ALM. BRAND BANK ANNUAL REPORT 2002 ALM. BRAND BANK ANNUAL REPORT 2002 ALM. BRAND ALM.SUND FORNUFT

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1 ALM. BRAND BANK ANNUAL REPORT 2002 ALM. BRAND BANK ANNUAL REPORT ALM.SUND FORNUFT ALM. BRAND

2 CONTENTS MANAGEMENT GROUP STRUCTURE FIVE YEAR HIGHLIGHTS OVERVIEW DIRECTORS REPORT WELL EN ROUTE TO 2006 THE GROUP S BUSINESS ACTIVITIES EMPLOYEES RISK MANAGEMENT FINANCIAL REVIEW ACCOUNTS ACCOUNTING POLICIES SIGNATURES AUDITORS REPORT PROFIT AND LOSS ACCOUNT AND PROFIT ALLOCATION BALANCE SHEET NOTES TO THE ACCOUNTS CASH FLOW STATEMENT PROFIT AND LOSS ACCOUNT EXCLUDING PENSION POOLS BALANCE SHEET EXCLUDING PENSION POOLS PENSION POOL SCHEMES DIRECTORSHIPS ADDRESSES

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4 MANAGEMENT ANNUAL REPORT

5 MANAGEMENT EXECUTIVE BOARD BOARD OF DIRECTORS Henrik Nordam Christian N.B. Ulrich, Chairman Christian G. Kjøller, Deputy Chairman Ole Bach Per Hansen Christian Hjorth-Andersen Ole Joachim Jensen Søren Boe Mortensen Brian Kudsk AUDITORS Deloitte & Touche Statsautoriseret Revisionsaktieselskab KPMG C.Jespersen REGISTRATION Bankaktieselskabet Alm. Brand Bank CVR-no Peter Reedtz ADDRESS 7 Midtermolen, DK-2100 Copenhagen Ø Phone: Fax: Internet: bank@almbrand.dk 4

6 GROUP STRUCTURE ALM. BRAND BANK 19.5% 100% 100% 100% ALM. BRAND PANTEBREVE ALM. BRAND BILKREDIT ALM. BRAND LEASING ALM. BRAND PRIVATE EQUITY (dormant) ALM. BRAND INVEST The bank has four subsidiaries: Alm. Brand Pantebreve A/S Alm. Brand Bilkredit A/S Alm. Brand Leasing A/S Alm. Brand Private Equity A/S (dormant) In addition, the bank acts as depositary bank for the Alm. Brand Invest unit trust. OWNERSHIP The bank is wholly owned by the listed company Alm. Brand A/S, Skadesforsikringsselskab, Copenhagen. The consolidated accounts of Alm. Brand Bank are included in the consolidated accounts of Alm. Brand A/S, Skadesforsikringsselskab and Alm. Brand af 1792 fmba. 5

7 FIVE YEAR HIGHLIGHTS PROFIT AND LOSS ACCOUNT BALANCE SHEET KEY RATIOS AND OTHER FINANCIAL DATA DKK million Interest receivable Interest payable Net interest income Net fee and commission income and dividends etc Net interest and fee income Market value adjustment of securities and exchange-rate adjustment of foreign currency Other operating income Profit on ordinary activities before expenses Costs Net provisions for bad and doubtful debts Value adjustment of participating interests Profit on ordinary activities before tax Tax Profit for the year Profit attributable to minority interests Loans and advances 8,655 6,848 5,789 5,261 4,947 Deposits 9,091 8,244 8,639 7,852 7,680 Minority interests Shareholders equity Total assets 13,195 12,835 10,703 9,277 10,927 Average number of employees, full-time equivalents Number of branches at year-end Net interest margin 2.6% 2.5% 2.5% 2.6% 2.4% Return on equity before tax 12.9% 15.0% 8.6% 9.7% 9.1% Return on equity after tax 13.8% 8.3% 5.7% 6.7% 7.8% Return in excess of the interest rate on certificates of deposit 9.4% 10.2% 4.1% 6.6% 5.0% 6

8 OVERVIEW NET INTEREST AND FEE INCOME INCOME/COST RATIO PROFIT BEFORE TAX 450 DKKm DKK DKKm DEPOSITS, LOANS AND ADVANCES PROVISIONING RATIO RETURN ON EQUITY BEFORE TAX DKKbn 10 4 % 16 % ! 1999! 2000! 2001! 2002! Deposits Loans and advances Return on equity Income target 7

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10 DIRECTORS REPORT ANNUAL REPORT

11 WELL EN ROUTE TO 2006 by HENRIK NORDAM FINANCIAL RESULTS The bank posted its best results ever in 2002 with a pre-tax profit of DKK 101 million, equivalent to a return on equity of 12.9%. Accordingly, we achieved our earnings target of a return on equity of the money market rate plus 5 percentage points. The satisfactory results may be attributed to several factors: We generated profitable growth in our core areas, primarily in the lending area. In addition, our trading activities, that is, trading in mortgage deeds and retail stockbroking, contributed favourably to our performance. We recorded strong growth in the stockbroking area and substantial growth in assets under management. Moreover, we succeeded in keeping costs at a reasonable level while making investments in shaping our future. STRATEGY We aim to retain our position as Denmark s savings and investment bank a position we succeeded in further strengthening in In future, we will, moreover, focus on supporting the Alm. Brand Group s strategy of increasing the number of fullservice customers, that is, customers who buy both banking and insurance products from Alm. Brand. We intend to achieve this by expanding our range of lending products offered to private and agricultural customers in good financial standing. At the same time, we will continue to focus on generating a satisfactory return to our shareholders on the capital invested. The rationale of full-service customers is actually quite simple. We believe that offering both banking and insurance products to the same customer enables us to offer top-quality financial advice with a high degree of security at very competitive prices. Our experience furthermore suggests that full-service customers who buy their banking and insurance products from the same supplier tend to be more loyal, and we believe that long-term customer relationships are in the interest of both parties. The overall objective of the Alm. Brand Group is for 20% of our customers to buy both banking and insurance products from Alm. Brand by We are still some distance from achieving this very ambitious objective, but we are confident that we will achieve it if we make a targeted effort. The bank is substantially smaller than Alm. Brand Forsikring in terms of customer volume. To achieve the group s full-service customer objective it is necessary for the bank to attract more new customers who already buy their insurance products from the group in the years ahead. At the same time, we must ensure that an increased number of our existing customers obtain even greater benefits from placing all their business with Alm. Brand. In an effort to create better opportunities for the successful implementation of the full-service customer concept, we restructured the bank in 2002, dividing it into two main areas: retail banking and wholesale banking. As part of the restructuring process, Peter Reedtz and Brian Kudsk were appointed to the Executive Board. 10

12 In future, the retail bank will concentrate on all the products that form the basis of the full-service customer activities, whereas the wholesale bank will focus on the professional market. The wholesale bank will continue to draw on its expertise within stockbroking, asset management, mortgage deeds and investment properties to contribute to the bank s results while supporting the retail bank and car finance/leasing to ensure that the bank has a satisfactory loan-to-deposit ratio. NEW HEAD OFFICE Effective 1 December 2002, the bank relocated from its head office through 16 years at Jarmers Plads in central Copenhagen to Midtermolen just north of the city centre, where all of Alm. Brand s head office functions are now located. The physical proximity will facilitate the development of new and joint products and the coordination of new initiatives. Moreover, the bank is now housed in modern premises that provide the framework for our future growth. In order to strengthen our capital base, we raised supplementary capital in the amount of DKK 300 million in The capital base totalled DKK 1.1 billion at 31 December 2002, and the group s solvency ratio is 12.6%. CUSTOMER SERVICE We will continue to serve our customers through the group s network of customer offices and to offer internet, mobile and fixed network solutions. Our customers will, as always, receive a personal and efficient service when they contact us. We believe that high-quality advice is key to maintaining good customer relationships, and we are convinced that employee qualifications and attitudes are essential to Alm. Brand Bank s success. In 2002, a common set of values was introduced for the entire Alm. Brand Group building on our philosophy of acting with ordinary common sense, and the new values have been well received by our employees. LIQUIDITY AND CAPITAL We will continue to base our liquidity on deposits from Danish private customers and, if feasible, on liquidity from other sources as well. We will ensure that our cash resources are adequate at all times. In 2002, employee turnover fell 50%. This agrees well with a survey carried out throughout Alm. Brand in the autumn of 2002 showing a general employee satisfaction of 79%. This is a satisfactory outcome which we endeavour to improve through a continued focus on employee satisfaction and allocation of resources to train and develop our employees. 11

13 DEVELOPMENTS Our agricultural finance activities have been very successful since they were launched in the autumn of 2001, and lending has increased substantially. Owing to Alm. Brand s traditionally strong position as a provider of agricultural insurance, agricultural finance also supports the full-service customer concept. For many years, the bank has had successful partnerships with, for instance, the EDC chain of estate agents and the Semler Group (car importers). In 2002, Alm. Brand established a partnership with the Danish Association of Managers and Executives (Ledernes Hovedorganisation). In this connection, we introduced the banking and insurance product provider, Ledernes Bank og Forsikring, in the autumn of 2002, which, in terms of banking, is mainly an internet-based activity. OUTLOOK FOR 2003 We expect a pre-tax profit in the region of DKK 85 million in We will aim to generate moderate growth in lending while maintaining our tight credit policy to ensure that losses remain among the lowest in the market. The profit forecast for 2003 is below the 2002 level, mainly because we anticipate increased costs in connection with investments in shaping our future and in the full-service customer concept in particular. We look forward to 2003 with great expections that this year will consolidate our position as one of Denmark s ten largest banks. In the summer of 2002, we acquired a major car finance portfolio from GE Capital Bank to consolidate our position as a key player in the Danish car finance market. We made a decision in 2002 to defer the introduction of Alm. Brand Private Equity given the investor reluctance that is a natural response to recent years general downturn in the financial markets. Henrik Nordam President and CEO 12

14 THE GROUP S BUSINESS ACTIVITIES Alm. Brand Bank s business activities are distributed on the following areas: Retail banking Wholesale banking Car finance (Alm. Brand Bilkredit A/S) Leasing (Alm. Brand Leasing A/S) The group s business activities are divided into function-specific head-office units, securing the customer a range of quality services from all areas. RETAIL BANKING Offering a wide and in recent years gradually expanding range of banking products, the retail bank targets the private and agricultural customer segments. Today, the retail bank offers attractive solutions to customers in good financial standing. The retail bank has some 70,000 private customers and a staff of 136 employees. Retail banking contributed DKK 13 million to the group s contribution margin in The customers are served through the Alm. Brand Group s 42 customer offices and the bank s customer service centre. In addition, an increasing number of customers use the bank s many self-service facilities: netbanking, mobile banking, ATM and telephone services. Goals and strategies The retail bank aims to contribute to the Alm. Brand Group s overall objective of profitability and growth, for instance, by increasing the number of full-service customers in the group. The retail bank is well-positioned in the savings and investment areas and known for offering attractive products in these areas. The objectives are to strengthen the bank s profile in relation to private customer lending, to establish more full-service customer relationships and to create strong customer relationships through highly qualified advice. Moreover, the retail bank aims to achieve a growth rate that outperforms the general market. The long-term objective is to build a market share similar to the one Alm. Brand holds in the insurance area, thereby strengthening the group s overall distribution power. Our strategy is to provide attractive products offering customers unique benefits in the selected market segments. We aim to achieve competitive strength in the market by offering competitive products and avoiding unprofitable segments. The retail bank is pursuing a multi-pronged distribution strategy that covers branches, business partners, customer service centre and self-service facilities. Highlights Deposit campaigns The bank launched two major deposit campaigns in The campaigns were successful despite keen competition in the market and the generally very low level of interest rates. Deposits in the retail bank totalled DKK 7.4 billion at 31 December Alm. Brand Invest The investment area remained very much in focus in 2002, especially the Alm. Brand Invest unit trust with which the bank collaborates closely. In 2002, Alm. Brand Invest s total assets increased 37% to DKK 1.4 billion distributed on more than 10,000 members. Growth in Alm. Brand Invest was substantially above the general growth rate in the unit trust market, and it was achieved in a difficult market characterised by falling share prices. The growth rate in Alm. Brand Invest is partly owing to refinancing of the bank s pension pools which were discontinued in 2002 to increase transparency for the pension savers. 13

15 THE GROUP S BUSINESS ACTIVITIES Customer service The retail bank s customer service centre handles more than 300,000 telephone enquiries from customers each year. Customer satisfaction surveys made on a regular basis revealed that satisfaction in all areas increased sharply during the year. In general, more than 80% of the customers are satisfied with Alm. Brand Bank s telephone services. It should also be noted that the bank came in fifth among the financial operators in Denmark in an annual cross-cutting benchmark survey of call centres operated by a large number of major companies in Growth in lending In 2002, the retail bank s lending rate increased by more than DKK 400 million to more than DKK 800 million at 31 December Growth is distributed evenly on a number of lending areas. The most significant increase was recorded on home loans and was to a large extent attributable to the partnership with the EDC chain of estate agents. This partnership continued to develop satisfactorily in The bank is co-owner of DLR Kredit A/S and provides DLR mortgage loans to agricultural customers. This partnership developed very favourably in Outlook for 2003 In 2003, the retail bank will be focusing on achieving stable growth in deposits exceeding the general market developments while continuing the favourable trend in lending to private and agricultural customers. We will focus increasingly on establishing full-service customer relationships and creating strong customer relations. An important target group for the continued expansion of the retail bank is the group s insurance customers, who are offered attractive terms if they pool more business with Alm. Brand. We expect the retail bank s contribution to the bank s performance in 2003 to be slightly higher relative to 2002 while further developing the full-service customer concept. Unsecured consumer loans is a relatively new business area which also performed satisfactorily in 2002 and recorded substantial growth. In the lending area, we apply a credit scoring model that has provided good results in the past. Credit losses are on a level with expectations. Agricultural department Today, Alm. Brand Forsikring holds a strong position in the agricultural market. Based on this position, the bank established an agricultural department in 2001 to ensure that Alm. Brand would be capable of offering a full range of financial products to its agricultural customers in the future. The agricultural department got off to a good start in 2002, and many new customer relationships were established. The vision of establishing close ties between agricultural customers and the Alm. Brand Group through full-service customer relationships has been achieved, as the majority of the bank s new agricultural customers are also insurance customers of Alm. Brand. 14

16 WHOLESALE BANKING The wholesale bank is responsible for the banking group s activities within bond, share and currency trading and analysis and asset management. In addition, the wholesale bank handles lending, primarily relating to mortgage deed and investment property commitments. The wholesale bank staffs 65 employees. Wholesale banking contributed DKK 112 million to the group s contribution margin in Alm. Brand Børs provides advisory services to professional investors and advisory and other services to private customers. Investors are offered a broad range of products for the active and targeted management of their financial assets. An important part of the business area is to offer customers a number of other services in addition to the core service. Additional services offered include performance reporting, preparation of work routines, developing job descriptions and tools to manage risks and providing inspiration for sales efforts and customer servicing. Goals and strategies The wholesale bank aims to be the best wholesale bank in Denmark by providing a unique and different management and service offering. The business area has worked towards four objectives for a number of years. The objectives have been defined in the areas of customer satisfaction, employee satisfaction, profit and lending, and all four objectives were met in The MinBors.dk web portal was improved and further developed during the year. In addition to allowing customers to view portfolios, transactions, returns and benchmarks, the portal now also includes fixed income research. In an effort to improve the information level provided to customers, MinBors.dk now features NetPosten s financial news. Our aim of having at least 1,000 page views per week was achieved in The wholesale bank is one of Denmark s ten largest players within bonds, shares and asset management and one of Denmark s leading players in mortgage deeds and the niche area of investment property finance. It is our aim to further expand these positions through organic growth in In addition, the wholesale bank will focus increasingly on retaining its strong position within savings and investments. Our strategy is to provide attractive products offering customers unique benefits in the selected market segments. We aim to achieve competitive strength in the market by offering competitive products and avoiding unprofitable segments. Highlights Alm. Brand Børs Alm. Brand Børs and asset management increased the number of assets under management in 2002 while achieving the best results ever in share, bond and currency trading. In August 2002, the wholesale bank signed an asset management contract with the other companies of the Alm. Brand Group to the effect that a considerable share of the group s assets are now managed by Alm. Brand Bank. Alm. Brand Børs has maintained its certification to the Global Investment Performance Standard (GIPS), which was initially obtained in February 2000 for all portfolios under management. The GIPS certification ensures objective assessment and benchmarking of returns etc. Alm. Brand Børs has maintained its policy that it has no own positions so as not to remove focus from customer requirements. Mortgage deeds For many years, the bank has specialised in mortgage deed trading, financing and management on behalf of investors, thereby gaining considerable expertise in the area. Today, the bank is one of Denmark s largest players in this area in terms of turnover. We recorded substantial turnover in mortgage deed portfolios in Coupled with considerable growth in the volume of financing provided to investors, this has helped to enhance profit. 15

17 THE GROUP S BUSINESS ACTIVITIES We successfully continued to purchase mortgage deeds to an extent enabling us to meet investor needs. The mortgage deeds originate from the bank s partnership with the EDC chain of estate agents and purchases in the wholesale market, respectively. Alm. Brand Pantebreve A/S As a result of the continued keen interest in mortgage deed investments, we once again experienced a need to increase the share capital in the listed company Alm. Brand Pantebreve A/S in Accordingly, a share issue was successfully carried through in the spring of The listed B share capital was increased by DKK 35 million nominal value to DKK 85 million, bringing the company s total share capital to DKK 105 million, consisting of DKK 20 million unlisted A shares held by Alm. Brand Bank and DKK 85 million B shares. The capital increase was made with pre-emption rights to existing shareholders at the ratio of 1:2, and we saw considerable interest from both existing and new shareholders. The number of registered B shareholders consequently rose to 531 at 31 December The company s shares are believed to provide a good supplement to an existing long-term investment which emphasises an appropriate diversification of the interest-bearing and the share-based investment in agreement with the customer s individual risk profile. The share is preferred by customers demanding professional management and risk diversification on their mortgage deed investments. In 2002, Alm. Brand Pantebreve posted a pre-tax profit of DKK 11 million, equivalent to a return on average shareholders equity of 9.8%. Investment property The investment property department specialises in financing prime-location property mainly used for retail or residential purposes. During the year, the department expanded its competences in the cooperative residential area and recorded handsome growth rates in all areas. The selection of investment properties is based on location and the creditworthiness of the customer purchasing the property. Growth was thus achieved while maintaining the bank s restrictive credit policy in the area. Outlook for 2003 The wholesale bank will retain its focus on ensuring growth in lending based on sound credit principles and on generating satisfactory returns to its customers in the stockbroking and asset management areas. In addition, we aim to continue providing professional services to our customers. We believe that it is important to develop and offer comprehensive finance packages to our customers, and we therefore make continued efforts to cultivate connections with other players in the market and develop comprehensive financing solutions through concerted action. Insurance and on-line banking etc. are offered to cover the customer s subsequent need for services. The wholesale bank s contribution to the bank s profit in 2003 is expected to be below the level contributed in 2002, primarily because 2002 was an extraordinarily good year. 16

18 ALM. BRAND BILKREDIT A/S Alm. Brand Bilkredit is a wholly owned subsidiary of the bank providing car loans to private and corporate customers, primarily through business partners. Set up in 1985, Alm. Brand Bilkredit generated recent years growth through new business and by acquiring various car loan portfolios. The company s lending increased from DKK 1.9 billion at 31 December 2001 to DKK 2.4 billion at 31 December Collaboration with a number of major Danish car importers was further intensified and expanded in In the years ahead, we will be focused on further expanding and enhancing the efficiency of the these partnerships. The volume of new business is related to the sale of cars in Denmark. After several years of declining car sales, sales of new cars went up in Despite the hike in 2002, sales of new cars remain substantially below the level prevailing in the late 1990s. Highlights In the spring of 2002, the company relocated from Copenhagen to Lyngby, bringing administration and repair shop together under one roof. The low sales of new cars have increased competition between the car finance companies and other providers of car loans. Alm. Brand Bilkredit s staff averaged 24 employees in Alm. Brand Bilkredit s pre-tax profit was DKK 13 million in In August 2002, Alm. Brand Bilkredit acquired a DKK 1.1 billion car loan portfolio from GE Capital Bank, equivalent to an increase in the company s total assets of approximately 60%. The conversion of the portfolio to Alm. Brand Bilkredit s systems and the subsequent case management proceeded satisfactorily. The portfolio performed in line with expectations. Goals and strategies The company aims to consolidate its current position as an important player in the Danish market for car finance. Our strategy is to offer competitive financial solutions to business partners and customers and to limit credit risk as much as possible through a selective credit policy. Outlook for 2003 Alm. Brand Bilkredit expects sales of new cars in 2003 to be on a par with Moreover, the company expects to increase the efficiency and range of competitive financial services offered to business partners and customers. Alm. Brand Bilkredit thus projects that the profit for 2003 will be higher than the profit for

19 THE GROUP S BUSINESS ACTIVITIES ALM. BRAND LEASING A/S Alm. Brand Leasing is a wholly owned subsidiary of Alm. Brand Bank primarily offering car lease services to corporate customers. Historically, Alm. Brand Leasing has provided car and office equipment leases through business partners. In addition, Alm. Brand Leasing has offered car leases directly to companies with large car fleets. In the autumn of 2000, the company discontinued»office equipment leasing«, and today car lease services offered through business partners and to car fleet customers thus constitute its core activity. In 2002, Alm. Brand Leasing therefore extended its partnerships with a number of car suppliers. Highlights In the spring of 2002, the company relocated from Copenhagen to Lyngby, bringing administration and repair shop together under one roof. In 2002, the company received an injection of DKK 40 million from a capital increase by issuance of new shares of DKK 1 million nominal value at the price of DKK 4,000 per share. In August 2002, the company acquired a DKK 200 million leasing portfolio from GE Capital Bank, equivalent to an increase in the company s total assets of approximately 26%. The conversion of the portfolio to Alm. Brand Leasing s systems and the subsequent case management proceeded satisfactorily. The portfolio performed in line with expectations. Alm. Brand Leasing s staff averaged 25 employees in Alm. Brand Leasing s pre-tax profit was DKK 5 million in Goals and strategies Alm. Brand Leasing aims to cover the financing requirements of financially sound companies for car lease services and to be an active leasing partner for professional leasing intermediaries. Alm. Brand Leasing extended its close partnership with a number of car suppliers in Direct sales to major car fleet customers were also strengthened and scaled up in The company s lending fell from DKK 850 million at 31 December 2001 to DKK 825 million at 31 December The relatively moderate drop in lending despite the discontinuance of»office equipment leasing«is attributable to a good inflow of new business from business partners and car fleet customers and to the takeover of the GE Capital Bank leasing portfolio. Outlook for 2003 Alm. Brand Leasing expects sales of new cars in 2003 to be on a par with Moreover, the company expects to increase the range of competitive financial services offered to business partners and customers. Early 2003, a new leasing system has been implemented, which will contribute to a further optimisation of our business processes. We thus expect to increase efficiency and improve the service level offered to our business partners and customers. Alm. Brand Leasing projects that the profit for 2003 will be higher than the profit for We intend to reduce the leasing portfolio of office equipment further while ensuring growth in the other business areas. 18

20 EMPLOYEES EMPLOYEES We believe that the attitude, conduct and professional competences of our employees are key to our success. Accordingly, satisfied and loyal employees are important if the bank is to achieve its targets. At the end of 2002, there were 372 employees in the bank and 414 in the banking group. The corresponding figures for 2001 were 339 and 394, respectively. We expect to retain this level in GOALS AND STRATEGIES The Alm. Brand Group therefore aims to offer its employees responsibility, a say in their own situation, challenges and personal development opportunities. Developing the employees will enable the bank to stand out from the competition. The aim of the Alm. Brand Group, and thus of Alm. Brand Bank, is for 90% of employees to be satisfied or very satisfied with working at Alm. Brand by The objectives will be achieved through focused efforts in the following areas: Developing the image of the Alm. Brand Group as an attractive place to work Focusing on individual development and training of managers Implementing a common corporate culture Maintaining targeted, open and honest communication lines to all employees Increasing focus on profitability through increased use of performance pay The Alm. Brand Group seeks to have informal rules of conduct with a short chain of command from the management to the employees. HIGHLIGHTS IN 2002 In an effort to support an overall corporate culture, a number of activities were implemented during 2002 to introduce a common set of values for the entire group. The activities proved very successful. The values have been defined by means of a number of conduct watchwords which reflect the way Alm. Brand would like to be perceived by its customers, business partners and the external environment. VALUES AND CONDUCT WATCHWORDS ORDINARY COMMON SENSE WE IDENTIFY WITH THE CUSTOMER WE KEEP OUR PROMISES WE MANAGE RULES WITH COMMON SENSE MUTUAL RESPECT WE LISTEN TO EACH OTHER WE RESPECT EACH OTHER S OPINIONS WE DRAW ON EACH OTHER S KNOWLEDGE AND EXPERIENCE HOLISM AND PROXIMITY WE TAKE A HOLISTIC APPROACH WE CARE FOR EACH OTHER WE ARE ACCESSIBLE At 31 December Number of employees full-time equivalents Average age Average seniority (years) 6 5 WILL TO SUCCEED WE SET AMBITIOUS AND REALISTIC GOALS WE STRIVE FOR PROFESSIONAL AND PERSONAL DEVELOPMENT WE CREATE RESULTS TOGETHER 19

21 RISK MANAGEMENT RISK MANAGEMENT The risk department and the credit secretariat are responsible for the banking group s overall risk management, for drafting guidelines and for monitoring the market risks and credit risks to which the bank is exposed. groups are consumer loans to private customers, who already have a commitment with the Alm. Brand Group, and agricultural customers. The key criterion for accepting this type of commitment is a satisfactory credit assessment of the debtor. CREDIT RISKS The bank offers a wide range of lending products on standard terms and conditions that focus on providing finance for selected types of assets for which the bank has special expertise in terms of pricing and selling. It is a common feature of these lending products that the credit assessment primarily centres on the bank s expertise in and knowledge of the assets on which the loans are granted. Basically, the bank also generally requires that the borrower has an equity interest, either by way of a down-payment or by the collateral value exceeding the commitment. The financing of securities and mortgage deed portfolios is based on investors providing capital that at least corresponds to the difference between the loan and a loan value of the securities as determined by the bank. When borrowing against security in investment properties, the bank emphasises the quality, location and re-letting potential of the mortgaged property. The investments must have positive cash flows, and the cash flows in the facilities provided must be sufficient to cover payments to the bank and other operating expenses. In addition, the bank offers a range of lending products to special customer groups based on the objective of creating fullservice customer relationships. The most important customer In its credit policy, the bank strives to keep its credit losses among the lowest in the industry as this is a prerequisite for the bank to continue to offer competitive products. The bank seeks to limit the risk of major credit losses by diversifying credits granted on a large number of small commitments or by avoiding a concentration of security on a few, large assets, with the exception of cash placed with banks or large, financially strong business corporations. Based on a regular review of commitments, the bank determines the need for making provisions against future credit losses. The banking group s provisions amount to 2.5% of total loans and guarantees. The bank has individual provisions on separate commitments as well as statistical provisions on large loan portfolios of a uniform nature, based on the bank s previous credit experience and future expectations as to how general economic developments could affect credit losses. MARKET RISKS The bank s exposure to customers in the securities and foreign exchange markets and its investment of surplus liquidity involve an exposure to various kinds of market risks which arises in connection with fluctuations in interest rates, share prices and exchange rates. The Board of Directors has defined detailed limits as to which market risks the bank will assume. 20

22 INTEREST RATE RISKS The bank s interest rate risk, made up according to the guidelines issued by the Danish Financial Supervisory Authority, amounted to DKK 75 million at 31 December 2002, equivalent to 11.1% of the bank s equity. At 31 December 2001, the group s interest rate risk amounted to DKK 46 million. The calculation method defined by the Danish Financial Supervisory Authority does not take into account any prepayments of mortgage deeds. Adjusted for this impact, the interest rate risk was DKK 11 million at 31 December The bank monitors prepayments on the mortgage deed portfolio closely and makes regular adjustments to its assessed interest rate risk. The bank s overall interest rate risk as a result of a general 1 percentage point increase in interest rates must not exceed 5% of the bank s equity, which corresponds to DKK 34 million in terms of the adjusted interest rate risk. The bank regularly uses financial instruments in its management of interest rate risk to reduce its interest rate exposure to fixed income assets. This is done by seeking a strong correlation between derivative financial instruments and fixed income assets. EQUITY RISK The bank only takes own positions for minor amounts when setting prices, for transaction purposes and as a market maker for Alm. Brand A/S, Skadesforsikringsselskab, Alm. Brand Pantebreve A/S and the Alm. Brand Invest funds. The bank s own portfolio of listed shares totalled DKK 85 million at 31 December 2002, including DKK 55 million worth of shares in Alm. Brand A/S, Skadesforsikringsselskab. CURRENCY RISK The bank s policy is to have only very limited own positions in foreign currency. At 31 December 2002, the group s position amounted to 2.5% of its tier 1 capital after deductions. Equity risks given various changes in market parameters Impact, DKKm before tax Percentage of equity at 31 December 2002 Interest-bearing assets at 1%-point increase % Interest-bearing liabilities at 1%-point increase % Interest-bearing claims, net, at 1%-point increase % Equity risk on listed shares at 10% fall % Currency risk in terms of indicator % The interest rate risks shown in the table has been adjusted to take into account prepayments of mortgage deeds. 21

23 FINANCIAL REVIEW GROUP RESULTS In 2002, the banking group s net interest and fee income increased by 8% from DKK 406 million to DKK 440 million. The increase reflected higher interest income generated by substantially higher lending and a sustained growth in activities in the fee and commission-based areas such as trading in securities and mortgage deeds. The pre-tax profit for the year was DKK 101 million as compared with DKK 114 million in Tax for the year represented an income of DKK 4 million, bringing the group s total profit after tax to DKK 105 million against DKK 63 million in Other ordinary income was DKK 31 million, largely in line with the 2001 level of DKK 29 million. A significant part of the group s activities are carried out by the bank s subsidiaries. The banking group s costs including depreciation of machinery and equipment increased by 8% to DKK 313 million in 2002 from DKK 289 million in If the 2001 figure is adjusted for the DKK 14 million reversed write-down on properties, the increase would be 3%. Provisions for bad and doubtful debts charged to the profit and loss account totalled DKK 48 million. This was an increase of DKK 30 million over 2001 and reflected an increase in provisions due both to the acquisition of the loan and leasing portfolio from GE Capital Bank totalling DKK 1.3 billion and to the growth in the bank s portfolio of unsecured consumer loans. Provisions for bad and doubtful debts charged to the profit and loss account in 2002 accounted for 0.5% of total loans and guarantees, an increase of 0.3 percentage points over Total provisions break down on 81% A provisions (provisions to meet a likely loss) and 19% B provisions (a loss is deemed to be unavoidable, but the amount of the loss cannot yet be made up). In terms of total assets, Alm. Brand Bilkredit A/S and Alm. Brand Leasing A/S are the largest subsidiaries. The volume of new lending in these companies was low in 2002 due to relatively weak sales of new cars. However, the total volume in the companies increased steeply as a result of the acquisition of the GE Capital Bank portfolio. Alm. Brand Bilkredit A/S posted a pre-tax profit of DKK 13 million in 2002 as compared with DKK 19 million in Alm. Brand Leasing A/S posted a profit of DKK 5 million, which was unchanged from Alm. Brand Pantebreve A/S posted a pre-tax profit of DKK 11 million in 2002, equivalent to a pre-tax return of 9.8% as compared with the company s average equity. To ensure a continued increase of the business volume, the company increased its share capital by DKK 35 million through a share issue in early Alm. Brand Bank holds 19.5% of the shares and 70.3% of the votes in the company. 22

24 Alm. Brand Private Equity A/S had no activities in 2002 and posted a result of DKK 0 million for the year. In July 2002, the bank sold the property at Midtermolen 1-3 in Copenhagen to the Alm. Brand life group at book value at 31 December The company was wound up at 31 December The bank made repo/reverse transactions in 2002, and this impacted both lending and deposits in the amount of DKK 0.4 billion. The bank raised supplementary capital of DKK 300 million in 2002, which substantially strengthened its capital base. At 31 December 2002, the group s total capital base was DKK 1.1 billion with a solvency ratio of 12.6%. GROUP BALANCE SHEET Loans and advances in the banking group amounted to DKK 8.7 billion at 31 December 2002 against DKK 6.8 billion the year before. This reflected an increase of DKK 1.9 billion or 26% attributable to the acquisition of the GE Capital Bank portfolio and to increased lending to investment properties and mortgage deeds. The bank issued Commercial Papers worth DKK 100 million in The bank expects to pay dividends of DKK 170 million to Alm. Brand A/S, Skadesforsikringsselskab in respect of the 2002 financial year in early Deposits in the banking group also grew in 2002, but in a competitive market with very small margins. Deposits increased from DKK 8.2 billion at 31 December 2001 to DKK 9.1 billion at 31 December 2002, equivalent to an increase of DKK 0.9 billion or 10%. 23

25

26 ACCOUNTS ANNUAL REPORT

27 ACCOUNTING POLICIES GENERAL The annual report, comprising the annual accounts and consolidated accounts for 2002 of Bankaktieselskabet Alm. Brand Bank, has been prepared in accordance with the Danish Banking Act (Lov om banker og sparekasser mv.) and the Executive Order on the Preparation of Bank Accounts and the guidelines issued by the Danish Financial Supervisory Authority (Finanstilsynet). Newly acquired undertakings are included as from the date of acquisition. Undertakings which have been divested or wound up are included in the consolidated accounts until the date of divestment/winding-up. Comparative figures are not restated to reflect companies divested or added by way of acquisitions or mergers. The accounting policies are unchanged as compared with last year. CONSOLIDATION The annual report comprises the parent company, Bankaktieselskabet Alm. Brand Bank, and undertakings in which the parent company holds more than 50% of the votes or otherwise exercises a controlling influence. PARTICIPATING INTERESTS IN GROUP UNDERTAKINGS Participating interests in subsidiary undertakings are valued using the equity method. Participating interests in other listed group undertakings are stated at year-end market value. Market value adjustments of participating interests in group undertakings comprise the pre-tax profits of subsidiary undertakings after deduction of profits on intercompany transactions and market value adjustments of other group undertakings. Tax in subsidiary undertakings is carried under»tax«. The consolidated accounts are prepared on the basis of the accounts of Alm. Brand Bank and its subsidiary undertakings by consolidating items of a similar nature and eliminating intercompany income and expenses, intercompany accounts and gains and losses on transactions between the consolidated companies. The accounts used in the consolidation are prepared in accordance with the group s accounting policies. Parent company participating interests in subsidiary undertakings are offset by the parent company s proportionate share of the net assets of the subsidiary undertakings. The proportionate shares of the results and shareholders equity of subsidiary undertakings attributable to minority interests are adjusted and stated separately in the profit and loss account and the balance sheet. INTERCOMPANY TRANSACTIONS Intercompany transactions provided as part of normal operating activities are settled on market terms. Trading in assets, including property and other financial investment assets, is transacted at market prices. Other intercompany services are settled on the basis of actual costs incurred. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currency are stated at the rates of exchange published by Danmarks Nationalbank at the end of the financial year. Income and expenses in foreign currency are translated into Danish kroner using the exchange rates prevailing at the time of booking. Exchange gains and losses are recognised in the profit and loss account. 26

28 PROFIT AND LOSS ACCOUNT ITEMS, GENERAL Interest receivable and interest payable etc. are accrued over the lifetime of the transactions and included in the profit and loss account with the amounts relating to the accounting period. Fees etc. are normally recognised when received. LOANS AND GUARANTEES ETC. (including mortgage deeds and leasing) Provisions for bad and doubtful debts etc. are made on the basis of an individual assessment of the companies commitments. Debts which are regarded as bad debts are written off completely against the profit and loss account. When a facility is considered to be non-performing, the continuous charge of interest on the facility is stopped. Provisions for groups of similar, minor loans are made on the basis of statistical calculations of debtor risk. The group s portfolios of mortgage deeds and fixed-interest loans are written down so that the return thereon corresponds at least to the market return on similar claims. Write-downs and reversals thereof are stated in the profit and loss account under»value adjustments of fixed-interest loans«. The group s leasing assets are stated in the balance sheet under»loans and advances«. Loans and commitments are valued at cost less any repayment instalments taking into account the useful economic lives of the individual assets. The historic cost less any estimated residual value is depreciated over the lease period. REPO/REVERSE TRANSACTIONS Securities sold under agreements to repurchase at a later date (repo transactions) remain in the balance sheet. Amounts received are stated as liabilities payable to the purchaser and are subject to interest at the agreed rate. The securities are revalued as if they were still included in the balance sheet, and market value adjustments and interest etc. are included in the profit and loss account. Securities purchased under agreements to resell at a later date (reverse transactions) are not included in the balance sheet. Amounts paid are stated as assets and are subject to interest at the agreed rate. TANGIBLE ASSETS Machinery and equipment etc. is stated at cost plus any improvements and less depreciation and write-downs. Depreciation is based on the expected useful lives of the assets. INTANGIBLE ASSETS Intangible assets, including IT software and IT development costs, are fully expensed in the year of acquisition. DERIVATIVES Forward transactions, futures and options are entered at the market values prevailing at the end of the year. Market value adjustments are reflected in the profit and loss account. BONDS AND SHARES Listed shares and bonds are stated at year-end market value. Unlisted securities are stated at the lower of historic cost and a conservatively estimated market value. Unlisted units of unit trusts are stated at net asset value. Interest receivable from swaps and premiums on forward securities and forward currency transactions is stated on a net basis in the profit and loss account under»interest receivable from derivatives«. Swaps entered into to hedge the interest rate exposure on fixed-interest assets are not market value adjusted. 27

29 ACCOUNTING POLICIES TAX Bankaktieselskabet Alm. Brand Bank and the wholly owned subsidiaries are taxed jointly with Alm. Brand A/S, Skadesforsikringsselskab. Alm. Brand A/S, Skadesforsikringsselskab, makes a provision in respect of the estimated tax charge on jointly taxed income and deferred tax. Tax payable by subsidiaries not included in the joint taxation is calculated at the rate of 30% in the respective company. The charge on interest benefits from tax deductions in respect of provisions for bad and doubtful debts is carried under»tax«. Cash flows from operating activities include the items of the profit and loss account adjusted for operating items of a noncash nature. Realised gains and losses on the sale of assets are included in cash flow from investing activities. Cash flows from working capital include assets and liabilities related to operating activities, including loans, deposits etc. Cash flows from investing activities include acquisitions and divestments of subsidiary undertakings, changes in intercompany accounts and net investments in assets, including realised gains and losses on the sale of the assets. CASH FLOW STATEMENT The cash flow statement shows the group s cash flows for the year divided into cash flows from operating activities; working capital; investing activities and financing activities. The cash flow statement is presented using the indirect method and based on the profit for the year. Cash flows from financing activities include financing from shareholders and from the raising of short-term and long-term loans, including supplementary capital and issued bonds. Cash and cash equivalents comprise cash at bank and in hand and balances with credit institutions and central banks. 28

30 SIGNATURES The Board of Directors and the Executive Board have today reviewed and adopted the annual report for the financial year ended 31 December As members of the Board of Directors and the Executive Board we declare that to the best of our knowledge and belief: The annual report has been prepared in accordance with the provisions of Danish legislation and the articles of association of the company. The annual report provides a true and fair view of the company s assets, liabilities, financial position, financial results and of the group s cash flows. We recommend that the annual report be adopted by the shareholders at the annual general meeting. EXECUTIVE BOARD Copenhagen, 27 February 2003 Henrik Nordam Brian Kudsk Peter Reedtz BOARD OF DIRECTORS Copenhagen, 27 February 2003 Christian N.B. Ulrich Chairman Christian G. Kjøller Deputy Chairman Ole Bach Per Hansen Christian Hjorth-Andersen Ole Joachim Jensen Søren Boe Mortensen 29

31 AUDITORS REPORT INTERNAL AUDIT We have audited the annual report of Alm. Brand Bank for the financial year ended 31 December The annual report is the responsibility of the company s Board of Directors and Executive Board. Our responsibility is to express an opinion on the annual report based on our audit. Basis of opinion We conducted our audit on the basis of the Executive Order of the Danish Financial Supervisory Authority on Auditing Financial Enterprises and Financial Groups and in accordance with Danish auditing standards. Based on an evaluation of materiality and risk, we reviewed the accounting policies applied and the estimates made and tested the basis for the amounts and other disclosures in the annual report. Our audit did not give rise to any qualifications. Opinion In our opinion, the annual report provides a true and fair view of the group s and the parent company s assets, liabilities and financial position at 31 December 2002 and of the results of the group s and the parent company s operations and of the group s cash flows for the year 2002 in accordance with the accounting provisions of Danish legislation. Copenhagen, 27 February 2003 Ole Sørensen Group Chief Auditor Hanne Rousing Chief Auditor AUDITORS APPOINTED BY THE GENERAL MEETING To the shareholders of Alm. Brand Bank We have audited the annual report of Alm. Brand Bank for the financial year ended 31 December The annual report is the responsibility of the company s Board of Directors and Executive Board. Our responsibility is to express an opinion on the annual report based on our audit. Basis of opinion We conducted our audit in accordance with Danish auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual report is free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual report. An audit also includes assessing the accounting policies used and significant estimates made by the Board of Directors and the Executive Board, as well as evaluating the overall annual report presentation. We believe that our audit provides a reasonable basis for our opinion. Our audit did not give rise to any qualifications. Opinion In our opinion, the annual report provides a true and fair view of the group s and the parent company s assets, liabilities and financial position at 31 December 2002 and of the results of the group s and the parent company s operations and of the group s cash flows for the year 2002 in accordance with the accounting provisions of Danish legislation. Copenhagen, 27 February 2003 Deloitte & Touche Statsautoriseret Revisionsaktieselskab KPMG C.Jespersen Jørgen Jørgensen Henrik Priskorn Arne Nielsen Henrik Kofoed State-Authorised Public Accountant State-Authorised Public Accountant State-Authorised Public Accountant State-Authorised Public Accountant 30