Contents. General Information of AS Sampo Pank 2. Chairman s Statement and Development Trends for Management Report

Transcription

1 AS Sampo Pank Annual Report 2006

2 Contents General Information of AS Sampo Pank 2 Chairman s Statement and Development Trends for Management Report Estonian Economic Environment Important Banking Events Financial Ratios Business Results of the Consolidated Group of AS Sampo Pank Description of the Consolidated Group of AS Sampo Pank Shareholders Dividend Policy Development Costs Remuneration of the Management and Supervisory Board Remuneration and the Average Number of Employees Internal Control Systems Ratings Lawsuits Corporate Social Responsibility 15 Financial Statements 16 Declaration of the Management Board 59 Approval of the Supervisory Board 60 Additional documents to the Annual Report Auditor s Report 61 Proposal for the Distribution of Profit 62 1

3 General Information Sampo Supervisory Board of AS Sampo Pank Georg Schubiger, Chairman of the Supervisory Board Gintautas Galvanauskas, Member of the Supervisory Board Jukka Edvin Ohls, Member of the Supervisory Board Markku Pehkonen, Member of the Supervisory Board Risto Tornivaara, Member of the Supervisory Board Management Board of AS Sampo Pank Aivar Rehe, Chairman of the Management Board Ivar Pae, Chief Financial Officer Indrek Puskar, Director of Corporate Services Margus Žuravljov, Director of Business Development Tõnu Vanajuur, Director of Personal and Retail Banking 2

4 of AS Pank Contact information Business name: Address: Activity: AS Sampo Pank Narva mnt 11, Tallinn, the Republic of Estonia Credit institutions Register code: Register: Commercial Register of the Republic of Estonia Filing date: 31 May 1996 Phone: Fax: Auditors Hanno Lindpere, authorised auditor since 1998 Tiina Sõmer, authorised auditor since 1998 Ernst & Young Baltic AS Rävala 4, Tallinn Register code: Abbreviations used in the present Annual Report are as follows: Sampo Pank or the Bank in the meaning of AS Sampo Pank; The Group in the meaning of the Consolidated Group of AS Sampo Pank. Reporting period: The balance sheet date of the report is 31 December The reporting currency is Estonian kroon and figures are presented in millions of kroons. 3

5 Chairman s Statement And Development Trends For 2007 Last year witnessed strong economic growth in Estonia. It also meant fast growth in the entire financial sector, including banking. Demand for various loan, savings and investment products, as well as high-quality settlement services increased significantly was a very successful year for Sampo Pank. We achieved record growth in business volumes, as well as in the number of clients. Almost a double increase in profit over the year to EEK 333 million was perfectly in line with our objective of effective growth. In 2006, Sampo Pank consolidated its third position in the Estonian banking market. The Bank s assets increased by 67%, exceeding EEK 23 billion. The number or our clients amounted to at the end of the year. The significantly higher growth figures compared with the average of the market indicate that Sampo Pank has the reputation of a reliable financial partner whose high-quality and professional services are appreciated by customers. The rising mortgage market favoured active lending and offering attractive home loan solutions to customers. The total volume of loans to retail customers increased by 66% over the year, amounting to EEK 8.8 billion at yearend. Due to new attractive depositing opportunities and competitive deposit interest rates, the total volume of client deposits increased by 50 %, reaching EEK 12.6 billion. In corporate banking, we offered various new financing and settlement solutions. As a result, loans to corporate customers increased by 66%, amounting to EEK 9.2 billion, and corporate deposits grew by 83.1%, totalling EEK 8.6 billion at the end of In order to improve our service level, we made considerable investments in the further development of the ATM and office network. In cooperation with our partners we are implementing a project on the establishment of an extensive ATM network in the Baltics. According to the project 400 new ATMs will be set up in the Baltic countries in coming. Sampo Pank s office network comprised 19 offices at year-end. In August we opened our new Internet Bank, which was quickly adopted by customers due to its user-friendliness. On 9 November 2006, Sampo plc signed an agreement on the sale of the banking and investment services business line to Danske Bank. We are convinced that Sampo Pank s affiliation to the leading Nordic banking group will open up new opportunities for both our clients and employees. Development Trends for 2007 In client service, the Bank s main objective for 2007 is to increase considerably both the number of settlement clients and the volume of settlement services. One of our priorities is to provide fast and high-quality service to our customers. We also aim to increase the volume of card payments, as well as payments made via electronic channels. In the conditions of continued rapid growth of the Estonian loan market in 2007, the Bank aims to increase its market share in the segments of retail and corporate banking, as well as in the public sector segment. In lending, the Bank intends to concentrate on the further development of credit risk management methods in order to maintain high quality of its assets also in the future. Considering the growing demand for various savings and investment products, the Bank intends to offer investment solutions provided by the companies of the Group. In connection with the sale of Sampo Group s banking and investment services business line to Danske Bank, Sampo Pank will start to integrate with the technological platform of Danske Bank and bring its business processes in line with the relevant processes of Danske Bank. 4

6 For our customers, this integration will primarily mean a wider range of banking services. Retail customers will be offered a more diversified choice of loan and savings products and corporate customers will be provided new payment and trade financing opportunities. In recent, significant changes have been made in the regulations governing financial intermediation. In 2007 the Bank intends to carry on development activities related to the implementation of the requirements of Basel II and MiFID. In the medium term, the Bank aims to generate value by profitably increasing its market share in the main business segments. Cost-efficient business operations and adherence to prudent business practice serve this goal. Aivar Rehe Chairman of the Management Board of AS Sampo Pank In cooperation with our partners we will continue the establishment of the ATM network both in Estonia and the Baltics. 5

7 Management Report Estonian Economic Environment A rapid growth 2006 was another year of strong global growth - the world economy expanded at the fastest pace over the recent three decades. Estonia continued to be among the most dynamic economies in the Baltic Sea region and Europe with its growth of 11%. Reasons for such a strong economic performance can be seen in the current global upswing as well as the economic reforms of earlier. Estonia s economy benefited from high foreign investor confidence as well as the integration with the European financial market. Brisk growth contributed to economic well-being and raised optimism about the future. This was reflected in a considerable expansion in consumption. At the same time, investment activity remained very high and Estonia maintained its leading position in Europe regarding investment per capita. Strong economic growth also boosted tax revenues, resulting in a solid surplus of government finances. Bottlenecks in production and labour supply that became evident over the year indicated, however, that the economy was running at the ultimate limits of its capacity. This confirmed that the economic expansion had reached the peak in Though the pace of economic growth is set to slow in coming, the high level of investment that has boosted productivity growth and competitiveness in the international markets implies that Estonia has good prerequisites for long-term sustainable growth. Developments in the labour market urge structural changes The vigorous economic expansion contributed to a tightening of the labour market last year. Employment increased by a record-high increase of 6% and unemployment fell rapidly. As a result, most branches of economy faced deepening problems with finding skilled labour. Tensions in the labour market are unlikely to ease in coming, as the population is ageing and attractive working opportunities elsewhere in Europe support the outflow of labour. The tight labour market speeded up growth in wages. While rapidly growing wages boosted disposable income, they also contributed to higher prices, as increased purchasing power enabled companies to pass part of their higher energy and wage costs on to consumers. Altogether it resulted in the acceleration of inflation to 4.4%, leaving Estonia outside the 6

8 eurozone. Estonia s economic growth, which remains faster than the EU average, indicates that inflation will remain above the level required for the adoption of the euro for some time. Strong domestic demand spurred growth in imports, resulting in the economy s deteriorated external balance. The current account deficit widened to 12% of GDP. Growth in exports, which exceeded that of imports in the prior year, weakened. However, reasons for the less powerful performance of the export sector should be looked for rather in the impressive growth rates of recent than in deteriorated competitiveness. Nevertheless, it is clear that the rising domestic cost level will pose new challenges to the export sector, which is already experiencing intensified global competition. These will speed up changes in the economic structure towards a knowledgedriven and higher value-added economy. Considering our limited natural and labour resources, it is the only way to ensure the economy s competitiveness and continued growth in wealth. both households and the corporate sector in recent in combination with rising euro interest rates, however, indicate that the rate of increase in credit growth should become less robust. Popularity of savings and investment products Savings and investment products have developed very fast in recent. Though bank deposits have maintained a major position in household savings, the popularity of alternative savings and investment products is increasing. Long-term saving, which was actually triggered by the pension reform, has expanded steadily. Saving both in mandatory and voluntary pension funds has increased considerably. Rising incomes also support demand for other investment services. In recent, saving in investment deposits, investment funds as well as life insurance has expanded significantly. Rising interest rates have had no major impact on borrowing Strong economic growth facilitated demand for both corporate and retail credit more than estimated in early The impact of slowly but steadily increasing euro interest rates on borrowing remained still modest. The fastest growth was still recorded in household loans, as the improved financial situation and increased confidence in the future favoured active borrowing both for the purpose of consumption and home purchase. The debt service ability of those households already having financial liabilities remained good, as the rise in income compensated for the increase in debt service costs deriving from higher interest rates. Though the credit market remained buoyant throughout the year, some signs of levelling out in credit growth could be noticed. This can primarily be attributed to a weakening demand in the housing market, as the very rapid price rise, which had lasted until spring, started to restrain the number of buyers. Credit demand by the corporate sector continued to be strong until the year-end. By economic activity, the financing of construction and real estate purchases grew most rapidly resulting in a higher than desirable share of real estate loans in the banks loan portfolios. In coming, the economic environment continues to favour strong demand for bank credit. The very rapidly grown indebtedness of 7

9 Important Banking Events On 3 January 2006, the merger of AS Sampo Liising with AS Sampo Pank was completed. Sampo Pank continued using the brand name of Sampo Liising in providing leasing services to its customers. On 4 January, the Supervisory Board of Sampo Pank adopted a resolution to recall Härmo Värk from the Bank s Management Board and to elect Aivar Rehe as a member of the Bank s Management Board. Aivar Rehe who was appointed Chairman of the Management Board of Sampo Pank commenced work on 16 January Härmo Värk continued work as a member of the Supervisory Board of Sampo Pank. On 19 April, Sampo Bank plc, the sole shareholder of Sampo Pank, adopted a resolution to increase the share capital of Sampo Pank by EEK 200 million by issuing 20 million new shares. All the issued 20 million new shares were subscribed for by Sampo Bank plc, the sole shareholder of Sampo Pank. On 17 August, Sampo Pank, Nordea Bank and the service provider First Data International signed a cooperation agreement aimed at setting up a new ATM network in the Baltics. Under the cooperation agreement altogether 400 ATMs will be put up in the Baltics in coming. On 23 August, Sampo Pank s new Internet Bank, which is safer and more user friendly, was opened for customers. On 10 October, the Supervisory Board of Sampo Pank elected Tõnu Vanajuur as the fifth member of the Management Board of Sampo Pank. From November Tõnu Vanajuur started to perform the responsibilities of Personal and Retail Banking Director. Member of the Management Board and the former Personal and Retail Banking Director Margus Žhuravljov started to manage the launching of retail banking business in Profibank (St. Petersburg), which had been acquired by Sampo Bank plc, the sole shareholder of Sampo Pank. On 9 November, Sampo plc signed an agreement on the sale of all the shares of Sampo Bank plc, the sole shareholder of Sampo Pank, to Danske Bank A/S. Sampo Pank continues to operate in the Baltics under its current name. On 12 December, Sampo Bank plc adopted a resolution to recall Härmo Värk from the Supervisory Board of Sampo Pank. Härmo Värk resigned from his position in Sampo Group. On 13 December, an increase in the share capital of Sampo Pank by EEK 225 million was entered into the commercial register. All the issued 22.5 million new shares were subscribed for by Sampo Bank plc, the sole shareholder of Sampo Pank. On 1 February 2007 Danske Bank Group s purchase of Sampo Bank from Sampo Group was completed. Danske Bank is the sole owner of Sampo Bank plc. 8

10 Financial Ratios In millions of kroons, except for efficiency ratios and share figures Group Bank For the period Total income Net interest income Net fees and commission income Operating expenses Credit loss Net profit Total at period-end Total assets Loan portfolio Deposits Equity Share of net loan portfolio in assets 80.18% 80.07% 79.92% 79.91% Loan portfolio / deposits % % % % Equity multiplier Performance indicators (in kroons) Basic earnings per share Book value at period-end Efficiency ratios Return on equity 26.11% 23.07% 26.41% 23.65% Return on assets 1.82% 1.47% 1.84% 1.49% Assets utilisation 6.90% 6.79% 6.83% 6.60% Interest income on average assets 4.84% 4.91% 4.84% 4.77% Interest expenses on interest-bearing liabilities 2.53% 1.91% 2.53% 1.91% Net interest margin 2.79% 3.19% 2.77% 3.04% Interest spread 2.30% 2.99% 2.31% 2.86% Profit margin 26.41% 21.61% 26.87% 22.58% Cost/income ratio 54.81% 67.99% 53.56% 66.31% Definitions of key indicators: Total income = net interest income + net fees and commission income + net profit from financial transactions + other operating income Net interest income = interest income - interest expense + net profit from securities designated at fair value through profit or loss + net profit (loss) from derivative financial instruments Equity multiplier = average assets of the period / average equity of the period Basic earning per share = net profit / weighted average period-end number of shares Return on equity = net profit / average equity of the period Return on assets = net profit / average assets of the period Assets yield = (total income + interest expense + fees and commission expense) / average assets of the period Interest income on average assets = interest income / average assets of the period Interest expenses on average interest-bearing liabilities = interest expenses / average interest-bearing liabilities of the period Net interest margin = net interest income before credit losses / average assets of the period Interest spread = interest income / average interest-earning assets of the period - interest expenses / average interest-bearing liabilities of the period Profit margin = net income / (total income + interest expense + fees and commission expense) Cost / income ratio = operating expenses / total income Computation of the efficiency figures is based on the financial year balance sheet averages. 9

11 Business Results of the Consolidated Group of AS Sampo Pank Income statement analysis The Group s net profit for 2006 totalled EEK million (2005 EEK m) an increase of 93.2% from the prior year. This increase is primarily attributable to the fast growth in income and improved cost efficiency. Return on equity and return on assets were 26.1% (23.1%) and 1.8% (1.5%), respectively. The cost/income ratio was 54.8% (68.0%). Income The Group s total income amounted to EEK million at the end of 2006 (EEK m), experiencing an increase of 44.0% over the prior year. The composition of income was as follows: net interest income, 58.7% (63.6%); net fees and commission income, 21.9% (20.5%) and other income 19.4% (15.9%). Net Interest Income The Group s net interest income totalled EEK million (EEK m), an increase of 32.9% compared with last year. Interest income amounted to EEK million (EEK m), a gain of 59.4%. This gain is primarily attributable to the fast growth of the loan portfolio. Interest expense totalled EEK million (EEK m), a rise of 105.7%, largely as a result of higher base rates and the increased volume of borrowed funds. Return on interest earning assets decreased to 4.8% (4.9%). Expense on interest bearing liabilities was 2.5% (1.9%). Net interest margin before credit losses was 2.8% (3.2%). Net Fees and Commission Income The Group s net fees and commission income totalled EEK million (EEK m), a gain of 54.0% compared with the prior year. This gain can be largely explained by the increased number of payments and concluded loan agreements, as well as growth in assets under management. Fees and commission income totalled EEK million (EEK mln), rising 43.8% from the prior year. Fees and commission expense amounted to EEK 55.6 million (EEK 46.6 m), representing a 19.3% increase over the year. Other Income The Group s other income totalled EEK million (EEK 87.7 m), a 75.6% rise from the prior year. Net profit on financial operations comprised 86.5% (78.4%) and other operating income 13.5% (21.6%) of other income. Net profit on financial operations totalled EEK million (EEK 68.7 m), a gain of 93.8% over the prior year. Income from forex-operations doubled, amounting to EEK 72.0 million (EEK 35.3 m). Profit on other financial operations totalled EEK 61.3 million (EEK 33.4 m), an increase of 83.4%. Other operating income amounted to EEK 20.7 million (EEK 19.0 m), a rise of 9.5% from last year. Credit Losses Credit losses totalled EEK 29.3 million in 2006 (EEK 5.3 m). At the same time, EEK 3.6 million (EEK 1.3 m) was recovered from the write-offs of previous. Credit losses and recoveries amounted to EEK 25.7 million (EEK 4.0 m). Operating Expenses The Group s operating expenses totalled EEK million at the end of 2006 (EEK m), an increase of 16.1% compared with last year. The composition of operating expenses was as follows: administrative expenses, 82.1% (84.2%); depreciation, 7.1% (7.0%) and other operating expenses, 10.7% (8.7%). Administrative Expenses General administrative expenses amounted to EEK million at the end of 2006 (EEK m), experiencing an increase of 13.2% over the prior year. Due to the modest growth in administrative expenses the ratio of administrative expenses to average assets improved to 2.0% (2.7%). 10

12 Personnel expenses (i.e.personnel expenses, together with taxes) comprised 60.2% (53.8%) and other administrative expenses 39.8% (46.2%) of general administrative expenses. Personnel expenses totalled EEK million (EEK m), a gain of 26.8% over the prior year, mainly due to the increased number of employees. The average number of employees increased by 14.4%, to 575 persons (503 persons). Other administrative expenses decreased by 2.6% compared to the prior year, amounting to EEK million (EEK m). The largest expense items of other administrative expenses were: communication and data processing expenses, 36.3% (36.0%); advertising expenses, 13.2% (16.4%); rent 14.9% (20.9%) and transportation expenses 9.5% (8.8%). Public utilities expenses increased mainly due to the expansion of the office network. Advertising expenses, as well as communication and data processing expenses were lower than in the prior year. Other Operating Expenses and Depreciation Other operating expenses amounted to EEK 46.7 million (EEK 32.7 m), an increase of 42.9% compared with the prior year. The reasons for this increase were as follows: raising of the contribution rate of the Deposit Guarantee Sectoral Fund and growth in client deposits. Depreciation totalled EEK 31.0 million (EEK 26.4 m), an increase of 17.5%. Balance Sheet Analysis The Group s total assets amounted to EEK 23.4 billion at the end of 2006 (EEK 14.0 bn), an increase of 67.1% over the prior year. Fast economic growth, which encouraged clients to consume and invest actively created a strong demand for loan products. As the growth of the loan portfolio outpaced that of deposits, the ratio of loans to deposits increased to 148% (133%) by the end of the year. Assets The composition of assets was as follows: the loan portfolio, 80.2% (80.1%); liquid assets and securities, 18.4% (18.6%) and all the other assets, 1.4% (1.3%). Securities and Liquid Assets Total liquid assets amounted to EEK 4.3 billion at the end of 2006 (EEK 2.6 bn), an increase of 66.0% compared with last year, partly due to the raising of the mandatory reserve requirement by the Central Bank. The structure of liquid assets was as follows: debt securities and fixed income securities, 47.3% (49.2%); claims and loans to the Central Bank, 34.0% (34.4%); claims and loans to credit institutions, 16.4% (13.6%); cash, 2.4% (2.8%). Lending The Group s gross loan portfolio amounted to EEK 18.8 billion at the end of 2006 (EEK 11.2 bn), an increase of 67.4% over the year. No significant changes occurred in the structure of the loan portfolio in Loans to private persons represented 47.1% (47.6%), loans to private companies 49.2% (49.6%) and loans to other customers 3.7% (2.8%) of the loan portfolio. Loans to private persons reached EEK 8.8 billion (EEK 5.3 bn), an increase of 65.6%. Mortgages, which comprised 86.8% of the loan portfolio of private persons, experienced an increase of 66.7% over the year. Loans to private companies totalled EEK 9.2 billion (EEK 5.6 bn), a gain of 65.7% over the prior year. Credit Losses and Overdue Loans Despite the fast growth of the loan portfolio, the quality of the portfolio, as well as the debt ser vice ability of customers still remained good. The ratio of credit losses to the gross loan portfolio was 0.7% at the end of 2006 (0.9%). The share of overdue loans in the gross loan portfolio was 4.0% (5.0%). Total credit losses made up 16.7% (18.6%) of overdue loans. Other assets Other assets, which primarily comprise tangib le assets, accrued income, shares and other securities, totalled EEK million at the end of 2006 (EEK m), experiencing an increase of 53.4% over the prior year. The volume of shares and other securities (incl. Derivative financial instruments) doubled, amounting to EEK million (EEK 76.1 m). Tangible assets totalled EEK million (EEK m). Liabilities and Owners Equity The Group s total liabilities increased to EEK 21.7 billion by the end of 2006 (EEK 13.1 bn), or 66.2%. Client deposits represented the largest 11

13 share of total liabilities, accounting for 58.3% (64.4%), followed by amounts owed to credit institutions, comprising 29.5% (24.7%). The share of other liabilities made up 12.2% (10.9%) of total liabilities. Client Deposits The total volume of client deposits amounted to EEK 12.6 billion at the end of 2006 (EEK 8.4 bn), an increase of 50.5% over the prior year. Demand deposits represented 40.7% (45.2%) and time deposits 59.3% (54.8%) of total client deposits. Demand deposits totalled EEK 5.1 billion (EEK 3.8 bn), an increase of 35.7% from the prior year. Time deposits amounted to EEK 7.5 billion (EEK 4.6 bn), an increase of 62.6% over the year. The composition of client deposits was as follows: private company deposits, 67.7% (55.6%); deposits of private persons, 19.0% (23.8%), and deposits of other customers, 13.3% (20.5%). The deposits of private persons totalled EEK 2.4 billion at the end of 2006 (2005: EEK 2.0 bn), a gain of 20.2% over the year. Demand deposits increased by 16.9% and time deposits by 22.7%. Private company deposits amounted to EEK 8.6 billion at the end of 2006 (2005: EEK 4.7 bn), experiencing an increase of 83.1% over the year. Demand deposits increased by 39.0% and time deposits by 146.5%. Loans from Banks Loans from other banks amounted to EEK 6.4 billion (EEK 3.2 bn), an increase of 98.5% over the prior year. This increase can be explained by active lending and a more conservative growth in client deposits. Issued Debt Securities and Subordinated Liabilities The volume of issued debt securities reached EEK 1.1 billion at year-end 2006 (EEK 0.7 m), experiencing a gain of 47.9%. The volume of derivative financial instruments increased fourfold to EEK million. Subordinated liabilities totalled EEK million (EEK m), an increase of 80.3%. Owners Equity and Capital Adequacy The owners equity of the Group amounted to EEK 1.7 billion at the end of 2006 (EEK 1.0 bn), a gain of 79.7% over the prior year, due to increased share capital and higher profits. Share capital increased by 89.9% to EEK 0.9 billion by the end of 2006 (0.5 bn), as a result of two share issues arranged during the year. The volume of risk-weighted assets doubled, amounting EEK 20.0 billion (EEK 10.0 bn). Capital adequacy was 11.4% as at the end of 2006 (12.4%). Description of the Consolidated Group of AS Sampo Business name Main business activity 1. Register code 2. Register 3. Registration date Address Ownership % AS Sampo Pank Banking services Commercial Register of the Republic of Estonia Narva mnt Tallinn Sampo Kinnisvarahalduse AS (under liquidation) Property management Commercial Register of the Republic of Estonia Narva mnt Tallinn 100 Sampo Baltic Asset Management AS Asset management services, Fund manager Commercial Register of the Republic of Estonia (The District Court of Tartu, Reg. Dep.) Narva mnt Tallinn 100 There is no difference in the structure of AS Sampo Pank Group and the Consolidated Group of AS Sampo Pank. 12

14 Shareholders of Sampo Pank As at Sampo Bank plc owned 100% of Sampo Pank s shares ( shares). Dividend Policy Sampo Pank intends to retain profit for The total profit will be reinvested in order to finance the development of the business operations of the Bank and its subsidiaries. Development Costs In 2006 Group s development costs amounted to EEK 41.7 million. The Group s development costs budgeted for 2007 total EEK 50.2 million. Remuneration of the Management and Supervisory Board Salaries and fringe benefits paid to the members of the management and supervisory boards of the Group s subsidiaries totalled EEK 12.5 million (taxes included) in the reporting period. Remuneration and the Average Number of Employees Salaries and fringe benefits to the employees of the Group in the reporting period totalled EEK 214 million (taxes included). The average number of persons employed by the Group during the year was 575. Internal Control Systems The internal control system, which covers all the management levels and business activities of the Bank and the Group, is an essential part of the risk management process. The aim of the system is to ensure with reasonable assurance efficient operations of all the companies of the Group in accordance with relevant laws, regulations and good banking practice. An efficient internal control system serves to ensure that decisions are made on the basis of reliable and relevant information and disclosed information is trustworthy. It also informs the management of the necessity to revise the policy statements in accordance with the latest developments in the business environment. The internal control system forms an integral part of the main and supportive processes of the companies of the Group. It is the responsibility of the managers of different levels and business areas to ensure that this system is established and applied efficiently. Each management level performs certain tasks in the internal control system. Detailed control is conducted in the form of daily controls, the functioning of which is ensured by means of random inspection controls (or monitoring). In addition to the daily functioning internal control system, there are several units and bodies in the Bank that perform control functions the Bank s Supervisory and Management Boards, several committees (e.g. the RMC, the IT Steering Committee) and the independent Internal Audit Department (hereinafter the IAD ). The efficient functioning of the internal control system is ensured by the coordinated activities of all the parties involved: The Bank s Supervisory Board performs supervision over the activities of the companies of the Group, approves the Group s strategy and the general risk management principles and monitors the activities of the Management Board. The Management Board is responsible for running the daily business of the companies of the Group, determining the scope of the competence and responsibility of each management level, as well as approving job descriptions, internal regulations and procedure rules. The IAD gives reasonable assurance to the Bank s Supervisory Board and management that the entire management process (incl. the risk management system and the internal control system) has been established as required and functions efficiently. The Bank s IAD is part of the joint internal audit function of Sampo plc. According to the Bank s organisational chart, the IAD is directly subordinated to the Chairman of the Bank s Management Board, but functionally, it is subordinated to the Bank s Supervisory Board. The IAD s annual action plan is approved by the Bank s Supervisory Board. 13

15 Ratings The internal audit function is managed and the internal auditing process is performed pur suant to the legal acts of the Republic of Estonia, the Constitution of AS Sampo Pank, the Code of Ethics and the Statement of Internal Auditing Standards (SIAS) developed by the Institute of Internal Auditors (IIA), the guidelines developed by Sampo plc (the Guidelines of Sampo Group Internal Audit) and the internal regulations of AS Sampo Pank. In accordance with AS Sampo Pank s Charter of Internal Auditing, approved by the Bank s Supervisory Board, the IAD is obliged to submit a report on the detected shortcomings and the recommendations for the elimination and prevention of these shortcomings to the Bank s Management Board and to the Head of Internal Audit of Sampo plc at least once a quarter and to the Bank s Supervisory Board at least once a half-year. Rating history of Sampo Pank: Moody s Investors Service Long-term deposit rating Short-term deposit rating Financial strength rating A2 A2 A2 P-1 P-1 P-1 D+ D D On 1 November 2004, Moody s Investors Service upgraded the long-term and short-term deposit ratings of Sampo Pank to A2/P-1 from A3/P-2. The outlook on Sampo Pank s financial strength rating D remained positive. On 3 April 2006, Moody s upgraded Sampo Pank s financial strength rating (FSR) to D+ from D, changing the outlook to stable. The stable outlook on the Bank s deposit ratings was affirmed. On 9 November 2006, Moody s placed on review for possible upgrade the A2 long-term local and foreign currency deposit rating of Sampo Pank, following a similar action on the parent bank Sampo Bank plc. The short-term foreign currency deposit rating Prime-1 was affirmed and the D+ bank financial strength rating was put on positive outlook. On 2 February 2007, Moody s upgraded the longterm local currency deposit rating of Sampo Pank to Aa3 from A2 and maintained the stable The operations of the Bank and the Group are regularly supervised by various authorities (e.g. the Financial Supervision Authority, Sampo plc etc.), and once a year audited by an independent auditing company. In the course of audits, external auditors examine the Bank s and the Group s internal control system and familiarize themselves with the results of the audits performed by the IAD. Based on the information gathered as a result of the audits, external auditors submit to the Bank s Management Board a report containing their observations and, if necessary, also recommendations for the improvement of the existing internal control system. The further development of the internal control system is aimed at integrating Sampo Group into the international financial group (Danske), the improvement of the control environment and bringing the Bank s business activities in line with the requirements established in Sampo plc. outlook. At the same time, Moody s upgraded the bank s long-term foreign currency deposit rating to A1 from A2 and changed the rating outlook to positive from stable. Moody s also affirmed Sampo Pank s P-1 short-term (local currency and foreign currency) deposit ratings and their stable outlook and affirmed the positive outlook on the bank s D+ bank financial strength rating. On 2 February 2007, Moody s upgraded the longterm local currency deposit rating of Sampo Pank to Aa3 from A2 and maintained the stable outlook. At the same time, Moody s upgraded the bank s long-term foreign currency deposit rating to A1 from A2 and changed the rating outlook to positive from stable. Moody s also affirmed Sampo Pank s P-1 short-term (local currency and foreign currency) deposit ratings and their stable outlook and affirmed the positive outlook on the bank s D+ bank financial strength rating. On 23 February 2007, Moody s upgraded Sampo Pank s financial strenght rating to C- from D+. Short descriptions of the levels of ratings are presented on the website of the rating agency All assigned ratings and changes made in the previous ratings are also published on the website. Lawsuits Neither the Bank nor any of its subsidiaries were involved in any lawsuits, which could incur considerable losses to them. 14

16 Corporate Social Responsibility Sampo has a responsible attitude to people and the environment. Our desire is to contribute to the promotion of saving, to help people to achieve their long-term objectives and economic security. In decision-making we take into consideration both local concerns and problems of the whole society. We wish to help to solve these problems, supporting financially as well as with know-how. We have participated in various charity initiatives and sponsorship projects. Sampo Pank s sponsorship principles are based on the desire to contribute to the development of Estonia s educational, cultural and sports life and through it to the overall development of the Estonian society. In the field of education and science, we support practising doctors-university professors through the Sampo scholarship established at the Tartu Cultural Capital. We support Estonian national culture through two subfoundations established at the Estonian National Culture Foundation. Being a long-term major sponsor of the Estonian National Olympic Committee, Sampo Pank supports Estonian sports and sports movement through both the promotion of physical activity in general and the development of professional sports. Sampo Pank is also a major sponsor of the Estonian Rowing Federation, supporting our rowing teams in both local and international competitions. In cooperation with Tartu City Council and Tartu University Clinic Sampo has supported various events that promote a healthy lifestyle. One of our objectives is to make the Bank s operations even more environmentally friendly: economical consumption of electrical energy, paper and water has become a habit in our daily operations. Since 2006 Sampo Pank has been a completely non-smoking company. 15

17 16 Raamatupidamise aastaaruanne Financial Statements

18 Income Statement In millions of kroons, year ended 31 December Group Bank Note Restated 1 Restated 1 Interest income Interest expense Net interest income Fees and commission income Fees and commission expense Net fees and commission income Net profit on financial operations Personnel expenses Social security tax expense Other administrative expenses Total administrative expenses Depreciation, amortisation and impairment of tangible and intangible assets and investment property 24,25, Credit losses and recoveries Other operating income Other operating expenses Other operating income and expense Profit for the year Basic / diluted earnings per share (in kroons) For detailed information regarding restatements please see Note 1. Notes on pages of this Annual Report form an integral part of the Financial Statements. 17

19 Balance Sheet In millions of kroons, as at 31 December Assets Group Bank Note Restated 1 Restated 1 Cash Due from Central Bank Due from credit institutions Securities designated at fair value through profit or loss Derivative financial instruments Loans to clients 16,17, Credit losses Net loans Other assets Prepayments and accrued income Investments in subsidiary undertakings Intangible assets Tangible assets Investment property Total assets Liabilities Due to credit institutions Due to clients Government lending funds Derivative financial instruments Issued debt securities Other liabilities Accruals and deferred income Subordinated liabilities Total liabilities Owner s equity Share capital Paid-in capital over par Reserves Retained earnings Total owner s equity Total liabilities and owner s equity For detailed information regarding restatements please see Note1. Notes on pages of this Annual Report form an integral part of the Financial Statements. 18

20 Cash Flow Statement In millions of kroons, year ended 31 December Cash flows from operating activities Group Notes on pages of this Annual Report form an integral part of the Financial Statements. Bank Note Restated Restated Profit for the financial year Profit adjustments Depreciation, amortisation and impairment of tan gible and intangible assets and investment property Net interest income Credit losses Changes in assets and liabilities related to operating activities Time deposits with credit institutions Loans to clients Securities designated at fair value through profit or loss and derivative financial instruments Other assets related to operating activities Due to credit institutions, excl. loans Due to clients Other liabilities related to operating activities Interest receipts Interest payments Total cash flows from operating activities Cash flows from investing activities Acquisition of tangible and intangible assets 24, Disposal of tangible and intangibe assets Sales of financial instruments Total cash flows from investing activities Cash flows from financing activities Proceeds from borrowed funds Repayments of borrowed funds Debt securities issued Paid upon redemption of debt securities Proceeds from subordinated loans Cash proceeds from issuance of shares Total cash flows from financing activities Total cash flows Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents at end of year consist of: Cash Demand deposits with Central Bank Demand deposits with credit institutions Total cash and cash equivalents

21 Statement of Changes In Owners`Equity In millions of kroons Group Share capital Share premium Mandatory reserve Retained earnings Total Number of shares (fully issued and fully paid) Balance at 1 January Issue of new shares Transfer to reserve Profit for the year Balance at 31 December Balance at 1 January Issue of new shares Transfer to reserve Profit for the year Balance at 31 December Bank Share capital Share premium Mandatory reserve Retained earnings Total Number of shares (fully issued and fully paid) Balance at 1 January Issue of new shares Transfer to reserve Profit for the year Balance at 31 December Balance at 1 January Issue of new shares Transfer to reserve Profit for the year Balance at 31 December The Bank issued 15 million new shares, each with a nominal value of 10 kroons. The respective entry was made into the commercial register on 07 December The Bank issued 42.5 million new shares, each with a nominal value of 10 kroons. Increases in the share capital by 200 million kroons and by 225 million kroons were made into the Commercial Register on 31 May 2006 and on 13 December 2006, respectively. The maximum share capital allowed by the Articles of Association of Sampo Pank is 900 million kroons, each with a nominal value of 10 kroons per share. If the retained earnings less the mandatory reserve as proposed by the Management as at 31 December 2006 formed from the profit for 2006, were fully distributed to the shareholders as dividends as at 31 December 2006, income tax liability in the amount of million kroons ( million kroons) would be incurred. The calculation of maximum possible income tax liability is based on the prerequisite that distributable net dividends and the incurred income tax expense must not exceed the distributable retained earnings as at 31 December Notes on pages of this Annual Report form an integral part of the Financial Statements. 20

22 Notes To The Financial Statement Note 1 Accounting policies AS Sampo Pank, registered at Narva mnt 11, Tallinn, Estonia (reg.no ) is a limited liability credit institution, the sole shareholder of which was Sampo Bank plc as at 31 December The main accounting principles applied in the preparation of these financial statements are set out below. 1. Basis of Preparation The consolidated financial statements of the Consolidated Group of AS Sampo Pank (the Group) and the separate financial statements of the parent company AS Sampo Pank (the Bank) (hereinafter together also referred to as the financial statements ) have been prepared in compliance with the International Financial Reporting Standards (IFRS), as adopted by the EU. The financial statements of the Bank have been presented as required by Estonian Accounting Act. The financial statements have been prepared under historical cost basis, except for financial assets and liabilities designated at fair value through profit or loss, derivative financial instruments and also investments in subsidia ries (in the Bank s separate financial statements) which are measured at their fair value. According to the Estonian Business Code, the annual report, including the financial statements, prepared by the Management Board and approved by the Supervisory Board is authorized by the Shareholders General meeting. The shareholders hold the power not to approve the annual report and the right to request a new annual report to be prepared. From , several new and revised IFRS standards and interpretations became effective. In the preparation of the current financial statements, the Group has applied the following standards: IAS 21 The Effect of Changes in Foreign Exchange Rates; IAS 39 Financial Instruments: Recognition and Measurement; IFRS 4 Insurance contracts- Financial Guarantee Contracts; In accordance with the revised standards the presentation, if applicable, has been changed as well (the presentation of comparative data has been also restated). The new and revised standards and interpretations, which have been adopted by the EU and became effective in 2006 (e.g. the Amendments to IAS 19- Employee Benefits, IFRS 6- Exploration for and Evaluation of Mineral Resources, IFRIC 4- Determi ning whether an Arrangement contains a Lease, IFRIC 5- Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds, IFRIC 6- Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment) do not have any impact on the accounting principles applied by the Group. New or revised standards and new interpretations, which have been issued but will be effective on or after , have no impact on the financial statements as of 31 December These standards include IFRS 7 Financial instruments: disclosures, IAS 1 Presentation of financial statements Capital disclosures, IFRS 8 Operating segments, IFRIC 7 Applying the restatement approach under IAS 29 Financial reporting in hyperinflationary economies, IFRIC 8 Scope of IFRS 2, IFRIC 9 Reassessment of Embedded Derivatives, IFRIC 10 Interim financial reporting and impairment, IFRIC 11 IFRS 2 Group and Treasury Share Transactions, IFRIC 12 Service Concession Arrangements. 2. Presentation and Comparatives The same accounting principles and way of presentation that were used in the preparation of the prior year s financial statements have been used in the preparation of the present financial statements except for the accoun ting principles that derive from those revised standards that the Group is obliged to apply for annual periods beginning on or after The amendments made to the accounting princip les due to the revision of IFRS that became effective on did not have any impact on the size of the Bank s and the Group s owners equity as at and net profit for Additionally, some smaller changes in the presentation of the present financial statements have been made in compliance with the requirements of the revised standards. The amendments that also required changing of the comparatives do not have any impact on the size of the Group s or the Bank s owners equity as at and the business results of the financial year that ended on that date. For detailed reclassifications, please see table below. 21

23 Reclassifications In millions of kroons Group Bank 2005 Restated Restated 2005 Reclassifications Reclassifications Assets Securities designated at fair value through profit or loss 1 Loans to clients Credit losses 2, Other assets Prepayments and accrued income 1 Total Liabilities Due to credit institutions Due to clients Issued debt securities Other liabilities Accruals and deferred income Subordinated liabilities Total Income statement Interest expense Credit losses and recoveries 2, Other operating income Other operating expenses 2, Total Nature of reclassifications: 1 Accrued interest (revised standards) 2 Collateral repossessed (reclassification) 3 Financial guarantees (revised standards) 4 Payments to Deposit Guarantee Sectorial Fund (reclassification) 3. Cash and Cash Equivalents Cash and cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, including cash on hand and demand deposits with other credit institutions and the Central Bank, on the use of which no substantial restrictions have been imposed. Cash flows from operating activities are reported using the indirect method. Cash flows from investing and financing activities are reported based on gross receipts and disbursements made during the accounting period. 4. Consolidation and Business Combinations Subsidiaries over which the Group holds control have been fully consolidated. In case the Bank acquired or disposed a subsidiary some time in the middle of the year, the business results of the subsidiary are included in the consolidated financial statements only as from the date of obtaining control over the subsidiary or until the date of relinquishing control over it. The financial statements of subsidiaries are prepared for the same period as those of the Bank and the Group and by using the same accounting principles. 22

24 All intragroup transactions, balances and resulting unrealised profits/losses have been eliminated in the Group s consolidated statements. Business combinations are recorded at the date on which control is transferred to the Group using the purchase method of accounting, i.e. an amount equal to the fair value of the business combination on the date control is obtained, should be allocated to the identifiable assets acquired and the liabilities assumed (i.e. contingent liabilities). 5. Subsidiaries in the Separate Financial Statements of the Bank Subsidiaries are recorded at fair value in the separate financial statements of the Bank, while the respective changes in their fair value are recorded in the income statement. Fair value is the amount for which an asset or a liability could be exchanged or a liability settled, between knowledgeable, willing parties in an arm s length transaction. According to the estimates of the management the fair value of the subsidiaries is determined: a) with the same frequency, as presenting the reports to external users (e.g. once a month); and b) using book value of equity of subsidiaries. As its subsidiaries are an integrated part of the Group s and the Bank s operations and ma nagement does not have any intention to sell these investments, in the opinion of Bank s management it is appropriate to use the book value of equity as a basis for fair value, except for Sampo Kinnisvarahalduse AS. The balance sheet of Sampo Kinnisvarahalduse AS included the investment property (located in Pärnu), which was recorded using the cost model and therefore the book value of equity of this subsidiary had to be adjusted with the difference of the fair value and the book value of the investment property. Profit/loss deriving from a change in the fair value of the subsidiary is recognized under Net profit on financial operations in the income statement. 6.Foreign Currencies The financial statements have been prepared in Estonian kroons (in millions of kroons) that is the accounting and presentation currency of the Bank and the Group. The Estonian kroon (EEK) is pegged to the euro (EUR) at the rate of 1 EUR = EEK. All the other currencies except for the Estonian kroon are referred to as foreign currencies. Foreign-currency-based transactions are recorded by applying the exchange rate of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Estonian kroons at each balance sheet date, by applying the official exchange rates quoted by the Bank of Estonia at the ba lance sheet date. Translation differences are recorded under Net profit on financial operations in the income statement for the period. Profit/loss from purchase and sale of currencies is also recorded as Net profit on financial operations in the income statement. Foreign currencies not quoted by the Bank of Estonia are recorded in the balance sheet according to the exchange rate of the central bank of the respective country on the basis of the EUR exchange rate. 7. Offsetting Financial assets and liabilities are offset and the net amount recorded in the balance sheet only if there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 8. Interest Income and Expense Interest income and expense (borrowing expenses) are recognised in the income statement on an accrual basis, using the effective interest method. Interest income includes coupon payments earned on fixed income securities and the amortisation of premium or discount of bonds and other zero coupon debt securities/bonds as well as analogous income on certain off-balance sheet instruments. Changes in the market value of FX forward and swap transactions, deriving from changes in forward points are recorded as a component of interest income and interest expense. Changes in the market value of FX and forward transactions, deriving from changes in the FX spot rate are recorded as a component of income/expense from forex-operations. As the Bank uses FX forward and swap transactions primarily for hedging currency and interest rate risks, the use of the described recording method ensures that the same type of income/expense is recorded on the same line of the income statement. The use of the above recording method facilitates the interpretation of the income statement. 9. Fee and Commission Income Fee and commission income is recorded on an accrual basis. Fees related to loans (less direct expenses related to the loans) are taken into consideration while calculating the effective interest on the loan. 23

25 10. Financial Assets and Financial Liabilities Designated at Fair Value through Profit or Loss Financial assets and financial liabilities are classified as financial assets or financial liabilities designated at fair value through profit or loss on the basis of the following criteria: a) held for trading; b) classified as such, since this provides more relevant financial information. Financial assets or financial liabilities which are not held for trading may be classified under this group if: this serves the purpose of eliminating any differences in the recognition of income and expenses arising from measurement of assets and the related liabilities - i.e. helps to reduce the so-called accounting discrepancy; or the group of financial assets are managed together, and the results measured at fair value in accordance with documented risk management or investment strategy, and the corresponding information is forwarded to the top management. 11. Securities Equity instruments (except for the equities whose fair value cannot be determined reliably), debt securities (except for the debt securities that are intended to be held until maturity date) and other securities are financial assets that are recorded at fair value through profit or loss. Securities are initially recognised in the balance sheet at cost at trade date and subsequently they are measured at fair value based on quoted market prices and the official exchange rates of the Bank of Estonia. Purchase prices of the balance sheet date are used for listed securities. The fair value that is applied to unlisted securities is calculated on the basis of any information available to the Group about these securities. Income/loss deriving from, any change in the fair value of and the dividend as well as interest income received on the above-mentioned securities, is recognised under Net profit on financial operations in the income statement. 12. Derivative Financial Instruments Derivative financial instruments are financial instruments that are recorded at fair value through profit or loss. Derivative financial instruments (e.g. spots, forwards and swaps, futures and options) are initially recognised in the balance sheet at their cost at trade date and subsequently measured at fair value. Fair values are determined on the basis of quoted market prices and the official exchange rates of the Bank of Estonia. All derivative financial instruments are recorded as assets when their fair value is positive and as liabilities when fair value is negative. The nominal/contractual values of derivative financial instruments are recorded as offbalance sheet claims or obligations and assets and liabilities from derivative financial instruments recorded in the balance sheet are not offset. Income and expenses on derivative financial instruments are recognised under Net profit on financial operations in the income statement. Income and expenses related to derivative financial instruments acquired for hedging purposes are recorded in the same group as the income/expenses of the underlying assets of the transaction. 13. Loans/Leases and Credit Losses Disbursed loans (incl. leases) are recorded at cost at settlement date. Leases include all claims, which have arisen from finance lease agreements. Initially assets under a finance lease are recognized at an amount equal to the net investment in the lease. The recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the lessor s net investment in the finance lease. Subsequently loans are accounted for at amortised cost, using effective interest rate. Credit losses are recognised, if it is probable that the Group will not be able to collect all amounts in due time. The amount of the credit loss is equal to the difference between the carrying amount of the lease/loan receivable and the recoverable amount (including amounts recoverable from guarantees and collateral) which is the present value of expected future cash flows, discounted by the initial effective interest rate. Based on the experience, the interest receivab les which are uncollectible are considered doubtful and since that time the recognition of interest income is finalised. Loan losses are estimated, based on earlier experience in the evaluation of different components of the loan portfolio, the credit ratings assigned to the borrowers and reflecting the current economic environment in which the borrowers operate. Credit losses are recognised under Credit losses and recoveries in the income statement. If, in a subsequent period, the amount of the credit loss decreases and the decrease can be related objectively to an event occurring 24

26 after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised credit loss shall be reversed either directly or by adjusting an allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal shall be recognised in profit or loss. When a loan is uncollectible, it is recognised off the balance sheet together with the credit loss recorded earlier. Subsequent recoveries are recognised as income under Credit losses and recoveries in the income statement. Interest income is recorded under Interest income in the income statement. 14. Collateral Repossessed Collateral repossessed are recorded and measured in accordance with IAS 2 Inventories. In the balance sheet collateral repossessed are measured at the lower of cost and net reali sable value. The cost of a collateral repossessed comprise all costs of purchase and other costs incurred in bringing the collateral repossessed to their present condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. Write-downs of a collateral repossessed to realisable value and reversals of write-downs are recorded under Other operating expenses and Other operating income in the income statement. 15. Other Financial Assets Other financial assets are the remaining financial assets, which are not included under securities, loans and derivative financial instruments. Other financial assets, excluding debt securities that are held until maturity date, and other claims, are recorded at their fair value in the balance sheet. Debt securities that are held until redemption date and other claims are re cognised in the balance sheet at amortised cost in the balance sheet. If the recoverable amount of the financial asset is less than its carrying value, the financial asset is written down to the recoverable amount and the respective cost is recognised under Credit loss and recoveries in the income statement. The reversal of impairment is recognised on the same line of the income statement. 16. Tangible and Intangible Assets All tangible and intangible assets are recognised at acquisition cost wherefrom accumulated depreciation and impairment losses have been deducted, except for the intangible assets whose useful lifetime has not been specified, that are measured at acquisition cost, wherefrom only accumulated impairment losses have been deducted. Tangible assets are assets whose acquisition cost exceeds 20 thousand kroons and the expected useful lifetime is over one year. Tangib le assets whose acquisition cost is less than 20 thousand kroons are expensed at their acquisition. Based on the estimation of the management similar items of tangible assets can be initially recognised as a set of items. Depreciation on a tangible and a intangible assets is calculated from the moment of putting it into operation for the purpose planned by the management and depreciation will be completed either upon classifying the tangible asset as Tangible assets for sale or upon derecognition. The straight-line depreciation method is used with the rates being established as follows: Buildings Improvement of buildings Intangible assets Equipment, computers, cars Other tangible assets 2% p.a. 20% p.a. 25% p.a. 30% p.a. 20% p.a. The depreciable amount of an asset (i.e., cost of an asset less its residual value) is expensed over the expected useful life of an asset. Depreciation expense is recorded under Depreciation, amortisation and impairment of tangible and intangible assets and investment property in the income statement. At the end of the accounting period the remaining useful lifetime of essential tangible assets, the depreciation method used and non-depreciable residual values are estimated. In case the new estimations differ significantly from the initial ones, the useful lifetime, the depreciation method and/or residual values are adjusted prospectively. Depreciation calculation is suspended, if the non-depreciable residual value of the asset exceeds its carrying value. In case the tangible and/or the intangible asset declines, the asset is written down to its recoverable amount. In case the value of the fixed asset has recovered again, the expense which resulted from the write-down will be reversed. The impairment of either tangible or intangible asset as well as its reversal is recognized under 25

27 Depreciation, amortisation and impairment of tangible and intangible assets and investment property in the income statement. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed, if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. Such reversal is recognised as a reduction of expenses in income statement when incurred. Subsequent expenditure related to tangible assets is added to the carrying value of the assets, if it is probable that economic benefit will be obtained from it and its acquisition cost can be measured reliably. If a certain part of the tangible asset is replaced in the course of improvement, the replaced part will be dere cognised in the balance sheet. 17. Investment Property Investment property is land or a building or part of a building or both held to rental income or for capital appreciation or both. Investment property is recognised initially at acquisition cost, i.e. the same accounting principles that are applied in recognising tangible assets are also applied (see accounting principle 16). A particular asset is depreciated over its useful lifetime (40-50 ), using the straight-line depreciation method. 18. Deposits Deposits are recorded under Due to credit institutions and Due to clients in the balance sheet at settlement date and relevant inte rest expenses are recognised under Interest expense in the income statement. 19. Borrowings Borrowings are recorded under Due to credit institutions and Due to clients in the balance sheet at settlement date of the loan. Borrowings are initially recognised at cost (net of direct transaction costs incurred) in the ba lance sheet and subsequently they are accounted for at amortised cost, using the effective interest rate. Transaction costs are taken into account at calculating the effective interest rate and they are amortised over the lifetime of the loan. The interest expense of the borrowings is recognised under Interest expense in the income statement. 20. Debt Securities Issued Issued debt securities (incl. commercial paper) are initially recognised at cost in the balance sheet, being their issue proceeds net of transaction costs incurred, at trade date. Issued debt securities (except for structured debt securities, which belong to trading port folio) are subsequently accounted for at amortised cost, using the effective interest rate. Transaction costs incurred are taken into account at the calculation of effective interest rate and are expensed over the period of the security. The relevant interest expense and the diffe rence of the carrying value and the acquisition cost of the debt securities is recognised under Interest expense in the income statement. Structured debt securities are subsequently measured at fair value designated through profit or loss on the basis of changes in market interest rates (on the basis of the interest rates of inter bank deposits or interest rate swaps). Income/loss deriving from any change in the fair value of structured debt securities and interest income received on these securities is recorded under Net profit on financial operations in the income statement. 21. Subordinated Liabilities Subordinated liabilities are long-term liabilities which are reimbursed in case of the credit institution s bankruptcy or liquidation after the claims of other creditors have been met. Subordinated liabilities are initially recognised in the balance sheet at cost (net of direct transaction costs incurred) at settlement date. Subsequently they are accounted for at amortised cost, using the effective interest rate. Issuing costs are taken into account at the calculation of effective interest rate and are expensed over the period of the loan. Respective interest expense is recognised under Interest expense in the income statement. 22. Income Tax Under the Income Tax Act of the Republic of Estonia no income tax is imposed on profit earned by companies, but it is imposed on disbursed dividends, certain payments and expenses indicated in the Income Tax Act. An income tax rate of 23/77 was imposed on dividends disbursed in An income tax rate of 22/78 will be imposed on dividends disbursed from 1 January 2007, while the tax rate will be lowered further by 1 per cent per annum, until it reaches the rate of 20/80 in As the disbursed dividends, but not the profit of the company are subject to income tax, there is no difference between the taxable and carrying residual values of assets and liabilities that would be subject to deferred income tax claim or liability. 26

28 The potential income tax liability concerning the disposable owners equity, which would arise, if the retained earnings were fully distributed to the shareholders, is not recorded in the ba lance sheet. The maximum income tax liability incurred, if dividends were fully distributed, is presented in the statement of changes in owners equity. Income tax incurred by the distribution of dividends is recorded as expense in the income statement at the moment the distribution of dividends is announced. 23. Mandatory Reserve According to the Commercial Code, appropriations to the mandatory reserve have to be made each year (at a minimum of 5% of the net profit) until the reserve reaches 10% of the share capital. According to the decision of the general meeting of shareholders reserve capital may be used for covering losses (in case it is not possible to cover them at the expense of disposable owners equity). Reserve capital can also be used for increasing share capital. 24. Guarantees and Other Off-balance Sheet Claims and Obligations Claims and obligations deriving from guarantees, potential loan commitments and undrawn loan facilities are recorded as off-balance sheet transactions. The nominal/contractual claims and obligations deriving from derivative financial instruments are also recorded off balance sheet (see Accounting principle 12). Financial guarantees issued by the Bank are recognised initially at fair value in the balance sheet at settlement date. Subsequently they are recorded at amortised cost or as an amount, needed to cover the estimated costs relating to the guarantee, depending on which is higher. 25. Reporting by Geographical and Business Segments The Group s primary segments are distinguished by business activities (banking activity, leasing activity, asset management and other activities) and secondary segments are geographical segments according to the location of the property. All assets and liabilities which are directly related to segments are recognised as the assets and liabilities of the segments. Other assets and liabilities are recorded as the Group s joint assets and liabilities. Expenses, which are not related to segments, are recorded as the Group s joint expenses. The notes also present clients liabilities with the Bank and the Group as concentrated by major geographical areas of clients` domicile and economic sector. Determination of geographical areas is based on the division of states and territories by the State Classification Centre. Economic sectors have been defined in accordance with the Classifier of Estonian Economic Activities issued by the Statistics Office Register of Companies. 26. Earnings Per Share Earnings per share are calculated by dividing the net profit for a period by the period s weighted average number of shares. 27. Assets Management Services The Group provides asset management services and is engaged in fund management. The assets owned by the third party and managed by the Group are recorded off-balance sheet. 28. Research and Development Costs In general, research and development costs are expensed when incurred, with an exception of research and development costs which can be identified and which probably generate revenue during next periods. 29. Provisions Provisions are recognised, in case it is pro bable (based on a past event) that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount of the obligation can be reliably estimated. The provisions are recorded under the expenses of the accounting period. 30. Accounting for Leases A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Finance leases are measured at the fair value of the asset or at the present value of minimum lease payments, if the latter is lower, in the lessee s balance sheet. An asset acquired under finance lease is depreciated either during its useful lifetime or the lease term, depending on which of them is shorter. A lease is classified as an operating lease, if it does not transfer substantially all risks and rewards incident to ownership, whereas lease payments are recorded as operating expenses by the lessee and operating income by the lessor. Regarding finance lease from the lessor s viewpoint, see also accounting principle Significant accounting estimates The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are related to lease and loan portfolio. For further information please see note 2 and note

29 Note 2 Risk management General Principles The objectives of risk management are as follows: to identify, manage and price all risks arising from the operations of the Consolidated Group of AS Sampo Pank; to ensure a stable structure of revenues and the reliability, stability and profitability of the Group as well as to ensure an increase in shareholders value. Risk management includes the following activities as a minimum: Identifying. The risks associated with providing new services are studied, recognized and approved before launching a new product or starting a new activity. Pricing. The general principle is that all risks assumed by the Group must be compensated with an optimal risk/return ratio. The criteria used in the pricing of risks are as follows: the capital tied up by a service/product, the targeted capital yield, and the costs related to a product/service. Portfolio management. The portfolios of the products/services are managed with the aim of preserving the required risk/return ratio and preventing possible losses. The responsibility for portfolio management is clearly divided between different divisions and structural units of the Group by use of the authorizations and limits. Management accounting, risk measurement and reporting is conducted independently of business activities. The main types of risk resulting from the operations of the Group are: Credit risk; Market risk (related to fluctuations in foreign exchange rates, interest rates and prices of financial assets); Liquidity risk; Operational risk. The Bank s Management Board who is responsible for risk management has delegated the risk management function as follows: Assessment of credit risk to the Rating Committee; Management of credit risk to credit committees; Management of market, liquidity, investment risks and operational risk to the Risk Management Committee (the RMC); Management of IT risk to the IT Steering Committee; In 2006, the organizational structure of risk management was reorganized, by creating the position of a risk manager who is directly subordinated to the Chief Financial Officer. The risk manager is responsible for the management of credit, market, liquidity and operational risks. The Financial Policy Statement and its subdocuments stipulate the principles of taking and managing financial risks and the areas of responsibility in the Group. The credit risk arising from the activities of the Group is managed in compliance with the Credit Policy Statement and the credit risk management principles of Sampo Baltic banking. The management of the operational risk arising from the activities of the Group is regulated by the Operational Risk Policy Statement. All the Group s policy statements have been developed in accordance with the respective principles of Sampo plc and have been approved by the Bank s Supervisory Board. Credit Risk Credit risk is a fluctuation in the Group s earnings due to bad debts or changes in the other party s creditworthiness. A loss arises when cash flows agreed with a debtor or the other party do not materialize or when the value of a receivable/ agreement changes due to a change in the other party s creditworthiness. All such exposures are monitored and controlled according to counterparty limits, which that are established by the respective decision-making committee, and by portfolio diversification, which is stipulated by the RMC or the Bank s Credit Committee. The target structure of the Group s credit portfolio by risk categories and economic sectors is determined in the Credit Policy Statement that is developed by the beginning of each financial year. Credit Risk Related to Financial Institutions Credit risk related to financial institutions is managed through the internal counterparty rating system. Based on the ratings, counterparties are divided into categories and every category is assigned a limit. The categorization of counterparties and the establishment, alteration and cancellation of limits is carried out by the Bank s Credit Committee. 28

30 The system of credit limits covers capital and money market transactions, as well as foreign exchange and derivative financial instruments transactions. Credit risk associated with derivative finantsial instrumets is assessed, using the methodology which takes into consideration the maturity and type of an instrument. Credit risk related to financial institutions is monitored by the Credit Risk Department and adherence to limits is monitored by the Assets and Liabilities Management Department. Credit Risk Related to Lending Process of credit risk assumption. Pursuant to the principles approved by the Bank s Management Board, credit risk decisions are adopted by a multi-level decision-making system. Depending on the size of the risk, credit risk decisions concerning different counterparties are made by the following decision makers: the Bank s Credit Committee, the SME Credit Committee, the Credit Committee of Private Persons, the Lease Credit Committee, the Regional Credit Committee or individual decision makers. Decisions related to larger exposures are approved by relevant credit committees of the parent bank (Sampo Bank plc). Credit decisions are based on a thorough analysis of the credit applicant s financial performance and business activities. Before the respective credit committee makes a credit risk decision, the Bank s internal rating has to be assigned to the counterparty. The Group has adopted the rating principles used by Sampo Bank plc according to which assumed credit risks are divided into 13 groups: L1+...D. In assigning risk ratings, several factors are taken into consideration: payment discipline, financial condition, competitiveness, management competence, the overall situation of the economic sector etc. Risk ratings to large exposure clients are assigned by the rating committee of the parent bank on the basis of the proposal submitted by the credit analyst. Monitoring of loans and other credit products. The main objective in the monitoring of loans and other credit products is to prevent possible loan losses and to form reserves for covering them. Clients are monitored on two levels: the monitoring of loans (clients) on an individual basis and the monitoring of the aggregate credit portfolio. On an individual basis, a loan (a credit product) is monitored by the client s relationship manager and the Credit Risk Department pursuant to the procedures established for the monitoring of clients and handling overdue loans. The objective of the monitoring of the aggregate credit portfolio is to analyse changes and risk concentration in the Group s credit portfolios, as well as to inform the Bank s Credit Committee and the management accordingly. Credit risk assessment is conducted via an internal reporting system. According to the system, reports, which reflect the scope and concentration of credit risks, as well as their distribution between different products, economic sectors and risk categories are prepared periodically (on a daily, monthly or quarterly basis). All necessary information is compiled and analysed by the Credit Risk Department. Credit loss. The objective is to form reserves for covering possible loan losses and to represent the Group s assets at their fair value in the balance sheet. Credit loss depends on the client s risk rating. Problem claims are assessed on an individual basis and credit losses are established for the uncollateralised part of such claims. Collective assessment for the impairment of the credit portfolio are formed for covering possible loan losses assumed in the rating classes L1+...L4. Loans are defined as problem assets when they are more than 90 days overdue and/or if the borrower s financial situation has deteriorated considerably. Credit losses are calculated on a monthly basis. Credit losses are not formed for loans within the first ninety days after the signing of the loan agreement. Handling of problem loans. The objective is to decrease actual loan losses by recovering overdue loans and the claims written off earlier. The Group has set up a separate unit the Risk Assets Department, which is responsible for the management of problem assets. Country Risk Country limits are established in the Credit Policy Statement and approved by the Bank s Supervisory Board. Established limits depend on the ratings assigned by international rating agencies, based on the risk level of a particular country. The Assets and Liabilities Management Department is responsible for the daily monitoring of country limits and periodic reporting to the Bank s Credit Committee and the Supervisory Board. 29

31 Market Risk Market risk arises from changes in interest rates, foreign exchange rates and prices of financial assets. These risks are monitored in the course of the Group s daily activities. Market risk limits are determined by the RMC pursuant to the Financial Policy Statement and monitored and managed by the Assets and Liabilities Management Department in co-operation with the Financial Markets Division. The Assets and Liabilities Management Department reports to the RMC and the Bank s Supervisory Board on a regular basis. Foreign Exchange Risk Foreign exchange risk is a potential loss caused by fluctuations in currency exchange rates. The Group holds a reasonable level of foreign exchange positions necessary to offer services to clients. The RMC establishes open foreign currency position limits on currency groups and limits by currencies. All foreign currency positions are monitored on a daily basis and marked to market. Foreign currency market risk is measured applying the Value-at-Risk (VaR) method. VaR is defined as the greatest possible loss on existing open foreign currency positions within 24 hours with 95% probability, based on the volatility of the exchange rates of the previous 100 banking days. The VaR limit is set by the RMC. Open foreign currency positions arising from the Group s operations are hedged primarily by swap and forward transactions. Intraday open foreign currency position limits are set by the RMC. The Assets and Liabilities Management Department carries out the daily monitoring of exposures. Interest Rate Risk Interest rate risk is defined as an adverse variation in net interest income or in the market value of the Group s balance sheet and offbalance-sheet assets and liabilities caused by a change in the absolute level of interest rates, in the spread of the borrowing and lending rates, in the shape of the yield curve, or in any other aspect concerning interest rates. The Group uses the GAP methodology for mea suring and monitoring interest rate risk. Besides, various interest risk scenarios to value potential losses deriving from interest rate changes are used. Interest rate risk is defined as the potential loss resulting from an assumed parallel shift of the yield curve by 100 basis points. The overall interest rate risk limit is approved by the RMC. The overall limit is established as a percentage of the budgeted net interest income. The RMC also has the authority to establish interest rate risk limits on the main currencies and to approve different strategies for the management of interest rate risk. Derivative financial instruments are used for covering open interest rate positions, if necessary. The market risk of the debt securities included in the Trading Portfolio is measured and monitored according to the system of Valueat-Risk (VaR) on a daily basis. The total portfolio VaR limit on the Bank s net own funds is set by the RMC. The Assets and Liabilities Management Department is responsible for the daily monitoring of interest rate risk and it reports to the RMC. Changes in the Value of Financial Assets The Bank s equity investments are divided into two portfolios: the Equity Trading Portfolio and the Equity Investment Portfolio. The Equity Trading Portfolio is managed with the aim of providing services to the Bank s clients. The overall limit of the Equity Trading Portfolio and the limits by individual shares are approved by the RMC. The Assets and Liabilities Management Department monitors adherence to the limits and it periodically reports to the RMC. The Equity Trading Portfolio is recorded at its fair value based on market prices. The Equity Investment Portfolio contains companies (unlisted) equities with the intention to exit at a certain time over a longer period or long-term investments into companies equities which are necessary in view of the Bank s business activities (e.g. SWIFT). The size of the portfolio is established by the RMC. The Assets and Liabilities Management Department is responsible for relevant monitoring and reporting to the RMC on a regular basis. Liquidity Risk Liquidity risk is defined as the Group s inability to meet its obligations due to market conditions or the mismanagement of its balance sheet. The Group s liquidity management is based on the current and desired profiles of its balance sheet structure and the maturities of relevant instruments. Liquidity management involves coordinated series of decisions concerning the 30

32 maturity profile and financial instruments of assets and liabilities based on maturity gap reports. The main objective of liquidity management is to ensure the Group s ability to meet all its obligations duly. Other goals of liquidity management are as follows: To comply with the Bank of Estonia requirements; To minimize negative efficiency; To coordinate cooperation between the providing and the allocating structural units; To react duly and adequately to significant changes in the business environment. To maintain an adequate liquidity level, the Group has to keep part of its assets in liquid instruments, which includes liquidity reserves with the Bank of Estonia, cash, demand as well as short-term deposits with other banks and liquid debt securities. The size, distribution and instruments of liquid assets are established by the RMC. Operational Risk Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is divided into: Risks related to personnel (personnel risk); Legal risks; Technological risks; Information security risks; Procedure risks; Environmental risks (incl. working environment, external fraud etc.). Operational risk management is an indepen dent risk management area, which is inseparable from the management of an organisation and its risk management system. Operational risk management is coordinated by the Operational Risk Department. The objective of operational risk management is to achieve the lowest possible risk level in compliance with the principle of economic efficiency of risk management. Unfamiliar risks are not taken, despite expected growth in earnings. Personnel Risk is a risk of loss if functions are inadequately manned; employees are not pro perly trained or commit a fraud and/or abuse. Personnel Risk also covers risks related to the infringement of terms stipulated in labour laws or the employment contract by the employee or the employer. The components of personnel risk management are as follows: Use of various recruitment sources; Conducting of background surveys; A thorough methodological selection process; Special employee development programs; Motivation systems. Competence patterns developed on the basis of Sampo s basic values are used in the selection of new employees. All employees have job descriptions, which include position-related requirements and determine the scope of their responsibilities. Connections between the organisation s strategies and an employee s individual objectives are strengthened and the continuity of personnel risk management is ensured by means of regular professional development interviews. Legal risk arises from the inadequacy and ineffectiveness of concluded agreements. To manage this risk, the validity of concluded agreements is checked regularly. Internal regulations have been developed to manage the Group s legal procedures. Daily transactions are regulated by and performed in compliance with standard agreements. Transactions that divert from the standard agreements have to be approved by the Legal Division. Legal risk is assessed by the Legal Division. Risk of Information Technology is a risk of loss if necessary IT systems (software, hardware, servers and data communication facilities etc) are missing, do not function and /or function incorrectly. Due to high usability of electronic channels and ever increasing automatization of processes the Group s general risk profile becomes more and more IT-centred. The IT Steering Committee coordinates the implementation of business development projects, which require IT resources. The risks relating to the internal operations of the IT Division are managed by applying relevant procedures and control mechanisms. Additional control activities are carried out by the Information Security Department. Quarterly reports on the availability and service level of the systems necessary for providing business services, as well as on major IT incidents are submitted to the IT Steering Committee. The activities of the IT Division are controlled both by internal and external auditors. The management of information security risk is coordinated by the IT Steering Committee. On a daily basis the risk is managed by the Information Security Department, which keeps 31

33 a register of information security incidents and submits regular reports to the Operational Risk Department and the Management Board. Procedure risk is a risk of loss if a process or procedures regulating it are incomplete, missing or outdated. In order to optimize the procedure risk the Group has established strict procedure rules and instructions for performing daily banking transactions. In order to ensure compliance with the established procedure rules the Group applies an internal control system. The Group s security manager coordinates the management of risks related to the physical environment. It is assessed regularly if the working environment complies with the requirements stipulated in the legal acts and regulations and the security requirements established in the Group s internal regulations. In order to mitigate operational risk, the Group has concluded, via Sampo plc, an insurance agreement covering potential losses due to fraud, crime (incl. electronic and computer crime) and professional activities of the employees. The Directors and Officers Liability Agreement has also been concluded. In order to mitigate risks related to the physical environment property insurance agreements have been concluded. Monitoring and evaluation of operational risk Realised operational loss events and incidents are registered in the respective database. Once a year operational risk scorecard evaluation and the analysis of its results is performed throughout the Group. The business continuity planning process has been developed by the Group. A documentary framework necessary for ensuring the business continuity of the Group has been created. This framework determines core business services, as well as most important infrastructure and IT services needed for their functioning. Necessary business continuity plans of core business services, as well as recovery plans of supportive services have been developed. These activities are coordinated by the Business Continuity Committee. Basel II In order to adopt Basel II principles, work groups in different business fields have been formed. The activities of these work groups are coordinated by Basel II project team of the parent bank. Sampo Group has set an objective to apply the following approaches: Credit risk - Internal Ratings-Based Approach; Operational risk - Standardised Approach; Market risk - Standardised Approach. 32

34 Notes INTEREST INCOME In millions of kroons, year ended 31 December Group Bank Loans Factoring Demand deposits Time deposits Overnight loans Other interest income Currency swap Leasing Total interest income INTEREST EXPENSE In millions of kroons, year ended 31 December Group Bank Demand deposits Time deposits Borrowings Subordinated liabilities Issued debt securities Total interest expense FEE AND COMMISSION INCOME In millions of kroons, year ended 31 December Group Bank Bank operations Cash operations Investment services Credit relates fees and commissions Card transactions Other services Total fee and commission income FEE AND COMMISSION EXPENSE In millions of kroons, year ended 31 December Group Bank Bank operations Cash operations Investment services Credit relates fees and commissions Card transactions Other services Total fee and commission expense

35 7. INTEREST PRODUCTIVITY OF THE BALANCE SHEET OF THE GROUP 1,2 In millions of kroons, year ended 31 December Average balance for the Interest income / expense Effective interest rate Average balance for the Interest income / expense Effective interest rate year year Demand deposits with banks % % Time deposits with banks % % Total deposits % % Loans to clients % % Credit losses % % Net loans % % Securities % % Total interest-earning assets % % Other assets % % Total assets % % Demand deposits % % Time deposits % % Due to credit institutions % % Issued debt securities % % Government lending funds % % Subordinated liabilities % % Total interest-bearing liabilities % % Other liabilities and owners equity % % Total liabilities and owner s equity % % A 3 Interest income / interestearning % % assets B 3 Interest expense / interestbearing % % liabilities Interest spread (A- B) 2.3% 3.0% Net interest margin 4,5 2.8% 3.2% 1 Interest income and expense includes interest income and expense recorded in Notes 3 and 4 and profit from debt securities designated at fair value through profit or loss and profit (loss) from derivative financial instruments in Note 8. 2 Averages have been calculated based on the monthly average balances. 3 Interest income includes profit from debt securities designated at fair value through profit or loss and profit (loss) from derivative financial instruments in Note 8. 4 The figure also includes the result of currency swaps. 5 Net interest margin = net interest income / average assets of the period 34

36 7. INTEREST PRODUCTIVITY OF THE BALANCE SHEET OF THE BANK 1,2 In millions of kroons, year ended 31 December Average balance for the Interest income / expense Effective interest rate Average balance for the Interest income / expense Effective interest rate year year Demand deposits with banks % % Time deposits with banks % % Total deposits % % Loans to clients % % Credit losses % % Net loans % % Securities % % Total interest-earning assets % % Other assets % % Total assets % % Demand deposits % % Time deposits % % Due to credit institutions % % Issued debt securities % % Government lending funds % % Subordinated liabilities % % Total interest-bearing liabilities % % Other liabilities and owners equity % % Total liabilities and owner s equity % % A 3 Interest income / interestearning % % assets B 3 Interest expense / interestbearing % % liabilities Interest spread (A- B) 2.3% 2.9% Net interest margin 4,5 2.8% 3.0% 1 Interest income and expense includes interest income and expense recorded in Notes 3 and 4 and profit from debt securities designated at fair value through profit or loss and profit (loss) from derivative financial instruments in Note 8. 2 Averages have been calculated based on the monthly average balances. 3 Interest income includes profit from debt securities designated at fair value through profit or loss and profit (loss) from derivative financial instruments in Note 8. 4 The figure also includes the result of currency swaps. 5 Net interest margin = net interest income / average assets of the period 35

37 8. NET PROFIT ON FINANCIAL OPERATIONS In millions of kroons, year ended 31 December Group Bank Income from forex-operations Profit from debt securities designated at fair value through profit or loss Profit from shares designated at fair value through profit or loss Gain from changes in fair value of subsidiary undertakings Profit (loss) from derivative financial instruments Net profit on financial operations PERSONNEL EXPENSES In millions of kroons, year ended 31 December Group Bank Salaries Bonuses and vacation accrual Fringe benefits Total salaries expense OTHER ADMINISTRATIVE EXPENSES In millions of kroons, year ended 31 December Group Bank Rent Business travelling and training Communication and data processing expenses Office equipment and stationery goods Advertising Forms expenses Security expenses Maintenance expenses Transportation expenses Services purchased Other administrative expenses Total other administrative expenses The Group s development and research expenditures in 2006 totalled 41.7 million kroons (2005: 43.5 million kroons). Future minimum lease payments in 2006 by the following periods: up to 1 year from 1 year to 5 year annual lease payments under no-term lease contracts Future minimum lease payments in 2005 by the following periods: up to 1 year from 1 year to 5 year annual lease payments under no-term lease contracts 14 million kroons 23 million kroons 1 million kroons 5 million kroons 11 million kroons 2 million kroons The agreements include rent for premises and software licences and do not include call options or any other limitations. 36

38 11. OTHER OPERATING INCOME AND EXPENSE In millions of kroons, year ended 31 December Group Bank Other operating income Rent Sale of assets Reversal of write-down of collateral repossessed Other operations Total other operating income Other operating expense Financial supervision Payments to Guarantee Fund Write-down of collateral repossessed Other operations Total other operating expense Total other operating income and expense EARNINGS PER SHARE Year ended 31 December Group Bank Weighted average number of shares for the year Profit for the year (in millions of kroons) Basic earnings per share (in kroons) Diluted earnings per share (in kroons) As the Bank has no potential ordinary shares, basic earnings per share equal to diluted earnings per share. 13. CASH In millions of kroons, as at 31 December Group Bank Cash in Estonian kroons Cash in foreign currencies Total cash DUE FROM CENTRAL BANK In millions of kroons, as at 31 December Group Bank Demand deposits with Central Bank Due from Central Bank

39 15. SECURITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS In millions of kroons, as at 31 December Group Bank Trading securites Debt securities of government Debt securities of central banks Debt securities of credit institutions Debt securities of financial institutions Other debt securities Shares Total trading securities Other securities Debt securities of credit institutions Shares Total other securities Total securities designated at fair value through profit or loss As at December 31, 2006, investments with a participation of over 10 per cent are included: Pankade Kaardikeskuse AS (10.6% participation, balance sheet value 6.2 million kroons, Estonian Republic). 16. LOANS TO CLIENTS In millions of kroons, as at 31 December Group Bank Contractual values of loans by client types Government Local governments Insurance institutions Financial institutions Private enterprises Commercial undertakings of state and local governments Non-profit associations Private persons Total contractual values of loans by client types Accrued interest Effective interest rate application effect Total loans to clients Contractual values of loans by collateral types Mortgage Pledge of register Surety, guarantee Deposit Without collateral Lease asset Other Total contractual values of loans by collateral types Including Loans to subsidiaries Lease receivables including finance lease claims (see Note 23) Reverse repos

40 17. OVERDUE CLAIMS AND LOANS In millions of kroons, as at 31 December 2006 Group Bank Claim Up to 30 days overdue 30 to 60 days overdue Over 60 days overdue Up to 30 days overdue 30 to 60 days overdue Over 60 days overdue Loans Lease receivables Total In millions of kroons, as at 31 December 2005 Group Bank Claim Up to 30 days overdue 30 to 60 days overdue Over 60 days overdue Up to 30 days overdue 30 to 60 days overdue Over 60 days overdue Loans Lease receivables Total Overdue claims and loans include claims and loans, the principal or interest of which is overdue. Overdue claims and loans are shown at their amortised cost. Loans, interest calculation of which, has been suspended totalled 11.8 million kroons as at 31 December 2006 ( million kroons). 18. CREDIT LOSSES AND RECOVERIES In millions of kroons, year ended 31 December 2006 Group Bank Loans Other claims Total Loans Other claims Total As of the end of the previous accounting period Credit losses during the accounting period including credit losses for lease receivables Uncollectible claims and loans written off during the accounting period As of the end of the accounting period In millions of kroons, year ended 31 December 2005 Group Bank Loans Other claims Total Loans Other claims Total As of the end of the previous accounting period Credit losses during the accounting period including credit losses for lease receivables Uncollectible claims and loans written off during the accounting period Effect of merge with subsidiary As of the end of the accounting period Uncollectible claims and loans written-off earlier and recovered by the Group in 2006 totalled 3.5 million kroons and by the Bank 3.3 million kroons, respectively (2005 Group 1.3 million kroons, Bank 1.1 million kroons). Interest income from impaired loans in 2006 was 6.3 million kroons both in the Group and in the Bank ( million kroons both in the Group and in the Bank). 39

41 19. OTHER ASSETS In millions of kroons, as at 31 December Group Bank Items in transit Collateral repossessed Total other assets PREPAYMENTS AND ACCRUED INCOME In millions of kroons, as at 31 December Group Bank Other prepayments Overpaid value added tax Other accrued income Total prepayments and accrued income INVESTMENTS IN SUBSIDIARY UNDERTAKINGS In millions of kroons, as at 31 December 2006 Name of enterprise Bank s control and voting power Book value of investment as at Gain from changes in fair value in 2006 Book value of investment as at Sampo Kinnisvarahalduse AS (under 100% liqudation) Sampo Baltic Asset Management AS 100% Total Name of enterprise Bank s control and voting power Book value of investment as at Gain from changes in fair value in 2005 Book value of investment as at Sampo Kinnisvarahalduse AS 100% AS Sampo Liising 1 100% Sampo Baltic Asset Management AS 100% Total In 2005, AS Sampo Liising was merged with the parent: in accordance with the merger agreement the merger date was 30 June 2005 and the respective entry concerning the merger was made in the commercial register on 3 January Until the balance-sheet date of the merger AS Sampo Liising was recognized at fair value in the separate balance sheet of the parent and from the balance-sheet date of the merger the assets and liabilities as well as income and expenses of the company being acquired have been included in the separate financial statements of the parent line by line. The merger of AS Sampo Liising with the parent did not have any impact on the consolidated financial statements. All the Bank s subsidiaries have been registered in the Republic of Estonia. 22. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The book value of financial assets and liabilities does not differ significantly from their fair value. The fair value is determined based on the listed market prices or discounted cashflow method. 40

42 23. GROUP FINANCIAL LEASE GROSS AND NET INVESTMENTS In millions of kroons, as at 31 December Net investments Gross investments Interest income expected in coming periods Net investments Gross investments Interest income expected in coming periods Up to 1 year From 1 year to Over Total As at 31 December 2006 unguaranteed residual value of leased assets totalled 12 million kroons ( million kroons). 24. INTANGIBLE ASSETS In millions of kroons, year ended 31 December 2006 Group Bank Licences Total Licences Total Residual value at beginning of year Cost at beginning of year Accumulated depreciation at beginning of year Acquisitions Amortisation Residual value at end of year Cost at end of year Accumulated depreciation at end of year In millions of kroons, year ended 31 December 2005 Group Bank Licences Total Licences Total Residual value at beginning of year Cost at beginning of year Accumulated depreciation at beginning of year Acquisitions Internal movements at residual value Internal movements at cost Depreciation of internal movements Amortisation Residual value at end of year Cost at end of year Accumulated depreciation at end of year

43 25. TANGIBLE ASSETS In millions of kroons, year ended 31 December 2006 Group Bank Land and buildings Other Total Land and buildings Other Residual value at beginning of year Cost at beginning of year Accumulated depreciation at beginning of year Total Acquisitions Disposals at residual value Disposals at cost Depreciation of sold assets Write-offs at residual value Write-offs at cost Depreciation of assets written-off Depreciation Residual value at end of year Cost at end of year Accumulated depreciation at end of year In millions of kroons, year ended 31 December 2005 Group Bank Land and buildings Other Total Land and buildings Computers Computers Computers Computers Other Residual value at beginning of year Cost at beginning of year Accumulated depreciation at beginning of year Total Acquisitions Disposals at residual value Disposals at cost Depreciation of sold assets Write-offs at residual value Write-offs at cost Depreciation of assets written-off Internal movements at residual value Internal movements at cost Depreciation of internal movements Depreciation Residual value at end of year Cost at end of year Accumulated depreciation at end of year Write-offs relate to fully depreciated and obsolete fixed assets. 42

44 26. INVESTMENT PROPERTY In millions of kroons, year ended 31 December 2006 Group Residual value at beginning of year 13 Cost at beginning of year 15 Accumulated depreciation at beginning of year - 2 Disposals at residual value - 13 Disposals at cost - 15 Depreciation of sold assets 2 Residual value at end of year 0 Cost at end of year 0 Accumulated depreciation at end of year 0 In millions of kroons, year ended 31 December 2005 Group Residual value at beginning of year 13 Cost at beginning of year 15 Accumulated depreciation at beginning of year - 2 Residual value at end of year 13 Cost at end of year 15 Accumulated depreciation at end of year - 2 Rental income from investment property was 0.7 million kroons in 2006 ( million kroons). The realisable value of the investment property realised in 2006 was 15.4 million kroons and gain on disposal was 3 million kroons. 27. DUE TO CREDIT INSTITUTIONS In millions of kroons, as at 31 December Group Bank Individually significant loans 1 Maturity Sampo Bank plc Sampo Bank plc (agent) Sampo Bank plc EIB KFW NIB HSH Nordbank (agent) Other loans Demand deposits Overdrafts Total due to credit institutions All loans in excess of EUR 10 million. 43

45 28. DUE TO CLIENTS In millions of kroons, as at 31 December Group Bank Contractual values of demand deposits Government Non-budgetary funds Local governments Insurance institutions Financial institutions Private enterprises Non-profit associations Private persons Contractual values of demand deposits Interest payable Total demand deposits Demand deposits by residency Residents Non-residents Total demand deposits Demand deposits by currency Estonian kroon Foreign currency Total demand deposits Contractual values of time deposits Government Government social security funds Local governments Commercial undertakings of state and local governments Insurance institutions Financial institutions Private enterprises Non-profit associations Private persons Total contractual values of time deposits Interest payable Total time deposits Time deposits by residency Residents Non-residents Total time deposits Time deposits by currency Estonian kroon Foreign currency Total time deposits Total amounts owed to clients of credit institution

46 29. ISSUED DEBT SECURITIES In millions of kroons, as at 31 December Group Bank Maturity Sampo Pank Sampo Pank Sampo Pank Sampo Pank Sampo Pank Sampo Pank Sampo Pank Sampo Pank Sampo Pank structured debt securities Sampo Pank structured debt securities Total issued debt securities * The yield of debt securities depends on changes in the price of the underlying assets. If on the redemption date the price of the underlying assets is lower than it was on the issue date, the issued debt securities will be redeemed at their nominal value. 30. OTHER LIABILITIES In millions of kroons, as at 31 December Group Bank Outgoing payment orders Incoming payment orders Clearing accounts Fair value of financial guarantees Total other liabilities ACCRUALS AND DEFERRED INCOME In millions of kroons, as at 31 December Group Bank Payables to companies Vacation s and salarie s liabilities Tax liabilities Other accrued expenses Payables to Guarantee Fund Client prepayments Total accruals and deffered income SUBORDINATED LIABILITIES In millions of kroons, as at 31 December Group Bank Maturity AS Sampo Pank subordinated debt securities AS Sampo Pank subordinated debt securities AS Sampo Pank subordinated debt securities Total subordinated liabilities

47 33. TRANSACTIONS BETWEEN RELATED PARTIES Transactions between Sampo Pank and parent company In millions of kroons, as at 31 December Deposits and loans with parent company Other assets Deposits and loans from parent company Subordinated loan from parent company Other liabilities 25 8 Derivative financial instruments (claims) Derivative financial instruments (obligations) Interest income (per year) Interest expense (per year) Other expense (per year) 3 0 Sampo Bank plc was the parent company of AS Sampo Pank as at and as at Transactions with management In millions of kroons, as at 31 December 2006 Loans Range of interest Deposits Range of interest Salaries Termination benefits Management % % 10 3 In millions of kroons, as at 31 December 2005 Loans Range of interest Deposits Range of interest Salaries Termination benefits Management % % 9 2 Transactions with other companies belonging to consolidation group of Sampo plc In millions of kroons, as at 31 December Deposits with companies belonging to consolidation group 1 6 Loans to companies belonging to consolidation group 7 2 Deposits and loans from companies belonging to consolidation group Accruals and deferred income 1 1 Issued debt securities 58 0 Subordinated debt securities 25 0 Interest expense from companies belonging to consolidation group 4 2 (per year) Other income from companies belonging to consolidation group (per year) Other expense from companies belonging to consolidation group (per year) ASSETS MANAGED BY THE GROUP The volume of the client portfolios managed by the Group as at 31 December 2006 amounted to about 2 billion kroons ( billion kroons). The market value of the clients funds kept in the Bank s securities accounts amounted to 3.7 billion kroons as at 31 December 2006 ( billion kroons). The Group earns a service fee for the management of these portfolios which does not entail any credit or market risks for the Group. 46

48 35. STRUCTURE OF INTEREST-BEARING ASSETS AND LIABILITIES BY INTEREST RATE REPRICING DATE In millions of kroons, as at 31 December 2006 Group Assets Demand Up to 1 month Over 5 Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Debt securities Forwards and futures Credit lines and standby loans Total assets including total amount of fixed interest rate agreements at year-end Liabilities Demand Up to 1 month Over 5 Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Issued debt securities Subordinated liabilities Forwards and futures Credit lines and standby loans Other irrevocable commitments Total liabilities including total amount of fixed interest rate agreements at year-end Gap (Assets-Liabilities) Cumulative Gap Bank Assets Demand Up to 1 month Over 5 Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Debt securities Forwards and futures Credit lines and standby loans Total assets Total Total Total including total amount of fixed interest rate agreements at year-end Liabilities Demand Up to 1 month Over 5 Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Issued debt securities Subordinated liabilities Forwards and futures Credit lines and standby loans Other irrevocable commitments Total liabilities including total amount of fixed interest rate agreements at year-end Gap (Assets-Liabilities) Cumulative Gap Total assets and liabilities also include assets and liabilities, which are recorded off-balance sheet (including forwards and futures, the unused limits of credit lines and standby loans and other irrevocable claims and commitments). Assets and liabilities are recorded at contractual value. Total 47

49 35. STRUCTURE OF INTEREST-BEARING ASSETS AND LIABILITIES BY INTEREST RATE REPRICING DATE In millions of kroons, as at 31 December 2005 Group Assets Demand Up to 1 month Over 5 Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Debt securities Forwards and futures Credit lines and standby loans Total assets including total amount of fixed interest rate agreements at year-end Liabilities Demand Up to 1 month Over 5 Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Issued debt securities Subordinated liabilities Forwards and futures Credit lines and standby loans Other irrevocable commitments Total liabilities including total amount of fixed interest rate agreements at year-end Gap (Assets-Liabilities) Cumulative Gap Bank Assets Demand Up to 1 month Over 5 Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Debt securities Forwards and futures Credit lines and standby loans Total assets Total Total Total including total amount of fixed interest rate agreements at year-end Liabilities Demand Up to 1 month Over 5 Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Issued debt securities Subordinated liabilities Forwards and futures Credit lines and standby loans Other irrevocable commitments Total liabilities including total amount of fixed interest rate agreements at year-end Gap (Assets-Liabilities) Cumulative Gap Total assets and liabilities also include assets and liabilities, which are recorded off-balance sheet (including forwards and futures, the unused limits of credit lines and standby loans and other irrevocable claims and commitments). Assets and liabilities are recorded at contractual value. Total 48

50 36. CONCENTRATION OF EXPOSURES BY GEOGRAPHICAL REGIONS In millions of kroons, as at 31 December 2006 Group Region Balance sheet exposures incl. overdue and Loans 1 Securities Interest uncollectible receivable loans Irrevocable liabilities Region share (%) Estonia Germany Finland the Netherlands France the United Kingdom Belgium Denmark the United States of America Russia Lithuania Norway Ireland Japan Ukraine Other regions Total Bank Region Balance sheet exposures incl. overdue and Loans 1 Securities Interest uncollectible receivable loans Irrevocable liabilities Region share (%) Estonia Germany Finland the Netherlands France the United Kingdom Belgium Denmark the United States of America Russia Lithuania Norway Ireland Japan Ukraine Other regions Total Including loans to credit institutions and loans to customers. 49

51 36. CONCENTRATION OF EXPOSURES BY GEOGRAPHICAL REGIONS In millions of kroons, as at 31 December 2005 Group Region Balance sheet exposures incl. overdue and Loans 1 Securities Interest uncollectible receivable loans Irrevocable liabilities Region share (%) Estonia Germany Lithuania France the United Kingdom Finland the Netherlands the United States of America Russia Belgium Sweden Denmark Luxembourg Norway Ireland Other regions Total Bank Region Balance sheet exposures incl. overdue and Loans 1 Securities Interest uncollectible receivable loans Irrevocable liabilities Region share (%) Estonia Germany Lithuania France the United Kingdom Finland the Netherlands the United States of America Russia Belgium Sweden Denmark Luxembourg Norway Ireland Other regions Total Including loans to credit institutions and loans to customers. 50

52 37. CONCENTRATION OF EXPOSURES BY ECONOMIC SECTORS In millions of kroons, as at 31 December 2006 Group Economic sector Balance sheet exposures incl. overdue and Loans 1 Securities Interest receivable uncollectible loans Irrevocable liabilities Sector share (%) Private persons Real estate, renting and business activities Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods Financial intermediation Public administration and defence Manufacturing Transport, storage and communication Other community, social and personal service activities Construction Hotels and restaurants Agriculture, hunting and forestry Electricity, steam, gas and water supply Education Healthcare and social work Mining Fishing Total Bank Economic sector Balance sheet exposures incl. overdue Loans 1 Securities Interest and receivable uncollectible loans Irrevocable liabilities Sector share (%) Private persons Real estate, renting and business activities Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods Financial intermediation Public administration and defence Manufacturing Transport, storage and communication Other community, social and personal service activities Construction Hotels and restaurants Agriculture, hunting and forestry Electricity, steam, gas and water supply Education Healthcare and social work Mining Fishing Total Including loans to credit institutions and loans to customers. 51

53 37. CONCENTRATION OF EXPOSURES BY ECONOMIC SECTORS In millions of kroons, as at 31 December 2005 Group Economic sector Balance sheet exposures incl. overdue Loans 1 Securities Interest and receivable uncollectible loans Irrevocable liabilities Sector share (%) Private persons Real estate, renting and business activities Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods Manufacturing Financial intermediation Public administration and defence Transport, storage and communication Other community, social and personal service activities Hotels and restaurants Construction Agriculture, hunting and forestry Electricity, steam, gas and water supply Education Healthcare and social work Mining Fishing Total Bank Economic sector Balance sheet exposures incl. overdue Loans 1 Securities Interest and receivable uncollectible loans Irrevocable liabilities Sector share (%) Private persons Real estate, renting and business activities Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods Manufacturing Financial intermediation Public administration and defence Transport, storage and communication Other community, social and personal service activities Hotels and restaurants Construction Agriculture, hunting and forestry Electricity, steam, gas and water supply Education Healthcare and social work Mining Fishing Total Including loans to credit institutions and loans to customers. 52

54 38. OFF BALANCE SHEET CLAIMS AND OBLIGATIONS In millions of kroons, as at 31 December Group Irrevocable transactions Guarantees and other similar irrevocable transactions Credit lines and overdrafts (unused limits) Revocable transactions Credit lines and overdrafts (unused limits) Derivative financial instruments Currency related derivatives Interest rate related derivatives Contractual value Market value Contractual value Market value Claims Obligations Assets Liabilities Claims Obligations Assets Liabilities Bank Irrevocable transactions Guarantees and other similar irrevocable transactions Credit lines and overdrafts (unused limits) Revocable transactions Credit lines and overdrafts (unused limits) Derivative financial instruments Currency related derivatives Interest rate related derivatives Contractual value Market value Contractual value Market value Claims Obligations Assets Liabilities Claims Obligations Assets Liabilities

55 39. BUSINESS SEGMENTS OF GROUP In millions of kroons, income and expense year ended 31 December 2006, assets and liabilities as at 31 December Banking Leasing Asset management Elimination Interest revenue Interest revenue from other segment Interest expense Interest expense from other segment Fee and commission income Fee and commission income from other segment Profit on financial operations Bad and doubtful debts expense Profit from segment Unallocated interest expense Other unallocated revenue 21 Other unallocated expense Net profit for the year 333 Segment assets Total assets Segment liabilities Unallocated liabilities and related interest payable Total liabilities Acquisition of tangible and intangible assets Depreciation Other non-cash expenses Group In millions of kroons, income and expense year ended 31 December 2005, assets and liabilities as at 31 December Banking Leasing Asset management Elimination Interest revenue Interest revenue from other segment Interest expense Interest expense from other segment Fee and commission income Fee and commission income from other segment Profit on financial operations Bad and doubtful debts expense Profit from segment Unallocated interest expense - 98 Other unallocated revenue 19 Other unallocated expense Net profit for the year 172 Segment assets Total assets Segment liabilities Unallocated liabilities and related interest payable Total liabilities Acquisition of tangible and intangible assets Depreciation Other non-cash expenses As the entire operations of the Group take place within Estonia, no separate information has been presented about the secondary segment.the prices used in cross-segment transactions do not differ largely from market prices. Group 54

56 40. CAPITAL ADEQUACY In millions of kroons, as at 31 December Group Bank Original own funds Paid-in share capital Other reserves Retained earnings Intangible fixed assets (with the minus) Additional (surplus) own funds Total gross own funds (1+2) Deductions from the total gross own funds Net own funds (3-4) Own funds for covering the market risks of the Trading book 7. Risk weighed assets Category I Category II Category III Category IV Risk weighed derivatives and other irrevocalbe Transactions 8.1. Group I Group II Capital requirement against currency risk Capital requirement against the risks associated with The trading book Capital requirement against interest position risks Capital requirement against equity risks Capital requirement against the positions of trading Book instruments exceeding the risk exposure limits Capital adequacy (5+6)/(7+8+9x10+10x12,5+11x12,5) 11.43% 12.44% 11.39% 12.39% 41. EXPOSURES In millions of kroons, as at 31 December Number of large exposure customers Loans granted to customers with large exposure Loans granted to persons associated with credit institution Number/ Amount Group Bank % of net own funds Number/ Amount % of net own funds Number/ Amount % of net own funds Number/ Amount % of net own funds % % % % % % % % Maximum credit risk exposure as at 31 December 2006 of the Group and the Bank totalled 27.3 billion kroons ( billion). 55

57 42. ASSETS AND LIABILITIES BY REMAINING MATURITIES In millions of kroons, as at 31 Decemebr 2006 Group Assets Demand Up to 1 month Over 5 Overdue Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Trading securities Available-for-sale securities Derivative financial instruments Other assets Prepayments and accrued income Forwards Credit lines and standby loans Total assets Liabilities Demand Up to 1 month Over 5 Overdue Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Derivative financial instruments Issued debt securities Other liabilities Accruals and deffered income Subordinated liabilities Forwards Credit lines and standby loans Other irrevocable commitments Total liabilities Gap (Assets-Liabilities) Cumulative Gap Bank Assets Demand Up to 1 month Over 5 Overdue Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Trading securities Other securities Derivative financial instruments Shares of subsidiary undertakings Other assets Prepayments and accrued income Forwards Credit lines and standby loans Total assets Liabilities Demand Up to 1 month Over 5 Overdue Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Derivative financial instruments Issued debt securities Other liabilities Accruals and deffered income Subordinated liabilities Forwards Credit lines and standby loans Other irrevocable commitments Total liabilities Gap (Assets-Liabilities) Cumulative Gap Claims to clients and accrued income are recorded at net value including credit losses. Total assets and liabilities also include assets and liabilities, which are recorded off-balance sheet (including forwards, the unused limits of credit lines and standby loans and other irrevocable claims and commitments). Total Total Total Total 56

58 42. ASSETS AND LIABILITIES BY REMAINING MATURITIES In millions of kroons, as at 31 Decemebr 2005 Group Assets Demand Up to 1 month Over 5 Overdue Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Trading securities Available-for-sale securities Derivative financial instruments Other assets Prepayments and accrued income Forwards Credit lines and standby loans Total assets Liabilities Demand Up to 1 month Over 5 Overdue Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Derivative financial instruments Issued debt securities Other liabilities Accruals and deffered income Subordinated liabilities Forwards Credit lines and standby loans Other irrevocable commitments Total liabilities Gap (Assets-Liabilities) Cumulative Gap Bank Assets Demand Up to 1 month Over 5 Overdue Cash and claims to Central Bank Claims and loans to credit institutions Claims and loans to clients Trading securities Available-for-sale securities Derivative financial instruments Shares of subsidiary undertakings Other assets Prepayments and accrued income Forwards Credit lines and standby loans Total assets Liabilities Demand Up to 1 month Over 5 Overdue Amounts owed to credit institutions Amounts owed to clients Amounts owed to government Derivative financial instruments Issued debt securities Other liabilities Accruals and deffered income Subordinated liabilities Forwards Credit lines and standby loans Other irrevocable commitments Total liabilities Gap (Assets-Liabilities) Cumulative Gap Total Total Total Total Claims to clients and accrued income are recorded at net value including credit losses. Total assets and liabilities also include assets and liabilities, which are recorded off-balance sheet (including forwards, the unused limits of credit lines and standby loans and other irrevocable claims and commitments). 57

59 43. CURRENCY NET POSITIONS In millions of kroons, as at 31 December 2006 Common position of EEK and EUR Group USD Other Total Common position of EEK and EUR Bank USD Other Total Total assets Total liabilities Balance sheet position Off-balance sheet position In millions of kroons, as at 31 December 2005 Common position of EEK and EUR Group USD Other Total Common position of EEK and EUR Bank USD Other Total Total assets Total liabilities Balance sheet position Off-balance sheet position EVENTS AFTER THE BALANCE SHEET DATE On 1 February 2007 Danske Bank Group s purchase of Sampo Bank from Sampo Group was completed. Danske Bank is the sole owner of Sampo Bank plc. On 2 February 2007, Moody s upgraded the long-term local currency deposit rating of AS Sampo Pank to Aa3 from A2 and maintained the stable outlook. At the same time, Moody s upgraded the bank s long-term foreign currency deposit rating to A1 from A2 and changed the rating outlook to positive from stable. On 23 February 2007, Moody s upgraded AS Sampo Pank s financial strenght rating to C- from D+. 58

60 Declaration of The Management Board The Management Board of AS Sampo Pank is responsible for the preparation of the 2006 Financial Statements presented on pages and confirms that: a) the Financial Statements have been compiled in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU ; b) the Financial Statements present a true and fair view of the financial situation, business results and cash flows of the Bank and the Group; c) AS Sampo Pank and the Group is a going concern. Aivar Rehe 26 February 2007 Ivar Pae 26 February 2007 Indrek Puskar 26 February 2007 Margus Žuravljov 26 February 2007 Tõnu Vanajuur 26 February

61 Approval of The Supervisory Board The Supervisory Board of AS Sampo Pank approved the Annual Report for 2006 complied by the Management Board. Georg Schubiger 27 March 2007 Gintautas Galvanauskas 27 March 2007 Jukka Edvin Ohls 27 March 2007 Markku Pehkonen 27 March 2007 Risto Tornivaara 27 March

62 Auditor`s report 61

63 Proposal for The Distribution of Profit On 26 February 2006, Sampo Pank s Management Board confirmed the Financial Statements and the Management Report for Sampo Pank s Management Board proposes to distribute the profit for the financial year 2006 in the amount kroons as follows: a) to carry an amount of kroons to the reserve capital under the balance sheet item Reserve ; b) to carry an amount of kroons to the next periods under the balance sheet item Retained earnings. 62

64 Addresses Head Office Narva mnt Tallinn Järve Selveri Office Pärnu mnt Tallinn Stockmann Office Liivalaia Tallinn Katleri Office Paasiku 2a Tallinn Kristiine Office Endla Tallinn Lasnamäe Centrum Office Mustakivi tee Tallinn Merimetsa Selver Office Paldiski mnt Tallinn Jõhvi Office Keskväljak Jõhvi Narva Office Puškini Narva Narva Fama keskus Office Tallinna mnt 19c Narva Pärnu Office Hommiku Pärnu Tartu Lõunakeskus Office Ringtee Tartu Tartu Ülikooli Street Office Ülikooli 6a Tartu Representative Office in Russia Teterinski Pereulok 4, Strojenije Moscow, Russia Mustika Office A.H. Tammsaare tee Tallinn Representation in Rakvere Laada 3a Rakvere Rae Office Raekoja plats Tallinn Tartu Kaubamaja Office Riia Tartu Rocca al Mare Office Paldiski mnt Tallinn Rävala Office Rävala pst Tallinn Sikupilli Office Tartu mnt Tallinn Sampo Info 24h Phone Telex: forex ee S.W.I.F.T. FOREEE2X info@sampo.ee 63

65 64 Design: RAKETT

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