MISSION STATEMENT. We believe in relationships both with our clients as well as with our institutional partners.

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1 2017

2 MISSION STATEMENT Our goal is to deliver highly personalised banking and innovative investment solutions backed by experience, competence and robust support services. Sparkasse Bank Malta plc has built its reputation on understanding the needs of individuals, whatever their walk of life, developing relationships and responding to them effectively and discreetly. We believe in relationships both with our clients as well as with our institutional partners. 1

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4 GLOSSARY OF ABBREVIATIONS AC Audit Committee AR Annual Report AFS Available for sale ALCO Asset Liability Committee AVS Anteilsverwaltungssparkasse Schwaz BoD Board of Directors CBM Central Bank of Malta CET1 Common Equity Tier 11 CRD Capital Requirements Directive CRR Capital Requirements Regulation EBA European Banking Authority ECB European Central Bank EGB Erste Group Bank EXCO Executive Committee FIAU Financial Intelligence Analysis Unit IAS International Accounting Standards IASB International Accounting Standards Board ICAAP Internal Capital Adequacy Assessment Process IFRIC International Financial Reporting Interpretations Committee IFRS Internal Financial Reporting Standards LCO Legal and Compliance Committee LCR Liquidity Coverage Ratio LSI Less Significant Institution MD Managing Director NED Non-Executive Director MFSA Malta Financial Services Authority NII Net Interest Income NSFR Net Stable Funding Ratio RWA Risk Weighted Assets SBM Sparkasse Bank Malta plc SEPA Single Euro Payments Area SHM Sparkasse Holdings (Malta) Limited SIC Standing Interpretations Committee SPS Sparkasse Schwaz AG T1 Tier 1 Capital 3

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6 CONTENTS DIRECTORS REPORT 7 BOARD OF DIRECTORS AND THE EXECUTIVE COMMITEE 11 REMUNERATION REPORT 20 AUDITOR S REPORT 23 FINANCIAL STATEMENTS 29 STATUTORY INFORMATION AND STATEMENT OF ACCOUNTING POLICIES 36 NOTES TO THE FINANCIAL STATEMENTS 49 DETAILED INCOME STATEMENT 90 5 YEAR SUMMARIES 92 APPENDICES 5

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8 DIRECTORS REPORT 7

9 DIRECTORS REPORT The Directors of Sparkasse Bank Malta plc (from here on known as the Bank or SBM ) present their report and audited financial statements for the year ended 31 st December PRINCIPAL ACTIVITIES Sparkasse Bank Malta plc is licensed as a Credit Institution under the Banking Act In addition to Banking Services, the Bank also provides Investment Services and Fund Custody and Depositary Services, by virtue of a Category 2 and Category 4a Investment Services license respectively as issued by the Malta Financial Services Authority. FINANCIAL PERFORMANCE REVIEW The year under review was yet again a strong year for the Bank as it continued to demonstrate its capability to generate sustainable revenues re enforcing the soundness of the Bank s business model. The Directors are proud to present yet again a set of positive results despite the challenges faced by operating within a back drop of negative interest rates within the Euro zone. This back drop represents significant challenges to banks when managing their treasury. Total Operating Income for the year stood at Euro 8.6 Million against Euro 8.0 Million in the previous year. Net interest income fell by 18% from the previous year as a result of the negative backdrop highlighted above. However, the fall in revenue was adequately compensated for by a significant pick-up in fee income generated by the Bank s business lines. Total operating income generated by the Bank s business lines (excluding Net Interest Income) reached the record figure at Euro 7.6 Million against a previous year figure of Euro 6.9 Million. Costs in relation to revenue generation remained at an acceptable level representing less than 50% of total revenue. Both IT related expenses as well as regulatory fees representing the largest increase year on year. Profit before taxation for the year stood at Euro 4.6 Million compared to Euros 4.1 Million reported in Customer deposits as well as customer securities held by the Bank stood at Euro 482 Million and Euros 2.2 Billion respectively as at year end. These are very encouraging figures and confirm the Bank s position in the market locally. Total customer base continued on its upward trajectory in 2017 whereby the Bank on-boarded new relationships in-line with its targets contributing to an overall increase in its customer base. This, despite the Bank s continued policy to actively review existing customer relationships and aligning its data base with its current risk appetite and customer acceptancy guidelines. During the course of the year, the Bank continued to support its prudent strategy of retaining a significant part of its liquidity directly with the Central Bank of Malta (Euro 123 Million) while managing to increase its exposure to financial assets through the acquisition of High Quality Liquid Assets to the tune of Euro 168 Million up from Euro 149 Million in During the course of the year, the Bank manged to retain larger balances with banks as it sought to broaden with success its banking relationships and payment infrastructure in this respect loans and advances to banks increased from Euro 170 Million in 2016 to Euro 209 Million in The broader and more diversified network of bank correspondents that the Bank sought to do business with, has facilitated the Bank s capability of holding liquidity at this level while operating within the regulatory large exposure limits. CAPITAL Dividend and Reserves In line with the Bank s dividend policy and as articulated in its Recovery Plan the Bank will continue to make distributions to SHM for part retention as retained earnings and possible down-streaming back to the Bank. This policy will continue until further notice and has prevailed in 2017 whereby a dividend of slightly over Euro 2.5 million has been declared to SHM out of profits for the year under review. 8

10 DIRECTORS REPORT (continued) LIQUIDITY, OWN FUNDS AND OTHER REGULATORY RATIOS Total Assets at yearend stood at Euro 520 Million up from Euro 485 Million in The Bank registered the following important banking ratios at year end: Own Funds T 23,227 Common Tier 1 Ratio 25.45% Total Risk T 91,256 Leverage Ratio 4.33% The Bank s liquidity continues to remain very robust due to the very nature of its business model. As at December 2017, the LCR and the NSFR ratios stood at % and % respectively and the relationship between Eligible Short Term Liabilities versus Eligible Liquid Assets stood at 80.92% well over the statutory minimum of 30%. PROJECTS AND GOING FORWARD In 2017 as was announced in 2016, the Bank managed to successfully complete its objectives in regards to strengthening its payment infrastructure by fulfilling its full EBA membership and direct participation in SEPA making it one of two banks locally to effect direct SEPA payments and one of 143 banks within the EU. The Bank is very proud of this achievement as it provides a certificate of excellence in its payment infrastructure. This was possible thanks to the Bank s investment and commitment to support and commit significant investment in its IT department. During the year under review, the Bank also completed the acquisition of the remaining office space adjacent to its current location providing for additional space to expand its operations in Malta. As part of the Bank s plans to seek further expansion and growth for its business, in 2017, a strategic decision to seek new opportunities within other EU jurisdictions was taken. The Bank will be seeking to emulate its current business model within other jurisdictions as it believes that it operates a scalable business model that allows it to expand its revenues without necessarily taking on additional pillar one risk. A decision was taken to establish a first branch in Dublin in 2018 while concurrently seeking to strengthen its position in Malta. In line with the Bank s expansion plan, the Bank has and shall continue to invest in Human Resources and IT related resources seeking to grow its competence for an ever evolving financial services sector. The Bank today has 63 employees and the outlook will be to grow this force to 75 strong in CORPORATE GOVERNANCE As the Bank continues to grow its business and work force, the importance of enterprise governance becomes all the more relevant. To cater for this growth the Bank has organised itself by strengthening its Board in 2016 with an additional three nonexecutive Directors and the establishment of the Audit Committee bringing to the board new talent and expertise allowing it to continue to actively set and fulfil its duties especially in regard to the development of the Bank s business strategy, risk monitoring and setting the Bank s risk appetite. The board executes its strategy and objectives via the Managing Director (MD) jointly with the Bank s senior executives who assist him. To assist in the day to day decision making process, the Bank has constituted two management committees mandated to assist the MD to execute the Board s decisions. The committees in question are the Executive Committee (EXCO) and the Legal and Compliance Committee (LCCO) both committees meet regularly and are guided by their respective terms of reference as approved by the Board. As was disclosed in 2016, the Bank proceeded with the appointment of three additional members to the EXCO as a sign of its intention to strengthen governance and transparency within the Bank. 9

11 DIRECTORS REPORT (continued) It is the Bank s intention to further strengthen its internal controls, compliance and overall governance in 2018 in line with the EBA guideline of good corporate governance. The Executive Committee s main tasks in 2017 were in the following areas: Manage processes and supervise the day-to-day business Assess and control of the Bank s business risk Monitor competitive activities Implement the bank s strategy, budgets and policies Monitor the Bank s performance Make recommendations to the Board The members of the EXCO in 2017 included the following eight members: the Managing Director, Head of Legal, Manager for Private Banking & Payments, Manager for Securities & Custody, Senior Finance Officer, Compliance & MLRO, Manager for Client On-Boarding and Manager Software Architecture and Development. The members of the LCCO in 2017 included the following four members: the Managing Director, Head of Legal, Compliance & MLRO and Senior Compliance Supervisor. CORPORATE SOCIAL RESPONSIBILITY As part of the Bank s Corporate Social Responsibility, the Bank continues to support the local heritage through sponsorship programs offered by Din L-Art Helwa and Fondazzjoni Patrimonju Malti for the restoration of Maltese heritage and culture. STANDARD LICENCE CONDITIONS In accordance with paragraph 7.35 of the Investment Services Guidelines issued by the Malta Financial Services Authority, licence holders are required to disclose any regulatory breaches of standard licence conditions in their annual report. In this respect the Bank declares that in 2017 the Bank was served with an administrative fine by the FIAU relating to incomplete documentation collected by the Bank in respect of an account the Bank held in 2009 which was subsequently closed in 2014 details of this fine are available from the FIAU website. Otherwise there were no breaches reported to the Malta Financial Services Authority and no other breach of regulatory requirements, which were subject to an administrative penalty or regulatory sanction, were reported. AUDITORS A resolution will be submitted to the forthcoming Annual General Meeting to re-appoint Messrs BDO Malta as auditors to the company. Approved by the Board of Directors on the 13th February 2018 and signed on its behalf by its Directors. 10

12 BOARD OF DIRECTORS AND THE EXECUTIVE COMMITEE 11

13 BOARD OF DIRECTORS The Board of Directors: Standing: Mr. Klaus Pfister (NED; AC); Mr. Andrew Manduca (NED; AC); Mr. Siegfried Kirchner (NED; AC); Sitting: Mr. Bernhard Plattner (Director); Mr. Harald Wanke (Chairman of the Board); Mr. Paul Mifsud (MD); 12

14 BOARD OF DIRECTORS Mr. Harald Wanke Chairman of the Board Mr. Paul Mifsud Managing Director Mr. Bernhard Plattner Director Was born and resides in Austria. He graduated in economics after which he joined the bank of Sparkasse Schwaz as a senior manager within the Marketing Department. He was then appointed member of the Managing Board, a post he retained until Prior to his election as Chairman on the board of Sparkasse Schwaz he held the post of Assistant Chairman for a number of years. In 2000 Sparkasse Bank Malta plc started its operation and Mr. Wanke has been Chairman on the local board ever since. He holds further positions on the board of Global Fund Selection SICAV acting as president and president of the Savings Banks Group of Tirol and Vorarlberg. Attended Downside School, a Benedictine school in Bath (UK). Gained his experience in finance through his education at the Centre International De Glion, in Switzerland where he graduated in Management and Finance. He furthered his education in securities from The Chartered Institute for Securities & Investment in London. In 2015 he completed his Masters as a Chartered Banker from Bangor University, Wales. Joined the Bank in 2006 as Managing Director after the acquisition of Quest Investment Services a company he was a Senior Partner in, performing Investment Advisory Services. He was instrumental in developing the Bank s business and presence in Malta and making the Bank become a major player in Fund Custody and Wealth Management. His areas of expertise are securities including trading, settlements, advisory, custody and compliance. Was born and resides in Schwaz in the Tyrol region of Austria. In 1982 he graduated from the business and finance school of Schwaz. That same year he commenced his career in the banking sector by joining Sparkasse Schwaz. His initial post started him off at a Junior Level in the Accounting and Controlling Division the same division which he was honoured to head in In 2001 he was made Member of the Accounting Expert Council of the Austrian Savings Banks which was swiftly followed by being made Director of Sparkasse Bank Malta plc in In 2004 he was made Director of Sparkasse (Holdings) Malta Ltd. In 2012 he was elected to the Supervisory Board of Sparkasse Mittersill Bank AG, a local Savings Bank in Austria. 13

15 BOARD OF DIRECTORS (continued) Mr. Andrew Manduca Non-Executive Director Mr. Siegfried Kirchner Non-Executive Director Mr. Klaus Pfister Non-Executive Director Mr. Manduca joined the Board of Directors in June 2016.He is also the Chairman of the audit committee of the Bank. Mr. Manduca was the founder partner in 1980 of a small Maltese accounting firm that went on to become the member firm of Deloitte in 1989.He retired as Chairman and Senior Partner of Deloitte Malta in December 2015.He is a Certified Public Accountant and a fellow of the Chartered Association of Certified Accountants (UK). He is a former President of the Malta Institute of Accountants, a former President of the Institute of Financial Services Practitioners (IFSP) and a former member of the Board of Governors of Finance Malta. He was educated at St Edwards College and subsequently served on the Board of Governors of this school for 21 years. Was born and resides in Austria. He graduated in biology and physical education and has worked as teacher and head of a college for tourism for years. Mr. Kirchner, as a long-time member of the Sparkassenverein Sparkasse Schwaz, the Sparkassenrat of Anteilsverwaltungssparkasse Schwaz and member of the supervisory board of Sparkasse Schwaz AG, was elected president of the Sparkassenverein, chairman of the Sparkassenrat and also chairman of the supervisory board of Sparkasse Schwaz AG in In 2016 he became Non-Executive Director of Sparkasse Bank Malta plc. Was born and resides in Austria. He graduated in business administration and completed his training as tax consultant. He founded a tax consultancy firm in Tyrol, Austria, where he has worked for more than 30 years. Mr. Pfister is a long-time member of the Sparkassenverein Sparkasse Schwaz and the Sparkassenrat of Anteilsverwaltungssparkasse Schwaz and became a member of the supervisory board of Sparkasse Schwaz AG in In 2016 he was made Non-Executive Director of Sparkasse Bank Malta plc. 14

16 THE EXECUTIVE COMMITTEE The Executive Committee: Standing: Elton Dimech (Client Relations and On Boarding), Elvio DeGabriele (Finance), Beppe Cassar (Private Banking and Payments); Miguel Attard (Compliance and MLRO); Sitting: Anna Mironova (Securities and Custody); Paul Mifsud (Managing Director); Daniele Cop (Legal) In Absentia: Christian Reiter (Software Architecture and Development) 15

17 THE EXECUTIVE COMMITTEE (continued) Ms. Anna Mironova Securities and Custody Ms. Daniele Cop Legal Mr. Miguel Attard Compliance and AML Anna Mironova was born in Russia and has lived in Malta since In 2005, she obtained her Bachelor of Commerce degree majoring in Banking and Finance from University of Malta and joined the Wealth Management Department of the Bank in Prior to joining the Bank, Anna worked with investment advisory company Quest Investment Services Ltd. She is currently responsible for the settlement and custody services division of the Bank and was instrumental in the successful development of Fund Custody Department. In 2013, she also received her Masters degree in Banking from University of London. Was born in Antwerp, Belgium and resides in Malta. Studied law at the University of Antwerp (Belgium) and obtained a post-graduate degree in Economic Law at VUB in Brussels (Belgium) in Appointed as Head of Legal at Sparkasse Bank Malta in April Before joining the Bank, she was a partner at Mamo TCV Advocates, one of the top tier law firms in Malta, and co-head of the Financial Services Department, specialising in funds, custody, prime brokerage, investment and payment services. She started her career in Malta as an associate in the EU law department with the same law firm, where she focused on internal market legislation, including data protection, public procurement, competition law and State aid. She then gained experience in corporate law and started practicing in the field of financial services legislation and regulation in 2006; she was made partner in January Miguel Attard was born and resides in Malta. Having completed his primary and secondary education at St Edwards College and St Aloysius College respectively he went on to graduate from the University of Malta with an Honours degree in Banking and Finance. He is currently reading for his FRM with the Global Association of Risk Professionals. Mr Attard joined the Bank in 2011 as a Customer Relationship Officer assisting the Wealth Management and Custody Departments subsequently focusing his attention on the latter. In January 2013 he was appointed and approved by the MFSA as the Bank s Compliance Officer (CO) and subsequently as the Bank s Money Laundering Reporting Officer (MLRO) in January Mr Attard was appointed to the Bank s Legal and Compliance Committee in September 2015 and Executive Committee in January

18 EXECUTIVE COMMITTEE (continued) Mr. Elvio DeGabriele Finance Mr. Beppe Cassar Private Banking and Payments Mr. Elton Dimech Client Relations and On-Boarding Graduated from the University of Malta in 2008 with a Degree in Banking, Finance and Management and following a couple of years in the retail industry, joined Lombard Bank in After two successful years were he gained priceless experience in Finance, he joined Sparkasse Bank Malta plc in He founded the Finance Department of the Bank through the on boarding of all Finance related tasks which were previously handled by various internal departments. He is now the Senior Officer of a fast growing control department consisting of four other members, taking care of all matters relating to Finance, Treasury and Reporting. He became member of the Executive Committee in 2017 while also being responsible for other key functions of the Bank namely the Bank s Business Continuity Plan, Human Resources while also being responsible for the Bank s premises and infrastructures. He is currently reading for a Masters degree in Accountancy. Beppe Cassar graduated from the Universita Commerciale Luigi Bocconi in Milan with a Bachelor s Degree in International Economics, Management and Finance in Following his degree, he joined the Bank as a Relationship Officer within the Private Banking Department and became a licensed Investment Advisor early in He furthered his studies and graduated from SOAS, University of London with a Master s of Science Degree in Finance and Financial Law in late He is now the Manager of the Bank s Payments and Private Banking Departments, whereby he is responsible for a staff complement of 8 members and the servicing of a customer base with Assets Under Management (AUM) of over 200 million. He is also a member of the Bank s Executive Committee whereby he assists the Managing Director, in his capacity as a Core Business Line Manager, by implementing the Bank s business and regulatory strategy as well as by ensuring that the Bank s policies and procedures continue to cater for the Bank s successful business model. Was born and resides in Malta. Studied Banking and Financial Services at MCAST before joining the On-Boarding Department of the Bank in 2010 as a Customer Relationship Officer. Prior to joining the Bank, he worked with Bank of Valletta plc. In 2013, he obtained a degree in Banking Practice and Management from the University of Kent. In 2017, he was appointed Manager of the On- Boarding Department becoming responsible of a team of people handling all aspects relating to onboarding and customer relations at the Bank. Upon his appointment as Manager, he also became a member of the Executive Committee. 17

19 EXECUTIVE COMMITTEE (continued) Mr. Christian Reiter Software Architecture and Development Christian Reiter was born and lives in Schwaz in the Tyrol region of Austria. He started his professional career in 1998 as Systems Engineer in an Austrian I.T. Service Provider. After gaining comprehensive experience in system administration he soon began to focus his interest on software development. Leading various software projects for international clients allowed him to collect a wealth of experience in project management which allowed him to change his specialization to Software Architecture. He joined Sparkasse Bank Malta in January 2014 where he founded the Software Department and was promoted to the post of Manager Software Architecture and Development in January In November 2017 he became member of the Executive Committee. A broad repertoire of skills and experience allows him to supply the Bank with tailor-made, reliable and secure software solutions. 18

20 STATEMENT OF DIRECTORS RESPONSIBILITIES FOR FINANCIAL REPORT The Companies Act (Cap. 386) (the Act ) requires the directors of Sparkasse Bank Malta plc (the Bank ) to prepare financial statements for each financial year which give a true and fair view of the financial position of the Bank as at the end of the financial year and of the profit or loss of the Bank for that period. In preparing the financial statements, the Directors are responsible for: Ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the European Union; Selecting appropriate accounting policies and applying them consistently; Making accounting judgements and estimates that are reasonable in the circumstances; Ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Bank will continue in business as a going concern. The Directors are also responsible for designing, implementing and maintaining internal controls relevant to the preparation and the fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Companies Act (Cap.386) and the Banking Act (Cap. 371). They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy, at any time, the financial position of the Bank and to enable them to ensure that the financial statements have been properly prepared in accordance with the provisions of the Companies Act (Cap. 386) and the Banking Act (Cap. 371). After reviewing the Bank s plans for the coming financial years, the Directors are satisfied that at the time of approving the financial statements, it is appropriate to continue adopting the going concern basis in the financial statements. The Directors, through oversight of management, are responsible to ensure that the Bank establishes and maintains internal control to provide reasonable assurance with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. Management is responsible, with oversight from the Directors, to establish a control environment and maintain policies and procedures to assist in achieving the objective of ensuring, as far as possible, the orderly and efficient conduct of the Bank s business. This responsibility includes establishing and maintaining controls pertaining to the Bank's objective of preparing financial statements as required by the Act and managing risks that may give rise to material misstatements in those financial statements. In determining which controls to implement in order to prevent and detect fraud, management considers the risks that the financial statements may be materially misstated as a result of fraud. 19

21 REMUNERATION REPORT 20

22 REMUNERATION REPORT Elements and Principles of the Remuneration Policy For the sake of this report, Identified Staff, are Staff personnel whose actions are deemed to have a critical operational effect and have material impact on the risk profile of the Bank. Such Identified Staff are mainly the Managing Director, three Business Line Managers and the three Heads of Departments thus the Executive Committee. The remuneration packages offered to these staff personnel are broken down as follows: Fixed Element: this basically encompasses the salary set out the in the personnel s employment contract which is based on local market conditions, level of expertise and experience and performance. Variable Element: such a variable element is seen as a means to aim to motivate the staff employed at the Bank to reach the targets set out in the beginning of the year. Performance of the staff personnel is taken to be of critical importance for the pay out of such a variable element. Further to the above, staff is entitled to other non-cash benefits such as health insurance and pension plan. The Managing Director is also entitled to the use of a company car. Directors The remuneration of the Directors is not performance related and does not include any profit sharing schemes or any other benefits apart from the Bank s contribution to the Pension plan for the Managing Director. Only one Director, the Managing Director, has a contract which binds him to the Bank on a day to day basis. The other Non-Executive Directors attend the necessary meetings such as Executive Committee Meetings, Board Meetings and Annual General Meetings as deemed necessary. The fees attributable to Directors, including Non-Executive Directors, are as follows: Fixed Remuneration Variable Remuneration Managing Director 154, , , , Non-Executive Directors 140, , , , , , Staff Emoluments The Bank aims that any staff hired throughout the year, have the necessary skills and attributes necessary to work for Sparkasse Bank Malta plc. All staff personnel are hired on an indefinite contract basis, after completely a statutory period of probation. This is all set out and represented in the staff s employment contracts. All staff personnel of the Bank are eligible for annual salary increments as the Board of Directors deem fit. All staff is also entitled to a performance bonus which does not exceed 100% of the fixed component of the total remuneration of each individual. It is usually equivalent to one month s pay of the individual monthly gross salary. On the other hand Senior Management who are seen as Identified Staff by the Bank and thus, represented by the Bank s Business Line Managers and other senior personnel are entitled to a performance bonus which may exceed one month s gross salary of the individual. All staff personnel are also entitled to other benefits such as a pension plan contribution after three years of service at the bank and a health insurance scheme. 21

23 REMUNERATION REPORT (continued) Identified Staff Emoluments Fixed Remuneration Variable Remuneration Identified Staff 527, , , ,

24 AUDITOR S REPORT 23

25 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF SPARKASSE BANK MALTA PLC Report on the Audit of the Financial Statements We have audited the financial statements of Sparkasse Bank Malta plc («the Bank»), set out on pages 30 to 88, which comprise the statement of financial position as at 31 December 2017, the statement of comprehensive income, statement of changes in equity, and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Bank as at 31 December 2017, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU (EU IFRSs) and have been prepared in accordance with the requirements of the Companies Act (Cap. 386). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in accordance with the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act (Cap. 281) in Malta, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. An overview of the scope of our audit Our audit scope focused on the Bank s only operating location being Sliema in Malta. We apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of material misstatements on our audit and on the financial statements. For the purposes of determining whether the financial statements are free from material misstatements we define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable person, relying on the financial statements, would be changed or influenced. We determine materiality for the Bank to be 400,000 which is approximately 8.7% of profit before tax and 1.6% of total equity. Our evaluation of materiality requires professional judgement and necessarily takes into account qualitative as well as quantitative considerations implicit in the definition. On the basis of risk assessments, our judgement was that overall performance materiality for the bank should be 75% of planning materiality, and clearly trivial error is 20,

26 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF SPARKASSE BANK MALTA PLC (continued) Key Audit Matters 1 Loans to other banks Key Audit Matter Most part of the Bank s assets comprise of the current accounts in other banks, including the money held in Central Bank Related Disclosures Refer to note 10 and 11 of the accompanying financial statements. Audit Response We obtained and analyzed 100% of the bank statements reconciliations related to the Bank s current accounts in other banks and Central Bank. We have sent the request to other banks to get the replies directly from independent counterparty. On the date of this audit report we ve received the replies for most part of our request and identified no material differences. We have also obtained and reviewed all the loans provided to the customers of the bank. All the loans are fully secured and approved by the board of directors. We identified no unreconciled items in this area. 2 Customers portfolio Key Audit Matter Amounts owed to customers is the main part of the Bank s liability Related Disclosures Refer to note 21 of the accompanying financial statements. Audit Response Based on our understanding of the Bank s internal controls we obtained the sample of the client s files to identify any deficiency in a process of processing of payment orders and other internal documents from the client as well as application of relevant commission to the clients. We ve also observed the process of off-balance sheet reconciliation of the client s portfolio in order to exclude any potential misstatements between on- and off-balance sheet accounts. We did not identified any misstatements as a result of our procedures. 3 Loans to other banks Key Audit Matter Most part of the Bank s assets comprise of the current accounts in other banks, including the money held in Central Bank Related Disclosures Refer to note 10 and 11 of the accompanying financial statements. Audit Response We obtained and analyzed 100% of the bank statements reconciliations related to the Bank s current accounts in other banks and Central Bank. We have sent the request to other banks to get the replies directly from independent counterparty. On the date of this audit report we ve received the replies for most part of our request and identified no material differences. We have also obtained and reviewed all the loans provided to the customers of the bank. All the loans are fully secured and approved by the board of directors. We identified no unreconciled items in this area. 25

27 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF SPARKASSE BANK MALTA PLC (continued) Key Audit Matters (continued) 4 Customers portfolio Key Audit Matter Amounts owed to customers is the main part of the Bank s liability Related Disclosures Refer to note 21 of the accompanying financial statements. Audit Response Based on our understanding of the Bank s internal controls we obtained the sample of the client s files to identify any deficiency in a process of processing of payment orders and other internal documents from the client as well as application of relevant commission to the clients. We ve also observed the process of off-balance sheet reconciliation of the client s portfolio in order to exclude any potential misstatements between on- and off-balance sheet accounts. We did not identified any misstatements as a result of our procedures. Other Information The directors are responsible for the other information. The other information comprises the directors report, remuneration report, detailed income statement and 5 years summary, but does not include the financial statements and our auditor s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Other Information (continued) With respect to the Directors Report, we also considered whether the Directors Report includes the disclosures required by Article 177 of the Maltese Companies Act (Cap. 386). Based on the work we have performed, in our opinion: The information given in the directors report for the financial year for which the financial statements are prepared is consistent with the financial statements; and The directors report has been prepared in accordance with the Maltese Companies Act (Cap.386). In addition, in light of the knowledge and understanding of the Bank and its environment obtained in the course of the audit, we are required to report if we have identified material misstatements in the directors report. We have nothing to report in this regard Responsibilities of the Directors As explained more fully in the Statements of Directors Responsibilities set out on page 22, the directors are responsible for the preparation of the financial statements that give a true and fair view in accordance with EU IFRS, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Bank s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. The directors are responsible for overseeing the Bank s financial reporting process. 26

28 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF SPARKASSE BANK MALTA PLC (continued) Auditor s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Auditor s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Bank s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Bank to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the directors, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 27

29 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF SPARKASSE BANK MALTA PLC (continued) Report on Other Legal and Regulatory Requirements Under the Maltese Companies Act (Cap. 386) we are required to report to you if, in our opinion: We have not received all the information and explanations we require for our audit. Adequate accounting records have not been kept, or that returns adequate for our audit have not been received from branches not visited by us. The financial statements are not in agreement with the accounting records and returns. The information given in the directors report is not consistent with the financial statements. Certain disclosures of directors remuneration specified by law are not made in the financial statements, giving the required particulars in our report. We have nothing to report to you in respect of these responsibilities. BDO Malta Certified Public Accountants Registered Audit Firm Tower Gate Place, Tal-Qroqq Street Msida MSD 1703 Malta 13 February

30 FINANCIAL STATEMENTS 29

31 STATEMENT OF COMPREHENSIVE INCOME Notes Interest receivable and similar income 1 376, , (Loss)/Income from investments 2 1,416, ,135, Interest payable and similar charges 3 (873,270.85) (409,580.01) Net interest inc ome/(loss) 919, ,120, Fees and commissions income 7,096, ,034, Fees and commissions expense (1,098,829.64) (919,848.17) Net fee and commission income 4 5,997, ,115, Impairment provision reversal 219, Profit on foreign exchange acitivites 1,333, ,767, Other operating income 89, ,643, ,767, Results from operating activities 8,561, ,003, Staff costs (1,972,435.58) (1,616,917.44) Depreciation and amortisation 14,16 (626,047.11) (462,687.88) Other operating costs (1,386,662.09) (1,807,219.03) (3,985,144.78) (3,886,824.35) Profit/(loss) before income tax 5 4,576, ,116, Income tax expense 7 (1,699,249.00) (1,441,315.00) Profit/(loss) for the year 2,876, ,675, Other comprehensive income Revaluation reserve - change in fair value (281,285.18) 493, income taxes 98, (172,622.00) Other comprehensive income/(loss) (net of income tax) (182,835.18) 320, Total comprehensive income/(loss) for the year 2,694, ,995, Earnings per share All amounts relate to continuing activities. The accounting policies from pages 38 to 47 and the notes from pages 50 to 88 are an integral part of these financial statements. 30

32 STATEMENT OF FINANCIAL POSITION Note Assets Cash and Balances held with Central Bank of Malta ,849, ,061, Loans and advances to banks ,333, ,308, Loans and advances to customers 12 10,212, ,240, Financial assets ,447, ,139, Property, plant and equipment 14 5,824, ,098, Intangible assets 16 1,776, ,124, Prepayments and accrued income , , Deferred tax Asset , Other assets 19 2, , Total Assets 519,996, ,807, Equity and Liabilities Equity Called up share capital 24 24,000, ,000, Retained earnings 1,160, , Revaluation reserve 25 (62,390.60) 120, Total Equity 25,097, ,911, Liabilities Amount owed to banks 20 6,399, ,546, Amount owed to customers ,035, ,237, Other liabilities 22 3,072, ,525, Accruals and deferred income , , Deferred tax Liability , Current tax 3,210, , Total liabilities 494,898, ,895, Total equity and liabilities 519,996, ,807, Memorandum items Contingent Liabilties Commitments 32 16,585, ,982, The accounting policies from pages 38 to 47 and the notes from pages 50 to 88 are an integral part of these financial statements. The financial statements from pages 38 to 88 were approved and authorised for issue by the Board of Directors on 13 th February 2018 and signed on its behalf by: 31

33 STATEMENT OF CHANGES IN EQUITY Share Capital Revaluation Reserves Retained Earnings Total At 1 January ,000, (200,138.35) 1,130, ,929, Transactions with owners Increase in Share Capital Dividend distribution - - (3,014,000.00) (3,014,000.00) Total comprehensive income for the year Profit for the year - - 2,675, ,675, Other comprehensive loss, net of income tax: - 320, , At 31 Dec ember ,000, , , ,911, At 1 January ,000, , , ,911, Transactions with owners Increase in Share Capital 2,000, ,000, Dividend distribution - - (2,508,000.00) (2,508,000.00) Total comprehensive income for the year Profit for the year - - 2,876, ,876, Other comprehensive income, net of income tax: Net Fair Value change (Note 25) - (182,835.18) - (182,835.18) At 31 Dec ember ,000, (62,390.60) 1,160, ,097, The accounting policies from pages 38 to 47 and the notes from pages 50 to 88 are an integral part of these financial statements. 32

34 STATEMENT OF CASH FLOWS Cash flows from operating activities: Profit on ordinary activities before tax 4,576, ,116, Adjustment for: Loss on disposal of securities 196, , Gain on disposal of securities (306,774.35) (384,797.74) Unrealised forex differences on securities 4,679, (1,800,208.63) (Gains) / Loss on fixed assets written off 4, Reduction in Provision on loans and advances to customers - - Prepayments and accrued income (261,040.53) 784, Interest payable and accrued liabilities 78, (63,766.73) Depreciation 626, , Ordinary profit before w orking c apital changes 9,593, ,545, Movement in operating assets and liabilities Amounts owed to banks 3,852, (1,347,705.49) Amounts owed to customers 27,797, (117,968,154.13) Deposit held with Central Bank of Malta 220, (68,986,035.87) Loans and advances to banks (12,835,705.56) 216,259, Loans and advances to customers (1,972,213.23) (5,130,425.73) Other assets 519, (522,500.00) Other liabilities (453,692.50) 343, ,128, ,648, Cash flow from operating ac tivities before tax 26,721, ,193, Taxation paid (849,289.00) (1,834,836.00) Net cash generated from operating activities 25,872, ,358,

35 STATEMENT OF CASH FLOWS (continued) Net cash generated from operating activities 25,872, ,358, Cash flows from investing activities: Disposal of securities 260,195, ,468, Disposal of tangible and intangible assets Purchase of securities (285,360,810.12) (349,997,659.47) Purchase of tangible fixed assets (5,144,192.36) (45,420.84) Purchase of intangible assets (865,054.48) (450,120.75) Net cash used in investing ac tivities (31,174,085.30) (28,024,915.17) Cash flow s from financing activities: Issue of shares 2,000, Dividends paid (2,508,000.00) (3,014,000.00) Net cash used in financ ing ac tivities (508,000.00) (3,014,000.00) Movement in cash and c ash equivalents (5,809,427.71) (6,680,168.69) Cash and cash equivalents at beginning of year 202,312, ,992, Cash and cash equivalents at 31 December (Note 27) 196,503, ,312, The accounting policies from pages 38 to 47 and the notes from pages 50 to 88 are an integral part of these financial statements. 34

36 35

37 STATUTORY INFORMATION AND STATEMENT OF ACCOUNTING POLICIES 36

38 STATUTORY INFORMATION AND BASIS OF PREPARATION 1. Reporting entity Sparkasse Bank Malta plc (the Bank ) is a public limited company incorporated and domiciled in Malta, whose shares are not publicly listed. The principal activities of the Bank are disclosed on the Directors Report on page Parent and ultimate parent company Sparkasse Holdings (Malta) Limited, a company registered in Malta (C 35408), owns 99.99% of the issued share capital of this Bank. The ultimate parent company is Anteilsverwaltungssparkasse Schwaz which owns 90% of Sparkasse Holdings (Malta) Limited. Sparkasse Schwaz AG own the remaining 10% of the shares in the Holding Company. Sparkasse (Holdings) Malta Limited prepares consolidated financial statements. 3. Basis of preparation of financial statements The financial statements have been prepared on the historical cost basis except that available-for-sale sale financial assets are measured at their fair value. 4. Statement of Compliance The financial statements have been prepared and presented in accordance with International Financial Reporting Standards as adopted by the EU ( the applicable framework ). All references in these financial statements to IAS, IFRS or SIC / IFRIC interpretations refer to those adopted by the EU. The financial statements have also been drawn up in accordance with the provisions of the Banking Act (Cap. 371) and the Companies Act (Cap. 386), to the extent that such provisions do not conflict with the applicable framework. The Act specifies that in the event that any one of its provisions is in conflict or not compatible with IFRS as adopted by the EU, or its application is incompatible with the obligation for the financial statements to give a true and fair view, that provision shall be departed from in order to give a true and fair view. The preparation of financial statements in conformity with IFRS requires the use of certain accounting estimates. It also requires the directors to exercise their judgement in the process of applying the Bank s accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note

39 STATEMENT OF ACCOUNTING POLICIES 1. Changes of Accounting Policies a) New standards, interpretations and amendments effective from 1 January 2017 The following new standards, amendments and interpretations are effective for the first time in these financial statements but none have had a material effect on the company: Amendments to IAS 7: Disclosure Initiative (issued on 29/01/2016, effective from the year beginning on 01/01/2017) Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses (issued on 19/01/2016, effective from the year beginning on 01/01/2017) The applications of these new standards and amendments has had no impact on the disclosures or amounts recognized in the company s financial statements. b) New standards, interpretations and amendments as adopted by EU but not yet effective The following new standards, interpretations and amendments, which have not been applied in these financial statements, will or may have an effect on the company s future financial statements: IFRS 9 Financial Instruments (issued on 24/07/2014, effective from year beginning on 01/01/2018) IFRS 15 Revenue from Contracts with Customers (issued on 28/05/2014, effective from the year beginning 01/01/2018) IFRS 16 Leases (issued on 13/01/2016, effective from the year beginning 01/01/2019) Clarification to IFRS 15: Revenue from Contracts with Customers (issued on 12/04/2016, effective from the year beginning on 01/01/2018) Amendments to IFRS 4: Applying IFRS 9 with IFRS 4 (issued on 12/07/2016, effective for the year beginning on 01/01/2018) The effects of IFRS 15 Revenues from Contracts with Customers, IFRS 16 Leases and IFRS 9 Financial Instruments are still being assessed, as these new standards may have a significant effect on the company s future financial statements. The company will assess the impact that the adoption of these and other Financial Reporting Standards will have in the financial statements of the company in the period of initial application. The impact of the adoption of IFRS 9 is disclosed in Note 35. c) New standards, interpretations and amendments issued by IASB but not yet adopted by EU Improvements to IFRSs (issued on 08/12/2016, effective from year beginning on 01/01/2018) Improvements to IFRSs (issued on 12/12/2017, effective from year beginning on 01/01/2019) IFRS 17 Insurance Contracts (issued on 18/05/2017, effective from the year beginning on 01/01/2021) IFRIC 22: Foreign Currency Transactions and Advance Consideration (issued on 08/12/2016, effective from the year beginning on 01/01/2018) IFRIC 23: Uncertainty over the Income Tax Treatments (issued on 07/07/2017, effective from year beginning on 01/01/2019) Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions (issued on 20/06/2016, effective for the year beginning on 01/01/2018) Amendments to IAS 40: Transfers to Investment Property (issued on 08/12/2016, effective from the year beginning on 01/01/2018) 38

40 STATEMENT OF ACCOUNTING POLICIES (continued) Amendments to IFRS 9: Prepayment Features with Negative Compensation (issued on 12/10/2017, effective for the year beginning on 01/01/2019) Amendments to IAS 28: Long-term Interest in Associates and Joint Ventures (issued on 12/10/2017, effective from the year beginning on 01/01/2019) The company has not early adopted all these revisions to the requirements of IFRSs and the company s director is of the opinion that there are no requirements that will have a possible significant impact on the company s financial statements in the period of initial application. d) New standards, interpretations and amendments issued by IASB but not adopted by EU IFRS 14 Regulatory Deferral Accounts (issued on 30/01/2014, effective from the year beginning 01/01/2016) European Commission has decided not to endorse the standard Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between Investor and its Associate or Joint Venture (issued on 11/09/2014, effective from the year beginning 01/01/2016) postponed indefinitely by European Commission 2. Principal accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. 2.1 Functional and presentational currency The financial statements are presented in Euro, which is the Bank's functional currency. Transactions in foreign currencies are translated to the functional currency at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Foreign currency differences arising on retranslation are recognised in profit or loss. 2.2 Property, plant and equipment Tangible fixed assets are stated at cost less accumulated depreciation, with the exception of the cost of land which is not depreciated. Depreciation is calculated on a straight line basis so as to write off the cost of the asset over its estimated useful life as follows: Freehold Premises 25 years (4% per annum) Furniture, fixtures & fittings 10 years (10% per annum) Air-conditioning 5 years (20% per annum) Office equipment 5 years (20% per annum) Computer equipment 4 years (25% per annum) Motor vehicles 5 years (20% per annum) In the year of acquisition the charge is calculated on a six monthly basis if purchased after 30 June. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down 39

41 STATEMENT OF ACCOUNTING POLICIES (continued) immediately to its recoverable amount. On disposal of a tangible asset, the difference between the net disposal proceeds and the carrying amount of the asset, is charged or credited to the other administrative expenses in the statement of comprehensive income. 2.3 Intangible Assets Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives. Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below). The significant intangibles recognised by the Bank and their useful economic lives are as follows: Bavaria Banken Software 6 years (17% per annum) Self-developed software 10 years (10% per annum) Other software 4 years (25% per annum) In the year of acquisition the charge is calculated on a six monthly basis if purchased after 30 June. On disposal of an intangible asset, the difference between the net disposal proceeds and the carrying amount of the asset, is charged or credited to the other administrative expenses in the statement of comprehensive income. As from 2013, the Bank decided to commence a project entailing the creation of a core banking software built inhouse by specially hired I.T. employees. The Board of Directors determined in accordance with IAS 38 that all assets bought by the Bank and any expenses incurred for the generation of such a Banking software are to be capitalized and added to the value of the Intangible Asset itself. This will also include the depreciation of any fixed assets acquired immediately for the sole purpose of the generation of the said software. Such a rationale was discussed indepth with the Bank s audit company. Such fixed assets will not be depreciated immediately due to the fact that the Bank is not generating any income as yet from such an investment. Once such a Banking software goes live and is up and running depreciation will commence in-line with the Bank s accounting policies underlined above. From then on, any expenses incurred by the Bank due to maintenance and up-keep of the software will not be capitalized any further but charged to the Bank s profit and loss. 2.4 Financial Instruments The Bank classifies its financial instruments into one of the categories discussed below, depending on the purpose for which the asset was acquired. The company has not classified any of its financial assets as held to maturity. a) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. When the Bank purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date ( reverse repo or stock borrowing ), the arrangement is accounted for as a loan or advance, and the underlying asset is not recognised in the Bank s financial statements. Loans and advances are 40

42 STATEMENT OF ACCOUNTING POLICIES (continued) initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. b) Investment securities Investment securities are initially measured at fair value plus, in case of investment securities not at fair value through profit or loss, incremental direct transaction costs and subsequently accounted for depending on their classification as either held-to-maturity, at fair value through profit or loss, or available-for-sale. Recognition The Bank initially recognises loans and advances, deposits, and subordinated liabilities on the date that they are originated. Regular way purchases and sales of financial assets are recognised on the trade date at which the Bank commits to purchase or sell the asset. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is initially measured at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. Investment securities are classified all as available-for-sale financial assets. They are recognised on the settlement date, and are initially measured at the cost directly attributable to their acquisition. Such securities are subsequently revalued at fair value based on quoted bid prices in an active market. Unrealised gains and losses, arising from changes in the fair value of securities are recognised in equity as a Revaluation Reserve. Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a separate asset or liability in the statement of financial position. On derecognition of a financial asset, the difference between the carrying amount of the asset (of the carrying amount allocated to the portion of the asset transferred), and the sum of: The consideration received (including any new asset obtained less any new liability assumed); and Any cumulative gain or loss that had been recognised in other comprehensive income, is recognised in profit or loss. The Bank enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all of the risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. In transactions in which the Bank neither retains nor transfers substantially all the risks and rewards of ownership of financial asset and it retains control over the asset, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. 41

43 STATEMENT OF ACCOUNTING POLICIES (continued) In certain transactions the Bank retains the obligation to service the transferred financial asset for a fee. The transferred asset is derecognised if it meets the recognition criteria. An asset or liability is recognised for the servicing contract, depending on whether the servicing fee is more than adequate (asset) or is less than adequate (liability) for performing the servicing. The Bank derecognises a financial liability when its contractual obligations are discharged or are cancelled or expire. Fair value measurement Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Bank has positions with offsetting risk, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Bank believes a third-party market participant would take them into account in pricing a transaction. Identification and measurement of impairment At each reporting date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Bank considers evidence of impairment for loans and advances at both a specific and a collective level. All individually significant loans and advances are assessed for specific impairment. All individually significant loans and advances found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics. In assessing collective impairment the Bank uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective interest rate. Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and advances. 42

44 STATEMENT OF ACCOUNTING POLICIES (continued) Interest on impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition costs, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in other comprehensive income. The Bank writes off certain loans and advances and investment securities when they are determined to be uncollectible. 2.5 Cash and Cash Equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with any bank or financial institution and highly liquid financial assets, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position and comprise: cash in hand and deposits repayable on demand or with a contractual period to maturity of less than ninety days, with any bank or financial institution; short term highly liquid investments which are readily convertible into known amounts of cash without notice, subject to an insignificant risk of changes in value and with a contractual period to maturity of less than three months, such as T-Bills; advances from banks repayable within three months from the date of the advance. 2.6 Provisions A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract. 43

45 STATEMENT OF ACCOUNTING POLICIES (continued) 2.7 Share Capital and Dividends Financial instruments issued by the Bank are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Bank ordinary shares are classified as equity instruments. Incremental costs directly attributable to issue of ordinary shares are recognised as a deduction from equity. Dividend distribution to the Bank s shareholders is recognised as liability in the Bank s financial statements in the period in which the dividends are approved by the Bank s shareholders. 2.8 Revaluation Reserve Revaluations of fixed assets are performed by a professionally qualified architect with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Any surpluses arising on such revaluation are credited to a revaluation reserve unless they reverse a revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously charged. Any deficiencies resulting from decreases in value are deducted from this revaluation reserve to the extent that the balance held in this reserve relating to a previous revaluation of that asset is sufficient to absorb these, and charged to profit or loss thereafter. Investment securities are subsequently revalued at fair value based on quoted bid prices in an active market. Unrealised gains and losses, arising from changes in the fair value of securities are recognised in equity as a Revaluation Reserve. 2.9 Interest Income and Expenses Interest income and expense are recognised in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation of the effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. Interest income and expense presented in the statement of comprehensive income include: interest on financial assets and liabilities at amortised cost calculated on an effective interest basis; and interest on available-for-sale investment securities calculated on an effective interest basis. Fair value changes on derivatives held for risk management purposes, are presented in net income on other financial instruments carried at fair value in the statement of comprehensive income Fees and Commission Income and Expenses Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, placement fees and syndication fees, are recognised as the related services are performed. When a loan 44

46 STATEMENT OF ACCOUNTING POLICIES (continued) commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received Net Trading Income Net trading income comprises all realised and unrealised foreign exchange differences Dividend Income Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity securities Income Tax Expense Income tax expense comprises current and deferred tax. Current and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity, or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised Employee Benefits The Bank contributes towards the state pension defined contribution plan in accordance with local legislation and to which it has no commitment beyond the payment of fixed contributions. Obligations for contributions to the defined contribution plan are recognised as an expense during the year in which these are incurred Earnings per share The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period Regulatory Capital Following the introduction of the new CRR regime, the European Union set out standards which all Banks have to abide with. Through the Malta Financial Services Authority, the EU monitors all members to make sure the standards are abided 45

47 STATEMENT OF ACCOUNTING POLICIES (continued) with. The new regulations, in essence are still a measure of Own Funds versus Risk-Weighted Assets. Nevertheless, the newly adopted risk weights are more stringent but yet a safer measure of the Bank's assets. Such new adopted measures where a direct consequence of the financial crisis. The aim of such measures was to require institutions to hold more high quality capital. The standard 8% Capital Adequacy thresholds can be increased through the introduction of capital buffer requirements. Nevertheless, such requirements depend of the type of the institution and the jurisdiction in which such an institution holds its Head Office. As before, the Bank adopted the Standardised Approach for when it comes to risk weighting the Bank's exposures. Such exposures are classified into different exposure classes, namely, Sovereigns, Multilateral Developments Banks, International Organisations, Institutions, Corporates, Collective Investment Schemes and Other Assets. A multitude of preassigned risk weights are given to the exposure, which are mainly based on credit rating, maturities, underlying assets being the prime factors. The Bank s capital base is divided in two categories, as defined in the new CRD IV Banking Rule. The Bank's main Capital base is the Share Capital invested by the shareholder. Following the introduction of the new regime, the capital base of the Bank fell into two categories which replaced the old BR03 rule: Tier 1 Capital: This is made up of the Share Capital of the Bank and its Retained Earnings. From such a capital base, prudential filters and deductions are subtracted to give a better true and fair value of the Bank's Own Funds. Tier 2 Capital: Mainly made up of any other Capital instruments and subordinated loans, as was the case in 2014 with the gradual phasing out of the revaluation reserve reported in The Bank s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders return is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. Capital allocation The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily upon the regulatory capital, but in some cases the regulatory requirements do not reflect fully the varying degree of risk associated with different activities. In such cases the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required for regulatory purposes. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation, by the Bank s Risk Management and Credit Administration and is subject to review by the Board of Directors or ALCO as appropriate. Although maximisation of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Bank to particular operations or activities, it is not the sole basis used for decision making. Account is also taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Bank s longer term strategic objectives. The Bank s policies in respect of capital management and allocation are reviewed regularly by the Board of Directors Judgements in applying accounting policies and key sources of estimation uncertainty The amounts recognised in the financial statements are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of financial statements. The judgements made by management in applying the Bank s 46

48 STATEMENT OF ACCOUNTING POLICIES (continued) accounting policies that have the most significant effect on the amounts recognised in the financial statements, together with information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are: Impairment losses on available-for-sale investments In the case of financial assets classified as available-for-sale investments, objective evidence of impairment includes observable data about the following loss events, as applicable; significant financial difficulty of the issuer, a breach of contract, it becoming probable that the borrower will enter bankruptcy or other financial reorganisation, the disappearance of an active market for the financial asset because of financial difficulties or observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets. In addition to these loss events, objective evidence of impairment for an investment includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates or a significant or prolonged decline in the fair value of an investment below its cost. The determination of these loss events requires judgement Financial risk management The Bank's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Bank's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Bank's financial performance. A detailed report of the Bank s Financial risk Management and how it operates to mitigate such risks is to be found in the Additional Regulatory Requirements section at the back of this Annual Report. 47

49 48

50 NOTES TO THE FINANCIAL STATEMENTS Note Page 1 Interest receivable and similar income 50 2 Income from investments 60 3 Interest payable 51 4 Net fee and commission income 51 5 Profit before Taxation 52 6 Staff Headcount 52 7 Taxation 53 8 Earnings per share 53 9 Dividends per share Balances held with Central Bank of Malta and cash Loans and advances to banks Loans and advances to customers Financial assets Property, plant and equipment Operating Leases Intangible assets Prepayments and accrued income Deferred taxation Other assets Amounts owed to banks Amounts owed to customers Other Liabilities Accruals and deferred income Called-up share capital Revaluation Reserve Ordinary Profit before changes Cash and cash equivalents Investor compensation scheme Investment services license related income Related party transactions Contingent Liabilities Commitments Registered Office Ultimate parent company IFRS Transitions Financial Risk Management 71 49

51 NOTES TO THE FINANCIAL STATEMENTS 1. Interest Receivable and Similar Income On loans and advances to banks and financial institutions 228, , On loans to customers 148, , On balance held with Central Bank of Malta , , Related Parties Interest Income from Related Parties 86, , Other Interest Income 290, , , , Inc ome from Investments Interest from quoted investments 1,283, ,172, Dividend from quoted investments 22, , Profit on disposal of investments 306, , Loss on disposal of investments (196,467.96) (429,607.90) 1,416, ,135, Related Parties Interest income from Related Parties - - Profit / Loss on disposal from Related Parties - - Other interest income 1,305, ,180, Other Profit / (Loss) on disposal 110, (44,810.16) 1,416, ,135,

52 NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Interest Pay able On customer deposits 82, , On bank deposits 331, , On balance held with Central Bank of Malta 459, , , , Related Parties: Interest expense to Related Parties , Other interest expense 873, , , , Net fee and c ommission inc ome Fee and commission income Portfolio and management fees 3,778, ,087, Credit related fee and commissions retail banking 3,318, ,947, ,096, ,034, Fee and commission expenses Portfolio and management fees (690,526.17) (667,916.93) Other fees paid (408,303.47) (251,931.24) (1,098,829.64) (919,848.17) Net Fee and c ommission inc ome 5,997, ,115, Related Parties: Fee income from Related Parties - - Fee expense to Related Parties (121,486.56) (151,151.15) Other net fee income 6,119, ,266, ,997, ,115,

53 NOTES TO THE FINANCIAL STATEMENTS (continued) 5. Profit Before Taxation Is stated after charging for: Auditors Remuneraton 57, , I.T. Expenses 526, , Other Administrative Expenses 802, ,374, Depreciation 626, , Directors fees 328, , Wages, salaries and allowances 1,384, ,149, Social Security Costs 107, , Defined contribution plan 38, , Other Staff Costs 113, , ,985, ,886, Staff Headc ount The weekly average number of persons employed by the Bank during the year amounted to 59 (2016: 51 ) as follows: Weekly average: Executive and senior managerial 1 1 Other managerial and clerical Other The headcount, including persons employed as part-time, as at end of year is as follows: Weekly average: Executive and senior managerial 1 1 Other managerial and clerical Other

54 NOTES TO THE FINANCIAL STATEMENTS (continued) 7. Taxation Current tax 3,210, , Prior year adjustment for current tax 1, (15.00) Deferred tax (1,512,053.00) 593, ,699, ,441, The provision for taxation differs from the theoretical amount that would arise using the basic rate of 35% as follows: Profit on ordinary activities before tax 4,576, ,116, Tax thereon at 35% 1,601, ,440, Tax effect of: Reversal of temporary differences - - Prior year adjustment 1, (15.00) Permanent differences 96, Tax charge for the year 1,699, ,441, By means of an extraordnary resolution dated 29th December 2009, the shareholders of the Bank opted with effect from 1st January 2009 to be treated as a company which was registered in Malta on or after 1st January 2007 but was not resident in Malta before that date in accordance with Article 48(4A)(b)(i)(2) of the Income Tax Management Act. This resolution was notified to the Commissioner of Inland Revenue. 8. Earnings per share The calculation of basic earnings per share at 31st December 2017 was based on the profit attributable to ordinary shareholders of 2,875, (2016: 2,675,295.44) and the number of ordinary shares outstanding of 23,152 (2016: 22,000). 9. Dividends per share Dividend per share declared and paid for the year covered by the Financial Statements The calculation of dividend per share at 31st December 2017 is based on the amount of ordinary shares outstanding at end of year and thus 24,000 (2016: 22,000) 53

55 NOTES TO THE FINANCIAL STATEMENTS (continued) 10. Balanc e held w ith Central Bank of Malta and c ash The balance held with Central Bank of Malta inlcudes an amount of 13,316, (2016: 4,096,336.63) for reserve deposits in terms of Article 37 of the Central Bank of Malta Act. An amount of 751, (2016: 1,454,122.45) has been pledged under the Depositor Compensation Scheme. A further balance at the Central Bank of Malta is deposited and left for liquidity purposes. The Balances as at year end of Cash and Cash Equivalents is as follows: Minimum reserve deposit 13,316, ,096, Depositor Compensation Scheme 751, ,454, Malta Government Treasury Bills 12,007, ,000, Other Deposit 96,768, ,506, Cash 5, , ,849, ,061, As part of its Liquidity strategy, Sparkasse Bank Malta plc, invests in Malta Government Treasury Bills which a bear a maturity of between one month to one year. The composition of the year end position is as follows: Treasury Bills as cost: At 1 January ,061, ,011, Additions at cost 69,210, ,868, Disposals at cost (100,241,030.05) (113,818,629.00) At 31 Dec ember ,030, ,061, Provision for fluctuation in market value (22,674.06) (60,426.66) Provision for fluctuation in forex rate - - At 31 Dec ember ,007, ,000,

56 NOTES TO THE FINANCIAL STATEMENTS (continued) 11. Loans and advances to Banks Repayble at call or short notice 196,497, ,308, Current term loans and advances 12,835, ,333, ,308, Remaining maturity of term advances: More than 5 years - - More than 1 to 5 years year or less but over 3 months months or less but not payable on demand 12,835, ,835, By currency: EU Currency 77,845, ,312, United States Dollar 46,779, ,689, UK Pound 48,169, ,816, Hongkong Dollar 15,732, ,151, Swiss Franc 3,133, ,274, Other currencies 17,671, ,063, ,333, ,308, By country: Austria 49,767, ,209, Malta 42,367, ,464, Luxembourg 12,856, ,895, Denmark 7,567, ,998, Great Britain 45,508, ,012, Other countries 51,264, ,728, ,333, ,308, Related parties: Loans and advances to Related Parties 20,701, ,058, Loans and advances to other banks 188,632, ,249, ,333, ,308,

57 NOTES TO THE FINANCIAL STATEMENTS (continued) 12. Loans and advances to Customers Repayable at call and short notice 784, ,060, Current term loans and advances 9,428, ,180, Provision for bad debts - - Remaining maturity of term advances: 10,212, ,240, More than 5 years - - More than 1 to 5 years 410, , year or less but over 3 months 1,954, , months or less but not payable on demand 7,063, ,981, By currency: 9,428, ,180, EU Currency 8,184, ,688, United States Dollar 1,677, ,197, UK Pound 342, , Other currencies 8, , By country: 10,212, ,240, Austria Malta 9,942, ,894, France Other countries 270, , ,212, ,240, As at 31st December 2017, there where no General or Specific provisions upon these loans and advances 56

58 NOTES TO THE FINANCIAL STATEMENTS (continued) 13 Financial Assets Acquisitions at cost: Bonds 144,446, ,010, Investment Funds Certificates 2,994, ,994, ,440, ,004, Additions at cost 184,150, ,130, Disposals at cost (159,844,365.22) (208,694,467.05) 171,746, ,440, Impairment losses written off (780,028.54) (999,999.93) Reversal of Impairment losses (219,971.39) - Provision for fluctuation in market value (73,311.54) 245, Provision for fluctuation in forex rate (2,226,005.48) 2,453, ,447, ,139, By currency: EU Currency 77,244, ,043, United States Dollar 48,659, ,600, UK Pound 41,227, ,002, Australian Dollar - 682, Canadian Dollar 1,314, ,811, ,447, ,139, By country: Austria 10,683, ,607, Malta 6,341, ,958, Germany 6,139, ,134, Luxembourg 22,937, ,731, United States 46,498, ,140, Great Britain 35,930, ,811, Other Countries 39,916, ,754, ,447, ,139, Related parties: Bonds issued by Related Parties - - Other investments 168,447, ,139, ,447, ,139,

59 NOTES TO THE FINANCIAL STATEMENTS (continued) 13. Financial Assets (continued ) Issued by Public Bodies: - Local Government 5,822, ,447, Foreign Sovereigns 130,387, ,818, ,209, ,265, Issued by Public Issuers: - Local Banks 518, , Foreign Banks 17,546, ,540, Foreign Corporates 11,108, ,784, Collective Investment Schemes 3,063, ,037, ,237, ,874, Total available-for-sale assets held 168,447, ,139, The specific impariement was created for an Investment Fund Certificate in 2008 and was partially reversal in

60 NOTES TO THE FINANCIAL STATEMENTS (continued) 14. Property, Plant and Equipment Furniture, Freehold Computer Fittings & Motor Vehicle Total Premises Hardware Equipment Cost At 1 January , , , , ,055, A dditions - 29, , , Written off - (1,722.33) - - (1,722.33) At 31 December , , , , ,099, At 1 January , , , , ,099, Additions 5,021, , , ,144, Written off - (2,561.41) (6,155.00) - (8,716.41) At 31 December ,019, , , , ,234, Depreciation At 1 January , , , , , Charge for the year 39, , , , , Released - (1,722.33) - - (1,722.33) At 31 December , , , , ,000, At 1 January , , , , ,000, Charge for the year 240, , , , , Released - (2,561.41) (1,491.00) - (4,052.41) At 31 December , , , , ,410, Net book value At 31 December , , , , ,269, At 31 December , , , , ,098, At 31 December ,459, , , , ,824,

61 NOTES TO THE FINANCIAL STATEMENTS (continued) 15. Operational Leases At the end of 2017, the Bank had the following outstanding commitments under operating leases, which fall due as follows: Less than 1 year Between 1 and 2 years More than 2 years 57, , , , , , , , During 2017, the Bank finalised the acquisition of the properties adjacent to the Bank's Head Office in 101, Townsquare and therefore oustanding commitments where reduced drastically as at the date under review. The same property was now subject to Rental Income from a third party Bank. The remaining outstanding commitments such to an operating lease where for other properties the Bank rents out for its operations. Lease payments, recognised as an expense and posted to the Profit and Loss Account of Sparkasse Bank Malta plc for the year ended amount to 56,

62 NOTES TO THE FINANCIAL STATEMENTS (continued) 16. Intangible Assets Bavaria Banken Self Developed Software Under Other Software Total Software Software Development Cost At 1 January , , , , ,754, Additions 14, , , , , Written off (19,416.00) (19,416.00) At 31 December , , , , ,196, At 1 January , , , , ,196, Additions 100, , , , , Written off At 31 December , , , , ,070, Depreciation At 1 January , , , , Charge for the year 165, , , , Released (19,416.00) (19,416.00) At 31 December , , , ,072, At 1 January , , , ,072, Charge for the year 59, , , , Released At 31 December , , , ,294, Net book value At 31 December , , , , , At 31 December , , , , ,124, At 31 December , , , , ,776, The Bank has continued to invest in its I.T. infrastructure and just like previous years, software being under development and still under creation has not been depreciated in accordance with the Bank's accounting policies and in line with IAS 38 - Intangible Assets, given that the Board definitely believes that once this software being developed goes live, an economic benefit will definitely result. Once it is launched, then depreciation shall commence, just like the Self Developed Software. 61

63 NOTES TO THE FINANCIAL STATEMENTS (continued) 17. Prepayments and Accrued Income Accrued income 455, , Prepayments 117, , , , Related Parties Accrued income and prepayments from Related Parties - - Other accrued income and prepayments 573, , , , Deferred Taxation The balance on the deferred taxation account arises as a consequence of temproary differences arising on: Capital allowances 310, , Fair value adjustment Financial Assets and T-Bills (95,985.60) 185, Securities forex adjustment (2,226,005.48) 2,453, Impairment Loss (780,028.54) (999,999.93) (2,791,531.62) 1,809, Deferred tax assets / (liability) 35% 977, (633,467.00) 19. Other Assets Deposit on Property acquisition - 522, Items in course of collection 2, , ,

64 NOTES TO THE FINANCIAL STATEMENTS (continued) 20. Amounts owed to banks Repayble at call or short notice 6,399, ,546, Current term deposits - - 6,399, ,546, With agreed maturity dates or periods of notice, by remaining maturity: More than 5 years - - More than 1 to 5 years year or less but over 3 months months or less but not payable on demand By currency: EU Currency 1,492, ,277, United States Dollar 262, , Canadian Dollar , Other currencies 4,644, , ,399, ,546, By country: Austria 5,052, , Malta 762, , Italy - - Canada - - Luxembourg 262, ,094, Other countries 322, , ,399, ,546, Related parties: Amounts owed to Related Parties - - Amounts owed to other banks 6,399, ,546, ,399, ,546,

65 NOTES TO THE FINANCIAL STATEMENTS (continued) 21. Amounts owed to customers Repayble at call or short notice 479,016, ,176, Current term deposits 3,018, , ,035, ,237, With agreed maturity dates or periods of notice, by remaining maturity: More than 5 years - - More than 1 to 5 years year or less but over 3 months 2,294, , months or less but not payable on demand 724, ,018, , By currency: EU Currency 263,583, ,090, United States Dollar 95,775, ,161, UK Pound 89,580, ,998, Hongkong Dollar 11,399, ,394, Canadian Dollar 3,019, ,911, Other currencies 18,675, ,682, ,035, ,237, By country: Austria 1,033, ,156, Malta 334,103, ,786, Cayman Islands 513, ,753, British Virgin Islands 13,528, ,287, Great Britain 54,664, ,498, Other countries 78,190, ,754, ,035, ,237,

66 NOTES TO THE FINANCIAL STATEMENTS (continued) 22. Other Liabilities Due to shareholders 2,508, ,014, Withholding tax 45, , Items in suspense 438, , Items in course of settlement 17, , Other creditors 62, , ,072, ,525, The shareholders account for 2017 of 2,508,000 (2016: 3,014,000 ) is unsecured, interest free and does not have any fixed date of repayment 23. Accruals and Deferred Income Accrued interest payable 13, Accrued Liabilities 168, , , , Related parties: Accrued expenses and liabilities to Related Parties - - Other accrued expenses and liabilities 182, , , ,

67 NOTES TO THE FINANCIAL STATEMENTS (continued) 24. Called-up Share Capital Authorised: 15,000 Ordinary 'A' voting shares of 1,000 each 15,000, ,000, ,000 Ordinary 'B' non-voting shares of 1,000 each 15,000, ,000, ,000, ,000, Issued and fully paid: 15,000 Ordinary 'A' voting shares of 1,000 each 15,000, ,000, ,000 (2016: 7,000) Ordinary 'B' non-voting shares of 1,000 each 9,000, ,000, ,000, ,000, On 29 th March 2017, 2,000 new Ordinary Non-Voting B Shares were allotted to Sparkasse (Holdings) Malta Limited and paid in cash. 25. Revaluation Reserve On available for sale investments (Note 13) Balance at 1 January , (200,138.35) Fair value movement for the year (281,285.18) 493, Deferred tax 98, (172,622.00) Balance as at 31 December 2017 (62,390.60) 120,

68 NOTES TO THE FINANCIAL STATEMENTS (continued) 26. Operating Profit before changes in operating assets and liabilities Profit on ordinary activities before tax 4,576, ,116, Adjustment for: Loss on disposal of securities 196, , Gain on disposal of securities (306,774.35) (384,797.74) Unrealised forex differences on securities 4,679, (1,800,208.63) (Gain)/Loss on fixed assets and investments written off 4, Reduction in Provision on loans and advances to customers - - Prepayments and accrued income (261,040.53) 784, Interest payable and accrued liabilities 78, (63,766.73) Depreciation 626, , ,593, ,545, Cash and Cash equivalents Cash in hand (Note 10) 5, , Malta Government Treasury Bills (Note 10) - 32,000, Money on call and at short notice 196,497, ,308, ,503, ,312,

69 NOTES TO THE FINANCIAL STATEMENTS (continued) 28. Investor Compensation Scheme In accordance with the provisions of the Investor Compensation Scheme Regulations issued under the Investment Services Act, licence holders are required to transfer a variable contribution to an Investor Compensation Scheme Reserve and place the equivalent amount with a Bank, pledged in favour of the Scheme. This amounted to during the year under review (2016: ) 29. Investment Services Licence Related Income Net Income derived during the current year from activities for which an Investment Services Licence has been issued to the Bank amounted to 3,087, (2016: 2,419,373.79) 30. Related party transactions For the sake of this note, the related party is Sparkasse Bank Malta plc's sister bank, Sparkasse Schwaz AG Interest receivable and similar income (note 1) 86, , Interest from quoted investments (note 2) - - Interest payable on deposits (note 3) (48.92) (5,446.48) Commission receivable (note 4) - - Commission payable (note 4) (121,486.56) (151,151.15) Year end balances with Related Parties are as follows: Loans and advances to Related Parties (note 11) 20,701, ,058, Bonds issued by Related Parties (note 13) - - Prepayments and accrued income (note 17) - - Prepayments and accrued expenses (note 23) - - Key management personnel compensation: Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the company. Key management personnel compensation is disclosed below: Salary and Bonuses 313, , Defined Plan Contribution 13, , Social Security Contribution 2, , , ,

70 NOTES TO THE FINANCIAL STATEMENTS (continued) 31. Contingent Liabilities Sparkasse Bank Malta plc has not contingent liabilities to report as at end of Commitments Credit Facilities and other commitments to lend 16,585, ,982, ,585, ,982, Registered Office Sparkasse Bank Malta plc is a public limited company domiciled and incorporated in Malta. Its registered office is 101, Townsquare, Qui-Si-Sana Seafront, Sliema, SLM 3112, Malta. 34.Ultimate parent c ompany The parent company is Sparkasse Holdings (Malta) Limited, bearing Company Registration number C35408, which acts as a Holding company. The ultimate parent company is Anteilsverwaltungssparkasse Schwaz, which in turn is also a shareholder of the former ultimate parent bank of Sparkasse Bank Malta plc, Sparkasse Schwaz AG, which owns 90% of the shares in Sparkasse Holdings (Malta) Limited. Another 10% of the shares of Sparkasse Holdings (Malta) Limited are still owned by Sparkasse Schwaz AG. Sparkasse Schwaz AG stillforms part of Erste Group. It is now the sister company of Sparkasse Bank Malta plc following the transfer of shares to the new parent company. In the opinion of the Directors' there is no ultimate controlling party of the Group. 69

71 NOTES TO THE FINANCIAL STATEMENTS (continued) 35. IFRS 9 Transition Effects Valuation Portfolio Method IFRS 9 - Classification Original IAS 39 - Reclassifcation Book Value Effects in Retained Effects in OCI +/- Earnings Actual IFRS9 - Book Value Assets Cash and Balances to Central Bank of Malta, excl. T-Bills Amortised Cost AC At Amortised Cost 110,841, ,841, Cash and Balances to Central Bank of Malta, T-Bills Available for Sale FVTOCI FVTOCI 12,007, (4,917.66) 4, ,007, Loans and Advances to Banks Loans and Advances AC At Amortised Cost 209,333, (122,267.94) 209,211, Loans and Advances to Customers Loans and Advances AC At Amortised Cost 10,212, (250,017.22) 9,962, Financial Assets - Available for Sale (Debt Instruments) Available for Sale FVTOCI At Amortised Cost - 88,675, , , ,693, Financial Assets - Available for Sale (Debt Instruments) Available for Sale FVTOCI FVTOCI 165,383, (88,675,791.53) 137, (137,582.53) 76,707, Financial Assets - Available for Sale (Equity Instruments) Available for Sale FVTOCI FVTOCI 3,063, ,063, Other Assets (Receivables and other assets) Amortised Cost AC At Amortised Cost 8,177, ,177, Deferred tax Asset Amortised Cost AC At Amortised Cost 977, (326,146.00) (37,734.00) 613, Total Assets 519,996, , , ,278, Liabilities Amount owed to banks AC AC At Amortised Cost 6,399, ,399, Amount owed to customers AC AC At Amortised Cost 482,035, ,035, Other Liabilities (Payables and other liabilities) AC AC At Amortised Cost 6,464, ,464, Called-up share capital and retained earnings 25,160, , ,371, Revaluation reserve (62,390.60) , , Total Liabilities 519,996, , , ,278,

72 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management Introduction Sparkasse Bank Malta plc is a Maltese bank domiciled in Malta with its parent company being Sparkasse Holdings Malta) Limited, which acts as a Holding company for the ultimate parent company, Anteilsverwaltungssparkasse Schwaz, which in turn is also a shareholder of the former ultimate parent bank of Sparkasse Bank Malta plc, Sparkasse Schwaz AG. The bank commenced business in Malta in 2001 as a licenced credit institution and also enjoys MFSA Investment Services Category 2 and 4a licences. At Sparkasse Bank Malta plc the risk management function falls under the responsibility of the Board of Directors, which in turn relies on recommendations and information provided inter -alia by the Executive Committee, the local Managing Director and the Senior Finance Officer of the Bank. The main categories of risk which the Bank faces, and thus are given importance in this report are the following: Credit Risk Market Risk Reputational Risk Liquidity Risk Operational Risk The disclosures within this report have been prepared in line with the Banking Rule BR 07: Publication of Annual Report and Audited Financial Statements of Credit Institutions as authorised under the Banking Act 1994, issued by the Malta Financial Services Authority. These requirements and disclosures are not subject to an external audit, unlike other parts of this Annual Report which has been prepared in accordance with the requirements of International Financial Reporting Standards (IFRS) as adopted within the European Union. Risk Management Framework The organisational structure of the Bank is now enlarged to cater for the increasing number of employees, at the same time keeping a strict segregation of the back office and front office functions. The organisational structure shows clear distinct lines between all core business lines headed by their separate Head of Department. These include Customer Relationship and Private Banking, Securities and Custody. Control functions such as Compliance and AML and Finance are visible too. Risk Appetite The risk appetite of the Bank is determined by a series of indicators which it has embedded within its policies and procedures which must not be exceeded. Such indicators are reviewed and monitored on a quarterly basis to ensure compliance with such limits. Such indicators are set to ensure that the targets set by the Bank s Board of Directors are met while the Bank s robustness in its policies, procedures and business ethic remains of the highest standard possible at all times. Furthermore, internal controls are embedded around such indicators to ensure that such risk triggers are not exceeded. Such internal controls are clearly set out in the Bank s procedure manual together with the Bank s ICAAP and ILAAP which further enhance the Bank s robustness and clear vision towards being the Best of Breed in the business lines that it executes business in. Such internal controls, policies and procedures are managed and reviewed accordingly on a frequent basis in the following areas such as Finance, Risk Management, Treasury, Anti-Money Laundering and Compliance. 71

73 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) The Bank looks at the following risk indicators to ensure that it adheres to its risk profile: Balance Sheet robustness Profitability progression Liquidity Risk Credit Risk Market Risk Operational Risk Such indicators allow the Bank to ascertain that any decisions taken are executed with a purpose, with the sole aim of ascertaining that the Bank s name is not jeopardised, maintaining an unchanged risk profile and ultimately protecting the interests of its employees, customers and shareholders. Board of Directors The Board of Directors is responsible for setting the Bank s strategy, monitoring risk and providing the required leadership to the Bank s executives while encouraging a high degree of Corporate Governance within the Bank. As the Bank continues to grow, the governance, support and control structures within the Bank are destined to increase accordingly and proportionately. As a result, and in an effort to cater for the growth the Bank has experienced in 2017 and the growth the Bank projects to continue building on in the near future, the Bank has introduced 3 new board members in their capacity as non-executive directors. This ensures that the Board is composed of members who boast a diverse range of skill sets so as to ensure that the Board collectively maintains the suitable skills required to manage the Bank competently and prudently. Management Committees To increase efficiency and allow deeper focus in specific areas, the Board has established two management committees to assist in day to day operations and oversight of the Bank. The committees were created and mandated by the full Board. Presently, the Board has created two (2) Committees: The Executive Committee; and The Legal and Compliance Committee. Executive Committee The Board of Directors delegates specific responsibilities to the Managing Director who leverages on the support of the Executive Committee for the implementation of policy and control measures. It meets regularly and focuses on substantive business decisions extending across issues of Company-wide significance in terms of parameters and resolutions of the Board of Directors. The Executive Committee is composed of senior level management charged with assisting the Managing Director in the Management of the Bank and implementing strategy across business lines and Departments. The Executive Committee is accountable to the Board. 72

74 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) The Executive Committee is responsible for: Managing the day-to-day business Monitoring of the Bank s risk Monitoring competitive activities Implementation of approved strategy, budgets and policies Monitoring of the Bank s performance Making recommendations to the Board The Committee is composed of the Managing Director, who is the Chairman of the Executive Committee, together with Business Line Managers and Heads of Departments of Control and Support Functions, namely: Securities and Custody On-Boarding Private Banking and Payments Legal Finance Compliance and AML Software Development and Architecture Legal and Compliance Committee The Board of Directors of the Bank have established a Legal and Compliance Committee to oversee the Bank s compliance with its obligations imposed by law, regulations and rules that are relevant to the Bank and its business. The Committee is composed of: Managing Director Head of Legal Compliance Officer Senior Compliance Supervisor As previously identified the Bank s Risk Management Framework is composed of the following policies: Risk Appetite Framework Risk Materiality Assessment Risk Concentration Stress Testing Risk Bearing Capacity Calculation Audit Committee The Board of Directors of Sparkasse Bank Malta plc has established a stand-alone committee of the Board to be known as the Audit Committee, with the objective to advise the Board of Directors on the Bank s internal control, internal audit and risk management systems and the Bank s accounting policies and external audit. The Committee is composed of the three nonexecutive directors of the Bank, one of whom is the Chairman of the Audit Committee. 73

75 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Key Risk Components Credit Risk: Credit Risk can be simply defined as the risk of suffering financial loss, due to the failure of the Bank s customers or counterparties being unable to meet and fulfil their obligations to the Bank. Usually these can be in form of loans and advances to customers and the investment in debt securities. As a general rule, in the course of its business, the Bank does not incur credit risk by lending funds to its customers. In the rare occasions that it does, it is almost invariably against full cash collateral and for short terms. Market Risk: Market risk is the risk that the fair value, or future cash flows, of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange risk and share prices. Consequently, Market Risk is made up of the following three foundations, namely: o Interest Rate risk, which is brought about by changes in interest rates. o Exchange Rate risk, which the risk brought about by change in exchange rates vis-à-vis foreign currency holdings. o Investments price risk, which is the risk of incurring losses due to the changes in the prices of investments. Reputational Risk: This is the risk that a Bank may be exposed to negative publicity about its business practices leading to impairment in its liquidity or capital base. The Board of Directors, through the Executive Committee, constantly reviews the bank s activities from an ethical, trust, integrity and honesty point of view to ensure that the bank s reputation is always safeguarded. Liquidity Risk: Liquidity Risk is the risk that an entity will encounter difficulty in meeting expected or unexpected current and future cash flows needs without affecting daily operations or the financial condition of the bank. Liquidity risk may also result from the inability to sell a financial asset quickly at close to its fair value. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Liquidity Risk can arise from two particular sub-categories, namely: o Market Liquidity Risk: Risk of losses being incurred due to not being able to access a product or market any required time or required price. o Funding Liquidity Risk: The loss faced due to a timing mismatch which would eventually lead into missing settlement date or the obligation met at a premium price which would mean higher cost for the Bank. Operational Risk: Operational Risk is the non-financial risk of loss arising from failed internal processes or systems as well as from external events. The Board of Directors, through the Executive Committee, regularly monitors operational risk by early identification and appropriate action. Operational risks are mitigated by a system of controls, policies, procedures and random checks. In addition risk is mitigated through adequate back up sites and systems and the continuous maintenance of the business continuity plan. Credit Risk Credit risk is defined as the potential for loss due to failure of a borrower to meet its contractual obligation to repay a debt in accordance with the agreed terms. The Bank faces numerous exposures resulting from the positioning of its Assets however these are classed in seven different classes for the derivation of a Credit Risk figure. Such classes are mainly sovereigns, multidevelopment banks, international organisations, institutions, corporates, collective investment schemes and other items. Such classes carry varying credit risk weightings in accordance to their relative Articles within the CRR. 74

76 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Credit risk is the primary risk category to which the Bank is exposed, namely through the granting of loans and advances to customers and balances held with other institutions. The Bank is also exposed to credit risk through its investment portfolio. The Bank has policies and procedures for accepting, measuring and managing credit risk. The objective of credit risk management is to achieve an appropriate balance between risk and return, and to minimise potential adverse effects of credit risk on the Bank s financial performance. Credit risk represents the Bank s largest regulatory capital requirement under Pillar 1. The Bank adopts the Standardised Approach to calculate Pillar 1 capital requirements for credit risk. Exposures can come in a handful of classes which vary from Sovereigns, Multi-lateral Development Banks, International Organisations, Institutions, Corporates, Collective Investment Schemes and Other Items. Apart from Credit Default Risk, the Bank also faces Credit Risk from other sub-categories from Credit concentration risk and counterparty risk and settlement risk. Credit Concentration Risk: The risk of incurring significant credit losses stemming from a concentration of exposures to a small group of borrowers, to a set of borrowers with similar default behaviour. Counterparty Credit Risk and Settlement Risk: The risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. Such risks is captured under any Pillar II add-ons which from time to time the Bank deems fit to add along to Pillar I requirements after internal exercises held every year. Till now the Bank does not deem itself to face such sub-categories to the extent that it requires any Pillar II add-ons. Such risks can be driven from various risk drivers which the Bank mitigates with various internal controls which it has embedded in its processes which bring down the residual risk levels to acceptable levels which result in the need of not adding a Pillar II add-on. If the residual level of risk is above the inherent risk then the Bank will deem itself to be in need of a Pillar II add-on. As said he Bank is exposed to credit risk through its activity in Investments, which include deposits with other banks and through its own investment in Debt Securities. The Bank s investment policy determines what level of risk can be undertaken for different asset classes, in relation to external ratings by major rating agencies, such as Standard and Poor s, Fitch and Moody s as well as length of time of such a debt security, what sector such a security is centred upon and various other contributing factors such as coupon rate, yield and others. Such investments are normally classified at available-for-sale. The Board of Directors, together with the input of the Executive Committee and the Senior Finance Officer are responsible for the management of such credit risk. It is of the utmost importance that such a risk is well managed and reviewed on a frequent basis, apart from the normality and mandatory quarterly reporting to the Regulator. Constant on-going monitoring and updating of such internal calculation is considered pivotal and vital for the optimum running of the Bank. The Bank s credit risk exposures relating to on-balance sheet assets and off-balance sheet instruments, reflecting the carrying amount of the same exposure and as reported to the Malta Financial Services Authority in the Bank s COREP regulatory submissions as at 31 st December Such credit Risk exposures are as follows: 75

77 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Credit Risk Exposures - On Balance Sheet Exposures '000 '000 Balances with Central Bank of Malta 122, ,061 Loans and Advances to Banks 209, ,309 Loans and Advances to Customers 10,213 8,241 Available for sale Financial Assets 168, ,140 of which: Sovereigns 121, ,018 Multi-lateral Development Banks 10,350 1,183 International Organisations 13,109 4,065 Institutions 5,715 10,052 Corporates 14,249 7,785 Collective Investment Schemes 3,063 2,037 Other Assets 9,154 3,057 Total Credit Risk Exposures - On Balance Sheet Exposures 519, ,808 Credit Risk Exposures - Off Balance Sheet Exposures Contingent Liabilties - - Commitments 16,585 34,982 Total Credit Risk Exposures - Off Balance Sheet Exposures 16,585 34,982 Total Credit Risk Exposures 536, ,790 Apart from the standard cash held at the Central Bank of Malta for Reserve requirements, the Bank places its cash with high quality financial institutions. No new doubtful loans were classified as at end of the reporting period. All loans are classified as regular and their activity is monitored on a frequent basis as part of their ongoing monitoring of the Bank's client base. Apart from the normal factors that constitute credit risk, the Bank also closely monitors the location from which such credit risk is being borne. The following table shows the country of risk of the Bank s credit risk: 76

78 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Carrying Amount Malta Austria Other 2017 '000 '000 '000 '000 Central Government or Central Banks 259, ,672 10, ,299 Institutions 227,398 42,887 49, ,743 Corporates 21,322 9,941-11,381 Collective Investment Scheme 3, ,468 Other Items 9,154 8, , ,266 60, ,240 Carrying Amount Malta Austria Other 2016 '000 '000 '000 '000 Central Government or Central Banks 283, ,508 2, ,752 Institutions 180,361 13,976 45, ,175 Corporates 16,027 7,895-7,590 Collective Investment Scheme 2, ,495 Other Items 3,057 2, , ,185 47, ,240 Such credit risk is also analysed below in terms of residual maturity: Carrying Over 1 to 5 Up to 1 Y ear Amount Years Over 5 Years 2017 '000 '000 '000 '000 Central Government or Central Banks 259, ,851 14,328 34,881 Institutions 227, ,294 8,108 7,996 Corporates 21,322 11,135 6,171 4,016 Collective Investment Scheme 3, ,063 Other Items 9,154 1,552 7, , ,832 36,209 49,956 Carrying Over 1 to 5 Up to 1 Y ear Amount Years Over 5 Years 2016 '000 '000 '000 '000 Central Government or Central Banks 283, ,245 22,294 10,787 Institutions 180, ,309 5,925 4,127 Corporates 16,027 8,418 6,058 1,551 Collective Investment Scheme 2, ,037 Other Items 3, , , ,807 36,499 18,502 77

79 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Following the criteria stipulated in the Bank s ICAAP, the Bank also keeps a firm look out for the asset quality when it comes to the debt securities the Bank invests in. It is on very rare occasions that the Bank invests in a debt security which has a rating lower than A-, and if so, the minimum rating allowed on the portfolio would be that of BBB+. Below is a breakdown of the credit quality of the Bank s debt securities and treasury bills according to the rating given assigned to them by market leading credit rating agencies, Standard and Poor s, Fitch and Moody s. Treasury Other Total Bills Securities 2017 '000 '000 '000 AAA to A- 172,209 88,716 83,493 Lower to A- 5,183-5,183 Unrated 3,063-3, ,455 88,716 91,739 Treasury Other Total Bills Securities 2016 '000 '000 '000 AAA to A- 187, ,427 53,613 Lower to A- 3,064-3,064 Unrated 2,037-2, , ,427 58,714 The following table also provides an analysis of how the Bank values its Financial Assets at fair value. The Bank holds Level 1 and Level 2 financial assets, with Level 2 denoting Unrated and Unlisted bonds held as at end of year. The figure within the "Unrated" category is the cumulative position the Bank holds in equity positions. Financial Assets not quoted in active markets are determined using valuation techniques. Such techniques are tested for validity and re-calibrated while factors normally used in setting a price and accepted as normal methodologies for pricing are always monitored and kept in line. Total Level 1 Level '000 '000 '000 AAA to A- 172, ,209 - Lower to A- 5,183 5,183 - Unrated 3,063-3, , ,392 3,063 Total Level 1 Level '000 '000 '000 AAA to A- 187, ,040 - Lower to A- 3,064 3,064 - Unrated 2,037-2, , ,104 2,037 78

80 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Concentration and Counterparty Risk The Bank s Credit concentration risk stems from the probability that one of the Bank s counterparties to whom the Bank is exposed on a number of exposures, defaults. A prime example of this could be a sovereign exposure that the Bank has acquired multiple bonds of for its Balance Sheet such as a Government Stock. The Bank holds limits in place within its ICAAP which indicate how much concentration towards one particular counterparty the Bank can expose itself to. This may be based upon credit rating, jurisdiction and sector amongst other factors. On the other hand Counterparty Risk is mainly derived from the probability that a transaction will not settle due to a default of one of the Bank s counterparties. This can be in form of an acquisition of a bond for the Bank s Balance Sheet or also when the Bank execute Foreign Exchange deals for an on behalf of its customers. Such Forex transactions are done on a T+2 basis and therefore this kind of risk is always present in some form or another. The Bank sees that such a risk as very low due to the counterparties that it executes such deals with being of very high quality while the Financial Assets acquired are always of a very High Quality. At end of December 2017 the Bank did not deem to have risks at very high levels and thus does not deem it necessary to hold a Pillar II Risk add-on to counterbalance such risks. Market Risk Market risk is the risk that the fair value, or future cash flows, of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange risk and share prices. Consequently, Market Risk is made up of the following three foundations: Interest Rate risk, which is brought about by changes in interest rates; Exchange Rate risk, which the risk brought about by change in exchange rates vis-à-vis foreign currency holdings; Investments price risk, which is the risk of incurring losses due to the changes in the prices of investments. The Bank s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Bank s financial performance. Market risk is derived from two main sources namely: i) Position Risk: Risk of the negative effect on the value of a particular position in the Banking Book of the Bank due to the general movements within the market environment mainly due to the interest rate environment. ii) Foreign Exchange Risk: The risk incurred or faced due to the crystallisation of a loss due to a transaction being denominated in a currency other than that of the Bank. iii) Equity Price Risk: The risk of loss because of changes in investment prices The drivers towards Position Risk are mainly derived from Investments that the Bank holds on its portfolio. Such a portfolio, as at end of December 2017, was made up of Available for Sale assets which are in their normality held till their maturity. Such a portfolio is made up of two types of assets, namely, short term very liquid treasuries predominantly denominated in Euro, United States Dollar and British Pound while the presence of longer term bonds denominated in the same currencies as a mean of store of value to increase interest income. On the other hand, the drivers that instigate Foreign Exchange Risk is mainly due to the transactions that are executed within the Bank which are away from the base currency of the Bank. 79

81 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) The Bank accepts deposits in a number of currencies away from the Euro and whenever forexes are executed these would create mismatches which carry a certain amount of risk due the difference in exchange rate that might arise. The Bank is exposed to foreign exchange risk arising from various currency exposures. The main exposures arise from four major currencies which are the USD, GBP, HKD and CHF. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. USD to GBP to CHF to HKD to 2017 '000 '000 '000 '000 Assets denominated in foreign currencies Loans and advances to Banks 46,780 48,170 3,134 15,733 Loans and advances to customers 1, Financial Assets 48,660 41, ,117 89,741 3,137 15,733 Liabilities denominated in foreign c urrenc ies Amounts owed to Banks ,323 Amounts owed to customers 95,776 89,580 3,137 11,400 96,038 89,733 3,137 15,723 Net Exposure 1, USD to GBP to CHF to HKD to 2016 '000 '000 '000 '000 Assets denominated in foreign currencies Loans and advances to Banks 27,689 51,816 2,275 14,152 Loans and advances to customers 2, Financial Assets 75,600 28, ,486 80,165 2,278 14,153 Liabilities denominated in foreign c urrenc ies Amounts owed to Banks Amounts owed to customers 101,161 79,998 2,283 14, ,039 80,071 2,292 14,394 Net Exposure 3, (14) (241) 80

82 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) The exchange rates used as at end of year are as follows: USD to GBP to CHF to HKD to The Bank monitors frequently the effect of such a risk through the ALCO report the Finance Department compiles for the Bank. Through this tool it has a very good idea of how the bank stands with respect to the net exposures to foreign currencies. The table in the preceding page summarises the Bank s exposure to the four main foreign currencies. Investment Price Risk The Bank is exposed to securities price risk by virtue of the investments held by the Bank and classified on the balance sheet either as available-for-sale or at fair value through profit or loss. The Board of Directors together with the Executive Committee frequently monitor the positions that the bank has as Financial Assets and comes up with solutions and decisions were deemed fit should the Board decide on new investments or on disposing of any. Nevertheless, the Bank maintains its stance on investing in high quality financial assets with a healthy credit rating. It is important to note also that the Bank is not exposed to commodity price risk. Operational Risk Operational Risk is the non-financial risk of loss arising from failed internal processes or systems as well as from external events. Such risk can take form in various sub-categories of risk such as Sanctions Risk, Anti-Money Laundering Risk, Internal Fraud Risk, External Fraud Risk, Conduct Risk, Systems ICT Risk, Business Process Risk, Reputational Risk and also Key Staff Dependency Risk. Such risks can be driven by various risk drivers which are all a treat to the Bank s operations. The Board of Directors, through the Executive Committee, regularly monitors operational risk by early identification and appropriate action. Operational risks are mitigated by a system of controls, policies, procedures and random checks. In addition risk is mitigated through adequate back up sites and systems and the continuous maintenance of the business continuity plan. Such a risk is given high importance by the Bank given that none of the sub-categories are captured by Pillar I Risk. If at any point in time in the future the Board of Directors deems it necessary to introduce a Pillar II add-on with respect to Operational Risk, it will do so without hesitation. The Bank calculates Operational Risk with the use of the Basic Indicator Approach under the current Capital Regulatory Directive (CRD), and based on the financial results in 2014, 2015 and 2016, given that a three year average needs to be taken, the Bank calculated that the Operational Risk for the year 2018 is 1,245K and for the year 2017 is 1,189K. 81

83 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) '000 '000 Net Interest Income 1,682 1,575 of which Realised Gains and Losses on Investments (873) (409) 809 1,166 Profit on foreign exchange activity 1,334 1,767 Net fee and Commission Income 5,998 5,115 Other Operating Income 90 - Operating Profit 8,231 8,048 3 Year Profit Average (2014: 7,105; 2015: 8,625) 8,301 7,926 15% Haircut Applic ation (for 2018 / for 2017) 1,245 1,189 Liquidity Risk Liquidity Risk is the risk that an entity will encounter difficulty in meeting expected or unexpected current and future cash flows needs without affecting daily operations or the financial condition of the bank. Liquidity risk may also result from the inability to sell a financial asset quickly at close to its fair value. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Sparkasse Bank Malta PLC maintains a very conservative approach to the ratio of liquid assets to short term liabilities and its loan to deposit ratio and the regulatory liquidity ratios are very positive, almost invariably well in excess of the statutory minimum of 30%. As at 31st December 2016, the proportion of liquid assets to short term liabilities maturing within three months was at 91%. Furthermore, the new LCR and NSFR ratios, introduced by way of the new CRD IV, where constantly monitored throughout the year. The LCR threshold which was enforced by 1st October 2015 and has a minimum requirement of 60% with periodical and equal increments up to 100%. The Bank is satisfied with the current position it is in, with LCR figure standing at 320%, well above the 70% threshold. Nevertheless, the Bank will continue to monitor such figures on a monthly basis. On the other hand the Net Stable Funding Ratio of the Bank stood at 243% for year end. The Board of Directors and Executive Committee, constantly monitors such ratios and figures and discusses ways of how to mitigate such a risk through the introduction of new controls. The Bank's liquidity profile is generally made up of cash deposits and a sizeable portfolio of Financial Assets which are eligible as collateral against borrowing from the European Central Bank. Such Financial Assets are mainly government bonds of highly rated countries including Malta, Germany and Luxembourg amongst others. The following table analyses the Bank's principal assets and liabilities when grouped into maturity classes based on their remaining lifetime period as at the reporting date. 82

84 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) 2017 Total Between 3 Between 1 Less than 3 Over 5 Months and Year and 5 Months Years 1 Y ear Years '000 '000 '000 '000 '000 Assets Balances with Central Bank of Malta 122, ,842 12, Loans and advances to Banks 209, , Loans and Advances to Customers 10,213 7,849 1, Available-for-sale Financial Assets 168,447 81,587 8,707 28,197 49, , ,611 22,669 28,607 49,956 Liabilities Amounts owed to Banks 6,399 6, Amounts owed to Customers 482, ,741 2, , ,140 2, Maturity Gap (76,529) 20,375 28,607 49,956 Cumulative Gap (76,529) (56,154) (27,547) 22, Total Between 3 Between 1 Less than 3 Over 5 Months and Year and 5 Months Years 1 Y ear Years '000 '000 '000 '000 '000 Assets Balances with Central Bank of Malta 154, ,061 11, Loans and advances to Banks 170, , Loans and Advances to Customers 8,241 7, Available-for-sale Financial Assets 149,140 91,847 4,840 33,951 18, , ,260 16,712 34,277 18,502 Liabilities Amounts owed to Banks 2,547 2, Amounts owed to Customers 454, , , , Maturity Gap (44,464) 16,651 34,277 18,502 Cumulative Gap (44,464) (27,813) 6,464 24,966 83

85 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Own Funds While the Bank s capital management is based on the regulatory requirements established by the regulations modelled on the European Union Directive of Capital Requirements, the Standardised Approach is used to calculate the Capital Requirement for the Bank. Own Funds gives an indication of the Bank's available capital and reserves while underlining the strength of the Bank and keeping in line with the regulations stipulated within the above mentioned rule. It must be mentioned that during the year ended 31st December 2017, the Bank always kept in line with the limits set by the Banking Rule. The Bank s capital base is only made up of Common Equity Tier 1 (CET1) capital, with no Tier 2 capital being present in the calculation. It is made up of the following items: Share Capital - The Bank s Share Capital as at 31st December 2016 is analysed and split up in note 23. Retained Earnings The Bank s retained earnings shown here is the remaining balance from the previous year s balance, added to the year s profit after tax figure and less the dividend pay-out to the shareholder. Other regulatory adjustments including deductions for intangible assets and prudential filters for available for sale assets in accordance with CRD IV. Tier 2 Capital although at this moment in time, the Bank does not have any Tier 2 as part of its Own Funds calculation this can be made up of various other capital instruments such as Property Revaluation Reserve. Below is a breakdown of how the Bank s Capital Base is divided under the Banking Act '000 '000 Own Funds Common Equity Tier 1 (CET1) Paid up Share Capital 24,000 22,000 Retained Earnings 1, CET 1 Capital before regulatory adjustments 25,160 22,791 Deductions and Adjustments Adjustment to CET 1 due to prudential filters (156) (238) Intangible Assets (1,777) (1,124) Other transitional adjustments due to Article 3 in CRR - - Total Deductions and Adjustments (1,933) (1,362) Total Tier 1 After Prudential Filters and Deduc tions 23,227 21,429 Tier 2 Capital Capital Instruments and subordinated loans Total Tier 2 Capital - - Total Own Funds 23,227 21,429 Total Risk Weighted Assets 91,256 98,115 CET1 Capital Ratio 25.45% 21.84% Tier 1 Capital Ratio 25.45% 21.84% Total Capital Ratio 25.45% 21.84% 84

86 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Capital Requirements Article 73 of Directive 2013/36/EU ( CRDIV ) (transposed into Maltese law by Article 17C of the Banking Act (Chapter 371 of the Laws of Malta) requires Sparkasse Bank Malta plc to have in place sound and effective strategies to assess and mitigate the risk that the Bank is exposed to. The Bank has developed these strategies to minimize the risk faced during its course of business and which in turn are clearly documented in the Bank s ICAAP and ILAAP documents. This will assist the Bank into ascertaining that it does not fall beneath the stipulated regulatory minimum thresholds. The Pillar I minimum capital requirements are calculated for all Pillar I risks faces, that is, credit risk, market risk and operational risk as mandatory by all Banks. The Bank applies the Standardised Approach for credit risk, the Basic Approach for market risk and the Basic Indicator Approach for Operational Risk in order to calculate Pillar I capital requirements. For credit risk the Bank risk weights its on-balance sheet and off-balance sheet exposures in line with the asset quality, asset type, and credit rating which in turn is obtained from nominated ECAIs, namely Fitch and Reuters. In the case of unrated exposures, criteria within CRR are applied. The total risk weighted amount is then multiplied by 8% to reveal the amount of capital requirements for credit risk. On the other hand, for Foreign Exchange Risk, the Basic Approach is applied whereby 8% of the higher between the total long positions and total short positions is taken in each foreign currency. For Operational Risk the Basic Indicator Approach is used where the Bank takes 15% of the gross income of the preceding three years. Exposure Risk Weighted Capital Value Assets Requirement 2017 '000 '000 '000 Pillar I Credit Risk Central Governments or Central banks 284,888 5, Multi-lateral Development Banks 10, International Organisations 13, Institutions 174,965 35,937 2,875 Corporates 41,047 24,373 1,950 Claims in the form of Collective Investment Schemes 3,063 3, Other Items 9,159 6, Total Credit Risk 536,582 74,998 6,000 Foreign Exchange Risk 1, Operational Risk 14,862 1,189 Total Pillar I Risk 91,256 7,301 Pillar II Risk - - Total Capital Requirement 91,256 7,301 85

87 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Following the calculation of the above three Pillar I risks, the Bank then proceeds to calculate the Total Capital Ratio as defined within the CRR, by dividing regulatory capital versus risk weighted assets. As a pre-requisite this percentile should be above 8%, which is the minimum Capital Requirements Ratio. Further to the Capital Requirements Ratio, Banks are now required to maintain a capital conservation buffer of 0.625% as from 1st January This buffer will be phased in until 31st December 2018 when it reaches 2.5%. Such a buffer is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down when losses are incurred in times of stress. As at end of the year this buffer stood at 1.25% of risk weighted assets as shown in the below illustration. CET1 Capital CET1 Capital 23,227 Tier 2 - Total Own Funds 23,227 Total Capital Ratio 25.45% Capital Capital Requirement Requirement '000 % Total Pillar I Risk 7, % Total Pillar II Risk % Total SREP Capital Requirement 7, % Capital Conservation Buffer 1, % Overall Capital Requirement (OCR) 8, % Head room over OCR 14,786 Internal Capital Adequacy Assessment Process (ICAAP) Under Pillar II of the CRD, the Bank is required to enact an Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP will be performed annually and is required under the new MFSA Banking Rule BR / 12. The Board via the Executive Committee has the overall responsibility of the design and details of the ICAAP capital document. Apart from the responsibility of the design, the Board discussed, approved, endorsed and delivers the yearly ICAAP submission. The results of the ICAAP show that the Bank continues to maintain a very comfortable level of excess capital and substantial liquidity that ensures the flexibility and resources needed to achieve its long term strategic objectives even under market stress situations. 86

88 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) The bank has decided to adopt the standardised approach in respect of Pillar I and welcomed the Internal Capital Adequacy Assessment Process (ICAAP) embedded in Pillar II. This will ensure a proper measurement of material risks and capital thus allowing for better capital management and an improvement in risk management. The Executive Committee formally measures material risks and capital and reports to the Board at quarterly intervals. The actual ICAAP capital document was formally approved by the Board. Leverage The leverage ratio is a non-risk-based ratio and supervisory tool proposed to provide transparency in terms of an institutions exposures. It is calculated on a three-month average of capital as a proportion to total exposures, both on-balance and offbalance sheet exposures. On the other hand, Tier 1 Capital, is calculated in line with Article 25 of the CRR. Sparkasse Bank Malta plc s leverage ratio has always averaged above 4%, which is well above the 3% Pillar I under Basel III requirements '000 Exposure Values On-Balance Sheet Expsoures (excluding derivatives and SFTs) 519,997 Off-Balance Sheet Exposures at gross notional amount 16,585 Leverage ratio total exposure measure 536,582 Tier 1 Capital 23,227 Total Tier 1 Capital 23,227 Leverage Ratio 4.33% Other Directorships In accordance with Article 91 of Directive 2013/36/EU (CRD IV) the number of directorships at significant institutions which may be held by any of the Bank s directors at the same time shall take into account individual circumstances and the nature, scale and complexity of the institutions activities. A director shall not hold more than one of the following combinations of directorships at the same time: One executive directorship with two non-executive directorships; Four non-executive directorships. In accordance with the Guide to banking supervision issued by the ECB in November 2014, an institution is deemed to be significant if one of the following criteria is met: The total value of its assets exceeds 30 billion or, unless the total value of its assets is below 5 billion, exceeds 20% of national GDP; It is one of the three most significant credit institutions established in a Member State; It is a recipient of direct assistance from the European Stability Mechanism; The total value of its assets exceeds 5 billion and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%. 87

89 NOTES TO THE FINANCIAL STATEMENTS (continued) 36. Financial Risk Management (continued) Sparkasse Bank Malta plc does not meet any of the above criteria and thus is not considered as a significant credit institution by the banking supervisors, and thus is exempt of the said article. On the basis of materiality, the number of directorships does not require disclosure in line with Article 432 in CRR. Recruitment and Diversity policy The Bank has adopted a strong approach to recruitment in all areas of the Bank. This is especially with regards to positions in key areas such as members of the Board of Directors and members of Bank committees such as Executive Committee members and Legal and Compliance Committee. The Bank s overall objectives are held in high regard and thus when recruiting new staff members or appointing members to committees, the person s skills, expertise, attributes and merit are commensurate to the position being proposed. New staff personnel are selected following deliberation between the Managing Director and the Head of Department of that particular area which requires recruiting, whereby the skills, knowledge and expertise of the short-listed few are discussed and best candidate is selected for employment. As with the regards any positions that might be available for positions within the Board, the Board of Directors themselves make sure that all members of the Board come from different backgrounds and different areas of expertise to make sure that any risks which the Bank faces in its course of business are mitigated by such expertise on Board. This can also be said for the recently vacated position of Company Secretary whereby the best candidate for this key position was chosen in line with the person s level of expertise, merit and knowledge. 88

90 89

91 DETAILED INCOME STATEMENT 90

92 DETAILED INCOME STATEMENT Interest receivable and similar income Loans and advances to banks and financial institutions 376, , Inc ome from investments Interest from quoted investments 1,283, ,172, Dividend from quoted investments 22, , Gains from disposal of investments 306, , Loss from disposal of investments (196,467.96) (429,607.90) 1,416, ,135, ,793, ,530, Interest payable and similar charges Deposits from customers (82,336.31) (51,986.68) Deposits from banks (790,934.54) (357,593.33) (873,270.85) (409,580.01) Net interest inc ome 919, ,120, Trading profits Impairment provision reversal 219, Profit on foreign exchange activities 1,333, ,767, Commissions Receivable 7,096, ,034, Payable (1,098,829.64) (919,848.17) 5,997, ,115, Operating profit 8,471, ,003, Other income 89, Administration expenses (3,354,703.67) (3,424,136.47) Bad debts provision - - Bad debts written off - - Write off on disposal of fixed assets (4,394.00) - Depreciation (626,047.11) (462,687.88) (3,985,144.78) (3,886,824.35) Profit on ordinary ac tivities 4,576, ,116,

93 5 YEAR SUMMARIES 92

94 INCOME STATEMENT - 5 YEAR SUMMARY '000 '000 '000 '000 '000 Operating income Interest receivable and similar income Income from investments 1,416 1,136 1,428 1,429 1,210 1,793 1,531 1,951 2,258 2,023 Interest payable and similar charges (873) (410) (42) (122) (81) Net interest inc ome 920 1,121 1,909 2,136 1,942 Reversal of Impairment on securities Profit on foreign exchange activities 1,334 1,767 1,442 1, Commissions (net) 5,997 5,115 5,141 3,919 2,764 Operating profit 8,471 8,003 8,492 7,135 5,594 Other income Total Operating Profit 8,561 8,003 8,492 7,135 5,658 Operating expenses Administrative expenses (3,985) (3,887) (2,755) (2,125) (1,578) Profit on ordinary activities before taxation 4,576 4,116 5,737 5,010 4,080 Tax on ordinary activities (1,699) (1,441) (2,028) (1,783) (1,430) Profit on ordinary activities after taxation 2,877 2,675 3,709 3,227 2,650 Earnings per 1000 shares

95 STATEMENT OF FINANCIAL POSITION - 5 YEAR SUMMARY '000 '000 '000 '000 '000 Assets Balance held with Central Bank of Malta and cash 122, ,061 67,087 14,349 9,413 Loans and advances to banks 209, , , , ,910 Loans and advances to customers 10,213 8,241 3,110 2,203 2,188 Financial assets 168, , ,353 85,831 75,398 Fixed assets 7,601 2,223 2,190 1,904 1,588 Prepayments and accrued income ,097 1, Deferred tax Other assets Total assets 519, , , , ,697 Equity Called up share capital 24,000 22,000 22,000 20,000 18,000 Retained income 1, , ,417 Revaluation reserve (62) 120 (200) Total Equity 25,098 22,912 22,930 21,015 21,539 Liabilities Amount owed to banks 6,399 2,547 3,894 3,308 3,619 Amount owed to customers 482, , , , ,186 Other liabilities 3,072 3,526 3,182 6,250 1,737 Accruals and deferred income Deferred Tax Liability Current tax 3, ,835 1,702 1,407 Total liabilities 494, , , , ,158 Total Equity and Liabilities 519, , , , ,697 94

96 STATEMENT OF CASH FLOWS - 5 YEAR SUMMARY '000 '000 '000 '000 '000 Net Cash from / (used in) operating ac tivities 25,873 24,359 52, ,585 50,639 Cash Flows from investing activities Disposal of securities 260, ,468 69,341 26,036 9,420 Disposal of tangible assets Purchase of securities (285,361) (349,998) (107,132) (41,163) (38,307) Purchase of tangible assets (5,144) (45) (299) (278) (164) Purchase of intangible assets (865) (450) (421) (404) (101) Net Cash from / (used in) investing activities (31,174) (28,025) (38,510) (15,809) (29,152) Cash Flow s from financing activities Issue of shares 2,000-2,000 2,000 - Dividends paid (2,508) (3,014) (3,014) (6,210) (1,710) Net Cash from / (used in) financing activities (508) (3,014) (1,014) (4,210) (1,710) Movements in c ash and cash equivalents (5,809) (6,680) 12,772 81,566 19,777 Cash and Cash Equivalents at beginning of the year 202, , , ,655 94,878 Cash and Cash Equivalents at c lose of the year 196, , , , ,655 95

97 Statement of Compliance with the Principles of Good Corporate Governance APPENDIX I STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE

98 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE Sparkasse Bank Malta plc believes that good corporate governance should be at the forefront of every decision taken by the Bank of whatever magnitude it may be. While compliance with The Code of Principles of Good Corporate Governance set out in Appendix 5.1 to Chapter 5 of the Listing Rules, as issued by the Malta Financial Services Authority is not mandatory for the Bank since its shares are not admitted to listing on the Malta Stock Exchange, the Bank is committed to implement the highest standards possible of corporate governance in all areas to which it relates, taking into account the nature, scale and complexity, its size and internal organisation. The Bank also takes note of the Corporate Governance Guidelines for Public Interest Companies issued by the Malta Financial Services Authority. As a credit institution which also provides investment services, the Bank is required to observe the governance rules established under the Banking Act (Chapter 371 of the Laws of Malta) and the Investment Services Act (Chapter 370 of the Laws of Malta), in particular the provisions transposing the CRD and MiFID. The implementation of such rules is addressed in various policies and procedures of the Bank. The information given in this document covers the period from 1 st January 2017 to 31 st December 2017 and is valid as at 31 st December SECTION 1 COMPLIANCE WITH THE CODE In this Section, the Bank aims to give an overview of how it complies, on a voluntary basis, with the relevant principles on good governance set out in The Code of Principles of Good Corporate Governance issued by the Malta Financial Services Authority. PRINCIPLE 1 THE BOARD The Board of Directors of the Bank consists of six Directors, five of whom are non-executive Directors, and one Managing Director who is the only Executive Director of the Bank. One of the five non-executive Directors is the Bank s Chairman. Apart from having a good mix of individuals as part of the Board of Directors, all members of the Board currently hold or previously held key management positions in other organisations. The Board has ultimate responsibility for the Bank s business strategy and financial soundness, key personnel decisions, internal organisation and governance structure and practices, risk management and compliance obligations. It should ensure that the Bank s organisational structure enables the Board and senior management to carry out their responsibilities and facilitates effective decision-making and good governance. This includes clearly laying out the key responsibilities and authorities of the Board itself, senior management and those responsible for the control functions. The Board has appointed three committees to assist in the performance of certain function of the Board, namely the Audit Committee which is a Board Committee and two management committees which primarily assist and support the Managing Director: the Executive Committee and the Legal and Compliance Committee. The three Committees are regulated by their own Terms of Reference as approved by the Board. Further details of such Committees will be found under Principle 7 in this same section. PRINCIPLE 2 THE CHAIRMAN AND THE MANAGING DIRECTOR The roles of Chairman of the Board and Managing Director of the Bank are separate and occupied by different individuals. A clear and distinct division of responsibilities exists between the two roles. The role of the Chairman of the Board is to lead and run the Board of Directors while that of the Managing Director is to run the Bank s business.

99 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) The Chairman s role is to lead for the Board of Directors and to see that it reaches its full potential and maximising its full contribution. He also is charged with setting the agenda of each of the Board of Directors meetings. Furthermore, he must make sure that all members of the Board engage in effective discussions with the aim of reaching the best decision possible in the best interest of the Bank. The Managing Director, who is also a member of the Board of Directors, heads the Executive Committee and the Legal and Compliance Committee. He serves as a link between the Board of Directors and such committees while he is charged with leading the Bank s business in line with the approved strategy set by the Board. PRINCIPLE 3 COMPOSITION OF THE BOARD The Board is composed of the Chairman, one Executive Director, who is the Managing Director, and four non-executive Directors. None of the non-executive Directors of the Bank are involved in the daily running of the business. The Board also considers Mr. Andrew Manduca, Mr. Klaus Pfister and Mr. Siegfried Kirchner to be independent Directors. The members who served on the Board during the period under review were the following: Mr. Harald Wanke - Chairman Mr. Paul Mifsud Managing Director Mr. Siegfried Kirchner Independent Non-Executive Director Mr. Klaus Pfister Independent Non-Executive Director Mr. Bernhard Plattner - Director Mr. Andrew Manduca Independent Non-Executive Director The shareholders of the Bank have the right to appoint or remove Directors on the Board, in accordance with the Companies Act (Chapter 386 of the Laws of Malta) and the Bank s memorandum and articles of association. PRINCIPLE 4 THE RESPONSIBILITIES OF THE BOARD The members of the Board should exercise their duty of care and duty of loyalty to the Bank under the applicable Maltese laws, regulatory requirements and supervisory standards. This includes actively engaging in major matters concerning the Bank and keeping up with material changes in the Bank s business and the external environment as well as acting in a timely manner to protect the long-term interests of the Bank. Accordingly, the Board should: Establish and monitor the Bank s business objectives, policies and strategy; Establish the Bank s corporate culture and values; Oversee implementation of the appropriate governance framework; Develop, along with senior management, the Bank s risk appetite, taking into account the competitive and regulatory landscape, long-term interests, exposure to risk and the ability to manage risk effectively; Monitor the Bank s adherence to the risk policy and risk limits; Approve and oversee the implementation of the Bank s capital adequacy assessment process, capital and liquidity plans, compliance policies and obligations, and the internal control framework; Approve the selection and oversee the performance of senior management; and

100 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) Oversee the design and operation of the Bank s remuneration system, and monitor and review the system to ensure that it is aligned with the Bank s desired risk culture and risk appetite. The Board should ensure that transactions with related parties are reviewed to assess risk and are subject to appropriate restrictions and that corporate or business resources of the Bank are not misappropriated or misapplied. The Board should review the governance framework periodically so that it remains appropriate in the light of material changes in the Bank s size, complexity, geographic reach, business strategy, market and governance best practices, and regulatory requirements. Furthermore, The Companies Act (Cap. 386) (the Act ) requires the Directors of the Bank to prepare financial statements for each financial year which give a true and fair view of the financial position of the Bank as at the end of the financial year and of the profit or loss of the Bank for that period. In preparing the financial statements, the Directors are responsible for: Ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the European Union; Selecting appropriate accounting policies and applying them consistently; Making accounting judgements and estimates that are reasonable in the circumstances; Ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Bank will continue in business as a going concern. The Directors are also responsible for designing, implementing and maintaining internal controls relevant to the preparation and the fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Companies Act (Cap. 386) and the Banking Act (Cap. 371). They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy, at any time, the financial position of the Bank and to enable them to ensure that the financial statements have been properly prepared in accordance with the provisions of the Companies Act (Cap. 386) and the Banking Act (Cap. 371). PRINCIPLE 5 BOARD MEETINGS The Board meets four times a year in Malta in order to be in a position to conduct its duties as effectively and efficiently as possible. The first Board meeting of the year is held in February, as is followed by the Annual General Meeting, whereby the Board usually recommends the appointment of the external auditors for the upcoming period. The other three Board Meetings are convened in the months of May, September and November; these are normal Board meetings whereby the Board meets to discuss all the necessary topics that require addressing during that particular period. The Chairman of the Board makes sure, with the assistance of the Company Secretary, that all material and relative information required for the upcoming meeting is distributed in a timely manner to ensure that all Board members have sufficient time to prepare themselves for the meeting.

101 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) During 2017, the Board of Directors met 4 times. The attendance was as follows: Attended Mr. Harald Wanke 4 out of 4 Mr. Paul Mifsud 4 out of 4 Mr. Siegfried Kirchner 4 out of 4 Mr. Klaus Pfister 4 out of 4 Mr. Bernhard Plattner 4 out of 4 Mr. Andrew Manduca 4 out of 4 PRINCIPLE 6 INFORMATION AND PROFESSIONAL DEVELOPMENT The Board of Directors appoints the Managing Director. The Managing Director, after careful deliberation and discussion with his fellow Directors appoints, after nomination, persons for senior management roles such as Head of Department or other key roles such as a seat on one of the management committees. All Directors on the Board of Directors have access to the advice and services of the Bank s support and internal control functions and the Company Secretary who may advise the Board on govenrnace matters and is responsible to ascertain that the Board adheres to its procedures. PRINCIPLE 7 EVALUATION OF THE BOARD S PERFORMANCE The Board, acting in its supervisory function through its non-executive Directors, is responsible for reviewing the Bank s management and implementation of the Bank s strategy and objectives. For the period under review (financial year 2017), no material changes to the composition of the Board were effected. However, the Board decided to appoint additional members to the Executive Committee to include the Manager of Customer Relations and On-Boarding, Manager Private Banking and Payments, the Compliance Officer and MLRO and the Senior Finance Officer. PRINCIPLE 8 COMMITTEES Given the relatively small size of the Bank and its Board, the Board has not appointed a risk committee, nomination committee or remuneration committee; the role of such committees remains vested with the Board itself (see Section 2 below). The Bank s risk management function is performed by the Board, with the assistance of the Finance Department; risk monitoring is conducted also by the Audit Committee and the Executive Committee. The Bank has the following Board and Management committees in place which in turn assist the Board of Directors and the Managing Director: THE EXECUTIVE COMMITTEE The Board of Directors delegates specific responsibilities to the Managing Director who leverages on the support of the Executive Committee for the implementation of policy and internal control measures. It meets regularly and focuses on substantive business decisions extending across issues of Company-wide significance in terms of parameters and resolutions of the Board of Directors.

102 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) The Executive Committee is a management committee charged with assisting the Managing Director in the management of the Bank and implementing policies and strategy across business lines and Departments. The Executive Committee is accountable to the Managing Director. The Executive Committee is responsible for: Managing the day-to-day business; Monitoring of the Bank s risks; Monitoring competitive activities; Implementation of approved strategy, budgets and policies; Monitoring of the Bank s business performance; Making recommendations to the Managing Director and the Board. The Committee is composed of the Managing Director, who chairs the Committee, business line Managers (and Heads of Departments, the Manager of the Securities and Custody Department, the Manager of the Private Banking & Payments Department, the Manager of Customer Relations & On-Boarding), the Head of Legal, together with the Senior Finance & Reporting Officer, the Compliance and MRLO and the Manager for Software and Architecture. THE AUDIT COMMITTEE The Board of Directors of Sparkasse Bank Malta plc has established the Audit Committee as a stand-alone committee of the Board, with the objective to advise the Board of Directors on the Bank s internal control, internal audit and risk management systems and the Bank s accounting policies and external audit. The Committee is appointed by the Board for the purpose of assisting it in assessing: Adequacy and effectiveness of the controls over financial reporting; The Bank s external auditor s qualifications, independence and performance; and The effectiveness, independence and overall performance of the Bank s internal audit function. The Committee is composed of three non-executive Directors, namely, Mr. Andrew Manduca, who chairs the committee, together with the other independent non-executive Directors of the Bank Mr. Klaus Pfister and Mr. Siegfried Kirchner. THE LEGAL AND COMPLIANCE COMMITTEE The Board of Directors of the Bank have established a Legal and Compliance Committee, which is a management committee overseeing the Bank s compliance with its obligations imposed by law, regulations and rules that are relevant to the Bank and its business. This committee is composed of the Bank s Managing Director, who chairs the Committee, while being assisted by the Head of Legal, together with two members from the Compliance Department, namely the Bank s Compliance and Money Laundering Reporting Officer, and the Senior Compliance Supervisor. PRINCIPLES 9 AND 10 RELATIONS WITH SHAREHOLDERS, THE MARKET AND INSTITUTIONAL SHAREHOLDERS The Board ascertains that the interests of the Bank s shareholders are protected at all times and makes sure that any decisions taken are executed in the best interest of both the Bank, its image and also the interest of the shareholders.

103 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) While the Bank is not a listed company and has no direct shareholders that are institutional investors (the Bank s direct shareholder is Sparkasse (Holdings) Malta Limited, which is the highest level for prudential supervision in Malta), it is aware of the impact its business may have on the market and other stakeholders, and is committed to act in the interests of its customers, as required by applicable law and regulation, and to contribute to upholding Malta s reputation as a robust financial services centre. PRINCIPLES 11 CONFLICTS OF INTEREST The Directors of the Bank are aware of the responsibility to act in the best interest of the Bank and aim to avoid anything that might result in a conflict of interest. The Bank has established a Conflicts of Interest policy whereby any instances where a Director has a conflict of interest, he does not participate in the discussion and is not allowed to vote in the decision being taken. Conflicts of interest of the Directors must also be declared and handled in accordance with the Bank s memorandum and articles of association. PRINCIPLES 12 - CORPORATE SOCIAL RESPONSIBILITY As part of the Bank s Corporate Social Responsibility the Bank supports the local community. In relation to this, the Bank supports non-profit, voluntary organisations such as Din L-Art Helwa and Fondazzjoni Patrimonju Malti in the aim to safeguard the historic, artistic and natural heritage of Malta. Such organisations depend on volunteer work and on donations to be used to restore and maintain Malta s immense historic and cultural patrimony. In 2017 the Bank successfully concluded the sponsorship of the restoration of one of the seven Mattia Preti paintings in Sarria Church, Floriana which it had commenced in Plans are afoot to sponsor more of these works in collaboration with Din L- Art Helwa, with the Bank confirming the sponsorship for the restoration of the painting of St. Michael the Archangel located in the same Church. Furthermore, the Bank also contributes towards other noble causes such as ALS Malta. The Bank constantly invests in staff education, development and training in order to help its staff members develop their career in banking through the frequent attendance of courses organised by training institutions while also conducting quarterly training evenings for all staff members covering topics which are of interest in the banking world at that time. During the past year four of these sessions were held. The Bank also firmly believes that the staff deserves all the support it needs including special activities organised solely for their enjoyment and team building. These included the summer boat party, end of quarter events and the sponsoring of the Sparkasse Bank football team in the annual Banca Cup tournament which the Bank competes in. Other charitable sponsorships and in line with one of The Bank s mottos mens sana in corpore sano the Bank also sponsors team members to compete in the Malta Marathon.

104 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) The painting of St. Nicholas after the restoration sponsored by Sparkasse Bank Malta plc was complete.

105 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) SECTION 2 NON-COMPLIANCE WITH THE CODE PRINCIPLE 8 CODE PROVISION 8A The Bank did not establish a Remuneration Committee as specified in Code Provision 8.A.1. The remuneration of Directors is not performance-related and the functions of such a committee is executed by the Board of Directors The Board has adopted and oversees the implementation of the Bank s remuneration policy. Directors are remunerated in accordance with such policy and the Bank s memorandum and articles of association. PRINCIPLE 8 CODE PROVISION 8B A Nomination Committee has not been set up; its functions remain vested in the Board of Directors. While Directors are appointed and removed by the Bank s shareholders in terms of the Bank s Memorandum and Articles of Association and the Companies Act (Chapter 386 of the Laws of Malta), the assessment of the initial and ongoing suitability of members of the Board is the responsibility of the Board. SECTION 3 INTERNAL CONTROL The Board of Directors is ultimately responsible for the internal control within the Bank, with the authority to manage the Bank day to day operations in the Managing Director. Corporate responsibility, accountability, strategy and policy development are always subjects high on the agenda of the Board of Directors. A system of controls is in place in order to appropriately manage all risks that the Bank faces in its daily operations, especially issues which might cause material operational risk. The Bank and its senior management constantly promote the four eye principle which aims to ensure that any error will be spotted by a fresh pair of eyes. The Legal and Compliance Department keeps the Board of Directors abreast with the implication of compliance with laws and regulations that might have an impact on the Bank s operations. This is obviously also applicable to, but not limited to, the development of new products which the Bank might offer from time to time. The Board of Directors also strongly believes in good planning especially when it comes to financial budgeting and forecasting. Such budgets and forecasts ascertain that the Bank is on course to meet its objectives, while ensuring that it is constantly in control with regards to the performance of the Bank, and that preventive or corrective measures can be taken as soon as possible whenever any issues arise. This is done through the monthly issuance of Management Accounts and also through the quarterly reviews that the Executive Committee conducts which is then presented to the Board of Directors for review. Management is responsible, with oversight from the Directors, to establish a control environment and maintain policies and procedures to assist in achieving the objective of ensuring, as far as possible, the orderly and efficient conduct of the Bank s business. This responsibility includes establishing and maintaining controls pertaining to the Bank's objective of preparing financial statements as required by the Act and managing risks that may give rise to material misstatements in those financial statements. In determining which controls to implement in order to prevent and detect fraud, management considers the risks that the financial statements may be materially misstated as a result of fraud. The Board also frequently participates in asset allocation discussions and decisions to ascertain that the strategy of the Bank is safeguarded. Any credit proposals, albeit very rarely given that this is not the a core business which the Bank entertains,

106 Statement of Compliance with the Principles of Good Corporate Governance STATEMENT OF COMPLIANCE WITH THE PRINCIPLES OF GOOD CORPORATE GOVERNANCE (continued) which exceed a certain threshold are also discussed by the Board of Directors in order to ascertain that the Bank is not overexposed to any particular unwanted risk.

107 Sparkasse Bank Malta plc, 101, Townsquare, Qui Si Sana Seafront, Sliema, SLM 3112 Malta