A n n u a l r e p o r t Dexia Bank Belgium

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1 Dexia Bank Belgium A n n u a l r e p o r t

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4 Co n t e n t s 4 Group profile 6 Key figures Additional information Annual Report 2010 Dexia Bank Belgium 3

5 Group profile Dexia is a European banking group with a staff of 35,200 employees and a core shareholders equity of EUR 19.2 billion as at 31 December The Group operates mainly in Belgium, Luxembourg, France and Turkey. Dexia s shares are listed on Euronext Brussels and Paris and on the Luxembourg Stock Exchange as well as on the BEL20, the benchmark index of the Brussels Stock Exchange and the Dow Jones EuroStoxx Banks. Dexia Bank is a public limited company under Belgian law collecting the savings of the general public. It is a subsidiary of Dexia SA and one of the principal retail banks in Belgium. It is also the financial partner of choice for local authorities, social profit organisations and businesses. Dexia 2014 : a high-street bank serving 10 million customers The Dexia Group has set the year 2014 as its strategic target date by which to: complete its financial restructuring with most of its income being derived from its commercial franchises; consolidate and build up strong commercial franchises by focusing its business lines on its retail and commercial operations and by taking advantage of the opportunities for growth afforded by the Turkish market; adopt a highly effective business model based on the search for synergies and gains in efficiency. This return to basics brought about by the recasting of the Group s strategy can be seen in Dexia s values of respect, excellence and agility which inform the focus of its staff on its shared objectives. Dexia s business lines 1. Retail and Commercial Banking Dexia offers a wide range of retail, commercial and private banking services to over 8 million customers. Dexia ranks among the three largest banks in Belgium and Luxembourg. In Belgium, it serves its four million customers through a network of around 850 branches. In Luxembourg, the Group has built up its international centre for asset management, and a network of branches covers the country. In addition to that Dexia has a strong position in Turkey through DenizBank, which is the sixth largest private sector bank in the country and has a network of around 500 branches. As well as its retail and commercial operations, DenizBank also serves big businesses and offers its clients asset management and insurance services. The Group aims to continue to expand its commercial franchises in Belgium and Luxembourg and to tap into the enormous growth potential offered by Turkey, the purpose being to increase the share of its high-street banking activities in its overall income (around 60% of total income with around 29% being generated in Turkey) and to achieve a customer base of 10 million (4 million in Belgium and Luxembourg and 6 million in Turkey) by Public and Wholesale Banking Dexia is a major provider mainly in Belgium and France of funding for local authorities and infrastructure, the health and social housing sectors and the social economy. Other areas of activity include: the funding of selected projects in sectors like infrastructure and renewable energy in Europe and North America; corporate banking in Belgium where Dexia focuses on medium-sized businesses, while keeping an eye open for opportunities to serve big businesses. Apart from that the Group has offices in Germany where it has access to long-term refinancing sources (through the Pfandbriefe market). Close to its clients and fully in tune with their requirements, Dexia is constantly developing and broadening its range of products and services. The aim is to reach beyond the role of specialist lender and to offer its Public and Wholesale Banking customers integrated solutions (cash management, efficient budgeting, IT solutions...) that are tailored to their needs. 3. Asset Management and Services This business line consists of three activities (asset management, investor services and insurance) with attractive growth prospects based on a diversified customer base and close collaboration with the other commercial franchises of the Group. With EUR 86.4 billion in assets under management as at 31 December 2010, Dexia Asset Management is the Group s asset management centre. Its four management centres (based in Belgium, France, Luxembourg and Australia) serve a broad customer base. The investor services business is conducted by RBC Dexia Investor Services, a joint venture with Royal Bank of Canada, which offers its expertise in global custody, fund and pension administration and shareholder services to institutions all around the world. assets under administration amounted to EUR 2,101 billion as at 31 December Dexia s insurance activities are concentrated mainly on the Belgian and Luxembourg markets. The Group offers a complete range of contracts to retail, commercial and private banking 4 Dexia Bank Belgium Annual Report 2010

6 Group profile customers (for both life and non-life insurance) as well as to Dexia s public and semi-public sector clients. This is done both through a bancassurance approach and through a network of tied agents. Ratings The principal business units of the Group that operate on the long-term capital markets Dexia Bank Belgium, Dexia Crédit Local and Dexia Banque Internationale à Luxembourg are rated A+ by Fitch, A1 by Moody s and A by Standard & Poor s. Three European subsidiaries of Dexia (Dexia Municipal Agency, Dexia Kommunalbank Deutschland and Dexia LDG Banque) issue AAA-rated covered bonds. Annual Report 2010 Dexia Bank Belgium 5

7 Key figures for Dexia Bank Belgium Consolidated statement of income key figures (in millions of EUR) 31/12/09 31/12/10 Result of the period Change Evolution in % Income Expenses 2, , % (1,685.0) (1,657.0) % GROSS OPERATING PROFIT Cost of risk NET INCOME GROUP SHARE KEY RATIOS Cost-income ratio (1) Return on equity (ROE) (2) % (184.0) (26.4) % 74.8% 67.7% -7.1% 6.0% 9.3% 3.3% (1) The ratio between the expenses and the income. (2) The ratio between the annualised net income group share and the weighted average of core shareholders equity (estimated dividend for the period deducted). 6 Dexia Bank Belgium Annual Report 2010

8 Key figures for Dexia Bank Belgium Consolidated balance sheet key figures (in millions of EUR) 31/12/09 31/12/10 TOTAL ASSETS of which Loans and advances to customers Loans and securities Change Evolution in % 253, ,902 (5,869) -2.3% 103,007 99,472 (3,535) -3.4% 47,920 42,795 (5,125) -10.7% TOTAL LIABILITIES of which Customers borrowings and deposits Debt securities TOTAL EQUITY of which Core shareholders equity shareholders equity Solvency ratios key figures (in millions of EUR) 31/12/09 31/12/10 Change SOLVENCY RATIOS Tier 1 ratio Capital adequacy ratio regulatory capital Risk weighted assets Ratings Dexia Bank Belgium (situation as at 31/12/10) Fitch Moody s Standard & Poor s 248, ,450 (5,646) -2.3% 77,799 82,877 5, % 29,437 28,958 (479) -1.6% 5,675 5,452 (223) -3.9% 7,270 7, % 5,643 5,432 (211) -3.7% 13.8% 14.6% 0.8% 15.5% 15.7% 0.2% 7,748 7, ,929 49,551 (378) Long term Outlook Short term A+ Stable F1+ A1 Stable P-1 A Negative A-1 Annual Report 2010 Dexia Bank Belgium 7

9 8 Dexia Bank Belgium Annual Report 2010

10 M a n a g e m e n t r e p o r t 10 Transformation plan 12 Strategy 13 Corporate governance 21 Activity report 30 Evolution of the consolidated balance sheet and statement of income 33 Evolution of the non-consolidated balance sheet and statement of income 35 Risk management 50 Capital management 54 General information 57 Transparency declaration Annual Report 2010 Dexia Bank Belgium 9

11 Transformation plan Throughout 2010 Dexia continued to put its transformation plan into effect. At the beginning of the year the European Commission acknowledged the considerable progress made with the plan since it was launched in November On 5 February 2010 the Belgian, French and Luxembourg authorities reached an agreement in principle with the European Commission regarding the Plan to restructure the Dexia Group which was approved by the new Commission on 26 February The impact for the bank of the undertakings made to the European Commission, as well as the progress achieved throughout 2010 and at the beginning of 2011 are set out in detail below. The work of implementing the Plan last year enabled the Bank, in an unfavourable economic environment, to cut its short-term funding requirements and reduce its risk profile. Reduction in the balance sheet In 2010 the Dexia Group continued the balance-sheet deleveraging policy it had begun in As at 31 December 2010 the Legacy Portfolio amounted to EUR 29 billion and included, among other things, the run-off bond portfolio of EUR 26 billion. Dexia Bank consolidated cut that portfolio by EUR 7 billion mainly through the sale of EUR 5.5 billion in bonds. Through natural depreciation in bonds combined with the absence of new issues, it was possible to reduce the balance sheet of Dexia Bank consolidated s Legacy Division by EUR 5.9 billion. Within the Core Division, Dexia Bank consolidated also sold off EUR 2 billion-worth of bonds from the ALM-portfolio. Disposals In total therefore EUR 7.5 billion in bonds were sold in 2010 at a loss of 0.5% on the face-value of the assets sold, resulting in a loss of EUR 34 million on the statement of income. Under the Dexia Group s strategy, Dexia Bank has sharpened its focus on its core activities and traditional markets. In June 2010 Dexia Bank reached an agreement with EDF for the sale of its 6.13% stake in SPE which operates in the Belgian energy sector, and an agreement with Network Research Belgium for the sale of its 51% holding in Adinfo which provides IT services to Belgian local authorities. The gains (after tax) from these sales amounted respectively to EUR 69 million in the case of SPE and EUR 14 million in that of Adinfo. These transactions were part of the Agreement reached with the European Commission which stipulated that the holdings should be sold before 31 December Legacy Portfolio Management Division At the beginning of 2010 Dexia brought its run-off portfolios together within a single specific division, the Legacy Portfolio Management Division. The assets of the Division remain on the Bank s balance sheet and enjoy clearly identified and allocated funding. State-guaranteed funding is allocated in full to it. The balance-sheet total of Dexia Bank consolidated amounted to EUR billion as at 31 December 2010, against EUR billion as at 31 December Cost cutting In order to maintain the focus of the Group s profitability on its main branch networks, Dexia Bank has announced its aim of reducing its cost base by EUR 116 million by the end of At the end of December 2010, costs amounted to EUR 1,421.9 million (not including Dexia Insurance Services), down by EUR 115 million since the end of December Costs in 2008 and in 2010 were seriously affected by the costs of restructuring. Those apart, costs have fallen by EUR 107 million. Other commitments 1. Commitment regarding Public and Wholesale Banking (PWB) This new analytical segmentation which complies with the undertakings made to the European Commission has enabled Dexia Bank substantially to improve the visibility of its main business lines. Dexia has undertaken to bring the lending activities of Public and Wholesale Banking into line with its capacity to issue covered bonds and to maintain the level of risk-adjusted return on capital (RAROC) at not less than 10%. In 2010, the new commitments amounted to EUR 4.6 billion (for Dexia Bank, subsidiaries included) and to EUR 4.1 billion (for Dexia Bank, subsidiaries non included) and, for the business line as a whole, the 10% RAROC level was observed. 10 Dexia Bank Belgium Annual Report 2010

12 Transformation Plan 2. Restrictions on dividends and hybrid instruments The Agreement with the European Commission imposes certain restrictions on dividends and hybrid instruments. Thus until the end of 2011 Dexia may not pay out any cash dividends: any dividends it pays out must be in the form of new shares. Likewise, until 31 December 2011 Dexia may not approve the distribution of dividends by companies over which it has direct or indirect control where such distribution of dividends might result in the payment of a coupon on hybrid Tier 1 or Tier 2 instruments to anyone other than Dexia or its subsidiaries. That implies that for the accounting year 2010 Dexia Bank may not pay its shareholders any dividend. Naturally the Bank must honour its commitments to holders of financial instruments where it has a contractual obligation to pay a dividend, subject however to the restrictions imposed by the European Commission. Annual Report 2010 Dexia Bank Belgium 11

13 Strategy Dexia Bank s strategic objectives: far-reaching aims for 2014 Dexia Bank s strategy follows that of the Dexia Group. Under the new banking environment, Dexia Bank has set itself the target by 2014 of completing its financial restructuration, consolidating and expanding its dense network of commercial franchises and giving itself an improved business model. Dexia Bank s far-reaching plan seeks to establish: a retail and commercial bank at the service of its customers and a financial partner of choice for local authorities, the social profit sector and the business community; a bank with a robust financial structure; a bank committed to business excellence. 1. A portfolio of business lines that have been recast around the retail and commercial bank supported by a sound franchises Dexia Bank ranks among the top three retail and commercial banks and has a branch network that covers the entire country. It is also the bank of choice when it comes to asset management. In the new banking environment, the retail and commercial bank aims by 2014 to: free up its growth potential; recover its market share, in particular with regard to asset management and small and medium-sized businesses; become a benchmark for bank customer satisfaction. To achieve that objective, an investment plan was drawn up in 2009 involving different aspects: the deployment of a new branch model based on the open branch concept which makes it possible to improve the specialised service provided in the branch thanks to a cash management system that uses the latest technology; the realignement of the Dexia brand focusing on transparency both in products and customer relations and on the adaptation of the system of customer segmentation; a new sales approach adapted to the specific needs of customers and based on specialist sales teams; an approach involving the development of Direct Sales. In the field of Public Banking: Dexia Bank aims to confirm its position as market leader through a business model offering a full range of products and a sound branch network. In the field of Corporate Banking: its aim is to become the partner of choice for medium-sized businesses with a turnover or balance sheet of between EUR 10 million and EUR 1 billion and to become a major operator for big businesses with a turnover or balance sheet of EUR 1 billion or more. In the field of project finance: to consolidate the company s franchises in the public-private partnership (PPP), transport, energy and environment sectors. Refinancing will be mainly achieved through the issue of covered bonds and by customer deposits. 2. A robust financial structure and a greatly reduced Legacy Division In order to meet the undertakings made in the Agreement between Dexia SA and the European Commission on the reduction of its balance sheet, Dexia Bank helps in the implementation of the assets sale plan, subject to market conditions. Between the end of 2008 and the end of 2014, the Legacy Division will be reduced through a combination of substantial deleveraging and natural depreciation. By 2014, the assets still in the portfolio will be mainly long-term assets for which Dexia has an acknowledged expertise loans to the public sector, the utility sector and project finance and good credit quality. At the same time, Dexia Bank takes whatever measures are necessary to reduce its short-term funding needs. Dexia Bank will continue to seek to reduce its costs in order to achieve an operating ratio of below 65% by A business model that has undergone profound change Various measures have been taken to reduce the cost base, including: the sale of or cut-back in non-strategic activities and, in particular, the geographical focus of the Public and Wholesale Banking business line; the search for gains in efficiency and the strengthening of synergies within the Dexia Group. There is still a place for the Public and Wholesale Banking business line in the company within the limits imposed by the geographical focus on traditional markets and subject to compliance with strict profitability standards. In that respect Dexia Bank has set itself the following targets for Improving the operational efficiency of the various business lines remains a priority. 12 Dexia Bank Belgium Annual Report 2010

14 Corporate governance Composition of the Management Board and the Board of Directors 1. Management Board 1.1. Composition The Management Board has a maximum of nine members who have all acquired experience in the banking and financial sector. The members of the Management Board form a college. At 31 December 2010, the Management Board of Dexia Bank had the following membership: Chairman Stefaan Decraene Vice-Chairman Xavier de Walque Members Ann De Roeck Benoît Debroise Dirk Gyselinck Marc Lauwers Roger Leyssens Jean-François Martin Luc Van Thielen 1.2. Responsibilities The Board of Directors has delegated the management of banking business to a Management Board created among its members. The Management Board operates as a college and can distribute its tasks among its members. The Management Board is responsible for the effective leadership of the Bank within the general policy guidelines laid down by the Board of Directors and in accordance with the strategy of the Dexia Group. 2. Board of Directors (1) 2.1. Composition In accordance with the Articles of Association, the Board of Directors has a maximum of twenty-seven members, of whom nine at the most are also members of the Management Board. At 31 December 2010 the Board of Directors of Dexia Bank consisted of twenty-six members, of whom nine are members of the Management Board. The Board of Directors includes an independent director who is also a member of the Audit Committee. At 31 December 2010 the Board of Directors had the following membership: Chairman Marc Deconinck Mayor of Beauvechain Vice-Chairman Jean-Luc Dehaene Chairman of the Board of Directors of Dexia SA Members Stefaan Decraene Chairman of the Management Board of Dexia Bank SA, Member of the Management Board of Dexia SA Xavier de Walque Vice-Chairman of the Management Board of Dexia Bank SA, Chief Financial Officer, responsible for Finance, Research and Balance-Sheet Management Ann De Roeck Member of the Management Board of Dexia Bank SA, Secretary General, Head of the Compliance, Legal and Tax Departments, the Department for Wealth Analysis & Planning and the General Secretariat & Participations Benoît Debroise Member of the Management Board of Dexia Bank SA, Head of Treasury and Financial Markets Dirk Gyselinck Member of the Management Board of Dexia Bank SA, Head of Public and Wholesale Banking Marc Lauwers Member of the Management Board of Dexia Bank SA, Head of Retail and Commercial Banking Roger Leyssens Member of the Management Board of Dexia Bank SA, Head of Human Resources Management Jean-François Martin Member of the Management Board of Dexia Bank SA, Chief Risk Officer Luc Van Thielen Member of the Management Board of Dexia Bank SA, Chief Operations Officer, Head of IT, Operations, Facility Management and Organisation (1) Article 2 of the law of 6 August 1931 (Belgian Gazette of 14 August 1931) forbids ministers, former ministers and State Ministers, as well as members or former members of Legislative Assemblies to mention their status as such in the deeds and publications of profit-making companies. Annual Report 2010 Dexia Bank Belgium 13

15 Corporate governance Robert de Metz Executive Director of La Fayette Management Ltd In addition, the Board of Directors carries out the following functions required by law and under its Articles of Association: Wivina Demeester Consultant, independent director and, since 2 August 2010, Chairman of the Audit Committee in succession to Bruno Flichy Patrick Develtere Chief Executive Officer of the ACW Thierry Jacques President of the Mouvement ouvrier chrétien Patrick Janssens Mayor of Antwerp Marc Justaert President of the Fédération des mutualités chrétiennes Serge Kubla Mayor of Waterloo Patrick Lachaert Lawyer and Municipal Councillor for Merelbeke Pierre Mariani Chief Executive Officer and Chairman of the Management Board of Dexia SA Luc Martens Mayor of Roeselare Claude Rolin Secretary General of the Confédération des syndicats chrétiens de Belgique Francine Swiggers Chairman of the Management Board of the ARCO Group Bernard Thiry Chairman of the Management Board of Ethias Tony Van Parys Lawyer and Municipal Councillor for Ghent Jean-Jacques Viseur Mayor of Charleroi 2.2. Remit The Board of Directors is a collegial body with the task of defining the general policy of the Bank on the one hand and of properly supervising the business of the Bank and the management carried out by the Management Board on the other. General policy means: defining the strategy of Dexia Bank within the strategy guidelines drawn up by the Board of Directors of Dexia SA and determining aims and values; approval of projects, financing plans and budgets; approval of major legal structural changes; responsibility for relations between the company and its shareholders. the appointment of the Chairman, Vice-Chairman and members of the Management Board and the co-opting of directors to the Board of Directors; the decision to grant discharge to the members of the Management Board and the advisory committees set up by it (in particular the Audit Committee); the decision to pay an interim dividend; the fixing of the compensation package for the members of the Management Board and the aforesaid advisory committees; the drafting of the agenda for the Ordinary Shareholders Meeting and for any Extraordinary or Special Shareholders Meetings; the decision to convene the Shareholders Meeting. The Board of Directors also carries out tasks relating to the company, and in particular: the drawing up of the financial which must give a true and fair view of the assets, the financial situation and the annual results of Dexia Bank; the assessment of how the Board of Directors functions; the supervision of the management and the evaluation of the management structure and the organisation; through activity reports, the examination of the findings of the audit, compliance and risk departments and the findings of the Banking, Finance and Insurance Commission and the Auditor; the evaluation of the existence and functioning of internal audit systems, including the proper identification and management of risks and the reliability of the financial reporting system; monitoring the existence and operations of the functions of proper independent supervision, internal audit, compliance and risk; ensuring that the Auditor is able to do his job properly; the evaluation of the performance of Dexia Bank against plans and budgets. For particular tasks the Board of Directors may seek the assistance of the Audit Committee Activities of the Board of Directors In addition to the business for which it is normally responsible (such as the monitoring of the quarterly results, the co-option of directors, the decision to convene the Ordinary Shareholders Meeting, the minutes of the meetings of the Audit Committee), the matters considered by the Board of Directors during 2010 included the following: the strategy concerning Public & Wholesale Banking for Dexia Bank; the transformation plan and its impact on the Bank; the progress of negotiations between the social partners over the transformation plan; the policy regarding human resources; the Agreement with the European Commission on the restructuring of Dexia; the Dexia Group s compensation policy; the Code of Ethics and the rules governing personal transactions in Dexia financial instruments; 14 Dexia Bank Belgium Annual Report 2010

16 Corporate governance Dexia Compliance Policy : charter and integrity policy; the sale of Crédit du Nord; the closure of the London branch; the transfer of the subsidiary Dexia Real Estate Capital Markets to Dexia Crédit Local; the sale of Adinfo; the Bank s Risk Appetite Framework; insurance: business plan and results; the update of the Memorandum of Good Governance; the update of the Group s policy to guarantee the independence of auditors; the Bank s liquidity situation; Dexia Bank s budget for 2011; monitoring the progress of the most important cases. Changes to the composition of the Board of Directors Mr Jozef Gabriels tendered his resignation as vice-chairman and director of Dexia Bank with effect from 1 January On 26 February 2010 the Board of Directors decided to co-opt Mr Luc Martens as a director of Dexia Bank to replace Mr Jozef Gabriels. Mr Luc Martens was appointed definitively at the Ordinary Shareholders Meeting on 28 April 2010 for a maximum term of office of 4 years ending after the Ordinary Shareholders Meeting of Mr Bruno Flichy tendered his resignation as an independent director of Dexia Bank with effect from 27 May The Board of Directors decided to appoint in his place for a temporary period Mr Robert de Metz as a director of Dexia Bank with effect from 27 May Mr Robert de Metz s definitive appointment will be submitted for approval by the shareholders at the Ordinary Shareholders Meeting of Mr Jan Renders tendered his resignation as a director of Dexia Bank with effect from 6 September On 14 September 2010 the Board of Directors decided to co-opt Mr Patrick Develtere as a director of Dexia Bank to replace him with effect from 14 September Mr Patrick Develtere s definitive appointment will also be submitted for approval by the shareholders at the Ordinary Shareholders Meeting of Advisory committees set up by the Board of Directors 1. Compensation Committee 1.1. Derogation On 26 February 2010 the Board of Directors approved the Dexia Group s new compensation policy in pursuance of the Circular of 26 November 2009 by the Banking, Finance and Insurance Commission on the recommendation regarding the adoption of a sound compensation policy in the banks. That compensation policy was adapted to the new Circular by the Banking, Finance and Insurance Commission of 14 February 2011 and approved by the Board of Directors on 3 March Dexia Bank has requested the Committee for Systemic Risks and System-relevant Financial Institutions (CSRSFI) to exempt it from the need to set up a Compensation Committee within Dexia Bank, empowering, instead, Dexia SA s Compensation Committee to carry out the Bank s Compensation Committee duties and to regularly report back to the Bank. The Bank s Board of Directors decodes on compensation for the Bank s Management Board on the basis of advice submitted to it by the Compensation Committee and the Banking, Finance and Insurance Commission (the CBFA). Dexia Bank has no Appointment Committee. In order to meet its responsibilities in that regard, the Board of Directors itself takes care to avail itself of directors possessing the qualities essential to the running of a financial institution. The Board of Directors presents to the Ordinary Shareholders Meeting the prospective directors it has selected on the basis of a defined skills profile Composition The Appointment and Compensation Committee of Dexia SA consists of 3 to 7 non-executive directors including the Chairman of the Board of Directors of Dexia SA. Most of the members are independent directors. That Committee has the requisite expertise regarding the compensation policy. The Chief Executive Officer of Dexia SA may attend the meetings of the Committee but he cannot be a member of it (since he has an executive function). At 31 December 2010, the Appointment and Compensation Committee of Dexia SA had the following members: Chairman Jean-Luc Dehaene Chairman of the Board of Directors of Dexia SA and an independent director of Dexia SA Members Christian Giacomotto Independent director of Dexia SA; Francine Swiggers Director of Dexia SA and Dexia Bank SA; Augustin de Romanet Director of Dexia SA; Francis Vermeiren Director of Dexia SA; Catherine Kopp Independent director of Dexia SA Compensation of members of the Management Board Introduction Procedure The compensation of members of the Management Board is fixed by the Board of Directors of Dexia Bank SA on proposals from the Appointment and Compensation Committee. The Appointment and Compensation Committee analyses the levels of compensation of members of the Management Board having regard to compensation granted in other companies in the sector. Annual Report 2010 Dexia Bank Belgium 15

17 Corporate governance In this respect, compensation consultants are used to obtain information on salary developments on the labour market for the financial sector. In order to offer compensation in line with the market, every two years the Appointment and Compensation Committee asks for a benchmarking study. This study was carried out in 2010 with the support of Towers Watson, a specialist external consultant. The Appointment and Compensation Committee determines the reference group of companies to be included in the benchmark and the positioning of Dexia vis-à-vis that reference group. On analysing this benchmark, as regards members of the Management Board of Dexia Bank SA, the Appointment and Compensation Committee makes a proposal to the Board of Directors on any increases in fixed compensation and, if necessary, adjustment of the extent of variable compensation and any changes justified by market developments. The year when the Appointment and Compensation Committee does not require a benchmark, it will be informed by its external advisor (compensation specialist) of the evolution of the executive compensation market Regulatory context The compensation of executives of companies in the financial sector has been subject to numerous regulations over the last two years. The Board of Directors immediately undertook to observe this regulatory framework as it evolved on the basis of national and international provisions aimed at strengthening Corporate Governance particularly in terms of compensation, as well as Circulars from the Banking, Finance and Insurance Commission. Against that background, last year Dexia Bank even anticipated the obligations weighing on the financial sector in particular regarding the deferment of variable compensation. During the year 2010, Dexia reviewed its compensation policy in the light of recent initiatives in the matter and sent the Banking, Finance and Insurance Commission details of a global compensation policy for the Dexia Group complying with Belgian and European regulations as well as recent principles of sound compensation practice. In accordance with the regulations, Dexia Bank retroactively altered the conditions for variable compensation for 2010 paid in 2011 and as a consequence amended its compensation policy with retroactive effect. Dexia s compensation policy has been prepared by the Human Resources department in collaboration with the Audit, Risk and Legal, Compliance & Tax departments and submitted to the Appointment and Compensation Committee of Dexia SA. The proposals of the Appointment and Compensation Committee were submitted to the Board of Directors of Dexia SA and Dexia Bank SA which validated the Group compensation policy. The compensation policy applicable to compensation paid from 2011 on the one hand states the general principles applicable to all members of staff of the Dexia Group. On the other hand, observing the principle of proportionality, it contains specific provisions, exclusively applicable to an identified group as being likely to impact the risk profile of the Dexia Group by virtue of the nature or level of their functions and/or compensation Orientations adopted by the Board of Directors in accordance with the regulations Considering the guidelines in particular included in the Royal Decree of 22 February 2011 (1), the Board of Directors reviewed the balance of the compensation packages of executives and senior management of the Group. That revision aimed to reduce the incentive to take excessive risks which might assume recourse to variable compensation which is disproportionate in comparison to the fixed compensation. It will also enable the extent of variable compensation to be reduced considerably, without any increase of costs, whilst maintaining a competitive package for Group executives Compensation Fixed and variable compensation The compensation of members of the Management Board consists of a fixed part and a variable part. The fixed and variable compensation of members of the Management Board constitutes a whole from which will be deducted any director s fees or percentage paid to a member of the Management Board by a company in the Dexia Group or by a third-party company in which a mandate is performed in the name and on behalf of Dexia Compensation for the year 2010 Fixed compensation Fixed compensation is determined considering the nature and importance of the responsibilities assumed by each (and taking account of market benchmarks for comparable posts). Bonus package In accordance with the above, the Board of Directors decided to reduce the variable compensation dependent on the performance of members of the Management Board in order to reduce the potential incentive to take excessive risks. As a consequence, the Board decided to grant a bonus package, not affected by performance, paid quarterly to members of the Management Board. This bonus will be paid for the first time (2) on 1 April 2011 (year n+1) for the year The variable compensation and its extent will be reduced accordingly. As a result, and in accordance with Article 7 of the Royal Decree of 22 February 2011, the Board is increasing the compensation not linked to performance which must be a significant proportion of the entire compensation. (1) Royal Decree approving the Regulations of the Banking, Finance and Insurance Commission dated 8 February 2011 concerning the compensation policy of financial institutions. (2) This bonus will be paid, recurrently, quarterly for Dexia Bank Belgium Annual Report 2010

18 Corporate governance Variable compensation for the year 2010 Principles Variable compensation will be granted up to at least 50% in the form of equity instruments. These instruments will be reflected, at the beneficiary s choice, by: a payment in cash indexed to the share price; a payment in hybrid Tier 1. Deferment of variable compensation The deferred part of the variable compensation corresponds at a minimum to 40% of the total amount of the variable compensation. The principle of deferment of the variable compensation is applicable to the total variable compensation. The period of deferment is three years following the financial year during which the variable compensation is due. The deferred part of the variable compensation will be granted in the years 2012, 2013 and 2014, at one third each year, provided that the following conditions are met: On a proposal of the Appointment and Compensation Committee, the Board of Directors will verify on each date of payment of a deferred part that the performance of the Management Board has not deteriorated; The member of the Management Board is still in the service of the Group at the time of payment of the different amounts. The deferred parts will be lost if the beneficiary leaves the Group voluntarily or if there is a termination on serious grounds, unless the Board of Directors decides otherwise on a proposal of the Appointment and Compensation Committee. Retention The instruments representing the capital in the form of which the variable compensation is partially granted have a maximum retention period of one year. A posteriori adjustment of the variable compensation The variable compensation may be adjusted in the case of poor individual or collective performance. Application of these principles for 2010 The Board of Directors has noted that the objectives of the transformation plan were achieved and even exceeded in As in 2009, the Board of Directors reaffirms that variable compensation, for the year 2010, must be lower than practice prior to the crisis for the equivalent post. The Board recalls that there was no stock option or free allocation of shares during In line with the compensation policy rules adopted by the Board of Directors, the part paid immediately in cash represents 30% of the variable compensation. The balance is deferred Deferred part of the variable compensation for 2009 due in 2011 Principles The Board of Directors decided in 2009 to apply principles enabling variable compensation to be linked to long-term performances. To do so, the payment of variable compensation will be deferred and subject to certain conditions to be met over several years. The deferred part is thus linked to the share price and is liable to adjustment in the case of poor performance. Conditions for allocation and payment of the variable compensation For 2009, the allocation and payment of variable compensation to members of the Management Board was subject not only to maintenance of a level of performance and fulfilment of undertakings made to the European Commission, but also to the non-renewal of the State guarantees on interbank loans and bond issues beyond 30 June Deferment of variable compensation In line with the principles stated above, the variable compensation of members of the Management Board for 2009 was deferred over three years, the deferred part determined under the following conditions: In n+1 (i.e. 2010), the member of the Management Board receives: for the part not exceeding EUR 50,000: 100%; for the part exceeding EUR 50,000 but not EUR 100,000: 50%; for the part exceeding EUR 100,000: 33%. The member of the Management Board is likely to receive the balance, under the conditions described above, in n+2 (i.e. 2011) and in n+3 (i.e. 2012), provided he is still in the service of the Group on payment of the deferred amounts. The deferred parts are lost if the beneficiary leaves the Group voluntarily or there is a dismissal on serious grounds, unless the Board of Directors decides otherwise, on a proposal from the Appointment and Compensation Committee. In order to index the deferred part to the share price over the deferment period and thus closely linking the interests of members of the Management Board to those of the shareholders (from a long-term perspective), the deferred part was converted into a number of Dexia shares, on the basis of a benchmark price of EUR 4.253, corresponding to the average closing price of the Dexia share on Euronext Brussels over the thirty days preceding 1 March At the time of payment of the deferred part, it is valued on the basis of a benchmark price corresponding to the average closing price of the Dexia share on Euronext Brussels over the thirty days preceding 1 March of the year of payments. Changes with regard to recent corporate governance initiatives As the Board of Directors reserved the right, the terms of payment of the deferred part of the variable compensation for 2009 were revised with regard to recent principles and provisions adopted in respect of good governance and sound compensation practice. Under the provisions of European Directive CRD III (1) as stated by the recommendations of the Committee of European Banking Supervisors, the principle of indexation of variable compensation to the share price may be limited to one half of total variable compensation. (1) Directive amending Directives of the European Parliament and Council dated 14 June 2006 No 2006/48/EC relating to the taking-up and pursuit of the business of credit institutions and No 2006/49/EC on the capital adequacy of investment firms and credit institutions. Annual Report 2010 Dexia Bank Belgium 17

19 Corporate governance It was therefore decided that one half of the shares representing the capital to which the deferred part of the variable compensation for 2009 relates will be valued at the benchmark price on the basis of which the conversion into capital shares was initially made. Considering the adjustment following the issue of bonus shares decided by the Extraordinary Shareholders Meeting on 12 May 2010 and the evolution of the share price, the amounts paid to members of the Management Board in March 2011 are reduced by 13% on their initial value. 2. Audit Committee The Audit Committee, set up on 18 December 2002, is an advisory subcommittee of the Board of Directors consisting of three non-executive directors. In 2010, Mr Bruno Flichy chaired the Committee on behalf of the Board of Directors until 20 May 2010, and Mrs Wivina Demeester from 2 August Composition Chairman Mr Bruno Flichy until 20 May 2010 Mrs Wivina Demeester from 2 August 2010 Members Mr Marc Deconinck Mrs Wivina Demeester Mr Robert de Metz from 2 August Independence and expertise In addition to having among its members an independent director with the individual expertise required for accountancy and/or auditing, the Audit Committee also has within its current membership a collective expertise in the fields of banking, as well as accounting and auditing. On 2 August 2010, the Board of Directors decided that Mrs Wivina Demeester met the criteria of an independent director within the meaning of Article 526ter of the Companies Code. The Board of Directors considered that, in the light of her training and the professional experience she had gained in the field of accounting and/or audit when carrying out her past and current duties and professional activities, Mrs Wivina Demeester had the requisite individual skills in the field of accounting and/or audit. The Board of Directors is of the opinion that the members of the Audit Committee possess collective expertise in the field of banking as well as accounting and audit. Both Mr Marc Deconinck and Mr Bruno Flichy have among other things acquired auditing experience as members of the Audit Committee of the Bank. Mrs Wivina Demeester has experience in auditing acquired when carrying out her past and current duties and professional activities. In addition, Mr Robert de Metz has a thorough knowledge of the business of banking following the professional experience in the French banking sector he has gained in the past in different executive management roles. He also has experience in accounting and auditing as a former Inspector of Finances (in France) and as a member of the Accounts Committee of Dexia SA. Mr Marc Deconinck has acquired experience in accounting and auditing through his previous position in a public utility company and through his experience as Chairman and member of the Board of Directors of Dexia Bank Tasks and remit The Audit Committee assists the Board of Directors in its task of carrying out prudential controls and exercising general supervision Financial reporting The Audit Committee monitors the integrity of the financial information provided by the company, in particular by evaluating the accounting standards used and the criteria governing the scope of the consolidation. It also oversees the follow-up of regular financial information before its submission to the Bank s Board of Directors Internal audit and risk management At least once a year the Audit Committee examines the efficiency of the internal audit and risk management systems set up by the executive management to ensure that the main risks (including the risks linked to compliance with current laws and regulations) are properly identified and managed. To that end the Management Board submits to the Audit Committee a report on the internal audit system and risk management. During 2010 the Audit Committee received reports on the activities of the Legal Department and on outstanding legal disputes, on the activities of the Compliance Department and on those of Audit and Supervision, on the monitoring of credit, market (including liquidity) and operational risks, and on the security of the IT system. It was also regularly informed about and consulted over the transformation plan of the Dexia Group and over its implementation Internal audit The Audit Committee assesses the operational efficiency and independence of the Internal Audit division. It also verifies the extent to which the management responds to the findings of the Audit Department and its recommendations. In 2010 the Audit Committee examined and approved the Annual Report for 2009, the Audit Plan for 2010, the Half-Yearly Activity Report for 2010 and the regular follow-up reports on the implementation of recommendations. It also approved the updated version of the Dexia Internal Audit Charter and the Charter of the new Investigations & Branch Audit support line Statutory auditing of the financial and the consolidated financial In 2010 the Audit Committee reported to the Board of Directors on the consolidated financial of Dexia Bank as at 31 December 2009, 31 March 2010, 30 June 2010 and 30 September After considering the comments received from the management of the Bank and the auditors, the Audit Committee delivered a favourable opinion on the financial results and on the facts that had influenced them External audit function and monitoring of auditor independence The Audit Committee verifies that the auditors carry out their external audits satisfactorily. The Audit Committee delivers opinions to the Board of Directors on the appointment or re-appointment of auditors by the Ordinary Shareholders Meeting and on their independence and pay. The Audit Committee monitors the independence of the auditors and their auditing programmes. 18 Dexia Bank Belgium Annual Report 2010

20 Corporate governance Supervision of the financial reporting process, the internal audit and risk management systems, the financial and the independence of the auditor of Dexia Funding Netherlands Since the end of August 2009 the Audit Committee has, pursuant to European Directive 2006/43/EC, assumed the role and responsibilities of the Audit Committee of Dexia Funding Netherlands, a wholly-owned Dutch subsidiary and issuing vehicle for Dexia Bank Functioning of the Audit Committee The Audit Committee may demand to see any useful information or supporting evidence and may carry out any inspection whatsoever. To that end it calls on the services of the Internal Audit department of Dexia Bank which reports to the Management Board. accounting ledger at the end of the month. Amounts which are not reconciled are the subject of an automatic report using a special programme. The decentralised accounts department analyses the differences and makes any adjustments that may be required. The (Belgian GAAP and IFRS) accounts are closed each month. An initial level of supervision is carried out by the Accounting Competence Centres (which have full responsibility for the accounting ledger and the inventory). As to the activities of the Treasury and Financial Markets division, the market risk management department is responsible for validating the profit and loss accounts and other items of overall income. The Accounting Competence Centre concerned is responsible for on-balance-sheet and off-balance-sheet accounts and for the inventory. The auditing procedures and activities are documented by each department concerned. In 2010 the Audit Committee met nine times. At those meetings, which were held prior to the meetings of the Board of Directors, the Audit Committee examined among other things the quarterly, half-yearly and annual financial. Several extraordinary meetings were held in order to examine the progress made with the Dexia Group transformation plan and to deliver opinions thereon to the Board of Directors. In addition, a joint working party was organised with the Audit Committee of Dexia SA Internal audit Informed by its group vision and strategy, the Dexia financial group has established a uniform and integrated audit function with a support line of auditing departments in the different business units. It applies the most exacting standards consistently for all Dexia s activities. The methodology and audit plan are integrated throughout the entire Group. The remit of the audit function is to promote internal supervision and constantly to ensure that existing auditing systems perform effectively and are efficiently applied. The audit function helps uphold the good reputation of Dexia Bank and maintain the effectiveness and integrity of its structures values to which it attaches particular importance. Internal Audit verifies that the risks that Dexia Bank takes in the course of all its activities are duly identified, analysed and covered. Internal audit and risk management systems applied to financial Dexia Bank applies various internal audit and risk management systems to its financial. These audits are carried out at different levels. A second level of supervision is carried out by the Financial Data and Cost Control department in order to oversee the closure process and ensure the centralisation and final validation of all the accounting data and relevant information for reporting purposes. A risk-based approach is used to determine the type of supervision and how far it should go. For the most part audits analyse the difference between balances and ratios, carry out sample-based tests, examine supporting evidence and perform likelihood tests. The findings are set out in a progress report to the management. The auditing procedures and activities are recorded by each department. The first and second levels of supervision provide a reasonable level of assurance regarding the exhaustiveness, accuracy and appropriate presentation of the accounting data in accordance with financial and prudential requirements. At the level of the Dexia Group, the Finance Supervision department has been set up with the remit of financial supervision for the entire Group. External activities of directors Article 27(2) of the law of 22 March 1993 on the Status and Supervision of Credit Institutions Under the Regulation by the Banking, Finance and Insurance Commission (CBFA) on the pursuit of external activities by bank directors, approved by Royal Decree on 19 July 2002, Dexia Bank is required to disclose any external appointment held by its directors and senior managers. Dexia Bank has chosen to publish such appointments in the Bank s Annual Report, which is deposited with the National Bank. Each day the inventory is automatically reconciled with the balances on the accounting ledger. This is carried out both in the set of accounts drawn up in accordance with the Belgian accounting standards and in the set of accounts drawn up in accordance with recognised international accounting standards (IFRS). The amounts of the inventory of on-balance-sheet and off-balance-sheet accounts are adjusted to those of the Annual Report 2010 Dexia Bank Belgium 19