31 Dec 2020 Profit/(loss) for 2020 NLB’s shareholding % NLB’s voting rights % NLB Group’s shareholding % NLB Group’s voting rights% in EUR thousands Finance leases The following table sets out a maturity analysis of lease receivables, showing Data of subsidiaries as included in the consolidated financial statements of Loans and advances to customers in NLB Group include finance lease the undiscounted lease payments to be received after the reporting date. NLB Group as at 31 December 2020: receivables. NLB Group Less than one year One to two years Two to three years Three to four years Four to five years More than five years Total undiscounted lease receivable Unearned finance income Net investment in the lease During 2020, NLB Group recognised interest income on lease receivables in Operating lease in EUR thousands 2019 25,351 13,119 7,317 3,632 1,758 1,860 53,037 (4,020) 49,017 2020 23,287 11,506 7,734 5,159 3,243 2,719 53,648 (4,131) 49,517 Core members NLB Banka a.d., Skopje Banking North Macedonia 229,777 19,222 NLB Banka a.d., Podgorica Banking Montenegro 68,556 1,387 NLB Banka a.d., Banja Luka Banking Bosnia and Herzegovina 99,872 10,122 NLB Banka sh.a., Prishtina Banking Kosovo 98,335 13,334 NLB Banka d.d., Sarajevo Banking Bosnia and Herzegovina NLB Banka a.d., Belgrade Banking Serbia 89,808 74,205 5,895 2,598 Komercijalna banka a.d. Belgrade Banking Serbia 609,943 (9,050) Komercijalna banka a.d. Banja Luka Banking Bosnia and Herzegovina 31,045 (1,309) Komercijalna banka a.d. Podgorica Banking Montenegro 20,689 (1,224) KomBank Invest a.d. Belgrade Finance Serbia 1,342 - the amount of EUR 1,957 thousand (2019: EUR 3,776 thousand). A maturity analysis of lease payments, showing the undiscounted lease NLB Skladi d.o.o., Ljubljana Finance Slovenia 10,487 5,490 payments to be received after the reporting date: NLB Lease&Go, leasing d.o.o., Ljubljana Finance Slovenia 1,938 (1,062) NLB Group NLB in EUR thousands NLB Zavod za upravljanje kulturne dediščine, Ljubljana Cultural heritage management Slovenia 378 368 Less than one year One to two years Two to three years Three to four years Four to five years More than five years Total 2020 3,082 1,863 1,497 1,411 1,308 1,759 2019 1,855 1,447 1,200 484 445 697 2020 2019 Non-core members 399 364 341 333 331 243 405 392 315 293 285 326 NLB Leasing d.o.o. - v likvidaciji, Ljubljana Finance Slovenia Optima Leasing d.o.o., Zagreb - "u likvidaciji" Finance Croatia NLB Leasing d.o.o., Belgrade - u likvidaciji Finance Serbia Tara Hotel d.o.o., Budva Real estate Montenegro PRO-REM d.o.o., Ljubljana - v likvidaciji Real estate Slovenia OL Nekretnine d.o.o., Zagreb - u likvidaciji Real estate Croatia 10,920 6,128 2,011 2,016 BH-RE d.o.o., Sarajevo - u likvidaciji Real estate Bosnia and Herzegovina NLB Group realised rental income arising from: investment properties in the amount of EUR 471 thousand (2019: EUR 697 thousand); and movable the amount of EUR 2,572 thousand (2019: EUR 4,124 thousand); and property in the amount of EUR 470 thousand (2019: EUR 455 thousand) movable property in the amount of EUR 1,003 thousand (2019: EUR 985 (note 4.8.). thousand). NLB realised rental income arising from: investment properties in REAM d.o.o., Podgorica Real estate Montenegro REAM d.o.o., Belgrade Real estate Serbia SPV 2 d.o.o., Belgrade Real estate Serbia S-REAM d.o.o, Ljubljana Real estate Slovenia REAM d.o.o., Zagreb Real estate Croatia 17,568 1,346 5,940 17,025 20,870 1,409 7 1,652 1,762 820 1,349 2,108 720 (996) 19 (204) 353 (127) (14) (166) (145) 8 (236) 92 5.12. Investments in subsidiaries, associates and joint ventures a) Analysis by type of investment in subsidiaries NLB Banks Other financial organisations Enterprises Total 31 Dec 2020 31 Dec 2019 in EUR thousands 671,880 21,819 55,361 749,060 277,160 18,819 55,904 351,883 NLB Srbija d.o.o., Belgrade Real estate Serbia 32,046 1,149 NLB Crna Gora d.o.o., Podgorica Real estate Montenegro NLB InterFinanz AG, Zürich in Liquidation Finance Switzerland NLB InterFinanz d.o.o., Belgrade Finance Serbia 755 10,783 3 139 986 (3) LHB AG, Frankfurt Finance Germany 1,732 (432) 86.97 99.83 99.85 81.21 97.34 86.97 99.83 99.85 81.21 97.35 86.97 99.83 99.85 81.21 97.34 86.97 99.83 99.85 81.21 97.35 99.997 99.997 99.997 99.997 81.42 0.002 83.23 0.002 - - 100 100 100 100 - 100 - - 100 100 100 100 - 100 12.71 12.71 100 100 - - 100 100 100 100 - 100 100 100 - 100 - - 100 100 100 100 - 100 100 100 - 100 81.42 83.23 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 128 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Data of subsidiaries as included in the consolidated financial statements of NLB Group as at 31 December 2019: Data of subsidiaries with significant non-controlling interests, before intercompany eliminations Nature of Business Country of Incorporation Equity as at 31 Dec 2019 Profit/(loss) for 2019 NLB’s shareholding % NLB’s voting rights% NLB Group’s shareholding % NLB Group’s voting rights% in EUR thousands 86.97 99.83 99.85 81.21 97.34 86.97 99.83 99.85 81.21 97.35 86.97 99.83 99.85 81.21 97.34 86.97 99.83 99.85 81.21 97.35 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 Attributable to non-controlling interest 99.997 99.997 99.997 99.997 Other comprehensive income 100 100 100 100 Total comprehensive income Attributable to non-controlling interest Paid dividends to non-controlling interest Statement of financial position Current assets Non-current assets Current liabilities Non-current liabilities Equity Attributable to non-controlling interest Core members NLB Banka a.d., Skopje Banking North Macedonia 209,664 32,877 NLB Banka a.d., Podgorica Banking Montenegro 67,532 7,565 NLB Banka a.d., Banja Luka Banking Bosnia and Herzegovina 88,745 17,101 NLB Banka sh.a., Prishtina Banking Kosovo 84,927 19,545 NLB Banka d.d., Sarajevo Banking Bosnia and Herzegovina NLB Banka a.d., Belgrade Banking Serbia NLB Skladi d.o.o., Ljubljana Finance Slovenia Non-core members NLB Leasing d.o.o. - v likvidaciji, Ljubljana Finance Slovenia Optima Leasing d.o.o., Zagreb - "u likvidaciji" Finance Croatia 81,499 72,954 10,509 16,786 2,373 9,047 4,142 5,512 1,332 (502) NLB Leasing Podgorica d.o.o., Podgorica - "u likvidaciji" Finance Montenegro (1,558) (1,662) NLB Leasing d.o.o., Belgrade - u likvidaciji Finance Serbia NLB Leasing d.o.o., Sarajevo Finance Bosnia and Herzegovina Tara Hotel d.o.o., Budva Real estate Montenegro PRO-REM d.o.o., Ljubljana - v likvidaciji Real estate Slovenia 5,930 632 17,618 20,518 430 (365) 480 141 OL Nekretnine d.o.o., Zagreb - u likvidaciji Real estate Croatia 1,556 (161) BH-RE d.o.o., Sarajevo Real estate Bosnia and Herzegovina REAM d.o.o., Podgorica Real estate Montenegro REAM d.o.o., Belgrade Real estate Serbia SPV 2 d.o.o., Belgrade Real estate Serbia S-REAM d.o.o, Ljubljana Real estate Slovenia REAM d.o.o., Zagreb Real estate Croatia NLB Srbija d.o.o., Belgrade Real estate Serbia NLB Crna Gora d.o.o., Podgorica Real estate Montenegro 18 1,818 1,912 814 1,585 2,045 30,933 615 (13) (89) (267) (57) (168) 458 557 165 NLB InterFinanz AG, Zürich in Liquidation Finance Switzerland 9,817 2,302 NLB InterFinanz d.o.o., Belgrade Finance Serbia LHB AG, Frankfurt Finance Germany (21) 2,164 (1) (275) Changes in ownership interest in subsidiaries of NLB Group in 2020 and 2019 are presented in note 3. 100 - 100 100 100 100 - 100 100 100 12.71 12.71 100 100 - - 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 Banka, Skopje NLB Banka, Prishtina in EUR thousands 2020 13.03 13.03 81,673 19,222 2,505 898 20,120 2,622 - 2019 13.03 13.03 84,105 32,877 4,284 1,092 33,969 4,426 3,139 690,387 895,265 668,866 793,433 1,176,539 1,049,358 179,336 229,777 29,940 203,277 209,664 27,319 2020 18.79 18.79 47,699 13,334 2,505 74 13,408 2,519 - 443,289 435,775 689,776 90,953 98,335 18,477 2019 18.79 18.79 45,066 19,545 3,673 1,025 20,570 3,865 1,396 379,090 421,995 597,505 118,653 84,927 15,958 Beside NLB Banka, Skopje and NLB Banka, Prishtina also Komercijalna EUR 1,864 thousand are included in NLB Group’s income statement banka is a subsidiary with significant non-controlling interest, with non- for 2020. Loss attributable to non-controlling interest amounts to EUR controlling interest in equity of 18.58% and non-controlling interest 2,149 thousand and gain attributable to non-controling interest recognised in voting rights of 16.77%. Since the acquisition was concluded on 30 in other comprehensive income amounts to EUR 463 thousand. Equity December 2020, only 12-month expected credit losses in the amount of attributable to non-controlling interest as at 31 December 2020 amounts to EUR 13,447 thousand and attributable deferred taxes in the amount of EUR 119,848 thousand. b) Acquisition of Komercijalna banka a.d. Beograd On 30 December 2020 NLB acquired an 83.23% ordinary shareholding in Komercijalna banka a.d. Beograd, which represents 81.42% of total shareholding in Komercijalna banka a.d. Beograd. The acquired bank has three subsidiaries: Subsidiaries Komercijalna banka a.d. Podgorica, Montenegro Komercijalna banka a.d. Banja Luka, Bosnia and Herzegovina Investment Management Company KomBank Invest a.d. Belgrade, Serbia Komercijalna banka Beograd’s ownership NLB’s direct ownership 100% 99.998% 100% - 0.002% - Serbia has long been a strategically important market for NLB Group in the market by population) it was, until the execution of this transaction, sub- context of the strategy to be the leading international bank headquartered in and focused on the SEE region. Whilst in all countries of Group’s scale. operations NLB has a top three market position, in Serbia (the largest As a result of the transaction, NLB became the third largest banking group in Serbia with the acquisition of Komercijalna banka increasing NLB’s 129 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020market share from approximately 2% by total assets to over 12% as at 30 At acquisition date cash in acquired entities amounted to EUR 847,488 NLB Group recognises non-controlling interests in Komercijalna banka ‘Negative goodwill.’ The main reasons for negative goodwill are current September 2020. The business operations of NLB Group in Serbia will be thousand, therefore net inflow of cash amounted to EUR 452,770 thousand Beograd at the non-controlling interest’s proportionate share of the acquired market conditions, when banks are generally valued below their net book (besides the Slovenian market) the largest and most important one, adding (included in statement of cash flows within payments from investing entity’s net identifiable assets. values. more than 800,000 active retail customers and the largest distribution activities). network in the country of 203 branches to NLB’s existing operations. Acquisition of Komercijalna banka Beograd resulted in a gain from a As a result of the acquisition, NLB Group’s off-balance sheet liabilities Purchase consideration amounted to EUR 394,718 thousand and was follows: fully paid in cash. There are no contingent consideration arrangements. thousand, which is recognised in income statement under line item The assets and liabilities recognised as a result of the acquisition are as bargain purchase (negative goodwill) in the amount of EUR 137,858 increased by EUR 377,361 thousand: in EUR thousands 19,431 15,437 3,994 88,123 34,467 53,656 266,832 1,440 1,535 377,361 In 2020, acquisition-related costs amounted to EUR 1,643 thousand and are NLB obtained all the necessary information for measuring fair values, included within administrative expenses (2019: EUR 3,305 thousand). therefore no amounts were measured and recognised on a provisional basis. in EUR thousands Short-term guarantees - financial - non-financial Long-term guarantees - financial - non-financial Commitments to extend credit Letters of credit Other Total Cash, cash balances at central banks and other demand deposits at banks Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income (note 5.4.b) Financial assets measured at amortised cost - debt securities - loans and advances to banks - loans and advances to customers - other financial assets Tangible assets Property and equipment (notes 5.8.b and 5.11.a) Investment property (note 5.9.) Intangible assets (note 5.10.) Current income tax assets Deferred income tax assets Other assets Non-current assets held for sale (note 5.7.b) Total assets 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 - other financial liabilities Provisions (note 5.16.) Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Net identifiable assets acquired (100%) Less: non-controlling interests Net assets acquired (NLB Group share) Consideration given Bargain purchase (negative goodwill) 836,408 66,356 5,628 1,284,895 7,214 46,981 1,877,349 23,250 54,771 19,643 18,121 153 1,125 17,604 1,969 4,261,467 35,895 8,788 3,443,478 29,295 49,072 34,537 4 2,112 4,176 3,607,357 654,110 (121,534) 532,576 394,718 137,858 130 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The valuation techniques used for measuring the fair value of material assets and liabilities acquired were as follows: Assets acquired Valuation technique Performing loans Non-performing loans Debt securities Real estate Core deposits Trade name Discounted cash flow approach: Since these are performing loans, it was assumed that they would be repaid by future cash flows in accordance with amortisation schedules. Credit risk was considered for loans which are classified in Stage 2 in Komercijalna banka’s local financial statements, by reducing future cash flows accordingly. Also prepayment risk was estimated for two retail products namely cash loans and housing loans which have the longest maturity. As a discount rate, average weighted interest rate for new transactions in the market for the same products, currency and clients (sector) were used. The source was Serbian central bank (NBS) statistical database, which provided a history of interest rates data by various products, currencies, maturities, type of interest rates and size of customer for new loans. Discounted cash flow approach: Since these are non-performing loans, it could generally not be assumed that they would be repaid with cash flows from client’s regular business. Instead, gone concern principle was used, taking into account liquidation value of collateral as expected cash flows. Appropriate haircuts for age of valuations, type of collateral, type of location and type of real estate were used to estimate the liquidation value of collateral, which was then discounted for a period of 4 years, with the required yield of 20%. Only exceptionally, also cash flows from regular business were considered, also discounted with the required yield of 20%. For debt securities classified in Level 1 of fair value hierarchy, fair values were determined by an observable market price in an active market for an identical asset. For valuing debt securities in Level 2, income approach was used, based on the estimation of future cash flows discounted to the present value. The input parameters used in the income approach were the risk-free yield curve and the spread over the yield curve (credit, liquidity, country). Three approaches were used for estimating the value of real estate - the income capitalisation approach, the sale comparison approach and the residual land value approach. Each views the valuation from different perspectives and considers data from different market sources. The most suitable approach depends on the characteristics and use of individual real estate. The income capitalization approach: Values property by the amount of income – cash flow that it can potentially generate. The value of the property is derived by converting the expected income generated from a property into a present value estimate using market capitalization rate. This method is commonly used for valuing income-generating properties. The sale comparison approach: Values property by comparing similar properties that have been sold recently. This approach is sometimes referred to as the ‘direct sales comparison approach.’ The reliability of an indication found by this method depends on the quality of comparable data found in the marketplace and application of adequate adjustments for individually appraised real estate. When sale transactions are not available, the direct sales comparison approach is not applicable. Residual land value approach: is a method for calculating the value of development land. It is performed by subtracting from the total value of a development project, all costs associated with the development project, including profit but excluding the cost of the land. It is applicable only for development/construction land. Acquired core deposit accounts typically provide a low-cost source of funds to the buyer. To replace these established, low-cost deposit accounts in a timely manner, the buyer’s alternative would be to utilize higher-cost funds at current market rates. Core deposits value is measured by the present value of the difference, or spread, between the core deposit’s ongoing cost and the cost of a market alternative replacement. The trade name was valued by applying the relief-from-royalty method under the income approach. This method is based upon the application of an appropriate royalty rate on the respective revenues to estimate the Fair Value for the trade name. This method assumes that, by virtue of having ownership of the trade name rather than licensing one for use. Liabilities acquired Valuation technique Deposits Discounted cash flow approach: Aggregated future cash flows were discounted by applying market interest rates for term deposits. Future cash flows were grouped into 11 groups according to the type of client and currency. As a discount rate, average weighted interest rate for new transactions in the market in 2020 was applied. c) Analysis by type of investment in associates and joint ventures NLB Group NLB in EUR thousands Carrying amount of the NLB Group's interest 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Other financial organisations Enterprises Total 7,988 - 7,988 7,499 - 7,499 1,382 280 1,662 1,056 310 1,366 In 2020, NLB sold its 50% stake in the share capital of NLB Vita (note 4.15.), which was in 2019 reclassified to non-current assets held for sale. NLB Group’s associates 2020 2019 Nature of Business Country of Incorporation Shareholding % Voting rights % Shareholding % Voting rights % Bankart d.o.o., Ljubljana ARG - Nepremičnine d.o.o., Horjul Card processing Real estate Slovenia Slovenia 40.08 75.00 40.08 75.00 39.44 75.00 39.44 75.00 By contractual agreement between the shareholders, NLB does not The carrying amount of interests in associates included in the consolidated control ARG-Nepremičnine, Horjul, but does have a significant influence. financial statements of NLB Group: Therefore, the entity is accounted as an associate. Carrying amount of the NLB Group's interest NLB Group's share of: - Profit for the year - Other comprehensive income - Total comprehensive income 2020 7,988 874 (41) 833 in EUR thousands 2019 7,499 1,036 (81) 955 The fair value of acquired loans and advances to customers is EUR Since the transaction was closed on 30 December 2020, only 12-month the amount of EUR 21 thousand (31 December 2019: EUR 5 thousand), as 2019: EUR 2,295 thousand). 1,877,349 thousand, of which EUR 1,836,970 thousand relates to expected credit losses for Stage 1 financial assets in the amount of EUR it still has the cumulative unrecognised share of losses of an associate that performing portfolio and EUR 40,379 thousand to non-performing 13,447 thousand and attributable deferred taxes in the amount of EUR portfolio. The latter was recognised as purchased or originated credit 1,864 thousand are included in NLB Group income statement. If the NLB Group’s joint ventures In 2020, NLB Group did not recognise a share of profit of an associate in as at 31 December 2020 amounted to EUR 2,274 thousand (31 December impaired financial assets (POCI). The gross contractual amount for acquisition has occurred on 1 January 2020, management estimates that performing loans and advances to customers is EUR 1,827,721 thousand consolidated revenue (excluding negative goodwill) would have been and for this exposure 12-month expected credit losses in the amount of between EUR 750 and 760 million and consolidated profit for the year EUR 10,349 thousand were recognised through the income statement. would have been between EUR 260 and 265 million. The exact result The gross contractual amount for non-performing loans and advances to is difficult to assess due to some changed circumstances during the year, NLB Vita d.d., Ljubljana customers is EUR 149,654 thousand, and it is expected that approximately especially the COVID-19 pandemic. EUR 75 million of the contractual cash flows will not be collected. Prvi Faktor Group, Ljubljana 2020 2019 Nature of Business Country of Incorporation Voting rights% Voting rights% Insurance Finance Slovenia Slovenia - 50 50 50 In 2020, NLB Group did not recognise a share of loss of a joint venture in Cumulative unrecognised share of losses of a joint venture as at 31 the amount of EUR 243 thousand (31 December 2019: unrecognised loss EUR 199 thousand). December 2020 amounted to EUR 14,946 thousand (31 December 2019: EUR 14,704 thousand). 131 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 d) Movements of investments in associates and joint ventures in EUR thousands a) Movements in allowance for the impairment of loans and receivables measured at amortised cost 5.14. Movements in allowance for the impairment of financial assets 2020 7,499 326 1,036 (162) (41) (670) - 7,988 2019 37,147 - 5,051 (854) 7,819 (2,781) (38,883) 7,499 NLB Group 12-month expected credit losses Loans and advances to individuals Loans and advances to legal entities Other financial assets Lifetime ECL not credit-impaired Effects of translation of foreign operations to presentation currency Balance as at 1 Jan 2020 Increases/ Transfers (Decreases) Write-offs Changes in models/risk parameters Foreign exchange and other movements Disposal of subsidiary Balance as at 31 Dec 2020 Repayments of written-off receivables in EUR thousands 21,613 35,210 177 (22) (10) (1) (3) (2) 1 12,806 (9,062) 5,004 7,865 63 80 (11,149) (8,675) (17) 7,250 4,955 (143) (1) (6) (22) (3) (4) (4) (290) 1,582 (21) 5,925 9,334 166 - (18) - 28 (2) - NLB Group NLB Other financial assets 27 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Lifetime ECL credit-impaired in EUR thousands Loans and advances to legal entities 27,076 Loans and advances to individuals 6,103 Assets, received as collateral (note 6.1.l) 76,017 51,322 Loans and advances to individuals 47,737 (22) (1,610) 29,353 (20,159) 1,689 4,317 9,157 7,858 2,949 1,159 6,005 2,513 2,021 1,950 4,926 5,976 180 467 115 5,292 4,935 378 435 102 97,140 63,811 11,664 11,142 NLB Group Balance as at 1 January Increase in capital share Share of results before tax Share of tax Net gains/(losses) recognised in other comprehensive income Dividends received Transfer to non-current assets held for sale (note 5.7.b) Balance as at 31 December 5.13. Other assets Deferred expenses Inventories Claim for taxes and other dues Prepayments Total Assets, received as collateral on NLB Group in the amount of EUR 75,151 thousand (31 December 2019: EUR 50,467 thousand), and on NLB in the amount of EUR 4,926 thousand (31 December 2019: EUR 5,292 thousand) consisting of real estate (note 6.1.l). - 25,044 (11) 49,616 - - - - - 276 8,151 32,682 30 61,305 - - - - - - 5,858 9,565 499 - - Loans and advances to legal entities 184,800 Other financial assets 4,702 Of which: Purchased credit- impaired financial assets Loans and advances to legal entities 1,887 Other financial assets 3 67 (9) - - 3,624 11,750 (31,254) (46) 2,395 (2,258) - - (568) 1 - - 98 16 - - 27,584 (1,046) 195,623 485 (38) 5,247 - - - - 1,319 4 Column Increases/(Decreases) includes also 12-month expected credit losses EUR 8,198 thousand for Loans and advances to legal entities and in the recognised at acquisition of Komercijalna banka in the amount of EUR amount of EUR 54 thousand for Other financial assets (notes 4.14. and 2,150 thousand for Loans and advances to individuals, in the amount of 5.12.b.). Effects of translation of foreign operations to presentation currency Balance as at 1 Jan 2019 Increases/ Transfers (Decreases) Write-offs Changes in models/risk parameters Foreign exchange and other movements Disposal of subsidiary Balance as at 31 Dec 2019 Repayments of written-off receivables in EUR thousands NLB Group 12-month expected credit losses Loans and advances to individuals Loans and advances to legal entities Other financial assets Lifetime ECL not credit-impaired 17,162 24,416 182 11,754 (7,474) - 120 9,598 4,184 (197) (2,825) 20 11 (31) (7) 50 18 2 1 22 (1) Loans and advances to individuals 8,263 Loans and advances to legal entities 27,274 Other financial assets 58 Lifetime ECL credit-impaired (8,321) 3,980 (1,317) (1,369) (63) 24 (3) (38) (2) Loans and advances to individuals 59,054 189 (3,433) 13,661 (21,117) Loans and advances to legal entities 317,524 1,000 (8,281) (12,839) (112,266) Other financial assets 7,956 (3) 43 795 (2,073) Of which: Purchased credit- impaired financial assets Loans and advances to legal entities 2,184 Other financial assets 1 - - - - (298) 2 - - 2,182 2,510 11 (638) (18) 8 - - 1 16 - 1 (6) - 21 (320) - - - - - - - - 21,613 35,210 177 6,103 27,076 27 - - - - - - 47,737 3,821 184,800 13,499 (4) (2,020) 4,702 56 1 - - - 1,887 3 - - 132 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Balance as at 1 Jan 2020 Transfers Increases/ (Decreases) Write-offs in EUR thousands Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2020 Repayments of written-off receivables 7,195 13,670 55 1,396 9,792 9 15,576 71,277 1,777 1,856 3 6,107 3,254 68 (4,953) (3,261) (1) (1,154) 7 (67) - - (6,509) (3,356) (22) 3,422 (2,516) (7) 14,318 (2,677) 411 (537) 1 (1) (6) (2) (3) (4) - (6,227) (7,159) (864) - - 2,181 3,285 (25) 2,491 4,925 1 (365) (119) (2) - - - (28) (1) (2) - - 707 22,264 - - - 8,973 16,819 73 2,351 8,936 2 22,855 83,593 1,255 1,319 4 - - - - - - 2,319 4,139 328 - - Balance as at 1 Jan 2019 Transfers Increases/ (Decreases) Write-offs in EUR thousands Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2019 Repayments of written-off receivables NLB 12-month expected credit losses Loans and advances to individuals Loans and advances to legal entities Other financial assets Lifetime ECL not credit-impaired Loans and advances to individuals Loans and advances to legal entities Other financial assets Lifetime ECL credit-impaired Loans and advances to individuals Loans and advances to legal entities Other financial assets Of which: Purchased credit- impaired financial assets Loans and advances to legal entities Other financial assets NLB 12-month expected credit losses Loans and advances to individuals Loans and advances to legal entities Other financial assets Lifetime ECL not credit-impaired 6,355 10,511 27 3,991 2,036 15 (2,377) 728 25 Loans and advances to individuals 1,255 (2,875) 1,854 Loans and advances to legal entities 11,405 6,433 (8,882) Other financial assets 6 (2) 4 Lifetime ECL credit-impaired Loans and advances to individuals Loans and advances to legal entities Other financial assets Of which: Purchased credit- impaired financial assets Loans and advances to legal entities Other financial assets 18,347 154,763 1,855 2,145 1 (1,116) (8,469) (13) 5,833 (6,962) (7,892) (66,998) 659 (722) - - (290) 2 - - - (5) (4) (3) (34) - (775) 380 (8) 1,164 870 1 (545) (139) (2) - - 1 20 - 1 - - 19 12 - 1 - 7,195 13,670 55 1,396 9,792 9 15,576 71,277 1,777 1,856 3 - - - - - - 1,382 6,671 16 - - b) Movements in allowance for the impairment of debt securities in EUR thousands NLB Group Balance as at 1 Jan 2020 12-month expected credit losses Debt securities measured at amortised cost Debt securities measured at fair value through other comprehensive income Lifetime ECL not credit-impaired Debt securities measured at fair value through other comprehensive income Lifetime ECL credit-impaired Debt securities measured at fair value through other comprehensive income 3,140 4,757 42 798 Effects of translation of foreign operations to presentation currency (2) 2 - - Transfers Increases/ (Decreases) Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2020 - - - - 343 4,156 (6) - 204 (253) (9) - - (6) 1 - 3,685 8,656 28 798 Column Increases/(Decreases) includes also 12-month expected credit losses of EUR 2,932 thousand for Debt securities measured at fair value through recognised at acquisition of Komercijalna banka in the amount of EUR 32 other comprehensive income (notes 4.14. and 5.12.b.). thousand for Debt securities measured at amortised cost and in the amount NLB Group Balance as at 1 Jan 2019 Effects of translation of foreign operations to presentation currency Transfers Increases/ (Decreases) Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2019 in EUR thousands 12-month expected credit losses Debt securities measured at amortised cost Debt securities measured at fair value through other comprehensive income Lifetime ECL not credit-impaired Debt securities measured at fair value through other comprehensive income Lifetime ECL credit-impaired Debt securities measured at fair value through other comprehensive income 2,898 3,597 75 798 4 (4) - - - 19 292 1,332 (19) (24) - - (55) (188) 10 - 1 1 - - 3,140 4,757 42 798 The contractual amount outstanding on financial assets that were written which EUR 4,162 thousand in NLB Group (31 December 2019: EUR off during the year ending 31 December 2020 and that are still subject to 42,811 thousand) and EUR 2,537 thousand in NLB (31 December 2019: enforcement activity for NLB Group amounted to EUR 42,738 thousand EUR 41,747 thousand) represents interest receivables that have not been (31 December 2019: EUR 142,593 thousand), and for NLB amounted to EUR 9,773 thousand (31 December 2019: EUR 92,882 thousand), of recognised in the income statement prior to the write-off. 133 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB 12-month expected credit losses Debt securities measured at amortised cost Debt securities measured at fair value through other comprehensive income Lifetime ECL credit-impaired Debt securities measured at fair value through other comprehensive income NLB 12-month expected credit losses Debt securities measured at amortised cost Debt securities measured at fair value through other comprehensive income Lifetime ECL credit-impaired Debt securities measured at fair value through other comprehensive income Balance as at 1 Jan 2020 Increases/ (Decreases) in EUR thousands Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2020 1,617 1,714 798 16 626 - 208 9 - - (6) - 1,841 2,343 798 Balance as at 1 Jan 2019 Increases/ (Decreases) in EUR thousands Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2019 1,323 1,541 798 342 182 - (49) (11) - 1 2 - 1,617 1,714 798 applying the effective interest rate to the net amortised cost of the financial EUR 705 thousand at NLB level relates to loans and advances to individuals asset. Part of the contractually due interest for Stage 3 exposures that is not measured at amortised cost and EUR 27,389 thousand at NLB Group included in the income statement (so-called ‘excluded interest’) has been level and EUR 22,284 thousand at NLB level to loans and advances to in previous periods presented as a decrease of gross carrying amount of legal entities measured at amortised cost). This increased the NPE ratio in financial assets. In year 2020, the Bank of Slovenia changed the instructions accordance with the EBA methodology by 0.15 percentage points for NLB for reporting of monetary financial institutions and regards excluded Group and by 0.20 percentage points for NLB. Comparative information interest as part of gross carrying amount, even if not recognised in the has not been adjusted in this respect. income statement. Therefore, NLB Group changed the presentation as at 31 December 2020 and increased gross carrying amount and impairments The table below illustrates how changes in the gross carrying amount of for EUR 33,990 thousand on the Group level and EUR 25,112 thousand loans and advances to customers in year 2020 contributed to changes in the on the NLB level (of which EUR 4,347 thousand at NLB Group level and loss allowance. NLB Group NLB in EUR thousands 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired Total Total Balance as at 1 January 2020 7,092,324 471,017 348,827 7,912,168 4,350,549 189,426 147,389 4,687,364 Effects of translation of foreign operations to presentation currency (2,427) (198) (126) (2,751) Acquisition of subsidiaries (note 5.12.b) 1,836,970 - 40,379 1,877,349 - - - - - - Transfers (258,846) 153,780 105,066 - (151,114) 113,827 37,287 - - - Increases/(Decreases) 334,625 (64,104) (39,581) 230,940 81,181 (44,558) (22,784) 13,839 c) Explanation of how significant changes in the gross carrying amount NLB Group in the amount of EUR 3,290 thousand was mainly caused by of financial instruments contributed to changes in the loss allowance a decrease of carrying amount due to disposal of subsidiary (EUR 2,020 In year 2020, the gross carrying amount of debt securities measured at thousand) and write-offs (EUR 2,106 thousand). At the NLB level, the loss amortised cost decreased by EUR 150,216 thousand for NLB Group (2019: allowance for other financial assets decreased only by EUR 47 thousand. Write-offs Foreign exchange Excluded interest (7) (2,151) - (7) (90) 30 increased by EUR 225,128 thousand) and decreased by EUR 207,062 Modification losses (note 4.12.) (3,094) (357) (51,413) (51,427) (7) (7) (13,386) (13,400) (57) 31,706 (126) (2,298) 31,736 (3,577) (2,946) (178) - - - - (118) 22,989 - (3,242) 22,989 - thousand for NLB (2019: increased by EUR 210,482 thousand). Since they In year 2020, the biggest change in loss allowance was recognised for loans are all classified in Stage 1, the impact on the balance of loss allowance was and advances to customers, as it increased by EUR 49,836 thousand at not material. At the NLB Group level it increased by EUR 545 thousand the NLB Group level (EUR 19,047 thousand relating to individuals and Balance as at 31 December 2020 8,997,394 560,071 434,675 9,992,140 4,277,663 258,510 171,377 4,707,550 (2019: increased by EUR 242 thousand) and at the NLB level increased EUR 30,789 thousand to legal entities), and EUR 24,607 thousand at the In year 2019, loss allowance for loans and advances to other customers 2 and 3 with lifetime expected credit losses, while increases were realised by EUR 224 thousand (2019: increased by EUR 294 thousand). Debt NLB level (EUR 10,012 thousand relating to individuals and EUR 14,595 decreased by EUR 131,123 at the NLB Group level, and EUR 83,794 at the in Stage 1 with only 12-month expected credit losses. The table below securities measured at fair value through other comprehensive income thousand to legal entities). The main reasons for this increase are changed NLB level, regardless of the fact that the gross carrying amount increased illustrates how changes in the gross carrying amount of loans and advances increased only by EUR 59,493 thousand for NLB (2019: increased by EUR risk parameters, which increased loss allowance by EUR 18,338 thousand by EUR 333,968 thousand for NLB Group and EUR 33,328 thousand for to customers in year 2019 contributed to changes in the loss allowance. 128,129 thousand), while for NLB Group they increased by EUR 1,354,686 at NLB Group level (EUR 7,324 thousand individuals and EUR 11,014 NLB. The most decreases in gross carrying amounts were realised in Stages thousand (2020: increased by EUR 242,787), mainly due to acquisition thousand legal entities) and by EUR 12,398 thousand at NLB level (EUR of Komercijalna banka Beograd. Consequently, loss allowance for NLB 4,307 thousand individuals and 8,091 thousand legal entities) and an increased only by EUR 629 thousand for NLB (2019: increased by EUR increase of the gross carrying amount. At the NLB Group level, the gross 173 thousand), while for NLB Group it increased by EUR 3,885 thousand carrying amount increased by EUR 2,079,972 thousand (EUR 1,014,105 (2019: increased by EUR 1,127 thousand). thousand individuals and EUR 1,065,867 thousand legal entities), mainly due to acquisition of subsidiaries, while at the NLB level it increased by NLB Group NLB in EUR thousands 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired Total Total Changes in the gross carrying amount of loans to banks did not cause EUR 20,186 thousand (increase of loans to individuals by EUR 35,157 Balance as at 1 January 2019 6,426,820 577,935 573,445 7,578,200 4,146,744 208,191 299,101 4,654,036 significant changes in the loss allowance. For NLB Group, the gross thousand and decrease of loans to legal entities for EUR 14,971 thousand). carrying amount of loans to banks increased by EUR 103,648 thousand Effects of translation of foreign operations to presentation currency 4,896 587 2,110 7,593 - - - (2019: decreased by EUR 25,324 thousand) and loss allowance increased Acquisition of subsidiaries (note 5.12.b) contributed EUR 1,877,349 Transfers (6,887) (17,381) 24,268 - (12,370) 9,872 2,498 - - by EUR 46 thousand (2019: decreased by EUR 31 thousand), while at the thousand to the gross carrying amount of loans and advances to customers NLB level the gross carrying amount increased by EUR 13,982 thousand on NLB Group level, of which EUR 849,428 thousand relates to individuals (2019: increased by EUR 34,119 thousand) and loss allowance increased and EUR 1,027,921 thousand to legal entities. For the performing part by EUR 14 thousand (2019: increased by EUR 64 thousand). Increase of of this portfolio, 12-month expected credit losses in the amount of EUR gross carrying amount due to acquisition of subsidiaries was EUR 46,981 10,349 thousand were recognised. thousand. The loss allowance for other financial assets in year 2020 moved in line with gross carrying amount and increased by EUR 647 thousand at NLB excluded interest. NLB Group calculates interest income by applying the effective interest rate to the gross carrying amount of financial assets other Group level, while at the NLB level it decreased by EUR 511 thousand. than credit-impaired assets. When a financial asset becomes credit-impaired In year 2019, the decrease of loss allowance for other financial assets for and is, therefore, regarded as Stage 3, interest income is calculated by The gross carrying amount also increased due to changed presentation of Increases/(Decreases) 666,201 (90,126) (116,619) 459,456 213,446 (28,728) (80,394) 104,324 Write-offs Foreign exchange Modification losses (note 4.12.) (197) 1,515 (24) (41) 92 (49) (133,383) (133,621) (885) (109) 722 (182) (5) 2,734 - (37) 128 - (73,960) (74,002) 144 - 3,006 - Balance as at 31 December 2019 7,092,324 471,017 348,827 7,912,168 4,350,549 189,426 147,389 4,687,364 134 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20205.15. Financial liabilities, measured at amortised cost Analysis by type of financial liabilities, measured at the amortised cost c) Subordinated liabilities Deposits from banks and central banks Borrowings from banks and central banks Due to customers Borrowings from other customers Subordinated liabilities Other financial liabilities Total a) Deposits from banks and central banks and amounts due to customers NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 72,633 158,225 42,840 170,385 41,635 143,464 89,820 161,564 16,397,167 11,612,317 8,850,755 7,760,737 91,560 288,321 207,300 64,458 210,569 158,484 13 288,321 101,273 2,537 210,569 98,342 17,215,206 12,259,053 9,425,461 8,323,569 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 NLB Group and NLB in EUR thousands 31 Dec 2020 31 Dec 2019 Currency Due date Interest rate Carrying amount Nominal value Carrying amount Nominal value EUR EUR EUR 06.05.2029 4.2% to 06.05.2024, thereafter 5Y MS + 4.159% p.a. 19.11.2029 3.65% to 19.11.2024, thereafter 5Y MS + 3.833% p.a. 05.02.2030 3.4% to 05.02.2025, thereafter 5Y MS + 3.658% p.a. 45,867 45,000 45,826 45,000 119,480 120,000 119,376 120,000 122,974 120,000 - - Subordinated bonds Subordinated loans EUR 20.09.2029 3.826% to 20.09.2024, thereafter 5Y IRS + 4.21% p.a. - - 45,367 45,000 Total 288,321 285,000 210,569 210,000 All issued subordinated bonds represent non-convertible Tier 2 instruments c) in priority to the obligations arising from shares or other instruments (note 5.22.). In the event of bankruptcy or liquidation of the issuer, which qualify as Common Equity Tier 1 capital instruments or obligations arising from Tier 2 instruments shall be repaid: additional Tier 1 instruments or have the same priority of repayment as these instruments. Deposit 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 b) Borrowings from banks and central banks and other customers Loans - banks and central banks - other customers - governments - financial organisations - companies Total As at 31 December 2020, NLB Group and NLB had EUR 140,713 thousand in undrawn borrowings (31 December 2019: EUR 344,687 thousand). 52,250 31,298 41,635 86,366 a) after repayment of all unsubordinated obligations of the Issuer as well 13,633,889 9,463,888 8,128,950 6,917,810 307,082 192,224 214,472 134,735 86,276 137,204 69,855 114,836 3,223,612 2,212,002 1,551,952 1,352,522 9,910,971 6,902,679 6,353,518 5,380,597 20,383 11,542 - 2,763,278 2,148,429 721,805 117,428 134,716 398,595 42,909 126,156 299,094 2,112,539 1,680,270 35,515 34,474 192,955 458,861 3,454 842,927 31,027 32,147 175,368 604,385 16,469,800 11,655,157 8,892,390 7,850,557 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 158,225 170,385 143,464 91,560 20,183 70,956 421 64,458 16,657 44,157 3,644 13 - - 13 249,785 234,843 143,477 161,564 2,537 - - 2,537 164,101 as at all subordinated obligations (if any) which are expressed to rank in In September 2019, NLB entered into a loan agreement relating to a EUR priority to Tier 2 instruments; 45 million of subordinated loan intended for the inclusion into additional capital to strengthen and optimise its capital structure. NLB may, according b) with the same priority (pari passu) as, and proportionally with the to valid legislation, only include the loan in calculation of additional capital obligations arising from other instruments which qualify as Tier 2 after obtaining approval from the ECB. As such, approval had not been instruments or have the same priority of repayment as the Tier 2 granted by 23 December 2019, and it was not reasonably expected to be instruments; granted in the near future, NLB announced the prepayment of the loan, which was exercised in January 2020. Movement of subordinated liabilities Balance as at 1 January Effects of translation of foreign operations to presentation currency Cash flow items: - new issued subordinated liabilities - repayments of subordinated liabilities - repayments of interest Non-Cash flow items: - accrued interest - other NLB Group NLB in EUR thousands 2020 210,569 - 67,383 119,222 (45,000) (6,839) 10,369 10,243 126 2019 15,050 6 192,807 208,321 (15,002) (512) 2,706 2,818 (112) 2020 210,569 - 67,383 119,222 (45,000) (6,839) 10,369 10,243 126 2019 - - 208,321 208,321 - - 2,248 2,374 (126) Balance as at 31 December 288,321 210,569 288,321 210,569 135 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020d) Other financial liabilities Memorandum of Understanding signed in 2013 whose intent was to find extraordinary legal measure with the Supreme Court of the Republic of NLB Group NLB in EUR thousands a solution to the transferred foreign currency savings of Ljubljanska banka Croatia. in Croatia (LB) on the basis of the Agreement on Succession Issues. The Items in the course of payment Debit or credit card payables Suppliers Lease liabilities (note 5.11.a) Accrued expenses Accrued salaries Unused annual leave Fees and commissions Liabilities to brokerage firms and others for securities purchase and custody services Other financial liabilities Total Other financial liabilities mainly include liabilities to insurance companies, received warranties, obligation for purchase of securities, and trust services. 5.16. Provisions a) Analysis by type of provisions 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 46,395 22,883 20,993 26,359 21,314 19,068 6,137 1,100 2,459 40,592 207,300 24,124 24,092 21,600 16,713 17,848 13,011 3,784 1,736 433 35,143 158,484 4,412 20,135 15,768 3,212 10,635 9,807 2,497 967 2,443 31,397 101,273 4,960 20,014 16,259 2,784 10,481 9,666 2,455 1,660 181 29,882 98,342 Memorandum also said that the Republic of Croatia would ensure the stay Contrary to the decisions of the court described above in another case, a of all the proceedings commenced by the PBZ and the ZaBa in relation to claim filed by the PBZ was refused and the judgment became final in favour the transferred foreign currency savings until the issue was finally resolved. of NLB. The extraordinary legal measure with the Supreme Court of the Republic of Croatia, filed by the plaintiff, was dismissed by the Supreme Despite the agreement in the Memorandum of Understanding to stay Court on 16 June 2015. all of the proceedings commenced, the Court of Appeal, the County Court of Zagreb, ruled in six claims (as explained below in detail) in In the other cases, with respect to which court procedures described above favour of the plaintiff. In three of those cases, NLB filed a constitutional are pending, final court decisions have not yet been issued. suit after extraordinary legal measure of NLB with the Supreme Court of the Republic of Croatia was not successful, and in three NLB filed an The table below summarises the amounts according to final court decisions (not including penalty interest). Date of the ruling Plaintiff Principal amount Costs of the proceedings Measures taken by NLB May 2015 PBZ 254.76 EUR 15,781.25 HRK April 2018 PBZ 222,426.39 EUR 253,283.37 HRK NLB Group NLB in EUR thousands September 2017 ZaBa 492,430.53 EUR 748,583.75 HRK 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 November 2017 December 2018 PBZ PBZ 220,115.98 EUR 688,268.12 HRK 375,938.42 EUR 679,926.08 HRK March 2019 PBZ 9,185,141.76 USD 3,198,760.00 HRK Constitutional suit against the final judgement, as NLB found the court decision contrary to the legislation in force and constitutional principles and as well contrary to the Memorandum concluded between the Republic of Slovenia and the Republic of Croatia. Constitutional Court of the Republic of Croatia rejected the constitutional appeal of NLB d.d. on 21 May 2018. Constitutional suit against the court decisions (including the decision of the Supreme Court of the Republic of Croatia in the revision proceeding), as NLB found the court decision contrary to the legislation in force and constitutional principles and as well contrary to the Memorandum concluded between the Republic of Slovenia and the Republic of Croatia. Constitutional suit against the court decisions (including the decision of the Supreme Court of the Republic of Croatia in the revision proceeding), as NLB found the court decision contrary to the legislation in force and constitutional principles and as well contrary to the Memorandum concluded between the Republic of Slovenia and the Republic of Croatia. NLB challenged the judgments with the extraordinary legal measure (revision) on the Supreme Count of the Republic of Croatia and later, if necessary, will challenge the judgments with all other available remedies of the obligations of the old foreign currency savings in accordance with Slovenian Constitutional Law are not the liabilities of NLB. NLB challenged the judgment with the extraordinary legal measure (revision) on the Supreme Count of the Republic of Croatia and later, if necessary, will challenge the judgment with all other available remedies of the obligations of the old foreign currency savings in accordance with Slovenian Constitutional Law are not the liabilities of NLB. Provisions for guarantees and commitments (note 5.23.a) Stage 1 Stage 2 Stage 3 Employee benefit provisions Restructuring provisions Provisions for legal risks Other provisions Total 42,174 15,796 2,767 23,611 20,707 15,565 46,602 11 125,059 39,421 12,909 2,444 24,068 17,704 14,500 16,627 162 88,414 28,543 7,510 732 20,301 14,220 15,354 5,673 - 63,790 29,163 6,145 653 22,365 14,743 14,182 2,211 85 60,384 The NLB Shareholders’ Meeting provided the Management Board of NLB with the accrued interest, and shall not compensate NLB for its own costs or with instructions how to act in the event of existing or potential new final for the difference between the book value of its assets sold in enforcement decisions by Croatian courts against LB and NLB regarding the transferred proceedings and the price obtained for such assets in enforcement foreign currency deposits, especially not to voluntarily settle the adjudicated proceedings. There shall be no compensation for any voluntarily made amounts, and also gave some additional instructions on the usage of payments by NLB. In accordance with the ZVKNNLB and pursuant to the Provisions for guarantees and commitments represent expected credit losses In connection with legal risks, the largest amount of material monetary legal remedies and regarding the management of the property from that agreement between NLB and the Fund, as envisaged by the ZVKNNLB in accordance with IFRS 9, employee benefits are recognised in accordance claims relates to civil claims filed by Privredna banka Zagreb (the PBZ) and perspective. with IAS 19, while all other provisions are recognised according to IAS 37. Zagrebačka banka (the ZaBa) against NLB, referring to the old savings of (which was concluded on 14 August 2018), NLB has to contest the claims made against it in court proceedings in relation to transferred foreign LB Branch Zagreb savers, which were transferred to these two banks in a On 19 July 2018, the National Assembly of the Republic of Slovenia passed currency deposits, and use against court decisions that are disadvantageous Legal risks principal amount of approximately EUR 168 million (as per 31 December the ‘Act for Value Protection of Republic of Slovenia’s Capital Investment for NLB, all reasonable legal remedies and to continue to actively challenge Provisions for legal risks are formed based on expectations regarding the 2020). Due to the fact the proceedings had been pending for such a long in Nova Ljubljanska banka d.d., Ljubljana’ (Zakon za zaščito vrednosti the judicial decisions of the courts of the Republic of Croatia in relation probable outcome of legal disputes. As at 31 December 2020, NLB Group time, the penalty interest already exceeds the principal amount. As NLB is kapitalske naložbe Republike Slovenije v Novi Ljubljanski banki d.d., to transferred foreign currency deposits on the basis of which enforcement was involved in 39 (31 December 2019: 31) legal disputes with material not liable for the old foreign currency savings, based on numerous process Ljubljana, hereinafter: ‘the ZVKNNLB’) which entered into force on 14 took place, leading, on the basis of ZVKNNLB, to the compensation of the claims against Group members in the total amount of EUR 292,098 and content-related reasons, NLB has all along objected to these claims. August 2018. In accordance with the ZVKNNLB, the Succession Fund of sums recovered from NLB by enforcement. In the aforementioned case from thousand, excluding accrued interest (31 December 2019: EUR 340,492 Two key reasons NLB is not liable for the old foreign currency savings the Republic of Slovenia (Sklad Republike Slovenije za nasledstvo, javni May 2015, the Succession Fund of the Republic of Slovenia has already thousand). As at 31 December 2020, NLB was involved in 18 (31 December are that it was only founded on the basis of the Constitutional Act on 27 sklad, hereinafter: ‘the Fund’), shall compensate NLB for the sums recovered compensated the sums recovered from NLB by enforcement. 2019: 16) legal disputes with material monetary claims against NLB. The total amount of these claims, excluding accrued interest, was EUR 179,996 July 1994 (at the time the savings were deposited with LB Branch Zagreb, NLB did not yet exist), and NLB did not assume any such obligations. from NLB by enforcement of final judgements delivered by Croatian courts with regard to the transferred foreign currency deposits, that is the All procedures relating to the receivables of PBZ and ZaBa, as well as NLB’s thousand (31 December 2019: EUR 177,075 thousand). Moreover, this is a former Yugoslavia succession matter, as the governments principle amount, accrued interest, expenses of court, attorney’s expenses view on this matter were also discussed with the ECB as the supervisor of of the Republic of Slovenia and the Republic of Croatia agreed in a and other expenses of the plaintiff, and expenses related to enforcement both Croatian banks. 136 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Provisions for legal risks for claims filed by PBZ and ZaBa are not formed, Regardless of the negative judgement, in the financial statements NLB since NLB believes that based on the factual and legal evaluation there are Group did not recognise the negative impact due to protection provided greater prospects for the court proceedings to end in favour of NLB than the by the ZVKNNLB. For final judgements, NLB Group recognised the opposite. liabilities and related assets which currently amount to approximately EUR 21 million. They are included within other financial assets (note 5.6.d) and other financial liabilities (note 5.15.d). b) Movements in provisions for guarantees and commitments NLB 12-month expected credit losses Guarantees and commitments Lifetime ECL not credit-impaired Effects of translation of foreign operations to presentation currency Balance as at 1 Jan 2020 Acquisition of subsidiaries Transfer Increases/ (Decreases) Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2020 Lifetime ECL credit-impaired Guarantees and commitments Of which: Purchased credit-impaired in EUR thousands Guarantees and commitments Balance as at 1 Jan 2020 Transfer Increases/ (Decreases) in EUR thousands Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2020 6,145 653 193 136 947 (418) 22,365 (329) (1,622) 228 363 (97) (3) (2) 7,510 732 (16) 20,301 1,049 659 1,863 (676) (4) 15,796 - (300) (99) 727 - 2,767 NLB Balance as at 1 Jan 2019 Transfer Increases/ (Decreases) in EUR thousands Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2019 Guarantees and commitments 1,984 - 1,838 - (14) 3,808 1,249 (359) (1,293) (40) (15) 23,611 12-month expected credit losses 1,249 - 1,838 - (14) 5,057 Lifetime ECL not credit-impaired Guarantees and commitments 4,071 513 2,223 (663) Effects of translation of foreign operations to presentation currency Balance as at 1 Jan 2019 Transfer Increases/ (Decreases) Changes in models/risk parameters Foreign exchange and other movements Balance as at 31 Dec 2019 in EUR thousands Guarantees and commitments Lifetime ECL credit-impaired Guarantees and commitments Of which: Purchased credit-impaired 821 (261) 28 24,624 (252) (2,013) Guarantees and commitments 688 - 1,296 65 (8) - 8 1 3 - 2,318 2,596 (1,058) (1,721) 655 (597) (2,114) - 1,296 245 (12) - 1 - 14 - 12,909 2,444 24,068 1,984 c) Movements in employee benefit provisions Post-employment benefits Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) 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 NLB Group 2020 15,320 (2) 3,374 983 (560) 76 (151) (878) 18,162 2019 13,157 2 - 1,155 (708) 147 (210) 1,777 15,320 1 - 14 - 6,145 653 22,365 1,984 in EUR thousands NLB 2020 13,165 - - 672 (433) 27 (36) (700) 12,695 2019 11,588 - - 724 (670) 85 (85) 1,523 13,165 NLB Group 12-month expected credit losses Guarantees and commitments 12,909 Lifetime ECL not credit-impaired Guarantees and commitments 2,444 Lifetime ECL credit-impaired Guarantees and commitments 24,068 Of which: Purchased credit-impaired Guarantees and commitments 1,984 (4) (5) 1 - NLB Group 12-month expected credit losses Guarantees and commitments Lifetime ECL not credit-impaired Guarantees and commitments Lifetime ECL credit-impaired 9,044 3,264 Guarantees and commitments 26,774 Of which: Purchased credit-impaired Guarantees and commitments 688 137 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additional provisions (note 4.9.) Provisions released (note 4.9.) Interest expenses (note 4.1.) Utilised during year Balance as at 31 December Other employee benefits include NLB Group’s obligations for jubilee long- service benefits. d) Movements in restructuring provisions Balance as at 1 January Effects of translation of foreign operations to presentation currency Disposal of subsidiaries Additional provisions (note 4.13.) Provisions released (note 4.13.) Utilised during year Balance as at 31 December Other employee benefits NLB Group NLB in EUR thousands f) Movements in other provisions 2020 2,384 (1) 179 234 (112) 24 (163) 2,545 2019 2,247 2 - 329 (35) 37 (196) 2,384 2020 1,578 - - 103 (38) 3 (121) 1,525 2019 1,570 - - 164 - 11 (167) 1,578 Balance as at 1 January Additional provisions (note 4.13.) Provisions released (note 4.13.) Utilised during year Balance as at 31 December 5.17. Deferred income tax a) Analysis by type of deferred income taxes NLB Group NLB in EUR thousands 2020 162 34 (153) (32) 11 2019 209 66 (105) (8) 162 2020 85 - (85) - - 2019 198 - (105) (8) 85 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 NLB Group NLB in EUR thousands 2020 14,500 (1) (50) 3,500 - (2,384) 15,565 2019 12,363 - - 5,523 (45) (3,341) 14,500 2020 14,182 - - 3,500 - (2,328) 15,354 2019 11,942 - - 5,500 - (3,260) 14,182 Deferred income tax assets Valuation of financial instruments and capital investments 37,729 36,286 37,650 36,244 Impairment of financial assets Provisions for liabilities and charges Depreciation and valuation of non-financial assets Fair value adjustments of financial assets measured at amortised cost Tax reliefs Other 3,190 8,489 4,063 938 1,179 111 910 4,109 1,087 - - - 947 3,138 140 - - - 784 3,196 154 - - - Total deferred income tax assets 55,699 42,392 41,875 40,378 Deferred income tax liabilities Valuation of financial instruments Depreciation and valuation of non-financial assets Impairment of financial assets Fair value adjustments of financial assets measured at amortised cost Other Total deferred income tax liabilities Net deferred income tax assets 21,023 1,515 3,271 592 1,984 28,385 31,789 (4,475) 11,159 1,296 3,270 - - 15,725 29,500 (2,833) 11,871 10,131 193 597 - - 12,661 29,214 - 201 477 - - 10,809 29,569 - NLB Group has adopted a business strategy and initiated key strategic digitalisation and simplification, and adjustment of the organisational initiatives, aiming among others towards a leaner organisation, optimisation structure. These initiatives will result in fewer employees in the coming of processes, implementation of a new IT strategy with a focus on years. e) Movements in provisions for legal risks in EUR thousands Net deferred income tax liabilities Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Disposal of subsidiaries Additional provisions (note 4.13.) Provisions released (note 4.13.) Utilised during year Exchange differences Balance as at 31 December NLB Group 2020 16,627 (8) 28,686 (119) 6,355 (1,659) (3,280) - 46,602 2019 13,076 24 - - 5,837 (141) (2,168) (1) 16,627 NLB 2020 2,211 - - - 4,411 (181) (768) - 5,673 2019 2,180 - - - 251 (60) (160) - 2,211 138 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020in EUR thousands in EUR thousands Included in the income statement - valuation of financial instruments and capital investments - impairment of financial assets - provisions for liabilities and charges - depreciation and valuation of non-financial assets - other Included in other comprehensive income - valuation and impairment of financial assets measured at fair value through other comprehensive income - actuarial assumptions and experience NLB Group 2020 3,238 308 3,108 54 (336) 104 (1,619) (1,486) (133) 2019 8,041 8,305 100 293 (657) - (1,714) (1,859) 145 NLB 2020 540 308 163 75 (6) - (895) (762) (133) 2019 8,556 8,305 87 136 28 - (1,221) (1,366) 145 NLB Balance as at 1 January 2019 (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Balance as at 31 December 2019 (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Balance as at 31 December 2020 Deferred income tax liabilities Provisions for liabilities and charges Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets Impairment of financial assets 2,915 136 145 3,196 75 (133) 3,138 25,747 8,190 2,307 36,244 188 1,218 37,650 157 (3) - 154 (14) - 140 697 87 - 784 163 - 947 NLB Group Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets Fair value adjustments of financial assets measured at amortised cost Other Impairment of financial assets Balance as at 1 January 2019 3,305 7,205 1,179 Effects of translation of foreign operations to presentation currency Charged/(credited) to profit and loss 6 (95) 54 2 (115) 4,067 2 115 - Balance as at 31 December 2019 3,270 11,159 1,296 Effects of translation of foreign operations to presentation currency Charged/(credited) to profit and loss Charged/(credited)to other comprehensive income Acquisition of subsidiaries Balance as at 31 December 2020 (7) (861) 696 173 3,271 - (120) 2,030 7,954 (2) 180 - 41 21,023 1,515 - - - - - - - - - - - - - - - - 1,984 1,984 592 592 exceed the total amount of deferred tax assets for which a reversal is arising from the impairments of investments in subsidiaries and associates Charged/(credited) to other comprehensive income Tax loss on which NLB did not recognize deferred tax assets, as at 31 In addition to NLB, Komercijalna banka Beograd also has a significant December 2020 amounts to EUR 922,898 thousand (31 December 2019: amount of tax loss for which no deferred tax assets are recognised. This tax 949,136 thousand). Slovenian tax law does not set deadlines by which loss expires in 2021 and as at 31 December 2020 amounts to EUR 73,898 uncovered tax losses must be utilised, but the use of tax loss is limited to thousand. 50% of the actual tax base. Impairments of investments in non-strategic capital investments, where deferred tax assets are not recognised as they NLB Group did not recognise deferred tax assets on temporary differences expected within five years, amounts to EUR 242,861 thousand (2019: EUR where it is not probable that the temporary difference will reverse in the 291,357 thousand). b) Movements in deferred income taxes Deferred income tax assets foreseeable future. This temporary differences amounts to EUR 347,040 thousand as at 31 December 2020 (31 December 2019: EUR 322,077 thousand). NLB Group Provisions for liabilities and charges Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets Impairment of financial assets Tax relief Fair value adjustments of financial assets measured at amortised cost in EUR thousands Other Total Balance as at 1 January 2019 3,671 25,834 1,627 905 Effects of translation of foreign operations to presentation currency (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income - 293 145 - 8,190 2,262 2 (542) - Balance as at 31 December 2019 4,109 36,286 1,087 Effects of translation of foreign operations to presentation currency (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Acquisition of subsidiaries Balance as at 31 December 2020 4 54 (133) 4,455 8,489 - 188 1,240 15 37,729 - (156) 2,247 - 3,132 4,063 - 31 3,190 - 5 - 910 2 - - - - - - - - - - - - - - - - 1,179 1,179 938 938 - - - - - - 104 - 7 32,037 2 7,946 2,407 42,392 6 2,437 1,107 9,757 111 55,699 NLB Balance as at 1 January 2019 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2019 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2020 Impairment of financial assets Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets 444 - 33 477 - 120 597 6,606 (115) 3,640 10,131 (120) 1,860 11,871 232 (31) - 201 (8) - 193 in EUR thousands Total 7,282 (146) 3,673 10,809 (128) 1,980 12,661 Total 29,516 8,410 2,452 40,378 412 1,085 41,875 in EUR thousands Total 11,689 10 (95) 4,121 15,725 (9) (801) 2,726 10,744 28,385 139 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20205.18. Income tax relating to components of other comprehensive income in the aggregate, directly or indirectly 25% or more NLB shares with voting 5.21. Accumulated other comprehensive income and reserves NLB Group NLB in EUR thousands rights. a) Reserves The share premium account as at 31 December 2020 and 31 December 2020 Before tax Tax expense Net of tax Before tax Tax expense Net of tax Actuarial gains and losses Financial assets measured at fair value through other comprehensive income 878 (133) 10,364 (1,486) 745 8,878 Share of associates and joint ventures (11,067) - (11,067) 175 (1,619) (1,444) 700 4,012 - 4,712 (133) (762) - (895) 567 3,250 - 3,817 The shares also give their holders the right to be informed, as well as the 2019 comprises paid-up premiums in the amount of EUR 822,173 pre-emptive right to subscribe for new shares on a pro rata basis in case of thousand and the revaluation of share capital from previous years in the a share capital increase, the right to a pro-rata share of remaining assets amount of EUR 49,205 thousand. in case of bankruptcy or liquidation or NLB and the right to receive a dividend. In 2020, NLB did not pay any dividends for previous year (2019: As at 31 December 2020 and 31 December 2019, profit reserves in the 7.13 EUR per share, which decreased retained earnings for EUR 142,600 amount of EUR 13,522 thousand relate entirely to legal reserves in thousand). accordance with the Companies Act. Total 2019 Actuarial gains and losses Financial assets measured at fair value through other comprehensive income Share of associates and joint ventures Total NLB Group NLB Board that in the period of 36 months from the adoption of the retained earnings as at 31 December 2020. in EUR thousands In June 2019, the General Assembly of NLB authorised the Management thousand (2019: net profit EUR 176,149 thousand) which is included in the As at 31 December 2020 and 31 December 2019, NLB holds no own shares. In 2020, NLB recorded a net profit in the amount of EUR 113,952 Before tax Tax expense Net of tax Before tax Tax expense Net of tax shareholders’ resolution, it can buy own shares of the Bank for the payment of variable remuneration to certain employees as required by the Banking (1,777) 13,413 9,673 21,309 145 (1,859) (1,854) (3,568) (1,632) 11,554 7,819 17,741 (1,523) 145 (1,378) Act and other relevant regulations. When disposing of own shares which 7,190 (1,366) - - 5,667 (1,221) 5,824 - 4,446 NLB acquires on the basis of this authorisation, the pre-emptive right of the existing shareholders to acquire shares is completely excluded, provided that own shares are disposed of for the purpose of paying variable remuneration to employees of NLB in the form of NLB shares. 5.19. Other liabilities b) Accumulated other comprehensive income NLB Group NLB in EUR thousands NLB Group NLB in EUR thousands Deferred income Taxes payable Payments received in advance Other liabilities Total 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 12,364 5,009 2,195 859 9,012 4,209 1,991 - 20,427 15,212 5,391 4,107 199 - 9,697 6,142 3,039 53 - 9,234 Financial assets measured at fair value through other comprehensive income - debt securities Financial assets measured at fair value through other comprehensive income - equity securities Actuarial defined benefit pension plans Foreign currency translation Hedge of a net investment in a foreign operation Total 38,852 3,644 (4,399) 45,040 2,840 (5,086) (17,724) (17,055) 754 21,127 754 26,493 27,242 452 (3,592) - - 24,156 288 (4,159) - - 24,102 20,285 5.20. Share capital restrictions imposed by the regulators, Group’s risk appetite, target capital The share capital of NLB amounts to EUR 200,000 thousand and did adequacy at Group’s level and actual prevailing capital position at the time not change in 2020. It is comprised of 20,000,000 no-par-value ordinary of the proposal. 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. The shares give to their holders the right to vote at the NLB’s meeting of As at 31 December 2020, the major shareholder of NLB with significant shareholders where, as a rule, each share entitles its holder to one vote. influence is the Republic of Slovenia, owning 25.00% plus one share. Nevertheless, a shareholder who acquires shares which, together with the shares already held by such shareholder or by a third person on behalf of The book value of a NLB share on a consolidated level as at 31 December such shareholder, represent more than 25% of the NLB’s share capital, 2020 was EUR 97.6 (31 December 2019: EUR 84.3), and on solo level may only exercise its voting rights under such shares if NLB’s Supervisory was EUR 72.5 (31 December 2019: EUR 66.7). It is calculated as the ratio Board approves such an acquisition. The Supervisory Board’s approval may of net assets’ book value without other equity instruments issued and the only be rejected if, following such an acquisition, such a person would hold number of shares. shares representing more than 25% of NLB’s issued share capital plus one share. The approval shall be considered given if not expressly rejected in 20 Distributable profit as at 31 December 2020 amounts to EUR 341,992 days. No such approval is necessary in respect of the shares acquired by a thousand (31 December 2019: EUR 228,040 thousand), consists of NLB person on behalf of third persons provided that such a person is not entitled net profit for 2020 in the amount of EUR 113,952 thousand (2019: EUR to exercise the voting rights arising out of such shares at its own discretion 176,149 thousand), and retained earnings from previous years in the amount of EUR 228,040 thousand. Its allocation will be subject to a decision by and undertakes to NLB that it will not exercise the voting rights based on voting instructions unless such voting instructions are accompanied with a the Bank’s General Assembly. The proposal for the General Assembly will confirmation that the person giving such instructions is the beneficial owner be prepared by the Management and the Supervisory Board, considering of the shares in respect of which votes are to be exercised and does not hold 140 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20205.22. Capital adequacy ratios in EUR thousands NLB’s overall capital requirement on the consolidated level NLB Group NLB SREP requirement 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Paid up capital instruments Share premium Retained earnings - from previous years Profit eligible - from current year Accumulated other comprehensive income Other reserves Minority interest Prudential filters: Additional Valuation Adjustments (AVA) (-) Goodwill (-) Other intangible assets 200,000 871,378 552,146 63,635 21,588 13,522 71,562 (3,632) (3,529) 200,000 871,378 358,648 35,000 14,364 13,522 - (2,194) (3,529) 200,000 871,378 228,040 21,658 24,102 13,522 - 200,000 871,378 51,891 8,166 20,285 13,522 - (1,755) (1,701) - - (33,222) (36,013) (9,914) (25,980) COMMON EQUITY TIER 1 CAPITAL (CET1) 1,753,448 1,451,176 1,347,031 1,137,561 Minority interest Additional Tier 1 capital TIER 1 CAPITAL Capital instruments and subordinated loans eligible as Tier 2 capital Minority interest TIER 2 CAPITAL TOTAL CAPITAL RWA for credit risk RWA for market risks RWA for credit valuation adjustment risk RWA for operational risk 14,614 14,614 - - - - - - 284,595 12,806 297,401 44,595 284,595 44,595 - - - 44,595 284,595 44,595 2,065,463 1,495,771 1,631,626 1,182,156 10,222,923 7,720,232 4,805,127 4,344,829 1,250,563 523,050 657,088 274,025 200 663 200 663 Pillar 1 (P1R) Pillar 2 (P2R) Total SREP Capital Requirement (TSCR) Combined buffer requirement (CBR) Conservation buffer O-SII buffer Countercyclical buffer Pillar 2 Guidance (P2G) OCR + P2G 1,768,062 1,451,176 1,347,031 1,137,561 Overall capital requirement (OCR) = MDA threshold from 12 March 2020 onwards as at 1 January till 11 March 2020 CET1 AT1 T2 CET1 Tier 1 Total Capital CET1 Tier 1 4.5% 1.5% 2.0% 1.55% 2.06% 2.75% 6.05% 8.06% Total Capital 10.75% CET1 CET1 CET1 CET1 Tier 1 Total Capital CET1 CET1 2.5% 1.0% 0.0% 9.55% 11.56% 14.25% 1.0% 10.55% 4.5% 1.5% 2.0% 0.0% 0.0% 2.75% 7.25% 8.75% 10.75% 2.5% 1.0% 0.0% 10.75% 12.25% 14.25% 1.0% 11.75% 2019 4.5% 1.5% 2.0% 0.0% 0.0% 3.25% 7.75% 9.25% 11.25% 2.5% 1.0% 0.0% 11.25% 12.75% 14.75% 1.0% 12.25% The Overall Capital Requirement (OCR) amounted to 14.25% for NLB on Non-controlling interest (minority capital) was included in the capital - as at the consolidated basis, consisting of: June 2020 in the amount of EUR 31.7 million and as at December 2020 in the total amount of EUR 99.0 million (of which EUR 66.1 million due to 947,342 941,594 566,385 605,581 • 10.75% TSCR (8% Pillar 1 Requirement and 2.75% Pillar 2 the acquisition of Komercijalna banka Beograd). In addition, risk mitigation TOTAL RISK EXPOSURE AMOUNT (RWA) 12,421,028 9,185,539 6,028,800 5,225,098 Common Equity Tier 1 Ratio Tier 1 Ratio Total Capital Ratio 14.1% 14.2% 16.6% 15.8% 15.8% 16.3% 22.3% 22.3% 27.1% 21.8% 21.8% 22.6% Requirement); and contracts to reduce RWA on consolidated basis were concluded with MIGA • 3.5% CBR (2.5% Capital Conservation buffer, 1% O-SII buffer and 0% in the total amount of up to EUR 303.1 million and became effective as at Countercyclical buffer). 31 July 2020. The applicable OCR requirement for 2020 decreased from 14.75% to The capital of NLB and NLB Group at the end of year 2020 remains strong 14.25%, as Pillar 2 Requirement decreased by 0.5 p.p. to 2.75%, as a result in accordance with risk appetite orientations, at a level which covers all the of better overall SREP assessment. Moreover, Pillar 2 Guidance (P2G) current and announced regulatory capital requirements, including capital which should be comprised entirely of CET1 capital, remains at a relatively buffers and other currently known requirements, as well as the P2G. European banking capital legislation – CRD IV, is based on the Basel III (together with the Pillar 1 requirement it represents the minimum total low level 1.0%. guidelines. The legislation defines three capital ratios reflecting a different SREP capital requirement – TSCR); As at 31 December 2020, NLB Group capital ratios on a consolidated basis quality of capital: • The applicable combined buffer requirement (CBR): a system of capital In 2021, NLB is required to maintain the same level of OCR at 14.25% on stand at: • Common Equity Tier 1 ratio (ratio between common or CET1 capital breach of capital requirement, but triggers limitations in payment of • 14.1% CET1 ratio, and risk-weighted exposure amount or RWA), which must be at least dividends and other distributions from capital. Some of the buffers are In 2020, the Bank continued with strengthening and optimising the capital • 14.2% Tier 1 ratio, 4.5%; prescribed by law for all banks and some of them are bank-specific, set structure. On 5 February 2020, the Bank issued subordinated Tier 2 notes • 16.6% Total Capital ratio. • Tier 1 capital ratio (Tier 1 capital to RWA), which must be at least 6%; by the supervisory institution (CBR and TSCR together form the overall (10NC5) in the aggregate nominal amount of EUR 120 million. On 25 buffers to be added on top of TSCR – breaching of the CBR is not a a consolidated basis, with unchanged structure. and capital requirement – OCR); March 2020, NLB obtained ECB permission for its inclusion in the capital, In the scope of regulatory risks, which include credit risk, operational risk, • Total capital ratio (total capital to RWA), which must be at least 8%. • Pillar 2 Capital Guidance: capital recommendation set by the supervisory so the instrument is included in capital as at 31 March 2020. and market risk, NLB Group uses the standardised approach for credit and In addition to the aforementioned ratios which form the Pillar 1 recommendation, and not obligatory. Any non-compliance does not affect On 4 March 2020, the Bank also obtained ECB permission to include in the risks is made according to the basic indicator approach. The same requirement, NLB must meet other requirements and recommendations dividends or other distributions from capital; however, it might lead to capital subordinated Tier 2 notes issued in November 2019 in the amount approaches are used for calculating the capital requirements for NLB on a that are imposed by the supervisory institutions or by the legislation: intensified supervision and the imposition of measures to re-establish a prudent level of capital (including preparation of capital restoration plan). of EUR 120 million. All the existing subordinated Tier 2 instruments in total amount of EUR 284.6 million are therefore included in the capital. standalone basis, except for the calculation of the capital requirement for operational risks where the standardised approach is used. institution through the SREP process. It is bank-specific and is a market risks, while the calculation of capital requirement for operational • The Pillar 2 Requirement (SREP requirement): bank-specific, obligatory requirement set by the supervisory institution through the SREP process 141 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020As at 31 December 2020, the Total Capital Ratio for NLB Group stood at The increase in RWA for market risks and CVA (EUR 727.1 million YoY) b) Analysis of derivative financial instruments by notional amounts 16.6% (or 0.3 p.p. higher than at the end of 2019), and for NLB at 27.1% is also mainly due to completion of the acquisition process of Komercijalna (or 4.4 p.p. higher than at the end of 2019). As at 31 December 2020, the banka Beograd. The increase in the RWA for operating risks (EUR 5.7 CET1 ratio stood at 14.1% (1.7 p.p. lower than at the end of 2019). The million) derives from the higher three-year average of relevant income, higher NLB Group total capital adequacy compared to the end of 2019 as defined in Article 316 of CRR, which represents the basis for the derives from higher capital (increase of EUR 569.7 million YoY) which calculation. compensated RWA increase of EUR 3,235.5 million YoY for the Group. Higher RWA derives from acquisition of Komercijalna banka Beograd. The most important goal of internal capital adequacy assessment process Total capital increased mainly due to inclusion of the Tier 2 notes (EUR (ICAAP) in NLB Group, set up in accordance with ECB Guidelines, is 240.0 million), inclusion of undistributed profit for the year 2019 (EUR ensuring adequate capital and sustainability on ongoing basis. The purpose 157.5 million), partial inclusion of 2020 profit (EUR 63.6 million), and of this process is to have in place sound, effective, and comprehensive inclusion of a minority interest in the capital calculation from June 2020 strategies and processes to assess and maintain capital on an ongoing onwards (EUR 99.0 million as at 31 December 2020). basis, as well the adequate distribution of internal capital for covering the The RWA for credit risk in 2020 increased by EUR 2,502.7 million, In addition, NLB Group gives strong emphasis on its integration into the mainly due to completion of the acquisition process of Komercijalna overall risk management system in order to assure proactive support for nature and level of the risks to which NLB Group is or might be exposed. banka Beograd. Excluding the acquisition, RWA for credit risk decreased informed decision-making. by EUR 173.9 million as the result of changes in regulation CRR and MIGA guarantee for obligatory reserves in NLB Group banking members. From an economic perspective, NLB Group manages its capital adequacy CRR ‘Quick Fix’ brought more favourable treatment of SME exposures by ensuring that all its risks are adequately covered by internal capital. A (changes of prescribed SME supporting factor) and temporary treatment of normative perspective is a multiyear forward-looking assessment of NLB Swaps - currency swaps - interest rate swaps Options - interest rate options - securities options Forward contracts - currency forward Total NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Short-term Long-term Short-term Long-term Short-term Long-term Short-term Long-term 99,420 1,425,765 42,736 1,706,073 78,413 1,425,765 52,299 1,706,073 99,420 6,068 42,736 69,328 78,413 6,068 52,299 69,328 - 1,419,697 - 1,636,745 - 1,419,697 - 1,636,745 12,811 27,000 12,864 28,875 12,811 27,000 12,864 28,875 - 27,000 - 28,875 - 27,000 - 28,875 12,811 - 12,864 - 12,811 - 12,864 - 91,309 41,423 108,640 28,298 93,846 41,423 107,936 28,298 91,309 41,423 108,640 28,298 93,846 41,423 107,936 28,298 203,540 1,494,188 164,240 1,763,246 185,070 1,494,188 173,099 1,763,246 1,697,728 1,927,486 1,679,258 1,936,345 public debt issued in the currency of another Member State. Furthermore, Group which shows its ability to fulfil all of its capital-related regulatory and The notional amounts of derivative financial instruments that qualify The fair values of derivative financial instruments are disclosed in notes 5.2. inclusion of Serbia on the list of third countries whose supervisory and supervisory requirements and risk appetite of NLB Group. Within these for hedge accounting at NLB Group and NLB amount to EUR 573,753 and 5.5. regulatory requirements are considered equivalent as EEA countries capital constraints, NLB Group defines its management buffers in the Risk thousand (31 December 2019: EUR 561,500 thousand) (note 5.5.b). contributed significantly to RWA reduction at the beginning of 2020 (EUR appetite above the regulatory and supervisory requirement and internal Derivatives that qualify for hedge accounting are used to hedge interest rate 100.0 million). Due to changed treatment of intangible assets, which were capital needs that allow it to sustainably follow its business strategy. A risk. previously deducted from capital in whole and now are partially included in normative perspective includes several stress scenarios which are integrated RWA, RWA increased by EUR 24.9 million. into NLB Group’s annual business plan review and budgeting process. c) Capital commitments NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 2,433 9,566 11,999 7,286 2,122 9,408 2,429 9,403 11,832 7,201 2,084 9,285 5.23. Off-balance sheet liabilities a) Contractual amounts of off-balance sheet financial instruments NLB Group NLB Capital commitments for purchase of: in EUR thousands Short-term guarantees - financial - non-financial Long-term guarantees - financial - non-financial 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 222,440 119,309 103,131 904,002 359,787 544,215 210,469 111,526 98,943 705,989 272,071 433,918 122,136 112,461 61,322 60,814 567,532 196,681 370,851 58,920 53,541 502,012 171,989 330,023 - property and equipment - intangible assets Total 5.24. Funds managed on behalf of third parties are charged to the respective fund, and no liability falls on NLB Group in Funds managed on behalf of third parties are accounted separately from connection with these transactions. NLB Group charges fees for its services. NLB Group’s funds. Income and expenses arising with respect to these funds Commitments to extend credit 1,816,441 1,346,012 1,306,791 1,072,458 Funds managed on behalf of third parties Letters of credit Other Provisions (note 5.16.b) Total 21,794 10,293 22,871 8,742 2,256 5,865 6,243 14,106 2,974,970 2,294,083 2,004,580 1,707,280 (42,174) (39,421) (28,543) (29,163) 2,932,796 2,254,662 1,976,037 1,678,117 Fiduciary activities Settlement and other services Total NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 25,713,799 24,495,725 24,466,910 23,259,665 971,600 1,012,492 907,132 980,964 26,685,399 25,508,217 25,374,042 24,240,629 Fee income from all issued non-financial guarantees amounted to EUR signed, bank and a client agree on all conditions for issuing guarantees. 4,910 thousand (2019: EUR 4,801 thousand) in NLB Group, and to EUR Nevertheless, NLB Group can discontinue issuing guarantees if the client’s 4,397 thousand (2019: EUR 4,375 thousand) in NLB. conditions worsen. As at 31 December 2020 unused guarantee lines at the NLB Group level amount to EUR 307,093 thousand (31 December 2019: Besides the instruments presented in the table above, NLB Group and NLB EUR 307,199 thousand), and at the NLB level EUR 236,542 thousand (31 enter also into contracts related to guarantee lines. When the contract is December 2019: EUR 247,485 thousand). 142 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Fiduciary activities Assets Clearing or transaction account claims for client assets 25,633,706 24,431,766 24,396,203 23,202,008 - from financial instruments 25,630,244 24,431,355 24,392,773 23,201,641 NLB Group NLB 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 in EUR thousands 6. Risk management NLB Group plans a prudent risk profile and optimal capital usage, representing an important element of its business strategy and related mid- Risk management in NLB Group is implemented in accordance with the term financial targets. The management of credit risk, which is the most set strategic guidelines, established internal policies and procedures which important risk category in NLB Group, concentrates on taking moderate take into account European banking regulations, the regulations adopted risks – a diversified credit portfolio, adequate credit portfolio quality, the by the Bank of Slovenia, the current EBA guidelines, and relevant good sustainable costs of risk, and ensuring an optimal return considering the banking practices. In addition, the Group is constantly enhancing and risks assumed. As regards liquidity risk, the tolerance is low, while the complementing the existing approaches, methodologies, and processes in all activities are geared towards an adequate liquidity position on an ongoing risk management segments with the aim to proactively and comprehensively basis. The Group limited exposure to credit spread risk, arising from the - receipt, processing, and execution of orders 9,194,539 9,574,811 8,502,331 8,930,064 support decision-making. - management of financial instruments portfolio 528,206 522,263 - - valuation risk of debt securities portfolio servicing as liquidity reserves, to the moderate level. The fundamental orientation in the management - custody services 15,907,499 14,334,281 15,890,442 14,271,577 - 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 49 3,413 80,094 42,029 38,065 124 287 63,959 28,250 35,709 17 3,413 70,707 32,642 38,065 80 287 57,657 21,948 35,709 Managing risks and capital efficiently is crucial for NLB Group sustained of interest rate risk is to limit unexpected negative effects on revenues long-term profitable operations. Robust Risk Management framework is and capital, therefore, a moderate tolerance for this risk is stated. When comprehensively integrated into decision-making, steering, and mitigation assuming operational risk, the Group pursues the orientation that such a risk processes within the Group. NLB Group gives high importance to the risk must not significantly impact its operations. On this basis, changes of control culture and awareness of all relevant risks within the entire Group. activities, processes, and/or organisation were performed. Besides the NLB Group’s Risk management framework supports business decision- of potential damage. The conclusion of transactions in derivative financial making on strategic and operating levels, comprehensive steering, proactive instruments at NLB is primarily limited to servicing customers and hedging risk management and mitigation by incorporating: Bank’s own positions. In the area of currency risk, NLB Group pursues Group also focuses on proactive mitigation, prevention, and minimisation the goals of low to moderate exposure. The tolerance for other risk types Clearing or transaction liabilities for client assets 25,713,799 24,495,725 24,466,910 23,259,665 • risk appetite statement and risk strategy orientations, is low and focuses on minimising their possible impacts on NLB Group’s - to client from cash and financial instruments - receipt, processing, and execution of orders 25,707,581 24,492,746 24,461,033 23,258,161 9,230,406 9,606,633 8,538,198 8,961,886 • yearly review of strategic business goals, budgeting, and capital planning entire operations. Environmental, social, and governance (ESG) risks do process, not represent a new risk category, but rather an aggravating factor for the • internal capital adequacy assessment process (ICAAP) and internal types of risks already managed through the established risk management - management of financial instruments portfolio 537,283 527,134 - - liquidity adequacy assessment process (ILAAP), framework. - custody services 15,939,892 14,358,979 15,922,835 14,296,275 • recovery plan activities, - 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. 72 5,755 391 83 2,514 382 72 5,414 391 83 1,039 382 • other internal stress-testing capabilities, early warning systems and on- Risk management focuses on managing and mitigating risks in line with going risk analysis, the Group’s Risk Appetite and Risk Strategy. Within these frameworks, the • regulatory and internal management reporting. Group monitors a range of risk metrics, including internal capital allocation, NLB Group uses the ‘three lines of defence framework’ as an important usage of risk limits and potential deviations from limits and target values are element of its internal governance, whereby Risk management function acts regularly reported to the respective committees and/or the Management in order to assure Group’s risk profile is in line with its risk appetite. The Fee income for funds managed on behalf of third parties NLB Group NLB they support business operations and enable efficient risk management by in EUR thousands as a second line of defence. Set governance and different risk management Board of the Bank. The banking subsidiaries within NLB Group adapted a tools enable adequate oversight of the Group’s risk profile. Moreover, corresponding approach to monitor and manage their target risk profiles. Fiduciary activities (note 4.3.b) Settlement and other services Total 2020 9,812 925 2019 9,267 1,435 10,737 10,702 2020 8,494 864 9,358 2019 7,775 1,185 8,960 incorporating escalation procedures and different mitigation measures when NLB Group established a comprehensive stress-testing framework and other necessary. a) Risk management strategies and processes early warning systems in different risk areas with the intention to strengthen the existing internal controls and timely responding when necessary. Robust and uniform stress-testing programme includes all material types of risk The key goal of NLB Group’s Risk Management is to proactively and relevant stress scenario analysis, according to the vulnerability of the manage, assess, and monitor risks within the Group. Sound and Group’s business model. It is integrated into Risk appetite, ICAAP, ILAAP, holistic understanding of risk management is embedded into the entire Recovery Plan, and budgeting process to support proactive management organisation, focusing on risk identification at a very early stage, efficient risk of the Group’s risk profile, namely the capital and liquidity positions on a management, and mitigation of them with the aim of ensuring the prudent forward-looking perspective. In addition, the Group also performs reverse use of its capital and adequate liquidity structure to support the financial stress tests with the aim to test its maximum recovery capacity. Other partial resilience of the Group. risk assessments are covered by the sensitivity analysis, based on relevant stressed risk parameters, and integrated into the process of setting a risk Key risk management guidelines of NLB Group are defined by its Risk management limit system. Appetite and Risk Strategy regarding the Group’s business model, based on a forward-looking perspective. The Strategy of NLB Group, the Risk For the purpose of an efficient risk mitigation process, NLB Group Appetite, Risk Strategy, and the key internal policies of NLB Group – which applies a single set of standards to retail and corporate loan collateral, are approved by the Management and Supervisory Boards – specify the representing a secondary source of repayment with the aim of efficient strategic goals, risk appetite guidelines, approaches, and methodologies for credit risk management and optimal capital consumption. The Group has monitoring, measuring, and managing all types of risk in order to meet internal strategic objectives and fulfil all external requirements. The main a system for monitoring and reporting collateral at fair (market) value in accordance with the International Valuation Standards (IVS). The eligibility strategic risk guidelines are comprehensively integrated into decision- of collateral, by types and ratios referring to prudent lending criteria, is making, including the annual business plan review and budgeting process. set within internal lending guidelines. Credit risk mitigation principles and 143 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020rules in NLB Group are described in more relevant details in the section Committee of NLB. The process follows the co-decision principle, in which d) Data and IT system profile was moderate. The harmonisation in the area of the Group’s risk Credit risk management. When hedging market risks, namely interest rate the credit committee of the respective Group member first approves their Risk data are calculated and stored in NLB Group Data Warehouse (DWH), management framework and uniform data flow, based on Group’s Risk risk and foreign exchange risk, in line with the set risk appetite, NLB Group decision, following which the Credit Committee of NLB gives their opinion. collected from NLB and other Group member’s DWH. The established management Standards, is underway. follows the principle of natural hedge or using derivatives in line with hedge The resolution of the Credit Committee of NLB is made on the basis of all process provides an integrated information in common reference structure accounting principles. available documentation, including a non-binding rating opinion prepared where business users can access in a consistent and subject-oriented format. 6.1. Credit risk management by the underwriting department of NLB. This same principle and process Data are regularly checked and validated. Data used for internal risk a) Introduction b) Risk management structure and organisation is set also for the issuing of credit exposures for the materially important assessment, management, and reporting are the same as data which NLB In its operations, NLB Group is exposed to credit risk, or the risk of losses NLB Group’s corporate governance framework is based on the principles clients of NLB Group. Group uses for regulatory reporting. of sound and responsible governance, in accordance with the applicable legislation of the Republic of Slovenia, particularly the provisions of the Risk monitoring in NLB Group members is operating within an e) Main emphasis of risk management in 2020 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 Companies Act (ZGD-1) and the Banking Act (ZBan-2), Regulation on independent and/or separate organisational unit. This way, monitoring Efficient managing of risks and capital remains crucial for NLB Group to Financial Reporting Standards, regulations issued by the European Central Internal Governance Arrangements, the Management Body, and the of risks is established on the basis of standardised and systemic risk sustain long-term profitable operations. The Group further enhanced the Bank or Bank of Slovenia, and the EBA guidelines. This area is governed Internal Capital Adequacy Assessment Process for Banks and Savings management approaches. This monitoring enables a comprehensive robustness of its risk management system in all respective risk categories in greater detail by the internal methodologies and procedures set out in Banks, the EBA Guidelines on internal governance, the EBA Guidelines overview of the Group’s and of each member’s statement of financial in order to manage them proactively, comprehensively, and prudently. internal acts. on the assessment of the suitability of members of the management body, position. In compliance with the risk appetite, risk management strategy Risk identification in a very early stage, its efficient managing, and the and key function holders, as well as the EBA Guidelines on remuneration and policies of NLB Group, risk monitoring in each NLB Group member corresponding mitigation processes represent essential steps in such a Through regular reviews of the business practices and the credit portfolios practices. Several layers of management provide cohesive risk management is separated from its management and/or business function in order to system. The business and operating environment relevant for NLB Group of NLB entities, NLB ensures that the credit risk management of those governance in NLB Group. maintain the objectivity required when assessing business decisions. The operations is changing with trends, such as: changing customer behaviour, entities function in accordance with NLB Group’s risk management organisational unit for managing risks directly reports to the Management emerging new technologies and competitors, sustainable financing, and standards to enable meaningfully uniform procedures at the consolidated NLB Group established three lines of a defence framework with the aim Board and its committees (Credit Committee, ALCO and the Operational increasing new regulatory requirements. With that in mind, the risk level. of managing risks effectively. The three lines of defence concept provides Risk Committee), which report to the Supervisory Board (the Risk management framework is continuously adapting with the aim to detect and a clear division of activities and defines roles and responsibilities for risk Committee of the Supervisory Board or Board of Directors). manage new potential emerging risks. NLB Group manages credit risk at two levels: management at different levels within the Group. Risk management in the Group acts as a second line of defence, accountable for appropriate c) Risk measurement and reporting systems The Group gives special focus on the inclusion of risk analysis into the • At the level of the individual customer/group of customers appropriate managing, assessing, monitoring, and reporting of risks in the Bank as As a systemic banking group, NLB Group is subject to the Single decision-making process on strategic and operating levels, diversification procedures are followed in various phases of the relationship with a the main entity in Slovenia, and as the competence centre in charge of Supervisory Mechanism (SSM), which is supervised by the Joint Supervisory in order to avoid a large concentration, optimal usage of internal capital, customer prior to, during, and after the conclusion of an agreement. nine banking members and other non-core subsidiaries which are in Team of the ECB and the Bank of Slovenia. The Group member complies appropriate risk-adjusted pricing, regular education/trainings at all levels Prior to concluding an agreement, a customer’s performance, financial the controlled wind-out. As at 30 December 2020, the acquisition of with the ECB regulation, while NLB Group subsidiaries operating outside of management, and the assurance of overall compliance with internal position, and past cooperation with NLB are assessed. For the purpose of Komercijalna banka Beograd was completed. The harmonisation in the Slovenia are also compliant with the rules set by the local regulators. With policies/rules and relevant regulations. area of the Group’s risk management framework and uniform data flow, regards to capital adequacy, based on the provisions of the Directive (CRD), objectively assessing a client’s operation comprehensively, internal scoring models for particular client segments have been developed. It is also based on Group’s Risk management Standards, is ongoing. Decision (CRR), NLB Group applies the standardised approach to credit The overall slow-down of the economy caused by the COVID-19 pandemic important to secure high-quality collateral even though it does not affect a and market risk, and the basic approach (a simplified approach with less had some negative impacts on the loan portfolio quality and new loan customer’s credit rating. This is followed by various forms of monitoring Overall, the organisation and delineation of competencies in NLB Group’s data granularity) to operational risks, with the exception of NLB which generation. Nevertheless, the rating structure of credit portfolio remained a customer, in particular an assessment of its ability to generate sufficient risk management structure is designed to prevent conflicts of interest and applies the standardised approach. relatively stable, as well its structure stayed diversified. The cost of risk cash flows for the regular settlement of its liabilities and contractual ensure a transparent and documented decision-making process, subject to an increased due to the impact of worsened macroeconomic environment, obligations. In this part of the credit process, regular monitoring of clients appropriate upward and downward flow of information. Risk management Across the Group, risks are assessed, monitored, managed, or mitigated in where its materiality and impacts on the risk profile of the loan portfolio within the Early Warning System (EWS) is important. In the case of client in NLB Group is managed within the Risk management business-line, which a uniform manner, as defined in the Group’s Risk management standards, in the future will mostly depend on the length and severity of disruption in default, restructuring or work-out is initiated depending on the severity of is a specialised business-line encompassing several professional areas, for considering also the specifics of the markets in which individual NLB corporate operations and the average income of private individuals. From the client’s position. which the Global Risk Department, the Corporate and the Retail Credit Group members operate. For the purposes of measuring exposure to the beginning of the COVID-19 pandemic NLB Group has complied Analysis Department, and the Evaluation and Control Department are credit risk, liquidity risk, interest rate risk in the banking book, valuation with EBA guidelines on payment moratoria regarding forborne exposures, • The quality and trends in the credit portfolio, including on-balance and responsible within NLB, and which reports to the Assets and Liabilities risk, operational risk, market risk, and non-financial risks, in addition to namely by frequently performing the assessment of borrowers and ensuring off-balance sheet exposures, are actively monitored and analysed at the Committee (ALCO) of the Management Board and the Risk Committee of the prescribed regulations, NLB Group uses internal methodologies and effective early warning systems. In contrast, the Group faced growing excess level of the overall portfolio of NLB Group and NLB. the Supervisory Board. The Risk management business line is in charge of approaches that enable more detailed monitoring and management of liquidity, impacts of the pandemic did not cause any material liquidity formulating and controlling the risk management policies of NLB Group, risks. These internal methodologies are aligned with ECB, EBA and Basel outflows. Following the indications of the outbreak of COVID-19 in Comprehensive analyses are regularly performed to assure monitoring of setting limits, establishing methodologies, overseeing the harmonisation of guidelines, as well as best practices in banking methodologies. Following the Slovenia and SEE, the Group has taken necessary measures to protect its the portfolio quality through time and to identify any breach of limits or risk management policies within the NLB Group, monitoring NLB Group’s acquisition of Komercijalna banka group, the harmonisation process in the customers and employees by ensuring the relevant safety conditions and targets. Great emphasis is placed on the evolution of portfolio structure risk exposures, and preparing external and internal reports. area of risk management is underway. making sure that the services offered by the Group are provided without any in terms of client segmentation, credit rating structure, structure by stages All members of NLB Group, which are included in the financial As for risk reporting, NLB Group’s internal guidelines reflect, in addition to with higher frequency than before crises to assure adequate and timely is an important indicator of potential future losses that has to be closely statements of NLB Group, report their exposure to risks to the competent internal requirements, the substance and frequency of reporting required oversight over the critical elements of risk management and executing monitored. organisational units within the Risk management business line. These by the Bank of Slovenia and the ECB. In addition, each member of NLB mitigation measures if needed. organisational units then report all relevant risk information to the Assets Group also complies with the requirements of its local regulations. Risk In light of the COVID-19 circumstances in 2020, a detailed monitoring and Liabilities Committee (ALCO) of the Management Board and the Risk reporting is carried out in the form of standardised reports, pursuant to As at 30 December 2020, the acquisition of Komercijalna banka of COVID-19-related transactions has been initiated. The Bank Committee of the Supervisory Board, which is where the Management risk management policies based on common methodologies for measuring Beograd was completed. NLB Group, including Komercijalna banka monitors COVID-19-related moratoria in terms of the type of moratoria Board and the Supervisory Board, adopt appropriate measures. exposure to risks, uniform database structure within Data Warehouse (DWH), comprehensive data quality assurance and automated report group, concluded the year 2020 as self-funded, with strong liquidity and a solid capital position, demonstrating the Group’s financial resilience. (legislative, non-legislative, or private), the length of the moratoria period granted and the behaviour of loans after the expiration of the grace The credit ratings of clients that are materially important to NLB Group preparation, which ensures the quality of reports and reduces the possibility The acquired Komercijalna banka group has similar business model to period. and the issuing of credit risk opinions are centralised via the Credit of errors. the existing NLB Group, and respectively its impact on the Group’s risk disruption. All relevant information was available to management bodies (based on IFRS 9), and NPL ratios. Furthermore, the coverage of NPL 144 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Apart from analysing the portfolio as a whole, vintage analysis is used to credit risk assessment in line with best banking practises, while at the same and acquisition of Komercijalna banka group, while further reduction (comparable to 2.7% at the end of 2019). Moreover, the coverage ratio monitor the quality of new loans production and test the conservativity time enabling faster responsiveness towards clients. resulted from active workout activities. Reduction of NPLs on the Group remains high at 57.3%, which is well above the EU average published by the of the lending standards, which should ensure the portfolio quality is level remained a strong focus in 2020. As at 31 December 2020 the share of EBA (45.3% in 4Q 2020). maintained within the Group Risk Appetite. Lending growth in the corporate segment remained relatively moderate, non-performing exposure by EBA methodology in NLB Group was 2.8% Apart from default risk, the portfolio management is also focused on situation contributed to a temporary slowdown in the growth of retail c) Maximum exposure to credit risk especially in the current specific circumstances. Besides that, the COVID-19 monitoring single name and industry concentration, migration, and FX segment. As at 30 December 2020, with acquisition of Komercijalna lending risk. Increasing emphasis is also placed on stress tests that forecast banka, there were no major changes in the corporate and retail credit the effects of negative macroeconomic movements on the portfolio, portfolio structure. Credit portfolio remains well diversified, there is no large on the level of impairments and provisions, and on capital adequacy. concentration in any specific industry or client segment. The share of retail Capital requirements for credit risk at NLB Group level within the first portfolio in the whole credit portfolio is quite substantial with still prevailing pillar are calculated according to the Standardised approach, while segment of mortgage loans. within the second pillar an internal IRB approach is used to estimate the RWA for default, migration, and FX lending risk. In addition, a single Starting in March 2020, the rise of the COVID-19 pandemic in Europe name concentration add-on is based on the Granularity adjustment (including the Bank strategic markets) give rise to new legislation in most NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Cash, cash balances at central banks, and other demand deposits at banks 3,961,812 2,101,346 2,261,533 1,292,211 Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss 84,855 27,233 24,038 16,717 18,831 30,935 24,085 20,571 Financial assets at fair value through other comprehensive income 3,446,491 2,091,805 1,671,204 1,611,711 methodology and an industry concentration add-on is estimated based on countries of SE Europe, encouraging granting of moratoria to clients (both Financial assets at amortised cost the HHI concentration indexes. retail and corporate) effected by the pandemic. In the markets where the Bank is positioned, different types of regulation were approved (opt-in/ NLB and other NLB Group members assess the level of credit risk losses on opt-out principles). Furthermore, during the year when the pandemic an individual basis for material claims, and at the collective level for the rest progressed, some governments decided for a second or even third package of the portfolio. of legislation, requiring the banks to prolong or grant new moratoria to its existing clients. NLB Group followed the legislative rules in each market and An individual review is performed for material Stage 3 financial assets which provided moratoria to a material part of the portfolio, however, at the end have been rated as non-performing based on the information regarding of 2020 the grace periods have expired for a large part of the facilities. significant financial problems encountered by a customer, regarding actual breaches of contractual obligations such as arrears in the settlement of At the same time, the Bank places great effort to appropriately monitor the liabilities, whether financial assets will be restructured for economic or clients in need of moratoria. Based on the EBA Guidelines for COVID-19 legal reasons, and the likelihood that a customer will enter into bankruptcy legislative and non-legislative moratoria, the Bank did not consider or a financial reorganisation. Expected future cash flows (from ordinary COVID-19 moratoria as a forbearance measure if granted before 30 operations and the possible redemption of collateral) are assessed following September 2020 or if granted after that date, but the cumulative moratoria an individual review. If their discounted value differs from the book value of period did not exceed nine months. Nevertheless, any moratoria granted the financial asset in question, impairment must be recognised. due to the COVID-19 situation not aligned with the legislative or non- legislative standards, was checked for forbearance status on case-by-case Collective ECL allowances are made for the remainder of the portfolio, basis. Additionally, the clients who were granted COVID-19 moratoria or which is not assessed on an individual basis. Based on IFRS 9 requirements, new financing on the basis of the COVID-19 circumstances, were analysed Debt securities Loans to government Loans to banks Loans to financial organisations Loans to individuals Loans to other customers Other financial assets Derivatives - hedge accounting Total net financial assets Guarantees Financial guarantees Non-financial guarantees Loan commitments Other potential liabilities 1,503,087 1,653,848 1,277,880 1,485,166 368,400 197,005 158,871 271,389 93,403 100,054 170,742 158,320 177,198 182,582 144,352 131,442 4,933,093 3,938,035 2,377,770 2,352,625 4,159,496 3,280,246 1,838,468 1,901,950 113,138 - 97,415 788 54,503 - 67,279 788 18,953,481 13,669,084 10,037,384 9,214,762 1,126,442 479,096 647,346 916,458 383,597 532,861 689,668 258,003 431,665 614,473 230,909 383,564 1,816,441 1,346,012 1,306,791 1,072,458 32,087 31,613 8,121 20,349 financial assets measured at amortised cost are attributed to the appropriate as part of the regular credit process using a wide variety of financial and Total contingent liabilities 2,974,970 2,294,083 2,004,580 1,707,280 stage based on the estimated increase of credit risk of a single exposure non-financial indicators and were downgraded or placed on the watch list if since initial recognition. The stage of financial assets determines whether increase in credit risk was identified. Total maximum exposure to credit risk 21,928,451 15,963,167 12,041,964 10,922,042 a 12-month or lifetime ECL must be considered. The ECL calculation is based on the forward-looking probability of default (PD) and loss given In addition to moratoria, the governments in Serbia and Slovenia provide default (LGD), which are calculated using historic data and statistical public guarantee schemes for new financing of clients whose business has Maximum exposure to credit risk is a presentation of NLB Group’s balance sheet items in their net book value as reported in the statement of modelling, as well as predicted macroeconomic parameters. For the off- been severely damaged due to the COVID-19 pandemic. The guarantee exposure to credit risk separately by individual types of financial assets and financial position, and for off-balance sheet items in the amount of their balance financial assets, the probability of the redemption of guarantees is covers the financing up to 30% in Serbia and in the range of 70-80% in contingent liabilities. Exposures stated in the above table are shown for the nominal value. considered when creating collective provisions. The models used to estimate Slovenia. Nevertheless, the decision of granting such loans is left to the future risk parameters are validated and back-tested on a regular basis to discretion of each individual bank, and so the regular client review is make loss estimations as realistic as possible. performed in line with the bank lending standards. b) Main emphasis in 2020 In 2020, the NLB Group reviewed IFRS 9 provisioning on an ongoing basis In the process of constantly complementing and enhancing credit risk by testing a set of relevant macroeconomic scenarios to adequately reflect management, NLB Group focuses on taking moderate risks, and at the same the current circumstances and related future impacts. time ensuring an optimal return considering the risks assumed. Preserving high credit portfolio quality represents the most important key aim, with The COVID-19 pandemic had some negative impacts on the existing a focus on the quality of new placements leading to a diversified portfolio loan portfolio quality and new loan generation. Nevertheless, the Group’s of customers. The Group is actively present on the market in the region, credit portfolio quality remained solid with quite stable rating structure financing existing and new creditworthy clients. To further enhance existing risk management tools, the Group is constantly developing a wide range of and diversified portfolio. Great emphasis was placed on intensive and proactive handling of problematic customers and early warning system advanced approaches supported by mathematical and statistical models in for detecting increased credit risk at a very early stage. The stock of NPE volume moderately increased, mainly as a result of COVID-19 impacts 145 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Group in EUR thousands Fully/over collateralised financial assets Financial assets 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 33,375 78,426 149 111,950 132,532 532,990 2,338 667,860 20,822 45,161 1,478 67,461 5,922 55,545 89 61,556 31 Dec 2019 Financial assets at amortised cost Loans to government Loans to individuals Loans to other customers Other financial assets Total NLB Group in EUR thousands e) Collateral from loans mandatorily at fair value through profit or loss NLB in EUR thousands Fully/over collateralised financial assets Financial assets 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 3,219 18,101 21,683 9 6,405 42,505 94,608 1,519 43,012 145,037 - 6,948 10,585 352 17,885 - 1,954 22,802 39 24,795 NLB Group in EUR thousands Fully/over collateralised financial assets 31 Dec 2020 31 Dec 2019 Net value of loans and advances Fair value of collateral Net value of loans and advances Fair value of collateral d) Collateral from financial assets that are credit-impaired 31 Dec 2020 Financial assets at amortised cost Loans to individuals Loans to other customers Other financial assets Total 31 Dec 2019 Financial assets at amortised cost Loans to government Loans to individuals Loans to other customers Other financial assets Total 31 Dec 2020 Financial assets at amortised cost Loans to individuals Loans to other customers Other financial assets Total Fully/over collateralised financial assets Financial assets 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 3,219 26,984 45,571 177 75,951 6,405 88,119 274,472 4,055 373,051 NLB 1,273 12,786 26,457 992 41,508 - 9,161 66,348 93 75,602 in EUR thousands Fully/over collateralised financial assets Financial assets 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 17,359 30,058 7 45,756 116,073 448 47,424 162,277 11,431 6,081 70 17,582 2,672 20,757 44 23,473 Loans mandatorily at fair value through profit or loss 25,076 47,725 14,961 28,981 NLB in EUR thousands Fully/over collateralised financial assets 31 Dec 2020 31 Dec 2019 Net value of loans and advances Fair value of collateral Net value of loans and advances Fair value of collateral Loans mandatorily at fair value through profit or loss 30,935 45,407 20,571 25,085 f) Credit protection policy securities, and real-estate mortgages (the real estate must be, beside other NLB Group applies a single set of standards to retail and corporate loan criteria, located in the European Economic Area for the effect on capital to collateral, as developed by NLB Group members in accordance with be recognised). regulatory requirements. The master document regulating loan collateral in the NLB Group is the Loan Collateral Policy in NLB d.d. and NLB Group. Loans made to companies and sole proprietors may be secured by other The Policy has been adopted by the Management Board of NLB Group. forms of collateral, as well (e.g., a lien on movable property, a pledge of an The Policy represents the basic principles that NLB Group’s employees equity stake, investment coupons, collateral by pledged/assigned receivables, must take into account when signing, evaluating, monitoring, and reporting etc.) if it is assessed that the collateral could generate a cash flow if it were collateral, with the aim of reducing credit risk. needed as a secondary source of payment. If there is of a lower probability In line with the policy, the primary source of loan repayment is the debtor’s conservative approach and accepts the collateral while reporting its value as that this type of collateral would generate a cash flow, NLB Group takes a solvency, and the accepted collateral is a secondary source of repayment in zero. case the debtor ceases to repay the contractual obligations. NLB Group primarily accepts collateral complying with the Basel II In compliance with relevant regulations, NLB Group has established a requirements with the aim of improving credit risk management and consuming capital economically. In accordance with Basel II, collateral system for monitoring and reporting collateral at fair (market) value. may consist of pledged deposits, government guarantees, bank guarantees, The market value of real estate used as collateral is obtained from valuation debt securities issued by central governments and central banks, bank debt reports of licensed appraisers. The market value of movable property g) The processes for valuing collateral 146 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020is obtained from valuation reports of licensed appraisers or from sales NLB Group monitors the value of collateral during the loan repayment • A pledge or assignment of receivables as collateral: cash receivables must i) Evaluation risk of collateral agreements. Both, valuation reports and sales agreements must not be period in accordance with the mandatory periods and internal instructions. have longer maturities than the maturity of the investment and they must Client/counterparty credit risk is the key decision parameter when older than one year. In NLB and members of NLB Group, most reports of For example, the value of collateral using mortgaged real estate is monitored not be due and not be paid. approving exposures. Collateral is a secondary source of repayment, and external real estate appraisers are controlled. Controls are performed by annually by either preparing individual assessments or using the internal • Other material forms of loan collateral (e.g., life insurance policies therefore decisions on approvals of exposures should not primarily be based internal appraisers. The subject of control is the content, value, scope, and methodology for preparing an own value appraisal of real estate (which pledged to NLB): The Bank accepts products of Vita, life insurance on the provided collateral. However, collateral is an important comfort format of the report, its compliance with international valuation standards, applies to Republic of Slovenia, and partly, for the housing segment to company d.d. Ljubljana – a pledge of an investment life insurance policy element in the approval process and, depending on the credit rating of and the estimated value. If they notice deviations, they estimate needed Serbia, Montenegro, and Bosnia and Herzegovina) based on public records and a life insurance policy with a guaranteed return that includes saving, the client, a prerequisite. NLB Group has prescribed the minimum ratios correction of the value of the external valuation (in %) and correct the and indexes of real-estate value published by the relevant government in addition to insurance. value of the external valuation. The value adjustment can only be negative authorities (the Surveying and Mapping Authority in the Republic of 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, and can be applied only in a limited range. For the purposes of business Slovenia). The value of pledged movable property is monitored once a year Personal loan collateral is a method for reducing credit risk whereby a third regulatory guidelines, and are prescribed in the Business Rules. decisions and the calculation of the necessary impairments and provisions, (in NLB automated, with a straight-line depreciation over the period of the party undertakes to pay the debt in case of the primary debtor (borrower) additional deductions (haircuts) are applied to the eventual adjusted market remaining useful life). defaulting. value, depending on the type of collateral. These haircuts for purpose of NLB Group pays particular attention to closely monitoring the fair value of collateral, and to receiving regular and independent revaluations by liquidation value are for real estate in the range of 30 to 70%, depending on h) The main types of collateral taken by the NLB Group NLB Group accepts the following types of personal loan collateral: applying the International Valuation Standards. Through a detailed the type of real estate and location, and for movables they range between 50 NLB Group accepts different forms of material and personal security as examination of all collateral received, NLB has ensured that only collateral and 100%, depending on the type of movable. loan collateral. • Joint and several guarantees by retail and corporate clients: for the from which payment can be realistically expected if it is liquidated, is collateralisation of private individuals’ loans, employees, or pensioners considered. The market value of financial instruments held by NLB Group is obtained Material loan collateral gives the right in the case of a debtor (borrower) are adequate guarantors. They must not be in the process of personal from the organised market – such as the stock exchange, for listed financial defaulting on their contractual obligations to sell a specific property to bankruptcy. They are responsible for fulfilling the debtor’s obligations NLB Group has the largest concentration of collaterals arising from instruments or determined in accordance with the internal methodology for recover claims, keep specific non-cash property or cash, or reduce or offset for loans with a repayment period not exceeding 60 months. For the mortgages on real estate, which is a relatively reliable and quality type unlisted financial instruments (such collateral is used exceptionally and on a the amount of exposure against the counterparty’s debt to the Bank. collateralisation of legal entities investments, legal entities, individuals or of collateral; however, among others due to the falling real estate market small scale in loans granted to companies and sole proprietors). private individuals are adequate guarantors. prices in recent history, the Bank closely monitors the real-estate collateral NLB Group accepts the following material types of loan collateral: • Bank guarantees; values and, where required, establishes higher amounts of impairments NLB has compiled a reference list of licensed real estate appraisers for real • Government guarantees (e.g., of the Republic of Slovenia); and provisions for non-performing loans secured by real estate, based estate. All appraisals must be made for the purpose of secured lending and • Collateral in the form of business and residential real estate: land, • Guarantees by national and regional development agencies with which on estimated discounts of the real-estate value, which are expected to be in accordance with the international valuation standards (IVS, EVS and buildings and individual parts of buildings in a storeyed property intended the Bank has a contract on the acceptance of guarantees (e.g. Slovene achieved in a sale (expected payment from collateral). Priority is given to RICS). Appraisals related to retail loans are generally ordered only from for living in or performing a business activity, such as land in the area Enterprise Fund); appraisers with whom the NLB has a contract for real-estate valuations. foreseen for construction, apartments, residential buildings, garages and • Other types of personal loan collateral. For corporate loans, appraisals are usually submitted by clients. If a client holiday homes, business premises, industrial buildings, offices, shops, property where the pledge right of the Bank is entered in the first place and real estate is already owned by the debtor and/or the pledger. For real estate, there must be a market, and it must be redeemable within a reasonable time. submits an appraisal that is not made by an appraiser included on the NLB’s hotels, branches and warehouses, forests, parking spaces, etc. Objects can Loans are very often secured by a combination of collateral types. reference list, the NLB’s expert department which employs certified real be completed or under construction. Priority is given to property where Collateral consisting of securities entails market risk, specifically the risk estate appraisers in construction with licences granted by the Slovenian the pledge right of the bank is entered in the first place and real estate The general recommendations on loan collateral are specified in the internal of changes in the prices of securities on capital markets. To limit such risks Ministry of Justice, and certified real-estate value appraisers with licences is already owned by the debtor and/or the pledger. For real estate, there instructions and include the elements specified below. The decision on the and restrict the possibility of the value of instruments received as collateral granted by the Slovenian Institute of Auditors, will verify the appraisal. The must be a market, and it must be redeemable within a reasonable time. type of collateral and the coverage of loan by collateral depends on the falling below approved limits, the Rules determine minimum pledge ratios expert department is also responsible for reviewing valuations of real estate • Collateral in the form of movable property: priority is given to the types client’s creditworthiness (credit ranking), loan maturity, and varies depending for securing loans based on pledged securities and equity shares in NLB. serving as collateral for large loans. of movable property, that are highly likely to be sold in the event of on whether the loan is granted to retail or a corporate client. Deviations from the Rules are subject to the prior approval of the respective Other NLB Group members obtain valuations from in-house appraisers claims (their market value must be estimated with considerable reliability). NLB has also created, in the area of real-estate loan collateral, an ‘online’ securities’ value is determined regarding the securities’ liquidity, maturity, and outsourced appraisers, all possessing the necessary licences. NLB Among the appropriate types of movable property, the bank includes connection with the Surveying and Mapping Authority in the Republic of correlation with changes in market indexes, i.e. by considering the key Group has compiled a reference list of appraisers for valuations of real motor vehicles, agricultural machinery, construction machinery, Slovenia, which allows direct and immediate verification of the existence of features reflecting the level of volatility of market prices, and the ability to estate located outside the Republic of Slovenia. Appraisals must be made production lines and series-produced machines, and some custom-made property. sell the securities at the market price. execution, and the funds received are used to repay the collateralised decision bodies of the Bank. The ratio between the loan amount and the in accordance with the international valuation standards, and for larger production machines. exposures, real-estate evaluations must also be reviewed by an internal • Collateral by a pledge of financial assets (bank deposits or cash-like NLB Group strives to ensure the best possible collateral for long-term Collateral consisting of the sureties of corporate clients, sureties of private licensed appraiser with knowledge of the local real-estate market. If the instruments, debt securities of different issuers, investment fund units, loans, in particular mortgages where possible. As a result, the mortgaging individuals, and bank guarantees entail the credit risk of the provider of the appraisal does not correspond to the international valuation standards or if equity securities, or convertible bonds): of real estate is the most frequent form of loan collateral of corporate collateral. NLB Group includes the amount of the guarantees received in the value adjustment is greater than certain limit, the appraisal is rejected as - Cash receivable collateral: bank deposits and savings with bank are and retail clients. In corporate exposures, the next most frequent forms of the exposure of the guarantor, and guarantees are only taken into account inadequate. appropriate in domestic and foreign currency; collateral are government and corporate guarantees, while in retail loans, it as collateral if the guarantor has sufficient overall creditworthiness. - Debt securities: shares and bonds which, according to the bank’s is guarantors. When assuring collateral, NLB Group follows the internal regulations which assessment, are suitable for securing investments and are traded on a define the minimum security or pledge ratios. NLB Group strives to obtain regulated market (marketable securities of higher-quality Slovenian and collateral with a higher value than the underlying exposure (depending on foreign issuers); the borrower’s rating, loan maturity, etc.) with the aim of reducing negative - The pledge of investment coupons of mutual funds managed by consequences resulting from any major swings in market prices of the assets management companies (a priority company NLB Skladi) and are, used as collateral. If real estate, movable property, and financial instruments according to the bank assessment, suitable for insurance of investments. serve as collateral, NLB Group’s lien on such assets should be top ranking. Exceptionally, where the value of the mortgaged real estate is large enough, the lien can have a different priority order. • A pledge of an equity stake: non-marketable capital shares with a credit rating of at least B are adequate. 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. 147 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020j) Credit quality analysis for financial assets and contingent liabilities NLB Group NLB in EUR thousands 31 Dec 2020 Debt securities at amortised cost A B Loss allowance Carrying amount Loans and advances to banks at amortised cost A B C Loss allowance Carrying amount Loans and advances to customers at amortised cost A B C D and E Loss allowance Carrying amount Other financial assets at amortised cost A B C D and E Loss allowance Carrying amount Debt instruments at fair value through other comprehensive income A B Loss allowance Contingent liabilities A B C D and E Loss allowance Carrying amount 12-month expected credit losses Lifetime ECL not credit- impaired Lifetime ECL credit- impaired Purchased credit- impaired financial assets 12-month expected credit losses Lifetime ECL not credit- impaired Lifetime ECL credit- impaired Total Purchased credit- impaired financial assets 31 Dec 2019 Total Debt securities at amortised cost 1,118,700 388,072 (3,685) 1,503,087 67,862 128,784 500 (141) 197,005 - - - - - - - - - 5,809,837 76,453 2,964,808 198,112 222,630 285,588 - - - - - - - - - - - - - 1,118,700 1,118,700 - - 388,072 161,021 (3,685) (1,841) - 1,503,087 1,277,880 - - - - - 67,862 158,475 128,784 500 (141) - - (155) 197,005 158,320 - - - - - - - - - - 5,886,290 3,110,739 42,762 - 3,162,920 1,132,586 111,683 - 508,218 34,338 104,065 - - - - - - - - - - - - - - - - - - - - - - - - 1,118,700 161,021 (1,841) 1,277,880 158,475 - - (155) 158,320 3,153,501 1,244,269 138,403 - - 390,921 43,791 434,712 - - 169,036 2,341 171,377 (74,518) (40,834) (255,603) (1,325) (372,280) (25,637) (11,287) (105,129) (1,319) (143,372) A B Loss allowance Carrying amount Loans and advances to banks at amortised cost A B C Loss allowance Carrying amount Loans and advances to customers at amortised cost A B C D and E Loss allowance Carrying amount 8,922,757 519,319 135,318 42,466 9,619,860 4,252,026 247,223 63,907 1,022 4,564,178 Other financial assets at amortised cost 64,691 46,382 223 - (276) 111,020 1,596,443 1,849,818 (8,656) 28 55 438 - - - - - - 64,719 48,994 46,437 5,386 661 - 5,655 1,219 6,874 (5,243) (4) (5,553) 56 - (73) 412 1,215 113,138 54,363 - - - 1,596,443 1,447,706 - 1,850,048 223,498 (798) - (9,482) (2,343) (30) 491 - 230 (28) 1 28 36 - (2) 63 - - - 1,285,492 843 1,490,929 53,326 48,329 49,781 - - - - 1,286,335 984,496 238 - 1,544,255 889,669 41,654 - 98,110 22,253 31,363 - - - 1,324 (1,251) 73 - - (798) - - - - - - 8 (4) 4 - - - - - - 48,995 5,414 92 1,332 (1,330) 54,503 1,447,706 223,498 (3,141) 984,734 931,323 53,616 - - 31,474 14,796 46,270 - - 27,855 7,052 34,907 (15,796) (2,767) (18,554) (5,057) (42,174) (7,510) (732) (16,493) (3,808) (28,543) 2,808,954 101,183 12,920 9,739 2,932,796 1,888,908 72,523 11,362 3,244 1,976,037 A B C D and E Loss allowance Carrying amount Debt instruments at fair value through other comprehensive income A B Loss allowance Contingent liabilities A B C D and E Loss allowance Carrying amount NLB Group NLB in EUR thousands 12-month expected credit losses Lifetime ECL not credit- impaired Lifetime ECL credit- impaired Purchased credit- impaired financial assets 12-month expected credit losses Lifetime ECL not credit- impaired Lifetime ECL credit- impaired Total Purchased credit- impaired financial assets 1,316,405 340,583 (3,140) 1,653,848 68,270 24,728 500 (95) 93,403 - - - - - - - - - 4,887,014 47,299 2,180,375 132,989 24,935 290,729 - - - - - - - - - - - - - 1,316,405 1,316,405 - - 340,583 170,378 (3,140) (1,617) - 1,653,848 1,485,166 - - - - - 68,270 144,392 24,728 500 (95) 101 - (141) 93,403 144,352 - - - - - - - - - - 4,934,313 3,173,430 10,940 - 2,313,364 1,155,231 38,324 - 315,664 21,888 140,162 - - - - - - - - - - - - - - - - - - - - - - - - Total 1,316,405 170,378 (1,617) 1,485,166 144,392 101 - (141) 144,352 3,184,370 1,193,555 162,050 - - 344,050 4,777 348,827 - - 143,605 3,784 147,389 (56,728) (33,179) (230,650) (1,887) (322,444) (20,724) (11,188) (84,997) (1,856) (118,765) 7,035,596 437,838 113,400 2,890 7,589,724 4,329,825 178,238 58,608 1,928 4,568,599 71,271 24,439 192 - (177) 95,725 1,631,116 460,427 (4,757) 982,227 3,442 1,108,696 43,620 17,348 65,554 33 49 466 - - - - 5,855 (27) 521 - 262 (42) (4,699) 1,156 - - (798) - - - - - - 16 (3) 13 71,304 59,971 24,488 6,720 658 5,871 (4,906) 179 - (55) 6 18 88 - (9) - - - 2,129 (1,774) 97,415 66,815 103 355 - - - - 1,631,116 1,504,437 460,689 107,274 (5,597) (1,714) - - - 985,669 782,113 806 - 1,152,316 781,518 20,201 - 82,902 11,580 41,422 - - (798) - - - - - - 9 (3) 6 - - - - - - 59,977 6,738 267 2,138 (1,841) 67,279 1,504,437 107,274 (2,512) 782,919 801,719 53,002 - - 66,252 6,944 73,196 - - 62,696 6,944 69,640 (12,909) (2,444) (22,084) (1,984) (39,421) (6,145) (653) (20,381) (1,984) (29,163) 2,095,362 110,172 44,168 4,960 2,254,662 1,569,066 61,776 42,315 4,960 1,678,117 The NLB Group’s client credit rating classification is based on an internally The Rating Group A (AAA to A rating classes) includes the best clients developed methodology, drawing from internal statistical analyses, good with a low degree of default probability, characterised by high coverage of banking practices, as well as Bank of Slovenia regulations, and ECB and financial liabilities with free cash flow. The Rating Group A is considered as EBA guidelines and requirements. The aligned rating methodology is used across the entire NLB Group. It includes a uniform credit grade scale of investment grade classification. 12 rating classes, out of which nine represent performing clients and three The Rating Group B (BBB to B rating classes) includes clients with a low non-performing clients. credit risk, starting one notch lower than ‘A’ rating group clients. These 148 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020in EUR thousands Collateral and financial guarantees received on forborne exposures clients show stable performance, acceptable financial ratios, and qualitative In 2020, NLB Group applied a new default definition based on the EBA elements, and have sufficient cash flow to settle their obligations, but may be guidelines, where the materiality threshold for delays is determined in more sensitive to changes in the industry or the economy. The Rating Group absolute and relative terms (EUR 100 for retail and EUR 500 for non-retail B classification is an investment grade for BBB, and an ‘invest with care’ for segment and 1% of the total exposure on the client level). At the same time, BB and B. the assessment of rating for private individuals was improved by establishing NLB Group All forborne exposures Impairment, provisions and value adjustments a common rating on the client level. Non - performing The Rating Group C (CCC to C rating classes) includes clients who are exposed to a higher and above-average level of credit risk. CCC rated A standard corporate rating methodology, with the prescribed set of clients are financed by the Bank only in the case when such support brings parameters (qualitative and quantitative) applies to all the NLB Group bank more positive effects for the Bank; however, the Rating Group C is overall entities. Groups of connected clients are treated as materially important considered as a substantial risk. The Bank reasonably restricts cooperation for the NLB Group whenever exposure exceeds EUR 7 million. Materially with such clients and decreases its exposure to them. important clients are submitted to the NLB Credit Committee. The Rating Groups D (D and DF rating classes) and E represent non- NLB regularly reviews the business practices and credit portfolios of performing clients that are treated as defaulted. D, DF, and E rating NLB Group entities to make sure they are operating in accordance with classified clients are ordinarily transferred to the specialised units for the minimum risk management standards of NLB Group. This ensures restructuring (which performs business and financial restructuring with a appropriate standard processes for managing and reporting credit risks at goal of minimising losses and restoring the client to a performing status) the consolidated level. or workout and legal support (with the goal of minimising losses due to default). k) Forborne loans 31 Dec 2020 Loans and advances (including at amortised cost and fair value) Governments Other financial organisations Non-financial organisations Households Debt instruments other than held for trading 303,802 Loan commitments given 1,586 NLB Group All forborne exposures Impairment, provisions and value adjustments Non - performing Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures in EUR thousands Collateral and financial guarantees received on forborne exposures 303,802 55,354 223,376 248,448 (5,761) (141,372) 142,714 1,342 2,425 254,947 45,088 1,050 50 33,882 20,372 55,354 942 292 2,375 292 2,375 (5) - (292) (2,375) - 50 195,993 221,065 (4,739) (129,550) 114,395 24,716 24,716 (1,017) (9,155) 28,269 223,376 248,448 (5,761) (141,372) 142,714 644 644 (4) (37) 1,332 31 Dec 2019 Loans and advances (including at amortised cost and fair value) Governments Other financial organisations Non-financial organisations Households Debt instruments other than held for trading 278,449 Loan commitments given 2,414 Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures 278,449 65,090 213,359 213,359 (4,940) (139,455) 130,954 5,945 1,959 237,588 32,957 - 24 53,970 11,096 65,090 1,520 5,945 1,935 5,945 1,935 - - (2,725) (1,935) 3,219 24 183,618 183,618 (4,464) (128,327) 104,518 21,861 21,861 (476) (6,468) 23,193 213,359 213,359 (4,940) (139,455) 130,954 894 894 (7) (835) 1,309 Total exposures with forbearance measures 280,863 66,610 214,253 214,253 (4,947) (140,290) 132,263 NLB All forborne exposures Impairment, provisions and value adjustments Non - performing Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures in EUR thousands Collateral and financial guarantees received on forborne exposures 148,251 21,976 103,287 126,275 (1,522) (73,298) 76,210 31 Dec 2020 Loans and advances (including at amortised cost and fair value) Other financial organisations Non-financial organisations Households Debt instruments other than held for trading 148,251 Loan commitments given 1,560 2,397 117,671 28,183 22 9,522 12,432 21,976 920 2,375 85,161 15,751 2,375 108,149 15,751 - (742) (780) (2,375) (66,055) (4,868) 103,287 126,275 (1,522) (73,298) 640 640 (2) (35) Total exposures with forbearance measures 149,811 22,896 103,927 126,915 (1,524) (73,333) 22 58,447 17,741 76,210 1,332 77,542 Total exposures with forbearance measures 305,388 56,296 224,020 249,092 (5,765) (141,409) 144,046 149 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB All forborne exposures Impairment, provisions and value adjustments in EUR thousands l) 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: Non - performing Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures Collateral and financial guarantees received on forborne exposures Nature of assets Net value Net value NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 168,852 45,830 123,022 123,022 (2,910) (69,783) 92,366 Equity securities measured at fair value through OCI (note 5.4.b) 31 Dec 2019 Loans and advances (including at amortised cost and fair value) Governments Other financial organisations 5,627 1,959 - 24 5,627 1,935 5,627 1,935 - - (2,407) (1,935) Non-financial organisations 137,872 37,670 100,202 100,202 (2,610) (62,157) Households 23,394 8,136 15,258 15,258 (300) (3,284) Debt instruments other than held for trading 168,852 45,830 123,022 123,022 (2,910) (69,783) Loan commitments given 2,389 1,495 894 894 (7) (835) Total exposures with forbearance measures 171,241 47,325 123,916 123,916 (2,917) (70,618) Forborne exposures of debt instruments by periods of forbearance NLB Group in EUR thousands Up to 3 months 3 to 6 months 6 to 12 months Over 12 months 13,455 32,950 46,405 5,745 3,759 9,504 9,963 1,786 11,749 3,819 1,286 5,105 NLB 1,858 7,140 8,998 8,166 1,967 10,133 24,317 65,200 89,517 42,420 70,114 112,534 in EUR thousands Up to 3 months 3 to 6 months 6 to 12 months Over 12 months 8,304 3,969 12,273 3,298 3,129 6,427 931 942 1,873 309 967 1,276 1,398 5,513 6,911 5,083 722 5,805 9,821 42,553 52,374 34,230 48,421 82,651 31 Dec 2020 Performing exposures Non-performing exposures Total exposures with forbearance measures 31 Dec 2019 Performing exposures Non-performing exposures Total exposures with forbearance measures 31 Dec 2020 Performing exposures Non-performing exposures Total exposures with forbearance measures 31 Dec 2019 Performing exposures Non-performing exposures Total exposures with forbearance measures The main forbearance measurements used by NLB Group and NLB are: deferral of payment, reduction of interest rates, acquisition of collateral for partial repayment of claims, and others, either as a single forbearance measurement or as a combination of those. 3,219 24 71,389 17,734 92,366 1,283 93,649 Investment property (note 5.9.) Property and equipment (note 5.8.) Investments in subsidiaries and associates Real estates (note 5.13.) Other assets (note 5.13.) Total m) Analysis of loans and advances by industry sectors 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 - 36,130 13,268 - 75,151 866 125,415 3,289 32,465 1,440 - 50,467 855 88,516 - 4,079 7 2,412 4,926 - - 3,464 7 2,442 5,292 - 11,424 11,205 in EUR thousands 31 Dec 2020 31 Dec 2019 Gross loans Impairment provisions Net loans (%) Gross loans Impairment provisions Net loans 197,146 (141) 197,005 116,593 (3,126) 113,467 298,612 (6,971) 291,641 361,494 (27,548) 333,946 952,671 (44,446) 908,225 13,883 91,780 (1,111) (7,023) 12,772 84,757 301,205 (5,737) 295,468 1.98 1.14 2.93 3.35 9.12 0.13 0.85 2.97 79,662 (1,230) 78,432 314,276 (7,268) 307,008 725,020 (71,133) 653,887 (%) 1.20 1.16 2.23 2.65 93,498 (95) 93,403 93,479 (2,763) 90,716 178,504 (4,352) 174,152 236,394 (29,669) 206,725 857,269 (42,368) 814,901 10.45 10,762 61,261 (559) (6,770) 10,203 54,491 184,435 (4,533) 179,902 0.13 0.70 2.31 0.79 3.08 6.57 7.90 8.03 0.47 1.14 18,441 (1,596) 16,845 151,217 (3,609) 147,608 599,180 (55,871) 543,309 745,260 (18,099) 727,161 752,835 (75,264) 677,571 24,604 102,321 (1,538) (4,906) 23,066 97,415 0.22 1.89 6.97 9.33 8.69 0.30 1.25 5,027,648 (94,555) 4,933,093 49.55 4,013,488 (75,453) 3,938,035 50.52 10,333,053 (377,974) 9,955,079 100.00 8,122,948 (327,445) 7,795,503 100.00 Transport and communications 811,517 (25,029) 786,488 Trade industry 874,235 (75,309) 798,926 Health care and social security 48,620 (1,794) 46,826 118,691 (5,553) 113,138 Other financial assets Total 150 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202031 Dec 2020 31 Dec 2019 in EUR thousands o) Analysis of debt securities and derivative financial instruments by geographical sectors in EUR thousands 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 Gross loans Impairment provisions Net loans (%) Gross loans Impairment provisions Net loans 158,475 (155) 158,320 135,040 (4,405) 130,635 157,515 (2,892) 154,623 63,025 (8,463) 54,562 3.29 2.72 3.22 1.13 144,493 (141) 144,352 125,521 (3,441) 122,080 138,587 (2,497) 136,090 67,427 (11,545) 55,882 (%) 3.01 2.54 2.83 1.16 519,880 (14,445) 505,435 10.51 557,861 (13,994) 543,867 11.33 5,197 15,099 95,930 (38) (865) (1,793) 5,159 14,234 94,137 0.11 0.30 1.96 6,078 14,714 92,924 (56) (809) (1,689) 6,022 13,905 91,235 0.13 0.29 1.90 2,411,949 (34,179) 2,377,770 49.46 2,376,791 (24,166) 2,352,625 49.00 8,580 (74) 8,506 52,216 (3,014) 49,202 454,154 (44,827) 409,327 0.18 1.02 8.51 6,495 (47) 6,448 49,732 (1,604) 48,128 398,059 (29,139) 368,920 0.13 1.00 7.68 Transport and communications 589,269 (4,965) 584,304 12.15 645,791 (3,822) 641,969 13.37 Trade industry 204,343 (22,190) 182,153 26,288 55,833 (1,222) (1,330) 25,066 54,503 3.79 0.52 1.13 217,068 (24,849) 192,219 10,887 69,120 (1,107) (1,841) 9,780 67,279 4.00 0.20 1.40 4,952,793 (144,857) 4,807,936 100.00 4,921,548 (120,747) 4,800,801 100.00 n) Analysis of net loans and advances by geographical sectors Country Slovenia Serbia Other European Union members Other countries Total NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 4,360,051 4,405,416 4,354,155 4,401,362 2,146,793 157,557 454,299 180,385 3,290,678 2,755,403 134,303 73,252 246,226 103,458 100,261 195,720 9,955,079 7,795,503 4,807,936 4,800,801 31 Dec 2020 NLB Group NLB Financial assets measured at amortised cost Financial assets held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at FV through profit or loss Derivative financial instruments Financial assets measured at amortised cost Financial assets held for trading Financial assets measured at fair value through OCI Derivative financial instruments 305,697 930,258 78,720 121,657 36,910 1,025 - 38,515 151,981 63,155 20,907 45,576 7,088 22,112 11,626 71,821 50,409 26,432 45,937 23,600 21,662 66,622 8,072 16,431 9,786 257,346 204,455 20,386 7,182 - - - 14,037 - 4,993 6,293 - - - - - - - - - - - - - - - - - - - - - - - - - 2,450 484,875 978,504 73,959 78,858 3,255 16,420 15,976 81,905 155,580 104,967 9,924 36,464 11,048 749 18,385 37,853 133,360 17,023 19,377 5,599 36,350 53,201 59,424 8,827 79,543 66,356 1,903,569 - - 143,059 18,649 66,356 1,267,258 - - - - - - - - 75,223 167,131 30,548 27,514 104,493 8,988 20,526 40,180 - 111 14,498 305,697 672 930,258 - - - - - - - - - - 111 - - - - - - - - - - - 2,046 - - - - - - - - - - - - - - - - - - 80 120 - - - - - - 90 - - - - - - 382 - 879 7 - 30 786 - - - 56 - - - 78,720 121,657 36,910 1,025 - 38,515 151,981 63,155 20,907 45,576 7,088 22,112 11,626 71,821 50,409 26,432 45,937 23,600 21,662 66,622 8,072 16,431 9,786 32,139 - 6,816 - - - - 14,037 - 4,993 6,293 - - - - - - - - - - - - - - - - - - - - - - - - - 2,450 - - - - - - - - - - - - 389,932 14,498 932,714 672 59,163 57,167 3,255 16,420 15,976 80,827 149,673 104,967 9,924 34,146 11,048 749 18,385 37,853 - - - - - - 80 120 - - - - - - 133,360 90 17,023 19,377 5,599 36,350 53,201 59,424 8,827 56,742 - - - - - - 382 - 291,816 1,211 56,433 3,134 - - - 30,548 27,514 104,493 8,988 20,526 40,180 - - 365 786 4 - - 56 - - - 1,503,087 68,806 3,446,491 2,157 16,049 1,277,880 2,450 1,671,204 16,381 Country Slovenia Other members of European Union - Austria - Belgium - Bulgaria - Czech Republic - Denmark - Finland - France - Germany - Hungary - Ireland - Italy - Latvia - Lithuania - Luxembourg - Netherlands - Poland - Portugal - Romania - Slovakia - Spain - Sweden - Other United States of America Other countries - North Macedonia - Montenegro - Serbia - Kosovo - Bosnia and Herzegovina - Albania - Canada - Great Britain - Iceland - Norway - Other Total Other members of the European Union included in the item ‘Other’ are Other members of the ‘Other countries’ in the item ‘Other’ are Israel, Malta, Cyprus, Greece and Croatia. Kazakhstan and Russia. 151 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202031 Dec 2019 NLB Group NLB in EUR thousands p) Internal rating of derivatives counterparties Financial assets measured at amortised cost Financial assets held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at FV through profit or loss Derivative financial instruments Financial assets measured at amortised cost Financial assets held for trading Financial assets measured at fair value through OCI Derivative financial instruments 417,611 1,041 535,160 - 13,278 417,611 1,041 457,671 13,278 976,304 40 1,103,666 1,391 6,416 976,304 40 1,074,241 6,416 79,096 124,649 35,880 1,024 - 41,312 164,488 120,107 1,193 27,252 40,754 8,720 13,534 9,082 78,891 50,642 13,873 44,704 18,161 21,721 63,600 8,091 9,530 46,724 213,209 141,909 26,773 - - - 14,052 5,070 6,304 19,101 - - - - - - 10 10 - - 10 - - - - - - - - - 10 - - 3,244 - - - - - - - - - - 34,066 62,276 3,301 19,180 18,288 80,712 234,174 91,484 79,053 1,841 56,834 15,463 12,123 24,654 48,042 99,586 43,741 22,863 5,239 42,630 51,105 42,029 14,982 36,442 - - - - - 625 - 302 - - - 109 - - 355 - - - - - - - - - 416,537 365 99,914 24,852 84,118 70,140 87,464 29,156 - 17,706 3,187 - - - - - - - - 365 1,756 1,653,848 4,325 2,091,805 - 16 - - - - 622 426 4,941 - - - - - - 3 - - - - - - 408 - 807 - - - 807 - - - - - 79,096 124,649 35,880 1,024 - 41,312 164,488 120,107 1,193 27,252 40,754 8,720 13,534 9,082 78,891 50,642 13,873 44,704 18,161 21,721 63,600 8,091 9,530 46,724 44,527 - - - - - 14,052 5,070 6,304 19,101 - - - - - - 10 10 - - 10 - - - - - - - - - 10 - - 3,244 - - - - - - - - - - 34,066 57,515 3,301 19,180 18,288 79,645 223,049 88,479 79,053 1,841 51,425 15,463 12,123 24,654 48,042 99,586 43,741 22,863 5,239 42,630 47,047 42,029 14,982 16,678 63,121 - 3,271 9,801 - - 29,156 - 17,706 3,187 - 16 - - - - 622 426 4,941 - - - - - - 3 - - - - - - 408 - 854 2 - 45 807 - - - - - 20,501 1,485,166 4,325 1,611,711 20,548 Country Slovenia Other members of European Union - Austria - Belgium - Bulgaria - Czech Republic - Denmark - Finland - France - Germany - Great Britain - Hungary - Ireland - Italy - Latvia - Lithuania - Luxembourg - Netherlands - Poland - Portugal - Romania - Slovakia - Spain - Sweden - Other United States of America Other countries - North Macedonia - Montenegro - Serbia - Kosovo - Bosnia and Herzegovina - Canada - Iceland - Norway - Other Total A B C D and E Total NLB Group NLB 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 in % 73.56 15.35 10.90 0.19 100.00 74.14 16.34 9.52 0.00 100.00 in % 73.75 15.24 10.82 0.19 100.00 74.27 16.26 9.47 0.00 100.00 All derivatives in the banking book are entered into with counterparties with transactions are covered through back-to-back transactions involving third an external investment-grade rating. parties 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 r) Debt securities in NLB’s and NLB Group’s portfolio that represent subordinated liabilities for the issuer 31 Dec 2020 Internal rating Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - loans and advances to banks - loans and advances to customers Total 31 Dec 2019 Internal rating Financial assets measured at amortised cost - debt securities - loans and advances to banks - loans and advances to customers Total A B - - - - A 523 - - 523 14,796 - - 14,796 B - - - - D Total 14,796 A - - - 67,128 - 14,796 67,128 - - - - NLB Group C - - - - NLB Group C - - - - D Total A - - - - 523 523 - - 67,167 - 523 67,690 NLB C - - 5,858 5,858 NLB C - - 5,915 5,915 B - - - - B - - - - in EUR thousands D Total - - - - - 67,128 5,858 72,986 in EUR thousands D Total - - - - 523 67,167 5,915 73,605 Other members of the European Union included in the item ‘Other’ are Cyprus and Croatia. Other members of the ‘Other countries’ in the item ‘Other’ are Australia and Russia. 152 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020s) Presentation of net financial instruments by measurement category NLB Group in EUR thousands Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L Financial assets measured at FV through OCI Financial assets measured at amortised cost Financial leases Total 31 Dec 2020 Cash and obligatory reserves with central banks, and other demand deposits at banks - - - 3,961,812 17,317 3,514,290 1,503,087 2,157 3,260,940 1,480,478 67,799 50,449 - - 135,102 22,609 - - - - - - - - 3,961,812 5,103,500 4,812,381 71,970 50,449 157,711 10,989 16,049 Securities - Bonds - Shares - Treasury bills Derivatives Loans and receivables - Loans to government - Loans to banks 9,768,232 48,633 9,841,941 - Loans to financial organisations 3,061 368,400 - Loans to individuals 365,339 197,005 158,845 - 26 197,005 158,871 4,913,793 19,300 4,933,093 4,133,250 26,246 4,184,572 113,138 - 113,138 - Loans to other customers Other financial assets Total financial assets 68,806 68,806 - - - - 16,049 - - - - - - - 4,171 - - 10,989 - 25,076 - - - - 25,076 - 84,855 42,393 3,514,290 15,346,269 48,633 19,036,440 NLB Group in EUR thousands 31 Dec 2019 Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L Financial assets measured at FV through OCI Financial assets measured at amortised cost Financial leases Derivatives for hedge accounting Cash and obligatory reserves with central banks, and other demand deposits at banks Total 2,101,346 3,809,999 3,536,976 52,790 94,033 120,725 5,475 Securities - Bonds - Shares - Commercial bills - Treasury bills Derivatives Loans and receivables - Loans to government - Loans to banks - - - - - - - 788 20,501 - Loans to financial organisations - - - - - - - - - - 28,013 8,563 - - - - - - - - - - - - - 4,325 4,325 - - - - 19,713 - - - - - - - - - 2,101,346 10,398 2,141,428 1,653,848 1,756 1,913,623 1,617,272 3,167 - - 5,475 - 14,961 - - - - 14,961 - 49,623 66,020 112,162 - - - - - - - - - 7,638,615 44,512 267,796 3,593 93,403 100,010 3,914,839 3,262,567 97,415 - 44 23,196 17,679 - - - - - - - - 7,698,088 271,389 93,403 100,054 3,938,035 3,295,207 97,415 - Loans to individuals - Loans to other customers Other financial assets Total financial assets 24,038 25,359 2,141,428 11,491,224 44,512 788 13,727,349 As at 31 December 2020 and 31 December 2019, all of NLB Group’s financial liabilities, except for derivatives designated as hedging instruments, trading liabilities, and financial liabilities measured at fair value through profit or loss, were carried at amortised cost. NLB in EUR thousands Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L Financial assets measured at FV through OCI Financial assets measured at amortised cost Total - 2,450 2,450 - - 16,381 - - - - - - - - - 2,261,533 2,261,533 4,171 1,716,351 1,277,880 3,000,852 - 1,598,760 1,277,880 2,879,090 4,171 - - 30,935 - - - - 30,935 - 45,147 72,444 - - - - - - - - - - - 49,318 72,444 16,381 4,722,498 4,753,433 170,742 158,320 177,198 170,742 158,320 177,198 2,377,770 2,377,770 1,838,468 1,869,403 54,503 54,503 18,831 35,106 1,716,351 8,316,414 10,086,702 NLB in EUR thousands Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L Financial assets measured at FV through OCI Financial assets measured at amortised cost Derivatives for hedge accounting - 4,325 4,325 - - - 19,760 - - - - - - - - - 1,292,211 2,716 1,656,657 1,485,166 - 1,509,559 1,457,153 2,716 44,946 - - - - 20,571 - - - - 20,571 - - 28,013 102,152 - - - - - - - - - - 4,712,951 182,582 144,352 131,442 2,352,625 1,901,950 67,279 - - - - - - 788 - - - - - - - Total 1,292,211 3,148,864 2,971,037 47,662 28,013 102,152 20,548 4,733,522 182,582 144,352 131,442 2,352,625 1,922,521 67,279 24,085 23,287 1,656,657 7,557,607 788 9,262,424 31 Dec 2020 Cash and obligatory reserves with central banks, and other demand deposits at banks Securities - Bonds - Shares - Commercial bills - Treasury bills - Investment funds Derivatives Loans and receivables - Loans to government - Loans to banks - Loans to financial organisations - Loans to individuals - Loans to other customers Other financial assets Total financial assets 31 Dec 2019 Cash and obligatory reserves with central banks, and other demand deposits at banks Securities - Bonds - Shares - Commercial bills - Treasury bills - Investment funds Derivatives Loans and receivables - Loans to government - Loans to banks - Loans to financial organisations - Loans to individuals - Loans to other customers Other financial assets Total financial assets 153 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20206.2. Market risk 6.2.1. Currency risk (FX) a) Analysis of financial instruments by currency exposure NLB defines market risk as the risk of potential financial losses due to Foreign currency risk (FX) is a risk of the potential losses from the open FX changes in rates and/or market prices (exchange rates, credit spreads, positions due to the changes of the foreign currency rates. The exposures of and equity prices), or in parameters that affect prices (volatilities and NLB to the movement of the FX rates have impact on the financial position correlations). Losses may impact profit or loss directly, for example in the and cash flows of the Bank. The Bank measures and manages the FX risk case of trading book positions. However, for the banking book positions with a usage of combination of sensitivity analysis, VaR, scenarios, and they are reflected in the revaluation reserve. The exposure to the market stress-testing. risk is to a certain degree integrated into the banking industry and offers an opportunity to create financial results and value. 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 of The Global Risk Department of NLB is independent from the trading the Bank and in accordance to the adopted policy of managing market risk activities and reports to the Bank’s committee ALCO. Global Risk also in the trading book of NLB. Trading FX risk is managed on an integrated monitors and manages exposure to market risks separately for the banking basis at a portfolio level. and trading books. Exposures and limits are monitored daily and reported to 31 Dec 2020 Financial assets Cash, cash balances at central banks, and other demand deposits at banks Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost the ALCO committee on a regular basis. NLB monitors and manages FX risk in the banking book according to the - debt securities The Bank uses a wide selection of quantitative and qualitative tools for protect Common Equity Tier 1 against the negative effects of the volatility measuring, managing, and reporting market risks such as value-at-risk of the FX rates, whilst limiting the volatility in the income statement. FX (VaR), sensitivity analysis, stress-testing, back-testing, scenarios, other market exposures in banking book result from core banking business activities. risk mitigants (concentration of exposures, gap limits, stop-loss limits, etc.), net interest income sensitivity, economic value of equity, and economic Each member is responsible for its own currency risk policy, which also capital. Stress-testing provides an indication of the potential losses that could includes a limit system and is in line with the parent Bank’s guidelines and policy of managing FX risk in NLB. The policy is primarily composed to occur in severe market conditions. standards, as well as local regulatory requirements. Policies are confirmed by either the local Management Board or Supervisory Board. NLB monitors In the area of currency risk, NLB Group pursues the goal of low to medium and manages NLB Group currency risk exposure on a monthly basis for exposure. NLB monitors the open position of NLB Group on an ongoing each member and on the consolidated level. basis. The orientation of NLB Group in interest rate risk management is to prevent negative effects on the net revenues arising from changed market NLB Group banks follow the guidelines for managing FX lending in NLB interest rates. The conclusion of transactions involving derivatives at NLB is Group. The guidelines’ goal is to address risks stemming from the potential limited to the servicing of the clients’ and hedging of the Group’s own open excessive growth of FX lending, to identify hidden risks, and tail-event positions. In accordance with the provisions of the Strategy on trading with risks related to FX lending, to mitigate the respective risk, to internalise the financial instruments in NLB Group, the trading activities in other NLB respective costs, and to hold adequate capital with respect to FX lending. Group members are very restricted. For monitoring and managing NLB Group’s exposure to market risks NLB, for which a daily limit is set, are monitored daily. FX positions are uniform guidelines and exposure limits for each type of risk are set for managed on the currency level so that they are always within the limits. The positions of all currencies in the statement of financial position of individual NLB Group entities. The methodologies are in line with regulatory requirements on individual and consolidated levels, while Regarding structural FX positions on a consolidation level, assets, and reporting to the regulator on the consolidated level is carried out using liabilities held in foreign operations are translated into euro currency at the the standardised approach. Pursuant to the relevant policies, NLB Group closing FX rate on the reporting date. Foreign exchange differences of non- entities must monitor and manage exposure to market risks and report euro assets and liabilities against euro are recognised in OCI, and therefore to NLB accordingly. The exposure of an individual NLB Group entity is affect shareholder’s equity and CET1 capital. NLB Group ALM employs regularly monitored and reported to the Assets and Liabilities Committee of strategies to manage this foreign currency exposure, including matched NLB Group (NLB Group ALCO). funding of assets and liabilities. Exposure to currency risks is discussed at daily liquidity meetings and monthly meetings of the Assets and Liabilities Committee of NLB Group (ALCO), and quarterly on the consolidated level. NLB Group in EUR thousands EUR USD CHF Other Total 3,017,875 46,572 101,712 795,653 3,961,812 40,910 32,104 2,450 4,579 - - 41,495 5,710 84,855 42,393 2,395,335 206,985 14,796 897,174 3,514,290 1,285,569 74,422 7,816,698 52,010 13,844 11,408 47,796 36,337 20,445 - - 11,065 49,276 41 - 206,110 63,722 1,503,087 197,005 1,717,549 9,619,860 40,642 113,138 - 13,844 - loans and advances to banks - loans and advances to customers - other financial assets Fair value changes of the hedged items in portfolio hedge of interest rate risk Total financial assets 14,728,767 376,572 176,890 3,768,055 19,050,284 Financial liabilities Financial liabilities held for trading Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 15,485 61,161 28,242 140,358 - - 7,668 11,889 - - 5,574 5,978 - - 31,149 - 15,485 61,161 72,633 158,225 - due to customers 13,228,655 328,533 161,887 2,678,092 16,397,167 - borrowings from other customers - subordinated liabilities - other financial liabilities Total financial liabilities Net on-balance sheet financial position Derivative financial instruments Net financial position 31 Dec 2019 Total financial assets Total financial liabilities 91,560 288,321 123,362 13,977,144 751,623 30,748 782,371 11,460,626 10,487,637 - - 23,139 371,229 5,343 651 5,994 260,127 232,710 - - - - 1,836 58,963 91,560 288,321 207,300 175,275 2,768,204 17,291,852 1,615 999,851 1,758,432 (2,303) (43,314) (14,218) (688) 956,537 1,744,214 105,818 91,618 1,909,769 13,736,340 1,522,496 12,334,461 Net on-balance sheet financial position 972,989 27,417 14,200 387,273 1,401,879 Derivative financial instruments 16,442 (14,336) (4,232) (7,707) (9,833) Net financial position 989,431 13,081 9,968 379,566 1,392,046 154 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB in EUR thousands b) FX sensitivity analysis EUR USD CHF Other Total Scenarios USD CHF CZK RSD MKD JPY AUD HUF HRK BAM 31 Dec 2020 Appreciation of USD CHF CZK RSD MKD Other 31 Dec 2020 Financial assets Cash, cash balances at central banks, and other demand deposits at banks Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities - loans and advances to banks - loans and advances to customers - other financial assets Fair value changes of the hedged items in portfolio hedge of interest rate risk 2,188,898 11,345 14,042 47,248 2,261,533 16,381 30,527 2,450 4,579 1,589,855 96,888 1,266,472 158,215 4,482,044 34,136 13,844 11,408 105 31,245 19,751 - - - - - - - - 18,831 35,106 29,608 1,716,351 - - 1,277,880 158,320 49,111 1,778 4,564,178 - 616 - 54,503 13,844 Total financial assets 9,780,372 177,771 63,153 79,250 10,100,546 Financial liabilities Financial liabilities held for trading 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 - subordinated liabilities - other financial liabilities Total financial liabilities 15,500 61,161 5,945 8,635,809 125,597 13 288,321 79,721 9,212,067 - - 9,675 129,809 11,889 - - 19,908 171,281 - - 6,456 47,542 5,978 - - 39 60,015 - - 19,559 37,595 - - - 1,605 58,759 15,500 61,161 41,635 8,850,755 143,464 13 288,321 101,273 9,502,122 Net on-balance sheet financial position 568,305 6,490 3,138 20,491 598,424 Derivative financial instruments 4,136 (2,491) (3,299) (12,169) (13,823) Net financial position 572,441 3,999 (161) 8,322 584,601 31 Dec 2019 Total financial assets Total financial liabilities 8,957,777 8,142,363 176,516 142,395 66,028 61,999 71,094 51,957 9,271,415 8,398,714 Net on-balance sheet financial position 815,414 34,121 4,029 19,137 872,701 Derivative financial instruments 21,804 (21,784) (2,760) (7,168) (9,908) Net financial position 837,218 12,337 1,269 11,969 862,793 NLB Group and NLB 31 Dec 2020 31 Dec 2019 +/-7% +/-4% +/-8% +/-1% +/-3% +/-8% +/-10% +/-9% +/-2% +/-0% +/-4% +/-3% +/-3% +/-2% +/-2% +/-5% +/-5% +/-4% +/-1% +/-0% NLB Group NLB in EUR thousands Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income (345) (293) (4) 9 4 85 - 231 - 7,096 7,663 91 (97) (32) (4) 22 19 89 (3) 83 29 3 (22) (18) (70) 5 (11) - - - - - (11) 10 - - - - - 10 Effects on comprehensive income (544) 15,081 Depreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income 295 270 3 (9) (4) (68) 487 - (213) - (6,959) (7,151) (89) (14,412) 155 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202031 Dec 2019 Appreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income Depreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income NLB Group NLB in EUR thousands while it also contributes to the stability of the interest rate margin, which Each member of NLB Group is responsible for its own interest rate risk is why valuation risk has been included in the Group’s interest rate risk policy, which includes the limit system and is in line with the parent Bank’s Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income management model. guidelines and standards, as well as with the local regulatory requirements. NLB regularly monitors the interest rate risk exposure of each individual 340 (218) 1 11 3 78 215 (314) 204 (1) (10) (3) (71) (195) - 164 - 2,083 4,310 237 6,794 - (154) - (2,009) (4,132) (236) (6,531) 298 8 1 14 13 80 NLB Group also manages interest rates risk by using plain vanilla derivative member of NLB Group in accordance with the Standards for Risk financial instruments (interest rate swaps, overnight index swaps, cross Management in NLB Group. The aforementioned document comprises (11) currency swaps, and forward rate agreements), most of which are treated guidelines for uniform and effective interest rate risk management within - - - - - according to hedge accounting rules. Interest rate risk exposure arises individual NLB Group members. mainly from banking book positions; particularly in a current low interest rate environment, where NLB Group recorded an increased volume of fixed Interest rate risk in the banking book is measured, monitored, and reported interest rate loans and long-term banking book securities on the assets side weekly in the case of NLB by the Global Risk Department, while positions and transformation of deposits from term to sight. are managed by Financial Markets and the monthly Group level. Exposure to interest rate risk is discussed on ALCO monthly on NLB’s individual level and quarterly on the consolidated level. 414 (11) (276) 10 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 thousands 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 (7) (1) (13) (12) (73) - - - - - (382) 10 31 Dec 2020 Financial assets 6.2.2. Managing market risks in the trading book consistent methodologies, models, and limit systems. NLB Group manages Market risk exposure in the trading book arises mostly as a result of the interest rate risk exposure through application of two main measures: changes in interest rates, credit spreads, FX rates, and equity prices. The Management Board determines low total risk appetite and limits by the measures the extent to which the economic value of the banking book risk type. The limits are monitored daily by the Global Risk Department. would change if interest rates changes according to the scenario. NLB uses an internal VaR model based on the variance-covariance method which measures the impact of the interest rate change on future net for other market risks. The daily calculation of the VAR value is adjusted interest income over a one-year period, assuming constant balance sheet • Sensitivity of net interest income – using EaR method (Earnings at Risk), • Economic value sensitivity – using BPV method (Basis Point Value), which Cash, cash balances at central banks, and other demand deposits at banks 3,961,812 1,255,642 2,706,170 2,706,170 Financial assets held for trading 84,855 16,049 68,806 15,170 - - - - 44,775 8,861 - - Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost 42,393 15,160 27,233 709 11,192 13,879 1,171 282 3,514,290 67,799 3,446,491 193,663 89,570 408,497 2,008,154 746,607 - debt securities 1,503,087 - 1,503,087 76,716 45,405 76,178 695,030 609,758 - loans and advances to banks 197,005 8,643 188,362 148,527 36,127 3,708 - - to Basel standards (99% confidence interval, a monitored period of 250 volume and structure. - loans and advances to customers 9,619,860 69,958 9,549,902 2,328,747 1,383,720 2,781,228 2,106,629 949,578 business days, a 10-day holding position period). 6.2.3. Interest rate risk NLB Group regularly measures interest rate risk exposure in the banking book under various standardised and additional scenarios of changes in the Interest rate risk is the risk to NLB Group’s capital and profit or loss arising level and shape of interest rate yield curve, including all significant sources from changes in market interest rates. Interest rate risk management of NLB of risk, taking into account behavioural and modelling assumptions. Part Group includes all interest rate-sensitive on- and off-balance sheet assets and of non-maturing deposits, which is considered as a core part is allocated liabilities which are divided into the trading and banking book according to long-term by using replicating portfolio. Optionality risk is mainly derived regulatory standards. It takes into account the positions in each currency. from behavioural options, reflected in prepayments and withdrawals, and Interest rate risk management in NLB Group is adopted in accordance embedded options such as caps and floors. Moreover, considering expected - other financial assets 113,138 113,138 Fair value changes of the hedged items in portfolio hedge of interest rate risk 13,844 13,844 - - - - - - - - - - - - Total financial assets 19,050,284 1,560,233 17,490,051 5,469,702 1,566,014 3,328,265 4,819,845 2,306,225 Financial liabilities Financial liabilities held for trading 15,485 15,485 Derivatives - hedge accounting 61,161 61,161 - - - - - - - - - - with the risk appetite and risk strategy, based on general Basel standards cash flows, non-performing exposures, as well as off-balance sheet items are Financial liabilities measured at amortised cost on interest rate management in the banking book (IRRB; hereinafter: considered when measuring interest rate risk exposure. Optionality models ‘Standards’) and final European Banking Authority guidelines. are, to a large extent, based on linear regression using the historical data as input. - deposits from banks and central banks 72,633 1,103 71,530 51,534 19,610 163 223 - borrowings from banks and central banks 158,225 - 158,225 2,777 8,043 134,364 13,041 In the trading book interest rate risk is measured on the basis of the VaR - due to customers 16,397,167 102,981 16,294,186 14,106,104 419,267 1,071,490 686,051 11,274 method and BPV method, in accordance with the adopted policy for The interest rate risk is closely measured, monitored, and managed managing market risk in the trading book of NLB. within approved risk limits and controls. The Group manages interest The interest rate risk in the banking book is measured and monitored rate positions and stabilises its interest rate margin primarily with the pricing policy and a fund transfer pricing policy. An important part of the - borrowings from other customers - subordinated liabilities - other financial liabilities 91,560 288,321 - - 288,321 91,560 18,581 207,300 207,270 30 3,868 3,690 - 7,064 26,329 35,718 1,759 282,872 11 14 - - - 5 within a framework of Interest rate risk management policy that establishes interest rate risk management is presented by the banking book securities Total financial liabilities 17,291,852 388,000 16,903,852 14,179,001 454,478 1,214,851 1,008,530 46,992 portfolio, whose primary purpose is to maintain adequate liquidity reserves, Total interest repricing gap (8,709,299) 1,111,536 2,113,414 3,811,315 2,259,233 156 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report - - - - Annual Report 202031 Dec 2019 Financial assets NLB Group in EUR thousands 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 Dec 2020 Financial assets NLB in EUR thousands 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 Cash, cash balances at central banks, and other demand deposits at banks 2,101,346 644,013 1,457,333 1,457,333 Financial assets held for trading 24,038 19,713 4,325 1,040 - 21 - 37 - - Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost 25,359 8,642 16,717 7,165 3,760 1,728 3,781 2,141,428 49,623 2,091,805 112,049 238,266 177,088 996,792 567,610 - 3,227 283 Cash, cash balances at central banks, and other demand deposits at banks 2,261,533 192,405 2,069,128 2,069,128 Financial assets held for trading 18,831 16,381 2,450 - - - - 1 - 2,449 - - Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost 35,106 4,171 30,935 1,515 14,900 14,112 126 282 1,716,351 45,147 1,671,204 91,312 19,936 185,583 867,674 506,699 - debt securities 1,653,848 - 1,653,848 100,245 106,742 103,961 561,810 781,090 - debt securities - loans and advances to banks 93,403 533 92,870 65,918 23,860 2,188 902 2 - loans and advances to banks 1,277,880 158,320 - 3 1,277,880 66,893 13,792 41,502 556,444 599,249 158,317 7,363 22,824 109,853 3,274 15,003 - loans and advances to customers 7,589,724 71,720 7,518,004 1,653,925 1,281,613 2,443,003 1,415,059 724,404 - loans and advances to customers 4,564,178 42,747 4,521,431 1,061,961 933,029 1,503,250 508,354 514,837 - other financial assets Derivatives - hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk 97,415 97,415 788 788 8,991 8,991 - - - - - - - - - - - - - - - - - - - other financial assets Fair value changes of the hedged items in portfolio hedge of interest rate risk 54,503 54,503 13,844 13,844 - - - - - - - - - - - - Total financial assets 10,100,546 369,201 9,731,345 3,298,172 1,004,481 1,854,301 1,938,321 1,636,070 Total financial assets 13,736,340 901,438 12,834,902 3,397,675 1,654,262 2,728,005 2,978,344 2,076,616 Financial liabilities Financial liabilities held for trading 17,903 17,903 Financial liabilities measured at fair value through profit or loss 7,998 7,998 Derivatives - hedge accounting 49,507 49,507 - - - - - - - - - - - - Financial liabilities measured at amortised cost - deposits from banks and central banks 42,840 805 42,035 34,576 2,552 4,907 - - - - - borrowings from banks and central banks 170,385 - 170,385 2,845 5,559 146,993 14,838 - due to customers 11,612,317 79,124 11,533,193 9,837,184 356,977 856,938 479,620 - - - - 150 2,474 Financial liabilities Financial liabilities held for trading 15,500 15,500 Derivatives - hedge accounting 61,161 61,161 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 - subordinated liabilities - other financial liabilities - - - - 41,635 41,635 - - - - - - - - - 143,464 85 2,816 128,674 11,889 - - - - 8,850,755 8,449,271 159,095 175,979 65,690 720 13 288,321 - - 5 - 13 - 3,690 1,759 282,872 - 11 14 - - - 41,635 143,464 8,850,755 13 288,321 - - - - - 101,273 101,243 30 - borrowings from other customers - subordinated liabilities - other financial liabilities 64,458 210,569 - - 210,569 45,367 158,484 158,438 46 6 64,458 1,287 2,011 7,322 24,395 29,443 - - 1,754 163,448 11 29 - - Total financial liabilities 9,502,122 177,904 9,324,218 8,490,996 165,601 306,436 360,465 720 Total interest repricing gap (5,192,824) 838,880 1,547,865 1,577,856 1,635,350 Total financial liabilities 12,334,461 313,775 12,020,686 9,921,265 367,099 1,017,925 682,330 32,067 Total interest repricing gap (6,523,590) 1,287,163 1,710,080 2,296,014 2,044,549 157 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB in EUR thousands The assessment of the impact of a change in interest rates of 50/100 basis points on the amount of net interest income of the banking book position: - 3,227 283 - - - - - 31 Dec 2019 Financial assets 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 Cash, cash balances at central banks, and other demand deposits at banks 1,292,211 164,725 1,127,486 1,127,486 Financial assets held for trading 24,085 19,760 4,325 1,040 - 21 - 37 - - 23,287 2,716 20,571 7,845 6,610 2,821 3,012 NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Net interest income sensitivity Net interest income sensitivity - as % of Equity 13,852 0.78% 14,689 1.01% 7,493 0.55% 8,488 0.75% 1,656,657 44,946 1,611,711 25,798 186,222 115,877 795,629 488,185 1,485,166 144,352 - 18 1,485,166 97,672 73,519 84,662 453,767 775,546 points represents a realistic and practical scenario. The calculations of the standardised interest rate shock scenarios or more if necessary, according to 144,334 15,880 12,010 97,210 4,124 15,110 sensitivity of net interest income are implemented in technological support. the situation on financial markets. Calculations are considering behavioural and automatic options, as well as the allocation of non-maturing deposits. The values in the table are calculated on short-term interest rate gaps, cash flows and provides a comprehensive view of the possible long- where the applied parallel interest rate shock down by 50/100 basis term effects of changing interest rates at least under the six prescribed - loans and advances to customers 4,568,599 49,123 4,519,476 1,086,078 1,022,248 1,557,001 440,464 413,685 The ‘EVE’ (Economic Value of Equity) method is a measure of the Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities - loans and advances to banks - other financial assets Derivatives - hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk 67,279 67,279 788 788 8,991 8,991 - - - - - - - - - - - - - - - - - - Total financial assets 9,271,415 358,346 8,913,069 2,361,799 1,300,630 1,857,608 1,696,996 1,696,036 Financial liabilities Financial liabilities held for trading 17,892 17,892 Financial liabilities measured at fair value through profit or loss 7,746 7,746 Derivatives - hedge accounting 49,507 49,507 - - - - - - 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 - subordinated liabilities - other financial liabilities 89,820 161,564 7,760,737 2,537 210,569 - - - - - 89,820 89,820 161,564 85 5,559 142,871 13,049 7,760,737 7,233,733 194,230 256,289 74,580 1,905 2,537 - 210,569 45,367 - - - 32 2,505 1,754 163,448 11 29 - - - 98,342 98,296 46 6 - - - - - - - - - - - - sensitivity of changes in market interest rates on the economic value of The assessment of the impact of a change in interest rates of 200 basis financial instruments. The EVE represents the present value of net future points on the economic value of the banking book position: NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Interest risk in banking book - EVE Interest risk in banking book - EVE as % of Equity 128,370 7.27% 88,355 6.09% 82,116 5.98% 71,979 6.33% The applied sudden parallel interest rate shock up is by 200 basis points, Liquidity risk is defined as an important risk type for NLB Group, and which represents a “worst case” scenario for NLB Group. The calculation one which must be managed carefully. NLB Group has a liquidity risk takes into the account allocation of the core part of non-maturing deposits management framework in place that enables maintaining a low risk and other behavioural assumptions. tolerance for liquidity risk. NLB Group formulated a set of liquidity risk metrics and limits to manage liquidity position within the requirements Exposure to the interest rate risk of the banking book mainly arises from set by the regulator. By maintaining a smooth long-term maturity profile, investments in long-term debt securities and loans with fixed interest rate, limiting dependence on wholesale funding, and holding a solid liquidity as well as from transformation of term to sight deposits due to low interest buffer, the NLB Group maintains a sound and robust liquidity position, even rate environment. Long-term interest positions of other members in NLB under severely adverse conditions. Group, of which present a majority of their exposure to interest-rate risk (an Total financial liabilities 8,398,714 173,441 8,225,273 7,369,011 199,789 400,957 253,611 1,905 economic point of view), mainly arise from a portfolio of mortgage loans The Management Board approves the Liquidity Risk Management Policy, Total interest repricing gap (5,007,212) 1,100,841 1,456,651 1,443,385 1,694,131 with a fixed interest rate. 6.3. Liquidity risk which outlines the key principles for the Bank’s liquidity management. ALCO receives a regular report on the liquidity position and the performance against approved limits and targets. ALCO oversees the Liquidity risk is the risk that NLB Group is unable to meet all its actual and development of the Bank’s funding and liquidity position and decides on Cash flows are presented by taking into account their contractual maturity b) A net interest income sensitivity analysis and an economic potential payments or collateral posting obligations, as well as the risk that liquidity risk-related issues in NLB Group. and according to the amortisation schedule. Financial instruments without view of interest rate risk in the banking book NLB Group is unable to fund the growth of assets at reasonable prices, or maturity such as sight deposits and financial instruments with expired The analysis of interest income sensitivity for the horizon of the next 12 only at excessive cost. maturity such as non-performing loans are presented in the first gap months assumes a sudden parallel interest rate shock down by 50 basis irrespective of their behavioural characteristics and the Bank’s expectations. points for EUR, USD, and CHF currencies, while for all other significant There are two types of risk: For the purpose of risk management, the Bank use different cash flow currencies a 100 basis points sudden parallel interest rate shock down is Risk tolerance for liquidity risk is low, therefore NLB Group always maintains an adequate level of liquidity to provide sufficient funds for settling its liabilities, even if a specific stress scenario is realised. NLB Group measures and manages its liquidity in three stages: modelling techniques. implied. The analysis assumes that the positions used remain unchanged. • Funding liquidity risk is the risk of not being able to accommodate both expected and unexpected current and future cash outflows and collateral • Current exposure and compliance with the limits, needs because insufficient cash is available. Eventually, this will affect the • Forward-looking and stress-testing, Group’s daily operations or its financial conditions. • Liquidity in exceptional circumstances. • Market Liquidity risk is a risk that the Group cannot sell an asset on time at a reasonable price due to insufficient market depth (insufficient supply and demand) or market disruptions. Market risk includes the sensitivity in liquidity value of a portfolio due to changes in the applicable haircuts and market value. 158 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The objectives of monitoring and managing liquidity risk in NLB Group are The Group members have defined a liquidity management plan for The structure of liquidity reserves is shown in the following table. as follows: exceptional circumstances that lays down guidelines and a plan of activities • ensuring a sufficient level of liquid assets; • minimising the costs of maintaining liquidity; • optimising the amount of liquidity reserves; 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. • ensuring an appropriate level of liquidity for different situations and stress scenarios; Liquidity risk management in NLB Group is under strict monitoring Liquid assets for recognising problems, searching for solutions, and handling exceptional Liquid assets NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 • anticipating emergencies or crisis conditions, and implementing by NLB as a parent bank. Reporting to NLB by all Group members is contingency plans in the event of extraordinary circumstances; performed daily. Global Risk gives guidelines and defines minimal standards • preparing dynamic projections of liquidity taking several cash-flow for Group members regarding liquidity risk management in NLB Group scenarios of the Bank into account; and Risk Management Standards. Each Group member is responsible for • preparing proposals for establishing additional financial assets as collateral ensuring adequate liquidity via the necessary sources of funding and for sources of funding. their appropriate diversification and maturity, and by managing liquidity reserves and fulfilling the requirements of regulations governing liquidity. Overall assessment of the liquidity position of NLB Group is assessed in the The exposure of an individual NLB Group member towards liquidity risk Internal Liquidity Adequacy Assessment Process (ILAAP) at least once per is regularly monitored and reported to ALCO, and to local Assets and year for NLB Group, and it includes a clear formal statement on liquidity Liabilities Committees. adequacy, supported by an analysis of ILAAP outcomes. NLB Group Cash, cash balances at central banks, and other demand deposits at banks 3,961,812 2,101,346 2,261,533 1,292,211 Time deposits at banks Trading book securities Banking book securities ECB eligible loans Total liquid assets 128,074 68,806 91,076 4,325 63,405 2,450 62,651 4,325 5,008,841 3,745,653 2,949,084 3,096,877 582,986 545,247 582,986 545,247 9,750,519 6,487,647 5,859,458 5,001,311 As at 31 December 2020, 81.8% (31 December 2019: 78.9%) of debt Corporate Debt Securities in Large Corporates, which clearly define the maintains a sufficient amount of liquidity reserves in the form of high credit The year 2020 was largely influenced by the COVID-19 pandemic, which securities in the banking book of NLB Group were government securities objectives and characteristics of the associated portfolio. quality debt securities that are eligible for refinancing via the ECB/central was also reflected in the liquidity risk management of NLB Group. Greater (including government guaranteed bonds – GGB), and 8.4% (31 December bank or on the market. In the current situation, NLB Group also strives to emphasis was placed on improving the quality and monitoring of daily 2019: 7.8%) were senior unsecured bonds. With the acquisition of The ECB-eligible credit claims comprise loans which fulfil the high follow as closely as possible the long-term trend of diversification on both data, including daily monitoring of movements in loans and deposits, as Komercijalna banka group, the structure of liquid assets did not change eligibility criteria set by the ECB itself and for domestic loans are specified the liability and asset sides of the balance sheet. NLB Group regularly well as daily calculations of the LCR indicator. Especially in the first half significantly, while the amount of liquid assets increased by EUR 2,226,951 in the general terms about execution of monetary policy framework (Part 4) performs stress tests with the aim of testing the liquidity stability and the of the year, the intensity of liquidity reporting increased significantly, thousand. availability of liquidity reserves in various stress situations. In addition, both internally, to ALCO of the NLB Group, as well as at the request 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 special attention is given to the fulfilment of the liquidity regulation (CRR/ of the regulator. In addition to regular monthly reporting, weekly and The purpose of banking book securities is to provide liquidity, along with eligible counterparty. As such, these ECB credit claims are included among CRD), with monitoring and reporting of the liquidity coverage ratio (LCR) daily reporting to the Management Board was also introduced, while the stabilisation of the interest margin and interest rate risk management liquidity reserves. according to the Delegated Act and net stable funding ratio (NSFR). This regulator introduced several new reports, with an emphasis on monitoring simultaneously. When managing the portfolio, NLB Group uses conservative also includes monitoring and reporting of Additional Liquidity Monitoring daily liquidity. The second half of the year, and especially the end of 2020, principles, particularly with respect to the portfolio’s structure in terms of Members of NLB Group manage their liquid assets on a decentralised basis Metrics (ALMM) on solo and consolidated levels. In accordance with was marked by the acquisition of the Komercijalna banka group on 30 issuers’ ratings and asset class. The framework for managing the banking in compliance with the local liquidity regulation and valid policies of NLB the Commission Implementing Regulation (EU), NLB Group regularly December 2020, which required many coordination activities, which will book securities are the Policy for managing debt securities in the Financial Group. monitors and issues quarterly reports on asset encumbrance. continue next year. The liquidity risk of the NLB Group has not changed Markets’ banking book and the Policy for Managing Domestic (Slovenian) Within regular liquidity stress-testing NLB Group regularly prepares a continues to maintain a favourable liquidity position. b) Encumbered assets significantly due to the acquisition of the Komercijalna banka group, as it static liquidity mismatch table by residual maturity and dynamic liquidity projections taking several cash-flow scenarios into account to ensure a) Managing NLB Group’s liquidity reserves monitoring over the liquidity position of each NLB Group member. NLB Group has liquidity reserves available to cover liabilities that fall or The Group manages its liquidity position (liquidity within one day) daily, Liquidity reserves are comprised of cash, the settlement account at the for a period of several days or weeks in advance, based on the planning and central bank, sight deposits and term deposits at banks, and debt securities monitoring of cash flows. Each NLB Group member is responsible for its and loans eligible as collateral for the Eurosystem’s liquidity providing own liquidity position and carries out the following activities: operations, on the basis of which the Bank may generate the requisite may become due. Liquidity reserves must become available on short notice. • managing intraday liquidity; • planning and monitoring cash flows; liquidity at any time. The available liquidity reserves are liquidity reserves decreased by the reserve requirement, required balances for the continuous performance of payment transactions, encumbered securities, and/or credit • monitoring and complying with the liquidity regulations of the central claims for different purposes (secured funding). bank; • adopting business decisions; The minimum amount of liquidity reserves is determined on the basis of the • forming and managing liquidity reserves; and methodology pertaining to liquidity risk stress tests. The amount represents • performing liquidity stress test to define the liquidity buffer for smooth the survival of a severe stress over a period of three months in a combined functioning of the payment system in stressed circumstances. stress scenario. NLB Group members actively manage 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 NLB in EUR thousands 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 991,649 - 2,462,193 - 102,458 708 708 82,251 80,949 - - - 1,966,670 - 49,318 49,318 52,336 55,519 4,968,205 5,017,867 52,336 55,519 2,899,198 2,951,975 80,204 - 1,124,897 - - 9,874,875 1,053,435 18,440,959 - - 72,943 - 227,737 - - 4,734,993 1,148,687 10,798,866 - - 2020 Loans on demand Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total 159 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Group NLB in EUR thousands 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 443,953 - - - 1,317,496 - 86,302 58,265 58,265 - - - 1,041,184 - 47,662 47,662 50,944 57,697 3,700,790 3,755,463 50,944 57,697 3,050,258 3,101,857 71,105 - 566,002 - - 7,724,398 807,137 13,608,086 - - 64,711 - 201,957 - - 4,736,090 724,406 9,599,600 - - 2019 Loans on demand Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total c) Collateral received – unencumbered The nominal amount of collateral received, or own debt securities issued not available for encumbrance are shown in the table below: e) Non-derivative cash flows disclosed in the table are the undiscounted contractual cash flows The tables below illustrate the cash flows from non-derivative financial determined on the basis of spot rates at the end of the reporting period. instruments by residual maturities at the end of the year. The amounts NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 31 Dec 2020 Financial liabilities and credit-related commitments Financial liabilities measured at amortised cost - deposits from banks and central banks 52,434 19,813 558 491 - 73,296 - borrowings from banks and central banks 666 727 18,146 130,821 10,273 160,633 - due to customers 14,111,895 379,127 1,080,487 848,237 19,059 16,438,805 - borrowings from other customers - subordinated liabilities - other financial liabilities 1,041 - 137,463 2,899 4,426 8,762 9,719 6,803 14,402 43,382 41,400 42,917 39,743 328,352 3,756 96,784 380,981 207,300 NLB Group NLB Non-financial guarantees 25,177 67,127 154,766 334,078 66,198 647,346 in EUR thousands Credit risk related commitments 563,821 226,551 703,691 408,880 424,681 2,327,624 2019 2020 2019 Total 14,892,497 709,432 1,988,572 1,850,206 892,062 20,332,769 Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total d) Source of encumbrance 2020 268,249 10,438 146,750 197,157 198,874 176,532 - - - 111,726 20,165 20,249 10,679,630 7,361,858 3,809,244 3,703,078 11,105,067 7,670,741 4,028,283 3,899,859 NLB Group NLB 2020 2019 2020 2019 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 Other sources of encumbrance 76,187 91,250 65,056 78,174 76,187 91,250 65,056 78,174 5,978 12,055 3,875 1,021,592 8,955 4,107 14,553 5,978 12,055 8,955 14,553 473,274 - 124,433 - 109,230 Total 86,040 1,124,897 78,118 566,001 82,165 227,738 74,011 201,957 in EUR thousands Financial liabilities measured at fair value through profit or loss - 129 96 7,773 Total financial assets 5,228,895 651,541 2,434,589 7,867,386 4,621,083 20,803,494 31 Dec 2019 Financial liabilities and credit-related commitments NLB Group in EUR thousands 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 measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 34,762 829 3,171 713 4,728 20,183 179 132,649 19,175 173,549 - due to customers 9,748,905 310,184 923,914 646,400 11,446 11,640,849 - borrowings from other customers - subordinated liabilities - other financial liabilities 547 45,447 99,576 2,384 - 6,592 6,801 7,984 13,629 29,818 25,080 34,037 28,387 194,798 3,258 67,728 272,126 158,484 Credit risk related commitments 519,894 141,560 542,244 291,615 265,909 1,761,222 Non-financial guarantees 26,319 47,942 146,477 244,240 67,883 532,861 - - 7,998 42,840 As at 31 December 2020, NLB Group and NLB had a large share of assets equalled EUR 1,125 million (31 December 2019: EUR 566 million), Total 10,476,279 514,067 1,664,664 1,411,791 590,856 14,657,657 unencumbered assets. Other sources of encumbrance mostly relate to the relating to the deposit guarantee scheme and to secure funding received obligatory reserve. On the NLB Group level, the amount of encumbered from international financial organisations. Total financial assets 3,089,393 766,986 1,897,395 5,418,262 3,864,711 15,036,747 160 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB in EUR thousands f) An analysis of the statement of financial position by residual contractual maturity 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 in EUR thousands 31 Dec 2020 Financial liabilities and credit-related commitments Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 41,635 85 - 704 - - 13,547 121,751 - due to customers 8,412,546 108,942 184,159 143,115 - borrowings from other customers - subordinated liabilities - other financial liabilities - - 70,217 - 4,426 6,134 13 6,803 582 - 41,400 23,813 - 9,561 4,775 - 328,352 527 41,635 145,648 8,853,537 13 380,981 101,273 Credit risk related commitments 478,872 143,562 418,866 261,282 270,333 1,572,915 Non-financial guarantees 18,203 41,599 90,299 245,158 36,406 431,665 Total 9,021,558 305,367 714,269 836,519 649,954 11,527,667 Total financial assets 2,800,273 217,309 1,008,108 3,878,926 2,904,506 10,809,122 NLB in EUR thousands Financial liabilities measured 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 89,820 85 - - - - 7,746 - 713 17,004 128,181 - due to customers 7,192,671 138,709 274,599 148,107 - - 18,537 10,017 7,746 89,820 164,520 7,764,103 - borrowings from other customers - subordinated liabilities - other financial liabilities - 45,447 63,098 - - 6,403 32 6,801 3,053 2,505 25,080 25,707 - 2,537 194,798 272,126 81 98,342 Financial assets held for trading 16,046 15,173 47,223 6,412 - loans and advances to customers 538,078 421,665 1,733,251 4,252,968 2,673,898 9,619,860 - other financial assets 80,692 8,319 3,380 20,597 150 113,138 31 Dec 2020 Cash, cash balances at central banks, and other demand deposits at banks Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities - loans and advances to banks Fair value changes of hedged items in portfolio hedge of interest rate risk Non-current assets held for sale Property and equipment Investment property Intangible assets Current income tax assets Deferred income tax assets Other assets Total assets Financial liabilities held for trading Derivatives - hedge accounting Financial liabilities measured at amortised cost Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 3,961,812 - - - 3,961,812 - 1 6,067 120 24,954 1,171 10,081 352,474 57,055 337,298 1,960,192 807,271 3,514,290 74,540 154,686 47,087 36,706 76,672 4,375 695,030 609,758 1,503,087 1,238 - 197,005 84,855 42,393 - - - - - - 1,656 327 - - - - - - 22 - - 8,658 - - - - 2,691 - 24,548 9,109 54,992 885 - 78,847 41,501 32,274 - - 28,759 8,337 12,959 - 13,844 8,658 170,270 249,117 13,341 29,394 7,988 - 2,703 154 54,842 61,668 7,988 4,369 31,789 97,140 5,210,926 595,256 2,246,272 7,169,022 4,344,379 19,565,855 15,485 61,161 - - - - - - - - - 15,485 61,161 72,633 31 Dec 2019 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 Investments in associates and joint ventures - deposits from banks and central banks 52,434 19,813 163 223 - borrowings from banks and central banks 658 717 17,468 129,215 10,167 158,225 Credit risk related commitments 462,738 112,337 357,075 198,855 192,711 1,323,716 - due to customers 14,109,959 375,751 1,069,785 825,076 16,596 16,397,167 Non-financial guarantees 19,401 37,667 92,882 197,417 36,197 383,564 - borrowings from other customers Total 7,873,260 295,829 751,446 733,598 452,341 10,106,474 Total financial assets 1,835,982 455,148 1,027,315 3,627,280 3,080,579 10,026,304 - subordinated liabilities - other financial liabilities - lease liabilities Provisions When determining the gap between the financial liabilities and financial compiled a substantial amount of high-quality liquid investments, mostly Current income tax liabilities assets in the maturity bucket of up to one month, it is necessary to be government securities and selected loans, which are accepted as adequate aware of the fact that financial liabilities include total demand deposits, financial assets by the ECB. and that NLB may apply a stability weight of 60% to demand deposits when ensuring compliance with the central bank’s regulations concerning Liabilities and credit-related commitments are included in maturity buckets calculation of the liquidity position. To ensure NLB Group’s and NLB’s based on their residual contractual maturity. liquidity, and based on its approach to risk, in previous years NLB Group Deferred income tax liabilities Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 977 - 136,371 1,092 8,507 644 763 9,467 2,731 3,690 7,703 1,059 1,183 358 - 412 9,120 1,759 9,552 4,850 32,785 - - 2,690 41,072 37,660 - 282,872 25,970 16,947 79,159 - 3,301 1,521 1,345 2,411 3,425 - 411 91,560 288,321 180,941 26,359 125,059 1,002 4,475 6,337 20,427 14,397,518 413,417 1,148,172 1,122,484 361,224 17,442,815 563,821 25,177 226,551 67,127 703,691 154,766 408,880 334,078 424,681 2,327,624 66,198 647,346 Total liabilities and credit-related commitments 14,986,516 707,095 2,006,629 1,865,442 852,103 20,417,785 161 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Group in EUR thousands NLB in EUR thousands 31 Dec 2019 Cash, cash balances at central banks, and other demand deposits at banks Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities - loans and advances to banks Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 31 Dec 2020 Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 2,101,346 20,753 600 - 21 461 - 37 - - 2,428 12,945 - 2,101,346 3,227 8,925 24,038 25,359 246,264 220,646 157,256 956,226 561,036 2,141,428 Cash, cash balances at central banks, and other demand deposits at banks Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost 2,261,533 16,381 526 - - - 1 158 26,084 - 2,449 3,885 - - 4,453 2,261,533 18,831 35,106 91,312 19,936 185,583 867,674 551,846 1,716,351 74,571 63,799 108,115 127,645 562,425 781,092 1,653,848 - debt securities 24,393 2,764 2,440 7 93,403 - loans and advances to banks 66,893 392 13,792 22,824 41,502 50,274 556,444 599,249 1,277,880 28,990 55,840 158,320 - loans and advances to customers 487,218 367,641 1,420,888 3,185,043 2,128,934 7,589,724 - loans and advances to customers 322,669 141,946 609,404 2,029,791 1,460,368 4,564,178 1,012 912 22,486 - other financial assets 33,661 218 - other financial assets Derivatives - hedge accounting Fair value changes of hedged items in portfolio hedge of interest rate risk Non-current assets 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 73,005 788 - - - - - - 202 - - - - - - - - 29 - - - 43,191 - - - - 6,053 - - 903 - 28,441 40,760 11,147 - - 29,419 7,596 - - 8,088 97,415 788 8,991 11,556 28,395 7,499 - 81 - 52,316 39,542 7,499 6,284 29,500 63,811 3,087,230 730,600 1,790,423 4,859,831 3,706,004 14,174,088 Financial liabilities held for trading Financial liabilities measured 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 17,903 - 49,507 34,762 815 - 129 - 3,171 705 - 96 - 4,728 19,393 - 7,773 - 179 - - - - 17,903 7,998 49,507 Fair value changes of hedged items in portfolio hedge of interest rate risk Non-current assets held for sale - 43,191 Property and equipment 167,164 195,605 Investment property Intangible assets Investments in subsidiaries, associates and joint ventures Current income tax assets Deferred income tax assets Other assets Total assets Financial liabilities held for trading Derivatives - hedge accounting Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - due to customers 9,747,598 307,696 913,343 632,382 11,298 11,612,317 - subordinated liabilities 130,528 18,944 170,385 - borrowings from other customers 42,840 - due to customers 8,412,510 108,772 183,709 141,077 - borrowings from other customers - subordinated liabilities - other financial liabilities - lease liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 485 45,367 99,205 371 10,559 1,798 - 8,653 2,202 - 7,300 684 641 473 - 544 5,980 1,754 11,001 2,628 32,464 - - 1,397 27,547 28,244 - 163,448 24,265 9,772 42,888 - 2,478 4,000 - 3,258 1,862 - 355 618 64,458 210,569 141,771 16,713 88,414 2,271 2,833 15,212 - other financial liabilities - lease liabilities Provisions Other liabilities Total liabilities 10,017,023 323,545 992,784 881,812 228,027 12,443,191 Total liabilities and credit-related commitments 9,103,742 305,224 728,060 834,610 608,553 11,580,189 519,894 26,319 141,560 47,942 542,244 146,477 291,615 244,240 265,909 1,761,222 67,883 532,861 Credit risk related commitments Non-financial guarantees 478,872 18,203 143,562 41,599 418,866 90,299 261,282 245,158 270,333 1,572,915 36,406 431,665 Total liabilities and credit-related commitments 10,563,236 513,047 1,681,505 1,417,667 561,819 14,737,274 162 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report - - - - - - - - 6,558 - - - - - - - - - 40 - 4,454 - - - 1,719 1,923 20,584 885 - 22,173 8,300 13,058 65,140 - - 29,214 5,106 - - 12,959 - 69,502 - 15,047 54,503 13,844 4,454 91,675 8,300 28,105 683,863 750,722 - - - 1,923 29,214 11,664 15,500 61,161 41,635 85 - - - - - - - - - 704 12,948 120,260 - - 70,144 73 495 5,064 - 3,690 6,006 128 669 94 13 1,759 - 582 19,463 421 - - 21,899 1,914 41,533 1,487 - - - 9,467 4,687 - 15,500 61,161 41,635 143,464 8,850,755 13 282,872 288,321 12 515 1,630 2,631 98,061 3,212 63,790 9,697 8,606,667 120,063 218,895 328,170 301,814 9,575,609 18,684 8,282 29,249 2,799,925 198,874 926,090 3,648,587 3,453,127 11,026,603 Annual Report 2020Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total the relevant maturity buckets based on residual maturities. The amounts NLB in EUR thousands g) Derivative cash flows disclosed in the table are the contractual undiscounted cash flows prepared The table below illustrates cash flows from derivatives, broken down into on the basis of spot rates on the reporting date. 31 Dec 2019 Cash, cash balances at central banks, and other demand deposits at banks Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities - loans and advances to banks 1,292,211 20,800 365 - 21 144 - 37 785 - 3,227 18,994 - - 2,999 1,292,211 24,085 23,287 25,798 186,222 115,877 795,629 533,131 1,656,657 74,400 8,925 73,519 12,011 107,934 453,767 775,546 1,485,166 48,149 8,358 66,909 144,352 - loans and advances to customers 360,469 162,053 659,576 1,937,129 1,449,372 4,568,599 - other financial assets Derivatives - hedge accounting Fair value changes of hedged items in portfolio hedge of interest rate risk Non-current assets 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 43,901 788 - - - - - - - - 5,472 314 600 22,464 - - - - - - - 23 - - - - 5,532 - - - 1,719 5,440 - 903 - 19,637 9,303 10,199 65,170 - - 29,569 5,670 - - - 8,088 - 70,267 - 15,781 67,279 788 8,991 5,532 89,904 9,303 25,980 286,360 353,249 - - - 5,463 29,569 11,142 1,833,129 434,307 951,319 3,374,349 3,208,453 9,801,557 Financial liabilities held for trading Financial liabilities measured 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 17,892 - 49,507 89,820 85 - - - - - - - - - 7,746 - - - - - - 17,892 7,746 49,507 89,820 705 16,296 126,165 18,313 161,564 - due to customers 7,192,603 138,492 273,855 145,898 9,889 7,760,737 - borrowings from other customers - subordinated liabilities - other financial liabilities - lease liabilities Provisions Other liabilities Total liabilities - 45,367 63,067 31 231 3,949 - - 6,269 134 309 333 32 1,754 2,452 601 22,313 334 23,770 1,937 37,531 4,000 - 81 - 618 95,558 2,784 60,384 9,234 7,462,552 146,242 317,637 349,552 192,349 8,468,332 Credit risk related commitments Non-financial guarantees 462,738 19,401 112,337 37,667 357,075 92,882 198,855 197,417 192,711 1,323,716 36,197 383,564 Total liabilities and credit-related commitments 7,944,691 296,246 767,594 745,824 421,257 10,175,612 31 Dec 2020 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow Interest rate derivatives - Interest rate swaps and cross-currency swaps - Outflow - Inflow Total outflow Total inflow 31 Dec 2019 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow - Outflow - Inflow - Caps and floors - Outflow - Inflow Total outflow Total inflow NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (24,456) (28,334) (65,976) (13,817) 24,494 28,368 66,041 13,828 (20,709) (49,105) (36,055) 20,297 49,112 36,034 - - - - - - (132,583) 132,731 (105,869) 105,443 (692) 73 (2,962) (11,378) (42,239) (18,643) (75,914) 718 4,394 8,777 2,348 16,310 (45,857) (80,401) (113,409) (56,056) (18,643) (314,366) 44,864 78,198 106,469 22,605 2,348 254,484 NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (28,609) (79,443) 28,636 79,494 (34,425) 34,370 (1,170) 94 - - (3,893) 3,897 (2,772) 1,024 - - (7,913) 7,919 (73,630) 73,797 (20,868) 20,886 - - - - - - (136,833) 136,935 (111,948) 112,064 (12,146) (44,445) (23,811) (84,344) 6,359 15,742 14,139 37,358 - - (4) 4 - - (4) 4 (64,204) (86,108) (93,689) (65,317) (23,811) (333,129) 63,100 84,415 88,075 36,632 14,139 286,361 2,505 - 2,537 Interest rate derivatives - 163,448 210,569 - Interest rate swaps and cross-currency swaps 163 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 202031 Dec 2020 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow Interest rate derivatives - Interest rate swaps and cross-currency swaps - Outflow - Inflow Total outflow Total inflow 31 Dec 2019 Foreign exchange derivatives - Forwards - Outflow - Inflow - Swaps - Outflow - Inflow Interest rate derivatives - Interest rate swaps and cross-currency swaps - Outflow - Inflow - Caps and floors - Outflow - Inflow Total outflow Total inflow NLB in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (23,685) (31,650) (65,976) (13,817) 23,715 31,685 66,041 13,828 (24,874) (53,580) 24,821 53,592 (6,063) 6,068 - - - - - - (135,128) 135,269 (84,517) 84,481 6.4. Management of non-financial risks a) Operational risk Through comprehensive identification of operational risks, possible future losses are identified, estimated, and appropriately managed. The major When assuming operational risks, NLB Group follows the guideline that operational risks are actively managed with the measures taken to reduce such risks may not materially impact its operations and, therefore, the risk them. An operational risk profile is prepared once a year on the basis of appetite for operational risks is low to moderate. The risk is also gradually the operational risk identification. Special emphasis is put on the most decreasing due to the reduced complexity of operations in NLB Group, topical risks, among which in particular are those with a low probability of with disinvestment process of non-core activities and optimisation of occurrence and very high potential financial influence. For this purpose, internal processes. NLB Group has set up a system of collecting loss events, the Bank has developed the methodology of stress-testing for operational identification, assessment, and management of operational risks, all with risk. The methodology is a combination of modelling loss event data and the aim of ensuring quality management of operational risks. This is scenario analysis for exceptional, but plausible events. Scenario analyses are particularly valid in strategic banking members. made based on experience and knowledge of experts from various critical All NLB Group banking members monitor risk appetite limits for areas. operational risk. The upper tolerance limit is defined as the limit amount of The capital requirement for operational risk is calculated using the basic net loss that an individual member still allows in its operations. If the sum of indicator approach at NLB Group level and using the standardised net loss exceeds the tolerance limit, a special treatment of major loss events approach at the NLB level. (692) 73 (2,962) (11,378) (42,239) (18,643) (75,914) is required and, if necessary, takes additional measures for the prevention 718 4,394 8,777 2,348 16,310 or mitigation of the same or similar loss events are taken. The warning b) Business Continuity Management (BCM) (49,251) (88,192) (83,417) (56,056) (18,643) (295,559) 48,609 85,995 76,503 22,605 2,348 236,060 NLB in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (27,908) (79,443) 27,935 79,494 (36,436) 36,380 (7,021) 7,019 (7,913) 7,919 (78,099) 78,228 (20,868) 20,886 - - - - - - (136,132) 136,234 (121,556) 121,627 (1,170) (2,772) (12,146) (44,445) (23,811) (84,344) 94 1,024 6,359 15,742 14,139 37,358 - - - - - - (4) 4 - - (4) 4 and critical limit of loss events are also defined, which in case of exceeding In NLB Group, business continuity management is carried out to protect require escalation procedures an acceptance of possible additional risk lives, goods, and reputation. Business continuity plans are prepared to be management measures. In addition, the Bank does not allow certain risks used in the event of natural disasters, IT disasters, and the undesired effects in its business – for them a so-called ‘zero tolerance’ was defined. For of the environment to mitigate their consequences. monitoring some specific more important key risk indicators, that could show a possible increase of an operational risk, the Bank developed a The concept of the action plan that is prepared each year is such that specific methodology as an early warning system. Such risks are periodically the activities contribute to the upgrading or improvement of the Business monitored in different business areas, and the results are discussed at the Continuity Management System. The basis for modernising the business Operational Risk Committee. The latter was named as the highest decision- continuity plans is the regular annual Business Impact Analysis (BIA). making authority in the area of operational risk management. Relevant On its basis, the adequacy of the plans for office buildings HR plans and operational risk committees were also appointed at other NLB Group IT plans is checked. The best indicator of the adequacy of the business banks. The Management Board serves in this role at other subsidiaries. continuity plans is testing. In 2020 just four manual procedures and an IT The main task of the afore-mentioned bodies is to discuss the most test were carried out at NLB (no evacuation test because of the COVID-19 significant operational risks and loss events, and to monitor and support pandemic). No major deviations were discovered. the effective management of operational risks including their mitigation within an individual entity. All NLB Group entities, which are included in In NLB Group, know-how and methodologies are transferred to the the consolidation, have adopted relevant documents that are in line with members (except non-core members which are in the process of liquidation). NLB standards. In banking members, these documents are in line with the The members have adopted appropriate documents which are in line with development of operational risk management and regularly updated. The the standards of NLB and revised in accordance with the development of whole NLB Group uses uniform software support, which is also regularly business continuity management. The activity of the members is monitored upgraded. throughout the year, and expert assistance is provided if necessary. In NLB Group, the reported incurred net loss arising from loss events For more efficient functioning of the business continuity management in 2020 were higher than in the previous year, partially also due to the system in NLB Group, training courses and visits to individual banking COVID-19 pandemic. Nevertheless, the reported incurred net loss remain members are also provided. In 2020, visits of NLB Group banking within the set tolerance limits for operational risk. subsidiaries were suspended due to COVID-19 situation, nevertheless all In general, considerable attention is paid to reporting loss events, their sent to the members with the purpose to help and act in the uniform way. preventive and response measures with regard to business continuity were (65,514) (89,236) (98,158) (65,317) (23,811) (342,036) mitigation measures and defining operational risks in all segments. To treat 64,409 87,537 92,506 36,632 14,139 295,223 major loss events appropriately and as soon as possible, the Bank introduced With regards to IT failures, the Bank successfully used the IT plans an escalation scale for reporting bigger or more important loss events to and instructions for manual procedures, and thus also ensured business the top levels of decision-making at NLB and the Supervisory Board of operations in emergency situations. 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 Following the indications of the outbreak of COVID-19 in Slovenia events. Furthermore, the methodology to monitor, analyse and report key and SEE, NLB Group has taken measures to protect its customers risk indicators is established, servicing as an early warning system. The aim and employees, such as (but not limited to) ensuring the relevant safety is to improve business and supporting processes, as well enabling prompt response. conditions and making sure that the services offered by the Group are provided without any disruption. The NLB Group continuously offered necessary services to clients, especially through digital channels (mobile banking, video calls and telebanking), which the NLB Group continues to 164 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020develop at an accelerated pace. A Crisis Management Team was activated or liability may be exchanged in multiple active markets, the principal a) Financial and non-financial assets and liabilities measured at fair value in the financial statements in the Bank and other banking members with full engagement of the market for the asset or liability must be determined. In the absence of a Management Board members. Special attention was paid to continuous principal market, the most advantageous market for the asset or liability provision of services to clients, their monitoring, health protection measures must be determined. and prevention of cyber fraud. • Level 2 – A valuation technique where inputs are observable, either directly (i.e., prices) or indirectly (i.e., derived from prices). Level 2 c) Management of other types of non-financial risks – capital includes prices quoted for similar assets or liabilities in active markets and risk, strategic risks, reputation risk, and profitability risk prices quoted for identical or similar assets, and liabilities in markets that Risks not included in the regulatory capital requirements (standardised are not active. The sources of input parameters for financial instruments, approach) but have or might have an important influence on the risk such as yield curves, credit spreads, foreign exchange rates, and the profile of NLB Group, are regularly assessed, monitored, and managed. volatility of interest rates and foreign exchange rates, is Bloomberg. In addition, they are integrated into internal capital adequacy assessment • Level 3 – A valuation technique where inputs are not based on observable process (ICAAP). NLB Group established internal methodologies for market data. Unobservable inputs are used to the extent that relevant identifying and assessing specific types of risk, referring to the Group’s observable inputs are not available. Unobservable inputs must reflect the business model or arising from other external circumstances. If a certain assumptions that market participants would use when pricing an asset or risk is assessed as a materially important risk, relevant disposable preventive liability. This level includes non-tradable shares and bonds, and derivatives and mitigation measures are applied, including regular monitoring of associated with these investments and other assets and liabilities for which their effectiveness. On this basis, internal capital is considered and its fair value cannot be determined with observable market inputs. consumption regularly monitored. 6.5. Fair value hierarchy of financial and non-financial assets and liabilities in an active market for an identical asset or liability. An active market is Fair value is the price that would be received when selling an asset or paid a market in which transactions for an asset or liability are executed with Wherever possible, fair value is determined as an observable market price 31 Dec 2020 Financial assets Financial instruments held for trading Debt instruments Derivatives Financial assets measured at fair value through other comprehensive income Debt instruments Equity instruments Non-trading financial assets mandatorily at fair value through profit and loss Debt instruments Equity instruments Loans Financial liabilities to transfer a liability in an orderly transaction between market participants sufficient frequency and volume to provide pricing information on an Financial instruments held for trading at the measurement date. NLB Group uses various valuation techniques to ongoing basis. Assets and liabilities measured at fair value in active markets determine fair value. IFRS 13 specifies a fair value hierarchy with respect are determined as the market price of a unit (e.g. share) at the measurement to the inputs and assumptions used to measure financial and non-financial date, multiplied by the quantity of units owned by NLB Group. The fair assets and liabilities at fair value. Observable inputs reflect market data value of assets and liabilities whose market is not active is determined using obtained from independent sources, while unobservable inputs reflect valuation techniques. These techniques bear a different intensity level of the assumptions of NLB Group. This hierarchy gives the highest priority estimates and assumptions, depending on the availability of observable to observable market data when available, and the lowest priority to market inputs associated with the asset or liability that is the subject of the unobservable market data. NLB Group considers relevant and observable valuation. Unobservable inputs shall reflect the estimates and assumptions Derivatives Derivatives - hedge accounting Non-financial assets Investment properties Non-current assets held for sale Non-financial assets impaired during the year market prices in its valuations, where possible. The fair value hierarchy that other market participants would use when pricing the asset or liability. Recoverable amount of property and equipment comprises the following levels: For non-financial assets measured at fair value and not classified at Level Recoverable amount of investments in subsidiaries, associates and joint ventures • Level 1 – Quoted prices (unadjusted) on active markets. This level includes 1, fair value is determined based on valuation reports provided by certified listed equities, debt instruments, derivatives, units of investment funds, valuators. Valuations are prepared in accordance with the International and other unadjusted market prices of assets and liabilities. When an asset Valuation Standards (IVS). NLB Group NLB in EUR thousands Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value 2,450 2,450 81,619 66,356 - 15,263 786 - 786 84,855 68,806 16,049 2,450 2,450 15,595 - - 15,595 786 - 786 18,831 2,450 16,381 2,068,317 1,444,146 1,827 3,514,290 1,663,619 52,458 274 1,716,351 2,060,346 1,385,245 7,971 58,901 900 927 67,799 3,446,491 1,663,619 7,585 - 1,671,204 13,146 2,157 10,989 - - - - - - - - - - - - 29,247 42,393 - 2,157 4,171 15,160 25,076 25,076 15,485 15,485 61,161 - - - 15,485 15,485 61,161 22,632 32,210 54,842 8,658 3,897 - - - - 8,658 3,897 - - - - - - - - - - - - - 44,873 274 45,147 7,947 27,159 35,106 - - - - 4,171 4,171 7,947 22,988 30,935 15,500 15,500 61,161 8,300 4,454 - 280 - - - - - - 15,500 15,500 61,161 8,300 4,454 - 4,670 4,950 165 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 31 Dec 2019 Financial assets Financial instruments held for trading Debt instruments Derivatives Derivatives - hedge accounting Financial assets measured at fair value through other comprehensive income Debt instruments Equity instruments Non-trading financial assets mandatorily at fair value through profit and loss Debt instruments Equity instruments Loans Financial liabilities Financial instruments held for trading Derivatives Derivatives - hedge accounting Financial liabilities measured at fair value through profit or loss Non-financial assets Investment properties Non-current assets held for sale Non-financial assets impaired during the year Recoverable amount of property and equipment Recoverable amount of investments in subsidiaries, associates and joint ventures NLB Group NLB in EUR thousands Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value 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. 4,325 4,325 - - 18,906 - 18,906 788 807 - 807 - 24,038 4,325 19,713 788 4,325 4,325 - - 18,953 - 18,953 788 807 - 807 - 24,085 4,325 19,760 788 1,847,901 289,418 4,109 2,141,428 1,603,904 52,494 259 1,656,657 1,847,739 244,066 - 2,091,805 1,603,904 7,807 - 1,611,711 162 45,352 4,109 49,623 7,682 1,756 5,926 - - - - - - - - - - - - - 17,677 25,359 - 2,716 1,756 8,642 14,961 14,961 17,903 17,903 49,507 - - - 17,903 17,903 49,507 - 7,998 7,998 23,383 28,933 52,316 43,191 4,299 - - - - 43,191 4,299 - - - - - - - - - - - - - - 44,687 259 44,946 7,516 15,771 23,287 - - - - 2,716 2,716 7,516 13,055 20,571 17,892 17,892 49,507 - - - 17,892 17,892 49,507 - 7,746 7,746 9,303 5,532 - 310 - - - 9,303 5,532 - 5,222 5,532 Derivatives Fair value hierarchy 1 2 3 Equities Equity stake Funds Debt securities Loans Equities Currency Interest 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 valuation model valuation model valuation model valuation model (underlying in level 1) valuation model (underlying instrument in level 3) Transfers from level 1 to 3 from level 1 to 3 from level 1 to 2 from level 2 to 3 from level 2 to 3 equity excluded from exchange market fund management company stops publishing regular valuation debt securities excluded from exchange market counterparty reclassified from performing to NPL underlying instrument excluded from exchange market from level 1 to 3 from level 3 to 1 from level 1 to 2 from level 3 to 2 from level 3 to 2 companies in insolvency proceedings from level 1 to 3 equity not liquid (not trading for 2 months) from level 3 to 1 equity included in exchange market fund management company starts publishing regular valuation debt securities not liquid (not trading for 6 months) counterparty reclassified from NPL to performing underlying instrument included in exchange market from level 1 to 3 and from 2 to 3 companies in insolvency proceedings from level 2 to 1 and from 3 to 1 start trading with debt securities on exchange market from level 3 to 2 until valuation parameters are confirmed on ALCO (at least on quarterly basis) For 2020 and 2019, neither NLB Group nor NLB had any significant Non-financial assets on Level 2 of the fair value hierarchy at NLB Group transfers between levels of valuation of financial instruments measured at and NLB include investment properties. fair value in financial statements. c) Financial and non-financial assets and liabilities at income approach based on an estimation of future cash flows discounted to When valuing bonds classified on Level 2, NLB Group primarily uses the Level 2 regarding the fair value hierarchy the present value. Financial instruments on Level 2 of the fair value hierarchy at NLB Group and NLB include: The input parameters used in the income approach are the risk-free yield curve and the spread over the yield curve (credit, liquidity, country). • debt securities: bonds not quoted on active markets and valuated by a valuation model; Fair values for derivatives are determined using a discounted cash flow • derivatives: derivatives except forward derivatives and options on equity model based on the risk-free yield curve. Fair values for options are instruments that are not quoted on active markets; determined using valuation models for options (the Garman and Kohlhagen • performing loans measured at fair value, which according to IFRS 9 do model, binomial model, and Black-Scholes model). not pass SPPI test. Fair value is calculated on the basis of the discounted expected future cash flows with the required rate of return; and • the National Resolution Fund. At least one of the 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 166 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020is assessed. When valuing an investment property, average rents at similar Non-financial assets on Level 3 of the fair value hierarchy at NLB Group Movements of financial assets and liabilities at Level 3 locations and capitalisation ratios such as: the risk-free yield, risk premium include investment properties. and the risk premium to account for capital preservation are used. Rents at similar locations are generated from various sources, like data from lessors NLB Group uses three valuation methods for the valuation of equity and lessees, web databases, and own databases. NLB Group has observable financial assets mentioned in first bullet: the income, market, and cost data for all investment property at its disposal. If observable data for similar approaches. locations are not available, NLB Group uses data from wider locations and appropriately adjusts such data. NLB Group selects valuation model and values of unobservable input data within a reasonable possible range, but uses model and input data that other d) Financial and non-financial assets and liabilities market participants would use. at Level 3 of the fair value hierarchy Financial instruments on Level 3 of the fair value hierarchy in NLB Group At least one of the three valuation methods are used for the valuation of and NLB include: investment property. The majority of investment property is valued using the income approach where the present value of future expected returns • equities: mainly financial equities that are not quoted on active markets; is assessed. When valuing an investment property, average rents at similar • derivative financial instruments: forward derivatives and options on equity locations and capitalisation ratios such as: the risk-free yield, risk premium instruments that are not quoted on an active organised market. Fair and the risk premium to account for capital preservation are used. Rents at values for forward derivatives are determined using the discounted cash similar locations are generated from various sources, like data from lessors flow model. Fair values for equity options are determined using valuation and lessees, web databases, and own databases. NLB Group has observable models for options (the Garman and Kohlhagen model, binomial model, data for all investment property at its disposal. If observable data for similar and Black-Scholes model). Unobservable inputs include the fair values of locations are not available, NLB Group uses data from wider locations and underlying instruments determined using valuation models. The source of appropriately adjusts such data. observable market inputs is the Bloomberg information system; and • non-performing loans measured at fair value, which according to IFRS 9 do not pass SPPI test. Fair value is calculated on the basis of the discounted expected future cash flows with the required rate of return. In defining the expected cash flows for non-performing loans, the value of collateral and other pay off estimates can be used. NLB Group Balance as at 1 January 2019 Effects of translation of foreign operations to presentation currency Valuation: - through profit or loss - recognised in other comprehensive income Exchange differences Increases Decreases Transfers to Level 3 Balance as at 31 December 2019 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries Valuation: - through profit or loss - recognised in other comprehensive income Exchange differences Increases Decreases Financial instruments held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at fair value through profit or loss in EUR thousands Financial liabilities measured at fair value through profit or loss Derivatives Debt instruments Equity instruments Equity instruments Loans and other financial assets Total financial assets Loans and other financial liabilities 329 - 478 - - - - - 807 - - (21) - - - - - - - - - - - - - 900 - - - - 3,960 106 - 43 - - - - 4,109 53 85 - 21 - (3,341) 927 1,923 23,800 30,012 4,190 - - 106 - 7,128 14,291 21,897 3,798 - - - - - 43 - 7,147 7,147 (6,935) (30,277) (37,212) 600 2,716 - - - 14,961 - - 600 22,593 53 985 - 10 - - - 7,998 - - 1,642 (2,720) (1,099) (8,006) - (187) - - 4,171 - (48) 20,399 (7,516) 25,076 21 (235) 20,399 (10,857) 31,860 - 8 - - - Balance as at 31 December 2020 786 900 167 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Financial instruments held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at fair value through profit or loss in EUR thousands Financial liabilities measured at fair value through profit or loss Derivatives Equity instruments Equity instruments Loans and other financial assets Total financial assets Loans and other financial liabilities NLB Group 2019 Financial assets held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at fair value through profit or loss in EUR thousands Financial liabilities measured at fair value through profit or loss Derivatives Equity instruments Equity instruments Loans and other financial assets Loans and other financial liabilities 248 1,923 21,596 24,096 3,981 Items of Income statement NLB Balance as at 1 January 2019 Valuation: - through profit or loss - recognised in other comprehensive income Exchange differences Increases Decreases Transfers to Level 3 Balance as at 31 December 2019 Valuation: - through profit or loss - recognised in other comprehensive income Exchange differences Increases Decreases 329 478 - - - - - 807 (21) - - - - - 11 - - - - 259 - 15 - - - 7,128 13,346 20,952 3,755 - - - (6,935) 600 2,716 1,642 - (187) - - - - 7,146 (29,033) - 13,055 11 - 7,146 (35,968) 600 16,837 - 10 - - - 7,746 (2,831) (1,210) (7,754) - (48) 19,833 (7,021) 22,988 15 (235) 19,833 (7,021) 28,219 - 8 - - - Balance as at 31 December 2020 786 274 4,171 NLB Group and NLB recognise the effects from valuation of trading comprehensive income in the accumulated other comprehensive income instruments in income statement line ‘Gains less losses from financial item ‘Financial assets measured at fair value through other comprehensive assets and liabilities held for trading,’ effects from valuation of non-trading income.’ equity instruments and loans mandatorily measured at fair value through profit or loss in income statement line ‘Gains less losses from non-trading In 2020 and in 2019, NLB Group and NLB recognised the following financial assets mandatorily at fair value through profit or loss,’ and effects unrealised gains or losses for financial instruments that were at Level 3 as at from valuation of financial assets measured at fair value through other 31 December: NLB Group 2020 Items of Income statement Financial assets held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at fair value through profit or loss in EUR thousands Financial liabilities measured at fair value through profit or loss NLB 2019 Items of Income statement Derivatives Equity instruments Equity instruments Loans and other financial assets Loans and other financial liabilities Gains less losses from financial assets and liabilities held for trading 478 Gains less losses from financial assets and liabilities held for trading (21) Gains less losses from non-trading assets mandatorily at fair value through profit or loss Foreign exchange translation gains less losses Item of Other comprehensive income Financial assets measured at fair value through other comprehensive income - - - - - - - 1,642 (187) - (2,720) (48) - 8,006 (8) 21 - - - Gains less losses from financial assets and liabilities held for trading 478 Gains less losses from non-trading assets mandatorily at fair value through profit or loss Foreign exchange translation gains less losses Item of Other comprehensive income Financial assets measured at fair value through other comprehensive income - - - - - - 43 - 845 - - - 14,291 - - - (3,798) (10) - NLB 2020 Items of Income statement Financial assets held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at fair value through profit or loss in EUR thousands Financial liabilities measured at fair value through profit or loss Derivatives Equity instruments Equity instruments Loans and other financial assets Loans and other financial liabilities Gains less losses from financial assets and liabilities held for trading (21) Gains less losses from non-trading assets mandatorily at fair value through profit or loss Foreign exchange translation gains less losses Item of Other comprehensive income Financial assets measured at fair value through other comprehensive income - - - - - - - 1,642 (187) - (2,831) (48) - 7,754 (8) 15 - - - Financial assets held for trading Financial assets measured at fair value through OCI Non-trading financial assets mandatorily at fair value through profit or loss in EUR thousands Financial liabilities measured at fair value through profit or loss Derivatives Equity instruments Equity instruments Loans and other financial assets Loans and other financial liabilities Gains less losses from non-trading assets mandatorily at fair value through profit or loss Foreign exchange translation gains less losses Item of Other comprehensive income Financial assets measured at fair value through other comprehensive income - - - - - - 11 - 845 - - - 13,346 - - - (3,755) (10) - 168 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Movements of non-financial assets at Level 3 Investment property Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additions Disposals Transfer from/(to) property and equipment Transfer from/(to) non-current assets held for sale Transfer from/(to) other assets Net valuation to fair value Balance as at 31 December in EUR thousands NLB Group 2020 28,933 (24) 19,643 609 (189) (62) 17 (16,790) 73 32,210 2019 32,208 84 - - (4,188) (363) 550 - 642 28,933 e) Fair value of financial instruments not measured purposes only and do not impact NLB Group statement of financial at fair value in financial statements position or income statement. Financial instruments not measured at fair value are not managed on a fair value basis. For these instruments fair values are calculated for disclosure The table below shows estimated fair values of financial instruments not Deposits and borrowings The estimated fair value of other deposits and borrowings from customers The fair value of sight deposits and overnight deposits equals their carrying is based on discounted cash flows using interest rates for new deposits with value. However, their actual value for NLB Group depends on the timing similar residual maturities. 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 Other financial assets and liabilities term deposits. Therefore, their economic value for NLB Group differs from The carrying amount of other financial assets and liabilities is a reasonable the carrying amount. approximation of their fair value as they mainly relate to short-term receivables and payables. Fair value hierarchy of financial instruments not measured at fair value in financial statements NLB Group NLB in EUR thousands 31 Dec 2020 Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value Financial assets measured at amortised cost - debt securities 1,267,437 288,484 7,182 1,563,103 1,254,337 79,503 - loans and advances to banks - loans and advances to customers - other financial assets Financial liabilities measured at amortised cost - deposits from banks and central banks - - - - - - - 197,220 9,873,137 113,138 72,648 155,673 16,414,382 93,020 234,629 46,372 - 207,300 - - - - - - - - - 197,220 9,873,137 113,138 72,648 155,673 16,414,382 93,020 - - - - - - - 165,966 4,674,069 54,503 41,635 140,702 8,860,267 13 281,001 234,629 46,372 207,300 - 101,273 - - - - - - - - - - 1,333,840 165,966 4,674,069 54,503 41,635 140,702 8,860,267 13 281,001 101,273 in EUR thousands measured at fair value in the statement of financial position. - borrowings from banks and central banks NLB Group NLB in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Carrying value Fair value Carrying value Fair value Carrying value Fair value Carrying value Fair value - due to customers - borrowings from other customers - subordinated liabilities - other financial liabilities Financial assets measured at amortised cost - debt securities 1,503,087 1,563,103 1,653,848 1,715,350 1,277,880 1,333,840 1,485,166 1,543,518 NLB Group NLB - loans and advances to banks 197,005 197,220 93,403 93,503 158,320 165,966 144,352 150,520 - loans and advances to customers 9,619,860 9,873,137 7,589,724 7,775,128 4,564,178 4,674,069 4,568,599 4,713,622 31 Dec 2019 Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value - other financial assets 113,138 113,138 97,415 97,415 54,503 54,503 67,279 67,279 Financial assets measured at amortised cost - debt securities 1,464,677 250,673 Financial liabilities measured at amortised cost - deposits from banks and central banks 72,633 72,648 42,840 42,690 41,635 41,635 89,820 89,820 - borrowings from banks and central banks 158,225 155,673 170,385 178,374 143,464 140,702 161,564 169,312 - due to customers 16,397,167 16,414,382 11,612,317 11,630,157 8,850,755 8,860,267 7,760,737 7,768,365 - loans and advances to banks - loans and advances to customers - other financial assets - borrowings from other customers 91,560 93,020 64,458 63,868 13 13 2,537 2,548 Financial liabilities measured at amortised cost - subordinated liabilities 288,321 281,001 210,569 211,889 288,321 281,001 210,569 211,889 - other financial liabilities 207,300 207,300 158,484 158,484 101,273 101,273 98,342 98,342 Loans and advances to banks Loans and advances to customers The estimated fair value of deposits is based on discounted cash flows The estimated fair value of loans and advances represents the discounted using prevailing market interest rates for instruments with similar credit risk amount of estimated future cash flows expected to be received. Expected and residual maturities. The fair value of overnight deposits equals their cash flows are discounted at current market rates for debts with similar carrying value. credit risk and residual maturities to determine their fair value. - deposits from banks and central banks - borrowings from banks and central banks - due to customers - borrowings from other customers - subordinated liabilities - other financial liabilities - - - - - - - 93,503 7,775,128 97,415 42,690 178,374 11,630,157 63,868 166,349 45,540 - 158,484 - - - - - - - - - - 1,715,350 1,437,771 105,747 93,503 7,775,128 97,415 42,690 178,374 11,630,157 63,868 - - - - - - - 150,520 4,713,622 67,279 89,820 169,312 7,768,365 2,548 211,889 166,349 45,540 158,484 - 98,342 - - - - - - - - - - 1,543,518 150,520 4,713,622 67,279 89,820 169,312 7,768,365 2,548 211,889 98,342 169 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 20206.6. Offsetting financial assets and financial liabilities In 2013, NLB Group also novated certain standardised derivatives (some 7. Analysis by segment for NLB Group NLB Group has entered into bilateral foreign exchange netting interest rate swaps) to a clearing house or central counterparty. A system of arrangements with certain banks and corporates. Cash flows from such daily margins assures the mitigation and collateralisation of exposures, as a) Segments transactions that are due on the same day in the same currency, are settled well as the daily settlement of cash flows for each currency. on a net basis, i.e. a single cash flow for each currency. The settlement of all interest rates derivatives is also carried out by netting of both legs of All derivatives are conducted under the conditions of signed Master transaction. Assets and liabilities related to these netting arrangements are Agreements (MA), with international banks ISDA MA is in place along with not presented in a net amount in the statement of financial position because CSA annex and for corporates domestic MA is in place, which enable daily netting rules apply to cash flows and not to an instrument as a whole. evaluation and exchange of margining. in EUR thousands 2020 Total net income NLB Group Net income from external customers 184,758 81,124 213,881 12,713 NLB Group in EUR thousands Corporate and Investment Banking in Slovenia Retail Banking in Slovenia Strategic Foreign Markets Financial Markets in Slovenia Non-Core Members Other activities Unallocated Total 170,358 75,185 209,091 39,633 5,445 4,537 908 1,199 2,012 (813) 7,958 7,472 486 240 203 37 Intersegment net income (14,400) (5,939) (4,790) 26,921 Net interest income 81,395 34,007 159,261 23,471 Net interest income from external customers 96,357 40,873 163,255 (3,126) Intersegment net interest income (14,962) (6,866) (3,994) 26,598 Administrative expenses (102,089) (37,878) (94,862) (6,972) (11,848) (11,047) Depreciation and amortisation (12,043) (3,911) (14,162) (619) (1,011) (685) Reportable segment profit/(loss) before impairment and provision charge Other net gains/(losses) from equity investments in subsidiaries, associates and joint ventures Negative goodwill 56,226 33,396 100,067 32,042 (7,414) (3,774) 874 - - - - 137,858 - - - - - - Impairment and provisions charge (15,069) 8,982 (59,084) (1,267) 2,854 (7,770) Profit/(loss) before income tax 42,031 42,378 178,841 30,775 (4,560) (11,544) Owners of the parent Non-controlling interests Income tax Profit for the year 42,031 42,378 175,792 30,775 (4,560) (11,544) - - - - 3,049 - - - - - - - Reportable segment assets 2,545,714 2,043,324 9,346,255 5,218,038 131,204 273,332 Investments in associates and joint ventures 7,988 - - - - - Reportable segment liabilities 7,367,145 1,519,067 7,879,089 557,402 4,571 115,540 Additions to non-current assets 15,679 6,047 13,517 418 695 2,941 - - - - - - - - - - - - - - - 507,670 504,484 3,186 299,573 299,573 - (264,696) (32,431) 210,543 874 137,858 (71,354) 277,921 274,872 3,049 (5,165) (5,165) 269,707 19,557,867 7,988 17,442,815 39,298 - - - - 31 Dec 2020 Amounts not set off in the statement of financial position Financial assets/liabilities Derivatives - assets Derivatives - liabilities Gross amounts of recognised financial assets/liabilities 15,820 76,646 Impact of master netting agreements Financial instruments collateral 608 608 594 74,861 31 Dec 2019 Amounts not set off in the statement of financial position NLB Group Financial assets/liabilities Derivatives - assets Derivatives - liabilities Gross amounts of recognised financial assets/liabilities 19,695 67,399 Impact of master netting agreements Financial instruments collateral 16 59,657 4,061 4,061 NLB 31 Dec 2020 Amounts not set off in the statement of financial position Financial assets/liabilities Derivatives - assets Derivatives - liabilities Gross amounts of recognised financial assets/liabilities 16,189 76,661 Impact of master netting agreements Financial instruments collateral 594 74,861 623 623 NLB 31 Dec 2019 Amounts not set off in the statement of financial position Financial assets/liabilities Derivatives - assets Derivatives - liabilities Gross amounts of recognised financial assets/liabilities Impact of master netting agreements Financial instruments collateral 19,742 67,399 4,061 4,061 16 59,657 NLB Group and NLB have no financial assets/liabilities set off in the statement of financial position. Net amount 14,618 1,177 in EUR thousands Net amount 15,618 3,681 in EUR thousands Net amount 14,972 1,177 in EUR thousands Net amount 15,665 3,681 170 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB Group in EUR thousands Corporate and Investment Banking in Slovenia Retail Banking in Slovenia Strategic Foreign Markets Financial Markets in Slovenia Non-Core Members Other activities Unallocated Total 165,689 80,236 212,072 35,612 11,484 14,051 2019 Total net income Net income from external customers 172,730 85,002 214,841 19,227 11,382 13,991 Intersegment net income (7,041) (4,766) (2,769) 16,385 Net interest income 87,409 37,264 157,543 33,604 Net interest income from external customers 94,829 41,348 160,463 17,703 102 2,740 4,277 Intersegment net interest income (7,420) (4,084) (2,920) 15,901 (1,537) 60 (73) (133) 60 Administrative expenses (106,454) (40,518) (94,912) (6,888) (13,170) (13,400) Depreciation and amortisation (11,546) (3,937) (12,931) (621) (1,300) (1,271) Reportable segment profit/(loss) before impairment and provision charge Other net gains/(losses) from equity investments in subsidiaries, associates and joint ventures 47,689 35,780 104,229 28,103 (2,986) (621) 4,197 - - - - - Impairment and provisions charge (4,382) 21,043 (11,295) (475) (108) (5,776) Profit/(loss) before income tax 47,504 56,823 92,934 27,628 (3,094) (6,397) Owners of the parent Non-controlling interests Income tax Profit for the year 47,504 56,823 84,692 27,628 (3,094) (6,397) - - - - 8,242 - - - - - - - Reportable segment assets 2,551,708 2,042,200 4,731,350 4,412,561 169,456 259,314 Investments in associates and joint ventures 7,499 - - - - - Reportable segment liabilities 6,464,417 1,341,878 4,043,172 465,168 8,791 119,766 Additions to non-current assets 13,310 4,618 13,994 342 291 4,111 - - - - - - - - - - - - - - 519,143 517,172 1,971 318,487 318,487 - (275,342) (31,607) 212,194 4,197 (994) 215,397 207,155 8,242 (13,579) (13,579) 193,576 14,166,589 7,499 12,443,191 36,667 - - - - Segment reporting is presented in accordance with the strategy on the basis • Corporate and Investment Banking in Slovenia, which includes banking of the organisational structure used in management reporting of NLB with Key Corporate Clients, SMEs, Investment Banking and Custody, Group’s results. NLB Group’s segments are business units that focus on Restructuring and Workout and part of the new subsidiary NLB different customers and markets. They are managed separately because each Lease&Go that includes operations with corporate clients. business unit requires different strategies and service levels. • Strategic Foreign Markets, which consist of the operations of strategic Group banks in the strategic markets (North Macedonia, Bosnia and The business activities of NLB are divided into several segments. Interest Herzegovina, Kosovo, Montenegro, and Serbia). As a result of the income and expenses are reallocated between segments on the basis of acquisition of Komercijalna banka Beograd at the end of the year fund transfer prices (FTP). Other NLB Group members are, based on their 2020, NLB Group acquired three banks: Komercijalna banka Beograd, business activity, included in only one segment except NLB Lease&Go Komercijalna banka Podgorica, and Komercijalna banka Banja Luka, as which is according to its business activities divided into two segments. well as an investment fund company KomBank Invest Beograd. The segments of NLB Group are divided into core and non-core segments. financial instruments, while they also present the results of asset and • Financial Markets in Slovenia include treasury activities and trading in The core segments are the following: liabilities management (ALM). • Other accounts for the categories whose operating results cannot be allocated to specific segments as well as a new subsidiary ‘The NLB • Retail Banking in Slovenia, which includes banking with individuals Cultural Heritage Management Institute.’ and asset management (NLB Skladi), and part of new subsidiary NLB Lease&Go that includes operations with retail clients as well as the contribution to the result of the associated company Bankart (in 2019 also Non-Core Members include the operations of non-core Group members, namely REAM and leasing entities (with the exception of NLB Lease&Go), of the joint venture NLB Vita and in 2020 realised a gain on sale of this NLB Srbija and NLB Crna Gora. investment). Data for 2019 are adjusted to changed schemes prescribed by the Bank of There was no income from transactions with a single external customer that Slovenia (relocation of some items from the other net operating income to amounted to 10% or more of NLB Group’s income. other general and administrative expenses), so there might be changes in previously reported numbers (note 2.3.). b) Geographical information NLB Group is primarily a financial group, and net interest income country in which individual NLB Group entities are located. Geographical analysis includes a breakdown of items with respect to the represents the majority of its net revenues. NLB Group’s main indicator of a segment’s efficiency is net profit before tax. NLB Group Slovenia South East Europe North Macedonia Serbia Montenegro Croatia Revenues Net income Profit/(loss) before income tax Income tax in EUR thousands 2020 2019 2020 2019 2020 2019 2020 2019 322,128 332,511 290,376 297,134 93,362 114,711 (1,154) (2,821) 265,600 266,923 214,486 218,126 184,266 100,034 (3,963) (10,692) 81,710 84,134 64,466 66,701 21,008 36,216 (1,566) (3,211) 35,240 33,578 28,046 26,143 130,912 31,291 33,121 25,033 28,321 2,741 42 63 454 799 (1,019) 4,997 8,353 (105) 1,323 (426) (12) (172) (1,909) (100) Bosnia and Herzegovina 69,616 70,975 57,079 58,945 15,776 28,738 (1,572) (2,857) Kosovo Western Europe Germany Switzerland Czech Republic Total 47,701 45,052 39,408 37,217 14,848 21,835 (1,710) (2,443) 3 2 1 - 571 7 564 - (378) 80 (458) - 1,911 55 1,856 1 293 (433) 726 - 665 (276) 941 (13) (48) - (48) - (66) - (66) - 587,731 600,005 504,484 517,172 277,921 215,397 (5,165) (13,579) The column ‘Revenues’ includes interest and similar income, dividend The column ‘Net Income’ includes net interest income, dividend income, income, and fee and commission income. NLB Group Slovenia South East Europe North Macedonia Serbia Montenegro Croatia Bosnia and Herzegovina Kosovo Western Europe Germany Switzerland Total net fee and commission income, the net effect of financial instruments, foreign exchange translation, the effect on the derecognition of assets, net operating income, and gain less losses from non-current assets held for sale. Non-current assets Total assets Number of employees in EUR thousands 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 153,671 151,934 10,142,675 9,350,558 219,886 142,870 9,411,671 4,811,617 37,181 34,971 1,576,941 1,448,179 109,167 25,549 4,587,600 639,351 17,934 381 39,576 15,647 58 58 - 30,089 2,045 709,797 533,849 4,390 12,497 34,246 1,654,026 1,381,718 15,970 878,917 796,023 158 152 6 11,509 1,648 9,861 11,913 1,787 10,126 2,691 6,098 877 3,198 467 7 1,086 463 3 1 2 2,750 3,124 903 494 312 7 934 474 4 1 3 373,615 294,962 19,565,855 14,174,088 8,792 5,878 171 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The table below presents data on NLB Group members before intercompany eliminations and consolidation journals. 8. Related-party transactions Revenues Net income Profit/(loss) before income tax Income tax member of the key management personnel of the reporting entity. Related related parties have control, joint control, or significant influence parties of NLB Group and NLB include: key management personnel A number of banking transactions are entered into with related parties in 2020 2019 2020 2019 2020 2019 2020 2019 (Management Board, other key management personnel and their family the normal course of business. The volume of related-party transactions in EUR thousands A related party is a person or entity that is related to NLB Group in such a Related-party transactions with Management Board and other key manner that it has control or joint control, has a significant influence, or is a management personnel, their family members and companies these 341,092 415,437 328,302 372,613 120,806 185,857 (1,221) (2,926) 265,889 267,546 211,337 216,145 44,271 99,862 (3,949) (10,635) members); the Supervisory Board; companies in which members of the and the outstanding balances are as follows: Management Board, key management personnel, or their family members have control, joint control, or a significant influence; a major shareholder of 81,673 84,105 62,658 65,151 20,788 36,088 (1,566) (3,211) NLB with significant influence, subsidiaries, associates and joint ventures. NLB Group Slovenia South East Europe North Macedonia Serbia Montenegro Croatia 35,318 33,798 28,386 26,869 (6,761) 31,376 33,381 24,356 28,236 187 145 142 468 772 (1,019) 4,919 8,368 (105) 1,337 (426) (12) (115) (1,909) (100) Bosnia and Herzegovina 69,678 71,054 56,791 58,264 16,032 28,604 (1,572) (2,857) Kosovo Western Europe Germany Switzerland Czech Republic Total 47,699 45,066 38,678 36,853 15,044 21,988 (1,710) (2,443) 335 2 333 - 1,688 2 1,686 - (144) 81 (225) - 2,886 56 588 (432) 2,830 1,020 1 - 2,033 (275) 2,308 (13) (34) - (34) - (6) - (6) - 607,316 684,671 539,495 591,645 165,665 287,739 (5,204) (13,567) Management Board and other Key management personnel Family members of the Management Board and other key management personnel in EUR thousands 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 2020 2019 2020 2019 2020 2019 2020 2019 Loans issued Balance at 1 January Increase Decrease Balance at 31 December Interest income Deposits received Balance at 1 January Increase Decrease Balance at 31 December Interest expense Other financial assets Other financial liabilities Guarantees issued and credit commitments Fee income Other income Other expenses 2,119 1,476 (1,311) 2,284 40 1,579 1,392 1,903 1,192 (976) 2,119 41 1,732 1,367 (1,361) (1,520) 1,610 1,579 (4) 2 2,759 242 15 16 (11) (4) - 2,759 246 11 20 (8) 520 184 347 492 130 90 231 245 (260) (319) (220) (346) 444 8 871 826 (741) 956 - - - 78 7 - - 520 8 447 1,175 (751) 871 - - - 82 6 - - - 1 193 207 (264) 136 - - 8 6 101 - (76) 130 3 102 265 (174) 193 - - 4 91 5 - (54) 248 109 (52) 305 7 198 277 (152) 323 - - - 33 1 - - 413 43 (208) 248 5 341 158 (301) 198 - - - 18 2 - - Key management compensation Board or employee performing special work and refers to the period to The performance of key management is defined by financial and non- which the variable part of the salary for performance relates. financial criteria. They are entitled to the annual variable part of the salary based on their achievement of the financial and non-financial performance The members of the Management Board under the contract shall be criteria, which encompass the goals of NLB Group or NLB, the goals of entitled to a variable portion of the performance remuneration on the basis the organisational unit, and the personal goals of the employee performing of NLB Group’s financial objectives, financial objectives targeted in an special work. area which is within the competence of each member of the Management Board and on the basis of the personal objectives of the member of the Members of the Management Board are entitled to a contractual gross Management Board of the Bank. The objectives and criteria of each salary considering the limitations of the Slovenian legislation (Zban-2). The applicable Remuneration Policy for the Employees Performing special job in member of the Management Board shall be determined each year by the Supervisory Board of the Bank at the time of adoption of the Bank’s annual NLB d.d. regulates the remuneration of the members of the Management business plan. 172 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020The variable portion of performance receipts for a given financial year of the variable remuneration must consist of instruments. The employee Payments to individual members of the Management Board may not exceed eight average gross monthly salaries of a member of the performing special job may only transfer such instruments with the Bank’s Management Board in the financial year. The members of the Management approval which cannot be issued before the expiry of two years after the Board shall be entitled to a variable part of the performance benefit only in acquisition. The latter applies to both – the non-deferred and deferred part proportional part to the actual period of employment (duration of the term of the variable remuneration. Member Blaž Brodnjak 01.12.2012 of office) of the Bank during the period to which the variable part of the performance benefit relates. The deferred part of the variable part of the salary must be deferred for a period of at least three and at most five years of the day on which the The non-deferred part of variable remuneration is paid no later than non-deferred part of such variable remuneration is paid, according to the three months after the adoption of the Annual Report of NLB d.d. for legislation (ZBan-2). the business year to which the variable remuneration relates. Variable remuneration part of payment of an employee performing special work is Upon the conclusion of the General Meeting of Shareholders, members awarded and paid in cash, provided that the amount does not exceed EUR of the Supervisory Board receive payment for their performance, while 50 thousand for each financial year, and if this is permissible in accordance the previously mentioned amounts are limited to a decision of the General with the relevant regulation. Meeting of Shareholders and are in full compliance with the applicable If the variable remuneration part of payment of an employee performing special work exceeds EUR 50 thousand for each financial year and if this The table below shows payments in presented periods. is permissible in accordance with the relevant regulation, then at least 50% recommendations of corporate governance. Andreas Burkhardt 18.09.2013 Management Board Other key management personnel Supervisory Board in EUR thousands 2020 1,401 4 259 4 - 1,668 2019 1,676 4 - 6 162 1,848 2020 5,501 95 108 49 - 5,753 2019 5,064 86 - 72 1,316 6,538 2020 649 34 - - - 2019 357 85 - - - 683 442 NLB Group and NLB Short-term benefits Cost refunds Long-term bonuses: - severance pay - other benefits - variable part of payments Total 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. Archibald Kremser 31.07.2013 Petr Brunclík 18.05.2020 László Pelle 26.10.2016 - 31.01.2020 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 - variable part of payments Total Short-term benefits: - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - severance payments - other benefits - variable part of payments Total 2020 384,734 2,250 1,304 940 - 389,228 352,796 17,861 1,212 940 - 372,809 366,484 24,331 1,248 940 - 393,003 170,517 20,647 710 705 - 192,579 57,624 4,343 129 258,750 117 - 320,963 in EUR 2019 433,882 2,173 1,016 1,409 45,497 483,977 397,291 18,515 1,047 1,409 45,497 463,759 412,973 25,393 1,028 1,409 45,497 486,300 - - - - - - 355,473 30,364 1,261 - 1,409 25,000 413,507 173 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Payments to individual members of the Supervisory Board Member Andreas Klingen 22.06.2015 Primož Karpe 11.02.2016 David Eric Simon 04.08.2016 Peter Groznik 08.09.2017 Gregor Rok Kastelic 10.06.2019 Shrenik Dhirajlal Davda 10.06.2019 Mark William Lane Richards 10.06.2019 Verica Trstenjak 15.06.2020 Sergeja Kočar 17.06.2020 Bojana Šteblaj 17.06.2020 Janja Žabjek Dolinšek 20.11.2020 Petra Kakovič Bizjak 17.06.2020 - 10.09.2020 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 2020 - 84,000 2,690 - 89,583 8,235 - 75,000 6,455 - 66,000 429 - 70,625 4,239 - 66,000 3,917 - 75,000 3,617 - 33,933 - - 5,662 153 - 5,255 457 - 169 - - 7,302 178 in EUR 2019 5,940 41,136 17,200 7,260 48,980 9,698 6,380 36,994 16,770 5,720 32,214 4,056 1,980 21,901 4,406 2,200 23,072 6,136 2,200 26,008 4,119 - - - - - - - - - - - - - - - Member László Zoltan Urbán 11.02.2016 - 15.06.2020 Alexander Bayr 04.08.2016 - 15.06.2020 Simona Kozjek 08.09.2017 - 28.02.2019 Vida Šeme Hočevar 08.09.2017 - 28.02.2019 Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Session fees Annual compensation Costs refunds Related-party transactions with subsidiaries, associates and joint ventures Loans issued Balance at 1 January Increase Decrease Balance at 31 December Interest income Impairment Deposits received Balance at 1 January Effects of translation of foreign operations to presentation currency Increase Decrease Balance at 31 December Interest expense Other financial assets Other financial liabilities Guarantees issued and credit commitments Fee income Fee expense Other income Other expense 2020 - 31,875 1,456 - 36,000 2,799 - - - - - - in EUR 2019 5,445 33,384 6,759 6,765 38,758 15,992 935 3,750 - 1,155 5,000 22 NLB Group in EUR thousands Associates Joint ventures 2020 2019 2020 2019 1,066 165 (125) 1,106 32 27 842 - 4,461 (1,330) 3,973 - 19 596 38 15 1,176 112 (222) 1,066 34 21 722 - 1,920 (1,800) 842 - 18 1,294 31 9 (13,977) (14,101) 177 (699) 192 (545) 1,205 11 (365) 851 11 (23) 8,455 (3) 90,966 (95,984) 3,434 (62) 1 - 21 983 (952) 144 (37) 2,981 37 (1,813) 1,205 21 66 4,424 17 92,618 (88,604) 8,455 (66) 539 250 26 4,985 (2,138) 134 (23) 174 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020NLB in EUR thousands Related-party transactions with major shareholder with significant influence The volumes of related party transactions with major shareholder are as follows: Subsidiaries Associates Joint ventures 2020 2019 2020 2019 2020 2019 Loans issued Balance at 1 January Increase Decrease Balance at 31 December Interest income Impairment Deposits Balance at 1 January Increase Decrease Balance at 31 December Interest income Impairment Deposits received Balance at 1 January Increase Decrease Balance at 31 December Interest expense Derivatives Fair value Contractual amount Other financial assets Other financial liabilities 160,634 187,744 98,221 95,047 (89,679) (122,157) 169,176 160,634 5,007 (1,835) 4,694 1,461 70,469 56,784 658,253 376,939 (659,336) (363,254) 69,386 70,469 21 4 34 (12) 80,806 40,313 7,934,453 13,862,854 (7,995,844) (13,822,361) 19,415 (21) 354 12,424 948 800 80,806 (228) 47 9,743 984 235 Guarantees issued and credit commitments 55,068 32,727 Income/(expense) provisions for guaranties and commitments Received loan commitments and financial guarantees Fee income Fee expense Other income Other expense Gains less losses on derecognition of financial assets/liabilities held for trading Gains less losses from non-trading financial assets mandatorily at fair value through profit or loss (53) 6,692 6,857 (25) 780 (1,065) 1,208 436 (461) 3,297 6,276 (19) 533 (443) (225) (419) 1,066 165 (125) 1,106 32 27 - - - - - - 842 4,461 (1,330) 3,973 - - - 19 480 38 - - 15 1,176 112 (222) 1,066 34 21 - - - - - - 1,174 10 (333) 851 10 (23) - - - - - - 2,940 35 (1,801) 1,174 19 66 - - - - - - 722 1,920 5,418 86,850 2,588 82,911 (1,800) (91,984) (80,081) 842 284 5,418 - - - 18 1,174 31 - - 9 (11,140) (11,918) 177 (664) - - 192 (542) - - - - - 1 - 21 - - 925 (332) 144 (37) - - - - - 539 116 26 - - 4,847 (771) 133 (23) - - Loans issued Balance at 1 January Increase Decrease Balance at 31 December Interest income Investments in securities Balance at 1 January Increase Decrease Valuation Balance at 31 December Interest income Other financial assets Other financial liabilities Guarantees issued and credit commitments Fee income Fee expense Other income Other expense Gains less losses on derecognition of financial assets/liabilities not classified at FVPL Gains less losses on derecognition of financial assets/liabilities held for trading NLB Group and NLB disclose all transactions with the major shareholder with significant influence. For transactions with other government-related entities, NLB Group discloses individually significant transactions. NLB Group Shareholder in EUR thousands NLB Shareholder 2020 2019 2020 2019 28,206 1,607 (6,594) 23,219 720 850,965 866,414 79,156 3,320 (54,270) 28,206 1,563 908,263 767,386 28,206 1,607 (6,594) 23,219 720 778,088 758,140 76,374 3,270 (51,438) 28,206 1,513 855,872 630,949 (1,026,883) (836,044) (940,974) (720,857) 1,372 691,868 8,219 807 6 1,241 194 (30) 206 (6) 14,660 43 11,360 850,965 13,014 651 22 1,168 144 (35) 181 (5) 2,809 (360) 1,869 597,123 8,681 807 6 1,241 194 (30) 206 (6) 14,660 43 12,124 778,088 14,047 651 22 1,168 144 (35) 181 (5) 2,809 (360) 175 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Amount of significant transactions concluded during the year Number of significant transactions concluded during the year in EUR thousands 9. Events after the reporting date NLB published Takeover Bid for acquisition of all remaining regular shares of Komercijalna banka Beograd (i.e. 2,820,270 regular shares or 16.77% of this class of shares) at RSD 3,315.47 per one share and all priority shares of Komercijalna banka (i.e 373,510 priority shares or 100% of this class of shares) at RSD 934.72 per one share. Takeover bid is open for acceptance for 30 days, beginning from 11 March 2021. NLB Group and NLB Loans Borrowings, deposits and business accounts NLB Group and NLB Loans Debt securities measured at amortised cost Borrowings, deposits and business accounts NLB Group and NLB Interest income from loans Fees and commissions income Interest income from debt securities measured at amortised cost Interest expense from borrowings, deposits, and business accounts 2020 2019 2020 2019 - - 57,113 179,309 - - 1 2 Year-end balance of all significant transactions Number of significant transactions at year-end in EUR thousands 2020 516,058 76,396 70,006 2019 582,081 78,014 115,500 2020 2019 6 1 1 6 1 2 Effects in income statement during the year in EUR thousands 2020 3,669 27 1,166 (290) 2019 3,175 175 2,139 (849) 176 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Alternative Performance Indicators Table 43b: NLB Group’s banking subsidiaries CIR calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd (in EUR million and %) 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 The Bank has chosen to present these APIs, either because they are in common use within the industry or because they are commonly used by Cost of risk - Calculated as the ratio between credit impairments and provisions annualized from the income statement and average net loans to investors and as such useful for disclosure. The APIs are used internally to customers. monitor and manage operations of the Bank and the Group, and are not considered to be directly comparable with similar KPIs presented by other companies. The Bank’s APIs are described below together with definitions. Table 42: NLB Group cost of risk calculation Numerator Credit impairments and provisions(i) Denominator Average net loans to customers(ii) Cost of risk NLB Group (in EUR million and bps) 2020(iii) 47.6 7,696.1 62 2019 -14.5 7,339.4 -20 (i) NLB internal information. Credit impairments and provisions are annualized, calculated as all established and released impairments on loans and provisions for off balance (from income statement) in the period divided by number of months for reporting period and multiplied by 12. The net established Credit impairments and provisions are shown with a positive sign, net released Credit impairments and provisions are shown with a negative sign. (ii) NLB internal information. Average net loans to customers are calculated as sum of balance of previous year end (31 December) and monthly balances of the last day of each month from January to month t divided by (t+1). (iii) NLB Group (w/o Komercijalna Banka group). Cost to income ratio (CIR) - Indicator of cost efficiency, calculated as the ratio between total costs and total net operating income. Table 43a: NLB Group and NLB CIR calculation Numerator Total cost Denominator Total net operating income Cost to income ratio (CIR) 26.5 26.8 13.9 13.5 15.1 14.8 12.3 11.8 13.6 13.8 20.4 19.8 62.7 65.2 30.1 30.7 26.7 27.6 38.7 36.9 24.3 26.6 26.6 25.2 42.3% 41.2% 46.1% 44.1% 56.5% 53.6% 31.8% 32.0% 56.0% 51.9% 76.4% 78.6% CIR is adjusted for 2019 to changed schemes prescribed by the BoS. FVTPL - Financial assets measured mandatorily at fair value through profit or loss (FVTPL) are not classified into stages and are therefore Stage 3 – An impaired portfolio: NLB Group recognises lifetime allowances for these financial assets. Definition on default is harmonised shown separately (before deduction of fair value for credit risk; loans with with EBA guidelines. contractual cash flows that are not solely payments of principal and interest on the principal amount outstanding). A significant increase in credit risk is assumed: when a credit rating significantly deteriorates at the reporting date in comparison to the IFRS 9 classification into stages for loan portfolio: credit rating at initial recognition; when a financial asset has material IFRS 9 requires an expected loss model, where an allowance for the assessment); if NLB Group expects to grant the client forbearance or if expected credit losses (ECL) are formed. Loans measured at amortised the client is placed on the watch list. delays over 30 days (days past due are also included in the credit rating costs (AC) are classified into the following stages (before deduction of loan loss allowances): The remaining minor part (0.30 per cent. December 2020; 0.27 per cent. December 2019) represents FVTPL. Classification into stages is calculated Stage 1 – A performing portfolio: no significant increase of credit risk since initial recognition, NLB Group recognises an allowance based on a in internal data source, by which the NLB Group measures the loan portfolio quality and is also published in Business Report of Annual and 12-month period; Interim Reports. (in EUR million and %) lifetime period; Stage 2 – An underperforming portfolio: a significant increase in credit risk since initial recognition, NLB Group recognises an allowance for a NLB Group NLB Table 44a: NLB Group Stage 1 calculation 2020 2019 2018 2020 2019 2018 Numerator Total costs Denominator Total net operating income Cost to income ratio (CIR) CIR is adjusted for 2018 and 2019 to changed schemes prescribed by the BoS. 293.9 305.0 292.3 180.5 191.1 180.3 504.5 58.3% 517.2 59.0% 496.9 58.8% 311.7 57.9% 354.7 53.9% 324.8 55.5% Numerator Total (AC) loans in Stage 1 Denominator Total gross loans and advances IFRS 9 classification into Stage 1 NLB Group (in EUR million and %) 2020 2019 2018 12,650.8 8,947.7 7,816.7 13,686.6 92.4% 9,793.5 91.4% 9,017.2 86.7% 177 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 44b: NLB Group (w/o Komercijalna Banka group) Stage 1 calculation Table 44f: NLB Group (w/o Komercijalna Banka group) Stage 3 calculation NLB Group (w/o Komercijalna Banka group) (in EUR million and %) NLB Group (w/o Komercijalna Banka group) (in EUR million and %) Numerator Total (AC) loans in Stage 1 Denominator Total gross loans and advances IFRS 9 classification into Stage 1 2020 Numerator 10,065.6 Total (AC) loans in Stage 3 11,061.0 91.0% Denominator Total gross loans and advances IFRS 9 classification into Stage 3 2020 435.3 11,061.0 3.9% Table 44c: NLB Group Stage 2 calculation Table 44g: NLB Group and NLB Group (w/o Komercijalna Banka group) Stage 1 in the Corporate segment calculation Numerator Total (AC) loans in Stage 2 Denominator Total gross loans and advances IFRS 9 classification into Stage 2 NLB Group (in EUR million and %) 2020 2019 2018 560.1 471.1 577.9 13,686.6 4.1% 9,793.5 4.8% 9,017.2 6.4% Numerator Total (AC) loans in Stage 1 to Corporates Denominator Total gross loans to Corporates Corporates - IFRS 9 classification into Stage 1 NLB Group (in EUR million and %) NLB Group (w/o Komercijalna Banka group) 2020 4,135.7 4,921.0 84.0% 2020 3,169.6 3,920.3 80.9% Table 44d: NLB Group (w/o Komercijalna Banka group) Stage 2 calculation (in EUR million and %) Table 44h: NLB Group and NLB Group (w/o Komercijalna Banka group) Stage 2 in the Corporate segment calculation Numerator Total (AC) loans in Stage 2 Denominator Total gross loans and advances IFRS 9 classification into Stage 2 Table 44e: NLB Group Stage 3 calculation Numerator Total (AC) loans in Stage 3 Denominator Total gross loans and advances IFRS 9 classification into Stage 3 NLB Group (w/o Komercijalna Banka group) 2020 560.1 11,061.0 5.1% Numerator Total (AC) loans in Stage 2 to Corporates Denominator Total gross loans to Corporates Corporates - IFRS 9 classification into Stage 2 NLB Group (in EUR million and %) NLB Group (w/o Komercijalna Banka group) 2020 426.8 4,921.0 8.7% 2020 426.8 3,920.3 10.9% NLB Group (in EUR million and %) 2020 2019 2018 475.7 348.6 573.3 13,686.6 3.5% 9,793.5 3.6% 9,017.2 6.4% Table 44i: NLB Group and NLB Group (w/o Komercijalna Banka group) Stage 3 in the Corporate segment calculation Numerator Total (AC) loans in Stage 3 to Corporates Denominator Total gross loans to Corporates Corporates - IFRS 9 classification into Stage 3 NLB Group (in EUR million and %) NLB Group (w/o Komercijalna Banka group) 2020 358.6 4,921.0 7.3% 2020 324.0 3,920.3 8.3% 178 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 44j: NLB Group and NLB Group (w/o Komercijalna Banka group) Stage 1 in the Retail segment calculation Table 45a: NLB Group LCR calculation Numerator Total (AC) loans in Stage 1 to Retail Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 1 NLB Group 2020 4,779.2 5,029.7 95.0% (in EUR million and %) NLB Group (w/o Komercijalna Banka group) 2020 Numerator 31 Dec 2020 30 Nov 2020 31 Oct 2020 30 Sep 2020 31 Aug 2020 31 Jul 2020 30 Jun 2020 31 May 2020 30 Apr 2020 31 Mar 2020 29 Feb 2020 31 Jan 2020 31 Dec 2019 NLB Group (in EUR million and %) 3,935.5 Stock of HQLA 5,003.0 4,849.5 4,746.2 4,710.4 4,730.0 4,726.0 4,737.7 4,449.6 4,292.4 3,974.2 3,901.5 3,799.7 3,985.0 4,180.2 94.1% Denominator Net liquidity outflow 1,943.1 1,586.9 1,555.4 1,553.9 1,569.3 1,616.3 1,594.0 1,439.9 1,457.0 1,308.0 1,231.2 1,092.4 1,226.4 LCR 257.5% 305.6% 305.1% 303.1% 301.4% 292.4% 297.2% 309.0% 294.6% 303.8% 316.9% 347.8% 324.9% Table 44k: NLB Group and NLB Group (w/o Komercijalna Banka group) Stage 2 in the Retail segment calculation Based on the EC’s Delegated Act on LCR. NLB Group (in EUR million and %) NLB Group (w/o Komercijalna Banka group) Table 45b: NLB Group (w/o Komercijalna Banka group) LCR calculation Numerator Total (AC) loans in Stage 2 to Retail Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 2 2020 133.3 5,029.7 2.7% 2020 133.3 4,180.2 3.2% Numerator Stock of HQLA Denominator Net liquidity outflow LCR Table 44l: NLB Group and NLB Group (w/o Komercijalna Banka group) Stage 3 in the Retail segment calculation Based on the EC’s Delegated Act on LCR. NLB Group (w/o Komercijalna Banka group) (in EUR million and %) 31 Dec 2020 4,703.5 1,642.1 286.4% Numerator Total (AC) loans in Stage 3 to Retail Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 3 NLB Group (in EUR million and %) NLB Group (w/o Komercijalna Banka group) 2020 117.1 5,029.7 2.3% 2020 111.4 4,180.2 2.7% Liquidity coverage ratio - LCR refers to high liquid assets held by the financial institution to cover its net liquidity outflows over a 30-calendar day flows under pressure. The assets to hold must equal to or greater than their net cash outflow over a 30-calendar-day stress period (having at least 100% stress period. coverage). The parameters of the stress scenario are defined under Basel III guidelines. Below presented calculations are based on internal data sources. The LCR requires financial institutions to maintain a sufficient reserve of high-quality liquid assets (HQLA) to withstand a crisis that puts their cash Net loan to deposit ratio (LTD) – Calculated as the ratio between net loans to customers and deposits from customers. There is no regulatory defined limitation on the LTD, however the aim of this measure is to restrict extensive growth of the loan portfolio. Table 46a: NLB Group and NLB LTD calculation NLB Group NLB (in EUR million and %) 31 Dec 2020 31 Dec 2019 31 Dec 2018 31 Dec 2020 31 Dec 2019 31 Dec 2018 Numerator Net loans to customers 9,644.9 7,604.7 7,148.4 4,595.1 4,589.2 4,478.1 Denominator Deposits from customers 16,397.2 11,612.3 10,464.0 Net loan to deposit ratio (LTD) 58.8% 65.5% 68.3% 8,850.8 51.9% 7,760.7 59.1% 7,033.4 63.7% 179 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 46b: NLB Group’s banking subsidiaries LTD calculation Table 47c: NLB Group member banks in SEE total net interest margin on the basis of interest bearing assets calculation (in EUR million and %) (in EUR million and %) NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd NLB Group member banks in SEE 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 1-12 2020 1-9 2020 1-6 2020 1-3 2020 1-12 2019 Numerator Net loans to customers 956.9 915.1 430.7 411.7 399.2 399.3 559.2 540.1 367.3 346.3 472.2 412.0 Numerator Net interest income(i) Denominator 159.3 159.1 158.0 160.1 157.5 Denominator Deposits from customers Net loan to deposit ratio (LTD) 1,288.8 1,175.6 633.5 618.1 521.6 515.2 748.3 685.4 431.7 436.5 496.3 437.3 Average interest bearing assets(ii) Net interest margin on interest bearing assets 4,782.3 3.33% 4,744.2 3.35% 4,694.1 3.37% 4,669.5 3.43% 4,390.9 3.59% 74.2% 77.8% 68.0% 66.6% 76.5% 77.5% 74.7% 78.8% 85.1% 79.3% 95.1% 94.2% (i)(ii) Please refer to notes under Table 47a. Table 47d: NLB net interest margin on the basis of interest bearing assets calculation Net interest margin on the basis of interest bearing assets – Calculated as the ratio between net interest income annualized and average interest bearing assets. Table 47a: NLB Group net interest margin on the basis of interest bearing assets calculation NLB Group (in EUR million and %) 1-12 2020 1-9 2020 1-6 2020 1-3 2020 1-12 2019 Numerator Net interest income(i) Denominator NLB (in EUR million and %) 1-12 2020 1-9 2020 1-6 2020 1-3 2020 1-12 2019 138.9 139.4 142.4 149.5 158.1 Numerator Net interest income(i) Denominator 299.6 299.9 301.8 311.2 318.5 (i)(ii) Please refer to notes under Table 47a. Average interest bearing assets(ii) Net interest margin on interest bearing assets 9,620.4 1.44% 9,455.8 1.47% 9,270.4 1.54% 9,078.1 1.65% 8,537.9 1.85% Average interest bearing assets(ii) 14,492.7 14,009.2 13,791.1 13,560.3 12,845.9 Table 47e: NLB Group’s banking subsidiaries net interest margin on the basis of interest bearing assets calculation Net interest margin on interest bearing assets 2.07% 2.14% 2.19% 2.29% 2.48% (i) Net interest income is annualized, calculated as sum of interest income and interest expenses in the period divided by number of days in the period and multiplied by number of days in the year. (ii) NLB internal information. Average interest bearing assets for the NLB Group and SEE banking members are calculated as the sum of balance of previous year end (31 December) and monthly balances of the last day of each month from January to reporting month t divided by (t+1). Average interest bearing assets for NLB are calculated as sum of balance of the previous year end (31 December) and daily balances in the period (from 1 January to day d – last day in reporting month) divided by (d+1). Numerator NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd (in EUR million and %) 1-12 2020 1-12 2019 1-12 2020 1-12 2019 1-12 2020 1-12 2019 1-12 2020 1-12 2019 1-12 2020 1-12 2019 1-12 2020 1-12 2019 Table 47b: NLB Group (w/o Komercijalna Banka group) net interest margin on the basis of interest bearing assets calculation Net interest income(i) 48.1 49.0 18.6 18.5 17.8 18.0 32.3 31.0 20.6 20.3 21.8 20.7 Numerator Net interest income(i) Denominator Average interest bearing assets(ii) Net interest margin on interest bearing assets (i)(ii) Please refer to notes under Table 47a. NLB Group (w/o Komercijalna Banka group) (in EUR million and %) 1-12 2020 299.6 14,187.6 2.11% Denominator Average interest bearing assets(ii) Net interest margin on interest bearing assets 1,453.0 1,338.5 756.7 738.9 611.9 608.1 817.7 715.8 499.9 475.2 643.1 514.4 3.3% 3.7% 2.5% 2.5% 2.9% 3.0% 3.9% 4.3% 4.1% 4.3% 3.4% 4.0% (i)(ii) Please refer to notes under Table 47a. 180 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Net interest margin on total assets - Calculated as ratio between net interest income annualized and average total assets. Table 48: NLB Group and NLB net interest margin on total assets calculation NLB Group NLB (in EUR million and %) NPL - Non-performing loans include loans to D and E rated clients, namely loans at least 90 days past due, or loans unlikely to be repaid without of loan loss allowances; ratio in gross terms. Where non-performing loans are defined as loans to D and E rated clients, namely loans at least 90 recourse to collateral (before deduction of loan loss allowances). days past due, or loans unlikely to be repaid without recourse to collateral NPL per cent. - Share of non-performing loans in total loans: non- performing loans as a percentage of total loans to clients before deduction (before deduction of loan loss allowances). Share of non-performing loans is calculated on the basis of internal data source, by which the NLB Group monitors the loan portfolio quality. Numerator Net interest income(i) Denominator Average total assets(ii) 1-12 2020 1-12 2019 1-12 2018 1-12 2020 1-12 2019 1-12 2018 Table 50a: NLB NPL calculation 299.6 318.5 312.9 138.9 158.1 158.0 15,086.4 13,311.7 12,515.5 10,336.2 9,206.3 8,870.9 Numerator (in EUR million and %) NLB 2020 2019 2018 Net interest margin on total assets 2.0% 2.4% 2.5% 1.3% 1.7% 1.8% Total Non-Performing Loans 208.4 169.5 342.9 (i) Net interest income is annualized, calculated as sum of interest income and interest expenses in the period divided by number of days in the period and multiplied by number of days in the year. (ii) NLB internal information. Average total assets for the NLB Group are calculated as sum of balance of the previous year end (31 December) and monthly balances of the last day of each month from January to month t divided by (t+1). Average total assets for NLB are calculated as sum of total assets of the previous year end (31 December) and daily balances in the period (from 1 January to day d – last day in reporting month) divided by (d+1). Denominator Total gross loans NPL per cent. 6,980.8 3.0% 5,989.9 2.8% 5,455.5 6.3% NPE - NPE includes risk exposure to D and E rated clients (includes loans and advances, debt securities and off-balance exposures, which are included in report Finrep 18; before deduction of allowances for the expected credit before deduction of allowances for the expected credit losses; ratio in gross Table 50b: NLB Group NPL calculation terms. NLB Group (in EUR million and %) losses). Non-performing exposures measured by fair value loans through Where Non-Performing Exposure includes risk exposure to D and E P&L (FVTPL) are taken into account at fair value increased by amount of rated clients (includes loans and advances, debt securities and off-balance negative fair changes for credit risk. exposures, which are included in report Finrep 18; before deduction of Numerator 2020 2019 2018 2017 2016 2015 2014 2013 2012 NPE per cent. (on-balance and off-balance) / Classified on-balance and off-balance exposures - NPE per cent. in accordance with EBA allowances for the expected credit losses). Share of NPEs is calculated on the basis of internal data source, by which the NLB Group monitors the portfolio quality. Below presented calculations are based on internal data methodology: NPE as a percentage of all exposures to clients in Finrep18, sources. Table 49a: NLB and NLB Group NPE calculation Total Non-Performing Loans 474.7 374.7 622.3 844.5 1,299.2 1,895.5 2,623.4 2,797.7 3,683.6 Denominator Total gross loans 13,686.6 9,793.5 9,017.2 9,130.4 9,443.7 9,829.2 10,432.6 10,936.6 13,083.8 NPL per cent. 3.5% 3.8% 6.9% 9.2% 13.8% 19.3% 25.1% 25.6% 28.2% NLB NLB Group Table 50c: NLB Group (w/o Komercijalna Banka group) NPL calculation (in EUR million and %) Numerator Total Non-Performing on-balance and off- balance Exposure in Finrep18 Denominator 2020 2019 2018 2020 2019 2018 235.1 221.0 384.7 513.0 432.7 674.8 Total on-balance and off-balance exposures in Finrep18 12,223.1 11,087.8 9,763.5 22,042.3 16,228.5 14,410.5 NPE per cent. 1.9% 2.0% 3.9% 2.3% 2.7% 4.7% Numerator Total Non-Performing Loans Denominator Total gross loans NPL per cent. Table 49b: NLB Group (w/o Komercijalna Banka group) NPE calculation NLB Group (w/o Komercijalna Banka group) (in EUR million and %) Table 50d: NLB Group’s banking subsidiaries NPL calculation NLB Group (w/o Komercijalna Banka group) (in EUR million and %) 2020 434.8 11,061.0 3.9% (in EUR million and %) Numerator Total Non-Performing on-balance and off-balance Exposure in Finrep18 Denominator Total on-balance and off-balance exposures in Finrep18 NPE per cent. 2020 464.8 17,738.6 2.6% NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 63.2 48.3 13.7 7.6 24.7 18.6 17.5 10.9 27.3 18.1 8.7 8.0 Numerator Total Non- Performing Loans Denominator Total gross loans 1,239.1 1,147.1 590.2 598.0 553.4 563.8 768.2 714.4 470.0 455.3 605.5 512.9 NPL per cent. 5.1% 4.2% 2.3% 1.3% 4.5% 3.3% 2.3% 1.5% 5.8% 4.0% 1.4% 1.6% 181 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 50e: Komercijalna Banka group NPL calculation Table 52a: NLB and NLB Group NPL coverage ratio 2 calculation Komercijalna Banka, Beograd Komercijalna Banka, Banja Luka Komercijalna Banka, Podgorica (in EUR million and %) NLB NLB Group (in EUR million and %) 2020 2019 2018 2020 2019 2018 Numerator Total Non-Performing Loans Denominator Total gross loans NPL per cent. 2020 1.2 198.4 0.6% 35.2 2,315.1 1.5% Numerator Loan loss allowances non-performing loan portfolio 120.7 96.2 195.8 272.1 243.7 402.0 3.6 130.0 2.7% Denominator Total Non-Performing Loans NPL coverage ratio 2 (NPL CR 2) 208.4 57.9% 169.5 56.7% 342.9 57.1% 474.7 57.3% 374.7 65.0% 622.3 64.6% NPL coverage ratio 1 - The coverage of the gross non-performing loans portfolio with loan loss allowances on the entire loan portfolio - loan accounts in respect of the total of impaired loans. NPL coverage ratio 1 is calculated on the basis of internal data source, by which the NLB Group impairment in respect of non-performing loans. It shows the level of monitors the quality of loan portfolio. credit provisions that the entity has already absorbed into its profit and loss Table 51a: NLB NPL coverage ratio 1 calculation (in EUR million and %) NLB 2020 2019 2018 Numerator Table 52b: NLB Group (w/o Komercijalna Banka group) NPL coverage ratio 2 calculation NLB Group (w/o Komercijalna Banka group) (in EUR million and %) Numerator Loan loss allowances non-performing loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 2 (NPL CR 2) 2020 272.0 434.8 62.6% Loan loss allowances entire loan portfolio 158.4 129.2 225.8 Table 52c: NLB Group’s banking subsidiaries NPL coverage ratio 2 calculation Denominator Total Non-Performing Loans NPL coverage ratio 1 (NPL CR 1) 208.4 76.0% 169.5 76.2% 342.9 65.8% NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd (in EUR million and %) 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Table 51b: NLB Group NPL coverage ratio 1 calculation 2020 2019 2018 2017 2016 2015 2014 2013 2012 NLB Group (in EUR million and %) Numerator Loan loss allowances entire loan portfolio Denominator 388.4 334.2 479.6 654.8 988.7 1,368.1 1,801.8 1,948.9 2,184.1 Total Non-Performing Loans 474.7 374.7 622.3 844.5 1,299.2 1,895.5 2,623.4 2,797.7 3,683.6 NPL coverage ratio 1 (NPL CR 1) 81.8% 89.2% 77.1% 77.5% 76.1% 72.2% 68.7% 69.7% 59.3% Table 51c: NLB Group (w/o Komercijalna Banka group) NPL coverage ratio 1 calculation Numerator Loan loss allowances entire loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 1 (NPL CR 1) 2020 378.0 434.8 86.9% NPL coverage ratio 2 - The coverage of the gross non-performing loans portfolio with loan loss allowances on the non-performing loans portfolio. NPL coverage ratio 2 is calculated on the basis of internal data source, by which the NLB Group monitors the loan portfolio quality. NLB Group (w/o Komercijalna Banka group) Loan loss allowances non-performing loan portfolio (in EUR million and %) Numerator Denominator Total Non-Performing Loans NPL coverage ratio 2 (NPL CR 2) Numerator Loan loss allowances non-performing loan portfolio Denominator Total Non- Performing Loans NPL coverage ratio 2 (NPL CR 2) 43.6 33.7 8.7 6.0 17.0 15.4 14.2 9.4 13.9 9.9 5.2 3.8 63.2 48.3 13.7 7.6 24.7 18.6 17.5 10.9 27.3 18.1 8.7 8.0 69.0% 69.7% 63.6% 78.8% 68.9% 82.9% 81.2% 86.0% 50.9% 54.8% 59.8% 47.1% Table 52d: Komercijalna Banka group NPL coverage ratio 2 calculation Komercijalna Banka, Beograd Komercijalna Banka, Banja Luka Komercijalna Banka, Podgorica (in EUR million and %) 2020 0.0 1.2 0.0% 0.0 35.2 0.0% 0.0 3.6 0.0% Net NPL Ratio - Share of net non-performing loans in total net loans: non-performing loans after deduction of loss allowances on the non- performing loans portfolio as a percentage of total loans to clients after deduction of loan loss allowances; ratio in net terms. Below presented calculations are based on internal data sources. 182 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 53: NLB and NLB Group Net NPL Ratio calculation Table 56: NLB and NLB Group Gross NPL ratio (EBA def.) (BoS) calculation NLB NLB Group NLB NLB Group (in EUR million and %) (in EUR million and %) Numerator Numerator Net volume of non-performing loans 87.8 73.3 147.1 202.7 131.0 220.2 Gross volume of Non-Performing Loans and advances 199.1 164.3 328.4 466.0 372.9 613.9 2020 2019 2018 2020 2019 2018 2020 2019 2018 2020 2019 2018 Denominator Total Net Loans 6,822.4 5,860.7 5,229.7 13,298.2 9,459.2 8,537.5 Gross volume of Loans and advances in Finrep18 7,028.2 6,050.9 5,482.4 13,795.3 9,888.1 9,087.0 Denominator Net NPL ratio per cent. (%Net NPL) 1.3% 1.3% 2.8% 1.5% 1.4% 2.6% Gross NPL ratio per cent. (% NPL) 2.8% 2.7% 6.0% 3.4% 3.8% 6.8% Received collaterals for NPLs / NPL – The coverage of the gross non-performing loans portfolio with collateral for non-performing loans. The collateral market value is used for this calculation. Below presented calculations are based on internal data sources. NPL coverage ratio (EBA def.) - The NPL coverage ratio is the ratio of the amount of accumulated impairment, negative changes in fair value due the EBA methodology (report Finrep18). Loans and advances classified as held for sale, cash balances at CBs and other demand deposits are excluded Table 54: NLB and NLB Group Received collaterals for NPLs / NPL calculation (in EUR million and %) Table 57: NLB and NLB Group NPL coverage ratio (EBA def.) calculation to credit risk to the non-performing loans and advances, in accordance with both from the denominator and from the numerator. NLB NLB Group 2020 2019 2018 2020 2019 2018 Numerator Gross volume of Non-Performing Loans covered by collaterals 137.2 122.1 243.8 288.1 249.7 419.3 Denominator Total Non-Performing Loans Received collaterals for NPLs / NPL 208.4 65.8% 169.5 72.0% 342.9 71.1% 474.7 60.7% 374.7 66.6% 622.3 67.4% Numerator Volume of allowances and value adjustments for credit losses on Non-Performing loans and advances(i) Denominator NLB NLB Group (in EUR million and %) 2020 2019 2018 2020 2019 2018 110.1 91.2 180.7 265.3 240.4 391.2 Gross volume of Non-Performing loans and advances(i) NPL coverage ratio per cent. (% CR) 199.1 55.3% 164.3 55.5% 328.4 55.0% 466.0 56.9% 372.9 64.5% 613.9 63.7% Non-performing loans and advances (EBA def.) - Non-performing loans include loans and advances in accordance with EBA Methodology Gross NPL ratio (EBA def.) - The gross NPL ratio is the ratio of the gross carrying amount of non-performing loans and advances to the total (i) Without loans and advances classified as held for sale, cash balances at CBs and other demand deposits. that are classified as to D and E, namely loans at least 90 days past due, or gross carrying amount of loans and advances, in accordance with the EBA loans unlikely to be repaid without recourse to collateral (before deduction methodology (report Finrep18). For the purpose of this calculation, loans NPL coverage ratio (EBA def.) (BoS) – The NPL coverage ratio is the ratio of the amount of accumulated impairment, negative changes in accordance with the EBA methodology (report Finrep18). Cash balances at CBs and other demand deposits are included in the calculation. of loan loss allowances). and advances classified as held for sale, cash balances at CBs and other fair value due to credit risk to the non-performing loans and advances, in Table 55: NLB and NLB Group Gross NPL ratio (EBA def.) calculation demand deposits are excluded both from the denominator and from the numerator. Below presented calculations are based on internal data sources. Numerator Gross volume of Non-Performing Loans and advances without loans held for sale, cash balances at CBs and other demand deposits Denominator Gross volume of Loans and advances in Finrep18 without loans held for sale, cash balances at CBs and other demand deposits NLB NLB Group (in EUR million and %) 2020 2019 2018 2020 2019 2018 199.1 164.3 328.4 466.0 372.9 613.9 4,958.8 4,923.3 4,840.6 10,340.6 8,127.5 7,811.0 Gross NPL ratio per cent. (% NPL) 4.0% 3.3% 6.8% 4.5% 4.6% 7.9% Gross NPL ratio (EBA def.) (BoS) - The gross NPL ratio is the ratio of the gross carrying amount of non-performing loans and advances to demand deposits are included in the calculation. The indicator for the banking sector in the EU is published quarterly by the EBA in the Risk the total gross carrying amount of loans and advances, in accordance with the EBA methodology (report Finrep18). Cash balances at CBs and other dashboard. Below presented calculations are based on internal data sources. Table 58: NLB and NLB Group NPL coverage ratio (EBA def.) (BoS) calculation Numerator Volume of allowances and value adjustments for credit losses on Non-Performing loans and advances Denominator NLB NLB Group (in EUR million and %) 2020 2019 2018 2020 2019 2018 110.1 91.2 180.7 265.3 240.4 391.2 Gross volume of Non-Performing loans and advances NPL coverage ratio per cent. (% CR) 199.1 55.3% 164.3 55.5% 328.4 55.0% 466.0 56.9% 372.9 64.5% 613.9 63.7% Collaterals received / NPL (EBA def.) - The NPL collateral ratio is the ratio of the collateral received for non-performing loans and advances to the is provided on single loan basis. The NPLs where the amount of collateral received exceeds the net non-performing of each loan exposure are the gross carrying amount of collateralized non-performing loans and advances, subject of calculation. in accordance with the EBA methodology (report Finrep18). The calculation 183 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 59: NLB and NLB Group NPL coverage ratio (EBA def.) calculation NLB NLB Group (in EUR million and %) Operational business margin (OBM) – Calculated as the ratio between operational business net income annualized and average assets. 2020 2019 2018 2020 2019 2018 Table 62: NLB Group and NLB OBM calculation Numerator Volume of collateral received up to the carrying amount of each loan or advance Denominator Gross volume of collateralized Non- Performing loans and advances 38.6 12.9 23.4 61.3 23.9 46.4 NPL coverage ratio per cent. (% CR) 43.5% 33.6% 39.9% 88.8 38.2 58.7 144.6 42.4% 67.4 35.4% 112.5 41.2% Net stable funding ratio (NSFR) - The net stable funding ratio is a liquidity risk standard requiring financial institutions to hold enough stable on-going basis. ‘Available stable funding’ is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by funding to cover the duration of their long-term assets. the NSFR, which extends to one year. The amount of such stable funding required of a specific institution is a function of the liquidity characteristics NSFR is defined as the amount of available stable funding relative to and residual maturities of the various assets held by that institution as well as the amount of required stable funding, and is based on the current Basel those of its off-balance-sheet (OBS) exposures. Below presented calculations Committee guidelines. This ratio should be equal to at least 100% on an are based on internal data sources. NLB Group NLB (in EUR million and %) 2020 2019 2018 2020 2019 2018 Numerator Operational business net income(i) 490.3 502.1 484.0 257.7 268.6 262.2 Denominator Average total equity(ii) OBM 15,086.2 13,311.7 12,515.5 10,336.3 9,215.3 8,847.4 3.2% 3.8% 3.9% 2.5% 2.9% 3.0% (i) Operational business net income is annualized, calculated as operational business income in the period divided by the number of months for the reporting period and multiplied by 12. Operational business income consists of net interest income (excluding interest expenses from subordinated securities), net fees and commissions and net gains and losses from financial assets and liabilities held for trading that derive from foreign exchange trading. (ii) NLB internal information. Average total assets is calculated as a sum of balance as at the end of the previous year end (31 December) and monthly balances of the last day of each month from January to month t divided by (t+1). Table 60: NLB Group NSFR calculation Numerator Amount of available stable funding Denominator Amount of required stable funding NSFR NLB Group (in EUR million and %) Return on equity before tax (ROE b.t.) – Calculated as the ratio between result before tax annualized and average total equity (including non-controlling interests). 31 Dec 2020 31 Dec 2019 Table 63: NLB Group and NLB ROE b.t. calculation 16,514.6 11,957.9 9,966.8 165.7% 7,495.5 159.5% Numerator Result before tax(i) Denominator Average total equity(ii) ROE b.t. NLB Group NLB (in EUR million and %) 2020 2019 2018 2020 2019 2018 277.9 215.4 233.3 113.9 177.7 177.5 1,808.1 15.4% 1,700.7 12.7% 1,768.7 13.2% 1,384.6 8.2% 1,328.7 13.4% 1,426.8 12.4% EVE (Economic Value of Equity) method is a measure of sensitivity of changes in market interest rates on the economic value of financial instruments. EVE represents the present value of net future cash flows and markets. Calculations are taking into account behavioural and automatic options as well as allocation of non-maturing deposits. (i) Result before tax is annualized, calculated as result before tax in the period divided by number of months for reporting period and multiplied by 12. (ii) NLB internal information. Average total equity (including non-controlling interests) is calculated as sum of balance as at end of previous year end (31 December) and monthly balances of the last day of each month from provides a comprehensive view of the possible long-term effects of changing The assessment of the impact of a change in interest rates of 200 bps on the January to month t divided by (t+1). interest rates at least under the six prescribed standardised interest rate economic value of the banking book position: shock scenarios or more if necessary, according to the situation on financial Table 61: NLB Group EVE calculation Return on equity after tax (ROE a.t.) – Calculated as the ratio between result after tax annualized and average equity. NLB Group Table 64a: NLB Group and NLB ROE a.t. calculation (in EUR thousands and %) 31 Dec 2020 31 Dec 2019 31 Dec 2018 31 Mar 2019 30 Jun 2019 30 Sep 2019 31 Mar 2020 30 Jun 2020 30 Sep 2020 31 Dec 2020 w/o KB -128,370 -88,355 -102,397 -105,256 -77,841 -102,319 -68,129 -59,547 -98,185 -110,838 Numerator Interest risk in banking book – EVE Denominator Equity (Tier I) 1,765,000 1,451,176 1,458,318 1,460,078 1,425,298 1,424,020 1,426,936 1,616,921 1,622,945 1,765,000 EVE as % of Equity -7.3% -6.1% -7.0% -7.2% -5.5% -7.2% -4.8% -3.7% -6.1% -6.3% Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. NLB Group NLB (in EUR million and %) 2020 2019 2018 2020 2019 2018 269.7 193.6 203.6 114.0 176.1 165.3 1,751.2 15.4% 1,658.0 11.7% 1,729.9 11.8% 1,384.6 8.2% 1,328.7 13.3% 1,426.8 11.6% (i) Result after tax is annualized, calculated as result after tax in the period divided by number of months for reporting period and multiplied by 12. (ii) NLB internal information. Average equity is calculated as sum of balance as at end of previous year end (31 December) and monthly balances of the last day of each month from January to month t divided by (t+1). 184 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020Table 64b: NLB Group (w/o Komercijalna Banka group) ROE a.t. calculation NLB Group (w/o Komercijalna Banka group) (in EUR million and %) Return on assets (ROA a.t.) – Calculated as the ratio between result after tax annualized and average total assets. Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. (i)(ii) Please refer to notes under Table 64a. Table 64c: NLB Group’s banking subsidiaries ROE a.t. calculation 2020 141.3 1,741.1 8.1% (in EUR million and %) Table 66a: NLB Group and NLB ROA a.t. calculation Numerator Result after tax(i) Denominator Average total assets(ii) ROA a.t. NLB Group NLB (in EUR million and %) 2020 2019 2018 2020 2019 2018 269.7 193.6 203.6 114.0 176.1 165.3 15,086.2 13,311.7 12,515.5 10,336.3 9,215.3 8,847.4 1.8% 1.5% 1.6% 1.1% 1.9% 1.9% NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd (i) Result after tax is annualized, calculated as result after tax in the period divided by number of months for reporting period and multiplied by 12. (ii) NLB internal information. Average total assets is calculated as sum of balance as at end of previous year end (31 December) and monthly balances of the last day of each month from January to month t divided by (t+1). 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Numerator Result after tax(i) 19.2 32.9 10.1 17.1 5.9 9.0 13.3 19.5 1.4 7.6 2.6 4.1 Table 66b: NLB Group’s banking subsidiaries ROA a.t. calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd (in EUR million and %) Denominator 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Average equity(ii) 219.4 202.8 93.3 86.1 84.3 80.5 92.1 78.0 68.2 67.6 74.2 69.8 Numerator ROE a.t. 8.8% 16.2% 10.8% 19.9% 7.0% 11.2% 14.5% 25.1% 2.0% 11.2% 3.5% 5.9% Result after tax(i) 19.2 32.9 10.1 17.1 5.9 9.0 13.3 19.5 1.4 7.6 2.6 4.1 (i)(ii) Please refer to notes under Table 64a. Return on assets (ROA b.t.) – Calculated as the ratio between result before tax annualized and average total assets. Table 65: NLB Group and NLB ROA b.t. calculation Numerator Result before tax(i) Denominator Average total assets(ii) ROA b.t. NLB Group NLB (in EUR million and %) 2020 2019 2018 2020 2019 2018 277.9 215.4 233.3 113.9 177.7 177.5 Denominator Average total assets(ii) 1,507.2 1,377.1 784.9 759.3 639.3 620.0 824.9 720.6 541.0 520.3 662.8 537.1 ROA a.t. 1.3% 2.4% 1.3% 2.3% 0.9% 1.5% 1.6% 2.7% 0.3% 1.5% 0.4% 0.8% (i)(ii) Please refer to notes under Table 66a. Total capital ratio (TCR) - Total capital ratio is the own funds of the institution expressed as a percentage of the total risk exposure amount. Table 67a: NLB Group and NLB TCR calculation NLB Group NLB (in EUR million and %) 31 Dec 2020 31 Dec 2019 31 Dec 2018 31 Dec 2020 31 Dec 2019 31 Dec 2018 15,086.2 13,311.7 12,515.5 10,336.3 9,215.3 8,847.4 Numerator 1.8% 1.6% 1.9% 1.1% 1.9% 2.0% Total capital (Own funds) 2,065.5 1,495.8 1,453.4 1,631.6 1,182.2 1,208.3 (i) Result before tax is annualized, calculated as result before tax in the period divided by number of months for reporting period and multiplied by 12. (ii) NLB internal information. Average total assets is calculated as sum of balance as at end of previous year end (31 December) and monthly balances of the last day of each month from January to month t divided by (t+1). Denominator Total risk exposure Amount (Total RWA) Total capital ratio 12,421.0 16.6% 9,185.5 16.3% 8,677.6 16.7% 6,028.8 27.1% 5,225.1 22.6% 5,023.6 24.1% Table 67b: NLB Group’s banking subsidiaries TCR calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd (in EUR million and %) 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Numerator Total capital 190.6 188.4 78.4 70.1 74.7 68.9 103.2 98.2 52.1 46.1 84.5 81.1 Denominator Total risk exposure Amount (Total RWA) 1,212.5 1,149.2 452.3 439.9 416.4 431.1 579.7 599.1 321.5 308.1 443.1 416.3 Total capital ratio 15.7% 16.4% 17.3% 15.9% 17.9% 16.0% 17.8% 16.4% 16.2% 15.0% 19.1% 19.5% 185 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 NLB Group Chart Nova Ljubljanska banka d.d., Ljubljana Core members Non-core members Banks Foreign countries Financial institutions Slovenia Companies Slovenia 100% 100% 100% 100% Bankart, Ljubljana(ii) NLB Cultural Heritage Management Institute 40.08% 40.08% 100% 100% NLB Banka, Beograd 99.997% 99.997% NLB Skladi, Ljubljana NLB Banka, Sarajevo NLB Banka, Podgorica NLB Banka, Prishtina NLB Banka, Banja Luka NLB Banka, Skopje Komercijalna Banka, Beograd 97.35% 97.35% 99.83% 99.83% 81.21% 81.21% 99.85% 99.85% 86.97% 86.97% 83.23% 83.23% NLB Lease&Go, Ljubljana Komercijalna Banka, Banja Luka(iii) 99.998% 100% Komercijalna Banka, Podgorica Kombank INvest, Beograd 100% 100% 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 (i) 90% direct ownership Prvi Faktor, Ljubljana in liquidation, 5% NLB, 5% SID banka d.d. (ii) Abanka merged into Nova KBM, which currently has a 29.22% share in Bankart. This is over the 25% threshold set in the Founding agreement - no shareholder other than NLB can have more than 25% capital share in Bankart. (iii) 99.998% direct ownership Komercijalna Banka, Beograd, 0.002% NLB. Financial institutions Slovenia NLB Leasing, Ljubljana in liquidation 100% 100% Optima Leasing, Zagreb in liquidation 100% 100% Prvi faktor, Ljubljana in liquidation 50% 50% Prvi faktor, Beograd in liquidation(i) Prvi faktor, Sarajevo in liquidation Prvi faktor, Zagreb in liquidation 90% 95% 100% 100% 100% 100% Companies Slovenia PRO-REM, Ljubljana in liquidation 100% 100% BH-RE, Sarajevo in liquidation OL Nekretnine, Zagreb in liquidation 100% 100% 100% 100% S-REAM, Ljubljana REAM, Zagreb ARG-Nepremičnine, Horjul 100% 100% 100% 100% 75% 75% Foreign countries Foreign countries NLB InterFinanz, Zürich in liquidation 100% 100% NLB InterFinanz, Beograd in liquidation 100% 100% NLB Leasing, Beograd in liquidation LHB AG, Frankfurt 100% 100% 100% 100% REAM, Beograd REAM, Podgorica Tara Hotel, Budva SPV 2, Beograd NLB Srbija, Beograd NLB Crna Gora, Podgorica 100% 100% 100% 100% 12.71% 100% 100% 100% 100% 100% 100% 100% 186 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Organisational Structure of NLB Understanding of the tasks and responsibilities of Global Risk, Compliance and Integrity and Internal Audit is taken into account in accordance to the definitions of the (currently valid) Banking Act - Zban-2. (i) Worker´s Council is independent organisational unit with no subordinate or superior organisational units and it operates in accordance with ZSDU. Supervisory Board Management Board Strategy and Business Development Legal and Secretariat Communications Human Resources and Organization Development CEO Internal Audit Worker’s council(i) Compliance and Integrity Group Steering CRO Global Risk Credit Risk - Corporate and Retail CFO CMO COO Group Real Estate Management Sales Development and Management IT Architecture Controlling CSA & Cross-border Financing IT Delivery Evaluation and Control Financial Accounting and Administration Large Corporates Data Management Restructuring Financial Markets Small and Mid Corporates IT Shared Service Centre Workout and Legal support Trade Finance Services Investment Banking and Custody NLB Group IT Security Governance IT Infrastructure Private Banking Procurement NLB Contact Centre Payments Processing Sales Support Cash Processing Distribution Network Area Branch Ljubljana Area Branch Southwest Slovenia Area Branch Northwest and Central Slovenia Area Branch Northeast Slovenia Area Branch Southeast Slovenia Micro Enterprises Mobile Banking Distribution Network Back Office Financial Markets Processing Corporate Banking Processing Retail Banking Processing 187 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 NLB Group Directory Nova Ljubljanska banka d.d., Ljubljana Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 39 00, +386 1 477 20 00 Mobile banking Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 44 39 CSA & Cross-border Financing Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 26 18 E-mail: info@nlb.si www.nlb.si Blaž Brodnjak, CEO & CMO Archibald Kremser, CFO Andreas Burkhardt, CRO Petr Brunclík, COO19 Slovenian network Ljubljana Area Branch Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 23 30 Innovative Entrepreneurship Centre Large corporates Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 31 49 Small and Mid-corporates Small Enterprises I Trg republike 2 1000 Ljubljana, Slovenia Tel.: +386 1 476 49 52 Institutional Investors Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 24 92 Large Corporates Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 26 92 Northwest and Central Slovenia Area Branch Titova cesta 2 Small Enterprises II Members of NLB Group NLB Banka a.d., Beograd20 Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 71 51 522 E-mail: info@nlb.rs www.nlb.rs Branko Greganović, President of the Executive Board Vlastimir Vuković, Member of the Executive Board21 Dejan Janjatović, Member of the Executive Board22 NLB Banka a.d., Podgorica Bulevar Stanka Dragojevića 46 81000 Podgorica, Montenegro Tel: +382 20 402 000 E-mail: info@nlb.me www.nlb.me Martin Leberle, CEO Marko Popovič, Executive Officer Dino Redžepagić, Executive Officer Ljubljanska cesta 62 1230 Domžale, Slovenia Tel: +386 1 724 55 01 Northeast Slovenia Area Branch Titova cesta 2 2000 Maribor, Slovenia Tel: +386 2 234 45 04 Southeast Slovenia Area Branch Seidlova cesta 3 8000 Novo mesto, Slovenia Tel: +386 7 339 14 56 Southwest Slovenia Area Branch Cesta Zore Perello - Godina 7 6000 Koper, Slovenia Tel: +386 5 610 30 10 Private Banking Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 23 66 Micro Enterprises Trg republike 2 1520 Ljubljana, Slovenia Tel: +386 1 476 50 01 2000 Maribor, Slovenia Tel.: +386 2 234 45 09 Central region Trg republike 2 1520 Ljubljana, Slovenia Tel.: +386 1 476 26 11 Northeast region Ljubljanska cesta 62 1230 Domžale, Slovenia Tel.: +386 1 724 54 75 Southwest region Cesta Zore Perello - Godina 7 6000 Koper, Slovenia Tel.: +386 5 610 30 29 Podravsko-Pomurska region Titova cesta 2 2000 Maribor, Slovenia Tel.: +386 2 234 45 00 Savinjsko-Koroška region Kocenova 1 3000 Celje, Slovenia Tel.: +386 3 424 01 11 19. From 18 May 2020. 20. Jelena Živković is a Member of the Executive Board from 5 January 2021. 21. Till 4 January 2021. 22.Till 4 January 2021. NLB Banka d.d., Sarajevo Komercijalna Banka a.d. Banja Luka29 Ul. Koševo br. 3, 71000 Sarajevo - Centar Jevrejska 69, 78000 Banja Luka, Republic of 71000 Sarajevo, Bosnia and Herzegovina Srpska, Bosnia and Herzegovina NLB Banka sh.a., Prishtina Rr. Ukshin Hoti nr. 124 10000 Prishtina, Kosovo Tel: +383 38 744 000 E-mail: info@nlb-kos.com https://nlb-kos.com/ Albert Lumezi, Tel: +387 33 720 300 E-mail: info@nlb.ba www.nlb.ba Lidija Žigić, President of the Management Board President of the Management Board Gem Maloku, Denis Hasanić, Member of the Management Board Member of the Management Board Lavdim Koshutova, Jure Peljhan, Member of the Management Board Member of the Management Board Tel: +387 51 244 700 E-mail: office@kombank-bl.com www.kombank-bl.com Boško Mekinjič, President of the Management Board Siniša Smiljanić, Member of the Management Board30 Dragana Vujičić Stefanović, Member of the Management Board NLB Banka a.d. Banja Luka23 Komercijalna Banka a.d. Beograd24 Kombank INvest a.d. Beograd Milana Tepića 4 Svetog Save 14, 11000 Belgrade, Serbia Kralja Petra 19, 11000 Belgrade, Serbia 78000 Banja Luka, Republic of Srpska, Tel: +381 11 30 80 100 Tel.: +381 11 330 8310 Bosnia and Herzegovina Tel: +387 51 248 588 E-mail: helpdesk@nlbbl.com www.nlb.ba Radovan Bajić, President of the Management Board Marjana Usenik, Member of the Management Board Dragan Injac, Member of the Management Board NLB Banka AD Skopje Majka Tereza 1 1000 Skopje, North Macedonia Tel: +389 2 5 100 865 E-mail: info@nlb.mk www.nlb.mk Antonio Argir, President of the Management Board Günter Friedl, E-mail: posta@kombank.com www.kombank.com Vladimir Medan, President of the Management Board25 Una Sikimič, Member of the Management Board26 Miroslav Perić, Member of the Management Board27 Pavao Marjanović, Member of the Management Board28 Dragiša Stojanović, Member of the Management Board Komercijalna Banka a.d. Podgorica Ulica Cetinjska 12, 81000 Podgorica, Montenegro Tel: +382 20 426 300 E-mail: office@kombank.me www.kombank.me Mirko Marojevič, E-mail: vladimir.garic@kombankinvest.com www.kombankinvest.com Vladimir Garić, Director NLB Lease&Go, leasing, d.o.o., Ljubljana31 Šlandrova ulica 2, 1000 Ljubljana, Slovenia Tel: +386 1 586 29 10 E-mail: info@nlbleasego.si www.nlbleasego.si Andrej Pucer, Director Anže Pogačnik, Director NLB Leasing d.o.o., Ljubljana – v likvidaciji Šlandrova ulica 2 1000 Ljubljana, Slovenia Tel: +386 1 586 29 10 E-mail: info@nlbleasing.si Anže Pogačnik, Liquidator NLB Leasing d.o.o. Beograd – u likvidaciji Member of the Management Board President of the Management Board Bulevar Mihajla Pupina 165 v Peter Zelen, Veselin Vuković, Member of the Management Board Member of the Management Board Igor Dačevski, Srđan Savić, Member of the Management Board Member of the Management Board 11070 Belgrade, Serbia Tel: +381 11 222 01 01 E-mail: info@nlbleasing.rs Veljko Tanić, Liquidator 23. Goran Babić is a Member of the Management Board from 1 January 2021. 24. Vlastimir Vuković is a President of the Management Board from 4 February 2021. Dejan Janjatović is a Member of the Management Board from 4 February 2021. 25. Till 4 February 2021. 26. Till 4 February 2021. 27. Till 22 March 2021. 28. Till 31 March 2021. 29. Martin Mavrič is a Member of the Management Board from 23 March 2021. 30. Till 22 March 2021. 31. Claus-Peter Martin Mueller is a Director from 1 January 2021. 188 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Optima Leasing d.o.o. u likvidaciji, Zagreb NLB Skladi, upravljanje Miramarska 24 10000 Zagreb, Croatia Tel: +385 1 61 77 225 E-mail: info@optima-leasing.hr Vjekoslav Budimir, Liquidator premoženja, d.o.o., Ljubljana Tivolska cesta 48 1000 Ljubljana, Slovenia Tel: +386 1 476 52 70 E-mail: info@nlbskladi.si www.nlbskladi.si REAM d.o.o., Zagreb Miramarska 24/6 10000 Zagreb, Croatia Tel: +385 1 56 25 914 NLB Srbija d.o.o., Beograd Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 22 25 366 E-mail: lamija.hadziosmanovic@ream-cro.com E-mail: office@nlbsrbija.co.rs E-mail: julijana.milic@nlb.si Lamija Hadžiosmanović, Director www.nlbsrbija.co.rs Veljko Tanić, Director Prvi faktor d.o.o., v likvidaciji, Ljubljana32 Kruno Abramovič, President of the Julijana Milić, Director Slovenska cesta 17 1000 Ljubljana, Slovenia Management Board Blaž Bračič, Member of the E-mail: klemen.hauko@prvifaktor.si Management Board Klemen Hauko, Liquidator Prvi faktor – faktoring d.o.o., Beograd – u likvidaciji Bulevar Mihajla Pupina 165 v 11070 Novi Beograd, Serbia Tel: +381 11 222 54 00 Bankart d.o.o., Ljubljana Celovška cesta 150 1000 Ljubljana, Slovenia Tel: +386 1 583 42 02 E-mail: info@bankart.si www.bankart.si OL Nekretnine d.o.o. u likvidaciji, Zagreb Bulevar Džorža Vašingtona 102, I sprat/20 NLB Crna Gora d.o.o., Podgorica Miramarska 24 10000 Zagreb, Croatia Tel: +385 1 56 25 914 81000 Podgorica, Montenegro Tel: +382 686 661 553 E-mail: marko.celebic@nlb.me E-mail: lamija.hadziosmanovic@ream-cro.com Marko Čelebić, Executive Director E-mail: ivan.strek@ream-cro.com Barbara Šink, Authorised Representative Lamija Hadžiosmanović, Liquidator Goran Laličević, Authorised Representative Ivan Štrek, Liquidator S-REAM d.o.o., Ljubljana E-mail: zeljko.atanaskovic@prvifaktor.rs Aleksander Kurtevski, Director REAM d.o.o., Beograd – Novi Beograd Čopova 3 Željko Atanasković, Liquidator Prvi faktor d.o.o. u likvidaciji, Sarajevo Jure Kvaternik, Director Rainer Schamberger, Director Bulevar Mihaila Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 22 25 374 Mis Irbina 26/1 LHB Aktiengesellschaft, Frankfurt am Main E-mail: vladimir.vasilijevic@ream-srb.com Matjaž Jevnišek, President of the Management Bulevar Mihaila Pupina 165 v SPV2 d.o.o., Beograd – Novi Beograd Branches and representative offices 71000 Sarajevo, Bosnia and Herzegovina Große Bockenheimer Str. 33-35 Tel: +387 61 066 055 E-mail: denan.bogdanic@prvifaktor.ba Đenan Bogdanić, Liquidator 60313 Frankfurt, Germany Tel: +49 69 21 65 78 20 E-mail: info@lhb.de Prvi faktor d.o.o. u likvidaciji, Zagreb33 Board Hektorovičeva 2 10000 Zagreb, Croatia Tel: +385 1 6165 000 E-mail: info@prvifaktor.hr Jure Hartman, Liquidator NLB InterFinanz AG in Liquidation, Zürich Beethovenstrasse 48 8002 Zürich, Switzerland Tel: +41 44 283 17 15 PRO-REM d.o.o., Ljubljana - v likvidaciji Čopova 3 1000 Ljubljana, Slovenia Tel: +386 1 586 29 16 E-mail: info@prorem.si www.nlbrealestate.com Jovica Jakovac, Liquidator Vladimir Vasilijević, Director Veljko Tanić, Director 11070 Belgrade, Serbia Tel: +381 11 22 25 374 E-mail: office@ream-srb.com Vladimir Vasilijević, Director Tara Hotel d.o.o., Budva 81000 Podgorica, Montenegro E-mail: gligor.bojic@nlb.me Lamija Hadžiosmanović, Liquidator Gligor Bojić, Director Bulevar Džordža Vašingtona 102, Podgorica Marko Čelebić, Director 1000 Ljubljana, Slovenia Tel: +386 (0)41 307 759 E-mail: info@s-ream.com www.nlbrealestate.com Jovica Jakovac, Director Lamija Hadžiosmanović, Director of NLB Group members outside their country of residence NLB InterFinanz AG in liquidation Ljubljana Branch in liquidation Puharjeva ulica 3 1000 Ljubljana, Slovenia Komercijalna banka, branch Kosovska Mitrovica Čika Jovina 11, 38 220 Kosovska Mitrovica E-mail: info@nlbinterfinanz.ch REAM d.o.o., Podgorica BH-RE d.o.o., Sarajevo u likvidaciji Goran Dželajlija, Director Jean-David Barnezet Llort, Liquidator Bul. Džordža Vašingtona br. 102, I. sprat/20, Trg solidarnosti br. 2a Polona Žižmund, Liquidator 81000 Podgorica, Montenegro Tel: +382 20 674 900 71000 Sarajevo, Bosnia and Herzegovina E-mail: denis.silajdzic@nlbleasing.ba NLB InterFinanz d.o.o., Beograd – u likvidaciji E-mail: gligor.bojic@nlb.me Denis Silajdžić, Director Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 22 25 351 Liljana Zoraja, Liquidator Gligor Bojić, Director Marko Furlan, Authorised Representative 32. France Zupan and Iztok Zupanc are liquidators from 1 March 2021. 33. Vjekoslav Budimir is liquidator from 1 March 2021. 189 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020 Definitions and Glossary of Selected Terms ALCO ALM ALMM Asset and Liability Committee Asset and Liability Management Additional Liquidity Monitoring Metrics AML/CTF Anti-Money Laundering and Counter-Terrorism Financing BCM Business Continuity Management BIA BiH BMR BoS bps Business Impact Analysis Bosnia and Herzegovina Benchmarks Regulation Bank of Slovenia Basis Points CAGR Compound Annual Growth Rate CB CBR CEE CEO CET1 CFO CIR CMO COO CRD CRO CRR CSD CSR CVA DGS DPS DWH EBA EBRD EC ECB ECL EEA EPS E&S Central Bank Combined Buffer Requirement Central Eastern Europe Chief Executive Officer Common Equity Tier 1 Chief Financial Officer Cost-to-Income Ratio Chief Marketing Officer Chief Operating Officer Capital Requirements Directive Chief Risk Officer Capital Requirements Regulation Central Security Depository Corporate Social Responsibility Credit Value Adjustments Deposit Guarantee Scheme Dividends Per Share Data Warehouse European Banking Authority European Bank for Reconstruction and Development European Commission European Central Bank Expected Credit Losses European Economic Area Earnings Per Share Environmental and Social ESG ESMS EU EVE EVS EWS Environmental, Social and Governance Environmental and Social Management System European Union Economic Value of Equity European Valuation Standards Early Warning System FATCA Foreign Account Tax Compliance Act FDI FTP FVTPL FX GDP GDPR GDR HR HQLA IAS IASB ICAAP IFRIC IFRS ILAAP IMAD IMF IVS JV KB KDD KPI LCR LGD LTD M&A MAR Foreign Direct Investments Fund Transfer Pricing Fair Value Loans Through Profit or Loss Foreign Exchange Gross Domestic Product General Data Protection Regulation Global Depositary Receipts Human Resources High Quality Liquid Assets International Accounting Standard International Accounting Standards Board Internal Capital Adequacy Assessment Process International Financial Reporting Interpretations Committee International Financial Reporting Standard Internal Liquidity Adequacy Assessment Process Institute of Macroeconomic Analysis and Development International Monetary Fund International Valuation Standards Joint Venture Komercijalna banka Central Securities Clearing Corporation Key Performance Indicator Liquidity Coverage Ratio Loss Given Default Loan-to-Deposit Ratio Mergers and Acquisitions Market Abuse Regulation MiFID II Markets in Financial Instruments Directive MiFIR MIGA Markets in Financial Instruments Regulation Rules Multilateral Investment Guarantee Agency (part of the World Bank Group) MREL Minimum Requirement of Own Funds and Eligible Liabilities NLB or the Bank NLB d.d. NLB Skladi NLB Assets Management NPE NPL NSFR OCR P2R p.p. POCI POS PD PSD2 REAM RICS ROA ROE RoS RWA SEE SME SREP SRF SSM TCR Non-Performing Exposures Non-Performing Loans Net stable funding ratio Overall Capital Requirement Pillar 2 Requirements Percentage point(s) Purchased or originated credit impaired Point of Sale Probability of Default Payments Services Directive Real Estate Asset Management Royal Institution of Chartered Surveyors Return on Assets Return on Equity Republic of Slovenia Risk Weighted Assets South Eastern Europe Small and Medium-sized Enterprises Supervisory Review and Evaluation Process Single Resolution Fund Single Supervisory Mechanism Total Capital Ratio The Group NLB Group TLOF TLTRO TREA TSCR UN UN SDG ZBan-2 ZGD-1 ZTFI-1 ZVOP-2 Total Liabilities and Own Funds Targeted Longer-Term Refinancing Operations Total Risk Exposure Amount Total SREP Capital Requirement United Nations United Nations Sustainability Development Goals Slovenian Banking Act The Companies Act Financial Instruments Market Act The Slovenian Personal Data Protection Act 190 CONTENTS MB Statement SB Statement Key highlights Acquisition of KB Risk factors & Outlook Performance Overview Risk Management Financial Report Annual Report 2020This is Our Home NLB d.d., Ljubljana nlb.si Text: NLB d.d. Production: Gigodesign, Taktik Photographs: Primož Korošec, Archive NLB Copyright: NLB d.d., Ljubljana Ljubljana, April 2021

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