CONSOLIDATED ANNUAL REPORT 2017

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1 CONSOLIDATED ANNUAL REPORT

2 List of contents CONSOLIDATED MANAGEMENT REPORT 3 AUDIT REPORT 6 CONSOLIDATED BALANCE SHEET 14 CONSOLIDATED OFF BALANCE SHEET 16 CONSOLIDATED PROFIT AND LOSS ACCOUNT 18 NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS 21

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4 CONSOLIDATED MANAGEMENT REPORT MANAGEMENT REPORT 2017 marked another year of continued profitability since Havilland Group s inception in It also marked another year of consolidation of operations and a renewed focus on positioning the Group for the future. In this respect a global review of the strategy was conducted and a new risk appetite framework was developed. This has involved repositioning the Group towards our core markets and lowering the overall risk profile. Following the closing of the legal merger with Banque Havilland Institutional Services S.A. (previously Banco Popolare (Luxembourg) S.A.) we reached a number of important milestones during the year and completed the integration on 1 st October As a result of this transformational step, which has significantly increased the size and scale of our business in Luxembourg, the Group is able to offer a wider range of institutional fund services to our clients. As a combined bank operating on a single consolidated group wide IT system, we are now also positioned even better to provide clients with an extensive product offering. In the summer, the Bank also successfully migrated Banque Havilland (Suisse) S.A. into the operational platform run by Banque Havilland Luxembourg. Our priorities for the coming years are to realise the full potential of these new integrated businesses and to seize new opportunities for the benefit of our clients, employees and shareholder. Secondly, implementing a new corporate governance framework on a group wide basis, including an increased number of independent Directors, a reconfiguration of several management committees and the continuous update of policies and key monitoring processes. In light of the Group s redefined strategy, certain loans were not renewed at maturity and the loan book stood at EUR 523m at the end of 2017; correspondingly cash in hand and at central banks stood at its highest since the Group s inception at over EUR 330m. Assets under Custody originated by predominantly low risk institutional clients remained largely stable while client deposits remained broadly unchanged. The investment portfolio of the Group amounted to EUR 755m (2%) and loans to banks rose significantly to EUR 190m (+39%). Net interest margin increased by 13% to EUR 37.8m and net commissions by 6.7% to EUR 20.4m. The Group continues to maintain very strong ratios, with statutory capital adequacy finishing the year above 23%, compared to 3

5 a legal minimum of 15.5% and a Board of Directors mandated minimum of 17% and LCR (Liquidity coverage ratio) above 200%. Compared to historical standards, the financial environment in 2017 had been characterised by continued low levels of global interest rates. Although the ECB rate has been maintained at 0.40%, The Fed raised rates three times and in the United Kingdom, the Bank of England, made their first rate rise since 2007 to take the rate to 0.5%. Despite this tightening bias, the conservative positioning of the Group s portfolio and increased client activity in foreign exchange markets allowed the Group to record a significant increase in the financial result from EUR 12.0m in 2016 to EUR 13.9m in The consolidation of the Bank is also expressed in terms of staff. The Group counted, on average, 219 employees during 2017, with a significant increase in its Luxembourg hub. This illustrates the continued investments made, especially in the control functions, in competences to support the business development, to follow the pace of regulatory evolution, to support the subsidiaries. Staff costs rose from EUR 27.5m in 2016 to EUR 36.3m in 2017 and are a result of the full year effect of acquisitions made in the loop of 2016 and the hiring of specialised competences. The cost of risk on loans and advances has been reduced from a net cost of EUR 4.6m in 2016 to EUR 62k in 2017, which illustrates our prudent approach towards lending activities. The lending policy continues to be conservative predominantly against primary homes in select locations and eligible security portfolios. At times, standalone asset backed loans at modest loan to values are being granted to support our clients. Since the creation of the Bank in 2009, loan losses from new origination have been negligible and this is a testament to the expertise in cross border lending the Bank has established and continues to build upon. The evolving regulatory landscape will also continue to have an impact on the Bank, with the introduction of EMIR, MiFID 2 and GDPR amongst a plethora of other regulatory initiatives. The Bank continues to invest heavily to meet these challenges. In the normal cycle of the regulatory process we, like all credit institutions, have been subject to regulatory inspections and investigations. While the final outcomes of these are still pending, any potential financial impact has been provisioned in the attached consolidated annual accounts. As part of the new strategy established by the Group, its international network was reviewed and it was decided to exit from Russia (please see note 9.6) and the Bank in the Bahamas has been placed under strategic review. As a result of this decision, the depreciation of the goodwill on Bahamian participation has been accelerated. Against this background of the ongoing integration processes throughout 2017 and the significant resources invested in professional fees to deal with the continued advancement in the regulatory environment, the Management of the Group is pleased to announce a profit of the year at EUR 5.2m. 4

6 On behalf of the Group s Executive Committee and the shareholder, we would like to express our thanks to the clients and employees of Banque Havilland S.A.. Capital and Risk Management The Group s business is exposed to several risks, such as credit, market, liquidity, operational and other business risks. The Group continues to maintain a robust approach to risk management with an independent department reporting directly to the Executive Management and the Board of Directors. The Risk Management Department ensures that each key risk of the business is identified and properly managed by applying a holistic view. Key risk areas are managed through a framework of policies, procedures and limits with regular reviews of such framework. During 2017, the Group has enhanced its control framework both in terms of staff and technology to face the increase in business. The Group has no direct or indirect exposure towards subprime credit or structured credit obligations (such as CDOs, SIVs and CLOs) in its loan or bond portfolios. Additional information on risk management is available on request in accordance with part 8 of the EU Regulation No 575/2013 (CRR: Capital Requirements Regulation ). For further information on the Group s exposure to risks, please refer to notes 7.3 and 7.4 of these annual accounts. Luxembourg, 6 th July 2018 This period saw the strong development of the Group s CFD (Contracts For Differences) activity. The business consists of the issuing of CFD contracts to clients served by the Group. The CFDs issued are fully hedged by the acquisition of the underlying asset or by backing the operation with another CFD on the market. Activities of the Group in the field of research and development The Group did not undertake any activities in terms of Research and Development. Acquisition of own shares No entity within the Group acquired own shares in 2017 and does not hold own shares. Representation offices The Group operates representation offices in Dubai and in Moscow (BH International LLC). Postclosing events In early 2018, the Group performed a strategic review of its international network and decided that operations in the Bahamas were noncore to its renewed strategy. The Management has been mandated to evaluate exit options and the participation has been valued accordingly. The Group entered into a sale process regarding its participation in BH International LLC in Moscow, which successfully closed on 5 th April Peter Lang CEO Harley Rowland Member of the Board of Directors 5

7 Audit report To the Board of directors of Banque Havilland S.A. REPORT ON THE AUDIT OF THE ANNUAL ACCOUNTS Our opinion In our opinion, the accompanying consolidated annual accounts give a true and fair view of the consolidated financial position of Banque Havilland S.A. (the Bank ) and its subsidiaries (the Group ) as at 31 st December 2017, and of the consolidated results of its operations for the year then ended in accordance with Luxembourg legal and regulatory requirements relating to the preparation and presentation of the consolidated annual accounts. What we have audited The Group s consolidated annual accounts comprise: the consolidated balance sheet as at 31 st December 2017; the consolidated profit and loss account for the year then ended; and the notes to the consolidated annual accounts, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with the EU Regulation No 537/2014, the Law of 23 July 2016 on the audit profession (Law of 23 July 2016) and with International Standards on Auditing (ISAs) as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier (CSSF). Our responsibilities under those Regulation, Law and standards are further described in the Responsibilities of the Réviseur d Entreprises Agréé for the audit of the consolidated annual accounts section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) as adopted for Luxembourg by the CSSF together with the ethical requirements that are relevant to our audit of the consolidated annual accounts. We have fulfilled our other ethical responsibilities under those ethical requirements. 6

8 To the best of our knowledge and belief, we declare that we have not provided nonaudit services that are prohibited under Article 5(1) of Regulation (EU) No 537/2014. The nonaudit services that we have provided to the Bank and its controlled undertakings, for the year then ended, are disclosed in Note 9.5 to the consolidated annual accounts. Emphasis of Matter We draw attention to Note 5.8 to these consolidated annual accounts, which describes the fact that the Bank has been subject to ongoing regulatory inspections and investigations. Our opinion is not modified in respect of this matter. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated annual accounts of the current period, and include the most significant assessed risks of material misstatement (whether or not due to fraud). These matters were addressed in the context of our audit of the consolidated annual accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 7

9 KEY AUDIT MATTER Recoverability of loans with less liquid collaterals As at 31 st December 2017, the Group holds a large portfolio of loans and advances to customers, representing a material balance in the consolidated annual accounts (523 Mio EUR). Some of these loans and advances are backed by less liquid collaterals for which the impairment assessment requires the exercise of judgement and use of subjective assumptions. Due to the significance of the loans and advances to customers and the relevant estimation uncertainty over the value of these specific loans, this is considered to be a key audit matter. Refer to page 14 and the disclosures in Note 7.3 on Pages 48 and 49 of the consolidated annual accounts. HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER We obtained an understanding of the Group s relevant internal control environment regarding loans and advances to customers. We also considered the impact of the findings identified by the regulatory inspections in relation with the banking operations of the Bank. For a sample of loans held by the Group, we performed a credit review by reviewing the relevant loan agreements, pledge agreements, credit application forms, credit risk assessments and additional documentations within the client files. When relevant, we obtained the valuation reports of the collaterals from external valuation experts and reconciled the valuation indicated in those reports with the amounts taken into consideration in the assessment performed by the Management. Based on the list of nonperforming loans held by the Bank, we identified those which are backed by less liquid collateral and we reviewed the assessment performed by the Bank on these loans. 8

10 Management estimates on provisions As at 31 st December 2017, Other provisions amounts to 29,9 Mio EUR. Provisions are intended to cover losses or debts, the nature of which are clearly defined and which, at the date of the balance sheet, are either likely to be incurred or certain to be incurred but remain uncertain regarding their amount or the date on which they will arise. In 2017, significant provisions were booked. Further, certain deficiencies were identified during ongoing regulatory inspections and investigations. In order to face the potential financial consequences, the Bank has decided to book a provision. The recognition and valuation of provisions is judgemental by nature, and there is a risk that the estimate may be incorrect and that the provision may be materially misstated. We focused on this area because of the inherent risk linked to judgement exercised by Management and the Board of Directors in estimating some Other provisions items. Refer to Page 15 and the disclosures in Note 5.8 on Page 39 of the consolidated annual accounts. To support and review estimation of provisions performed by the Management and the Board of Directors of the Bank, we have obtained an understanding of the provision estimation process and the controls in place. We held formal meetings with the Management to understand their assumptions and perspective in deriving the figure for provisions. We obtained and reviewed Management s formal assessment and challenged the assumptions used in the provisions summary memorandum. We also reviewed and tested additional supporting evidence, which contributed to the assumptions used in deriving the figure for provisions. We requested confirmation from the lawyers of the Bank and its subsidiaries for existing litigations. We also inspected the Board of Directors minutes to identify other potential litigation and if any, we checked that appropriate provisions have been recorded in the consolidated annual accounts. We also refer to our Emphasis of Matter paragraph above. Accounting estimates on goodwill Goodwill represents the difference between the cost of the parent company s investment in a consolidated subsidiary and its share of the net assets of this subsidiary at the date of acquisition. We focused on this area because the amortisation of the positive goodwill (recognised in assets) and the reversal of negative goodwill recognised in Other Provisions have a significant impact on the consolidated profit and loss account. 9

11 Refer to Pages 14 and 15 and the disclosures in Note 2.3 on Page 23, in Note 5.8 on Page 39 and in Note 8.2 on Page 53 of the consolidated annual accounts. We obtained an understanding of the Group s relevant accounting policies and valuation rules for goodwill and of the controls in place. We obtained and reviewed the amortisation schedules of the positive goodwill. We checked if durable depreciation in value was identified and if any, resulted in an accelerated amortisation. We checked that the amount of negative goodwill which has been reversed is in line with the loss of the corresponding subsidiary, when applicable. We ensured that negative goodwill related to the acquisition of a subsidiary merged with the Bank in 2017 (Banque Havilland Institutional Services S.A.) and disclosed in Other Provisions has been subject to an appropriate assessment and accounting treatment. Other information The Board of Directors is responsible for the other information. The other information comprises the information stated in the consolidated Management report but does not include the consolidated annual accounts and our audit report thereon. Our opinion on the consolidated annual accounts does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated annual accounts, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated annual accounts or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directors for the consolidated annual accounts The Board of Directors is responsible for the preparation and fair presentation of the consolidated annual accounts in accordance with Luxembourg legal and regulatory requirements relating to the preparation and presentation of the consolidated annual accounts, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated annual accounts that are free from material misstatement, whether due to fraud or error. In preparing the consolidated annual accounts, the Board of Directors is responsible for assessing the Group 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 Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. 10

12 Responsibilities of the Réviseur d entreprises agréé for the audit of the consolidated annual accounts The objectives of our audit are to obtain reasonable assurance about whether the consolidated annual accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an audit 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 the EU Regulation No 537/2014, the Law of 23 July 2016 and with ISAs as adopted for Luxembourg by the CSSF 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 consolidated annual accounts. As part of an audit in accordance with the EU Regulation No 537/2014, the Law of 23 July 2016 and with ISAs as adopted for Luxembourg by the CSSF, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: identify and assess the risks of material misstatement of the consolidated annual accounts, 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 Group s internal control; evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors; conclude on the appropriateness of the Board of Directors 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 Group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our audit report to the related disclosures in the consolidated annual accounts 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 audit report. However, future events or conditions may cause the Group to cease to continue as a going concern; evaluate the overall presentation, structure and content of the consolidated annual accounts, including the disclosures, and whether the consolidated annual accounts 11

13 represent the underlying transactions and events in a manner that achieves fair presentation; and obtain sufficient appropriate audit evidence regarding the financial information of the entities and business activities within the Group to express an opinion on the consolidated annual accounts. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, 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. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS The consolidated Management report is consistent with the consolidated annual accounts and has been prepared in accordance with applicable legal requirements. We have been appointed as Réviseur d Entreprises Agréé of the Group by the Board of Directors on 24 th October 2017 and the duration of our uninterrupted engagement, including previous renewals and reappointments, is 9 years. PricewaterhouseCoopers, Société coopérative Luxembourg, 6 th July 2018 Represented by We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated annual accounts of the current period and are therefore the key audit matters. We describe these matters in our audit report unless law or regulation precludes public disclosure about the matter. Cyril Lamorlette PricewaterhouseCoopers Société coopérative 2, Rue Gerhard Mercator B.P L1014 Luxembourg Telephone Facsimile Cabinet de révision agréé. Expertcomptable (autorisation gouvernementale n ) R.C.S. Luxembourg B TVA LU

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15 Consolidated Balance Sheet as at 31 ST December 2017 (Expressed in Euro) ASSETS NOTES 31/12/ /12/2016 Cash in hand, balances with central banks and post office banks 4.1, Loans and advances to credit institutions repayable on demand other loans and advances 4.2, 7.1, Loans and advances to customers 2.8, 4.3, 7.1, Bonds and other fixedincome transferable securities issued by public bodies issued by other borrowers 2.6, 4.4, 7.1, Shares and other variableyield transferable securities 2.7, 4.5, 7.1, Intangible assets 2.4, Goodwill of first consolidation 2.3, Tangible assets 2.5, Other assets Prepayments and accrued income TOTAL ASSETS The accompanying notes form an integral part of these consolidated annual accounts. 14

16 Consolidated Balance Sheet as at 31 ST December 2017 (Expressed in Euro) LIABILITIES NOTES 31/12/ /12/2016 Amounts owed to credit institutions repayable on demand with agreed maturity dates or periods of notice 5.1, Amounts owed to customers other debts repayable on demand with agreed maturity dates or periods of notice 5.2, Other liabilities Accruals and deferred income Provisions provisions for taxation other provisions 2.3, 5.8, Fund for general banking risks Subscribed capital 5.4, Share premium account Reserves and profit or loss brought forward 5.5, Profit for the financial year attributable to the Group Minority interests TOTAL LIABILITIES The accompanying notes form an integral part of these consolidated annual accounts. 15

17 Consolidated off Balance Sheet for the year ended 31 st DECEMBER 2017 (EXPRESSED IN EURO) OFF BALANCE SHEET NOTES 31/12/ /12/2016 Contingent liabilities of which: Guarantees and assets pledged as collateral security Acceptances and endorsements 6.1, Fiduciary transactions Commitments The accompanying notes form an integral part of these consolidated annual accounts. 16

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19 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST DECEMBER 2017 (EXPRESSED IN EURO) NOTES Interest receivable and similar income of which: arising from fixedincome transferable securities Interest payable and similar charges ( ) ( ) Net interest income Income from transferable securities Income from shares and other variableyield securities Commission receivable Commission payable ( ) ( ) Net commission income Net profit on financial operations Other operating income Total operating income General administrative expenses Staff costs of which: wages and salaries social security costs of which: pension costs Other administrative expenses 9.3, , 9.5 ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Value adjustments in respect of tangible, intangible and goodwill of consolidation ( ) ( ) Other operating charges 5.8, 8.4 ( ) ( ) Value adjustments in respect of loans and advances and provisions for contingent liabilities and commitments 8.5 ( ) ( ) The accompanying notes form an integral part of these consolidated annual accounts. 18

20 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST DECEMBER 2017 (EXPRESSED IN EURO) NOTES Value readjustments in respect of loans and advances and provisions for contingent liabilities and commitments Value readjustment in respect of securities held as financial fixed assets, participating interests and shares in affiliated undertakings Income from the reversal of amounts included in the fund for general banking risks Profit before tax Tax on profit or loss on ordinary activities (21 287) Profit or loss on ordinary activities after tax Extraordinary income Extraordinary charges (40 542) ( ) Other taxes not shown in the preceding items ( ) ( ) PROFIT OR LOSS FOR THE FINANCIAL YEAR Thereof minority interests Profit for the financial year attributable to the Group The accompanying notes form an integral part of these annual accounts. 19

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22 Notes to the consolidated annual accounts as at 31 st DECEMBER GENERAL Banque Havilland S.A. (the Bank ) was incorporated in the GrandDuchy of Luxembourg on 10 th July 2009 as a limited liability company ( Société Anonyme ). The Ministry of Finance granted the company a banking licence on 25 th June The Bank was created through a non cash contribution of assets and liabilities from a former bank. This non cash contribution was calculated as the lower of net book value or fair value as at the date of the contribution. As a consequence, the Bank is now carrying all former assets and liabilities and reflects the historical cost and accumulated depreciation. The Bank is registered at the Luxembourg Registre du Commerce et des Sociétés under the Number B The head office is located 35a, Avenue J.F. Kennedy, L1855 Luxembourg. The share capital of the Bank prepared is expressed in Euro (EUR) and the accounting records are prepared and maintained in this currency. The Bank s accounting year is defined as the calendar year. The Bank is permitted to carry out all banking activities. Its principal activity is private banking. As of 31 st December 2017, the Bank has one branch established in the UK (5 Savile Row, London, United Kingdom) with private banking activity. The Bank and the subsidiaries described in note 3 are referred to as the Group. The Group is also consolidated by Havilland Group S.A. registered in Luxembourg at 35, Avenue J.F. Kennedy, L1855 Luxembourg. 21

23 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND VALUATION RULES 2.1. BASIS OF PRESENTATION The Group prepares its consolidated annual accounts using the historical cost principle, in accordance with the laws and regulations in force in the Grand Duchy of Luxembourg and on the basis of accounting principles generally accepted by the banking sector in the Grand Duchy of Luxembourg. The accounting policies and the valuation principles are determined and applied by the Board of Directors, apart from those which are defined by law and by the Commission de Surveillance du Secteur Financier. The preparation of consolidated annual accounts requires the use of a certain critical accounting estimates. It also requires the Board of Directors to exercise its judgment in the process of applying accounting policies. Changes in assumptions may have a significant impact on the consolidated annual accounts in the period in which the assumptions changed. The Board of Directors believes that the underlying assumptions are appropriate and that the consolidated annual accounts therefore present the financial position and results fairly. The Board of Directors confirms the application of the going concern principle as appropriate, considering the items reported in the notes 5.8 and 9.6. The Board of Directors makes estimates and assumptions that affect the reported amounts of assets and liabilities in the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 22

24 2.2. CONSOLIDATION METHOD The Group has adopted the full consolidation method for its subsidiaries (direct or indirect holding of more than 50%) GOODWILL Goodwill represents the difference between the cost of the parent company s investment in a consolidated subsidiary and its share of the net assets of this subsidiary as at the date of acquisition. Positive goodwill is disclosed on the asset side of the balance sheet and amortised over 5 years on a linear basis. In case of durable reduction in value, positive goodwill is subject to an accelerated amortisation. Negative goodwill is either disclosed in the consolidated reserves or disclosed under Provisions when it corresponds to future expected losses. Subsequently, a part of this provision is reversed into the profit and loss accounts for an amount corresponding to the financial year loss of the subsidiary. The provisions are not maintained if the reason for which they were made, no longer exists INTANGIBLE ASSETS Intangible assets are included at purchase price less accumulated depreciation. Intangible assets consist of: Software amortised over 4 years on a linear basis; Goodwill acquired for valuable consideration and amortised over 4 years on a linear basis; 23

25 Formation expenses and costs in relation to capital increases are directly expensed when incurred. In case of durable reduction in value, intangible assets are subject to value adjustments regardless of whether their utilisation is limited. The valuation of the inferior value is not maintained if the reason for which the value adjustments were made no longer exist TANGIBLE ASSETS Tangible assets are included at purchase price less accumulated depreciation. Tangible assets are depreciated over their expected useful life. The rates and methods of depreciation are as follows: RATES METHOD Office equipment, fixtures and fittings 25% linear Company cars 25% linear Building 1.5% 4% linear Fixtures and fittings costing less than EUR 867 or whose expected useful life does not exceed one year are charged directly to profit and loss account for the year. In case of durable reduction in value, tangible assets are subject to value adjustments regardless of whether their utilisation is limited. The valuation of the inferior value is not maintained if the reason for which the value adjustment were made no longer exist. 24

26 2.6. DEBT SECURITIES AND OTHER FIXEDINCOME SECURITIES The Group has divided its portfolio of fixedincome transferable securities into three categories whose principal characteristics are the following: An investment portfolio of financial fixed assets which are intended to be used on a continuing basis in the Bank s activities; A trading portfolio of securities purchased with the intention of resale in the short term; A structural portfolio of securities which do not fall into either of the two other categories. Fixed income securities are recorded at their acquisition price and valued as follows at the balance sheet date: Investment portfolio of financial fixed assets Fixedincome transferable securities included in the investment portfolio of financial fixed assets are valued at acquisition price. In case of longterm depreciations, the securities concerned are subject to value adjustments in order to give them the lower value which is to be assigned to them on the balance sheet date. When the purchase price of fixedincome transferable securities included in the Bank s investment portfolio exceed their redemption price or is below their redemption price, the difference is recorded in profit or loss in instalments over the period remaining to maturity. As at 31 st December 2017 and 31 st December 2016, the Group does not hold fixedincome securities of this category. 25

27 Trading portfolio Fixedincome transferable securities included in the trading portfolio are valued at the lower of cost or market value. As at 31 st December 2017 and 31 st December 2016, the Group does not hold fixedincome securities of this category. Structural portfolio Fixedincome transferable securities included in the structural portfolio are valued at the lower of cost or market value. Value adjustments are made for securities in the structural portfolio for which the valuation is lower than the purchase price. The valuation is the market value on the balance sheet date, the estimated realisable value or the quotation, which best represents the inherent value of the securities held. As at 31 st December 2017, the Group hold fixedincome securities of this category for EUR (2016: EUR ) SHARES AND OTHER VARIABLEYIELD SECURITIES Shares and other variableyield securities are classified in the structural portfolio of the Bank and recorded at purchase price. At the balance sheet date, they are valued at the lower of purchase price or market value. A value adjustment is recorded when the market value is lower than the purchase price. 26

28 2.8. LOANS AND ADVANCES Loans and advances are disclosed at their nominal value. Accrued interests are recorded under the heading Prepayments and accrued income on the asset side of the balance sheet VALUE ADJUSTMENTS IN RESPECT OF CURRENT ASSETS The policy of the Group is to establish specific provisions to cover the risk of loss and of the nonrecovery of debtors. Value adjustments are deducted from the relevant current assets PROVISION FOR ASSETS AT RISK A tax free lumpsum provision is accounted for based on the Group s assets at risk. These assets are determined in accordance with the regulatory provisions governing the computation of the capital adequacy ratio. The lumpsum provision is split between the relevant assets at risk in accordance with the provisions of the Luxembourg Monetary Institute circular letter dated 16 th December The portion related to the assets at risk is deducted from these assets FUND FOR GENERAL BANKING RISKS ( FRBG ) The Group has established a fund for general banking risks to cover the particular risks associated with banking. Transfers to this fund are booked from income after tax, but before determination of net income. This fund is not subject to any quantitative limit. The difference between 2016 and 2017 is due to foreign exchange translation impact. 27

29 2.12. PURCHASE PRICE OF FUNGIBLE ASSETS The Group values fungible assets by the weighted average price method VALUATION OF FOREIGN CURRENCY BALANCES AND TRANSACTIONS Foreign currency The share capital of the Group is expressed in Euro ( EUR ) and the accounting records are maintained in that currency. Intangible and tangible assets are converted at the historic rate. All other assets and liabilities denominated in a currency other than EUR are converted into EUR at the rate of exchange ruling at the balance sheet date. Income and charges in foreign currencies are converted into EUR at the rate of exchange ruling on the date of the transaction. Foreign currency differences arising from these valuation principles are taken to the profit and loss account. The annual accounts of subsidiaries whose operating currency is not the EUR are converted using the closing rate method. Under this method, all assets, liabilities and result brought forward, both monetary and nonmonetary, are converted using the spot exchange rate at the balance sheet date. Minority interests included in reserves are converted at the spot exchange rate at the balance sheet date. Income and expense items are converted at the average rate for the year Valuation of transactions not subject to currency risk Swap transactions not linked to balance sheet items The spot result realised in cash terms is offset by the result arising from the revaluation of the forward leg. The premium/discount is spread prorata temporis. 28

30 Overthecounter closed forward transactions Future profits that are certain to arise are deducted from future losses that are certain to arise in the same currency. A provision is created for any excess losses; any excess profits are deferred Valuation of transactions subject to currency risk Overthecounter speculative forward transactions Provision is made for unrealised losses on forward transactions, which do not represent the hedging of a spot position. Unrealised gains are not accounted for. The Group only enters into financial instruments for hedging purposes. 29

31 3. SCOPE OF CONSOLIDATION NAME OF THE COMPANY REGISTERED OFFICE PROPORTION OF THE CAPITAL HELD BY THE PARENT COMPANY AS OF 31/12/2017 Parent company Banque Havilland S.A. Luxembourg Full consolidation Banque Havilland (Monaco) S.A.M. Monaco 100.0% Banque Havilland (Liechtenstein) AG 1) Liechtenstein 52.5% Banque Havilland (Bahamas) Ltd. 1) Bahamas 100.0% BH International Limited Liability Company 1) Russia 100.0% Banque Havilland (Suisse) S.A. Switzerland 100.0% AS OF 31/12/2016 Parent company Banque Havilland S.A. Luxembourg Full consolidation Banque Havilland (Monaco) S.A.M. Monaco 100.0% Banque Havilland (Liechtenstein) AG Liechtenstein 52.5% Banque Havilland (Bahamas) Ltd. Bahamas 100.0% BH International Limited Liability Company Russia 100.0% Banque Havilland (Suisse) S.A. Switzerland 100.0% Banque Havilland Institutional Services S.A. 2) Luxembourg 100.0% 1) Please refer to note 9.6 on subsequent events. 2) As at 1 st October 2017, Banque Havilland Institutional Services S.A. has been merged by absorption with the Bank and became a dedicated business line of the Bank. All services to institutional investors have been maintained. All assets and liabilities have been merged into the Bank. 30

32 4. DETAILED DISCLOSURES RELATING TO ASSET HEADINGS 4.1. CASH IN HAND, BALANCES WITH CENTRAL BANKS AND POST OFFICE BANKS In accordance with the requirements of the European Central Bank, the Central Bank of Luxembourg implemented effective 1 st January 1999, a system of mandatory minimum reserves which applies to all Luxembourg credit institutions. The reserve balance as at 31 st December 2017 held by the Group with the Central Bank of Luxembourg amounted to EUR (2016: EUR ). The Group has no overnight deposit at the Central Bank of Luxembourg as at 31 st December 2017 (2016: EUR 0). The reserve balance as at 31 st December 2017 held by the Group with the Banque de France amounted to EUR (2016: EUR ). The reserve balance as at 31 st December 2017 held by the Group with the Swiss National Bank amounted to EUR (2016: EUR ). The reserve balance as at 31 st December 2017 held by the Group with the Central Bank of the Bahamas amounted to EUR (2016: EUR ) LOANS AND ADVANCES TO CREDIT INSTITUTIONS As at 31 st December 2017, the Group has no loan granted to affiliated credit institutions (2016: EUR 0) LOANS AND ADVANCES TO CUSTOMERS As at 31 st December 2017, loans and advances to related parties amount to EUR (2016: EUR ). 31

33 4.4. DEBT SECURITIES AND OTHER FIXEDINCOME TRANSFERABLE SECURITIES This heading includes debt securities, whether quoted on a recognised market or not, issued by public bodies, credit institutions or other issuers and which are not included under another balance sheet heading. Quoted and nonquoted securities are analysed as follows: 2017 (EUR) 2016 (EUR) Securities quoted on a recognised market Securities not quoted on a recognised market TOTAL Debt securities and other fixedincome securities held are included in the structural portfolio. The Group uses the European Central Bank Monetary Policy Operations to finance a part of its eligible securities portfolio. As at 31 st December 2017, the Bank is not committed in sale and repurchase agreements with a firm repurchase obligation (2016: EUR ). 32

34 4.5. SHARES AND OTHER VARIABLEYIELD TRANSFERABLE SECURITIES This heading includes shares, holdings in investment funds and other variableyield securities whether quoted on a recognised market or not which are not included in fixed asset investments. Quoted and nonquoted shares and other variableyield securities are analysed as follows: 2017 (EUR) 2016 (EUR) Securities quoted on a recognised market Securities not quoted on a recognised market TOTAL All shares and other variableyield securities held are included in the structural portfolio. As at 31 st December 2017, the Group holds shares and other variableyield transferable securities amounting to EUR for hedging purposes in the frame of contracts for differences ( CFD ) with clients (2016: EUR ). 33

35 4.6. MOVEMENTS IN FIXED ASSETS FIXED ASSETS (EUR) GROSS VALUE AT THE BEGINNING OF THE FINANCIAL YEAR FOREIGN EXCHANGE IMPACT ADDITIONS DISPOSALS/ ADJUS TMENTS GROSS VALUE AT THE END OF THE FINANCIAL YEAR CUMULATIVE VALUE ADJUSTMENTS AT THE BEGINNING OF THE FINANCIAL YEAR (*) CUMULATIVE VALUE ADJUSTMENT (*) NET BOOK VALUE AS AT 31/12/2017 NET BOOK VALUE AS AT 31/12/ Positive Goodwill of consolidation ( ) ( ) Intangible assets of which: ( ) ( ) ( ) ( ) Goodwill acquired for valuable consideration Software Other intangible assets ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tangible assets of which: ( ) ( ) ( ) ( ) a) Office equipment fixtures and fittings b) Company cars c) Building (*) Including lump sum provision. ( ) (22 032) ( ) ( ) (17 594) ( ) ( ) ( ) ( ) ( ) ( ) ( )

36 4.7. OTHER ASSETS This heading consists of the following: 2017 (EUR) (*) 2016 (EUR) (*) Tax advances Guarantee called Management and performance fees receivable Margin calls on contracts for differences with clients Invoices issued Receivable on sales of securities Cheques in transitory Building available for sale Other receivables TOTAL (*) Including lumpsum provision ASSETS DENOMINATED IN FOREIGN CURRENCIES Assets denominated in currencies other than EUR have a total value of EUR (2016: EUR ) as at 31 st December The majority of the gap between non EUR denominated assets and non EUR denominated liabilities is covered by exchange rates derivatives instruments. 35

37 5. DETAILED DISCLOSURES RELATING TO LIABILITY HEADINGS 5.1. AMOUNTS OWED TO CREDIT INSTITUTIONS As at 31 st December 2017, the Group has no amount owed to affiliated credit institutions (2016: EUR 0) AMOUNTS OWED TO CUSTOMERS As at 31 st December 2017, amounts owed to related parties amount to EUR (2016: EUR ) OTHER LIABILITIES 2017 (EUR) 2016 (EUR) Invoice payable Guarantee payable Payable on sales of securities Business introducers commissions payables Cheques in transitory Other payable Transitory margin accounts on contracts for differences Payable on sales of structured products Preferential creditors TOTAL

38 5.4. SUBSCRIBED CAPITAL As at 31 st December 2017, the subscribed and fully paid share capital of the Group is EUR made up of shares with a nominal value of EUR each LEGAL RESERVE In accordance with Article 72 of the Luxembourg company law, an amount of 5% of net profits should be allocated to a non distributable legal reserve, until this reserve reaches 10% of the subscribed capital. As a result, the annual general meeting of Banque Havilland S.A. held on 13 th June 2017 has allocated an amount of EUR to the legal reserve, in respect of the 2016 financial year. 37

39 5.6. CHANGES IN SHAREHOLDERS EQUITY The movements of shareholders equity of Banque Havilland S.A. may be summarised as follows: SUBSCRIBED CAPITAL (EUR) SHARE PREMIUM (EUR) LEGAL RESERVE (EUR) CONSOLIDATED RESERVES AND PROFIT BROUGHT FORWARD (EUR) MINORITY INTERESTS (EUR) PROFIT OF THE YEAR (GROUP) (EUR) TOTAL OWN FUNDS (EUR) Balance at 31 st December Capital increase Transfer to legal reserve ( ) Translation impact on: group reserves minority interests ( ) ( ) ( ) ( ) Profit brought forward ( ) Current year profit BALANCE AT 31 ST DECEMBER LIABILITIES DENOMINATED IN FOREIGN CURRENCIES Liabilities denominated in currencies other than EUR have a total value of EUR (2016: EUR ) as at 31 st December The majority of the gap between non EUR denominated assets and non EUR denominated liabilities is covered by exchange rates derivative instruments. 38

40 5.8. OTHER PROVISIONS As at 31 st December 2017, Other provisions is mainly composed of: Provisions for Clients claims for an amount of EUR 6,9 Mio (2016: 4,2 Mio); Provisions for legal and consultancy costs for an amount of EUR 3,9 Mio (2016: Nil); Negative goodwill (note 2.3) for an amount of EUR 6,9 Mio (2016: 15,7 Mio); Provisions for bonus for an amount of EUR 2,0 Mio (2016: 1 8Mio); Others for an amount of EUR 10,2Mio (2016: 4 7 Mio). The Bank has been subject to ongoing regulatory inspections and investigations since While certain deficiencies have been identified and the Bank continues to work towards meeting higher standards of conduct and compliance, the final outcome of these regulatory inspections and investigations remain pending. In order to face the potential financial consequences, the Bank has booked a provision included in the caption Other provisions Others in accordance with the applicable accounting policies based on the information known at the date of establishment of these consolidated annual accounts, based on the progress status of the regulatory inspections and investigations and based on the communications with the Luxembourg regulator during the beginning of the year The Bank is confident that the final outcome of the ongoing investigations will only have limited effect on these financial statements as a result of several mitigating actions already undertaken. However as at the date of these consolidated annual accounts and based on the facts currently known, the Bank and its legal advisors are unable to precisely predict all the potential consequences of this matter. 39

41 5.9. LUXEMBOURG RESOLUTION FUND ( LRF ) AND LUXEMBOURG DEPOSIT GUARANTEE SCHEME ( LGDS ) The law related to the resolution, reorganisation and windingup measures of credit institutions and certain investment firms and on deposit guarantee and investor compensation schemes ( the Law ), transposing into Luxembourgish law the directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms and the directive 2014/49/EU related to deposit guarantee and investor compensation schemes, was passed on 18 th December The deposit guarantee and investor compensation scheme previously in place through the Association pour la Garantie des Dépôts Luxembourg (AGDL) has been replaced by a new contribution based system of deposit guarantee and investor compensation scheme. This new system covers eligible deposits of each depositor up to an amount of EUR (Luxembourg Deposit Guarantee Scheme) and investments up to an amount of EUR (Luxembourg Investors Compensation Scheme). The Law also provides that deposits resulting from specific transactions or fulfilling a specific social or other purpose are covered for an amount above EUR for a period of 12 months. Provisions which were booked in the annual accounts of the credit institutions throughout the years in order to respect the obligations of the AGDL are reversed in proportion to the contribution paid on the new Luxembourg Resolution Fund (LRF) and Luxembourg Deposit Guarantee Scheme (LDGS). The funded amount of the LRF shall reach by the end of 2024 at least 1% of covered deposits, as defined in Article 1 Number 36 of the Law, of all authorised credit institutions all participating Member States. This amount will be collected from the credit institutions through annual contributions during the years 2015 to 2024 using the previously constituted AGDL provision. 40

42 The target level of funding of the LDGS is set at 0.8% of covered deposits, as defined in Article 163 Number 8 of the Law, of the relevant credit institutions arid is to be reached by the end of 2018 through annual contributions using the previously constituted AGDL provision. When the level of 0.8% will be reached, the Luxembourgish credit institutions are to continue to contribute for 8 additional years in order to constitute an additional safety buffer of 0.8% of covered deposits as defined in Article 163 Number 8 of the Law. According to the law, the Group decided to use the AGDL provision constituted up to 31 st December 2015 to cover LRF and LDGS charges occurring during the year. During 2017, the AGDL provision was used to cover LRF and LDGS charges for respectively EUR (2016: EUR ) and EUR (2016: EUR ). 41

43 6. CONTINGENT LIABILITIES AND COMMITMENTS 6.1. CONTINGENT LIABILITIES Contingent liabilities consist of guarantees and other direct substitutes for loans OPEN FORWARD AGREEMENTS AT THE BALANCE SHEET DATE The Group is engaged in forward foreign exchange transactions (swaps, outrights) in the normal course of its banking business. A significant portion of these transactions has been contracted to hedge the effects of fluctuations in exchange rates (see notes 7.2 and 7.3 for additional information) MANAGEMENT AND FIDUCIARY SERVICES The Group s services to third parties consist of: Portfolio management and investment advice; Custody and administration of transferable securities; Credit activities; Fund administration. 42

44 7. INFORMATION RELATING TO FINANCIAL INSTRUMENTS 7.1. DISCLOSURES RELATING TO PRIMARY FINANCIAL INSTRUMENTS IN RELATION TO NON TRADING ACTIVITIES The following tables provide an analysis of the carrying amount of primary financial assets and financial liabilities of the Group into relevant maturity groupings based on the remaining periods to repayment. As at 31 st December 2017, primary financial assets and liabilities are analysed as follows (in EUR): FINANCIAL ASSETS LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS NO MATURITY TOTAL Cash, balances with central banks and post office banks Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixedincome securities Shares and other variableyield securities TOTAL

45 FINANCIAL LIABILITIES LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS NO MATURITY TOTAL Amounts owed to credit institutions Amounts owed to customers TOTAL The maturity mismatch between the assets and the liabilities of the Bank are mainly related to the Bank s bond portfolio. This portfolio mainly comprises of floating rate notes indexed on the 3 or 6 months Libor. A smaller portion relates to fixedcoupon bonds and structuredcoupon bonds, which are interest sensitive. The modified duration of the entire portfolio is of As per end of year the Bank did not make use of source of funding available via the ECB Monetary Policy Operations (e.g. via MRO s and LTRO s). A positive shift of 200 bps of the interest rate curve would mean a decrease of EUR of the present value of our assets and liabilities. The portfolio is therefore slightly sensitive to the fluctuation of short term interest rates. 44

46 7.1. DISCLOSURES RELATING TO PRIMARY FINANCIAL INSTRUMENTS IN RELATION TO NON TRADING ACTIVITIES (CONTINUED) As at 31 st December 2016, primary financial assets and liabilities are analysed as follows (in EUR): FINANCIAL ASSETS LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS NO MATURITY TOTAL Cash, balances with central banks and post office banks Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixedincome securities Shares and other variableyield securities TOTAL FINANCIAL LIABILITIES LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS TOTAL Amounts owed to credit institutions Amounts owed to customers TOTAL

47 7.2. DISCLOSURES RELATING TO DERIVATIVE FINANCIAL INSTRUMENTS The following tables provide an analysis of the derivative financial assets and liabilities of the Bank into relevant maturity groupings based on the remaining periods to repayment. As at 31 st December 2017, overthecounter derivative financial assets and liabilities are analysed as follows (in EUR): INSTRUMENT CLASS CONTRACT/ NOTIONAL AMOUNT (EUR) LESS THAN THREE MONTHS FINANCIAL ASSETS FINANCIAL LIABILITIES BETWEEN THREE MONTHS AND ONE YEAR FINANCIAL ASSETS FINANCIAL LIABILITIES BETWEEN ONE YEAR AND FIVE YEARS FINANCIAL ASSETS FINANCIAL LIABILITIES FINANCIAL ASSETS TOTAL FINANCIAL LIABILITIES FOREIGN EXCHANGE OTC Forward currency contracts Currency swap contracts Options EQUITIES OTC Contracts for difference Exchangetraded Options Futures INDEX Exchangetraded Futures COMMODITY Exchangetraded Futures

48 INSTRUMENT CLASS CONTRACT/ NOTIONAL AMOUNT (EUR) LESS THAN THREE MONTHS FINANCIAL ASSETS FINANCIAL LIABILITIES BETWEEN THREE MONTHS AND ONE YEAR FINANCIAL ASSETS FINANCIAL LIABILITIES BETWEEN ONE YEAR AND FIVE YEARS FINANCIAL ASSETS FINANCIAL LIABILITIES FINANCIAL ASSETS TOTAL FINANCIAL LIABILITIES FOREIGN EXCHANGE OTC Forward currency contracts Currency swap contracts Options INTEREST RATES Exchangetraded Futures EQUITIES OTC Contracts for difference Exchangetraded Options DISCLOSURES RELATING TO CREDIT RISK The Group is exposed to credit risk mainly through its lending, investing and hedging activities and in cases where the Group acts as an intermediary on behalf of customers and issues guarantees. The Group s primary exposure to credit risk arises from its loans and advances and debt securities. The credit exposure in this regard is represented by the carrying amounts of the assets in the balance sheet. 47

49 The Group is also exposed to offbalance sheet credit risk through guarantees issued and instruments linked to exchange, interest and other market rates (forward transactions, swaps and option contracts). The credit exposure in respect of instruments linked to exchange, interest and other market rates are equal to the equivalent at risk according to the initial risk approach. The credit risk exposure can be analysed as follows (in EUR): 2017 CREDIT RISK EXPOSURE 2016 CREDIT RISK EXPOSURE Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixedincome securities Shares and other variableyield securities Contingent liabilities Derivatives TOTAL Loans and advances to customers are usually secured by cash, listed investments, third party guarantees and mortgage on real estate property. 48

50 Credit risk concentrations on total on and off balance sheet are analysed as follows: 2017 (EUR) 2016 (EUR) Corporates Credit institutions Individuals Public sector TOTAL Credit institutions, corporates, individuals and public sector are essentially issued from OECD countries, main ones being Luxembourg, United States, Switzerland, France and the United Kingdom. 49

51 Geographical Concentration of credit risk (in EUR): 2017 (EUR) 2016 (EUR) Luxembourg (EUR) 2016 (EUR) Russia United States Liechtenstein Switzerland Sweden France Cyprus United Kingdom Jersey Germany Norway Monaco China British Virgin Islands Austria Turkey Czech Republic Belgium Finland Netherlands Canada Japan Cayman Islands Denmark Spain Iceland Poland Israel Azerbaijan Lebanon Hong Kong United Arab Emirates Mauritius Italy Guernsey Other TOTAL

52 7.4. INFORMATION ON THE MANAGEMENT OF OTHER RISKS Liquidity Risk A cash management system enables the Group to achieve a daily automatic vostronostro reconciliation of its main correspondent accounts. The Group is able to identify possible cash flow errors, to determine adjusted opening balances and generate an accurate liquidity gap to better channel shortterm liquidity needs. The Asset and Liability Committee ( ALCO ) receives a daily report on the overall liquidity situation of the Group, the upcoming liquidity risks and the cash buffer. Interest Rate Risk The Group monitors its interest rate risk by analysing the different maturity gaps in the balance sheet. Stress tests are performed quarterly by analysing parallel curve shifts. Exchange Rate Risk The Group s main exposure to foreign exchange risk ( FX ) arises from USD, CHF and GBP. A foreign exchange position system provides an overall view of the currency risk and related profit or loss impact by business line, turnover and margins. The implementation of a Value at Risk ( VaR ) model gives a view of the potential loss of the overnight position. The ALCO members monitor and control the exchange rate risk through the daily report received from the Treasury department. 51

53 Market Risk The Group s Market Risk is managed in both a qualitative and a quantitative manner. The profit and loss of the Group s investment and FX book is reported daily by the Treasury to the ALCO members. An indepth analysis of the Group s investment portfolio is performed monthly in terms of geographic segmentation, sector segmentation, type of products, last important news on the issuer, yield analysis, rating agency s views, liquidity, issuer s healthiness, etc. The FX overnight s risk is computed daily through a 99% Expected Shortfall. These documents are sent to the ALCO. All the investment s decisions need to be compliant with the Investment Guidelines as agreed by the Board of Directors. The monitoring and control of CFD positions is operationalised, among others, through the production of two daily reports: a CFD control report and a CFD statement report. The details for each position, corresponding margin call, profit and loss, computed VaR are indicated in these documents. In case of any breach the Relationship Manager of the client and the credit department are immediately informed. The Credit Department with the support of the Relation Manager has to solve the breach whether by margin calling the client, either by closing the CFD s contract. The Treasury of the Group can hedge the client s CFDs either by backing the CFD on the market with a CFD provider, either by taking positions on the underlying. In any case, the Group s book has to be delta neutral. 52

54 8. INFORMATION ON THE PROFIT AND LOSS ACCOUNT 8.1. GEOGRAPHICAL ANALYSIS INCOME Interest receivable and similar income, commission receivable and net profit on financial operations mainly originate from Western Europe OTHER OPERATING INCOME Other operating income is mainly composed of gain on deals/claims settled for an amount of EUR 1.9m (2016: EUR 0,2m) and reversal of negative goodwill (see note 2.3) for an amount of EUR 8.1m (2016: EUR 5.6m). In 2017, the Board of Directors has assessed the institutional business resulting from the merger between the Bank and Banque Havilland Institutional Services S.A.. In the opinion of the Board of Directors, the instutional business could be considered as a profitable business after the merger. As a result, the negative goodwill related to Banque Havilland Institutional Services S.A. amounting to EUR 2.8m has been fully reversed OTHER ADMINISTRATIVE EXPENSES In November 2017 a number of media articles have relayed references to a financial plan concerning Qatar in which the Bank s name has been mentioned. These articles have referred to this plan as being unrealistic and farfetched and the Bank firmly denies any improper conduct. The Bank has cooperated with its regulators openly and launched immediately an independent forensic investigation on the matters led by independent external legal counsel. While the investigation on these events is in its final stage the Bank considers that it has already factually established in the 53

55 meantime that the Bank did not engage in any transaction contemplated in the said articles. Whilst there is still an uncertainty concerning the final regulatory outcome of this matter, actual and expected legal and consultancy costs related to this event have been recorded for an amount of EUR 2.5m in Other administrative expenses on the profit and loss account. Moreover, the Bank considers that appropriate measures have been taken to ensure that possible regulatory and financial consequences would not affect either the Group s financial position or its results OTHER OPERATING CHARGES Other operating charges are analysed as follows: 2017 (EUR) 2016 (EUR) Writeoff of receivables Administrative fees reinvoiced Provision for claims Expenses on insurance activities Tax adjustments related to previous years Provision for restructuring costs Other (note 5.8) TOTAL

56 8.5. NET VALUE ADJUSTMENTS IN RESPECT OF LOANS AND ADVANCES AND PROVISIONS FOR CONTINGENT LIABILITIES AND COMMITMENTS This heading is analysed as follows: 2017 (EUR) 2016 (EUR) Specific value adjustments on loans to customers Additions Reversals ( ) ( ) Lump sum provision additions TOTAL (62 101) ( ) As at 31 st December 2017, the lump sum provision amounts to EUR (2016: EUR ) TAX INFORMATION The Parent company is liable to taxes on income and net assets in line with the Luxembourg legislation. 55

57 9. OTHER INFORMATION 9.1. COUNTRY BY COUNTRY INFORMATION According to Article 383 of the Law of April 5, 1993 as amended by the law of July 23, 2015, the credit institutions, financial holding companies and investment companies must publish information on their locations and activities, included in their scope of consolidation in each state or territory. As at 31 st December 2017, country by country information are analysed as follows (in EUR): EU MEMBER COUNTRIES STATUTORY OPERATING INCOME STATUTORY PROFIT OR LOSS BEFORE TAX STATUTORY TAX ON PROFIT OR LOSS NUMBER OF EMPLOYEES Luxembourg ( ) 125 United Kingdom (99 552) 15 NONEU MEMBER COUNTRIES STATUTORY OPERATING INCOME STATUTORY PROFIT OR LOSS BEFORE TAX STATUTORY TAX ON PROFIT OR LOSS NUMBER OF EMPLOYEES Bahamas ( ) 8 Liechtenstein (1 024) 20 Monaco Switzerland ( ) ( ) 41 Russia (86 110) (8 178) 3 No public subsidies have been received by the Group during the year that ended 31 st December

58 As at 31 st December 2016, country by country information are analysed as follows (in EUR): EU MEMBER COUNTRIES STATUTORY OPERATING INCOME STATUTORY PROFIT OR LOSS BEFORE TAX STATUTORY TAX ON PROFIT OR LOSS NUMBER OF EMPLOYEES Luxembourg ( ) 125 United Kingdom NONEU MEMBER COUNTRIES STATUTORY OPERATING INCOME STATUTORY PROFIT OR LOSS BEFORE TAX STATUTORY TAX ON PROFIT OR LOSS NUMBER OF EMPLOYEES Bahamas ( ) 11 Liechtenstein Monaco Switzerland ( ) 40 Russia ( ) (77 093) 3 No public subsidies have been received by the Group during the year that ended 31 st December RETURN ON ASSETS The return on assets of the Group for the year ended 31 st December 2017 stands to 0.27% (0.73% for the previous year). The return on assets is calculated as being the net profit divided by the total balance sheet. 57

59 9.3. PERSONNEL EMPLOYED The average number of persons employed during the financial year was as follows: Management Employees TOTAL MEMBERS OF THE ADMINISTRATION, MANAGERIAL AND SUPERVISORY BODIES Remuneration paid to the various bodies of the Group during the financial year was as follows: 2017 (EUR) 2016 (EUR) Management Supervisory body TOTAL Loans and advances granted to members of the Management and the Board of Directors as at 31 st December 2017 amount to EUR (2016: EUR ). As at 31 st December 2017, a guarantee of EUR (2016: EUR 0) has been issued in favour of member of the Management and the Board of Directors. It was decided at the Annual General Meeting held on 13 th June 2017 that four Board members of the Bank in Luxembourg received emoluments in respect of their duties for a total gross amount of EUR related to the fiscal year ended 31 st December 2017 (2016: EUR ). 58

60 9.5. INDEPENDENT AUDITOR S FEES Fees billed (excluding VAT) to the Group by PricewaterhouseCoopers, Société coopérative, Luxembourg and other member firms of the PricewaterhouseCoopers network during the year are as follows: 2017 (EUR) 2016 (EUR) Audit fees Auditrelated fees Taxrelated fees Other fees TOTAL Such fees are presented under other administrative expenses in the consolidated profit and loss account SUBSEQUENT EVENTS Early 2018, the Group performed a strategic review of its international network and decided Bahamas was non core. The Management has been mandated to evaluate exit options. The Bank also entered into a sale process of its participation in BH International LLC and successfully closed it on 30 th April, 2018 at book value. In the beginning of 2018, the Group has started a process to buy the remaining 47.5% from the minority shareholder of Banque Havilland (Liechtenstein) AG. 59

61