Nova Ljubljanska banka d.d., Ljubljana. EUR 130,000,000 Perpetual Floating rate Tier One Step-up Notes Issue Price 100 per cent.

Transcription

1 Nova Ljubljanska banka d.d., Ljubljana EUR 130,000,000 Perpetual Floating rate Tier One Step-up Notes Issue Price 100 per cent. Prospectus The 130,000,000 Perpetual Floating Rate Tier One Step-up Notes (the Notes ) of Nova Ljubljanska banka d.d., Ljubljana ( NLB or "the Issuer") have no maturity and may only be redeemed at the option of NLB. Subject to the NLB having obtained all necessary approvals of the competent authorities, NLB may redeem all (but not some only) of the Notes at their principal amount on any Interest Payment Date falling in or after July Subject to certain additional conditions described herein, the Notes may also be redeemed at the option of NLB on the Interest Payment Date falling in July 2010 or on any Interest Payment Date thereafter. See Terms and Conditions of the Notes Redemption and Purchase. The claims under the Notes are subordinated to the claims of all other creditors of NLB other than claims under NLB's ordinary or non-cumulative preferential shares and any other claims that rank, or are expressed to rank, pari passu with the claims under the Notes. See Terms and Conditions of the Notes Status and Subordination. Interest on the Notes is payable quarterly in arrear on the Interest Payment Dates falling on 15 July and 15 January in each year. NLB may, subject to certain conditions described herein, suspend the payment of interest in respect of the Notes. The payments so suspended shall be non-cumulative. See Terms and Conditions of the Notes Status and Subordination. For a discussion of certain factors regarding NLB and the Notes which should be considered by prospective purchasers, see Risk Factors. The Notes will not be rated. Application has been made to list the Notes on the EuroMTF of the Luxembourg Stock Exchange. The Notes are initially represented by a temporary global note (the Temporary Global Note ), without interest coupons attached, which was deposited on or about 15 July 2005 (the Closing Date ) with a common depositary for Euroclear Bank S.A./N.V. as operator of the Euroclear system ( Euroclear ) and Clearstream Banking, société anonyme ( Clearstream, Luxembourg ). The Temporary Global Note will be exchangeable for interests in a permanent global note (the Permanent Global Note ), without interest coupons attached, on or after a date which is expected to be 24 August 2005, upon certification as to non-u.s. beneficial ownership. The Permanent Global Note will be exchangeable in whole, but not in part, for definitive Notes in bearer form in the denomination of EUR 100,000 in the limited circumstances set out in the Permanent Global Note. See Summary of Provisions relating to the Notes while in Global Form. The date of this Prospectus is 30 August 2005.

2 NLB accepts responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of NLB (which has taken all reasonable care to ensure that such is the case) the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information. No person has been authorised to give any information or to make any representation other than those contained in this Prospectus in connection with the offering of the Notes and, if given or made, such information or representations must not be relied upon as having been authorised by NLB or the Lead Manager (as defined under Subscription and Sale below). Neither the delivery of this document nor any sale made hereunder shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of NLB since the date hereof. The Lead Manager has not separately verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Lead Manager as to the accuracy or completeness of the information contained in this Prospectus or any other information provided by NLB in connection with the Notes or their distribution. This Prospectus is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by NLB or the Lead Manager that any recipient of this Prospectus should purchase any of the Notes. Each investor contemplating purchasing Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness NLB. This Prospectus may only be used for the purposes for which it has been published. This Prospectus does not constitute an offer of, or an invitation by or on behalf of NLB or KBC Bank N.V. to subscribe or purchase any Notes. The distribution of this Prospectus and the offer or sale of Notes may be restricted by law in certain jurisdictions. Persons into whose possession this Prospectus comes are required by NLB and KBC Bank N.V. to inform themselves about and to observe any such restrictions. The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended, (the Securities Act ) and are subject to U.S. tax law requirements. Subject to certain exceptions, the Notes may not be offered, sold or delivered within the United States or to U.S. persons. No Notes may be offered or sold, directly or indirectly, and neither this Prospectus nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this Prospectus or any Notes may come must inform themselves about, and observe, any such restrictions on the distribution of this Prospectus and the offering and sale of Notes. For a further description of certain restrictions on the offering and sale of the Notes and on distribution of this Prospectus, see Subscription and Sale below. In connection with the issue and distribution of the Notes, KBC Bank N.V. may over-allot or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail for a limited period. However, there may be no obligation on KBC Bank N.V. or any agent of it to do this. Such stabilising, if commenced, may be discontinued at any time and must be brought to an end after a limited period. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus, in particular those in which NLB uses the words anticipates, estimates, expects, believes, intends, plans, may, will, should and any similar, may constitute forward-looking statements. Forward-looking statements include statements concerning NLB s plans, objectives, goals, strategies and future operations and performance and the assumptions underlying these forward-looking statements. NLB has based these forward-looking statements on its current view with respect to future events and financial performance. These views reflect the best judgement NLB but involve uncertainties and are subject to certain risks the occurrence of which could cause actual results to differ materially from those expressed or implied in the NLB s forward-looking 2

3 statements and from past results, performance or achievements. Although NLB believes that the estimates and the projections reflected in its forward-looking statements are reasonable, if one or more of the risks, uncertainties or other factors materialise or occur, including those which NLB has identified in this Prospectus, or if any of the NLB s underlying assumptions prove to be incomplete or incorrect, the NLB s actual results of operations may vary from those expected, estimated or projected. Such factors include, among others, the following: the ability of NLB and its subsidiaries to develop and expand their business; the ability of NLB to take advantage of new technologies and integrate new computer systems in its operations, and to use these systems to enhance productivity and support new products; the ability of NLB to integrate acquired businesses; changes in overall economic conditions or currency exchange rates; the effects of European Economic and Monetary Union; capital spending and financial resources; the effects of regulation (including tax regulations); outcome of any legal proceedings; and anticipated future revenues. NLB's forward-looking statements speak only as of the date of this Prospectus. NLB expressly disclaims any obligation or undertaking to release publicly any updates of, or revisions to, any forwardlooking statement contained herein to reflect any change in NLB s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. All subsequent written or oral forward-looking statements attributable to NLB, or persons acting on NLB s behalf, are expressly qualified in their entirety by the cautionary statements contained throughout this Prospectus. As a result of these risks, uncertainties and assumptions, a prospective purchaser of the Notes should not place undue reliance on these forward-looking statements. 3

4 Table of Contents 1. PRESENTATION OF FINANCIAL INFORMATION 7 2. INCORPORATION BY REFERENCE 8 3. EXCHANGE RATES AND EXCHANGE CONTROLS 9 4. LIST OF ABBREVIATIONS RISK FACTORS TERMS AND CONDITIONS OF THE NOTES _ SUMMARY OF PROVISIONS RELATING TO THE NOTES IN THE GLOBAL FORM INFORMATION ABOUT THE ISSUER History and development of the Issuer The legal and commercial name of the Issuer The place of registration of the Issuer and its registration number The date of the incorporation of the Issuer Domicile and legal form of the Issuer The objects of the Issuer _ Recent events of the Issuer BUSINESS OVERVIEW _ Principal activities Brief description of the issuer s principal activities Significant new products and/or activities Principal markets Competition and market shares Other Business Related Information Business Volumes Credit Risk Management _ Market Risk Management Human Resources Management Information Technology _ ORGANISATIONAL STRUCTURE _ Description of the Issuer and the NLB Group Dependence of the Issuer upon other entities within the Group TREND INFORMATION_ Trends, uncertainties and events Trends Uncertainties _ Commitments Demands Slovenian Banking Sector PROFITS FORECAST OR ESTIMATES ADMINISTRATIVE, MANAGEMENT AND SUPERVISORY BODIES Members of the administrative, management and supervisory bodies 59 4

5 13.2. Administrative, management and supervisory bodies conflicts of interests Transactions of the Issuer with members of the Management and Supervisory Board Potential conflicts of interest NLB' CAPITAL Issued Share Capital and Number of Shares Approved Increase in Share Capital Subscribed Capital Own Shares Employees stakes MAJOR SHAREHOLDERS AND PRIVATISATION The issuer s shareholders Issuer s privatisation CAPITALISATION FINANCIAL INFORMATION CONCERNING THE ISSUER S ASSETS AND LIABILITIES, FINANCIAL POSITION AND LOSSES Financial Statements Non-Consolidated Financial Information Consolidated Financial Information _ Auditor s report for financial year ending 31 December Legal and arbitration proceedings Issues related to the dissolution of the former Socialist Federal Republic of Yugoslavia Other litigation or arbitration proceedings involving NLB or its subsidiaries Material Contracts Comfort letter in respect of LHB Internationale Handelsabnk AG Obligations in Connection with Acquisition of SIB Regulatory Requirements Capital Adequacy Bank of Slovenia rules Regulatory provisions for loan impairment SLOVENIAN TAXATION SUBSCRIPTION AND SALE GENERAL INFORMATION Issue Date Authorisation Litigation Significant or Material Change Third Party Information Purpose of the Issue and Use of Proceeds Listing and Admission to Trading Clearing Systems _ Statutory Auditors 88 5

6 21. INFORMATION ON DISPLAY Documents that can be obtained Documents available for inspection Financial reporting obligations of the NLB 89 APPENDIX I 90 APPENDIX II 92 APPENDIX III 93 INDEX TO THE FINANCIAL STATEMENTS F-1 6

7 1. PRESENTATION OF FINANCIAL INFORMATION NLB prepares audited consolidated and non-consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ). The NLB's financial information included in this Prospectus has been derived and/or extracted from NLB's consolidated and non-consolidated financial statements as of and for the three months ended 31 March 2004 and 2005 (the "Interim Financial Statements") and from NLB's and consolidated and non-consolidated financial statements as at and for the years ended 31 December 2003 and 2004 (the Annual Financial Statements and together with the Interim Financial Statements, the Financial Statements ), in each case prepared in accordance with IFRS. The Annual Financial Statements have been audited by PricewaterhouseCoopers d.o.o. located at Parmova cesta 53, SI-1000 Ljubljana, Slovenia ("PWC"). PWC have expressed an unqualified opinion on the Annual Financial Statements. The Annual Financial Statements, including the review and audit opinions of PWC and the accompanying notes are set out on pages to F- 1 to F-62 of this Prospectus. The selected financial and other data contained in this Prospecuts should be read in conjunction with the notes to Financial Statements contained or incorporated by reference in this document. Companies that are included in consolidation as at and for the year ended 31 December 2004 are presented in notes to the Annual Financial Statements (see note 44). As regards consolidation as per 31 March 2005 the following changes should be noted: - increase of shareholdings in Banka Domžale d.d., Domžale (by 2.5. % points), Banka Zasavje d.d., Trbovlje (0.7 % points), Tutunska banka d.d., Skopje (0.8 % points), Banka Celje d.d., Celje (2.9 % points); - establishment of 100 % indirectly controlled new companies LB Leasing Podgorica d.o.o. and Prvi faktor Beograd d.o.o.; - change of ownership of LB Leasing Koper d.o.o., which still remains 100 % controlled by the NLB or the banks of the NLB Group. NLB also prepares consolidated and non-consolidated semi-annual interim financial statements in accordance with Slovenian Accounting Standards ( SAS ). IFRS differs in certain significant respects from SAS as it is evident in the Appendix Summary of Principal Differences between IFRS and Slovenian Accounting Standards herein. NLB presents its financial statements in Slovenian Tolar ( SIT ). However, for comparative purposes only, this Prospectus presents translations of certain SIT amounts into Euro at specified rates. Unless otherwise stated, any balance sheet data in Euro is translated from SIT at the exchange rates applicable on the date of such balance sheet (or, if no such rate was published for such date, the immediately preceding date), and any income statement data in Euro is translated from SIT into Euro at the average exchange rate applicable to the period to which such income statement data relate. See Exchange Rates for further information regarding rates of exchange between the SIT and the Euro. In this Prospectus, sums of the amounts listed in a table may not add due to rounding. 7

8 2. INCORPORATION BY REFERENCE The annual reports of NLB Group for the years ended 31 December 2004 and 31 December 2003 and NLB's interim report for the three months ended 31 March 2005 are incorporated by reference in this Prospectus. All documents incorporated by reference may be obtained free of charge at the specified office of the Paying Agent in Luxembourg. 8

9 3. EXCHANGE RATES AND EXCHANGE CONTROLS The table below sets forth, certain period-ending, high, average and low for SIT/Euro (ECU) midexchange rates expressed as a number of SIT per Euro (ECU). Period-end High Average Low to 30 June As per 15 July ,5160 Source: Bank of Slovenia There are currently no exchange controls in Slovenia that would restrict the payment of any amounts in respect of the Notes by NLB. 9

10 4. LIST OF ABBREVIATIONS Abbreviation ALCO ATM Basel II BCK BIS BoS CAR EBRD ECB EIB EMU ERM EU EUR FX IFRS KAD KBC LHB NBY NLB NLB Group RoS SAS SEE SFRY SIT SITIBOR SME SOD TOM USD Phrase Assets-Liabilities Committee Automated Teller Machine New Basel Capital Accord Back-up Bank for International Settlements Bank of Slovenia Capital Adequacy Ratio European Bank for Reconstruction and Development European Central Bank European Investment Bank Economic and Monetary Union Exchange Rate Mechanism European Union Euro Foreign Exchange International Financial Reporting Standards Kapitalska družba, d.d. (State Pension Fund) KBC Bank N.V., Brussels LHB Bank Internationale Handelsbank AG, Frankfurt/Main National Bank of Yugoslavia Nova Ljubljanska banka d.d., Ljubljana NLB and its associated companies set out in the Appendix III Republic of Slovenia Slovenian Accounting Standards South East Europe Socialist Federalist Republic of Yugoslavia Slovenian Tolar Slovenian Interbank Offered Rate Small & Medium sized Enterprises Slovenska odškodninska družba, d.d. (Slovenian Restitution Fund) Base Interest Rate (Temeljna obrestna mera) US Dollar 10

11 5. RISK FACTORS Prior to making an investment decision prospective investors should carefully consider all of the information set forth in this Prospectus including the following risk factors. The risk factors set out below are not intended to be exhaustive and there may be other considerations, which should be taken into account in relation to any investment in the Notes. Risks relating to NLB Competition On 1 May 2004 Slovenia became a member of the European Union. Although Slovenia s membership of the European Union may improve NLB s operating environment, it may also intensify an already competitive market. EU accession has also made Slovenia s banking sector more attractive to foreign investors. As the banking sector is highly concentrated and dominated by the top three banks (51,7% market share including NLB), foreign banks may look to offer more competitive rates for loans and deposits (including other services offered by NLB) to gain a foothold in the market. This would put downward pressure on net interest margins, and ultimately could negatively impact NLB s profitability. It is possible that with EU accession competition will continue to grow, which could have a material adverse effect on NLB s future financial condition and results of operations. Agreements and undertakings as a result of privatisation The first phase of privatisation of the NLB was concluded in The Government of the Republic of Slovenia ( RoS ) sold the 34% stake to the KBC Bank N.V., Brussels ( KBC ) and 5% to the European Bank for Reconstruction and Development ( EBRD ). RoS still has the biggest share in the capital (35,4% directly and 10% indirectly through Slovenian Restitution Fund (SOD) and State Pension Fund (KAD), companies wholly owned by RoS). As a result of privatisation steps already undertaken, KBC, EBRD, RoS (along with KAD and SOD) have entered into a number of agreements, in particular the Shareholders Agreement (the Shareholders Agreement ), setting out the relationship among the NLB s shareholders, which among others define corporate governance, future status of NLB, terms of investment and undertakings by KBC, rights and obligations of RoS and terms of EBRD s investment and similar. KBC agreed not to dispose of, sell or create any encumbrance or trust over any of the shares held by it until 31 December 2005 while RoS has a right to sell at any time up to 31 December 2005 a block of RoS residual shares amounting to no less than 5% and no more than 25% plus one share to KBC (please see further description in Section on NLB s Shareholders). Changes in the shareholders structure may influence on the NLB s business and investment policy, its future anticipated activities and perspective on the Slovenian and other (SEE) markets. Fluctuations in interest rates may impact NLB s results NLB s performance is also influenced by fluctuation in interest rates across Europe (with respect to net interest income and asset/liability management). The bank s interest rate exposures are monitored and managed using interest rate sensitivity gap reports. Those reports contain both on- and offbalance sheet net interest rate sensitive positions which are separated by types of interest rates and repricing bands at a single point in time. The results of NLB s banking operations are affected by NLB s management of interest rate risk and sensitivity. Interest rate sensitivity refers to the relationship between changes in market interest rates and NLB s net interest income. Interest rate risk arises as a result of mismatches in the maturities of NLB s assets and liabilities. A mismatch of interest-earning assets and interest-bearing liabilities in any given period, which tends to accompany changes in interest rates, may have a material effect on NLB s financial condition or results of operations. 11

12 Acquisition and Integration of the banks in South East Europe NLB Group operates in EU countries and SE Europe through the following banks: LHB Internationale Handelsbank AG, Frankfurt/Main ( LHB ), Adria Bank AG, Vienna, CBS Bank d.d., Sarajevo, LHB Banka a.d., Banja Luka, LHB Banka Beograd a.d., Beograd, Continental banka a.d., Novi Sad, Montenegrobanka a.d., Podgorica, Euromarket banka a.d., Podgorica, Tutunska banka a.d., Skopje and West East Bank a.d., Sofija. The aforementioned banks in SE Europe have contributed a lot to establishing NLB s stable position in the region. Among other things, these banks have also played an important role in building up new connections between business entities from Slovenia and SE Europe. The Management believes there are significant synergies to be gained from the acquisition of the banks in SE Europe since NLB will henceforth have access to both an extensive branch network, as well as to banks strong retail client base, which provides further potential for cross-selling. However there can be no assurance that the expected benefits of the transaction will materialise. Accordingly, any difficulties in the integration process may have a material adverse effect on NLB s financial condition and results of operations. Non-performing loans Due to its history as a state-owned bank, NLB inherited a part of the amount of non-performing loans from the time when NLB underwent a government-sponsored rehabilitation programme as part of the rehabilitation programme initiated by the banking authorities in Slovenia. The most of such loans have been successfully resolved until now. While the Management is convinced that the risks relating to these non-performing loans are sufficiently covered by specific loan loss reserves, there can be no assurance that additional provisioning requirements will not adversely affect NLB s profitability or constrain its credit rating. NLB has strict credit approval and monitoring procedures in order to limit the amount of future non-performing loans. However, there can be no assurance that its credit approval and monitoring procedures will reduce the amount of loans that become non-performing in the future, or that non-performing loans will not have a material negative impact on NLB s operating results in future periods. In addition, a downturn in the Slovenian economy would be likely to have a negative impact on NLB s financial condition and operating results, which could significantly increase its level of non-performing loans and require additional loan loss provisions. Changes in the Slovenian and European regulatory framework could adversely affect NLB s business The NLB Group is subject to extensive regulation and supervision by the Bank of Slovenia ( BoS ). The banking laws to which NLB is subject govern the activities in which banks may engage, and are designed to maintain the safety and soundness of banks, as well as to limit the banks exposure to risk. In addition, NLB must comply with financial services laws that govern its marketing and selling practices. Any changes in how such laws and regulations are applied, or the implementation of the New Basel Capital Accord ( Basel II ) on capital requirements for financial institutions, may have a material effect on NLB s business and operations. As some of the banking laws and regulations affecting NLB have only been recently adopted, the manner in which such laws and related regulations are applied to the operations of financial institutions is still evolving. No assurance can thus be given that laws and regulations will be adopted, enforced or interpreted in a manner that will not have an adverse effect on the business, financial condition, cash flows and results of operations of NLB. Changes in law Due to the rapid changes that Slovenian laws have undergone during recent years, NLB may from time to time have violated, may be violating and may in the future violate, certain legal requirements, including provisions of labour, foreign exchange, customs, tax and banking regulations. NLB believes that any such violations have not had a material adverse effect upon NLB s activities or financial condition, but there can be no assurances that this will continue to be the case. 12

13 Information technology systems In recent years NLB has been implementing new solutions for business support with the aim to achieve simpler architecture and higher integration, and solutions that would ensure easier change management as response to the needs for delivering new services to the market,. In relation to this NLB had faced difficulties in the second half of 2003, which have since been overcome. NLB has recently set up the strong back-up (BCK) facilities with all required BC processes. NLB is continuing the process of replacing old legacy systems together with the process of integration of support for all front-end services in one solution. In the wholesale and corporate business NLB started the roll out of Globus a new integrated IT solution. The time frame for completing all required functionalities is 2007, and is both a business opportunity and operational risk. The implementation of the data warehouse last year has provided an opportunity to introduce CRM and adhere to the demanding changes on regulatory reporting. The key targets for information systems development in the next two years include the EURO compliance project with the target date of January 1 st This project is focused on ensuring that all systems will be Euro compliant, and that the conversion process will be implemented on schedule. Entering the EU has also had additional impact on Information Systems IS with new regulatory changes, such as the planned reforms on payments services in the EU. Also the business impact on growth of competition and the need for new product and services will require an increased number of requests for change. Economic risk NLB conducts its business in Slovenia and abroad, either directly, or indirectly through its subsidiaries. Most of its subsidiaries are situated in the area of SE Europe and the EU. The potential economic risk factors in these markets that may adversely affect NLB s performance are set out below. Economic risk Slovenia 2004 was an important milestone in the Slovenia s history. Two of Slovenia s national objectives were realised, namely NATO membership in April the subsequent entry to the EU in May. In addition, Slovenia entered the exchange rate mechanism ERM2 in July. Despite a change of government following the general elections in November, no major shifts in foreign policy are anticipated. However policy differences relating to the manufacturing and financial sectors could arise, in particular in the case of the latter there is a strong possibility of consolidation, as well as the privatisation of nationally owned banks and insurance companies. Interest rates and inflation are anticipated to decline further as Slovenia endeavours to move closer to compliance to Maastricht criteria for EMU entry in January 2007.GDP is expected to grow at around 4 percent in real terms in Main economic risk factors that could potentially influence the course of business for entities operating in Slovenia: - failure to ensure the stability of exchange rate SIT/EUR within the boundaries, set by the entry into ERM 2; - failure to enter the EMU and adopt Euro as a single currency in 2007; - new scheme of adjusting the level of pensions, which is expected to increase the expenditures for pensions and could adversely affect the fiscal deficit and/or spending; - uncertainty as to the potential change in the tax system in the future; - the increase in oil prices and prices of raw materials could further affect the terms of trade and subsequently the real GDP growth. Economic risk SE Europe Most markets in which NLB Group is active showed a positive trend in Bulgaria, Bosnia and Herzegovina, Croatia, and Serbia and Montenegro all saw solid economic growth and grew faster than 13

14 Slovenia. Only Macedonia saw its industrial output decline. A common characteristic of all these countries is their very high levels of unemployment. Potential risk factors that could adversely affect the course of business of the NLB and/or NLB Group in SE Europe: - political instability and uncertainty; - legal uncertainty, legal under-regulation; - lack of fiscal discipline; - potential political unrest due to high levels of unemployment; - for Serbia: unresolved issues as to the status of Kosovo, as well as the future of the joint state with Monte Negro; - for Croatia: failure to cooperate with the International Criminal Tribunal for the former Yugoslavia could further dampen Croatia s chances to start negotiations for accession to the EU; - for Macedonia: unresolved issues with Greece that could harm the beginning of the negotiations with the EU. Legal risk Although remote in the NLB s view, there are certain proceedings existing or threatened which may influence NLB s operations in the future. Please see section on Legal and Arbitration proceedings for further details. Credit ratings The international credit ratings of NLB include assumptions of expected support of the RoS in the case of any material events that would negatively impact the bank s financial position. In case when when this support was reduced or no longer perceived to be available, this could affect the international credit rating of the bank. Capital raising constraints The largest shareholders of the NLB are RoS (including KAD and SOD), KBC and EBRD. Due to a lack of interest on the side of RoS to provide additional capital and its unwillingness to allow for changes in the ownership structure the NLB is currently unable to raise new equity capital. Therefore the bank uses other measures (hybrid instruments, subordinated debt etc.) to provide sufficient capital in order to maintain capital adequacy ratio above the required level as the bank grows and expands its business (see also the section on Regulatory Reporting Requirements). The above-described situation could potentially change. Risks relating to the Notes Absence of prior market Application has been made to list the Notes on the EuroMTF of the Luxembourg Stock Exchange. However, there can be no assurance that an active trading market for the Notes will develop, or, if one does develop, that it will be maintained. If an active trading market for the Notes does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. Subordination The claims under the Notes are subordinated to the claims of all other creditors of NLB other than claims under NLB's ordinary or non-cumulative preferential shares and any other claims that rank, or 14

15 are expressed to rank, pari passu with the claims under the Notes. This means, in particular, that on a winding-up of NLB (i) the claims of the Noteholders and the Couponholders shall be subordinated in right of payment to the claims ranking in priority to the Notes and (ii) no Noteholder shall be entitled to claim for or receive or retain any amount payable hereunder unless and until all amounts payable under the claims ranking in priority to the Notes have been paid in full. Suspension of Interest NLB may, subject to certain conditions described herein, suspend the payment of interest in respect of the Notes if the most recent unconsolidated financial statements published prior to the date on which the same would otherwise become due and payable show no distributable net profit ("bilančni dobiček"). In such circumstances, NLB will be relieved from the obligation to make payment of such interest. The payments so suspended shall be non-cumulative and NLB shall have no further obligation with respect to the amounts of interest so suspended. See Terms and Conditions of the Notes Status and Subordination. Restricted remedy for non-payment In accordance with the requirements set out in the Banka Slovenije's Regulation entitled "Sklep o kapitalski ustreznosti bank in hranilnic" (Official Gazette RS, No. 24/2002, 85/2002, 22/2003, 36/2004, 68/2004, 103/2004, 124/2004 and 62/2005), the sole remedy against NLB available to any Noteholder for recovery of amounts owing in respect of any payment of principal or interest in respect of the Notes will be the taking of such steps in the Republic of Slovenia as may be appropriate with a view to having NLB declared bankrupt, or put into liquidation. In such an event, if NLB is declared bankrupt or put into liquidation, all Notes shall become due and payable without further formality, subject always to the provisions of the Notes as to subordination and other characteristics of the Notes. Tax Uncertainties NLB may have the option to redeem the Notes prior to 15 July 2015 if certain circumstances set out in Condition 5(b) of the Terms and Conditions of the Notes arise, including the following: (i) (ii) if NLB has or will become obliged to gross-up any payment of principal or interest by in accordance with Condition 7 and such obligation cannot be avoided by NLB taking reasonable measures available to it; as a result of a change in law or regulation or the interpretation thereof, NLB is or will become unable to deduct amounts of interest payable under the Notes for the purpose of calculating its overall taxable income; or Regarding (i), NLB believes that no Slovenian withholding tax applies to the amounts of interest payable by NLB under debt securities insofar (a) such payments are made through non-resident paying agents and (b) the identity of beneficial owners of such interest is not known and cannot be known to NLB. Accordingly, NLB has taken the decision that it will not withhold such tax unless the tax authorities of the Republic of Slovenia will provide it with a different interpretation and has notified this decision to the competent tax authorities in February No response from the tax authorities has been received so far. Regarding (ii), the Republic of Slovenia have not yet confirmed to NLB that the interest payable under the Notes will be a tax-deductible expense of NLB. In addition, Slovenian tax legislation contains provisions prusuant to which amounts of interest payable on the loans granted by persons having their registered seat or domicile in a country outside EU which has a general nominal income tax rate lower than 12,5 per cent. shall not be recognised as tax-deductible expenses. It is not clear whether and how this provision may apply in the context of the Notes. 15

16 6. TERMS AND CONDITIONS OF THE NOTES The following are the terms and conditions substantially in the form in which they will be endorsed on the Notes: The issue of the 130,000,000 Perpetual Floating Rate Tier One Step-Up Notes (the "Notes") was authorised by a resolution of the Management Board ("uprava") and Supervisory Board ("nadzorni svet") of Nova Ljubljanska banka d.d., Ljubljana, a bank incorporated under the laws of The Republic of Slovenia (the "Issuer") on 8 July, 2005 and on 17 June, 2005, respectively. A Fiscal Agency Agreement dated 11 July 2005 (as amended or supplemented from time to time, the "Fiscal Agency Agreement") has been entered into in relation to the Notes between the Issuer and Kredietbank S.A. Luxembourgeoise as fiscal agent and the paying agents named in it. The fiscal agent and the paying agents for the time being are referred to below respectively as the "Fiscal Agent and the Paying Agents (which expression shall include the Fiscal Agent). The Fiscal Agency Agreement includes the form of the Notes and the coupons relating to them (the "Coupons"). Copies of the Fiscal Agency Agreement are available for inspection during usual business hours at the specified offices of the Paying Agents. The holders of the Notes (the "Noteholders") and the holders of the Coupons (whether or not such Coupons are attached to the relevant Notes) (the "Couponholders") are deemed to have notice of, all the provisions Fiscal Agency Agreement. 1. Definitions In these Conditions, except to the extent that the context otherwise requires: "Business Day" means, in respect of the place specified herein, any day on which banks are open for presentation and payment of bearer debt securities and for dealings in foreign currencies in such place; "Capital Adequacy Regulation" means the Central Bank s Regulation entitled "Sklep o kapitalski ustreznosti bank in hranilnic" (Official Gazette RS, No. 24/2002, 85/2002, 22/2003, 36/2004, 68/2004, 103/2004, 124/2004 and 62/2005); "Central Bank" means the Banka Slovenije, or any successor as banking supervisory authority of Slovenia; "euro" or " " means the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Community, as amended. "Euro-zone" means the region comprised of member states of the European Union that adopt the single currency in accordance with the Treaty; "Extraordinary Resolution" means a resolution passed at a meeting of noteholders duly convened and held in accordance with the Fiscal Agency Agreement by a majority of at least 75 per cent. of the votes cast; "Senior Creditors" means any and all creditors of the Issuer (which expression shall, for the avoidance of doubt, not include holders of any of the ordinary or non-cumulative preferential shares issued by the Issuer in their capacity as holders of such shares), including creditors whose claims are subordinated to the claims of unsubordinated creditors or other subordinated creditors, other than those whose claims are, or are expressed to rank, pari passu with the claims of the Noteholders; "specified office" means, in relation to the Fiscal Agent or a Paying Agent, the specified office of such entity referred to in the Fiscal Agency Agreement; "Subsidiary" means, in relation to any Person (the "first Person") at any particular time, any other Person (the "second Person"): 16

17 (a) (b) whose affairs and policies the first Person controls or has the power to control, whether by ownership of share capital, contract, the power to appoint or remove members of the governing body of the second Person or otherwise; or whose financial statements are, in accordance with applicable law and generally accepted accounting principles, consolidated with those of the first Person; "Slovenia" means the Republic of Slovenia; "TARGET" means the Trans European Automated Real Time Gross Settlement Express Transfer (TARGET) System; "TARGET Business Day" means a day on which TARGET is operating; and "Treaty" means the Treaty establishing the European Communities, as amended by the Treaty on European Union, as amended or reenacted. 2. Form, Denomination and Title (a) (b) Form and denomination The Notes are serially numbered and in bearer form in the denominations of 100,000 each with Coupons attached on issue. Notwithstanding the foregoing, it is anticipated that, on issue, the Notes will be represented by a temporary global note, without coupons, which will be exchanged for a permanent global note, without coupons, as provided for in the Fiscal Agency Agreement. The Fiscal Agency Agreement contains additional provisions applicable to the Notes in global form. Title Title to the Notes and Coupons passes by delivery. The holder of any Note or Coupon will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it, any writing on it, or its theft or loss) and no person will be liable for so treating the holder. 3. Status and Subordination (a) Status The Notes and Coupons constitute unsecured, subordinated obligations of the Issuer, subordinated at all times to the claims of all Senior Creditors and shall at all times rank pari passu and without any preference among themselves and with other instruments of the Issuer which are or are expressed to rank equally with the Notes and the Coupons and in priority to all classes of share capital of the Issuer. The Notes shall qualify as innovative instruments of the Issuer within the meaning of the provisions of Article 3.3 of the Capital Adequacy Regulation and shall have, among others, the following characteristics: (i) (ii) (iii) the Notes must enable the Issuer to absorb losses on a going-concern basis, for which purpose the Issuer shall, among others, be entitled to suspend payments of interest under the Notes in circumstances described in Condition 3 (d) and dispose freely with the amount so suspended, and the amount so suspended shall not cumulate; the Notes shall be permanent and in no event shall the principal amount of the Notes become due and payable at the initiative of any Noteholder; neither the Rate of Interest nor the Margin (each as defined in Condition 4(c)) shall be reset due to a change in the credit standing of the Issuer; 17

18 and the provisions of these Conditions shall be construed accordingly. The provisions of this Condition 3 shall take precedence over any other provision contained herein or in the Fiscal Agency Agreement. (b) (c) (d) Subordination On a winding-up (which term shall, for the purposes of these Conditions, mean bankruptcy ("stečaj") and liquidation ("likvidacija") in accordance with the applicable provisions of Slovenian law) of the Issuer, (i) the claims of the Noteholders and the Couponholders shall be subordinated in right of payment to the claims of all Senior Creditors and (ii) no Noteholder shall be entitled to claim for or receive or retain any amount payable hereunder unless and until all amounts due to Senior Creditors have been paid in full. Set-Off, Counterclaim, Retention, etc. No Noteholder or Couponholder may exercise, claim or plead any right of set-off, counter-claim or retention or any similar right in respect of any amount owed to it by the Issuer arising under or in connection with the Notes or the Coupons and each Noteholder and Couponholder shall, by virtue of being the holder of any Note or, as the case may be, Coupon, be deemed to have waived all such rights. Suspension of Payments Notwithstanding Condition 4, the Issuer may elect, by notice in writing to the Fiscal Agent, from time to time and at any time, to suspend the payment of interest in respect of the Notes if the most recent unconsolidated financial statements published prior to the date on which the same would otherwise become due and payable show no distributable net profit ("bilančni dobiček") and, accordingly, on the giving of such notice the Issuer shall be relieved from the obligation to make payment of such interest and shall be entitled to dispose freely with the amounts of such interest and such non-payment shall not constitute a default by the Issuer for any purpose. For the avoidance of doubt, the payments so suspended shall be non-cumulative and the Issuer shall have no further obligation with respect to interest accrued during the relevant Interest Period (as defined in Condition 4 below). 4. Interest (a) (b) Interest Payment Dates The Notes bear interest from, and including, 15 July 2005 and such interest will be payable on each 15 July and 15 January (each an "Interest Payment Date"). If any Interest Payment Date would otherwise fall on a day which is not a Business Day in the place of the specified office of the Fiscal Agent, it shall be postponed to the next day which is a Business Day in such place unless it would thereby fall into the next calendar month in which event it shall be brought forward to the immediately preceding Business Day in such place. The period beginning on, and including, 15 July 2005 and ending on, but excluding, the first Interest Payment Date and each successive period beginning on, and including, an Interest Payment Date and ending on, but excluding, the next succeeding Interest Payment Date is called an "Interest Period". Interest Payments Subject to Condition 3(d), each Note will cease to bear interest from the due date for redemption unless, upon due presentation, payment of principal is improperly withheld or refused. In such event, it shall continue to bear interest in accordance with this Condition until whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder, and (ii) the day which is seven days after the Fiscal Agent has notified Noteholders of receipt of all sums due in respect of all the Notes up to that seventh day (except to the 18

19 extent that there is failure in the subsequent payment to the relevant holders under these Conditions). (c) (d) Rate of Interest The rate of interest from time to time in respect of the Notes (the "Rate of Interest") will be determined by the Fiscal Agent on the following basis: (i) On the second TARGET Business Day before the beginning of each Interest Period (the "Interest Determination Date") the Fiscal Agent will determine the offered rate for six-month euro deposits ("EURIBOR") as at a.m. (Central European time) on the Interest Determination Date in question. Such offered rate will be that which appears on the display designated as page "248" on the Bridge/Telerate Monitor (or such other page or service as may replace it for the purpose of displaying Euro-zone interbank offered rates of major banks for six months euro deposits) (the "Screen Rate"). The Rate of Interest for such Interest Period shall be the aggregate of the Margin (as defined below) and the Screen Rate. (ii) If the Screen Rate does not so appear, or if the relevant page is unavailable, the Fiscal Agent will request the principal Euro-zone office of each of four major banks in the Euro-zone interbank market selected by the Fiscal Agent (the "Reference Banks") to provide the Fiscal Agent with its offered quotation to leading banks in the Euro-zone interbank market for six-month euro deposits as at a.m. (Central European time) on the Interest Determination Date in question. The Rate of Interest for such Interest Period shall be the aggregate of the Margin and the arithmetic mean (rounded, if necessary, up to the nearest fifth decimal place) of such quotations (or of such of them, being at least two, as are so provided), as determined by the Fiscal Agent. (iii) If on any Interest Determination Date on which the Rate of Interest would otherwise be determined in accordance with Condition 4(c)(ii), one only or none of the Reference Banks provides such quotation, the Rate of Interest for the next Interest Period shall be the rate per annum which the Fiscal Agent determines to be the aggregate of the Margin and the arithmetic mean (rounded, if necessary, up to the nearest fifth decimal place) of the rates which leading banks in the Euro-zone selected by the Fiscal Agent are quoting, on the relevant Interest Determination Date, for euro deposits for a period of six months commencing on the relevant Interest Determination Date, to leading European banks, except that, if the banks so selected by the Fiscal Agent (being at least three in number) are not quoting as mentioned above, the Rate of Interest shall be the Rate of Interest in effect for the last preceding Interest Period to which one of the preceding sub-paragraphs of this paragraph (c) shall have applied. (iv) For the purposes of these Conditions, "Margin" means, in respect of any Interest Period ending on an Interest Payment Date falling on or before the Interest Payment Date in July 2015, 1.68 per cent. per annum and thereafter 2.68 per cent. per annum (and, for the avoidance of doubt, the Margin shall not change otherwise than in accordance with this definition). Determination of Rate of Interest and Calculation of Coupon Amount The Fiscal Agent will, as soon as practicable after a.m. (Central European time) on each Interest Determination Date, determine the Rate of Interest and calculate the amount of interest payable on the presentation and surrender of each Coupon (the "Coupon Amount") for the relevant Interest Period. The Coupon Amount shall be calculated by applying the Rate of Interest to the principal amount of one Note of each denomination, multiplying such product by the actual number of days in the Interest Period concerned divided by 360 and rounding the resulting figure to the nearest 0.01 ( being rounded upwards). The determination of the Rate of Interest and 19

20 the Coupon Amount by the Fiscal Agent shall (in the absence of manifest error) be final and binding upon all parties. (e) (f) Publication of Rate of Interest and Coupon Amount The Fiscal Agent will cause the Rate of Interest and the Coupon Amount for each Interest Period and the relevant Interest Payment Date to be notified to the Issuer and the Noteholders in accordance with Condition 14 as soon as possible after their determination but, in any event, no later than the second Business Day in the place of the specified office of the Fiscal Agent thereafter. If the Notes become due and payable under Condition 8, the accrued interest and the Rate of Interest payable in respect of the Notes shall nevertheless continue to be calculated as previously by the Fiscal Agent in accordance with this Condition (except as otherwise provided by law) but no publication of the Rate of Interest or the Coupon Amount so calculated need be made unless the Fiscal Agent otherwise requires. Fiscal Agent The Issuer will procure that, so long as any Note is outstanding, there shall at all times be a fiscal agent for the purposes of the Notes. If such entity (acting through its relevant office) is unable or unwilling to continue to act as Fiscal Agent or if the Fiscal Agent fails duly to establish the Rate of Interest for any Interest Period or to calculate the Coupon Amount, the Issuer shall appoint some other leading bank engaged in the Euro-zone interbank market (acting through its principal Euro-zone office) to act as such in its place. The Fiscal Agent may not resign its duties without a successor having been so appointed. 5. Redemption and Purchase (a) (b) Maturity of the Notes The Notes are permanent and have no maturity and shall only become repayable in accordance with this Condition 5. Redemption for taxation and regulatory reasons The Notes may be redeemed at the option of the Issuer (subject to fulfilment of the conditions set forth in paragraph (g) of this Condition) in whole, but not in part, on the Interest Payment Date in July 2010 or on any Interest Payment Date thereafter, on giving not less than 30 nor more than 60 days notice to the Noteholders (which notice shall be irrevocable), at their principal amount, if: (i) (ii) (iv) the Issuer has or will become obliged to pay additional amounts as provided or referred to in Condition 7 and such obligation cannot be avoided by the Issuer taking reasonable measures available to it; as a result of a change in law or regulation or the interpretation thereof, the Issuer is or will become unable to deduct amounts of interest payable under the Notes for the purpose of calculating its overall taxable income; or as a result of a change in law or regulation or the interpretation thereof, the Notes have ceased to have regulatory capital treatment as innovative Tier One instruments and are no longer eligible for inclusion in the Issuer's core capital ("temeljni kapital") under the Capital Adequacy Regulation (as amended or supplemented). Prior to the publication of any notice of redemption pursuant to this paragraph (b), the Issuer shall deliver to the Fiscal Agent (1) a certificate signed by two Directors of the Issuer stating that the circumstances referred to in (i), (ii) or (iii) exist and (2) an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such additional amounts or that the Notes no longer qualify as innovative Tier One instruments as aforesaid or, as the case may be, that the Issuer is or will become unable to deduct amounts as aforesaid. The Fiscal Agent shall, without enquiry and without any liability therefor, accept such certificate 20

21 as sufficient evidence of such circumstances above in which event it shall be conclusive and binding on the Noteholders and the Couponholders. (c) (d) (e) (f) (g) Redemption at the Option of the Issuer The Issuer may, on the Interest Payment Date in July 2015 or on any Interest Payment Date thereafter, on giving not more than 30 nor less than 15 days irrevocable notice to the Noteholders and subject to fulfilment of the conditions set forth in paragraph (g) of this Condition, redeem all, but not some only, of the Notes at their principal amount, together with accrued interest (excluding, for the avoidance of doubt, any amounts of interest the payment of which has been suspended in accordance with Condition 3(d)) and any additional amounts which may be payable in respect of the Notes under Condition 7. Upon the expiry of such notice the Issuer shall be bound to redeem the Notes accordingly. Notice of redemption All Notes in respect of which any notice of redemption is given under this Condition shall be redeemed on the date specified in such notice in accordance with this Condition. Notice of redemption shall be given in accordance with Condition 14. Purchase of Notes and taking Notes as security The Issuer may, on the Interest Payment Date falling in July 2010 or at any time thereafter, and subject to fulfilment of the conditions set forth in paragraph (g) of this Condition purchase Notes in the open market or otherwise at any price (provided that they are purchased together with all unmatured Coupons relating to them) or accept the Notes or Coupons as security. Any purchase by tender shall be made available to all Noteholders alike. The Notes, while held by or on behalf of the Issuer or any of its Subsidiaries, shall not entitle the holder to vote at any meetings of the Noteholders and shall not be deemed to be outstanding for the purposes of calculating quorums at meetings of the Noteholders or for the purposes of Condition 11(a). Cancellation All Notes so redeemed or purchased by the Issuer and any unmatured Coupons attached to or surrendered with them will be cancelled and may not be re-issued or resold. Conditions for redemption, purchase and taking Notes as security Any redemption under paragraphs (b) or (c) or purchase or taking security under paragraph (e) of this Condition 5 shall be subject to the fulfilment of the following conditions: (i) (ii) 6. Payments the Issuer having obtained all necessary approvals of competent authorities that may be required in connection with such redemption, purchase or taking security, including the approval of the Central Bank; and the Issuer having notified the Fiscal Agent in writing that the approvals set forth in (i) of this paragraph have been obtained. (a) Method of payment Payments of principal and interest in respect of the Notes will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the Notes or the appropriate Coupons (as the case may be) at the specified office of a Paying Agent in euro by credit or transfer to a euro account (or any other account to which euro may be credited or transferred) specified by the payee in a city in which banks have access to TARGET. Payments of interest due in respect of any Note other than on presentation and surrender of matured Coupons shall be made only against presentation and either surrender or endorsement (as appropriate) of the relevant Note. 21

22 (b) (c) (d) (e) Payments subject to fiscal laws All payments are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 7. No commissions or expenses shall be charged to the Noteholders or Couponholders in respect of such payments. Unmatured Coupons Upon the due date for redemption of any Note, unmatured Coupons relating to such Note (whether or not attached) shall become void and no payment shall be made in respect of them. Where any Note is presented for redemption without all unmatured Coupons relating to it, redemption shall be made only against the provision of such indemnity as the Issuer may require. Payments on Business Days If the due date for payment of any amount in respect of any Note or Coupon is not a Business Day in the place of presentation (or, in the case of payment by transfer to a euro account as referred to above, is not a TARGET Business Day), the holder shall not be entitled to payment of the amount due until the next succeeding day which is Business Day in the place of presentation (and, in the case of payment by transfer to a euro account as referred to above, a TARGET Business Day) and shall not be entitled to any further interest or other payment in respect of any such delay. Paying Agents The Issuer reserves the right at any time to vary or terminate the appointment of a Paying Agent and appoint additional or other Paying Agents. Notice of any change in the Paying Agents or specified offices of a Paying Agent will be given promptly to the Noteholders in accordance with Condition Taxation All payments of principal and interest by or on behalf of the Issuer in respect of the Notes and the Coupons shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or within Slovenia or any authority therein or thereof having power to tax, unless such withholding or deduction is required by law. In that event the Issuer shall pay such additional amounts as will result in receipt by the Noteholders and the Couponholders of such amounts as would have been received by them had no such withholding or deduction been required, except that no such additional amounts shall be payable in respect of any Note or Coupon presented for payment: (a) (b) (c) Other connection: by or on behalf of a holder who is liable to such taxes, duties, assessments or governmental charges in respect of such Note or Coupon by reason of his having some connection within Slovenia other than the mere holding of the Note or Coupon; Presentation more than 30 days after the Relevant Date: more than 30 days after the Relevant Date except to the extent that the holder of it would have been entitled to such additional amounts on presenting such Note or Coupon for payment on the last day of such period of 30 days; Payment to individuals: where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of November, 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or 22

23 (d) Payment by another Paying Agent: by or on behalf of a Noteholder or a Couponholder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the European Union. "Relevant Date" means whichever is the later of (i) the date on which such payment first becomes due and (ii) if the full amount payable has not been received by the Fiscal Agent on or prior to such due date, the date on which, the full amount having been so received, notice to that effect shall have been given to the Noteholders. Any reference in these Conditions to "principal" and/or "interest" shall be deemed to include any additional amounts which may be payable under this Condition or any undertaking given in addition to or substitution for it under the Fiscal Agency Agreement. 8. Default (a) (b) (c) If the Issuer shall not make payment of any principal or any interest in respect of the Notes for a period of 10 days or more after the due date for the same (which failure to make payment shall constitute prima facie evidence of the Issuer s inability to make such payment, but such failure shall not exist if the Issuer has suspended payment of interest under Condition 3(d)), the Noteholders may institute proceedings in Slovenia (but not elsewhere) for the winding-up of the Issuer and prove in such winding-up. The Noteholders shall be entitled to institute such proceedings against the Issuer as they may think fit to enforce any obligation, condition or provision binding on the Issuer under the Fiscal Agency Agreement or the Notes (other than any obligation for payment of any principal or interest in respect of the Notes or Coupons) provided that the Issuer shall not by virtue of any such proceedings be obliged to pay, and any Noteholder shall not be entitled to claim for or receive or retain, any sum or sums representing principal or interest in respect of the Notes or Coupons sooner than the same would otherwise have been payable by it. In the event of the commencement of the liquidation ("likvidacija") or insolvency ("stečaj") proceedings in respect of the Issuer, any Noteholder may (i) give notice to the Issuer that the Notes are due and repayable immediately (and the Notes shall thereby become, subject always to Condition 3, so due and repayable) at their principal amount together with accrued interest and any additional amounts as provided in these Conditions and (ii) prove in the winding-up of the Issuer. 9. Enforcement of Rights No remedy against the Issuer, other than as referred to in Condition 8, shall be available to the Noteholders or Couponholders in Slovenia or elsewhere, whether for the recovery of amounts owing in respect of the Notes or in respect of any breach by the Issuer of any of its other obligations under or in respect of the Notes or under the Fiscal Agency Agreement. 10. Prescription Claims in respect of principal and interest will become void unless presentation for payment is made as required by Condition 6 within a period of 5 years in the case of principal and 3 years in the case of interest from the appropriate Relevant Date. 11. Meetings of Noteholders, Modification and Waiver (a) Meetings of Noteholders The Fiscal Agency Agreement contains provisions for convening meetings of Noteholders to consider matters affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of any of these. Such a meeting may be convened by the Issuer or Noteholders holding not less than 10 per cent. in principal 23

24 amount of the Notes for the time being outstanding. The quorum for any meeting convened to consider an Extraordinary Resolution will be two or more persons holding or representing a clear majority in principal amount of the Notes for the time being outstanding, or at any adjourned meeting two or more persons being or representing Noteholders whatever the principal amount of the Notes held or represented, unless the business of such meeting includes consideration of proposals, inter alia, (i) to modify the dates on which interest is payable in respect of the Notes, (ii) to reduce or cancel the principal amount of, or interest on or to vary the method of calculating the rate of interest on, the Notes, (iii) to change the currency of payment of the Notes or the Coupons, or (iv) to modify the provisions concerning the quorum required at any meeting of Noteholders or the majority required to pass an Extraordinary Resolution, or (v) to modify the provisions relating to the subordination of the Notes, in which case the necessary quorum will be two or more persons holding or representing not less than 75 per cent., or at any adjourned meeting not less than 25 per cent., in principal amount of the Notes for the time being outstanding. The effectiveness of any Extraordinary Resolution duly passed shall be subject to the fulfilment of the following conditions: (i) the Central Bank having approved the changes sanctioned by such Extraordinary Resolution; and (ii) the Issuer having notified the Fiscal Agent in writing that the approval set forth in (i) of this paragraph has been obtained; and shall, upon fulfilment of the above conditions be binding on Noteholders (whether or not they were present at the meeting at which such resolution was passed) and on all Couponholders. (b) Modification and Waiver The Fiscal Agent may agree, without the consent of the Noteholders or Couponholders, to any modification of any of the provisions of the Fiscal Agency Agreement which is of a formal, minor or technical nature or is made to correct a manifest error. Any such modification shall be binding on the Noteholders and the Couponholders and shall be notified to the Noteholders as soon as practicable. 12. Further Issues The Issuer shall be at liberty from time to time without the consent of the Noteholders or the Couponholders to create and issue further notes or other securities either ranking pari passu in all respects and (in the case of Notes) so that the same shall be consolidated and form a single issue with the Notes or upon such terms as to ranking, interest, premium, redemption and otherwise as the Issuer may at the time of the issue thereof determine. 13. Replacement of Notes and Coupons If a Note or Coupon is mutilated, defaced, destroyed, stolen or lost it may be replaced at the specified office of the Fiscal Agent on payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Issuer may require (provided that the requirement is reasonable in the light of prevailing market practice). Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued. 14. Notices Subject to further provisions of the Fiscal Agency Agreement, notices to Noteholders will be valid if published in a leading newspaper having general circulation in London (which is expected to be the Financial Times) and (so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of that Stock Exchange so require) on the Luxembourg Stock Exchange s website or in a leading newspaper having general circulation in Luxembourg (which is expected to be the d'wort) or, if in the opinion of the Issuer such 24

25 publication shall not be practicable, in an English language newspaper of general circulation in Europe. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the first date on which publication is made. Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholders in accordance with this Condition. 15. Governing Law and Jurisdiction (a) Governing Law The Notes and the Coupons are governed by, and shall be construed in accordance with the laws of Slovenia. (b) Slovenian courts The courts of Slovenia have exclusive jurisdiction to settle any dispute (a "Dispute"), arising from or connected with the Notes or the Coupons (including a dispute regarding the existence, validity or termination of the Notes or the Coupons) or the consequences of its nullity. 25

26 7. SUMMARY OF PROVISIONS RELATING TO THE NOTES IN THE GLOBAL FORM The following is a summary of the provisions to be contained in the Temporary Global Note and the Permanent Global Note (together the Global Notes ) which apply to, and in some cases modify, the Terms and Conditions of the Notes while the Notes are represented by the Global Notes: 1 Exchange The Temporary Global Note is exchangeable in whole or in part for interests in the Permanent Global Note on or after a date which is expected to be 24 August 2005 upon certification as to non- U.S. beneficial ownership in the form set out in the Temporary Global Note. The Permanent Global Note is exchangeable in whole but not in part (free of charge to the holder) for the Definitive Notes described below (1) if the Permanent Global Note is held on behalf of Euroclear or Clearstream, Luxembourg and any such clearing system is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business or does in fact do so, (2) any of the circumstances described in Condition 8 (Events of Default) occurs or (3) if, by reason of any change in the laws of Slovenia, the Issuer is or will be required to make any withholding or deduction from any payment in respect of the Notes which would not be required if the Notes were in definitive form (unless a default notice has been given as referred to in Default below). Thereupon (in the case of (1) or (2) above) the holder may give notice to the Fiscal Agent, and (in the case of (3) above) the Issuer may give notice to the Fiscal Agent and the Noteholders, of its intention to exchange the Permanent Global Note for Definitive Notes on or after the Exchange Date specified in the notice. On or after any Exchange Date the holder of the Permanent Global Note may surrender the Permanent Global Note to or to the order of the Fiscal Agent. In exchange for the Permanent Global Note the Issuer shall deliver, or procure the delivery of, an equal aggregate principal amount of duly executed and authenticated Definitive Notes (having attached to them all Coupons in respect of interest which has not already been paid on the Permanent Global Note), security printed in accordance with applicable legal and stock exchange requirements and substantially in the form set out in Schedule 3 to the Fiscal Agency Agreement. On exchange in full of the Permanent Global Note, the Issuer will, if the holder so requests, procure that it is cancelled and returned to the holder together with the relevant Definitive Notes. Exchange Date means a day falling not less than 30 days after that on which the notice requiring exchange is given and on which banks are open for presentation and payment of bearer debt securities and for dealings in foreign currencies in the city in which the specified office of the Fiscal Agent is located. 2 Payments No payment will be made on the Temporary Global Note unless exchange for an interest in the Permanent Global Note is improperly withheld or refused. Principal and interest in respect of the Permanent Global Note shall be paid to its holder against presentation and (if no further payment falls to be made on it) surrender of it to or to the order of the Fiscal Agent (or to or to the order of such other Paying Agent as shall have been notified to the Noteholders for this purpose) which shall endorse such payment or cause such payment to be endorsed in the appropriate Schedule hereto (such endorsement being prima facie evidence that the payment in question has been made). References in the Conditions to Coupons and Couponholders shall be construed accordingly. 3 Notices So long as Notes are represented by the Temporary Global Note or the Permanent Global Note and such Temporary Global Note or Global Note is held on behalf of Euroclear or Clearstream, Luxembourg, notices required to be given to Noteholders may be given by their being delivered to 26

27 Euroclear, and Clearstream, Luxembourg, rather than by publication as required by the Conditions, except that, so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of the exchange so require, notices shall also be published on the Luxembourg Stock Exchange s website or in a leading newspaper having general circulation in Luxembourg (which is expected to be the d'wort). 4 Meetings The holder of the Temporary Global Note and/or the Permanent Global Note shall (unless the Permanent Global Note represents only one Note) be treated as two persons for the purposes of any quorum requirements of a meeting of Noteholders. 5 Cancellation Cancellation of any Note represented by Temporary Global Note and/or the Permanent Global Note which is required by the Conditions to be cancelled will be effected by reduction in the principal amount of the Permanent Global Note on its presentation to or to the order of the Fiscal Agent for notation in the appropriate Schedule thereto. 27

28 8. INFORMATION ABOUT THE ISSUER Nova Ljubljanska banka d.d., Ljubljana NLB is incorporated in Slovenia and is organised in the form of a joint stock company ( delniška družba ) and is licensed in Slovenia to provide universal banking services. The largest shareholders of NLB are the RoS, holding 35.4% of the shares, and KBC, holding 34.0% of the NLB s shares. NLB is the largest bank in Slovenia, and forms by far the largest part of the NLB Group. NLB Group is the largest banking and financial services organisation in Slovenia with total assets on consolidated basis of SIT 2, billion, as at 31 th December NLB Group (including its daughter banks and an associated bank in Slovenia) has a market share of 36,1% of total assets as at 31 st December NLB is a universal bank and has a dominant position in retail and corporate banking and also offers investment banking services. In Slovenia, NLB and its three Slovenian daughter banks have approximately 64,000 corporate clients and 937,000 retail clients. The loan portfolio as at 31 st December 2004 was split 34% to retail customers, 63% to corporates and the remaining 3% to the government. NLB Group As at 31 March 2005 the NLB Group consists of NLB as the parent bank and the group of 54 subsidiaries, associates and joint venture banks and/or companies (see Appendix III). According to their core activity the members of the NLB Group are divided into banks, financial organisations and other companies, registered in Slovenia and abroad. The strategic goals of the NLB Group envisage further expansion of the NLB Group to the markets of the South-Eastern Europe, preservation of the largest market share in the banking sector in Slovenia and development of the NLB Group into one of the leading financial group in the region History and development of the Issuer NLB was established in 1994 by a Legislative Act of the National Assembly of the Republic of Slovenia, namely The Constitutional Law on Amendments to the Constitutional act for the Implementation of the Basic Constitutional Charter on the Independence and Sovereignty of the Republic of Slovenia ( Ustavni zakon o dopolnitvah ustavnega zakona za izvedbo Temeljne ustavne listine o samostojnosti in neodvisnosti Republike Slovenije, dated 27. July, 1994 as amended, the Constitutional Law, Official Gazette of the RoS 45/1-94, as amended, hereinafter the Constitutional Law ). Pursuant to the Constitutional Law, NLB took over the majority of the assets, liabilities and operations of Ljubljanska banka d.d., Ljubljana, to the extent provided for and defined by the Constitutional Law. The legislation provided, inter alia, for Ljubljanska banka d.d., Ljubljana to retain (and thus, for NLB not to assume see Legal and Arbitration Proceedings): all contingent liabilities under the joint and several liability pursuant to the New Financing Agreement ( NFA ) and other potential liabilities arising from the relationships with the National Bank of Yugoslavia ( NBY ) and the former SFRY for the part of which the debtors are in the other republics of the former SFRY; a corresponding part of contingent claims arising therefrom; all liabilities for foreign currency deposits in foreign currency accounts and foreign currency savings-books, for which the RoS has not assumed the guarantee pursuant to Article 19 of the Constitutional Law; 28

29 the liabilities towards the NBY and those liabilities to foreign creditors for which a guarantee was given by the former SFRY while the funds were used by ultimate/final beneficiaries in other republics of the former SFRY; and relationship with branches and subsidiaries of Ljubljanska banka d.d., Ljubljana having their registered seat in other republics on the territory of the former SFRY, on the understanding that it also keeps an adequate share of the claims towards NBY and arising from foreign currency savings-deposits. Pursuant to Article 22 of the Constitutional Law, the Bank Rehabilitation Agency of the Republic of Slovenia for Banks and Savings Banks was the founder of NLB. Due to Article 22č of the Constitutional Law, NLB was assigned the status of the bank in rehabilitation upon its foundation. On 16 July 1997 the rehabilitation process in NLB was concluded. The main steps of the NLB s history may be summarised as follows: 1994 On 27 July 1994, Nova Ljubljanska banka d.d., Ljubljana is established by and under the Constitutional Law. In 1994, NLB establishes a subsidiary for the management of investment funds, LB Maksima d.o.o., Ljubljana and co-founds a joint stock company specialising in factoring, LB Factors E-Banka Maribor merges with NLB and is transformed into NLB's Area Branch in Maribor. NLB establishes representatives offices in Celje, Koper and Nova Gorica. It also establishes a new subsidiary, LB Consulting Praha, s.r.o., Prague, which is registered for financial consulting and factoring and forfeiting services NLB acquires LB Posavska banka d.d., Krško, which is transformed into a branch with 12 banking units. Representative Offices Celje and Nova Gorica are transformed into branches, NLB opens new banking units in Slovenska Bistrica and Ajdovščina The official ending of the rehabilitation of NLB takes place on 16 July Concurrent with this event the supervisory board and the management board are appointed. Leading international rating agencies: FITCH IBCA, Standard & Poor's, Moody's, Thomson Financial BankWatch and Capital Intelligence assign to NLB Investment Grade Ratings that are among the highest ratings assigned to banks in Central and Eastern Europe. NLB establishes branches in Kranj and Novo mesto and opens banking units in Lucija, Ormož, Rače and Žalec. NLB becomes a major shareholder in Bankart, a processing center for credit cards and ATMs. Five Slovenian banks, in which NLB holds 40 % of the share capital, join NLB Group, namely Koroška banka d.d., Pomurska banka d.d., Banka Velenje d.d., Banka Zasavje d.d. and Banka Domžale d.d On 28 June 1998, NLB held its first Annual General Meeting since the successful conclusion of its rehabilitation. NLB declares and pays a dividend to its shareholders. NLB opens new banking units in Slovenske Konjice and Celje and introduces the first two units in largest shopping centres, so called in-store banking outlets, in Ptuj and Maribor. Investment grade ratings for NLB's operations in the period 1998/1999 are among the highest assigned to banks in Central and Eastern Europe. NLB acquires directly the majority shareholding in Banka Velenje d.d. (59,88 %) and indirectly the majority shareholding in Pomurska banka d.d. (50,05 %) NLB opens new in-store banking units in Ljubljana and Nova Gorica and moves its branch in Italy from Milan to Trieste. NLB signs strategic partnership and business co-operation agreements with Banka Celje d.d. and Dolenjska banka d.d. In November 1999, Central European, the magazine of Euromoney Institutional Investor focused on Central Europe, nominates NLB as Slovenian Bank of the Decade The international rating agencies Capital Intelligence and Moody's upgrade NLB's long-term investment grade ratings, while Standard & Poor's and Thomson Financial BankWatch affirm their latest ratings of NLB. Due to its rating NLB belongs among the highly rated banks in 29

30 Central and Eastern Europe. NLB opens new banking units in Bled, Idrija and Ljubljana as well as a representative office in Skopje. Together with the insurance company Triglav, NLB establishes a new pension insurance company, Skupna pokojninska družba d.d. NLB signs a strategic partnership with Tutunska banka a.d., Skopje. Through a shareholding of NLB's daughter bank Banka Domžale d.d., Commercebank d.d., Sarajevo, joins the NLB Group. In July 2000, NLB receives Euromoney Annual Award for Excellence for the fourth consecutive year. In September 2000, the London Financial Times magazine The Banker selects NLB as Bank of the Year 2000 for Slovenia Rating-agency Fitch IBCA upgrades NLB's long-term investment grade rating from BBB+ to A-. On 31 May 2001, the Government of the Republic of Slovenia adopts the Privatisation programme of NLB. In October 2001, the merger process of the three daughter banks with the NLB (Merger by Assumption), namely: Banka Velenje d.d., Pomurska banka d.d. and Dolenjska banka d.d. (NLB being the surviving entity) is completed, which results in an increase of the NLB's market share and substantial expansion of the domestic branch network. NLB opens representative offices in Belgrade and Warsaw and signs a strategic partnership and capital investment agreement with Continental banka d.d., Novi Sad. NLB receives Euromoney Annual Award for Excellence for the fifth consecutive year. For the second consecutive year Financial Times magazine The Banker selects NLB as Slovenian Bank of the Year. In October 2001, NLB receives international certificate for quality ISO 9001/TickIT In September 2002 the first phase of privatisation successfully concluded with a 34 percent stake of the state being purchased by the Belgian banking and insurance group KBC and 5 percent by the European Bank for Reconstruction and Development. The privatization process has brought considerable change within the organisation with a change in the Management Board and the Supervisory Board that is now reflecting the new ownership structure. This has brought further improvement in corporate governance and provided a sound base for future growth. On the business front NLB maintained its position as the leading bank in Slovenia, despite increased competition especially from foreign banks present in the local market. At present 95 percent of the total assets of the NLB Group is represented by banks. Significant groundwork was completed in the preparation for development of new fields complementing traditional banking activities. In particular bankassurance and asset management, are areas that NLB will enter into while other strategic activities that are yielding dividends include leasing, factoring and forfaiting. Operationally NLB continued its business rationalisation and technology development through the IT based project. A number of new operations were ported onto the new IT platform during the year and a new delivery channel mobile phone banking was introduced. With the intention of achieving greater quality of NLB operations, a new organisation structure was implemented at the beginning of Its primary advantage is combining business into five centres regarding customer segments. These centres are: Treasury, Investment Banking, Asset Management and Group Investments Value Centre, Retail, SME and E-Banking Value Centre, Corporate Banking Value Centre, International Banking, Information Technology and Operations (Value Centre) and Governance Centre In 2003 the rating agencies Standard & Poor's and Moody's upgraded NLB's international credit rating. Moody's upgraded NLB's rating to A2 from Baa2 while the financial strength rating (FSR) was upgraded from C- to C. This represents a significant three-notch upgrade and firmly places NLB amongst the strongest group of credit rated banks. Standard & Poor's upgraded NLB's rating to BBB from BBB -. Agencies Fitch and Capital Intelligence confirmed the credit rating A -. NLB remains a universal bank with a leading position in the Slovenian banking sector. It expanded its range of services on the Slovenian market in 2003 with creation of a life assurance company NLB Vita, d.d., a joint venture with KBC. This venture has enabled NLB Group develop new business areas in addition to traditional banking services. The success of this venture can be measured in terms of the 4% market share already achieved in the relevant life assurance market in the first six months of operations. 30

31 The Group expanded its geographic presence with the acquisition of subsidiary banks Montenegrobanka a.d., Podgorica in Serbia & Montenegro and Prva Preduzetnićka banka a.d., Beograd subsequently renamed to LHB Banka Beograd a.d., Beograd, while West East Bank a.d., Sofija in Bulgaria joined NLB Group as an associate Bank. Other newly established companies including LB InterFinanz d.o.o., Beograd, LB Leasing d.o.o., Beograd, and CBS Invest d.o.o., Sarajevo are targeted at increasing forfeiting, leasing and real estate management activities. Due to the implementation of new IT systems NLB experienced some difficulties with the functioning and performance of its IT system. NLB has successfully dealt with these problems and has resolved them. However, the occurrence of these difficulties has received great attention and negative publicity in the press An important change in NLB Management Board has taken place at the beginning of 2004 with the long standing president and CEO Marko Voljč taking up a position in KBC. NLB Bank's new president and CEO Marjan Kramar was appointed for a five-year mandate and took up his position on the February 1, Marjan Kramar has a long track record in management of financial institutions in Slovenia and is highly respected in financial circles. In the beginning of 2004 NLB Bank has begun to offer asset management services through the company NLB Skladi, a 100 % NLB Bank owned subsidiary. In 2004 the rating agency Standard & Poor s upgraded NLB s international long term credit rating from BBB to BBB The legal and commercial name of the Issuer Name: Abbreviated name: Commercial name: Registered office: Address: Nova Ljubljanska banka d.d., Ljubljana NLB d.d. Nova Ljubljanska banka or NLB Trg republike 2, Ljubljana Trg republike 2, 1520 Ljubljana, Slovenia The place of registration of the Issuer and its registration number Company reg. no.: No. of entry in the Companies Register (held with 1/25578/00 the District Court of Ljubljana): Place of Registration: Ljubljana, Slovenia Registered code of core activity: J/ Date of establishment: 27 July The date of the incorporation of the Issuer Date of Incorporation: 27 July 1994 Length of life: Indefinite Domicile and legal form of the Issuer NLB d.d. is established and operates in compliance with the Slovenian legislation. Domicile: Slovenia Legal form: Joint stock company (delniška družba) Legislation under which the Issuer operates: Slovenian Country of Incorporation: Slovenia Address: Trg republike 2, 1520 Ljubljana Telephone number:

32 The objects of the Issuer The NLB's objects are defined in Article Two of its Articles of Association, pursuant to which NLB's object is the performance of banking and other financial services for which an authorization has been obtained from the Bank of Slovenia, as well as other business operations normally performed by banks in accordance with regulations applicable from time to time. NLB may perform business operations both in the Republic of Slovenia and abroad in accordance with regulations applicable from time to time. NLB shall be engaged in the following activities: Banking services: - accepting deposits from natural persons and legal entities, - granting loans out of funds raised by deposits, for its own account, - services for which another law stipulates that they may only be performed by banks; Financial services: - granting loans, including consumer loans, mortgage loans and financing of commercial business deals, - performing payment transaction services, - issuing of guarantees and other warranties, - dealing in foreign currencies, including currency exchange business, - issuing and managing of other payment instruments, - securities services pursuant to the law regulating the securities market, - derivatives dealing, - factoring, - collection, analysis and forwarding of information on credit worthiness of legal entities, - intermediation in the sale of insurance policies pursuant to the law regulating the insurance business, - intermediation in loan and credit business, - financial leasing, - management of pension funds and investment trusts pursuant to the law regulating pension funds and investment trusts; - renting of safe deposit boxes; - issuing of electronic money; - performing of custodian services. Activities auxiliary to banking: - financial, tax and other business consultancy, - realty management, - management of data processing system, - computer services consultancy, development and supply, - activities related to databases, - data (information) processing, - safekeeping of precious articles, - education services, - transport of cash and other precious articles, - services of banking services development, - dealing in technological solutions (know-how), - dealing in gold, - legal consultancy, - other business activities Recent events of the Issuer There was no disclosure of material post balance sheet events in the NLB Group s 2004 annual report. 32

33 Credit and bond ratings and international ranking of the Issuer On the basis of investment risk rating, as estimated by the leading international rating agencies, such as FITCH, Moody's and Capital Intelligence, NLB ranks among the safest European banks: The Agency Long-term Short-term Financial strength investments investments Moody s A2 P-1 C FITCH A- F2 C Capital Intelligence A- A-2 - In 2004, all the above rating agencies confirmed their ratings from Following the regular annual review for 2003, Moody s improved NLB s bond rating by three levels, i.e. from Baa2 to A2 and the financial strength rating from C- to C, thereby placing NLB among the strongest banking groups with international ratings. It must be noted, however, that a rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. International placements of NLB and awards presented by foreign financial press: Among 10 leading banks in Central Europe (The Banker, London, July 2003) 3 rd place in terms of the balance sheet total, 7 th place in terms of the capital. Among 1000 leading banks in the world (The Banker, London, July 2004): 447 th in terms of the balance sheet total; 437 th in terms of the capital; 348 th in terms of the real profit growth; Among the awards of The Banker magazine from London conferred to the Best Banks of the World, NLB was selected as the best Slovenian bank in the years 2000, 2001, 2002, 2003 and For the eighth consecutive year, NLB received the Global Finance Best Domestic Bank Award. Also for the eighth consecutive year the best Slovenian bank in Euromoney Annual Award for Excellence Investment and disinvestment of the Issuer s capital investments in 2005 In 2005, NLB continues with the activities aimed at increasing its stakes in three subsidiary banks of the NLB Group in Slovenia to 75% + 1 share and increasing the stake in LB Maksima d.o.o., Ljubljana to 100% as well as activities related to increasing its stake in Banka Celje d.d., Celje to just below 50%. NLB also completed the activities related to the planned changes in the ownership of leasing companies. NLB thus became the owner of a 55% stake in the company LB Leasing Koper d.o.o. as of 1 January 2005 (the holders of the remaining stakes are three Slovenian banks members of the NLB Group, namely, Banka Domžale d.d. 21%, Koroška banka d.d. 16%, Banka Zasavje d.d. 8%). In 2004, NLB also increased its stake in Tutunska banka a.d., Skopje, to 17.03% in capital and 42.83% in voting rights. Members of NLB Group obtained the authorisation to establish a pension company and the licence to manage pension funds in Macedonia. Therefore, NLB (51 %) together with Tutunska banka a.d., Skopje (49 %) under assistance of Skupna pokojninska družba d.d., Ljubljana (joint pension company), established a pension company Nov penziski fond a.d., Skopje, which was registered on 17 May NLB successfully concluded the purchase of Euromarket banka a.d., Podgorica in On 22 March 2005, the Bank signed a purchase agreement with the shareholders of Euromarket banka a.d., 33

34 Podgorica for the purchase of 11,200 ordinary shares (80.29% in the Bank s capital and voting rights) and of the basis of the payment of the agreed purchase amount, NLB acquired ownership on 15 April The remaining shares of Euromarket banka a.d. are held by EBRD (subject to Call and Put Option Agreement). On 6 July 2005 the NLB also concluded the purchase of Continental banka a.d., Novi Sad. NLB now owns % of the share capital of the aforementioned bank, which has over 70 affiliates in Serbia and approximately 154,000 customers. The activities related to the expansion of the NLB Group on the SEE markets continue, focusing primarily on markets of former SFRY. In 2005, NLB continues with the implementation of its programme of disinvesting non-strategic capital investments. 34

35 9. BUSINESS OVERVIEW 9.1. Principal activities NLB is a universal bank, founded to perform banking and other financial services for which it has acquired permit of the Bank of Slovenia, as well as all other business operations which a bank may perform pursuant to regulations in effect at any one time both in Slovenia and abroad (decree of the Bank of Slovenia, dated 25 August 1999, 30 August 2000 and 10 October 2000). Companies within NLB Group offer specific financial and other auxiliary banking services, such as financial leasing, repurchase of claims under the system of factoring, management of investment funds, financial consultancy and realty management Brief description of the issuer s principal activities Retail banking NLB has a leading market position in retail banking within Slovenia with approximately clients. It offers approximately 148 products through a wide variety of distribution channels offering its individual customers a full range of cards, time deposit, savings programmes, loans (long and short term), brokerage services and financial advice. The retail branch network, the largest in Slovenia, is also responsible for the provision of corporate facilities to SMEs and sole traders. Latest achievements (2004): NLB s retail network consists of 155 branches and, together with the bank members of NLB Group, in Slovenia there are 223 branches in total. Over 200,000 users of modern distribution channels. 500,000 visits per month to our website by more than 300,000 customers who make up to 150,000 informative calculations. More than 10,000 points of sale are equipped with NLB POS terminals. The number of Golden Account holders doubled among citizens, involving a 4.2 percent share. The amount of newly approved loans increased by 37% as compared to The number of Gold MasterCard cards is 66% higher, while the volume of transactions grew by 35% as compared to NLB Group s retail strategy, given its already high market share, is to retain its customers whilst aiming to increase product penetration. In terms of product offering, the highest priority is to introduce pension, insurance and investment products (such as brokerage and asset management). Credit cards represent an attractive product as do long term loans, such as mortgages. Personal banking NLB offers personal banking to more demanding and wealthier customers. A personal banker provides simple and effective access to a whole range of services and products. Private banking The Bank pays special attention to the most demanding and wealthiest customers. Private banking, which represents the highest level of service for our customers, provides extensive experience, knowledge and excellent international connections, absolute security, discretion and the comfortable performance of all banking operations. This first-class service includes, in addition to regular banking services, the integral treatment of customers, quality asset management, tax and real estate advising and the planning of one s financial future to meet the needs and wishes of each customer. Cross sales The integral treatment of customers and cross-marketing of services within NLB Group is becoming ever more common in operations with individual citizens. Integral financial advice 35

36 In 2004 NLB Group offered new products and developed packages comprising asset management, insurance and loans. At the end of 2004 NLB started with its offer of Everything in the one place and offered our customers not only a wide range of saving and investment possibilities, but also advice about the complete investment of savings according to their risk awareness, financial targets and wishes. The Bank also introduced real estate and personal euro loans. Also increasing are mini-loans, which were introduced at the end of 2003, and which are approved for customers directly at retail outlets. The change in savings habits and the offer of new financial instruments did not strongly influence deposits since the balance of citizen s deposits, in spite of the great sales by insurance and mutual funds, increased by 5.7 percent. Card operations NLB Group offers a wide range of cards and acts as an issuer and acquirer for all card products (except for Visa cards where it is an issuer only). Last year NLB recorded the highest growth in the use of the Gold MasterCard card. The number of issued cards was 66 percent higher than in 2003, while the volume of operations increased by 35 percent. The shares of domestic and licensed cards in NLB are approximately the same. 1,322 new points of sale with POS terminals joined NLB network. Transactions grew by 35 percent in comparison to More than 70 percent of points of sale provide the safe entry of PIN codes when paying with debit cards. The market share of all issued and active cards of NLB Group is 41 percent. Modern distribution channels NLB continued with its optimisation and renewal of branches. The most frequently visited branch is NLB website. The Bank is continuously updating it with information about NLB Group and our products. Also seeing growing use are modern distribution channels: telephone, which provides Teledom, Moba NLB, SMS and automatic answering machine; the Internet bank Klik NLB; and self-service channels ATM and Tolimat for the youngest. NLB Group owns 659 ATMs, which means a 48 percent market share in Slovenia. In 2004 the number of Moba users increased by more than half, the users of Klik NLB increased by more than 30 percent, while the number of Teledom users, which can only be used by NLB customers, increased by over 6 percent. The shares of Moba NLB and Klik NLB increased within the structure of modern distribution channels users due to new users joining. Market shares (retail) Year 2003 Year 2004 Transactional accounts Business accounts Personal accounts Loans All customers Enterprises Individuals Private entrepreneurs Deposits All customers Enterprises Individuals Private entrepreneurs Issued cards All cards Personal cards Business cards Domestic cards Licence cards 33.7% 35.3% 30.7% 30.5% 31.1% 22.9% 34.0% 35.5% 36.7% 39.8% 37.3% 32.7% 4.3% 24.9% 34.1% 33.5% 34.2% 29.3% 28.6% 28.9% 24.1% 33.7% 29.2% 35.5% 40.3% 34.5% 31.6% 4.4% 23.2% 34.1% ATMP By number 44.0% 42.1% 36

37 Corporate banking Corporate banking is carried out by the Corporate Markets division for large corporates and by the retail branch network for lending to large companies, SMEs and sole traders in the region covering by each specific branch. Lending to large corporates is becoming an increasingly competitive market as they are able to raise funds on their own in the international capital markets. The strategy is, therefore, to increase NLB Group s share of SME business as well as maintaining the current market share of large corporates. The aim is to achieve this through increasing the range of products offered, improved customer service and more flexible and aggressive pricing policies to maintain the attractiveness of the offerings. Latest achievements (2004): active support of the investments of Slovenian companies in SE Europe markets; the main agent for EU funds; a 39% market share of the SME sector; and 26,000 of our customers use the electronic banking provided by Proklik NLB. All products offered by the Group are available to all customers although they tend to be more tailormade for larger corporates. NLB offered to corporates various products such as financing (loan services, warranty services), payment transaction services, cash management services, investment services. NLB s corporate banking services include also advising, preparation and execution of individual transactions, which range from regular financing, organising syndicated loans (The total amount of syndicated loans arranged in 2004 was SIT 150 billion), project financing up to more complex services, which are offered together with other organisational parts of the Bank, i.e. the financing of takeovers and issuing of securities was marked by greater competition in the banking sector from mostly foreign banks. This led to a continued lowering of interest rates with the goal to gain a larger market share. Despite the very strong competition NLB s corporate banking services succeeded in keeping a stable corporate loan portfolio, which proves our adaptability to changing circumstances. The more intensive investment activities of companies resulting in increased demand for long-term sources is seen in the faster growth of long-term loans. Similar to 2003, demand from large corporate customers was mostly for foreign currency loans, which accordingly changed the value structure of the loan portfolio. This points to the fact that the Slovenian economy has already accepted the euro to some extent, and is at the same time a result of the discrepancy between SIT and foreign currency interest rates. NLB Group played an active role in supporting Slovenian companies in their efforts to expand to foreign markets. Successful co-operation was noted in Bosnia and Herzegovina, Serbia and Montenegro and Macedonia, where some important projects were executed in the fields of tourism and commerce. These projects enjoy significant support from the local residents which strengthens the role and reputation of NLB Group. NLB s corporate banking services focused on cross-selling within NLB Group. Special efforts were also made to develop financial services with higher added value, the main one being cash management services. This approach takes advantage of potential synergies within NLB Group. This is a comparative advantage in financial markets both in Slovenia and abroad. With accession to the European Union Slovenian companies and non-commercial entities have been given the opportunity to acquire financial assistance from the Union s funds that are only available to its full members. As a consequence, NLB has decided to expand its range of services by providing consulting services to those customers seeking to obtain EU funding. NLB thus offers guidance and financial support throughout the related tendering procedures and provides opinions on the economic justification of the projects wishing to apply for such funding. 37

38 Offer for SMEs In 2004, the volume of loans given to small and medium-sized enterprises has increased by more than 44 percent. The growth of foreign currency loans is substantially stronger than for SIT loans. As an important novelty the Bank introduced a special offer of long-term foreign currency loans from the European Investment bank. These loans have a favourable interest rate, a longer maturity and are intended for companies and sole proprietors. The offer is also expanded by the long-term SIT loans linked to the interbank interest rate SITIBOR, which is based on interest rates for deposits and is similar to the foreign currency offer in its characteristics. Proklik NLB In 2004, in co-operation with an external partner NLB enabled existing users of Proklik NLB to exchange smart cards with more extensive characteristics for a fair price. In addition to electronic banking, Card Ena enables operations with e-uprava, Durs (the tax authority), Intrastat, Ajpes and edavek. Proklik NLB has been upgraded with the possibility of asset management, which enables the headquarters of companies to independently manage assets in the business accounts of linked subsidiary companies. Financial markets Latest achievements (2004): Financing the construction of motorways in the Republic of Slovenia by a bond issue totalling 13.4 billion tolars. Co-operation in eight acquisitions with a market capitalisation of 36 million tolars. Average customer value of assets under management is 86 percent higher. A senior co-lead manager in the Eurobond issue. A very complex swap transaction (Ratchet Callable Swap) was concluded. Corporate bond issues and organisation Within investment banking activities NLB seek to gain mandates for securities issue. In 2004 NLB arranged two significant corporate bond issues in the primary capital market in Slovenia. The Bank organised and executed a 20-year bond issue totalling billion tolars for the purpose of financing the construction of motorways. Bonds were used for the first time as an alternative source of funds to the existing way of financing traffic infrastructure by granting loans. The second corporate bond issue performed by the Bank, totalling 36.5 million euros, was used for financing current business and refinancing some existing loans of a major retail trade company. In both transactions, NLB acted as the underwriter of securities. NLB bond issue For the purpose of improving the Bank s balance sheet and maturity structure, and given its continuous presence in the primary bond market in Slovenia since 2000, the Bank issued two new bond series in 2004 named NLB15 and NLB16, totalling 20.8 billion tolars. Both bond issues were sold through private placements. All Bank bonds are listed in the official market of the Ljubljana Stock Exchange, except for the last issue. Dealing in securities The Slovenian equity index SBI 20 rose by 25 percent as a result of increased investments in equities and mutual funds by domestic investors in the Slovenian capital market. Due to low returns on savings-bank deposits resulting from low interest rates, domestic investors were searching for other more attractive investment alternatives. In 2004, the Bank s turnover on the Ljubljana Stock Exchange was 129 billion tolars. This resulted in a 38 percent increase over 2003 and a convincing first place in the Ljubljana Stock Exchange. In 2005, more steady growth of the Slovenian capital market and relatively stronger demand for investing abroad is expected. For that reason the Bank plans to offer its customers a choice to invest in the capital markets of former Yugoslav countries and other emerging South-east European markets. 38

39 Asset management In 2004, NLB recorded strong growth in its asset management fees through selling standardised products (type portfolios) through NLB branch network, which resulted in a 52 percent increase in net revenues over Net inflows in various portfolios totalled 7.1 billion SIT in 2004, an excellent result since the services target customers willing to invest more than 30 million SIT. Subsequently, the cost efficiency of these services grew for both customers and the Bank. Custody services The growth of assets in custody is more than a solid indicator that interest in these services is increasing from non-residents investing in the domestic market as for domestic investment made abroad. Planned net revenues for the area of existing custody services were surpassed, despite the harsh business environment, due to the increase in costs of foreign custody services. Planned revenues deriving from fund administration services were postponed as the revenues will be realised in The fallback occurred mostly on account of changes in the regulations which had a significant impact of closing the project with the aim of implementing a new service. Strategic orientation in the area of fund administration will see an expansion of fund administration services for mutual pension funds and covering of assurance funds for pension companies, whereby the full spectrum of funds administration services in the Slovenian capital market will be covered. In the area of custody services, the main target remains regional custody, which would include other capital markets of SE Europe, besides the Croatian market, which is already covered. Mergers and acquisitions In 2004, the Bank considerably enhanced its market position as an agent in the field of mergers and acquisitions in the Slovenian market. The Bank participated in the execution of eight transactions, in seven of them it was the sole arranger. The latter transactions were among the largest transactions executed entirely in The value of takeover offers totalled 16.9 billion SIT, while the value of purchased shares amounted to 7.1 billion SIT. Currency trading In retail trading, the Bank continued to expand its range of products and intensively market instruments in the money and currency markets to individual strategic customers. Due to its more aggressive marketing, the Bank s volume of operations increased considerably. In 2004, the surpluses in foreign exchange were temporarily sold to the Bank of Slovenia for the purpose of acquiring SIT funds. The volume of FX temporarily sold to the BoS kept falling over the next few months as the Bank used the possibility of selling FX permanently. Thus, 1,358 million euros was sold permanently in One part of the FX surplus was also sold in the inter-bank market. In the second half of 2004, the Bank also bought FX from the BoS as a result of market developments related to Slovenia s entry to the ERM2. In 2004, the number of transactions involving the buying of FX from companies almost doubled. The number of transactions involving the selling of FX to companies rose by 46 percent. Derivatives trading 2004 was a successful year in terms of trading with established financial instruments. NLB concluded 4,861 transactions worth 5 billion euros. Considering the size of the Slovenian market, the volume of concluded FX options and option combinations was relatively large. Besides the forward transactions, companies frequently decide on the protection of foreign-currency risk by means of FX options. At the moment, these are usually standard options while more complex ideas of protection and quite diversified combinations are also gaining in popularity. The awareness of interest risk is also growing in Slovenia. Due to changed interest rates, the demand for interest rate swaps and other possible solutions of protecting companies interest position is also increasing. Interest rate collars are also becoming ever more popular. 39

40 Debt securities trading The major part of the domestic securities portfolio consists of government bonds. The government issued numerous new bonds, with its key strategy in this market being the acquisition of government bonds in the primary market and their gradual sales in the secondary market. It also intensively traded in treasury bills. The portfolio of foreign currency securities is composed of first-class bonds issued by governments, state institutions, banks and financial organisations (investment grade BBB- or above: S&P), and to a smaller extent also of bonds without the so-called investment rating that were bought on the basis of the Management Board s approval. Securities not intended for trading include central bank bills. In 2004, investments in SIT denominated central bank bills dropped and the maturity structure also changed. 270-day central bank bills that fell due were partly converted to 60-day bills, which now account for two-thirds of total investments in central bank bills. Investments in FX central bank bills were reduced in 2004 mainly due to their maturity. Moreover, the BoS reduced the level of obligatory subscription to central bank bills in FX from 40 to 35 percent. Interbank market The volume of deposits raised in the interbank market grew by 7.3 billion SIT in 2004, while the volume of deposits placed dropped due to increased FX lending. Total turnover in currency trading with foreign and domestic banks rose, together with a higher number of deals. Liquidity management NLB regularly met all its monetary obligations and set aside sufficient reserves in both domestic currency and FX in compliance with the Bank of Slovenia's regulations. Given the general situation in the Slovenian market, the Bank was acquiring substantial SIT funds stemming from temporary sales of foreign exchange (swaps) to the BoS. In addition to this source, NLB obtained funds in the interbank market, through the Ministry of Finance and by means of the BOS' instruments stemming from temporary sales of the BoS FX-denominated bills (repo). The majority of funds acquired had a long-term maturity. Surpluses in SIT funds were placed with banks at higher interest rates in the interbank market, as well as invested in central bank bills and treasury bills. In co-operation with the BoS, Slovenian banks drafted a framework contract for REPO transactions that will be concluded in the domestic market. Activities were going on throughout the year aimed at aligning the draft contracts for concluding REPO transactions in foreign markets the GMRA/ISMA contract as well as activities for acquiring new contracts from foreign banks with which NLB has already performed some other treasury operations. Also in 2004 NLB s treasury took care of co-ordinated liquidity management in NLB Group s Slovenian banks within the scope of the terms and conditions stipulated by the Agreement on Co-operation in Treasury Operations. Another important achievement of NLB Group in 2004 was the implementation of a business line approach in the network of foreign banks within the Group and the related development of common products as well as expansion of the range of financial instruments in the treasury area. NLB offered specialist professional training, assistance and co-operation in the establishment of the treasury functions with the aim of establishing closer and better business relationships with the new banks within the Group. Compliance with the Bank of Slovenia s regulations In 2004, NLB complied with the regulation on statutory reserves. The percentage of meeting the statutory reserves ranged between and percent. Gradual adaptation of the statutory reserves to the ECB standards brought some further substantial changes, applicable as of February 2004: The period of meeting the prescribed level of reserves was shifted one month forward. The interest on the balance on an entity s account is accrued up to the level of the statutory reserves in the last completed accounting period. The interest rate did not change (1 percent). 40

41 The Bank complied with the prescribed measure on minimum liquidity while its liquidity ratios during the January-December 2004 period ranged between and in the class 0-30 days and between and in the class days. International banking Based on its long-standing experience in international activities, NLB as the largest bank in Slovenia has been highly regarded among international banks for many years. It reputation and position in international markets has been additionally strengthened by its presence in major financial centres around the world. Latest achievements (2004 results): Correspondent relationship network of 1,300 banks in 137 countries. 87 nostro accounts in a foreign currency and 290 loro accounts in SIT or in a foreign currency. Syndicated loan in the amount of 400 million euro. Total volume of export financing reached more than 65 million euros. First issue of hybrid lending instruments. Latest achievements (2005 update): Highest ever amount of a club deal loan, 540 million EUR. International payments From the point of view of creating non-interest revenues and strengthening the competitiveness of NLB as well, the area of international payments remains one of NLB s key activities. Compared to 2003, the total volume of international payments in 2004 increased by 21.3 percent, and amounted to 12.2 billion euros, with inflows of 6.9 billion euros and outflows of 5.3 billion euros. 61 percent of international payments were executed using the electronic banking services Proklik NLB or Proklik Plus NLB. For it customers, NLB also provides International Cash Management services which enable customers to manage funds from their associated companies abroad or within Slovenia. Supporting Slovenian Exporters NLB offers a wide range of trade-related services including supporting trade with letters of credit and letters of guarantee as well as providing insurance through confirmations of letters of credit and letters of guarantee. Compared to 2003, newly issued foreign guarantees rose by 17 percent, which is not reflected in the total volume of newly issued guarantees since the figure of the total volume of the year before includes a patronage statement in the amount of 107 million euros. The significant increase in foreign guarantees is related to the financing of projects, electricity and the acquisition of shares in foreign companies. The total number of import letters of credit dropped by 10 percent but, on the other side, the number of import collections increased by the same percentage which shows greater confidence in the relationship between commercial partners. The same situation is seen on the export side, where export collections are decreasing by nearly the same percentage as export letters of credit. Nevertheless, the value of export letters of credit is the same, which is the result of including letters of credit in export financing schemes. Trade-related business is covered by confirmations of letters of credit and letter of guarantee and also financed through various forms of forfeiting, post financing of letters of credit, arranging buyers credits, bank-to-bank loans and loans to financial organisations whereby products and services are always tailored to customers needs. The major share in export financing and insurance facilities provided is to support Slovenian exports to emerging markets. Special focus is on Slovenia's main trading partners in emerging markets such as Russia, Ukraine, Belarus, Kazakhstan, CEFTA countries, Croatia, Macedonia, Serbia and Montenegro as well as countries in the Middle East and Turkey, which are important targets for Slovenian exports. Exportcredit financing and insurance facilities were provided in co-operation with the Slovenian Export Credit Insurance Agency ( SID ). 41

42 Transactions in 2004 included financing Russian buyers of Slovenian equipment and services in a total amount of 31 million euros, Ukrainian buyers of Slovenian equipment in a total amount of 15 million euros, a Belarusian buyer of Slovenian equipment in a total amount of 11 million euros and Kazakhstan buyers of Slovenian equipment and pharmaceuticals services in a total amount of 3.5 million euros. Supporting NLB Group members Besides trade and export finance a very important part involves providing medium and long-term funds to foreign members of NLB Group and their strategic customers, where we benefit from the regional expertise of our local operations. In this regard, NLB strongly supports its subsidiary banks and financial Institutions in Central and Eastern Europe such as the subsidiaries in Bosnia and Herzegovina, Macedonia, Serbia and Montenegro, Bulgaria, Czech Republic and Slovakia. Funds are used by subsidiaries for financing international trade and investment projects. As a supplement to trade and export finance NLB occasionally participates in syndicated loans raised by foreign banks. Participation is only considered where it might support future trade and export finance transactions. In 2004 the aggregate volume of financial transactions reached 173 million euros, while the total volume of confirmation of letters of credit and letters of guarantee reached 91 million euros. The credit portfolio grew from 127 million euros at the end of 2003 to 211 million euros at the end of Offbalance sheet items increased from 56 million euros at the end of 2003 to 100 million euros at the end of Advisory services to NLB Group members Advising services were one of the key activities in NLB acted as a financial advisor to its subsidiary Tutunska banka a.d., Skopje, in raising a syndicated loan in the amount of 20 million euros. This was arranged by the EBRD and was the very first syndicated loan raised in international financial markets by any Macedonian institution. External borrowing External borrowing remains one of the most important segments among international activities. In 2004 NLB was able to negotiate lower margins than in previous years due to Slovenia s accession to the EU. The increased external borrowing of NLB in international markets was a result of the introduction of the new Law on Corporate Income Tax and arrangements for adopting the euro that were started by Slovenian companies. Due to the changes in the Slovenian economy, 2004 holds the record in terms of NLB s long-term external borrowing. In 2004, the most significant events included a syndicated loan in the amount of 400 million euros, which was the largest transaction ever, followed by a hybrid capital instrument issued in the amount 100 million euros, as a first transaction of any Slovenian financial institution in international financial markets. A subordinated bond in the amount of 50 million euros was also issued. NLB successfully concluded negotiations with the EIB to grant a Global Loan Facility in the amount of 100 million euros. NLB and the EIB signed the first of two contracts in the amount of 75 million euros which are intended for financing small and medium-sized companies and projects involving the environment, infrastructure, the knowledge-based economy, the efficient use of energy, health and education. Attention was also paid to an environmental preservation project. NLB concluded an agreement with the EBRD in the amount of 10 million euros for financing a project based on the EBRD/GEF s programme. The programme aims to reduce pollution of the Danube basin and is sponsored by the GEF. Due to the attractive scheme and a completion fee following successful completion of the project, a large number of Slovenia companies decided for this programme. 42

43 56 bilateral loan agreements were concluded with foreign banks, totalling 22 million euros to satisfy the requirements of Slovenian companies, 92.8 percent of these agreements were concluded with Austrian banks. Consequently, total external borrowing in 2004 increased by 29.8 percent compared to 2003 and amounted to 1,076 million euros at the end of In 2005, NLB took on a club deal loan in the amount of 540 million EUR, which was the largest transaction ever concluded. The deal has been finalized in June In the period January-May 2005 the bank has also signed bilateral agreements for general purpose funding in the amount totalling 30 million EUR Significant new products and/or activities In 2004, the company NLB Skladi, d.o.o. started conducting business (note: established in November 2003), offering asset management services. In May 2004 the company started managing and offering to the public through the extensive NLB branch network with 4 mutual funds. Today the company manages 6 mutual funds and a closed-end investment fund. Through its successful cooperation and marketing of products through the branch network of NLB as well as those of other Slovenian banks within the NLB Group (Koroška banka d.d., Banka Domžale d.d. and Banka Zasavje d.d.) the company has thus far (as per 20 June 2005) managed to obtain a % market share according to pure asset value of funds (2 nd place in the market) and % of net inflow to funds within the last 12 months (placing it on the 1 st spot in the market) Principal markets NLB Group operates in three geographical areas: Slovenia, SEE markets and Western Europe. The Slovenian market represents the key area where the Group generated the major share of its total income (NLB and its subsidiaries in Slovenia accounted for 83 percent of the Group s total income in 2004). In line with the strategy, operations in other markets, mainly in SE Europe, are becoming ever more important for the Group. This is evident from the growing share of income that rose from 12 to 17 percent (compared to the year 2003). Banks as members of NLB Group contribute most to the overall financial result. Besides the traditional bank offer, the Group is putting more emphasis on introducing new services: export financing, leasing, asset management and bancassurance. Their contribution to total income grew from 14 to 19 percent in Within each region NLB and its subsidiaries are present with various different products and services as it is described in the table below. Banks Leasing Factoring & Forfaiting Life Insurance Asset management Other activities Slovenia SE Europe West and Central Europe In Slovenia NLB Group includes the following banks: Banka Domžale d.d., Domžale, Banka Zasavje d.d., Trbovlje, Koroška banka d.d., Slovenj Gradec and Banka Celje d.d., Celje (associated bank). 1 Due to availability the data herein only include domestically managed mutual funds. 43

44 Subsidiary banks in Slovenia have a licence to offer all banking services to corporate and retail customers. Despite growing competition in the Slovenian banking sector and the fall in interest margins, the 2004 financial performance of the banks was successful. NLB Group operates in EU countries and SE Europe through the following banks: LHB Internationale Handelsbank AG, Frankfurt/Main, Adria Bank AG, Vienna, CBS Bank d.d., Sarajevo, LHB Banka a.d., Banja Luka, LHB Banka Beograd a.d., Beograd, Montenegrobanka a.d., Podgorica, Euromarket banka a.d., Podgorica, Tutunska banka a.d., Skopje and West East Bank a.d., Sofija. The mentioned banks in SE Europe have contributed a lot to establishing NLB s stable position in the region. Among other things, these banks have also played an important role in building up new connections between business entities from Slovenia and SE Europe. The main Group s strategy: to put our customers, their wishes and needs at the centre of our activities; to maintain our leading position in Slovenia; to become the leading financial group in SE Europe; and to continue introducing new services to the Slovenian market. The main goals for the next mid-term is to ensure the balance between maintaining the market position in Slovenia, cost efficiency and profitability of operations. The main internal challenges of the NLB Group in the next years are further improvement of corporate management and restructuring of business processes to the areas of retail and corporate operations. The main challenges of the business environment that the NLB Group will have to face in Slovenia are pricing war, interest rate convergence, introduction of euro and Basel II as well as low level of economic development and political risks in the SE Europe Competition and market shares The NLB Group is the largest banking organisation in Slovenia. As at 31 December 2004 the market share of domestic banks from the NLB Group in total assets of the Slovenian banking sector, loans to non-banking sector and deposits of non-banking sector stood at 36.3%, 32.5% and 37.9% respectively. Within the NLB Group the parent bank NLB holds a 90% share in total assets. NLB classifies its competitors into three categories: domestic banks, foreign banks and providers of specific financial services. In the financial market its competitors are domestic and foreign universal banks, such as Nova Kreditna banka Maribor, d.d., Abanka Vipa, d.d., SKB Banka, d.d., Bank Austria Creditanstalt, Hypo Alpe-Adria-Bank, d.d., and major regional banks, i.e. Banka Koper, d.d. in Gorenjska banka, d.d. The presence of foreign banks, particularly from the neighbouring countries, which offer their services through branches or directly, is intensifying and thus also the range is expanding and competitiveness becoming fiercer. In the case of a specific range of services, i.e. investment banking, NLB's competitors are specialised companies - especially stock broking companies. As Slovenia entered the EU, the presence of foreign banks' range intensified considerably, namely both in corporate and retail banking. In view of the growing competition NLB's vision is to keep the leading role among the banks in Slovenia and to become one of the leading financial groups in South-East Europe. In securities trading on the organised market NLB in 2004 reached a market share, thus ranking first among the players on the organised market. Second ranking is Perspektiva BPD, holding a 10.21% market share, followed by Abanka Vipa d.d. with an 8.25% market share. According to the data of the Ljubljana Stock Exchange NLB was among the most active members of the stock exchange also in the first quarter of In securities trading on the organised market NLB ranked second among the market participants, holding a 16% and a 13% market share in January and February respectively, while in March it ranked first with a 23% market share. 44

45 Gorenjska banka 4,9% Other banks 15,6% Bank Austria 5,2% Banka Koper 5,8% Banka Celje 6,3% SKB 6,8% Abanka Vipa 8,4% NKBM 10,6% NLB Group 36,3% Banka Zasavje 0,9% NLB d.d. 32,7% Banka Domžale 1,5% Koroška banka 1,3% Figure: Market share of the NLB Group as at 31 December 2004 in terms of total assets Note: Source for the aforementioned data on market shares have been obtained from The Bank Association of Slovenia, The Bank of Slovenia and Ljubljana Stock Exchange Other Business Related Information Business Volumes Balance sheet (as at 31 December 2004) NLB represents more than three-quarters of NLB Group s total assets, namely 1,855.6 billion SIT. Of the other NLB Group members, LHB is the largest by size, followed by the three Slovenian subsidiary banks and the Tutunska banka a.d., Skopje from Macedonia. The share of loans to non-bank customers in total assets was 54.8 percent. Investment activity was mostly financed with deposits and loans from non-bank customers and loans from banks, representing 81 percent of total liabilities. Debt securities and equity are the second biggest source of financing. Customer loans Customer loans exceeded the 2003 level by 15.5 percent. From the total of billion SIT corporate loans involve the biggest share with 73 percent while at the same time recording the highest growth of 16.6 percent. The trend of declining interest rates, caused by the differing SIT and foreign currency interest rates, was reflected in the currency structure of customer loans, with 37.8 percent growth in foreign currency lending. Customer deposits NLB's customer deposits amounted to 1,153.5 billion SIT, a 5.6 percent increase over Despite increased competition in collecting bank deposits, mutual funds and life insurance, retail deposits grew by 6 percent to billion SIT and corporate deposits by 4 percent to 278 billion SIT. Alternative savings products, especially the combination of bancassurance that NLB Group offers through NLB Vita, d.d., are changing customer behaviour in the area of savings. The currency structure is still in favour of SIT deposits with their 64.7 percent share, despite the SIT interest rates continuing to converge with the European levels. 45

46 Debt securities, subordinated liabilities, deposits and loans from banks Deposits and loans from banks reached billion SIT, an increase of 25 percent. This substantial increase in 2004 was a consequence of the newly arranged syndicated loan in the amount of 400 million euros, the highest amount so far involved for NLB. Subordinated liabilities increased by 43 percent due to the activities of the issue of hybrid capital instruments and a subordinated loan in the amount of 150 million euros to ensure a capital adequacy ratio increase for NLB. The maturity of NLB s own shares was reflected in a decrease in the volume of debt securities issued, despite the issue of two series of NLB bonds in Capital ratios See the section on Regulatory Reporting Requirements Credit Risk Management The Bank s credit portfolio includes balance sheet items (loans, securities, capital investments, interest, fees, commissions etc.) as well as off-balance sheet items (guarantees, L/Cs, commitments and contingencies, derivatives etc.) vis-à-vis corporate customers, banks, financial institutions, public sector, retails customers and all other customers. By entering into any of the abovementioned investments the Bank exposes itself to credit risk. Investing with customers who are residents of a foreign country also introduces country risk. Depending on the country risk and contingent insurance, the Bank forms an appropriate amount of provisions to shield itself against the country risk. Prior to credit approval or entering into a contract which would expose the bank to credit risk, every customer receives a rating and individual limit. The rating of the customer depends on its financial position, business performance, relationship with the Bank to date, and the ability to provide sufficient finance to meet future obligations. Table: NLB Migration matrix weighted with exposure for the year 2004 to from A B C D E Total exposure (in thousand SIT) Average rating A 98,26% 1,50% 0,19% 0,06% 0,00% ,98 B 16,54% 78,71% 3,42% 1,33% 0,00% ,10 C 13,73% 6,27% 67,90% 12,09% 0,01% ,22 D 0,00% 4,48% 1,12% 80,64% 13,76% ,96 E 0,00% 0,16% 0,00% 0,24% 99,60% ,01 Table: NLB Migration matrix weighted with exposure on previous yearly migration matrixes for the period to from A B C D E Total exposure (in thousand) Average rating A 97,90% 1,86% 0,19% 0,05% 0,01% ,98 B 17,16% 78,72% 2,40% 1,55% 0,16% ,11 C 5,81% 21,77% 60,85% 10,50% 1,07% ,21 D 0,09% 17,41% 13,50% 58,24% 10,76% ,38 E 1,60% 0,54% 0,23% 1,82% 95,81% ,10 Limits for a customer are established on the basis of their creditworthiness, the feasibility of their business and projects, as well as other elements, which might influence their ability to pay back the investment. Limits are determined separately for long- and short-term investments. 46

47 In addition to determining limits for individual customers the Bank also establishes limits for customer groups and countries. After an investment has been approved NLB regularly monitors every customer s performance and interest repayment. Depending on the risk category of a customer, as expressed by their internal rating, and the risk of a specific business or project, which is also influenced by the guarantees provided, the Bank forms appropriate provisions for protection against credit risk. Provisions are formed in accordance with both the Slovenian and International Standards of Financial Reporting. Since 2002 NLB has strengthened its control over subsidiary banks and financial institutions by performing regular checks of their portfolios. This approach ensures equal procedures are applied when rating customers and forming provisions for credit risk. When differences in forming provisions are determined (mainly due to differing national legislation and practices), these are recalculated in agreement with the regulation set by the Bank of Slovenia, and the differences are included in the consolidated accounting statements of NLB Group Market Risk Management Market risk concentrates on potential losses in the Bank s positions, which arise due to adverse changes in the interest rate, foreign exchange, equities and derivatives markets. The Bank manages market risk on a global level, as well as separately for positions in the trading and banking book. During 2004 the Bank was mainly exposed to foreign exchange and interest rate risk, whereby the exposure was relatively small. NLB does not actively trade in derivative products. The system in operation enables NLB to manage risks on a daily basis and compares exposure to predefined limits. The defined limits, which have been approved by the Management Board, are in accordance with business demands and opinions of risk management department. If the limits are exceeded, the open positions are closed or hedged through appropriate hedging instruments to ensure they are within the approved limits again. The exposures and utilisation of limits is shown on a regular basis in risk reports submitted to the business side and ALCO. In line with requirements set by the Bank of Slovenia, the Bank provides sufficient equity to cover potential unexpected losses which may arise from exposure to foreign exchange and other market risks. Reporting to the Bank of Slovenia according to the standardised approach is conducted on a monthly or quarterly basis. Currency risk The Bank s financial position and cash flows are exposed to foreign currency fluctuations. Foreign exchange ( FX ) risk is monitored and managed on a daily basis. By closing open FX positions on a daily basis the Bank minimises its foreign exchange exposure and thereby adheres to its relatively conservative policy of managing foreign exchange risk. The Management Board confirms limits on permissible exposure in each foreign currency and for every trader. In addition to the standardised methodology the bank uses its own internal Value at Risk model (VAR) to determine the FX risk embedded in its positions (trading and banking book positions) and the maximum potential losses associated with them. The VAR numbers are calculated using a historical simulation method and are in accordance with the Basel II standards considering capital charge calculations. The method is based on a daily calculation of changes in the foreign exchange part of the balance and off-balance sheets, thereby taking into account previous exchange rate values and their mutual correlations during the previous year. In addition to this, backtesting is carried out on a daily basis to corroborate the exactness of the internal model. Since the model is still in the testing phase, the Bank of Slovenia has not issued an approval for the model to be formally used in capital adequacy calculations yet. Therefore, its application is constrained to internal usage only. The FX risk measurement model has the following characteristics: VAR is calculated daily, based on the end of the previous working day s exposure; 47

48 a holding period of 10 days; an observation period of 250 working days; a confidence level of 99%; and historical time series are updated daily. Interest rate risk Interest rate risk arises when interest-sensitive assets have different maturities or reprising characteristics than the corresponding interest-sensitive liabilities. The Bank s objective in managing interest rate risks is to reduce the volatility of net interest margins. The Bank s interest rate exposures are monitored and managed using interest rate sensitivity gap reports. Those reports contain interest rate sensitivity analysis according to time gaps for both on and off-balance sheet items which are segregated by type of interest rate and reprising bands. NLB has upgraded its interest rate sensitivity analysis with the individual management of interest rate risks of two positions in the banking book - transformation and hedging position. Within the transformation position assets with undefined maturities but with presumed stability over a given time period are invested in securities according to the benchmarking principle. The aim of this method is to realise an interest margin without exposing oneself to credit, liquidity or currency risks. The hedging position, which includes financial instruments with known maturities and results on business with corporate and retail customers, is managed so that the position s exposure to interest rate risk is kept at a minimum. For the purpose of determining its exposure to interest rate risks, NLB performs interest rate gap analyses as well as sensitivity analyses of changes in market-based interest rates in the market value of instruments held and the corresponding level interest income Human Resources Management In 2004 Human Resources activities focused primarily on the processes that support a further rise in the effectiveness of the investment in labour costs, which in turn improves the links between NLB Group members in the field of Human Resources, as well as those that ensure the appropriate competence and motivation of employees. All these activities were implemented with a carefully managed balance that has helped to attain both goals, improve cost effectiveness and at the same time sustain a high competence level, the motivation of employees as well as retain the key talents. Key data in the area of Human Resources as per end of 2004: 5,790 employees in NLB Group, with 3,619 in NLB; average age is 41 years; average work experience in NLB is 16 years; three-quarters of the employees are female; and in internal educational programmes with 6,300 participants have been performed. The personal commitment of employees, their professionalism and loyalty was reconfirmed in 2004; the business results were achieved with almost 5 percent fewer employees than in This success is a result of the synergy between labour cost effectiveness related to optimisation of the business process and the restructuring programme, which is changing the structure of human resources and ensuring an adequate level of competencies and quality of the working environment. Training is clearly one activity that helps ensure the employees readiness for new challenges. NLB Group banking school, established in 2003, provides professional knowledge to all groups of employees. While focusing on NLB Group s strategy, its values and business model, it creates a better understanding of the business and the importance of co-operation between different parts of NLB and NLB Group. In order to increase the return on investment in training and allow the employees to choose their time for training, the Bank has extended the offer of e-learning courses. For the first time, along with training the e-platform allowed for knowledge assessment. 48

49 In co-operation with NLB Group members the Bank set the basis for the planned employee mobility among members, called 'Groups for the Group', thus increasing co-operation within the Group in the HR area. At the same time, NLB organised different forms of training which where organisationally and content-wise adjusted in order to ensure the transfer of knowledge and best practices to key employees within NLB Group, who will then add to further knowledge dispersion and improve cooperation among Group members Information Technology In 2004, important decisions were made regarding the development strategy in information technology from the aspect of technology, long-term partnership with local IT companies and process optimisation within the IT centre aimed at better control and high-quality IT risk management. Compared to 2003 the performance of the systems in 2004 was substantially more stable while system availability reached 99.6 percent. Given the problems with IT systems in 2003 the Bank proceeded with activities for managing information and other operating risks. An important part of these activities related to the disaster recovery plan, where a functional host was completely installed at the secondary location and the setup of other key systems is about to finish and the integration testing is scheduled for May. This will enable business continuity or restoration within a critical time for all business functions. All the manuals have also been produced to cover the situation when a system goes down. Apart from other resources, the Bank budgeted almost 1 billion SIT for hardware investments for business continuity planning. In the development strategy a target technical and business architecture was designed, the target development environment defined and decisions were made in line with this strategy for key projects. In retail development, several functionalities were developed catering for new products and rationalising the system s performance. The most important development project in the retail area is an integrated front-end application, which will considerably facilitate work, making it more efficient and improving control mechanisms in operations while at the same time facilitating connections to other management systems especially for non-banking products using the advantage NLB has with its widespread network for selling services to its customers. In 2004, the gap analysis in the corporate banking and treasury was completed, which was considered a good basis for restarting the Globus project for developing an integrated corporate banking system. The end of 2005 will introduce the implementation of the first batch of functionalities. The Bank introduced important changes to the IT governance function and its compliance with the development goals. Development priorities were aligned with business development needs and regulatory compliance, which to a large extent requires changes to the information system as Slovenia is moving closer to the EU regulations. A new reporting system for the ECB was put in place in 2004 along with interest taxing and payment system customisations because of STEP2 and Target. In line with development requirements and better risk management during the implementation of new solutions as well as the scheduled introduction of the euro, NLB contacted local IT companies to ensure adequate capacity for the critical period of the next two to three years. This approach will accommodate several development needs of the Bank and regulatory requirements while at the same time reducing dependency on a few key individuals and delivering urgent activities for reducing the complexity of the information system. 49

50 10. ORGANISATIONAL STRUCTURE Description of the Issuer and the NLB Group As at 31 March 2005 the NLB Group consists of Nova Ljubljanska banka d.d., Ljubljana, as the parent bank and the group of 56 subsidiaries, associates and joint venture banks and/or companies. According to their core activity the members of the NLB Group are divided into banks, financial organisations and other companies, registered in Slovenia and abroad. The NLB itself represent 77,8 % of the group s total assets and 71,4 % of group s net profit for the year ended on 31 st December The strategic goals of the NLB Group envisage further expansion of the NLB Group to the markets of the SE Europe, preservation of the largest market share in the banking sector in Slovenia and development of the NLB Group into the leading financial group in the region. As at 31 May 2005 the NLB Group consisted of the following banks and companies: SLOVENIA Banks Financial organisations Companies ABROAD Banks Financial organisations Companies Nova Ljubljanska banka d.d., Ljubljana; Koroška banka d.d., Slovenj Gradec, banking group of Nova Ljubljanska banka; Banka Domžale d.d., Domžale, banking group of Nova Ljubljanska banka; Banka Zasavje d.d., Trbovlje, banking group of Nova Ljubljanska banka; Slovenska investicijska banka d.d. - in liquidation; Banka Celje d.d., Celje LB Leasing d.o.o., Ljubljana; Feniks d.o.o., Murska Sobota; Optima Leasing d.d., Ljubljana; LB Leasing Koper d.o.o.; LB Leasing Maribor d.o.o.; Fit Leasing d.o.o., Velenje; Prvi faktor d.o.o., Ljubljana; LB Maksima d.o.o., Ljubljana; Skupna pokojninska družba d.d., Ljubljana; LHB Finance d.o.o., Ljubljana; NLB Vita d.d., Ljubljana; NLB Skladi d.o.o., Ljubljana NLB Propria d.o.o., Ljubljana; Golf Arboretum d.o.o., Radomlje; Bankart d.o.o., Ljubljana; Prospera plus d.o.o., Ljubljana; FIN-DO d.o.o., Domžale; ICJ d.o.o., Domžale Adria Bank AG, Vienna; LHB Internationale Handelsbank AG, Frankfurt; LHB Banka a.d., Banja Luka; Tutunska banka a.d., Skopje; CBS Bank d.d., Sarajevo; LHB Banka Beograd a.d., Belgrade; Montenegrobanka a.d., Podgorica; Euromarket banka a.d., Podgorica; West East Bank a.d., Sofia LB InterFinanz AG, Zürich; LB InterFinanz s.r.o., Prague; LB InterFinanz Italy S.r.l., Gorizia; LBIS d.o.o.e.l., Skopje; Nov penzjski fond a.d.., Skopje; LB InterFinanz d.o.o., Belgrade; VB InterInvest a.d., Banja Luka; LHB Consult d.o.o., Belgrade; LB Leasing d.o.o., Belgrade; CBS Leasing d.o.o., Sarajevo; LB Leasing d.o.o., Podgorica;Optima Leasing d.o.o., Zagreb; Tutunskabroker a.d., Skopje; Prvi faktor d.o.o., Zagreb; Prvi faktor d.o.o., Belgrade; NLB Factoring a.s., Ostrava; NLB Factor, s.r.o., Bratislava; LHB Immobilien GmbH, Frankfurt; LHB Trade d.o.o, Zagreb; CBS Invest d.o.o., Sarajevo; TEXIBA d.o.o., Belgrade; BTB a.d., Belgrade; Krajina promet a.d., Banja Luka; Plan a.d., Banja Luka In 1997 the following Slovenian banks joined the NLB Group: Koroška banka d.d., Banka Zasavje d.d. and Banka Domžale d.d. with its group; in 2000: Banka Celje d.d., Celje, and in May 2003: Slovenska investicijska banka d.d. (subsequently put into liquidation). In May 2003 NLB acquired a 78.78% stake in Slovenska investicijska banka d.d., Ljubljana, by purchasing it from the company JP Energetika. Through public offering it acquired further 2% (see also the section on Legal and Administration Proceedings). In line with the programme for increasing capital investments, NLB in the first five months of 2005 increased its participation in Banka Domžale d.d. to 64.03%, in Banka Zasavje d.d. to 67.27%, in Banka Celje d.d., Celje, to 36.95% (stake) and 45.48% (voting rights) and in Tutunska banka a.d., Skopje, to 17.03% (stake) and 42.83% (voting rights). In the first quarter of 2005 NLB concluded the agreement on purchase of the shares of Euromarket banka a.d., Podgorica, and on 15 April 2005 it acquired a 80.29% stake in the bank, while the 50

51 remaining stake is continued to be held by EBRD. Among financial organisations in Slovenia dealing in leasing are the company LB Leasing d.o.o., Ljubljana, established in 1990, with its group (Optima Leasing d.d., Ljubljana, Feniks d.o.o., Murska Sobota, LB Leasing d.o.o., Belgrade, LB Leasing Podgorica, CBS Leasing, Sarajevo and Optima Leasing, Zagreb) as well as the companies LB Leasing Koper d.o.o., LB Leasing Maribor d.o.o. and FIT Leasing d.o.o., Velenje. For the purpose of managing investment funds LB Maksima d.o.o., Ljubljana, was established in A member of the NLB Group dealing in factoring is the company Prvi faktor d.o.o., Ljubljana (together with its daughters Prvi faktor d.o.o., Zagreb, and Prvi faktor, Belgrade) which have a status of joint ventures (besides NLB another partner is Slovenska izvozna družba d.d.). In 2000, Skupna pokojninska družba d.d. has been established bearing the status of associated company and providing services of additional pension insurance. Among the companies whose activity complements the banking activity is the subsidiary NLB Propria d.o.o. (established in 1990 as LB Hipo d.o.o.) dealing in real property management, the company Prospera plus d.o.o. providing catering and tourist services and the associated company Bankart d.o.o., Ljubljana, providing services of payment instrument processing. In the course of 2004 the winding up of the companies LB Trading d.o.o. and Bančno zavarovalna družba d.o.o. through voluntary liquidation was completed. Abroad, NLB is the majority shareholder of LHB Internationale Handelsbank AG, Frankfurt, established in 1974, which owns several banks and companies registered mainly in the newly emerged countries of the former Yugoslavia (LHB Banka a.d., Banja Luka 2, and its subsidiaries VB Inter Invest a.d., Banja Luka, Krajina promet a.d., Banja Luka, and Plan Banja Luka, LHB Trade d.o.o., Zagreb, LHB Consult d.o.o., Belgrade, LHB Immobilien GmbH, Frankfurt, LHB Finance d.o.o., Ljubljana, CBS Bank d.d. and its subsidiary CBS Invest d.o.o., Sarajevo, LHB Banka Beograd a.d. with subsidiaries BTB a.d., Belgrade and TEXIBA d.o.o., Belgrade), through which it implements the strategy of ensuring its presence on these markets and providing services to respective clients. The associated member of the NLB Group is the Austrian bank Adria Bank AG, Vienna. The services of commercial financing are provided by the Swiss company LB InterFinanz AG, Zürich, with companies in Prague, Gorizia, Skopje and Belgrade. The services of factoring are provided by the Czech Ostrava-based company NLB Factoring a.s. and its Slovakian Bratislava-based daughter company NLB Faktor s.r.o. In 2000 NLB penetrated the market of Bosnia and Herzegovina by having indirectly purchased (through Banka Domžale d.d. and LHB) a majority parcel of shares in CBS Bank d.d. in Sarajevo. Members of the NLB Group are also present in the Republic of Srpska, as LHB is the majority owner of LHB Banka a.d., Banja Luka. In 2000 NLB penetrated the Macedonian market by acquiring, together with LHB, a majority shareholding in the third largest Macedonian bank Tutunska banka a.d., Skopje. NLB strives to expand its market share in Serbia as well, where LHB s subsidiary LHB Consult d.o.o., Belgrade, is operating, while in 2003 LHB acquired a 51% stake in Prva Preduzetnićka banka a.d. from Belgrade (presently: LHB Banka Beograd a.d.) 3. The following companies also started operating in this area: LB Leasing d.o.o., Belgrade, LB InterFinanz d.o.o., Belgrade, in 2003 and Prvi faktor d.o.o., Belgrade, at the beginning of 2005, and they perform the activities of their parent companies on the territory of Serbia (namely: LB Leasing d.o.o., Ljubljana, LB InterFinanz AG, Zürich, and Prvi faktor d.o.o., Ljubljana). On 6 July 2005 the NLB has also conluded the purchase of Continental banka a.d., Novi Sad, in which the NLB now owns % of the share capital. The NLB Group has been present in Montenegro since July 2003 when the agreement on sales of a 91.5% stake in Montenegrobanka a.d., Podgorica, was concluded between NLB and the Republic of Montenegro. Koroška banka d.d. became the owner of a 86.52% stake and NLB of the remaining 5% stake. 2 In 2004 the bank was renamed from VB Banka a.d., Banja Luka, into LHB Banka a.d., Banja Luka. 3 During 2004 NLB purchased shares of this bank and thus acquired a 9.4% stake in it. 51

52 At the end of 2003 NLB penetrated the market of Bulgaria by indirectly participating in the capital of the newly established West East Bank a.d., Sofia, through the company LB Maksima d.o.o., Ljubljana. Thus for a number of years NLB renders its clients the leasing, factoring and forfeiting services and in the recent times it has been developing new products in the field of property management and together with KBC Bank in the field of insurance. For this purpose two new companies were established in The company NLB Skladi d.o.o. provides services of asset management, while NLB Vita d.d. provides life insurance services. By implementing the set strategy the NLB Group follows its policy of providing a comprehensive range of financial services to clients on developed financial markets as well as financial markets of the countries in transition. NLB has a status of associated bank in the bankassurance company KBC. Note: The organizational structure of the NLB is presented in Appendix II. The structure of the NLB Group is presented in Appendix III Dependence of the Issuer upon other entities within the Group NLB is the single largest entity in the NLB Group and is directly or indirectly a major shareholder in most other NLB Group members. In addition to that, NLB has no direct and/or material dependence on other entities within the NLB Group. 52

53 11. TREND INFORMATION Trends, uncertainties and events Trends Interest Rate Movements In recent years there has been a marked downward trend in SIT interest rates as the decline in national inflation coupled with the convergence of exchange rates to Euro have influenced a convergence also in SIT interest rates closer to Euro interest rates. Using the Bank of Slovenia (BoS) 60 day bills as indicative rate the SIT and Euro rates from year end 2001 to Mar 2005 the convergence trend in interest rates can be seen: SIT 60 day BoS Bills Euro 60 day BoS Bills % 3.28% % 2.74% % 1.99% % 2.09% % 2.04% Growth in Euro Business As Slovenia s anticipated entry to EMU draws closer, with a stable Euro / SIT exchange rate in the past year and as general interest rates in Euro are lower than SIT, NLB has experienced a notable shift in the growth pattern of customer business. Most new business written by the bank in Slovenia is now in Euro, in particular in customer lending Uncertainties Competition Slovenia s accession to the EU on 1 May 2004 may yet bring about potential changes in the competitive environment of the banking, and on the greater scale, financial industry. Slovenian banking sector is at the moment highly concentrated (CR3 = 51,7 %). Therefore foreign banks (especially those from other EU countries) may try to gain market share in Slovenian banking sector by way of acquisitions or establishing subsidiaries and/or branches in Slovenia. Due to high concentration the possible way to gain market share would be to offer lower loan rates and more competitive conditions for other services. Change in the structure of Supervisory Board At the General Meeting held on 29 June 2005 new members were elected to the Supervisory Board replacing Igor Kušar and Dirk Mampaey who resigned Anton Žunič, Uroš Slavinec, Metka Tekavčič, Borut Jamnik, members whose mandates expired. The new members elected are Peter Ješovnik, Igor Marinšek, Žiga Lavrič, Adrijana Starina Kosem, Marko Rus and Riet Docx. No material changes in the overall strategy of the bank are expected due to the change in the Supervisory Board. 53

54 Changes in ownership Future steps in the change in the ownership structure of NLB are unknown. The Government of the RoS has not yet made any public announcement of any decision regarding the sale or otherwise of its shareholding in NLB. Up until the end of 2005 KBC has committed to not increasing its share in NLB. Potential ownership changes after this date are unknown. Regulator and regulatory framework (see also Regulatory Reporting Requirement) Bank of Slovenia as the banking regulator is committed to following ECB regulatory directives and legislation. The Bank of Slovenia is expected to ensure that Slovenian banks follow all the major new and existing international regulatory and reporting requirements. In particular the banks will be expected to comply with Basel II requirements and also the statutory accounts will change from Slovenian Accounting Standards to International Financial Reporting Standards by 1 st January Introduction of the Euro Slovenia is expected to adopt and implement the Euro currency on January 1 st Slovenia entered ERM 2 on July 1 st 2004 and since then has experienced a very stable exchange rate with the Euro. Much of the business carried on in the bank s customer business is in Euro with 42.5 % of total assets and 44.4 % of total liabilities already in the Euro currency. The majority of the growth in customer business is now in Euro. The bank is currently running an enterprise wide project to ensure all systems will be Euro compliant and the execution of all Euro related matters will be implemented on schedule. The project covers information systems, accounting systems, transaction systems and all hardware and software matters related to the changeover. SEE economies political instability As the NLB group network expands in SE Europe, dependency on these economies increases. While in recent years most of these economies have experienced solid growth, there remains economic and political risk while these emerging economies develop, especially while high levels of unemployment remain. Anticipated increases in the Issuer s capital On 7 July 2004, NLB s General Meeting of Shareholders adopted a resolution on authorised capital and authorised the NLB s Management Board to increase, during the period of five years after the entry in the Companies Register of the amendment to the Articles of Association (registered on 30 September 2004), the NLB s share capital once or several times by no more than SIT 7,682,014,000.00, subject only to the approval of the Supervisory Board. For the amount of the authorised capital, a total of no more than 3,841,007 new ordinary or preference shares in the nominal value of SIT 2, per share at the issue price specified by the Management Board may be issued upon approval of the Supervisory Board. The new shares shall be issued with the pertaining rights, under the conditions and in the manner specified in a relevant resolution on capital increase and the issue of new shares adopted by the Management Board. The new shares can be issued against payment in cash, assets in kind or real takeover (stvarni prevzem), if this is in accordance with the regulations applicable at the time of adopting the resolution on increase the share capital and on issue of new shares. The Management Board may decide on the exclusion of the existing shareholders preemptive right to buy new shares, if this is approved by the Supervisory Board. For the time being, the NLB does not plan any changes in its share capital Commitments In February 2004, the Supervisory Board of NLB has adopted the strategic orientations of the NLB Group s operations and the measures for their achievement in the period, based on the 54

55 projections of movements in the external environment and taking into account the current trends in the banking industry, with the emphasis on the European area, and Slovenia s entry in the EU and the EMU. It considered the forecast situation in economy and developments in the financial and banking sectors in Slovenia, analysis of competition and internal analysis of the NLB Group. Special emphasis was put on NLB as the parent bank, which defines standards and trends for the entire Group, mainly due to its size. In the following medium-term period the NLB Group will continue to pursue the objectives of healthy growth and will focus on the consolidation of operations integrating new acquisitions, searching for synergies and strengthening the supervision function of the NLB Group. Strategic guidelines of the NLB Group are based on its vision and mission. The most important mid-term strategic goals of the NLB Group are the following: 1. put the clients, their needs and requirements, in the centre of the Bank s operations 2. maintain the leading position in Slovenia 3. become the leading financial group in the SE Europe 4. continue with the development of new services on the Slovenian market. Capital Investments Efficient implementation of NLB s strategy in the field of capital investments depends on the orientations of NLB s largest owners (Republic of Slovenia and KBC), on NLB s financial ability, the acts of subsidiaries and affiliates, decisions adopted by other shareholders of related persons and market situation. NLB s goals in this area are as follows: Maintain or increase the level of strategic investments. The criteria for determining strategic investments are: capital investments in banks and financial organisations; investments in at least the controlling stake; the subject covers the domestic and foreign market area not covered by the Bank s organisational parts; covering the market of services not provided by the Bank, which nevertheless form part of the Bank s integral range of products and services offered to clients; appropriate returns (capital yields and dividends). Sales of non-strategic investments investments in companies in which the stake held by the Bank is below 20 % and which engage in non-strategic and non-traditional banking activities. NLB s strategy abroad is to increase its presence on the markets assessed to be of strategic economic importance for NLB in terms of macroeconomic (the volume of goods trade with Slovenia, capital flows, acceptable country risk and other) and microeconomic criteria. Thus, NLB intends to increase its presence in the SEE markets in the next 3-year period. In accordance with the aforementioned objectives of becoming the leading financial group in SE Europe NLB plans to make several further investments in acquiring existing banks and establishing other financial institutions in this part of Europe. As far as potential capital investments, likely to occur in 2005, are concerned, the following should be mentioned: - the purchase of a 83 % stake in Tuzlanska banka d.d., Tuzla; - the purchase of a % stake in Razvojna banka Jugoistočne Evrope a.d., Banja Luka; - further increases in the ownership of Slovenian subsidiary banks and an associate bank. 55

56 Investments in IT The bank continues to look for synergies and methods of improving business operations. In addition there continues to be ever increasing demand for new information requests driven either by regulation or by business demands. To meet these needs the banks continues to invest in IT, especially in the development of core application systems and in specific projects demanded by regulatory or business needs Demands Demands of the BoS on maintaining the level of CAR above 10 % are described to greater detail in section on Regulatory Reporting Requirement Slovenian Banking Sector When comparing the concentration of banking sectors 4 in the EU Member States, the Slovenian banking sector is highly concentrated, ranking with its 65% in the upper half of the EU Member States, where the average share is between 20% and 80%. For the banking business, the year 2004 was also characterised by increased competition between the banks and other financial institutions in Slovenia and approaching the Slovenian interest rates to the European rates. In recent years the Slovenian banks have carried out the process of modernising their operations, expanded the range of their traditional and non-traditional banking services (insurance business, mutual and pension funds, leasing, factoring) and started to implement the strategies for increasing cost-effectiveness and reducing banking capacities. The Banking System brief overview Slovenia s banking sector is dominated by commercial banks, which accounted for 99.4 per cent (compared with 98.7 % in 2003) of total banking assets at year-end Savings banks and savings and loan undertakings made up the remaining 0.6 per cent, with savings banks accounting for 0.5 per cent of the market (compared with 0.4 per cent at the end of 2003), and savings and loan undertakings 0.1 per cent (0.9 per cent at the end of 2003). The banking system is highly concentrated with the top two banks, NLB and Nova Kreditna banka Maribor d.d., making up around 43 % of total banking assets, the top three accounting for more than half, and the top eight banks holding a combined 81 % market share. At 31 December 2004 there were 20 banks operating in Slovenia, the same as at 31 December Of the 20, five were subsidiaries of foreign banks and two were branch offices of foreign banks. Apart from these, there were five wholly domestically owned and eight more under majority domestic ownership. At the end of 2004, there were still two savings banks in operation. The number of savings and loan undertakings continued to fall, as many are required to bring their operations in line with the Banking Act. There were 8 savings and loan undertakings in operation at the end of 2003, but just two at the end of During the last two years a large number of savings and loan undertakings amalgamated with the Association of Savings and Loan Undertakings, and to a lesser degree savings and loan undertakings were taken over by banks or underwent voluntary liquidation and bankruptcy. There were few changes in the ownership structure of the banks in Slovenia in The share of foreign equity amounted to 32.4 per cent at the end of 2004, thus remaining unchanged as compared to the previous year. 4 Measured as market share in terms of total assets of five largest banks in the country. 56

57 Ownership structure of the banking sector in Slovenia as at 31 December 2004: % of equity capital Non-residents with more than 50 % stake Non-residents with less than 50 % stake Central government Other domestic entities Source: Bank of Slovenia Total assets of banks and savings banks (including savings and loans undertakings) are rising annually as a proportion of GDP. At the end of 2004, total banking assets accounted for 87% of Slovenia s GDP, which is still relatively low, thus indicating there are potential growth opportunities for the banking system. The following table sets out details of the average total assets as a proportion of GDP of banks in Slovenia: SIT millions Average total assets of banks and savings banks 3,505,317 4,217,835 4,841,493 5,364,886 GDP at current prices 4,761,815 5,314,494 5,747,168 6,191,161 Average total assets (% GDP) Source: Bank of Slovenia In 2004, banks have seen an increase in their net profits, grossing up to 56.1 billion SIT, thus being 8.3 billion SIT higher than in That signifies a real increase of 13.3 %. Banks profitability was therefore on the increase, present also from the profitability ratios. The average return on equity (ROE) rose from 12.5 in 2003 to 13.3 %, while average return on assets saw an increase of 0.1 percentage point to 1.1 %. The net interest margin has risen from 1.74 in 2003 to 1.86 in On the other hand cost efficiency has increased as well, with operating costs as compared to average assets declining from 3 % in 2003 to 2.8 % in Issuing authorisations to banks and savings banks is one of the BoS s most important responsibilities. BoS issues authorisations for acquiring a qualifying shareholding, undertaking a merger or an acquisition, establishing a branch abroad, establishing a branch of a foreign bank in RS, establishing a representative office of a foreign bank, and serving as a member of a bank s management board. In 2004 BoS issued in total 22 licences for different kinds of banking and financial services, acquiring qualifying shareholdings and performing the function as a member of the management board of a bank. It also rebutted 1 application for acquiring a qualifying shareholding in a bank. 57

58 12. PROFITS FORECAST OR ESTIMATES No profit forecast is included in this document as NLB has not publicy released any financial data, comments or otherwise on any financial matters relating to future periods. Unaudited financial statements for the quarter ended March 31 st 2005, including a profit estimate for the NLB Group and the NLB, prepared in accordance with the IFRS are included in this Prospectus. See "Financial Statements " on page 68 below. 58

59 13. ADMINISTRATIVE, MANAGEMENT AND SUPERVISORY BODIES Members of the administrative, management and supervisory bodies In line with the provisions of the Banking Act, the bank is organised as a public limited company (joint stock company delniška družba) governed by the Companies Act and the Banking Act. The details of the internal organisation and management are regulated by the Bank s Articles of Association. Management and Supervisory Boards The Management Board represents the Bank and manages its business operation. It consists of 6 members (a president and 5 other members). The President and other members of the Management Board of the Bank are appointed and recalled by the Supervisory Board for a period of five years. The President and members of the Management Board may be recalled prior to the expiry of their term of office in accordance with applicable laws and the Articles of Association. The structure of the Management Board is presented below. 2 members of the Management Board (namely, Mr Luts and Mr Van Keirsbilck) have been appointed upon the proposal of KBC. The Management Board consists of: Name Function Significant Outside Activity Marjan Kramar President of the Management Board President of the Supervisory Board of: - LHB Internationale Handelsbank, Frankfurt, - ETI d.d., Izlake Andrej Hazabent Member of the Management Board President of the Supervisory Board of: - Koroška banka, - NLB Skladi, - NLB Factoring Ostrava, - Euromarket banka, - Nov penziski fond, Skopje - Continental banka, Novi Sad Member of the SB of: - West East Bank, Sofia, - Adria Bank, Vienna - Bank Association of Slovenia (ZBS), - Skupna pokojninska družba, - Pozavarovalnica Triglav RE d.d. - NLB Faktor Bratislava Matej Narat Member of the Management Board President of the Supervisory Board of: - Banka Domžale, - Montenegrobanka, - Banka Zasavje, - LB Leasing Ljubljana, - NLB Propria, - CBS bank Sarajevo Member of the SB of: - Tutunska banka, Skopje 59

60 Borut Stanič Member of the Management Board President of the Supervisory Board of: - LB Maksima, - Prospera Plus, - Banka Celje, - LB Interfinanz Zurich, - Bankart, Ljubljana, Member of the SB of: - LHB Banka Banja Luka, - LHB Banka Beograd, Permanent Mandatory of: - Prvi faktor, Ljubljana Pierre Van Keirsbilck Member of the Management Board Member of the Supervisory Board of: - LHB Internationale Handelsbank, Frankfurt, - NLB Vita, - NLB Skladi, - LB Interfinanz Zurich, - Continental banka, Novi Sad Erik Marcel Hugo Luts Member of the Management Board / Members of the Management Board are normally appointed for a period of five years. The term of office of four of the members of the Management Board (except for Erik Luts) shall expire on 15 July 2007 and that of the President of the Management Board on 1 February At the end of October 2004, Erik Marcel Hugo Luts obtained the licence from the Bank of Slovenia to perform the function of a member of the Management Board and became a member of the Management Board in charge of information technology on 1 November His term of office shall expire on 1 November The Supervisory Board consists of 11 members, appointed by the shareholders at their General Meeting from among persons proposed by the shareholders or the Supervisory Board. In line with the Shareholder Agreement, 4 members of the Supervisory Board represent the Republic of Slovenia, KAD and SOD, 4 members are from KBC and one from EBRD. Two members are to be appointed from among independent experts. As of the 29 June 2005, the Supervisory Board members are: Name Function Significant Outside Activity Zvonko Ivanušič Member of the Supervisory Board - Deputy President of the Management Board, Pozavarovalnica Sava, - President of SB of Zavarovalnica Maribor, Zavarovalnica Tilia - Member of SB of Sava Plus, Dars Peter Ješovnik Member of the Supervisory Board Head of European Union affair, Chamber of commerce and industry of Slovenia Žiga Lavrič President of the Supervisory Board General Director for Financial System, Ministry of Finance Igor Marinšek Member of the Supervisory Board Director of Branch office Maribor, Adriatic, Insurance Company Marko Rus Member of the Supervisory Board President of the Management 60

61 Board, A&C Rus Consulenza Sol. Andrijana Starina Kosem Deputy President of the Supervisory Board - State Secretary, Ministry of the Economy, - President of SB of KAD, - Member of SB of Slovenske železnice d.d. André Bergen Member of the Supervisory Board CEO of the Executive Committee of KBC Bank, Deputy Group CEO Christian Defrancq Member of the Supervisory Board Managing Director of KBC Insurance Co NV, Member of the Executive Committee of KBC Insurance Co NV François Louise Florquin Member of the Supervisory Board - Managing Director KBC bank, - Member of the Executive Committee responsible for HRM, Retail Private Bancassurance and Communication, - Member of the Board of Directors Belgische Raiffeisen Stichting, - Vice President and Treasurer International Raiffeisen Union Member of IDAC - President of the Board of Directors CBC Banque - President of the Board of Directors Centea - Member of the SB of CSOB Bank, Kredyt Bank, K&H Bank, KBC Asset Management NV, Tuir Warta Riet Docx Member of the Supervisory Board General Manager Central Europe Banking Coordination, KBC Central Europe Directorate Anne Fossemalle Member of the Supervisory Board - Senior Banker, EBRD Financial Institutions Team - Member of the SB of CSOB Bank, FUIB, BRD, Ukraine Fund The Chairman of the Supervisory Board is Žiga Lavrič. The existing members of the Supervisory Board have been appointed for the period lasting until the end of the Bank's General Meeting of Shareholders, which decides on the Annual Report for the fourth business year since they have been elected. Changes in the composition of the Supervisory Board: At the General Meeting on 29 June 2005 new members of the Supervisory Board were nominated in place of Igor Kušar and Dirk Mampaey who resigned and Anton Žunič, Uroš Slavinec, Metka Tekavčič, Borut Jamnik whose mandates expired. New members elected are Peter Ješovnik, Igor Marinšek, Žiga Lavrič, Adrijana Starina Kosem, Zvonko Ivanušič and Riet Docx. 61

62 13.2. Administrative, management and supervisory bodies conflicts of interests Transactions of the Issuer with members of the Management and Supervisory Board NLB has not concluded, in the last year, any deals with the members of the Supervisory Board or Management Board, or the persons related to those members, that would exceed the scope of NLB s regular operations Potential conflicts of interest There are no potential conflicts of interest between the duties to the Bank of the Members of Bank s administrative, management and supervisory bodies and their other duties and private interests. 62

63 14. NLB' CAPITAL Issued Share Capital and Number of Shares NLB's issued share capital currently amounts to SIT and is divided into ordinary voting shares in registered form with a nominal value of SIT each. The shareholders are entitled to participate in the distribution of dividends and to exercise their voting righs (one vote per share) at the general meeting of NLB's shareholders. NLB has issued no convertible or exchangeable debt securities or similar instruments Approved Increase in Share Capital NLB s Management Board is authorised to increase, by no later than 30 September 2009, the NLB s by no more than SIT , subject only to the approval of the Supervisory Board. For the amount of the authorised capital, a total of no more than 3,841,007 new ordinary or preference shares in the nominal value of SIT 2, per share at the issue price specified by the Management Board may be issued upon approval of the Supervisory Board Subscribed Capital NLB's has no subscribed capital and no part of NLB's issued share capital is still to be paid up Own Shares As of 31 March 2005 NLB doesn t hold any own shares in its portfolio. Companies in which NLB has a direct or indirect holding of more than 50% have the following holdings of NLB shares (treasury shares): 31 March 2005 NLB Subsidiary %of the NLB % of the holding in the company Number of shares subscribed capital Book value in SIT Nominal value in SIT Koroška banka d.d., , ,553, ,848, Slovenj Gradec NLB Propria d.o.o , , Total: 34, ,572, ,850, Employees stakes As at 31 March 2005, the members of the Management and Supervisory Boards held the following stakes in NLB s capital: Marjan Kramar, Management Board, 100 shares, Zvone Ivanušič, Supervisory Board, 100 shares. The members of the Management and the Supervisory Boards have no rights to acquire or purchase shares or stakes. As at 31 March 2005, the employees participation accounted for 0.02% of the Bank s capital. The Bank does not have a policy or a formally established scheme of employee participation in its capital. 63

64 15. MAJOR SHAREHOLDERS AND PRIVATISATION The issuer s shareholders Major Shareholders Table of the largest NLB shareholders with voting rights as at 31 March 2005: Shareholder Number of shares Voting rights (in %) 1. Republic of Slovenia 2,720, KBC Bank NV 2,611, Slovenska odškodninska družba, d.d. 388, Kapitalska družba d.d. 384, EBRD 384, Poteza naložbe d.o.o. 253, NFD 1 Delniški Investicijski sklad d.d. 128, Triglav Steber I, Delniška ID, d.d. 93, Zavarovalnica Triglav, d.d. 64, Aktiva Naložbe, d.d. 60, As at 31 March 2005, 913 holders of NLB shares were entered in total in the Share Register of NLB. The Nature of Control and Control Mechanisms The five major shareholders of the bank, namely RoS, KBC, EBRD, KAD and SOD, owning % of the total outstanding share capital, have signed a Shareholders Agreement. The mentioned agreement sets out the details of how these shareholders effect the control over the bank and its operations. The shareholders perform control over NLB in accordance with the Slovenian legislation and the bank s Articles of Association by appointing members to serve on the Supervisory Board. The Supervisory Board consists of 11 members, appointed (and recalled) by the shareholders at their General Meeting from among persons proposed by the shareholders or the Supervisory Board. Members of the Supervisory Board are appointed for a period of 4 years. In line with the Shareholders Agreement, 4 members of the Supervisory Board represent the RoS, KAD and SOD, 4 members are proposed by the KBC and one by EBRD. The members appoint two independent experts. The Supervisory Board effects its control over the Management Board and the conduct of business of the bank in accordance with its mandate, which is clearly defined in the Companies Act and the bank s Articles of Association. The Supervisory Board introduced working bodies at its annual meeting in 2002, a development committee and an audit committee were established: - The SB Development Committee follows strategic issues nad prepares proposals on information system development, product development, operations on domestic and foreign markets and organization of the NLB Bank. - The SB Audit Committee follows and prepares suggested decisions in the area of internal audit and compliance with legislation, internal and external audit reports and in evaluating audit procedures. The Supervisory Board is in quorum when at least half the members are present at the meeting or, in some cases, when at least 8 out of 11 members are present. The Supervisory Board reaches decision by way of simple majority. In cases when there is an equal number of votes in favour and against a certain decision, the vote of the President of the Supervisory Board is a decisive one. 64

65 Internal Audit (Control System) The internal audit function of NLB and NLB Group is organised as an independent function directly subordinated to the Management Board. The aim of the internal audit function is to provide objective assurance and to advise the management for the purpose of protecting the Bank s assets and improving the quality and efficiency of its operations. The internal audit helps the Bank and members of the Group to achieve strategic and business objectives in the light of best banking practices. The work methods of the Internal Audit Department follow the new bank legislation and the development of the internal audit profession. The audit approach is based on inherent and control risks that exist within individual areas of the audit target areas, which are also the basis for annual and long-term audit planning. The main stress is laid on the internal control system and risk management, which is also defined in international practice in accordance with the COSO ('Committee of Sponsoring Organisations of the Treadway Commission') or the ERM ('Enterprise Risk Management') models. In order to check internal control systems in the branch network and the internal audit function at members of NLB Group, the audit approach of CSA forms ( Control Self Assessment ) is used. The CSA approach involves a combination of management supervision and classic internal auditing and is an addition to the existing internal auditing. The internal audit is also responsible for maintaining and developing unified audit standards in NLB Group as well as for supervising the internal audit activities and business performance of NLB Group members. The internal audit co-operates with the KBC s internal auditors in the areas of the development of audit methodology, education programmes and the implementation of best practices. The internal audit also co-operates with the KBC s internal auditors specialists in specific areas during joint audits of NLB. The internal audit carried out several regular audits and extraordinary reviews and followed up recommended procedures issued by the Bank of Slovenia and by the external auditor. They cooperated at supervisory reviews of the Bank of Slovenia, monitored the execution of issued decrees and recommendations by the Bank of Slovenia, co-operated in the external audit of the Bank and NLB Group, performed control reviews at contractual exchange offices credit agents performance in accordance with the regulations of the Bank of Slovenia and transferred work methodology standards and knowledge to the internal auditors of members of NLB Group in order to unify audit work. Quite a lot of time in 2004 was spent on the development of audit methodology, including an upgrade of the methodology of long-term and annual audit planning which was successfully implemented during the 2005 planning process. The internal audit also developed computer support for recording and monitoring recommendations, which led to a shortening and simplification of status reporting. In 2004 the internal audit gradually introduced the COSO model and issued the internal policy of the independence and objectivity of internal auditors Issuer s privatisation The privatisation procedure that took place during 2002 brought a significant change in the ownership structure of the NLB. The sale of shares of the Republic of Slovenia to the KBC as the key investor and institutional investors, together with contractual commitments assumed by the RoS, KAD, SOD, KBC and the EBRD, are described below. Sale of shares In accordance with the privatisation programme the shares were sold in two phases. In the first phase the RS sold a stake representing 34% of shares of NLB to the key shareholder, i.e. the Belgium banking-insurance group KBC. In the second phase the RS first sold 5% of shares of NLB to the EBRD (under the same conditions and at the same price as to the key investor). For the remaining stake accounting for 9% of shares of NLB, which was intended for domestic and foreign institutional 65

66 investors, the offers were submitted by eight investors, who bought 0.3% of shares of NLB in total. After the sale was completed, the RS preserved a 35.41% stake in the equity of NLB. Contractual provisions assumed by the RS (together with KAD and SOD), KBC and the EBRD Within the scope of implemented activities KBC, the EBRD and the RS (together with KAD and SOD) entered into agreements, which regulate mutual relationships and the relation between the shareholders, among other things also the principles of corporate management, the future status of NLB, the conditions and commitments of KBC, the rights and obligations of the RS as well as the conditions and commitments of the EBRD. The agreement between the shareholders stipulates the relationship between the shareholders of NLB d.d. as regards the management of NLB and disposal with shares. The agreement contributes to the completion of the privatisation programme adopted by the Government of the RoS, since it lays down the restrictions and duties of KBC and the EBRD within the scope of disposal with NLB's shares and the acquisition of NLB's shares in the period until 31 December The agreement was concluded between KBC, the R, KAD and SOD, while the EBRD later signed an annex, thus becoming a party to the agreement. In general the agreement distinguished between the existing shares (already issued) and new shares (which will be issued for the purpose of capital increase, which was not accomplished). The agreement defines the general terms and conditions for applying contractual provisions according to the capital stake of the KBC holding (together with related parties) and the RoS (together with KAD and SOD) in NLB The agreement also contains a provision stating that in the case of capital increase KBC and the EBRD are entitled to buy certain number of new shares, which enables them to preserve the acquired stake in the equity of NLB. The structure of the Supervisory Board as well as the rights and obligations of parties as regards the proposal, election and discharge of the Supervisory Board members according to their stakes are specifically defined. On the basis of the concluded agreement KBC appointed four members of the Supervisory Board and one member of the Management Board, while the EBRD appointed one member of the Supervisory Board. KBC and the RoS undertake to previously agree on the issues that have to be decided at the General Meeting of Shareholders and to vote at the General Meeting of Shareholders in accordance with their mutual agreement. By signing the agreement KBC undertook to support NLB in capital terms, if this is necessary for the implementation of NLB's long-term strategy. The agreement defines the profit sharing policy (dividends), laying down that dividend payment must not jeopardise the implementation of long-term strategy of the Bank or its capital position. Moreover, NLB and KBC signed a Memorandum of Understanding and co-operation, which stipulates the principles of business and technical co-operation between NLB and KBC in the future years. The memorandum provides for the principles for the transfer of knowledge related to bank assurance deals, information technology, e-banking and asset management as well as the assistance and support of KBC in the implementation of NLB's long-term strategy. NLB and KBC agree that the main guidance followed in the implementation and measurement of the effectiveness of long-term strategy will be profitability and increase in value. Pursuant to such memorandum, NLB has a status of an associated bank, which is not part of the KBC Group and operates in accordance with already established management mechanism. Trading in NLB shares In view of the fact that the ownership structure resulting from privatisation does not enable the expected trading in NLB shares, the key owners of NLB in the beginning of April 2003 adopted a decision that the NLB shares should not be listed on the organised securities market as yet. Considering the trading limitations, to which KBC and the EBRD committed based on the provisions of the agreement, approximately 15% of NLB shares are freely transferable until the end of

67 16. CAPITALISATION The following table sets out the unaudited non-consolidated capitalisation of NLB as at 30 June 2005, prepared in accordance with IFRS as adjusted to reflect the issue of the Notes. (SIT million) Long-term debt Senior liabilities* Subordinated liabilities Shareholders Equity Share capital Share premium Reserves and retained earnings Total capitalisation * Including long-term deposits. ** For the purposes of the above table, the principal amount of the Notes has been translated into SIT at the rate of Euro 1 = SIT 239,5220. Except for the issue of the Notes (which is already reflected in the above table) there has been no material change in the capitalisation table of NLB since 30 June

68 17. FINANCIAL INFORMATION CONCERNING THE ISSUER S ASSETS AND LIABILITIES, FINANCIAL POSITION AND LOSSES Financial Statements The following tables contain selected financial and other data extracted without material adjustment from the Financial Statements. See PRESENTATION OF FINANCIAL INFORMATION" on page Non-Consolidated Financial Information Year ended 31 Three months ended December 31 March (in millions SIT) (in millions SIT) INCOME STATEMENT Interest and similar income Interest expense and similar charges (45.044) (64.472) (10.219) (12.806) NET INTEREST INCOME Fees and commissions income Fees and commissions expense (5.643) (4.334) (1.086) (875) NET FEES AND COMMISSIONS Gains arising from trading securities (net) (213) Gains arising from investment securities (net) (41) 116 Gains arising from dealing in foreign currencies (net) (Losses)/Gains arising from derivatives (net) (1.372) (3.024) 47 (539) Foreign exchange losses (net) (1.943) (122) (17) Other operating income OPERATING INCOME Impairment losses on loans and advances (15.556) (10.510) (1.043) (1.073) General administrative expenses (40.928) (40.114) (8.576) (8.948) Other operating expenses (8.511) (6.636) (1.789) (1.642) PROFIT BEFORE TAX Tax (3.954) (5.195) (1.809) (2.695) NET PROFIT FOR THE PERIOD Earnings per share (expressed in SIT per share)

69 As at 31 December (in millions SIT) As at 31 March (in millions SIT) BALANCE SHEET ASSETS Cash and balances with the Central Bank Placements with, and loans to banks Securities held for trading Loans and advances to customers Investment securities Investment property Investments in associated and joint ventures Investments in subsidiaries Other assets Accrued income and deferred expenses Property and equipment Intangible assets TOTAL ASSETS LIABILITIES Deposits from banks Borrowings from banks Deposits from other customers Borrowings from other customers Debt securities Other liabilities Accruals and deferred income Provisions for liabilities and charges Subordinated liabilities TOTAL LIABILITIES SHAREHOLDERS EQUITY Share capital Share premium Reserves and retained earnings TOTAL SHAREHOLDERS EQUITY TOTAL EQUITY AND LIABILITIES

70 Consolidated Financial Information Year ended 31 December (in millions SIT) Three months ended 31 March (in millions SIT) INCOME STATEMENT Interest and similar income Interest expense and similar charges (54.512) (74.637) (12.917) (15.114) NET INTEREST INCOME Fees and commissions income Fees and commissions expense (6.580) (4.872) (1.344) (1.043) NET FEES AND COMMISSIONS Gains arising from securities held for trading (net) (100) Gains arising from investment securities (net) Gains arising from dealing in foreign currencies (net) (Losses)/gains arising from derivatives (1.124) (2.965) 49 (548) Foreign exchange gains and losses (net) (1.106) Other operating income OPERATING INCOME Impairment losses (18.519) (13) (1.898) (2.160) General administrative expenses (58.699) (56.434) (13.151) (12.922) Other operating expenses (13.323) (11.847) (2.511) (2.187) PROFIT FROM OPERATIONS Share of profits of associated companies and joint ventures PROFIT BEFORE TAX Income tax expense (6.260) (8.045) (2.639) (3.473) PROFIT AFTER TAX Minority interest (2.627) (2.344) (727) (543) NET PROFIT Earnings per share (expressed in SIT per share)

71 As at 31 December (in millions SIT) As at 31 March (in millions SIT) BALANCE SHEET ASSETS Cash and balances with the Central Bank Placements with, and loans to banks Securities held for trading Loans and advances to customers Investment securities Investment property Investments in associated companies and joint ventures Other assets Accrued income and deferred expenses Property and equipment Intangible assets TOTAL ASSETS LIABILITIES Deposits from banks Borrowings from banks Deposits from other customers Borrowings from other customers Debt securities Other liabilities Accruals and deferred income Provisions for liabilities and charges Subordinated liabilities TOTAL LIABILITIES Minority interest SHAREHOLDERS' EQUITY Share capital Share premium Reserves and retained earnings TOTAL SHAREHOLDERS' EQUITY TOTAL EQUITY AND LIABILITIES

72 17.2. Auditor s report for financial year ending 31 December

73 17.3. Legal and arbitration proceedings The following is a description of certain lawsuits, litigation and other legal or administrative or arbitration proceedings involving NLB or other members of the NLB Group Issues related to the dissolution of the former Socialist Federal Republic of Yugoslavia I. New Financing Agreement of 1988 and Slovenian Exchange (London Club creditors); Under the New Financing Agreement, dated 20 September 1988 ("NFA", see also section 8.1 "History and development of the Issuer") among various banks from the former SFRY as obligors ("Obligors"), several international commercial banks named therein as creditors ("Creditors"), National Bank of the former Socialist Federal Republic of Yugoslavia as paying agent ("Paying Agent") and Manufacturers Hanover Limited, London as agent ("NFA Agent"), the Obligors restructured their indebtedness to Creditors, under the guarantee of the former SFRY. On 11 June 1996, the Republic of Slovenia ( RoS ) issued USD 646,2 million and DEM 255,5 million principal amount of its Floating Rate Amortising Bonds due 2006 (the "Exchange Bonds") in exchange for an equivalent principal amount of debt outstanding to the Creditors under the NFA (prior to that exchange, some USD 4,2 billion), subject to prior consent of the majority Creditors as defined the NFA (consisting of Creditors holding at least 66,6 percent of the outstanding debt (which was obtained)), that Slovenian Obligors and Slovenian entities (which includes NLB) are released from any obligations and liabilities under the NFA. Certain Creditors ( Non-eligible Creditors ), by reason of being organised in, or having certain connections to, Federal Republic of Yugoslavia ("ZRJ" or "Serbia and Montenegro") were not eligible to exchange loans under NFA for the Exchange Bonds. With regard to the above-mentioned exchange transactions, in March 1996, the National Bank of Yugoslavia ( NBY ), which is the central bank of ZRJ (Serbia and Montenegro) and several banks (i.e. Beogradska banka a.d., Jugobanka a.d., Montenegrobanka a.d. and Vojvodjanska banka a.d.) organised in Serbia and Montenegro that are Obligors under the NFA commenced proceedings in the Royal Courts of Justice in London (the London Proceedings ) against the Consenting Creditors, RoS, Banka Slovenije (the central bank of the RoS), four Slovenian banks (including the Ljubljanska banka d.d., Ljubljana ( LB ) and NLB) and others, asserting that the exchange transactions described above violated the terms of the NFA. This legal action sought, among other things, a declaration that the exchange and the release of the Slovenian entities from NFA liability are null and void. To NLB s knowledge and belief, these proceedings have not been pursued by the plaintiffs and have been dormant since service in The Agreement on Succession Issues ( Sporazum o vprašanjih nasledstva ), made between five successor states to the SFRY in Vienna and dated 29 June 2001 (the Succession Agreement, believed to be ratified by all successor states), provides in Schedule C that, inter alia, upon signing of the Succession Agreement all pending litigations in respect of claims between the successor states and relating to, inter alia, obligations towards London Club creditors shall be terminated and no other shall be started anew, regardless of the outcome of the solution of the London Club obligations on the side of ZRJ (now Serbia and Montenegro). Regardless of such agreements, to the knowledge of NLB, the dismissal of London proceedings has not yet been initiated by Serbia and Montenegro although it was allegedly approved by the government of the predecessor state (ZRJ). II. Foreign exchange deposits of individuals in LB s branches outside the Republic of Slovenia prior to dissolution of SFRY (a) Privredna banka Zagreb; In 1997, 1999 and 2001, NLB was served with all together 19 suits (15 proceedings), filed by Privredna banka d.d. Zagreb, Republic of Croatia, in the Commercial Court of Zagreb (Trgovački sud v Zagrebu) against LB and NLB, seeking from both of them the repayment of foreign exchange deposits in the principal amount of some DM 129 million (equivalent in various currencies claimed, calculated by using the Croatian Exchange rate of 1992; under the Banka Slovenije exchange rate some 67 million EUR). The amount claimed 73

74 purportedly represents part of the deposits deposited by Croatian natural persons ( Croatian Depositors ) in foreign currencies with the former Main Branch of LB in Zagreb (the Zagreb Branch ) prior to The action sought a declaration that NLB and the LB are jointly and severally liable to repay the plaintiff for the value of the above mentioned deposits. Certain Croatian legislation provided for a possibility of such deposits with the Branch to be transferred to certain Croatian banks and for the issue of Republic of Croatia bonds to the Croatian banks which assumed the deposits so transferred to cover the assumption of such deposits by such Croatian banks. According to Issuer s understanding, part of the deposits made with the Zagreb Branch were transferred under such legislation to Croatian banks, including to the plaintiff. To NLB s knowledge and belief, such deposits are recognised as Croatian public debt by issuing the Croatian bonds to the plaintiff covering thereby the deposits assumed by the plaintiff. NLB denies any liability for such deposits, inter alia, primarily because: (i) (ii) Issuer was founded as a separate legal entity by the Constitutional Law on the Amendments of the Constitutional Law on the Implementation of the Basic Constitutional Charter on the Independence and Sovereignty of the RoS ( Ustavni zakon o dopolnitvah ustavnega zakona za izvedbo Temeljne ustavne listine o samostojnosti in neodvisnosti Republike Slovenije, dated 27. July, 1994 as amended, the Constitutional Law ) which expressly provides for obligations for deposits, not guaranteed by the RoS, to remain obligations of the LB (which is an existing banking institution in the RoS with matching claims for those obligations) and not of NLB, and there is no liability for the LB or NLB in any case since the plaintiff suffered no loss because it received matching bonds of the Republic of Croatia which form part of Croatian public debt guaranteed by Croatia. In first instance proceedings defendants raised various objections, including improper jurisdiction (and lack of the jurisdiction of the Croatian courts for NLB at all) and non-entitlement of the plaintiff to claim repayment from either LB or NLB at all. Following such objections and after transferring the proceedings from the previous court (for lack of jurisdictional power) to the Municipal Court in Zagreb ( Občinski sud v Zagrebu ), by the first decision (of 4 March, 2002), first instance court judgement (followed by the same judgements in 4 other proceedings) rejected plaintiff s claims for lack of plaintiff s capacity to sue and claim payment of these deposits. The plaintiff filed appeal against such judgements and the appellate proceeding is still pending, but also final judgements are expected to be in favour of NLB (and LB). (b) (c) Zagrebačka banka Zagreb; In 1999 and 2001 NLB has been served with five complaints, filed by Zagrebačka banka d.d. Zagreb against LB and NLB on grounds similar to those of Privredna banka Zagreb (see above) in the principal amount of some DM 191 million (equivalent of various currencies claimed, calculated by using the Croatian Exchange rate of 1992). The amount claimed purportedly equals to the amount of deposits of Croatian Depositors transferred to Zagrebačka banka (similarly to those transferred to Privredna banka Zagreb) and therefore the standpoints of the parties to the litigations are the same as in case of Privredna banka proceedings described above. All five have been ruled in favour of the defendants in the first instance court (on the grounds that the plaintiff is not the creditor of either NLB or LB in relation to claimed deposits), subsequently plaintiff filed appeal and appellate procedures are still pending. Individual depositors; Certain proceedings by individual depositors in respect of foreign exchange deposits made with the branches of LB outside RoS have been commenced, while other can not be excluded should the issue of individual depositors foreign exchange deposits not be regulated among the successor states in the future (e.g. following the principle adopted in 1991 by RoS which assumed obligations for all deposits made with the banks on the territory of the RoS; see also explanation on Succession Agreement). NLB s position in all such 74

75 proceedings is substantially the same as described elsewhere herein with reference to foreign exchange deposits made with the LB s branches in other republics of former SFRY, pursuing also the fact that such foreign exchange funds were required to be deposited with the former National Bank of former SFRY (former SFRY s central bank) in exchange for domestic currency loans to such banks and granted by such banks to entities locally. The present situation of the proceedings existing on the date hereof (including those already adjourned) is set forth below. (i) Proceedings in Federal Republic of Germany; In Federal Republic of Germany, at present two such (previously four) proceedings are pending against NLB (and LB) initiated by certain depositors of Zagreb Branch and former Branch of LB in Sarajevo (the Sarajevo Branch ) in the total principal amount of some EUR 100,000, seeking, in particular, the declaration by the court that NLB is a legal successor of the LB, as it has allegedly, under the Constitutional Law, taken over majority of the LB s assets and liabilities ( take-over of the property ) and that it is therefore liable for the payment of such deposits. In one of the previous proceedings NLB was already successful in Frankfurt court with its arguments that, inter alia, based on the Constitutional Law, the claims arising out of old foreign exchange deposits remained with the LB together with the amount of corresponding LB s claims against the former NBY in respect of such deposits. In one previous final judgement the court, after rehearing of the case, found for the defendants for lack of jurisdiction; The remaining proceedings are now pending before the first instance courts; similar judgements are expected in the remaining cases. (ii) Proceedings in Italy; In January 2002 a Croatian depositor (Mr. Vukasović), representing also certain other Croatian depositors (and striving to organise also others), filed a motion in the Triest court against the LB and NLB for the recognition of certain foreign judgements (mainly Croatian) allegedly issued in favour of such depositors in respect of their pre-1991 deposits with LB branches in SFRY republics, other than RoS. It is worth mentioning that the original judgements were issued only against LB, however the request for recognition of judgements wished to expand the effects of such judgements towards NLB and its branch in Triest (NLB Filiale Trieste). The court refused the motion in spring 2004; subsequently the plaintiff filed an appeal to which NLB responded and the appellate proceedings are currently pending before the appellate court in Rome. Subsequently, in 2003 Mr Vukasovič (on behalf of some 700 depositors for an aggregate amount of some EUR 4mio) also filed a complaint in the Triest Court for certain pre-1991 deposits made with branches in other republics of former SFRY. Complaint alleges that the transfer of the Filiale Triest from LB to NLB was not made properly (NB: although registered with the Banca d Italia). The last hearing has been held in April 2005; within the discovery phase, the parties are now exchanging cross motions. New hearing has been scheduled for 29 September (iii) Proceedings in Austria; In March 2002, depositor of former LB Sarajevo Branch filed a complaint in the Handelsgericht Wien against NLB and LB in the principal amount of some EUR 29,000, seeking, in principle, for the declaration that NLB is jointly and severally liable for such deposits as, allegedly, the transfer of certain assets and liabilities from LB to NLB under the Constitutional Law is contrary to Austrian public policy. With the final judgement the court ruled for the defendants in (N.B.: The subject matter of Privredna banka and Zagrebačka banka proceedings (as well as all other old pre-1991 foreign exchange deposits in branches of the LB outside Slovenia) is being dealt with within the negotiations among the successor states to former SFRY pursuant to the Succession Agreement mentioned above. Negotiations are still pending and NLB is not a party 75

76 to such discussions; EU bodies have been involved in an effort to find a solution on the issue acceptable to all successor states to SFRY and to NLB s understanding such are under discussion. As regards some individual Croatian depositors, to NLB s knowledge some depositors also initiated a case against RoS before the European Court of Human Rights, which preliminary ruled for its jurisdiction in the case); NLB is not a party to such proceedings Other litigation or arbitration proceedings involving NLB or its subsidiaries I. LB Shareholders; Commencing in July 1999, certain individuals (which were LB shareholders) filed complaints against the RoS and NLB asserting damages which they allegedly suffered as a result of LB being placed into rehabilitation in 1993 by the Banka Slovenije (and Ministry of Finance). Currently, NLB is involved in nine such proceedings involving some 40 ex-lb shareholders in which the plaintiffs claim for payment of damages in an aggregate principal amount of some SIT 11 million (some EUR EUR). No hearings have been performed so far. More similar complaints have been filed against the RoS only. Although such proceedings are of a minor importance as to the amount and without merit as against NLB, they are listed herein only because of publicity these proceedings might gain. II. III. IV. FI-COM Ljubljana; In March 2002, the company FI-COM commenced a litigation against BTC Ljubljana, one of the largest Slovenian mercantile companies, and NLB, seeking for a declaration that the purchase by NLB of BTC s mortgage bonds in the amount of EUR 30 million and the creation of a mortgage for such bonds in the amount of EUR 40 million registered in the name of NLB (as agent for, and in favour of, the bond holders) is null and void allegedly because BTC used the bond proceeds for the acquisition of its own shares. NLB purchased some EUR 10 million BTC but there exists no responsibility for the monitoring of the application of bond proceeds by the BTC or other misconduct of BTC s obligations. In autumn 2002 the court rejected the complaint; subsequently the plaintiff filed an appeal which is still pending. Istraturist d.d., Umag, Croatia; Istraturist, a Croatian tourist company, filed a complaint against NLB in the Commercial Court in Zagreb seeking a declaration that NLB s claim in the amount of some 31mio EUR (and certain security provided by Istraturist) does not exist. No hearing has been scheduled yet. NLB s borrower in Triest: In 2003 a former borrower of NLB filed a complaint in the Court in Triest against NLB, seeking the return of EUR deposited with NLB and against which NLB has partially set-off it s claims against the plaintiff. The claim was eventually reduced to 851, EUR. The plaintiff is alleging that his signature on the deposit contracts was forged but a court expert s opinion has confirmed that the signature is of the plaintiff. On the other hand in a related proceeding started by NLB, the Court in Triest issued a final decision according to which NLB is entitled to apply for a writ of execution for the payment of the remainder of it s claim against the plaintiff that was not set-off (i.e. EUR 630,892.89). V. NBY (Central Bank of former SFRY) deposits: At the end of 2003, Republic of Croatia filed a complaint against LHB Internationale Handelsbank AG, Frankfurt am Main ( LHB ), an Issuer s subsidiary, requesting from LHB, in essence, to provide to the plaintiff with all information in respect of accounts and funds on accounts of NBY with LHB after 1990 (alleged to be some USD 67mio). Croatia has requested payment of 23% of the assents on all accounts of the former NBY and/or former SFRY with LHB. The Defendant claims Croatia has filed an unfounded claim, lawsuit is inadmissible and German Court lacks jurisdiction to decide about claims brought by Croatia. In its argumentation, the plaintiff alleges that it is one of the successor states to the SFRY and is therefore allegedly entitled to part of such NBY assets, as dealt with in the Succession Agreement. The Court of 1 st Instance has not reached a final decision yet. VI. Litigations in connection with Slovenska Investicijska Banka d.d., Ljubljana (now in liquidation): In 2003 NLB acquired 78,78 per cent. of SIB shares from the public company JP Energetika, Ljubljana ( JPE ); SIB was subsequently put into voluntary liquidation. 76

77 (a) (b) Disputes between NLB and JPE: Within couple of months after the purchase of SIB s shares by NLB in 2003, JPE filed a complaint against SIB s previous management, SIB s previous auditors and SIB itself, claiming damages in the amount of some SIT 2.5 billion (approximately EUR 10 million) allegedly suffered by the JPE upon its original purchase of SIB s shares in 2001 (alleged to have been fraudulently influenced by SIB s management upon purchase in 2001 and JPE s subsequent capital contributions beginning of 2002). In response, NLB filed a complaint against JPE for damages for factual and latent defects (not disclosed prior to Issuer s purchase) in the amount of some SIT 1,2 billion. Preliminary hearing have been performed in the case of JPE against SIB and others, while no hearing has been scheduled in the litigation against JPE. SIB's Borrowers: End of May 2005, NLB received a complaint filed by a Slovenian individual in the Ljubljana Court against (i) three Republic of Slovenia s Ministries (Ministry for Work and Social Affairs, Ministry for Commercial Activities and Ministry for Agriculture), (ii) local community Pesnica, (iii) Public Fund of RoS for the Regional Development and Preservation of Countryside Settlement and (iv) Slovenska Investicijska Banka d.d., Ljubljana in liquidation (stating NLB as the legal successor of Slovenska Investicijska Banka d.d. SIB ). This lawsuit relates to the 1992 Agreement between the Republic of Slovenia and Federal Republic of Germany on Financial Assistance for Establishment of Conditions and Professional Involvement of Qualified Workers of the Republic of Slovenia ( Sporazum med Vlado Republike Slovenije in Vlado Zvezne Republike Nemčije o finančni pomoči za ustvarjanje eksistence in poklicnem vključevanju kvalificiranih delavcev Republike Slovenije hereinafter Bilateral Agreement ) The Bilateral Agreement referred to above provides, in essence, for the framework of the measures to be undertaken by the contracting states and that would establish proper environment for the return of the Slovenian individuals (temporarily, at that time) employed in Germany. The contracting states agreed, inter alia, on financial assistance in the form of Republic of Germany s and Republic of Slovenia s loans/funds on favourable terms ( Bilateral Funds ) that should serve as funds for on-lending to such employees returing from the Republic of Germany. Deutsche Enwicklungs Gesellschaft and SIB were authorised by the states as entities of each state to perform administrative and other activities necessary for the financial performance of the Bilateral Agreement (Ministries were empowered for some other). In practice, SIB extended loans to such individuals. It seems that the plaintiff asserts that the financial conditions of the loan(s) granted to it by SIB in pursuance of the above Bilateral Agreement are less favourable than the terms envisaged under the Bilateral Agreement (the Bilateral Agreement does not provide the terms and conditions for the on-lending, rather only for the repayment of funds contributed by each individual contracting state). Although the loan granted to the plaintiff by SIB was some EUR , as a result of various allegedly false acts or omissions by all the defendants, the plaintiff now claims payment of material and immaterial damages in the amount of some EUR 4,28mio. After preliminary review of the complaint it seems that it lacks merit. NLB is definitely not the legal successor of SIB although NLB, upon request by the BoS in 2002, issued a comfort letter regarding payment of SIB s liabilities to support the liquidity of SIB at such times. Second, the plaintiff is constructing the Bilateral Agreement in a way that the onlending terms should be the same as those in the Bilateral Agreement (for the return of Republic of Germany s funds) which seems to have no grounds under the Bilateral Agreement. As to the amount of the damages, the plaintiff seems to have failed to provide relevant evidence to establish and prove the amount of such alleged damages. In relation to this litigation, NLB also received a copy of a proposal addressed to SIB, in which 12 other individuals (similar to the plaintiff in the litigation described above) request SIB to adjust existing terms and conditions of their loans (onlended Bilateral Funds) to the 77

78 terms and conditions of the Bilateral Agreement. The outstanding aggregate amount of such loans is alleged to amount to some EUR 0,96mio. Other than the proposal to SIB to review and adjust the existing terms and conditions under existing loan agreements with such individuals, no other action has been taken. VII. Summary of other legal procedings involving NLB (a) (b) Administrative proceedings: Except for a couple of proceedings with the Tax authorities of the RoS (DURS) followed by administrative proceedings filed by Issuer in the Supreme Court of RoS in which NLB claims for the return of taxes that NLB believes were not properly assessed, NLB is not involved in any administrative proceedings that could have a negative material effect on NLB. There are two important proceedings with the Tax authorities of the RoS (DURS) where the principal amounts are ,40 SIT and SIT ,28. Labour disputes: NLB is involved in 9 labour disputes not involving material amounts. NLB s subsidiary Banka Zasavje is involved in one labour dispute where the principal amount is SIT ,00. (c) Summary of other Issuer s proceedings (as of 31 May 2005): Individuals ( pending proceedings) principal NLB as Plaintiff: Legal Entities (1.141 pending proceedings) principal NLB as Defendant: Legal and Natural Persons as Plaintifs (66 pending proceedings) principal SIT SIT SIT USD USD EUR ITL DEM CHF ATS DEM 129 GBP EUR (d) Receivables filed in bankruptcy proceedings (as of 31 May 2005); 197 proceedings, aggregate principal amount SIT , DEM , EUR , USD ; (e) Receivables filed in compulsory settlement proceedings (as of 31 May 2005); 73 proceedings, aggregate principal amount SIT ; (f) Receivables filed in liquidation proceedings (as of 31 May 2005), 7 proceedings, aggregate principal amount SIT VIII. Summary of legal proceedings involving other certain members of the NLB Group (as of 28 June 2005): (a) Banka Domžale: Plaintiff against legal entities: 31 proceedings; aggregate principal amount SIT ; Plaintiff against individuals: 144 proceedings; aggregate principal amount SIT ; and 37 proceedings; aggregate principal amount SIT ; 78

79 Receivables filed in compulsory settlement proceedings: 1; aggregate principal amount SIT ; Receivables filed in bankruptcy proceedings: 5; aggregate principal amount ; Provisions established for procedures of third parties against Banka Domžale in the amount of 100% of all claims. (b) Banka Zasavje: Plaintiff against legal entities: 68 proceedings; aggregate principal amount SIT ,00; Plaintiff against individuals: 148 proceedings; aggregate principal amount SIT ,00; Receivables filed in compulsory settlement proceedings: 2; aggregate principal amount SIT ,00 SIT; Provisions established for procedures of third parties against Banka Zasavje in the amount of 50% and 100% of all claims; Receivables filed in bankruptcy proceedings: 15, aggregate principal amount SIT ,00. (c) Koroška banka: Provisions established for procedures against Individuals in the amount of 100% of claims in total amount of SIT ,32; Provisions established for procedures against legal entities in the amount of 100% of claims. Receivables filed in compulsory settlement proceedings: 1; principal amount SIT ,46. (d) LHB Internationale Handelsbank AG: Plaintiff against legal entities and Individuals: 5 proceedings; aggregate principal amount EUR ,71; Receivables filed in bankruptcy proceedings: 6 proceedings; aggregate principal amount EUR ,00. Provisions established for procedures of third parties against LHB I.H. AG: in total EUR ,00. (e) Euromarket Banka, Podgorica, Montenegro: Plaintiff against legal entities: 17 proceedings; aggregate principal amount EUR 778,718.48; Plaintiff against individuals: 81 proceedings; aggregate principal amount EUR 104,222.56; Receivables filed in bankruptcy proceedings: 3; aggregate principal amount EUR ,74; 79

80 Provisions established for procedures against 3rd persons: amount EUR 508,471,13 (55,95 % of all claims): Provisions established for procedures against legal entities: amount 404, Provisions established for procedures against private individuals: amount 104, (f) Continental Banka, a.d., Novi Sad, Serbia Continental banka as plaintiff: 36 proceedings in aggregate amounts of DIN 187 million; DEM ; USD ; EUR ; Continental banka as defendant: 21 proceedings in aggregate amounts of of EUR 1.9 million; ACH ; DIN 212,5 million; USD 2,5 million; DEM 0.91 million; Material Contracts The following is a description of certain material contracts that could result in lawsuits, litigation and other legal or administrative or arbitration proceedings involving NLB or other members of the NLB Group Comfort letter in respect of LHB Internationale Handelsabnk AG NLB issued a comfort letter regarding all obligations of the LHB Internationale Handelsbank AG, Frankfurt am Main. As of 28 June 2005, such obligations amounted to EUR , Obligations in Connection with Acquisition of SIB In connection with acquisition of Slovenska investicijska banka d.d. ("SIB") NLB issued, upon request of the BoS, a comfort letter regarding payment of SIB s liabilities. As at 28 June 2005, the obligations of SIB to which this letter relates amounted to SIT , Regulatory Requirements Capital Adequacy Bank of Slovenia rules In addition to preparing Capital Adequacy Ratio (CAR) calculations for the bank and the group using international BIS rules, NLB is also obliged by regulatory requirements to report CAR using Bank of Slovenia rules. Capital adequacy ratios for NLB Group and NLB using the Bank of Slovenia's methodology and BIS standards: As at 31 December 2003 As at 31 December 2004 in % Bank of Slovenia BIS Bank of Slovenia BIS NLB Group NLB The principal difference in the ratios set above are explained as follows: Capital adequacy ratios as calculated in accordance with the BoS rules include an additional amount for provisions for loan impairment (see section below). This is the principal reason for the difference in ratios when using BoS as opposed to BIS rules. Other differences are due to different accounting treatment of fair value of financial instruments and general banking provisions. (See reconciliation table below for differences in net profit and equity using SAS versus using IFRS.) 80

81 NLB is currently obliged to maintain CAR at the 10 % level using BoS rules. This is higher than the 8 % applicable to other Slovenian banks. The reason that NLB is obliged to do so is as a result of the increased operational risk as assessed by the BoS in the implementation of the new IT system in NLB during the period The BoS has expressed its satisfaction with the current IT implementation status, however it has not yet released the NLB s obligation to maintain the ratio above the 10 % level Regulatory provisions for loan impairment SAS financial statements include provisions for losses on loans according to the granding group of the loan or client and in accordance with percentages prescribed by the BoS in the Decree on the Classification of Balance Sheet and Off-Balance Sheet Asset of Banks and Savings Banks. In the IFRS financial statements impairment loss is recognised when it is probable that the Group will not be able to collect all amounts due according to contractual terms of loans. The effect of different treatment of loan impairment provisions is present from the following tables. Reconciliation of net profit and equity from SAS to IFRS: In millions of SIT RECONCILIATION OF NET INCOME Note Net profit SAS 8,666 6,245 Fair value of financial instruments a) (531) 2,309 Provisions for loan impairment b) (2,062) (2,737) General banking risks provision c) 2,819 3,190 Negative goodwill/goodwill d) 1, Employee benefits e) Tax prior year - (289) Deferred tax f) 3, Other h) 114 (630) Net profit IFRS 13,142 9,613 ========= ========= RECONCILIATION OF EQUITY Equity SAS 117, ,569 Fair value of financial instruments a) 9,025 15,790 Provisions for loan impairment b) 41,037 36,779 General banking risks provisions c) 11,768 8,672 Negative goodwill/goodwill d) (1,027) (1,796) Employee benefits e) (2,716) (2,641) Treasury shares g) (491) (491) Deferred tax f) (10,635) (13,701) Other h) 18 (109) Equity IFRS 164,153 ========= 153,072 ========= On the 1 st January 2006 Slovenian banks will adopt IFRS that will replace SAS as the obligatory accounting standard. The decision as to how regulatory provisions for loan impairment will be implemented or changed has not yet been reached by the BoS. 81

82 18. SLOVENIAN TAXATION The following is a general description of certain Slovenian tax considerations relating to the Notes. It does not purport to be a complete analysis of all tax considerations relating to the Notes. Prospective purchasers of Notes should consult their tax advisers as to the consequences under the tax laws of the country of which they are resident for tax purposes and the tax laws of the Republic of Slovenia of acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes. This summary is based upon NLB's understanding of the law as in effect on the date of this Prospectus and is subject to any change in law that may take effect after such date. General In 2004, the Republic of Slovenia adopted new tax laws, the most of which it became applicable only on 1 January Due to certain uncertainty of the new tax laws and its implementation, it remains to be seen how the provisions described below will be applied in the context of the Notes. In particular, it remains unclear: a. whether or not the payments of interest on the Notes will not be subject to any withholding tax imposed by the Republic of Slovenia to the extent that such payments will be made by a nonresident bank not having a permanent establishment in Slovenia; b. whether or not NLB will be required to withhold any tax from the amounts paid by it to the Fiscal Agent in respect of the amounts of interest to be distributed to the Noteholders; and c. whether and how any exemption from such withholding tax on interest will apply since neither NLB nor any of its Agents will have the information on the nationality, residence or identity of the beneficial owners of such payments. NLB, having made thorough examination of the relevant legislation and possible interpretations thereof, believes that no Slovenian withholding tax applies to the amounts of interest payable by NLB under debt securities insofar (a) such payments are made through non-resident paying agents and (b) the identity of beneficial owners of such interest is not known and cannot be known to NLB. Accordingly, NLB has taken the decision that it will not withhold such tax unless the tax authorities of the Republic of Slovenia will provide it with a different interpretation and has notified this decision to the competent tax authorities in February No response from the tax authorities has been received so far. The terms of the Notes provide that, in the event of any such imposition of withholding tax with respect to the Notes, NLB will be required to gross-up payments, subject to certain exceptions set out in the Terms and Conditions of the Notes. Corporate Investors (a) Tax on Interest Income The amounts of interest accruing after the issuance of the Notes and paid by, or charged to, a Slovenian resident or a non-resident having a permanent establishment in Slovenia will be subject to the withholding tax at the rate of 25 per cent., unless the interest is paid (i) to the Republic of Slovenia or a municipality therein; (ii) to the Bank of Slovenia; (iii) to a Slovenian resident or a permanent establishment of a non-resident who is subject to corporate tax and provides the payer of interest with its taxpayer ID number; or (iv) to a recipient who is exempt from such tax (or is subject to such tax at a reduced rate) pursuant to a treaty between the Republic of Slovenia and the country in which it is resident for taxation purposes and such exemption or reduction is approved by the Slovenian Tax authorities. However, the availability of the said exemptions is subject to the uncertainty described above. Certain additional exemptions are available in respect of payments of interests the beneficial owner of which is an affiliate of the payer resident in one of the EU Member States (other than Slovenia), subject to approval by the tax authority and certain conditions being met. 82

83 In addition, in the case of Slovenian residents or non-residents having a permanent establishment in Slovenia, the income derived from interest will constitute a part of their overall annual income and will be subject to the corporate income tax ("Davek od dohodka pravnih oseb") imposed on the overall net income of such Slovenian resident or, as the case may be, permanent establishment, at the rate of 25 per cent. (b) Capital Gains Slovenian tax legislation provides that any income of a legal person (whether a resident of Slovenia or not) resulting from the sale of securities issued by, among others, corporate issuers organised under the laws of Slovenia, shall be subject to Slovenian corporate income tax levied at the rate of 25 per cent. On the other hand, the relevant legislation does not provide for a method by which such tax will be levied in the event that the recipient of such income is attributable to a non-resident having no permanent establishment in Slovenia. Consequently, it is also possible that capital gains earned by such persons are not subject to Slovenian taxation. Individuals (a) Tax on Interest Income Pursuant to the Personal Income Tax Act, interest on debt securities issued by Slovenian issuers and payable to individuals are taxable. Income derived by individuals from interest on debt securities issued by, among others, corporate issuers organised under the laws of Slovenia, is taxable and will be levied by way of withholding at the rate of 25 per cent. The part of such interest income that shall be subject to tax amounts to 10 per cent. with respect of income received in year 2005 and will be increased to 25 per cent. in year 2006, to 40% in year 2007, to 75% in year 2008 and to 100% in year 2009 and thereafter. However, interest on debt securities traded on a stock exchange which is a member of the World Federation of Exchanges (WFE) will be exempt from such withholding tax. Therefore, assuming that the Luxembourg Stock Exchange will remain a member of the WFE, interest on the Notes paid to individuals will be exempt from such withholding tax for as long as the Notes will be listed on that stock exchange. As regards the individuals who are not resident in Slovenia for tax purposes, the withholding tax referred to above (if any) will be the definitive tax imposed by Slovenia on their interest income. In the case of Slovenian residents, the whole or a part of income derived from interest will constitute a part of their overall income and will be subject to the tax rate applicable to the relevant amount of overall annual income to the extent that the aggregate annual amount of interest income exceeds SIT 300, The part of such excess interest income that shall be subject to tax amounts to 10 per cent. with respect of income received in year 2005 and will be increased to 25 per cent. in year 2006, to 40% in year 2007, to 75% in year 2008 and to 100% in year 2009 and thereafter. Furthermore, from 1 July 2005, individuals who are resident for tax purposes in EU Member States (other than Slovenia) are fully exempt from Slovenian tax on interest. Instead, Slovenian tax authorities will provide information on interest income paid to such individual to the tax authorities of the EU Member state in which such individual is resident. In each case the availability of the said exemptions is subject to the uncertainty described above. (b) Tax on capital gains In the case of Slovenian residents, the capital gains resulting from disposal of the Notes before expiry of the period of three years following the acquisition thereof will constitute a part of their overall income and will be subject to the tax rate applicable to the relevant amount of overall annual income. The tax rate for advance tax payment is 25%. 83

84 Individuals who are not resident in Slovenia for tax purposes will not be liable to Slovenian tax on capital gains resulting from disposals of the Notes if and to the extent that there will be no other connection between Slovenia and such capital gain but the mere fact that NLB is organised under the laws of Slovenia. Value added tax Pursuant to Article 27/1/4(e) of the Value Added Tax Act, transactions with securities are VAT exempt in Slovenia. According to such laws interest on debt securities is not subject to taxation, thus VAT is neither charged nor payable. Any Noteholders who are in doubt as to tax applicable to the Notes or stamp duty which may be applicable to the transfer or disposition of the Notes are advised to consult their professional advisers in connection therewith. 84

85 19. SUBSCRIPTION AND SALE NLB has entered into a Subscription Agreement dated 11 July 2005 (the Subscription Agreement ) with KBC Bank N.V. (the Lead Manager ). Subject to the terms and conditions contained in the Subscription Agreement, the Lead Manager has agreed to subscribe for the Notes at an issue price of 100 per cent. of their principal amount. NLB has paid to the Lead Manager a combined management and underwriting commission in accordance with the provisions of the Subscription Agreement. NLB has agreed to reimburse the Lead Manager for certain of its expenses in connection with the issue of the Notes. In addition, NLB has agreed to indemnify the Lead Manager against certain liabilities in connection with the offer and sale of the Notes. General No action has been or will be taken in any jurisdiction by NLB that would permit a public offering of the Notes, or possession or distribution of any offering material in relation thereto, in any country or jurisdiction where action for that purpose is required. The Lead Manager has agreed that it will comply with all applicable laws and regulations in each country or jurisdiction in which it purchases, offers, sells or delivers Notes or has in its possession or distributes this Prospectus, in all cases at its own expense. United States The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. The Lead Manager has represented that it has offered and sold the Notes, and has agreed that it will offer and sell the Notes (i) as part of their distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 of Regulation S under the Securities Act. Accordingly, neither it, its affiliates, nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts with respect to the Notes, and it and they have complied and will comply with the offering restrictions requirement of Regulation S. The Lead Manager agrees that, at or prior to confirmation of sale of Notes, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the distribution compliance period a confirmation or notice to substantially the following effect: The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the Securities Act ) and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, except in either case in accordance with Regulation S under the Securities Act. Terms used above have the meanings given to them by Regulation S. Terms used in this paragraph have the meanings given to them by Regulation S. The Notes are subject to U.S. tax requirements and must not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code and regulations thereunder. United Kingdom The Lead Manager has represented, warranted and agreed that: - it has only communicated or caused to be communicated, and will only communicate or cause to be communicated, any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to NLB. 85

86 - it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom Slovenia The Lead Manager has acknowledged that no action has been taken by NLB which would permit the public offering ( javna ponudba ) of the Notes in the Republic of Slovenia and that, consequently, the Notes may not be in any way offered to the public in the Republic of Slovenia. The Lead Manager has represented, warranted and agreed that it has not and will not, whether acting directly or through any of its employees or agents, do or cause to be done anything that might constitute the offering of the Notes to an indefinite group of persons in the Republic of Slovenia or the advertising thereof. European Economic Area In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State"), the Lead Manager has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the "Relevant Implementation Date") it has not made and will not make an offer of Notes to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of Notes to the public in that Relevant Member State at any time: to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or in any other circumstances which do not require the publication by NLB of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an offer of Notes to the public in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression "Prospectus Directive" means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State. 86

87 20. GENERAL INFORMATION Issue Date The issue date of the Notes is 15 July Authorisation The creation and issue of the Notes has been authorised by a resolution of the Management Board ("uprava") and Supervisory Board ("nadzorni svet") of NLB on 8 July, 2005 and on 17 June, 2005, respectively Litigation Save as disclosed in section "Legal and arbitration proceedings", there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which NLB is aware), since 31 December 2004, which may have, or have had in the recent past, significant effects on NLB and/or NLB's financial position or profitability Significant or Material Change Save as disclosed in this Prospectus there has been no significant change in the financial or trading position of NLB or any of its subsidiaries since 31 December 2004 and no material adverse change in the prospects of NLB Group since 31 December 2004, being the date of the last published audited financial statements Third Party Information Certain information contained in this Prospectus was derived from publicly available sources and the relevant sources are identified where such information appears. Such information has been accurately reproduced and, as far as NLB is aware and is able to ascertain from information published by the relevant sources, no facts have been omitted which would render the reproduced information inaccurate or misleading. However, no assurance can be given as to the accuracy and completeness of such information, and such data has not been independently verified by NLB Purpose of the Issue and Use of Proceeds The gross proceeds of the issue of the Notes amount to EUR 130,000,000, which amount is intended for inclusion in NLB's core capital ("temeljni kapital") in accordance with the Banka Slovenije's Capital Adequacy Regulation ("Sklep o kapitalski ustreznosti bank in hranilnic", Official Gazette RS, No. 24/2002, 85/2002, 22/2003, 36/2004, 68/2004, 103/2004, 124/2004 and 62/2005). NLB has agreed to pay certain commissions to the Lead Manager and to reimburse the Lead Manager for certain expenses incurred in connection with its management of the issue of the Notes. The aggregate amount payable by NLB pursuant to such arrangements is expected to amount to approximately EUR 1,125,000. Accordingly, the effective net proceeds of the issue are expected to amount to approximately EUR 128,875,000. NLB will use the net proceeds for general corporate purposes Listing and Admission to Trading Application has been made to list the Notes on the EuroMTF of the Luxembourg Stock Exchange Clearing Systems The Notes have been accepted for clearance through Euroclear and Clearstream Luxembourg. The ISIN is XS and the common code is

88 The address of Euroclear is Boulevard Emile Jacqmain 151, B-1210 Brussels, Belgium and the address of Clearstream, Luxembourg is 67 Boulevard Grand-Duchesse Charlotte, L-1331 Luxembourg Statutory Auditors The consolidated and non-consolidated financial statements of NLB for the financial years ended on or prior to 31 December 2002 have been audited, without qualification, by KPMG Slovenija d.o.o., Železna Cesta 8a, SI-1000 Ljubljana, Slovenia. The consolidated and non-consolidated financial statements of NLB for the financial years ended December 31, 2003 and December 31, have been audited, without qualificiation, by PricewaterhouseCoopers d.o.o., Parmova cesta 53, SI-1000 Ljubljana, Slovenia. Both KPMG Slovenija d.o.o. and PricewaterhouseCoopers d.o.o. are registered as auditing firms ("revizijska gospodarska družba") with the Slovenski inštitut za revizijo. At the General Meeting of Issuer's Shareholders held on 29 June 2005, the auditing firm PricewaterhouseCoopers d.o.o. was reappointed as NLB s external auditor for the current financial year. PricewaterhouseCoopers d.o.o. did not participate in the current issue. 88

89 21. INFORMATION ON DISPLAY Documents that can be obtained Copies of the following documents will be available free of charge from the registered office of NLB and from the specified office of the Paying Agent for the time being in Luxembourg during its business hours so long as any of the Notes remains outstanding: (a) (b) (c) (d) NLB Group's annual reports for the years ended 31 December 2004 and 31 December 2003, containing audited consolidated and non-consolidated financial statements of NLB as at, and for the financial years ended 31 December 2004 and 31 December 2003 and the relevant auditors' reports; NLB's interim report for the three months ended 31 March 2005, containing unaudited consolidated and non-consolidated financial statements of NLB as at and for the three months ended 3 March 2005; the most recently available NLB Group's annual report with the accompanying financial statements and the auditors' reports and the most recently available unaudited consolidated and non-consolidated semi-annual interim financial statements of NLB; and NLB's Articles of Association (with an English translation thereof). The documents referred to in (a) to (c) above are also available on the NLB's website ( Documents available for inspection Copies of Fiscal Agency Agreement will be available for inspection, at the specified offices of each of the Paying Agents during normal business hours, so long as any of the Notes is outstanding Financial reporting obligations of the NLB NLB is obliged by law to make the following information available to the general public not later than on the dates of publication indicated below: Date of Publication February 28 of each year March 31of each year May 31 of each year June 30 of each year July 31 of each year Information Annual unaudited unconsolidated financial statements of NLB under SAS Annual unaudited consolidated financial statements of NLB Group under SAS Summary of Annual Report of NLB and NLB Group under SAS Annual Report of NLB and NLB Group under SAS and IFRS Interim Report of NLB and NLB Group under SAS 89

90 APPENDIX I SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN IFRS AND SLOVENIAN ACCOUNTING STANDARDS The following section describes the principal differences between IFRS and SAS insofar as they relate to NLB. This summary does not purport to describe all possible differences between IFRS and SAS but rather to enable the reader of the NLB s financial statements to understand the principal differences when reading the Slovenian Accounting Standards (SAS) financial information. Background of SAS Slovenian Accounting Standards were first issued in There were various inconsistencies between the initial SAS and IFRS. The most significant of these differences was that SAS required a form of current cost accounting i.e., certain assets and liabilities and equity were required to be revalued for annual inflation as measured by the consumer price index ( CPI ). The result of such revaluation was debited or credited to the income statement. The accounting treatment required was broadly in line with IAS 29 Financial Reporting in Hyperinflationary Economies with the obvious problem that Slovenia was not hyperinflationary. In accordance with SAS, all Slovenian banks prepared revaluation statements in addition to the balance sheet and income statement. The revaluation statement included income and expenses for the revaluation of equity balances, tangible and intangible assets, foreign exchange differences (positive and negative) and interest (income and expenses) arising from the revaluation of composed interest rates. Commonly used changeable components of interest rates were DEM (subsequently the EURO, seldom USD) and TOM (a revaluation index calculated and published by the Bank of Slovenia, which was different to the revaluation index). The net effect of the revaluation was then included in other operating revenues or expenses in the income statement of the bank. Revised SAS issued in 2001 changed substantially with effect from 1 January According to the new SAS revaluation only occurs if the exchange rate of SIT in a calendar year decreases by more than 5,5% against the EURO. The revaluation statement is no longer required. All interest income and expenses and the interest for changeable components (TOM, EURO, USD) are included in the income statement as regular interest income and expense line items. Although revaluation is not permitted, its effects are still present in the balance sheet (f. e. equity - specific revaluation reserve and in property, plant and equipment opening cost and accumulated depreciation amounts include the accumulated revaluation from previous periods). The rest of the changes in 2001 can be considered to be a massive step towards harmonisation with IFRS. Major differences in respect of balance sheet and income statement items are: General provisions as well as obligatory special provisions formed for A graded loans (for explanation of Slovenia prescribed loan grading scale see note below) are under SAS shown as a component of liabilities, whereas for IAS they are offset against receivables. Specific loan loss allowances for bad and doubtful loans graded C to E under Bank of Slovenia regulations are offset against receivables. Rates of provisions for loans are proscribed by Bank of Slovenia as follows: - For B graded loans: 5 15 % - For C graded loans: % - For D graded loans: % - For E graded loans: 100 % Note: For A-graded loans a provision of 2% is required (in accordance with Bank of Slovenia prescribed loan grading system; which recognizes 5 classes of loans (A to E). Loans are graded based on the probability of default of the loan. Furthermore SAS allow banks the option to treat revenues from interest, when the interest is due (i.e. cash basis), for all A and B graded loans. For C through E graded loans, the bank must to exclude interest until it is paid. However, excluded interest does not increase total assets because the interest is provided for, together with other 90

91 provisions required by the Bank of Slovenia s stipulations for C to E graded loans, as capital amounts. Under IFRS impairment loss is recognised when it is probable that the group will not be able to collect all amounts due according to the contractual terms of the loans. General banking risks provision under SAS are charged to the income statement and presented as a separate item on the liability side of the balance sheet. Under IFRS they are accounted as an appropriation of the retained earnings among shareholders equity. Under SAS the negative goodwill is presented under provisions for liabilities and charges while under IFRS it is presented as a deduction of accrued income and deferred expenses. IFRS financial statements include provisions, which are established for other long-term employee benefits such as jubilee bonuses, retirement compensation and other long service benefits. In SAS financial statements provisions for other long-term employee benefits are not recognised. SAS does not specifically require accounting for deferred tax therefore in SAS financial statements accounting rules for deffered tax are not applied. IFRS financial statements include deferred tax, which relates to fair value of financial instruments, provisions for loan impairment and employee benefits. Treasury stock (an investment in a company s own shares) is recorded as an investment under SAS not as a deduction from equity as under IFRS. According to SAS, marketable securities classified as held for trading or available for sale (market portfolio) and derivative financial instruments can be valued at cost or fair value (market) basis. It is common practice in Slovenia to use the first method, as the market for financial instruments in Slovenia is still developing and therefore prudence principle is applied. This means that the held for trading and available for sale securities and derivatives are initially recorded at cost and are then subsequently stated at lower of the cost or fair value. In the stand alone financial statements of the NLB bank under SAS are investments in associates, jointly controlled companies and subsidiaries accounted for using the equity method, while in the stand alone financial statements of the NLB bank under IFRS these investments are accounted for using the cost method. 91

92 APPENDIX II Organizational Chart NLB d.d. 1 July 2005 Company Secretary MANAGEMENT BOARD MANAGEMENT BOARD NLB Group Management Centre* Capital Investments Management and Control NLB Group Joint Services Co-ordination Internal Audit Management Board Committee Credit Committee ALCO Office of the Management Board Human Resources Legal and Compliance Department Financial Management Group Treasury & Financial Markets Head of Marketing and Distribution - Retail Senior Officer, Investment Evaluation and Foreign Branch Payment Systems, International and Business Operations Information Technology Controlling Financial Accounting Accounts Administration and Payroll Risk Management and Intensive Care & Recovery Risk Management Intensive Care and Recovery Middle Office Financial Markets Economics and Organization Development Management Organization Development Procurement and Investments Management Centre Assets and Liabilities Management - ALM & Treasury Financial Markets Mergers & Acquisitions Investment Banking Custody Management Value Centre 1 *NLB Group Management Centre Subsidiaries & Associated Banks in Slovenija Subsidiaries & Associated Banks Abroad Subsidiaries & Associated Companies in Slovenija Subsidiaries & Associated Companies Abroad Distribution-Retail Marketing Management Retail & Private Banking Private Banking Area Branch Ljubljana-Center Area Branch Šiška-Bež igrad Area Branch Moste Area Branch Vič -Notranjska Area Branch Gorenjska Area Branch Savinjsko-Š aleška Area Branch Kamnik Area Branch Podravje Area Branch Dolenjska and Bela krajina Area Branch Kočevje Area Branch Posavje-Krš ko Area Branch Pomurje Area Branch Nova Gorica Area Branch Koper Value Centre 2 Investment Evaluation Branch Trieste Corporate Banking Division - Central Slovenia Corporate Banking - Central Slovenia 1 Corporate Banking - Central Slovenia 2 State Organisations, Financial Institutions and Utilities Corporate Banking Division - Regions and the NLB Group Corporate Banking - Dolenjska-Posavje Region Corporate Banking - Savinjsko-Šaleška Region Corporate Banking - Pomurje Region Corporate Banking - Podravje Region Corporate Banking - Primorska Region Value Centre 3 Treasury and Investment Banking Operations Corporate Banking Administration Retail Banking Administration Financial Institutions and International Trade Finance Processing International payments Domestic payments Cash Services Value Centre 4 & Support Centre Information System Governance and Strategic Planning Information System Development Help Desk and New Technologies IT processing and Infrastructure Information Technology

93 APPENDIX III 93