SOCIETE GENERALE BANK & TRUST ANNUAL REPORT 2013

Transcription

1 SOCIETE GENERALE BANK & TRUST 2013 ANNUAL REPORT 2013

2 This report is a translation from the French annual accounts, management report and report of the Réviseur d Entreprises Agréé. In case of any discrepancies between the French and English version, the French version shall prevail.

3 Contents MANAGEMENT REPORT Pages 4-8 REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉé TO THE BOARD OF DIRECTORS OF societe generale bank & trust société anonyme luxembourg Pages 9-10 ANNUAL FINANCIAL STATEMENTS Pages Balance sheet page Profit and loss account page 13 Statement of changes in equity page Notes pages 16-98

4 management report AT MARch 28, 2014 MANAGEMENT REPORT OF societe generale bank & trust s.a. BUSINESS REVIEW A wholly-owned subsidiary of Societe Generale group, Societe Generale Bank & Trust S.A. ( SGBT ), which applies a diversified model, has four business lines: Private Banking, Capital Markets, Securities Services and Corporate Services, covering activities ranging from daily cash flow management to arranging structured financing. In 2013, SGBT reported solid results in a macroeconomic environment characterized by the stabilization of activity in the eurozone with increased activity beginning in the second quarter. Although this growth was limited, it marked the end of six consecutive quarters of contraction. This slight improvement remains fragile and the recovery is still moderate, due largely to the public and private deleveraging process in developed countries. Similarly, in terms of regulations, and with the continuation of G20 initiatives from 2010, capital, liquidity and even market activities remain subject to stringent requirements. In this contrasting environment, SGBT was able to count on the solidity of its business, the resilience of its business lines and on the management and diversification of risk, demonstrated by its ability to generate profit in 2013 (SGBT Personne Morale posted a net profit of EUR million). Operating income increased to EUR million, showing a rise of 7% relative to 2012, reflecting the high quality of the customer bases of SGBT s businesses and their capacity for generating sustainable revenue. Operating expenses increased significantly to EUR million, given the exceptional impairment loss of EUR million on Généras, mostly subsequent to transferring its business to Société Générale Ré. S.A.. Excluding exceptional items, the increase is only 7%, related to expanding the scope of activity in 2013, reflecting more efficient management of overhead costs by the businesses and the support center. SGBT s adaptation to its environment will build its future investment capacity to sustain the growth of business and strengthen its operational efficiency. The Private Banking business line operates in Luxembourg and in three foreign branches: SGBT Singapore, SGBT Hong Kong, and SGBT Middle East in Dubai. Assets under management were globally stable and stood at EUR 20 billion at the end of 2013 when compared with EUR 19.9 billion at the end of These branches were able to maintain their customer bases despite an unfavorable tax environment in Europe. This was attainable through product diversification and innovation as well as offering a comprehensive range of private banking services (Wealth Planning, Fiduciary services, Wealth Investment Solutions, Prime Market Access, etc.). In the context of a stable interest rate market at floor levels, cash flow performance continues to be driven by a highly successful transformation. This situation is attributable to a combination of two factors: a high level of AUM from private banking customers and record-setting hedges during a period when liquidity spreads were the highest.

5 MANAGEMENT REPORT AT MARCH 28, 2014 MANAGEMENT REPORT OF societe generale bank & trust s.a. In 2013, SGBT won the Best Private Bank in Luxembourg award presented by the Euromoney magazine, in particular for its Equity and Fixed-income Portfolio Management, Family Offices Services and Client Relationship Management. The bank s institutional investor services are part of the Societe Generale group s business line, Societe Generale Securities Services. Despite a highly competitive market, SGSS in Luxembourg continues to build up its customer base and develop services on niche markets such as structuring private equity funds, SIFs and Real Estate, which will differentiate it from the competition while strengthening intragroup synergies, particularly with Private Banking (Global Custody PRIV.). Corporate financial engineering activities continued to expand in 2013, especially by extending structured transactions to European investors. They contributed to the launch of new SGBT Group entities, in particular the subsidiary SG FD (loan brokerage) and the expansion of issuing vehicle activities for the Group: SG LDG and SG Issuer. The development of the latter was significant, with EUR 20 billion issued. Corporate banking activities offers a complete range of banking services provided from Luxembourg, for clients of Societe Generale group and its own customers (Corporations, Institutions and Private Equity Funds). Business performance remains restricted by the low interest-rate environment. We note that gains from proprietary management declined by EUR 110 million compared to 2012 due to the depreciation of Généras securities. OUTLOOK Subsequent to December 31, 2013, a sale agreement concerning SGBT branches in Hong Kong and Singapore was signed with DBS Bank. This agreement sets out the sale, by the end of 2014, of the Private Banking activities in Asia of the 2 branches. The net assets of the two branches amounted to EUR 125 million as at December 31, In recent months, economic indicators have suggested an improvement in global activity. However, this recovery will remain moderate in 2014 in an uncertain climate. In the eurozone the recovery is very gradual. Budget adjustments and private-sector deleveraging, in addition to high unemployment, continue to stifle opportunities for a rebound. Meanwhile, an improving economic climate in the United States still depends on the exit of previous quantitative monetary and budget policies. Emerging economies are being faced with a wave of capital outflows following the change of course in US monetary policy and renewed worries over a Chinese slowdown and even a rise in geopolitical risk in some countries. This may lead to depreciating currencies in countries with current account deficits or which are experiencing a cyclical slowdown (India, Indonesia, Brazil, Turkey, South Africa). Nonetheless, other countries have until now been less affected by these trends, including Central and 4 5

6 MANAGEMENT REPORT AT MARCH 28, 2014 MANAGEMENT REPORT OF societe generale bank & trust s.a. Eastern European countries like South Korea and Mexico, which have demonstrated a certain amount of differentiation from other emerging markets. Current trends may drag down growth in emerging markets, but without triggering the kind of systemic financial crises seen in the 1990s. Against this constrained backdrop and in line with the Group s transformation, SGBT will continue to adapt its sales organization and its development targeting Private Banking Services and Investment Services, particularly by capitalizing on the advantages of Luxembourg (stability and AAA rating) and by providing its customers with considerable expertise. This change is reflected in the contribution or transfer to Luxembourg of new business activities, including the launch of a new entity, SG CMF (securitization activity). SGBT will also continue its efforts to streamline operations in order to support the development of its businesses and effectively address regulatory changes such as automated exchange of data and strengthening the protection of investors. FINANCIAL STRUCTURE SGBT enjoys a favorable creditworthiness rating from Standard & Poor s as regards the financial soundness of the Group: A-1 in the short term, A in the long term (rating as of January 23, 2012). Under the Basel II capital framework, SGBT s Tier One ratio stood at 12.13% at the end of 2013 after application of additional Basel I floor capital requirements (floor effect). Excluding the floor effect, the ratio is 19.94%. The capital adequacy ratio incorporating eligible Tier II capital stood at 12.89% as at December 31, The increase in the regulatory capital requirement between 2012 and 2013 is mainly due to the significant growth of SG Issuer s issuing activity (approximately EUR 20 billion issued in 2013). In 2013, SGBT once again recognized a lump-sum provision of EUR 10 million. SGBT did not buy back any of its own shares in RISK MANAGEMENT Running a strong and efficient organization and managing risks are of paramount importance to SGBT. The main goals of this organization are: to contribute to business expansion by optimizing overall risk-adjusted profitability; to guarantee the viability of the Bank by instituting effective risk analysis, valuation and control systems.

7 MANAGEMENT REPORT AT MARCH 28, 2014 MANAGEMENT REPORT OF societe generale bank & trust s.a. Risk management governance is based on the active involvement of the company s management, clearly-defined internal rules and procedures, and permanent surveillance by teams that are independent of the operational departments and who are responsible for regulating the underwriting of new risks, ensuring regular monitoring and supervising the application of rules and procedures. An SGBT Risk Committee, chaired by a member of the SGBT Board of Directors, Deputy Head of the Risk Division of Societe Generale group, meets quarterly to review risk management and, if necessary, to channel the direction of risk acceptance and management. The risk monitoring process identifies five main risk categories: credit risk: the risk of losses arising from the inability of clients, sovereign issuers or other counterparties to meet their financial obligations. This includes the counterparty risk arising from the Bank s capital market activities; operational risk: risk of losses or fraud caused by defects or deficiencies in internal procedures or systems, human error or external events, including IT risk and management risk. Particular attention is paid to compliance risk, which is subject to enhanced monitoring; market risk: the risk of losses arising from unfavorable market trends; interest rate risk: the risk of losses or a residual impairment of assets, whether recognized or not on the balance sheet, due to interest rate fluctuations. This excludes the interest rate risk on market activities, which is covered by market risk; liquidity risk: the risk that the Group would be unable to meet its current or future liquidity requirements, whether expected or not, at a reasonable cost. APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS AND ALLOCATION OF EARNINGS Profit for the period was EUR 311,816,373, plus retained earnings brought forward, which amounted to EUR 585,443,478 as well as the reversal of the special reserve for the wealth tax charge set up in 2008, amounting to EUR 33,445,895, resulted in total disposable income of EUR 930,705,746. Earnings will be allocated as follows: Allocation to the legal reserve: EUR 5,548,013 Special reserve to set up in respect of the wealth tax: EUR 33,926,290 Special reserve to set up in respect of the wealth tax for fully consolidated companies: EUR 18,354,720 Dividends: EUR 250,000,000 Retained earnings: EUR 622,876,723 As at December 31, 2013, SGBT s Tier One capital amounted to EUR 2,788,788,767, prior to distribution. Subordinated debt of EUR 250,000,000 and reserves of EUR 17,254,770 recognized for the reinvestment of capital gains should be added to this amount, resulting in a total of EUR 3,056,043,

8 MANAGEMENT REPORT AT MARCH 28, 2014 MANAGEMENT REPORT OF societe generale bank & trust s.a. We recommend that you approve the annual accounts for the financial year ending December 31, 2013 and that you grant full and complete discharge to the directors of their management obligations. Véronique de la Bachelerie, CEO of Societe Generale Bank & Trust Luxembourg, March 28, 2014

9 REPORT OF THE réviseur d entreprises agréé REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉé TO THE BOARD OF DIRECTORS OF societe generale bank & trust société anonyme luxembourg Report on the annual accounts Following our appointment by the Board of Directors on March 26, 2013, we have audited the accompanying annual accounts of Societe Generale Bank & Trust S.A., which comprise the balance sheet as at December 31, 2013 and the profit and loss account for the year then ended, and a summary of significant accounting policies and other explanatory information. Responsibilty of the Board of Directors for the annual accounts The Board of Directors is responsible for the preparation and fair presentation of these annual accounts in accordance with Luxembourg legal and regulatory requirements relating to the preparation and presentation of the annual accounts and for such internal controls as the Board of Directors determines is necessary to enable the preparation of annual accounts that are free from material misstatement, whether due to fraud or error. Responsibility of the réviseur d entreprises agréé Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit so as to obtain reasonable assurance that the annual accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the réviseur d entreprises agréé s judgment, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error. In making those risk assessments, the réviseur d entreprises agréé considers internal control relevant to the entity s preparation and fair presentation of the annual accounts, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the annual accounts. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the annual accounts give a true and fair view of the financial position of Societe Generale Bank & Trust S.A. as of December 31, 2013, and of the results of its operations for the year then ended, in accordance with Luxembourg legal and regulatory requirements relating to the preparation and presentation of the annual accounts. 8 9

10 REPORT OF THE réviseur d entreprises agréé REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉé TO THE BOARD OF DIRECTORS OF societe generale bank & trust société anonyme luxembourg Report on other legal and regulatory requirements The management report, which is the responsibility of the Board of Directors, is consistent with the annual accounts. For Deloitte Audit, Cabinet de révision agréé Stéphane Césari, Réviseur d entreprises agréé Partner Luxembourg, April 17, 2014

11 BALANCE SHEET (in EUR thousands) Cash and demand deposits with central banks (Note 3) 7,119 1,532,044 Financial assets held for trading (Note 4) 827,599 1,090,980 Financial assets designated at fair value through profit or loss (Note 5) 248, ,967 Available-for-sale financial assets (Note 6) 6,427,150 5,425,703 Loans and receivables measured at amortized cost (Note 7) 33,240,153 33,108,067 Held-to-maturity investments (Note 8) 388, ,054 Derivatives Hedge Accounting (Note 9) 4,345 1,568 Property, plant and equipment (Note 10) 13,628 8,858 Intangible assets (Note 10) 14,578 14,294 Tax assets (Note 11) 35,462 68,302 Other assets (Note 12) 670, ,336 TOTAL ASSETS 41,877,122 42,383,173 Due to central banks 2, ,715 Financial liabilities held for trading (Note 13) 3,613,450 3,780,669 Financial liabilities measured at amortized cost (Note 14) 34,477,370 34,469,684 Derivatives Hedge Accounting (Note 9) 271, ,771 Provisions (Note 15) 103,183 81,387 Tax liabilities (Note 11) 52,348 56,233 Other liabilities (Note 16) 568, ,878 Total liabilities 39,088,333 39,680,337 The accompanying notes are an integral part of the annual accounts

12 BALANCE SHEET (in EUR thousands) Share capital (Note 17) 1,389,043 1,389,043 Share premium (Note 17) 2,817 2,817 Revaluation reserves including available-for-sale assets (Note 17) 162,278 (41,859) Other reserves (including retained earnings) (Note17) 922, ,814 Profit for the year 311, ,021 Total EQUITY 2,788,789 2,702,836 Total EQUITY AND TOTAL LIABILITIES 41,877,122 42,383,173 Loan obligations (undrawn lines) 1,375,410 1,145,034 Financial guarantees 6,528,059 5,895,056 Other obligations 3,395,754 2,967,973 Total loan obligations, financial guarantees and other obligations 11,299,224 10,008,063 Asset management (Note 31) Including fiduciary operations 442,553,331 4,338, ,496,804 4,044,670 The accompanying notes are an integral part of the annual accounts.

13 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2013 (in EUR thousands) Interest receivable and similar income (Note 19) 925,894 1,091,137 Interest payable and similar expenses (Note 19) (684,341) (762,417) Income from dividends (Note 20) 214, ,343 Commissions receivable (Note 21) 262, ,925 Commissions payable (Note 21) (93,875) (77,344) Gains and losses on financial assets and liabilities not measured at fair value through profit or loss (Note 24) 22,260 (600) Gains and losses on financial assets and liabilities held for trading (Note 22) 35,872 (61,332) Gains and losses on financial assets and liabilities designated at fair value through profit or loss (Note 23) (1,835) 25,578 Gains and losses from hedge accounting (15,198) (873) Gains and losses on foreign exchange (Note 25) 10,419 14,127 Other operating income (Note 26) 85,900 69,754 Other operating expenses (Note 26) (11,014) (29,835) Operating income 751, ,463 Staff expenses (Note 27) 133, ,547 Administrative expenses (Note 28) 105,563 90,696 Depreciation expense Property, plant and equipment (Note 10) 3,364 3,748 Amortization expense Intangible assets (Note 10) 2,229 1,618 Provision allowances/reversals (Note 15) 16,733 22,709 Impairment losses of financial assets not measured at fair value through profit or loss (Note 29) 146,634 1,471 Non-financial assets value adjustments Operating expenses 408, ,234 EBIT 343, ,229 Current income tax (Note 30) (31,648) (27,811) Deferred tax (Note 30) - 13,603 net income for the year 311, ,021 Change in fair value reserve (Note 17) (*) 204,137 (41,859) Total other items of comprehensive income (*) 204,137 (41,859) Total comprehensive income (*) 515, ,162 (*) Revaluation reserves are not an integral part of the Income Statement. The accompanying notes are an integral part of the annual accounts

14 Statement of changes in equity FOR THE YEAR ENDED DECEMBER 31, 2013 (in EUR thousands) Share capital Additional paid-in capital Balance as at December 31, ,389,043 2,817 First-time adoption reserve - - Deferred tax - - Appropriation of previous year s net income - - Profit for the year - - Dividends for FY Change in fair value reserve - Available-for-sale financial instruments Cash flow hedges - - Foreign exchange differences - - Balance at December 31, ,389,043 2,817 Appropriation of previous year s net income - - Profit for the year - - Dividends for FY Change in fair value reserve - Available-for-sale financial instruments Cash flow hedges Other items - - Foreign exchange differences - - Balance as at December 31, ,389,043 2,817 The accompanying notes are an integral part of the annual accounts.

15 Revaluation reserves Reserves and retained earnings Total reserves and retained earnings NET INCOME FOR THE YEAR Total equity (85,340) 1,336,559 1,251, ,555 2,922, , ,555 (279,555) , ,021 - (696,300) (696,300) - (696,300) 71,171-71,171-71,171 (28,892) - (28,892) - (28,892) 1,203-1,203-1,203 (41,859) 919, , ,021 2,702, , ,021 (433,021) , ,816 - (430,000) (430,000) - (430,000) 133, , ,795 69,033-69,033-69,033 (1,917) - (1,917) - (1,917) 3,226-3,226-3, , ,835 1,085, ,816 2,788,

16 NOTE 1 - ORGANIZATION Societe Generale Bank & Trust S.A. (the Bank ) was formed as Ingéfilux on April 11, Its name was changed to Luxbanque, Société Luxembourgeoise de Banque S.A. on May 7, In 1995, the Extraordinary Shareholders Meeting decided to change the Bank s name to Societe Generale Bank & Trust S.A., with effect as of June 1, The Bank is governed by Luxembourg banking regulations and in particular the Law of April 5, 1993, as amended, on the financial sector. On December 19, 1995, the Bank increased its capital through a contribution of the Swiss and Luxembourg branches of Societe Generale Alsacienne de Banque S.A., Strasbourg ( Sogenal ). The Extraordinary Shareholders Meeting of Sogenal on December 20, 1995 approved the transfer to the Bank, which comprised the transfer of all assets and rights as held by the Swiss and Luxembourg branches as at June 30, On October 6, 2004, the Bank carried out another capital increase through non-cash contributions. This transaction modified its direct share ownership structure. In 2005, the Bank opened a branch in Singapore. In 2006, it opened two branches, in Greece and in Hong Kong, also through contributions in kind from the private banking businesses of Societe Generale s branches in these countries. In 2007, the Bank opened a branch in Dubai. On June 1, 2012, the Bank transferred the business of the SGBT Hellas branch to General Bank of Greece Geniki SA. This branch s activity has been dormant since then and was liquidated on October 31, As at December 31, 2013, the Bank s capital is wholly-owned by Sogeparticipations, a Société Anonyme incorporated under French law, part of the Societe Generale group. The Bank provides asset management, investment advisory, financial engineering and depository services, in particular for collective investment undertakings. It is also active on the financial markets and with institutional clients, with a high volume of proprietary cash management transactions and financing operations carried out on behalf of large corporations. The annual accounts of the Bank as at December 31, 2013 include the financial statements of the Singapore, Hong Kong and Dubai branches (the Branches ). As the financial statements of the Branches were prepared using generally accepted accounting principles in their respective countries, they were subsequently adjusted to comply with the accounting principles applicable to the preparation of annual accounts in Luxembourg.

17 NOTE 2 - Significant accounting principles 2.1 Applicable standards and comparability The Bank s accounting policies comply with the legal requirements in force in the Grand Duchy of Luxembourg and, in particular, the Law of June 17, 1992 as amended relating to the annual and consolidated financial statements of credit institutions governed by Luxembourg law ( Law on the accounts of banks ). On December 31, 2012, the Bank decided to amend certain accounting policies and elected to draw up its annual accounts in accordance with the mixed financial reporting framework ( mixed framework or Generally Accepted Accounting Principles in the Grand Duchy of Luxembourg, LUX-GAAP, with IAS options ). The amended Law of June 17, 1992 allows credit institutions to publish their LUX GAAP financial statements using some IAS/ IFRS ( IAS options ). These IAS options relate not only to the presentation of the financial statements but also to valuation rules. In this regard, the Bank has elected the following options: Use on December 31, 2013, of an alternative balance sheet layout, drawing mainly on the supervisory reporting layout ( FINREP ); Use on December 31, 2013 of an alternative profit and loss account layout, drawing mainly on the supervisory reporting layout ( FINREP ); Inclusion of a statement of changes in equity. The accounting principles used by the Bank are based on the International Financial Reporting Standards (IFRS) as adopted by the European Union, among which only the following standards have been applied: IAS 10 - Events after the Reporting Period; IAS 12 - Income Taxes; IAS 16 - Property, Plant and Equipment; IAS 18 - Revenue; IAS 19 - Employee Benefits; IAS 21 - Effects of Changes in Foreign Exchange Rates; IAS 24 - Related Party Disclosures; IAS 32 - Financial Instruments: Presentation; IAS 36 - Impairment of Assets; IAS 38 - Intangible Assets; IAS 39 - Financial Instruments: Recognition and Measurement

18 Among the new standards, revisions to standards or interpretations published by the IASB (International Accounting Standards Board) in 2013, the standards listed below will be applied to future reporting periods: IFRS 9 Financial Instruments, effective for annual periods beginning on or after January 1, 2018; IAS 27 (Revised) Separate Financial Statements, effective for annual periods beginning on or after January 1, 2014; Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32), effective for annual periods beginning on or after January 1, 2014; Transition Guidance (Amendments to IFRS 10 and IFRS 12), effective for annual periods beginning on or after January 1, With regard to the provisions in the texts mentioned above, with the exception of IFRS 9, the Bank does not expect any significant impact arising out of their application. With regard to IFRS 9, which introduces new requirements on the classification and measurement of financial assets, its application may bring about, depending of the options elected, a change in the recognition of profit and loss (income or equity). Other estimated impacts are not expected to be significant. As of yet, no decision has been made as to the date of adoption of this standard. As to the amendments to IAS 19, which aim to amend some existing obligations regarding defined benefit plans, an analysis of the effects of application can be found in Note 15. The Bank is the ultimate parent company of a fiscally consolidated group of several entities (See Note 2.14). The Bank has opted to continue recognizing a lump-sum provision, special line items with a reserve share and funds for general banking risks ( supervisory reserves ). See Note 2.9. The significant accounting principles used in the preparation of the financial statements are described below. These policies have been consistently applied to the annual periods presented. Therefore, opening balances have been adjusted accordingly to allow for the comparability of data across two annual periods. The business year runs from the January 1 to December 31 of each year. As at December 31, 2013 and 2012, the Bank was included in the consolidated financial statements of Societe Generale, whose head office is located at 29 Boulevard Haussmann, Paris, and which represents the largest group of companies of which the Bank is a subsidiary. The consolidated accounts are available from the head office as indicated above. In adherence with Article 80 of the Law on the Accounts of Banks, as from the preceding annual period, the Bank will no longer prepare consolidated accounts as its statements are included in the consolidated financial statements of the Societe Generale group.

19 2.2 Critical Accounting Estimates The preparation of the financial statements and the application of the accounting policies and methods require critical accounting estimates that involve judgments and the use of assumptions. By their nature, the assessments necessary for drawing up the financial statements require the formulation of hypotheses and carry risks and uncertainties as to their occurrence in the future. Although the Board of Directors believes that it has taken all available information into account in determining these judgments and estimates, the actual future results of the operations concerned could differ from these estimates and therefore have a material impact on the financial statements. The use of estimates mainly concerns the following valuations: the determination of the fair value of financial instruments that do not have a quoted market price; the determination of the useful life and the residual value of intangible assets and tangible assets; the estimation of the recoverable amount of impaired assets; the amount of deferred tax assets; assessment of a present obligation as a result of past events in connection with the recognition of provisions, including provisions related to employee benefits; more broadly, provisions recorded on the liabilities side of the balance sheet. The use of critical judgments in applying accounting policies may comprise the following: recognition of income; classification of financial instruments as prescribed by international standards and considering management intentions; the discount rate used for the supplemental defined benefit retirement plan. 2.3 Transactions in foreign currencies Items included in the Bank s financial statements are measured using the currency of the principal economic region in which the entity carries out its business (the functional currency ). The financial statements are presented in Euro ( EUR ), the functional currency and the reporting currency of the Bank. The branches in Asia and the Middle East report their results in USD. The Bank maintains a multi-currency accounting system, which records all foreign currency-denominated transactions in separate accounts based on the underlying currency, expressed in terms of positions. At period-end, monetary assets and liabilities denominated in foreign currencies are converted into Euro at the prevailing spot exchange rate. Realized or unrealized foreign exchange losses or gains are recognized in the profit and loss account. Forward foreign exchange transactions are recognized at fair value based on the forward exchange rate for the remaining 18 19

20 maturity. Spot foreign exchange positions are valued using the official spot rates applying at the end of the period. Unrealized gains and losses are recognized in the profit and loss account. Non-monetary financial assets denominated in foreign currencies, including shares and other variable income securities that are not part of the trading portfolio, are converted into the entity s functional currency at the exchange rate applying at the end of the period. Translation differences arising from these financial assets are taken to equity and are recognized in the profit and loss account only when sold or impaired or where the currency risk is fair value hedged. In particular, non-monetary assets funded by a liability denominated in the same currency are converted by applying the prevailing spot rate at the end of the period by booking the impact of exchange rate fluctuations to profit or loss if there is a fair value hedging relationship between the two financial instruments. The balance sheets of the Branches are translated at the official exchange rates prevailing at year-end. The profit and loss account line items of these branches are translated at the average annual exchange rate. Gains and losses arising from the translation of capital, reserves, retained earnings and income are recognized in equity under Equity - Revaluation Reserve - Foreign currency translation. The main spot exchange rates used by the Bank as at December 31, 2013 and 2012 are as follows: EUR 1 = USD USD EUR 1 = CAD CAD EUR 1 = JPY JPY EUR 1 = CHF CHF Cash and demand deposits with central banks Cash consists primarily of cash balances and the mandatory minimum reserve with the Central Bank of Luxembourg. The funds for the minimum reserves are not available for financing the current operations of the Bank. The reserve base, calculated monthly, is based on balance sheet assets in accordance with Luxembourg accounting principles. The baseline calculation that determines the reserve requirement is performed by the Central Bank. 2.5 Financial instruments At initial recognition, financial assets and financial liabilities are measured at fair value, including transaction costs (except for financial instruments recognized at fair value through profit or loss). After initial recognition, financial assets and financial liabilities, based on their category, are measured either at fair value or at amortized cost using the effective interest method (see below).

21 The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected (estimated) life of the financial instrument or, when appropriate, a shorter period to obtain the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. In addition, the calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. The Bank s balance sheet sets out all asset and liability items in accordance with the resource availability date criterion, that is, the date of effective transfer, except for derivative financial instruments, which are booked on the transaction (trade) date Determining the fair value of financial instruments Fair value is the price that would be received for the sale of an asset or paid for the transfer of a liability in a normal transaction between market participants. The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, fair value is established by using a valuation technique. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. Determining whether a market is inactive relies on indicators such as a sharp decline in trading volume and in the level of market activity, a sharp pricing disparity over time and between the various market participants referred to above, or the fact that the latest transactions dealt on an arm s length basis are not recent enough. When the financial instrument is traded in several markets to which the Bank has immediate access, the fair value of the financial instrument is the most advantageous price on an active market. If a published price quotation in an active market does not exist for a financial instrument in its entirety, but active markets exist for its component parts, fair value is determined on the basis of the relevant market prices for the component parts by factoring in the bid price and the ask price of the net position, taking the direction of the trend into account. If the market for a financial instrument is not active or is no longer considered active, its fair value is established using a valuation technique (in-house valuation models). Depending on the instrument of interest, these models may use data derived from recent transactions concluded on an arm s length basis, from the current fair value of another instrument that is substantially the same, from discounted cash flow analysis or option pricing models, or from valuation parameters. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, then the Bank uses that technique. The use of internal assumptions for future cash flows and discount rates, correctly adjusted for the risks that market 20 21

22 participants consider, is permitted. Such adjustments are made in a reasonable and appropriate manner after examining all available information. Notably, internal assumptions consider counterparty risk, non-performance risk, liquidity risk and model risk, as relevant. Amounts that would be received or paid in a forced transaction, involuntary liquidation or distress sale are not usually accepted as fair value. When the valuation criteria used are observable market data, the fair value is the market price and any difference between the transaction price and the price output by the in-house valuation model, i.e. the trade margin, is immediately recognized in profit or loss. However, if the valuation criteria are not observable or if the valuation models are not consistent with acceptable market models, the fair value of the financial instrument at the time of the transaction is deemed to be the transaction price and the trade margin is then usually recognized in profit or loss over the lifetime of the instrument. For some instruments, due to their complexity, this margin is not recognized in profit or loss until their maturity or in the event of early sale. Where substantial volumes of issued instruments are traded on a secondary market with quoted prices, the trade margin is recognized in profit or loss consistent with instrument s pricing formula. When valuation criteria become observable, any portion of the trade margin that has not yet been booked is recognized in profit or loss at that time Financial assets and financial liabilities Each category has its own accounting treatment and specific pricing Financial assets held for trading Financial assets and liabilities held for trading are financial assets or liabilities acquired or incurred principally with an intention to sell or repurchase them in the near term or that are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. Such assets and liabilities are initially recognized at fair value on the transaction date (excluding transaction costs taken directly to profit or loss) and subsequently remeasured at fair value on the balance sheet date. Changes in fair value are recognized in profit or loss under Gains and losses on financial instruments held for trading. Interest received or paid on non-derivative instruments is recognized under interest income or interest expense. Dividends received are aggregated under Income from dividends. All derivative financial instruments with a positive (negative) substitution value are considered financial assets (liabilities) held for trading, with the exception of derivatives qualifying as hedge instruments. Changes in fair value are recognized under Gains and losses on financial instruments held for trading and any interest received or paid on derivatives is recognized under interest income or interest expense. Due to their nature, there is no allowance for impairment for this category of financial assets and financial liabilities.

23 Financial assets and liabilities designated at fair value through profit and loss Financial assets and financial liabilities are designated at fair value through profit or loss (or fair value option) only and irrevocably upon initial recognition, in accordance with the following use criteria if: this designation eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise if not used; or a group of financial assets or financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains one or more embedded derivatives not closely related to the host contract. If the option to designate a financial asset or financial liability at fair value on initial recognition is used, it is irrevocable. This category has the same measurement rules as those applied to Financial assets and financial liabilities held for trading. The same headings as those defined for financial assets or liabilities held for trading are used to recognize interest and dividends. In contrast, changes in fair value are recognized under Gains and losses on financial instruments designated at fair value through profit or loss. Due to their nature, there is no allowance for impairment for this category of financial assets and financial liabilities Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that are neither held for trading purposes nor intended for sale from the time they are purchased or originated. After initial recognition they are measured at amortized cost based on the effective interest rate and are tested for impairment at each balance sheet date and may give rise to, if applicable, an impairment loss (See Note 7) Held-to-maturity investments These are non-derivative financial assets with fixed or determinable payments and fixed maturity that are quoted in an active market and which the Bank has the positive intention and ability to hold to maturity. They are measured after acquisition at amortized cost and may be subject to impairment, if appropriate (Note 8). Using the effective interest method, amortized cost includes premiums and discounts as well as transaction costs. These financial assets are recognized in the balance sheet under Held-to-maturity investments. Amortization using the effective interest method is reported in the profit and loss account under Interest and related income. Impairment losses are recognized in profit or loss under Impairment on financial assets not measured at fair value through profit or loss

24 Available-for-sale financial assets These are non-derivative financial assets held for an indeterminate period which the Bank may sell at any time. Available-forsale financial assets are non-derivative financial assets designated as available for sale or which are not allocated to any of the above-mentioned categories. These assets are measured at fair value at initial recognition on the transaction date, including transaction costs, and subsequently remeasured to fair value on the balance sheet date. All changes in fair value are recognized in a single line item under equity. Upon the sale or realization of an other than temporary impairment of these assets, the results of cumulative revaluation previously recognized in equity are reclassified in profit and loss under Gains on financial assets not measured at fair value through profit or loss or, if there is a loss, under Losses on financial assets not measured at fair value through profit or loss. For interest-bearing instruments, income recognized using the effective interest method is aggregated under Interest receivable and similar income. Dividends received are aggregated under Income from dividends. Available-for-sale financial assets include fixed-rate and floating-rate securities that are not classified as held for trading and that are designated at fair value through profit or loss as well as the instruments described in paragraph below, and the Bank s participating interests. Participating interests are measured at the acquisition cost less any permanent impairment in accordance with IAS (c) and 66 (Note 29) Impairment of financial assets a) Impairment of financial assets measured at amortized cost At the end of every reporting period, the Bank assesses whether there is any objective evidence that a financial asset or group of financial assets is impaired as a result of one or more events occurring after the initial recognition of the asset (a loss event ) and whether that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Bank first assesses whether any objective evidence exists that the financial assets that are individually significant are impaired. If there is objective evidence that loans or other receivables, or financial assets classified as Held-to-maturity financial assets, are impaired, an impairment loss is booked for the difference between the carrying amount and the present value of estimated future recoverable cash flows, taking into account any guarantees, discounted at the financial assets original effective interest rate. This impairment is recognized in profit and loss under Impairment on financial assets not measured at fair value through profit or loss in the profit and loss account and the value of the financial asset is proportionately reduced.

25 The Bank does not use collective assessments of impairment due to the lack of uniformity of the relevant assets. b) Impairment of available-for-sale financial assets Impairment of an available-for-sale financial asset is recognized through profit or loss if there is objective evidence of impairment as a result of one or more events occurring after the impairment was recognized. A significant or prolonged decline in the value of equity instruments to below their acquisition cost constitutes objective evidence of an impairment loss. An impairment is then recognized in the profit and loss account amounting to any capital loss deemed permanent. The criteria for impairment of debt instruments are similar to those for impairment of financial assets measured at amortized cost. Impairment losses recognized through profit or loss on an equity instrument classified as available-for-sale are reversed through profit or loss only when the instrument is sold. Once an equity instrument has been recognized as impaired, any further loss of value is booked as an additional impairment loss. In contrast, an impairment loss on a debt instrument is reversed through profit or loss only if it subsequently recovers in value. This cumulative loss is measured as the difference between the acquisition cost (net of any repayments of principal and amortization) and the present fair value, less any impairment of the financial asset that has already been booked through profit and loss Financial derivatives and hedge accounting All derivatives are recognized at fair value as financial assets or financial liabilities on the balance sheet. Except for derivative financial instruments recognized as cash flow hedges (see below), changes in the fair value of derivative financial instruments are recognized in the profit and loss account for the period. Derivative financial instruments are divided into two categories: Derivative financial instruments held for trading Derivative financial instruments are considered to be held for trading by default, unless they qualify as hedging instruments. They are reported on the balance sheet under Financial assets or liabilities at fair value through profit or loss. Changes in fair value are carried in the profit and loss account under Gains and losses on financial assets and liabilities designated at fair value through profit or loss

26 Derivatives financial instruments - Hedge Accounting To qualify as a hedging derivative instrument, the Bank must document the hedging relationship at inception. This documentation specifies the hedged asset, liability, or future transaction, the risk to be hedged, the type of financial instrument used and the valuation method that will be applied to measure its effectiveness. The derivative financial instrument designated as a hedge is expected to be highly effective in offsetting the exposure to changes in the hedged item s fair value or cash flows attributable to the hedged risk. Such effectiveness is measured at inception of the hedge and thereafter throughout its life. Derivative financial instruments used as hedges are recognized on the balance sheet under Derivatives - Hedge Accounting. Based on the hedged risk, the Bank designates the financial instrument as a fair value or cash flow hedging instrument. a) Fair value hedge In a fair value hedge, changes in the hedged item s fair value attributable to the hedged risk are recognized in the profit and loss account, offsetting the changes in the hedging instrument s fair value, proportionate to the efficiency ratio of the hedging relationship. The ineffective portion therefore remains recognized in profit and loss. As regards interest rate derivatives, accrued interest income or expenses are recognized in the profit and loss account under Interest income and expense at the same time as the interest income or expense related to the hedged item. If it becomes apparent that the derivative financial instrument has ceased to meet the effectiveness criteria in connection with a hedging relationship or if it is sold, hedge accounting is prospectively discontinued. Thereafter, the carrying amount of the hedged asset or liability ceases to be adjusted for changes in fair value and the cumulative adjustments previously recognized in hedge accounting are amortized over the remaining life of the item previously hedged. Hedge accounting is discontinued automatically if the hedged item is sold before maturity or redeemed early. b) Cash flow hedge In a cash flow hedge, the effective portion of the changes in fair value of the derivative financial instrument is recognized in a single separate line in equity, while the ineffective portion is recognized in the profit and loss account under Gains and losses on financial instruments designated at fair value through profit or loss. Amounts directly recognized in equity in cash flow hedge accounting are reclassified in Interest receivable and payable in the profit and loss account at the same time as the cash flows being hedged. Accrued interest income or expense on hedging derivatives is recognized in the profit and loss account under Interest receivable and payable at the same time as the interest income or expense related to the hedged item. If it becomes apparent that the derivative financial instrument has ceased to meet the effectiveness criteria in connection with a hedging relationship if it is no longer highly probable, for example or if it is sold, hedge accounting is prospectively