Nova Ljubljanska Banka
Annual Report 2021

Plain-text annual report

We believe in this region’s potential NLB Group Annual Report 2021 Contents Report format The Annual Report in PDF format represents its unofficial version. The Annual Report in ESEF format is pursuant to Commission Delegated Regulation (EU) 2019/815 and paragraph one of Article 134 of the Market in Financial Instruments Act (ZTFI-1) and represents its official version published on SEOnet. Forward-looking statements The expectations, forecasts and statements regarding future developments that are contained in this report are based on Statement by the Management Board of NLB . . . . . . . . . . . . . . . . 6 Compliance and Integrity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Statement by the Chairman of the Supervisory Board of NLB 8 Internal Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121 Strategic Members Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Corporate Governance Statements. . . . . . . . . . . . . . . . . . . . . . . . . 122 Key Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Disclosure on Shares and Shareholders of NLB . . . . . . . . . . . . 144 Key Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Events After the End of the 2021 Financial Year . . . . . . . . . . . . . 146 Market Performance of NLB’s Shares and GDRs. . . . . . . . . . . . . 18 Reconciliation of Financial Statements in Business and Financial Part of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Alternative Performance Indicators . . . . . . . . . . . . . . . . . . . . . . . . 149 NLB Group Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Organisational Structure of NLB. . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 FINANCIAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 NLB Group Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .342 Definitions and Glossary of Selected Terms. . . . . . . . . . . . . . . . 345 Macroeconomic Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Regulatory Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 BUSINESS REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Risk Factors and Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Impact of COVID-19 on Operations . . . . . . . . . . . . . . . . . . . . . . . . . .34 Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 Overview of Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . 40 Segment Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Retail Banking in Slovenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Corporate and Investment Banking in Slovenia. . . . . . . . . . . . . . 67 Strategic Foreign Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Financial Markets in Slovenia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Non-Core Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94 Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 IT and Cyber Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 assumptions and are contingent on a number of factors that Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108 will come into play in the future. Consequently, the actual situation may turn out to be different. Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 2 NLB, Ljubljana NLB Banka, Banja Luka NLB Banka, Beograd Komercijalna Banka, Beograd NLB Banka, Sarajevo NLB Banka, Podgorica NLB Banka, Prishtina NLB Banka, Skopje We are – where you are. Our home is here. Here are our families, friends, colleagues, neighbours, our favourite athletes, hosts, who know what kind of coffee we like … All this is our home and we believe in it with all our hearts. Since we are where you are, we know your potential and understand your commitment – even when no one else understands it. Where others merely see a spot on the map, we see a region full of opportunities. And we believe you deserve each and every one of them. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Southeast Europe, a region of opportunities. Southeast Europe, a region of opportunities. Southeast Europe, a region of opportunities. Who we are Vision Our strategic focus Sustainable banking The Group, headquartered in Ljubljana, is the largest banking and financial group in Slovenia with a strategic focus on selected countries in SEE, which have a population of approximately 17 million people – our home region. The Group is comprised of the leading and systemically most important bank in Slovenia, NLB, seven 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.1 The Group utilises a universal banking model and supports its clients through retail, corporate, and investment banking services. On six out of seven markets where the Group operates, the market share of member banks exceeds 10% (measured by total assets). 1 On 1 March 2022 NLB acquired the Slovenian Sberbank banka d.d. Further information is presented in chapter Events After the End of the 2021 Financial Year. The Group will take Become a regional In 2021, the Group set the direction of sustainability care of the financial champion activities by publishing the NLB Group Sustainability needs of its clients and improve the quality of life in its home SEE region. Putting clients first Grow our market position Monetize opportunities and synergies Framework and aligning its business model with UN’s Sustainable Development Goals. The focus was on decisive implementation of activities in the three pillars: • Contribution to society • Sustainable finance • Sustainable operations As the first bank from Slovenia to commit to the UN Principles for Responsible Banking, the Bank performed an impact analysis and published regional sustainability targets (NLB Group Sustainability Report 2021). The environmental dimension of the ESG was addressed by upgrading our climate-related and environmental risk management, integration of EU Taxonomy regulation, and measuring the carbon footprint of the Group’s own operations in 2021. Focus was put on the social dimension, supported by continuing CSR activities and the #HelpFrame project. Ratings 2016 S&P: BB- Fitch: BB- Moody's: Ba3 CI: BB+ 2017 S&P: ↑BB Fitch: ↑BB Moody's: ↑Ba1 CI: ↑BBB- 2018 S&P: ↑BB+ Fitch: ↑BB+ Moody's: ↓Baa2 CI: BBB- 2019 S&P: ↑BBB- Fitch: BB+ Moody's: Baa2 2020 S&P: BBB- Fitch: BB+ Moody's: ↑Baa1 2021 S&P: BBB- Moody's: Baa1 NLB has an investment grade rating from S&P and Moody’s. Note: Moody's: unsolicited rating. Contents 4 Antonio Argir Member of the Management Board(i) Andreas Burkhardt Member of the Management Board (CRO) Blaž Brodnjak CEO and CMO Hedvika Usenik Member of the Management Board(i) Andrej Lasič Member of the Management Board(i) Archibald Kremser Member of the Management Board (CFO) Note: (i) Appointed by the Supervisory Board of NLB on 20 January 2022; Mr. Argir, Ms. Usenik and Mr. Lasič are waiting for the relevant consent by the ECB to assume the office of the Management Board member. Statement by the Management Board of NLB Dear Stakeholders, Encouraged by the economic recovery, driven by healthy of the CHF Law with the Constitution is pending. If legal Are you well? How many times have you heard or asked this returned to robust growth, and achieved excellent results question in 2021, a year marked once again by the grip of which exceeded set guidance. This growth was based on the private consumption and strong loan demand, the Group remedies are unsuccessful, the estimated effects on pre-tax result will be material but manageable.2 COVID-19 and its consequent impact on the global economy strong underlying performance of all business segments, In a remarkable milestone deserving special attention, the and quality of life? We sincerely hope that you were able to meaningful contribution from Komercijalna Banka, Beograd, Bank’s share price gained 67.2 percent YoY on the London do as we in the Group did: leave the epidemic behind you and while robust risk management supporting Group’s business Stock Exchange, 66.4 percent on the Ljubljana Stock answer with “we are more than just well – actually, we are operations resulted also in strong asset quality. The Group Exchange, and received the ‘Prime Market Share of the Year’ stronger than ever.” generated EUR 236.4 million in profit after tax and increased award by the Ljubljana Stock Exchange. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report market shares in all segments, with all banking members operating in our home region, SEE, reporting solidly positive Combining dividend payouts, privatisation proceeds, and the net earnings and contributing 39% to the after tax result. residual value of the RoS equity stake in NLB, the Bank has fully repaid the amount it received for the 2013 recapitalization. The results of the banking members prove once again that From here on out, we are creating new value for all our they are becoming an increasingly important factor in Group shareholders. business operations, as well as in their respective markets – in five out of six markets where the Group operates, the market The Group will continue to prudently grow and increase its share (by total assets) of member banks exceeds 10 percent. market shares organically, however, we are closely monitoring We firmly believe that further intragroup consolidation, which developments in our home region and will analyse and is in full swing following the successful merger of NLB Banka, address any value accretive opportunities for new M&A- Podgorica and Komercijalna Banka, Podgorica in November, based growth. The Bank has the capacity to buy banks and/or as well as the sale of Komercijalna Banka, Banja Luka in portfolios in any of our existing, as well as other markets in the December, and the expected merger of NLB Banka, Beograd region, thus becoming a true regional champion. Accordingly, and Komercijalna Banka, Beograd in April 2022, will bring based on the SRB’s resolution scheme for Slovenian Sberbank additional opportunities to leverage synergies. banka d.d. and decision of BoS regarding the sale of this bank, NLB on 1 March 2022 bought 100% of shares of Sberbank The Group’s strong business performance, together with the banka d.d. With this acquisition NLB contributed to the expiration of the BoS’s decision on restricting the dividends financial stability of the Slovenian banking sector and further payment, enabled the Bank to fulfil stakeholder expectations improved NLB’s market position in Slovenia. In the following with a substantial dividend payout. Keeping its promise, the months Sberbank banka d.d. will be integrated in NLB Group. Bank paid out a total of EUR 92.2 million as dividends in 2021, thereby reaffirming the Group's stable and successful business In spite of prevailing global geopolitical challenges, operations, strong capital position, and solid dividend payment macroeconomic environment, and other impacts influencing our capacity also for the future. More specifically, the Bank’s business environment in a Slovenian and wider Group’s region ambition is a total dividend payment to the shareholders of context, our outlook for the future is positive. EUR 210 million in the 2022–2023 period. Turning our gaze to the future, our focus will be on providing In February 2022 the Slovenian parliament adopted law our clients with innovative solutions and the best user concerning loan agreements in Swiss francs concluded experience, 24 hours a day, every day. Currently in Slovenia, by banks operating in Slovenia (including NLB) and our clients can fulfil almost all their banking needs without individuals. NLB has used legal remedies against the law. having to visit a branch, and we strive to apply this digital The implementation of the law is currently suspended by Constitutional Court while its final decision on the conformity 2 Further information is available in chapters Events after the end of the 2021 financial year and Outlook 2022. EUR 236.4 million net profit of NLB Group. Contents 6 leadership position to other markets in which our Group go the extra mile when needed. That is why we strive to to the successful management of the Group and to meeting the operates by working on frontend solutions to consolidate attract, educate, develop, and retain best talents this region strategic commitments given to you, our stakeholders. e- and m-banking platforms. Despite many predictions in has to offer. We are not only focused on the field of IT where the past decades that banks will cease to exist, we are here considerable effort has been made to attract the brightest Nevertheless, it is not only the welfare of our clients, our stronger than ever, since we have done our homework, and best IT talent by building a technological hub in Belgrade employees, and the rest of the stakeholders that is on our adapted, and started to invest heavily in digitalization, and that will develop solutions for the whole group, but also in minds and in our focus, but also the prosperity and the quality fintech technologies. Nowadays, the Group is no longer just other vocations of which an institution such as NLB Group has of life in the entire region. Consequentially, the sustainability a banking group, but one of the largest IT and data science no shortage. companies in the region with an ambition to foster the of our business operations and practices is increasingly becoming our priority. The Group is among the first in the evolution of a local flexible digital ecosystem that offers clients We believe, that only a satisfied employee, one who feels financial industry in the SEE to set ambitious ESG goals, tailormade products and services. The Group is aware of a the firm’s trust and care for his or her work/life balance and to withdraw support for projects using exclusively coal cyber security risks and continuously improves the resilience potential, will help us address the opportunities that await technologies, to focus on becoming paperless, to actively of its operations. us. That is why we continue to develop our employees and reduce its carbon footprint, and to work on introducing All of this fills us with confidence and sets good prospects their well-being. This is why the Top Employer Institute has for the future. Our most important stakeholders, our clients, also recognized us, awarding the Bank the prestigious ‘Top In the Group, we do not say in vain that this is our home. Here are understand what we offer them and value our contribution Employer’ certificate for the seventh consecutive year. our families, friends, colleagues, neighbours, favourite athletes, to society. Ultimately, they are ready to recommend our hosts who know what kind of coffee we like . . . here we can solutions, services, knowledge, and advice to their families, We are also happy to report that in February 2022 the breathe with full lungs, create, experience ups and downs, and friends, acquaintances, and their community. Supervisory Board decided to expand the Bank’s Management expand our ties together. Here are our thoughts and our hearts. search for new approaches that will confirm our care for products that promote sustainability and energy efficiency. Board by adding three new members. After they receive their That’s why we can see what this region is capable of firsthand and This, however, could not be secured without a dedicated respective licences, the Management Board will consist of six recognise its potential before anyone else. Because where others team of colleagues who truly care about our mission and members which will, in our firm opinion, significantly contribute see just a spot on the map, we see a region of opportunities. Yours truly, Management Board of NLB Archibald Kremser CFO Andreas Burkhardt CRO Blaž Brodnjak CEO & CMO MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 7 Statement by the Chairman of the Supervisory Board of NLB relentlessly pursue the best brain available out there, so we systems. Having said that, we are looking forward to the final can keep up with the fast-paced development to which we are merger of our two banks in Serbia (Komercijalna Banka, committed. Beograd and NLB Banka, Beograd) in April 2022, enabling us further push into the organic growth on that market. Group foundations are strong and robust, and we on the Supervisory Board are of the opinion that the Group will We are aware the road ahead is filled with challenges. only grow stronger. If we are to come out of these uncertain However, the Group will continue to pursue its strategic times feeling proud of ourselves and our decisions, strong objectives, focusing mainly on intensive digitalisation and foundations are an absolute must. At the time this letter was providing top quality user experience, as well as sustainable created, we have already acquired the Slovenian Sberbank operations and development, whilst justifying the expectations banka d.d., which, albeit early days, I dare to say, has a of its shareholders through dividend payments. potential to turn into a textbook case of how the Group can act rapidly, with logical consistency, and flawless delivery of its Our focus on EPS and DPS value accretive business decisions business strategy. remains intact, and we will never look in any other direction. Referring to the above, we on the Supervisory Board can Still, while the past is behind us, with the memory fading only assure you the Group is transitioning towards the core of quickly in light of the recent developments, we have to our strategy, to be the talent magnet for tech and consumer acknowledge the Group's remarkable business performance behaviour-savvy jobseekers, who are and will be able to in 2021 which led to a record high profits. Such an excellent grasp with the challenges defining the future of banking. result proved that even in times of economic difficulties, knowledge, experience, and sound business decisions based on sustainable principles can generate success. 2021 Business Developments Following a pandemic-induced contraction in 2020, the global economy recovered strongly in 2021. The rebound Primož Karpe President of the Supervisory Board of NLB Dear Shareholders, The times we find ourselves in make me think of the following quote which adequately reflects the logic we are trying to pursue at our NLB Group: “In these uncertain times, we don’t necessarily need more command and control over what we already exercise in our regular business operations, but we We believe the Group’s business results prove that its was particularly strong after the re-opening of economies, objectives are set prudently and strategically, focusing on but then the momentum eased throughout the year due to the innovative, higher recurring growth financial products, rising headwinds in the form of supply chain bottlenecks, addressing digital innovation across our key markets. inflationary pressures, and new COVID-19 outbreaks. Moreover, the past year has once again reaffirmed the However, the impact of the pandemic on economic activity importance of banking members, which are key factor faded over the course of the year. do need all possible means to engage everyone’s intelligence not only in the Group’s business operations, but also in whilst solving and addressing business challenges as they arise.” Specifically, after the visible ease of the COVID-19 their respective markets, where the majority of them hold Similar to global economic trends, the Group’s region systemically important positions. We firmly believe that further rebounded sturdily from the pandemic-induced contraction. impact on business performance and the strong economic intragroup consolidation will bring additional opportunities to Private consumption was the main growth driver, and it was rebound across our entire region which lifted our Group leverage these synergies and further strengthen our position. propelled by credit growth, remittances, and pent-up demand. performance on a record level, we are now awakening to a This way we will do everything needed to actually spearhead Tourism-dependent countries benefitted in particular from world where worldwide sanctions imposed on Russia have the innovation trends in banking, and not merely defend our lifting restrictions at home and abroad, which resulted in the dramatically increased the markets’ volatility, and all the while market positions in the future at times when some worldwide rebound in the tourism sector over the summer. Nonetheless, spill-over sector-specific effects are re-calculated over and trends indicate that digitalization is set to disrupt the classical the Group’s region was not immune to the global surge in over again. Uncertainty looms all over the civilised world. banking model in the segment of consumer revenue. commodity prices, rising energy prices and supply-chain When it comes to our business, we need a calm and focused The acquisition of Komercijalna Banka, Beograd at the end of resulted in increasing inflationary pressures. mind, swift execution ability, and the determination to not 2020 exemplifies that we are able to execute on the complex stray away from our core business growth strategy, keeping harmonisation process with NLB standards with regard to Nevertheless, the economic rebound in 2021 had a positive the promises to all our stakeholders. We also need to the alignment of services, financial products, and support impact on banking systems in the Group’s region with lending bottlenecks, which coupled with revival in domestic demand MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 8 activity recording a notable revival in corporate, as well as Net interest margin of 2.07% and operational business (in addition to Primož Karpe and Andreas Klingen, members household loans while strong inflow of deposits continued margin of 3.28% have stabilised with TLTRO recognition of were also Gregor Rok Kastelic, Mark William Lane Richards, also in 2021. Positive developments reflected also in the interest income in Q4 having a marginal positive impact Shrenik Dhirajlal Davda, David Eric Simon, Verica Trstenjak, profitability of the banking systems of the Group’s region, in the last quarter. The cost-to-income ratio increased by and Islam Osama Zekry) and four were representatives of which recorded a notable improvement. four percentage points YoY, to 62.3%, accounting for the employees (Sergeja Kočar, Bojana Šteblaj, Janja Žabjek costs of Komercijalna Banka group integration process. The Dolinšek, and Tadeja Žbontar Rems). extraordinary results from workout of the legacy NPL book and material contributions from Komercijalna Banka group In 2021, the Supervisory Board held seven regular and 12 on top, led to a EUR 35.8 million net release of impairments correspondence sessions. In its work, the Supervisory Board 2021 Business Performance The remarkable performance of the Group in 2021 led to a record high profit of EUR 236.4 million – a substantial growth from the previous year when excluding the effects from the acquisition of Komercijalna Banka, Beograd, as unaudited 2021 data shows. Top line growth continued throughout 2021, net interest income growing by 37% YoY based on strong loan growth also contributed by Komercijalna Banka group, adding EUR 98.5 million to that revenue line. With realised higher loan volumes, the Group recorded growth in net interest income in most of its markets in the region despite the still challenging margin environment. Impressive growth in net fee and commission income, up 39% YoY, further added to the Group’s performance in 2021. Strong demand for investment products, such as asset management products and bancassurance, and at the same time strong income generation from increased business activities (such as payments), led to increase in fee and commission income. The Group managed to keep costs within the guidance, also considering an important part of Komercijalna Banka group integration costs. The Bank remains a highly desired employer in the region, while the staff cost is tightly managed by proactive approach to employment through sourcing employees from all over the region. The Group recorded 9% loan growth in 2021, thus exceeding the full year guidance. Loans to individuals recorded double digit growth throughout the group (12% or 13% excluding impact of Komercijalna Banka, Banja Luka sale), driven by strong production of housing loans in Slovenia and the healthy demand for consumer loans in strategic foreign markets. Deposits increased by EUR 1,243.6 million in 2021 on the Group level. Deposits from individuals increased by a mere 5%, indicating that individuals migrated part of their savings to alternative investments (e.g., mutual funds). The strengthened liquidity and capital position, with a CET1 ratio at 15.5% and TCR at 17.8%, ensure a comfortable capacity for an ambitious shareholder pay-out and continued drive for growth opportunities. Despite substantial growth, the Group has managed to maintain RWA close to 2020 levels, helped and provisions for credit risk – ending the year at -41 bps cost of risk. The Group established EUR 27.1 million of other impairments and provisions, of which EUR 14.8 million for HR restructuring charges in Serbia and the rest mostly from litigation charges in Serbia – although the recent dynamic in the latter is more favourable. NLB Group maintains its corporate governance principles in line with the highest standards The Supervisory Board performed its work in accordance with applicable laws (predominantly, but not exclusively with recently changed the Companies Act (ZGD-1) and the Banking Act (ZBan-3), as well as powers and procedures as set by the Articles of Association of NLB and the Rules of Procedure of the Supervisory Board of NLB. It carried out its function of assuring efficient and active supervision over the management of NLB and the Group in its duty of careful and scrupulous performance, while adhering to the internal acts of the Bank. In performing its duties, the Supervisory Board followed the recommendations of the Corporate Governance Code for Listed Companies. The Corporate Governance Statement of NLB transparently reveals deviations from the mentioned code, as well as explains key aspects of the Bank’s corporate governance, particularly the composition and work of the Bank’s Management Board and Supervisory Board and its committees, internal control mechanisms, and internal control functions. It is published in the business part of this Annual report. The Management Board adopted mentioned statement on its session dated 1 February 2022 and the Supervisory Board on its session dated 24 February 2022 and had no comments to it (recommendation 5 of the aforementioned Code). Next year, the Supervisory Board will report on implementing new recommendations made with renewed version of the Corporate Governance Code for Listed Companies, that will be first used for preparation of the Corporate Governance Statement for the business year 2022. of NLB received professional assistance from five operational committees, namely: The Audit Committee, the Risk Committee, the Nomination Committee, the Remuneration Committee, and the Operations and Information Technology Committee. These committees function as consulting bodies of the Supervisory Board and in great detail discuss the materials and proposals of the Management Board related to a particular area. Based on their findings the Supervisory Board passed appropriate resolutions. Each of the five committees is composed of at least three members of the Supervisory Board. Through the year, the Supervisory Board monitored the implementation and effectiveness of the NLB Group’s strategy. The Supervisory Board issued approvals to the Management Board related to the Bank’s business policy, the Financial Plan, and the Budget of the NLB Group, adopted the NLB Group Annual Report, the NLB Group Sustainability Report, the NLB Group Sustainability Framework, Pillar 3 disclosures for the NLB Group, periodic business reports, adopted decisions related to management of risk, reported on cost optimisation activities, published the annual (and periodic) Internal Audit Plan and Plan of Compliance & Integrity, adopted yearly comprehensive opinion of the Internal Audit, adopted performance assessments and appointments of directors of Compliance & Integrity, and the Internal Audit. The Supervisory Board adopted decisions with regards to the convocation of the two General Meetings of shareholders, gave consent to termination of office of the Management Board (Petr Brunclík, COO with the termination of office with effect on 30 June 2021) and gave consent to nomination of a candidate for a member of a Supervisory Board. The Supervisory Board gave consent to renovation of internal policy on Internal Controls System; Rules and Procedures for the Sustainability Committee; Review of the Diversity Policy; New Remuneration Policy for Employees for the NLB and the NLB Group; The Remuneration Policy of the Members of Supervisory Board of NLB; and the Members of the Management Board of NLB. It also gave consent to annual by inclusion of BiH and Macedonia on EBA's third party equivalent list, and by conclusion of MIGA guarantees. At the end of 2021, the Supervisory Board was composed of 12 members, of which eight were representatives of shareholders MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 9 self-assessment of employees performing special work and While members of the Supervisory Board have the proper and and ensured that it regularly and thoroughly monitored the approved achievements of the Management Board and complementary knowledge, experience, and skills to perform Bank’s and the Group’s operations in 2021 within its powers proposed new goals for the Management Board. their duties, they all have different professional, national, and and efficiently supervised the Bank’s and NLB Group’s educational backgrounds. All the members of the Supervisory management and operations. The Supervisory Board was active in adopting decisions Board have the necessary personal integrity and professional on establishment of new companies (in Serbia and North ethics to hold their positions, which was confirmed by the Macedonia), cross-border financing and international positive Fit & Proper assessment. This provides the assurance syndicated financing, transactions with MIGA, large that we can carry out our supervisory roles in a responsible exposures, sale of receivables, claim write-offs, the divestment manner and make decisions that benefit NLB and add of the Group companies, legal proceedings involving NLB value to the Group. The delivery of critical and assertive and the Group members, transactions with persons in special opinions has been and will always remain at the core of our relations with the Bank, Worker’s Council 2021 report, etc. decision-making principles through the expected engaged On the session of the Supervisory Board dated 20 January regularly upgrade the skills and the knowledge required for participation of all the members. I can assure you we also 2022, following the best practice selection and evaluation the fulfilment of our duties. process, the Supervisory Board appointed three additional new members of the Management Board, namely: Hedvika The Supervisory Board continued to act in accordance with Usenik, Antonio Argir, and Andrej Lasič, thus expanding the highest ethical standards of management, considering it to six members in total. They all come from NLB or NLB the prevention of conflict of interest. The Supervisory Board Group, have extensive experience and proven value members took precautionary measures to avoid any creating a positive track record. We believe that the Bank's conflicts of interest that might have influenced their decisions. Management Board, supplemented with three new members, Throughout the year, there were 10 potential conflicts of is properly equipped for challenge that await us and offers interest identified at sessions of the Supervisory Board, and the best combination of various knowledge, experience, and they were all handled with utmost professional due care. competencies. A five-year term of office for the new members will start after they have obtained consent from regulator. Throughout the year, the Supervisory Board has maintained a Until then, they will continue to perform the functions of well-balanced professional relationship with the Management executive assistants to the Management Board. Board and enjoyed timely, comprehensive, and data- Through the year, we acknowledged regular reports on Board to adopt all its decisions in line with the professional documents received from the regulator(s), namely the BoS and interests of the Bank, whilst always adhering to banking the ECB, and on the implementation of the requirements of regulations and its statutory powers. supported inputs from the latter, enabling the Supervisory mentioned regulators and adopted other amendments to the internal policies. Despite extremely demanding times during second year of COVID-19 pandemic, the Supervisory Board members Review of the NLB Group Annual Report 2021 Pursuant to Article 282 of the Companies Act (ZGD-1), Article 50 of the Banking Act (ZBan-3), it is the obligation of the Supervisory Board to examine the Annual Report together with the auditor's report and the proposal for the allocation of distributable profit presented by the Management Board. The NLB Group Annual Report 2021 and unaudited financial statements of NLB Group were examined by the Audit Committee and the Supervisory Board at its meetings on 23 February and 24 February 2022. Within the legal deadline, the Management Board of NLB submitted to the Supervisory Board the NLB Group Annual Report 2021, including the Business Report and the Financial Report, with the audited separate financial statements of NLB and the consolidated financial statements of the NLB and its subsidiaries, and the auditor's opinion. According to the auditor's opinion, in all material respects, the separate and consolidated financial statements enclosed give a true and fair view of the financial position of NLB and the NLB Group as of 31 December 2021, the separate and consolidated income statement, the separate and consolidated statement of other comprehensive income, the separate and the consolidated statement of changes in equity and the separate and the consolidated statement of cash flows for the year then ended, in accordance with the International Financial Reporting Standards as adopted by the European Union. It was also established based on the review of the business report that the information contained in the business section of the Annual Report is consistent with the audited financial With the aim of ensuring sustainable development, the assess that the Management Board managed to successfully statements of the Bank and the NLB Group. Group strives to actively contribute to a more balanced and implement the NLB Group Strategy. The very solid financial inclusive economic and social system through three lines of results of NLB Group in 2021 enabled the Bank to pay out Yours truly, actions: sustainable operations, sustainable finance, and a total of EUR 92.2 million in dividends to the shareholders, Corporate Social Responsibility. In 2021, the Group moved thereby reaffirming NLB Group’s stable and successful from the awareness-raising phase, to the phase of actively business operations and strong capital position. The implementing sustainability elements into the business Supervisory Board assesses that the NLB Group has model. Therefore, in 2021, the Bank adopted the NLB Group successfully utilised the opportunities offered to it by the Sustainability Framework and put in place the 4-level NLB supportive economic environment of strong GDP growth Group Sustainability Governance Structure, which is as follows: in the region, and that performance and results of the NLB (i) the Supervisory Board; (ii) the Sustainability Committee Management Board proved again we can have full trust in our (consultative body and a decision-making body of the executive team. Management Board), (iii) the Sustainability Team, and (iv) the Supervisory Board of NLB NLB Group Working Groups. The Supervisory Board adopts Pursuant to Article 272 of the Companies Act (ZGD-1) and decisions related to sustainability issues in almost every session. the above report the Supervisory Board of NLB established Primož Karpe Chairman MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 10 Strategic Members Overview Table 1: Strategic members overview NLB Group NLB, Ljubljana Slovenia NLB Lease&Go, Ljubljana Serbia North Macedonia Bosnia and Herzegovina Kosovo Montenegro NLB Skladi, Ljubljana Komercijalna Banka, Beograd NLB Banka, Beograd KomBank Invest, Beograd NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica(vii) 75 675,310 12,700 5,153 9,660 208.4 26.3% Market position in 2021 Branches Active clients Total assets (in EUR million) Net loans to customers (in EUR million) Deposits from customers (in EUR million) Result after tax (in EUR million) Market share by total assets Macroeconomic indicators for 2021 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) 479(i) 1,891,064(ii) 21,577 10,587 17,641 236.4 - 7.6 2.9 10.7 -1.4 -4.8 - - 120 100 - -0.9 - 8.1 2.0 4.8 4.8 -6.5 - - 2,128(iii) - - 9.0 37.3%(iv) 190 28 975,033 142,964 4,165 1,796 3,425 34.8 9.7% 715 512 449 4.3 1.6%(vi) 7.4 4.1 11.1 -4.4 -4.1 - - 2 - - 0.0 - 48 47 36 33 22 415,368 213,112 129,954 230,014 84,342 1,771 1,084 1,400 39.0 16.9% 4.0 3.2 15.7 -3.5 -5.4 927 471 760 18.2 728 453 593 10.0 931 635 799 24.4 751 492 610 10.1 19.1%(viii) 5.4%(v) 16.3% 14.1% 5.9 2.0 15.5 -2.8 -2.7 10.4 3.3 24.0 -6.8 -3.6 12.0 2.4 16.6 -16.4 -4.7 (i) Including Komercijalna Banka, Beograd. (ii) Number of active clients of 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 Federation of BiH as at 30 September 2021. (vi) Market share as at 30 September 2021. (vii) Merger of NLB Banka, Podgorica and Komercijalna Banka, Podgorica on 12 November 2021. (viii) Market share in the Republic of Srpska. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 11 Key Highlights Financial Performance Strong business performance marked by continuous loan growth, Business Overview increased fee and commission Leading player in SEE income, one-off effects and negative cost of risk Asset Quality Good asset quality trends with well diversified portfolio, prudent credit standards and decisive workout approach Capital & Liquidity Strengthened capital and liquidity position ensuring capital return and continued growth opportunities Strategy Committed to pursue the strategic objectives • Profit a.t. amounted to EUR 236.4 million. • A robust and sustainable universal • Strong loan growth of 12% YoY to individuals, with the high production of new loans (especially housing loans) and 8% YoY to corporates, compensated reduction in interest rates, and supported net interest income. • The economic rebound led to the business model with increased focus on digitalisation and ESG. • Striving to become a regional champion. • Higher availability and use of digital channels – a wider range of 24/7 digital • Positive trends in asset quality continued, resulting in a further decline of the NPL ratio, and the negative cost of risk. • Well-diversified, stable, and robust credit portfolio quality. • Proactive approach to workouts and more favourable optimisation of the investment portfolios solutions offered to clients. macroeconomic predictions of households, and the growth of housing loans, mutual funds, and bancassurance, hence increasing net fee and commission income (39% YoY; 14% YoY without the Komercijalna Banka group contribution). • The integration process of the Komercijalna Banka banks with the NLB banks in Serbia and Montenegro is progressing as planned. In Podgorica, the merger than expected contributed to the negative cost of risk (-41 bps). • The stable and low level of NPE (EBA def.) of 1.7% with a comfortable NPL coverage ratio of was successfully completed in 57.9%. • No asset quality deterioration was observed in loans with expired moratoriums. • Continuous cost discipline. November 2021, while in Serbia the merger is on schedule to be completed in the Q2 2022. Komercijalna Banka in BiH was successfully sold in December 2021. • Non-recurring valuation income in the amount of EUR 14.8 million from repayment of exposure, classified as non-performing, EUR 9.0 million of other operational income from the settlement of legal dispute, and EUR 8.1 million loss from the sale of Komercijalna Banka, Banja Luka. • Positive impact of the release of impairments and provisions for credit risk (EUR 35.8 million), mostly due to successful repayment of on- and off-balance exposures and changed parameters related to more favourable macroeconomic forecasts. EUR 27.1 million net established other impairments and provisions, due to restructuring provisions and provisions for legal risk, mostly related to Komercijalna Banka, Beograd. • The capital position was • The Bank continues to execute comfortably above regulatory requirements (TCR of 17.8%, 1.2 p.p. higher YoY). Inclusion of the negative goodwill recognised at its strategic initiatives as well as explore new business opportunities on both domestic and other regional markets where the acquisition of Komercijalna the Group is not yet present. Banka, Beograd as of 30 June 2021, and partial inclusion of the 2021 result on one side and successful RWA optimisation measures undertaken on the other, had a positive impact on the capital position. • In 2021, the Bank paid out a cumulative dividend of EUR 92.2 million. • The liquidity position of the Group remained very strong, with a high level of unencumbered liquid assets in total assets (38.3%). The strong deposit base demonstrated client confidence in the Group. • The Bank participated in the ECB TLTRO III operation. The positive lending performance will partially compensate the negative outcome from holding liquidity reserves. • The digital leadership position in Slovenia is being applied to other markets in which the Group operates. The vision is to become one of the best data science companies in the region to productively use customer data and to evolve a local flexible digital ecosystem offering products and services for clients. • Continue to serve the community aiming to improve the quality of life in the Group’s region. Driving business value through sustainability and commitment to enhance the management of environmental and social risks of its operations, and meeting stakeholders’ needs and expectations. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 12 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Key Performance Indicators Table 2: 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 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) NPE ratio (EBA definition) NPE ratio (EBA definition) (BoS)(v) Received collaterals / NPL NPL collateral received / NPL (EBA definition) Credit impairments and provisions / RWA 2021 2020 2019 NLB Group NLB NLB Group 409 258 294 -415 -451 252 9 1 261 11 236 21,577 10,903 -316 10,587 5,208 17,641 2,079 137 4,655 17.8% 15.5% 15.5% 12,667 58.7% 86.1% 57.9% 58.4% 58.4% 367 2.4% 1.0% 3.4% 2.4% 1.7% 1.7% 61.7% 58.8% -0.3% 139 222 232 -184 -193 178 34 - 211 - 208 12,700 5,250 -97 5,153 3,034 9,660 1,552 - 3,489 24.6% 20.3% 20.3% 6,709 52.8% 75.1% 60.6% 60.8% 60.8% 130 1.5% 0.6% 2.4% 1.5% 1.1% 1.1% 60.0% 63.1% -0.4% 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% 81.8% 57.3% 56.9% 56.9% 475 3.5% 1.5% 4.5% 3.4% 2.3% 2.3% 60.7% 42.4% 0.5% NLB 139 173 180 -180 -188 131 -17 - 114 - 114 11,027 4,753 -158 4,595 3,017 8,851 1,451 - 3,684 27.1% 22.3% 22.3% 6,029 54.7% 76.0% 57.9% 55.3% 55.3% 208 3.0% 1.3% 4.0% 2.8% 1.9% 1.9% 65.8% 43.5% 0.1% NLB Group 318 199 219 -305 -321 212 -1 4 215 8 194 14,174 7,938 -334 7,605 3,830 11,612 1,686 45 4,222 16.3% 15.8% 15.8% 9,186 64.8% 89.2% 65.0% 64.5% 64.5% 375 3.8% 1.4% 4.6% 3.8% 2.7% 2.7% 66.6% 35.4% -0.1% NLB 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% 76.2% 56.7% 55.5% 55.5% 169 2.8% 1.3% 3.3% 2.7% 2.0% 2.0% 72.0% 33.6% -0.3% Further details on the definition of certain indicators in this table are available in the chapter Alternative Performance Indicators. (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). (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) The carrying amount of debt instruments measured at fair value through other comprehensive income (FVOCI) is increased by value adjustments due to impairments. (vi) Calculated on the basis of average total assets. (vii) 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. (viii) 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. (ix) Including Komercijalna Banka, Beograd. (x) Including Komercijalna Banka, Beograd, Komercijalna Banka, Banja Luka and Komercijalna Banka, Podgorica. (xi) Unsolicited rating. Contents 13 c) Profitability Net interest margin (BoS)(vi) Financial intermediation margin (BoS)(i) Operational business margin(vii) 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 Liquidity assets / Average total assets Liquidity Coverage Ratio (LCR) Net stable funding ratio (NSFR) f) Leverage ratio Leverage ratio g) Other Market share in terms of total assets LTD Total revenues / RWA(i) Key indicators per share Shareholders(viii) Shares The corresponding value of one share (in EUR) Book value (in EUR) Branches Number of branches Employees Number of employees International credit ratings S&P Fitch Moody's(xi) 2021 2020 2019 NLB Group NLB NLB Group 2.0% 3.4% 3.3% 11.8% 1.3% 11.4% 1.1% 2.2% 62.3% 3.3% 1.9% 48.9% 40.2% 252.6% 185.2% 10.2% - 60.0% 5.3% - - - 103.9 479(ix) 8,185 1.2% 3.1% 2.3% 14.0% 1.8% 13.8% 1.8% 1.6% 50.8% 2.7% 1.4% 59.4% 47.4% 314.5% 171.4% 13.6% 26.3% 53.3% 5.4%  2,571 20,000,000 10 77.6 75  2,510 2.0% 4.4% 3.2% 15.4% 1.8% 15.4% 1.8% 2.1% 58.3% 2.4% 1.5% 56.1% 51.8% 257.5% 165.7% 7.8% - 58.8% 4.1% - - - 97.6 530(x)  8,792 Rating BBB- - Baa1 Outlook Stable - Stable Rating BBB- BB+ Baa1 NLB 1.3% 3.1% 2.5% 8.2% 1.1% 8.2% 1.1% 1.8% 57.9% 3.0% 1.6% 65.8% 54.9% 336.3% 162.1% 10.3% 24.7% 51.9% 5.2% 2,455 20,000,000 10 72.5 80 2,591 Outlook Negative Negative Stable NLB Group 2.4% 4.0% 3.8% 12.7% 1.6% 11.7% 1.5% 2.4% 59.0% 3.3% 2.2% 54.7% 44.7% 324.9% 159.5% 8.7% - 65.5% 5.6% - - - 84.3 318 NLB 1.7% 3.9% 2.9% 13.4% 1.9% 13.3% 1.9% 2.2% 53.9% 3.7% 2.0% 63.8% 52.1% 362.1% 158.9% 9.7% 23.8% 59.1% 6.8% 2,100 20,000,000 10 66.7 93 5,878 2,659 Rating BBB- BB+ Baa2 Outlook Stable Stable Positive Further details on the definition of certain indicators in this table are available in the chapter Alternative Performance Indicators. (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). (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) The carrying amount of debt instruments measured at fair value through other comprehensive income (FVOCI) is increased by value adjustments due to impairments. (vi) Calculated on the basis of average total assets. (vii) 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. (viii) 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. (ix) Including Komercijalna Banka, Beograd. (x) Including Komercijalna Banka, Beograd, Komercijalna Banka, Banja Luka and Komercijalna Banka, Podgorica. (xi) Unsolicited rating. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 14 Outlook Table 3: Market performance and outlook for the period 2022-2023 Regular income Exceeding EUR 600 million EUR 640.9 million ~ EUR 670 million 2021 Guidance Performance in 2021 2022(iv) 2023 > EUR 700 million Costs Cost of risk Loan growth Dividend ROE a.t. Initial increase in cost base in the year 2021, costs projected around EUR 430 million including integration costs Around -20 bps Mid-single digit loan growth EUR 421.4 million(i) -41 bps 9% EUR 92.2 million EUR 92.2 million(ii) > 10% 11.4% Costs at 2021 level ~ EUR 400 million 20-30 bps 30-50 bps High single digit loan growth High single-digit loan growth EUR 100 million ~ 10%, (ROE normalized(iii): 12%) EUR 110 million > 10% (ROE normalized(iii): > 12%) (i) Including integration costs: EUR 7.8 million G&A costs and EUR 5.9 million HR provisions. (ii) Further information is available in the chapter Outlook 2022. (iii) ROE normalized = Result a.t. w/o minority shareholder profit divided by consumed capital. Consumed capital computed as 13.06% of average RWA reduced for minority shareholder capital contribution. (iv) If legal remedies against the adopted law in February 2022 concerning loan agreements in Swiss francs concluded by banks operating in Slovenia (including NLB) and individuals are unsuccessful, the Bank estimated a negative pre-tax effect on the operations of NLB and NLB Group should not exceed EUR 70 - 75 million. This would have a limited (up to 55 bps) negative impact on the capital position. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 15 Shareholder structure of NLB The Bank’s shares are listed on the Prime Market sub- Table 4: NLB’s main shareholders as at 31 December 2021(i) 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 Bank of New York Mellon on behalf of the GDR holders(ii) of the London Stock Exchange (ISIN: US66980N2036 and of which Brandes Investment Partners, L.P.(iii) US66980N1046, London Stock Exchange GDR trading symbol: NLB and 55VX). Five GDRs represent one share of NLB. of which EBRD(iii) of which Schroders plc(iii), (iv) Republic of Slovenia (RoS) Other shareholders Total Shareholder Number of shares Percentage of shares 11,357,368 / / / 5,000,001 3,642,631 20,000,000 56.79 >5 and <10 >5 and <10 >5 and <10 25.00 18.21 100.00 (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. The 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. (iv) Further information is available in chapter Events after the end of the 2021 financial year. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 16 Key Events January February March April May June July August September October November December January New member of the Supervisory Board: Tadeja Žbontar Rems was elected as the member of the Supervisory Board of the Bank – representative of workers. ‘Top Employer’ certificate: The Top Employers Institute awarded the Bank the prestigious ‘Top Employer’ certificate for the 6th consecutive year. February Quick loans: Increased accessibility of quick loans for individuals via video call. April Fee for customers balances: The Bank introduced a monthly fee for average monthly balances of individuals’ assets over a certain threshold (currently EUR 100,000). Increased shareholding in KB, Beograd: After the Bank acquired additional shares, its shareholding in Komercijalna Banka, Beograd increased to 88.28%. Change in Management Board: Petr Brunclík, member of the Management Board and COO, agreed with the Supervisory Board on the termination of his office taking effect on 30 June. May New payment methods: NLB, as the first bank in Slovenia, introduced the Flik P2M payment method and is offering a new debit Mastercard for individuals and legal persons. June New member of the Supervisory Board: Islam Osama Zekry was confirmed as a new member of the Supervisory Board. Dividend payment: The Bank paid the first instalment of dividends in the amount of EUR 12.0 million. Bankarium: The first banking museum in Slovenia was opened for the public. November Consolidation of operations in Montenegro: The merger of NLB Banka, Podgorica and Komercijalna Banka, Podgorica was completed. 4 July ECB stress tests: The results of stress tests carried out for important banks by the ECB to assess the resilience of financial institutions were disclosed. The result ranks the Group among banks with solid resilience. 3 Avgust Advertiser of the Year: Slovenian Chamber of Advertising has awarded NLB the title Advertiser of the Year for 2020. NLB was the only bank in history to receive such award in Slovenia. September New products in offering: The Bank began offering an extraordinary overdraft with a gradual decrease and automatic renewal for individuals, as well as a new health insurance option. October Dividend payment: The Bank paid the second instalment of dividends in the amount of EUR 12.8 million. Marketing award: The Marketing Association of Slovenia awarded the Bank with the main award in the category ‘Determination of Marketing Strategies’ for the project ‘Strategic Initiative of Customer Focus.’ December Sale of KB, Banja Luka: The Bank successfully sold 100% of its ordinary shares of Komercijalna Banka, Banja Luka to Banka Poštanska štedionica, Beograd. Expanding leasing activities: The Group initiated activities for expanding leasing operations in Serbia and North Macedonia. M-bank Klikpro: M-bank Klikpro was upgraded with a new digital signing solution. NLB share awarded: NLB shares (NLBR) received the Ljubljana Stock Exchange Award, ‘Prime Market Share of the Year.’ Supervisory and Management board transactions with NLBR shares: Primož Karpe, Chairman of the Supervisory board, bought 200 ordinary shares of NLB. Blaž Brodnjak, CEO & CMO and Archibald Kremser, CFO both bought 100 ordinary shares of NLB. Dividend payment: The Bank paid an additional incremental dividend in the amount of EUR 67.4 million, contributing to the 2021 cumulative payout of EUR 92.2 million. 3 For more information see the chapter Risk Management. 4 For more information see the chapter Strategic Foreign Markets. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 17 Market Performance of NLB’s Shares and GDRs NLB Shares and GDRs In 2021, European banking sector stocks continued their higher in comparison to the bottom of 2020. Since peaking in recovery that was initiated towards the end of 2020. In November 2021, the Bank’s stock moved slightly lower over the general, European banking sector stocks managed to remaining part of the year. gradually recover all of the pandemic-induced drop from March 2020 over the course of the year, with some of the In 2021, the Ljubljana Stock Exchange modified its banks being among the better performers of the stock market methodology for calculation of key indices with which a share rally since the end of 2020. European banking sector stocks of NLBR increased from 8.71% on 21 December 2020 to 18.05% recorded an increase in value of around 34% in 2021. However, on 20 December 2021. The increased weight in local indices European banking sector stocks finished the year below the and the strong capital market activity with NLBR in 2021 led to 2021 peak reached in November and even slightly below the NLB winning the ‘Prime Market Share of the year’ award for 2020 pre-pandemic peak reached in February 2020. the first time. In October, the Bank signed an agreement with InterCapital to provide the service of market making in NLBR The Bank’s stocks more than recovered the pandemic- shares with the intention of narrowing the bid-ask spread and increasing liquidity of shares. induced drop in the Bank’s stock price from March 2020. The Bank’s stock price recorded an increase of around 66% in 2021, contrasting the approximately 40% growth in the Slovenian Blue Chip Index SBI Top, and the 34% growth in European banking sector stocks in the year. In fact, the Bank’s stock entirely recovered the pandemic-induced drop from 2020 by the beginning of the summer 2021, and then continued to gradually move higher over the remaining part of the year. As such, the Bank’s stock price ended the year approximately 17% higher in comparison to the peak of 2020, and 123% Table 5: NLB share information Share information Total number of shares issued Highest closing price (in 2021) Lowest closing price (in 2021) Closing price as at 30 December 2021(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) Market capitalisation(i) (i) No market on 31 December 2021. 31 Dec 2021 20,000,000 EUR 80.6 EUR 42.0 EUR 76.2 EUR 103.9 EUR 11.8 0.73 EUR 4.61 EUR 1,524,000,000 NLB Shares (NLBR) received the Ljubljana Stock Exchange Award: Prime Market Share of the Year. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 18 Figure 1: NLB shares’ price movement on the Ljubljana Stock Exchange and NLB GDR’s price movement on the London Stock Exchange (in EUR) R D G 18.00 17.00 16.00 15.00 14.00 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Ja n 2 0 21 Fe b 2 0 21 M ar 2 0 21 A pr 2 0 21 M a y 2 0 21 Ju n 2 0 21 Jul 2 0 21 A u g 2 0 21 S e p 2 0 21 O ct 2 0 21 N ov 2 0 21 D ec 2 0 21 85.00 80.00 75.00 70.00 65.00 60.00 55.00 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 s e r a h S Shares (NLBR) GDR (NLB) Source: Ljubljana Stock Exchange, Bloomberg. Indices Investor Relations’ function The Bank’s shares are included in several indices: the The Bank participates in varied forms of engagement, such SBITOP index, SBITOP TR index, and ADRIA prime index of as investor meetings, calls, conferences, and roadshows, the Ljubljana Stock Exchange; the FTSE Frontier Index, MSCI reflecting the diverse nature of the Bank’s ownership Frontier, and MSCI Slovenia; the S&P Eastern Europe BMI, structure. Transparent communication with investors and S&P Emerging Frontier Super Composite BMI, S&P Extended analysts allowed for dialogue promotion on strategic Frontier 150, S&P Frontier BMI, S&P Frontier Ex-GCC BMI, S&P developments, as well as on the recent financial performance Slovenia BMI; as well as the STOXX All Europe Total Market, of the Group. The Bank promoted greater awareness and STOXX Balkan Total Market, STOXX Balkan Total Market ex- understanding of operating businesses, developments, and Greece & Turkey, STOXX EU Enlarged Total Market, STOXX events which have an influence on the performance of the Eastern Europe 300, STOXX Eastern Europe 300 Banks, Bank’s share price. Since the listing, six analysts released STOXX Eastern Europe Large 100, STOXX Eastern Europe research reports about the Group. Performance of the Bank is Total Market, STOXX Eastern Europe Total Market Small, covered by analysts from JP Morgan, Deutsche Bank, Wood & STOXX Global Total Market, and STOXX Slovenia Total Market. Company, Citi, InterCapital, and Raiffeisen Bank International. IR presentations, financial reports, and important information are available on the Bank’s website in line with IR’s Financial Calendar. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 19 We are your loyal partners. Great-grandfathers built bridges. Grandfathers built factories. Fathers built the internet. Your goal is to build the future. New builders of the future are driven by the same pioneer spirit that has accompanied this region for decades. You also are not going to sit and wait for better times to come along, instead you want to create them yourself. We are right here by your side, following the trends and always developing new solutions which will inspire and encourage you to create change. The same way we helped others before you. Macroeconomic Environment In 2021, following a pandemic-induced contraction in 2020, the global economy recorded a strong although imbalanced recovery. In general, global economic activity has managed to surpass pre-pandemic levels, but the recovery has remained incomplete and uneven across countries as well as sectors. 5.3% 8.1% 7.6% economic growth in the Euro-area in 2021. economic growth in Slovenia in 2021. economic growth in the Group’s region in 2021. Global and European economy Since the strong rebound resulting from the re-opening, the momentum has eased throughout the year because the global rebound has faced several headwinds that have influenced the momentum. The surge in demand for goods has faced production chain bottlenecks, and has resulted in supply- demand imbalances. As a consequence, inflation pressures have emerged in all economies with disruptions in energy, food, and commodity markets that have been reflected in increased prices. Inflationary pressures have been passed on to consumers and lasted longer than initially expected. The labour market is still yet to recover completely, but labour shortages have been evident in several economic sectors. The pandemic continued its grasp on economic activity also in 2021, but to a much lesser extent than in the previous year. New outbreaks weighed on economic activity by extending existing and originating new supply constraints. As such, business survey measures of output and new orders moved below their peaks recorded in Q2, while consumer confidence deteriorated in many countries in the last months of the year. Nevertheless, global industrial production and retail sales remained above pre-pandemic levels, although they have also recorded easing momentum over the course of the year. In the Euro area, economic activity rebounded sharply in H1 in line with the improvement in the health situation. The main driver of the rebound has been private consumption that was fuelled by the pent-up demand and a reduction in the household saving ratio. These have been driven by diminishing forced savings when the restrictions started to be gradually lifted in spring. This propelled the recovery in services which followed the recovery in manufacturing. Nevertheless, a sharp resumption in economic activity has resulted in supply-demand imbalances and has created vast supply disruptions and bottlenecks. The latter has influenced momentum slowing down the rebound and causing economic activity to ease after peaking in the summer. Global supply chain bottlenecks have been a significant constraint on industrial production and goods trade throughout the year. Supply bottlenecks, increasing producer prices, coupled with a surge in energy prices, and stronger demand as a result of the reopening of the economy have caused a strong increase in inflationary pressures. The latter has resulted in a surge in headline, as well as core inflation rates as inflationary pressures have become more and more broad-based and have been mainly passed on to consumers over the course of the year. The strength of the labour market in 2021 was reflected in the decreasing unemployment rate throughout the year, while pockets of labour shortages have emerged and have become a sector-specific issue. Monetary policy authorities kept the notion of transitory inflation for the large majority of the year, but rapid resumption in economic activity, rising inflation rates, and labour market conditions improvement forced them to reconsider monetary policy stances. In the Euro area, the ECB has maintained very favourable financing conditions in 2021 with TLTRO-III and the Pandemic emergency purchase programme (PEPP) playing their parts in supporting the Euro area recovery. Nevertheless, the pace of purchases under the PEPP have decreased throughout the year, and at the December meeting, the ECB outlined the discontinuation plan for the programme. The net purchases under the programme discontinued in March 2022, which was in accordance with its design. However, the ECB has also decided to temporarily increase purchases under the regular asset purchases programme in order to provide some sort of a transitional period, but subsequently implemented a quicker slowdown of the programme. In the US, asset purchases tapering was announced and outlined in November, but sustained price pressures prompted the Fed to drop the notion of transitory inflation and to double the tapering pace, which also resulted in moving forward the timeline of rate hikes. At the March meeting, the Fed actually raised the rate by 25 bps, with additional rate hikes set to follow. The global economy is expected to continue with the recovery in 2022. The impact of pandemic on economic activity has considerably waned over time, and it should further wane over the coming years, resulting in a restoration of demand patterns and an easing of supply disruptions and inflationary pressures. However, the recovery may quite possibly remain unbalanced across countries and sectors. In the Euro area, the strong output recovery that is underway is expected to continue in 2022. GDP growth is expected to moderate to 3.6% in 2022, with forces of the re-opening set to fade out. Growth in the Euro area will be primarily driven by strong private consumption in light of households reducing the saving rate to normal levels on the back MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 21 of further diminishing forced and precautionary savings. Another in particular, will push up inflation in the coming months. In fact, driver is business investment, which is expected to recover inflation could rise even further and remain elevated for longer substantially, and which will be additionally supported by the due to commodity price surge and additionally due to second Next Generation EU funds. The withdrawal of emergency support round effects, in terms of the impact on the underlying inflation, measures targeting firms and households should result in a wage growth and higher inflation expectations. This erodes tighter fiscal policy stance, while the ECB gives the impression household purchasing power and together with a squeeze on of being headed for the exit from the accommodative monetary company profits, and deteriorated business and consumer policy. Supply chain bottlenecks and the surge in energy prices confidence will weigh on economic growth. Consequently, with are expected to sustain inflationary pressures in 2022 with elevated downside risks to growth and upside risks to inflation, inflation being projected to be higher. Strong labour demand the risks of stagflation have increased. A macroeconomic snapshot for the NLB Group’s region In Slovenia, economic activity surpassed its pre-pandemic level in 2021 on the back of a revival in private consumption, investment, and strong international demand. The economy expanded rapidly in H1. Since then, import growth has outpaced export growth and external trade made a negative contribution to the economic growth. Nevertheless, this negative contribution was more than offset by continued growth in private consumption and investment, while the fiscal policy stance also played its part in supporting the economic activity. Similarly, to other the Euro area economies, the economy has not been immune to supply chain bottlenecks and inflationary pressures. Inflation accelerated in Q3, and continued with acceleration MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report and likely further improvement in the labour market is expected to drive the unemployment lower. However, there are still some risks to the outlook. Despite the weakened impact of the pandemic on economic activity, it still represents some degree of risk. Furthermore, supply bottlenecks could be more severe, prolonged, and widespread than expected, while the emergence of new sources of supply bottlenecks is also possible. Protracted staff shortages could drag on economic activity and exacerbate supply chain issues. Inflation could continue to surprise on the upside and turn out higher than expected. If inflation expectations become entrenched at higher levels, more broad- based price increases could not be excluded. Moreover, with costs pressures being passed-through to consumers, inflationary pressures could become even more widespread. The latter could undermine households‘ purchasing power and impact the main growth driver. Geopolitical tensions in Eastern Europe adds yet another layer to the overall pile of risks to the outlook. The war in Ukraine has several economic implications resulting in a renewed downside risks to global growth, with Europe being the most exposed in this regard. Elevated uncertainty, potential energy supply disruptions, more widespread commodity shortages and new supply chain disruptions will weigh on the economy. A surge in commodity prices, with oil and gas prices accelerating higher The economy in the Group’s region The Group’s region rebounded strongly from the pandemic- in Q4, with energy prices being the main driver. induced economic crisis, in line with global economic trends. Private consumption has been the main driver of the growth in the Group’s region. Private consumption has been spurred by In Serbia, after experiencing a mild contraction in 2020, the economy exceeded the pre-pandemic output level and rebounded strongly credit growth, remittances, a strong tourism season, and pent-up in 2021 on the back of a strong increase in private consumption and demand despite the fact that labour markets in some countries have still not escaped the impact of the pandemic-induced crisis. investment, both more than offsetting the negative contribution of net exports and lower government consumption. Robust wage growth Private investment has solidified although there have been some in the year propelled household spending, while a sharp rebound in differences in dynamics between countries. Strong export demand oil prices and increase in food prices resulted in an acceleration of from the EU market and industrial production supported growth inflation over the course of the year. in BiH, North Macedonia, and Serbia, while Montenegro and Kosovo benefited in particular from the rebound in the tourism sector over the summer. Nevertheless, the Group’s region was not In North Macedonia, after contraction in Q1, a marked increase in private consumption propelled a buoyant Q2. Remittance inflow able to circumvent the global surge in commodity prices, rising also played its part in boosting private consumption resumption by energy prices and supply-chain bottlenecks. Coupled with firming bolstering households’ disposable incomes. Strengthened foreign domestic demand, this resulted in inflation increasing over the demand turned out beneficial for the external sector of the economy. course of the year. Fiscal policy remained accommodative and Inflation increased over the course of the year with pressures arising monetary policy rates were kept at historical lows. mainly due to rising global energy and goods prices, as well as supply chain disruptions. Table 6: Movement of key macroeconomic indicators in the Euro area and NLB Group region GDP (real grow th in %) Average inflation (in %) Unemployment rate (in %) 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Euro area Slovenia Serbia N. Macedonia BiH Kosovo Montenegro 1.6 3.3 4.3 3.9 2.8 4.8 4.1 -6.5 -4.2 -0.9 -6.1 -3.2 -5.3 -15.3 5.3 8.1 7.4 4.0 5.9 10.4 12.0 3.6 3.5 3.9 3.4 3.2 3.9 4.8 2.7 3.4 4.1 3.7 3.2 4.2 3.9 1.2 1.7 1.8 0.8 0.6 2.7 0.6 0.3 -0.3 1.6 1.2 -1.1 0.2 -0.3 2.6 2.0 4.1 3.2 2.0 3.3 2.4 5.3 5.7 7.8 6.1 6.0 6.3 5.0 2.2 2.4 4.1 2.5 2.5 2.6 7.6 4.5 11.2 17.3 15.7 8.0 5.0 9.7 16.4 15.9 7.7 4.8 11.1 15.7 15.5 7.2 4.4 10.0 15.1 15.1 25.7 25.9 24.0 23.0 2.0 15.1 17.9 16.6 15.8 7.2 4.4 9.4 14.7 14.7 22.2 15.2 Source: Statistical offices, Focus Economics. Note: NLB Forecasts are highlighted in grey. In BiH, a recovery in external markets and the expansion of domestic private consumption propelled the growth in 2021. Private consumption was supported by credit growth, wages growth, and remittances. However, in H2 the rebound in private consumption lost some momentum, but high public and capital spending bolstered the domestic economy somewhat. Inflation increased throughout the year due to rekindled domestic demand and global trends in price pressures. In Kosovo, the economy recovered due to strong growth in domestic and external demand. Lifted restrictions on travel across Europe boosted tourism inflows. The rebound in the hospitality sector, while strong remittances inflow upheld private consumption. Surging exports of goods and services buoyed the economy when private and public consumption lost momentum in H2. Higher prices for food and energy have driven up price pressures over the course of the year. Contents 22 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) Euro area Slovenia Serbia N. Macedonia BiH Kosovo 2019 2020 2021 2022 2023 2.3 6.0 -6.9 -3.3 -2.7 -5.7 1.9 7.4 -4.1 -3.4 -3.6 -7.0 2.7 4.8 -4.4 -3.5 -2.8 -6.8 2.5 4.9 -4.3 -2.8 -2.9 -6.8 2.6 4.7 -4.4 -2.7 -2.9 -6.3 Montenegro -14.3 -26.0 -16.4 -14.4 -13.5 Source: Statistical offices, Focus Economics. Note: Consensus Forecasts are highlighted in grey. 2019 -0.6 0.4 -0.2 -2.0 1.9 -2.6 -2.9 2020 2021 2022 2023 2019 2020 -7.2 -7.7 -8.0 -8.2 -5.3 -7.1 -10.2 -6.8 -6.5 -4.1 -5.4 -2.7 -3.6 -4.7 -4.0 -4.5 -2.9 -4.6 -1.9 -2.2 -3.7 -2.7 -3.2 -1.7 -3.9 -1.4 -2.1 -2.9 83.6 65.6 51.9 40.7 32.5 17.6 76.5 97.3 79.8 57.0 51.2 36.7 22.4 105.1 2021 99.0 78.7 55.6 53.8 37.3 23.8 92.3 2022 2023 97.5 77.3 55.5 55.4 37.2 25.5 85.7 96.5 76.0 53.4 56.3 36.9 26.3 81.5 In Montenegro, the economy rebounded strongly with the improvement of the epidemiological situation and the opening form of the pandemic uncertainties, sturdier and prolonged labour market is seen as requiring some more time to leave elevated inflation, and the long-term impact of supply-side the memory of the crisis completely behind. Downside risk to of borders which propelled a resumption of tourism. After bottlenecks. Economic implications of the war in Ukraine add the outlook relates to the pandemic-related uncertainty and a sluggish start, tourism picked-up strongly in the summer yet another layer of uncertainty. months. The rebound in the tourism sector boosted a surge of private consumption which was the main driver of the recovery. Inflation accelerated over the course of the year with In North Macedonia, the growth in 2022 should be mainly driven by private consumption, being the key part of the possible implications on the tourism sector, although its effect is fading. Downside risk arises due to the overall economic implications of the war in Ukraine. higher commodity prices and firming demand driving price firming domestic demand. Coupled with strengthening foreign pressures. demand, it should lead to solid expansion. Nevertheless, The economic growth in the Group’s region could be around 3.7% in 2022. The recovery is expected to lose some Macroeconomic outlook for NLB Group’s region In Slovenia, economic activity is expected to continue growing, with domestic demand envisioned as being the main driver. Private consumption and investment, propelled by EU funds, should be key drivers of GDP growth. The labour market will drive the unemployment rate lower. After the 2021 pick-up in inflation, the acceleration of inflation is expected to continue in 2022 with high energy prices continuing to drive the headline inflation for most of the upcoming year. Buoyant imports growth should outpace exports, resulting in a negative contribution to the GDP growth of net exports. Pandemic-related uncertainties, although waning, continue to weigh on the outlook. Economic implications of the war in pandemic-related uncertainty, high energy prices, and momentum as the external boost gradually fades and the prolonged disruption of supply chains represent the main base effects wanes. Nevertheless, growth should be mainly downside risks to the outlook. Economic implications of the driven by firming private consumption and investment. The war in Ukraine represent an additional risk to the outlook. tighter labour market could propel household spending and In BiH, economic growth should remain solid, being supported by higher capital and public spending. That said, wage growth. Further improvement in the tourism sector should be beneficial, especially for tourism-dependent countries of the Group’s region. In the mid-term, countries the pandemic-related uncertainty, slower recovery in export of the Group’s region should also benefit from the Economic markets, and political stalemate represent the downside risks and Investment Plan adopted by the EU, which aims to boost to the outlook. Higher inflation and economic implications of more sustainable, green, digital, and people-focused growth. the war in Ukraine represent an additional risk to the outlook. However, supply disruptions, and rising commodity and In Kosovo, the economy should see robust, but cooled-down economic growth in 2022 due to the lower base effect. Firming energy prices, which are set to be additionally affected by the war in Ukraine, represent downside risks to the economic outlook of the Group’s region. Persistently higher inflation capital expenditure growth and a tighter labour market are levels could undermine households’ purchasing power and by seen as supporting factors for activity with the additional that private consumption. This would hinder the main growth beneficial effect of a healthier external backdrop. Pandemic- driver thus impacting growth. Moreover, political tensions and Ukraine represent an even greater risk to the outlook. related uncertainty and lingering political uncertainty are uncertainty in some countries of the Group’s region cannot In Serbia, growth is projected to return towards the pre- pandemic path. Growth should be mainly driven by private consumption and investment, as well as by more positive net exports contribution. However, downside risks are in the downside risks to the outlook. Additional downside risk arises be disregarded due to its impact on economic confidence, due to the overall economic implications of the war in Ukraine. while economic activity in tourism-dependent countries is In Montenegro, further growth in the tourism sector should propel the economy to recover the pre-pandemic level, but the particularly dependent on the path of the pandemic, in the Group’s region as well as abroad, despite pandemic’s waning effect on economic activity in general. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 23 Table 8: Movement of key banking systems indicators in the NLB Group region, 2021 Corporate loans Household loans Corporate deposits Household deposits Net interest margin NPL CAR in EUR million ∆ % YoY 9,302 16,166 3,003 4,486 2,335 1,277 6.3 8.8 8.7 2.2 13.7 7.3 in EUR million 11,263 10,606 3,256 5,336 1,399 1,456 ∆ % YoY 5.1 11.1 7.8 5.5 18.6 3.2 in EUR million 8,998 10,845 2,237 2,830 1,129 1,616 ∆ % YoY 12.0 13.0 11.6 17.6 19.7 26.6 in EUR million 23,953 16,919 4,966 7,513 3,237 2,193 ∆ % YoY 2020, in % 2021, in % in % ∆ pp YoY in % ∆ pp YoY 6.8 13.6 7.1 6.8 13.8 25.3 1.8 3.0 3.3 2.4 4.5 3.7 1.4 2.7 3.2(i) 2.4(i) 4.5 4.0 1.6 3.5 3.6(i) 5.5(i) 2.3 6.2 -1.0 -0.2 0.2 -1.1 -0.4 0.7 18.2 21.7 17.3(i) 19.2(i) 15.2 18.5 -0.1 -0.7 0.4 0.9 -1.2 0.0 Slovenia Serbia N. Macedonia BiH Kosovo Montenegro Source: Statistical offices, CBs, NLB. Note: Net interest margin calculated on interest-bearing assets; (i) Q3 2021 data. The banking system in the Group’s region The economic rebound in 2021 also had a positive impact on the banking system in the Group’s region. Lending activity recorded a notable revival in both, corporate and household loans. The majority of countries of the Group’s region recorded a notable improvement in corporate loans growth, with Slovenia and BiH bouncing into the positive territory after recording negative growth in 2020. In Serbia, growth in rates from the previous year. Kosovo recorded a marked corporate loans slightly moderated, but remained firm, while improvement in the household loans growth. in Kosovo further improvement in corporate loans growth was recorded. Montenegro and North Macedonia recorded However, despite a notable improvement in the credit robust corporate loans growth, representing a remarkable activity, a strong inflow of deposits continued in 2021. Despite improvement in comparison to the last year. Considering remaining robust, corporate and household deposits growth household loans, the dynamics were similar to the corporate moderated to some extent in Slovenia and partially in Serbia. loans. BiH and Slovenia recorded a significant rebound in In Montenegro, growth in corporate and household deposits household loans. Montenegro also recorded an improvement, surged after last year’s outflow of deposits. In Kosovo, already while Serbia and North Macedonia retained robust growth high growth in household and corporate deposits increased Figure 2: LTD ratio in the Euro area and NLB Group region Montenegro Kosovo BiH N. Macedonia Serbia Slovenia Euro area 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2021 2020 Source: ECB, National CBs, NLB. further, while North Macedonia and BiH recorded a somewhat less significant increase in the growth rate of corporate and household deposits. The net interest margin of the Group’s region banking systems exhibit some differences. In general, net interest income was driven by the increase in growth of lending contributing to positive quantity effects on the movement of net interest, and by the negative impact of price effects. The net interest margin of the banking systems in the Group’s region is largely a reflection of the two factors. The capital adequacy of the banking systems remains solid, well-capitalised, and the general improvement of the NPL ratio suggest some improvement in the quality of banks’ portfolios. The LTD ratio decreased in some of the Group’s region banking systems since the inflow of deposits remained strong. In general, the growth in deposits outpaced the growth in MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 24 Figure 3: ROE ratio in the Euro area and NLB Group region Montenegro Kosovo BiH N. Macedonia Serbia Slovenia Euro area loans, hence offsetting the effect of the revival in the credit activity. The profitability of the banking systems of the Group’s region improved, with ROE increasing in all countries of the Group’s region. Profitability improvement was to the great extent driven by the net release of impairments and provisions. Loans potential outlook for the Group’s region Loans to non-financial corporations and household loans as a percentage of GDP levels of the Group’s region suggest that the whole Group has the potential for further growth when compared to the levels of the same categories in the Euro area. The continued solid economic growth in the Group’s region bodes well for loans’ potential. The growth MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 0% 3% 6% 9% 12% 15% 18% in the Group’s region should be predominantly driven by private consumption and fixed investments, both important components of loans’ potential, and both expected to exhibit robust growth in 2022. Private consumption, as the most important component of GDP, is expected to range from around 3.0% in BiH to 5.9% in Montenegro. Fixed investment is expected to be somewhere between 3.4% in Montenegro and 8.6% in North Macedonia, with the growth rate in the Group's region in the upper half of that range. In general, stabilising private consumption and fixed investment should have a positive impact on lending activity in the Group’s region. 2021 2020 Source: ECB, National CBs. Note: Return on average equity (ROAE) used for BiH; Q3 2021 data for BiH, N. Macedonia and Euro area. Figure 4: Loans to non-financial corporations and household loans in the Euro area and NLB Group region in 2021 Montenegro Kosovo BiH N. Macedonia Serbia Slovenia Euro area 0% 10% 20% 30% 40% 50% 60% Household loans, % GDP Loans to non-financial corporations, % GDP Source: National CBs, National Statistical Offices. Note: Q3 2021 annualised data for BiH and Kosovo. Contents 25 Regulatory Environment During 2021, more than 100 changes in the EU and Slovenian regulatory environments were adopted with material effects on the Bank and the Group. The Group strives to be fully compliant with the existing and new requirements. Disclosure of the most relevant changes of legislation and regulation which have an effect on the Group is presented herein. The regulatory environment in Slovenia The Bank is subject to capital adequacy and liquidity rules imposed by the EU (CRR/CRD), which govern the activities in which banks may engage in, and are designed to maintain the safety and soundness of banks, as well as limit their exposure to risk. The CRD V was further transposed into the new Banking Act (ZBan-3), which also regulates the participation of employees in the management of the Bank, something the Bank already encourages. As a financial institution offering benchmark-based products, the Bank meets its obligations under the Regulation 2016/1011 (BMR) and regularly monitors developments in this area by adapting its operations to the requirements of regulators and industry. Due to the constant care for the interests of its customers, especially the protection of their data, the legislation in the field of personal data protection is also important for the Bank. The Bank strictly adheres to its obligations imposed on it by GDPR in both Slovenia and the Group. As the Slovenian law, which would further supplement the regulation, was not adopted either in 2021, further obligations for the Bank may arise when the law will be adopted. In the field of financial markets there were no significant changes in regulatory environment in 2021. Limited implications of latest upgrades of the Shareholders’ Rights Directive (SRD II) that was transposed into the amended Companies Act, have been duly implemented in the Bank’s processes. The Bank complies with the provisions of MIFIR/ terrorist financing. At the end of 2021, an amendment to the Prevention of Money Laundering and Terrorist Financing Act was proposed that will further remove certain inconsistencies and ambiguities, relax certain requirements, and introduce additional tools or options for the implementation of measures by obliged persons. Compliance with the Payments Act (PSD2) and regulatory technical standards, which brought open banking into the financial environment, required major changes to the Bank’s information systems. The Bank is constantly monitoring new regulatory requirements imposed by the regulator, is adapting to them, and taking into account the best user experience. Due to the COVID-19 epidemic in 2021, the RoS adopted several intervention laws and measures which mainly affected the Bank in the area of credit moratoriums and daily operations. An ongoing activity from 2019 included the amendment of policies and contracts due to EBA Guidelines on outsourcing arrangements, that provide a clear definition of outsourcing and specify the criteria to assess whether or not an outsourced activity, service, process, or function (or part of it) is critical or important. In the EU’s policy context under the European Green Deal, ‘sustainable finance’ is understood as finance to support economic growth while reducing pressures on the environment, and taking into account social and governance aspects. The Bank is approaching the development of a comprehensive policy on sustainable finance, comprising the action plan on financing transition to low-carbon economy. MIFID II and EMIR regarding financial markets transactions, Regarding the upcoming legislation in the corporate enhanced investor protection, transparency, and reporting governance area, an amendment to the Companies Act obligations. (ZGD-1) is in the process of adoption which will have an impact on the Bank mainly in the area of relations with shareholders The Group also takes into account and complies with the and the exercise of shareholders’ rights, as well as information regulations in the field of preventing money laundering and on corporate actions (following SRD2). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 26 In the Republic of Srpska, a new Decision on the Bank’s management system was published by the Banking Agency of the Republic of Srpska, which has replaced five previous by- laws and therefore required thorough changes of the Bank’s internal acts. Also, the Law on the Protection from harassment at work was published in October 2021. Next to these, the local regulator published several by-laws related to liquidity, reporting, credit risk management, etc. In Kosovo, the local CB adopted the Instructions for using the form on the origin of funds and determining the holder of the property right and the Guideline on loan restructuring due to COVID-19. The government of the Republic of Kosovo, and the Ministry of Finance Labour and Transfers adopted the product ‘Diaspora Bonds’; the Deposit Insurance Fund of Kosovo (DIFK) adopted the Rules on reporting, calculation, and collection of premiums, testing the depositor compensation system, and on administrative sanctions for members of the DIFK. The Assembly of the Republic of Kosovo adopted the Law on Electronic identification and trust services in electronic transactions. In Montenegro, the main activities in 2021 were dedicated to the implementation of Law on Credit Institutions, Bank Recovery and Resolution Law, together with a number of by-laws for both legal acts. Also important is that some of the by-laws have been changed before the start of its application. No less important were the activities on implementation of by-laws for Deposit Protection Act, as well as the Central Bank of Montenegro Decision on the Central Register of Transaction Accounts. Regulatory environment in the Group’s region The regulatory environment in the rest of the region where the Group operates was dominated by legislative and regulatory changes related to the COVID-19 pandemic and minimising its consequences in the financial sector and economies. There were also local regulatory (prudential and macroeconomic) measures adopted to ensure stable functioning of the financial systems. Serbia continued harmonizing the business environment with the EU framework through the adoption/amendments of the new Law on Capital Market, the Law on Electronic Invoicing, and the Law on Companies (all these to be enforced successively). The National Bank of Serbia put more scrutiny on the clients’ complaints and the process of refinancing loans in the banks. Regulatory activities on COVID-19 continued with the aim of mitigating the consequences of the pandemic both for the economy and citizens. In North Macedonia, COVID-19 pandemic-related laws focused mostly on social support for vulnerable social groups, and financial help for the affected companies. The AML law was amended to transpose the EU legislation in the relevant area so that Banks could use electronic identification in its day-to-day activities. The National Bank of the Republic of North Macedonia adopted the decisions, mostly in order to harmonize with EU legislation and standards in the area of required reserves, the methodology for identifying systemically significant banks, and submitting and publishing data on the performed activities in the payment operations. In the Federation of BiH the most important decision of the regulator in 2021 was the Decision on Internal Governance System in the Bank, which represents an alignment of local regulations with EBA Guidelines on Internal Governance. A new ‘Law on Accounting and Auditing in the Federation of BiH’ must also be emphasized as it brings new accounting frame in Federation of BiH. In the area of legal entity legislation, there are new regulations related to the possibility of using digitally signed documents in the registration of a legal entity, but in this very moment technical and legal support on the level of the state is not yet provided. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 27 BUSINESS REPORT MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 28 Strategy Despite the challenging and uncertain economic environment, the Group has continued to duly execute its medium-term strategy. This includes 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 to ensure delivery of the Group’s vision. Become a regional champion Putting clients first The Group aims to further strengthen its role as a systemically In retail banking, the Group continues to strive to become important financial institution in the SEE region, and strives closer to its clients by offering anchor products and the to become a market leader in all of its core markets and to most accessible and personalised digital services (e.g., have a prominent role in the region’s development. With the omnichannel, marketplace) that suit their lifestyles. In completion of the acquisition of Komercijalna Banka, Beograd corporate banking, the Bank is looking to provide more in 2020, the Group made an important step in this direction. complex, cross-border products and services, and to find The Group believes there is significant potential from the new entry points in order to suit all its clients’ financial needs. deal for the whole region given the complementary product One of the key efforts is improved availability for all clients. offerings of Komercijalna Banka, Beograd that enable the The Group has made itself available anywhere and anytime Group to extend a number of products and services in the by building a strong customer call centre and upgrading its Serbian market and increase its cross-border activity. In portfolio of digital sales channels. These now offer a growing addition, cost- and capability-related business synergies will set of banking products and services, both for retail and be derived from its integration within the Group and which will corporate clients. be finished in 2022. It is estimated that the combined synergy effects could result in over EUR 20 million annually from 2023 onwards. Further business synergies are expected from the integration of Sberbank banka d.d. in the Group. Finishing integration of Komercijalna banka, Beograd Promoting the ESG agenda Creating new business expansion opportunities Monitoring and increasing stakeholder value Becoming a great place to work Become a regional champion Putting clients first Grow our market position Monetize opportunities and synergies Digitizing distribution channels Supporting clients' expansion Adding new financial products Building strong customer support Continuing strategic transformation initiatives Establishing diversified horizontal businesses MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 29 Digitalization The Group continues to implement comprehensive and substantial strategic efforts toward digital distribution and operating models that have been accelerated by the COVID-19 pandemic. The new circumstances related to the pandemic and the economic uncertainty continue to affect the growth and acceptance of digital channels by our customers. The Group was prepared for such a market trend, since it was The Group regularly engages with all of its stakeholders in funds for their implementation. With the projects, all major defining what is material to both them and the Group. A variety running change efforts are channelled into one overall of communication channels are used for an open and strategic transformation program. transparent dialogue on sustainability related issues. Some of the most important channels for communications with the The backbone of the strategy is strengthening customer- stakeholders (in addition to the regular publicly available centricity by establishing customer-based market periodic reports, presentations, and webcasts on the Group management, improving the understanding of clients, performance) are the NLB Group Sustainability Report, the reimagining digital client journeys, and accelerating CSR and Sustainability e-mail box, the corporate website, and innovation to provide lifestyle and value chain services to already the leading provider and innovator in its core markets social media channels. strengthen relationships. before the outbreak. At the same time, the Group is striving to simplify and automate processes in order to minimise their time and costs. The focus on digitalization is to enable quicker and better customer service, a higher level of internal processes efficiency, and consequently additional cost savings. The Group will continue to invest substantially in IT infrastructure and its capabilities. The focus will be on The Group’s employees represent its key resource: human The transformation program also focuses efforts into capital and are one of its main drivers for creating value. increased operational efficiency, cost management, Through the focus on recruitment, management, and the and the improved utilisation of the Group’s capital. continual development of employees, they are given the Simultaneously, overall operational capabilities are opportunity to thrive by making the most of their talent and being enhanced by improving human capital, optimising experiences and adapt to a fast-changing world. They are IT infrastructure, digitalizing internal processes, and encouraged to act in a responsive, respectful, and result- leveraging information capital. To drive the transformation, driven manner within and outside their work efforts. The a new change management platform was set up. ambition is to truly involve the whole organisation in realising improving the speed IT can deliver results by adopting agile the Group’s sustainability ambitions. Brexit’s impact on the Group’s performance Due to the limited focus of the Group’s operations beyond the SEE region, Brexit did not have any significant impact on the methodology principles, the provision and implementation of the best online experience for customers in the SEE, and enhancing capabilities for processing data, modelling, and the relevance of services to clients. One such example is the already established technological hub in Belgrade that develops solutions for the whole Group. Due to the positive effects of working remotely during the pandemic, the Group has developed a hybrid working model (combination of work-from-home and work from the office) initiative, thus offering more flexibility to its workforce and achieving cost benefits at the same time. Grow our market position The Group is working to protect and strengthen its market position as a systemic player in its home region. In order to do this, the Group is monitoring how well it is adding value to three types of its main stakeholders: shareholders, customers, and employees. With respect to shareholders, the Group views its decisions through a lens of maximising its return on equity. With respect to customers, a net promoter score (NPS) is monitored and tracked. With respect to employees, an employee engagement metric is measured and analysed. In addition to the mentioned key performance indicators, other supporting indicators and benchmarks are tracked in order to continually revaluate current projects and utilise those insights for future decisions. Monetize opportunities and synergies Significant strategic business efforts are undertaken to Group’s business performance. achieve business synergies across the Group, both in costs and operational efficiency. The Group believes these can help offset significant negative economic effects of the COVID-19 pandemic on the Group’s future business results. The Group is fully engaged in re-establishing some of the key financial services (leasing, factoring, etc.), thus diversifying its services on a horizontal level. The Bank is simultaneously monitoring additional M&A opportunities (within consolidation processes in banking sectors in the SEE) that could add value to the Bank’s shareholders. It makes sense to actively participate in the expected growth and consolidation of the market. Continuing transformation To facilitate the aforementioned strategic focus and support continuous transformation in an everchanging environment, the Group is following an elaborated, comprehensive, and detailed program plan to deliver its mission and financial targets. The Group has identified a series of projects and initiatives, and has also dedicated considerable investment MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 30 Risk Factors and Outlook Risk factors Risk factors affecting the business outlook are (among others): • The economies’ sensitivity to a potential slowdown in the Euro area or globally • Widening credit spreads • Potential liquidity outflows • Worsened interest rate outlook • Potential cyber-attacks • Regulatory, other legislative and tax measures impacting the banks • Geopolitical uncertainties Special attention is paid to continuous provision of services to IFRS 9 baseline scenario is based on the NLB monthly clients, their monitoring, health protection measures, and the prevention of cyber attacks and potential fraud events. The Group has established internal controls and other measures to facilitate their adequate management. However, these Economic Outlook that was created in April 2021. • The macroeconomic rationale behind the alternative scenarios is related to a range of plausible impacts of the COVID-19 pandemic on economic development during measures may not always fully prevent potential adverse the next 3 years. The basis for the alternative scenarios is effects. related to the ECB's view of economic development after the coronavirus outbreak since early 2020. Based on the The Group is subject to a wide variety of regulations and ECB illustration of a mild and severe scenario resolution of laws relating to banking, insurance and financial services. the pandemic crisis through the lens of possible expected Respectively, it faces the risk of significant interventions by a impact on economic activity in the Euro area, the Group number of regulatory and enforcement authorities in each of developed both alternative scenarios. In general, the the jurisdictions in which it operates. mild scenario envisions a resolution of the health crisis by the end of 2021 and a long-term reviving process of the economy, while a severe scenario assumes a more protracted crisis and permanent losses in economic The economic momentum in the region where the Group The SEE region is the Group's most significant geographic operates was affected by the COVID-19 pandemic. In 2021, the Group’s region returned to growth on the back of revival area of operations outside of the RoS and the economic conditions in this region are therefore important to the Group's potential. These scenarios were included in the calculation in private and investment consumption. However, it is not results of operations and financial condition. As a result of any possible to assume with a high degree of confidence that such instability or economic deterioration in this region, the Group's of ECL in accordance with IFRS 9 as of 30 June 2021. Apart from this the Group had kept track of the latest economic economic momentum will continue. financial condition could be adversely affected. Lending growth in the corporate segment remained relatively In this regard, the Group closely follows the macroeconomic moderate, especially in the current circumstances. On the indicators relevant to its operations: other hand, the Group benefited from increased demand for • GDP trends and forecasts mortgage loan financing, especially in Slovenia, as well as in banking subsidiaries. During 2021 impacts of the COVID-19 pandemic did not have a meaningful impact on the credit portfolio quality. The Group faced a favourable NPL movement • Economic sentiment • Unemployment rate • Consumer confidence • Construction sentiment resulting in lower percentage of NPLs and positive effects • Deposit stability and growth of loans in the banking sector from on- and off-balance sheet collection. Credit risk is • Credit spreads and related future forecasts usually materially increased in times of economic slowdown. • Interest rate development and related future forecasts Notwithstanding the established procedures in the Group's • FX rates credit risk management, there can be no assurance that they • Other relevant market indicators will be sufficient to ensure that the Group's quality of credit portfolio or the corresponding impairments will remain at the adequate level in the future. The investment strategy of the Group, referring to the Group’s bond portfolio kept for liquidity purposes, adapts to the expected market trends in accordance with the set risk appetite. While the Group monitors its liquidity position and corresponding trends, impacts of credit spread and interest rate fluctuations on its positions, any significant and unanticipated movements on the markets or variety of factors, such as competitive pressures, customer’s confidence or other certain factors outside the Group's control, could adversely affect the Group's operations and financial condition. During 2021, the Group reviewed IFRS 9 provisioning by testing a set of relevant macroeconomic scenarios to adequately reflect the current circumstances and the related impacts in the future. The Group established and developed multiple scenarios (i.e. baseline, mild and severe) on the level of ECL calculation: • The baseline scenario presents a common forecast macroeconomic view for all countries that are present in the Group. This scenario is constructed with the purpose to culminate various outlooks into a unified projection of macroeconomic and financial variables for the Group. This is in line with the concept that the Bank has a consolidated view on the future of economic development in SEE. The developments and changing official projections. • The latest set of IFRS 9 scenarios for macroeconomic variables is applied in the modelling process for the probability of default (PD) and loss given default (LGD) estimates. Nevertheless, the focus in macroeconomic scenarios is on the trajectory of real GDP and the unemployment rate over the projection horizon from 2021 to 2023. Both variables are included in the modelling process of PD and LGD, respectively. The Group established a comprehensive internal stress-testing framework and early warning systems in various risk areas with built-in risk factors relevant to the Group’s business model. The stress-testing framework is integrated into Risk Appetite, ICAAP, ILAAP, and Recovery Plan to determine how severe and unexpected changes in the business and macro environment might affect the Group’s capital adequacy or liquidity position. Both the stress-testing framework and recovery plan indicators support proactive management of the Group’s overall risk profile in these circumstances, including capital and liquidity positions from a forward-looking perspective. Risk Management actions that might be used by the Group are determined by various internal policies and applied when necessary. Moreover, the selection and application MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 31 of mitigation measures follows a three-layer approach, the coming years. In the Euro area, output recovery is expected commodity prices, with oil and gas prices accelerating higher considering the feasibility analysis of the measure, its impact to continue in 2022. GDP growth is expected to moderate to in particular, will push up inflation in the coming months. In fact, on the Group’s business model, and the strength of available 3.6% in 2022, with the re-opening effects set to fade out. Growth inflation could rise even further and remain elevated for longer measure. Outlook in the Euro area will be primarily driven by strong private due to commodity price surge and additionally due to second consumption and business investment, which is expected round effects, in terms of the impact on the underlying inflation, to recover substantially, additionally supported by the Next wage growth and higher inflation expectations. This erodes Generation EU funds. The withdrawal of emergency support household purchasing power and together with a squeeze on The indicated outlook constitutes forward-looking statements measures targeting firms and households should result in a company profits, and deteriorated business and consumer which are subject to a number of risk factors and are not a tighter fiscal policy stance, while the ECB gives the impression confidence will weigh on economic growth. Consequently, guarantee of future financial performance. of being headed for the exit from the accommodative monetary with elevated downside risks to growth and upside risks to policy. Supply chain bottlenecks and the surge in energy inflation, the risks of stagflation have increased. Regarding the The Group is pursuing a range of strategic activities to prices are expected to sustain inflationary pressures in 2022 Group’s region, the economic growth could be at around 3.7% enhance its business performance. Interest rate outlook is with inflation being projected to be higher. However, there are in 2022. The recovery is expected to lose some momentum. uncertain given the adaptive monetary policy of the ECB to still some risks to the outlook. Despite the weakened impact Nevertheless, growth should be mainly driven by firming the general economic sentiment. The Bank is committed to of the pandemic on economic activity, it still represents some private consumption and investment. Tighter labour market delivering sound financial performance. degree of risk. Furthermore, supply bottlenecks could be more could propel household spending and wage growth while severe, prolonged, and widespread than expected, while further improvement in the tourism sector should be beneficial The measures and potentials outlined in the above strategy the emergence of new sources of supply bottlenecks is also especially for tourism-dependent countries. That said, supply are reflected in the Group’s outlook for the 2022 to 2023 period possible. Protracted staff shortages could drag on economic disruptions, and rising commodity and energy prices, which are (Table 9). Potential effects of acquisition of Sberbank banka activity and exacerbate supply chain issues. Inflation could set to be be additionally affected by economic implications of d.d. are not included in the outlook. continue to surprise on the upside and even more broad- the war in Ukraine, represents downside risks to the economic Outlook 2022 Macroeconomic The global economy is expected to continue with the recovery based price increases could not be excluded. The latter could outlook of the Group’s region because persistently higher undermine households‘ purchasing power. Geopolitical inflation levels could undermine households’ purchasing power. tensions in Eastern Europe adds yet another layer to the Moreover, political tensions and uncertainty in some countries overall pile of risks to the outlook. The war in Ukraine has of the Group’s region cannot be disregarded due to its impact several economic implications resulting in a renewed downside on economic confidence while economic activity in tourism- risks to global growth, with Europe being the most exposed dependent countries is particularly dependent on the path of in this regard. Elevated uncertainty, potential energy supply the pandemic, despite its waning effect on economic activity. in 2022. The impact of pandemic on economic activity has disruptions, more widespread commodity shortages and new considerably waned over time, and it should further wane over supply chain disruptions will weigh on the economy. A surge in Table 9: Outlook for the period 2022-2023 Regular income Costs Cost of risk Loan growth Dividend ROE a.t. 2022(ii) ~ EUR 670 million Costs at 2021 level 20-30 bps Revenues and loan growth On the back of continuing economic rebound with strong 2023 private consumption and business investment, the Group > EUR 700 million ~ EUR 400 million 30-50 bps expects high single digit loan growth in 2022. Retail Banking in Slovenia is expected so see continuation of strong loan growth also in 2022, with a healthy demand for mortgage loans. Corporate and Investment Banking in Slovenia is also expected to grow on the back of cross-border lending and revival in investment spending. Strategic Foreign Markets will maintain High single digit loan growth High single-digit loan growth EUR 100 million EUR 110 million robust performance with loan growth expected to reach double (i) ROE normalized = Result a.t. w/o minority shareholder profit divided by consumed capital. Consumed capital computed as 13.06% of average RWA reduced for minority shareholder capital contribution. (ii) If legal remedies against the adopted law in February 2022 concerning loan agreements in Swiss francs concluded by banks operating in Slovenia (including NLB) and individuals are unsuccessful, the Bank estimated a negative pre-tax effect on the operations of NLB and NLB Group should not exceed EUR 70 - 75 million. This would have a limited (up to 55 bps) negative impact on the capital position. ~ 10%, (ROE normalized(i): 12%) > 10% (ROE normalized(i): > 12%) digit growth. Therefore, interest income growth is expected to be primarily driven by loan book growth, and productive use of liquid assets. Post COVID-19 opening of the economies and introduction of high balance fees stimulated demand for fee generating products and income. All of the above should result in total regular revenues of around EUR 670 million in 2022. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 32 Costs and cost of risk The Group will continue to pursue a strong cost containment agenda addressing both labour and non-labour cost elements. Total costs continue to be impacted by a business environment with a visible labour cost inflation throughout the region. Additionally, the Group continues with its investment activities into information technology upgrades, amid the growing relevance of digital banking. Importantly, integration costs associated with the acquired Komercijalna potential adverse negative market movements by further not include part of the 2021 result in the amount of EUR 100 shortening of the portfolio duration and classification of new million. Therefore, there will be no effect on the capital in case investments with longer duration as hold to collect in order the dividends are paid. The dividend payment in the year to decrease sensitivity to regulatory capital. High levels of 2022 might be split in two instalments. The Bank envisages deposit inflows are putting an additional strain on profitability. cumulative dividend payout of EUR 210 million in the period 2022-2023. In June 2021 the Bank participated in the ECB TLTRO operation and has drawn a credit tranche of EUR 750 million. The Bank is considering early repayment in June 2022. If materialized, this will not have a material impact on the Group’s liquidity Banka, Beograd will contribute to total costs in 2022. Based position. on this, costs including integration expenses are expected to remain at 2021 level. The realised cost of risk in 2021 at -41 bps outperformed Capital The capital position represents a strong base to cover all COVID-19 Despite the COVID-19 related circumstances the Group ensured continuity of service provision to its clients by adjusting the Group’s offer, increased use of digital channels, and enhancing customer experience. The Group is aiming to further support its clients, by constant development including creating flexible local digital ecosystem of offering products previous outlook guidance for 2021 (around -20 bps) due to regulatory capital requirements, including capital buffers and services. very strong development in NPL resolution. It is expected and other currently known requirements, as well as the Pillar that resolutions will continue to positively impact cost of risk in 2022, but with a diminished importance. Based on 2 Guidance. If legal remedies against the adopted law in February 2022 concerning loan agreements in Swiss francs assessed environment the expected cost of risk will be in concluded by banks operating in Slovenia (including NLB) and Sustainability The Group has committed to sustainability, and has been the range of 20 bps to 30 bps, and somewhat lower than individuals are unsuccessful, the Bank estimated a negative enhancing the management of environmental and social expected in the 2023 (30-50 bps). pre-tax effect on the operations of NLB and NLB Group should risks of its operations, among others to meet EBRD and MIGA Loan portfolio quality The Group anticipates lending growth in all key segments. Special focus will be given to the retail segment where the Group experienced strong growth in the previous year. The Group is very prudent in identifying any increase in credit risk, as well as proactive in the area of NPL management. On this basis well diversified and stable quality of credit portfolio is expected during the year 2022. Potential moderation of current positive economic trends due to not exceed EUR 70 - 75 million. This would have a limited (up standards. It also substantially increased the use of digital to 55 bps) negative impact on the capital position, leaving channels, improved customer experience, and aims to create the Bank’s capital position comfortably above all current a flexible local digital ecosystem for offering products and requirements. services. The Bank is exploring opportunities for MREL funding, In 2022, the Group intends to make sustainability more issuance of Tier 2, and potential issuance of Additional Tier 1 tangible throughout the Group. The resources are shifting instrument(s) to further strengthen and optimize its capital on towards a low-carbon economy and engaging with customers solo and consolidated level. Based on transitional increase is key in financing the transition. An important step forward of MREL requirement, the Bank in 2022 intends to strengthen will be done by expanding the product portfolio with loans MREL eligible liabilities in the amount of around EUR 400 dedicated to supporting energy efficiency and renewable COVID-19 uncertainties might have a negative impact on the million. Also, in 2022 the Group continues with activities to energy production and introducing digital only card. The existing loan portfolio quality, but its impact should not be optimise RWAs. excessive. Liquidity From liquidity perspective, deposits at the Group level are still increasing (in the Bank and in banking members), although growth of retail deposits has moderated in H2 2021. The liquidity position of the Group is expected to remain solid even if a highly unfavourable liquidity scenario materialises, as the Group holds sufficient liquidity reserves in the form of placements at the ECB, prime debt securities, M&A opportunities The Group might explore further value accretive M&A Group supports global decarbonization goals and aims to expand the Group’s measurements of emissions to Scope 3. Implementation of climate related and environmental risk management follows ECB and EBA guidelines. Moreover, participation in ECB climate-risk stress test exercise will opportunities in its domestic and other regional markets provide additional important insights, which will surely where the Group is not yet present with the aim to increase have an effect on further adaptation of the existing Group’s shareholders’ value. Dividends The Bank’s general intention is to distribute dividends on business model. Effective integration of sustainability-related regulatory requirements will be important in 2022 for ESG disclosures and reporting (e.g. EU Taxonomy, BASEL Pillar III). The Group plans to make required steps in order to obtain our first ESG rating. However, all of the above mentioned cannot be achieved without highly motivated and adequately skilled and money market placements. Significant attention is given yearly basis in line with its capacity, while at the same time to the structure and concentration of liquidity reserves, by incorporating early warning systems, keeping in mind the fulfilling all regulatory requirements, including the Pillar 2 teams, hence relevant trainings will be an important part of Guidance and risk appetite. 2021 YE capital calculation does the working agenda. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 33 Impact of COVID-19 on Operations Following a very demanding year due to the worldwide impact of the COVID-19 outbreak having unprecedented effects around the globe, the year 2021 was in general a return to new normal and growth. Nevertheless, the disease is still present and will continue to affect the economies to various degrees despite increased Impact on credit portfolio quality COVID-19 did not have a meaningful impact on the quality of the credit portfolio. The support schemes introduced by the governments in the Group countries providing moratoriums to eligible clients as part of the COVID-19 pandemic measures phased out during 2021. As at 31 December 2021, the exposures medical capabilities and an improved toolbox where COVID-19 moratoria were granted amounted to against the struggle with the pandemic. Though the COVID-19 pandemic, coupled with its implications on all aspects of life and in particular on the business environment, was still the region’s and world’s buzzword, the Group managed to stay well capitalised, very liquid, and as the business results show, also highly profitable. EUR 1,681.5 million and represented 10.8% of the Group’s credit portfolio. The exposure with the remaining COVID-19 moratoria was negligible and amounted to EUR 24.8 million, while 98.5% of those moratoria already expired by 2021 YE. A total of 86.4% of exposure with the expired moratoria have no delays, while 2.1% had delays exceeding 90 days. The Bank is very prudent in identifying any increase in credit risk. Measures The Group continued to take necessary measures to protect its customers and employees by ensuring safety conditions and making sure services offered by the Group were provided without disruption. The vast majority of the products and services offered by the Group banks are available to clients in digital form without the need to visit a branch – and 24/7 client support by enhancing the availability of digital channels was ensured. The ‘Work from Home’ initiative In parallel, the plans to introduce a ‘work from home’ initiative which pre-dates the COVID-19 pandemic was somehow accelerated by the overall circumstances in the last two years, and was well received by the employees. In this respect, the pandemic provided a further push in the direction of digitalisation of the Group’s business model. Resilience of strategic initiatives The resilience of the Group’s strategic initiatives was well demonstrated throughout the outbreak of the COVID-19 of any significant delays in the envisaged execution timelines, which should positively impact the Group’s future financial and operational performance. Impact on sustainability The COVID-19 pandemic has had a substantial influence on three of the most significant aspects of sustainability: the society, economy, and environment. Its heavy economic burden on societies is likely to leave persistent social scars, such as greater inequality and poverty, as well as challenges regarding affordability and access to basic needs. By understanding that the pandemic has had direct effect on the economy, we have decided to further support vulnerable groups and exempt humanitarian organisations from paying commissions.5 Although COVID-19 restrictions of movement and changes of commuting patterns have altered in the past two years, with the economy recovery in 2021 global emissions are rising back to the pre-COVID level, which makes the fight against climate change even more urgent.6 This also resulted in important and decisive steps in development of the sustainability regulatory framework. In this regard, the Group strengthened the role of sustainability within the Group and amplified its activities: enhanced environmental and climate risk management, performed impact and materiality analysis, began measuring carbon footprint of own operations, and strengthened corporate governance by establishing NLB Group Sustainability Committee. For more information, please refer to the NLB Group Sustainability Report 2021. The year 2021 has proved that the Group adapted to ‘new normal’ with distinction. Digitalization, inclusion, and environmental protection have been some of the most important drivers for us. We have used them to continue developing progressive and digitalized services, and products that support energy efficiency and thus a transition to a low- carbon society. 7 5 For more information, please refer to chapter Sustainability and subchapter Corporate Social Responsibility. 6 IEA, 2021: https://www.iea.org/reports/global-energy-review-2021/co2- emissions. 7 For more information, please refer to chapter Corporate and Investment pandemic. The new ways of working enabled the avoidance Banking in Slovenia. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 34 Sustainability Sustainability, with a focus on climate issues and covering other aspects of the environment as well as broader ESG aspects, is an opportunity for the Group to meet societal expectations, adapt Implementation of sustainability into the Group business model to a changing environment, and mitigate certain With less than a decade left to the 2030 deadline for achieving risks. This has been demonstrated already in globally set commitments towards ESG, several key pieces the widespread actions taken by the Group. of the EU sustainable finance legislation entered into force, and the EU Fit for 55 (EU plan to reduce greenhouse gas emissions by 55% by 2030) unleashed wide-reaching industrial changes that need to be implemented. The Group has shaped a number of important developments, with results such as: Sustainability Framework The NLB Group Sustainability Framework was published as a strategic document that highlights the ambitions and commitments to the integration of sustainability in the Group’s business model. Besides providing an alignment of the Group’s sustainability approach with the UN’s Sustainable Development Goals (UN SDG), it offers stakeholders a list of sustainable economic activities promoted by the Group and therefore sets out the basis for classifying financing as sustainable. Moreover, the document addresses in detail ESG risk management, the principles of responsible banking and business ethics, and the Group’s corporate sustainability governance structure. Alignment of the Group’s sustainability approach with the UN SDG: SDG 7: Ensure access to affordable, reliable, sustainable, and modern energy for all SDG 8: Promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all SDG 12: Ensure sustainable consumption and production SDG 3: Ensure healthy lives and promote well-being for all at all ages SDG 13: Take urgent action to combat climate change and its impacts MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 35 Impact analysis & target-setting In 2020, the Bank signed the United Nations Environment Programme Finance Initiative’s Principles for Responsible Banking (UNEP FI PRB) which aims to align bank’s strategy and practice with the UN SDG and the Paris Climate Agreement. Principles for Responsible Banking are as follows: Principle 1: Alignment Principle 2: Impact & Target Setting Principle 3: Clients & Customers Principle 4: Stakeholders the Group considers the Green House Gas Protocol (GHG Protocol), which represents the world’s most widely used GHG accounting standard. Sustainable financing In 2021, over EUR 60 million of EU Taxonomy eligible long-term loans were approved by the Bank (large corporates segment): the Bank financed investments in energy infrastructure, a telecommunications network, water supply network, construction of cultural and school facilities, and energy efficiency. Within the SME segment, sustainable financing was at modest levels. At the end of 2021, the Bank and the Group banking members set ambitious sustainable financing goals for the years 2022–2025. Based on the analysis, the focus will be on renewable energy sources, solutions for the carbon footprint reductions, improving energy efficiency, and supporting a circular economy. EU Taxonomy The unfolding of the EU Taxonomy regulation was closely monitored by the Group representative in the European Principle 5: Governance & Culture Principle 6: Transparency & Accountability The Bank will fully implement all six principles and therefore Banking Federation’s Sustainable Finance working group, the required steps regarding impact analysis, target-setting & which covered among other tasks the UNEP FI and EBA implementation, and accountability by the end of 2024. project ‘The Application of the EU Taxonomy to Bank Lending.’ In 2022, the EU Taxonomy regulation will be fully implemented In 2021, the Group conducted an impact analysis in the Group financing process. which resulted in target-setting, which represents the implementation of the second principle for responsible banking. The impact analysis identifies the most relevant and significant positive and negative impacts of a bank’s portfolio on the societies, economies, and environments that the bank operates in. It is also the essential groundwork needed for meaningful target-setting. ESG Risk management In 2021, substantial effort was made in implementing climate, environmental, and social risk management requirements in line with ECB and EBA guidelines. In recent years, the Bank signed Framework Agreements with the EBRD and the Contract of Guarantees with MIGA. It was therefore required to develop a mechanism for environmental and social Materiality analysis With the aim to keep the ‘double materiality’ concept in the screening of current and potential financing applications against MIGA and EBRD Exclusion List and applicable focus for the year 2021, the Group also decided for a traditional environmental and social laws. Consequently, the Group’s (GRI) materiality analysis as a complement to the impact existing risk management framework is constantly upgraded analysis, since GRI materiality and stakeholder identification with environmental and social elements. As a systemically can be used to further corroborate impact analysis findings important institution, the Group is included into 2022 ECB and so help with the setting of priorities. Climate Stress test exercise. More information is available in Carbon footprint In H2 2021, ‘The NLB Group Carbon Footprint Measurement and Reporting Policy’ was adopted as an internal policy Risk Management chapter of this report. Sustainability training The Group’s ‘Sustainability on-line training program’ was on the calculation of the carbon footprint of the Group’s carefully prepared on the model of similar training programs own operations, and so provides the key methodological of the International Finance Corporation (IFC) and is approach for why and how the carbon footprint reporting implemented throughout the Group. In the future, the Group for the Group will be carried out. With reference thereto, will conduct Sustainability training on a yearly basis. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 36 NLB Group Sustainability Governance Structure The NLB Group Sustainability Governance Structure is anchored at different levels within the Bank and the Group thus guaranteeing that it receives attention from the highest decision-making bodies while also being broadly integrated in our operations. Sustainability working groups Ad hoc working groups are being set up in the bank to introduce various elements of sustainability. Their composition For more information, please refer to: • the chapter Risk Management, subchapter Incorporating ESG Risks varies according to the area of sustainability considered. • Note 6 of the Financial part of the report ESMS Officers have been appointed in our banking • the chapter Statement of Management of Risk members who regularly report to the local boards. They are • the Pillar 3 Disclosures representatives of risk management line who ensure the ESMS • the NLB Group Sustainability Report 2021 In the Q3 2021, the NLB Group ‘Sustainability Committee’ was is properly implemented organisation wide. established as part of corporate sustainability governance developments and the first meeting was held in December 2021. It is chaired by the CEO and oversees the integration of the ESG factors to the Group business model in a focused and coordinated way across the Group and issues opinions, recommendations, initiatives, and takes relevant decisions when needed. The committee has the authority to discuss, develop, and approve sustainability strategies, policies, initiatives, methodologies, KPIs, targets, and other relevant procedures of the NLB Group, and has influence over sustainability-related strategic objectives. Apart from anchoring sustainability at different levels within the Bank in its daily operations (on the Management Board level, Executive Management level, Group level, and Business & Country level), NLB has put in place a 4-level NLB Group Sustainability Governance Structure, namely: Supervisory Board of the NLB The Bank has established a comprehensive framework for sustainable management, starting by sponsoring the matter at the level of the NLB SB, which, significantly contributes to the implementation of sustainability. The SB regularly monitors the implementation of ESG factors and discusses the topic on regular basis. Sustainability Committee It is composed of the highest-level officers and provides the overall vision and sustainability strategy, it defines key policies, reviews progress on major initiatives, decides on specific external partnerships and agreements, and ensures cohesion of the overall program with the Bank’s mission. Sustainability Team The Sustainability Team within Strategy and Business Development Division of the NLB oversees Group-wide sustainability agenda and is tasked with driving the culture, monitoring implementation of the strategy, coordinating initiatives, measuring the impact, and reporting on the progress to the Sustainability Committee, the MB, and the SB. Other sustainability-related topics Many of these outcomes reflect ongoing, long-term challenges, but at the same time they reflect the Group’s ability to reach tangible results in this area. It should be mentioned that in 2021 several other sustainability-related topics were addressed, such as: • digitalization and paperless operations • remuneration policy • CSR projects corresponding to UN SDG Corporate Social Responsibility The Group contributes towards wider socio-economic development through its CSR activities and is responsible to its clients, employees, and the social environment. The Group pays special attention to knowledge and lifelong learning. The key pillars of the socially responsible operations of the Group are care for its employees and protection of lawfulness • inclusion & diversity at the level of employees and clients and integrity, as well as the promotion of entrepreneurship, • building partnerships & capacities by being involved with increasing financial literacy, support to professional and relevant representatives from academia, NGOs, and the real youth sports, humanitarian activities, the protection of cultural economy sector heritage, and care for the environment. • talent development and care for employees. Roadmap for 2022 The Group sustainability roadmap for the year 2022 is full of new challenges. As a UN PRB signatory, the Bank will consider joining the UNEP FI’s Net Zero Banking Alliance, since it is an accelerator that provides a dedicated forum to shape the net zero journey of the banking industry. The Group is responsive to the desire of investors, supervisors, and its peers and other stakeholders to align its business model with net zero objectives. The progress in achieving targets for 2030 and 2050, at the latest, in line with credible 1.5°C scenarios, is however, not only dependent on the willingness and capacity of a bank, but to a large extent on a complex sum of factors, such as the availability of sustainable investments and activities, transition projects, transformation capacities of the industry, as well as public and industrial policies supporting transition. Every year, the Group strives to increase the share of CSR activities that pursue UN SDG. The target for 2021 – at least 30% of all CSR activities in every bank member should be aligned with UN SDG – was achieved, even more, some member banks even exceeded it. At the same time, the Group plans, not only to align key CSR topics within Group members, but also to carry out more joint Group wide CSR projects. In 2021, the main two projects were #HelpFrame and Heartful opportunities. Understanding small entrepreneurs’ challenges - #HelpFrame project continued in 2021 The Group’s socially responsible actions have been The Group's sustainability ambition is anchored in its mission. continuously upgraded with projects that follow the UN SDG. This is seen as an opportunity to help businesses not only The Group’s first such regional project was launched in spring survive, but also to take initiative and position themselves for 2020. The COVID-19 crisis closed the door to many dreams future growth. Sustainability is at the centre of our business model and a pillar for the transformation of the Group. in previous years. That is why the decision was made to give a glimmer of hope with the #HelpFrame project for another MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 37 year in 2021. The project is our way of giving a helping hand to local small entrepreneurs who have been most affected by the NLB Banka, Banja Luka focused on both youth and the elderly by providing 500 children with disabilities and socially situation in recent years. As part of the campaign, advertising endangered families with New Year’s presents, and 500 space was donated to 73 selected entrepreneurs in Slovenia elderly visitors from elderly centres with Christmas lunch and and 258 across the whole NLB Group. The participants bedding. Following its tradition of the past years, NLB Banka, Sarajevo supported an orphanage in Tuzla to help children without parents and families. The public institution, ‘Home for Children without Parental Care Tuzla’ deals with the care and upbringing of children without parental care, children from dysfunctional families, and children found begging and wandering the streets. They provide all of them with a home, healthcare, regular education, clothes, and food. They currently have 56 children of all ages – from babies to high school students. NLB Banka, Prishtina also decided on a double donation. The first went to the National Autism Association in Kosovo (ANAK) which deals with the identification and support of children with autism and their families. This time, the organisation is promoting the talents of children with autism through paintings. The second donation was donated to the Ideas Partnership, an organisation that works mainly with Roma, Ashkali, and Egyptian communities in the field of education, health, social work, and the environment. NLB Banka, Podgorica’s donation supported the Rights Centre for Children, a non-governmental organisation that is, among others, helping children towards stronger participation in the decision-making process and ensuring their voices are heard, but also working with sensitive groups, such as children from foster families and socially vulnerable groups. from 2020 were invited to become ambassadors of last year's project and to share their positive experiences in the #HelpFrame. A world full of heart is a world full of opportunities The world is much more beautiful and colourful when we stand by each other and with full hearts create new opportunities – opportunities such as those that also arise with our support. In all markets where the Group operates, organisations that promote inclusion whether for children, the elderly, or both with a charitable donation are supported. In Slovenia, NLB donated to two humanitarian organisations, Botrstvo and Humanitarček. The NLB donation to Botrstvo will enable 200 disadvantaged children the opportunity to develop their talent. In contrast, as many as 97,000 elderly people live below the poverty line in Slovenia. With the help of a donation, the Humanitarček association will be able to provide them with 21,000 hot meals. NLB Banka, Beograd and Komercijalna Banka, Beograd donated to the centre for youth integration ‘SOS dečija sela,’ a non-governmental, humanitarian, and non-profit organisation that has been working to improve the quality of life of children and youth without parental care, empowering families at risk, supporting the economic independence of young people from vulnerable groups, and providing emergency assistance to local populations and refugees. NLB Banka, Skopje also decided to support both children and the elderly by donating to a healthcare centre for the elderly in Skopje and the Foundation for Educational and Cultural Initiatives ‘Step by Step,’ and the Project ‘Be IN, Be Inclusive, Be Included,’ that strive to improve the educational opportunities for children with disabilities and contributes to the development of an inclusive, non-segregated primary education subsystem. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 38 We are your neighbours. Great-grandmothers saved up for hard times. For grandmothers, education was the best investment. Mothers invested in their own companies. As modern women, you invest in dreams. We support you through all life periods, help you successfully tackle challenges they bring, offer you useful solutions and a reliable path towards realising the biggest and the most daring of goals. And even though your priorities change throughout the years, ours remain the same: we help you with the best advice and provide you with new opportunities at every step. Overview of Financial Performance The Group achieved a profit after tax in the amount of EUR 236.4 million, 67.3% or EUR 95.1 million more than the year before (2020: EUR 141.3 million), if the positive impact of the acquisition of The Group’s result is based on the following key drivers: • NLB Skladi achieved 79.8% YoY growth of gross inflows • Integration of Komercijalna Banka, Beograd, acquired in mutual funds (EUR 252.4 million) and the assets under at the end of 2020, merger of NLB Banka, Podgorica and management from NLB clients is approaching EUR 1.3 Komercijalna Banka, Podgorica in November 2021, and the billion; sale of Komercijalna Banka, Banja Luka in December 2021; • A strong TCR of 17.8%; Komercijalna Banka, Beograd in 2020 is excluded. • Strong 12% loan growth to individuals and solid 8% to • The negative CoR of -41 bps, given good asset quality trends MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report corporate, above 10% growth even without Komercijalna and a decisive workout approach; Banka, Banja Luka; • The multi-year declining trend of the non-performing • Net interest income increased EUR 109.8 million on the credit portfolio stock continued, mostly due to repayments, back of the Komercijalna Banka group contribution (EUR collection, the sale of claims, and cured clients. The 98.5 million). Net interest income without the Komercijalna combination of successful resolution of NPL and credit Banka group contribution also increased, based on higher growth of a high-quality portfolio resulted in the decrease volumes and increased market shares in the loan book of gross NPL ratio (EBA def.) from 4.5% to 3.4% YoY, and the compensating for the reduction in interest rates. In general, NPE ratio (EBA def.) by 0.6 p.p. YoY to 1.7%; net interest income was impacted by excess liquidity, • Unencumbered liquidity reserves portfolio amounted to which determined a consequently higher volume of cash EUR 8,280.6 million (38.3% of total assets). and balances with CBs, with low or negative interest rates; however, additional interest income was recognised based on lower interest rates for TLTRO in the Bank in December; • The economic rebound led to the optimisation of investment portfolio of households, growth of housing loans, mutual funds, and bancassurance, which increased net fee and commission income (high balance deposit fees and net fees Figure 5: Profit after tax of NLB Group (in EUR million) / ROE after tax (in %)(i) from asset management and bancassurance); • Lower non-recurring income, which in 2021 included ROE a.t. EUR 236.4 million of net profit. valuation income in the amount of EUR 14.8 million from the repayment of exposure, classified as non-performing, EUR 9.0 million of other operation income from the settlement of a legal dispute, and EUR 8.1 million loss from the sale of Komercijalna Banka, Banja Luka; in 2020, the sale of NLB Vita and debt securities had a positive effect on the result in the amount of EUR 28.1 million; • Continuous cost discipline; costs higher due to integration costs and employee costs; • Net impairments and provisions for credit risk were released in the amount of EUR 35.8 million, mostly due exposures and changed parameters related to more favourable macroeconomic forecasts. Other impairments and provisions were established in the amount of EUR 27.1 million, mostly due to restructuring provisions and provisions for legal risk, mostly related to Komercijalna Banka, Beograd; to the successful repayment of on-and off-balance 225.1 14.4% 11.8% 11.7% 8.1% 11.4% CAGR* 1% 203.6 193.6 269.7 236.4 2017 2018 2019 2020 2021 *Compounded Annual Growth Rate. (i) Komercijalna Banka group included from 2021 on. Contents 40 Income statement Table 10: Income statement of NLB Group and NLB NLB Group 2021 2020 Change YoY o/w KB contribution Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 Change QoQ in EUR million Net interest income Net fee and commission income Dividend income Net income from financial transactions Net other income Net non-interest income Total net operating income Employee costs Other general and administrative expenses Depreciation and amortisation 409.4 237.2 0.2 38.4 -18.3 257.6 666.9 -231.3 -137.5 -46.5 299.6 170.3 0.1 32.0 2.6 204.9 504.5 -165.0 -97.3 -31.7 Total costs -415.4 -293.9 Result before impairments and provisions Impairments and provisions for credit risk Other impairments and provisions Impairments and provisions Gains less losses from capital investments in subsidiaries, associates, and joint ventures Negative goodwill Result before tax Income tax Result of non-controlling interests 251.5 35.8 -27.1 8.8 1.1 0.0 261.4 -13.5 11.5 210.5 -62.3 -9.1 -71.4 0.9 137.9 277.9 -5.2 3.0 109.8 66.9 0.1 6.5 -20.8 52.6 162.4 -66.4 -40.3 -14.8 -121.4 41.0 98.1 -18.0 80.1 0.2 -137.9 -16.5 -8.4 8.4 Result after tax 236.4 269.7 -33.3 98.5 42.5 0.2 8.1 -17.9 32.8 131.3 -54.9 -38.3 -13.4 -106.6 24.7 3.4 -24.0 -20.6 0.0 0.0 4.2 2.5 1.5 5.2 37% 39% 101% 20% - 26% 32% -40% -41% -47% -41% 19% - -198% - 27% - -6% -162% - -12% 107.0 64.6 0.0 5.0 -9.6 60.0 167.0 -63.1 -43.4 -11.7 -118.2 48.8 1.8 -18.3 -16.5 0.2 0.0 32.5 -0.6 1.0 30.9 103.7 58.6 0.1 7.4 -3.8 62.3 166.0 -56.5 -31.7 -11.6 -99.9 66.1 3.3 2.9 6.3 0.5 0.0 72.9 -3.3 3.9 65.7 101.1 59.9 0.0 20.8 -2.0 78.7 179.9 -56.5 -32.6 -11.6 -100.7 79.1 14.8 -11.3 3.5 0.3 0.0 82.9 -4.8 2.9 75.2 97.5 54.1 0.0 5.3 -2.8 56.5 154.0 -55.1 -29.8 -11.6 -96.6 57.5 16.0 -0.5 15.5 0.1 0.0 73.1 -4.7 3.8 75.1 45.1 0.0 2.0 -1.0 46.1 121.2 -42.0 -27.6 -8.0 -77.7 43.5 -13.2 -7.9 -21.1 0.0 137.9 160.2 3.8 -1.1 3.4 6.0 -0.1 -2.4 -5.8 -2.3 1.1 -6.6 -11.7 -0.1 -18.4 -17.3 -1.6 -21.2 -22.8 -0.4 0.0 3% 10% -65% -32% -154% -4% 1% -12% -37% -1% -18% -26% -47% - - -68% - -40.4 -55% 2.7 -2.9 81% -75% -53% 64.6 165.1 -34.8 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 41 NLB Net interest income Net fee and commission income Dividend income Net income from financial transactions Net other income Net non-interest income Total net operating income Employee costs Other general and administrative expenses Depreciation and amortisation Total costs Result before impairments and provisions Impairments and provisions for credit risk Other impairments and provisions Impairments and provisions Result before tax Income tax Result after tax 2021 139.1 119.6 79.6 19.0 4.2 222.4 361.5 -107.0 -59.1 -17.5 -183.6 177.9 26.1 7.5 33.6 211.5 -3.0 2020 138.9 104.5 6.3 28.1 33.9 172.8 311.7 -102.6 -60.0 -17.8 -180.5 131.2 -9.0 -8.3 -17.4 113.9 0.1 208.4 114.0 Change YoY Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 Change QoQ in EUR million 0.3 15.1 73.4 -9.2 -29.8 49.6 49.8 -4.4 0.9 0.3 -3.1 46.7 35.1 15.8 50.9 97.6 -3.1 94.5 0% 14% - -33% -88% 29% 16% -4% 2% 2% -2% 36% - - - 86% - 83% 37.4 31.2 74.7 0.8 0.9 107.5 144.9 -28.4 -19.2 -4.3 -52.0 93.0 4.9 5.7 10.6 103.6 -1.1 102.5 34.2 30.0 0.4 1.8 0.3 32.6 66.8 -26.8 -13.0 -4.4 -44.1 22.6 6.3 0.1 6.4 29.0 -0.2 28.8 33.8 30.8 0.0 14.7 0.8 46.3 80.1 -26.0 -13.8 -4.4 -44.3 35.9 3.3 -0.1 3.2 39.0 -1.2 37.9 33.7 27.6 4.5 1.6 2.2 35.9 69.6 -25.8 -13.1 -4.4 -43.2 26.4 11.7 1.8 13.5 39.9 -0.6 39.3 34.5 27.3 5.5 3.0 1.5 37.4 72.0 -25.4 -17.0 -4.3 -46.8 25.2 8.5 -7.9 0.6 25.8 2.6 28.4 3.2 1.2 74.2 -1.0 0.5 74.9 78.2 -1.6 -6.2 0.0 -7.8 70.4 -1.4 5.5 4.2 74.5 -0.9 73.7 9% 4% - -55% 160% - 117% -6% -48% 1% -18% - -22% - 66% - - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 42 Result reflects great performance and important milestones achieved bancassurance, and arrangement fees for the organisation of syndicated loans; • Non-recurring valuation income in the amount of EUR 14.8 million from repayment of exposure, classified as non- The Group generated EUR 236.4 million of profit after tax, EUR performing, EUR 9.0 million of other operation income from 33.3 million or 12% less YoY, and was based on the following the settlement of a legal dispute, and EUR 8.1 million loss key drivers and YoY evolution: from the sale of Komercijalna Banka, Banja Luka; YoY lower, • Net interest income increased EUR 109.8 million, backed with the sale of NLB Vita and debt securities impacting the by the Komercijalna Banka group contribution (EUR 98.5 2020 result in the total amount of EUR 28.1 million; million). Increasing net interest income without the • Continuous cost discipline; costs higher due to integration Komercijalna Banka group contribution was impacted by and employee costs; excess liquidity which determined a consequently higher • Net impairments and provisions for credit risk were released volume of cash and balances with CBs, with low or negative in the amount of EUR 35.8 million, mostly due to successful interest rates. Interest income without the Komercijalna repayment of on-and off-balance exposures and changed Banka group contribution was higher YoY, based on higher parameters related to more favourable macroeconomic volumes and increased market shares in the loan book, forecasts; compensating for the reduction in interest rates; • Other impairments and provisions were established in • Net fee and commission income increased in all banks, in the amount of EUR 27.1 million, mostly due to restructuring the Bank mostly due to repricing of packages, fees for high provisions and provisions for legal risk, mostly related to balances, higher net fees from asset management and Komercijalna Banka, Beograd. EUR 666.9 million of total net operating income. Figure 6: Profit after tax of NLB Group (in EUR million) – evolution YoY 109.8 66.9 -14.2 -121.4 80.1 0.2 -137.9 -8.4 -8.4 24.4 98.5 269.7 11.3 42.5 -4.6 -9.6 -14.9 -106.6 100.7 -20.6 0.2 -137.9 -10.8 2.5 -9.9 1.5 236.4 5.4 2020 Net interest income Net fee and commission income Other net non- interest income Total costs Impairments and provisions Gains and losses(i) Negative goodwill Income tax Result of non- controlling interests 2021 NLB Group w/o KB KB (i) Gains less losses from capital investments in subsidiaries, associates, and joint ventures. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 43 Figure 8: Result before impairments and provisions of NLB Group (in EUR million) 79.1 67.2 27.8 -15.9 66.1 70.9 1.6 -6.4 48.8 61.1 -5.8 -6.5 57.5 61.4 43.5 47.1 -2.4 -1.1 -6.3 2.4 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Result before impairments and provisions w/o non- recurring income and regulatory costs Non-recurring net non-interest income Regulatory costs Despite the unstable environment due to COVID-19 pandemic, Recurring profit before impairments and provisions of the all banks (active at the end of the year) reported a profit. Group totalled EUR 225.5 million, EUR 48.7 million or 28% Higher profit YoY was recorded in all the banks, mainly due higher YoY. In Q2 2021, the result before impairments and to the establishment of credit impairments and provisions provisions was higher due to non-recurring net non-interest related to COVID-19 outbreak in 2020 and successful income (EUR 14.8 million valuation income from the repayment operations in the reporting year. of exposure classified as non-performing, and EUR 9.0 million of other operation income from the settlement of a legal The result of the Bank increased by 83% YoY to EUR 208.4 dispute), but partially offset by regulatory costs in the Bank million from EUR 114.0 million achieved in 2020, mostly due (EUR 2.0 million for SRF and EUR 7.5 million for DGS). to higher dividend pay-out, since banking subsidiaries were refrained from paying out dividends due to COVID-19 restrictions in 2020, and the net release of impairments and provisions for credit risk (establishment in 2020 due to COVID-19 outbreak which materially lowered the final result). Non-recurring valuation income from repayment of exposure, classified as non-performing in the amount of EUR 12.9 million and from the settlement of legal dispute in the amount of EUR 8.6 million influenced 2021 result, while the sale of NLB Vita in the amount of EUR 35.5 million and the sale of debt securities in the amount of EUR 17.1 million had a positive impact on the 2020 result. Figure 7: Profit after tax of NLB Group banks(i) (on a stand-alone basis, in EUR million) +83% 208.4 114.0 +103% 39.0 19.2 +80% +70% 18.2 10.1 5.9 10.0 +83% 24.4 13.3 +625% +65% 34.8 10.1 1.4 2.6 4.3 0.5 -5.8 NLB, Ljubljana NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd KB, Beograd KB, Banja Luka KB, Podgorica 2020 2021 (i) NLB Banka, Podgorica and Komercijalna Banka, Podgorica merged in November 2021; Komercijalna Banka, Banja Luka was sold on 9 December 2021. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 44 409.4 111.1 299.6 355.2 366.7 -55.6 -55.8 -12.6 Net interest income Figure 9: Net interest income of NLB Group (in EUR million) Figure 10: Net interest margin and Operational business margin of NLB Group(i) (quarterly data, in %) 3.25% 3.25% 3.32% 3.18% 3.35% 2.03% 2.09% 2.08% 2.02% 2.07% Net non-interest income Figure 11: Net non-interest income of NLB Group (in EUR million) 257.6 0.2 26.0 42.5 204.9 33.7 0.1 0.8 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 75.1 89.3 -14.2 103.7 28.6 92.5 107.0 26.7 97.0 -14.3 -14.1 -3.1 -2.6 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 170.3 194.7 Net interest margin - quarterly Operational business margin - quarterly (i) Calculated on the basis of average interest-bearing assets. Komercijalna Banka group included from 2021 on. The quarterly net interest margin of 2.07%, as well as the operational business margin (OBM) of 3.35% in Q4 for the 2020 -5.9 2021 46.1 0.0 2.1 45.1 -1.1 62.3 0.1 2.0 12.9 1.6 8.8 60.0 0.0 1.2 49.8 51.7 -5.8 Q4 2020 Q3 2021 Q4 2021 2020 2021 Q4 2020 Q3 2021 Q4 2021 KB interest income Interest expenses Interest income KB interest expenses Net interest income of the Group accounted for 61% of the Group’s total net revenues (2020: 59%), and totalled to EUR 409.4 million. Out of the EUR 109.8 million increase, EUR 98.5 million was contributed by Komercijalna Banka group. Without Komercijalna Banka group contribution, higher level of net interest income was achieved YoY, due to higher volume of securities and loans, despite lower yields, but partially offset by higher cash volumes and balances with the CB (bearing negative interest in line with the expansionary monetary policy). The net interest income was also affected by higher liquidity position streaming from TLTRO-III secured borrowing and additional interest income, based on lower interest rates, was recognised at the end of the year in the Bank. Interest expenses in most member banks were decreasing due to lower interest rates for customer deposits. The pressure on the net interest margins in the Bank and member banks in SEE continues. Group was 0.1 p.p. and 0.04 p.p. higher YoY. Despite the declining trend of interest rates on loans, the interest rate on corporate and state loans in the Bank slightly increased, due to the syndicated loan with an attractive interest rate, repayment of some exposures with low interest rates, and the higher volume of Cross-border corporate loans bearing higher interest rates. Interest rate on loans to individuals is in the declining trend mainly due to changed portfolio mix in favour of housing loans bearing lower interest rate. On the QoQ basis, the margins were higher due to TLTRO repricing. One-off positive effects in the total amount of EUR 23.8 million due to positive valuation effect from the repayment of exposure, classified as non-performing and other operation income from the settlement of a legal dispute. Net fee and commission income Recurring other net non-interest income KB net fee and commission income Non-recurring other net non-interest income Dividend income Net non-interest income reached EUR 257.6 million of which EUR 32.8 million were contributed by Komercijalna Banka group. A major part of the net non-interest income has been derived from the net fee and commission income, which grew YoY, mostly in the Bank due to the repricing of the packages, fee for high balances in the amount of EUR 8.1 million (from April on also for individuals8), higher net fees from asset management (79.8% YoY growth of gross inflows in mutual funds, total of EUR 252.4 million in 2021) and bancassurance (higher YoY inflows with new distribution terms), and arrangement fees for organisation of syndicated loans. The net non-interest income was strongly affected by non- recurring valuation income in the amount of EUR 14.8 million from the repayment of exposure classified as non-performing, EUR 9.0 million of other operation income from the settlement of a legal dispute, and EUR 8.1 million loss from the sale of Komercijalna Banka, Banja Luka. The non-recurring items were higher in 2020 with the sale of NLB Vita and debt securities in total amount of EUR 28.1 million. 8 Further information is available under the chapter Key Events. Contents 45 EUR 35.8 million released impairments and provisions for credit risk. Total costs Impairments and provisions Figure 12: Total costs of NLB Group (in EUR million) Figure 13: NLB Group impairments and provisions (in EUR million) 415.4 13.4 33.2 38.3 99.3 54.9 293.9 31.7 97.3 165.0 176.4 8.0 77.7 8.3 99.9 3.3 9.0 3.3 12.6 27.6 42.0 22.7 12.5 44.1 8.4 118.2 30.8 16.0 47.1 CoR (bps) 62 e s a e e R l t n e m h s i l b a t s E -13.4 -41 8.8 3.4 32.4 -3.1 -24.0 6.3 3.6 3.4 -0.4 -0.3 -1.0 2.8 -4.2 -14.1 -16.5 0.2 -13.4 -7.9 -21.1 2020 2021 Q4 2020 Q3 2021 Q4 2021 -48.9 Employee costs KB employee costs Other general and administrative expenses KB other general and administrative expenses Depreciation and amortisation KB depreciation and amortisation Total costs amounted to EUR 415.4 million of which EUR 106.6 -9.1 -71.4 million from Komercijalna Banka group. Without Komercijalna 2020 2021 Q4 2020 Q3 2021 Q4 2021 Banka group contribution the costs increased YoY for EUR 14.9 million due to integration costs and employee costs. CIR stood at 62.3%, a 4.0 p.p. increase YoY. KB other impairments and provisions Other impairments and provisions Impairments and provisions for credit risk KB impairments and provisions for credit risk & expected credit losses The Group released net impairments and provisions for credit risk (EUR 35.8 million in 2021) mostly due to successful repayment of on-and off-balance exposures and changed parameters related to more favourable macroeconomic forecasts. Other impairments and provisions were established in the amount of EUR 27.1 million, of which there were provisions for legal risk (EUR 16.6 million, to a large extent attributable to processing fees in Serbia) and restructuring provisions (EUR 14.8 million).9 The Group’s cost of risk was negative (-41 bps), as it was in most Group bank members. 9 More details are available in Note 5.16. of the Financial part of the report. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 46 Statement of financial position Table 11: Statement of financial position of NLB Group and NLB NLB Group ASSETS 31 Dec 2021 31 Dec 2020 Change YoY 31 Dec 2021 30 Sep 2021 30 Jun 2021 31 Mar 2021 31 Dec 2020 Change QoQ in EUR million Cash, cash balances at central banks, and other demand deposits at banks 5,005.1 3,961.8 1,043.2 26% 5,005.1 4,947.0 4,739.4 3,961.8 58.1 1% -29% 140.7 211.7 243.4 197.0 3,918.2 205.0 Loans to banks Net loans to customers Gross loans to customers - Corporate - Individuals - State Impairments and valuation of loans to customers Financial assets - Trading book - Non-trading book Investments in subsidiaries, associates, and joint ventures Property and equipment Investment property Intangible assets Other assets TOTAL ASSETS LIABILITIES 140.7 197.0 10,587.1 9,644.9 10,903.5 10,033.3 4,996.0 5,621.1 286.3 -316.3 5,208.3 7.7 4,631.7 5,027.6 374.0 -388.4 5,119.5 84.9 5,200.6 5,034.7 11.5 247.0 47.6 59.1 271.1 8.0 249.1 54.8 61.7 268.9 -56.3 942.2 870.1 364.3 593.5 -87.7 72.1 88.8 -77.2 166.0 3.5 -2.1 -7.2 -2.6 2.1 21,577.5 19,565.9 2,011.6 Deposits from customers 17,640.8 16,397.2 1,243.6 - Corporate - Individuals - State Deposits form banks and central banks Borrowings Other liabilities Subordinated liabilities Equity Non-controlling interests 4,463.7 3,949.1 12,680.8 12,023.5 496.4 71.8 932.6 427.6 288.5 2,078.7 137.4 424.5 72.6 249.8 434.9 288.3 1,952.8 170.3 514.5 657.2 71.8 -0.8 682.8 -7.3 0.2 125.9 -32.9 TOTAL LIABILITIES AND EQUITY 21,577.5 19,565.9 2,011.6 10% 9% 8% 12% -23% 19% 2% -91% 3% 44% -1% -13% -4% 1% 10% 8% 13% 5% 17% -1% - -2% 0% 6% -19% 10% 10,587.1 10,267.0 10,071.4 9,824.5 9,644.9 10,903.5 10,593.7 10,421.8 10,208.2 10,033.3 4,996.0 5,621.1 286.3 -316.3 4,783.9 5,487.4 322.3 -326.7 4,772.7 5,304.8 344.4 -350.4 4,720.8 5,126.6 360.8 -383.7 5,208.3 5,264.7 5,490.9 5,376.4 7.7 10.5 13.5 75.1 4,631.7 5,027.6 374.0 -388.4 5,119.5 84.9 5,200.6 5,254.2 5,477.4 5,301.3 5,034.7 11.5 247.0 47.6 59.1 271.1 8.5 242.1 54.1 53.0 249.0 8.4 243.8 53.3 55.7 281.1 8.1 247.3 54.4 58.2 266.9 8.0 249.1 54.8 61.7 268.9 -71.0 320.2 309.8 212.1 133.7 -36.0 10.4 -56.4 -2.8 -53.6 3.0 4.9 -6.5 6.1 22.1 21,577.5 21,296.9 21,187.3 19,959.0 19,565.9 280.6 17,640.8 17,248.6 4,463.7 4,276.6 17,143.0 4,130.2 16,732.1 4,011.0 16,397.2 3,949.1 12,680.8 12,495.2 12,477.8 12,254.4 12,023.5 496.4 71.8 932.6 427.6 288.5 2,078.7 137.4 476.8 82.0 975.6 412.5 290.2 2,140.5 147.6 535.0 78.0 976.6 466.8 287.6 2,091.4 143.8 466.7 71.9 251.1 428.5 286.8 2,014.1 174.5 424.5 72.6 249.8 434.9 288.3 1,952.8 170.3 392.2 187.1 185.5 19.6 -10.1 -43.0 15.1 -1.7 -61.8 -10.2 21,577.5 21,296.9 21,187.3 19,959.0 19,565.9 280.6 -34% 3% 3% 4% 2% -11% 3% -1% -27% -1% 36% 2% -12% 12% 9% 1% 2% 4% 1% 4% -12% -4% 4% -1% -3% -7% 1% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 47 Investments in subsidiaries, associates, and joint ventures 786.0 750.7 775.5 750.7 750.7 NLB ASSETS 31 Dec 2021 31 Dec 2020 Change YoY 31 Dec 2021 30 Sep 2021 30 Jun 2021 31 Mar 2021 31 Dec 2020 Change QoQ in EUR million Cash, cash balances at central banks, and other demand deposits at banks 3,250.4 2,261.5 988.9 44% 3,250.4 3,049.8 2,961.4 2,127.3 2,261.5 200.6 Loans to banks Net loans to customers Gross loans to customers - Corporate - Individuals - State Impairments and valuation of loans to customers Financial assets - Trading book - Non-trading book Property and equipment Investment property Intangible assets Other assets TOTAL ASSETS LIABILITIES 199.3 158.3 41.0 5,153.0 4,595.1 557.9 5,250.4 2,411.1 2,694.4 144.9 -97.4 3,034.3 7.7 4,753.1 2,168.5 2,411.9 172.6 -158.0 3,017.2 18.8 3,026.6 2,998.4 86.1 9.2 29.5 151.7 91.7 8.3 28.1 115.6 497.3 242.6 282.4 -27.7 60.6 17.1 -11.1 28.2 35.3 -5.6 0.9 1.3 36.1 12,699.5 11,026.6 1,672.9 Deposits from customers 9,659.6 8,850.8 808.9 - Corporate - Individuals - State Deposits form banks and central banks Borrowings Other liabilities Subordinated liabilities Equity 2,436.7 7,078.9 144.0 109.3 873.9 216.3 288.5 1,916.6 6,812.4 121.8 41.6 143.5 251.4 288.3 520.1 266.5 22.2 67.7 730.4 -35.2 0.2 1,551.9 1,451.0 100.9 TOTAL LIABILITIES AND EQUITY 12,699.5 11,026.6 1,672.9 26% 12% 10% 11% 12% -16% 38% 199.3 176.5 5,153.0 4,903.5 5,250.4 5,001.0 2,411.1 2,244.9 2,694.4 2,609.8 144.9 -97.4 146.3 -97.5 162.8 4,787.8 4,916.3 2,245.4 2,514.4 156.5 -128.5 164.3 4,677.5 4,828.4 2,213.4 2,452.3 162.7 -150.9 158.3 4,595.1 4,753.1 2,168.5 2,411.9 172.6 -158.0 22.7 249.5 249.3 166.2 84.6 -1.4 0.2 1% 3,034.3 3,160.2 3,398.6 3,365.2 3,017.2 -125.9 -4% -59% 7.7 10.4 13.6 23.8 18.8 -2.8 -26% 1% 5% -6% 11% 5% 31% 15% 9% 27% 4% 18% 163% - -14% 0% 7% 15% 3,026.6 3,149.8 3,385.0 3,341.4 2,998.4 -123.2 786.0 86.1 9.2 29.5 151.7 775.5 88.1 9.1 25.3 125.4 89.3 8.3 26.1 121.2 89.7 8.3 26.8 128.6 10.6 -2.0 0.1 4.1 91.7 8.3 28.1 115.6 26.2 12,699.5 12,313.5 12,330.9 11,338.4 11,026.6 386.0 9,659.6 9,243.3 9,272.2 9,056.6 8,850.8 2,436.7 2,158.4 2,070.0 1,996.8 7,078.9 6,994.2 7,060.3 6,924.9 144.0 109.3 873.9 216.3 288.5 90.7 158.3 863.6 233.5 290.2 142.0 142.0 866.3 252.5 287.6 134.9 124.0 143.4 242.0 286.8 1,916.6 6,812.4 121.8 41.6 143.5 251.4 288.3 1,551.9 1,524.6 1,510.3 1,485.5 1,451.0 416.3 278.3 84.6 53.4 -49.0 10.3 -17.2 -1.7 27.4 12,699.5 12,313.5 12,330.9 11,338.4 11,026.6 386.0 7% 13% 5% 5% 7% 3% -1% 0% -4% 1% -2% 1% 16% 21% 3% 5% 13% 1% 59% -31% 1% -7% -1% 2% 3% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 48 Balance sheet volume of the Group increased by EUR 2,011.6 million YoY totalling to EUR 21,577.5 million, mainly due to the continued inflow of deposits from individuals (EUR 657.2 million YoY), corporate (EUR 514.5 million YoY), and participation in a liquidity-providing operation by the ECB in the amount of EUR 750 million (TLTRO-III). Excess liquidity was in large extent placed on the account at the CB (EUR 1,043.2 million YoY increase) and in gross loans to customers (EUR 364.3 million to corporate and EUR 593.5 million to individual clients). However, despite the deposit growth, the trend of redistribution of deposits to alternative investments (e.g., mutual funds and bancassurance) is visible. The share of customers’ deposits accounted for 82% of the total funding, 2.0 p.p. less as at the end of 2020. Figure 14: Total assets of NLB Group (in EUR million) – structure +10% YoY 19,565.9 642.6 5,119.5 21,577.5 636.3 5,208.3 9,644.9 4,158.8 10,587.1 5,145.7 14,174.1 544.9 3,829.7 7,604.7 2,194.7 31 Dec 2019 31 Dec 2020 31 Dec 2021 Cash equivalents, placements with banks and loans to banks Net loans to customers Financial Assets Other Assets Assets 54.3% of the total assets were related to Group members located in Slovenia (2020: 51.8%) and 22.2% in Serbia (2020: 23.4%). Figure 15: NLB Group total assets by location of NLB Group entities (in %)(i) 23.4% 22.2% 51.8% 54.3% Slovenia Serbia North Macedonia BiH Kosovo Montenegro 8.1% 8.1% 8.5% 7.4% 4.5% 4.3% 3.6% 3.6% Other 0.1% 0.1% 31 Dec 2020 31 Dec 2021 (i) The geographical analysis includes a breakdown of items with respect to the country in which individual NLB Group members are located. Komercijalna Banka group is divided between the countries based on each entity location from 30 September 2021 on, with YE data adjusted to the new methodology. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 49 The lending activity spiked and recorded a significant growth offers for clients and intensive marketing campaigns. The Despite the declining trend of interest rates on loans, in all the banks in 2021. Gross loans to individuals recorded the volume of consumer loans was slightly lower YoY (EUR 16.1 the average interest rate on corporate and state highest, 17% YoY increase in Strategic foreign markets (without million); however, the new production in 2021 amounted to loan book portfolio in the Bank slightly increased Komercijalna Banka group banks, but included Komercijalna EUR 229.1 million and was higher compared to 2020 (EUR due to changed portfolio structure (conclusion of Banka, Podgorica on 31 December 2021 due to the merger 196.7 million). Gross loans to corporate and state recorded a new syndicated loan with an attractive interest rate, with NLB Banka, Podgorica), while the highest increase EUR 214.9 million growth YoY, where growth derived from the repayment of some exposures with low interest rates of gross loans to the corporate and state was recorded in corporate segment (EUR 242.6 million), while the state segment and higher volume of Cross-border corporate loans), Komercijalna Banka, Beograd, i.e., 16% YoY. exposures shrank by EUR 27.7 million. Corporate loan growth bearing higher interest rates. The interest rate on was distributed across all sub-segments. loans to individuals is in a declining trend mainly due Gross loans to individuals in the Bank grew by EUR 282.4 to the changed portfolio mix in favour of housing loans million YoY, mostly due to an increasing volume of housing The volume of gross loans to customers in Strategic foreign bearing lower interest rates. loans (EUR 280.9 million YoY, with enviable high new markets increased, with a remarkable new production in lending production of EUR 557.6 million in 2021, compared to EUR to individuals, with all the Group member banks recording a 303.1 million in the previous year) related to more attractive double-digit YoY growth in outstanding loan balances. Figure 16: NLB Group gross loans to customers dynamics (in EUR million) NLB Group NLB(i) Gross loans to individuals Strategic foreign markets w/o KB(i)(ii) KB Beograd (i)(ii) +12% YoY +13% w/o KB BL 5,621.1 4.90% 5,027.6 4.92% 4,993.0 34.6 +12% YoY 4.05% 2,411.9 3.84% 2,694.4 +17% YoY +14% w/o KB PG 6.28% 1,743.5 5.83% 2,036.9 1,992.5 44.3 5.87% +9% YoY 770.2 840.4 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 Gross loans to corporate & state +6% YoY +8% w/o KB BL 5,005.7 2.72% 4,884.9 120.8 5,282.3 2.98% +9% YoY 2,341.1 1.85% 2,556.0 1.91% +10% YoY +7% w/o KB PG 4.11% 1,613.9 4.01% 1,776.5 1,726.1 50.4 3.52% +16% YoY 846.1 978.4 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 (i) On stand alone basis; (ii) NLB Banka, Podgorica and Komercijalna Banka, Podgorica merged in November 2021; Komercijalna Banka, Banja Luka sold on 9 December 2021; the growth in Strategic foreign market is impacted by the merger of NLB Banka, Podgorica and Komercijalna Banka, Podgorica (the latter was not included in this segment as at 31 December 2020). Interest rates Gross loans KB Banja Luka KB Podgorica MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 50 Figure 17: Loan portfolio(i) by segment, geography, currency, and rate type (in EUR million) Institutions 539 3% SME 2,881 19% State(ii) 4,202 27% EUR 15.5 billion Corporates 2,298 15% Retail consumer 2,427 16% Retail mortgages 3,195 21% by segment(iv) Serbia 2,956 19% Kosovo 796 5% Montenegro 618 4% N. Macedonia 1,309 8% Other(iii) 730 5% EUR 15.5 billion Slovenia 7,871 51% BiH 1,262 8% by geography BAM 5% Other 2% MKD 5% RSD 7% EUR 15.5 billion EUR 81% Floating 37% EUR 15.5 billion Fixed 63% Currency 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. Despite significant portfolio growth in all NLB Group banks in 2021, there were no major changes in the corporate and retail credit portfolio structure. The credit portfolio remains well- diversified, and 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 the segment of mortgage loans still prevailing. The majority of the loan portfolio refers to euro currency, while the rest originates from local currencies of the Group banking members. From interest rate type, more than 63% of the loan portfolio is linked to a fixed interest rate, and the rest to a floating rate (mostly to the Euribor reference rate). Lending growth in the corporate segment remained relatively moderate, while the retail segment, namely mortgage lending, experienced considerable growth in 2021. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 51 Liabilities Figure 18: Total liabilities of NLB Group – structure (in EUR million) +10% YoY 19,565.9 2,123.1 288.3 424.5 434.9 322.4 3,949.1 21,577.5 2,216.1 427.6 1,004.4 288.5 496.4 4,463.7 12,023.5 12,680.8 14,174.1 1,730.9 210.6 277.7 2,772.0 342.6 257.4 8,582.9 31 Dec 2019 31 Dec 2020 31 Dec 2021 Deposits from individuals Corporate deposits State deposits Borrowings and Deposits from banks and central banks Subordinated liabilities Other liabilities Total equity Total liabilities of the Group increased and amounted to EUR 19,361.4 million. The Group’s funding base is dominated by customer deposits accounting for 82% in which sight deposits prevail (87%, compared to 85% as at 2020 YE and 81% as at 2019 YE). The majority of customer deposits (72%) were from individuals. 55% of deposits were collected in Slovenia (54% at 2020 YE), 22% in Serbia (24% at 2020 YE), and the rest in other Group banking members in SEE. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 52 Figure 19: NLB Group deposits from customers dynamics (in EUR million) NLB Group NLB(i) Strategic foreign markets w/o KB(i)(ii) KB Beograd(i)(ii) Deposits from individuals +5% YoY +6% w/o KB BL 12,680.8 4.90% +4% YoY 6,812.4 2,411.9 7,078.9 2,694.4 0.16% 0.05% 0.04% 12,023.5 11,963.8 0.17% 59.7 +11% YoY +8% w/o KB PG 2,764.9 0.47% 3,058.1 2,979.6 0.31% 78.5 +10% YoY 2,307.7 2,543.7 0.31% 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 Deposits from corporate & state +13% YoY +16% w/o KB BL 4,960.1 4,373.7 4,278.7 0.17% 95.0 +27% YoY 2,038.4 2,580.7 0.13% 0.05% 0.03% +15% YoY +11% w/o KB PG 1,355.4 0.35% 1,552.4 1,508.4 0.22% 44.0 +2% YoY 860.8 880.9 0.18% 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 (i) On stand alone basis; (ii) NLB Banka, Podgorica and Komercijalna Banka, Podgorica merged in November 2021; Komercijalna Banka, Banja Luka sold on 9 December 2021; the growth in Strategic foreign market is impacted by the merger of NLB Banka, Podgorica and Komercijalna Banka, Podgorica (the latter was not included in this segment as at 31 December 2020). Interest rates Deposits KB Banja Luka KB Podgorica Deposits from customers increased by 8% YoY. The largest The interest rate for deposits has been decreasing due to of deposits to alternative investments (e.g., mutual funds and increase of EUR 542.3 million was recorded in the corporate repricing at lower interest rate and shorter maturity (due bancassurance) was visible. and state deposits in the Bank, due to various reasons, i.e., the term deposits are mostly placed on the accounts). Growth of increase of balances in investment and pension funds, inflows deposit base was reflected in higher costs of liquidity surplus, from takeovers on the market, and incentives due to COVID-19 which was successfully mitigated with a high balance deposit pandemic. Deposits from individuals increased the most in the fee, charged by the Bank to corporate and from April on also Komercijalna Banka, Beograd, EUR 236.0 million. to individual clients. Consequently, the trend of redistribution MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 53 Figure 20: Deposits from customers by type as at 31 December 2021 Figure 21: LTD ratio movement Figure 22: NLB Group off-balance sheet items (in EUR million) 20.6% 7.0% 79.4% 93.0% 65.5% 11,612.3 7,604.7 58.8% 60.0% 16,397.2 17,640.8 9,644.9 10,587.1 0% YoY 4,221.7 916.5 22.9 4,672.7 1,126.4 4,655.3 1,236.7 21.8 35.6 International Slovenia Term deposits Sight deposits 31 Dec 2019 31 Dec 2020 31 Dec 2021 LTD Net loans (in EUR million) Deposits (in EUR million) 1,927.5 1,697.7 1,354.8 1,826.7 1,892.2 1,490.8 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report The LTD ratio (net) was 60.0% at the Group level; a 1.2 p.p. YoY increase, due to favourable higher growth of loans compared to deposits. 31 Dec 2019 31 Dec 2020 31 Dec 2021 Guarantees Letters of credit - risk bearing Commitments to extend credit and other risky commitments Derivatives Off-balance sheet items of the Group amounted to EUR 4,655.3 million and were comprised of guarantees (27%), letters of credit (1%), commitments to extend credit and other risky commitments (41%), and derivatives (32%). Commitments to extend credit and other risky commitments were divided between loans (99% corporate), overdrafts (59% retail and 41% corporate), and cards (89% retail). A majority of the Group's derivatives were concluded by the Bank either for the hedging of the banking book or trading with customers. Contents 54 Capital and capital adequacy Capital Figure 23: NLB Group capital (in EUR million) 2,065 297 1,768 1,496 45 1,451 2,252 287 1,966 Figure 24: NLB Group capital ratios and regulatory thresholds (in %) 15.80% 16.28% 15.75% 14.75% 16.63% 15.25% 14.25% 14.12% 17.78% 15.25% 15.47% 14.25% 31 Dec 2019 31 Dec 2020 31 Dec 2021 31 Dec 2019 31 Dec 2020 31 Dec 2021 Tier 1 Tier 2 Total capital ratio CET1 ratio OCR = MDA threshold (Total capital) OCR+P2G (Total capital) In 2021, NLB was required to maintain the OCR at the level of 14.25% on a consolidated basis, consisting of 10: • 10.75% TSCR (8% P1R and 2.75% P2R); and • 3.5% CBR (2.5% Capital Conservation Buffer, 1% O-SII buffer11 and 0% Countercyclical buffer). P2G amounts to 1.0% of CET1. The Bank and Group’s capital covers all the current and announced regulatory capital requirements, including capital buffers and other currently known requirements, as well as the P2G. Figure 25: NLB Group capital requirements as at 31 December 2021 15.25% 1.00% 3.50% 2.75% 1.55% 0.52% 0.69% 10.75% 6.05% 2.02% 2.69% 8.00% CET1 4.50% AT1 1.50% T2 2.00% 10.55% 2.02% 2.69% 10 Further information on developments in 2022 are available in chapter Events after the end of the 2021 financial year. 11 The O-SII Buffer will as of 1 January 2023 amount to 1.25%. Pillar 1 Pillar 2 TSCR Combined Buffer P2G OCR+P2G (Total capital) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 55 Table 12: NLB Group Capital Requirements and buffers(i) Pillar 1 (P1R) Pillar 2 (SREP req. - P2R) Total SREP Capital Requirement (TSCR) Combined Buffer requirement (CBR) Conservation buffer O-SII buffer Countercyclical buffer CET1 AT1 T2 CET1 Tier 1 Total Capital CET1 Tier 1 Total Capital CET1 CET1 CET1 CET1 Overall capital requirement (OCR) = MDA threshold Tier 1 Pillar 2 Guidance (P2G) OCR + P2G Total Capital CET1 CET1 (i) Further information on developments in 2022 are available in the chapter Events After the End of the 2021 Financial Year. 2021 4.5% 1.5% 2.0% 1.55% 2.06% 2.75% 6.05% 8.06% 10.75% 2.5% 1.0% 0.0% 9.55% 11.56% 14.25% 1.0% 10.55% from 12 March 2020 onwards as at 1 January till 11 March 2020 4.5% 1.5% 2.0% 1.55% 2.06% 2.75% 6.05% 8.06% 10.75% 2.5% 1.0% 0.0% 9.55% 11.56% 14.25% 1.0% 10.55% 4.5% 1.5% 2.0% 2.75% 2.75% 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% 3.25% 3.25% 3.25% 7.75% 9.25% 11.25% 2.5% 1.0% 0.0% 11.25% 12.75% 14.75% 1.0% 12.25% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 56 As at 31 December 2021 the TCR for the Group stood at 17.8% (or 1.2 p.p. higher than as at 31 December 2020), and for NLB at 24.6% (or 2.5 p.p. lower than as at 31 December 2020). As at 31 December 2021, the CET1 ratio stood at 15.5% (1.4 p.p. YoY increase). The higher Group total capital adequacy compared to the end of 2020 derives from higher capital (increase of EUR 187.0 million YoY) which compensated RWA increase of EUR 246.4 million YoY for the Group. Higher RWA derives from the increase of RWA for operational risk. Total capital increased mainly due to inclusion of negative goodwill in retained earnings in the amount of EUR 137.9 million and partial inclusion of 2021 profit (EUR 136.0 million). Figure 26: Capital of NLB Group (in EUR million) – evolution YoY 2,065 138 136 13 -63 -37 n.a. 2,252 1.1% 1.1% 0.1% -0.5% -0.3% -0.3% 16.6% 17.8% 31 Dec 2020 NGW Profit inclusion KB BG buyout NCI OCI and other RWA impact 31 Dec 2021 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 57 Dividend pay-out Pursuant to the ECB regulation/BoS decision valid till 30 September 2021, the dividend payout in 2021 was split into two tranches. The first instalment in the amount of EUR 12.0 million was paid on 22 June 2021, while the second in the amount of EUR 12.8 million after expiry of the BoS decision on 18 October 2021. Besides that, the Bank paid on 24 December 2021 Total risk exposure dynamic Table 13: Total risk exposure for NLB Group Total risk exposure amount (RWA) additional incremental dividend in the amount of EUR 67.4 RWA for credit risk million, contributing to the 2021 cumulative pay-out of EUR 92.2 million. Central governments or central banks 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 31 Dec 2021 30 Sep 2021 31 Dec 2020 in EUR million Change YoY Change QoQ 12,667.4 10,205.2 1,158.5 99.8 47.0 310.2 2,748.7 4,171.0 453.0 179.4 442.5 41.1 19.4 88.5 446.0 1,218.2 1,244.0 12,824.4 10,648.0 1,842.8 126.0 212.7 355.1 2,312.4 4,190.7 397.1 191.8 444.1 40.3 17.6 79.7 437.7 1,229.0 947.3 12,421.0 10,222.9 1,892.2 135.5 248.8 311.7 2,224.2 3,891.8 355.7 231.5 344.2 40.9 18.7 47.1 480.9 1,250.8 947.3 246.4 -17.8 -733.7 -35.6 -201.8 -1.4 524.5 279.2 97.4 -52.0 98.3 0.2 0.8 41.4 -34.9 -32.6 296.7 -157.0 -442.8 -684.3 -26.2 -165.8 -44.8 436.3 -19.7 56.0 -12.4 -1.5 0.8 1.8 8.8 8.2 -10.8 296.7 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 58 The RWA for credit risk decreased by EUR 17.8 million. On The RWA for market risk decreased by EUR 32.6 million YoY one hand, the factors to increase were loan growth to the due to a lower fixed income position in the trading book. In corporates and retail, new investments in subordinated, state contrast, RWA for FX risk increased by EUR 35.3 million YoY and EU institutions bonds. On the other hand, the increase and RWA for CVA increased by EUR 10.7 million, of which was compensated by regulatory changes namely inclusion EUR 10.6 million as a result of new regulatory requirements of BiH and Macedonia on EBA's third party equivalent list, which became effective from June 2021 onward (calculation of legislation criteria changes for the CRR collateral adequacy, original exposure method (OEM) with residual maturity). signing of guarantee agreements with MIGA as well as changed investment policy such as shift of some liquid The increase in the RWA for operational risks (EUR 296.7 million assets from the central governments to lower risk-weighted YoY) derives from the higher three-year average of relevant counterparties (NLB Banka, Prishtina, NLB Banka, Podgorica) income, as defined in Article 316 of CRR, which represents the or optimization of deposits with banks (Komercijalna Banka, basis for the calculation. The main effect for increased relevant Beograd). Furthermore, successful recovery of NPL clients, income was acquisition of Komercijalna Banka, Beograd in 2020. where the biggest part represented repayments by a large client, contributed to the RWA decrease, while on the other Further information on capital and capital adequacy is hand RWA for high-risk exposures is higher mainly due to new available in the Note 5.22 to the Audited Annual Financial project finance loans. Statements and in Pillar 3 Disclosures. MREL The MREL requirement for the Group is based on the Multiple Point of Entry (MPE) approach. As of 1 January 2024, NLB must comply with MREL requirement on a consolidated basis at resolution group level (i.e., NLB Resolution Group, consisting of NLB and other members of the Group excluding banks) which amounts to 31.38% of Total Risk Exposure Amount (TREA) (excluding CBR) and 9.97% of the Leverage Ratio Exposure (LRE). NLB has to ensure a linear build-up of own funds and eligible liabilities towards MREL requirement and its compliance with 25.19% of the TREA (excluding CBR) and 8.03% of the LRE on 1 January 2022. MREL requirement forms part of Group’s risk appetite and MREL requirement is regularly analysed and monitored by the Group. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 59 Figure 27: LCR quarterly dynamic of NLB Group Liquidity position The Group’s liquidity remains strong, with a high level of unencumbered liquidity reserves in total assets (38.3%) that is reflected in the LCR ratio standing at 252.6% (31 December 2020: 257.5%). The Group holds a comfortable liquidity position, with liquidity ratios standing well above the risk appetite limit at the Group and individual banking member level. 7,000 6,000 n o i l l i m R U E 5,000 4,000 3,000 2,000 1,000 - 257.5% 262.0% 272.6% 272.4% 252.6% 5,003 4,915 5,453 5,286 5,367 1,943 1,876 2,000 1,941 2,125 50.0% 0.0% 31 Dec 2020 31 Mar 2021 30 Jun 2021 30 Sep 2021 31 Dec 2021 Stock of HQLA Net liquidity outflow LCR MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 300.0% 250.0% 200.0% 150.0% 100.0% As at 31 December 2021 the Group’s unencumbered liquidity reserves corresponded to EUR 8,280.6 million (2020: EUR 8,327.0 million) comprised of cash, balances with CB without minimum reserve requirement, debt securities portfolio, and credit claims eligible for CB-secured funding operations. Among other these liquidity reserves provide the basis for future strategic growth. Encumbered liquidity reserves (EUR 877.6 million; excluding obligatory reserves), used for operational and regulatory purposes, are excluded from the liquidity reserves portfolio. Figure 28: Evolution of NLB Group unencumbered liquidity reserves (in EUR million) 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 8,327.0 8,203.1 8,366.1 8,191.1 8,280.6 59.9% 0.8% 32.2% 7.0% 63.4% 0.7% 29.6% 6.3% 59.7% 57.7% 0.0% 39.1% 1.2% 0.0% 42.0% 0.4% 55.9% 0.0% 43.1% 1.0% 31 Dec 2020 31 Mar 2021 30 Jun 2021 30 Sep 2021 31 Dec 2021 ECB eligible credit claims Trading book debt securities Cash & CB reserves Banking book debt securities Contents 60 Segment Analysis Table 14: Core and Non-Core Segments of NLB Group Retail Banking in Slovenia includes banking with individuals and micro companies, asset management (NLB Skladi), and one part of the subsidiary NLB Lease&Go that deals with retail clients, as well as the contribution to the result from the associated company Bankart. Corporate and Investment Banking in Slovenia includes banking with Key corporate clients and SMEs, Cross-border corporate financing, Investment Banking and Custody, Restructuring and Workout, and one part of the subsidiary NLB Lease&Go that renders services to corporate clients. Core Segments Non-Core Segment Strategic Foreign Markets Financial Markets in Slovenia includes the operations of strategic Group banks in the strategic markets (Serbia, North Macedonia, BiH, Kosovo and Montenegro). covers treasury activities and trading in financial instruments, while it also presents the results of asset and liabilities management (ALM). Other Non-Core Members accounts for the Bank’s categories of which the operating results cannot be allocated to specific segments as well as the subsidiary NLB Cultural Heritage Management Institute. includes the operations of non-core Group members, namely REAM and leasing entities (except NLB Lease&Go), NLB Srbija, and NLB Crna Gora. (in EUR million) NLB Group Profit b.t. Contribution to Group’s profit b.t. Total assets % of total assets CIR Cost of risk (bps) 261.4 100% 21,577 100% 62.3% -41 49.0 19% 2,823 13% 68.1% 26 86.8 33% 2,334 11% 44.4% -141 113.2 43% 9,798 45% 63.0% -11 15.8 6% 6,190 29% 35.8% / -4.7 -2% 337 2% 177.5% / 1.3 0% 96 0% 157.4% / NLB Group’s main indicator of a segment’s efficiency is net profit before tax. No revenues were generated from transactions with a single external customer that would amount to 10% or more of Group's revenues. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 61 Retail Banking in Slovenia The Bank continues to be the market leader in retail banking by knowing customers’ needs. Through anchor loan products and best-suited offers to different segments, the Bank again proved its efficiency and gained new clients. The banking environment is changing considerably and new approaches and sales channels are emerging. The Bank continues to be available through its traditional branch offices, but also through its mobile branch. Technology enables the availability of the Bank’s services to clients Financial performance Table 15: Performance of the Retail Banking in Slovenia segment 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 24/7 via the Contact Centre and digital banking. Total net operating income Total costs Result before impairments and provisions Impairments and provisions Net gains from investments in subsidiaries, associates, and JVs' Result before tax Net loans to customers Gross loans to customers Housing loans Interest rate on housing Loans Consumer loans Interest rate on consumer Loans Other Deposits from customers Interest rate on deposits Non-performing loans (gross) Cost of risk (in bps) CIR Interest margin Contribution to NLB Group Figure 29: Contribution to NLB Group 19% 19% 36% Result b.t. Net interest income Net non-interest income (i) Net interest income from assets and liabilities with the use of FTP. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report in EUR million consolidated Change YoY 2021 79.5 82.7 -3.1 91.5 96.6 171.0 -116.5 54.5 -6.7 1.1 49.0 2020 81.4 78.4 3.0 89.0 82.7 170.4 -114.1 56.2 -15.1 0.9 42.0 2,731.6 2,769.7 1,815.5 2.34% 635.6 6.70% 318.6 7,703.6 0.03% 58.1 2,415.4 2,450.7 1,534.7 2.51% 651.7 6.43% 264.3 7,356.8 0.04% 52.4 -1.9 4.3 -6.1 2.5 13.8 0.7 -2.4 -1.7 8.4 0.2 6.9 316.2 319.0 280.9 -2% 5% - 3% 17% 0% -2% -3% 56% 27% 17% 13% 13% 18% -0.17 p.p. -16.1 -2% 0.27 p.p. 54.3 346.8 5.7 -0.01 p.p. 21% 5% 11% 31 Dec 2021 31 Dec 2020 Change YoY 2021 26 68.1% 1.55% 2020 63 67.0% 1.75% Change YoY -38 1.1 p.p. -0.20 p.p. Contents 62 Net interest income The net interest income from loans to individuals was EUR 4.3 million higher YoY; the higher volume of housing loans and higher interest margins on consumer loans was due to higher volumes of new production and a higher share of loans with a risk premium and quick loans in the portfolio; lower volumes on overdrafts had a negative impact on the interest income. There was also a reduction of the retail deposits margin after transfer price (FTP) in the amount of EUR 6.1 million YoY. Net non-interest income Higher net non-interest income in the amount of EUR 2.5 million YoY was due to EUR 13.8 million or 17% higher net fee and commission income related mostly to package repricing and higher net fees from asset management (high net inflows in mutual funds of NLB Skladi, EUR 192.8 million) and bancassurance. In April, the Bank started charging a fee for high balances for individuals to restrain the deposit inflow which diverted extra liquidity to other financial products (mutual funds, investments) and compensated for the negative interest rates charged for the balances at the CB. Net impairments and provisions Net impairments and provisions were established in the amount of EUR 6.7 million, due to changes in risk parameters. Loans to customers The production of new housing loans was record high, EUR 557.6 million in 2021 (2020: EUR 303.1 million). Deposits from customers The deposits base increased by EUR 346.8 million (5%) YoY, with sight deposits prevailing (95% in 2021, compared to 93% in 2020). The Bank strengthened its position in Lending and Asset Management. Figure 30: NLB’s market share in Retail Banking in Slovenia 30.5% 26.2% 23.1% 21.8% 33.0% 31.0% 29.0% 27.0% 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% 31.3% 26.4% 23.4% 22.5% 30.7% 26.9% 24.7% 24.4% Distribution channels Branch office and ATMs network The Bank’s main sales channel remains its branch network in Slovenia with 75 branches, and is supported with the ATM network (538 or a 37.6% market share in Slovenia) of which 89% are contactless. A higher daily limit of cash withdrawals on ATMs was 31 Dec 2019 31 Dec 2020 31 Dec 2021 enabled to encourage clients to increase use of ATMs, and MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report consequently to strengthen the advisory role of branch offices. Mobile bank: NLB Bank&Go The mobile branch NLB Bank&Go, engaged in promoting the Bank in various cities in Slovenia, is being increasingly recognised. Unique 24/7 banking service in Slovenia Extending the use of video calling for sales and contract conclusions for almost all of the Bank’s products (consumer and housing loans with straightforward collateral, Vita and Generali insurance products, deposits, savings and cards, onboarding of e- and m-bank) was an important step towards strengthening the role of the Contact Centre as a 24/7 sales channel. The Contact Centre experienced a YoY increases of 11% in total contacts, mainly due to the 57% increase in video calls. Despite the broader scope of work, the client experience remained at a very high level, with an average 2021 NPS for video call and chat of 71. Market share in loans to customers Market share in deposits from customers Market share in housing loans Market share in consumer loans Business performance The market leader in retail banking in Slovenia Leader in Slovenia Bank remains the leader in the Slovenian market in retail lending and deposit-taking. An encouraging increase of the market share is noticed in the category of housing loans, namely to 24.4% (31 December 2020: 22.5%), which is the result of a very impressive production of new housing loans in 2021 (market share of 32.2%; 2020: 28.3%). The Bank remains the leader because of their very well- established branch and ATM network, the 24/7 Contact centre, and continuous digitalization improvements. The Bank retains its role as a market leader in payments by being a reliable and trustworthy provider of payments services with a focus on providing a positive user experience. The private banking arm of the Bank has been positioned as a leader in this segment in Slovenia for over 20 years. NLB Skladi is a market-leading asset management company, whose market share and annual net inflows are increasing every year. Contents 63 Figure 31: NLB Contact Centre no. of contacts +57% Sustainability Following the ESG orientation of the Group, special financing Mobile wallet - NLB Pay M-wallet NLB Pay usage is increasing at a significant pace for the purchase of solar panels, power storage and heat and the application is constantly being upgraded. The most +11% pumps was agreed to be offered to clients by one of the recent updates have been made in line with regulatory Slovenian retailers, selling technical products. requirements for Strong Customer Authentication and include Digital banking The number of digital users continued to increase (13% YoY), with the number of active users surpassing 300,000. The number of m-bank Klikin and e-bank NLB Klik users increased by 23% (72,076 new users) and 6% (22,771 new users) Flik Instant Payments for person to person (P2P), person to merchant (P2M), and person to e-merchant (P2eM) payments. The application has become a must-have, especially as it is an easy way to confirm e-commerce purchases. Figure 34: NLB Pay in numbers MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 158,099 863,717 999,460 1,112,933 YoY respectively, which is well demonstrated by the digital penetration (see the figure below). 100,397 43,289 2019 2020 2021 2019 2020 2021 Video call Total contacts The total volume and number of payments processed in the e-bank and m-bank increased by 32% and 14% YoY, respectively. Figure 33: Online and mobile banking penetration +140% +188% Digitalisation and improved client experience High level of client satisfaction The Bank maintained a high level of client satisfaction, as 42% 38% 36% 35% 35% 27% 52% 40% 44,097 36,218 18,402 12,827 7,722 12,577 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 2019 2020 2021 2019 2020 2021 measured through the Customer Satisfaction Index (CSI). The E-bank M-bank # of users Volume of transactions (in EUR thousand) CSI remains stable and well above competition. Furthermore, clients also express a high level of trust and loyalty. The Bank also managed to change price perception in segment of young people, where satisfaction improved (from 74 to 77; 2021 Valicon Client Satisfaction Survey). Figure 32: Satisfaction with the attitude towards customers Competitor banks' average 2021 75 NLB 2021 NLB 2020 NLB 2019 NLB 2018 81 83 77 77 24.4% market share in housing loans. Digital banks NLB Klik’s and Klikin’s penetration and share of active users substantially increased. Source: 2021 Valicon Client Satisfaction Survey. Contents 64 Stable card market share The Bank’s card market share remained stable with 26.1% (2020: 26.5%) in the Slovenian market. New debit Mastercards (NLB Debit Mastercard, NLB Debit Mastercard World, and NLB Mastercard World Elite) were introduced to replace the Maestro card, and are part of the client’s wallet and mobile wallet NLB Pay. The debit Mastercard offers added value to clients at a time when most purchases are made online. SMS Instalments for personal pay-later payment cards were introduced. The only condition to activate this option is the activation of SMS Alarm service. This new service complements instalment purchases for all possible card transactions (POS and e-commerce purchases, ATM withdrawals). Flik Instant payments The introduction of a new payment method within the local Slovenian instant payment scheme Flik P2M promotes further migration from cash to digital payments. Flik P2M is integrated in the m-wallet NLB Pay and also provides support for iOS users. Private banking Leading private banking provider in Slovenia Private banking has positioned itself among the leading Figure 35: Assets under management and the number of private banking clients Figure 36: Customers’ penetration of ancillary business 1,800 1,580 1,168 1,231 1,309 746.9 752.5 911.1 1,075.1 1,242.9 1,077 554.0 12.9% 13.4% 14.0% 14.9% 15.2% 15.6% 3.7% 1.2% 4.9% 1.5% 6.5% 7.5% 8.3% 9.1% 1.5% 1.7% 1.9% 2.2% 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 AuM (million EUR) # of Clients NLB Skladi Vita Generali Ancillary businesses complementing banking products GENERALI Zavarovalnica - Non-life insurance products Non-life insurance products, including car and home insurance, are provided to clients in cooperation with the NLB Skladi – Slovenia’s largest GENERALI Zavarovalnica. asset management company The market share of NLB Skladi increased to 37.3% (31 December 2020: 34.9%). With EUR 232.8 million of net inflows in 2021, which is the company’s highest annual amount of inflows ever recorded, the company ranked first among its peers in Slovenia, accounting for 50.4% of all net inflows in the market. Fees for high balances of clients’ assets introduced in April 2021 also triggered a partial reallocation of client assets from deposits and contributed to an additional increase of interest occurred on asset management products. Despite challenging circumstances, excellent results were achieved, namely gross written premiums increased YoY by 19%, and the number of car insurance and home insurance policies by 19% and 23%. private banking providers in Slovenia for over 20 years. In The total assets under management amounted to EUR 2,128.0 2021, its leading position was further strengthened with assets million (31 December 2020: EUR 1,625.6 million) of which under management reaching EUR 1.2 billion (16% YoY), and the EUR 1,610.4 million consisted of mutual funds (31 December number of clients increased by 14% YoY. 2020: EUR 1,125.5 million) and EUR 517.6 million of the Throughout the year, private bankers managed to maintain sales activities on a high level. Results were solid in all areas, but the best were in mutual fund sales. This can be attributed to our dedicated team, the positive economic and capital market environment, and introduction of the fee for high discretionary portfolio (31 December 2020: EUR 500.1 million). Vita - insurance company The insurance company Vita remains the Bank’s strategic partner. Its products are sold through the Bank’s distribution network, such as savings and investment insurance products, balances for individual clients. risk, and health insurance products. By offering carefully selected and tailored products and Vita introduced a new health insurances product – NLB Vita services, the Bank demonstrates that it is able to take good Specialist, which among others covers the costs of medical care of their clients’ wealth. specialists and more complex diagnostic examinations. A new Debit Mastercard was introduced to replace the Maestro card. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 65 We are your right hand. The great-grandfather had the first store on the street. The grandfather expanded his business onto the entire town. The father built a national store chain. For them, there are no limits. Even small companies have big plans. Yet, business growth demands creativity, passion and hard work. We want to cooperate with companies that boast such qualities and support them on their path. That is why we offer much more than just banking services – we share our knowledge with you to build a stronger, more profitable future in the region where determination and entrepreneurial courage know no limits. Corporate and Investment Banking in Slovenia Financial performance Table 16: Performance of the Corporate and Investment Banking in Slovenia segment MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report in EUR million consolidated Change YoY The Bank is strengthening its market position as a systemic player in its home region, and actively participates in the growth of markets by supporting sustainable projects. As a leading player, the Bank also supports the more complex, cross-border needs of its clients and diversifies services for them. Clients’ trust and satisfaction are solid foundations for future sustainable growth. 31.5% market share in guarantees and letters of credit. Contribution to NLB Group Figure 37: Contribution to NLB Group 33% 9% 26% Result b.t. Net interest income Net non-interest income 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 Total costs Result before impairments and provisions lmpairments and provisions Result before tax Net loans to customers Gross loans to customers Corporate Key/SME/Cross Border Corporates Interest rate on Key/SME/Cross Border Corporates loans Investment banking Restructuring and Workout NLB Lease&Go State Interest rate on State loans Deposits from customers Interest rate on deposits Non-performing loans (gross) Cost of risk (in bps) CIR Interest margin (i) Net interest income from assets and liabilities with the use of FTP, 2021 35.7 41.1 -5.4 65.8 38.9 101.5 -45.1 56.4 30.5 86.8 2020 34.0 36.8 -2.8 41.2 33.2 75.2 -41.8 33.4 9.0 42.4 2,047.1 2,167.5 2,006.4 1,827.6 1.79% 0.2 160.8 17.8 160.7 2.20% 1,487.4 0.06% 156.0 2,332.4 2,390.7 2,258.5 2,110.6 1.79% 0.1 88.2 59.6 131.9 2.07% 1,938.2 0.03% 72.5 2021 -141 44.4% 1.76% 31 Dec 2021 31 Dec 2020 Change YoY 1.7 4.3 -2.6 24.6 5.7 26.3 -3.3 23.0 21.5 44.5 285.2 223.1 252.1 283.1 -0.1 -72.6 41.7 -28.8 0.00 p.p. 5% 12% -93% 60% 17% 35% -8% 69% - 105% 14% 10% 13% 15% -38% -45% - -18% -0.13 p.p. 450.7 30% -0.03 p.p. -83.5 -53% 2020 -44 55.6% 1.90% Change YoY -97 -11.1 p.p. -0.15 p.p. Contents 67 Net interest income The interest income from loans to corporate and state was EUR 4.3 million higher YoY, due to higher volumes, mostly in Key and Cross-Border Corporates. There was also a reduction of the deposits margin after transfer price (FTP) in the amount of EUR 2.6 million YoY. Non-recurring net non-interest income Non-recurring net non-interest valuation income in the amount of EUR 13.0 million from repayment of exposure, classified as non-performing, and EUR 8.6 million other operation income from the settlement of a legal dispute. Net fee and commission income Higher net fee and commission income YoY, mostly due to a higher fee for high balances on customers assets (EUR 6.6 million in 2021, EUR 3.3 million higher YoY) and arrangement fees for organisation of syndicated loans. Net impairments and provisions Net impairments and provisions were released in the amount of EUR 30.5 million due to the repayment of several exposures, changes in credit ratings, and changed parameters for collective impairments and provisions related to more favourable macroeconomic forecasts. Loans to customers The volume of loans to corporate increased by EUR 252.1 million YoY, mostly due to newly approved syndicated loans and increased volumes in the Cross-border Corporates and NLB Lease&Go. The Investment Banking and Custody The Investment Banking and Custody recorded non-interest income in the amount of EUR 10.8 million and increased by EUR 1.4 million YoY, mostly due to arrangement fees for organisation of syndicated loans. The total value of assets under custody decreased YoY and amounted to EUR 15.9 billion (31 December 2020: EUR 16.2 billion). Figure 38: NLB’s market share in Corporate Banking in Slovenia 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 30.0% 17.5% 16.5% 31.4% 31.5% 17.3% 17.0% 18.9% 18.3% The Bank also remains a reliable partner to Slovenian companies when they want to expand their activities abroad. Despite substantial loan repayments, the entire portfolio grew as several new high-quality transactions were concluded in financing exports and manufacturing, the state, project finance, acquisitions, factoring, and international finance. In 2021, EUR 1,281.5 million of loans were approved to corporate 31 Dec 2019 31 Dec 2020 31 Dec 2021 and state clients presenting a 23% YoY increase. Market presence and a proactive approach are also reflected in the YoY growth of the loan portfolio in all corporate segments, namely in Key by 7%, SME by 9%, and Cross-border even by 79%. Growth is recorded across all products and services. As the leading bank in the Slovenian market for the organisation of syndicated loans, the Bank continues to successfully support and finance the expansion of Slovenian companies in the region. The Bank is also a leading Slovenian bank in the field of trade finance with products that support the export economy. Group clients are supported with letters of guarantees, letters of credit, and purchases of receivables through digital channels in a safe and fast way, with a market share of 31.5% (31 December 2020: 31.4%) in guarantees and letters of credit (including guarantee lines). Diversified product mix Bank’s offer The Bank’s offer of financial services, including lending, cash management, payment services, as well as capital markets’ advisory services supports various clients’ needs. Clients can get short-term or long-term financing facilities and advisory services to find a best-suited financing structure. In this way, the Bank supports key projects that are important for the development of the country, as well as the Group’s home region. Market share in loans to customers Market share in deposits from customers Market share in guarantees and letters of credit Client base expanded with additional stable and well performing groups of companies. Business performance Market leader focusing on customers’ needs Leading bank servicing corporate clients in Slovenia NLB is the leading bank in servicing corporate clients in Slovenia with a growing client base, and it has an 18.3% market share in corporate loans (31 December 2020: 17.3%). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 68 Trade finance solutions The Bank is a leading Slovenian bank in the field of trade Basic products & Cards business New debit Mastercard products (NLB Debit Mastercard The platform provides security and simplicity, a competitive edge to providers, and good user experience. finance with products that also support the export economy, Business and NLB Debit Mastercard World Business) are now and represent an important part of the Slovenian economy. also available to business account holders, replacing the The trade finance product range and tailor-made solutions Maestro business card. are comprehensive and range from traditional trade finance products, to other modern structures which provide safe New debit cards are included in the renewed package offer financing throughout the supply chains. for legal entities, namely NLB Business Package Basic, Instant payments Since 2020, the Bank gradually introduced instant payments, including instant internal transfers and Flik payments in the NLB Pay. Instant outgoing payments are now also available to clients (free of charge) in the m-banking solutions Klikin and Advanced, and Comprehensive, with a special offer for the Klikpro. As a member of the Factor Chain International, the Bank aims target group of newly established and non-profit clients. to offer exporters and importers international purchase of receivables, thus providing them with a modern, fast, and SMS Instalments for business pay-later payment cards were easy way of financing, which is an additional incentive for introduced, the only condition being the activation of an SMS international business. Special attention is given to letter of Alarm service. This new service complements the instalment guarantees by which the Bank supports major infrastructure purchase for all possible card transactions (POS and projects in Slovenia and the wider home region. The stronger e-commerce purchases, ATM withdrawals). market position reflects the Group’s active advisory approach towards its customers. Sustainability In the process of actively integrating the ESG factors, the Bank is devoting increasing efforts to identifying new business opportunities arising from its transition to support circular and carbon neutral economy. #HelpFrame, a social environment project with a clearly defined sustainability component, continued in 2021. In addition to know-how, advice, and services, advertising space was also made available to the selected entrepreneurs, farmers and small and micro companies, thus helping them present their products and services to potential buyers and customers. Figure 39: Transaction volume in acquiring (in EUR million) +8% +17% 55 47 2,247 2,348 2,535 Project financing Recent developments in the real estate market have opened up new opportunities for project financing. With 14 2019 2020 2021 2019 2020 2021 comprehensive financial solutions, supported by a strong e-commerce (in EUR million) POS (in EUR million) team of experts, the Bank is able to meet even the most demanding challenges in this area. Each project is reviewed from different perspectives – feasibility, costs, and sale, thus trying to minimise risk for both, A leader in merchant-acquiring The Bank is a leader in merchant-acquiring by accepting all the Bank and the client. Clients are also supported in the trade major payment cards, the local Flik instant payment scheme finance area, as successful completion of the transaction also and a modern contactless POS network, with a 36.7% market requires guarantees to eliminate hidden defects to end users. share in merchant acquiring. Favourable financing conditions are offered to the buyer of Users of e-commerce expect secure and simple online the property, and a team of mobile bankers is involved to ensure a successful implementation. purchases, which is why the Bank offers NLB E-commerce, a modern payment platform, to its providers and their clients. Flik payments With the main goal of decreasing the use of cash, the Flik P2M payment method is being gradually implemented in all shops with NLB POS terminals. NLB was the first bank in Slovenia to enable clients such a service. Global Payments Innovation (GPI) full on-boarding The Group, as a first banking group in the region, fully onboarded the GPI (Global Payment Initiative), i.e., service from SWIFT, which enables more efficient processing and easier tracking of international payment orders, thus enabling considerable improvement and smoother international payments experience for customers involved in international business. Cross border financing is becoming increasingly important. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 69 International corporate business Collaboration within the Group Excess liquidity, a rather limited Slovenian market, and the wish to expand operations with existing and new clients are the main reasons why cross-border financing is becoming increasingly important. In the Western Balkans, the Bank is among others currently supporting selected projects mainly in the telecommunications and food industry, as well as renewable energy sources. loans, which includes also some of world-renowned brands The Bank helped many companies broaden funding base and leaders in their industries. The EEA lending portfolio and arranged the issuance of both long-term and short-term exceeds EUR 150 million at YE, and is also expected to grow instruments in the total of EUR 44.3 million on debt capital further due to very well-established relationships with some of markets. the European partnership banks. Digitalisation of product offering M-bank Klikpro The number of m-bank Klikpro users is constantly increasing (YoY by 17%), which proves that clients are adopting the The Bank was active in M&A and other financial advisory engagements. As the sole financial advisor, it successfully organised the sales process of a leading Slovenian company in the production of paints. The Bank successfully organised two takeover bids as well. Brokerage services and Financial Instruments In the brokerage services in 2021, the Bank executed clients’ buy and sell orders in the total amount of EUR 902.9 million At YE, the portfolio, including participating shares of Group process of digital banking. subsidiaries lending in such a transaction, already well exceeds EUR 150 million. The notable potential in the region can be observed especially in corporate financing focusing The latest upgrade also included digital signing of documents (2020: EUR 941.3 million), while in the area of dealing in for a defined list of products, which will be further extended in financial instruments, the Bank executed foreign exchange on renewable energy, infrastructure, and residential project the following periods. finance. Corporate lending in EEA The Bank also entered into different EU markets and Mobile wallet NLB Pay The Bank’s mobile wallet NLB Pay application enables clients to make contactless, simple, fast, and secure payments on diversified its cross-border portfolio across the EEA. Most the contactless POS (in Slovenia and abroad) with the NLB notable transactions were concluded in Germany, France, Business Mastercard and NLB Business Maestro cards, and Austria, and the Netherlands. also enables instalment payments. Deals are primary made through participation in syndicated international facilities or through participation in Schuldschein Investment banking and securities services Arranger of several transactions In 2021, the Bank organised six syndicated facilities in the total amount of EUR 652.1 million, where it also acted as the mandated lead arranger, as an agent, and also as the leading bank with EUR 275.7 million participation. spot deals in the total of EUR 946.6 million (2020: EUR 724.0 million) and for EUR 382.5 million (2020: EUR 242.6 million) worth of transactions involving derivatives. Good economic conditions in 2021 resulted in more activities in foreign, non-Euro markets, by the clients. At the same time, due to higher inflation expectations, more demand for interest rate hedging was noticed. Custodian services The Bank remains one of the top Slovenian players in custodian services for Slovenian and international customers. The total value of assets under custody on 31 December 2021 was, together with the fund administration services, EUR 15.9 billion (31 December 2020: EUR 16.2 billion). Arranging EUR 652.1 million of syndicated loans. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 70 Strategic Foreign Markets With the merger of two banks in Montenegro and the finalised sale of one bank in the Republic of Srpska in 2021, the core part of the Group in foreign markets now consists of seven banks and one 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 strong reputation. The market shares by total assets of subsidiary banks exceed 10% in five out of six markets. Financial performance Table 17: Results of the Strategic Foreign Markets segment Net interest income Interest income Interest expense Net non-interest income o/w Net fee and commmission income Total net operating income The banks in the Group strategic foreign markets Total costs offer a full range of financial services to retail and corporate clients. In 2021, the Group banks marked remarkable double-digit growth of gross loans to customers, especially in housing loans segments with raised demand for housing loans, reaching up to 41% YoY (NLB Banka, Sarajevo) to 55% YoY growth rates (NLB Banka, Beograd). Result before impairments and provisions Impairments and provisions Negative goodwill (KB) Result before tax o/w Result of minority shareholders In 2021 the Group banks accelerated their digital Net loans to customers transformation by offering e-identification Gross loans to customers (NLB Banka, Skopje), pay mobile card solution, Individuals end-to-end automated loan processing (Komercijalna Banka, Beograd) to robotics solutions in several internal processes (NLB Banka, Sarajevo), and implemented SWIFT GPI services to enable faster, more transparent, and reliable international transactions to its clients. Contribution to NLB Group Figure 40: Contribution to NLB Group Interest rate on retail loans Corporate Interest rate on corporate loans State Interest rate on state loans Deposits from customers Interest rate on deposits Non-performing loans (gross) Cost of risk (in bps)(ii) CIR Interest margin(ii) 43% 65% 37% Result b.t. Net interest income Net non-interest income (i) Interest rates for 2020 are calculated without Komercijalna Banka group. (ii) Komercijalna Banka, Beograd is excluded from the calculation. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report in EUR million consolidated Change YoY o/w KB contribution 2021 266.8 299.6 -32.8 95.1 101.6 361.9 -227.9 134.0 -20.8 113.2 11.5 2020 159.3 182.6 -23.3 49.8 54.1 209.1 -109.0 100.1 -59.1 137.9 178.8 3.0 107.5 117.0 -9.5 45.3 47.5 152.9 -118.9 34.0 38.3 -137.9 -65.6 8.4 98.8 111.5 -12.8 33.2 42.3 132.0 -107.3 24.7 -20.6 4.2 1.5 31 Dec 2021 31 Dec 2020(i) Change YoY 5,441.9 5,632.2 2,877.3 5.83% 2,613.5 3.96% 141.4 3.35% 7,998.8 0.29% 191.7 5,052.4 5,234.8 2,592.9 - 2,443.7 - 198.1 - 7,552.2 - 195.0 389.5 397.4 284.4 169.8 -56.7 446.6 -3.3 -0.45 p.p. -0.20 p.p. -0.18 p.p. -0.14 p.p. 68% 64% -41% 91% 88% 73% -109% 34% 65% - -37% - 8% 8% 11% 7% -29% 6% -2% 2021 -11 63.0% 2.86% 2020 140 52.1% 3.33% Change YoY -151 10.8 p.p. -0.47 p.p. Contents 71 Net interest income Net interest income increased by EUR 8.8 million (6%) YoY without the Komercijalna Banka group contribution, due to higher volumes despite a lower interest margin. Net non-interest income Net non-interest income increased EUR 12.1 million YoY without the Komercijalna Banka group contribution, of which EUR 5.1 million in net fee and commission income due to normalisation of business after COVID-19 outbreak in 2020. Net non-interest income in 2021 was negatively affected with the sale of Komercijalna Banka, Banja Luka (EUR 8.1 million), while in 2020 with modification losses caused by changes of contractual cash flows for loans subject to COVID-19 moratoria in 2020. Total costs Total costs increased YoY (EUR 11.6 million or 11%) due to a higher volume of business in all banks and additionally due to integration costs on the Serbian and Montenegrin markets. Net impairments and provisions Net impairments and provisions were established in the amount of EUR 20.8 million, mostly related to legal and restructuring provisions, while impairments and provisions for credit risk of the segment were net released. Figure 41: Gross loans volume and interest rates in Strategic Foreign Markets +8% YoY 6.28% 6.71% 5,234.8 2,592.9 5,632.2 2,877.3 2,641.9 2,754.9 3,162.0 1,604.0 1,558.0 4.46% 4.11% 5.83% 3.92% 31 Dec 2019 31 Dec 2020 31 Dec 2021 2019 Individuals Corporate & state 2020 w/o KB 2021 Gross loans to customers Gross loans to customers increased by EUR 397.4 million (8%) YoY, despite EUR 155.4 million decrease attributable to the sale of Komercijalna Banka, Banja Luka. The most material increase was in housing loans. The increase of the loan portfolio was visible in all of the member banks; the largest increases were recorded in Komercijalna Banka, Beograd (EUR 202.5 million) and NLB Banka, Skopje (EUR 123.1 million). Seven subsidiary banks and one investment fund company. Profit before tax EUR 113.2 million only 37% lower compared to last year, when the result was higher due to acquisition of Komercijalna Banka, Beograd. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 72 Deposits from customers Deposits from customers increased by EUR 446.6 million YoY, despite EUR 154.7 million decrease due to the sale of Komercijalna Banka, Banja Luka. The growth was recorded in all member banks, except NLB Banka, Beograd. Figure 42: Deposit volume and interest rates in Strategic Foreign Markets +6% YoY 7,552.2 3,856.7 5,211.1 0.58% 0.41% 7,998.8 5,601.9 2,598.0 1,258.7 2,341.1 2,397.0 0.47% 0.35% 0.32% 0.22% 31 Dec 2019 31 Dec 2020 31 Dec 2021 2019 Individuals Corporate & state 2020 w/o KB 2021 The market shares (by total assets) of subsidiary banks exceed 10% in five out of six markets. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 73 Komercijalna Banka, Beograd The acquisition of Komercijalna Banka, Beograd further strengthened the Group’s strategic position in Serbia and has placed NLB as one of the leading (and systemic) banks on the market. The bank is strongly positioned as a leader on retail market with more than 1.1 million clients, and a high market share both in lending (consumer and housing) and deposits. In corporate segment, the bank was mainly building relationships with public and large domestic companies. Nevertheless, the Group recognises that Komercijalna Banka, Beograd has still important growth potential in all the segments, which is expected to be realised in the following period. NLB finalised harmonisation of Komercijalna Banka, Beograd with NLB Group standards within six months from acquisition, while the merger of Komercijalna Banka, Beograd with NLB Banka, Beograd is planned for the end of April 2022. It is expected that the merger of the two banks could bring Macroeconomic Snapshot In Serbia, the economy lost some steam in Q4 due to rising price pressures while softer merchandise import growth suggesting a slight cooldown in domestic demand. Nevertheless, the economy rebounded from a mild contraction in 2020 with investment and private consumption propelling economic activity in 2021. Figure 43: GDP growth, Inflation, Unemployment GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 8.0 6.0 4.0 2.0 0.0 -2.0 8.0 6.0 4.0 2.0 0.0 12.0 10.0 8.0 6.0 2020 2021 2022 2020 2021 2022 2020 2021 2022 Outlook Economic growth is expected to return towards the pre- pandemic path, and so, growth is expected at a slower pace important synergy effects on cost and on revenue side. After in 2022. The economy should grow on the back of private finalisation of the merger, the Bank will focus on digitalization consumption and investment, while government investment and modernisation of services to establish the bank as one of and EU funds should further aid the growth. Downside risks the leaders in service quality. Despite ongoing harmonisation are in the form of pandemic-related uncertainty, sturdier and activities and merger process with the NLB Banka, Beograd, prolonged elevated inflation, the long-term impact of supply- the bank achieved in 2021 record sales growth in both retail side bottlenecks and economic implications of the war in and corporate banking segment and already introduced Ukraine. some modern digital solutions (Kombank pay mobile card solution, end-to-end automated loan processing, etc.). Contribution to NLB Group Figure 44: Contribution to NLB Group 10% 22% 18% Result b.t. Net interest income Net non-interest income Banking services provided through: 190 branches 281 ATMs 4th largest bank in the country. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 74 Financial performance Business performance Table 18: Key performance indicators of Komercijalna Banka, Beograd(i) in EUR thousand Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax Financial position statement indicators Total assets Net loans to customers Gross loans to customers Deposits from customers Equity Key financial indicators Total capital ratio Net interest margin ROE a.t. ROA a.t. CIR NPL volume NPL ratio (internal def.: NPL/Total loans) Market share by total assets LTD 2021 88,570 40,110 -87,979 -7,637 33,064 34,818 4,165,249 1,795,882 1,818,793 3,424,633 634,643 28.6% 2.4% 5.5% 0.9% 68.4% 36,329 1.4% 9.7% 52.4% (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. For year 2020, comparable data are not available. The bank realised a profit after tax in the amount of EUR 34.8 million, ROE a.t. 5.5% and CIR 68.4%. TCR was stable at 28.6%. The result was driven by the high loan production growth in retail and corporate. Net interest income reached EUR 88.6 million, while net non-interest income was EUR 40.1 million. The total assets amounted to EUR 4,165.2 million. The NPL ratio was 1.4%. 62% YoY growth, retail housing loans 34% YoY growth) and growth in total income (9% higher YoY) and growth in net fees (18% higher YoY). The bank finally managed to defend the retail loan market share despite the ongoing integration process. Conversely, deposits growth was 10% YoY of which foreign currency savings grew EUR 169 million. The bank also Retail banking The retail segment, with the largest client base on the local market, represents the predominant strength of Komercijalna developed ‘KomBank Pay,’ a mobile wallet for contactless Banka, Beograd. Since the acquisition, the bank focuses payments. strongly on boosting activity in retail area through series of structural initiatives. These initiatives resulted in significant growth in gross loans (9% YoY). The Bank recorded the historically highest loan production growth (cash loans Figure 45: 2-year market share evolution 11.8% 10.0% 8.5% 6.3% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 11.2% 9.7% 8.4% 6.3% 31 Dec 2020 31 Dec 2021 Market share by total assets Market share in loans to corporate Market share in loans to individuals Market share in deposits from customers Corporate banking Corporate banking in the bank was historically concentrated on servicing public and domestic companies and was holding a less dominant market position compared to the retail segment. In the corporate segment, the bank improved its management structure and processes. This generated 18% YoY growth in gross loans. In addition, 2021 was a record year in the bank in terms of new loan production which amounted to EUR 524.7 million, representing 39% growth YoY, and mainly coming from large segment clients, noticeably outperforming the market growth. Additionally, corporate deposits noted a growth of 8%. The key drivers of income growth were large corporate and SME loans. Net non-interest income increased by 3% YoY and net fees recorded growth by 11% YoY. Additionally, the bank redesigned offer of existing loans for liquidity and working capital (18 and 36 months), and introduced reverse factoring (production of EUR 7.4 million).   EUR 33.1 million result b.t. 9.7% market share in total assets. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 75 NLB Banka, Beograd Financial performance In 2021, one of the crucial activities for NLB Banka, Beograd was participation and full support for the ongoing integration project with Komercijalna Banka, Beograd where the merger is planned in Q2 2022. After the merger, NLB Banka, Beograd will cease to exist. The bank was fully engaged in all initiatives of the integration process. In spite of demanding Table 19: Key performance indicators of NLB Banka, Beograd(i) in EUR thousand 2021 2020 Change YoY Key performance indicators integration process, the Bank managed to maintain dynamic Net interest income 23,359 21,822 7.0% sales activity, where the retail and agro segments produced outstanding results. The bank increased market shares in housing and consumer loans, and in the agro segment the bank managed to strengthen its market position to 14.1% (2020: 13.6%). Net non-interest income 6,954 4,812 44.5% Total costs -22,170 -20,351 Impairments and provisions -3,202 -3,591 Result before tax 4,941 4,293 2,692 2,598 Macroeconomic Snapshot and Outlook for Serbia see under Result after tax Komercijalna Banka, Beograd. Financial position statement indicators Total assets 715,375 686,693 Net loans to customers 511,693 472,170 Gross loans to customers 520,518 482,552 Deposits from customers 449,476 496,288 Equity 77,918 74,205 Key financial indicators Total capital ratio Net interest margin ROE a.t. ROA a.t. CIR 19.2% 3.4% 5.5% 0.6% 19.1% 3.4% 3.5% 0.4% 73.1% 76.4% -3.3 p.p. 16th largest bank in the country. -8.9% 10.8% 83.5% 65.2% 4.2% 8.4% 7.9% -9.4% 5.0% 0.2 p.p. 0.1 p.p. 2.0 p.p. 0.2 p.p. Contribution to NLB Group Figure 46: Contribution to NLB Group 2% 6% 3% NPL volume NPL ratio (internal def.: NPL/Total loans) Market share by total assets(ii) 9,489 1.5% 1.6% 8,718 1.4% 1.9% 8.8% 0.1 p.p. -0.2 p.p. LTD 113.8% 95.1% 18.7 p.p. Banking services provided through: (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. (ii) Data for 2021 as at 30 September 2021. The bank realised a profit after tax in the amount of EUR 4.3 million (2020: EUR 2.6 million) and profit before impairments and provisions in the amount of EUR 8.1 million (2020: EUR 6.3 million). ROE a.t. was 5.5% (2020: 3.5%), while CIR decreased to 73.1% (2020: 76.4%). The result was mainly driven by the increase in business volume. The total assets 28 branches 63 ATMs Result b.t. Net interest income Net non-interest income of the bank rose by 4%, the main factor being new loan production. NPL ratio increased to 1.5% (2020: 1.4%). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 76 Corporate banking As a part of the integration strategy for Serbia, large company production has been moved from NLB Banka, Beograd to Komercijalna Banka, Beograd, to benefit from the larger capital base and lower cost of funding, which finally resulted in the decline in overall gross loans (-1.4%) in NLB Banka, Beograd. Thus, the corporate portfolio was driven mainly by production in SME segment, which was on a satisfactory level. In addition, in the integration process it has been decided to move corporate sales force and production completely to Komercijalna Banka, Beograd at the beginning of 2022 (including the micro and agro segments in retail), which was one of the major organisational initiatives impacting the corporate team at the end of 2021. Deposit volumes also declined during the year (-3.1%), driven on one side by the transfer of large corporates to Komercijalna Banka, Beograd, while on the other side there was one additional major impact coming from a synergy initiative between both banks enabling NLB Banka, Beograd to offer loans at higher pricing compared to the cost of deposits NLB Banka, Beograd paid on the market. Due to this, NLB Banka, Beograd was in the position to gradually release expensive deposits, which resulted in a decline of deposit volumes. EUR 4.9 million result b.t. 1.6% market share in total assets. Business performance Retail banking Retail banking recorded double-digit growth in gross loans (22.3%), while deposits declined by 13.8% compared to 2020. Retail deposits were mainly in EUR. In 2021, the retail loan portfolio was dominated by consumer loans (62.4% of gross retail loans), while housing loans occupied 36.1% of gross retail loans. The retail loan portfolio is driven by cash loans (RSD) with still attractive interest rates (below 7.6%). The interest margin on cash loans was high, but under significant pressure coming from competition and falling interest rates in RSD and increasing dinarisation12 in general. In 2021, the bank put more efforts on housing loans and achieved a significant 55% YoY growth in this segment, where the market is very active and competitive with banks were offering interesting products at attractive prices. Figure 47: 3-year market share evolution(i) 1.9% 1.8% 2.0% 1.8% 2.0% 2.0% 1.9% 1.9% 2.2% 1.8% 1.6% 1.4% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 31 Dec 2019 31 Dec 2020 31 Dec 2021 Market share by total assets Market share in loans to corporate Market share in loans to individuals Market share in deposits from customers (i) Market share data for 2021 as at 30 September 2021. 12 Dinarisation – Strategy of Dinarisation of the Serbian Financial System as per Memorandum, signed between National Bank of Serbia (NBS) and the Government of the Republic of Serbia, expected to be implemented in 2022. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 77 NLB Banka, Skopje Macroeconomic Snapshot In North Macedonia, economic growth slowed considerably On its local market, the bank is in the group of systemically in Q3 as the base effect faded. Growth in private consumption important banks. The predominant strength of the bank is and investment decelerated, while the external sector the retail segment. However, the bank provides a full range supported economic activity. In Q4 2021, growth in retail of financial services to retail and corporate clients. Having sales eased as inflation further increased, at the same time a continuous progress in digitalization, the bank achieved as industrial production figures imply stronger private sector in 2021 great success in this field, being the first bank in dynamics. the country by introducing e-identification, upgrading, and adjusting the mKlik application for visually impaired clients and by opening a new, completely digital branch, offering cashless services. The position of a market leader in bancassurance was once again confirmed by expanding the offer, introducing voluntary private health insurance and a new unique life insurance product in cooperation with partner insurance company. Besides this, the bank introduced assets management products for clients, the sale and trading of shares and funds for individuals and legal entities in cooperation with an asset management and investment services company. Figure 48: GDP growth, Inflation, Unemployment GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 7.0 3.5 0.0 -3.5 -7.0 8.0 6.0 4.0 2.0 0.0 17.0 15.0 13.0 11.0 2020 2021 2022 2020 2021 2022 2020 2021 2022 Outlook GDP should record a solid expansion in 2022 on the back of private consumption. This should be the main growth driver of the firming domestic demand, while foreign demand should also be supportive of the activity. Pandemic-related uncertainty, high energy prices, and prolonged disruption of supply chains represent the main downside risks to the outlook. Economic implications of the war in Ukraine represent an additional downside risk to the outlook. Contribution to NLB Group Figure 49: Contribution to NLB Group 17% 13% 7% Result b.t. Net interest income Net non-interest income Banking services provided through: 48 branches 170 ATMs 3rd largest bank in the country. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 78 Financial performance Table 20: Key performance indicators of NLB Banka. Skopje(i) provisions and higher collected written-off receivables. The total rated clients, who secured the long-term stability of the assets of the bank rose by 12%, with a 12% growth in gross loans portfolio and stable revenue generation. The bank approved to customers, and a 9% growth in deposits from customers. The total of EUR 55 million in project financing, out of which NPL ratio amounted to 4.3% (2020: 5.1%). almost EUR 20 million was approved solely for green energy in EUR thousand 2021 2020 Change YoY Business performance Key performance indicators Net interest income 50,386 48,140 4.7% Net non-interest income 18,043 14,518 24.3% Retail banking Retail banking recorded a significant growth in gross loans investments, while also providing syndicated financing for several large clients. The bank has successfully concluded the internationally financed syndicated facility for the shopping mall in Skopje, opened and operational since October 2021, as one of the most important projects for the bank and the Group. The project totalling EUR 72 million, was supported with participation of five banks – three local banks and two Total costs -28,619 -26,497 -8.0% (12%) substantially over the market average growth, driven by international banks. Impairments and provisions 3,244 -15,373 - Result before tax 43,054 20,788 107.1% the growth in housing loans (17.5%) and in the deposit base (9%). The retail loan portfolio was dominated by consumer loans (54.4% of gross retail loans), while housing loans Result after tax 39,000 19,222 102.9% occupied 37.5% of gross retail loans. The interest margin MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Financial position statement indicators Total assets 1,770,587 1,585,652 Net loans to customers 1,084,075 956,931 Gross loans to customers 1,144,420 1,021,276 Deposits from customers 1,399,501 1,288,824 Equity 243,267 229,777 Key financial indicators 11.7% 13.3% 12.1% 8.6% 5.9% Total capital ratio 18.0% 15.7% 2.3 p.p. Net interest margin ROE a.t. ROA a.t. CIR 3.1% 15.9% 2.4% 3.3% 8.8% 1.3% -0.2 p.p. 7.1 p.p. 1.1 p.p. 41.8% 42.3% -0.5 p.p. NPL volume 59,728 63,177 -5.5% NPL ratio (internal def.: NPL/Total loans) 4.3% 5.1% -0.8 p.p. Market share by total assets 16.9% 16.5% 0.4 p.p. LTD 77.5% 74.2% 3.2 p.p. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. The bank realised a profit after tax in the amount of EUR 39.0 million (2020: EUR 19.2 million), and profit before impairments and provisions in the amount of EUR 39.8 million (2020: EUR in the retail segment is still high, but under strong pressure from competition and expansive monetary policy. The key drivers of income growth were domestic and foreign payment operations, account management, and card operations. Figure 50: 3-year market share evolution 20.5% 17.3% 16.0% 14.4% 20.8% 18.0% 16.5% 14.2% 21.6% 18.1% 16.9% 14.9% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 31 Dec 2019 31 Dec 2020 31 Dec 2021 Market share by total assets Market share in loans to corporate Market share in loans to individuals Market share in deposits from customers Corporate banking The upward trend in the corporate segment which started in May, resulted in a 12% growth in gross loans at the 2021 YE. Corporate deposits noted a growth of 8%. The key drivers of income growth were long-term loans, investment, loans for working capital and the liquidity needs of the companies, as well as domestic and foreign payment operations and 36.2 million). This very good result in the first post COVID-19 year account management. reflected in ROE a.t., which increased to 15.9% (2020: 8.8%), and CIR, which decreased to 41.8% (2020: 42.3%). TCR increased to As at 31 December 2021, the bank had a market share of 14.9% 18.0% (2020: 15.7%). The result was driven mostly by retail lending, in corporate gross loans. The bank increased the portfolio, payment services, and additionally by lower impairments and especially in the segment of long-term financing to high- 16.9% market share in total assets. EUR 43.1 million result b.t. Contents 79 NLB Banka, Banja Luka The bank in 2021 celebrated its 25th anniversary. The predominant strength of the bank is its market position in Macroeconomic Snapshot In BiH, the economy expanded at a softer pace in Q3, partly due to a less favourable base effect. Private consumption recorded the largest slowdown in growth rate amid rising the corporate and retail segments, and a very strong deposit inflation. Higher growth in public and capital spending base. The bank introduced new banking solutions and propelled the domestic economy. In Q4, a further rise in products for clients largely contributing to a high share of net consumer prices and pandemic-related restrictions further non-interest income (37.7% of fee and commissions income in weighed on private consumption. net income). Figure 51: GDP growth, Inflation, Unemployment GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 6.0 3.0 0.0 -3.0 -6.0 6.0 4.0 2.0 0.0 -2.0 16.0 14.0 12.0 10.0 2020 2021 2022 2020 2021 2022 2020 2021 2022 Outlook The economy is expected to record a solid growth in 2022, supported by higher capital and public spending while the relaxation of restrictive pandemic-related measures at home and abroad should further bolster economic activity. Pandemic-related uncertainty, slower recovery in export markets, and political tensions represent the downside risks to the outlook. Additional downside risk to the outlook has arisen due to the war in Ukraine. Contribution to NLB Group Figure 52: Contribution to NLB Group 7% 5% 5% Result b.t. Net interest income Net non-interest income Banking services provided through: 47 branches 71 ATMs 2nd largest bank in the Republic of Srpska. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 80 Financial performance Table 21: Key performance indicators of NLB Banka, Banja Luka(i) released impairments and provisions as a result of successful row, which also effected the loan portfolio in this segment. NPL management. Net non-interest income represents 39.5% The Banking Agency of Republic of Srpska (BARS) maintains of total income, the highest among NLB Group banking reliefs, moratoriums, and grace periods for clients directly and subsidiaries. The total assets of the bank rose by 16%, with indirectly affected by the negative effects from the pandemic. in EUR thousand a 9% growth in net loans to customers, predominantly to 2021 2020 Change YoY individuals, and a 20% growth in deposits from customers, respectively. The NPL ratio decreased to 1.3% (2020: 2.3%). Key performance indicators Net interest income 20,087 18,589 Net non-interest income 13,128 11,477 Total costs -15,182 -13,874 Impairments and provisions 1,379 -5,009 Result before tax Result after tax 19,412 18,180 11,183 10,122 Financial position statement indicators 8.1% 14.4% -9.4% - 73.6% 79.6% Total assets 927,152 796,486 16.4% Net loans to customers 471,144 430,713 Gross loans to customers 488,672 450,708 9.4% 8.4% Business performance Retail banking Retail banking recorded double digit growth in gross loans (14%) and deposits (10%). The retail loan portfolio was dominated by housing loans (51.9% of gross retail loans), while consumer loans participated with 43.5% of gross retail loans. Growth in gross retail loans was recorded, mainly due to growth in consumer loans (8%) and housing loans (13%). The key drivers of income growth were new loan production and card operations. Deposits from customers 759,915 633,507 20.0% The focus remains in further growth of retail portfolio, with Equity 97,149 99,872 -2.7% special emphasis on introducing additional services for Key financial indicators customers, especially in the field of digitalisation. Total capital ratio 16.9% 17.3% -0.5 p.p. Figure 53: 3-year market share evolution Net interest margin 2.4% 2.5% -0.1 p.p. ROE a.t. ROA a.t. CIR 17.0% 10.8% 6.2 p.p. 2.1% 1.3% 0.8 p.p. 45.7% 46.1% -0.4 p.p. NPL volume 9,371 13,703 -31.6% NPL ratio (internal def.: NPL/Total loans) 1.3% 2.3% -1.0 p.p. Market share by total assets 19.1% 18.6% 0.4 p.p. LTD 62.0% 68.0% -6.0 p.p. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 20.1% 18.8% 16.4% 14.8% 18.6% 20.1% 17.5% 13.8% 20.4% 19.1% 18.4%% 14.3% 31 Dec 2019 31 Dec 2020 31 Dec 2021 Market share by total assets Market share in loans to corporate Market share in loans to individuals Market share in deposits from customers The bank realised a profit after tax in the amount of EUR 18.2 million (2020: EUR 10.1 million), and profit before impairments and provisions in the amount of EUR 18.0 million (2020: EUR Corporate banking Corporate banking recorded a growth in deposits (22%), 16.2 million). ROE a.t. was 17.0% (2020: 10.8%) and CIR dropped as well as in gross loans to corporate (3%). The pandemic to 45.7% (2020: 46.1%). TCR also dropped to 16.9% (2020: situation had a huge influence in reducing the demand for 17.3%). The main drivers of the result were higher income and investments and new projects for the second year in the 19.1% market share in total assets. EUR 19.4 million result b.t. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 81 Komercijalna Banka, Banja Luka The sale process of Komercijalna Banka, Banja Luka was concluded on 9 December 2021, therefore after that date the bank was no longer part of NLB Group. Until 9 December 2021 Komercijalna Banka, Banja Luka was part of the core segment, one of the stand-alone member banks of the Group, therefore the key performance indicators of the bank for 2021 are represented in the table below. Table 22: Key performance indicators of Komercijalna Banka, Banja Luka(i) in EUR thousand Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax 2021 4,885 1,655 -5,393 -607 540 495 (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. For year 2020 comparable data are not available. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 82 NLB Banka, Sarajevo Macroeconomic Snapshot In BiH, the economy expanded at a softer pace in Q3, partly The predominant strength of the bank is in consumer lending due to a less favourable base effect. Private consumption and the development of innovative retail products largely recorded the largest slowdown in growth rate amid rising contributing to a high share of net non-interest income (33% inflation. Higher growth in public and capital spending of fee and commission income in net income). Improving propelled the domestic economy. In Q4, a further rise in customer experience was achieved with the introduction of consumer prices and pandemic-related restrictions further new digital products and robotic process automation (RPA) weighed on private consumption. solutions. Figure 54: GDP growth, Inflation, Unemployment GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 6.0 3.0 0.0 -3.0 -6.0 6.0 4.0 2.0 0.0 -2.0 16.0 14.0 12.0 10.0 2020 2021 2022 2020 2021 2022 2020 2021 2022 Outlook The economy is expected to record a solid growth in 2022, supported by higher capital and public spending while relaxation of restrictive pandemic-related measures at home and abroad should further bolster economic activity. Pandemic-related uncertainty, slower recovery in export markets, and political tensions represent the downside risks to the outlook. Additional downside risk to the outlook has arisen due to the war in Ukraine. Contribution to NLB Group Figure 55: Contribution to NLB Group 4% 4% 4% Result b.t. Net interest income Net non-interest income Banking services provided through: 36 branches 84 ATMs 7th largest bank in the Federation of BiH. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 83 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Financial performance Table 23: Key performance indicators of NLB Banka. Sarajevo(i) ROE a.t. increased to 10.7% (2020: 7.0%), and CIR increased to 57.7% (2020: 56.5%). Net interest income was at the same level as in 2020, while net interest margin dropped to 2.8% (2020: 2.9%). Net non-interest income was higher than previous year, in EUR thousand mainly due to higher net income from financial operations. 2021 2020 Change YoY The bank intensified activities on less risky products such as trade finance and with good results compensated missing Corporate banking The corporate banking segment recorded a growth in gross loans (14%) and deposits (9%). Focus was on increasing the client loan portfolio with acquisition of new creditworthy clients. Also, a positive trend was in the volume of guarantees portfolio, mainly due to the introduction of a new product Key performance indicators Net interest income Net non-interest income Total costs 17,795 10,256 -16,183 17,826 8,902 -15,113 Impairments and provisions -920 -5,063 Result before tax Result after tax 10,948 10,012 6,552 5,895 Financial position statement indicators Total assets 727,860 647,150 Net loans to customers 452,977 399,146 Gross loans to customers 473,118 420,274 Deposits from customers 593,026 521,639 Equity 87,838 89,808 Key financial indicators -0.2% 15.2% -7.1% 81.8% 67.1% 69.8% 12.5% 13.5% 12.6% 13.7% -2.2% Total capital ratio 16.9% 17.9% -1.1 p.p. Net interest margin ROE a.t. ROA a.t. CIR 2.8% 10.7% 1.5% 2.9% 7.0% 0.9% -0.2 p.p. 3.7 p.p. 0.6 p.p. 57.7% 56.5% 1.1 p.p. NPL volume 19,046 24,691 -22.9% NPL ratio (internal def.: NPL/Total loans) 3.1% Market share by total assets(ii) 5.4% 4.5% 5.2% -1.4 p.p. 0.2 p.p. LTD 76.4% 76.5% -0.1 p.p. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. (ii) Data for 2021 as at 30 September 2021. The bank realised a profit after tax in the amount of EUR 10.0 million (2020: EUR 5.9 million), and profit before impairments and provisions in the amount of EUR 11.9 million (2020: EUR 11.6 million). The higher profit was the result of higher net non- interest income. TCR stood at 16.9% and was above the ‘Guarantee Line.’ regulatory required minimum. Total assets of the bank rose by 12%, with 13% growth in net loans and 14% growth in deposits. The NPL ratio decreased to 3.1% (2020: 4.5%). Business performance Retail banking Retail banking recorded growth in gross loans (12%) and deposits (8%). Growth in gross retail loans was driven by growth of housing and consumer loans. Significant growth of housing loans of 41% was the result of increased demand, many campaigns and increased engagement of employees. The share of housing loans in total retail loans increased by 4 p.p., to 20.5%. The average interest rate in the retail segment is decreasing (2021: 5.73%; 2020: 6.26%). The bank continued with activities aimed to increase the active number of e- and m-banking users; the number of active users for e- and m-Bank in 2021 increased by 60%, and the number of transactions by 72%. Figure 56: 3-year market share evolution(i) Deposits from corporates increased. In December, the bank introduced a fee for vista deposits above EUR 0.3 million for legal entities, with the exception of the government and public enterprises. The aim was to reduce the concentration of a vista corporate deposits. 13 5.4% market share in total assets. 6.1% 5.3% 5.3% 5.1% 6.3% 5.2% 5.2% 6.6% 5.5% 5.4% 5.0% 5.4% 13 Data for 2021 as at 30 September 2021. 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 31 Dec 2019 31 Dec 2020 31 Dec 2021 Market share by total assets Market share in loans to corporate Market share in loans to individuals Market share in deposits from customers interest income and release of impairments and provisions. (i) Market share data for 2021 as at 30 September 2021. EUR 10.9 million result b.t. Contents 84 NLB Banka, Prishtina Macroeconomic Snapshot In Kosovo, the pace of economic expansion softened in Q3, On its market, the bank is the market leader and had above although it remained strong. The deceleration reflected average growth in 2021. The predominant strength of the bank softer domestic demand with private and public consumption is in providing a full spectrum of financial services to retail and increasing at a slower pace. Exports of goods and services corporate clients, and being a market leader in innovations propelled the economy in Q3. In Q4, domestic demand on the local banking sector. A noticeable boost has been seems to have cooled amid rising inflation and falling observed in e-banking usage resulting in an increased remittances inflows. Nevertheless, in 2021 remittances inflows number of e-banking users by 17.8%. largely surpassed pre-pandemic levels, thus representing a considerable domestic demand aid. Diaspora inflows were in general a significant driver of the economic growth, especially when pandemic-related restrictive measures were eased. Figure 57: GDP growth, Inflation, Unemployment GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 12.0 6.0 0.0 -6.0 8.0 6.0 4.0 2.0 0.0 26.0 24.0 22.0 20.0 2020 2021 2022 2020 2021 2022 2020 2021 2022 Outlook The economy should record a robust although cooled-down economic growth in 2022 due to the lower base effect. Firming capital expenditure growth and a tighter labour market are seen supporting activity, assisted by the beneficial effect of healthier external backdrop. Pandemic-related uncertainty and lingering political uncertainty are downside risks to the outlook. The war in Ukraine and its overall economic implication represents additional downside risks to the outlook. Contribution to NLB Group Figure 58: Contribution to NLB Group 10% 9% 3% Result b.t. Net interest income Net non-interest income Banking services provided through: 33 branches 99 ATMs 2nd largest bank in the country. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 85 Financial performance Table 24: Key performance indicators of NLB Banka, Prishtina(i) to 17.3% (2020: 17.8%) due to dividend payout. The result was The bank offered fast, safe, and reliable execution of mainly driven by the increase of the business volumes. The payments, and competitive pricing led to an increased total assets of the bank rose by 6%, the main factors were number of payments contributing to the non-interest income the amount of net loans to customers and deposits from growth. Cooperation on the Group level resulted in the in EUR thousand customers. The NPL ratio decreased to 1.9% (2020: 2.3%). financing of the construction of a major locally recognised 2021 2020 Change YoY Key performance indicators Net interest income 34,459 32,286 Net non-interest income 7,374 6,392 6.7% 15.4% Total costs -13,546 -12,289 -10.2% Impairments and provisions -1,064 -11,345 90.6% Result before tax 27,223 15,044 Result after tax 24,436 13,334 Financial position statement indicators Total assets 930,545 879,064 Net loans to customers 634,529 559,223 Gross loans to customers 672,376 596,076 Deposits from customers 798,790 748,315 Equity 98,856 98,335 Key financial indicators 81.0% 83.3% 5.9% 13.5% 12.8% 6.7% 0.5% Total capital ratio 17.3% 17.8% -0.5 p.p. Net interest margin 3.8% 3.9% -0.1 p.p. ROE a.t. ROA a.t. CIR 22.4% 14.5% 8.0 p.p. 2.7% 1.6% 1.1 p.p. 32.4% 31.8% 0.6 p.p. NPL volume 15,614 17,519 -10.9% NPL ratio (internal def.: NPL/Total loans) 1.9% 2.3% -0.3 p.p. Market share by total assets 16.3% 17.2% -0.9 p.p. LTD 79.4% 74.7% 4.7 p.p. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. The financial result of the bank remained solid, although Business performance Retail banking In 2021, the bank recorded growth in gross loans (17%) and deposits (12%). The retail loan portfolio was dominated by housing loans (70.7% of gross retail loans), while consumer loans occupied 26.3% of gross retail loans. Growth in gross retail loans was recorded, mainly due to the increased volume of housing loans (21% growth). The key drivers of income growth were housing loans. The growth in retail was mainly driven by several partnership agreements with construction and trade companies to finance its products. New m-Klik features were also introduced. Figure 59: 3-year market share evolution 18.8% 18.3% 17.9% 17.6% 19.5% 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% 16.0% 15.5% 15.0% 18.9% 18.7% 17.5% 17.4% 17.2% 16.9% 16.7% 16.3% 31 Dec 2019 31 Dec 2020 31 Dec 2021 Market share by total assets Market share in loans to corporate Market share in loans to individuals Market share in deposits from customers Corporate banking Corporate banking recorded growth in gross loans (10%), influenced by COVID-19. The net profit amounted to EUR which was mainly due to the cross-selling of products through 24.4 million (2020: EUR 13.3 million), while the profit before existing corporate clients targeting new retail and SME clients impairments and provisions increased to EUR 28.3 million as well. A discouraging approach on deposits was reflected (2020: EUR 26.4 million). ROE a.t. was 22.4% (2020: 14.5%), while in a 7% decrease compared to 2020 YE. The key drivers of CIR minimally increased to 32.4% (2020: 31.8%). TCR decreased income growth were loans for fixed assets and overdrafts. project contributing largely to clean energy production from renewable sources. 16.3%market share in total assets. EUR 27.2 million result b.t. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 86 NLB Banka, Podgorica Macroeconomic Snapshot In Montenegro, the economy accelerated in Q3 due to robust On 12 November 2021, the merger of NLB Banka, Podgorica public consumption and surging export growth as the tourism and Komercijalna Banka, Podgorica was completed and the sector fared well. In Q4, industrial output growth gained some bank continues to operate under the franchise of NLB Banka, steam, while the tourism sector continued to record strong Podgorica. On its local market, the bank is categorised as one increases in arrivals. Rising inflation resulted in eased retail of the systemically important banks. The merged bank (NLB sales. Banka, Podgorica) is the second largest financial institution in Montenegro. As the first positive effect of the merger, NLB Klik, web and e-banking app are offering new and upgraded functionalities to the clients. The predominant strength of the bank is seen in the segment of retail housing and consumer loans, where the bank is an important player on the local market. It achieved the highest housing loans growth in 2021 amongst all banking members. The year was marked by several campaigns promoting digital channels, with a focus on cards, packages, and NLB Pay. Also, expanding the number of partners, the ‘NLB Loan on the spot’ campaign continued. After implementing the new payment service SWIFT GPI, the bank became the only bank in Montenegro connected to the SWIFT GPI platform with the aim of improving SWIFT payments for both banks and clients, providing faster implementation, transparency of transaction costs, and real-time transaction status information. Figure 60: GDP growth, Inflation, Unemployment GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 16.0 8.0 0.0 -8.0 -16.0 6.0 4.0 2.0 0.0 -2.0 18.0 16.0 14.0 12.0 2020 2021 2022 2020 2021 2022 2020 2021 2022 Outlook The economic growth is expected to ease in 2022 due to a fading base effect. Further growth in the tourism sector should propel the economy to recover towards the pre-pandemic level with the easing of pandemic-related restrictions also supporting domestic and foreign demand. The key downside risk to the outlook is related to the pandemic-uncertainty and its effect on the tourism sector due to Montenegrin economy’s considerable dependence on this sector of the economy. The war in Ukraine has emerged as an additional negative risk to the outlook. Contribution to NLB Group Figure 61: Contribution to NLB Group 4% 5% 2% Result b.t. Net interest income Net non-interest income Banking services provided through: 22 branches 65 ATMs 2nd largest bank in the country. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 87 Financial performance Table 25: Key performance indicators of NLB Banka, Podgorica(i) The result was driven by the double-digit growth of the loan portfolio to individuals being the main net interest income driver. The total assets increased by 40%, mainly due to merger. In 2021, mainly due to the merger, the bank increased in EUR thousand the volume of new NPL. The NPL ratio increased to 7.0% 2021 2020 Change YoY (2020: 5.8%). Business performance Corporate banking Corporate banking segment recorded growth in gross loans (42%) and deposits (36%) due to merger effect. The loan portfolio predominantly consisted of large corporates portfolio, which increased by 40% YoY. The growth in gross loans was recorded mainly due to merger effect and an increase of SME loans and used overdrafts by 47%. The increase in overall interest income in corporate segment comes from increase in volumes. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Key performance indicators Net interest income 21,953 20,598 6.6% Net non-interest income 6,161 3,741 64.7% Total costs -17,351 -13,622 -27.4% Impairments and provisions 613 -8,887 Result before tax Result after tax 11,376 10,050 1,830 1,387 Financial position statement indicators Total assets 751,351 537,629 Net loans to customers 491,579 367,168 Gross loans to customers 514,308 386,525 Deposits from customers 609,792 431,657 Equity 92,643 68,556 Key financial indicators - - - 39.8% 33.9% 33.1% 41.3% 35.1% Total capital ratio 16.3% 16.2% 0.1 p.p. Net interest margin ROE a.t. ROA a.t. CIR 4.0% 13.1% 1.7% 4.1% 2.0% 0.3% -0.1 p.p. 11.1 p.p. 1.4 p.p. 61.7% 56.0% 5.7 p.p. NPL volume 42,166 27,280 54.6% NPL ratio (internal def.: NPL/Total loans) 7.0% 5.8% 1.2 p.p. Market share by total assets 14.1% 11.7% 2.4 p.p. LTD 80.6% 85.1% -4.4 p.p. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. The bank realised profit after tax in the amount of EUR 10.1 million (2020: EUR 1.4 million) and profit before impairments and provisions in the amount of EUR 10.8 million (2020: EUR 10.7 million). Compared to previous year, positive development is visible in the segment of net impairments and provisions cost. ROE a.t. increased to 13.1% (2020: 2.0%), while CIR increased to 61.7% (2020: 56.0%). TCR was slightly higher compared to last year and reached 16.3% (2020: 16.2%). Retail banking Retail banking recorded growth in gross loans (30%) and deposits (41%) mainly due to merger effect, and the positive During 2021, a credit line from the EBRD was launched for the purpose of implementing the project ‘Women in Business’ (WiB), which aims to support women in business and their effect of the tourist season in July and August. A major part of business. the retail loan portfolio was dominated by housing loans (60% of gross retail loans), while consumer loans occupied 40% of gross retail loans. Growth in gross retail loans was recorded mainly by increase in housing loans volume by 36%, whereas consumer loans grew by 23%, boosted by the merger and Q4 campaign period. The bank expanded its offer to citizens by launching the bancassurance product, thus enabling the clients to buy online quickly, easily, cheaply, and completely safely, accident and property insurance policies. The bank offered a cash loan to individuals in the maximum amount of EUR 25,000 for up to 10 years and in this way offered the market a cash loan with the largest amount and the longest repayment period. In a joint project, the bank and Mastercard provided the first self- service payment terminal in Montenegro. Figure 62: 3-year market share evolution 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 16.9% 12.6% 11.9% 8.3% 18.1% 12.8% 11.7% 8.7% 22.9% 14.5% 14.1% 11.9% 31 Dec 2019 31 Dec 2020 31 Dec 2021 Market share by total assets Market share in loans to corporate Market share in loans to individuals Market share in deposits from customers 14.1%market share in total assets. EUR 11.4 million result b.t. Contents 88 Komercijalna Banka, Podgorica On 12 November 2021, the merger of Komercijalna Banka, Podgorica with NLB Banka, Podgorica was completed. Until 12 November 2021 Komercijalna Banka, Podgorica was part of the core segment, one of the standalone member banks of the Group, so, the key performance indicators of the bank for 2021 are represented in the below table. Table 26: Key performance indicators of Komercijalna Banka, Podgorica(i) in EUR thousand Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax 2021 5,306 537 -6,049 -5,658 -5,864 -5,761 (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. For year 2020 comparable data are not available. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 89 We are always available. Great-grandmothers paid with cash. Grandmothers paid with cheques. Mothers pay digitally. What will the next generation come up with? In order to keep up with the ever faster global changes, we develop solutions with the same features as the modern world: they are fast, efficient, handy and smart. With innovative digital solutions, we ensure that all banking services are available anyplace, anytime, while at the same time we use advanced safety technology to help protect privacy. Financial 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, continuous focus was on prudent liquidity reserves management. Financial performance Table 27: Performance of the Financial Markets in Slovenia segment Net interest income o/w ALM(i) Net non-interest income Total net operating income Total costs Result before impairments and provisions lmpairrrents and provisions Result before tax Balances with Central banks Banking book securities Interest rate on banking book securities Wholesale funding Interest rate on wholesale funding Subordinated liabilities Interest rate on subordinated liabilities MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report in EUR million consolidated Change YoY 2021 26.4 17.1 -2.3 24.1 -8.6 15.5 0.3 15.8 2020 23.5 16.5 16.2 39.6 -7.6 32.0 -1.3 30.8 2.9 0.6 -18.4 -15.5 -1.0 -16.6 1.6 -15.0 31 Dec 2021 31 Dec 2020 Change YoY 2,982.2 2,977.5 0.68% 873.5 -0.46% 288.5 3.70% 1,998.1 2,945.8 0.77% 143.5 0.54% 288.3 3.64% 984.2 31.7 730.0 0.2 -0.09 p.p. -1.00 p.p. 0.06 p.p. 12% 4% - -39% -14% -52% - -49% 49% 1% - 0% Contribution to NLB Group Figure 63: Contribution to NLB Group 6% 6% Result b.t. Net interest income (i) Net interest income from assets and liabilities with the use of FTP. Net interest income Net interest income was EUR 2.9 million (12%) higher YoY, mostly due to the changed FTP policy which partially transferred the costs of placing the excess liquidity from treasury to the retail and corporate segments to de-stimulate the deposit collection. Otherwise, the revenues from treasury activities were YoY lower due to significantly lower reinvestment yields of banking book securities and excess liquidity, additionally reflected in the negative effect from higher placements with the CB at negative interest rates. Net non-interest income Lower net non-interest income, EUR 18.4 million YoY, due to the one-off effect from the sale of debt securities, which positively impacted performance in 2020. Assets increase mostly offset by wholesale funding Increase in balances with CBs (EUR 984.2 million YoY) mostly due to increase in wholesale funding by EUR 730.0 million derived from participation in the ECB‘s liquidity providing operation TLTRO-III (EUR 750 million). Banking book securities registered a minor increase by EUR 31.7 million or 1%. Contents 91 Focus The Group’s liquidity management focuses on ensuring a sufficient level of liquidity reserves to settle all due liabilities, minimising the cost of maintaining liquidity and optimising the structure of liquidity reserves. To ensure an appropriate level of liquidity for different situations, emergencies and crisis conditions are anticipated and therefore described in the liquidity contingency plan. Organisation Liquidity management in the Group is decentralised. Each Group member manages its own liquidity on operational and strategic levels, while Financial Markets in Slovenia manage liquidity of the Bank. 77%government securities in the Group’s banking book portfolio. Figure 64: Banking book securities portfolio of NLB Group by asset class and geographical structure as at 31 December 2021 Business performance Liquidity management The Group’s ALM Focus The purpose of the Group ALM process is to strategically manage the Group’s balance sheet with respect to the interest rate, currency, and liquidity risk considering the macroeconomic environment and financial markets development. Organisation Monitoring and management of the Group’s exposure to market risk is decentralised. Uniform guidelines and limits for each type of risk are set for individual Group member. The exposure of an individual Group member is regularly monitored and reported to the Group ALCO. Balance sheet management From the interest rate risk perspective, the surplus liquidity position of the Group contributed to further growth of fixed interest rate loans, mostly housing loans, and investments in high quality debt securities. In terms of funding, the non- banking sector deposits continued to increase in the form of sight deposits and savings accounts, partly as a result of the increased propensity to save due to the COVID-19 pandemic. The Group manages its 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 N. Macedonia derivatives. 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. Slovenia Serbia Other 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 requirements of regulations governing liquidity. Geographical structure Finland Austria Netherlands Germany Belgium France 3% 3% 4% 4% 4% 7% 7% 13% 0% 5% 10% 24% 30% 15% 20% 25% 30% Asset class distribution Corporate Subodrinated debt Agency GGB 0% 1% 2% 3% Covered bond 7% Senior Unsecured 10% Government sec. 77% 0% 10% 20% 30% 40% 50% 60% 70% 80% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 92 Liquid assets For settling due liabilities, the Group uses its liquid assets, which are comprised of liquidity reserves (see the subchapter Liquidity Position in the chapter Overview of Financial Performance) and other liquid assets. The latter includes funds held on accounts with other banks and money market placements which are according to LCR calculation treated as inflows. Likewise, liquid assets are managed by each Group member on its own. Banking book securities portfolio At year-end, the banking book debt securities portfolio constituted 23.7% of the Group’s total assets. The purpose of the banking book securities is to provide liquidity, along with stabilisation of the interest margin, and interest rate risk management. The portfolio is well diversified from the Characteristics of banking book securities portfolio The average maturity of banking book securities is approximately 3.5 years as at year-end. The average yield achieved in 2021 on the Group’s banking book securities portfolio was 0.68% (2020: 0.77%). Wholesale funding Purpose Wholesale funding activities in the Group are conducted with the aim of achieving diversification, improving structural liquidity and capital position, and fulfilling regulatory requirements, especially ensuring compliance with the MREL geographical, asset class and maturity profile perspective. requirement. From 2020, the Group turned its attention to the new and fast- developing market of ESG bonds. Currently, these bonds have a small share in the whole portfolio (EUR 106.2 million), but it is expected to grow in the future. The Bank was not active on the wholesale market in 2021, but has instead optimized its long-term funding structure with the repayment of certain credit lines. Table 28: Maturity profile of NLB Group’s banking book securities as at 31 December 2021 Domestic securities (the Group strategic markets) - Slovenia - Other SEE International securities Total 2022 489.3 53.3 435.9 498.8 988.0 2023-2024 2025-2026 2027+ 774.4 100.7 673.7 706.3 741.9 172.4 569.5 541.4 498.2 329.4 168.8 810.1 1,480.7 1,283.3 1,308.3 in EUR million Total 2,503.8 655.9 1,847.9 2,556.5 5,060.3 3.5 years average maturity of the Group’s banking book securities portfolio. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 93   Non-Core Members The Non-Core Members segment includes the operations of non-core Group members. 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. Financial performance Table 29: Results of the Non-Core Members segment Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions lmpairrrents 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 Other assets Non-performing loans (gross) Result before tax The segment recorded EUR 1.3 million profit before tax. The higher net non-interest income was achieved also due to the positive effect attributable to the segment from the settlement of a legal dispute (EUR 0.4 million). Total assets decreased A decrease of the total assets of the segment YoY (EUR 35.3 million) was in line with the divestment strategy of the non- core segment. EUR 41.1 million reduction of gross loans to customers in 2021. 2021 1.3 5.9 7.2 -11.4 -4.1 5.4 1.3 2020 1.2 4.2 5.4 -12.9 -7.4 2.9 -4.6 0.1 1.6 1.8 1.5 3.3 2.5 5.8 31 Dec 2021 31 Dec 2020 Change YoY 95.9 24.3 53.9 65.6 6.0 45.0 131.2 45.0 95.0 70.2 16.0 71.3 -35.3 -20.7 -41.1 -4.6 -10.0 -26.3 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report in EUR million consolidated Change YoY 11% 39% 33% 12% 44% 89% - -27% -46% -43% -7% -63% -37% Contents 94 Business performance Active management of real estate assets Divestment process The divestment process of still remaining NPL exposures at the Bank or at the non-core subsidiaries’ level is being facilitated through a specialised team for repossessing, managing, and divesting collateral real estate. Real estate expertise and services are offered to the Group members assisting them in implementation of the most efficient divestment manner of the remaining non-performing portfolio or the repossession of the collateral real-estates. Value-preserving strategies The main task is to ensure value-preserving strategies for the real estate management, respectively the collateral value of NPL claims by either temporarily repossessing real-estate or ensuring a value-preserving divestment process of the real- estate or a claim. From 2015 to 2021, real-estate transactions with a total sales value of EUR 193.8 million were executed or supported, and directly or indirectly contributed to a EUR 622.6 million of NPL reduction, of which EUR 122.5 million in 2021 alone. EUR 25.1 million the total sales value of real-estate transactions executed or supported by the real-estate team in 2021. The wind-down of the Non-Core segment in 2021 included: • Divestment of non-core Group members • Sale of the Bank’s equity participations • Active management of real-estate assets Divestment of non-core Group members Liquidation process A liquidation process was initiated in all non-core leasing and trade finance subsidiaries and some real estate subsidiaries. In 2021, the liquidation processes of BH-RE d.o.o. Sarajevo and Prvi faktor d.o.o. Sarajevo were completed, and the companies were deleted from the court register. The divestment process has been running with thoughtful cost management and well-established collection procedures. Decrease of non-core portfolio 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-core subsidiaries’ portfolio remains ongoing through regular repayments and collection measures. Sale of NLB’s equity participations Numbers At the 2021 YE, the overall asset volume of equity participations is at EUR 0.20 million (2020: EUR 0.28 million). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 95 making, steering, and mitigation processes and the competence centre for seven banking subsidiaries. within the Group, with the aim of proactively supporting its business operations. The Group Figure 65: Risk profile of NLB Group as at 31 December 2021 Risk Management The self-funded model, strong liquidity, and a solid capital position continued in 2021, 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- is engaged in contributing to sustainable finance by incorporating environmental, social, and governance risks into its business strategies, risk management framework, and internal governance arrangements. -41 bps negative Cost of risk on Group level. The Group has a well-diversified business model. In other non-financial risks are less important from materiality accordance with its strategic orientations, it intends to be a perspective. The Group integrates and manages ESG risks sustainably profitable, predominantly working with clients on within the aforementioned types of risks, namely credit and its core markets, providing innovative but simple customer- operational risk, as part of its risk management framework. oriented solutions, and actively contributing to a more Liquidity risk tolerance is low. The Group must maintain an balanced and inclusive economic and social system. Efficient appropriate level of liquidity at all times, and also pursue an managing of risks and capital is crucial for the Group to appropriate structure of the sources of financing. sustain long-term profitable operations. Risk Management in the Group is in charge of managing, assessing, and monitoring risks within the Bank as the main entity in Slovenia, Table 30: NLB Group’s Key Risk Appetite indicators (KRIs) KRIs TCR CET1 ratio LCR NSFR Cost of Risk NPL (EBA def.) NPE (EBA def.) Interest rate risk (EVE) 31 Dec 2021 17.8% 15.5% 252.6% 185.2% -41 bps 3.4% 1.7% -6.4% COVID-19 did not have a meaningful impact on the quality of the credit portfolio. Its impacts caused moderate credit quality deterioration, which resulted in an increase of Stage 2 and Stage 3 exposures. In Q2 2021, a reversal was observed, mainly 63.2% due to successful recovery of on- and off-balance sheet NPLs. Respectively, the Group’s credit portfolio quality remained solid, with stable rating structure and portfolio diversification. Lending growth in the corporate segment remained relatively moderate, while the retail segment, namely mortgage lending, experienced a considerable growth in 2021. The Group is compliant with EBA guidelines on payment moratoria and is very prudent in identifying any increase in credit risk. The vast schemes introduced by the governments in the Group countries providing moratoriums to eligible clients as part of the COVID-19 pandemic measures were 0.8% 2.2% 7.1% 10.4% 13.2% 3.1% Credit risk Concentration risk Credit spread risk Interest rate risk in banking book Operational risk Market risk Business and Strategic risk Based on the Group’s business strategy, credit risk is the phasing out during the 2021. Apart from the moratoria, the dominant risk category, followed by credit spread and Group provided additional liquidity by granting new loans to interest rate risk in the banking book and operational risk. creditworthy clients to help them with the specific situation Management of credit risk focuses on moderate risk-taking, due to the COVID-19 crisis. striving to assure a diversified credit portfolio, adequate credit portfolio quality, the sustainable cost of risk, and optimal The cost of risk was negative (-41 bps) due to very strong return considering the risks assumed. The Group has limited exposure to other aforementioned risks, while market risk and development in NPL resolution and more favourable macroeconomic situation compared to the 2020 YE. The MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 96 Group faced favourable NPL movement due to repayments in the segment of large corporate clients, and other successfully resolved smaller exposures in the region. During the year, the Group reviewed IFRS 9 provisioning by testing a set of relevant macroeconomic scenarios to adequately reflect the current circumstances and the related impacts in the future. The Group established and developed multiple scenarios on the The Bank is, as a systemic bank, involved in the Single Supervisory Mechanism. analysis into the decision-making process at strategic and operating levels, diversification to avoid large concentration, optimal capital usage and allocation, appropriate risk- adjusted pricing, and overall compliance with internal rules Supervision is under the jurisdiction of the Joint Supervisory and regulations. Team of: Risk Management focuses on managing and mitigating level of ECL calculation. ECB BoS risks in line with the Group’s Risk Appetite and Risk Strategy, Though COVID-19 coupled with its implications on the representing the foundation of the Group’s Risk Management framework. Within these frameworks, the Group monitors business environment, the Group faced growing excess ECB regulations are followed by the Group, where the Group a range of risk metrics in order to assure the Group’s risk liquidity and managed to stay well capitalised. The Group subsidiaries operating outside Slovenia are compliant with profile is in line with its Risk Appetite. In addition, the Group is perceived as safe heaven and therefore faced growing the rules set by the local regulators.  Third party equvivalent is constantly enhancing its Risk Management system, where excess liquidity, and impacts of the pandemic did not cause are approved in Serbia, BiH and North Macedonia, resulting consistent incorporation of ICAAP, ILAAP, Recovery plan, any material liquidity outflows. Significant attention was put in alignment of local regulation with CRR rules. and other internal stress-testing capabilities into the Risk into the structure and concentration of liquidity reserves by incorporating early warning systems, while keeping in mind the potential adverse negative market movements. Excess liquidity and market demand for fixed interest rate products resulted in moderate interest rate and credit spread risk exposure, which stayed within the risk appetite tolerance toward this risk. The Group’s liquidity and capital position remained strong in both the Group and banking member levels. In 2021, the Group was included into ECB Stress test exercise. On 30 July, the results of stress tests carried out for important banks by the ECB to assess the resilience of the financial institutions have been disclosed. Under the adverse scenario, CET1 ratio (fully loaded) would fall by maximum 483 bps (published range 300-599 bps) after three years without mitigation measures from the 2020 YE. The Group’s results of adverse depletion were lower than for peer group and SSM sample banks. Besides, the Group’s data quality and accuracy were assessed as above average. Final results of the bottom- up stress test showed that even in a very unfavourable market conditions defined by the EBA and ECB, the Group holds sufficient resilience in terms of capitalisation. The qualitative outcomes were included in the determination of capital requirements by ECB, namely setting Pillar 2 Guidance.14 14 Further information is available in chapter Events After the End of 2021 Financial Year. Across the Group, risks are assessed, monitored, managed, or mitigated in a uniform manner, as defined in the Group’s Risk management standards, also considering the specifics of the markets in which individual Group members operate. Risk Management and control is performed through a clear organisational structure with defined roles and responsibilities. The organisation and delineation of competencies is designed to prevent conflicts of interest, ensure a transparent and documented decision-making process, subject to an appropriate upward and downward flow of information. Business line Risk Management in NLB is, by encompassing several professional areas, in charge of: • formulating and controlling the Group’s Risk Management policies, • setting limits, • overseeing the harmonisation, • regular monitoring of risk exposures and limits based on centralised reporting at the Group level. The Group puts great emphasis on the risk culture and awareness across the entire Group. The Group’s Risk Management framework is forward-looking and tailored to its business model and corresponding risk profile. The main risk principles and limits are set forth by the Group’s Risk Appetite and Risk Strategy, and designed in accordance with business strategy. The Group performs risk identification process on regular basis, as part of the ICAAP and ILAAP frameworks. In this process all topical risks, including ESG related ones, are comprehensively assessed, monitored and mitigated where necessary. Special focus is placed on the inclusion of risk Management system is essential. Moreover, the Group puts great emphasis on their integration into the overall Risk Management system in order to assure proactive support for informed decision-making. Figure 66: NLB Group’s Risk Management framework Business strategy Risk identification Risk Appetite (Limit system) Capital and Financial planning ICAAP & ILAAP inputs ILAAP • Economic and normative assessment of liquidity • Stress tests • Liquidity contingency plan (LCP) ICAAP • Economic and normative assessment of capital • Stress tests Results Recovery plan Assessment of liquidity and capital (significant deterioration) The uniform stress-testing programme, which includes internally developed models, stress scenarios, and sensitivity analysis, was further complemented. In 2021, the Group MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 97 established its own ESG stress testing concept to identify also incorporating normative and economic perspectives Figure 67: NLB Group’s Pillar 2 Requirement evolution the most relevant financial vulnerabilities stemming from as part of the established ICAAP process. As at 31 December climate risk. Such a stress-testing framework is the subject 2021, the Group had a very solid capital position and TCR of a regular internal validation cycle and related procedures of 17.8% (1.2 p.p. higher than at the 2020 YE). The CET1 ratio, where the Group established comprehensive validation representing the capital of highest quality, stood at 15.5% (1.4 framework. Namely, the Group supports a strong validation p.p. YoY increase). governance process and controls over applied selected risk approaches and internal models. The higher Group total capital adequacy compared to the previous year derives from higher capital (increase of The business and operating environment, relevant for EUR 186.8 million YoY, mainly due to inclusion of negative the Group operations is changing, with trends such as goodwill in retained earnings) which compensated the RWA 3.50% 3.50% 3.25% 2.75% 2.75% 2.60% changing customer behaviour, emerging new technologies increase of EUR 58.2 million YoY for the Group. Loan growth 2017 2018 2019 2020 2021 2022(i) and competitors, actively contributing to a more balanced to the corporates and retail and new investments in bonds (i) Applicable as of 1 March 2022. and inclusive economic and social system, and increasing contributed to an increase of RWA for credit risk. On the other new regulatory requirements. It should be noted that Risk hand, the increase was compensated by collateral adequacy MREL requirement forms part of Group’s risk appetite, Management is continuously adapting with the aim of due to third party equivalent, agreements with MIGA, detecting and managing new potential emerging risks. changed investment policy and successful recovery of NPLs. whereby its fulfilment is regularly analysed and monitored. NLB complies all interim targets. More information on MREL is Additionally, the closing trading position of Komercijalna available in the chapter Capital and Capital Adequacy. Proactive Risk Management in 2021 Prudent capital level position and achieved interim MREL targets One of the key aims of Risk Management is to preserve a prudent level of the Group’s capital position. The Group monitors its capital position at the Group and individual subsidiary bank level in accordance with the Risk Appetite, Figure 68: NLB Group’s LCR Banka, Beograd resulted in a decrease in RWA for market risks. RWA for operational risk increased due to higher income of the Group arising from the acquisition of Komercijalna Banka, Beograd. As at 31 December 2021, the Group meets all fully loaded regulatory requirements. Moreover, enhanced overall corporate governance in the recent years led to a lower P2R, which decreased from 3.5% in 2018 to 2.75% applicable in 2021 and 2.60% applicable as of 1 March 2022, while Pillar 2 Guidance remains at low level of 1%. 450% 400% 350% 300% 250% 200% 150% 100% 31 D ec 2 0 2 0 31 Ja n 2 0 21 28 Fe b 2 0 21 31 M ar 2 0 21 3 0 A pr 2 0 21 31 M a y 2 0 21 3 0 Ju n 2 0 21 31 Jul 2 0 21 31 A u g 2 0 21 3 0 S e p 2 0 21 31 O ct 2 0 21 3 0 N ov 2 0 21 31 D ec 2 0 21 LCR NLB Group Maintaining a solid level and structure of liquidity Maintaining a solid level and structure of liquidity represents the next very important risk target. The liquidity position of the Group remained stable, and the impacts of the pandemic did not cause any material liquidity outflows. Strong liquidity position is held at the Group and individual subsidiary bank levels. Group LCR slightly decreased to 252.6% (by 4.9 p.p. YoY), but remained well above the risk appetite limit (130%). The level of the unencumbered eligible liquid reserves remained at a high level, representing 38.3% of total assets. The Group has sufficient liquidity reserves in the form of placements with the ECB, prime debt securities, and money market placements. Even in the event of the combined adverse stress scenario, the Group would survive at least three months under such stress conditions. The core funding base of the Group predominately represents retail customer deposits with very stable and constantly growing base. LTD increased to 60.0% (31 December 2020: 58.8%), remaining at very comfortable level. In June, the Bank participated in the 8. ECB operation, namely TLTRO III and had drawn a credit tranche of EUR 750 million maturing in three years. With TLTRO, the ECB continues to support lending to enterprises and households. The Bank was successful in achieving the lending performance threshold in the special reference period, the positive effect from this transaction will partially compensate the negative outcome from holding liquidity reserves. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 98 Figure 69: NLB Group structure of the credit portfolio(i) (gross loans) by segment (in EUR million) and rating(ii) Institutions 539 State(iii) 4,202 SME 2,881 61% 63% 65% 63% 60% EUR 15.5 billion Corporates 2,298 A Highest quality Retail consumer 2,427 Retail housing 3,195 31 Dec 2018 31 Dec 2019 31 Dec 2020 w/o KB 31 Dec 2020 31 Dec 2021 28% 30% 28% 33% 32% NPLs 4% 3% 3% 4% 3% 3% 2% 2% 2% 1% 4% 2% 2% 2% 1% B C D E Default MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report (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. Maintaining the adequate credit portfolio quality Maintaining the adequate credit portfolio quality is the most important goal, with the focus on cautious risk-taking and quality of new loans leading to a diversified portfolio of customers. The Group is constantly developing a wide 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. The Group is actively present on SEE markets by financing the existing and new creditworthy clients. The Group’s lending strategy focuses on its core markets of retail, SME, and selected corporate business activities within the region and EU. On the Slovenian market, the focus is on providing appropriate solutions for retail, medium-sized companies, and small enterprise segments, whereas on the corporate segment, the Bank established cooperation with selected corporate clients (through different types of lending or investment instruments). 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. Lending growth in the corporate segment remained relatively moderate, while the SME and retail segment experienced a considerable growth in 2021 after a temporary slowdown in 2020 due to COVID-19 circumstances. The current structure of credit portfolio (gross loans) consists of 36.2% retail clients, 14.8% large corporate clients, and 18.5% SMEs and micro companies, while the remainder of the portfolio consists of other liquid assets. The credit portfolio remains well diversified, and 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. The majority of the Group’s loan portfolio is classified as Stage 1 (94.2%), the remaining portfolio as Stage 2 (3.4%), and Stage 3 and FVTPL (2.4%). The portfolio quality remains very stable with increasing Stage 1 exposures and a relatively low percentage of NPLs. The percentage of Stage 1 loan portfolio Proactive risk management in 2021. Contents 99 Table 31: Overview of NLB Group loan portfolio by industry as at 31 December 2021 Corporate sector Retail sector Corporate sector by industry Accommodation and food service activities Administrative and support service activities Agriculture, forestry and fishing Arts, entertainment and recreation Construction industry Education Electricity, gas, steam and air conditioning Finance Human health and social work activities Information and communication Manufacturing Mining and quarrying Professional, scientific and techn. act. Public admin., defence, compulsory social. Real estate activities Services Transport and storage Water supply Wholesale and retail trade Other Total Corporate sector Retail consumer 43% EUR 5.6 billion Retail mortgages 57% Figure 70: NLB Group loan portfolio (measured at amortised cost) by stages as at 31 December 2021 Stage 3 Stage 2 3% 2% FVTPL 0% NLB Group 156.3 108.1 310.7 22.7 434.6 13.3 318.2 120.2 37.9 244.1 1,091.1 50.4 175.4 172.4 251.3 12.0 573.3 43.9 1,043.1 0.5 % 3.0% 2.1% 6.0% 0.4% 8.4% 0.3% 6.1% 2.3% 0.7% 4.7% 21.1% 1.0% 3.4% 3.3% 4.9% 0.2% 11.1% 0.8% 20.1% 0.0% 5,179.5 100.0% in EUR million ∆ 2021 15.1 -13.6 22.0 1.7 60.9 -0.8 60.1 -47.5 -12.1 10.2 105.0 -29.6 3.7 -47.0 29.7 -1.9 -18.8 2.8 120.0 -1.3 258.4 remains almost at the same level as at 2020 YE, i.e., at 95.6% in the Retail segment, while in the Corporate segment, despite to eligible clients as part of the COVID-19 pandemic measures had been phasing out during the 2021. the adverse economic conditions, improved to the level of 87.4%, which is a result of cautious lending policy and As at 31 December 2021, the exposures where COVID-19 successful closure of NPL. moratoria have been granted amounted to EUR 1,681.5 million, representing 10.8% of the Group’s credit portfolio. The COVID-19 did not have a meaningful impact on the quality exposure with remaining COVID-19 moratoria is negligible and of the credit portfolio. The vast schemes introduced by the amounts to EUR 24.8 million, while 98.5% of those moratoria governments in the Group countries providing moratoriums have already expired by 2021 YE. A total of 86.4% of exposure Stage 1 94% Institutions 3% State 29% Corporates 31% Retail 37% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 100 Table 32: NLB Group loan portfolio by stages as at 31 December 2021 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 Total NLB Group 14,638.0 94.2% 1,987.2 532.4 o/w Corporate 4,525.5 87.4% o/w Retail o/w State 5,371.1 95.6% 4,202.4 100.0% o/w Institutions 538.9 100.0% 389.9 591.9 912.3 93.2 412.2 120.2 - - 3.4% 8.0% 2.1% - - -27.6 -14.6 -13.1 - - 371.4 241.7 129.7 - - 2.4% 4.7% 2.3% - - -104.3 -116.8 12.6 - - 70.4 50.6 18.3 1.3 0.2 0.5% 1.1% 0.3% 0.0% 0.0% 34.0 26.6 7.4 - - 6.4% 6.5% 6.2% - - Provisions & FV changes Coverage with provisions and FV changes 212.1 136.0 76.0 - - 57.1% 56.3% 58.6% - - Figure 71: NLB Group Corporate and Retail loan portfolio (valued at amortised cost) by stages Stage 1 by segment (in EUR million) Stage 2 by segment (in EUR million) Stage 3 by segment (in EUR million) +9% YoY 4,526 4,136 3,207 3,170 2,811 +12% YoY 5,371 4,779 3,822 3,936 3,492 -3% YoY 445 367 427 427 412 -10% YoY 133 104 133 133 120 520 -33% YoY 359 324 286 242 +11% YoY 101 87 111 117 130 Corporate Retail Corporate Retail Corporate Retail 31 Dec 2018 31 Dec 2019 31 Dec 2020 w/o KB 31 Dec 2020 31 Dec 2021 with expired moratoria have no delays, while 2.1% had delays exceeding 90 days. The Bank is very prudent in identifying any New NPLs formation and NPL increase in credit risk. management In addition to moratoria, the governments in Serbia and Slovenia provided public guarantee schemes for new financing of clients whose business has been materially impacted due to the COVID-19 pandemic. As at 31 December 2021, these loans amounted to EUR 177.2 million; none of the guarantees have been exercised. At the end of 2020, Komercijalna Banka group was acquired and their NPL were included as an additional NPL formation in net value (based on consolidation rules), which, along with the COVID-19 related circumstances, resulted in the NPL formation of EUR 148 million or 1.1% of the total portfolio. In 2021, NPL formation amounted to EUR 143 million or 0.9% 1.7%NPE (EBA def.) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 101 Figure 72: % of Days past due for expired COVID-19 moratoria in NLB Group 88.9% 86.4% 84.8% 81.8% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 14.1% 11.5% 9.3% 7.4% 2.4% 2.2% 1.6% 2.1% 1.7% 1.5% 2.1% 2.1% NO DELAYS 1-30 DPD 31-90 DPD >90 DPD 30 Sep 2020 31 Dec 2020 30 Sep 2021 31 Dec 2021 of the total portfolio and was influenced by harmonisation portfolio stock continued, mostly due to repayments, collection, process in Komercijalna Banka group. Nevertheless, the sale of claims, and cured clients. The non-performing credit total amount of NPL decreased during 2021. Proactive non- portfolio stock in the Group decreased at 2021 YE in comparison performing management, including successful repayment of with 2020 YE to EUR 367.4 million (2020 YE: EUR 474.7 million). on- and off-balance sheet exposures, and more favourable The combined result of contraction in non-performing credit macroeconomic situation across the region than initially portfolio stock and credit growth of a higher quality portfolio expected, resulted in a negative cost of risk. led to 2.4% of NPLs, while the internationally more comparable Figure 73: NLB Group gross NPL formation (in EUR million) Formation / gross loans (stock) 0.7% 0.7% 0.6% 60 37 21 64 36 16 2 12 56 35 20 1.1% 148 78 60 0.9% 143 80 58 2017 Corporate 2018 2019 2020 SME Retail 10 5 2021 NPE ratio, based on the EBA methodology, stood at 1.7%. The Group’s indicator gross NPL ratio, defined by the EBA, is equal to 3.4% and is below the regulatory defined threshold for establishment of NPL strategy framework. Figure 74: NLB Group NPL, NPL ratio and Coverage ratio 1(i) (in EUR million) 76.1% 77.5% 77.1% 89.2% 86.1% 81.8% 4,000 3,500 3,000 2,500 2,000 1,500 1,299 13.8% 844 9.2% 622 6.9% 1,000 500 0 375 3.8% 475 3.5% 367 2.4% 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 100 90 80 70 60 50 40 30 20 10 0 in case of need, and to efficiently work out exposures with no realistic recovery prospects. This extensive knowledge base is available throughout the Group, and risk units, as well as restructuring and workout teams are properly staffed and have the capacity to deal, if needed, with considerably increased volumes in a professional and efficient manner. An important Group strength is the NPL coverage ratio 1 (coverage of gross NPLs with impairments for all loans), which remains high at 86.1%. Furthermore, the Group’s NPL coverage ratio 2 (coverage of gross NPLs with impairments for NPL) stands at 57.9%, which is well above the EU average as published by the EBA (45.1% for Q3 2021). As such, it enables a further reduction in NPLs without significantly influencing the cost of risk in the coming years. The decrease in coverage indicators at the end of 2020 was influenced by the special treatment of NPLs from the acquired entities. NPLs of Komercijalna Banka group are initially recognised at fair value, without any additional credit loss allowances. The latter is also reflected in the lower coverage ratio CR2 than the NLB Group banks average at the end of 2021 in Komercijalna Banka, Beograd and NLB Banka, Podgorica, which merged with Komercijalna Banka, Podgorica in November 2021. The Group strives to ensure the best possible collateral for long-term loans, namely mortgages in most cases. Thus, the real-estate mortgage is the most frequent form of loan collateral for corporate and retail clients. In the corporate loans, it is followed by government and corporate guarantees. In retail loans, the other most frequent types of loan collateral are loan insurances by insurance companies and guarantors. The Group is following the ECB guidelines to banks on NPLs with regards to the evaluation of collateral. The establishment of market values for collateral for NPLs is by means of individual evaluation when NPL status is established. The value of collateral is then regularly monitored on a yearly level and updated by either independent evaluation (over prescribed threshold) or with the use of statistical re-evaluation for smaller values of NPL. For statistical re-evaluation the indexes from the government agency or other relevant official data sources are 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. In 2021, the multi-year declining trend of the non-performing credit Coverage ratio 1 NPL ratio NPLs used. The value of collateral is with statistical approach always (i) By internal definition. Due to extensive experience gained in the last few years in dealing with clients with financial difficulties, resulting primarily from legacy portfolios, the Group has developed an extensive knowledge base both in the prevention of financial difficulties for clients, to restructure viable clients updated only downwards, never upwards. Only if the individual appraisal shows a higher value of collateral, the upwards re- evaluation would be performed. If the data from statistics would show significant decline in the real estate market, individual evaluations for such types of real estate would be performed and values corrected accordingly. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 102 Table 33: NPL, NPL ratio(i) and Coverage ratio by NLB Group members 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 Total NLB Group banks Total NLB Group (i) By internal definition. NPL 31 Dec 2021 % NPL 31 Dec 2021 NPL CR 1 31 Dec 2021 NPL CR 2 31 Dec 2021 in EUR thousands 130,392.1 59,728.3 42,165.7 19,045.5 15,613.7 9,371.2 9,489.0 36,342.9 322,148.4 367,409.1 1.5% 4.3% 7.0% 3.1% 1.9% 1.3% 1.5% 1.4% 2.0% 2.4% 75.1% 101.2% 54.0% 106.3% 243.2% 189.3% 93.4% 63.5% 89.7% 86.1% 60.6% 64.7% 39.1% 87.6% 91.6% 61.0% 57.6% 21.7% 57.2% 57.9% The Group’s interest rate positions were slightly affected by moratoriums during the year 2021, which were mostly short- term, from 3 to 6 months, and consequently not very material. The Group places excess liquidity mainly into banking book securities with fixed IR, while in current negative interest rate environment there is also higher demand for products with fixed IR. The interest rate exposure to interest rate risk remains modest, within the risk appetite limits. If market interest rates would increase, the net interest income of the Group would be positively affected, whereas if they decreased, negative effects would be lower due to zero floor clauses included in a number of loan contracts. When assessing EVE sensitivity, the Group members apply different scenarios. For most members, the worst-case regulatory scenario is in the case of increase of IR by 200 bps. From the EVE perspective, the estimated capital sensitivity of 200 bps equals -6.4% of the Group’s capital. Robust operational risk management In the area of operational risk management, where the Group has established robust operational risk culture, the main qualitative activities refer to the reporting of loss events and identification, assessment, and management of operational 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. During the year 2021, the position of trading book of Komercijalna Banka, Beograd decreased to the minimum extent. 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. The Group carries its main business activities in euros, and the subsidiary 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 from transactional risk is low, and at less than 1.10% of capital. Regarding structural FX positions on a consolidated level, assets and liabilities held in foreign operations are converted into euro currency at the closing FX rate on the balance sheet date. FX differences of non-euro assets and liabilities are recognised in the other comprehensive income, and therefore affect shareholder’s equity and CET1 capital. Proactive management of interest rate risk in the banking book The Group’s exposure to interest rate risk is moderate and arises mainly from banking book positions. In the recent years, risks. On this basis, constant improvements of control the Group recorded the growth of fixed interest rate loans and activities, processes, and/or organisation are performed. the long-term banking book securities on the assets side, and Besides that, the Group also focuses on proactive mitigation, the transformation of deposits from term to sight as a result of prevention, and minimisation of potential damage. Special the low interest rate environment and excessive liquidity. attention is dedicated to the stress-testing system, based on Figure 75: NLB Group’s EVE evolution -9.0% -8.0% -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% -7.0% -7.2% -7.2% -5.5% -6.1% -6.1% -4.8% -3.7% -8.1% -7.3% -7.1% -7.1% -6.4% 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 Mar 2021 30 Jun 2021 30 Sep 2021 31 Dec 2021 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 103 a scenario analysis referring to the potential high severity, ESG risks do not represent a new risk category, but rather an are prepared to be used in the event of natural disasters, IT low frequency events, and modelling data on loss events. aggravating factor for the existing types of risks. The Group disasters, and the undesired effects of the environment to Furthermore, key risk indicators, servicing as an early warning integrates and manages them within the established risk mitigate their consequences. system for the broader field of operational risks (such as HR, management framework, namely in the area of credit and processes, systems, and external conditions) are regularly operational risk. The management of ESG risks follows ECB As systemically important institution, the Group is included into monitored, analysed, and reported, with the aim to improve and EBA guidelines with tendency of their comprehensive 2022 ECB Climate Stress test exercise. Preparation activities in the existing internal controls and enabling reacting on time. integration into all relevant processes. The availability of ESG the Group for the purpose of this exercise, consisting of three During the COVID-19 pandemic in Slovenia and the SEE, the Nevertheless, the Group strives to obtain relevant clients’ ECB intends to assess how banks are prepared for dealing Group has taken necessary measures to protect its customers data as prerequisite for adequate decision-making and with financial and economic shocks stemming from climate and employees by ensuring the relevant safety conditions corresponding proactive management of ESG risks. risk. The exercise will be conducted in the first half of 2022 and making sure that the services offered by the Group are after which the ECB will publish aggregate results in July 2022. data in the region where the Group operates is still lacking. modules, are already underway. By performing this exercise provided without any disruption. The Group continuously In recent years, the Bank signed Framework Agreements offered necessary services to clients, especially through digital with the EBRD, the Contract of Guarantees with MIGA and Further information on risk management is available in the channels (mobile banking, video calls, telebanking), which committed to the UN Principles of Responsible Banking. Note 6 of the Financial part of the report, Pillar 3 Disclosures the Group continues to develop at an accelerated pace. A Consequently, the Group established mechanism for and NLB Group Sustainability Report 2021. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report crisis management team is established in the Bank and other environmental and social screening of current or potential banking members with full engagement of the Management financing applications against the MIGA and EBRD Exclusion Board members. Special attention was paid to continuous List and applicable environmental and social laws. The provision of services to clients, their monitoring, health management of ESG risks addresses the Group’s overall credit protection measures, and the prevention of cyber fraud. approval process and related credit portfolio management. In addition, the Group was also diligently managing other, with the Group’s ESMS. Beside addressing ESG risks in all non-financial risks, referring to the Group’s business model relevant stages of the credit-granting process relevant ESG or arising from other external circumstances, within the criteria were also considered in the collateral evaluation Sustainable financing is implemented in accordance established ICAAP process. Incorporating ESG risks The Group is engaged in contributing to sustainable finance by incorporating ESG risks into its business process. On portfolio level the Group does not face any large concentration towards specific NACE industrial sectors exposed to climate risk, whereby the role of transitional risk is more prevailing. The Group carefully considers potential reputation and strategies, risk management framework, and internal liability risks which could arise from sustainable financing of governance arrangements. With the adoption of the NLB its clients. Special attention is given to the approval of new Group Sustainability programme, the Group implemented products and monitoring of fulfilment of relevant criteria sustainability elements into its business model. NLB Group by the clients. Additional key risk indicators have been Sustainability Committee oversees the integration of the ESG addressed, servicing as an early warning system in the area factors into the NLB Group business model. Thus, sustainable of ESG risks. Besides, physical risks, as part of ESG risks in finance integrates ESG criteria into Group’s business and the area of operational risk, are addressed in the Group’s investment decisions for the lasting benefit of Group’s clients business continuity management (BCM). BCM is carried out to and society. protect lives, goods, and reputation. Business continuity plans Contents 104 IT and Cyber Security The Group continues to provide its clients sustainable and efficient services supported through highly reliable and secure technology platforms. The Bank continues to actively pursue its technology transformation programme. In line with the refreshed IT strategy introduced in 2020, the IT team began delivering on outlined roadmaps and also successfully delivered a proof of concept for a consolidated core banking system. The Group is aiming to centralise and unify governance, applications, IT infrastructure and reliability High performance confirmed with numbers IT performance is monitored through a set of relevant indicators that are linked to the Balanced Scorecard (BSC) system. The indicators show a high performance of IT operations and successful risk management in this area. The availability of the information system in the Bank is at very high level of 99.98% (2020: 99.92%), and the share of unplanned interruptions is very low, 0.02% (2020: 0.08%). In 2021, the number of days without system/service interruptions were at 83.6% (2020: 78.5%). Harmonised Service Level Agreements (SLA) are in place with users of the information and infrastructure. The Bank also continued to system, which the Bank managed to fulfil in a very high rollout an effective online collaboration solution throughout the Group and enabled a majority of employees to work from home without interruption to operations. Due to the general cyber security risks increase, special focus, extra resources, and investments were made to raise the overall level of cyber security resilience. 99.98%the availability in NLB. proportion. High IT operational performance was also recorded in the Group members (between 99.90% and 99.99%). Main IT initiatives Transformation The main focus was the transformation of IT in terms of organisation, a group perspective, processes, people, and technology. IT supported a more agile way of delivery, to better partnering with business, and as a result be more efficient and effective. It also hired new leaders and experts especially in the areas of IT security and digital banking. Change of delivery approach The team managed to reach important achievements in following new strategic directions in terms of solution delivery. Managed to migrate first applications from mainframe to distributed systems, selected multiple new cloud solutions instead of on-premise, and strengthened resources in digital and front-end delivery. Core systems consolidation IT followed the core banking system strategy and successfully delivered the proof of concept for consolidated core banking system. Based on the success of the proof of concept, the core system consolidation project in Slovenia business entity was initiated. Application architecture Application architecture is focused on the Group solution and majority of new solution selections are done as a Group standard with related Group roadmaps. The IT team has made significant progress in simplifying applications with the key achievement being the retirement of the KRAT core system for syndicated loans. Group-wide capabilities extended Group-wide capabilities were significantly extended (mainly in the Group competence centre in Belgrade, Serbia) for the new digital banking platform, enterprise integration platform, the business process management platform development within the region, and the cyber security and infrastructure group. The competence centre has 46 employees. Data management The Bank achieved several new milestones in the implementation of a Group-wide data management platform which encompasses an enterprise data warehouse, advanced analytics, risk management analytics, profitability, data governance, and consolidated Group regulatory reporting. In October 2021, the NLB initiative Leveraging information capital: Fin-tech architecture at the heart of the traditional 1,366,984 digital users in the Group. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 105 Figure 76: Digital penetration of the Group’s banks as at 31 December 2021 59% 16% 25% 11% 10% 19% NLB Banka, Beograd NLB Banka, Sarajevo NLB Banka, Podgorica NLB Banka, Prishtina NLB Banka, Banja Luka NLB Banka, Skopje 50% NLB 22% Komercijalna Banka, Beograd bank, developed as part of the Data Management Project of the Group, was selected as one of the top 6 finalists in Gartner’s Eye on Innovation Awards competition. Cyber security Strengthening team and Outlook In the coming years, the Bank is expected to continue to invest in newly adopted technologies to support the business strategy, especially in the areas of digital, data, and customer relationship management (CRM), consolidating the Group’s infrastructure, simplifying core systems and to achieving superior client experience in terms of quality, innovation, reliability, and security. implementing new solutions The Group is giving special focus to cyber security, and consequently assuring the confidentiality, integrity, and the availability of data, information, and IT systems that support banking services and products for clients. Cyber security in the Group is constantly tested and upgraded by security assessments, independent reviews, and penetration testing. Cyber security is regularly discussed at the Bank’s IT Strategy 2020-2024 At the end of the 2020, a refreshed IT Strategy was adopted that also incorporates the Group dimension. Build the best digital banking IT team in the SEE region. Vision Main principles • increase client satisfaction in all segments with new digital omnichannel platform, digitize client journeys and interactions (CRM), and achieve operational excellence; • have an effective IT architecture using cloud solutions • and open-source software where possible; introduce a new way of agile development and DevOps transformation leading to shorter releases cycles, automated testing, and less manual tasks; Enable the best client and employee experiences through reliable, effective, secure, accessible, and scalable IT solutions. Mission • • ensure the necessary development capacity - hire right talents with the digital skills and looking forward to execute change; introduce modern collaboration tools and digitize internal processes; leverage the investment made in the data platform; • • assure quality, security, and availability of the IT systems and applications; • have a highly motivated, effective, and satisfied IT team working closely with the business side. Strengthening the team and extra investments in cyber security. Information Security Steering Committee, Operational Risk Committee, and Management Board meetings. During 2021, the Group increased its capacity in terms of human resources by hiring specialists in different domains. The Group now has a group team on two locations, in Ljubljana and Belgrade. Beside increasing capacity in human resources, improvement was made in detection capabilities by fine tuning detection systems, as well as by performing hardening on network devices across the Group. The threat intelligence process was established and new IT Security strategy was adopted focusing on unification of IT security systems and centralisation of processes. A new Group vulnerability management platform was selected. A technical measures guideline, as the Group standard for tools and processes, was also adopted and rolled out to the Group. All employees educated, continuous information exchange All employees in the Group are continuously educated about the importance of information/cyber security, as well as social engineering techniques. The Group banks are providing employees and customers with security notifications, especially for the occurrence of threats in the (global) environment with potential impact on the banks’ IT systems, services, products, and clients. The Bank is also testing the awareness of its employees with social engineering attack simulations. Threat intelligence data is shared by the Group team to all Group members with information on the latest threats and recommendations on mitigation measures. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 106 We are on your team. The first generation opened clubs. The next generation won all the national championships. The third generation raised regional champions. We will help this generation reach for the stars. Nothing connects, strengthens the bonds of cooperation or teaches how to win and lose with dignity as well as sport does. Especially in a region with such diversely rich sporting history. Since we believe that sport boasts an immense power for connecting, enhancing physical and spiritual well-being and inclusion, we are proud to support top athletes and young sports prodigies on a regional level, among those are girls from U13 football team NK Radomlje. This way, we are becoming one of the largest sponsors of sport in the region. Human Resources As a market leader, the Group realises that investing in employees is crucial. Engaged employees contribute significantly to business goals and results. That’s why the Group continued with its long-lasting tradition of investing in employee development, along with searching for new approaches and introducing new practices to improve organisational culture, leadership, and employee experience. COVID-19 pandemic impacts were felt throughout the year and so the health and safety environment was of the highest priority. The Group continuously enabled the majority of non-branch employees to work from home, and on average 32% of employees did so. Due to the COVID-19 situation, the development activities took place in an online environment and remained focused on the challenges of remote work and leadership. Table 34: NLB Group headcount by countries as at 31 December 2021 and 2020 Country Slovenia Serbia North Macedonia BiH(i) Kosovo Montenegro(ii) Germany Switzerland Croatia Group Total 31 Dec 2021 2,619 (NLB: 2,510, other: 109) 2,901 877 942 463 374 1 2 6 8,185 Employee Headcount Number of employees reduced The Group continued with optimisation of processes and right sizing its staffing level. Due to the acquisition of Komercijalna Banka, Beograd and its subsidiaries in December 2020, the number of employees at the 2020 YE rose to 8,792 but has downsized throughout the year to reach 8,185 at the 2021 YE. Work from home During the year, the COVID-19 pandemic still influenced business operations and work was organised in a way to minimise the risk of infections. The Group continuously enabled employees, whose presence in the Group’s premises was not essential to business process, to work from home (remotely) (the Group: 32%, NLB: 47%). All decisions related to health and safety were made on time and following the epidemiological circumstances. Strive to Be ‘Top Employer’ The Group is continuing to strengthen its HR practises based on feedback from reputable institutions and benchmarks 31 Dec 2020 2,691 (NLB: 2,591, other: 100) Changes YoY -72 (NLB: -81, other: 9) 3,198 877 1,086 463 467 1 2 7 8,792 -297 0 -144 0 -93 0 0 -1 -607 (i) The sale process of Komercijalna Banka, Banja Luka was concluded in December 2021. (ii) The merger of NLB Banka, Podgorica and Komercijalna Banka, Podgorica was completed in November 2021. ‘Top Employer’ for the 7th consecutive year. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 108 with best-in-class HR practises. The Bank was once again recognised as a ‘Top Employer’ by the Dutch Top Employer Institute for the 7th consecutive year, demonstrating a high level of expertise and contribution in the areas from people strategy, leadership, digitalization, talent acquisition and development, performance management, sustainability, and a lot more. The Bank will continue ensuring an even more stimulating work environment in the future. Continuing a longstanding tradition of investing in employees Organisational culture Organisational culture is an important driving force of company development and success, that’s why the Group has decided to take an active and comprehensive approach to develop it. Measurement of the organisational culture gave a roadmap on how to grow and further enhance constructive organisational styles. This includes involving employees from all backgrounds, areas, and levels in focus groups, and provides in-depth insights on the actions that need to be taken Employment – Hackathon The strategic direction of the Bank defines employment of new In first 10 months, the most often enrolled courses were from areas of IT Development, Data Analytics & Science, Office profiles needed on a Group level. As a trendsetter, the Bank Productivity and Personal Development. organised two NLB Hackathons (one for Data Science, and second one for Open Finance) to recognise talents in its home region and promote the Bank as a desirable employer. Well-being & Health Engagement of employees A crucial part of success is the motivation and engagement of employees. In 2021, a total of 72% of employees participated in the survey.15 Compared to the year 2020, the percentage of engaged employees (loyal and psychologically committed to Creating a work environment The Group is always committed to offering knowledge on good health, creating a work environment that enables quality interpersonal relationships, and promoting activities that enhance the good health and satisfaction of employees. the organisation) rose by 10% to 53%. Figure 77: NLB Group Employee Engagement 2021 Engaged Not engaged Actively disengaged Prepared to Tackle Future Challenges Promoting healthy habits and new health and safety measures During the pandemic, emphasis was placed on developing healthy habits. Health trainings were organised to help employees cope with mental side of new reality and emphasise benefits of regular physical activity. 53% 36% 11% The Group continued to make sure that prescribed protective measures are followed and equipment (masks, gloves, and disinfectants) was available to employees and clients. It also encouraged working from home. to ensure even higher engagement and success in the areas of leadership, employee empowerment, and interpersonal Various training activities to embrace changes The Group strives for high quality and standards of a cooperation. Leadership development Significant influence on employee satisfaction derives from their working environment, and leaders on all levels have a significant role in creating a productive atmosphere. The modern learning organisation. Due to the rapidly changing environment, the Group expanded its offer of trainings with access to future skills topics, made training more accessible and on demand, while also still offering classical channels of training and workshops. Group is actively developing leadership competencies of senior management to align with the activities of changing Trainings, e-learning Due to COVID-19, most of the trainings were conducted online. organisational culture. Ensuring the succession for The emphasis of online programmes was focused on various managerial positions is also of key importance throughout the topics from the Banking & Financial area, Leadership & Group and one of the strategic activities. Management, Sales, IT, to Personal Development, Compliance Developing talent Among its employees, the Group identified talents in the fields of leadership, professional, and young talents. They are provided additional opportunities, knowledge, and skills needed to manage and lead in challenges of the future, as well as individual development activities. Developing NLB Employer Brand To attract top talent throughout the region, the Group has identified the need to develop the Employer Brand actively. The Group has done internal and external surveys, interviews, and multiple focus groups to identify the relevant employer value proposition. and the Work Environment, and ESG & Social Responsibility. Along with these areas, the Group also made substantial investment in training employees in Data Analytics & Science across the Group. Online learning with access to 7,000+ courses On 1 March, the Group enabled employees’ access to the online learning platform Udemy for Business. The aim was to empower employees over their own development and give them opportunities to upskill or reskill, and be better prepared for upcoming challenges. 15 NLB Banka, Beograd and Podgorica were exempt from the survey due to the integration activities with Komercijalna Banka. On average 32% of the Group's employees worked from home in the period of pandemic. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 109 Remuneration system as a motivation for engaged and committed employees For an employee working in the companies within the Group, salary is composed of: Fixed part Determined according to the complexity of the work for which the employee has concluded a contract of employment. Variable part Depends on the employee’s performance for reaching set goals. Empoyees are awarded: 1. 2. quarterly or half-yearly compensation and annual rewards related to the business performance of the bank in which they work. Performance assessment is done by the head of the employee’s organisational unit using a top- down approach to evaluate the employee’s achievements in relation to goals set for a particular assessment period (quarter or half-year). The goals are set according to the ‘SMART’ method, meaning that they have to be specific, measurable, achievable, relevant, and time-bound. Diversity Policy Framework The policy sets the framework in the area of diversity and representation of both genders in the Supervisory Board and Management Board and the senior management. With the policy, the Bank also sets the framework for diversity with regards to education, range of knowledge, skills and experience, age, gender, and international experience. Objectives • Cover an adequately wide range of knowledge, skills, and expert experience of its members, and be composed with regard to the following criteria: experience, reputation, management of any conflicts of interest, independence, available time, and collective suitability of the body as a whole. • International experience of its members in different areas. • Diversity as regards gender representation. • Diversity as regards the age structure, which should reflect the age structure in the Bank to the largest extent possible. The goals of the Policy shall also be reasonably applied to the provision of diversity of the wider management. Table 35: Diversity - review of management bodies and senior management in 2021 and plan for 2022 Wide range of knowledge, skills and professional experience International experience of the members in different areas Age structure Supervisory Board of NLB Management Board of NLB Senior Management of NLB 2021 Plan for 2022 2021 Plan for 2022 2021 Plan for 2022 High High 20-30 = 0 30-40 = 0 40-50 = 1 50-60 = 8 60+ = 3 High High 0 0 1 6 5 High High 20-30 = 0 30-40 = 0 40-50 = 3 50-60 = 0 60+ = 0 High High High High Medium High Medium High 0 0 5 1 0 20-30 = 1 30-40 = 5 40-50 = 19 50-60 = 13 60+ = 0 1 5 19 13 0 Share of women 42% 42% 0% 16.7% 45% 45% Remuneration policy for members of the Supervisory Board and Management Board of NLB Members of the Supervisory Board may receive remuneration that is compliant with the relevant resolutions of the Bank’s General Meeting. Members of the Management Board receive remuneration consisting of a fixed part of the salary and a variable part of the salary. The variable part of remuneration is allocated and paid in the form of cash and/or instruments. Remuneration policy for employees in NLB and in the Group In 2021, a refreshed Remuneration Policy for employees in NLB and in the Group was adopted where the basic principles represent the framework for rewarding employees in NLB and the Group. The remuneration policy defines fixed and variable remuneration, the goal-setting system and performance criteria (KPIs), and sets out the conditions for the allocation and payment of the variable part of remuneration. 8,185 employees in the Group family. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 110 Corporate Governance Corporate governance of the Bank is based on legislation of the RoS, particularly (but not exclusively) the provisions of the changed Companies Act (ZGD-1) and the Banking Act Rules and Procedures Corporate governance of the Bank includes the processes is designed jointly by the Management Board and the Supervisory Board of the Bank. Therein are publicly disclosed commitments to shareholders, clients, creditors, employees, through which Bank objectives are set and pursued (directed and other stakeholders as a whole, how the Bank will be and controlled), and lately it is becoming an efficient way to supervised and managed, as well as decision which corporate (ZBan-3), the Decision of the BoS on Internal channel investor-driven initiatives related to sustainability. governance code the Bank should follow (https://www.nlb.si/ Governance, the Management Body and the Adequate Internal Capital Assessment Procedure for Banks and Savings Banks, the Corporate governance with its principles identifies the distribution of rights and responsibilities among different stakeholders in the Bank (Management and Supervisory Board, shareholders, creditors, auditors, regulators, and corporate-governance). The Corporate Governance Policy of NLB should be read together with the NLB Group Corporate Governance Policy in which the corporate governance principles and mechanisms of the Group members (NLB relevant EBA Guidelines on internal governance, other stakeholders), and include the rules and procedures for excluded) are defined and governed. the EBA Guidelines on the assessment of the making decisions in corporate affairs. The most important suitability of members of the management body and key function holders, the EBA Guidelines on remuneration practices, and the EU regulations regarding ESG. rules and procedures are: Articles of Association of NLB In accordance with the applicable Banking Act (ZBan-3) and Companies Act (ZGD-1), the Articles of Association of NLB the Bank has a two-tier governance system, according to which the Bank is managed by the Management Board and its operations are supervised by the Supervisory Board (https:// www.nlb.si/corporate-governance), while shareholders exercise their rights on meetings of shareholders. Corporate Governance Statement of NLB Apart from the binding legal framework, the Bank also follows NLB Group Code of Conduct In the NLB Group Code of Conduct (Code), values, mission, and core principles of conduct are defined together with set guidelines to which the Group is committed. The Code describes the values and the basic principles of ethical business conduct that the Group respects, promotes, and expects to be followed in the whole Group (https://www.nlb.si/ code-of-conduct). Operating with integrity and responsibility is a key element of the Group’s corporate culture. It is important to achieve business goals as well as the way to achieve them. The Group demands that every employee, regardless of their job or location of work and every other stakeholder of the Group, complies with the highest standards the Corporate Governance Code for Listed Companies (valid of integrity. The key for achieving these standards is strong since 1 January 2017). The Code defines the governance, culture of compliance practiced by the Group. management, and leadership principles based on the ‘comply or explain’ principle of companies listed on the Slovenian Remuneration Policy for the members regulated market (https://www.ljse.si). Deviations from the recommendations of the mentioned code are published in the Corporate Governance Statement of NLB, which is adopted by the NLB Supervisory Board. The mentioned statement is prepared according to Article 70 (paragraph 5) of the Companies Act (ZGD-1) and is part of the Business Report in the NLB Group Annual Report. The mentioned statement is also published on the Bank’s webpage (https://www.nlb.si/ corporate-governance), as well as on the webpage of the Ljubljana Stock Exchange – SEOnet (https://seonet.ljse.si). Corporate Governance Policy of the NLB and NLB Group Corporate Governance Policy The corporate governance framework of the Bank, being the Corporate Governance Policy of NLB (November 2020), of the Supervisory Board and Management Board of NLB In accordance with the fifth paragraph of Article 294a of the Companies Act, the Bank publicly posted on its website the Remuneration Policy for the Members of the Supervisory Board of NLB and the Members of the Management Board of NLB (version 1), which was adopted by the Supervisory Board of NLB on 15 October 2021 and approved by the General Meeting of Shareholders of NLB on its session on 16 December 2021 (https://www.nlb.si/corporate-governance). The resolution was legitimately passed with the necessary majority of the votes cast. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 111 Policy on the Provision of Diversity of the Management Body and Senior Management Policy on the Provision of Diversity of the Management Body and Senior Management regarding selection of members of the Supervisory Board, the Management Board and B-1 level was confirmed on General Meeting of Shareholders on 10 June 2019. With mentioned policy the Bank follows high standards of adequate representation of both sexes in the managing bodies. In 2020 and January 2021, the Workers’ Council of NLB elected and appointed employee representatives as members of the Supervisory Board of NLB, thus four employee representatives were appointed. As part of employee participation in the Bank’s management, the appointment of four representatives brings additional diversity at all levels, including the achievement of gender quotas in the Bank’s governing bodies, and employees’ representatives with their diverse work experience will be able to contribute to better employee involvement in governing bodies. The Supervisory Board yearly follows the implementation of the goals set by mentioned policy. NLB Group Sustainability Governance Structure NLB became the first bank in Slovenia to commit to the UN Principles for Responsible Banking (September 2020). These principles represent a single framework for a sustainable banking industry and are aligned with the 2015 Paris Climate Agreement and with the objectives of the UN Sustainable Development Goals (UN SDGs) that cover three dimensions of sustainability: economic, social, and environmental. In that respect, the Bank upgraded the Corporate Social Responsibility (CSR) activities with more consistent adherence to the 2030 Agenda of the UN SDGs. In 2021, however, the Group moved from raising awareness to actively implementing sustainability elements into the business model and established sustainable operations in the Framework for Sustainable Operations of the NLB Group (https://www.nlb.si/sustainability). The framework defines the Bank’s corporate sustainability strategy, vision and mission, commitment to the UN SDG, sustainable economic activities, ESG risk management, sustainability governance structure, responsible banking, and business ethics. During the year, the Bank also gradually built mechanisms to ESG factors and indirect economic factors are assure very important and comprehensive steps in integrating comprehensively recognised and managed according to sustainability into banking operations, the so-called ESMS. GRI (Global Reporting Initiative – Global Standards (GRI GS)) The ESMS is a set of policies, procedures, tools, and internal standards. Key ESG information is published in the following capacity to identify and manage a financial institution’s chapters of this report or other related webpages: exposure to the environmental and social risks of its clients/ investees. Significant changes in the lending process of the Group are one of the most important consequences of the Environment (E): - In Sustainability chapter introduction of the ESMS. The risk policies were upgraded to - In separately published NLB Group Sustainability Report follow ECB and EBA guidelines. 2021 published on the Bank’s webpage - the chapter Risk Management, subchapter Incorporating The Bank anchored ESMS at different levels within the Bank ESG Risks and the Group thus guaranteeing that it receives attention - the chapter Statement of Management of Risk from the highest decision-making bodies in the Bank in Note 6 of the Financial part of the report and in the Group members. With the establishment of the Sustainability Committee in the fall of 2021, which is a new advisory Body to the Management Board, the Bank built a 4-level NLB Group Sustainability Governance Structure, as follows: Supervisory Board of the NLB Sustainability Committee Social (S): - In Human Resources chapter - In the diversity and remuneration chapters in a separate report on Pillar 3 Disclosures according to Basel Standards Governance (G): - In this chapter of report - In the Corporate Governance Statement of NLB of this report and on the Bank’s webpage https://www.nlb.si/ corporate-governance and on the webpage of the Ljubljana Stock Exchange https://seonet.ljse.si Sustainability Team Sustainability working groups More information is available on https://www.nlb.si/ nlb-sustainability-framework.pdf and in this report, in Sustainability chapter. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 112 There were two General Meetings of Shareholders in 2021. The shareholders of the Bank gathered on 36th General Meeting on 14 June. Due to COVID-19 pandemic, for the first time the General Meeting was hybrid, as it was held live and The Supervisory Board The Supervisory Board supervises the online. The shareholders took note of the approved NLB management of the Bank and its duty of diligent Group Annual Report 2020, the Report of the Supervisory Board of NLB on the results of the examination of the NLB Group Annual Report 2020, and Information on the income of members of the Management Board and Supervisory Board of the Bank for the previous business year. The shareholders decided on the allocation of distributable profit for 2020. The distributable profit of the Bank as at 31 December 2020 was EUR 341,992,219.43. and prudent conduct in line with powers defined in Companies Act (ZGD-1) and according to provisions of the Banking act (ZBan-3), other regulations, and internal rules of the Bank (the Articles of Association of NLB and Rules of Procedures of the Supervisory Board of NLB). In accordance with Articles of Association the Supervisory Board consists of 12 members, of The General Meeting of NLB granted discharge to the which eight members represent the interests MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Bank’s Governing Bodies The Bank’s corporate governance is based on a two-tier system in which the Management Board manages the Bank, while its daily operations are supervised by the Supervisory Board. General Meeting of Shareholders Supervisory Board Management Board General Meeting of Shareholders The shareholders exercise their rights related members of the management and supervisory bodies for the 2020 financial year, adopted amendments and supplements to the Articles of Association, and appointed Islam Osama Zekry as a new member of the Supervisory Board. At the 37th General Meeting of Shareholders that was summoned for 16 December 2021, the shareholders decided on additional allocation of distributable profit for 2020. to the Bank’s operations at General Meetings. The Bank paid out in three instalments a total of EUR 92.2 The Bank’s General Meeting passes decisions in accordance with the legislation and the Bank’s Articles of Association. Decisions adopted by the million of dividends to the shareholders in 2021. At the General Meeting, the shareholders also voted on the Remuneration Policy for the Members of the Supervisory General Meeting include, among others: adopt Board of NLB and the Members of the Management Board and amend the Articles of Association, use of of NLB. distributable profit, grant a discharge from liability to the Management and Supervisory Board, More information on the work of the General Meeting of the Shareholders activities is available in Corporate Governance changes to the Bank’s share capital, appoint and Statement of NLB. discharge members of the Supervisory Board, remuneration of members of the Supervisory and Management Board and authorisation regarding the characteristics of issues of securities. of shareholders, and four members represent the interests of employees. Members of the Supervisory Board of the Bank representing the interests of shareholders are elected and recalled by the Bank’s General Meeting from persons proposed by shareholders or the Supervisory Board of the Bank. Members of the Supervisory Board of the Bank representing the interests of employees are elected and recalled by the Workers’ Council of the Bank. All Supervisory Board members must be independent experts. Number of members: Diversity: 12 (8 are representatives of capital, while 4 are representatives of workers) In SB 5 out of 12 members are female (41.67%) There were two changes in the composition of the Supervisory Board in 2021. The Workers Council of the Bank elected Tadeja Žbontar Rems as a member of the Supervisory Board (representative of workers). Her term of office runs from 22 January 2021. Islam Osama Zekry was elected as a new member of the Supervisory Board on the General Meeting of Shareholders on 14 June 2021. Contents 113 At 31 December 2021, the Supervisory Board had the following members: Representatives of capital Representative of employees Primož Karpe, M.Sc. Chairman Term of office: 2016-2020, renewed term 2020-2024 Andreas Klingen Deputy Chairman Term of office: 2015-2019, renewed term 2019-2023 Link to CV Link to CV Membership in NLB Supervisory Board committees: • Nomination Committee (Chairman) Membership in NLB Supervisory Board committees: • Nomination Committee (Deputy Chairman) • Audit Committee (Member) • Operations and IT • Risk Committee (Chairman) • Operations and IT Committee (Member) Committee (Member) Membership in management bodies of related or unrelated companies: • Angler d.o.o. - Director David Eric Simon Member Term of office: 2016-2020, renewed term 2020-2024 Link to CV Membership in NLB Supervisory Board committees: • Audit Committee (Chairman) • Risk Committee (Member) Membership in management bodies of related or unrelated companies: • Jihlavan a.s. - Chairman of the Supervisory Board • Czech Aerospace industries sro - Legal representative • Central Europe Industry Partners a.s. - Sole Member of the Supervisory Board Membership in management bodies of related or unrelated companies: • Credit Bank of Moscow - Member of the Supervisory Board(i) • Kyrgyz Investment and Credit Bank CISC - Member of the Board of Directors • Nepi Rockcastle plc - Member of the Board of Directors (i) Till 14 March 2022. Islam Osama Zekry, Ph.D. Member Term of office: 2021-2025 Link to CV Membership in NLB Supervisory Board committees: • Operations and IT Committee (Deputy Chairman) • Risk Committee (Member) Membership in management bodies of related or unrelated companies: • CIB Housing association, Egypt - President of the Supervisory Board • Egyptian AI Council (Ministry of Communication and Information Technology) – Member of the Supervisory Board Shrenik Dhirajlal Davda, M.Sc. Member Term of office: 2019-2023 Link to CV Membership in NLB Supervisory Board committees: • Risk Committee (Deputy Chairman) • Remuneration Committee (Member) • Audit Committee (Deputy Chairman) Membership in management bodies of related or unrelated companies(i): • PJSC Ukrgasbank - Independent Member of the Supervisory Board (i) Since 8 March 2022 also: IPSO, UK - Lay Member of the Board. Mark William Lane Richards, M.Sc. Member Term of office: 2019-2023 Link to CV Membership in NLB Supervisory Board committees: • Operations and IT Committee (Chairman) • Remuneration Committee (Deputy Chairman) • Risk Committee (Member) Membership in management bodies of related or unrelated companies: • Vencap International pic Ukraine (UK) - Director • BPL Global (Lloyds of London insurance Broker) - Non-Executive Director • Sheffield Haworth Ltd - Non-Executive Director Gregor Rok Kastelic Member Term of office: 2019-2023 Verica Trstenjak, Ph.D. Member Term of office: 2020–2024 Bojana Šteblaj, M.Sc. Member Term of office: 2020–2024 Sergeja Kočar, M.Sc. Member Term of office: 2020–2024 Link to CV Link to CV Membership in NLB Supervisory Board committees: • Nomination Committee (Member) • Remuneration Membership in NLB Supervisory Board committees: • Nomination Committee (Member) • Remuneration Committee (Member) Committee (Member) Membership in management bodies of related or unrelated companies: • None Membership in management bodies of related or unrelated companies: • None Janja Žabjek Dolinšek, M.Sc. Member Term of office: 2020–2024 Tadeja Žbontar Rems, M.Sc. Member Term of office: 2020–2024 Link to CV Membership in NLB Supervisory Board committees: • Operations and IT Link to CV Membership in NLB Supervisory Board committees: • Operations and IT Committee (Member) Committee (Member) Membership in management bodies of related or unrelated companies: • None Membership in management bodies of related or unrelated companies: • None Further information about the work and composition of the Link to CV Link to CV Supervisory Board is available in the chapter Corporate Governance Statement of NLB. Membership in NLB Supervisory Board committees: • Remuneration Committee (Chairman) • Audit Committee (Member) • Risk Committee (Member) Membership in management bodies of related or unrelated companies: • None Membership in NLB Supervisory Board committees: • Nomination Committee (Member) Membership in management bodies of related or unrelated companies: • European Union Agency for fundamental rights – Member of the Management Board MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 114 Committees of the Supervisory Board The Supervisory Board appoints committees that Audit Committee Audit Committee Risk Committee Risk Committee 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: Nomination Nomination Committee Committee Remuneration Remuneration Committee Committee Operations and Operations and Information Information Technology (IT) Technology (IT) Committee Committee David Eric Simon, Chairman Andreas Klingen, Chairman Primož Karpe, Chairman Gregor Rok Kastelic, Chairman Mark William Lane Richards, Chairman Shrenik Dhirajlal Davda, Deputy Chairman Shrenik Dhirajlal Davda, Deputy Chairman Andreas Klingen, Deputy Chairman Mark William Lane Richards, Deputy Chairman Islam Osama Zekry, Deputy Chairman Primož Karpe, Member Islam Osama Zekry, Member Verica Trstenjak, Member Shrenik Dhirajlal Davda, Member Andreas Klingen, Member Gregor Rok Kastelic, Member Mark William Lane Richards, Member Bojana Šteblaj, Member Bojana Šteblaj, Member Primož Karpe, Member David Eric Simon, Member Sergeja Kočar, Member Sergeja Kočar, Member Janja Žabjek Dolinšek, 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. Gregor Rok Kastelic, Member Tadeja Žbontar Rems, Member MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 115 The Management Board At the end of 2021, the composition of the Management Board was as follows16: The Management Board represents the Bank and manages its daily operations, independently and at its own discretion, as provided for by the applicable laws and the Articles of Association of NLB. In accordance with the Articles of Association, the Management Board has three to seven members (the president and up to six members) 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 in accordance with the law and Articles of Association. Number of members: Mandate: three members five-year term of office The Supervisory Board of NLB and, member of the Management Board and Chief Operating Officer (COO) Petr Brunclík, agreed on the termination of office with effect on 30 June 2021. The decision was brought about by personal reasons. As of 22 April 2021, his tasks were taken over by other members of the NLB’s Management Board. Further information about the work and composition of the Management Board is available in the chapter Corporate Governance Statement of NLB. Andreas Burkhardt CRO Term of office: 2016-2021, renewed term 2021-2026 Link to CV Other important functions and achievements: • 20 years of experience in the area of banking, especially in the area of Central Europe. Direct responsibility: • Internal Audit • Compliance and Integrity • Global Risk and Credit Risk – Corporate and Retail • Workout and Legal Support • Restructuring • Evaluation and Control • Financial Instruments Processing • Corporate Customer Delivery • Retail Banking Processing Membership in management or supervisory bodies of related or unrelated companies: • Chairman of the Board of Directors: NLB Lease&Go NLB Bank, Banja Luka NLB Bank, Sarajevo Archibald Kremser CFO Term of office: 2016-2021, renewed term 2021-2026 Link to CV Other important functions and achievements: • More than 21 years of experience in the financial services industry in Austria, CEE, and SEE focusing on finance and asset management, strategy, and corporate development, as well as performance improvement assignments. Direct responsibility: • Financial Accounting • Controlling • Financial Markets • Group Real Estate Management • Group Steering • IT Architecture • IT Delivery • Data Management • IT Shared Service Centre • NLB Group IT Security Governance • IT Infrastructure • Procurement Membership in management or supervisory bodies of related or unrelated companies: • Chairman of the Board of Directors: NLB Banka, Podgorica Komercijalna Banka, Beograd Blaž Brodnjak CEO & CMO Term of office: 2016-2021, renewed term 2021-2026 Link to CV Other important functions and achievements: • More than 21 years of experience at managerial positions on all levels of international banking groups. • Was a chairman or member of the supervisory boards of 13 commercial banks in six countries, three insurance companies in three countries, leading asset management company in Slovenia and multinational production group. Direct responsibility: • Strategy and Business Development • Legal and Secretariat • Communication • HR and Organisation Development • Investment Banking and Custody • Retail and Private Banking, Corporate Banking • Payment Processing • Cash Processing Membership in management or supervisory bodies of related or unrelated companies: • Chairman of the Supervisory Board: NLB Banka, Skopje • Chairman of the Board of Directors: NLB Banka, Prishtina • Member of the Board of Directors: Komercijalna Banka, Beograd • President of the Association of Banks in Slovenia • President of the Board of Governors: AmCham Slovenia • Member of Executive Committee of the Handball Federation of Slovenia • Member of the Board of Directors: Cedevita Olimpija (from 1 February 2022) 16 Further information is available in the chapter Events After the End of the 2021 Financial Year. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 116 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 Assets and Liabilities Management Committee of the NLB Group NLB Operational Risk Committee The Change the Bank Committee The Group Real Estate Management Committee The Sales Committee Private Individual Credit Committee Chairman: CRO Chairman: CFO Chairman: CRO Chairman: CEO Chairman: CFO Chairman: Executive Assistant to MB for CIB area Chairman: Director of Credit Risk – Retail Number of members: 8 The Committee determines credit ratings and makes decisions on the reclassification of clients and approves commercial banking investment transactions and limits that are beyond the competencies of the directors. The Committee adopts 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 week. Number of members: equal to the number of the appointed members of the Management Board 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. Number of members: 16 The Committee is responsible for monitoring, guiding, and supervising operational risk management in the Bank, and for transferring this methodology to the Group members. As a rule, the Committee meets once every two months. Number of members: equal to the number of the appointed members of the Management Board The Committee is responsible for adopting 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. Number of members: 3 Number of members: 13 Number of members: 5 The Sales Committee adopts decisions on the management of the range of products and services and the relations with the clients in the area of sales. As a rule, Committee meetings are convened once a week. The Committee 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 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 Management Board also appointed working bodies that operate at a lower level: Committee for New and Existing Products Group Real Estate Management Sub Committee Committee for Business IT Architecture Data Management Committee Anti - Money Laundering Commission Corporate Customer Acceptability Committee Advisory bodies of the Bank’s Management Board The Watch List Committee The Risk Committee NLB Group Non-Performing Assets Divestment Committee NLB Group Sustainability Committee Chairman: CRO Chairman: CRO Chairman: Director of Workout and Legal Support Chairman: CEO Number of members: 7 Number of members: 12 Number of members: 7 Number of members: 17 The Watch List Committee is a body which monitors the progress of activities for clients on the Watch list. As a rule, committee meetings are convened quarterly. The Risk Committee monitors and periodically reviews matters related to risk and commercial risk and prepares materials for the Management Board to obtain decisions. As a rule, committee meetings are convened quarterly. The NLB Group Non-Performing Assets Divestment Committee monitors operations of Non-Core Group Members and issues opinions, recommendations, and initiatives. The Committee shall discuss the strategies regarding optimal management of the Group members and shall monitor realisation of their strategic objectives. As a rule, committee meetings are convened quarterly. Committee oversees the integration of the ESG factors to the NLB Group business model in a focused and coordinated way across the company and issues opinions, recommendations, initiatives and takes relevant decisions when needed. As a rule, committee meetings are convened quarterly. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 117 NLB Group’s Corporate Governance As the parent bank, NLB implements the corporate governance of the Group members in compliance with EU and BoS legislation, the The Group is governed: In recent years, the concept of corporate governance of the Group has been upgraded, and the role of members of the Management Board of the Bank in management of other In accordance with fundamental corporate rules Group members strengthened. The target composition of through various bodies of the Group members: • By voting at general meetings of the Group members • By exercising supervision through the supervisory bodies of supervisory bodies in the Group members was established, the functioning of the supervisory bodies optimised, and the reporting and standards related to the harmonisation of the Group members operations simplified. local legislation, and regulatory requirements • With proposals for appointing the management of the applicable to respective Group members, while also considering internal rules, ECB Guidelines, and other applicable regulations. The roles, authorisations, and responsibilities of individual bodies and organisational units, as well as the manner to coordinate their operations to achieve the set business goals, are stipulated comprehensively in the NLB Group Corporate Governance Policy. In the Bank, the Group Steering Department is the principal partner of the Bank’s Management Board in the governance of strategic and non- strategic Group companies, and is responsible for appropriate corporate governance, the alignment of strategies, and the objectives achieved by subsidiaries. Group members • With proposals for appointing representatives of the Bank to supervisory bodies • Through participation of Bank’s representatives in various committees and commissions of the Group members Through mechanisms that ensure efficient business monitoring and governance, such as: • Harmonisation of operations in accordance with the so- called ‘competence line principle’ • NLB Group Management Board Meetings, NLB Group Leadership meetings, NLB Group ALCO meetings, etc. • Development activities carried out via cross-functional working groups, group projects, competence centres, centres of excellence, etc. • Through additional supervision of NLB Group members carried out by control functions (risk management, internal audit, compliance, AML, information, and physical security) and external supervising authorities (ECB, local regulators, external auditors). In line with strategic aspirations, the concept of ‘country managers’ was fully introduced with the main goal to support and steer the Group members, as well as to be a strong link between Group members and the Bank. They also facilitate best practice sharing on different levels. Stream coordinators were introduced to address the facilitation of more in-depth knowledge of competence lines and greater integration between streams and the Group members, the increasing transmission of current information, needs, and other requirements from the Group members, and exploitation of synergies at the Group level and coordination of regional projects. Legal and organisational structure of the banking group, including a description of the internal governance arrangements, the arrangements with regard to close links and the arrangements regarding the governance of subsidiaries are available on the Bank’s webpage (http://www.nlbgroup.si/profile). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 118 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. compliance risks are mitigated. Group-wide ethics and integrity standards Within the framework of the programme of ensuring business compliance, the Group also deals with the ethics and integrity A culture of compliance is integrated into the day-to day of the organisation. For that reason, all of the employees are business of the Bank to support its operations, to contribute included in yearly training and awareness-raising activities to its strong internal control environment, and to ensure that in the areas of general ethics, anticorruption, anti-money laundering, information security, etc. The values of the Group, embedded in the Group Code of Conduct, provide guidance and principles of expected behaviour regarding ethical conduct and require appropriate conduct from all employees at any level of the organisation, including its contractors. The regime on inside information (MAR) In line with the Market Abuse Regulation (MAR), and other 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 in a manner that enables it to comply with the obligations related to inside information identification and disclosure in accordance with the rules and regulations applicable at any time. Also, the Bank has a system in place implementing the market abuse prevention regime in accordance with MAR to prevent insider trading, market manipulation, and illegal disclosure of inside information. 537 new laws, draft laws, regulations, and other information regarding regulatory environment of the Bank reviewed. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 119 Fraud prevention and investigation Physical / technical security AML/CTF Business ethics and corporate integrity Privacy data protection and information security Oversight, monitoring, steering, and managing the Group compliance function and programme(i) Identification, assessment, and management of compliance, and integrity risks at the Bank and the Group levels The Compliance and Integrity in the Bank addresses the following risk areas: Regulatory compliance Corruption prevention 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 (i) Established by standards for compliance and integrity for the Group and implementation of monitoring by off-site data analysis and onsite visits. Prevention of Money Laundering and Terrorism Financing and Financial Sanctions Compliance 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 cyber security The Bank complies with national regulations on Anti-Money resilience of information systems (pen-tests). Laundering and Combating the Financing of Terrorism (AML/CFT), including the European Banking Authority Furthermore, in line with the plan, several internal (EBA), BoS and other competent authorities’ guidelines and assessments/compliance checks according to ISO/IEC 27001 standards. The RoS is a member of the EU, and thus subject standard were carried out in 2021, including assessment to the European AML/CFT Directives, the means by which of information security at outsourcing providers. Special the EU transposes the Financial Action Task Force (FATF) obligatory e-trainings for all employees in the area of recommendations throughout the EU. For the Bank, it is of information security and social engineering were prepared paramount importance to effectively mitigate the risk of money laundering, financing of terrorism and breaches of and executed all as part of prevention measures in this area. financial sanctions. For these reasons, the rules, procedures, The Bank runs its operations in line with GDPR requirements, and technology in AML/CFT area are subject to strict and including the retention and processing of personal data, dedicated unified policies and standards. The same principles are also applied for setting out the Bank’s framework on financial sanctions. In the previous year, the Bank upgraded and introduced further enhancements of AML governance in line with directions set by the BoS. Through the system of Data Privacy Officer, education, and training of employees. The new Slovenian Personal Data Protection Act (ZVOP-2) was not adopted in 2021 as expected. If necessary, further alignments will be made when the national legislation is in place. regular reporting and constant onsite and off-site control, the headquarters effectively monitors the implementation and Prevention execution of standards throughout the Group. The Bank regularly performs customer due diligence, following the risk-based approach and, in the case of enhanced risk, performs additional measures both in Based on the assessment of compliance risks (so-called ECRA – Enterprise Compliance Risk Assessment) the management of the Bank and in particular Compliance and Integrity can plan its activities; all with the aim to reduce or mitigate the compliance and integrity risks. As part of compliance programme, the segment of ‘Know your customer,’ as well as ongoing Compliance and Integrity is also involved, inter alia, in risk monitoring of the transactional activities. In the case of assessments regarding new and changed products, fit and detected deviations, also considering the AML/CTF indicators, proper assessments for key function holders, outsourcing, and the AML unit of the Bank ensures the review and, if required by other changes materially affecting the Bank’s business. AML/CFT legislation, reports the customers and transactions to the competent Financial Intelligence Unit. In its Acceptance As a standard Compliance function, several workshops Policy, the Bank has also adopted additional measures to and compulsory e-education on ethics, the prevention of prevent onboarding of customers that do not correspond to its corruption, conflicts of interest, protection of personal data, risk appetite. The Bank also ensures a high level of awareness AML/CTF, Information Security, Physical Security, and other on the AML/CFT area and the area of financial sanctions with relevant topics related to everyday work were prepared. regular training of all employees of the Bank. 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. 169 compliance processes and other reviews. 39 cases investigated. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 120 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 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 assurance regarding the management of key operations on an ongoing basis. The Internal Audit provided The highest standards were followed Internal Audit and other internal audit services in the Group operate in accordance with the: MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report risks, management of the Bank, operation of internal controls, and thereby strengthens and protects the value of the Bank. 69 planned and extraordinary audits conducted in the Bank. impartial assurance to the Management Board and Supervisory Board on the management of risks in key areas, i.e., cyber security, Linux and Windows server platforms, restructuring – retail, ICAAP process, personal accounts, outsourcing process, liquidity and credit risk management, lending processes (loans to retail – overdraft facilities, credit cards facilities, non-performing loans, leveraged transactions), corporate real estate management, cash management in branches, and others. Performed audits The 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 2021, the Internal Audit of NLB conducted 43 audit assignments (of that, three audits on a Group level), seven were postponed due to objective reasons. Furthermore, auditors conducted 27 branch inspections, one joint audit with the local auditors, and two internal audit quality reviews, both in the Group. Auditors were also involved in several strategic projects as advisor. The majority of the recommendations given in 2021 were implemented within the agreed deadlines. Implementation of uniform rules 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. The Internal Audit also introduces uniform rules of operation of the internal audit function and regularly monitors the compliance with these rules within the Group. International Standards for the Professional Practice of Internal Auditing Banking Act (ZBan-3) or other relevant laws which regulate the operations of a Group member Code of Ethics of an Internal Auditor Code of Internal Auditing Principles 28 Internal Audit experts. Contents 121 Corporate Governance Statements MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 122 Statement of Management’s Responsibility In accordance with the provisions of Article 134 (2nd paragraph) of the Market and Financial Instruments Act17, the Management Board hereby confirms the statements made in the business report, which are in accordance with the attached financial statements as at 31 December 2021, and represent the actual and fair financial standing of the Bank and the NLB Group as well as their operating results in the year that ended 31 December 2021. The Management Board confirms that the business report gives a fair view of developments and operating results of the Bank and the Group and their financial standings, including a description of the key types of risks and Group companies included in the consolidation are exposed as a whole. Ljubljana, 11 April 2022 Management Board of NLB Archibald Kremser CFO Andreas Burkhardt CRO Blaž Brodnjak CEO & CMO 17 (ZTFI-1, Official Gazzete of the RoS, No. 77/18, 17/19 – corr., 66/19 in 123/21). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 123 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 Market and Financial Instruments Act (ZTFI) It may perform the following additional financial services, pursuant to Article 6 of the ZBan-3: 1. insurance agency service pursuant to the law governing the insurance industry 4. custodian services according to the law governing investment funds and management companies 5. credit brokerage for consumer and other types of loans Authorisation to perform banking services is published on the official web page of the BoS (https://www.bsi.si/en/financial-stability/institutions-under- supervision/banks-in-slovenia/8/nova-ljubljanska-banka- dd-ljubljana). Authorisation to Perform Banking Services In accordance with the provisions of Article 14 (1st paragraph) of the Regulation on Books of Accounts and Annual Reports of Banks and Savings Banks (Official Gazette of the RoS, No. 184/21) adopted by the BoS on the basis of the authorisation from Article 109 of the Banking Act,18 (ZBan-3), NLB hereby lists all types of financial services which, in accordance with the authorisation of the BoS, took place during the period for which the business report was prepared. NLB has the authorisation to perform banking services pursuant to Article 5 of the ZBan-3. Banking services are the acceptance of deposits and other repayable funds from the public and the granting of credits for its own account. 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 ZBan-3, 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 commitments 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 18 Official Gazette of the RoS, No. 92/21 and 123/21. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 124 Corporate Governance Statement of NLB Pursuant to Article 70, paragraph 5, of the Companies Act (ZGD-1)19 NLB hereby gives the following Corporate Governance Statement of NLB as a part of the Business Report of the NLB Group Annual Report 2021. The main function of this statement is the prompt informing of investors on the coherence of the Bank’s corporate governance system. 1. STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE standards of ethical business conduct, and serves as the Corporate Governance of this annual report, as well as in the guideline for all our relationships regardless of whether Corporate Governance Policy of NLB (November 2020) published it involves clients, competitors, business partners, state on the NLB’s website (https://www.nlb.si/corporate-governance). authorities, regulators, shareholders, or internal relationships Information on the Diversity Policy and Remuneration Policy is also between employees. At the same time, it is the basis of the described in the Pillar 3 Disclosures according to Basel standards Group values and basic principles of conduct which provide (https://www.nlb.si/financial-reports). specific conduct guidelines to its employees. The aim of this approach is to ensure compliance with all applicable laws, regulations, and standards. It is published on the Bank’s web page (https://www.nlb.si/compliance-and-integrity). Compliance with the aforementioned Code is explained in the Corporate Governance Statement of NLB on ‘comply or explain basis,’ in which the Bank provides explanation regarding 2. COMPLIANCE WITH THE SLOVENIAN CORPORATE GOVERNANCE CODE FOR LISTED COMPANIES deviations, reasoning for non-compliance with a certain The Bank does not follow or partially implements or adhere recommendation, or alternative practices performed mostly due to different, in most cases stricter, banking regulations with NLB, as a public company whose shares are listed on Prime to stricter banking regulation. The statement refers to the Bank’s regard to the following recommendations: Market of the Ljubljana Stock Exchange, hereby discloses the system of corporate governance from the beginning to the end of compliance with the Slovenian Corporate Governance Code for financial year, which also corresponds to the beginning and the Listed Companies, adopted by the Ljubljana Stock Exchange end of the calendar year (from 1 January until 31 December). and Slovene Directors’ Association, on 27 October 2016 (valid from 1 January 2017) as the code that applies for the bank. Corporate Governance Statement of NLB is included in the Information contained in this point represents a 'Statement of Business Report of the NLB Group Annual Report (published Compliance with the Corporate Governance Code' as defined in on https://www.nlb.si/financial-reports), and is also published Recommendation no. 8.5: In the reasoning of the proposals for the General Meeting, NLB does not cite eventual conflicts of interest because they are already included into the Fit & Proper procedure. Recommendation no. 10.1: In assessing candidate’s eligibility for a Supervisory Board member, statutory criteria are Article 24 of the Ljubljana Stock Exchange Rules, dated 27 May as a separate report on the Bank’s website under chapter applied, however candidates don’t have a certificate 2020 (https://ljse.si/en/rules-and-regulations/252). on Corporate Governance (https://www.nlb.si/corporate- evidencing their specialised professional competence for 1.1. References to the Code on Corporate Governance governance), as well as on the website of the Ljubljana Stock membership on a Supervisory Board, such as the Certificate Exchange (https://seonet.ljse.si). of the Slovenian Directors’ Association, or any other relevant certificate. However, all strict conditions must be fulfilled The recommended best corporate governance practices NLB strives to increase the level of its business transparency according to banking legislature. contribute to a transparent and understandable corporate and informs the shareholders and other expert community governance system, which promotes both domestic and foreign in line with Guidelines on Disclosure for Listed Companies investor confidence, as well as the confidence of employees, (Ljubljana Stock Exchange, 18 December 2020) on electronic other stakeholders (regulators, suppliers, etc.), and the general communications system of the Ljubljana Stock Exchange public. A decision on which code the Bank will follow was made (https://ljse.si/en/rules-and-regulations/252) and in line with jointly by the Management Board and the Supervisory Board Rules and Regulation of the Luxembourg Stock Exchange, as 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 the Management Board needs prior approval of the Supervisory Board, but refer to Article 24 of the Articles of Association. The mentioned rules also do not include of the Bank by adopting the Corporate Governance Policy of well as in line with Rules of the London Stock Exchange through the Supervisory Board evaluation, education, and training NLB (November 2020). In 2022, the Group will actively analyse Regulatory News Services (RNS) of the London Stock Exchange. of the members of the Supervisory Board. The mentioned the changes made with a renewed version of the Slovenian provisions are part of other internal documents or decisions of Corporate Governance Code for Listed Companies, that will The Corporate Governance system of the Bank and all the managing bodies. be the first used for preparation of the Corporate Governance relevant information on Bank’s management that exceeds the Statement of NLB for the business year 2022. requirements of article 70 of the Companies Act (ZGD-1) are published in the chapter of Risk Management of this annual NLB also has its own corporate governance code. The NLB report, where ESG Risk Management for the year 2021 is Group Code of Conduct is a standardised document for all described, as well as in the Sustainability chapter of this annual 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 respected by the Management Board in its periodic reporting of the Supervisory Board. However, the members of the Group that defines values, lays down the report, and the NLB Group Sustainability Report 2021 (https://www. scope of topics and time frames of periodic reporting to the nlb.si/sustainability). Some other aspects about the functioning Supervisory Board are included in annual Action Plan of the 19 The Companies Law (ZGD- 1; Official Gazette of the RoS, No. 65/09 and of the Bank’s managing bodies are described in the chapter of Supervisory Board and Articles of Association. Professional consecutive changes). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 125 services of the Bank take care that timely information is EUR 50,000 and does not exceed one third of his/her total on the web page of the Ljubljana Stock Exchange provided to the Supervisory Board. remuneration for such year, ZBan-3 allows for an exception (https://seonet.ljse.si). Recommendation no. 15.3: NLB does not follow this recommendation because the President of the Supervisory from the requirement that a part of variable remuneration must be paid in Instruments. On 15 October 2021, the Supervisory Board of the bank adopted a new Remuneration Board is at the same time President of the Nominations Policy of Members of the Management Board of NLB and the Committee. Recommendation no. 17.1: In 2021, the Supervisory Board members (representatives of capital and representatives of workers) did not receive attendance fees, but received Members of the Supervisory Board of NLB, which was also adopted by the General Meeting of shareholders of the Bank on 16 December 2021. The voting on mentioned policy by the General Meeting of shareholders was consultative. payments for performing their function based on the decisions of the General Meeting of shareholders dated 21 October Recommendation no. 25.3: The Bank does not follow the recommendation on rotation of audit companies (at least once 2019 and 15 June 2020. Remuneration of the members of the every seven years); however, the Bank complies with the Banking Supervisory Board is regulated by the Remuneration Policy Law (ZBan-3) that allows longer period. However, the audit firm for the Members of the Supervisory Board of NLB and the did replace the audit partner responsible for the audit of NLB Members of the Management Board of NLB adopted by the and the Group financial statements for year 2020 and 2021. Supervisory Board on 15 October 2021 and by the General Meeting of shareholders on 16 December 2021. The voting on mentioned policy by the General Meeting of shareholders was Recommendation no. 27.4: NLB draws up its financial calendar which is published on Banks’ website (https://www. consultative. nlb.si/financial-calendar) and includes the date of the Annual General Meeting, however, it doesn’t provide information on Recommendations no. 21.4 to 21.6: In 2021, NLB did not pay variable remuneration in the form of NLB’s shares to any the dividend payment date. The dividend payment date is announced in the publication of the Agenda and Proposed member of the NLB Management Board, nor do stock option Resolutions to be passed at the Annual General Meeting 3. MAIN FEATURES OF INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN RELATION TO FINANCIAL REPORTING NLB is governed by the provisions of the Capital Requirements Regulation (CRR), with amendment, together with all applicable delegated acts, Banking Act (ZBan-3) and the Regulation on Internal Governance Arrangements, the Management Body and the Internal Capital Adequacy Assessment Process for Banks and Savings Banks regulating, and relevant EBA Guidelines, among other, the Bank’s obligation to set up, maintain appropriate internal control, and risk management systems. Due to the above, the NLB has developed a steady and reliable internal governance system encompassing the following: • a clear organisational structure with precisely defined transparent and consistent internal relations in the area of plans and comparable financial instruments make up most (https://www.nlb.si/general-meetings). The dividend payment responsibility; of the variable remuneration of any member of the NLB date is determined based on KDD Operations Rules (Central • effective risk management processes for identifying, Management Board. In relation to the payment of variable Securities Clearing Corporation). measuring or assessing, managing, and monitoring risks, including risk appetite, risk strategy, ICAAP, ILAAP, recovery remuneration in ordinary or preference shares of NLB, or share linked instruments, or equivalent non-cash instruments NLB complies with the recent changes introduced by the Banking Act (ZBan-3)20 that came into force on 23 June 2021. In accordance with point 3 of the second paragraph Recommendation no. 29.2: The Bank performs the corporate sustainability reporting according to Global Reporting plan, and the reporting of risks to which the Group is exposed or could be exposed in its operations; Initiative Standards (GRI). Another institution suitable for • incorporating main strategic risk guidelines into annual independent external assessment of corporate sustainability business plan review, budgeting process, and other relevant of Article 190 of the ZBan-3, at least 50% of the variable reporting will verify the correctness of information in the decision-making; remuneration of (among other) each member of the NLB corporate sustainability report presumably for business year • suitable internal control mechanisms that include Management Board shall comprise ordinary or preference 2022 (this also includes GRI standards). However, the bank appropriate administrative and accounting procedures; shares of NLB, or share linked instruments, or equivalent already adopted a decision that in 2022 an independent • the appropriate remuneration policies and practices that non-cash instruments (hereinafter collectively: Instruments). external verification of the work of calculating the carbon are in line with prudent and effective risk management, and This requirement applies to both the non-deferred and the footprint will be performed by renowned natural science and thus promote risk management. deferred part of variable remuneration (which are different technology research institute in Slovenia. from recommendations 21.4 and 21.6, which provide that variable remuneration given as shares, as well as the execution of stock options and any other rights to acquire Recommendation no. 29.9: NLB does not publish the rules of procedure of its bodies (Management Board and Supervisory Internal control mechanisms 3.1. Suitability of the internal control mechanisms are determined by the independence, quality and validity of: shares or be remunerated based on share price movements, Board and its committees) on its website. However, each year • the rules for and controls of the implementation of the must not be made possible for at least three years after such the Bank discloses the composition, competences, and work of Bank's organisational procedures, business procedures, rights were awarded). When the variable remuneration of an its managing bodies in the Corporate Governance Statement of and work procedures (internal controls) and individual Identified Staff for a particular year does not exceed NLB and publishes it in the NLB Group Annual Report, on Bank's • the internal control functions and departments (internal website (https://www.nlb.si/corporate-governance), as well as control functions). 20 Banking Act (ZBan-3; Official Gazette of the RS, No 92/21). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 126 Internal Controls 3.1.1. In August 2021, the Bank upgraded a system of internal the completeness, functionality, and adequacy of the operations. In addition to that, the Internal Audit carries out internal control system. Internal audit is completely regular control of the quality of operation of the other internal controls by adopting a revised Policy Internal Control System independent of both the first line and the second-level audit departments in the Group and takes care of constant that is harmonized with international regulatory requirements control functions. development of the internal auditing function. and standards (CRR, Banking Act, BIS, COSO, regulation of the BoS, EBA et al). A system of internal controls means a set of In the event of deficiencies, irregularities of breaches Pursuant to the provisions of the law, the Bank has organised rules, procedures, and organisational structures aimed at: identified in the process of implementation of internal the internal audit as an independent organisational unit, • ensuring efficient and consistent implementation of NLB's controls the breaches are discussed at the Operational primary responsible to the Supervisory Board of the NLB and strategies and operations, Risk Committee (which is collective decision-making body secondary to the Management Board of the Bank. • ensuring efficient and consistent processes and procedures appointed by the Management Board of the Bank that is in the NLB, established for execution of individual tasks within powers The Supervisory Board of NLB must issue its approval of the • protection of the value of NLB's assets, of the Management Board of the Bank). The mentioned appointment, remuneration, and dismissal to the Head of the • ensuring the reliability and integrity of accounting and committee adopts decisions so that appropriate actions are Internal Audit, which ensures their independence and so, the management data and information, taken and informs the Management Board of the Bank about independence of the work of the Internal Audit. • ensuring the operation and operation of the NLB in deficiencies and actions taken on that behalf. accordance with all applicable rules and regulations. The system of internal controls in NLB is designed to ensure Internal Control Functions 3.1.2. The internal control functions are part of the system of the b) The Risk Management Function The Risk Management Function is organised according to the Charter of the Risk Management Function of NLB adopted by the that for each key risk there is a process or other measure to internal governance in the Bank. Internal control functions Management Board, in agreement with the Supervisory Board reduce or manage that risk and that process or measure is include: effective for that purpose. The aforementioned policy introduces a new description of a) The Internal Audit Function The Internal Audit function is organised according to of NLB. The Charter on Functioning of the Risk Management Function of NLB is the framework document on understanding and role of the risk management function; it defines the purpose, validity, and method of operation, as well as the the three lines of defence, namely: the Charter on the Internal Audit of NLB adopted by the authorisations and responsibilities of the risk management 1. First-level (or line) controls are implemented into business Management Board on 13 November 2018 (and supplemented function according to the requirements of the Banking Act (ZBan- and non-business organisational units (OU): controls on 13 August 2019), to which the Supervisory Board of NLB 3) and the Regulation on Internal Management Arrangements, are designed to ensure the proper implementation gave its approval (30 November 2018 and 6 September 2019). Management Body, and Internal Capital Adequacy Assessment of business activities, i.e., the Bank's operations. Process for Banks and Savings Banks. Supervision in each individual business area is carried The Charter of the Internal Audit of NLB is the umbrella out by the competent organisational unit (OU), which is document about the understanding and role of the The risk management function represents an important part responsible for the implementation of procedures; Internal Audit in NLB, which defines the purpose, powers, of overall management and governance system in the Group. responsibilities, and tasks of the Internal Audit in line with This function in NLB is organised within the Risk stream, 2. Second-level controls are divided between Risk the International Standards for the Professional Practice of covered by the member of the Management Board in charge Management and Compliance control functions Internal Auditing. The Charter lays down the position of the of risk (Chief risk officer - CRO). The risk stream covers the (including AML/CTF and Information security Internal Audit in the organisation, including the nature of following organisational units: management) that carry out independent controls and the relationship between the functional responsibility of the • Global Risk supervision over the operation of the first line of defence. Head of the Internal Audit to the supervisory body, grants The business compliance function sees to the supervision authorisations to internal auditors for accessing records, of the correct implementation and ensuring compliance employees, premises, and equipment relevant for performing • Credit Risk – Corporate • Credit Risk - Retail • Evaluation and Control (line controls) with the regulatory framework, its their tasks, and defines the area and activities of the Internal • Restructuring consistent interpretation at the Group level, as well as Audit. to identifying, assessing, preventing, and monitoring • Work-out and Legal support overall risks to compliance and integrity in the NLB. The The Management Board has set up an independent internal The risk management function is performed by the Global risk management function directs risk management and audit function which gives assurances and advice about risk Risk. In accordance with the competences, authorisations, control by defining policies and methodologies for risk management, internal controls system, and management of and responsibilities Global Risk is represented by its General assessment and management; the NLB. The mission and the principal task of the Internal Manager. The Global Risk is in functional and organisational 3. The third level of controls is performed by the internal audit function, which assesses and regularly checks issuing objective assurances based on risk assessment, with consultancy and deep understanding of the Bank’s are adopted and where potential conflict of interest may arise with the risk management function. The head of the risk Audit is to consolidate and secure the value of the Bank by terms separate from other functions where business decisions MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 127 management function has direct access to the Management Compliance and Integrity is an organisational unit of the Bank, source applications, and archiving pursuant to the laws and Board of the NLB and at the same time unhindered and placed directly under the Bank’s Management Board in the internal regulations. Furthermore, the policy precisely defines independent access to the Supervisory Board of NLB and the organisational structure. The Bank adopted Integrity and primary accounting controls, performed in the scope of Risk Committee of the Supervisory Board of the NLB. Compliance Policy of the NLB and the NLB Group (Version 1, analytical bookkeeping, and secondary accounting controls, In members of the Group, the risk management function is the activities of the compliance function in the Bank. Separate accounting controls. With an efficient mechanism of controls organised according to the local legislation, considering policies regulate different areas which are organised within in accounting reporting, NLB ensures: the bases for set-up, organisation, and activities in risk the Compliance and Integrity in NLB. Supervision over • A reliable decision-making and operation support system management in the members, as defined in the document compliance of operations is within the competence of the • Accurate, complete, and timely accounting data, the 'Risk Management Standards in the NLB Group.' The Compliance and Integrity.  This enables the Compliance resulting accounting, and other reports of the Bank described standards on risk management provide the and Integrity to operate independently from other Bank’s • Compliance with legal and other requirements. December 2016), which regulates the method and scope of i.e., checking the efficiency of implementation of primary members of the Group the bases with which they have to align departments. their organisation, strategic risk-taking guidelines, internal Financial statements of NLB and consolidated financial policies, methodologies, and reporting system. The director of Compliance and Integrity does not perform statements of the NLB Group are audited by the auditing any other function at the Bank that could possibly lead to company Ernst & Young d.o.o., Ljubljana. The mentioned Risk management and control is performed through a conflict of interests. To ensure his independence, the director auditing company was appointed as the auditor of NLB by the clear organisational structure with defined roles and reports to the Management Board and to a specific member General Meeting of shareholders of the Bank for the financial responsibilities. The organisation and delineation of of the Bank’s Management Board responsible for compliance years 2018 to 2022 (27 June 2018). The auditing company competencies is designed to prevent conflicts of interest, area (including information security, personal data protection, verifies the business report in accordance with the provisions ensure a transparent and documented decision-making and AML/CTF functions), which additionally ensures of the Companies Act (ZGD-1). process, subject to an appropriate upward and downward independence of operation of the Compliance and Integrity. flow of information. The competence line Risk Management in NLB, encompassing several professional areas, is in charge As information security, AML/CTF, and Group AML functions for formulating and controlling the Group’s risk management are organised within Compliance and Integrity, CISO for NLB, policies, setting limits, overseeing the harmonisation, regular Group CISO, DPO (Data Protection Officer), head of AML/ monitoring of risk exposures, and limits based on centralised CTF area for NLB and head of Group AML are ensured full reporting at the Group level. independence through equal reporting lines as the director of Compliance and Integrity and have direct access and The Group puts great emphasis on the risk culture and separate reporting line to the Bank’s Supervisory Board. awareness across the entire Group. Group’s Risk Management Following NLB’s model, the compliance function has been framework is forward-looking and tailored to its business established in the core members of the Group, as well based model and corresponding risk profile. on the Group standards for the compliance and integrity area. Through specific binding standards in the area of compliance c) The Compliance Function, Information Security Function, and integrity, there is a harmonised system of standards and and AML/CTF Function Compliance and Integrity in the Group in its role as internal practices in the area of compliance and integrity in place in the entire NLB Group, in core and non-core members. control function performs control activities with respect to the main following areas: • anti-money laundering and counter-terrorist financing (separately for NLB and the Group) • information security and data protection, • personal data protection, • regulatory compliance management, • prevention of fraud and internal investigations, • security, • development of compliance risk methodologies, and setting and monitoring ethics and integrity standards; • harmonisation of policies and practices within the Group (Competence line Compliance and Integrity). 3.2. Financial reporting With the aim of ensuring appropriate financial reporting procedures, NLB pursues the adopted Policy on Accounting Controls. The accounting controls are provided through the operation of the complete accounting function with the purpose of ensuring quality and reliable accounting information, and thereby accurate and timely financial reporting. The principal identified risks in this area are managed with an appropriate system of authorisations, a segregation of duties, compliance with accounting rules, documenting of all business events, a custody system, posting on the day of a business event, in-built control mechanisms in 4. INFORMATION ON POINT 4, PARAGRAPH 5, OF THE ARTICLE 70 OF THE ZGD-1 regarding points 3, 4, 6, 8, and 9 of paragraph 6 of the same article Explanation regarding significant direct and indirect ownership of the company’s securities in the sense of achieving a qualified stake as determined by the act regulating acquisitions (Point 3 of the sixth paragraph of Article 70 of the ZGD-1) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 128 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Significant direct and indirect ownership of the company’s Notwithstanding the provision mentioned in the first applicable laws and Articles of Association. Each member securities in terms of achieving a qualifying holding as defined paragraph, approval for the transfer of shares is not required of the Management Board of the Bank may prematurely in the Takeovers Act (as of 31 December 2021). if the acquirer of the shares has acquired them for the account resign her/his term of office with a period of notice of three Shareholder Number of shares Percentage of shares Nature of ownership of third parties, so that it is not entitled to exercise voting rights months. A written notice shall be delivered to the Chair of from these shares at its sole discretion, while at the same time the Supervisory Board of the Bank. The notice term may committing to the Bank, it will not exercise voting rights on be shorter than three months if requested by the resigning RoS 5,000,001 25.00 shares the basis of the instructions of an individual third party for member of the Management Board of the Bank in his/her Brandes Investment Partners, L.P.(i) EBRD(i) Schroders plc(i), (ii) / / / >5 and <10 GDRs >5 and <10 GDRs >5 and <10 GDRs (i) In the form of GDRs. (ii) Further information is available in chapter Events after the end of the 2021 financial year. More information on the Bank’s Share Capital is available on the website: https://www.nlb.si/shares. Explanation regarding the holders of securities that carry special control rights (Point 4 of the sixth paragraph of Article 70 of the ZGD-1) The Bank did not issue any securities carrying special controlling rights. Explanation regarding restrictions related to voting rights, in particular: (i) restrictions of voting rights to a certain stake or certain number of votes, (ii) deadlines for executing voting rights, and (iii) agreements in which, based on the company’s cooperation, the financial rights arising from securities are separated from the rights of ownership of such securities (Point 6 of the sixth paragraph of Article 70 of the ZGD-1) The shares of the Bank are freely transferable, subject to the provisions 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 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 whose account it has acquired the shares if, together with the notice and is subject to the approval of the Supervisory Board instructions for voting, it does not receive a written guarantee of the Bank. from that person that this person has shares for his own account, and that this person is not, directly or indirectly, a A member of the Bank’s Management Board may only be holder of more than 25% of the Bank’s voting rights. a person who fulfils the legally prescribed conditions for a The acquirer who exceeds the share of 25% of the Bank’s who obtained a licence from the BoS or the ECB, if executing shares with voting rights and does not require the issuance the competences and tasks from Item (e) of paragraph 1 of of approval for the transfer of shares, or does not receive the Article 4 of Regulation (EU) no. 1024/2013 for the performance approval of the Bank, may exercise the voting right from 25% of the function of a bank’s management board member of the shares with the voting rights. under the law regulating banking. The Bank assesses management board member under the law on banking and every candidate following the Bank’s Policy governing the There are no restrictions other than those mentioned and Fit & Proper assessment prior to the appointment. those that are regulatory. Explanation on the (i) company’s rules on appointment or The Supervisory Board The Supervisory Board of the Bank consists of a total of 12 replacement of members of the management or supervisory members, of which eight members represent the interests bodies, and (ii) changes to company’s Articles of Association of shareholders and four members represent the interests (Point 8 of the sixth paragraph of Article 70 of the ZGD-1) of employees. Members representing the interests of shareholders shall be elected and recalled by the Bank’s The appointment or replacement of members of the General Meeting from persons proposed by shareholders or management or supervisory bodies the Supervisory Board of the Bank and members representing the interests of employees shall be elected and recalled by The Management Board The Management Board of the Bank is comprised of three the Workers’ Council of the Bank. Members of the Supervisory Board representing the interests of shareholders are elected to seven members, one of whom is appointed President by an ordinary majority of votes cast by shareholders. of the Management Board of the Bank. The number of Management Board members is determined by a resolution The term of office of the Supervisory Board members of the Bank’s Supervisory Board. The President and other commences on the day their appointment enters into force members of the Management Board are appointed and (start of term of office) and lasts up until the end of the Bank's recalled by the Supervisory Board of the Bank; the President Annual General Meeting of shareholders which decides on the of the Management Board may propose to the Chair of use of accumulated profit for the fourth business year since acquirer, exceeds the share of 25% of the Bank’s voting the Supervisory Board of the Bank to appoint or recall the start of their term of office, unless otherwise stipulated shares. Approval for the transfer of shares is issued by the an individual member or the remaining members of the at the time of appointment of individual members. In this Supervisory Board. Management Board of the Bank. context, the first year is deemed the business year in which the members of the Supervisory Board of the Bank started their The Bank rejects the request for approval of transfer shares The President and members of the Management Board term of office. if the acquirer, together with the shares held by the acquirer shall be appointed for a period of five years and may be before the acquisition and the shares held by third parties for re-appointed for another term of office. The President The general meeting of the Bank may dismiss an individual the account of the acquirer, exceeded the 25% share of the and members of the Management Board may be recalled or all members of the Supervisory Board (representatives of Contents Bank with voting rights, increased by one share. prior to the expiry of their term of office in accordance with shareholders) even before the expiration of their term of office. 129 A resolution on a dismissal shall be valid if adopted with at treasury shares are disposed of for the purpose of paying the of Association stipulate a larger majority or other conditions least a three-quarter majority of all votes cast. variable part of remuneration to the employees of NLB in the (adoption and amendments of the Articles of Association, form of NLB’s shares. In 2021, however, NLB did not purchase issue of convertible bonds or other equity securities, exclusion The Supervisory Board of the Bank shall at its first meeting treasury shares. after an appointment elect from among its members a Chair and at least one Deputy Chair of the Supervisory Board of the Bank. A member representing the interests of employees cannot be elected Chair or Deputy Chair of the Supervisory Board of the Bank. All the supervisory board members shall be independent professionals as defined by the Articles of Association. A member of the Bank’s Supervisory Board may only be a person who fulfils the legally prescribed conditions for a supervisory board member under the law on banking and who obtained a licence from the BoS or the ECB, if executing the competences and tasks from Item (e) of paragraph 1 of Article 4 of Regulation (EU) no. 1024/2013 for the performance of the function of a bank’s supervisory board member under the law regulating banking. The Bank assesses every candidate following the Bank’s Policy governing Fit & Proper assessment prior to the appointment. Amendments to Articles of Association A qualified majority of at least 75% (seventy-five per cent) of the votes cast by shareholders at the general meeting of the Bank’s shareholders is required for the adoption of any amendments of the Articles of Association. Explanation regarding the authorisation of the members of the management, particularly authorisations to issue or purchase own shares 5. INFORMATION ON THE WORK AND KEY POWERS OF THE SHAREHOLDERS’ MEETING AND OF ITS KEY POWERS, AND A DESCRIPTION OF SHAREHOLDERS’ RIGHTS AND THE METHOD OF THEIR EXERCISING Competences of the Bank’s General Meeting are stipulated in the Companies Act (ZGD-1), the Banking Act (ZBan-3), and the Articles of Association of the Bank. The General Meeting is a 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), adopting decisions on all statutory issues in respect of appointing and discharging members of the Supervisory Board (representatives of shareholders), and appointment of an auditor, distribution decisions (appropriation of distributable profit), and the granting of discharge from liability to the Management and Supervisory Board. of pre-emptive right of existing shareholders, decrease in share capital, the status restructuring of the Bank, or liquidation of the Bank and discharge of Supervisory Board members). The shareholders have the right to participate at the general meeting of the Bank, the voting right, pre-emptive right to subscribe for new shares in case of share capital increase, the right to profit participation (dividends), and the right to a share in surplus in the event of liquidation or bankruptcy of the Bank and the right to be informed. According to Article 296 of the Companies Act, NLB informs shareholders on their rights as shareholders in an Information on the Rights of Shareholders that is published among the documents for convocation of each General Meeting (i.e., on expansion of the agenda, proposals by shareholders, voting proposals by shareholders, and the shareholders right to be informed). There were two General Meetings of shareholders in 2021. The shareholders of NLB gathered on 36th General Meeting on 14 June 2021. Due to COVID-19 pandemic, for the first time the General Meeting was hybrid, as it was held live and online. The shareholders took note of the approved NLB Group Annual Report 2020, the Report of the Supervisory Board of NLB on the results of the examination of the NLB Group Annual Report 2020, and Information on the income of members of the Management Board and Supervisory Board of NLB for the (Point 9 of the sixth paragraph of Article 70 of the ZGD-1) The General Meeting is convened by the Management Board. previous business year. With the aim of ensuring NLB treasury shares for the payment of variable part of the remuneration to the employees of NLB in the form of NLB shares, the General Meeting of shareholders of NLB on 10 June 2019, authorised the The General Meeting may be convened by the Supervisory Board in cases where the Management Board fails to convene the General Meeting or where a convocation is necessary to ensure unhindered operations of the Bank. The Supervisory Board may amend the agenda of the General Meeting Management Board for redeeming treasury shares in the convened in line with the bylaws. period of 36 months from the adoption of the resolution at the The shareholders decided on the allocation of distributable profit for 2020. The distributable profit of NLB as of 31 December 2020 was EUR 341,992,219.43. Distributable profit in the amount of EUR 24,800,000.00 was about to be paid to the shareholders as dividends in two instalments. In accordance with the recommendation of the ECB, the Regulation of the General Meeting. The authorisation is valid for acquiring up As a rule, the General Meeting of the Bank shall be convened BoS and adopted resolution of the General Meeting the first to 36,542 NLB treasury shares, while the total percentage of at the registered office of the Bank, yet it may also be instalment of dividends in the total amount of EUR 12 million shares acquired based on this authorisation, together with convened at another venue specified by the convenor. The was paid on 22 June 2021 (EUR 0.60 per share), while the the treasury shares already in possession of NLB, may not Management Board may stipulate that shareholders may second instalment of dividends in the total amount of EUR 12.8 exceed 10% of NLB share capital (2,000,000 shares). When attend or vote before or at the General Meeting by electronic million (EUR 0.64 per share) was paid on 18 October 2021. disposing its treasury shares which NLB acquired based means without physical presence. The General Meeting of on this authorisation, the pre-emptive right of the existing shareholders shall adopt resolutions by simple majority of the The General Meeting of NLB granted discharge to the shareholders to acquire shares is excluded in full in case votes cast, unless the applicable laws or the Bank’s Articles members of the Management Board and Supervisory MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 130 Board for the 2020 financial year and adopted amendments Andreas Burkhardt, CRO, and Petr Brunclík, COO, since the the Group, the internal control system organisation, and and supplements to the Articles of Association of NLB and Supervisory Board reappointed the president and members gives consent to the Annual Plan of the Internal Audit and appointed Islam Osama Zekry as a new member of the of the Supervisory Board (Blaž Brodnjak as the CEO, Archibald to financial transactions defined in Articles of Association. Supervisory Board. Kremser as the CFO, and Andreas Burkhardt as the CRO of The Supervisory Board acts in accordance with the highest NLB) on its session on 12 November 2020. At the 37th General Meeting of shareholders on 16 December 2021, the shareholders decided on additional allocation of distributable On 21 April 2021, the Supervisory Board of NLB and Petr profit for 2020, as the BoS's decision restricting the payment of Brunclík agreed on the termination of office that went into dividends expired at the end of September 2021. Therefore, an effect on 30 June 2021. As at 22 April 2021, his tasks were taken additional EUR 67.4 million of distributable profit (EUR 3.37 per over by other members of the NLB Management Board. share) was paid to the shareholders on 24 December 2021. NLB paid out a total of EUR 92.2 million as dividends (or 4.61 EUR per share) to shareholders in 2021 (EUR 12 million on 22 Material changes that occurred in the Management Board after the end of the business year 2021 are described in special statement at the end of this Corporate Governance Statement June, EUR 12.8 million on 18 October and EUR 67.4 million on of NLB. 24 December), thereby reaffirming NLB Group's stable and successful business operations and strong capital position. At the General Meeting, the shareholders also voted on the Remuneration Policy for the Members of the Supervisory Board of NLB and the Members of the Management Board of NLB required by the latest amendments to the Companies Act, applicable to all the companies whose securities are traded on an organised market. In the future, NLB will put it forward to vote at the General Meeting upon any material amendment or at least every four years. 6. INFORMATION ABOUT THE COMPOSITION AND WORK OF THE MANAGEMENT AND SUPERVISORY BODY AND ITS COMMITTEES 6.1. The Management Board Composition of the Management Board The Management Board is the decision-making and representation body of the Bank. It manages the company, makes business decisions autonomously and independently, adopts the development strategy, ensures sound and effective risk management, acts with the highest professional integrity, protects Work of the Management Board In 2021, the Management Board continued to work on the implementation of the NLB Group Strategy. The very solid financial results of NLB Group in 2021 enabled the Bank to pay out a total of EUR 92.2 million as dividends to the shareholders in 2021 (EUR 12 million on 22 June, EUR 12.8 million on 18 October, and EUR 67.4 million on 24 December), thereby reaffirming NLB Group's stable and successful business operations and strong capital position. Combining these dividend pay-outs, privatisation proceeds, and the residual value of the RoS, NLB has fully repaid the amount it received for the 2013 recapitalisation. After successful acquisition of Komercijalna Banka, Beograd in December 2020, the Management Board immediately started working on its harmonisation with NLB Group's standards. The Management Board worked on intensive digitalisation and emphasis on top quality user experience, as well as a commitment to sustainable operations and development. The Management Board worked on a commitment to sustainable operations and development and implementation of the ESG factors and their inclusion in the NLB Group business model. All year long, the Management Board took all necessary actions in order to lower the impact and consequences of COVID-19 epidemic in the Group. A detailed information on composition and the amount of remuneration of the Management Board can be found in Appendices C.1 and C.3 of this statement. business secrets, and is held accountable for the legality of the Bank’s operations within the limits set by the relevant regulations. 6.2. The Supervisory Board In accordance with the two-tier governance system, ethical standards of management, considering the prevention of conflicts of interest. The Supervisory Board performs its tasks in accordance with the provisions of the applicable legislation governing the operations of banks and companies, the Bank’s Articles of Association, and its Rules of Procedure of the Supervisory Board of NLB. The Supervisory Board may engage legal and other consultants and institutions required by itself or its committees to perform their tasks. Composition of the Supervisory Board In accordance with changes made to the Articles of Association of NLB (June 2020) that enabled workers’ participation in the Bank’s management bodies, the Supervisory Board 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). At the beginning of 2021, the Supervisory Board of NLB consisted of 11 members, of which eight were representatives of shareholders (in addition to Primož Karpe, President and Andreas Klingen, Deputy members were also Mark William Lane Richards, Shrenik Dhirajlal Davda, Peter Groznik, David Eric Simon, Gregor Rok Kastelic, and Verica Trstenjak), and three were representatives of employees (Sergeja Kočar, Bojana Šteblaj, and Janja Žabjek Dolinšek). In January 2021, however, the Workers Council of NLB elected Tadeja Žbontar Rems as a member of the Supervisory Board of the NLB – the representative of the workers. With the mentioned election, the composition of the Supervisory Board was complete. Because the term of office of member of the Supervisory Board Peter Groznik expired in the middle of the year, the General Meeting of shareholders on 14 June 2021 elected Islam Osama Zekry as a new member of the Supervisory Board. Statement of Independence of the Members of the Supervisory Board In accordance with the Article 20 of the Articles of Association of the NLB all Supervisory Board, members must be independent experts. Persons representing the interests of employees in the Supervisory Board of the Bank At the beginning of 2021, the Management Board of the Bank Management Board related to the Banks’ business policy employment relationship with the Bank upon fulfilling certain consisted of Blaž Brodnjak, CEO, Archibald Kremser, CFO, and financial plan, approves the strategy of the Bank and terms and conditions. the Bank’s Supervisory Board issues approvals to the are considered independent despite the existence of an MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 131 A statement of independence, in which they declare • NLB Group Risk Appetite; NLB Group Risk Strategy; Regular • The Nomination Committee themselves on their meeting of the criteria of conflict of risk reports for NLB and NLB Group; Outcome of the • The Remuneration Committee interest, is provided by a candidate for a function of a member Pragmatic SREP 2020; NLB Group Recovery Plan for 2021; • The Operations and IT Committee of the Supervisory Board, upon each change that would Report on the Top 50 groups of clients by exposure in the mean change of his/her independence status once yearly. NLB Group, Restructuring TOP 20; Revised ILAAP – Internal Committees are composed of at least three members of the It is published on the Bank’s webpage (https://www.nlb.si/ liquidity adequacy process; Revised ICAAP – Internal Supervisory Board. The Worker’s Council can nominate one corporate-governance). Capital Adequacy Process; Reputation Risk Management; Supervisory Board member – a representative of the workers Foreclosed Strategy for 2021 – 2025; into each committee. The member of the Committee may only Work of the Supervisory Board In 2021, the Supervisory Board met at seven regular and • Internal Audit’s Annual Report for 2020; Internal Audit be appointed from among the members of the Supervisory Plan (2022 & long - term plan, Action Plan for Compliance Board. The term of office of Chair, the Deputy Chair, and 12 correspondence sessions. Upon receiving reports from &Integrity for 2022; Regular periodic reports on Internal members of the Committee should not exceed their term of its committees, the Supervisory Board acquainted itself or Audit; Compliance and Security, and on Information Security office as Supervisory Board members. The responsibilities of adopted the following most important decisions: Assurance in NLB; committees are defined in Rules of Procedure of the particular • NLB Group Strategy Implementation Progress Report; • Reports on the Documents received from the BoS and the Committee of the Supervisory Board of NLB. • Annual NLB Group Report for 2020; Report of the ECB; Reports on the implementation of the requirements Supervisory Board of NLB on the Results of Examining the of the BoS and ECB and on the implementation of the Composition of the aforementioned Committees in 2021 is Annual NLB Group Report for 2020; Corporate Governance requirements; described in detail in the Appendix C.2 of this statement. Statement of NLB; Risk Management Statement of NLB; • Renovation of Internal Act on Internal Controls System; Rules Annual Report of Internal Audit for 2020; Comprehensive and Procedures for the Sustainability Committee; Review of Opinion of the Internal Audit for 2020; the Diversity Policy; New Remuneration Policy for employees 6.3.1. The Audit Committee of the Supervisory Board of NLB The Audit Committee monitors and prepares draft resolutions • The Corporate Social Responsibility Report for 2020; for the NLB and the NLB Group; The Remuneration Policy for the Supervisory Board on accounting reporting, internal The NLB Group Sustainability Programme; ESC Internal of the Members of Supervisory Board of NLB and the control and risk management, internal audit, compliance, and Documentary Framework (Lending Policies); NLB Group Management Board of NLB; external audit, and as well monitors the implementation of Sustainability Framework; Confirmation of Pillar III • Investment Relations periodic Reports; NLB Workers’ regulatory measures. disclosures of the NLB Group for 2020; Council Report; • Proposals to convene the regular General Meeting of • Implementation of IT Strategy; Data Centres in the NLB shareholders for 14 June 2021 and extraordinary meeting for Group; Strategy update; IT Security KPI’s update; Status of IT 16 December 2021; • Information on the Supervisory Board election; Membership in the committees of the Supervisory Board; Conflict of interest Management; Information of departure of the member of the Management Board; Self-assessment of the collective suitability of the members of the Supervisory Board; Supervisory Board self-assessment and Action – periodic Reports; Cor Banking System Consolidation; • Consent to legal transactions with MIGA, Washington, Serbia Merger Scenarios; Information on Project Matthew; Expected sale of a subsidiary bank; large exposures, sale of receivables, write-offs of claims, approvals of transactions with persons in special relations with the Bank; establishment of new companies in Serbia and Macedonia, Plan; Achievements of the goals of the Management Board etc. in 2020; Annual self-assessment of employees performing special work; Information on award of variable part of salary of the members of the Management Board and employees performing special work; Future setup of the Governing Body; Fit & Proper assessment for candidates for membership of the Supervisory Board – representatives of employees; Composition and the amount of remuneration of the Supervisory Board members is described in the Appendices C.2 and C.4 of this statement. 6.3. The Supervisory Board Committees All five Committees for the Supervisory Board function as • Internal audit • Compliance of operations • Appointments of the Director of Global Risk and the Director consulting bodies of the Supervisory Board of NLB and • External audit of Compliance & Integrity and their performance; discuss the material and proposals of Management Board • NLB Group Financial Plan 2021 and financial projections of NLB for the Supervisory Board meetings related to a 2022-2025; Interim Reports on the NLB Group Operations; particular area. The Supervisory Board has the following Benchmark analysis of the NLB Group; NLB Group Budget committees. 2022 and Financial Projections 2023 – 2025; Information on cost optimisation; • The Audit Committee • The Risk Committee At the end of 2021, the composition of the committee was as follows: David Eric Simon (Chairman), Shrenik Dhirajlal Davda (Deputy Chairman), Primož Karpe, Gregor Rok Kastelic (members). Changes in membership of the committee that occurred during the year are reflected in the chart on Supervisory Board Committees (C4 below). The Audit Committee’s tasks are defined by relevant law, the Bank’s Articles of Association, Rules of Procedure of the Audit Committee of the Supervisory Board of NLB, resolutions of the Supervisory Board and other regulations, from which the Committee especially monitors and prepares proposals of resolutions for the Supervisory Board for the area: • Accounting and financial reporting • Internal control and risk management MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 132 There were seven regular sessions and three correspondence • NLB Group Recovery plan for 2021 There were seven regular sessions and one correspondent sessions of the Audit Committee in 2021. The following is a • NLB Group Non-performing Exposure and Foreclosed session of the Nomination Committee in 2021. The following summary of key topics considered by the Audit Committee: Assets Strategy for 2020 -2024 and semi-annual is a summary of key topics considered by the Nomination • NLB Group 2020 Annual Report, Overall Opinion of Internal implementation reports Committee: Audit for 2020; Corporate Governance Statement of NLB; • Reputation risk management – management mechanisms • The Supervisory Board election process and candidate Statement on Management of Risk of the NLB, NLB Group • Information on Pillar III Disclosures of the NLB Group selection; Bases for the Fit & Proper assessments of on Sustainable Operations in 2020; for 2020; and Acknowledgement of quarterly Pillar III candidates; The suitability matrix – the self-assessment of the • Regular interim reports on the operations of the NLB Group, Disclosures collective suitability of the Members of the Supervisory Board; Business Performance Indicatory for NLB and NLB Group, • Quarterly Information on status of information security in • The Management Board expansion process; New quarterly Internal Audit Reports, Compliance and Integrity NLB and NLB Group organisational structure; Reports, Reports on Information security assurance in NLB; • Report on Top 50 groups of clients by exposure in the NLB • Review of the Diversity Policy; Rules and Procedures for the • Audit Plan 2021, Internal Audit Plan (2022 & long-term), Action Group; Report on Top 20 largest restructuring cases selection of candidates. Plan for Compliance and Integrity for 2022; • Initiation of procurement process for selection of statutory • Regular reports on overdue material recommendations auditor for financial years from 2023 onwards; Auditing of 6.3.4. The Remuneration Committee of the of the Internal Audit; Reports on the documents received the electronic (ESEF) format of financial statements Supervisory Board of NLB from the BoS and ECB and on the implementation of the • Issuing subordinated Tier 2 bonds The Remuneration Committee carries out expert and requirements of the BoS and ECB; Policy of the Internal • Proposals for the issuance of prior consent of the independent assessments of the remuneration policies and Controls System; Rules of Procedure of the NLB Group Supervisory Board of NLB for a legal transaction based practices and formulates initiatives for measures related Sustainable Committee; on which the Bank’s total exposure to individual client or to improving the management of the Bank’s risks, capital, • Performance assessment of the Director of the Compliance a group of related clients would reach or exceed 10% of and liquidity; prepares proposals for remuneration-related and Integrity and the Director of the Internal Audit; the Bank’s eligible capital; consents to early repayments; decisions of the Supervisory Board; and supervises the • Self-assessment of the Audit Committee. approval of overdraft on business account of a client and remuneration of senior management performing the risk final write-offs of receivables management and compliance functions. 6.3.2. The Risk Committee of the Supervisory Board of NLB The Risk Committee monitors and drafts resolutions for the Supervisory Board in all risk areas relevant to the Bank’s • Report on the material court proceedings for NLB and NLB Group members At the end of 2021, the composition of the committee was as follows: Gregor Rok Kastelic (Chairman), Mark William Lane operations. It is consulted on the Group’s current and future risk 6.3.3. The Nomination Committee of the Richards (Deputy Chairman), Shrenik Dhirajlal Davda, Sergeja appetite, the corresponding risk profile and risk management Supervisory Board of NLB Kočar, and Bojana Šteblaj (members). Changes in membership strategy, and helps carry out control over senior management The Nomination Committee drafts proposed resolutions for of the committee that occurred during the year are reflected in concerning implementation of the risk management strategy. the Supervisory Board concerning the appointment and the chart on Supervisory Board Committees (C3 below). dismissal of the Management Board members; recommends At the end of 2021, the composition of the committee was as candidates for Supervisory Board members; recommends There were four regular and five correspondence sessions follows: Andreas Klingen (Chairman), Shrenik Dhirajlal Davda to the Supervisory Board the dismissal of members of of the Remuneration Committee in 2021. The following is a (Deputy Chairman), Islam Osama Zekry, Mark William Lane the Management Board and the Supervisory Board summary of key topics considered by the Remuneration Richards, Gregor Rok Kastelic, David Eric Simon (members). (representatives of capital); prepares the content of executive Committee: Changes in membership of the committee that occurred employment contracts for the President and members of • Annual self-assessment of employees performing special during the year are reflected in the chart on Supervisory the Management Board; evaluates the performance of the work in accordance with the Remuneration Policy; Board Committees (C4 below). Management Board and the Supervisory Board; and assesses • Realisation of goals of Management Board of NLB for 2020 the knowledge, skills, and experience of individual members and proposal for goals for 2021; There were five regular sessions of the Risk Committee in 2021. of the Management Board and Supervisory Board and the • Information on the award of variable part of salary to Following is a summary of key topics considered by the Risk bodies as a whole. Committee: members of the Management Board and employees performing special work in control function for the year • Statement of Management of Risk of the NLB At the end of 2021, the composition of the committee was as 2020; • NLB Group Risk Appetite follows: Primož Karpe (Chairman), Andreas Klingen (Deputy • Proposal for the payment of the non-deferred part of the • Regular quarterly risk reports of NLB and the NLB Group Chairman), Verica Trstenjak, Sergeja Kočar, Bojana Šteblaj variable pay for 2019 and payment of the deferred variable • NLB Group Risk Strategy; (members). Changes in membership of the committee part of salary for 2016 and 2017 for the Bank's Management • Internal liquidity adequacy process (ILAAP), The Internal that occurred during the year are reflected in the chart on Board; Capital Adequacy Assessment Process (ICAAP) in NLB Group Supervisory Board Committees (C4 below). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 133 • Proposal of new Remuneration Policy of members of Supervisory Board of NLB and members of the Management Implementation and the results achieved by the diversity the Supervisory Board of NLB and members of the Board of NLB (for the Supervisory Board members the policy policy during the reporting period: Management Board of NLB. is based on previously adopted resolutions of the General Meeting) that was changed due to recent amendments to 6.3.5. The Operations and IT Committee of the Companies Act (ZGD-1), and is to be followed by all the a) The Supervisory Board We estimate that the goals for 2021 were achieved, as the the Supervisory Board of NLB companies whose securities are traded on the regulated members of the Supervisory Board as a whole met at a high The Committee shall monitor and prepare draft resolutions market. for the Supervisory Board, whereby the main tasks that it performs are the following: monitors the implementation of the IT Strategy, Information Security Strategy, and Operations policy is published on the NLB website (https://www.nlb.si/ in 2022. It is also estimated that the representation of women is In accordance with the Companies Act (ZGD-1) mentioned international experience in various fields; which is maintained level the requirements related to the set of knowledge, skills, professional experience, and requirements related to relevant Strategy; monitors key operations and IT KPI’s and service quality indicators; monitors key operations and IT projects and initiatives; monitors operating risks in the area of Operations, IT and Security; monitors the recommendations for ensuring and increasing the level of information/cyber security issued by CISO, addresses the report on potential violations, events, and incidents in the area of IT security; and monitors the Target Operating Model implementation in the areas of IT, the Security Operating System, Competence Centre, and Operations. At the end of 2021, the composition of the committee was as follows: Mark William Lane Richards (Chairman), Islam Osama Zekry (Deputy Chairman), Andreas Klingen, Primož Karpe, Tadeja Žbontar Rems, Janja Žabjek Dolinšek (members). There were five sessions of the Operations and IT Committee 2021. The Operations and IT Committee acknowledged itself with: • IT Strategy progress update; IT Strategy implementation activities • Cash Processing Optimisation update; Cost optimisation update • Report on further progress of the Leveraging Information Capital project • New digital platform DEMO; Information on projects • KB IT Security update; GCC Belgrade – status of activities and plan • Date centres in Belgrade; Proof on concept on Core Banking System; Consolidation of the Core Banking System • Budgeting Group activities 6.4. Remuneration Policy for the Members of the Supervisory Board of NLB and Members of the Management Board of NLB corporate-governance), together with the date and voting 42% of the share, and it is planned in this amount for 2022. results. Remuneration of the members of the Management Board and the members of the Supervisory Board for 2021 can Regarding the age structure, it is also considered appropriate, be found in Appendices C3 and C.4 of this statement and in as the members of the Supervisory Board are represented the chapter on the Related Party Transactions of this annual in the age groups from 40 to 60+, which is also planned for report (Financial report). 7. DESCRIPTION POLICY ON THE PROVISION OF DIVERSITY OF THE MANAGEMENT BODY AND SENIOR MANAGEMENT 2022, with a slight increase in the share of members in the age group above 60 years (from 3 members to 5). b) The Management Board We estimate that the goals for 2021 have been achieved as the members of the Management Board as a whole meet at a high level the requirements related to the set of knowledge, skills, professional experience, and requirements related to relevant international experience in various fields; this is also planned Policy on the Provision of Diversity of the Management Body for 2022. and Senior Management was adopted by the General Meeting of shareholders on 10 June 2019. With mentioned Policy, NLB defines target diversity pursued with respect to adequate representation of members of the Management Board and the Supervisory Board and Senior Management from the perspective of education, range of knowledge, skills and experience, age, gender, and international experience, as appropriate for the NLB with regard to its characteristics. The Bank implements the principles of this policy through other policies and procedures, namely Policy on the selection of suitable candidates for members of the Supervisory Board and the Policy on the selection of suitable candidates for members of the Management Board, as well as procedures of the There were no women represented in the Management Board in 2021, however, the plan for 2022 was that the share of women would increase to 16.7% or one woman was expected to be represented among the members of the Management Board. As stated below this goal was realised already in January 2022. Regarding the age structure, in 2021 all members of the Management Board were in the age group of 40 to 50, however, in 2022 with additional members elected to the Management Board caused that the representation of this class increased (from 3 to 5), and one member of the Management Board will move to the age group from 50 to 60 Nomination Committee of the Supervisory Board. Key criteria for years. the selection of candidates were supplemented by criteria that include experience, reputation, management of potential conflict of interests, independence, time availability, and conditions for achieving collective suitability of the Supervisory Board. c) Senior Management For 2021, we estimate that the goals were achieved, as senior management at a high level met the requirements relating to the range of knowledge, skills, and professional experience. Regarding the requirements related to international experience in various fields, it is estimated The General Meeting of shareholders on 16 December 2021 Mentioned diversity policy is periodically reviewed by the adopted the Remuneration Policy of the members of the Nomination Committee of the Supervisory Board. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 134 that senior management has largely relevant international December 2020) NLB hereby states that the following changes user experience. Also, the fact that the bank is implementing experience, which is planned to the same extent in 2022. It is occurred between the end of accounting period up to the its commitment to sustainable operations and development, also estimated that 45% of women in senior management publication of this statement. appropriate and will be maintained as such in 2022. which all require and will require also in the future even more comprehensive, coordinated, and efficient management, both On 20 January 2022, the Supervisory Board appointed three of individual business areas and the Group as a whole, as well Regarding the age structure, it is also considered appropriate, new members to the Management Board, namely Hedvika as exploitation of all the synergies within the Group. as senior management in the age structure is very dispersed Usenik, Antonio Argir, and Andrej Lasič. They all come from and is thus represented in all age groups from 20 to 60 years, NLB or the Group, have extensive experience and proven The Bank's Management Board, supplemented with three new which is maintained in the same ratio in 2022. value creating a track record. All three of them are currently members, is properly equipped for this challenge and offers Additional information on the framework, objectives, and Usenik for Retail and Private Banking, Antonio Argir for the competencies. A five-year term of office for the new members chart with set goals of the Diversity Policy can be found in the NLB Group, and Andrej Lasič for Corporate and Investment will start after they have obtained a licence of the banking executive assistants to the NLB Management Board: Hedvika the best combination of various knowledge, experience, and chapter Human Resources of this annual report. Banking. regulator, so until then they will continue to perform the functions of executive assistants to the Management Board. Statement on changes that occurred between the end of The reasons that the Supervisory Board adopted a decision accounting period up to the publication of this statement to enlarge the Management Board from three to six Ljubljana, 11 April 2022 In accordance with Guidelines on Disclosure for Listed Komercijalna Banka, Beograd, that the Group's strategy also Companies, Point 6.3.2 (Ljubljana Stock Exchange, 18 focuses on intensive digitalisation and emphasis on top quality members are the fact that NLB has successfully acquired the Supervisory Board of NLB Management Board of NLB Primož Karpe Chairman Archibald Kremser CFO Andreas Burkhardt CRO Blaž Brodnjak CEO & CMO MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 135 Table 36: Composition of Management in financial year 2021 (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 President CEO 6 July 2016 6 July 2026 Slovene 1974 MBA Banking/Finance Membership in supervisory bodies in companies not related to the company Banks' Association of Slovenia, AMCham Slovenia, Handball Federation of Slovenia Andreas Burkhardt Member Archibald Kremser Member Petr Brunclík Member CRO CFO COO 18 September 2013 6 July 2026 31 July 2013 6 July 2026 German Austrian 18 May 2020 30 June 2021 Czech 1971 1971 1979 MBA MBA MSc Banking/Finance Banking/Finance Information technologies and applied informatics MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 136     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 Table 37: Composition of Supervisory Board and Committees in financial year 2021 (C.2) Name and Surname Position held (Chairman, Deputy Chairman, Member) First appointment to the position Conclusion of the position / term of office Representative of the company's capital structure / employees Primož Karpe Chairman 10 February 2016 2024 Andreas Klingen Deputy Chairman 22 June 2015 2023 David Eric Simon Member 4 August 2016 2024 Peter Groznik Member 8 September 2017 14 June 2021 Mark William Lane Richards Member 10 June 2019 2023 Shrenik Dhirajlal Davda Gregor Rok Kastelic Verica Trstenjak Member 10 June 2019 2023 Member 10 June 2019 2023 Member 15 June 2020 2024 Sergeja Kočar Member 17 June 2020 2024 Bojana Šteblaj Member 17 June 2020 2024 Janja Žabjek Dolinšek Member 20 November 2020 2024 Tadeja Žbontar Rems Member 22 January 2021 2025 Islam Osama Zekry Member 14 June 2021 2025 (i) Till 14 March 2022. (ii) Since 8 March also: IPSO, UK. 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 Representative of the company's capital structure Attendance at SB session in regard to the total number of SB session (for example 5/7) applicable on his/her mandate 7/7 7/7 male Slovene 1970 MSc Banking/ Finance male German 1964 University Degree Banking/ Finance 7/7 male British 1948 Higher National Diploma in Business Studies 3/3 male Slovene 1971 PhD Banking/ Finance Finance, industry, investment banking 7/7 7/7 7/7 7/7 7/7 7/7 7/7 7/7 male British 1966 MSc Banking/ Finance YES male British 1960 MSc Finance YES male Slovene 1968 MSc Banking/ Finance female Slovene 1962 PhD Law YES YES female Slovene 1968 MSc Management YES female Slovene 1962 MSc Management YES female Slovene 1957 MSc female Slovene 1957 MSc YES YES YES YES YES YES 4/4 male Egyptian 1977 PhD IT IT IT YES Angler d.o.o. Kyrgyz Investment and Credit Bank CISC, Credit Bank of Moscow(i), Nepi Rockcastle plc Jihlavan a.s., Czech Aerospace industries sro, Central Europe Industry Partners a.s. MSIN d.o.o., Ljubljana, CETIS d.d., Ljubljana BPL Global (Lloyds of London insurance Broker), Sheffield Haworth Ltd, Vencap International pic Ukraine (UK) PJSC Ukrgasbank(ii) EU Agency for Fundamental Rights, Vienna NO NO NO NO NO NO NO NO NO NO NO YES NO CIB Housing association, Egypt, Egyptian AI Council (Ministry of Communication and Information Technology) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 137         Name and Surname Membership in committees (audit, nominal, income committee, etc.) First appointment to the position Conclusion of the position/term of office Chairman/Deputy Chairman/ Member Attendance at sessions of SB's Committees in regard to the total number of SB's session (applicable on his/her mandate) Nomination Committee 19 February 2016 Nomination Committee 6 October 2017 14 June 2021 Shrenik Dhirajlal Davda Remuneration Committee Gregor Rok Kastelic Remuneration Committee Mark William Lane Richards Remuneration Committee Peter Groznik Bojana Šteblaj Sergeja Kočar Primož Karpe Andreas Klingen Peter Groznik Verica Trstenjak Sergeja Kočar Bojana Šteblaj David Eric Simon Primož Karpe Shrenik Dhirajlal Davda Gregor Rok Kastelic Janja Žabjek Dolinšek Andreas Klingen Peter Groznik Shrenik Dhirajlal Davda David Eric Simon Remuneration Committee Remuneration Committee Remuneration Committee Nomination Committee Nomination Committee Nomination Committee Nomination Committee Audit Committee Audit Committee Audit Committee Audit Committee Audit Committee Risk Committee Risk Committee Risk Committee Risk Committee Mark William Lane Richards Risk Committee Gregor Rok Kastelic Islam Osama Zekry Tadeja Žbontar Rems Risk Committee Risk Committee Risk Committee 28 June 2019 28 June 2019 26 June 2020 26 June 2020 8 April 2021 26 June 2020 15 April 2016 26 June 2020 26 June 2020 8 April 2021 7 April 2016 15 April 2016 28 June 2019 28 June 2019 28 January 2021 19 February 2016 6 October 2017 8 July 2021 7 April 2016 28 June 2019 26 June 2020 8 July 2021 28 January 2021 Mark William Lane Richards Operational and IT Committee 28 June 2019 Shrenik Dhirajlal Davda Operational and IT Committee 28 June 2019 Operational and IT Committee 28 June 2019 Operational and IT Committee 15 April 2016 Andreas Klingen Primož Karpe Bojana Šteblaj Operational and IT Committee 26 June 2020 12 April 2021 Tadeja Žbontar Rems Operational and IT Committee 8 April 2021 Janja Žabjek Dolinšek Operational and IT Committee 8 April 2021 Islam Osama Zekry Operational and IT Committee 8 July 2021 2024 2025 2025 2023 2023 2024 14 June 2021 2024 2024 2024 2023 2024 2024 2024 2024 2024 2023 2023 12 August 2021 2023 14 June 2021 2025 2024 2023 2023 2025 12 August 2021 2023 8 July 2021 2023 2024 Member Member/Chairman Deputy Chairman Member Member Member Chairman Deputy Chairman Member Member Member Member Chairman Member Member/Deputy Chairman Member Member Chairman Member/Deputy Chairman Deputy Chairman Member Member Member Member Member Chairman Deputy Chairman Member Member Member Member Member Deputy Chairman 4/4 4/4 4/4 4/4 2/2 3/3 7/7 7/7 3/7 7/7 7/7 2/2 7/7 7/7 7/7 7/7 4/4 6/6 3/3 2/2 6/6 6/6 6/6 2/2 2/2 5/5 5/5 4/5 5/5 2/2 3/3 3/3 2/2 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. Name and Surname none Attendance at sessions of SB's Committees in regard to the total number of SB's session (for example 5/7) Gender Qualification Year of birth Professional profile Membership in supervisory bodies in companies not related to the company MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 138             Table 38: Composition and amount of remuneration of the Management Board members in the financial year 2021 (C.3) Name and Surname Position held (President, Member) Fixed income - gross (1) Variable income - gross on the basis of quantity criteria on the basis of quality criteria Deferred income (3) Severance pay (4) Total (2) Bonuses (5) ‘Draw- back’ (6) Total gross (1+2+3+4+5-6) Total net(i) Blaž Brodnjak President 441,770.20 43,750.00  43,750.00 87,500.00 42,710.85  Archibald Kremser Andreas Burkhardt Member Member 420,808.88 41,666.67  41,666.67 83,333.34 42,710.85  405,091.54 40,104.17 40,104.17 80,208.34 42,710.85 0.00 0.00 0.00 2,310.19 34,116.83 32,671.82 Petr Brunclík Member 221,963.09 7,316.72 7,316.72 14,633.44 0.00  385,000.00 30,091.68 0.00 0.00 0.00 0.00 574,291.24 241,568.49 580,969.90 244,905.39 560,682.55 237,273.57 651,688.21 327,310.24 (i) This chart does not include other benefits and cost refunds. Table 39: Composition and amount of remuneration of members of the Supervisory Board and committee members in the financial year 2021 (in EUR) (C.4) Name and Surname Position held (Chairman, deputy Chairman, member, external member of Committee) Payment for the performance of services - gross per year (1) Attendance fees for SB and committees - gross per year (2) Total gross (1+2) Total net(i) Travel expenses Benefits Primož Karpe Chairman Andreas Klingen Deputy Chairman Islam Osama Zekry Member David Eric Simon Peter Groznik Mark William Lane Richards Member Member Member Shrenik Dhirajlal Davda Member Gregor Rok Kastelic Member Verica Trstenjak Sergeja Kočar Bojana Šteblaj Member Member Member Janja Žabjek Dolinšek Member Tadeja Žbontar Rems Member 96,000.00 90,000.00 38,607.52 81,000.00 32,800.00 81,000.00 72,000.00 81,000.00 65,790.32 11,855.76 15,655.26 6,839.40 26,656.31 - - - - - - - - - - - - - 96,000.00 90,000.00 38,607.52 81,000.00 32,800.00 81,000.00 72,000.00 81,000.00 65,790.32 11,855.76 15,655.26 6,839.40 26,656.31 74,400.00 90,000.00 25,432.70 62,775.00 23,855.44 53,358.72 47,430.00 53,358.72 43,339.32 8,622.69 11,386.05 4,974.27 19,387.12 4,629.06 4,946.99 5,704.85 5,251.42 0.00 2,642.98 2,367.17 758.31 0.00 0.00 0.00 0.00 0.00 447.47 447.47 447.47 447.47 0.00 447.47 447.47 447.47 447.47 447.47 447.47 447.47 447.47 (i) After the prepayment of income taxes which is not taken into account in potential subsequent balancing payments of personal income taxes.  MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 139                 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Statement of Management of Risk NLB’s Management Board and Supervisory Board provide herewith a concise statement of the Risk Management according to Article 17 of the Decision on Internal Governance Arrangements, the Management body and the Internal Capital Adequacy Assessment Process for Banks and Savings banks (Official Gazette of the RoS, no. 73/2015 and 115/2021), Regulation (EU) 575/2013, article 435 (Risk management objectives and policies), point (e) and (f), as well as EBA Guidelines on Internal Governance (EBA/GL/2021/05), and EBA Guidelines on Disclosure requirements (EBA GL/2016/11). Risk Management in the Group, representing an important element of the Group’s overall corporate governance, is implemented in accordance with the set strategic guidelines, established internal policies, and procedures which take into account the European banking regulations, the regulations adopted by the BoS, the current EBA guidelines, and the relevant good banking practices. EU regulations are followed by the Group, where the Group subsidiaries operating outside Slovenia are also compliant with the rules set by the local regulators. The Group gives high importance to the risk culture and awareness of all relevant risks within the entire Group. Maintaining risk-awareness is engrained in the business strategy of the Group. The business and operating environment, relevant for the Group’s operations, is changing with trends such as changing customer behaviour, emerging new technologies and competitors, sustainable financing, and increasing new regulatory requirements. Respectively, Risk Management is continuously adapting with aim to detect and manage new potential emerging risks. The Group uses the ‘three lines of defence framework’ as an important element of its internal governance, whereby the Risk Management function acts as a second line of defence. The Group’s has enhanced overall corporate governance which reflects in the lowering of the SREP requirement in recent years. A robust and comprehensive Risk Management framework is defined and organised with regard to the Management tools enable adequate oversight of the Group’s limits or target values are regularly reported to the respective risk profile, proactively support its business operations, and committees and/or the Management Board of the Bank, the its management by incorporating escalation procedures Risk Committee of the Supervisory Board, and the Supervisory and using different mitigation measures when necessary. Board of the Bank. In this respect, the Group is constantly enhancing and complementing the existing methods and processes in all Risk Additionally, the Group established a comprehensive stress Management segments. testing framework and other early warning systems in different risk areas, with the intention to contribute to setting and The Group is engaged in contributing to sustainable finance pursuing the Group’s business strategy, to support decision- by incorporating environmental, social and governance making on an ongoing basis, to strengthen the existing internal (ESG) risks into its business strategies, risk management controls, and to enable a timely response when necessary. framework, and internal governance arrangements. With the The stress-testing framework includes all material types of risk adoption of the NLB Group Sustainability programme, the and different relevant stress scenarios or sensitivity analysis, Group implemented sustainability elements into its business according to the vulnerability of the Group’s business model. model. The goal of this strategic, organisation-wide initiative Stress-testing has an important role when assessing the is to ensure sustainable financial performance of the Group Group’s resilience to stressed circumstances, namely from by considering ESG risks and opportunities in its operations, profitability, capital adequacy, and forward-looking perspective and to actively contribute to a more balanced and inclusive about liquidity. As such, it is embedded into the Group’s Risk economic and social system. Thus, sustainable finance Management system, namely Risk appetite, ICAAP, ILAAP, and integrates ESG criteria into Group’s business and investment the Recovery plan, as an important component of sound Risk decisions for the lasting benefit of Group’s clients and Management. Beside internal stress-testing, the Group as a society. The NLB Group Sustainability Committee oversees systemically important bank also participates in the regulatory the integration of the ESG factors to the Group business stress test exercises carried out by the ECB. model. The management of ESG risks addresses the Group’s overall credit approval process and related credit portfolio The Group is one of the largest Slovenian banking and management. It follows ECB and EBA guidelines with tendency financial groups with an important presence in the SEE of their comprehensive integration into all relevant processes. region. In accordance with its strategic orientations intends The availability of ESG data in the region where the Group to be a sustainably profitable, predominantly working with operates is still lacking, nevertheless the Group strives to clients on its core markets, providing innovative but simple obtain relevant clients’ data as prerequisite for adequate customer-oriented solutions and actively contributing to a decision-making. more balanced and inclusive economic and social system. The Group has a well-diversified business model. Efficient The Group plans a prudent risk profile, optimal capital usage, managing of risks and capital is crucial for the Group to and profitable operations in the long run, considering the sustain long-term profitable operations. Based on the Group’s risks assumed. The Business strategy, the Risk appetite, the business strategy, credit risk is the dominant risk category, Risk strategy, and the key internal risk policies of the Group, followed by credit spread risk on banking book portfolio, approved by the Management Board and the Supervisory interest rate risk in banking book, operational risk, liquidity Board of NLB, specify the strategic objectives and guidelines risk, market risk, and other non-financial risks. Regular risk concerning risk assumption, and the approaches and identification and their assessment is performed within ICAAP methodologies of monitoring, measuring, mitigating, process with the aim of assuring their overall control and and managing all types of risk at different relevant levels. effective Risk Management on an ongoing basis. Group’s business and risk profile, based on a forward-looking Moreover, the main strategic risk guidelines are consistently perspective to meet internally set strategic objectives and integrated into the regular business strategy review, the Managing risks and capital efficiently at all levels is crucial all external requirements. A proactive Risk Management budgeting process, and other strategic decisions, whereby for the Group’s sustained long-term profitable operations. and control system is primarily based on the Risk appetite informed decision-making is assured. The Group is regularly Management of credit risk, representing the Group’s most and Risk strategy, which are consistent with the Group’s monitoring its target risk appetite profile and internal capital important risk, focuses on the taking of moderate risks – Business strategy, and focused on early risk identification and allocation, representing the key component of proactive diversified credit portfolio, adequate credit portfolio quality, Contents efficient Risk Management. Set governance and different Risk management. Risk limits usage and potential deviations from sustainable cost of risk and ensuring an optimal return 140 considering the risks assumed. The liquidity risk tolerance is • improvement in the quality of the credit portfolio, sufficient • Transactional FX risk 1.10% of capital, low. The Group must maintain an appropriate level of liquidity NPL coverage, sustainable credit risk volatility, sustainable • Net losses from operational risk 1.6% of capital requirement at all times to meet its short-term liabilities, even if a specific cost of risk across the economic cycle, sustainable industry for operational risk. stress scenario is realised. Further, with the aim of minimising concentration, sustainable exposure to project financing, this risk, the Group pursues an appropriate structure of • maintenance of a solid liquidity position, maintaining stable COVID-19 did not have a meaningful impact on the quality sources of financing. The Group limited exposure to credit customers’ deposits as the main funding base, of the credit portfolio. The Group is compliant with EBA spread risk, arising from the valuation risk of debt securities • diversification of risk in exposures to banks and guidelines on payment moratoria and is very prudent in portfolio servicing as liquidity reserves, to the moderate level. sovereigns, The Group’s basic orientation in the management of interest • limited exposure to credit spread risk, rate risk is to limit unexpected negative effects on revenues • limited exposure to interest rate risk, identifying any increase in credit risk. The vast schemes introduced by the governments in the Group countries providing moratoriums to eligible clients as part of the and capital that would arise from changed market interest • limited exposure to foreign exchange risk, COVID-19 pandemic measures had been phasing out during rates and, therefore, a moderate tolerance for this risk is • sustainable tolerance to net losses from operational risk. the 2021. With respect to the COVID-19 pandemic and its stated. When assuming operational risk, the Group pursues implications on the business environment, the Group faced the orientation that such risk must not significantly impact Sustainable ESG financing in accordance with Environmental growing excess liquidity and managed to stay well capitalised. its operations. Risk appetite for operational risks is low to and Social Management System (ESMS) will be integrated moderate, with a focus on mitigation actions for important in the Group's Risk appetite statement in the year 2022. Consequently, the Group concluded the year 2021 as self- risks and key risk indicators servicing as an early warning Additional key risk indicators and targets in the area of ESG funded, with a strong liquidity and solid capital position, system. The conclusion of transactions in derivative financial are going to be addressed based on NLB Group Sustainability demonstrating the Group’s financial resilience. The acquired instruments at NLB is primarily limited to servicing customers programme and ESMS. and hedging Bank’s own positions. In the area of currency Komercijalna Banka group has a similar business model to the Group’s, and so, its impact on the Group’s risk profile at risk, the Group thus pursues the goals of low to moderate The values of the most important risk appetite indicators the end of the year 2020 was moderate with no other major exposure. The tolerance for all other risk types, including non- of the Group, as at the end of year 2021, reflecting the impacts during the year 2021. Otherwise, there were no other financial risks, is low with a focus on minimising their possible interconnection between strategic business orientations, risk transactions of sufficiently material nature to impact on the impacts on the Group’s operations. ESG risks do not represent strategy, and targeted risk appetite profile, were following: Group’s risk profile or distribution of the risks on the Group a new risk category, but rather an aggravating factor for the • Total capital ratio 17.8%, level. existing types of risks, such as credit and operational risk. The • Tier 1 capital ratio 15.5%, Group integrates and manages them within the established • Common Equity Tier 1 ratio (CET1) 15.5%, A Condensed Statement of the management of risk is risk management framework. • Leverage ratio 10.2%, • Cost of risk -41 bps, also published on the Bank’s intranet with the aim of strict adherence of the Banks’ employees at daily operations of the The main NLB Group Risk Appetite Statement objectives are • The share of non-performing exposure (NPE%) by EBA 1.7%, Bank, as regards the definition and importance of a consistent following: • Non-performing loans coverage ratio 2 (NPL CR 2) 57.9%, tendency of the adopted risks, and ways to take into account • preservation of regulatory capital adequacy, • Loan-to-deposit ratio (LTD) 60.0%, when adopting its daily business decisions. • preservation of internal capital adequacy, • fulfilment of the MREL requirement, • maintenance of low leverage, • LCR 252.6%, • NSFR 185.2%, • EVE sensitivity (of 200 bps) -6.4% of capital, Ljubljana, 11 April 2022 Supervisory Board of NLB Management Board of NLB Primož Karpe Chairman Archibald Kremser CFO Andreas Burkhardt CRO Blaž Brodnjak CEO & CMO MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 141 Statement on Non- financial Operation In line with Article 70.c of the Companies Act (ZGD-1), 21 the Bank reports on non-financial operation separately from the NLB Group Annual Report 2021. The Bank’s disclosures of non- financial operation are prepared in NLB Group Sustainability Report 2021 (https://www.nlb.si/sustainability), by applying the GRI Sustainability Reporting Standards (GRI) and thus ensuring compliance with the requirements of the regulations regarding the disclosure of non-financial information. As part of the NLB Group Sustainability Report 2021, the Bank publishes UNEP FI PRB Self-Assessment Report on how the Bank is implementing the UN Principles for Responsible Banking (UN PRB). The UN PRB set out the banking industry’s role and responsibility in shaping a sustainable future and in aligning the banking sector with the objectives of the UN SDGs and the 2015 Paris Climate Agreement. Ljubljana, 11 April 2022 Management Board of NLB Archibald Kremser CFO Andreas Burkhardt CRO Blaž Brodnjak CEO & CMO 21 Official Gazette of the RoS, No. 65/09, 33/11, 91/11, 32/12, 57/12, 44/13 – Resolution of the Constitutional Court 82/13, 55/15, 15/17, 22/19 – Business Secret Act, 158/20 – Integrity and Corruption Prevention Act-C and 18/21). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 142 We are attentive to what you cherish the most. 52 years ago, we celebrated Earth Day for the first time. 40 years ago, we introduced recycling. 2 years ago, we committed to low-carbon economy. What will the next generations commit to? The rising importance of environmental and social issues plays an important role in the quality of life in our local region. By incorporating sustainability in our banking services, we not only strengthen relations with our clients, employees, suppliers, investors and broader communities, but also take care of present and future generations. We do not perceive sustainability as merely a letter on a piece of paper, but as a string of decisions, measures and actions that will provide new opportunities for the generations to follow. Disclosure on Shares and Shareholders of NLB 1. Information pursuant to the Companies Act (ZGD-1), Article 70, paragraph 6 rights on the basis of the instructions of an individual third party for whose account it has 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 his own account and that this person is not, directly or indirectly, a holder of more than 25% of the Bank’s voting rights. 1.1 Structure of the Bank’s share capital The Bank has issued only ordinary registered no-par value The acquirer who exceeds the share of 25% of the Bank’s shares with voting rights, and does not require the issuance shares, the holders of which have a voting right and the of approval for the transfer of shares, or does not receive the right to participate at the General Meeting of the Bank’s approval of the Bank, may exercise the voting right from 25% shareholders, the pre-emptive right to subscribe for new of the shares with the voting rights. shares in case of a share capital increase, the right to profit 1.8 The company’s rules on the appointment or replacement of management and supervisory board members and changes of the articles of association This information is included in the chapter Corporate Governance Statement of NLB. 1.9 Authorisations given to management, particularly authorisations to issue or purchase own shares This information is included in the chapter Corporate participation (dividends), the right to a share in the surplus in There are no restrictions other than those mentioned and Governance Statement of NLB. the event of liquidation or bankruptcy of the Bank, and the those that are regulatory. right to be informed. All shares belong to a single class and are issued in book-entry form. Information regarding the shareholder structure of NLB (as at 31 December 2021) is available in the subchapter Shareholder Structure of NLB in the chapter Key Highlights. 1.2 All restrictions relating to the transfer of shares and the restrictions on voting rights The shares of the Bank are freely transferable, subject to the provisions of the Articles of Association of the Bank which require 1.3 Qualifying holdings This information is included in the chapter Corporate Governance Statement of NLB. 1.4 Securities carrying special controlling rights This information is included in the chapter Corporate Governance Statement of NLB. 1.5 The employee share scheme, if used by the 1.10 All major agreements to which the company is a party and which take effect, are changed or cancelled following a change in control over the company resulting from a bid, as laid down by 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 would take effect, be changed, or cancelled following a change in control over the Bank resulting from a company, for shares to which the scheme bid. the approval of the Supervisory Board, namely for the transfer relates and about the method of exercising of shares of the Bank by 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 acquirer, exceeds the share of 25% of the Bank’s voting shares. Approval for the transfer of shares is issued by the Supervisory Board. The Bank rejects the request for approval of transfer shares if the acquirer, together with the shares held by the acquirer before the acquisition and the 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. control over this scheme, if the controlling rights are not exercised directly by employees The Remuneration policy for employees performing special work defines the payments with financial instruments according to the applicable banking law, however, there was no payout in instruments in 2021. 1.11 All agreements between the Bank and its management or supervision bodies or its employees which envisage compensation if, due to a bid as laid down by the Act governing M&A, these persons resign, are dismissed without a well-founded reason, 1.6 Explanation regarding restrictions or their employment is terminated related to voting rights This information is included in the chapter Corporate Governance Statement of NLB. Notwithstanding the provision mentioned in the first paragraph, approval 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 exercise voting rights from these shares at its sole discretion, while at the 1.7 All agreements among shareholders which are known to the company and could result in restrictions relating to the transfer of securities or voting rights same time committing to the Bank, it will not exercise voting The Bank is not aware of such agreements. In line with the employment contracts of the members of the Management Board, in case the Supervisory Board recalls a member of the Management Board ‘for other business and economic reasons,’ such a member of the Management Board of NLB is entitled to compensation for early termination of his term of office. The member of the Management Board shall not be entitled to compensation for early termination of the term of office if he is employed in the Bank or in the Group after the termination of the term of office. In the event of resignation, the member of the Management Board shall MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 144 not be entitled to any compensation for early discontinuation of the term of office, unless otherwise decided by the Supervisory Board. 3. Stock option agreements The Bank has no stock option agreements in relation with 2. Number of shares held by members of the Supervisory Board and Management Board Table 40: Number of shares held by members of the Supervisory Board and Management Board listed shares. 4. Dividend taxation Withholding tax In 2021 a Slovenian payer was required to deduct and withhold the amount of Slovenian corporate or personal income tax from dividend payments made to the certain categories of payees: Shares held as at 31 December 2021 • Individuals: 27.5% • Intermediaries: 27.5% Number % • Legal entities (other than Intermediaries): 15% Name of member of Supervisory Board Primož Karpe Andreas Klingen David Eric Simon(i) Islam Osama Zekry Gregor Rok Kastelic Shrenik Dhirajlal Davda Mark William Lane Richards Verica Trstenjak Sergeja Kočar Bojana Šteblaj Janja Žabjek Dolinšek Tadeja Žbontar Rems Name of member of Management Board Blaž Brodnjak Archibald Kremser Andreas Burkhardt Petr Brunclík 1,136 1,198 582 0.006% 0.006% 0.003% — — — — — 61 — — — Number — — — — — 0.000% — — — % 1,500 0.008% 791 451 278 0.004% 0.002% 0.001% In 2022, the tax rate for individuals and intermediaries has changed from 27.5% to 25%. There are some exemptions if dividends are paid to intermediaries and legal entities For the purposes of Slovenian tax legislation, the GDR depositary will 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 25% (in 2021 27.5%). A holder, an owner of a GDR or a beneficial owner will be entitled, if and to the extent applicable, to claim a refund of the withholding tax. In the case of legal entities, the exemptions are related to the characteristics of the legal entities. Application of Double Tax Treaties If the payee is not an intermediary, Slovenian tax authorities may approve the application of a lower tax rate specified in the double tax treaty between the RoS and the country of residence of the payee if the Slovenian payer provides certain information on the payee and a confirmation that the payee is a resident for taxation purposes in such a country, issued by the tax authorities of such a country. (i) David Eric Simon holds 2,910 GDRs, which is equal to 582 shares (as 1 share represents 5 GDRs). Refund of Withholding Tax If the Slovenian tax was deducted and withheld at a higher tax rate than it would be paid if a Slovenian payer would make the dividend payment 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 Dividends with respect to the shares received by a legal person who is a Slovenian resident are exempt from Slovenian corporate income tax (davek od dohodkov pravnih oseb). Individuals The amount of tax withheld from a dividend payment received by an individual constitutes the final amount of Slovenian Personal Income Tax (dohodnina) with respect to such a dividend payment. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 145 Events After the End of the 2021 Financial Year Management Board change On 20 January, the Supervisory Board appointed Hedvika Usenik, Antonio Argir and Andrej Lasič as members of the Management Board, thus expanding it to six members in total. Their five-year term of office will start after they have obtained their respective licences. Until then, they will continue to act as executive assistants to the Management Board. Swiss Francs Law adopted On 2 February, the Slovenian National Assembly adopted the Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs (CHF Law). The CHF Law affects all loan agreements denominated in Swiss francs (regardless of whether the agreements are still in force) concluded between banks operating in Slovenia (including NLB) as lenders and individuals as borrowers in the period from 28 June 2004 to 31 December 2010, and provides for a cap on the exchange rate between Swiss francs and the Euro to be set at 10% volatility and shall be applied from the conclusion of any of the affected loan agreements. NLB intends to use all legal remedies against the CHF Law before the Constitutional Court and, if necessary, in front of relevant European forums. In this respect, the banks (including NLB) on 28 February filed an initiative with the Constitutional Court of the RoS to initiate proceedings to assess the constitutionality of the CHF Law and a proposal for its temporary suspension of enforcement. The Constitutional assessment of the CHF Law and if outlined legal remedies are Key information of the acquired bank unsuccessful, the Bank estimated a negative pre-tax effect on the operations of NLB and NLB Group should not exceed EUR 70 - 75 million. The Bank considers this as a non-adjusting event after the reporting period. New SREP Decision On 2 February, the ECB issued a new SREP decision for the Bank under which it has reduced the P2R from 2.75% to 2.60%, Income Statement Net interest income Net fee and commission income Other income Total income while P2G remains at 1.00%. The new SREP decision applies as Expenses of 1 March. Consequently, the Bank is as of this date required Pre-provision income to maintain the OCR at the level of 14.10% on a consolidated Provisions and impairments basis, consisting of (i) 10.60% TSCR, and (ii) 3.5% CBR. Geopolitical tensions in Ukraine In February, Russian Federation began a military invasion of Ukraine. Group has limited exposure to Russian Federation and Ukraine which mainly derives from NLB’s investment in Russian sovereign bonds in the approximate amount of Profit before tax Profit after tax Balance Sheet Total assets Loans and advances to customers Deposits from non-bank customers EUR 20 million. The manner and timing of their settlement Shareholders' equity in the given circumstances is not determined yet. Since the beginning of the tensions, the credit spreads widening was observed, which is currently impacting the Bank’s FVOCI positions. Further information is available in Note 9 of the Financial part of this report. Sberbank banka d.d. acquisition On 1 March, the Single Resolution Board (SRB) in coordination Ratios(i) Net interest margin(ii) Business operating margin(ii) ROE a.t. NPL ratio(iii) CET1 ratio in EUR million 2021 Unaudited 2020 30 12 -1 43 -29 13 -11 1 1 1,839 1,200 1,340 184 1.61 2.29 0.52 5.5 18.8 26 14 2 43 -30 13 1 13 10 1,721 1,153 1,274 195 in % 1.49 2.49 5.4 4.4 18.7 Court of the RoS adopted a decision on 10 March to suspend in with local regulator BoS decided to adopt a resolution scheme whole the implementation of the CHF Law. The implementation in respect of Slovenian Sberbank banka d.d. (Sberbank). of the law has been suspended until the final decision of the Resolution scheme envisaged the application of the sale of Constitutional Court on the conformity of the CHF Law with the business tool for Sberbank and BoS issued a decision for the Constitution. During this time the deadlines set for individual sale of 100% shares issued by Sberbank. Under the resolution liabilities of the banks do not apply. Until the final decision of scheme, and following a marketing procedure, the SRB has the Constitutional Court on the constitutionality of the CHF Law decided to transfer all the shares issued by the Sberbank to is made, the NLB will act in accordance with the applicable NLB. Therefore as of 1 March NLB became a 100% owner of legislation and courts’ decisions, and will, at the same time, Sberbank. In the following months activities for integration of exercise all legal remedies at its disposal. Based on the Sberbank within NLB Group will be carried out. Source: Sberbank banka d.d. reports: for 2020 Annual report, for 2021 data from Sberbank banka d.d. Notes: (i) Ratios as calculated by Sberbank banka d.d. (ii) Based on total assets. (iii) Non-performing loans and other financial assets / classified loans and other financial assets (excluding balances with central bank accounts and sight deposits with banks). Further information about the acquisition of Sberbank banka d.d. is available on the Bank’s website under Investor News. Supervisory and Management board transactions with NLBR shares Between 25 February and 23 March, Primož Karpe, President of the Supervisory Board, Sergeja Kočar, Member of the Supervisory Board, Blaž Brodnjak, CEO and CMO, and Andreas Burkhardt, CRO together acquired 468 ordinary shares of NLB ISIN: SI0021117344, LJSE ticker NLBR. Notification of major holdings On 7 March the shareholding of Schroders in the Bank changed from 5.061% to 4.95%. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 146   Reconciliation of Financial Statements in Business and Financial Part of the Report Table 41: Income Statement of NLB Group for the annual period ended 31 December 2021 in EUR million Financial report in EUR thousands Notes Business report Net interest income Net fee and commission income Dividend income Net income from financial transactions Net other income Net non-interest income Total net operating income Employee costs Other general and administrative expenses 409.4 237.2 Interest and similar income Interest and similar expenses Fee and commission income Fee and commission expenses 0.2 Dividend income Gains less losses from financial assets and liabilities not measured at fair value through profit or loss Gains less losses from financial assets and liabilities held for trading 38.4 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 Gains less losses from modification of financial assets Gains less losses on derecognition of non-financial assets Other net operating income Cash contributions to resolution funds and deposit guarantee schemes Gains less losses from non-current assets held for sale Net gains or losses on derecognition of investments in subsidiaries, associates and joint ventures Administrative expenses (18.3) 257.6 666.9 (231.3) (137.5) Depreciation and amortisation (46.5) Depreciation and amortisation Total costs Result before impairments and provisions Impairments and provisions for credit risk Other impairments and provisions Impairments and provisions Gains less losses from capital investment in subsidiaries, associates, and joint ventures Result before tax Income tax (415.4) 251.5 35.8 (27.1) 8.8 1.1 Provisions for credit losses Impairment of financial assets Provisions for other liabilities and charges Impairment of non-financial assets Share of profit from investments in associates and joint ventures (accounted for using the equity method) 261.4 Profit before income tax (13.5) Income tax Result of non-controlling interests 11.5 Attributable to non-controlling interests Result after tax 236.4 Attributable to owners of the parent 477,829 (68,469) 332,589 (95,413) 223 167 21,194 16,838 167 345 (263) 2,681 23,221 (35,140) 248 (9,298) 257,559 666,919 (368,851) (46,528) (415,379) 251,540 8,504 27,331 (22,670) (4,407) 8,758 1,108 261,406 (13,538) 11,464 236,404 4.1. 4.1. 4.3. 4.3. 4.2. 4.4. 4.5. 4.6. 5.5.a) 4.7. 4.12. 4.8. 4.10. 4.15. 5.12.b) 4.9. 4.11. 4.13. 4.14. 4.13. 4.14. 5.12.d) 4.16. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 147 Table 42: Statement of Financial Position of NLB Group as at 31 December 2021 Business report ASSETS Cash, cash balances at central banks, and other demand deposits at banks Loans to banks Net loans to customers Financial assets - Trading book - Non-trading book in EUR million Financial report in EUR thousands 5,005.1 Cash, cash balances at central banks and other demand deposits at banks 140.7 Financial assets measured at amortised cost - loans and advances to banks Financial assets measured at amortised cost - loans and advances to customers 10,587.1 5,208.3 Non-trading financial assets mandatorily at fair value through profit or loss - part (only loans) 7.7 Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss - part (without loans) 5,200.6 Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities Investments in subsidiaries, associates, and joint ventures 11.5 Investments in associates and joint ventures Property and equipment, investment property Intangible assets 294.6 Property and equipment Investment property 59.1 Intangible assets Other assets 271.1 Current income tax assets Financial assets measured at amortised cost - other financial assets Derivatives - hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk TOTAL ASSETS LIABILITIES Deposits from customers Deposits from banks and central banks Borrowings Deferred income tax assets Other assets Non-current assets held for sale 21,577.5 Total assets 17,640.8 Financial liabilities measured at amortised cost - due to customers 71.8 932.6 Financial liabilities measured at amortised cost - deposits from banks and central banks Financial liabilities measured at amortised cost - borrowings from banks and central banks Financial liabilities measured at amortised cost - borrowings from other customers Financial liabilities held for trading Financial liabilities measured at amortised cost - other financial liabilities Derivatives - hedge accounting Other liabilities 427.6 Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Subordinated liabilities Equity Non-controlling interests TOTAL LIABILITIES AND EQUITY 288.5 Financial liabilities measured at amortised cost - subordinated liabilities 2,078.7 Equity and reserves attributable to owners of the parent 137.4 Non-controlling interests 21,577.5 Total liabilities and equity 5,005,052 140,683 10,587,121 - 5,208,325 7,678 21,161 3,461,860 1,717,626 11,525 247,014 47,624 59,076 122,229 568 7,082 3,948 38,977 91,221 7,051 21,577,496 17,640,809 71,828 858,531 74,051 7,585 206,878 35,377 119,404 5,878 3,045 49,468 288,519 2,078,733 137,390 21,577,496 Notes 5.1. 5.6.b) 5.6.c) 5.3.a) 5.2.a) 5.3.a) 5.4. 5.6.a) 5.12.d) 5.8. 5.9. 5.10. 5.6.d) 5.5.b) 5.5.c) 5.17. 5.13. 5.7. 5.15.a) 5.15.a) 5.15.b) 5.15.b) 5.2.b) 5.15.d) 5.5.b) 5.16. 5.17. 5.19. 5.15.c) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 148 Alternative Performance Indicators 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 investors and as such are useful for disclosure. The APIs are used internally to 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. Cost of risk – Calculated as the ratio between credit impairments and provisions annualized from the income Cost-to-income ratio (CIR) – Indicator of cost efficiency, calculated as the ratio between the total costs and total net statement and average net loans to customers. operating income. Table 43: NLB Group cost of risk calculation(iii) Table 44a: NLB Group and NLB CIR calculation in EUR million NLB Group 2021 2020 NLB Group 2021 2020 2019 2021 in EUR million NLB 2020 2019 Numerator Numerator Credit impairments and provisions(i) -40.8 47.6 Total costs 415.4 293.9 305.0 183.6 180.5 191.1 Denominator Denominator Average net loans to customers(ii) 10,080.9 7,696.1 Total net operating income Cost of risk (bps) -41 62 Cost to income ratio (CIR) 666.9 62.3% 504.5 58.3% 517.2 59.0% 361.5 50.8 % 311.7 57.9% 354.7 53.9% (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 the income statement) in the period divided by the number of months for reporting period and multiplied by 12. The net established Credit impairments and provisions are shown with a positive sign, and the 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 the 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). (iii) Komercijalna Banka group included from 2021 on. CIR is adjusted for 2019 to changed schemes prescribed by the BoS. Table 44b: 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 Komercijalna Banka, Beograd 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 Numerator Total cost 28.6 26.5 15.2 13.9 16.2 15.1 13.5 12.3 17.4 13.6 22.2 20.4 88.0 Denominator Total net operating income Cost to income ratio (CIR) 68.4 62.7 33.2 30.1 28.1 26.7 41.8 38.7 28.1 24.3 30.3 26.6 128.7 41.8% 42.3% 45.7% 46.1% 57.7% 56.5% 32.4% 31.8% 61.7% 56.0% 73.1% 76.4% 68.4% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 149 FVTPL – Financial assets measured mandatorily at fair value through profit or loss (FVTPL) represent the minor part IFRS 9 classification into stages for loan portfolio: • Stage 3 – An impaired portfolio: NLB Group recognises lifetime allowances for these financial assets. The definition (0.002% December 2021; 0.30% December 2020) of the loan IFRS 9 requires an expected loss model, where an allowance of default is harmonised with the EBA guidelines. portfolio (before the deduction of fair value for credit risk; for the expected credit losses (ECL) are formed. Loans loans with contractual cash flows that are not solely payments measured at amortised costs (AC) are classified into the A significant increase in credit risk is assumed: when a credit of principal and interest on the principal amount outstanding). Classification into stages is calculated in the internal data following stages (before deduction of loan loss allowances): • Stage 1 – A performing portfolio: no significant increase of rating significantly deteriorates at the reporting date in comparison to the credit rating at initial recognition; when a source, by which the NLB Group measures the loan portfolio credit risk since initial recognition, NLB Group recognises an financial asset has material delays over 30 days (days past quality, and which is also published in the Business Report of allowance based on a 12-month period; due are also included in the credit rating assessment); if NLB Annual and Interim Reports. • Stage 2 – An underperforming portfolio: a significant Group expects to grant the client forbearance or if the client is increase in credit risk since initial recognition, NLB Group placed on the watch list. recognises an allowance for a lifetime period; MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Table 45a:NLB Group Stage 1 calculation Table 45d: NLB Group Stage 1 in the Corporate segment calculation Table 45g: NLB Group Stage 1 in the Retail segment calculation in EUR million NLB Group 2021 in EUR million NLB Group 2021 Numerator Numerator Numerator Total (AC) loans in Stage 1 14,638.0 Total (AC) loans in Stage 1 to Corporates 4,525.5 Total (AC) loans in Stage 1 to Retail Denominator Total gross loans and advances IFRS 9 classification into Stage 1 15,541.8 94.2% Denominator Total gross loans to Corporates Corporates - IFRS 9 classification into Stage 1 5,179.5 87.4% Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 1 in EUR million NLB Group 2021 5,371.1 5,621.1 95.6% Table 45b: NLB Group Stage 2 calculation Table 45e: NLB Group Stage 2 in the Corporate segment calculation Table 45h: NLB Group Stage 2 in the Retail segment calculation in EUR million NLB Group 2021 in EUR million NLB Group 2021 Numerator Numerator Numerator Total (AC) loans in Stage 2 532.4 Total (AC) loans in Stage 2 to Corporates 412.2 Total (AC) loans in Stage 2 to Retail Denominator Denominator Total gross loans and advances 15,541.8 Total gross loans to Corporates IFRS 9 classification into Stage 2 3.4% Corporates - IFRS 9 classification into Stage 2 5,179.5 8.0% Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 2 Table 45c: NLB Group Stage 3 calculation Table 45f: NLB Group Stage 3 in the Corporate segment calculation Table 45i: NLB Group Stage 3 in the Retail segment calculation in EUR million NLB Group 2021 Numerator Numerator Total (AC) loans in Stage 3 371.1 Total (AC) loans in Stage 3 to Corporates Denominator Denominator Total gross loans and advances 15,541.8 Total gross loans to Corporates IFRS 9 classification into Stage 3 2.4% Corporates - IFRS 9 classification into Stage 3 in EUR million NLB Group 2021 241.4 5,179.5 4.7% Numerator Total (AC) loans in Stage 3 to Retail Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 3 in EUR million NLB Group 2021 120.2 5,621.1 2.1% in EUR million NLB Group 2021 129.7 5,621.1 2.3% Contents 150 Leverage ratio – its calculation uses Tier 1 as the numerator, and the denominator is the total exposure of all active balance sheet and off-balance-sheet items after the adjustments are made in the context of which the exposures from individual derivatives, exposures from transactions of security funding, and other off-balance sheet items are especially pointed out. The leverage ratio is a non-risk based supplementary measure to the risk-based capital requirements. A minimum leverage ratio requirement is 3%. The purpose of the leverage ratio is to limit the size of the Bank balance sheets, and with a special emphasis on exposures which are not weighted within the framework of the existing capital requirement calculations. Table 46: NLB and NLB Group leverage ratio Numerator Tier I Denominator 2021 NLB 2020 in EUR million NLB Group 2019 2021 2020 2019 1,362.7 1,347.0 1,137.6 1,965.6 1,768.1 1,451.2 Total Leverage Ratio exposure measure Leverage ratio 10,041.1 13.6% 13,058.8 10.3% 11,705.2 9.7% 19,229.5 22,603.9 10.2% 7.8% 16,671.3 8.7% 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 stress period. The LCR requires financial institutions to maintain a sufficient reserve of high-quality liquid assets (HQLA) to withstand a crisis that puts their cash 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% coverage). The parameters of the stress scenario are defined under Basel III guidelines. The calculations presented below are based on internal data sources. Table 47: NLB Group LCR calculation 31 Dec 2021 30 Nov 2021 31 Oct 2021 30 Sep 2021 31 Aug 2021 31 Jul 2021 30 Jun 2021 31 May 2021 30 Apr 2021 31 Mar 2021 29 Feb 2021 31 Jan 2021 31 Dec 2020 31 Dec 2019 31 Dec 2021 31 Dec 2020 31 Dec 2019 NLB Group in EUR million NLB Numerator Stock of HQLA 5,367.1 5,333.4 5,222.9 5,285.7 5,346.8 5,350.7 5,452.8 4,976.0 4,941.4 4,915.3 4,871.5 5,027.8 5,003.0 3,985.0 4,698.7 4,323.4 3,701.3 Denominator Net liquidity outflow 2,125.0 2,064.7 1,993.4 1,940.5 1,899.7 1,966.5 2,000.2 1,915.8 1,918.6 1,876.4 1,889.0 1,945.5 1,943.1 1,226.4 1,493.9 1,285.4 1,022.1 LCR 252.6% 258.3% 262.0% 272.4% 281.4% 272.1% 272.6% 259.7% 257.6% 262.0% 257.9% 258.4% 257.5% 324.9% 314.5% 336.3% 362.1% Based on the European Commission’s Delegated Act on LCR. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 151 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 48a: NLB Group and NLB LTD calculation NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2019 31 Dec 2021 31 Dec 2020 31 Dec 2019 in EUR million Numerator Net loans to customers 10,587.1 9,644.9 7,604.7 5,153.0 4,595.1 4,589.2 Denominator Deposits from customers 17,640.8 16,397.2 Net loan to deposit ratio (LTD) 60.0% 58.8% 11,612.3 65.5% 9,659.6 8,850.8 7,760.7 53.3% 51.9% 59.1% Table 48b: NLB Group’s banking subsidiaries LTD calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd in EUR million Komercijalna Banka, Beograd 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 Numerator Net loans to customers 1,084.1 956.9 471.1 430.7 453.0 399.2 634.5 559.2 491.6 367.3 511.7 472.2 1,795.9 Denominator Deposits from customers 1,399.5 1,288.8 759.9 633.5 593.0 521.6 798.8 748.3 609.8 431.7 449.5 496.3 Net loan to deposit ratio (LTD) 77.5% 74.2% 62.0% 68.0% 76.4% 76.5% 79.4% 74.7% 80.6% 85.1% 113.8% 95.1% 3,424.6 52.4% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 152 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 49: NLB Group’s banking subsidiaries net interest margin on the basis of interest bearing assets calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd Komercijalna Banka, Beograd in EUR million Numerator Net interest income(i) Denominator 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 50.4 48.1 20.1 18.6 17.8 17.8 34.5 32.3 22.0 20.6 23.4 21.8 Average interest bearing assets(ii) 1,605.3 1,453.0 844.3 756.7 645.0 611.9 900.6 817.7 550.2 499.9 678.3 643.1 Net interest margin on interest bearing assets 3.1% 3.3% 2.4% 2.5% 2.8% 2.9% 3.8% 3.9% 4.0% 4.1% 3.4% 3.4% 2021 88.6 3,742.6 2.4% (i) Net interest income is annualized, and calculated as the sum of interest income and interest expenses in the period divided by the number of days in the period and multiplied by the number of days in the year. (ii) NLB internal information. Average interest-bearing assets for individual bank 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). Net interest margin on the basis of interest-bearing assets (quarterly) – Calculated as the ratio between the net interest income annualized and average interest-bearing assets. Table 50: NLB Group net interest margin on the basis of interest bearing assets calculation (quarterly)(iii) Numerator Net interest income(i) Denominator in EUR million NLB Group Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 424.6 411.3 405.7 395.4 298.7 Average interest bearing assets(ii) 20,526.7 20,314.4 19,459.1 18,902.8 14,739.7 Net interest margin on interest bearing assets (quarterly) 2.07% 2.02% 2.08% 2.09% 2.03% (i) Net interest income (quarterly) is annualized, calculated as the sum of interest income and interest expenses in the period divided by the number of days in the quarter and multiplied by the number of days in the year. (ii) NLB internal information. Average interest-bearing assets (quarterly) for the NLB Group are calculated as the sum of monthly balances (t) for the corresponding quarter and monthly balance at the end of the previous quarter divided by (t+1). (iii) Komercijalna Banka group included from 2021 on. Net interest margin on total assets – Calculated as the ratio between net interest income annualized, and average total assets. Table 51: NLB Group and NLB net interest margin on total assets calculation Numerator Net interest income(i) Denominator NLB Group 2021 2020 2019 2021 in EUR million NLB 2020 2019 409.4 299.6 318.5 139.1 138.9 158.1 Average total assets(ii) 20,659.0 15,086.2 Net interest margin on total assets 2.0% 2.0% 13,311.7 2.4% 11,853.9 10,336.2 9,206.3 1.2 % 1.3 % 1.7 % (i) Net interest income is annualized, and calculated as sum of interest income and interest expenses in the period divided by the number of days in the period and multiplied by the 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 the sum of total assets of the previous year end (31 December) and daily balances in the period (from 1 January to day d – the last day in reporting month) divided by (d+1). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 153 NPE – NPE includes risk exposure to D- and E-rated clients (includes loans and advances, debt securities, and off-balance of all exposures to clients in Finrep18, before deduction of allowances for the ECL; the ratio is in gross terms. exposures, which are included in report Finrep 18; before the deduction of allowances for the ECL). Non-performing Where Non-Performing Exposure includes risk exposure to exposures measured by fair value loans through P&L (FVTPL) D- and E-rated clients (includes loans and advances, debt are taken into account at fair value increased by the amount securities, and off-balance exposures, which are included of negative fair changes for credit risk. in report Finrep 18; before the deduction of allowances for the ECL). The share of NPEs is calculated on the basis of an NPE per cent. (on-balance and off-balance)/Classified on-balance and off-balance exposures – NPE per cent. in internal data source, with which the NLB Group monitors the portfolio quality. The calculations presented below are based accordance with EBA methodology: NPE as a percentage on internal data sources. Table 52: NLB and NLB Group NPE (Eba def.) calculation Numerator Total Non-Performing on-balance and off-balance Exposure in Finrep18 Denominator Total on-balance and off-balance exposures in Finrep18 2021 NLB 2020 in EUR million NLB Group 2019 2021 2020 2019 159.5 235.1 221.0 415.5 513.0 432.7 13,869.9 12,223.1 11,087.8 24,328.0 22,042.3 16,228.5 NPE per cent. 1.1% 1.9% 2.0% 1.7% 2.3% 2.7% NPE – NPE indicator according to the BoS calculation differs from the EBA methodology in the treatment of debt instruments measured at FVOCI. The carrying amount of debt instruments measured at FVOCI is increased by value adjustments due to impairments. Table 53: NLB and NLB Group NPE (Eba def.) (Bos) calculation Numerator Total Non-Performing on-balance and off-balance Exposure in Finrep18 Denominator Total on-balance and off-balance exposures in Finrep18, where carrying amount of FVOCI is increased by value adjustments due to impairments NLB 2020 2021 in EUR million NLB Group 2019 2021 2020 2019 159.5 235.1 221.0 415.5 513.0 432.7 13,872.1 12,225.5 11,089.5 24,339.2 22,051.0 16,233.3 NPE per cent. 1.1% 1.9% 2.0% 1.7% 2.3% 2.7% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 154 NPL – Non-performing loans include loans to D- and E-rated clients, namely loans at least 90 days past due, or loans gross terms. Where non-performing loans are defined as loans to D- and E-rated clients, namely loans at least 90 days unlikely to be repaid without recourse to collateral (before past due, or loans unlikely to be repaid without recourse to deduction of loan loss allowances). collateral (before deduction of loan loss allowances). The share of non-performing loans is calculated on the basis of an internal data source, with which the NLB Group monitors the loan portfolio quality. NPL per cent. – The share of non-performing loans in total loans: non-performing loans as a percentage of total loans to clients before deduction of loan loss allowances; ratio in Table 54a: NLB NPL calculation in EUR million NLB 2021 2020 2019 Numerator Total Non-Performing Loans 130.4 208.4 169.5 Denominator Total gross loans 8,522.5 6,980.8 5,989.9 NPL per cent. 1.5% 3.0% 2.8% Table 54b: NLB Group NPL calculation 2021 2020 2019 2018 2017 2016 NLB Group in EUR million Numerator Total Non-Performing Loans 367.4 474.7 374.7 622.3 844.5 1,299.2 Denominator Total gross loans 15,541.8 13,686.6 NPL per cent. 2.4% 3.5% 9,793.5 3.8% 9,017.2 6.9% 9,130.4 9.2% 9,443.7 13.8% Table 54c: NLB Group’s banking subsidiaries NPL calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd Komercijalna Banka, Beograd in EUR million NLB Group’s banking subsidiaries 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2021 59.7 63.2 9.4 13.7 19.0 24.7 15.6 17.5 42.2 27.3 9.5 8.7 36.3 322.1 Numerator Total Non- Performing Loans Denominator Total gross loans 1,383.8 1,239.1 NPL per cent. 4.3% 5.1% 734.7 1.3% 590.2 2.3% 621.0 3.1% 553.4 4.5% 802.0 1.9% 768.2 2.3% 602.0 470.0 7.0% 5.8% 618.1 1.5% 605.5 1.4% 2,610.1 1.4% 15,894.4 2.0% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 155 NPL coverage ratio 1 – The coverage of the gross non- performing loans portfolio with loan loss allowances on the entire loan portfolio - loan impairment in respect of non- performing loans. It shows the level of credit provisions that the entity has already absorbed into its profit and loss accounts with respect to the total of impaired loans. The NPL coverage ratio 1 is calculated on the basis of an internal data source, with which the NLB Group monitors the quality of loan portfolio. Table 55a: NLB NPL coverage ratio 1 calculation in EUR million NLB 2021 2020 2019 97.9 158.4 129.2 Numerator Loan loss allowances entire loan portfolio Denominator Total Non-Performing Loans 130.4 208.4 169.5 NPL coverage ratio 1 (NPL CR 1) 75.1% 76.0% 76.2% Table 55b: NLB Group NPL coverage ratio 1 calculation NLB Group in EUR million 2021 2020 2019 2018 2017 2016 316.5 388.4 334.2 479.6 654.8 988.7 Numerator Loan loss allowances entire loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 1 (NPL CR 1) 367.4 86.1% 474.7 81.8% 374.7 89.2% 622.3 77.1% 844.5 77.5% 1,299.2 76.1% Table 55c: NLB Group's banking subsidiaries NPL coverage ratio 1 calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd Komercijalna Banka, Beograd NLB Group’s banking subsidiaries in EUR million 2021 Numerator Loan loss allowances entire loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 1 (NPL CR 1) 60.5 59.7 101.2% 17.7 9.4 189.3% 20.3 38.0 22.8 19.0 106.3% 15.6 243.2% 42.2 54.0% 8.9 9.5 93.4% 23.1 289.0 36.3 63.5% 322.1 89.7% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 156 NPL coverage ratio 2 – The coverage of the gross non- performing loans portfolio with loan loss allowances on the non-performing loans portfolio. The NPL coverage ratio 2 is calculated on the basis of an internal data source, with which the NLB Group monitors the loan portfolio quality. Table 56a: NLB and NLB Group NPL coverage ratio 2 calculation NLB 2020 2021 in EUR million NLB Group 2019 2021 2020 2019 Numerator Loan loss allowances non-performing loan portfolio 79.0 120.7 96.2 212.9 272.1 243.7 Denominator Total Non-Performing Loans 130.4 208.4 169.5 367.4 474.7 374.7 NPL coverage ratio 2 (NPL CR 2) 60.6% 57.9% 56.7% 57.9% 57.3% 65.0% Table 56b: NLB Group’s banking subsidiaries NPL coverage ratio 2 calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd Komercijalna Banka, Beograd 2021 in EUR million NLB Group’s banking subsidiaries Numerator Loan loss allowances non-performing loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 2 (NPL CR 2) 38.7 59.7 64.7% 5.7 9.4 61.0% 16.7 14.3 16.5 19.0 87.6% 15.6 91.6% 42.2 39.1% 5.5 9.5 57.6% 7.9 184.2 36.3 21.7% 322.1 57.2% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 157 Net NPL Ratio – The 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 the deduction of loan loss allowances; the ratio is in net terms. The calculations presented below are based on internal data sources. Table 57: NLB and NLB Group Net NPL Ratio calculation 2021 NLB 2020 in EUR million NLB Group 2019 2021 2020 2019 Numerator Net volume of non-performing loans 51.4 87.8 73.3 154.5 202.7 131.0 Denominator Total Net Loans Net NPL ratio per cent. (%Net NPL) 8,424.7 0.6% 6,822.4 5,860.7 15,225.4 13,298.2 9,459.2 1.3% 1.3% 1.0% 1.5% 1.4% 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. The calculations presented below are based on internal data sources. Table 58: NLB and NLB Group Received collaterals for NPLs/NPL calculation 2021 NLB 2020 in EUR million NLB Group 2019 2021 2020 2019 78.2 137.2 122.1 226.6 288.1 249.7 Numerator Gross volume of Non-Performing Loans covered by collaterals Denominator Total Non-Performing Loans Received collaterals for NPLs / NPL 130.4 60.0% 208.4 65.8% 169.5 72.0% 367.4 61.7% 474.7 60.7% 374.7 66.6% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 158 Non-performing loans and advances (EBA def.) – Non- performing loans include loans and advances in accordance with EBA Methodology that are classified as to D and E, namely loans at least 90 days past due, or loans unlikely to be repaid without recourse to collateral (before deduction of loan loss allowances). 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 gross carrying amount of loans and advances, in accordance with the EBA methodology (report Finrep18). For the purpose of this calculation, loans and advances classified as held for sale, cash balances at CBs, and other demand deposits are excluded from both the denominator and the numerator. The calculations presented below are based on internal data sources. Table 59: NLB and NLB Group Gross NPL ratio (EBA def.) calculation 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 2020 2021 in EUR million NLB Group 2019 2021 2020 2019 131.2 199.1 164.3 375.1 466.0 372.9 5,498.9 4,958.8 4,923.3 11,128.8 10,340.6 8,127.5 Gross NPL ratio per cent. (% NPL) 2.4% 4.0% 3.3% 3.4% 4.5% 4.6% 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 the total gross carrying amount of loans and advances, in accordance with the EBA methodology (report Finrep18). Cash balances at CBs and other 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 dashboard. The calculations presented below are based on internal data sources. Table 60: NLB and NLB Group Gross NPL ratio (EBA def.) (BoS) calculation NLB 2020 2021 in EUR million NLB Group 2019 2021 2020 2019 Numerator Gross volume of Non-Performing Loans and advances 131.2 199.1 164.3 375.1 466.0 372.9 Denominator Gross volume of Loans and advances in Finrep18 8,615.3 7,028.2 6,050.9 15,668.8 13,795.3 9,888.1 Gross NPL ratio per cent. (% NPL) 1.5% 2.8% 2.7% 2.4% 3.4% 3.8% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 159 NPL coverage ratio (EBA def.) – The NPL coverage ratio is the ratio of the amount of accumulated impairment, negative changes in fair value due to credit risk to the non-performing loans and advances, in accordance with the EBA methodology (report Finrep18). Loans and advances classified as held for sale, cash balances at CBs and other demand deposits are excluded both from the denominator and from the numerator. Table 61: NLB and NLB Group NPL coverage ratio (EBA def.) calculation Numerator Volume of allowances and value adjustments for credit losses on Non-Performing loans and advances(i) Denominator NLB 2020 2021 in EUR million NLB Group 2019 2021 2020 2019 79.8 110.1 91.2 219.1 265.3 240.4 Gross volume of Non-Performing loans and advances(i) 131.2 199.1 164.3 375.1 466.0 372.9 NPL coverage ratio per cent. (% CR) 60.8% 55.3% 55.5% 58.4% 56.9% 64.5% (i) Without loans and advances classified as held for sale, cash balances at CBs, and other demand deposits. NPL coverage ratio (EBA def.) (BoS) – The NPL coverage ratio is the ratio of the amount of accumulated impairment, negative changes in fair value due to credit risk to the non- performing loans and advances, in accordance with the EBA methodology (report Finrep18). Cash balances at CBs and other demand deposits are included in the calculation. Table 62: 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 2021 2020 2019 2021 2020 2019 in EUR million 79.8 110.1 91.2 219.1 265.3 240.4 Gross volume of Non-Performing loans and advances 131.2 199.1 164.3 375.1 466.0 372.9 NPL coverage ratio per cent. (% CR) 60.8% 55.3% 55.5% 58.4% 56.9% 64.5% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 160 Collateral received/NPL (EBA def.) – The NPL collateral ratio is the ratio of the collateral received for non-performing loans the EBA methodology (report Finrep18). The calculation is provided on single loan basis. The NPLs where the amount of and advances to the gross carrying amount of collateralized collateral received exceeds the net non-performing of each non-performing loans and advances, in accordance with loan exposure are the subject of calculation. Table 63: NLB and NLB Group NPL coverage ratio (EBA def.) 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 NLB 2020 2021 in EUR million NLB Group 2019 2021 2020 2019 12.2 38.6 12.9 36.7 61.3 23.9 19.4 88.8 38.2 62.5 144.6 67.4 NPL coverage ratio per cent. (% CR) 63.1% 43.5% 33.6% 58.8% 42.4% 35.4% Net stable funding ratio (NSFR) – The net stable funding ratio is a liquidity risk standard requiring financial institutions to ‘Available stable funding’ is defined as the portion of capital and liabilities expected to be reliable over the time horizon hold enough stable funding to cover the duration of their long- considered by the NSFR, which extends to one year. The term assets. NSFR is defined as the amount of available stable funding relative to the amount of required stable funding, and is amount of such stable funding required of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution, as well as those of its off-balance-sheet (OBS) exposures. The based on the current Basel Committee guidelines. This ratio calculations presented below are based on internal data should be equal to at least 100% on an on-going basis. sources. Table 64: NLB Group NSFR calculation Numerator NLB NLB Group 31 Dec 2021 31 Dec 2020 31 Dec 2019 31 Dec 2021 31 Dec 2020 31 Dec 2019 in EUR million Amount of available stable funding 10,815.8 9,455.7 8,251.6 18,446.7 16,514.6 11,957.9 Denominator Amount of required stable funding 6,309.5 5,833.7 5,193.9 9,960.8 9,966.8 7,495.5 NSFR 171.4% 162.1% 158.9% 185.2% 165.7% 159.5% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 161 EVE (Economic Value of Equity) method – EVE 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 provides a comprehensive view of the possible long-term effects of changing interest rates at least under the six prescribed standardised interest rate shock scenarios or more if necessary, according to the situation on financial markets. Calculations take into account behavioural and automatic options, as well as the allocation of non-maturing deposits. The assessment of the impact of a change in interest rates of 200 bps on the economic value of the banking book position: Table 65: NLB Group EVE calculation Numerator Interest risk in banking book – EVE -126,651 -135,133 -134,173 -140,567 -128,370 -98,185 -59,547 -68,129 -88,355 -102,319 -77,841 -105,256 -102,397 31 Dec 2021 30 Sep 2021 30 Jun 2021 31 Mar 2021 31 Dec 2020 30 Sep 2020 30 Jun 2020 31 Mar 2020 31 Dec 2019 30 Sep 2019 30 Jun 2019 31 Mar 2019 31 Dec 2018 Denominator Equity (Tier I) 1,972,485 1,903,800 1,879,365 1,734,545 1,765,000 1,622,945 1,616,921 1,426,936 1,451,176 1,424,020 1,425,298 1,460,078 1,458,318 EVE as % of Equity -6.4% -7.1% -7.1% -8.1% -7.3% -6.1% -3.7% -4.8% -6.1% -7.2% -5.5% -7.2% -7.0% NLB Group in EUR thousand Operational business margin (OBM) – Calculated as the ratio between operational business net income annualized and average assets. Table 66: NLB Group and NLB OBM calculation NLB Group 2021 2020 2019 2021 in EUR million NLB 2020 2019 Numerator Operational business net income(i) 678.1 490.3 502.1 274.3 257.7 268.6 Denominator Average total assets(ii) OBM (cumulative) 20,659.0 15,086.2 3.3% 3.2% 13,311.7 3.8% 11,876.0 10,336.3 2.3% 2.5% 9,215.3 2.9% (i) Operational business net income is annualized, and calculated as operational business income in the period divided by the number of days in the period and multiplied by the number of days in the year. 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). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 162 Operational business margin (OBM) (quarterly) – Calculated as the ratio between operational business net income annualized and average assets. Table 67: NLB Group OBM (quarterly) calculation(iii) NLB Group in EUR million Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 Numerator Operational business net income(i) 718.0 675.1 676.3 642.1 499.8 Denominator Average total assets(ii) OBM (quarterly) 21,414.5 3.35% 21,232.1 3.18% 20,357.0 3.32% 19,749.0 3.25% 15,378.5 3.25% (i) Operational business net income (quarterly) is annualized, and calculated as operational business income in the period divided by the number of days in the quarter and multiplied by the number of days in the year. 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). (iii) Komercijalna Banka group included from 2021 on. 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). Table 68: NLB Group and NLB ROE b.t. calculation Numerator Result before tax(i) Denominator Average total equity(ii) ROE b.t. NLB Group 2021 2020 2019 2021 in EUR million NLB 2020 2019 261.4 277.9 215.4 211.5 113.9 177.7 2,222.8 11.8% 1,808.1 15.4% 1,700.7 12.7% 1,507.2 14.0% 1,384.6 8.2% 1,328.7 13.4% (i) The result before tax is annualized, and calculated as the result before tax in the period divided by the number of months for the reporting period and multiplied by 12. (ii) NLB internal information. Average total equity (including non-controlling interests) is calculated as the sum of the balance as at 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). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 163 Return on equity after tax (ROE a.t.) – Calculated as the ratio between result after tax annualized and average equity. Table 69a: NLB Group and NLB ROE a.t. calculation Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. NLB Group in EUR million NLB 2021 2020 2019 2018 2017 2021 2020 2019 236.4 269.7 193.6 203.6 225.1 208.4 114.0 176.1 2,069.9 1,751.2 1,658.0 1,729.9 1,566.7 1,507.2 1,384.6 1,328.7 11.4% 15.4% 11.7% 11.8% 14.4% 13.8% 8.2% 13.3% (i) The result after tax is annualized, and calculated as the result after tax in the period divided by the number of months for the reporting period and multiplied by 12. (ii) NLB internal information. Average equity is calculated as the sum of the 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 69b: NLB Group (w/o Komercijalna Banka group) ROE a.t. calculation NLB Group (w/o Komercijalna Banka group) in EUR million Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. (i)(ii) Please refer to the notes under Table 69a. Table 69c: NLB Group’s banking subsidiaries ROE a.t. calculation 2020 141.3 1,741.1 8.1% Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 39.0 19.2 18.2 10.1 10.0 5.9 24.4 13.3 10.1 1.4 4.3 2.6 245.4 15.9% 219.4 8.8% 106.7 93.3 93.5 84.3 108.9 92.1 76.5 68.2 77.4 74.2 17.0% 10.8% 10.7% 7.0% 22.4% 14.5% 13.1% 2.0% 5.5% 3.5% (i)(ii) Please refer to the notes under Table 69a. in EUR million Komercijalna Banka, Beograd 2021 34.8 630.2 5.5% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 164 Return on assets (ROA b.t.) – Calculated as the ratio between result before tax annualized and average total assets. Table 70: NLB Group and NLB ROA b.t. calculation NLB Group 2021 2020 2019 2021 in EUR million NLB 2020 2019 261.4 277.9 215.4 211.5 113.9 177.7 Numerator Result before tax(i) Denominator Average total assets(ii) 20,659.0 15,086.2 ROA b.t. 1.3% 1.8% 13,311.7 1.6% 11,876.0 10,336.3 1.8% 1.1% 9,215.3 1.9% (i) The result before tax is annualized, and calculated as the result before tax in the period divided by the number of months for the reporting period and multiplied by 12. (ii) NLB internal information. Average total assets is calculated as the sum of the balance as at the end of the previous year end (31 December) and the monthly balances of the last day of each month from January to month t divided by (t+1). Return on assets (ROA a.t.) – Calculated as the ratio between result after tax annualized and average total assets. Table 71a: NLB Group and NLB ROA a.t. calculation Numerator Result after tax(i) Denominator Average total assets(ii) ROA a.t. NLB Group 2021 2020 2019 2021 in EUR million NLB 2020 2019 236.4 269.7 193.6 208.4 114.0 176.1 20,659.0 15,086.2 1.1% 1.8% 13,311.7 1.5% 11,876.0 10,336.3 1.8% 1.1% 9,215.3 1.9% (i) The result after tax is annualized, and calculated as the result after tax in the period divided by the number of months for the reporting period and multiplied by 12. (ii) NLB internal information. Average total assets is calculated as the 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 71b: 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 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 39.0 19.2 18.2 10.1 10.0 5.9 24.4 13.3 10.1 1.4 4.3 2.6 Numerator Result after tax(i) Denominator Average total assets(ii) 1,658.6 1,507.2 ROA a.t. 2.4% 1.3% 874.5 2.1% 784.9 1.3% 673.5 1.5% 639.3 0.9% 906.0 2.7% 824.9 1.6% 593.5 1.7% 541.0 0.3% 696.3 0.6% 662.8 0.4% (i)(ii) Please refer to the notes under Table 71a. in EUR million Komercijalna Banka, Beograd 2021 34.8 4,029.4 0.9% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 165 Total capital ratio (TCR) – TCR is the own funds of the institution expressed as a percentage of the total risk exposure amount. Table 72a: NLB Group and NLB TCR calculation NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2019 31 Dec 2021 31 Dec 2020 31 Dec 2019 in EUR million Numerator Total capital (Own funds) 2,252.5 2,065.5 1,495.8 1,647.3 1,631.6 1,182.2 Denominator Total risk exposure Amount (Total RWA) 12,667.4 12,421.0 Total capital ratio 17.8% 16.6% 9,185.5 16.3% 6,708.5 6,028.8 24.6% 27.1% 5,225.1 22.6% Table 72b: 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 Komercijalna Banka, Beograd 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 in EUR million 243.6 190.6 77.1 78.4 75.0 74.6 112.3 103.2 70.0 52.1 87.7 84.5 555.8 Numerator Total capital Denominator Total risk exposure Amount (Total RWA) 1,354.4 1,212.5 456.7 452.3 445.0 416.4 647.9 579.7 429.3 321.5 456.3 443.1 Total capital ratio 18.0% 15.7% 16.9% 17.3% 16.9% 17.9% 17.3% 17.8% 16.3% 16.2% 19.2% 19.1% 1,946.7 28.6% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 166 NLB Group Chart Nova Ljubljanska banka d.d., Ljubljana CORE MEMBERS NON-CORE MEMBERS Banks Financial institutions Companies Financial institutions Companies Foreign countries Slovenia Slovenia Slovenia Slovenia NLB Banka, Beograd 100% 100% NLB Skladi, Ljubljana Bankart, Ljubljana(ii) 100% 100% 45.64% 45.64% NLB Banka, Sarajevo NLB Lease&Go, Ljubljana 97.35% 97.35% 100% 100% NLB Cultural Heritage Management Institute 100% 100% NLB Banka, Podgorica (iii) 75.90% 99.87% NLB Banka, Prishtina 82.377% 82.377% NLB Banka, Banja Luka 99.85% 99.85% NLB Banka, Skopje 86.97% 86.97% Komercijalna Banka, Beograd 88.28% 88.28% KomBank Invest, Beograd 100% 100% Legend: The chart shows voting rights shares.The Group includes entities according to the definition in the Financial Conglomerates Act (Article 2). Subsidiary % direct share % indirect share at the group level Associate % direct share % indirect share at the group level Joint venture % direct share % indirect share at the group level Notes: (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% threshhold set in the Founding agreement - no shareholder other than NLB can have more than 25% capital share in Bankart. (iii) 75.90% direct ownership NLB; 23.97% Komercijalna Banka, Beograd. (iv) 100% direct ownership NLB Lease&Go d.o.o., Ljubljana NLB Leasing Ljubljana- in liquidation(iv) 100% 100% PRO-REM, Ljubljana in liquidation 100% 100% Optima Leasing, Zagreb in liquidation 100% 100% OL Nekretnine, Zagreb in liquidation 100% 100% Prvi faktor, Ljubljana in liquidation 50% 50% Prvi faktor, Beograd in liquidation(i) 90% 95% Prvi faktor, Zagreb in liquidation 100% 100% S-REAM, Ljubljana 100% 100% REAM, Zagreb 100% 100% ARG-Nepremičnine, Horjul 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 100% 100% LHB AG, Frankfurt 100% 100% NLB Crna Gora, Podgorica 100% 100% REAM, Beograd 100% 100% REAM, Podgorica 100% 100% Tara Hotel, Budva 12.71% 100% SPV 2, Beograd 100% 100% NLB Srbija, Beograd 100% 100% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 167 Organisational Structure of NLB SUPERVISORY BOARD MANAGEMENT BOARD Internal Audit Strategy and Business Development Compliance and Integrity Legal and Secretariat Group Steering Worker´s Council(i) Communication Human Resources and Organization Development Global Risk Group Real Estate Management Sales Development and Management IT Architecture Credit Risk - Corporate Controlling CSA & Cross-border Financing IT Delivery Credit Risk - Retail Financial Accounting and Administration Large Corporates Data Management Evaluation and Control Financial Markets Small and Mid Corporates IT Shared Service Centre Restructuring CFO Trade Finance Services NLB Group IT Security Governance Workout and Legal support CRO 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-3). (i) Worker´s Council is independent organisational unit with no subordinate or superior organisational units and it operates in accordance with ZSDU. Investment Banking and Custody IT Infrastructure Private Banking Procurement KC 24/7 Payments Processing Distribution Network Cash Processing Area Branch Ljubljana Financial Instruments Processing Area Branch Northwest and Central Slovenia Corporate Customer Delivery Area Branch Northeast Slovenia Retail Banking Processing Area Branch Southeast Slovenia COO Area Branch Southwest Slovenia Micro Enterprises Mobile Banking CMO MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 168 We believe you deserve every opportunity. First, we liked your résumé. Then, you fascinated us with your enthusiasm. After that, we saw great potential in you. Now, we will make sure you utilise it to the fullest. We believe that a satisfied and efficient employee is one who successfully aligns their private and professional life, while at the same time preserves the feeling that their potential is recognised and respected. With intensive investments into the upgrading of the potential of our employees, we have raised a company of enthusiastic experts from across the region who firmly believe in their work and mission. Just like Nino, Ljubica and Matej from our Ljubljana IT office. FINANCIAL REPORT MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 170 Contents Independent auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 2.13. Allowances for financial assets . . . . . . . . . . . . . . . . . . . . . . 192 Statement of management’s responsibility . . . . . . . . . . . . . . 177 2.14. Forborne loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 3. 4. Changes in the composition of the NLB Group . . . . . 203 Notes to the income statement. . . . . . . . . . . . . . . . . . . . 204 Statement of comprehensive income for the annual period ended 31 December . . . . . . . . . . . . . . . . 179 Statement of financial position as at 31 December . . . . . . . .180 Statement of changes in equity for the annual period ended 31 December . . . . . . . . . . . . . . . . 182 2.15. Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 4.1. Interest income and expenses . . . . . . . . . . . . . . . . . . . . . . 204 2.16. Offsetting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 4.2. Dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 2.17. Sale and repurchase agreements . . . . . . . . . . . . . . . . . . . 195 4.3. Fee and commission income and expenses. . . . . . . . . 205 2.18. Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 4.4. Gains less losses from financial assets Statement of cash flows for the annual period ended 31 December . . . . . . . . . . . . . . . . 184 2.19. Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 and liabilities not measured at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Notes to the financial statements. . . . . . . . . . . . . . . . . . . . . . . . . 186 2.20. Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 4.5. Gains less losses from financial assets and liabilities held for trading . . . . . . . . . . . . . . . . . . . . . . . 207 1. 2. General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 2.21. Non-current assets and disposal groups classified as held for sale . . . . . . . . . . . . . . . . . . . . 196 4.6. Gains less losses from non-trading Summary of significant accounting policies . . . . . . . . 186 2.22. Accounting for leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 financial assets mandatorily at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 2.1. Statement of compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 2.23. Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 197 4.7. Foreign exchange translation gains less losses . . . . . 208 2.2. Basis for presenting the financial statements . . . . . . . . 186 2.24. Borrowings, deposits, and issued debt securities with characteristics of debt . . . . . . . . . . 197 4.8. Other net operating income . . . . . . . . . . . . . . . . . . . . . . . . 209 2.3. Comparative amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 4.9. Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 2.4. Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 with characteristics of equity . . . . . . . . . . . . . . . . . . . . . . . . 197 4.10. Cash contributions to resolution funds 2.25. Other issued financial instruments 2.5. Business combinations, goodwill, and bargain purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 2.6. Investments in subsidiaries, associates and joint ventures . . . . . . . . . . . . . . . . . . . . . . . . 188 2.7. A combination of entities or businesses under common control . . . . . . . . . . . . . . . . . . 188 2.8. Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . 188 2.9. Interest income and expenses . . . . . . . . . . . . . . . . . . . . . . . 188 2.10. Fee and commission income . . . . . . . . . . . . . . . . . . . . . . . . 189 2.26. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 2.27. Contingent liabilities and commitments. . . . . . . . . . . . . . 197 and deposit guarantee schemes. . . . . . . . . . . . . . . . . . . . . .211 4.11. Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . .211 2.28. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 of financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 4.12. Gains less losses from modification 2.29. Fiduciary activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 4.13. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 2.30. Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 4.14. Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 2.31. Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 4.15. Gains less losses from non-current 2.32. Segment reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 2.33. Critical accounting estimates and assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 4.16. Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 2.11. Dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 judgments in applying accounting policies . . . . . . . . . . 199 4.17. Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 2.12. Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 2.34. Implementation of the new and revised International Financial Reporting Standards . . . . . . . . 201 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 171 5. Notes to the statement of financial position . . . . . . . . 215 5.17. Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 5.1. Cash, cash balances at central banks, and other demand deposits at banks . . . . . . . . . . . . . . . . 215 5.18. Income tax relating to components of other comprehensive income . . . . . . . . . . . . . . . . . . . . 269 5.2. Financial instruments held for trading . . . . . . . . . . . . . . 216 5.19. Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 5.3. Non-trading financial instruments measured at fair value through profit or loss . . . . . . . . 217 5.20. Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 5.4. Financial assets measured at fair value through other comprehensive income . . . . . . . . . . . . . . . 218 5.5. Derivatives for hedging purposes. . . . . . . . . . . . . . . . . . . 220 5.6. Financial assets measured at amortised cost. . . . . . . .223 5.7. Non-current assets held for sale . . . . . . . . . . . . . . . . . . . .226 5.8. Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .226 5.9. Investment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .229 5.21. Accumulated other comprehensive income and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 5.22. Capital adequacy ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 5.23. Off-balance sheet liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 273 5.24. Funds managed on behalf of third parties . . . . . . . . . . .275 6. Risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 6.1. Credit risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . .278 5.10. Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 6.2. Market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .297 5.11. Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 6.3. Liquidity risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 5.12. Investments in subsidiaries, associates and joint ventures . . . . . . . . . . . . . . . . . . . . . . . .234 5.13. Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .243 5.14. Movements in allowance for the impairment of financial assets . . . . . . . . . . . . . . .244 5.15. Financial liabilities, measured at amortised cost . . . . . . . . . . . . . . . . . . . . . . . . 255 5.16. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .258 6.4. Management of non-financial risks. . . . . . . . . . . . . . . . . . 316 6.5. Fair value hierarchy of financial and non-financial assets and liabilities . . . . . . . . . . . . . . . . . . . 317 6.6. Offsetting financial assets and financial liabilities . . .328 7. 8. 9. Analysis by segment for NLB Group. . . . . . . . . . . . . . . .329 Related-party transactions. . . . . . . . . . . . . . . . . . . . . . . .333 Events after the reporting date . . . . . . . . . . . . . . . . . . . . 341 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 172 Independent auditor’s report MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 173 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 174 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 175 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 176 Statement of management’s responsibility The Management Board hereby confirms its responsibility the requirements of the Slovenian Companies Act and the statements of NLB Group and NLB, together with the for preparing the consolidated financial statements of NLB Banking Act so as to give a true and fair view of the financial accompanying notes, have been prepared on a going- Group and the financial statements of NLB for the year ending position of NLB Group and NLB as at 31 December 2021, and concern basis for NLB Group and NLB, and in line with on 31 December 2021, and for the accompanying accounting their financial results and cash flows for the year then ended. valid legislation and the International Financial Reporting policies and notes to the financial statements. Standards as adopted by the European Union. The Management Board also confirms that the appropriate The Management Board is responsible for the preparation accounting policies were consistently applied, and that The Management Board is also responsible for appropriate and fair presentation of these financial statements in the accounting estimates were prepared according to accounting practices, the adoption of appropriate measures accordance with the International Financial Reporting the principles of prudence and good management. The for safeguarding assets, and the prevention and identification Standards as adopted by the European Union, and with Management Board further confirms that the financial of fraud and other irregularities or illegal acts. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Management Board of NLB Archibald Kremser CFO Andreas Burkhardt CRO Blaž Brodnjak CEO & CMO Contents 177 Income statement for the annual period ended 31 December NLB Group in EUR thousands NLB Interest income calculated using the effective interest method Other interest and similar income Interest and similar income Interest expenses calculated using the effective interest method Other interest and similar expenses Interest and similar expenses Net interest income Dividend income Fee and commission income Fee and commission expenses Net fee and commission income Gains less losses from financial assets and liabilities not measured 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. 5.12.b) 4.8. 4.9. 4.10. 4.11. 4.12. 4.13. 4.13. 4.14. 4.14. 5.12.c) 5.12.d) 4.15. 4.16. 2021 467,500 10,329 477,829 (53,171) (15,298) (68,469) 409,360 223 332,589 (95,413) 237,176 167 21,194 16,838 167 345 (9,298) 2,681 23,221 (368,851) (35,140) (46,528) (263) 8,504 (22,670) 27,331 (4,407) - 1,108 248 261,406 (13,538) 247,868 236,404 11,464 2020 347,636 7,552 355,188 (41,208) (14,407) (55,615) 299,573 111 232,432 (62,152) 170,280 17,689 9,794 6,598 720 739 (471) 1,300 7,549 (262,226) (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 2021 170,002 9,183 179,185 (25,142) (14,904) (40,046) 139,139 79,616 155,217 (35,623) 119,594 24 4,596 13,492 167 700 - 53 13,747 (166,079) (9,535) (17,522) - 8,028 (72) 18,067 7,547 - - (94) 211,468 (3,047) 208,421 208,421 - Earnings per share/diluted earnings per share (in EUR per share) 4.17. 11.8 13.5 10.4 The notes are an integral part of these financial statements. 2020 167,611 7,493 175,104 (21,883) (14,334) (36,217) 138,887 6,259 136,691 (32,234) 104,457 16,970 4,741 6,815 720 (1,108) - 12 5,794 (162,613) (7,103) (17,848) - 599 (7,645) (9,633) (685) - - 35,234 113,853 99 113,952 113,952 - 5.7 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 178 Statement of comprehensive income for the annual period ended 31 December 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 Income tax relating to components of other comprehensive income 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 Transferred to income statement Share of other comprehensive income/(losses) of entities accounted for using the equity method Income tax relating to components of other comprehensive income 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. Notes 5.16.c) 5.4.c) 5.18. 5.4.c) 4.4., 4.14. 5.18. NLB Group NLB in EUR thousands 2021 247,868 (30,168) (1,377) 3,072 (30) (1) 611 611 (37,394) (40,081) 2,687 - 4,951 217,700 207,854 9,846 2020 272,756 (2,147) 878 3,809 (41) (534) (703) (703) 6,555 7,733 (1,178) (11,026) (1,085) 270,609 266,907 3,702 2021 208,421 (15,281) (115) (383) - 94 - - (17,359) (17,187) (172) - 2,482 193,140 193,140 - 2020 113,952 3,817 700 202 - (171) - - 3,810 7,522 (3,712) - (724) 117,769 117,769 - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 179 Statement of financial position as at 31 December 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. Notes 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.d) 5.8. 5.9. 5.10. 5.17. 5.13. 5.7. 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) NLB Group 31 Dec 2020 3,961,812 84,855 42,393 3,514,290 in EUR thousands NLB 31 Dec 2020 2,261,533 18,831 35,106 1,716,351 31 Dec 2021 3,250,437 7,682 12,360 1,585,751 1,503,087 197,005 9,619,860 113,138 - 13,844 - 7,988 249,117 54,842 61,668 4,369 31,789 97,140 8,658 19,565,855 15,485 - 72,633 158,225 16,397,167 91,560 288,321 182,095 61,161 125,059 1,002 4,475 45,632 17,442,815 200,000 871,378 21,127 13,522 846,762 1,952,789 170,251 2,123,040 1,436,424 199,287 5,145,153 92,404 568 7,082 781,540 4,483 86,122 9,181 29,453 3,761 31,902 11,853 4,089 12,699,532 7,602 352 109,329 873,479 9,659,605 406 288,519 102,527 35,377 49,363 - - 21,039 11,147,598 200,000 871,378 8,768 13,522 458,266 1,551,934 - 1,551,934 19,565,855 12,699,532 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 11,026,603 15,500 - 41,635 143,464 8,850,755 13 288,321 88,969 61,161 63,790 - - 22,001 9,575,609 200,000 871,378 24,102 13,522 341,992 1,450,994 - 1,450,994 11,026,603 31 Dec 2021 5,005,052 7,678 21,161 3,461,860 1,717,626 140,683 10,587,121 122,229 568 7,082 - 11,525 247,014 47,624 59,076 3,948 38,977 91,221 7,051 21,577,496 7,585 - 71,828 858,531 17,640,809 74,051 288,519 206,878 35,377 119,404 5,878 3,045 49,468 19,361,373 200,000 871,378 (10,552) 13,522 1,004,385 2,078,733 137,390 2,216,123 21,577,496 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 180 The Management Board has authorised for issue the financial statements and the accompanying notes. Archibald Kremser CFO Andreas Burkhardt CRO Blaž Brodnjak CEO & CMO Ljubljana, 11 April 2022 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 181 Statement of changes in equity for the annual period ended 31 December NLB Group Notes Balance as at 1 January 2021 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid Transactions with non-controlling interests (note 3.) Transfer of fair values reserve Other Accumulated other comprehensive income Share capital Share premium 5.20. 200,000 5.21.a) 871,378 - - - - - - - - - - - - - - Fair value reserve of financial assets measured at FVOCI Foreign currency translation reserve 5.21.b) 42,496 - (28,005) (28,005) - 149 (3,274) - 5.21.b) (17,724) - 540 540 - - - - Other 5.21.b) (3,645) - (1,085) (1,085) - - (4) - in EUR thousands Profit reserves Retained earnings Equity attributable to owners of the parent Equity attributable to non-controlling interests Total equity 5.21.a) 13,522 - - - - - - - 846,762 1,952,789 170,251 2,123,040 236,404 236,404 - (28,550) 236,404 207,854 (92,200) (92,200) 11,464 (1,618) 9,846 (7,710) 247,868 (30,168) 217,700 (99,910) 10,168 3,278 (27) 10,317 (34,997) (24,680) - (27) - - - (27) Balance as at 31 December 2021 200,000 871,378 11,366 (17,184) (4,734) 13,522 1,004,385 2,078,733 137,390 2,216,123 NLB Group Notes Balance as at 1 January 2020 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Acquisition of subsidiaries Transfer of fair values reserve Share capital Share premium 5.20. 200,000 5.21.a) 871,378 - - - - - - - - - - Balance as at 31 December 2020 200,000 871,378 in EUR thousands Accumulated other comprehensive income Fair value reserve of financial assets measured at FVOCI 5.21.b) 47,880 - (2,833) (2,833) - (2,551) 42,496 Foreign currency translation reserve 5.21.b) (17,055) - (669) (669) - - Other 5.21.b) (4,332) - 702 702 - (15) Profit reserves Retained earnings Equity attributable to owners of the parent Equity attributable to non-controlling interests Total equity 5.21.a) 13,522 - - - - - 574,489 1,685,882 45,015 1,730,897 269,707 - 269,707 (2,800) 269,707 266,907 3,049 653 3,702 272,756 (2,147) 270,609 - 2,566 - - 121,534 121,534 - - (17,724) (3,645) 13,522 846,762 1,952,789 170,251 2,123,040 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 182 NLB Notes Balance as at 1 January 2021 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid Transfer of fair values reserve Share capital 5.20. 200,000 - - - - - Share premium 5.21.a) 871,378 - - - - - Balance as at 31 December 2021 200,000 871,378 Accumulated other comprehensive income Fair value reserve of financial assets measured at FVOCI 5.21.b) 27,694 - (15,177) (15,177) - (53) 12,464 Other 5.21.b) (3,592) - (104) (104) - - Profit reserves 5.21.a) 13,522 - - - - - (3,696) 13,522 NLB Notes Balance as at 1 January 2020 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Share capital 5.20. 200,000 - - - Share premium 5.21.a) 871,378 - - - Balance as at 31 December 2020 200,000 871,378 The notes are an integral part of these financial statements. Accumulated other comprehensive income Fair value reserve of financial assets measured at FVOCI 5.21.b) 24,444 - 3,250 3,250 27,694 Other 5.21.b) (4,159) - 567 567 Profit reserves 5.21.a) 13,522 - - - (3,592) 13,522 in EUR thousands Retained earnings Total equity 5.20. 341,992 208,421 - 208,421 (92,200) 53 458,266 Retained earnings 5.20. 228,040 113,952 - 113,952 341,992 1,450,994 208,421 (15,281) 193,140 (92,200) - 1,551,934 in EUR thousands Total equity 1,333,225 113,952 3,817 117,769 1,450,994 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 183 Statement of cash flows for the annual period ended 31 December 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 Payments to employees and suppliers Other receipts Other payments Income tax (paid)/received 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 CASH FLOWS FROM INVESTING ACTIVITIES Receipts from investing activities Proceeds from sale of property, equipment, and investment property Proceeds from sale of subsidiaries, net of cash and cash equivalents 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 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 Issuance 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. Notes 5.12.b) 3., 5.12.c) 5.15.c) 5.15.c) 2021 541,219 (69,578) 635 332,575 (92,102) 171 21,563 (382,529) 27,516 (51,129) (8,617) 319,724 (964,998) 68,965 36,500 (57,015) (1,020,944) 7,496 2,108,374 2,106,985 1,389 1,463,100 495,174 5,077 (47,832) 966 536,963 (832,512) (23,013) (12,704) (24,437) (2,900) (769,458) (337,338) - - (100,503) (100,503) - (100,503) 14,640 1,025,259 4,136,412 5,176,311 NLB Group in EUR thousands NLB 2020 372,903 (52,921) 787 232,607 (65,728) 17,993 10,919 (260,259) 13,642 (20,629) (6,645) 242,669 (366,831) 1,838 (12,667) (150,006) (207,260) 1,264 1,338,778 1,338,591 187 1,214,616 478,251 5,341 - 39,078 433,832 108,232 (27,626) (15,020) 452,770 (326) (301,566) 586,483 119,222 119,222 (45,000) - (45,000) 74,222 (2,176) 1,875,321 2,263,267 4,136,412 2021 214,866 (43,343) 56,606 152,288 (33,927) 24 5,404 (170,986) 17,723 (16,026) (1,603) 181,026 (469,788) 2,471 35,792 90,215 (598,138) (128) 1,589,861 1,589,415 446 1,301,099 478,851 12 15,310 791 462,738 (697,976) (9,093) (6,889) (40,046) (2,900) (639,048) (219,125) - - (92,200) (92,200) - (92,200) 3,219 989,774 2,261,791 3,254,784 2020 207,188 (31,881) 6,261 133,743 (32,972) 17,274 5,634 (164,558) 8,627 (9,490) 3,779 143,605 (105,859) 1,838 (12,564) (77,098) (18,357) 322 1,043,991 1,044,255 (264) 1,081,737 402,729 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 184 Cash and cash equivalents comprise: Cash, cash balances at central banks, and other demand deposits at banks 5.1. 5,005,946 3,962,686 3,250,784 2,261,791 Loans and advances to banks with original maturity up to three months Debt securities measured at fair value through other comprehensive income with original maturity up to three months Total 142,319 28,046 146,223 27,503 4,000 - - - 5,176,311 4,136,412 3,254,784 2,261,791 NLB Group NLB in EUR thousands Notes 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 185 Notes to the financial statements 1. General information Nova Ljubljanska banka d.d. Ljubljana (hereinafter: ‘NLB’ or ‘the Bank’) is a Slovenian joint-stock entity providing universal banking services. NLB Group consists of NLB and its subsidiaries located in nine countries, mainly in Slovenia and the SEE market. Information on NLB Group’s structure is disclosed in note 5.12. Information on other related party relationships of NLB Group is provided in note 8. NLB is incorporated and domiciled in Slovenia. The address of its registered office is Trg Republike 2, 1000 Ljubljana. NLB’s shares are listed on the Ljubljana Stock Exchange, and the global depositary receipts (‘GDR’), representing ordinary shares of NLB, are listed on the London Stock Exchange. Five GDRs represent one share of NLB. As at 31 December 2021 and as at 31 December 2020, the largest shareholder of NLB with significant influence is the Republic of Slovenia, owning 25.00% plus one share. All amounts in the financial statements and in the notes to the financial statements are expressed in thousands of euros unless otherwise stated. 2. Summary of significant accounting policies The principal accounting policies adopted for the preparation of the separate and consolidated financial statements are set out below. The policies have been consistently applied to all The separate and consolidated financial statements are This document contains both the separate financial comprised of the income statement and statement of statements of NLB, and the consolidated financial statements comprehensive income, the statement of financial position, the of NLB Group. The presented accounting policies apply statement of changes in equity, the statement of cash flows, to both sets of financial statements, with the exception of significant accounting policies, and the notes. policies described in notes 2.4. and 2.5., which only apply to 2.2. Basis for presenting the financial statements The financial statements have been prepared on a going- concern basis, under the historical cost convention as modified by the revaluation of financial assets measured at fair value through other comprehensive income, financial assets, and financial liabilities at fair value through profit or loss, including all derivative contracts, hedged items in fair value hedge accounting relationships, non-current assets held for sale, and investment property. the consolidated financial statements and policies described in note 2.6., where differences in the accounting treatment for investments in subsidiaries, and associated and joint ventures between separate and consolidated financial statements are described. Data relating to separate financial statements is marked ‘NLB,’ while data relating to consolidated financial statements is marked ‘NLB Group.’ 2.3. Comparative amounts Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed The preparation of financial statements in accordance with with comparative amounts. Where IAS 8 applies, comparative the IFRS requires the use of estimates and assumptions that figures have been adjusted to conform to the changes in affect the reported amounts of assets and liabilities, the presentation in the current year. disclosure of contingent assets and liabilities on the date of the financial statements, and the reported amounts of Compared to the presentation of the financial statements for revenue and expenses during the reporting period. Although the year ended 31 December 2020, the classification of certain these estimates are based on management’s best knowledge line items in the Statement of Financial Position changed due of current events and activities, actual results may ultimately to changes prescribed by the Bank of Slovenia. Additionally, differ from those estimates. Accounting estimates and there was a change in the line item ‘Interest and similar underlying assumptions are reviewed on an ongoing basis. expenses’ in the Income statement, where two lines were Revisions of accounting estimates are recognised in the added with more detailed presentation of interest expenses. period in which the estimate is revised. Critical accounting Comparative amounts have been adjusted to reflect these estimates and judgements in applying accounting policies are changes in the presentation. disclosed in note 2.33. 31 Dec 2020 NLB Group NLB Notes Old presentation Current presentation Change Old presentation Current presentation Change Statement of financial position: in EUR thousands the years presented, except for changes in accounting policies Other financial liabilites 5.15.d) resulting from the application of new standards or changes to Accrued salaries standards. 2.1. Statement of compliance The principal accounting policies applied in the preparation of the separate and consolidated financial statements were prepared in accordance with the International Financial Accounting Standards (hereinafter: ‘the IFRS’) as adopted by the European Union (hereinafter: ‘EU’). Additional requirements under the national legislation are included where appropriate. Unused annual leave Other liabilities Accrued salaries Unused annual leave Income statement: Interest expenses calculated using the effective interest method Other interest and similar expenses 19,068 6,137 - - (19,068) (6,137) 9,807 2,497 5.19. - - - - 19,068 6,137 19,068 6,137 (41,208) (41,208) (14,407) (55,615) (14,407) - - 9,807 2,497 (9,807) (2,497) 9,807 2,497 (21,883) (21,883) (14,334) (36,217) (14,334) - - - - - Interest and similar expenses 4.1. (55,615) - (36,217) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 186 ‘Accrued salaries’ and ‘Unused annual leave’ are included NLB Group treats transactions with non-controlling interests A contingent consideration classified as equity is not re- under the line item ‘Other liabilities’; before changing the as transactions with equity owners of NLB Group. For measured and its subsequent settlement is accounted for classification, these line items were included under the line purchases of subsidiaries from non-controlling interests, the within equity. A contingent consideration classified as an asset item ‘Other financial liabilities.’ difference between any consideration paid and the relevant or liability that is a financial instrument and within the scope of share acquired of the carrying value of net assets of the IFRS 9 Financial Instruments, is measured at fair value at each ‘Interest expenses calculated using the effective interest subsidiary is deducted from the equity. For sales to non- reporting date and changes in fair value are recognised in the method’ and ‘Other interest and similar expenses’ were not controlling interests, the differences between any proceeds statement of profit or loss in accordance with IFRS 9. Other disclosed separately before the change, they were shown received and the relevant share of non-controlling interests contingent considerations that are not within the scope of under the line item ‘Interest and similar expenses.’ are also recorded in the equity. All effects are presented in the IFRS 9 are measured at fair value at each reporting date and line item ‘Equity Attributable to Non-controlling Interest.’ changes in fair value are recognised in profit or loss. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 2.4. Consolidation In the consolidated financial statements (NLB Group), subsidiaries which are directly or indirectly controlled by NLB have been fully consolidated. Subsidiaries are consolidated from the date on which effective control is transferred to NLB Group. NLB controls an entity when all three elements of control are met: • it has power over the entity; • it is exposed or has rights to variable returns from its involvement with the entity; and • it has the ability to use its power over the entity to affect the amount of the entity’s returns. NLB reassesses whether it controls an entity if facts and circumstances indicate there are changes to one or more of the three elements of control. If the loss of control of a subsidiary occurs, the subsidiary is no longer consolidated from the date that the control ceases. Where necessary, the accounting policies of subsidiaries have been amended to ensure consistency with the policies adopted by NLB. The financial statements of consolidated subsidiaries are prepared as at the parent entity’s reporting date. Non-controlling interests are disclosed in the consolidated statement of changes in equity. Non-controlling interest is that part of the net results, and of the equity of a subsidiary, attributable to interests which NLB does not own, either directly or indirectly. NLB Group measures non-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 acquiree. Inter-company transactions, balances, and unrealised gains on transactions between NLB Group entities are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. 2.5. Business combinations, goodwill, and bargain purchases For each business combination, NLB Group elects whether to measure the non-controlling interests in the acquiree at fair NLB Group accounts for business combinations using the value or at the present ownership instruments’ proportionate acquisition method when the acquired set of activities and share in the recognised amounts of the acquiree’s identifiable assets meets the definition of a business and control is net assets at the date of acquisition. All other components transferred to the Group. In determining whether a particular of non-controlling interests are measured at their set of activities and assets is a business, the Group assesses acquisition-date fair values, unless another measurement whether the set of assets and activities acquired includes, at a basis is required by IFRSs. minimum, an input and substantive process and whether the acquired set has the ability to produce outputs. The acquired Goodwill is measured as the excess of the aggregate of the process is considered substantive if it is critical to the ability to consideration transferred measured at fair value, the amount continue producing outputs; and the inputs acquired include of any non-controlling interest in the acquiree, and the fair an organised workforce with the necessary skills, knowledge, value of an interest in the acquiree held immediately before or experience to perform that process or it significantly the acquisition date over the net amounts of the identifiable contributes to the ability to continue producing outputs and assets acquired, as well as the liabilities assumed. Any is considered unique or scarce or cannot be replaced without negative amount, a gain on a bargain purchase (or ‘negative significant cost, effort, or delay in the ability to continue goodwill’), is recognised in profit or loss after management producing outputs. reassesses whether it has identified all the assets acquired and all the liabilities and contingent liabilities assumed, and The consideration transferred is measured at the fair value reviews the appropriateness of their measurement. of the assets transferred, equity interest issued, liabilities incurred or assumed, including the fair value of assets or Goodwill is tested annually for impairment. For the purpose liabilities from contingent consideration arrangements and of impairment testing, goodwill arising from a business fair value of any pre-existing equity interest in subsidiary. combination is, from the acquisition date, allocated to the However, this excludes amounts related to the settlement Group’s cash-generating units (CGUs) or groups of CGUs that of pre-existing relationships which are recognised in profit are expected to benefit from the synergies of the combination. or loss. Acquisition-related costs such as advisory, legal, Where goodwill has been allocated to a cash-generating unit valuation, and similar professional services are recognised in profit or loss as well. Transaction costs incurred for issuing (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation equity instruments are deducted from the equity, and all is included in the carrying amount of the operation when other transaction costs associated with the acquisition are determining the gain or loss on disposal. Goodwill disposed expensed. in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash- Identifiable assets acquired and liabilities assumed in a generating unit retained. business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The goodwill of associates and joint ventures is included in the carrying value of investments. Contents 187 In a business combination achieved in stages, NLB Group merged entities as reported in the consolidated financial • assets and liabilities for each statement of financial position remeasures its previously held equity interest in the acquiree statements. No goodwill is recognised on mergers of NLB presented are translated at the closing rate on the reporting at its acquisition-date fair value and recognises the resulting Group entities. date; gain or loss, if any, in profit or loss. • income and expenses for each income statement are 2.6. Investments in subsidiaries, associates and joint ventures In the separate financial statements (NLB), investments in subsidiaries, associates and joint ventures are accounted for with the cost method. Dividends from subsidiaries, joint ventures, or associates are recognised in the income statement when NLB’s right to receive the dividend has been established. In the consolidated financial statements, investments in associates, are accounted for using the equity method of accounting. These are generally undertakings in which NLB Group holds between 20% and 50% of the voting rights, and over which NLB Group exercises significant influence, but does not have control. Joint ventures are entities over whose activities NLB Group has joint control, established by contractual agreement. In the consolidated financial statements, investments in joint ventures are accounted for using the equity method of accounting. NLB Group’s share of its associates’ and joint ventures’ post- acquisition profits or losses is recognised in the consolidated income statement, and its share of other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When NLB Group’s share of losses in an associate and joint venture equals or exceeds its interest in the associate and joint venture, including any other unsecured receivables, NLB Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the associate and joint venture. NLB Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised (note 5.12.d). Mergers of entities within NLB Group do not affect the translated at average exchange rates; and consolidated financial statements. • components of equity are translated at the historical rate. 2.8. Foreign currency translation Functional and presentation currency Items included in the financial statements of each of NLB Group’s entities are measured using the currency of the primary economic environment in which the entity operates (i.e., the functional currency). The financial statements are presented in euros, which is NLB Group’s presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. In the consolidated financial statements, exchange differences arising from the translation of the net investment in foreign operations are recognised in other comprehensive income. When control over a foreign operation is lost, the previously recognised exchange differences on translations to a different presentation currency are reclassified from other comprehensive income to profit and loss for the year. On the partial disposal of a subsidiary without loss of control, the related portion of accumulated currency translation differences is reclassified as a non-controlling interest within the translation of monetary assets and liabilities denominated the equity. in foreign currencies, are recognised in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges. Interest income and expenses 2.9. Interest income and expenses for all financial instruments measured at amortised cost, and financial assets measured Translation differences resulting from changes in the at fair value through other comprehensive income are amortised cost of monetary items denominated in foreign recognised in the income statement for all interest-bearing currency and classified as financial assets measured at fair instruments on an accrual basis using the effective interest value through other comprehensive income, are recognised in method. Interest income on all trading assets and financial the income statement. assets mandatorily required to be measured at fair value through profit or loss is recognised using the contractual Translation differences on non-monetary items, such as equity interest rate. The effective interest method is used to calculate instruments at fair value through profit or loss, are reported the amortised cost of a financial asset or financial liability, as part of the fair value gain or loss in the income statement. and to allocate the interest income or interest expenses over Translation differences on non-monetary items, such as equity the relevant period. The effective interest rate is the rate that instruments classified as financial assets, measured at fair value exactly discounts estimated future cash payments or receipts through other comprehensive income, are included together over the expected life of the financial instrument, or a shorter with valuation reserves in the valuation (losses)/gains taken to other comprehensive income and accumulated in the equity. period (when appropriate) to the gross carrying amount of the financial asset or to the amortised cost of a financial liability. Interest income includes coupons earned on fixed-yield NLB Group’s subsidiaries, associates and joint ventures are presented in note 5.12. Gains and losses resulting from foreign currency purchases investments and trading securities, and accrued discounts and sales for trading purposes are included in the income and premiums on securities. The calculation of the effective statement as gains less losses from financial assets and interest rate includes all fees and points paid or received by 2.7. A combination of entities or businesses liabilities held for trading. parties to the contract and all transaction costs, but excludes future credit risk losses. under common control A merger of entities within NLB Group is a business combination involving entities under common control. For such mergers, members of NLB Group apply merger accounting principles, and use the carrying amounts of NLB Group entities The financial statements of all NLB Group entities that have a Interest income is calculated by applying the effective interest functional currency different from the presentation currency are translated into the presentation currency as follows: rate to the gross carrying amount of financial assets other than credit-impaired assets. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 188 When a financial asset becomes credit-impaired and is, therefore, classified in Stage 3, interest income is calculated by applying the effective interest rate to the net amortised cost of the financial asset. If the financial asset cures and is no longer credit- impaired, interest income is again calculated on a gross basis. 2.12. Financial instruments a) Classification and measurement Financial instruments are initially measured at fair value plus or minus, in the case of a financial instrument not measured at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial In the case of purchased or originated credit-impaired financial instrument. Subsequent measurement depends on the assets (POCI), the credit-adjusted effective interest rate is applied to the amortised cost of the financial asset from initial classification of the instrument. recognition. The credit-adjusted effective interest rate is the Financial assets interest rate that, at initial recognition, discounts the estimated future cash flows (including credit losses) to the amortised cost of the purchased or originated credit-impaired financial asset. At NLB Group level, most POCI exposures relate to initial recognition All debt financial assets need to be assessed based on a combination of the Group’s business model for managing the assets and the instruments’ contractual cash flow characteristics. Measurement categories of financial assets of non-performing exposures in case of business combination. are as follows: 2.10. Fee and commission income Fees and commissions mainly include fees received from credit cards and ATMs, customer transaction accounts, payment services, investment funds, and commissions from guarantees. Fee and commission income are recognised at an amount that reflects the consideration to which the Group expects to be entitled in exchange for providing the services. The performance obligations, as well as the timing of their satisfaction, are identified, and determined, at the inception of the contract. The Group’s revenue contracts do not include multiple performance obligations. When the Group provides a service to its customers, consideration is invoiced and generally due immediately upon satisfaction of a service provided at a point in time. When the service is provided over time, the consideration is invoiced and due in line with contractual provisions. The Group has generally concluded that it is the principal in its revenue arrangements because it typically controls the services before transferring them to the customer. Fees and commissions that are integral to the effective interest rate of financial assets and liabilities are presented within interest income or expenses. 2.11. Dividend income Dividends are recognised in the income statement within the line item ‘Dividend income’ when NLB Group’s right to receive payment has been established and an inflow of economic benefits is probable. In the consolidated financial statements, dividends received from associates and joint ventures reduce the carrying value of the investment. • Financial assets, measured at amortised costs (AC); • Financial assets at fair value through other comprehensive income (FVOCI); • Financial assets held for trading (FVTPL); and • Non-trading financial assets, mandatorily at fair value through profit or loss (FVTPL). Financial assets are measured at AC if they are held within a business model for the purpose of collecting contractual cash flows (‘held to collect’), and if cash flows are solely payments of principal and interest on the principal amount outstanding. After initial recognition, they are measured at the amortised cost using the effective interest method and are subject to impairment. Interest income calculated using the effective interest method, foreign exchange gains and losses, and impairment are recognised in profit or loss. Each of them is presented as a separate line item in the income statement. Any gain or loss on derecognition is recognised in profit or loss in line item ‘Gains less losses from financial assets and liabilities not classified at fair value through profit or loss.’ Debt financial instruments are measured at FVOCI if they are held within a business model for the purpose of both collecting contractual cash flows and selling (‘held to collect and sell’), and if cash flows are solely payments of principal and interest on the principal amount outstanding. FVOCI results in the debt instruments being recognised at fair value in the statement of financial position and at the AC in the income statement. Interest income is calculated using the effective interest method, foreign exchange gains and losses, and impairments are recognised separately in the income statement. Other net gains and losses are recognised in other comprehensive income, until the instrument is derecognised. At derecognition of the debt financial instrument, the cumulative gains and losses previously recognised in other comprehensive income are reclassified to the income statement under the line item ‘Gains less losses from financial assets and liabilities not classified at fair value through profit or loss.’ Equity instruments that are not held for trading may be irrevocably designated as FVOCI, with no subsequent reclassification of gains or losses to the income statement. Dividends are recognised as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment, in which case, such gains are recorded in other comprehensive income. Other net gains and losses are recognised in other comprehensive income and are never reclassified to profit or loss. In NLB Group, the most material equity instrument irrevocably designated as FVOCI is investment in National Resolution Fund (note 5.4.a). NLB Group decided to use this presentation alternative because the fund was established based on the law and it has a highly regulated investment strategy in order to ensure safety, low risk, and the high liquidity of the fund. All other financial assets are mandatorily measured at FVTPL, including financial assets within other business models such as financial assets managed at fair value or held for trading and financial assets with contractual cash flows that are not solely payments of principal and interest on the principal amount outstanding. Net gains and losses, including any interest or dividend income, are recognised in profit or loss. IFRS 9 includes an option to designate financial assets at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on different bases. Financial liabilities Financial liabilities are subsequently measured at the amortised cost or at fair value through profit or loss, when they are held for trading, derivative instruments, or the fair value designation is applied. Upon initial recognition, financial liability may be irrevocably designated as measured at fair value through profit or loss if that eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 189 losses on them on different bases, or if the liabilities are part of • Debt securities are divided into three business models: Accounting policy for modified financial assets a group of financial instruments which are managed and their • the first group of debt securities presents ‘held for trading’ When contractual cash flows of a financial asset are modified, performance evaluated on a fair value basis in accordance category; NLB Group assesses if the terms and conditions have been with a documented risk management or investment strategy. • debt securities in the second group are held under a modified to the extent that, substantially, it becomes a new Changes in the fair value of financial liabilities designated as of collecting the contractual cash flows and sale of considered when making such assessment: measured at fair value through profit or loss are recognised financial assets, and forms part of the Group’s liquidity • reason for modification of cash flows (commercial or client’s business model ‘held to collect and sale’ with the intention financial asset. The following factors are, amongst others, in profit or loss, with the exception of movement in the fair reserves; financial difficulties); value due to changes of NLB Group’s own credit risk. Such • the third part of debt securities is held within the • change in currency of the loan; changes are presented in other comprehensive income with business model for holding them with objective to collect • introduction of an equity feature; no subsequent reclassification to the income statement. contractual cash flows. • replacement of initially agreed debtor with a new debtor that is not related party to initial debtor; and Other financial liabilities are subsequently measured at With regard to debt securities within the ‘held to collect’ • if the modification changes the result of the SPPI test. amortised cost using the effective interest method. Interest business model, the sales which are related to the increase of expenses and foreign exchange gains and losses are the issuers’ credit risk, concentrations risk, sales made close If the modification results in derecognition of a financial asset, recognised in profit or loss. Any gain or loss on derecognition to the final maturity, or sales in order to meet liquidity needs in the new financial asset is initially recognised at fair value, with of financial liability is recognised in profit or loss. In the event a stress case scenario are permitted. Other sales, which are the difference recognised as a derecognition gain or loss, of derecognition of a financial liability measured at amortised not due to an increase in credit risk may still be consistent with to the extent that an impairment loss has not already been cost, the gains and losses are recognised in the line item a held to collect business model if such sales are incidental to recorded. If the modification does not result in cash flows that ‘Gains less losses from financial assets and liabilities not the overall business model, and: are substantially different, the modification does not result classified at fair value through profit or loss.’ Gains and losses • are insignificant in value both individually and in aggregate, in derecognition. In such cases, NLB Group recalculates the on disposals of financial liabilities designated as measured at even when such sales are frequent; gross carrying amount of the financial asset and recognises fair value through profit or loss are also presented separately • are infrequent even when they are significant in value. modification gain or loss in the income statement. The gross from those held for trading. Assessment of NLB Group’s business model characteristics (the SPPI test – solely payment of principal A review of instruments’ contractual cash flow carrying amount is recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset’s original effective interest NLB Group has determined its business model separately and interest on the principal amount outstanding) rate (or credit-adjusted effective interest rate for purchased or for each reporting unit within NLB Group, and is based on The second step in the classification of the financial assets in originated credit-impaired financial assets). observable factors for different portfolios that best reflect how portfolios being ‘held to collect’ and ‘held to collect and sell’ the Group manages groups of financial assets to achieve its relates to the assessment of whether the contractual cash business objective, such as: flows are consistent with the SPPI test. The principal amount b) Reclassification Financial assets can be reclassified when and only when NLB • how the performance of the business model and the reflects the fair value at initial recognition less any subsequent Group’s business model for managing those assets changes. financial assets held within that business model are changes, e.g., due to repayment. The interest must represent The reclassification takes place from the start of the reporting evaluated and reported to key management personnel; only the consideration for the time value of money, credit risk, period following the change. Such changes are expected to • the risks that affect the performance of the business model other basic lending risks, and a profit margin consistent with be very infrequent, and none occurred during the presented and, in particular, the way those risks are managed; • how the managers of the business are compensated (e.g., whether the compensation is based on the fair value of the basic lending features. If the cash flows introduce more than de minimis exposure to risk or volatility that is not consistent with basic lending features, the financial asset is mandatorily assets or on collection of contractual cash flows); and measured at fair value through profit or loss. • the expected frequency, value, and timing of sales. periods. Financial liabilities shall not be reclassified. c) Day one gains or losses The best evidence of fair value at initial recognition is the transaction price (i.e., the fair value of the consideration given NLB Group reviews the portfolio within ‘held to collect’ and or received), unless the fair value of that instrument is evidenced The business model assessment is based on reasonably ‘held to collect and sale’ for standardised products on a level by a comparison with other observable current market expected scenarios without taking worst-case and stress case of a product and for non-standardised products on a single transactions in the same instrument (i.e., without modification scenarios into consideration. In general, the business model exposure level. The Group has established a procedure for or repackaging), or based on a valuation technique whose assessment of the Group can be summarised as follows: SPPI identification as part of regular investment process with variables only include data from observable markets. • Loans and deposits given are included in a business model defined responsibilities for primary and secondary controls. ‘held to collect’ since the primary objective of NLB Group for Special emphasis is put on new and non-standardised If the transaction price on a non-active market is different the loan portfolio is to collect the contractual cash flows; characteristics of loan agreements. than the fair value from other observable current market transactions in the same instrument or is based on a valuation MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 190 technique whose variables only include data from observable pricing models are used, inputs are based on market-based statement together with any changes in the fair value of the markets, the difference between the transaction price and fair measurements at the reporting date. hedged asset or liability that are attributable to the hedged value is recognised immediately in the income statement (‘day one gains or losses’). g) Derivative financial instruments and hedge accounting Derivative financial instruments – including forward and related hedged items are reflected in ‘Fair Value Adjustments in Hedge Accounting’ in the income statement. risk. Effective changes in the fair value of hedging instruments In cases where the data used for valuation are not fully and futures contracts, swaps, and options – are initially Any ineffectiveness from derivatives is recorded in ‘Gains Less observable in financial markets, day one gains or losses are recognised in the statement of financial position at fair Losses on Financial Assets and Liabilities Held for Trading.’ not recognised immediately in the income statement. The value. Derivative financial instruments are subsequently re- timing of recognition of deferred day one gains or losses is measured at their fair value. Fair values are obtained from If a hedge no longer meets the hedge accounting criteria, determined individually. It is either amortised over the life of quoted market prices, discounted cash flow models, or pricing the adjustment to the carrying amount of the hedged item the transaction, deferred until the instrument’s fair value can models, as appropriate. All derivatives are carried at their fair for which the effective interest method is used is amortised be determined using market observable inputs, or realised value within assets when the derivative position is favourable to profit or loss over the remaining period to maturity. The through settlement. to NLB Group, and within liabilities when the derivative adjustment to the carrying amount of a hedged equity position is unfavourable to NLB Group. security is included in the income statement upon disposal of d) Derecognition A financial asset is derecognised when the contractual rights The method of recognising the resulting fair value gain or loss to the cash flows from the financial asset expire, or when the depends on whether the derivative is designated as a hedging the equity security. Cash flow hedge financial asset is transferred, and the transfer qualifies for instrument and, if so, the nature of the item being hedged. NLB The effective portion of changes in the fair value of derivatives derecognition. A financial liability is derecognised only when Group designates certain derivatives as either: that are designated and qualify as cash flow hedges is it is extinguished, i.e., when the obligation specified in the • hedges of the fair value of recognised assets or liabilities or recognised in other comprehensive income. The gain or loss contract is discharged, cancelled, or expires. firm commitments (fair value hedge); relating to the ineffective portion is immediately recognised in e) Write-offs NLB Group writes off financial assets in their entirety or a • hedges of highly probable future cash flows attributable to a the income statement. recognised asset or liability, or a highly probable forecasted transaction (cash flow hedge); or Amounts accumulated in equity are recycled as a portion thereof when it has exhausted all practical recovery • hedges of a net investment in a foreign operation (net reclassification from other comprehensive income to the efforts and has no reasonable expectations of recovery. Criteria investment hedge). income statement in the periods when the hedged item affects indicating that there is no reasonable expectation of recovery the profit or loss. include default period, quality of collateral, and different stages Hedge accounting is used when certain criteria are met. of enforcement procedures. NLB Group may write off financial NLB Group and NLB have exercised the option to continue When a hedging instrument expires or is sold, or when a assets that are still subject to enforcement activities, but this applying the existing IAS 39 hedge accounting requirements hedge no longer meets hedge accounting criteria, any does not affect its rights in the enforcement procedures. NLB in accordance with the policy choice permitted under IFRS 9. cumulative gain or loss existing in other comprehensive Group still seeks to recover all amounts it is legally entitled to in However, disclosures that are required by the IFRS 9 related income and previously accumulated in equity at that time full. A write-off reduces the gross carrying amount of a financial amendments to IFRS 7 ‘Financial Instruments: Disclosures’ are remains in other comprehensive income and in equity, and asset and allowance for the impairment. Any subsequent implemented. recoveries are credited to credit loss expenses. Write-offs and is recognised in profit or loss only when the forecasted transaction is ultimately recognised in the income statement. recoveries are disclosed in note 5.14.a). At the inception of the transaction, NLB Group documents the When a forecasted transaction is no longer expected to f) Fair value measurement principles The fair value of financial instruments traded on active relationship between hedged items and hedging instruments, occur, the cumulative gain or loss that was reported in other as well as its risk management objective, valuation comprehensive income is immediately transferred to the methodology, and strategy for undertaking various hedge income statement. markets is based on the price that would be received to sell transactions. NLB Group also documents its assessment, both the assets or transfer liability (exit price) being measured at at the hedge inception and on an ongoing basis, of whether Hedge of a net investment in a foreign operation the reporting date, excluding transaction costs. If there is no the derivatives used in hedging transactions are highly Hedges of net investments in foreign operations are active market, the fair value of the instruments is estimated effective in offsetting changes in fair values or cash flows of accounted for in consolidated financial statements similar to using discounted cash flow techniques or pricing models. hedged items. The actual results of a hedge must always fall cash flow hedges. Any gain or loss on the hedging instrument If discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates; and Fair value hedge within a range of 80–125%. relating to the effective portion of the hedge is recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income the discount rate is a market-based rate at the reporting Changes in the fair value of derivatives that are designated statement in ‘Gains Less Losses on Financial Assets and date for an instrument with similar terms and conditions. If and qualify as fair value hedges are recognised in the income Liabilities Held for Trading.’ Gains and losses accumulated in MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 191 other comprehensive income are included in the consolidated • Stage 3 – impaired portfolio: NLB Group recognises lifetime The ECL for Stage 1 financial assets is calculated based on income statement when the foreign operation is disposed of allowances for these defaulted financial assets. 12-month PDs or shorter period PDs, if the remaining maturity as part of the gain or loss on the disposal. of the financial asset is shorter than 1 year. The 12-month 2.13. Allowances for financial assets a) Expected credit losses for collective allowances IFRS 9 applies an expected loss model that provides an unbiased and probability-weighted estimate of credit losses by evaluating a range of possible outcomes that incorporates forecasts of future economic conditions. The expected loss model requires NLB Group to recognise not only credit losses The Bank has aligned its definition of credit impaired assets PD already includes the macroeconomic impact effect. under IFRS 9 to the new European Banking Authority (EBA) Allowances in Stage 1 are designed to reflect expected credit definition of non-performing loans (NPLs) as at 31 December losses that had been incurred in the performing portfolio but 2020. The Bank uses a unified definition of past due and have not been identified. default exposures; defaulted clients are rated D, DF, or E based on the internal rating system and contains the clients The ECL for Stage 2 financial assets is calculated based on with material delays over 90 days, as well as the clients that lifetime PDs (LPD) because their credit risk has increased were assessed as unlikely to pay. All facilities of retail clients significantly since their initial recognition. This calculation is MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report that have already occurred, but also losses that are expected obtain a unified credit rating. to occur in the future. An allowance for expected credit losses (ECL) is required for all loans and other debt financial assets not measured at FVTPL, together with loan commitments and financial guarantee contracts. In the general model, the allowance is based on the expected credit losses associated with the probability of default in the next 12 months unless there has been a significant increase in credit risk since initial recognition, in which case, the allowance is based on the probability of default over the life of the financial asset (LECL). When determining whether the risk of default increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical data, experience, expert credit assessment, and incorporation of forward-looking information. In 2021, the NLB Group made improvements to the SICR (significant increase of credit risk) identification concept by including additional qualitative indicators as well as by development of numeric LPD (lifetime probability of default) concept for part of the portfolio where this was feasible Classification into stages 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, and Stage 3, based on the applied ECL allowance methodology as described below: • Stage 1 – performing portfolio: no significant increase of credit risk since initial recognition, NLB Group recognises an allowance based on 12-month period; also based on a forward-looking assessment that considers a number of economic scenarios in order to recognise the A significant increase in credit risk is assumed: probability of losses associated with the predicted macro- • when a credit rating significantly deteriorates at the economic forecasts. reporting date in comparison to the credit rating at initial recognition (which is accompanied with the increase of For financial instruments in Stage 3, the same treatment Probability of default (PD) indicator), is applied as for those considered to be credit impaired. • when threefold increase of LPD since initial recognition is Exposures below the materiality threshold obtain collective detected, allowances using a PD of 100%. Financial instruments will be • when a financial asset has material delays over 30 days transferred out of Stage 3 if they no longer meet the criteria (days past due are also included in the credit rating of being credit-impaired after a probation period. Special assessment), treatment applies for purchased or originated credit-impaired • if NLB Group grants the forbearance to the borrower, financial instruments (POCI), where only the cumulative • if the facility is placed on the watch list or intensive care list, changes in lifetime expected losses since the initial recognition • if a retail client obtained COVID-19 moratoria and is placed are recognised as a loss allowance. on the watch list. The calculation of collective allowances is performed by As COVID-19 moratoria granted to the bank clients in the past multiplying the EAD (exposure at default) at the end of each years have mostly expired, these exposures no longer need month with an appropriate PD and LGD (loss-given default). specific treatment, and so SICR identification is carried out in The obtained result for each month is discounted to the the same manner as for any other exposures. present time using the original effective interest rate of the facility. For Stage 1 exposures, the ECL only takes a 12-month The methodology of credit rating for banks and sovereign period into account, while for Stage 2 or 3 all potential losses classification depends on the existence or non-existence of a until the maturity date are included. Risk parameters are rating from international credit rating agencies Fitch, Moody’s, calculated separately for each of the three possible scenarios. or S&P. Ratings are set on a basis of the average international The final ECL for each facility is calculated as a weighted credit rating. If there are no international credit ratings, the average ECL for each scenario. classification is based on the internal methodology of NLB Group. The EAD represents the anticipated outstanding amount owed by the obligor, which is determined as the sum of The classification into stages is based on the facility level, on-balance exposure and expected future drawings of the nevertheless occurring delays on one facility may trigger the off-balance exposure. The drawings are assessed by applying Stage deterioration of other facilities of the same client. When the CCF (credit conversion factor) based on the Bank’s historic the SICR criteria no longer exist, the facility may be transferred experience with similar types of facilities. to a more favourable stage subject to the prescribed cure • Stage 2 – underperforming portfolio: significant increase period of three months. in credit risk (SICR) since initial recognition, NLB Group recognises an allowance for lifetime period; and Contents 192 The PD is the estimation of likelihood of default over a given scenario relies on the NLB monthly Economic Outlook created in economic potential. These scenarios are included in the time horizon. The estimation is performed separately for each in April 2021. unique segment (corporate clients by size, institutions, central calculation of expected credit losses under IFRS 9. Apart from this important innovation, we had to keep track of the latest government) or by product group (mortgage, consumer The macroeconomic rationale behind the alternative scenarios is economic developments and changing official projections. loans and other retail products). Through the cycle, the PD is related to a range of plausible effects of the COVID-19 pandemic supplemented with the forward-looking aspect using three on economic development during the next three years (the This latest set of IFRS 9 scenarios for macroeconomic possible scenarios. so-called ‘post-COVID-19 period’). The basis for the alternative variables is applied in the modelling process for the scenarios is related to the ECB’s view of economic development probability of default (PD) and loss given default (LGD) The LGD parameter reflects the expected loss the facility after the coronavirus outbreak in early 2020. Based on the estimates. Nevertheless, our focus in macroeconomic will incur in case of the event of default. The LGD value is ECB illustration of a mild and severe scenario resolution of the scenarios is on the trajectory of real GDP and the assessed based on the Bank’s historic data on repayments pandemic crisis through the lens of the possible expected impact unemployment rate over the projection horizon from 2021 to from different types of collateral (hair-cuts are calculated on economic activity in the euro area, the Group developed both 2023. Both variables are included in the modelling process of for homogenic groups of collateral), as well as other types of alternative scenarios. In general, the mild scenario envisions PD and LGD, respectively. repayments such as regular/partial repayments, repayments a resolution of the health crisis by the end of 2021 and a long- from legal proceedings, the sale of receivables, and others. term reviving process of the economy, while a severe scenario Macroeconomic scenarios for explanatory variables, Through the cycle, the LGD is supplemented with the forward- assumes a more protracted crisis and permanent losses developed for each country in the NLB Group (in %): looking aspect to reflect the expected changes in the macroeconomic parameters using three possible scenarios. Risk parameter calculations are based on the data from each subsidiary, while the calculations and modelling are performed centrally. In the case where the data samples are not sufficiently large, hurdle rates are applied based on the regulatory or other benchmarks. Expected Life When measuring ECL, the Bank must consider the maximum contractual period over which the Bank is exposed to credit risk. For certain revolving credit facilities that do not have a fixed maturity, the expected life is estimated based on the period over which the Bank is exposed to credit risk Slovenia Real GDP Unemployment rate Bosnia and Herzegovina Real GDP Unemployment rate Montenegro Real GDP and where the credit losses would not be mitigated by Unemployment rate management actions. Forward-looking information In 2021, the Group reviewed IFRS 9 provisioning by testing a set of relevant macroeconomic scenarios to adequately reflect the current circumstances and the related impacts in the future. NLB Group established and developed multiple scenarios (i.e., baseline, mild, and severe) on the level of ECL calculation. The baseline scenario presents our forecast macroeconomic view for all countries present in the NLB Group. This scenario is constructed to culminate various outlooks into a unified projection of macroeconomic and financial variables for the NLB Group. This approach is in line with the concept that the NLB Group has a consolidated view of the future of economic North Macedonia Real GDP Unemployment rate Serbia Real GDP Unemployment rate Kosovo Real GDP development in Southeast Europe (SEE). The IFRS 9 baseline Unemployment rate Mild scenario Baseline scenario Severe scenario 2021 7.2 4.8 2021 4.8 16.7 2021 10.4 15.7 2021 6.4 16.2 2021 8 9.1 2021 7.2 24.3 2022 4.4 4.4 Mild scenario 2022 3.8 14.7 Mild scenario 2022 5.5 14.2 Mild scenario 2022 4.4 14.7 Mild scenario 2022 4.9 8 Mild scenario 2022 4.9 22.2 2023 3.7 3.9 2023 3.1 13.9 2023 3.7 13.5 2023 3.7 13.9 2023 4.2 7.4 2023 4.2 21.3 2021 4.5 5 2021 3 17.5 2021 6.5 16.5 2021 4 17 2021 5 9.5 2021 4.5 25.5 2022 4 5 Baseline scenario 2022 3.5 16.5 Baseline scenario 2022 5 16 Baseline scenario 2022 4 16.5 Baseline scenario 2022 4.5 9 Baseline scenario 2022 4.5 25 2023 3.5 4.5 2023 3 16 2023 3.5 15.5 2023 3.5 16 2023 4 8.5 2023 4 24.5 2021 2.3 5.2 2021 1.5 18.3 2021 3.3 17.3 2021 2 17.8 2021 2.5 9.9 2021 2.3 26.7 2022 2023 2.1 5.7 Severe scenario 2022 1.9 18.9 Severe scenario 2022 2.7 18.4 Severe scenario 2022 2.1 18.9 Severe scenario 2022 2.4 10.3 Severe scenario 2022 2.4 28.7 4.2 5.2 2023 3.6 18.3 2023 4.2 17.7 2023 4.2 18.3 2023 4.8 9.7 2023 4.8 28 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 193 NLB Group formed three probable scenarios with an operations is considered along with the sale of collateral of forbearance status, except in cases, where detailed review associated probability of occurrence for forward-looking that is not crucial for future business. In the case of the ‘gone and analysis sufficiently justify that the client is not in financial assessment of risk provisioning in the context of IFRS 9. The concern’ principle, the repayments are based on expected difficulties. If to receivables due from the client the status of scenarios are weighted 20-60-20, where both alternative ones cash flows from the sale of collateral. The expected payment restructuring is introduced, the debtor must be classified in (i.e., mild and severe) receive a weight of 20%. The assigned from the collateral is calculated from the appraised market the rating group C or lower. weight for the baseline scenario is 60%.  value of the collateral, the haircut used as defined in the Recalculation is performed annually of all risk parameters. liabilities are also assessed individually and, where necessary, were developed by the European Banking Authority (EBA). IFRS 9 macroeconomic scenarios incorporate the forward- related allowances are recognised as liabilities. These definitions aim to achieve comprehensive coverage looking and probability-weighted aspects of ECL impairment of exposures to which forbearance measures have been Haircut Methodology, and discounted. Off-balance sheet The definitions of forborne loans closely follow definitions that calculation. Both features may change when material changes The carrying amount of financial assets measured at extended. in the future development of the economy are recognised and amortised cost is reduced through an allowance account not embedded in previous forecasts. Then all the parameters and the loss is recognised in the income statement line item The accounting treatment of forborne loans depends are recalculated according to new weight and projections. ‘Impairment of financial assets.’ If the amount of allowances on the type of restructuring. When NLB Group embarks for ECL decreases subsequently due to an event occurring on a forborne loan via the modified terms of repayment The favourable macroeconomic environment has the most after the impairment was recognised (e.g., repayment in the proceeding from extending the deadline for the repayment significant impact on expected credit losses in 2021. This collection process exceeds the assessed expected payment of the principal and/or interest, and/or a forbearance of the change in macroeconomic scenarios affects forward-looking from collateral), the reversal of the loss is recognised as a repayment of the principal, and/or interest or a reduction values of risk parameters during the post-COVID-19 period. reduction in the allowance account, and the gain is recognised in the interest rate, and/or other expenses, it adjusts the Risk parameter overlays and mark-ups  in the same income statement item. For off-balance carrying amount of the forborne loan on the basis of the exposures, the amount of ECL is recognised in the statement discounted value of the estimated future cash flows under NLB Group implemented overlays and mark-ups on forward- of financial position in the line item ‘Provisions’ and in the the modified terms, and recognises the resulting effect in looking PD and LGD, respectively. PD overlay measures are income statement in the line item ‘Provisions for credit losses.’ profit or loss. In the event of the reduction of a claim against implemented to address prediction errors from the back- the debtor via the reduction in the amount of the claims as a testing exercise in particular segments and rating categories. The ECLs for debt instruments measured at fair value through result of a contractually agreed debt waiver and ownership In addition, mark-ups on the LGD risk parameter are applied other comprehensive income do not reduce the carrying restructuring or debt to equity swap, NLB Group derecognises by NLB Group members due to the particularities of the local amount of these financial assets in the statement of financial the claim in the part relating to the write-down or the market. position, which remains at fair value. Instead, an amount equal contractually agreed upon debt waiver. The new estimate of Effects of changed risk parameters to the allowance that would arise if the assets were measured the future cash flows for the residual claim, not yet written at amortised cost is recognised in other comprehensive down, is based on an updated estimate of the probability of Effects of changed risk parameters on the amount of expected income as an accumulated impairment amount, with a loss. NLB Group considers the debtor’s modified position, the credit losses are disclosed in notes 5.14. and 5.16.b). corresponding charge to profit or loss. The accumulated loss economic expectations, and the collateral of the forborne b) Individual assessment of allowances for impaired the profit or loss upon derecognition of the assets, or when by taking possession of other assets (i.e., property, plant and recognised in other comprehensive income is recycled to loan. When NLB Group is embarking on the forborne loan financial assets NLB Group assesses impairments of financial assets separately for all individually significant assets classified in Stage 3. The materiality threshold is set at EUR 0.5 million exposure for legal entities and EUR 0.1 million for private persons on the level of NLB, while the Group members apply lower thresholds applicable to their portfolio size. All other financial assets obtain collective allowances. The amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, 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 from the amount of allowances for ECL decreases due to an event equipment, securities, and other financial assets), including occurring after the impairment was recognised. investments in the equity of debtors obtained via debt- 2.14. Forborne loans A forborne loan (or restructured financial asset) arises as a result of a debtor’s inability to repay a debt under the originally agreed terms, either by modifying the terms of the original contract (via an annex) or by signing a new contract under which the contracting parties agree the partial or total repayment of the original debt. Loans with deferral of payment approved in line with the national legislation on intervention measures in response to SARS-CoV-2 (COVID-19) pandemic until 30 September 2020 are not forborne loans. Loans with deferrals of payment under COVID-19 measures approved after 30 September 2020 are subject of assignment to-equity swaps, it recognises the acquired assets in the statement of financial position at fair value, recognising the difference between the fair value of the asset and the carrying amount of the eliminated claim in profit or loss. Forborne exposures may be identified in both the performing and non-performing parts of the portfolio. Where the forborne loan is classified in the non-performing part of the portfolio, it can be reclassified to the performing part if exposure is no longer considered as impaired or defaulted, if determined amounts were repaid, if one year has passed from the latest of the events defined (introduction of forbearance, MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 194 classification in the non-performing part, repayment of realisable value. The effect of impairment is recognised as the Depreciation is calculated on a straight-line basis over the last overdue amount, end of the grace period) and impairment of other assets and the reversal of impairment as the assets’ estimated useful lives. The following annual after the introduction of forbearance there have been no income from the reversal of the impairment of other assets. depreciation rates were applied: overdue amounts or doubts concerning the repayment of the entire exposure, under the terms and conditions after the forbearance. The absence of doubt is confirmed by analysis of the financial situation of the debtor. 2.16. Offsetting Financial assets and liabilities are offset, and the net amount reported in the statement of financial position when there is NLB Group and NLB Buildings a legally enforceable right to offset the recognised amounts, Leasehold improvements The forborne status is withdrawn when: and there is an intention to settle on a net basis, or to realise • at least a 2-year probation period has passed since the the asset and settle the liability simultaneously. latest of: • the moment of extending the restructuring measures or • the forborne exposure was deemed performing; • regular payments of the principal or interest were made, in a substantial total amount, during at least half the probation period; • no exposure, in the probation period, is more than 30 days in default of more than EUR 100; • the client fulfils determined financial indicators. In the case of a deferral of payment approved due to the COVID-19 crisis, the probation period is extended for the period of deferral. 2.17. Sale and repurchase agreements Securities sold under sale and repurchase agreements (repos) are retained in the financial statements, and the counterparty liability is recognised in financial liabilities measured at an amortised cost. Securities sold subject to sale and repurchase agreements are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the collateral. Securities purchased under agreements to resell (reverse repos) are presented as loans to other banks or customers, as appropriate. In financial statements, the difference between the sale and 2.15. Repossessed assets In certain circumstances, assets are repossessed following the repurchase price is treated as interest and accrued over the life of the repo agreements using the effective interest foreclosure on loans that are in default. Repossessed assets are method. initially recognised in the financial statements at their fair value and classified in the appropriate category according to their purpose and are sold as soon as it is feasible in order to reduce exposure (note 6.1.l). After initial recognition, repossessed assets are measured and accounted for in accordance 2.18. Property and equipment All items of property and equipment are initially recognised at cost. They are subsequently measured at cost less any accumulated depreciation and any accumulated impairment with the policies applicable to the relevant asset categories. loss. Repossessed assets mainly represent items of real estate that NLB Group classifies within investment properties measured in Each year, NLB Group assesses whether there are indications accordance with an IAS 40 Investment property (note 2.20.), and that property and equipment may be impaired. If any such 2 5 14.3 10 12.5 in % 5 25 50 33.3 25 - - - - - Computers Furniture and equipment Motor vehicles Depreciation does not begin until the assets are available for use. The assets’ residual values and useful lives are reviewed and adjusted if appropriate on each reporting date. Gains and losses on the disposal of items of property and equipment are determined as the difference between the sale proceeds and their carrying amount and are recognised in the income statement. Maintenance and repairs are charged to the income statement during the financial period in which they are incurred. Subsequent costs that increase future economic benefits are recognised in the carrying amount of an asset, and the replaced part, if any, is derecognised. 2.19. Intangible assets Intangible assets include software licenses, goodwill (note 2.5.), and identifiable intangible assets acquired in a business combination. Intangible assets other than goodwill, have a finite useful life and are in the statement of financial position stated at cost, less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis at rates designed to write-down the cost of an intangible asset other assets measured in accordance with IAS 2 Inventories. indication exists, the recoverable amounts are estimated. The over its estimated useful life. The core banking system is Real estate obtained as collateral from the foreclosure of to sell and value in use. If the recoverable amount exceeds loans and receivables, classified as other assets are initially the carrying value, the assets are not impaired. If the carrying period of three to five years. Amortisation does not begin until the assets are available for use. recoverable amount is the higher of the fair value less costs amortised over a period of 10 years, and other software over a recognised at fair value less costs to sell (realisable value), amount exceeds the recoverable amount, the difference is wherein only the direct costs of sales can be considered. At recognised as an impairment loss in the income statement. The identifiable intangible assets acquired in a business subsequent measurement, the realisable value is verified combination and recognised separately from goodwill, are at least annually. Valuations of the fair value of real estate Items of a largely independent property and equipment recorded at fair value on the acquisition date if the intangible are performed by certified real estate appraisers. The real which do not generate cash flows are included in the cash- asset is separable or arises from contractual or other legal estate is impaired when the carrying value exceeds the generating unit and later tested for possible impairment. rights. After initial recognition, intangible assets acquired in a MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 195 business combination are measured in accordance with IAS Liabilities directly associated with disposal groups are value guarantees, the exercise price of a purchase option if 38 Intangible Assets. Additionally identified intangible assets reclassified and presented separately in the statement of there exists a reasonable certainty for it to be exercised, and acquired in a business combination in December 2020 (note financial position. 5.12.c) relate to core deposits and trade name. Their useful life is assessed to be 5 years. Amortisation of a trade name is calculated on a straight-line basis, while for core deposits accelerated amortisation is applied, since it better reflects the pattern of asset’s consumption. 2.20. Investment properties Investment properties include properties held to earn rentals, 2.22. Accounting for leases A lease is a contract, or part of a contract, which creates enforceable rights and obligations and conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Thus, IFRS 16 requires determination whether a contract is, or contains, a lease. or to increase the value of a long-term investment, rather than NLB Group as a lessee to be used by NLB Group. Investment properties are carried NLB Group recognises a liability to make lease payments and at fair value determined by a certified appraiser. Fair value is an asset representing the right to use the underlying asset based on current market prices. Any gain or loss arising from a (i.e., the right-of-use asset) during the lease term for all leases, change in the fair value is recognised in the income statement. except for short-term leases and leases of low-value. Short- payments of penalties for terminating the lease, if the lease term reflects exercising the option to terminate. Subsequently (after the commencement date), NLB Group measures the lease liability by: • increasing the carrying amount to reflect interest on the lease liability; • reducing the carrying amount to reflect the lease payments made; • remeasuring the carrying amount to reflect any reassessment or lease modifications. In the statement of financial position, lease liabilities are presented in line item ‘Other financial liabilities.’ 2.21. Non-current assets and disposal groups classified as held for sale date have a lease term of 12 months or less without the option to purchase the underlying asset. Leases of underlying assets Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through with a value, when new, lower or equal to EUR 5 thousand are defined as low value leases, and are thus recognised as Payments under operating leases are recognised as income on a straight-line basis over the period of the lease. Assets leased under operating leases are presented in the statement of financial position as investment property or as property a sale transaction rather than through continuing use. This expenses on a straight-line basis over the lease term. and equipment. term leases are defined as those which at the commencement NLB Group as a lessor condition is deemed to be met only when the sale is highly probable, and the asset is available for immediate sale in its Right-of-use assets present condition. Management must be committed to the At the commencement date, NLB Group measures the sale, which should be expected to qualify for recognition as a right-of-use asset at cost, reduced by any accumulated completed sale within one year from the date of classification. depreciation and impairment losses, and adjusted for any Non-current assets and disposal groups classified as held remeasurement of lease liabilities. The cost of right-of-use for sale are measured at the lower of the assets’ previous assets consists of the amount of lease liabilities recognised, carrying amount and fair value less costs to sell. initial direct costs incurred, an estimate of costs to be incurred by the lessee in dismantling, and removing the underlying NLB Group classifies a lease as a finance lease when the risks and rewards incidental to ownership of a leased asset lie with the lessee. When assets are leased under a finance lease, the present value of the lease payments is recognised as a receivable. Income from finance lease transactions is amortised over the lifetime of the lease using the effective interest method. Finance lease receivables are recognised at an amount equal to the net investment in the lease, including In the case of business combinations, NLB Group measures asset to the condition required by the terms and conditions the unguaranteed residual value. an acquired non-current asset (or disposal group) that of the lease and lease payments made at or before the is classified as held for sale at the acquisition date in commencement date less any lease incentives received. After Sale-and-leaseback transactions accordance with IFRS 5 Non-current Assets Held for Sale and the commencement date, NLB Group measures the right-of- Discontinued Operations at fair value less costs to sell. use asset using a cost model and recognises depreciation of the right-of-use assets, on a straight-line basis over the During subsequent measurement, certain assets and liabilities lease term, and (separately) interest on the lease liabilities. of a disposal group that are outside the scope of IFRS 5 measurement requirements are measured in accordance with the applicable standards (e.g., deferred tax assets, In the statement of financial position, right-of-use assets are presented in the line item ‘Property and equipment.’ NLB Group also enters into sale-and-leaseback transactions (in which NLB Group is primarily a lessor) under which the leased assets are purchased from, and then leased back to the lessee. These contracts are classified as finance leases or operating leases, depending on the contractual terms of the leaseback agreement. assets arising from employee benefits, financial instruments, Lease liabilities investment property measured at fair value, and contractual At the commencement date, NLB Group measures the lease rights under insurance contracts). Tangible and intangible liability at the present value of the lease payments that are assets are not depreciated. The effects of sale and valuation not paid at that date. The lease payments consist of fixed are included in the income statement as a gain or loss from payments, variable lease payments that depend on an non-current assets held for sale. index or a rate, amounts expected to be paid under residual Leases recognised in a business combination In all leases acquired in a business combination, the acquiree is the lessee. For such leases, NLB Group applies the IFRS 16 initial measurement provisions (with exceptions for leases with remaining term of 12 months or less and low value leases) and recognises the acquired lease liability as if the lease contract MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 196 was a new lease at the acquisition date. The right-of-use asset is measured at an amount equal to the recognised liability. There are no favourable or unfavourable terms of the leases relative to market terms, which would require the adjustment of the right-of-use assets. 2.23. Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and balances with central banks and other demand deposits at banks, debt securities held for trading, loans to banks, and debt securities not held for trading with an original maturity of up to three months. Cash and cash equivalents are disclosed under the cash flow statement. 2.24. Borrowings, deposits, and issued debt securities with characteristics of debt Loans and deposits received and issued debt securities are 2.26. Provisions Provisions are recognised when NLB Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. They are recognised in the amount that is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. When the effect of the time value of money is material, NLB Group determines the level of provisions by discounting the expected cash flows at a pre-tax rate reflecting the current rates specific to the liability. 2.27. Contingent liabilities and commitments Financial and non-financial guarantees Financial guarantees are contracts that require the issuer to documents that are in line with the conditions and deadlines set out in the letter of credit. A commitment may also take the form of a letter of credit confirmation, which is usually done at the request or authorisation of the issuing (opening) bank and constitutes a firm commitment by the confirming bank, in addition to that of the issuing bank, which independently assumes a commitment to the beneficiary under certain conditions. Other contingent liabilities and commitments Other contingent liabilities and commitments represent undrawn loan commitments to extend credit, uncovered letters of credit, and other commitments. The nominal contractual values of guarantees, letters of credit, and undrawn loan commitments where the loan make specific payments to reimburse the holder for a loss it agreed to be provided is on market terms, are not recognised initially recognised at fair value. Borrowings are subsequently incurs because a specific debtor fails to make payments when in the statement of financial position. measured at the amortised cost. The difference between the due, in accordance with the terms of debt instruments. Such value at initial recognition and the final value is recognised financial guarantees are given to banks, financial institutions, in the income statement as interest expenses, applying the and other bodies on behalf of the customer to secure loans, effective interest rate. overdrafts, and other banking facilities. Contingent liabilities recognised in a business combination A contingent liability recognised in a business combination is initially measured at its fair value. After initial recognition, it is measured at the higher of: Repurchased own debt is disclosed as a reduction of The issued guarantees covering non-financial obligations of • the amount that would be recognised in accordance with liabilities in the statement of financial position. The difference the clients represent the obligation of the Bank (guarantor) to IAS 37 Provisions, Contingent Liabilities and Contingent between the book value and the price at which own debt was pay if the client fails to perform certain works in accordance Assets; or repurchased is disclosed in the income statement. with the terms of the commercial contract. • the amount initially recognised less, if appropriate, the 2.25. Other issued financial instruments with characteristics of equity Financial and non-financial guarantees are initially with the principles of IFRS 15 Revenue from Contracts with recognised at fair value, which is usually evidenced by the fees Customers. This requirement does not apply to contracts Upon initial recognition, other issued financial instruments received. The fees are amortised to the income statement over accounted for in accordance with IFRS 9. cumulative amount of income recognised in accordance are classified in part or in full as equity instruments if the the contract term using the straight-line method. NLB Group’s contractual characteristics of the instruments are such liabilities under guarantees are subsequently measured at the that NLB Group must classify them as equity instruments in greater of: accordance with IAS 32 Financial Instruments: Presentation. • the initial measurement, less amortisation calculated to An issued financial instrument is only considered an equity recognise fee income over the period of guarantee; or instrument if that instrument does not represent a contractual • ECL provisions as set out in note 2.13. obligation for payment. Issued financial instruments with characteristics of equity are Documentary letters of credit Documentary (and standby) letters of credit constitute a recognised in equity in the statement of financial position. written and irrevocable commitment of the issuing (opening) Transaction costs incurred for issuing such instruments are bank on behalf of the issuer (importer) to pay the beneficiary deducted from equity reserves. The corresponding interest is (exporter) the value set out in the documents by a defined recognised directly in profit reserves. deadline: • if the letter of credit is payable on sight; and The carrying value of an issued financial instrument with • if the letter of credit is payable for deferred payment, the characteristics of equity is presented in the statement of bank will pay according to the contractual agreement when changes in equity in the line item ‘Other Equity Instruments.’ and if the beneficiary (exporter) presents the bank with 2.28. Taxes Income tax expenses comprises current and deferred income tax. Current corporate income tax in NLB Group is calculated on taxable profits at the applicable tax rate in the respective jurisdiction. The corporate income tax rate for 2021 in Slovenia was 19% (2020: 19%). Current and deferred taxes are recognised in profit or loss, except to the extent that they relate to a business combination or taxes related to effects recognised directly in equity (deferred tax related to the fair value re-measurement of financial assets measured at fair value through other comprehensive income, cash flow hedges, and actuarial gains and losses on defined benefit pension plans is charged or credited directly to other comprehensive income). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 197 Deferred income tax is calculated using the balance sheet income statement when the service has been provided (see passage of time. For post-employment benefits, actuarial liability method for temporary differences arising between the also note 2.10.). Fee and commission income charged for this gains and losses from the effect of changes in actuarial tax bases of assets and liabilities, and their carrying amounts type of service is broken down by items in note 4.3.b). Further assumptions and experience adjustments (differences for financial reporting purposes. details on transactions managed on behalf of third parties are between the realised and expected payments) are recognised Deferred tax assets are recognised if it is probable that future disclosed in note 5.24. in other comprehensive income under the line item ‘Actuarial Gains/(Losses) on Defined Benefit Pensions Plans,’ and will taxable profit will be available in the foreseeable future Based on the requirements of Slovenian legislation, NLB not be recycled to the income statement. Actuarial gains against which the temporary differences can be utilised. Group has, in note 5.24., additionally disclosed the assets and and losses that relate to other employment benefits are liabilities on accounts used to manage financial assets from recognised in the income statement as defined benefit costs. Deferred tax assets and liabilities are measured at tax rates fiduciary activities, i.e., information related to the receipt, In the statement of financial position, liabilities for short- enacted or substantively enacted at the end of the reporting processing, and execution of orders and related custody term employee benefits are included in the line item ‘Other MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report period that are expected to apply to the period when the asset activities. is realised, or the liability is settled. At each reporting date, NLB Group reviews the carrying amount of deferred tax assets and assesses future taxable profits against which temporary taxable differences can be utilised. Deferred tax assets for temporary differences arising from impairments of investments in subsidiaries, associates and joint ventures are recognised only to the extent that it is probable that: • the temporary differences will be reversed in the foreseeable future; and • taxable profit will be available. 2.30. Employee benefits Employee benefits include: • short-term employee benefits (such as salaries, compensations, annual holiday allowance, separation allowance, and non-monetary benefits); • reimbursement of commuting costs, meal allowance, compensation for use of own resources); • retirement indemnity bonuses (post-employment benefits); • other employment benefits (jubilee long-service benefits, liabilities,’ while liabilities for post-employment benefits and other employment benefits (jubilee long-service benefits) are included in the line item ‘Provisions.’ In the case of a business combination employee benefits are recognised and measured in accordance with IAS 19 Employee Benefits, i.e., not at fair value. 2.31. Share capital Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the voluntary supplementary pension insurance); period in which they are approved by NLB’s shareholders. • variable remuneration. Slovenian tax law does not set deadlines by which uncovered Short-term employee benefits are recognised in the period to Treasury shares If NLB or another member of NLB Group purchases NLB’s tax losses must be utilised. In the case of business combination deferred tax balances are recognised if related to temporary differences and carry- forwards of an acquiree that exist at the acquisition date or if they arise as a result of the acquisition. Income taxes are measured in accordance with IAS 12 Income Taxes. A tax on financial services is a tax on fees, paid for prescribed financial services rendered (financial services, exempt from value added tax (with the exception of securities transactions) and the services of insurance brokers and agents), paid in Slovenia. The tax rate is 8.5% (2020: 8.5%) and the tax is paid monthly. Given that the tax on financial services is classified as a sales tax, it reduces accrued revenues in the financial statements. which they relate and included in the income statement line shares, the consideration paid is deducted from the total item ‘Administrative expenses.’ Among others they include the shareholders’ equity as treasury shares. If such shares are payment of contributions for pension and disability insurance, subsequently sold, any consideration received is included in which according to local legislation (for employer) amount to equity. If NLB’s shares are purchased by NLB itself or other 8.85% of the gross salaries. NLB Group entities, NLB creates reserves for treasury shares According to legislation, employees retire after they fulfil certain conditions according to Pension and Disability Insurance Act (ZPIZ), they are entitled to a lump-sum Share issue costs Costs directly attributable to the issue of new shares are severance payment. Employees are also entitled to a long- recognised in equity as a reduction in the share premium service bonus for every 10 years of service in NLB. account. in equity. These obligations are measured at the present value of future cash outflows considering future salary increases and other conditions, and then apportioned to past and future employee service based on the benefit plan’s terms and conditions. 2.32. Segment reporting Operating segments are reported in a manner consistent with internal reporting to the Management Board, which is the executive body that makes decisions regarding the allocation of resources and assesses the performance of a specific 2.29. Fiduciary activities NLB Group provides asset management services to its clients. Service costs are included in the income statement in the segment. line item ‘Administrative expenses’ as defined benefit costs, Assets held in a fiduciary capacity are not reported in NLB while interest expenses on the defined benefit liability are Group’s financial statements as they do not represent assets recognised in the line item ‘Interest and similar expenses.’ of NLB Group. Fee and commission income and expenses These interest expenses represent the change during the relating to fiduciary activities are generally recognised in the period in the defined benefit liability that arises from the Transactions between organisational units (OUs) are managed under normal operating conditions. Interest income among individual OUs in the parent bank (NLB) is allocated using a fund transfer pricing method and shown within the Contents 198 net interest income of each OU. Net non-interest income is of risk parameters combining the historic movements with In year 2020, the volatility of prices on various markets allocated to the OU that actually provides the service that the future macroeconomic predictions for three separate increased as a result of the spread of COVID-19. Therefore, generates income. Direct costs are attributed to the segment scenarios. The models used to estimate future risk parameters NLB Group decided to sell some securities with increased that is directly related to the provided service and indirect are validated and back-tested on a regular basis to make loss credit spreads as part of its strategy to manage the credit costs (costs which service centres provide for profit centres) estimations as realistic as possible. are attributed to the segment for which the service is provided, risk. Most of these securities were classified as measured at fair value through other comprehensive income (EUR 250,297 whereas overhead costs are allocated according to general NLB Group performs regular stress-testing as part of the thousand at NLB Group and EUR 222,586 thousand at NLB), keys. External net income is the net income of NLB Group ICAAP process normative approach, where the 3-year budget while EUR 120,131 thousand of sold securities were measured from the consolidated income statement. Income tax is not is tested for adverse circumstances. The selected stress at amortised cost. The total realised gains due to sales of allocated between segments. Analysis by segment for NLB scenario predicts adverse economic circumstances as a result securities amount to EUR 17,815 thousand at NLB Group and Group is presented in note 7.a). of the prolonged COVID-19 pandemic. EUR 17,096 thousand at NLB (note 4.4.). In accordance with IFRS 8, NLB Group has the following In terms of credit risk, the scenario has an unfavourable impact Due to increased frequency and values of sales of securities reportable segments: Retail Banking in Slovenia, Corporate on default rates (transfer of assets from performing to default) measured at amortised cost, NLB Group reassessed whether and Investment Banking in Slovenia, Strategic Foreign and loss rates (expected losses after occurrence of default). there has been a change in its business model for managing Markets, Financial Markets in Slovenia, Non-core members, Furthermore, a transfer of assets within the performing sub- financial assets. Sales were made due to an increase in the and Other Activities. portfolio to rating classes with worse default probabilities is assets’ credit risk, and are therefore consistent with a held to 2.33. Critical accounting estimates and judgments in applying accounting policies NLB Group’s financial statements are influenced by accounting policies, assumptions, estimates, and envisaged. Based on the existing exposures (static balance collect business model because the credit quality of financial sheet assumption), additional allowances for expected credit assets is relevant to NLB Group’s ability to collect contractual losses are assessed on existing default exposures and new cash flows. Credit risk management activities that are aimed default flows, as well as on the remaining performing portfolio. at minimising potential credit losses due to credit deterioration are integral to such a model. management’s judgment. NLB Group makes estimates and The results of the stress scenario for NLB Group shows an assumptions that affect the reported amounts of assets and increase of credit risk impairments in the first year of stress Furthermore, the sales were made as a response to COVID-19 liabilities within the next financial year. All estimates and assumptions required in conformity with the IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgments are evaluated on a by EUR 139.6 million (2020: EUR 134.7 million), and an increase situation and the increased volume of sales is not expected to in the coverage of the credit portfolio by impairments by 0.98 persist. It is expected, that future sales volumes will be lower in percentage points (2020: 0.90 percentage points). frequency and value. So, no change in our business model has been made. continuing basis, and are based on past experience and other factors, including expectations with regard to future events. b) Fair value of financial instruments The fair values of financial investments traded on the active The fair values of derivative financial instruments are a) Allowances for expected credit losses on loans and advances NLB Group monitors and checks the quality of the loan market are based on current bid prices (financial assets) or determined on the basis of market data (mark-to-market), in offer prices (financial liabilities). accordance with NLB Group’s methodology for the valuation of financial instruments. The market exchange rates, interest The fair values of financial instruments that are not traded on rates, yield, and volatility curves used in valuations are based portfolio at the individual and portfolio levels to continuously the active market are determined by using valuation models. on the market snapshot principle. Market data are saved daily estimate the necessary allowances for ECL. NLB Group creates individual allowances for individually significant financial assets attributed to Stage 3. Such an assignment is based on information regarding the fulfilment of contractual obligations or other financial difficulties of the debtor, and other important facts. Individual assessments are based on These include a comparison with recent transaction prices, at 4 p.m., and later used for the calculation of the fair values the use of a discounted cash flow model, valuation based on (market value, NPV) of financial instruments. NLB Group comparable entities, and other frequently used valuation models. applies market yield curves for valuation, and fair values are These valuation models at their best estimate reflect current additionally adjusted for credit risk of the counterparty. market conditions at the measurement date, which may not be representative of market conditions either before or after the The fair value hierarchy of financial instruments is disclosed in the expected discounted cash flows from operations and/or measurement date. Management reviewed all applied models note 6.5. the assessed expected payment from collateral. as at the reporting date to ensure they appropriately reflect Allowances are assessed collectively for financial assets market and the applied credit spread. Changes in assumptions assigned to Stage 1 or 2, or for financial assets in Stage 3 regarding these factors could affect the reported fair values joint ventures The process of identifying and assessing the impairment of with exposure below the materiality threshold. The ECL in of financial instruments held for trading, and financial assets investments in subsidiaries, associates and joint ventures is this group of assets are estimated based on expected value measured at fair value through other comprehensive income. inherently uncertain, as the forecasting of cash flows requires current market conditions, including the relative liquidity of the c) Impairment of investments in subsidiaries, associates and MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 199 the significant use of estimates, which themselves are sensitive on the cost of equity allocated to an individual investment. to the assumptions used. The review of impairment represents The discount rate reflects the impact of a range of financial management’s best estimate of the facts and assumptions and economic variables, including the risk-free rate and such as: risk premium. The value of variables used is subject to • Future cash flows from individual investments present the fluctuations outside management’s control. The pre-tax estimated cash flow for periods for which adopted business discount rate is between 9.66 and 15.88% (31 December plans are available. For core members, estimated cash 2020: between 9.66 and 15.88%). flows are based on a five-year business plan. For non-core members, estimated cash flows are based on a period in For strategic NLB Group members in 2021 and 2020, there line with the strategy of divestment. The business plans of were no indications of impairment for equity investments. individual entities are based on an assessment of future economic conditions that will impact an individual member’s In 2021, NLB impaired equity investments in non-core business and the quality of the credit portfolio; members in the amount of EUR 458 thousand (2020: EUR 582 • The growth rate in cash flows for the period following the thousand). adopted business plan is between 2.6 and 3.7%; • The target capital adequacy ratio of an individual bank is between 14 and 17%; d) Employee benefits Liabilities for certain employee benefits are calculated by an • The discount rate derived from the capital asset pricing independent actuary. The main assumptions included in the model that is used to discount future cash flows is based 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 2021 2020 0.5% - 4.3% 0.3% - 4.0% 2021 0.6% NLB 2020 0.3% 1.8% - 4.8% 1.0% - 4.0% 2.5% - 3.0% 2.6% - 3.0% Number of employees eligible for benefits 7,014 7,996 2,444 2,572 A sensitivity analysis of significant actuarial assumptions for post-employment benefit: 31 Dec 2021 NLB Group NLB Discount rate Future salary increases Discount rate Future salary increases +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. Impact on provisions for employee benefits - post-employment benefits (in %) (5.3) 5.7 5.5 (5.1) (5.1) 5.5 5.5 (5.2) 31 Dec 2020 NLB Group NLB Discount rate Future salary increases Discount rate Future salary increases +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. Impact on provisions for employee benefits - post-employment benefits (in %) (4.9) 3.8 5.3 (4.8) (5.2) 3.4 5.6 (5.3) The minimum discount rate is considered to be 0%. Individual analysis is done by changing one assumption for + / - 0.5 percentage points, while all other assumptions stay the same. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 200 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 NLB in EUR thousands 2021 251 (1,211) (417) (1,377) 2020 606 134 138 878 2021 292 151 (558) (115) 2020 473 200 27 700 Post-employment benefit NLB Group NLB 2021 2020 9.4 - 19.0 10.5 - 18.7 2021 11.0 2020 11.1 e) Taxes NLB Group operates in countries governed by different Accounting standards and amendments to existing free rate. The Phase 2 amendments include a practical standards effective for annual periods beginning on expedient to require contractual changes, or changes to laws. The deferred tax assets recognised as at 31 December 1 January 2021 that were endorsed by the EU and adopted by cash flows that are directly required by the reform, to be 2021 are based on profit forecasts and take the expected manner of recovery of the assets into account. Changes in assumptions regarding the likely manner of recovering assets or changes in profit forecasts can lead to the recognition of currently unrecognised deferred tax assets or derecognition of previously created deferred tax assets. NLB Group • IFRS 4 (amendment) – Insurance Contracts – deferral of IFRS 9 is effective for annual periods beginning on or after 1 January 2021. Currently IFRS 4 requires insurance entities to apply IFRS 9 – Financial Instruments from 1 January 2021, and amendments allow them to defer the application If NLB profit projections used for estimation of the amount of IFRS 9 until the annual period beginning on or after of deferred tax assets which are expected to be reversed in 1 January 2023. The amendment will not impact NLB Group’s treated as changes to a floating interest rate equivalent to a movement in a market rate of interest. The practical expedient is also required for entities applying IFRS 4 – Insurance Contracts that are using the exemption from IFRS 9 – Financial Instruments (and therefore, apply IAS 39 – Financial Instruments: Recognition and Measurement) and for IFRS 16 – Leases, to lease modifications required by the IBOR reform. The amendments permit changes required foreseeable future (i.e., within 5 years) would change by 10%, consolidated financial statements. There is no impact on by the IBOR reform to be made to hedge designations and the estimated amount of deferred tax assets would change by NLB Group’s and NLB’s financial statements. hedge documentation under both IFRS 9 and IAS 39 without approximately EUR 3.2 million (notes 4.16. and 5.17.). 2.34. Implementation of the new and revised International Financial Reporting Standards During the current year, NLB Group adopted all new and revised standards and interpretations issued by the International Accounting Standards Board (hereinafter: ‘the IASB’) and the International Financial Reporting Interpretations Committee (hereinafter: ‘the IFRIC’), and • IFRS 9 (amendment), IAS 39 (amendment), IFRS 7 (amendment), IFRS 4 (amendment) and IFRS 16 (amendment) – Interest Rate Benchmark Reform – Phase 2 are effective for annual periods beginning on or after 1 January 2021 with the hedging relationship being discontinued. Under IFRS 7 – Financial instrument: Disclosures amendments an entity will be required to disclose information about new risks arising from the reform and how it manages the transition to alternative benchmark rates. The Phase 2 amendments earlier application permitted. Unlike Phase 1, which focused apply only to changes required by the interest rate on issues of the impact of the reform on financial reporting benchmark reform to financial instruments and hedging in the period before the replacement of the existing interest relationships. Additional information about interest rate rate benchmark with a risk-free interest rate, Phase 2 benchmark reform is provided in note 5.5.d). that are endorsed by the EU that are effective for annual focuses on issues that affect financial reporting when an accounting periods beginning on 1 January 2021. existing interest rate benchmark is replaced with a risk- MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 201 beyond 30 June 2021 is effective for annual periods beginning on or after 1 April 2021. The amendment extended Accounting standards and amendments to existing after 1 January 2022. The amendments modify the standard • IFRS 16 (amendment) – Covid-19-Related Rent Concessions standards that were endorsed by the EU, but not adopted regarding costs a company should include as the cost of early by NLB Group New and revised accounting standards and interpretations fulfilling a contract when assessing whether a contract is onerous. The amendments specify that the ‘cost of fulfilling’ the availability of the practical expedient by one year so endorsed by the EU that are not mandatory for annual a contract comprises the ‘costs that relate directly to the that it applies to rent concessions for which any reduction accounting periods beginning on 1 January 2021, were contract.’ The costs that relate directly to a contract can in lease payments affects only payments originally due on not adopted early by NLB Group. These standards and either be incremental costs of fulfilling that contract or or before 30 June 2022, provided the other conditions for amendments are not expected to have a material impact an allocation of other costs that relate directly to fulfilling applying the practical expedient are met. There is no impact on the consolidated financial statements of NLB Group contracts. NLB Group and NLB do not expect an impact on on NLB Group’s and NLB’s financial statements. in the future reporting periods and on foreseeable future their financial statements. transactions. NLB Group plans to adopt the accounting standards and amendments listed below for reporting periods • Annual Improvements to IFRS Standards 2018-2020 commencing on or after the effective date. (amendments) are effective for annual periods beginning on • IFRS 3 (amendment) – Business Combinations – Reference to the Conceptual Framework is effective for annual periods beginning on or after 1 January 2022. The amendments update a reference in IFRS 3 to the Conceptual Framework or after 1 January 2022. The amendments to IFRS 9 clarify which fees and costs should be included in the ‘10 per cent’ test for derecognition of a financial liability. The amendment to IFRS 16 – Leases removes from the example the illustration of the reimbursement of leasehold improvements by the Accounting standards and amendments to existing standards, but not endorsed by the EU • IAS 1 (amendment and deferral of effective date) – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current is effective for annual periods beginning on or after 1 January 2023. The amendments clarify that liabilities are classified as either current or non-current, depending on the rights that exist at for Financial Reporting without changing the accounting lessor in order to resolve any potential confusion regarding the end of the reporting period. Classification is unaffected requirements for business combinations. Furthermore, the amendments add an exception to the recognition principle for liabilities and contingent liabilities within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets the treatment of lease incentives. The amendments to IFRS 1 – First-time Adoption of International Financial Reporting Standards permits a subsidiary that becomes a first-time adopter of IFRS Standards later than its parent to measure by the expectations of the entity or events after the reporting date. The amendment also clarifies what IAS 1 means when it refers to the ‘settlement’ of a liability. NLB Group and NLB do not expect an impact on their financial statements. or IFRIC 21 Levies. The amendments also clarify existing cumulative translation differences at amounts included in guidance for contingent assets. • IAS 16 (amendment) – Property, Plant and Equipment: Proceeds before Intended Use is effective for annual periods beginning on or after 1 January 2022. The amendment prohibits the consolidated financial statements of the parent, based on the parent’s date of transition to IFRS Standards. The amendments to IAS 41 – Agriculture remove the requirement to exclude cash flows for taxation when measuring fair value • IAS 1 (amendment) – Presentation of Financial Statements and IFRS Practice Statement 2 – Disclosure of Accounting policies is effective for annual periods beginning on or after 1 January 2023. The amendments to IAS 1 require companies under IAS 41. This amendment is intended to align with the to disclose their material accounting policy information the deduction from the cost of an item of property, plant and requirement in the standard to discount cash flows on a post- rather than their significant accounting policies. The equipment of any proceeds from the sale of produced items while the asset is being prepared for its intended use. The proceeds from selling such items, and the cost of producing those items, are recognised in profit or loss. It also clarifies that tax basis. This will ensure consistency with the requirements in IFRS 13 – Fair Value Measurement. NLB Group and NLB do not expect an impact on their financial statements. amendments to IFRS Practice Statement 2 provide guidance on how to apply the concept of materiality to accounting policy disclosures. NLB Group and NLB do not expect an an entity is ‘testing whether the asset is functioning properly’ • IFRS 17 (new standard including amendments) – Insurance when it assesses the technical and physical performance of the asset. The financial performance of the asset is not relevant Contracts is effective for annual periods beginning on or after 1 January 2023. The new standard provides a comprehensive to this assessment. The amendment further requires separate principle-based framework for the measurement and disclosure of the amounts of proceeds and costs relating presentation of all insurance contracts. The new standard will impact on their financial statements. • IAS 8 (amendment) – Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates is effective for annual periods beginning on or after 1 January 2023. The amendments clarify how to items produced that are not an output of the entity’s ordinary replace IFRS 4 Insurance Contracts and requires insurance companies should distinguish changes in accounting activities. It is also necessary to disclose the line item in the contracts to be measured using current fulfilment cash policies from changes in accounting estimates. That statement of comprehensive income where the proceeds are flows, and for revenue to be recognised – as the service is distinction is important because changes in accounting included. NLB Group and NLB do not expect an impact on their provided over the coverage period. The additionally issued estimates are applied prospectively only to future financial statements. amendments to IFRS 17 simplify some requirements and transactions and other future events, but changes • IAS 37 (amendments) – Provisions, Contingent Liabilities and Contingent Assets: Onerous Contracts – Cost of Fulfilling a Contract is effective for annual periods beginning on or explanation of financial performance, and provide additional in accounting policies are generally also applied transition reliefs to reduce the complexity of applying retrospectively to past transactions and other past events. standard for the first time. NLB Group and NLB do not expect NLB Group and NLB do not expect an impact on their an impact on their financial statements. financial statements. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 202 • IAS 12 (amendment) - Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction is effective for annual periods beginning on or after 1 January 2023. IAS 12 specifies how a company accounts for income tax, including deferred tax, which represents tax payable or recoverable in the future. In specified circumstances, companies are exempt from recognising deferred tax when they recognise assets or liabilities for the first time. The amendments clarify that the exemption does not apply and that companies are required to recognise deferred tax on such transactions. NLB Group and NLB do not expect an impact on their financial statements. • IFRS 17 (amendment) – Insurance contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information is effective for annual periods beginning on or after 1 January 2023. The amendment is a transition option relating to comparative information about financial assets presented on initial application of IFRS 17. The amendment is aimed at helping entities to avoid temporary accounting mismatches between financial assets and insurance contract liabilities, and therefore improve the usefulness of comparative information for users of financial statements. NLB Group and NLB do not expect an impact on their financial statements. 3. Changes in the composition of the NLB Group Changes in 2021 Capital changes: • In April 2021, NLB increased the share of voting rights in the takeover bid for the remaining shares of Komercijalna banka a.d. Beograd from 83.23% to 87.999% and also acquired 15.328% of preference shares. This increased NLB’s share in total shareholding of the bank from 81.42% to 86.42%. The increase in capital investment was recognised in the amount of EUR 23,098 thousand. • In May 2021, NLB increased the share of voting rights in the public offering of ordinary shares of Komercijalna banka a.d. Beograd from 87.999% to 88.28%. This increased NLB’s share in total shareholding of the bank from 86.42% to 86.70%. The increase in capital investment was recognised in the amount of EUR 1,337 thousand. • In May 2021, NLB acquired the remaining shares of minority shareholders of NLB Banka a.d., Beograd and increased its ownership from 99.997% to 100%. The increase in capital investment was recognised in the amount of EUR 2 thousand. • An increase in equity reserves in the form of a cash contribution in the amount of EUR 300 thousand in REAM d.o.o., Beograd to ensure regular business operations. • In October 2021, NLB increased its business share in Bankart d.o.o., Ljubljana from 40.08% to 45.64%. • In November 2021, Komercijalna banka a.d. Podgorica merged with NLB Banka a.d. Podgorica. After this merger, Komercijalna banka a.d. Beograd has 23.97% shareholding of NLB Banka a.d. Podgorica, while NLB d.d. has 75.90%. • In December 2021, an increase in share capital in the form of a cash contribution in the amount of EUR 15,309 thousand in NLB Lease&Go, leasing, d.o.o., Ljubljana for the purpose of achieving NLB Group’s leasing strategy. • In December 2021, NLB increased its ownership in settlement agreement in relation to the put and call option of shares of NLB Banka sh.a., Prishtina from 81.21% to 82.38%. The increase in capital investment was recognised in the amount of EUR 223 thousand. Other changes: • In April 2021 company BH-RE d.o.o., Sarajevo – u likvidaciji was liquidated. In accordance with a court order, company was removed from the court register. • In September 2021, NLB sold its 0.002% ownership interest in Komercijalna banka a.d. Banja Luka to Komercijalna banka a.d. Beograd. • In November 2021, Prvi Faktor d.o.o., Sarajevo - u likvidaciji was liquidated. In accordance with a court order, the company was removed from the court register. • In December 2021, Komercijalna banka a.d. Beograd sold its subsidiary Komercijalna banka a.d. Banja Luka. • In December 2021, NLB sold its subsidiary NLB Leasing d.o.o., Ljubljana – v likvidaciji to NLB Lease&Go, leasing, d.o.o., Ljubljana. Changes in 2020 Capital changes: • In December 2020, NLB acquired an 83.23% ordinary shareholding in Komercijalna banka a.d. Beograd, which represents 81.42% of total shareholding in the bank. • In December 2020, NLB acquired 1 ordinary share of Komercijalna banka a.d. Banja Luka which represents a 0.002% share of their capital. • In December 2020, NLB acquired additional shares of Bankart d.o.o., Ljubljana and thereby increased its ownership from 39.44% to 40.08%. • An increase in share capital in the form of a debt-to-equity conversion in the amount of EUR 1,800 thousand in NLB Leasing Podgorica d.o.o. – u likvidaciji. Other changes: • In April 2020, NLB established the non-financial cultural heritage institute named ‘NLB Zavod za upravljanje kulturne dediščine, Ljubljana.’ • In May 2020, NLB established financial company named ‘NLB Lease&Go, leasing, d.o.o., Ljubljana.’ • In May 2020, all the suspensive conditions under the joint NLB and KBC Insurance NV sale agreement signed in December 2019 were met, therefore the sale of NLB’s 50% stake in the share capital of NLB Vita d.d., Ljubljana was completed (note 4.15.). • In December 2020, BH-RE d.o.o., Sarajevo – beginning of the liquidation procedure entered in the court register. • In December 2020, NLB sold its subsidiaries NLB Leasing d.o.o., Sarajevo - u likvidaciji and NLB Leasing Podgorica d.o.o., Podgorica - u likvidaciji. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 203 4. Notes to the income statement Interest income and expenses 4.1. Analysis by type of assets and liabilities Interest and similar income 5.15.b). NLB Group NLB in EUR thousands The item ‘Negative interest’ classified under the line item ‘Other interest and similar income’ mainly includes the interest from targeted longer-term refinancing operations in the 2021 2020 2021 2020 amount of EUR 3,979 thousand for NLB Group and NLB (note Interest income calculated using the effective interest method 467,500 347,636 170,002 167,611 Loans and advances to customers at amortised cost 412,449 312,695 144,081 140,203 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 Other interest and similar income Financial assets held for trading Negative interest (note 5.15.b) Non-trading financial assets mandatorily at fair value through profit or loss Other Total Interest and similar expenses Interest expenses calculated 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) Other interest and similar expenses Derivatives - hedge accounting Negative interest Financial liabilities held for trading Interest expenses on defined employee benefits (note 2.30., 5.16.c) Other Total 14,049 40,347 416 239 10,329 4,757 3,980 780 812 16,165 18,180 383 213 7,552 5,408 3 1,800 341 10,150 11,733 3,937 101 9,183 4,455 3,981 744 3 12,736 10,704 3,882 86 7,493 5,408 5 1,739 341 The item ‘Negative interest’ classified under the line item ‘Other interest and similar expenses’ includes the interest from deposits with banks and central banks in the amount of EUR 11,692 thousand for NLB Group (2020: EUR 7,178 thousand), and EUR 8,826 thousand for NLB (2020: EUR 5,912 thousand). It also includes interest from deposits with financial organisations in the amount of EUR 336 thousand for NLB Group and NLB (2020: EUR 411 thousand) and interest from securities with a negative yield due to the purchase with a premium in the amount of EUR 683 thousand for NLB Group and NLB (2020: EUR 845 thousand). Other interest income in year 2021 for NLB Group in the 477,829 355,188 179,185 175,104 amount of EUR 809 thousand relates to interests in relation to a refund of VAT from the Slovenian Tax Authority, while EUR 341 thousand in year 2020 for NLB Group and NLB relates to a refund of corporate income tax from the Italian Tax Authority (note 4.16.). 53,171 25,575 1,797 1,205 41,208 20,541 880 941 25,142 3,067 1,647 - 21,883 3,835 774 - 10,548 10,040 10,548 10,040 865 470 15,298 10,279 12,711 4,222 202 595 78 294 14,407 9,439 8,434 4,789 100 79 6 29 14,904 10,279 9,845 4,222 48 355 27 39 14,334 9,439 7,168 4,789 30 76 68,469 55,615 40,046 36,217 Net interest income 409,360 299,573 139,139 138,887 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 204 4.2. Dividend income Financial assets measured at fair value through other comprehensive income - related to investments held at the end of reporting period Investments in subsidiaries Investments in associates and joint ventures Non-trading financial assets mandatorily at fair value through profit or loss Total NLB Group NLB 2021 2020 2021 2020 in EUR thousands 184 184 - - 39 223 83 83 - - 28 111 - - 79,136 441 39 79,616 - - 5,561 670 28 6,259 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 2021 2020 2021 2020 in EUR thousands 93,644 90,212 77,248 27,095 13,918 8,642 10,445 321,204 63,940 66,311 50,325 19,286 11,781 6,338 4,639 38,389 57,147 22,751 8,694 7,831 7,010 4,484 35,634 49,566 21,109 5,931 7,282 5,241 3,434 222,620 146,306 128,197 67,860 46,473 27,952 25,581 11,567 3,650 3,468 1,026 4,535 6,134 1,034 2,272 778 2,528 917 1,015 664 957 808 909 760 524 712 817 92,106 59,219 32,313 29,303 Net fee and commission income related to banking activities 229,098 163,401 113,993 98,894 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 205 b) Fee and commission income and expenses relating to fiduciary activities Fee and commission income related to fiduciary activities Receipt, processing, and execution of orders Management of financial instruments portfolio Initial or subsequent underwriting and/or placing of financial instruments without a firm commitment basis Custody and similar services Management of clients’ account of non-materialised securities Safe-keeping of clients’ financial instruments Advice to companies on capital structure, business strategy, and related matters and advice, and services relating to mergers and acquisitions of companies in EUR thousands NLB Group NLB 2021 2020 2021 2020 1,942 2,118 264 5,290 1,595 26 150 1,583 1,237 327 4,842 1,797 - 26 1,655 - 264 5,247 1,595 - 150 1,435 - 327 4,909 1,797 - 26 Total 11,385 9,812 8,911 8,494 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 3,188 119 3,307 2,876 57 2,933 3,191 119 3,310 2,874 57 2,931 Net fee income related to fiduciary activities 8,078 6,879 5,601 5,563 Total fee and commission income Total fee and commission expenses 332,589 232,432 95,413 62,152 155,217 35,623 136,691 32,234 Total a) and b) 237,176 170,280 119,594 104,457 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 206 4.4. Gains less losses from financial assets and liabilities not measured at fair value through profit or loss 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). in EUR thousands NLB Group NLB 2021 2020 2021 2020 171 (4) - - 167 5,244 (178) 12,749 (126) 17,689 24 - - - 24 4,525 (178) 12,749 (126) 16,970 4.5. Gains less losses from financial assets and liabilities held for trading in EUR thousands NLB Group NLB 2021 2020 2021 2020 28,160 (7,114) 776 (616) (199) 749 (562) 21,194 31,628 (21,139) 10,799 (5,795) 23,022 (18,623) 797 (392) (170) (909) (21) 9,794 460 (571) (484) 749 (562) 4,596 797 (392) 867 (909) (21) 4,741 Foreign exchange trading - gains - losses Debt instruments - gains - losses Derivatives - currency - interest rate - securities Total Interest income from financial assets held for trading is included in the income statement line item ‘Interest and similar income’ and interest expenses from financial liabilities held for trading in line item ‘Interest and similar expenses’ (note 4.1.). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 207 4.6. Gains less losses from non-trading financial assets mandatorily at fair value through profit or loss Equity securities - gains - losses Debt securities - gains - losses Loans and advances to customers - gains Total in EUR thousands NLB Group NLB 2021 2020 2021 2020 2,208 (1,049) 5 (63) 15,737 16,838 4,003 (2,656) 14 (49) 5,286 6,598 1,157 (855) - - 13,190 13,492 3,043 (1,587) - - 5,359 6,815 Material exposure that was restructured in 2014, and classified Interest income from non-trading financial assets mandatorily as non-performing, was repaid in April 2021. This resulted in at fair value through profit or loss is included in the income positive valuation effect in the amount of EUR 14,837 thousand statement line item ‘Interest and similar income’ (note 4.1.). at NLB Group level and EUR 13,033 thousand at the NLB level. 4.7. Foreign exchange translation gains less losses Financial assets and liabilities not measured as at fair value through profit or loss Financial assets measured at fair value through profit or loss Other Total NLB Group NLB in EUR thousands 2021 359 37 (51) 345 2020 836 (131) 34 739 2021 714 37 (51) 700 2020 (1,011) (131) 34 (1,108) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 208 4.8. 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 in EUR thousands NLB Group NLB 2021 2020 2021 2020 6,528 3,241 1,074 426 1,787 3,558 4,447 778 14,335 29,646 453 858 5,114 6,425 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 5,884 3,250 471 1,098 1,065 567 411 - 10,633 17,495 453 105 3,190 3,748 5,595 2,994 470 891 1,240 471 884 164 1,508 8,622 1,328 87 1,413 2,828 Other net operating income 23,221 7,549 13,747 5,794 Other operating income in year 2021 includes settlement of Other operating expenses mainly include expenses associated legal dispute in the amount of EUR 8,978 thousand in the NLB with donations, penalties and damages, and licences. Group and EUR 8,559 thousand in NLB. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 209 4.9. Administrative expenses Employee costs Gross salaries, compensations, and other short-term benefits Defined contribution scheme Social security contributions Defined benefit expenses (note 5.16.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 Total administrative expenses NLB Group in EUR thousands NLB 2021 2020 2021 2020 205,821 15,065 10,363 73 126 (53) 145,878 10,297 8,236 545 423 122 94,433 6,891 5,715 (59) (27) (32) 90,063 6,689 5,546 304 239 65 231,322 164,956 106,980 102,602 5,806 40,193 16,504 4,628 19,061 7,584 823 502 11,407 27,085 5,960 1,928 7,450 6,015 851 4,881 30,599 12,949 9,895 2,518 5,237 11,377 4,859 4,131 2,387 2,153 137,529 368,851 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 1,521 17,896 5,468 2,493 9,935 932 307 129 5,641 11,676 2,357 283 4,347 1,821 166 2,702 15,107 6,053 6,332 1,655 1,067 4,770 2,935 669 1,166 1,120 97,270 262,226 59,099 166,079 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 14,655 7,164 5,054 1,383 1,054 5,509 3,581 724 1,204 733 60,011 162,613 Number of employees 8,185 8,792 2,510 2,591 Costs of other services include costs for cash transport and insurance, archiving services, personal insurance costs, legal costs and fees, and session fees to the members of the Supervisory Board. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 210 In the presented years, NLB Group and NLB paid the following expenses related to the services of the statutory auditor: NLB Group 2021 2020 679 161 34 874 542 55 42 639 in EUR thousands NLB 2020 211 55 42 308 2021 232 119 34 385 External audit services Audit of annual report Other audit services Other non-audit services Total Additionally, to the services included in the table above, the statutory auditor in 2021 performed also some services related to the expected issuance of subordinated instrument in the amount of EUR 325 thousand (2020: EUR 75 thousand). 4.10. Cash contributions to resolution funds and deposit guarantee schemes 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 NLB Group NLB Group 2020 15,022 1,652 16,674 2020 10,112 17,062 4,541 31,715 2021 33,148 1,992 35,140 2021 16,211 21,607 8,710 46,528 in EUR thousands NLB 2020 5,451 1,652 7,103 in EUR thousands NLB 2020 6,908 10,092 848 17,848 2021 7,543 1,992 9,535 2021 6,022 10,610 890 17,522 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 211 4.12. Gains less losses from modification of financial assets 2021 2020 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 Total in EUR thousands NLB Group Financial assets modified during the period Amortised cost before modification 15,569 5,259 Net modification gains/(losses) (48) (12) 4,435 (203) 25,263 416,341 27,798 8,756 452,895 (263) (3,094) (357) (126) (3,577) NLB Group 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 in EUR thousands 31 Dec 2021 31 Dec 2020 162 1,690 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 in EUR thousands 2021 (8,504) 14,797 7,873 - 14,166 2020 482 3,500 4,696 (119) 8,559 2021 (8,028) - 72 - (7,956) 2020 (599) 3,500 4,230 (85) 7,046 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 212 4.14. Impairment charge Impairment of financial assets Cash balances at central banks, and other demand deposits at banks Loans and advances to banks measured at amortised cost (note 5.14.a) Loans and advances to individuals measured at amortised cost (note 5.14.a) Loans and advances to other customers measured at amortised cost (note 5.14.a) 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) in EUR thousands NLB Group NLB 2021 2020 2021 2020 117 57 13,414 (44,639) 2,854 (383) 1,249 344 47 29,007 25,972 3,888 547 1,994 89 27 6,830 (24,840) (148) (17) (8) 124 14 13,219 (4,611) 635 224 28 Total impairment of financial assets (27,331) 61,799 (18,067) 9,633 Impairment of investments in subsidiaries, associates and joint ventures Investments in subsidiaries Investments in associates and joint ventures Total Impairment of other assets Property and equipment (note 5.8.) Intangible assets (note 5.10.) Other assets Total - - - 216 936 3,255 4,407 - - - 204 - 792 996 (7,522) 79 (7,443) - - (104) (104) 552 30 582 - - 103 103 Total impairment of non-financial assets 4,407 996 (7,547) 685 Total impairment (22,924) 62,795 (25,614) 10,318 In 2021, NLB impaired equity investments in non-core In 2020, impairment of financial assets includes EUR 13,447 subsidiaries and an associate in total amount of EUR thousand of 12-month expected credit losses for Stage 1 458 thousand (2020: EUR 582 thousand). The release of financial assets, acquired through a business combination impairments in amount of EUR 7,901 thousand relates to sale (note 5.12.c). Of that, EUR 10,434 thousand relates to financial of non-core subsidiary (note 3.). In 2020, NLB did not release assets measured at amortised cost, EUR 2,932 thousand any impairments of equity investments. to financial assets measured at fair value through other comprehensive income, and EUR 81 thousand to cash Impairments of investments in subsidiaries and associates are balances at central banks and other demand deposits at included in the segment ‘Non-core members.’ banks. 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 NLB Group NLB in EUR thousands 2021 - 248 248 2020 11,006 (153) 10,853 2021 - (94) (94) 2020 35,454 (220) 35,234 In May 2020, all the suspensive conditions under the joint NLB share capital of NLB Vita was completed. The effect of sale is and KBC Insurance NV sale agreement signed in December included in the segment ‘Retail Banking in Slovenia.’ 2019 were met, therefore, the sale of NLB’s 50% stake in the MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 213 4.16. Income tax Current income tax Income tax related to previous period Deferred income tax (note 5.17.) Total NLB Group in EUR thousands NLB 2021 16,961 - (3,423) 13,538 2020 11,972 (3,569) (3,238) 5,165 2021 3,159 - (112) 3,047 2020 4,010 (3,569) (540) (99) 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 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 NLB Group in EUR thousands NLB 2021 261,406 49,667 (12,685) 6,510 (32,036) (463) 10,675 (11,345) 3,156 50 9 13,538 2020 277,921 52,805 (26,300) 3,838 (9,016) (1,902) (4,351) (6,273) 114 (3,457) (293) 5,165 2021 211,468 40,179 (14,900) 1,160 (36,446) - 9,886 - 3,156 3 9 3,047 2020 113,853 21,632 (4,359) 1,662 (8,652) (1,649) (4,985) - 114 (3,569) (293) (99) Each member of NLB Group (disclosed in note 5.12.a) is taxable Non-taxable income of NLB Group for 2020 mostly relates as required by local tax legislation. Income tax rates within to the gain from a bargain purchase (negative goodwill) of NLB Group range from 9–32%. Komercijalna banka Beograd. A tax rate of 19% was applied in Slovenia in 2021 (2020: 19%). In 2020, NLB received EUR 3,569 thousand corporate income tax refund and EUR 341 thousand interest from the Italian Tax For the year 2021, NLB realised tax loss due to the utilisation of Authority. The refund is related to the closing of Trieste Branch previously tax non-deductible expenses for impairments in the (officially closed in 2017) and is the consequence of tax non- subsidiary, which was divested in 2021. The effects of the sale deductible impairments of financial assets, recognised by the of the subsidiary are included into the effect of unrecognised Trieste Branch in the year 2013. The refund procedure started deferred tax assets on impairments of subsidiaries and in 2016 and was successfully concluded in 2020. associates, and the effects of new tax loss are included into effect of unrecognised deferred tax assets on tax losses. NLB recognised deferred tax assets accrued on the basis of Non-taxable income of NLB relates mostly to dividends. estimates, is expected to be reversed in the foreseeable future (i.e., Non-taxable dividend income in 2021 amounts to EUR 75,635 within five years). Due to some uncertainties regarding external thousand (2020: EUR 5,947 thousand). factors (regulatory environment, market situation, etc.), a lower range of expected outcomes was considered for the purposes of temporary differences in an amount that, given future profit deferred tax assets calculation. The estimated amount of deferred tax assets, expected to be reversed in foreseeable future, was not changed in 2021 and stays the same as in 2020. NLB did not recognise deferred tax assets arising from tax losses and tax reliefs. NLB recognised deferred tax assets on all temporary differences, except for impairments of non-strategic capital investments and valuation of financial instruments where deferred tax assets are recognised in the amount that, taking into account other recognised deferred tax assets reaches the total amount of deferred tax assets, for which a reversal is expected within five years. The deferred tax assets with respect to which simultaneously deferred tax liabilities are recognised are excluded from this calculation (e.g., deferred tax assets for temporary non- deductible expenses for impairment of debt securities measured at fair value through other comprehensive income and deferred tax assets related to fair value hedge accounting). NLB Group members did not recognise deferred tax assets for tax losses if there is uncertainty about whether the tax losses can be utilised, because it is not probable that future taxable profits will be available against which the deferred tax assets can be utilised. The tax authorities may audit operations of NLB Group entities. In general, tax inspection, which may result in the emergence of additional tax liability, default interest, and penalties, may be initiated at any time within four to six years from the date of tax statement or from the year in which tax should have been assessed. NLB is not aware of any circumstances that could give rise to a potential material tax liability in this respect. In 2018, the Financial Administration of the Republic of Slovenia (FURS) granted NLB special tax status for a period of three years. This status was extended in March 2021 for another three years. The purpose of the status is to establish cooperation between FURS and the taxpayers, with the aim of encouraging voluntary compliance and reduce administrative burdens on financial supervision. FURS cooperates with NLB and responds quickly to resolve NLB’s tax compliance issues, which reduces NLB’s tax risks and uncertain tax positions. The effective tax rate of NLB Group relating to operations in 2021, calculated as a ratio of the tax expenses and profit before tax is 5.2% (2020: 1.9%). NLB Group profit before tax for the year 2020 includes non-taxable gain from a bargain purchase (negative goodwill) of EUR 137,858 thousand. Without this one- off event, the effective tax rate of NLB Group in 2020 would be 3.7%. The effective tax rate for NLB is 1.4% (2020: -0.1%). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 214 4.17. Earnings per share Earnings per share are calculated by dividing the net profit by Diluted earnings per share are the same as basic earnings per the weighted average number of ordinary shares in issue, less share for NLB Group and NLB, since subordinated loans and treasury shares. issued debt securities have no future conversion options, and consequently there are no dilutive potential ordinary shares. 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 2021 236,404 20,000 11.8 11.8 2020 269,707 20,000 13.5 13.5 2021 208,421 20,000 10.4 10.4 2020 113,952 20,000 5.7 5.7 5. Notes to the statement of financial position 5.1. Cash, cash balances at central banks, and other demand deposits at banks Balances and obligatory reserves with central banks Cash Demand deposits at banks Allowance for impairment Total in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 4,133,104 509,596 363,246 3,149,775 2,982,576 1,998,297 507,970 304,941 178,045 90,163 192,405 71,089 5,005,946 3,962,686 3,250,784 2,261,791 (894) (874) (347) (258) 5,005,052 3,961,812 3,250,437 2,261,533 Slovenian banks are required to maintain a compulsory Group maintain a compulsory reserve in accordance with reserve with the Bank of Slovenia relative to the volume and local legislation. NLB and other banks in NLB Group fulfil their structure of their customer deposits. Other banks in NLB compulsory reserve deposit requirements. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 215 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 Serbia - other non-EU members Total securities Total - quoted securities of these debt instruments NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 6,665 438 6,227 54 53 1 959 959 7,678 - - - - 7,678 - - 13,597 400 13,197 786 - 786 1,666 1,666 16,049 68,806 66,356 2,450 68,806 84,855 68,806 68,806 6,675 448 6,227 54 53 1 953 953 7,682 - - - - 7,682 - - 13,932 735 13,197 786 - 786 1,663 1,663 16,381 2,450 - 2,450 2,450 18,831 2,450 2,450 The notional amounts of derivative financial instruments are disclosed in note 5.23.b). b) Financial liabilities held for trading Derivatives. excluding hedging instruments Swap contracts - currency swaps - interest rate swaps Options - interest rate options Forward contracts - currency forward Total NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 6,609 716 5,893 53 53 923 923 7,585 13,932 777 13,155 - - 1,553 1,553 15,485 6,626 733 5,893 53 53 923 923 13,947 792 13,155 - - 1,553 1,553 7,602 15,500 The notional amounts of derivative financial instruments are disclosed in note 5.23.b). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 216 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 debt instruments - unquoted securities of these equity instruments b) Financial liabilities measured at fair value through profit or loss NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 4,472 12,428 4,261 - 21,161 4,261 4,261 16,900 16,900 4,171 10,989 2,157 25,076 42,393 2,157 2,157 15,160 15,160 4,472 4,171 - - 7,888 12,360 - - 4,472 4,472 - - 30,935 35,106 - - 4,171 4,171 NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands Liabilities Loans and advances to companies - - 352 - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 217 5.4. 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 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 of these debt securities of these equity securities NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 3,251,826 2,477,285 314,929 462,459 1,196,724 503,173 739,935 34,606 22,109 44,490 105,866 6,475 69,836 - 29,555 37,569 3,461,860 3,395,261 66,599 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 3,514,290 3,446,491 67,799 1,526,237 1,598,760 766,688 270,423 331,676 5,021 159,568 724,943 34,606 219 44,490 14,805 - 14,805 - - - 1,585,751 1,541,042 44,709 879,856 334,819 370,484 - 174,553 701,663 17,241 273 44,874 72,444 45,007 7,011 - 20,426 - 1,716,351 1,671,204 45,147 Allowance for impairment (note 5.14.b) (12,016) (9,482) (3,001) (3,141) - quoted securities of these debt instruments of these equity instruments - unquoted securities of these debt instruments of these equity instruments 3,205,277 3,204,745 532 256,583 190,516 66,067 3,307,103 3,306,400 703 207,187 140,091 67,096 1,541,042 1,541,042 - 44,709 - 44,709 1,671,204 1,671,204 - 45,147 - 45,147 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). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 218 b) Movements of financial assets measured at fair value through other comprehensive income NLB Group NLB 2021 2020 2021 2020 Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities in EUR thousands Balance as at 1 January 3,446,491 67,799 2,091,805 49,623 1,671,204 45,147 1,611,711 44,946 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Additions Derecognition Net interest income Exchange differences on monetary assets Changes in fair values Disposal of subsidiary (note 5.12.b) Balance as at 31 December 1,194 - 1,455,823 31 - - (406) 1,267,281 1,856,445 94 17,614 - - - 219,733 - - - - - 1,045,700 (1,468,240) (4,297) (1,790,053) (3,341) (338,929) (55) (999,844) 40,310 8,367 (52,085) (36,599) - - 3,066 - 17,370 (10,895) 14,944 - - - 3,809 - 11,696 8,452 (31,114) - - - (383) - 9,894 (11,007) 14,750 - - - - - - - 201 - 3,395,261 66,599 3,446,491 67,799 1,541,042 44,709 1,671,204 45,147 As at 31 December 2021 and as at 31 December 2020, NLB gain in the amount of EUR 53 thousand (2020: NLB Group and at amortised cost’ because the conditions of the bankruptcy Group and NLB do not have any equity instruments measured NLB did not realise any gain or loss by selling equity securities proceedings were not met. At the time of conversion, NLB at fair value through other comprehensive income obtained measured at fair value through other comprehensive income). Group transferred EUR 1,002 thousand from accumulated by taking possession of collateral in the statement of financial Realised gain in year 2021 was transferred to retained other comprehensive income into retained earnings position (note 6.1.l). earnings (note 5.4.c). (note 5.4.c). By selling equity securities measured at fair value through Equity investment obtained by taking possession of collateral other comprehensive income in 2021, NLB Group realised a in amount of EUR 3,289 thousand was during year 2020 net gain in the amount of EUR 3,362 thousand, and NLB a net converted back to the line item ‘Financial assets measured MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 219 c) Accumulated other comprehensive income related to financial assets measured at fair value through other comprehensive income NLB Group NLB 2021 2020 2021 2020 Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities in EUR thousands 3,726 45,480 27,242 452 24,156 288 Balance as at 1 January Effects of translation of foreign operations to presentation currency Disposal of subisidiaries (note 5.12.b) - valuation and impairment - deferred income tax (note 5.17.) 39,924 (7) (1,916) 193 6 - - Net gains/(losses) from changes in fair value (38,158) 3,066 Gains/losses transferred to net profit on disposal (note 4.4.) Impairment (note 4.14.) Transfer of gains/losses to retained earnings (5.4.b) Deferred income tax (note 5.17.) Share of other comprehensive income of associates and joint ventures Balance as at 31 December (167) 2,854 - 4,758 - 7,481 - - (3,362) (179) - 3,257 16 - - 7,717 (5,066) 3,888 - (1,085) (11,026) 39,924 2,836 32 - - - - - - - - 3,809 (17,187) (383) - - (1,002) (401) (1,548) 3,726 (24) (148) - 2,482 - 12,365 - - (53) 83 - 99 - - - 7,522 (4,347) 635 - (724) - 27,242 - - - 202 - - - (38) - 452 5.5. Derivatives for hedging purposes NLB Group entities measure exposure to interest rate risk on a hedged item for a fixed interest rate. All cash flow hedges Hedge accounting principles were not applied in economic are made on liability items, while fair value hedges are used hedges using CIRS. Thus, the effects of valuation are disclosed using repricing gap analysis and by calculating the sensitivity on asset items. in the income statement in the line item ‘Gains less losses from financial assets and liabilities held for trading.’ of the statement of financial position and off-balance-sheet items in terms of the economic value of equity. The portfolio duration is used as a measure of risk in the management of securities in the banking book. NLB Group entities use various derivatives such as interest rate swaps (IRS) and currency interest rate swaps (CIRS) to close open positions in an individual maturity bucket. Micro and macro fair value hedges are used for that purpose, i.e., the swapping of a fixed interest rate on a hedged item for a variable interest rate. Micro cash flow hedges are also Hedge accounting principles (fair value and cash flow hedging) were applied in the hedging of interest rate risk using interest Sources of hedge ineffectiveness may arise, but are not limited rate swaps. These hedge relationships are designated in such to the discount rates used for valuation of derivatives at fair a way that the characteristics of the hedging instrument and value, and notional and timing differences, as well differences those of the hedged item match (i.e., the principal terms match), in the amortisation plan between hedged items and the while the dollar-offset method is used to regularly measure hedging instrument. Hedge effectiveness is assessed monthly, hedge effectiveness retrospectively. Prospective testing of by comparing changes in the fair value of the hedged item hedge effectiveness is carried out regularly for macro hedges that are attributable to a hedged risk with changes in the fair where the characteristics of both items in the hedge relationship value of the hedging instrument. do not fully match by comparing the change in the fair value of occasionally used, i.e. the swapping of a variable interest rate both items to the shift in the yield curve. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 220 a) Fair value adjustment in hedge accounting recognised in profit or loss 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 2021 167 26,406 19,547 6,859 (26,239) (105) (5,443) (13,929) (6,762) in EUR thousands 2020 720 (12,348) (7,537) (4,811) 13,068 (128) 1,116 7,227 4,853 In both years presented, all fair value hedges were effective, NLB Group applied a hedge of a net investment in a foreign with actual results of the hedge ratio within a range of 80–125%, operation in years 2011 and 2012, and at that time recognised therefore, no discontinuation of the hedge accounting was required. a EUR 754 thousand gain on the hedging instrument in other comprehensive income (note 5.21.b). This gain will be included As at 31 December 2021 and 2020, NLB Group and NLB had in the consolidated income statement when the foreign no relationships designated for cash flow hedge accounting operation is disposed of as a part of the gain or loss on the or for hedge of a net investment in a foreign operation. disposal. b) Notional amounts of interest rate swaps NLB Group and NLB Fair value hedge 31 Dec 2021 31 Dec 2020 Notional amount in EUR thousands Fair value Asset Liability 572,455 573,753 568 - 35,377 61,161 c) Accumulated fair value adjustments arising from the statement of financial position as a hedged item, except for corresponding continuing hedge relationships The table below presents accumulated fair value adjustments macro fair value hedges. In such relationships, hedged items are presented in the line item ‘Financial assets measured at arising from the corresponding continuing hedge amortised cost,’ while the accumulated fair value adjustment relationships, irrespective of whether there has been a change is presented in a separate line item ‘Fair value changes of the in the hedge designation during the year. The accumulated fair value adjustment is presented in the same line of hedged items in portfolio hedge of interest rate risk.’ NLB Group and NLB Micro fair value hedges Fixed rate corporate loans measured at AC Fixed rate bonds measured at AC Fixed rate bonds measured at FVOCI Macro fair value hedges Fixed rate retail loans 2021 in EUR thousands 2020 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 479,574 1,662 117,368 360,544 145,638 145,638 23,783 60 8,426 15,297 7,082 7,082 498,397 2,667 117,839 377,891 154,050 154,050 43,571 165 14,182 29,224 13,844 13,844 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 221 d) IBOR reform NLB Group closely monitors the development of Benchmark In May 2021, the Euro RFR Working Group produced its NLB Group activities for implementation of LIBOR transition recommendations on EURIBOR fallback trigger events were as follows: Interest Rate Reform and is actively preparing for the changes and €STR-based EURIBOR fallback rates. Our mid-term • review of outstanding LIBOR referencing loans, imposed by the regulation. In 2018, NLB formed a special activities are expected to undertake on the implementation • identification of alternative reference rate to be used for working group which deals with the preparation for the of more precise fallback provisioning, based on these loan portfolio, discontinuation of some important reference interest rates recommendations. NLB identified potential €STR-based • analysis of how the alternative reference rate will be and reports on this to NLB Group ALCO. fallbacks for EURIBOR, in line with the current market calculated and how to calculate any economic difference consensus on those fallbacks and intends to proceed between LIBORs and the selected alternative reference NLB Group no longer offers new products that would be with the activities for inclusion on EURIBOR fallbacks into rates, tied to reference rates in termination. The exception are all new EURIBOR-based contracts. In the next step, the • consideration of IT system accommodation with alternative products related to EURIBOR, which is not scheduled for Bank is expected to include fallback provisions also in reference rates, discontinuation. Therefore, NLB Group’s attention was focused legacy contracts. The exact timing depends on regulatory • documentation of the transition of the loans. on the modification of new contractual relationships with development and best market practice. customers in which EURIBOR occurs and the amendment of In February 2021; the European Commission adopted an existing contractual relationships with customers in which NLB as a supervised entity, is required to comply with the amendment to the existing EU BMR and in October 2021; other benchmarks in termination appear. Benchmark regulation and, as a user of benchmarks, must the European Commission published the Implementing EURIBOR (likely) discontinuation Due to timely transition to the new hybrid EURIBOR methodology produce and maintain a robust written plan setting out Regulation on the designation of a statutory replacement for the actions NLB would take in the event that a benchmark certain settings of CHF LIBOR and for EONIA. materially changes or ceases to be provided. NLB has which meet the BMR requirements, EURIBOR can continue to be prepared a plan, which sets out an inexhaustive/summary CHF LIBOR transition to SARON Compound Rate was used in new and legacy contracts for the foreseeable future. action list, and will continue to closely follow market standards successfully implemented in due time. to identify alternative benchmarks that could be referenced in EU supervised entities are bound to include robust fallback substitute of existing benchmarks. clauses into contractual documentation with the clients. In November 2019, the Euro risk-free rates (RFR) Working Group published high level recommendations for fallback provisions LIBOR (imminent) discontinuation. Since many LIBOR settings ceased to exist at the beginning The table below indicates the nominal amount and weighted average maturity of derivatives in hedging relationships that will be affected by the IBOR reform, analysed on an interest rate basis. The derivative hedging instruments provide a close for products referencing EURIBOR. The inclusion of robust of 2022, the Bank accelerated the process of winding-down approximation to the extent of the risk exposure NLB Group fallback language is a requirement in contracts subject to the the exposures in a most efficient way. Incremental LIBOR manages through hedging relationships. EU Benchmark Regulation. The Bank already incorporated transactions were not allowed unconditionally. the generic fallback clause into all new EURIBOR (both retail and corporate) contracts. NLB Group and NLB 2021 2020 Nominal amount (in EUR thousands) Weighted average maturity (years) Nominal amount (in EUR thousands) Weighted average maturity (years) Interest rate swaps EURIBOR (3 months) EURIBOR (6 months) USD LIBOR (6 months) 186,472 371,866 14,117 4.23 7.00 0.98 186,471 374,254 13,028 5.18 7.83 1.99 As can be seen from the table, the majority of long-term maturities, when a change of EURIBOR could be expected. derivatives in hedging relationships are exposed to As at 31 December 2021, derivatives with remaining maturity EURIBOR, therefore, the uncertainty arising from interest rate of five or more years amount to EUR 272,730 thousand benchmark reform derives mainly from derivatives with longer (31 December 2020: EUR 310,730 thousand). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 222 5.6. Financial assets measured at amortised cost Analysis by type Debt securities Loans and advances to banks Loans and advances to customers Other financial assets Total in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 1,717,626 140,683 10,587,121 122,229 1,503,087 197,005 9,619,860 113,138 1,436,424 199,287 5,145,153 92,404 1,277,880 158,320 4,564,178 54,503 12,567,659 11,433,090 6,873,268 6,054,881 The credit quality analysis for financial assets and contingent liabilities is disclosed in note 6.1.j). a) Debt securities Governments Companies Banks Financial organisations Allowance for impairment (note 5.14.b) Total b) Loans and advances to banks Loans Time deposits Reverse sale and repurchase agreements Purchased receivables Allowance for impairment (note 5.14.a) Total NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 1,317,248 79,852 295,653 28,178 1,720,931 (3,305) 1,717,626 1,173,718 86,946 220,988 25,120 1,506,772 (3,685) 1,503,087 1,041,787 72,632 295,653 28,178 1,438,250 (1,826) 953,881 79,732 220,988 25,120 1,279,721 (1,841) 1,436,424 1,277,880 NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 10,200 130,602 - 79 140,881 (198) 140,683 9,809 128,074 59,263 - 197,146 (141) 197,005 117,490 81,900 - 79 199,469 (182) 199,287 95,070 63,405 - - 158,475 (155) 158,320 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 223 c) Loans and advances to customers Loans Overdrafts Finance lease receivables (note 5.11.b) Credit card business Called guarantees in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 10,310,300 9,490,734 5,006,871 4,501,991 352,018 108,715 129,330 2,731 322,622 49,517 125,725 3,542 174,063 152,487 - 59,305 1,333 - 52,156 916 10,903,094 9,992,140 5,241,572 4,707,550 Allowance for impairment (note 5.14.a) (315,973) (372,280) (96,419) (143,372) Total 10,587,121 9,619,860 5,145,153 4,564,178 Analysis of loans and advances to customers by sector Governments Financial organisations Companies Individuals Total in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 281,010 141,709 368,400 158,871 143,864 226,144 170,742 177,198 4,645,112 4,159,496 2,118,210 1,838,468 5,519,290 4,933,093 2,656,935 2,377,770 10,587,121 9,619,860 5,145,153 4,564,178 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 224 d) Other financial assets Analysis by type of other financial assets Receivables in the course of settlement 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 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 40,436 22,670 8,227 7,303 613 1,715 - 1,526 45,965 128,455 (6,226) 122,229 32,484 20,260 6,316 6,563 611 1,327 - 447 50,683 118,691 (5,553) 113,138 23,945 15,270 1,311 3,041 610 1,690 20,493 - 27,197 93,557 (1,153) 92,404 15,906 11,383 1,307 2,871 610 1,296 - - 22,460 55,833 (1,330) 54,503 Receivables in the course of settlement are temporary Other financial assets include receivables to pension funds balances which will be transferred to the appropriate item in for early retirement payments, receivables from insurance the days following their occurrence. Analysis of other financial assets by sector companies, claims in enforcement procedures, claims from refunds, claims for subsidies from related transactions, paid duties, and court fees. Banks Government Financial organisations Companies Individuals Total NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 33,325 43,432 15,979 5,994 23,499 122,229 35,431 41,576 14,488 3,912 17,731 113,138 34,131 23,769 12,818 647 21,039 92,404 8,069 22,537 7,257 580 16,060 54,503 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 225 e) Movement of called non-financial guarantees Balance as at 1 January Effects of translation of foreign operations to presentation currency Called guarantees Paid guarantees Write-offs Balance as at 31 December NLB Group in EUR thousands NLB 2021 1,838 (1) 1,541 (1,904) (757) 717 2020 1,859 (2) 2,376 (1,932) (463) 1,838 2021 440 - 1,207 (470) (757) 420 2020 365 - 2,261 (1,723) (463) 440 5.7. Non-current assets held for sale The line item ‘Non-current assets held for sale’ includes business premises and assets received as collateral that are in the process of being sold. As at 31 December 2021, the value of assets received by taking possession of collateral and included in non-current assets held for sale by NLB Group amounted to EUR 699 thousand (31 December 2020: EUR 699 thousand). As at 31 December 2021 and as at 31 December 2020, NLB did not have any non-current assets obtained by taking possession of collateral and included in non-current assets held for sale (note 6.1.l). Analysis of movements of non-current assets held for sale Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Additions Transfer from/(to) property and equipment (note 5.8.) Transfer from/(to) other assets Transfer from/(to) investment property (note 5.9.) Disposals Valuation Balance as at 31 December NLB Group in EUR thousands NLB 2021 8,658 3 - 97 605 20 (22) (1,952) (358) 7,051 2020 43,191 (3) 1,969 89 2,779 - (17) (39,089) (261) 8,658 2021 4,454 - - - 518 - - (547) (336) 4,089 2020 5,532 - - - 2,626 - - (3,484) (220) 4,454 In May 2020, all the suspensive conditions under the joint NLB share capital of NLB Vita was completed. The effect of sale and KBC Insurance NV sale agreement signed in December in year 2020 is included in the segment ‘Retail Banking in 2019 were met, therefore, the sale of NLB’s 50% stake in the Slovenia.’ 5.8. Property and equipment a) Analysis by type Own property and equipment Right-of-use assets (note 5.11.) Total NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 223,593 23,421 247,014 223,598 25,519 249,117 82,905 3,217 86,122 88,495 3,180 91,675 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 226 b) Movement of own property and equipment 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 in EUR thousands Cost Balance as at 1 January 2021 345,769 81,729 98,838 4,309 530,645 197,043 49,580 49,355 3,514 299,492 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Effects of translation of foreign operations to presentation currency 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.) Disposal of subsidiary (note 5.12.b) Balance as at 31 December 2021 Depreciation and impairment 62 3,987 (1,385) (126) 4,377 (5,707) (119) 346,858 17 7,296 (8,710) - - - 30 4,871 (8,393) - - - (201) 80,131 (617) 94,729 - 1,948 (648) - - - - 109 18,102 (19,136) (126) 4,377 (5,707) (937) - 3,321 - - (2,423) (2,089) - - 1,513 (7,194) - - - - - 1,510 (4,722) - - - - - 9 (4) - - - - - 6,353 (11,920) - (2,423) (2,089) - 5,609 527,327 195,852 43,899 46,143 3,519 289,413 Balance as at 1 January 2021 173,404 53,822 76,897 2,924 307,047 135,343 32,905 39,944 2,805 210,997 Effects of translation of foreign operations to presentation currency Disposals Depreciation (note 4.11.) Impairment (note 4.14.) Transfer to/from investment property (note 5.9.) Transfer to/from non-current assets held for sale (note 5.7.) Disposal of subsidiary (note 5.12.b) 7 (684) 7,124 90 (2,676) (5,102) (3) 10 (8,634) 8,733 - - - (98) Balance as at 31 December 2021 172,160 53,833 26 (7,577) 5,196 - - - (127) 74,415 - (152) 554 - - - - 43 (17,047) 21,607 90 (2,676) (5,102) (228) - - 3,825 - (2,083) (1,571) - - (7,194) 4,376 - - - - - (4,248) 2,086 - - - - - (3) 323 - - - - - (11,445) 10,610 - (2,083) (1,571) - 3,326 303,734 135,514 30,087 37,782 3,125 206,508 Net carrying value Balance as at 31 December 2021 174,698 26,298 20,314 2,283 223,593 60,338 13,812 8,361 394 82,905 Balance as at 1 January 2021 172,365 27,907 21,941 1,385 223,598 61,700 16,675 9,411 709 88,495 Contents 227 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 in EUR thousands Cost 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.c) 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) 40,173 5,888 (5,843) (43) (756) (6,717) (20) 1,773 10,254 (961) - - - (40) 3,249 6,945 (6,955) - - - Disposal of subsidiary (note 3.) - (61) (34) - - 1,255 (3,132) - - - - (161) 45,195 24,342 (16,891) (43) (756) (6,717) (95) - - - - - 5,299 (13) - - (6,556) - 5,378 (433) 3,356 (5,629) 104 (2,031) - - - - - - - - - - - - 14,137 (8,106) - - (6,556) - 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 Effects of translation of foreign operations to presentation currency Disposals Depreciation (note 4.11.) Impairment (note 4.14.) Transfer to/from investment property (note 5.9.) 173,763 48,808 79,515 4,625 306,711 135,328 29,440 43,762 4,367 212,897 (25) (2,427) 6,271 161 (401) (17) (948) 6,040 - - - (40) (6,651) 4,103 - - - - (82) (2,349) (12,375) - - 648 17,062 3,945 - - - - 161 (401) - - (3,938) (3,930) (91) - - (431) 3,896 - - - - - (5,600) 1,782 - - - - - (2,031) 469 - - - - - (8,062) 10,092 - - (3,930) - Transfer to/from non-current assets held for sale (note 5.7.) (3,938) Disposal of subsidiary (note 3.) - (61) (30) 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 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 As at 31 December 2021, the value of assets received by taking possession of collateral and included in property and equipment by NLB Group amounted to EUR 13,559 thousand (31 December 2020: EUR 13,268 thousand), and in NLB to EUR 7 thousand (31 December 2020: EUR 7 thousand) (note 6.1.l). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 228 5.9. Investment property Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) 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.) Disposals of subisidiaries (note 5.12.b) Other Balance as at 31 December NLB Group NLB in EUR thousands 2021 54,842 19 - - (4,075) (7,053) 22 1,397 3,589 (1,215) 98 2020 52,316 (24) 19,643 717 (2,493) 355 17 (16,559) 870 - - 2021 8,300 - - - - 340 - 137 306 - 98 2020 9,303 - - - (2,031) - - 231 797 - - 47,624 54,842 9,181 8,300 As at 31 December 2021, the value of assets received by to EUR 4,176 thousand (31 December 2020: EUR 4,079 taking possession of collateral and included in investment thousand) (note 6.1.l). property by NLB Group amounted to EUR 36,009 thousand (31 December 2020: EUR 36,130 thousand), and in NLB amounted Operating expenses arising from investment properties: Leased to others Not leased to others Total in EUR thousands NLB Group NLB 2021 1,103 231 1,334 2020 1,157 242 1,399 2021 291 183 474 2020 383 194 577 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 229 5.10. Intangible assets in EUR thousands NLB Group Software licenses Other intangible assets Goodwill Total NLB Software licenses Cost Balance as at 1 January 2021 246,687 13,200 32,336 292,223 201,614 Effects of translation of foreign operations to presentation currency Additions Write-offs Disposal of subsidiary (note 5.12.b) 13 14,866 (15,527) (432) 11 - - - - - - - 24 - 14,866 7,370 (15,527) (7,956) (432) - Balance as at 31 December 2021 245,607 13,211 32,336 291,154 201,028 Amortisation and impairment Balance as at 1 January 2021 Effects of translation of foreign operations to presentation currency Amortisation (note 4.11.) Impairments (note 4.14.) Write-offs Disposal of subsidiary (note 5.12.b) 201,748 8 11,944 936 (15,435) (204) - 7 4,267 - - - 28,807 230,555 173,509 - - - - - 15 16,211 936 - 6,022 - (15,435) (7,956) (204) - Balance as at 31 December 2021 198,997 4,274 28,807 232,078 171,575 Net carrying value Balance as at 31 December 2021 46,610 8,937 3,529 59,076 29,453 Balance as at 1 January 2021 44,939 13,200 3,529 61,668 28,105 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 230 Cost Balance as at 1 January 2020 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5,12.c) Additions Write-offs Disposal of subsidiary (note 3.) in EUR thousands NLB Group Software licenses Other intangible assets Goodwill Total NLB Software licenses 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 3,529 61,668 28,105 Balance as at 1 January 2020 36,013 - 3,529 39,542 25,980 Other intangible assets represent additionally identified intangible assets in a business combination, namely core deposits and trade name (note 5.12.c). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 231 5.11. Leases a) NLB Group as a lessee Right-of-use assets Land and buildings Vehicles Furniture and equipment Total Lease liabilities NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 19,545 390 3,486 23,421 24,324 22,758 959 1,802 25,519 26,359 2,244 960 13 3,217 3,256 2,240 912 28 3,180 3,212 In the statement of financial position, right-of-use assets are and in NLB EUR 1,245 thousand (2020: EUR 1,808 thousand). included in the line item ‘Property and equipment’ and lease Due to the acquisition of subsidiaries in 2020, the right-of-use liabilities are included in the line item ‘Other financial liabilities.’ assets in NLB Group increased by EUR 9,576 thousand. Additions to the right-of-use assets during 2021 in NLB Group The income statement shows the following amounts relating amounted to EUR 10,172 thousand (2020: EUR 4,736 thousand) to leases: in EUR thousands NLB Group NLB 2021 2020 2021 2020 7,159 444 1,107 8,710 2021 (470) (606) (1,050) 108 3,299 571 671 4,541 465 410 15 890 441 391 16 848 NLB Group NLB in EUR thousands 2020 (294) (719) (771) 92 2021 (29) (179) (157) - 2020 (39) (266) (151) - 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) The total cash outflow for leases in 2021 in NLB Group was EUR 9,397 thousand (2020: EUR 4,865 thousand) and in NLB EUR 933 thousand (2020: EUR 897 thousand). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 232 NLB Group leases various offices, branches, vehicles, and of the finance lease agreements are concluded for a non- other equipment used in its business. Rental contracts for cancellable period of between 48 and 60 months. By paying offices and branches generally have lease terms between the last instalment at the end of the contract, the leasing 5 to 20 years, while some contracts are made for indefinite object becomes the lessee’s property. The financial leasing periods. Contracts for indefinite periods are included in receivables are secured by the object of financing. NLB Group measurement of the liability in accordance with planning does not have finance lease contracts with variable payments projections. Normally, a lease term of 5 years is assumed, with not included in the measurement of the net investment in the the exemption of business premises on strategic locations lease. where management assesses a different (longer) lease term. Vehicles and other equipment generally have lease terms The investment properties are leased to lessee under between 1 to 5 years. There are several lease contracts that operating leases with rentals payable monthly. There are no include extension and termination options. These options are variable lease payments that depend on an index or rate. The negotiated by management to align with the Group’s business investment properties generally have lease terms between 2 needs. Lease payments to be made under reasonably certain to 10 years. Some contracts are made for indefinite period. extension options are included in measurement of the liability. Lease terms are negotiated on an individual basis and finance lease receivables included in the allowance for contain a range of different terms and conditions. The loan impairment amounted to EUR 436 thousand (as at 31 lease agreements do not impose any covenants other than December 2020 EUR 884 thousand). As at 31 December 2021, the allowance for unrecoverable the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for Finance leases borrowing purposes. Loans and advances to customers in NLB Group include finance lease receivables. NLB Group also has certain leases of other equipment with lease term of 12 months or less, and equipment with low value. The following table sets out a maturity analysis of lease For these leases, NLB Group applies the short-term lease receivables, showing the undiscounted lease payments to be and lease of low-value assets recognition exemptions. Lease received after the reporting date. payments on short-term leases and leases of low-value assets are recognised as an expenses on a straight-line basis over the lease term. NLB Group For calculation of the net present value of the future lease Less than one year payments, NLB Group applies the internal transfer price for retail deposits as a discount rate. NLB Group and NLB do not have expenses relating to variable payments and gains or losses arising from sale and leaseback transactions. A maturity analysis of lease liabilities is disclosed in note 6.3.f). b) NLB Group as a lessor Finance and operating leases of motor vehicles and operating leases of business premises and POS terminals represent the majority of agreements in which NLB Group acts as a lessor. One to two years Two to three years Three to four years Four to five years More than five years Most of the lease agreements entered into by NLB Group as lessor contracts are finance lease agreements. Most 1,957 thousand). 2021 36,465 25,723 21,276 16,435 10,375 8,604 in EUR thousands 2020 23,287 11,506 7,734 5,159 3,243 2,719 53,648 (4,131) 49,517 Total undiscounted lease receivable 118,878 Unearned finance income Net investment in the lease (10,163) 108,715 During 2021, NLB Group recognised interest income on lease receivables in the amount of EUR 3,452 thousand (2020: EUR MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 233 Operating lease A maturity analysis of lease payments, showing the undiscounted lease payments to be received after the reporting date: 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 NLB Group NLB in EUR thousands 2021 2,757 1,396 817 597 430 1,211 2020 3,082 1,863 1,497 1,411 1,308 1,759 7,208 10,920 2021 375 348 346 342 301 1,029 2,741 2020 399 364 341 333 331 243 2,011 NLB Group realised rental income arising from: investment NLB realised rental income arising from: investment properties in the amount of EUR 3,558 thousand (2020: EUR 2,572 thousand); and movable property in the amount of EUR properties in the amount of EUR 567 thousand (2020: EUR 471 thousand); and movable property in the amount of 1,074 thousand (2020: EUR 1,003 thousand). EUR 471 thousand (2020: EUR 470 thousand) (note 4.8.). 5.12. Investments in subsidiaries, associates and joint ventures a) Analysis by type of investment in subsidiaries NLB Banks Other financial organisations Enterprises Total in EUR thousands 31 Dec 2021 31 Dec 2020 696,538 671,880 29,720 55,282 21,819 55,361 781,540 749,060 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 234 Data of subsidiaries as included in the consolidated financial statements of NLB Group as at 31 December 2021: Nature of Business Country of Incorporation Equity as at 31 Dec 2021 Profit/(loss) for 2021 NLB’s shareholding % NLB’s voting rights % NLB Group’s shareholding % NLB Group’s voting rights % in EUR thousands Core members NLB Banka a.d., Skopje NLB Banka a.d., Podgorica NLB Banka a.d., Banja Luka Banking Banking Banking North Macedonia Montenegro Bosnia and Herzegovina NLB Banka sh.a., Prishtina Banking Kosovo NLB Banka d.d., Sarajevo NLB Banka a.d., Beograd Komercijalna banka a.d., Beograd KomBank Invest a.d., Beograd NLB Skladi d.o.o., Ljubljana NLB Lease&Go, leasing, d.o.o., Ljubljana Banking Banking Banking Finance Finance Finance NLB Zavod za upravljanje kulturne dediščine, Ljubljana Cultural heritage management Non-core members NLB Leasing d.o.o., Beograd - u likvidaciji NLB Leasing d.o.o., Ljubljana - v likvidaciji* Optima Leasing d.o.o., Zagreb - "u likvidaciji" Finance Finance Finance Bosnia and Herzegovina Serbia Serbia Serbia Slovenia Slovenia Slovenia Serbia Slovenia Croatia 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 REAM d.o.o., Podgorica REAM d.o.o., Beograd SPV 2 d.o.o., Beograd S-REAM d.o.o., Ljubljana REAM d.o.o., Zagreb NLB Srbija d.o.o., Beograd NLB Crna Gora d.o.o., Podgorica NLB InterFinanz AG, Zürich in Liquidation NLB InterFinanz d.o.o., Beograd LHB AG, Frankfurt *100% ownership of NLB Lease&Go, leasing, d.o.o., Ljubljana. Real estate Montenegro Real estate Serbia Real estate Serbia Real estate Slovenia Real estate Croatia Real estate Serbia Finance Finance Finance Finance Montenegro Switzerland Serbia Germany 243,267 92,643 97,149 98,856 87,838 77,918 634,643 1,345 14,966 16,342 814 5,985 18,058 1,258 16,802 19,966 1,319 1,696 1,844 831 2,197 1,025 32,259 3,130 12,395 3 2,221 39,000 10,050 18,180 24,436 10,012 4,293 34,818 4 8,969 (921) 436 40 2,545 (94) (223) 154 (93) 44 (217) 9 850 5 188 2,375 1,725 - 489 86.97 75.90 99.85 82.38 97.34 100 86.70 - 100 100 100 100 - - 12.71 100 - 100 100 100 100 - 100 100 100 - 100 86.97 75.90 99.85 82.38 97.35 100 88.28 - 100 100 100 100 - - 12.71 100 - 100 100 100 100 - 100 100 100 - 100 86.97 99.87 99.85 82.38 97.34 100 86.70 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 86.97 99.87 99.85 82.38 97.35 100 88.28 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 235 Data of subsidiaries as included in the consolidated financial statements of NLB Group as at 31 December 2020: Nature 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 Core members NLB Banka a.d., Skopje NLB Banka a.d., Podgorica NLB Banka a.d., Banja Luka NLB Banka sh.a., Prishtina NLB Banka d.d., Sarajevo NLB Banka a.d., Belgrade Komercijalna banka a.d., Belgrade Komercijalna banka a.d., Banja Luka Komercijalna banka a.d., Podgorica KomBank Invest a.d., Belgrade NLB Skladi d.o.o., Ljubljana NLB Lease&Go, leasing, d.o.o., Ljubljana Banking Banking Banking Banking Banking Banking Banking Banking Banking Finance Finance Finance NLB Zavod za upravljanje kulturne dediščine, Ljubljana Cultural heritage management Non-core members NLB Leasing d.o.o., Ljubljana - v likvidaciji Optima Leasing d.o.o., Zagreb - "u likvidaciji" NLB Leasing d.o.o., Belgrade - u likvidaciji Finance Finance Finance North Macedonia Montenegro Bosnia and Herzegovina Kosovo Bosnia and Herzegovina Serbia Serbia Bosnia and Herzegovina Montenegro Serbia Slovenia Slovenia Slovenia Slovenia Croatia 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 BH-RE d.o.o., Sarajevo - u likvidaciji Real estate Bosnia and Herzegovina REAM d.o.o., Podgorica REAM d.o.o., Belgrade SPV 2 d.o.o., Belgrade S-REAM d.o.o., Ljubljana REAM d.o.o., Zagreb NLB Srbija d.o.o., Belgrade Real estate Montenegro Real estate Real estate Serbia Serbia Real estate Slovenia Real estate Croatia Real estate Serbia NLB Crna Gora d.o.o., Podgorica Real estate Montenegro NLB InterFinanz AG, Zürich in Liquidation NLB InterFinanz d.o.o., Belgrade LHB AG, Frankfurt Finance Finance Finance Switzerland Serbia Germany Changes in ownership interest in subsidiaries of NLB Group in 2021 and 2020 are presented in note 3. 229,777 68,556 99,872 98,335 89,808 74,205 19,222 1,387 10,122 13,334 5,895 2,598 609,943 (9,050) 31,045 20,689 1,342 10,487 1,938 378 17,568 1,346 5,940 17,025 20,870 1,409 7 1,652 1,762 820 1,349 2,108 32,046 755 10,783 3 1,732 (1,309) (1,224) - 5,490 (1,062) 368 720 (996) 19 (204) 353 (127) (14) (166) (145) 8 (236) 92 1,149 139 986 (3) (432) 86.97 99.83 99.85 81.21 97.34 99.997 81.42 0.002 - - 100 100 100 100 - 100 12.71 100 - - 100 100 100 100 - 100 100 100 - 100 86.97 99.83 99.85 81.21 97.35 99.997 83.23 0.002 - - 100 100 100 100 - 100 12.71 100 - - 100 100 100 100 - 100 100 100 - 100 86.97 99.83 99.85 81.21 97.34 99.997 81.42 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 86.97 99.83 99.85 81.21 97.35 99.997 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 236 Data of subsidiaries with significant non-controlling interests, before intercompany eliminations Komercijalna banka, Beograd NLB Banka, Skopje in EUR thousands NLB Banka, Prishtina Non-controlling interest in equity in % Non-controlling interest's voting rights in % Income statement and statement of comprehensive income 2021 13.30 11.72 2020* 18.58 16.77 2021 13.03 13.03 Revenues 156,710 - 87,864 Profit/(loss) for the year Attributable to non-controlling interest Other comprehensive income Total comprehensive income Attributable to non-controlling interest Paid dividends to non-controlling interest 34,818 4,631 (10,117) 24,701 3,285 - (9,050) 39,000 (1,681) 2,145 (6,905) (1,283) - 5,082 (759) 38,241 4,983 3,222 2020 13.03 13.03 81,673 19,222 2,505 898 20,120 2,622 - 2021 17.62 17.62 51,509 24,436 4,306 (311) 24,125 4,252 4,160 2020 18.79 18.79 47,699 13,334 2,505 74 13,408 2,519 - Statement of financial position Current assets Non-current assets Current liabilities 1,859,605 1,455,793 719,846 690,387 446,182 443,289 2,305,644 2,441,294 1,050,742 895,265 484,363 435,775 3,266,253 2,978,959 1,335,444 1,176,539 756,702 689,776 Non-current liabilities 264,353 308,185 191,877 Equity 634,643 609,943 243,267 Attributable to non-controlling interest 84,408 113,327 31,698 179,336 229,777 29,940 74,987 98,856 17,421 90,953 98,335 18,477 *Since the acquisition of Komercijalna banka, Beograd was concluded on 30 December 2020, only 12-month expected credit losses and attributable deferred taxes are included in NLB Group’s income statement for 2020. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 237 b) Disposal of Komercijalna banka a.d. Banja Luka In December 2021, Komercijalna banka a.d. Beograd sold its subsidiary Komercijalna banka a.d. Banja Luka. The assets and liabilities derecognised from NLB Group financial statements as a result of the disposal are as follows: in EUR thousands Cash, cash balances at central banks, and other demand deposits at banks Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - loans and advances to customers - other financial assets Tangible assets Property and equipment - own property and equipment (note 5.8.b) - right-of-use assets Investment property (note 5.9.) Intangible assets (note 5.10.) Current income tax assets Other assets Total assets Financial liabilities measured at amortised cost - deposits from banks and central banks - due to customers - borrowings from other customers - other financial liabilities Provisions Deferred income tax liabilities Other liabilities Total liabilities Net assets of subsidiary Total disposal consideration Cash and cash equivalents in subisidiary sold Cash outflow on disposal Consideration for disposal of the subsidiary Carrying amount of net assets disposed of Transfer of FV OCI revaluation reserve to P&L Loss from disposal of subsidiary in consolidated financial statements - Non-controlling interest - Attributable to owners of the parent Effect of sale of Komercijalna banka a.d. Banja Luka is included in the segment ‘Strategic Foreign Markets.’ 75,699 36,599 131,928 381 2,438 709 1,729 1,215 228 29 1,026 249,543 15,514 172,900 25,120 2,289 361 61 277 216,522 33,021 22,000 (69,832) (47,832) 22,000 33,021 1,723 (9,298) (1,237) (8,061) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 238 c) Acquisition of Komercijalna banka a.d. Beograd On 30 December 2020, NLB acquired an 83.23% ordinary represents 81.42% of total shareholding in Komercijalna banka a.d. Beograd. At the date of acquisition, the acquired bank had shareholding in Komercijalna banka a.d. Beograd, which the following subsidiaries: Subsidiaries Komercijalna banka a.d. Podgorica, Montenegro Komercijalna banka a.d. Banja Luka, Bosnia and Herzegovina Investment Management Company KomBank Invest a.d. Beograd, Serbia Komercijalna banka Beograd’s ownership 100% 99.998% 100% NLB’s direct ownership - 0.002% - Serbia has long been a strategically important market for NLB adding more than 800,000 active retail customers and the Group in the context of the strategy to be the leading international largest distribution network in the country of 203 branches to bank headquartered in and focused on the SEE region. Whilst in NLB’s existing operations. all countries of Group’s operations NLB has a top three market position, in Serbia (the largest market by population) it was, until Purchase consideration amounted to EUR 394,718 thousand the execution of this transaction, sub-scale. and was fully paid in cash. There are no contingent As a result of the transaction, NLB became the third largest banking group in Serbia with the acquisition of Komercijalna in acquired entities amounted to EUR 847,488 thousand, therefore the net inflow of cash amounted to EUR 452,770 banka increasing NLB’s market share from approximately thousand (included in statement of cash flows within 2% by total assets to over 12% as at 30 September 2020. The payments from investing activities). consideration arrangements. At acquisition date, cash business operations of NLB Group in Serbia will be (besides the Slovenian market) the largest and most important one, MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 239 The assets and liabilities recognised as a result of the acquisition are as follows: 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) in EUR thousands 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 NLB Group recognises non-controlling interests in Komercijalna of EUR 137,858 thousand, which is recognised in income banka Beograd at the non-controlling interest’s proportionate statement under line item ‘Negative goodwill.’ The main share of the acquired entity’s net identifiable assets. reasons for negative goodwill are current market conditions, when banks are generally valued below their net book values. Acquisition of Komercijalna banka Beograd resulted in a gain from a bargain purchase (negative goodwill) in the amount MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 240 As a result of the acquisition, NLB Group’s off-balance sheet The valuation techniques used for measuring the fair value of liabilities increased by EUR 377,361 thousand: material assets and liabilities acquired were as follows: in EUR thousands Assets acquired Valuation technique Short-term guarantees - financial - non-financial Long-term guarantees - financial - non-financial Commitments to extend credit Letters of credit Other Total 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 included within administrative expenses. NLB obtained all the necessary information for measuring fair values, therefore no amounts in 2020 financial statements were measured and recognised on a provisional basis. 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. Performing loans 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. Non-performing 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%. Debt securities 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. Real estate 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. Core deposits 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 utilise 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. Trade name 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. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 241 The fair value of acquired loans and advances to customers Since the transaction was closed on 30 December 2020, only is EUR 1,877,349 thousand, of which EUR 1,836,970 thousand 12-month expected credit losses for Stage 1 financial assets in relates to performing portfolio and EUR 40,379 thousand the amount of EUR 13,447 thousand and attributable deferred to non-performing portfolio. The latter was recognised as taxes in the amount of EUR 1,864 thousand are included in NLB purchased or originated credit-impaired financial assets Group income statement. If the acquisition has occurred on 1 (POCI). The gross contractual amount for performing loans January 2020, management estimates that consolidated revenue and advances to customers is EUR 1,827,721 thousand and for (excluding negative goodwill) would have been between EUR this exposure 12-month expected credit losses in the amount 750 and 760 million and consolidated profit for the year would of EUR 10,349 thousand were recognised through the income have been between EUR 260 and 265 million. The exact result is statement. The gross contractual amount for non-performing difficult to assess due to some changed circumstances during the loans and advances to customers is EUR 149,654 thousand, year, especially the COVID-19 pandemic. and it is expected that approximately EUR 75 million of the contractual cash flows will not be collected. d) Analysis by type of investment in associates and joint ventures Carrying amount of the NLB Group's interest 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 NLB Group NLB in EUR thousands Other financial organisations Enterprises Total NLB Group’s associates 11,525 - 11,525 7,988 - 7,988 4,282 201 4,483 1,382 280 1,662 Nature of Business Country of Incorporation Shareholding % Voting rights % Shareholding % Voting rights % 2021 2020 Bankart d.o.o., Ljubljana Card processing Slovenia ARG - Nepremičnine d.o.o., Horjul Real estate Slovenia 45.64 75.00 45.64 75.00 40.08 75.00 40.08 75.00 By contractual agreement between the shareholders, NLB The carrying amount of interests in associates included in the does not control ARG-Nepremičnine, Horjul, but does have a consolidated financial statements of NLB Group: significant influence. 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 in EUR thousands 2020 7,988 874 (41) 833 2021 11,525 1,108 (30) 1,078 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 242 In 2021, NLB Group did not recognise a share of profit of an losses of an associate that as at 31 December 2021 amounted associate in the amount of EUR 65 thousand (2020: EUR 31 to EUR 2,199 thousand (31 December 2020: EUR 2,264 thousand), as it still has the cumulative unrecognised share of thousand). NLB Group’s joint ventures Prvi Faktor Group, Ljubljana Finance Nature of Business Country of Incorporation Slovenia 2021 2020 Voting rights% Voting rights% 50 50 In 2021, NLB Group did not recognise a share of profit of a joint joint venture as at 31 December 2021 amounted to EUR 14,825 venture in the amount of EUR 435 thousand (2020: EUR 556 thousand (31 December 2020: EUR 15,259 thousand). thousand). The cumulative unrecognised share of losses of a e) Movements of investments in associates NLB Group Balance as at 1 January Increase in capital share Share of result before tax Share of tax Net gains/(losses) recognised in other comprehensive income Dividends received Balance as at 31 December 5.13. Other assets Assets. received as collateral (note 6.1.l) Deferred expenses Inventories Claim for taxes and other dues Prepayments Total in EUR thousands 2020 7,499 326 1,036 (162) (41) (670) 7,988 2021 7,988 2,900 1,339 (231) (30) (441) 11,525 NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 75,450 10,046 2,173 1,826 1,726 91,221 76,017 9,157 7,858 2,949 1,159 97,140 4,827 6,202 42 621 161 4,926 5,976 180 467 115 11,853 11,664 Assets, received as collateral on NLB Group in the amount (31 December 2020: EUR 4,926 thousand) consist of real estate of EUR 74,717 thousand (31 December 2020: EUR 75,151 (note 6.1.l). thousand), and on NLB in the amount of EUR 4,827 thousand MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 243 5.14. Movements in allowance for the impairment of financial assets a) Movements in allowance for the impairment of loans and receivables measured at amortised cost NLB Group Notes 12-month expected credit losses Loans and advances to banks Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL not credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Of which: Purchased or originated credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Balance as at 1 Jan 2021 Effects of translation of foreign operations to presentation currency Transfers Increases/ (Decreases) Write-offs Changes in models/risk parameters Foreign exchange differences and other movements Disposal of subsidiary Balance as at 31 Dec 2021 Repayments of written-off receivables in EUR thousands 4.14. 9 (13,005) 2,476 115 6,975 (240) 7 - 14,152 4,036 202 (8,554) (3,515) - - (164) (8) (54) (35) (231) (7) (5,598) 25,606 (15,160) (521) (202) - - - 8 1,770 (1,157) (3,243) (602) (66,532) (847) (702) (2,312) (9) 4.14. 48 (7,479) (4,292) (70) 898 (1,960) 9 7,868 1,641 (112) - - - - 5 20 (2) 1 4 - 14 587 - 1 - (1) - (3) 31 10 (3) 21 (3) 2,135 6,226 (142) 1,701 4,849 - 5.6.b), c), d) 4.14. - (214) (777) (1) (35) (137) - (123) (425) - - - - 198 18,336 50,961 476 7,398 26,624 36 76,047 136,607 5,714 (157) 613 (608) - - - - - - - 7,449 42,272 470 - - - 141 25,044 49,475 276 8,151 32,682 30 61,305 195,623 5,247 - 1,319 4 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 244 NLB Group Notes 12-month expected credit losses Loans and advances to banks Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL not credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Of which: Purchased or originated credit-impaired Loans and advances to other customers Other financial assets Balance as at 1 Jan 2020 Effects of translation of foreign operations to presentation currency Transfers Increases/ (Decreases) Write-offs Changes in models/risk parameters Foreign exchange differences and other movements Disposal of subsidiary Balance as at 31 Dec 2020 Repayments of written-off receivables in EUR thousands 95 21,613 35,115 177 6,103 27,076 27 47,737 184,800 4,702 1,887 3 (1) (22) (9) (1) (3) (2) 1 (22) 67 (9) - - - 12,806 5,004 63 (11,149) (8,675) (17) (1,610) 3,624 (46) - - 4.14. 62 (9,062) 7,803 80 7,250 4,955 (143) 4.14. (15) (290) 1,597 (21) 5,925 9,334 166 - (1) (6) (22) (3) (4) (4) 29,353 (20,159) 1,689 11,750 2,395 (568) 1 (31,254) (2,258) - - 98 16 - - 5.6.b), c), d) 4.14. - - (18) - 28 (2) - 4,317 27,584 485 - - - - (11) - - - - - (1,046) (38) - - 141 25,044 49,475 276 8,151 32,682 30 61,305 195,623 5,247 1,319 4 - - - - - - - 5,858 9,565 499 - - Column Increases/(Decreases) for year 2020 also includes thousand for Loans and advances to other customers and 12-month expected credit losses recognised at acquisition of in the amount of EUR 54 thousand for Other financial assets Komercijalna banka in the amount of EUR 2,150 thousand for (notes 4.14. and 5.12.c). Loans and advances to individuals, in the amount of EUR 8,198 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 245 NLB Notes 12-month expected credit losses Loans and advances to banks Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL not credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Of which: Purchased or originated credit-impaired Loans and advances to other customers Other financial assets Balance as at 1 Jan 2021 Transfers Increases/ (Decreases) Write-offs Changes in models/risk parameters Foreign exchange differences and other movements 155 8,973 16,664 73 2,351 8,936 2 22,855 83,593 1,255 1,319 4 - 3,881 4,740 14 (2,181) (2,651) - (1,700) (2,089) (14) - - 4.14. 27 (4,914) (5,419) 41 2,007 (2,715) (1) 8,779 (659) 129 1,339 2 - (156) (1) (12) (27) (3) - (6,020) (33,269) (280) - - 4.14. - (4,281) (5,915) (57) 270 (1,799) - 7,566 349 - - - in EUR thousands Balance as at 31 Dec 2021 Repayments of written-off receivables 5.6.b), c), d) 4.14. - - 32 3 1 19 - 17 (815) - (1,820) - 182 3,503 10,101 62 2,421 1,787 1 31,497 47,110 1,090 838 6 - - - - - - - 2,597 8,682 120 - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 246 Balance as at 1 Jan 2020 Transfers Increases/ (Decreases) Write-offs Changes in models/risk parameters Foreign exchange differences and other movements NLB Notes 12-month expected credit losses Loans and advances to banks Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL not credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Lifetime ECL credit-impaired Loans and advances to individuals Loans and advances to other customers Other financial assets Of which: Purchased or originated credit-impaired Loans and advances to other customers Other financial assets 141 7,195 13,529 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) - - 4.14. 32 (6,509) (3,388) (22) 3,422 (2,516) (7) 14,318 (2,677) 411 (537) 1 - (1) (6) (2) (3) (4) - (6,227) (7,159) (864) - - 4.14. (18) 2,181 3,303 (25) 2,491 4,925 1 (365) (119) (2) - - in EUR thousands Balance as at 31 Dec 2020 Repayments of written-off receivables 5.6.b), c), d) 4.14. - - (28) (1) (2) - - 707 22,264 - - - 155 8,973 16,664 73 2,351 8,936 2 22,855 83,593 1,255 1,319 4 - - - - - - - 2,319 4,139 328 - - The contractual amount outstanding on financial assets EUR 2,251 thousand in NLB Group (31 December 2020: EUR that were written off during the year ending 31 December 4,162 thousand) and EUR 1,265 thousand in NLB (31 December 2021 and that are still subject to enforcement activity for NLB 2020: EUR 2,537 thousand) represents interest receivables that Group amounted to EUR 76,252 thousand (31 December 2020: have not been recognised in the income statement prior to the EUR 42,738 thousand), and for NLB amounted to EUR 8,136 write-off. thousand (31 December 2020: EUR 9,773 thousand), of which MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 247 b) Movements in allowance for the impairment of debt securities NLB Group Notes 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 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 Group Notes 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 Balance as at 1 Jan 2021 Effects of translation of foreign operations to presentation currency Transfers Increases/ (Decreases) Changes in models/risk parameters in EUR thousands Disposal of subsidiary Balance as at 31 Dec 2021 Foreign exchange differences and other movements 4.14. 4.14. 5.6.a), 5.4.a) 3,685 8,656 - 28 798 1 2 - - - (32) - 32 - - 997 81 16 24 - (1,400) 2,731 4 18 - 2 18 - - - - (340) - - - 3,253 11,148 52 70 798 Balance as at 1 Jan 2020 Effects of translation of foreign operations to presentation currency Transfers Increases/ (Decreases) Changes in models/risk parameters 3,140 4,757 42 798 (2) 2 - - - - - - 4.14. 343 4,156 (6) - 4.14. 204 (253) (9) - Foreign exchange differences and other movements in EUR thousands Balance as at 31 Dec 2020 5.6.a), 5.4.a) - (6) 1 - 3,685 8,656 28 798 Column Increases/(Decreases) for year 2020 includes also of EUR 2,932 thousand for Debt securities measured at fair 12-month expected credit losses recognised at acquisition of value through other comprehensive income (notes 4.14. and Komercijalna banka in the amount of EUR 32 thousand for 5.12.c). Debt securities measured at amortised cost and in the amount MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 248 NLB Notes 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 2021 Increases/ (Decreases) Changes in models/risk parameters Foreign exchange differences and other movements 1,841 2,343 798 4.14. 456 (22) - 4.14. (473) (126) - 2 8 - NLB Notes 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) Changes in models/risk parameters Foreign exchange differences and other movements 4.14. 16 626 - 4.14. 208 9 - 1,617 1,714 798 - (6) - in EUR thousands Balance as at 31 Dec 2021 5.6.a), 5.4.a) 1,826 2,203 798 in EUR thousands Balance as at 31 Dec 2020 5.6.a), 5.4.a) 1,841 2,343 798 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 249 c) Explanation of how significant changes in the gross carrying amount of financial instruments contributed to changes in the loss allowance Movement of gross carrying amount of loans to banks 12-month expected credit losses Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Decreases/Increases Exchange differences on monetary assets Balance as at 31 December Movement of gross carrying amount of loans and advances to individuals NLB Group in EUR thousands NLB 2021 197,146 (7) - (61,245) 4,987 140,881 2020 93,498 (99) 46,981 56,616 150 197,146 2021 158,475 - - 41,094 (100) 199,469 2020 144,493 - - 13,829 153 158,475 Individuals Balance as at 1 January 2021 Effects of translation of foreign operations to presentation currency Transfers Increases/(Decreases) Write-offs Exchange differences on monetary assets Modification losses (note 4.12.) Disposal of subsidiary Balance as at 31 December 2021 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 NLB Group NLB 4,777,413 1,268 (39,411) 666,437 (164) 1,930 (31) (34,891) 5,372,551 132,987 (8) 4,604 (16,708) (35) 27 (6) (626) 120,235 117,193 26 34,807 (8,010) (15,160) 32 (2) (601) 128,285 5,027,593 2,295,630 1,286 - 641,719 (15,359) 1,989 (39) (36,118) 5,621,071 - (17,729) 291,509 (156) 1,671 - - 64,675 - 5,230 (3,888) (27) 45 - - 51,644 - 12,499 (764) (6,020) 37 - - 2,570,925 66,035 57,396 2,694,356 Individuals 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 NLB Group NLB Balance as at 1 January 2020 3,822,266 103,734 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Transfers Increases/(Decreases) Write-offs Exchange differences on monetary assets Excluded interest Modification losses (note 4.12.) Balance as at 31 December 2020 (20) 843,675 (88,975) 203,520 (1) (1,983) - (1,069) 4,777,413 (1) - 44,785 (15,470) (3) (88) 30 - 132,987 87,488 - 5,753 44,190 (4,342) (20,159) (54) 4,317 - 117,193 4,013,488 2,301,339 34,826 40,627 (21) 849,428 - 183,708 (20,163) (2,125) 4,347 (1,069) - - (50,790) 44,914 (1) 168 - - - - 36,066 (6,216) (3) 2 - - - - 14,724 1,812 (6,227) 3 705 - 5,027,593 2,295,630 64,675 51,644 2,411,949 in EUR thousands Total 2,411,949 - - 286,857 (6,203) 1,753 - - in EUR thousands Total 2,376,792 - - - 40,510 (6,231) 173 705 - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 250 In year 2021, the loss allowance for loans and advances to EUR 7,324 thousand at NLB Group level and by EUR 4,307 impaired assets. When a financial asset becomes credit- individuals increased by EUR 7,281 thousand at NLB Group thousand at NLB level. At the NLB Group level, the gross impaired and is, therefore, classified in Stage 3, interest level, while at NLB level it increased by EUR 3,242 thousand. carrying amount increased by EUR 1,014,105 thousand, mainly income is calculated by applying the effective interest rate Even though the gross carrying amount increased mainly in due to acquisition of subsidiaries, while at the NLB level it to the net amortised cost of the financial asset. Part of the Stage 1 due to new exposures, the increase of loss allowance increased by EUR 35,157 thousand. was observed mostly in Stage 3. The main reason for this were contractually due interest for Stage 3 exposures that is not included in the income statement (so-called ‘excluded changes in risk parameters, which increased loss allowance Acquisition of subsidiaries (note 5.12.c) contributed EUR interest’) has been in previous periods presented as a for Stage 3 loans and advances to individuals in the amount 849,428 thousand to the gross carrying amount of loans decrease of gross carrying amount of financial assets. In of EUR 7,868 thousand at NLB Group level and EUR 7,566 and advances to individuals on NLB Group level. For the year 2020, the Bank of Slovenia changed the instructions thousand at NLB level. performing part of this portfolio, 12-month expected credit for reporting of monetary financial institutions and regards losses in the amount of EUR 2,150 thousand were recognised. excluded interest as part of gross carrying amount, even In year 2020, the loss allowance for loans and advances if not recognised in the income statement. Therefore, NLB to individuals increased by EUR 19,047 thousand at NLB The gross carrying amount also increased due to changed Group changed the presentation as at 31 December 2020 and Group level, while at NLB level it increased by EUR 10,012 presentation of excluded interest. NLB Group calculates increased gross carrying amount and impairments for EUR thousand. The main reasons for the increase were changed interest income by applying the effective interest rate to the 4,347 thousand on the Group level and EUR 705 thousand on risk parameters, which increased loss allowance by gross carrying amount of financial assets other than credit- the NLB level. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 251 Movement of gross carrying amount of loans and advances to other customers Other customers Balance as at 1 January 2021 Effects of translation of foreign operations to presentation currency Transfers Increases/(Decreases) Write-offs Exchange differences on monetary assets Modification losses (note 4.12.) Disposal of subsidiary Balance as at 31 December 2021 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 Total NLB Group NLB 4,219,862 1,220 (110,801) 608,913 (8) 3,620 (17) (92,304) 4,630,485 427,166 82 85,364 (98,209) (231) 235 (6) (2,217) 412,184 317,519 852 25,437 (34,880) (66,532) 159 (201) (3,000) 239,354 4,964,547 1,982,033 193,835 119,733 2,295,601 2,154 - 475,824 (66,771) 4,014 (224) (97,521) 5,282,023 - (13,004) 379,138 (1) 3,109 - - - 11,931 (82,687) (3) 228 - - - 1,073 (15,037) (33,269) 137 - - - - 281,414 (33,273) 3,474 - - 2,351,275 123,304 72,637 2,547,216 in EUR thousands NLB Group NLB in EUR thousands Other customers 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 Total Balance as at 1 January 2020 3,270,058 367,283 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Transfers Increases/(Decreases) Write-offs Exchange differences on monetary assets Excluded interest Modification losses (note 4.12.) Balance as at 31 December 2020 (2,407) 993,295 (169,871) 130,986 (6) (168) - (2,025) 4,219,862 (197) - 108,995 (48,552) (4) (2) - (357) 427,166 261,339 (126) 34,626 60,876 (35,202) (31,254) (3) 27,389 (126) 317,519 3,898,680 2,049,210 154,600 106,762 2,310,572 (2,730) 1,027,921 - - - (100,324) 47,232 (31,264) (173) 27,389 (2,508) 36,267 (6) (3,114) - - - - 77,761 (38,342) (4) (180) - - 4,964,547 1,982,033 193,835 - - 22,563 (24,596) (7,159) (121) 22,284 - 119,733 - - - (26,671) (7,169) (3,415) 22,284 - 2,295,601 In year 2021, the gross carrying amount of loans and advances (decrease of loss allowance at NLB Group level for EUR 4,611 11,029 thousand at NLB Group level and by EUR 8,109 thousand to other customers increased by EUR 317,476 thousand at NLB thousand and at NLB level for EUR 7,365 thousand). at NLB level. At the NLB Group level, the gross carrying Group level and EUR 251,615 thousand at NLB level, mostly in amount increased by EUR 1,065,867 thousand, mainly due to Stage 1 due to increased exposure. Regardless of that, loss In year 2020, the loss allowance for loans and advances to acquisition of subsidiaries, while at the NLB level it decreased allowance decreased (for EUR 63,588 thousand at NLB Group other customers increased by EUR 30,789 thousand at NLB by EUR 14,971 thousand. level and EUR 50,195 thousand), with main reasons being Group level, while at NLB level it increased by EUR 14,595 write-offs (EUR 66,771 thousand at NLB Group level and EUR thousand. The main reasons for the increase were changed 33,273 thousand at NLB level) and changes in risk parameters risk parameters, which increased loss allowance by EUR MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 252 Acquisition of subsidiaries (note 5.12.c) contributed EUR 1,027,921 thousand to the gross carrying amount of loans Movement of gross carrying amount of other financial assets thousand), with main reason being write-offs in the amount of EUR 292 thousand. and advances to customers on NLB Group level. For The loss allowance for other financial assets in year 2021 on the performing part of this portfolio, 12-month expected NLB Group level moved in line with gross carrying amount The loss allowance for other financial assets in year 2020 credit losses in the amount of EUR 8,183 thousand were and increased by EUR 673 thousand. At NLB level, gross moved in line with gross carrying amount and increased by recognised. carrying amount increased by EUR 37,724 thousand, but EUR 647 thousand at NLB Group level, while at the NLB level it most of this increase relates to receivables with very short decreased by EUR 511 thousand. The gross carrying amount also increased for EUR 27,389 maturity (of that EUR 20,492 thousand to receivables towards thousand at NLB Group level and for EUR 22,284 thousand at a subsidiary for dividends declared in 2021). Therefore, NLB level due to changed presentation of excluded interest. the loss allowance in 2021 slightly decreased (by EUR 177 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Movement of gross carrying amount of debt securities measured at amortised cost NLB Group in EUR thousands NLB 2021 2020 2021 2020 12-month expected credit losses Lifetime ECL not credit - impaired 12-month expected credit losses 12-month expected credit losses 12-month expected credit losses Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Additions Derecognition Net interest income Exchange differences on monetary assets Other Transfers Balance as at 31 December 1,506,772 74 - 769,067 (564,041) 13,144 1,348 (5,444) (7,209) 1,713,711 - 11 - - - - - - 7,209 7,220 1,656,988 1,279,721 1,486,783 (325) 7,214 303,670 (477,592) 16,130 (429) 1,116 - - - 639,735 (486,630) 9,504 1,364 (5,444) - - - 181,235 (401,685) 12,701 (429) 1,116 - 1,506,772 1,438,250 1,279,721 Contents 253 Movement of gross carrying amount of debt securities measured at fair value through other comprehensive income 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 Total NLB Group NLB in EUR thousands Balance as at 1 January 2021 Effects of translation of foreign operations to presentation currency Additions Derecognition Net interest income Exchange differences on monetary assets Disposal of subisidiary Balance as at 31 December 2021 3,407,394 1,204 1,455,823 (1,481,974) 40,310 8,367 (35,023) 3,396,101 203 - - (19) - - - 184 798 3,408,395 1,639,915 - - - - - - 1,204 1,455,823 (1,481,993) 40,310 8,367 (35,023) - 219,733 (352,824) 11,696 8,452 - 798 3,397,083 1,526,972 - - - - - - - - 798 1,640,713 - - - - - - - 219,733 (352,824) 11,696 8,452 - 798 1,527,770 in EUR thousands 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 Total NLB Group NLB Balance as at 1 January 2020 2,055,362 220 798 2,056,380 1,583,603 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Additions Derecognition Net interest income Exchange differences on monetary assets Balance as at 31 December 2020 (421) 1,267,281 1,856,445 (1,777,748) 17,370 (10,895) 3,407,394 - - - (17) - - 203 - - - - - - (421) 1,267,281 1,856,445 (1,777,765) 17,370 (10,895) - - 1,045,700 (988,275) 9,894 (11,007) 798 3,408,395 1,639,915 - - - - - - - - 798 1,584,401 - - - - - - - - 1,045,700 (988,275) 9,894 (11,007) 798 1,640,713 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 254 5.15. Financial liabilities, measured at amortised cost Analysis by type of financial liabilities, measured at the 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 in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 71,828 858,531 72,633 158,225 109,329 873,479 41,635 143,464 17,640,809 16,397,167 9,659,605 8,850,755 74,051 288,519 206,878 91,560 288,321 182,095 406 288,519 102,527 13 288,321 88,969 19,140,616 17,190,001 11,033,865 9,413,157 a) Deposits from banks and central banks and amounts due to customers 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 NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 56,427 52,250 94,323 41,635 15,319,112 13,633,889 8,982,546 8,128,950 401,295 303,858 307,082 192,224 3,653,713 3,223,612 109,228 265,900 1,870,118 86,276 137,204 1,551,952 10,960,246 9,910,971 6,737,300 6,353,518 15,401 20,383 2,321,697 2,763,278 95,062 125,310 380,815 1,720,510 117,428 134,716 398,595 2,112,539 15,006 677,059 34,801 71,582 229,093 341,583 - 721,805 35,515 34,474 192,955 458,861 17,712,637 16,469,800 9,768,934 8,892,390 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 255 b) Borrowings from banks and central banks and other customers Loans - banks and central banks - other customers - governments - financial organisations - companies Total NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 858,531 74,051 20,607 52,958 486 932,582 158,225 91,560 20,183 70,956 421 249,785 873,479 406 - - 406 873,885 143,464 13 - - 13 143,477 As at 31 December 2021, NLB Group and NLB had EUR 94,115 threshold in the special reference period and will use the threshold. Since the threshold was achieved and early thousand in undrawn borrowings (31 December 2020: EUR 140,713 thousand). positive effect from this transaction to partially compensate for the negative carry of liquidity reserves. Based on repayment in June 2022 is still expected, no changes in estimates of payments due to revised assessment were In June 2021, the Bank participated in the ECB TLTRO III.8 early repayment in June 2022. operation and had drawn a credit tranche of EUR 750,000 Group recognised in 2021 interest income in the amount of EUR 3,979 thousand (note 4.1.). The carrying amount of the thousand for three years. With targeted longer-term NLB Group accounts for this loan according to the loan as at 31 December 2021 amounts to EUR 746,021 thousand. currently available information, the Bank plans to opt for needed. By applying the effective interest rate of -1%, NLB refinancing operations, the ECB continues to support the requirements of IFRS 9. Expected effective interest rate was access of enterprises and households to bank loans. The estimated based on the expectations of early repayment Bank was successful in achieving the lending performance in June 2022 and achieving the lending performance c) Subordinated liabilities Subordinated bonds Total NLB Group and NLB 31 Dec 2021 31 Dec 2020 in EUR thousands 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. 45,903 119,577 123,039 288,519 45,000 120,000 120,000 285,000 45,867 119,480 122,974 288,321 45,000 120,000 120,000 285,000 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 256 All issued subordinated bonds represent non-convertible Tier 2 instruments (note 5.22.). In the event of bankruptcy b) with the same priority (pari passu) as, and proportionally with the obligations arising from other instruments which or liquidation of the issuer, obligations arising from Tier 2 qualify as Tier 2 instruments or have the same priority of instruments shall be repaid: repayment as the Tier 2 instruments; a) after repayment of all unsubordinated obligations c) in priority to the obligations arising from shares or other of the Issuer, as well as at all subordinated obligations instruments which qualify as Common Equity Tier 1 capital (if any) which are expressed to rank in priority to Tier 2 instruments or additional Tier 1 instruments or have the same instruments; priority of repayment as these instruments. Movement of subordinated liabilities NLB Group and NLB Balance as at 1 January Cash flow items: - new issued subordinated liabilities - repayment of subordinated liabilities - repayment of interest Non-Cash flow items: - accrued interest - other Balance as at 31 December 2021 288,321 (10,350) - - (10,350) 10,548 10,548 - 288,519 in EUR thousands 2020 210,569 67,383 119,222 (45,000) (6,839) 10,369 10,243 126 288,321 In September 2019, NLB entered into a loan agreement after obtaining approval from the ECB. As such, approval relating to a EUR 45 million of subordinated loan intended for had not been granted by 23 December 2019, and it was not the inclusion into additional capital to strengthen and optimise reasonably expected to be granted in the near future, NLB its capital structure. NLB may, according to valid legislation, announced the prepayment of the loan, which was exercised only include the loan in calculation of additional capital in January 2020. d) Other financial liabilities Items in the course of settlement Debit or credit card payables Suppliers Lease liabilities (note 5.11.a) Accrued expenses Fees and commissions Liabilities to brokerage firms and others for securities purchase and custody services Other financial liabilities Total NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 57,934 27,325 17,514 24,324 25,852 1,609 297 52,023 206,878 46,395 22,883 20,993 26,359 21,314 1,100 2,459 40,592 182,095 5,940 24,638 12,049 3,256 12,909 1,504 202 42,029 102,527 4,412 20,135 15,768 3,212 10,635 967 2,443 31,397 88,969 Other financial liabilities mainly include liabilities to initiatives, received warranties, and obligation for purchase insurance companies, liabilities for received EIB financial of securities. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 257 5.16. Provisions a) Analysis by type of provisions 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 NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 33,441 12,912 1,640 18,889 21,447 19,217 45,288 11 42,174 15,796 2,767 23,611 20,707 15,565 46,602 11 20,560 3,909 141 16,510 14,206 11,131 3,466 - 28,543 7,510 732 20,301 14,220 15,354 5,673 - 119,404 125,059 49,363 63,790 Provisions for guarantees and commitments represent foreign currency savings, based on numerous process and expected credit losses in accordance with IFRS 9, employee content-related reasons, NLB has all along objected to these benefits are recognised in accordance with IAS 19, while all claims. Two key reasons NLB is not liable for the old foreign other provisions are recognised according to IAS 37. currency savings are that it was only founded on the basis of Legal risks the Constitutional Act on 27 July 1994 (at the time the savings were deposited with LB Branch Zagreb, NLB did not yet exist), Provisions for legal risks are formed based on expectations and NLB did not assume any such obligations. regarding the probable outcome of legal disputes. As at 31 December 2021, NLB Group was involved in 38 (31 December Moreover, this is a former Yugoslavia succession matter, as the 2020: 39) legal disputes with material claims against Group governments of the Republic of Slovenia and the Republic of members in the total amount of EUR 404,001 thousand, Croatia agreed in a Memorandum of Understanding signed excluding accrued interest (31 December 2020: EUR 292,098 in 2013 whose intent was to find a solution to the transferred thousand). As at 31 December 2021, NLB was involved in 16 (31 foreign currency savings of Ljubljanska banka in Croatia December 2020: 18) legal disputes with material monetary (LB) on the basis of the Agreement on Succession Issues. The claims against NLB. The total amount of these claims, Memorandum also said that the Republic of Croatia would excluding accrued interest, was EUR 180,077 thousand (31 ensure the stay of all the proceedings commenced by the PBZ December 2020: EUR 179,996 thousand). and the ZaBa in relation to the transferred foreign currency savings until the issue was finally resolved. In connection with legal risks, the largest amount of material monetary claims relates to civil claims filed by Privredna Despite the agreement in the Memorandum of Understanding banka Zagreb (the PBZ) and Zagrebačka banka (the ZaBa) to stay all of the proceedings commenced, the Court of Appeal, against NLB, referring to the old savings of LB Branch Zagreb the County Court of Zagreb, ruled in six claims (as explained savers, which were transferred to these two banks in a below in detail) in favour of the plaintiff. In four of those cases, principal amount of approximately EUR 171 million (as per 31 NLB filed a constitutional suit after extraordinary legal measure December 2021). Due to the fact the proceedings had been of NLB with the Supreme Court of the Republic of Croatia was pending for such a long time, the penalty interest already exceeds the principal amount. As NLB is not liable for the old not successful, and in two NLB filed an extraordinary legal measure with the Supreme Court of the Republic of Croatia. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 258 Contrary to the decisions of the court described above in In the other cases, with respect to which court procedures another case, a claim filed by the PBZ was refused and the described above are pending, final court decisions have not yet judgment became final in favour of NLB. The extraordinary been issued. legal measure with the Supreme Court of the Republic of Croatia, filed by the plaintiff, was dismissed by the Supreme The table below summarises the amounts according to final Court on 16 June 2015. 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 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. April 2018 PBZ 222,426.39 EUR 253,283.37 HRK September 2017 ZaBa 492,430.53 EUR 748,583.75 HRK November 2017 PBZ 220,115.98 EUR 688,268.12 HRK December 2018 PBZ 3,855,173.35 SEK 679,926.08 HRK March 2019 PBZ 9,185,141.76 USD 3,198,760.00 HRK 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 Court of the Republic of Croatia rejected the constitutional appeal of NLB d.d. on 5 October 2021. 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 Court of the Republic of Croatia rejected the constitutional appeal of NLB d.d. on 5 October 2021. 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. 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 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. The NLB Shareholders’ Meeting provided the Management the Succession Fund of the Republic of Slovenia (Sklad has to contest the claims made against it in court proceedings Board of NLB with instructions how to act in the event of Republike Slovenije za nasledstvo, javni sklad, hereinafter: in relation to transferred foreign currency deposits, and use existing or potential new final decisions by Croatian courts ‘the Fund’), shall compensate NLB for the sums recovered against court decisions that are disadvantageous for NLB, against LB and NLB regarding the transferred foreign from NLB by enforcement of final judgements delivered all reasonable legal remedies and to continue to actively currency deposits, especially not to voluntarily settle the by Croatian courts with regard to the transferred foreign challenge the judicial decisions of the courts of the Republic adjudicated amounts, and also gave some additional currency deposits, that is the principle amount, accrued of Croatia in relation to transferred foreign currency deposits instructions on the usage of legal remedies and regarding the management of the property from that perspective. interest, expenses of court, attorney’s expenses and other expenses of the plaintiff, and expenses related to enforcement on the basis of which enforcement took place, leading, on the basis of ZVKNNLB, to the compensation of the sums On 19 July 2018, the National Assembly of the Republic of its own costs or for the difference between the book value case from May 2015, the Succession Fund of the Republic of Slovenia passed the ‘Act for Value Protection of Republic of of its assets sold in enforcement proceedings and the price Slovenia has already compensated the sums recovered from with the accrued interest, and shall not compensate NLB for recovered from NLB by enforcement. In the aforementioned Slovenia’s Capital Investment in Nova Ljubljanska banka obtained for such assets in enforcement proceedings. There NLB by enforcement. d.d., Ljubljana’ (Zakon za zaščito vrednosti kapitalske shall be no compensation for any voluntarily made payments naložbe Republike Slovenije v Novi Ljubljanski banki d.d., by NLB. In accordance with the ZVKNNLB and pursuant to All procedures relating to the receivables of PBZ and ZaBa, as Ljubljana, hereinafter: ‘the ZVKNNLB’) which entered into the agreement between NLB and the Fund, as envisaged by well as NLB’s view on this matter were also discussed with the force on 14 August 2018. In accordance with the ZVKNNLB, the ZVKNNLB (which was concluded on 14 August 2018), NLB ECB as the supervisor of both Croatian banks. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 259 Provisions for legal risks for claims filed by PBZ and ZaBa are impact due to protection provided by the ZVKNNLB. For final not formed, since NLB believes that based on the factual and judgements, NLB Group recognised the liabilities and related legal evaluation there are greater prospects for the court assets which currently amount to approximately EUR 22 proceedings to end in favour of NLB than the opposite. million. They are included within other financial assets (note 5.6.d) and other financial liabilities (note 5.15.d). Regardless of the negative judgements, in the financial statements NLB Group did not recognise the negative b) Provisions for guarantees and commitments Movements in provisions for guarantees and commitments NLB Group Notes 12-month expected credit losses Guarantees and commitments Lifetime ECL not credit-impaired Guarantees and commitments Lifetime ECL credit-impaired Guarantees and commitments Of which: Purchased or originated credit-impaired Guarantees and commitments Balance as at 1 Jan 2021 Effects of translation of foreign operations to presentation currency Transfer Increases/ (Decreases) Changes in models/risk parameters 4.13. 4.13. Foreign exchange differences and other movements 15,796 2,767 23,611 5,057 1 - 1 - 1,388 (1,337) (2,810) (730) (358) (659) (4,239) - (755) (37) 277 - (4) 4 48 42 NLB Group Notes 12-month expected credit losses Guarantees and commitments Lifetime ECL not credit-impaired Guarantees and commitments Lifetime ECL credit-impaired Guarantees and commitments Of which: Purchased or originated credit-impaired Guarantees and commitments Balance as at 1 Jan 2020 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries Transfer Increases/ (Decreases) Changes in models/risk parameters 12,909 2,444 24,068 1,984 (4) (5) 1 - 1,049 - 1,249 1,249 4.13. 1,863 (99) (1,293) 659 (300) (359) - 1,838 4.13. (676) 727 (40) - in EUR thousands Disposal of subsidiary Balance as at 31 Dec 2021 5.16.a) 12,912 1,640 (122) (6) (150) 18,889 - 4,344 in EUR thousands Balance as at 31 Dec 2020 Foreign exchange differences and other movements 5.16.a) 15,796 2,767 23,611 5,057 (4) - (15) (14) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 260 NLB Notes 12-month expected credit losses Guarantees and commitments Lifetime ECL not credit-impaired Guarantees and commitments Lifetime ECL credit-impaired Guarantees and commitments Of which: Purchased or originated credit-impaired Guarantees and commitments NLB Notes 12-month expected credit losses Guarantees and commitments Lifetime ECL not credit-impaired Guarantees and commitments Lifetime ECL credit-impaired Guarantees and commitments Of which: Purchased or originated credit-impaired Guarantees and commitments Balance as at 1 Jan 2021 Transfer Increases/ (Decreases) Changes in models/risk parameters Foreign exchange differences and other movements in EUR thousands Balance as at 31 Dec 2021 7,510 732 20,301 3,808 530 (123) (407) - 4.13. (1,451) (340) (3,698) 186 4.13. (2,683) (129) 273 - 3 1 41 47 5.16.a) 3,909 141 16,510 4,041 Balance as at 1 Jan 2020 Transfer Increases/ (Decreases) Changes in models/risk parameters Foreign exchange differences and other movements in EUR thousands Balance as at 31 Dec 2020 6,145 653 22,365 1,984 193 136 (329) - 4.13. 947 (418) (1,622) 1,838 4.13. 228 363 (97) - (3) (2) (16) (14) 5.16.a) 7,510 732 20,301 3,808 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 261 Movement of contractual amounts of guarantees and commitments in off-balance sheet 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 Total NLB Group NLB in EUR thousands Balance as at 1 January 2021 2,824,750 103,950 46,270 2,974,970 1,896,418 Effects of translation of foreign operations to presentation currency Increases/(Decreases) Foreign exchange differences Transfers Disposal of subsidiary Balance as at 31 December 2021 687 219,688 2,733 (685) (19,202) 3,027,971 24 (4,666) 101 (1,752) (121) 97,536 9 (9,309) 51 2,437 (460) 720 205,713 2,885 - (19,783) - 4,769 2,570 9,815 - 38,998 3,164,505 1,913,572 73,255 - (14,315) 92 (9,930) - 49,102 34,907 2,004,580 - (8,167) 48 115 - - (17,713) 2,710 - - 26,903 1,989,577 in EUR thousands 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 Total NLB Group NLB Balance as at 1 January 2020 2,108,271 112,616 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Increases/(Decreases) Foreign exchange differences Transfers (543) 369,847 368,553 (3,615) (17,763) (56) - (147) 8,473 Balance as at 31 December 2020 2,824,750 103,950 73,196 (3) 7,514 (163) 9,290 46,270 2,294,083 1,575,211 62,429 69,640 1,707,280 (602) 377,361 308,053 (3,925) - - - 346,086 (3,702) (21,177) 2,974,970 1,896,418 - - (6,940) (147) 17,913 73,255 - - (37,834) (163) 3,264 - - 301,312 (4,012) - 34,907 2,004,580 (16,936) (43,564) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 262 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.c) Disposal of subsidiaries Additional provisions (note 4.9.) Provisions released (note 4.9.) Interest expenses (note 4.1.) Utilised during year (payments) Actuarial gains and losses Balance as at 31 December Other employee benefits Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Additional provisions (note 4.9.) Provisions released (note 4.9.) Interest expenses (note 4.1.) Utilised during year Balance as at 31 December NLB Group in EUR thousands NLB 2021 18,162 - - (83) 1,957 (1,831) 177 (532) 1,377 19,227 2021 2,545 - - 222 (275) 25 (297) 2,220 2020 15,320 (2) 3,374 - 983 (560) 76 (151) (878) 18,162 2020 2,384 (1) 179 234 (112) 24 (163) 2,545 NLB Group 2021 12,695 - - - 723 (750) 43 (45) 115 12,781 2021 1,525 - - 100 (132) 5 (73) 1,425 2020 13,165 - - - 672 (433) 27 (36) (700) 12,695 in EUR thousands NLB 2020 1,578 - - 103 (38) 3 (121) 1,525 Other employee benefits include NLB Group’s obligations for jubilee long-service benefits. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 263 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.) Utilised during year Balance as at 31 December NLB Group NLB in EUR thousands 2021 15,565 11 - 14,797 (11,156) 19,217 2020 14,500 (1) (50) 3,500 (2,384) 15,565 2021 15,354 - - - (4,223) 11,131 2020 14,182 - - 3,500 (2,328) 15,354 Following the acquisition of Komercijalna banka a.d. Significant amount of restructuring provisions relates also Beograd in December 2020, NLB Group prepared a plan for to NLB, which has in previous periods adopted a business optimisation of operations, including anticipated merger strategy and initiated key strategic initiatives, aiming of banks in Serbia and decreased number of employees. Therefore in 2021, Serbian banks recognised restructuring among others towards a leaner organisation, optimisation of processes, implementation of a new IT strategy with a provisions in the amount of EUR 14,797 thousand, of which EUR focus on digitalisation and simplification, and adjustment of 6,868 thousand were already utilised during the year. The rest the organisational structure. These initiatives will result in is expected to be paid to employees leaving the bank within decreased number of employees in the coming years. the next twelve months. e) Movements in provisions for legal risks Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.c) Disposal of subsidiaries Additional provisions (note 4.13.) Provisions released (note 4.13.) Utilised during year Balance as at 31 December NLB Group NLB in EUR thousands 2021 46,602 40 - - 16,632 (8,759) (9,227) 45,288 2020 16,627 (8) 28,686 (119) 6,355 (1,659) (3,280) 46,602 2021 5,673 - - - 1,881 (1,809) (2,279) 3,466 2020 2,211 - - - 4,411 (181) (768) 5,673 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 264 f) Movements in other provisions 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 2021 11 - - - 11 2020 162 34 (153) (32) 11 2021 2020 - - - - - 85 - (85) - - NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands Deferred income tax assets Valuation of financial instruments and capital investments 33,002 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 Unpaid dividends Tax losses Tax reliefs Other 5,879 10,128 3,505 320 3,876 253 945 62 37,729 3,190 8,489 4,063 938 - - 1,179 111 31,696 917 2,660 112 - 3,876 - - - 37,650 947 3,138 140 - - - - - Total deferred income tax assets 57,970 55,699 39,261 41,875 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 Net deferred income tax liabilities 12,026 1,374 3,960 3,338 1,340 22,038 38,977 (3,045) 21,023 1,515 3,271 592 1,984 28,385 31,789 (4,475) 6,620 169 570 - - 7,359 31,902 - 11,871 193 597 - - 12,661 29,214 - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 265 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 - tax losses - unpaid dividends - tax reliefs - fair value adjustments of financial assets measured at amortised cost - other Included in other comprehensive income - valuation and impairment of financial assets measured at fair value through other comprehensive income - actuarial assumptions and experience Included in equity - transfer of fair value reserve - valuation of financial assets measured at fair value through other comprehensive income NLB Group NLB in EUR thousands 2021 3,423 (1,024) 2,260 1,453 (338) 253 3,876 (234) (3,413) 590 4,950 4,772 178 368 368 2020 3,238 308 3,108 54 (336) - - - - 104 (1,619) (1,486) (133) - - 2021 112 (3,241) (30) (489) (4) - 3,876 - - - 2,576 2,565 11 - - 2020 540 308 163 75 (6) - - - - - (895) (762) (133) - - Temporary differences on which NLB did not recognise reversed in five years are presented in the table below, deferred tax assets, as related deferred tax assets would together with non-recognised deferred tax assets. exceed the amount of deferred tax assets expected to be NLB Tax loss Tax reliefs Impairments and valuation of capital investments and financial instruments in EUR thousands 31 Dec 2021 31 Dec 2020 Temporary difference Non-recognised deferred tax assets Temporary difference Non-recognised deferred tax assets 974,902 4,329 73,359 185,231 823 13,938 922,898 - 242,861 175,351 - 46,144 Tax loss on which NLB did not recognise deferred tax assets, NLB Group did not recognise deferred tax assets on as at 31 December 2021 amounts to EUR 974,902 thousand temporary differences arising from the impairments of (31 December 2020: 922,898 thousand). Slovenian tax law does not set deadlines by which uncovered tax losses must be investments in subsidiaries and associates where it is not probable that the temporary difference will reverse in the utilised, but the use of tax loss is limited to 50% of the actual foreseeable future. These temporary differences amount to tax base. Other banking members have no unrecognised EUR 315,531 thousand as at 31 December 2021 (31 December deferred tax assets for tax losses. 2020: EUR 347,040 thousand). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 266 b) Movements in deferred income taxes Deferred income tax assets Provisions for liabilities and charges Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets Impairment of financial assets Unpaid dividends Tax losses Tax relief Fair value adjustments of financial assets measured at amortised cost NLB Group Balance as at 1 January 2020 4,109 36,286 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 Effects of translation of foreign operations to presentation currency (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Disposal of subisidiaries Balance as at 31 December 2021 4 54 (133) 4,455 8,489 8 1,453 178 - 10,128 - 188 1,240 15 37,729 - (3,368) (1,359) - 33,002 1,087 - (156) - 3,132 4,063 1 (480) - (79) 3,505 - - - - - - - - - - - - - - - - - - 1,179 1,179 - 3,876 253 (234) - - - - - - 3,876 253 945 910 2 2,247 - 31 3,190 4 2,791 - (106) 5,879 NLB - - - - 938 938 - (618) - - 320 Balance as at 1 January 2020 (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Balance as at 31 December 2020 (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Balance as at 31 December 2021 Provisions for liabilities and charges Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets Impairment of financial assets Unpaid dividends 3,196 75 (133) 3,138 (489) 11 2,660 36,244 188 1,218 37,650 (3,367) (2,587) 31,696 154 (14) - 140 (28) - 112 784 163 - 947 (30) - 917 - - - - 3,876 - 3,876 in EUR thousands Other Total - - 104 - 7 111 2 (51) - - 62 42,392 6 2,437 1,107 9,757 55,699 15 3,622 (1,181) (185) 57,970 in EUR thousands Total 40,378 412 1,085 41,875 (38) (2,576) 39,261 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 267 Deferred income tax liabilities Balance as at 1 January 2020 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 Effects of translation of foreign operations to presentation currency Charged/(credited) to profit and loss Charged/(credited)to other comprehensive income Disposal of subisidiaries Balance as at 31 December 2021 Balance as at 1 January 2020 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2020 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2021 Impairment of financial assets Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets NLB Group 3,270 (7) (861) 696 173 3,271 1 531 157 - 3,960 11,159 - (120) 2,030 7,954 21,023 3 (2,344) (6,656) - 12,026 1,296 (2) 180 - 41 1,515 1 (142) - - 1,374 Other - - - - 1,984 1,984 1 (641) - (4) 1,340 Fair value adjustments of financial assets measured at amortised cost - - - - 592 592 1 2,795 - (50) 3,338 Impairment of financial assets NLB Valuation of financial instruments and capital investments Depreciation and valuation of non- financial assets 477 - 120 597 - (27) 570 10,131 (120) 1,860 11,871 (126) (5,125) 6,620 201 (8) - 193 (24) - 169 in EUR thousands Total 15,725 (9) (801) 2,726 10,744 28,385 7 199 (6,499) (54) 22,038 in EUR thousands Total 10,809 (128) 1,980 12,661 (150) (5,152) 7,359 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 268 5.18. Income tax relating to components of other comprehensive income 2021 NLB Group NLB Before tax Tax expense Net of tax Before tax Tax expense Net of tax in EUR thousands Actuarial gains and losses Financial assets measured at fair value through other comprehensive income Share of associates and joint ventures Total 2020 Actuarial gains and losses Financial assets measured at fair value through other comprehensive income Share of associates and joint ventures Total 5.19. Other liabilities Accrued salaries Unused annual leave Deferred income Taxes payable Payments received in advance Other liabilities Total (1,377) (34,322) (30) (35,729) 178 4,772 - 4,950 (1,199) (29,550) (30) (30,779) (115) (17,742) - (17,857) 11 2,565 - 2,576 (104) (15,177) - (15,281) in EUR thousands NLB Group NLB Before tax Tax expense Net of tax Before tax Tax expense Net of tax 878 10,364 (11,067) 175 (133) (1,486) - (1,619) 745 8,878 (11,067) (1,444) 700 4,012 - 4,712 (133) (762) - (895) 567 3,250 - 3,817 NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 18,615 6,032 11,374 9,450 3,997 - 49,468 19,068 6,137 12,364 5,009 2,195 859 45,632 9,050 2,425 5,257 3,999 308 - 21,039 9,807 2,497 5,391 4,107 199 - 22,001 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 269 5.20. Share capital The share capital of NLB amounts to EUR 200,000 thousand and did not change in 2021. It is comprised of 20,000,000 no- par-value ordinary registered shares, with the corresponding value of EUR 10.0 for one share. All issued shares are fully paid and there are no un-issued authorised shares. As at 31 December 2021, the major shareholder of NLB with significant influence is the Republic of Slovenia, owning 25.00% plus one share. The book value of a NLB share on a consolidated level as at 31 December 2021 was EUR 103.9 (31 December 2020: EUR 97.6), and on solo level was EUR 77.6 (31 December 2020: EUR 72.5). It is calculated as the ratio of net assets’ book value excluding other equity instruments issued and the number of shares. Distributable profit as at 31 December 2021 amounts to EUR 458,266 thousand (31 December 2020: EUR 341,992 thousand), consists of NLB net profit for 2021 in the amount of EUR 208,421 thousand (2020: EUR 113,952 thousand), the transfer of fair value reserve in the amount of EUR 53 thousand on the derecognition of equity financial instruments measured at fair value through OCI and retained earnings from previous years in the amount of EUR 249,792 thousand. Its allocation will be subject to a decision by the Bank’s General Assembly. The proposal for the General Assembly will be prepared by unless such voting instructions are accompanied with a the Management and the Supervisory Board, considering confirmation that the person giving such instructions is the restrictions imposed by the regulators, Group’s risk appetite, beneficial owner of the shares in respect of which votes are target capital adequacy at Group’s level and actual prevailing to be exercised and does not hold in the aggregate, directly capital position at the time of the proposal. or indirectly 25% or more NLB shares with voting rights. The shares give to their holders the right to vote at the NLB’s The shares also give their holders the right to be informed, as meeting of shareholders where, as a rule, each share entitles well as the pre-emptive right to subscribe for new shares on a its holder to one vote. Nevertheless, a shareholder who pro rata basis in case of a share capital increase, the right to acquires shares which, together with the shares already held a pro-rata share of remaining assets in case of bankruptcy or by such shareholder or by a third person on behalf of such liquidation or NLB and the right to receive a dividend. In 2021, shareholder, represent more than 25% of the NLB’s share NLB paid dividends for previous year in the amount of 4.61 EUR capital, may only exercise its voting rights under such shares per share (2020: NLB did not pay out any dividends for previous if NLB’s Supervisory Board approves such an acquisition. year), which decreased retained earnings for EUR 92,200 The Supervisory Board’s approval may only be rejected if, thousand. following such an acquisition, such a person would hold shares representing more than 25% of NLB’s issued share As at 31 December 2021 and 31 December 2020, NLB holds capital plus one share. The approval shall be considered no own shares. In June 2019, the General Assembly of NLB given if not expressly rejected in 20 days. No such approval authorised the Management Board that in the period of 36 is necessary in respect of the shares acquired by a person months from the adoption of the shareholders’ resolution, it on behalf of third persons provided that such a person is can buy own shares of the Bank for the payment of variable not entitled to exercise the voting rights arising out of such remuneration to certain employees as required by the shares at its own discretion and undertakes to NLB that it will Banking Act and other relevant regulations. NLB did not buy not exercise the voting rights based on voting instructions any own shares based on this authorisation. 5.21. Accumulated other comprehensive income and reserves a) Reserves The share premium account as at 31 December 2021 and 31 As at 31 December 2021 and 31 December 2020, profit reserves In 2021, NLB recorded a net profit in the amount of EUR 208,421 December 2020 comprises paid-up premiums in the amount in the amount of EUR 13,522 thousand relate entirely to legal thousand (2020: net profit EUR 113,952 thousand) which is of EUR 822,173 thousand and the revaluation of share capital reserves in accordance with the Companies Act. included in the retained earnings as at 31 December 2021. from previous years in the amount of EUR 49,205 thousand. b) Accumulated other comprehensive income 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 NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 8,540 2,826 (5,488) (17,184) 754 (10,552) 38,852 3,644 (4,399) (17,724) 754 21,127 12,365 99 (3,696) - - 27,242 452 (3,592) - - 8,768 24,102 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 270 NLB Group NLB reflecting a different quality of capital: in EUR thousands European banking capital legislation – CRD IV, is based on the Basel III guidelines. The legislation defines three capital ratios 5.22. Capital adequacy ratios 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 (-) Insufficient coverage for non-performing exposures 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 200,000 200,000 200,000 200,000 871,378 767,152 135,968 (10,091) 13,522 27,905 (3,498) (3,529) (39,116) (90) 871,378 552,146 63,635 21,588 13,522 71,562 (3,632) (3,529) 871,378 249,845 39,613 8,768 13,522 - (1,606) - (33,222) (18,829) - (10) 871,378 228,040 21,658 24,102 13,522 - (1,755) - (9,914) - COMMON EQUITY TIER 1 CAPITAL (CET1) 1,959,601 1,753,448 1,362,681 1,347,031 Minority interest Additional Tier 1 capital TIER 1 CAPITAL 5,950 5,950 14,614 14,614 - - - - 1,965,551 1,768,062 1,362,681 1,347,031 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 284,595 2,344 286,939 284,595 12,806 297,401 - - 284,595 284,595 2,252,490 2,065,463 1,647,276 1,631,626 10,205,172 10,222,923 5,411,433 4,805,127 1,206,363 1,250,563 698,463 657,088 11,850 200 1,244,023 947,342 11,850 586,781 200 566,385 TOTAL RISK EXPOSURE AMOUNT (RWA) 12,667,408 12,421,028 6,708,527 6,028,800 Common Equity Tier 1 Ratio Tier 1 Ratio Total Capital Ratio 15.5% 15.5% 17.8% 14.1% 14.2% 16.6% 20.3% 20.3% 24.6% 22.3% 22.3% 27.1% • Common Equity Tier 1 ratio (ratio between common or CET1 capital and risk-weighted exposure amount or RWA), which must be at least 4.5%; • Tier 1 capital ratio (Tier 1 capital to RWA), which must be at least 6%; and • Total capital ratio (total capital to RWA), which must be at least 8%. In addition to the aforementioned ratios which form the Pillar 1 requirement, NLB must meet other requirements and recommendations that are imposed by the supervisory institutions or by the legislation: • The Pillar 2 Requirement (SREP requirement): bank-specific, obligatory requirement set by the supervisory institution through the SREP process (together with the Pillar 1 requirement it represents the minimum total SREP capital requirement – TSCR); • The applicable combined buffer requirement (CBR): a system of capital buffers to be added on top of TSCR – breaching of the CBR is not a breach of capital requirement, but triggers limitations in the payment of dividends and other distributions from capital. Some of the buffers are specific, set by the supervisory institution (CBR and TSCR together form the overall capital requirement – OCR); • Pillar 2 Capital Guidance: capital recommendation set by the supervisory institution through the SREP process. It is bank-specific and is a recommendation, and not obligatory. Any non-compliance does not affect dividends or other distributions from capital; however, it might lead to intensified supervision and the imposition of measures to re-establish a prudent level of capital (including preparation of capital restoration plan). 284,595 284,595 prescribed by law for all banks and some of them are bank- MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 271 10.75% will be no effect on the capital in case the dividends are paid. NLB’s overall capital requirement on the consolidated level SREP requirement Pillar 1 (P1R) Pillar 2 (P2R) Total SREP Capital Requirement (TSCR) Combined buffer requirement (CBR) Conservation buffer O-SII buffer Countercyclical buffer Overall capital requirement (OCR) = MDA threshold Pillar 2 Guidance (P2G) OCR + P2G CET1 AT1 T2 CET1 Tier 1 Total Capital CET1 Tier 1 Total Capital CET1 CET1 CET1 CET1 Tier 1 Total Capital CET1 CET1 2021 4.5% 1.5% 2.0% 1.55% 2.06% 2.75% 6.05% 8.06% 10.75% 2.5% 1.0% 0.0% 9.55% 11.56% 14.25% 1.0% 10.55% From 12 March 2020 onwards As at 1 January till 11 March 2020 4.5% 1.5% 2.0% 1.55% 2.06% 2.75% 6.05% 8.06% 10.75% 2.5% 1.0% 0.0% 9.55% 11.56% 14.25% 1.0% 10.55% 4.5% 1.5% 2.0% 2.75% 2.75% 2.75% 7.25% 8.75% 2.5% 1.0% 0.0% 10.75% 12.25% 14.25% 1.0% 11.75% The Overall Capital Requirement (OCR) amounted to 14.25% As at 31 December 2021, NLB Group capital ratios on a for NLB on the consolidated basis, consisting of: consolidated basis stand at: • 10.75% TSCR (8% Pillar 1 Requirement and 2.75% Pillar 2 Requirement); and • 15.5% CET1 ratio, • 15.5% Tier 1 ratio, • 3.5% CBR (2.5% Capital Conservation buffer, 1% O-SII buffer • 17.8% Total Capital ratio. and 0% Countercyclical buffer). In the scope of regulatory risks, which include credit Pillar 2 Guidance (P2G) which should be comprised entirely of risk, operational risk, and market risk, NLB Group uses a CET1 capital, remains at a relatively low level 1.0%. standardised approach for credit and market risks, while the calculation of capital requirement for operational risks The Pillar 2 Requirement for 2022 decreased by 0.15 p.p. to is made according to a basic indicator approach. The same 2.60%, as a result of better overall SREP assessment. approaches are used for calculating the capital requirements The capital adequacy of NLB and NLB Group at the end of year of the capital requirement for operational risks where the 2021 remains strong in accordance with risk appetite orientations, standardised approach is used. at a level which covers all the current and announced regulatory capital requirements, including capital buffers and other As at 31 December 2021, the Total Capital Ratio for NLB Group currently known requirements, as well as the P2G. stood at 17.8% (or 1.2 p.p. higher than at the end of 2020), and for NLB on a standalone basis, except for the calculation for NLB at 24.6% (or 2.5 p.p. lower than at the end of 2020). As at 31 December 2021, the CET1 ratio stood at 15.5% (1.4 p.p. higher than at the end of 2020). The higher NLB Group total capital adequacy compared to the end of 2020 derives from higher capital (increase of EUR 187.0 million compared to 31 December 2020) which compensated RWA increase of EUR 246.4 million compared to 31 December 2020 for the Group. Higher RWA derives mainly from the increase of RWA for operational risk. Total capital increased mainly due to inclusion of Negative goodwill in retained earnings in the amount of EUR 137.9 million and partial inclusion of 2021 profit (EUR 136.0 million). The capital calculation as at 31 December 2021 does not include part of the 2021 result in the amount of EUR 100.0 million. Therefore, there The RWA for credit risk decreased by EUR 17.8 million compared to 31 December 2020. On one hand, the factors for increase were loan growth to the corporates and retail, new investments in subordinated, state, and EU institutions bonds. On the other hand, the increase was compensated by regulatory changes, namely the inclusion of Bosnia and Herzegovina and Macedonia on EBA’s third party equivalent list, legislation criteria changes for the CRR collateral adequacy, signing of agreements with MIGA as well as changed investment policy such as the shift of some liquid assets from the central governments to lower risk weighted counterparties (NLB Banka, Prishtina, NLB Banka, Podgorica) or optimisation of deposits with banks (Komercijalna banka, Beograd). Furthermore, successful recovery of NPL clients, where the biggest part represented repayments by a large client, contributed to the RWA decrease, while in contrast, the RWA for high-risk exposures is higher mainly due to new project finance loans. The RWA for market risk decreased by EUR 32.6 million compared to 31 December 2020 due to the lower fixed income position in the trading book. And yet, RWA for FX risk increased by EUR 35.3 million compared to 31 December 2020, and RWA for CVA increased by EUR 10.7 million – of which EUR 10.6 million as a result of new regulatory requirements which became effective from June 2021 onward (calculation of original exposure method (OEM) with residual maturity). The increase in the RWA for operating risks (EUR 296.7 million compared to 31 December 2020) derives from the higher three-year average of relevant income, as defined in Article 316 of CRR, which represents the basis for the calculation. The main reason for increased relevant income was the acquisition of Komercijalna banka Beograd in 2020. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 272 The most important goal of internal capital adequacy assessment into the overall risk management system in order to assure Group. Within these capital constraints, NLB Group defines its process (ICAAP) in NLB Group, set up in accordance with ECB proactive support for informed decision-making. management buffers in the Risk appetite above the regulatory Guidelines, is ensuring adequate capital and sustainability on and supervisory requirement and internal capital needs that an ongoing basis. The purpose of this process is to have in place From an economic perspective, NLB Group manages its allow it to sustainably follow its business strategy. A normative sound, effective, and comprehensive strategies and processes capital adequacy by ensuring that all its risks are adequately perspective includes several stress scenarios which are to assess and maintain capital on an ongoing basis, as well the covered by internal capital. A normative perspective is a integrated into NLB Group’s annual business plan review and adequate distribution of internal capital for covering the nature multiyear forward-looking assessment of NLB Group which budgeting process. and level of the risks to which NLB Group is or might be exposed. shows its ability to fulfil all of its capital-related regulatory In addition, NLB Group gives strong emphasis on its integration and supervisory requirements and risk appetite of NLB MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 5.23. Off-balance sheet liabilities a) Contractual amounts of off-balance sheet financial instruments Short-term guarantees - financial - non-financial Long-term guarantees - financial - non-financial Loan commitments Letters of credit Other Provisions (note 5.16.b) Total NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 258,975 139,732 119,243 977,759 393,901 583,858 1,878,988 35,615 13,167 222,440 119,309 103,131 904,002 359,787 544,215 1,816,441 21,794 10,293 3,164,504 2,974,970 (33,441) 3,131,063 (42,174) 2,932,796 112,758 63,188 49,570 614,343 226,747 387,596 1,259,489 1,950 1,037 1,989,577 (20,560) 1,969,017 122,136 61,322 60,814 567,532 196,681 370,851 1,306,791 2,256 5,865 2,004,580 (28,543) 1,976,037 Fee income from issued non-financial guarantees amounted to EUR 7,578 thousand (2020: EUR 4,910 thousand) in NLB Group, in accordance with the Capital Requirements Regulation (credit and other lines which can be irrevocably cancelled by and to EUR 4,547 thousand (2020: EUR 4,397 thousand) in NLB. a bank). As at 31 December 2021 these items at the NLB Group In addition to the instruments presented in the table above, EUR 307,093 thousand), and at the NLB level EUR 302,063 NLB Group and NLB have also some low-risk off-balance thousand (31 December 2020: EUR 236,542 thousand). sheet items, for which 0% credit conversion factor is applied level amount to EUR 372,403 thousand (31 December 2020: Contents 273 b) Analysis of derivative financial instruments by notional amounts NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 Short-term Long-term Short-term Long-term Short-term Long-term Short-term Long-term in EUR thousands Swaps - currency swaps - interest rate swaps Options - interest rate options - securities options Forward contracts - currency forward 99,349 99,349 - 9,880 - 9,880 38,825 38,825 1,284,832 16,844 1,267,988 30,945 30,945 - 26,921 26,921 99,420 99,420 - 12,811 - 12,811 91,309 91,309 1,425,765 6,068 1,419,697 27,000 27,000 - 41,423 41,423 109,137 109,137 - 9,880 - 9,880 37,511 37,511 1,284,832 16,844 1,267,988 30,945 30,945 - 26,921 26,921 Total 148,054 1,342,698 203,540 1,494,188 156,528 1,342,698 78,413 78,413 - 12,811 - 12,811 93,846 93,846 185,070 1,425,765 6,068 1,419,697 27,000 27,000 - 41,423 41,423 1,494,188 1,490,752 1,697,728 1,499,226 1,679,258 The notional amounts of derivative financial instruments that The fair values of derivative financial instruments are qualify for hedge accounting at NLB Group and NLB amount disclosed in notes 5.2. and 5.5. to EUR 572,455 thousand (31 December 2020: EUR 573,753 thousand) (note 5.5.b). Derivatives that qualify for hedge accounting are used to hedge interest rate risk. c) Capital commitments Capital commitments for purchase of: - property and equipment - intangible assets Total NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 1,696 4,243 5,939 2,433 9,566 11,999 1,623 4,094 5,717 2,429 9,403 11,832 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 274 5.24. Funds managed on behalf of third parties Funds managed on behalf of third parties are accounted respective fund, and no liability falls on NLB Group in connection with these transactions. NLB Group charges fees separately from NLB Group’s funds. Income and expenses for its services. arising with respect to these funds are charged to the Funds managed on behalf of third parties Fiduciary activities Settlement and other services Total Fiduciary activities Assets Clearing or transaction account claims for client assets - from financial instruments - receipt, processing, and execution of orders - management of financial instruments portfolio - custody services - 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 Clearing or transaction liabilities for client assets - to client from cash and financial instruments - receipt, processing, and execution of orders - management of financial instruments portfolio - custody services - 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. in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 26,165,580 25,713,799 24,806,894 24,466,910 1,079,500 971,600 977,197 907,132 27,245,080 26,685,399 25,784,091 25,374,042 NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 26,071,589 26,024,700 10,085,409 588,761 25,633,706 25,630,244 9,194,539 528,206 24,741,052 24,694,275 9,346,002 - 24,396,203 24,392,773 8,502,331 - 15,350,530 15,907,499 15,348,273 15,890,442 180 46,709 94,934 75,151 19,783 49 3,413 80,094 42,029 38,065 68 46,709 65,842 46,059 19,783 17 3,413 70,707 32,642 38,065 26,165,580 26,129,503 10,110,124 591,772 25,713,799 25,707,581 9,230,406 537,283 24,806,894 24,797,057 9,371,707 - 24,466,910 24,461,033 8,538,198 - 15,427,607 15,939,892 15,425,350 15,922,835 3,865 31,825 387 72 5,755 391 134 9,316 387 72 5,414 391 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 275 Fee income for funds managed on behalf of third parties in EUR thousands category in NLB Group, concentrates on taking moderate risks – a diversified credit portfolio, adequate credit portfolio quality, the sustainable costs of risk, and ensuring an optimal return considering the risks assumed. As regards liquidity risk, NLB Group NLB the tolerance is low, while the activities are geared towards Fiduciary activities (note 4.3.b) Settlement and other services Total 2021 11,385 1,567 12,952 2020 9,812 925 10,737 2021 8,911 1,552 10,463 2020 8,494 864 9,358 6. Risk management Risk management in NLB Group is implemented in accordance with the set strategic guidelines, established internal policies, and procedures which take into account European banking regulations, the regulations adopted by the Bank of Slovenia, the current EBA guidelines, and relevant good banking practices. In addition, the Group is constantly enhancing and complementing the existing approaches, methodologies, and processes in all risk management segments with the aim to proactively support decision-making. Managing risks and capital efficiently is crucial for NLB Group sustained long-term profitable operations. Robust Risk Management framework is comprehensively integrated into decision-making, steering, and mitigation processes within the Group. NLB Group gives high importance to the risk culture and awareness of all relevant risks within the entire Group. NLB Group’s Risk management framework supports business decision-making on strategic and operating levels, comprehensive steering, proactive risk management, and mitigation by incorporating: • risk appetite statement and risk strategy orientations; • yearly review of strategic business goals, budgeting, and capital planning process; • internal capital adequacy assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP); • recovery plan activities; Risk management function acts as a second line of defence. Set governance and different risk management tools enable adequate oversight of the Group’s risk profile. Moreover, they support business operations and enable efficient risk management by incorporating escalation procedures and different mitigation measures when necessary. a) Risk management strategies and processes The key goal of NLB Group’s Risk Management is to proactively manage, assess, and monitor risks within the Group. Sound and holistic understanding of risk management is embedded into the entire organisation, focusing on risk identification at a very early stage, efficient risk management, and mitigation of them with the aim of ensuring the prudent use of its capital and adequate liquidity structure to support the financial resilience of the Group. Key strategic risk management principles of NLB Group are defined by its Risk Appetite and Risk Strategy, designed in accordance with the Group’s business model, integrating forward-looking perspective. The Strategy of NLB Group, the Risk Appetite, Risk Strategy, and the key internal policies of NLB Group – which are approved by the Management and Supervisory Boards – specify the strategic goals, risk appetite guidelines, approaches, and methodologies for monitoring, measuring, and managing all types of risk in order to meet internal strategic objectives and fulfil all external requirements. The main strategic risk guidelines are comprehensively integrated into decision-making, including • other internal stress-testing capabilities, early warning the business plan review and budgeting process. systems, and regular risk analysis; • regulatory and internal management reporting. NLB Group uses the ‘three lines of defence framework’ as an important element of its internal governance, whereby the NLB Group plans a prudent risk profile and optimal capital usage, representing an important element of its business strategy and related mid-term financial targets. The management of credit risk, which is the most important risk ensuring an adequate liquidity position on an ongoing basis. The Group limited exposure to credit spread risk, arising from the valuation risk of debt securities portfolio servicing as liquidity reserves, to moderate level. The fundamental orientation in the management of interest rate risk is to limit unexpected negative effects on revenues and capital, therefore, a moderate tolerance for this risk is stated. When assuming operational risk, the Group pursues the orientation that such a risk must not significantly impact its operations. On this basis, changes of control activities, processes, and/ or organisation are performed. Besides the Group also focuses on proactive mitigation, prevention, and minimisation of potential damage. The conclusion of transactions with derivative financial instruments at NLB is primarily limited to servicing customers and hedging Bank’s own positions. In the area of currency risk, NLB Group pursues the goals of low to moderate exposure. The tolerance for other risk types is low and focuses on minimising their possible impacts on NLB Group’s entire operations. Environmental, social, and governance (ESG) risks do not represent a new risk category, but rather an aggravating factor for the types of risks, not least credit and operational risk. The Group integrates and manages them within the established risk management framework. The management of ESG risks follows ECB and EBA guidelines with the tendency to comprehensively integrate them into all relevant processes. The availability of ESG data in the region where NLB Group operates is still lacking. Nevertheless, the Group strives to obtain relevant clients’ data as prerequisite for adequate decision-making and the corresponding proactive management of ESG risks. Risk management focuses on managing and mitigating risks in line with the Group’s Risk Appetite and Risk Strategy. Within these frameworks, the Group monitors a range of risk metrics, including internal capital allocation, in order to assure Group’s risk profile is in line with its risk appetite. The usage of risk limits and potential deviations from limits and target values are regularly reported to the respective committees and/or the Management Board of the Bank. The banking subsidiaries within NLB Group adapted a corresponding approach to monitor and manage their target risk profiles. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 276 NLB Group established a comprehensive stress-testing framework NLB Group established three lines of a defence framework their decision, following which the Credit Committee of NLB and other early warning systems in different risk areas with the with the aim of managing risks effectively. The three lines of gives their opinion. The resolution of the Credit Committee intention to strengthen the existing internal controls and timely defence concept provides a clear division of activities and of NLB is made on the basis of all available documentation, response when necessary. Robust and uniform stress-testing defines roles and responsibilities for risk management at including a non-binding rating opinion prepared by the programme includes all material types of risk and relevant stress different levels within the Group. Risk management in the underwriting department of NLB. This same principle and scenario analysis, according to the vulnerability of the Group’s Group acts as a second line of defence, accountable for process is set also for the issuing of credit exposures for the business model. In 2021, the Group established own ESG stress appropriate managing, assessing, monitoring, and reporting materially important clients of NLB Group. testing concept to identify most relevant financial vulnerabilities of risks in the Bank as the main entity in Slovenia, and as the stemming from climate risk. Stress-testing is integrated into the risk competence centre in charge of seven banking members and Risk monitoring in NLB Group members is operating within appetite, ICAAP, ILAAP, Recovery Plan, and budgeting process to other non-core subsidiaries which are in a controlled wind- an independent and/or separate organisational unit. This support proactive management of the Group’s risk profile, namely out. the capital and liquidity positions in a forward-looking perspective. way, monitoring of risks is established based on standardised and systemic risk management approaches. This monitoring In addition, the Group also performs reverse stress tests with Overall, the organisation and delineation of competencies enables a comprehensive overview of the Group’s and of each the aim to test its maximum recovery capacity. Other partial risk in NLB Group’s risk management structure is designed member’s statement of financial position. In compliance with assessments are covered by other risk analysis, based on relevant to prevent conflicts of interest and ensure a transparent the risk appetite, risk management strategy and policies of risk parameters, and integrated into the process of setting a risk and documented decision-making process, subject to an NLB Group, risk monitoring in each NLB Group member is management limit system. appropriate upward and downward flow of information. separated from its management and/or business function to Risk management in NLB Group is managed within the maintain the objectivity required when assessing business For the purpose of an efficient risk mitigation process, Risk management competence line, which is a specialised decisions. The organisational unit for managing risks directly NLB Group applies a single set of standards to retail and competence line encompassing several professional areas reports to the Management Board and its committees (Credit corporate loan collateral, representing a secondary source for which the Global Risk Department, the Credit Risk – Committee, ALCO and the Operational Risk Committee), which of repayment with the aim of efficient credit risk management Corporate Department, the Credit Risk – Retail Department report to the Supervisory Board (the Risk Committee of the and optimal capital consumption. The Group has a system and the Evaluation and Control Department are responsible Supervisory Board or Board of Directors). for monitoring and reporting collateral at fair (market) value within NLB, and which reports to the Assets and Liabilities in accordance with the International Valuation Standards Committee (ALCO) of the Management Board and the Risk (IVS). The eligibility of collateral, by types and ratios referring Committee of the Supervisory Board. The risk management c) Risk measurement and reporting systems As a systemic banking group, NLB Group is subject to the to prudent lending criteria, is set within internal lending competence line is in charge of formulating and controlling Single Supervisory Mechanism (SSM), which is supervised guidelines. Credit risk mitigation principles and rules in NLB the risk management policies of NLB Group, setting limits, by the Joint Supervisory Team (JST) of the ECB and the Group are described in more relevant details in the section establishing methodologies, overseeing the harmonisation of Bank of Slovenia. The Group member complies with the ECB ‘Credit risk management.’ When hedging market risks, namely risk management policies within the NLB Group, monitoring regulation, while NLB Group subsidiaries operating outside interest rate risk and foreign exchange risk, in line with the set NLB Group’s risk exposures, and preparing external and Slovenia are also compliant with the rules set by the local risk appetite, NLB Group follows the principle of natural hedge internal reports. or using derivatives in line with hedge accounting principles. regulators. A third-party equivalent was approved in Serbia, Bosnia and Herzegovina, and North Macedonia, resulting in b) Risk management structure and organisation NLB Group’s corporate governance framework is based statements of NLB Group, report their exposure to risks to the capital adequacy, based on the provisions of the Directive competent organisational units within the Risk management (CRD), Decision (CRR), NLB Group applies a standardised on the principles of sound and responsible governance, in competence line. These organisational units then report approach to credit and market risk, and the basic approach accordance with the applicable legislation of the Republic all relevant risk information to the Assets and Liabilities (a simplified approach with less data granularity) to of Slovenia, particularly the provisions of the Companies Act Committee (ALCO) of the Management Board and the Risk operational risks, with the exception of NLB which applies the All members of NLB Group that are included in the financial alignment of local regulation with CRR rules. With regards to (ZGD-1) and the Banking Act (ZBan-3), Regulation on Internal Committee of the Supervisory Board, which is where the standardised approach. Governance Arrangements, the Management Body, and the Management Board and the Supervisory Board, adopt Internal Capital Adequacy Assessment Process for Banks and appropriate measures. Savings Banks, the EBA Guidelines on internal governance, Across the Group, risks are assessed, monitored, managed, or mitigated in a uniform manner, as defined in the Group’s the EBA Guidelines on the assessment of the suitability of The credit ratings of clients that are materially important Risk management standards, considering also the specifics members of the management body, and key function holders, to NLB Group and the issuing of credit risk opinions are of the markets in which individual NLB Group members as well as the EBA Guidelines on remuneration practices. centralised via the Credit Committee of NLB. The process operate. For the purposes of measuring exposure to credit Several layers of management provide cohesive risk follows the co-decision principle, in which the credit risk, liquidity risk, interest rate, and credit spread risk in management governance in NLB Group. committee of the respective Group member first approves the banking book, operational risk, market risk, and non- MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 277 financial risks, in addition to the prescribed regulations, NLB The NLB Group gives special focus on the inclusion of risk liabilities to NLB Group. For that reason, it proactively and Group uses internal methodologies and approaches that analysis into the decision-making process on strategic and comprehensively monitors and assesses the aforementioned enable more detailed monitoring and management of risks. operating levels, diversification in order to avoid a large risk. In that process, NLB Group follows the International These internal methodologies are aligned with ECB, EBA, concentration, optimal usage of internal capital, appropriate Financial Reporting Standards, regulations issued by the and Basel guidelines, as well as best practices in banking risk-adjusted pricing, regular education/trainings at all levels European Central Bank or Bank of Slovenia, and the EBA methodologies. of management, and the assurance of overall compliance with guidelines. This area is governed in greater detail by the internal policies/rules and relevant regulations. internal methodologies and procedures set out in internal As for risk reporting, NLB Group’s internal guidelines reflect, acts. in addition to internal requirements, the substance and COVID-19 did not have a meaningful impact on the quality of frequency of reporting required by the Bank of Slovenia the credit portfolio. NLB Group is compliant with EBA guidelines Through regular reviews of the business practices and the and the ECB. In addition, each member of NLB Group also on payment moratoria and is very prudent in identifying any credit portfolios of NLB entities, NLB ensures that the credit complies with the requirements of its local regulations. increase in credit risk. The vast schemes introduced by the risk management of those entities function in accordance Risk reporting is carried out in the form of standardised governments in the Group countries providing moratoriums with NLB Group’s risk management standards to enable reports, pursuant to risk management policies based on to eligible clients as part of the COVID-19 pandemic measures meaningfully uniform procedures at the consolidated level. common methodologies for measuring exposure to risks, had been phasing out during the 2021. Though COVID-19 uniform database structure within Data Warehouse (DWH), coupled with its implications on the business environment the NLB Group manages credit risk at two levels: comprehensive data quality assurance, and automated Group faced growing excess liquidity and managed to stay well • At the level of the individual customer/group of customers report preparation, which ensures the quality of reports and capitalised. Besides, the Group has taken necessary measures appropriate procedures are followed in various phases of reduces the possibility of errors. to protect its customers and employees by ensuring the relevant the relationship with a customer prior to, during, and after d) Data and IT system Risk data are calculated and stored in NLB Group DWH, safety conditions and making sure that the services offered by the conclusion of an agreement. Prior to concluding an the Group are provided without any disruption. agreement, a customer’s performance, financial position, and past cooperation with NLB are assessed. To objectively collected from NLB and other Group member’s DWH. The NLB Group is engaged in contributing to sustainable finance assess a client’s operation, internal scoring models for established process provides an integrated information by incorporating environmental, social, and governance particular client segments or product types have been in common reference structure where business users can (ESG) risks into its business strategies, risk management developed. It is also important to secure high-quality access in a consistent and subject-oriented format. Data are framework, and internal governance arrangements. With the collateral even though it does not affect a customer’s credit regularly checked and validated. Data used for internal risk adoption of the NLB Group Sustainability programme, NLB rating. This is followed by various forms of monitoring assessment, management, and reporting are the same as Group implemented sustainability elements into its business a customer, in particular an assessment of its ability to data which NLB Group uses for regulatory reporting. model. Thus, sustainable finance integrates ESG criteria into generate sufficient cash flows for the regular settlement of e) Main emphasis of risk management in 2021 Efficient managing of risks and capital remains crucial the Group’s business and investment decisions for the lasting its liabilities and contractual obligations. In this part of the benefit of the Group’s clients and society. The NLB Group credit process, regular monitoring of clients within the Early Sustainability Committee oversees the integration of the ESG Warning System (EWS) is important. In the case of client for NLB Group to sustain long-term profitable operations. factors to the NLB Group business model. The management default, restructuring or work-out is initiated depending on The Group further enhanced the robustness of its risk of ESG risks addresses the NLB Group’s overall credit the severity of the client’s position. management system in all respective risk categories in approval process and related credit portfolio management. order to manage them proactively, comprehensively, It follows ECB and EBA guidelines with a tendency of their • The quality and trends in the credit portfolio, including and prudently. Risk identification in a very early stage, comprehensive integration into all relevant processes. The on-balance and off-balance sheet exposures, are actively its efficient managing, and the corresponding mitigation availability of ESG data in the region where NLB Group monitored and analysed at the level of the overall portfolio processes represent essential steps in such a system. The operates is still lacking, nevertheless, the NLB Group strives of NLB Group and single banking entities. business and operating environment relevant for NLB Group to obtain relevant clients’ data as prerequisite for adequate operations is changing with trends, such as: changing decision-making. In addition, the NLB Group carefully Comprehensive analyses are regularly performed to assure customer behaviours, emerging new technologies and considers potential reputation and liability risks which could monitoring of the portfolio quality through time and to competitors, sustainable financing, actively contributing to arise from sustainable financing of its clients. identify any breach of limits or targets. Great emphasis is a more balanced and inclusive economic and social system, and increasing new regulatory requirements. Respectfully, the risk management framework is regularly adapted with the aim of detecting and managing new potential 6.1. Credit risk management a) Introduction In its operations, NLB Group is exposed to credit risk, or placed on the evolution of portfolio structure in terms of client segmentation, credit rating structure, structure by stages (based on IFRS 9), and NPL ratios. Furthermore, the coverage of NPL is an important indicator of potential future losses that emerging risks. the risk of losses due to the failure of a debtor to settle its is closely monitored. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 278 Apart from analysing the portfolio as a whole, vintage of default (PD) and loss given default (LGD), which are range of advanced approaches supported by mathematical analysis is used to monitor the quality of new loans production calculated using historic data and statistical modelling, as and statistical models in credit risk assessment in line with and test the conservativity of the lending standards, which well as predicted macroeconomic parameters for different best banking practises, while at the same time enabling faster should ensure the portfolio quality is maintained within the scenarios. For off-balance financial assets, the probability of responsiveness towards clients. Group Risk Appetite. the redemption of guarantees is considered when creating collective provisions. The models used to estimate future risk Lending growth in the corporate segment remained relatively Apart from default risk, the portfolio management is parameters are validated and back-tested on a regular basis moderate, while the SME and retail segment experienced a also focused on monitoring single name and industry to make loss estimations as realistic as possible. considerable growth in 2021 after a temporary slowdown in concentration, migration, and FX lending risk. Increasing 2020 due to COVID-19 circumstances. After the acquisition emphasis is also placed on stress tests that forecast the The management of ESG risks addresses the Group’s of Komercijalna banka as at 30 December 2020, the Bank effects of negative macroeconomic movements on the overall credit approval process and related credit portfolio worked actively on harmonisation of risk management portfolio, on the level of impairments and provisions, and on management. Sustainable financing is implemented through methodologies with the NLB Group. Credit portfolio remains capital adequacy. Capital requirements for credit risk at NLB amended documentary framework: well-diversified, there is no large concentration in any specific Group level within the first pillar are calculated according to • Lending Policy for Non-Financial Companies in NLB d.d. and industry or client segment. The share of retail portfolio in the the Standardised approach, while within the second pillar an NLB Group where in special Chapter Environmental and whole credit portfolio is quite substantial with still prevailing internal IRB approach is used to estimate the RWA for default, Social Framework three categories are defined (prohibited, segment of mortgage loans. migration, and FX lending risk. In addition, a single name restricted, normal activities) concentration add-on is based on the Granularity adjustment • Policy Environmental and Social Transaction Framework in COVID-19 did not have a meaningful impact on the quality methodology and an industry concentration add-on is NLB d.d. and NLB Group applies to certain transactions with of the credit portfolio. The vast schemes introduced by the estimated based on the HHI concentration indexes. greatest potential for significant E&S impact (exclusion list, governments in the Group countries providing moratoriums regulatory compliance check, category A list). to eligible clients as part of the COVID-19 pandemic measures NLB and other NLB Group members assess the level of credit • Methodology Environmental and Social Transaction had been phasing out during the 2021. risk losses on an individual basis for material claims, and at Categorisation Methodology Framework in NLB d.d. and the collective level for the rest of the portfolio. NLB Group that provides a guide to the typical level of In addition to moratoria, the governments in Serbia and inherent environmental and social risk according to NACE Slovenia provided public guarantee schemes for new An individual review is performed for material Stage 3 codes. financial assets which have been rated as non-performing financing of clients whose business has been materially impacted due to the COVID-19 pandemic; none of the based on the information regarding significant financial Beside addressing ESG risks in all relevant stages of the guarantees have been exercised. problems encountered by a customer, regarding actual credit-granting process relevant ESG criteria were considered breaches of contractual obligations such as arrears in also in the collateral evaluation process. On portfolio level the In 2021, the Group’s credit portfolio quality remained solid the settlement of liabilities, whether financial assets will Group does not face any large concentration towards specific with a stable rating structure and diversified portfolio. Great be restructured for economic or legal reasons, and the NACE industrial sectors exposed to climate risk, whereby the emphasis was placed on intensive and proactive handling likelihood that a customer will enter bankruptcy or a financial role of transitional risk is more prevailing. The availability of problematic customers and early warning system for reorganisation. Expected future cash flows (from ordinary of ESG data in the region where NLB Group operates is still detecting increased credit risk at a very early stage. The operations and possible redemption of collateral) are lacking, nevertheless the Group strives to obtain relevant stock of NPE volume decreased, as a result of active workout assessed following an individual review. If their discounted clients’ data as prerequisite for adequate decision-making. management. As at 31 December 2021, the share of non- value differs from the book value of the financial asset in question, impairment must be recognised. b) Main emphasis in 2021 In the process of constantly complementing and enhancing 1.7% (2.8% at the end of 2020). Moreover, the coverage ratio remains high at 57.9%, which is well above the EU average performing exposure by EBA methodology in NLB Group was Collective ECL allowances are made for the remainder of credit risk management, NLB Group focuses on taking published by the EBA (45.1% in 3Q 2021). the portfolio, which is not assessed on an individual basis. moderate risks, and at the same time ensuring an optimal Based on IFRS 9 requirements, financial assets measured at return considering the risks assumed. Preserving high credit amortised cost or at fair value through other comprehensive portfolio quality represents the most important key aim, income are attributed to the appropriate stage based on the with a focus on the quality of new placements leading to estimated increase of credit risk of a single exposure since a diversified portfolio of customers. The Group is actively initial recognition. The stage of financial assets determines present on the market in the region, financing existing and whether a 12-month or lifetime ECL must be considered. The new creditworthy clients. To further enhance existing risk ECL calculation is based on the forward-looking probability management tools, the Group is constantly developing a wide MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 279 c) Maximum exposure to credit risk 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 at fair value through other comprehensive income Financial assets at amortised cost Debt securities Loans to governments Loans to banks Loans to financial organisations Loans to individuals Loans to other customers Other financial assets Derivatives - hedge accounting in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 5,005,052 3,961,812 3,250,437 2,261,533 7,678 4,261 84,855 27,233 7,682 7,888 18,831 30.935 3,395,261 3,446,491 1,541,042 1,671,204 1,717,626 281,010 140,683 141,709 5,519,290 4,645,112 122,229 568 1,503,087 1,436,424 1,277,880 368,400 197,005 158,871 4,933,093 4,159,496 113,138 - 143,864 199,287 226,144 2,656,935 2,118,210 92,404 568 170,742 158,320 177,198 2,377,770 1,838,468 54,503 - Total net financial assets 20,980,479 18,953,481 11,680,885 10,037,384 Guarantees Financial guarantees Non-financial guarantees Loan commitments Other potential liabilities 1,236,734 533,633 703,101 1,878,988 48,782 1,126,442 479,096 647,346 1,816,441 32,087 727,101 289,935 437,166 1,259,489 2,987 689,668 258,003 431,665 1,306,791 8,121 Total contingent liabilities 3,164,504 2,974,970 1,989,577 2,004,580 Total maximum exposure to credit risk 24,144,983 21,928,451 13,670,462 12,041,964 Maximum exposure to credit risk is a presentation of NLB their net book value as reported in the statement of financial Group’s exposure to credit risk separately by individual types position, and for off-balance sheet items in the amount of their of financial assets and contingent liabilities. Exposures stated nominal value. in the above table are shown for the balance sheet items in MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 280 d) Collateral from financial assets that are credit-impaired 31 Dec 2021 NLB Group in EUR thousands 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 financial assets Fair value of collateral Net value of financial assets Fair value of collateral 32,372 79,120 127 111,619 122,205 446,308 6,661 575,174 18,718 23,364 2,098 44,180 7,645 23,694 32 31,371 31 Dec 2020 NLB Group in EUR thousands 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 financial assets Fair value of collateral Net value of financial assets 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 2021 NLB in EUR thousands 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 financial assets Fair value of collateral Net value of financial assets Fair value of collateral 17,785 21,490 6 39,281 49,518 117,862 408 167,788 8,114 4,037 22 12,173 3,924 4,478 5 8,407 31 Dec 2020 NLB in EUR thousands Financial assets at amortised cost Loans to individuals Loans to other customers Other financial assets Total Fully/over collateralised financial assets Net value of financial assets Fair value of collateral Financial assets not or not fully covered with collateral Net value of financial assets Fair value of collateral 17,359 30,058 7 47,424 45,756 116,073 448 162,277 11,431 6,081 70 17,582 2,672 20,757 44 23,473 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 281 e) Collateral from loans mandatorily at fair value through profit or loss in EUR thousands NLB Group Fully/over collateralised loans 31 Dec 2021 31 Dec 2020 Net value of loans Fair value of collateral Net value of loans Fair value of collateral Loans mandatorily at fair value through profit or loss - - 25,076 47,725 f) Credit protection policy NLB Group applies a single set of standards to retail and corporate loan collateral, as developed by NLB Group members in accordance with regulatory requirements. The master document regulating loan collateral in the NLB Group is the Loan Collateral Policy in NLB d.d. and NLB Group. The Policy has been adopted by the Management Board of NLB Group. The Policy represents the basic principles that NLB Group’s employees must take into account when signing, evaluating, monitoring, and reporting collateral, with the aim of reducing credit risk. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 31 Dec 2021 NLB repay the contractual obligations. In line with the policy, the primary source of loan repayment is the debtor’s solvency, and the accepted collateral is a in EUR thousands secondary source of repayment in case the debtor ceases to Loans mandatorily at fair value through profit or loss 4,198 4,500 3,690 2,050 Fully/over collateralised loans Loans not or not fully covered with collateral Net value of loans Fair value of collateral Net value of loans Fair value of collateral NLB Group primarily accepts collateral complying with the Basel II requirements with the aim of improving credit risk management and consuming capital economically. In accordance with Basel II, collateral may consist of pledged deposits, government guarantees, bank guarantees, debt securities issued by central governments and central banks, bank debt securities, and real-estate mortgages (the real in EUR thousands estate must be, beside other criteria, located in the European 31 Dec 2020 NLB Loans mandatorily at fair value through profit or loss 22,989 43,620 7,946 1,787 Fully/over collateralised loans Loans not or not fully covered with collateral Net value of loans Fair value of collateral Net value of loans Fair value of collateral Economic Area or in country recognised in EBA’s third party equivalent list for the effect on capital to be recognised). Loans made to companies and sole proprietors may be secured by other forms of collateral, as well (e.g., a lien on movable property, a pledge of an equity stake, investment coupons, collateral by pledged/assigned receivables, etc.) if it is assessed that the collateral could generate a cash flow if it were needed as a secondary source of payment. If there is of a lower probability that this type of collateral would generate a cash flow, NLB Group takes a conservative approach and accepts the collateral while reporting its value as zero. g) The processes for valuing collateral In compliance with relevant regulations, NLB Group has established a system for monitoring and reporting collateral at fair (market) value. The market value of real estate used as collateral is obtained from valuation reports of licensed appraisers. The market value of movable property is obtained from valuation reports of licensed appraisers or from sales agreements. Both, valuation reports and sales agreements must not be older than one year. In NLB and members of NLB Group, most Contents 282 reports of external real estate appraisers are controlled. exposures, real-estate evaluations must also be reviewed by a storeyed property intended for living in or performing Controls are performed by internal appraisers. The subject of an internal licensed appraiser with knowledge of the local a business activity, such as land in the area foreseen for control is the content, value, scope, and format of the report, real-estate market. If the appraisal does not correspond to the construction, apartments, residential buildings, garages its compliance with international valuation standards, and international valuation standards or if the value adjustment is and holiday homes, business premises, industrial buildings, the estimated value. If they notice deviations, they estimate greater than certain limit, the appraisal is rejected as inadequate. offices, shops, hotels, branches and warehouses, forests, needed correction of the value of the external valuation (in parking spaces, etc. Objects can be completed or under %) and correct the value of the external valuation. The value When assuring collateral, NLB Group follows the internal construction. Priority is given to property where the pledge adjustment can only be negative and can be applied only in regulations which define the minimum security or pledge right of the Bank is entered in the first place and real estate a limited range. For the purposes of business decisions and ratios. NLB Group strives to obtain collateral with a higher is already owned by the debtor and/or the pledger. For real the calculation of the necessary impairments and provisions, value than the underlying exposure (depending on the estate, there must be a market, and it must be redeemable additional deductions (haircuts) are applied to the eventual borrower’s rating, loan maturity, etc.) with the aim of reducing within a reasonable time; adjusted market value, depending on the type of collateral. negative consequences resulting from any major swings • Collateral in the form of movable property: priority is given These haircuts for purpose of liquidation value are for real in market prices of the assets used as collateral. If real to the types of movable property, that are highly likely to be estate in the range of 30 to 70%, depending on the type of real estate, movable property, and financial instruments serve sold in the event of execution, and the funds received are estate and location, and for movables they range between 50 as collateral, NLB Group’s lien on such assets should be top used to repay the collateralised claims (their market value and 100%, depending on the type of movable. ranking. Exceptionally, where the value of the mortgaged real must be estimated with considerable reliability). Among the estate is large enough, the lien can have a different priority appropriate types of movable property, the Bank includes The market value of financial instruments held by NLB Group order. is obtained from the organised market – such as the stock motor vehicles, agricultural machinery, construction machinery, production lines and series-produced machines, exchange, for listed financial instruments or determined NLB Group monitors the value of collateral during the loan and some custom-made production machines; in accordance with the internal methodology for unlisted repayment period in accordance with the mandatory periods • Collateral by a pledge of financial assets (Bank deposits or financial instruments (such collateral is used exceptionally and internal instructions. For example, the value of collateral cash-like instruments, debt securities of different issuers, and on a small scale in loans granted to companies and sole using mortgaged real estate is monitored annually by either investment fund units, equity securities, or convertible proprietors). preparing individual assessments or using the internal bonds): methodology for preparing an own value appraisal of real NLB has compiled a reference list of licensed real estate estate (which applies to Republic of Slovenia, and partly, for • Cash receivable collateral: bank deposits and savings with appraisers for real estate. All appraisals must be made for the housing segment to Serbia, Montenegro, and Bosnia and Bank are appropriate in domestic and foreign currency; the purpose of secured lending and in accordance with Herzegovina) based on public records and indexes of real- • Debt securities: shares and bonds which, according to the the international valuation standards (IVS, EVS, and RICS). estate value published by the relevant government authorities Bank’s assessment, are suitable for securing investments Appraisals related to retail loans are generally ordered only (the Surveying and Mapping Authority in the Republic and are traded on a regulated market (marketable from appraisers with whom the NLB has a contract for real- of Slovenia). The value of pledged movable property is securities of higher-quality Slovenian and foreign issuers); estate valuations. For corporate loans, appraisals are usually monitored once a year (in NLB automated, with a straight-line • The pledge of investment coupons of mutual funds submitted by clients. If a client submits an appraisal that is depreciation over the period of the remaining useful life). managed by management companies (a priority company not made by an appraiser included on the NLB’s reference list, the NLB’s expert department which employs certified real estate appraisers in construction with licences granted by the h) The main types of collateral taken by the NLB Group NLB Group accepts different forms of material and personal NLB Skladi) and are, according to the Bank’s assessment, suitable for insurance of investments. Slovenian Ministry of Justice, and certified real-estate value security as loan collateral. • A pledge of an equity stake: non-marketable capital shares appraisers with licences granted by the Slovenian Institute of with a credit rating of at least B are adequate; Auditors, will verify the appraisal. The expert department is Material loan collateral gives the right in the case of a debtor • A pledge or assignment of receivables as collateral: cash also responsible for reviewing valuations of real estate serving (borrower) defaulting on their contractual obligations to sell receivables must have longer maturities than the maturity of as collateral for large loans. a specific property to recover claims, keep specific non-cash the investment and they must not be due and not be paid; Other NLB Group members obtain valuations from in-house against the counterparty’s debt to the Bank. policies pledged to NLB): The Bank accepts products of appraisers and outsourced appraisers, all possessing the Vita, life insurance company d.d. Ljubljana – a pledge of an necessary licences. NLB Group has compiled a reference list NLB Group accepts the following material types of loan investment life insurance policy and a life insurance policy of appraisers for valuations of real estate located outside the collateral: with a guaranteed return that includes saving, in addition to property or cash, or reduce or offset the amount of exposure • Other material forms of loan collateral (e.g., life insurance Republic of Slovenia. Appraisals must be made in accordance • Collateral in the form of business and residential real insurance. with the international valuation standards, and for larger estate: land, buildings, and individual parts of buildings in MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 283 Personal loan collateral is a method for reducing credit risk collateral. However, collateral is an important comfort element includes the amount of the guarantees received in the whereby a third party undertakes to pay the debt in case of in the approval process and, depending on the credit rating exposure of the guarantor, and guarantees are only taken into the primary debtor (borrower) defaulting. of the client, a prerequisite. NLB Group has prescribed the account as collateral if the guarantor has sufficient overall NLB Group accepts the following types of personal loan amount, depending on the type of collateral, loan maturity collateral: and the client rating. The ratios are based on experience and The Business Rules – Collateral for Retail and Corporate • Joint and several guarantees by retail and corporate regulatory guidelines. clients: for the collateralisation of private individuals’ loans, Loans regulate which forms of collateral are acceptable, and which preconditions a type of collateral needs to fulfil to be employees, or pensioners are adequate guarantors. They NLB Group pays particular attention to closely monitoring able to be considered. minimum ratios between the value of collateral and the loan creditworthiness. must not be in the process of personal bankruptcy. They are the fair value of collateral, and to receiving regular and responsible for fulfilling the debtor’s obligations for loans independent revaluations by applying the International with a repayment period not exceeding 60 months. For the Valuation Standards. Through a detailed examination of all collateralisation of legal entities investments, legal entities, collateral received, NLB has ensured that only collateral from individuals, or private individuals are adequate guarantors. which payment can be realistically expected if it is liquidated, • Bank guarantees; is considered. • Government guarantees (e.g., of the Republic of Slovenia); • Guarantees by national and regional development agencies NLB Group has the largest concentration of collaterals arising with which the Bank has a contract on the acceptance of from mortgages on real estate, which is a relatively reliable guarantees (e.g. Slovene Enterprise Fund); and quality type of collateral. Due to the possible decrease • Other types of personal loan collateral. of real estate market prices, the Bank closely monitors the real-estate collateral values and, where required, establishes Loans are very often secured by a combination of collateral higher amounts of impairments and provisions for non- types. The general recommendations on loan collateral are performing loans secured by real estate, based on estimated specified in the internal instructions and include the elements discounts of the real-estate value, which are expected to be specified below. The decision on the type of collateral and achieved in a sale (expected payment from collateral). Priority the coverage of loan by collateral depends on the client’s is given to property where the pledge right of the Bank is creditworthiness (credit rating), loan maturity, and varies entered in the first place and the real estate is already owned depending on whether the loan is granted to retail or a by the debtor and/or the pledger. For real estate, there must corporate client. be a market, and it must be redeemable within a reasonable NLB has also created, in the area of real-estate loan collateral, time. an ‘online’ connection with the Surveying and Mapping Collateral consisting of securities entails market risk, Authority in the Republic of Slovenia, which allows direct and specifically the risk of changes in the prices of securities on immediate verification of the existence of property. capital markets. To limit such risks and restrict the possibility of the value of instruments received as collateral falling below NLB Group strives to ensure the best possible collateral for approved limits, the Rules determine minimum pledge ratios long-term loans, in particular mortgages where possible. As a for securing loans based on pledged securities and equity result, the mortgaging of real estate is the most frequent form shares in NLB. Deviations from the Rules are subject to the of loan collateral of corporate and retail clients. In corporate prior approval of the respective decision bodies of the Bank. exposures, the next most frequent forms of collateral are The ratio between the loan amount and the securities’ value government and corporate guarantees, while in retail loans, it is determined regarding the securities’ liquidity, maturity, is guarantors. i) Risks, deriving from valuation of received collateral Client/counterparty credit risk is the key decision parameter correlation with changes in market indexes, i.e., by considering the key features reflecting the level of volatility of market prices, and the ability to sell the securities at the market price. when approving exposures. Collateral is a secondary source Collateral consisting of the sureties of corporate clients, of repayment, and therefore decisions on approvals of sureties of private individuals, and bank guarantees entail exposures should not primarily be based on the provided the credit risk of the provider of the collateral. NLB Group MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 284 j) Credit quality analysis for financial assets and contingent liabilities 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 31 Dec 2021 Debt securities at amortised cost A B C Loss allowance Carrying amount Loans and advances to banks at amortised cost A B Loss allowance Carrying amount Loans and advances to individuals at amortised cost A B C D and E Loss allowance Carrying amount Loans and advances to other 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 C D and E 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 1,218,597 495,114 - (3,253) 1,710,458 89,499 51,382 (198) 140,683 5,305,833 60,891 5,827 - (18,336) 5,354,215 1,172,770 3,333,087 124,628 - (50,961) 4,579,524 92,430 26,908 319 - (476) 119,181 1,587,032 1,809,069 - - (11,148) 1,405,533 1,574,401 48,037 - (12,912) 3,015,059 - - 7,220 (52) 7,168 - - - - 46,972 23,933 49,330 - (7,398) 112,837 59 198,824 213,301 - (26,624) 385,560 37 128 694 - (36) 823 - - 184 - (70) 6,451 67,514 23,571 - (1,640) 95,896 - - - - - - - - - - - - 125,297 (76,204) 49,093 - - - 209,229 (135,994) 73,235 - - - 6,703 (6,322) 381 - - - 798 (798) - - - 24,565 (14,545) 10,020 - - - - - - - - - 249 16 293 2,430 157 3,145 3 26 17 30,079 (613) 29,512 - - - 1,236 608 1,844 - - - - - 38 11 18 14,366 (4,344) 10,089 Total 1,218,597 495,114 7,220 (3,305) 1,717,626 89,499 51,382 (198) 140,683 1,183,578 254,672 - (1,826) 1,436,424 199,390 79 (182) 199,287 5,353,054 2,554,006 84,840 55,450 127,727 (101,781) 5,519,290 1,172,832 3,531,937 337,946 239,308 (214,192) 5,067,831 92,467 27,036 1,013 7,939 (6,226) 122,229 1,587,032 1,809,069 184 798 16,919 - - (3,503) 2,567,422 875,912 1,421,398 53,965 - (10,101) 2,341,174 83,943 5,223 3,224 - (62) 92,328 1,308,690 218,282 - - (12,016) (2,203) 1,412,022 1,641,926 71,626 38,931 (33,441) 3,131,064 1,041,295 844,526 27,751 - (3,909) 1,909,663 - - - - - - - - - 26,634 15,108 24,293 - (2,421) 63,614 26 85,402 37,876 - (1,787) 121,517 1 19 29 - (1) 48 - - - - - 5,657 34,180 9,265 - (141) 48,961 - - - - - - - - - - - - 57,396 (31,497) 25,899 - - - 68,782 (46,272) 22,510 - - - 1,107 (1,084) 23 - - - 798 (798) - - - 19,252 (12,469) 6,783 - - - - - - - - - - - - - - - - - - 3,855 (838) 3,017 - - - 11 (6) 5 - - - - - - - - 7,651 (4,041) 3,610 Total 1,183,578 254,672 - (1,826) 1,436,424 199,390 79 (182) 199,287 2,580,640 32,027 24,293 57,396 (37,421) 2,656,935 875,938 1,506,800 91,841 72,637 (58,998) 2,488,218 83,944 5,242 3,253 1,118 (1,153) 92,404 1,308,690 218,282 - 798 (3,001) 1,046,952 878,706 37,016 26,903 (20,560) 1,969,017 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 285 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 individuals at amortised cost A B C D and E Loss allowance Carrying amount Loans and advances to other 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 D and E Loss allowance Contingent liabilities A B C D and E Loss allowance Carrying amount in EUR thousands 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit- impaired Purchased credit-impaired financial assets Total 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit- impaired Purchased credit-impaired financial assets NLB Group NLB 1,118,700 388,072 (3,685) 1,503,087 67,862 128,784 500 (141) 197,005 4,739,470 34,415 3,528 - (25,044) 4,752,369 1,070,367 2,930,393 219,102 - (49,475) 4,170,387 64,691 46,382 223 - (276) 111,020 1,568,201 1,839,167 - (8,656) 1,285,492 1,490,929 48,329 - (15,796) 2,808,954 - - - - - - - - - 76,080 9,471 47,436 - (8,151) 124,836 373 188,641 238,152 - (32,682) 394,484 28 55 438 - (30) 491 - 229 - (28) 843 53,326 49,781 - (2,767) 101,183 - - - - - - - - - - - - 111,118 (61,305) 49,813 - - - 279,803 (194,298) 85,505 - - - 5,655 (5,243) 412 - - 798 (798) - - - 31,474 (18,554) 12,920 - - - - - - - - - - - - 6,075 - 6,075 - - - 37,716 (1,325) 36,391 - - - 1,219 (4) 1,215 - - - - - - - 14,796 (5,057) 9,739 1,118,700 388,072 (3,685) 1,503,087 67,862 128,784 500 (141) 197,005 1,118,700 161,021 (1,841) 1,277,880 158,475 - - (155) 158,320 4,815,550 2,290,498 43,886 50,964 117,193 (94,500) 4,933,093 1,070,740 3,119,034 457,254 317,519 (277,780) 4,686,767 64,719 46,437 661 6,874 (5,553) 113,138 1,568,201 1,839,396 798 (9,482) 1,286,335 1,544,255 98,110 46,270 (42,174) 2,932,796 5,132 - - (8,973) 2,286,657 820,241 1,127,454 34,338 - (16,664) 1,965,369 48,994 5,386 56 - (73) 54,363 1,422,777 217,138 - (2,343) 984,496 889,669 22,253 - (7,510) 1,888,908 - - - - - - - - - 42,642 460 21,573 - (2,351) 62,324 120 111,223 82,492 - (8,936) 184,899 1 28 36 - (2) 63 - - - - 238 41,654 31,363 - (732) 72,523 - - - - - - - - - - - - 51,644 (22,855) 28,789 - - - 117,392 (82,274) 35,118 - - - 1,324 (1,251) 73 - - 798 (798) - - - 27,855 (16,493) 11,362 - - - - - - - - - - - - - - - - - - 2,341 (1,319) 1,022 - - - 8 (4) 4 - - - - - - - 7,052 (3,808) 3,244 Total 1,118,700 161,021 (1,841) 1,277,880 158,475 - - (155) 158,320 2,333,140 5,592 21,573 51,644 (34,179) 2,377,770 820,361 1,238,677 116,830 119,733 (109,193) 2,186,408 48,995 5,414 92 1,332 (1,330) 54,503 1,422,777 217,138 798 (3,141) 984,734 931,323 53,616 34,907 (28,543) 1,976,037 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 286 The NLB Group’s client credit rating classification is based The Rating Group B classification is an investment grade for is determined in absolute and relative terms (EUR 100 for on an internally developed methodology, drawing from BBB, and an ‘invest with care’ for BB and B. retail and EUR 500 for non-retail segment and 1% of the total internal statistical analyses, good banking practices, as well on-balance exposure on the client level). At the same time, the as Bank of Slovenia regulations, and ECB and EBA guidelines Rating Group C (CCC to C rating classes) includes clients who assessment of rating for private individuals was improved by and requirements. The aligned rating methodology is used are exposed to a higher and above-average level of credit establishing a common rating on the client level. across the entire NLB Group. It includes a uniform credit risk. CCC rated clients are financed by the Bank only in the grade scale of 12 rating classes, out of which nine represent case when such support brings more positive effects for the A standard corporate rating methodology, with the prescribed performing clients and three non-performing clients. Bank; however, the Rating Group C is overall considered as a set of parameters (qualitative and quantitative) applies to all substantial risk. The Bank reasonably restricts cooperation the NLB Group bank entities. Groups of connected clients are Rating Group A (AAA to A rating classes) includes the best with such clients and decreases its exposure to them. treated as materially important for the NLB Group whenever clients with a low degree of default probability, characterised exposure exceeds EUR 7 million or EUR 15 million for NLB Group by high coverage of financial liabilities with free cash flow. Rating Groups D (D and DF rating classes) and E represent members with total assets greater than EUR 1 billion. Materially The Rating Group A is considered as investment grade non-performing clients that are treated as defaulted. D, DF, important clients are submitted to the NLB Credit Committee. classification. and E rating classified clients are ordinarily transferred to the specialised units for restructuring (which performs business NLB regularly reviews the business practices and credit Rating Group B (BBB to B rating classes) includes clients and financial restructuring with a goal of minimising losses and portfolios of NLB Group entities to make sure they are operating with a low credit risk, starting one notch lower than ‘A’ restoring the client to a performing status) or workout and legal in accordance with the minimum risk management standards rating group clients. These clients show stable performance, support (with the goal of minimising losses due to default). of NLB Group. This ensures appropriate standard processes for acceptable financial ratios, and qualitative elements, and managing and reporting credit risks at the consolidated level. have sufficient cash flow to settle their obligations, but may In 2020, NLB Group applied a new default definition based on be more sensitive to changes in the industry or the economy. the EBA guidelines, where the materiality threshold for delays k) Forborne loans 31 Dec 2021 NLB Group All forborne exposures Non - performing Impairment, provisions and value adjustments Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures in EUR thousands Collateral and financial guarantees received on forborne exposures Loans and advances (including at amortised cost and fair value) 239,208 57,058 182,094 182,150 (4,602) (100,963) 109,177 Governments Other financial organisations Non-financial organisations Households Debt instruments other than held for trading Loan commitments given Total exposures with forbearance measures 1,093 2,744 180,754 54,617 239,208 718 239,926 828 213 35,422 20,595 57,058 96 57,154 265 2,531 145,276 34,022 182,094 622 182,716 265 2,531 145,332 34,022 182,150 622 182,772 (11) (8) (3,268) (1,315) (4,602) - (4,602) (265) (2,531) (83,243) (14,924) (100,963) (374) (101,337) - 12 79,260 29,905 109,177 294 109,471 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 287 31 Dec 2020 NLB Group All forborne exposures Non - performing Impairment, provisions and value adjustments Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures in EUR thousands Collateral and financial guarantees received on forborne exposures Loans and advances (including at amortised cost and fair value) 303,802 Governments Other financial organisations Non-financial organisations Households Debt instruments other than held for trading Loan commitments given Total exposures with forbearance measures 31 Dec 2021 Loans and advances (including at amortised cost and fair value) Other financial organisations Non-financial organisations Households Debt instruments other than held for trading Loan commitments given Total exposures with forbearance measures 1,342 2,425 254,947 45,088 303,802 1,586 305,388 55,354 1,050 50 33,882 20,372 55,354 942 56,296 223,376 248,448 (5,761) (141,372) 142,714 292 2,375 195,993 24,716 223,376 644 224,020 292 2,375 221,065 24,716 248,448 644 249,092 (5) - (4,739) (1,017) (5,761) (4) (5,765) (292) (2,375) (129,550) (9,155) (141,372) (37) - 50 114,395 28,269 142,714 1,332 (141,409) 144,046 NLB All forborne exposures Non - performing Impairment, provisions and value adjustments Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures 109,674 2,744 69,299 37,631 109,674 688 110,362 25,485 213 13,100 12,172 25,485 96 25,581 84,133 2,531 56,143 25,459 84,133 592 84,725 84,189 2,531 56,199 25,459 84,189 592 84,781 (1,130) (8) (291) (831) (1,130) - (1,130) (48,898) (2,531) (35,930) (10,437) (48,898) (344) (49,242) in EUR thousands Collateral and financial guarantees received on forborne exposures 51,837 12 31,564 20,261 51,837 294 52,131 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 288 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 Loan commitments given Total exposures with forbearance measures NLB All forborne exposures Non - performing Impairment, provisions and value adjustments Gross carrying amount Performing Impaired Defaulted Performing forborne exposures Non-performing forborne exposures 148,251 2,397 117,671 28,183 148,251 1,560 149,811 21,976 22 9,522 12,432 21,976 920 22,896 103,287 2,375 85,161 15,751 103,287 640 103,927 126,275 2,375 108,149 15,751 126,275 640 126,915 (1,522) - (742) (780) (1,522) (2) (1,524) (73,298) (2,375) (66,055) (4,868) (73,298) (35) (73,333) in EUR thousands Collateral and financial guarantees received on forborne exposures 76,210 22 58,447 17,741 76,210 1,332 77,542 Forborne exposures of debt instruments by periods of forbearance 31 Dec 2021 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 2021 Performing exposures Non-performing exposures Total exposures with forbearance measures 31 Dec 2020 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. Up to 3 months 3 to 6 months 6 to 12 months Over 12 months NLB Group in EUR thousands 7,411 26,835 34,246 13,455 32,950 46,405 5,055 4,856 9,911 9,963 1,786 11,749 9,860 18,540 28,400 1,858 7,140 8,998 30,130 30,956 61,086 24,317 65,200 89,517 Up to 3 months 3 to 6 months 6 to 12 months Over 12 months NLB in EUR thousands 2,819 7,467 10,286 8,304 3,969 12,273 3,898 2,410 6,308 931 942 1,873 7,008 13,863 20,871 1,398 5,513 6,911 10,630 11,551 22,181 9,821 42,553 52,374 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 289 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: NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 Net value Net value 36,009 13,559 - 74,717 733 699 125,717 36,130 13,268 - 75,151 866 699 126,114 4,176 7 2,333 4,827 - - 4,079 7 2,412 4,926 - - 11,343 11,424 Nature of assets 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.) Non-current assets held for sale (note 5.7.) 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 Transport and communications Trade industry Health care and social security Other financial assets Total 31 Dec 2021 31 Dec 2020 in EUR thousands Gross loans Impairment provisions 140,881 90,538 361,520 420,173 1,059,774 12,888 91,735 231,488 5,621,071 49,936 341,670 778,569 798,822 1,008,369 36,541 128,455 (198) (2,851) (5,392) (29,459) (30,352) (1,358) (3,530) (5,269) (101,781) (1,604) (7,554) (34,587) (25,902) (64,364) (1,970) (6,226) Net loans 140,683 87,687 356,128 390,714 1,029,422 11,530 88,205 226,219 (%) 1.30 0.81 3.28 3.60 9.49 0.11 0.81 2.08 5,519,290 50.87 48,332 334,116 743,982 772,920 944,005 34,571 122,229 0.45 3.08 6.86 7.12 8.70 0.32 1.13 Gross loans Impairment provisions 197,146 116,593 298,612 361,494 952,671 13,883 91,780 301,205 5,027,648 79,662 314,276 725,020 811,517 874,235 48,620 118,691 (141) (3,126) (6,971) (27,548) (44,446) (1,111) (7,023) (5,737) (94,555) (1,230) (7,268) (71,133) (25,029) (75,309) (1,794) (5,553) Net loans 197,005 113,467 291,641 333,946 908,225 12,772 84,757 295,468 4,933,093 78,432 307,008 653,887 786,488 798,926 46,826 113,138 (%) 1.98 1.14 2.93 3.35 9.12 0.13 0.85 2.97 49.55 0.79 3.08 6.57 7.90 8.03 0.47 1.14 11,172,430 (322,397) 10,850,033 100.00 10,333,053 (377,974) 9,955,079 100.00 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 290 NLB Industry sector Banks Finance Electricity, gas, and water Construction industry Heavy industry Education Agriculture, forestry, and fishing Public sector Individuals Mining Entrepreneurs Services Transport and communications Trade industry Health care and social security Other financial assets Total 31 Dec 2021 31 Dec 2020 Gross loans Impairment provisions Net loans Gross loans Impairment provisions Net loans 199,469 169,679 228,423 71,989 583,658 4,045 13,073 94,176 2,694,356 22,316 54,600 482,176 556,786 248,823 25,360 93,557 (182) (3,109) (724) (9,870) (6,747) (27) (100) (974) (37,421) (514) (1,942) (11,421) (5,459) (16,492) (1,619) (1,153) 199,287 166,570 227,699 62,119 576,911 4,018 12,973 93,202 2,656,935 21,802 52,658 470,755 551,327 232,331 23,741 92,404 (%) 3.66 3.06 4.18 1.14 10.60 0.07 0.24 1.71 48.80 0.40 0.97 8.65 10.13 4.27 0.44 1.70 158,475 135,040 157,515 63,025 519,880 5,197 15,099 95,930 2,411,949 8,580 52,216 454,154 589,269 204,343 26,288 55,833 (155) (4,405) (2,892) (8,463) (14,445) (38) (865) (1,793) (34,179) (74) (3,014) (44,827) (4,965) (22,190) (1,222) (1,330) 2,377,770 49.46 8,506 49,202 409,327 584,304 182,153 25,066 54,503 0.18 1.02 8.51 12.15 3.79 0.52 1.13 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report in EUR thousands (%) 3.29 2.72 3.22 1.13 10.51 0.11 0.30 1.96 158,320 130,635 154,623 54,562 505,435 5,159 14,234 94,137 5,542,486 (97,754) 5,444,732 100.00 4,952,793 (144,857) 4,807,936 100.00 n) Analysis of net loans and advances by geographical sectors Country Slovenia Other European Union members Serbia Other countries Total in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 4,861,968 4,360,051 4,856,305 4,354,155 249,772 2,320,491 3,417,802 157,557 2,146,793 3,290,678 156,425 136,696 295,306 73,252 134,303 246,226 10,850,033 9,955,079 5,444,732 4,807,936 As at 31 December 2021, Other countries include direct exposure to Ukraine amount to EUR 4 thousand at NLB Group exposure to Russia in the amount of EUR 94 thousand at level and EUR 2 thousand at NLB level. NLB Group level and EUR 84 thousand at NLB level. Direct Contents 291 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report o) Analysis of debt securities and derivative financial instruments by geographical sectors Financial assets measured at amortised cost Financial assets held for trading Financial assets measured at fair value through OCI NLB Group NLB in EUR thousands 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 31 Dec 2021 Country Slovenia Other members of European Union - Austria - Belgium - Bulgaria - Czech Republic - Cyprus - Denmark - Finland - France - Germany - Greece - Hungary - Ireland - Italy - Latvia - Lithuania - Luxembourg - Netherlands - Poland - Portugal - Romania - Slovakia - Spain - Sweden - Other United States of America Other countries - Bosnia and Herzegovina - Kosovo - Montenegro - North Macedonia - Serbia - Albania - Canada - Great Britain - Iceland - Israel - Kazakhstan - Norway - Russia - Other Total 324,705 1,076,225 76,628 126,828 43,374 - 12,447 - 45,899 170,425 105,368 - 21,719 51,906 26,190 24,929 15,321 78,097 67,678 17,829 47,842 23,365 21,603 70,347 15,128 13,302 5,061 311,635 4,048 - 37,349 221,697 7,167 - 14,026 - 5,768 - - 14,606 - 6,974 1,717,626 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Non-trading financial assets mandatorily at FV through profit or loss - 2,428 - - - - - - - - - - - 107 - - - 2,321 - - - - - - - 1,833 - - - - - - - - - - - - - - - 331,155 1,180,521 81,063 93,404 3,173 12,795 1,755 20,234 107,633 193,668 115,180 14,805 6,547 100,689 10,910 - 27,226 30,087 143,546 18,989 18,704 5,484 34,627 64,377 75,625 - 75,498 1,808,087 145,522 76,533 23,578 152,886 1,196,724 29,823 27,247 81,218 8,857 10,468 14,254 16,210 20,105 4,662 6,835 1,388 - 642 - - - - - 528 167 - - - - - - - 51 - - - - - - - - 23 - 1 - 6 - - - 16 - - - - - - 324,705 1,041,207 76,628 126,828 43,374 - 12,447 - 45,899 160,423 95,361 - 21,719 51,906 26,190 24,929 15,321 78,097 57,670 17,829 47,842 23,365 21,603 65,346 15,128 13,302 5,061 65,451 4,048 - 6,799 13,230 - - 14,026 - 5,768 - - 14,606 - 6,974 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 280,174 970,192 56,551 59,830 3,173 12,795 1,755 20,234 99,578 162,625 92,622 14,805 6,547 32,639 10,910 - 27,226 30,087 135,529 18,989 18,704 5,484 34,627 49,857 75,625 - 8,667 282,009 3,204 - 3,073 57,867 5,021 29,823 27,247 81,218 8,857 10,468 14,254 16,210 20,105 4,662 6,835 1,388 - 642 - - - - - 528 167 - - - - - - - 51 - - - - - - - - 27 - 1 - - 10 - - 16 - - - - - - Other members of the European Union included in the line Other members of the ‘Other countries’ in the line item ‘Other’ item ‘Other’ are Malta and Estonia. are Egypt, Uzbekistan, and Oman. 3,395,261 4,261 8,246 1,436,424 1,541,042 8,250 Contents 292 31 Dec 2020 Country Slovenia Other members of European Union - Austria - Belgium - Bulgaria - Czech Republic - Cyprus - Denmark - Finland - France - Germany - Greece - Hungary - Ireland - Italy - Latvia - Lithuania - Luxembourg - Netherlands - Poland - Portugal - Romania - Slovakia - Spain - Sweden - Other United States of America Other countries - Bosnia and Herzegovina - Kosovo - Montenegro - North Macedonia - Serbia - Albania - Canada - Great Britain - Iceland - Israel - Kazakhstan - Norway - Russia 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 NLB Group NLB in EUR thousands 305,697 930,258 78,720 121,657 36,910 1,025 12,662 - 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 3,769 9,786 257,346 - - 20,386 204,455 7,182 - 14,037 - 4,993 - - 6,293 - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,450 66,356 - - - - 66,356 - - - - - - - - 484,875 978,504 73,959 78,858 3,255 16,420 1,826 15,976 81,905 155,580 104,967 7,001 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 - 79,543 1,903,569 167,131 75,223 18,649 143,059 1,267,258 30,548 27,514 104,493 8,988 9,511 12,261 20,526 18,408 - 111 - - - - - - - - - - - - 111 - - - - - - - - - - - 2,046 - - - - - - - - - - - - - - 14,498 672 305,697 930,258 - - - - - - - 80 120 - - - - - - - 90 - - - - - - 382 - 879 - 786 - 7 30 - - 56 - - - - - 78,720 121,657 36,910 1,025 12,662 - 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 3,769 9,786 32,139 - - 6,816 - - - 14,037 - 4,993 - - 6,293 - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,450 - - - - - - - - - - - - - - 389,932 932,714 59,163 57,167 3,255 16,420 1,826 15,976 80,827 149,673 104,967 7,001 9,924 34,146 11,048 749 18,385 37,853 133,360 17,023 19,377 5,599 36,350 53,201 59,424 - 56,742 291,816 - - 3,134 56,433 - 30,548 27,514 104,493 8,988 9,511 12,261 20,526 18,408 14,498 672 - - - - - - - 80 120 - - - - - - - 90 - - - - - - 382 - 1,211 4 786 - - 365 - - 56 - - - - - Total 1,503,087 68,806 3,446,491 2,157 16,049 1,277,880 2,450 1,671,204 16,381 Other members of the European Union included in the line item ‘Other’ are Malta and Croatia. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 293 p) Internal rating of derivatives counterparties A B C D and E Total in % NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 74.08 25.69 0.03 0.19 73.56 15.35 10.90 0.19 74.25 25.53 0.03 0.19 73.75 15.24 10.82 0.19 100.00 100.00 100.00 100.00 All derivatives in the banking book are entered into with rating, but all such transactions are covered through back- counterparties with an external investment-grade rating. to-back transactions involving third 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 r) Debt securities in NLB Group’s and NLB’s portfolio that represent subordinated liabilities for the issuer 31 Dec 2021 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 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 A 48,099 - - 48,099 A - - - - B - - - - B 14,796 - - 14,796 NLB Group C - - - - NLB Group C - - - - D - - - - D - - - - Total A 48,099 33,107 - - 84,399 - 48,099 117,506 Total 14,796 A - - - 67,128 - 14,796 67,128 NLB C - - 6,522 6,522 NLB C - - 5,858 5,858 B - - - - B - - - - in EUR thousands D - - - - Total 33,107 84,399 6,522 124,028 in EUR thousands D - - - - Total - 67,128 5,858 72,986 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 294 s) Presentation of net financial instruments by measurement category Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L Financial assets measured at FV through OCI NLB Group Financial assets measured at amortised cost Financial leases Derivatives for hedge accounting - 5,005,052 - - - - - - - 7,678 - - - - - - - - 21,161 4,261 4,472 - - 12,428 - - - - - - - - 3,461,860 3,251,826 66,599 37,569 105,866 - - - - - - - - - 1,717,626 1,707,960 - - 9,666 - - 10,619,525 280,961 140,683 141,698 5,473,278 4,582,906 122,229 17,464,432 7,678 21,161 3,461,860 in EUR thousands Total 5,005,052 5,200,647 4,964,047 71,071 37,569 115,532 12,428 8,246 10,727,804 281,010 140,683 141,709 5,519,290 4,645,112 122,229 21,063,978 - - - - - - - - 108,279 49 - 11 46,012 62,206 - 108,279 - - - - - - - 568 - - - - - - - 568 Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L NLB Group Financial assets measured at FV through OCI Financial assets measured at amortised cost in EUR thousands Financial leases Total - 68,806 68,806 - - - - 16,049 - - - - - - - 84,855 - 17,317 2,157 4,171 - - 10,989 - 25,076 - - - - 25,076 - 42,393 - 3,514,290 3,260,940 67,799 50,449 135,102 - - - - - - - - - 3,961,812 1,503,087 1,480,478 - - 22,609 - - 9,768,232 365,339 197,005 158,845 4,913,793 4,133,250 113,138 3,514,290 15,346,269 - - - - - - - - 48,633 3,061 - 26 19,300 26,246 - 48,633 3,961,812 5,103,500 4,812,381 71,970 50,449 157,711 10,989 16,049 9,841,941 368,400 197,005 158,871 4,933,093 4,184,572 113,138 19,036,440 31 Dec 2021 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 governments - Loans to banks - Loans to financial organisations - Loans to individuals - Loans to other customers Other financial assets Total financial assets 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 governments - Loans to banks - Loans to financial organisations - Loans to individuals - Loans to other customers Other financial assets Total financial assets MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 295 31 Dec 2021 Cash and obligatory reserves with central banks, and other demand deposits at banks Securities - Bonds - Shares - Treasury bills Derivatives Loans and receivables - Loans to governments - Loans to banks - Loans to financial organisations - Loans to individuals - Loans to other customers Other financial assets Total financial assets 31 Dec 2020 Cash and obligatory reserves with central banks, and other demand deposits at banks Securities - Bonds - Shares - Treasury bills Derivatives Loans and receivables - Loans to governments - Loans to banks - Loans to financial organisations - Loans to individuals - Loans to other customers Other financial assets Total financial assets Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L NLB Financial assets measured at FV through OCI Financial assets measured at amortised cost Derivatives for hedge accounting - - - - - 7,682 - - - - - - - 7,682 - 4,472 - 4,472 - - 7,888 - - - - 7,888 - 12,360 - 1,585,751 1,526,237 44,709 14,805 - - - - - 1,585,751 3,250,437 1,436,424 1,436,424 - - - 5,344,440 143,864 199,287 226,144 2,656,935 2,118,210 92,404 10,123,705 - - - - - 568 - - - - - - - 568 Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L NLB Financial assets measured at FV through OCI Financial assets measured at amortised cost - 2,450 2,450 - - 16,381 - - - - - - - 18,831 - 4,171 - 4,171 - - 30,935 - - - - 30,935 - 35,106 - 1,716,351 1,598,760 45,147 72,444 - - - - - - - - 1,716,351 2,261,533 1,277,880 1,277,880 - - - 4,722,498 170,742 158,320 177,198 2,377,770 1,838,468 54,503 8,316,414 in EUR thousands Total 3,250,437 3,026,647 2,962,661 49,181 14,805 8,250 5,352,328 143,864 199,287 226,144 2,656,935 2,126,098 92,404 11,730,066 in EUR thousands Total 2,261,533 3,000,852 2,879,090 49,318 72,444 16,381 4,753,433 170,742 158,320 177,198 2,377,770 1,869,403 54,503 10,086,702 As at 31 December 2021 and 31 December 2020, all of NLB liabilities measured at fair value through profit or loss, were Group’s financial liabilities, except for derivatives designated carried at amortised cost. as hedging instruments, trading liabilities, and financial MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 296 6.2. Market risk NLB defines market risk as the risk of potential financial losses due to changes in rates and/or market prices (exchange rates, credit spreads, and equity prices), or in parameters that affect prices (volatilities and correlations). Losses may impact profit or loss directly, for example in the case of trading book positions. However, for the banking book positions they are reflected in the revaluation reserve. The exposure to the market risk is to a certain degree integrated into the banking industry and offers an opportunity to create financial results and value. The Global Risk Department of NLB is independent from the trading activities and reports to the Bank’s Assets and Liabilities Committee (ALCO). Global Risk also monitors and manages exposure to market risks separately for the banking and trading books. Exposures and limits are monitored daily and reported to the ALCO committee on a regular basis. The Bank uses a wide selection of quantitative and qualitative tools for measuring, managing, and reporting market risks such as value-at-risk (VaR), sensitivity analysis, stress- testing, back-testing, scenarios, other market risk mitigants (concentration of exposures, gap limits, stop-loss limits, etc.), net interest income sensitivity, economic value of equity, and economic capital. Stress-testing provides an indication of the of an individual NLB Group entity is regularly monitored and Regarding structural FX positions on a consolidation level, reported to the Assets and Liabilities Committee of NLB Group assets, and liabilities held in foreign operations are translated (NLB Group ALCO). 6.2.1. Currency risk (FX) Foreign currency risk (FX) is a risk of the potential losses into euro currency at the closing FX rate on the reporting date. Foreign exchange differences of non-euro assets and liabilities against euro are recognised in OCI, and therefore affect shareholder’s equity and CET1 capital. NLB Group ALM from the open FX positions due to the changes of the foreign employs strategies to manage this foreign currency exposure, currency rates. The exposures of NLB to the movement of the including matched funding of assets and liabilities. FX rates have impact on the financial position and cash flows of the Bank. The Bank measures and manages the FX risk with Exposure to currency risks is discussed at daily liquidity a usage of combination of sensitivity analysis, VaR, scenarios, meetings and monthly meetings of the ALCO committee of the and stress-testing. NLB Group, and quarterly on the consolidated level. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 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 Bank and in accordance to the adopted policy of managing market risk in the trading book of NLB. Trading FX risk is managed on an integrated basis at a portfolio level. NLB monitors and manages FX risk in the banking book according to the policy of managing FX risk in NLB. The policy is primarily composed to protect Common Equity Tier 1 against the negative effects of the volatility of the FX rates, whilst limiting the volatility in the income statement. FX exposures in banking book result from core banking business potential losses that could occur in severe market conditions. activities. In the area of currency risk, NLB Group pursues the goal of low to medium exposure. NLB monitors the open position of NLB Group on an ongoing basis. The orientation of NLB Group in interest rate risk management is to prevent negative effects on the net revenues arising from changed market interest rates. The conclusion of transactions involving derivatives at NLB is limited to the servicing of the clients’ and hedging of the Group’s own open positions. In accordance with the provisions of the Strategy on trading with financial instruments in NLB Group, the trading activities in other NLB Group members are very restricted. For monitoring and managing NLB Group’s exposure to market risks uniform guidelines and exposure limits for each type of risk are set for individual NLB Group entities. The Each member is responsible for its own currency risk policy, which also includes a limit system and is in line with the parent Bank’s guidelines and standards, as well as local regulatory requirements. Policies are confirmed by either the local Management Board or Supervisory Board. NLB monitors and manages NLB Group currency risk exposure on a monthly basis for each member and on the consolidated level. NLB Group banks follow the guidelines for managing FX lending in NLB Group. The guidelines’ goal is to address risks stemming from the potential excessive growth of FX lending, to identify hidden risks, and tail-event risks related to FX lending, to mitigate the respective risk, to internalise the respective costs, and to hold adequate capital with respect to methodologies are in line with regulatory requirements on FX lending. individual and consolidated levels, while reporting to the regulator on the consolidated level is carried out using the standardised approach. Pursuant to the relevant policies, NLB Group entities must monitor and manage exposure to market risks and report to NLB accordingly. The exposure The positions of all currencies in the statement of financial position of NLB, for which a daily limit is set, are monitored daily. FX positions are managed on the currency level so that they are always within the limits. Contents 297 a) Analysis of financial instruments by currency exposure 31 Dec 2021 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 Derivatives - hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk EUR RSD NLB Group USD CHF Other Total in EUR thousands 4,035,603 7,678 11,000 2,349,722 1,489,279 79,530 8,582,987 61,713 568 7,082 294,459 - 5,689 802,321 7,168 145 763,856 12,463 - - 58,367 - 4,472 206,583 19,172 37,070 19,478 20,813 - - 112,880 503,743 5,005,052 - - - - 7,678 21,161 14,992 88,242 3,461,860 - 17,293 68,284 48 - - 202,007 6,645 1,152,516 27,192 - - 1,717,626 140,683 10,587,121 122,229 568 7,082 Total financial assets 16,625,162 1,886,101 365,955 213,497 1,980,345 21,071,060 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 7,585 35,377 49,351 845,649 14,295,198 73,645 288,519 133,555 15,728,879 - - 1,456 - 1,244,161 - - 24,471 1,270,088 - - 6,370 12,882 358,851 406 - 26,131 404,640 - - 2,114 - 179,934 - - 2,641 184,689 - - 12,537 - 7,585 35,377 71,828 858,531 1,562,665 17,640,809 - - 20,080 1,595,282 74,051 288,519 206,878 19,183,578 Net on-balance sheet financial position 896,283 616,013 (38,685) 28,808 385,063 1,887,482 Derivative financial instruments (27,149) 2,002 44,115 (24,124) (13,568) (18,724) Net financial position 31 Dec 2020 Total financial assets Total financial liabilities 869,134 618,015 5,430 4,684 371,495 1,868,758 14,728,767 13,962,729 1,921,270 1,254,761 376,572 371,229 176,890 175,275 1,846,785 1,502,653 19,050,284 17,266,647 Net on-balance sheet financial position 766,038 666,509 5,343 1,615 344,132 1,783,637 Derivative financial instruments 30,748 - 651 (2,303) (43,314) (14,218) Net financial position 796,786 666,509 5,994 (688) 300,818 1,769,419 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 298 31 Dec 2021 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 Derivatives - hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk EUR 3,165,604 7,682 7,888 1,477,670 1,407,226 199,287 5,060,091 50,515 568 7,082 RSD 1,212 - - - - - - 7 - - NLB USD 24,185 - 4,472 82,038 19,172 - 13,932 20,755 - - in EUR thousands CHF Other Total 13,648 45,788 - - - - - 69,808 1 - - - - 26,043 10,026 - 1,322 21,126 - - 3,250,437 7,682 12,360 1,585,751 1,436,424 199,287 5,145,153 92,404 568 7,082 Total financial assets 11,383,613 1,219 164,554 83,457 104,305 11,737,148 Financial liabilities 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 - due to customers - borrowings from other customers - subordinated liabilities - other financial liabilities Total financial liabilities 7,602 352 35,377 75,149 860,597 9,412,452 - 288,519 79,050 10,759,098 - - - 13 - 5 - - - 18 - - - 10,878 12,882 148,364 406 - 22,174 194,704 - - - 2,416 - 55,391 - - 153 57,960 - - - 20,873 - 43,393 - - 1,150 65,416 7,602 352 35,377 109,329 873,479 9,659,605 406 288,519 102,527 11,077,196 Net on-balance sheetfinancial position 624,515 1,201 (30,150) 25,497 38,889 659,952 Derivative financial instruments (15,358) - 35,825 (25,132) (14,076) (18,741) Net financial position 31 Dec 2020 Total financial assets Total financial liabilities Net on-balance sheet financial position 609,157 1,201 5,675 365 24,813 641,211 9,780,372 9,199,763 580,609 2,289 13 2,276 177,771 171,281 63,153 60,015 76,961 58,746 10,100,546 9,489,818 6,490 3,138 18,215 610,728 Derivative financial instruments 4,136 - (2,491) (3,299) (12,169) (13,823) Net financial position 584,745 2,276 3,999 (161) 6,046 596,905 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 299 b) FX sensitivity analysis Scenarios USD CHF CZK RSD MKD JPY AUD HUF HRK BAM 31 Dec 2021 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 and NLB 31 Dec 2021 31 Dec 2020 +/-5.74% +/-4.23% +/-4.55% +/-0.35% +/-1.34% +/-5.66% +/-6.77% +/-6.53% +/-1.38% +/-0% +/-7.89% +/-4.02% +/-8.57% +/-0.97% +/-3.46% +/-8.56% +/-10.70% +/-9.63% +/-2.02% +/-0% NLB Group NLB Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income in EUR thousands 454 (358) 11 2 2 23 134 (405) 329 (10) (2) (2) (21) (111) - 566 - 2,501 3,570 70 6,707 - (520) - (2,484) (3,476) (69) (6,549) (132) 6 11 4 285 (17) 157 117 (5) (10) (4) (277) 15 (164) 42 - - - - - 42 (38) - - - - - (38) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 300 NLB Group NLB in EUR thousands In the trading book, interest rate risk is measured on the basis of the VaR method and BPV method, in accordance with the adopted policy for managing market risk in the trading book of NLB. 31 Dec 2020 Appreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income Depreciation of USD CHF CZK RSD MKD Other Effects on comprehensive income Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income (345) (293) (4) 9 4 85 (544) 295 270 3 (9) (4) (68) 487 - 231 - 7,096 7,663 91 15,081 - (213) - (6,959) (7,151) (89) (14,412) (97) (32) (4) 22 19 89 (3) 83 29 3 (22) (18) (70) 5 (11) - - - - - (11) 10 - - - - - 10 The effect on the other comprehensive income statement of calculation of the VAR value is adjusted to Basel standards NLB Group has decreased by half due to the lower translation (99% confidence interval, a monitored period of 250 business positions in MKD and RSD currencies and due to the lower days, a 10-day holding position period). volatility growths’ scenarios for MKD and RSD currencies. 6.2.2. Managing market risks in the trading book Market risk exposure in the trading book arises mostly as a 6.2.3. Interest rate risk Interest rate risk is the risk to NLB Group’s capital and profit or loss arising from changes in market interest rates. Interest result of the changes in interest rates, credit spreads, FX rates, rate risk management of NLB Group includes all interest rate- and equity prices. sensitive on and off-balance sheet assets and liabilities which are divided into the trading and banking book according The Management Board determines low total risk appetite to regulatory standards. It takes into account the positions and limits by the risk type. The limits are monitored daily by in each currency. Interest rate risk management in NLB the Global Risk Department. Group is adopted in accordance with the risk appetite and risk strategy, based on general Basel standards on interest NLB uses an internal VaR model based on the variance- rate management in the banking book (IRRBB; hereinafter: covariance method for other market risks. The daily ‘Standards’) and European Banking Authority guidelines. The interest rate risk in the banking book is measured and monitored within a framework of interest rate risk management policy that establishes consistent methodologies, models, and limit systems. NLB Group manages interest rate risk exposure through application of two main measures: • Economic value sensitivity – using BPV method (Basis Point Value), which measures the extent to which the economic value of the banking book would change if interest rates change according to the scenario. • Sensitivity of net interest income – using EaR method (Earnings at Risk), which measures the impact of the interest rate change on future net interest income over a one-year period, assuming constant balance sheet volume and structure. NLB Group regularly measures interest rate risk exposure in the banking book under various standardised and additional scenarios of changes in the level and shape of interest rate yield curve, including all significant sources of risk, taking into account behavioural and modelling assumptions. Part of non-maturing deposits, which is considered as a core part is allocated long-term by using replicating portfolio. Optionality risk is mainly derived from behavioural options, reflected in prepayments and withdrawals, and embedded options such as caps and floors. Moreover, considering expected cash flows, non-performing exposures, as well as off-balance sheet items are considered when measuring interest rate risk exposure. The interest rate risk is closely measured, monitored, and managed within approved risk limits and controls. The Group manages interest rate positions and stabilises its interest rate margin primarily with the pricing policy and a fund transfer pricing policy. An important part of the interest rate risk management is presented by the banking book securities portfolio, whose primary purpose is to maintain adequate liquidity reserves, while it also contributes to the stability of the interest rate margin, which is why valuation risk has been included in the Group’s interest rate risk management model. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 301 NLB Group also manages interest rates risk by using plain Each member of NLB Group is responsible for its own interest Interest rate risk in the banking book is measured, monitored, vanilla derivative financial instruments (interest rate swaps, rate risk policy, which includes the limit system and is in line and reported by the Global Risk Department (weekly in the overnight index swaps, cross currency swaps, and forward with the parent Bank’s guidelines and standards, as well case of NLB and monthly on Group level), while positions are rate agreements), most of which are treated according to as with the local regulatory requirements. NLB regularly managed by Financial Markets. Exposure to interest rate risk hedge accounting rules. Interest rate risk exposure arises monitors the interest rate risk exposure of each individual is discussed on ALCO monthly on NLB’s individual level and mainly from banking book positions; particularly in a current member of NLB Group in accordance with the Standards quarterly on the consolidated level. low interest rate environment, where NLB Group recorded an for Risk Management in NLB Group. The aforementioned increased volume of fixed interest rate loans and long-term document comprises guidelines for uniform and effective banking book securities on the assets side and transformation interest rate risk management within individual NLB Group of deposits from term to sight. members. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report a) Analysis of financial instruments according to the Financial instruments without maturity such as sight deposits exposure to interest rate risk The following table presents open net interest rate risk positions by the most important currencies of NLB Group. are presented in the first gap irrespective of their behavioural characteristics and the NLB Group’s expectations. 31 Dec 2021 Currency EUR RSD MKD Other 31 Dec 2020 Currency EUR RSD MKD Other 31 Dec 2021 Currency EUR Other 31 Dec 2020 Currency EUR Other 1 - 3 years (2,404,620) 203,340 141,261 (32,296) 1 - 3 years (1,856,327) 216,751 74,788 (134,917) 1 - 3 years (1,803,603) 1,626 1 - 3 years (1,479,227) (9,471) NLB Group 3 - 5 years 1,211,248 341,214 21,960 124,132 NLB Group 3 - 5 years 816,980 175,362 43,725 49,451 NLB 3 - 5 years 815,356 32,325 NLB 5 - 10 years 1,573,325 62,458 13,835 66,726 5 - 10 years 1,397,446 167,139 5,224 16,095 in EUR thousands Over 10 Years 446,585 1,912 9,378 3,234 in EUR thousands Over 10 Years 279,265 - 11,032 (2,886) in EUR thousands 5 - 10 years 1,203,636 1,242 Over 10 Years 389,570 6,627 in EUR thousands 3 - 5 years 5 - 10 years Over 10 Years 451,008 9,171 1,071,925 5,628 227,828 (7) Contents 302 b) Net interest income sensitivity analysis and an economic The assessment of the impact of a change in interest rates of view of interest rate risk in the banking book The analysis of interest income sensitivity for the horizon of the next 12 months assumes a sudden parallel interest rate shock down by 50 basis points or 100 basis points. The analysis assumes that the positions used remain unchanged. 50/100 basis points on the amount of net interest income of the banking book position: NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands Net interest income sensitivity Net interest income sensitivity - as % of Equity 18,520 0.94% 13,852 0.78% 6,668 0.49% 7,493 0.55% The values in the table are calculated on short-term interest comprehensive view of the possible long-term effects of rate gaps, where the applied parallel interest rate shock down changing interest rates at least under the six prescribed by 50/100 basis points represents a realistic and practical standardised interest rate shock scenarios or more if scenario. The calculations of the sensitivity of net interest necessary, according to the situation on financial markets. income are implemented in technological support. Calculations are considering behavioural and automatic options, as well as the allocation of non-maturing deposits. The ‘EVE’ (Economic Value of Equity) method is a measure of the sensitivity of changes in market interest rates on the The assessment of the impact of a change in interest rates of economic value of financial instruments. The EVE represents 200 basis points on the economic value of the banking book the present value of net future cash flows and provides a position: NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands Interest risk in banking book - EVE Interest risk in banking book - EVE as % of Equity 126,651 6.42% 128,370 7.27% 84,130 6.14% 82,116 5.98% The applied sudden parallel interest rate shock up is by 200 loans with fixed interest rate, as well as from transformation of basis points, which represents a “worst case” scenario for NLB term to sight deposits due to a low interest rate environment. Group. The calculation takes into the account allocation of the Long-term interest positions of other members in NLB Group, core part of non-maturing deposits and other behavioural which present a majority of their exposure to interest-rate risk assumptions. (an economic point of view), mainly arise from a portfolio of mortgage loans with a fixed interest rate. Exposure to the interest rate risk of the banking book mainly arises from investments in long-term debt securities and MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 303 6.3. Liquidity risk Liquidity risk is the risk of the NLB Group being unable to fulfil current or future expected and unexpected cash requirements, across all time horizons. The risk may stem from the reduction in funding sources or a reduction in the liquidity of certain assets. Liquidity risk is related to funding liquidity risk (the NLB Group’s liquidity on the liabilities-side) and market liquidity risk (counterbalancing capacity on the assets-side). On the liabilities-side, liquidity risk can result in a loss if the Bank is unable to settle all its liabilities or when the Bank, because of its incapacity to provide sufficient funds to settle its obligations, is forced to raise the necessary funds at a cost which significantly exceeds the normal cost. On the assets-side, the liquidity risk is related to the market value of The Management Board approves the Liquidity Risk NLB Group performs stress tests on a regular basis for a Management Policy, which outlines the key principles for variety of bank-specific and market-wide stress scenarios the Bank’s liquidity management. ALCO receives a regular (individually and in combination) to identify sources of report on the liquidity position and the performance against potential liquidity strain and to ensure that current exposures approved limits and targets. ALCO oversees the development remain in accordance with the NLB Group’s established of the Bank’s funding and liquidity position and decides on liquidity risk tolerance. Stress test outcomes are used to liquidity risk-related issues in NLB Group. adjust its liquidity risk management strategies, policies, and Risk tolerance for liquidity risk is low, therefore NLB Group capacity, and to develop effective contingency plans. must be able to provide sufficient funds for settling its liabilities at all times, even if a specific stress scenario is realised. NLB The NLB Group has a formal liquidity contingency plan (LCP) Group measures and manages its liquidity in two stages: that clearly sets out the procedures for addressing liquidity positions, define minimum amount of counterbalancing • Static view (current exposure), • Forward-looking and stress-testing. shortfalls in stressed situations. The plan outlines procedures to manage a range of stress environments, establish clear lines of responsibility, include clear invocation and escalation The objectives of monitoring and managing liquidity risk in procedures, and is regularly tested and updated to ensure counterbalancing capacity and arises in case of significant NLB Group are as follows: that it is operationally robust. reduction of market value of an individual financial instrument • ensuring a sufficient amount of liquidity for the settlement of and may result in insufficient value of counterbalancing capacity to cover the NLB Group’s liquidity needs. Intraday liquidity risk is the capacity required during the business day to enable financial institutions to make payments and settle obligations. In the risk identification process, first the reasons for the realisation of each identified material risk are analysed and grouped together in short risk descriptions. Material risks are then classified into three groups based on what part of liquidity is affected by the realisation of the material risks: liabilities side, assets side, intraday liquidity risk. Based on the identified material risks, key liquidity risk drivers are defined. Key risk drivers of the liquidity position are factors that are expected to trigger a substantial deterioration of the Group’s liquidity position. This deterioration may take place in the form of an increase in outflows, a decrease in inflows or a decrease in the liquidity value of the counterbalancing capacity. Liquidity risk is defined as an important risk type for NLB Group, and one which must be managed carefully. NLB Group has a liquidity risk management framework in place that enables maintaining a low risk tolerance for liquidity risk. NLB Group formulated a set of liquidity risk metrics and limits to manage liquidity position within the requirements set by the regulator. By maintaining a smooth long-term maturity profile, limiting dependence on wholesale funding, and holding a solid liquidity buffer, the NLB Group maintains a sound and robust liquidity position, even under severely adverse conditions. all NLB Group’s liabilities; NLB Group maintains a sufficient amount of liquidity • minimising the costs of maintaining liquidity; reserves in the form of high credit quality debt securities • determining an adequate amount of counterbalancing that are eligible for refinancing via the ECB/central bank capacity and optimal liquidity management; or on the market. In the current situation, NLB Group also • ensuring adequate control environment; strives to follow as closely as possible the long-term trend • ensuring an appropriate level of liquidity for different of diversification on both the liability and asset sides of situations and stress scenarios; the balance sheet. NLB Group regularly performs stress • anticipating emergencies or crisis conditions, and tests with the aim of testing the liquidity stability and the implementing contingency plans in the event of availability of liquidity reserves in various stress situations. extraordinary circumstances; In addition, special attention is given to the fulfilment of • ensuring regular projections of future cash flows and stress- the liquidity regulation (CRR/CRD), with monitoring and testing of liquidity risk; reporting of the liquidity coverage ratio (LCR) according to • preparing proposals for establishing additional financial the Delegated Act and net stable funding ratio (NSFR). This assets as collateral for sources of funding. also includes monitoring and reporting of Additional Liquidity Overall assessment of the liquidity position of NLB Group In accordance with the Commission Implementing Regulation is assessed in the Internal Liquidity Adequacy Assessment (EU), NLB Group regularly monitors and issues quarterly Monitoring Metrics (ALMM) on solo and consolidated levels. Process (ILAAP) at least once per year for NLB Group, and reports on asset encumbrance. it includes a clear formal statement on liquidity adequacy, supported by an analysis of ILAAP outcomes. The ILAAP The Group manages its liquidity position (liquidity within one process is integral to risk management frameworks and is day) daily, for a period of several days or weeks in advance, aligned with the NLB Group’s risk appetite which is consistent based on the planning and monitoring of cash flows. Each with the business model and approved by the management NLB Group member is responsible for its own liquidity position board. Based on the Risk Appetite, the NLB Group prepares and carries out the following activities: a business plan and financial forecasts which are crucial for • managing intraday liquidity; defining internal capital needs (ICAAP process) and internal • planning and monitoring cash flows; liquidity assessment (ILAAP process). Both processes are • monitoring and complying with the liquidity regulations of conducted from the normative and economic perspectives the central bank; and supplemented by the stress-testing programme. • adopting business decisions; • forming and managing liquidity reserves; and MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 304 • performing liquidity stress test to define the liquidity buffer funding and their appropriate diversification and maturity, liquidity reserves decreased by the required balances for for smooth functioning of the payment system in stressed and by managing liquidity reserves and fulfilling the the continuous performance of payment transactions, circumstances. requirements of regulations governing liquidity. The exposure encumbered securities, and/or credit claims for different of an individual NLB Group member towards liquidity risk is purposes (secured funding). NLB Group members actively manage liquidity over the regularly monitored and reported to ALCO, and to local Assets course of a day, taking into account the characteristics and Liabilities Committees. of payment settlements to ensure the timely settlement of liabilities in normal and stressed circumstances. a) Managing NLB Group’s liquidity reserves NLB Group has liquidity reserves available to cover liabilities tests. The amount represents a sum of liquidity reserves that would enable the survival of a severe stress over a period of The minimum amount of liquidity reserves is determined on the basis of the methodology pertaining to liquidity risk stress Liquidity risk management in NLB Group is under strict that fall or may become due. Liquidity reserves must become one month in a combined stress scenario and comprises high monitoring by NLB as a parent bank. Reporting to NLB by available on short notice. Liquidity reserves are comprised quality liquid assets according to LCR methodology, specified all Group members is performed daily. Global Risk gives of cash, the settlement account at the central bank above in Commission Delegated Regulation (EU) 2015/61 and the guidelines and defines minimal standards for Group members reserve requirement, debt securities, and loans eligible as later amendments. regarding liquidity risk management in NLB Group Risk collateral for the Eurosystem’s liquidity providing operations, Management Standards. Each Group member is responsible on the basis of which the Bank may generate the requisite for ensuring adequate liquidity via the necessary sources of liquidity at any time. The available liquidity reserves are The structure of liquidity reserves is shown in the following table. Liquidity reserves Cash, cash balances at central banks* Trading book securities Banking book securities ECB eligible loans Total available liquidity reserves Encumbered liquidity reserves *above reserve requirement NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 3,567,873 - 4,615,374 80,043 8,263,290 874,827 2,683,851 68,809 4,946,632 582,986 8,282,278 52,336 3,068,123 - 2,479,952 80,043 5,628,118 874,827 2,106,517 2,450 2,896,747 582,986 5,588,700 52,336 As at 31 December 2021, 79.8% (31 December 2020: 81.8%) of debt securities in the banking book of NLB Group were with respect to the portfolio’s structure in terms of issuers’ ratings and asset class. The framework for managing the loans are specified in the general terms about execution of monetary policy framework (Part 4) adopted by the Bank of government securities (including government guaranteed banking book securities is the Policy for managing debt Slovenia. NLB is the only member of NLB Group that complies bonds – GGB), and 10.0% (31 December 2020: 8.4%) were securities in the Financial Markets’ banking book and the with the conditions set by the Eurosystem to classify as an senior unsecured bonds. Policy for Managing Domestic (Slovenian) Corporate Debt eligible counterparty. As such, these ECB credit claims are The purpose of banking book securities is to provide liquidity, objectives and characteristics of the associated portfolio. along with stabilisation of the interest margin and the interest Members of NLB Group manage their liquid assets on a rate risk management, simultaneously. When managing the The ECB-eligible credit claims comprise loans which fulfil the decentralised basis in compliance with the local liquidity portfolio, NLB Group uses conservative principles, particularly high eligibility criteria set by the ECB itself and for domestic regulation and valid policies of NLB Group. Securities in Large Corporates, which clearly define the included among liquidity reserves. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 305 b) Encumbered/unencumbered assets 31 Dec 2021 Loans on demand Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total NLB Group NLB 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 1,083,713 780 454,939 471,556 - 2,010,988 - 780 455,631 - - 3,411,743 82,719 4,662,209 10,378,477 1,031,360 19,566,508 - 82,719 4,689,116 - - 101,854 - 497,515 464,027 - 1,063,396 - - 500,328 - - 2,970,538 49,181 2,479,951 4,980,705 1,155,761 11,636,136 - 49,181 2,501,899 - - in EUR thousands MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report 31 Dec 2020 Loans on demand Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total NLB Group NLB 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 991,649 708 52,336 80,204 - 1,124,897 - 708 2,462,193 82,251 55,519 4,968,205 - - 9,874,875 1,053,435 18,440,959 - 80,949 5,017,867 - - 102,458 - 52,336 72,943 - 227,737 - - 55,519 - - 1,966,670 49,318 2,899,197 4,734,993 1,148,687 10,798,865 - 49,318 2,951,975 - - in EUR thousands Contents 306 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: Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total d) Source of encumbrance in EUR thousands NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 242,682 - 140,751 268,249 10,438 146,750 203,620 - 20,245 198,874 - 20,165 9,839,848 10,679,630 4,120,940 3,809,244 10,223,281 11,105,067 4,344,805 4,028,283 NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral 42,292 746,021 3,698 792,011 53,744 835,066 1,122,179 76,187 5,978 3,875 2,010,989 86,040 91,250 12,055 1,021,592 1,124,897 42,292 790,505 - 53,744 877,641 132,010 832,797 1,063,395 76,187 5,978 - 82,165 91,250 12,055 124,433 227,738 in EUR thousands Derivatives Deposits Other sources of encumbrance Total As at 31 December 2021, NLB Group and NLB had a large share of unencumbered assets. Other sources of encumbrance mostly relate to the obligatory reserve. On the NLB Group level, the amount of encumbered assets equalled EUR 2,011 million (31 December 2020: EUR 1,125 million), relating to the deposit guarantee scheme and to targeted longer-term refinancing operations (TLTRO). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 307 e) Non-derivative cash flows The tables below illustrate the cash flows from non-derivative financial instruments by residual maturities at the end of the year. The amounts disclosed in the table are the undiscounted contractual cash flows determined on the basis of spot rates at the end of the reporting period. 31 Dec 2021 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 Financial liabilities and credit-related commitments 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 Credit risk related commitments Non-financial guarantees Total Total financial assets 56,073 954 15,772,513 614 - 120,694 578,233 30,426 16,559,507 6,179,369 173 480 270,238 1,929 4,427 11,678 166,473 72,983 528,381 820,022 684 748,496 859,204 6,824 6,803 17,866 838,890 195,917 2,674,684 2,704,322 15,448 99,842 743,774 29,554 41,400 55,321 470,308 342,426 1,798,073 8,110,038 - 6,048 22,543 40,862 318,201 1,319 407,499 61,349 857,821 5,031,994 72,378 855,820 17,668,272 79,783 370,831 206,878 2,461,403 703,101 22,418,466 22,845,745 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 NLB Group in EUR thousands Financial liabilities and credit-related commitments 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 Credit risk related commitments Non-financial guarantees Total Total financial assets 52,434 666 14,111,895 1,041 - 112,258 563,821 25,177 14,867,292 5,228,895 19,813 727 379,127 2,899 4,426 8,762 226,551 67,127 709,432 651,541 558 18,146 1,080,487 9,719 6,803 14,402 703,691 154,766 1,988,572 2,434,589 491 130,821 848,237 43,382 41,400 42,917 408,880 334,078 1,850,206 7,867,386 - 10,273 19,059 39,743 328,352 3,756 424,681 66,198 892,062 4,621,083 73,296 160,633 16,438,805 96,784 380,981 182,095 2,327,624 647,346 20,307,564 20,803,494 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 308 NLB in EUR thousands 31 Dec 2021 Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Financial liabilities and credit-related commitments 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 Credit risk related commitments Non-financial guarantees Total Total financial assets - 94,326 44,569 9,303,784 - - 71,942 503,492 16,714 10,034,827 3,678,758 - - - 65,745 - 4,427 4,041 96,524 45,786 216,523 308,197 352 15,197 82,882 158,637 406 41,400 25,501 280,201 240,761 845,337 - - - 8,706 - 318,201 427 220,580 33,803 581,717 4,150,714 3,280,846 - - 742,584 125,834 - 6,803 616 451,614 100,102 1,427,553 1,061,588 NLB Total 352 109,523 870,035 9,662,706 406 370,831 102,527 1,552,411 437,166 13,105,957 12,480,103 in EUR thousands 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 Financial liabilities and credit-related commitments 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 Credit risk related commitments Non-financial guarantees Total Total financial assets 41,635 85 8,412,546 - - 57,913 478,872 18,203 9,009,254 2,800,273 - 704 108,942 - 4,426 6,134 143,562 41,599 305,367 217,309 - 13,547 184,159 13 6,803 582 418,866 90,299 714,269 - 121,751 143,115 - 41,400 23,813 261,282 245,158 836,519 - 9,561 4,775 - 328,352 527 270,333 36,406 649,954 1,008,108 3,878,926 2,904,506 41,635 145,648 8,853,537 13 380,981 88,969 1,572,915 431,665 11,515,363 10,809,122 When determining the gap between the financial liabilities calculation of the liquidity position. To ensure NLB Group’s Liabilities and credit-related commitments are included in and financial assets in the maturity bucket of up to one month, and NLB’s liquidity, and based on its approach to risk, in maturity buckets based on their residual contractual maturity, it is necessary to be aware of the fact that financial liabilities previous years NLB Group compiled a substantial amount of with the exception of the TLTRO loan, which is included based include total demand deposits, and that NLB may apply a high-quality liquid investments, mostly government securities on expected early repayment in June 2022 (note 5.15.b). stability weight of 60% to demand deposits when ensuring compliance with the central bank’s regulations concerning and selected loans, which are accepted as adequate financial assets by the ECB. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 309 f) An analysis of the statement of financial position by residual contractual maturity NLB Group in EUR thousands 31 Dec 2021 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 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 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 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 - lease liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 5,005,052 7,678 6,739 401,080 38,317 119,930 466,930 92,505 568 - - - - - - - - 23,983 6,162,782 7,585 35,377 56,053 889 15,771,461 535 - 120,182 512 7,314 2,722 - 36,495 16,039,125 578,233 30,426 - - - - - 921 163,233 400,588 124,948 2,374 1,912,038 773 - - 7,051 - - - - 3,948 620 19,859 - - 3,340 1,888,222 783,028 1,552 4,519,726 25,538 - 1,330 - 89,813 43,693 29,259 - - 31,934 37,563 - - 10,161 608,737 752,226 - 3,141,189 104 - 5,752 - 157,201 3,931 29,817 11,525 - 6,423 161 Total 5,005,052 7,678 21,161 3,461,860 1,717,626 140,683 10,587,121 122,229 568 7,082 7,051 247,014 47,624 59,076 11,525 3,948 38,977 91,221 2,473,120 7,454,998 4,727,227 21,577,496 - - 521 751,773 852,576 6,186 1,759 13,817 4,049 39,914 - - 5,749 1,676,344 838,890 195,917 - - 15,254 99,418 727,308 27,074 - 37,643 17,678 69,863 - 3,045 4,867 1,002,150 470,308 342,426 - - - 6,009 20,980 38,486 283,071 257 1,062 1,130 - - 1,609 352,604 407,499 61,349 7,585 35,377 71,828 858,531 17,640,809 74,051 288,519 182,554 24,324 119,404 5,878 3,045 49,468 19,361,373 2,461,403 703,101 19,107 16,827 547,238 3,309 - - - - - - - - - 9,655 759,369 - - - 442 268,484 1,770 3,689 10,655 1,023 1,183 3,156 - 748 291,150 166,473 72,983 Total liabilities and credit-related commitments 16,647,784 530,606 2,711,151 1,814,884 821,452 22,525,877 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 310 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 NLB Group in EUR thousands 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 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 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 - lease liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 3,961,812 16,046 6,067 352,474 74,540 154,686 538,078 80,692 - - - - - - 1,656 327 24,548 5,210,926 15,485 61,161 52,434 658 14,109,959 977 - 111,166 1,092 8,507 644 763 31,914 - 15,173 120 57,055 47,087 36,706 421,665 8,319 - - - - - - 22 - 9,109 595,256 - - 19,813 717 375,751 2,731 3,690 7,703 1,059 1,183 358 - 412 14,394,760 413,417 563,821 25,177 226,551 67,127 - 1 24,954 337,298 76,672 4,375 1,733,251 3,380 - 8,658 - - - - 2,691 - 54,992 2,246,272 - - 163 17,468 1,069,785 9,120 1,759 9,552 4,850 32,785 - - 4,505 1,149,987 703,691 154,766 - 47,223 1,171 1,960,192 695,030 1,238 4,252,968 20,597 885 - 78,847 41,501 32,274 - - 28,759 8,337 7,169,022 - - 223 129,215 825,076 41,072 - 25,970 16,947 79,159 - 3,301 2,464 1,123,427 408,880 334,078 - 6,412 10,081 807,271 609,758 - 2,673,898 150 12,959 - 170,270 13,341 29,394 7,988 - 2,703 154 Total 3,961,812 84,855 42,393 3,514,290 1,503,087 197,005 9,619,860 113,138 13,844 8,658 249,117 54,842 61,668 7,988 4,369 31,789 97,140 4,344,379 19,565,855 - - - 10,167 16,596 37,660 282,872 1,345 2,411 3,425 - 411 6,337 361,224 424,681 66,198 15,485 61,161 72,633 158,225 16,397,167 91,560 288,321 155,736 26,359 125,059 1,002 4,475 45,632 17,442,815 2,327,624 647,346 Total liabilities and credit-related commitments 14,983,758 707,095 2,008,444 1,866,385 852,103 20,417,785 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 311 31 Dec 2021 Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years NLB in EUR thousands Cash, cash balances at central banks, and other demand deposits at banks 3,250,437 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 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 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 - due to customers - borrowings from other customers - subordinated liabilities - other financial liabilities - lease liabilities Provisions Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 7,682 614 24,773 2,825 916 317,315 66,454 568 - - - - - - - - 6,984 3,678,568 7,602 - 35,377 94,326 44,569 9,303,755 - - 71,866 76 544 14,216 9,572,331 503,492 16,714 - - 29 57,473 18,182 40,463 171,605 658 - - - - - - - - - - 288,410 - - - - - 65,612 - 3,689 3,895 146 672 166 74,180 96,524 45,786 - - 306 141,428 90,276 50,129 676,938 3,100 - - 4,089 - - - 24,282 3,761 - 4,869 999,178 - - - - 746,028 125,287 - 1,759 2 614 18,501 1,442 893,633 451,614 100,102 - - 6,939 918,421 608,223 32,066 2,183,239 22,192 - 1,330 - 19,304 9,181 14,255 37,984 - 31,902 - - - 4,472 443,656 716,918 75,713 1,796,056 - - 5,752 - 66,818 - 15,198 723,757 - - - Total 3,250,437 7,682 12,360 1,585,751 1,436,424 199,287 5,145,153 92,404 568 7,082 4,089 86,122 9,181 29,453 786,023 3,761 31,902 11,853 3,885,036 3,848,340 12,699,532 - 352 - 15,003 82,882 156,322 406 - 23,495 2,006 29,646 3,683 313,795 280,201 240,761 - - - - - 8,629 - 283,071 13 414 - 1,532 293,659 220,580 33,803 7,602 352 35,377 109,329 873,479 9,659,605 406 288,519 99,271 3,256 49,363 21,039 11,147,598 1,552,411 437,166 Total liabilities and credit-related commitments 10,092,537 216,490 1,445,349 834,757 548,042 13,137,175 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 312 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 Cash, cash balances at central banks, and other demand deposits at banks 2,261,533 NLB in EUR thousands 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 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 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 - lease liabilities Provisions Other liabilities Total liabilities Credit risk related commitments Non-financial guarantees 16,381 526 91,312 66,893 392 322,669 33,661 - - - - - - - - 6,558 2,799,925 15,500 61,161 41,635 85 8,412,510 - - 57,840 73 495 14,610 - - 158 19,936 13,792 22,824 141,946 218 - - - - - - - - - - 1 26,084 185,583 41,502 50,274 609,404 40 - 4,454 - - - 1,719 1,923 - 5,106 - 2,449 3,885 867,674 556,444 28,990 2,029,791 20,584 885 - 22,173 8,300 13,058 65,140 - 29,214 - - - 4,453 551,846 599,249 55,840 1,460,368 - 12,959 - 69,502 - 15,047 683,863 - - - Total 2,261,533 18,831 35,106 1,716,351 1,277,880 158,320 4,564,178 54,503 13,844 4,454 91,675 8,300 28,105 750,722 1,923 29,214 11,664 198,874 926,090 3,648,587 3,453,127 11,026,603 - - - 704 108,772 - 3,690 6,006 128 669 94 - - - 12,948 183,709 13 1,759 - 582 19,463 2,236 220,710 418,866 90,299 - - - 120,260 141,077 - - 21,899 1,914 41,533 2,430 329,113 261,282 245,158 - - - 9,467 4,687 - 282,870 12 515 1,630 2,631 15,500 61,161 41,635 143,464 8,850,755 13 288,319 85,757 3,212 63,790 22,001 301,812 9,575,607 270,333 36,406 1,572,915 431,665 8,603,909 120,063 478,872 18,203 143,562 41,599 Total liabilities and credit-related commitments 9,100,984 305,224 729,875 835,553 608,551 11,580,187 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 313 g) Derivative cash flows The table below illustrates cash flows from derivatives, residual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows prepared on the basis of broken down into the relevant maturity buckets based on spot rates on the reporting date. 31 Dec 2021 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 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 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 (26,202) 26,214 (96,742) 96,483 (1,116) 34 - - (124,060) 122,731 (10,460) 10,465 (2,362) 2,364 (2,107) 237 - - (14,929) 13,066 (16,853) 16,865 (17,335) 17,346 (10,153) 3,321 (1) 2 (44,342) 37,534 (12,180) 12,199 - - (26,901) 7,179 (51) 52 (39,132) 19,430 - - - - (12,053) 7,287 - - (12,053) 7,287 (65,695) 65,743 (116,439) 116,193 (52,330) 18,058 (52) 54 (234,516) 200,048 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 (24,456) 24,494 (20,709) 20,297 (692) 73 (45,857) 44,864 (28,334) 28,368 (49,105) 49,112 (2,962) 718 (80,401) 78,198 (65,976) 66,041 (36,055) 36,034 (11,378) 4,394 (113,409) 106,469 (13,817) 13,828 - - (42,239) 8,777 (56,056) 22,605 - - - - (18,643) 2,348 (18,643) 2,348 (132,583) 132,731 (105,869) 105,443 (75,914) 16,310 (314,366) 254,484 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 314 31 Dec 2021 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 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 Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total NLB in EUR thousands (24,891) 24,902 (102,036) 101,772 (1,116) 34 - - (128,043) 126,708 (10,460) 10,465 (6,875) 6,864 (2,107) 237 - - (19,442) 17,566 (12,180) 12,199 - - (26,901) 7,179 (51) 52 (39,132) 19,430 (16,853) 16,865 (17,335) 17,346 (10,153) 3,321 (1) 2 (44,342) 37,534 NLB - - - - (12,053) 7,287 - - (12,053) 7,287 (64,384) 64,431 (126,246) 125,982 (52,330) 18,058 (52) 54 (243,012) 208,525 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) 23,715 (24,874) 24,821 (692) 73 (49,251) 48,609 (31,650) 31,685 (53,580) 53,592 (2,962) 718 (88,192) 85,995 (65,976) 66,041 (6,063) 6,068 (11,378) 4,394 (83,417) 76,503 (13,817) 13,828 - - (42,239) 8,777 (56,056) 22,605 - - - - (18,643) 2,348 (18,643) 2,348 (135,128) 135,269 (84,517) 84,481 (75,914) 16,310 (295,559) 236,060 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 315 6.4. Management of non-financial risks a) Operational risk When assuming operational risks, NLB Group follows the mostly due to inclusion of the net losses arising from acquired The concept of the action plan that is prepared each year Komercijalna banka Group. Nevertheless, the reported is such that the activities contribute to the upgrading or incurred net loss remained within the set tolerance limits for improvement of the Business Continuity Management System. guideline that such risks may not materially impact its operational risk. operations and, therefore, the risk appetite for operational In 2021, Business Continuity Management was upgraded System according to external influence – we added scenarios risks is low to moderate. The risk is also gradually decreasing In general, considerable attention is paid to reporting loss for most likely events which could affect the bank (earthquake, due to the reduced complexity of operations in NLB Group, events, their mitigation measures, and defining operational fire, floods, sleet, epidemic, terrorism, IT disaster, cyber- with disinvestment process of non-core activities and risks in all segments. To treat major loss events appropriately attack). optimisation of internal processes. NLB Group has set up a and as soon as possible, the Bank introduced an escalation system of collecting loss events, identification, assessment, scale for reporting bigger or more important loss events to The basis for modernising the business continuity plans is the and management of operational risks, all with the aim of the top levels of decision-making at NLB and the Supervisory regular annual Business Impact Analysis (BIA). On its basis, ensuring quality management of operational risks. This is Board of NLB. Additional attention is paid to the reporting of the adequacy of the plans for office buildings, HR plans and particularly valid in strategic banking members. potential loss events in order to improve the internal controls, IT plans is checked. The best indicator of the adequacy of the All NLB Group banking members monitor risk appetite limits the methodology to monitor, analyse, and report key risk and an IT test were carried out at NLB (no evacuation and for operational risk. The upper tolerance limit is defined as the indicators is established, servicing as an early warning manual procedures test because of the COVID-19 pandemic). limit amount of net loss that an individual member still allows system. The aim is to improve business and supporting No major deviations were identified. and thus minimise those and similar events. Furthermore, business continuity plans is testing. In 2021, only external tests in its operations. If the sum of net loss exceeds the tolerance processes, as well enabling prompt response. limit, a special treatment of major loss events is required and, In NLB Group, know-how and methodologies are transferred if necessary, takes additional measures for the prevention or Through comprehensive identification of operational to the members (except non-core members which are in mitigation of the same or similar loss events are taken. The risks, possible future losses are identified, estimated, and the process of liquidation). The members have adopted warning and critical limit of loss events are also defined, which in appropriately managed. Each year, special emphasis is appropriate documents which are in line with the standards case of exceeding require escalation procedures an acceptance placed on current risks as a result of risk identification of NLB and revised in accordance with the development of of possible additional risk management measures. In addition, process, including ESG risks. Additional KRIs have been business continuity management. The activity of the members the Bank does not allow certain risks in its business – for them addressed for ESG risks, servicing as an early warning is monitored throughout the year, and expert assistance is a so-called ‘zero tolerance’ was defined. For monitoring some system. The major operational risks are actively managed provided if necessary. specific more important key risk indicators, that could show a with the measures taken to reduce them. An operational possible increase of an operational risk, the Bank developed a risk profile is prepared once a year on the basis of the For more efficient functioning of the business continuity specific methodology as an early warning system. Such risks operational risk identification. Special emphasis is put on management system in NLB Group, training courses and visits are periodically monitored in different business areas, and the the most topical risks, among which in particular are those to individual banking members are also provided. In 2021, results are discussed at the Operational Risk Committee. The with a low probability of occurrence and very high potential visits of NLB Group banking subsidiaries were suspended latter was named as the highest decision-making authority in the financial influence. For this purpose, the Bank has developed due to COVID-19 situation, nevertheless all preventive and area of operational risk management. Relevant operational risk the methodology of stress-testing for operational risk. The response measures with regard to business continuity were committees were also appointed at other NLB Group banks. The methodology is a combination of modelling loss event data sent to the members with the purpose to help and act in the Management Board serves in this role at other subsidiaries. The and scenario analysis for exceptional, but plausible events. uniform way. Besides, workshops were performed to present main task of the aforementioned bodies is to discuss the most Scenario analyses are made based on experience and development of Business Continuity Management System significant operational risks and loss events, and to monitor and knowledge of experts from various critical areas. to all the NLB Group members to be more resilient in the support the effective management of operational risks including epidemic/pandemic circumstances. their mitigation within an individual entity. All NLB Group entities, The capital requirement for operational risk is calculated which are included in the consolidation, have adopted relevant using the basic indicator approach at the NLB Group level and With regards to IT failures, the Bank successfully used the IT documents that are in line with NLB standards. In banking using the standardised approach at the NLB level. plans and instructions for manual procedures, and thus also members, these documents are in line with the development of operational risk management and regularly updated. The whole NLB Group uses uniform software support, which is also b) Business Continuity Management (BCM) In NLB Group, business continuity management is carried out During COVID-19 pandemic in Slovenia and SEE, NLB Group ensured business operations in emergency situations. regularly upgraded. to protect lives, goods, and reputation. Business continuity has taken measures to protect its customers and employees, In NLB Group, the reported incurred net loss arising from loss events in 2021 was higher than in the previous year, disasters, IT disasters, epidemic/pandemic, and the undesired conditions and making sure that the services offered by the effects of the environment to mitigate their consequences. Group are provided without any disruption. The NLB Group plans are prepared to be used in the event of natural such as (but not limited to) ensuring the relevant safety MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 316 continuously offered necessary services to clients, especially between market participants at the measurement date. NLB • Level 3 – A valuation technique where inputs are not based through digital channels (mobile banking, video calls and Group uses various valuation techniques to determine fair on observable market data. Unobservable inputs are telebanking), which the NLB Group continues to develop at an value. IFRS 13 specifies a fair value hierarchy with respect to used to the extent that relevant observable inputs are not accelerated pace. A Crisis Management Team was activated the inputs and assumptions used to measure financial and available. Unobservable inputs must reflect the assumptions in the Bank and other banking members with full engagement non-financial assets and liabilities at fair value. Observable that market participants would use when pricing an asset or of the Management Board members. Special attention was inputs reflect market data obtained from independent liability. This level includes non-tradable shares and bonds, paid to continuous provision of services to clients, their sources, while unobservable inputs reflect the assumptions and derivatives associated with these investments and monitoring, health protection measures, and prevention of of NLB Group. This hierarchy gives the highest priority to other assets and liabilities for which fair value cannot be cyber fraud. observable market data when available, and the lowest determined with observable market inputs. priority to unobservable market data. NLB Group considers c) Management of other types of non-financial risks relevant and observable market prices in its valuations, where Wherever possible, fair value is determined as an observable – capital risk, strategic risks, reputation risk, and possible. The fair value hierarchy comprises the following market price in an active market for an identical asset or profitability risk Risks not included in the regulatory capital requirements levels: liability. An active market is a market in which transactions for • Level 1 – Quoted prices (unadjusted) on active markets. This an asset or liability are executed with sufficient frequency and (standardised approach) but have or might have an important level includes listed equities, debt instruments, derivatives, volume to provide pricing information on an ongoing basis. influence on the risk profile of NLB Group, are regularly units of investment funds, and other unadjusted market Assets and liabilities measured at fair value in active markets assessed, monitored, and managed. In addition, they are prices of assets and liabilities. When an asset or liability are determined as the market price of a unit (e.g., share) at the integrated into internal capital adequacy assessment process may be exchanged in multiple active markets, the principal measurement date, multiplied by the quantity of units owned (ICAAP). NLB Group established internal methodologies for market for the asset or liability must be determined. In the by NLB Group. The fair value of assets and liabilities whose identifying and assessing specific types of risk, referring to absence of a principal market, the most advantageous market is not active is determined using valuation techniques. the Group’s business model or arising from other external market for the asset or liability must be determined. These techniques bear a different intensity level of estimates circumstances. If a certain risk is assessed as a materially and assumptions, depending on the availability of observable important risk, relevant disposable preventive and mitigation • Level 2 – A valuation technique where inputs are market inputs associated with the asset or liability that is the measures are applied, including regular monitoring of their observable, either directly (i.e., prices) or indirectly (i.e., subject of the valuation. Unobservable inputs shall reflect the effectiveness. On this basis, internal capital is considered and derived from prices). Level 2 includes prices quoted for estimates and assumptions that other market participants its consumption regularly monitored. similar assets or liabilities in active markets and prices would use when pricing the asset or liability. 6.5. Fair value hierarchy of financial and non-financial assets and liabilities Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction markets that are not active. The sources of input parameters For non-financial assets measured at fair value and not for financial instruments, such as yield curves, credit classified at Level 1, fair value is determined based on valuation spreads, foreign exchange rates, and the volatility of interest reports provided by certified valuators. Valuations are prepared rates and foreign exchange rates, is Bloomberg. in accordance with the International Valuation Standards (IVS). quoted for identical or similar assets, and liabilities in MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 317 a) Financial and non-financial assets and liabilities measured at fair value in the financial statements NLB Group NLB Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value in EUR thousands 31 Dec 2021 Financial assets Financial instruments held for trading Derivatives Derivatives - hedge accounting Financial assets measured at fair value through other comprehensive income 2,010,485 1,449,888 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 intangible assets Recoverable amount of investments in subsidiaries, associates and joint ventures 2,009,699 1,385,211 786 16,689 4,261 12,428 - - - - - - - - - - 64,677 - - - - 7,585 7,585 35,377 - 19,982 7,051 - - - - - - 7,677 7,677 568 7,678 7,678 568 - - - 3,461,860 1,533,797 3,395,261 1,533,797 1 1 - 1,487 351 1,136 4,472 - 4,472 - - - - - 27,642 - 66,599 21,161 4,261 16,900 - 7,585 7,585 35,377 - 47,624 7,051 2,990 2,990 872 - 872 - 7,681 7,681 568 51,735 7,245 44,490 7,888 - - 7,888 7,602 7,602 35,377 352 9,181 4,089 - - 201 1 1 - 219 - 219 4,472 - 4,472 - - - - - - - - - 7,682 7,682 568 1,585,751 1,541,042 44,709 12,360 - 4,472 7,888 7,602 7,602 35,377 352 9,181 4,089 - - 2,618 2,819 - - - - - - - - - - - - - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 318 NLB Group NLB Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value in EUR thousands 31 Dec 2020 Financial assets Financial instruments held for trading Debt instruments Derivatives 2,450 2,450 - 81,619 66,356 15,263 Financial assets measured at fair value through other comprehensive income 2,068,317 1,444,146 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 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 2,060,346 1,385,245 7,971 13,146 2,157 10,989 - - - - - - - - 58,901 - - - - 15,485 15,485 61,161 22,632 8,658 - - 786 - 786 1,827 900 927 29,247 - 4,171 25,076 - - - 32,210 - 3,897 - 84,855 68,806 16,049 2,450 2,450 - 3,514,290 1,663,619 3,446,491 1,663,619 67,799 42,393 2,157 15,160 25,076 15,485 15,485 61,161 54,842 8,658 3,897 - - - - - - - - - - - - - 15,595 - 15,595 52,458 7,585 44,873 7,947 - - 786 - 786 274 - 274 27,159 - 4,171 18,831 2,450 16,381 1,716,351 1,671,204 45,147 35,106 - 4,171 7,947 22,988 30,935 15,500 15,500 61,161 8,300 4,454 - 280 - - - - - - 4,670 15,500 15,500 61,161 8,300 4,454 - 4,950 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 319 b) Significant transfers of financial instruments between levels of valuation NLB Group’s policy of transfers of financial instruments between levels of valuation is illustrated in the table below. Fair value hierarchy Equities Equity stake Funds Debt securities Loans Equities Currency Interest Derivatives 1 2 3 Transfers 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 (underlying in level 1) valuation model (underlying instrument in level 3) valuation model valuation model 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 For 2021 and 2020, neither NLB Group nor NLB had any significant transfers between levels of valuation of financial instruments measured at fair value in financial statements. 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) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 320 c) Financial and non-financial assets and liabilities at Level 2 yield, risk premium, and the risk premium to account for NLB Group selects valuation model and values of regarding the fair value hierarchy Financial instruments on Level 2 of the fair value hierarchy at capital preservation are used. Rents at similar locations are unobservable input data within a reasonable possible range, generated from various sources, like data from lessors and but uses model and input data that other market participants NLB Group and NLB include: lessees, web databases, and own databases. NLB Group has would use. • debt securities: mostly bonds not quoted on active markets observable data for all investment property at its disposal. and valuated by a valuation model; If observable data for similar locations are not available, At least one of the three valuation methods are used for the • derivatives: derivatives except forward derivatives and NLB Group uses data from wider locations and adjusts it valuation of investment property. The majority of investment options on equity instruments that are not quoted on active appropriately. markets; property is valued using the income approach where the present value of future expected returns is assessed. When • performing loans measured at fair value, which according d) Financial and non-financial assets and liabilities at Level 3 valuing an investment property, average rents at similar to IFRS 9 do not pass SPPI test. Fair value is calculated on the basis of the discounted expected future cash flows with of the fair value hierarchy Financial instruments on Level 3 of the fair value hierarchy in locations and capitalisation ratios such as: the risk-free yield, risk premium and the risk premium to account for the required rate of return; and • the National Resolution Fund. NLB Group and NLB include: capital preservation are used. Rents at similar locations are • equities: mainly financial equities that are not quoted on generated from various sources, like data from lessors and active markets; lessees, web databases, and own databases. NLB Group has Non-financial assets on Level 2 of the fair value hierarchy at • derivative financial instruments: forward derivatives and observable data for all investment property at its disposal. NLB Group and NLB include investment properties. options on equity instruments that are not quoted on an If observable data for similar locations are not available, active organised market. Fair values for forward derivatives NLB Group uses data from wider locations and adjusts it When valuing bonds classified on Level 2, NLB Group primarily are determined using the discounted cash flow model. Fair appropriately. uses the income approach based on an estimation of future values for equity options are determined using valuation cash flows discounted to the present value. models for options (the Garman and Kohlhagen model, binomial model, and Black-Scholes model). Unobservable The input parameters used in the income approach are the inputs include the fair values of underlying instruments risk-free yield curve and the spread over the yield curve determined using valuation models. The source of observable (credit, liquidity, country). market inputs is the Bloomberg information system; and • non-performing loans measured at fair value, which Fair values for derivatives are determined using a discounted according to IFRS 9 do not pass SPPI test. Fair value is cash flow model based on the risk-free yield curve. Fair values calculated on the basis of the discounted expected future for options are determined using valuation models for options cash flows with the required rate of return. In defining the (the Garman and Kohlhagen model, binomial model, and expected cash flows for non-performing loans, the value of Black-Scholes model). collateral and other pay off estimates can be used. At least one of the three valuation methods are used for the Non-financial assets on Level 3 of the fair value hierarchy at valuation of investment property. The majority of investment NLB Group include investment properties. property is valued using the income approach where the present value of future expected returns is assessed. When NLB Group uses three valuation methods for the valuation of valuing an investment property, average rents at similar equity financial assets mentioned in first bullet: the income, locations and capitalisation ratios such as: the risk-free market, and cost approaches. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 321 Movements of financial assets and liabilities at Level 3 NLB Group Derivatives Debt instruments Equity instruments Equity instruments Loans and other financial assets 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 Total financial assets in EUR thousands Financial liabilities measured at fair value through profit or loss Loans and other financial liabilities Balance as at 1 January 2020 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries Valuation: - through profit or loss - recognised in other comprehensive income Foreign exchange differences Increases Decreases Balance as at 31 December 2020 Effects of translation of foreign operations to presentation currency Valuation: - through profit or loss - recognised in other comprehensive income Foreign exchange differences Increases Decreases Balance as at 31 December 2021 807 - - (21) - - - - 786 - (785) - - - 1 - - 900 - - - - - 900 - - - 63 (612) 351 4,109 53 85 - 21 - - (3,341) 927 (2) - 266 - (55) 1,136 2,716 - - 1,642 - (187) - - 4,171 - (56) - 357 - - 4,472 14,961 - - (2,720) - (48) 20,399 (7,516) 25,076 - 15,747 - 9 3,017 (43,849) - 22,593 53 985 (1,099) 21 (235) 20,399 (10,857) 31,860 (2) 14,906 266 366 3,080 (44,516) 5,960 7,998 - (8,006) - 8 - - - - - - - - - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 322 NLB Derivatives Equity instruments Equity instruments Loans and other financial assets 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 Total financial assets Balance as at 1 January 2020 Valuation: - through profit or loss - recognised in other comprehensive income Foreign exchange differences Increases Decreases Balance as at 31 December 2020 Valuation: - through profit or loss Foreign exchange differences Increases Decreases Balance as at 31 December 2021 807 (21) - - - - 786 (785) - - - 1 259 - 15 - - - 274 - - - (55) 219 2,716 1,642 - (187) - - 4,171 (56) 357 - - 4,472 13,055 (2,831) - (48) 19,833 (7,021) 22,988 13,749 9 3,005 (39,751) - 16,837 (1,210) 15 (235) 19,833 (7,021) 28,219 12,908 366 3,005 (39,806) 4,692 in EUR thousands Financial liabilities measured at fair value through profit or loss Loans and other financial liabilities 7,746 (7,754) - 8 - - - - - - - - NLB Group and NLB recognise the effects from valuation of from non-trading financial assets mandatorily at fair value trading instruments in income statement line item ‘Gains less through profit or loss,’ and effects from valuation of financial losses from financial assets and liabilities held for trading,’ assets measured at fair value through other comprehensive effects from valuation of non-trading equity instruments income in the accumulated other comprehensive income line and loans mandatorily measured at fair value through item ‘Financial assets measured at fair value through other profit or loss in income statement line item ‘Gains less losses comprehensive income.’ MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 323 In 2021 and in 2020, NLB Group and NLB recognised the following unrealised gains or losses for financial instruments that were at Level 3 as at 31 December: NLB Group 2021 Items of Income statement 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 NLB Group 2020 Items of Income statement Gains less losses from financial assets and liabilities held for trading 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 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 Derivatives Equity instruments Equity instruments Loans and other financial assets - - - - - 266 (56) 357 - - - - 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 Derivatives Equity instruments Equity instruments Loans and other financial assets in EUR thousands Financial liabilities measured at fair value through profit or loss Loans and other financial liabilities - - - in EUR thousands Financial liabilities measured at fair value through profit or loss Loans and other financial liabilities (21) - - - - - - 21 - 1,642 (187) - - (2,720) (48) - 8,006 (8) - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 324 NLB 2021 Items of Income statement Gains less losses from non-trading assets mandatorily at fair value through profit or loss Foreign exchange translation gains less losses NLB 2020 Items of Income statement Gains less losses from financial assets and liabilities held for trading 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 Movements 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.c) 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 Disposal of subsidiary (note 5.12.b) Balance as at 31 December 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 Derivatives Equity instruments Equity instruments - - - - (56) 357 Loans and other financial assets - - 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 Derivatives Equity instruments Equity instruments Loans and other financial assets in EUR thousands Financial liabilities measured at fair value through profit or loss Loans and other financial liabilities - - in EUR thousands Financial liabilities measured at fair value through profit or loss Loans and other financial liabilities - 1,642 (187) - - (2,831) (48) - 7,754 (8) - - (21) - - - - - - 15 2021 32,210 19 - - (502) (7,568) 22 1,260 3,416 (1,215) 27,642 in EUR thousands NLB Group 2020 28,933 (24) 19,643 609 (189) (62) 17 (16,790) 73 - 32,210 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 325 e) Fair value of financial instruments not measured at fair disclosure purposes only and do not impact NLB Group value in financial statements statement of financial position or income statement. Financial instruments not measured at fair value in financial The table below shows estimated fair values of financial statements are not managed on a fair value basis. For instruments not measured at fair value in the statement of respective instruments fair values are calculated for financial position. NLB Group NLB 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 Carrying value Fair value Carrying value Fair value Carrying value Fair value Carrying value Fair value in EUR thousands Financial assets measured at amortised cost - debt securities - loans and advances to banks 1,717,626 140,683 1,745,225 140,843 1,503,087 197,005 - loans and advances to customers 10,587,121 10,751,051 9,619,860 - other financial assets 122,229 122,229 113,138 1,563,103 197,220 9,873,137 113,138 1,436,424 199,287 5,145,153 92,404 1,461,185 204,743 1,277,880 158,320 1,333,840 165,966 5,235,839 4,564,178 4,674,069 92,404 54,503 54,503 Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 71,828 858,531 69,720 849,834 72,633 158,225 72,648 155,673 109,329 873,479 109,522 863,970 41,635 143,464 41,635 140,702 - due to customers 17,640,809 17,658,686 16,397,167 16,414,382 9,659,605 9,664,607 8,850,755 8,860,267 - borrowings from other customers - subordinated liabilities - other financial liabilities 74,051 288,519 206,878 73,744 292,130 206,878 91,560 288,321 182,095 93,020 281,001 182,095 406 288,519 102,527 406 292,130 102,527 13 288,321 88,969 13 281,001 88,969 Loans and advances to banks Deposits and borrowings Other financial assets and liabilities The estimated fair value of deposits is based on discounted The fair value of sight deposits and overnight deposits equals The carrying amount of other financial assets and liabilities is cash flows using prevailing market interest rates for their carrying value. However, their actual value for NLB a reasonable approximation of their fair value as they mainly instruments with similar credit risk and residual maturities. Group depends on the timing and amounts of cash flows, relate to short-term receivables and payables. The fair value of overnight deposits equals their carrying current market rates, and the credit risk of the depository value. institution itself. A portion of sight deposits is stable, similar to term deposits. Therefore, their economic value for NLB Group Loans and advances to customers differs from the carrying amount. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected The estimated fair value of other deposits and borrowings to be received. Expected cash flows are discounted at current from customers is based on discounted cash flows using market rates for debts with similar credit risk and residual interest rates for new deposits with similar residual maturities. maturities to determine their fair value. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 326 Fair value hierarchy of financial instruments not measured at fair value in financial statements 31 Dec 2021 NLB Group NLB Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value in EUR thousands Financial assets measured at amortised cost - debt securities 1,434,411 - 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 - borrowings from banks and central banks - due to customers - borrowings from other customers - subordinated liabilities - other financial liabilities - - - - - - - 245,700 - 303,647 140,843 10,751,051 122,229 69,720 849,834 17,658,686 73,744 46,430 206,878 7,167 - - - - - - - - - 1,745,225 140,843 10,751,051 122,229 69,720 849,834 17,658,686 73,744 292,130 206,878 1,358,293 - - - - - - - 245,700 - 102,892 204,743 5,235,839 92,404 109,522 863,970 9,664,607 406 46,430 102,527 - - - - - - - - - - 1,461,185 204,743 5,235,839 92,404 109,522 863,970 9,664,607 406 292,130 102,527 in EUR thousands 31 Dec 2020 NLB Group NLB 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 - 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 - borrowings from banks and central banks - due to customers - borrowings from other customers - subordinated liabilities - other financial liabilities - - - - - - - 234,629 - 288,484 197,220 9,873,137 113,138 72,648 155,673 16,414,382 93,020 46,372 182,095 7,182 - - - - - - - - - 1,563,103 197,220 9,873,137 113,138 72,648 155,673 16,414,382 93,020 281,001 182,095 1,254,337 - - - - - - - 234,629 - 79,503 165,966 4,674,069 54,503 41,635 140,702 8,860,267 13 46,372 88,969 - - - - - - - - - - 1,333,840 165,966 4,674,069 54,503 41,635 140,702 8,860,267 13 281,001 88,969 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 327 6.6. Offsetting financial assets and financial liabilities NLB Group has entered into bilateral foreign exchange netting arrangements with certain banks and corporates. Cash flows from such transactions that are due on the same day in the same currency, are settled 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 transaction. Assets and liabilities related to these netting mitigation and collateralisation of exposures, as well as the arrangements are not presented in a net amount in the daily settlement of cash flows for each currency. statement of financial position because netting rules apply to cash flows and not to the entire financial instrument. All derivatives are conducted under the conditions of signed In 2013, NLB Group also novated certain standardised in place along with CSA annex and for corporates domestic derivatives (some interest rate swaps) to a clearing house or MA is in place, which enable daily evaluation and exchange of central counterparty. A system of daily margins assures the margining. Master Agreements (MA), with international banks ISDA MA is 31 Dec 2021 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31 Dec 2020 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31 Dec 2021 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31 Dec 2020 Financial assets/liabilities Derivatives - assets Derivatives - liabilities Gross amounts of recognised financial assets/liabilities 8,239 42,961 Gross amounts of recognised financial assets/liabilities 15,820 76,646 Gross amounts of recognised financial assets/liabilities 8,249 42,978 NLB Group Amounts not set off in the statement of financial position in EUR thousands Impact of master netting agreements Financial instruments collateral Net amount 998 998 NLB Group 445 41,121 6,796 842 in EUR thousands Amounts not set off in the statement of financial position Impact of master netting agreements Financial instruments collateral Net amount 608 608 NLB 594 74,861 14,618 1,177 in EUR thousands Amounts not set off in the statement of financial position Impact of master netting agreements Financial instruments collateral Net amount 1,008 1,008 NLB 445 41,121 6,796 849 in EUR thousands Gross amounts of recognised financial assets/liabilities 16,189 76,661 Amounts not set off in the statement of financial position Impact of master netting agreements Financial instruments collateral Net amount 623 623 594 74,861 14,972 1,177 NLB Group and NLB have no financial assets/liabilities set off in the statement of financial position. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 328 7. Analysis by segment for NLB Group a) Segments Retail Banking in Slovenia Corporate and Investment Banking in Slovenia Strategic Foreign Markets Financial Markets in Slovenia Non-Core Members NLB Group in EUR thousands Other activities Unallocated Total 2021 Total net income Net income from external customers Intersegment net income Net interest income Net interest income from external customers Intersegment net interest income 171,046 188,629 (17,583) 79,535 98,898 (19,363) 101,505 110,588 (9,083) 35,714 44,481 (8,767) 361,945 363,452 (1,507) 266,804 270,839 (4,035) Administrative expenses (104,844) (40,829) (198,589) Depreciation and amortisation Reportable segment profit/(loss) before impairment and provision charge Other net gains/(losses) from equity investments in subsidiaries, associates and joint ventures Impairment and provisions charge Profit/(loss) before income tax Owners of the parent Non-controlling interests Income tax Profit for the year (11,659) 54,543 1,108 (6,684) 48,967 48,967 - - (4,278) 56,398 - 30,450 86,848 86,848 - - (29,329) 134,027 - (20,779) 113,248 101,784 11,464 - 24,107 (8,855) 32,962 26,377 (6,188) 32,565 (7,963) (677) 15,467 - 329 15,796 15,796 - - 7,223 7,014 209 1,331 1,751 (420) 6,127 6,091 36 (401) (421) 20 (10,534) (10,259) (833) (4,144) - 5,403 1,259 1,259 - - (619) (4,751) - 39 (4,712) (4,712) - - Reportable segment assets 2,811,209 2,333,769 9,797,839 6,190,193 95,905 337,056 Investments in associates and joint ventures 11,525 - Reportable segment liabilities 7,720,693 1,966,530 Additions to non-current assets 9,972 4,218 - 8,315,316 26,608 - 1,231,669 - 7,749 264 (10,036) - 119,416 2,039 - - - - - - - - - - - - - - (13,538) - - - - 671,953 666,919 5,034 409,360 409,360 - (373,018) (47,395) 251,540 1,108 8,758 261,406 249,942 11,464 (13,538) 236,404 21,565,971 11,525 19,361,373 33,065 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 329 Retail Banking in Slovenia Corporate and Investment Banking in Slovenia Strategic Foreign Markets Financial Markets in Slovenia Non-Core Members NLB Group in EUR thousands Other activities Unallocated Total 2020 Total net income Net income from external customers Intersegment net income Net interest income Net interest income from external customers Intersegment net interest income Administrative expenses Depreciation and amortisation Reportable segment profit/(loss) before impairment and provision charge Other net gains/(losses) from equity investments in subsidiaries, associates and joint ventures Negative goodwill Impairment and provisions charge Profit/(loss) before income tax Owners of the parent Non-controlling interests Income tax Profit for the year 170,358 184,758 (14,400) 81,395 96,357 (14,962) (102,089) (12,043) 56,226 874 - (15,069) 42,031 42,031 - - 75,185 81,124 (5,939) 34,007 40,873 (6,866) (37,878) (3,911) 33,396 - - 8,982 42,378 42,378 - - 209,091 213,881 (4,790) 159,261 163,255 (3,994) (94,862) (14,162) 100,067 - 137,858 (59,084) 178,841 175,792 3,049 - 39,633 12,713 26,921 23,471 (3,126) 26,598 (6,972) (619) 32,042 - - (1,267) 30,775 30,775 - - 5,445 4,537 908 1,199 2,012 (813) (11,848) (1,011) (7,414) - - 2,854 (4,560) (4,560) - - 7,958 7,472 486 240 203 37 (11,047) (685) (3,774) - - (7,770) (11,544) (11,544) - - 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 Additions to non-current assets 15,679 6,047 13,517 418 - 4,571 695 - 115,540 2,941 Segment reporting is presented in accordance with the Group members are, based on their business activity, included new subsidiary NLB Lease&Go that includes operations with strategy on the basis of the organisational structure used in in only one segment except NLB Lease&Go which is according retail clients, as well as the contribution to the result of the management reporting of NLB Group’s results. NLB Group’s to its business activities divided into two segments. associated company Bankart. segments are business units that focus on different customers and markets. They are managed separately because each The segments of NLB Group are divided into core and non- • Corporate and Investment Banking in Slovenia, which business unit requires different strategies and service levels. core segments. The business activities of NLB are divided into several The core segments are the following: includes banking with Key Corporate Clients, SMEs, Cross- border corporate financing, Investment Banking and Custody, Restructuring and Workout, and part of the new segments. Interest income and expenses are allocated between • Retail Banking in Slovenia, which includes banking with subsidiary NLB Lease&Go that includes operations with segments on the basis of fund transfer prices (FTP). Other NLB individuals and asset management (NLB Skladi), and part of corporate clients. - - - - - - - - - - - - - - - (5,165) - - - - 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) 269,707 19,557,867 7,988 17,442,815 39,298 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 330 • Strategic Foreign Markets, which consist of the operations • Financial Markets in Slovenia include treasury activities and NLB Group is primarily a financial group, and net interest of strategic Group banks in the strategic markets (North trading in financial instruments, while they also present the income represents the majority of its net revenues. NLB Macedonia, Bosnia and Herzegovina, Kosovo, Montenegro, results of asset and liabilities management (ALM). Group’s main indicator of a segment’s efficiency is net profit and Serbia). As a result of the acquisition of Komercijalna before tax. banka Beograd at the end of the year 2020, NLB Group • Other accounts for the Bank’s categories whose operating acquired three banks: Komercijalna banka Beograd, results cannot be allocated to specific segments as well as No revenues were generated from transactions with a single Komercijalna banka Podgorica, and Komercijalna banka subsidiary NLB Cultural Heritage Management Institute. external customer that would amount to 10% or more of Banja Luka, as well as an investment fund company Group’s revenues. KomBank Invest Beograd. In November 2021, the merger of Non-Core Members include the operations of non-core Group NLB Banka Podgorica and Komercijalna banka Podgorica members, namely REAM and leasing entities (except NLB was finalized. Komercijalna banka Banja Luka was sold Lease&Go), NLB Srbija, and NLB Crna Gora. NLB Leasing b) Geographical information Geographical analysis includes a breakdown of items with outside the NLB Group on 9 December 2021, so it is included Ljubljana was sold to the strategic company Lease&Go within respect to the country in which individual NLB Group entities in the result of the segment for 2021 with its operations until the NLB Group in 2021. Despite the change in ownership, its are located. the specified date. operations continue to be monitored within the segment of non-core members. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report NLB Group Slovenia South East Europe North Macedonia Serbia Montenegro Croatia Bosnia and Herzegovina Kosovo Western Europe Germany Switzerland Total Revenues Net income Profit/(loss) before income tax Income tax in EUR thousands 2021 352,053 458,571 87,936 192,048 43,983 5 83,087 51,512 17 1 16 2020 322,128 265,600 81,710 35,240 31,291 42 69,616 47,701 3 2 1 2021 301,021 365,649 70,157 165,199 34,756 207 52,735 42,595 249 499 (250) 2020 290,376 214,486 64,466 28,046 25,033 454 57,079 39,408 (378) 80 (458) 2021 137,857 121,301 43,277 29,405 6,508 (181) 15,236 27,056 2,248 488 1,760 2020 93,362 184,266 21,008 130,912 2,741 (1,019) 15,776 14,848 293 (433) 726 2021 (5,043) (8,462) (4,054) 2,077 (1,484) (1) (2,213) (2,787) (33) - (33) 2020 (1,154) (3,963) (1,566) 1,323 (426) (12) (1,572) (1,710) (48) - (48) 810,641 587,731 666,919 504,484 261,406 277,921 (13,538) (5,165) The column ‘Revenues’ includes interest and similar income, effect of financial instruments, foreign exchange translation, dividend income, and fee and commission income. the effect on the derecognition of assets, net operating income, and gain less losses from non-current assets held The column ‘Net Income’ includes net interest income, for sale. dividend income, net fee and commission income, the net Contents 331 NLB Group Slovenia South East Europe North Macedonia Serbia Montenegro Croatia Bosnia and Herzegovina Kosovo Western Europe Germany Switzerland Total Non-current assets Total assets Number of employees 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 31 Dec 2021 31 Dec 2020 in EUR thousands 150,829 214,380 37,384 108,515 18,328 383 34,782 14,988 30 30 - 153,671 219,886 37,181 109,167 17,934 381 39,576 15,647 58 58 - 11,716,270 9,845,128 1,758,269 4,780,843 775,238 4,025 1,596,370 930,383 16,098 971 15,127 10,142,675 9,411,671 1,576,941 4,587,600 709,797 4,390 1,654,026 878,917 11,509 1,648 9,861 2,619 5,563 877 2,901 374 6 942 463 3 1 2 2,691 6,098 877 3,198 467 7 1,086 463 3 1 2 365,239 373,615 21,577,496 19,565,855 8,185 8,792 The table below presents data on NLB Group members before intercompany eliminations and consolidation journals. NLB Group Slovenia South East Europe North Macedonia Serbia Montenegro Croatia Bosnia and Herzegovina Kosovo Western Europe Germany Switzerland Total Revenues Net income Profit/(loss) before income tax in EUR thousands Income tax 2021 448,559 459,405 87,864 192,776 43,978 3 83,275 51,509 19 1 18 2020 341,092 265,889 81,673 35,318 31,376 145 69,678 47,699 335 2 333 2021 387,692 374,776 68,429 161,017 35,417 274 67,806 41,833 86 493 (407) 2020 328,302 211,337 62,658 28,386 24,356 468 56,791 38,678 (144) 81 (225) 2021 225,706 146,496 43,054 37,536 7,969 (181) 30,895 27,223 2,247 489 1,758 2020 120,806 44,271 20,788 (6,761) 187 (1,019) 16,032 15,044 588 (432) 1,020 2021 (5,252) (8,940) (4,054) 1,599 (1,484) (1) (2,213) (2,787) (33) - (33) 2020 (1,221) (3,949) (1,566) 1,337 (426) (12) (1,572) (1,710) (34) - (34) 907,983 607,316 762,554 539,495 374,449 165,665 (14,225) (5,204) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 332 8. Related-party transactions A related party is a person or entity that is related to NLB Group in such a manner that it has control or joint control, has a significant influence, or is a member of the key management personnel of the reporting entity. Related parties of NLB Group and NLB include: key management personnel (Management Board, other key management personnel and their family members); the Supervisory Board; companies in which members of Related-party transactions with Management Board and the Management Board, key management personnel, other key management personnel, their family members or their family members have control, joint control, or a and companies these related parties have control, joint significant influence; a major shareholder of NLB with significant influence, subsidiaries, associates and joint control, or significant influence A number of banking transactions are entered into with ventures. NLB Group and NLB Management Board and other Key management personnel Family members of the Management Board and other key management personnel 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 expenses Other financial assets Other financial liabilities Guarantees issued and loan commitments Fee income Other income Other expenses 2021 2,284 1,041 (1,228) 2,097 39 1,610 2,048 (1,488) 2,170 (4) - 2,268 215 12 13 - 2020 2,119 1,476 (1,311) 2,284 40 1,579 1,392 (1,361) 1,610 (4) 2 2,759 242 15 16 (11) 2021 444 228 (257) 415 7 956 595 (833) 718 - - 1 72 6 - - 2020 520 184 (260) 444 8 871 826 (741) 956 - - - 78 7 - - related parties within regular course of business. The volume of related-party transactions and the outstanding balances are as follows: Companies in which members of the Management Board, key management personnel or their family members have control, joint control or a significant influence in EUR thousands Supervisory Board 2021 - 891 (359) 532 6 136 1,625 (1,171) 590 - - 14 194 83 - (78) 2020 130 90 (220) - 1 193 207 (264) 136 - - 8 6 101 - (76) 2021 305 55 (300) 60 4 323 321 (139) 505 (1) - - 23 2 - - 2020 248 109 (52) 305 7 198 277 (152) 323 - - - 33 1 - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 333 Key management compensation The remuneration for the members of the Supervisory change, repeal, or replace any of its resolutions in relation to Bank during the period to which the variable part of the the remuneration of the Supervisory Board members at any performance benefit relates. Board of NLB d.d. and the Management Board of NLB d.d. time, or adopt a new resolution in relation to the remuneration is regulated in Remuneration Policy for the Members of of the Supervisory Board members. the Supervisory Board of NLB d.d. and the Members of the The non-deferred part of variable remuneration is paid no later than three months after the adoption of the Annual Management Board of NLB d.d. The remuneration for the The performance of key management is defined by financial Report of NLB Group for the business year to which the identified employees and other employees is regulated in and non-financial criteria. In addition to the salary determined variable remuneration relates. Variable remuneration part Remuneration Policy for employees of NLB d.d. and NLB in their employment contract, they are entitled to the annual of payment of an identified employee is awarded and paid Group. variable part of the salary based on their achievement of in cash, provided that the amount does not exceed EUR 50 the financial and non-financial performance criteria, which thousand or/and is higher than one-third of his/her total In 2021, NLB d.d. in accordance with the Companies Act (ZGD- encompass the goals of NLB Group or NLB, the goals of the remuneration for each financial year, and if this is permissible 1) and the Banking Act (ZBan-3), adopted a new Remuneration organisational unit, and the personal goals of the employee in accordance with the relevant regulation. Policy for members of the Supervisory Board of NLB d.d. performing special work. and members of the Management Board of NLB d.d., which If the variable remuneration part of payment of an identified was adopted by the Supervisory Board of NLB d.d. and then The objectives and criteria of each member of the Management employee exceeds EUR 50 thousand or/and is higher than submitted to the General Meeting of Shareholders of NLB d.d., Board shall be determined each year by the Supervisory Board one-third of his/her total remuneration for each financial where it was voted in December 2021. Pursuant to Article 294.a NLB d.d. at the time of adoption of the Bank’s annual business year and if this is permissible in accordance with the relevant of the Companies Act (ZGD-1), the Bank must in case of every plan. The objectives and criteria for the identified employees regulation, then at least 50% of the variable remuneration must significant change submit the Remuneration Policy to the are determined by the Management Board. consist of instruments. The part of the variable remuneration General Meeting of Shareholders for voting, and in any case at of an identified employee consisting of instruments shall be least every four years. The variable portion of receipts for a given financial year awarded and paid, under the terms and conditions in the valid may not exceed eight salaries for the period including 5 July Remuneration Policy, in instruments whose value is based on In the Remuneration Policy and based thereon, the Bank 2021, while for the period as of 6 July 2021 onwards it shall the value of the share of NLB d.d. (with these instruments not designates identified employees. In designating identified be seven salaries of a member of the Management Board in giving any dividends or other yields). employees, the internal organisation and the nature, scope the financial year. Other identified employees are entitled to and complexity of the Bank’s activities are taken into account. a variable part of remuneration according to the category The deferred part of the variable part of the salary must be The criteria fully take into account the risks that the Bank or of employee in the maximum amount of three to six salaries. deferred for a period of at least five years of the day on which the NLB Group is or could be exposed to its given risk profile Key management shall be entitled to a variable part of the the non-deferred part of such variable remuneration is paid and risk appetite. The Remuneration Policy includes members performance benefit only in proportional part to the actual and it is paid in proportional shares, according to the relevant of the Supervisory Board, members of the Management period of employment (duration of the term of office) of the legislation. Board, senior management and other identified employees who are included in the Policy on the basis of the Bank’s self- assessment. The table below shows payments in presented periods. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Members of the Supervisory Board may, in relation to their function of a member of the Supervisory Board, only receive remuneration that is compliant with the relevant resolutions of NLB Group and NLB the Bank’s General Meeting. The Supervisory Board members are entitled to a remuneration for performing their function and/or attendance fees for their membership in the Supervisory Board of the Bank and the committees of the Supervisory Board of the Bank, which are determined in accordance with respective applicable resolution by the General Meeting of the Bank, and to reimbursement of travel expenses, daily allowances, and accommodation costs up to the amount provided by the regulations governing reimbursement of costs related to work and other income not included in the tax base. The Bank’s General Meeting may determine and change the remuneration of the members of the Supervisory Board independently from the Remuneration Policy, and may Short-term benefits Cost refunds Long-term bonuses: - severance pay - other benefits - variable part of payments Total Management Board Other key management personnel in EUR thousands Supervisory Board 2021 1,589 4 385 5 394 2,377 2020 1,401 4 259 4 - 1,668 2021 5,480 83 5 70 2,898 8,536 2020 5,501 95 108 49 - 5,753 2021 705 26 - - - 731 2020 649 34 - - - 683 Short-term benefits include: The reimbursement of cost comprises food • monetary benefits (gross salaries, supplementary allowances, travel expenses, and use of own insurance, holiday allowances and other bonuses); resources. • non-monetary benefits (company cars, health care, residential facilities, etc.). Contents 334 Payments to individual members of the Management Board Member Blaž Brodnjak 01.12.2012 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 Andreas Burkhardt Short-term benefits: 18.09.2013 - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - other benefits - variable part of payments Total Archibald Kremser Short-term benefits: 31.07.2013 - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - other benefits - variable part of payments Total Petr Brunclík Short-term benefits: 18.05.2020 - 30.06.2021 - 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 László Pelle Short-term benefits: 26.10.2016 - 31.01.2020 - 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 2021 441,770 2,310 1,302 1,410 130,211 577,003 405,092 32,672 1,290 1,410 122,919 563,383 420,809 34,117 1,249 1,410 126,044 583,629 221,963 30,092 476 385,000 705 14,633 652,869 - - - - - - - in EUR 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 335 Payments to individual members of the Supervisory Board Member Andreas Klingen Session fees 22.06.2015 Primož Karpe 11.02.2016 Annual compensation Other bonuese - benefit Costs refunds Session fees Annual compensation Other bonuese - benefit Costs refunds David Eric Simon Session fees 04.08.2016 Annual compensation Other bonuese - benefit Costs refunds Gregor Rok Kastelic Session fees 10.06.2019 Annual compensation Other bonuese - benefit Costs refunds Shrenik Dhirajlal Davda Session fees 10.06.2019 Annual compensation Other bonuese - benefit Costs refunds Mark William Lane Richards Session fees 10.06.2019 Annual compensation Other bonuese - benefit Costs refunds Verica Trstenjak Session fees 15.06.2020 Sergeja Kočar 17.06.2020 Annual compensation Other bonuese - benefit Costs refunds Session fees Annual compensation Other bonuese - benefit Costs refunds 2021 - 90,000 447 4,947 - 96,000 447 4,629 - 81,000 447 5,251 - 81,000 447 758 - 72,000 447 2,367 - 81,000 447 2,643 - 65,790 447 - - 11,856 447 - in EUR 2020 - 84,000 388 2,690 - 89,583 388 8,235 - 75,000 388 6,455 - 70,625 388 4,239 Member Bojana Šteblaj 17.06.2020 Session fees Annual compensation Other bonuese - benefit Costs refunds Janja Žabjek Dolinšek Session fees 20.11.2020 Annual compensation Other bonuese - benefit Costs refunds Islam Osama Bahgat Zekry Session fees 14.06.2021 Annual compensation Other bonuese - benefit Costs refunds Tadeja Žbontar Rems Session fees 22.01.2021 Annual compensation Other bonuese - benefit Costs refunds - Peter Groznik Session fees 2021 - 15,655 447 - - 6,839 447 - - 38,608 447 5,705 - 26,656 447 - - 66,000 388 3,917 - 75,000 388 3,617 - 33,933 388 - - 5,662 500 153 08.09.2017 - 14.06.2021 Annual compensation 32,800 Other bonuese - benefit Costs refunds Petra Kakovič Bizjak Session fees 17.06.2020 - 10.09.2020 Annual compensation Other bonuese - benefit Costs refunds László Zoltan Urbán Session fees 11.02.2016 - 15.06.2020 Annual compensation Other bonuese - benefit Costs refunds Alexander Bayr Session fees 04.08.2016 - 15.06.2020 Annual compensation Other bonuese - benefit Costs refunds - - - - - - - - - - - in EUR 2020 - 5,255 500 457 - 169 - - - - - - - - - - - 66,000 388 429 - 7,302 112 178 - 31,875 - 1,456 - 36,000 - 2,799 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 336 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 expenses Other financial assets Other financial liabilities Guarantees issued and loan commitments Fee income Fee expenses Other income Other expenses in EUR thousands NLB Group Associates Joint ventures 2020 2021 2020 2021 1,106 89 (184) 1,011 38 26 3,973 - 7,610 (3,616) 7,967 - 20 1,148 2,032 38 1,066 165 (125) 1,106 32 27 842 - 4,461 (1,330) 3,973 - 19 596 38 15 (13,583) (13,977) 162 (726) 177 (699) 851 7 (657) 201 4 69 3,434 3 7,706 (7,651) 3,492 (59) - 1 - 1 - 2 - 1,205 11 (365) 851 11 (23) 8,455 (3) 90,966 (95,984) 3,434 (62) 1 - 21 983 (952) 144 (37) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 337 Subsidiaries NLB Associates in EUR thousands Joint ventures 2021 2020 2021 2020 2021 2020 169,176 170,308 (89,181) 250,303 4,906 1,075 69,386 433,380 (418,818) 83,948 3 2 - 44,484 44,484 1 160,634 98,221 (89,679) 169,176 5,007 (1,835) 70,469 658,253 (659,336) 69,386 21 4 - - - - 19,415 80,806 7,558,162 7,934,453 (7,509,205) (7,995,844) 68,372 (2) (7) 9,789 25,491 (8) 1,860 31,003 584 14,541 9,720 (21) 1,078 (2,133) (298) 19,415 (21) 354 12,424 948 - 800 55,068 (53) 6,692 6,857 (25) 780 (1,065) 1,208 (558) 436 1,106 89 (184) 1,011 38 26 - - - - - - - - - - 3,973 7,610 (3,616) 7,967 - - - 20 - 1,001 2,032 - - 38 (10,782) 162 (708) - - 1,066 165 (125) 1,106 32 27 - - - - - - - - - - 842 4,461 (1,330) 3,973 - - - 19 - 480 38 - - 15 (11,140) 177 (664) - - 851 7 (657) 201 4 69 - - - - - - - - - - 1,174 10 (333) 851 10 (23) - - - - - - - - - - 284 213 (470) 27 5,418 86,850 (91,984) 284 - - - - - - - - - 1 - 2 - - - - - - 1 - - 21 - - 925 (332) 144 (37) - - 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 Loans received Balance at 1 January Increase Balance at 31 December Interest income Deposits received Balance at 1 January Increase Decrease Balance at 31 December Interest expenses Derivatives Fair value Contractual amount Other financial assets Impairment Other financial liabilities Guarantees issued and loan commitments Income/(expenses) provisions for guaranties and commitments Received loan commitments and financial guarantees Fee income Fee expenses Other income Other expenses 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 338 Related-party transactions with major shareholder with significant influence The volumes of related party transactions with major shareholder are as follows: NLB Group Shareholder in EUR thousands NLB Shareholder 2021 2020 2021 2020 23,219 13,199 (15,884) 20,534 713 691,868 1,247,211 28,206 1,607 (6,594) 23,219 720 850,965 866,414 23,219 13,199 (15,884) 20,534 713 597,123 947,581 (1,392,356) (1,026,883) (1,049,482) (12,201) 534,522 6,021 (652) 659 4 1,184 309 (27) 212 (5) - (158) 1,372 691,868 9,024 (805) 807 6 1,241 194 (30) 206 (6) 14,660 43 (11,566) 483,656 6,389 (652) 659 4 1,184 309 (27) 212 (5) - (158) 28,206 1,607 (6,594) 23,219 720 778,088 758,140 (940,974) 1,869 597,123 9,486 (805) 807 6 1,241 194 (30) 206 (6) 14,660 43 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 Interest expenses Other financial assets Other financial liabilities Guarantees issued and loan commitments Fee income Fee expenses Other income Other expenses Gains less losses from financial assets and liabilities not measured at fair value through profit or loss Gains less losses from financial assets and 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. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 339 NLB Group and NLB Guarantees issued and loan commitments Amount of significant transactions concluded during the year 2021 70,000 2020 112,500 NLB Group and NLB Loans Debt securities measured at amortised cost Borrowings, deposits and business accounts Guarantees issued and loan commitments Year-end balance of all significant transactions 2021 507,159 72,633 184,267 152,500 2020 516,058 76,396 70,006 152,500 NLB Group and NLB Interest income from loans Fees and commissions income Interest income from debt securities measured at amortised cost and net valuation effects from hedge accounting Interest expenses from borrowings, deposits, and business accounts in EUR thousands Number of significant transactions concluded during the year 2021 1 2020 1 in EUR thousands Number of significant transactions at year-end 2021 2020 7 1 3 2 6 1 1 2 in EUR thousands Effects in income statement during the year 2021 3,141 241 (990) (213) 2020 3,706 27 1,166 (290) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 340 9. Events after the reporting date The Swiss Francs Law On 2 February 2022, the Slovenian Parliament passed the ‘Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs’ (here and after the CHF Law). The CHF Law affects all loan agreements denominated in Swiss francs (regardless of whether the agreements are still in force) concluded between banks operating in Slovenia (including NLB) as lenders and individuals as borrowers in the period from 28 June 2004 to 31 December 2010, and provides for a cap on the exchange rate between Swiss francs and the Euro to be set at 10% volatility (the ‘FX cap’) and shall be applied from the conclusion of any of the affected loan agreements. During the validity of the FX cap, the value of instalments and other payments Acquisition of Sberbank banka d.d., Ljubljana On the level of the European Central Bank and the Single Dependence on Russia and Ukraine within the country trade balance in the NLB Group region is moderate; the highest volume Resolution Board, a decision was made on 28 February 2022 to of trade is done with the EU. suspend the business operations of the banking group Sberbank Europe AG, which also had a subsidiary bank in Slovenia. At the same time, a transitional period or short-term moratorium was adopted, during which a solution for the Slovenian subsidiary, Sberbank banka d.d., was found with the aim to ensure the continuity of the business operations for all of its clients. On 1 March 2022, in order to maintain financial stability in Slovenia, the Single Resolution Board, in cooperation with the Bank of Slovenia, adopted a scheme and resolution plan for Sberbank banka d.d., Ljubljana. Based on this resolution, the Bank of Slovenia issued a decision using the instrument of sale of operation in a way that all shares are transferred from the shareholders to the transferee. Country Bosnia and Herzegovina Montenegro North Macedonia Kosovo Serbia Slovenia Export to Russia Import from Russia 1.10% 0.00% 0.91% 2.10% 0.00% 1.70% no data available no data available 3.90% 2.60% 5.30% 1.20% under such loans shall equal the amount at which the FX cap has In the process of finding a new owner of Sberbank banka d.d., Direct and indirect exposures of NLB toward Russia and Ukraine is been triggered and the lender would be required to repay any Ljubljana, a sale agreement was concluded with NLB d.d., which moderate, but on the other hand Russia's invasion of Ukraine has overpayment to the relevant borrower. Further, any overpayment became an owner of 100% of the bank's shares as at 1 March 2022. increased risks globally. Effects on the global economy will occur on such loans by the relevant borrowers shall be subject to default interest to be paid by the lender. The purchase price for the bank was EUR 5,109 thousand and through three major channels: • commodity price shocks, Since the CHF Law affects civil law contractual relationships arrangements. Initial accounting for the business combination has market risk aversion), and retroactively, the constitutionality of the Law has been extensively not yet been completed, therefore assets, liabilities, and gain on a • security challenges associated with military conflict or through was fully paid in cash. There are no contingent consideration • financial repercussions (new sanctions against Russia and debated during the legislative process with a number of national bargain purchase (negative goodwill) recognised as a result of the cyberattacks. and European authorities considering the Law to violate the acquisition are not disclosed. Slovenian Constitution. The shareholders of affected Slovenian banks (including NLB) submitted a joint letter to several Slovenian and European authorities expressing great concern regarding Russian-Ukrainian conflict In February 2022, Russia began a military invasion of Ukraine. The In particular, commodity prices will have effects on the whole corporate output leading to an increased inflation rate in NLB Group markets. the Law. On 28 February 2022, the banks filed an initiative with Russian-Ukrainian conflict has led to quite considerable volatility in the Constitutional Court of the Republic of Slovenia to initiate the financial markets, in particular shifts in credit spreads, interest With regards to the credit portfolio, the NLB Group carefully proceedings to assess the constitutionality of the CHF Law and a rates and foreign exchange rates. Special attention is given to the monitors its clients being present or having direct and indirect proposal for its temporary suspension of enforcement. markets in the Balkans, neighbouring countries to Ukraine and connection with Russia, Ukraine, Belarus or its neighbouring Russia and international banks with operations in Russia. The NLB countries. These clients are closely monitored with the intention The Constitutional Court of the Republic of Slovenia adopted Group is closely monitoring its major bond portfolio positions, of identifying any significant increase in credit risk at a very early a decision on 10 March 2022 to suspend in whole the mostly sovereigns, with a stronger connection to the Russian crisis. stage. Corporate clients are still assessing the possible impacts of implementation of the CHF Law. The decision has been adopted Besides, the Group holds EUR 20 million of Russian government this conflict on their business model and financial performance, unanimously. The implementation of the law has been suspended bonds maturing in April 2022 and in September 2023. The fair however at this stage these effects are not very excessive. until the final decision of the Constitutional Court on the conformity value of these securities has decreased by approximately 30% by Moreover, the length and intensity of the Russian-Ukrainian of the CHF Law with the Constitution. During this time the 31 March 2022. The manner and timing of their settlement in the conflict might cause additional spill-over effects in the mid- deadlines set for individual liabilities of banks do not apply. Until given circumstances is not determined yet. Since the beginning term period, such as raising the price of energy sources or their the final decision of the Constitutional Court on the constitutionality of the crisis, the Bank has observed credit spreads widening from availability, which may at a later period have some impact also on of the CHF Law is made, the NLB will act in accordance with the 50 to 200 bps for selected positions (with the exception of Russia other segments of the credit portfolio. applicable legislation and courts’ decisions, and will, at the same where the escalation is more severe), which is currently impacting time, exercise all legal remedies at its disposal. the Bank’s FVOCI positions. Compared to 31 December 2021, the Sberbank d.d. Slovenia with its entire portfolio become a member fair value revaluation reserve has decreased by more than EUR 50 of the NLB Group in March 2022. The Bank strategy was focused Based on the assessment of the CHF Law, NLB estimated that million at the NLB Group level and EUR 40 million at the NLB level on the Slovenian SME segment, so the NLB Group does not expect negative pre-tax effect on the operations of NLB and NLB Group (analysis of debt securities by geographical sectors as at year- major direct exposures toward Russia or Ukraine. All identified should not exceed EUR 70 – 75 million. Impact on NLB and NLB end is disclosed in note 6.1.o). Regarding the Group’s major FX risks will be appropriately considered when assessing fair values Group is material but manageable given the historically limited positions, no material movements were observed so far. Current of assets, liabilities and contingent liabilities and final calculation of extent to which NLB engaged in Swiss francs lending. NLB developments, market observations and potential mitigations are gain on a bargain purchase (negative goodwill). considers this as a non-adjusting event after the reporting period. discussed at daily monitoring meetings. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 341 NLB Group Directory Nova Ljubljanska banka d.d., Ljubljana Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 39 00, +386 1 477 20 00 E-mail: info@nlb.si www.nlb.si Blaž Brodnjak, CEO & CMO Archibald Kremser, CFO Andreas Burkhardt, CRO Petr Brunclík, COO 22 Slovenian network Ljubljana Area Branch Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 23 30 Northwest and Central Slovenia Area Branch 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 22 Until 30 June 2021. Private Banking Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 23 66 Micro Enterprises Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 50 01 Mobile banking Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 44 39 Small and Mid-corporates Small Enterprises I23 Trg republike 2 1000 Ljubljana, Slovenia Tel.: +386 1 476 49 52 Small Enterprises II 24 Titova cesta 2 2000 Maribor, Slovenia Tel.: +386 2 234 45 09 Central region Trg republike 2 1000 Ljubljana, Slovenia Tel.: +386 1 476 26 11 Northwest 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 23 Until 31 December 2021. 24 Until 31 December 2021. 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 CSA & Cross-border Financing Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 26 18 Large corporates Institutional Investors Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 24 92 Large Corporates Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 26 92 Members of NLB Group Komercijalna Banka a.d. Beograd Svetog Save 14, 11000 Belgrade, Serbia Tel: +381 11 20 18 600 Email:kontaktni.centar@kombank.com www.kombank.com Vlastimir Vuković, President of the Management Board Dejan Janjatović, Deputy of the president of the Management Board Dragiša Stanojević, Member of the Management Board Dubravka Djedović Negre Member of the Management Board MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 342 NLB Banka a.d., Beograd Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 71 51 522 E-mail: info@nlb.rs www.nlb.rs 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/ Jelena Živković, President of the Management Board Albert Lumezi, President of the Management Board Vladimir Čaprić, Member of the Management Board Gem Maloku, Member of the Management Board Lavdim Koshutova, Member of the Management Board NLB Banka AD Skopje Majka Tereza 1 1000 Skopje, North Macedonia Tel: +389 2 15 600 E-mail: info@nlb.mk www.nlb.mk Antonio Argir, President of the Management Board 25 Günter Friedl, Member of the Management Board Peter Zelen, Member of the Management Board Igor Davčevski, Member of the Management Board NLB Banka a.d. Banja Luka Milana Tepića 4 78000 Banja Luka, Republic of Srpska, Bosnia and Herzegovina Tel: +387 51 248 588 E-mail: helpdesk@nlbbl.com www.nlb-rs.ba 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 26 Marko Popovič, Executive Officer 27 Dino Redžepagić, Executive Officer 28 Lana Đurasović, Executive Officer 29 KomBank Invest a.d. Beograd Kralja Petra 19, 11000 Belgrade, Serbia Tel.: +381 11 330 8310 E-mail: vladimir.garic@kombankinvest.com www.kombankinvest.com Vladimir Garić, Director Goran Babić, President of the Management Board Marjana Usenik, Member of the Management Board Dragan Injac, Member of the Management Board NLB Lease&Go, leasing, d.o.o., Ljubljana Šlandrova ulica 2, 1231 Ljubljana - Črnuče, Slovenia NLB Banka d.d., Sarajevo Ul. Koševo br. 3, 71000 Sarajevo - Centar 71000 Sarajevo, Bosnia and Herzegovina Tel: +387 33 720 300 E-mail: info@nlb.ba www.nlb.ba Tel: +386 1 586 29 10 E-mail: info@nlbleasego.si www.nlbleasego.si Andrej Pucer, Director Anže Pogačnik, Director Claus-Peter Martin Mueller, Director Lidija Žigić, President of the Management Board Denis Hasanić, Member of the Management Board NLB Leasing d.o.o., Ljubljana – v likvidaciji Šlandrova ulica 2 Jure Peljhan, Member of the Management Board 1231 Ljubljana - Črnuče, Slovenia Tel: +386 1 586 29 10 E-mail: info@nlbleasing.si Anže Pogačnik, Liquidator 26 Martin Leberle is a President of the Management Board from 1 January 2022. 27 Dražen Vujošević is a Member of the Management Board from 1 January 2022. 28 Dino Redžepagić is a Member of the Management Board from 1 January NLB Leasing d.o.o. Beograd – u likvidaciji Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 222 01 01 E-mail: info@nlbleasing.rs Veljko Tanić, Liquidator Optima Leasing d.o.o. u likvidaciji, Zagreb Miramarska 24 10000 Zagreb, Croatia Tel: +385 1 61 77 225 E-mail: info@optima-leasing.hr Vjekoslav Budimir, Liquidator Prvi faktor d.o.o., v likvidaciji, Ljubljana 30 Slovenska cesta 17 1000 Ljubljana, Slovenia E-mail: france.zupan@prvifaktor.si iztok.zupanc@prvifaktor.si France Zupan, Liquidator Iztok Zupanc, Liquidator Prvi faktor – faktoring d.o.o., Beograd – u likvidaciji Bulevar Mihajla Pupina 165 v 11070 Beograd, Serbia Tel: +381 11 222 54 00 E-mail: zeljko.atanaskovic@prvifaktor.rs Željko Atanasković, Liquidator Prvi faktor d.o.o. u likvidaciji, Zagreb 31 Miramarska cesta 24 10000 Zagreb, Croatia Tel: +385 1 6165 000 E-mail: info@prvifaktor.hr Vjekoslav Budimir, Liquidator 25 Branko Greganović, President of the Management Board from 1 January 2022. 2022 29 Till 31 December 2021. 30 France Zupan and Iztok Zupanc are liquidators from 1 March 2021. 31 Vjekoslav Budimir is liquidator from 1 March 2021. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 343 NLB InterFinanz AG in Liquidation, Zürich Beethovenstrasse 48 8002 Zürich, Switzerland Tel: +41 44 283 17 15 E-mail: info@nlbinterfinanz.ch Jean-David Barnezet Llort, Liquidator Polona Žižmund, Liquidator NLB InterFinanz d.o.o., Beograd – u likvidaciji Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 22 25 351 Liljana Zoraja, Liquidator REAM d.o.o., Podgorica Bul. Džordža Vašingtona br. 102, I. sprat/20, 81000 Podgorica, Montenegro Tel: +382 20 674 900 E-mail: gligor.bojic@nlb.me Gligor Bojić, Director Marko Furlan, Authorised Representative REAM d.o.o., Zagreb Miramarska 24/6 10000 Zagreb, Croatia Tel: +385 1 56 25 914 E-mail: josip.zurga@ream-cro.com E-mail: julijana.milic@nlb.si NLB Skladi, upravljanje premoženja, d.o.o., Ljubljana Tivolska cesta 48 Josip Žurga, Director Julijana Milić, Director 1000 Ljubljana, Slovenia Tel: +386 1 476 52 70 E-mail: info@nlbskladi.si www.nlbskladi.si Kruno Abramovič, President of the Management Board Blaž Bračič, Member of the Management Board 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 Aleksander Kurtevski, Director Jure Kvaternik, Director OL Nekretnine d.o.o. u likvidaciji, Zagreb Miramarska 24 10000 Zagreb, Croatia Tel: +385 1 56 25 914 E-mail: vjekoslav.budimir@ream-cro.com E-mail: ivan.strek@ream-cro.com Vjekoslav Budimir, Liquidator Ivan Štrek, Liquidator REAM d.o.o., Beograd – Novi Beograd Bulevar Mihaila Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 22 25 374 E-mail: vladimir.vasilijevic@ream-srb.com Vladimir Vasilijević, Director Veljko Tanić, Director LHB Aktiengesellschaft, Frankfurt am Main Große Bockenheimer Str. 33-35 SPV2 d.o.o., Beograd – Novi Beograd Bulevar Mihaila Pupina 165 v 60313 Frankfurt, Germany Tel: +49 69 21 65 78 20 E-mail: info@lhb.de Matjaž Jevnišek, President of the Management Board 11070 Belgrade, Serbia Tel: +381 11 22 25 374 E-mail: office@ream-srb.com Vladimir Vasilijević, Director PRO-REM d.o.o., Ljubljana - v likvidaciji Čopova 3 Tara Hotel d.o.o., Budva Bulevar Džordža Vašingtona 102, Podgorica 1000 Ljubljana, Slovenia Tel: +386 1 586 29 16 E-mail: info@prorem.si www.nlbrealestate.com Jovica Jakovac, Liquidator Nataša Batagelj, Liquidator 81000 Podgorica, Montenegro Tel: +:382 20 674 900 E-mail: gligor.bojic@nlb.me Gligor Bojić, Director NLB Srbija d.o.o., Beograd Bulevar Mihajla Pupina 165 v 11070 Belgrade, Serbia Tel: +381 11 22 25 366 E-mail: office@nlbsrbija.co.rs www.nlbsrbija.co.rs Veljko Tanić, Director NLB Crna Gora d.o.o., Podgorica Bulevar Džordža Vašingtona 102, I sprat/20 81000 Podgorica, Montenegro Tel: +382 68 886 441 E-mail: goran.lalicevic@nlb.me Goran Laličević, Executive Director Barbara Šink, Authorised Representative Marko Čelebić, Authorised Representative S-REAM d.o.o., Ljubljana Čopova 3 1000 Ljubljana, Slovenia Tel: +386 (0)41 307 759 E-mail: info@s-ream.com www.nlbrealestate.com Jovica Jakovac, Director Lamija Hadžiosmanović, Director Branches and representative offices of NLB Group members outside their country of residence NLB InterFinanz AG in liquidation Ljubljana Branch in liquidation Puharjeva ulica 3 1000 Ljubljana, Slovenia Marko Čelebić, Director Komercijalna banka, branch Kosovska Mitrovica Čika Jovina 11, 38 220 Kosovska Mitrovica Goran Dželajlija, Director MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 344 Definitions and Glossary of Selected Terms AC ALCO ALM ALMM AML/CTF BARS BCM BIA BiH BIS BMR BoS bps BPV CAGR CB CBR CCF CEE CEO CET1 CFO CGU CIR CIRS CISO CMO COO CoR COSO CRD CRM CRO CRR CSA CSD CSI CSR CVA DGS DPS DWH EAD EaR EBA EBRD ECB ECL ECRA EEA EIB EMIR EPS ESEF ESG ESMS Amortised Costs Asset and Liability Committee Asset and Liability Management Additional Liquidity Monitoring Metrics Anti-Money Laundering and Counter- Terrorism Financing The Banking Agency of Republic of Srpska Business Continuity Management Business Impact Analysis Bosnia and Herzegovina Bank for International Settlements Benchmarks Regulation Bank of Slovenia Basis Points Basis Point Value Compound Annual Growth Rate Central Bank Combined Buffer Requirement Credit Conversion Factor Central Eastern Europe Chief Executive Officer Common Equity Tier 1 Chief Financial Officer Cash-Generating Units Cost-to-Income Ratio Currency Interest Rate Swaps Chief Information Security Officer Chief Marketing Officer Chief Operating Officer Cost of Risk Committee of Sponsoring Organizations of the Treadway Commission Capital Requirements Directive Customer Relationship Management Chief Risk Officer Capital Requirements Regulation Credit Support Annex Central Security Depository Customer Satisfaction Index Corporate Social Responsibility Credit Value Adjustments Deposit Guarantee Scheme Dividend per Share Data Warehouse Exposure at Default Earnings at Risk European Banking Authority European Bank for Reconstruction and Development European Central Bank Expected Credit Losses Enterprise Compliance Risk Assessment European Economic Area European Investment Bank European Market Infrastructure Regulation Earnings Per Share European Single Electronic Format Environmental, Social and Governance Environmental and Social Management System EU EVE EVS EWS FATF FTP FURS FVOCI FVTPL FX GDP GDPR GDR GGB GRI GS HHI HR IAS IASB ICAAP IFRIC IFRS ILAAP IRRBB IRS ISDA IVS JST JV KB KDD KPI KRI LCP LCR LECL LGD LPD LRE LTD M&A MA MAR MiFID II MiFIR MIGA MREL NACE NLB or the Bank NPE NPL NPS NPV NSFR European Union Economic Value of Equity European Valuation Standards Early Warning System Financial Action Task Force Fund Transfer Pricing Financial Administration of the Republic of Slovenia Fair Value Through Other Comprehensive Income Fair Value Through Profit or Loss Foreign Exchange Gross Domestic Product General Data Protection Regulation Global Depositary Receipts Government Guaranteed Bonds Global Reporting Initiative - Global Standards Herfindahl-Hirschman Index Human Resources 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 Interest Rate Risks for Banking Book Interest Rate Swaps International Swaps and Derivatives Association International Valuation Standards Joint Supervisory Team Joint Venture Komercijalna Banka Central Securities Clearing Corporation Key Performance Indicator Key Risk Indicators Liquidity Contingency Plan Liquidity Coverage Ratio Lifetime Expected Credit Losses Loss Given Default Lifetime Probability of a Default Leverage Ratio Exposure Loan-to-Deposit Ratio Mergers and Acquisitions Master Agreements Market Abuse Regulation Markets in Financial Instruments Directive Markets in Financial Instruments Regulation Rules Multilateral Investment Guarantee Agency (part of the World Bank Group) Minimum Requirement of Own Funds and Eligible Liabilities Statistical Classification of Economic Activities in the European Community NLB d.d. Non-Performing Exposures Non-Performing Loans Net Promoter Score Net Present Value Net stable funding ratio OBM OCR OEM O-SII OU p.p. P1R P2eM P2G P2M P2P P2R PD PEPP POCI POS PSD2 REAM RFR RICS ROA ROE RoS RPA RSD RWA SDG SEE SICR SLA SME SPPI SRB SRD II SREP SRF SSM TCR The Group TLTRO TREA TSCR UN UN SDG UNEP FI PRB VaR VAT ZBan-3 ZGD-1 ZPIZ ZTFI-1 ZVKNNLB ZVOP-2 Operational Business Margin Overall Capital Requirement Original Exposure Method Other Systemically Important Institutions Organisational Units Percentage Point(s) Pillar 1 Requirement Person to e-Merchant Pillar 2 Guidance Person to Merchant Person to Person Pillar 2 Requirements Probability of Default Pandemic Emergency Purchase Programme Purchased or Originated Credit-Impaired Point of Sale Payments Services Directive Real Estate Asset Management Risk-Free Rates Royal Institution of Chartered Surveyors Return on Assets Return on Equity Republic of Slovenia Robotic Process Automation Serbian Dinar Risk Weighted Assets Sustainable Development Goals South Eastern Europe Significant Increase of Credit Risk Service Level Agreements Small and Medium-sized Enterprises Solely Payment of Principal and Interest Single Resolution Board Shareholders Rights Directive Supervisory Review and Evaluation Process Single Resolution Fund Single Supervisory Mechanism Total Capital Ratio NLB Group Targeted Longer-Term Refinancing Operations Total Risk Exposure Amount Total SREP Capital Requirement United Nations United Nations Sustainable Development Goals United Nations Environment Programme Finance Initiative's Principles for Responsible Banking Value-at-Risk Value Added Tax Slovenian Banking Act Companies Act Slovenian Pension and Disability Insurance Act Financial Instruments Market Act Slovenian Act for Value Protection of Republic of Slovenia’s Capital Investment in Nova Ljubljanska banka d.d., Ljubljana Slovenian Personal Data Protection Act MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report Contents 345 NLB d.d., Ljubljana nlb.si NLB d.d. Production: Saatchi & Saatchi Ljubljana Photographs: Archive NLB, Urša Premik, iStock Copyright: NLB d.d., Ljubljana Ljubljana, April 2022 

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