Annual Report 2017 LUMINOR BANK AS

Transcription

1 Annual Report 2017 LUMINOR BANK AS CONSOLIDATED FINANCIAL STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2017

2 CONTENTS GENERAL INFORMATION AND CONTACTS 4 MANAGEMENT REPORT 5 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS ADOPTION OF NEW AND/OR CHANGED IFRS AND INTERNATIONAL FINANCIAL REPORTING INTERPRETATIONS COMMITTEE (IFRIC) INTERPRETATIONS GENERAL RISK MANAGEMENT POLICIES INTEREST INCOME INTEREST EXPENSE FEE AND COMMISSION INCOME OTHER OPERATING INCOME OTHER OPERATING EXPENSES PERSONNEL EXPENSES OTHER ADMINISTRATIVE EXPENSES CASH AND BALANCES WITH CENTRAL BANKS DUE FROM OTHER CREDIT INSTITUTIONS (DEMAND) RECEIVABLES FROM PARENT PLEDGED AS COLLATERAL DERIVATIVE FINANCIAL INSTRUMENTS LOANS TO CUSTOMERS ALLOWANCES FOR IMPAIRED LOANS AND RECEIVABLES OTHER ASSETS INVESTMENTS IN SUBSIDIARIES INTANGIBLE ASSETS TANGIBLE ASSETS LOANS AND DEPOSITS FROM CREDIT INSTITUTIONS DEPOSITS FROM CUSTOMERS DEBT SECURITIES ISSUED OTHER LIABILITIES PROVISIONS ISSUED CAPITAL CONTINGENT ASSETS AND LIABILITIES AND COMMITMENTS FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS ( ASSETS / FUNDS UNDER MANAGEMENT) 89

3 31. RELATED PARTIES LITIGATIONS AND CLAIMS MERGER WITH NORDEA NET IMPAIRMENT (LOSSES/ REVERSAL) ON LOANS AND RECEIVABLES SEGMENT REPORTING UNCONSOLIDATED PRIMARY STATEMENTS OF LUMINOR BANK AS AS A SEPARATE ENTITY EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE 99 INDEPENDENT AUDITOR S REPORT PROFIT ALLOCATION PROPOSAL SIGNATURES OF THE MANAGEMENT BOARD TO THE ANNUAL REPORT

4 General information and contacts Luminor Bank AS Address: Liivalaia Tallinn Estonian Republic Registration nr: Phone: Fax: Web page: Main activity: Auditor: Credit institution Ernst & Young Baltic AS Reporting period:

5 Management report GENERAL INFORMATION On 1 October 2017, after receiving the approval of all supervision authorities and the consent of the Competition Board, DNB Bank ASA (commercial Register number ) and Nordea Bank AB (Swedish Commercial Register number ) merged their activities in the Baltic States and established the jointly owned bank Luminor. The transfer of business included the transfer of the assets and liabilities of Nordea Bank AB Lithuania branch, Nordea Bank AB Latvia and Nordea Bank AB Estonia branch, including the shares of the leasing and pension companies and companies dealing with problematic assets located in the Baltic States, to Luminor Bank AB in Lithuania (formerly AB DNB bankas), Luminor Bank AS in Latvia (formerly DNB banka AS) and Luminor Bank AS in Estonia (formerly Aktsiaselts DNB Pank). In Estonia Aktsiaselts DNB Bank focused mainly on offering financial solutions for corporate customers and on serving leasing clients. Based on the 2017 Q3 results, Aktsiaselts DNB Bank had 11,584 clients, served by 100 employees. The combined assets of DNB Bank ASA as at the end of Q amounted to billion Norwegian kroner and market capitalisation amounted to billion Norwegian kroner. In Norway, DNB Bank ASA has over 2.1 million private clients and over 210,000 corporate clients, 1.2 million insurance clients and approximately 480,000 investment fund clients. 60% of major Norwegian companies, every second Norwegian and two of five Norwegian companies use the services of the DNB Group. DNB Bank ASA has a credit rating (Fitch A+, Moody s Aa2). In terms of market capitalisation, Nordea belongs among the 10 largest European universal banks. Nordea has ca 11 million clients, 30,000 employees and approximately 600 branches. The shares of Nordea are listed at Nasdaq Stockholm, Nasdaq Helsinki and Nasdaq Copenhagen stock exchanges. Nordea Bank AB has a credit rating (Fitch AA-, Moody s Aa3). Luminor Bank, a new generation financial services provider established exclusively for the Baltic States, started operating on 1 October 2017 with 1.3 million clients and ca 3,000 employees. Luminor is the third-largest financial services provider in the Baltic States with a 16% market share in deposits and 23% share in loans. Luminor is primarily financed by retail and corporate customer deposits and funding from shareholder banks. To support Luminor s long-term funding strategy we are willing to acquire an international credit rating during Our current funding is mainly sourced from customer deposits and the support of our highly rated shareholders, Nordea and DNB. In the near future we plan to issue medium- and long-term bonds to reduce the funding from our parent banks. 5

6 On 19th of December 2017 Luminor made an announcement about issuance of first inaugural bonds in amount of 65 million Euros. The investments have been made by LHV pension funds in amount of 34 million Euros and by Swedbank pension funds in 30 million Euros. The funds will be for the ordinary course of business and will replace the funding provided by Luminor`s shareholder banks. Luminor Bank AS (or Luminor Estonia ) has managed to maintain its business momentum while integrating the operations after the merger to achieve a solid financial result in Largely due to the merger the net interest income and the net fees and commissions increased year on year by EUR 16 million and EUR 3.4 million, respectively, reaching a combined figure of EUR 31.6 million in The operating expenses in 2017 were also impacted by various merger-related costs. Profit for the year amounted to EUR 12.8 million. ECONOMIC DEVELOPMENT IN 2017 AND FUTURE PROSPECTS WORLD ECONOMY The synchronised and accelerating growth of global economy with the record increase in economic security supports the faster economic growth of the Eurozone, incl. Estonia. The estimated growth of global GDP in 2017 reached 3.7% and it is likely to accelerate to 3.9% in Significant growth in different countries is more even today than it has been before and in addition to the emerging countries, which used to grow faster, it also covers a stronger contribution by developed countries. The growth expectations of both the US and the Eurozone have been raised. The cyclical upturn of the Eurozone is becoming more broadbased with the support of domestic demand and the recovering increase in loans. The Eurozone s growth reached a remarkable 2.7% in Q4 last year and the result for the year was 2.5%, the strongest in the last decade. Unemployment has dropped below 9% with the support of strong employment. The Eurozone will continue with a broader-based 2.3% growth this year. The risk of deflation has decreased and been replaced with a moderate price increase. The central banks of developed countries will be gradually reducing the support of fiscal policy to the economy. However, the level of the base rates in the Eurozone will continue to promote growth for the economic partners as well as the economy of Estonia. The good news for Estonia is that the Nordic economies will continue at a speed faster than the long-term capacity for growth, which will be reflected in the improvement of the labour market. Whilst the fast economic growth of Sweden has slowed down somewhat due to the cooling down of the property market, the economic activity of Norway and Finland has increased. The biggest positive surprise this time is the economy of Finland, which probably grew by 3% last year with the support of investments and export. Finland and Sweden are important export partners to Estonia and the development of our economy depends on their success. 6

7 THE ECONOMY OF ESTONIA The economic growth of Estonia exceeded all expectations with 4.5% last year and has become broad-based as a result of the boost in investments. This year, the strong growth is expected to slow down somewhat to 3.5%. The slowdown will be moderate, as domestic demand keeps driving the growth with the support of renewable investments and the prospects of the export markets remain favourable overall. Export will continue to grow moderately. The biggest risks are the volatility of foreign markets due to geopolitical risks, which could cool down the growth prospects of the Eurozone and Scandinavian countries. All in all, the economy of Estonia will continue growing faster than the long-term capacity. This supports the improvement of the labour market and wage pressures will increase alongside this. Today, the economic growth is broad-based in terms of economic sectors, as the energy and food sectors, which previously demonstrated rather modest results, are also recovering. The rapid price increase and decelerating employment continue to restrict private consumption, which will return to the good level of 4% this year. The recovery of investments has been sudden and from a low level. What the economy needs the most are investments in long-term capacity for growth and competitiveness in order to reap the benefits of the century of technology and support a more broad-based increase in income. OVERVIEW OF THE COMPANY OPERATING PRINCIPLES Luminor Group is a contemporary financial services provider operating in the Baltic States, which was established for local people and businesses. We re a pan-baltic organisation that considers the region s cultural and business environment, helps guarantee the best opportunities for local people and supports local companies in their operations. Luminor s core business is to serve entrepreneurial people in the Baltics, with primary focus on local companies as well as financially active people with an entrepreneurial mindset. We are creating a new generation bank because we are determined to build a better tomorrow for families, businesses, communities and countries where we live and operate. Taking good care of our customers everyday financial matters is an essential part of the better tomorrow. Luminor is explicitly for the Baltics. There is no other bank in our region who is independent and self-sustaining while covering all three Baltic countries with a significant footprint. Luminor has the benefit of being the important local financial service provider with significant scale. Luminor Estonia has customer service branches in Tallinn, Tartu, Pärnu, Viljandi, Kuressaare, Rakvere, Jõhvi and Narva. Luminor employs 608 people in total. The consolidation group of Luminor Estonia has ca 160,000 clients with products in total. 7

8 Being a Baltic company also brings the richness and diversity that multi-country and -culture organizations can offer. Luminor is building its operating model in a way which supports regional scale, business development and efficiency but also high local relevance and customer intimacy. Luminor s face towards our customers is our strong country service and sales organizations. In addition to the business volume, Luminor has independent governance and arm`s length relationship with the parent banks, that allow us to stand out and be even closer to our clients. Luminor has a strong and capable team which consists of people that want to move the organisation forward. We re entrepreneurial and open, and we hold cooperation in high esteem. We hope to become one of the most desirable employers in the region. Over time, Luminor must develop into the best financial environment for local active people and companies. We develop our products and services on the basis of data and knowledge, and we cooperate with experts operating in other fields. In three years, we want to grow into the financial services provider that offers the best digital solutions in the Baltic States. In five years, we hope to become the financial environment with the best market opportunities in the region. Our goals are to build a strong organisation, manage our business efficiently and cope well with the risks emerging during the economic cycles to ensure that they cannot jeopardise our independence or existence. RISK MANAGEMENT AND INTERNAL CONTROL The permanently functioning internal control system and risk management framework are implemented in the Group. The internal control as a system of organizational measures, actions and internal procedures ensures the effective and efficient operations and prudent conduct of business, the compliance with laws and regulations, the adequate assessment and control of risks, as well as the reliability of financial and non-financial information and submission thereof in a timely manner. The Group identifies, evaluates, accepts and manages the risks or combinations of risks it is exposed to. In uncertain cases the Group follows the principles of precaution, conservatism and prudence. The aim of risk management in the Group is assuring an acceptable profitability and return on equity pursuing the adequate policy of risk management. While implementing a sound risk management policy the Group focuses not only on minimizing potential risk but also on improving pricing and achieving efficient capital allocation. The riskrelated activity of the Bank and the Group is guided by Credit Strategy and Risk Appetite Framework. The risk management function of the Group is organized in such a way that ensures efficient risk management and facilitates the realization of the tasks stipulated in the Risk Management Strategy. The risk management is based on the best practice and is organized in such a way that any possible conflicts of interest would be avoided. The function of all-type risk control is segregated from risk taking, i.e. from the front-office units. 8

9 The Bank assesses and manages credit, liquidity, market, operational, compliance and other (business, reputational) risks it is exposed to in its activities. The credit risk is the dominant in the Bank s risk structure. The detailed information about financial risk assessment and management is provided in the section 4 of this report. The strict risk management principles were kept during the reporting period. The risk management processes are continuously being improved and aligned taking into account the gained knowledge from the ultimate owners DNB Bank ASA and Nordea Bank AB and the best practice applied by the whole financial system. The duly established and regulated control function is operating in the Group. The control function includes the risk control, compliance and internal audit functions. The risk control function in the Bank is performed by the Operational Risk, Credit Control, Risk Analysis and Market Risk Departments. The compliance function is performed by the Compliance Department and the internal audit function by the Internal Audit Department. Each control function periodically submits reports to the management of the Bank. IMPORTANT EVENTS IN THE FINANCIAL YEAR On 14 September 2017, the European Commission approved the merger of the operations of DNB and Nordea in Estonia, Latvia and Lithuania. On October 1, 2017 the merger of DNB Bank ASA (Commercial Register number ) and Nordea Bank AB (Swedish Commercial Register number ) in the Baltics was finished, and DNB Pank AS was as a result renamed Luminor Bank AS. By the end of 2017 Luminor Estonia had up to clients in total, served by 608 employees. Luminor is guided in its everyday activities by its core values: curiosity, collaboration, and focus. CHANGES IN STRUCTURE OF THE ORGANISATION As of 1 October 2017, when Nordea Bank AB and DNB Bank ASA merged their banking operations in the Baltic States and transferred the assets and liabilities of Nordea Bank AB Estonia branch to Luminor Bank AS (former DNB Bank), Luminor Bank AS has been dealing with the reorganisation of work to join the people of the two organisations into a single team. A new organisational structure was approved, which supports pan-baltic cooperation with the Latvian and Lithuanian banks of Luminor. Luminor Group companies belong to Swedish company Luminor Group AB, which has as subsidiary credit institutions in Estonia, Latvia and Lithuania. Nordea Bank AB, DNB Bank ASA and Luminor MiCom AB are the owners of Luminor via the holding company Luminor Group AB (or Luminor Group ), which is registered in Sweden and whose goal is to hold and manage the shares of the Baltic commercial undertakings of Luminor. Nordea Bank AB and DNB Bank ASA have equal voting rights in Luminor Group. Nordea Bank AB owns 56.2%, DNB Bank ASA owns 43.6% and MiCom AB owns 0.2% of 9

10 proprietary rights, which reflects the proportional contribution of each bank made at the closure of the Luminor Group deal on 1 October Luminor MiCom AB is a private limited liability company registered in Sweden acting as a vehicle for holding 0.2% of the shares of Luminor Group AB for the high level managers of Luminor Group, thus forming a part of the incentive package for the key personnel. Ownership and organisational structure of Luminor Bank AS DNB Bank ASA (Norway) Luminor MiCom AB (Sweden) Nordea Bank AB (Sweden) Luminor Group AB (Sweden) Luminor Bank AS Luminor Liising AS Promano Est OÜ Uus-Sadama 11 OÜ Luminor Pensions Estonia AS Luminor Kindlustusmaakler OÜ In terms of market capitalisation, Nordea (Fitch AA-, Moody s Aa3) belongs among the 10 largest European universal banks and has ca 11 million clients. DNB (Fitch A+, Moody s Aa2) is one of the biggest finance groups in the Nordic region and the Norwegian market leader, which operates in 18 countries throughout the world. DNB is currently one of the best capitalised banks in the world. Luminor Estonia subsidiaries fields of activity Luminor Liising AS Promano Est OÜ Uus-Sadama 11 OÜ Luminor Pensions Estonia AS Luminor Kindlustusmaakler OÜ Leasing and factoring Asset management Asset management II and III pillar pension funds Insurance broker 10

11 The Luminor Group will be transformed from 2018 to 2019 and the objective of this is to concentrate the Baltic business operations of the Luminor Group to the credit institution Luminor Bank AS, which is based in Estonia. Luminor Bank AB in Lithuania and Luminor Bank AS in Latvia will terminate their operations and merge with Luminor Bank AS in Estonia. A cross-border merger will be applied for in accordance with Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, which is applied in Estonia, Latvia and Lithuania. The assets and liabilities of the specified subsidiaries will be transferred in accordance with the relevant legislation to Luminor Bank AS, which operates in Estonia, on the basis of general legal succession and each subsidiary will finish operating as a legal entity after the registration of the cross-border merger. Luminor Bank AS, which operates in Estonia, will conduct banking activities in Lithuania and Latvia via its branches after the merger. CORPORATE CLIENTS In 2017 Aktsiaselts DNB Bank focused mainly on serving corporate customers and increasing their leasing portfolio. The merger of DNB and Nordea Baltic businesses was handled actively. The objective was to ensure smooth customer service in all usual bank channels. The client and product portfolios of Nordea Bank AB Estonia branch and AS DNB Pank were joined in the course of the merger of the business operations of the two banks and they are served from the 1 of October 2017 by the new Luminor Bank AS. The main objective of corporate banking at Luminor in 2017 was to serve clients without glitches and to maintain client relationships during and after the merger. A reception for major clients and partners was held in December 2017, where the heads of the bank introduced the vision and future prospects of Luminor. PRIVATE CLIENTS The main objective of retail banking at Luminor in 2017 was to serve clients without glitches and to maintain client relationships during and after the merger. The increase in the income of private persons in 2017 strongly supported savings and financial investments, which is why we saw growth in the volumes of current accounts and investments in The growth of property loans exceeded 6% on the market, which led to an increase in the home loan portfolio of Luminor. The increased confidence of private persons could also be seen in the faster growth of consumer loans. In 2017 Luminor focused on the further development of the virtual consultation concept and introduced the option of a quick chat on the Luminor website in order to improve the quality of customer service. 11

12 LEASING The focus in 2017 was mainly on increasing the leasing portfolio and serving leasing clients without glitches during the merger. Leasing clients include both private and corporate clients. Leasing operations were reorganised in Q and it was decided to provide leasing services via the subsidiary Luminor Liising AS as of 1 January As a result of the reorganisation, the staff serving the leasing portfolio and new sales were moved to Luminor Liising AS. The existing leasing portfolio remained in the balance sheet of Luminor Bank and transferring the portfolio to Luminor Liising AS is not planned in the near future. Similar to earlier leasing activities, Luminor Liising AS will also provide leasing for vehicles, heavy equipment and other assets, which are removable in their nature and therefore suitable for being financed by leasing. Luminor Liising AS has two sales units, a seller cooperation unit, which focuses on cooperation with the sellers of assets and the bank cooperation unit, which focuses on cooperation with the sales departments of bank. PENSION The former Nordea pension funds bear the name of Luminor as of October The experienced pension team of Luminor focuses on growing the pension assets of clients. The pension funds of Luminor continued to demonstrate positive results in 2017 and as at the end of December 2017, people in Estonia had trusted Luminor to look after their pension capital, which totals 313 million euros. In November and December 2017, we chose the third pension pillar as the product to focus on. We carried out a marketing and sales campaign, which focused on changing the attitudes of people towards planning their future. At the same time, we also launched the new pension information environment which allows everyone who saves for retirement to obtain a comprehensive overview of the current status of their pension pillars. The volume of the assets of Luminor pension funds increased by 13.3% or 36.7 million euros in a year. PRODUCT DEVELOPMENT Luminor is a contemporary financial services provider, which was established for local business and entrepreneurial people. Our goal is to guarantee a better life for local people and better business opportunities for local companies. Over time, Luminor must develop into the best financial environment for local people and companies. Traditional banking and financial services are constantly changing. Luminor has an opportunity to change the Baltic banking sector. In addition to the necessary activity volume, our advantages include independence from parent banks and local management and decision-making competence. Luminor s governance structure has been created following the best industry practices and will allow us to ensure prudent risk management, at the same time ensuring good pace in developing our own services and partnerships with other institutions 12

13 and third parties. Over time we want Luminor to become the best financial ecosystem of our target clients. We focus on the existing data and knowledge when developing our products and services. We cooperate with companies operating in other areas and we hope that Luminor will become a fully digital new generation financial services provider in the coming years is mainly focused on the finalisation of post-merger processes and transferring two bank systems to one central system. Luminor is also planning to enter the market with independent customer offers and continue as a uniform and whole Luminor. CORPORATE SOCIAL RESPONSIBILITY Our purpose is to build a better tomorrow. A world in which our families, businesses, communities and countries are richer in every sense of the word: stronger, more dynamic, more imaginative and, ultimately, capable of realising their true potential. Thus, Luminor goal for the work on CSR is to create value in a responsible and sustainable manner for all Luminor stakeholders. We are committed to take into account the corporate governance, social conditions and environment in all of our activities, including product and service development, advisory services and sales, investment and credit decisions, and other operations. Luminor shall not contribute to the infringement of human or labour rights, corruption, serious environmental harm or other actions that could be regarded as unethical. Luminor distinguishes and describes its CSR principles in four main areas: 1. Corporate governance 2. Employees 3. Customers, products and services 4. Environment and local society Corporate governance Luminor is committed to comply with corporate governance principles that include having: High ethical standards and sound corporate governance; Clear and open communication to all target groups; Zero tolerance for corruption and defence against corruption based on transparency and verifiability; 13

14 Regular dialogues with all stakeholders: employees, customers, shareholders, public authorities and other public bodies, suppliers and vendors regarding environmental, social and governance related matters. Employees Luminor follows social responsibility that includes: Full respect towards internationally recognised human rights; Reviewing value chain in order to reveal the risk for actual and potential infringements of human rights which are instrumental and directly connected to company s capacity as employer, investor, lender or buyer; Working to achieve dialogue with involved parties and other stakeholders, as well as ensuring or cooperating to ensure the right to effective complaints handling for involved parties through prudent processes; Promoting diversity among the employees and ensuring that discrimination against ethnic origin, religion, sexual orientation, functional ability, age or gender shall not occur; Neither investing in nor extending loans to companies that manufacture weapons whose normal use violates basic humanitarian principles; Supporting socially useful objectives and securing important social values in those areas and industry sectors where Luminor operates. Customers, products and services In Luminor we follow best practices, ensuring ethical cooperation towards customers, socially responsible product and services development, including: In depth analysis in customer needs and good faith when offering Luminor products and services; Ethical investments and asset management that follows centrally approved and openly communicated ethical investment guidelines; Prudent credit policies and in depth risk analysis; Pragmatic business advisory and sales, ensuring fair, open and risk aware communication with customers. 14

15 Environment and local society Luminor is committed to taking into account the climate and the environment: Operating so that it is possible to measure, report and handle climate risk which company is exposed to, both directly through its own operations and indirectly as an investor and lender; Operating as energy efficiently as possible; Promoting continual environmental improvements and to meeting requirements from the authorities and internal requirements concerning the external environment; Minimising its indirect impact on the environment in its capacity as owner/investor, lender and purchaser; Promoting greater environmental responsibility and encouraging the development and distribution of environmentally friendly and sustainable technology and solutions; Encouraging and ensuring open dialogue with local societies. DIVERSITY We are establishing a new generation bank, which employs curious, collaborative and dedicated Luminor people. We value the well-being of our employees and understand that overall satisfaction is based on the balance between working and private life, which allows employees to invest their energy in the team. The value proposition to our employees gives the top specialists working at Luminor the opportunity to focus on achieving the best possible results in their careers. We offer a contemporary environment and professional challenges as well as development opportunities via the possibility to work together with experts of other fields. We understand that in addition to our common goals, each Luminor employee has their personal goals and preferences, which is why the flexible part of the value proposition gives them the opportunity to choose the benefits that are the most important to them. Curiosity, cooperation and focus are Luminor s values. It s important to us that people want to work and develop at Luminor and achieve their best professional performance here, which will help Luminor reach its strategic objectives. 15

16 FINANCIAL RESULTS OVERVIEW OF THE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME On October 1st, 2017 DNB Bank ASA (Org. No ) and Nordea Bank AB (Swedish company registration No ), after all regulatory approvals and competition clearance were received, have combined their Baltic business into a jointly owned bank, Luminor. In Estonia Nordea Bank AB Estonia branch assets and liabilities, including shares of leasing, pension and distressed assets companies were transferred to Luminor Bank AS (prev. Aktsiaselts DNB Pank). The merger between DNB and Nordea has had significant impact both to the financial result and operational focus full year result for Luminor Group in Estonia consists of 9 months DNB Group result plus 3 months Luminor Group result. The new bank is now better equipped to counter increasing competition and capitalise on scale in order to become the main full service bank for more businesses, customers and partners. The larger scale will enable to extract benefits that would be difficult to achieve as stand-alone banks. Luminor Estonia has managed to maintain its business momentum while integrating the operations after the merger to achieve a solid financial result in Largely due to the merger the net interest income and the net fees and commissions increased year on year by EUR 16 million and EUR 3.4 million, respectively, reaching a combined figure of EUR 31.6 million in The operating expenses in 2017 were also impacted by various mergerrelated costs. Profit for the year amounted to EUR 13.3 million. QUALITY OF ASSETS After merging businesses from 1st of October 2017 Luminor has started to work in accordance with joint Credit manual and Credit strategy. Consequently, there is a joint approach to risk classification and calculation of risk related measures (e.g. loss given default, internal capital, credit conversion factors for off-balance). The overall quality of credit portfolio remains good and the portfolio structure is balanced. This is supported by no significant new loan losses in The net impairment reversal of loans and receivables in 2017 amounted to EUR 0.1 million (1.6 million euros in 2016). BALANCE SHEET OVERVIEW LOAN PORTFOLIO As at the end of Q Luminor credit portfolio amounted to EUR 3.23 billion. Mortgage loans and loans to legal entities represent 33.4% and 30.2% respectively of Luminor credit portfolio. Leasing and factoring portfolio is accounting for 33.7% of total exposure, the remaining 2.7% is formed by debt securities and consumer lending. 16

17 Luminor market share in lending in Estonia is approximately 18%. DEPOSITS AND SAVINGS The volume of deposits from customers amounted to EUR 1.65 billion by the end of Deposits from corporate customers represented 57%, while private customers deposits represented 30%. The remaining 13% of deposits were from the public sector. The loan to deposit ratio has increased in 2017 due to the merger (196% in 2017, 165% in 2016). The goal is to improve the ratio by attracting more deposits and increasing the share of deposits from private customers. Luminor market share in deposits in Estonia is approximately 10%. PRIORITIES FOR 2018 Luminor is created by merging Nordea s and DNB s Baltic operations to form a new standalone Baltic bank with arm s-length governance from both parent banks. Both organisations are proud of their Nordic roots and culture and are built with strong Nordic banking traditions. This entails long term view to strategy, customer centric service models, conservative risk taking and collaborative and balanced corporate culture. After the merger Luminor in Estonia has sufficient scale to compete with the largest players, but we will be limited by our technological standing and merger affected organisations. Therefore, one of the biggest goals of Luminor is to complete the activities associated with the merger and build a single well-functioning organisation. This starting point impacts many of our strategic choices and short to medium-term activities, but we are determined to execute on our key strategic priorities: Creation of a leading customer centric, primarily Baltic bank with Nordic roots: Achieve service excellence and implement operational excellence; Operational and funding independence over time: IT separation and consolidation, set-up of required group functions and drive balance sheet efficiencies; and Achieve a sustainable return on equity in line with the company s cost of equity. Another goal we ve set ourselves is to increase our loan portfolio in a sustainable manner, maintain and improve our position among the target group of clients and improve the credit risk quality. We want to gradually increase the volume of the deposits of our clients and replace funding from parent banks with stable mid- and long-term institutional funding. In an internal corporate restructuring of Luminor Group will take place with an aim to concentrate the entire Baltic businesses of Luminor Group in Luminor Bank AS, a credit institution in Estonia; where Luminor Bank AS in Estonia will remain as the surviving entity while Luminor Bank AB in Lithuania and Luminor Bank AS in Latvia will be merged into Luminor Bank AS in Estonia and cease to exist. A cross border merger would be pursued under Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 17

18 2017 relating to certain aspects of company law as implemented in Lithuania, Latvia and Estonia respectively. All assets and liabilities of the respective subsidiaries would, in accordance with the relevant laws, be transferred into the Luminor Bank AS in Estonia as a matter of universal succession, and each subsidiary would cease to exist as a legal entity upon registration of the cross-border merger. Following the merger, Luminor Bank AS in Estonia would pursue the banking businesses in Lithuania and Latvia through its branches. MANAGEMENT SUPERVISORY BOARD The Articles of Association of Aktsiaselts DNB Pank (Public Limited Company DNB Bank) stipulate that the supervisory board must have at least five members who are elected for a term of five years. The members of the supervisory board are appointed and removed by the sole owner. The supervisory board is a managing body whose main task is to plan the company s activities, give management directions to the management board of the company and organise supervision of the company s operations and the work of the management board. The members of the supervisory board check that the activities of the management board comply with laws, the rules of procedure and other requirements established by the managing bodies of the bank, and make sure that the management board of the company ascertain all risks, monitor them and deal with risk management. The supervisory board must grant its consent in all issue that are strategically significant or particularly important for the company s operations. The supervisory board of Aktsiaselts DNB Pank has five members from the start of the financial year until 1 October 2017: Atle Nicolai Knai (Chairman of the Supervisory Board), Mats Ingemar Wermelin, Björnar Lundi, Olaf Tronsgaard and Eline Skranstad. The working language of the supervisory board is English and the minutes of the supervisory board meetings are in English. No remuneration is paid to the members of the supervisory board. The members of the supervisory board, the persons related to them or the companies controlled by said persons jointly or separately did not hold any shares of Aktsiaselts DNB Pank as at 1 October The supervisory board of Aktsiaselts DNB Pank held 11 meetings during the financial year. On 1 October 2017 DNB Bank ASA and Nordea Bank AB merged their business activities in the Baltic States and Luminor Bank AS started operating. The supervisory board of Luminor Bank AS was formed on 1 October 2017 and Erkki Raasuke, Marilin Pikaro, Hannu Saksala, Christian Wallentin and Mari Mõis were appointed to the supervisory board. 18

19 Erkki Raasuke was elected the Chairman of the Supervisory Board at the supervisory board meeting held on 1 October The working language of the supervisory board is English and the minutes of the supervisory board meetings are in English. The supervisory board of Luminor Estonia supervises the activities of the management board and represents the interests of the owners in the bank. The supervisory board adopts the strategic resolutions that concern the activities of the bank. No remuneration is paid to the members of the supervisory board. The members of the supervisory board, the persons related to them or the companies controlled by said persons jointly or separately did not hold any shares of Luminor Bank AS as at 1 December The supervisory board of Luminor held 10 meetings during the financial year. All members of the supervisory board attended at least half of the supervisory board meetings. MANAGEMENT BOARD The Articles of Association of Aktsiaselts DNB Pank stipulate that the management board must have at least three members who are elected for a term of three years. According to law and the Articles of Association, the management board is a managing body of the company that directs the organisation of the bank s everyday work in accordance with the strategies established by the supervisory board and the general principles of work. The management board of Aktsiaselts DNB Bank had six members from the start of the financial year until 1 October 2017: Ivars Kapitovičs (Chairman), Jaan Liitmäe, Silja Särev, Krõõt Kilvet, Mari Mõis and Hannu Kalevi Saksala. The management board meets regularly after every two weeks. The management board held 22 meetings from 1 January 2017 to 1 October The working language of the management board is English and the minutes of meetings are in English. The members of the member of the management board, the persons related to them or the companies controlled by said persons jointly or separately did not hold any shares of DNB Pank as at 1 October Gunnar Toomemets (Chairman of Management Board), Kairi Evard and Ivar Kallast belong to the management board of Luminor Bank AS, which started operating on 1 October The management board of Luminor Estonia organises the everyday management of Luminor Estonia and represents the bank. The management board is responsible for ensuring that Luminor provides financial services in accordance with the law. HUMAN RESOURCES AND REMUNERATION PRINCIPLES The team of Aktsiaselts DNB Pank consisted of 100 members from the start of the financial year until 1 October The number of employees increased by five people during Developing the competencies of employees and managers as well as their personal development are extremely important to Aktsiaselts DNB Pank. Several training events for managers and employees were organised during the year. The training was carried out by the 19

20 bank s employees or recognised external trainers. The bank cooperates closely with the Latvian and Lithuanian banks belonging to the DNB Group and the head office in Norway in the area of training and development programmes. The employee remuneration system of DNB Bank is based on the principle that the principal salary of an employee comprises the main part of the remuneration paid to the employee. Variable remuneration (bonus) systems, which are based on the individual performance of the employees, are also applied in addition to the principal salary. Quarterly performance pay is applied to leasing employees and the sales performance of the employees is the main criterion for determining such pay. The year-based bonus system is applied to the employees who receive no quarterly performance pay. Maximum limits are established for annual bonuses and generally, the payment of bonuses is deferred for several years. The performance pay paid by DNB Bank to the persons engaged in risk management and the members of the management board in 2017 amounted to euros. DNB Bank does not pay large compensation and does not offer significant non-monetary benefits. On 1 October 2017 DNB Bank ASA and Nordea Bank AB merged their business activities in the Baltic States and Luminor Bank AS started operating. After 1st of October 2017 Luminor has formed a remuneration committee, which consists of four members appointed by the supervisory board of the bank. The members of the remuneration committee are Erkki Raasuke (Chairman), Mari Mõis and Christian Wallentin. The remuneration committee supervises the remuneration of the management board and the employees, assesses the implementation of remuneration principles once a year, makes suggestions about updating the remuneration principles and, if necessary, prepares drafts of the resolutions concerning remuneration for the supervisory board of the credit institution. The number of employees of Luminor after the merger was 633. The organisation of Luminor was restructured and its teams were completed from 1 October 2017 to 31 December, which resulted in the disappearance of overlapping positions. Luminor had 608 employees as at the end of the financial year. Supporting the professional and personal development of its employees is important to Luminor. Opportunities for professional development were offered via challenging job tasks, participation in local and pan-baltic project teams and training carried out in classrooms. Various management training events were organised for managers to help them develop their general management competences. The employee remuneration system of Luminor is based on the principle that the principal salary of an employee comprises the main part of the remuneration paid to the employee. Variable remuneration (bonus) systems, which are based on the individual performance of the employees, are also applied in addition to the principal salary. The variable remuneration of various position groups is paid out either once a quarter or once a year. Managers can also allocate one-off bonuses to employees that have performed exceptionally well. The variable remuneration or bonus related to risk management is deferred for three years according to the requirements arising from regulations if it is higher than the established rate. 20

21 AUDITORS Luminor Bank AS is audited by Ernst & Young Baltic AS since Olesia Abramova is the lead auditor. Luminor Bank AS complies with the auditor rotation requirement. In addition to the statutory audit, the following non-audit services were provided during 2017 by the auditor: a) training services, b) other regulatory reports audits. 21

22 KEY FIGURES (in thousands of Euro) Net profit Average equity Return on equity (ROE), % Average assets Return on assets (ROA), % Net interest income Average interest earning assets Net interest margin (NIM) % Price spread, % Cost / Income ratio, % Explanations Average equity (attributable to owners of the Luminor Bank AS) = (Equity of current year end + Equity of previous year end) / 2 Return on equity (ROE) = Net profit/average equity * 100 Average assets = (Assets of current year end + Assets of previous year end) / 2 Return on assets (ROA) = Net profit/average assets * 100 Average interest earning assets = (Average interest earning assets of current year end + Average interest earning assets of previous year end) / 2 Net interest margin (NIM) = Net interest income/average interest earning assets * 100 Price spread = Yield on interest earning assets* - Cost of interest bearing liabilities** *Yield on interest earning assets = Interest income/average interest earning assets *100 **Cost of interest bearing liabilities = Interest expenses/average interest bearing liabilities *100 Cost/Income Ratio = Total Operating Expenses/Total Income *

23 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 Consolidated statement of comprehensive income for the year (in thousands of Euro) Notes Interest income Interest expense Net interest income Fees and commission income Fees and commission expense Net fees and commission income Net gain from operations with foreign currency Net gain from financial assets designated at fair value through profit or loss 88 0 Other operating income Other operating expenses Net other operating income Net total operating income Salaries and other personnel expenses Other administrative expenses Depreciation and impairment of tangible and intangible assets 20, Total operating expenses Net impairment (losses/ reversal) on loans and receivables Share of the profit of investments in an associate 69 0 Tax expense related to profit or loss from continuing operations Profit for the year Total comprehensive income for the year Profit attributable to: Equity holders of the Bank Total comprehensive income attributable to: Equity holders of the Bank Profit attributed to equity holders of the parent Weighted average number of issued shares (units) Earnings per share (EUR per share) The accounting policies and notes on pages 28 to 99 are an integral part of the consolidated financial statements. 23

24 Consolidated statement of financial position as at 31 December 2017 (in thousands of Euro) Assets Notes Cash and balances with central banks Due from other credit institutions (demand) Receivables from parent pledged as collateral Derivative financial instruments Financial assets at fair value through profit or loss Loans and receivables Due from other credit institutions (term) Debt securities Loans to customers Allowances Investments in an associate Other assets Intangible assets Tangible assets Total assets Liabilities Loans and deposits from credit institutions Deposits from customers Debt securities issued Derivative financial instruments Other liabilities Provisions Total liabilities Shareholder's equity Issued capital Share premium Retained earnings Other reserves Total shareholder's equity attributable to the shareholders of the Bank Total shareholder's equity Total liabilities and shareholder's equity The accounting policies and notes on pages 28 to 99 are an integral part of the consolidated financial statements. 24

25 Consolidated statement of changes in equity for the year (in thousands of Euro) Attributable to equity holders of the bank Notes Share capital Share premium Other reserves Retained earnings Total equity At 1 January Total comprehensive income At 31 December At 1 January Total comprehensive income for the year Issue of share capital Dividends Increase of reserve capital Changes related to merger with Nordea branch At 31 December The accounting policies and notes on pages 28 to 99 are an integral part of the consolidated financial statements. 25

26 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 (in thousands of Euro) Cash flows from operating activities Notes Profit for the year from continuing operations Adjustment for: Depreciation and impairment of tangible and intangible assets 20, Allowances for impaired loans and receivables Provisions 63 0 Loss/(Profit) from impairment of repossessed assets Loss/(Profit) from foreign currency revaluation Interest income Interest expenses Cash flow from operating activities before changes in assets and liabilities Decrease/(Increase) in financial assets fair value Decrease/(Increase) in loans and advances to customers Increase/(Decrease) in due from credit institutions Increase/(Decrease) in due to credit institutions (Increase)/Decrease in receivables from parent pledged as collateral Decrease/(Increase) in accrued income and deferred expenses Decrease/(Increase) in other assets Increase/(Decrease) in client deposits Debt securities issued Increase/(Decrease) in accrued expenses and deferred income (Decrease)/Increase in other liabilities Interest received Interest paid Income tax paid Increase/(decrease) in cash and cash equivalents as a result of operating activities Cash flows from investing activities Acquisition of property and equipment and intangible assets 20, Disposal of property and equipment and intangible assets 19 0 Acquired an associate Acquired cash and cash equivalents during merger Purchase of subsidiaries during merge transaction of Nordea branch (Decrease)/Increase in cash and cash equivalents as a result of investing activities Cash flows from financing activities Increase of share capital and share premium Dividends paid Increase/(decrease) in cash and cash equivalents as a result of financing activities Net increase/(decrease) in cash and cash equivalents