ANNUAL REPORT 2017 SG FINANS AS CLIENT SATISFACTON IS OUR PRIORITY

Transcription

1 HEADLINE ANNUAL REPORT 2017 SG FINANS AS CLIENT SATISFACTON IS OUR PRIORITY

2 2 SG Finans AS aims with local presence and international network to please the Nordic industry for capital intensive equipment, liquidity and administrative services by flexible financial solutions. Client satisfaction is our priority, and the following values guide all our activities; team spirit, engagement, innovation, commitment and relations. SG Finans is part of the international retail banking and financial services in Société Générale, number one in leasing equipment in Europe.

3 3 CONTENTS SUMMARY 5 Transform to grow 5 Key figures 6 REPORT OF THE BOARD OF DIRECTORS 7 The company 7 Activities 7 Company development 8 Market conditions 8 Financial results 9 Corporate governance 11 Risk management 11 The organisation and working environment 12 Future prospects 13 SOCIETE GENERALE EQUIPMENT FINANCE PROFILE 15 ORGANISATION 17 Vision and values 17 Brands and image 17 SG Finans AS organisation and management 17 SG Finans Norway 18 SG Finans Sweden 20 SG Finans Denmark 21 FINANCIAL STATEMENT 22 Profit and loss account 22 Balance sheet 23 Cash flow statement 25 Statement of changes in equity 26 Notes 27 AUDITOR S REPORT 63 EMPLOYEE REPRESENTATIVES AND MANAGEMENT 64 ADDRESSES 67

4 SUMMARY 5

5 SUMMARY 5 TRANSFORM TO GROW The result for 2017 shows that our businesses continue developing in a very positive direction. In SG Finans Strategic House for the years to come, transform to grow is one of the key messages given to all SG Finans employees and collaborating partners. STRATEGIC PRIORITIES Provided that the economic context improves we will be able to deliver superior, profitable and sustainable growth in all three countries. In a continuously changing context, what is important is to be able to adapt and to transform. We will focus on accelerating our digital transformation to simplify our processes and channels for customer relationships, open ourselves up to new players and solutions, and not at least use data more efficiently. In 2017 we have strengthened our digital capacity on innovation, and we shall use the capacity to increase efficiency, enhance the client experience and create new businesses in factoring and equipment finance. What we have accomplished in the past few years has made us more robust. In 2017 we have shown a capacity to grow and deliver excellent profitability. This is the result of strong commitment by all employees. Our performance confirms also our position as an important player in Société Générale, number one in Europe in Equipment Finance. All in all, 2017 has been another very successful year for SG Finans AS. We will continue to build further on our robust and solid foundations, being the partner of choice for local Scandinavian and international vendors and clients. MAIN POINTS 2017 Operating result for leasing and factoring is MNOK before taxes. The operating result is the best since we started in Net loans to customers amounts to MNOK Up 10,2 % from Losses are showing a positive trend from MNOK in 2016 to MNOK in Our market leader positions in equipment finance and ordinary factoring (Norway) are maintained. We are aiming for higher market shares in Denmark and Sweden going forwards. Carsten Thorne CEO

6 6 SUMMARY KEY FIGURES Amounts in NOK thousand Profit & Loss Net banking income Operating expenses Operating profit before losses Losses on loans Net profit before tax Loans outstanding Equipment Norway Factoring Others Equipment Denmark Equipment Sweden Total loans Capital adequacy Risk weighted assets Total regulatory capital Capital adequacy ratio 21,39 % 20,03 %

7 REPORT OF THE BOARD OF DIRECTORS 7 REPORT OF THE BOARD OF DIRECTORS This year we have seen the strong dynamism of a dedicated sales organisation, the innovation and entrepreneurial spirit of our teams to deliver new solutions to our clients and partners, contributing to the profitable growth of our business. We set ambitious targets for our organisation in order to ensure the continued support to Scandinavian businesses by financing capital-intensive equipment and providing liquidity and administration of receivables. In 2017 we have reinforced our position in the markets, developed our solutions and organisation, delivered solid financial results and thus further strengthened our ability to support the development of our clients and partners. ABOUT THE COMPANY SG Finans AS is a wholly owned company of the Société Générale Group. The company is part of the Société Générale Equipment Finance business line, Europe s leading player for equipment leasing. Factoring is an integrated part of our services and an important solution for our clients liquidity and ability to maintain growth. Société Générale is one of the largest European financial services groups. The head office is located in Paris, France. Based on a diversified and integrated banking model, the Group combines financial solidity with a strategy of sustainable growth, and aims to be the reference for relationship banking, recognised on its markets, close to clients, chosen for the quality and commitment of its teams. Société Générale has been playing a vital role in the economy for 150 years. With more than 145,000 employees, based in 66 countries, the bank serves on a daily basis 31 million clients throughout the world. Société Générale s teams offer advice and services to individual, corporate and institutional customers in three core businesses: Retail banking in France with the Société Générale branch network, Crédit du Nord and Boursorama, offering a comprehensive range of multi-channel financial services at the leading edge of digital innovation; International retail banking, insurance and financial services to corporates with a presence in developing economies and leading specialised businesses; Corporate and investment banking, private banking, asset management and securities services, with recognised expertise, top international rankings and integrated solutions. OUR ACTIVITIES With a local presence and a European network, SG Finans AS aims to satisfy the requirements of Scandinavian trade and industry for capital-intensive equipment, liquidity and administrative services. The company is a Scandinavian finance company, and its business is carried out through a broad, Scandinavian distribution network with 15 regional and sales offices in Norway, 5 offices in Sweden and 2 in Denmark. The company s head office is located in Lysaker, Bærum, Norway. At the end of the year, the company had 346 employees. This represents a net reduction of 10 employees during the year. The activities of SG Finans do not pollute the external environment; however, some leasing objects may cause pollution when they are used. SG Finans is reporting a number of indicators for the company s environmental impact, which are part of Société Générale Group s sustainability reporting. The indicators include among others measurement of energy consumption, waste, paper and CO2 footprint. The report is available on the Société Générale Group s web pages. Société Générale is currently included in the main sustainability indices: DJSI (World and Europe), FTSE4Good (Global and Europe), Euronext Vigeo (World, Europe and Eurozone), Ethibel Sustainability Index (ESI) Excellence Europe, 4 of the STOXX ESG Leaders indices, MSCI Low Carbon Leaders Index. MAIN COMPANY DEVELOPMENT Digitalisation and the transformation of our business with new digital solutions remain the priority number for innovation and new development. When we launched the new electronic services, e-invoicing and e-signature, back

8 8 REPORT OF THE BOARD OF DIRECTORS in 2014, we had the ambition that new digital services should contribute significantly to the digital transformation of our business. Truly, it is impressive to observe the speed of change, how quickly new technological solutions are developed and widely spread. With the implementation of e-pledge and the customer portal, we have taken further steps to facilitate financing to clients and to improve our support to clients and partners. SG Finans maintains a healthy capitalization level with good coverage of capital buffer requirements. We manage funding profiles and liquidity positions to limit transformation risk in line with regulatory requirements on net stable funding. The company is well prepared for continued growth in financing to Scandinavian businesses. The division of International Banking and Financial Services, including our business line Société Générale Equipment Finance, is one of the key drivers for growth in lending and profitability for the Société Générale Group. SG Finans is one of the core entities to pursue further growth. During 2017, our financing activities to clients increased by 10,2%, reaching MNOK ,8 at the end of the year. This is a growth of MNOK 3.256,9 from the end of The growth was particularly strong within financing of equipment in Denmark and Norway. At the end of 2017, financing in Denmark and Sweden represented 33,4% of total financing of equipment to clients. We expect to maintain higher growth rates in both Denmark and Sweden, while keeping our leading position within both equipment finance and factoring in the Norwegian market. As an important part of the company s focus on relationship-strengthening activities, a number of market initiatives and events have been carried out. The primary objective of these activities is strengthening relations with the company s most important customers and partners. A goal for the future is to continue to develop the company s Scandinavian corporate culture and further strengthen the brands Société Générale Equipment Finance and Société Générale Factoring. EVOLUTION OF MARKET AND MARKET CONDITIONS SG Finans established new financing of assets in Equipment Finance of MNOK ,5 in This is an increase of MNOK 560,8 or 3,9% compared to Total new financing thus reached the highest level since establishment of SG Finans. The growth in volume compared to previous year is most significant in financing of equipment within agriculture and construction which increase by MNOK 283,4 or 13,0% and MNOK 461,4 or 11,4% respectively. The volume of financing of high-tech equipment is lower with 10,1% compared to 2016, while the financing of industrial equipment grows by 10,2%. The number of new contracts financed is growing with 4,1% compared to The company has established more than new financing contracts in The average margins on new financing are at the same level as in With the intense competition in the markets, we note considerable pressure on margins for new financing in several segments. The mix of new financing is fairly stable compared to previous years, with 15% of new financing in High-tech segment, 39% in Transport and Agriculture equipment and 46% in Industrial Equipment. SG Finans maintains its strong position in the Norwegian market, being the number one provider in equipment finance, as also in factoring. Based on figures from the Association of Norwegian Finance Houses as of end 2017, the company s market shares were respectively: Equipment leasing 27 % Factoring (ordinary) 39 % The Norwegian Equipment Finance market showed a general market growth of 5,8% in 2017 after 13,1% growth last year. SG Finans AS showed a stronger growth in Norway compared to the general market, with new financing increasing by 7,7% to MNOK 9.504,0. In Norway the growth in new financing for SG Finans is most pronounced in financing of industrial equipment, which increased by 17%. In Norway, the margins on new financing were slightly higher compared to 2016, while the number of new financing contracts increased by 3,9% to reach in Within Factoring, SG Finans AS has established contracts with new clients representing more than MNOK 1.149,7 in financing volume and more than 383 thousand invoices for administration. The new financing volume is 12% higher than the new volume achieved in 2016, while the number of invoices is lower with 15% new invoices less in 2017 compared to the year before. We have continued as planned in Denmark to increase the volume of new financing of equipment through In Denmark we have financed equipment for MNOK 3.077,3 which is an increase of 13,3% compared to The margin on new financing are generally higher than the year before, and with we see the number of new financing contracts increase by 26,9%. In Sweden we have established new financing of MNOK 2.474,2 which represents a decrease of 16,1%. We initiated a reorganisation of the sales teams in Sweden late 2016 and early 2017, and the volumes of new financing are again increasing in the second half of 2017 after the new sales organisation is established and complete. Margins on new financing are lower in 2017 in Sweden compared to the year before. With a total of new financing contracts, the number is also lower than 2016, with a decrease of 9,2%.

9 REPORT OF THE BOARD OF DIRECTORS 9 SG Finans retains its position as a market leader in Norway within both product areas. The company maintains a strong and growing market position in Denmark, while the market share in Sweden is lower in 2017 given the lag in new financing volumes through the year. Based on the strong positioning in the Scandinavian markets, SG Finans maintains its role as one of Scandinavia s leading finance companies. FINANCIAL RESULTS (all figures for SG Finans AS) SG Finans produces an operating result of MNOK 853,2 in This is an improvement of 24% from Total comprehensive income, after tax and OCI, is MNOK 760,5, compared to MNOK 334,0 for The increase in total comprehensive income is due to the improved operating result and lower tax expense in In 2017, the Net Banking Income amounts to MNOK 1.500,8. This is an improvement of MNOK 170,2 from 2016 when the Net Banking Income amounted to MNOK 1.330,6. The improvement is mainly due to the impact on Net Interest Income from the reversal of previous fixed income investments part of the company s asset-liability management. The impact is described in further detail under the section Risk Management below. Net Interest Income amounts to MNOK 1.210,9 compared to MNOK 1.047,0 in 2016, which is an increase of MNOK 163,8 during the year. The impact on Net Interest Income from the reversal of fixed interest rate investments represents MNOK 163,5. The average volume of financing to clients has increased with 7,1% compared to The growth in average volume of financing is strongest in Denmark with a growth in average volume of financing of 19,4%. Growth in financing volume normally results in increasing Net Interest Income, but due to the lower Net Interest Margin in 2017 in financing to clients, Net Interest Income remains at the same level as in 2016 when adjusting for the one-off impact of the reversal of fixed interest investments. Net Interest Margin measured against the average volume of financing to clients drops in all three countries during 2017 compared to the year before. Also in 2017, the historical low level of interest rates, with negative interest rates in both DKK and SEK through the year, demonstrate the challenges in stimulating the Scandinavian economies to new growth. Other Income represents MNOK 290,0 in 2017 compared to MNOK 283,6 in This is an increase of MNOK 6,4 or 2,2%, and the underlying elements of Other Income remain stable. The largest source of Other Income is gains on sale of assets and used equipment, which includes residual income from prolongation of leasing contracts after ordinary contract term and early termination of contracts. These gains on sales represent more than half of Other Income with MNOK 148,6 in 2017, compared to MNOK 146,3 in Net income from Commissions and fees represent MNOK 130,1 in 2017 compared to MNOK 131,7 in Operating Expenses amount in 2017 to MNOK 611,0 compared to MNOK 588,7 in This is an increase of MNOK 22,3 or 3,8% during the year. The increase in operational expenses comes mainly from higher expenses for retirement benefits, increased fees for external consultants and temporary staff and communication expenses. Staff expenses amount to MNOK 384,1 and represent thus 62,9% of total Operating Expenses which is same level as last year (2016: 63,1%). Payroll increases by 0,1% compared to previous year, while pension expenses and retirement benefits increase by 26,7%. The Board has decided to pay an extraordinary bonus to all staff for the excellent results produced in Other Expenses amount in 2017 to MNOK 226,8 compared to MNOK 217,0 in This is a increase by MNOK 9,8 or 4,5%. The increase in Other Expenses is mainly due to increased fees for external consultants, temporary staff and higher marketing and communication expenses. The cost of risk drops again in 2017 compared to previous years. Total cost of risk amounts to MNOK 36,7. This is a reduction of 30,3% or MNOK 15,9 from the MNOK 52,6 cost of risk in The cost of risk represents 0,11% of average funded assets in 2017 compared to 0,17% in The cost of risk in 2017 is below the company s long-term expected average cost of risk. We note in particular a reduction in cost of risk within Equipment Finance in Norway during the year. Total loans outstanding has decreased from NOK 36,4 billion to NOK 35,7 billion. This is an decrease of 1,9% during the year. While loans to customers continue increasing, loans to financial institutions drop with the reversal of fixed rate investments. Net loans to customers at the end of 2017 amounted to NOK 35,3 billion compared to NOK 32,0 billion at the end of 2016, which is an increase of 10,2%. The branches in Sweden and Denmark represented 31,4% of net loans to customers at the end of the year. This is an increase compared to end of In line with the decrease in total loans outstanding, our funding, i.e. loans and deposits from financial institutions with agreed maturity, is down by 5,0% and reaches at the end of 2017 NOK 28,7 billion, down from NOK 30,2 billion end of Net loans to customer represent thus 123,0% of loans and deposits from financial institutions with agreed maturity as at This is an increase from 106,0% at the end of 2016 which is linked to the change in asset-liability management principles

10 10 REPORT OF THE BOARD OF DIRECTORS implemented in The majority of our funding is raised from the parent, Société Génerale Group. Total write-downs for credit risk was at year end MNOK 386,2 corresponding to 1,08% of total outstanding loans to customers. This is an increase of MNOK 6,6 during the year. In comparison, at the end of 2016, total write-downs for credit risk represented MNOK 379,6, or 1,17% of total outstanding loans to customers. Gross doubtful loans were MNOK 869,5, which is an increase of MNOK 75,0 or 9,4% compared to MNOK 794,5 at the end of the previous year. This represented 2,4% of total loans to customers, down from 2,5% at the end of We observe generally lower cost of risk in spite of the increased amount of defaulted engagements. Considering the evolution of the Scandinavian economies, we assess the uncertainty in relation to future losses in line with or below long-term average. Write-downs for credit losses are done based on individual engagements, and the company has not made write-downs for groups of assets. This is in line with the Société Générale Equipment Finance s principles and guidelines. The Board assesses that the write-downs for credit losses represent a satisfactory estimate of expected losses in the portfolio by year-end The company has adapted the methodology, procedures and reporting tools for the measurement and presentation of financial instruments in line with the new accounting standard for financial instruments, IFRS9, which will enter into force from The total level of write downs for credit losses will increase further through the introduction of IFRS9. This impact is considered in the company capital planning and assessment of allocation of total comprehensive income. Assets that are repossessed as a result of defaulted leasing and loan contracts amounted at year end to MNOK 25,9 from total 154 contracts. This is an increase of MNOK 2,1 during the year compared to MNOK 23,8 from total 200 contracts at the end of Turnover during the year from the sale of repossessed assets amounted to MNOK 317,5 which is higher than in 2016 when the turnover was MNOK 272,4. The company has achieved acceptable prices on sale of repossessed assets in 2017, and the market for second-hand equipment has generally been good. A substantial part of the sale of repossessed assets is handled through SG Finans webbased auction portal. We experience that this solution is well received and appreciated in the market. The company s common equity at the end of the year was MNOK 5.066,1 including net result of the year as proposed allocated to other equity. Total regulatory capital for the calculation of the capital coverage amounted to MNOK 6.003,8 as at Regulatory core capital represented MNOK 4.903,8. The total capital coverage by year end 2017 was 21,4%, which is above the level as at the end of previous year. The regulatory minimum requirement, including capital buffer requirements, is 15,02% at the end of This includes the prudential increase by 0,5% of the countercyclical capital buffer requirement which came into force with effect from 31 December The effective institution specific countercyclical capital buffer requirement for SG Finans, as defined by the country specific requirements for the portfolio, is 1,52% at the end of At the end of the year, SG Finans total capital ratio is well above regulatory minimum requirements and internal targets, with 6,4% or MNOK 1.787,5 total capital above regulatory minimum pilar one capital requirements. The core capital ( tier 1 ) ratio was 17,5% at the end of 2017, which is well above the regulatory minimum requirement for the core capital ratio at 13,02% at year-end. SG Finans had at end of 2017 core capital of MNOK 1248,9 above minimum regulatory requirements. Finanstilsynet issued in December 2016, prudential requirements for SG Finans which require the entity to maintain 1,5% common equity capital above minimum own funds requirements, with effect from 1 January Furthermore, the regulator recommends that SG Finans maintains common equity tier one capital above 15,5%. Finanstilsynet confirmed again the prudential requirements and recommendation as part of the supervisory risk evaluation process in The Board takes into consideration this additional requirement and recommendation from the regulator in the proposal for allocation of net result for 2017, assessments of dividends and capital planning going forward. SG Finans calculates the capital requirement and capital coverage for 2017 based on the advanced internal ratings based method ( A-IRB ) for credit risk for the main portfolios and standard method for other portfolios, while using the basic indicator approach for operational risk. The calculation basis for calculation of capital adequacy was MNOK ,5 at the end of Of this, riskweighted assets for credit risk represented MNOK ,7. This is an increase in risk-weighted assets (credit risk) from 2016 of 6,8%. The regulatory pilar one capital requirement for operational risk was MNOK 195,2. The company does not take market risk and the regulatory capital requirement for market risk was zero. The minimum regulatory requirement for total capital (8%) was MNOK 2.245,7. In addition, the Norwegian regulator has implemented minimum capital buffer requirements at end 2017 of total 7,02% as follows: Capital conservation buffer requirement of 2,5% which represents MNOK 701,8 Systemic risk buffer requirement of 3,0% which represents MNOK 842,1 Countercyclical buffer requirement of 1,52% which represents MNOK 426,6

11 REPORT OF THE BOARD OF DIRECTORS 11 The capital buffer requirements shall be covered in addition to the core capital (tier 1) requirement of minimum 6,0%, meaning that core capital ratio (tier 1 ratio) shall be at least 13,02%. The total capital requirement including buffers is therefore 15,02%. The Board closely monitors development in prudential capital requirements in order to early plan and initiate measures to manage capital levels and capital buffers in relation to expected growth, unexpected credit losses as well as established market practice. As part of the company s capital management procedures, stress testing of all relevant risks is performed and the change in the capital requirement under various stress scenarios is evaluated. The results of the stress testing of the individual risk areas show that in the aggregate, i.e. if all main risks occur at the same time, the potential impact on earnings / capital is well covered by the company s buffer capital and internal minimum capital targets. The capital adequacy is considered satisfactory considering the results of the performed stress tests. The available capital buffer, after performed stress tests and regulatory capital buffer requirements, is MNOK 1.787,5 compared to MNOK 1.414,2 at the end of Total comprehensive income, after tax and OCI, for 2017 is MNOK 760,5. Further to assessment of current capital levels, prudential capital requirements and internal capital targets, The Board proposes to allocate total comprehensive income for 2017, MNOK 760,5, to Other Equity. The Board considers that the financial statements give a true and fair view of the company s financial position. Other than what is stated in the accounts there have not been any events after balance-sheet date that may have any significant impact on the financial statements. Based on the results of the year, the Board concludes that there are grounds for going concern, and this forms the basis for the preparation of the financial statements for CORPORATE GOVERNANCE SG Finans is a wholly owned subsidiary of Société Générale Group, and is subject to comprehensive reporting to and controls from the parent company. Furthermore, the company has established a number of functions to ensure good monitoring and control of the company development, use of resources and risk taking. The company takes credit risk through lending and financing of equipment, while other types of risk are hedged or limited to the extent this is possible and practicable. The company s principles and guidelines for internal governance and internal control are based on among other CEBS guidelines and recommendations. It is established formal committees and procedures for monitoring and control, including control of credit risk, financial risks, operational risks as well as for internal control, compliance, anti-money laundering and audit. The Board of Directors has established a dedicated risk committee for the monitoring of the company s risk governance, i.e. risk appetite and strategies, risk tolerance and exposures, risk management and pricing of assets and liabilities. Furthermore, management testing of internal controls has been integrated in the group permanent supervision tool, GPS. The tool facilitates testing, documentation and reporting and supervision of any anomalies, and should thus contribute to further strengthening internal control. In order to increase staff awareness and comprehension, the company has pursued training programmes on among others international sanctions, anti-money laundering, anti-corruption and management of conflicts of interest. SG Finans thus complies with the internal requirements defined by the parent company, and the company representatives participate in relevant external forums to contribute to the development of rules and regulations for financing companies. The company has updated by-laws, organisation of governance and supervision as well as control functions, as part of the adaptation to the new Norwegian law on financial institutions which entered into force from RISK MANAGEMENT The company s principles for risk management are described more in detail in the notes to the financial statements, cf in particular the note 18 on Risk Management. SG Finans has a policy of prudent risk taking, where the fundamental principle is that the company shall earn money on credit and / or object risk, while other risks are managed, hedged or limited within defined limits, or in case no limits are defined, to the extent practicable. In the business of financing assets (equipment leasing) and receivables (factoring) credit risk is the most important risk for the company. Effectively managing credit risk is fundamental. The company has implemented credit policies, organising procedures and regulations as well as models which address this need. SG Finans has developed classification models for risk assessment and management of credits, which provide a good view of the risk profile of the portfolio. The classification builds on debtor solidity and market value assessments of the assets. The French and Norwegian regulators have validated SG Finans use of internal models for the calculation of capital requirements according to the Advanced Internal

12 12 REPORT OF THE BOARD OF DIRECTORS Rating based approach. For the purpose of calculation of capital requirements, SG Finans uses calibrated models for among others the calculation of the probability that a debtor defaults as well as the final loss in case of a default. The financing provided is generally secured by direct ownership (leasing) or pledge (loans). The value development of the financed objects is therefore critical in assessing and controlling the risk profile of the portfolio, and knowledge about the object s second-hand value, liquidity and markets is fundamental for the credit quality and total loss in the portfolio. The risk management approach is to balance credit risk (counterparty) and asset value development of the financed equipment or invoice serving as security for our financing. Since the experiences of the severe consequences of the financial crisis in Europe and globally, regulators have focussed increasingly on ensuring banks and financial institutions have access to necessary liquidity at all times. SG Finans has continuously adapted the maturity profile of funding to match maturities of lending in order to ensure stable long term funding and long term coverage of liquidity requirements. We have refocused our funding strategies to establish new long-term relationships with lenders, in order to broaden our funding sources. As part of liquidity planning and management, we assess sensitivities and continuously maintain liquidity contingency back-up plans. SG Finans contribute to the Société Génerale Group liquidity planning and assessment of liquidity reserve requirements. SG Finans main source of funding remains the parent company and we maintain a close contact with our parent. In total we can conclude that the company has had access to satisfactory levels of funding and liquidity. The company is subject to internal and external capital adequacy requirements. The internal guidelines compel the company always to comply with the internal requirements which are stricter than the regulatory minimum requirements. As part of the company s policy and procedures for capital management, the company regularly performs assessment of the capital situation and capital adequacy in given stress tests for various scenarios and relevant types of risk. This has been carried out in accordance with the regulatory requirements for internal processes for the assessment of capital adequacy (Internal Capital Adequacy Assessment Process or ICAAP). The analysis demonstrates that the company s capital adequacy and solidity is satisfactory in respect of expected future growth and also following the stress tests that have been performed. In order to align the principles for management of assets and liabilities, SG Finans reversed fixed rate investments to financial institutions for an amount of NOK 4,0 billion in The change in principles was validated by the asset-liability committee in the entity and at parent level. Further to the reversal of the fixed rate investment position, the company reduced its risk-weighted assets with approximately MNOK 800 and realised a one-off impact in profit and loss of MNOK 163,5. The impact is presented under Net Interest Income. The transaction lead to an increase in the core capital ratio of close to 1,0%. SG Finans has implemented and operated the central elements in Société Générale Group s methods and procedures for operational risk management. As a part of this, the company monitors and reports on key risk indicators for operational risk and scenario analysis of different stress scenarios, in addition to reporting of events and losses and the group s framework for selfassessment of risks and controls. On an overall level, the Board assesses the level of operational risk losses in the company in 2017 as acceptable. As part of Société Générale group, the company has worked in line with the group s principles and framework for internal control and corporate governance. Assessments are made of relevant risks and the efficiency of internal controls. The results of these assessments are considered satisfactory. THE ORGANISATION AND WORKING ENVIRONMENT At the end of the year the company had 346 employees, whereof 265 in the Norwegian operations, 41 in Sweden and 40 in Denmark. The number of staff is reduced with 10 employees during the year. The decrease in number of staff is mainly due to increased efficiencies in internal processes. The average number of FTE is lower in 2017 compared to 2016, with an average of 345,5 FTE in 2017 compared to 353,9 FTE During the year, the company has recruited 24 new employees, compared to 12 new employees in The Board welcomes all new employees joining SG Finans. SG Finans focuses on ensuring that its employees experience equal opportunities, and work designed to achieve this has been incorporated into the company s strategy plan. Furthermore, the company has established functions and procedures to prevent any form of discrimination. This includes the Remuneration and Recruitment Committee and the Work Environment Committee, whose members are equally staff representatives and company management, anonymous whistle-blower protection procedures for employees,

13 REPORT OF THE BOARD OF DIRECTORS 13 periodic staff appraisal reviews as well as staff satisfaction surveys where any potential discrimination shall be identified and avoided. As an IA-company ( Including working environment ) SG Finans has in the plans for the company s IA-activities defined measures to avoid discrimination of employees with disabilities in new recruitments. The company facilities are adapted to employees with disabilities. Based on the above functions and measures the company procedures related to the law against discrimination and availability ( diskriminerings- og tilgjengelighetsloven ) are considered satisfactory. SG Finans reports on a set of indicators related to corporate and social responsibility, including diversity, workers rights and social conditions, which are part of Société Générale Group s sustainability reporting. The report is available on the Société Générale Group s web pages. Turnover has increased from 4,4% in 2016 to 9,8% in This increase is mainly due to the closing of a sales office in Sweden combined with workforce reductions due to increased efficiency, especially within back-office/ operations. SG Finans AS as a provider of specialist financial services is exposed to a restricted market for the required skills and competencies reflecting the strong demand for employees with expertise in the finance sector. Being the leading finance company within equipment finance and factoring in Norway and part of Société Générale Group are clearly advantages in attracting new talents to the organisation. The number of days of absence due to illness is about the same level in 2017 compared to the year before, and at an acceptable level at a total of absence days, compared to in The rate of absence during 2017 is 2,25% compared to 2,3% in SG Finans has a strong and continuous focus on measures to keep the rate of absence as low as possible. This is done by offering regular management training and support from HR on how to prevent long term sick leave as well as close cooperation with our company health provider. We offer inhouse exercise facilities at the head office at Lysaker with a physiotherapist present once a week to prevent musculoskeletal problems among the employees. The Board is not aware of any personal injuries occurred at work in The working environment at SG Finans is considered to be good. This was again confirmed in the company s staff satisfaction survey in The company has a Work Environment Committee and a Cooperation Committee. Legally required meetings have been held. The Board compensation committee has monitored compensation to identified staff in line with regulation on compensation, and the compensation policy, including quantitative and qualitative criteria for fixed and variable compensation, is reviewed on at least yearly basis by the Board compensation committee. Various cultural and expertise-building measures have been conducted in the year, both at local (regional and branch) and central level. Emphasis has also been placed on continuing to build up a common Scandinavian culture based on the company and group values. Simultaneously we are promoting the advantages of being part of one of Europe s largest banking groups to the company s employees. Being part of Société Générale group is actively marketed in recruitment of new staff and is an important part of the company s employer branding. FUTURE PROSPECTS We are ending a year of many completed achievements, positive development of the company and strong financial results. At the same time we are conscious about the fundamental and rapid changes the Scandinavian financial industry is facing with increased digitalisation. The offer, demand, value chains and business models, for financial services, are under transformation with the codification of processes, change in distribution models, development of sharing economies and platforms, as well as the potential entry of global players in our local markets. With the low level of interest rates and exceptional high availability of liquidity, the financing of businesses, and in particular to our main market segment, SME s, is under strong competitive pressure has demonstrated a shift towards more positive signs for stronger economic development. The Scandinavian region also demonstrates more positive trends for growth. However, the economic environment lead us to expect still exceptional low levels of interest rates in the coming year. Current indications are that interest rates will not increase significantly before the late part of 2018, at the earliest. Such low levels of interest rates should normally strengthen the debt servicing capacity of our clients, and we therefore may expect bankruptcy levels and cost of risk in line with or below long term averages. Considering the low cost of debt financing, we may also expect more business to priorities investments for further growth, which again should underpin a growth in our business. SG Finans is well prepared for serving our clients and partners, in their requirement for financial solutions to improve liquidity and to make available the equipment necessary for their activities. It is important for SG Finans that our clients and partners experience that the company has the willingness and ability to be a long-term partner for financing of capital goods and equipment. Our focus

14 14 REPORT OF THE BOARD OF DIRECTORS From left: Philippe Dairien, Jacques Bensen, Anett Carlsson, Jochen Jehmlich, Ellen Altenborg and Carsten Thorne. will continue to be maintaining and developing the good relations to our existing clients and partners and developing new long-term relations. SG Finans has demonstrated the capability to adapt to new regulatory requirements, to maintain strong earnings and thus create the basis for future capitalisation and at the same time to develop our tools and staff to the satisfy client and vendor partner demands. The organisation is well prepared to meet the challenges for the coming years. The company has employees with a high degree of competence and experience and the organisation has both the capacity and will for adjustment and change. Lysaker 15 March 2018 Jochen Jehmlich Philippe Dairien Anett Carlsson Ellen Altenborg Jacques Bensen Tommy Pedersen Carsten Thorne Managing Director

15 SOCIETE GENERALE EQUIPMENT FINANCE 15 SOCIETE GENERALE EQUIPMENT FINANCE PROFILE Societe Generale Equipment Finance is a leading partner for manufacturers and vendors in Europe, the Americas, Africa & Asia. With a presence in 41 countries, Societe Generale Equipment Finance is part of the French banking group Societe Generale. Our skilled local teams can provide sales finance facilities adapted to the different needs of international manufacturers and distributors. In all countries, our teams have sound industry and project knowledge in the transportation, industrial equipment and technology markets. HQ PARIS Our business is well-balanced with a wide range of assets financed along the entire value chain from manufacturer to end user, to whom we offer an attractive range of tailor-made equipment finance solutions (lease, operating lease, receivables & loans) as well as insurance for asset-financing needs. Our clients trust our multicultural expertise and deep market knowledge. SGEF s key mission is to be the first choice for clients and vendors around the world through consistent customer focus, innovation and professionalism. SGEF aims to establish long-term partnerships, built on mutual benefits. Accordingly, a broad offer of vendor services and cooperation is available. Depending on our partners sales strategy, they can choose between various leasing services offered to their customers under their own brand, co-branding agreements or loose cooperation arrangements. They can also benefit from further Societe Generale Equipment Finance services, such as individual sales promotion campaigns or accounting, collection and reporting services. In 2017 Societe Generale Equipment Finance reaffirmed its leading position with a N.2 position at the European and global level. The company was awarded EU SME Champion and Vendor Finance Provider of the year by Leasing Life. Societe Generale Equipment Finance managed a portfolio of 27.2bn in outstandings for the full year 2017 while New Business Volume increased by 8% to 12.4 bn.

16 16 AVSNITTSTITTEL

17 ORGANISATION 17 ORGANISATION SG Finans is a wholly owned company of the Société Générale Group. The company operates through fifteen regional offices in Norway, four in Sweden and two in Denmark. The company s head office is in Lysaker (near Oslo). At the end of 2017 the total number of employees was 346. SG Finans is a part of Société Générale Equipment Finance, a leading player in equipment leasing in Europe. Société Générale group has employees and is represented in 66 countries. VISION AND VALUES SG Finans wants to be seen as a leading Scandinavian player who creates values through teamwork and knowledge. The vision is based on the following core values: Relations Innovation Commitment Team spirit Responsibility BRANDS AND IMAGE The core activities are equipment finance (leasing) and factoring. Brands are Société Générale Equipment Finance and Société Générale Factoring. At company level the brand is Société Générale Equipment Finance. SG FINANS ORGANISATION AND MANAGEMENT* The business activities of SG Finans are organized into regions in Norway and Denmark and branch offices in Sweden. Key corporate functions are: Credit, Finance, Compliance, Risk control, IT and HR together with the Departments Sales- & Business Development Equipment (SOFE) and Factoring (SOFF). CEO Carsten Thorne Internal audit Carl Gunnar Lunde Finance, Compliance and Risk Control Hans Einar Herzog Deputy to the CEO Sale & Business development equipment Finn Mathisen Sale & Business development factoring Kjell Vegard Opheim HR Maria Ulla IT Sverre Edin Group coordinator Kjell Brevik Credit Armand Taillandier Sweden Jonas Böös Denmark Lars Rasmussen Region North, Norway Stig-Are Eriksen Region South, Norway Nina Bratlie Region East, Norway Magne Sogn Region West, Norway Espen Brochmann * From

18 18 ORGANISATION SG FINANS NORWAY EQUIPMENT SG Finans is still the number one provider in equipment finance in Norway. Based on the figures from the Association of Norwegian Finance Houses of , the company s market share in equipment is 27,4 %. In 2017 the total leasing market in Norway reached a historical top in the industrial and construction sector. Product Director Equipment, Finn Mathisen Historical high amount a of total equipment financing in Norway passed the cap of 32 bn NOK in 2017, and the equipment finance market showed a general market growth of 5,8% after a 13,1% growth last year. SG Finans showed a stronger growth in Norway compared to the general market, with new financing increasing by 7,7% to MNOK 9.504,0. The market share for SG Finans is as mentioned at 27,4 %, followed by DNB with 17,4 % and Sparebank 1 and Brage, both companies with a market share of 14%. In Norway the growth in new financing for SG Finans is most pronounced in financing of industrial equipment, which increased by 17%. The margins on new financing were slightly higher compared to 2016, while the number of new financing contracts increased by 3,9% reaching in For the years to come we expect leasing financing to keep a comparable level as in We also see a positive development in the main sectors, construction, agriculture and transportation. In the high tech segment, the total market remains at a low level, though we can see an important interest in digital investments in all sectors. The positive development indicates a growth in the market from 0 5 % in Profitable growth is still the priority for SG Finans and the company is continuously improving its good relationship with vendors and dealers. For 2018, we expect a moderate growth in the Norwegian economy and there are some signs of positive effects in the oil sector. It is encouraging that business investments in Norway have risen for successive quarters. REGIONAL Regional Director West Espen Brochmann Regional Director South Nina Bratlie

19 ORGANISATION 19 SG FINANS NORWAY FACTORING 2017 was a good year for the factoring product in SG Finans Norway. New business volume is according to budget, we managed to increase our profit, to reduce cost of risk and we established a new business development team. We also kept our strong position as one of the leading companies in the industry in our market. Product Director Factoring, Kjell Vegard Opheim Total factoring turnover in SG Finance (included invoice discounting and supply chain finance) in 2017 was 223,3 billion NOK. This is an increase of 12,3 % from If you exclude invoice discounting and supply chain finance, the market grew by 5,5 % from 2016 to 2017 and net ordinary factoring turnover ended at 150,3 billion NOK. The increase in the market is driven by the supply chain finance products which are limited in number of transactions but important in terms of volume. Recently we are facing some newcomers in the industry doing more or less traditional factoring business. We also have some new banks targeting the SME segments in addition to new financial technology (fintech) challenging the existent players in the factoring arena. Looking back at 2017, we have developed the factoring products accordingly to our plans by delivering enhancements to our clients and at the same time optimized internal processes. Total funds in use is by year end ,9 billion NOK, up from12,8 billion NOK from This represents an increase of 24,4 %. If we exclude invoice discounting and supply chain finance, the total funds in use is 8,2 billion NOK by year end 2017, an increase of 9,5 % from The business line has set ambitious targets for 2018 and the years to come. We have increased investments in business development, and we expect that our new business development team, together with a very skilled factoring organization, will satisfy our client s needs for a reliable and future-oriented business partner. DIRECTORS Regional Director North Stig-Are Eriksen Regional Director East Magne Sogn

20 20 ORGANISATION SG FINANS SWEDEN For SG Finans in Sweden, 2017 was an intense and interesting year. We experienced tough competition and a stable economic environment, where our focus was on preparing for the next steps towards our long-term target of 10% market share. The financial market showed a strong growth of approximately 9% during There are several factors behind this growth and one of them is the continued strong Swedish economy where GDP grew by approximately 3% by Q4. The prognosis is continued Jonas Böös growth of 2.6% in 2018 that will have a positive effect on the growth of the financial market. Another factor is the negative interest rate set by the central bank, which has stimulated the economy. The central bank expects to increase the interest rate during the second half 2018, but it will continue to be negative until mid The increase in interest rate could have a negative effect on the financial market, even if the pace will be slow. Even though the Swedish GDP grew, the financial health of the companies showed a somewhat different picture. The number of bankruptcies increased with 3% during 2017 compared to 2016, which might indicate a tougher climate for the Swedish companies. The new business volume decreased by 15% in 2017 compared to previous year, which is explained by the change in the organization. Following this, the market share declined to approximately 4% by the end of the year. To strengthen the sales team we have recruited several sales persons that have experience and knowledge of both new sectors as well as existing ones. One of the new sectors where we see a potential for large growth is machine tools. This fits perfect with our growth strategy and will broaden our offer to our customers. SG Finans Sweden delivered a result of 1.79% compared to average funded assets, which was in line with the expectations. Both operational costs and cost of risk were handled in a good way and we are below the expectations at year-end. Overall, SG Finans in Sweden delivered a good result with well-managed costs for We are now prepared for profitable growth in the years to come. During the year, SG Finans Sweden made some changes in the organization of the sales team, in order to have better opportunity for growth in the coming years. In short, previously the main focus has been vendor and dealer business. With the new organization, we have implemented a new team focusing on direct business with end-customers. This will broaden our business offer and enable us to grow towards our target of 10% market share. Following this change, SG Finans in Sweden has a similar sales organization as SG Finans in Norway and Denmark.

21 ORGANISATION 21 SG FINANS DENMARK Continued growth in a flat market an increase in new business volume of 13% contributed to a higher market share and satisfactory growth in the portfolio and net profit. Strong relations and a high level of satisfaction among business partners, customers and employees secure the foundation for further development. After several years of strong growth on the leasing market, growth in 2017 only amounted to approx. 2.5%, and the market did not grow at all within the market areas serviced by SG Finans. Based on our growth in new business volume, the portfolio increased by 18% Lars Rasmussen in With continued growth in operations and favourable developments in terms of general costs and the cost of risk, SG Finans Danmark realised a highly satisfactory operating profit in The Danish economy is healthy, but the growth rates remain low and susceptible to international developments. We expect largely unchanged framework conditions for the business sector in Denmark in We finance the growth and development of the Danish business sector by making the right equipment for the task available on time. We realise this in close cooperation with suppliers of operating equipment, for instance within agricultural implements, transport equipment, contractor machinery, production machinery, IT and medical equipment. This means that, among other things, we help secure the basis for bringing in the harvest, transporting the goods, well-maintained roads, data processing and storage and for enabling doctors to treat the Danish population. For the past eight years, SG Finans Danmark has managed to maintain growth and a positive financial development, building on strong relations and cooperation, a high level of service and products that are easily accessible. Denmark will contribute to fulfilling the overall ambitions of SG Finans by means of continued portfolio and market share growth and input to process optimisation and synergies within SG Finans. We measure our compliance with the vision of SG Finans Danmark: Denmark s preferred leasing company through increasing market shares and maintenance of very high satisfaction among our business partners, customers and employees. Once again in 2017, it gives us great satisfaction to note that we have met these targets. In order to be able to maintain and develop our position and high level of service in the market, SG Finans will continue to place great emphasis on innovation and development of our technological solutions. Digital signatures on financing agreements, a customer portal with digital access through NemID and our web-based distribution portal SGFinans24 are market-leading cornerstones of our current digital solutions. Solutions that will be continuously expanded, also in Based on our common set of values: Relations, Responsibility, Innovation, Commitment and Team Spirit, all of our 41 employees in Denmark help ensure our continued development to thoroughly solidify a position as the preferred leasing company for our target groups. Our expectations of 2018 are a continued high level of activity, with growth in our portfolio.

22 22 FINANCIAL STATEMENT PROFIT AND LOSS ACCOUNT Amounts in NOK thousand NOTES Total interest income Total interest expenses Net interest income Commission and fee income Commission and fee expenses Net fee income Net gains on financial instruments at fair value through P&L Net change in value and gains on foreign currency Total income on other activity Net banking income Total payroll, fees and other staff costs 6, Total other operating expenses Gross operating profit Losses on loans Operating profit Taxes Profit for the year Other comprehensive income Items that could be reclassified Exchange differences on translation of foreign operations Taxes Items that cannot be reclassified Actuarial gains and losses Taxes Other comprehensive income for the year Attributable to: Equity holder of the parent Total comprehensive income of the year

23 FINANCIAL STATEMENT 23 BALANCE SHEET Amounts in NOK thousand NOTES Assets Cash and deposits with central banks 6 10 Deposits with financial institutions 13,22, Loans to financial institutions 22,23, Financial derivatives 10,14, Loans to customers Repayment loans Factoring receivables Factoring loans Financial lease agreements 10, Total loans before allowances Allowances on doubtful loans 8, Net loans to customers 19,22,23, Repossessed assets Shares and primary capital certificates Deferred tax assets Other intangible assets Machinery, tools and equipment, means of transport Other assets Prepayments and accrued income Total assets

24 24 FINANCIAL STATEMENT Amounts in NOK thousand NOTES Liabilities Loans and deposits from financial institutions with agreed maturity 16,22,23,24, Deposits from and debt to customers with termination rights 17, Financial derivatives 10,14, Retention of margin and other customer accounts Other liabilities Accruals and deferred income Pension liabilities Current tax liabilities Subordinated debt 22,23, Total liabilities Equity Share capital Share premium account Other equity including profit for the year Total equity Total liabilities and equity Contingent liabilities Guarantee liabilities 28, Lysaker 15 March 2018 Jochen Jehmlich Philippe Dairien Anett Carlsson Ellen Altenborg Jacques Bensen Tommy Pedersen Carsten Thorne Managing Director

25 FINANCIAL STATEMENT 25 CASH FLOW STATEMENT Amounts in NOK thousand Operations Interest income Interest costs Other receipts Operating expenses Receipts on previous losses Paid taxes Net cash flow from operations New investments leasing Proceeds from sale of leasing Decrease in loans (net) Decrease (increase) in other receivables Decrease (increase) in advance payments Net cash flow from current financial activity Decrease (increase) in tangible assets Net cash flow from investment activity Increase (decrease) in deposits from customers Payment of dividends Currency exchange without cash effect Increase (decrease) in loans from credit institutions Increase (decrease) in debt Increase (decrease) accrued costs Net cash flow from long term financial activity Net cash flow Cash at the 1st of January Cash at the 31st of December Reconciliation cash, 31st of December Cash and deposits with central banks 6 10 Deposits with financial institutions Cash at the 31st of December

26 26 FINANCIAL STATEMENT STATEMENT OF CHANGES IN EQUITY Amounts in NOK thousand Share capital Share premium Retained earnings Translation differences Actuarial gains and losses Total Equity Profit for the year Other comprehensive income Dividends Total equity Equity Profit for the year Other comprehensive income Dividends 0 0 Total equity

27 FINANCIAL STATEMENT 27 NOTES TO THE ACCOUNTS 1. ACCOUNTING PRINCIPLES IMPORTANT ACCOUNTING ESTIMATES AND DISCRETIONARY EVALUATION 34 INCOME STATEMENT 3. NET INTEREST INCOME NET FEE AND INCOME ON OTHER ACTIVITY NET GAINS ON FINANCIAL INSTRUMENTS AT FAIR VALUE OPERATING EXPENSES PENSIONS LOSSES AND ALLOWANCES RECOGNISED IN THE PROFIT AND LOSS ACCOUNTS TAXES 39 BALANCE SHEET 10. INFORMATION ON FAIR VALUE LEASING (FINANCIAL LEASING ASSETS) TANGIBLE FIXED ASSETS AND INTANGIBLE ASSETS RESTRICTED DEPOSITS FINANCIAL DERIVATIVES OFFSETTING FUNDING / INTEREST EXPENSES OTHER LIABILITIES 47 INFORMATION ON RISK 18. RISK MANAGEMENT 47 Credit risk 19. RISK CLASSIFICATION DOUBTFUL LOANS REPOSSESSED ASSETS 53 Interest rate sensitivity 22. INTEREST RISK AND INTEREST RATE ADJUSTMENT PERIOD 54 Liquidity risk 23. LIQUIDITY RISK AND REMAINING MATURITY ON BALANCE SHEET ITEMS 55 Currency risk 24. NET POSITION PER CURRENCY 57 ADDITIONAL INFORMATION 25. OWNERSHIP INFORMATION ON RELATED PARTIES AND REMUNERATIONS CAPITAL ADEQUACY GUARANTEE LIABILITIES AND LOAN COMMITMENTS CONTINGENCIES NUMBER OF EMPLOYEES/FULL-TIME POSITIONS SUMMARY OF COMPENSATION POLICY 62

28 28 FINANCIAL STATEMENT NOTES 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES Company information SG Finans AS is a Scandinavian finance company and its business is carried out through a broad, Scandinavian distribution network with 15 regional and sales offices in Norway, 5 offices in Sweden and 2 in Denmark. SG Finans AS forms part of Société Générale SA, a group listed on the stock exchange with head office in Paris, France. The Group consolidated financial statement is prepared by Société Générale SA, and is available on The company is a limited company incorporated and domiciled in Norway. Its registered office is in Strandveien 18, Lysaker. The separate financial statements for the year ended 31 December 2017 were authorised for issue by Board of directors and annual shareholders meeting on 15 March The basis of preparation of the financial statements SG Finans AS separate financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), approved by the E.U. The financial statements are set up on an historic cost basis, with the exception of the specific recognition criteria for financial instruments as described below. Branches and subsidiary company The financial statements show the figures for SG Finans AS, comprising the business operations in Norway, Denmark (branch) and Sweden (branch). The subsidiary Klokkergårdsveien 32 AS has been exempted from consolidation as the company s profit before taxes and balance both represent less than 0.1 % of the profit and balance for SG Finans AS, as well as the criteria s in IFRS 10.4 are met. Functional currency and presentation currency The functional currency is determined in each unit in SG Finans based on the currency within the unit s primary economic environment. Transactions in foreign currency are translated to functional currency using the exchange rate at the date of the transaction. At the end of each reporting period foreign currency monetary items are translated using the closing rate. Non-monetary items that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction and non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. Changes in the exchange rates are recognised continuously in the accounting period. SG Finans s presentation currency is Norwegian Kroner (NOK). The statement of financial position figures of branches with a different functional currency are translated at the exchange rate prevailing at the end of the reporting period for balance sheet items, and the exchange rate at the date of the transaction for profit and loss items. The monthly average exchange rates are used as an approximation of the transaction exchange rate. Exchange differences are recognised in other comprehensive income ( OCI ). Comparable figures Comparable figures are prepared for profit and loss, balance, cash flow statement and notes. The use of estimates The preparation of financial statements in accordance with IFRS includes assessments, estimates and assumptions that affect both which accounting principle is applied and the reported amounts for assets, liabilities, revenues and expenses. The actual amounts can vary from estimated figures. Estimates and underlying assumptions are reviewed and assessed on an ongoing basis. Changes in accounting estimates are applied in the period in which the estimates are changed, and in all future periods affected. Note 2 provide further information on significant estimates and assumptions. Accrual accounting for interest income, sales gains, commissions and fees Interests are carried at amortised cost in accordance with the effective interest rate method. Commissions received and paid, fees and other related amounts are included in the calculation of the effective interest rate. The expected maturity of the contracts is used as the basis for calculating the effective interest rate for loans, whereas the contractually fixed maturities in the agreements are used for financial leases. When contracts are terminated during the period, the outstanding balance is posted to the income statement as revenue or expense. Loans, loans that are in default or at risk of default and individual/group write-downs Loans are valued at amortised cost with the exception of loans that are at risk of default or in default where there are objective indications of impairment in value. Objective evidence of impairment for credit risk on loans includes significant financial problems at the debtor,

29 FINANCIAL STATEMENT SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) defaulted payments or other material breaches of contract, instances where it is considered probable that the debtor will initiate debt settlement negotiations or other specific circumstances that have occurred. Write-downs will be made if objective evidence of a decline in value can be identified. If there is objective evidence that an impairment in value has occurred, the loss is measured as the difference between the asset s value in the balance sheet and the net present value of estimated future cash flows (excluding future credit losses which have not occurred), discounted with the financial asset s original effective interest rate (i.e. the effective interest rate calculated at inception). The asset s balance sheet value is reduced using a separate provision account. The loss amount is included in the Profit and Loss statement. Loans are defined as being in default when the delay in payment exceeds 90 days and the delay is not due to accidental circumstances at the customer. If a customer has several contracts, but only one is in default, the entire customer engagement is reported as being in default. Loans that are at risk of default are not necessarily in default, however the customer s financial standing and the value of the securities indicate a risk of default. The recovery of loans in default takes place with a new assessment when the applicable payment plans have been followed for a period and the loan is no longer deemed to be at risk of default. Write-downs for credit losses are made for loans on an individual basis. In accordance with the group s guidelines and documentation requirements for write-downs on group s of assets, we have not written down groups of loans. Losses that have been incurred but not reported (IBNR write-downs) have not been written down. When the company collects assets for realisation of a security interest or sells leased objects, and this is due to customer default, the lease object is classified as a repossessed asset and temporarily valued at the assumed net realisable value. Actual losses on realisation are recorded to losses on loans in the income statement. Financial assets When financial assets and liabilities are first entered into the accounts, they are classified in one of the following categories for the purposes of assessing value: Loans and receivables, Fair value with changes in value through profit or loss ( trading ), Other liabilities. Loans and receivables This category includes financial leases and loans that are not listed in an active market and are not defined as assets valued at fair value with changes in value recognised in the income statement. The classification also includes loan factoring, receivables factoring and loans to the parent company. This group is carried at amortised cost. Fair value with changes in value recognised in the income statement The classification includes derivatives that cannot be classified as hedging instruments. Interest income and expenses are recorded directly into the accounts. See separate note on derivatives. Other financial obligations The classification includes borrowings from the parent company and is recorded at amortised cost. Hedging Before a hedging transaction is carried out, the Treasury department assesses whether a derivative (or possibly another financial instrument in the case of a currency hedge) is to be used to hedge the fair value of a recognised asset or liability or a firm commitment. SG Finans s criteria for classifying a derivative or other financial instrument as a hedging instrument are as follows: the hedge is expected to be effective in that it counteracts changes in the fair value of an identified asset - a prospective hedging efficiency of % is expected, the effectiveness of the hedge can be reliably measured, there is adequate documentation when the hedge is entered into that the hedge is effective, and that the hedge is in line with the company s financial policy and risk management strategies. the hedge is evaluated regularly and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated. Fair value hedges: Derivatives designated as hedging instruments are measured at their fair value and changes in the fair value are recognised in the statement of comprehensive income as they arise. Correspondingly, a change in the fair value of the hedged object which is due to the risk that the object is hedged against, is recognised in the statement of comprehensive income. The hedge accounting is discontinued if: a. the hedging instrument expires or is terminated, exercised or sold, or

30 30 FINANCIAL STATEMENT 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) b. the hedge does not meet the abovementioned hedge requirements, or c. the company chooses to discontinue hedge accounting for other reasons. If the hedge assessment is terminated, the changes which have been made in the carrying amount of the hedged object are amortised over the remaining economic life using the effective interest rate method if the hedging instrument is a financial instrument that has been recognised according to the effective interest rate method. Risk classification Interest rate Hedging the interest rate risk from fixed interest rate contracts is implemented through swap contracts where we pay fixed and receive variable interest. This enables us to hedge our financial risk against changes in interest rates, and the loans outstanding match the funding. Interest rate swaps that do not qualify as hedging instruments are classified as trading and presented in the balance sheet in the line item for financial derivatives and changes in value are included in Net gains on financial instruments at fair value. Foreign exchange A Cross Currency Swap is an agreement between two parties to exchange interest payments and principal on loans denominated in two different currencies. In a cross currency swap, a loan s interest payments and principal in one currency would be exchanged for an equally valued loan and interest payments in a different currency. Such swaps allow SG Finans AS to switch its loan and interest repayments in EUR into currencies as NOK, DKK and SEK, or other currencies when required. Valuation of financial instruments Financial instruments are included in the balance sheet at fair value at the date of trade. On subsequent measurement the value in the accounts of financial instruments as defined above is set to either fair value or amortised cost. Refer to Note 10 for further information about fair value. Leasing SG Finans leasing activities comprise financial lease agreements. Financial leasing is classified as leasing and for accounting purposes treated as loans. Contracts with residual value are written off to the residual value over the duration of the contract. The interest component of the lease payments is recorded as interest income in accordance with the principles described in the point for loans, while the principal component reduces the lease loan. Revenue from lease payment is recorded in accordance with the annuity principle. For tax purposes, the leasing objects are depreciated using the declining balance method. Direct marginal revenues and costs when first calculated and the expected gains on sale are included in net interest income. Other leasing gains on sale are posted under other revenues. Factoring Factoring is recorded in accordance with the net method, i.e. the loan to the user of the factoring service is recorded in the balance sheet. This loan is classified as loan factoring. If SG Finans has assumed the credit risk for the receivables then this loan is classified as receivables factoring. Retention of margin and other customer accounts is classified as such when prepayment to customer is lower than factoring receivables. Pension obligations As of January 1, 2013 SG Finans applied IAS 19 Employee Benefits (June 2011) ( IAS 19R ) and changed the basis for calculating the pension liability and costs. The Group previously used the corridor approach when recognising unamortised changes in accounting estimates. The corridor approach is no longer accepted and all changes in accounting estimates shall be recognised in other comprehensive income in accordance with IAS 19R. A distinction is made between insured and uninsured schemes. From 31st of December 2009, the benefit plan in Norway is replaced with a defined contribution schemes. The Swedish and Danish branches only operate defined contribution schemes. The pension calculations are undertaken by actuaries on the basis of assumptions that can change in the future. Income tax The tax expense consists of the tax payable and changes to deferred tax. Deferred tax/tax assets are calculated on all differences between the book value and tax value of assets and liabilities. Deferred tax assets are recognised when it is probable that the company will have a sufficient profit for tax purposes in subsequent periods to utilise the tax asset. The companies recognise previously unrecognised deferred tax assets to the extent it has become probable that the company can utilise the deferred tax asset. Similarly, the company will reduce a deferred tax asset to the extent that the company no longer regards it as probable that it can utilise the deferred tax asset. Deferred tax and deferred tax assets are measured on the basis of the expected future tax rates applicable to the company where temporary differences have arisen.

31 FINANCIAL STATEMENT SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) Deferred tax and deferred tax assets are recognised at their nominal value and classified as non-current asset investments (long-term liabilities) in the balance sheet. Taxes payable and deferred taxes are recognised directly in equity to the extent that they relate to equity transactions. Equity securities Equities held are securities in the subsidiary Klokkergårdsveien 32 AS. The cost method is used in the company accounts. Provisions Provisions are recorded when the company has an obligation (legally or self-imposed) relating to a prior event, it is probable (more probable than not) that a financial settlement will take place as a result of the obligation and the actual amount can be reliably measured. Intangible assets Capitalised software is recorded as an intangible asset and depreciated using the straight-line method based on the estimated lifetime, 3-7 years, from when the software is operational. Capitalisation occurs when the circumstances in accordance with IAS 38 have been met. The costs associated with maintaining the economic value of IT systems are expensed directly. Machinery, tools and equipment, means of transportation Tangible assets are valued at their cost less accumulated depreciation and impairment losses. When assets are sold or disposed of, the carrying amount is derecognised and any gain or loss is recognised in the statement of comprehensive income. The cost of tangible non-current assets is the purchase price, including taxes/duties and costs directly linked to preparing the asset ready for its intended use. Costs incurred after the asset is in use, such as regular maintenance costs, are recognised in the statement of comprehensive income, while other costs that are expected to provide future financial benefits are capitalized. Depreciation is calculated using the straight-line method over the useful life spanning from 3 to 10 years. Cash and cash equivalents Cash includes cash in hand and at bank. Cash equivalents are short-term liquid investments that can be immediately converted into a known amount of cash and have a maximum term to maturity of three months. In the statement of cash flows, the overdraft facility is stated minus the balance of cash and cash equivalents. 1.1 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES No new and amended standards and interpretations have been implemented for the first time in CHANGES IN STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE Standards and interpretations issued up to the date of issuance of the consolidated financial statements, but not yet effective are disclosed below. SG Finans intention is to adopt the relevant new and amended standards and interpretations when they become effective, subject to EU approval before the consolidated financial statements are issued. IFRS 9 Financial instruments In July 2014, IASB published the last sub-project for IFRS 9 and the standard has now been completed. IFRS 9 constitutes amendments linked to the classification and valuation, hedge accounting and impairment. IFRS 9 will replace IAS 39 Financial Instruments - Recognition and Valuation. Those parts of IAS 39 which have not been changed as part of this project have been transferred and included in IFRS 9. The standard will be implemented retrospectively, except for hedge accounting, but preparing comparative figures is not a requirement. The rules for hedge accounting should mainly be implemented prospectively but with some exceptions. The standard have accounting effect from 1 January It is expected that IFRS 9 will have the following effects: Classification and measurement SG Finans portfolios of financial assets were reviewed to determine, based on the characteristics of their contractual cash flows and on how they are managed (business models), their future accounting treatment under IFRS 9. Financial assets are required to be classified into three categories according to applicable measurement methods (amortised cost, fair value through profit or loss and fair value through other comprehensive income). Classification will depend on the contractual cash flow characteristics of the instruments and the entity s business model for managing its financial instruments. Implementing IFRS 9 classification will be modified, but there are no effect on the measurement. The hold to collect business model with collection of principal and interest measured at amortised cost is a continuation of the existing measurement for loan and receivable under IAS 39.

32 32 FINANCIAL STATEMENT 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) Impairment All debt instruments classified as financial assets, measured at amortised cost or at fair value through other comprehensive income, as well as lease receivables, loan commitments and issued financial guarantee contracts, will be systematically subject to depreciation or provision for expected credit losses. This depreciation or provision will be recognised as soon as loans are granted or as soon as commitments are issued, without waiting for objective evidence of impairment to occur. The purpose of this approach is to recognise credit losses in profit or loss on a timely basis, symmetrically to the recognition in profit or loss of the credit spread embedded in the interest income. Thus, these financial assets will be allocated among three categories according to the gradual deterioration of their credit risk since their initial recognition, and an impairment loss will be recognised for each of these categories as follows: Credit risk category Stage 1 Stage 2 Stage 3 Transfer criteria Performing assets Underperforming assets Measurement of credit risk Interest income recognition basis Initial recognition of the instrument in stage 1 12-Month expected credit risk Gross carrying amount of the asset before impairment Credit risk on the instrument has increased significantly since initial recognition/ 35 days past due* Lifetime expected credit risk Gross carrying amount of the asset before impairment Credit-impaired or defaulted assets Evidence that the instrument has become creditimpaired/ 90 days past due Lifetime expected credit risk Net carrying amount of the asset after impairment *SG Finans has observed a higher quality of the stage 2 applying 35 dpd (days past due). Methodologies for measuring depreciations and provisions The measurement of expected credit losses is primarily calculated as the product of the instruments probability of default (PD), loss given default (LGD) and exposure at default. Estimates of 12-month expected credit losses use a maximum of 12-month probability of default, while estimates of lifetime expected credit losses use a probability of default assessed over the remaining life of the instrument. Parameters necessary for these evaluations will be assessed on the basis of financial asset portfolios. For that purpose, portfolios of Group s financial assets and commitments were segmented to ensure their homogeneity in terms of credit risk characteristics and their correlation with the international and local macroeconomic variables that can affect them. This segmentation addresses all specificities encountered in the Group s entities. This new segmentation of portfolios was determined consistently with that used for the needs of the Basel prudential calculations to guarantee the uniqueness of the historical data of default and losses that are used. Assessment of the increase in credit risk Increases in a financial asset s credit risk since its initial recognition, entailing transfer from stage 1 (performing assets) to stage 2 (deteriorated assets), and from stage 2 to stage 3 (non-performing or doubtful loans), are firstly assessed on the basis of the internal credit risk rating currently used by SG Finans. Significant degradation of the rating is assessed on a portfolio basis according to default probability curves used to measure provisions and depreciations for credit risk under IFRS 9. A more than 35 days past due payment automatically trigger the transfer of the related financial asset into stage 2. In addition, if at the closing date a significant increase in credit risk has been identified on a given counterparty, all the outstanding s on this counterparty at this date will then be transferred to stage 2 and depreciated for lifetime expected losses. After this transfer to stage 2, any new instrument concluded with the same counterparty will then be initially recognised in stage 1 and will then follow the process of assessment of the subsequent degradation of the credit risk. SG Finans observes a higher ODR (observed default rate) for the 30 dpd sample than the rest of the portfolio, but it is significantly lower than the 35 dpd. More than 90% of the 30 dpd that defaults, will at some point be included by a 35 dpd rule. By setting the rule to 35 dpd, the probability of falsely classifying good clients as bad is reduced, thus increasing the quality and stability of stage 2. The identification of a default situation leading to a transfer to stage 3 is assessed according to the same criterion as those previously used under IAS 39 for the assessment of an incurred credit risk on an individual outstanding. In the same way, as currently done under IAS 39, the assessment of a default situation on an individual outstanding implies by contagion that all the outstanding s on the defaulting counterparty are transferred to stage 3. Forward looking approach Using a forward-looking approach to determine the amount of expected credit losses (12-month or lifetime) depends above all on the integration of the economic perspectives in the evaluation of the probabilities of default. The main macroeconomic variables used in that calculation is generally the economic growth rate of the country that is used. Concerning the calculation of expected losses in case of default (Loss Given Default - LGD), the forward looking approach is currently limited to finance lease portfolios. Expected credit losses are calculated on the basis of probabilised average of three macroeconomic

33 FINANCIAL STATEMENT SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) scenarios established by the Group s economists for all the consolidated entities (a base scenario and a stress scenario, plus an optimistic scenario). In addition, a marginal adjustment can be applied, following expert appraisal, to increase or decrease the total expected credit losses calculated, in order to take into account future risks that cannot be modelled (mostly related to legislative or regulatory changes). For SG Finans AS, the IFRS 9 impairment model covers assets measured at amortised cost. Loans, leasing and factoring contracts and in addition, loans and deposits to financial institutions are in scope of the impairment model. SG Finans will apply a sophisticated approach for the main part of the portfolios. Portfolios not meeting given requirements will be calculated based on a simplified approach. Recognition of expected credit loss will be based on assessment in individual basis, taking into consideration both backward and forward looking information. As at 31st of December 2017 the estimated ECL (expected credit loss) for SG Finans is MNOK 98,1, and is distributed between the stages as presented in table 1 ECL. The table also included the individual impairment recognised at 31st of December 2017, now referred to as stage 3. Stage Total Simplified Sophisticated Objecive evidence Total Implementing IFRS 9 from 1st January 2018 will impact the impairment by MNOK 98,1, and the Equity with MNOK 75,2 after taxes. Hedge accounting SG Finans has analysed the various options offered by IFRS 9 in its transition guidance for hedge accounting and has decided, as allowed by IFRS 9, not to modify the hedge accounting methods currently applied in accordance with IAS 39 as adopted in the European Union. SG Finans will continue to keep abreast of IASB research on accounting methods for macro-hedging operations. IFRS 15 Revenue from Contracts with Customers IASB and FASB have published a new joint standard for revenue recognition, IFRS 15Revenue from Contracts with Customers. The standard replaces all existing standards and interpretations for revenue recognition. The core principle of IFRS 15 is that revenue is recognised to reflect the transfer of contracted goods or services to customers, and then at an amount that reflects the consideration the company expects to be entitled to in exchange for those goods or services. With a few exceptions, the standard applies to all income-generating contracts with customers and provides a model for the recognition and valuation of the sale of certain non-financial assets (e.g. sale of property, plant and equipment). The group is also considering the clarifications in IFRS 15 issued by the IASB in April 2016 and will follow up any further changes to the standard. IFRS 15 is to be implemented either by applying the fully retrospective method or the modified retrospective method. The standard has accounting effect from 1 January The Group is currently analysing the impact of this standard on its net income and equity. Given the application scope of the standard, the contracts that are expected to be mostly concerned by this analysis are those service contracts that lead to the recognition of fee income (loyalty packages, fees related to asset management or to loan syndication ). SG Finans expect the amendment will have little effect on the financial statement. The effect is however on the date of the issue of the financial statement unknown. IFRS 16 Leases IASB has run a joint program with FASB with the aim of establishing a new leasing standard. IFRS 16 Lease replaces the existing IFRS standard for leases, IAS 17 Leases. IFRS 16 sets out principles for recognition, measurement, presentation and disclosure of leases for both parties in a lease, i.e. the customer (lessee) and provider (lessor). The new standard requires that the lessee includes assets and liabilities for most leases, which is a significant change from current policies. For lessors, IFRS 16 essentially continues existing principles from IAS 17. In line with this, a lessor shall continue to classify their leases as operating leases or finance leases and report these two types of leases separately. The standard is expected to have accounting effect from 1 January 2019 and will be implemented using either the full retrospective or modified retrospective method. SG Finans will be effected as both a Lessor and Lessee. As a lessors, IFRS 16 essentially continues existing principles from IAS 17, and the effect is expected to be minor. As a Lessee, SG Finans will need to recognise agreement related to offices and premises. SG Finans expect the amendment will have little effect on the financial statement. The effect is however on the date of the issue of the financial statement unknown.

34 34 FINANCIAL STATEMENT 2. IMPORTANT ACCOUNTING ESTIMATES AND DISCRETIONARY EVALUATIONS The preparation of annual financial statements in conformity with generally accepted accounting principles requires that occasionally management must make estimates and assumptions. Estimates and discretionary evaluations are regularly assessed and are based on historic experience and other factors, including the expectations of future events that are considered to be probable under the current circumstances. The company prepares estimates and makes presumptions and assumptions connected to the future. The accounting estimates that are based on this will seldom be entirely in accordance with the final outcome. Some accounting principles are considered to be especially important to enlighten the company s financial position because they require the management to make difficult or subjective assessments and determine estimates that are, for the most part, uncertain at the time the estimates are made. Further information on these types of assessments and estimates is provided below. Loan write-downs When evaluating the need for write-downs the most important assessment is related to estimating the most probable future cash flows from the customer. In principle, all cash flows from the loan shall be identified, and an evaluation must be made as to which cash flows are deferred. With the large number of loans that are subject to assessment, these types of calculations must be made based on approximations and experience. For further information about the procedure used for the write-downs, refer to Note 1 Accounting principles. Expected sales gain As part of the equipment leasing activity, SG Finans may obtain sales gains from disposal of leased assets. Based on historic observations, tendencies and development in the second-hand market, estimated sales gains from disposal of leased assets further to the contract coming to end of term are included in interest income, see also note NET INTEREST INCOME Amounts in NOK thousand Interest income from financial institutions, valued at amortised cost Interest income from customers financial leases and loans, valued at amortised cost Other interest income Total interest income Interest expenses to financial institutions, valued at amortised cost Interest expenses on deposits and debt to customers, valued at amortised cost Interest expenses on subordinated debt Other interest expenses Total interest expenses Net interest income NET FEE AND INCOME ON OTHER ACTIVITY Amounts in NOK thousand Commission and fee income from loans and similar to customers Comission and fee income Commission and fee expenses from loans and similar to customers Other commission and fee expenses Commission and fee expenses Net commission and fee income

35 FINANCIAL STATEMENT NET FEE AND INCOME ON OTHER ACTIVITY (CONTINUED) Sales gains Income from extension of leasing contracts Other income Total income other activity NET GAINS ON FINANCIAL INSTRUMENTS AT FAIR VALUE Amounts in NOK thousand Net gains on financial derivatives, trading Change in fair value on financial derivatives, hedging Change in fair value on hedged fixed interest loans Net gains on financial instruments at fair value through P&L OPERATING EXPENSES Amounts in NOK thousand Payroll Pensions Social security costs Other staff cost Total payroll, fees and other staff costs Rent and other office costs Fees and temporary staff Travel and marketing Other operating costs Intragroup services Depreciation and gain/loss Total other operating expenses Total operating expenses Fees paid to Ernst & Young AS and cooperating companies are made up as follows (exclusive VAT): Amounts in NOK thousand Statutory audit Other attestation services Tax advice Other non-audit services 0 0 Total

36 36 FINANCIAL STATEMENT 7. PENSIONS SG Finans is obligated to follow the Act on Mandatory company pensions. The company s pension scheme complies with the requirement as defined in the Act. SG Finans AS has defined contribution plans for employees in Norway, Sweden and Denmark. The contributions comprise between 4,5 % and 14,4 % of salaries. As at 31 December 2017, 346 members were covered by the plans. As a replacement of the old AFP-plan a new AFP-plan has been established. The new AFP-plan is in the contrary to the old, not an early retirement plan, but a plan that gives a lifelong contribution to the ordinary pension. The employees can choose to exercise the new AFP plan starting at the age of 62 years, in addition to working, and it will continue accruing if working until the age of 67 years. The new AFP-plan is a defined benefit multi-company plan which is financed through contributions that are determined by a percentage of the employee s salaries. There is currently no reliable measure and allocation of liabilities and assets in the plan. The plan is accounted for as a defined contribution plan where no accruals are made and the contributions are accounted for as they occur. For 2017 the contribution has been set to 2,5 % of the total salaries between 1 G and 7,1 G to the employees. The plan will be unfunded and it is expected that the level of contribution will increase in the following years. The company has an additional pension scheme that covers a total of 13 employees. The pension scheme gives the right to defined future benefits, which are mainly dependent on salary level at time of retirement. The following assumptions were used calculating the future pension obligations for the defined benefit pension scheme. Economic assumptions Percentage Discount rate 1,70 % 1,40 % Expected return on assets 0,00 % 0,00 % Growth in salary 4,00 % 4,00 % Inflation 2,50 % 2,50 % G - regulation 3,75 % 3,75 % Growth in current pensions 3,75 % 3,75 % Withdrawal tendency AFP 0 % 0 % Pension cost Amounts in NOK thousand Funded Unfunded Total 2017 Funded Unfunded Total 2016 Present value of pensions earned during the year Interest cost of accrued pension liabilities Expected return on plan assets Plan change, curtailments Difference between actual and estimated values Net pension cost Pension cost for 2017 amounts to TNOK from the defined benefit plans and TNOK from the contribution plans. The total pension cost amounts to TNOK Pension cost for 2016 amounts to TNOK from the defined benefit plans and TNOK from the contribution plans. The total pension cost in 2016 amounts to TNOK

37 FINANCIAL STATEMENT PENSIONS (CONTINUED) Pension liabilities in balance sheet Amounts in NOK thousand Funded Unfunded Total 2017 Funded Unfunded Total 2016 Plan assets at market value Estimated pension liabilities Net pension liability Actuarial gains (-)/losses Plan change, curtailment Recognised pension liability Recognised pension liability year end 2017 amounts to TNOK The total pension liability was TNOK at year end Changes in the liabilities: In calculating the pension costs and net pension liabilities, the following assumptions have been made: The discount rate is based on government bonds in Norway adjusted for the duration of the pension obligation. The duration is calculated to 14,5 years (avr). Salary rates, pension adjustments and G-regulations is based on historical observations and an expected future inflation of 2,5 %. Amounts in NOK thousand Opening balance Total service cost Interest cost Payments from internal book Payments from plan assets 0 0 Settlement, curtailment Actuarial gains/(losses) Ending balance Historical disclosure information Amounts in NOK thousand Gross pension liability Plan assets, fair value Net pension liability Actuarial gains/(losses) 0 0 Experience adjustment expressed as percentage of plan liability 0,0 % 0,0 % Experience adjustment expressed as percentage of plan asset 0,0 % 0,0 % Expected Future Benefit Payments Amounts in NOK thousand

38 38 FINANCIAL STATEMENT 7. PENSIONS (CONTINUED) Sensitivity analysis The defined benefit obligation is affected by changes in actuarial assumption. The table below presents a sensitivity analysis indicating the effect changes in the assumption will have on the benefit obligation. Sensitivities in: DBO Discount rate -0.5% 13,5 % Discount rate +0.5% -11,6 % Inflation rate -0.5% -10,2 % Inflation rate +0.5% 11,6 % Salary increase rate +0.5% 20,9 % 8. LOSSES AND ALLOWANCES RECOGNISED IN THE PROFIT AND LOSS ACCOUNTS Amounts in NOK thousand Allowances on doubtful loans Allowances on doubtful loans as of Exchange rate adjustments (opening balance) Actual losses that are covered by previous allowances Reclassification of previous allowances Allowances on doubtful loans in the period = Allowances on doubtful loans Losses on loans Write-downs for loan losses as at Exchange rate adjustment (opening balance) Write-downs for loan losses as at Total actual losses Income on actual losses = Losses on loans

39 FINANCIAL STATEMENT TAXES Amounts in NOK thousand The tax expense for the year is made up as follows: Taxes payable on profit for the year Too much allocated prior years Change in deferred tax Total tax expense for the year Taxes payable are made up as follows: Profit on ordinary activities before tax expense Permanent differences Change in temporary differences Basis for taxes payable Taxes payable on profit for the year In 2017 TNOK of the permanent differences is related to recognition of the operation of the company s branches in Sweden and Denmark. The equivalent difference in 2016 totalled TNOK Amounts in NOK thousand Deferred tax assets Property, plant and equipment Pensions Derivatives 0 9 Deferred tax assets - gross Other Exchange rate difference Deferred tax liabilities - gross Net recognised deferred tax assets This years changes in deferred tax assets Deferred tax assets Changes against ordinary result Exchange rate diff deferred tax assets Adjustments against OCI Deferred tax assets At the end of 2017 recorded net deferred tax asset for the company amounted to TNOK 2 266, compared to a deferred tax asset in 2016 of TNOK 167..

40 40 FINANCIAL STATEMENT 9. TAXES (CONTINUED) Amounts in NOK thousand Reconciliation from nominal to actual tax rate Net profit before tax Expected income tax with nominal tax rates (24 % / 27 %) The tax effect of following items; Non-deductible costs Adjustment in respect of current income tax* Other entries related to allowances previous years Tax expense Effective tax rate 10,3 % 51,0 % *From 2017 the current tax rate in Norway is reduced from 24% to 23%. SG Finans has assessed the Finance Tax in Norway, and concluded that we are exempt from this tax. Assets and liabilities with deferred tax/tax assets are measured using the new tax rate. The effect of change in tax rate is recognised in profit and / or OCI in line with how changes in the underlying asset / liabilities are recognised. The tax rate was reduced from 25 % to 24 % in 2016.

41 FINANCIAL STATEMENT INFORMATION ON FAIR VALUE Method to calculate fair value of financial instruments Regarding financial instruments recorded at fair value, see description in note 1 Accounting Principles. Lending (loans and financial leasing) to and receivables on customers The pricing of lending (loans and financial leasing) is based on market prices. Stipulated prices include additions to cover credit risk. The value of impaired engagements is determined by discounting expected future cash flows. We therefore assess that the recorded value is a fair estimate of fair value for loans and receivables valued at amortised cost. Loans from financial institutions and deposits from customers Fair value is determined to be equal recorded value for loans from financial institutions and deposits from customers valued at amortised cost. Amounts in NOK thousand Financial assets Book value Amortised cost Fair value Book value Amortised cost Cash and deposits with central banks Deposits with financial institutions Loans to financial institutions Financial derivatives Net loans to customers Total assets Fair value Financial liabilities Loans and deposits from financial institutions with agreed maturity Deposits from and debt to customers with termination rights Financial derivatives Retention of margin and other customer accounts Total liabilities SG Finans uses the following hierarchy related to determining and disclosing the fair value of financial instruments: 1) Quoted (unadjusted) prices in active markets for identical assets or liabilities (level 1) 2) Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly (level 2) 3) Techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data (level 3) Valuation technique The contracts in level 2 have been evaluated based on observable spot rates, yield curve and exchanges rates.

42 42 FINANCIAL STATEMENT 10. INFORMATION ON FAIR VALUE (CONTINUED) Amounts in NOK thousand level 1 level 2 level 3 level 1 level 2 level 3 Financial assets Financial derivatives Financial lease agreements Total assets Financial liabilities Financial derivatives Total liabilities

43 FINANCIAL STATEMENT LEASING (FINANCIAL LEASING ASSETS) Amounts in NOK thousand Purchase costs Exchange rate difference (opening balance) Inflow during the year Outflow during the year Purchase costs Accumulated ordinary depreciation Exchange rate difference Ordinary depreciation during the year Reversed depreciation sold assets Accumulated depreciation Book value leasing assets Customer receivables Other accruals Book value in the balance sheet Accumulated allowance for uncollectible minimum lease payments receivable Customer receivables are ordinary leasing receivables and advancement on leasing rent. Up-front establishing fee constitute other accruals. Overview of future minimum finance lease rental Within 1 year to 5 years Future minimum finance lease rental Present value non guaranteed Present value of minimum lease payments Unearned finance income Average interest 3,30 % 3,68 % Unearned finance income consists of interest, fees and future estimated sales gain. The company uses standard leasing agreements prepared in cooperation with the Association of Norwegian Finance Houses, and similar agreements in Denmark and Sweden. The company offers leasing of a broad range of equipment to Scandinavian businesses and public sector entities where the material leasing arrangements consist of equipment that fall within: Industry: High-Tech: Transport: Construction machinery, production machinery, graphic machinery, forestry machinery, fish farming installations, furnishing etc. ICT-equipment, copy machines, office machines, medical equipment etc. Vans, trailers, buses, tractors, farming equipment, trucks, mobile cranes, automobiles, containers, helicopters, airplanes, ships etc.

44 44 FINANCIAL STATEMENT 12. TANGIBLE FIXED ASSETS AND INTANGIBLE ASSETS Amounts in NOK thousand Machines, fixtures, transportation equipment Intangible assets Machines, fixtures, transportation equipment Intangible assets Purchase costs Change in value - opening balance Purchases Sales Purchase costs Accumulated ordinary depreciation Change in value - opening balance Ordinary depreciation of the year Change in value - during the year Reversed sold Accumulated depreciation Book value Intangible assets consist of software, which is depreciated linearly over 3-7 year from the time the software is taken into use. Machines, fixtures, transportation equipment is depreciated linearly over 3-10 years. Tangible assets are not pledged or in any other way used as collateral. 13. RESTRICTED DEPOSITS Deposits with financial institutions include restricted deposits for withholding tax of NOK

45 FINANCIAL STATEMENT FINANCIAL DERIVATIVES Financial derivatives are contracts stipulating financial values in the form of interest rate terms for fixed periods of time. Derivatives used by SG Finans AS include interest rate swaps (IRS), currency swaps and forward rate agreements (FRA). Financial derivatives are used to manage interest rate risk from the company s ordinary operations. The table below shows nominal values as well as positive and negative market values of the interest and currency swaps. The company does not have any outstanding forward rate agreements at year end. Amounts in NOK thousand Nominal values total Positive market value Negative market value Nominal values total Positive market value Negative market value Interest rate swaps NOK Interest rate swaps DKK Interest rate swaps SEK Currency swaps USD Currency swaps EUR Total At year end 2017 the company had one interest rate swap in NOK which was classified as held for trading. Nominal value on this was TNOK and the negative market value was TNOK Year end 2016 the nominal value was TNOK and the negative market value was TNOK Specification of financial derivatives in nominal values Amounts in NOK thousand 1 month from 1 month to 3 months from 3 months to 1 year from 1 year to 5 years > 5 years No maturity Total Maturity profile, fixed rate loans - NOK Maturity profile, fixed rate loans - DKK Maturity profile, fixed rate loans - SEK Maturity profile, interest and currency swaps -USD Maturity profile, interest and currency swaps - EUR Sum fixed rate loans Maturity profile, interest rate swaps - NOK Maturity profile, interest rate swaps - DKK Maturity profile, interest rate swaps - SEK Maturity profile, currency swaps - USD Maturity profile, currency swaps - EUR Sum swaps Net position In order to measure the company s interest risk, the effect of a parallel change of 1% (100bp) over the whole interest curve is measured on the company s unsecured interest positions. As at the company s interest sensitivity, impacting operating result, was calculated to TNOK The effect on equity and net income is TNOK

46 46 FINANCIAL STATEMENT 14. FINANCIAL DERIVATIVES (CONTINUED) Specification of financial derivatives in nominal values Amounts in NOK thousand 1 month from 1 month to 3 months from 3 months to 1 year from 1 year to 5 years > 5 years No maturity Total Maturity profile, fixed rate loans - NOK Maturity profile, fixed rate loans - DKK Maturity profile, fixed rate loans - SEK Maturity profile, interest and currency swaps - USD Maturity profile, interest and currency swaps - EUR Sum fixed rate loans Maturity profile, interest rate swaps - NOK Maturity profile, interest rate swaps - DKK Maturity profile, interest rate swaps - SEK Maturity profile, currency swaps - USD Maturity profile, currency swaps - EUR Sum swaps Net position In order to measure the company s interest risk, the effect of a parallel change of 1% (100bp) over the whole interest curve is measured on the company s unsecured interest positions. As at the company s interest sensitivity, impacting operating result, was calculated to TNOK of which TNOK is related to loan to the group. The effect on equity and net income is TNOK OFFSETTING SG Finans has established Credit Support Annex (CSA) agreements. The agreements involve a mutual commitment to provide collateral for derivatives trading between the parties. Any net position is related to financial derivatives entered into with the group where no CSA agreement is in place. Amounts in NOK thousand 2017 Gross amount Amounts that are offset Net amount in financial position Financial instruments on balance sheet Cash collateral in the balance sheet Net position Assets Financial derivatives Total assets Liabilities Financial derivatives Total Liabilities Amounts in NOK thousand 2016 Gross amount Amounts that are offset Cash collateral in the balance sheet Net position Net amount in financial position Financial instruments on balance sheet Assets Financial derivatives Total assets Liabilities Financial derivatives Total Liabilities SG Finans has set-off rights for leasing agreements where customers also have entered into factoring arrangements with the company.

47 FINANCIAL STATEMENT FUNDING / INTEREST EXPENSES SG Finans AS total interest expenses amounted to TNOK in Interest expenses are distributed on the following currencies: Amounts in currency thousand 2017 Currency Interest expense Average interest rate End balance Average balance CHF 0 0,00 % DKK ,07 % EUR 256 0,32 % GBP 19 0,58 % NOK ,76 % SEK ,15 % USD 427 1,41 % SG Finans AS total interest expenses amounted to TNOK in Interest expenses are distributed on the following currencies: Amounts in currency thousand 2016 Currency Interest expense Average interest rate End balance Average balance CHF 0 0,00 % DKK ,25 % EUR 164 0,21 % GBP 29 0,72 % NOK ,95 % SEK ,17 % USD 268 0,80 % OTHER LIABILITIES Amounts in NOK thousand Accounts payable Excise duty Other liabilites Prepayment from customers Sum other liabilities Payments received not yet allocated to a contract on the balance sheet date are included in prepayment from customers. 18. RISK MANAGEMENT Credit risk In the business of financing assets (equipment leasing) and receivables (factoring), credit risk is the most important risk for the company. Effectively managing credit risk is therefore fundamental. The company has implemented credit policies and strategies, organising procedures and regulations as well as models which address this need. SG Finans has developed classification models for risk assessment and management of business credits, which provide a good view of the risk profile of the portfolio. The classification builds on debtor solidity and market value assessments of the assets. The financing provided to clients is secured by direct ownership (leasing) or security (loans). The value development of the financed object is therefore critical in assessing and controlling the risk profile of the portfolio, and knowledge about the object s second-hand value, liquidity and markets is therefore fundamental for the credit quality and total loss in the portfolio.

48 48 FINANCIAL STATEMENT 18. RISK MANAGEMENT (CONTINUED) In those cases where a customer defaults on the payment terms in the leasing contract, SG Finans may have to terminate the contract and repossess the asset. The company works to ensure rapid sale of repossessed assets in order to hold the total quantity of assets in storage at an acceptable level. Repossession of assets and sale of repossessed assets is managed by an internal team of specialists. SG Finans uses different channels for the sale of such assets. Operational risk The company has implemented the Société Générale group s procedures for identification, assessment and reporting of losses caused by operational risk events. Reported events are used by Société Génerale Group in order to adapt the control environment and procedures as well as for the calculation and allocation of capital requirements to cover operational risk. Furthermore the company has established monitoring and reporting of a number of key risk indicators for operational risk. The company also performs scenario analysis and stress testing of operational risk scenarios. Self-assessment of risks and controls is a central element in the identification and management of operational risk. Observed losses caused by failures in internal routines, system failures, internal/external fraud and other operational events are very limited. Of the observed events, attempts of external fraud and execution errors are the most common. We assess that the existing control measures are satisfactory for uncovering and preventing this type of fraud and errors. Financial risk management The company is subject to the group s guidelines for financial risk management (defined as interest rate, currency, liquidity and funding) as well as guidelines from the Board incorporated into the company s finance policy and liquidity policy. Management and control of financial risk are carried out centrally in the finance division, the treasury and asset-liability management function at the company s headquarters. Treasury attends to the needs for financing, financial risk management, balance-sheet management, together with banking relations for the whole company i.e. the operations in all the countries. Treasury is organised as a service centre whose main purpose is to facilitate financing and manage financial risk within defined limits. The boundaries for financial risk are restrictive and adjusted to the size and needs of the operation. Financial risk is reported to the company s assets and liabilities committee (ALCO) and the group s unit for monitoring and control of financial risk. ALCO has responsibility for the limits, measurement principles and monitoring of financial risk (interest rates, currency, funding and liquidity), managing assets and liabilities, capital requirements and capital structure. ALCO also coordinates stress testing of risks related to the company s internal process for assessment of capital adequacy ( ICAAP ) and liquidity ( ILAAP ). Interest rate risk management The finance policy is to macro hedge fixed interest rate contracts, with the objective of ensuring that the economic and accounting effects of changes in interest rate markets are held at a limited level. Our economic risk at the end of the year was almost fully hedged against changes in interest rates and the maturity profile of loans outstanding matches the funding. Due to small differences in the maturity profile between fixed interest rate contracts and hedging swaps, a small number of swaps do not meet the hedge accounting requirements. These interest rate swaps are classified as for trading purposes and the change in market value is posted directly to the income statement. The efficiency of new hedges is tested prospectively prior to entering new hedging contracts and thereafter on a quarterly basis for existing hedging relationships. The efficiency is measured based on accumulated changes in the market value for hedging instruments and hedged contracts using the dollar-offset method. Please refer to the notes for a closer description of accounting effects and interest rate sensitivity. Currency risk management Currency risk is managed by borrowing in the same currency and with the same maturity as assets in the foreign currency. The net result from contracts in foreign currencies is exchanged into Norwegian Kroner (NOK) or other local currency on realisation. Moreover, the result from the branches in Sweden and Denmark is exchanged into NOK. To some extent the company may borrow in a different currency and use cross currency swaps. Such swaps allow SG Finans to switch its loan and interest repayments in e.g. EUR into local currencies as NOK, DKK and SEK. The efficiency of new hedges is tested prospectively prior to entering new hedging contracts and thereafter on a quarterly basis for existing hedging relationships. The efficiency is measured based on accumulated changes in the market value for hedging instruments and hedged contracts using the dollar-offset method. Please refer to the notes for a closer description of accounting effects and interest rate sensitivity. Liquidity management / funding The company s funding is mainly provided by the Société Générale group. Funding from the group is based on a

49 FINANCIAL STATEMENT RISK MANAGEMENT (CONTINUED) bilateral agreement for funding as well as funding limits according to our funding needs over time, based on budgeted and expected growth. Planning and managing liquidity and funding thus occur in close collaboration with the group unit for financing of subsidiaries and operating businesses. SG Finans has been working on diversifying its sources of funding, and to attract new lenders to finance the activities. This initiative is linked to the Société Génerale Group strategy to diversify funding sources for its operating entities. In 2013, SG Finans entered into a cooperation with Nordic Investment Bank under their mandate to provide funding through intermediaries to Nordic small and medium sized business (SMEs). The Nordic Investment Bank provides a MEUR 80 loan to SG Finans, which shall be allocated to financing equipment for SMEs in Norway. This initiative was followed by a MEUR 80 loan from the European Investment Bank in May The loan is allocated according to European Investment Bank s criteria to qualifying SMEs in Denmark and Sweden. In 2014, we also raised a MEUR 250 secured loan from a Japanese bank. The loan is secured with a pledge in the transport assets financed under Norwegian leasing contracts. In 2016, we have raised a new loan from European Investment Bank of MEUR 150, and a loan from Nordic Investment Bank of MEUR 150. Both loans are established under the same mandates as the existing loans from the respective lender. Since SG Finans main source of funding remains the parent company, we have in the entire period maintained a close contact with our parent. In total we can conclude that the company has had access to satisfactory levels of funding and liquidity. Solidity / Capital Adequacy / Capital Management The company s policy for capital management defines the applicable principles and guidelines for capital planning and management. Moreover, the company is subject to the group s guidelines for capital management. The internal guidelines compel the company always to comply with the internal requirements which are stricter than the local regulatory minimum requirements. A central part of the policy for capital management is regular assessment of the capital situation and capital adequacy under stress tests for various scenarios and relevant types of risk. This has been carried out in accordance with the regulatory requirements for internal processes for the assessment of capital adequacy (Internal Capital Adequacy Assessment Process or ICAAP) and liquidity risk (Internal Liquidity Adequacy Assessment Process or ILAAP). The analysis demonstrates that the company s capital adequacy, solidity and liquidity management are satisfactory in respect of expected future growth and also following the stress tests that have been carried out. SG Finans is subject to minimum capital adequacy requirements as a regulated financial institution in the Kingdom of Norway. These requirements are defined and monitored by Finanstilsynet, the Norwegian Financial Supervisory Authority of Norway. Capital requirements, including capital buffer requirements at the end of 2017, were as follows: The company should hold minimum common equity capital of 4,5% of the calculation basis (cf note on capital adequacy). The minimum level of core capital (socalled tier 1 capital) should be 6,0% of the calculation basis. The total capital, including tier 2 capital, should be kept at minimum 8,0% of calculation basis. In addition to these minimum requirements, the company should hold capital buffers in the form of core capital, with at least 2,5% conservation buffer, 3,0% system risk buffer and 2,0% (note: individual requirement of 1,52%) countercyclical buffer. The combination of minimum capital requirements and capital buffer requirements leads to total core capital requirement of 13,02% of calculation basis and total capital adequacy requirement of 15,02% at end of Finanstilsynet and European Central Bank confirmed again in 2017 its prudential requirements for SG Finans which require the entity to maintain 1,5% common equity capital above minimum own funds requirements. Furthermore, the regulator recommends that SG Finans maintains common equity tier capital above 15,5%. Consequently, with effect from 1 January 2017, the entity shall hold regulatory minimum common equity / core capital of 14,52% and total capital of 16,52%. The increased buffer requirement is included in the capital planning of the company. In the planning and management of capital and compliance to internal and external requirements, SG Finans monitor evolution of all core elements of capital, including common equity (equity, share premium account, retained earnings, and deductible items to define regulatory capital base) as well as supplementary capital (tier 2) in the form of subordinated debt. At the end of 2017 the company had issued subordinated debt of MNOK Subordinated debt is issued to strengthen the total capital adequacy level of the company. In addition, SG Finans has agreed to a financial covenant in a loan agreement, which imposes the entity to hold 0,5% core capital above regulatory requirement and 1,0% of minimum total regulatory requirement. These elements and restrictions are considered in capital planning and in stress testing and assessment of future capital situation.

50 50 FINANCIAL STATEMENT The main principle for the company s capital is that the capital level shall at all times be sufficient to cover regulatory minimum requirements presented above, and to ensure that the company is adequately capitalised for a planning horizon of at least 15 months. The planning horizon of 15 months is assessed as sufficient to allow enough time for the shareholder (Société Génerale Group) to plan for capital increase, allocation of net earnings / dividends or implementation of required measures should the capital situation in SG Finans fall below the defined internal targets. For the current financial planning period, the internal capital level target is set at the same level as recommended by the regulatory authorities, i.e. to maintain common equity capital ratio above 15,50%. The capital buffer and capital ratio targets are assessed by the Board of Directors when required, and at least in connection with updates to capital management policy and review of the internal capital assessment results. Note 27 contains further quantitative information on capital and capital adequacy. Corporate Governance / Internal control As part of the Société Générale group, the company has continued the development of its principles and framework for internal control and corporate governance to the standards of the group. The main risks and the efficiency of internal controls are assessed on a regular basis. The results of these assessments are satisfactory. 19. RISK CLASSIFICATION The company uses a risk classification system for customers and exposures. The classification is based on objective criteria and consists of two parameters, the customer s creditworthiness and the object s security coverage. Counterparty classification is based on available financial information, as well as other information. The combination of these parameters determines how the exposure is classified. Models for calculating credit risk (probability of default), loss given default and other parameters are used in estimating the risk of an exposure and the level of capital needed to cover future expected and unexpected losses. Exposures are classified in categories in accordance with capital adequacy regulations for banks and finance houses. Based on the combination of counterparty classification (probability of default (1-10)) and object classification (loss given default (A-E)) the exposure is classified in a credit matrix based on debtor class and asset classes. The financed assets are classified according to value curves, expressing expected evolution of the market value of the financed asset, based on historical observations. See also accounting principles. SG internal obligor rating scale SG Obligor rating Moody s rating S & P rating Fitch IBCA rating Capital Intelligence 1-year probability of default rating Interval Mean 1 Aaa AAA AAA AAA [0,0000 %;0,0112 %] 0,01 % 2+ Aa1 AA+ AA+ AA+ [0,0112 %;0,0165 %] 0,01 % 2 Aa2 AA AA AA [0,0165 %;0,0225 %] 0,02 % 2- Aa3 AA- AA- AA- [0,0225 %;0,0287 %] 0,03 % 3+ A1 A+ A+ A+ [0,0287 %;0,0339 %] 0,03 % 3 A2 A A A [0,0339 %;0,0472 %] 0,04 % 3- A3 A- A- A- [0,0472 %;0,0894 %] 0,06 % 4+ Baa1 BBB+ BBB+ BBB+ [0,0894 %;0,1827 %] 0,13 % 4 Baa2 BBB BBB BBB [0,1827 %;0,3589 %] 0,26 % 4- Baa3 BBB- BBB- BBB- [0,3589 %;0,7427 %] 0,50 % 5+ Ba1 BB+ BB+ BB+ [0,7427 %;1,5288 %] 1,10 % 5 Ba2 BB BB BB [1,5288 %;2,6317 %] 2,12 % 5- Ba3 BB- BB- BB- [2,6317 %;3,8774 %] 3,26 % 6+ B1 B+ B+ B+ [3,8774 %;5,9829 %] 4,61 % 6 B2 B B B [5,9829 %;9,4143 %] 7,76 % 6- B3 B- B- B- [9,4143 %;12,7916 %] 11,42 % 7+ Caa1 CCC+ CCC+ C+ [12,7916 %;17,1134 %] 14,33 % 7 Caa2 CCC CCC C [17,1134 %;23,5996 %] 20,44 % 7- Caa3 CCC- CCC- C- [23,5996 %, ---] 27,25 % 8-10 Defaulted

51 FINANCIAL STATEMENT RISK CLASSIFICATION (CONTINUED) Risk classification loans to customer In 2014 a complete review of the object risk classes was performed. The goal was to group exposures with similar object risk and have limits adapted to the Loss Given Default (LGD) levels observed in the portfolio today. In this process it was decided to calculate the actual LGD on each exposure, taking into account maturity, down payment and residual value in addition to object type. This is a natural evolution from before when the average LGDs of each object class was used. When setting the new limits observed historical loss, number of observations and expectations from business line experts were taken into consideration. Object classification 2017 Amounts in NOK thousand A B C D E Not classified Total Obligor classification [0 % ; 4 %] [4 % ; 8 %] [8 % ; 13 %] [13 % ; 18 %] [18 % ; 100 %] High[ 1 ; 3] High/medium [-3 ;-4] Medium [5+ ;-5] Medium/Low [6+ ;7+] Low [ 7 ;-7 ] Default [ 8 ;10 ] Not classified Total Object classification 2016 Amounts in NOK thousand A B C D E Not classified Total [0 % ; 4 %] [4 % ; 8 %] [8 % ; 13 %] [13 % ; 18 %] [18 % ; 100 %] High[ 1 ; 3] High/medium [-3 ;-4] Medium [5+ ;-5] Obligor classification Medium/Low [6+ ;7+] Low [ 7 ;-7 ] Default [ 8 ;10 ] Not classified Total Maturity analysis - age of loans Amounts in NOK thousand 2017 Not past due Past due, days outstanding > 180 > 1 year Total Loans Percentage rate 94,53 % 1,40 % 3,30 % 0,63 % 0,12 % 0,01 % 0,01 % 100,0 % Past due, non-doubtful > 180 > 1 year Total Loans Amounts in NOK thousand 2016 Not past due Past due, days outstanding > 180 > 1 year Total Loans Percentage rate 95,08 % 1,43 % 2,82 % 0,38 % 0,20 % 0,08 % 0,00 % 100,0 % Past due, non-doubtful > 180 > 1 year Total Loans

52 52 FINANCIAL STATEMENT 19. RISK CLASSIFICATION (CONTINUED) Credit exposure Maximal credit exposure is calculated based on net loan to customer (not considering third-party guarantees), contingent liabilities like guarantees, loan commitments, and positive market value on derivatives or fixed interest loans. SG Finans AS has collateral through right of ownership for leased objects. Other loans and factoring are generally secured by pledge, notification or third-party guarantees, see also note 18. Amounts in NOK thousand Net loans to customers Positive market value derivatives Guarantee liabilities and loan commitments Total credit exposure Collateral and other credit enhancements as described in note 18 and 19 are taken into account the company s risk classification. The Company s maximum credit exposure is TNOK , and open risks are estimated to be TNOK for leased objects. Collateral Agreement In June 2014 SG Finans signed a collateral secured loan drawn over a 2 and 4 year funding period with an aggregated value of 250 MEUR. The lender holds encumbrance, MEUR 332,5 in our transport portfolio. The security was created through the lender entering into a first ranking floating charge over leased assets containing movable objects from our transport portfolio. This transaction was completed the 20th of August The charge is created through the use of Norwegian Lians Act,cf. section 3-8. The registration documents have been submitted for registration with the Movables Register prior to 20th of August The Term Loan Agreement between SG Finans and the lender defines that the pledged amount shall any given time be equivalent to or exceed the agreed collateral amount MEUR % Haircut, accordingly MEUR 332,5. On the 20th of August 2016 MEUR 50 of the loan was repaid. This was the first tranche with 2 year maturity. Next maturity for the remaining amount of the loan will be on 20th of August The pledge is perfected by notification to the leasing customer informing that the contract is included in a pledged portfolio. Carrying Amount The current book value of the portfolio that our external lender holds encumbrance in, was measured to TNOK per Fair Value All reported numbers are in current book value, and all contracts within the transport portfolio, and hence therefore the entire portfolio compromising the encumbrance held by external lender, follow an amortizing profile. The amounts for fair value and carrying amount are therefore equivalent. 20. DOUBTFUL LOANS Amounts in NOK thousand Gross doubtful loans Write-downs on impaired assets Net doubtful loans Gross doubtful loans are total engagements for customers where one or more of the contracts are considered to be doubtful/in default. See notes 1 and 2 as well as 8 and 9.

53 FINANCIAL STATEMENT REPOSSESSED ASSETS Repossessed assets at amounted to TNOK against TNOK in 2016, consisting of 154 contracts against 200 contracts at end This is an increase of TNOK during the year. For 2016 there was an increase of TNOK The turnover from disposal of repossessed assets amounted to TNOK compared to TNOK in Repossessed assets consist of 40 % industrial and 60 % transport equipment. SG Finans has an objective of quickly realizing repossessed assets, and maintaining stock at a reasonable level. The company does not use repossessed assets, but sells the objects to third-parties. The company has achieved acceptable prices on sale of repossessed assets in 2017, and the market for second-hand equipment has generally been very good the last couple of years. Amounts in NOK thousand Carrying amount Write down Booked value

54 54 FINANCIAL STATEMENT 22. INTEREST RISK AND INTEREST RATE ADJUSTMENT PERIOD Interest rate risk arises from loan and leasing engagements where SG Finans receives fixed interest rate payments from the client. The interest rate can be fixed for different maturities, and in order to manage interest rate exposure, SG Finans AS applies different methods for interest rate hedging. See notes 1 and 18 for a description of hedging. Generally, a change in market interest rates will take effect faster in the interest rate to customer than it will in the funding rate. During normally a three months period this effect will however be neutralized. Amounts in NOK thousand 2017 Period until next interest rate adjustment 1 month from 1 month to 3 months from 3 months to 1 year from 1 year to 5 years > 5 years No agreed fixed rate Total Financial assets Receivables, bank Loans to financial institutions Financial derivatives Loans to customers hereof foreign currency Other assets Total financial assets Financial liabilities Debt to banks hereof foreign currency Customer deposits/debt to customer Financial derivatives Retention of margin Other liabilities Subordinated debt Total financial liabilities Total balance sheet items Interest rate swaps - nominal values hereof foreign currency Guarantees - given Guarantees - received Total balance sheet and off-balance sheet items

55 FINANCIAL STATEMENT INTEREST RISK AND INTEREST RATE ADJUSTMENT PERIOD (CONTINUED) Amounts in NOK thousand 2016 Period until next interest rate adjustment 1 month from 1 month to 3 months from 3 months to 1 year from 1 year to 5 years > 5 years No agreed fixed rate Total Financial assets Receivables, bank Loans to financial institutions Financial derivatives Loans to customers hereof foreign currency Other assets Total financial assets Financial liabilities Debt to banks hereof foreign currency Customer deposits/debt to customer Financial derivatives Retention of margin Other liabilities Subordinated debt Total financial liabilities Total balance sheet items Interest rate swaps - nominal values hereof foreign currency Guarantees - given Guarantees - received Total balance sheet and off-balance sheet items LIQUIDITY RISK AND REMAINING MATURITY ON BALANCE SHEET ITEMS Funding is mainly provided by the parent company Société Générale, on the basis of a framework agreement and limits. The company s liquidity risk is therefore mainly linked to the owner, and refinancing is organised in close collaboration with the group treasury department. The table below shows due date for assets and liabilities in nominal values.

56 56 FINANCIAL STATEMENT 23. LIQUIDITY RISK AND REMAINING MATURITY ON BALANCE SHEET ITEMS (CONTINUED) Amounts in NOK thousand month from 1 month 3 months from 3 months to 1 year from 1 year to 5 years > 5 years Without maturity Total Financial assets Loans / receivables, banks Loans to financial institutions Financial derivatives Loans to customers hereof foreign currency Other assets Total financial assets Financial liabilities Debt to banks hereof foreign currency Customer deposits/debt to customer Financial derivatives Retention of margin Other liabilities Subordinated debt Total financial liabilities Amounts in NOK thousand month from 1 month 3 months from 3 months to 1 year from 1 year to 5 years > 5 years Without maturity Total Financial assets Loans / receivables, banks Loans to financial institutions Financial derivatives Loans to customers hereof foreign currency Other assets Total financial assets Financial liabilities Debt to banks hereof foreign currency Customer deposits/debt to customer Financial derivatives Retention of margin Other liabilities Subordinated debt Total financial liabilities

57 FINANCIAL STATEMENT NET POSITION PER CURRENCY Foreign currency positions arise from contracts in foreign currencies, and from the activities in the branches in Denmark and Sweden. Net foreign currency position at year end 2017 was TNOK Hence giving a foreign currency sensitivity of TNOK 645 with a 10 % shift in exchange rates between NOK and other foreign currencies. The impact on net result and equity would be equivalent to TNOK 491 For 2016 a shift of 10 % in exchange rates would have resulted in an impact of TNOK 420 before tax and TNOK 315 on net profit and equity. The foreign currency positions shown are only non functional currencies. Amounts in currency thousand 2017 USD EUR SEK CHF GBP DKK Assets : Norway Sweden Denmark Sum of assets Debt : Norway Sweden Denmark Sum of debt Net balance sheet items Exchange rate 8,24 9,85 1,00 8,44 11,10 1,32 Converted to NOK Foreign currency sensitivity (10 % shift) before tax Foreign currency sensitivity (10 % shift) after tax Amounts in currency thousand 2016 USD EUR SEK CHF GBP DKK Assets : Norway Sweden Denmark Sum of assets Debt : Norway Sweden Denmark Sum of debt Net balance sheet items Exchange rate 8,65 9,09 0,95 8,45 10,61 1,22 Converted to NOK Foreign currency sensitivity (10 % shift) before tax Foreign currency sensitivity (10 % shift) after tax

58 58 FINANCIAL STATEMENT 25. OWNERSHIP The share capital of SG Finans AS is constituted of 101 shares, with a nominal value of NOK per share. All issued shares have equal voting rights and the same right to receive dividend. All shares are held by SG Equipment Finance International GmbH, Wuppertal, Germany, which is ultimately 100 % owned by Société Générale SA, Paris, France. Ordinary shares Issued and fully paid January the 1st December 31st Dividend - ordinary shares Amounts in NOK thousand Total dividend Dividend per share 0 Total dividend Dividend per share INFORMATION ON RELATED PARTIES AND REMUNERATIONS Receivables from and debt to Group companies (Société Générale) amounted to : Amounts in NOK thousand 2017 Interest Interest 2016 Assets Loans to Group companies Total Liabilities Loans from Group companies Subordinated debt Other liabilities Total Funding is provided by the parent company Société Générale, on the basis of a framework agreement and limits. All transactions are made on market terms. SG Finans has recognised TNOK for the purchase of intercompany services from the parent company

59 FINANCIAL STATEMENT INFORMATION ON RELATED PARTIES AND REMUNERATIONS (CONTINUED) Remuneration of senior management Pay Bonus Pension cost Other remuneration Share options Total 2017 Total 2016 Carsten Thorne, CEO Hans Einar Herzog, deputy CEO Total remuneration of senior management An early retirement pension plan is established for the CEO, entitling him to receive an early retirement pension of 60 % of pensionable salary from the age of 62 years. Senior managers are persons with authority to commit the company by virtue of their position (power of procuration). Bonus payments are dependant on the results achieved in relation to agreed conditions both individual and collective, outlined in the Société Générale Fidelity Bonus Plan. Bonus is granted as deferred cash in NOK and deferred Quasi-shares in EUR. Consequently the liability will be a result of underlying number of Quasi-shares and the market price of the shares and the exchange rate EUR/NOK. The cash bonus will be payable in 2018, and the bonus related to the Quasi-shares respectively in 2018 through 2020 upon certain conditions. Deferred bonus Received in the financial year New provision Balance 2017 Balance 2016 Carsten Thorne, CEO Cash Quasi-shares Total deferred bonus Hans Einar Herzog, deputy CEO Cash Quasi-shares Total deferred bonus Share options are issued from Société Générale SA, and give the right of purchase of shares in Société Générale SA. The options had a 3 year lock-in period, and exercise of options requires that the employee must be employed at the date of exercise.. Remuneration to the Board of Directors Pay / Fees Bonus Other remuneration Jochen Jehmlich, chairman Jacques Bensen, board member Ellen Altenborg, board member Philippe Dairien, board member Tommy Pedersen, board member Anett Carlsson, employee representative Torbjørn Nilsen, former employee representative Total remuneration to the Board of Directors Total 2017 Total 2016

60 60 FINANCIAL STATEMENT 27. CAPITAL ADEQUACY With effect as of January 2014, SG Finans is approved by Finanstilsynet (The Norwegian Financial Supervisory Authority) for the use of the advanced IRB approach for calculating capital requirements for the major part of SG Finans loan/leasing portfolio. Basic Indicator Approach for Operational Risk is applied. The entity does not take Market Risk positions and the capital requirement for Market Risk is nil. Amounts in NOK thousand Common Equity Tier1 capital Share capital Share premium account Other equity including profit for the year Independently reviewed interim profits net of any foreseeable charge and dividend 0 0 Common Equity Tier 1 capital before regulatory adjustment Common Equity Tier 1 capital : Regulatory adjustment Deferred tax assets Intangible assets (net of related tax liability) Negative amounts resulting from the calculation of expected loss Total regulatory adjustments to Common Equity Tier Common Equity Tier 1 capital Additional Tier 1 capital 0 0 Tier 1 capital Tier 2 capital: instrument and provision Subordinated debt Tier 2 capital before regulatory adjustment Tier 2 capital: regulatory adjustment Total regulatory adjustment to Tier 2 capital 0 0 Tier 2 capital Total capital

61 FINANCIAL STATEMENT CAPITAL ADEQUACY (CONTINUED) Credit risk, standardised method Local and regional authorities (including muncipalities) Institutions Corporate Engagements in default Total Credit risk, standardised method Credit risk, IRB method Corporate - small and medium sized businesses Corporate - other Total Credit risk, IRB method Total credit risk Operational risk, basic indicator approach Additional capital requirement according to Basel I floor Total risk weighted assets Capital ratios and buffers Common Equity Tier 1 17,47 % 15,86 % Tier 1 17,47 % 15,86 % Total capital 21,39 % 20,03 % Institution specific buffer requirement 11,52 % 11,16 % of which: capital conservation buffer 2,50 % 2,50 % of which: countercyclical buffer 1,52 % 1,16 % of which: systemic risk buffer 3,00 % 3,00 % of which: systemically important institution buffer 0,00 % 0,00 % Common Equity Tier 1 above minimum capital requirements and capital buffers 5,95 % 4,69 % Tier 1 capital above minimum capital requirements and capital buffers 4,45 % 3,19 % Total capital above minimum capital requirements and capital buffers 6,37 % 5,37 % Capital ratios and buffers, Nominal amounts Institution specific buffer requirement of which: capital conservation buffer of which: countercyclical buffer of which: systemic risk buffer of which: systemically important institution buffer 0 0 Common Equity Tier 1 above minimum capital requirements and capital buffers Tier 1 capital above minimum capital requirements and capital buffers Total capital above minimum capital requirements and capital buffers Amount below the thresholds for deductions Deferred tax assets arsing from temporary differences

62 62 FINANCIAL STATEMENT 28. GUARANTEE LIABILITIES AND LOAN COMMITMENTS Amounts in NOK thousand Endorser's liability Guarantee liability Total SG Finans AS has at year end 2017 given loan commitments of TNOK The commitments are related to future financing of equipment, where SG Finans has a contractually obligation. By the end of 2016 the corresponding amount was TNOK CONTINGENCIES SG Finans AS has at the end of the reporting period a commercial dispute estimated at MNOK 2, primary to cover expenses to lawyers. 30. NUMBER OF EMPLOYEES/FULL-TIME POSITIONS Total Norway Sweden Denmark Number of employees Recruitment Departures Number of employees Number of employees calculated on a full-time basis ,27 261,44 40,61 39,22 Number of employees calculated on a full-time basis ,71 268,14 42,35 39, SUMMARY OF COMPENSATION POLICY Main principles The compensation policy for all employees in SG Finans AS is based on the provisions of Sentralavtalen (the Central Agreement) between the Finans Norge (Employers Association for Financial institutions) and Finansforbundet (The Finance sector Union of Norway). The compensation shall be evaluated based on performance, qualifications and market considerations. The criteria shall be discussed with employee representatives, and in connection with the objectives and assessments for each employee. Fixed salary The fixed salary is based on the wage scale for member companies in the Employers Association for Financial institutions. Salaries for the CEO, Management Committee and key employees are validated by SG Group. Assessment of individual salary raise shall be done in conjunction with the company s annual salary review. The fixed salary is linked to the employee s position and achievement, and is related to the scope of responsibility and the position s market value. Fixed salary can also be adjusted due to advancement or acquirement of education that involve change of responsibility or job level. One time premiums Key employees involved in more extensive projects, high achievers or with extraordinary workload can be granted a one-time premium. Variable compensation bonus schemes The aim of the bonus system is to reward achievement of performance goals, and to motivate and keep the most valuable staff members, while not giving incentives for excessive risk-taking. Existing bonus schemes are subject to annual revision. No staff in SG Finans has guaranteed bonus payments. Criteria for variable compensation/bonus schemes include company results, regional/department results, product results and discretionary criteria. Bonus scheme senior executives For the senior executives, the composition of fixed and variable remuneration shall be balanced. The variable part of the remuneration for the senior executives cannot be higher than 50% of the fixed part. The senior executives are only exceptionally granted one time premiums. One time premiums and regular bonuses shall in total not exceed 50% of fixed salary. The basis for the variable remuneration should be a period of the last two years, and at least half of the variable part can be distributed in the form of SG performance shares or as a SG share-adjusted cash bonus over at least a 3 year schedule (in line with SG Group policy and the Norwegian regulation).

63 AUDITOR S REPORT AND STATEMENT FROM THE CONTROL COMMITTEE 63 AUDITOR S REPORT

64 64 EMPLOYEE REPRESENTATIVES AND MANAGEMENT IN 2017 BOARD OF DIRECTORS Chairman Jochen Jehmlich CEO, Société Générale Equipment Finance, France Jacques Bensen Country Supervisor SGEF, Paris, France Philippe Dairien Risk SGEF, Paris, France Ellen Elisabeth Altenborg CEO, Linke Invest & Management, Bærum Tommy Pedersen Chairmain & Non Executive Director, Denmark Employee representative Anett Carlsson Senior consultant, SG Finans AS Employee representative (substitute) Per Magne Tröim Key Account Manager, SG Finans AS MANAGEMENT TEAM SG FINANS AS Carsten Thorne Hans Einar Herzog Armand Taillandier Sverre Edin Finn Mathisen Kjell Vegard Opheim Nina Bratlie Stig-Are Eriksen Espen Brochmann Magne Sogn Jonas Böös Lars Rasmussen Maria Ulla Kjell Brevik CEO Finance, deputy to the CEO Credit IT Sales and Business Development Equipment Finance Sales and Business Development Factoring Region South Region North Region West Region East Sweden Denmark HR Group coordinator AUDITOR Ernst & Young AS, represented by Andreas Lie, state authorised public accountant

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66 66 AVSNITTSTITTEL