ANNUAL REPORT 1999 SKB Banka d.d., in accordance with IAS International Accounting Standards

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1 ANNUAL REPORT 1999 SKB Banka d.d., in accordance with IAS International Accounting Standards

2 CONTENTS SKB Banka d.d. profile and international ratings 2 New developments in New products and services in SKB s branch network in Slovenia 5 Financial highlights, capital adequacy 6 Major shareholders 8 Management of SKB Group 9 Statement of the Management Board 14 - Our confidence for the future is based on our new strategy and vision 16 - SKB's 10th anniversary: Historical highlights Operations of SKB Banka in General economic environment 26 - Review of operations of SKB Banka in SKB's share since 1999: always at the forefront 33 - SKB's capital investments 37 Financial analysis 39 Report of the auditors and financial statements for the year ended 31 December Independent auditors report 44 - Consolidated income statement 45 - Bank income statement 46 - Consolidated balance sheet 47 - Bank balance sheet 48 - Consolidated statement of changes in shareholders' equity 49 - Consolidated cash flow statement 51 - Bank cash flow statement 52 Accounting policies 53 Notes to the financial statements 56 Post balance-sheet events 82 Comparisons 1996 to Consolidated income statement 1996 to Consolidated balance sheet 1996 to Consolidated profit compared with unconsolidated profit 85 International addresses and contacts 86 Addresses of subsidiary and associated companies 90 Organisation charts: 91 - The SKB Group 91 - SKB Banka 92 Visit our Web Site at for the chapters Slovenian banking sector in 1999 and early 2000 and Slovenia in 1999, outlook for

3 SKB banka d.d. profile SKB Banka d.d. is Slovenia's largest bank in private ownership and third largest bank in terms of total assets. The Bank had 1,099 employees at the end of 1999 (the Group had 1,360). SKB's shares are traded in Ljubljana, London, Frankfurt, Berlin and Munich. Ownership SKB Banka had 2,008 registered corporate and individual shareholders at the end of 1999 (51% domestic, 49% international). The international shareholders are: The Bank of New York (29%), which is the depositary for SKB's Global Depositary Receipts traded on four international stock exchanges, EBRD - the European Bank for Reconstruction and Development (15%), and DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbh (5%). The largest domestic shareholder is Ljubljana City Council (5.1%). History The bank was established in 1978 as Stanovanjsko-Komunalna Banka, a subsidiary of Ljubljanska Banka, specialising in housing loans to individuals and enterprises and the financing of municipal construction. Independence of the bank followed in 1990 with the transformation to a joint-stock company, and an abbreviation of the name to SKB. The bank rapidly expanded its operations between 1990 and 1996 in order to take advantage of the changing economic conditions in Slovenia. Present activities SKB is a universal bank, providing retail, commercial, investment and international banking services. It has an extensive network of 58 branches throughout the country and a representative office in London. Relationships with 957 correspondents abroad enable the bank to give an effective and efficient international service to customers including, from 1 January 1999, services in euros. SKB's retail customers have had access to bank account details and bill settlement via the Internet since September In April 1998, SKB was the first bank in Slovenia to offer a choice of remote banking facilities by launching telephone banking. The bank had roughly corporate and individual customers in The Group In 1999 the SKB Banka Group consisted of SKB Banka d.d., five subsidiary and four associated companies offering additional services to its core banking activities, including trade in real estate, investment in construction, insurance, leasing and factoring. On 1 January 1999, SKB fully integrated the Ljubljana based UBK Banka, acquired in 1997, into its structure. SKB Faktor Ltd., a subsidiary company offering factoring, started operations in January SKB s INTERNATIONAL RATINGS: Moody's - June 1999: Thomson BankWatch - August 1999: Long-term deposits: Baa3 Intra-Country Issuer Rating: IC-B Short-term deposits: Prime3 Short-term (local currency): LC-1 *Financial strength: D+ Long-term Debt Rating: BBB+ 2 *(D+ is equivalent to the highest bank financial strength rating assigned so far by Moody's in the transforming countries of Central and Eastern Europe.)

4 New developments in 1999 During 1999, important developments took place in SKB Banka which will greatly influence its operations in future years: New Management Board commenced operations in June 1999 Following a meeting of the Supervisory Board of SKB Banka on 2 April 1999, and after consultation with the main shareholders of the Bank, a new Management Board of the Bank was appointed, with Cvetka Selšek becoming President of the Management Board and Chief Executive Officer. The new Board was completed with the appointment of Franjo Bizjak and SreËko Korber as Members of the Management Board. Prior to taking up these appointments, Franjo Bizjak was a member of the Management Board of the insurance company Generali SKB. SreËko Korber worked previously at the Bank of Slovenia as Head of Banking Supervision, and as Director of the Banking Association of Slovenia. Larger provisions to mitigate the credit risk In November 1999 the Supervisory Board of the bank approved the recommendation of the SKB's Management Board to improve the quality of the credit portfolio, by establishing increased provisions for bad and doubtful loans granted in previous years. These measures significantly affected the profitability of the bank for the year ending 31 December A new strategy for A new strategy adopted by the new Management Board defined ways of enhancing profitability and mitigating risk, and set guidelines for selecting suitable domestic and foreign partner banks for strategic partnerships or for mergers and/or acquisitions. Future alliances with other banks SKB Banka will form alliances with other banks by seeking a strategic international partner and through mergers and/or acquisitions in Slovenia and abroad. SKB will target partner banks which have specific strengths and are compatible with SKB in know-how, development, management, and technology. Merger talks between SKB and NKBM, Nova Kreditna Banka Maribor, commenced in the second half of 1999 and were publicly announced in January Changes in the organisational structure In line with the new strategy, a complex reorganisation was introduced in the second half of 1999, with the setting up of four specialist departments to cover risks: credit assessment, credit portfolio monitoring, bad loans collection, and asset and liability management. These departments report directly to the Management Board and will later be incorporated under a new Risk Management Department. In addition, credit committees at the Head Office and branches were reorganised, as well as the bank's commercial business, the sales function of which has been strengthened. Rationalisation of capital investments The bank will sell surplus fixed assets, and will divest itself of some of its subsidiary companies (SKB Investment Company Ltd., SKB Aurum Ltd.) and activities which are not directly connected to the bank's core business. 3

5 New products and services launched by skb banka in 1999 January 1999: Services in euros from 1 January 1999 Launch of Slovenia's first electronic banking service for corporates (account information through SKB NET - GATHERING CENTRE ) March 1999: Visa Golf Cobrand card April 1999: Launch of account information and safe local payments through BUSINESS SKB NET - for pilot companies (pending new legislation which will gradually make this possible for all domestic companies in 2000 and 2001). Daril»EK and MEGA savings deposits (30 or 365 days) for children aged 5 to 15. May 1999: An innovative form of insurance in Slovenia for SKB's clients raising housing loans (launched in conjunction with Generali SKB) June 1999: Loyalty personal deposits over 1 year (revolving) Private placement SKB bonds - 4th issue, in EUR and in SIT Launch of DNT, a facility enabling the safe 24-hour cash deposits of corporate clients Safe Internet shopping with SKB's credit cards (in conjunction with the portal EON). July 1999: Launch of two attractive savings schemes, linked to future housing loans Launch of Mega payment card for students August 1999: Loans to finance graduate and post-graduate studies Real time account information for personal customers through Bankotel September 1999: Launch of foreign currency accounts for domestic corporates* Investment in foreign securities and custody for domestic corporate and personal customers* Innovation in Slovenia: attractive 10-year housing loans with interest rate linked to EUR (based on a EUR 10 million housing facility from the EBRD). November 1999: Launch of personal tolar time deposits through SKB-NET Internal transactions between personal accounts through SKB-NET and through Zeleni telefon, SKB's Call Centre. * A new Law on Foreign Exchange Transactions, passed in April 1999 with the aim of harmonising Slovenia's foreign exchange operations with those of EU, has from September enabled banks in Slovenia to maintain foreign currency accounts for domestic corporates, as well as to offer them investment opportunities in foreign securities. 4

6 SKB branch network in Slovenia Head Office Regional Branch Offices (11) Branches (58); each regional centre has several branches which are not shown on the map. Individuals can withdraw cash from over 600 cash dispensers and from 530 post-offices in Slovenia. SKB Banka has a representative office in London and correspondent relationships with 957 banks in 118 countries. 5

7 CAPITAL ADEQUACY The Group monitors the adequacy of its capital using ratios established by the Bank for International Settlements (BIS). These ratios measure capital adequacy by comparing the Group's capital with its balance sheet assets, off-balance-sheet commitments and market and other risk positions at a weighted amount to reflect their relative risk. Assets are weighted according to broad categories of notional credit risk, being assigned a risk weighting according to the amount of capital deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50%, 100%) are applied; for example cash and money market instruments have a zero risk weighting, which means that no capital is required to support the holding of these assets. Property and equipment carries a 100% risk weighting, meaning that it must be supported by capital equal to 8% of the carrying amount. Other asset categories have intermediate weightings. Off-balance-sheet credit related commitments and forward based derivative instruments are taken into account by applying different categories of credit conversion factors, designed to convert these items into balance sheet equivalents. The resulting credit equivalent amounts are then weighted for credit risk using the same percentages as for balance sheet assets. Tier 1 capital consists of shareholders' equity. Tier 2 capital includes the Group's general provisions, general banking reserve, revaluation reserve and other funds. The minimum amount of Tier 1 plus eligible Tier 2 capital required to be maintained under BIS guidelines is 8% of weighted risk assets. Balance sheet/ Risk weighted amount Nominal amount Balance sheet assets (net of provisions) Due from other banks 28,703,001 25,366,455 7,335,877 6,161,746 Loans and advances to customers 174,398, ,125, ,433, ,593,378 Dealing and investment securities 12,310,024 9,685,534 12,310,024 9,685,534 Property and equipment 20,159,230 15,945,416 20,159,230 15,945,416 Capital investments 2,022,715 1,961,134 2,022,715 1,961,134 Other assets 16,581,511 14,977,930 16,581,511 14,977,930 Off-balance sheet positions Credit related commitments 71,957,140 65,211,025 56,882,927 52,665,857 Letters of credit 513,732 1,126, , ,352 Total risk-weighted assets 272,828, ,216,347 BIS Capital Ratios Capital BIS% Tier 1 capital 17,439,154 22,840, Tier 2 capital 10,099,446 7,328, Tier 1 + Tier 2 capital 27,538,600 30,169, BIS minimum

8 GROUP FINANCIAL HIGHLIGHTS (SIT million) Profit/(loss) before taxation (5,287) 2,349 1,979 Dividends Total assets 301, , ,897 Funds employed 25,707 29,257 27,025 (Loss)/earnings per share (SIT) (732) Share book value (SIT) 3,296 3,751 3,465 No dividend will be proposed for BIS Capital adequacy ratios - the group SIT million % SIT million % SIT million % Tier 1 17, , , Tier 2 10, , , Capital base 27, , , Official exchange rates (31 Dec.): (1 DEM = SIT) (1999, 1 EUR = SIT; 1998, 1997, 1 XEU = SIT) (1 USD$ = SIT) Annual inflation (%) Number of employees - SKB Banka 1,099 1,122 1,047 7

9 MAJOR SHAREHOLDERS AS AT 31 DECEMBER 1999 *Notes: 1. Number of shares: 7,800,000. Face value: SIT 1,000. Share book value as at 31 Dec. 1999: SIT 3,296. The shares are dematerialised and entered in the Shareholder Register of KDD (Central Securities Clearing Corporation). 2. Number of shareholders on 31 December 1999: 2,008. Shareholder structure: 9 international shareholders (48.9%), 554 domestic institutional shareholders (46.2%), and 1,445 domestic individual shareholders (4.88%) The Bank of New York is shareholder and depositary bank for Global Depositary Receipts (GDRs) issued in The GDRs are traded on the London, Frankfurt, Berlin and Munich stock exchanges.skb's domestic shares (71.10%) are traded on the Ljubljana Stock Exchange.

10 MANAGEMENT STRUCTURE OF SKB GROUP IN 1999 the General Meeting of Shareholders the Supervisory Board the Management Board THE GENERAL MEETING OF SHAREHOLDERS Chairman (27 May 1999): Drago Pleško Delo prodaja d.d., Ljubljana SKB BANKA D.D. SUPERVISORY BOARD MEMBERS Following SKB Banka's 8th Annual General Meeting of shareholders, which took place on 27 May 1999, SKB Banka's Supervisory Board consists of the following 9 people: Chairman: Mr Kazimir Pregl EBRD's Slovenian representative on SKB's Supervisory Board Deputy Chairman: Mr Andrej LasiË Managing Director of Velana, Ljubljana (Velana, manufacturer of curtains) Members: Ms Dragica PilipoviÊ-Chaffey Co Director, EBRD, London (European Bank for Reconstruction and Development) Ms Viktorija PotoËnik Mayor of Ljubljana, Mestna obëina Ljubljana (Ljubljana City Council) Dr Volker Neuschütz Senior Investment Manager, Representative of DEG, Cologne (Deutsche Investitions- und Entwicklungsgesellschaft mbh) Mr Franc Košir Managing Director of ZZZS, Ljubljana (Zavod za zdravstveno zavarovanje Slovenije - Health Insurance Institute of Slovenia) Mr Bojan SimoniË Managing Director of TobaËna Ljubljana d.o.o. (TobaËna Ltd., tobacco products) Ms Karmen Dietner Representative of Slovenski odškodninski sklad, Ljubljana (Slovenian Restitution Fund) Mr Milan Jelenc Representative of Intereuropa, Koper (Intereuropa, forwarding agent/transport of goods) Note: The term of office of SKB's previous Supervisory Board expired in May Members are appointed for a period of 4 years and may be reappointed for a second 4-year term. Ms Dietner, Slovenian Restitution Fund, and Mr Jelenc, Intereuropa, replaced two of the previous members of SKB's Supervisory Board (Mr Mihael Urbanija, Managing Director of Ljubljanske mlekarne, Ljubljana, resigned because of the forthcoming merger of his company. Mr Vinko Rejec, representative of SKB Banka's employees, resigned because of changed legislation regarding the representation of employees on the Supervisory Boards of banks). Following the AGM which will be held on 31 May 2000, Ms Dragica PilipoviÊ-Chaffey, EBRD, who has been entrusted with other duties within EBRD, will be replaced by Ms Kanako Sekine, Senior Banker, EBRD. 9

11 SKB BANKA D.D. MANAGEMENT BOARD Cvetka Selšek President of the Management Board & Chief Executive Officer Franjo Bizjak Member of the Management Board & Deputy Chief Executive Officer SreËko Korber Member of the Management Board & Deputy Chief Executive Officer PROFILES OF THE MANAGEMENT BOARD CVETKA SELŠEK President of the Management Board and Chief Executive Officer Key qualifications: B.Sc. (Econ.), University of Zagreb Ms Selšek was appointed President of SKB Banka's Management Board in April She will continue to take responsibility for the retail, commercial, international business of the bank and capital investments. Ms Selšek was from September 1997 to April 1999 Member of SKB's Management Board, after having been Executive Director International Banking from May From 1991 to May 1995, Ms Selšek served as Deputy Managing Director & Chief Executive International, and as Executive Vice President for International Banking of SKB Banka d.d. Prior to joining SKB Banka in 1991, Ms Selšek served for 14 years in the Ministry for International Co-operation for the Republic of Slovenia and was a member of the government of Slovenia and Minister for International Co-operation from 1986 to 1990, responsible for foreign trade and foreign currency systems. Memberships: Ms Selšek is a member of the BIAC Steering Committee for central and eastern Europe (Business and Industry Advisory Committee to the OECD), and since 1995 President of the National Sub-Committee for Slovenia. She was appointed President of the Supervisory Board of the Ljubljana Stock Exchange in September 1998, having been a member of the Supervisory Board since May FRANJO BIZJAK Member of the Management Board and Deputy Chief Executive Officer Key qualifications: B.Sc. (Econ.), University of Ljubljana Mr Bizjak commenced his responsibilities as Member of the Management Board of SKB Banka d.d. on 1 June His current areas of responsibility are planning, analysis, investment banking, electronic banking, IT, organisation and internal services. From 1997 to June 1999 Mr Bizjak was a Member of the Management Board of SKB Banka's associated company, Generali- SKB Insurance Company Ltd., Ljubljana. 10

12 From 1990 to 1997, Mr Bizjak acted as SKB Banka's Deputy Managing Director responsible for current bank operations, and as Executive Director responsible for strategic planning, budget and analyses. From 1988 to 1990 Mr Bizjak was Deputy President of the Managing Board of Stanovanjsko-Komunalna Banka and from 1979 to 1988, in the first years of his career in the bank, Mr Bizjak served as Head of Planning and Analysing Division. SRE»KO KORBER Member of the Management Board and Deputy Chief Executive Officer Key qualifications: B.Sc. (Econ.), University of Ljubljana Mr Korber became a Member of the Management Board of SKB Banka d.d. on 1 June He is responsible for risk management, treasury, corporate payments and financial operations of the bank. From 1994 to June 1999, Mr Korber was Director of the Bank Association of Slovenia, and before that, from 1992 to 1994, acted as Director of the central bank's Department for Banking Supervision where he was actively involved in the bank rehabilitation process in Slovenia as a member of the Board of the Agency for Rehabilitation of Banks and Savings Banks. Mr Korber commenced his career in the Analytical and Research Centre of the central bank, Bank of Slovenia, in In 1986 he became Controller and in 1989 Assistant Director of the Department for Monetary Operations. PROFILES OF SKB's SENIOR MANAGEMENT BOŠTJAN KOLER Executive Director Retail Banking Key qualifications: LL.B., Faculty of Law, University of Ljubljana Mr Koler was appointed Executive Director Retail Banking in March He joined SKB Banka in 1996 as Director of SKB s Branch Office Ljubljana. Before joining SKB Banka, Mr Koler worked from 1986 to 1996 in Ljubljanska banka, where, as part of his training programme, he spent the early years of his career working in different sections of the retail banking department. In 1991 he headed the reorganisation of the branch network of LB Temeljna Banka Zagreb, Ljubljanska Banka s subsidiary in Croatia. In 1993 he was appointed Adviser of the Management Board of NLB-Nova Ljubljanska Banka which at that time commenced a rehabilitation process. In the period from 1994 to 1996 Mr Koler also acted as Director of the Department for Small Business, and as Director of Life Insurance Project. JANEZ KREVS Executive Director International Banking Key qualifications: B.Sc. (Econ.), University of Ljubljana Mr Krevs was appointed Executive Director International Banking in June Between 1992 and 1999 he served in SKB Banka as Adviser to the Management Board, International Credit Relations. 11

13 Prior to joining the bank, Mr Krevs worked for two years as adviser at the Slovenian Ministry of Foreign Affairs, and member of a team preparing legislation on foreign currency operations and on credit transactions with foreign countries. From 1986 to 1990, Mr Krevs served as Deputy President, Committee for International Co-operation, Republic of Slovenia, responsible for foreign currency operations, foreign trade, joint-ventures, international credit relations, and alignment of the Slovenian economy with directives of the EU and GATT. From 1982 to 1986 he was analyst in the Government Offices of the Republic of Slovenia, responsible for analyses of Slovenian macroeconomic situation, trade balance and balance of payments. Mr Krevs worked as analyst in the central bank, National Bank of Slovenia (now Bank of Slovenia), from 1977 to IGOR KRIÆMAN Executive Director Capital Investments Key qualifications: B.Sc., M.Sc. (Econ.), University of Zagreb Mr Kriæman was appointed Executive Director Capital Investments in He joined the Group in 1991, as Deputy Director of Investment Bankig, working in the bank's subsidiary, SKB Aurum. Before joining the Group, Mr Kriæman held various posts in the period between 1969 and 1986: he was under-secretary and adviser on economic developments to the Prime Minister of Slovenia, Vice President of Trading with the export-import company Astra and, from 1987 to 1991, he was President of the Management Board at the University Clinic Centre in Ljubljana. ALENKA MARKI» Executive Director for Capital Alliances with Banks Key qualifications: B.Sc. (Econ.), University of Ljubljana Ms MarkiË became Executive Director, Strategic Capital Alliances, in June Before that, she served in SKB Banka as General Manager Investment Banking Division (from 1993). Between 1987 and 1993, Ms MarkiË was Deputy Minister of Finance, Slovenian Ministry of Finance, responsible for public finance, budget, and tax system of the Republic of Slovenia. From 1986 to 1987 she was Deputy Director of Institute for Planning, the City of Ljubljana, responsible for the city budget and policy. From 1982 to 1986 Ms MarkiË was Assistant Minister, Committe for Planning of the Republic of Slovenia, responsible for medium-term planning. Ms MarkiË started her career in 1975, at Institute for Planning (today IMAD - Institute for Macroeconomic Analysis and Development). Last position: Adviser to the Director, and member of a team responsible for analysing current economic trends, carrying out medium-term plans, and preparing bases for the annual economic policy of the Republic of Slovenia. 12

14 MATEJ NARAT Executive Director Commercial Banking Key qualifications: B.Sc., M.Sc. (Econ.), University of Ljubljana Mr Narat was appointed Executive Director Commercial Banking in December 1999 when he joined SKB Banka d.d. Prior to this, Mr Narat spent three years as Executive Director Treasury in Factor Banka d.d., Ljubljana, after having served as Managing Director of Studio Marketing J. Walter Thomson Ltd. Slovenija for over a year, and three years as Assistant at the Ljubljana University of Economy (Monetary Affairs and Finance). JOÆE SLAPNI»AR Director of SKB Banka's Branch Network Key Qualifications: B.Sc. (Econ.), University of Maribor Mr SlapniËar was appointed Director of SKB's branch network in July Prior to this, he was from 1994 to 1996 Adviser to SKB's President of the Management Board, after serving as General Manager of SKB's Corporate Loans Department from 1992 to Mr SlapniËar joined SKB's predecessor, Stanovanjsko-Komunalna Banka in 1988 as General Manager of Resources Division and was from 1990 to 1992 General Manager of Resources and Investments Division. Before joining the bank in 1988, Mr SlapniËar held various posts in Slovenian companies. 13

15 STATEMENT OF THE MANAGEMENT BOARD In 1999, SKB Banka witnessed several important events and underwent changes, which will influence its operations in the coming years. The major changes that took place during the year were the appointment of a new Management Board, a large increase in provisions for bad and doubtful debts, a reorganisation of the Bank's operations and structure, and the decision to participate actively in the consolidation process of the banking system in Slovenia. The Bank's operating environment was characterised principally by the implementation of the new Banking Act, the introduction of VAT (which significantly affected cash flows in the middle of the year) and foreign-currency corporate accounts, as well as a further reduction in the interest margin, so that, at the end of the year, the Bank's margins were comparable to those in Europe. A 4.9% increase in gross domestic product and a rise of 8.2% in industrial output further stabilised the economic environment. A slightly higher inflation by 8% resulted from the implementation of VAT, but it is expected that this will start decreasing in The Bank of Slovenia eased the restrictions on foreign portfolio investments in Slovenia. However, only the lifting of these restrictions will significantly influence stock exchange trading. Residents of Slovenia were allowed to buy foreign securities, but so far, few have taken advantage of this deregulation. On the basis of the Supervisory Board's decision, a new Management Board took over in Its duties were primarily oriented towards developing a business strategy, lowering operating costs, reorganising the Corporate Banking Division, and consolidating the SKB Group and restructuring the personnel function. In reorganising the Corporate Banking Division, it was established that the Bank had not fully complied with the criteria set by the Bank of Slovenia for making bad debt provisions. As a result, the Bank down-graded part of its credit portfolio and established additional provisions, which resulted in an operating loss for Despite the consolidated operating income from ordinary activities totalling SIT 15.6 billion, the loss of SIT 5.3 billion was caused by substantial additional provisioning amounting to a net SIT 9.9 billion. Due to the drop in the interest margin and suspended interest on nonperforming assets, interest income was 6% lower than the previous year. However, net fee and commission income rose by 9%. In the following three-year period fees and commission income, together with an intensified debt recovery programme and a better management of non-performing assets, are expected to be the major profit generators of the Bank. Based on the experience learned from past mistakes, new procedures with stricter criteria were established and imposed for granting loans, and provisions consistently established. At the same time the Bank intensified the collection of overdue claims and default interest. The Management Board of the Bank decided to separate the risk management function from corporate banking, setting this into a special organisational unit. Simultaneously, personnel restructuring took place in the Corporate Banking Division and major clients were assigned their own customer relationship managers. 14

16 The Management Board of the Bank promptly informed all domestic and foreign shareholders, business partners and the public about these developments, because it is aware of the vital importance to these parties of timely and comprehensive information. We are certain that by doing so we have preserved the confidence of our shareholders and clients. Last year the Bank accelerated the redesign of its IT system and successfully put to use new modules. This is expected to be completed by the end of 2000, by when the Bank will have a quality information system that will streamline its operations. Computer applications were modified and hardware upgraded to mitigate the Y2K problems. The Bank made preparations for the transfer of corporate payment transactions from the Agency for Payment Transactions to commercial banks. These are already being carried out successfully with pilot corporate clients through standard and electronic channels. The state is unfortunately late with its promised planned transfer of payment transactions to commercial banks. The Bank's policy of consolidation with the objective of forming a successful banking group began in This will mean exiting products and services which are not commercially viable or which tie up too much of the Bank's capital. Certain holdings will be disposed of and other companies will discontinue part of their business - whilst part of their operations will be transferred to the Bank. The Bank will also dispose of certain of its equity investments in financial organisations. At the same time, the Bank will invest in new projects, such as in the establishment of a pension fund management company, in co-operation with several large Slovene companies. SKB Banka will base its development on technologically advanced services, creating easier financial management for corporate and retail clients. In the international banking arena where it has already been present successfully for several years the bank will continue to develop closer links with banks and clients. Under its new strategy SKB Banka decided to consolidate the potential of the Slovene banking industry and forge alliances with strategic partners. In 1999, the Management Board of the Bank and the Management Board of Nova Kreditna Banka Maribor (NKBM) reached an agreement on the merger of the two banks. A letter of intent has been approved by the Supervisory Boards of both banks, serving as a basis for the preparation of the documentation necessary for resolutions to be passed formally by the General Meetings of Shareholders of both banks, which are needed in the implementation of this demanding project. It has to be stressed that SKB Banka enters this amalgamation process as a sound bank, having raised the level of its provisions with the support of its shareholders. This project represents the first phase of NKBM's privatisation, whereby the state's shareholding in the new bank is planned to be reduced to less than 50%. The project will succeed only if the shareholders of both banks accept the decision to establish a private bank with the clearly defined aim of reducing further this participation of the state. On behalf of SKB Banka's Management Board, I should like to thank shareholders for their continued support and assistance. The Management Board also wishes to thank sincerely the management and staff of the Bank for their hard work and fine contribution during the past year. Ljubljana, April 2000 Cvetka Selšek President of the Management Board of SKB Banka 15

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27 OPERATIONS OF SKB BANKA IN INTRODUCTION General economic environment The main characteristics influencing the operations of Slovenian banks in 1999 were as follows: During the year consumer prices rose by 8%. The revaluation rate (TOM*) in the January-December period was 6.1%. The USD exchange rate in the same period appreciated by 22.1% and that of the EURO by 4.7%. The implementation of VAT, value added tax, was instrumental in increasing gross domestic product in the second quarter of In the first eleven months of 1999 total industrial output was significantly lower than in 1998, as a result of weaknesses in some countries with which the bank co-operates and the implementation of VAT. At the beginning of 1999 there was insufficient demand for goods and services exported from Slovenia and exports normalised only in autumn, by which time factors promoting imports came into play. This was the reason for the increased deficit in foreign trade at the end of the year. Despite the November cut in wages and salaries the aggregate wage budget paid from January to November rose by 9.3%, mainly in the public sector. Poor liquidity in the capital market, although improving in the second half of the year, was reflected in the increased volume of securities' dealings and the higher price of some shares. In 1999 the main source of capital inflow came from companies and banks raising loans abroad and foreign direct investment in Slovenia. However the flow decreased due to a more pronounced servicing of short-term corporate loans and a greater volume of foreign cash and retail deposits. The banking industry was characterised by: The enforcement of the new Banking Act; Lower interest rates in the first half of the year. Although in August and September some interest rates on loans and deposits increased, there followed a fall in October, after which rates remained constrained until the end of the year; The Bank of Slovenia abolished restrictions on borrowing abroad and altered the method of calculating foreign exchange minimum reserves of banks (January, November); The poor liquidity of the entire banking system throughout the year slightly improved in the third quarter; New foreign exchange legislation permitted domestic companies to maintain foreign currency accounts and purchase foreign securities; The entry of new banks into Slovenia; In 1999 the total profit of Slovenian banks amounted to SIT 20,959 million, 19% less than the previous year. 26 Note: *TOM: average consumer price index over the preceding 12-month period

28 2. REVIEW OF OPERATIONS OF SKB BANKA IN 1999 BRANCH NETWORK SKB Banka closed down two of its branches in 1999, in Celje and in Murska Sobota. At the end of the year, the SKB branch network had 11 main branches with 58 outlets. DEPOSITS Last year the average volume of deposits was 6% higher than in December 1998, less than planned. The growth in deposits was primarily based on retail sight tolar deposits, corporate tolar and foreign currency sight deposits, short-term tolar time deposits and long-term foreign currency deposits of retail customers, as well as short-term foreign currency deposits of corporate customers. On average, deposits in 1999 stood at SIT billion. The maturity structure of deposits deteriorated in December compared to the beginning of the year as follows: The average volume of sight deposits grew from 26.0% to 28.0% of total sight deposits (of which retail customers accounted for 54.1%, corporate 42.8%, and sole proprietors a mere 3.1%. A decrease in average short-term deposits from 50.3% to 49.8% of total short-term deposits. A fall in average long-term deposits from 23.7% to 22.2% (retail customers 44.1%, corporate customers 55.8%, and sole proprietors 0.1%). 27

29 Retail deposits in 1999 The total volume of retail deposits fluctuated from month to month. At the beginning of the year it rose as funds were being transferred from smaller banks to larger, more trusted ones. In April and May the volume of retail deposits decreased, owing to the expected introduction of VAT, only to rise in August and September as a result of higher interest rates on deposit accounts. Until the end of the year deposits continued to grow. In the first six months the maturity structure of retail deposits deteriorated because of the expected VAT and because of the generally decreased deposit interest rates. Later in 1999 the maturity structure somewhat improved because interest rates changed. Both tolar and foreign currency sight deposits were converted into short- and long-term time deposits. Participation in the National Housing Savings Scheme SKB was one of 12 Slovenian banks eligible to participate in a scheme introduced on 1 July 1999 by the Housing Fund of the Republic of Slovenia (21 banks applied to participate). The scheme enabled SKB and the other 11 banks to offer to individuals a 5-year or 10-year savings plan, subsidised by the state. After 5 or 10 years, depositors will be able to raise 10- and 20-year housing loans at low interest rates. SKB Banka raised SIT million by the end of 1999 under this scheme. Since the launch, Slovenians have taken such great interest in the National Housing Savings Scheme, a project of national importance, that SKB launched a new parallel product in July, attracting a further SIT 71.1 million by the end of New services for the young "Daril»EK", a gift-cheque coupon, was launched in April 1999 as a part of "Papi's MEGA savings deposits" aimed at encouraging long-term savings by children aged 5 to 15. The product has an educational function and complements the "PAPI package", banking services for children developed by SKB in A new "MEGA" package of services for the young aged 16 to 27 was launched in September These services are linked to a bank account and comprise 24-hour account information and banking through SKB-NET and/or telephone banking. Access to ATMs, card payments at points-of-sale in stores, an overdraft facility, time deposits, and loans to finance purchases of computers and books are also included in this package. 28 Corporate deposits in 1999 In December corporate deposits averaged SIT billion. Volume fluctuated from month to month: a fall in the first quarter was followed by growth almost until the end of the year, whilst in December the average volume of deposits again decreased by SIT 2.8 billion, mostly because of a fall in both short- and long-term deposits. Deposits of the Ministry of Finance (deposits up to 30 days) and other large depositors influenced considerably month-by-month the volume of short-term deposits held in SKB Banka.

30 A new legislation harmonising Slovenia's foreign exchange operations with those of the EU In September, new legislation allowed the bank to introduce two important fee-generating services: foreign currency accounts for corporates (by 1 January 2000, 942 had been opened), and investment in foreign securities & custody accounts and services. The introduction of foreign currency corporate accounts caused a rise in sight foreign currency deposits and in short-term foreign currency denominated deposits, as a substitute for foreign currency central bank bills. LOANS During the first months of the year the bank was very active in lending. This was followed by a decrease in corporate crediting, owing to poor liquidity. Nevertheless, the total volume of loans in the January-December period grew by SIT 1.1 billion, mainly as result of an increase in longterm loans (4.5% higher compared with the beginning of the year). At the end of December the total of loans was SIT 174 billion. Their maturity structure changed during the year. The volume of long-term loans increased from 57.5%to 60.5% whilst short-term loans fell from 42.5% to 39.5% primarily due to a decrease in short-term foreign currency loans to corporate customers. Retail loans in 1999 Demand for loans started to rise in March, primarily because of larger purchases of durable goods, with the aim of avoiding price increases expected after the introduction of VAT. The volume of lending dropped considerably during the summer, because of changes in credit terms, when the bank wished to decrease its loan book. Current account overdraft facilities as a form of short-term lending were on the increase (almost 59% of total short-term lending), resulting from a decrease in short-term consumer loans. Overdrafts fluctuated in the first six months of 1999, but from July until the end of the year they continued to grow (with the exception of December, when a slight fall was recorded). Consumer loans, however, experienced the opposite trend. Throughout the entire year consumer lending was declining, except in May and July, resulting from the introduction of VAT. Long-term loans grew until the middle of the year, but a negative trend persisted from August until the end of December, owing to the above mentioned measures aimed at decreasing lending. This was especially due to a fall in consumer lending and loans to sole proprietors. 29

31 An EBRD long-term credit line for housing loans to be on-lent by SKB Banka In September an EBRD credit line for housing loans in an amount of EUR 10 million (SIT 2 billion), in two tranches, with a 10-year maturity, made long-term funding more accessible to SKB's customers. These loans were new to the market and especially attractive because their variable lending interest rate were linked to a foreign currency index in EUR instead of domestic indexation. Background: in 1999 two banks in Slovenia benefitted from an EUR 50 million framework credit facility for "financing financial institutions in the country, to promote the development of a market-oriented economy in Slovenia". Nova Ljubljanska Banka was extended an EUR 15 million subordinated loan to finance its expansion. The second loan under the framework was extended to SKB Banka, "to provide long-term funding to its Slovenian clients for the purchase or renovation of residences in Slovenia. Home ownership is one of the characteristics of a market-oriented economy and the project will contribute to extending this opportunity to an increasing number of Slovenians." Loans to corporates in 1999 At the beginning of the year tolar loans grated to corporate customers had a negative impact on the tolar liquidity of the bank, after which the bank restricted its lending. Despite this restrictive policy, long-term loans rose until July, but in August a fall was recorded partly because some previously sold fixed assets were repurchased. Participation in domestic syndications: In the financing of infrastructure projects, the bank, together with other Slovenian banks, participated in long-term syndicated loans to the power station Brestanica, to the Slovenian Railway Company - Slovenske æeleznice, to DARS - the Slovenian company responsible for the construction of motorways in Slovenia, and the mobile operator SI.mobil. In the January-April period the volume of foreign-currency loans decreased, whereas a rise was recorded from May onwards (in short- as well as long-term foreign currency loans). The bank obtained funds for foreign-currency loans by raising a syndicated loan abroad and through "bank to bank" bilateral lines of credit. INTERNATIONAL BANKING ACTIVITIES SKB's International Division assists Slovenian companies involved in international trade, grants loans to foreign entities, services non-resident corporate customers, and raises favourable funding for the bank and for Slovenian customers abroad, and provides foreign currency funding and guarantees to corporate non-residents. 30

32 A new Banking Law came into force in 1999 enabling domestic companies to maintain foreign currency accounts with banks. The International Division developed and, together with other departments of the bank, introduced foreign currency "transaction accounts" for domestic and foreign corporates. Correspondent Banking Network At the end of 1999, SKB Banka had 957 correspondent relationships in 118 countries and maintained 51 nostro accounts with foreign banks. The bank maintained accounts in EUR in EMU member states from the introduction of the new currency because of the convenience of carrying out international payments. Although at the end of 1999 the bank had 29 account relationships in EUR, this number is expected to be gradually rationalised to one account in each EMU member state. Links with banks provide favourable foreign credit lines, to be on-lent to Slovenian corporates, or used to cover the bank's own requirements. EUR 80 million raised on international capital markets In May 1999, SKB Banka raised a syndicated loan abroad, in an amount of EUR 80 million (SIT 15.4 billion), primarily to make available foreign exchange loans to domestic and foreign customers and partly for the repayment of a previously raised syndicated loan. The five-year term loan was arranged for SKB by a syndicate of 19 international banks, led by BNP London, RZB Vienna, DG Bank Frankfurt, and the Dublin branch of KBC. International Trade Finance SKB Banka secures payments for exporters and importers with documentary business - letters of credit and collections, foreign currency guarantees, and provides financing. Together with SID, Slovenian Export Company, it assists Slovenian exporters in trading with the countries from eastern and southern Europe. International payments With an 11.8% market share in international payments (a growth from DEM million at the end of 1998 to DEM million at the end of 1999), SKB continues to rank second in Slovenia. Customers can receive account information and send payment orders via BUSINESS SKB NET from April SKB's London Representative Office SKB Banka is one of only two Slovenian banks to have opened a representation in London, Europe s largest trading and financial centre. The city had 560 foreign banks at the end of 1999, more than any other city in the world. It has a stock exchange which trades a higher turnover of equities than all other European financial centres combined. 31

33 The main activities of the London office are to promote SKB's name and seek funding in the London financial markets, to promote trade between British and Slovenian companies, and to advise UK corporates of business opportunities in Slovenia. INVESTMENT BANKING ACTIVITIES In 1999 SKB invested further in tolar central bank bills, foreign securities (the last quarter of 1999 saw the enforcement of a new act which enables the purchase of foreign securities by both corporate and retail domestic customers) and traded securities. The bank issued a 4th issue of private placement bonds in June, which was sold entirely by the beginning of September. The volume of central bank bills in the portfolio grew, as the bank had a short foreign exchange position in the last months of the year. The bank's services for investors include: securities trading and brokerage, investment advisory services, portfolio management, and research. Investment Banking Division also offers custody accounts and trust services for foreign investors, and assistance with the listing of sound domestic companies on international stock exchanges in the form of Global Depositary Receipts. Custody accounts for foreign investors SKB Banka is the second largest custodian bank in Slovenia with a market share of over 25%. It has been offering custody to foreign investors for over four years. Clients include reference global investment and commercial banks. In 1999 the central bank eased the regulations regarding custody accounts for foreign portfolio investors. They are now required to hold the shares for only 1 year (in 1997 and 1998 for 7 years) or trade the shares outside Slovenia, unless they are willing to take on higher custody fees. According to EU accession requirements, capital restrictions must be abolished by February New in Slovenia: custody accounts for domestic investors Previous restrictions against investment of domestic individuals and corporates were lifted under the new Banking Law from September SKB Banka actively marketed this new fee-generating service among institutional investors in the last months of There was growing interest among investors in the first months of 2000, enhanced by the local capital market's illiquidity at that time. 32

34

35 Movements on the Ljubljana Stock Exchange in 1999 At the end of 1998, the Slovene Stock Exchange Index (SBI) stood at 1,706 index points. It gradually increased until having reached 1,982 index points at mid February 1999, a downward trend followed until July. The SBI rose again to reach 1,974 index points at the beginning of September. Between that time and the end of December 1999, the SBI saw a falling trend and concluded the year at 1,806 index points. SKB's share price in 1999 On the local capital market, the price of SKB share fluctuated considerably in 1999 (between SIT 1,911 and SIT 2,750). The highest price was recorded in May as a result of Abanka's purchases during merger talks with SKB. The lowest prices were recorded in October and November, at the time of SKB's first announcement of the loss for On the international markets, the price of SKB Banka's GDRs (Global Depositary Receipts) fluctuated between US$ 7.27 on 1 January 1999, and US$ on 15 March No data are available about the turnover on the SEAQ International at the London Stock Exchange. Generally, trade with SKB's GDRs was low in There are only two market makers taking care of SKB's GDRs, the minimum allowed. After a modest start in January, SKB's GDRs succeded in gaining a reputation as a good investment among foreign investment funds, and the price on the London Stock Exchange grew by 55% during Stock Exchange Currency Share price Share price 4 Jan Dec Ljubljana SIT 1, ,315.7 London US$ Frankfurt EUR Munich EUR Berlin EUR SKB had 2,008 shareholders at 31 December (Shareholder structure at the end of 1999: international shareholders held 48.9% of SKB's equity, 46.2% was in the hands of domestic corporates, and 4.9% in the hands of domestic individual shareholders. Face value of SKB share: SIT 1,000. Number of shares: 7,800,000). ELECTRONIC BANKING PRODUCTS AND SERVICES Card and ATM transactions SKB issues the following cards: international credit cards EUROCARD MASTERCARD and VISA, a domestic credit and payment card KARANTA, and domestic payment cards BA CIRRUS MAESTRO and MEGA. All individuals with accounts in SKB Banka have a BA Maestro card, around 15% of them have a Karanta card. In addition, 75% have a Eurocard Mastercard, but only 3.5% have Visa (which is for high net worth individuals only). Since the end of 1999, the credit card Karanta can be used at 556 more merchants, whilst BA and Maestro are accepted by a further 535 merchants (SKB has contracts with some 10,200 points-of-sale). In ATM operations a new BA card for young clients, MEGA, was issued in May 1999, and preparations for the switch from the BA software package to new ATM technology continued (SKB changed the provider of ATM services after joining the national pool of ATMs at the end of 1997). The provider of all services related to ATMs of all banks in the pool is a jointly established company, Bankart. Because of technical problems, eight SKB's ATMs enabling cash withdrawals with international credit cards have remained - until Bankart finds the right solution - in the network of SKB's previous ATM service provider, Plasis. 34

36 Internet banking for personal and corporate customers Corporate customers were offered a new service called BUSINESS SKB NET - GATHERING CENTRE in January. The facility enables corporates to retrieve information on performed payment transactions via the Internet. In April 1999, BUSINESS SKB NET was launched for pilot corporate customers enabling them to execute online payments. The facility will be available to all corporate customers after domestic payments have been transferred from the Agency for Payments to commercial banks. SKB's personal customers and sole proprietors have been able to carry out payments via SKB NET since September In 1999, the number of users grew by 739, to 4,620. Two new services were added to SKB NET in 1999: transactions on internal accounts can be performed, and time tolar deposits can be made from home or other remote location. SKB's web site has since 1996 offered free subscription via to DAILY EXCHANGE RATES in Slovenia. There were 1,382 subscribers to this service in March 2000 (77 subscribed to the rates in English, the rest in Slovenian; 404 domestic and 21 international subscribers wished to receive exchange rates of the central bank, the rest SKB Banka's exchange rates for companies and for individuals). Safe Internet shopping with credit cards: During a press conference held in June 1999, Slovenia's new portal EON, SKB Banka and Slovenia's Post Office, presented "safe Internet commerce" which encompasses shopping in virtual shops and safe on-line payments with plastic cards. At that time SKB Banka and EON carried out the first automated real-time settlement on the Internet in Slovenia using a credit card. The number of Slovenian virtual shoppers has been constantly growing. Telephone banking SKB introduced its free telephone customer information service, THE GREEN TELEPHONE LINE, in In April 1998, this service was converted into a call centre, as the bank complemented online services rendered via SKB NET, by offering account information and telephone payments for retail customers through the call centre (SKB was in 1998 the only bank in Slovenia offering a choice of two remote banking facilities). In 1999, 186 new users were registered, and the total number of those who perform payments via telephone stood at 1,182 at the end of December. Like SKB NET, last year SKB's telephone banking was upgraded to enable tolar time deposits to be made from home or other remote location, and transactions on customers' internal accounts. There were 40,836 calls registered by SKB's call centre in BANKOTEL, an automated telephone information service giving personal account balances, and another automated telephone service for information on corporate and individual exchange rates, are also widely used by domestic customers. 35

37 SKB BANKA's INTERNAL DEVELOPMENT Investment In 1999 SKB Banka invested SIT 1,601 million, 80% more than planned. The majority of this sum (76%) was used for IT, 14% for office furniture and stationery and the remainder for the modernisation of outlets in the branch network (arising from the fact that domestic corporate payment transactions would be transferred to banks). Information Technology SKB Banka continued the development and upgrading of several important projects and development tasks. Projects relating to payment transactions were: - domestic corporate payments, launch of DNT for safe cash deposits of corporates; domestic payments of selected pilot companies, installation of a new information support for scanning and optical reading of documents; - international payments - development and launch of the new foreign currency "transaction accounts" for corporates in the module RB (Retail Banking). Introduction of operations in EURO from 1 January 1999 Switch to SKB's own SWIFT facility (in previous years, SKB used this facility through Nova Ljubljanska Banka); Development of POSEB, a solution to introduce foreign currency corporate payments through SKB NET; Successful implementation of the Y2K project at the millennium changeover. Organisational changes in 1999 In line with the new strategy, a complex reorganisation was introduced in the second half of 1999, as follows: Four specialist departments were set up to cover risk: credit assessment, credit portfolio monitoring, bad loans collection, and asset and liability management. These departments report directly to the Management Board. In addition, credit committees at Head Office and branches were reorganised. The monitoring by SKB of all deposit and credit operations with companies and sole proprietors across Slovenia was centralised and is now covered from Head Office. The concept of customer relationship managers in branches and at Head Office, started in 1997 and 1998, was further implemented to strengthen SKB's sales and cross-selling. Throughout 1999, complex activities were carried out in relation to the introduction of the new "transaction" accounts of corporates with banks. SKB's Marketing and PR Department was incorporated into the bank's commercial operations during 1999, with the aim of strengthening its sales function. Human resources SKB's policy in 1999 was to reduce the workforce. At the end of the year, the bank employed 1,099 staff, 23 less than the previous year. The bank paid special attention to the training of the staff, especially in the field of information technology, marketing and sales, taxation, legal matters, and business communications. 36

38 3. SKB's CAPITAL INVESTMENTS IN 1999 The Capital Investments Division of SKB Banka is engaged in: The establishement of subsidiary companies and joint-ventures Other investments in the corporate sector Major developments in 1999: SKB Faktor Ltd. established on 1 January 1999; Two recapitalisations of Generali-SKB Insurance Co (at the beginning and at the end of 1999); Purchase of a 40% stake in CA-SKB Leasing Ltd. from SKB NepremiËnine & Leasing at the end of July 1999; Sale of a stake in Slovenske æelezarne (Slovenian ironworks). SKB BANKA's SUBSIDIARY COMPANIES AND ASSOCIATES The SKB Group consists of SKB Banka d.d., the parent, and its subsidiary and associate companies, established since 1990 to complement core banking business in real estate, investment in construction, leasing, insurance, investment fund management and factoring. These subsidiaries and associates employed a total of 261 staff as at 31 December 1999 (51 subsidiaries, 210 associates). At the end of 1999 SKB Banka had five subsidiary companies and four associates (please refer to the organisation chart on page 92). SKB's stakes in subsidiaries: SKB maintained a 100% stake in three subsidiaries in 1999 (SKB NepremiËnine & Leasing Ltd., SKB Investment Co. Ltd., and SKB Faktor Ltd.). The bank held a majority stake in SKB Aurum Ltd. (76.7%), and a 6% stake in SKB Trading Ltd. Stakes in associates: Stakes SKB held in associates in 1999: 45% in Plasis, 40% in Atena, 40% in CA-SKB Leasing Ltd., and 25% in Generali-SKB Insurance Company. Profiles of SKB's subsidiary and associate companies in 1999 SKB Real Estate and Leasing Ltd. (SKB NepremiËnine & Leasing d.o.o.) was established in 1990 to conduct the bank's real estate operations including trading, engineering and consultancy. SKB Real Estate & Leasing's leasing operations were transferred to CA SKB Leasing Ltd. in As at 31 December 1999, the company had total assets of SIT 7,479 million and a profit before tax of SIT 95.4 million. The registered office is located at Slovenska cesta 54, 1000 Ljubljana. This subsidiary is 100% owned by SKB Banka d.d. SKB Investment Co. Ltd. (SKB Investicijsko podjetje d.o.o.) was established in 1990 and carries out the bank's property investment activities including investment in the Slovenian construction industry. As at 31 December 1999, it had total assets of SIT 5,985 million and a profit before taxation of SIT 23.4 million. Its registered office is located at Slovenska cesta 56, 1000 Ljubljana. The subsidiary is 100% owned by SKB Banka d.d. but will be sold in mainly because of the new legislation requiring changes in relations between companies within the Group and the bank, SKB Banka decided to sell this subsidiary company, even though it was profitable in SKB Faktor Ltd. (SKB Faktor d.o.o.) started operating on 1 January The takeover of UBK Banka by SKB was formally completed in December 1998 when UBK's shareholders became SKB's shareholders. UBK's retail, commercial, investment and international operations were fully integrated into the structure of SKB Banka during Factoring activities, started by UBK in 1998, were transferred to a subsidiary company SKB Faktor Ltd., established in December 1998 from SKB's subsidiary RI-NA Ltd. As at 31 December 1999, SKB Faktor had total assets of SIT 1,184 million and a profit before taxation of SIT 346,000. Its registered office is located at Dalmatinova 2, 1000 Ljubljana. The subsidiary is 100% owned by SKB Banka d.d. SKB Aurum Ltd. (SKB Aurum d.o.o.) was established in The company provides custodial and safe deposit facilities, precious metal trading and the granting of mortgage and Lombard (collateralised) loans. As at 31 December 1999, 37

39 it had total assets of SIT 1,938 million and a profit before taxation of SIT 417,000. Its registered office is located at Slovenska cesta 58, 1000 Ljubljana. SKB Banka maintains a 76.7% share in Aurum Ltd. SKB Trading Ltd. (SKB Trading d.o.o.) The activities of this subsidiary are gradually being wound down, and the subsidiary will slowly cease to exist. SKB directly owns a 6% stake (and indirectly 30% through SKB Aurum, and 24% through SKB Real Estate & Leasing). Plasis - Payment Systems Ltd. (Plasis - plaëilni sistemi d.o.o.) was established in This associate issues SKB's Eurocard and Visa credit cards and processes credit card transactions for SKB's customers. As at 31 December 1999, Plasis had total assets of SIT 1,003 million and a profit before taxation of SIT 47.5 million. Its registered office is located at Slovenska cesta 56, 1000 Ljubljana. SKB Banka d.d. owns a 45% share of this company. Taking a direct stake in CA-SKB Leasing Ltd. The new Law on Banking, passed in February 1999, imposed limitations in regard to stakes held by associated companies. In July 1999 SKB bought 40% of this profitable Ljubljana-based limited liability company, the stake previously owned by SKB's subsidiary SKB Real Estate & Leasing Ltd. The other two shareholders are Creditanstalt Leasing, Vienna (40%), and DEG - Deutsche Investitions- und Entwicklungsgesellschaft, Cologne (20%). CA-SKB Leasing was established in 1994 as a joint venture between SKB Real Estate & Leasing Ltd. and Creditanstalt Leasing, an Austrian company. It is among the largest leasing companies in Slovenia. CA SKB Leasing Ltd. (CA SKB Leasing d.o.o.) is involved in the leasing of industrial equipment and commercial and passenger vehicles. As at 31 December 1999, the company had total assets of SIT 12,537 million and a profit before taxation of SIT 1,611 million. Its registered office is located at Slovenska cesta 54, 1000 Ljubljana. Atena Investment Fund Management Co. Ltd. (Atena PooblašËena druæba za upravljanje investicijskih skladov d.o.o.) was established in It is an authorised investment management company, which operates three investment funds. Since 1994 these funds have been involved primarily in collecting vouchers issued by the Slovenian government during the privatisation process. In October 1998, the three privatisation investment funds of Atena began to be traded on the Ljubljana Stock Exchange. Atena's registered office is located at Slovenska 56, 1000 Ljubljana. SKB Banka d.d. has a 40% share in this company. Generali SKB d.d. Ljubljana (Formerly Ljubljanska zavarovalnica d.d. - The Ljubljana Insurance Company, acquired by SKB Banka in 1994 and inactive until Sept. 1996) is a joint-stock company and a joint-venture with the Austrian insurance company EA Generali AG. Since February 1997 it has been operating jointly with EA Generali selling insurance products through SKB's branch network. The insurance company's registered office is located at KræiËeva 3, 1000 Ljubljana. SKB Banka d.d. maintains a 25% share in this joint-venture. OTHER CAPITAL INVESTMENTS SKB's other capital investments can be divided into: SKB's stakes in various companies SKB Banka has minority holdings and voting rights in several Slovenian companies and foundations for strategic reasons. Takeovers (mostly debt/equity swaps) In the past, debt/equity swaps occurred when bad loans were converted into equity. The percentage of such shareholdings has increased due to the current deteriorating circumstances in the Slovenian economic sector. SKB Banka might be involved in the restructuring of some of its corporate borrowers through debt/equity swaps. 38 Stakes in investment funds SKB Banka, together with other international finance institutions, including the EBRD and the International Finance Corporation, invested in the Slovenian Development Capital Fund (Slovenski razvojni kapitalski sklad) which invests in medium-sized private sector companies, and Horizonte which provides investment capital to small and medium-sized Slovenian businesses.

40 FINANCIAL ANALYSIS CONSOLIDATED INCOME STATEMENT SKB Group incurred a consolidated net loss of SIT 5.3 billion at the end of The loss, which was predicted by the Management Board in an announcement in November 1999, arose primarily as a result of increased provisioning for bad and doubtful debts. The consolidated operating profit amounted to SIT 15.6 billion, a 4% decrease compared with 1998 due to a significant fall in the interest margin. Net interest income amounted to SIT 9.8 billion in 1999, a 6% decrease compared with 1998 (SIT 10.5 billion). The main reasons for this net interest income decrease were: - The net interest margin (net interest income on average total assets) decreased from 3.9% to 3.4% by the end of 1999, due mainly to decreasing lending rates. - A high proportion of interest income (in 1999 SIT 3.8 billion and in 1998 SIT 2.3 billion) was suspended due to the reclassification of loans during the cleaning of the credit portfolio. Net fee and commission income amounted to SIT 3.2 billion, a 9% increase on last year (SIT 3 billion). The majority of this income was generated through international payments, fees from contracts, guarantees, domestic payments and bank cards. Net fee and commission income is expected to increase due to the gradual transfer of corporate payments to the banks (previously executed through the state-owned Agency for Payments). Net trading income amounted to SIT 756 million and was almost the same as in 1998 (SIT 755 million). 000 SIT 31 Dec Dec Net trading income 756, ,095 Foreign exchange (573,735) (465,885) Gains from derivatives (9,179) 7,301 Net gains from dealing in securities 698, ,895 Net gains from dealing in foreign currencies 605, ,784 Other operating income amounted to SIT 1.8 billion, a 12% decrease over last year due to a lower net profit from operations of the subsidiary companies. The bank will sell surplus fixed assets, and will divest itself of two subsidiary companies (SKB Investment Company and Aurum), as well as cease activities which are not directly connected to the bank's core business. 000 SIT 31 Dec Dec Other operating income 1,803,255 2,055,385 Income from previous years 368, ,651 Rents receivable 210, ,896 Non banking services 6,427 5,868 Profit on disposal 987,387 1,334,229 Other 230, ,741 Operating expenses in 1999 for the SKB Group were SIT 11 billion, 9% higher than last year. Taking into account inflation of 8%, operating costs have remained similar to those in The increase is due to rising staff costs of the SKB Banka Group (expenses related to the take over of UBK's employees at the beginning of 1999 after the acquisition of UBK) and higher depreciation costs (see breakdown of operating expenses on the next page). 39

41 000 SIT 31 Dec Dec Operating expenses 11,045,285 10,135,170 Staff costs 5,027,386 4,387,258 Professional services 254, ,044 Advertising and marketing 427, ,210 Administrative expenses 60,722 79,724 Depreciation 1,496,198 1,289,355 Software development costs 238, ,042 Operating lease rentals 422, ,718 Other 3,117,814 2,888,819 Bad and doubtful debts expense (net) amounted to SIT 9.9 billion in 1999, significantly higher than last year due to the cleaning of the credit portfolio, mostly in the corporate and international banking departments. The increase is a result of increased bad and doubtful debts expense and write-offs on bad loans.the majority of these bad and doubtful debts are covered by mortgages over property. The bank has instituted a more efficient and accelerated programme for the collection of bad debts, and it is anticipated that a large percentage of debts will be repaid. Collection of overdue claims is slow due to long lasting court procedures. Nevertheless, during 1999 the bank was successful in the collection of some retail bad debts, recovering SIT 1.4 billion. 000 SIT 31 Dec Dec Bad and doubtful debts expense 9,877,930 3,826,565 Amounts due to other banks - Specific provision 358,600 (53,169) Loans and advances to customers - Specific provision 5,389,477 1,703,485 - General provision 917, ,847 Investment in associates - Specific provision 943, ,847 Dealing securities - Specific provision 2,337 1,283 Other assets - Specific provision 809, ,475 Commitments and contingents 436,748 64,953 Other provisions - Specific provision 71,792 (315,568) - General banking risk provision for potential FX losses 15,012 - Bad debts written off directly 998,113 1,255,621 Recoveries on loans previously written off (64,100) (207,209) 40

42 CONSOLIDATED BALANCE SHEET At the end of 1999, total assets of the Group amounted to SIT 302 billion, a 7% increase compared with In 1999 the market share of SKB Banka was 11.7% in terms of total assets. ASSETS Cash and balances with central banks amounted to SIT 11 billion, a 53% increase compared with 1998 due to increased mandatory reserve deposits and higher balances with the central bank. Treasury bills and bonds amounted to SIT 36.5 billion, 27% higher than in 1998 due to the changed method of calculating the foreign exchange reserves requirement of banks (60% of the foreign exchange reserves must be placed in treasury bills). Dealing securities at the end of 1999 increased from SIT 9.7 billion to SIT 12.1 billion due to an increased investment by the bank in bonds and shares of blue-chip companies. Loans and advances to customers at the end of 1999 were SIT 174 billion, about the same as in SKB has historically been a significant corporate lender. This led to asset quality problems, and the Bank had to make substantial annual provisions. The ratio of non-performing loans to total loans rose from 9.2% at the end of 1998 to 12.2% at end of 1999, following a thorough portfolio review. During the first months of the year the bank was very active in lending. This was later followed by a decrease in corporate lending, owing to poor liquidity. Nevertheless, the total volume of loans in the January-December period grew by SIT 1.1 billion, mainly as a result of an increase in long-term loans (4.5% higher compared with the beginning of the year). The volume of long-term loans increased from 57.5% to 60.5% whilst short-term loans fell from 42.5% to 39.5% primarily due to a decrease in short-term foreign currency loans to corporate customers. Property and equipment amounted to SIT 20.2 billion, a 26% increase compared with 1998 due to the purchase of premises and a repurchase of premises previously rented by the bank. LIABILITIES Other deposits amounted to SIT 980 million, a significant decrease compared with 1998 due to a decreased volume of certificates of deposits. Liabilities due to customers amounted to SIT 194 billion at the end of 1999, a 2% increase on last year. At the end of 1999 the bank's market share was 10.8%. The most notable growth was recorded in retail sight tolar deposits and short-term foreign exchange deposits and corporate short-term tolar deposits and foreign exchange deposits due to the introduction of foreign currency accounts for corporates. 41

43 Debt securities in issue amounted to SIT 12 million in 1999, 66% higher than last year due to the SKB banka 4th bond issue in June amounting to DEM 50 million. Other borrowed funds amounted to SIT 46 billion, an 81% increase on the same period last year due to increased foreign borrowings. In May 1999 SKB Banka raised a syndicated loan on the international capital markets amounting to EUR 80 million to be used primarily for foreign exchange lending to domestic and foreign clients and partly for the repayment of previously raised foreign loans abroad. In September 1999, SKB Banka raised an EBRD credit line for housing loans amounting to EUR 10 million in two tranches with a 10-year maturity. Shareholders' equity amounted to SIT 25.7 billion, a 12% decrease over last year due to the loss incurred at the end of The SKB group's capital adequacy ratio (10.1%) at 31 December 1999 remains in line with BIS requirements. SKB BANKA'S BUSINESS POLICY In the next strategic three-year period, the bank's activities will be oriented towards satisfying the needs and expectations of shareholders, clients and employees. The bank will adapt its services to the individual needs of customers and to market conditions as much as possible. Sales efforts will focus on optimising total income and they will be supported by extensive marketing activities. State-ofthe-art distribution channels will be adapted to clients' requirements. The bank will pursue its intensive search for an appropriate strategic partner in Slovenia and/or abroad, in accordance with Slovenian and global trends. SKB Banka will invest in the equity of other companies in which it is strategically interested or where profit is expected. A substantially greater emphasis will be given to risk management. The bank's internal operations will also positively contribute to the achievement of the strategic goals. SKB Banka's plan for 2000 Key tasks for the implementation of the bank's basic objectives are defined in the plan for 2000: setting up an efficient system of bad debt collection; spreading, diversifying and improving the quality of the bank's portfolio; successful mergers with, or acquisitions of, selected Slovenian banks; systematic marketing of products in target market segments of retail clients; establishing a pension fund; efficient management of all types of risk and optimising of assets and liabilities structure; disinvesting in non-strategic equity investments; equity investments in the markets of the former Yugoslavia; completing the information system project (Customer Lending and Retail Banking modules are being developed). 42

44 Report of the Auditors and financial statements for the year ended 31 December