The very difficult business year of 2009 is behind us. The global economic crisis spread to almost all areas of business. We had to face major changes, some of them unexpected, for which reason scenario management was even more in the foreground.

While early in 2009, the main focus of the financial markets remained liquidity, as in the last quarter of 2008, this focus changed during the course of the year as various instruments and measures used by stakeholders in the financial and capital markets started to show effects. The focus then shifted to the stabilisation of interest income and credit risk management. The dramatic slump in the Euribor reflected very negatively on the net interest income of banks, Banka Volksbank d.d. included.

Net interest income fell the most in the first quarter of 2009 (in Volksbank by 20 % compared to the last quarter of 2008), but the situation improved significantly during the second half of the year, as the measures we identified at the end of 2008 and implemented gradually in the course of 2009 worked quite well. By year-end, the fall was almost, but not entirely, offset as the bank recorded a fall of 3.8 % in its nominal net interest income. Fee income also fell compared to 2008, by more than 12 %, but this drop was constant throughout the year. The main reason for this reduced income was the sales of certain investment products that were slower than in 2007 and 2008 due to the changed market conditions.

The bank’s total income fell by 8.6 % compared to 2008. The bank managed to significantly offset this drop in income by taking cost-saving measures and strictly controlling its expenses, which it managed to reduce by 5.8 %.

This crisis, which started in 2008 in the financial markets, spilled over to the real sector as expected. We were prepared for this and, working closely with our clients, adjusted our business solutions to fit as well as possible their needs. The bank stuck to its strategy adopted in 2008 of reducing significantly the unsecured loans in its portfolio.

In practice, this meant that we focused even more on the strategically most important business segments: the retail segment and the small and medium-sized corporate segment. Despite the difficult conditions we thus increased the volume of loans to small and medium-sized companies by 15 %, while the volume of loans to all companies remained at the 2008 level. Loan volume in the retail segment increased only slightly.

As at year-end, deposits were higher than a year ago, but their volumes fluctuated significantly over the course of the year. This is mainly attributable to the fact that the bank has a very stable liquidity structure (long-term refinancing included), for which it did not have to attract deposits by offering aggressive interest rates to compensate for any repaid loans raised on the inter-bank market. This caused a slight outflow of deposits, but we were satisfied to see that the response of our clients to changes in interest rates, in particular those from the retail segment, was not very volatile, and that what counts the most is trust and a long-term relationship with the bank.

All the efforts and measures notwithstanding, we were not able to completely escape the crisis that hit our clients and required increased impairments of loans. This was somewhat mitigated due to the sound loan portfolio collateral.

As instructed by Banka Slovenije, the supervising body, the bank changed the method of calculating general impairments associated with credit risk, and consequently significantly increased them (EUR 2 million) – to reflect not only the current, but also the past growth in loan volume. This of course caused a one-off surge in impairments that affected the 2009 profit, which was EUR 454 thousand in 2009.

As the entire banking sector, Volksbank faced very difficult conditions in 2009: on the one hand, there was the fall in income, mainly in the first half of the year, and on the other, there was the increase in credit risk. Bank management and employees are aware that such conditions require rapid and flexible action, as well as strong partner relationships with clients. We believe that our organisation and staffing are such that they will allow the bank to operate adequately and with success also in such critical conditions.

In this context, we must not lose sight of our long-term objectives and client relationships, which are the most important.