Drenaje Subterráneo

The financial statements have been prepared assuming

the Group will continue its operations as a going concern for the foreseeable future and will be able to meet its liabilities as they become due. The Management Board and senior management of the Bank and the management bodies of Group companies positively assessed the Group’s ability to continue as a going concern. In this assessment, a wide range of data on current and future operating conditions was considered. The Group incurred operating losses in both 2011 and 2012, and the management considers it likely that there will also be a net loss in 2013. These operating losses

are a direct result of the ongoing financial crisis and the

economic recession. The economic conditions include

high unemployment, financial difficulties for businesses,

including their insolvencies, and declining marketability and pricing of assets, including assets pledged as collateral for the Group’s loans. There is evidence that the economic recession will continue and the eventual economic recovery will be slow, which may result in material additional future losses for the Group.

The financial consequences of the economic recession

on the Group have been partially mitigated by disposals of some non-core assets and an increase in capital in 2011 and a repurchase of debt at a gain in 2012. Also, the Group maintains a manageable loan-to-deposit ratio, a satisfactory asset/liability management position, and a

reasonable net interest margin that is sufficient to cover

administration costs. In October 2012, the Bank Assets Management Company (BAMC) was created by the state. Non-performing assets will be taken over by the BAMC in exchange for government guaranteed bonds.

approved, is expected to be implemented in 2013. The

Group’s capital level at the end of 2012 was adequate, but

additional capital is needed. A further increase in capital is expected in 2013 based on consultations with state

officials and information available about the state’s plans

for recovery of the banking sector in Slovenia (the state is the controlling shareholder of the Bank).

The Management Board and senior management of the Bank and the management bodies of Group companies are aware that there are inherent uncertainties about the future that are outside the control of the management. These relate to the future impact on the Group of the continuing economic recession, which cannot be fully estimated, and the risk that unanticipated events could

occur that might have a material adverse effect on the Group’s financial position.

So far, Nova KBM has had steady support from the regulator and its main owner, i.e. the government. In accordance with the Ordinance on the Management of Capital Shares of the Republic of Slovenia in Nova KBM

d.d (OdUKNNKBM - Official Gazette of RS, No. 47/2012),

Nova KBM is considered a systemic bank supported by the main owner – the Republic of Slovenia. In the aforementioned ordinance, the Bank’s main owner declared its understanding that a successful capital raising of the Bank would also be fundamental to the

programme of financial consolidation in the Republic of Slovenia and, consequently, relevant to the government’s financial position and its credit rating. The government’s

last capital raising took place at the end of 2012 (this

capital raising was completed in April 2013, after the hybrid instrument was converted into Bank equity). The Republic of Slovenia provided the European

Commission with the restructuring programme for

the Group, defining the relevant activities and one-time need for additional financing so that the Group would

become independent in its operations and development on the basis of capital accumulation in the form of

retained earnings. The programme was the result of intensive cooperation between Nova KBM and the Ministry of Finance. The Group continues with activities

for improvement of its capital adequacy in line with the

restructuring plan for the capital raising in mid-2013 that

has been presented to the European Commission. After the restructuring process, which was initiated in

2012, the organisation will be more economical and

efficient. Certain activities carried out by the Group will be

merged within the companies in the Group or transferred to the Bank, while some less relevant activities are expected to be sold.

Within the Slovene banking system, Nova KBM and PBS have a favourable structure of assets and liabilities, with a considerable market share in deposit business (especially with households) and an accessible and widespread network for operations with the households

segment. The Group carries out diversified scenarios of liquidity management on a monthly basis. Based on these scenarios, it can assure adequate liquidity by considering

the assumptions regarding normal functioning, as well as extraordinary situations. According to the results of basic

and stressful scenarios on two difficulty levels, the Group has a sufficient amount of liquidity reserves.

In the Spring Forecasts for 2013 Economic Trends (March

2013), experts from the Slovene Institute of Macroeconomic

Analysis and Development (UMAR) predicted that

Slovenia will start to emerge from the crisis in 2014.

According to UMAR, the Slovene banking position will

probably stop declining by the end of 2013, thanks to the adoption of measures for restructuring the bank balance

sheets. Establishment of the Bank Assets Management

Company (BAMC) and implementation of regulations and responsibilities of BAMC under the Measures of the Republic of Slovenia to Strengthen the Stability of Banks

Act (Official Gazette of RS, No. 105/2012) will ensure a

smooth launch of activities aimed at improving the banks’

2.6

ChanGes in the layouts of

financial statements

The amended Regulation on Books of Account and Annual Reports of Banks and Savings Banks was published in spring 2012, introducing several changes in the layouts

of financial statements. The Group used these amended layouts for the first time for its financial statements as of

30 June 2012. The comparability of data included in this

financial report has been ensured.

Changes in the statement of financial position are set out

below:

• other financial assets (cheques, claims for fees and

commissions, the majority of other receivables) were

transferred from the item 'Other assets' to the item 'Loans and advances'

• other financial liabilities (liabilities for fees and

commissions, the majority of other liabilities) were

transferred from the item 'Other liabilities' to the item 'Financial liabilities measured at amortised cost' • current and deferred tax assets and tax liabilities are

now disclosed in the net amount, and not gross, as was the case before, resulting in a decrease of total assets

set out in the Group’s statement of financial position as

of 31 December 2011 included in this report.

Changes made to the statement of income items do not

have any impact on profit or loss, but only on the following

notes to the statement of income:

• realised gains and losses on other financial assets are

included in realised gains and losses on loans (Note 11)

• impairments of other financial assets were excluded from the item 'Impairment of other assets' and included in the item 'Impairment of loans and other financial assets' (Note 19).

Other accounts were not affected by the aforementioned

changes.

Reclassifications of statement of financial position and statement of income items were insignificant in value terms.

3

siGnifiCant aCCountinG

poliCies

Adopted accounting policies have been consistently applied in both reporting periods presented in these

consolidated financial statements.

3.1 consolidation