DEUTSCHE BANK MEXICO, S. A. Institución de Banca Múltiple. Financial Statements. December 31, 2006 and 2005

Transcription

1 Financial Statements December 31, 2006 and 2005 (With Independent Auditors Report Thereon) (Free Translation from Spanish Language Original)

2 Independent Auditors Report (Free translation from Spanish language original) The Board of Directors and Stockholders Deutsche Bank México, S. A., : We have examined the accompanying balance sheets of Deutsche Bank México, S. A., Institución de Banca Múltiple ( the Bank ) as of December 31, 2006 and 2005, and the related statements of income, changes in stockholders equity and changes in financial position for the years then ended. These financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in accordance with the accounting criteria for credit institutions in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in note 2 to the financial statements, the Bank is required to prepare and present its financial statements in accordance with the accounting criteria established by the National Banking and Securities Commission ( the Banking Commission ) for credit institutions in Mexico, which in general conform with Mexican Financial Reporting Standards (MFRS) issued by The Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera or CINIF). The accounting criteria include particular rules, which in some cases depart from such Standards. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Deutsche Bank México, S. A., as of December 31, 2006 and 2005 and the results of its operations, the changes in its stockholders equity and the changes in its financial position for the years then ended, in conformity with the accounting criteria established by the Banking Commission for credit institutions in Mexico, as described in note 2 to the financial statements. KPMG CARDENAS DOSAL, S. C. SIGNATURE Hermes Castañón Guzmán February 27, 2007.

3 Balance Sheets December 31, 2006 and 2005 (Millions of Mexican pesos of constant purchasing power as of December 31, 2006, except when indicated otherwise) Assets Liabilities and Stockholders' Equity Cash and due from banks (note 4) $ 1, Due to banks and other financial institutions $ - 26 Investment securities: Securities and derivative transactions: Trading securities (note 5) 810 1,491 Credit balances on repurchase/resell agreements (note 6) 1 - Derivative financial instruments Securities and derivative transactions: (note 7) 1,559 1,028 Debit balances on repurchase/resell agreements (note 6) ,560 1,028 Derivative financial instruments Other accounts payable: (note 7) 1, Income tax (note 12) Sundry creditors and other accounts 1, payable (note 11) 2,138 1,264 Other accounts receivable, net (note 8) 1, Total liabilities 3,698 2,419 Deferred income tax, net (note 12) Stockholders' equity (note 13): Paid-in capital stock Other assets (note 10) 18 1 Earned capital: Statutory reserve Retained earnings Net income Commitments (note 17) Total stockholders' equity 1,715 1,706 Total assets $ 5,413 4,125 Total liabilities and stocholders' equity $ 5,413 4,125 Memorandum accounts (notes 6 and 15): Property in trust or under mandate $ 62,587 23,673 Assets in custody or under management Securities receivable under repurchase agreements $ 5,097 2,140 Creditors under agreements to repurchase (5,051) (2,115) Debtors under agreements to resell Securities deliverable under resell agreements - (156) - - $ See accompanying notes to the financial statements. "These balance sheets were prepared in accordance with the accounting criteria for credit institutions issued by the National Banking and Securities Commissionbased on Articles 99, 101 and 102 of the Credit Institutions Law, which are of general and mandatory nature and have been applied on a consistent basis, accordingly, they reflect the transactions carried out by the Institution through the dates noted above. Furthermore, these transactions were carried out and valued in accordance with sound banking practices and the applicable legal and administrative provisions". "These balance sheets were approved by the Board of Directors under the responsibility of the undersigned officers". "The Bank's historical capital stock as of December 31, 2006 amounts to $709 milion of Mexican pesos". SIGNATURE Tito Vidaurri Del Castillo General Director SIGNATURE María Guadalupe Morales Ortega Chief Financial Officer SIGNATURE Arturo Rodríguez Rodríguez Controller SIGNATURE Jorge Carrillo Internal Auditor

4 Statements of Income Years ended December 31, 2006 and 2005 (Millions of Mexican pesos of constant purchasing power as of December 31, 2006) Interest income (note 16a) $ Interest expense (note 16a) (262) (197) Monetary position loss, net (note 16a) (113) (68) Financial margin Commissions and fees, net (note 9) Brokerage income, net (note 16b) Total operating income, net Administrative and promotional expenses (notes 9) (246) (221) Net operating (loss) income (107) 286 Other income, net Income (loss) before income tax (IT) (18) 399 Current IT (note 12) - (159) Deferred IT (note 12) Net income $ See accompanying notes to the financial statements. "These statements of income were prepared in accordance with the accounting criteria for credit institutions issued by the National Banking and Securities Commission based on Articles 99, 101 and 102 of the Credit Institutions Law, which are of general and mandatory nature and have been applied on a consistent basis, accordingly, they reflect all the revenues and disbursements relating to the transactions carried out by the Institution for the years noted above. Furthermore, these transactions were carried out and valued in accordance with sound banking practices and the applicable legal and administrative provisions". "These statements of operations were approved by the Board of Directors under the responsibility of the undersigned officers". SIGNATURE Tito Vidaurri Del Castillo General Director SIGNATURE María Guadalupe Morales Ortega Chief Financial Officer SIGNATURE Arturo Rodríguez Rodríguez Controller SIGNATURE Jorge Carrillo Internal Auditor

5 Statements of Changes in Stockholders' Equity Years ended December 31, 2006 and 2005 (Millions of Mexican pesos of constant purchasing power as of December 31, 2006) Paid-in Net Total capital Statutory Retained (loss) stockholders' stock reserve earnings income equity Balances at December 31, 2004 $ (219) 1,380 Items related to stockholder resolutions: Appropriation to retained earnings - - (219) Items related to the recognition of comprehensive income: Net income Balances at December 31, ,706 Items related to stockholder resolutions: Appropriation to retained earnings (326) - Items related to the recognition of comprehensive income: Net income Balances at December 31, 2006 $ ,715 See accompanying notes to the financial statements. "These statements of changes in stockholders' equity were prepared in accordance with the accounting criteria for credit institutions issued by the National Banking and Securities Commission based on Articles 99, 101 and 102 of the Credit Institutions Law, which are of general and mandatory nature and have been applied on a consistent basis, accordingly, they reflect all the stockholders' equity account entries relating to the transactions carried out by the Institution for the years noted above. Furthermore, these transactions were carried out and valued in accordance with sound banking practices and the applicable legal and administrative provisions". "These statements of stockholders' equity were approved by the Board of Directors under the responsibility of the undersigned officers". lo. Tito Vidaurri Del Castillo General Director.SIGNATURE María Guadalupe Morales Ortega Chief Financial Officer.SIGNATURE. Arturo Rodríguez Rodríguez Controller SIGNATURE Jorge Carrillo Internal Auditor

6 Statements of Changes in Financial Position Years ended December 31, 2006 and 2005 (Millions of Mexican pesos of constant purchasing power as of December 31, 2006) Operating activities: Net income $ Items included in operations not (providing) requiring cash: Results on valuation to fair value of derivative transactions and investment securities (60) 62 Deferred income tax (27) (86) Cash (used in) provided by operations (78) 302 Net financing from (investing in) operating accounts: Derivative instruments and investment securities 617 (194) Other accounts payable Other accounts receivable and other assets (544) (21) Cash provided in operating activities Cash (used in) provided by financing activities through due to banks and other financial institutions (26) 26 Increase in cash and due from banks Cash and due from banks: At beginning of year At end of year $ 1, See accompanying notes to the financial statements. "These statements of changes in financial position were prepared in accordance with the accounting criteria for credit institutions issued by the National Banking and Securities Commission based on Articles 99, 101 and 102 of the Credit Institutions Law, which are of a general and mandatory nature and have been applied on a consistent basis, accordingly, they reflect all sources and applications of funds relating to the transactions carried out by the Institution for the years noted above. Furthermore, these transactions were carried out and valued in accordance with sound banking practices and the applicable legal and administrative provisions". "These statements of changes in financial position were approved by the Board of Directors under the responsibility of the undersigned officers". SIGNATURE Tito Vidaurri Del Castillo General Director SIGNATURE María Guadalupe Morales Ortega Chief Financial Officer SIGNATURE Arturo Rodríguez Rodríguez Controller SIGNATURE Jorge Carrillo Internal Auditor

7 December 31, 2006 and 2005 (Millions of Mexican pesos of constant purchasing power as of December 31, 2006, except when indicated otherwise) These financial statements have been translated from the Spanish language original solely for the convenience of foreign/englishspeaking readers. (1) Operations- On February 18, 2000, the Mexican Ministry of Finance and Public Credit (SHCP) issued a resolution authorizing the incorporation and operation of Deutsche Bank México, S. A. (the Bank) which is a 99.99% subsidiary of Deutsche Bank Americas Holding Corporation (the Corporation), as an Affiliate Multiple Banking Institution and according to the Credit Institutions Law, the Bank is authorized to carry out full-service banking activities. The Bank has no employees and, therefore, it is not subject to labor obligations. Administrative services are provided by DB Servicios México, S. A. de C. V. (DB Servicios), an affiliated company for a fee (note 9). (2) Summary of significant accounting policies- (a) Financial statement presentation- On February 27, 2007, the officers who provide administrative services and are assigned to the positions noted below authorized the issuance of the accompanying financial statements and related footnotes: Tito Vidaurri Del Castillo Ma. Guadalupe Morales Ortega Arturo Rodríguez Rodríguez Jorge Carrillo General Director Chief Financial Officer Controller Internal Auditor The financial statements are prepared based on the applicable banking legislation and in conformity with the accounting criteria established by the National Banking and Securities Commission ( the Banking Commission ) for credit institutions in Mexico. The Banking Commission is responsible for the inspection and supervision of financial institutions and for reviewing their financial information.

8 2 The accounting criteria established by the Banking Commission generally conform to Mexican Financial Reporting Standards (MFRS) issued by the Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera or CINIF) and include particular rules relating to accounting, valuation, presentation and disclosure, which in certain respects, differ from such MFRS (see section (d) of this note). Beginning June 1, 2004, the CINIF is in charge of issuing financial reporting standards in Mexico. To accomplish this task, CINIF received from the Mexican Institute of Public Accountants the bulletins of Generally Accepted Accounting Principles and Circulars issued through that date, which have been renamed as Financial Reporting Standards (FRS), and will continue in force until modified, substituted or superseded by a new FRS. Through December 2006, CINIF had issued eight series A and one series B FRS, effective for fiscal years beginning after December 31, Therefore, all prior series A bulletins, as well as bulletins B-1 and B-2, have been superseded. For cases not contemplated therein, the accounting criteria include a process which provides for the supplementary use of other accounting principles and standards, in the following order: MFRS; International Financial Reporting Standards issued and approved by the International Accounting Standards Board (IASB); accounting principles generally accepted in the United States of America (US GAAP); or in cases not covered by these principles and standards, any other formal and recognized accounting standard that does not contravene the general criteria of the Banking Commission. The accompanying financial statements are expressed in millions of Mexican pesos of constant purchasing power, using the Investment Unit (UDI) value. The UDI is a unit of measurement whose value is determined by the Banco de México (Central Bank) based on inflation. UDI values at December 31 are as follows: At December 31 UDI Annual inflation 2006 $ % % %

9 3 For purposes of disclosure in the notes to the financial statements, when reference is made to pesos or $, it refers to million of Mexican pesos, and dollars or USD refers to million of dollars of the United States of America. The Bank s financial statements recognize the assets and liabilities arising from the purchase and sale of foreign currencies, investments in securities, securities repurchase and resell agreements, and derivative financial instruments on the day the transactions are entered into regardless of the settlement date. (b) (c) Cash and due from banks- This caption comprises cash, bank balances, 24 and 48-hour foreign-currency purchase/sale transactions, and deposits with Central Bank, which include monetary regulatory deposits that the Bank is required to maintain by Law, for the purpose of regulating liquidity in the money market. Such deposits have no maturity and bear interest at the average rate for bank deposits. The receivables associated with 24 and 48-hour foreign currency sales are recorded in Other accounts receivable and Cash and due from banks ; while the obligations arising from 24 and 48-hour foreign currency purchases are recorded in Sundry creditors and other accounts payable. Investment securities- Investment securities consist of government securities and other fixed income securities, classified depending on management s investment intentions into: Trading Trading securities are bought and held principally to be sold in the near term. Debt securities are initially recorded at cost and subsequently marked to market using information provided by an independent price vendor. When a fair and representative market value cannot be determined, fair values of financial instruments with similar characteristics or prices calculated based on formal widelyaccepted valuation techniques are used. Valuation effects are recognized in the statement of income.

10 4 Securities acquired which settlement date is up to 4 business days following the purchase transaction date shall be recognized as restricted securities while securities sold will be recognized as an output of investments in securities. The counterpart should be a settlement, credit or debit account, as applicable. (d) Securities under repurchase/resell agreements- Securities under repurchase/resell agreements are stated at market value using information provided by an independent price vendor, and the obligations or rights from the commitments to repurchase or resell the securities are stated at the net present value at maturity. The balance sheet presents the sum of debit or credit balances after individually offsetting the restated values of the securities receivable or deliverable and the repurchase or resale commitment of each repurchase/resell agreement. Transactions where the Bank acts as repurchaser and repurchasee with the same entity are not offset. The presentation of repurchase/resell agreements differs from that of MFRS, which present the balances separately and requires offsetting similar transactions with the same counterparty. Interest, premiums, gains or losses and mark to market adjustments from these transactions are reported in the statement of operations under Interest income, Interest expense, and the mark to market effects are recognized in the Brokerage income, net, respectively. In accordance with Central Bank Circular 1/2003, it is mandatory that in repurchase/resell agreement transactions with a maturity of more than three days, the parties contractually agree to guarantee such transactions when the fluctuations in the value of the securities under the repurchase/resell agreement cause an increase in the net exposure that exceeds the maximum value agreed upon by the parties. The guarantee granted (without transfer of property) is recorded in the securities portfolio as trading instruments, restricted or pledged as security, and if they correspond to cash deposits, as restricted cash balances. The guarantees received that do not represent a transfer of property are recorded in memorandum accounts as assets held in custody or under management. The guarantees are valued in accordance with the current dispositions for valuing investment securities, cash and equivalents and assets in custody or under management, respectively.

11 5 (e) Derivative transactions- Transactions with derivate financial instruments comprise those carried out for trading, the accounting treatment of which is described below. Forward contracts The net change in market value of the future price of the contract is presented in the balance sheet with a corresponding charge or credit to the statement of income. Swaps Rights or obligations established in the contract arising from the exchange of cash flows or asset yields (swaps) are recorded as assets or liabilities. The assets and liabilities derived from swaps for trading purposes are marked to market, reporting the net value of the swap on the balance sheet while the related gains or losses are recognized in the statement of income. According to Bulletin C-10 of MFRS, effective as from January 1, 2005, derivative financial instruments are recognized, without considering their purpose, at fair value, which is originally represented by the agreed-upon consideration; transaction-related costs and cash flows received or delivered to mark the instrument to market at the beginning of the transaction, not associated with premiums on options, are amortized during the transaction s validity period. Changes in fair value of derivative financial instruments for trading purposes are recognized under Comprehensive Financial Results, in the statement of income. (f) Clearing accounts- Clearing accounts record the amounts receivable and payable derived from investment securities, repurchase/resell agreements, securities loan transactions, and/or transactions with derivative financial instruments that have reached maturity and that are pending settlement, as well as amounts receivable or payable resulting from currency purchase or sale transactions for which immediate settlement is not stipulated, or on those with a same-day value date. Debit and credit balances of the clearing accounts resulting from currency purchase or sale transactions are offset provided there is a contractual right to compensate the amounts recorded and at the same time there is the intention to settle them on a net basis or else realize the asset and settle the liability simultaneously. Assets and liabilities in transactions that are of the same nature or are derived from the same agreement are also offset provided they have the same maturity and are liquidated simultaneously.

12 6 (g) Fees and premiums- Premiums and other fees for services are recognized in income on accrual basis and provided, respectively. (h) Deferred income tax (IT)- Deferred IT is accounted for under the asset and liability method which compares accounting and tax values. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as for unamortized tax loss carry-forwards and unused tax credits. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period enacted. (i) Due to banks and other financial institutions- This caption comprises loans obtained through credit auctions with the Central Bank. The interests are recognized in results on the accrual basis. (j) Restatement of capital stock, statutory reserves and retained earnings- This restatement is determined by multiplying stockholder contributions and retained earnings by UDI factors, which measure accumulated inflation from the dates contributed or generated through the most recent year end. The resulting amounts represent the constant value of stockholders equity.

13 7 (k) (l) Monetary position gains and losses- The Bank recognizes in income the effect (gain or loss) in the purchasing power of its monetary position, which is determined by multiplying the difference between monetary assets and liabilities at the beginning of each month by inflation through year end. The aggregate of these results represents the monetary gain or loss for the year arising from inflation, which is reported in results of operations for the year. The gain or loss from interest-bearing monetary assets and liabilities is included in the statement of income as part of the Financial margin, while the gain or loss from all other monetary items is presented in Other income, net. Revenue recognition- The interests on investments in fixed-income securities are recognized in results of operations as earned. The premiums earned on repurchase agreement transactions is calculated based on the present value of the price at maturity. Since 2006, trust-fees collected in advance are recorded as deferred income and recognized in the statement of income as accrued. The effect of this change was not significant for the financial statements as of December 31, 2005 taken as a whole. (m) Foreign currency transactions- (n) The accounting records are maintained in both pesos and foreign currencies, which for financial statement presentation purposes, in the case of currencies other than the dollar are translated from the respective currency to dollars, as established by the Banking Commission, and the dollar equivalence with Mexican currency is translated at the exchange rate determined by the Central Bank. Foreign exchange gains and losses are recognized in results of operations when incurred. Contributions to the Bank Savings Protection Institute (IPAB)- Among other provisions, the Bank Savings Protection Law establishes the creation of the IPAB, as a system to protect the guaranteed savings of the public and regulate the financial support granted to banking institutions in order to comply with this objective.

14 8 According to the law mentioned before, the IPAB guarantees the bank deposits of savers up to 400 thousand UDIS. The Bank recognizes in results of operations the mandatory contributions to the IPAB. (o) Contingencies- Liabilities for loss contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. When a reasonable estimation cannot be made, qualitative disclosure is provided in the notes to the financial statements. Contingent income, earnings or assets are not recognized until their realization is virtually assured. (p) Use of estimates- The preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results may differ from those estimates and assumptions. (3) Foreign currency exposure and exchange rates- (a) Foreign currency exposure- Central Bank regulations require that banks maintain balanced positions in foreign currencies within certain limits. The short or long position permitted by the Central Bank is equivalent to a maximum of 15% of the basic capital of the Bank. As of December 31, 2006 and 2005, the Bank maintained a position in foreign currencies within the limits mentioned, which is analyzed as shown in the next page.

15 Assets 1,443 2,443 Liabilities (1,441) (2,442) Long (short) position, net 2 (1) ===== ==== (b) Exchange rates- The exchange rate of the peso to the dollar at December 31, 2006 and 2005, was $ and $ , nominal pesos, respectively. (4) Cash and due from banks- At December 31, 2006 and 2005, cash and due from banks are analyzed as follows: Banks and due from banks $ Restricted funds: Foreign currency purchases to be settled within 24 and 48 hours 2,965 1,471 Foreign currency sales to be settled within 24 and 48 hours (1,605) (864) $ 1, ===== ==== As explained in note 2(b), the liability corresponding to foreign currency purchases is recorded in Sundry creditors and other accounts payable and the asset corresponding to foreign currency sales is recorded in Other accounts receivable. At December 31, 2006 and 2005, the deposit in Central Bank is $327 (in nominal pesos) in both years, for regulating liquidity in the financial markets.

16 10 (5) Investment securities- At December 31, 2006 and 2005, short-term investment securities for trading purposes are analyzed as follows: Unrestricted Government securities $ 857 1,567 Private securities Value date transactions sales (See notes 8 and 10) (1,840) (199) (568) 1,414 Restricted Value date transactions purchases (See notes 8 and 10) 1, $ 810 1,491 ==== ==== At December 31, 2006 and 2005, government securities terms are between 12 days and 15 years and bears average annual interest rates of 6.73% and 7.02%, respectively, while the terms of private securities range between 26 and 34 years and average annual interest rates of 7.97% and 8.25%, respectively. (*) Transactions using the Interbank Electronic Payments System (SPEI, formerly SPEUA)- During 2005 the Central Bank implemented a new interbank electronic payments system (SPEI, formerly the wide use electronic payments system or SPEUA) thus repealing the Central Bank s circular telefax 21/2003, which required that participating institutions create guarantees through government securities (Cetes, Bondes or Udibonos).

17 11 (6) Securities repurchase/resell agreements- At December 31, 2006 and 2005, the Bank had entered into securities repurchase/resell agreements, which have average weighted tenor of 4 and 3 days respectively, with rates average of 7.17% and 8.45%, respectively, are analyzed as follows: December 31, 2006 Assets Liabilities Securities receivable $ 5,097 - Accounts payable on repurchase agreements - (5,051) 5,097 (5,051) Offsetting reclassification (nota 2d.) (5,050) 5,050 December 31, 2005 $ 47 (1) ==== ==== Securities receivable (deliverable) $ 2,140 (157) Accounts receivable (payable) on repurchase agreements 157 (2,115) 2,297 (2,272) Offsetting reclassification (nota 2d.) (2,272) 2,272 $ 25 - ==== ==== At December 31, 2006 and 2005, the securities receivable and deliverable are analyzed as follows: Securities receivable Government securities: Bonds $ 216 2,083 Cetes 1, Udibonos 1,744 - Other private securities 1,103 - Accrued interest and valuation adjustment $ 5,097 2,141 ==== ====

18 12 Securities deliverable Government securities: Cetes $ ====== ====== (7) Derivative financial instruments- At December 31, 2006 and 2005, derivative instruments for trading purposes are analyzed as follows: Assets 2006 Liabilities Foreign exchange forwards: Receivable (deliverable) $ 16,111 (16,067) Reclassification due to offsetting (14,655) 14,655 1,456 (1,412) Swaps: (Receivable) deliverable: Interest rate 27,495 (27,642) Foreign currency 10,143 (10,143) Reclassification due to offsetting (37,638) 37,638 - (147) $ 1,456 (1,559) ===== =====

19 13 Assets 2005 Liabilities Foreign exchange forwards: Receivable (deliverable) $ 41,446 (41,378) Reclassification due to offsetting (40,624) 40, (754) Swaps: (Receivable) deliverable: Interest rate 23,513 (23,709) Foreign currency 13,256 (13,335) Reclassification due to offsetting (36,769) 36,770 - (274) $ 822 (1,028) ====== ====== The notional amounts of contracts represent the derivative volume outstanding and do not represent the gain or loss associated with the market risk or credit risk of such instruments. The notional amounts represent the amount to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notional amounts of the derivative financial instruments for trading purposes at December 31, 2006 and 2005 are analyzed as follows: Dollars: Cross currency swaps Interest rate swaps Cross currency forwards 1,460 - ===== ===== Nominal Mexican pesos: Cross currency swaps $ 5,267 6,228 Interest rate swaps 60,785 49,433 ===== =====

20 14 (8) Other accounts receivable, net- Other accounts receivable are comprised of the following: Debtors for value date transactions (see notes 5 and 10) $ 1, Value date transactions offsetting (2,372) (377) Debtors for liquidation of transactions 1, Recoverable taxes Other debtors, net (9) Related-party transactions and balances- $ 1, ==== === Transactions carried out in the years ended December 31, 2006 and 2005 with affiliate and related companies were as follows: Commissions collected $ Administrative services and rents paid === === Balances receivable from (payable to) affiliate and related companies at December 31, 2006 and 2005, are analyzed as follows: Deutsche Bank, London $ DB Servicios México (6) (13) == == Balances receivable from and payable to related companies are included in the Other accounts receivable and Sundry creditors and other accounts payable captions, respectively.

21 15 In accordance with the IT Law, corporations carrying out transactions with related parties, whether domestic or foreign, are subject to certain limitations and tax requirements as to the determination of prices, since such prices must be equivalent to those that would be used in arm s-length transactions. (10) Other assets- On December 28, 2006 the Bank acquired a certificate of trust rights (Certificate), as support for 50% of the excess of distributions to be made by the irrevocable trust F/00036 (the Trust) to the holders of such Certificate after the Stock Certificates (SCs) derived from the mortgage loan portfolio securitization process by Crédito y Casa, S. A. de C. V. SOFOL, have been fully settled by the Trust and the amounts owing to the Sociedad Hipotecaria Federal have been paid in accordance with the trust agreement where Banco J.P. Morgan, S. A. acts as Trustee. For such Certificate the Bank paid 1.5 dollars. (11) Sundry creditors and other accounts payable- Sundry creditors and other accounts payable at December 31, 2006 and 2005 are analyzed as follows: Creditors for value date transactions settlements (see notes 5 and 8) $ 1, Value date transactions offsetting (2,372) (377) Creditors for transaction settlements 2,975 1,474 Other (12) Income tax (IT), asset tax (AT) and tax loss carry-forwards- $ 2,138 1,264 ==== ==== For purposes of determining IT, there are specific rules for the deductibility of expenses and the recognition of the effects of inflation. In accordance with current tax legislation, companies must pay the greater of IT or AT. Both taxes recognize the effects of inflation, although differently from MFRS.

22 16 The AT Law provides for a 1.8% tax rate on restated assets, less certain liabilities. For the year ended December 31, 2006 and 2005, the Bank was not subject to AT, since it does not have assets that are subject to this tax in accordance with Article 5-B of the AT Law. For the year 2007 the Bank will apply a tax rate of 1.25% and no liability may be deducted. Following is a condensed reconciliation between the accounting income (loss) and taxable income in nominal values for the years ended December 31, 2006 and 2005: (Loss) income before IT $ (18) 399 Accounting effects of inflation Nominal income Reconciling items: Tax effects of inflation (68) (39) Mark-to-market adjustments Taxable income (deductions), net (84) 81 VAT recoveries - (50) Other (56) 34 Taxable (loss) income (99) 507 Tax rate 29% 30% IT payable Restatement for inflation - 7 Current IT expense $ === ===

23 17 In accordance with the tax reforms to the IT Law, the income tax rate for the year 2006 was 29% and 30% for In the year 2007 and subsequent years will be 28%. Tax loss carryforwards pending to be amortized as of December 31, 2006 amounted to $99 and expire in the year In accordance with Mexican tax law, the tax authorities are entitled to examine transactions carried out during the five years prior to the most recent income tax return filed. The deferred tax asset at December 31, 2006 and 2005, is made up of the following (nominal) items: Valuation of investment securities, securities and derivatives transactions $ Miscellaneous provisions Tax loss carryforwards Restatement for inflation - 3 $ === == Movements in results by deferred income tax $ Restatement for inflation - 3 Deferred IT recognized in results $ === == (13) Stockholders equity- (a) Structure of capital stock- The capital stock is represented by 708,832 shares with a par value of one thousand pesos each, of which 708,831 are Series F shares and one is a Series B share. The Series F shares must represent at least 51% of capital stock and may only be acquired by a foreign financial institution or by their affiliate holding company. Series B shares may represent up to 49% of the Bank s capital stock and may be subscribed without restrictions.

24 18 As of December 31, 2006 paid-in capital stock was comprised as follows: Capital stock Nominal Restated Initial contribution on February 28, 2000 $ Capital stock contribution on July 12, (b) Restrictions on stockholders equity- $ === === The Banking Law requires an appropriation of ten percent of net income for the year to statutory reserves, until such reserves reach an amount equal to paid-in capital. Stockholder contributions, and retained earnings on which income tax has been paid, restated on a tax basis, may be distributed or refunded to stockholders taxfree. Other refunds and distributions in excess of these amounts are subject to IT as provided for in the IT Law. (c) Capitalization The SHCP requires credit institutions to maintain a minimum capitalization percentage over risk assets, which is calculated by applying specific percentages in accordance with the risk assigned. At December 31, 2006 and 2005 the following page information corresponds to the net capital, risk assets and Bank s capitalization requirement. Net capital at December 31, 2006 and 2005 amounts to $1,715 and $1,706, respectively.

25 19 Risk assets: Equivalent Capital risk assets requirement Market risk: Operations: Mexican currency at a nominal rate $ 2,526 6, Nominal rate in a foreign currency Real rates 3, UDIS Foreign currency position Credit risk: Total market risk 5,949 7, On derivatives 1, On securities positions On deposits and loans Other Total credit risk 1, Total market and credit risk $ 7,253 8, ==== ==== === === Capitalization index: Capital to market and credit risk assets 23.64% 21.17% Capital to total required capital 2.96 times 2.65 times ======= =======

26 20 (14) Risk Management (unaudited)- Risk management refers to the set of objectives, policies, procedures and actions implemented to identify, measure, monitor, limit, control, inform and disclose the various types of risks to which the Bank is exposed. The Board of Directors of the Bank approved objectives, limits, guidelines and policies on risk exposure, which are reviewed at least once a year. Also, the Board of Directors designated a Risk Committee for the purpose of providing a forum that will allow monitoring compliance with the above mentioned objectives, limits, guidelines and policies. Objectives Risks must be assumed in moderation, in relation to available capital and where attractive opportunities for reward exist. Risks taken should be measured using a common basis. Risks must be supervised in accordance with the type of risk, and the different areas involved should be duly informed. Risks assumed must comply strictly with the limitations contained in Mexican Legislation and corporate standards. Use of the best risk management practices. Principles The principles of the policy on risk management for the Bank s activities are based on: Excellence and integrity in its transactions. Balancing risk-taking with appropriate controls. The importance of discipline and respect for limits. Diversification so as to avoid unnecessary concentration of risk. Balancing the dependence on models with the use of good judgment. Determination of limits depends on (i) the internal and external economic factors that imply some type of risk (mainly the economic framework, economic expectations, market liquidity and volatility) and (ii) the capacity to absorb losses based on the Bank s capital.

27 21 Risk Committee and comprehensive Risk Management Unit The Risk Committee is chaired by a owner member of the Board of Directors and its comprised by General Director, an adviser, the person responsible for the Comprehensive Risk Management Unit (UAIR) and the person responsible for credit; with the participation of the risk and internal audit areas, among others. This Committee meets every third Monday of the month and permit to review and discuss the points presented by the UAIR, such as: 1. Performance of risk factors. 2. Performance of the positions exposed to risk and their sensitivity analysis. 3. Updating of the methodology and models for measuring and controlling risks. 4. Risk policies with respect to: management of risks in excess of the established limits analysis of market liquidity and creation of liquidity reserves analysis of sensitivity analysis of new products 5. Performance of asset and liability positions 6. Creation of preventive liquidity reserves 7. Specific analysis of quantifiable and non-quantifiable risks. The Bank has manuals that set forth the guidelines and directives necessary for comprehensive risk management. The UAIR is independent and separate from the business areas. This area is responsible for identifying, measuring, monitoring, limiting and controlling the Bank s risks through the use of approved risk measurement standards. If the UAIR identifies a problem with regard to the exposure, limits or control of some type of risk, it immediately informs the General Director, the Risk Committee and the area responsible for adopting the necessary measures. The UAIR must be satisfied that the measures taken will solve the problem and minimize the probabilities of a recurrence.

28 22 Methodology to identify and quantify the credit, liquidity and market risk Market Risk: To measure market risk, the UAIR determines the Value at Risk (VaR) daily based on the Montecarlo Simulation method, generating 1,000 scenarios based on a 252-day holding period and a 99% confidence level. The calculation is made for the total portfolio and by type of product. The VaR permits measuring the market risk of a given portfolio and the benefits of its correlation. The PV01 is an additional measure, which offers more opportunities; therefore, it is a widely used tool in the intra-day risk monitoring process. The PV01 results from subtracting the market value from the market value + 1 basis point. The monetary position is calculated for quantifying the risk associated with exchange rate variances. It consists of calculating the present value of the current positions in foreign currency so as to measure their sensibility. Additionally, a monthly calculation is done of the impact of stress scenarios that contemplate parallel displacements of the market curves, as well as actual crisis scenarios and the comparative analysis is done of the VaR and the results obtained in back testing, explaining significant variations between operating losses and maximum VaR losses. Liquidity Risk: The liquidity risk is monitored daily, by checking that the maximum negative net flow does not exceed the limits set per week, and performance of the first eight weeks is monitored. A daily settlement operating limit is also monitored. An estimate is made of potential losses from having to liquidate the securities portfolio in a short period of time. It is calculated monthly by the UAIR based on the Bank s positions and the difference between the market purchase and sale prices. Also monthly, the impact of market liquidity contingency scenarios is also assessed.

29 23 Excess liquidity and admission of liabilities and foreign exchange position limit of the Central Bank. Capitalization rules issued by the Ministry of Finance and Public Credit. Credit Risk: For measuring credit risk, the Loans Officer establishes exposure limits by means of a lines of credit approval procedure. Such lines of credit are established based on analyses made of the financial position and rating of each counterpart, the nature of the exposure, the degree of loan documentation, market and sector conditions. The rating of each counterpart determines the level of risk exposure and the likelihood of debtor noncompliance. In monitoring risk exposure credit systems are used where it is possible to consult mark to market positions and maximum exposure levels. Corporate models used for such modeling are CCE (Current Credit Exposure), which considers the market value of all current transactions aggregated by counterpart and PFE (Potential Future Exposure), which is guide of what may happen to the CCE in the future. Furthermore, an Expected and Unexpected Loss calculation is made based on individual counterpart exposures and ratings. Monthly, the Bank compares its estimated and actual credit risk exposures and makes the necessary adjustments in case the projected and actual results vary significantly. Stress Testing tries to identify events or influences that may have an impact on the Bank's credit risk exposure. The system used by the Bank in calculating market risk, liquidity and concentration of credit may synchronize the information relative to the operating system transactions during the day.

30 24 Description of methodologies used for managing and controlling operational, technology and legal risks Operational risk: Potential loss due to failure or deficiencies in the information systems, internal controls or errors in the processing of transactions. Topics related to operational and legal risks and their potential impacts as well as gains/losses due to errors are discussed on a monthly basis. The UAIR classifies them in a historic database within the DB IRS system, including the type of loss and related cost. The Bank has operating manuals that provide for the internal controls to ensure the integrity of transactions, which are primarily based on proper segregation of duties, where any transaction will be reviewed by trained personnel to ascertain the adequate and efficient flow of operations. Besides the manuals, all Bank areas: Maintain matrices that identify and document processes that describe the activities of each operating or business area and the related implied operating risks. Evaluate and inform, at least quarterly, the consequences on the business from the materialization of identified risks. The results are informed to those responsible of the units involved so as to determine the control measures to be applied in mitigating such risks. The Bank has a plan, which purpose is to use an alternative location in the State of Mexico in case of contingency. This alternative site is intended for use in case of a catastrophe that prevents access to the premises during a period in excess of four hours. The business activities may continue to be carried out at the alternative premises but to a limited extent, until the previously designated individuals from the Business, Risks, Operations, Systems and Controllership areas may return to the Bank s principal site. Throughout the year, tests are made simulating a contingency scenario. All employees have been assigned with duties to be performed in case of contingency. The contingency manual describes the functions of each and every one of the Bank s employees.

31 25 Technology risk The methodology adopted to ensure the prevention of technology-related risks is designed for the specific purpose of identifying, assessing and documenting any risk associated with an information asset. The purposes are described in greater detail below. Facilitate the identification and documentation of risks associated with information assets; technical, procedural, operating and regulatory controls required for mitigating identified information security risks and from control weaknesses/gaps that do not meet information safety standards. Communicate to the owner of the information asset the control profile and risk associated with the asset and obtain approval in that controls and associated risks have been documented and communicated to the Information Risk Manager/Team. The foregoing must be considered for each system development procedure, so as to include information security processes. In like manner, the process for documenting developments should consider the definition of security requirements, documented using a particular form, access rights according to the security of the application developed and the procedure for the proper functioning of the security management processes. Information systems should consider an analysis of the business criticality and the likelihood of specific threats and vulnerabilities that is made through a questionnaire to be reviewed on a regular basis and that allows for the identification and communication of the protection level required in case a contingency arises, as well as the attention to be given to significant processes of applications deemed critical. There are firewalls and data encryption for safeguarding the integrity of information in the Bank s data network. Also, loss of information and software is prevented through information backups. Availability levels and response times are monitored using various tools. Database performance is monitored continually, which prevents the deterioration in response time and functionality of applications. This process takes place by clearing temporary files and the analysis of database behavior, which result in diagnosis reports with recommendations that should be applied for maintaining an outstanding performance of applications.

32 26 The Bank s applications allow for the possibility of generating control reports, stored electronically for validating the type of user access to the applications depending on the job to be performed as well as user behavior while using the application. Legal Risk Legal risks are the potential loss resulting from noncompliance with the applicable legal and administrative provisions, the issue of adverse administrative and judicial resolutions and the application of penalties in connection with the Bank s operations. The Bank has engaged several prestigious and experienced lawyer firms for legal consulting and opinion of services regarding the various legal relationships with customers, counterparties, suppliers and regulatory authorities. Master agreements are used in connection with the Bank s legal relationship with customers and counterparties; therefore, prior to executing any of these agreements, the Bank knows in advance the type of legal risks to which it will be exposed. Any amendments to the approved wording of the agreements would necessarily require the intervention of the legal area so that the Bank would be in a position to fully know the legal risks inherent in such amendments. Any regulatory provisions issued by the different authorities are distributed internally and, if the topic so warrants, meetings are held for discussing and analyzing the effects of such provisions. It is obligatory that all officers and employees attend courses on (i) Bank conduct policies; (ii) money laundering; (iii) activities with the public and third parties that may compromise the Bank s or the employee s reputation, equality and respect in commercial relationships, personal transactions and privileged information. All newly-hired employees receive a copy of the Ethics Code applicable to all employees, which they should read carefully and certify that they are aware of its contents.