2001 Annual Report of Julius Baer Holding Ltd. Financial Report

Transcription

1 Annual Report of Julius Baer Holding Ltd. Financial Report Contents << <

2 Investor Relations Jan A. Bielinski Chief Communications Officer Julius Baer Holding Ltd. Bahnhofstrasse 36, Postfach, CH-8010 Zürich Telephone +41 (0) Fax +41 (0) Internet Contents << <

3 Financial Report Contents << < 1

4 Contents << < 2

5 Contents 4 Highlights 7 Consolidated financial statements of the Julius Baer Group 75 Financial statements of Julius Baer Holding Ltd. In the Business Summary, you will find further information on the services, companies and corporate bodies of the Julius Baer Group. < 3 JULIUS BAER GROUP

6 Highlights Key figures for Julius Baer Holding Ltd. shares /00 % Net profit per bearer share (CHF) Shareholders equity 1 per bearer share 2 (book value, CHF) Price/earnings ratio per bearer share 3 Price/book value ratio per bearer share 3, 4 Dividend per bearer share 5 (CHF) High price per bearer share (CHF) Low price per bearer share (CHF) Market prices at year-end (adjusted, CHF) Market capitalization 6 ( at year-end) Julius Baer Group key figures Balance sheet assets Shareholders equity 7 Due from customers Due to customers Due from banks Due to banks /00 % Key ratios Shareholders equity/total assets (equity ratio) BIS tier 1 Return on equity (ROE) Cost/income ratio Consolidated profit per employee 8 (CHF 1000) % % % % % % Asset management Assets under management of which investment fund assets Baer Custodian Service CHF bn CHF bn CHF bn CHF bn CHF bn Personnel Personnel (FTE) of whom Switzerland of whom abroad Excluding minority interest 2 Book value at year-end 3 Coefficient at year-end 4 Including net profit before dividend 5 As proposed to the Shareholders Meeting 6 Shares entitled to dividends; including registered shares 7 Including consolidated profit before dividend; including minority interest 8 Personnel: average of two consecutive year-end figures 9 New calculation basis as of 1997 Contents << < 4

7 Consolidated income statement /00 % Interest income Interest expense Net interest income Commission income of which brokerage and securities underwriting of which commissions from asset management and investment Commission expenses Results from commission and service fee activities Results from trading operations of which securities of which foreign exchange and precious metals Other ordinary results Net operating income Personnel expenses Other operating expenses Operating expenses Depreciation and write-offs of non-current assets Valuation adjustments, provisions and losses Profit before taxes Taxes Consolidated profit Minority interest in consolidated profit Net profit Contents << < 5

8 Contents << < 6

9 Consolidated financial statements of the Julius Baer Group Companies consolidated as of 31 December Commentary on the consolidated income statement and balance sheet Consolidated income statement Consolidated balance sheet Consolidated shareholders equity Consolidated statement of cashflows Consolidated off-balance-sheet transactions Notes Comment on business activities Comment on risk management Consolidation policies and valuation principles Information on the consolidated income statement Segment reporting by business line Earnings per share Information on the consolidated balance sheet Report of the Group auditors to the Ordinary Shareholders Meeting of Julius Baer Holding Ltd., Zurich Balance sheet structure and operational efficiency Key figures: shares 1992 Assets under management Overview of investment funds Personnel statistics Contents << < 7 JULIUS BAER GROUP

10 Companies consolidated 1 as of 31 December Switzerland Head office Currency Capital m Equity interest % Julius Baer Holding Ltd. Zurich CHF Banks Bank Julius Baer & Co. Ltd. Zurich CHF Finance companies Julius Baer Invest Ltd. including Julius Baer Investment Funds Services Ltd. Julius Baer Italia Investment Funds Services S.r.l. Julius Baer Investline Ltd. Julius Baer (Luxembourg) SA Zurich Zurich Milan Zurich Luxembourg CHF CHF EUR CHF EUR Infidar Investment Advisory Ltd. Zurich CHF Julius Baer Family Office Ltd. Zurich CHF Julius Baer Asset Management Ltd. Zurich CHF BCT Services Ltd. Zug CHF JB Swiss Capital Market Research Ltd. Zurich CHF Real estate company AG, formerly Waser Söhne & Cie. Zurich CHF s in the companies consolidated: Julius Baer Investline Ltd., Zurich, new Julius Baer (Luxembourg) SA, Luxembourg, new Stellax Ltd., Zurich, merger with Bank Julius Baer & Co. Ltd., per 31 August 1 Companies included in the Group accounts on a fully consolidated basis 2 Remainder: stakes held by management 3 Remainder: stakes held by management, not entitled to dividends Contents << < 8 JULIUS BAER GROUP

11 Abroad Head office Currency Capital m Equity interest % Banks Bank Julius Bär (Deutschland) AG including Julius Bär Capital GmbH Frankfurt Frankfurt EUR EUR Julius Bär Kapitalanlage Aktiengesellschaft Frankfurt EUR Julius Baer Bank and Trust Company Ltd. including Julius Baer Trust Company (Cayman) Ltd. Directorate Inc. Grand Cayman Grand Cayman Tortola, BVI CHF CHF USD Finance companies Julius Baer Securities Inc. including Julius Baer Investment Management Inc. New York New York USD USD Julius Baer Investments Ltd. London GBP Julius Baer International Ltd. London GBP Julius Baer France SA Paris EUR Julius Baer Investment Advisory (Asia) Ltd. Hong Kong USD Julius Baer Investment Advisory (Canada) Ltd. Montreal CAD Julius Baer Trust Company (Channel Islands) Limited Guernsey CHF Société de Gestion Julius Baer (Monaco) S.A.M. Monaco EUR URSA Company Ltd. Grand Cayman CHF Contents << < 9 JULIUS BAER GROUP

12 Commentary on the consolidated income statement and balance sheet The annual financial statements dated 31 December were published for the first time in accordance with the accounting standards IAS 39 (recognition and measurement of financial instruments) and IAS 40 (investment property). The resulting changes are described in detail in the consolidation policies and valuation principles. Consolidated income statement The Julius Baer Group s net profit fell notably from CHF 433 million to CHF 225 million in the financial year. The reasons for this decline are the sharply reduced turnover in the financial markets, the negative results from equity trading, the lower assets under management and the considerable non-recurring special charges. Operating income decreased by 19% or CHF 328 million to CHF 1.4 billion. Results from commission and service fee activities receded by approximately the same degree to CHF 1.05 billion, representing 75% (76%) of operating income. Results from trading operations declined by around half to CHF 94 million and thus accounted for 7% (11%) of operating income. Stable net interest income comprised 13% (11%) of operating income, while other ordinary results contributed 5% (2%). Net interest income of CHF 188 million nearly reached the level of the previous year (CHF 191 million). In line with the lower business volume, interest and discount income decreased by 14% to CHF 449 million, while interest and dividend income on financial investments fell by 8% to CHF 94 million. These declines were nearly fully offset by the drop in interest expenses by 18% to CHF 354 million. Results from commission and service fee activities were down by 20% or CHF 258 million to CHF 1.05 billion in the year under review. As a result of the drop in assets under management, the mainly asset-value-related commissions from asset management and investment fell by 9% to CHF 825 million. Turnover-related commissions from brokerage and investment counseling declined by a much bigger percentage, dipping 32% to CHF 360 million. Income from securities underwriting decreased by nearly one third to CHF 29 million. In total, commission income on securities and investment transactions thus receded by 18% to CHF 1.21 billion. Commission income on other services increased from CHF 21 million to CHF 37 million, whereas commission income on lending activities remained stable at CHF 2 million. In contrast to the reduced business volume, commission expenses climbed from CHF 197 million to CHF 203 million. The drop in trading income from CHF 196 million to CHF 94 million is mainly attributable to the poor operating conditions in the international stock markets, as well as the non-recurring special charges. Whereas results from foreign exchange and precious metals trading were nearly stable at CHF 111 (113) million, securities trading recorded a loss of CHF 17 million. Income from bond trading was up from CHF 20 million to CHF 31 million, but this rise was more than offset by the negative result of CHF 8 million from proprietary equity trading as well as mainly by the non-recurring special charges. Within scope of the restructuring of Julius Bär Kapitalanlage Aktiengesellschaft, Frankfurt, the Group took over positions (primarily in the private equity area) that required valuation adjustments of CHF 37 million. Contents << < 10 JULIUS BAER GROUP

13 The advance of other ordinary results from CHF 34 million to CHF 70 million is mainly attributable to the release of CHF 32 million of provisions that are no longer required, as well as to the gain of CHF 12 million from the sale of a property in Zurich used only partially for business purposes. Operating expenses were cut by 5% or CHF 45 million to CHF 964 million during the financial year. The measures to sustainably lower costs already showed initial success in the second half of. Whereas personnel expenses (excluding bonuses) rose by 14% to CHF 473 million due to another increase in the average number of staff during the year, bonus payments dropped from CHF 276 million to CHF 154 million in line with results. Hence, total personnel expenses receded by 9% to CHF 627 million. After rising by 12% in the previous year, other operating expenses were up by only half as much or 6% in. Among other things, this rise reflects infrastructure expenses related to the growth in personnel. In addition, nonrecurring expenses resulted from the construction of and move into the new office building in Zurich-Altstetten. The other operating expenses connected with the online platform, which in its envisioned form has been put on hold for the time being, came to CHF 11 million. On balance, gross profit was down by 39% to CHF 437 million in the financial year. Depreciation and write-offs of non-current assets amount to CHF 37 (41) million. Valuation adjustments, provisions and losses of CHF 69 million are significantly higher than the year-ago figure (CHF 22 million). CHF 53 million of this amount (i.e. the majority) relate to the restructuring in Frankfurt. Profit before taxes dropped by around half from CHF 656 million to CHF 331 million. After deducting taxes, which fell accordingly to CHF 80 (192) million, and the minority interest in consolidated profit, which came to CHF 25 (31) million, the Julius Baer Group ended the financial year with a net profit of CHF 225 million, down from CHF 433 million a year earlier. Consolidated balance sheet The consolidated balance sheet total decreased by 25% or CHF 4.9 billion to CHF 14.9 billion in. Approximately 60% of this reduction is attributable to the first-time application of accounting standard IAS 39 (concerning the recognition of financial instruments). One of the consequences of this is that the securities lending & borrowing activities are no longer directly recorded in the balance sheet. On the assets side of the balance sheet, loans to customers shrank by 19% to CHF 3.6 billion, thus representing 24% (22%) of total assets. Due from banks declined by 22% to CHF 4.5 billion and now comprise 30% (29%) of the balance sheet total. Money market instruments fell by 28% to CHF 1.1 billion, and they thus account for a stable 8% share of total assets. In line with the trend in the capital markets, the securities and precious metal trading portfolios diminished by more than half to CHF 1.7 (4) billion, whereas financial investments expanded by 27% to CHF 2.3 billion. Overall, securities holdings went down from CHF 5.8 billion to CHF 4.1 billion and now amount to 27% (29%) of total assets. The positive replacement values arising from transactions involving derivative instruments are stated separately for the first time and dropped from CHF 1.05 billion to CHF 0.81 billion during Contents << < 11 JULIUS BAER GROUP

14 the year under review. This position does not correspond to the market risk faced by the Group; it represents a gross value that reflects neither the counterpositions booked under the liabilities nor the netting agreements. Among the remaining asset positions, intangible assets grew from CHF 54 million to CHF 75 million due to capitalizations, while tangible fixed assets increased by 5% to CHF 197 million. On the liabilities side of the balance sheet, due to customers decreased by 2% to CHF 8.9 billion, thus representing 60% (46%) of the balance sheet total. Due to customers, other, accounts for CHF 8.5 (8.7) billion of this total amount. Due to banks receded by a notable 53% to CHF 1.8 billion or 12% (19%) of the balance sheet total. The liability item derivative financial instruments and trading liabilities declined sharply by 61% to CHF 1.5 billion. The sum of accrued income tax and deferred tax liabilities declined by CHF 25 million. Bonds and mortgage-backed bonds diminished by CHF 123 million to CHF 334 million due to repayments/repurchases. Accrued expenses and deferred income fell from CHF 482 million to CHF 305 million, while valuation adjustments and provisions increased by CHF 7 million to CHF 43 million. Consolidated shareholders equity (excluding minority interest) was down by 6% or CHF 101 million to CHF 1.52 billion in the financial year. In accordance with the resolutions of the Ordinary Shareholders Meeting of Julius Baer Holding Ltd. on 9 May, the share capital was reduced in two steps by CHF 51.6 million to CHF 5.7 million. First of all, CHF 0.6 million of this capital reduction relates to the nullification of the bearer shares held by the company in connection with share repurchases. Second, the share capital was lowered by CHF 51 million through reduction of the par value and repayment to the shareholders. The reduction of the capital reserve by CHF 30 million to CHF 219 million corresponds to the net expenditures for the staff participation plans. After taking into consideration the allocation of profit for the 2000 financial year, retained earnings increased by CHF 0.19 billion to CHF 1.19 billion. Own shares rose slightly to CHF 117 (112) million. This position contains all own shares and derivative instruments on ownshares. On balance, the share of the balance sheet total represented by stated equity capital (excluding minority interest) rose from 8.2% to 10.2% during the financial year. The BIS ratio of the Julius Baer Group came to 15.3% (16.4%) on the balance sheet date. This comfortable level of capital resources continues to surpass legal requirements as well as the guidelines of the Bank for International Settlements by a wide margin. With this in mind, we will continue our active capital management through systematic share repurchases. Contents << < 12 JULIUS BAER GROUP

15 Consolidated income statement Note 2000 % Interest and discount income Interest and dividend income on financial investments Interest expenses Net interest income Commission income on lending activities Commission income on securities and investment transactions Commission income on other services Commission expenses Results from commission and service fee activities Results from trading operations Other ordinary results Net operating income Personnel expenses Other operating expenses Operating expenses Gross profit Depreciation and write-offs of non-current assets Valuation adjustments, provisions and losses Profit before taxes Taxes Consolidated profit Minority interest in consolidated profit Net profit CHF CHF CHF Net profit per share Net profit per bearer share Net profit per registered share Diluted net profit per share Diluted net profit per bearer share Diluted net profit per registered share Contents << < 13 JULIUS BAER GROUP

16 Consolidated balance sheet Assets Note % Cash Money market instruments Due from banks Due from customers Trading securities Derivative financial instruments Financial investments Tangible fixed assets Intangible assets Accrued income and prepaid expenses Deferred tax assets Other assets assets subordinated claims due from non-consolidated participations and significant shareholders 27, Beginning 1 January and in accordance with IAS 39, the securities lending & borrowing business is no longer disclosed on the balance sheet. Contents << < 14 JULIUS BAER GROUP

17 Liabilities and shareholders equity Note % Money market instruments Due to banks Due to customers in savings and investment accounts Due to customers, other Derivative financial instruments and trading liabilities Cash bonds Bonds and mortgage-backed bonds Accrued expenses and deferred income Other liabilities Current taxes Deferred tax liabilities Provisions liabilities Minority interest in shareholders equity Share capital less own shares Capital reserve Retained earnings Net profit shareholders equity, excluding minority interest liabilities and shareholders equity subordinated liabilities due to non-consolidated participations and significant shareholders 27, Beginning 1 January and in accordance with IAS 39, the securities lending & borrowing business is no longer disclosed on the balance sheet. Contents << < 15 JULIUS BAER GROUP

18 Consolidated shareholders equity Note 2000 Share capital Balance at the beginning of the year Capital reduction Balance at the end of the year Own shares Balance at the beginning of the year Capital reduction in own shares Balance at the end of the year Capital reserve 2 Balance at the beginning of the year Participation plans Balance at the end of the year Retained earnings Balance at the beginning of the year Julius Baer Holding Ltd. dividend Capital reduction in own shares Other Net profit Balance at the end of the year Reserves IAS 39 5 Adoption of IAS 39 at 1 January Unrealized gains and losses on: Available-for-sale investments net of tax Hedging Reserve for Cash Flow Hedges, net of tax Balance at the end of the year Translation differences Balance at the beginning of the year Decrease Balance at the end of the year shareholders' equity Major shareholders Number of registered shares Number of bearer shares Percentage of voting stock 4 Percentage of share capital 4 Davis Selected Advisers, L.P. Tucson % 13.1% Families Baer and staff % 18.9% 1 See Note 26, page 51 2 The capital reserve represents the additional proceeds (premium) received from the issue of shares by Julius Baer Holding Ltd. and from the exercise of conversion rights and warrants for Julius Baer Holding Ltd. 3 See Note 30, participation plans, page 55 4 In respect of dividend-bearing capital 5 no restatement of the previous year Contents << < 16 JULIUS BAER GROUP

19 Consolidated statement of cashflows 2000 Interest received (excluding financial investments) Commissions received Interest paid Commissions paid Payments for personnel and other operating expenses Other income Subtotal s in assets and liabilities from operating activities: Claims and investments Trading portfolios Liabilities Other Cashflow from operating activities before taxes Taxes paid Cashflow from operating activities after taxes Acquisition of financial investments Acquisition of non-current assets Sale of financial investments Sale of non-current assets -772 Interest received from financial investments and participations Dividends received from financial investments and participations 450 Acquisition of subsidiaries and participations Sale of subsidiaries and participations 777 Cashflow from investing activities Dividend payments in holdings of own shares Capital reduction due to reduction of nominal value Staff participation Other influences Cashflow from financing activities Cash and cash equivalents at beginning of period Cashflow from operating activities after taxes Cashflow from investing activities Cashflow from financing activities Effects of exchange rate changes Cash and cash equivalents at end of period Cash and cash equivalents include cash, credit balances at central banks, as well as bills and notes which are eligible for refinancing at central banks. They are structured as follows: Cash Bills and money market instruments eligible for discount at central banks Securities acceptable to central banks Contents << < 17 JULIUS BAER GROUP

20 Consolidated off-balance-sheet transactions Note % Contingent liabilities Credit guarantees in the form of obligations under avals, sureties and guarantees, including guarantee obligations in the form of irrevocable letters of credit Bid and performance bonds Irrevocable liabilities under documentary letters of credit Other contingent liabilities Irrevocable commitments Unutilized irrevocable commitments to extend credit Liabilities for calls on shares and other equities Confirmed credits Acceptance liabilities Amounts already contained in balance sheet. Derivative instruments Contract volume Fiduciary transactions Fiduciary deposits 1 Fiduciary credits Other fiduciary transactions (securities lending & borrowing on an agent basis) Investments which Group companies enter into at banks outside of the consolidated companies for the account of and at the risk of the client. Contents << < 18 JULIUS BAER GROUP

21 Consolidated off-balance-sheet transactions % Securities lending 1/2 Due from banks Due from customers Securities borrowing 3 Due to banks Due to customers The trading positions lent out and the financial investments lent out are disclosed in Note 14 and Note 16 respectively. 2 The positions lent out in the securities lending business are on average up to 105 % collaterized. 3 Assets pledged for commitments from the securities borrowing are disclosed in Note 19. Contents << < 19 JULIUS BAER GROUP

22 Comment on business activities Julius Baer Holding Ltd., Zurich, is the holding company of the Julius Baer Group, a financial services institution operating worldwide. The Baer families and the staff hold all of the registered shares and thus the majority of the voting stock of Julius Baer Holding. Representatives of the third and fourth generation of the Baer families play an active role in the Julius Baer Group. The comprehensive services of the Julius Baer Group encompass foremost asset management and related services for private and institutional investors from around the world. Accompanying services are offered in the brokerage area as well as in securities and foreign exchange trading. These activities are supported by capable research analysts who cover the world s major global financial markets an products. The Julius Baer Group holds a strong position in the investment fund business in Switzerland and Luxembourg, both in terms of our own clientele as well as in cooperation with external distribution partners. The most important company of the Group is Bank Julius Baer & Co. Ltd., Zurich, which traces its beginnings to 1890 and is one of the leading asset management banks in Switzerland. It has branches in Geneva, Lucerne, Guernsey and New York, along with numerous representative offices. Additional companies of the Julius Baer Group are domiciled in Amsterdam, Frankfurt, Grand Cayman, Hong Kong, London, Luxembourg, Madrid, Milan, Monaco, Montreal, Paris and Stockholm. Our comprehensive range of services, moderate size, international focus and first-class financial position make the Julius Baer Group an attractive partner in the fields of asset management and investment counseling, investment funds as well as securities and foreign exchange trading. Number of employees On 31 December, the Julius Baer Group employed persons in comparison with persons at the end of Contents << < 20 JULIUS BAER GROUP

23 Comment on risk management 1. Risk management framework Risk is defined as a deviation from an expected outcome. Risk management is a business enabler and therefore a key focus of the management process of the Julius Baer Group. The Group is exposed to various risks resulting in the following risk landscape: Business risks Credit risks Market risks (trading book) Liquidity and balance sheet risks Operational risks Legal risks and compliance Personnel risks Reputational risks The Board of Directors defines and regularly reviews an appropriate risk policy to manage the risks of the Group and to determine suitable processes and instruments. The Board of Directors is assisted by its Risk Committee. The overall responsibility for the implementation of the Group s risk management lies with the Group Executive Board. It is assisted by its Group Risk Committee (GRIC), by its Group Asset and Liability Management Committee (GALM) and by the following Group functions: Group Risk Management (GRM) for the management and controlling of credit risks, of market risks (in the trading book), of liquidity and balance sheet risks and of operational risks. Human Resources for the management and controlling of personnel risks. These functions establish appropriate risk guidelines and directives, coordinate and contribute directly to the risk management of the business lines and ensure independent risk controlling. The main responsibility for risk management, however, is with the business lines. 2. Business risks Business risks cover strategy risk and business risk, especially expense and revenue risk. These risks are managed and controlled by the individual business lines, the Executive Board and the Board of Directors. Following the principles of value- and risk-oriented management and controlling, an annual strategic check-up is carried out to determine the necessary strategic and structural projects and adjustments. After the analysis of the mid-term financial and risk-relevant implications, implementation is then initiated through a rolling 3-year planning cycle, and then in the annual budgets accordingly. This process provides the basis for active and efficient financial, capital and risk management. The various controlling processes and tools such as monthly comparison of the actual results with the budget or rolling forecasts allow an analysis of the sensitivity of the Group s earnings to various scenarios. Group Legal Management for the management and controlling of legal risks and compliance. Contents << < 21 JULIUS BAER GROUP

24 3. Credit risks Credit or counterparty risk is the risk of noncompliance with an obligation a counterparty has incurred with the Julius Baer Group. Such noncompliance may result in a loss to the Bank. The Julius Baer Group primarily assumes credit risk with private clients on a collateralized basis. Such credit risk may be composed of lending and derivatives exposure from trading activities in foreign exchange, securities and interest products. Portfolios are analyzed and rated individually by the credit supervision system, and an advanceable value (exposure limit) is assigned based on the quality of the collateral. Limit and exposure supervision is effected on a daily basis. The Julius Baer Group offers a wide range of trading instruments and deals with banks, institutional clients and selected corporates on an unsecured basis. Individual risk limits and settlement limits are approved for each counterparty. Trading limits and exposures are controlled on a daily basis, and netting agreements are used to limit potential risk. Country limits are established to limit the potential exposure to any country or region. It is not a policy of the Julius Baer Group to engage in corporate lending activities. The credit department reports to the Chief Risk Officer (CRO), who is a member of the Extended Group Executive Board. 4. Market risks (trading book) The term market risk is defined as the possibility of sudden losses arising in the Group s trading book as a result of unforeseen changes in market prices and rates (e.g. interest rates, equity prices, foreign exchange rates, volatilities). Market risk management involves the identification, measurement, control and steering of the market risks assumed. The trading units enter into market risk positions within prescribed limits. The department Market Risk & Product Control is independent from trading and carries out a supervisory and guidance function in market risk management. This department also reports to the CRO. Market risk measurement, market risk limitation, back testing and stress testing The Julius Baer Group uses the following types of measurement and limitation of market risks: value at risk (VAR) limits, sensitivity or concentration limits (delta, gamma, basis point and nominal limits) and country limits for trading positions. The key risk figure, value at risk (VAR), measures the possible future loss of a portfolio that, under normal circumstances and for a specific probability, will not be exceeded during the observed holding period.the VAR of the Julius Baer Group amounted to CHF 4.3 million on 31 December (1-day holding period, 95% confidence level). The maximum VAR recorded in amounted to CHF 10.2 million; the minimum was CHF 3.7 million. The pertinence of the VAR procedure, which is based on historical market movements, is monitored through regular back testing. This involves the comparison of the daily gains and losses generated by the trading book with the VAR values calculated each day. The following chart shows the daily calculations of VAR in (at confidence levels of 95% and 99%) compared with the actual daily gains and losses generated by the trading operations of the Julius Baer Group. Contents << < 22 JULIUS BAER GROUP

25 Back testing trading Julius Baer Group for (CHF) January February March April May June July August September October November December VAR 99% VAR 95% P+L Whereas VAR forecasts identify potential losses during normal market movements, daily stress tests are carried out in order to estimate the consequences of extreme market swings. VAR method and regulatory capital For its VAR calculations, the Julius Baer Group employs historical simulation with complete revaluation of all trading positions over the latest 300 trading days. The historical simulation is based on empirically observed changes in market parameters (prices, interest curves, volatilities) over the latest 300 trading day period. As a result, correlations may be employed implicitly, without having to draw on calculations and assumptions based on a correlation matrix. The risk management platform and the internal market risk models of the Julius Baer Group fulfill the relevant regulatory requirements and have been approved by the Swiss Federal Banking Commission for use in determining the capital requirement for market risks in the trading book. The regulatory approval of our models relates to so-called general market risk as well as to issuer-specific risk. Contents << < 23 JULIUS BAER GROUP

26 5. Liquidity and balance sheet risks The Group Asset and Liability Management Committee (GALM) has Group responsibility for the management of both liquidity risk and interest rate risk in the banking book. Trading book market risks are managed separately and are monitored by GRIC. The following definitions are used to separate trading and banking book activities: The trading book consists of proprietary positions in financial instruments that are held for resale or repurchase and that are taken on with the intention of benefiting, in the short term, from actual or expected differences between their buying and selling prices. The banking book is defined as all other assets, liabilities and off-balance-sheet items that are intended to be held in order to generate interest income over time. The GALM has delegated the daily management of liquidity and balance sheet risks to the Group ALM sub-business line. The risk is independently measured and controlled by GRM. Risk reports are reviewed monthly at the GALM meeting and quarterly at the Board of Directors Risk Committee meetings. Interest rate risk is measured both as the potential impact of a 1% change in the general level of interest rates on the projected interest income of the Group and in terms of the sensitivity of the net present value of assets and liabilities to interest rate changes. The liquidity position of Bank Julius Baer is monitored and managed daily and maintains a margin above the regulatory minima, as required by the Group s liquidity policy. Strategy in using financial instruments The Group accepts deposits from customers at both fixed and floating rates and for various periods and seeks to maximize interest margins by investing these funds in high-quality assets. The Group seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due. In managing the associated balance sheet risks, the Group employs derivative instruments within scope of its ordinary business activities. Fair value hedges The Group hedges part of its existing interest rate risk resulting from any potential increase in the fair value of bonds issued using interest rate and swaps. The net fair value of these swaps on 31 December was CHF 1.7 million. Cash flow hedges The Group hedges a portion of interest rate risk resulting from cashflows resulting from term deposits or term loans using interest rate swaps. The net fair value of these swaps on 31 December was CHF -7.6 million. 6. Operational risks The Operational Risk section was reinforced with new staff in the year under review. It has Groupwide responsibility for coordinating all operational risk issues in order to minimize the potential financial consequences from operational risks on an ongoing basis. The objectives with respect to managing operational risks are: Contents << < 24 JULIUS BAER GROUP

27 Avoiding potential substantial losses caused by operational risks. Enhancing a high degree of risk awareness at all levels. Enhancing an efficient early warning system for operational risks. Enhancing the existing culture of risk awareness, risk responsibility and risk control. Assessing all operational risk issues before new services or products are offered by the organization. Administrating, continually monitoring and updating the business recovery plan as well as the crisis management process. Defining a method for quantifying operational risks in order to allocate capital in line with these risks and measure risk-adjusted performance. The central function Operational Risk Management is supported by experienced line managers who serve as Operational Risk Coordinators (ORCs) within the various business lines and thus assist the business line management in all issues related to operational risks. The ORCs report to the head of the business line as well as to the head of Operational Risk, who coordinates the overall management of operational risks for the Group. The Operational Risk section reports to the CRO. 7. Legal risks and compliance The terms legal risks and compliance refer to those risks that stem from the legal and regulatory dimension of the business environment. The main risks in this regard are liability and default risks, regulatory risks as well as conduct and franchise risks. The Julius Baer Group fully respects the given legal and regulatory framework within which it operates. Its conduct adheres to the highest ethical standards and best market practices. Personal sense of responsibility on the part of management and staff as well as fairness in business dealings are central to the Group s business philosophy. Liability and default risks are consistently and carefully evaluated, taking into account the associated opportunities and dangers. In the interest of clients, shareholders and the other stakeholder groups, franchise protection ultimately receives top priority. The corresponding controlling and monitoring functions are carried out Group-wide by Legal Controlling Services. Legal Controlling Services together with Legal Engineering Services comprise Group Legal Management. Legal Controlling Services is responsible for legal services regarding liability and default risks under civil, criminal and administrative law as well as for compliance services related to regulatory risks, conduct risks (especially criminal conduct, negligence and error) and franchise risks with the view to reputation, business ethics and corporate integrity. The organizational units Legal Services Europe, Legal Services Americas and Group Compliance Services run the local legal controlling centers. They are independent of the front-line management and report to the Chief Legal Officer. In Contents << < 25 JULIUS BAER GROUP

28 turn, the Chief Legal Officer is a member of the Extended Group Executive Board and has the authority to call directly on the Chairman of the Board of Directors. The various Legal Engineering Services in the fields of estate planning and trusts, information technology, investment funds, client tax services and trading, finally, also support effective legal risk and compliance management by directly contributing to the development and management of products and services with specific and partially standardized legal architecture and promoting sound selling policies as well as state-of-the-art structures and procedures. The Legal Engineering Services are, therefore, directly integrated into the reporting structures of frontline management and, via matrix, under the command of the Chief Legal Officer. 9. Reputational risks The Group s ability to conduct its business is critically dependent on the reputation that it has established over the more than hundred years of its existence. Reputational risk is understood as the risk of events occurring which could materially impair the Group s reputation and thus the value of the Julius Baer franchise. Consequently, the potential for reputational risk exists throughout all business lines and corporate functions, and it is the responsibility of each business line and corporate function head to monitor and control reputational risk within his business line/corporate function. 8. Personnel risks The major personnel risks according to our risk landscape lie with the dependency on highly qualified staff and the availability of the necessary management and leadership capacities. Based on this risk assessment and given the unchanged demand for qualified staff, our efforts clearly focus on attracting and retaining professional staff, paying special attention to the leadership competencies of our management, the attractiveness of our employment conditions, and targeted training and development measures. Contents << < 26 JULIUS BAER GROUP

29 Consolidation policies and valuation principles General accounting policies Julius Baer Holding Ltd. is a Swiss corporation. Values in the annual financial statements are stated in thousands of Swiss francs. The consolidated financial statements were prepared in compliance with International Accounting Standards (IAS) and employed the historical cost principle, with the exception of the trading positions, derivative financial instruments and available-for-sale financial investments, which are valued at market prices. Figures for the previous year Some figures for the previous year have been restated in order to ensure comparability with the figures for. Consolidation policies Method of consolidation The consolidation of capital is based on the Anglo- Saxon purchase method, i.e. capital is consolidated on the date of acquisition. For subsidiaries that have been acquired, the assets and liabilities are revalued for the capital consolidation and set off against the cost value. Any resulting goodwill is stated in the balance sheet and written off over its useful life. Goodwill that no longer merits capitalization as an asset based on annual assessment is immediately written off. The consolidated financial statements include, in addition to the figures for Julius Baer Holding Ltd., the results from participations according to the following rules: Consolidated participations Group companies in which Julius Baer Holding Ltd. directly or indirectly owns a majority of the voting stock and/or capital are fully consolidated. A complete list of these companies is provided on pages 8 and 9. All significant internal Group claims, liabilities, off-balance-sheet transactions, expenses and income are eliminated. The interest of minority shareholders in the equity and consolidated profit are stated in the consolidated balance sheet as minority interest in shareholders equity and in the consolidated income statement as minority interest in consolidated profit. Non-consolidated participations Minority participations of between 20% and 50% are reported in the consolidated accounts in accordance with the equity method. These companies are recorded in the consolidated financial statements according to the percentage share of the Group in their equity and net profit. Participations of less than 20% are included in the balance sheet at fair value in available-forsale financial investments. Currency translation The balance sheets of Group companies that are denominated in foreign currencies are translated into Swiss francs at year-end exchange rates. Average exchange rates for the year are used for the consolidated income statement. Translation differences arising from consolidation are shown as accumulated currency differences in the shareholders equity. In the individual financial statements of the Group companies, income and expenses denominated in foreign currencies are translated at the prevailing daily exchange rates. Assets and liabilities are translated at year-end rates. The resulting gains and losses are recorded in the income statement. The following exchange rates were used for the major currencies: Contents << < 27 JULIUS BAER GROUP

30 Year-end rates Average exchange rates for the year actions in securities and securities underwriting transactions are posted to the balance sheet on the contract date in the Group. USD/CHF EUR/CHF GBP/CHF JPY/CHF Consolidation period The period covered by the consolidation is the calendar year for all participations Accounting policies and valuation principles According to IAS 39, all transactions shall be assigned to one of the four categories ( trading, held-to-maturity financial instruments, originated loans and receivables and available-for-sale financial assets ) and uniformly recorded within these categories on the value date or settlement date. The divergent recognition of securities transactions, cash transactions and securities underwriting transactions within the four categories mentioned above does not have a significant effect on the balance sheet reporting. The drawing up of the balance sheet and valuation of all Group companies is performed in accordance with uniform guidelines. Except for the changes mentioned below, these guidelines remain the same as in the previous year. Income from services is recorded at the time the service is performed, i.e. upon execution of a transaction or over the life of a contract. Claims s in the accounting policies financial statements: IAS 39: Financial instruments. This standard, which entered into force on 1 January, sets forth principles for recognizing, measuring and disclosing information about financial instruments. The figures for the previous year have not been restated. IAS 40: Investment property. This standard governs the valuation and disclosure of investment property. Claims are valued at their amortized cost using the effective interest rate method. If material doubts exist as to the ability of a borrower to repay his debts, this is taken into account in the valuation adjustments. Valuation adjustments are also made for interest that is more than 90 days overdue, except where it is secured by easily realizable assets. These valuation adjustments are netted against the corresponding claims in the balance sheet. If a claim is rated as unrecoverable, the sum of the loss is offset against the valuation adjustment that has been made. Reporting of transactions All completed transactions are reported and valued. Foreign exchange and money market transactions are posted to the balance sheet on the value date. Until the value date, they are stated in the off-balance-sheet transactions. Spot trans- Provisions for risks Latent credit risks and country risks are accounted for through a general valuation adjustment. This is done on the basis of historical values as well as expected credit losses in view of economic conditions and other factors. In the balance sheet, this valuation adjustment is netted against the corresponding claims. Contents << < 28 JULIUS BAER GROUP