Nova Ljubljanska Banka
Annual Report 2022

Plain-text annual report

Creating better footprints. For today. NLB Group Annual Report 2022 Pictured: NLB employees Contents NLB Group at a Glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Internal Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121 Statement by the Management Board of NLB . . . . . . . . . . . . . . . . . 4 Corporate Governance Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 122 Statement by the Chairman of the Supervisory Board of NLB . . 7 Disclosure on Shares and Shareholders of NLB . . . . . . . . . . . . . 143 Key Members Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Events After the End of the 2022 Financial Year . . . . . . . . . . . . . . 146 Key Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Key Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Market Performance of NLB’s Shares and GDRs . . . . . . . . . . . . . . 17 The Macroeconomic Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 The Regulatory Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Reconciliation of Financial Statements in Business and Financial Part of the Report . . . . . . . . . . . . . . . . . . . 147 Alternative Performance Indicators . . . . . . . . . . . . . . . . . . . . . . . . . 149 NLB Group Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Organisational Structure of NLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report FINANCIAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171 NLB Group Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 Definitions and Glossary of Selected Terms . . . . . . . . . . . . . . . . . .334 BUSINESS REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Funding Strategy and MREL Compliance . . . . . . . . . . . . . . . . . . . . . 31 Risk Factors and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 The Impact on Operations of the Russian invasion in Ukraine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Overview of Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Segment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Retail Banking in Slovenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Corporate and Investment Banking in Slovenia. . . . . . . . . . . . . . .70 Strategic Foreign Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Financial Markets in Slovenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86 Non-Core Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Report format The Annual Report in PDF format represents its unofficial version. The Annual Report in European Single Electronic Format (ESEF) 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. Risk Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93 Forward-looking statements The expectations, forecasts and statements regarding future developments that are contained in this report are based on IT and Cyber Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106 assumptions and are contingent on a number of factors that Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 will come into play in the future. Consequently, the actual situation may turn out to be different. Compliance and Integrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118 2 Vision The Group will take care of the financial needs of its clients and improve the quality of life in its home region – South-Eastern Europe. Our strategic focus • Be a regional champion • Put clients first • Grow our market position • Monetize opportunities and synergies Who we are • The leading banking and financial group in the region, with eight banking members, companies for ancillary services (leasing, asset management, real estate management, etc.) and limited number of subsidiaries in a controlled wind-down. Total Assets: EUR 24,160 million Total Capital: EUR 2,806 million Regular Income: EUR 779 million • The leading and systemically most important bank in Slovenia. • Universal banking model offering services to retail and corporate clients. • The market share of member banks in excess of 10% (measured by total assets) in six out of seven markets. Number of active clients: more than 2.7 million Employees: 8,228 Branches: 440 Sustainable banking • NLB officially joined the Net-Zero Banking Alliance in May 2022. • Sustainalytics ESG Rating: 17.7 (top 15%). • Improving our operational energy efficiency and lowering carbon footprint. • Reduction of CO2 footprint 2022: • 52% (Scope 1 and 2) • 46% (Scope 1, 2, 3; category 15 (financed emissions) excluded) • Substantial progress made in all three pillars: • Sustainable finance • Sustainable operations • Contribution to society • Following sustainability reporting standards: • Global Reporting Initiative • UNEP FI Principles of Responsible Banking • TCFD standards • Implementation of ECB Guide on climate and environmental risk management. NLB Group at a Glance Ratings 2021 BBB- 2022 BBB Positive investment grade rating dynamics in S&P Global Ratings. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 3 Statement by the Management Board of NLB Esteemed Stakeholders, We have been living in an extremely turbulent period in 2022, with serious new challenges throughout the entire European society. In the past year, more than ever before, the systemically important role of the banks in the Group and the footprints we create in our home region of South-Eastern Europe (SEE) came to the forefront. “We consistently follow our strategic priorities and look into the future with confidence.” of the energy sectors and by providing much-needed liquidity contributed to the successful mastering of this challenge as well. All of this came on top of the Group’s regular business objectives of growth in all key segments and providing our clients with innovative, relevant solutions through an ever- improving user experience. The Group responded to the global industry disruptive trends by establishing a Group competence centre, ‘NLB DigIT,’ in Belgrade to act as a development hub for group wide IT solutions. Nowadays, NLB Group is no longer just a banking group, but surely one of the most ambitious and most dedicated IT employers in the region. The Group’s clear objective is to keep and build its digital leadership position by using the most advanced available technologies in all of its home markets. Yet, NLB DigIT and the aforementioned N Banka, were not the only new strategic members of the Group in 2022. As we see the potential and believe that modern mobility solutions with embedded leasing services significantly complement our universal offering, we decided to gradually expand this activity by establishing a presence in Serbia and in North Macedonia. “We strive to keep and build Group’s digital leadership position.” “Our high quality of the loan portfolio is a warranty for the sustainable growth of the Group.” — Andreas Burkhardt, Member of the Management Board (CRO) The need to prove our systemic importance has been accentuated soon after the beginning of the year. We entered 2022 firmly positioned and prepared to tackle any challenges still anticipated by the post-covid recovery of the economies in SEE where we operate. What wasn’t anticipated, however, were the uncertainties, challenges, and consequences brought on by the Russian aggression in Ukraine. Nonetheless, our response was decisive and concrete. We are enormously proud to be able to confidently state that the Group and its member banks have contributed their share to stabilisation of the industry and regional economy. Following the sanctions directed towards the Russian Sberbank and its subsidiaries, including Sberbank banka d.d. Slovenija, NLB responded conscientiously and responsibly, and by entering the ownership structure of this Slovenian bank (later renamed to N Banka) at short notice helped to stabilise the Slovenian banking system during one of its most critical periods. In parallel, we also signalled our interest in resolving comparable challenges in Bosnia and Herzegovina and potentially Croatia (if legacy hurdles were removed), and in case of lack of alternatives, NLB was prepared — Blaž Brodnjak, CEO to act as the last resort solution. Furthermore, the Group’s banks in various markets also stepped up in times of instability — Archibald Kremser, Member of the Management Board (CFO) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 4 the economic slowdown, 2022 was the best year in the history of this banking group, evidenced by the historically highest absolute net income of any business group headquartered in Slovenia. The financial performance was truly exceptional despite the level of fear and stress in the markets. While the Group generated EUR 446.9 million in profit after tax (89% higher year on year), we also enhanced market shares in all key segments. The Group’s strong business results translated into added value for our shareholders, with a substantial dividend pay-out in two tranches in the total amount of EUR 100 million. The Group remains committed to justify stakeholder expectations, and projects a total capital return through solid cash dividends in the cumulative amount of EUR 500 million (including 2022 pay- outs) by 2025. This will, on one hand, ensure a stable dividend increase, and on the other provide room for incremental organic growth and pursuit of tactical M&A opportunities. More specifically, NLB has the capacity to grow organically or by acquisition in any of our existing, as well as neighbouring markets, including the currently missing Croatia, thus becoming a natural choice for a pan-regional platform. “We are a trusted partner for the financial well-being of the region.” “We support our clients and stand for what’s right, in business and everyday life.” — Hedvika Usenik, Member of the Management Board(i) It is planned that in its mature phase, leasing will contribute more than EUR 1 billion to the total assets of the Group, through organic and potentially also inorganic growth. With leasing activities and its eventual partnering ecosystem, we aim to become one of the leading providers of mobility solutions in the region. It is also worth to highlight one of the most challenging, but also the most important processes NLB has undertaken in recent years – the integration of NLB Banka, Beograd and Komercijalna Banka, Beograd to NLB Komercijalna Banka, Beograd in spring of 2022. This successfully completed process further strengthened NLB’s position in Serbia, providing it with the ability and the responsibility to truly influence the economic environment and society in one of the key markets in the region; while on the other hand once again confirming the ever-growing, key importance of subsidiary banks and their contribution to the Group’s financial performance. Despite the aforementioned precarious circumstances, the shadow of the war in Europe, the resulting energy crisis, and — Antonio Argir, Member of the Management Board(i) (i) Since 28 April 2022. “We are only as strong and robust as our clients are – our households and our economies.” — Andrej Lasič, Member of the Management Board(i) The Group’s business results, although remarkable and unprecedented thus far, are by no means the only indicator of the vital role the Group holds in SEE. At least equally important is our goal of improving the quality of lives and business environment in our home region. Guided by this objective, it is not surprising that we have put sustainability in its broadest sense at the heart of our business decisions and actions. Our efforts encompass the environmental, social and management aspects, and result in a number of initiatives and milestones, many of them reached in 2022. In the past year, we have, for example, established the NLB Group Sustainability framework and joined the United Nations Net Zero Banking Alliance, which aims to harmonise credit and investment portfolios to reaching zero net emissions by 2050 or earlier. We have continued to develop a range of green services and solutions, have been mindful of our own carbon footprint, and have supported and promoted sports, culture, and socially disadvantaged groups. We further recognised not only opportunities, but also our responsibility for helping the economy outside the framework of banking, as demonstrated by the project #FrameOfHelp in MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 5 its third edition, during which we encouraged reflection and /A-3, with a stable outlook; while the Top Employers Institute discussion about the sustainable future of our home region. awarded NLB the prestigious Top Employer certificate. We are truly proud that our efforts and our progress were Looking at all these achievements and results of the Group in recognised by receiving our first ESG rating. Sustainalytics, one the past year, it can-not be denied that they are impressive and of the leading independent ESG research, ratings, and data make us feel extremely proud. However, with an entrepreneurial firms in the world has rated NLB with an ESG Risk Rating of 17.7 mindset being amongst our core values, we are not the ones to and a low risk of experiencing material financial impacts from sit idly, resting on our laurels. Circumstances have arisen where ESG factors, due to medium exposure and strong management it is essential to look into the future. In it, we see plenty of new of material ESG issues. NLB thereby became the first bank challenges, but, above all, plenty of opportunities. The Group is with headquarters and an exclusive strategic interest in SEE extremely well positioned. We will do our best to live up to the which has obtained this rating, as well as the first among the expectations of all our stakeholders – shareholders, employees, companies listed on the Ljubljana Stock Exchange. clients, and the public – to seize all opportunities and thereby create better footprints in the region which is our home. The first ESG rating, however, was not the only important recognition NLB received in 2022. Standard and Poor’s rating Yours truly, agency raised NLB’s credit rating to BBB/A-2 from BBB- EUR 446.9 million net profit of NLB Group (EUR 184.1 million contribution of N Banka) Management Board of NLB Hedvika Usenik Member Andrej Lasič Member Archibald Kremser Member Andreas Burkhardt Member Antonio Argir Member Blaž Brodnjak Chief executive officer MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 6 Statement by the Chairman of the Supervisory Board of NLB To Our Shareholders, “It’s about being, not having” wrote Derek Sivers, in his heart- warming book, Anything You Want. You might ask yourself what does this book have to do with banking? I’ll tell you that the answer lies in the mindset Derek describes in his book about the logic we should pursue when talking about “put clients first,” which is one of our strategic focus points. More specifically, if we want to grow with a self-sustaining long- term rate, show the investment public our underwriting and lending practices are the industry’s best practices, grow using the principles of margin accretion (and not only volume), continue proving our business model is set to create value because we can profitably grow at a fast pace and increase the positive gap between the cost of our equity and our RAROC and ROE metrics, then we need to be the banking group that works on establishing — Primož Karpe, President of the Supervisory Board of NLB a deep, even emotional connection with our growing client base. rates leaped from their historic lows, and with them, bank It is from that connection that our other stakeholder groups feed, margins increased after a decade or more of contraction. The including you shareholders. This connection should be created spread between inflation and interest rates in Europe reached everywhere you look within our banking group. Starting from the a 40-year high (almost 9 p.p. difference between the Eurozone welcoming smile at our retail desks, up to the complex financing inflation and marginal refinancing rate), something unseen instruments serving our most demanding corporate clients, while across the investors’ universe to-date. The business model of at the same time placing the utmost attention and skillset to the banks across the world started to create returns on equity above investment tactics we use to shield and profitably grow our big the cost of capital after years of languishing below it. It’s now surplus liquidity. Everything we embark upon, as we do our job, the time to realize that banks everywhere have an opportunity stems from the desire to be able to create an offering of services to make use of these higher margins to invest and reinvent as and products our existing and new clients will want to use on they lay the groundwork for long-term accelerated growth and a recurring basis. These are the services and products which profitability. Of course, there are strong divergences among they need, like, and will be ready to recommend to their friends, developed, emerging, and what is classified as frontier markets, neighbours, peers, and even competitors. but our core region should be anything but a frontier. Since So, it’s all about what we want to be, before we get to the point market volatility peaked, some so-called “reinventors of financial of having and deciding what we’ll distribute to our shareholders, industry” (referring to several fintech segments) have come employees, and society. So, what do we want to be, and are we to the realisation that sales growth has to be profitable to be asset valuations have contracted across several industries, and on a good path to become that? sustainable. And somewhere in the background we observed the retrenchment to value investing. Seeing that, we in the NLB Group If you read this Annual Report, you should find some of the believe we sit at the heart of it. Because so many banks have answers yourself. We hope you see that we want to be a bank such low valuations, it is a clear sign that the banking industry which is customer-centric and exists and develops to serve our still lacks a persuasive future-proof business model to create clientele in a way that makes them happy. I personally believe the growth premium seen in other industries. And now is the our clients don’t care about our size and systemic nature, they perfect time to change the existing model and re-wire our mental care about their customer experience and nothing else. It’s also perception of the future. How? about being a bank our current and future employees are and will be proud to work for, and it’s about being a bank whose We should focus on persistence. I mean, the persistence to business model is ESG-focused, creating a future-proof society innovate in the field of digital solutions and products, the impact alongside above-average returns. Furthermore, it’s about persistence to innovate in the field of middle and back-office showing our investors our regional risk premium is decreasing. processes, the persistence to step out of the “doing business as usual” mentality in the fields of talent attraction, and the You see, to have something is the means, not the end, while to be persistence in the digging deeper into the AI-driven data science something we promise is the final goal. The end game in sight to drive incremental value for the business through improved is the banking group, which is built on the strong fundamental business performance, better marketing leads, customer principles of a modern, future-focused financial institution satisfaction, and engagement experience. And finally, we should business model. We want to follow the best peers across the show the persistence to find ways to safeguard the bank by globe and to strive to learn from the best, while acknowledging applying sophisticated risk and fraud detection models. we have comparative advantages in our core region. We believe the business ideas embedded in our budget and forecasts are Dear shareholders, we at the NLB Group believe the right time to just the multiplier of our execution capacity, and is only up to our prove that is right now. execution capacity to show we can deliver on our promises. And in our capacity as the Supervisory Board, we can only promise Yours truly, you that we are doing everything in our power to spread this logic of thinking across our organisation, so that NLB Group will Supervisory Board of NLB always be able to back its promises with its execution. Yes, 2022 brought precarious circumstances, like the continuing shadow of war in Europe, the resulting energy crisis, and the economic slowdown, but 2022 was also the year when suddenly almost everything changed in the world of banking. Interest Primož Karpe Chairman MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 7 This is our home. A region of opportunities. NLB, Ljubljana Market share by total assets 27.6% Result after tax 160 (in EUR milliions) Total assets 13,939 (in EUR millions) Active clients 687,537 N Banka, Ljubljana Market share by total assets 2.6% Result after tax 11 (in EUR milliions) Total assets 1,293 (in EUR millions) Active clients 39,769 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2021 Financial Report NLB Banka, Banja Luka Market share by total assets 20.1% Result after tax 19 (in EUR milliions) Total assets 995 (in EUR millions) Active clients 211,356 NLB Komercijalna Banka, Beograd Market share by total assets 10.0% Result after tax 66 (in EUR milliions) Total assets 4,670 (in EUR millions) Active clients 972,264 NLB Banka, Sarajevo NLB Banka, Skopje Market share by total assets 5.9% Result after tax 11 (in EUR milliions) Total assets 838 (in EUR millions) Active clients 138,454 Market share by total assets 16.3% Result after tax 38 (in EUR milliions) Total assets 1,848 (in EUR millions) Active clients 412,362 NLB Banka, Podgorica NLB Banka, Prishtina Market share by total assets 13.3% Result after tax 17 (in EUR milliions) Total assets 852 (in EUR millions) Active clients 84,720 Market share by total assets 16.7% Result after tax 32 (in EUR milliions) Total assets 1,084 (in EUR millions) Active clients 225,880 8 Key Members Overview1 Table 1: Key members overview for 2022 or as at 31 December 2022 Slovenia NLB Group NLB, Ljubljana N Banka, Ljubljana NLB Lease&Go, Ljubljana NLB Skladi, Ljubljana Market position Total assets (in EUR millions) Net loans to customers (in EUR millions) Deposits from customers (in EUR millions) Result after tax (in EUR millions) Market share by total assets Branches Active clients Macroeconomic indicators GDP (real growth) Average inflation Unemployment rate Current account of the balance of payments (as a % of GDP) Budget deficit/surplus (as a % of GDP) 24,160 13,073 13,939 6,062 20,028 10,984 160 27.6% 71 687,537 447 - 440(i) 2,772,342 3.8% 11.5% 9.3% -4.6% -2.9% 1,293 939 899 11 2.6% 11 39,769 217 189 - 1 - - - 1,960(iii) - - 8 39.1%(iv) - - 5.4% 9.3% 4.2% -0.8% -3.5% (i) 7 out of 11 N Banka’s branches operating within NLB, Ljubljana branches, therefore not included in total number. (ii) Number of active clients of NLB Komercijalna Banka, Beograd measured by different definitions as for the rest of the NLB Group members. (iii) Assets under management. (iv) Market share of assets under management in mutual funds. (v) Market share as at 30 September 2022. (vi) Market share in the Republic of Srpska. (vii) Market share in the Federation of BiH. (viii) In April 2022 NLB Banka, Beograd merged with Komercijalna Banka, Beograd. 1 Data on a stand-alone basis as included in the consolidated financial statements of the Group. Only members with material contributions to the NLB Group performance are included. Serbia NLB Komercijalna Banka, Beograd(viii) North Macedonia NLB Banka, Skopje Bosnia and Herzegovina Kosovo Montenegro NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica 4,670 2,589 3,692 66 10.0% 180 972,264(ii) 2.3% 12.0% 9.4% -7.0% 1,848 1,171 1,462 38 16.3% 48 412,362 2.1% 14.1% 14.4% -6.0% -3.3% -4.5% 995 523 797 19 838 521 673 11 20.1%(v, vi) 5.9%(v, vii) 47 211,356 35 138,454 3.8% 14.0% 15.6% -4.1% 0.5% 1,084 741 894 32 16.7% 33 225,880 3.3% 11.6% 17.0% -9.4% 852 532 693 17 13.3% 22 84,720 6.1% 13.0% 14.8% -11.6% -1.6% -5.3% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 9 Key Highlights Key Highlights Records achieved in all financial dimensions (in EUR millions) Profit a.t. 447 173 NGW N Banka 225 204 194 270 138 NGW KB 236 92 110 62 -1,442 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Net interest income 505 409 Net fee and commission income 273 237 330 340 317 309 313 318 300 234 138 140 147 146 155 161 170 170 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Gross loans to customers 9,509 9,053 8,351 7,901 7,641 7,627 7,938 10,033 1,877 KB 13,397 954 N Banka 10,903 Non-performing loans (NPLs) 2,838 2,623 1,896 1,299 844 622 375 475 367 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 31 Dec 2022 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 328 31 Dec 2022 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 10 Fortress balance sheet to enable seizing of growth opportunities N Banka acquisition2 Capital MREL Asset quality negative goodwill TCR MREL ratio cost of risk EUR 173 million 19.2% 36.3% 14 bps vs 15.1% requirement (incl. P2G) vs 28.7% requirement total assets dividends paid out MREL funding NPL ratio EUR 1,293 million EUR 500 million ~ EUR 740 million 1.8% ambition for 2022 to 2025 (of which EUR 100 million paid in 2022) ~ EUR 300 million in subordinated debt ~ EUR 440 million in other MREL eligible instruments 2 On 1 March 2022 NLB acquired the Slovenian Sberbank and renamed it to N Banka. It is currently in the process of integration with NLB. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 11 Key Performance Indicators Table 2: Key financial indicators for NLB Group and NLB Income statement data (in EUR millions) Net interest income Net non-interest income Net non-interest income (BoS) Total costs Operating costs (BoS) Result before impairments and provisions(i) 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 millions) 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 millions) 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)(ii) NPL coverage ratio (EBA definition) (BoS)(iii) NPL volume (in EUR millions) NPL ratio (internal def.; NPL/ Total loans) Net NPL ratio (internal def.; net NPL / Total net loans) NPL ratio (EBA definition)(ii) NPL ratio (EBA definition) (BoS)(iii) NPE ratio (EBA definition) 2022 505 294 503 -460 -496 338 -29 1 483 11 447 24,160 13,397 -324 13,073 4,877 20,028 2,366 57 5,449 19.2% 15.7% 15.1% 14,653 60.6% 98.9% 57.1% 58.1% 58.1% 328 1.8% 0.8% 2.4% 1.8% 1.3% NLB Group 2021 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% 2020 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% 2022 177 189 199 -208 -218 158 6 - 164 - 160 13,939 6,157 -95 6,062 2,961 10,984 1,603 - 4,046 25.6% 19.1% 18.1% 7,833 56.2% 86.1% 58.1% 58.2% 58.2% 111 1.1% 0.5% 1.7% 1.1% 0.9% NLB 2021 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% 2020 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% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 12 NPE ratio (EBA definition) (BoS)(iv) Received collaterals / NPL NPL Collateral received / NPL (EBA definition) Credit impairments and provisions / RWA c) Profitability Net interest margin (BoS)(v) Financial intermediation margin (BoS) Operational business margin(vi) ROE b.t. ROA b.t. ROE a.t. ROA a.t. d) Business costs Operating costs / Average total assets (BoS) CIR Total costs / RWA Total costs / Total assets 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 Key indicators per share Shareholders(vii) 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 2022 1.3% 61.0% 54.7% 0.1% 2.2% 4.4% 3.6% 20.6% 2.1% 19.9% 1.9% 2.2% 57.6% 3.1% 1.9% 48.5% 40.7% 220.3% 183.0% 9.1% - 65.3% 5.4% - - - 114.1 440 8,228 NLB Group 2021 1.7% 61.7% 58.8% -0.3% 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(viii) 8,185 2020 2.3% 60.7% 42.4% 0.5% 2.0% 4.4% 3.2% 15.4% 1.8% 15.4% 1.8% 2.1% 58.3% 2.4% 1.5% 56.1% 51.8% 257.5% 165.7% 7.8% - 58.8% 4.1% - - - 97.6 530(ix)  8,792 2022 0.9% 58.4% 75.6% 0.2% 1.3% 2.9% 2.5% 10.5% 1.2% 10.2% 1.2% 1.7% 56.8% 2.7% 1.5% 61.8% 49.8% 276.5% 177.6% 10.3% 27.6% 55.2% 4.7% 3,025 NLB 2021 1.1% 60.0% 63.1% -0.4% 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 2020 1.9% 65.8% 43.5% 0.1% 1.3% 3.1% 2.5% 8.2% 1.1% 8.2% 1.1% 1.8% 57.9% 3.0% 1.6% 65.8% 54.9% 336.3% 162.1% 10.3% 24.7% 51.9% 5.2% 2,455 20,000,000 20,000,000 20,000,000 10 75.9 71 2,418 10 77.6 75  2,510 10 72.5 80 2,591 NLB Rating 2022 NLB Rating 2021 NLB Rating 2020 NLB Outlook 2022 NLB Outlook 2021 NLB Outlook 2020 BBB BBB- BBB- Stable Stable - Stable Negative Negative Stable Fitch Moody's(viii), (ix) Further details on the definition of certain indicators in this table are available in the chapter Alternative Performance Indicators. (i) The result before impairments and provisions of NLB Group for the years 2020 and 2022 does not include negative goodwill. (ii) Loans and advances without loans and advances classified as held for sale, cash balances at central banks and other demand deposits. (iii) Loans and advances including cash balances at CBs and other demand deposits. (iv) The carrying amount of debt instruments measured at fair value through other comprehensive income (FVOCI) is increased by value adjustments due to impairments. (v) Calculated on the basis of average total assets. (vi) Calculated as Net income from operational business (NII - Tier 2 expenses + Net fee and commission income + Recurring net income from financial operations)/Average total assets. (vii) As per share register of Central Securities Clearing Corporation (KDD). The shares are listed on Ljubljana Stock Exchange. The Bank of New York Mellon (the 'GDR Depositary') represented in the share register of KDD as one holder is not the beneficial owner of shares, it holds shares in its capacity as the depositary for the GDR holders. The GDRs representing shares are issued against the deposit of shares and are listed on London Stock Exchange. Therefore, the number in the share register of KDD does not represent all final beneficial owners of the Bank shares. The rights under the deposited shares can be exercised by the GDR holders only through the GDR Depositary and individual GDR holders do not have any direct right to either attend the general meeting of bank's shareholders or to exercise any voting rights under the deposited shares. (viii) Unsolicited rating. (ix) For more information, see chapter Events After the End of the 2022 Financial Year. Stable Baa1 Baa1 Baa1 BB+ - - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 13 The Shareholder Structure of NLB The Bank’s shares are listed on the Prime Market sub-segment of the Ljubljana Stock Exchange (ISIN SI0021117344, Ljubljana Stock Exchange trading symbol: NLBR), and the GDRs, that represent shares, are listed on the Main Market of the London Stock Exchange (ISIN: US66980N2036 and US66980N1046, London Stock Exchange GDR trading symbol: NLB and 55VX). Five GDRs represent one share of NLB. Table 3: NLB’s main shareholders as at 31 December 2022(i) Shareholder Bank of New York Mellon on behalf of the GDR holders(ii) of which EBRD(iii) of which Schroders plc(iii), (iv) Republic of Slovenia (RoS) Other shareholders Total Number of shares Percentage of shares 10,957,270 54.79 / / >5 and <10 >5 and <10 5,000,001 4,042,729 25.00 20.21 20,000,000 100.00 (i) The information is sourced from NLB’s shareholders book that is 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 require 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 the chapter Key Events. 20.21% Other shareholders 25% +1 share Republic of Slovenia 54.79% Shares in GDR format(i) (i) Bank of New York Mellon on behalf of the GDR holders GDR holders with shares >5% and <10%: - EBRD - Schroders plc MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 14 Key Events January ‘Top Employer’ certificate March Acquisition of N Banka May S&P upgrade July NLB 100% owner of NLB Komercijalna Banka, Beograd Senior Preferred Notes issued September Leasing activities in N. Macedonia AT1 Notes issued November T2 Notes issued Leasing activities in Serbia 1 2 3 4 5 6 7 8 9 10 11 12 February New SREP Decision reduced P2R April Merger of Serbian subsidiaries June Dividend payment August Cancelation of high balance deposit fee December Dividend payment ESG rating New SREP Decision reduced P2R MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 15 Key Events May • 1st Investor Day of NLB Group held in Beograd: November • Tier 2 Notes: The Bank issued 10NC5 subordinated Tier 2 The commitment to exceed EUR 300 million 5 in regular profit notes in the amount of EUR 225 million. January • ‘Top Employer’ certificate: The Top Employers Institute awarded the Bank the prestigious ‘Top Employer’ certificate for the 7th consecutive year. February • Swiss Francs Law: NLB, together with eight other banks, filed an initiative to review the constitutionality of the adopted Swiss Francs Law by The National Assembly. The Constitutional Court adopted a decision to suspend in whole the implementation of the Swiss Francs Law until the final decision conformity of the Swiss Francs Law with the Constitution. In December, the Constitutional Court annulled the Law. • New Supervisory Review and Evaluation Process (SREP) Decision: The European Central Bank (ECB) issued a new SREP decision for the Bank under which it has reduced the P2R from 2.75% to 2.60%, while P2G remains at 1.00%.3 March • Acquisition of N Banka: NLB became a 100% owner of by 2025. • Rating upgrade: Standard and Poor’s rating agency upgraded NLB’s credit rating to BBB/A-2 from BBB-/A-3, with a stable outlook. • The Bank officially joined the UN-Convened Net-Zero Banking Alliance. June • Notifications of major holdings change: The shareholding of Brandes Investment Partners, L.P. in the Bank changed to 4.78%. • Dividend payment: The Bank paid the dividends (the first tranche) in the amount of EUR 50 million. July • NLB became a 100% owner of NLB Komercijalna Banka, Beograd. • Supervisory Board change: Janja Žabjek Dolinšek member of the Supervisory Board – Workers’ Representative terminated her mandate. • Notifications of major holdings change: Schroders’s shareholding in the Bank changed from 5.05% to 5.12%. • Leasing activities: Acquisition of leasing company Zastava Istrabenz Lizing, Serbia, and it was renamed to NLB Lease&Go Leasing, Beograd on 17 January 2023. December • Dividend payment: The Bank paid the dividends (the second tranche) in the amount of EUR 50 million. • ESG rating: NLB obtained for the first time an ESG Risk Rating of 17.7 for having a low risk of experiencing material financial impacts from ESG factors. • New SREP Decision: ECB issued a new SREP decision for the Bank under which it has reduced the P2R from 2.60% to 2.40%, while P2G remains at 1.00%. The new SREP decision applies as of 1 January 2023. 6 • Macroprudential instruments: The BoS raised the countercyclical capital buffer for exposures to Slovenia from zero to 0.5% of the total risk exposure amount. Banks have to meet the requirement by 31 December 2023.7 Sberbank banka d.d. (Sberbank). Sberbank was renamed to • Senior Preferred Notes: The Bank issued 3NC2 Senior N Banka and new supervisory board members of the bank Preferred notes in the amount of EUR 300 million. were appointed. • Notifications of major holdings change: Schroders’s shareholding in the Bank changed from 5.061% to 4.95%. April • New members of the Management Board: Hedvika Usenik, Antonio Argir and Andrej Lasič assumed their offices. Thus, the Management Board has six members. • Merger of Serbian subsidiaries: Serbian subsidiaries, Komercijalna Banka, Beograd and NLB Banka, Beograd merged and operate under the new name NLB Komercijalna banka a.d. Beograd. • New Macroprudential instruments: The BoS issued a new regulation on determining the requirement to maintain a systemic risk buffer for banks and savings banks which has with 1 January 2023 introduced the systemic risk buffer rates for the sectoral exposures.4 • IT solutions: NLB established NLB DigIT in Serbia to act as a development hub for common IT Group solutions. August • High balance deposit fee: The Bank stopped charging fees on high balances for individuals and corporate clients. September • Leasing activities: Leasing company NLB Liz&Go, Skopje was established, and it was renamed to NLB Lease&Go, Skopje in December. • Supervisory Board change: NLB Workers’ Council recalls a member of the Supervisory Board – workers’ representative Bojana Šteblaj. • AT1 Notes: The Bank issued AT1 notes in the amount of EUR 82 million. October • Notifications of major holdings change: Schroders’s shareholding in the Bank changed from 4.95% to 5.05%. 3 Further information is available in the chapter Capital. 4 Further information is available in the chapter Capital. 5 Further information is available in the chapter Risk Factors and Outlook, the subchapter Outlook. 6 Further information is available in the chapter Capital. 7 Further information is available in the chapter Capital. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 16 Market Performance of NLB’s Shares and GDRs 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 22 Fe b 2 0 22 M ar 2 0 22 A pr 2 0 22 M a y 2 0 22 Ju n 2 0 22 Jul 2 0 22 A u g 2 0 22 S e p 2 0 22 O ct 2 0 22 N ov 2 0 22 D ec 2 0 22 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 Growth in Trading Combined trading in our shares and GDRs in 2022 increased by more than 40% as compared to the previous year Shares (NLBR) GDR (NLB) Source: Ljubljana Stock Exchange, Bloomberg. European banking stocks lost roughly only 4% in value during The SBI index saw its peak in the beginning of the year, 2022, and it was all thanks to a stellar performance in the last towards the end of January 2022, and was in a steady decline quarter. Rebased to January 2022, the index saw it highest that lasted until mid-March 2022. A rebound that made up for point in February after growing approximately 15%, only to roughly half of the lost value was followed by a period where reach -15% in the beginning of March. Investors clearly were the indexes stuck to a certain level, followed by a drop in afraid that a weakening economy would result in credit losses, October 2022 that marked the lowest value of the year (losing which explains the steep fall. The lowest point of the year was almost 10% compared to the year’s maximum). The European reached in October 2022 with the index hovering in the negative stock markets had their worst year since 2018 due to the war, territory the whole time. Thanks to the strong close of the year, persisting inflation, and a tightened monetary policy, as the European banking stocks outperformed the European stock central banks were directing the markets with their action. index. In fact, the last quarter performance was the strongest amongst all sectors contributing to the index. The reason must The Bank’s stock declined through the vast majority of year lie in the higher interest rates, that saw banks increase their net 2022. From its peak in January 2022, the value declined almost interest margins. Yet, still it was not enough to break into the 24% in March 2022, a consequence of the hostilities breaking positive territory at the close of the year. A war, high (energy) out and the inflation imposing itself on the economy. Two prices, and the looming stagflation have weighed on the gains periods, consisting of a rebound and a steady decline ended from higher interest rates. with the lowest value of the 2022 in November, after which the Bank’s stock gained some 15% in value again, to close the year on a positive note. In 2022, the stock lost 18% in value, while still outperforming the SBI top Slovenian blue-chip index by 2 p.p. >EUR 600,000 in combined average regular trading volume per day (excluding block trades) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 17 NLB Shares and GDRs Table 4: NLB share information Share information Total number of shares issued Highest closing price (in 2022) Lowest closing price (in 2022) Closing price as at 30 December 2022(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 2022. Indices The Investor Relations’ function The Bank participated in varied forms of engagement, such as investor meetings, calls, conferences, and roadshows, to meet the requirements of the Bank’s ownership. Transparent communication with investors and analysts allowed for dialogue on strategic developments, as well as on the financial performance of the Group. The Bank promoted greater awareness and understanding of operating businesses, developments, and events which have an influence on the performance of the Bank’s share price. Performance of the Bank is covered by analysts from EFG Hermes, JP Morgan, 31 Dec 2022 20,000,000 EUR 82.0 EUR 52.4 EUR 62.4 EUR 114.1 EUR 22.3 0.55 EUR 5.0 EUR 1,248,000,000 Deutsche Bank, Wood & Company, Citi, InterCapital, Raiffeisen Bank International and Ilirika BPH. In May 2022, the Bank organised its first ever Investor Day. The event took place in Beograd, Serbia with the key message: “Welcome to our home, welcome to our region of opportunities!” Ljubljana Stock Exchange awarded NLB as: the Best Investor Relations The Bank’s shares are included in several indices: the SBITOP index, SBITOP TR index, and ADRIA prime index of the Ljubljana During the inaugural Investor Day the Group communicated Stock Exchange, the FTSE Frontier Index, MSCI Frontier, and several KPIs for the year 2025, i.e. regular profit to exceed EUR MSCI Slovenia, the S&P Eastern Europe BMI, S&P Emerging 300 million, EUR 100 million contribution from Serbian market, Frontier Super Composite BMI, S&P Extended Frontier 150, S&P EUR 500 million total capital return through cash dividends Frontier BMI, S&P Frontier Ex-GCC BMI, S&P Slovenia BMI, as well as the STOXX All Europe Total Market, STOXX Balkan Total Market, STOXX Balkan Total Market ex-Greece & Turkey, STOXX between 2022 and 2025, tactical M&A capacity of EUR 1.5 billion RWA, and ROE to exceed 12%.8 EU Enlarged Total Market, STOXX Eastern Europe 300, STOXX IR presentations, financial reports, and important information Eastern Europe 300 Banks, STOXX Eastern Europe Large 100, are available on the Bank’s website in line with IR’s Financial STOXX Eastern Europe Total Market, STOXX Eastern Europe Calendar. Total Market Small, STOXX Global Total Market, and STOXX Slovenia Total Market, among others. In December 2022, the Ljubljana Stock Exchange awarded the IR team as having the best investor relations among listed companies. Expanded Analyst Coverage In 2022, the list of respectable analysts covering NLB has further expanded with initiation of the report by EFG Hermes, helping us share our equity story to a larger investor universe 8 Further information is available in the chapter Risk Factors and Outlook, the subchapter Outlook. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 18 The Macroeconomic Environment In 2022, the momentum from the 2021 rebound started to wane as the global economy was forced to deal with supply bottlenecks, a war in Ukraine, and rising inflation. High energy prices and the highest interest rates in 15 years cooled growth and sentiment indicators substantially in the second half, resulting in a low growth environment towards the year’s end. as these firms are more affected by rising borrowing costs and declining fiscal support. China’s abrupt reversal of its ‘COVID Zero’ policy resulted from the domestic backlash and pushed economic activity in December 2022 to its slowest pace since February 2020 as infections increased and kept people at home which prompted businesses to close. This pent-up demand is set to be released once the sentiment improves. China’s reopening has already elevated commodity prices and could rekindle pressures just as the year end brought some relief to the still elevated inflation and producer price indexes. Global manufacturing has been in decline most of the year, and its movement could hold the key whether the world will see stagflation or a “soft landing.” The global and European economy Momentum in the euro area remained subdued in the first months. Industrial production was weak in the period, weighed down by soaring commodity prices and supply constraints. The services sector suffered from surging Year 2022 opened with inflation above 5% and rising. The pace of the sequential GDP expansion slowed notably inflation and souring consumer sentiment. More positively, the unemployment rate continued to fall amid easing at the close of 2021. Momentum seemingly remained COVID-19 restrictions. In Q2, robust PMI readings suggested 3.5% economic growth in the Euro-area in 2022 subdued at the outset of 2022. The spread of the Omicron solid activity, a resumption of some services sector activity, started retreating due to persisting inflation and rising variant and the highest inflation rate since the 1990s took and a healthy early tourism season. However, pessimistic interest rates that also hurt real wages. Energy prices a toll on the tertiary sector, as showed by deteriorating consumer sentiment and elevated inflation have started have risen to such an extent that they have also become Purchasing Managers’ Index (PMI). Consumer sentiment weighing on household spending. In July, inflation climbed visible in other goods and services. This effect was most in February 2022 showed first signs of deterioration, while further, while consumer sentiment tanked, pointing to pronounced in food prices that continued going strong hawkish signals from the ECB and Russia’s invasion of consumer spending slowing its pace. Moreover, the PMI and rising further even though the end of the year could be Ukraine have put bond rates in the countries of Southern started contracting, due to slowing services sector activity categorised as disinflationary. Europe under pressure. The following months saw global and shrinking manufacturing output. Electricity prices real GDP contract modestly in China, Russia, and the hit new highs in August, amid the war in Ukraine and a The sharp rebound from the COVID recession has turned US, as well as sharp slowdowns in Eastern European prolonged heatwave, prompting the closure of European in the prospect of low growth in 2023. It had an effect on countries most directly affected by the war in Ukraine smelters and the adoption of energy-saving measures. the headline inflation and hence the calibration of the and international sanctions aimed at pressuring Russia to Many countries of the Euro area have chosen to cut energy monetary policy by central banks, which has tightened end hostilities. During 2022, the key trends were steadily taxes and excise duties. The ECB started raising interest much more than the CBs themselves had anticipated at slowing growth, a tightening labour market, and growing rates in July to cool demand. The slowdown came amid the beginning of the year. The FED set the stage for the inflation. Private consumption was the main driver of higher inflation, energy prices, and interest rates. Business hiking cycle at the January meeting, providing a hint that a growth, causing the savings rates to decrease and the and consumer sentiment tumbled due to the impact of the first hike would be seen in March. The hiking cycle brought appetite for loans to increase. The loan growth rates were war in Ukraine and global headwinds. The manufacturing the federal funds rate in 2022 from 0.25%-0.50% up 4 p.p. surprisingly marginally impacted by the growing interest and services PMIs contracted further in October 2022, As the FED started raising the interest rates before the rates that eventually started restraining global demand, while economic sentiment slipped again, pointing to a ECB, the dollar gained in value and pushed the euro to causing the retail indexes and sentiments to drop. In the further weakening in activity. Both industrial production fall below parity for the first time since December 2002. second half of the year, supply constraints eased off and and retail sales fell. The low number of new manufacturing However, the euro eventually appreciated, trading at 1.07 commodities prices began falling. Large firms reported orders, shortening of suppliers’ delivery times, and dollars at the close of the year. The FED now foresees a a contraction in profit margins due to higher costs, while contracting manufacturing PMIs suggest/indicate that the higher peak in rates, at 5.0% by the end of 2023. The ECB downward pressures to global earnings growth appeared eurozone industrial sector moved into a cyclical downturn started hiking the key interest rates in July 2022, to rise from to be gaining momentum. In small firms, bankruptcies have nearing the year end. Supply bottlenecks started easing -0.75% to 2% at the end of the year in order to, according already started to increase in major advanced economies, off noticeably by year’s end, as household consumption to its mandate, bring inflation down. The last inflation rates MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 19 of the year offered positive reinforcement to the ECB’s the increased interest rates will push it down. Deteriorating endeavours, however, core inflation never eased in 2022. retail sales data in the euro area, even with declining That was the key message from the December 2022 ECB fuel prices, suggest that private consumption will remain meeting, when President Lagarde struck an unusually subdued in 2023 as increasing uncertainty, declining hawkish tone. The December 2022 HICP figures supported purchasing power, and rising political risk that will remain this view, while markets cheered another marked decline regionally contained, indicate a slowdown. We see the in headline inflation. It is lower energy prices and the euro area economy stagnating in 2023, the tightness of resulting base effects, as well as government interventions the labour market should decrease. Finally, the monetary that are pushing down headline inflation. In August, policy tightening works with long and variable lags, and so the Governing Council decided to reinvest the principal past and upcoming rate hikes and tightening of financial payments from maturing securities purchased under and bank lending conditions will continue to impact the the Pandemic Emergency Purchase Programme until at economy. 5.4% economic growth in Slovenia in 2022 least the end of 2024. Their decision also ended full APP reinvestments in March 2023 and the decline with a pace of EUR 15 billion per month until June 2023. The pace beyond that is still to be determined. Such a reduction in the central banks’ demand could potentially translate into less potential to absorb shocks and therefore higher liquidity premiums and lower market liquidity. Consequently, the ECB approved the Transmission Protection Instrument (TPI) to ensure the uniform monetary policy transmission by alleviating prospective excessive pressures on sovereign bonds’ credit spreads. Global activity should remain muted in 2023. Private consumption will be weighed on by stubbornly high inflation, tighter financing conditions, and depleted savings. Additionally, global economic headwinds will hit the external sector. Elevated interest rates, heavy public debts, and volatile commodity prices pose risks. The price pressures will decrease due to combined effects of increased key rates and quantitative tightening signalled by central banks. The labour markets are predicted to balance a little due to stagnation, and so pressures on wage growth should ease. Global trade should experience no additional supply shocks in energy and commodities. Political tensions are expected to remain, but will stay regionally contained. The GDP growth rate in 2024 and beyond should be supported by declining interest rates and The economy in the Group’s region Private consumption has been the main driver of growth in 2022 as it has dwarfed government consumption. It has been spurred by surprisingly resilient and strong credit growth, remittances, and tourism, joined by strong export demand from the EU propping up the growth of regional economies. Fixed investment, which rebounded sharply after abrupt drops in 2021 for Montenegro and N. countries because of fossil fuel subsidies, price caps, and support to households and firms. The EU accession reforms, and investment mitigate the negative effects of Macedonia, also helped drive growth. The trend was the high energy and food prices, disruptions to trade and opposite in BiH and Serbia where investments diminished investment flows, and spillovers from the slowdown in the rapidly compared to 2021. The relatively high inflation rate euro area. However, there is significant political uncertainty can be explained by both relatively large price increases about the risk that parliamentary impasses will create in energy and food, as well as those items’ relatively large delays in the implementation of reforms, and thus prevent share in the consumer basket. Higher energy prices have efficient absorption of related funds (BiH, Montenegro, translated directly into larger import bills, a wider current N. Macedonia). Regional instability due to the rekindled account, and generated sizable fiscal costs in several conflict between Serbia and Kosovo also poses a risk. Table 5: Movement of key macroeconomic indicators in the Euro area and NLB Group region GDP (real growth in %) Average inflation (in %) Unemployment rate (in %) 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 positive expectations regarding investments and durable Euro area goods consumption. A relatively warm winter, energy savings, and fiscal support measures helped to alleviate fears of imminent energy shortages in the euro area. Production levels will benefit from improving supply conditions and declining energy and commodity prices. The inflation rate will decrease as the expected Central Bank balance sheet reduction and Slovenia Serbia N. Macedonia BiH Kosovo -6.3 -4.3 -0.9 -4.7 -3.3 -5.3 5.3 8.2 7.5 3.9 7.1 10.5 13.0 3.5 5.4 2.3 2.1 3.8 3.3 6.1 0.0 0.6 1.8 1.6 1.0 2.4 2.6 1.6 2.2 3.1 3.0 2.0 3.5 3.2 0.3 -0.1 1.6 1.2 -1.1 0.2 -0.3 2.6 1.9 4.1 3.2 2.0 3.3 2.4 8.4 9.3 12.0 14.1 14.0 11.6 13.0 6.1 6.8 10.1 8.5 8.0 7.0 7.5 3.0 3.9 5.4 3.6 3.0 3.5 2.6 8.0 5.0 9.7 16.4 15.9 7.7 4.7 11.0 15.7 17.4 26.0 20.8 17.9 16.6 6.7 4.2 9.4 14.4 15.6 17.0 14.8 7.0 4.0 9.5 13.9 15.2 16.5 13.7 7.3 4.2 9.2 13.7 15.1 16.0 13.3 Montenegro -15.3 Source: Statistical offices, Focus Economics. Note: NLB Forecasts are highlighted in grey. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 20 Table 6: 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 Montenegro 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 2020 1.6 7.6 -4.1 -3.0 -3.2 -7.0 -26.1 2.3 3.8 -4.2 -3.1 -2.3 -8.7 -9.2 0.0 -0.8 -7.0 -6.0 -4.1 -9.4 -11.6 0.5 0.5 -6.5 -4.9 -4.5 -7.9 -11.2 1.1 0.9 -5.9 -4.1 -3.9 -7.6 -7.0 -7.7 -8.0 -8.2 -4.7 -7.1 -10.6 -10.2 -5.1 -4.7 -4.1 -5.4 0.7 -0.9 -2.0 -3.7 -3.5 -3.3 -4.5 0.5 -1.6 -5.3 -3.6 -4.3 -2.8 -4.0 0.0 -2.0 -4.9 -3.1 -2.7 -2.1 -3.4 0.2 -1.8 -4.4 97.0 79.6 57.0 51.9 36.5 22.4 103.5 2021 95.4 74.5 56.5 51.8 35.4 21.9 83.3 2022 94.1 70.0 53.4 50.9 31.0 21.2 77.5 2023 93.5 69.5 53.4 51.0 29.2 22.4 75.3 2024 92.9 68.1 51.9 51.5 28.1 23.4 74.6 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Source: Statistical offices, Focus Economics. Note: Consensus Forecasts are highlighted in grey. A macroeconomic snapshot for the NLB Group’s region In Slovenia, the driver of growth was household consumption expenditure which started to lose steam as inflation persisted and sentiment deteriorated. Growth rates outperformed those of the euro area, and confirmed the presence of accumulated savings and consumers’ spending inclination. After lagging behind imports in H1 2022, exports improved in Q3 2022, and in last months of the year decreased the deficit accumulated throughout the year. Prices remained elevated throughout 2022, easing off only marginally in the final two months. Household final consumption expenditures increased significantly due to the persistent growth of gross disposable income in nominal terms and the higher essential costs of living. For the first time in more than a decade, households in Slovenia in the Q3 2022, generated a deficit, mainly due to the significant decrease in gross savings and an increase in gross investments. The turning point in consumer survey was in April 2022 when indicators about major purchases, savings, and the financial situation in households began declining and stayed below average for the rest of the year. In BiH, the economy performed well in 2022. Domestic demand was the key growth factor. Investment activity was robust due to infrastructure works, while private consumption rose, driven by the double-digit rise in nominal wages and higher remittances. Real export growth outpaced that of imports, but the net external contribution was still negative at the half-year mark. Despite the robust nominal growth in exports, the overall external balance deteriorated, due to a similar surge on the import side. Remittances inflow remained solid. On the financing side, net FDI slowed down. In the second half of 2022, activity started to wane. As real wages remained subdued by inflation, retail activity started decelerating. Headline inflation surged this year as food prices continue to soar, contributing roughly 50% of headline inflation at the close of the year, given its relatively high share in the consumer basket. BiH subsidized household electricity prices, so the cost was much lower than on the international markets. In North Macedonia, moderate growth from 2021 continued with a soft pace into 2022 and was mainly driven by services. Investments rose significantly, reflecting stocking in inventories. Household demand grew at a stable pace, causing the demand to be served by surging imports, leading net exports into negative territory. The inflationary environment and underlying energy crisis continue to put the economy under pressure. Economic activity is correlated to the euro area, which is a key source of demand for the country’s goods and a source of investment 3.8%economic growth in the Group’s region in 2022 and remittances. The inflation rate reflected the consecutive in May 2022. A new organic budget law was adopted in hikes in the regulated energy tariffs, full passthrough of September 2022. fuel prices, no VAT rate reductions on food and fuel prices, and a large amount of food in the consumption basket. The energy crisis and deteriorating external demand are In Montenegro, the economy exhibited strong growth in the first half of 2022, courtesy of robust private consumption, creating a balance of payment pressures. The temporary inventory build-up, and solid export performance. Tourism, tax cuts on food and fuel products that were implemented as the most important sector, exceeded expectations. following Russia’s invasion of Ukraine were not extended Tourist arrivals in November YtD almost reached the 2019 Contents 21 level, missing the mark by roughly 10%, with the months of July and August exceeding it. A reform of the tax code had a noticeable effect on real wage growth and further lowered unemployment. By May, exports recorded strong growth of both - goods and services. At the same time, strong domestic demand pushed imports higher. Secondary accounts rose due to remittances, and FDIs exhibited solid growth in 2022. Inflationary pressures continue to weigh on the economy, with the most important driver being food and non-alcoholic beverages. High energy prices presented a unique opportunity, as the strong electricity generating capacity enabled energy exports to more than double in 2022, compared YoY. In Serbia, the net external demand contributed strongly to growth. The drought during the summer months caused agriculture to underperform, as it hurt hydro electricity generation which Serbia usually exports. The coverage of imports by exports decreased significantly, reflecting the much higher yearly growth rates of imports compared to exports. The current account deficit increased sharply in 2022, mainly due to higher costs of energy imports. The realised net foreign direct investments were lower than in 2021. Inflation never eased off during the year, with food being the most important driver. Core inflation rose further, hurting the disposable income and dampening private consumption. The increase of gross and net salaries and wages translated to growth in real terms. The total public debt increased, as did total public revenues in real terms due to growth in most revenue categories - particularly in corporate income taxes, VAT, and custom duties, while excises revenues decreased. In Kosovo, services spurred by the diaspora’s demand, credit growth, and public transfers were the main drivers of growth. Trade deficit widened and final consumption expenditure was strong. The growth rate soon halved, driven by a notable contraction in construction and capital formation. Inflation started picking up in March 2022, peaked in July, and remained elevated thereafter, but lower than most other countries of the region. Food become an increasingly important driver. The second part of the year saw further moderation in most activities. The total amount of General Government revenues picked up in the second part of the year (VAT, income tax). The macroeconomic outlook for NLB Group’s region In Slovenia, on the fiscal side, the 2023 budget deficit target is suggesting a more accommodative stance, with the expected widening of the gap reflecting the government’s efforts to tackle the energy crisis. The government is planning measures worth nearly EUR 5 billion to fight the energy crisis in 2023. The slowdown is to be induced by weaker external demand, still elevated inflation, and greater uncertainty, which are expected to weigh on private consumption and investment growth. The labour market will be slightly less tight, muting the pressures of wage demands. Inflation should ease off due to a tighter monetary policy. In BiH, electricity price pressures are likely to be contained, as BiH has one of the largest electricity generations in the region and limited gas usage. Investments in energy and infrastructure will continue to add to overall growth, although to a lesser extent than in the last two years. Indirect effects stemming from destabilizing global commodity and financial markets negatively impact external account and domestic growth prospects. Inflation will ease in 2023, albeit remaining high in historical terms. The unemployment rate is expected to decline slightly in 2023 with stabilization of the international situation. In Kosovo, the gradual projected decline in commodity prices should bring relief, with expansionary fiscal policy contributing to activity. A slowdown in investments and private consumption is to be expected. Remittances should slow down as well as the current account. In addition, FDI and external lending will be key sources of financing for the current account. In North Macedonia, however, growth should be supported by planned investments in infrastructure and capacity expansion of the export sector. External demand will weaken, wage pressures will become more pronounced, and a further tightening of financial market conditions pose downside risks. Inflation should ease in 2023 as import prices will fall. The labour market should get slightly tighter. The opening of EU accession talks could boost capital inflows and momentum for reforms. Tighter financial conditions, and the withdrawal of wage subsidies is expected to weigh on consumer spending and business investments. In Montenegro, growth should be subdued in 2023, but amongst the highest in the region. Private consumption will slow down. The current account deficit should remain amongst the highest in the region. Higher energy prices support its reduction as the growing capacities are used for energy exports. Together with exports, tourism, and transport services should aid in reducing the current account deficit. Further development of electricity- generating capabilities, together with tourism revenue, has the potential to improve country’s external equation. In Serbia, the economy is set to soften in 2023. Private spending growth will decelerate due to high inflation eroding real incomes, while a slowing global economy will see export growth cool. Regional instability and elevated inflation amid commodity price swings and gas supply disruptions represent downside risks. The current account deficit is set to increase. The inflation growth rate is expected to stay elevated in 2023, as we see it as the highest and most persistent in the region. The contribution of net exports to growth is expected to improve due to decelerating imports and an increased export capacity supported by the FDIs. Serbia remains an attractive destination for “nearshoring.” The Group’s region is expected to grow at a rate of 1.3% in 2023. Regional growth will cool significantly this year. A weaker Euro Area economy, elevated inflation, declining real wages, geopolitical volatility, and the war in Ukraine will restrain household spending, industrial production, and exports. In addition, tighter financing conditions should further subdue activity in most countries of the region. Performance will depend upon the euro area, with remittances and exports waiting upon the outlook to improve. Since tourism rebounded in 2022, 2023 could be beneficial for tourism-dependent countries. Current accounts are mostly set to deteriorate in 2023. Growth should start picking up towards the end of the year. A reduction in inflation should happen in the second half of the year, providing some relief to real income and household consumption. The effect of the electricity prices pass-through waned in the second part of the year, after core inflation pressures were still rising in the beginning of the year. China’s reopening unsettled the MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 22 Table 7: Movement of key banking systems indicators in the NLB Group region, 2022 Corporate loans Household loans Corporate deposits Household deposits Net interest margin NPL CAR in EUR millions 10,487 13,641 3,349 4,681 2,689 1,413 ∆ % YoY in EUR millions ∆ % YoY in EUR millions ∆ % YoY in EUR millions ∆ % YoY 2021, in % 2022, in % in % ∆ pp YoY in % ∆ pp YoY 12.8 5.8 11.5 4.3 15.2 10.7 12,138 11,904 3,495 5,613 1,632 1,588 7.8 6.2 7.3 5.2 16.7 9.1 9,710 13,233 2,319 3,142 1,175 2,321 7.9 12.7 3.7 11.0 19.0 43.7 25,784 17,864 5,253 7,452 3,647 2,458 7.6 2.9 5.8 -0.8 8.3 12.6 1.4 2.7 3.0 2.3 4.5 4.0 1.6 2.9(ii) 3.0(i) 1.7(i) 3.9 4.0(i) 1.1 3.2(i) 2.9 4.9 2.0 5.9(i) -0.1 -0.4 -0.3 -0.6 -0.3 0.3 17.0(i) 19.5(i) 17.7 19.2 14.8 18.4(i) -1.5 -1.3 0.4 0.0 -0.5 -0.1 Slovenia Serbia N. Macedonia BiH Kosovo Montenegro Source: Statistical offices, CBs, NLB. Note: Net interest margin calculated on interest-bearing assets; Residential deposits and loans for Montenegro; (i) Data for Q3 2022; (ii) Data for 30 November 2022. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report commodity markets, caused prices to rise again, and didn’t bode well for industrial production. Growing wages will induce additional price pressures. Labour markets should continue with rising employment rates and the unemployment rate should reduce for the most part. Loan appetite in the region should cool amid tightened monetary policies and rising food prices, slowing down demand. Geopolitical tension remains a strong possible constraint on growth and on a predictable business environment. The banking system in the Group’s region Since the population of the region amassed notable savings since the COVID pandemic, consumption was amongst the most notable drivers of growth. As a result, the loan appetite of corporates and households alike remained very robust throughout the region, slowing down slightly towards the year Figure 2: LTD ratio in the Euro area and NLB Group region Euro area Slovenia Serbia N. Macedonia BiH Kosovo Montenegro Source: ECB, National CBs, NLB. Note: LTD for Slovenia and BiH is from Q3 2022, and for Serbia for 30 November 2022. 2021 2022 94.4% 95.4% 66.1% 69.1% 79.4% 85.8% 82.6% 86.1% 75.7% 76.5% 76.5% 78.3% 80.0% 70.1% end. Corporate loans were particularly in high demand and grew notably due to a turbulent year, with supply bottlenecks, high producer prices, higher commodity prices, and stock refilling. Kosovo, Slovenia, Montenegro, and N. Macedonia saw corporate credit grow in double digits, with Serbia and BiH ending the year in mid-single digits. The household loans’ segment grew at a little softer pace in comparison, but was still fuelled by private consumption and exhibited higher growth rates than expected. The dynamics were very similar to the corporates. Likewise, Slovenia, Kosovo, Montenegro, and N. Macedonia saw the strongest growth, with Serbia growing at a slightly slower pace. BiH followed with a similar growth rate as in the corporate sector. The NPLs fell in all countries of the Group’s region, except for Montenegro. The corporate deposit growth was in double digits in Kosovo, BiH, Serbia, and particularly in Montenegro, which saw notable growth. In N. Macedonia, the rate was subdued, while in Slovenia the growth was nearing the 8% mark. The growth of household deposits was much less pronounced as savings were being used to sustain consumption. Considering the macro circumstances Slovenia, Kosovo, N. Macedonia, and Serbia saw solid growth, with Montenegro as an outlier, exceeding the other rates by a big margin. BiH was the only country to register a contraction. Contents 23 Figure 3: ROE ratio in the Euro area and NLB Group region Euro area Slovenia Serbia N. Macedonia BiH Kosovo Montenegro 5.3% 4.8% 11.4% 10.7% 7.5% 10.6% 9.6% 12.9% 12.2% 12.6% 5.9% 14.3% 2021 2022 19.5% 20.6% Source: ECB, National CBs. Note: Return on average equity (ROAE) used for BiH; Q3 2022 data for BiH and the Euro area. November 2022 data for Serbia. Figure 4: Loans to non-financial corporations and household loans (% GDP) in the Euro area and NLB Group region in 2022 Euro area Slovenia Serbia N. Macedonia BiH Kosovo Montenegro 44.3% 58.9% 18.1% 18.3% 22.8% 19.7% 26.4% 28.0% 20.8% 24.7% 18.4% 21.7% 30.6% 26.7% Source: National CBs, National Statistical Offices. Note: Q3 2022 annualised data for BiH and Kosovo. Residential loans for Montenegro. Loans to non-financial corporations, % GDP Household loans, % GDP The net interest margin was not moving uniformly in the Group region. It grew in Serbia and Slovenia, reflecting the interest rate hikes by respective central banks, the growth of lending, and price effects. It fell in BiH and in Kosovo, reflecting a competitive environment. In Montenegro and N. Macedonia, the margin saw no change YoY. The capital adequacy ratio mostly saw slight negative change in Slovenia, Serbia, Montenegro, and in Kosovo. In N. Macedonia, the ratio improved. Despite a turbulent year, the banks in the Group remain solid and well-capitalized. The LTD ratio increased in all countries, except in Montenegro where the growth of deposits was the highest. For the rest of the countries, the ratio movement reflects the growth of loans outpacing the growth of deposits. The profitability of the banking systems of the NLB group improved in all countries except in Slovenia and N. Macedonia, where slight decreases were noted. 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 further potential for expansion, as compared to the same categories in the Euro area. This is so especially in the household loans sector where the growth in the euro area has been much more pronounced, as the households seemed more at ease with taking on additional debt. However, seeing that private consumption is expected to slow down in 2023, this does not bode well for new household credit origination. Private consumption is the most important driver of GDP growth and is expected to range between 0.7% in Slovenia and 2.5% in Serbia. Fixed investment is expected to range from a contraction of -0.7% in BiH, and a growth of 4.3% in N. Macedonia. Banking sector loan growth is expected to slow down in 2023, however, in most of NLB Group home markets loan growth rates will likely stay positive in low to mid single-digit range for both, corporate and retail sectors. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 24 The Regulatory Environment During 2022, 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 in legislation and regulation which influence 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 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). In October 2021, the European Commission adopted a further package of a review of the CRR and CRD. One core aspect of that package (Regulation (EU) 2022/2036 which introduces targeted adjustments to improve the resolvability of banks) has already been finalised and published in the Official Journal in December 2022. 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 to the Bank. The Bank strictly adheres to its obligations imposed on it by GDPR in both Slovenia and the Group. The new Slovenian Personal Data Protection Act (ZVOP-2) was adopted in December 2022, and is in the process of implementation in the Bank’s operations. In the field of financial markets, there were no significant changes in the regulatory environment in 2022. The Bank complies with the provisions of MiFIR/MiFID II and EMIR regarding financial markets transactions, enhanced investor protection, transparency, and reporting obligations. The Group also considers and complies with the regulations In December 2022, the Digital Operational Resilience Act in the field of preventing money laundering and terrorist (DORA) Regulation was published in the EU’s Official Journal financing (AML/CTF). In April 2022, the new Prevention of Money alongside the revised directive on the security of network and Laundering and Terrorist Financing Act (ZPPDFT-2) entered information systems (NIS2). The new framework introduces a into force and replaced the law in force at the time. The new comprehensive set of rules concerning the information and Act has implemented the provisions of Directive (EU) 2019/1153, communications technologies (ICT), risk management of of Directive (EU) 2019/2177, and of Regulation (EU) 2018/1672 financial sector firms to strengthen their digital operational into Slovenia's legislation. In addition, an Amendment and resilience, and prevents and mitigates cyber threats. supplements to the Act on Prevention of Money Laundering and Terrorist Financing (ZPPDFT-2A) was published in the Slovenian Official Gazette in November 2022. Due to the aforementioned regulatory changes, several activities were carried out by the Group to ensure compliance with new AML/CFT requirements. Concerning the changed geopolitical environment related to the Russian aggression in Ukraine, the Group regularly monitors and manages all newly introduced financial sanctions stemming from all relevant regimes. In the field of payment and settlement systems, there were no significant changes in the regulatory environment in 2022. The Bank meets its obligations under PSD2, the respective regulatory technical standards and Payment Services, Services for Issuing Electronic Money and Payment Systems Act (ZPlaSSIED). New regulatory requirements imposed by the regulator are constantly monitored and managed, also taking into account what constitutes the best user experience. In light of the EBA Guidelines on outsourcing arrangements, the Group has undertaken a continuous effort to adhere to regulatory requirements. This has entailed the revision of internal policies and the modification of contracts with external (service) providers. 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 formed a comprehensive sustainability governance structure and adopted the NLB Group Sustainability framework. In 2022, substantial effort was made in implementing EU Taxonomy regulation in the Group financing process. The Group has also performed stress-testing using the ECB’s adverse and severe scenarios. In the field of consumer protection, the new Consumer Protection Act (ZVPot-1) was adopted by Slovenia's National Assembly in October 2022. The regulatory environment in the Group’s region The regulatory environment in the rest of the region where the Group operates was dominated by actions to ensure the stable functioning of financial systems. In Serbia throughout 2022, there were numerous regulatory changes adopted by the National Bank of Serbia with the intention to minimise the consequences of the COVID-19 pandemic on the economy and the financial sector (e.g., the agreement concluded between the National Bank of Serbia and the banks in 2020, which, among other things, contains restrictions on the payment of dividends), as well as to determine and define the support of the citizens (e.g., to facilitate Access to Financing for Natural Persons, Adequate Management of Credit Risk in Agricultural Loans Portfolio in Conditions of Aggravated Agricultural Production). To protect citizen standards regarding payment services needed for everyday activities, the National Bank of Serbia adopted the Decision on the Payment Account with Basic Features. The National Bank of Serbia has also adopted the Decision Amending the Decision on Risk Management by Banks to provide an additional bank supervisory mechanism and ensure transparent and clear conduct of banks in the case of intended increases in fees for the provision of payment services and in the case of an introduction of new fees. In North Macedonia, the past year was marked by a significant change in the regulation that includes the adoption of two systemically important laws. The Law on Payment Services and Payment Systems, harmonised with European legislation in the relevant area – which includes liberalisation of the payment services market through entry of non-banking institutions such as payment institutions and electronic money institutions. Furthermore, it ensures transparency and comparability of fees MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 25 for payment services, and enables the opening of an account with basic functions. Also, it limits the maximum charge for In Kosovo, three regulations were adopted by the Central Bank of Kosovo. The regulation on the liquidity coverage ratio, the natural person accounts and the introduction of an obligatory regulation on the net stable funding ratio, and the regulation number of transactions free-of-charge for vulnerable social on access to payment accounts with basic services. The Law on categories. The Law on the Prevention of Money Laundering Implementation of Targeted International Financial Sanctions and Financing of Terrorism, harmonised with European was adopted concerning the prevention and combating against legislation in the field of fighting organised crime. This law terrorism, terrorist financing, and the proliferation of weapons strengthens the analysis measures that banks should apply of mass destruction, etc., in accordance with the Resolutions when there is a high risk, when cross-border correspondence of the UN Security Council, and the European Union Acts. As is established, when the person is not physically present for foreseen by the Law on Electronic identification and Trust the purposes of identification, when the client is a politically Services in Electronic Transactions, 10 bylaws were adopted by exposed person, in a business relationship, or in a transaction the end of December 2022. that is involved in a high-risk state. In the Federation of BiH, the most important decision of the regulator in 2022 was the new decision for managing In Montenegro, the main activities in 2022 were dedicated to the implementation of the new law on comparability of fees associated with consumer payment accounts, the transfer of outsourcing arrangements in the bank, which includes: activities consumer payment accounts, and payment accounts with and conditions for outsourcing, applications within the banking basic services. The amendments to the Law on Payment group, materially significant activities, risk assessment, duties Transactions were published in October 2022. Pursuant to and responsibilities of the bank’s Management and Supervisory the amendments to the Law on Tax Administration, banks are Board, conflict of interests, the outsourcing register, contracting, obliged to implement the new instruction on a way of reporting supervision, and the powers and procedures of the regulator. data to the administrative body responsible for taxation. This The new decision represents an alignment of local regulations instruction includes reporting under the Foreign Account Tax with EBA outsourcing standards. Compliance Act (FATCA) and the Common Reporting Standard (CRS). The Bank continued to regularly apply the decisions on In the Republic of Srpska, the most significant activity relates to the adoption of the Law on Amendments to the Law on the introduction of international restrictive measures in relation to activities that undermine or threaten the territorial integrity, National Payment Transactions in April 2022 by the Ministry sovereignty, and independence of Ukraine. of Finance of the Republic of Srpska, with the aim of greater transparency of payment services, greater financial inclusion of individuals through the use of a basic payment account, introduction of safe deposit boxes for individuals and business entities, and the Law on Inter-banking Fees for Payment Card Transactions. In addition, other significant regulatory changes refer to the adoption of several bylaws related to the number of eligible deposits, temporary measures to mitigate the risk of interest rate growth, outsourcing of arrangements, and a new accounting framework for banks and other financial organisations. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 26 BUSINESS REPORT MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 27 The record results in 2022 are just the tip of NLB Banka, Banja Luka successful operations over the past few years. We reached many important milestones and improved our market share. For the fifth year in a row, we received the Golden BAM award as the bank with the highest ROA and ROE in BiH. We intertwined the commitment to a better quality of life and ESG principles in all segments of our operations. Environmental and social actions supported responsible activities and initiatives through sponsorships and donations, supporting ecology, digitalization , energy efficiency, inclusion, and equality. Our focus on youth segment and digital channels created better footprints for today and made data-based decisions for the future. Our business results are a solid basis for successful transformation to a modern digital bank that is ready for whatever may come, preserving the potential of our home region, and utilizing opportunities of sustainability. Pictured: NLB Banka, Banja Luka employees Strategy Despite the challenging and uncertain economic environment, the Group has continued to duly execute its medium-term strategy. This includes focusing on protecting and strengthening its market position in its home region, actively participating in the growth and consolidation of the market, and promoting the Environmental, Social, and Governance (ESG) agenda. Digitalization, client centricity, and cost efficiency remain some of key strategic orientations to ensure delivery of the Group’s vision. Be a regional champion The Group aims to further strengthen its role as a systemically important financial institution in the SEE region. To achieve this, it strives to become a market leader in all its markets and to have a prominent role in the region’s development. The Group believes there is significant value to be unlocked by facilitating further development of the region and increasing its standard of living. This will be further accelerated by promoting advanced environmental, sustainability, and corporate governance agendas. The Group is accelerating its efforts to adhere to all modern standards, as well as catalyse their adoption throughout its client base and markets. It has created novel green financial products for financing clients’ green transformation, as well as invested significant efforts and resources to reduce the carbon footprint of the Group’s own business operations. For information on environmental risks that may affect the Group’s business results, please refer to the chapter Risk Factors below. As one of the most important players in the region’s financial system, the Group is carrying its share of responsibility for building a stable banking system. The 2022 acquisition of N Banka in the wake of Russia’s attack on Ukraine is an example of the Group’s resolve to commit capital in turbulent times for the benefit of all stakeholders. By stopping the run on the bank in fast cooperation with the regulator, the Group has safeguarded unsecured deposits of retail and even more so of corporate customers. This endeavour brought not only stability to the Slovenian banking sector, but also enabled the Group to remain a leading player. Put clients first The Group is driving its customer-centricity agenda by starting with the client’s financial needs and looking for ways to improve and streamline its products and services to fulfil them to the utmost extent. One way the Group does this is by digitizing its distribution channels, allowing clients to access its products and services from anywhere at any time. This makes it easier for clients to manage their finances and take care of their banking needs at their own convenience without having to visit a physical branch. The Group is committed to adding new financial solutions to meet unmet and new needs of its clients. By staying on top of the latest trends, needs, and technologies, it will stay competitive and provide the best possible banking experience. Accelerating the development of the SEE region Promoting the ESG agenda Supporting stability of the banking sector Growing client market share Creating value for shareholders Offering a great place to work Be a regional champion Put clients first Grow our market position Monetize opportunities and synergies Digitalizing distribution channels Adding new financial solutions as per clients' needs Offering strong customer support Finding inorganic expansion opportunlties Establishing horizontally diversified businesses Finishing integration of N Banka Continuing strategic transformation MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 29 Ensuring strong customer support remains one of the Group’s The Group regularly engages with its stakeholders in defining key focuses. It requires that its customer service team is what is material to both them and the Group. A variety of knowledgeable, friendly, and always ready to assist clients with communication channels are used for an open and transparent their questions or concerns, wherever they may be. dialogue on sustainability-related issues. Some of the most Digitalization important channels for communications with the stakeholders (in addition to the regular publicly available periodic reports, presentations, and webcasts on the Group performance) are the NLB Group Sustainability Report, the Corporate Social The Group continues to implement substantial efforts and Responsibility (CSR) and Sustainability e-mail box, the corporate resources toward digital distribution channels and operating website, and social media channels. models. The customers’ preference for an increased share of digital business interactions has remained even after The Group’s employees represent its key resource and are normalization since the COVID-19 pandemic. Effective and safe one of its main drivers for creating value. Through the focus digital distribution channels require novel operating models on recruitment, management, and continual development of and automated processes to minimise response times and employees, they are given the opportunity to thrive by making costs. The focus on digitalization is to enable quicker and better the most of their talent and experiences. They are encouraged customer service, a higher level of internal processes efficiency, to act in a responsive, respectful, and result-driven manner. The and consequently, additional cost savings. ambition is to also involve the whole organisation in realising the Group’s sustainability ambitions. The Group will continue to invest substantially in IT infrastructure and its digital capabilities and roles. The focus will be on improving the speed of IT delivery by adopting agile methodology principles, provision, and implementation of the best online experience for customers in the SEE, and enhancing capabilities for processing data, modelling, and relevance of services to clients. One such example is the establishment of technological hub NLB DigIT in Beograd that develops solutions for the whole Group. For more information on NLB DigIT please refer to the chapter Strategic Foreign Markets. 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 and carbon footprint 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. 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 its shareholders, the Group views its decisions through a lens of maximising its return on equity. With respect to its customers, market shares and Net Promoter Scores (NPS) are tracked. With respect to its employees, an employee engagement metric is measured and analysed. In addition, other supporting indicators and benchmarks are tracked to continually revaluate current projects and utilise those insights for future decisions. Monetize opportunities and synergies The Group is 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 ongoing growth and consolidation of the banking markets. The Group is fully engaged in re- establishing some key financial services (leasing, factoring, etc.) across all its markets, thus also diversifying its services on a horizontal level. The Group is moving closer to the fintech ecosystem to find new and better ways of solving customers’ financial needs. To achieve this, it has established a corporate venture team eNLaB, for building business cooperation with ambitious fintech players, to accelerate the Group’s efforts in bringing novel use cases and business solutions to the market. It is looking into opportunities in the areas of credit underwriting, payments and digital banking services, financial enterprise technology, regulatory technology, web 3.0 and blockchain technology, and personal finance and asset management. Significant strategic business efforts have been undertaken to achieve business synergies across the Group, both in costs and operational efficiency. The Group believes these can help offset the negative economic effects the rising inflation will have on the Group’s clients. In Slovenia, further synergies are expected after full integration of N Banka in 2023. The increased importance of leasing – A new business opportunity In the Group Strategy, leasing activities represent a significant part of the Group’s business mix. Leasing operations in Slovenia (NLB Lease&Go, Ljubljana) are gaining momentum with increased total assets, while new leasing operations have been added in North Macedonia and Serbia. Management and governance structures are being set up in new leasing Group members, with full implementation of the Group’s corporate governance principles, including two members of NLB Management Board being Chair and Co-chair of NLB Lease&Go, Ljubljana Supervisory Board. The Group expects leasing will once again become a significant part of its business operations. It is planned that in its mature phase, leasing will contribute more than EUR 1 billion to the total assets of the Group, through organic and potentially inorganic growth. For more information on leasing operations expansion in SEE please refer to the chapter Strategic Foreign Markets. Continuing transformation To facilitate the continuous transformation in an everchanging environment, the Group is following comprehensive plan to deliver its mission and financial targets. The Group has identified a series of projects and initiatives, and has dedicated considerable resources for their implementation. All major running change efforts are channelled into one overall strategic transformation programme. The backbone of the strategy is strengthening customer- centricity by establishing customer-based market management, improving the understanding of clients, reimagining digital client journeys, and accelerating innovation to provide lifestyle and value chain services to strengthen relationships. The transformation programme also focuses efforts into increased operational efficiency, cost management, and the improved utilisation of the Group’s capital. Simultaneously, overall operational capabilities are being enhanced by improving human capital, optimising IT infrastructure, digitalizing internal processes, and leveraging information capital. To drive the transformation, a new change management platform has been set up. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 30 Funding Strategy and MREL Compliance A good client relationship is the main foundation for a stable and growing deposit base, while wholesale funding is primarily driven by fulfilment of minimum requirement of own funds and eligible liabilities (MREL) and further strengthening and optimizing the capital. The latter drives the average cost of funding higher, however, the total cost of funding remains low for now due to a comfortable high and stable deposit base and the inelasticity of the sight deposit pricing. Figure 5: Average cost of funding (quarterly data) standards, is regularly part of the Group business process. Year The NLB Resolution Group consists of NLB as the resolution 2022 underlined the importance of proper liquidity pricing for entity and other non-banking members. The entities and their business stability in the uncertain environment. contribution to the NLB Resolution Group are presented in the Group retail deposits represent a majority in the structure and are the most stable funding source with around 80% being Table 8: Composition of NLB Resolution Group by TREA Table 8. insured by the Deposit Guarantee Scheme. Despite turbulent business environment, Group retail deposits recorded an increase in 2022. Sight deposits represent around 90% of retail deposits and witnessed stable growth in recent years. This supports the stable business of the Group in the region, even during the volatile times on the wholesale funding markets. Entity NLB NLB Lease&Go, Ljubljana NLB Skladi, Ljubljana NLB Interfinanz - in liquidation Corporate sector deposits, albeit representing a smaller share in the deposit structure of the Group, are an important source TARA HOTEL, Budva REAM d.o.o., Beograd of liquidity, as well. Corporations are offered various deposit products to manage their liquidity position in a flexible way, supporting young and small businesses, as well as already Other TREA total in EUR millions 31 Dec 2022 6,679 146 53 15 14 13 49 6,968 0.32% established large firms in all sectors of the regional economy. On 31 December 2022, the MREL ratio amounted to 36.32% and was well above the required level. 0.24% As the funding structure of the Group relies mostly on non- banking sector deposits, the Group’s average funding costs was The composition of the own funds and eligible liabilities items still relatively low. by which the Bank met the MREL requirement was as presented 0.12% 0.12% Q1 2022 Q2 2022 Q3 2022 Q4 2022 Deposit strategy Deposits from customers represent the main funding source for the Group, and each bank within the Group has established processes that enable prudent strategic deposits management that is aligned with business targets and regulatory requirements. Regular monitoring of deposits and its structure enables timely reactions whenever necessary due to business or regulatory-related reasons. Events that caused significant economic and even political disturbances in 2022 proved that the deposit base of the Group is robust and liquidity position strong – the LTD ratio evolution in recent years that include the COVID pandemic, as well as turbulent 2022 regime was still confined to a healthy liquidity zone below 70%. A leading Group market position and a responsive relationship with clients are important factors for a stable deposit base, and besides that, proper deposit pricing plays a pivotal role in risk management and business decision-making. Established funds pricing, aligned with international liquidity pricing Wholesale funding and MREL 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 requirement. The MREL requirement for the Group is based on the Multiple Total Point of Entry (MPE) approach. in the table below. Table 9: Composition of the own funds and eligible liabilities of NLB Resolution Group Own funds and eligible liabilities items CET1 Additional Tier 1 instruments Tier 2 instruments Unsecured and unsubordinated claims arising from debt instruments in EUR millions 31 Dec 2022 1,451 82 508 490 2,531 As at 1 January 2022, NLB must comply with MREL requirement on a consolidated basis at resolution group level (i.e., NLB Resolution Group), which amounts to: • 28.69% of Total Risk Exposure Amount (TREA) (consisting of (i) 25.19% of TREA and (ii) 3.5% of Combined Buffer Requirement (CBR)), • 8.03% of Leverage Ratio Exposure (LRE). NLB has to ensure a linear build-up of own funds and eligible liabilities towards the MREL requirement applicable as at 1 January 2024, which amounts to: • 31.38% of TREA + applicable CBR, • 9.97% of LRE. To support the Group’s growth capacity and comply with MREL, the Bank was very active on the debt capital markets in 2022 with the issuance of EUR 300 million Senior Preferred notes in July 2022, EUR 82 million Additional Tier 1 notes in September 2022, and EUR 225 million Tier 2 notes in November 2022. In addition, the Bank attracted EUR 114 million in eligible deposits and concluded loans in the amount of EUR 30 million. All mentioned instruments are MREL-eligible, while subordinated instruments also strengthened the capital position and the Bank’s rating. The Bank expects to be active on debt capital markets in 2023 by issuing approximately EUR 300 million of new senior notes that count for MREL. This will lead to the Bank comfortably meeting the binding MREL requirement, applicable as at 1 January 2024. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 31 Risk Factors and Outlook Risk factors Risk factors affecting the business outlook are (among others): • The economy’s sensitivity to a potential slowdown in the euro area or globally • Widening credit spreads • Potential liquidity outflows • Worsened interest rate outlook / Persistence of high inflation • Energy and commodity price volatility • Increasing Unemployment • Potential cyber-attacks • Regulatory, other legislative, and tax measures impacting the banks • Geopolitical uncertainties In 2022, the Group’s region continued to grow on the back of the revival in private and investment consumption after being affected by the pandemic in the past period. Higher prices of energy, commodities, raw materials, and food as a result of the war in Ukraine, have and will further impact the economic momentum. As a result, a gradual slowdown in economic growth can be expected. The Group’s region is still expected to grow moderately, though the inflationary pressures might suggest a further slowdown, namely in the area of private consumption. However, it is not possible to assume with a high degree of confidence that the positive economic momentum will further continue. Lending growth in the corporate and retail segments is expected to remain relatively moderate, especially in the current circumstances. With regards to credit portfolio quality, the Group carefully monitors the most affected client segments with the intention to detect any significant increase in credit risk at a very early stage. The Group’s direct and indirect exposures towards Russia and Ukraine in 2022 was rather limited, additionally in February 2023 all remaining outstanding Russian government bonds were sold. Credit risk usually considerably increases in times of economic slowdown. In light of increasing energy prices, inflationary pressures, and a forecast of a decrease in economic growth, The Group is subject to a wide variety of regulations and the Group has thoroughly analysed potential impact on the laws relating to banking, insurance, and financial services. credit portfolio. The Group closely monitors the circumstances Respectively, it faces the risk of significant interventions by a in the most affected credit portfolio segments and makes the number of regulatory and enforcement authorities in each of necessary adjustments. The length and intensity of the war the jurisdictions in which it operates. in Ukraine might cause additional spill-over effects in the mid-term period, such as raising the price of energy sources The SEE region is the Group's most significant geographic area or their availability, which might at a later period also have of operations outside of the RoS and the economic conditions some impact on other segments of the credit portfolio. These in this region are therefore important to the Group’s results adverse developments could affect the evolution of the cost of of operations and financial condition. The Group's financial risk and NPLs. Notwithstanding the established procedures in condition could be adversely affected as a result of any the Group’s credit risk management, there can be no certainty instability or economic deterioration in this region. that they will be sufficient to ensure the Group’s quality of credit portfolio or the corresponding impairments will remain at the In this regard, the Group closely follows the macroeconomic adequate level in the future. indicators relevant to its operations: • GDP trends and forecasts, The investment strategy of the Group, referring to the Group’s • Economic sentiment, bond portfolio kept for liquidity purposes, adapts to the • Unemployment rate, expected market trends in accordance with the set risk appetite. • Consumer confidence, The war in Ukraine has led to quite considerable volatility in the • Construction sentiment, financial markets, in particular shifts in credit spreads, rising of • Deposit stability and growth of loans in the banking sector, interest rates and foreign exchange rates fluctuations. Special • Credit spreads and related future forecasts, attention is given to the markets in the Balkans, neighbouring • Interest rate development and related future forecasts, countries to Ukraine and Russia and international banks with • FX rates, operations in Russia. The Group is closely monitoring its major • Energy and commodity prices, bond portfolio positions, mostly sovereigns, by incorporating • Other relevant market indicators. adequate early warning systems. Since the beginning of the crisis, the Group has been observing credit spreads widening, which impacted FVOCI positions. During 2022, 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 No material movements were observed so far regarding the future. The Group established and developed multiple scenarios Group’s major FX positions. Current developments, market (i.e., baseline, mild, and severe) on the level of an Expected observations, and potential mitigations are very closely Cred Losses (ECL) calculation. The baseline scenario presents monitored and discussed. While the Group monitors its liquidity, a common forecast macroeconomic view for all countries interest rate, credit spread, FX position and corresponding of the Group. This scenario is constructed with the purpose trends, impacts of credit spread, interest rate and FX to culminate various outlooks into a unified projection of fluctuations on its positions, any significant and unanticipated macroeconomic and financial variables for the Group. This is in movements on the markets or variety of factors, such as line with the concept that the bank has a consolidated view on competitive pressures, customer confidence or other certain the future of economic development in SEE. The IFRS 9 baseline factors outside the Group’s control, could adversely affect the scenario is based on the most recent official and professional Group’s operations, capital, and financial condition. forecaster outputs, with additional specific adjustments for Special attention is paid to the continuous provision of services to clients, their monitoring, health protection measures, and The macroeconomic rationale behind the alternative the prevention of cyber-attacks and potential fraud events. The scenarios is related to a range of plausible drivers of economic Group has established internal controls and other measures to development in the next three years. The narrative for the facilitate their adequate management. However, these measures alternative scenarios combines statistical techniques with may not always fully prevent potential adverse effects. individual countries of the Group. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 32 expert knowledge as a means of the concept and validation The stress-testing framework is integrated into Risk Appetite, pursuing a range of strategic activities to enhance its business of outputs. The Group developed both alternative scenarios Internal Capital Adequacy Assessment Process (ICAAP), performance. The interest rate outlook is uncertain given the through the lens of possible expected impact on the regional Internal Liquidity Adequacy Assessment Process (ILAAP), and adaptive monetary policy of the ECB and local central banks economic activity. In general, the mild scenario is a demand- the Recovery Plan to determine how severe and unexpected to the general economic sentiment. The Bank is committed to driven optimistic scenario, where limited supply disruption changes in the business and macro environment might affect delivering sound financial performance. factors and an active role from the central banks help to the Group’s capital adequacy or liquidity position. Both the brighten the economic conditions and economic subjects' stress-testing framework and recovery plan indicators support Based on current and expected rates environment, growth confidence. This scenario narrates stronger economic growth, proactive management of the Group’s overall risk profile in outlook, strict costs control supported by IT/digital solutions and while the severe scenario envisions zero real economic growth these circumstances, including capital and liquidity positions successful implementation of the Group’s strategy and initiatives, for all Group home countries. Namely, the severe one is a from a forward-looking perspective. supply-driven pessimistic scenario, where both upside inflation the 2023 outlook and guidance for 2025 have been revised and further improved. During the inaugural Investor Day which took risk and downside growth risk materialize. The Bank includes Risk Management actions that might be used by the Group place in May 2022, the Group communicated several KPIs for these scenarios in calculating expected credit losses in the are determined by various internal policies and applied when the year 2025, i.e., regular profit will exceed EUR 300 million, a context of IFRS 9. necessary. Moreover, the selection and application of mitigation EUR 100 million contribution from the Serbian market, EUR 500 The Group formed three probable scenarios with an feasibility analysis of the measure, its impact on the Group’s and 2025, tactical M&A capacity of EUR 1.5 billion RWA, and ROE associated probability of occurrence for forward-looking business model, and the strength of the available measure. will exceed 12%. The Group remains committed to deliver on measures follows a three-layer approach, considering the million total capital return through cash dividends between 2022 assessment of risk provisioning in the context of IFRS 9. These IFRS 9 macroeconomic scenarios incorporate the forward- looking and probability-weighted aspects of ECL impairment calculation. Both features may change when material changes Outlook these KPIs, moreover it is improving the outlook for regular profit (to be around EUR 400 million), tactical M&A capacity (to EUR 2 billion RWA), and ROE (to exceed 13%). in the future development of the economy are recognised and The indicated outlook constitutes forward-looking statements The measures and potentials outlined in the above strategy not embedded in previous forecasts. which are subject to a number of risk factors and are not are reflected in the Group’s outlook for the 2023-2025 period a guarantee of future financial performance. The Group is (Table 10). The monitoring process of the macroeconomic environment revealed that uncertainties remain high in the global economy due to the energy crisis, inflation, and the war in Ukraine. The current economic situation led to sluggish growth projections, persistent inflationary pressures, and Table 10: Market performance and outlook for the period 2023-2025 Last Guidance for 2022 Actual 2022 Performance Last Guidance for 2023 Revised Guidance for 2023 Last Outlook for 2025 Revised Outlook for 2025 interest rate hikes. Increased uncertainty and changes in Regular income ~ EUR 750 million EUR 779 million > EUR 850 million ~ EUR 900 million expectations of macroeconomic development affected forecasts for some economies in the Group. Material decreases in growth projections for Slovenia and Serbia for 2023 was noticed. Hence, an executive decision was taken to adjust risk expectations using the scenario’s weight. The scenario probability weighting was changed to 0%-10%-90% where Costs ~ EUR 460 million EUR 460 million ~ EUR 490 million ~ EUR 490 million Cost of risk Loan growth Below 30 bps Low double-digit organic growth(ii) 14 bps 14%(ii) (23% with N Banka) 30-50 bps 30-50 bps Mid single-digit Mid single-digit High single-digit Dividends EUR 100 million EUR 100 million EUR 110 million EUR 110 million EUR 500 million (2022-2025) EUR 500 million (2022-2025) severe and baseline scenarios reflect the likelihood of relevant future economic conditions for them. The likelihood of ROE a.t. ~ 10% w/o NGW, (ROE normalized(i): 12% w/o NGW) 20%, 12% w/o NGW (ROE normalized(i): 16% w/o NGW) > 10%, (ROE normalized(i): > 12%) ~11%, (ROE normalized(i): ~14%) > 12% > 13%, (ROE normalized(i): > 17%) > EUR 1 billion Flat on 2023 level or below 30-50 bps occurrence for the pessimistic scenario was derived to 90%, whereby the baseline scenario received a weight of 10%. Minor changes were also applied in other countries based on the latest available forecast. 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. Regular profit Contribution from Serbian market M&A potential > EUR 300 million ~ EUR 400 million EUR 100 million > EUR 100 million Tactical M&A capacity of EUR 1.5 billion RWA Tactical M&A capacity of EUR 2 billion RWA (i) ROE normalized = Result a.t. divided by Average risk adjusted capital. Average risk adjusted capital calculated as Tier 1 requirement of average Risk Weighted Assets (RWA) reduced for minority shareholder capital contribution. (ii) Without N Banka. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 33 Outlook 2023 Macroeconomic A warmer-than-expected winter, energy savings, and fiscal support measures helped to alleviate fears of imminent energy shortages in the euro area. Production levels should benefit from improving supply conditions, while energy and commodities markets are not expected to experience any additional supply shocks. The inflation rate growth should decrease, but remain elevated, due to the combined effects of higher interest rates, tighter financial conditions, and alleviated inflationary pressures stemming from commodities prices. Private consumption should remain subdued in 2023 due to declining purchasing power, as core inflation is to become the predominant inflation driver. Muted private consumption and uncertainty, stemming from continued although regionally contained political tensions, are expected to be the main drag on economic growth. The labour market tightness should slightly decrease due to the stagnating economy, which is expected to result in less pressure on wage growth and consequently fewer second round effects driving inflation. Overall, we see the euro area economy stagnating in 2023, while the Group’s region economies are expected to grow 1.3% on average in 2023. However, the Group’s region growth is set to cool notably this year with the weaker euro area economy, elevated inflation, declining real wages, geopolitical volatility, and the war in Ukraine restraining household spending, industrial production, and exports. On top of this, tighter financing conditions could further subdue activity in most countries of the region. More information is available in the chapter Macroeconomic Environment, and the subchapter Loans potential outlook for the Group’s Region. Revenues Interest income growth is expected to be primarily driven by loan production, higher rates, and the productive use of liquid assets. Moderate growth of net fee and commission income is expected for 2023, mainly on the account of basic services such as payments and cards, but also bancassurance and asset management products. The continued increase of digital sales The Group remains very prudent in identifying any increase in activities, cross-sell, and new client acquisition should further credit risk, as well as proactive in the area of NPL management. support the growth of net fee and commission income going Consequently, a well-diversified and stable quality of credit forward. Based on these expectations, the outlook for regular portfolio is expected in 2023. Based on assessed environment, income increased from the previously communicated of more the expected cost of risk in 2023 will be between 30 to 50 bps. than EUR 850 million to around EUR 900 million in 2023. Costs Liquidity The Group continues to pursue a strong cost containment in 2022, and it is expected they will continue to grow in the next agenda addressing both employee and other cost elements. period. The liquidity position of the Group is expected to remain Total costs continue to be impacted by the business very robust even if a highly unfavourable liquidity scenario environment with a visible cost inflation throughout the region. materialises, as the Group holds sufficient liquidity reserves Additionally, the Group continues with its investment activities mostly in the form of high-quality liquid assets. From a liquidity perspective, deposits at the Group level grew into information technology upgrades amid the growing relevance of digital banking. Moreover, integration costs As major part of liquidity reserves, the Group closely monitors associated with N Banka will contribute to the total costs in its major bond portfolio positions, mostly sovereigns. Since 2023. All this will increase the costs, with the expectation for the beginning of the crisis, the Group has been observing the rising cost base of around EUR 490 million in 2023. yield environment and the widening of credit spreads, which Loan growth and portfolio quality The Group expects mid-single digit organic loan growth in 2023. Slower loan growth is foreseen for 2023 after exceptionally high new corporate and retail loan origination across all markets in 2022 that is also influenced by expectations of higher interest rates. materially impacted FVOCI positions in 2022. Consequently, the Group will continue to carefully manage the structure and concentration of liquidity reserves in order to limit the potential sensitivity of regulatory capital. Capital and MREL The capital position represents a strong basis to cover all regulatory capital requirements, including capital buffers and In light of the war in Ukraine, increasing energy prices, other currently known requirements, as well as the Pillar 2 inflationary pressures, and a forecast of a decrease in economic Guidance. growth, the Group has thoroughly analysed potential impacts on its credit portfolio and made the necessary adjustments. Wholesale funding in 2023 will be driven by the MREL The Group’s direct and indirect exposures toward Russia and requirement, for this purpose the Bank intends to issue new Ukraine are quite limited. The most affected industries are senior MREL eligible notes of approximately EUR 300 million. carefully monitored with the intention to detect any additional This will lead to the Bank comfortably meeting binding MREL significant increase in credit risk at a very early stage. Increased requirement applicable as of 1 January 2024. and prolonged inflationary pressures might cause some deterioration of the credit portfolio quality in the retail segment, The Bank will become more frequent issuer on capital markets though its impact should not be too excessive. As a result, the in the following years, mainly for the purpose of MREL Group strengthened the early warning system for this segment. compliance. The annual anticipated issuance / re-financing size will be in the area of EUR 300 million. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 34 Dividends Sustainability The Bank’s general intention is to distribute dividends on a In 2023, the Group will continue to implement its sustainability yearly basis, while at the same time fulfilling all regulatory agenda in all three pillars of its Sustainability Framework. In the requirements, including the Pillar 2 Guidance and risk appetite. Sustainable Financing Pillar, the primary focus of the Group will The Group aims to maintain stable dividend growth and at the be in the development and implementation of net-zero business same time have room to support organic growth and potential strategy and financing, as well as measurement of portfolio M&A opportunities. emissions. The first targets related to reducing its footprint in carbon-intensive industries will be published by the end of 2023. In the period between 2022 and 2025, the Bank envisages a In the Sustainable Operations Pillar, the Bank will continue to total capital return through cash dividends of EUR 500 million. adhere to high standard of corporate governance, which are Dividends in the amount of EUR 100 million were paid in the foundation of sustainable operation, and will maintain 2022, while for the year 2023 the Bank anticipates a dividend long-term relationships with key stakeholders. The Group will payment in the amount of EUR 110 million. also take measures to lower energy and resources consumption M&A opportunities The Group’s drive to deliver value to the shareholders is subject to organic growth and the capacity to engage in further value accretive M&A opportunities. Such opportunities for inorganic growth will be subject to a diligent analysis of strategic, financial, and other resource utilisation. and to increase energy efficiency, disclose all relevant ESG data and further implement the EU Taxonomy. Focus will also be on analysis and implementation of the newly adopted Corporate Sustainability Reporting Directive, as well as the upcoming Corporate Sustainability Due Diligence Directive. In the third pillar, the Group will continue with its active CSR programme contributing to development of local communities and society in all regions where the Group operates. Our sponsorship, donations, and partnership projects will continue to be based on supporting and following the UN Sustainable Development Goals (UN SDG). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 35 The Impact on Operations of the Russian invasion in Ukraine In 2022, the world was once again confronted with additional new challenges, as the war in Ukraine had unprecedented effects around the globe. The impact of the Russian invasion in Ukraine is still present and will continue to affect the economies to various degrees. The impact on the global economy and SEE region The consequences of the war in Ukraine reached far beyond the Ukrainian-Russian border as the conflict had a lasting effect globally. Even prior to the beginning of the war in Ukraine, commodity prices had risen substantially, and global supply chains were strained. The start of the war exacerbated these trends. The global economy was impacted by the war through significant disruptions in trade, food, and fuel price shocks, decelerating global economic activity and intensifying inflationary pressures. The EU is among the most exposed economies due to geographical proximity to the war and heavy dependence on imports of fossil fuels from Russia. Reduced exports from Russia have affected fossil fuel trade and contributed to the steep increase in natural gas prices, as the EU needed to refill gas storages by diversifying energy suppliers. What is more, the wholesale price of electricity in the EU’s internal market is directly linked to the price of gas resulting in skyrocketing gas and electricity prices. High energy prices affected the profitability of energy-intensive firms, while inflationary pressures resulted in a sharp erosion of households’ purchasing power and deteriorated consumer sentiment. Real income losses, deteriorating economic sentiment, and heightened uncertainty resulted in worsened confidence also in the business sector amid high production costs, supply bottlenecks, and tighter financing conditions. In response to the cost-of-living crisis, European governments implemented a range of policy measures at national and supranational levels with policies tackling the impact of higher costs on consumers and businesses, and policies aiming at stabilisation and reduction of wholesale prices and ensuring energy security. Countries of the Group’s region are in general largely dependent on energy and food commodities imports. As a consequence, globally rising prices resulted in a widening of the current account deficits and double-digit inflation. The latter weighed on households’ purchasing power and consumption habits. To cope with the rising-cost-of-living crisis, governments implemented different measures that were to lessen the burden of the rising prices for households and businesses. Impact on credit portfolio In the light of the war in Ukraine, increasing energy prices, inflationary pressures, and a forecast of a decrease in economic growth, the Group has thoroughly analysed the potential impact on the credit portfolio. Increasing prices of raw materials, commodities, and energy may represent an important factor for certain corporate clients. Additional effects can be related to a potential gas shortage for certain corporate clients with high dependency on the production cycle mainly from steel, aluminium, glass, mineral, stone, chemicals, and the paper industry. The Group is closely monitoring the circumstances in the most affected industries (energy, transport, automotive, construction, and food production) and is in close communication with key clients to identify any changes in The Bank’s response to clients’ needs After the war started in Ukraine, the international market environment has become strongly unpredictable and a higher demand for and utilisations of working capital facilities was recognised. With the emerging of energy crisis, the Bank rapidly responded to its clients’ needs and organised the arrangement of new syndication financing to the respective energy sector. In March 2022, the Bank decided to help refugees coming from Ukraine. These customers received the management of the NLB Basic package account free-of-charge for three months after opening. For more information, see chapters Retail Banking in Slovenia and Corporate and Investment Banking in Slovenia. Impact on payment transactions The execution of payments to banks that were excluded from the SWIFT area were stopped and all other payments to other banks to Russia and Belarus were also stopped. This action made these payments only possible after preliminary consideration and obtained a positive opinion from the authorities (compliance). The exchange of Russian rubles was business circumstances. The Group performed stress-testing suspended. by applying adverse and severe scenarios, and the potential estimated losses are perceived as sustainable. In contrast, the inflation pressure and prices of energy sources may limit the credit capabilities in the retail segment. To enable early identification of a significant increase in credit risk (SICR), the Group strengthened the early warning system for the retail segment in Q3 2022. N Banka – NLB's contribution to financial stability NLB as a systemic institution responded responsibly and At the beginning of the war in Ukraine, the Group had limited decisively to the sudden challenge to the financial stability of exposure to Russian government bonds in the notional amount of USD 22.0 million. In May 2022, Russian government bonds the Slovenian banking sector due to the Russian invasion. As a complement to NLB’s Slovenian franchise, and as contribution in the notional amount of USD 14.0 million were fully repaid. to the financial stability of the Slovenian banking system, Therefore, on 31 December 2022, the Group had very limited NLB acquired Slovenian Sberbank in March 2022. With the exposure to Russian government bonds with the notional acquisition, NLB helped to provide certainty for Sberbank’s amount of USD 8.0 million, maturing in September 2023. In customers and strengthen the stability of the Slovenian banking February 2023, these bonds were sold. Further information is sector. available in Note 5.4. of the financial part of this report. After the stabilisation period and rebranding to N Banka, the integration process started. The integration of N Banka is running on track, targeting completion of the legal and technical merger in September 2023. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 36 Acquisition 27 Feb 2022 SRB determines Sberbank Europe failing or likely to fail 1 Mar 2022 BoS Decision to utilize a resolution tool 1 Mar 2022 Decision to transfer all shares to NLB taken 2 Mar 2022 All the necessary approvals obtained On 1 March 2022, NLB acquired 100% shareholding in Sberbank, Ljubljana (subsequently renamed to N Banka) in the course of the regulatory resolution procedure led by the Single Resolution Board (SRB) and the BoS. By that NLB contributed on one side to the financial stability of the Slovenian banking sector, however, on the other side it also further improved NLB’s market position in Slovenia. Following the acquisition, NLB worked on the corporate image of the new member of the Group that from 12 April 2022 now operates under the name of N Banka. NLB took over the control over the bank’s operations by setting a new Supervisory Board of the bank on 30 June 2022, and also engaged in the process of harmonisation with the Group standards, that finalised in Q3 2022. In addition to contributing to the stability of the Slovenian banking sector, there were also strategic and financial rationales behind the acquisition, namely: • Strategic Rationale: The key rationale motivating the acquisition of N Banka was the optimisation of business performance on one market. N Banka was running a subscale operation (68% CIR, 53,000 clients, relatively capped revenue base, costs increasing by approximately 12% in the last four years); considering the additional capex investments needed to modernise the business and keep up with the technology development in the coming years, it would be difficult to maintain a satisfactory level of profitability of N Banka on a standalone basis. The transaction would complement NLB’s existing franchise in Slovenia, particularly in the corporate and Small and Medium-sized Enterprises (SME) segments which accounted for app. 56% of Sberbank’s net customer loans at the end of 2021. Additionally, the planned merger would also bring several benefits from the clients’ perspective, since they would be able to receive a full range of products and services, and so at the quality at the level of other NLB clients. • Financial rationale: Integration of two banks would improve market share in terms of total assets to 30.2% in the Slovenian banking system as per the end of 2022. NLB's capital position has been strengthened by the inclusion of negative goodwill (EUR 172.8 million) from the N Banka acquisition. From the new production perspective, the acquisition was anticipated to be earnings accretive already in 2023. Run rate synergies are estimated at a level exceeding EUR 14 million by 2025. Total integration costs are expected to be covered by synergies by the end of 2025. The integration process NLB conducted a detailed post-acquisition review, and in line with the Management Board’s resolution of March 2022 started the process for the merger of the bank with NLB. The defined target operating model confirmed NLB’s commitment to keep its clients’ satisfaction as a clear priority. By the acquisition N Banka’s clients were given the access to the Group benefits. To ensure smooth and successful merger of N Banka, the Group established a comprehensive and well-structured integration project, that allows strong oversight of all integration initiatives, implementation of all necessary tasks according to agreed plan, and protection of the Group and its key stakeholder interests. A complete and comprehensive integration of N Banka into the organisational structure of NLB requires a merger to be conducted on two levels – legal and operational. According to the plan, they are going to be executed simultaneously – in September 2023. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 37 Corporate banking With the executed acquisition and initiated integration process with the Bank, the corporate segment of N Banka was primarily focused on the following goals: • active integration of business and clients in the Group; • continued active financing of all existing corporate clients, primarily in the SME segment with working capital facilities; • continue executing project financing deals; • active processing of new financing products under special schemes from “Slovenski podjetniški sklad” and from “Sklad skladov” in cooperation with the SID bank. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Financial performance Table 11: Key performance indicators of N Banka(i) in EUR thousands 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 CIR NPL volume NPL ratio (internal def.: NPL/Total loans) Market share by total assets LTD 2022 25,270 10,453 -22,976 925 13,672 11,085 1,293,280 939,238 955,035 898,768 186,423 21.4% 2.0% 64.3% 23,633 1.9% 2.6% 104.5% (i) Data on a stand-alone basis for the period March-December as included in the consolidated financial statements of the Group. For year 2021, comparable data are not available. N Banka internal calculation of net interest margin and total capital ratio. Since N Banka is in procedure of integration, the bank is running its business under special circumstances. The contribution of N Banka to NLB Group total assets and loans to customers amounted to 5% and 7% respectively at the end of 2022. Loans portfolio was decreasing in 2022 as per integration plan and transferring of business clients from N Banka to NLB. Deposit base also decreased, however cash position and financial assets sum up to around 20% of the total assets and represents liquid assets which could be transferred to cash fast, if need for liquidity arises. Contribution to revenues and cost to the Group was approximately 5% in 2022. Full potential contribution is expected in 2025 when run-rate synergies kick in from employee optimization, IT synergies, head quarter synergies and other general and administrative expenses. Business performance Retail banking Clients are the core focus of the Group. Therefore, in the merging process, special attention to client retention is paid, aiming at the smallest possible churn rate. At the end of the year, N Banka had 40,068 clients in the private individuals’ segment, of which 86% were active clients. In future, we expect a strong commercial push to activate the remaining idle customer base, to increase the cross sales of clients, for loan penetration, e/-m-bank usage, and bancassurance penetration. Contents 38 Client care and responsible risk management are key to success; however, our results are foremost an indicator of the dedicated work of our whole team. In 2022, NLB Banka, Sarajevo was recognized as the second most desirable employer in the financial sector in BiH, which further confirmed our efforts to promote human-cantered values, the development of human potential, prosperity, and continuous learning and trust. We are also proud of other recognitions, for example of the Golden BAM award for the most successful bank in the category growth in loan market share; and the Best Business Move in Tourism by Indikator.ba for the project of developing winter tourism. We believe that the best is yet to come, look forward to the upcoming challenges and the footprints we will create continuing to justify the trust given to us by shareholders, partners, and clients. Pictured: NLB Banka, Sarajevo employees Sustainability An important part of our mission – besides taking care for our customers with our commitment, knowledge, and innovative solutions – is to create a better life and a better future for us all. That is why the Group has embarked on the path of intensive integration of sustainability into its operations and business model. In the broadest sense, the Group understands sustainability as its operations that meet the needs of this generation and simultaneously preserve the opportunities of future generations. Implementation of sustainability into the Group’s business model In 2022, the world, and especially Europe, was faced with impactful geopolitical changes which had direct influence on the role of sustainability not only in business, but in our every- day lives as well. The shift towards net-zero became ever more important, and in the EU the sustainable agenda received strong regulatory support with the adoption of the Corporate Sustainability Reporting Directive. Being aware of the changes and their far-reaching consequences, the Group has made important steps forward in implementing Sustainability into its operations and business model, and has also received its first external ratings for its endeavours. Sustainability Framework In 2022, the Group continued to implement the activities as outlined in the NLB Group Sustainability Framework. Substantial progress has been made in all three pillars (Sustainable finance, Sustainable operations, and Contribution to society) alongside with implementation of public targets as announced in Sustainability report 2021. Special attention was given to implementation within the Group, having a direct effect on the improved level of comprehensiveness of sustainability. Net-zero Banking Alliance After successful feedback on the Banks’ first self-assessment report on implementing the United Nations Environment Programme Finance Initiative’s Principles for Responsible Banking (UNEP FI PRB), the Group has committed itself to contributing to a climate-positive future. In May 2022, NLB (as the first bank from Slovenia) officially became a member of the United Nations-Convened Net-Zero Banking Alliance. With this step, the Bank made a pledge to align the bank’s lending and investment portfolio with net-zero emissions by 2050, and published its first target, which will focus on priority sectors where the Bank can have the most significant impact, i.e., the most GHG-intensive sectors within their portfolios. For this purpose, the Group started with a portfolio emissions measurement and formed its net-zero business strategy. ESG Rating In December 2022, NLB received an ESG Risk Rating of 17.7 and was assessed by Sustainalytics to be at low risk of experiencing material financial impacts from ESG factors, due to its medium exposure and strong management of material ESG issues. NLB’s efforts in the field of sustainability encompass the environmental, social, and management aspects. Carbon Footprint After last year, the Group calculated its first operational carbon footprint for the years 2019–2021, special attention was given to reduction measures in 2022. In the field of energy consumption, the Group (where energy market rules allow) was supplied with electricity from zero-carbon sources. Extensive activities went on in the following areas: • energy efficiency – possibilities for the continuation of energy consumption (electricity and heating) decreasing were reviewed, • renewable energy production – a review of the Group’s premises for setting up solar power plants and a review of renewable power purchase agreements, • transformation of the NLB car fleet – NLB Group Sustainable Car Fleet Management and Company Car Policy was successfully adopted and marks the start of the replacement of ICE vehicles for electric and hybrid, • office space-demand optimisation. For the purpose of calculation of GHG Protocol Category 15 (credit portfolio GHG emissions), several important activities started in 2022. For larger corporate clients, the Bank initiated direct Scope 1, Scope 2, & Scope 3 data gathering processes, whereas for the SME and micro segments the Bank developed its own proxies. In residential mortgages, the most important input for GHG calculation are the buildings’ energy performance certificates. By end of 2022, the Bank formed the emission calculation for the Slovenian market, whereas in the Region this process will continue and will be developed in 2023. Sustainable Financing The Group successfully started to fulfil its publicly announced target to generate at least EUR 785 million of new sustainable corporate financing by 2030. In 2022, the Group strengthened its activities in ESG financing and achieved EUR 166.9 million of new loans, out of which EUR 105.5 million in Slovenia. The purpose of financing throughout the region was to support wind farms, solar projects, biomass projects, energy efficient buildings. The Group arranged and co-arranged several larger projects financings, including major residential real estate in Bosnia and Hercegovina and a large renewables project in Serbia. The Bank upgraded its Green loan offer with two new loans for legal entities – the NLB Green loan for investments in energy efficiency of business buildings, and the NLB Green loan for reducing carbon footprint. Besides that, the Bank signed a partnership contract with two providers of the Green partner loan, covering renewable energy and energy efficiency purposes for private individuals and legal entities. A substantial amount of time was dedicated to training our employees, whereas sustainability has been the central topic in all our regional events with our clients. EU Taxonomy To determine the eligibility of the portfolio, the Bank followed a sector approach (based on Statistical Classification of Economic Activities in the European Community (NACE) codes). In such manner, EU Taxonomy was implemented in the credit process where credit application was amended with display of listed/not listed activity based on NACE and SKD activity. Representatives of the Bank are also actively involved in EU Taxonomy Task Force at the Slovenian Bank Association. ESG Risk Management In 2022, the Group continued with the implementation and upgrading of its environmental and social risk management requirements in line with ECB and EBA guidelines, showing in enhancement of the existing stress-testing framework and integration of ESG risks into the existing risk-management framework. As a systemically important institution, the Group successfully participated in the 2022 ECB Climate Stress test exercise. Being part of the Bank Association of Slovenia working groups, NLB experts participated in the preparation of ESG questionnaires on client & transaction levels, which result in an internal ESG rating. In recent years, the Bank signed Framework Agreements with the EBRD and the Contract of Guarantees with Multilateral Investment Guarantee Agency (MIGA), whereas environmental and social performance requirements were implemented within the loan approval process (preparation MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 40 of manuals & process instructions and their implementation and the impact of sustainable development and sustainable side, the Group will continue to lower its carbon footprint throughout the Group). More information is available in the Risk financing among employees within the Group in order to by implementing energy efficiency and energy resources Management chapter of this report. successfully integrate ESG factors in the Bank’s operations. management. NLB will sign the Commitment to respect Human rights in business, which is part of the National Action Plan on Business and Human Rights of the Republic of Slovenia, and appoint a Human Rights Custodian to monitor and manage human rights compliance. The Bank will continue to offer regular (internal and external) sustainability trainings to all its employees and new activities to the related well-being of employees and in line with the Full Family Friendly Company certificate. A NLB Procurement team will upgrade all relevant internal acts for the inclusion of ESG criteria in the supply chain. The Group will continue with its contributions to local communities. To raise the level of sustainability awareness among employees, the Bank will again organising the NLB Group Sustainability Day, which aims at presenting sustainability-related topics, holding lectures by prominent sustainability experts and other educational activities. Our sponsorship and donations will continue to be based on supporting and following the UN Sustainable Development Goals. For more information, please refer to: • the chapter Risk Management, subchapter Incorporating ESG Risks • the Chapter Corporate Governance • Note 6 of the financial part of the report • the chapter Statement of Management of Risk • the NLB Group Sustainability Report 2022 • the Pillar 3 Disclosures Sustainability Training With the goal to enhance and further develop the skills and Other Sustainability-related Topics Many of these outcomes reflect ongoing, long-term challenges, knowledge of employees, strong focus was given to different but at the same time they reflect the Group’s ability to reach levels and manners of sustainability training, namely: tangible results in this area. It should be mentioned that in • external (expert) ESG training programmes, 2022 several other sustainability-related topics were regularly • internal workshops to facilitate the upgrading of employee addressed, such as: skills in the ESG area (ESG Documentary Framework – • Procurement Commitments & Regulatory Requirements with Overview of • Remuneration policy Environmental and Social Management System (ESMS) in NLB and NLB Group), • Digitalization • Diversity policy • workshops where comprehensive integration of ESG • CSR projects corresponding to UN SDGs elements into the Group’s risk management framework and • Talent development and caring for employees corresponding data requirements were presented, • Partnership and capacity-building • regular training for NLB Group Supervisory Board members, • Innovation • providing essential information on sustainability and its implementation to the Group to competence lines and working groups in the Group. NLB Group Sustainability Governance Structure With the adoption of the NLB Sustainability Programme at the end of 2020, and the implementation of the NLB Group Sustainability Framework in the fall of 2021, the Group accelerated implementation of sustainability elements into its business model and upgraded sustainable operations of the Bank. Sustainability is centrally managed by a coordination team in NLB, which regularly reports to the Management and Supervisory Board. The sustainability team closely works with regional ESG coordinators and ESMS Officers, who manage the topic on the Group level. All relevant internal stakeholders (Management board of NLB and the Group members, designated directors, ESG coordinators, and ESMS officers) convene on a quarterly basis at the Sustainability Committee chaired by the CEO, which serves as a forum to address the most relevant sustainability topics. In 2022, four regular and one ad hoc sessions were carried out. For more information, please refer to the chapter Corporate Governance and the NLB Group Sustainability Report 2022. NLB Group Sustainability Day For its employees, the Bank organised its first Group-wide sustainability awareness event – ‘NLB Group Sustainability Day.’ The main goal was to increase awareness, understanding, Outlook In 2023, the Group will continue to implement its sustainability agenda in all three pillars. In the Sustainable Financing Pillar, the primary focus of the Group will be in development and implementation of net-zero business strategy and measurement of portfolio emissions. First targets related to reducing its footprint in carbon-intensive industries will be published by the end of 2023. The Group will continue its engagement in contributing to sustainable finance by incorporating environmental, social, and governance risks into its business strategies, risk management framework, and internal governance in accordance with ECB and EBA guidelines and best banking practises. The Group aims to improve its ESG rating and will finalize implementation of EBRD environmental and social performance requirements in its business model. The Group will continue to support its clients in their green transition – fine tuning its products and expanding its green financing. In the Sustainable Operations Pillar, the Group will disclose all relevant ESG data and further implement the EU Taxonomy. Focus will also be on analysis and implementation of the newly adopted Corporative Sustainability Reporting Directive, as well as the upcoming Corporate Sustainability Due Diligence Directive. The Bank will further strengthen sustainability governance and will put extra effort in standardisation of sustainability throughout the Group. On the operational MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 41 Corporate Social Responsibility The Group remains determined in its intention to create better footprints in its home region. It strives to increase the share of Support for professional and youth sports The Group's socially responsible operations are traditionally focused on the strong promotion of sports. Its goal is to raise awareness about the importance of physical exercise for preserving health, which during the previous years was a common concern and focused public's attention on the positive CSR activities that pursue the UN SDG every year. The Group’s impact that sport has on rehabilitation, socialisation, and target for 2022 – at least 40% of all CSR activities in every bank inclusion. The Group is particularly proud of the long tradition member should be aligned with UN SDG – was achieved, even of NLB Youth Sports project in Slovenia (in 2022, the project more, it was even exceeded. More information is also available continued for the eighth consecutive year with NLB supporting in NLB Group Sustainability Report 2022. 65 sports clubs) and NLB Wheel – an International Wheelchair Basketball League. Environmental care – #FrameOfHelp focused on sustainable ideas In 2022, the Group continued with the #FrameOfHelp project Culture and protection of cultural heritage Most of the Group's efforts in protection of cultural heritage in for the third consecutive year, this time offering opportunity to 2022 were concentrated on Bankarium, the Slovenian Banking regional companies that prioritise sustainable ideas. As many Museum. Founded by NLB, it is the first and only banking as 300 companies participated in the project with which the museum in the country. Visitors can walk through a 5,000-year- Group sought sustainable solutions to challenges of the future. Among 60 finalists, three regional winners were selected and old history of world banking in a multimedia introduction, explore the 200-year-old banking heritage on the Slovenian awarded sponsorship funds and professional consulting on territory, learn about all the currencies that were valid here the successful introduction of sustainable business into the during this period, as well as different economic systems, a company's strategic and operational processes. The awarded major banking institution, and key personalities of the Slovenian companies presented solutions on circular economy with banking system. artificial intelligence being the key, water consumption and food production, and modern technology to face the threat of fires. Business and financial literacy As a financial mentor, the Group is dedicated to counselling in the field of financial literacy. Bankarium is therefore not just a museum – it is also a financial literacy centre where visitors, mostly schoolchildren, can play digital games and quizzes, and learn or check their financial literacy in a playful way. Furthermore, NLB Banka, Podgorica helps customers with a special web platform within the web portal, offers advice and knowledge on social networks, and teaches courses at elementary schools and preschool institutions. NLB Banka, Sarajevo supports the Youth Business Camp – a project that educates and implements workshops with young people who want to develop in the business world. Humanitarian activities - End of the year charitable donation The Group concluded 2022 with charitable donations in all of the markets of its operations in a total amount of more than EUR 500,000 to various associations, humanitarian organisations, and groups, chosen by employees. Inclusiveness – EBRD Support Program "Women in Business" NLB Banka, Podgorica, the bank of primary choice for more than 32% of registered businesses managed by women in Montenegro, is the first commercial bank in this country that joined the EBRD Support Program "Women in Business", with the aim of supporting the potential of female entrepreneurs, providing access to financing, but also to the knowledge needed for business growth. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 42 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Overview of Financial Performance The Group achieved a profit after tax in the amount of EUR 446.9 million, 89% or EUR 210.5 million more than the year before (2021: EUR 236.4 million), with the EUR 184.1 million contribution of N Banka. The Group’s result is based on the following key drivers: • Acquisition of N Banka, with a positive effect from negative goodwill in the amount of EUR 172.8 million. • EUR 2,493.9 million YoY increase of the Group’s gross loans to customers, with EUR 953.7 million increase due to the acquisition of N Banka; impressive new loan production with increasing interest rates supported growth of net interest income. • An increase of the deposit base of the Group, EUR 2,386.9 million YoY, of which EUR 898.5 million due to the acquisition of N Banka. Figure 6: Profit after tax of NLB Group – evolution YoY (in EUR millions) • Net interest income increased EUR 69.8 million YoY without N previously written-off receivables. Other impairments and Banka’s contribution mostly due to a higher volume of loans. provisions were net established in the amount of EUR 11.4 Interest rates on loans and on central bank balances were million. also increasing in the second half of the year - which had • ROE a.t. stood at 19.9% or 12.2% without inclusion of negative positive influence on interest income. goodwill (N Banka EUR 172.8 million, NLB Lease&Go Leasing, • Net fee and commission income increased 12% YoY without N Beograd EUR 0.1 million). Banka’s contribution; the increase was recorded in all banks • Cost of risk was 14 bps, with good asset quality trends and a of the Group, in the Bank by EUR 9.6 million due to higher fees decisive workout approach. from cards, payments, investment funds and bancassurance • A strong Total Capital Ratio (TCR) of 19.2%, mainly due to products, and income from high balance deposit fee, which inclusion of negative goodwill from N Banka, partial inclusion was cancelled in August. This cancellation negatively affected of 2022 result, and new AT1 and Tier 2 notes. net fee and commission income, but was compensated with • The multi-year declining trend of the non-performing credit positive evolution of the interest income for central bank portfolio stock continued, mostly due to repayments, cured balances. clients, collection, and the sale of claims. The combination • Total costs increased YoY in most Group banking members, of successful resolution of NPL and credit growth of a high- due to increasing employee costs and other general and quality portfolio resulted in the decrease of gross NPL ratio administrative expenses, mostly related to the overall inflation (EBA def.) from 3.4% to 2.4% YoY, and the NPE ratio (EBA def.) in the region. by 0.4 p.p. YoY to 1.3%. • The Group established net impairments and provisions for • Unencumbered liquidity reserves portfolio amounted to credit risk in total amount of EUR 17.5 million, with portfolio EUR 9,187.5 million (39.0% of total assets). development along with the portfolio growth being the key factors for the establishment, while the impact was partially offset by releases of provisions from successful collection of 95.6 36.2 -0.1 -44.9 -37.6 -0.3 172.9 -11.7 0.5 28.1 25.7 8.1 -1.9 1.8 -22.1 -22.8 172.8 -38.7 1.1 -0.3 0.1 236.4 69.8 -9.1 -2.6 0.5 0.0 446.9 184.1 2021 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 2022 NLB Group w/o N Banka N Banka (i) Gains less losses from capital investments in subsidiaries, associates, and joint ventures. Contents 43 EUR 446.9 million of net profit EUR 172.8 million negative goodwill from the N Banka acquisition Recurring profit before impairments and provisions of the All banks reported a profit on stand-alone basis and positively Group totalled EUR 318.7 million, EUR 93.2 million or 41% contributed to the Group’s result. The largest contribution of higher YoY, with a EUR 9.6 million contribution from N Banka. EUR 184.1 million came from N Banka due to negative goodwill In Q2 2022, the result before impairments and provisions was from the acquisition, followed by contribution of the Bank and influenced by a one-time yearly payment of regulatory costs NLB Komercijalna Banka, Beograd with EUR 83.3 million and in the Bank (EUR 2.1 million Single Resolution Fund (SRF) and EUR 66.2 million, respectively. The YoY contribution of the Bank EUR 7.6 million Deposit Guarantee Scheme (DGS)), while in Q4 was lower due to higher total costs, higher net impairments and various non-recurring effects were recorded (e.g., volatility of provisions, and the positive effects from non-recurring items financial markets, exchange rate differences, and the valuation in 2021. However, it was partially neutralized by higher regular of real estates). Figure 7: Result before impairments and provisions of NLB Group (in EUR millions) income. SEE banks contributed 39% to the Group result with growth achieved in all banks, except NLB Banka, Skopje. For more information on banks’ operations, please refer to chapter Strategic Foreign Markets. +34% YoY 338.3 251.5 260.6 26.0 -35.1 2021 354.9 19.5 -36.1 2022 71.8 77.0 1.5 -6.7 67.6 81.5 2.4 -16.4 91.7 95.6 2.6 -6.5 107.2 100.7 13.0 -6.5 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Result before impairments and provisions w/o non-recurring income and regulatory costs Non-recurring net non-interest income Regulatory costs Figure 8: Profit after tax by company – contribution (in EUR millions) -31% YoY 120.5 83.3 184.1 N G W E U R . 1 7 2 8 m i l l i o n 66.2 2.2 NLB Banka, Beograd Komercijalna Banka, Beograd 22.7 18.4 2021 64.0 4.3 2022 +192% YoY 66.2 -3% YoY 34.1 33.1 22.7 +6% YoY +14% YoY 18.3 19.4 9.7 11.1 +33% YoY 26.6 20.0 +329% YoY 16.6 3.9 NLB N Banka NLB Komercijalna Banka, Beograd NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica(i) 2021 2022 (i) Result for 2021 for NLB Banka, Podgorica includes also result of Komercijalna Banka, Podgorica (merger in November 2021). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 44 Balance sheet volume of the Group totalled to EUR 24,160.2 million at the end of the year, with an 83% share of the total funding represented by customers’ deposits to support lending activity with LTD ratio at 65.3%. Figure 9: Balance sheet structure of NLB Group on 31 December 2022 (in EUR millions) State loans 2.3% Corporate loans 47.0% Individual loans 50.7% 24,160 Other assets 715 Financial assets 4,877 Cash equivalents & placements with banks 5,494 Net loans to customers 13,073 24,160 Total equity 2,422 Other liabilities 507 Other debt securities in issue 307 Subordinated debt securities 509 Deposits from banks and central banks & Borrowings  388 LTD 65.3% Deposits from customers 20,028 State deposits 2.6% Corporate deposits 27.8% Individual deposits 69.6% 13,073 20,028 Assets Liabilities MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 45 Income statement Table 12: Income statement of NLB Group and NLB NLB Group 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 Gains less losses from capital investments in subsidiaries, associates, and joint ventures Negative goodwill Result before tax Income tax Result of non-controlling interests Result after tax 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 2022 2021 Change YoY o/w N Banka contribution Q4 2022 Q3 2022 Q2 2022 Q1 2022 in EUR millions 504.9 273.4 0.2 36.6 -16.6 293.6 798.5 -257.7 -155.2 -47.4 -460.3 338.3 -17.5 -11.4 -28.9 0.8 172.9 483.1 -25.2 11.0 446.9 2022 177.0 129.1 56.0 9.1 -5.1 189.2 366.2 -117.3 -73.6 -17.0 -207.9 158.3 -14.7 20.4 5.8 164.1 -4.5 159.6 409.4 237.2 0.2 38.4 -18.3 257.6 666.9 -231.3 -137.5 -46.5 -415.4 251.5 35.8 -27.1 8.8 1.1 0.0 261.4 -13.5 11.5 236.4 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 -3.0 208.4 95.6 36.2 0.0 -1.8 1.7 36.1 131.6 -26.3 -17.7 -0.9 -44.9 86.7 -53.3 15.7 -37.6 -0.3 172.9 221.7 -11.7 -0.5 210.5 25.7 8.1 0.0 -7.0 8.8 9.9 35.6 -14.2 -6.8 -1.9 -22.8 12.7 -1.6 2.6 1.1 0.0 172.8 186.6 -2.6 0.0 184.1 23% 15% 9% -5% 9% 14% 20% -11% -13% -2% -11% 34% - 58% - -30% - 85% -86% -4% 89% 151.8 69.2 0.0 12.6 1.2 83.0 234.9 -71.2 -44.2 -12.2 -127.7 107.2 -25.0 -6.3 -31.2 -0.4 0.1 75.7 -4.2 2.4 69.1 126.7 70.5 0.1 10.3 -2.0 78.9 205.6 -63.7 -38.3 -11.9 -113.9 91.7 9.8 0.2 10.0 -0.4 0.0 101.3 -10.4 0.1 90.8 118.6 69.1 0.1 8.5 -12.7 65.0 183.6 -65.2 -39.0 -11.8 -116.0 67.6 1.6 -4.9 -3.3 1.0 0.0 65.2 -5.4 4.3 55.5 107.8 64.5 0.0 5.2 -3.0 66.7 174.5 -57.5 -33.7 -11.5 -102.7 71.8 -4.0 -0.4 -4.4 0.6 172.8 240.8 -5.2 4.1 231.5 Change YoY Q4 2022 Q3 2022 Q2 2022 Q1 2022 in EUR millions 37.9 9.6 -23.6 -9.9 -9.3 -33.2 4.7 -10.3 -14.5 0.5 -24.3 -19.6 -40.8 13.0 -27.8 -47.4 -1.4 -48.8 27% 8% -30% -52% - -15% 1% -10% -24% 3% -13% -11% - 173% -83% -22% -47% -23% 57.2 31.3 21.6 3.3 2.1 58.4 115.6 -32.9 -22.9 -4.2 -60.0 55.5 -8.0 20.5 12.5 68.1 -2.7 65.4 42.3 33.7 0.8 2.7 2.0 39.2 81.5 -28.4 -17.4 -4.2 -49.9 31.6 -2.8 0.0 -2.9 28.7 -1.4 27.3 39.7 32.3 24.2 1.9 -7.5 50.9 90.6 -29.5 -17.9 -4.3 -51.6 39.0 -4.6 -0.1 -4.7 34.3 -0.1 34.2 37.9 31.8 9.5 1.1 -1.7 40.6 78.5 -26.5 -15.4 -4.3 -46.3 32.3 0.8 0.0 0.8 33.0 -0.4 32.7 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 46 Net interest income Figure 10: Net interest income of NLB Group (in EUR millions) +23% YoY +17% w/o N Banka 504.9 27.6 409.4 477.8 542.2 -68.5 2021 -63.0 -1.9 2022 Interest income N Banka interest income Interest expenses N Banka interest expenses EUR 798.5 million of total net operating income 107.8 2.8 120.2 118.6 8.1 125.7 126.7 7.9 134.6 8.7 151.8 161.6 -0.3 -15.0 -0.8 -14.5 -0.3 -15.5 -0.5 -18.0 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Net interest income of the Group accounted for 63% of the Group’s total net revenues (2021: 61%) and totalled EUR 504.9 million. Out of the EUR 95.6 million increase, EUR 25.7 million was contributed by N Banka. Not considering the contribution of N Banka, a higher level of interest income was achieved YoY, as a result of higher volumes, increase of key ECB and reference interest rates, and repricing of new loan production as a response to the rising inflation environment. Interest expenses were influenced by the Bank's repayment of Targeted Longer-Term Refinancing Operations (TLTRO) financing with the ECB at a very favourable interest rate of -1% p.a. in June, issue of MREL-eligible Senior Preferred notes in the amount of EUR 300 million in July, and subordinated Tier 2 notes in the aggregate nominal amount of EUR 225 million in November. These new issues increased interest expenses for EUR 8.8 million in second half of the year. In contrast, the interest expenses for deposits in SEE banks decreased due to the decrease of interest rates. Figure 11: Net interest margin and Operational business margin of NLB Group(i) (quarterly data) 3.32% 3.45% 3.60% 3.87% Consequently, the annual net interest margin of the Group was improved by 0.23 p.p to 2.30% in 2022. The annual operational business margin was 3.57%, 0.29 p.p. higher YoY, due to net interest income and net fee and commission income growth. The increase in last quarter was solely due to the net interest 2.07% 2.16% 2.27% 2.65% income growth. Q1 2022 Q2 2022 Q3 2022 Q4 2022 Net interest margin Operational business margin (i) Calculated on the basis of average interest-bearing assets. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 47 Net non-interest income Figure 12: Net non-interest income of NLB Group (in EUR millions) +14% YoY +10% w/o N Banka 293.6 19.5 0.2 0.5 8.1 257.6 26.0 0.2 237.2 265.3 1.5 0.6 66.7 1.1 65.0 2.4 2.9 0.1 2.6 5.7 78.9 83.0 0.1 0.9 0.8 13.0 3.2 63.5 66.2 69.6 66.0 -5.9 -6.6 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Net fee and commission income N Banka net fee and commission income Dividend income Recurring other net non-interest income Non-recurring other net non-interest income The net non-interest income reached EUR 293.6 million, of rate differences, valuation of real estates). At the same time, the which EUR 9.9 million was contributed by N Banka. A major 2021 result was positively affected by non-recurring valuation part of the net non-interest income has been derived from the income in the amount of EUR 14.8 million from the repayment net fee and commission income, which grew YoY, mostly in the of exposure classified as non-performing, EUR 9.0 million of Bank (higher fees from investment funds and bancassurance other operation income from the settlement of a legal dispute, products, high balance deposit fee, and higher fees from cards and negatively affected by a EUR 8.1 million loss from the sale of and payment services). Komercijalna Banka, Banja Luka. No major one-offs that influenced net non-interest income In Q3, two important effects on net fee and commissions were were recorded in the current year, just various smaller ones, observed, the cancellation of the high balance deposit fee, and in the total amount of EUR 19.5 million, the majority of which the Serbian central bank decision to contain retail fees for a occurred in Q4 (e.g., volatility of financial markets, exchange limited period. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 48 Total costs Figure 13: Total costs of NLB Group (in EUR millions) Breakdown of Other general and administrative expenses(i) Other costs 6% Material 4% Services 30% EUR 155.2 million +11% YoY +5% w/o N Banka 460.3 1.9 45.5 6.8 148.4 14.2 } 415.4 46.5 137.5 Communications 7% Marketing 10% Technology 21% 231.3 243.5 11.3 102.7 0.2 0.9 1.4 32.8 56.1 11.2 116.0 0.6 2.6 4.7 36.4 60.5 Buildings & equipment 21% 11.3 113.9 0.6 2.5 4.2 35.8 59.5 11.7 0.6 0.8 3.9 127.7 43.4 67.3 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Employee costs Other general and administrative expenses Depreciation and amortisation N Banka employee costs N Banka other general and administrative expenses N Banka depreciation and amortisation (i) Further information available in the Note 4.9. of the financial part of the report. Total costs amounted to EUR 460.3 million of which EUR 22.8 million from N Banka. Without the N Banka contribution, the Group banks in Serbia (NLB Banka, Beograd and Komercijalna Banka, Beograd), electricity costs (EUR 4.3 million higher YoY), network optimisation, etc.) to keep costs low. However, given the circumstances and economic situation, significant costs increased YoY by EUR 22.1 million due to an increase in and software maintenance (EUR 2.7 million due to the N Banka inflationary pressures have been noticed across all cost the Bank and in most of the SEE banking members. The Group acquisition). is affected by the inflation and rising employee, material, and categories consuming much of the successful efficiency measures across the Group, and specifically in Serbia. energy costs, but has successfully kept them under control. Distribution of costs throughout the year was regular, with Combined with further planned investments into technology The largest YoY increases were recorded on employee costs higher share occurring in the last quarter of the year (28% of enhancements across the Group, upward cost trends are (EUR 12.2 million without N Banka contribution) and general total costs in current and previous year). expected for 2023 which will still be a transition year with regard and administrative expenses (EUR 10.9 million without N Banka to integration processes in Serbia and Slovenia. contribution) with increasing marketing costs, especially in the The Group is undertaking several strategic initiatives (channel Bank related to the acquisition of N Banka and merger of the strategy, digitalization, going paperless, lean process, branch CIR stood at 57.6%, a 4.6 p.p. decrease YoY. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 49 Impairments and provisions Figure 14: Impairments and provisions of NLB Group (in EUR millions) CoR (bps) -41 14 8.8 35.8 -27.1 -8.9 -8.6 -11.4 -28.9 10.0 9.8 -0.2 4.9 -8.9 -0.4 -4.4 1.6 -4.9 -3.3 -25.0 -6.3 -31.2 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Impairments and provisions for credit risk Other impairments and provisions N Banka 12 month expected credit losses recognised at acquisition date The Group established net impairments and provisions Other impairments and provisions were established in the for credit risk in the amount of EUR 17.5 million. Portfolio amount of EUR 11.4 million, of which EUR 4.6 million and EUR development along with the portfolio growth during 2022 5.7 million for the reorganisation in NLB Komercijalna Banka, was the key factor contributing to the establishment of net Beograd and N Banka, respectively. In contrast, EUR 8.4 million provisions. At the same time, expected 12-month credit losses provisions for contingent liabilities, which were recognised at were recognised at the acquisition date for the performing the acquisition of N Banka, where released in December, when portfolio of N Banka (EUR 8.9 million). As a result of less the possible obligation ceased to exist. favourable macroeconomic forecasts and risk, parameters deteriorated, and additional impairments and provisions were The Group’s cost of risk settled at 14 bps. formed in Q3 and Q4 2022. The positive effects derived also from a successful collection of previously written-off receivables due to successful NPL resolution, mostly in the corporate segment. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 50 Statement of financial position Table 13: Statement of financial position of NLB Group and NLB NLB Group ASSETS Cash, cash balances at central banks, and other demand deposits at banks 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 Deposits from customers - Corporate - Individuals - State Deposits form banks and central banks Borrowings Subordinated debt securities Other debt securities in issue Other liabilities Equity Non-controlling interests TOTAL LIABILITIES AND EQUITY (i) Excluding funding provided by NLB in the amount of EUR 64.0 million. 31 Dec 2022 31 Dec 2021 Change YoY 31 Dec 2022 30 Sep 2022 30 Jun 2022 31 Mar 2022 in EUR millions o/w N Banka 202.4 (i) 0.0 937.9 953.7 589.3 363.6 0.8 -15.8 62.1 0.0 62.1 0.0 7.9 1.0 1.5 16.2 5,271.4 223.0 13,073.0 13,397.3 6,345.7 6,743.4 308.2 -324.4 4,877.4 21.6 4,855.8 11.7 251.3 35.6 58.2 358.6 5,005.1 140.7 10,587.1 10,903.5 4,996.0 5,621.1 286.3 -316.3 5,208.3 7.7 5,200.6 11.5 247.0 47.6 59.1 271.1 266.3 82.3 2,485.9 2,493.9 1,349.7 1,122.4 21.8 -8.0 -330.9 13.9 -344.8 0.2 4.3 -12.0 -0.8 87.5 24,160.2 1,229.0 21,577.5 2,582.7 20,027.7 5,565.6 13,948.7 513.4 106.4 281.1 508.8 307.2 506.7 2,365.6 56.7 24,160.2 898.5 447.4 409.6 41.5 0.0 116.2 0.0 0.0 33.0 181.3 0.0 1,229.0 17,640.8 4,463.7 12,680.8 496.4 71.8 932.6 288.5 0.0 427.6 2,078.7 137.4 21,577.5 2,386.9 1,101.9 1,268.0 17.1 34.6 -651.5 220.3 307.2 79.1 286.9 -80.7 2,582.7 5% 58% 23% 23% 27% 20% 8% -3% -6% 181% -7% 1% 2% -25% -1% 32% 12% 14% 25% 10% 3% 48% -70% 76% - 18% 14% -59% 12% 5,271.4 223.0 13,073.0 13,397.3 6,345.7 6,743.4 308.2 -324.4 4,877.4 21.6 4,855.8 11.7 251.3 35.6 58.2 358.6 4,911.4 210.7 12,925.3 13,244.0 6,321.7 6,635.5 286.9 -318.7 4,765.1 21.3 4,743.8 11.9 255.8 37.4 55.2 325.0 4,321.1 176.8 12,620.2 12,944.2 6,213.5 6,445.0 285.7 -324.0 4,919.5 14.9 4,904.6 13.1 252.6 45.3 55.3 326.3 4,865.4 162.8 12,108.7 12,434.6 5,884.6 6,242.1 307.9 -325.9 5,219.9 10.9 5,209.0 12.1 254.0 48.2 57.8 290.2 24,160.2 23,497.8 22,730.3 23,019.1 20,027.7 5,565.6 13,948.7 513.4 106.4 281.1 508.8 307.2 506.7 2,365.6 56.7 24,160.2 19,573.1 5,387.4 13,569.2 616.5 108.3 322.0 290.4 302.6 504.3 2,339.8 57.2 23,497.8 19,151.1 5,091.8 13,498.1 561.2 138.0 326.8 287.8 0.0 507.6 2,195.6 123.5 22,730.3 18,525.8 4,934.8 13,097.3 493.6 115.0 1,241.0 287.0 0.0 474.3 2,254.4 121.6 23,019.1 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 51 NLB ASSETS Cash, cash balances at central banks, and other demand deposits at banks 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 Deposits from customers - Corporate - Individuals - State Deposits form banks and central banks Borrowings Subordinated liabilities Other debt securities in issue Other liabilities Equity TOTAL LIABILITIES AND EQUITY 31 Dec 2022 31 Dec 2021 Change YoY 31 Dec 2022 30 Sep 2022 30 Jun 2022 31 Mar 2022 in EUR millions 3,339.0 350.6 6,062.3 6,157.4 2,947.1 3,084.3 126.0 -95.1 2,960.7 21.7 2,939.0 908.6 78.6 6.8 30.4 202.3 3,250.4 199.3 5,153.0 5,250.4 2,411.1 2,694.4 144.9 -97.4 3,034.3 7.7 3,026.6 786.0 86.1 9.2 29.5 151.7 88.6 151.3 909.3 907.0 536.0 390.0 -18.9 2.2 -73.6 14.0 -87.6 122.6 -7.5 -2.4 1.0 50.6 13,939.3 12,699.5 1,239.8 10,984.4 2,874.9 7,916.2 193.3 212.7 57.5 508.8 307.2 265.9 1,602.9 13,939.3 9,659.6 2,436.7 7,078.9 144.0 109.3 873.9 288.5 0.0 216.3 1,551.9 12,699.5 1,324.8 438.2 837.3 49.3 103.3 -816.4 220.3 307.2 49.6 50.9 1,239.8 3% 76% 18% 17% 22% 14% -13% 2% -2% 182% -3% 16% -9% -26% 3% 33% 10% 14% 18% 12% 34% 95% -93% 76% - 23% 3% 10% 3,339.0 350.6 6,062.3 6,157.4 2,947.1 3,084.3 126.0 -95.1 2,960.7 21.7 2,939.0 908.6 78.6 6.8 30.4 202.3 3,019.1 278.2 5,931.7 6,024.8 2,868.5 3,026.4 129.9 -93.1 2,966.1 20.9 2,945.2 871.4 78.8 6.8 27.6 178.5 2,368.6 300.9 5,655.5 5,753.0 2,722.9 2,901.9 128.2 -97.5 3,121.1 10.7 3,110.4 809.2 79.5 9.0 28.0 185.9 3,127.4 406.6 5,327.7 5,426.8 2,499.6 2,791.9 135.3 -99.1 3,171.5 8.1 3,163.4 791.1 81.5 9.1 28.2 132.0 13,939.3 13,358.3 12,557.7 13,075.1 10,984.4 2,874.9 7,916.2 193.3 212.7 57.5 508.8 307.2 265.9 1,602.9 13,939.3 10,604.9 2,804.7 7,616.5 183.8 257.8 45.9 290.4 302.6 271.5 1,585.1 13,358.3 10,296.6 2,592.2 7,603.0 101.4 169.5 44.6 287.8 0.0 263.1 1,496.1 12,557.7 9,914.5 2,547.1 7,254.7 112.6 258.2 857.8 287.0 0.0 213.1 1,544.6 13,075.1 Balance sheet volume of the Group increased by EUR 2,582.7 There was a decrease of borrowings totalling EUR 651.5 Issued subordinated Additional Tier 1 notes in the amount of million YoY totalling to EUR 24,160.2 million, mainly due to the million, due to TLTRO early repayment (EUR 750 million) and EUR 82 million increased the equity of the Bank in September. acquisition of N Banka (EUR 1,229.0 million). The strong inflow SID repayment (EUR 70 million) in the Bank in June, but there of deposits (EUR 2,386.9 million, of which EUR 898.5 million was an increase of debt securities with the issuance of MREL from N Banka) enabled substantial growth of gross loans to eligible Senior Preferred notes in the amount of EUR 300 million customers (EUR 2,493.9 million, of which EUR 953.7 million from at 6% coupon rate in July, and subordinated Tier 2 notes in the N Banka). aggregate nominal amount of EUR 225 million in November. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 52 Assets Figure 15: Total assets of NLB Group – structure (in EUR millions) +12% YoY +6% w/o N Banka 24,160.2 715.5 4,877.4 13,073.0 5,494.3 31 Dec 2022 21,577.5 636.3 5,208.3 10,587.1 5,145.7 31 Dec 2021 Cash equivalents, placements with banks and loans to banks Net loans to customers Financial Assets Other Assets 57.7% of the total assets were related to Group members located in Slovenia (2021: 54.3%) and 19.3% in Serbia (2021: 22.2%). Figure 16: Total assets of NLB Group by country (in %)(i) 22.2% 19.3% Slovenia Serbia North Macedonia BiH Kosovo Montenegro 8.1% 7.6% 7.4% 7.4% 4.3% 4.5% 3.6% 3.4% Other 0.1% 0.1% 31 Dec 2021 31 Dec 2022 (i) The geographical analysis includes a breakdown of items with respect to the country in which individual NLB Group members are located. 22,931.2 4,815.3 688.9 12,135.1 5,291.9 31 Dec 2022 w/o N Banka 54.3% 57.7% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 53 The lending activity continued with enviable growth in all the related to generally positive economic sentiment and successful environment has become strongly unpredictable, and a higher banks in 2022. The highest increases were recorded in Slovenia, marketing campaigns. The volume of consumer loans was demand for and utilisations of working capital facilities was with a 20% YoY increase of gross loans to corporate and state on the same level YoY, however, the new production in 2022 recognised. With the emerging of energy crisis, the Bank rapidly (43% with N Banka) and a 14% YoY increase of gross loans to amounted to EUR 254.7 million and was higher compared to the responded to its clients’ needs and organised the arrangement individuals (28% with N Banka). Strategic foreign markets also previous year (EUR 229.3 million). of new syndication financing to the respective energy sector. achieved strong growth, with 12% and 11% YoY increase of gross loans to individuals and corporate and state, respectively. Gross loans to corporate and state in the Bank recorded a The volume of gross loans to customers in Strategic Foreign EUR 517.1 million growth YoY, where growth derived from the Markets also increased, with even higher new production in Gross loans to individuals in the Bank grew mostly due to an corporate segment (EUR 536.0 million), while the state segment consumer loans compared to the more than successful previous increasing volume of housing loans (EUR 358.4 million YoY, with exposures shrank by EUR 18.9 million. New production was year, with all the Group member banks recording high YoY high new production of EUR 726.6 million contractual value high, with over EUR 1.5 billion of new loans approved in 2022. growth in outstanding loan balances. in 2022, compared to EUR 558.3 million in the previous year) Since the war started in Ukraine, the international market MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Figure 17: NLB Group gross loans to customers dynamics (in EUR millions) NLB Group +20% YoY Gross loans to individuals 6,743.4 5,621.1 4.90% 4.74% +28% YoY +14% w/o N Banka 3.84% 2,694.4 31 Dec 2021 31 Dec 2022 31 Dec 2021 +26% YoY Gross loans to corporate & state 6,653.9 5,282.4 2.98% 3.04% +43% YoY +20% w/o N Banka 2,556.0 1.91% Slovenia(i)(ii) Strategic foreign markets(i)(iii) +12% YoY 5.83% 2,877.3 5.66% 3,220.9 31 Dec 2021 31 Dec 2022 +11% YoY 3.92% 2,754.9 3.84% 3,050.3 3,448.0 3.84% 3,084.3 363.6 31 Dec 2022 3,664.5 3,073.1 2.19% 591.4 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 Gross loans N Banka gross loans Interest rates (i) On a standalone basis. (ii) Includes NLB and N Banka; interest rates only for NLB. (iii) Includes only banks. Contents 54 Figure 18: Loan portfolio(i) by segment, geography, currency, and rate type (in EUR millions) Institutions 369 2% SME 3,649 20% State(ii) 4,746 26% Other(iii) 550 3% Serbia 3,419 19% Slovenia 10,012 54% Despite significant portfolio growth in all NLB Group banks in 2022, there were no major changes in the corporate and retail loan portfolio structure. The loan portfolio remained well- diversified, and there was no large concentration in any specific industry or client segment. The share of retail portfolio in the whole loan portfolio was 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, almost 62% of the loan portfolio was linked to a fixed interest rate, and the rest mostly to the Euribor reference rate. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report EUR 18.4 billion Corporates 2,897 16% EUR 18.4 billion Kosovo 913 5% Montenegro 679 4% N. Macedonia 1,419 8% Retail mortgages 3,932 21% BiH 1,412 8% by segment(iv) by geography Retail consumer 2,812 15% BAM 5% Other 1% MKD 5% RSD 6% EUR 18.4 billion EUR 83% Floating 38% EUR 18.4 billion Fixed 62% by currency by interest rate (i) Loan portfolio also includes account balances and required reserves at CBs, as well as 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. Contents 55 Total liabilities of the Group increased and amounted to EUR 21,737.9 million. The Group’s funding base is dominated by customer deposits accounting for 83% in which sight deposits prevail (87%, same as at the end of 2021). The majority of customer deposits were from individuals (70%). 59% of deposits were collected in Slovenia (55% at 2021 YE), 18% in Serbia (22% at 2021 YE), and the rest in other Group banking members in SEE. Liabilities Figure 19: Total liabilities and equity of NLB Group – structure (in EUR millions) +12% YoY +6% w/o N Banka 24,160.2 2,422.3 21,577.5 2,216.1 816.0 506.7 387.5 427.6 288.5 1,004.4 22,931.2 2,241.0 816.0 473.7 271.3 20,027.7 19,129.2 17,640.8 31 Dec 2021 31 Dec 2022 31 Dec 2022 w/o N Banka Deposits from customers Borrowings and Deposits from banks and central banks Subordinated liabilities and Other debt securities in issue Other liabilities Total equity MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 56 Deposits from customers increased by 8% YoY, without the uncertainty of rising prices and the expected impact on their and consumer behaviour, while slow growth was perceived in N Banka contribution. The largest increase of 19% was recorded financial situation in the future. in the corporate and state deposits in the Bank, due to various the remaining year in most members, with further outflow in the second half of the year in the Serbian market, mostly due to reasons, i.e., the increase of balances in investment and In Strategic Foreign Markets, deposits from corporate and state attractive offers with higher interest rates from competitors. pension funds, and inflows from takeovers on the market. The recorded 6% growth, while deposits from individuals stayed on precautionary savings of households have contributed to a 12% the same level YoY. The main reason for this were the outflows in YoY increase in deposits from individuals in the Bank, due to the Q1 as a response to the Ukraine war and its influence on prices Figure 20: NLB Group deposits from customers dynamics (in EUR millions) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report NLB Group Slovenia(i)(ii) Strategic foreign markets(i)(iii) Deposits from individuals +10% YoY 12,680.8 1,720.5 13,948.7 1,665.3 +18% YoY +12% w/o N Banka 7,078.9 341.6 106.7 302.9 8,325.8 295.3 10,960.2 12,283.4 6,737.3 7,620.9 0% YoY 5,601.9 1,378.9 4,222.9 0.32% 5,623.0 1,263.3 4,359.6 0.17% 0.16% 0.10% 0.04% 0.05% 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 Deposits from corporate & state +23% YoY 6,079.0 976.4 4,960.1 601.2 4,358.9 5,102.6 0.13% 0.11% +38% YoY +19% w/o N Banka 2,580.7 335.5 250.4 3,557.4 420.2 238.8 2,245.2 0.03% 2,648.0 0.05% +6% YoY 2,433.3 274.1 2,159.1 0.22% 2,588.5 306.2 2,282.2 0.18% 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 Sight deposits N Banka sight deposits Term deposits N Banka term deposits Interest rates (i) On a standalone basis. (ii) Includes NLB and N Banka; interest rates only for NLB. (iii) Includes only banks. Contents 57 Figure 21: Deposits from customers in NLB Group by type as at 31 December 2022 19.2% 9.0% Figure 22: NLB Group's LTD ratio movement Figure 23: Off-balance sheet items of NLB Group (in EUR millions) 65.4% 65.9% 66.0% 65.3% 18,525.8 19,151.1 19,573.1 20,027.7 80.8% 91.0% 12,108.7 12,620.2 12,925.3 13,073.0 +17% YoY 4,655.3 1,236.7 1,892.2 35.6 5,449.5 1,511.3 2,407.1 35.0 International Slovenia Term deposits Sight deposits 31 Mar 2022 30 Jun 2022 30 Sep 2022 31 Dec 2022 LTD Net loans (in EUR millions) Deposits (in EUR millions) 1,490.8 1,496.0 The LTD ratio (net) was 65.3% at the Group level; a 5.3 p.p. YoY increase, as a result of the acquisition of N Banka, with a higher LTD, as well as a higher increase of gross loans compared to deposits. 31 Dec 2021 31 Dec 2022 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 5,449.5 million and were comprised of guarantees (28%), letters of credit (1%), commitments to extend credit and other risky commitments (44%), and derivatives (27%). Commitments to extend credit and other risky commitments were divided between loans (99% corporate), overdrafts (58% retail and 42% 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. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 58 Capital and capital adequacy Capital Figure 24: NLB Group capital (in EUR millions) 2,065 297 2,252 287 1,768 1,966 2,806 511 2,296 Figure 25: NLB Group capital ratios and regulatory thresholds (in %) 16.63% 15.25% 14.25% 14.12% 17.78% 15.25% 15.47% 14.25% 19.15% 15.10% 15.07% 14.10% 31 Dec 2020 31 Dec 2021 31 Dec 2022 Total capital ratio CET1 ratio OCR = MDA threshold (Total capital) OCR+P2G (Total capital) Figure 26: NLB Group capital requirements as at 31 December 2022 31 Dec 2020 31 Dec 2021 31 Dec 2022 Tier 1 Tier 2 In 2022, the Overall Capital Requirement (OCR) for the Group was 14.10%, consisting of: • 10.60% Total SREP Capital Requirement (TSCR) (8.00% Pillar 1 Requirement and 2.60% Pillar 2 Requirement9) and • 3.50% CBR (2.50% Capital Conservation Buffer, 1.00% O-SII Buffer 10 and 0.00% Countercyclical Buffer). Pillar 2 Guidance (P2G) amounts to 1.0% of Common Equity 8.00% Tier 1 (CET1). On 29 April 2022, the BoS issued a new Regulation on determining the requirement to maintain a systemic risk buffer for banks and savings banks, which will on 1 January 2023, introduce the systemic risk buffer rates for the sectoral exposures: • 1.00% for all retail exposures to natural persons secured by residential real estate in Slovenia, • 0.50% for all other exposures to natural persons in Slovenia. CET1 4.50% AT1 1.50% T2 2.00% 2.60% 1.46% 0.49% 0.65% 10.60% 5.96% 1.99% 2.65% 15.10% 1.00% OCR 14.10% 3.50% 10.46% 1.99% 2.65% OCR+P2G (Total capital) Pillar 1 Pillar 2 TSCR Combined Buffer P2G Additionally, in December 2022, the BoS announced that due to growing uncertainties in the economic environment and systemic risks, the countercyclical buffer for exposures to the Republic of Slovenia is raised from 0% to the level of 0.5% of the total risk exposure amount. Banks have to meet the requirement by 31 December 2023. 9 As of 1 January 2023, the Pillar 2 Requirement decreased by 0.2 p.p. to 2.40%, as a result of better overall SREP assessment. 10 As of 1 January 2023, the O-SII Buffer amounts to 1.25%. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 59 Table 14: NLB Group Capital Requirements and buffers Pillar 1 (P1R) Pillar 2 (SREP req. - 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 Tier 1 Total Capital 2022 4.5% 1.5% 2.0% 1.46% 1.95% 2.60% 5.96% 7.95% 10.60% 2.5% 1.0% 0.0% 9.46% 11.45% 14.10% 1.0% 10.46% 12.45% 15.10% 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% 12.56% 15.25% 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% 12.56% 15.25% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 60 As at 31 December 2022, the TCR for the Group stood at 19.2% Figure 27: Capital of NLB Group – evolution YoY (in EUR millions) (or 1.4 p.p. increase YoY), and the CET1 ratio stood at 15.1% (0.4 p.p. decrease YoY). The higher total capital adequacy derives from higher capital (EUR 553.9 million YoY), which compensated the increase of the RWA (EUR 1,985.7 million YoY). The Group increased the capital with the inclusion of negative goodwill from the acquisition of N Banka in retained earnings (EUR 172.8 million), a partial inclusion of 2022 profit (EUR 161.5 million), additional Tier 1 notes issued in September (EUR 82 million), and subordinated Tier 2 notes issued in November (EUR 222.9 million 11). In accordance with the CRR ‘Quick fix’ from June 2020, temporary treatment of FVOCI for sovereign securities was implemented by the Group in September 2022, which increased the capital by EUR 61.6 million (i.e., accumulated other comprehensive income amounted EUR -98.5 million instead of EUR -160.1 million). This temporary measure ceased to apply as of 1 January 2023. 2,252 173 161 -88 82 223 n.a. 2,806 1.3% 1.4% -0.7% 0.7% 1.7% -3.0% The capital calculation does not include a part of the 2022 result in the amount of EUR 110 million, which is envisaged to be paid 17.8% as the dividend distribution in 2023. 19.2% Dividend pay-out The dividend pay-out in 2022 was split into two tranches. The first instalment in the amount of EUR 50.0 million was paid in June 2022, while the second was paid in the same amount of EUR 50.0 million in December 2022, thereby contributing to the 2022 cumulative pay-out of EUR 100.0 million. TCR 31 Dec 2021 NGW Result OCI AT1 notes Tier 2 notes RWA impact TCR 31 Dec 2022 11 T2 notes were issued in the amount of EUR 225 million, amount included in the capital was EUR 222.9 million (due to issuance below par). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 61 Total risk exposure dynamic Table 15: Total risk exposure for NLB Group Total risk exposure amount (RWA) RWA for credit risk Central governments or central banks Regional governments or local authorities Public sector entities Institutions Corporates Retail Secured by mortgages on immovable property Exposures in default Items associated with particularly 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 2022 31 Dec 2021 in EUR millions Change YoY 14,653.1 11,797.9 1,109.2 101.2 57.9 292.0 3,520.3 4,371.0 987.7 156.4 642.4 31.5 17.9 90.1 420.1 1,445.1 1,410.1 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 1,985.7 1,592.7 -49.2 1.4 10.9 -18.2 771.6 200.0 534.7 -23.0 199.9 -9.6 -1.5 1.6 -25.9 226.9 166.1 In 2022 (YoY), the RWA of Group for credit risk increased by and NLB Banka, Skopje. At the same time, lower exposure the conclusion of longer term and higher size of derivatives by EUR 1,592.7 million, where EUR 747.1 million of the increase to the covered bonds in the Bank also reduced the RWA. The the Bank) and higher RWA for Traded Debt Instruments (TDI) relates to the acquisition of N Banka (on the purchase day the repayments, as well as the upgrade of some clients, additional risk in the amount of EUR 13.7 million (a consequence of new contribution of N Banka to NLB Group was EUR 858.9 million). impairments and provisions recognised, and the package derivatives businesses). The remaining part of the RWA increase in the amount of sale of NPLs from Serbia contributed to a lower RWA for the EUR 845.6 million was mainly the consequence of ramping exposures in default. up lending activity in all Group banks, the most in the Bank The increase in the RWA for operational risks (EUR 166.1 million YoY) derives from the higher three-year average of relevant and NLB Komercijalna Banka, Beograd. The RWA growth was The increase in RWAs for market risks and Credit Value income, as defined in Article 316 of CRR, which represented the partially mitigated by CRR eligible real estate collaterals from Adjustments (CVA) in the amount of EUR 226.9 million YoY was basis for the calculation. The main reasons for the increase BiH, Serbia, and North Macedonia. Higher RWA for high-risk the result of a higher RWA for FX risk in the amount of EUR 139.4 were a generally higher income base in most Group members, exposures was the result of higher project finance exposure. million (mainly the result of more opened positions in domestic and the acquisition of N Banka in March 2022. Furthermore, the RWA decrease was observed for liquidity currencies of non-euro subsidiary banks), higher RWA for assets mainly due to the maturity of some non-EU sovereign CVA risk in the amount of EUR 73.8 million (a consequence of Further information on capital and capital adequacy is bonds (mainly Serbia, Kosovo and Russia). The lower exposure an adjustment of calculating exposure in the CVA calculation available in the Note 5.23. of the financial part of the report and to institutions also resulted in the RWA reduction, the most in NLB Komercijalna Banka, Beograd, banks from BiH, the Bank, due to the change of a methodology from a mark to market method to the Original Exposure Method (OEM), and due to in Pillar 3 Disclosures. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 62 Liquidity position The Group’s liquidity remains strong, with a high level of unencumbered liquidity reserves in total assets (39.0%) that is reflected in the LCR ratio standing at 220.3% (31 December 2021: 252.6%). 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. s n o i l l i m R U E n i 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Figure 28: LCR quarterly dynamic of NLB Group 252.6% 233.3% 213.0% 218.5% 220.3% 300.0% 250.0% 200.0% 150.0% 100.0% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report 5,367 5,690 5,325 5,772 6,028 2,125 2,440 2,500 2,641 2,737 50.0% 0.0% 31 Dec 2021 31 Mar 2022 30 Jun 2022 30 Sep 2022 31 Dec 2022 Stock of HQLA Net liquidity outflow LCR As at 31 December 2022, the Group’s unencumbered liquidity reserves corresponded to EUR 9,187.5 million (2021: EUR 8,280.6 million) comprised of cash, balances with CB without minimum reserve requirement, the debt securities portfolio, and credit claims eligible for CB-secured funding operations. Among others, these liquidity reserves provided the basis for future strategic growth. Encumbered liquidity reserves, used for operational and regulatory purposes, were excluded from the liquidity reserves portfolio and amounted to EUR 123.0 million (excluding obligatory reserves; 31 December 2021: EUR 877.6 million). The decrease of the encumbered liquidity reserves was due to the early repayment of additional financing via the CB secured funding at the end of H1 2022. Figure 29: Evolution of NLB Group unencumbered liquidity reserves (in EUR millions) s n o i l l i m R U E n i 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 8,280.6 8,131.7 8,049.8 55.9% 55.1% 0.0% 0.0% 57.4% 0.0% 43.1% 43.9% 37.1% 8,645.4 51.7% 0.0% 42.2% 9,187.5 49.4% 0.0% 43.8% 1.0% 1.0% 5.5% 6.1% 6.8% 31 Dec 2021 31 Mar 2022 30 Jun 2022 30 Sep 2022 31 Dec 2022 ECB eligible credit claims Trading book debt securities (market value) Cash & CB reserves Banking book debt securities (market value) Contents 63 Segment Analysis Table 16: Segments of NLB Group Retail Banking in Slovenia includes banking with individuals and micro companies (the Bank and N Banka), asset management (NLB Skladi), a part of NLB Lease&Go, Ljubljana that includes operations with retail clients, and the contribution to the result of the associated company Bankart. Corporate and Investment Banking in Slovenia includes banking with Key Corporate Clients, SMEs, Cross-Border Corporate financing, Investment Banking and Custody, Restructuring and Workout in the Bank and N Banka and a part of the NLB Lease&Go, Ljubljana that includes operations with corporate clients. Core Segments Non-Core Segment Strategic Foreign Markets12 Financial Markets in Slovenia Other Non-Core Members include treasury activities and trading in financial instruments, while they also present the results of asset and liabilities management (ALM) in both, the Bank and N Banka. accounts in the Bank and N Banka for the categories whose operating results cannot be allocated to specific segments, including negative goodwill from the acquisition of N Banka in March 2022, as well as subsidiaries NLB Cultural Heritage Management Institute and Privatinvest. includes the operations of non-core Group members, i.e., REAM and leasing entities in liquidation, NLB Srbija, and NLB Crna Gora. include the operations of strategic Group banking members in the strategic markets (North Macedonia, BiH, Kosovo, Montenegro, and Serbia), investment company KomBank Invest, Beograd, NLB DigIT, Beograd, to which IT services from NLB Banka, Beograd were transferred in 2022, the newly established leasing company NLB Lease&Go, Skopje and in 2022 the purchased company NLB Lease&Go Leasing, Beograd. 47 10% 3,677 15% 68.1% 58 52 11% 3,372 14% 61.9% -42 187 39% 10,179 42% 53.4% 7 34 7% 6,514 27% 20.2% / 172 36% 356 1% 79.1% / in EUR millions -9 -2% 62 0% 268.4% / Profit b.t. Contribution to Group’s profit b.t. Total assets % of total assets CIR Cost of risk (bps) NLB Group 483 100% 24,160 100% 57.6% 14 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 the Group's revenues. 12 Komercijalna banka, Banja Luka was sold outside the NLB Group on 9 December 2021; its operations till that date are included in the result of the segment for the year 2021. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 64 Retail Banking in Slovenia Figure 30: Contribution to NLB Group Financial performance Table 17: Performance of the Retail Banking in Slovenia segment 2022 2021 in EUR millions consolidated Change YoY o/w N Banka contribution 10% Result b.t. 21% Net interest income 36% Net interest income Net interest income from Assets(i) Net interest income from Liabilities(i) Net non-interest income o/w Net fee and commission income 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 N Banka, Ljubljana NLB Lease&Go, Ljubljana Other Deposits from customers Interest rate on deposits(ii) N Banka, Ljubljana Non-performing loans (gross) Cost of risk (in bps) CIR Interest margin(ii) 32% 16% - 17% 17% 24% -24% 24% - -30% -4% 9.3 8.0 1.3 6.4 6.4 15.7 -16.3 -0.6 -3.3 -3.8 31% 31% 20% 1% 71% 12% 18% 104.8 95.8 9.1 106.7 113.2 211.5 -144.0 67.4 -21.4 0.8 46.8 79.5 82.7 -3.1 91.5 96.6 171.0 -116.5 54.5 -6.7 1.1 49.0 25.3 13.1 12.2 15.2 16.7 40.4 -27.5 12.9 -14.8 -0.3 -2.2 31 Dec 2022 31 Dec 2021 Change YoY 3,586.5 3,641.0 2,173.9 2.35% 640.9 7.11% 446.1 69.0 311.1 9,085.8 0.05% 502.0 67.7 2022 58 68.1% 1.70% 2,731.6 2,769.7 1,815.5 2.34% 635.6 6.70% 40.4 278.2 7,703.6 0.03% 855.0 871.3 358.4 5.3 28.6 32.8 1,382.1 0.01 p.p. 0.41 p.p. 0.02 p.p. 58.1 9.6 17% 2021 26 68.1% 1.55% Change YoY 32 0.0 p.p. 0.15 p.p. Net non-interest income (i) Net interest income from assets and liabilities with the use of Fund Transfer Pricing (FTP). (ii) Interest margins and interest rates only for NLB. Knowing customers’ needs and with clients’ experience being our focus, the Bank strengthened its position as market leader in retail banking. The trigger to acquire new clients and to activate existing ones is to tailor its product and service offering to the needs of different segments. The Bank is available through its traditional branch offices, a unique mobile branch on wheels, and its wide ATM network. As the main goal is to be a bank that can compete in the digital world and can make the best use of strategic assets – through transformation of the sales process and improving of user experience. The Bank’s services are available to clients 24/7 via the Contact Centre and digital banking. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 65 Net interest income The net interest income from loans to individuals was EUR 25.3 million higher YoY (EUR 9.3 million contributed by N Banka), due to the higher volume of housing loans and overdrafts and the key ECB interest rate increase in the second half of the year that also impacted higher net interest income after use of FTP on clients’ deposits. Net non-interest income Higher net non-interest income in the amount of EUR 15.2 million YoY was due to EUR 16.7 million higher net fee and commission income, of which EUR 6.4 million came from N Banka. The growth derived from all categories, in large part from card business, due to higher volume and active cost production stabilised in the last quarter due to an increased A well-established branch network and the largest ATM interest rate environment. network (31 December 2022: 538) with the only Slovenian 24/7 banking Contact Centre are other factors establishing the Bank Retail part of NLB Lease&Go, Ljubljana successfully continued as the market leader. with a steady growth pace and concluded approximately EUR 47 million new deals (of which in 97% subject of financing was The Bank retains its role as a market leader in payments by passenger vehicle, while in remaining 3% light commercial being a reliable and trustworthy provider of services and a vehicles were largely presented). positive user experience. Deposits from customers The deposits base increased by EUR 1,382.1 million (18%) YoY, with EUR 502.0 million from N Banka, as a result of precautionary savings of households, due to the uncertainty of rising prices and the expected impact on their financial The private banking arm of the Bank has been positioned as a leader in this segment in Slovenia for over 20 years. NLB Skladi has been strengthening its position for several years as a leading asset management company with the highest market share and annual net inflows among its peers. management, but also from payments, asset management, situation in the future. bancassurance products, and the income from the high balance deposit fee. Total costs Higher costs by EUR 11.3 million without N Banka’s contribution, mostly due to higher operating costs resulting from inflationary pressures. Net impairments and provisions Net impairments and provisions were established in the amount of EUR 21.4 million, due to increase of loan volume and changes in risk parameters as a response to worsened macroeconomic projections. Loans to customers The high production of new housing loans in the Bank continued (EUR 726.6 million in 2022) and resulted in the increase of the portfolio by 20% YoY. However, the new Business performance Ways to the Client The market leader in retail banking in Slovenia Branch network The Bank’s main sales channel remains its branch network in Slovenia with 71 branches, however the preferences of our clients are changing with increasing use of digital solutions in Figure 31: NLB’s market share in Retail Banking in Slovenia their interaction with the Bank, those being more simple, more 31.3% 26.4% 23.4% 22.5% 30.7% 26.9% 24.7% 24.4% 31.9% convenient, and available wherever and whenever. The focus 26.6% 26.2% 26.6% for the future is in a more advisory role, thus educating clients about self-service on digital channels. Comprehensive renovation of branch offices, which was stalled by the pandemic, continued in 2022. An important milestone in N Banka’s integration was achieved with the smooth transfer of seven branch offices to a kiosk-type of office, which are now part of the NLB respective branches. 31 Dec 2020 31 Dec 2021 31 Dec 2022 Market share in loans to customers Market share in deposits from customers Market share in housing loans Market share in consumer loans Leader in Slovenia The Bank continued to strengthen its leading position with a market of 26.2% in retail lending (31 December 2021: 24.7%), and 31.9% deposit-taking (31 December 2021: 30.7%). Market shares in the category of housing loans increased, specifically in portfolio to 26.6% (31 December 2021: 24.4%), and in new production, as a result of the historic record sales of new housing loans, to 32.5% (2021: 32.2%). 30%annual growth of new housing loans production 26.6%market share in housing loans MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 66 Only 24/7 available banking service in Slovenia The Contact Centre is positioned as a service and sales channel, transforming to a retail virtual bank for almost all of the Bank’s products like consumer and housing loans with straightforward collateral, overdrafts, insurance products, deposits, savings, and onboarding of e-bank and m-bank. In 2022, its share of concluded basic financing products of the Bank (consumer loans and overdrafts) was 11%. This part of Retail banking has an important role as a standalone sales and advisory remote channel, and at the same time offering very much support to customers of m-bank and branch network 24/7. The Contact Centre further strengthened its role of a proactive customer outbound calling centre and processed 27% more video calls YoY. With the new support for contact management, customers can now also use the “Call back" option and also give a customer experience rating for telephone communication. An average NPS for a video call was 75, and the first Customer Experience (CX) measurement on telephone communication achieved an NPS of 62. Figure 32: NLB Contact Centre number of contacts (in thousands) The total volume of payments processed digitally through user experience and automated processes, some of which are e-bank and m-bank increased by 16% YoY. Moreover, products now possible due to regulatory changes. with contracts are finalized with digital signing of documents in m-bank Klikin, contributing to paperless operations. With the acquisition and retention of clients, constant activity is Figure 33: Digital penetration of active clients 42% 34% 19% 48% 45% 17% 54% 52% also an activation of existing client pools, resulting in growing the base of active clients. In 2022, the number of active clients increased by 1.7% YoY (+10,645 clients). Micro segment The Bank expects to increase the volume of business in the segment, and consequently gain market share through adopting high standards and expertise. With the merging of N Banka’s client base, the Bank will be able to use cross-selling 15% and upselling, which will lead to better product penetration of the client portfolio. 31 Dec 2020 31 Dec 2021 31 Dec 2022 E-bank M-bank Digital Private banking Active clients' base increase Constant activities in attracting new clients in 2022 resulted in Leading private banking provider in Slovenia The Bank was the first in Slovenia to have a clear vision of an exclusive offer of asset management for high net-worth the acquiring of 36,196 new clients, of which 20% are returning individuals and families. Today, 20 years later, this successful clients. However, with proper measures the retention of clients story of private banking is an integral part of the offer, with is also at high level and contributed to growth of the client base. more than EUR 1.3 billion assets under management (11% YoY The focus of client acquisition is primarily on the segment which growth) for 2,000 clients (11% increase YoY). 18% YoY presents the Bank’s future client pool – young citizens. Several activities, also in cooperation with relevant companies, are By offering carefully selected and tailored products and reflected in adjusting products that are most suitable for this services, the Bank demonstrates that it can take good care 27% YoY segment. of their clients’ wealth. Comprehensive wealth management brings a combination of banking and financial products and Package Digital onboarding for new clients was upgraded with the whole spectrum of advisory services. key advantages including an adjusted view that provides better 1,308 1,113 201 999 158 100 2020 2021 2022 2020 2021 2022 Video call Total contacts Digital banking The number of digital users in 2022 increased by 14% YoY. The rate of m-bank Klikin and e-bank NLB Klik users YoY increase remains stable at 16% (66,018 new users) and 6% (23,619 new users), respectively, which is also clearly proven by the digital penetration of active clients (see the figure below). The latter is also an enabler for decreasing cash and transactional business in branches. Increased digital penetration by 6 p.p. More than 36,000 new clients acquired MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 67 As the global markets significantly changed in 2022, the sale Figure 35: Satisfaction with the attitude towards customers The Bank teams organised the workshops entitled, "Modern of gold was introduced for the clients of private banking, with first encouraging results being achieved for this new investment offering. Figure 34: Assets under management and the number of private banking clients 2,000 1,800 1,580 1,231 1,309 753 911 1,075 1,243 1,377 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 31 Dec 2022 AuM (in EUR millions) # of Clients Client satisfaction is our focus High level of client satisfaction The Bank measures client satisfaction on two levels, each serving a specific purpose for customer experience management and offers improvements. In our Client Satisfaction Survey (CSS), a long-term relationship with the clients through the indicator Customer Satisfaction Index (CSI) is measured. The indicator of transactional satisfaction after completed service with a focus on processes and attitude towards clients is the NPS. The Bank maintained a high level of client satisfaction, as measured with CSI remaining stable and well above the competition. Furthermore, clients express a higher level of satisfaction with our advisors. Kindness and competence are valued the most and are the main reasons for higher client satisfaction (84 vs. 74 for the competition; 2022 Valicon Client Satisfaction Survey). Also, the NPS for 2022 shows a high level of satisfaction with value 62 (the benchmark for the financial sector in 2022 is 49; SurveyMonkey global benchmark), which Competitor banks' average 2022 74 NLB 2022 NLB 2021 NLB 2020 NLB 2019 84 81 83 77 Source: 2022 Valicon Client Satisfaction Survey. Financing products Dedicated sales teams and successful marketing campaigns played important roles in contributing to the excellent sales results. To enable our clients’ management of unexpected costs or higher monthly expenses (car insurance, paying for vacations, buying school supplies, etc.), the Bank developed a solution of postponing the payment of one monthly instalment of the loan. Without giving a reason, the client can once in each calendar year freeze one payment, with the loan repayment period being extended for the period of payment deferrals. This option can be used after six months of regular loan repayments. A gradual reduction of the overdraft with automatic renewal was very well accepted by clients who can decrease the amount of the overdraft every month by a pre-agreed amount until it’s paid off. Since the overdraft is automatically renewed, it can be paid off over several years. Sustainability Environmental and social sustainability are important goals of the Group. They are also being incorporated in the Group with our growing ESG product portfolio. Different financing products help customers implement sustainability measures in developing their own lasting environmental solutions. An ESG- oriented offer includes the NLB Green housing loan to finance construction or purchase of a passive house, and finance the purchase of solar panels, heat pumps, and central ventilation also in cooperation with vendors. Connecting with partners to help our clients in their transition to energy efficiency resulted in the offer of the NLB Green partner loan as an end-to-end was mostly influenced by the high satisfaction with consultancy. solution. In 2022, the Bank provided more than EUR 53 million in ESG-related loans. Banking" for the elderly, where the use of modern digital banking services was presented. In addition to the excellent response and positive feedback, digital products were activated. With the participation of students working for the Contact Centre, this was a true intergenerational event. Stable card portfolio In 2022, Mastercard’s personal debit card was introduced in digital form only, enabling the card and PIN to be issued instantly, and can be used immediately after the client digitizes its card in the NLB Pay m-wallet. The contactless payment limit with no PIN needed was raised to EUR 50 for NLB cards, as well. With green awareness in mind, a receipt is issued only on demand. Individual debit and credit card volumes and the number of payment transactions and cash withdrawals, YoY increased by 18% or 16%, respectively. Mobile wallet - NLB Pay From May onwards, online purchases have no longer been possible without strong authentication. Therefore, the use and download of NLB Pay m-wallet is even more important and proven with the continued increase of usage at a significant pace. With NLB Pay solution, the Bank was also among the first complying with the modern security standards of the EU directive. Further strengthening of the market position in lending, deposits, and asset management MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 68 The Flik solution is incorporated in NLB Pay, enabling client’s P2P (person to person) money transferring among all Slovenian bank clients, P2M (person to merchant) payments as purchase on NLB POS terminals, and on Point of Sale (POS) terminals of some other Slovenian banks which have upgraded their POS. The Bank is the first on the market also for Person to e-Merchant (P2eM) for online purchases. Added value in ancillary businesses NLB Skladi – Slovenia’s largest asset management company The conflict in Ukraine and higher energy costs, which led to The insurance company Vita remains the Bank’s strategic partner with products such as savings and investment insurance products, risk, and health insurance products being included in the Bank’s offer. Despite challenging circumstances, excellent results for Generali’s products of car insurance and home insurance were a further increase in inflation, higher interest rates and lower achieved, namely gross written premiums increased YoY by 13%. Use of m-wallet NLB Pay increased at a significant pace with purchasing power of the population had a significant impact on the number of users and volume of transactions YoY, increasing the mutual funds market in 2022. Despite that, the market share by 67% and 63% YoY, respectively. Figure 36: NLB Pay in numbers 67% YoY 63% YoY of NLB Skladi increased to 39.1% (31 December 2021: 37.3%). With EUR 115.3 million of net inflows in 2022, the company again ranked first among its peers in Slovenia, accounting for 55.2% of all net inflows in the market. The total assets under management nevertheless experienced a YoY drop of 7.9% and amounted to EUR 1,960.4 million (31 December 2021: EUR 2,128.0 million) of which EUR 1,536.2 million consisted of mutual funds (31 December 2021: EUR 1,610.4 million) and EUR 424.2 million of the discretionary portfolio (31 December 2021: EUR 517.6 million). 73,711 36,218 58,924 Bancassurance The Bank is the top sales channel among Slovenian banks with spectrum of life and non-life insurance products in its offer. In the Bank’s sales channels bancassurance products of the insurance companies Vita and GENERALI Zavarovalnica are 44,097 18,402 12,577 sold. 2020 2021 2022 2020 2021 2022 # of users Volume of transactions (in EUR thousands) Figure 37: Active clients’ penetration of ancillary business 16.5% 8.4% 16.8% 9.4% 17.1% 10.3% 17.4% 10.6% 1.9% 2.2% 2.5% 2.6% 31 Dec 2019 31 Dec 2020 31 Dec 2021 31 Dec 2022 NLB Skladi Vita Generali MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 69 Financial performance Table 18: Performance of the Corporate and Investment Banking in Slovenia segment in EUR millions consolidated Change YoY o/w N Banka contribution  48% 31% 86% -21% 12% 4% -44% -29% -60% -40% 5.5 5.1 0.4 3.3 3.2 8.7 -12.9 -4.2 4.6 0.4 44% 43% 47% 24% -4% -31% 103 % -14% 41% 2022  2021  52.9 53.7 -0.8 52.3 43.6 105.2 -65.1 40.1 12.2 52.3 35.7 41.1 -5.4 65.8 38.9 101.5 -45.1 56.4 30.5 86.8 17.2 12.6 4.6 -13.5 4.7 3.7 -20.0 -16.3 -18.3 -34.6 31 Dec 2022 31 Dec 2021 Change YoY 3,370.1 3,424.6 3,311.5 2,623.2 1.95% 0.1 60.8 506.7 120.7 112.9 2.59% 2,731.0 0.07% 396.5 67.6 2022 -42 61.9% 1.80% 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% 1,037.7 1,033.9 1,052.9 512.5 0.0 -27.5 61.1 -19.0 792.8 0.16 p.p. 0.52 p.p. 0.04 p.p. 72.5 -4.9 -7% 2021 -141 44.4% 1.76% Change YoY 99 17.4 p.p. 0.05 p.p. Net interest income Net interest income from Assets(i) Net interest income from Liabilities(i) Net non-interest income o/w Net fee and commission income Total net operating income Total costs Result before impairments and provisions Impairments 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 N Banka, Ljubljana NLB Lease&Go, Ljubljana State Interest rate on State loans Deposits from customers Interest rate on deposits(ii) N Banka, Ljubljana Non-performing loans (gross) Cost of risk (in bps) CIR Interest margin(ii) (i) Net interest income from assets and liabilities with the use of FTP. (ii) Interest margins and interest rates only for NLB. Corporate and Investment Banking in Slovenia Figure 38: Contribution to NLB Group 11% Result b.t. 10% Net interest income 18% Net non-interest income The Bank reconfirmed its role of a leading and systemic player in its home region and supporting corporate clients with daily banking and tailor-made comprehensive solutions, including trade finance, corporate finance, and cross border financing. Customer centricity and sustainability are the basis of what we do. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 70                   Net interest income The interest income from loans to corporate and state was EUR 7.5 million higher YoY without N Banka’s contribution. The interest margin from loans in the Key, SME and Cross-Border Corporates in the Bank was EUR 5.2 million higher YoY, mostly due to higher volumes in all sub-segments. However, the interest rates also started to increase due to the key ECB interest rate hikes which impacted both, loans and deposits. Net fee and commission income Higher net fee and commission income YoY, mostly due to higher income from cards, payment transactions, and guarantees. A high balance deposit fee was cancelled from August on and influences fee income by approximately EUR 0.8 million each month, but was compensated with the net interest income after the user of FTP on clients’ deposits. Total costs Higher costs by EUR 7.1 million without N Banka’s contribution, mostly due to higher operating costs resulting from inflationary pressures. Net impairments and provisions Net impairments and provisions were released in the amount of EUR 12.2 million, mostly due to repayments of previously written- off receivables, which offset the establishment of impairments and provisions due to higher exposures and changes in risk parameters as a response to worsened macroeconomic projections. Loans to customers The volume of loans increased by EUR 1,033.9 million YoY, with N Banka contributing EUR 506.7 million, with the growth distributed in all sub-segments. With a EUR 61.1 million increase in the portfolio, the contribution of the NLB Lease&Go, Ljubljana to the segment is growing. Deposits from customers The volume of deposits increased for EUR 792.8 million YoY, of which EUR 396.5 million contributed N Banka, due to various reasons, i.e., the increase of balances in investment and pension funds, and inflows from takeovers on the market. Investment Banking and Custody The total value of assets under custody increased YoY and amounted to EUR 16.4 billion (31 December 2021: EUR 15.9 billion). Arranging EUR 961.1 million of syndicated loans Business performance Market leader focusing on customer needs Figure 39: NLB’s market share in Corporate Banking in Slovenia 31.4% 31.5% 17.3% 17.0% 18.9% 18.3% 33.5% 20.8% 19.8% 31 Dec 2020 31 Dec 2021 31 Dec 2022 Market share in deposits from customers Market share in guarantees and letters of credit Market share in loans to customers Main achievements of 2022 With deep and strong local and regional presences, the Bank further increased its corporate client base to over 10,000 clients, and not only confirmed its leading role in all areas of corporate banking, but again reinforced its commitments to understanding and supporting the economy and the clients. The Bank approved over EUR 1.5 billion new financing volume to corporate and state clients, which generated an increase in loan volume by 21.9% YoY, and further strengthened their loan market share to customers to 19.8% (31 December 2021: 18.3%). Loan growth was realised in all business segments, specifically with large corporates enjoying a 17.2% increase YoY, with SME a 31.1% increase YoY, and in the cross border segment a 29.8% increase YoY. The market share of deposits also increased and reached 19.4% at the end of the year (31 December 2021: 18.9%) confirming its strong systemic position and trust from its broad client base. After the war started in Ukraine, the international market environment became unpredictable with a higher demand for working capital facilities. With the emerging of energy crisis, the Bank rapidly responded to its clients’ needs and arranged EUR 285 million of new syndication financing for the respective energy sector, with EUR 105 million of own participation. In addition, the Bank provided certain bilateral facilities, with all this confirming its position as a systemic bank and a strong supporter of the economy. The Bank further improved its leading position in trade finance products, supporting clients with letters of guarantees, letters of credit, and purchases of receivables, which are also available through digital channels in a safe and fast way. 22%annual growth in corporate loans volume w/o N Banka contribution MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 71 Activities of the Bank in organising syndicated facilities continued with the total annual amount of EUR 961.1 million. In these transactions, the Bank acted as the mandated lead arranger, as an agent and as the leading bank with a EUR 306.0 million participation. Having a unique regional position with a local presence enabled the Bank to further expand cross-border financing activities and increased its portfolio by up to EUR 500 million of financing volume, including financing in the Group’s home region and across European Economic Area (EEA) with sound diversification in terms of geography and industry. Sustainability has been at the centre of the Bank’s activities, where the Bank also introduced new green products for corporate clients, addressing the client needs at lower financing costs. In 2022, the Bank approved more than EUR 105 million in Comprehensive solution offering Trade finance solutions Strong market position The Bank is a leading Slovenian bank in the field of trade finance with products that support domestic and international trade economy. The trade finance product range and tailor- made solutions are comprehensive and included traditional trade finance products to other modern structures which provide safe financing throughout the supply chains. As a member of the Factor Chain International, the Bank also aims to offers exporters and importers the international purchase of receivables. The Bank was regionally active in M&A and other financial advisory engagements (organising and coordinating M&A procedure, advising on optimal capital structure, organising takeover bids, etc.). Brokerage services and Financial Instruments In the brokerage services in 2022, the Bank executed clients’ buy and sell orders in the total amount of EUR 1.09 billion (2021: EUR 902.9 million), while in dealing in financial instruments, the Bank executed foreign exchange spot deals in the total amount of EUR 1.38 billion (2021: EUR 946.6 million) and for EUR 433.2 million (2021: EUR 382.5 million) worth of transactions involving derivatives. In all product fields (guarantees, letter of credit and purchase of receivables) the Bank realised over 30% volume growth YoY. Despite already strong market position in Slovenia, market Economic conditions in 2022 resulted in more activities of the clients in foreign, non-Euro markets. Consequently a 20% increase was recorded in the number of clients concluding FX new financing in the ESG area. shares were further improved, namely in guarantees and letter deals. Strategic priorities The Bank remains fully devoted to its strategic priorities: • Remaining the leading and best preferred bank among all corporate clients, offering them best in class products and solutions, and enabling our clients to improve their international business and footprint. • Keeping deep customer relationships and continuing to improve customer satisfaction and experience, also by product and process digitalization. • Maintaining a leading position in Slovenia in the areas of trade finance, project finance, loan syndications, and M&A finance, aiming to further expand that role in the SEE region, while maintaining disciplined risk management. • Working closely with companies to help them transition towards net zero emissions and confirming the Bank’s commitment to sustainability finance by supporting new green projects in a broader region and contributing to society. • Focusing on profitability, also by improving fee business and strengthening our focus on capital light product solutions. of credits to 33.5% (2021: 31.5%). We further enriched our offer with reverse factoring, which represents a safe and quick way of supplier finance, and the Bank can process the transactions in modern digital way. Special attention has been given to letter of guarantees and counter-guarantees by which the Bank supports major infrastructure and ESG projects in Slovenia and the wider home region. A strong market position reflects the Group’s active advisory approach towards its customers. Investment banking and securities services Arranger of several transactions In 2022, the Bank organised six syndicated facilities in the total amount of EUR 961.1 million, where it also acted as the mandated lead arranger, as an agent, and as the leading bank with participation of EUR 306.0 million. The Bank was also very active in the field of issuing new financial instruments by arranging the issuance of both long-term and short-term instruments in the total amount of EUR 621.7 million on debt capital markets. 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 2022, was together with the fund administration services EUR 16.4 billion (31 December 2021: EUR 15.9 billion). 33.5%market share in guarantees and letters of credit MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 72 Cross Border Financing Financing within the Group home region Excess liquidity, a rather limited Slovenian market, and the desire to expand operations with existing and new clients are the main reasons why cross-border financing has become increasingly important. At the end of 2022, the portfolio of approved cross-border transactions in the Bank reached EUR 500 million (thereof EUR 360 million already drawn). Adding the participating shares of the Group subsidiaries, with the approved transactions amount exceed EUR 700 million. It is notable that in most cases approvals also meant that local Group subsidiaries can retain or increase their fee business and expand cross-selling potential with our clients. Corporate lending in EEA The Bank is also active in different EU markets and diversified be used immediately after the client digitizes its card in the NLB Pay m-wallet with no visit to any Bank’s premises. This its cross-border portfolio across the EEA. Most notable is possible also to all authorised card’s holders and most transactions in the portfolio were concluded in Luxemburg, importantly, the green issue with less plastic. Germany, France, Austria, and the Netherlands. Deals are primarily made through participation in syndicated Mobile wallet NLB Pay The Bank’s mobile wallet NLB Pay application enables clients international facilities or through participation in Schuldschein to make contactless, simple, fast, and secure payments on the loans, which also include some of world-renowned brands and contactless POS (in Slovenia and abroad) with the NLB Business leaders in their industries. The EEA lending part of cross-border debit Mastercard and NLB Business pay later Mastercard. portfolio exceeds EUR 160 million and is expected to grow further due to very well-established relationships with some of the European partnership banks. The focus remains profitable A leader in merchant-acquiring The Bank is a leader in merchant-acquiring by accepting all investments in stable EEA markets (with lower expected major payment cards, the local Flik instant payment scheme inflation and higher credit ratings) which significantly contribute and has a modern contactless POS network. to the further diversification of the investment portfolio of cross- MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report The overreaching theme of cross-border financing was border financing. continuous support of our key clients and involvement in the financing of some of the key projects in our home region. On the corporate finance side, this has meant a dominant focus on supporting energy and telecommunication industries, while on the project finance and real estate side, the Group has arranged and co-arranged several key financings, including major residential real estate in BiH, large renewables project in Serbia, and office and residential real estate projects in Serbia. Further potential in the home region can especially be observed in corporate financing, renewable energy, infrastructure, and residential/office real estate. Special focus is foreseen in financing renewable projects - as the Group’s priority, especially given the exceptional potential and opportunities which our home region offers in this respect. 30%annual growth in cross border financing volumes Leasing financing within NLB Lease&Go, Ljubljana NLB Lease&Go, Ljubljana potential Leasing activity is and has been since the second half of 2020, again the Group core activity. In 2022, it successfully continued its market progress, with a steady growth pace. Concluded new business totalled approximately EUR 120 million in deals with legal entities. In almost 44% of the deals, the subject of financing was a passenger vehicle (where used vehicles presented 64%), followed by almost 36% on heavy commercial vehicles (where new vehicles presented 73%), 14% represented equipment and the remaining 6% largely concentrated on new light commercial vehicles. The vast majority of respective production consisted of financial leasing, including stock financing. As per the latest publicly available data (outstanding as per 31 December 2022), the company had approximately 10% of the market share in segment in the legal entities. In March 2022, the Bank obtained permission from the BoS to intermediate in leasing transactions for corporate clients to the affiliated company NLB Lease&Go, Ljubljana with the aim of offering bank clients comprehensive financing solutions and customer experience. Transaction Banking and Payments Basic products After opening business account or any business package NLB E-commerce, a modern payment platform, enables secure and simple card payments, and enables competitive edge to providers, and good user experience to their clients. Figure 40: Transaction volume in acquiring (in EUR millions) 13% YoY 38% YoY 76 2,348 2,535 2,865 47 55 2020 2021 2022 2020 2021 2022 e-commerce POS Instant payments The Bank was the leading bank in the introduction of instant payments on the Slovenian market and is the only bank enabling users of m-banks to automatically send out Mastercard’s business debit card is available in digital form transactions as instant payments - every day of the year both in only, enabling the card and PIN to be issued instantly. It can Slovenia and in the SEPA area. Contents 73 Flik payments Flik P2P (person to person) enables money transfer among all offer, a NLB Green Investment loan for energy efficient business premises with additional benefits included was implemented. Slovenian banks’ clients, while Flik P2M (person to merchant) Connecting with partners to help our clients in their transition payments enable purchase on NLB POS terminals and on POS to energy efficiency resulted in the NLB Green partner loan terminals of some other Slovenian banks which have upgraded to provide an end-to-end solution. The Bank will continue to their POS. The Bank is among the first banks on the market create green products, and in such a way makes clients aware also offering instant payments P2eM for online purchases to of the sustainable aspect. merchants. Global Payments Innovation (GPI) The Group, as a first banking group in the SEE, enables services #FrameOfHelp After two successful projects during the pandemic, the Group's #FrameOfHelp under the slogan ‘Looking for a New arising from the SWIFT Global Payment Initiative, which is Tesla’ started for the third time, offering an opportunity to international payments service enabling banks to transfer regional companies giving priority to sustainable ideas. The money faster and more safely worldwide. At the same time, Bank’s attention is focused on the future of this region, on the it enables full tracking of payment orders and monitoring of opportunities that are opening for it and that the Group can related costs. support with decisions and services. Digital banking NLB Trading The new platform, ‘NLB Trading,’ is a modern way to facilitate the order of financial instruments to any of the Bank’s brokerage client. There are several advantages of NLB Trading which, among others, enable the overview of the portfolio with the possibility to review various options, placing and managing orders for sell or purchase at Ljubljana Stock Exchange, real time monitoring of trading by each instrument, and simple overview of transactions and concluded deals. M-bank Klikpro The number of m-bank Klikpro users continue to increase (YoY by 16%), proving that clients are more and more prone to digital banking. With included possibility of digital signing, this will further ease clients’ operations. Sustainable Finance ESG offer Climate change is happening, with banks also playing their part with appropriate financing for the transition to a more sustainable future. A NLB Green loan for reducing the carbon footprint is offered within the existing offer of NLB loans, exclusively for purposes where a sufficient positive impact on the environment has been proven. To complement the ESG MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 74 2022 was the most successful year for NLB Banka, Podgorica so far. Our team of motivated and ambitious professionals kept its focus on clients. We also started the transformation of our bank into an agile organization to speed up business processes and decision-making and thus become not only a better partner for our clients, but also a most desirable employer for top bankers and professionals in the region. Our success was recognized by two renowned media houses: Euromoney and the Financial Times, who awarded us the prestigious awards Best Bank in Montenegro 2022 and Bank of the Year in Montenegro 2022. Through responsible environmental and societal actions, we created better footprints and once again confirmed our commitment and contribution to a better quality of life in South-Eastern Europe, our home region. Pictured: NLB Banka, Podgorica employees Strategic Foreign Markets Contribution to NLB Group Figure 41: Contribution to NLB Group assets of subsidiary banks exceed 10% in five out of six The Group banks ESG and CSR activities were continuously markets. The banks in the Group strategic foreign markets upgraded by supporting the financial literacy of clients, offer a full range of financial services to retail and corporate the #FrameOfHelp project for small entrepreneurs, tree clients. In 2022, the global rising inflation pressures impacted planting activities, and many more events, stated in the Group the Group’s region of operations, however, loan demand Sustainability report. remained strong, especially in the H1 2022. Thus, Group banks marked remarkable double-digit growth of gross loans to In 2022, the Group banks accelerated their digital customers, above the local market average, especially in the transformation by automating processes and offering various retail segment thereby contributing to the overall economic digital solutions to clients, thus further boosting digital development of local countries households. penetration by almost doubling the number of digital users. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Financial performance Table 19: Results of the Strategic Foreign Markets segment Net interest income Interest income Interest expense Net non-interest income o/w Net fee and commission income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Negative goodwill (NLB Lease&Go Leasing, Beograd) Result before tax o/w Result of minority shareholders Net loans to customers Gross loans to customers Individuals Interest rate on retail loans(i) Corporate Interest rate on corporate loans(i) State Interest rate on state loans(i) Deposits from customers Interest rate on deposits(i) Non-performing loans (gross) Cost of risk (in bps) CIR Interest margin(i) (i) Changed methodology. 2022 298.0 322.8 -24.8 129.5 118.7 427.5 -228.1 199.4 -12.3 0.1 187.1 11.0 2021 266.8 299.6 -32.8 95.1 101.6 361.9 -227.9 134.0 -20.8 113.2 11.5 in EUR millions consolidated Change YoY 31.2 23.2 8.1 34.3 17.2 65.6 -0.2 65.4 8.5 0.1 73.9 -0.5 12% 8% 25% 36% 17% 18% 0% 49% 41% - 65% -4% 31 Dec 2022 31 Dec 2021 Change YoY 6,077.5 6,271.4 3,221.0 5.66% 2,869.0 3.84% 181.4 3.65% 8,171.2 0.17% 160.6 2022 7 53.4% 3.14% 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 2021 -11 63.0% 2.86% 635.7 639.2 343.7 255.4 40.0 172.4 -31.1 12% 11% 12% 10% 28% 2% -16% -0.18 p.p. -0.11 p.p. 0.30 p.p. -0.12 p.p. Change YoY 19 -9.6 p.p. 0.29 p.p. 39% Result b.t. 59% Net interest income 44% Net non-interest income With the merger of two banks in Serbia, the establishment of an IT hub, and enlarging the leasing activities in the region, the core part of the Group in foreign markets now consists of six banks, one investment fund company, an IT company, and two leasing companies. The Group banking subsidiaries are locally strongly 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 Contents 76       Sixsubsidiary banks, two one leasing companies, IT services company, and one investment fund company Net interest income Net interest income increased by EUR 31.2 million (12%) YoY, due Gross loans to customers Gross loans to customers increased by EUR 639.2 million (11%) to the high increase of loan volumes. YoY, with slightly higher growth to individuals (12%) than to Net non-interest income Net non-interest income increased EUR 34.3 million YoY, of which net fee and commission income EUR 17.2 million. The largest increase was recorded in NLB Komercijalna Banka, Beograd due to the repricing of services in Q2, but the growth corporate (10%). The increase of the loan portfolio was visible in all of the banking members. New loan production continued its enviable growth, especially in consumer loans. Deposits from customers Deposits from customers recorded only 2% YoY growth, due did not continue in Q3, since the Serbian central bank decided to outflows in Q1 as a response to the Ukraine war and its to contain retail fees for a limited period. influence on prices and consumer behaviour, while slow growth Total costs Total costs stayed on the same level YoY. Net impairments and provisions Net impairments and provisions were established in the amount of EUR 12.3 million, mainly due to impacts arising from successful NPL resolution, and despite additional provisions for reorganisation in NLB Komercijalna Banka, Beograd (EUR 4.6 million). was perceived in the remaining year in most members, with further outflow in the second half of the year in the Serbian market, mostly due to attractive offers with higher interest rates from competitors. The market shares (by total assets) of subsidiary banks exceed 10%in five out of six markets Profit before tax EUR 187.1 million 65% higher compared to last year MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 77 NLB Komercijalna Banka, Beograd In 2022, Komercijalna Banka, Beograd and NLB Bank, Beograd were successfully merged with a crucial goal of minimising potential disturbance of clients’ operations. Table 21: Key performance indicators of NLB Banka, Beograd(i) in EUR thousands 2022 2021 Change YoY Despite the demanding integration, the bank also managed to significantly increase lending activities in all segments and throughout almost the whole year achieved growth higher Key performance indicators Net interest income Net non-interest income than the market growth, while simultaneously improving the Total costs quality of the loan portfolio. After the integration, NLB Komercijalna Banka, Beograd Impairments and provisions Result before tax Result after tax 7,295 2,456 -7,242 -38 2,471 2,197 opened a new chapter, a complete transformation of the Financial position statement indicators business model by introducing an agile, simple, and fast Total assets work model, digitalizing products and services, and putting Net loans to customers a sustainability concept at the centre of business decisions. Gross loans to customers 14% Contribution to NLB Group’s result b.t. EUR 69.1 million Result b.t. 10.0% 4th Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Financial performance Table 20: Key performance indicators of NLB Komercijalna Banka, Beograd(i) in EUR thousands 2022 2021 Change YoY 124,269 58,805 88,570 40,110 -102,137 -87,979 -11,801 69,136 66,014 -7,637 33,064 34,818 40% 47% -16% -55% 109% 90% 12% 44% 44% 8% 16% Financial position statement indicators Total assets 4,670,405 4,165,249 Net loans to customers 2,589,222 1,795,882 Gross loans to customers 2,624,735 1,818,793 Deposits from customers 3,692,213 3,424,633 Equity 737,972 634,643 Market share by total assets Largest bank in the country Result before tax Result after tax -69% -65% 67% 99% -50% -49% 23,359 6,954 -22,170 -3,202 4,941 4,293 715,375 511,693 520,518 449,476 77,918 19.2% 3.4% 5.5% 0.6% 73.1% 9,489 1.5% 1.7% 113.8% 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 (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. In April 2022 NLB Banka, Beograd merged with Komercijalna Banka, Beograd. Business performance Retail banking 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 24.6% 28.6% -3.9 p.p. The retail segment operated in a challenging environment, and 3.0% 9.6% 1.5% 56.6% 32,519 1.0% 10.0% 70.1% 2.4% 5.5% 0.9% 68.4% 36,343 0.6 p.p. 4.0 p.p. 0.6 p.p. -11.7 p.p. -11% 1.4% -0.4 p.p. 9.7% 52.4% 0.4 p.p. 17.7 p.p. the bank continued to provide stable support for households in 2022. Through a number of initiatives, such as #FrameOfHelp project, Awards for the best Organic agriculture projects, Real Opportunity to Live on Your Own campaign (housing loan campaign for young population), the bank continued to build a relationship based on trust and keeping its customer base of around 1 million active customers, stable and strong. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. In April 2022 NLB Banka, Beograd merged with Komercijalna Banka, Beograd. Key financial indicators (ROE a.t., ROA a.t., CIR and net interest margin) calculated for merged bank. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 78 New production in 2022 reached record levels regarding loans to individuals, and retail banking recorded a significant YoY growth in gross loans (11%), which is over the market average growth and driven mostly by the growth in housing loans (16% YoY). The key drivers of income growth were housing and cash consumer loans, but also fees from payment transactions and current accounts. The bank continued to gain the growth of the market share in cash consumer loans to almost 10% and in housing loans over 12%. Corporate banking The corporate segment in 2022 marked a 10% growth in gross loans and 26% growth in documentary business. The bank aimed to build a strong value preposition for all products and services in the cross- & upselling program, which also brought added value to customers. The bank achieved growth in financing, as well as non-interest income, which was an additional stable revenue generator, with further focus on capital light products (trade finance products) and transaction business (payments, investment banking services, acquiring). In the agro segment, the bank confirmed the leading position in the market with almost 30% of the market share. Growth of the portfolio was based on acquisition efforts, short and mid-term financing of working capital, and financing of ongoing investments through increased borrowing to high- rated clients. The Bank participated in the project financing of the first large wind farm development (windfarm Krivača in the amount of EUR 10.5 million) based on the corporate power purchase agreement, thus confirming its commitment to the green agenda and ESG targets through the support of the increase of renewable energy in Serbia. The bank also approved several project financings for important real estate developments and sovereign financing for road infrastructure development in the amount of EUR 136 million for the financing of Dunavska magistrala. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 79 NLB Banka, Skopje EUR 41.7 million Result b.t. 16.3% 9% Contribution to NLB Group’s result b.t. 3rd Market share by total assets Largest bank in the country Business performance Retail banking Significant growth in gross loans of 9% YoY was recorded, which was above the level of the market growth for 2022, and driven by the growth in housing loans (11%) and consumer loans (9%). The highest amounts of disbursed loans so far in the retail segment led to an increase in the market share to 22%. The retail loan portfolio was dominated by consumer loans (54% of gross loans), while housing loans occupied 38% of gross loans. The deposit base increased 6% YoY. The interest margin in the retail segment was still high, but under strong pressure from competition. The key drivers of income growth were the portfolio increase, foreign payment operations, account management, and card operations. Corporate banking The corporate segment recorded a YoY growth of 6% in gross loans YE. The key drivers of income growth were long-term loans, investment, loans for working capital, and the liquidity needs of companies, as well as domestic and foreign payment operations and account management. As at 31 December 2022, the bank had a market share of 14% in corporate gross loans. It increased the portfolio, especially in the segment of long-term financing of high creditworthy clients, securing a stable portfolio and revenue generation. The bank had a total outstanding balance of EUR 46 million in project financing, and almost EUR 27 million outstanding balance of loans approved for investments in renewable sources and energy efficient investments. Additionally, the bank supported the business of the clients with documentary business instruments, which enabled them to adapt to the changed macroeconomic circumstances. The Bank is a leading banking institution on the local market, and is identified as a systemically important bank. In 2022, its success was once again confirmed and recognised by receiving the prestigious award “Bank of the Year” by the financial magazine, The Banker, for the 11th consecutive year, followed by “The Best Bank in Macedonia” at the Europe Banking Awards, and also won the award from “Finance Central Europe,” the award for best automated chatbot tool, three recognitions from Visa, Inc. for exceptional performance and partnership, and the certificate for Fair financial services for consumers. As a support to outstanding user experience, one new branch was opened, and another was fully renovated, both equipped according to the most modern security, architectural, and technological standards. Several improvements were made to mobile and electronic banking, which were mostly aimed at increasing security during their use, as a response to the increased risk and the generally growing trend of cyber-attacks. The bank made improvements to the loans approved through mobile banking, enabling better service for its clientele, and increased throughput and sales of the product. Financial performance Table 22: Key performance indicators of NLB Banka, Skopje(i) in EUR thousands 2022 2021 Change YoY Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax 53,932 21,948 -31,778 -2,434 41,668 37,874 50,386 18,043 -28,619 3,244 43,054 39,000 Financial position statement indicators Total assets 1,847,521 1,770,587 Net loans to customers 1,170,692 1,084,075 Gross loans to customers 1,234,343 1,144,420 Deposits from customers 1,462,015 1,399,501 Equity 265,844 243,267 7% 22% -11% - -3% -3% 4% 8% 8% 4% 9% 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 18.2% 3.1% 15.0% 2.1% 41.9% 18.0% 3.1% 15.9% 2.4% 41.8% 0.2 p.p. 0.0 p.p. -0.9 p.p. -0.2 p.p. 0.1 p.p. 54,549 59,728 -9% 3.6% 16.3% 80.1% 4.3% -0.7 p.p. 16.9% 77.5% -0.6 p.p. 2.6 p.p. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 80 NLB Banka, Banja Luka EUR 21.0 million Result b.t. 20.1% Market share by total assets In 2022, the bank is the second most important bank in the Republic of Srpska market. The market share in loans to individuals increased by 1.3 p.p. to 19.7%. The predominant strength of the Bank was its market position in the corporate and retail segments, and a very strong deposit base. The bank received a “Golden BAM” award for the highest ROA and ROE on the local market for several consecutive years. 4% Financial performance Table 23: Key performance indicators of NLB Banka, Banja Luka(i) Contribution to NLB Group’s result b.t. 2nd Largest bank in the Republic of Srpska in EUR thousands 2022 2021 Change YoY Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax 23,594 14,941 -17,293 -280 20,962 19,281 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 995,308 523,238 540,533 796,668 96,237 16.0% 2.6% 20.2% 2.0% 44.9% 8,272 20,087 13,128 -15,182 1,379 19,412 18,180 927,152 471,144 488,672 759,915 97,149 16.9% 2.4% 17.0% 2.1% 17% 14% -14% - 8% 6% 7% 11% 11% 5% -1% -0.9 p.p. 0.2 p.p. 3.2 p.p. 0.0 p.p. 45.7% -0.8 p.p. 9,371 -12% NPL ratio (internal def.: NPL/Total loans) Market share by total assets (ii) LTD 1.1% 1.3% -0.1 p.p. 20.1% 65.7% 19.1% 62.0% 1.0 p.p. 3.7 p.p. (i) Data on a stand-alone basis as included in the consolidated financial statements of the Group. (ii) Data for 2022 as at 30 September 2022. Business performance Retail banking Retail banking recorded excellent double-digit YoY growth in gross loans (15%), while deposits grew by 5% YoY. Consumer loans increased by 21% and housing loans by 10% YoY. Housing loans still dominated in retail loans (51% of gross retail loans), while consumer loans represented 46%. The market share in retail loans was 1.3 p.p. higher and reached 19.7%, while the market share in retail deposits also increased by 2.2 p.p. and was 27.2%. The key drivers of income growth were interest income from new loan production and income from payments processing. The focus remains in further growth of the retail portfolio, with special emphasis on introducing additional services for customers, especially in the field of digitalisation. Corporate banking Corporate banking recorded YoY growth in deposits (17%), as well as in gross loans (12%). The market share in loans consequently increased by 1.1 p.p. to 15.4%. The focus remains on cross-selling activities and raising awareness about environmentally responsible business. A Group project, #FrameOfHelp was successfully implemented in 2022, and had a great impact on the market of the bank's image as the “Bank supporting Sustainability.” MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 81 NLB Banka, Sarajevo In 2022, the bank marked solid performance and remarkable loan growth of 15% by boosting the bank's market share. The predominant strength of the bank was in consumer lending and the development of innovative retail products, largely contributing to the high share of net non-interest income Business performance Retail banking (34% of net fee and commission income in total net operating Retail banking recorded YoY growth in gross loans (18%), driven EUR 12.4 million Result b.t. 5.9% Market share by total assets 3% Contribution to NLB Group’s result b.t. 6th Largest bank in the Federation of BiH income). Improving customer experience was achieved with the introduction of new digital products and robotic process automation (RPA) solutions. Financial performance Table 24: Key performance indicators of NLB Banka, Sarajevo(i) in EUR thousands 2022 2021 Change YoY Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax 19,524 12,152 -18,304 -982 12,390 11,436 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(ii) LTD 838,117 521,326 542,001 673,402 90,608 16.5% 2.6% 12.5% 1.5% 57.8% 16,986 2.3% 5.9% 77.4% 17,795 10,256 -16,183 -920 10,948 10,012 727,860 452,977 473,118 593,026 87,838 16.9% 2.8% 10.7% 1.5% 57.7% 19,046 10% 18% -13% -7% 13% 14% 15% 15% 15% 14% 3% -0.4 p.p. -0.1 p.p. 1.8 p.p. 0.0 p.p. 0.1 p.p. -11% 3.1% -0.7 p.p. 5.5% 76.4% 0.4 p.p. 1.0 p.p. (i) Data on a standalone basis as included in the consolidated financial statements of the Group. (ii) Data for 2022 as at 30 September 2022. by growth of housing and consumer loans. Significant growth of housing loans of 28% YoY was the result of increased demand, many campaigns, and increased engagement of employees. The share of housing loans in total retail loans increased by 1.8 p.p., to 22.3%. The average interest rate in the retail segment decreased (2022: 5.37%; 2021: 5.73%). The bank continued with activities aimed to increase the active number of e- and m-banking users, with 133% increase in 2022, while the number of transactions increased by 39% YoY. Corporate banking The corporate banking segment recorded YoY growth in gross loans (11%). Focus was on increasing the client loan portfolio with acquisition of new creditworthy clients. Also, a positive trend was recorded in the volume of guarantees portfolio, mainly due to the introduction of a new product ‘Guarantee Line.’ Corporate deposits recorded YoY growth of 32%, with a change in the maturity structure, namely the share of corporate term deposits increased by 10% YoY. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 82 NLB Banka, Prishtina In 2022, the bank was a leader in terms of profitability and ranked as the second biggest bank in Kosovo. The predominant strength of the bank was in providing a full Business performance spectrum of financial services to retail and corporate clients, and being a market leader in innovations in the local banking Retail banking EUR 36.1 million Result b.t. 16.7% 7% Contribution to NLB Group’s result b.t. 2nd Market share by total assets Largest bank in the country sector. A noticeable boost has been observed in e-banking usage that translates to an increased number of e-banking users by 27% YoY The bank received the EBRD award “Most Active Local Bank in Using TFP Line” for several consecutive years. Financial performance Table 25: Key performance indicators of NLB Banka, Prishtina(i) in EUR thousands 2022 2021 Change YoY Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax 39,844 8,547 -14,348 2,052 36,095 32,402 34,459 7,374 -13,546 -1,064 27,223 24,436 Financial position statement indicators Total assets 1,083,638 930,545 740,775 777,202 894,242 113,844 15.7% 4.1% 29.2% 3.3% 29.7% 15,705 634,529 672,376 798,790 98,856 17.3% 3.8% 22.4% 2.7% 32.4% 15,614 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 16% 16% -6% - 33% 33% 16% 17% 16% 12% 15% -1.6 p.p. 0.2 p.p. 6.7 p.p. 0.6 p.p. -2.7 p.p. 1% (i) Data on a standalone basis as included in the consolidated financial statements of the Group. In 2022, the bank recorded YoY growth in gross loans (18%) and deposits (7%). The retail loan portfolio was dominated by housing loans (68%), while consumer loans occupied 32% of gross loans. Growth was recorded in housing 14% and in consumer loans 28% YoY with the key drivers of income growth being consumer loans. The growth in retail was mainly driven by an increase in loan demand and a further increase of the general consumption pattern. This has resulted in the price increase of real-estate driven by inflation. In addition, the bank has signed several partnership agreements with construction and trade companies to finance their products, and boost the performance committed by the sales department. Corporate banking Corporate banking recorded YoY growth in gross loans (14%), which was mainly driven by the disruption of the normal supply chain (external factors) and the cross-selling of products through existing corporate clients targeting new retail and SME clients, as well. Optimisation of bank’s liquidity structure was highlighted by a 27% YoY increase in the deposits. The key drivers of income growth were working capital loans, credit lines, and overdrafts. The bank offers fast, safe, and reliable execution of payments, and competitive pricing led to an increased number of payments contributing to the non-interest income growth. Cooperation on the Group level resulted in the financing of the construction of a major locally recognised project that 1.7% 1.9% -0.3 p.p. contributed largely to clean energy production from renewable 16.7% 82.8% 16.3% 79.4% 0.4 p.p. 3.4 p.p. sources. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 83 NLB Banka, Podgorica EUR 18.2 million Result b.t. 13.3% 4% Contribution to NLB Group’s result b.t. 2nd Market share by total assets Largest bank in the country After the merger of Komercijalna Banka, Podgorica and NLB Banka, Podgorica in 2021, the merged bank became the second largest financial institution in Montenegro. On its local market, the bank is categorised as one of the systemically important banks. The predominant strength of the bank was Business performance Retail banking seen in housing and consumer loans, where the bank was an Retail banking recorded YoY growth in gross loans (9%) and important player on the local market. The year was marked with numerous campaigns for housing loans and innovations with regard to improving the offer for individual clients and for legal entities as well, such as developing a modern call centre and investing in digital channels. In July 2022, the deposits (9%). A major part of the retail loan portfolio was dominated by consumer loans (50%), while housing loans occupied 48%. Growth in gross loans was recorded mainly by the increase in consumer loans volume by 14% YoY, and housing loans by 7% YoY. Consumer loans growth was affected Bank received the recognition 'The Best Bank in Montenegro’, by salary increase through the state program “Europe now”, awarded by the world most influential financial magazine thus boosting higher demand. "Euromoney.” MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Financial performance Table 26: Key performance indicators of NLB Banka, Podgorica(i) in EUR thousands 2022 2021 Change YoY Key performance indicators Net interest income Net non-interest income Total costs Impairments and provisions Result before tax Result after tax 29,607 7,720 -20,252 1,165 18,240 16,613 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 851,630 532,254 552,470 692,872 106,937 18.4% 4.0% 16.7% 2.1% 54.3% 32,610 4.6% 13.3% 76.8% 21,953 6,161 -17,351 613 11,376 10,050 751,351 491,579 514,308 609,792 92,643 16.3% 4.0% 13.1% 1.7% 61.7% 42,166 35% 25% -17% 90% 60% 65% 13% 8% 7% 14% 15% 2.0 p.p. 0.0 p.p. 3.6 p.p. 0.4 p.p. -7.5 p.p. -23% 7.0% -2.4 p.p. 14.1% -0.8 p.p. The bank was the first bank in the market that expanded its offer by introducing video calls to the market for communication with clients. The bank also offered usual products such as ‘Credit on the Spot,’ which enables purchases on credit in cooperation with partner merchants, without the need to come to the bank. NLB Credit on the Spot involves quick and simple approval of an interest-free loan at more than 30 merchants in Montenegro, in just two minutes. The credit is approved when making a purchase at selected merchants, on the spot. Corporate banking The corporate banking segment recorded YoY growth in gross loans (8%) and deposits (26%). The loan portfolio predominantly consisted of the large corporates’ portfolio, which increased by 11% YoY. Record new production was recorded in both segments, large corporate and SME. The bank presented a new, innovative, practical, and cost- effective bank service that enriched its offer for companies. It is a fiscal cash register where it is possible to pay by card like on a standard POS terminal, and was a novelty for the local market. This device can be used simultaneously for cash payments and digital payments such as card payments and via the mobile phone. As with a standard POS terminal, it is possible for customers to make payments using mobile wallets or other mobile devices that support payment using NFC technology. 80.6% -3.8 p.p. The bank was the first bank on the local market to introduce an (i) Data on a standalone basis as included in the consolidated financial statements of the Group. online account opening service for legal entities to the market, which significantly simplified and accelerated the account opening process, directly on the bank's website. Companies use a special platform to enter the necessary documentation for opening a business account. Contents 84 NLB DigIT On May 2022, NLB DigIT was officially established as an IT service company to act as a regional hub supporting the Group members and delivering digital transformation projects. The company was built on the resource pool of the Group Competence Centre of NLB Banka, Beograd, and additional external staff onboarding. NLB DigIT’s primary focus is to deliver services for Group entities with a high level of quality in domains where IT resources and expertise are scarce throughout the region. NLB DigIT provides services mostly in key areas such as IT security setup for all the banks, IT delivery, data management, and others. Leasing operations expansion in SEE In 2022, the Group started to gradually expand its leasing operations in the region of operations by establishing a presence in North Macedonia and Serbia. In North Macedonia, the company NLB LIZ&GO DOO Skopje was established in September 2022, and was afterwards renamed to NLB Lease&Go, Skopje. NLB Lease&Go, Ljubljana became the owner of Zastava Istrabenz Lizing in Serbia in November and later renamed it to NLB Lease&Go Leasing, Beograd. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 85 Financial Markets in Slovenia Financial performance Table 27: Performance of the Financial Markets in Slovenia segment Contribution to NLB Group Figure 42: Contribution to NLB Group 7% Result b.t. 9% Net interest income The segment is focused on the Group’s activities on international financial markets, including treasury operations. In the changed interest rate environment, continuous focus was on prudent liquidity reserves management. In 2022, the Bank was very active on the wholesale market, with three bond issuances in different asset classes (AT1, Tier 2, and SP notes) for a total of EUR 607 million. Net interest income o/w ALM(i) Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Result before tax Balances with Central banks Banking book securities Interest rate(ii) Borrowings Interest rate(ii) Subordinated liabilities (Tier 2) Interest rate(ii) Other debt securities in issue Interest rate(ii) in EUR millions consolidated Change YoY o/w N Banka contribution 2022 2021 47.3 31.1 -0.7 46.6 -9.4 37.2 -3.4 33.8 26.4 17.1 -2.3 24.1 -8.6 15.5 0.3 15.8 20.9 14.0 1.6 22.5 -0.8 21.7 -3.7 18.0 8.9 7.6 -0.2 8.7 -0.2 8.6 2.6 11.2 31 Dec 2022 31 Dec 2021 Change YoY 3,373.7 2,993.3 0.74% 160.5 -0.72% 508.8 4.16% 307.2 6.00% 2,982.2 2,977.5 0.68% 873.5 -0.46% 288.5 3.70% 391.4 15.9 -713.0 220.3 307.2 0.06 p.p. -0.26 p.p. 0.46 p.p. 6.00 p.p. 79% 82% 69% 93% -9% 140% - 114% 13% 1% -82% 76% - (i) Net interest income from assets and liabilities with the use of FTP. (ii) Interest rates only for NLB. Net interest income Net interest income was EUR 20.9 million (79%) higher YoY, of which EUR 8.9 million was due to the N Banka contribution. Excluding N Banka, net interest income increased primarily due to the changed FTP policy, which in H1 partially transferred the costs of placing the excess liquidity from treasury to retail and the corporate segment to de-stimulate the deposit collection, while in H2 net interest income growth was driven by higher yields on treasury investments. Net non-interest income Net non-interest income was negative, mostly due to the negative effect from securities divestments and higher premium for RWA optimisation measures. Balances with central bank There was an increase in balances with central banks (EUR 391.4 million YoY), due to the piling up of non-banking sector deposits and issues of new bonds for MREL purposes outweighing the early prepayments of wholesale funding. Wholesale funding For meeting MREL requirement, the Bank issued new EUR 300 million Senior Preferred notes in July 2022. In contrast, the subordinated Tier 2 debt increased by EUR 220 million due to the subordinated Tier 2 notes issuance on the international market in Q4 2022 (the Bank holding four outstanding subordinated notes). Borrowings decreased by EUR 713.0 million YoY mainly due to early prepayment of TLTRO (EUR 750 million) and certain credit lines (EUR 70 million) in H1. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 86 Business performance13 The Group’s ALM Focus The purpose of the Group’s 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 members. 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, and partly as a result of the acquisition of N Banka. The Group manages its positions and stabilises its interest margin by actively adjusting pricing policy for loans and by strict pricing of its stable deposit base, whereas for managing interest rate risk exposure the Group keeps outstanding plain vanilla 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. 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. Liquidity management 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 (LCP). Organisation Liquidity management in the Group is decentralised and therefore each Group member manages its own liquidity on operational and strategic levels. 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, according to LCR calculation, are treated as inflows. Likewise, liquid assets are managed by each Group member on its own. 13 This business overview includes the operations of the Group's ALM, due to more comprehensive presentation of the operations on the group level. 78%government securities in the Group’s banking book securities portfolio 2.7 years average duration 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 2022 Financial Report Contents 87 Banking book securities portfolio The purpose of the banking book securities is to provide liquidity, along with stabilisation of the interest margin, and Figure 43: Banking book securities portfolio of NLB Group and NLB by geographical structure and asset class as at 31 December 2022 (in EUR millions) Geographical structure interest rate risk management. At year-end, the banking book the Netherlands debt securities portfolio constituted 19.7% of the Group’s total assets (20.7% of Bank’s total assets). In the rising interest rate environment of 2022, the value of the portfolio partially diminished on the account of bonds valued at fair value through other comprehensive income (FVOCI). This portfolio at year-end represented 59.7% of total Group and 44.7% of Bank securities portfolio with the average duration of 2.0 and 2.6 years respectively. Negative valuation of FVOCI Group portfolio during 2022 amounted to EUR 168.6 million (net of hedge accounting effects). As of 31 December 2022, total accumulated other comprehensive income for FVOCI debt securities was negative in the amount of EUR 144.6 million (Note 5.4.(c) of the financial part of this report), consisting of EUR 168.7 million negative valuation and EUR 24.1 million of related deferred taxes and impairments. Approximately 60% of accumulated other comprehensive income for FVOCI debt securities (EUR 82,913 thousand) was as at 31 December 2022 already absorbed by the capital, with 40% of the valuation result for sovereign exposures exempt from the deduction in the capital due to the use of temporary treatment for FVOCI for sovereign securities. As of January 2023, the so-called ‘quick fix’ from June 2020 ceased to apply. As and when these exposures are repaid (more than 70% of them mature over the next 3 years) all deductions from capital will be reversed. New FVOCI investments are typically placed at durations of 1 year maximum. Further information is available in Notes 6.1. (j), 6.1. (o) and 6.5. (e) of the financial part of this report. Since the beginning of the bank stress and market turmoil, the financial institutions’ credit spreads widening and overall risk- free rates decrease were observed, which is currently positively impacting the Group’s FVOCI positions. Further information is available in the Chapter Events After the End of the 2022 Financial Year. Finland Austria BiH 7 Belgium Germany N. Macedonia 70 France Slovenia Serbia Other 4 Asset class distribution Corporate bonds Subordinated debt Multilateral bank bonds GGB Covered bond 13 22 31 31 138 138 154 154 Bank senior unsecured bonds Government bonds 277 277 430 435 157 170 142 172 148 175 185 185 185 223 244 324 318 354 Total NLB: EUR 2,935 million Total NLB Group: EUR 4,757 million 635 692 NLB Group NLB 924 1,085 1,292 Total NLB: EUR 2,935 million Total NLB Group: EUR 4,757 million 1,894 NLB Group NLB 3,700 Table 28: Maturity profile of NLB Group and NLB banking book securities as at 31 December 2022 Characteristics of the banking book securities portfolio The portfolio is well diversified from the geographical, asset class and maturity profile perspective. In 2022, due to the Ukraine-Russia conflict, some exposures to the neighbouring Domestic securities (the Group’s strategic markets) - Slovenia - Other SEE countries were lowered, while the nominal value of EUR 20.6 International securities 597.7 824.9 64.7 533.0 741.2 222.1 602.8 647.5 481.1 167.8 313.3 581.1 million in Russian sovereign bonds exposure on the day of the Total 1,338.9 1,472.4 1,062.1 Russian invasion, was partially left to mature (exposure EUR 13.1 341.3 2,245.0 692.2 1,552.8 2,511.5 237.6 103.7 541.7 883.1 57.2 44.9 12.3 481.7 4,756.5 538.9 840.8 2024- 2025 208.1 184.9 23.2 632.7 NLB Group 2023 2024- 2025 2026- 2027 2028+ Total 2023 NLB 2026- 2027 211.5 167.8 43.7 577.0 788.6 in EUR millions 2028+ Total 248.7 237.6 11.1 517.8 766.5 725.5 635.2 90.3 2,209.3 2,934.8 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 88   million, maturing in April 2022, settled in May 2022). The other part, the EUR 7.5 million exposure which matures in September 2023 was considered as a technical default at the end of 2022. This exposure was sold and successfully settled at the beginning of February 2023. Further information is available in Note 5.4. of the financial part of this report. As the Group actively works on incorporating ESG in its business profile, the portfolio reflects the growing market of ESG bonds. Currently, these bonds (EUR 191.2 million) have a share of 4.0% in the Group banking book securities portfolio (5.7% in the Bank’s), and it grows simultaneously with the share of ESG reinvestments. 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 requirement. The Bank was active on the wholesale market with the issuance of EUR 300 million Senior Preferred notes in July, EUR 82 million Additional Tier 1 notes in September, and EUR 225 million Tier 2 notes in November. All instruments are MREL eligible, while Additional Tier 1 and Tier 2 notes also improve the capital The average duration of the Group banking book securities is approximately 2.7 years as at year-end (3.4 years of the Bank’s). position. The average yield achieved in 2022 on the Group’s banking book securities portfolio was 1.11% (2021: 1.01%), 0.74% of the Bank’s (2021: 0.68%). The Bank also optimised its funding structure by exercising an early repayment of the EUR 70 million credit line facility. NLB Group members were also active on the wholesale market. More specifically, they obtained funding from international financial institutions in a total amount of EUR 10 million, which will be used for NLB Banka, Sarajevo for meeting its future MREL requirement. 3 bond issuances on international capital markets in different asset classes (AT1, Tier 2, and SP notes) Table 29: Overview of outstanding securities Type of bond ISIN code First call date Interest Rate Nominal Value in EUR millions Tier 2 Tier 2 Tier 2 SI0022103855 Issue Date 6 May 2019 Maturity 6 May 2029 6 May 2024 XS2080776607 19 November 2019 19 November 2029 19 November 2024 XS2113139195 5 February 2020 5 February 2030 5 February 2025 Senior Preferred XS2498964209 19 July 2022 19 July 2025 19 July 2024 Additional Tier 1 SI0022104275 23 September 2022 Perpetual between 23 September 2027 and 23 March 2028 4.2% p.a. 3.65% p.a. 3.40% p.a. 6.0% p.a. 9.721% p.a. Tier 2 XS2413677464 28 November 2022 28 November 2032 28 November 2027 10.750% p.a. 45 120 120 300 82 225 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 89 Non-Core Members Financial performance Table 30: Results of the Non-Core Members segment 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. EUR 18.4 million reduction of gross loans to customers in 2022 Net interest income Net non-interest income Total net operating income Total costs Result before impairments and provisions Impairments and provisions Result before tax Segment assets Net loans to customers Gross loans to customers Investment property and property & equipment received for repayment of loans Other assets Non-performing loans (gross) 2022 0.3 4.4 4.7 -12.6 -7.9 -0.8 -8.7 2021 1.3 5.9 7.2 -11.4 -4.1 5.4 1.3 31 Dec 2022 31 Dec 2021 61.5 13.8 35.4 39.6 8.1 32.3 95.9 24.3 53.9 65.6 6.0 45.0 Result before tax The segment recorded a EUR 8.7 million loss before tax. Total assets A decrease of the total assets of the segment YoY (EUR 34.4 million) was in line with the divestment strategy of the non-core segment. in EUR millions consolidated Change YoY -1.1 -1.5 -2.5 -1.2 -3.8 -6.2 -10.0 -34.4 -10.5 -18.4 -26.0 2.1 -12.8 -80% -25% -35% -11% -91% - - -36% -43% -34% -40% 36% -28% Change YoY MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 90 Business performance The wind-down of the Non-Core Members segment The wind-down of the Non-Core Members segment in 2022 included: • divestment of non-core Group members • active management of real-estate assets Divestment of non-core Group members Liquidation process A liquidation process is ongoing in all non-core leasing and trade finance subsidiaries and some real estate subsidiaries. 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 that 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. Active management of real estate assets Divestment process The divestment process of the 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 2022, real-estate transactions with a total sales value of EUR 242.1 million were executed or supported, and directly or indirectly contributed to a EUR 646.5 million in NPL reduction, of which EUR 23.9 million in 2022 alone. EUR 48.3 million the total sales value of real-estate transactions executed or supported by the real-estate team in 2022 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 91 Our objectives are set prudently and strategically, focusing on the innovative, higher recurring growth financial products, and addressing digital innovation. In NLB Banka, Prishtina we started 2022 with a sense of optimism, confidence, and trust in what we do. We took brave decisions promoting loan demand, supporting our clients towards their investments, contributing to economic recovery, and actively supporting wider socio-economic development and a better quality of life through our CSR activities with commitment to different groups of society. The remarkable performance led to a record high profit and rank our bank as the first in the market in terms of profitability. The bank also received the EBRD award “Most Active Local Bank in Using TFP Line” for several consecutive years. We remain fully dedicated and confident of achievements on our journey towards delivering our vision and creating better footprints for all. Pictured: NLB Banka, Prishtina employees Risk Management The self-funded model, strong liquidity, and a solid capital position continued in 2022, demonstrating the Group’s financial resilience. Efficient management of risks and capital is crucial for the Group to sustain long-term profitable operations. A robust Risk Management framework is comprehensively integrated into decision-making, steering, and mitigation processes within the Group, with the aim of proactively supporting its business operations. The Group 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. 1.3%NPE (EBA def.) The Group has a well-diversified business model. In accordance low. The Group must maintain an appropriate level of liquidity with its strategic orientations, it intends to be a sustainably at all times, and also pursue an appropriate structure of the profitable; predominantly working with clients on its core sources of financing. markets; providing innovative, but simple customer-oriented solutions; and actively contributing to a sustainable, more Table 31: NLB Group’s Key Risk Appetite indicators (KRIs) balanced, and inclusive economic and social system. Efficient managing of risks and capital is crucial for the Group to 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, and the competence centre for seven banking subsidiaries. Figure 44: Risk profile of NLB Group as at 31 December 2022 2.4% 1.9% 8.2% 8.9% 64.7% 10.2% 3.8% 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 dominant risk category, followed by credit spread and interest rate risk in the banking book, and operational risk. Management of credit risk focuses on moderate risk-taking, striving to assure a diversified credit portfolio, adequate credit portfolio quality, the sustainable cost of risk, and optimal return considering the risks assumed. The Group has limited exposure to other aforementioned risks, while market risk and other non- financial risks are less important from a materiality perspective. The Group integrates and manages ESG risks within the existing types of risks, such as credit, liquidity, market, and operational risk, as part of its risk management framework. These risks are estimated as low, except for transition risk in the area of credit, which is assessed as low to medium. Liquidity risk tolerance is KRIs Total capital ratio CET1 ratio LCR NSFR Cost of Risk NPL ratio (EBA definition) NPE (EBA definition) Interest rate risk (EVE) 31 Dec 2022 19.2% 15.1% 220.3% 183.0% 14 bps 2.4% 1.3% -5.1% In 2022, the war in Ukraine did not have a meaningful direct impact on the quality of the credit portfolio, nor on the liquidity of the Group. The Group’s credit portfolio quality remained solid, with a stable rating structure, portfolio diversification, and lower level of NPLs. In the light of increasing energy prices, inflationary pressures, and a forecast of a decrease in economic growth, the Group has thoroughly analysed potential impacts on its credit portfolio and made necessary adjustments. The most affected industries or segments are carefully monitored with the intention to detect any additional significant increase in credit risk at a very early stage. The Group experienced high new corporate and retail loan origination across all markets in 2022, also influenced by expectations of the higher interest rate. The current economic situation led to sluggish growth projections, persistent inflationary pressures, and interest rate hikes. Based on that, slower lending growth in all segments is foreseen for 2023. 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. Increased uncertainty and the changes in expectations of macroeconomic development affected forecasts for some economies in the NLB Group. Hence, an executive decision was made to adjust risk expectations by shifting the scenario's weights to reflect more severe development. The cost of risk remained at a relatively low level, at 14 bps, mainly due to further positive development in NPL resolution in the whole region. Though the war in Ukraine, coupled with its implications on the business environment, the Group faced a stable liquidity MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 93 position and managed to stay well capitalised in both the The organisation and delineation of competencies is designed Figure 45: NLB Group’s Risk Management framework Group and banking member levels. The Group is still perceived to prevent conflicts of interest, and to ensure a transparent and as a safe heaven, and therefore, in H2 2022 again faced documented decision-making process that is subject to an growing liquidity, while the impacts of the crisis did not cause appropriate upward and downward flow of information. any material liquidity outflows. Significant attention was put into the structure and concentration of liquidity reserves by Competence line Risk Management in NLB is, by encompassing incorporating early warning systems, while keeping in mind several professional areas, in charge of: the potential adverse negative market movements. Raising the • formulating and controlling the Group’s interest rate environment and corresponding increased market Risk Management policies, demand for fixed interest rate products resulted in moderate • setting limits, interest rate risk exposure, which stayed within the risk appetite • overseeing the harmonisation, tolerance. • regular monitoring of risk exposures and limits based on centralised reporting at the Group level. In 2022, the Group was included into the ECB Climate Stress test exercise, consisting of three modules. The exercise was Harmonization of risk management framework of N Banka, conducted in the first half of 2022 and the aggregate results which was acquired in March 2022, was fully implemented. were published in July 2022. By performing this exercise, Completion of the merger process is expected within this year. the ECB assessed how banks are prepared for dealing with financial and economic shocks stemming from climate risk. The The Group puts great emphasis on the risk culture and Group’s overall results were within the range of average peer awareness across the entire Group. The Group’s Risk results. Additionally, in 2023, the Group will be included into Management framework is forward-looking and tailored to its the regular EBA EU-wide/ECB SSM Stress test exercise. This business model and corresponding risk profile. The main risk EU-wide stress test is designed to provide valuable input for principles and limits are set forth by the Group’s Risk Appetite assessing the resilience of the European banking sector in the and Risk Strategy, and designed in accordance with its business current uncertain and changing macroeconomic environment. strategy. The Group performs the risk identification process on The Bank is, as a systemic bank, involved in the Single Supervisory Mechanism (SSM). Supervision is under the jurisdiction of the Joint Supervisory Team (JST) of: ECB BoS ECB regulations are followed by the Group, where the Group subsidiaries operating outside Slovenia are compliant with the rules set by the local regulators. Third party equivalents are approved in Serbia, BiH, and North Macedonia, resulting in alignment of the local regulation with CRR rules. 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. a 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 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 and regulations. Risk Management focuses on managing and mitigating risks in line with the Group’s Risk Appetite and Risk Strategy, representing the foundation of the Group’s Risk Management framework. Within these frameworks, the Group monitors a range of risk metrics to assure the Group’s risk profile is in line with its Risk Appetite. In addition, the Group is constantly enhancing its Risk Management system, where consistent incorporation of ICAAP, ILAAP, the Recovery plan, and other internal stress-testing capabilities into the Risk Management system is essential. Moreover, the Group puts great emphasis on their integration into the overall Risk Management system to assure proactive support for informed decision-making. ICAAP & ILAAP inputs Business strategy Risk identification Risk Appetite (Limit system) Capital and Financial planning 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 established an internal ESG stress-testing concept to identify the most relevant financial vulnerabilities stemming from climate risk, which will be further enhanced by considering available ESG-related data. Such a stress-testing framework is the subject of a regular internal validation cycle and related procedures where the Group established a comprehensive validation framework. That is to say, the Group supports a strong validation governance process and controls over applied and selected risk approaches and internal models. The business and operating environment, relevant for the Group operations is changing, with trends such as sustainability, social responsibility, governance, changing customer behaviour, emerging new technologies and competitors, actively MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 94 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 war in Ukraine and its overall economic implication did not cause any material 2.40% liquidity outflows. Strong liquidity positions are held at the Group and individual subsidiary bank levels. Group LCR slightly decreased to 220.3% (by 32.3 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 39.0% 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 a very stable and constantly growing base. LTD increased to 65.3% (31 December 2021: 60.0%), remaining at very comfortable level. contributing to a more sustainable, balanced, and inclusive Figure 46: NLB Group’s Pillar 2 Requirement evolution 3.50% 3.25% 2.75% 2.75% 2.60% 2018 2019 2020 2021 2022 2023 One of the key aims of Risk Management is to preserve a whereby its fulfilment is regularly analysed and monitored. prudent level of the Group’s capital position. The Group NLB complies all interim targets. More information on MREL monitors its capital position at the Group and individual is available in the chapter Funding Strategy and MREL subsidiary bank level in accordance with the Risk Appetite, also Compliance. MREL requirement forms part of the Group’s risk appetite, economic and social system, as well increasing new regulatory requirements. It should be noted that Risk Management is continuously adapting with the aim of detecting and managing new potential emerging risks. Proactive Risk Management in 2022 Prudent capital level position and achieved interim MREL targets incorporating normative and economic perspectives as part of the established ICAAP process. As at 31 December 2022, the Group had a very solid capital position and TCR of 19.2% (1.4 p.p. YoY increase). The CET1 ratio, representing capital of the highest quality, stood at 15.1% (0.4 p.p. YoY decrease). The capital is higher mainly due to the inclusion of the negative goodwill from the acquisition of N Banka in retained earnings in the amount of EUR 172.8 million, a partial inclusion of 2022 profit in the amount of EUR 161.5 million, additional Tier 1 notes issued in September in the amount of EUR 82 million, and subordinated Tier 2 notes issued in November in the amount of EUR 222.9 million,14 which compensated the negative revaluation adjustments on FVOCI securities (EUR -98.5 million YoY). An increase of RWA in NLB Group for credit risk relates to the acquisition of N Banka and lending activity in all NLB Group banks. RWA growth was partially mitigated by CRR eligible real estate collaterals from BiH, Serbia, and North Macedonia. The increase in RWAs for market risks and CVA is the result of higher RWA for FX risk and higher RWA for CVA risk. The main effect of an increase in the RWA for operational risks refers to the acquisition of N Banka. Figure 47: NLB Group’s LCR 300% 280% 260% 240% 220% 200% 180% 160% 140% 120% 100% 31 D ec 2 0 21 31 Ja n 2 0 22 28 Fe b 2 0 22 31 M ar 2 0 22 3 0 A pr 2 0 22 31 M a y 2 0 22 3 0 Ju n 2 0 22 31 Jul 2 0 22 31 A u g 2 0 22 3 0 S e p 2 0 22 31 O ct 2 0 22 3 0 N ov 2 0 22 31 D ec 2 0 22 LCR NLB Group As at 31 December 2022, the Group meets all fully loaded regulatory requirements. Moreover, enhanced overall corporate governance in recent years led to a lower P2R, which decreased Maintaining adequate credit portfolio quality from 2.60% applicable in 2022 to 2.40% applicable from Maintaining adequate credit portfolio quality is the most 1 January 2023, while Pillar 2 Guidance remains at a low level important goal, with the focus on cautious risk-taking and 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. of 1%. 14 T2 notes were issued in the amount of EUR 225 million, amount included in the capital was EUR 222.9 million (due to issuance below par). 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 The Group is actively present on SEE markets by financing existing and new creditworthy clients. The Group’s lending strategy focuses on its core markets of retail, SME, and selected MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 95 Figure 48: NLB Group structure of the credit portfolio(i) (gross loans) by segment (in EUR millions) and rating(ii) Institutions 369 State(iii) 4,746 SME 3,649 65% 63% 60%63% 62% 31 Dec 2019 31 Dec 2020 w/o KB 31 Dec 2020 31 Dec 2021 31 Dec 2022 EUR 18.4 billion Corporates 2,897 A Highest quality 30% 28% 33% 32% 33% NPLs 3% 3% 4% 3% 3% 2% 2% 2% 1% 1% 2% 2% 2% 1% 1% B C D E Default Retail consumer 2,812 Retail housing 3,932 (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 >90 days 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. corporate business activities within the region and EU. On Lending growth was observed in the corporate, as well as in portfolio consists of other liquid assets. The credit portfolio the Slovenian market, the focus is on providing appropriate the retail segments in 2022. In the circumstances of the growing remains well diversified, and there is no large concentration in solutions for retail, medium-sized companies, and small enterprise segments, whereas on the corporate segment, the EURIBOR, there was a certain transfer to fixed interest rates, especially in the housing loans market, which led to increased any specific industry or client segment. The share of the retail portfolio in the whole credit portfolio is quite substantial, with Bank established cooperation with selected corporate clients new production and the general increase in the volume of mortgage loans as the still prevailing segment. (through different types of lending or investment instruments). retail exposures. In the corporate segment, the Bank seized All other banking members in the SEE region where the Group opportunities to finance some of the top corporate clients in is present are universal banks, mainly focused on the retail, the region, while keeping the focus on SME as its key segment. medium-sized companies, and small enterprise segments. Their The current structure of credit portfolio (gross loans) consists primary goal is to provide comprehensive services to clients by of 36.6% retail clients, 15.7% large corporate clients, and applying prudent Risk Management principles. 19.8% SMEs and micro companies, while the remainder of the Table 32: Overview of NLB Group loan portfolio by industry as at 31 December 2022 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 Corporate sector NLB Group 216.7 79.8 326.2 23.7 569.8 13.9 550.5 224.7 46.8 314.9 1,458.8 54.2 187.1 188.7 312.8 16.8 629.5 51.4 1,278.0 1.3 6,545.6 % 3.3% 1.2% 5.0% 0.4% 8.7% 0.2% 8.4% 3.4% 0.7% 4.8% 22.3% 0.8% 2.9% 2.9% 4.8% 0.3% 9.6% 0.8% 19.5% 0.0% 100.0% in EUR millions ∆ 2022 ∆ 2022 w/o N Banka 60.4 -28.4 15.5 1.0 135.1 0.6 232.4 104.5 8.9 70.8 367.7 3.8 11.8 16.3 61.5 4.8 56.2 7.5 234.9 0.8 1,366.1 4.9 -33.5 14.7 -4.3 97.9 -0.7 180.8 93.3 2.3 63.5 197.9 -0.6 -59.8 15.5 20.2 -0.6 28.7 -1.7 157.1 0.6 776.2 Retail sector Retail consumer 42% EUR 6.7 billion Retail housing 58% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 96 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Figure 49: NLB Group corporate and retail loan portfolio by interest rates as at 31 December 2022 Approximately 50% of the NLB Group corporate and retail Figure 50: NLB Group loan portfolio by stages as at 31 December 2022 loan portfolio is linked to a fixed interest rate, and the rest Corporate (incl. SME) Consumer Housing to a floating rate (mostly to the Euribor reference rate). The 64% 36% 40% 60% 36% 64% Fix Float Table 33: NLB Group loan portfolio by stages as at 31 December 2022 corporate segment is dominated by floating interest rates. In the retail segment, more than 60% of the loan portfolio is linked to a fixed interest rate, which is a result of considerable growth predominately of housing loans in 2022 and activities of changing the type of contractual interest rates for existing loans at the request of the client. FVTPL 0% Stage 3 2% Stage 2 3% Corporate 34% Institutions 2% State 27% Retail 37% Stage 1 95% Stage1 Credit portfolio Stage2 Stage3 & FVTPL Stage1 Stage2 Stage3 & FVTPL Provisions and FV changes for credit portfolio in EUR millions Credit portfolio Share of Total YTD change Credit portfolio Share of Total YTD change Credit portfolio Share of Total YTD change Provision Volume Provision Coverage Provision Volume Provision Coverage Provisions & FV changes Coverage with provisions and FV changes Total NLB Group o/w Corporate o/w Retail o/w State o/w Institutions NLB-G w/o N Banka o/w Corporate o/w Retail o/w State o/w Institutions 17,457.5 5,920.1 6,423.0 4,745.6 368.9 16,379.6 5,394.7 6,077.4 4,538.6 368.9 94.9% 90.4% 95.2% 100.0% 100.0% 95.0% 90.6% 95.3% 100.0% 100.0% 2,819.6 1,394.5 1,051.9 543.2 -170.0 1,741.6 869.1 706.3 336.2 -170.0 618.3 425.7 192.6 - - 558.9 377.3 181.6 - - 3.4% 6.5% 2.9% - - 3.2% 6.3% 2.8% - - 85.9 13.5 72.4 - - 26.5 -34.9 61.4 - - 328.1 199.9 128.0 0.1 0.1 304.7 183.7 120.9 0.1 - 1.8% 3.1% 1.9% 0.0% 0.0% 1.8% 3.1% 1.9% 0.0% - -43.4 -41.9 -1.7 0.1 0.1 -66.8 -58.0 -8.8 0.1 - 92.5 59.3 31.3 1.8 0.1 85.5 53.6 30.1 1.8 0.1 0.5% 1.0% 0.5% 0.0% 0.0% 0.5% 1.0% 0.5% 0.0% 0.0% 45.0 31.1 13.9 - - 39.8 26.8 13.0 - - 7.3% 7.3% 7.2% - - 7.1% 7.1% 7.2% - - 187.4 110.6 76.6 0.1 0.1 183.6 108.2 75.3 0.1 - 57.1% 55.3% 59.8% 99.1% 96.3% 60.3% 58.9% 62.3% 99.1% - Figure 51: NLB Group Corporate and Retail loan portfolio (valued at amortised cost) by stages Stage 1 by segment (in EUR millions) Stage 2 by segment (in EUR millions) Stage 3 by segment (in EUR millions) +31% YoY 5,920 4,526 4,136 3,207 3,170 +20% YoY 5,371 6,423 4,779 3,822 3,936 +3% YoY 427 427 426 412 367 +60% YoY 193 133 133 120 104 359 324 286 -17% YoY 242 200 -1% YoY 111 117 130 128 87 Corporate Retail Corporate Retail Corporate Retail 31 Dec 2019 31 Dec 2020 w/o KB 31 Dec 2020 31 Dec 2021 31 Dec 2022 The majority of the Group’s loan portfolio is classified as Stage 1 almost at the same level as at the end of 2021, i.e., at 95.2% in the retail segment as a result of the changed macroeconomic (94.9%), the remaining portfolio as Stage 2 (3.4%), and Stage 3 the retail segment, while in the corporate segment, despite the conditions and improved Early Warning System (EWS) in the and FVTPL (1.8%). The portfolio quality remains very stable, with adverse economic conditions, improved to the level of 90.4%, increasing Stage 1 exposures and a relatively low percentage which is a result of cautious lending policy and successful of NPLs. The percentage of the Stage 1 loan portfolio remains closure of NPL. The volume of Stage 2 exposures increased in subsidiary banks, nevertheless the increase remains relatively low compared to the entire portfolio volume. Contents 97 The Russia – Ukraine conflict did not have a meaningful trend of the non-performing credit portfolio stock continued, in dealing with clients with financial difficulties, resulting impact on the bank portfolio quality. The government adopted mostly due to repayments, cured clients, and the collection, and primarily from legacy portfolios, the Group has developed an intervention laws that contributed to a mitigation of fluctuations sale of claims. The non-performing credit portfolio stock in the extensive knowledge base both in the prevention of financial in energy prices for end users while large energy consumers Group decreased at the end of 2022 in comparison with the end difficulties for clients, to restructure viable clients in case of in the corporate segments set different strategies to eliminate of 2021 to EUR 328.3 million (the end of 2021: EUR 367.4 million). need, and to efficiently work out exposures with no realistic any material impact. The bank is closely monitoring any clients The combined result of contraction in the non-performing credit recovery prospects. This extensive knowledge base is available whose activity may be affected by the current situation on the portfolio stock and credit growth of a higher quality portfolio throughout the Group, and risk units, as well as restructuring energy and commodity prices. led to 1.8% of NPLs, while the internationally more comparable and workout teams are properly staffed and have the capacity New NPLs formation and NPL management In March 2022, the Bank acquired N Banka, their NPE were included in the Group portfolio based on fair value. In 2022, NPL formation amounted to EUR 127 million or 0.7% of the total loan portfolio. Nevertheless, the total amount of NPL decreased during 2022. During the year, the Group reviewed IFRS 9 provisioning by testing a set of relevant macroeconomic scenarios to adequately reflect the current circumstances and applied necessary adjustments. Notably, the cost of risk remained at a relatively low level, more specifically due to further positive development in NPL collection in the whole region. Figure 52: NLB Group gross NPL formation (in EUR millions) Formation / gross loans (stock) 0.7% 0.6% 64 36 16 12 2018 Corporate 56 35 20 2019 SME Retail 1.1% 148 78 60 10 2020 143 80 58 5 2021 127 70 51 7 2022 Precisely set targets 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 the use of other active NPL management tools, such as foreclosure of collateral, the sale of claims, and pledged assets. In 2022, the multi-year declining NPE ratio, based on the EBA methodology, stood at 1.3%. The to deal, if needed, with considerably increased volumes in a Group’s indicator gross NPL ratio, defined by the EBA, is equal professional and efficient manner. to 2.4%. Figure 53: NLB Group NPL, NPL ratio and Coverage ratio 1(i) (in EUR millions) 2,000 1,500 1,000 500 0 77.1% 622 6.9% 89.2% 81.8% 86.1% 98.9% 375 475 3.8% 3.5% 367 2.4% 328 1.8% 100 90 80 70 60 50 40 30 20 10 0 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 31 Dec 2022 Coverage ratio 1 NPL ratio NPLs An important Group strength is the NPL coverage ratio 1 (coverage of gross NPLs with impairments for all loans), which remains high at 98.9%. Furthermore, the Group’s NPL coverage ratio 2 (coverage of gross NPLs with impairments for NPL) stands at 57.1%, which is well above the EU average as published by the EBA (44.1% for Q3 2022). As such, it enables a further reduction in NPLs without significantly influencing the cost of risk in the coming years. NPL coverage indicators were influenced by the special treatment of NPLs from the acquired entities. NPLs of NLB Komercijalna Banka, Beograd and N Banka 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 2022 in NLB Komercijalna Banka, Beograd and NLB Banka, Podgorica, which merged with Komercijalna Banka, Podgorica in November 2021, and N Banka. Due to extensive experience gained in the last few years Table 34: NPL, NPL ratio(i) and Coverage ratio by NLB Group members NLB Group member NLB, Ljubljana NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Komercijalna Banka, Beograd N Banka, Ljubljana Total NLB Group banks Total NLB Group (i) By internal definition NPL 31 Dec 2022 % NPL 31 Dec 2022 NPL CR 1 31 Dec 2022 in EUR millions NPL CR 2 31 Dec 2022 111.2 54.5 8.3 17.0 15.7 32.6 32.5 23.6 295.4 328.3 1.1% 3.6% 1.1% 2.3% 1.7% 4.6% 1.0% 1.9% 1.6% 1.8% 86.1% 116.9% 211.3% 122.6% 232.8% 62.1% 110.4% 67.3% 102.7% 98.9% 58.1% 70.9% 60.7% 87.7% 87.7% 45.1% 34.5% 16.2% 56.4% 57.1% 0.9% 0.7% (i) By internal definition. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 98 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. At the corporate loans, government and corporate guarantees are also common types of collateral. In retail loans, the other most frequent types of loan collateral are loan insurances by insurance companies and guarantors. The Group follows the ECB guidelines to banks on NPLs with regard to the evaluation of collateral. The establishment of market values for collateral for NPLs is by means of individual Proactive management of interest rate risk in the banking book The exposure to interest rate risk is moderate and derives mostly from the banking book positions. Bonds and loans with a fixed interest rate contribute the most to the interest rate risk exposure in terms of the Economic Value of Equity (EVE) indicator. In contrast, exposure is managed with core deposits which present the most important and material element of the interest rate risk management. To a lesser extent, the Group uses also plain vanilla derivatives for hedging the risk. The exposure to interest rate risk remains modest, within the risk appetite limits. For NLB Group, the worst-case regulatory scenario is in the case of a parallel shock of IR by + 200 bps. From the EVE perspective, the estimated capital sensitivity in the case of a parallel shock is + 200 bps equals -5.1% of the Group’s T1 capital. evaluation when NPL status is established. The value of Figure 54: NLB Group’s EVE evolution MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report 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 used. The value of collateral is with the statistical approach always updated downwards, never upwards. Only if the individual appraisal shows a higher value of collateral, the upward 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. 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. 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 1.1% 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. -7.3% -8.1% -7.1% -7.1% -6.4% -7.4% -6.3% -5.6% -5.1% 31 Dec 2020 31 Mar 2021 30 Jun 2021 30 Sep 2021 31 Dec 2021 31 Mar 2022 30 Jun 2022 30 Sep 2022 31 Dec 2022 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 risks. On this basis, constant improvements of control activities, processes, and/or organisation are performed. Besides that, the Group also focuses on proactive mitigation, prevention, and minimisation of potential damage. Special attention is dedicated to the stress-testing system, based on a scenario analysis referring to the potential high severity, low frequency events, and modelling data on loss events. For modelling, the Bank uses the gamma distribution technique which proved to be the most suitable. From an economic perspective, the aim is to assure the necessary capital for materially important risks which could happen extremely rarely. Consequently, data on realised loss events are used with a confidence interval of 99.9%. Moreover, some add-ons are added for specific current and significant risks. In a normative view, a 90% confidence level is used for more plausible, but still severe events, which would be absorbed through P&L. Apart from losses that are already included in the loss event database, the Bank could also experience one-off and unpredictable extreme events. The list of such potential events is updated yearly, based on current risks in the Bank's environment or past realised events in the banking industry. For those possible and topical events, scenario analyses are prepared by the Bank's experts. In 2022, 13 such scenarios were defined. The results show that the biggest loss could derive from the following potential events: external fraud events, major earthquake, legal risk, and cyber-attack. For these scenarios, existent controls were additionally revised, while for identifying potential deficiencies, mitigation measures were defined. Contents 99 Furthermore, key risk indicators, servicing as an early warning framework in the areas of credit, liquidity, market, and determination of the EU to reduce carbon emissions, according system for the broader field of operational risks (such as HR, operational risk. The management of ESG risks follows ECB and to its ambitious net zero strategy by 2050. With implementation processes, systems, and external conditions) are regularly EBA guidelines, following the tendency of their comprehensive of the Net Zero Strategy of NLB Group in 2023, it is expected that monitored, analysed, and reported with the aim of improving integration into all relevant processes. The availability of ESG its impacts will gradually diminish in the long run. Nevertheless, the existing internal controls and enabling on-time reactions. data in the region where the Group operates is still lacking. the Group assessed them more materially than physical risk. Nevertheless, the Group made significant progress in the The Group supports proactive discussion of operational risks process of obtaining relevant ESG-related data from its clients, In recent years, the Bank signed Framework Agreements on all hierarchical levels. Every employee has the possibility being the prerequisite for adequate decision-making and the with the EBRD, such as the Contract of Guarantees with to report loss events. The biggest/most important operational corresponding proactive management of ESG risks. For the MIGA, and committed to the UN Principles of Responsible risks are escalated in a short-time period and discussed at the purpose of calculating credit portfolio GHG emissions, several Banking. Consequently, the Group established a mechanism Operational Risk Committee sessions, while implementation of important activities started in 2022. For larger corporate clients, for environmental and social screening of current or potential the mitigation measures is closely monitored. we initiated direct Scope 1 & 2 & 3 data-gathering processes, financing applications against the MIGA and EBRD Exclusion List, whereas for the SME and micro segments, we developed and applicable environmental and social laws. The management In addition, the Group was also diligently managing other, our own proxies in cooperation with an external expert. In of ESG risks is incorporated into the Group’s overall credit non-financial risks, referring to the Group’s business model residential mortgages, the most important input for GHG approval process and the related credit portfolio management. or arising from other external circumstances, within the calculation are the buildings’ energy performance certificates. Sustainable financing is implemented in accordance with the established ICAAP process. By end of 2022, we formed the emission calculation for the Group’s ESMS. In addition to addressing ESG risks in all relevant Incorporating ESG risks The Group is engaged in contributing to sustainable finance by incorporating ESG risks into its business strategies, risk management framework, and internal governance arrangements. With the adoption of the NLB Group Sustainability programme, the Group implemented the main sustainability elements into its business model. The NLB Group Sustainability Committee oversees the integration of ESG factors into the NLB Group business model. Thus, sustainable finance integrates ESG criteria into the Group’s business and investment decisions for the lasting benefit of the Group’s clients and society. ESG risks do not represent a new risk category, but rather one of the risk drivers of the existing type of risks, such as credit, liquidity, market, and operational risk. The Group integrates and manages them within the established risk management Slovenian market, whereas in the Region this process will stages of the credit-granting process, relevant ESG criteria were continue and will be developed in 2023. Besides the emissions, also considered in the collateral evaluation process. the Group collected, analysed, and used different relevant historical data for physical risk and publicly available climate In the process of the transaction approval, collecting ESG data change studies relevant for its region. at the KYC stage was established. A regulatory compliance check represents a next important step that includes verification The Group conducts a materiality assessment, as part of its that a client is adhering to the applicable laws, regulations, and overall risk identification process, to determine the level of standards. If the transaction is classified with a high E&S risk, transitional and physical risk to which the Group is exposed. In a strict deviation management process is in place that ensures this process, identification of environmental risk factors, relevant further enhanced risk assessment. During a project’s lifetime, transmission channels, and their materiality and impact to the ESG risk monitoring is established to assess the impact of each Group’s financial performance in the short- and long-term risk, as well as the creation of a strategy for their mitigation. period are assessed. From the perspective of physical risk, With that, is the Group ensures that the risks are being the most relevant natural disasters are drought and floods, adequately addressed and that any changes or newly emerged while hail and windstorm are also frequent, but less material. risks are identified and addressed promptly. Despite this, we can expect that its impact will increase in the long run if no adequate policy changes are implemented in The Group is analysing and monitoring its credit portfolio by a timely manner. Chronic risk is not determined as material using heat maps. For the purpose of heat maps, the Group risk. Transition risks already arise in the short term due to aggregates single risks by using predefined weights for MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 100 the determination of a final risk score. Such an approach lives, goods, and reputation. Business continuity plans included enables different views over the Group’s corporate portfolio relevant ESG risks. They are prepared to be used in the event of from physical and transition risk perspectives. With regard to natural disasters, IT disasters, and the undesired effects of the physical risk, some negative historical events in the past years environment to mitigate their consequences. in the Region were observed on the public infrastructure and agriculture, but they were reimbursed to a large extent by In 2021, the Group established an internal ESG stress-testing the government or insurances. Consequently, there were no concept to identify the most relevant financial vulnerabilities material impacts on Group’s portfolio quality or liquidity. On stemming from transitional and physical climate risks, which will portfolio level, the Group does not face any large concentration be further enhanced by considering disposable ESG-related towards specific NACE industrial sectors exposed to climate data. The results of the climate stress tests showed no material risk, whereby the role of transitional risk is more prevailing. impacts on the Group’s capital and liquidity positions. Based on industry segmentation of portfolio and corresponding emissions, the Group has a relatively low exposure to emission- As a systemically important institution, the Group was included intensive sectors in its corporate client’s business. More into the 2022 ECB Climate Stress test exercise, which consisted exposed industries represent energy, transportation, industry, of three modules. The exercise was conducted in the first half and agriculture, though the exposure to the clients with high of 2022, and the aggregate results were published in July 2022. emissions in these branches is rather limited. As part of its By performing this exercise, the ECB assessed how banks strategy, the Group does not finance companies that extract were prepared for dealing with financial and economic shocks fossil fuels or operate coal-fired power plants. stemming from climate risk. The Group’s overall results were within the range of average peer results. The Group carefully considers potential reputation and liability risks which could arise from sustainable financing of its clients. NLB obtained in 2022 for the first time an ESG Risk Rating. Special attention is given to the approval of new products and The assigned rating reflects a low risk of experiencing material monitoring of the fulfilment of relevant criteria by the clients. financial impacts from ESG factors. Additional key risk indicators have been addressed, servicing as an early warning system in the area of ESG risks. Besides, Further information on risk management is available in the physical risks, as part of ESG risks in the area of operational Note 6 of the financial part of the report, Pillar 3 Disclosures and risk, are addressed in the Group’s business continuity the NLB Group Sustainability Report 2022. management (BCM). As such, BCM is carried out to protect Proactive Risk Management in 2022 14 bps low level of cost of risk on Group level MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 101 IT and Cyber Security IT infrastructure and reliability The Group continues to provide its clients sustainable and efficient services supported through highly reliable and secure technology platforms. The Bank is also actively pursuing its technology transformation programme. In line with the upgraded IT strategy introduced in 2020, the IT team delivered on its timelines and started the programme of consolidating core banking systems. The IT Security, IT Infrastructure, and IT Governance made significant progress in the consolidation on the group level. The Bank also rolled out additional group business solutions like the contact centre, new product origination platform, launched the new digital banking platform for the internal pilot in Slovenia. Komercijalna Banka was fully integrated within group’s IT and infrastructure simplification and streamlining, and is on schedule with three datacentres consolidated in 2022. Due to the increase in general cyber security risks, special focus, extra resources, and investments were made to raise the overall level of cyber security resilience. More than 1.5 million digital users in the Group 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 Core systems consolidation IT followed the core banking system strategy and successfully started the consolidation of core banking systems. Due to the N Banka integration in Slovenia, the programme course was adjusted and the N Banka consolidation strategy is now in line with the target core banking system. Enterprise and application architecture Enterprise and application architecture is focused on two information system in the Bank is at a very high level of 99.96% key areas. The first is the focus on the Group solution, and the (2021: 99.98%), and the share of unplanned interruptions is very low, 0.04% (2021: 0.02%). In 2022, the number of days majority of new solution selections are performed as a Group standard with related Group roadmaps. New Group solutions without system/service interruptions was at 81.1 % (2021: 83.6%). were selected in the areas of a digital web portal and Customer Harmonised Service Level Agreements (SLA) are in place with Relationship Management. users of the information system, which the Bank managed to fulfil to a very high degree. High IT operational performance was also recorded by the Group members (between 99.87% and 99.99%). Main IT initiatives Transformation The main focus is 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 partner with business, and as a result was more efficient and effective. Specifically, a Group IT domain concept was introduced, which promotes shared teams and IT solutions across the Group. The Group’s competence centre in Serbia was transferred from the Bank to the separated IT service company called ‘NLB DigIt.’ Change of delivery approach The team managed to reach important achievements in the following new strategic directions in terms of solution delivery. They managed to migrate a new call centre solution in Slovenia and BiH, a new product origination platform in N. Macedonia and Kosovo, and delivered a new Digital Banking platform to the pilot mode in Slovenia. The team also continued to pursue a reduction in the dependency on the mainframe, and migrated the next set of applications from the mainframe to distributed systems. After the N Banka acquisition, the IT team focused on onboarding N Banka IT to the Group and preparing an integration plan and strategy. The other is the setup of a standardised enterprise architecture management system for which a market standard tool was procured to enable simpler application portfolio management, managing of risk related to software obsolescence, and IT risk and support in defining transformation paths. Group-wide capabilities extended Group-wide capabilities were significantly extended and the Group competence centre in Belgrade, Serbia was transferred to a separate IT service company called ‘NLB DigIt.’ In the last two years, this team has grown from 15 to 80 employees. The datacentres consolidation programme has started, with the successful consolidation of three datacentres in Serbia and BiH. Data management The Bank continues to implement 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. Digital penetration Digitalization focus is on using the available, ever changing information technology tools, in order to increase the efficiency MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 102 Figure 55: Digital penetration of the Group’s banks as at 31 December 2022 56% 55% 62% 53% 26% 24% 26% 20% 24% 25% 25% 18% 17% 13% NLB, Ljubljana NLB Komercijalna Banka, Beograd NLB Banka, Skopje NLB Banka, Sarajevo NLB Banka, Banja Luka NLB Banka, Prishtina NLB Banka, Podgorica Penetration (all) Penetration (active) 99.96 %the availability in NLB of the Group through more innovative, personalized, accurate and prompt service to the clients. High growth in smart phone penetration, that they use anyhow on daily basis, creates the opportunity to move more customers to alternative distribution channels. The Group strives to a wide range of 24/7 digital solutions to come closer to clients and offering them anchor products and the most accessible and personalized digital services. Main target is digital penetration of active customers with goal of 55% of clients to be active on digital channels by Vision 2025. Build the best digital banking IT team in the SEE region. Main principles IT Strategy 2020-2024 At the end of the 2020, an upgraded IT Strategy was adopted that also incorporates the Group dimension. 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, the cloud, and customer relationship management (CRM), consolidating the Group’s infrastructure, simplifying core systems, and to achieve superior client experience in terms of quality, innovation, reliability, and security. Enable the best client and employee experiences through reliable, effective, secure, accessible, and scalable IT solutions. Mission • increase client satisfaction in all segments with a 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 fewer manual tasks; • ensure the necessary development capacity – hire right talents with the digital skills and who are forward-looking 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. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 103 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 provide 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 also tests 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. In addition to a regular phishing simulation, the Group Cyber Security team has implemented their own phishing platform and successfully conducted simulation in NLB Sarajevo as a pilot for all other Members. Regular, controlled, simulations impact employee’s awareness on the highest level. Strengthening the team and extra investments in cyber security Cyber security Strengthening team and 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, also regularly discussed at the Bank’s Information Security Steering Committee, Operational Risk Committee, and Management Board meetings. During 2022, the Group increased its capacity in terms of human resources by hiring specialists in different domains, and additional improvements were made in vulnerability management where all Group members have a unified solution and configuration. The team has the ability to perform on-demand scans and can stay abreast of global trends and the most recently published vulnerabilities. This provides a more proactive approach to the whole vulnerability remediation process in the Group. A Cloud Web Application Firewall was introduced to the Group, and in all Banks the migration process was initiated. The goal is to have all publicly available applications under the same security tool and monitoring. The biggest achievement in the Group Cyber security team comes from the fact that almost all Bank members in 2022 had individual on-demand requests for different penetration testing services. More information about cyber security is available in the chapter Regulatory Environment. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 104 In 2022, NLB Banka, Skopje confirmed its position as a systemically significant bank with high market share. We achieved positive business results and announced a new chapter in our operations – an investment in an associated company NLB Lease&Go, Skopje. Numerous awards and recognitions confirmed better footprints we created and successful operation of our bank, for example, Best Bank in Macedonia for 2021 by the renowned magazine EMEA Finance; five awards in the annual ranking of the magazine Finance Central Europe; three recognitions from the Visa Center for a bank that shows outstanding results, not only in North Macedonia, but also in the whole South-Eastern Europe, and the recognition as the Bank of the Year from the renowned international financial magazine The Banker for the 11th year in a row. Pictured: NLB Banka, Skopje employees Table 35: NLB Group headcount by countries Human Resources As a market leader, the Group realises that investing in Country Slovenia Serbia employees is crucial. Engaged employees contribute North Macedonia 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. All the while also firmly trying to establish itself as a ‘Top employer’ on the workforce market. BiH Kosovo Montenegro Germany Switzerland Croatia Group Total 31 Dec 2022 2,833 (NLB: 2,418, other: 415) 2,614 954 971 467 380 1 2 6 8,228 31 Dec 2021 2,619 (NLB: 2,510, other: 109) 2,901 877 942 463 374 1 2 6 8,185 Changes YoY +214 (NLB: -92, other: +306) -287 +77 +29 +4 +6 0 0 0 +43 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Employee Headcount Number of employees The Group continues with the optimisation of processes and right-sizing its staffing level. Due to the acquisition of N Banka, the number of employees rose to 8,475, but has downsized throughout the year to reach 8,228 by the end of 2022. Work from home The Group continuously enables employees, whose presence on the Group’s premises is not essential to the business process, to work from home (remotely) (the Group: 36%, NLB: 59%). With it we are enabling our employees, if they so choose, an option to better balance their work-life balance. Top Employer in 2022 for the 7th consecutive year Striving to remain a ‘Top Employer’ ‘Top Employer’ The Group continues strengthening its Human Resources (HR) practises based on feedback from reputable institutions and benchmarks with best-in-class HR practises. In 2022 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 to ensure aimed at improving it towards more constructive behavioural styles that will support the direction that NLB is heading in the future. Focus groups on three main areas were done throughout the Group at the end of 2021, through which improvement initiatives were defined. In 2022, we also defined renewed NLB values that were defined through workshops by employees from all levels and throughout the Group, and launched with several implementation initiatives. A leadership 360 feedback measurement and assessment, and individual development planning aimed towards improving organizational culture were implemented. Leadership development Significant influence on employee satisfaction derives from an even more stimulating work environment in the future. their working environment, and leaders on all levels have Continuing a longstanding tradition of investing in employees a significant role in creating a productive atmosphere. The Group is actively developing leadership competencies of senior management to align with the activities of changing organisational culture. In line with this we had two major activities this year: • M/I and L/I 360 feedbacks on culture impact - all B and B1 were provided individual feedback and coaching sessions to Organisational culture Organisational culture is an important driving force of company set up development plans. • An in-depth Leadership assessment (Boyden Assessment) development and success, that’s why the Group has decided to was done across the Group. Based on results, development take an active and comprehensive approach to develop it. plans and journey in line with the strategy and culture After measuring our organisational culture, the activities are improvement, will be done in the following years. Contents 106 Succession To ensure the leadership succession pipeline, we are identifying Developing NLB Employer Brand To attract top talent throughout the region, the Group has Engagement of employees A crucial part of success is the motivation and engagement of potential successors in all Group members. identified the need to develop the Employer Brand actively. The employees. In 2022, a total of 73% of employees participated in Group has done internal and external surveys, interviews with the survey. Developing talent Among its employees, the Group identified talents in the fields of stakeholders and multiple focus groups to identify the relevant employer value proposition. Based on this development, an leadership, professional, and young talents. They are provided employee value proposition and communication materials were additional opportunities, knowledge, and skills needed to prepared. manage and lead in challenges of the future, as well as individual development activities. This year the topics of change Also, we have implemented a Group-wide focus on cooperation management, technological trends, communication and data with universities, to establish a connection with potential future storytelling and visualization were in focus along with individual employees and to raise the awareness of Group as an attractive development activities of talents. employer. Mobility We adopted a Mobility policy in all Group members to accelerate and promote mobility within the Group. Virtual Employment – Data science hackathon The strategic direction of the Bank defines the employment of new profiles needed on a Group level. In line with that, the teams were established and few job rotations and permanent Group continued with the organisation of external and internal reassignments were realised inside the Group this year. Retention We revised our retention strategies and policies across the Group to better address present and future challenges to better cope with demanding workforce market. NLB Hackathons. This year, we had two hackathons on the subject of Data Science to find internal and external talents from our home region and promote the Bank as a desirable employer. Figure 56: NLB Group Employee Engagement 2022 Engaged Not engaged Actively disengaged 44% 39% 17% 8,228 employees in the Group family MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 107 Prepared to Tackle Future Challenges The Remuneration System as a Motivation for Engaged and Committed Employees Various training activities to embrace changes The Group strives for the high-quality standards of a modern learning organisation. Due to the rapidly changing environment, we expanded our offer of trainings to support new relevant topics (such as Change management, Data analytics, Digital literacy, ESG, M&A, etc.), that are changing our business and environment. Our aim is to make trainings more accessible and on demand with a wide variety of online content, while also still providing quality in-class trainings and workshops, internally or externally. Trainings, e-learning The majority of training hours in the Group are provided through internal trainings (37 %) and internal e-learning programmes (37 %), while external trainings (18 %) and Udemy for business (8 %) are also utilised. Online learning with access to 7,000+ courses In 2022, Udemy for Business was activated across the Group to a substantial number of employees, enabling them access to 7000+ English trainings. The aim is to empower employees over their own development and give them opportunities to upskill or reskill, at anytime, anywhere, to better prepare themselves for upcoming challenges. Well-being & Health Creating a work environment The Group is always committed to offering knowledge on healthy habits, promotes activities that enhance the good health and satisfaction of employees, and strives to create a healthy work environment that enables quality interpersonal relationships and work-life balance. Because of this, we are also the owner of a family-friendly certificate. Promoting healthy habits and new health and safety measures The Group organised Health trainings focused on stress management, healthy habits, mental health, mindfulness, personal energy, and communication. Between May and November, the Bank also had a Tour de NLB Group, a steps- counting activity through a mobile app, with which employees were encouraged to walk more for a good cause. For an employee working in the companies within the Group, salary is composed of: Fixed part Determined according to the complexity of the job position for which the employee has concluded a contract of employment. Depends on the employee’s performance. Variable part Employees are assessed and awarded: - 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. Remuneration policy for members of the Supervisory Board and Management Board of NLB On 19 October 2022, an amended Remuneration Policy of members of the Supervisory Board of NLB and members of the Management Board of NLB was adopted by the Supervisory Board of NLB. On 12 December 2022, the Remuneration Policy was submitted to the General Assembly of NLB for voting. The voting on the General Assembly is a consultative nature. 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 the remuneration for each member of the Management Board is awarded and paid in the form of cash if the amount of the variable part does not exceed EUR 50,000 and is not higher than one-third of his/ her total remuneration for the respective business year. The variable part of the remuneration for each member of the Management Board is awarded and paid in the form of cash and in financial instruments if the amount of the variable part exceeds EUR 50,000 and is higher than one-third of his/her total remuneration for the respective business year. On average 36 %of the Group’s employees worked from home At least 50% of the variable part of the salary of the Management Board member awarded for an individual business year shall be deferred for a period of at least five years starting on the day of payment of the non-deferred part of the variable part of the salary. Remuneration policy for employees in NLB and in the Group In ‘Remuneration Policy for Employees in the Group,’ the basic framework of principles for rewarding employees in the Group are presented. The remuneration policy defines fixed and variable remuneration, the goal-setting system and performance criteria (Key Performance Indicators (KPIs)), and sets out the conditions for the allocation and payment of the variable part of remuneration, including deferral, malus, retention, and claw back of the variable part of remuneration for identified employees, and severance pays and compensation for the non-competition period for identified employees and pension benefits for all employees. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 108 Table 36: Diversity - review of management bodies and senior management Wide range of knowledge, skills and professional experience International experience of the members in different areas Continuity of composition of the management body Personal integrity Geographical provenance Age structure Share of women Supervisory Board of NLB Management Board of NLB Senior Management of NLB 2022 High Medium High High High Medium High 20-30 = 0 30-40 = 0 40-50 = 1 50-60 = 7 60+ = 2 30% Plan for 2023 High Medium High High High Medium High 0 0 2 5 5 42% 2022 High Medium High High High Medium High 20-30 = 0 30-40 = 0 40-50 = 3 50-60 = 3 60+ = 0 16.7% Plan for 2023 High Medium High High High Medium High 0 0 2 4 0 16.7% 2022 High Medium High High High Low 20-30 = 0 30-40 = 3 40-50 = 20 50-60 = 13 60+ = 1 41% Plan for 2023 High Medium High High High Low 0 1 18 16 2 45% Diversity Policy Framework The Diversity Policy sets the framework for the Bank’s commitments to diversity in relation to representation on the Management Body, and senior management on certain aspects where specific goals and implementation of these goals related to gender structure, age structure, professional competencies, skills and experience, continuity of composition of the management body and senior management, international experience, personal integrity, and geographical provenance are defined. Objectives • Cover an adequately wide range of knowledge, skills, and expert experience of its members, and are 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; • 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; • Diversity as regards international experience; • Continuity of composition of the management body and senior management; • The highest expectations relating to personal integrity and diversity with regard to geographical provenance. The goals of the Policy shall also be reasonably applied to the provision of diversity of the wider management. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 109 Corporate Governance Corporate governance of the Bank is based on legislation of the RoS, particularly (but not exclusively) the provisions of the Companies Act (ZGD-1) and the Banking Act (ZBan-3), the Decision of the BoS on Internal Governance, the Management Body, and the Adequate Internal Capital Assessment Procedure for Banks and Savings Banks, the relevant EBA Guidelines on internal governance, the EBA Guidelines on the assessment of the suitability of members of the management body and key function holders, the EBA Guidelines on prudent remuneration, and the relevant EU regulations regarding sustainability issues and other relevant RoS and EU regulations. Apart from binding legal framework, the Bank also follows the Slovenian Corporate Governance Code for Listed Companies (valid since 1 January 2022). In 2022, substantive changes were made to the mentioned Code. It applies to the Bank for the 2022 financial year. The Code defines the governance, management, and leadership principles based on the ‘comply or explain’ principle of companies listed on the Ljubljana Stock Exchange. Deviations from the recommendations of the mentioned Code are published in the NLB Group Annual Report in the chapter Corporate Governance Statement of NLB. The mentioned statement is prepared according to Article 70 (paragraph 5) of the Companies Act (ZGD-1). The mentioned statement is also published on the Bank’s webpage, as well as on the webpage of the Ljubljana Stock Exchange – SEOnet. Rules and Procedures Articles of Association of NLB d.d. In accordance with the applicable Banking Act (ZBan-3) and Companies Act (ZGD-1), the Articles of Association of NLB: the • In the chapter Risk Management, subchapter Incorporating ESG Risks • In the chapter Statement of Management of Risk Bank has a two-tier governance system, according to which the • In a separate report on Pillar 3 Disclosures ESG Risks are Bank is managed by the Management Board and its operations disclosed are supervised by the Supervisory Board (https://www.nlb.si/ corporate-governance). Shareholders exercise their rights at General Meetings of Shareholders. • in Note 6 of the financial part of the report Social (S): • In the chapter Human Resources Corporate Governance Policy of the NLB and NLB Group Corporate Governance Policy The corporate governance framework of the Bank, being the • In the diversity and remuneration chapters in a separate report on Pillar 3 Disclosures according to Basel Standards • In the Remuneration policy which is public disclosed on the Corporate Governance Policy of NLB (February 2023), is drawn Bank’s webpage. up jointly by the Management Board and the Supervisory Board of the Bank. In this policy, the Management and Supervisory Board publicly discloses commitments to shareholders, clients, creditors, employees, and other stakeholders as a whole, and explains how the Bank is managed and supervised, as well as Governance (G): • In this chapter of the report • In the chapter Corporate Governance Statement of NLB and on the Bank’s webpage and on the webpage of the Ljubljana adopts a decision on which corporate governance code the Stock Exchange Bank follows (https://www.nlb.si/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 excluded) are defined and governed. NLB Group Code of Conduct In the NLB Group Code of Conduct, 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. Operating with integrity and responsibility is a key element of the Group’s corporate culture. The Code demands that every employee, regardless of their job or location of work and every other stakeholder of the Group, complies with the highest standards of integrity (https://www.nlb.si/code-of- conduct). Corporate governance of the Bank includes the processes through which Bank objectives are set and pursued (directed and controlled). Lately, it is becoming an efficient way to ESG factors and indirect economic factors are comprehensively recognised and managed according to GRI (Global Reporting Initiative – Global Standards (GRI GS)) standards. Key ESG channel investor-driven initiatives related to sustainability. The information is published in the following chapters of this report principles of corporate governance identify the distribution or other related webpages: of rights and responsibilities among different stakeholders in the Bank (Management and Supervisory Board, shareholders, investors, creditors, auditor, regulators, and other stakeholders), Environment (E): • In the chapter Sustainability and include the rules and procedures for making decisions in • In separately published NLB Group Sustainability Report 2022 corporate affairs. The most important rules and procedures are: published on the Bank’s webpage MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 110 The 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. The shareholders decided on the allocation of distributable profit for 2021. The distributable profit of the Bank as at 31 December 2021 was EUR 458,266,602.05. Shareholders decided that the part of the distributable profit in total amount of EUR 50 million shall be paid out to the shareholders as a dividend, which amounts to EUR 2.50 gross per share (the first tranche). General Meeting of Shareholders Supervisory Board Management Board The General Meeting of NLB also took note of various reports and voted on the proposal regarding the amendments and supplements to the Articles of Association of NLB, appointed the auditing company KPMG Slovenija, d.o.o. as the auditor of NLB for the financial years 2023–2026 and adopted the Policy on the provision of diversity of the management body and senior management. General Meeting of Shareholders The 39th General Meeting of NLB Shareholders held on 12 December 2022 confirmed on additional allocation of The shareholders exercise their rights related to the Bank’s distributable profit for 2021, more precisely on the second operations at General Meetings. The Bank’s General Meeting tranche of dividend payments, the payment of additional passes decisions in accordance with the legislation and the Bank’s Articles of Association. Decisions adopted by the General Meeting include, among others: adopt and dividends at EUR 2.50 per share, making a total dividend pay- out in 2022 of EUR 100 million. The remaining part of the NLB’s distributable profit will remain undistributed and represents amend the Articles of Association, use of distributable profit, retained earnings. grant a discharge from liability to the Management and Supervisory Board, changes to the Bank’s share capital, At the General Meeting, NLB Shareholders also voted on the appoint and discharge members of the Supervisory Board Remuneration Policy for the Members of the Supervisory Board (representatives of capital), remuneration of members of the of NLB and the Members of the Management Board of NLB, Supervisory and Management Boards, and authorisation and took note of the termination of the term of office of two NLB The Supervisory Board In accordance with the Articles of Association, the Supervisory Board consists of 12 members, of which eight members represent the interests 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 at 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. As at 31 December 2022: Number of members: Diversity: 10 (8 are representatives of capital, while 2 are representatives of workers)(i) 3 out of 10 members were female (30 %)(i) (i) During 2022 also two additional female members were representatives of workers, more information below. regarding the characteristics of the issue of securities. Supervisory Board members - workers’ representatives, namely: There were two changes in the composition of the Supervisory There were two General Meetings of Shareholders in 2022. Shareholders of NLB gathered at the 38th General Meeting on 20 June 2022. Due to changes brought by the COVID-19 pandemic, the General Meeting was hybrid, as it was held live and online. At the General Meeting, shareholders • due to statement of Janja Žabjek Dolinšek made on 26 May Board in 2022. Janja Žabjek Dolinšek on 26 May 2022 made 2022 regarding her termination of the function of a member a statement regarding her termination of the function of the Supervisory Board of NLB, because she was leaving of a member of the Supervisory Board of NLB–workers’ NLB, her term of office was terminated on 8 July 2022, as the representative, based on which her term of office terminated Works Council recalled her, on 8 July 2022. The NLB Works Council on 12 September • that NLB Works Council on 12 September 2022 passed a 2022 passed a decision on the recall of Bojana Šteblaj from acknowledged the adopted NLB Group 2021 Annual Report, the decision on the recall of Bojana Šteblaj from the function the function of a member of the Supervisory Board of NLB– Report of the Supervisory Board of NLB on the Results of the Examination of the NLB Group Annual Report 2021, the Report of a member of the Supervisory Board of NLB, workers’ representative, based on which her term of office in the workers’ representative, based on which her term of office terminated on 12 September 2022. The General Meeting of on Renumerations for the Business Year 2021, and the Additional Supervisory Board of NLB terminated on 12 September 2022. NLB, on its session dated 12 December 2022, took note of the information to the Report on Remuneration for the Business termination of term of office of two members of the Supervisory Year 2021 based on SSH’s Baselines. The shareholders also More information on the work of the General Meeting of the Board of NLB–workers’ representatives. decided on the allocation of distributable profit for 2021 and granted a discharge from liability to the Management Board and Supervisory Board of NLB for the previous year. Shareholders activities is available in the chapter Corporate Governance Statement of NLB, on the Bank’s website and the website of the Ljubljana Stock Exchange (SEOnet). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 111 As at 31 December 2022, the Supervisory Board had the following members: Representatives of Capital Representative of Employees Tadeja Žbontar Rems, M.Sc. Member Term of office: 2021–2025 Link to CV Membership in NLB Supervisory Board committees: • Operations and IT Committee (Member) Sergeja Kočar, M.Sc. Member Term of office: 2020–2024 Link to CV Membership in NLB Supervisory Board committees: • Nomination Committee (Member) • Remuneration 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 Supervisory Board is available in the chapter Corporate Governance Statement of NLB. 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) • Audit Committee (Member) • Operations and IT Committee (Member) Membership in management bodies of related or unrelated companies: • Angler d.o.o. – Director • Aroma Global 3 Ltd.–Chairman of the Supervisory Board Membership in NLB Supervisory Board committees: • Nomination Committee (Deputy Chairman) • Risk Committee (Chairman) • Operations and IT Committee (Member) Membership in management bodies of related or unrelated companies: • Credit Bank of Moscow– Member of the Supervisory Board (until 14 March 2022) • Kyrgyz Investment and Credit Bank CISC–Member of the Board of Directors • Nepi Rockcastle N.V. – Lead Independent Non- Executive Director David Eric Simon Member Term of office: 2016–2020, renewed term 2020–2024 Islam Osama Zekry, Ph.D. Member Term of office: 2021–2025 Link to CV 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 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, MBA, LLB 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: • PJSC Ukrgasbank– Independent Member of the Supervisory Board IPSO, UK–Lay Member of the Board (since 8 March 2022) • Gregor Rok Kastelic Member Term of office: 2019–2023 Link to CV 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 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)–Chairman • Berry Palmer & Lyle Ltd. (BPL Global) (Lloyds of London insurance Broker)– Non-Executive Director • Sheffield Haworth Ltd– Non-Executive Director Verica Trstenjak, Ph.D. Member Term of office: 2020–2024 Link to CV Membership in NLB Supervisory Board committees: • Nomination Committee (Member) Membership in management bodies of related or unrelated companies: • European Union Agency for fundamental rights, Vienna– Member of the Management Board (until June 2022) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 112 Committees of the Supervisory Board Audit Committee Audit Committee Risk Committee Risk Committee Nomination Nomination Committee Committee Remuneration Remuneration Committee Committee Operations and Operations and Information Information Technology (IT) Technology (IT) Committee Committee The Supervisory Board appoints committees that prepare proposals for resolutions passed by the Supervisory Board, ensures their implementation, and performs other expert tasks. The Bank’s Supervisory Board has five collective decision-making and advisory committees, namely: Further information about the work and composition of the Committees of the Supervisory Board is available in the chapter Corporate Governance Statement of NLB. 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 Sergeja Kočar, Member Sergeja Kočar, Member Primož Karpe, Member David Eric Simon, Member Gregor Rok Kastelic, Member Bojana Šteblaj, Member (until 12 September 2022) Bojana Šteblaj, Member (until 12 September 2022) Tadeja Žbontar Rems, Member Janja Žabjek Dolinšek, Member (until 8 July 2022) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 113 The Management Board As at 31 December 2022, the composition of the Management Board was as follows: 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 mentioned 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 to a five-year term of office and may be reappointed or dismissed early in accordance with the law and Articles of Association. As at 31 December 2022: Number of members: Mandate: six members five-year term of office On 20 January 2022, the Supervisory Board appointed Hedvika Usenik, Antonio Argir, and Andrej Lasič as three new members of the Management Board. They assumed their functions on 28 April 2022, after receiving approval from the regulator. They all come from NLB or the Group, have extensive experience and a proven value-creating track record. Upon extension, the Management Board of the Bank consists of Blaž Brodnjak as President & CEO, Archibald Kremser as CFO, Andreas Burkhardt as CRO, as well as Hedvika Usenik as Chief Marketing Officer (CMO), responsible for Retail Banking and Private Banking, Andrej Lasič as CMO, responsible for Corporate and Investment Banking, and Antonio Argir, responsible for Group governance, payments, and innovations. Andreas Burkhardt CRO Term of office: 2013–2016, 2016–2021, renewed term 2021–2026 Link to CV Other important functions and achievements: • 21 years of experience in banking, especially in Central Europe. Archibald Kremser CFO Term of office: 2013–2016, 2016–2021, renewed term 2021–2026 Link to CV Other important functions and achievements: • More than 22 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: • Global Risk • Credit Risk – Corporate • Credit Risk – 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 Supervisory Board: • NLB Lease&Go, Ljubljana • NLB Bank, Banja Luka • NLB Bank, Sarajevo Direct responsibility: • Financial Accounting and Administration • Controlling • Financial Markets • Group Real Estate Management • • • Data Management IT Governance • IT Infrastructure • IT Security • • Procurement IT Architecture IT Delivery Membership in management or supervisory bodies of related or unrelated companies: • Chairman of the Supervisory Board: • NLB Banka, Podgorica • NLB Komercijalna Banka, Beograd Blaž Brodnjak CEO Term of office: 2012–2016, 2016–2021, renewed term 2021–2026 (CEO since 2016) Link to CV Other important functions and achievements: • More than 22 years of experience at managerial positions on all levels of international banking groups. • Named ‘Manager of the Year 2022’ by Managers’ Association of Slovenia • 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 • Human Resources and Organisation Development Internal Audit • • Compliance and Integrity 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: • NLB 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 – present) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 114 Antonio Argir Responsible for Group governance, payments and innovations Term of office: 2022–2027 Andrej Lasič CMO (responsible for Corporate and Investment Banking) Term of office: 2022–2027 Hedvika Usenik CMO (responsible for Retail Banking and Private Banking) Term of office: 2022–2027 Link to CV Link to CV Link to CV Other important functions and achievements: • Under the management of Antonio Argir, NLB Banka Skopje marked exceptional growth in all segments of its operations and perceived as the most innovative bank on the market, a significant increase in the profitability of the bank, and share price increased fivefold. • Vice President of the Economic Chamber of North Macedonia (2018 – present) • Member of the Assembly of the Macedonian Banking Association (2018 – 2021) Direct responsibility: • Group Steering • Cash Processing • Payment Processing • Card Operations, ATM business and payment services Other important functions and achievements: • Over 25 years of experience in corporate and investment banking in international banking groups • President of the Supervisory Board of N Banka (2022 – present) • Member of the Supervisory Board, NLB Bank, Sarajevo (2021 – present) • Member of the Supervisory Board, NLB Lease&Go, Ljubljana (2020 – present) Direct responsibility: • Capital Structure Advisory and Cross Border Financing • Large Corporates • Small and Mid-Corporates • Trade Finance Services • Investment Banking and Custody Other important functions and achievements: • Over 20 years of experience in international banking groups, thereof more than 16 years of managerial experience • President of Supervisory Board of NLB Skladi (2021 – present) • Member of Supervisory Board of NLB Banka, Banja Luka (2021 – present) • Member of Supervisory Board of NLB Banka, Skopje and NLB Banka, Prishtina (2019 – 2021) Direct responsibility: • Private Banking • Call Centre 24/7 • Distribution Network • Sales Development and Management Membership in management or supervisory bodies of related or unrelated companies: • Vice President: • Economic Chamber of North Macedonia • Member of the Supervisory Board: • NLB Lease&Go, Ljubljana Membership in management or supervisory bodies of related or unrelated companies: • Chairman of the Supervisory Board: • N Banka • Member of the Board of Directors: • NLB Bank, Sarajevo Membership in management or supervisory bodies of related or unrelated companies: • Chairman of the Supervisory Board: • NLB Skladi • Member of the Board of Directors: • NLB Bank, Banja Luka Further information about the work and composition of the Management Board is available in the chapter Corporate Governance Statement of NLB. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 115 Collective Decision-making Bodies Different committees, commissions, boards, and working bodies may be appointed by the Management Board for execution of individual tasks within powers of the Management Board. Corporate Credit Committee Chairman: CRO 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. Assets and Liabilities Management Committee of the NLB Group Chairman: CFO 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, and 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. NLB Operational Risk Committee The Change the Bank Committee Chairman: CRO 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. Chairman: CEO 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. The Risk Committee Chairman: CRO The Group Real Estate Management Committee The Sales Committee Chairman: CFO Chairman: CMO (responsible for Corporate and Investment Banking) Private Individual Credit Committee Chairman: Director of Credit Risk – Retail Number of members: 12 Number of members: 3 Number of members: 13 Number of members: 5 The Risk Committee monitors and periodically reviews matters related to risk and commercial risk and prepares materials for the Management Board to take decisions. As a rule, committee meetings are convened quarterly. 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 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 Management Board also appointed working bodies that operate at a lower level: Committee for New and Existing Products Group Real Estate Management Sub Committee Advisory bodies of the Bank’s Management Board The Watch List Committee Chairman: CRO Number of members: 7 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. Committee for Business IT Architecture Data Management Committee Anti-Money Laundering Commission Corporate Customer Acceptability Committee NLB Group Non-Performing Assets Divestment Committee NLB Group Sustainability Committee Chairman: Director of Workout and Legal Support Number of members: 7 Chairman: CEO Number of members: 17 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 2022 Financial Report Contents 116 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 local legislation, and regulatory requirements 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. Well-functioning Corporate Governance in the Group is of special importance as several new companies were added to the Group in 2022: • N Banka, Ljubljana, • NLB DigIT, Beograd, • NLB Lease&Go, Skopje, • NLB Lease&Go Leasing, Beograd. The Group is governed: • In accordance with fundamental corporate rules through various bodies of the Group members: • By voting at general meetings of the Group members; • By exercising supervision through the supervisory bodies of the Group members; • With proposals for appointing the management of the 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”; • Management Board of NLB for NLB Group, NLB Group Leadership meetings, NLB Group ALCO meetings, CMO/ CFO/CIO calls, 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 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 Group members strengthened. The target composition 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 operations simplified. 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. The 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. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 117 Compliance and Integrity The Group addresses the challenges of high regulation and strict regulatory requirements with a systematic approach to mitigating compliance risks. It is important to ensure that employees and decision-makers know and understand the purpose and objectives of the regulations. The Group is continuously strengthening the compliance function and diligence of its operations. A culture of compliance is integrated into the day-to day business of the Bank to support its operations, to contribute to its strong internal control environment, and to ensure that compliance risks are mitigated. 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 of the organisation. For that reason, all of the employees are included in yearly training and awareness-raising activities in the areas of general ethics, anticorruption, anti-money laundering, information security, etc. The Group’s Code of Conduct provides guidance and principles of expected behaviour regarding ethical conduct and requires 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 on NLB 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. 527 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 2022 Financial Report Prevention of Money Laundering and Terrorism Financing and Financial Sanctions Compliance The Bank complies with national regulations on Anti-Money Laundering and Countering the Financing of Terrorism (AML/ CFT), including the EBA, BoS, and other competent authorities’ guidelines and standards. The RoS is a member of the EU, and thus subject to the European AML/CFT Directives, the means by which the EU transposes the Financial Action Task Force (FATF) recommendations throughout the EU. For the Bank, it is of paramount importance to effectively mitigate the risk of money laundering, financing of terrorism, and breaches of financial sanctions. For these reasons, the rules, procedures, and technology in AML/CFT area are subject to strict and unified policies and standards. The same principles are also applied for setting out the Bank’s framework on financial sanctions. The Bank regularly updates and enhances the governance in line with directions set by the BoS. Through the system of performing risk assessment, regular reporting, and Oversight, monitoring, steering, and managing the Group compliance function and programme(I) Business ethics and corporate integrity Physical / technical security Fraud prevention and investigation AML/CTF Privacy data protection and information security The Compliance and Integrity in the Bank addresses the following risk areas: Identification, assessment, and management of compliance, and integrity risks at the Bank and the Group levels 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 Corruption prevention Regulatory compliance (i) Established by standards for compliance and integrity for the Group and implementation of monitoring by off-site data analysis and onsite visits. Contents 118 459 issued opinions, recommendations, and guidelines on compliance and integrity topics constant onsite and off-site control, the headquarters effectively of each local Chief Information Security Officer (CISO) office monitors the implementation and execution of standards in core subsidiaries. The focus was on awareness regarding throughout the Group. local responsibility for information security management in accordance with the subsidiaries ‘executive management risk The Bank regularly performs customer due diligence, following appetite, organization‘s ability to build defences, and local the risk-based approach and, in the case of enhanced regulatory compliance. risk, performs additional measures both in the segment of ‘Know your customer,’ as well as ongoing monitoring of the The Bank is also a member of the only global cyber intelligence transactional activities. In the case of detected deviations, sharing community solely focused on financial services. All local also considering the AML/CFT indicators, the AML function CISO offices have access to intelligence exchange platform and of the Bank ensures the review and, if required by AML/CFT cyber resilience resources to anticipate, mitigate, and respond legislation, reports the customers and transactions to the to cyber threats. competent Financial Intelligence Unit. In its Acceptance Policy, the Bank has also adopted additional measures to prevent To manage cyber risks, the Group is working on critical onboarding of customers that do not correspond to its risk intelligence access, strategies to address crisis events, and appetite. The Bank also ensures a high level of awareness on building trusted network of relationships. In 2022, the Group the AML/CFT area and the area of financial sanctions with implemented cyber-attack incident response exercise and regular training of all employees of the Bank. participated at the European Cross-Border Exercise. The exercise explored how financial institutions may coordinate Concerning the changed geopolitical environment related across borders with peers, public sector partners, supporting to the Russian aggression in Ukraine, the Bank regularly service providers, and other major stakeholders to mitigate the monitors and manages all newly introduced financial sanctions impacts of major incidents. stemming from all relevant regimes. Information security and personal data protection The information security area, inter alia, focused on implementation of measures for increasing the level of The Bank runs its operations in line with GDPR requirements, including the retention and processing of personal data, dedicated Data Privacy Officer, education, and training of employees. The new Slovenian Personal Data Protection Act (ZVOP-2) was adopted in 2022 and is in the process of implementation in the Bank’s operations. information/cyber security, as well testing the cyber security resilience of information systems (pen-tests). Prevention Furthermore, in line with the plan, several internal assessments/ compliance checks according to ISO/IEC 27001 standard were carried out in 2022, including assessment of information security at 41 outsourcing providers. Special obligatory e-trainings in the field of information security and social engineering were prepared for all employees and executed as part of prevention measures in this area. In second half of 2022, the Bank detected increase in cyber fraud attempts of the Bank clients. This prompted the Group to respond by implementing additional controls mechanisms to counter client abuse risk. New information security approaches were introduced across the Group, that improved the visibility and autonomy Based on the assessment of compliance risks, so-called ‘Enterprise Compliance Risk Assessment (ECRA),’ 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, Compliance and Integrity is also involved, inter alia, in risk assessments regarding new and changed products, fit and proper assessments for key function holders, outsourcing, and other changes materially affecting the Bank’s business. As a standard compliance function, several workshops and compulsory e-education on ethics, the prevention of corruption, conflicts of interest, protection of personal data, AML/CFT, Information Security, Physical Security, and other relevant topics related to everyday work were prepared. For MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 119 35cases investigated 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. Fraud prevention and investigation The Group has a unified system in place for the prevention and investigation of suspected misconduct, which allows anyone, both internal and external stakeholders, to report potential misconduct through several different communication channels, including anonymously. Protection of the informant is comprehensively governed. The Bank uses various measures to ensure the total protection of the informant from any retaliation she/he could endure due to well-intended reporting of a suspicion of harmful conduct. All reports received are handled centrally by a specialised team according to pre-established internal procedures, and appropriate reporting mechanisms to management bodies are in place. Significant attention is devoted to employee awareness-raising and training for both all employees and specific target groups according to the identified risks. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 120 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 2022, Internal Audit completed 69 audits, out of which 66 audits were planned and covered various areas of operation of the Bank and the Group. 21 of these assignments were branch inspections, 2 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. The highest standards were followed audits were conducted as joint audits with a local auditor and In 2022 external quality review of internal audit function was one quality review in a banking subsidiary. In addition, Internal performed and confirmed that Internal Audit and other internal Audit initiated and completed 3 new audits and was involved 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 2022 Financial Report Internal Audit Internal Audit reviews key risks in the Group’s operations, advises management at all levels, and deepens understanding of the Bank’s operations. It provides independent and impartial assurance regarding the management of key risks, management of the Bank, operation of internal controls, and thereby strengthens and protects the value of the Bank. Internal Audit is the independent, objective, and advisory control body responsible for a systematic and professional assessment of the effectiveness of risk management procedures, completeness, and functionality of internal control systems, and the management of the Group operations on an ongoing basis. The Internal Audit provided impartial assurance to the Management Board and Supervisory Board on the management of risks in key areas, i.e., cyber security governance framework and cyber security – emerging risk, anti-money laundry, management of repossessed assets, central vault – cash handling, ILAAP, project financing, lending processes (loans to retail – housing and mortgages loans, in several strategic projects as advisor. Six planned audits were postponed due to objective reasons. The majority of the recommendations given in 2022 were implemented within the agreed deadlines. Implementation of uniform rules loans to small and medium corporates), IT governance, IT risk Internal Audit increases efficiency. It focuses on monitoring management, operational risk management – risk appetite and the implementation of audit recommendations, training, and key risk indicators, cash management in branches, and others. education, updating the internal audit charter and manual, 69 planned and extraordinary audits conducted in the Bank 30Internal Audit experts International Standards for the Professional Practice of Internal Auditing Code of Ethics of an Internal Auditor Banking Act (ZBan-3) or other relevant laws which regulate the operations of a Group member Code of Internal Auditing Principles Contents 121 Corporate Governance Statements MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 122 The Statement of Management’s Responsibility In accordance with the provisions of Article 134 (2nd paragraph) of the Market and Financial Instruments Act,15 the Management Board hereby confirms the statements made in this business report, which are in accordance with the attached financial statements as at 31 December 2022, 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 2022. 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 their description of the key types of risks and Group companies included in the consolidation that are exposed as a whole. Ljubljana, 12 April 2023 Management Board of NLB Hedvika Usenik Member Andrej Lasič Member Archibald Kremser Member Andreas Burkhardt Member Antonio Argir Member Blaž Brodnjak Chief executive officer 15 ZTFI-1, Official Gazette 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 2022 Financial Report Contents 123 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,16 (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 8. Participation in securities issues and the provision of associated services 9. Corporate consultancy regarding capital structure, operational strategy, and related matters, and consultancy and services in connection with corporate mergers and acquisitions 10. Monetary intermediation on interbank markets 11. Advice on portfolio management 12. Safekeeping of securities and other related services 13. Credit rating services: collecting, analysing, and disseminating information regarding creditworthiness 14. Leasing of safe deposit boxes 15. Investment services and transactions, and ancillary investment services in accordance with the 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 6. other services or transactions: 6.1 intermediation in financial leasing 6.2 sale and purchase of investments in gold Authorisation to perform banking services is published on the • • purchase of receivables with or without recourse official webpage of the BoS. (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. 7. Issuing of guarantees and other commitments Trading for own account or for the account of clients: • • • • • in money-market instruments in foreign legal tender, including currency exchange transactions in standardised futures and options in currency and interest-rate instruments in transferable securities 16 Official Gazette of the RoS, No. 92/21 with amendments. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 124 Corporate Governance Statement of NLB Pursuant to Article 70, paragraph 5, of the Companies Act (ZGD-1)17 NLB hereby gives the following Corporate Governance Statement of NLB as a part of the Business Report of the NLB Group Annual Report 2022. The main function of this statement is the prompt informing of investors on the coherence of the Bank’s corporate governance system. 1. COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE 1.1. References to the Code on Corporate Governance The recommended best corporate governance practices contribute to a transparent and understandable corporate The Corporate Governance Statement of NLB is included in the Business Report of the NLB Group Annual Report and is also published as a separate report on the Bank’s website under the chapter on Corporate Governance, as well as on the website of the Ljubljana Stock Exchange. NLB strives to increase the level of its business transparency and informs the shareholders and other expert community in line with the Guidelines on Disclosure for Listed Companies (Ljubljana Stock Exchange, 18 December 2020) on electronic communications system of the Ljubljana Stock Exchange and in line with Rules and Regulations of the Luxembourg Stock Exchange, as well as in line with Rules of the London Stock Exchange through Regulatory News Services (RNS) of the London Stock Exchange. NLB also has its own corporate governance code. The NLB Group Code of Conduct is a standardised document for all members of the Group that defines values, lays down the standards of ethical business conduct, and serves as the guideline for all our relationships regardless of whether it involves clients, competitors, business partners, state authorities, regulators, shareholders, or internal relationships governance system, which promotes both domestic and foreign between employees. At the same time, it is the basis of the investor confidence, as well as the confidence of employees, other stakeholders (regulators, suppliers, etc.), and the public. Group values and basic principles of conduct which provide specific conduct guidelines to its employees. The aim of this A decision on which code the Bank will follow was made jointly approach is to ensure compliance with all applicable laws, by the Management Board and the Supervisory Board of the Bank by adopting the Corporate Governance Policy of NLB. 18 In 2022, the Bank analysed changes made with a renewed regulations, and standards. It is published on the Bank’s webpage. version of the Slovenian Corporate Governance Code for Listed The Corporate Governance system of the Bank and all Companies, as it will be the first used for preparation of the relevant information on Bank’s management that exceeds the Corporate Governance Statement of NLB for the business year requirements of article 70 of the Companies Act (ZGD-1) are 2022. published in the chapter of Risk Management of this annual report, where ESG Risk Management for the year 2022 is Compliance with the Slovenian Corporate Governance Code described, as well as in the Sustainability chapter of this annual for Listed Companies is explained in this statement on ‘comply report, and the NLB Group Sustainability Report 2022. Some or explain basis,’ in which the Bank provides an explanation regarding deviations, reasoning for non-compliance with a certain recommendation, or alternative practices performed mostly due to stricter banking regulation. The statement refers to the Bank’s system of corporate governance from the beginning to the end of the financial year, which also other aspects about the functioning of the Bank’s managing bodies are described in the chapter of Corporate Governance of this annual report, as well as in the Corporate Governance Policy of NLB published on the NLB’s website. Information on the Diversity Policy and Remuneration Policy and ESG risks is also described in the Pillar 3 Disclosures according to Basel corresponds to the beginning and the end of the calendar year standards. (from 1 January until 31 December). 2. COMPLIANCE WITH THE SLOVENIAN CORPORATE GOVERNANCE CODE FOR LISTED COMPANIES The Bank does not follow or partially implement or adhere to different, in most cases stricter, banking regulations with regard to the following recommendations: Recommendation 7: The Bank's strategic document and the overall framework for managing sustainable development is the publicly disclosed NLB Group Sustainability Framework. The Comprehensive Sustainability Policy of NLB and NLB Group will be adopted in 2023. The bank also started activities to develop the NLB Group Net Zero Business Strategy in line with UNEP FI – Net Zero Banking Alliance (NZBA) guidance and methodology to decarbonize its portfolios. The Net Zero Business Strategy will be adopted by the end of 2023, and Net Zero portfolio targets will be publicly announced. Recommendation 7.1: Guidelines for identifying and acting on the bank's sustainability priorities are presented in the NLB Group Sustainability Report. As a signatory to the UNEP FI PRB 19, the Bank has undertaken an impact analysis with the aim of aligning the Bank's strategy and practices with the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreement. The analysis includes a materiality analysis (identification of key ESG issues that could affect the performance of the company and its stakeholders), the context of the Bank's business, and the specificities of the region in which the Bank operates. Recommendation 7.2: The NLB Group Sustainability Framework has been adopted by the Bank's Management Board. Recommendation 7.4: Human rights issues, human health and environmental protection, fundamental labour rights, the prevention of discrimination and inequalities and the promotion and advancement of equal opportunities, consumer rights, fiscal responsibility, and the prevention of corruption and other illegal practices are included in the Human Rights Policy in the NLB Group. 17 The Companies Law (ZGD- 1; Official Gazette of the RoS, No. 65/09 and consecutive changes). 18 November 2020 and February 2023. 19 UNEFI PRB - United Nations Environment Programme Finance Initiative Principles for Responsible Banking. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 125 Recommendation 12.1: In assessing a candidate’s eligibility as a Supervisory Board member, statutory criteria are applied, however, it is not necessary for candidates to have a certificate of NLB. Members of the Supervisory Board do not sign a special Board shall comprise ordinary or preference shares of NLB, or agreement on access to the archives upon taking the position. share linked instruments, or equivalent non-cash instruments (hereinafter collectively: ‘Instruments’). This requirement applies evidencing their specialised professional competence for membership on a Supervisory Board, such as the Certificate Recommendation 17.6: Decisions discussed at the meeting are always available to members of the Supervisory Board in the to both the non-deferred and the deferred part of variable remuneration (which is different from recommendation 23.5, of the Slovenian Directors’ Association, or any other relevant bank's information system. As soon as it is possible, but no later which provides that variable remuneration given as shares, certificate. However, all strict conditions must be fulfilled than three working days after the meeting of the Supervisory as well as the execution of stock options and any other rights according to the banking legislature, including the wide range Board, the Secretariat prepares copies of the decisions adopted to acquire shares or be remunerated based on share price of knowledge, skills, and experience. at the meetings of the Supervisory Board and forwards them movements, must not be made possible for at least three Recommendation 13.1: In 2022, Supervisory Board members did not inform each other of the content of the statements of employee of the Secretariat, who is present at the meeting, remuneration of an individual Identified Staff for a particular approves the amendments to the resolutions and thereby year does not exceed EUR 50,000 and does not exceed one independence at one of the meetings of the Supervisory Board. confirms the consistency of the content of the resolutions third of his/her total remuneration for such year, ZBan-3 to the proposer and all recipients listed in each decision. An years after such rights were awarded). When the variable MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report However, starting in 2023 such good practice will be put in adopted at the meeting. place. Recommendation no. 14.2: The currently valid Rules of Procedure of the Supervisory Board of NLB (Rules) are prepared according to strict rules governing banks. They do performing their function based on the decisions of the General of the Management Board of NLB, which was also approved not include the list of all types of transactions for which the Meeting of shareholders dated 21 October 2019 and 15 June by the General Meeting of shareholders of the Bank on 12 Management Board needs prior approval of the Supervisory 2020. Remuneration of the members of the Supervisory Board December 2022. Voting on this policy by the General Meeting of Board, as this provision is included in the Articles of Association is regulated by the Remuneration Policy for the Members shareholders was of a consultative nature. did not receive attendance fees but received payments for Members of the Supervisory Board of NLB. and the Members Recommendation 19.1: In 2022, the Supervisory Board members (representatives of capital and representatives of workers) allows for an exception from the requirement that a part of variable remuneration must comprise in Instruments. On 19 October 2022, the Supervisory Board of the Bank adopted a new (i.e., version 2 of the) Remuneration Policy for the of NLB. Changes to the mentioned Rules that will be adopted in Q1 2023 will also list all tasks of the Supervisory Board. The currently mentioned Rules also do not include the Supervisory of the Supervisory Board of NLB and the Members of the Management Board of NLB.20 The voting on mentioned policy by the General Meeting of shareholders was of a consultative Board’s evaluation, education, and training of the members of nature. the Supervisory Board. However, the renewed Rules will also address those issues. The Rules of Procedure of the Supervisory Board of NLB also do not include provisions on the Agreement Recommendation 20: Minutes of the Supervisory Board are not taken only by the Secretary of the Supervisory Board, but also on access to the archives after expiration of the term of office by certain employees of the Secretariat who are present at the of the members of the Supervisory Board, as access to the meeting. Recommendation 26.6: The Bank maintains a list of transactions with related persons according to Banking Act (ZBan-3). A list of transactions with related persons is submitted to the Supervisory Board by special demand. Recommendation 30.4: NLB draws up its financial calendar, which is published on the Banks’ website and includes the date of the Annual General Meeting. However, it doesn’t provide information on the dividend payment date which is announced archives after expiration of the term of office is determined by the provisions of the Rules of Procedure of the Supervisory Board of NLB and not a special agreement. Recommendation no. 14.3: The Rules of Procedure of the Supervisory Board of NLB do not include the scope of topics Recommendations 23.4 and 23.5: In 2022, NLB did not award or pay variable remuneration in the form of NLB’s shares to in the publication of the Agenda and Proposed Resolutions to be passed at the Annual General Meeting. The dividend any member of the NLB Management Board, nor do stock payment date is determined based on KDD Operations Rules option plans and comparable financial instruments make up (Central Securities Clearing Corporation). most of the variable remuneration of any member of the NLB and timeframe to be respected by the Management Board in Management Board. In relation to the awarding and payment its periodic reporting of the Supervisory Board. However, the of variable remuneration in ordinary or preference shares scope of topics and time frames of periodic reporting to the Supervisory Board are included in annual Action Plan of the Supervisory Board. Competent organisational units of the Bank of NLB, or share linked instruments, or equivalent non-cash instruments NLB complies with the Banking Act (ZBan-3). 21 In accordance with point 3 of the second paragraph of Article Recommendation 32.7: NLB does not publish the rules of procedure of its bodies (Management Board and Supervisory Board and its committees) on its website. However, each year the Bank discloses the composition, competences, and work of its managing bodies in the Corporate Governance Statement take care that timely information is provided to the Supervisory 190 of the ZBan-3, at least 50% of the variable remuneration of NLB and publishes it in the NLB Group Annual Report on Board. of (among other) each member of the NLB Management the Bank's website, as well as on the webpage of the Ljubljana Stock Exchange. Recommendation 14.6: Access to the archives after expiration of the term of office of the members of the Supervisory Board is determined by the Rules of Procedure of the Supervisory Board 20 Adopted by the Supervisory Board on 15 October 2021 and confirmed by the General Meeting of shareholders on 16 December 2021, changes were adopted by the Supervisory Board on 19 October 2022 and confirmed by the General Meeting on 12 December 2022. 21 Banking Act (ZBan-3; Official Gazette of the RS, No 92/21 and 123/21). Contents 126 3. MAIN FEATURES OF INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN RELATION TO FINANCIAL REPORTING completeness, functionality, and adequacy of the internal The risk management function represents an important part control system. An internal audit is completely independent of the overall management and governance system in the of both the first line and the second-level control functions. Group. This function in NLB is organised within the Risk stream, covered by the member of the Management Board in charge of In the event of deficiencies, irregularities of breaches identified risk (Chief Risk Officer - CRO). in the process of implementation of internal controls the breaches are discussed at the Operational Risk Committee The risk management function is performed by the Global Risk (which is the collective decision-making body appointed by function. In accordance with the competences, authorisations, the Management Board of the Bank that is established for and responsibilities, Global Risk is represented by its General NLB is governed by the provisions of the Capital Requirements execution of individual tasks within powers of the Management Manager. Global Risk is in functional and organisational Regulation (CRR), with amendments, together with all applicable delegated acts, the Banking Act (ZBan-3) and the Regulation on Internal Governance Arrangements, the Board of the Bank). The mentioned committee adopts decisions terms separate from other functions where business decisions so that appropriate actions are taken and informs the are adopted and where a potential conflict of interest may Management Board of the Bank about deficiencies and actions arise with the risk management function. The head of the risk MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Management Body and the Internal Capital Adequacy taken on that behalf. Assessment Process for Banks and Savings Banks regulating, and relevant EBA Guidelines, among others, the Bank’s obligation to set up, maintain appropriate internal control, 3.1.2. Internal Control Functions The internal control functions are part of the system of the and risk management systems. Due to the above, NLB has internal governance in the Bank. Internal control functions developed a steady and reliable internal governance system encompassing the following: include: a) The Internal Audit Function The Internal Audit function is organised according to the Charter on the Internal Audit of NLB adopted by the management function has direct access to the Management Board of the NLB, and at the same time unhindered and independent access to the Supervisory Board of NLB and the Risk Committee of the Supervisory Board of the NLB. 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, and is subject to an 3.1. Internal control mechanisms Suitability of the internal control mechanisms are determined by the independence, quality, and validity of: • the rules for and controls of the implementation of the Bank's organisational procedures, business procedures, and work procedures (internal controls); and • the internal control functions and departments (internal control functions). 3.1.1. Internal Controls The policy entitled, ‘Internal Control System’ defines a system of internal controls as set of rules, procedures, and organisational structures. The system of internal controls in NLB is designed to ensure that for each key risk there is a process or other measure to reduce or manage that risk, and that the process or measure is effective for that purpose. The mentioned policy introduces a new description of the three lines of defence, namely: 1. First-level (or line) controls are implemented into business and non-business organisational units (OU); 2. Second-level controls are divided between Risk Management and Compliance control functions (including AML/CTF and Information security management) that carry out independent controls and supervision over the operation of the first line of defence; and 3. The third level of controls is performed by the internal audit function, which assesses and regularly checks the Management Board on 13 November 2018 (and supplemented appropriate upward and downward flow of information. The on 13 August 2019), to which the Supervisory Board of NLB gave competence line Risk Management in NLB, encompassing its approval (30 November 2018 and 6 September 2019). The Management Board has set up an independent internal audit function which gives assurances and advice about risk several professional areas, is 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 management, internal controls system, and management of Group level. the NLB. The mission and the principal task of the Internal Audit is to consolidate and secure the value of the Bank by issuing objective assurances based on risk assessment, with consultancy and a deep understanding of the Bank’s In the members of the Group, the risk management function is organised according to the local legislation, considering the bases for set-up, organisation, and activities in risk operations. In addition to that, the Internal Audit carries out management in the members, as defined in the document ‘Risk regular control of the quality of operation of the other internal Management Standards in the NLB Group.’ audit departments in the Group and takes care of constant development of the internal auditing function. The Supervisory Board of NLB must issue its approval of the c) The Compliance Function, Information Security Function, and the AML/CTF Function Compliance and Integrity in the Group in its role as internal appointment, remuneration, and dismissal to the Head of the control function performs control activities with respect to the Internal Audit, which ensures their independence and so, the main following areas: independence of the work of the Internal Audit. 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 Management Board, in agreement with the Supervisory Board of NLB. • • • • • • 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; Contents 127 • • development of compliance risk methodologies, and built control mechanisms in source applications, and archiving Explanation regarding the holders of securities that carry setting and monitoring ethics and integrity standards; pursuant to the laws and internal regulations. Furthermore, special control rights harmonisation of policies and practices within the Group the policy precisely defines primary accounting controls, (Point 4 of the sixth paragraph of Article 70 of the ZGD-1) (Competence line Compliance and Integrity). performed in the scope of analytical bookkeeping, and secondary accounting controls, i.e., checking the efficiency The Bank did not issue any securities carrying special Compliance and Integrity is an organisational unit of the Bank, of implementation of primary accounting controls. With an controlling rights. placed directly under the Bank’s Management Board in the efficient mechanism of controls in accounting reporting, NLB organisational structure. The Bank adopted an Integrity and ensures: Explanation regarding restrictions related to voting rights, in Compliance Policy of NLB and NLB Group, which regulates the • A reliable decision-making and operation support system; particular: (i) restrictions of voting rights to a certain stake or method and scope of the activities of the compliance function • Accurate, complete, and timely accounting data, the resulting certain number of votes, (ii) deadlines for executing voting in the Bank. Supervision over the compliance of operations is accounting, and other reports of the Bank; rights, and (iii) agreements in which, based on the company’s within the competence of the Compliance and Integrity. This • Compliance with legal and other requirements. cooperation, the financial rights arising from securities are enables the Compliance and Integrity to operate independently separated from the rights of ownership of such securities from other Bank’s departments. Financial statements of NLB and consolidated financial (Point 6 of the sixth paragraph of Article 70 of the ZGD-1) statements of the NLB Group are audited by the auditing The director of Compliance and Integrity does not perform any company Ernst & Young d.o.o., Ljubljana. The mentioned The shares of the Bank are freely transferable, subject to the other function at the Bank that could possibly lead to conflict auditing company was appointed as the auditor of NLB at the provisions of the Articles of Association of the Bank which of interests. To ensure his independence, the director reports General Meeting of shareholders of the Bank for the financial require the approval of the Supervisory Board, namely for the to the Management Board and to a specific member of the years 2018 to 2022. Bank’s Management Board responsible for the compliance area (including information security, personal data protection, and AML/CTF functions), which additionally ensures the independence of operation of the Compliance and Integrity. As information security, AML/CTF, and Group AML functions are organised within Compliance and Integrity, CISO for NLB, Group CISO, DPO (Data Protection Officer), head of AML/CTF area for NLB, and the head of Group AML are ensured full independence through equal reporting lines as the director of Compliance and Integrity and have direct access and a separate reporting line to the Bank’s Supervisory Board. Following NLB’s model, the compliance function has been established in the core members of the Group, and as well is based on the Group standards for the compliance and integrity area. 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 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) Significant direct and indirect ownership of the company’s securities in terms of achieving a qualifying holding as defined in the Takeovers Act (as of 31 December 2022). operation of the complete accounting function with the purpose Shareholder 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- RoS EBRD(i) Schroders plc(i) (i) In the form of GDRs. Number of shares Percentage of shares Nature of ownership 5,000,001 / / 25.00 >5 and <10 >5 and <10 Shares GDRs GDRs More information on the Bank’s Share Capital is available on the website: https://www.nlb.si/shares. 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 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. 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 for 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 same time committing to the Bank, it will not exercise voting rights on the basis of the instructions of an individual third party for whose account it has acquired the shares if, together with the instructions for voting, it does not receive a written guarantee from that person that this person has shares for his own account, and that this person is not, directly or indirectly, a holder of more than 25% of the Bank’s voting rights. The acquirer who exceeds the share of 25% of the Bank’s shares with voting rights and does not require the issuance of approval for the transfer of shares, or does not receive the MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 128 approval of the Bank, may exercise the voting right from 25% of law regulating banking. The Bank assesses every candidate law regulating banking. The Bank assesses every candidate the shares with the voting rights. following the Bank’s Policy governing the Fit & Proper following the Bank’s Policy governing Fit & Proper assessment assessment prior to the appointment. prior to the appointment. There are no restrictions other than those mentioned and those that are regulatory. The Supervisory Board The Supervisory Board of the Bank consists of a total of twelve Amendments to Articles of Association A qualified majority of at least 75% (seventy-five per cent) of the Explanation on the (i) company’s rules on appointment or members, of which eight members represent the interests of votes cast by shareholders at the general meeting of the Bank’s replacement of members of the management or supervisory shareholders and four members represent the interests of shareholders is required for the adoption of any amendments bodies, and (ii) changes to company’s Articles of Association employees. Members representing the interests of shareholders of the Articles of Association. (Point 8 of the sixth paragraph of Article 70 of the ZGD-1) shall be elected and recalled by the Bank’s General Meeting The appointment or replacement of members of the Board of the Bank and members representing the interests of the management, particularly authorisations to issue or management or supervisory bodies of employees shall be elected and recalled by the Workers’ purchase own shares The Management Board Articles of Association define that the Management Board of the Bank is comprised of three to seven members, one of whom Council of the Bank. Members of the Supervisory Board (Point 9 of the sixth paragraph of Article 70 of the ZGD-1) representing the interests of shareholders are elected by an ordinary majority of votes cast by shareholders. No authorisation exists which would authorise the members of the management to issue or purchase own shares of the Bank. from persons proposed by shareholders or the Supervisory Explanation regarding the authorisation of the members is appointed President of the Management Board of the Bank. The term of office of the Supervisory Board members The number of Management Board members is determined by commences on the day their appointment enters into force a resolution of the Bank’s Supervisory Board. The President and (start of term of office) and lasts up until the end of the Bank's other members of the Management Board are appointed and Annual General Meeting of shareholders which decides on the recalled by the Supervisory Board of the Bank; the President use of accumulated profit for the fourth business year since the of the Management Board may propose to the Chair of the start of their term of office, unless otherwise stipulated at the Supervisory Board of the Bank to appoint or recall an individual time of appointment of individual members. In this context, the member or the remaining members of the Management Board first year is deemed the business year in which the members of of the Bank. the Supervisory Board of the Bank started their term of office. The President and members of the Management Board shall be The General Meeting of the Bank may dismiss an individual appointed for a period of five years and may be re-appointed or all members of the Supervisory Board (representatives of for another term of office. The President and members of the shareholders) even before the expiration of their term of office. Management Board may be recalled prior to the expiry of their A resolution on a dismissal shall be valid if adopted with at least term of office in accordance with applicable laws and Articles a three-quarter majority of all votes cast. of Association. Each member of the Management Board of the Bank may prematurely resign her/his term of office with The Supervisory Board of the Bank shall at its first meeting after a period of notice of three months. A written notice shall be an appointment elect from among its members a Chair and at delivered to the Chair of the Supervisory Board of the Bank. The least one Deputy Chair of the Supervisory Board of the Bank. notice term may be shorter than three months if requested by A member representing the interests of employees cannot be the resigning member of the Management Board of the Bank in elected Chair or Deputy Chair of the Supervisory Board of the his/her notice and is subject to the approval of the Supervisory Bank. All the supervisory board members shall be independent Board of the Bank. professionals as defined by the Articles of Association. A member of the Bank’s Management Board may only be A member of the Bank’s Supervisory Board may only be a a person who fulfils the legally prescribed conditions for a person who fulfils the legally prescribed conditions for a management board member under the law on banking and supervisory board member under the law on banking and who who obtained a licence from the BoS or the ECB, if executing the obtained a licence from the BoS or the ECB, if executing the competences and tasks from Item (e) of paragraph 1 of Article competences and tasks from Item (e) of paragraph 1 of Article 4 of Regulation (EU) no. 1024/2013 for the performance of the 4 of Regulation (EU) no. 1024/2013 for the performance of the function of a bank’s management board member under the function of a bank’s supervisory board member under the 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 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. The General Meeting is convened by the Management Board. 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 129 ensure unhindered operations of the Bank. The Supervisory The shareholders decided on the allocation of distributable Board may amend the agenda of the General Meeting profit for 2021. The distributable profit of the Bank as at 31 convened in line with the bylaws. December 2021 was EUR 458,266,602.05. Shareholders decided that the part of the distributable profit in total amount of EUR As a rule, the General Meeting of the Bank shall be convened 50 million shall be paid out to the shareholders as a dividend, at the registered office of the Bank, yet it may also be convened which amounts to EUR 2.50 gross per share (the first tranche). at another venue specified by the convenor. The Management Board may stipulate that shareholders may attend or vote The General Meeting of NLB also took note on various reports before or at the General Meeting by electronic means without and voted on the proposal regarding the amendments and 6. INFORMATION ABOUT THE COMPOSITION AND WORK OF THE MANAGEMENT AND SUPERVISORY BODY AND ITS COMMITTEES physical presence. The General Meeting of shareholders shall supplements to the Articles of Association of NLB, appointed the adopt resolutions by simple majority of the votes cast, unless auditing company KPMG Slovenija, d.o.o. as the auditor of NLB 6.1. The Management Board MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report the applicable laws or the Bank’s Articles of Association for the financial years 2023-2026, and adopted the Policy on stipulate a larger majority or other conditions (adoption and the provision of diversity of the management body and senior amendments of the Articles of Association, issue of convertible management. bonds or other equity securities, exclusion of pre-emptive right of existing shareholders, decrease in share capital, the The 39th General Meeting of NLB Shareholders held on status restructuring of the Bank, or liquidation of the Bank and 12 December 2022 confirmed on additional allocation of discharge of Supervisory Board members). distributable profit for 2021, more precisely on the second tranche of dividend payments, the payment of additional The shareholders have the right to participate at the general dividends at EUR 2.50 per share, making a total dividend pay- meeting of the Bank, the voting right, the pre-emptive right to out in 2022 EUR 100 million; The remaining part of the NLB’s subscribe for new shares in the case of a share capital increase, distributable profit will remain undistributed and represents the right to profit participation (dividends), the right to a share retained earnings. in the surplus in the event of liquidation or bankruptcy of the Bank, and the right to be informed. At the General Meeting, the NLB Shareholders also voted on the Remuneration Policy for the Members of the Supervisory According to Article 296 of the Companies Act, NLB informs Board of NLB and the Members of the Management Board of shareholders of their rights as shareholders in an Information NLB and took note of the termination of the term of office of two on the Rights of Shareholders that is published among the NLB Supervisory Board members - workers’ representatives, documents for convocation of each General Meeting (i.e., on namely: expansion of the agenda, proposals by shareholders, voting • due to the statement of Janja Žabjek Dolinšek made on proposals by shareholders, and the shareholders’ right to be 26 May 2022 regarding her termination of the function informed). of a member of the Supervisory Board of NLB, workers’ representative, her term of office was terminated on 8 July There were two General Meetings of shareholders in 2022. 2022; Shareholders of NLB gathered at the 38th General Meeting • that NLB Works Council on 12 September 2022 passed on 20 June 2022. At the General Meeting, shareholders a decision on the recall of Bojana Šteblaj from the function acknowledged the adopted NLB Group 2021 Annual Report, of a member of the Supervisory Board of NLB, workers’ the Report of the Supervisory Board of NLB on the results of the representative, based on which her term of office in the examination of the NLB Group Annual Report 2021, the Report Supervisory Board of NLB terminated on 12 September 2022. on renumerations for the business year 2021, and the Additional information to the Report on remuneration for the business year 2021 based on SSH's Baselines. The shareholders also decided on the allocation of distributable profit for 2021 and granted a discharge from liability to the Management Board and Supervisory Board of NLB for the previous year. At the beginning of 2022, the Management Board of the Bank consisted of Blaž Brodnjak, CEO, Archibald Kremser, CFO, Andreas Burkhardt, CRO. Due to new challenges brought by the Group expansion (the acquisition of Komercijalna Banka, intensive digitalisation, and the emphasis on top quality user experience, as well as a commitment to sustainable operations and development) the Supervisory Board on 20 January 2022 appointed Hedvika Usenik, Antonio Argir, and Andrej Lasič as three new members of the Management Board. They assumed their functions on 28 April 2022, upon receiving approval from the regulator. They all come from NLB or the Group, and have extensive experience and a proven value-creating track record. With the mentioned extension, the Management Board of the Bank consists of six members, namely: Blaž Brodnjak as President & CEO, Archibald Kremser as Chief Financial Officer (CFO), Andreas Burkhardt as Chief Risk Officer (CRO), as well as Hedvika Usenik as Chief Marketing Officer (CMO) - responsible for Retail Banking and Private Banking, Antonio Argir who is responsible for Group governance, payments, and innovations, and Andrej Lasič as CMO -responsible for Corporate and Investment Banking. Work of the Management Board In 2022, the Management Board continued to work on the implementation of the NLB Group Strategy and the ESG factors’ inclusion in the NLB Group business model. Even though the tragic war in Ukraine had significant influence on prices, consumer behaviour, and consequentially volatile capital markets, in 2022 the Group delivered remarkable business results. They enabled the Bank to pay out a distributable profit for 2021 in the form of dividends in the total amount of EUR 100 million, thereby reaffirming NLB Group's stable and successful business operations and strong capital position. The dividends were paid in two instalments, more specifically in the amount of EUR 50 million in June 2022 and in the amount of EUR 50 million in December 2022. Contents 130 The Bank reached important business milestones – such as the David Eric Simon, Gregor Rok Kastelic, and Verica Trstenjak), • Proposals to convene the General Meeting of shareholders acquisition of Sberbank banka, Ljubljana in March 2022 (later and four were representatives of employees (Sergeja Kočar, for 20 June 2022 and 12 December 2022; renamed to N Banka) and the merger of two Serbian banking Bojana Šteblaj, Janja Žabjek Dolinšek, and Tadeja Žbontar • Proposed appointment of three new members of the subsidiaries (NLB Banka, Beograd and Komercijalna Banka, Rems as a member of the Supervisory Board of the NLB – the Management Board of the NLB; Nomination of candidates for Beograd, completed by the end of April 2022). After launching representative of the workers). members of the Supervisory Board; the Lease&Go company in Ljubljana in 2020, strategic activities • Collective F&P assessment suitability of the members of the of the Group were further enhanced by establishing leasing Due to the statement of Janja Žabjek Dolinšek made on 26 May Management Board and the Supervisory Board; Supervisory companies in North Macedonia and in Serbia. The Group will 2022 regarding her termination of the function, because she Board self-assessment; Audit Committee Self-assessment continue growing prudently and increasing its market shares, was leaving NLB, her term of office was terminated on 8 July 2021; Achievements of the goals of the Management Board in above all, however, we will focus on providing our clients with 2022- as the NLB Works Council recalled her. The Works Council 2021 and proposed goals for 2023; innovative solutions and an ever-improving user experience, passed a decision on 12 September 2022 on the recall of Bojana • Proposed goals of the NLB Group; Annual assessment of the 24/7/365. The work of the Management Board was not merely Šteblaj from the function, based on which her term of office as identified staff; Awarding of variable pay to the Management on the business performance, but also with its’ ability to a member of the Supervisory Board – Workers' Representative Board members and heads of control functions; Development quickly adapt to ever more complex business challenges and was terminated on 12 September 2022. The General Meeting plan for three new members of the Management Board; opportunities within the financial industry. In this sense, another of shareholders took note of the resignations of members of Training for the members of the Supervisory Board in 2022; important milestone the Group achieved, was founding the the Supervisory Board – Workers’ Representative in its session Reappointment of the Internal Audit Director; NLB DigIT company in Belgrade. The company is dedicated dated 12 December 2022. • Selection of statutory auditor for financial years from 2023 to finding and designing IT solutions for the entire Group, onwards; to leverage the accumulated know-how and deploy the Statement of Independence of the Members of the • Periodic reports on the status of information security in NLB underlying common tech solutions across the Group’s markets. Supervisory Board In accordance with Article 16 of the Articles of Association of and the NLB Group; Annual Report for the 2021 ECRA – general risk assessment regarding integrity, and compliance In June 2022, NLB officially joined the Net-Zero Banking NLB, all Supervisory Board members must be independent operations at NLB and the Group level; Alliance (NZBA), the UN-convened alliance of banks worldwide, experts. Persons representing the interests of employees in the • NLB Group Financial Plan 2023 and financial projections committed to aligning their lending and investment portfolios Supervisory Board of the Bank are considered independent 2024–2026; Interim Reports on the NLB Group Operations; with net-zero emissions by 2050 or sooner, as set by the despite the existence of an employment relationship with the Financial Calendar 2024; most ambitious targets of the Paris Climate Agreement. The Bank upon fulfilling certain terms and conditions. • Regular risk reports for NLB and NLB Group; Information Management Board is deeply aware of the banks’ vital role in on Pillar III Disclosures for 2021; NLB Group Recovery Plan fighting climate change by supporting the global transition of A statement of independence, in which they declare themselves for 2022; Report on the Top 50 groups of clients by exposure the real economy towards net-zero, which is why we not only on their meeting of the criteria of conflict of interest, is provided in the NLB Group, Top 20 restructurings; Reputation Risk strive to reinforce, accelerate, and support the implementation by a candidate for a function as a member of the Supervisory Management; of decarbonisation, but also want to lead by example. Besides Board, upon each change that would mean change of his/her • Internal Audit’s Annual Report for 2021; Internal Audit Plan environmental issues, the Management Board is equally active independence status once yearly. It is published on the Bank’s (2023 & long-term plan), Action Plan for Compliance & about addressing social and governance topics, we advocate webpage. equal opportunities, as well as independent and professional corporate governance. To that extent, the Management Board was extremely proud of receiving very good first ESG rating in Work of the Supervisory Board In 2022, the Supervisory Board met at eight regular and 12 • Report of the progress and implementation of the sustainability factors in the NLB Group; Report on the Integrity for 2023; Regular periodic reports on Internal Audit; Compliance and Security, and on Information Security in NLB; December 2022 assessed by Sustainalytics. correspondence sessions. Upon receiving reports from its progress in the implementation of sustainability factors in the Detailed information on the composition of the Management the following most important decisions: • Reports on the documents received from the BoS and the Board can be found in Appendix C.1 of this statement. • NLB Group Strategy Progress Update; NLB Payments Strategy ECB and reports on implementation of deficiencies; ECB and committees, the Supervisory Board acquainted itself or adopted NLB Group; 6.2. The Supervisory Board At the beginning of 2022, the Supervisory Board of NLB consisted of 12 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, Islam Osama Zekry, update; on the implementation of the requirements; ECB review and • Annual NLB Group Report for 2021; E&Y report after the final evaluation process (SREP); audit of 2021 financial statements; Report of the Supervisory • Review of the Diversity Policy; Changes to the Remuneration Board of NLB on the Results of Examining the Annual NLB Policy of the Members of Supervisory Board of NLB and Group Report for 2021; Corporate Governance Statement the Management Board of NLB; Remuneration Policy for of NLB; Risk Management Statement; Annual Report of Employees of NLB and NLB Group – annual review; Annual Internal Audit for 2021; Comprehensive Opinion of the Internal Review of the Diversity Policy; Amendment of the Policy to Audit for 2021; and Review of the remuneration report by an assess the suitability of the Management and Supervisory external auditor; Board members; MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 131 • IT integration plan for N Banka; Implementation of IT 6.3.1. The Audit Committee of the Supervisory Sustainable Committee; Report on the court proceedings Strategy; Status of IT – periodic Reports; Information on the Board of NLB exceeding EUR 0.5 million; achievement of goals for 2022 in the area of Information The Audit Committee monitors and prepares draft resolutions • Self-assessment of the Audit Committee for 2021. Technology in the Group; for the Supervisory Board on accounting reporting, internal • Acquisition of the Sberbank banka; Merger of N Banka control and risk management, internal audit, compliance (former Sberbank banka) to NLB; merger of Serbian banks; of operations, and external audit, and as well monitors the Information on Project Afina; Foundation of a new IT implementation of regulatory measures. company in Serbia; Management of the largest exposures to clients in restructuring procedures; write-offs of claims, At the end of 2022, the composition of the committee was approvals of transactions with persons in special relations as follows: David Eric Simon (Chairman), Shrenik Dhirajlal with the Bank; Prior consent to legal transaction with MIGA, Davda (Deputy Chairman), Primož Karpe, Gregor Rok Kastelic Prior consent for borrowing of NLB in the form of Senior (members). Changes in membership of the committee Preferred notes; Large exposures, Approvals of transaction that occurred during the year are reflected in the chart on with persons in special relation with the bank; Sale of Supervisory Board Committees (C2 below). receivables, Merger of companies in Serbia, Information on loan agreements in Swiss Francs, etc. There were six regular, one extraordinary, and three Composition of the Supervisory Board members is described in following is a summary of key topics considered by the Audit correspondence sessions of the Audit Committee in 2022. The the Appendix C.2 of this statement. 6.3. The Supervisory Board Committees All five Committees of the Supervisory Board function as consulting bodies of the Supervisory Board of NLB and discuss the material and proposals of Management Board of NLB for the Supervisory Board meetings related to a particular area. The Supervisory Board has the following committees: • • • • • The Audit Committee The Risk Committee The Nomination Committee The Remuneration Committee The Operations and IT Committee. Committees are composed of at least three members of the Supervisory Board. The Worker’s Council can nominate one Supervisory Board member – a representative of the workers into each committee. The member of the Committee may only be appointed from among the members of the Supervisory Board. The term of office of Chair, the Deputy Chair, and members of the Committee should not exceed their term of office as Supervisory Board members. The responsibilities of committees are defined in Rules of Procedure of the Committees of the Supervisory Board of NLB. Committee: • NLB Group 2021 Annual Report, Key Performance Indicators; Comprehensive Opinion of Internal Audit for 2021; Internal Audit Annual Report for 2021;Corporate Governance Statement of NLB; Statement on Management of Risk of the NLB, The NLB Group Sustainability Report for 2021; Annual Report for the 2021 ECRA – general risk assessment regarding integrity and compliance operations at NLB and NLB Group; Audit planning for 2022 financial statements; Confirmation of the services of the auditor to perform services to review the report on remuneration; • Regular interim reports on the operations of the NLB Group, Business Performance Indicatory for NLB and NLB Group, Quarterly Internal Audit Reports, Compliance and Integrity Reports, Reports on Information security assurance in NLB; Assessment of the NLB Group identified employees in control functions for 2021; Approval of the payment of deferred variable part for Directors in control functions; • Audit Plan 2022, Internal Audit Plan (2023 & long-term), Action Plan for Compliance and Integrity for 2023; Initiation of procurement process for selection of statutory auditor; Selection of statutory auditor for 2023 onwards; Reappointment of the Internal Audit Director; • Regular reports on overdue material recommendations of the Internal Audit; Reports on the documents received from the BoS and ECB and on the implementation of the requirements of the BoS and ECB; Policy of the Internal Controls System; Rules of Procedure of the NLB Group 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 operations. It is consulted on the Group’s current and future risk appetite, the corresponding risk profile and risk management strategy, and helps carry out control over senior management concerning implementation of the risk management strategy. At the end of 2022, the composition of the committee was as follows: Andreas Klingen (Chairman), Shrenik Dhirajlal Davda (Deputy Chairman), Islam Osama Zekry, Mark William Lane Richards, Gregor Rok Kastelic, and David Eric Simon (members). Changes in membership of the committee that occurred during the year are reflected in the chart on Supervisory Board Committees (C2 below). There were five regular and one extraordinary sessions of the Risk Committee in 2022. Following is a summary of key topics considered by the Risk Committee: • Statement of Management of Risk of the NLB; • Regular quarterly risk reports of NLB and the NLB Group; Pillar III Disclosures of the NLB Group for 2021 and Acknowledgement of quarterly Pillar III Disclosures; • Risk Management Strategy of the NLB Group; Risk Appetite of the NLB Group; • Internal liquidity adequacy process (ILAAP), The Internal Capital Adequacy Assessment Process (ICAAP) in NLB Group; • NLB Group Recovery plan for 2022; • Top exposure to corporate client in NLB and NLB Group; NLB Group Non-Performing Exposure and Foreclosed Assets Strategy for the period 2022-2024; • Quarterly Information on status of information security in NLB and NLB Group; • Report on Top 50 groups of clients by exposure in the NLB Group; Report on Top 20 largest restructuring cases • Information of the assessment of the NLB Group and NLB results and identified employees in control function for the year 2021; Approval of the payment of the deferred variable part of the salary for the Director of the Global Risk; • Acquisition of Sberbank banka, Ljubljana; Proposals for the issuance of prior consent of the Supervisory Board of NLB for a legal transaction based on Banking Act (ZBan-3); prior consent to conclude legal deal with MIGA, consents to early MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 132 repayments; approval of overdraft on business account of a client and final write-offs of receivables over 1 million EUR; 6.3.4 The Remuneration Committee of the 6.3.5. The Operations and IT Committee of the Supervisory Board of NLB Supervisory Board of NLB • Legal framework of sanctions; War between Russia and The Remuneration Committee carries out expert and The Committee monitors and prepares draft resolutions Ukraine – credit risk assessment; Analysis of scenarios in independent assessments of the remuneration policies and for the Supervisory Board, whereby the main tasks that it Serbia; practices and formulates initiatives for measures related to performs are the following: monitors the implementation of • Report on the material court proceedings for NLB and the improving the management of the Bank’s risks, capital, and the IT Strategy, Information Security Strategy, and Operations Group members. liquidity; prepares proposals for remuneration-related decisions Strategy; monitors key operations and IT KPIs and service 6.3.3. The Nomination Committee of the Supervisory Board of NLB The Nomination Committee drafts proposed resolutions for the Supervisory Board concerning the appointment and dismissal of the Management Board members; recommends candidates for Supervisory Board members; recommends to the Supervisory Board the dismissal of members of the Management Board and the Supervisory Board (representatives of capital); prepares the content of executive employment contracts for the President and members of the Management Board; evaluates the performance of the Management Board and the Supervisory Board; and assesses the knowledge, skills, and experience of individual members of the Management Board and Supervisory Board and the bodies as a whole. At the end of 2022, the composition of the committee was as follows: Primož Karpe (Chairman), Andreas Klingen (Deputy Chairman), Verica Trstenjak, Sergeja Kočar (members). Membership of Bojana Šteblaj was terminated on 12 September 2022. Changes in membership of the committee that occurred during the year are reflected in the chart on Supervisory Board Committees (C2 below). There were six regular sessions of the Nomination Committee in 2022. The following is a summary of key topics considered by the Nomination Committee: • Annual review of attendance of educational events and knowledge obtained by in individual Supervisory Board member; • Development Plan for Three New Members of the Management Board; • Amendment of the Policy on the provision of diversity of the management body and senior management; Amendment of the Policy to assess the suitability of the Management and Supervisory Board members; Annual Review of the Diversity Policy; of the Supervisory Board; and supervises the remuneration quality indicators; monitors key operations and IT projects and of senior management performing the risk management and initiatives; monitors operating risks in the area of Operations, compliance functions. IT and Security; monitors the recommendations for ensuring and increasing the level of information/cyber security issued At the end of 2022, the composition of the committee was as by CISO, addresses the report on potential violations, events, follows: Gregor Rok Kastelic (Chairman), Mark William Lane and incidents in the area of IT security; and monitors the Target Richards (Deputy Chairman), Shrenik Dhirajlal Davda and Operating Model implementation in the areas of IT, the Security Sergeja Kočar (members). Membership of Bojana Šteblaj was Operating System, Competence Centre, and Operations. terminated on 12 September 2022. Changes in membership of the committee that occurred during the year are reflected in the At the end of 2022, the composition of the committee was as chart on Supervisory Board Committees (C2 below). follows: Mark William Lane Richards (Chairman), Islam Osama There were six regular and three correspondence sessions Zekry (Deputy Chairman), Andreas Klingen, Primož Karpe, and Tadeja Žbontar Rems (members). The membership of Janja of the Remuneration Committee in 2022. The following is Žabjek Dolinšek was terminated on 8 July 2022. Changes in a summary of key topics considered by the Remuneration membership of the committee that occurred during the year Committee: are reflected in the chart on Supervisory Board Committees (C2 • Proposed goals of the Group for 2022 for the members of the below). Management Board of the NLB; • Confirmation of financial goals of the NLB Group, financial There were five sessions of the Operations and IT Committee goals of NLB and goals for each member of the Management Board of NLB for 2022; Confirmation of the assessment of the Group and NLB results and identified employees in 2022. The Operations and IT Committee acknowledged itself with: • IT Strategy - progress report on strategic initiatives other than control function for the year 2021; Annual self-assessment of BIT and OMNI; identified staff in accordance with the Remuneration Policy; • Key performance indicators in IT; Review of IT KPIs and • Awarding of variable pay to the Management Board interim Goals & Objectives; Report on process metrics; members for financial years 2019 and 2020 in instruments; • Information on the achievement of goals for 2022 in the area • Proposal for the introduction of an instrument for the of Information Technology in the Group; allocation of part of variable remuneration to employees • New NLB Group target IT operating model; performing special work; Awarding and payment of the • Payment IT strategy update; Payment transactions – analysis variable pay for 2021 for members of the Management Board of process of optimisation; and payment of the deferred part of the variable pay for • BIT project rollout; OMNI project; Web project readiness 2018 for members of the Management Board and employees assessment; performing special work in the control function; • Procurement in 2021 and future plans; • Proposal for aligning and proposal for signing employment • Software-defined mainframe; contracts with the members of the Management Board of • IT integration plan of N Bank. NLB; • Report on the implementation of the NLB remuneration policy to the Group members; • Report on remunerations – audit report; • Amendment of the contract of members of the Management Board; MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 133 7. DESCRIPTION POLICY ON THE PROVISION OF DIVERSITY OF THE MANAGEMENT BODY AND SENIOR MANAGEMENT The Policy on the Provision of Diversity of the Management Body and Senior Management was adopted by the General Meeting of shareholders on 10 June 2019, and was amended in June 2022 according to EBA Guidelines on assessing the Board, and the Policy on the selection of suitable candidates for Regarding the age structure of the Supervisory Board, it is also members of the Management Board, as well as the procedures considered appropriate, according to the plan set up for 2022, of the Nomination Committee of the Supervisory Board. as members of the Supervisory Board are represented in the age groups from 40 to 60+. In order to achieve the objectives of this diversity policy, one of the measures that influences the selection process is also: if two candidates for the position of a member of the Management b) The Management Board We estimate that the goals for 2022 have been achieved, as Board or a member of the Supervisory Board meet all the members of the Management Board as a whole meet the required tender criteria and at the same time the target gender high level of requirements related to the set goals, namely representation is not achieved in a certain body, the candidate age structure, gender structure, professional competencies, of the underrepresented sex shall be selected. skills and experience, and requirements related to relevant international experience in various fields, personal integrity, Implementation and the results achieved by the diversity and geographical provenance. suitability of members of the management body and holders policy during the reporting period: of key functions, amendments to the Slovenian Corporate Governance Code, and EBA Guidelines on Internal Governance. a) The Supervisory Board It is estimated that the goals for 2022 were achieved, as the With the extension of the members of the Management Board in 2022, also the gender structure meets the expectations due to the share of women increasing to 16.7%, or one woman. The Diversity policy was amended in a way that in addition members of the Supervisory Board as a whole covers an to already existing goals (gender structure, age structure, professional competences skills and experience, international experience) new goals have been added (continuity in the composition of the body, personal integrity, and geographical adequately wide range of knowledge, skills, and professional In 2022, regarding the age structure, with additional members experience of its members, and is composed with regard to being elected to the Management Board, the representation in the following criteria: experience, reputation, management of the age group of 51 to 60 increased (from 0 to 3) and stayed at potential conflicts of interest, independence, available time, and the same level of 3 members in the age group for 41 – 50. provenance). Regarding gender, the Bank has set a quantitative collective suitability. goal by defining a period for achieving this goal. NLB respects and follows the initiative 40/33/2026 of the Slovenian Directors’ Also, the Supervisory Board has a suitable ratio between the c) Senior Management For 2022, we estimate that the goals were achieved, as senior Association for voluntary achievement of the goal of sexual diversity by the end of 2026: 40% for members of supervisory boards and a total of 33% for members of supervisory boards and management boards of the underrepresented sex in listed companies and state-owned companies. existing and the new members, considering when appointing management at a high level met the requirements relating to new members to the Supervisory Board the ratio between the range of knowledge, skills, and professional experience. existing and new members is not below 70%. The members of Regarding the requirements related to international experience the Supervisory Board have a high level of personal integrity, in various fields, it is estimated that senior management has a suitable share of members of the Supervisory Board have largely relevant international experience. It is also estimated international experience, and have suitable geographical that the share of 41% of women in senior management is The Diversity policy sets out the targets to be pursued in terms experience as set in the plan for the year 2022. appropriate. of representation on the supervisory board, management board, and senior management according to different diversity goals in order the management body is composed in such a way that, as a whole has the knowledge, skills, and experience Regarding the gender structure, the goal for the members of Regarding the age structure, it is also considered appropriate, the Supervisory Board has not been achieved since the plan as senior management in the age structure is very dispersed set up for the year 2022 assumed a 42% share of women on the and is thus represented in all age groups from 20 to 60 years. necessary for an in-depth understanding of the Bank's strategy Supervisory Board, but taking into account two resignations and challenges and the risks to which it is exposed. The policy is annually reviewed by the Nomination Committee of the by Supervisory Board members (employee representatives), Additional information on the framework, objectives, and the proportion of women dropped down to 30%. In order to chart with set goals of the Diversity Policy can be found in the Supervisory Board. increase the proportion of women on the Supervisory Board, chapter, Human Resources of this annual report. The Bank implements the principles of the Diversity policy it is suggested that all stakeholders endeavour to form an appropriate group of candidates in the recruitment process, through other policies and procedures, namely the Policy on the taking into account appropriate representation of the less selection of suitable candidates for members of the Supervisory represented gender. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 134 Statement on changes that occurred between the end of accounting period up to the publication of this statement In accordance with Guidelines on Disclosure for Listed Companies, point 6.3.2 (Ljubljana Stock Exchange, 18 December 2020) NLB hereby states that no changes occurred between the end of accounting period up to the publication of this statement. Ljubljana, 12 April 2023 Supervisory Board of NLB Primož Karpe Chairman Management Board of NLB Hedvika Usenik Member Andrej Lasič Member Archibald Kremser Member Andreas Burkhardt Member Antonio Argir Member Blaž Brodnjak Chief executive officer MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 135 Table 37: Composition of Management in financial year 2022 (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(i) 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, Cedevita Olimpija Antonio Argir Member Responsible for Group governance, payments and innovations 28 April 2022 28 April 2027 Macedonian 1975 Andreas Burkhardt Member Archibald Kremser Member CRO CFO 18 September 2013 6 July 2026 31 July 2013 6 July 2026 German Austrian Andrej Lasič Member Hedvika Usenik Member (i) Member of the Management Board since 2012. CMO (responsible for Corporate and Investment Banking) CMO (responsible for Retail Banking and Private Banking) 28 April 2022 28 April 2027 Slovene 28 April 2022 28 April 2027 Slovene 1971 1971 1970 1972 MBA MBA MBA Banking/Finance Economic Chamber of North Macedonia Banking/Finance Banking/Finance Bachelor’s degree Banking/Finance MBA Banking/Finance MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 136   MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Table 38: Composition of Supervisory Board and Committees in financial year 2022 (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 Attendance at SB session in regard to the total number of SB session (for example 5/7) applicable on his/her mandate Gender Citizenship Year of birth Qualification Professional profile Independence under Article 23 of the Code (YES/NO) Existence of conflict of interest, in the business year (YES/NO) Membership in supervisory bodies in other companies or institutions Primož Karpe Chairman 10 February 2016 2024 Andreas Klingen Deputy Chairman 22 June 2015 2023 David Eric Simon Member 4 August 2016 2024 Mark William Lane Richards Member 10 June 2019 2023 Shrenik Dhirajlal Davda Member 10 June 2019 2023 Gregor Rok Kastelic Verica Trstenjak Member 10 June 2019 2023 Member 15 June 2020 2024 Sergeja Kočar Member 17 June 2020 2024 Bojana Šteblaj Member 17 June 2020 12 September 2022 Janja Žabjek Dolinšek Member 20 November 2020 8 July 2022 Tadeja Žbontar Rems Member 22 January 2021 2025 Representative of the company's capital structure 8/8 Representative of the company's capital structure 8/8 Representative of the company's capital structure 8/8 Representative of the company's capital structure 8/8 male Slovenian 1970 MSc Banking/ Finance YES YES male German 1964 University Degree Banking/ Finance YES NO male British 1948 Higher National Diploma in Business Studies Banking/ Finance YES NO male British 1966 MSc Banking/ Finance YES NO 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 8/8 8/8 8/8 8/8 4/6 5/5 5/5 male British 1960 MBA, LLB Finance YES male Slovenian 1968 MSc Banking/ Finance YES female Slovenian 1962 PhD Law YES female Slovenian 1968 MSc Management YES female Slovenian 1962 MSc Management YES female Slovenian 1957 MSc female Slovenian 1968 MSc YES YES NO NO NO NO NO NO NO IT IT IT Islam Osama Zekry Member 14 June 2021 2025 Representative of the company's capital structure 7/8 male Egyptian 1977 PhD (i) Until 14 March 2022. (ii) Since 8 March 2022. (iii) Until June 2022. Angler d.o.o, Aroma Global 3 Ltd. Kyrgyz Investment, Credit Bank CISC, Credit Bank of Moscow(i), Nepi Rockcastle N.V. Jihlavan a.s., Czech Aerospace industries sro, Central Europe Industry Partners a.s. BPL Global (Lloyds of London insurance Broker), Sheffield Haworth Ltd, Vencap International pic Ukraine (UK) PJSC Ukrgasbank, IPSO, UK(ii) EU Agency for Fundamental Rights, Vienna(iii) YES NO CIB Housing association, Egypt, Egyptian AI Council (Ministry of Communication and Information Technology) 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)(i) Shrenik Dhirajlal Davda Remuneration Committee Gregor Rok Kastelic Remuneration Committee Mark William Lane Richards Remuneration Committee Bojana Šteblaj Sergeja Kočar Primož Karpe Andreas Klingen Verica Trstenjak Sergeja Kočar Bojana Šteblaj David Eric Simon Primož Karpe Shrenik Dhirajlal Davda Gregor Rok Kastelic Andreas Klingen Shrenik Dhirajlal Davda David Eric Simon Mark William Lane Richards Gregor Rok Kastelic Islam Osama Zekry 28 June 2019 28 June 2019 26 June 2020 8 April 2021 26 June 2020 15 April 2016 Remuneration Committee Remuneration Committee Nomination Committee Nomination Committee 19 February 2016 Nomination Committee Nomination Committee Nomination Committee Audit Committee Audit Committee Audit Committee Audit Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee 26 June 2020 26 June 2020 8 April 2021 7 April 2016 15 April 2016 28 June 2019 28 June 2019 19 February 2016 8 July 2021 7 April 2016 28 June 2019 26 June 2020 8 July 2021 Mark William Lane Richards Operational and IT Committee 28 June 2019 Andreas Klingen Primož Karpe Tadeja Žbontar Rems Janja Žabjek Dolinšek Islam Osama Zekry Operational and IT Committee 28 June 2019 Operational and IT Committee 15 April 2016 Operational and IT Committee Operational and IT Committee 8 April 2021 8 April 2021 Operational and IT Committee 8 July 2021 (i) There were also extraordinary sessions of the committees that are not reflected in this table. 2023 2023 2024 12 September 2022 2024 2024 2023 2024 2024 12 September 2022 2024 2024 2023 2023 2023 2025 2024 2023 2023 2025 2023 2023 2024 2025 8 July 2022 2025 Member Member/Chairman Deputy Chairman Member Member Chairman Deputy Chairman Member Member Member Chairman Member Member/Deputy Chairman Member Chairman Deputy Chairman Member Member Member Member Chairman Member Member Member Member Deputy Chairman 6/6 6/6 6/6 3/3 6/6 6/6 6/6 6/6 6/6 2/4 6/6 6/6 6/6 5/6 6/6 6/6 6/6 6/6 6/6 5/6 5/5 5/5 5/5 5/5 3/3 4/5 External member in committees (audit, nominal, income committee, etc.) - The Banking Act (ZBan-3) 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 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 none MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 138             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 RS, no. 73/15 and 115/2021), Regulation (EU) 575/2013, article 435 (Risk Management Objectives and Policies), point (e) and (f), as well as the 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 NLB 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 and risk strategy of the Group. The business and operating environment relevant for the Group’s operations is changing with trends such as sustainability, social responsibility, governance, changing customer behaviours, emerging new technologies and competitors, as well as increasing new regulatory requirements. Respectively, risk management is continuously adapting with the 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 is reflected in lower SREP requirement in recent years. Robust and comprehensive Risk Management framework is defined and The Group plans a prudent risk profile, optimal capital usage, organised with regards to the Group's business and risk profile, and profitable operations in the long run considering the based on a forward-looking perspective to meet internally risks assumed. The Business strategy, the Risk appetite, set strategic objectives and all external requirements. The the Risk strategy and the key internal risk policies of the proactive risk management and control system is primarily Group, approved by the Management Board and the based on Risk appetite and Risk strategy, which are consistent Supervisory Board of NLB, specify the strategic objectives with the Group’s Business strategy, and focused on early risk and guidelines concerning risk assumption, the approaches identification and efficient risk management. Set governance and methodologies of monitoring, measuring, mitigating and and different risk management tools enable adequate oversight managing all types of risk at different relevant levels. Moreover, of the Group’s risk profile, proactively support its business main strategic risk guidelines are consistently integrated into operations and its management by incorporating escalation the regular business strategy review, budgeting process, and procedures and using different mitigation measures when other strategic decisions, whereby informed decision-making necessary. In this respect, the Group is constantly enhancing is assured. The Group regularly monitors its target risk appetite and complementing the existing methods and processes in all profile and internal capital allocation, representing the key risk management segments. component of proactive management. Risk limits usage and potential deviations from limits or target values are regularly The Group is engaged in contributing to sustainable finance reported to the respective committees and/or the Management by incorporating environmental, social, and governance (ESG) Board of the Bank, the Risk Committee of the Supervisory risks into its business strategies, risk management framework, Board, and the Supervisory Board of the Bank. and internal governance arrangements. With the adoption of the NLB Group Sustainability programme, the Group Additionally, the Group established a comprehensive stress- implemented main sustainability elements into its business testing framework and other early warning systems in different model. The goal of this strategic, organisation-wide initiative risk areas with the intention to contribute to setting and is to ensure sustainable financial performance of the Group by pursuing the Group’s business strategy, to support decision- considering ESG risks and opportunities in its operations, and to making on an ongoing basis, to strengthen the existing internal actively contribute to a more balanced and inclusive economic controls, and to enable timely response when necessary. and social system. Thus, sustainable finance integrates ESG The stress-testing framework includes all material types of criteria into Group’s business and investment decisions for the risk, as well those related to ESG, and various relevant stress lasting benefit of Group’s clients and society. The NLB Group scenarios or sensitivity analysis, according to the vulnerability Sustainability Committee oversees the integration of the ESG of the Group’s business model. Stress-testing has an important factors to the Group business model. The management of role when assessing the Group’s resilience to stressed ESG risks addresses the Group’s overall risk management circumstances, namely from profitability, capital adequacy, framework, namely the credit approval process and related and liquidity in this forward-looking perspective. As such, it is credit portfolio management. It follows ECB and EBA guidelines, embedded into Group’s Risk management system, namely Risk with tendency of their comprehensive integration into all appetite, ICAAP, ILAAP, and Recovery plan, as an important relevant processes. The availability of ESG data in the region component of sound risk management. Beside internal stress- where Group operates is still lacking. Nevertheless, the Group testing, the Group as a systemically important bank also made significant progress in the process of obtaining relevant participates in the regulatory stress test exercises carried out by ESG-related data from its clients, as it is a prerequisite for ECB. adequate decision-making. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 139 The Group is one of the largest Slovenian banking and financial risk appetite for operational risks is low to moderate, with a strategic business orientations, risk strategy and targeted risk groups, and it has an important presence in the SEE region. In focus on mitigation actions for important risks, and key risk appetite profile, were following: accordance with its strategic orientations, the Group intends to indicators serving as an early warning system. The conclusion • Total capital ratio 19.2%, be sustainably profitable, predominantly working with clients of transactions in derivative financial instruments at NLB is • Tier 1 ratio 15.7%, on its core markets, providing innovative but simple customer- primarily limited to serving customers and hedging the Bank’s • CET1 ratio 15.1%, oriented solutions, and actively contributing to a more own positions. In the area of currency risk, the Group thus • Leverage ratio 9.1%, balanced and inclusive economic and social system. The Group pursues the goals of low to moderate exposure. Based on the • Cost of risk 14 bps, has a well-diversified business model. Efficient managing of environmental and climate risk assessment, the impact of these • NPE ratio (EBA definition) 1.3%, risks and capital is crucial for the Group to sustain long-term risks is estimated as low, except for transition risk in the area of • NPL coverage ratio (EBA definition) 58.1%, profitable operations. Based on the Group’s business strategy, credit, which is assessed as low to medium. The tolerance for all • LTD 65.3%, credit risk is the dominant risk category, followed by credit other risk types, including non-financial risks, is low with a focus • Liquidity Coverage Ratio (LCR) 220.3%, spread risk on its banking book portfolio, interest rate risk in its on minimising their possible impact on the Group's operations. • Net stable funding ratio (NSFR) 183.0%, banking book, operational risk, liquidity risk, market risk, and • Interest rate risk (EVE) (of 200 bps) -5.1% of capital, other non-financial risks. ESG risks do not represent a new risk The main NLB Group Risk Appetite Statement objectives are • Transactional FX risk 1.1% of capital, category, but rather one of risk drivers of the existing type of following: • No new financing of coal mining and coal-fired electricity risks, such as credit, liquidity, market, and operational risks. The • preservation of regulatory capital adequacy; generation (0 EUR), Group integrates and manages them within the established risk • preservation of internal capital adequacy; • Net losses from operational risk 0.7% of capital requirement management framework. Regular risk identification and their • fulfilment of MREL requirement; for operational risk. assessment is performed within the ICAAP process, with the aim • maintenance of low leverage; of assuring their overall control and effective risk management • improvement in the quality of the credit portfolio, sufficient In 2022, the war in Ukraine did not have a meaningful impact on an ongoing basis. NPL coverage, sustainable credit risk volatility, sustainable on the quality of the credit portfolio, nor on the liquidity of the cost of risk across the economic cycle, limited Stage 2 Group. The Group’s direct and indirect exposures toward Russia Managing risks and capital efficiently at all levels is crucial exposures, sustainable industry and individual concentration, and Ukraine are quite limited. In the light of increasing energy for NLB Group’s sustained, long-term profitable operations. sustainable exposure to project financing; prices, inflationary pressures, and a forecast of a decrease Management of credit risk, representing the Group’s most • maintenance of a solid liquidity position, maintaining stable in economic growth, the Group has thoroughly analysed important risk, focuses on the taking of moderate risks – customers' deposits as the main funding base; potential impacts on its credit portfolio and made the necessary diversified credit portfolio, adequate credit portfolio quality, • diversification of risk in exposures to banks and sovereigns; adjustments. The most affected industries or segments are the sustainable cost of risk, and ensuring an optimal return • limited exposure to credit spread risk; carefully monitored with the intention to detect any additional considering the risks assumed. The liquidity risk tolerance is • limited exposure to interest rate risk; significant increase in credit risk at a very early stage. The low. The Group must maintain an appropriate level of liquidity • limited exposure to foreign exchange risk; liquidity position of the Group remains very robust. Even if a at all times to meet its short-term liabilities, even if a specific • sustainable exposure to ESG risks; highly unfavourable liquidity scenario would materialise, the stress scenario is realised. Further, with the aim of minimising • sustainable tolerance to net losses from operational risk. Group holds sufficient level of high-quality liquidity reserves. this risk, the Group pursues an appropriate structure of sources of financing. The Group’s limited exposure to credit spread During 2022, sustainable ESG financing in accordance with Consequently, the Group concluded 2022 as self-funded, with risk, arises from the valuation risk of debt securities portfolio Environmental and Social Management System (ESMS) was strong liquidity, and a solid capital position, demonstrating servicing as liquidity reserves, to the moderate level. The partly integrated in the Group's Risk appetite statement. the Group’s financial resilience. The acquired N Banka has a Group’s basic orientation in the management of interest rate Additional key risk indicators and targets in the area of ESG are business model quite similar to that of NLB, so there were no risk is to limit the unexpected negative effects on revenues and going to be addressed based in ongoing activities related to the major changes in the Group’s risk profile in 2022. Otherwise, capital that would arise from changed market interest rates, Net Zero Banking Alliance commitment, signed by the Group. there were no other transactions of sufficiently material nature and, therefore, a moderate tolerance for this risk is stated. When to impact on the Group’s risk profile or distribution of the risks assuming operational risk, the Group pursues the orientation Values of the most important risk appetite indicators of the on the Group level. that such risk must not significantly impact its operations. The Group as at the end of 2022, reflecting interconnection between MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 140 The Condensed Statement of the management of risk is also published on the Bank intranet with the aim of strict adherence of the banks’ employees at daily operations of the Bank, as regards the definition and importance of a consistent tendency of the adopted risks, and ways to take into account when adopting its daily business decisions. Ljubljana, 12 April 2023 Supervisory Board of NLB Primož Karpe Chairman Management Board of NLB Hedvika Usenik Member Andrej Lasič Member Archibald Kremser Member Andreas Burkhardt Member Antonio Argir Member Blaž Brodnjak Chief executive officer MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 141 Statement on Non-financial Operation In accordance with Article 56 and in conjunction with Article 70c of the Companies Act, the Bank has prepared a Consolidated Statement on Non-Financial Operation as a separate report, called the NLB Group Sustainability Report 2022. The consolidated report enables interested parties to understand the material dimensions of the NLB Group’s development, performance, and position and the impact of its activities and includes the following non-financial information, which are disclosed in the NLB Group Sustainability Report 2022: • The NLB Group’s business model is presented in Chapters NLB Group at a Glance and Sustainability Strategy. • Policy description and results on environmental, social, and human resources matters are described in Chapters Sustainable Operations and Sustainable Finance and Risk Management. • Policy description and results on respect for human rights are described in Chapter Respecting Human Rights. • Policy description and results on anti-corruption and anti- • the recommendations of the Task force on Climate Related bribery matters are covered in Chapter Fighting Against Financial Disclosures (TCFD) - in line with the requirements Corruption and Bribery. and recommendations of the Financial Conduct Authority • The main risks regarding the aforementioned issues are listed (FCA); and in Chapters Sustainable Operations and Sustainable Finance • the Global Reporting Initiative (GRI) Sustainability Reporting and Risk Management. Standards. • Key non-financial performance indicators that are important for specific activities are described in the NLB Group The NLB Group Sustainability Report 2022 is published on the Sustainability Report 2022 and summarised in Appendix 1. Bank's website, on the Ljubljana Stock Exchange's SEOnet system, on the websites of the Agency of the Republic of In addition to the aforementioned information, the report Slovenia for Public Legal Records and Related Services (AJPES), discloses information based on the following legal bases, and on the London Stock Exchange (LSE), at the same time in requirements, recommendations, and reporting frameworks: the NLB Group Annual Report 2022. • EU Taxonomy: Regulation (EU) 2020/852 establishing a framework for the promotion of sustainable investments and The NLB Group's Consolidated Annual Report 2022 is thus in the delegated acts adopted under this Regulation; line with the requirements of the Companies Act (ZGD-1), which • Requirements and recommendations of regulatory requires public interest entities with an average number of authorities: BoS, Securities Market Agency (SMA); employees exceeding 500 on the balance sheet cut-off date • the United Nations Principles for Responsible Banking (UN- to include a Statement on Non-Financial Operation in their PRB); business report. • ECB Guide on Climate and Environmental Risks; • the European Commission's Guidelines on Non-Financial Ljubljana, 12 April 2023 Reporting; Management Board of NLB Hedvika Usenik Member Andrej Lasič Member Archibald Kremser Member Andreas Burkhardt Member Antonio Argir Member Blaž Brodnjak Chief executive officer MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 142 Disclosure on Shares and Shareholders of NLB 1. Information pursuant to the Companies Act (ZGD-1), Article 70, paragraph 6 1.1 Structure of the Bank’s share capital The Bank has issued only ordinary registered no-par value shares, the holders of which have a voting right and the right to participate in the General Meeting of the Bank’s shareholders, the pre-emptive right to subscribe for new shares in case of a share capital increase, the right to profit participation (dividends), the right to a share in the surplus in the event of acquirer of the shares has acquired them on the account of third parties, so that (s)he is not entitled to exercise voting rights from these shares at his/her sole discretion, while at the same time committing to the Bank, (s)he will not exercise voting rights on the basis of the instructions of an individual third party for whose account (s)he has acquired the shares if, together with the instructions for voting, (s)he does not receive a written guarantee from the person that this person has shares on his/her own account and that this person is not, directly or indirectly, a holder of more than 25% of the Bank’s voting rights. The acquirer who exceeds the share of 25% of the Bank’s shares with voting rights, and does not require the issuance of approval for the transfer of shares, or does not receive the approval of the Bank, may exercise the voting right from 25% of the shares with the voting rights. 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 The Bank is not aware of such agreements. 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 There are no restrictions other than those mentioned and those Governance Statement of NLB. that are regulatory. 1.3 Qualifying holdings This information is included in the chapter Corporate liquidation or bankruptcy of the Bank, and the right to be Governance Statement of NLB. informed. All shares belong to a single class and are issued in book-entry form. 1.4 Securities carrying special controlling rights This information is included in the chapter Corporate Information regarding the shareholder structure of NLB (as at Governance Statement of NLB. 31 December 2022) is available in the subchapter Shareholder Structure of NLB in the chapter Key Highlights. 1.5 The employee share scheme, if used by the 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 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 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, exceed the 25% share of the Bank with voting rights, increased by one share. Notwithstanding the provision mentioned in the first paragraph, approval for the transfer of shares is not required if the company, for shares to which the scheme relates and about the method of exercising control over this scheme, if the controlling rights are not exercised directly by employees NLB does not have an employee share scheme. In accordance with the relevant remuneration policies, (when required by ZBan-3) a part of variable remuneration of NLB’s Identified Staff shall consist of NLB shares, or NLB share-linked instruments or equivalent non-cash instruments (the instrument used is determined by the Supervisory Board). So far, NLB has not used own shares for this purpose. It currently uses NLB share-linked instruments. More information will be available in the Report of the Remunerations for the Business Year 2022. 1.6 Explanation regarding restrictions related to voting rights This information is included in the chapter Corporate Governance Statement of NLB. 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 bid. 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, or their employment is terminated In line with the employment contracts of the members of the Management Board, if 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 not be entitled to any compensation for early discontinuation of the term of office, unless otherwise decided by the Supervisory Board.” MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 143 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%. 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. 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 (FURS). 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. 2. Number of shares held by members of the Supervisory Board and Management Board Table 39: Number of shares held by members of the Supervisory Board and Management Board Shares held as at 31 Dec 2022 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 Tadeja Žbontar Rems Name of member of Management Board Blaž Brodnjak Archibald Kremser Andreas Burkhardt Andrej Lasič Hedvika Usenik Antonio Argir Number 1,286 1,298 582 — — — — — 190 — Number 1,700 791 800 325 450 620 % 0.006% 0.006% 0.003% — — — — — 0.001% — % 0.009% 0.004% 0.004% 0.002% 0.002% 0.003% (i) David Eric Simon holds 2,910 GDRs, which is equal to 582 shares (as 1 share represents 5 GDRs). 3. Stock option agreements The Bank has no stock option agreements in relation to its listed shares. 4. Dividend taxation Withholding tax In 2022 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: • Individuals: 25% • Intermediaries: 25% • Legal entities (other than Intermediaries): 15% In 2022, the tax rate for individuals and intermediaries has changed from 27.5% to 25%. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 144 NLB Group’s unique geographical footprint became even more pronounced by the merger of two Serbian banks of the Group into NLB Komercijalna Banka, Beograd in April 2022. The first chapter in its history was marked by results that exceeded all plans and predictions – dynamic growth, increased share in the banking sector, and enviable net profit. The bank remained a reliable support for citizens in solving important life issues, defended its position as the absolute market leader in agricultural loans, and confirmed that the economy recognizes it as a strategically important partner. We created better footprints and with strong support of the National Bank of Serbia implemented numerous measures that preserved the life standard of citizens and operations of business entities. Most importantly, however, we managed to justify the trust of almost a million clients and the entire community in which we operate. Pictured: NLB Komercijalna Banka, Beograd employees Events After the End of the 2022 Financial Year Rating upgrade On 7 February 2023 Moody's upgraded NLB to A3 from Baa1. USA regional banks & Credit Suisse turmoil In March 2023, the collapse of two regional banks in the USA, Silicon Valley Bank and Signature Bank, prompted investors globally to scour for weak spots in the financial system, resulting in an emergence of stress in the banking sector and a turmoil in the capital markets. Developments in the USA had impacts also in Europe and put European banks under stress as well. Credit Suisse had been heavily impacted by the collapse in confidence as the demise of regional banks in the USA had spread fear about weaker institutions at time of increasing interest rates undermining value of some financial assets. To increase confidence in the banking sector, Swiss financial regulators engineered an emergency rescue plan for Credit Suisse in the form of UBS Group AG buying Credit Suisse. As of 31 March 2023, the Group has only small exposure to Credit Suisse, deriving mainly from limited investment in bonds. Since the beginning of the bank stress and market turmoil, the financial institutions’ credit spreads widening and overall risk- free rates decrease were observed, which is currently positively impacting the Group’s FVOCI positions (other comprehensive income in relation to valuation of debt securities, net of related deferred tax in the first quarter of 2023 was positive in the amount of EUR 24 million). From a capital management point of view, most of FVOCI cumulative negative valuations (except a smaller part which was as of 31 December 2022 carved out by temporary treatment of sovereign debt introduced by COVID-19 related “quick fix” – see Note 5.23.) have already been accommodated in the Group’s capital ratios and thus going forward are rather supportive in terms of capital levels as those exposures mature and new investments are made only with short duration (i.e. low valuation risks). With regard to debt securities measured at amortised cost, the difference between the carrying amount and fair values as of 31 March 2023 is negative in the amount of EUR 152 million. These differences are not reflected in the capital ratio given the Group’s intention to hold them to maturity and collect cash flows from payments of interest and principal – thus these differences will not be materialised and also diminish eventually to zero over the lifetime of the book (duration on average: 3.75 years). With regard to the liquidity management neither of these portfolios are intended to be used given the Group’s and NLB’s very high cash balances (EUR 5,306 million at the Group level and EUR 3,478 million at NLB level as of 31 March 2023). Even in extreme circumstances the portfolios could be used to large extent to raise funds from the central bank using securities as collateral without selling the asset – by that also not realising any losses. At the year-end, the total amount of HQLA amounts to EUR 6,028 million at the Group level. Finally, the amount of non-insured retail deposits at the Group level is very low, around 20%. From a liquidity point of view, no material deviations from the normal intra-monthly deposit dynamics were identified at the NLB Group level as a result of the turmoil. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 146 in EUR millions Financial report in EUR thousands Notes Reconciliation of Financial Statements in Business and Financial Part of the Report Table 40: Income Statement of NLB Group for the annual period ended 31 December 2022 Business report Net interest income Net fee and commission income Dividend income 504.9 273.4 Interest and similar income Interest and similar expenses Fee and commission income Fee and commission expenses 0.2 Dividend income Net income from financial transactions 36.6 Net other income (16.6) 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 Gains less losses from financial liabilities measured 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 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 Gains less losses from capital investment in subsidiaries, associates, and joint ventures Negative goodwill Result before tax Income tax Result of non-controlling interests Result after tax 293.6   798.5   (257.7) (155.2) Administrative expenses (47.4) Depreciation and amortisation (460.3) 338.3   Provisions for credit losses Impairment of financial assets Provisions for other liabilities and charges Impairment of non-financial assets (17.5) (11.4) (28.9) 0.8 Share of profit from investments in associates and joint ventures (accounted for using the equity method) 172.9 Negative goodwill 483.1 Profit before income tax (25.2) Income tax 11.0 Attributable to non-controlling interests 446.9 Attributable to owners of the parent 569,776 (64,854) 381,599 (108,249) 242 866 33,451 90 286 1,655 297 (26) 1,861 16,778 (36,144) 921 293,627 798,549 (412,886) (47,390) (460,276) 338,273 (3,050) (14,454) (5,932) (5,433) (28,869) 781 172,878 483,063 (25,230) 10,971 446,862 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. 4.9. 4.11. 4.13. 4.14. 4.13. 4.14. 5.12.e) 5.12.b), c) 4.16. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 147                         Table 41: Statement of Financial Position of NLB Group as at 31 December 2022 in EUR millions Financial report in EUR thousands 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 Investments in subsidiaries, associates, and joint ventures Property and equipment Investment property Intangible assets Other assets TOTAL ASSETS LIABILITIES Deposits from customers Deposits from banks and central banks Borrowings Subordinated debt securities Other debt securities in issue 5,271.4 Cash, cash balances at central banks and other demand deposits at banks 223.0 Financial assets measured at amortised cost - loans and advances to banks 13,073.0 Financial assets measured at amortised cost - loans and advances to customers 4,877.4   21.6 Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss - part (without loans) 4,855.8 Financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost - debt securities 11.7 Investments in associates and joint ventures 251.3 Property and equipment 35.6 Investment property 58.2 Intangible 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 358.6 Current income tax assets Deferred income tax assets Other assets Non-current assets held for sale 24,160.2 Total assets 20,027.7 Financial liabilities measured at amortised cost - due to customers 106.4 Financial liabilities measured at amortised cost - deposits from banks and central banks 281.1 Financial liabilities measured at amortised cost - borrowings from banks and central banks Financial liabilities measured at amortised cost - borrowings from other customers 508.8 Financial liabilities measured at amortised cost - 307.2 debt securities issued Financial liabilities held for trading Financial liabilities measured at fair value through profit or loss Financial liabilities measured at amortised cost - other financial liabilities Other liabilities 506.7 Derivatives - hedge accounting Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Equity Non-controlling interests TOTAL LIABILITIES AND EQUITY 2,365.6 Equity and reserves attributable to owners of the parent 56.7 Non-controlling interests 24,160.2 Total liabilities and equity 5,271,365 222,965 13,072,986 4,877,437 21,588 19,031 2,919,203 1,917,615 11,677 251,316 35,639 58,235 177,823 59,362 (23,767) 1,696 55,527 72,543 15,436 24,160,240 20,027,726 106,414 198,609 82,482 815,990 21,589 1,796 294,463 2,124 122,652 12,420 2,569 49,081 2,365,585 56,740 24,160,240 Notes 5.1. 5.6.b) 5.6.c) 5.2.a) 5.3.a) 5.4. 5.6.a) 5.12.e) 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) 5.15.c) 5.2.b) 5.3.b) 5.15.d) 5.5.b) 5.16. 5.17. 5.19. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 148                               Alternative Performance Indicators Cost to income ratio (CIR) – Indicator of cost efficiency, calculated as the ratio between the total costs and total net operating income. Table 43a: NLB Group and NLB CIR calculation 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 Numerator Total costs Denominator Total net operating income Cost to income ratio (CIR) 2022 460.3 798.5 57.6% NLB Group 2021 415.4 666.9 62.3% 2020 293.9 504.5 58.3% 2022 207.9 366.2 56.8 % in EUR millions 2020 180.5 311.7 57.9% NLB 2021 183.6 361.5 50.8% to be directly comparable with similar KPIs presented by other Table 43b: NLB Group’s banking subsidiaries CIR calculation 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 statement and average net loans to customers. Table 42: NLB Group cost of risk calculation Numerator Credit impairments and provisions(i) 17.6 -40.8 in EUR millions NLB Group 2022 2021 NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica in EUR millions NLB Banka, Beograd NLB Komercijalna banka, Beograd N Banka, Ljubljana 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2021 2022 2021 2022 31.8 28.6 17.3 15.2 18.3 16.2 14.3 13.5 20.3 17.4 22.2 109.0 88.0 23.0 Numerator Total cost Denominator Total net operating income 75.9 68.4 38.5 33.2 31.7 28.1 48.4 41.8 37.3 28.1 30.3 192.4 128.7 35.7 Cost to income ratio (CIR) 41.9% 41.8% 44.9% 45.7% 57.8% 57.7% 29.7% 32.4% 54.3% 61.7% 73.1% 56.6% 68.4% 64.3% Average cost of funding (quarterly) – Calculated as the ratio between interest expenses annualized and average interest Denominator Average net loans to customers(ii) Cost of risk (bps) 12,256.6 10,080.9 14 -41 bearing liabilities. Table 44: Average cost of funding (quarterly) (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). Numerator Interest expenses(i) Denominator Q4 2022 Q3 2022 Q2 2022 Q1 2022 NLB Group in EUR millions 66.5 48.0 23.8 23.6 19,298.6 0.12% Average interest-bearing liabilities(ii) Average cost of funding (quarterly) 20,780.7 0.32% 20,335.2 0.24% 20,206.8 0.12% (i) Interest expenses (quarterly) are annualized, calculated as the sum of interest expenses in the period divided by the number of days in the quarter and multiplied by the number of days in the year. Interest expenses on interest bearing liabilities also include interest income from negative interest rate on financial liabilities. (ii) NLB internal information. Average interest-bearing liabilities (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). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 149 FVTPL – Financial assets measured mandatorily at fair value through profit or loss (FVTPL) represent the minor part (0.002% IFRS 9 classification into stages for loan portfolio: • Stage 3 – An impaired portfolio: NLB Group recognises lifetime allowances for these financial assets. The definition of December 2022; 0.002% December 2021) of the loan portfolio IFRS 9 requires an expected loss model, where an allowance for default is harmonised with the EBA guidelines. (before the deduction of fair value for credit risk; loans with the expected credit losses (ECL) are formed. Loans measured contractual cash flows that are not solely payments of principal at amortised costs (AC) are classified into the following stages A significant increase in credit risk is assumed: when a credit and interest on the principal amount outstanding). Classification into stages is calculated in the internal data source, by which (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 the NLB Group measures the loan portfolio quality, and which credit risk since initial recognition, NLB Group recognises an financial asset has material delays over 30 days (days past due is also published in the Business Report of Annual and Interim allowance based on a 12-month period; Reports. • Stage 2 – An underperforming portfolio: a significant increase in credit risk since initial recognition, NLB Group recognises an allowance for a lifetime period; are also included in the credit rating assessment); if NLB Group expects to grant the client forbearance or if the client is placed on the watch list. 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 millions NLB Group 2022 in EUR millions NLB Group 2022 Numerator Numerator Numerator Total (AC) loans in Stage 1 17,457.5 Total (AC) loans in Stage 1 to Corporates 5,920.1 Total (AC) loans in Stage 1 to Retail Denominator Total gross loans and advances IFRS 9 classification into Stage 1 18,403.9 94.9% Denominator Total gross loans to Corporates Corporates - IFRS 9 classification into Stage 1 6,545.6 90.4% Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 1 in EUR millions NLB Group 2022 6,423.0 6,743.6 95.2% 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 Numerator Total (AC) loans in Stage 2 Denominator Total gross loans and advances IFRS 9 classification into Stage 2 in EUR millions NLB Group 2022 618.3 Numerator Numerator Total (AC) loans in Stage 2 to Corporates 425.7 Total (AC) loans in Stage 2 to Retail in EUR millions NLB Group 2022 Denominator 18,403.9 Total gross loans to Corporates 3.4% Corporates - IFRS 9 classification into Stage 2 6,545.6 6.5% Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 2 in EUR millions NLB Group 2022 192.6 6,743.6 2.9% 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 Numerator Total (AC) loans in Stage 3 Total (FVTPL) non-performing loans Denominator Total gross loans and advances IFRS 9 classification into Stage 3 in EUR millions NLB Group 2022 327.7 0.4 Numerator Total (AC) loans in Stage 3 to Corporates Total (FVTPL) non-performing loans Denominator 18,403.9 Total gross loans to Corporates 1.8% Corporates - IFRS 9 classification into Stage 3 in EUR millions NLB Group 2022 199.5 0.4 6,545.6 3.1% Numerator Total (AC) loans in Stage 3 to Retail Denominator Total gross loans to Retail Retail - IFRS 9 classification into Stage 3 in EUR millions NLB Group 2022 128.0 6,743.6 1.9% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report 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 Group and NLB leverage ratio Numerator Tier I Denominator NLB Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 2,295.7 1,965.6 1,768.1 1,496.7 1,362.7 1,347.0 Total Leverage Ratio exposure measure Leverage ratio 25,240.5 9.1% 19,229.5 10.2% 22,603.9 7.8% 14,553.0 10.3% 10,041.1 13.6% 13,058.8 10.3% 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(i) 31 Dec 2022 30 Nov 2022 31 Oct 2022 30 Sep 2022 31 Aug 2022 31 Jul 2022 30 Jun 2022 31 May 2022 30 Apr 2022 31 Mar 2022 28 Feb 2022 31 Jan 2022 31 Dec 2021 31 Dec 2020 31 Dec 2022 NLB Group in EUR millions NLB 31 Dec 2021 31 Dec 2020 Numerator Stock of HQLA 6,028.3 5,836.6 5,505.7 5,772.1 5,577.4 5,612.1 5,325.3 5,712.1 5,636.4 5,690.4 5,524.2 5,545.5 5,367.1 5,003.0 5,046.3 4,698.7 4,323.4 Denominator Net liquidity outflow 2,736.6 2,612.2 2,587.4 2,641.3 2,568.0 2,498.5 2,499.6 2,524.2 2,548.1 2,439.6 2,163.5 2,134.5 2,125.0 1,943.1 1,825.2 1,493.9 1,285.4 LCR 220.3% 223.4% 212.8% 218.5% 217.2% 224.6% 213.0% 226.3% 221.2% 233.3% 255.3% 259.8% 252.6% 257.5% 276.5% 314.5% 336.3% (i) 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 2022 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 31 Dec 2022 NLB Group 31 Dec 2021 31 Dec 2020 31 Dec 2022 in EUR millions 31 Dec 2020 NLB 31 Dec 2021 Numerator Net loans to customers 13,073.0 10,587.1 9,644.9 6,062.3 5,153.0 4,595.1 Denominator Deposits from customers Net loan to deposit ratio (LTD) 20,027.7 65.3% 17,640.8 60.0% 16,397.2 58.8% 10,984.4 55.2% 9,659.6 53.3% 8,850.8 51.9% 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 NLB Komercijalna Banka, Beograd N Banka, Ljubljana 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022  in EUR millions Numerator Net loans to customers 1,170.7 1,084.1 523.2 471.1 521.3 453.0 740.8 634.5 532.3 491.6 511.7 2,589.2 1,795.9 939.2 Denominator Deposits from customers Net loan to deposit ratio (LTD) 1,462.0 80.1% 1,399.5 77.5% 796.7 65.7% 759.9 62.0% 673.4 77.4% 593.0 76.4% 894.2 82.8% 798.8 79.4% 692.9 76.8% 609.8 80.6% 449.5 113.8% 3,692.2 70.1% 3,424.6 52.4% 898.8 104.5% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 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(iii) NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd NLB Komercijalna Banka, Beograd N Banka, Ljubljana 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2021 2022 2021 2022  in EUR millions 53.9 50.4 23.6 20.1 19.5 17.8 39.8 34.5 29.6 22.0 23.4 131.6 88.6 27.8 Numerator Net interest income(i) Denominator Average interest-bearing assets(ii) 1,714.0 1,605.3 Net interest margin on interest-bearing assets 3.1% 3.1% 915.1 2.6% 844.3 2.4% 746.3 2.6% 645.0 2.8% 978.4 4.1% 900.6 3.8% 737.2 4.0% 550.2 4.0% 678.3 4,389.0 3,742.6 1,377.0 3.4% 3.0% 2.4% 2.0% (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). N Bank internal information. Average interest-bearing assets for N Bank are calculated as the sum of daily balances in the period (from 1 January to day d – the last day in reporting period) divided by number of days d. (iii) Data for N Bank internal information. 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 50: NLB Group’s net interest margin on the basis of interest- bearing assets calculation Numerator Net interest income(i) Denominator Average interest-bearing assets(ii) Net interest margin on interest-bearing assets in EUR millions NLB Group 2022 504.9 21,988.4 2.30% (i) Net interest income is annualized, 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 the Group are calculated as the sum of balance from the previous year end (31 December) and monthly balances of the last day of each month from January to the 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 51: NLB Group net interest margin on the basis of interest-bearing assets calculation (quarterly) Numerator Net interest income(i) Denominator Average interest-bearing assets(ii) Net interest margin on interest-bearing assets (quarterly) Q4 2022 Q3 2022 Q2 2022 Q1 2022 NLB Group in EUR millions 602.4 502.7 475.6 437.2 22,730.4 2.65% 22,155.9 2.27% 22,045.9 2.16% 21,087.6 2.07% (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). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 153                                                                                                                             Net interest margin on total assets – Calculated as the ratio between net interest income annualized, and average total assets. Table 52: NLB Group and NLB net interest margin on total assets calculation Numerator Net interest income(i) Denominator Average total assets(ii) Net interest margin on total assets 2022 NLB Group 2021 504.9 409.4 2020 299.6 22,975.9 2.2% 20,659.0 2.0% 15,086.2 2.0% 2022 177.0 13,133.2 1.3% in EUR millions 2020 138.9 10,336.2 1.3% NLB 2021 139.5 11,853.9 1.2% (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). NPE – NPE includes risk exposure to D- and E-rated clients (includes loans and advances, debt securities, and off-balance exposures, which are included in report Finrep18; before the deduction of allowances for the ECL). Non-performing exposures measured by fair value loans through P&L (FVTPL) are taken into account at fair value increased by the amount of negative fair changes for credit risk. NPE per cent. (on-balance and off-balance)/Classified on-balance and off-balance exposures – NPE per cent. in accordance with EBA methodology: NPE as a percentage of all exposures to clients in Finrep18, before deduction of allowances for the ECL; the ratio is in gross terms. Where Non-Performing Exposure includes risk exposure to D- and E-rated clients (includes loans and advances, debt securities, and off-balance exposures, which are included in report Finrep18; before the deduction of allowances for the ECL). The share of NPEs is calculated on the basis of an internal data source, with which the NLB Group monitors the portfolio quality. The calculations presented below are based on internal data sources. Table 53: NLB Group and NLB NPE (EBA def.) calculation NLB Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 373.6 415.5 513.0 136.0 159.5 235.1 Numerator Total Non-Performing on- balance and off-balance Exposure in Finrep18 Denominator Total on-balance and off- balance exposures in Finrep18 NPE per cent. 1.3% 1.7% 2.3% 0.9% 1.1% 28,133.2 24,328.0 22,042.3 15,512.0 13,869.9 12,223.1 1.9% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 154                                                                                     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 54: NLB Group and NLB 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 Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 373.6 415.5 513.0 136.0 159.5 235.1 28,134.7 24,339.2 22,051.0 15,506.3 13,872.1 12,225.5 NPE per cent. 1.3% 1.7% 2.3% 0.9% 1.1% 1.9% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 155                                         Non-performing loans include loans to D- and E-rated clients, namely loans at least 90 days past due, or loans unlikely to be repaid without recourse to collateral (before deduction of loan loss allowances). 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 gross terms. Where non-performing loans are defined as loans to D- and E-rated clients, namely loans at least 90 days past due, or loans unlikely to be repaid without recourse to 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. Table 55a: NLB NPL calculation in EUR millions NLB 2021 2020 2022 Numerator Total Non-Performing Loans 111.2 130.4 208.4 Denominator Total gross loans NPL per cent. 9,667.2 8,522.5 6,980.8 1.1% 1.5% 3.0% Table 55b: NLB Group NPL calculation Numerator Total Non-Performing Loans Denominator Total gross loans NPL per cent. 2022 328.3 18,403.9 1.8% 2021 367.4 15,541.8 2.4% 2020 474.7 13,686.6 3.5% NLB Group 2019 374.7 9,793.5 3.8% in EUR millions 2018 622.3 9,017.2 6.9% 2017 844.5 9,130.4 9.2% Table 55c: NLB Group’s banking subsidiaries NPL calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Komercijalna Banka, Beograd N Banka, Ljubljana in EUR millions NLB Group’s banking subsidiaries Numerator Total Non-Performing Loans 54.5 59.7 8.3 9.4 17.0 19.0 15.7 15.6 32.6 42.2 32.5 36.3 23.6 295.4 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2022 Denominator Total gross loans NPL per cent. 1,506.5 3.6% 1,383.8 4.3% 734.4 1.1% 734.7 1.3% 724.2 2.3% 621.0 3.1% 940.5 1.7% 802.0 1.9% 715.3 4.6% 602.0 7.0% 3,390.0 1.0% 2,610.1 1.4% 1,218.4 1.9% 18,174.2 1.6% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 156                                                                                                                                           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 56a: NLB NPL coverage ratio 1 calculation in EUR millions NLB 2021 2020 2022 95.7 97.9 158.4 Numerator Loan loss allowances entire loan portfolio Denominator Total Non-Performing Loans 111.2 130.4 208.4 NPL coverage ratio 1 (NPL CR 1) 86.1% 75.1% 76.0% Table 56b: NLB Group NPL coverage ratio 1 calculation Numerator Loan loss allowances entire loan portfolio Denominator 2022 2021 2020 2019 2018 2017 NLB Group in EUR millions 324.8 316.5 388.4 334.2 479.6 654.8 Total Non-Performing Loans NPL coverage ratio 1 (NPL CR 1) 328.3 98.9% 367.4 86.1% 474.7 81.8% 374.7 89.2% 622.3 77.1% 844.5 77.5% Table 56c: 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 2022 in EUR millions NLB Komercijalna Banka, Beograd N Banka, Ljubljana NLB Group’s banking subsidiaries 63.7 17.5 20.8 36.6 20.2 35.9 15.9 303.5 Numerator Loan loss allowances entire loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 1 (NPL CR 1) 54.5 116.9% 8.3 17.0 15.7 211.3% 122.6% 232.8% 32.6 62.1% 32.5 110.4% 23.6 67.3% 295.4 102.7% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 157                                                                                                       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 on an internal data source, with which the NLB Group monitors the loan portfolio quality. Table 57a: NLB Group and NLB NPL coverage ratio 2 calculation Numerator Loan loss allowances non- performing loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 2 (NPL CR 2) 2022 187.4 328.3 57.1% NLB Group 2021 212.9 367.4 57.9% 2020 272.1 474.7 57.3% 2022 64.5 111.2 58.1% in EUR millions NLB 2021 2020 79.0 120.7 130.4 60.6% 208.4 57.9% Table 57b: 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 2022 in EUR millions NLB Komercijalna Banka, Beograd N Banka, Ljubljana NLB Group’s banking subsidiaries 38.7 5.0 14.9 13.8 14.7 11.2 3.8 166.6 Numerator Loan loss allowances non- performing loan portfolio Denominator Total Non-Performing Loans NPL coverage ratio 2 (NPL CR 2) 54.5 70.9% 8.3 60.7% 17.0 87.7% 15.7 87.7% 32.6 45.1% 32.5 34.5% 23.6 16.2% 295.4 56.4% 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 58: NLB Group and NLB Net NPL ratio calculation Numerator Net volume of non-performing loans Denominator Total Net Loans Net NPL ratio per cent. (%Net NPL) 2022 140.9 18,079.1 0.8% NLB Group 2021 154.5 15,225.4 1.0% 2020 202.7 13,298.2 1.5% 2022 46.6 9,571.5 0.5% in EUR millions 2020 87.8 6,822.4 1.3% NLB 2021 51.4 8,424.7 0.6% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 158                                                                                                                                 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 59: NLB Group in NLB Received collaterals for NPLs/NPL calculation Numerator Gross volume of Non-Performing Loans covered by collaterals Denominator Total Non-Performing Loans Received collaterals for NPLs / NPL NLB Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 200.3 226.6 288.1 64.9 78.2 137.2 328.3 61.0% 367.4 61.7% 474.7 60.7% 111.2 58.4% 130.4 60.0% 208.4 65.8% 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 60: NLB Group and NLB 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 Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 337.2 375.1 466.0 111.7 131.2 199.1 13,796.0 11,128.8 10,340.6 6,610.8 5,498.9 4,958.8 Gross NPL ratio per cent. (% NPL) 2.4% 3.4% 4.5% 1.7% 2.4% 4.0% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 159                                                                                 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 61: NLB Group and NLB Gross NPL ratio (EBA def.) (BoS) calculation Numerator Gross volume of Non-Performing Loans and advances Denominator NLB Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 337.2 375.1 466.0 111.7 131.2 199.1 Gross volume of Loans and advances in Finrep18 18,590.5 15,668.8 Gross NPL ratio per cent. (% NPL) 1.8% 2.4% 13,795.3 3.4% 9,780.9 1.1% 8,615.3 1.5% 7,028.2 2.8% 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 62: NLB Group and NLB NPL coverage ratio (EBA def.) calculation Numerator Volume of allowances and value adjustments for credit losses on Non- Performing loans and advances(i) Denominator Gross volume of Non-Performing loans and advances(i) NPL coverage ratio per cent. (% CR) NLB Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 195.9 219.1 265.3 65.0 79.8 110.1 337.2 58.1% 375.1 58.4% 466.0 56.9% 111.7 131.2 199.1 58.2% 60.8% 55.3% (i) Without loans and advances classified as held for sale, cash balances at CBs, and other demand deposits. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 160                                                                           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 63: NLB Group and NLB NPL coverage ratio (EBA def.) (BoS) calculation Numerator Volume of allowances and value adjustments for credit losses on Non- Performing loans and advances Denominator Gross volume of Non-Performing loans and advances NPL coverage ratio per cent. (% CR) NLB Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 195.9 219.1 265.3 65.0 79.8 110.1 337.2 58.1% 375.1 58.4% 466.0 56.9% 111.7 131.2 199.1 58.2% 60.8% 55.3% Collateral received/NPL (EBA def.) – The NPL collateral ratio is the ratio of the collateral received for non-performing loans and advances to the gross carrying amount of collateralized non-performing loans and advances, in accordance with the EBA methodology (report Finrep18). The calculation is provided on single loan basis. The NPLs where the amount of collateral received exceeds the net non-performing of each loan exposure are the subject of calculation. Table 64: NLB Group and NLB NPL collateral 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 Group 2022 2021 2020 2022 30.7 36.7 61.3 56.1 62.5 144.6 6.2 8.2 in EUR millions NLB 2021 2020 12.2 38.6 19.4 88.8 NPL Collateral received / NPL (%) 54.7% 58.8% 42.4% 75.6% 63.1% 43.5% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 161                                                               Net stable funding ratio (NSFR) – The net stable funding ratio is a liquidity risk standard requiring financial institutions to hold enough stable funding to cover the duration of their long-term assets. NSFR is defined as the amount of available stable funding relative to the amount of required stable funding and is based on the current Basel Committee guidelines. This ratio should be equal to at least 100% on an on-going basis. ‘Available stable funding’ is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of such stable funding required of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution, as well as those of its off-balance- sheet (OBS) exposures. The calculations presented below are based on internal data sources. Table 65: NLB Group and NLB NSFR calculation NLB Group NLB 31 Dec 2022 31 Dec 2021 31 Dec 2020 31 Dec 2022 31 Dec 2021 31 Dec 2020 in EUR millions Numerator Amount of available stable funding 20,409.1 18,446.7 16,514.6 11,691.2 10,815.8 9,455.7 Denominator Amount of required stable funding NSFR 11,154.7 183.0% 9,960.8 185.2% 9,966.8 165.7% 6,582.3 177.6% 6,309.5 171.4% 5,833.7 162.1% 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 66: NLB Group EVE calculation 31 Dec 2022 30 Sep 2022 30 Jun 2022 31 Mar 2022 31 Dec 2021 30 Sep 2021 30 Jun 2021 31 Mar 2021 31 Dec 2020 NLB Group in EUR thousands Numerator Interest risk in banking book – EVE -110,452.4 -115,458.9 -129,345.0 -141,035.8 -126,650.6 -135,133.4 -134,172.8 -140,567.2 -128,370.1 Denominator Equity (Tier I) EVE as % of Equity 2,166,333.0 2,065,707.0 2,048,380.0 1,906,112.0 1,972,485.0 1,903,800.0 1,879,365.0 1,734,545.0 1,765,000.0 -5.1% -5.6% -6.3% -7.4% -6.4% -7.1% -7.1% -8.1% -7.3% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 162                                                                                 Operational business margin (OBM) – Calculated as the ratio between operational business net income annualized and average assets. Table 67: NLB Group and NLB OBM calculation NLB Group 2022 2021 2020 2022 in EUR millions NLB 2021 2020 Numerator Operational business net income(i) 820.0 678.1 490.3 326.8 274.3 257.7 Denominator Average total assets(ii) OBM (cumulative) 22,975.9 20,659.0 15,086.2 3.6% 3.3% 3.2% 13,147.5 2.5% 11,876.0 2.3% 10,336.3 2.5% (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). Operational business margin (OBM) (quarterly) – Calculated as the ratio between operational business net income annualized and average assets. Table 68: NLB Group OBM (quarterly) calculation Numerator Operational business net income(i) Denominator Average total assets(ii) OBM (quarterly) Q4 2022 Q3 2022 Q2 2022 Q1 2022 NLB Group in EUR millions 917.9 834.0 795.1 730.7 23,740.9 3.87% 23,185.2 3.60% 23,050.6 3.45% 22,006.7 3.32% (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 (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). 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 69: NLB Group and NLB ROE b.t. calculation Numerator Result before tax(i) Denominator Average total equity(ii) ROE b.t. NLB Group  2022 2021 2020 2022 in EUR millions NLB 2021 2020 483.1 261.4 277.9 164.1 211.5 113.9 2,344.4 20.6% 2,222.8 11.8% 1,808.1 15.4% 1,558.3 10.5% 1,507.2 14.0% 1,384.6 8.2% (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 2022 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 70a: NLB Group and NLB ROE a.t. calculation Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. 2022 446.9 2,248.7 19.9% NLB Group 2021 236.4 2,069.9 11.4% 2020 269.7 1,751.2 15.4% 2022 159.6 1,558.3 10.2% in EUR millions 2020 114.0 1,384.6 8.2% NLB 2021 208.4 1,507.2 13.8% (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 70b: NLB Group (w/o negative goodwill) ROE a.t. calculation NLB Group (w/o NGW) Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. (i)(ii) Please refer to the notes under Table 70a. in EUR millions 2022 274.0 2,248.7 12.2% Table 70c: NLB Group’s banking subsidiaries ROE a.t. calculation NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd NLB Komercijalna Banka, Beograd 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2021 2022 2021 in EUR millions 37.9 39.0 19.3 18.2 11.4 10.0 32.4 24.4 16.6 10.1 4.3 68.2 34.8 252.9 15.0% 245.4 15.9% 95.3 20.2% 106.7 17.0% 91.5 12.5% 93.5 10.7% 111.1 29.2% 108.9 22.4% 99.5 16.7% 76.5 13.1% 77.4 5.5% 713.0 9.6% 630.2 5.5% Numerator Result after tax(i) Denominator Average equity(ii) ROE a.t. (i)(ii) Please refer to the notes under Table 70a. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 164                                                                                                                       Return on equity after tax (ROE a.t.) normalized(iii)– Calculated as the ratio between result after tax annualized and average risk adjusted capital. Table 71: NLB Group ROE a.t. normalized calculation Numerator Result after tax(i) Denominator Average risk adjusted capital(ii) ROE a.t. in EUR millions NLB Group 2022 274.0 1,759.8 15.6% (i) Result after tax is annualized, calculated as a 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 risk adjusted capital is calculated as a sum of Risk Weighted Assets (RWA) balance as at the end of the previous year end (31 December) and monthly Risk Weighted Assets (RWA) balances of the last day of each month from January to month t divided by (t+1), multiplied by Tier 1 regulatory capital requirement and decreased by minority shareholder capital. (iii) Result a.t. w/o negative goodwill divided by Average risk adjusted capital. Average risk adjusted capital calculated as Tier 1 requirement of average Risk Weighted Assets (RWA) reduced for minority shareholder capital contribution. Return on assets (ROA b.t.) – Calculated as the ratio between result before tax annualized and average total assets. Table 72: NLB Group and NLB ROA b.t. calculation Numerator Result before tax(i) Denominator Average total assets(ii) ROA b.t. 2022 483.1 NLB Group 2021 261.4 22,975.9 2.1% 20,659.0 1.3% 2020 277.9 15,086.2 1.8% 2022 164.1 13,147.5 1.2% in EUR millions 2020 113.9 10,336.3 1.1% NLB 2021 211.5 11,876.0 1.8% (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 are 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). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 165                                           Return on assets (ROA a.t.) – Calculated as the ratio between result after tax annualized and average total assets. Table 73a: NLB Group and NLB ROA a.t. calculation Numerator Result after tax(i) Denominator Average total assets(ii) ROA a.t. 2022 446.9 NLB Group 2021 236.4 22,975.9 1.9% 20,659.0 1.1% 2020 269.7 15,086.2 1.8% 2022 159.6 13,147.5 1.2% in EUR millions 2020 114.0 10,336.3 1.1% NLB 2021 208.4 11,876.0 1.8% (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 are 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 73b: 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 NLB Komercijalna Banka, Beograd 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2021 2022 2021 in EUR millions 37.9 39.0 19.3 18.2 11.4 10.0 32.4 24.4 16.6 10.1 4.3 68.2 34.8 1,771.1 2.1% 1,658.6 2.4% 948.7 2.0% 874.5 2.1% 777.6 1.5% 673.5 1.5% 987.1 3.3% 906.0 2.7% 795.2 2.1% 593.5 1.7% 696.3 0.6% 4,668.8 1.5% 4,029.4 0.9% Numerator Result after tax(i) Denominator Average total assets(ii) ROA a.t. (i)(ii) Please refer to the notes under Table 73a. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 166                                                                                                                         Total capital ratio (TCR) – TCR is the own funds of the institution expressed as a percentage of the total risk exposure amount. Table 74a: NLB Group and NLB TCR calculation NLB Group NLB 31 Dec 2022 31 Dec 2021 31 Dec 2020 31 Dec 2022 31 Dec 2021 31 Dec 2020 in EUR millions Numerator Total capital (Own funds) 2,806.4 2,252.5 2,065.5 2,004.2 1,647.3 1,631.6 Denominator Total risk exposure Amount (Total RWA) Total capital ratio 14,653.1 19.2% 12,667.4 17.8% 12,421.0 16.6% 7,832.7 25.6% 6,708.5 24.6% 6,028.8 27.1% Table 74b: NLB Group’s banking subsidiaries TCR calculation Numerator Total capital Denominator Total risk exposure Amount (Total RWA) Total capital ratio NLB Banka, Skopje NLB Banka, Banja Luka NLB Banka, Sarajevo NLB Banka, Prishtina NLB Banka, Podgorica NLB Banka, Beograd NLB Komercijalna Banka, Beograd N Banka, Ljubljana 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 in EUR millions 251.4 243.6 81.4 77.1 80.4 75.0 117.5 112.3 77.0 70.0 87.7 620.9 555.8 188.3 1,384.8 1,354.4 508.3 456.7 488.1 445.0 18.2% 18.0% 16.0% 16.9% 16.5% 16.9% 746.0 15.7% 647.9 17.3% 419.6 429.3 456.3 2,521.5 1,946.7 877.9 18.4% 16.3% 19.2% 24.6% 28.6% 21.4% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 167 Big stories don’t write themselves. In NLB they are written by experts, visionaries, and caring mentors – in NLB we write them together, mindful of our business decisions and actions, and of the footprints we create. Despite the precarious circumstances, the shadow of war in Europe, the resulting energy crisis, and the economic slowdown, 2022 was the best year in the history of our Bank and Group. We reached many important milestones and through responsible environmental and societal actions once again confirmed our commitment and contribution to a better quality of life in South-Eastern Europe, our home region. We are proud that our efforts and our progress in the field of sustainability were recognized by our first ESG Risk Rating. The results give us confidence to pursue future growth ambitions. We will continue to create added value for our shareholders, live up to the expectations of our clients and the public, as well as seize all opportunities in front of us. Pictured: NLB employees NLB Group Chart Nova Ljubljanska banka d.d., Ljubljana Core Non-core Banks Financial institutions Companies Financial institutions Companies Slovenia Slovenia Slovenia Slovenia Slovenia N Banka, Ljubljana NLB Skladi, Ljubljana Bankart, Ljubljana(ii) 100% 100% 100% 100% 45.64% 46.03% NLB Lease&Go, leasing, Ljubljana NLB Cultural Heritage Management Institute 100% 100% 100% 100% NLB Leasing, Ljubljana- v likvidaciji (iii) 100% 100% Prvi faktor, v likvidaciji, Ljubljana 50% 50% S-REAM, Ljubljana 100% 100% PRO-REM, Ljubljana - v likvidaciji 100% 100% ARG-Nepremičnine, Horjul 75% 75% PRIVATINVEST, Ljubljana (iv) 100% 100% Foreign countries Foreign countries Foreign countries Foreign countries Foreign countries NLB Lease&Go, Skopje (v) NLB DigIT, Beograd 51% 100% 100% 100% NLB Lease&Go Leasing, Beograd (vi) 95.20% 95.20% NLB Banka, Sarajevo 97.35% 97.35% NLB Banka, Podgorica 99.87% 99.87% NLB Banka, Prishtina 82.38% 82.38% NLB Banka, Banja Luka 99.85% 99.85% NLB Banka, Skopje 86.97% 86.97% NLB Komercijalna Banka, Beograd 100% 100% 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 (i.a) 100% direct ownership Prvi Faktor, v likvidaciji, Ljubljana. (i.b) 90% direct ownership Prvi Faktor, v likvidaciji, Ljubljana, 5% NLB, 5% SID banka d.d. (ii) - 45.64% share NLB d.d., 0.39% share N Banka. - 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) 100% direct ownership NLB Lease&Go, leasing, d.o.o. Ljubljana. (iv) 100% direct ownership N Banka d.d., Ljubljana. (v) 51% direct ownership NLB Lease&Go, leasing, d.o.o. Ljubljana, 49% NLB Banka AD Skopje. (vi) 95.20% direct ownership NLB Lease&Go, leasing, d.o.o. Ljubljana. Former name of the company: Zastava Istrabenz Lizing, d.o.o., Beograd (change was registered on 17 January 2023). REAM, Beograd 100% 100% REAM, Podgorica 100% 100% Tara Hotel, Budva 12.71% 100% SPV 2, Beograd 100% 100% NLB Srbija, Beograd 100% 100% REAM, Zagreb 100% 100% OL Nekretnine, Zagreb - u likvidaciji 100% 100% NLB InterFinanz in Liquidation, Zürich 100% 100% NLB InterFinanz, Beograd - u likvidaciji 100% 100% NLB Leasing, Beograd - u likvidaciji 100% 100% LHB AG, Frankfurt 100% 100% NLB Crna Gora, Podgorica 100% 100% Prvi faktor u likvidaciji, Zagreb(i.a) 100% 100% Prvi faktor-faktoring, Beograd - u likvidaciji(i.b) 90% 95% Optima Leasing u likvidaciji, Zagreb 100% 100% MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 169 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 CSA & Cross-border Financing IT Delivery Credit Risk - Corporate Controlling Large Corporates Data Management Credit Risk - Retail Financial Accounting and Administration Small and Mid Corporates Evaluation and Control Financial Markets Trade Finance Services IT Governance IT Security Restructuring CFO Investment Banking and Custody IT Infrastructure 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. Procurement Card Operations Payments Processing Cash Processing Financial Instruments Processing Corporate Customer Delivery Retail Banking Processing COO NLB Group Corporate and Investment Banking Management Sales Development and Management Private Banking KC 24/7 Distribution Network Area Branch Ljubljana Area Branch Northwest and Central Slovenia Area Branch Northeast Slovenia Area Branch Southeast Slovenia 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 2022 Financial Report Contents 170 FINANCIAL REPORT MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 171 Contents Independent auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 2.13. Allowances for financial assets . . . . . . . . . . . . . . . . . . . . . . . 192 3. Changes in the composition of the NLB Group . . . . . 204 Statement of management’s responsibility . . . . . . . . . . . . . . . 178 2.14. Forborne loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 4. Notes to the income statement . . . . . . . . . . . . . . . . . . . . 205 Income statement for the annual period ended 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Statement of comprehensive income for the annual period ended 31 December. . . . . . . . . . . . . . . . . 180 2.15. Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 4.1. Interest income and expenses . . . . . . . . . . . . . . . . . . . . . . . 205 2.16. Offsetting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 4.2. Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 2.17. Sale and repurchase agreements . . . . . . . . . . . . . . . . . . . . 195 4.3. Fee and commission income and expenses. . . . . . . . . . 206 Statement of financial position as at 31 December . . . . . . . . . 181 2.18. Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 4.4. Gains less losses from financial assets and liabilities Statement of changes in equity for the annual period ended 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 2.19. Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 2.20. Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 not measured at fair value through profit or loss. . . . . .207 4.5. Gains less losses from financial assets and liabilities held for trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 Statement of cash flows for the annual period ended 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Notes to the financial statements . . . . . . . . . . . . . . . . . . . . . . . . . 187 1. 2. General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 Summary of significant accounting policies . . . . . . . . . 187 2.21. Non-current assets and disposal groups classified as held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 4.6. Gains less losses from non-trading financial assets mandatorily at fair value through profit or loss . . . . . . 208 2.22. Accounting for leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 4.7. Foreign exchange translation gains less losses . . . . . . 209 2.23. Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 197 4.8. Other net operating income . . . . . . . . . . . . . . . . . . . . . . . . . 209 2.1. Statement of compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 2.24. Borrowings, deposits, and issued debt securities with characteristics of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 2.2. Basis for presenting the financial statements . . . . . . . . . 187 2.25. Other issued financial instruments with characteristics of equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 4.9. Administrative expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 4.10. Cash contributions to resolution funds and deposit guarantee schemes . . . . . . . . . . . . . . . . . . . . . . . . . . .211 2.3. Comparative amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 4.11. Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . .211 2.4. Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 4.12. Gains less losses from modification of financial assets 211 2.26. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 2.5. Business combinations, goodwill, and bargain purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 2.27. Contingent liabilities and commitments. . . . . . . . . . . . . . . 198 2.28. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 4.13. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 4.14. Impairment charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 2.6. Investments in subsidiaries, associates and joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 2.29. Fiduciary activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 4.15. Gains less losses from non-current 2.30. Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 2.7. A combination of entities or businesses under common control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 2.31. Share-based payment transactions . . . . . . . . . . . . . . . . . . 199 4.16. Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 2.8. Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . 189 2.32. Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 4.17. Earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 2.9. Interest income and expenses . . . . . . . . . . . . . . . . . . . . . . . . 189 2.33. Segment reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 2.10. Fee and commission income . . . . . . . . . . . . . . . . . . . . . . . . . 189 2.11. Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .190 2.34. Critical accounting estimates and judgments in applying accounting policies . . . . . . . . . . . . . . . . . . . . . 200 2.12. Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .190 2.35. Implementation of the new and revised International Financial Reporting Standards . . . . . . . . . . . . . . . . . . . . . . .202 MB Statement MB Statement SB Statement SB Statement Key Highlights Key Highlights Strategy Strategy Risk Factors & Outlook Risk Factors & Outlook Sustainability Sustainability Performance Overview Performance Overview Risk Management Risk Management Events After 2022 Events After 2022 Financial Report Financial Report Contents 172 172 5. Notes to the statement of financial position . . . . . . . . . 214 5.22. Accumulated other comprehensive income and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 5.1. Cash, cash balances at central banks, and other demand deposits at banks . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 5.23. Capital adequacy ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .262 5.2. Financial instruments held for trading . . . . . . . . . . . . . . . 215 5.24. Off-balance sheet liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 265 5.3. Non-trading financial instruments measured 5.25. Funds managed on behalf of third parties . . . . . . . . . . . 266 at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . 216 5.4. Financial assets measured at fair value through other comprehensive income . . . . . . . . . . . . . . . . 217 6. Risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 6.1. Credit risk management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .269 5.5. Derivatives for hedging purposes . . . . . . . . . . . . . . . . . . . . 219 6.2. Market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 5.6. Financial assets measured at amortised cost . . . . . . . . . 221 6.3. Liquidity risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .293 5.7. Non-current assets held for sale . . . . . . . . . . . . . . . . . . . . . 224 6.4. Management of non-financial risks. . . . . . . . . . . . . . . . . . 305 6.5. Fair value hierarchy of financial and non-financial assets and liabilities. . . . . . . . . . . . . . . . . . . 306 6.6. Offsetting financial assets and financial liabilities . . . . . 315 7. 8. 9. Analysis by segment for NLB Group . . . . . . . . . . . . . . . . 316 Related-party transactions. . . . . . . . . . . . . . . . . . . . . . . . 320 Events after the reporting date . . . . . . . . . . . . . . . . . . . . .329 5.8. Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 5.9. Investment property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 5.10. Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 5.11. Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .229 5.12. Investments in subsidiaries, associates and joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 5.13. Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .239 5.14. Movements in allowance for the impairment of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 5.15. Financial liabilities, measured at amortised cost . . . . . . 247 5.16. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .249 5.17. Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 5.18. Income tax relating to components of other comprehensive income . . . . . . . . . . . . . . . . . . . . . 259 5.19. Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 5.20. Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 5.21. Other equity instruments issued . . . . . . . . . . . . . . . . . . . . . 260 MB Statement MB Statement SB Statement SB Statement Key Highlights Key Highlights Strategy Strategy Risk Factors & Outlook Risk Factors & Outlook Sustainability Sustainability Performance Overview Performance Overview Risk Management Risk Management Events After 2022 Events After 2022 Financial Report Financial Report Contents Contents 173 173 Independent auditor’s report INDEPENDENT AUDITOR'S REPORT To the Shareholders of Nova Ljubljanska Banka, d.d. REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Opinion We have audited the separate financial statements of Nova Ljubljanska Banka, d.d. (“the Bank”) and the consolidated financial statements of the Nova Ljubljanska Banka, d.d. and its subsidiaries (together “the Group”), which comprise the separate and consolidated statement of financial position as at December 31 2022, the separate and the consolidated income statement, the separate and the 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, and a summary of significant accounting policies and other explanatory information. In our opinion, the accompanying separate and consolidated financial statements present fairly, in all material respects, the financial position of the Bank and the Group as at 31 December 2022 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISA) and Regulation (EU) No. 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities (“Regulation (EU) No. 537/2014 of the European Parliament and the Council“). Our responsibilities under those rules are further described in the Auditor’s responsibilities for the audit of the separate and the consolidated financial statements section of our report. We are independent of the Bank and the Group in accordance with the International Ethics Standards Board of Accountants’ (IESBA) International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) together with the ethical requirements that are relevant to our audit of the separate and the consolidated financial statements in Slovenia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate and the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the separate and the consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the separate and the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the separate and the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying separate and the consolidated financial statements. Credit risk and impairment of loans and advances to customers including the impact of the conflict in Ukraine and the uncertain macroeconomic environment The carrying amount of loans and advances to customers at amortized cost amounts to EUR 6.1 billion (or 43% of total assets) of the Bank and EUR 13.1 billion (or 54% of total assets) of the Group as of 31 December 2022. As of 31 December 2022, total credit impairment allowances of the Bank amounted to EUR 93 million and of the Group to EUR 324 million. We understood and evaluated the processes and control environment for identifying default events (i.e. credit impairment events) within the loan portfolios, as well as the processes and controls for assessment of impairment losses related to loans and advances to customers. 1/7 The impairment of loans and advances to customers is a highly subjective area which requires a significant amount of judgment to be applied by management specifically around expected credit losses (ECL), loss given default (LGD) and probability of default (PD) in the case of Stage 1 and Stage 2 (i.e. for those loans and advances that are not yet credit impaired). Also, the assessment of individual credit provisions for loans and advances to customers in Stage 3 (i.e. those that are credit impaired), which are determined based on scenarios and their likelihood of occurrence requires management judgement. Scenarios are based on 'going' and 'gone' assumptions of debt repayment. Management judgements include assumptions and estimates identification of significant changes in credit risk, impairment triggers, probabilities of scenarios for cash flow forecasts and collateral realization, all containing high level of complexity and subjectivity. the assessment of credit impairment was made more complex as a result of the conflict in Ukraine and the increasingly uncertain macroeconomic environment interest rates, energy prices and inflation). The Bank’s Stage 3 gross balance of loans and advances to customers was EUR 108 million as of 31 December 2022 (Group: EUR 301 million) and total provisions were EUR 64 million (Group: EUR 190 million). (increasing In 2022, related to Provisions for loans and advances to customers in Stage 1 and Stage 2 are determined based on complex models and the parameters used in those models, such as lifetime PDs, LGDs, identification of significant changes in credit risk, inclusion of forward-looking elements and segmentation of exposures, all involve significant management assumptions and estimates. The Bank’s Stage 1 and Stage 2 combined gross balance of loans and advances to customers was EUR 6.0 billion (Group: EUR 12.9 billion) as of 31 December 2022 and total credit impairment allowances were EUR 29 million (Group: EUR 137 million). As provisions for loans and advances to customers are significant to understanding the financial statements as a whole and bear significant judgements, we consider this to be a significant item for our audit and a key auditing matter. For further information, refer to Note 6.1. Credit risk management of the separate and consolidated financial statements. For a sample of performing loans (i.e. those that are not credit impaired) with characteristics that might imply a default event had occurred, we assessed whether the criteria for determining whether a default event had occurred are fulfilled and therefore whether there was a requirement to calculate an impairment provision using the Stage 3 methodology or not. re-performed management’s For a sample of Stage 3 individually impaired loans, we understood the latest developments at the borrower and the basis of measuring the impairment provisions and considered whether key judgments were appropriate given the borrowers’ circumstances. We impairment also calculation for mathematical accuracy. In addition, we tested the key inputs of the impairment calculation, including the expected future cash flows and valuation of collateral held, and inquired with the management as to whether valuations were up to date, consistent with the strategy being followed in respect of the particular borrower and appropriate for the purpose. In respect of statistical models that are used for the estimation of credit risk related impairment losses of Stage 1 and Stage 2 exposures, we involved Credit risk the model in an evaluation of specialists documentation and other related evidence such as model governance, segmentation policy, expected credit loss estimation process. We also reviewed changes in risk models implemented in the current period. We evaluated the application of the models through the recalculation for mathematical accuracy of credit risk related impairment losses, allowances and provisions defined by IFRS 9. We have tested the days past due calculation and the effect on the staging classification of the exposures. Furthermore, we assessed how the Bank and Group incorporated uncertainty related to the conflict in Ukraine and in the macroeconomic environment (increasing interest rates, energy prices and inflation) in the parameters used for the calculation of collective impairments. Our Credit risk specialists reviewed forward looking information (FLI) and input parameters used and assessed whether the uncertainty related to the macroeconomic situation was adequately reflected in the PD.. We have assessed the adequacy of the Bank’s and the Group’s disclosures included in Note 6.1. Credit risk management, 5.14. Movements in allowance for the impairment of financial assets and 2.13. Allowances for financial assets of the separate and consolidated financial statements. 2/7 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 174 Information technology (IT) systems and controls over revenue recognition A significant part of the Bank's and the Group’s interest and fee revenue recognition process is reliant on IT systems with automated processes and controls over the capture, storage and extraction of information. A fundamental component of these processes and controls is ensuring that appropriate user access and change management protocols exist and are being adhered to. These protocols are important because they ensure that access and changes to IT systems and related data are made and authorized in an appropriate manner. As our audit sought to place a high level of reliance on IT systems and application controls related to interest and fee revenue recognition, a high proportion of the overall audit effort was in this area. Furthermore, the complexity of IT systems and nature of application controls requires special expertise to be involved in the audit. We therefore consider this to be a key audit matter. We focused our audit on those IT systems and controls that are significant for the Bank’s and the Group’s interest and fee revenue recognition processes. As audit procedures over the IT systems and application controls require specific expertise, we involved IT audit specialists in our audit procedures. This includes among other procedures, testing of IT dependant and application controls specific to interest and fee revenue recognition in the Bank’s and Group’s IT systems. We have tested algorithms used to calculate interest and fee income for products generating significant income using the Bank’s pricing tables. We understood and assessed the overall IT control environment and the controls in place which included controls over access to systems and data, as well as system changes. We adjusted our audit approach based on the financial significance of the system and whether there were automated procedures supported by that system. As part of our audit procedures, we tested the operating effectiveness of controls over appropriate access rights to assess whether only appropriate users had the ability to create, modify or delete user accounts for the relevant in-scope applications. We also tested the operating effectiveness of controls around system development and program changes to establish that changes to the system were appropriately authorized, implemented. Additionally, we developed and assessed and the design and operating effectiveness of the application controls embedded in the processes relevant to our audit. tested income, 4.1. We assessed the adequacy of the disclosures related to interest and fee revenue included in Notes 2.9. income and expenses, 2.10. Fee and Interest commission income and expenses and 4.3. Fee and commission income and expenses of the separate and the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. Interest Identification and measurement of the fair value of the assets acquired and liabilities assumed with respect to the acquisition of N-Banka d.d, Ljubljana On 1 March 2022, the Bank completed the acquisition of N-Banka d.d., Ljubljana for an acquisition price of EUR 5.1 million. As part of our audit of the separate and consolidated financial statements we have performed the following procedures: As described in Note 5.12 b) Acquisition of N Banka d.d., Ljubljana, the purchase price allocation was determined during the period, as a result of which EUR 172.8 million in negative goodwill (Bargain purchase), was recognized in the income statement. Note 5.12 b) Acquisition of N Banka d.d., Ljubljana also provides details of the accounting methods applied to the business combinations. We have examined the relevant legal documents pertaining to the acquisition of N-Banka d.d., Ljubljana with a view to identifying the specific clauses impacting the determination and recognition of the purchase price and the negative goodwill. We obtained, read and understood the corporate resolutions and administrative authorizations. We have performed audit procedures to obtain evidence of the We deemed the identification and measurement of fair value of the assets acquired and liabilities assumed N- Banka d.d., Ljubljana to be a key audit matter due to the significance of the transaction, the material impact of the negative goodwill on the current year result, and because it required estimations and judgments from Group management in terms of determining how the purchase price should be allocated to the difference classes of assets acquired and liabilities assumed. acquisition-date balances which, as provided for in the terms of acquisition. We assessed the criteria used for recognition of transaction as a business combination and the determination of the acquisition date and the consideration transferred. the We evaluated, with the involvement of valuation experts, the approaches used to determine the fair values of the assets acquired and liabilities assumed, the underlying assumptions and the mathematical accuracy of the calculations made. reviewed the qualitative and quantitative We information included in the accompanying notes to the consolidated financial statements. We assessed the adequacy of the disclosures included in Note 5.12 b) Acquisition of N Banka d.d., Ljubljana of the separate in and accordance with International Financial Reporting Standards as adopted by the European Union. financial statements the consolidated Other information Other information comprises the information included in the Annual Report other than the separate and the consolidated financial statements and auditor’s report thereon. Management is responsible for the other information. Our opinion on the separate and the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the separate and the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the separate and the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. In addition, we assess whether the other information has been prepared, in all material respects, in accordance with applicable law or regulation, in particular, whether the other information complies with law or regulation in terms of formal requirements and procedure for preparing the other information in the context of materiality, i.e. whether any non-compliance with these requirements could influence judgments made on the basis of the other information. Based on the procedures performed, to the extent we are able to assess it, we report that: • • The other information describing the facts that are also presented in the separate and the consolidated financial statements is, in all material respects, consistent with the separate and the consolidated financial statements; and The other information is prepared in compliance with applicable law or regulation. In addition, our responsibility is to report, based on the knowledge and understanding of the Bank and the Group obtained in the audit, on whether the other information contains any material misstatement. Based on the procedures we have performed on the other information obtained, we have not identified any material misstatement. Responsibilities of management and those in charge with governance for the separate and consolidated financial statements Management is responsible for the preparation and fair presentation of the separate and the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as management determines is necessary to enable the preparation of separate and the consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the separate and the consolidated financial statements, management is responsible for assessing the Bank’s and the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank and the Group or to cease operations, or has no realistic alternative but to do so. Those in charge with governance are responsible for overseeing the Company’s and the Group’s financial reporting process and to approve the annual report. 3/7 4/7 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 175 Auditor’s responsibilities for the audit of the separate and the consolidated financial statements REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Our objectives are to obtain reasonable assurance about whether the separate and the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these separate and consolidated financial statements. As part of an audit in accordance with audit rules, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • • • • identify and assess the risks of material misstatement of the separate and the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s and the Group’s internal control; evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s and the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the separate and the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank and the Group to cease to continue as a going concern; evaluate the overall presentation, structure and content of the separate and the consolidated financial statements, including the disclosures, and whether the separate and the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those in charge with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those in charge with governance with a statement that we have complied with relevant ethical requirements regarding independence and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those in charge with governance, we determine those matters that were of most significance in the audit of the separate and the consolidated financial statements of the current period and are therefore the key audit matters. OTHER REQUIREMENTS ON CONTENT OF AUDITOR’S REPORT IN COMPLIANCE WITH REGULATION (EU) No. 537/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Appointment and Approval of Auditor We were appointed as auditors of the Bank and the Group at the general meeting of shareholders on 27 June 2018, the president of the supervisory board has signed the audit agreement on 7 September 2018. The agreement was signed for the period of 5 years. Total uninterrupted engagement period, including previous renewals (extension of the period for which we were originally appointed) and reappointments for the statutory auditor, has lasted for 10 years. Sanja Košir Nikašinović and Simon Podvinski are certified auditors, responsible for the audit in the name of Ernst & Young d.o.o. Consistence with Additional Report to Audit Committee Our audit opinion on the separate and the consolidated financial statements expressed herein is consistent with the additional report to the audit committee of the Bank, which we issued on the 12 April 2023. Non-audit Services No prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No. 537/2014 of the European Parliament and of the Council were provided by us to the Bank and its controlled undertakings and we remain independent from the Bank and its controlled undertakings/the Group in conducting the audit. In addition to statutory audit services and services disclosed in the annual report and in the financial statements, no other services which were provided by us to the Bank and its controlled undertakings. AUDITOR'S REPORT ON THE COMPLIANCE OF FINANCIAL STATEMENTS IN ELECTRONIC FORMAT WITH THE REQUIREMENTS OF DELEGATED REGULATION NO. 2019/815 ON A SINGLE ELECTRONIC REPORTING FORMAT We have conducted a reasonable assurance engagement whether the audited the separate and the consolidated financial statements of the Bank and the Group for the financial year ended 31 December 2022 which are included in annual report (hereinafter: the audited separate and the consolidated financial statements), are prepared in accordance with the requirements of Commission Delegated Regulation (EU) 2019/815 of 17 December 2018 as well as adjusted Commission Delegated Regulation (EU) 2020/815 of 11 November 2020 supplementing Directive 2004/109 / EC of the European Parliament and of the Council Annex 1 with regard to regulatory technical standards on the specification of a single electronic reporting format applicable for 2021 (hereinafter referred to as the "Delegated Regulation"). Responsibility of the management and those responsible for governance Management is responsible for the preparation and accurate presentation of the audited separate and the consolidated financial statements in electronic format in accordance with the requirements of the Delegated Regulation, and for such internal control as the management determines is necessary to enable the preparation of the audited separate and consolidated financial statements in electronic format that are free from material misstatement, whether due to fraud or error. Those in charge of governance are responsible for overseeing the preparation of the audited separate and the consolidated financial statements in electronic format in accordance with the requirements of the Delegated Regulation. Auditor's Responsibility Our responsibility is to perform a reasonable assurance engagement and to express a conclusion on whether the audited consolidated financial statements have been prepared in accordance with the requirements of the Delegated Regulation. We conducted our reasonable assurance engagement in accordance with the revised International Standard on Assurance Engagements 3000 (revised), Assurance Engagements other than Audits or Reviews of Historical Financial Information (ISAE 3000), issued by the International Auditing and Assurance 5/7 6/7 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 176 Standards Board. This standard requires that we plan and perform the engagement to obtain reasonable assurance for reaching the conclusion. We have acted in accordance with the independence and ethical requirements of the Regulation EU no. 537/2014, and the International Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (including International Independence Standards) (IESBA Code), which establishes the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior. We apply International Standards on Quality Management (ISQM) 1, and accordingly, we maintain a robust system of quality control, including policies and procedures documenting compliance with relevant ethical and professional standards and requirements of applicable law and regulation. Summary of Work Performed Within the scope of work, we have performed primarily the following procedures: • • • • • identified and assessed the risk of material non-compliance of the audited separate and the separate consolidated financial statements with the requirements of the Delegated Regulation due to fraud or error; obtained an understanding of internal control relevant to the reasonable assurance engagement in order to design procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control; assessed whether the audited separate and the consolidated financial statements meet the requirements of the Delegated Regulation applicable at the reporting date; obtained reasonable assurance that the audited separate and the consolidated financial statements, which are included in the annual report of the issuer are accurately presented in electronic XHTML format; obtained reasonable assurance that the values and disclosures in the XHTML format of the audited consolidated financial statements are marked-up correctly using the Inline XBRL technology (iXBRL), and that machine reading of these documents ensures complete and true information contained in the audited consolidated financial statements. We believe that the evidence obtained is sufficient and appropriate to provide a basis for our conclusion. Conclusion Based on the procedures performed and the evidence obtained, in our opinion the audited separate and the consolidated financial statements of the Company and the Group for the financial year ended 31 December 2022, which are included in the annual report, have been prepared, in all material respects, in accordance with the requirements of the Delegated Regulation. Ljubljana, 12 April 2023 Sanja Košir Nikašinović Simon Podvinski Director, Certified auditor Certified auditor Ernst & Young d.o.o. Dunajska 111, Ljubljana 7/7 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 177 Statement of management’s responsibility The Management Board hereby confirms its responsibility for preparing the consolidated financial statements of NLB Group and the financial statements of NLB for the year ending on 31 December 2022, and for the accompanying accounting policies and notes to the financial statements. The Management Board is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards as adopted by the European Union, and with the requirements of the Slovenian Companies Act and the Banking Act so as to give a true and fair view of the financial position of NLB Group and NLB as at 31 December 2022, and their financial results and cash flows for the year then ended. The Management Board also confirms that the appropriate accounting policies were consistently applied, and that the accounting estimates were prepared according to the principles of prudence and good management. The Management Board further confirms that the financial statements of NLB Group and NLB, together with the accompanying notes, have been prepared on a going-concern basis for NLB Group and NLB, and in line with valid legislation and the International Financial Reporting Standards as adopted by the European Union. The Management Board is also responsible for appropriate accounting practices, the adoption of appropriate measures for safeguarding assets, and the prevention and identification of fraud and other irregularities or illegal acts. The Management Board of NLB Hedvika Usenik Member Andrej Lasič Member Archibald Kremser Member Andreas Burkhardt Member Antonio Argir Member Blaž Brodnjak Chief executive officer MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 178 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 Gains less losses from financial liabilities measured 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.d) 4.8. 4.9. 4.10. 4.11. 4.12. 4.13. 4.13. 4.14. 4.14. 5.12.b), c) 5.12.e) 4.15. 4.16. Earnings per share/diluted earnings per share (in EUR per share) 4.17. The notes are an integral part of these financial statements. 2022 561,467 8,309 569,776 (43,785) (21,069) (64,854) 504,922 242 381,599 (108,249) 273,350 866 33,451 90 286 1,655 297 - 1,861 16,778 (412,886) (36,144) (47,390) (26) (3,050) (5,932) (14,454) (5,433) 172,878 781 921 483,063 (25,230) 457,833 446,862 10,971 22.3 2021 467,500 10,329 477,829 (40,460) (28,009) (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 11.8 2022 214,163 7,799 221,962 (27,373) (17,562) (44,935) 177,027 56,044 166,440 (37,291) 129,149 (1,050) 11,332 (1,451) 163 1,655 (1,588) - 33 4,411 (190,865) (9,713) (17,001) - 282 (2,325) (14,968) 22,767 - - 168 164,070 (4,468) 159,602 159,602 - 8.0 2021 170,002 9,183 179,185 (15,297) (24,749) (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 - 10.4 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 179                 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 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. NLB Group  in EUR thousands NLB Notes 5.16.c) 5.4.c) 5.18. 5.4.c) 4.4., 4.14. 5.18. 2022 457,833 (149,677) 4,031 (2,383) 121 17 596 596 (163,055) (168,593) 5,538 10,996 308,156 297,936 10,220 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 2022 159,602 (90,445) 2,048 (1,925) - 80 - - (92,030) (98,172) 6,142 1,382 69,157 69,157 - 2021 208,421 (15,281) (115) (383) - 94 - - (17,359) (17,187) (172) 2,482 193,140 193,140 - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 180                 Statement of financial position as at 31 December NLB Group 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 - debt securities issued - 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 Other equity instruments 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.e) 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. 5.22.a) 5.21. 5.22.b) 5.22.a) 31 Dec 2022 5,271,365 21,588 19,031 2,919,203 1,917,615 222,965 13,072,986 177,823 59,362 (23,767) - 11,677 251,316 35,639 58,235 1,696 55,527 72,543 15,436 24,160,240 21,589 1,796 106,414 198,609 20,027,726 82,482 815,990 294,463 2,124 122,652 12,420 2,569 49,081 21,737,915 200,000 871,378 84,184 (160,588) 13,522 1,357,089 2,365,585 56,740 2,422,325 24,160,240 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 31 Dec 2022 3,339,024 21,692 15,411 1,334,061 in EUR thousands NLB 31 Dec 2021 3,250,437 7,682 12,360 1,585,751 1,597,448 350,625 6,054,413 114,399 59,362 (23,767) 904,040 4,571 78,592 6,753 30,425 - 34,888 13,161 4,235 13,939,333 22,150 2,514 212,656 57,292 10,984,411 216 815,990 164,567 2,124 45,216 3,940 - 25,387 12,336,463 200,000 871,378 84,184 (81,677) 13,522 515,463 1,602,870 - 1,602,870 13,939,333 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 12,699,532 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 181         The Management Board of NLB has authorised for issue the financial statements and the accompanying notes. Hedvika Usenik Member Andrej Lasič Member Archibald Kremser Member Andreas Burkhardt Member Antonio Argir Member Blaž Brodnjak Chief executive officer Ljubljana, 12 April 2023 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 182 Statement of changes in equity for the annual period ended 31 December Share capital Share premium Other equity instruments NLB Group Notes Balance as at 1 January 2022 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividend paid Other equity instruments issued Transactions with non-controlling interests (note 3.) Transfer of fair values reserve Other 5.20. 200,000 5.22.a) 871,378 - - - - - - - - - - - - - - - - Balance as at 31 December 2022 200,000 871,378  in EUR thousands Accumulated other comprehensive income Fair value reserve of financial assets measured at FVOCI 5.22.b) 11,366 - (153,255) (153,255) - - (1,020) - - Foreign currency translation reserve 5.22.b) (17,184) - 632 632 - - 67 - - (142,909) (16,485) Other Profit reserves Retained earnings Equity attributable to owners of the parent Equity attributable to non-controlling interests Total equity 5.22.b) (4,734) - 3,697 3,697 - - (140) (17) - (1,194) 5.22.a) 13,522 - - - - - - - - 1,004,385 2,078,733 446,862 - 446,862 446,862 (148,926) 297,936 (100,000) (100,000) - 82,000 137,390 10,971 (751) 10,220 (4,568) - 2,216,123 457,833 (149,677) 308,156 (104,568) 82,000 8,230 17 (2,405) 7,137 - (221) (86,358) (79,221) - 56 - (165) 13,522 1,357,089 2,365,585 56,740 2,422,325 5.21. - - - - - 82,000 - - 2,184 84,184 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 Share capital Share premium 5.20. 200,000 5.22.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 Foreign currency translation reserve Other Profit reserves Retained earnings Equity attributable to owners of the parent Equity attributable to non-controlling interests Total equity   in EUR thousands 5.22.b) 42,496 - (28,005) (28,005) - 149 (3,274) - 11,366 5.22.b) (17,724) - 540 540 - - - - 5.22.b) (3,645) - (1,085) (1,085) - - (4) - 5.22.a) 13,522 - - - - - - - 846,762 236,404 - 236,404 (92,200) 10,168 3,278 (27) 1,952,789 236,404 (28,550) 207,854 (92,200) 170,251 11,464 (1,618) 9,846 (7,710) 10,317 (34,997) - (27) - - 2,123,040 247,868 (30,168) 217,700 (99,910) (24,680) - (27) (17,184) (4,734) 13,522 1,004,385 2,078,733 137,390 2,216,123 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 183                                                       NLB Notes Balance as at 1 January 2022 - Net profit for the year - Other comprehensive income Total comprehensive income after tax Dividends paid Other equity instruments issued Other Share capital Share premium 5.20. 200,000 5.22.a) 871,378 - - - - - - - - - - - - Balance as at 31 December 2022 200,000 871,378 Accumulated other comprehensive income Other equity instruments Fair value reserve of financial assets measured at FVOCI Other Profit reserves Retained earnings Total equity in EUR thousands 5.21. - - - - - 82,000 2,184 84,184 5.22.b) 12,464 - (92,207) (92,207) - - - 5.22.b) (3,696) - 1,762 1,762 - - - 5.22.a) 13,522 - - - - - - (79,743) (1,934) 13,522 5.20. 458,266 159,602 - 159,602 (100,000) - (2,405) 515,463 1,551,934 159,602 (90,445) 69,157 (100,000) 82,000 (221) 1,602,870  in EUR thousands 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 Balance as at 31 December 2021 Share capital Share premium Fair value reserve of financial assets measured at FVOCI Accumulated other comprehensive income 5.20. 200,000 - - - - - 5.22.a) 871,378 - - - - - 200,000 871,378 5.22.b) 27,694 - (15,177) (15,177) - (53) 12,464 Other 5.22.b) (3,592) - (104) (104) - - (3,696) Profit reserves Retained earnings Total equity 5.22.a) 13,522 - - - - - 13,522 5.20. 341,992 208,421 - 208,421 (92,200) 53 458,266 1,450,994 208,421 (15,281) 193,140 (92,200) - 1,551,934 The notes are an integral part of these financial statements. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 184                             Statement of cash flows for the annual period ended 31 December NLB Group in EUR thousands NLB 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 bonds Issuance of Senior Preferred notes Issuance of ordinary shares and other equity instruments Other proceeds related to financing activities Payments from financing activities Dividends paid Purchase of subsidiary’s treasury shares 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.d) 3., 5.12.b), c) 5.15.c) 5.15.c) 5.21. 2022 624,528 (50,824) 965 382,354 (105,086) 3,365 32,799 (428,539) 19,148 (43,260) (18,336) 417,114 (1,002,409) (213) 3,357 349,351 (1,357,757) 2,853 468,473 467,966 507 (116,822) 211,536 19,675 - 1,081 190,780 (252,726) (26,910) (14,273) 198,241 - (409,784) (41,190) 599,338 217,873 299,029 82,000 436 (123,628) (104,586) (19,042) 475,710 6,213 317,698 5,176,311 5,500,222 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 2022 247,675 (30,982) 75,071 162,129 (37,183) 1 12,073 (186,831) 10,159 (11,955) 3,635 243,792 (819,088) (213) (3,048) 76,653 (890,003) (2,477) 620,902 616,303 4,599 45,606 138,980 2,915 21,130 645 114,290 (442,731) (5,748) (6,684) (120,944) - (309,355) (303,751) 598,902 217,873 299,029 82,000 - (100,000) (100,000) - 498,902 (1,106) 240,757 3,254,784 3,494,435 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 185                   Cash and cash equivalents comprise: Cash, cash balances at central banks, and other demand deposits at banks Loans and advances to banks with original maturity up to three months Debt securities measured at fair value through other comprehensive income with original maturity up to three months Total Notes 5.1. NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 5,272,538 208,404 19,280 5,500,222 5,005,946 142,319 28,046 5,176,311 3,339,381 155,054 - 3,494,435 3,250,784 4,000 - 3,254,784 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 186                           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 2022 and as at 31 December 2021, 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 years presented, except for changes in accounting policies resulting from the application of new standards or changes to 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. 2.3. Comparative amounts The separate and consolidated financial statements are comprised of the income statement and statement of comprehensive income, the statement of financial position, the statement of changes in equity, the statement of cash flows, significant accounting policies, and the notes. 2.2. Basis for presenting the financial statements The financial statements have been prepared on a going- concern basis, under the historical cost convention as modified by the revaluation of 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 preparation of financial statements in accordance with the Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with comparative amounts. Where IAS 8 applies, comparative figures have been adjusted to conform to the changes in presentation in the current year. Compared to the presentation of the Statement of financial position as at 31 December 2021, the line item ‘Subordinated liabilities’ was renamed to ‘Debt securities issued.’ In years 2020 and 2021, all issued debt securities were subordinated liabilities, while in 2022 the Bank also issued Senior Preferred notes. All issued debt securities are included in one line item and separately disclosed in note 5.15.c). 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 IFRS requires the use of estimates and assumptions that affect Group. the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities on the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and activities, actual results may ultimately differ from those estimates. Accounting estimates and underlying assumptions are reviewed on an ongoing basis. Revisions of accounting estimates are recognised in the period in which the estimate is revised. Critical accounting estimates and judgements in applying accounting policies are disclosed in note 2.34. This document contains both the separate financial statements of NLB, and the consolidated financial statements of NLB Group. The presented accounting policies apply to both sets of financial statements, with the exception of policies described in notes 2.4. and 2.5., which only apply to 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.’ 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 187 non-controlling interest’s proportionate share of net assets of deducted from the equity, and all other transaction costs disposed operation and the portion of the cash-generating unit the acquiree. associated with the acquisition are expensed. retained. Inter-company transactions, balances, and unrealised gains Identifiable assets acquired and liabilities assumed in a The goodwill of associates and joint ventures is included in the on transactions between NLB Group entities are eliminated. business combination are, with limited exceptions, measured carrying value of investments. Unrealised losses are also eliminated unless the transaction initially at their fair values at the acquisition date. provides evidence of impairment of the asset transferred. In a business combination achieved in stages, NLB Group A contingent consideration classified as equity is not re- remeasures its previously held equity interest in the acquiree at NLB Group treats transactions with non-controlling interests as measured and its subsequent settlement is accounted for within its acquisition-date fair value and recognises the resulting gain transactions with equity owners of NLB Group. For purchases equity. A contingent consideration classified as an asset or or loss, if any, in profit or loss. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report of subsidiaries from non-controlling interests, the difference liability that is a financial instrument and within the scope of between any consideration paid and the relevant share IFRS 9 Financial Instruments is measured at fair value at each acquired of the carrying value of net assets of the subsidiary reporting date and changes in fair value are recognised in the is deducted from the equity. For sales to non-controlling statement of profit or loss in accordance with IFRS 9. Other interests, the differences between any proceeds received and contingent considerations that are not within the scope of the relevant share of non-controlling interests are also recorded IFRS 9 are measured at fair value at each reporting date, and in the equity. All effects are presented in the line item ‘Equity changes in fair value are recognised in profit or loss. Attributable to Non-controlling Interest.’ 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 value or at the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets at the date of acquisition. All other components of non-controlling interests are measured at their acquisition-date NLB Group accounts for business combinations using the fair values, unless another measurement basis is required by acquisition method when the acquired set of activities and IFRSs. assets meets the definition of a business and control is transferred to the Group. In determining whether a particular Goodwill is measured as the excess of the aggregate of the set of activities and assets is a business, the Group assesses consideration transferred measured at fair value, the amount whether the set of assets and activities acquired includes, at a of any non-controlling interest in the acquiree, and the fair minimum, an input and substantive process, and whether the value of an interest in the acquiree held immediately before acquired set has the ability to produce outputs. The acquired the acquisition date over the net amounts of the identifiable process is considered substantive if it is critical to the ability to assets acquired, as well as the liabilities assumed. Any negative continue producing outputs; and the inputs acquired include an amount, a gain on a bargain purchase (or ‘negative goodwill’), organised workforce with the necessary skills, knowledge, or is recognised in profit or loss after management reassesses experience to perform that process or it significantly contributes whether it has identified all the assets acquired and all the to the ability to continue producing outputs and is considered liabilities and contingent liabilities assumed, and reviews the unique or scarce or cannot be replaced without significant cost, appropriateness of their measurement. effort, or delay in the ability to continue producing outputs. Goodwill is tested annually for impairment. For the purpose The consideration transferred is measured at the fair value of of impairment testing, goodwill arising from a business the assets transferred, equity interest issued, liabilities incurred combination is, from the acquisition date, allocated to the or assumed, including the fair value of assets or liabilities Group’s cash-generating units (CGUs) or groups of CGUs that from contingent consideration arrangements and fair value are expected to benefit from the synergies of the combination. of any pre-existing equity interest in the subsidiary. However, Where goodwill has been allocated to a cash-generating unit this excludes amounts related to the settlement of pre-existing (CGU) and part of the operation within that unit is disposed of, relationships which are recognised in profit or loss. Acquisition- the goodwill associated with the disposed operation is included related costs such as advisory, legal, valuation, and similar in the carrying amount of the operation when determining professional services are recognised in profit or loss as well. the gain or loss on disposal. Goodwill disposed in these Transaction costs incurred for issuing equity instruments are circumstances is measured based on the relative values of the 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.e). NLB Group’s subsidiaries, associates and joint ventures are Contents presented in note 5.12. 188 2.7. A combination of entities or businesses under common control A merger of entities within NLB Group is a business combination involving entities under common control. For such mergers, members of NLB Group apply merger accounting principles, and use the carrying amounts of merged entities as reported in the consolidated financial statements. No goodwill is recognised on mergers of NLB Group entities. Mergers of entities within NLB Group do not affect the consolidated financial statements. 2.8. Foreign currency translation Functional and presentation currency Items included in the financial statements of each of NLB Group’s entities are measured using the currency of the primary economic environment in which the entity operates (i.e., the functional currency). The financial statements are presented in euros, which is NLB Group’s presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges. Translation differences resulting from changes in the amortised cost of monetary items denominated in a foreign currency and classified as financial assets measured at fair value through other comprehensive income, are recognised in the income statement. Translation differences on non-monetary items, such as equity instruments at fair value through profit or loss, are reported as part of the fair value gain or loss in the income statement. Translation differences on non-monetary items, such as equity instruments classified as financial assets measured at fair value through other comprehensive income, are included together with valuation reserves in the valuation (losses)/gains taken to other comprehensive income and accumulated in the equity. Gains and losses resulting from foreign currency purchases and amortised cost of a financial liability. Interest income includes sales for trading purposes are included in the income statement coupons earned on fixed-yield investments and trading as gains less losses from financial assets and liabilities held for securities, and accrued discounts and premiums on securities. trading. NLB Group entities The financial statements of all NLB Group entities that have a The calculation of the effective interest rate includes all fees and points paid or received by parties to the contract and all transaction costs, but excludes future credit risk losses. functional currency different from the presentation currency are Interest income is calculated by applying the effective interest translated into the presentation currency as follows: rate to the gross carrying amount of financial assets other than • assets and liabilities for each statement of financial position credit-impaired assets. presented are translated at the closing rate on the reporting date; When a financial asset becomes credit-impaired and is, • income and expenses for each income statement are therefore, classified in Stage 3, interest income is calculated by translated at average exchange rates; and applying the effective interest rate to the net amortised cost of • components of equity are translated at the historical rate. the financial asset. If the financial asset cures and is no longer credit-impaired, interest income is again calculated on a gross Goodwill and fair value adjustments arising from the acquisition basis. of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. In the case of purchased or originated credit-impaired financial assets (POCI), the credit-adjusted effective interest rate is In the consolidated financial statements, exchange differences applied to the amortised cost of the financial asset from initial arising from the translation of the net investment in foreign recognition. The credit-adjusted effective interest rate is the operations are recognised in other comprehensive income. interest rate that, at initial recognition, discounts the estimated When control over a foreign operation is lost, the previously future cash flows (including credit losses) to the amortised cost recognised exchange differences on translations to a of the purchased or originated credit-impaired financial asset. different presentation currency are reclassified from other At the NLB Group level, most POCI exposures relate to the comprehensive income to profit and loss for the year. On the initial recognition of non-performing exposures in the case of a partial disposal of a subsidiary without loss of control, the business combination. related portion of accumulated currency translation differences is reclassified as a non-controlling interest within the equity. 2.9. Interest income and expenses 2.10. Fee and commission income Fees and commissions mainly include fees received from credit cards and ATMs, customer transaction accounts, Interest income and expenses for all financial instruments payment services, investment funds, and commissions from measured at amortised cost, and financial assets measured at guarantees. Fee and commission income are recognised at fair value through other comprehensive income are recognised an amount that reflects the consideration to which the Group in the income statement for all interest-bearing instruments on expects to be entitled, in exchange for providing the services. an accrual basis using the effective interest method. Interest The performance obligations, as well as the timing of their income on all trading assets and financial assets mandatorily satisfaction, are identified and determined at the inception required to be measured at fair value through profit or loss is of the contract. The Group’s revenue contracts do not include recognised using the contractual interest rate. The effective multiple performance obligations. interest method is used to calculate the amortised cost of a financial asset or financial liability, and to allocate the interest When the Group provides a service to its customers, the income or interest expenses over the relevant period. The consideration is invoiced and generally due immediately upon effective interest rate is the rate that exactly discounts estimated satisfaction of a service provided at a point in time. When the future cash payments or receipts over the expected life of the service is provided over time, the consideration is invoiced and financial instrument, or a shorter period (when appropriate) due in line with the contractual provisions. to the gross carrying amount of the financial asset or to the MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 189 The Group has generally concluded that it is the principal in its interest method, foreign exchange gains and losses, and IFRS 9 includes an option to designate financial assets at fair revenue arrangements because it typically controls the services impairment are recognised in profit or loss. Each of them is value through profit or loss if doing so eliminates or significantly before transferring them to the customer. presented as a separate line item in the income statement. Any reduces a measurement or recognition inconsistency that Fees and commissions that are integral to the effective interest line item ‘Gains less losses from financial assets and liabilities recognising the gains or losses on them on different bases. gain or loss on derecognition is recognised in profit or loss in would otherwise arise from measuring assets or liabilities, or rate of financial assets and liabilities are presented within not classified at fair value through profit or loss.’ 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. 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 Financial liabilities Debt financial instruments are measured at FVOCI if they are Financial liabilities are subsequently measured at the amortised held within a business model for the purpose of both collecting cost or at fair value through profit or loss, when they are held contractual cash flows and selling (‘held to collect and sell’), for trading, derivative instruments, or the fair value designation and if cash flows are solely payments of principal and interest is applied. on the principal amount outstanding. FVOCI results in the debt instruments being recognised at fair value in the statement Upon initial recognition, financial liability may be irrevocably of financial position and at the AC in the income statement. designated as measured at fair value through profit or loss Interest income is calculated using the effective interest method, if that eliminates or significantly reduces a measurement or foreign exchange gains and losses, and impairments are recognition inconsistency that would otherwise arise from recognised separately in the income statement. Other net gains measuring assets or liabilities or recognising the gains or and losses are recognised in other comprehensive income, until losses on them on different bases, or if the liabilities are part of the instrument is derecognised. At derecognition of the debt a group of financial instruments which are managed and their financial instrument, the cumulative gains and losses previously performance evaluated on a fair value basis in accordance with recognised in other comprehensive income are reclassified to a documented risk management or investment strategy. the income statement under the line item ‘Gains less losses from financial assets and liabilities not classified at fair value through Changes in the fair value of financial liabilities designated as at fair value through profit or loss, transaction costs that are profit or loss.’ measured at fair value through profit or loss are recognised in profit or loss, with the exception of movement in the fair directly attributable to the acquisition or issue of the financial instrument. Subsequent measurement depends on the classification of the instrument. Financial assets 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 Equity instruments that are not held for trading may be value due to changes of NLB Group’s own credit risk. Such irrevocably designated as FVOCI, with no subsequent changes are presented in other comprehensive income with no reclassification of gains or losses to the income statement. subsequent reclassification 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 Other financial liabilities are subsequently measured of the investment, in which case, such gains are recorded in at amortised cost using the effective interest method. other comprehensive income. Other net gains and losses are Interest expenses and foreign exchange gains and losses characteristics. The measurement categories of financial assets recognised in other comprehensive income and are never are recognised in profit or loss. Any gain or loss on the are as follows: • 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). reclassified to profit or loss. In NLB Group, the most material derecognition of a financial liability is recognised in profit equity instrument irrevocably designated as FVOCI is the or loss. In the event of derecognition of a financial liability investment in the National Resolution Fund (note 5.4.a). NLB measured at amortised cost, the gains and losses are Group decided to use this presentation alternative because recognised in the line item ‘Gains less losses from financial the fund was established based on the law and it has a highly assets and liabilities not classified at fair value through profit regulated investment strategy in order to ensure safety, low risk, or loss.’ Gains and losses on disposals of financial liabilities and the high liquidity of the fund. designated as measured at fair value through profit or loss are Financial assets are measured at AC if they are held within a All other financial assets are mandatorily measured at FVTPL, business model for the purpose of collecting contractual cash including financial assets within other business models such as Assessment of NLB Group’s business model also presented separately from those held for trading. 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 financial assets managed at fair value or held for trading and NLB Group has determined its business model separately financial assets with contractual cash flows that are not solely for each reporting unit within NLB Group, and is based on payments of principal and interest on the principal amount observable factors for different portfolios that best reflect how outstanding. Net gains and losses, including any interest or dividend income, are recognised in profit or loss. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 190 the Group manages groups of financial assets to achieve its flows are consistent with the SPPI test. The principal amount business objective, such as: reflects the fair value at initial recognition less any subsequent b) Reclassification Financial assets can be reclassified when and only when NLB • how the performance of the business model and the financial changes, e.g. due to repayment. The interest must represent Group’s business model for managing those assets changes. assets held within that business model are evaluated and only the consideration for the time value of money, credit risk, The reclassification takes place from the start of the reporting reported to key management personnel; other basic lending risks, and a profit margin consistent with period following the change. Such changes are expected to • the risks that affect the performance of the business model basic lending features. If the cash flows introduce more than be very infrequent, and none occurred during the presented and, in particular, the way those risks are managed; de minimis exposure to risk or volatility that is not consistent periods. Financial liabilities shall not be reclassified. • how the managers of the business are compensated (e.g., with basic lending features, the financial asset is mandatorily whether the compensation is based on the fair value of the measured at fair value through profit or loss. assets or on collection of contractual cash flows); and c) Day one gains or losses The best evidence of fair value at initial recognition is the • the expected frequency, value, and timing of sales. NLB Group reviews the portfolio within ‘held to collect’ and transaction price (i.e., the fair value of the consideration given ‘held to collect and sale’ for standardised products on a level or received), unless the fair value of that instrument is evidenced The business model assessment is based on reasonably of a product and for non-standardised products on a single by a comparison with other observable current market expected scenarios without taking worst-case and stress case exposure level. The Group has established a procedure for SPPI transactions in the same instrument (i.e., without modification scenarios into consideration. In general, the business model identification as part of regular investment process with defined or repackaging), or based on a valuation technique whose assessment of the Group can be summarised as follows: responsibilities for primary and secondary controls. Special variables only include data from observable markets. • Loans and deposits given are included in a business model emphasis is put on new and non-standardised characteristics ‘held to collect’ since the primary objective of NLB Group for of loan agreements. the loan portfolio is to collect the contractual cash flows; • Debt securities are divided into three business models: Accounting policy for modified financial assets If the transaction price on a non-active market is different than the fair value from other observable current market transactions in the same instrument, or is based on a valuation • the first group of debt securities presents ‘held for trading’ When contractual cash flows of a financial asset are modified, technique whose variables only include data from observable category; NLB Group assesses if the terms and conditions have been markets, the difference between the transaction price and fair • debt securities in the second group are held under a modified to the extent that, substantially, it becomes a new value is recognised immediately in the income statement (‘day business model ‘held to collect and sale’ with the intention financial asset. The following factors are, amongst others, one gains or losses’). of collecting the contractual cash flows and sale of financial considered when making such assessment: assets, and forms part of the Group’s liquidity reserves; • reason for modification of cash flows (commercial or client’s In cases where the data used for valuation are not fully • the third part of debt securities is held within the business financial difficulties); model for holding them with objective to collect contractual • change in currency of the loan; cash flows. • introduction of an equity feature; observable in financial markets, day one gains or losses are not recognised immediately in the income statement. The timing of recognition of deferred day one gains or losses is determined • replacement of initially agreed debtor with a new debtor that individually. It is either amortised over the life of the transaction, With regard to debt securities within the ‘held to collect’ is not related party to initial debtor; and deferred until the instrument’s fair value can be determined business model, the sales which are related to the increase of • if the modification changes the result of the SPPI test. using market observable inputs, or realised through settlement. the issuers’ credit risk, concentrations risk, sales made close to the final maturity, or sales in order to meet liquidity needs in a If the modification results in derecognition of a financial asset, stress case scenario are permitted. Other sales, which are not the new financial asset is initially recognised at fair value, with d) Derecognition A financial asset is derecognised when the contractual rights due to an increase in credit risk may still be consistent with a the difference recognised as a derecognition gain or loss, to the cash flows from the financial asset expire, or when the held to collect business model if such sales are incidental to the to the extent that an impairment loss has not already been financial asset is transferred, and the transfer qualifies for overall business model, and: recorded. If the modification does not result in cash flows that derecognition. A financial liability is derecognised only when it • are insignificant in value both individually and in aggregate, are substantially different, the modification does not result is extinguished, i.e., when the obligation specified in the contract even when such sales are frequent; in derecognition. In such cases, NLB Group recalculates the is discharged, cancelled, or expires. • are infrequent even when they are significant in value. gross carrying amount of the financial asset and recognises A review of instruments’ contractual cash flow characteristics carrying amount is recalculated as the present value of the modification gain or loss in the income statement. The gross e) Write-offs NLB Group writes off financial assets in their entirety or a (the SPPI test – solely payment of principal and interest on renegotiated or modified contractual cash flows that are portion thereof when it has exhausted all practical recovery the principal amount outstanding) discounted at the financial asset’s original effective interest efforts and has no reasonable expectations of recovery. Criteria The second step in the classification of the financial assets in rate (or credit-adjusted effective interest rate for purchased or indicating that there is no reasonable expectation of recovery portfolios being ‘held to collect’ and ‘held to collect and sell’ originated credit-impaired financial assets). include default period, quality of collateral, and different stages relates to the assessment of whether the contractual cash MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 191 of enforcement procedures. NLB Group may write off financial Hedge accounting is used when certain criteria are met. When a hedging instrument expires or is sold, or when a hedge assets that are still subject to enforcement activities, but this NLB Group and NLB have exercised the option to continue no longer meets hedge accounting criteria, any cumulative does not affect its rights in the enforcement procedures. NLB applying the existing IAS 39 hedge accounting requirements gain or loss existing in other comprehensive income and Group still seeks to recover all amounts it is legally entitled to in in accordance with the policy choice permitted under IFRS 9. previously accumulated in equity at that time remains in other full. A write-off reduces the gross carrying amount of a financial However, disclosures that are required by the IFRS 9 related comprehensive income and in equity, and is recognised in asset and allowance for the impairment. Any subsequent amendments to IFRS 7 ‘Financial Instruments: Disclosures’ are profit or loss only when the forecasted transaction is ultimately recoveries are credited to credit loss expenses. Write-offs and implemented. recoveries are disclosed in note 5.14.a). recognised in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain f) Fair value measurement principles The fair value of financial instruments traded on active markets At the inception of the transaction, NLB Group documents or loss that was reported in other comprehensive income is the relationship between hedged items and hedging immediately transferred to the income statement. instruments, as well as its risk management objective, valuation is based on the price that would be received to sell the assets methodology, and strategy for undertaking various hedge Hedge of a net investment in a foreign operation or transfer liability (exit price) being measured at the reporting transactions. NLB Group also documents its assessment, both Hedges of net investments in foreign operations are accounted date, excluding transaction costs. If there is no active market, at the hedge inception and on an ongoing basis, of whether the for in consolidated financial statements similar to cash flow the fair value of the instruments is estimated using discounted derivatives used in hedging transactions are highly effective in hedges. Any gain or loss on the hedging instrument relating cash flow techniques or pricing models. offsetting changes in fair values or cash flows of hedged items. to the effective portion of the hedge is recognised directly in The actual results of a hedge must always fall within a range of equity. The gain or loss relating to the ineffective portion is If discounted cash flow techniques are used, estimated future 80–125%. cash flows are based on management’s best estimates; and the discount rate is a market-based rate at the reporting Fair value hedge recognised immediately in the consolidated income statement in ‘Gains Less Losses on Financial Assets and Liabilities Held for Trading.’ Gains and losses accumulated in other comprehensive date for an instrument with similar terms and conditions. If Changes in the fair value of derivatives that are designated income are included in the consolidated income statement pricing models are used, inputs are based on market-based and qualify as fair value hedges are recognised in the income when the foreign operation is disposed of as part of the gain or measurements at the reporting date. statement together with any changes in the fair value of the loss on the disposal. hedged asset or liability that are attributable to the hedged risk. g) Derivative financial instruments and hedge accounting Derivative financial instruments – including forward and futures Effective changes in the fair value of hedging instruments and related hedged items are reflected in ‘Fair Value Adjustments in contracts, swaps, and options – are initially recognised in the Hedge Accounting’ in the income statement. Any ineffectiveness statement of financial position at fair value. Derivative financial from derivatives is recorded in ‘Gains Less Losses on Financial instruments are subsequently re-measured at their fair value. Assets and Liabilities Held for Trading.’ Fair values are obtained from quoted market prices, discounted cash flow models, or pricing models, as appropriate. All If a hedge no longer meets the hedge accounting criteria, the derivatives are carried at their fair value within assets when adjustment to the carrying amount of the hedged item for the derivative position is favourable to NLB Group, and within which the effective interest method is used is amortised to profit liabilities when the derivative position is unfavourable to NLB or loss over the remaining period to maturity. The adjustment to Group. the carrying amount of a hedged equity security is included in the income statement upon disposal of the equity security. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging Cash flow hedge instrument and, if so, the nature of the item being hedged. NLB The effective portion of changes in the fair value of derivatives Group designates certain derivatives as either: that are designated and qualify as cash flow hedges is • hedges of the fair value of recognised assets or liabilities or recognised in other comprehensive income. The gain or loss firm commitments (fair value hedge); relating to the ineffective portion is immediately recognised in • 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 • hedges of a net investment in a foreign operation (net reclassification from other comprehensive income to the income investment hedge). statement in the periods when the hedged item affects the profit or loss. 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 that have already occurred, but also losses that are expected to occur in the future. An allowance for expected credit losses (ECL) is required for all loans and other debt financial assets not 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 192 analysis, based on the Group’s historical data, experience, a rating from international credit rating agencies – Fitch, ECL for each facility is calculated as a weighted average ECL expert credit assessment, and incorporation of forward-looking Moody’s, or the S&P. Ratings are set on a basis of the average for each scenario. information. In 2022, the NLB Group made improvements to the international credit rating. If there are no international credit SICR (significant increase of credit risk) identification concept by ratings, the classification is based on the internal methodology The EAD represents the anticipated outstanding amount including a watch list for retail clients. of NLB Group. owed by the obligor, which is determined as the sum of on- balance exposure and expected future drawings of the off- Classification into stages The classification into stages is based on the facility level, balance exposure. The drawings are assessed by applying NLB Group prepared a methodology for ECL defining the nevertheless occurring delays on one facility may trigger the the CCF (credit conversion factor) based on the Bank’s historic criteria for classification into stages, transition criteria between stage deterioration of other facilities of the same client. When experience with similar types of facilities. stages, models for risk indicators calculation, forward-looking the SICR criteria no longer exist, the facility may be transferred scenarios, and the validation of models. The Group classifies to a more favourable stage subject to the prescribed cure The PD is the estimation of likelihood of default over a given financial instruments into Stage 1, Stage 2, and Stage 3, based period of three months. on the applied ECL allowance methodology as described time horizon. The estimation is performed separately for each unique segment (corporate clients by size, institutions, central below: The ECL for Stage 1 financial assets is calculated based on government) or by product group (mortgage, consumer • Stage 1 – performing portfolio: no significant increase of 12-month PDs or shorter period PDs, if the remaining maturity loans and other retail products). Through the cycle, the PD is credit risk since initial recognition, NLB Group recognises an of the financial asset is shorter than 1 year. The 12-month PD supplemented with the forward-looking aspect using three allowance based on 12-month period; already includes the macroeconomic impact effect. Allowances possible scenarios. • Stage 2 – underperforming portfolio: significant increase in Stage 1 are designed to reflect expected credit losses that had in credit risk (SICR) since initial recognition, NLB Group been incurred in the performing portfolio, but have not been The PD is the estimation of likelihood of default over a given recognises an allowance for lifetime period; and identified. • Stage 3 – impaired portfolio: NLB Group recognises lifetime time horizon. The estimation is performed separately for each unique segment (corporate clients by size, institutions, or allowances for these defaulted financial assets. The ECL for Stage 2 financial assets is calculated based on central government) or by product group (mortgage, consumer The Bank has aligned its definition of credit impaired assets significantly since their initial recognition. This calculation is also supplemented with the forward-looking aspect using three lifetime PDs (LPD) because their credit risk has increased loans, and other retail products). Through the cycle, the PD is under IFRS 9 to the new European Banking Authority (EBA) based on a forward-looking assessment that considers several possible scenarios. definition of non-performing loans (NPLs) as at 31 December economic scenarios in order to recognise the probability of 2020. The Bank uses a unified definition of past due and default losses associated with the predicted macro-economic forecasts. Risk parameter calculations are based on the data from each exposures; defaulted clients are rated D, DF, or E based on the subsidiary, while the calculations and modelling are performed internal rating system and contains the clients with material For financial instruments in Stage 3, the same treatment centrally. In the case where the data samples are not sufficiently delays over 90 days, as well as the clients that were assessed is applied as for those considered to be credit impaired. large, hurdle rates are applied based on the regulatory or other as unlikely to pay. All facilities of retail clients obtain a unified Exposures below the materiality threshold obtain collective benchmarks. credit rating. allowances using a PD of 100%. Financial instruments will be transferred out of Stage 3 if they no longer meet the criteria Expected Life A significant increase in credit risk is assumed: of being credit-impaired after a probation period. Special When measuring ECL, the Bank must consider the maximum • when a credit rating significantly deteriorates at the reporting treatment applies for purchased or originated credit-impaired contractual period over which the Bank is exposed to credit risk. date in comparison to the credit rating at initial recognition financial instruments (POCI), where only the cumulative For certain revolving credit facilities that do not have a fixed (which is accompanied with the increase of Probability of changes in lifetime expected losses since the initial recognition maturity, the expected life is estimated based on the period default (PD) indicator), are recognised as a loss allowance. • when a threefold increase of LPD since initial recognition is over which the Bank is exposed to credit risk and where the credit losses would not be mitigated by management actions. detected, The calculation of collective allowances is performed by • when a financial asset has material delays over 30 days (days multiplying the EAD (exposure at default) at the end of each Forward-looking information past due are also included in the credit rating assessment), month with an appropriate PD and LGD (loss-given default). During 2022, the Group reviewed IFRS 9 provisioning by testing • if NLB Group grants the forbearance to the borrower, The obtained result for each month is discounted to the present a set of relevant macroeconomic scenarios to adequately • if the facility is placed on the watch list or intensive care list, time using the original effective interest rate of the facility. For reflect the current circumstances and the related impacts in the • if a retail client is placed on the watch list. Stage 1 exposures, the ECL only takes a 12-month period into future. The methodology of credit rating for banks and sovereign maturity date are included. Risk parameters are calculated NLB Group established and developed multiple scenarios (i.e., classification depends on the existence or non-existence of separately for each of the three possible scenarios. The final baseline, mild, and severe) on the level of ECL calculation. The account, while for Stage 2 or 3 all potential losses until the MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 193 baseline scenario presents a common forecast macroeconomic NLB Group formed three probable scenarios with an associated the risk expectations of credit management due to uncertain view for all countries that are present in the NLB Group. This probability of occurrence for forward-looking assessment of conditions in the macroeconomic environment. The Bank scenario is constructed with the purpose to culminate various risk provisioning in the context of IFRS 9. IFRS 9 macroeconomic follows the conservative stance for the LGD parameter due to outlooks into a unified projection of macroeconomic and scenarios incorporate the forward-looking and probability- the particularities of the local market. financial variables for the NLB Group. This is in line with the weighted aspects of ECL impairment calculation. Both features concept that the bank has a consolidated view on the future may change when material changes in the future development Effects of changed risk parameters of economic development in Southeast Europe (SEE). The of the economy are recognised and not embedded in previous The effects of the changed risk parameters on the amount of IFRS 9 baseline scenario is based on the most recent official forecasts. For the year 2022, we have initially assigned the expected credit losses are disclosed in notes 5.14. and 5.16.b). and professional forecasters outputs, with additional specific scenario probability weights of 10% to the optimistic, 60% to the adjustments for individual countries of the NLB Group. baseline, and 30% to the pessimistic scenarios. b) Individual assessment of allowances for impaired financial assets The macroeconomic rationale behind the alternative scenarios The monitoring process of the macroeconomic environment NLB Group assesses impairments of financial assets separately is related to a range of plausible drivers on economic revealed that uncertainties remain high in the global economy for all individually significant assets classified in Stage 3. The development during the next three years. The narrative for due to the energy crisis, inflation, and the war in Ukraine. materiality threshold is set at a EUR 0.5 million exposure for the alternative scenarios combines statistical techniques The current economic situation led to sluggish growth legal entities, and EUR 0.1 million for private persons on the with expert knowledge as a means of concept and outputs projections, persistent inflationary pressures, and interest rate level of NLB, while the Group members apply lower thresholds validation. The Group developed both alternative scenarios hikes. Increased uncertainty and changes in expectations of applicable to their portfolio size. All other financial assets obtain through the lens of possible expected impact on regional macroeconomic development affected forecasts for some collective allowances. economic activity. In general, the mild scenario is a demand- economies in the NLB Group. The NLB Group noticed a material driven optimistic scenario, where limited supply disruption decrease in growth projections for Slovenia and Serbia for 2023. The amount of loss is measured as the difference between the factors and an active role from the central banks help to Hence, the executive decision was to adjust risk expectations asset’s carrying amount and the present value of estimated brighten the economic conditions and economic subjects’ using the scenario's weight. The Bank changed the scenario future cash flows, which are discounted to the estimation date. confidence. This scenario narrates stronger economic growth, probability weighting set to 0%–10%–90%, where the severe The scenario of expected cash flows can be based on the ‘going while the severe scenario envisions zero real economic growth and baseline scenarios reflect the likelihood of relevant future concern’ assumption, where the cash flow from operations is for all NLB Group home countries. Namely, the severe scenario economic conditions for them. We have derived the likelihood considered along with the sale of collateral that is not crucial is supply-driven pessimistic scenario, where both upside of occurrence for the pessimistic scenario to 90%, whereby the for future business. In the case of the ‘gone concern’ principle, inflation risk and downside growth risk materialize. The bank baseline scenario received a weight of 10%. Minor changes the repayments are based on expected cash flows from the includes these scenarios in calculating expected credit losses in were also applied in other countries based on the latest sale of collateral. The expected payment from the collateral is the context of IFRS 9. available forecast. These adjustments are adopted to reflect calculated from the appraised market value of the collateral, Macroeconomic scenarios for explanatory variables, developed for each country in the NLB Group (in %): Mild scenario Baseline scenario Severe scenario the haircut used as defined in the Haircut Methodology, and discounted. Off-balance sheet liabilities are also assessed individually and, where necessary, related allowances are 2022 2023 2024 2022 2023 2024 2022 2023 2024 recognised as liabilities. Slovenia Real GDP Unemployment rate Bosnia and Herzegovina Real GDP Unemployment rate Montenegro Real GDP Unemployment rate North Macedonia Real GDP Unemployment rate Serbia Real GDP Unemployment rate Kosovo Real GDP Unemployment rate 4.7 4.3 4.0 15.3 6.2 16.1 4.1 15.0 4.8 9.9 4.4 23.6 5.5 4.2 4.9 15.1 6.9 15.5 6.0 14.4 6.5 9.2 6.5 22.6 4.0 4.0 4.6 14.4 5.2 14.5 5.2 13.9 5.0 8.8 5.1 21.8 3.5 4.4 2.4 15.3 4.2 16.1 2.9 15.2 3.6 10.0 2.8 23.6 3.1 4.4 2.3 15.1 3.9 15.5 3.6 14.9 4.1 9.4 3.9 22.6 2.8 4.3 3.0 14.4 3.2 14.5 4.0 14.6 3.8 9.1 3.5 21.8 1.5 4.6 (0.1) 15.4 1.2 16.2 (0.1) 15.5 1.6 10.4 0.3 23.7 0.6 5.6 (0.7) 15.8 (0.1) 16.2 0.1 16.4 1.6 11.5 0.9 23.3 1.8 7.9 1.8 16.4 1.7 16.5 2.5 19.1 2.8 15.3 2.3 23.8 The carrying amount of financial assets measured at amortised cost is reduced through an allowance account and the loss is recognised in the income statement line item ‘Impairment of financial assets.’ If the amount of allowances for ECL decreases subsequently due to an event occurring after the impairment was recognised (e.g., repayment in the collection process exceeds the assessed expected payment from collateral), the reversal of the loss is recognised as a reduction in the allowance account, and the gain is recognised in the same income statement item. For off-balance exposures, the amount of ECL is recognised in the statement of financial position in the line item ‘Provisions’ and in the income statement in the line item ‘Provisions for credit losses.’ MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 194                                                                                                                 The ECLs for debt instruments measured at fair value through forborne loan. When NLB Group is embarking on the forborne assets are measured and accounted for in accordance other comprehensive income do not reduce the carrying loan by taking possession of other assets (i.e., property, plant with the policies applicable to the relevant asset categories. amount of these financial assets in the statement of financial and equipment; securities; and other financial assets), including Repossessed assets mainly represent items of real estate that position, which remains at fair value. Instead, an amount equal investments in the equity of debtors obtained via debt-to- NLB Group classifies within investment properties measured in to the allowance that would arise if the assets were measured equity swaps, it recognises the acquired assets in the statement accordance with an IAS 40 Investment property (note 2.20.), and at amortised cost is recognised in other comprehensive income of financial position at fair value, recognising the difference other assets measured in accordance with IAS 2 Inventories. as an accumulated impairment amount, with a corresponding between the fair value of the asset and the carrying amount of charge to profit or loss. The accumulated loss recognised in the eliminated claim in profit or loss. other comprehensive income is recycled to the profit or loss Real estate obtained as collateral from the foreclosure of loans and receivables, classified as other assets are initially upon derecognition of the assets, or when the amount of Forborne exposures may be identified in both the performing recognised at fair value less costs to sell (realisable value), allowances for ECL decreases due to an event occurring after and non-performing parts of the portfolio. Where the forborne wherein only the direct costs of sales can be considered. At the impairment was recognised. loan is classified in the non-performing part of the portfolio, it subsequent measurement, the realisable value is verified at MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report 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. When receivables from the client receive restructuring status, the debtor must be classified in the rating grade C or lower. The definitions of forborne loans closely follow definitions that were developed by the European Banking Authority (EBA). These definitions aim to achieve comprehensive coverage of exposures to which forbearance measures have been extended. The accounting treatment of forborne loans depends on the type of restructuring. When NLB Group embarks on a forborne loan via the modified terms of repayment proceeding from extending the deadline for the repayment of the principal and/or interest, and/or a forbearance of the repayment of the principal, and/or interest or a reduction in the interest rate, and/or other expenses, it adjusts the carrying amount of the forborne loan on the basis of the discounted value of the estimated future cash flows under the modified terms, and recognises the resulting effect in profit or loss. In the event of the reduction of a claim against the debtor via the reduction in the amount of the claims as a result of a contractually agreed debt waiver and ownership restructuring or debt to equity can be reclassified to the performing part when exposure is no least annually. Valuations of the fair value of real estate are longer considered as impaired or defaulted, when determined performed by certified real estate appraisers. The real estate is amounts were repaid, when one year has passed from the impaired when the carrying value exceeds the realisable value. latest of the events defined (introduction of forbearance, The effect of impairment is recognised as the impairment of classification in the non-performing part, repayment of the other assets and the reversal of impairment as income from the last overdue amount, end of the grace period), and after the reversal of the impairment of other assets. introduction of forbearance there have been no overdue amounts or doubts concerning the repayment of the entire exposure, under the terms and conditions after the forbearance. The absence of doubt is confirmed by analysis of the financial situation of the debtor. The forborne status is withdrawn when: • at least a 2-year probation period has passed since the 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 2.16. Offsetting Financial assets and liabilities are offset, and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. 2.17. Sale and repurchase agreements period; Securities sold under sale and repurchase agreements (repos) • no exposure, in the probation period, is more than 30 days in are retained in the financial statements, and the counterparty default of more than EUR 100; • the client fulfils determined financial indicators. 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 In the case of a deferral of payment approved due to the pledged assets when the transferee has the right by contract or COVID-19 crisis, the probation period is extended for the period custom to sell or re-pledge the collateral. Securities purchased of deferral. 2.15. Repossessed assets swap, NLB Group derecognises the claim in the part relating to In certain circumstances, assets are repossessed following the the write-down or the contractually agreed upon debt waiver. foreclosure on loans that are in default. Repossessed assets are The new estimate of the future cash flows for the residual claim, initially recognised in the financial statements at their fair value not yet written down, is based on an updated estimate of the and classified in the appropriate category according to their probability of loss. NLB Group considers the debtor’s modified purpose and are sold as soon as it is feasible in order to reduce position, the economic expectations, and the collateral of the exposure (note 6.1.l). After initial recognition, the repossessed 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 repurchase price is treated as interest and accrued over the life of the repo agreements using the effective interest method. Contents 195 2.18. Property and equipment 2.19. Intangible assets All items of property and equipment are initially recognised Intangible assets include software licenses, goodwill (note at cost. They are subsequently measured at cost less any 2.5.), and identifiable intangible assets acquired in a business accumulated depreciation and any accumulated impairment combination. Intangible assets other than goodwill, have a finite loss. useful life and are in the statement of financial position stated at cost, less accumulated amortisation and impairment losses. Each year, NLB Group assesses whether there are indications Amortisation is calculated on a straight-line basis at rates that property and equipment may be impaired. If any such designed to write-down the cost of an intangible asset over its indication exists, the recoverable amounts are estimated. The estimated useful life. The core banking system is amortised over recoverable amount is the higher of the fair value less costs a period of 10 years, and other software over a period of three to sell and value in use. If the recoverable amount exceeds to five years. Amortisation does not begin until the assets are the carrying value, the assets are not impaired. If the carrying available for use. amount exceeds the recoverable amount, the difference is recognised as an impairment loss in the income statement. The identifiable intangible assets acquired in a business Items of a largely independent property and equipment which combination and recognised separately from goodwill, are do not generate cash flows are included in the cash-generating recorded at fair value on the acquisition date if the intangible unit and later tested for possible impairment. asset is separable or arises from contractual or other legal rights. After initial recognition, intangible assets acquired in a Depreciation is calculated on a straight-line basis over the business combination are measured in accordance with IAS 38 assets’ estimated useful lives. The following annual depreciation Intangible Assets. Other intangible assets acquired in a business rates were applied: NLB Group and NLB Buildings Leasehold improvements Computers Furniture and equipment Motor vehicles in % 2 – 5 5 – 25 14.3 – 50 10 – 33.3 12.5 – 25 Depreciation does not begin until the assets are available for use. The assets’ residual values and useful lives are reviewed and adjusted if appropriate on each reporting date. Gains and losses on the disposal of items of property and equipment are determined as the difference between the sale proceeds and their carrying amount, and are recognised in the income statement. Maintenance and repairs are charged to the income statement during the financial period in which they are incurred. Subsequent costs that increase future economic benefits are recognised in the carrying amount of an asset, and the replaced part, if any, is derecognised. combination (note 5.10.) relate to core deposits and trade name. Their useful life is assessed to be five 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 the asset’s consumption. 2.20. Investment properties Investment properties include properties held to earn rentals, or to increase the value of a long-term investment, rather than to be used by NLB Group. Investment properties are carried at fair value determined by a certified appraiser. Fair value is based on current market prices. Any gain or loss arising from a change in the fair value is recognised in the income statement. 2.21. Non-current assets and disposal groups classified as held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is deemed to be met only when the sale is highly probable, and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets and disposal groups classified as held for sale are measured at the lower of the assets’ previous carrying amount and fair value less costs to sell. In the case of business combinations, NLB Group measures an acquired non-current asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations at fair value less costs to sell. During subsequent measurement, certain assets and liabilities of a disposal group that are outside the scope of IFRS 5 measurement requirements are measured in accordance with the applicable standards (e.g., deferred tax assets, assets arising from employee benefits, financial instruments, investment property measured at fair value, and contractual rights under insurance contracts). Tangible and intangible assets are not depreciated. The effects of sale and valuation are included in the income statement as a gain or loss from non- current assets held for sale. Liabilities directly associated with disposal groups are reclassified and presented separately in the statement of financial position. 2.22. Accounting for leases A lease is 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. NLB Group as a lessee NLB Group recognises a liability to make lease payments and an asset representing the right to use the underlying asset (i.e., the right-of-use asset) during the lease term for all leases, except for short-term leases and leases of low-value. Short- term leases are defined as those which at the commencement date have a lease term of 12 months or less without the option to purchase the underlying asset. Leases of underlying assets with a value, when new, lower, or equal to EUR 5 thousand are defined as low value leases, and are thus recognised as expenses on a straight-line basis over the lease term. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 196 Right-of-use assets the lessee. When assets are leased under a finance lease, Repurchased own debt is disclosed as a reduction of At the commencement date, NLB Group measures the right- the present value of the lease payments is recognised as a liabilities in the statement of financial position. The difference of-use asset at cost. The cost of right-of-use assets consists of receivable. Income from finance lease transactions is amortised between the book value and the price at which own debt was the amount of lease liabilities recognised, the initial direct costs over the lifetime of the lease using the effective interest method. repurchased is disclosed in the income statement. incurred, an estimate of costs to be incurred by the lessee in Finance lease receivables are recognised at an amount equal dismantling and removing the underlying asset to the condition to the net investment in the lease, including the unguaranteed required by the terms and conditions of the lease and lease residual value. payments made at or before the commencement date less any lease incentives received. After the commencement date, Sale-and-leaseback transactions NLB Group measures the right-of-use asset using a cost model NLB Group also enters into sale-and-leaseback transactions (in (the asset is measured at cost, reduced by any accumulated which NLB Group is primarily a lessor) under which the leased depreciation and impairment losses, and adjusted for any assets are purchased from, and then leased back to the lessee. remeasurement of lease liabilities) and recognises depreciation These contracts are classified as finance leases or operating of the right-of-use assets, on a straight-line basis over the leases, depending on the contractual terms of the leaseback lease term, and (separately) interest on the lease liabilities. agreement. 2.25. Other issued financial instruments with characteristics of equity Upon initial recognition, other issued financial instruments are classified in part or in full as equity instruments if the contractual characteristics of the instruments are such that NLB Group must classify them as equity instruments in accordance with IAS 32 Financial Instruments: Presentation. An issued financial instrument is only considered an equity instrument if In the statement of financial position, right-of-use assets are presented in the line item ‘Property and equipment.’ Lease liabilities Leases recognised in a business combination that instrument does not represent a contractual obligation for In most leases acquired in business combinations, the acquiree payment. is the lessee. For such leases, NLB Group applies the IFRS 16 At the commencement date, NLB Group measures the lease initial measurement provisions (with exceptions for leases with liability at the present value of the lease payments that are not remaining term of 12 months or less and low value leases) and paid at that date. The lease payments consist of fixed payments, recognises the acquired lease liability as if the lease contract variable lease payments that depend on an index or a rate, was a new lease at the acquisition date. The right-of-use asset Issued financial instruments with characteristics of equity are recognised in equity in the statement of financial position. Transaction costs incurred for issuing such instruments are deducted from retained earnings. The corresponding interest is amounts expected to be paid under residual value guarantees, is measured at an amount equal to the recognised liability. recognised directly in retained earnings. the exercise price of a purchase option if there exists a There are no favourable or unfavourable terms of the leases reasonable certainty for it to be exercised, and payments of relative to market terms, which would require the adjustment of penalties for terminating the lease if the lease term reflects the right-of-use assets. The carrying value of an issued financial instrument with characteristics of equity is presented in the statement of changes in equity in the line item ‘Other Equity Instruments.’ 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.’ NLB Group as a lessor Payments under operating leases are recognised as income on a straight-line basis over the period of the lease. Assets leased under operating leases are presented in the statement of financial position as investment property or as property and equipment. 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 2.26. Provisions Provisions are recognised when NLB Group has a present legal and other demand deposits at banks, debt securities held for or constructive obligation as a result of past events, and it is trading, loans to banks, and debt securities not held for trading probable that an outflow of resources embodying economic with an original maturity of up to three months. Cash and cash benefits will be required to settle the obligation, and a reliable 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 initially recognised at fair value. Borrowings are subsequently measured at the amortised cost. The difference between the value at initial recognition and the final value is recognised in the income statement as interest expenses, applying the 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. NLB Group classifies a lease as a finance lease when the risks and rewards incidental to ownership of a leased asset lie with effective interest rate. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 197 2.27. Contingent liabilities and commitments Other contingent liabilities and commitments Other contingent liabilities and commitments represent Deferred tax assets are recognised if it is probable that future taxable profit will be available in the foreseeable future against undrawn loan commitments to extend credit, uncovered letters which the temporary differences can be utilised. Financial and non-financial guarantees Financial guarantees are contracts that require the issuer to make specific payments to reimburse the holder for a loss it incurs because a specific debtor fails to make payments when due, in accordance with the terms of debt instruments. Such financial guarantees are given to banks, financial institutions, and other bodies on behalf of the customer to secure loans, overdrafts, and other banking facilities. The issued guarantees covering non-financial obligations of the clients represent the obligation of the Bank (guarantor) to pay if the client fails to perform certain works in accordance with the terms of the commercial contract. Financial and non-financial guarantees are initially recognised at fair value, which is usually evidenced by the fees received. The fees are amortised to the income statement over the contract term using the straight-line method. NLB Group’s liabilities under guarantees are subsequently measured at the greater of: • the initial measurement, less amortisation calculated to recognise fee income over the period of guarantee; or • ECL provisions as set out in note 2.13. Documentary letters of credit Documentary (and standby) letters of credit constitute a written and irrevocable commitment of the issuing (opening) bank on behalf of the issuer (importer) to pay the beneficiary (exporter) the value set out in the documents by a defined deadline: • if the letter of credit is payable on sight; and • if the letter of credit is payable for deferred payment, the bank will pay according to the contractual agreement when and if the beneficiary (exporter) presents the bank with documents that are in line with the conditions and deadlines set out in the letter of credit. A commitment may also take the form of a letter of credit confirmation, which is usually done at the request or authorisation of the issuing (opening) bank and constitutes a firm commitment by the confirming bank, in addition to that of the issuing bank, which independently assumes a commitment to the beneficiary under certain conditions. of credit, and other commitments. The nominal contractual values of guarantees, letters of credit, enacted or substantively enacted at the end of the reporting and undrawn loan commitments where the loan agreed to period that are expected to apply to the period when the asset be provided is on market terms, are not recognised in the is realised, or the liability is settled. At each reporting date, NLB Deferred tax assets and liabilities are measured at tax rates statement of financial position. Group reviews the carrying amount of deferred tax assets and assesses future taxable profits against which temporary taxable Contingent liabilities recognised in a business combination A contingent liability recognised in a business combination differences can be utilised. is initially measured at its fair value and is recognised in the Deferred tax assets for temporary differences arising from statement of financial position in the line item ‘Provisions.’ After impairments of investments in subsidiaries, associates and joint initial recognition, it is measured at the higher of: ventures are recognised only to the extent that it is probable • the amount that would be recognised in accordance with IAS that: 37 Provisions, Contingent Liabilities and Contingent Assets; or • the temporary differences will be reversed in the foreseeable • the amount initially recognised less, if appropriate, the future; and cumulative amount of income recognised in accordance • taxable profit will be available. with the principles of IFRS 15 Revenue from Contracts with Customers. This requirement does not apply to contracts Slovenian tax law does not set deadlines by which uncovered accounted for in accordance with IFRS 9. tax losses must be utilised. 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 2022 in Slovenia was 19% (2021: 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). 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% (2021: 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. 2.29. Fiduciary activities NLB Group provides asset management services to its clients. Assets held in a fiduciary capacity are not reported in NLB Deferred income tax is calculated using the balance sheet Group’s financial statements as they do not represent assets of liability method for temporary differences arising between the NLB Group. Fee and commission income and expenses relating tax bases of assets and liabilities, and their carrying amounts to fiduciary activities are generally recognised in the income for financial reporting purposes. statement when the service has been provided (see also note MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 198 2.10.). Fee and commission income charged for this type of employment benefits, actuarial gains and losses from the service is broken down by items in note 4.3.b). Further details on effect of changes in actuarial assumptions and experience 2.32. Share capital transactions managed on behalf of third parties are disclosed adjustments (differences between the realised and expected in note 5.25. payments) are recognised in other comprehensive income under the line item ‘Actuarial Gains/(Losses) on Defined Based on the requirements of Slovenian legislation, NLB Group Benefit Pensions Plans,’ and will not be recycled to the income has, in note 5.25., additionally disclosed the assets and liabilities statement. Actuarial gains and losses that relate to other on accounts used to manage financial assets from fiduciary employment benefits are recognised in the income statement activities, i.e., information related to the receipt, processing, and as defined benefit costs. In the statement of financial position, execution of orders and related custody activities. liabilities for short-term employee benefits are included in the 2.30. Employee benefits Employee benefits include: • short-term employee benefits (such as salary, 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, voluntary supplementary pension insurance); • variable remuneration. Short-term employee benefits are recognised in the period to which they relate and included in the income statement line item ‘Administrative expenses.’ Among others, they include the payment of contributions for pension and disability insurance, which according to local legislation (for employer) amount to 8.85% of the gross salaries. 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 severance payment. Employees are also entitled to a long-service bonus for every 10 years of service in NLB. 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. Service costs are included in the income statement in the line item ‘Administrative expenses’ as defined benefit costs, while interest expenses on the defined benefit liability are recognised in the line item ‘Interest and similar expenses.’ These interest expenses represent the change during the period in the defined benefit liability that arises from the passage of time. For post- line item ‘Other 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-based payment transactions Cash-settled share-based payment transactions If certain conditions are met, members of the Management Board and employees performing special work (i.e., those who can significantly impact the risk profile of the Group in the scope of their tasks and activities) receive part of their variable remuneration in the form of financial instruments, whose value is linked to the value of NLB share. Upon expiration of legally prescribed period (up to five years), beneficiaries receive cash payments depending on the value of a NLB share. The first contracts, including share-based payment transactions, were concluded in the second quarter of 2022. In the statement of financial position, a liability is recognised in line ‘Financial liabilities measured at fair value through profit or loss.’ Its fair value is measured initially and at each reporting date up to and including the settlement date, with changes in fair value recognised in the income statement line ‘Gains less losses from financial liabilities measured at fair value through profit or loss.’ Equity-settled share-based payment transactions NLB Group does not have any equity-settled share-based payment transactions. Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are approved by NLB’s shareholders. Treasury shares If NLB or another member of NLB Group purchases NLB shares, the consideration paid is deducted from the total shareholders’ equity as treasury shares. If such shares are subsequently sold, any consideration received is included in equity. If NLB shares are purchased by NLB itself or other NLB Group entities, NLB creates reserves for treasury shares in equity. Share issue costs Costs directly attributable to the issue of new shares are recognised in equity as a reduction in the share premium account. 2.33. Segment reporting Operating segments are reported in a manner consistent with internal reporting to the Management Board of the Bank, which is the executive body that makes decisions regarding the allocation of resources and assesses the performance of a specific segment. Transactions between organisational units (OUs) are managed under normal operating conditions. Interest income among individual OUs in the parent bank (NLB) and N Banka is allocated using a fund transfer pricing method and shown within the net interest income of each OU. Net non-interest income is allocated to the OU that actually provides the service that generates income. Direct costs are attributed to the segment that is directly related to the provided service, and indirect costs (costs which service centres provide for profit centres) are attributed to the segment for which the service is provided, whereas overhead costs are allocated according to general keys. External net income is the net income of NLB Group from the consolidated income statement. Income tax is not allocated between segments. Analysis by segment for NLB Group is presented in note 7.a). In accordance with IFRS 8, NLB Group has the following reportable segments: Retail Banking in Slovenia, Corporate and Investment Banking in Slovenia, Strategic Foreign Markets, Financial Markets in Slovenia, Non-core members, and Other Activities. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 199 2.34. Critical accounting estimates and judgments in applying accounting policies NLB Group’s financial statements are influenced by accounting policies, assumptions, estimates, and management’s judgment. NLB Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. All estimates and assumptions required in conformity with the IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgments are evaluated on a continuing basis, and are based on past experience and other factors, including expectations with regard to future events. a) Allowances for expected credit losses on loans and advances NLB Group monitors and checks the quality of the loan portfolio at the individual and portfolio levels to continuously estimate the necessary 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 the expected discounted cash flows from operations and/or the assessed expected payment from collateral. Allowances are assessed collectively for financial assets assigned to Stage 1 or 2, or for financial assets in Stage 3 with exposure below the materiality threshold. The ECL in this group of assets are estimated based on expected value of risk parameters combining the historic movements with the future macroeconomic predictions for three separate scenarios. The models used to estimate future risk parameters are validated In terms of credit risk, the scenario has an unfavourable impact value, NPV) of financial instruments. NLB Group applies market on default rates (transfer of assets from performing to default) yield curves for valuation, and fair values are additionally and loss rates (expected losses after occurrence of default). adjusted for credit risk of the counterparty. Furthermore, a transfer of assets within the performing sub- portfolio to rating classes with worse default probabilities is The fair value hierarchy of financial instruments is disclosed in envisaged. Based on the existing exposures (static balance note 6.5. sheet assumption), additional allowances for expected credit losses are assessed on existing default exposures and new c) Impairment of investments in subsidiaries, associates and default flows, as well as on the remaining performing portfolio. joint ventures The process of identifying and assessing the impairment of The results of the stress scenario for NLB Group shows an investments in subsidiaries, associates and joint ventures is increase of credit risk impairments in the first year of stress inherently uncertain, as the forecasting of cash flows requires by EUR 188 million (2021: EUR 177 million), and an increase in the significant use of estimates, which themselves are sensitive the coverage of the credit portfolio by impairments by 1.02 to the assumptions used. The review of impairment represents percentage points (2021: 1.14 percentage points). management’s best estimate of the facts and assumptions such as: b) Fair value of financial instruments The fair values of financial investments traded on the active • Future cash flows from individual investments present the estimated cash flow for periods for which adopted business market are based on current bid prices (financial assets) or plans are available. For core members, estimated cash offer prices (financial liabilities). flows are based on a five-year business plan. For non-core members, estimated cash flows are based on a period in The fair values of financial instruments that are not traded on line with the strategy of divestment. The business plans of the active market are determined by using valuation models. individual entities are based on an assessment of future These include a comparison with recent transaction prices, economic conditions that will impact an individual member’s the use of a discounted cash flow model, valuation based business and the quality of the credit portfolio; on comparable entities, and other frequently used valuation • The growth rate in cash flows for the period following the models. These valuation models at their best estimate reflect adopted business plan is between 2.3 and 4.0%; current market conditions at the measurement date, which • The target capital adequacy ratio of an individual bank is may not be representative of market conditions either before between 14 and 17%; or after the measurement date. Management reviewed • The discount rate derived from the capital asset pricing model all applied models as at the reporting date to ensure they that is used to discount future cash flows is based on the cost appropriately reflect current market conditions, including the of equity allocated to an individual investment. The discount relative liquidity of the market and the applied credit spread. rate reflects the impact of a range of financial and economic Changes in assumptions regarding these factors could affect variables, including the risk-free rate and risk premium. The the reported fair values of financial instruments held for trading, value of variables used is subject to fluctuations outside and financial assets measured at fair value through other management’s control. The pre-tax discount rate is between and back-tested on a regular basis to make the loss estimations comprehensive income. 13.1 and 22.2% (31 December 2021: between 9.66 and 15.88%). as realistic as possible. NLB Group performs regular stress-testing as part of the ICAAP process normative approach, where the 3-year budget is tested for adverse circumstances. The selected stress scenario predicts adverse economic circumstances as a result of the escalation of geopolitical tension and a fragile supply. This scenario features a fall in output, growing inflationary pressures, and a sudden increase in interest rates that hampers the debtors’ ability to repay. The fair values of derivative financial instruments are For strategic NLB Group members in 2022 and 2021, there determined on the basis of market data (mark-to-market), in were no indications of impairment for equity investments. In accordance with NLB Group’s methodology for the valuation of 2022, NLB released previously formed impairment of equity financial instruments. The market exchange rates, interest rates, investments in the amount EUR 23,388 thousand and impaired yield, and volatility curves used in valuations are based on the equity investments in non-core members in the amount of EUR market snapshot principle. Market data are saved daily at 4 615 thousand (2021: EUR 458 thousand). p.m., and later used for the calculation of the fair values (market MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 200 d) Employee benefits Liabilities for certain employee benefits are calculated by an independent actuary. The main assumptions included in the actuarial calculation are as follows: Actuarial assumptions Discount factor Wage growth based on inflation, promotions, and wage growth based on past years of service Other assumptions NLB Group 2022 2021 3.1% - 8.3% 0.5% - 4.3% NLB 2022 3.1% 2021 0.6% 2.3% - 14.2% 1.8% - 4.8% 3.0% - 7.0% 2.5% - 3.0% Number of employees eligible for benefits 7,154 7,014 2,369 2,444 A sensitivity analysis of significant actuarial assumptions for post-employment benefit: 31 Dec 2022 NLB Group NLB Impact on provisions for employee benefits - post-employment benefits (in %) Discount rate Future salary increases Discount rate Future salary increases +0.5 p.p. -0.5 p.p. +0.5 p.p. -0.5 p.p. +0.5 p.p. -0.5 p.p. +0.5 p.p. -0.5 p.p. (4.7) 5.0 5.1 (4.8) (4.5) 4.8 4.9 (4.7) 31 Dec 2021 NLB Group NLB Impact on provisions for employee benefits - post-employment benefits (in %) Discount rate Future salary increases Discount rate Future salary increases +0.5 p.p. -0.5 p.p. +0.5 p.p. -0.5 p.p. +0.5 p.p. -0.5 p.p. +0.5 p.p. -0.5 p.p. (5.3) 5.7 5.5 (5.1) (5.1) 5.5 5.5 (5.2) Individual analysis is done by changing one assumption for +/- 0.5 percentage points, while all other assumptions stay the same. The breakdown of actuarial gains and losses for post-employment benefit by causes: NLB Group in EUR thousands NLB 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: 2022 4,093 - (62) 4,031 2021 251 (1,211) (417) (1,377) 2022 1,759 - 289 2,048 Post-employment benefit NLB Group NLB 2022 11.1 - 22.0 2021 9.4 - 19.0 2022 11.1 2021 292 151 (558) (115) 2021 11.0 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 201                       e) Taxes NLB Group operates in countries governed by different laws. amendments add an exception to the recognition principle the treatment of lease incentives. The amendments to IFRS for liabilities and contingent liabilities within the scope of IAS 1 – First-time Adoption of International Financial Reporting The deferred tax assets recognised as at 31 December 2022 37 Provisions, Contingent Liabilities and Contingent Assets Standards permits a subsidiary that becomes a first-time are based on profit forecasts and take the expected manner of or IFRIC 21 Levies. The amendments also clarify existing adopter of IFRS Standards later than its parent to measure recovery of the assets into account. Changes in assumptions guidance for contingent assets. There is no impact on NLB cumulative translation differences at amounts included in regarding the likely manner of recovering assets or changes Group’s and NLB’s financial statements. the consolidated financial statements of the parent, based in profit forecasts can lead to the recognition of currently unrecognised deferred tax assets or derecognition of previously • IAS 16 (amendment) – Property, Plant and Equipment: created deferred tax assets. If NLB profit projections used for estimation of the amount of deferred tax assets which are Proceeds before Intended Use is effective for annual periods beginning on or after 1 January 2022. The amendment 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 under IAS 41. This amendment is intended to align with the expected to be reversed in foreseeable future (i.e., within five prohibits the deduction from the cost of an item of property, requirement in the standard to discount cash flows on a post- years) would change by 10%, the estimated amount of deferred plant and equipment of any proceeds from the sale of tax basis. This will ensure consistency with the requirements in tax assets would change by approximately EUR 3.4 million produced items while the asset is being prepared for its IFRS 13 – Fair Value Measurement. There is no impact on NLB (notes 4.16. and 5.17.). intended use. The proceeds from selling such items, and Group’s and NLB’s financial statements. 2.35. Implementation of the new and revised International Financial Reporting Standards During the current year, NLB Group adopted all new and revised standards and interpretations issued by the International Accounting Standards Board (hereinafter: ‘the IASB’) and the International Financial Reporting Interpretations Committee (hereinafter: ‘the IFRIC’), and that are endorsed the cost of producing those items, are recognised in profit or loss. It also clarifies that an entity is ‘testing whether the Accounting standards and amendments to existing standards asset is functioning properly’ when it assesses the technical that were endorsed by the EU, but not adopted early by NLB and physical performance of the asset. The financial Group performance of the asset is not relevant to this assessment. The amendment further requires separate disclosure of the New and revised accounting standards and interpretations amounts of proceeds and costs relating to items produced endorsed by the EU that are not mandatory for annual that are not an output of the entity’s ordinary activities. It is accounting periods beginning on 1 January 2022, were also necessary to disclose the line item in the statement of not adopted early by NLB Group. These standards and comprehensive income where the proceeds are included. amendments are not expected to have a material impact on There is no impact on NLB Group’s and NLB’s financial the consolidated financial statements of NLB Group in the by the EU that are effective for annual accounting periods statements. beginning on 1 January 2022. Accounting standards and amendments to existing standards effective for annual periods beginning on 1 January 2022 that were endorsed by the EU and adopted by NLB Group • IFRS 16 (amendment) – Covid-19-Related Rent Concessions beyond 30 June 2021 is effective for annual periods beginning on or after 1 April 2021. The amendment extended the availability of the practical expedient by one year so that it applies to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022, provided the other conditions for applying the practical expedient are met. There is no impact on NLB • IAS 37 (amendments) – Provisions, Contingent Liabilities and Contingent Assets: Onerous Contracts – Cost of Fulfilling a Contract is effective for annual periods beginning on or after 1 January 2022. The amendments modify the standard regarding costs a company should include as the cost of fulfilling a contract when assessing whether a contract is onerous. The amendments specify that the ‘cost of fulfilling’ future reporting periods and on foreseeable future transactions. NLB Group plans to adopt the accounting standards and amendments listed below for reporting periods commencing on or after the effective date. • 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 to a contract comprises the ‘costs that relate directly to the disclose their material accounting policy information rather contract.’ The costs that relate directly to a contract can either than their significant accounting policies. The amendments to be incremental costs of fulfilling that contract or an allocation IFRS Practice Statement 2 provide guidance on how to apply of other costs that relate directly to fulfilling contracts. There is the concept of materiality to accounting policy disclosures. no impact on NLB Group’s and NLB’s financial statements. NLB Group and NLB do not expect an impact on their financial statements. Group’s and NLB’s financial statements. • Annual Improvements to IFRS Standards 2018-2020 • 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 for Financial Reporting without changing the accounting requirements for business combinations. Furthermore, the (amendments) are effective for annual periods beginning on • IAS 8 (amendment) – Accounting policies, Changes in 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 Accounting Estimates and Errors: Definition of Accounting Estimates is effective for annual periods beginning on or after 1 January 2023. The amendments clarify how companies to IFRS 16 – Leases removes from the example the illustration should distinguish changes in accounting policies from of the reimbursement of leasehold improvements by the changes in accounting estimates. That distinction is important lessor in order to resolve any potential confusion regarding because changes in accounting estimates are applied MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 202 prospectively only to future transactions and other future Accounting standards and amendments to existing standards, events, but changes in accounting policies are generally also but not endorsed by the EU applied retrospectively to past transactions and other past events. NLB Group and NLB do not expect an impact on their • IAS 1 (amendment and deferral of effective date) – financial statements. • IFRS 17 (new standard including amendments) – Insurance Contracts is effective for annual periods beginning on or after 1 January 2023. The new standard provides a comprehensive Presentation of Financial Statements: Classification of Liabilities as Current or Non-current is effective for annual periods beginning on or after 1 January 2024. The amendments clarify that liabilities are classified as either current or non-current, depending on the rights that exist at principle-based framework for the measurement and the end of the reporting period. Classification is unaffected presentation of all insurance contracts. The new standard will by the expectations of the entity or events after the reporting replace IFRS 4 Insurance Contracts and requires insurance date. The amendment also clarifies what IAS 1 means when it contracts to be measured using current fulfilment cash refers to the ‘settlement’ of a liability. NLB Group and NLB do flows, and for revenue to be recognised – as the service is not expect an impact on their financial statements. provided over the coverage period. The additionally issued amendments to IFRS 17 simplify some requirements and explanation of financial performance, and provide additional transition reliefs to reduce the complexity of applying • IAS 1 (amendment) – Presentation of Financial Statements: Non-current Liabilities with Covenants is effective for annual periods beginning on or after 1 January 2024. The standard for the first time. NLB Group and NLB do not expect amendments improved the information an entity provides an impact on their financial statements. • 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 when its right to defer settlement of a liability for at least 12 months is subject to compliance with covenants. The amendments also responded to stakeholders’ concerns about the classification of such a liability as current or non- current. NLB Group and NLB do not expect an impact on their 2023. IAS 12 specifies how a company accounts for income financial statements. 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 • IFRS 16 (amendment) – Leases: Lease Liability in a Sale and Leaseback is effective for annual periods beginning on or after 1 January 2024. The amendments affect only the amendments clarify that the exemption does not apply and subsequent measurement of lease liabilities arising from a that companies are required to recognise deferred tax on sale and leaseback transaction with variable lease payments, such transactions. NLB Group and NLB do not expect an which occurred from the date of initial application of IFRS impact on their financial statements. 16 and for which the seller-lessee’s accounting policy differs from the requirements specified in these amendments. NLB Group and NLB do not expect an impact on their financial statements. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 203 was fully paid in cash (note 5.12.b). At the General Meeting of Other changes: 3. Changes in the composition of the NLB Group Changes in 2022 Capital changes: • In March 2022, in accordance with Resolution and Compulsory Winding-Up of Banks Act, NLB became an owner of 100% shares of Sberbank banka d.d., Ljubljana. The purchase price for the bank was EUR 5,109 thousand and Shareholders of Sberbank banka d.d., Ljubljana, held in April 2022, a decision was made to rename Sberbank banka d.d., Ljubljana to ‘N Banka d.d., Ljubljana.’ • In March 2022, Komercijalna banka a.d. Beograd bought 2.90% of all ordinary shares in the amount of EUR 19,047 thousand of treasury shares from dissenting shareholders, which Komercijalna banka a.d. Beograd should dispose of within 12 months of their takeover. • In April 2022, NLB established IT services company named ‘NLB DigIT d.o.o., Beograd.’ • In May 2022, NLB acquired an additional 442,799 ordinary shares of NLB Komercijalna banka a.d. Beograd and combined with existing shareholding reached the ownership of 90.2155% of the basic capital and 91.7294% of shares with voting rights. The increase in capital investment was recognised in the amount of EUR 15,715 thousand. company was EUR 1,036 thousand and was fully paid in cash • An increase in equity reserves in the form of a cash (note 5.12.c). In January 2023, the company was renamed to contribution in the amount of EUR 300 thousand in REAM ‘NLB Lease&Go leasing d.o.o. Beograd.’ d.o.o., Beograd to ensure regular business operations. • In December 2022, an increase in share capital in the form of • In October 2021, NLB increased its business share in Bankart a cash contribution in the amount of EUR 2,100 thousand in d.o.o., Ljubljana from 40.08% to 45.64%. NLB Lease&Go, leasing, d.o.o., Ljubljana for the purpose of • In November 2021, Komercijalna banka a.d. Podgorica achieving NLB Group’s leasing strategy. merged with NLB Banka a.d. Podgorica. After this merger, • In December 2022, an increase in share capital in the form of Komercijalna banka a.d. Beograd has 23.97% shareholding of a cash contribution in the amount of EUR 21,130 thousand in NLB Banka a.d. Podgorica, while NLB d.d. has 75.90%. S-REAM d.o.o., Ljubljana for the purpose of consolidation of • In December 2021, an increase in share capital in the form of MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report real estate companies in Slovenia. 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. • After obtaining all regulatory licenses, as well as by • In December 2021, NLB increased its ownership in settlement registering the merger with the Business Registers Agency, agreement in relation to the put and call option of shares of the integration process of Komercijalna banka a.d. Beograd NLB Banka sh.a., Prishtina from 81.21% to 82.38%. The increase and NLB Banka a.d., Beograd, was successfully completed. in capital investment was recognised in the amount of EUR From 30 April 2022, the bank operates under the new name 223 thousand. NLB Komercijalna banka a.d. Beograd. Based on the merger of NLB Banka a.d., Beograd to Komercijalna banka a.d. Other changes: Beograd as the acquirer, NLB Komercijalna Banka a.d. • In April 2021 company BH-RE d.o.o., Sarajevo – u likvidaciji Beograd is its universal legal successor. was liquidated. In accordance with a court order, the • In November 2022, NLB Komercijalna banka a.d. Beograd company was removed from the court register. sold its 23.97% ownership interest in NLB Banka a.d., • In September 2021, NLB sold its 0.002% ownership interest in Podgorica to NLB. Komercijalna banka a.d. Banja Luka to Komercijalna banka • In December 2022, NLB sold its 100% ownership interest in a.d. Beograd. PRO-REM d.o.o., Ljubljana – v likvidaciji to S-REAM d.o.o., • In November 2021, Prvi Faktor d.o.o., Sarajevo - u likvidaciji Ljubljana. 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 July 2022, NLB successfully squeezed out the remaining shareholders of NLB Komercijalna banka a.d. Beograd and Changes in 2021 Capital changes: thereby became the owner of 100% of this Serbian bank. Prior to the squeeze-out process, NLB owned 90.2155% of share capital and 91.7294% of voting rights. Through the squeeze-out process, NLB acquired 1,528,110 regular shares and 316,260 preferred shares with a total value of EUR 61,865 thousand. • In September 2022, an increase in share capital in the form of a cash contribution in the amount of EUR 306 thousand in NLB Lease&Go, leasing, d.o.o., Ljubljana for the purpose of achieving NLB Group’s leasing strategy. • In September 2022, NLB Lease&Go, leasing, d.o.o., Ljubljana (51%) and NLB Banka a.d., Skopje (49%) established financial company named ‘NLB Liz&Go d.o.o. Skopje.’ In December 2022, the company was renamed to ‘NLB Lease&Go d.o.o. Skopje.’ • In November 2022, NLB Lease&Go, leasing, d.o.o., Ljubljana became an owner of 95.20% of financial company ‘Zastava Istrabenz Lizing, d.o.o., Beograd.’ The purchase price for the • In April 2021, NLB increased the share of voting rights in the • In December 2021, NLB sold its subsidiary NLB Leasing d.o.o., takeover bid for the remaining shares of Komercijalna banka Ljubljana – v likvidaciji to NLB Lease&Go, leasing, d.o.o., a.d. Beograd from 83.23% to 87.999%, and also acquired Ljubljana. 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. Contents 204 4. Notes to the income statement 4.1. Interest income and expenses Analysis by type of assets and liabilities Interest and similar income Interest income calculated using the effective interest method Financial assets measured at fair value through other comprehensive income Securities measured at amortised cost Deposits with banks and central banks Loans and advances to banks measured at amortised cost Loans and advances to customers at amortised cost Other interest and similar income Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Negative interest Derivatives - hedge accounting Other Total Interest and similar expenses Interest expenses calculated using the effective interest method Deposits from banks and central banks Borrowings from banks and central banks Due to customers Borrowings from other customers Subordinated liabilities Debt securities issued 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 NLB Group in EUR thousands NLB 2022 2021 2022 2021 561,467 38,840 16,791 12,067 3,770 489,999 8,309 3,732 48 3,966 559 4 467,500 40,347 14,049 239 416 412,449 10,329 4,757 780 3,980 - 812 214,163 11,215 11,431 10,868 6,106 174,543 7,799 3,352 166 3,718 559 4 170,002 11,733 10,150 101 3,937 144,081 9,183 4,455 744 3,981 - 3 569,776 477,829 221,962 179,185 43,785 795 1,236 19,464 939 12,737 8,183 431 21,069 7,468 9,301 3,497 374 429 40,460 865 1,797 25,575 1,205 10,548 - 470 28,009 10,279 12,711 4,222 202 595 27,373 692 617 5,116 - 12,737 8,183 28 17,562 7,468 6,793 3,144 144 13 15,297 6 1,647 3,067 - 10,548 - 29 24,749 10,279 9,845 4,222 48 355 64,854 68,469 44,935 40,046 Net interest income 504,922 409,360 177,027 139,139 The item ‘Negative interest’ classified under the line item ‘Other interest and similar income’ mainly includes the interest from targeted longer-term refinancing operations (TLTRO) in the amount of EUR 3,902 thousand for NLB Group (2021: EUR 3,979 thousand) and EUR 3,677 thousand for NLB (2021: EUR 3,979 thousand) (note 5.15.b). 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 8,746 thousand for NLB Group (2021: EUR 11,692 thousand), and EUR 6,238 thousand for NLB (2021: EUR 8,826 thousand). It also includes interest from deposits with financial organisations in the amount of EUR 186 thousand for NLB Group and NLB (2021: EUR 336 thousand), and interest from securities with a negative yield in the amount of EUR 369 thousand for NLB Group and NLB (2021: EUR 683 thousand). Other interest income in year 2021 for NLB Group in the amount of EUR 809 thousand relates to interests in relation to a refund of VAT from the Slovenian Tax Authority. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 205                                                 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 in EUR thousands NLB 2022 2021 2022 2021 173 173 - - 69 242 184 184 - - 39 223 - - 55,244 754 46 56,044 - - 79,136 441 39 79,616 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 in EUR thousands NLB 2022 2021 2022 2021 113,358 89,277 94,035 29,640 16,417 10,511 17,336 370,574 93,644 90,212 77,248 27,095 13,918 8,642 10,445 321,204 44,476 52,120 24,005 9,034 8,418 7,973 11,019 38,389 57,147 22,751 8,694 7,831 7,010 4,484 157,045 146,306 78,291 67,860 28,390 27,952 13,812 1,335 4,036 1,713 5,594 104,781 11,567 3,650 3,468 1,026 4,535 92,106 1,148 841 944 1,580 917 33,820 917 1,015 664 957 808 32,313 Net fee and commission income related to banking activities 265,793 229,098 123,225 113,993 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 206                                           b) Fee and commission income and expenses relating to fiduciary activities NLB Group in EUR thousands NLB 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 Total Fee and commission expenses related to fiduciary activities Fee and commission related to Central Securities Clearing Corporation and similar organisations Fee and commission related to stock exchange and similar organisations Total Net fee income related to fiduciary activities 2022 1,928 1,601 143 5,150 1,696 34 473 11,025 3,374 94 3,468 7,557 2021 1,942 2,118 264 5,290 1,595 26 150 11,385 3,188 119 3,307 8,078 2022 1,657 - 143 5,426 1,696 - 473 9,395 3,377 94 3,471 5,924 2021 1,655 - 264 5,247 1,595 - 150 8,911 3,191 119 3,310 5,601 Total fee and commission income Total fee and commission expenses 381,599 108,249 332,589 95,413 166,440 37,291 155,217 35,623 Total a) and b) 273,350 237,176 129,149 119,594 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 - losses Total NLB Group 2022 96 (1,764) 3,269 (735) 866 2021 171 (4) - - 167 2022 - (316) 1 (735) (1,050) in EUR thousands NLB 2021 24 - - - 24 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 207                                                                                       4.5. Gains less losses from financial assets and liabilities held for trading Foreign exchange trading - gains - losses Debt instruments - gains - losses Derivatives - currency - interest rate - securities Total NLB Group in EUR thousands NLB 2022 2021 2022 2021 43,213 (13,988) 237 (175) 3,636 512 16 33,451 28,160 (7,114) 776 (616) (199) 749 (562) 21,194 19,388 (11,465) 195 (175) 2,768 605 16 11,332 10,799 (5,795) 460 (571) (484) 749 (562) 4,596 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.). 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 NLB Group in EUR thousands NLB 2022 3,481 (3,162) 70 (299) - 90 2021 2,208 (1,049) 5 (63) 15,737 16,838 2022 2,699 (1,925) - - (2,225) (1,451) 2021 1,157 (855) - - 13,190 13,492 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 the NLB Group level and EUR 13,033 thousand at the NLB level. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 208                                 4.7. Foreign exchange translation gains less losses NLB Group in EUR thousands NLB 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 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 2022 (95) (11) 403 297 2022 6,952 3,327 1,252 254 2,119 2,912 3,766 2,450 7,366 23,446 451 674 5,543 6,668 NLB Group 2021 359 37 (51) 345 2021 6,528 3,241 1,074 426 1,787 3,558 4,447 778 14,335 29,646 453 858 5,114 6,425 2022 (1,980) (11) 403 (1,588) 2022 6,367 3,383 475 1,020 1,489 459 85 393 2,912 10,216 451 1 5,353 5,805 2021 714 37 (51) 700 in EUR thousands NLB 2021 5,884 3,250 471 1,098 1,065 567 411 - 10,633 17,495 453 105 3,190 3,748 Other net operating income 16,778 23,221 4,411 13,747 Other operating expenses mainly include expenses associated Other operating income in year 2021 includes settlement of with donations, penalties and damages, and licences. legal dispute in the amount of EUR 8,978 thousand in the NLB 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 2022 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 NLB Group in EUR thousands NLB 2022 2021 2022 2021 230,277 16,343 11,404 (365) (82) (283) 205,821 15,065 10,363 73 126 (53) 104,278 7,217 6,002 (207) (38) (169) 94,433 6,891 5,715 (59) (27) (32) 257,659 231,322 117,290 106,980 6,091 47,053 20,393 5,422 21,238 4,096 833 1,230 15,340 33,092 10,212 2,079 8,846 6,181 689 5,085 32,735 15,792 9,725 3,022 4,196 11,146 4,043 4,717 2,386 3,611 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 1,529 24,748 9,932 3,325 11,491 956 322 326 7,916 15,230 5,740 273 4,335 1,935 156 2,791 16,349 6,140 6,760 1,876 1,573 4,423 2,612 649 1,162 1,776 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 1,120 155,227 137,529 73,575 59,099 Total administrative expenses 412,886 368,851 190,865 166,079 Number of employees 8,228 8,185 2,418 2,510 Costs of other services include costs for cash transport, administrative legal costs, other insurances 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 2022 Financial Report Contents 210             In the presented years, NLB Group and NLB paid the following expenses related to the services of the statutory auditor: External audit services Audit of annual report Other non-audit services Total NLB Group in EUR thousands NLB 2022 750 412 1,162 2021 679 195 874 2022 275 287 562 2021 232 153 385 Additionally, to the services included in the table above, the to the issuance of bonds in the amount of EUR 151 thousand statutory auditor in 2022 performed also some services related (2021: EUR 325 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 2021 33,148 1,992 35,140 2021 16,211 21,607 8,710 46,528 2022 33,884 2,260 36,144 2022 15,757 22,941 8,692 47,390 in EUR thousands NLB 2021 7,543 1,992 9,535 in EUR thousands NLB 2021 6,022 10,610 890 17,522 2022 7,614 2,099 9,713 2022 5,769 10,260 972 17,001 4.12. Gains less losses from modification of financial assets 2022 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  in EUR thousands NLB Group Financial assets modified during the period Amortised cost before modification Net modification gains/(losses) 1,046 (56) 1,361 5 698 25 3,105 (26) 15,569 (48) 5,259 (12) 4,435 (203) 25,263 (263) NLB Group Financial assets modified since initial recognition in EUR thousands 31 Dec 2022 31 Dec 2021 Gross carrying amount of financial assets for which loss allowance has changed to 12-month measurement during the period - 162 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 211                                                                           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 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) Total impairment of financial assets 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 Total impairment of non-financial assets NLB Group in EUR thousands NLB 2021 (8,504) 14,797 7,873 - 14,166 NLB Group 2021 117 57 13,414 (44,639) 2,854 (383) 1,249 2022 (282) - 125 2,200 2,043 2022 10 34 13,523 (4,744) 5,826 161 158 2021 (8,028) - 72 - (7,956) in EUR thousands NLB 2021 89 27 6,830 (24,840) (148) (17) (8) (27,331) 14,968 (18,067) - - - 216 936 3,255 4,407 (22,685) (88) (22,773) - - 6 6 (7,522) 79 (7,443) - - (104) (104) 4,407 (22,767) (7,547) 2022 3,050 10,325 1,645 (6,038) 8,982 2022 (6,600) 67 17,140 (2,629) 3,870 474 2,132 14,454 - - - 1,620 - 3,813 5,433 5,433 Total impairment 19,887 (22,924) (7,799) (25,614) 4.15. Gains less losses from non-current assets held for sale Gains less losses from property and equipment Total NLB Group in EUR thousands NLB 2022 921 921 2021 248 248 2022 168 168 2021 (94) (94) Impairment of financial assets in 2022 includes EUR 8,900 thousand of 12-month expected credit losses for Stage 1 financial assets, acquired through a business combination (note 5.12.b). Of that, EUR 8,894 thousand relates to financial assets measured at amortised cost, EUR 5 thousand to financial assets measured at fair value through other comprehensive income, and EUR 1 thousand to cash balances at central banks and other demand deposits at banks. Impairment of debt securities measured at fair value through other comprehensive income in 2022 relates mainly to impairment of Russian sovereign debt, which was sold in February 2023 (note 5.4.). In 2022, NLB impaired equity investment in non-core subsidiary in amount of EUR 615 thousand. The release of impairments relates to equity investments in subsidiaries and an associate in total amount of EUR 23,388 thousand. In 2021, NLB impaired equity investments in non-core subsidiaries and an associate in total amount of EUR 458 thousand. The release of impairments in amount of EUR 7,901 thousand relates to sale of non-core subsidiary (note 3.). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 212                                     4.16. Income tax Current income tax Deferred income tax (note 5.17.) Total NLB Group 2022 26,753 (1,523) 25,230 2021 16,961 (3,423) 13,538 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 2021 261,406 49,667 (12,685) 6,510 (32,036) (463) 10,675 (11,345) 3,156 50 9 13,538 2022 483,063 91,782 (45,791) 7,246 (7,518) (4,132) (12,963) (4,535) 1,617 (282) (194) 25,230 in EUR thousands NLB 2021 3,159 (112) 3,047 in EUR thousands NLB 2021 211,468 40,179 (14,900) 1,160 (36,446) - 9,886 - 3,156 3 9 3,047 2022 5,992 (1,524) 4,468 2022 164,070 31,173 (10,387) 1,488 (11,818) (2,792) (4,641) - 1,617 - (172) 4,468 Each member of NLB Group (disclosed in note 5.12.a) is taxable NLB recognised deferred tax assets accrued on the basis of 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 as required by local tax legislation. Income tax rates within NLB temporary differences in an amount that, given future profit NLB’s tax risks and uncertain tax positions. Group ranges from 9 to 32%. estimates, is expected to be reversed in the foreseeable future (i.e., within five years). Due to some uncertainties regarding A tax rate of 19% was applied in Slovenia in 2022 (2021: 19%). external factors (regulatory environment, market situation, etc.), a lower range of expected outcomes was considered for the The effective tax rate of NLB Group relating to operations in 2022, calculated as a ratio of the tax expenses and profit before tax is 5.2% (2021: 5.2%). The effective tax rate for NLB is 2.7% Non-taxable income of NLB relates mostly to dividends. purposes of deferred tax assets calculation. (2021: 1.4%). Non-taxable dividend income in 2022 amounts to EUR 53,242 thousand (2021: EUR 75,635 thousand). NLB did not recognise deferred tax assets arising from tax losses and tax reliefs. NLB recognised deferred tax assets For the year 2021, NLB realised tax loss due to the utilisation of on all temporary differences, except for impairments of non- previously tax non-deductible expenses for impairments in the strategic capital investments and the valuation of financial subsidiary, which was divested in 2021. The effects of the sale instruments where deferred tax assets are recognised in the of the subsidiary are included into the effect of unrecognised amount that, taking into account other recognised deferred deferred tax assets on impairments of subsidiaries and tax assets, reaches the total amount of deferred tax assets, for associates, and the effects of new tax loss are included into which a reversal is expected within five years. The deferred effect of unrecognised deferred tax assets on tax losses. tax assets with respect to which simultaneously deferred tax MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 213                         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 bonds and treasury shares. other 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 2022 446,862 20,000 22.3 22.3 2021 236,404 20,000 11.8 11.8 2022 159,602 20,000 8.0 8.0 2021 208,421 20,000 10.4 10.4 5. Notes to the statement of financial position 5.1. Cash, cash balances at central banks, and other demand deposits at banks NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 4,536,526 489,197 246,815 4,133,104 509,596 363,246 5,272,538 5,005,946 (1,173) (894) 5,271,365 5,005,052 3,104,442 180,483 54,456 3,339,381 (357) 3,339,024 2,982,576 178,045 90,163 3,250,784 (347) 3,250,437 Balances and obligatory reserves with central banks Cash Demand deposits at banks Allowance for impairment Total Slovenian banks are required to maintain a compulsory reserve with the Bank of Slovenia relative to the volume and structure of their customer deposits. Other banks in NLB Group maintain a compulsory reserve in accordance with local legislation. NLB and other banks in NLB Group fulfil their compulsory reserve deposit requirements. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 214                 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 Treasury bills Total securities Total - quoted securities of these debt instruments The notional amounts of derivative financial instruments are disclosed in note 5.24.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 The notional amounts of derivative financial instruments are disclosed in note 5.24.b). NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 16,169 743 15,426 2,312 2,295 17 2,904 2,904 21,385 203 203 21,588 203 203 6,665 438 6,227 54 53 1 959 959 7,678 - - 7,678 - - 16,274 849 15,425 2,312 2,295 17 2,903 2,903 21,489 203 203 21,692 203 203 6,675 448 6,227 54 53 1 953 953 7,682 - - 7,682 - - NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 15,903 1,550 14,353 2,800 2,800 2,886 2,886 21,589 6,609 716 5,893 53 53 923 923 7,585 16,535 1,963 14,572 2,742 2,742 2,873 2,873 22,150 6,626 733 5,893 53 53 923 923 7,602 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 215                                         5.3. Non-trading financial instruments measured at fair value through profit or loss a) Financial assets mandatorily at fair value through profit or loss Assets Shares Investment funds Bonds Loans and advances to companies Total - quoted securities of these equity instruments of these debt instruments - unquoted securities of these equity instruments NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 5,579 10,336 3,116 - 19,031 3,484 368 3,116 15,547 15,547 4,472 12,428 4,261 - 21,161 4,261 - 4,261 16,900 16,900 5,211 2,308 - 7,892 15,411 - - - 7,519 7,519 4,472 - - 7,888 12,360 - - - 4,472 4,472 As at 31 December 2022, the value of assets received by taking possession of collateral and included in financial assets at 31 December 2021, NLB did not have any assets received by taking possession of collateral and included in financial assets mandatorily at fair value through profit or loss by NLB Group mandatorily at fair value through profit or loss (note 6.1.l). amounted to EUR 368 thousand. As at 31 December 2022 and as b) Financial liabilities measured at fair value through profit or loss Liabilities Loans and advances to companies Other financial liabilities (note 2.31.) Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 - 1,796 1,796 - - - 1,786 728 2,514 352 - 352 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 216                                         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 - other non-EU members Commercial bills Total of these debt securities of these equity securities NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 2,506,224 1,895,891 269,853 271,464 898,531 456,043 578,552 31,781 22,285 58,122 310,748 52,723 170,382 87,643 21,824 2,919,203 2,838,796 80,407 3,191,280 2,416,739 314,929 406,315 1,196,724 498,771 739,935 34,606 22,109 44,490 166,412 6,475 125,980 33,957 37,569 3,461,860 3,395,261 66,599 1,196,760 1,526,237 586,427 199,224 253,346 3,913 129,944 578,552 31,781 269 42,515 94,517 32,908 10,888 50,721 - 1,334,061 1,291,277 42,784 766,688 270,423 331,676 5,021 159,568 724,943 34,606 219 44,490 14,805 - 14,805 - - 1,585,751 1,541,042 44,709 Allowance for impairment (note 5.14.b) (15,876) (12,016) (8,799) (3,001) - quoted securities of these debt instruments of these equity instruments - unquoted securities of these debt instruments of these equity instruments 2,612,330 2,593,533 18,797 306,873 245,263 61,610 3,205,277 3,204,745 532 256,583 190,516 66,067 1,291,277 1,291,277 - 42,784 - 42,784 1,541,042 1,541,042 - 44,709 - 44,709 As at 31 December 2022, bonds at the NLB Group and NLB level As at 31 December 2021, NLB Group and NLB also held Russian include Russian government bonds maturing in September government bonds with a notional amount of USD 14,000 2023, with a notional amount of USD 8,000 thousand (EUR thousand, which was fully repaid in May 2022. 7,500 thousand). Their fair value as at 31 December 2022 is assessed to be EUR 2,026 thousand (31 December 2021: EUR NLB Group and NLB do not have any other direct exposures 7,531 thousand), while the impairment for these bonds amounts towards Russia. to EUR 5,979 thousand (31 December 2021: EUR 19 thousand). In February 2023, NLB sold these bonds and released The credit quality analysis for financial assets and contingent impairments in the amount of EUR 4,299 thousand. 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 2022 Financial Report Contents 217             b) Movements of financial assets measured at fair value through other comprehensive income Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additions Derecognition Net interest income Exchange differences on monetary assets Changes in fair values Disposal of subsidiary (note 5.12.d) Balance as at 31 December NLB Group NLB 2022 2021 2022 2021 Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities 3,395,261 1,358 53,223 1,699,839 (2,141,377) 38,471 3,104 (211,083) - 2,838,796 66,599 30 16,164 - - - - (2,386) - 80,407 3,446,491 67,799 1,541,042 44,709 1,671,204 45,147 1,194 - 1,455,823 (1,468,240) 40,310 8,367 (52,085) (36,599) 3,395,261 31 - - (4,297) - - 3,066 - 66,599 - - 290,245 (414,666) 10,846 4,484 (140,674) - 1,291,277 - - - - - - (1,925) - 42,784 - - 219,733 (338,929) 11,696 8,452 (31,114) - - - - (55) - - (383) - 1,541,042 44,709 in EUR thousands As at 31 December 2022, and as at 31 December 2021, NLB By selling equity securities measured at fair value through other Group and NLB do not have any equity instruments measured comprehensive income in 2021, NLB Group realised a net gain at fair value through other comprehensive income obtained by taking possession of collateral in the statement of financial in the amount of EUR 3,362 thousand, and NLB a net gain in the amount of EUR 53 thousand. The realised gain in year 2021 was position (note 6.1.l). transferred to retained earnings (note 5.4.c). c) Accumulated other comprehensive income related to financial assets measured at fair value through other comprehensive income NLB Group NLB 2022 2021 2022 2021 Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities Debt securities Equity securities in EUR thousands Balance as at 1 January Effects of translation of foreign operations to presentation currency Disposal of subsidiaries (note 5.12.d) - valuation and impairment - deferred income tax (note 5.17.) 7,481 (12) - - 3,257 3 - - Net gains/(losses) from changes in fair value (168,581) (2,386) Gains/losses transferred to net profit on disposal (note 4.4.) Impairment (note 4.14.) Transfer of gains/losses to retained earnings (note 5.4.b) Deferred income tax (note 5.17.) Balance as at 31 December 1,668 3,870 - 10,996 (144,578) - - - 458 1,332 39,924 (7) (1,916) 193 (38,158) (167) 2,854 - 4,758 7,481 3,726 12,365 6 - - - - - 99 - - - 3,066 (98,172) (1,925) - - (3,362) (179) 3,257 316 5,826 - 1,382 (78,283) - - - 366 (1,460) 27,242 452 - - - (17,187) (24) (148) - 2,482 12,365 - - - (383) - - (53) 83 99 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 218                                         5.5. Derivatives for hedging purposes NLB Group entities measure exposure to interest rate risk using a) Fair value adjustment in hedge accounting recognised in profit or loss repricing gap analysis and by calculating the sensitivity of the statement of financial position and off-balance-sheet items in terms of the economic value of equity. The portfolio duration is NLB Group and NLB Fair value hedge used as a measure of risk in the management of securities in Net effects from hedging instruments the banking book. - interest rate swap for micro hedge - interest rate swap for macro hedge NLB Group entities use various derivatives such as interest Net effects from hedged items rate swaps (IRS) and currency interest rate swaps (CIRS) to - loans measured at amortised cost - micro hedge close open positions in an individual maturity bucket. Micro - bonds measured at amortised cost - micro hedge and macro fair value hedges are used for that purpose, i.e., - bonds measured at fair value through OCI - micro hedge the swapping of a fixed interest rate on a hedged item for - loans measured at amortised cost- macro hedge a variable interest rate. Micro cash flow hedges are also 2022 1,655 89,894 57,981 31,913 (88,239) (57) (14,834) (42,499) (30,849) in EUR thousands 2021 167 26,406 19,547 6,859 (26,239) (105) (5,443) (13,929) (6,762) occasionally used, i.e. the swapping of a variable interest rate In both years presented, all fair value hedges were effective, applied a hedge of a net investment in a foreign operation in years on a hedged item for a fixed interest rate. All cash flow hedges with actual results of the hedge ratio within a range of 80–125%, 2011 and 2012, and at that time recognised a EUR 754 thousand are made on liability items, while fair value hedges are used on therefore, no discontinuation of the hedge accounting was gain on the hedging instrument in other comprehensive income asset items. required. (note 5.22.b). This gain will be included in the consolidated income statement when the foreign operation is disposed of as a part of Hedge accounting principles (i.e., fair value and cash flow As at 31 December 2022 and 2021, NLB Group and NLB had no the gain or loss on the disposal. hedging) were applied in the hedging of interest rate risk using relationships designated for cash flow hedge accounting or for interest rate swaps. These hedge relationships are designated hedge of a net investment in a foreign operation. NLB Group in such a way that the characteristics of the hedging instrument and those of the hedged item match (i.e., the principal terms b) Notional amounts of interest rate swaps match), while the dollar-offset method is used to regularly measure hedge effectiveness retrospectively. Prospective NLB Group and NLB Notional amount testing of hedge effectiveness is carried out regularly for macro hedges where the characteristics of both items in the hedge Fair value hedge relationship do not fully match by comparing the change in the fair value of both items to the shift in the yield curve. 31 Dec 2022 31 Dec 2021 644,132 572,455 in EUR thousands Fair value Liability 2,124 35,377 Asset 59,362 568 Hedge accounting principles were not applied in economic hedges using CIRS. Thus, the effects of valuation are disclosed in the income statement in the line item ‘Gains less losses from financial assets and liabilities held for trading.’ Sources of hedge ineffectiveness may arise, but are not limited to the discount rates used for valuation of derivatives at fair value, and notional and timing differences, as well differences in the amortisation plan between hedged items and the hedging instrument. Hedge effectiveness is assessed monthly, by comparing changes in the fair value of the hedged item that are attributable to a hedged risk with changes in the fair value of the hedging instrument. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 219               c) Accumulated fair value adjustments arising from the financial position as a hedged item, except for macro fair value corresponding continuing hedge relationships hedges. In such relationships, hedged items are presented in The table below presents accumulated fair value adjustments the line item ‘Financial assets measured at amortised cost,’ arising from the corresponding continuing hedge relationships, while the accumulated fair value adjustment is presented in a irrespective of whether there has been a change in the hedge separate line item ‘Fair value changes of the hedged items in designation during the year. The accumulated fair value portfolio hedge of interest rate risk.’ adjustment is presented in the same line of statement of 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 2022 Carrying amount of hedged items in EUR thousands 2021 Accumulated amount of FV adjustments on the hedged item Carrying amount of hedged items Accumulated amount of FV adjustments on the hedged item 371,431 573 108,979 261,879 153,594 153,594 (33,923) 3 (6,721) (27,205) (23,767) (23,767) 479,574 1,662 117,368 360,544 145,638 145,638 23,783 60 8,426 15,297 7,082 7,082 d) IBOR reform NLB Group closely monitors the development of Benchmark November 2019, the Euro risk-free rates (RFR) Working Group materially changes or ceases to be provided. NLB has prepared published high level recommendations for fallback provisions a plan, which sets out an inexhaustive/summary action list, Interest Rate Reform and is actively preparing for the changes for products referencing EURIBOR. The inclusion of robust and will continue to closely follow market standards to identify imposed by the regulation. In 2018, NLB formed a special fallback language is a requirement in contracts subject to the alternative benchmarks that could be referenced in substitute of working group which deals with the preparation for the EU Benchmark Regulation. The Bank already incorporated the existing benchmarks. discontinuation of some important reference interest rates and generic fallback clause into all new EURIBOR (both retail and reports on this to NLB Group ALCO. corporate) contracts. LIBOR (imminent) discontinuation Since many LIBOR settings ceased to exist at the beginning NLB Group no longer offers new products that would be tied In May 2021, the Euro RFR Working Group produced its of 2022, the Bank finished the process of winding-down to reference rates in termination. The exception are products recommendations on EURIBOR fallback trigger events and the exposures in a most efficient way. Incremental LIBOR related to EURIBOR, which is not scheduled for discontinuation. €STR-based EURIBOR fallback rates. Our mid-term activities transactions were not allowed unconditionally. Therefore, NLB Group’s attention in the past few years was are expected to undertake on the implementation of more focused on the modification of new contractual relationships precise fallback provisioning, based on these recommendations. NLB Group activities for implementation of LIBOR transition with customers in which EURIBOR occurs and the amendment NLB identified potential €STR-based fallbacks for EURIBOR, in were as follows: of existing contractual relationships with customers in which line with the current market consensus on those fallbacks and • review of outstanding LIBOR referencing loans, other benchmarks in termination appear. intends to proceed with the activities for inclusion on EURIBOR • identification of alternative reference rate to be used for loan EURIBOR (possible) discontinuation Due to the timely transition to the new hybrid EURIBOR the Bank is also expected to include fallback provisions in legacy • analysis of how the alternative reference rate will be contracts. The exact timing depends on regulatory development calculated and how to calculate any economic difference methodology which meet the BMR requirements, EURIBOR and best market practice. can continue to be used in new and legacy contracts for the between LIBORs and the selected alternative reference rates, • consideration of IT system accommodation with alternative foreseeable future. NLB as a supervised entity, is required to comply with the reference rates, fallbacks into all new EURIBOR-based contracts. In the next step, portfolio, Benchmark regulation and, as a user of benchmarks, must • documentation of the transition of the loans. EU-supervised entities are bound to include robust fallback produce and maintain a robust written plan setting out clauses into contractual documentation with the clients. In the actions NLB would take in the event that a benchmark MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 220           The table below indicates the notional amount and weighted rate basis. The derivative hedging instruments provide a close average maturity of derivatives in hedging relationships that approximation to the extent of the risk exposure NLB Group will be affected by the IBOR reform, analysed on an interest manages through hedging relationships. NLB Group and NLB Interest rate swaps EURIBOR (3 months) EURIBOR (6 months) USD LIBOR (6 months) 2022 in EUR thousands 2021 Notional amount (in EUR thousands) Weighted average maturity (years) Notional amount (in EUR thousands) Weighted average maturity (years) 280,981 355,651 7,500 10.01 6.06 0.71 186,472 371,866 14,117 4.23 7.00 0.98 As can be seen from the table, the majority of long-term when a change of EURIBOR could be expected. As at 31 derivatives in hedging relationships are exposed to EURIBOR, December 2022, derivatives with remaining maturity of five or therefore, the uncertainty arising from interest rate benchmark more years amount to EUR 295,580 thousand (31 December reform derives mainly from derivatives with longer maturities, 2021: EUR 272,730 thousand). 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 NLB Group 31 Dec 2022 1,917,615 222,965 13,072,986 177,823 15,391,389 31 Dec 2021 1,717,626 140,683 10,587,121 122,229 12,567,659 in EUR thousands NLB 31 Dec 2022 31 Dec 2021 1,597,448 350,625 6,054,413 114,399 8,116,885 1,436,424 199,287 5,145,153 92,404 6,873,268 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 NLB Group in EUR thousands NLB 31 Dec 2021 31 Dec 2022 31 Dec 2021 1,317,248 79,852 295,653 28,178 1,720,931 (3,305) 1,717,626 1,184,601 64,913 323,944 25,980 1,599,438 (1,990) 1,597,448 1,041,787 72,632 295,653 28,178 1,438,250 (1,826) 1,436,424 31 Dec 2022 1,486,496 84,979 323,944 25,980 1,921,399 (3,784) 1,917,615 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 221                                   b) Loans and advances to banks Loans Time deposits Reverse sale and repurchase agreements Purchased receivables Allowance for impairment (note 5.14.a) Total c) Loans and advances to customers Loans Overdrafts Finance lease receivables (note 5.11.b) Credit card business Called guarantees Allowance for impairment (note 5.14.a) Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 782 118,241 102,358 1,853 223,234 (269) 222,965 31 Dec 2022 12,626,259 425,135 193,948 148,870 2,772 13,396,984 (323,998) 13,072,986 NLB Group 10,200 130,602 - 79 140,881 (198) 140,683 31 Dec 2021 10,310,300 352,018 108,715 129,330 2,731 10,903,094 (315,973) 10,587,121 127,717 221,271 - 1,853 350,841 (216) 350,625 31 Dec 2022 5,873,443 208,499 - 64,460 1,423 6,147,825 (93,412) 6,054,413 117,490 81,900 - 79 199,469 (182) 199,287 in EUR thousands NLB 31 Dec 2021 5,006,871 174,063 - 59,305 1,333 5,241,572 (96,419) 5,145,153 Analysis of loans and advances to customers by sector Governments Financial organisations Companies Individuals Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 303,443 116,078 6,031,795 6,621,670 13,072,986 281,010 141,709 4,645,112 5,519,290 10,587,121 124,736 286,504 2,606,674 3,036,499 6,054,413 143,864 226,144 2,118,210 2,656,935 5,145,153 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 222                                     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 in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 36,712 41,364 8,516 8,737 31,587 3,390 - 2,563 53,988 186,857 (9,034) 177,823 40,436 22,670 8,227 7,303 613 1,715 - 1,526 45,965 128,455 (6,226) 122,229 19,370 30,544 2,710 2,359 31,081 3,413 - - 25,935 115,412 (1,013) 114,399 23,945 15,270 1,311 3,041 610 1,690 20,493 - 27,197 93,557 (1,153) 92,404 Receivables in the course of settlement are temporary balances which will be transferred to the appropriate item in the days recognised in accordance with the ‘Act for Value Protection of Republic of Slovenia’s Capital Investment in Nova Ljubljanska following their occurrence. banka d.d., Ljubljana’ (note 5.16.a). The remaining balance includes claims for securities and trust services, claims arising Other financial assets in the amount of EUR 23,464 thousand from re-invoicing costs and claims to pension funds for early (31 December 2021: EUR 22,192 thousand) relate to a receivable retirement payments. Analysis of other financial assets by sector NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 Banks Government Financial organisations Companies Individuals Total 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 38,362 78,285 23,644 6,368 31,164 177,823 2022 717 1 891 (1,087) (125) 397 NLB Group 33,325 43,432 15,979 5,994 23,499 122,229 2021 1,838 (1) 1,541 (1,904) (757) 717 11,918 55,708 17,578 670 28,525 114,399 2022 420 - 82 (287) (125) 90 34,131 23,769 12,818 647 21,039 92,404 in EUR thousands NLB 2021 440 - 1,207 (470) (757) 420 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 223                                     5.7. Non-current assets held for sale The line item ‘Non-current assets held for sale’ includes EUR 651 thousand (31 December 2021: EUR 699 thousand). As business premises and assets received as collateral that are in at 31 December 2022, and as at 31 December 2021, NLB did not the process of being sold. As at 31 December 2022, the value of have any non-current assets obtained by taking possession of assets received by taking possession of collateral and included collateral and included in non-current assets held for sale (note in non-current assets held for sale by NLB Group amounted to 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 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 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 2022 7,051 9 - 8,226 - - (637) 787 15,436 2021 8,658 3 97 605 20 (22) (1,952) (358) 7,051 2022 4,089 - - 617 - - (532) 61 4,235 2021 4,454 - - 518 - - (547) (336) 4,089 NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 228,944 22,372 251,316 223,593 23,421 247,014 75,262 3,330 78,592 82,905 3,217 86,122 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 224                         b) Movement of own property and equipment Land & Buildings Computers Other equipment Total Land & Buildings Computers Other equipment Total NLB Group NLB for own use in operating lease for own use in operating lease  in EUR thousands Cost Balance as at 1 January 2022 346,858 80,131 94,729 5,609 527,327 195,852 43,899 55 - - Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) c) Additions Disposals Reversal of impairment (note 4.14.) Transfer to/from investment property (note 5.9.) Transfer to/from non-current assets held for sale (note 5.7.) Balance as at 31 December 2022 Depreciation and impairment 39 4,552 8,118 (1,242) 79 (1,358) (9,794) 347,252 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.) Balance as at 31 December 2022 Net carrying value (3) (1,109) 7,030 1,699 (313) (1,568) 177,896 84,875 95,075 9,304 536,506 42,180 43,783 3,722 285,370 13 818 13,508 (9,595) - - - 3 1,154 10,767 (11,550) - (28) - - - 4,262 (567) - - - 7 (9,608) 9,108 - - - 74,415 4 (8,084) 5,979 - (4) - 3,326 - (134) 824 - - - 6,524 36,655 (22,954) 79 (1,386) (9,794) 8 (18,935) 22,941 1,699 (317) (1,568) 53,340 72,310 4,016 307,562 1,448 - - - (1,615) 195,685 - - 3,748 - - (998) 138,264 3,072 (4,791) - - - - (4,713) 4,245 - - - 46,143 - 1,420 (3,780) - - - 3,519 - 271 (68) - - - 289,413 - 6,211 (8,639) - - (1,615) 37,782 - (904) 2,013 - - - 3,125 - (45) 254 - - - 29,619 38,891 3,334 12,561 13,812 4,892 8,361 388 394 206,508 - (5,662) 10,260 - - (998) 210,108 75,262 82,905 Balance as at 1 January 2022 172,160 53,833 303,734 135,514 30,087 Balance as at 31 December 2022 169,356 31,535 22,765 5,288 228,944 57,421 Balance as at 1 January 2022 174,698 26,298 20,314 2,283 223,593 60,338 As at 31 December 2022, the value of assets received by NLB did not have any assets received by taking possession taking possession of collateral and included in property and equipment by NLB Group amounted to EUR 11,962 thousand (31 of collateral and included in property and equipment (31 December 2021: EUR 7 thousand) (note 6.1.l). December 2021: EUR 13,559 thousand). As at 31 December 2022 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 225                                                         Land & Buildings Computers Other equipment Total Land & Buildings Computers Other equipment Total NLB Group NLB for own use in operating lease for own use in operating lease  in EUR thousands 345,769 62 3,987 (1,385) (126) 4,377 (5,707) (119) 346,858 173,404 7 (684) 7,124 90 (2,676) (5,102) (3) 172,160 81,729 17 7,296 (8,710) - - - (201) 80,131 53,822 10 (8,634) 8,733 - - - 98,838 30 4,871 (8,393) - - - (617) 94,729 76,897 26 (7,577) 5,196 - - - (98) 53,833 (127) 74,415 4,309 - 1,948 (648) - - - - 5,609 2,924 - (152) 554 - - - - 3,326 530,645 197,043 49,580 49,355 3,514 299,492 109 18,102 (19,136) (126) 4,377 (5,707) (937) 527,327 - 3,321 - - (2,423) (2,089) - 195,852 307,047 135,343 43 (17,047) 21,607 90 (2,676) (5,102) (228) 303,734 - - 3,825 - (2,083) (1,571) - 135,514 - 1,513 (7,194) - - - - - 1,510 (4,722) - - - - - 9 (4) - - - - 43,899 46,143 3,519 - 6,353 (11,920) - (2,423) (2,089) - 289,413 32,905 - (7,194) 4,376 - - - - 39,944 - (4,248) 2,086 - - - - 2,805 210,997 - (3) 323 - - - - - (11,445) 10,610 - (2,083) (1,571) - 30,087 37,782 3,125 206,508 Cost Balance as at 1 January 2021 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 Balance as at 1 January 2021 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) Balance as at 31 December 2021 Net carrying value Balance as at 31 December 2021 174,698 26,298 20,314 2,283 223,593 60,338 13,812 Balance as at 1 January 2021 172,365 27,907 21,941 1,385 223,598 61,700 16,675 8,361 9,411 394 709 82,905 88,495 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 226                                     5.9. Investment property Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12. b) 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 subsidiaries (note 5.12.d) Other Balance as at 31 December NLB Group in EUR thousands NLB 2022 47,624 22 766 70 (17,004) 1,069 - - 3,092 - - 35,639 2021 54,842 19 - - (4,075) (7,053) 22 1,397 3,589 (1,215) 98 47,624 2022 9,181 - - - (2,512) - - - 84 - - 6,753 2021 8,300 - - - - 340 - 137 306 - 98 9,181 As at 31 December 2022, the value of assets received by taking 2021: EUR 36,009 thousand), and in NLB amounted to EUR 1,901 possession of collateral and included in investment property by thousand (31 December 2021: EUR 4,176 thousand) (note 6.1.l). NLB Group amounted to EUR 25,326 thousand (31 December Operating expenses arising from investment properties: Leased to others Not leased to others Total NLB Group 2022 2,496 564 3,060 2021 1,103 231 1,334 in EUR thousands NLB 2022 355 300 655 2021 291 183 474 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 227                         5.10. Intangible assets Cost Balance as at 1 January 2022 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b), c) Additions Disposals Write-offs NLB Group Software licenses Other intangible assets Goodwill Total NLB Software licenses in EUR thousands 245,607 (7) 1,444 14,170 (535) (995) 13,211 16 - - - - 32,336 291,154 201,028 - - - - - 9 1,444 14,170 (535) (995) - - 6,741 - - Balance as at 31 December 2022 259,684 13,227 32,336 305,247 207,769 Amortisation and impairment Balance as at 1 January 2022 Effects of translation of foreign operations to presentation currency Amortisation (note 4.11.) Write-offs Balance as at 31 December 2022 Net carrying value Balance as at 31 December 2022 198,997 (8) 12,655 (823) 210,821 4,274 8 3,102 - 7,384 28,807 232,078 - - - 28,807 - 15,757 (823) 247,012 171,575 - 5,769 - 177,344 48,863 5,843 3,529 58,235 30,425 Balance as at 1 January 2022 46,610 8,937 3,529 59,076 29,453 Other intangible assets represent additionally identified intangible assets in a business combination, namely core deposits and trade name. Cost Balance as at 1 January 2021 Effects of translation of foreign operations to presentation currency Additions Write-offs Disposal of subsidiary (note 5.12.d) Balance as at 31 December 2021 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.d) Balance as at 31 December 2021 Net carrying value Balance as at 31 December 2021 in EUR thousands NLB Group Software licenses Other intangible assets Goodwill Total 246,687 13 14,866 (15,527) (432) 245,607 201,748 8 11,944 936 (15,435) (204) 198,997 13,200 32,336 11 - - - - - - - 13,211 32,336 292,223 24 14,866 (15,527) (432) 291,154 - 7 4,267 - - - 28,807 230,555 - - - - - 15 16,211 936 (15,435) (204) 232,078 4,274 28,807 NLB Software licenses 201,614 - 7,370 (7,956) - 201,028 173,509 - 6,022 - (7,956) - 171,575 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 2022 Financial Report Contents 228                                             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 in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 19,567 130 2,675 22,372 23,840 19,545 390 3,486 23,421 24,324 2,241 1,089 - 3,330 3,349 2,244 960 13 3,217 3,256 In the statement of financial position, right-of-use assets are Additions to the right-of-use assets during 2022 in NLB Group included in the line item ‘Property and equipment’ and lease amounted to EUR 6,411 thousand (2021: EUR 10,172 thousand), liabilities are included in the line item ‘Other financial liabilities.’ and in NLB EUR 1,751 thousand (2021: EUR 1,245 thousand). The income statement shows the following amounts relating to leases: Depreciation of right-of-use assets (note 4.11.) Land and buildings Vehicles Furniture and equipment Total Interest expenses on lease liabilities (note 4.1.) Expenses relating to short-term leases (included in administrative expenses) Expenses relating to leases of low-value assets that are not shown above as short-term leases (included in administrative expenses) Income from sub-leasing right-of-use assets (included in other operating income) NLB Group in EUR thousands NLB 2022 7,092 276 1,324 8,692 2022 (431) (855) (1,129) 77 2021 7,159 444 1,107 8,710 NLB Group 2021 (470) (606) (1,050) 108 2022 511 448 13 972 2022 (28) (158) (185) - 2021 465 410 15 890 in EUR thousands NLB 2021 (29) (179) (157) - The total cash outflow for leases in 2022 in NLB Group was EUR 8,547 thousand (2021: EUR 9,397 thousand), and in NLB EUR a lease term of five years is assumed, with the exemption of business premises on strategic locations where management 1,001 thousand (2021: EUR 933 thousand). assesses a different (longer) lease term. Vehicles and other equipment generally have lease terms between 1 to 5 years. NLB Group leases various offices, branches, vehicles, and other There are several lease contracts that include extension equipment used in its business. Rental contracts for offices and and termination options. These options are negotiated by branches generally have lease terms between 5 to 20 years, management to align with the Group’s business needs. Lease while some contracts are made for indefinite periods. Contracts payments to be made under reasonably certain extension for indefinite periods are included in the measurement of the options are included in measurement of the liability. liability in accordance with planning projections. Normally, MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 229                                     Lease terms are negotiated on an individual basis and contain Finance leases a range of different terms and conditions. The lease agreements Loans and advances to customers in NLB Group include do not impose any covenants other than the security interests in finance lease receivables. the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. The following table sets out a maturity analysis of lease NLB Group also has certain leases of other equipment with a received after the reporting date. receivables, showing the undiscounted lease payments to be lease term of 12 months or less, and equipment with low value. For these leases, NLB Group applies the short-term lease and the lease of low-value assets recognition exemptions. Lease payments on short-term leases and leases of low-value assets are recognised as expenses on a straight-line basis over the lease term. For calculation of the net present value of the future lease 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 a 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. Most of the lease agreements entered into by NLB Group as lessor contracts are finance lease agreements. Most of the finance lease agreements are concluded for a non- cancellable period of between 48 and 60 months. By paying the last instalment at the end of the contract, the leasing object becomes the lessee’s property. The financial leasing receivables are secured by the object of financing. NLB Group does not have finance lease contracts with variable payments not included in the measurement of the net investment in the lease. The investment properties are leased to the lessee under operating leases with rentals payable monthly. There are no variable lease payments that depend on an index or a rate. The investment properties generally have lease terms between 2 to 10 years. Some contracts are made for an indefinite period. As at 31 December 2022, the allowance for unrecoverable finance lease receivables included in the allowance for loan impairment amounted to EUR 726 thousand (as at 31 December 2021 EUR 436 thousand). NLB Group Less than one year One to two years Two to three years Three to four years Four to five years More than five years Total undiscounted lease receivable Unearned finance income Net investment in the lease  in EUR thousands 2022 70,629 46,515 39,899 29,423 17,422 13,878 217,766 (23,818) 193,948 2021 36,465 25,723 21,276 16,435 10,375 8,604 118,878 (10,163) 108,715 During 2022, NLB Group recognised interest income on lease receivables in the amount of EUR 6,607 thousand (2021: EUR 3,452 thousand). 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 in EUR thousands NLB Group NLB 2022 2,580 1,657 1,028 694 488 1,314 7,761 2021 2,757 1,396 817 597 430 1,211 7,208 2022 2021 345 343 340 315 315 1,224 2,882 375 348 346 342 301 1,029 2,741 NLB Group realised rental income arising from: investment properties in the amount of EUR 2,912 thousand (2021: EUR 3,558 thousand); and movable property in the amount of EUR 1,252 thousand (2021: EUR 1,074 thousand). NLB realised rental income arising from: investment properties in the amount of EUR 459 thousand (2021: EUR 567 thousand); and movable property in the amount of EUR 475 thousand (2021: EUR 471 thousand) (note 4.8.). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 230       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 2022 31 Dec 2021 813,362 32,126 58,552 904,040 696,538 29,720 55,282 781,540 Data of subsidiaries as included in the consolidated financial statements of NLB Group as at 31 December 2022:   Nature of Business Country of Incorporation Equity as at 31 Dec 2022 Profit/(loss) for 2022 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 Komercijalna banka a.d. Beograd KomBank Invest a.d. Beograd N Banka d.d., Ljubljana Privatinvest d.o.o., Ljubljana NLB Skladi d.o.o., Ljubljana NLB Lease&Go, leasing, d.o.o., Ljubljana NLB Lease&Go, d.o.o. Skopje** NLB Lease&Go leasing d.o.o. Beograd NLB Zavod za upravljanje kulturne dediščine, Ljubljana NLB DigIT d.o.o., Beograd Non-core members NLB Leasing d.o.o., Ljubljana - v likvidaciji* Optima Leasing d.o.o., Zagreb - “u likvidaciji” NLB Leasing d.o.o., Beograd - u likvidaciji Tara Hotel d.o.o., Budva REAM d.o.o., Podgorica REAM d.o.o., Beograd - Novi Beograd SPV 2 d.o.o., Beograd - Novi Beograd S-REAM d.o.o., Ljubljana REAM d.o.o., Zagreb PRO-REM d.o.o., Ljubljana - v likvidaciji OL Nekretnine d.o.o., Zagreb - u likvidaciji 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 Banking Banking Banking Banking Banking Banking Finance Banking Real estate Finance Finance Finance Finance Cultural heritage management North Macedonia Montenegro Bosnia and Herzegovina Kosovo Bosnia and Herzegovina Serbia Serbia Slovenia Slovenia Slovenia Slovenia North Macedonia Serbia Slovenia IT services Serbia Finance Finance Finance Real estate Real estate Real estate Real estate Real estate Real estate Real estate Real estate Real estate Finance Finance Finance Slovenia Croatia Serbia Montenegro Montenegro Serbia Serbia Slovenia Croatia Slovenia Croatia Serbia Montenegro Switzerland Serbia LHB AG, Frankfurt *100% ownership of NLB Lease&Go, leasing, d.o.o., Ljubljana. **51% ownership of NLB Lease&Go, leasing, d.o.o., Ljubljana and 49% ownership of NLB Banka a.d., Skopje. Germany Finance 265,844 106,937 96,237 113,844 90,608 737,972 1,203 186,423 123 12,598 19,578 529 766 3,414 2,368 16,936 821 5,899 13,546 1,767 1,758 867 23,141 994 19,974 1,467 31,591 3,295 10,029 4 1,086 37,874 16,613 19,281 32,402 11,436 66,014 (148) 11,085 (99) 8,404 810 (68) (390) 2,601 (36) 366 (434) (91) (3,255) 71 (90) 35 (184) 66 162 153 (709) 165 (2,213) 1 (646) 86.97 99.87 99.85 82.38 97.34 100 - 100 - 100 100 - - 100 100 - - 100 12.71 100 100 100 100 - - - 100 100 100 - 100 86.97 99.87 99.85 82.38 97.35 100 - 100 - 100 100 - - 100 100 - - 100 12.71 100 100 100 100 - - - 100 100 100 - 100 86.97 99.87 99.85 82.38 97.34 100 100 100 100 100 100 100 86.97 99.87 99.85 82.38 97.35 100 100 100 100 100 100 100 95.20 95.20 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 231                                                   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 NLB Banka sh.a., Prishtina 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 NLB Zavod za upravljanje kulturne dediščine, Ljubljana Non-core members NLB Leasing d.o.o., Ljubljana - v likvidaciji* Optima Leasing d.o.o., Zagreb - “u likvidaciji” NLB Leasing d.o.o., Beograd - u likvidaciji Tara Hotel d.o.o., Budva PRO-REM d.o.o., Ljubljana - v likvidaciji OL Nekretnine d.o.o., Zagreb - u likvidaciji REAM d.o.o., Podgorica REAM d.o.o., Beograd - Novi Beograd SPV 2 d.o.o., Beograd - Novi 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. Banking Banking Banking Banking Banking Banking Banking Finance Finance Finance Cultural heritage management Finance Finance Finance Real estate Real estate Real estate Real estate Real estate Real estate Real estate Real estate Real estate Finance Finance Finance Finance North Macedonia Montenegro Bosnia and Herzegovina Kosovo Bosnia and Herzegovina Serbia Serbia Serbia Slovenia Slovenia Slovenia Slovenia Croatia Serbia Montenegro Slovenia Croatia Montenegro Serbia Serbia Slovenia Croatia Serbia 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 18,058 1,258 5,985 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 2,545 (94) 40 (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 Changes in ownership interest in the subsidiaries of NLB Group in 2022 and 2021 are presented in note 3. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 232                                                 Data of subsidiaries with significant non-controlling interests, before intercompany eliminations: NLB Banka, Skopje NLB Banka, Prishtina in EUR thousands NLB Komercijalna banka, Beograd Non-controlling interest in equity in % Non-controlling interest’s voting rights in % Income statement and statement of comprehensive income Revenues Profit/(loss) for the year Attributable to non-controlling interest Other comprehensive income Total comprehensive income Attributable to non-controlling interest Paid dividends to non-controlling interest Statement of financial position Current assets Non-current assets Current liabilities Non-current liabilities Equity Attributable to non-controlling interest 2022 13.03 13.03 94,624 37,874 4,935 (5,071) 32,803 4,274 1,332 826,723 1,020,798 1,404,491 177,186 265,844 34,639 2021 13.03 13.03 87,864 39,000 5,082 (759) 38,241 4,983 3,222 719,846 1,050,742 1,335,444 191,877 243,267 31,698 2022 17.62 17.62 58,296 32,402 5,710 (309) 32,093 5,656 3,014 563,629 520,009 806,646 163,148 113,844 20,063 2021 17.62 17.62 51,509 24,436 4,306 (311) 24,125 4,252 4,160 446,182 484,363 756,702 74,987 98,856 17,421 2021 13.30 11.72 156,710 34,818 4,631 (10,117) 24,701 3,285 - 1,859,605 2,305,644 3,266,253 264,353 634,643 84,408 Data for NLB Komercijalna banka, Beograd is presented only for year 2021, as during the year 2022 NLB became 100% owner of the subsidiary (note 3.). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 233               b) Acquisition of N Banka d.d., Ljubljana On the level of the European Central Bank and the Single the Bank of Slovenia issued a decision using the instrument of In April 2022, Sberbank banka d.d., Ljubljana was renamed to N sale of operation in a way that all shares are transferred from Banka d.d., Ljubljana. Resolution Board, a decision was made on 28 February 2022 the shareholders to the transferee. In the process of finding a to suspend the business operations of the banking group new owner of Sberbank banka d.d., Ljubljana, a sale agreement The purchase price for the bank was EUR 5,109 thousand and Sberbank Europe AG, which also had a subsidiary bank in was concluded with NLB, which became an owner of 100% of was fully paid in cash. There are no contingent consideration Slovenia. At the same time, a transitional period or short-term the bank’s shares as at 1 March 2022. At the date of acquisition, arrangements. At the acquisition date, cash in acquired entities moratorium was adopted, during which a solution for the the acquired bank had one 100% owned subsidiary, company amounted to EUR 265,062 thousand, therefore the net inflow Slovenian subsidiary, Sberbank banka d.d., was found with the Privatinvest d.o.o., whose assets consist only of repossessed real of cash amounted to EUR 259,953 thousand (included in aim to ensure the continuity of the business operations for all of estate. It also had an investment into Bankart d.o.o., Ljubljana, the statement of cash flows within payments from investing its clients. On 1 March 2022, in order to maintain financial stability which is in individual financial statements of the acquired bank activities). in Slovenia, the Single Resolution Board, in cooperation with accounted for as financial asset measured at fair value through the Bank of Slovenia, adopted a scheme and resolution plan other comprehensive income, while on the level of NLB Group it for Sberbank banka d.d., Ljubljana. Based on this resolution, is an associate. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report 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 Financial assets measured at amortised cost - debt securities - loans and advances to banks - loans and advances to customers - other financial assets Investments in associates and joint ventures Tangible assets Property and equipment - own property and equipment (note 5.8.b) - right-of-use assets Investment property Intangible assets Current income tax assets Deferred income tax assets Other assets Total assets Financial liabilities held for trading Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks - due to customers - other financial liabilities Provisions Current income tax liabilities Other liabilities Total liabilities Net identifiable assets acquired Consideration given Bargain purchase (negative goodwill) in EUR thousands NLB owns 100% of N Banka, therefore no non-controlling 265,062 4,788 332 69,387 12,819 2,489 interests were recognised as a result of acquisition. The acquisition of N Banka resulted in a gain from a bargain purchase (negative goodwill) in the amount of EUR 172,810 thousand, which is recognised in the income statement under the line item ‘Negative goodwill.’ Current market conditions, when banks are generally valued below their net book 1,148,615 values, usually result in recognition of a gain from a bargain 3,465 11 purchase, which is in the case of N Banka even higher than it would be as a result of an orderly transaction, since the bank was acquired in the process of resolution. Negative goodwill is 10,905 not taxable. As a result of the acquisition, NLB Group’s off-balance sheet liabilities increased by EUR 277,772 thousand: 4,518 6,387 464 1,424 46 4,481 2,169 Guarantees - financial - non-financial 1,526,457 Commitments to extend credit Letters of credit 4,698 Total in EUR thousands 136,309 41,615 94,694 138,749 2,714 277,772 Since the bank was acquired within a very short timeframe in the process of resolution, acquisition-related costs were immaterial. NLB obtained all the necessary information for measuring fair values, therefore no amounts were measured and recognised on a provisional basis. 24,937 190,008 1,072,411 30,155 21,896 2,249 2,184 1,348,538 177,919 5,109 172,810 Contents 234         The valuation techniques used for measuring the fair value of material assets and liabilities acquired were as follows: Assets acquired Valuation technique 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 N Banka individual financial statements, by reducing future cash flows accordingly. Also prepayment risk was estimated for consumer and Performing loans mortgage loans. Non-performing loans The discount rates used for fair value measurement of loans were based on the publicly available interest rates published by Bank of Slovenia, that represent market rates and are thus considered the most appropriate. Discount rates differ based on product type, client segment, maturity and currency. 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 15%. 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 Debt securities 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 The fair value of acquired loans and advances to customers is EUR 1,148,615 thousand, of which EUR 1,127,261 thousand relates to performing portfolio and EUR 21,354 thousand to non- performing portfolio. The latter was recognised as purchased or originated credit-impaired financial assets (POCI). The gross contractual amount for performing loans and advances to customers is EUR 1,135,072 thousand and for this exposure 12-month expected credit losses in the amount of EUR 8,552 thousand were recognised through the income statement. The gross contractual amount for non-performing loans and advances to customers is EUR 49,641 thousand, and it is expected that approximately EUR 23 million of the contractual cash flows will not be collected. Immediately after acquisition, 12-month expected credit losses for Stage 1 financial assets in the amount of EUR 8,900 thousand and attributable deferred taxes in the amount of EUR 1,691 thousand were recognised. Additionally, EUR 39,657 thousand of revenue, EUR 18,294 thousand of gain after tax, and EUR 2,650 thousand of other comprehensive loss were recognised in NLB Group financial statements since the acquisition date. Had the acquisition occurred on 1 January 2022, management estimates that the consolidated revenue (excluding negative goodwill) would have been approximately EUR 960 million, and the consolidated profit for the year (excluding negative goodwill) approximately EUR 265 million. The exact result is difficult to determine due to the changed circumstances during the year, especially the impact of the war Real estate generated from a property into a present value estimate using market capitalization rate. This in Ukraine. method is commonly used for valuing income-generating properties. The sale comparison approach: Values property by comparing similar properties that have been sold recently. This approach is sometimes referred to as the ‘direct sales comparison approach.’ The reliability of an indication found by this method depends on the quality of comparable data found in the marketplace and application of adequate adjustments for individually appraised real estate. When sale transactions are not available, the direct sales comparison approach is not applicable. Residual land value approach: is a method for calculating the value of development land. It is performed by subtracting from the total value of a development project, all costs associated with the development project, including profit but excluding the cost of the land. It is applicable only for development/construction land. Liabilities acquired Deposits Valuation technique Discounted cash flow approach: Aggregated future cash flows were discounted by applying market interest rates for term deposits. As a discount rate, average market rates on the deposits, published by Bank of Slovenia, were used. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 235 c) Acquisition of NLB Lease&Go leasing d.o.o. Beograd In November 2022, NLB Lease&Go, leasing, d.o.o., Ljubljana The purchase price for the company was EUR 1,036 thousand and was fully paid in cash. There are no contingent became an owner of 95.20% of financial company Zastava consideration arrangements. At the acquisition date, cash in Istrabenz Lizing, d.o.o., Beograd. acquired entity amounted to EUR 117 thousand, therefore the net outflow of cash amounted to EUR 919 thousand (included In January 2023, Zastava Istrabenz Lizing, d.o.o., Beograd was in the statement of cash flows within payments from investing renamed to NLB Lease&Go leasing d.o.o. Beograd. activities). 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 measured at amortised cost - loans and advances to banks - loans and advances to customers - other financial assets Tangible assets Property and equipment - own property and equipment (note 5.8.b) Investment property Intangible assets Current income tax assets Other assets Total assets Financial liabilities measured at amortised cost - borrowings from other customers - other financial liabilities Provisions Other liabilities Total liabilities Net identifiable assets acquired (100%) Less: non-controling interests Net assets acquired (NLB Group share) Consideration given Bargain purchase (negative goodwill) in EUR thousands 117 171 913 5 137 137 302 20 5 2 1,672 490 7 7 8 512 1,160 56 1,104 1,036 68 NLB Group recognises non-controlling interests in NLB Lease&Go leasing d.o.o. Beograd at the non-controlling The acquisition of NLB Lease&Go leasing d.o.o. Beograd resulted in a gain from a bargain purchase (negative goodwill) interest’s proportionate share of the acquired entity’s net in the amount of EUR 68 thousand, which is recognised in identifiable assets. the income statement under the line item ‘Negative goodwill.’ Negative goodwill is not taxable. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 236         d) 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 subsidiary 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 the 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 2022 Financial Report Contents 237                             e) Analysis by type of investment in associates and joint ventures Carrying amount of the NLB Group’s interest Other financial organisations Enterprises Total NLB Group’s associates 2022 NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 11,677 - 11,677 11,525 - 11,525 4,282 289 4,571 4,282 201 4,483 in % Nature of Business Country of Incorporation Shareholding Voting rights Shareholding Voting rights NLB Group NLB Bankart d.o.o., Ljubljana Card processing ARG - Nepremičnine d.o.o., Horjul Real estate Slovenia Slovenia 46.03 75.00 46.03 75.00 45.64 75.00 2021 45.64 75.00 in % Nature of Business Country of Incorporation Shareholding Voting rights Shareholding Voting rights NLB Group NLB Bankart d.o.o., Ljubljana Card processing ARG - Nepremičnine d.o.o., Horjul Real estate Slovenia Slovenia 45.64 75.00 45.64 75.00 45.64 75.00 45.64 75.00 By contractual agreement between the shareholders, NLB does not control ARG-Nepremičnine, Horjul, but does have a significant influence. Therefore, the entity is accounted as an associate. The carrying amount of interests in associates included in the consolidated financial statements of NLB Group: Carrying amount of the NLB Group’s interest NLB Group’s share of: - Profit for the year - Other comprehensive income - Total comprehensive income  in EUR thousands 2021 11,525 1,108 (30) 1,078 2022 11,677 781 121 902 NLB Group's interest in an associate was in previous years reduced to zero, consequently NLB Group did not recognise a share of profit in the amount of EUR 94 thousand in 2022 (2021: EUR 88 thousand). The cumulative unrecognised share of losses of an associate as at 31 December 2022 amounted to EUR 2,083 thousand (31 December 2021: EUR 2,176 thousand). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 238                                                     NLB Group’s joint ventures Prvi Faktor Group, Ljubljana Nature of Business Finance Country of Incorporation Slovenia Voting rights Voting rights 50 50 2022 in % 2021 NLB Group's interest in a joint venture was in previous years (2021: EUR 435 thousand). The cumulative unrecognised share reduced to zero, consequently NLB Group did not recognise of losses of a joint venture as at 31 December 2022 amounted to a share of profit in the amount of EUR 429 thousand in 2022 EUR 14,396 thousand (31 December 2021: EUR 14,825 thousand). f) Movements of investments in associates NLB Group Balance as at 1 January Acquisition of subsidiaries (note 5.12.b) 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 2022 11,525 11 - 827 (46) 121 (761) 11,677 in EUR thousands 2021 7,988 - 2,900 1,339 (231) (30) (441) 11,525 Assets, received as collateral (note 6.1.l) Deferred expenses Inventories Claim for taxes and other dues Prepayments Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 51,586 12,200 4,961 1,509 2,287 72,543 75,450 10,046 2,173 1,826 1,726 91,221 3,170 6,929 2,324 417 321 13,161 4,827 6,202 42 621 161 11,853 Assets, received as collateral on NLB Group in the amount of EUR 50,913 thousand (31 December 2021: EUR 74,717 thousand), and on NLB in the amount of EUR 3,170 thousand (31 December 2021: EUR 4,827 thousand) consist of real estate (note 6.1.l). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 239                             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 Balance as at 1 Jan 2022 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 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 banks 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 198 18,336 50,961 476 7,398 26,624 36 - 76,047 136,607 5,714 (157) 613 (608) 1 (6) 6 1 (4) 2 (1) - 4 626 (3) 1 (2) - - 19,708 (4,026) (263) (12,893) 2,175 13 - (6,815) 1,851 250 - - - 4.14. (46) (12,932) 18,487 911 16,206 2,943 1 108 28,969 (9,912) 1,556 24 (11,136) (1,034) - (239) (1) (72) (18) (1) (26) - (21,199) (27,759) (1,136) (219) (244) - 4.14. 5 6,521 (5,585) 20 3,897 (493) 12 - (751) 144 (22) - - - Column Increases/(Decreases) also includes 12-month expected Other movements relate mainly to income from repayments credit losses recognised at acquisition of N Banka in the of non-performing exposures in NLB Komercijalna banka and amount of EUR 187 thousand for Loans and advances to banks, N Banka, which were at acquisition recognised at fair value, in the amount of EUR 8,552 thousand for Loans and advances without a corresponding allowance for the impairment and to to customers, and in the amount of EUR 95 thousand for Other expenses due to initial recognition of non-performing exposure financial assets (notes 4.14. and 5.12.b). at fair value in NLB. in EUR thousands Balance as at 31 Dec 2022 Repayments of written-off receivables 5.6.b), c), d) 4.14. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report 3 (3) (2) 173 (4) (20) 3 - (448) 9,597 1,391 (148) 7,635 1,827 161 31,385 59,840 1,246 14,582 31,230 38 108 75,807 111,154 7,750 (499) (3,134) 185 - - - - - - - - 8,213 24,770 346 1,537 3,546 12 Contents 240                                                                                                 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 141 25,044 49,475 276 8,151 32,682 30 61,305 195,623 5,247 - 1,319 4 - 5 20 (2) 1 4 - 14 587 - 1 - (1) - 14,152 4,036 202 (8,554) (3,515) - (5,598) (521) (202) - - - 4.14. 9 (13,005) 2,476 115 6,975 (240) 7 25,606 8 1,770 (1,157) (3,243) (602) - (164) (8) (54) (35) (231) (7) (15,160) (66,532) (847) (702) (2,312) (9) 4.14. 48 (7,479) (4,292) (70) 898 (1,960) 9 7,868 1,641 (112) - - - - (3) 31 10 (3) 21 (3) 2,135 6,226 (142) 1,701 4,849 - in EUR thousands Disposal of subsidiary Balance as at 31 Dec 2021 Repayments of written-off receivables 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 - - - Other movements relate mainly to income from repayments of allowance for the impairment and to expenses due to initial non-performing exposures in Komercijalna banka, which were recognition of non-performing exposure at fair value in NLB. at acquisition recognised at fair value, without a corresponding Balance as at 1 Jan 2022 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 Other movements relate mainly to expenses due to initial recognition of non-performing exposure at fair value. 182 3,503 10,101 62 2,421 1,787 1 31,497 47,110 1,090 838 6 - 7,665 833 16 (6,808) 1,192 - (857) (2,025) (16) - - 4.14. 34 (6,686) 5,358 95 8,313 (2,277) 2 9,321 3,922 225 4,801 (5) - (238) (1) (17) (15) (1) (1) (5,761) (11,178) (491) - - 4.14. - 1,916 (1,440) 46 3,474 100 - (279) (94) - - - in EUR thousands Balance as at 31 Dec 2022 Repayments of written-off receivables 5.6.b), c), d) 4.14. - 1 29 1 - (1) - 365 (7,835) - (5,001) - 216 6,161 14,880 203 7,385 800 2 34,286 29,900 808 638 1 - - - - - - - 2,536 10,313 210 - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 241                                                                                                                                                                                                     Balance as at 1 Jan 2021 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 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 - - Other movements relate mainly to expenses due to initial and that are still subject to enforcement activity for NLB thousand) and EUR 1,140 thousand in NLB (31 December 2021: recognition of non-performing exposure at fair value. Group amounted to EUR 29,654 thousand (31 December 2021: EUR 1,265 thousand) represents interest receivables that have EUR 76,252 thousand), and for NLB amounted to EUR 9,949 not been recognised in the income statement prior to the The contractual amount outstanding on financial assets that thousand (31 December 2021: EUR 8,136 thousand), of which write-off. were written off during the year ending 31 December 2022 EUR 1,730 thousand in NLB Group (31 December 2021: EUR 2,251 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 Balance as at 1 Jan 2022 Effects of translation of foreign operations to presentation currency Transfers Increases/ (Decreases) Changes in models/risk parameters 3,253 11,148 52 70 798 (2) 5 1 - - - (25) - (803) 828 4.14. 158 (2,049) 271 739 5,235 4.14. 104 (67) (59) 12 - Foreign exchange differences and other movements in EUR thousands Balance as at 31 Dec 2022 5.4.a), 5.6.a) 6 17 - 52 (84) 3,519 9,029 265 70 6,777 Column Increases/(Decreases) includes also 12-month expected credit losses recognised at the acquisition of N Banka in the amortised cost, and in the amount of EUR 5 thousand for Debt securities measured at fair value through other comprehensive Impairment of debt securities measured at fair value through other comprehensive income relates mainly to impairment of amount of EUR 60 thousand for Debt securities measured at income (notes 4.14. and 5.12.b). Russian sovereign debt (note 5.4.). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 242                                                                                                                                                         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 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 3,685 8,656 - 28 798 1 2 - - - (32) - 32 - - 4.14. 997 81 16 24 - 4.14. (1,400) 2,731 4 18 - Balance as at 1 Jan 2022 Transfers Increases/ (Decreases) 1,826 2,203 - 798 - (25) (803) 4.14. 119 (192) 751 828 5,235 Foreign exchange differences and other movements in EUR thousands Disposal of subsidiary Balance as at 31 Dec 2021 5.4.a), 5.6.a) 2 18 - - - - (340) - - - 3,253 11,148 52 70 798 Changes in models/risk parameters 4.14. Foreign exchange differences and other movements in EUR thousands Balance as at 31 Dec 2022 5.4.a), 5.6.a) 42 32 - - 3 4 52 1,990 2,022 - (84) 6,777 Impairment of debt securities measured at fair value through other comprehensive income relates mainly to impairment of Russian sovereign debt (note 5.4.). 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 1,841 2,343 798 4.14. 456 (22) - 4.14. (473) (126) - Foreign exchange differences and other movements in EUR thousands Balance as at 31 Dec 2021 5.4.a), 5.6.a) 2 8 - 1,826 2,203 798 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 243                                                                                                                                                                                           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 2022 NLB Group Lifetime ECL credit-impaired 2021 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.b), c) Decreases/Increases Exchange differences on monetary assets Transfer Balance as at 31 December 140,881 74 2,660 75,516 4,103 (108) 223,126 Movement of gross carrying amount of loans and advances to individuals - - - - - 108 108 NLB Group 197,146 (7) - (61,245) 4,987 - 140,881 2022 12-month expected credit losses 199,469 NLB in EUR thousands 2021 12-month expected credit losses 158,475 - - 150,644 728 - 350,841 NLB - - 41,094 (100) - 199,469 in EUR thousands MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Individuals Balance as at 1 January 2022 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Transfers Increases/(Decreases) Write-offs Exchange differences on monetary assets Modification losses (note 4.12.) Balance as at 31 December 2022 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 Total 5,372,551 120,235 128,285 5,621,071 2,570,925 66,035 57,396 2,694,356 672 411,068 (106,876) 746,532 (239) (746) (85) (12) - 78,073 (8,179) (18) 34 (12) 8 6,583 28,803 (12,059) (21,199) 12 13 668 417,651 - 726,294 (21,456) (700) (84) - - (46,023) 396,545 (238) 1,698 - - - 35,084 596 (15) 44 - - - 10,939 (2,932) (5,761) 38 - - - - 394,209 (6,014) 1,780 - 6,422,877 190,121 130,446 6,743,444 2,922,907 101,744 59,680 3,084,331 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 117,193 5,027,593 2,295,630 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 26 34,807 (8,010) (15,160) 32 (2) (601) 128,285 1,286 - 641,719 (15,359) 1,989 (39) (36,118) 5,621,071 - (17,729) 291,509 (156) 1,671 - - in EUR thousands Total 2,411,949 - - 286,857 (6,203) 1,753 - - 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 In year 2022, the loss allowance for loans and advances to and the acquisition of subsidiaries, while at the NLB level it level, while at the NLB level it increased by EUR 3,242 thousand. individuals increased by EUR 19,993 thousand at the NLB increased by EUR 389,975 thousand. Group level, while at the NLB level it increased by EUR 10,411 Even though the gross carrying amount increased mainly in Stage 1 due to new exposures, the increase of loss allowance thousand. The main reasons for this increase are changed Acquisition of subsidiaries (note 5.12.b) contributed EUR 417,651 was observed mostly in Stage 3. The main reason for this were risk parameters, which increased loss allowance by EUR 9,667 thousand to the gross carrying amount of loans and advances changes in the risk parameters, which increased loss allowance thousand at the NLB Group level, and by EUR 5,111 thousand to individuals on the NLB Group level. for Stage 3 loans and advances to individuals in the amount at NLB level and an increase of the gross carrying amount. of EUR 7,868 thousand at the NLB Group level and At the NLB Group level, the gross carrying amount increased In year 2021, the loss allowance for loans and advances to EUR 7,566 thousand at the NLB level. by EUR 1,122,373 thousand, mainly due to increased exposure individuals increased by EUR 7,281 thousand at the NLB Group Contents 244                                                     Movement of gross carrying amount of loans and advances to other customers Other customers Balance as at 1 January 2022 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b), c) Transfers Increases/(Decreases) Write-offs Exchange differences on monetary assets Modification losses (note 4.12.) Balance as at 31 December 2022 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 NLB Group NLB 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 4,630,485 412,184 239,354 5,282,023 2,351,275 123,304 72,637 2,547,216 in EUR thousands 1,189 716,577 (154,654) 835,299 (1) (639) 29 87 - 123,967 (112,477) (1) (106) 17 893 15,300 30,687 (56,944) (27,759) 41 12 2,169 731,877 - 665,878 (27,761) (704) 58 - - 34,662 572,648 (1) 1,871 - - - (37,337) (34,158) (1) 98 - - - 2,675 (13,056) (11,178) 55 - - - - 525,434 (11,180) 2,024 - 6,028,285 423,671 201,584 6,653,540 2,960,455 51,906 51,133 3,063,494 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 4,964,547 1,982,033 193,835 119,733 2,295,601 852 25,437 (34,880) (66,532) 159 (201) (3,000) 239,354 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 In year 2022, the gross carrying amount of loans and advances at the NLB Group level and EUR 50,195 thousand), with main only by EUR 2,808 thousand, while at the NLB level it decreased to other customers increased by EUR 1,371,517 thousand at the reasons being write-offs (EUR 66,771 thousand at the NLB by EUR 140 thousand. The main reason for this moderate NLB Group level and EUR 516,278 thousand at the NLB level, Group level and EUR 33,273 thousand at the NLB level) and increase at the NLB Group level and decrease on the NLB level mostly in Stage 1 due to the acquisition of subsidiaries and the changes in the risk parameters (a decrease of loss allowance at are write-offs (EUR 1,234 thousand at the NLB Group level and increased exposure. Regardless of that, the loss allowance the NLB Group level for EUR 4,611 thousand and at the NLB level EUR 509 thousand at the NLB level). decreased for EUR 11,968 thousand at the NLB Group level and for EUR 7,365 thousand). EUR 12,631 thousand at the NLB level, mainly in Stage 3. The main reason for the decrease were write-offs in the amount of EUR 27,761 thousand at the NLB Group level and EUR 11,180 Movement of gross carrying amount of other financial assets The gross carrying amount of other financial assets in year 2022 The loss allowance for other financial assets in year 2021 on the NLB Group level moved in line with the gross carrying amount and increased by EUR 673 thousand. At the NLB level, the gross thousand at the NLB level. increased (for EUR 58,402 thousand at the NLB Group level and carrying amount increased by EUR 37,724 thousand, but most of EUR 21,855 thousand at the NLB level), with the majority of this this increase relates to receivables with a very short maturity (of In year 2021, the gross carrying amount of loans and advances increase relating to credit card receivables and receivables for that EUR 20,492 thousand to receivables towards a subsidiary to other customers increased by EUR 317,476 thousand at the the sale of securities. As these receivables are by their nature for dividends declared in 2021). Therefore, the loss allowance NLB Group level and EUR 251,615 thousand at the NLB level, short-term, they did not contribute significantly to the increase in 2021 slightly decreased (by EUR 177 thousand), with the main mostly in Stage 1 due to the increased exposure. Regardless of of the loss allowance. Therefore the loss allowance for other reason being write-offs in the amount of EUR 292 thousand. that, the loss allowance decreased (for EUR 63,588 thousand financial assets in year 2022 on the NLB Group level increased MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 245                                     Movement of gross carrying amount of debt securities measured at amortised cost NLB Group in EUR thousands NLB 2022 2021 2022 2021 12-month expected credit losses Lifetime ECL not credit - impaired 12-month expected credit losses Lifetime ECL not credit - impaired 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.b) Additions Derecognition Net interest income Exchange differences on monetary assets Other Transfers Balance as at 31 December 1,713,711 (187) 12,819 411,723 (226,884) 16,792 1,030 (14,834) - 1,914,170 7,220 1,506,772 9 - - - - - - 7,229 74 - 769,067 (564,041) 13,144 1,348 (5,444) (7,209) 1,713,711 - 11 - - - - - - 7,209 7,220 Movement of gross carrying amount of debt securities measured at fair value through other comprehensive income 1,438,250 1,279,721 - - 310,394 (146,939) 11,431 1,136 (14,834) - 1,599,438 - - 639,735 (486,630) 9,504 1,364 (5,444) - 1,438,250 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 2022 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additions Derecognition Net interest income Exchange differences on monetary assets Transfers Balance as at 31 December 2022 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 subsidiary Balance as at 31 December 2021 3,396,101 1,370 53,223 1,699,839 (2,171,808) 38,554 2,054 (20,303) 2,999,030 184 - - - (13,750) 38 973 12,720 165 798 3,397,083 1,526,972 - - - - (121) 77 7,583 8,337 1,370 53,223 1,699,839 (2,185,558) 38,471 3,104 - 3,007,532 - - 290,245 (443,781) 10,929 3,434 (20,303) 1,367,496 - - - - (13,731) 38 973 12,720 - 798 1,527,770 - - - - (121) 77 7,583 8,337 - - 290,245 (457,512) 10,846 4,484 - 1,375,833 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 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 - - - - - - 798 1,204 1,455,823 (1,481,993) 40,310 8,367 (35,023) 3,397,083 - 219,733 (352,824) 11,696 8,452 - 1,526,972 - - - - - - - - 798 1,640,713 - - - - - - - 219,733 (352,824) 11,696 8,452 - 798 1,527,770 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 246                                                             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 Debt securities issued Other financial liabilities Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 106,414 198,609 71,828 858,531 212,656 57,292 109,329 873,479 20,027,726 17,640,809 10,984,411 9,659,605 82,482 815,990 294,463 74,051 288,519 206,878 216 815,990 164,567 406 288,519 102,527 21,525,684 19,140,616 12,235,132 11,033,865 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 in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 86,892 17,386,022 421,770 306,836 4,374,028 12,283,388 19,522 2,641,704 91,662 237,758 646,944 1,665,340 20,134,140 56,427 15,319,112 401,295 303,858 3,653,713 10,960,246 15,401 2,321,697 95,062 125,310 380,815 1,720,510 17,712,637 193,523 10,268,908 151,251 254,948 2,241,793 7,620,916 19,133 715,503 42,049 95,637 282,560 295,257 94,323 8,982,546 109,228 265,900 1,870,118 6,737,300 15,006 677,059 34,801 71,582 229,093 341,583 11,197,067 9,768,934 b) Borrowings from banks and central banks and other customers NLB Group in EUR thousands NLB thousand. The carrying amount of the loan as at 31 December 2022 amounts to EUR 62,755 thousand (EUR 92,850 as at the 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 acquisition date). Loans - banks and central banks - other customers - governments - financial organisations - companies Total 198,609 82,482 21,535 60,731 216 281,091 858,531 74,051 20,607 52,958 486 932,582 57,292 216 - - 216 57,508 873,479 406 - - 406 873,885 As at 31 December 2022, NLB Group and NLB had EUR 96,878 31 December 2021 amounted to EUR 746,021 thousand. The loan thousand in undrawn borrowings (31 December 2021: EUR 94,115 was early repaid in June 2022. thousand). In June 2021, the Bank participated in the ECB TLTRO III.8 operation and had drawn a credit tranche of EUR 93,000 operation and had drawn a credit tranche of EUR 750,000 thousand for three years. In December 2022, N Banka early thousand for three years. The carrying amount of the loan as at repaid a part of the loan in the amount of EUR 30,000 In December 2021, N Banka participated in ECB TLTRO III.10 NLB Group accounts for these loans according to the requirements of IFRS 9 and recognises interest income by applying the expected effective interest rate (note 4.1.). The expected effective interest rate was estimated based on the expectation of achieving a lending performance threshold, and in the case of NLB, also expected early repayment was taken into account. As the lending performance threshold was achieved in both banks, there were no changes in estimates of payments due to the revised assessment of meeting the eligibility criteria. NLB Group does not consider these loans as loans at below-market rate of interest, as these targeted longer- term refinancing operations were available to all banks under the same conditions. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 247                                             c) Debt securities issued NLB Group and NLB Subordinated bonds Total Subordinated bonds Senior Preferred notes Total Senior Preferred notes Total Debt securities issued   Currency Due date Interest rate Carrying amount Nominal value Carrying amount Nominal value 31 Dec 2022 31 Dec 2021 in EUR thousands EUR EUR EUR EUR EUR 06.05.2029 19.11.2029 05.02.2030 28.11.2032 4.20% to 06.05.2024, thereafter 5Y MS + 4.159% p.a. 3.65% to 19.11.2024, thereafter 5Y MS + 3.833% p.a. 3.40% to 05.02.2025, thereafter 5Y MS + 3.658% p.a. 10.75% to 28.11.2027, thereafter 5Y MS + 8.298% p.a. 19.07.2025 6% to 19.07.2024, thereafter 1Y MS + 4.835% p.a. 45,941 119,677 123,106 220,054 508,778 307,212 307,212 45,000 120,000 120,000 225,000 510,000 300,000 300,000 45,903 119,577 123,039 - 288,519 - - 45,000 120,000 120,000 - 285,000 - - 815,990 810,000 288,519 285,000 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report All issued subordinated bonds represent non-convertible Tier 2 b. with the same priority (pari passu) as, and proportionally instruments (note 5.23.). In the event of bankruptcy or liquidation with the obligations arising from other instruments which of the issuer, obligations arising from Tier 2 instruments shall be qualify as Tier 2 instruments or have the same priority of repaid: repayment as the Tier 2 instruments; a. after repayment of all unsubordinated obligations of the c. in priority to the obligations arising from shares or other Issuer, as well as at all subordinated obligations (if any) instruments which qualify as Common Equity Tier 1 capital which are expressed to rank in priority to Tier 2 instruments; instruments or Additional Tier 1 instruments or have the same priority of repayment as these instruments. Movement of debt securities issued NLB Group and NLB Balance as at 1 January Cash flow items: - new issued - repayment of interest Non-Cash flow items: - accrued interest Balance as at 31 December Subordinated bonds Senior Preferred notes in EUR thousands 2022 288,519 207,523 217,873 (10,350) 12,736 12,736 508,778 2021 288,321 (10,350) - (10,350) 10,548 10,548 288,519 2022 - 299,029 299,029 - 8,183 8,183 307,212 2021 - - - - - - - Contents 248                                                         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 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 70,232 72,148 19,608 23,840 33,574 751 224 74,086 294,463 57,934 27,325 17,514 24,324 25,852 1,609 297 52,023 206,878 16,281 54,920 13,455 3,349 15,898 633 205 59,826 164,567 5,940 24,638 12,049 3,256 12,909 1,504 202 42,029 102,527 Other financial liabilities in the amount of EUR 24,788 thousand banka d.d., Ljubljana’ (note 5.16.a). The remaining balance (31 December 2021: EUR 23,495 thousand) relate to a liability includes also liabilities to insurance companies, liabilities for recognised in accordance with the ‘Act for Value Protection of received EIB financial initiatives, received warranties, and Republic of Slovenia’s Capital Investment in Nova Ljubljanska obligations for the purchase of securities. 5.16. Provisions a) Analysis by type of provisions Provisions for guarantees and commitments (note 5.24.a) Stage 1 Stage 2 Stage 3 Employee benefit provisions Restructuring provisions Provisions for legal risks Other provisions Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 37,609 18,826 1,953 16,830 18,026 21,036 43,209 2,772 122,652 33,441 12,912 1,640 18,889 21,447 19,217 45,288 11 119,404 20,299 8,156 378 11,765 11,876 7,288 3,584 2,169 45,216 20,560 3,909 141 16,510 14,206 11,131 3,466 - 49,363 Provisions for guarantees and commitments represent expected recognised in accordance with IAS 19, while all other provisions credit losses in accordance with IFRS 9, employee benefits are are recognised according to IAS 37. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 249                   Legal risks pending for such a long time, the penalty interest already Despite the agreement in the Memorandum of Understanding Provisions for legal risks are formed based on expectations exceeds the principal amount. As NLB is not liable for the old to stay all of the proceedings commenced, the Court of Appeal, regarding the probable outcome of legal disputes. As at 31 foreign currency savings, based on numerous process and the County Court of Zagreb, ruled in six claims (as explained December 2022, NLB Group was involved in 41 (31 December content-related reasons, NLB has all along objected to these below in detail) in favour of the plaintiff. In four of those cases, 2021: 38) legal disputes with material claims against Group claims. Two key reasons NLB is not liable for the old foreign NLB filed a constitutional suit after an extraordinary legal members in the total amount of EUR 462,564 thousand, currency savings are that it was only founded on the basis of measure of NLB with the Supreme Court of the Republic excluding accrued interest (31 December 2021: EUR 404,001 the Constitutional Act on 27 July 1994 (at the time the savings of Croatia was not successful, and in two, NLB filed an thousand). As at 31 December 2022, NLB was involved in 17 were deposited with LB Branch Zagreb, NLB did not yet exist), extraordinary legal measure with the Supreme Court of the (31 December 2021: 16) legal disputes with material monetary and NLB did not assume any such obligations. Moreover, this Republic of Croatia. claims against NLB. The total amount of these claims, excluding is a former Yugoslavia succession matter, as the governments accrued interest, was EUR 219,847 thousand (31 December 2021: of the Republic of Slovenia and the Republic of Croatia agreed Contrary to the decisions of the court described above in EUR 180,077 thousand). in a Memorandum of Understanding signed in 2013 whose another case, a claim filed by the PBZ was refused and the In connection with legal risks, the largest amount of material savings of Ljubljanska banka in Croatia (LB) on the basis of the legal measure with the Supreme Court of the Republic of monetary claims relates to civil claims filed by Privredna Agreement on Succession Issues. The Memorandum also said Croatia, filed by the plaintiff, was dismissed by the Supreme intent was to find a solution to the transferred foreign currency judgment became final in favour of NLB. The extraordinary banka Zagreb (the PBZ) and Zagrebačka banka (the ZaBa) that the Republic of Croatia would ensure the stay of all the Court on 16 June 2015. against NLB, referring to the old savings of LB Branch Zagreb proceedings commenced by the PBZ and the ZaBa in relation savers, which were transferred to these two banks in a to the transferred foreign currency savings until the issue was In the other cases, with respect to which court procedures principal amount of approximately EUR 173.4 million (as per finally resolved. described above are pending, final court decisions have not yet 31 December 2022). Due to the fact the proceedings had been been issued. The table below summarises the amounts according to final court decisions (not including penalty interest): Date of the ruling Plaintiff Principal amount Costs of the proceedings Measures taken by NLB May 2015 PBZ 254.76 EUR 15,781.25 HRK April 2018 PBZ 222,426.39 EUR 253,283.37 HRK 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 final judgement, as NLB found the court decision contrary to the legislation in force and constitutional principles and as well contrary to the Memorandum concluded between the Republic of Slovenia and the Republic of Croatia. Constitutional Court of the Republic of Croatia rejected the constitutional appeal of NLB d.d. on 21 May 2018. Constitutional suit against the court decisions (including the decision of the Supreme Court of the Republic of Croatia in the revision proceeding), as NLB found the court decision contrary to the legislation in force and constitutional principles, and as well contrary to the Memorandum concluded between the Republic of Slovenia and the Republic of Croatia. Constitutional 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. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 250 The NLB Shareholders’ Meeting provided the Management NLB and the Fund, as envisaged by the ZVKNNLB (which was The Swiss Francs Law Board of NLB with instructions how to act in the event of existing concluded on 14 August 2018), NLB has to contest the claims On 2 February 2022, the Slovenian Parliament passed the ‘Law or potential new final decisions by Croatian courts against LB made against it in court proceedings in relation to transferred on limitation and distribution of foreign exchange risk between and NLB regarding the transferred foreign currency deposits, foreign currency deposits, and use against court decisions that creditors and borrowers concerning loan agreements in Swiss especially not to voluntarily settle the adjudicated amounts, and are disadvantageous for NLB, all reasonable legal remedies francs’ (here and after the CHF Law), which stipulated that also gave some additional instructions on the usage of legal and to continue to actively challenge the judicial decisions of all loan agreements denominated in Swiss francs concluded remedies and regarding the management of the property from the courts of the Republic of Croatia in relation to transferred between banks operating in Slovenia (including NLB) as lenders that perspective. foreign currency deposits on the basis of which enforcement and individuals as borrowers in the period from 28 June 2004 to took place, leading, on the basis of ZVKNNLB, to the 31 December 2010, are subjected to a cap on the exchange rate On 19 July 2018, the National Assembly of the Republic of compensation of the sums recovered from NLB by enforcement. between Swiss francs and the Euro to be set at 10% volatility Slovenia passed the ‘Act for Value Protection of Republic of In the aforementioned case from May 2015, the Succession Fund (the ‘FX cap’) and shall be applied from the conclusion of any Slovenia’s Capital Investment in Nova Ljubljanska banka of the Republic of Slovenia has already compensated the sums of the affected loan agreements and any overpayment on d.d., Ljubljana’ (Zakon za zaščito vrednosti kapitalske recovered from NLB by enforcement. such loans by the relevant borrowers shall be subject to default naložbe Republike Slovenije v Novi Ljubljanski banki d.d., interest to be paid by the lender. Ljubljana, hereinafter: ‘the ZVKNNLB’) which entered into All procedures relating to the receivables of PBZ and ZaBa, as force on 14 August 2018. In accordance with the ZVKNNLB, the well as NLB’s view on this matter, were also discussed with the On 28 February 2022, the banks filed an initiative with the Succession Fund of the Republic of Slovenia (Sklad Republike ECB as the supervisor of both Croatian banks. Constitutional Court of the Republic of Slovenia to initiate Slovenije za nasledstvo, javni sklad, hereinafter: ‘the Fund’), proceedings to assess the constitutionality of the CHF Law shall compensate NLB for the sums recovered from NLB by Provisions for legal risks for claims filed by PBZ and ZaBa and a proposal for its temporary suspension of enforcement. enforcement of final judgements delivered by Croatian courts are not formed, since NLB believes that based on the factual The Constitutional Court of the Republic of Slovenia adopted with regard to the transferred foreign currency deposits, that and legal evaluation there are greater prospects for the court a decision on 10 March 2022 to suspend in whole the is the principle amount, accrued interest, expenses of court, proceedings to end in favour of NLB than the opposite. implementation of the CHF Law, and on 17 November 2022 it attorney’s expenses and other expenses of the plaintiff, and adopted a decision to abrogate the CHF Law. The decision expenses related to enforcement with the accrued interest, and Regardless of the negative judgements, in the financial of the Constitutional Court of the Republic of Slovenia on shall not compensate NLB for its own costs or for the difference statements NLB Group did not recognise the negative abrogation of the CHF Law was published in the Official between the book value of its assets sold in enforcement impact due to protection provided by the ZVKNNLB. For final Gazette on 16 December 2022. proceedings and the price obtained for such assets in judgements, NLB Group recognised the liabilities and related enforcement proceedings. There shall be no compensation assets, which are included within other financial assets (note for any voluntarily made payments by NLB. In accordance 5.6.d) and other financial liabilities (note 5.15.d). with the ZVKNNLB and pursuant to the agreement between MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 251 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 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 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 2022 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries 5.12.b) 12,912 1,640 18,889 4,344 2 (1) (1) - 921 - 180 180 Transfer Increases/ (Decreases) Changes in models/risk parameters Foreign exchange differences and other movements in EUR thousands Balance as at 31 Dec 2022 740 (55) (685) 4.13. 1,468 291 (1,462) (11) (444) 4.13. 2,765 76 (88) - 18 2 (3) 26 5.16.a) 18,826 1,953 16,830 4,095 in EUR thousands Balance as at 1 Jan 2021 Effects of translation of foreign operations to presentation currency Transfer Increases/ (Decreases) Changes in models/risk parameters Foreign exchange differences and other movements Disposal of subsidiary Balance as at 31 Dec 2021 15,796 2,767 23,611 5,057 1 - 1 - 1,388 (730) (659) 4.13. (1,337) (358) (4,239) - (755) 4.13. (2,810) (37) 277 - 5.12.d) 5.16.a) (122) (6) (150) 12,912 1,640 18,889 - 4,344 (4) 4 48 42 Balance as at 1 Jan 2022 Transfer Increases/ (Decreases) Changes in models/risk parameters Foreign exchange differences and other movements 3,909 141 16,510 4,041 570 60 (630) 4.13. (229) 192 (4,146) (11) (1,179) 4.13. 3,910 (15) 6 - (4) - 25 25 in EUR thousands Balance as at 31 Dec 2022 5.16.a) 8,156 378 11,765 2,876 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 252                                                                                                                                                                                                                                                                         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 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 NLB Group Balance as at 1 January 2022 3,027,971 97,536 Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Increases/(Decreases) Foreign exchange differences Transfers Balance as at 31 December 2022 541 277,325 543,028 703 (6,275) 3,843,293 24 - (14,927) 16 621 83,270 38,998 4 447 (18,212) 6 5,654 26,897 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired NLB Group Balance as at 1 January 2021 2,824,750 103,950 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 46,270 9 (9,309) 51 2,437 (460) 38,998 Total 3,164,505 569 277,772 509,889 725 - 3,953,460 Total 2,974,970 720 205,713 2,885 - (19,783) 3,164,505 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired 1,913,572 49,102 26,903 - - 477,730 631 5,809 2,397,742 - - (11,491) 6 (399) 15,019 - - (8,465) 16 (5,410) 35,243 NLB 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired 1,896,418 - 4,769 2,570 9,815 - 1,913,572 73,255 - (14,315) 92 (9,930) - 49,102 34,907 - (8,167) 48 115 - 4.13. (2,683) (129) 273 - NLB 3 1 41 47 5.16.a) 3,909 141 16,510 4,041 in EUR thousands Total 1,989,577 - - 457,774 653 - 2,448,004 in EUR thousands Total 2,004,580 - (17,713) 2,710 - - 26,903 1,989,577 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 253                                                                                                                                   c) Movements in employee benefit provisions Post-employment benefits Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b), c) Disposal of subsidiaries (note 5.12.d) 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 Acquisition of subsidiaries (note 5.12.b) Additional provisions (note 4.9.) Provisions released (note 4.9.) Interest expenses (note 4.1.) Utilised during year Balance as at 31 December 2022 19,227 2 1,393 - 1,046 (1,128) 335 (823) (4,031) 16,021 2022 2,220 167 275 (558) 39 (138) 2,005 NLB Group Other employee benefits include NLB Group’s obligations for jubilee long-service benefits. d) Movements in restructuring provisions Balance as at 1 January Effects of translation of foreign operations to presentation currency Additional provisions (note 4.13.) Provisions released (note 4.13.) Utilised during year Balance as at 31 December NLB Group 2022 19,217 10 10,335 (10) (8,516) 21,036 Additional restructuring provisions recognised during the year 2022 relate mainly to N Banka and NLB Komercijalna banka and are based on reorganisation plans in both banks. 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 2021 15,565 11 14,797 - (11,156) 19,217 2022 12,781 - - - 635 (673) 130 (153) (2,048) 10,672 2022 1,425 - 90 (259) 14 (66) 1,204 2022 11,131 - - - (3,843) 7,288 2021 12,695 - - - 723 (750) 43 (45) 115 12,781 in EUR thousands NLB 2021 1,525 - 100 (132) 5 (73) 1,425 in EUR thousands NLB 2021 15,354 - - - (4,223) 11,131 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 254                                     e) Movements in provisions for legal risks NLB Group in EUR thousands NLB Balance as at 1 January Effects of translation of foreign operations to presentation currency Acquisition of subsidiaries (note 5.12.b) Additional provisions (note 4.13.) Provisions released (note 4.13.) Utilised during year Balance as at 31 December f) Movements in other provisions Balance as at 1 January Acquisition of subsidiaries (note 5.12.b) Additional provisions (note 4.13.) Provisions released (note 4.13.) Utilised during year Other Balance as at 31 December 2022 45,288 54 1,790 7,595 (5,950) (5,568) 43,209 2022 11 17,452 2,372 (8,410) (106) (8,547) 2,772 2021 46,602 40 - 16,632 (8,759) (9,227) 45,288 2021 11 - - - - - 11 NLB Group 2022 3,466 - - 125 - (7) 3,584 2022 - - 2,200 - (31) - 2,169 2021 5,673 - - 1,881 (1,809) (2,279) 3,466 in EUR thousands NLB 2021 - - - - - - - At acquisition of N Banka on 1 March 2022, other provisions were used to decrease the amount of related receivables, increased for EUR 17,452 thousand, which represents the mainly for unsettled derivative transactions. Additionally, the assessed fair value of contingent liabilities of N Banka as at the amount of other provisions significantly decreased in December acquisition date. During March 2022, some unfavourable events, 2022 (for EUR 8,400 thousand), when possible obligation which were taken into account already at assessing initial fair ceased to exist. values realised, therefore EUR 8,547 thousand of provisions MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 255                         5.17. Deferred income tax a) Analysis by type of deferred income taxes Deferred income tax assets Valuation of financial instruments and capital investments 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 Total deferred income tax assets 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 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 in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 48,415 9,480 9,899 4,737 2,046 - - - 141 74,718 8,375 1,641 5,501 5,366 877 21,760 55,527 (2,569) 2022 1,523 6,416 2,934 (1,718) 962 (253) (3,876) (945) (2,540) 543 11,013 11,454 (441) - - 33,002 5,879 10,128 3,505 320 3,876 253 945 62 38,028 2,050 1,819 109 - - - - - 31,696 917 2,660 112 - 3,876 - - - 57,970 42,006 39,261 12,026 1,374 3,960 3,338 1,340 22,038 38,977 (3,045) NLB Group 2021 3,423 (1,024) 2,260 1,453 (338) 253 3,876 (234) (3,413) 590 4,950 4,772 178 368 368 5,283 163 1,672 - - 7,118 34,888 - 2022 1,524 4,819 1,133 (555) 3 - (3,876) - - - 1,462 1,748 (286) - - 6,620 169 570 - - 7,359 31,902 - in EUR thousands NLB 2021 112 (3,241) (30) (489) (4) - 3,876 - - - 2,576 2,565 11 - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 256                             Temporary differences on which NLB did not recognise five years are presented in the table below, together with non- deferred tax assets, as related deferred tax assets would exceed recognised deferred tax assets. the amount of deferred tax assets expected to be reversed in NLB Tax loss Tax reliefs Impairments and valuation of capital investments and financial instruments 31 Dec 2022 in EUR thousands 31 Dec 2021 Temporary difference Non-recognised deferred tax assets Temporary difference Non-recognised deferred tax assets 950,469 - 116,913 180,589 - 22,213 974,902 4,329 73,359 185,231 823 13,938 Tax loss on which NLB did not recognise deferred tax assets, NLB Group did not recognise deferred tax assets on temporary as at 31 December 2022 amounts to EUR 950,469 thousand (31 differences arising from the impairments of investments in December 2021: 974,902 thousand). Slovenian tax law does not subsidiaries and associates where it is not probable that the set deadlines by which uncovered tax losses must be utilised, temporary difference will reverse in the foreseeable future. but the use of tax loss is limited to 50% of the actual tax base. These temporary differences amount to EUR 282,092 thousand Other banking members have no unrecognised deferred tax as at 31 December 2022 (31 December 2021: EUR 315,531 assets for tax losses. thousand). b) Movements in deferred income taxes Deferred income tax assets NLB Group Balance as at 1 January 2021 Effects of translation of foreign operations to presentation currency (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Disposal of subsidiaries Balance as at 31 December 2021 Effects of translation of foreign operations to presentation currency (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Acquisition of subsidiaries (note 5.12.b) Balance as at 31 December 2022 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 in EUR thousands Other Total 8,489 8 1,453 178 - 10,128 6 (1,718) (441) 1,924 9,899 37,729 - (3,368) (1,359) - 33,002 2 4,837 10,270 304 48,415 4,063 1 (480) - (79) 3,505 3 1,229 - - 3,190 4 2,791 - (106) 5,879 7 3,583 - 11 4,737 9,480 - - 3,876 - - 3,876 - (3,876) - - - - - 253 - - 253 - (253) - - - 1,179 - (234) - - 945 - (945) - - - 938 - (618) - - 320 - (516) - 2,242 2,046 111 2 (51) - - 62 - 79 - - 141 55,699 15 3,622 (1,181) (185) 57,970 18 2,420 9,829 4,481 74,718 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 257                         NLB Balance as at 1 January 2021 (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Balance as at 31 December 2021 (Charged)/credited to profit and loss (Charged)/credited to other comprehensive income Balance as at 31 December 2022 Deferred income tax liabilities Provisions for liabilities and charges 3,138 (489) 11 2,660 (555) (286) 1,819 NLB Group Impairment of financial assets 3,271 1 531 157 - 3,960 - 649 892 5,501 Balance as at 1 January 2021 Effects of translation of foreign operations to presentation currency Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Disposal of subsidiaries Balance as at 31 December 2021 Effects of translation of foreign operations to presentation currency Charged/(credited) to profit and loss Charged/(credited)to other comprehensive income Balance as at 31 December 2022 NLB Balance as at 1 January 2021 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2021 Charged/(credited) to profit and loss Charged/(credited) to other comprehensive income Balance as at 31 December 2022 Valuation of financial instruments and capital investments 37,650 (3,367) (2,587) 31,696 4,688 1,644 38,028 Valuation of financial instruments and capital investments 21,023 3 (2,344) (6,656) - 12,026 4 (1,579) (2,076) 8,375 Depreciation and valuation of non-financial assets Impairment of financial assets Unpaid dividends 140 (28) - 112 (3) - 109 Depreciation and valuation of non-financial assets 1,515 1 (142) - - 1,374 - 267 - 1,641 947 (30) - 917 1,133 - 2,050 Other 1,984 1 (641) - (4) 1,340 1 (464) - 877 - 3,876 - 3,876 (3,876) - - Fair value adjustments of financial assets measured at amortised cost 592 1 2,795 - (50) 3,338 4 2,024 - 5,366 Impairment of financial assets Valuation of financial instruments and capital investments Depreciation and valuation of non-financial assets 597 - (27) 570 - 1,102 1,672 11,871 (126) (5,125) 6,620 (131) (1,206) 5,283 193 (24) - 169 (6) - 163 in EUR thousands Total 41,875 (38) (2,576) 39,261 1,387 1,358 42,006 in EUR thousands Total 28,385 7 199 (6,499) (54) 22,038 9 897 (1,184) 21,760 in EUR thousands Total 12,661 (150) (5,152) 7,359 (137) (104) 7,118 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 258                               5.18. Income tax relating to components of other comprehensive income 2022 NLB Group NLB   in EUR thousands Actuarial gains and losses Financial assets measured at fair value through other comprehensive income Share of associates and joint ventures Total 2021   Before tax Tax expense Net of tax Before tax Tax expense Net of tax 4,031 (165,438) 121 (161,286) (441) 11,454 - 11,013 3,590 2,048 (153,984) (93,955) 121 - (150,273) (91,907) (286) 1,748 - 1,462 1,762 (92,207) - (90,445) 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 (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) 5.19. Other liabilities Accrued salaries Unused annual leave Deferred income Taxes payable Payments received in advance Total NLB Group   in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 21,948 6,886 11,177 5,724 3,346 49,081 18,615 6,032 11,374 9,450 3,997 49,468 14,014 2,569 4,749 4,023 32 25,387 9,050 2,425 5,257 3,999 308 21,039 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 259                               5.21. Other equity instruments issued On 23 September 2022, NLB issued subordinated notes intended to qualify as Additional Tier 1 Instruments in the aggregate nominal amount of EUR 82 million. The notes have no scheduled maturity date. The issuer has the option for early redemption of the notes in the period between 23 September 2027 and 23 March 2028, and on each distribution payment date after 23 March 2028. Until 23 March 2028, the interest on the principal of the notes will accrue at the interest rate of 9.721% per annum, and for each subsequent 5-year period, will accrue at the applicable interest rate, which shall be reset prior to the commencement of each such period (5Y MS + 7.20% per annum). The coupon payments are discretionary and non-cumulative. The notes terms provide for a temporary write-down in the event that the Common Equity Tier 1 ratio of NLB Group and/or NLB drop(s) below 5.125%. The issue price was equal to 100% of the nominal amount of the notes. The ISIN code of the notes is SI0022104275. The carrying amount as of 31 December 2022 is EUR 84,184 thousand. 5.20. Share capital The share capital of NLB amounts to EUR 200,000 thousand and did not change in 2022. 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 2022, 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 2022 was EUR 114.1 (31 December 2021: EUR 103.9), and on a solo level was EUR 75.9 (31 December 2021: EUR 77.6). 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 2022 amounts to EUR 515,463 thousand (31 December 2021: EUR 458,266 thousand) and consists of NLB net profit for 2022 in the amount of EUR 159,602 thousand (2021: EUR 208,421 thousand), and retained earnings from previous years in the amount of EUR 358,267 thousand reduced for the interests and direct issue costs of subordinated bonds issued in the year 2022, which are considered instruments of additional basic capital in the amount of EUR 2,405 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 the Management and the Supervisory Board, considering restrictions imposed by the regulators, the Group’s risk appetite, the target capital adequacy at the Group’s level and actual prevailing capital position at the time of the proposal. The shares give to their holders the right to vote at the NLB’s meeting of shareholders where, as a rule, each share entitles its holder to one vote. Nevertheless, a shareholder who acquires shares which, together with the shares already held by such shareholder or by a third person on behalf of such shareholder, represent more than 25% of the NLB’s share capital, may only exercise its voting rights under such shares if NLB’s Supervisory Board approves such an acquisition. The Supervisory Board’s approval may only be rejected if, following such an acquisition, such a person would hold shares representing more than 25% of NLB’s issued share capital plus one share. The approval shall be considered given if not expressly rejected in 20 days. No such approval is necessary in respect of the shares acquired by a person on behalf of third persons provided that such a person is not entitled to exercise the voting rights arising out of such shares at its own discretion and undertakes to NLB that it will not exercise the voting rights based on voting instructions unless such voting instructions are accompanied with a confirmation that the person giving such instructions is the beneficial owner of the shares in respect of which votes are to be exercised and does not hold in the aggregate, directly or indirectly 25% or more NLB shares with voting rights. The shares also give their holders the right to be informed, as well as the pre-emptive right to subscribe for new shares on a pro rata basis in the case of a share capital increase, the right to a pro-rata share of remaining assets in case of bankruptcy or liquidation or NLB and the right to receive a dividend. In 2022, NLB paid dividends for previous year in the amount of EUR 5.0 per share (2021: EUR 4.61 per share), which decreased retained earnings for EUR 100,000 thousand (2021: EUR 92,200 thousand). As at 31 December 2022 and 31 December 2021, NLB holds no own shares. In June 2019, the General Assembly of NLB authorised the Management Board that in the period of 36 months from the adoption of the shareholders’ resolution, it can buy own shares of the Bank for the payment of variable remuneration to certain employees as required by the Banking Act and other relevant regulations. NLB did not buy any own shares based on this authorisation. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 260 5.22. Accumulated other comprehensive income and reserves a) Reserves The share premium account as at 31 December 2022 and 31 As at 31 December 2022 and 31 December 2021, profit reserves December 2021 comprises paid-up premiums in the amount of in the amount of EUR 13,522 thousand relate entirely to legal EUR 822,173 thousand and the revaluation of share capital from reserves in accordance with the Companies Act. 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 In 2022, NLB recorded a net profit in the amount of EUR 159,602 thousand (2021: net profit EUR 208,421 thousand) which is included in the retained earnings as at 31 December 2022. NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 (143,954) 1,045 (1,948) (16,485) 754 8,540 2,826 (5,488) (17,184) 754 (78,283) (1,460) (1,934) - - 12,365 99 (3,696) - - Total (160,588) (10,552) (81,677) 8,768 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 261             5.23. 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 COMMON EQUITY TIER 1 CAPITAL (CET1) Capital instruments eligible as AT1 Capital Minority interest Additional Tier 1 capital TIER 1 CAPITAL Capital instruments and subordinated loans eligible as Tier 2 capital Minority interest TIER 2 CAPITAL TOTAL CAPITAL RWA for credit risk RWA for market risks RWA for credit valuation adjustment risk RWA for operational risk TOTAL RISK EXPOSURE AMOUNT (RWA) Common Equity Tier 1 Ratio Tier 1 Ratio Total Capital Ratio NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 200,000 871,378 908,965 334,297 (98,470) 13,522 26,806 (2,981) (3,529) (41,351) (418) 2,208,219 82,000 5,481 87,481 2,295,700 507,516 3,159 510,675 2,806,375 11,797,851 1,359,476 85,600 1,410,132 200,000 200,000 871,378 767,152 135,968 (10,091) 13,522 27,905 (3,498) (3,529) (39,116) (90) 1,959,601 - 5,950 5,950 1,965,551 284,595 2,344 286,939 2,252,490 10,205,172 1,206,363 11,850 1,244,023 871,378 355,861 49,602 (50,527) 13,522 - (1,385) - (23,675) (80) 1,414,696 82,000 - 82,000 1,496,696 507,516 - 507,516 2,004,212 6,356,959 776,963 86,138 612,654 200,000 871,378 249,845 39,613 8,768 13,522 - (1,606) - (18,829) (10) 1,362,681 - - - 1,362,681 284,595 - 284,595 1,647,276 5,411,433 698,463 11,850 586,781 14,653,059 12,667,408 7,832,714 6,708,527 15.1% 15.7% 19.2% 15.5% 15.5% 17.8% 18.1% 19.1% 25.6% 20.3% 20.3% 24.6% European banking capital legislation – CRD IV, is based on the requirement it represents the minimum total SREP capital Basel III guidelines. The legislation defines three capital ratios requirement – TSCR), reflecting a different quality of capital: • The applicable combined buffer requirement (CBR): a system • Common Equity Tier 1 ratio (ratio between common or CET1 of capital buffers to be added on top of TSCR – breaching of capital and risk-weighted exposure amount or RWA), which the CBR is not a breach of capital requirement, but triggers must be at least 4.5%, limitations in the payment of dividends and other distributions • Tier 1 capital ratio (Tier 1 capital to RWA), which must be at from capital. Some of the buffers are prescribed by law for least 6%, and all banks and some of them are bank-specific, set by the • Total capital ratio (total capital to RWA), which must be at supervisory institution (CBR and TSCR together form the least 8%. overall capital requirement – OCR), • Pillar 2 Capital Guidance: capital recommendation set by In addition to the aforementioned ratios which form the the supervisory institution through the SREP process. It is Pillar 1 requirement, NLB must meet other requirements bank-specific and is a recommendation, and not obligatory. and recommendations that are imposed by the supervisory institutions or by the legislation: Any non-compliance does not affect dividends or other distributions from capital; however, it might lead to intensified • The Pillar 2 Requirement (SREP requirement): bank-specific, supervision and the imposition of measures to re-establish obligatory requirement set by the supervisory institution a prudent level of capital (including preparation of capital through the SREP process (together with the Pillar 1 restoration plan). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 262             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 2022 4.5% 1.5% 2.0% 1.46% 1.95% 2.60% 5.96% 7.95% Total Capital 10.60% CET1 CET1 CET1 CET1 Tier 1 Total Capital CET1 CET1 Tier 1 Total Capital 2.5% 1.0% 0.0% 9.46% 11.45% 14.10% 1.0% 10.46% 12.45% 15.10% 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% 12.56% 15.25% 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% 12.56% 15.25% In 2022, the Overall Capital Requirement (OCR) for the Group and systemic risks is raising the countercyclical buffer for was 14.10%, consisting of: exposures to the Republic of Slovenia from 0% to the level of • 10.60% TSCR (8.00% Pillar 1 Requirement and 2.60% Pillar 2 0.5% of the total risk exposure amount, valid from December Requirement); and 2023 onwards. • 3.50% CBR (2.50% Capital Conservation Buffer, 1.00% O-SII Buffer 22 and 0.00% Countercyclical Buffer). The Bank and Group’s capital covers all the current and announced regulatory capital requirements, including capital P2G amounts to 1.0% of CET1. The Pillar 2 Requirement for 2023 buffers and other currently known requirements, as well as the decreased by 0.2 p.p. to 2.40%, as a result of better overall SREP P2G. assessment. As at 31 December 2022, NLB Group capital ratios on a On 29 April 2022, the Bank of Slovenia issued a new Regulation consolidated basis stand at: on determining the requirement to maintain a systemic risk buffer for banks and savings banks, which is with 1 January • 15.1% CET1 ratio, • 15.7% Tier 1 ratio, 2023 introducing the systemic risk buffer rates for the sectoral • 19.2% Total Capital ratio. exposures: • 1.00% for all retail exposures to natural persons secured by In the scope of regulatory risks, which include credit residential real estate, • 0.50% for all other exposures to natural persons. risk, operational risk, and market risk, NLB Group uses a standardised approach for credit and market risks, while the calculation of capital requirement for operational risks is made Additionally, in December 2022 the Bank of Slovenia announced according to a basic indicator approach. The same approaches that due to growing uncertainties in the economic environment 22 As of 1 January 2023, the O-SII Buffer will amount to 1.25%. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 263               are used for calculating the capital requirements for NLB on of EUR 845.6 million was mainly the consequence of ramping CRR, which represents the basis for the calculation. The main a standalone basis, except for the calculation of the capital up lending activity in all NLB Group banks, the most in NLB reasons for the increase were a generally higher income base requirement for operational risks where the standardised and NLB Komercijalna banka. RWA growth was partially in most Group members, and the acquisition of N Banka in approach is used. mitigated by CRR-eligible real estate collaterals from Bosnia March 2022. and Herzegovina, Serbia, and North Macedonia. Higher As at 31 December 2022, the Total capital ratio for the Group RWA for high-risk exposures was the result of higher project The most important goal of internal capital adequacy stood at 19.2% (or a 1.4 p.p. increase compared to 31 December finance exposure. Furthermore, RWA decrease was observed assessment process (ICAAP) in NLB Group, set up in accordance 2021), and the CET1 ratio stood at 15.1% (a 0.4 p.p. decrease for liquidity assets mainly due to maturity of some non-EU with ECB Guidelines, is ensuring adequate capital and compared to 31 December 2021). The higher total capital sovereign bonds (mainly Serbia, Kosovo and Russia). The sustainability on an ongoing basis. The purpose of this process adequacy derives from higher capital (EUR 553,9 million lower exposure to institutions also resulted in RWA reduction, is to have in place sound, effective, and comprehensive compared to 31 December 2021), which compensated the the most in NLB Komercijalna banka, banks from Bosnia strategies and processes to assess and maintain capital on increase of the RWA (EUR 1,985.7 million compared to 31 and Herzegovina, NLB and NLB Banka Skopje. At the same an ongoing basis, as well the adequate distribution of internal December 2021). The Group increased the capital with the time, lower exposure to covered bonds in NLB also reduced capital for covering the nature and level of the risks to which inclusion of negative goodwill from the acquisition of N Banka RWA. The repayments, as well as the upgrade of some clients, NLB Group is or might be exposed. In addition, NLB Group in retained earnings (EUR 172.8 million), a partial inclusion of additional impairments and provisions recognised, and the gives strong emphasis on its integration into the overall risk 2022 profit (EUR 161.5 million), additional Tier 1 notes issued in package sale of NPLs from Serbia contributed to a lower RWA management system in order to assure proactive support for September (EUR 82 million) and additional Tier 2 notes issued for the exposures in default. informed decision-making. in November (EUR 222.9 million). In accordance with the CRR ‘Quick fix’ from June 2020, the temporary treatment of FVOCI The increase in RWAs for market risks and CVA (Credit Value From an economic perspective, NLB Group manages its for sovereign securities was implemented by the Group in Adjustments) in the amount of EUR 226.9 million compared to capital adequacy by ensuring that all its risks are adequately September 2022, which increased the capital by EUR 61.6 million 31 December 2021 is the result of higher RWA for FX risk in the covered by internal capital. A normative perspective is a (i.e., accumulated other comprehensive income amounted amount of EUR 139.4 million (mainly the result of more opened multiyear forward-looking assessment of NLB Group which EUR -98.5 million instead of EUR -160.1 million). This temporary positions in domestic currencies of non-euro subsidiary banks), shows its ability to fulfil all of its capital-related regulatory measure ceased to apply as of 1 January 2023. higher RWA for CVA risk in the amount of EUR 73.8 million (a and supervisory requirements and risk appetite of NLB consequence of an adjustment of calculating exposure in the Group. Within these capital constraints, NLB Group defines its The capital calculation does not include a part of the 2022 result CVA calculation due to the change of a methodology from a management buffers in the Risk appetite above the regulatory in the amount of EUR 110 million which is envisaged to be paid mark to market method to the OEM (original exposure method), and supervisory requirement and internal capital needs that as the dividend distribution in 2023. Therefore, there will be no and due to the conclusion of longer term and the higher size allow it to sustainably follow its business strategy. A normative effect on the capital once the dividends in this amount are paid. of derivatives by NLB) and the higher RWA for TDI risk in the perspective includes several stress scenarios which are amount of EUR 13.7 million (a consequence of new derivatives integrated into NLB Group’s annual business plan review and In 2022, the RWA of NLB Group for credit risk increased by businesses). budgeting process. EUR 1,592.7 million, where EUR 747.1 million of the increase relates to the acquisition of N Banka (at the acquisition date The increase in the RWA for operational risks (EUR 166.1 million the contribution of N Banka to NLB Group was EUR 858.9 compared to 31 December 2021) derives from the higher three- million). The remaining part of RWA increase in the amount year average of relevant income, as defined in Article 316 of MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 264 5.24. Off-balance sheet liabilities a) Contractual amounts of off-balance sheet financial instruments Short-term guarantees - financial - non-financial Long-term guarantees - financial - non-financial Loan commitments Letters of credit Other Provisions (note 5.16.b) Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 407,967 220,786 187,181 1,103,341 427,743 675,598 2,388,468 35,029 18,655 3,953,460 (37,609) 3,915,851 258,975 139,732 119,243 977,759 393,901 583,858 1,878,988 35,615 13,167 3,164,504 (33,441) 3,131,063 176,535 96,473 80,062 613,061 230,318 382,743 1,635,498 13,204 9,706 2,448,004 (20,299) 2,427,705 112,758 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 Fee income from issued non-financial guarantees amounted to accordance with the Capital Requirements Regulation (credit EUR 7,535 thousand (2021: EUR 7,578 thousand) in NLB Group, and other lines which can be irrevocably cancelled by a bank). and to EUR 4,574 thousand (2021: EUR 4,547 thousand) in NLB. As at 31 December 2022, these items at the NLB Group level In addition to the instruments presented in the table above, 372,403 thousand), and at the NLB level EUR 316,977 thousand NLB Group and NLB have also some low-risk off-balance sheet (31 December 2021: EUR 302,063 thousand). items, for which a 0% credit conversion factor is applied in amount to EUR 657,232 thousand (31 December 2021: EUR b) Analysis of derivative financial instruments by notional amounts Swaps - currency swaps - interest rate swaps Options - interest rate options - securities options Forward contracts - currency forward Total NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 Short-term Long-term Short-term Long-term Short-term Long-term Short-term Long-term 257,015 256,820 195 72 72 - 54,660 54,660 311,747 1,111,946 - 1,111,946 60,626 46,963 13,663 11,720 11,720 99,349 99,349 1,284,832 16,844 - 1,267,988 9,880 - 9,880 38,825 38,825 30,945 30,945 - 26,921 26,921 359,978 359,587 391 72 72 - 54,384 54,384 1,111,690 - 1,111,690 60,626 46,963 13,663 11,720 11,720 109,137 109,137 1,284,832 16,844 - 1,267,988 9,880 - 9,880 37,511 37,511 30,945 30,945 - 26,921 26,921 1,184,292 148,054 1,342,698 414,434 1,184,036 156,528 1,342,698 1,496,039 1,490,752 1,598,470 1,499,226 The notional amounts of derivative financial instruments that thousand) (note 5.5.b). Derivatives that qualify for hedge qualify for hedge accounting at NLB Group and NLB amount accounting are used to hedge interest rate risk. to EUR 644,132 thousand (31 December 2021: EUR 572,455 c) Capital commitments Capital commitments for purchase of: - property and equipment - intangible assets Total The fair values of derivative financial instruments are disclosed in notes 5.2. and 5.5. NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 1,651 5,246 6,897 1,696 4,243 5,939 1,496 5,206 6,702 1,623 4,094 5,717 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 265                                       5.25. Funds managed on behalf of third parties Funds managed on behalf of third parties are accounted fund, and no liability falls on NLB Group in connection with separately from NLB Group’s funds. Income and expenses these transactions. NLB Group charges fees for its services. arising with respect to these funds are charged to the respective 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. NLB Group 31 Dec 2022 26,935,868 1,247,360 28,183,228 31 Dec 2021 26,670,696 1,079,548 27,750,244 31 Dec 2022 24,990,075 1,156,361 26,146,436 NLB Group in EUR thousands NLB 31 Dec 2021 24,806,894 977,197 25,784,091 in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 26,886,137 26,866,494 10,004,881 509,000 16,352,613 891 18,752 49,731 22,037 27,694 26,935,868 26,931,466 10,024,193 519,728 16,387,545 444 3,540 418 26,601,809 26,554,920 10,085,409 588,761 15,880,750 180 46,709 69,897 50,114 19,783 26,670,696 26,659,703 10,110,124 591,772 15,957,807 134 10,472 387 24,950,876 24,931,891 9,166,585 - 15,765,306 233 18,752 39,199 22,037 17,162 24,990,075 24,986,135 9,185,897 - 24,741,052 24,694,275 9,346,002 - 15,348,273 68 46,709 65,842 46,059 19,783 24,806,894 24,797,057 9,371,707 - 15,800,238 15,425,350 444 3,078 418 2022 9,395 1,363 10,758 134 9,316 387 in EUR thousands NLB 2021 8,911 1,552 10,463 Fee income for funds managed on behalf of third parties Fiduciary activities (note 4.3.b) Settlement and other services Total NLB Group 2021 11,385 1,567 12,952 2022 11,025 1,372 12,397 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 266                                             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, 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 the capital planning process; • internal capital adequacy assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP); • recovery plan activities; • other internal stress-testing capabilities, early warning 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 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 of the existing types of risks, such as credit, liquidity, market adequate liquidity structure to support the financial resilience of and operational risk. The Group integrates and manages the Group. them within the established risk management framework. The management of ESG risks follows ECB and EBA guidelines Key strategic risk management principles of NLB Group are with the tendency to comprehensively integrate them into all defined by its Risk Appetite and Risk Strategy, designed in relevant processes. Based on environmental and climate risk accordance with the Group’s business model, integrating assessment impact of these risks is estimated as low, except for forward-looking perspective. The Strategy of NLB Group, the transition risk in the area of credit which is assessed as low to Risk Appetite, Risk Strategy, and the key internal policies of medium. The availability of ESG data in the region where NLB NLB Group – which are approved by the Management and Group operates is still lacking. Nevertheless, the Group made a Supervisory Boards – specify the strategic goals, risk appetite large progress in the process of obtaining relevant ESG related guidelines, approaches, and methodologies for monitoring, data from its clients, being prerequisite for adequate decision- measuring, and managing all types of risk in order to meet making and the corresponding proactive management of ESG internal strategic objectives and fulfil all external requirements. risks. The main strategic risk guidelines are comprehensively integrated into decision-making, including the business plan Risk management focuses on managing and mitigating risks review and budgeting process. in line with the Group’s Risk Appetite and Risk Strategy. Within these frameworks, the Group monitors a range of risk metrics, NLB Group plans a prudent risk profile and optimal capital including internal capital allocation in order to assure Group’s usage, representing an important element of its business risk profile is in line with its risk appetite. The usage of risk strategy and related mid-term financial targets. The limits and potential deviations from limits and target values management of credit risk, which is the most important risk are regularly reported to the respective committees and/or category in NLB Group, concentrates on taking moderate the Management Board of the Bank. The banking subsidiaries risks – a diversified credit portfolio, adequate credit portfolio within NLB Group adapted a corresponding approach to quality, the sustainable costs of risk, and ensuring an optimal monitor and manage their target risk profiles. return considering the risks assumed. As regards liquidity risk, the tolerance is low, while the activities are geared towards NLB Group established a comprehensive stress-testing ensuring an adequate liquidity position on an ongoing basis. framework and other early warning systems in different risk The Group limited exposure to credit spread risk, arising areas with the intention to strengthen the existing internal from the valuation risk of debt securities portfolio servicing controls and timely response when necessary. Robust and as liquidity reserves, to moderate level. The fundamental uniform stress-testing programme includes all material types orientation in the management of interest rate risk is to limit of risk and relevant stress scenario analysis, according to unexpected negative effects on revenues and capital, therefore, the vulnerability of the Group’s business model. The Group a moderate tolerance for this risk is stated. When assuming established an internal ESG stress-testing concept to identify operational risk, the Group pursues the orientation that such a most relevant financial vulnerabilities stemming from climate risk must not significantly impact its operations. On this basis, risk, which will be further enhanced by considering disposable changes of control activities, processes, and/or organisation ESG-related data. Stress testing is integrated into the risk are performed. Besides the Group also focuses on proactive appetite, ICAAP, ILAAP, Recovery Plan, and budgeting process mitigation, prevention, and minimisation of potential damage. to support proactive management of the Group’s risk profile, The conclusion of transactions with derivative financial namely the capital and liquidity positions in a forward-looking instruments at NLB is primarily limited to servicing customers perspective. In addition, the Group also performs reverse stress and hedging Bank’s own positions. In the area of currency risk, tests with the aim to test its maximum recovery capacity. Other NLB Group pursues the goals of low to moderate exposure. The partial risk assessments are covered by other risk analysis, tolerance for other risk types is low and focuses on minimising based on relevant risk parameters, and integrated into the their possible impacts on NLB Group’s entire operations. process of setting a risk management limit system. Environmental, social, and governance (ESG) risks do not For the purpose of an efficient risk mitigation process, NLB represent a new risk category, but rather one of risk drivers Group applies a single set of standards to retail and corporate loan collateral, representing a secondary source of repayment MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 267 with the aim of efficient credit risk management and optimal Credit Risk – Retail Department and the Evaluation and Control Supervisory Board (the Risk Committee of the Supervisory capital consumption. The Group has a system for monitoring Department are responsible within NLB, and which reports to Board or Board of Directors). and reporting collateral at fair (market) value in accordance the Assets and Liabilities Committee (ALCO) of the Management with the International Valuation Standards (IVS). The eligibility Board and the Risk Committee of the Supervisory Board. The of collateral, by types and ratios referring to prudent lending risk management competence line is in charge of formulating c) Risk measurement and reporting systems As a systemic banking group, NLB Group is subject to the Single criteria, is set within internal lending guidelines. Credit risk and controlling the risk management policies of NLB Group, Supervisory Mechanism (SSM), which is supervised by the Joint mitigation principles and rules in NLB Group are described in setting limits, establishing methodologies, overseeing the Supervisory Team (JST) of the ECB and the Bank of Slovenia. more relevant details in the section ‘Credit risk management.’ harmonisation of risk management policies within the NLB The Group member complies with the ECB regulation, while When hedging market risks, namely interest rate risk and Group, monitoring NLB Group’s risk exposures, and preparing NLB Group subsidiaries operating outside Slovenia are also foreign exchange risk, in line with the set risk appetite, external and internal reports. NLB Group follows the principle of natural hedge or using compliant with the rules set by the local regulators. A third-party equivalent was approved in Serbia, Bosnia and Herzegovina, derivatives in line with hedge accounting principles. All members of NLB Group that are included in the financial and North Macedonia, resulting in alignment of local regulation statements of NLB Group, report their exposure to risks to the with CRR rules. With regards to capital adequacy, based on the b) Risk management structure and organisation NLB Group’s corporate governance framework is based competent organisational units within the Risk management provisions of the Directive (CRD), Decision (CRR), NLB Group competence line. These organisational units then report all applies a standardised approach to credit and market risk, on the principles of sound and responsible governance, in relevant risk information to the Assets and Liabilities Committee and the basic approach (a simplified approach with less data accordance with the applicable legislation of the Republic (ALCO) of the Management Board, the Management Board and granularity) to operational risks, with the exception of NLB of Slovenia, particularly the provisions of the Companies the Risk Committee of the Supervisory Board, which is where which applies the standardised approach. Act (ZGD-1) and the Banking Act (ZBan-3), the Regulation on the Management Board and the Supervisory Board, adopt Internal Governance Arrangements, the Management Body, appropriate measures. and the Internal Capital Adequacy Assessment Process for Across the Group, risks are assessed, monitored, managed, or mitigated in a uniform manner, as defined in the Group’s Banks and Savings Banks, the EBA Guidelines on internal The credit ratings of clients that are materially important Risk management standards, and consider the specifics of the governance, the EBA Guidelines on the assessment of the to NLB Group and the issuing of credit risk opinions are markets in which individual NLB Group members operate. For suitability of members of the management body, and key centralised via the Credit Committee of NLB. The process the purposes of measuring exposure to credit risk, liquidity function holders, as well as the EBA Guidelines on remuneration follows the co-decision principle, in which the credit committee risk, interest rate, and credit spread risk in the banking book, practices. Several layers of management provide cohesive risk of the respective Group member first approves their decision, operational risk, market risk, ESG, and non-financial risks, management governance in NLB Group. following which the Credit Committee of NLB gives their in addition to the prescribed regulations, NLB Group uses opinion. The resolution of the Credit Committee of NLB is internal methodologies and approaches that enable more NLB Group established three lines of a defence framework with made on the basis of all available documentation, including detailed monitoring and management of risks. These internal the aim of managing risks effectively. The three lines of defence a non-binding rating opinion prepared by the underwriting methodologies are aligned with ECB, EBA, and Basel guidelines, concept provides a clear division of activities and defines roles department of NLB. This same principle and process is also set as well as best practices in banking methodologies. and responsibilities for risk management at different levels for the issuing of credit exposures for the materially important within the Group. Risk management in the Group acts as a clients of NLB Group. second line of defence, accountable for appropriate managing, As for risk reporting, NLB Group’s internal guidelines reflect, in addition to internal requirements, the substance and frequency assessing, monitoring, and reporting of risks in the Bank as the Risk monitoring in NLB Group members is operating within of reporting required by the Bank of Slovenia and the ECB. main entity in Slovenia, and as the competence centre in charge an independent and/or separate organisational unit. This In addition, each member of NLB Group also complies with of six banking members and other non-core subsidiaries which way, monitoring of risks is established based on standardised the requirements of its local regulations. Risk reporting is are in a controlled wind-out. and systemic risk management approaches. This monitoring carried out in the form of standardised reports, pursuant to enables a comprehensive overview of the Group’s and of each risk management policies based on common methodologies Overall, the organisation and delineation of competencies in member’s statement of financial position. In compliance with for measuring exposure to risks, uniform database structure NLB Group’s risk management structure is designed to prevent the risk appetite, risk management strategy, and policies of NLB within Data Warehouse (DWH), comprehensive data quality conflicts of interest and ensure a transparent and documented Group, risk monitoring in each NLB Group member is separated assurance, and automated report preparation, which ensures decision-making process, subject to an appropriate upward from its management and/or business function to maintain the quality of reports and reduces the possibility of errors. and downward flow of information. Risk management in NLB the objectivity required when assessing business decisions Group is managed within the Risk management competence (three lines of defence concept). The organisational unit for line, which is a specialised competence line encompassing managing risks directly reports to the Management Board and d) Data and IT system Risk data are calculated and stored in NLB Group DWH, several professional areas for which the Global Risk its committees (Credit Committee, ALCO and the Operational collected from NLB and other Group member’s DWH. The Department, the Credit Risk – Corporate Department, the Risk Committee) and Management Board, which report to the established process provides an integrated information in MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 268 common reference structure where business users can access impacts on its credit portfolio and made necessary adjustments. Bank of Slovenia, and the EBA guidelines. This area is governed in a consistent and subject-oriented format. Data are regularly The most affected industries or segments are carefully in greater detail by the internal methodologies and procedures checked and validated. Data used for internal risk assessment, monitored with the intention to detect any additional significant set out in internal acts. management, and reporting are the same as data which NLB increase in credit risk at a very early stage. The liquidity position Group uses for regulatory reporting. of the Group remains very robust. Even if a highly unfavourable Through regular reviews of the business practices and the The Group has established a strong and robust data level of high-quality liquidity reserves. management of those entities function in accordance with NLB governance program that aligns with the goals and objectives Group’s risk management standards to enable meaningfully of the Group’s risk management function. NLB Group data The Group is engaged in contributing to sustainable finance uniform procedures at the consolidated level. liquidity scenario would materialise, the Group holds a sufficient credit portfolios of NLB entities, NLB ensures that the credit risk governance and data quality framework consists of identifying by incorporating environmental, social, and governance risks, developing policies and controls on data confidentiality, (ESG) risks into its business strategies, risk management NLB Group manages credit risk at two levels: integrity, accuracy, and availability, and by executing the framework, and internal governance arrangements. With the • At the level of the individual customer/group of customers second line of defence controls by an independent validation adoption of the NLB Group Sustainability programme, NLB appropriate procedures are followed in various phases of unit under the responsibility of Group Data Governance Officer. Group implemented sustainability elements into its business the relationship with a customer prior to, during, and after This framework covers agreed service level standards for both model. Thus, sustainable finance integrates ESG criteria into the conclusion of an agreement. Prior to concluding an in-house and outsourced data-related processes. the Group’s business and investment decisions for the lasting agreement, a customer’s performance, financial position, and benefit of the Group’s clients and society. The NLB Group past cooperation with NLB are assessed. To objectively assess e) Main emphasis of risk management in 2022 Efficient managing of risks and capital remains crucial for Sustainability Committee oversees the integration of the ESG a client’s operation, internal scoring models for particular factors to the NLB Group business model. As a systemically client segments or product types have been developed. It is NLB Group to sustain long-term profitable operations. The important institution, the Group was included into 2022 ECB also important to secure high-quality collateral even though Group further enhanced the robustness of its risk management Climate Stress test exercise. The exercise was conducted in the it does not affect a customer’s credit rating. This is followed system in all respective risk categories in order to manage them first half of 2022 and aggregate results were published in July by various forms of monitoring a customer, in particular an proactively, comprehensively, and prudently. Risk identification 2022. in a very early stage, its efficient managing, and the assessment of its ability to generate sufficient cash flows for the regular settlement of its liabilities and contractual corresponding mitigation processes represent essential steps The management of ESG risks follows ECB and EBA guidelines obligations. In this part of the credit process, regular in such a system. The business and operating environment with a tendency of their comprehensive integration into all monitoring of clients within the Early Warning System (EWS) relevant for NLB Group operations is changing with trends, such relevant processes. It addresses the Group’s overall credit is important. In the case of client default, restructuring or as sustainability, social responsibility, governance, changing approval process and related credit portfolio management. work-out is initiated depending on the severity of the client’s customer behaviours, emerging new technologies and Sustainable ESG financing in accordance with Environmental position. competitors, as well as increasing new regulatory requirements. and Social Management System is integrated into the Group’s • The quality and trends in the credit portfolio, including Respectfully, the risk management framework is regularly Risk Appetite Statement. As part of its strategy, the Group on-balance and off-balance sheet exposures, are actively adapted with the aim of detecting and managing new potential does not finance companies that extract fossil fuels or operate monitored and analysed at the level of the overall portfolio of emerging risks. coal-fired power plants. The availability of ESG data in the NLB Group and single banking entities. The NLB Group gives special focus on the inclusion of risk the Group made a large progress in the process of obtaining Comprehensive analyses are regularly performed to assure analysis into the decision-making process on strategic and relevant ESG-related data from its clients, being prerequisite monitoring of the portfolio quality through time and to identify operating levels, diversification in order to avoid a large for adequate decision-making and corresponding proactive any breach of limits or targets. Great emphasis is placed on the concentration, optimal usage of internal capital, appropriate management of ESG risks. evolution of portfolio structure in terms of client segmentation, region where NLB Group operates is still lacking. Nevertheless, risk-adjusted pricing, regular education/trainings at all levels of management, and the assurance of overall compliance with internal policies/rules and relevant regulations. In 2022, the war in Ukraine did not have a meaningful impact on the quality of the credit portfolio, nor on the liquidity of the Group. The Group’s direct and indirect exposures toward Russia and Ukraine are quite limited. In the light of increasing energy prices, inflationary pressures, and a forecast of a decrease in economic growth, the Group has thoroughly analysed potential 6.1. Credit risk management a) Introduction In its operations, NLB Group is exposed to credit risk, or the risk of losses due to the failure of a debtor to settle its liabilities to NLB Group. For that reason, it proactively and comprehensively monitors and assesses the aforementioned risk. In that process, NLB Group follows the International Financial Reporting Standards, regulations issued by the European Central Bank or 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 is closely monitored. Apart from analysing the portfolio as a whole, vintage analysis is used to monitor the quality of new loans production and test the conservativity of the lending standards, which should ensure the portfolio quality is maintained within the Group Risk Appetite. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 269 Beside default risk, the portfolio management is also focused The management of ESG risks addresses the Group’s retail exposures. In the Corporate segment, the Bank seized on monitoring single name and industry concentration, overall credit approval process and related credit portfolio opportunities to finance some of the top corporate clients in migration risk, and FX lending risk. Increasing emphasis is management. Sustainable financing is implemented through the region while keeping the focus on SME as its key segment. also placed on stress tests that forecast the effects of adverse amended documentary framework: Credit portfolio remains well-diversified, there is no large negative macroeconomic movements on the portfolio, on the • Lending Policy for Non-Financial Companies in NLB d.d. concentration in any specific industry or client segment. The level of impairments and provisions, and on capital adequacy. and NLB Group where in special Chapter Environmental and share of retail portfolio in the whole credit portfolio is quite Capital requirements for credit risk at NLB Group level within Social Framework three categories are defined (prohibited, substantial, with still prevailing segment of mortgage loans. the first pillar are calculated according to the Standardised restricted, normal activities) approach, while within the second pillar an internal IRB • Policy Environmental and Social Transaction Policy In 2022, the Group’s credit portfolio quality remained solid approach is used to estimate the RWA for default, migration, Framework in NLB d.d. and NLB Group applies to certain with a stable rating structure and diversified portfolio. Great and FX lending risk. In addition, a single name concentration transactions with greatest potential for significant E&S impact emphasis was placed on intensive and proactive handling of add-on is based on the Granularity adjustment methodology, (exclusion list, regulatory compliance check, category A list). problematic customers and early warning system for detecting and an industry concentration add-on is estimated based on • Methodology Environmental and Social Transaction increased credit risk at a very early stage. The stock of NPE the HHI concentration indexes. Categorisation Methodology Framework in NLB d.d. and volume decreased, as a result of active workout management. NLB Group provides a guide to the typical level of inherent As at 31 December 2022, the share of non-performing exposure NLB and other NLB Group members assess the level of credit environmental and social risk according to NACE codes. by EBA methodology in NLB Group was 1.3% (1.7% at the end of risk losses on an individual basis for material claims, and at the 2021). Moreover, the coverage ratio remains high at 57.1%, which collective level for the rest of the portfolio. Beside addressing ESG risks in all relevant stages of the credit- is well above the EU average published by the EBA (44.1% in 3Q granting process relevant ESG criteria were considered also 2022). An individual review is performed for material Stage 3 financial in the collateral evaluation process. On the portfolio level, the assets which have been rated as non-performing based Group does not face any large concentration towards specific on the information regarding significant financial problems NACE industrial sectors exposed to climate risk, whereby the encountered by a customer, actual breaches of contractual role of transitional risk is more prevailing. The availability of ESG obligations such as arrears in the settlement of liabilities, data in the region where NLB Group operates is still lacking, whether financial assets will be restructured for economic or nevertheless the Group has made material progress in this legal reasons, and the likelihood that a customer will enter respect in 2022 and has ambitious plans for the following year. bankruptcy or a financial reorganisation. Expected future cash flows (from ordinary operations and possible redemption of collateral) are assessed following an individual review. If their b) Main emphasis in 2022 In the process of constantly complementing and enhancing discounted value differs from the book value of the financial credit risk management, NLB Group focuses on taking asset in question, impairment must be recognised. moderate risks, and at the same time ensuring an optimal return considering the risks assumed. Preserving high credit Collective ECL allowances are made for the remainder of portfolio quality represents the most important key aim, with a the portfolio, which is not assessed on an individual basis. focus on the quality of new placements leading to a diversified Based on IFRS 9 requirements, financial assets measured at portfolio of customers. The Group is actively present on the amortised cost or at fair value through other comprehensive market in the region, financing existing and new creditworthy income are attributed to the appropriate stage based on the clients. To further enhance existing risk management tools, estimated increase of credit risk of a single exposure since the Group is constantly developing a wide range of advanced initial recognition. The stage of financial assets determines approaches supported by mathematical and statistical models whether a 12-month or lifetime ECL must be considered. The in credit risk assessment in line with best banking practises, ECL calculation is based on the forward-looking probability while at the same time enabling faster responsiveness towards of default (PD) and loss given default (LGD), which are clients. calculated using historic data and statistical modelling, as well as predicted macroeconomic parameters for different Lending growth was observed in the Corporate, as well as in scenarios. For off-balance financial assets, the probability of the Retail segment in 2022. In the circumstances of growing the redemption of guarantees is considered when creating EURIBOR, there was certain transfer to fixed interest rates, collective provisions. The models used to estimate future risk especially in the housing loans market, which led to increased parameters are validated and backtested on a regular basis to new production and the general increase in the volume of make loss estimations as realistic as possible. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 270 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 companies Other financial assets Derivatives - hedge accounting Total net financial assets Guarantees Financial guarantees Non-financial guarantees Loan commitments Other potential liabilities Total contingent liabilities NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 5,271,365 5,005,052 3,339,024 3,250,437 21,588 3,116 7,678 4,261 21,692 7,892 7,682 7,888 2,838,796 3,395,261 1,291,277 1,541,042 1,917,615 303,443 222,965 116,078 6,621,670 6,031,795 177,823 59,362 1,717,626 281,010 140,683 141,709 5,519,290 4,645,112 122,229 568 1,597,448 124,736 350,625 286,504 3,036,499 2,606,674 114,399 59,362 1,436,424 143,864 199,287 226,144 2,656,935 2,118,210 92,404 568 23,585,616 20,980,479 12,836,132 11,680,885 1,511,308 648,529 862,779 2,388,468 53,684 3,953,460 1,236,734 533,633 703,101 1,878,988 48,782 3,164,504 789,596 326,791 462,805 1,635,498 22,910 2,448,004 727,101 289,935 437,166 1,259,489 2,987 1,989,577 Total maximum exposure to credit risk 27,539,076 24,144,983 15,284,136 13,670,462 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 2022 Financial Report Contents 271             d) Collateral from financial assets that are credit-impaired 31 Dec 2022 NLB Group NLB in EUR thousands Fully/over collateralised financial assets Financial assets not or not fully covered with collateral 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 Net value of financial assets Fair value of collateral Net value of financial assets Fair value of collateral Financial assets at amortised cost Loans to individuals Loans to other customers Other financial assets Total 32,322 69,180 104 101,606 135,480 426,805 7,301 569,586 19,235 19,227 1,374 39,836 5,607 22,607 46 28,260 16,518 17,154 2 33,674 50,403 93,719 379 144,501 8,876 4,077 22 12,975 3,311 2,130 7 5,448 31 Dec 2021 NLB Group NLB in EUR thousands Fully/over collateralised financial assets Financial assets not or not fully covered with collateral 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 Net value of financial assets Fair value of collateral Net value of financial assets Fair value of collateral Financial assets at amortised cost Loans to individuals Loans to other customers Other financial assets Total 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 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 e) Collateral from loans mandatorily at fair value through profit or loss NLB Loans mandatorily at fair value through profit or loss 31 Dec 2022 31 Dec 2021 in EUR thousands Fully/over collateralised loans Loans not or not fully covered with collateral 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 Net value of loans Fair value of collateral Net value of loans Fair value of collateral 4,345 4,699 3,547 2,000 4,198 4,500 3,690 2,050 f) Credit protection policy NLB Group applies a single set of standards to retail and risk management and consuming capital economically. In accordance with Basel II, collateral may consist of pledged corporate loan collateral, as developed by NLB Group members deposits, government guarantees, bank guarantees, debt in accordance with regulatory requirements. The master securities issued by central governments and central banks, document regulating loan collateral in the NLB Group is the Loan bank debt securities, and real-estate mortgages (the real Collateral Policy in NLB d.d. and NLB Group. The Policy has been estate must be, beside other criteria, located in the European adopted by the Management Board of NLB Group. The Policy represents the basic principles that NLB Group’s employees must Economic Area or in country recognised in EBA’s third party equivalent list for the effect on capital to be recognised). take into account when signing, evaluating, monitoring, and reporting collateral, with the aim of reducing credit risk. Loans made to companies and sole proprietors may be secured by other forms of collateral, as well (e.g., a lien on In line with the policy, the primary source of loan repayment movable property, a pledge of an equity stake, investment is the debtor’s solvency, and the accepted collateral is a coupons, collateral by pledged/assigned receivables, etc.) if it is secondary source of repayment in case the debtor ceases to assessed that the collateral could generate a cash flow if it were repay the contractual obligations. needed as a secondary source of payment. If there is of a lower probability that this type of collateral would generate a cash NLB Group primarily accepts collateral complying with flow, NLB Group takes a conservative approach and accepts the Basel II requirements with the aim of improving credit the collateral while reporting its value as zero. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 272             g) The processes for valuing collateral In compliance with relevant regulations, NLB Group has from appraisers with whom the NLB has a contract for real- using mortgaged real estate is monitored annually by either estate valuations. For corporate loans, appraisals are usually preparing individual assessments or using the internal established a system for monitoring and reporting collateral at submitted by clients. If a client submits an appraisal that is methodology for preparing an own value appraisal of real fair (market) value. not made by an appraiser included on the NLB’s reference estate (which applies to Republic of Slovenia, and partly, for list, the NLB’s expert department which employs certified real the housing segment to Serbia, Montenegro, and Bosnia The market value of real estate used as collateral is obtained estate appraisers in construction with licences granted by the and Herzegovina) based on public records and indexes from valuation reports of licensed appraisers. The market value Slovenian Ministry of Justice, and certified real-estate value of real-estate value published by the relevant government of movable property is obtained from valuation reports of appraisers with licences granted by the Slovenian Institute of authorities (the Surveying and Mapping Authority in the licensed appraisers or from sales agreements. Both, valuation Auditors, will verify the appraisal. The expert department is also Republic of Slovenia). The value of pledged movable property is reports and sales agreements must not be older than one year. responsible for reviewing valuations of real estate serving as monitored once a year (in NLB automated, with a straight-line In NLB and members of NLB Group, most reports of external collateral for large loans. depreciation over the period of the remaining useful life). real estate appraisers are controlled. Controls are performed by internal appraisers. The subject of control is the content, Other NLB Group members obtain valuations from in-house value, scope, and format of the report, its compliance with appraisers and outsourced appraisers, all possessing the h) The main types of collateral taken by the NLB Group NLB Group accepts different forms of material and personal international valuation standards, and the estimated value. If necessary licences. NLB Group has compiled a reference list security as loan collateral. they notice deviations, they estimate needed correction of the of appraisers for valuations of real estate located outside the value of the external valuation (in %) and correct the value Republic of Slovenia. Appraisals must be made in accordance Material loan collateral gives the right in the case of a debtor of the external valuation. The value adjustment can only be with the international valuation standards, and for larger (borrower) defaulting on their contractual obligations to sell negative and can be applied only in a limited range. For the exposures, real-estate evaluations must also be reviewed by a specific property to recover claims, keep specific non-cash purposes of business decisions and the calculation of the an internal licensed appraiser with knowledge of the local property or cash, or reduce or offset the amount of exposure necessary impairments and provisions, additional deductions real-estate market. If the appraisal does not correspond to the against the counterparty’s debt to the Bank. (haircuts) are applied to the eventual adjusted market value, international valuation standards or if the value adjustment depending on the type of collateral. These haircuts for purpose is greater than certain limit, the appraisal is rejected as NLB Group accepts the following material types of loan of liquidation value are for real estate in the range of 30 to inadequate. collateral: 70%, depending on the type of real estate and location, and for • Collateral in the form of business and residential real estate: movables they range between 50 and 100%, depending on the When assuring collateral, NLB Group follows the internal land, buildings, and individual parts of buildings in a storeyed type of movable. regulations which define the minimum security or pledge ratios. property intended for living in or performing a business NLB Group strives to obtain collateral with a higher value activity, such as land in the area foreseen for construction, The market value of financial instruments held by NLB Group than the underlying exposure (depending on the borrower’s apartments, residential buildings, garages and holiday is obtained from the organised market – such as the stock rating, loan maturity, etc.) with the aim of reducing negative homes, business premises, industrial buildings, offices, shops, exchange, for listed financial instruments or determined in consequences resulting from any major swings in market prices hotels, branches and warehouses, forests, parking spaces, accordance with the internal methodology for unlisted financial of the assets used as collateral. If real estate, movable property, etc. The objects can be completed or under construction. instruments (such collateral is used exceptionally and on a small and financial instruments serve as collateral, NLB Group’s lien Priority is given to property where the pledge right of the scale in loans granted to companies and sole proprietors). on such assets should be top ranking. Exceptionally, where the Bank is entered in the first place and real estate is already NLB has compiled a reference list of licensed real estate have a different priority order. there must be a market, and it must be redeemable within a appraisers for real estate. All appraisals must be made for reasonable time; the purpose of secured lending and in accordance with NLB Group monitors the value of collateral during the loan • Collateral in the form of movable property: priority is given the international valuation standards (IVS, EVS, and RICS). repayment period in accordance with the mandatory periods to the types of movable property, that are highly likely to be Appraisals related to retail loans are generally ordered only and internal instructions. For example, the value of collateral sold in the event of execution, and the funds received are value of the mortgaged real estate is large enough, the lien can owned by the debtor and/or the pledger. For real estate, MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 273 used to repay the collateralised claims (their market value • Guarantees by national and regional development agencies NLB Group has the largest concentration of collaterals arising must be estimated with considerable reliability). Among the with which the Bank has a contract on the acceptance of from mortgages on real estate, which is a relatively reliable appropriate types of movable property, the Bank includes guarantees (e.g. Slovene Enterprise Fund); and quality type of collateral. Due to the possible decrease of motor vehicles, agricultural machinery, construction • Other types of personal loan collateral. real estate market prices, the Group closely monitors the real- machinery, production lines, and series-produced machines, estate collateral values and, where required, establishes higher and some custom-made production machines; Loans are very often secured by a combination of collateral amounts of impairments and provisions for non-performing • Collateral by a pledge of financial assets (bank deposits or types. The general recommendations on loan collateral are loans secured by real estate, based on estimated discounts cash-like instruments, debt securities of different issuers, specified in the internal instructions and include the elements of the real-estate value, which are expected to be achieved in investment fund units, equity securities, or convertible bonds): specified below. The decision on the type of collateral and a sale (expected payment from collateral). Priority is given to • Cash receivable collateral: bank deposits and savings with the coverage of loan by collateral depends on the client’s property where the pledge right of the Group is entered in the Bank are appropriate in domestic and foreign currency; creditworthiness (credit rating), loan maturity, and varies first place and the real estate is already owned by the debtor • Debt and equity securities: bonds and shares which, depending on whether the loan is granted to retail or a and/or the pledger. For real estate, there must be a market, and according to the Bank’s assessment, are suitable for corporate client. it must be redeemable within a reasonable time. securing investments and are traded on a regulated market (marketable securities of higher-quality Slovenian and NLB has also created, in the area of real-estate loan collateral, Collateral consisting of securities entails market risk, specifically foreign issuers); an ‘online’ connection with the Surveying and Mapping the risk of changes in the prices of securities on capital markets. • The pledge of investment coupons of mutual funds Authority in the Republic of Slovenia, which allows direct and To limit such risks and restrict the possibility of the value of managed by management companies (a priority company immediate verification of the existence of property. instruments received as collateral falling below approved NLB Skladi) and are, according to the Bank’s assessment, limits, the Rules determine minimum pledge ratios for securing suitable for insurance of investments. NLB Group strives to ensure the best possible collateral for loans based on pledged securities and equity shares in NLB. • A pledge of an equity stake: non-marketable capital shares long-term loans, in particular mortgages where possible. As a Deviations from the Rules are subject to the prior approval of with a credit rating of at least B are adequate; result, the mortgaging of real estate is the most frequent form the respective decision bodies of the Bank. The ratio between • A pledge or assignment of receivables as collateral: cash of loan collateral of corporate and retail clients. In corporate the loan amount and the securities’ value is determined receivables must have longer maturities than the maturity of exposures, the next most frequent forms of collateral are regarding the rating of the issuer, the securities’ liquidity, the investment and they must not be due and not be paid; government and corporate guarantees, while in retail loans, it is maturity and correlation with changes in market indexes, i.e., by • Other material forms of loan collateral (e.g., life insurance guarantors. policies pledged to NLB): The Bank accepts products of considering the key features reflecting the level of volatility of market prices, and the ability to sell the securities at the market Vita, life insurance company d.d. Ljubljana – a pledge of an investment life insurance policy and a life insurance policy i) Risks, deriving from valuation of received collateral Client/counterparty credit risk is the key decision parameter price. with a guaranteed return that includes saving, in addition to when approving exposures. Collateral is a secondary source of Collateral consisting of the sureties of corporate clients, sureties insurance. repayment, and therefore decisions on approvals of exposures of private individuals, and bank guarantees entail the credit risk should not primarily be based on the provided collateral. of the provider of the collateral. NLB Group includes the amount Personal loan collateral is a method for reducing credit risk However, collateral is an important comfort element in the of the guarantees received in the exposure of the guarantor, whereby a third party undertakes to pay the debt in case of the approval process and, depending on the credit rating of the and guarantees are only taken into account as collateral if the primary debtor (borrower) defaulting. client, a prerequisite. NLB Group has prescribed the minimum guarantor has sufficient overall creditworthiness. NLB Group accepts the following types of personal loan ratios between the value of collateral and the loan amount, collateral: depending on the type of collateral, loan maturity and the client The Business Rules – Collateral for Retail and Corporate Loans • Joint and several guarantees by retail and corporate rating. The ratios are based on experience and regulatory regulate which forms of collateral are acceptable, and which clients: for the collateralisation of private individuals’ loans, guidelines. preconditions a type of collateral needs to fulfil to be able to be employees, or pensioners are adequate guarantors. They considered. must not be in the process of personal bankruptcy. They are NLB Group pays particular attention to closely monitoring responsible for fulfilling the debtor’s obligations for loans the fair value of collateral, and to receiving regular and with a repayment period not exceeding 60 months. For the independent revaluations by applying the International collateralisation of legal entities investments, legal entities, Valuation Standards. Through a detailed examination of all individuals, or private individuals are adequate guarantors. collateral received, NLB has ensured that only collateral from • Bank guarantees; which payment can be realistically expected if it is liquidated, is • Government guarantees (e.g., of the Republic of Slovenia); considered. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 274 j) Credit quality analysis for financial assets and contingent liabilities in EUR thousands 31 Dec 2022 Debt securities at amortised cost A B C Loss allowance Carrying amount Loans and advances to banks at amortised cost A B C D and E 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 Total 12-month expected credit losses Lifetime ECL not credit - impaired Lifetime ECL credit-impaired Purchased credit-impaired financial assets NLB Group NLB 1,388,564 525,606 - (3,519) 1,910,651 87,422 135,704 - - (161) 222,965 6,327,508 80,749 14,620 - (31,385) 6,391,492 1,366,495 4,508,706 153,084 - (59,840) 5,968,445 138,353 37,103 1,370 - (1,246) 175,580 1,453,671 1,545,358 - - (9,029) 1,500,489 2,294,429 48,375 - (18,826) 3,824,467 - - 7,229 (265) 6,964 - - - - - - 82,441 40,465 67,215 - (14,582) 175,539 1,405 146,749 275,517 - (31,230) 392,441 57 169 577 - (38) 765 - - 165 - (70) 6,657 38,878 37,735 - (1,953) 81,317 - - - - - - - - 108 (108) - - - - 122,350 (76,306) 46,044 - - - 178,206 (114,288) 63,918 - - - 7,940 (7,565) 375 - - - 8,338 (6,777) - - - 20,134 (12,735) 7,399 - - - - - - - - - - - 772 50 1,514 5,760 499 8,595 - 15 1,898 21,465 3,134 26,512 - - - 1,288 (185) 1,103 - - - - - 34 318 88 6,323 (4,095) 2,668 1,388,564 525,606 7,229 (3,784) 1,917,615 87,422 135,704 - 108 (269) 222,965 6,410,721 121,264 83,349 128,110 (121,774) 6,621,670 1,367,900 4,655,470 430,499 199,671 (202,224) 6,451,316 138,410 37,272 1,947 9,228 (9,034) 177,823 1,453,671 1,545,358 165 8,338 (15,876) 1,507,180 2,333,625 86,198 26,457 (37,609) 3,915,851 1,318,134 281,304 - (1,990) 1,597,448 350,138 703 - - (216) 350,625 2,915,578 7,329 - - (6,161) 2,916,746 1,007,159 1,907,775 45,521 - (14,880) 2,945,575 102,414 11,362 759 - (203) 114,332 1,159,704 207,791 - - (2,022) 1,118,801 1,256,792 22,149 - (8,156) 2,389,586 - - - - - - - - - - - 37,725 29,299 34,720 - (7,385) 94,359 91 23,418 28,397 - (800) 51,106 2 19 23 - (2) 42 - - - - - 4,426 17,906 12,911 - (378) 34,865 - - - - - - - - - - - - - - 59,680 (34,286) 25,394 - - - 47,824 (29,262) 18,562 - - - 832 (807) 25 - - - 8,338 (6,777) - - - 11,575 (8,889) 2,686 - - - - - - - - - - - - - - - - - - - 2 3,307 (638) 2,671 - - - 1 (1) - - - - - - - 101 25 3,318 (2,876) 568 Total 1,318,134 281,304 - (1,990) 1,597,448 350,138 703 - - (216) 350,625 2,953,303 36,628 34,720 59,680 (47,832) 3,036,499 1,007,250 1,931,193 73,920 51,131 (45,580) 3,017,914 102,416 11,381 782 833 (1,013) 114,399 1,159,704 207,791 - 8,338 (8,799) 1,123,227 1,274,799 35,085 14,893 (20,299) 2,427,705 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 275                       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   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 1,218,597 495,114 - (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 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 2022 Financial Report Contents 276                                         The NLB Group’s client credit rating classification is based on Rating Groups D (D and DF rating classes) and E represent an internally developed methodology, drawing from internal non-performing clients that are treated as defaulted. D, DF, statistical analyses, good banking practices, as well as Bank and E rating classified clients are ordinarily transferred to the of Slovenia regulations, and ECB and EBA guidelines and specialised units for restructuring (which performs business requirements. The aligned rating methodology is used across and financial restructuring with a goal of minimising losses and the entire NLB Group. It includes a uniform credit grade scale of restoring the client to a performing status) or workout and legal 12 rating classes, out of which nine represent performing clients support (with the goal of minimising losses due to default). and three non-performing clients. Rating Group A (AAA to A rating classes) includes the best the EBA guidelines, where the materiality threshold for delays clients with a low degree of default probability, characterised is determined in absolute and relative terms (EUR 100 for by high coverage of financial liabilities with free cash flow. The retail and EUR 500 for non-retail segment and 1% of the total Rating Group A is considered as investment grade classification. on-balance exposure on the client level). At the same time, the In 2020, NLB Group applied a new default definition based on assessment of rating for private individuals was improved by Rating Group B (BBB to B rating classes) includes clients with establishing a common rating on the client level. a low credit risk, starting one notch lower than ‘A’ rating group clients. These clients show stable performance, acceptable A standard corporate rating methodology, with the prescribed financial ratios, and qualitative elements, and have sufficient set of parameters (qualitative and quantitative) applies to all cash flow to settle their obligations, but may be more sensitive the NLB Group bank entities. Groups of connected clients are to changes in the industry or the economy. The Rating Group B treated as materially important for the NLB Group whenever classification is an investment grade for BBB, and an ‘invest with exposure exceeds EUR 7 million, or EUR 15 million for NLB care’ for BB and B. Group members with total assets greater than EUR 1 billion. Materially important clients are submitted to the NLB Credit Rating Group C (CCC to C rating classes) includes clients who Committee. are exposed to a higher and above-average level of credit risk. CCC rated clients are financed by the Bank only in the NLB regularly reviews the business practices and credit case when such support brings more positive effects for the portfolios of NLB Group entities to make sure they are operating Bank; however, the Rating Group C is overall considered as a in accordance with the minimum risk management standards substantial risk. The Bank reasonably restricts cooperation with of NLB Group. This ensures appropriate standard processes for such clients and decreases its exposure to them. managing and reporting credit risks at the consolidated level. k) Forborne loans 31 Dec 2022 All forborne exposures Gross carrying amount Performing Non - performing Impaired Defaulted Impairment, provisions and value adjustments Performing forborne exposures Non- performing forborne exposures Collateral and financial guarantees received on forborne exposures NLB Group in EUR thousands Loans and advances (including at amortised cost and fair value) Governments Other financial organisations Non-financial organisations Households Debt instruments other than held for trading Loan commitments given 272,193 117,808 154,441 154,385 (9,929) (79,535) 121,376 840 1,526 207,417 62,410 272,193 1,392 604 201 89,871 27,132 117,808 743 236 1,325 117,602 35,278 154,441 649 236 1,325 117,546 35,278 154,385 649 (12) (6) (7,267) (2,644) (9,929) (2) (234) (1,325) (61,900) (16,076) (79,535) (209) - - 87,245 34,131 121,376 740 122,116 Total exposures with forbearance measures 273,585 118,551 155,090 155,034 (9,931) (79,744) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 277               NLB Group  in EUR thousands 31 Dec 2021 All forborne exposures Gross carrying amount Performing Non - performing Impaired Defaulted Impairment, provisions and value adjustments Performing forborne exposures Non- performing forborne exposures Collateral and financial guarantees received on forborne exposures Loans and advances (including at amortised cost and fair value) Governments Other financial organisations Non-financial organisations Households Debt instruments other than held for trading Loan commitments given Total exposures with forbearance measures 239,208 57,058 182,094 182,150 (4,602) (100,963) 109,177 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 (11) (8) (3,268) (1,315) (265) (2,531) (83,243) (14,924) (4,602) (100,963) - (374) - 12 79,260 29,905 109,177 294 182,772 (4,602) (101,337) 109,471 NLB in EUR thousands 31 Dec 2022 All forborne exposures 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 Gross carrying amount 84,638 1,526 42,414 40,698 84,638 687 85,325 Performing Non - performing Impaired Defaulted Impairment, provisions and value adjustments Performing forborne exposures Non- performing forborne exposures Collateral and financial guarantees received on forborne exposures (1,628) (37,260) 38,474 16,694 68,000 201 3,521 12,972 16,694 41 16,735 1,325 38,949 27,726 68,000 646 68,646 67,944 1,325 38,893 27,726 67,944 646 (6) (40) (1,582) (1,628) (2) (1,325) (22,935) (13,000) (37,260) (207) - 19,073 19,401 38,474 416 38,890 68,590 (1,630) (37,467) NLB in EUR thousands 31 Dec 2021 All forborne exposures 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 Gross carrying amount Performing Non - performing Impaired Defaulted 109,674 25,485 2,744 69,299 37,631 109,674 688 110,362 213 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 Impairment, provisions and value adjustments Performing forborne exposures Non- performing forborne exposures Collateral and financial guarantees received on forborne exposures (1,130) (48,898) (8) (291) (831) (1,130) - (2,531) (35,930) (10,437) (48,898) (344) (1,130) (49,242) 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 2022 Financial Report Contents 278                                                                     Forborne exposures of debt instruments by periods of forbearance 31 Dec 2022 Performing exposures Non-performing exposures Total exposures with forbearance measures 31 Dec 2021 Performing exposures Non-performing exposures Total exposures with forbearance measures Up to 3 months 3 to 6 months 6 to 12 months Over 12 months NLB Group in EUR thousands 2,930 4,343 7,273 7,411 26,835 34,246 45,452 3,472 48,924 5,055 4,856 9,911 NLB 4,714 13,351 18,065 9,860 18,540 28,400 54,783 53,684 108,467 30,130 30,956 61,086 in EUR thousands 31 Dec 2022 Performing exposures Non-performing exposures Total exposures with forbearance measures 31 Dec 2021 Performing exposures Non-performing exposures Total exposures with forbearance measures Up to 3 months 3 to 6 months 6 to 12 months Over 12 months 2,063 1,939 4,002 2,819 7,467 10,286 608 1,261 1,869 3,898 2,410 6,308 1,864 7,300 9,164 7,008 13,863 20,871 10,531 20,184 30,715 10,630 11,551 22,181 The main forbearance measurements used by NLB Group others, either as a single forbearance measurement or as a and NLB are: deferral of payment, reduction of interest rates, combination of those. acquisition of collateral for partial repayment of claims, and 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: Nature of assets Equity securities mandatorily measured at fair value through profit or loss (note 5.3.a) 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 NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 Net value Net value 368 25,326 11,962 - 50,913 673 651 89,893 - 36,009 13,559 - 74,717 733 699 125,717 - 1,901 - 2,049 3,170 - - 7,120 - 4,176 7 2,333 4,827 - - 11,343 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 279                                       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 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 2022 31 Dec 2021 in EUR thousands Gross loans Impairment provisions Gross loans Impairment provisions 223,234 235,737 601,556 547,251 1,415,304 13,246 98,813 285,495 6,743,441 53,854 389,376 809,891 920,149 1,239,161 43,710 186,857 (269) (2,579) (10,704) (27,686) (25,553) (1,313) (3,063) (4,737) (121,771) (2,747) (9,162) (41,343) (19,476) (53,113) (751) (9,034) Net loans 222,965 233,158 590,852 519,565 1,389,751 11,933 95,750 280,758 6,621,670 51,107 380,214 768,548 900,673 1,186,048 42,959 177,823 (%) 1.65 1.73 4.39 3.86 10.31 0.09 0.71 2.08 49.14 0.38 2.82 5.70 6.68 8.80 0.32 1.32 13,807,075 (333,301) 13,473,774 100.00 140,881 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 11,172,430 (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 5,519,290 48,332 334,116 743,982 772,920 944,005 34,571 122,229 (322,397) 10,850,033 (%) 1.30 0.81 3.28 3.60 9.49 0.11 0.81 2.08 50.87 0.45 3.08 6.86 7.12 8.70 0.32 1.13 100.00 31 Dec 2022 31 Dec 2021 in EUR thousands Gross loans Impairment provisions 350,841 383,781 371,356 150,715 688,517 3,529 15,432 104,303 3,084,331 23,736 64,471 342,882 589,152 308,724 24,788 115,412 6,621,970 (216) (3,167) (1,467) (9,714) (6,161) (19) (70) (1,176) (47,832) (185) (1,722) (12,336) (3,155) (6,143) (265) (1,013) (94,641) Net loans 350,625 380,614 369,889 141,001 682,356 3,510 15,362 103,127 3,036,499 23,551 62,749 330,546 585,997 302,581 24,523 114,399 (%) 5.37 5.83 5.67 2.16 10.45 0.05 0.24 1.58 46.52 0.36 0.96 5.06 8.98 4.64 0.38 1.75 Gross loans Impairment provisions 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) Net loans 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 6,527,329 100.00 5,542,486 (97,754) 5,444,732 100.00 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 280                                 n) Analysis of net loans and advances by geographical sectors Country Slovenia Other European Union members Serbia Other countries Total NLB Group 31 Dec 2022 31 Dec 2021 6,704,603 274,795 2,790,892 3,703,484 13,473,774 4,861,968 249,772 2,320,491 3,417,802 10,850,033 in EUR thousands NLB 31 Dec 2021 4,856,305 156,425 136,696 295,306 5,444,732 31 Dec 2022 5,824,477 180,842 184,530 337,480 6,527,329 As at 31 December 2022, Other countries include direct exposure level. Direct exposure to Ukraine amounts to EUR 21 thousand to Russia in the amount of EUR 284 thousand (31 December (31 December 2021: EUR 4 thousand) at the NLB Group level and 2021: EUR 94 thousand) at the NLB Group level and EUR 4 EUR 1 thousand (31 December 2021: EUR 2 thousand) at the NLB thousand (31 December 2021: EUR 84 thousand) at the NLB level. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 281           MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report o) Analysis of debt securities and derivative financial instruments by geographical sectors NLB Group NLB in EUR thousands Financial assets measured at amortised cost Financial assets held for trading Financial assets measured at fair value through OCI 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 2022 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 - Switzerland - Other 360,623 1,214,523 96,349 129,217 41,233 12,901 10,187 5,975 57,440 184,831 139,370 - 37,346 53,384 37,472 15,507 16,798 91,588 57,523 19,772 46,750 37,802 31,523 55,076 24,753 11,726 25,966 316,503 7,648 - 40,672 189,383 25,490 - 3,007 - 7,746 - - 16,186 - 19,287 7,084 Non-trading financial assets mandatorily at FV through profit or loss - 2,267 - - - - - - - - - - - - 99 - - - 2,168 - - - - - - - 849 - - - - - - - - - - - - - - - - 331,539 951,992 79,119 94,088 3,029 - 1,553 13,333 114,292 169,157 105,082 10,888 5,260 31,592 13,544 - - 27,256 112,907 17,691 16,440 4,827 31,592 39,097 61,245 - 62,170 1,493,095 177,746 58,034 20,949 134,268 898,531 25,866 21,147 54,178 7,892 9,053 12,970 11,206 2,026 54,572 4,657 - - - - - - - - - - - - - - - - - - - - - - - - - - - 203 - - - - - - - - - - - - - 203 - 203 2,450 36,606 - 11,397 - - - - - 10,087 10,447 - - - - - - - 4,675 - - - - - - - - 41,691 - 17 - 5 - - - 41,669 - - - - - - - 347,976 1,184,663 96,349 129,217 41,233 12,901 10,187 5,975 57,440 179,844 114,497 - 37,346 53,384 37,472 15,507 16,798 91,588 57,523 19,772 46,750 37,802 31,523 55,076 24,753 11,726 4,690 60,119 4,056 - 6,780 15,260 - - 3,007 - 7,746 - - 16,186 - - 7,084 1,597,448 - - - - - - - - - - - - - - - - - - - - - - - - - - - 203 - - - - - - - - - - - - - 203 - 203 241,095 774,380 51,193 55,622 3,029 - 1,553 13,333 84,477 137,668 70,207 10,888 5,260 29,525 13,544 - - 27,256 99,933 17,691 16,440 4,827 31,592 39,097 61,245 - 11,859 263,943 2,905 - 2,819 54,590 3,913 25,866 21,147 54,178 7,892 9,053 12,970 11,206 2,026 50,721 4,657 2,449 36,606 - 11,397 - - - - - 10,087 10,447 - - - - - - - 4,675 - - - - - - - - 41,796 - 17 - 31 79 - - 41,669 - - - - - - - Total 1,917,615 2,838,796 3,116 80,747 Other members of the European Union included in the line item Other members of the ‘Other countries’ in the line item ‘Other’ ‘Other’ are Malta and Estonia. are Egypt, Uzbekistan, and Oman. 1,291,277 80,851 Contents 282                   NLB Group NLB in EUR thousands Financial assets measured at amortised cost Financial assets held for trading Financial assets measured at fair value through OCI 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 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 4,662 324,705 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 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 Other members of the European Union included in the line item Other members of the ‘Other countries’ in the line item ‘Other’ ‘Other’ are Malta and Estonia. are Egypt, Uzbekistan, and Oman. 3,395,261 4,261 8,246 1,436,424 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 - - - - - - 1,541,042 8,250 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 283                   p) Internal rating of derivatives counterparties A B C D and E Total NLB Group NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 in % 88.90 11.10 0.00 0.00 100.00 74.08 25.69 0.03 0.19 100.00 90.18 9.82 0.00 0.00 100.00 74.25 25.53 0.03 0.19 100.00 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 financial instruments in NLB Group’s and NLB’s portfolio that represent subordinated liabilities for the issuer 31 Dec 2022 Internal rating Financial assets measured at fair value through other comprehwensive income Financial assets measured at amortised cost - debt securities - loans and advances to banks - loans and advances to customers Total 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 A 28,014 2,612 - - 30,626 A 48,099 - - 48,099 NLB Group B - - - - - C - - - - - D Total A - - - - - 28,014 28,014 2,612 - - 2,612 84,713 - 30,626 115,339 NLB Group B - - - - C - - - - D Total A - - - - 48,099 33,107 - - 84,399 - 48,099 117,506 NLB C - - - 6,613 6,613 NLB C - - 6,522 6,522 B - - - - - B - - - - in EUR thousands D Total - - - - - 28,014 2,612 84,713 6,613 121,952 in EUR thousands D Total - - - - 33,107 84,399 6,522 124,028 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 284                                             s) Presentation of net financial instruments by measurement category 31 Dec 2022 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 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 NLB Group in EUR thousands Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L Financial assets measured at FV through OCI Financial assets measured at amortised cost Financial leases Derivatives for hedge accounting - 203 - - - 203 - 21,385 - - - - - - - - 19,031 3,116 5,579 - - 10,336 - - - - - - - - - 2,919,203 2,506,224 80,407 21,824 310,748 - - - - - - - - - 5,271,365 1,917,615 1,917,615 - - - - - 13,102,729 303,086 222,965 116,046 6,550,704 5,909,928 177,823 21,588 19,031 2,919,203 20,469,532 - - - - - - - - 193,222 357 - 32 70,966 121,867 - 193,222 - - - - - - - 59,362 - - - - - - - 59,362 Total 5,271,365 4,856,052 4,426,955 85,986 21,824 310,951 10,336 80,747 13,295,951 303,443 222,965 116,078 6,621,670 6,031,795 177,823 23,681,938 NLB Group in EUR thousands Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L Financial assets measured at FV through OCI Financial assets measured at amortised cost Financial leases Derivatives for hedge accounting - - - - - - - 7,678 - - - - - - - - 21,161 4,261 4,472 - - 12,428 - - - - - - - - - 3,461,860 3,191,280 66,599 37,569 166,412 - - - - - - - - - 7,678 21,161 3,461,860 5,005,052 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 - - - - - - - - 108,279 49 - 11 46,012 62,206 - 108,279 - - - - - - - 568 - - - - - - - 568 Total 5,005,052 5,200,647 4,903,501 71,071 37,569 176,078 12,428 8,246 10,727,804 281,010 140,683 141,709 5,519,290 4,645,112 122,229 21,063,978 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 285                                 31 Dec 2022 Cash and obligatory reserves with central banks, and other demand deposits at banks Securities - Bonds - Shares - 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 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 Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L - 203 - - 203 - 21,489 - - - - - - - 21,692 - 7,519 - 5,211 - 2,308 - 7,892 - - - - 7,892 - 15,411 Financial assets held for trading Non-trading financial assets mandatorily at FV through P&L - - - - - 7,682 - - - - - - - 7,682 - 4,472 - 4,472 - - 7,888 - - - - 7,888 - 12,360 NLB Financial assets measured at FV through OCI - 1,334,061 1,196,760 42,784 94,517 - - - - - - - - - 1,334,061 NLB Financial assets measured at FV through OCI - 1,585,751 1,526,237 44,709 14,805 - - - - - - - - 1,585,751 Financial assets measured at amortised cost Derivatives for hedge accounting 3,339,024 1,597,448 1,597,448 - - - - 6,405,038 124,736 350,625 286,504 3,036,499 2,606,674 114,399 11,455,909 - - - - - - 59,362 - - - - - - - 59,362 Financial assets measured at amortised cost Derivatives for hedge accounting 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 in EUR thousands Total 3,339,024 2,939,231 2,794,208 47,995 94,720 2,308 80,851 6,412,930 124,736 350,625 286,504 3,036,499 2,614,566 114,399 12,886,435 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 As at 31 December 2022 and 31 December 2021, all of NLB Group’s financial liabilities, except for derivatives designated as hedging instruments, trading liabilities, and financial liabilities measured at fair value through profit or loss, were carried at amortised cost. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 286                             6.2. Market risk positions. In accordance with the provisions of the Strategy on the volatility in the income statement. FX exposures in banking trading with financial instruments in NLB Group, the trading book result from core banking business activities. NLB Group 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, backtesting, 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 potential losses that could occur in severe market conditions. 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 interest income and economic value of equity 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 activities in other NLB Group members are very restricted. For monitoring and managing NLB Group’s exposure to which also includes a limit system and is in line with the parent market risks, uniform guidelines and exposure limits for Bank’s guidelines and standards, as well as local regulatory each type of risk are set for individual NLB Group entities. requirements. Policies are confirmed by either the local The methodologies are in line with regulatory requirements Management Board or Supervisory Board. NLB monitors and on individual and consolidated levels, while reporting to the manages NLB Group currency risk exposure on a monthly basis regulator on the consolidated level is carried out using the for each member and on the consolidated level. Each member is responsible for its own currency risk policy, standardised approach. Pursuant to the relevant policies, NLB Group entities must monitor and manage exposure to NLB Group banks follow the guidelines for managing FX market risks and report to NLB accordingly. The exposure of an lending in NLB Group. The guidelines’ goal is to address risks individual NLB Group entity is regularly monitored and reported stemming from the potential excessive growth of FX lending, to to the Assets and Liabilities Committee of NLB Group (NLB identify hidden risks, and tail-event risks related to FX lending, Group ALCO). 6.2.1. Currency risk (FX) Foreign currency risk (FX) is a risk of the potential losses from the open FX positions due to the changes of the foreign currency rates. The exposures of NLB to the movement of the FX rates have an impact on the financial position and cash flows of the Bank. The Bank measures and manages the FX risk with a usage of combination of sensitivity analysis, VaR, scenarios, and stress-testing. In the trading book, similar to the other market risks, risk is managed on the basis of VaR limits which are approved by the Management Board 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 to mitigate the respective risk, to internalise the respective costs, and to hold adequate capital with respect to FX lending. 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. Regarding structural FX positions on a consolidation level, assets, and liabilities held in foreign operations are translated 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 employs strategies to manage this foreign currency exposure, including matched funding of assets and liabilities. Exposure to currency risks is discussed at daily liquidity meetings and monthly meetings of the ALCO committee of the 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 2022 Financial Report Contents 287 a) Analysis of financial instruments by currency exposure 31 Dec 2022 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 NLB Group  in EUR thousands EUR RSD USD CHF Other Total 4,371,725 275,809 46,277 78,264 499,290 5,271,365 21,385 8,704 - 5,116 - 5,211 203 - - - 21,588 19,031 1,977,055 627,667 157,859 54,572 102,050 2,919,203 1,677,506 82,041 10,952,838 108,884 59,362 (23,767) 6,964 102,510 804,520 12,280 - - 49,088 20,582 20,791 23,935 - - 19,287 3,047 53,759 44 - - 164,770 14,785 1,917,615 222,965 1,241,078 13,072,986 32,680 - - 177,823 59,362 (23,767) Total financial assets 19,235,733 1,834,866 323,743 209,176 2,054,653 23,658,171 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 - debt securities issued - other financial liabilities Total financial liabilities 21,580 1,157 2,124 84,104 184,920 9 155 - 1,539 - 16,639,644 1,156,350 82,266 815,990 207,887 - - 30,372 18,039,672 1,188,425 - - - 2,604 13,689 370,113 216 - 29,698 416,320 - - - - 484 - 21,589 1,796 2,124 5,788 - 12,379 - 106,414 198,609 201,228 1,660,391 20,027,726 - - - - 1,933 24,573 82,482 815,990 294,463 208,949 1,697,827 21,551,193 Net on-balance sheet financial position 1,196,061 646,441 (92,577) 227 356,826 2,106,978 Derivative financial instruments (75,897) 42,632 82,411 (2,031) 51,477 98,592 Net financial position 1,120,164 689,073 (10,166) (1,804) 408,303 2,205,570 31 Dec 2021 Total financial assets Total financial liabilities 16,625,162 1,886,101 15,728,879 1,270,088 365,955 404,640 213,497 184,689 1,980,345 21,071,060 1,595,282 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 869,134 618,015 5,430 4,684 371,495 1,868,758 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 288                         31 Dec 2022 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 Total financial assets 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 - debt securities issued - other financial liabilities Total financial liabilities EUR RSD 3,282,376 471 21,489 10,200 1,215,923 1,566,474 326,513 6,002,314 91,777 59,362 (23,767) 12,552,661 22,150 2,514 2,124 172,334 43,603 10,707,852 - 815,990 138,753 NLB USD 9,315 - 5,211 in EUR thousands CHF Other Total 11,672 35,190 3,339,024 203 - - - 21,692 15,411 51,641 50,721 15,776 1,334,061 27,812 - 14,902 22,000 - - - 16,776 36,418 1 - - 3,162 7,336 779 618 - - 1,597,448 350,625 6,054,413 114,399 59,362 (23,767) - - - 11,423 13,689 147,439 216 - 24,009 196,776 - - - 8,397 - 77,583 - - 265 86,245 - - - 20,400 - 22,150 2,514 2,124 212,656 57,292 51,535 10,984,411 - - 1,540 73,475 216 815,990 164,567 12,261,920 - - - - - - 3 - - - - - 102 - 2 - - - 474 130,881 115,791 62,861 12,862,668 11,905,320 104 Net on-balance sheet financial position 647,341 370 (65,895) 29,546 (10,614) 600,748 Derivative financial instruments (79,626) - 65,535 (29,451) 24,326 (19,216) Net financial position 567,715 370 (360) 95 13,712 581,532 31 Dec 2021 Total financial assets Total financial liabilities 11,383,613 10,759,098 1,219 18 164,554 194,704 83,457 57,960 104,305 65,416 11,737,148 11,077,196 Net on-balance sheet financial 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 609,157 1,201 5,675 365 24,813 641,211 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 289                         b) FX sensitivity analysis Scenarios USD CHF CZK RSD MKD JPY AUD HUF HRK BAM 31 Dec 2022 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 2022 31 Dec 2021 +/-9.27% +/-7.88% +/-5.70% +/-0.40% +/-1.62% +/-12.35% +/-9.91% +/-13.43% +/-0.98% +/-0 % +/-5.74% +/-4.23% +/-4.55% +/-0.35% +/-1.34% +/-5.66% +/-6.77% +/-6.53% +/-1.38% +/-0% NLB Group in EUR thousands NLB Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income (333) (662) (2) 11 1 251 (734) 277 565 2 (11) (1) (203) 629 - 463 - 3,167 4,518 48 8,196 - (396) - (3,142) (4,375) (48) (7,961) (482) 423 7 1 1 1 144 (328) 400 (6) (1) (1) (1) (121) 270 - - - - - 423 (351) - - - - - (351) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 290                         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 in EUR thousands NLB Group regularly measures interest rate risk exposure in NLB Group NLB Effects on income statement Effects on other comprehensive income Effects on income statement Effects on other comprehensive income 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) 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 approach. 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 effect on the other comprehensive income statement each currency. Interest rate risk management in NLB Group is the interest rate margin, which is why valuation risk has been of NLB Group has increased due to the higher translation adopted in accordance with the risk appetite and risk strategy, included in the Group’s interest rate risk management model. positions in MKD and RSD currencies and due to the higher based on general Basel standards on interest rate management volatility growths’ scenarios for MKD and RSD currencies. in the banking book (IRRBB; hereinafter: ‘Standards’) and NLB Group also manages interest rates risk by using plain 6.2.2. Managing market risks in the trading book Market risk exposure in the trading book arises mostly as a European Banking Authority guidelines. vanilla derivative financial instruments (interest rate swaps, overnight index swaps, cross currency swaps, and forward rate In the trading book, interest rate risk is measured on the basis agreements), most of which are treated according to hedge result of the changes in interest rates, credit spreads, FX rates, of the VaR method and BPV method, in accordance with the accounting rules. and equity prices. adopted policy for managing market risk in the trading book of The Management Board determines low total risk appetite NLB. Each member of NLB Group is responsible for its own interest rate risk policy, which includes the limit system and is in line and limits by the risk type. The limits are monitored daily by the The interest rate risk in the banking book is measured and with the parent Bank’s guidelines and standards, as well as Global Risk Department. monitored within a framework of interest rate risk management with the local regulatory requirements. NLB regularly monitors policy that establishes consistent methodologies, models, and the interest rate risk exposure of each individual member NLB uses an internal VaR model based on the variance- limit systems. NLB Group manages interest rate risk exposure of NLB Group in accordance with the Standards for Risk covariance method for other market risks. The daily calculation through application of two main measures: of the VAR value is adjusted to Basel standards (99% confidence interval, a monitored period of 250 business days, a 10-day holding position period). • 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 Management in NLB Group. The aforementioned document comprises guidelines for uniform and effective interest rate risk management within individual NLB Group members. 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 rate risk management of NLB Group includes all interest rate- change according to the scenario. Interest rate risk in the banking book is measured, monitored, • Sensitivity of net interest income – using EaR method and reported by the Global Risk Department (weekly in the (Earnings at Risk), which measures the impact of the interest case of NLB and monthly on Group level), while positions are rate change on future net interest income over a one-year managed by Financial Markets. Exposure to interest rate risk period, assuming constant balance sheet volume and is discussed on ALCO monthly on NLB’s individual level and sensitive on- and off-balance sheet assets and liabilities which structure. are divided into the trading and banking book according to regulatory standards. It takes into account the positions in quarterly on the consolidated level. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 291           a) Analysis of financial instruments according to the exposure Financial instruments without maturity such as sight deposits to interest rate risk are presented in the first gap irrespective of their behavioural The following table presents open net interest rate risk positions characteristics and the NLB Group’s expectations. by the most important currencies of NLB Group. 31 Dec 2022 Currency EUR RSD MKD Other 31 Dec 2021 Currency EUR RSD MKD Other 31 Dec 2022 Currency EUR Other 31 Dec 2021 Currency EUR Other 1 - 3 years (2,061,940) 338,852 192,033 (131,316) 1 - 3 years (2,404,620) 203,340 141,261 (32,296) in EUR thousands NLB Group 5 - 10 years Over 10 Years 1,389,104 52,070 17,792 52,832 667,013 2 10,070 6,652 3 - 5 years 1,461,068 213,972 13,086 73,414 NLB Group 3 - 5 years 5 - 10 years Over 10 Years in EUR thousands 1,211,248 341,214 21,960 124,132 1,573,325 62,458 13,835 66,726 446,585 1,912 9,378 3,234 NLB in EUR thousands 1 - 3 years (1,871,890) (81,512) 3 - 5 years 5 - 10 years Over 10 Years 1,050,116 29,436 1,023,946 395 550,833 7,189 NLB in EUR thousands 1 - 3 years (1,803,603) 1,626 3 - 5 years 5 - 10 years Over 10 Years 815,356 32,325 1,203,636 1,242 389,570 6,627 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 50/100 basis points on the amount of net interest income of the The analysis of interest income sensitivity for the horizon of the banking book position: 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. Net interest income sensitivity Net interest income sensitivity - as % of Equity NLB Group in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 43,713 2.02% 18,520 0.94% 21,393 1.48% 6,668 0.49% The values in the table are calculated on short-term interest economic value of financial instruments. The EVE represents rate gaps, where the applied parallel interest rate shock down the present value of net future cash flows and provides by 50/100 basis points represents a realistic and practical a comprehensive view of the possible long-term effects of scenario. The calculations of the sensitivity of net interest changing interest rates at least under the six prescribed income are implemented in technological support. standardised interest rate shock scenarios or more if necessary, according to the situation on financial markets. Calculations are The ‘EVE’ (Economic Value of Equity) method is a measure considering behavioural and automatic options, as well as the of the sensitivity of changes in market interest rates on the allocation of non-maturing deposits. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 292                                             The assessment of the impact of a change in interest rates of 200 basis points on the economic value of the banking book position: in EUR thousands Interest risk in banking book - EVE Interest risk in banking book - EVE as % of Equity NLB Group NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 122,276 5.60% 126,651 6.42% 82,714 5.72% 84,130 6.14% The applied sudden parallel interest rate shock up is by 200 basis points, which represents a “worst case” scenario for NLB Group. The calculation takes into the account allocation of the core part of non-maturing deposits and other behavioural assumptions. In the risk identification process, first the reasons for the Risk tolerance for liquidity risk is low, therefore NLB Group must realisation of each identified material risk are analysed and be able to provide sufficient funds for settling its liabilities at all grouped together in short risk descriptions. Material risks are times, even if a specific stress scenario is realised. NLB Group then classified into three groups based on what part of liquidity measures and manages its liquidity in two stages: Exposure to the interest rate risk of the banking book mainly arises from investments in long-term debt securities and loans with fixed interest rate, as well as from transformation of term to sight deposits due to a low interest rate environment. Long-term interest positions of other members in NLB Group, which present a majority of their exposure to interest-rate risk (an economic point of view), mainly arise from a portfolio of mortgage loans with a fixed interest rate. 6.3. Liquidity risk is affected by the realisation of the material risks: liabilities • Static view (current exposure), side, assets side, intraday liquidity risk. The origin of each risk • Forward-looking and stress-testing. is determined as being internal, external, or a combination of internal and external (internal shock, meaning it originates The objectives of monitoring and managing liquidity risk in NLB within the bank, or external shock; meaning it comes from Group are as follows: outside the bank - e.g., a major macroeconomic event, physical • ensuring a sufficient amount of liquidity for the settlement of or transition event, ESG rating downgrade). Based on the all NLB Group’s liabilities; identified material risks, key liquidity risk drivers are defined. • minimising the costs of maintaining liquidity; Based on the identified material risks, key liquidity risk drivers • determining an adequate amount of counterbalancing are defined. Key risk drivers of the liquidity position are factors capacity and optimal liquidity management; that are expected to trigger a substantial deterioration of the • ensuring adequate control environment; Group’s liquidity position. This deterioration may take place in • ensuring an appropriate level of liquidity for different Liquidity risk is the risk of the NLB Group being unable to fulfil the form of an increase in outflows, a decrease in inflows or a situations and stress scenarios; current or future expected and unexpected cash requirements, decrease in the liquidity value of the counterbalancing capacity. • anticipating emergencies or crisis conditions, and across all time horizons. The risk may stem from the reduction in implementing contingency plans in the event of extraordinary funding sources or a reduction in the liquidity of certain assets. Liquidity risk is defined as an important risk type for NLB Group, circumstances; and one which must be managed carefully. NLB Group has • ensuring regular projections of future cash flows and stress- Liquidity risk is related to funding liquidity risk (the NLB a liquidity risk management framework in place that enables testing of liquidity risk; Group’s liquidity on the liabilities-side) and market liquidity maintaining a low risk tolerance for liquidity risk. NLB Group • preparing proposals for establishing additional financial risk (counterbalancing capacity on the assets-side). On the formulated a set of liquidity risk metrics and limits to manage assets as collateral for sources of funding; liabilities-side, liquidity risk can result in a loss if the Bank is liquidity position within the requirements set by the regulator. • to ensure that climate-related and environmental risks which unable to settle all its liabilities or when the Bank, because of its By maintaining a smooth long-term maturity profile, limiting could have a material impact on net cash outflows or liquidity incapacity to provide sufficient funds to settle its obligations, is dependence on wholesale funding, and holding a solid liquidity reserves, are incorporate into liquidity risk management and forced to raise the necessary funds at a cost which significantly reserve, the NLB Group maintains a sound and robust liquidity liquidity reserves calibration. exceeds the normal cost. On the assets-side, the liquidity risk position, even under severely adverse conditions. is related to the market value of counterbalancing capacity Overall assessment of the liquidity position of NLB Group is and arises in case of significant reduction of market value of The Management Board approves the Liquidity Risk assessed in the Internal Liquidity Adequacy Assessment Process an individual financial instrument and may result in insufficient Management Policy, which outlines the key principles for the (ILAAP) at least once per year for NLB Group, and it includes a value of counterbalancing capacity to cover the NLB Group’s Bank’s liquidity management. ALCO receives a regular report clear formal statement on liquidity adequacy, supported by an liquidity needs. on the liquidity position and the performance against approved analysis of ILAAP outcomes. The ILAAP process is integral to risk Intraday liquidity risk is the capacity required during the Bank’s funding and liquidity position and decides on liquidity appetite which is consistent with the business model and approved business day to enable financial institutions to make payments risk-related issues in NLB Group. by the management board. Based on the Risk Appetite, the NLB limits and targets. ALCO oversees the development of the management frameworks and is aligned with the NLB Group’s risk and settle obligations. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 293             Group prepares a business plan and financial forecasts which are given to the fulfilment of the liquidity regulation (CRR/CRD), liquidity risk management in NLB Group Risk Management crucial for defining internal capital needs (ICAAP process) and with monitoring and reporting of the liquidity coverage ratio Standards. Each Group member is responsible for ensuring internal liquidity assessment (ILAAP process). Both processes are (LCR) according to the Delegated Act and net stable funding adequate liquidity via the necessary sources of funding conducted from the normative and economic perspectives and ratio (NSFR). This also includes monitoring and reporting and their appropriate diversification and maturity, and by supplemented by the stress-testing programme. of Additional Liquidity Monitoring Metrics (ALMM) on solo managing liquidity reserves and fulfilling the requirements of and consolidated levels. In accordance with the Commission regulations governing liquidity. The exposure of an individual NLB Group performs stress tests on a regular basis for a Implementing Regulation (EU), NLB Group regularly monitors NLB Group member towards liquidity risk is regularly monitored variety of bank-specific and market-wide stress scenarios and issues quarterly reports on asset encumbrance. and reported to ALCO, and to local Assets and Liabilities (individually and in combination) to identify sources of potential Committees. liquidity strain and to ensure that current exposures remain The Group manages its liquidity position (liquidity within one in accordance with the NLB Group’s established liquidity risk day) daily, for a period of several days or weeks in advance, tolerance. Stress test outcomes are used to adjust its liquidity based on the planning and monitoring of cash flows. Each NLB a) Managing NLB Group’s liquidity reserves NLB Group has liquidity reserves available to cover liabilities risk management strategies, policies, and positions, define Group member is responsible for its own liquidity position and that fall or may become due. Liquidity reserves must become minimum amount of counterbalancing capacity, and to develop carries out the following activities: effective contingency plans. • managing intraday liquidity; • planning and monitoring cash flows; available on short notice. Liquidity reserves are comprised of cash, the settlement account at the central bank above reserve requirement, debt securities, and loans eligible as collateral for NLB Group has a formal liquidity contingency plan (LCP) • monitoring and complying with the liquidity regulations of the the Eurosystem’s liquidity providing operations on the basis of that clearly sets out the procedures for addressing liquidity central bank; shortfalls in stressed situations. The plan outlines procedures • adopting business decisions; which the Bank may generate the requisite liquidity at any time. The available liquidity reserves are liquidity reserves decreased to manage a range of stress environments, establish clear • forming and managing liquidity reserves; and by the required balances for the continuous performance of lines of responsibility, include clear invocation and escalation • performing liquidity stress test to define the liquidity reserves payment transactions, encumbered securities, and/or credit procedures, and is regularly tested and updated to ensure that for smooth functioning of the payment system in stressed claims for different purposes (secured funding). it is operationally robust. circumstances. NLB Group maintains a sufficient amount of liquidity reserves NLB Group members actively manage liquidity over the course the basis of the methodology pertaining to liquidity risk stress in the form of high credit quality debt securities that are eligible of a day, taking into account the characteristics of payment tests. The amount represents a sum of liquidity reserves that for refinancing via the ECB/central bank or on the market. settlements to ensure the timely settlement of liabilities in would enable the survival of a severe stress over a period of In the current situation, NLB Group also strives to follow as normal and stressed circumstances. closely as possible the long-term trend of diversification on one month in a combined stress scenario and comprises high quality liquid assets according to LCR methodology, specified both the liability and asset sides of the balance sheet. NLB Liquidity risk management in NLB Group is under strict in Commission Delegated Regulation (EU) 2015/61 and the later The minimum amount of liquidity reserves is determined on Group regularly performs stress tests with the aim of testing monitoring by NLB as a parent bank. Reporting to NLB by all amendments. the liquidity stability and the availability of liquidity reserves Group members is performed daily. Global Risk gives guidelines in various stress situations. In addition, special attention is and defines minimal standards for Group members regarding MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 294 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 in EUR thousands NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 3,918,043 203 4,665,913 624,278 9,208,437 125,556 3,567,873 - 4,615,374 80,043 8,263,290 874,827 3,180,523 203 2,831,685 624,278 6,636,689 57,041 3,068,123 - 2,479,952 80,043 5,628,118 874,827 As at 31 December 2022, 81.0% (31 December 2021: 79.8%) The ECB-eligible credit claims comprise loans which fulfil the of debt securities in the banking book of NLB Group were high eligibility criteria set by the ECB itself and for domestic government securities (including government guaranteed loans are specified in the general terms about execution of bonds – GGB), and 9.1% (31 December 2021: 10.0%) were senior monetary policy framework (Part 4) adopted by the Bank of unsecured bonds. Slovenia. NLB is the only member of NLB Group that complies with the conditions set by the Eurosystem to classify as an The purpose of banking book securities is to provide liquidity, eligible counterparty. As such, these ECB credit claims are along with stabilisation of the interest margin and the interest included among liquidity reserves. rate risk management, simultaneously. When managing the portfolio, NLB Group uses conservative principles, particularly Members of NLB Group manage their liquid assets on a with respect to the portfolio’s structure in terms of issuers’ decentralised basis in compliance with the local liquidity ratings and asset class. The framework for managing the regulation and valid policies of NLB Group. banking book securities is the Policy for managing debt securities in the Financial Markets’ banking book and the Policy for Managing Domestic (Slovenian) Corporate Debt Securities in Large Corporates, which clearly define the objectives and characteristics of the associated portfolio. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 295             b) Encumbered/unencumbered assets 31 Dec 2022 Loans on demand Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total 31 Dec 2021 Loans on demand Equity instruments Debt securities Loans and advances other than loans on demand Other assets Total 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 ecurities Carrying amount of unencumbered assets Fair value of unencumbered securities NLB Group NLB  in EUR thousands 1,109,016 742 77,522 27,000 - 1,214,280 - 742 74,992 - - NLB Group 3,673,152 95,580 4,682,208 13,446,808 1,048,212 22,945,960 - 95,580 4,516,292 - - 112,804 - 57,041 11,413 - 181,258 - - 54,510 - - NLB 3,045,737 50,303 2,831,887 6,515,916 1,314,232 13,758,075 - 50,303 2,679,423 - - in EUR thousands Carrying amount of encumbered assets Fair value of encumbered securities Carrying amount of unencumbered assets Fair value of unencumbered securities Carrying amount of encumbered assets Fair value of encumbered ecurities 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 - - 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 Loans and advances other than loans on demand Other assets Total NLB Group 31 Dec 2022 31 Dec 2021 262,947 167,431 12,876,402 13,306,780 242,682 140,751 9,839,848 10,223,281 in EUR thousands NLB 31 Dec 2021 203,620 20,245 4,120,940 4,344,805 31 Dec 2022 239,405 16,867 4,721,729 4,978,001 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 296                                                             d) Source of encumbrance NLB Group NLB 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral Collateralised liability Assets given as collateral 3,238 62,755 13,753 65,048 42,292 746,021 53,744 835,066 9,607 13,001 20,051 12,971 42,292 790,505 2,901 1,135,479 3,698 1,122,179 - 148,235 - 53,744 877,641 132,010 68,894 1,214,280 792,011 2,010,989 22,608 181,257 832,797 1,063,395 in EUR thousands Derivatives Deposits Other sources of encumbrance Total As at 31 December 2022, NLB Group and NLB had a large (31 December 2021: EUR 2,011 million), relating to the deposit share of unencumbered assets. Other sources of encumbrance guarantee scheme and to targeted longer-term refinancing mostly relate to the obligatory reserve. On the NLB Group level, operations (TLTRO) which is held only by the N Banka. the amount of encumbered assets equalled EUR 1,214 million e) Non-derivative cash flows The tables below illustrate the cash flows from non-derivative year. The amounts disclosed in the table are the undiscounted contractual cash flows determined on the basis of spot rates at financial instruments by residual maturities at the end of the the end of the reporting period. in EUR thousands 31 Dec 2022 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 - debt securities issued - other financial liabilities Credit risk related commitments Non-financial guarantees Total Total financial assets 85,924 1,386 17,972,715 651 - 200,302 1,025,323 238,213 19,524,514 6,989,609 Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years NLB Group - - - 1,796 Total 1,796 106,787 201,625 20,069,028 85,495 1,176,970 294,463 3,090,681 862,779 - - 63,074 17,148 41,846 646,795 1,382 438,012 80,271 101 2,067 301,188 1,413 4,427 8,979 191,162 65,243 164 5,809 958,293 6,247 52,572 22,610 863,679 155,752 20,598 129,289 819,684 35,338 473,176 61,190 572,505 323,300 574,580 985,475 2,065,126 3,601,095 2,436,876 8,665,468 1,288,528 5,776,769 25,889,624 26,018,416 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 297                               31 Dec 2021 Financial liabilities and credit- related commitments NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total Financial liabilities measured at amortised cost - deposits from banks and central banks - borrowings from banks and central banks 56,073 954 173 480 - due to customers 15,772,513 270,238 - borrowings from other customers - debt securities issued - other financial liabilities Credit risk related commitments Non-financial guarantees Total Total financial assets 614 - 120,694 578,233 30,426 16,559,507 6,179,369 1,929 4,427 11,678 166,473 72,983 528,381 820,022 15,448 99,842 743,774 29,554 41,400 55,321 470,308 342,426 1,798,073 8,110,038 684 748,496 859,204 6,824 6,803 17,866 838,890 195,917 2,674,684 2,704,322 NLB - 6,048 22,543 40,862 318,201 1,319 407,499 61,349 857,821 72,378 855,820 17,668,272 79,783 370,831 206,878 2,461,403 703,101 22,418,466 5,031,994 22,845,745 in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total 31 Dec 2022 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 - debt securities issued - other financial liabilities Credit risk related commitments Non-financial guarantees Total Total financial assets 31 Dec 2021 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 - debt securities issued - other financial liabilities Credit risk related commitments Non-financial guarantees Total Total financial assets 728 1,786 2,514 4,643,031 3,344,409 13,996,664 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 119,935 208,066 - 193,526 13,086 10,604,437 1 - 122,875 536,542 23,682 11,494,149 4,036,868 - - 681 60,516 - 4,427 4,891 140,256 52,473 263,244 402,218 - - - - 52,572 6,494 618,940 106,608 904,549 1,570,138 NLB - 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 - - 742,584 125,834 - 6,803 616 451,614 100,102 1,427,553 1,061,588 19,441 45,052 215 473,176 29,915 396,200 243,618 1,416,411 352 15,197 82,882 158,637 406 41,400 25,501 280,201 240,761 845,337 - - 3,417 - 646,795 392 293,261 36,424 - 212,967 58,819 10,996,371 216 1,176,970 164,567 1,985,199 462,805 982,075 15,060,428 Total 352 109,523 870,035 406 370,831 102,527 1,552,411 437,166 13,105,957 12,480,103 - - - - 318,201 427 220,580 33,803 581,717 8,706 9,662,706 4,150,714 3,280,846 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 298                                                       When determining the gap between the financial liabilities and and based on its approach to risk, in previous years NLB financial assets in the maturity bucket of up to one month, it is Group compiled a substantial amount of high-quality liquid necessary to be aware of the fact that financial liabilities include investments, mostly government securities and selected loans, total demand deposits, and that NLB may apply a stability which are accepted as adequate financial assets by the ECB. weight of 60% to demand deposits when ensuring compliance with the central bank’s regulations concerning calculation of Liabilities and credit-related commitments are included in the liquidity position. To ensure NLB Group’s and NLB’s liquidity, maturity buckets based on their residual contractual maturity. f) An analysis of the statement of financial position by residual contractual maturity 31 Dec 2022 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 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 - debt securities issued - other financial liabilities - lease liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years 5,271,365 21,385 6,028 - 203 - - - - - - - - - 13,003 Total 5,271,365 21,588 19,031 581,522 167,836 365,650 1,525,431 278,764 2,919,203 20,627 216,239 589,494 145,171 59,362 - - - - - - - - 90,756 752 208,048 4,460 602,256 2,650,299 5,804 - - - - - - - - - 3,100 - (166) 15,436 - - - - 1,696 4,610 14,012 927,083 1,512 5,110,381 23,699 - 671,101 2 1,917,615 222,965 4,120,556 13,072,986 49 - 177,823 59,362 (2,770) (20,831) (23,767) - 29,482 31,399 13,797 - - 35,781 36,129 - 221,834 4,240 44,438 11,677 - 15,136 170 15,436 251,316 35,639 58,235 11,677 1,696 55,527 72,543 13,618 6,924,811 8,614 876,221 3,267,145 7,731,924 5,360,139 24,160,240 21,589 - 2,124 85,864 1,334 - - - - - - 101 1,807 164 5,551 17,971,630 298,609 943,776 616 - 196,862 3,440 15,173 3,610 - 30,797 1,335 3,689 8,548 431 1,434 506 - 1,311 5,667 12,198 19,697 2,913 30,812 8,304 - 2,788 - 1,796 - 20,285 126,867 797,893 33,086 299,026 44,890 16,300 73,879 - 2,569 10,409 - - - - 63,050 15,818 41,778 501,077 626 756 1,354 - - 3,776 21,589 1,796 2,124 106,414 198,609 20,027,726 82,482 815,990 270,623 23,840 122,652 12,420 2,569 49,081 18,333,039 317,771 1,031,870 1,427,000 628,235 21,737,915 Credit risk related commitments Non-financial guarantees 1,025,323 238,213 191,162 65,243 863,679 155,752 572,505 323,300 438,012 80,271 3,090,681 862,779 Total liabilities and credit-related commitments 19,596,575 574,176 2,051,301 2,322,805 1,146,518 25,691,375 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 299   31 Dec 2021 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 - debt securities issued - other financial liabilities - lease liabilities Provisions Current income tax liabilities Deferred income tax liabilities Other liabilities Total liabilities NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years 5,005,052 7,678 6,739 - - - - - 921 - - - - 3,340 10,161 Total 5,005,052 7,678 21,161 401,080 163,233 400,588 1,888,222 608,737 3,461,860 38,317 119,930 466,930 92,505 568 - - - - - - - - 19,107 16,827 547,238 3,309 - - - - - - - - - 23,983 9,655 124,948 2,374 783,028 1,552 752,226 - 1,717,626 140,683 1,912,038 4,519,726 3,141,189 10,587,121 773 25,538 - - 7,051 - - - - 3,948 620 19,859 - 1,330 - 89,813 43,693 29,259 - - 31,934 37,563 104 - 5,752 - 157,201 3,931 29,817 11,525 - 6,423 161 122,229 568 7,082 7,051 247,014 47,624 59,076 11,525 3,948 38,977 91,221 6,162,782 759,369 2,473,120 7,454,998 4,727,227 21,577,496 7,585 35,377 56,053 889 - - - 442 15,771,461 268,484 535 - 120,182 512 7,314 2,722 - 36,495 1,770 3,689 10,655 1,023 1,183 3,156 - 748 - - 521 751,773 852,576 6,186 1,759 13,817 4,049 39,914 - - 5,749 - - 15,254 99,418 727,308 27,074 - 37,643 17,678 69,863 - 3,045 4,867 - - - 6,009 20,980 38,486 283,071 257 1,062 1,130 - - 1,609 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 16,039,125 291,150 1,676,344 1,002,150 352,604 19,361,373 Credit risk related commitments Non-financial guarantees 578,233 30,426 166,473 72,983 838,890 195,917 470,308 342,426 407,499 2,461,403 61,349 703,101 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 2022 Financial Report Contents 300     31 Dec 2022 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 subsidiaries, associates and joint ventures 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 - debt securities issued - other financial liabilities - lease liabilities Provisions Current income tax liabilities Other liabilities Total liabilities NLB in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years 3,339,024 21,489 552 - 203 80 - - - - - - 143 6,806 7,830 Total 3,339,024 21,692 15,411 65,845 103,900 203,422 792,812 168,082 1,334,061 20,601 112,181 315,265 90,598 59,362 - - - - - - - 417 28,445 55,033 131,802 34,255 790,360 76,880 626,240 72,276 1,597,448 350,625 185,007 1,043,235 2,417,414 2,093,492 6,054,413 375 - - - - - - - - - 89 - (166) 4,235 - - - 7,663 - 5,494 23,320 - 17 - 114,399 59,362 (2,770) (20,831) (23,767) - 15,054 6,753 5,661 - 63,538 - 24,764 4,235 78,592 6,753 30,425 36,865 864,083 908,611 34,888 7,250 - - 34,888 13,161 4,025,334 373,043 1,430,172 4,211,293 3,899,491 13,939,333 22,150 - 2,124 193,526 13,086 10,604,203 1 - 122,793 82 360 - 14,496 - - - - 517 59,717 - 3,689 4,736 155 756 - 181 - - - - - 116,014 - 12,198 5,830 664 16,665 3,940 1,052 10,972,821 69,751 156,363 - 728 - 19,130 43,689 201,162 215 - 1,786 - - - 22,150 2,514 2,124 212,656 57,292 3,315 10,984,411 - 216 299,026 501,077 815,990 27,859 2,056 27,435 - 5,922 627,222 - 392 - - 3,736 161,218 3,349 45,216 3,940 25,387 510,306 12,336,463 Credit risk related commitments Non-financial guarantees 536,542 23,682 140,256 52,473 618,940 106,608 396,200 243,618 293,261 36,424 1,985,199 462,805 Total liabilities and credit-related commitments 11,533,045 262,480 881,911 1,267,040 839,991 14,784,467 Investments in subsidiaries with expected residual maturity between 3 months and 1 year include investment in N Banka in the amount 5,109 EUR thousands, which is expected to be merged with NLB during the year 2023. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 301   31 Dec 2021 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 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 - debt securities issued - other financial liabilities - lease liabilities Provisions Other liabilities Total liabilities NLB in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years 3,250,437 7,682 614 - - 29 - - - - - - 306 6,939 4,472 Total 3,250,437 7,682 12,360 24,773 57,473 141,428 918,421 443,656 1,585,751 2,825 916 317,315 66,454 568 - - - - - - - - 6,984 18,182 40,463 171,605 658 - - - - - - - - - - 90,276 50,129 676,938 3,100 - - 4,089 - - - 24,282 3,761 - 4,869 608,223 32,066 716,918 75,713 2,183,239 1,796,056 1,436,424 199,287 5,145,153 92,404 568 7,082 4,089 86,122 9,181 29,453 - - 5,752 - 66,818 - 15,198 723,757 786,023 - - - 3,761 31,902 11,853 22,192 - 1,330 - 19,304 9,181 14,255 37,984 - 31,902 - 3,678,568 288,410 999,178 3,885,036 3,848,340 12,699,532 7,602 - 35,377 94,326 44,569 9,303,755 - - 71,866 76 544 14,216 - - - - - 65,612 - 3,689 3,895 146 672 166 - - - - 746,028 125,287 - 1,759 2 614 18,501 1,442 - 352 - 15,003 82,882 156,322 406 - 23,495 2,006 29,646 3,683 - - - - - 7,602 352 35,377 109,329 873,479 8,629 9,659,605 - 283,071 13 414 - 1,532 406 288,519 99,271 3,256 49,363 21,039 9,572,331 74,180 893,633 313,795 293,659 11,147,598 Credit risk related commitments Non-financial guarantees 503,492 16,714 96,524 45,786 451,614 100,102 280,201 240,761 220,580 33,803 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 2022 Financial Report Contents 302     g) Derivative cash flows The table below illustrates cash flows from derivatives, contractual undiscounted cash flows prepared on the basis of broken down into the relevant maturity buckets based on spot rates on the reporting date. residual maturities. The amounts disclosed in the table are the 31 Dec 2022 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 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 NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (31,846) 31,895 (194,674) 193,719 (819) 816 (14) 45 (22,128) 22,136 (52,726) 53,098 (2,100) 2,560 (36) 30 (5,856) 5,863 (10,042) 9,996 (6,475) 6,487 - - - - - - (10,699) 19,982 (105,839) 76,356 (667) 850 (16,104) 1,468 (24,177) 44,616 (8,632) 15 (66,305) 66,381 (257,442) 256,813 (143,634) 144,330 (25,453) 2,408 (227,353) 226,475 (76,990) 77,824 (27,264) 36,691 (128,418) (32,809) (492,834) 84,311 44,631 469,932 NLB Group in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (26,202) 26,214 (96,742) 96,483 (1,116) 34 - - (10,460) 10,465 (2,362) 2,364 (16,853) 16,865 (17,335) 17,346 (12,180) 12,199 - - - - - - (65,695) 65,743 (116,439) 116,193 (2,107) 237 (10,153) 3,321 (26,901) 7,179 (12,053) 7,287 (52,330) 18,058 - - (1) 2 (51) 52 - - (52) 54 (124,060) 122,731 (14,929) 13,066 (44,342) 37,534 (39,132) 19,430 (12,053) 7,287 (234,516) 200,048 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 303                   31 Dec 2022 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 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 NLB in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (31,557) 31,618 (22,128) 22,136 (5,856) 5,863 (6,475) 6,487 (249,950) 248,993 (110,588) 110,595 - - - - - - - - (66,016) 66,104 (360,538) 359,588 (844) 819 (50) 45 (2,027) 2,567 (55) 30 (12,366) 20,349 (919) 850 (41,180) 77,243 (1,824) 1,468 (22,621) 44,616 (79,038) 145,594 (41) 15 (2,889) 2,408 (282,401) 281,475 (134,798) 135,328 (19,141) 27,062 (49,479) 85,198 (22,662) 44,631 (508,481) 573,694 NLB in EUR thousands Up to 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Total (24,891) 24,902 (102,036) 101,772 (10,460) 10,465 (6,875) 6,864 (16,853) 16,865 (17,335) 17,346 (12,180) 12,199 - - - - - - (64,384) 64,431 (126,246) 125,982 (1,116) 34 - - (2,107) 237 (10,153) 3,321 (26,901) 7,179 (12,053) 7,287 (52,330) 18,058 - - (1) 2 (51) 52 - - (52) 54 (128,043) 126,708 (19,442) 17,566 (44,342) 37,534 (39,132) 19,430 (12,053) 7,287 (243,012) 208,525 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 304                   6.4. Management of non-financial risks a) Operational risk When assuming operational risks, NLB Group follows the guideline that such risks may not materially impact its operations and, therefore, the risk appetite for operational risks is low to moderate. The risk is also gradually decreasing due to the reduced complexity of operations in NLB Group, with disinvestment process of non-core activities and optimisation of internal processes. NLB Group has set up a system of collecting loss events, identification, assessment, and management of operational risks, all with the aim of ensuring quality management of operational risks. This is particularly valid in strategic banking members. All NLB Group banking members monitor risk appetite limits for operational risk. The upper tolerance limit is defined as the limit amount of net loss that an individual member still allows in its operations. If the sum of net loss exceeds the tolerance limit, a special treatment of major loss events is required and, if necessary, takes additional measures for the prevention or mitigation of the same or similar loss events are taken. The warning and critical limit of loss events are also defined, which in case of exceeding require escalation procedures an acceptance of possible additional risk management measures. In addition, the Bank does not allow certain risks in its business – for them a so-called ‘zero tolerance’ was defined. For monitoring some specific more important key risk indicators that could show a possible increase of an operational risk, the Bank developed a specific methodology as an early warning system. Such risks are periodically monitored in different business areas, and the results are discussed at the Operational Risk Committee. The latter was named as the highest decision-making authority in the area of operational risk management. Relevant operational risk committees were also appointed at other NLB Group banks. The Management Board serves in this role at other subsidiaries. The main task of the aforementioned bodies is to discuss the most significant operational risks and loss events, and to monitor and support the effective management of operational risks including their mitigation within an individual entity. All NLB Group entities, which are included in the consolidation, have adopted relevant documents that are in line with NLB Group standards. In banking members, these documents are in line with the development of operational risk management and regularly updated. The whole NLB Group uses uniform software support, which is also regularly upgraded. In NLB Group, the reported incurred net loss arising from loss events in 2022 was significantly lower than in the previous year and remained within the set tolerance limits for operational risk. In general, considerable attention is paid to reporting loss The basis for modernising the business continuity plans is the events, their mitigation measures, and defining operational regular annual Business Impact Analysis (BIA). On its basis, the risks in all segments. To treat major loss events appropriately adequacy of the plans for Organizational Unit Plans (merged and as soon as possible, the Bank introduced an escalation office buildings and HR plans) and IT plans are checked. The scale for reporting bigger or more important loss events to best indicator of the adequacy of the business continuity plans the top levels of decision-making at NLB and the Supervisory is testing. In 2022, NLB tested evacuation, Manual Procedures, Board of NLB. Additional attention is paid to the reporting of backup locations and IT. No major deviations were identified. potential loss events in order to improve the internal controls, and thus minimise those and similar events. Furthermore, the In NLB Group, know-how and methodologies are transferred methodology to monitor, analyse, and report key risk indicators to the members. The members have adopted appropriate is established, servicing as an early warning system. The aim is documents which are in line with the standards of NLB and to improve business and supporting processes, as well enabling revised in accordance with the development of business prompt response. continuity management. The activity of the members is monitored throughout the year, and expert assistance is Through comprehensive identification of operational provided if necessary. risks, possible future losses are identified, estimated, and appropriately managed. Each year, special emphasis is For more efficient functioning of the business continuity placed on current risks as a result of risk identification management system in NLB Group, training courses and visits process, including ESG risks. For the later key risk indicators to individual banking members are also provided. All preventive (KRIs) have been also addressed for ESG risks, servicing as and response measures with regard to business continuity are an early warning system. The major operational risks are regularly sent to the members with the purpose to help and actively managed with the measures taken to reduce them. act in the uniform way. Besides, workshops are performed An operational risk profile is prepared once a year based on to present development of Business Continuity Management the operational risk identification. Special emphasis is put on System to all the NLB Group members to be more resilient in all the most topical risks, among which in particular are those relevant circumstances. with a low probability of occurrence and very high potential financial influence. For this purpose, the Bank has developed With regards to IT failures, the Bank successfully used the IT the methodology of stress-testing for operational risk. The plans and instructions for manual procedures, and thus also methodology is a combination of modelling loss event data and ensured business operations in emergency situations. scenario analysis for exceptional, but plausible events. Scenario analyses are made based on experience and knowledge of c) Management of other types of non-financial risks – experts from various critical areas. strategic risks, reputation risk, and profitability risk Risks not included in the regulatory capital requirements The capital requirement for operational risk is calculated using (standardised approach) but have or might have an important the basic indicator approach at the NLB Group level and using influence on the risk profile of NLB Group, are regularly the standardised approach at the NLB level. assessed, monitored, and managed. In addition, they are integrated into internal capital adequacy assessment process b) Business Continuity Management (BCM) In NLB Group, business continuity management is carried out to (ICAAP). NLB Group established internal methodologies for identifying and assessing specific types of risk, referring to protect lives, goods, and reputation. Business continuity plans the Group’s business model or arising from other external are prepared to be used in the event of natural disasters, IT circumstances. If a certain risk is assessed as a materially disasters, epidemic/pandemic, and the undesired effects of the important risk, relevant disposable preventive and mitigation environment to mitigate their consequences. measures are applied, including regular monitoring of their effectiveness. On this basis, internal capital is considered and its The concept of the action plan that is prepared each year consumption regularly monitored. is such that the activities contribute to the upgrading or improvement of the Business Continuity Management System. In 2022, Business Continuity Management was upgraded System according to external influence – we added list of all critical employees and their deputies for all Organizational Units. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 305 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 between market participants at the measurement date. NLB Group uses various valuation techniques to determine fair value. IFRS 13 specifies a fair value hierarchy with respect to the inputs and assumptions used to measure financial and non- In the absence of a principal market, the most advantageous liability. An active market is a market in which transactions for market for the asset or liability must be determined. an asset or liability are executed with sufficient frequency and volume to provide pricing information on an ongoing basis. • Level 2 – A valuation technique where inputs are observable, Assets and liabilities measured at fair value in active markets either directly (i.e., prices) or indirectly (i.e., derived from are determined as the market price of a unit (e.g., share) at the prices). Level 2 includes prices quoted for similar assets or measurement date, multiplied by the quantity of units owned liabilities in active markets and prices quoted for identical or by NLB Group. The fair value of assets and liabilities whose similar assets, and liabilities in markets that are not active. market is not active is determined using valuation techniques. The sources of input parameters for financial instruments, These techniques bear a different intensity level of estimates such as yield curves, credit spreads, foreign exchange rates, and assumptions, depending on the availability of observable and the volatility of interest rates and foreign exchange rates, market inputs associated with the asset or liability that is the MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report financial assets and liabilities at fair value. Observable inputs is Bloomberg. reflect market data obtained from independent sources, while unobservable inputs reflect the assumptions of NLB Group. This hierarchy gives the highest priority to observable market data when available, and the lowest priority to unobservable market data. NLB Group considers relevant and observable market prices in its valuations, where possible. The fair value hierarchy comprises the following levels: • Level 1 – Quoted prices (unadjusted) on active markets. This level includes listed equities, debt instruments, gold, subject of the valuation. Unobservable inputs shall reflect the estimates and assumptions that other market participants • Level 3 – A valuation technique where inputs are not based would use when pricing the asset or liability. on observable market data. Unobservable inputs are used to the extent that relevant observable inputs are not available. For non-financial assets measured at fair value and not Unobservable inputs must reflect the assumptions that classified at Level 1, fair value is determined based on valuation market participants would use when pricing an asset or reports provided by certified valuators. Valuations are prepared liability. This level includes non-tradable shares and bonds, in accordance with the International Valuation Standards (IVS). and derivatives associated with these investments and other assets and liabilities for which fair value cannot be derivatives, units of investment funds, and other unadjusted determined with observable market inputs. market prices of assets and liabilities. When an asset or liability may be exchanged in multiple active markets, the Wherever possible, fair value is determined as an observable principal market for the asset or liability must be determined. market price in an active market for an identical asset or Contents 306 a) Financial and non-financial assets and liabilities measured at fair value in the financial statements 31 Dec 2022 Financial assets Financial instruments held for trading Debt instruments Derivatives Derivatives - hedge accounting Financial assets measured at fair value through other comprehensive income Debt instruments Equity instruments Non-trading financial assets mandatorily at fair value through profit and loss Debt instruments Equity instruments Loans Financial liabilities Financial instruments held for trading Derivatives Derivatives - hedge accounting Financial liabilities measured at fair value through profit or loss Non-financial assets Investment properties Non-current assets held for sale Non-financial assets impaired during the year Recoverable amount of property and equipment Recoverable amount of investments in subsidiaries, associates and joint ventures Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value NLB Group NLB in EUR thousands 203 203 - - 1,746,405 1,745,896 509 11,512 3,116 8,396 - - - - - - - - - 21,368 - 21,368 59,362 1,169,306 1,090,664 78,642 - - - - 21,589 21,589 2,124 1,796 12,192 15,436 - - 17 - 17 - 3,492 2,236 1,256 7,519 - 7,519 - - - - - 23,447 - 30,636 - 21,588 203 21,385 59,362 2,919,203 2,838,796 80,407 19,031 3,116 15,915 - 21,589 21,589 2,124 1,796 35,639 15,436 30,636 - 203 203 - - 1,282,584 1,282,584 - - - - - - - - - - - - - 21,472 - 21,472 59,362 49,182 6,667 42,515 7,892 - - 7,892 22,150 22,150 2,124 2,514 6,753 4,235 - - 17 - 17 - 2,295 2,026 269 7,519 - 7,519 - - - - - - - - 3,301 21,692 203 21,489 59,362 1,334,061 1,291,277 42,784 15,411 - 7,519 7,892 22,150 22,150 2,124 2,514 6,753 4,235 - 3,301 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 307                                                                                 31 Dec 2021 Financial assets Financial instruments held for trading Derivatives Derivatives - hedge accounting Financial assets measured at fair value through other comprehensive income Debt instruments Equity instruments Non-trading financial assets mandatorily at fair value through profit and loss Debt instruments Equity instruments Loans Financial liabilities Financial instruments held for trading Derivatives Derivatives - hedge accounting Financial liabilities measured at fair value through profit or loss Non-financial assets Investment properties Non-current assets held for sale Non-financial assets impaired during the year Recoverable amount of property and equipment Recoverable amount of intangible assets Recoverable amount of investments in subsidiaries, associates and joint ventures Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value NLB Group NLB  in EUR thousands - - - 2,010,485 2,009,699 786 16,689 4,261 12,428 - - - - - - - - - - 7,677 7,677 568 1,449,888 1,385,211 64,677 - - - - 7,585 7,585 35,377 - 19,982 7,051 - - - 1 1 - 1,487 351 1,136 4,472 - 4,472 - - - - - 27,642 - 2,990 872 - 7,678 7,678 568 3,461,860 3,395,261 66,599 21,161 4,261 16,900 - 7,585 7,585 35,377 - 47,624 7,051 2,990 872 - - - - 1,533,797 1,533,797 - - - - - - - - - - - - - - 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 - - - - - - - - - 2,618 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 - - 2,819 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 308                                                                                 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 1 2 3 Transfers Equities Equity stake Gold Funds Debt securities Loans market value from exchange market market value from spot market regular valuation by fund management company market value from exchange market Equities Currency Interest Derivatives valuation model valuation model valuation model (underlying in level 1) valuation model valuation model valuation model valuation model valuation model valuation model valuation model valuation model (underlying instrument in level 3) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report from level 1 to 3 equity excluded from exchange market from level 1 to 3 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 from level 1 to 3 from level 1 to 2 from level 2 to 3 from level 2 to 3 fund management company stops publishing regular valuation from level 3 to 1 fund management company starts 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 2 from level 3 to 2 from level 3 to 2 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) Due to technical default of Russia in June 2022, there is no more maturity taking into account the required yield of the bond in For 2021, neither NLB Group nor NLB had any significant active market for Russian bonds. Consequently, NLB Group the market at the time of default, 100% repayment after four transfers between levels of valuation of financial instruments and NLB transferred Russian bonds with notional amount of years from maturity taking into account the required yield of measured at fair value in financial statements. USD 8 million from Level 1 to 3. Fair value at the date of transfer NPL on emerging markets, and no repayment. Each scenario was EUR 1,812 thousand. As of 31 December 2022, the bond is represents a third of the probability of an event occurring. evaluated according to three scenarios; 100% repayment at Contents 309                                     c) Financial and non-financial assets and liabilities at Level 2 At least one of the three valuation methods are used for the calculated on the basis of the discounted expected future regarding the fair value hierarchy valuation of investment property. The majority of investment cash flows with the required rate of return. In defining the Financial instruments on Level 2 of the fair value hierarchy at property is valued using the income approach where the expected cash flows for non-performing loans, the value of NLB Group and NLB include: present value of future expected returns is assessed. When collateral and other pay off estimates can be used; and • debt securities: mostly bonds not quoted on active markets valuing an investment property, average rents at similar • Russian bonds due to technical default in June 2022. and valuated by a valuation model; locations and capitalisation ratios such as: the risk-free yield, • derivatives: derivatives except forward derivatives and risk premium, and the risk premium to account for capital Non-financial assets on Level 3 of the fair value hierarchy at options on equity instruments that are not quoted on active preservation are used. Rents at similar locations are generated NLB Group include investment properties. markets; from various sources, like data from lessors and lessees, web • performing loans measured at fair value, which according to databases, and own databases. NLB Group has observable NLB Group uses three valuation methods for the valuation of IFRS 9 do not pass SPPI test. Fair value is calculated on the data for all investment property at its disposal. If observable equity financial assets mentioned in first bullet: income, market, basis of the discounted expected future cash flows with the data for similar locations are not available, NLB Group uses and cost approaches. required rate of return; and • the National Resolution Fund. data from wider locations and adjusts it appropriately. d) Financial and non-financial assets and liabilities at Level 3 input data within a reasonable possible range, but uses model NLB Group selects valuation model and values of unobservable Non-financial assets on Level 2 of the fair value hierarchy at of the fair value hierarchy and input data that other market participants would use. NLB Group and NLB include investment properties. Financial instruments on Level 3 of the fair value hierarchy in When valuing bonds classified on Level 2, NLB Group • equities: mainly financial equities that are not quoted on valuation of investment property. The majority of investment primarily uses the income approach based on an estimation active markets; property is valued using the income approach where the of future cash flows discounted to the present value. The input • derivative financial instruments: forward derivatives and present value of future expected returns is assessed. When parameters used in the income approach are the risk-free options on equity instruments that are not quoted on an valuing an investment property, average rents at similar yield curve and the spread over the yield curve (credit, liquidity, active organised market. Fair values for forward derivatives locations and capitalisation ratios such as: the risk-free yield, NLB Group and NLB include: At least one of the three valuation methods are used for the country). are determined using the discounted cash flow model. Fair risk premium and the risk premium to account for capital values for equity options are determined using valuation preservation are used. Rents at similar locations are generated Fair values for derivatives are determined using a discounted models for options (the Garman and Kohlhagen model, from various sources, like data from lessors and lessees, web cash flow model based on the risk-free yield curve. Fair values binomial model, and Black-Scholes model). Unobservable databases, and own databases. NLB Group has observable for options are determined using valuation models for options inputs include the fair values of underlying instruments data for all investment property at its disposal. If observable (the Garman and Kohlhagen model, binomial model, and determined using valuation models. The source of observable data for similar locations are not available, NLB Group uses Black-Scholes model). market inputs is the Bloomberg information system; data from wider locations and adjusts it appropriately. • non-performing loans measured at fair value, which according to IFRS 9 do not pass the SPPI test. Fair value is MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 310 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  in EUR thousands Total financial assets Balance as at 1 January 2021 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 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 Transfers to Level 3 Balance as at 31 December 2022 NLB Balance as at 1 January 2021 Valuation: - through profit or loss Foreign exchange differences Increases Decreases Balance as at 31 December 2021 Valuation: - through profit or loss - recognised in other comprehensive income Foreign exchange differences Increases Decreases Transfers to Level 3 Balance as at 31 December 2022 786 - (785) - - - - 1 - - 16 - - - - - 17 900 - - - - 63 (612) 351 - - - 239 (25) - (141) 1,812 2,236 927 (2) - 266 - - (55) 1,136 (2) 12 - 110 - - - - 1,256 4,171 - (56) - 357 - - 4,472 - - 477 - 262 2,873 (565) - 7,519 25,076 - 15,747 - 9 3,017 (43,849) - - - - - - - - - - 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 Derivatives Debt instruments Equity instruments Equity instruments Loans and other financial assets 786 (785) - - - 1 16 - - - - - 17 - - - - - - - 239 (25) - - 1,812 2,026 274 - - - (55) 219 - 50 - - - - 269 4,171 (56) 357 - - 4,472 477 - 262 2,873 (565) - 7,519 22,988 13,749 9 3,005 (39,751) - - - - - - - - 31,860 (2) 14,906 266 366 3,080 (44,516) 5,960 (2) 12 493 349 237 2,873 (706) 1,812 11,028 in EUR thousands Total financial assets 28,219 12,908 366 3,005 (39,806) 4,692 493 289 237 2,873 (565) 1,812 9,831 NLB Group and NLB recognise the effects from valuation of loans mandatorily measured at fair value through profit or at fair value through other comprehensive income in the trading instruments in income statement line item ‘Gains less loss in income statement line item ‘Gains less losses from non- accumulated other comprehensive income line item ‘Financial losses from financial assets and liabilities held for trading,’ trading financial assets mandatorily at fair value through profit assets measured at fair value through other comprehensive effects from valuation of non-trading equity instruments and or loss,’ and effects from valuation of financial assets measured income.’ MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 311                     In 2022 and in 2021, 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 2022 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 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 2022 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 NLB 2021 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 Financial assets held for trading Financial assets measured at fair value through OCI in EUR thousands Non-trading financial assets mandatorily at fair value through profit or loss Derivatives Debt instruments Equity instruments Equity instruments 16 - - - - - (25) 239 Financial assets held for trading Financial assets measured at fair value through OCI - - - 110 - 477 262 - in EUR thousands Non-trading financial assets mandatorily at fair value through profit or loss Derivatives Debt instruments Equity instruments Equity instruments - - - - - - - - 266 (56) 357 - Financial assets held for trading Financial assets measured at fair value through OCI in EUR thousands Non-trading financial assets mandatorily at fair value through profit or loss Derivatives Debt instruments Equity instruments Equity instruments 16 - - - - - (25) 239 Financial assets held for trading Financial assets measured at fair value through OCI - - - 50 - 477 262 - in EUR thousands Non-trading financial assets mandatorily at fair value through profit or loss Derivatives Debt instruments Equity instruments Equity instruments - - - - - - - - - - (56) 357 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 312                                                 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.d) Balance as at 31 December in EUR thousands NLB Group 2021 32,210 19 - - (502) (7,568) 22 1,260 3,416 (1,215) 27,642 2022 27,642 22 302 3 (7,578) 434 - - 2,622 - 23,447 e) Fair value of financial instruments not measured at fair For respective instruments fair values are calculated for value in financial statements disclosure purposes only, and do not impact NLB Group Financial instruments not measured at fair value in financial statement of financial position or income statement. statements are not managed on a fair value basis. The table below shows estimated fair values of financial instruments not measured at fair value in the statement of financial position. Financial assets measured at amortised cost - debt securities - 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 - debt securities issued - other financial liabilities 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 Carrying value Fair value Carrying value Fair value Carrying value Fair value Carrying value Fair value NLB Group NLB in EUR thousands 1,917,615 222,965 13,072,986 177,823 106,414 198,609 20,027,726 82,482 815,990 294,463 1,749,169 223,077 12,883,859 177,823 106,627 193,774 20,031,938 80,684 788,892 294,463 1,717,626 140,683 10,587,121 122,229 71,828 858,531 17,640,809 74,051 288,519 206,878 1,745,225 140,843 10,751,051 122,229 69,720 849,834 17,658,686 73,744 292,130 206,878 1,597,448 350,625 6,054,413 114,399 212,656 57,292 10,984,411 216 815,990 164,567 1,442,453 362,422 5,965,468 114,399 212,880 52,897 10,989,255 216 788,892 164,567 1,436,424 199,287 5,145,153 92,404 109,329 873,479 9,659,605 406 288,519 102,527 1,461,185 204,743 5,235,839 92,404 109,522 863,970 9,664,607 406 292,130 102,527 Loans and advances to banks The estimated fair value of deposits is based on discounted Deposits and borrowings Other financial assets and liabilities 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 instruments their carrying value. However, their actual value for NLB Group a reasonable approximation of their fair value as they mainly with similar credit risk and residual maturities. The fair value of depends on the timing and amounts of cash flows, current relate to short-term receivables and payables. overnight deposits equals their carrying value. market rates, and the credit risk of the depository institution Loans and advances to customers The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected itself. A portion of sight deposits is stable, similar to term deposits. Therefore, their economic value for NLB Group differs from the carrying amount. to be received. Expected cash flows are discounted at current The estimated fair value of other deposits and borrowings from market rates for debts with similar credit risk and residual customers is based on discounted cash flows using interest maturities to determine their fair value. rates for new deposits with similar residual maturities. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 313           Fair value hierarchy of financial instruments not measured at fair value in financial statements 31 Dec 2022 NLB Group NLB in EUR thousands Financial assets measured at amortised cost - debt securities - 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 - debt securities issued - other financial liabilities Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value 1,476,615 - - - - - - - 748,958 - 265,325 223,077 12,883,859 177,823 106,627 193,774 20,031,938 80,684 39,934 294,463 7,229 - - - - - - - - - 1,749,169 223,077 12,883,859 177,823 106,627 193,774 20,031,938 80,684 788,892 294,463 1,350,003 - - - - - - - 748,958 - 92,450 362,422 5,965,468 114,399 212,880 52,897 10,989,255 216 39,934 164,567 - - - - - - - - - - 1,442,453 362,422 5,965,468 114,399 212,880 52,897 10,989,255 216 788,892 164,567 31 Dec 2021 NLB Group NLB in EUR thousands 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 - 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 - debt securities issued - other financial liabilities 1,434,411 - - - - - - - 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 314                                                                                 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 arrangements are not All derivatives are conducted under the conditions of signed presented in a net amount in the statement of financial position Master Agreements (MA), with international banks ISDA MA is because netting rules apply to cash flows and not to the entire in place along with CSA annex and for corporates domestic financial instrument. MA is in place, which enable daily evaluation and exchange of margining. In 2013, NLB Group also novated certain standardised derivatives (some interest rate swaps) to a clearing house or central counterparty. A system of daily margins assures the mitigation and collateralisation of exposures, as well as the daily settlement of cash flows for each currency. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report 31 Dec 2022 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31 Dec 2021 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31 Dec 2022 Financial assets/liabilities Derivatives - assets Derivatives - liabilities 31 Dec 2021 Financial assets/liabilities Derivatives - assets Derivatives - liabilities NLB Group and NLB have no financial assets/liabilities set off in the statement of financial position. Gross amounts of recognised financial assets/liabilities Impact of master netting agreements Financial instruments collateral Amounts not set off in the statement of financial position NLB Group 80,724 17,482 72,204 1,959 3,053 3,053 NLB Group Gross amounts of recognised financial assets/liabilities Impact of master netting agreements Financial instruments collateral Amounts not set off in the statement of financial position 8,239 42,961 445 41,121 998 998 NLB Gross amounts of recognised financial assets/liabilities Impact of master netting agreements Financial instruments collateral Amounts not set off in the statement of financial position 80,834 24,273 72,204 8,251 3,133 3,133 NLB Gross amounts of recognised financial assets/liabilities Impact of master netting agreements Financial instruments collateral Amounts not set off in the statement of financial position 8,249 42,978 1,008 1,008 445 41,121 in EUR thousands Net amount 5,467 12,470 in EUR thousands Net amount 6,796 842 in EUR thousands Net amount 5,497 12,889 in EUR thousands Net amount 6,796 849 Contents 315                                         7. Analysis by segment for NLB Group a) Segments 2022 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 Reportable segment assets Investments in associates and joint ventures Reportable segment liabilities Additions to non-current assets Retail Banking in Slovenia Corporate and Investment Banking in Slovenia NLB Group Financial Markets in Slovenia Non-Core Members Other activities Unallocated Total in EUR thousands Strategic Foreign Markets 427,519 429,999 (2,480) 298,042 303,349 (5,307) (199,593) (28,538) 199,388 - 68 (12,325) 187,131 176,160 10,971 - 105,198 121,042 (15,844) 52,930 71,832 (18,902) (60,471) (4,629) 40,098 - - 12,156 52,254 52,254 - - 46,601 5,558 41,043 47,304 2,169 45,135 (8,812) (618) 37,171 - - (3,363) 33,808 33,808 - - 3,372,047 10,179,396 6,514,047 - 2,777,001 6,088 - 8,539,025 29,042 - 1,118,681 261 211,474 227,590 (16,116) 104,809 125,541 (20,732) (132,893) (11,149) 67,432 781 - (21,435) 46,778 46,778 - - 3,665,110 11,677 9,108,497 10,717 4,697 4,426 271 267 453 (186) (12,109) (498) (7,910) - - (829) (8,739) (8,739) - - 61,563 - 3,754 99 10,024 9,934 90 1,570 1,578 (8) (7,309) (621) 2,094 - 172,810 (3,073) 171,831 171,831 - - 356,400 - 190,957 4,688 - - - - - - - - - - - - - - (25,230) - - - - 805,513 798,549 6,964 504,922 504,922 - (421,187) (46,053) 338,273 781 172,878 (28,869) 483,063 472,092 10,971 (25,230) 446,862 24,148,563 11,677 21,737,915 50,895 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 316                 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 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 Impairment and provisions charge Profit/(loss) before income tax Owners of the parent Non-controlling interests Income tax Profit for the year Reportable segment assets Investments in associates and joint ventures Reportable segment liabilities Additions to non-current assets Retail Banking in Slovenia Corporate and Investment Banking in Slovenia 171,046 188,629 (17,583) 79,535 98,898 (19,363) (104,844) (11,659) 54,543 1,108 (6,684) 48,967 48,967 - - 2,811,209 11,525 7,720,693 9,972 101,505 110,588 (9,083) 35,714 44,481 (8,767) (40,829) (4,278) 56,398 - 30,450 86,848 86,848 - - 2,333,769 - 1,966,530 4,218 Strategic Foreign Markets 361,945 363,452 (1,507) 266,804 270,839 (4,035) (198,589) (29,329) 134,027 - (20,779) 113,248 101,784 11,464 - 9,797,839 - 8,315,316 26,608 NLB Group Financial Markets in Slovenia Non-Core Members Other activities Unallocated Total in EUR thousands 24,107 (8,855) 32,962 26,377 (6,188) 32,565 (7,963) (677) 15,467 - 329 15,796 15,796 - - 6,190,193 - 1,231,669 264 7,223 7,014 209 1,331 1,751 (420) (10,534) (833) (4,144) - 5,403 1,259 1,259 - - 95,905 - 7,749 (10,036) 6,127 6,091 36 (401) (421) 20 (10,259) (619) (4,751) - 39 (4,712) (4,712) - - 337,056 - 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 Segment reporting is presented in accordance with the retail clients, as well as the contribution to the result of the • Other accounts in NLB and N Banka for the categories whose strategy on the basis of the organisational structure used in associated company Bankart. management reporting of NLB Group’s results. NLB Group’s operating results cannot be allocated to specific segments, including negative goodwill from acquisition of N Banka NLB segments are business units that focus on different customers • Corporate and Investment Banking in Slovenia, which Lease&Go leasing Belgrade, as well as the subsidiaries NLB and markets. They are managed separately because each includes banking with Key Corporate Clients, SMEs, Cross- Cultural Heritage Management Institute and Privatinvest. business unit requires different strategies and service levels. border corporate financing, Investment Banking and Custody, Restructuring and Workout in NLB and N Banka, and part Non-Core Members include the operations of non-core The business activities of NLB and N Banka are divided into of the subsidiary NLB Lease&Go Ljubljana that includes NLB Group members, namely REAM and leasing entities in several segments. Interest income and expenses are reallocated operations with corporate clients. between segments on the basis of fund transfer prices (FTP). Other NLB Group members are, based on their business • Strategic Foreign Markets, which consist of the operations liquidation, NLB Srbija, and NLB Crna Gora. NLB Leasing Ljubljana was sold to the strategic company NLB Lease&Go Ljubljana within the NLB Group in 2021. Despite the change in activity, included in only one segment except NLB Lease&Go of strategic Group banks in the strategic markets (North ownership, its operations continue to be monitored within the Ljubljana which is according to its business activities divided Macedonia, Bosnia and Herzegovina, Kosovo, Montenegro, segment of non-core members. into two segments. and Serbia), as well as investment company KomBank Invest, Beograd, NLB DigIT, Beograd, NLB Lease&Go Skopje and NLB Group is primarily a financial group, and net interest The segments of NLB Group are divided into core and non-core NLB Lease&Go leasing Belgrade. Komercijalna banka, Banja income represents the majority of its net revenues. NLB Group’s segments. Luka was sold outside the NLB Group on 9 December 2021; main indicator of a segment’s efficiency is net profit before tax. The core segments are the following: segment for the year 2021. • Retail Banking in Slovenia, which includes banking with individuals and micro companies (NLB and N Banka), • Financial Markets in Slovenia include treasury activities and asset management (NLB Skladi), and part of subsidiary trading in financial instruments, while they also present the NLB Lease&Go Ljubljana that includes operations with results of asset and liabilities management (ALM) in both NLB its operations till that date are included in the result of the and N Banka. No revenues were generated from transactions with a single external customer that would amount to 10% or more of NLB Group’s revenues. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 317                                 b) Geographical information Geographical analysis includes a breakdown of items with respect to the country in which individual NLB Group entities are located. NLB Group Slovenia South East Europe Bosnia and Herzegovina Croatia Kosovo Montenegro North Macedonia Serbia Western Europe Germany Switzerland Total Revenues Net income Profit/(loss) before income tax in EUR thousands Income tax 2022 445,749 505,855 84,065 23 58,297 49,528 94,660 219,282 13 - 13 2021 352,053 458,571 83,087 5 51,512 43,983 87,936 192,048 17 1 16 2022 367,121 431,267 71,205 473 49,251 38,251 78,369 193,718 161 58 103 2021 301,021 365,649 52,735 207 42,595 34,756 70,157 165,199 249 499 (250) 2022 288,563 194,764 33,475 (170) 35,922 15,436 41,807 68,294 (264) (647) 383 2021 137,857 121,301 15,236 (181) 27,056 6,508 43,277 29,405 2,248 488 1,760 2022 (9,719) (15,487) (2,635) (45) (3,693) (1,838) (3,795) (3,481) (24) - (24) 2021 (5,043) (8,462) (2,213) (1) (2,787) (1,484) (4,054) 2,077 (33) - (33) 951,617 810,641 798,549 666,919 483,063 261,406 (25,230) (13,538) The column ‘Revenues’ includes interest and similar income, dividend income, and fee and commission income. The column ‘Net Income’ includes net interest income, dividend income, net fee and commission income, the net effect of financial instruments, foreign exchange translation, the effect on the derecognition of assets, net operating income, and gain less losses from non-current assets held for sale. NLB Group Slovenia South East Europe Bosnia and Herzegovina Croatia Kosovo Montenegro North Macedonia Serbia Western Europe Germany Switzerland Total Non-current assets Total assets Number of employees 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 31 Dec 2022 31 Dec 2021 in EUR thousands 152,037 204,802 35,550 377 14,289 17,416 36,348 100,822 28 28 - 150,829 214,380 34,782 383 14,988 18,328 37,384 108,515 30 30 - 13,935,167 10,216,136 1,799,877 3,557 1,082,474 825,400 1,832,477 4,672,351 8,937 691 8,246 11,716,270 9,845,128 1,596,370 4,025 930,383 775,238 1,758,269 4,780,843 16,098 971 15,127 2,833 5,392 971 6 467 380 954 2,614 3 1 2 2,619 5,563 942 6 463 374 877 2,901 3 1 2 356,867 365,239 24,160,240 21,577,496 8,228 8,185 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 318               The table below presents data on NLB Group members before intercompany eliminations and consolidation journals: NLB Group Slovenia South East Europe Bosnia and Herzegovina Croatia Kosovo Montenegro North Macedonia Serbia Western Europe Germany Switzerland Total Revenues Net income Profit/(loss) before income tax 2022 523,774 507,243 84,107 128 58,296 49,738 94,624 220,350 25 1 24 2021 448,559 459,405 83,275 3 51,509 43,978 87,864 192,776 19 1 18 2022 431,187 429,307 70,211 617 48,391 37,822 75,882 196,384 (12) 54 (66) 2021 387,692 374,776 67,806 274 41,833 35,417 68,429 161,017 86 493 (407) 2022 191,900 199,981 33,352 (170) 36,095 18,374 41,601 70,729 (2,835) (646) (2,189) 2021 225,706 146,496 30,895 (181) 27,223 7,969 43,054 37,536 2,247 489 1,758 in EUR thousands Income tax 2022 (9,153) (15,952) (2,635) (45) (3,693) (1,838) (3,795) (3,946) (24) - (24) 2021 (5,252) (8,940) (2,213) (1) (2,787) (1,484) (4,054) 1,599 (33) - (33) 1,031,042 907,983 860,482 762,554 389,046 374,449 (25,129) (14,225) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 319   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 Related-party transactions with Management Board and of NLB Group and NLB include: key management personnel other key management personnel, their family members and (Management Board, other key management personnel and companies these related parties have control, joint control, or their family members); the Supervisory Board; companies in which members of the Management Board, key management significant influence A number of banking transactions are entered into with related personnel, or their family members have control, joint control, parties within regular course of business. The volume of or a significant influence; a major shareholder of NLB with related-party transactions and the outstanding balances are as significant influence, subsidiaries, associates and joint ventures. follows: NLB Group 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 liabilities Other financial liabilities measured at fair value through profit or loss (note 2.31.) Other operating liabilities Guarantees issued and loan commitments Fee income Other income Other expenses Management Board and other Key management personnel Family members of the Management Board and other key management personnel 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 2022 2,097 1,526 (1,450) 2,173 41 2,170 2,938 (2,552) 2,556 (7) 2 801 6,559 237 19 17 - 2021 2,284 1,041 (1,228) 2,097 39 1,610 2,048 (1,488) 2,170 (4) 3 - 2,265 215 12 13 - 2022 415 324 (270) 469 10 718 634 (426) 926 - - - - 70 7 - - 2021 444 228 (257) 415 7 956 595 (833) 718 - 1 - - 72 6 - - 2022 532 8 (540) - - 590 6,413 (6,785) 218 - 3 - - - 66 - (382) 2021 - 891 (359) 532 6 136 1,625 (1,171) 590 - 14 - - 194 83 - (78) 2022 60 76 (82) 54 - 505 398 (555) 348 (2) - - - 17 2 - - 2021 305 55 (300) 60 4 323 321 (139) 505 (1) - - - 23 2 - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 320   NLB 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 liabilities Other financial liabilities measured at fair value through profit or loss (note 2.31.) Other operating liabilities Guarantees issued and loan commitments Fee income Other income Other expenses Management Board and other Key management personnel Family members of the Management Board and other key management personnel 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 2022 2,097 1,480 (1,405) 2,172 41 2,170 2,643 (2,277) 2,536 (7) 2 728 6,539 223 18 17 - 2021 2,284 1,041 (1,228) 2,097 39 1,610 2,048 (1,488) 2,170 (4) 3 - 2,265 215 12 13 - 2022 415 324 (270) 469 10 718 634 (426) 926 - - - - 70 7 - - 2021 444 228 (257) 415 7 956 595 (833) 718 - 1 - - 72 6 - - 2022 532 8 (540) - - 590 6,413 (6,785) 218 - 3 - - - 66 - (382) 2021 - 891 (359) 532 6 136 1,625 (1,171) 590 - 14 - - 194 83 - (78) 2022 60 76 (82) 54 - 505 398 (555) 348 (2) - - - 17 2 - - 2021 305 55 (300) 60 4 323 321 (139) 505 (1) - - - 23 2 - - Key management compensation The remuneration for the members of the Supervisory Board of NLB d.d. and the Management Board of NLB d.d. is regulated in in case of every significant change submit the Remuneration Members of the Supervisory Board may, in relation to their Policy to the General Meeting of Shareholders for voting, and in function of a member of the Supervisory Board, only receive Remuneration Policy for the Members of the Supervisory Board any case at least every four years. remuneration that is compliant with the relevant resolutions of the Bank’s General Meeting. The Supervisory Board members of NLB d.d. and the Members of the Management Board of NLB d.d. The remuneration for the identified employees and other employees is regulated in Remuneration Policy for employees of NLB d.d. and NLB Group. In 2022, NLB d.d. in accordance with the EBA Guidelines on sound remuneration policies under Directive 2013/36/EU, Companies Act (ZGD-1) and the Banking Act (ZBan-3), adopted a new Remuneration Policy for members of the Supervisory Board of NLB d.d. and members of the Management Board of In the Remuneration Policy and based thereon and in are entitled to a remuneration for performing their function accordance with Commission Delegated regulation (EU) and/or attendance fees for their membership in the Supervisory 2021/923, the Bank designates identified employees. In Board of the Bank and the committees of the Supervisory designating identified employees, the internal organisation Board of the Bank, which are determined in accordance with and the nature, scope and complexity of the Bank’s activities respective applicable resolution by the General Meeting of are taken into account. The criteria fully take into account the the Bank, and to reimbursement of travel expenses, daily risks that the Bank or the NLB Group is or could be exposed to allowances, and accommodation costs up to the amount its given risk profile and risk appetite. The Remuneration Policy provided by the regulations governing reimbursement of costs includes members of the Supervisory Board, members of the related to work and other income not included in the tax base. NLB d.d., which was adopted by the Supervisory Board of NLB Management Board, senior management, and other identified d.d. and then submitted to the General Meeting of Shareholders employees who are included in the Policy on the basis of the of NLB d.d., where it was voted in December 2021. Pursuant Bank’s self-assessment. to Article 294.a of the Companies Act (ZGD-1), the Bank must MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 321   The Bank’s General Meeting may determine and change The variable portion of receipts for a given financial year may If the variable remuneration part of payment of an identified the remuneration of the members of the Supervisory Board not exceed seven salaries of a member of the Management employee exceeds EUR 50 thousand or/and is higher than independently from the Remuneration Policy, and may change, Board in the financial year. Other identified employees are one-third of his/her total remuneration for each financial repeal, or replace any of its resolutions in relation to the entitled to a variable part of remuneration according to the year and if this is permissible in accordance with the relevant remuneration of the Supervisory Board members at any time, category of employee in the maximum amount of three to six regulation, then at least 50% of the variable remuneration must or adopt a new resolution in relation to the remuneration of the salaries. Key management shall be entitled to a variable part consist of instruments. The part of the variable remuneration Supervisory Board members. of the performance benefit only in proportional part to the of an identified employee consisting of instruments shall be actual period of employment (duration of the term of office) of awarded and paid, under the terms and conditions in the valid The performance of key management is defined by financial the Bank during the period to which the variable part of the Remuneration Policy, in instruments whose value is based on and non-financial criteria. In addition to the salary determined performance benefit relates. the value of the share of NLB d.d. (with these instruments not in their employment contract, they are entitled to the annual giving any dividends or other yields). variable part of the salary based on their achievement of The non-deferred part of variable remuneration is paid no the financial and non-financial performance criteria, which later than three months after the adoption of the Annual Report The deferred part of the variable part of the salary must be encompass the goals of NLB Group or NLB, the goals of the of NLB Group for the business year to which the variable deferred for a period of at least five years of the day on which organisational unit, and the personal goals of the employee remuneration relates. Variable remuneration part of payment of the non-deferred part of such variable remuneration is paid performing special work. an identified employee is awarded and paid in cash, provided and it is paid in proportional shares, according to the relevant that the amount does not exceed EUR 50 thousand or/and is legislation. The objectives and criteria of each member of the Management higher than one-third of his/her total remuneration for each Board shall be determined each year by the Supervisory Board financial year, and if this is permissible in accordance with the NLB d.d. at the time of adoption of the Bank’s annual business relevant regulation. plan. The objectives and criteria for the identified employees are determined by the Management Board. The table below shows payments in presented periods: NLB Group and NLB Management Board Other key management personnel   in EUR thousands Supervisory Board Short-term benefits Cost refunds Long-term bonuses: - severance pay - other benefits - variable part of payments Total Short-term benefits include: 2022 2,282 6 - 7 276 2,571 2021 1,589 4 385 5 394 2,377 2022 6,148 98 - 77 1,425 7,748 2021 5,480 83 5 70 2,898 8,536 2022 696 74 - - - 770 2021 705 26 - - - 731 The reimbursement of cost comprises food allowances, travel • monetary benefits (gross salaries, supplementary insurance, expenses, and use of own resources. holiday allowances and other bonuses); • non-monetary benefits (company cars, health care, residential facilities, etc.). MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 322             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 18.09.2013 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 Archibald Kremser 31.07.2013 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 Antonio Argir 28.04.2022 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 Andrej Lasič 28.04.2022 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 Hedvika Usenik 28.04.2022 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 Petr Brunclík 18.05.2020 - 30.06.2021 Short-term benefits: - gross salary and holiday allowance - benefits and other short-term bonuses Costs refunds Long-term bonuses: - severance payments - other benefits - variable part of payments Total 2022 542,370 6,908 1,318 1,912 95,214 647,722 486,438 33,588 1,243 1,452 89,132 611,853 517,370 39,220 1,302 1,452 91,870 651,214 205,291 30,077 796 859 - 237,023 205,292 4,216 796 859 - 211,163 205,292 5,512 782 859 - 212,445 - - - - - - - in EUR 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 323                               Payments to individual members of the Supervisory Board Member Primož Karpe 11.02.2016 Andreas Klingen 22.06.2015 David Eric Simon 04.08.2016 Gregor Rok Kastelic 10.06.2019 Shrenik Dhirajlal Davda 10.06.2019 Mark William Lane Richards 10.06.2019 Verica Trstenjak 15.06.2020 Sergeja Kočar 17.06.2020 Islam Osama Bahgat Zekry 14.06.2021 Tadeja Žbontar Rems 22.01.2021 Bojana Šteblaj 17.06.2020 - 12.09.2022 Janja Žabjek Dolinšek 20.11.2020 - 08.07.2022 Peter Groznik 08.09.2017 - 14.06.2021 Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds Session fees Annual compensation Other bonuses - benefit Costs refunds 2022 - 96,000 382 10,952 - 90,000 382 7,360 - 81,000 382 7,931 - 81,000 382 9,340 - 72,000 382 8,767 - 81,000 382 9,493 - 66,000 382 1,473 - 8,327 382 1,183 - 72,000 382 17,622 - 31,215 382 185 - 12,014 - - - 1,473 - 32 - - - - in EUR 2021 - 96,000 447 4,629 - 90,000 447 4,947 - 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 - - 38,608 447 5,705 - 26,656 447 - - 15,655 447 - - 6,839 447 - - 32,800 - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 324                                   Related-party transactions with subsidiaries, associates and joint ventures NLB Group Loans issued Balance at 1 January Acquisition of subsidiaries 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 Income/(expenses) provisions for guaranties and commitments Fee income Fee expenses Other income Other expenses Associates in EUR thousands Joint ventures 2022 1,011 77 145 (176) 1,057 39 (8) 7,967 - 5,982 (8,574) 5,375 - 7 1,116 2,034 (1) 69 (12,894) 92 (571) 2021 1,106 - 89 (184) 1,011 38 26 3,973 - 7,610 (3,616) 7,967 - 20 1,148 2,032 - 38 (13,583) 162 (726) 2022 201 - 2 (2) 201 3 2 3,492 3 1,073 (1,497) 3,071 (46) - 1 - - - - 5 - 2021 851 - 7 (657) 201 4 69 3,434 3 7,706 (7,651) 3,492 (59) - 1 - - 1 - 2 - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 325                   NLB Loans issued Balance at 1 January Increase Decrease Balance at 31 December of which at amortised cost of which at fair value through profit or loss Interest income Impairment Valuation Deposits Balance at 1 January Increase Decrease Balance at 31 December Interest income Interest expenses Impairment Loans received Balance at 1 January Increase Decrease Balance at 31 December Interest income Interest expenses Deposits received Balance at 1 January Increase Decrease Balance at 31 December Interest expenses Derivatives Fair value Contractual amount Interest income Interest expenses 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 Subsidiaries Associates Joint ventures 2022 2021 2022 2021 2022 2021 in EUR thousands 250,303 169,176 536,279 170,308 (448,682) (89,181) 337,900 250,303 328,641 241,840 9,259 7,461 (645) (2,225) 8,463 4,906 1,075 (558) 83,948 69,386 2,171,418 433,380 (2,031,874) (418,818) 223,492 83,948 940 (5) (18) 44,484 13,001 (44,484) 3 - 2 - 44,484 - 13,001 44,484 9 (2) 1 - 1,011 145 (174) 982 982 - 39 27 - - - - - - - - - - - - - - 1,106 89 (184) 1,011 1,011 - 38 26 - - - - - - - - - - - - - - 201 2 (2) 201 201 - 3 2 - - - - - - - - - - - - - - 851 7 (657) 201 201 - 4 69 - - - - - - - - - - - - - - 68,372 19,415 23,967,799 7,558,162 (23,870,393) (7,509,205) 165,778 68,372 7,967 5,982 (8,574) 5,375 3,973 7,610 (3,616) 7,967 27 82 (69) 40 284 213 (470) 27 (465) (6,681) 113,711 312 (181) (2) (7) 9,789 - - 2,514 25,491 (8) 1,860 34,016 584 14,541 9,720 5 2,710 46,366 (85) 10,983 10,200 (280) 1,543 (5,864) (7,132) - - - - - 7 - 972 2,034 (1) - 69 - - - - - 20 - 1,001 2,032 - - 38 (21) (9,964) (10,782) 1,078 (2,133) (298) 92 (559) - 162 (708) - - - - - - - - - - - - - - 2 - - - - - - - - - - - - - 1 - 2 - - MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 326               Related-party transactions with major shareholder with significant influence The volumes of related party transactions with major shareholder are as follows: Loans issued Balance at 1 January Increase Decrease Balance at 31 December Interest income Investments in securities Balance at 1 January Exchange difference on opening balance Acquisition of subsidiaries 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 held for trading NLB Group in EUR thousands NLB 2022 2021 2022 2021 20,534 3,708 (6,647) 17,595 713 534,522 36 151,047 672,692 (746,698) (47,312) 564,287 5,816 - 31,141 2 1,194 350 (28) 257 (3) (66) 23,219 13,199 (15,884) 20,534 713 20,534 3,708 (6,647) 17,595 713 23,219 13,199 (15,884) 20,534 713 691,868 483,656 597,123 - - 1,247,211 (1,392,356) (12,201) 534,522 6,021 (652) 659 4 1,184 309 (27) 212 (5) (158) - - 553,823 (521,066) (43,024) 473,389 5,844 - 31,141 2 1,194 350 (28) 257 (3) (66) - - 947,581 (1,049,482) (11,566) 483,656 6,389 (652) 659 4 1,184 309 (27) 212 (5) (158) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 327             NLB Group and NLB disclose all transactions with the major shareholder with significant influence. For transactions with other government-related entities, NLB Group discloses individually significant transactions. NLB Group and NLB Guarantees issued and loan commitments NLB Group and NLB Loans Debt securities measured at amortised cost Borrowings, deposits and business accounts Guarantees issued and loan commitments 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 Amount of significant transactions concluded during the year 2022 188,000 2021 70,000 Year-end balance of all significant transactions 2022 565,330 64,913 108,606 152,500 2021 507,159 72,633 184,267 152,500 in EUR thousands Number of significant transactions concluded during the year 2022 3 2021 1 in EUR thousands Number of significant transactions at year-end 2022 10 1 3 2 2021 7 1 3 2 in EUR thousands Effects in income statement during the year 2022 5,130 777 (4,940) (99) 2021 3,141 241 (990) (213) MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 328                                               9. Events after the reporting date USA regional banks & Credit Suisse turmoil In March 2023, two regional banks in the USA, Silicon Valley Bank and Signature Bank collapsed. Developments in the USA also had impacts in Europe and put European banks under stress. Credit Suisse was impacted by the collapse in confidence as the demise of regional banks in the USA. To increase confidence in the banking sector, Swiss financial regulators engineered an emergency rescue plan for Credit Suisse resulting in the UBS Group AG buying Credit Suisse. As of 31 March 2023, the NLB Group has only a small exposure to Credit Suisse, deriving mainly from limited investment in bonds. From a capital management point of view, most of the cumulative negative valuations of FVOCI securities (except for a smaller part which as of 31 December 2022 was carved out by the temporary treatment of sovereign debt introduced by COVID-19 related ‘quick-fix’ – see Note 5.23.) have already been reflected in the NLB Group’s capital ratios and thus going forward are rather supportive in terms of capital levels as those exposures mature and new investments are made only with a short duration (i.e. low valuation risks). From a liquidity point of view, no material deviations from the normal intra-monthly deposit dynamics were identified at the NLB Group level as a result of the turmoil. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 329 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 Antonio Argir, Responsible for Group governance, payments and innovations 23 Andreas Burkhardt, CRO Archibald Kremser, CFO Andrej Lasič, CMO (responsible for Corporate and Investment Banking)24 Hedvika Usenik, CMO (responsible for Retail Banking and Private Banking)25 Slovenian network Area Branch Ljubljana Trg republike 2 1000 Ljubljana, Slovenia Tel: +386 1 476 23 30 Area Branch Northwest and Central Slovenia Ljubljanska cesta 62 1230 Domžale, Slovenia Tel: +386 1 724 55 01 Area Branch East Slovenia26 Titova cesta 2 2000 Maribor, Slovenia Tel: +386 2 234 45 20 Area Branch Northeast Slovenia27 Rudarska cesta 3 3320 Velenje, Slovenia Tel: +386 2 234 45 04 23 Since 28 April 2022. 24 Since 28 April 2022. 25 Since 28 April 2022. 26 From 1 January 2023, new area branch. 27 From 1 January 2023, relocated. 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 Dolenjsko-Posavska region29 Seidlova cesta 3 8000 Novo mesto, Slovenia Tel.: +386 7 339 14 13 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 Area Branch Southeast Slovenia Seidlova cesta 3 8000 Novo mesto, Slovenia Tel: +386 7 339 14 56 Area Branch Southwest Slovenia Cesta Zore Perello - Godina 7 6000 Koper, Slovenia Tel: +386 5 610 30 10 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 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 Primorsko-Goriška region28 Cesta Zore Perello - Godina 7 6000 Koper, Slovenia Tel.: +386 5 610 30 17 28 From 1 January 2023, reorganized. 29 From 1 January 2023, new business centre. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 330 Members of NLB Group NLB Komercijalna Banka AD Beograd Svetog Save 14 11000 Belgrade, Serbia Tel: +381 11 30 80 100 Email: kontakt.centar@nlbkb.rs www. nlbkb.rs Vlastimir Vuković, President of the Management Board Dejan Janjatović, Deputy of the president of the Management Board Dragiša Stanojević, Member of the Management Board Bojana Kaličanin - Stojanović, 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 Branko Greganović, President of the Management Board Günter Friedl, Member of the Management Board30 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@nlb-rs.ba www.nlb-rs.ba Goran Babić, President of the Management Board Marjana Usenik, Member of the Management Board Ljiljana Krsman, Member of the Management Board NLB Banka d.d., Sarajevo Ul. Koševo br. 3 71000 Sarajevo, Bosnia and Herzegovina Tel: +387 33 720 300 E-mail: info@nlb.ba www.nlb.ba Lidija Žigić, President of the Management Board Denis Hasanić, Member of the Management Board Jure Peljhan, Member of the Management Board NLB Banka sh.a., Prishtina Rr. Ukshin Hoti nr. 124 10000 Prishtina, Kosovo Tel: +383 38 744 000 E-mail: info@nlb-kos.com www.nlb-kos.com Albert Lumezi, President of the Management Board Gem Maloku, Member of the Management Board NLB Lease&Go, leasing, d.o.o., Ljubljana Šlandrova ulica 2 1231 Ljubljana - Črnuče, Slovenia Tel: +386 1 586 29 00 E-mail: info@nlbleasego.si www.nlbleasego.si Andrej Pucer, Director Anže Pogačnik, Director Lavdim Koshutova, Member of the Management Board Claus-Peter Martin Mueller, Director 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, President of the Management Board Vujošević Dražen, Member of the Management Board Lana Đurasović, Member of the Management Board31 N Banka d.d. Ljubljana Dunajska cesta 128a 1000 Ljubljana, Slovenia Tel: +386 80 22 65 E-mail: info@nbanka.si www.nbanka.si Heribert Fernau, President of the Management Board NLB Lease&Go d.o.o. Skopje Majka Tereza 1, 1000 Skopje, North Macedonia Tel.: + 389 2 5100 845 E-mail: info@nlbleasego.mk Gregor Martinuč, Director    Gjore Andonovski, Director NLB Lease&Go Leasing d.o.o. Beograd Bulevar Despota Stefana 12 11000 Belgrade, Serbia Tel.: +381 11 3342 644 E-mail: office@nlbleasego.rs Boris Stević, Chairman of the Executive Board Michael Krenn, member of the Executive Board NLB Cultural Heritage Management Institute, Ljubljana Čopova ulica 3 Elena Burdakova, Member of the Management Board 1000 Ljubljana, Slovenia Martin Mavrič, Member of the Management Board NLB DigIT d.o.o. Beograd Bulevar Mihajla Pupina 165v 11070 New Belgrade, Serbia Tel: +386 1 476 42 63 E-mail: irena.cuk@nlb.si Irena Čuk, Director Tel.: +381 11 7220 112 E-mail: office@nlbdigit.rs www.nlbdigit.rs Vladimir Rupar, Director Dragana Marjanović Gencel, Director 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 NLB Leasing d.o.o., Ljubljana – v likvidaciji Šlandrova ulica 2 1231 Ljubljana - Črnuče, Slovenia Tel: +386 1 586 29 41 E-mail: anze.pogacnik@nlbleasing.si Anže Pogačnik, Liquidator NLB Leasing d.o.o. Beograd – u likvidaciji Bulevar Mihajla Pupina 165 v 11070 New Belgrade, Serbia Tel: +381 11 222 01 16 E-mail: veljko.tanic@nlbleasing.rs Veljko Tanić, Liquidator 30 Until 18 December 2022. 31 From 3 June 2022. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 331 Optima Leasing d.o.o. u likvidaciji, Zagreb Miramarska 24 NLB Skladi, upravljanje premoženja, d.o.o., Ljubljana Tivolska cesta 48 REAM d.o.o., Podgorica Bul. Džordža Vašingtona br. 102, I. sprat/20 10000 Zagreb, Croatia Tel: +385 1 632 99 79 E-mail: vjekoslav.budimir@optima-leasing.hr Vjekoslav Budimir, Liquidator Prvi faktor d.o.o., v likvidaciji, Ljubljana Slovenska cesta 17 1000 Ljubljana, Slovenia E-mail: france.zupan@prvifaktor.si E-mail: iztok.zupanc@prvifaktor.si France Zupan, Liquidator Iztok Zupanc, Liquidator 1000 Ljubljana, Slovenia Tel: +386 1 476 52 70 E-mail: info@nlbskladi.si www.nlbskladi.si Kruno Abramovič, President of the Management Board32 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 Prvi faktor – faktoring d.o.o., Beograd – u likvidaciji Bulevar Mihajla Pupina 165 v Aleksander Kurtevski, Director Jure Kvaternik, Director 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 Ulica Damira Tomljanovića - Gavrana 11 10000 Zagreb, Croatia Tel: +385 99 636 46 77 E-mail: josip.zurga@ream-cro.com E-mail: julijana.milic@ream-cro.com Josip Žurga, Director Julijana Milić, Director OL Nekretnine d.o.o. u likvidaciji, Zagreb Miramarska 24 10000 Zagreb, Croatia Tel: +385 1 56 25 919 E-mail: ivan.strek@ream-cro.com Vjekoslav Budimir, Liquidator 11070 New Belgrade, Serbia Tel: +381 64 642 4915 E-mail: zeljko.atanaskovic@prvifaktor.rs Željko Atanasković, Liquidator Prvi faktor d.o.o. u likvidaciji, Zagreb Miramarska cesta 24 10000 Zagreb, Croatia Tel: +385 1 6165 000 E-mail: info@prvifaktor.hr Vjekoslav Budimir, Liquidator NLB InterFinanz AG in Liquidation, Zürich Beethovenstrasse 48 8002 Zürich, Switzerland 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 New Belgrade, Serbia Tel: +381 11 22 25 351 Liljana Zoraja, Liquidator LHB Aktiengesellschaft, Frankfurt am Main Silberbornstrasse 14 D-60320 Frankfurt, Germany Tel: +49 69 95 62 58 27 E-mail: matjaz.jevnisek@lhb.de Matjaž Jevnišek, President of the Management Board Ivan Štrek, Liquidator PRIVATINVEST d.o.o. Ljubljana Dunajska cesta 128A 1000 Ljubljana, Slovenia Tel: +386 80 22 65 E-mail: info@nbanka.si Heribert Fernau, Director Miha Hiršl, Director PRO-REM d.o.o., Ljubljana - v likvidaciji Čopova 3 1000 Ljubljana, Slovenia Tel: +386 1 586 29 16 E-mail: info@s-ream.si www.nlbrealestate.com Jovica Jakovac, Liquidator Nataša Batagelj, Liquidator REAM d.o.o., Beograd – Novi Beograd Bulevar Mihaila Pupina 165 v 11070 New Belgrade, Serbia Tel: +381 11 22 25 374 E-mail: vladimir.vasilijevic@ream-srb.com Vladimir Vasilijević, Director Marko Bradić, Director33 Miroslav Živković, Director34 SPV2 d.o.o., Beograd – Novi Beograd Bulevar Mihaila Pupina 165 v 11070 New Belgrade, Serbia Tel: +381 11 22 25 374 E-mail: office@ream-srb.com Vladimir Vasilijević, Director 32 From 16 February 2023 new President of the Management Board Luka Podlogar. 33 Until 31 December 2022. 34 From 1 January 2023. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 332 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 Tara Hotel d.o.o., Budva Bulevar Džordža Vašingtona 102, Podgorica 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 New Belgrade, Serbia Tel: +381 11 22 25 366 E-mail: office@nlbsrbija.co.rs www.nlbsrbija.co.rs Veljko Tanić, Director35 Željko Atanasković, Director NLB Crna Gora d.o.o., Podgorica Bulevar Džordža Vašingtona 102, II sprat/38 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 1 586 29 16 E-mail: info@s-ream.com www.nlbrealestate.com Jovica Jakovac, Director Lamija Hadžiosmanović, Director ARG - Nepremičnine d.o.o. Vrhniška cesta 30, 1354 Horjul, Slovenia Tel: +386 59 784 943 E-mail: matic.kermavnar@cbre.com Matic Kermavnar, Director 35 Until 31 December 2022. MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 333 Definitions and Glossary of Selected Terms AC ALCO ALM ALMM AML/CTF AT1 BCM BIA BiH BMR BoS bps BPV CB CBR CCF CEE CEO CET1 CFO CGU CIR CIRS CISO CMO CoR CRD CRM CRO CRR CSA CSD CSI CSR CVA DGS DWH EAD EaR EBA EBRD ECB ECL ECRA EEA EIB EMIR EPS ESEF ESG ESMS EU EVE EVS EWS FATF FTP FURS FVOCI Amortised Costs Asset and Liability Committee Asset and Liability Management Additional Liquidity Monitoring Metrics Anti-Money Laundering and Counter-Terrorism Financing Additional Tier 1 capital Business Continuity Management Business Impact Analysis Bosnia and Herzegovina Benchmarks Regulation Bank of Slovenia Basis Points Basis Point Value Central Bank Combined Buffer Requirement Credit Conversion Factor Central Eastern Europe Chief Executive Officer Common Equity Tier 1 capital Chief Financial Officer Cash-Generating Units Cost-to-Income Ratio Currency Interest Rate Swaps Chief Information Security Officer Chief Marketing Officer Cost of Risk 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 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 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 FVTPL FX GDP GDPR GDR GGB GRI GS HHI HR IAS IASB ICAAP IFRIC IFRS ILAAP IRRBB IRS ISDA IVS JST 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 OBM OCR OEM O-SII OU p.p. P1R P2eM P2G P2M P2P P2R 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 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. Probability of Default 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 Risk Weighted Assets 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 Supervisory Review and Evaluation Process Single Resolution Fund Single Supervisory Mechanism Total Capital Ratio Traded Debt Instruments PD POCI POS PSD2 REAM RFR RICS ROA ROE RoS RPA RWA SEE SICR SLA SME SPPI SRB SREP SRF SSM TCR TDI The Group NLB Group Targeted Longer-Term Refinancing Operations TLTRO Total Risk exposure Amount TREA Total SREP Capital Requirement TSCR United Nations Sustainable Development Goals UN SDG UNEP FI PRB 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 Prevention of Money Laundering and Terrorist Financing Act VaR VAT ZBan-3 ZGD-1 ZPIZ ZPPDFT-2 ZPPDFT-2A Act Amending the Prevention of Money Laundering and ZTFI-1 ZVKNNLB ZVOP-2 ZVPot-1 Terrorist Financing 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 Consumer Protection Act Non-Performing Exposures Non-Performing Loans Net Promoter Score Net Present Value Net stable funding ratio 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 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 334 MB Statement SB Statement Key Highlights Strategy Risk Factors & Outlook Sustainability Performance Overview Risk Management Events After 2022 Financial Report Contents 335 NLB d.d., Ljubljana nlb.si NLB d.d. Production: Saatchi & Saatchi Ljubljana Photographs: Archive NLB Group members and IStock Copyright: NLB d.d., Ljubljana Ljubljana, April 2023 

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