SOCIETE GENERALE BANK & TRUST ANNUAL REPORT 2014

Transcription

1 SOCIETE GENERALE BANK & TRUST 2014 ANNUAL REPORT 2014

2 This report is a translation from the French annual accounts, management report and report of the Réviseur d Entreprises Agréé. In case of any discrepancies between the French and English version, the French version shall prevail.

3 Contents MANAGEMENT REPORT Pages 4-8 REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉÉ TO THE BOARD OF DIRECTORS OF SOCIETE GENERALE BANK & TRUST SOCIÉTÉ ANONYME LUXEMBOURG Pages 9-10 ANNUAL ACCOUNTS Pages Balance sheet pages Profit and loss account page 13 Statement of changes in equity pages Notes pages 16-96

4 MANAGEMENT REPORT AT APRIL 02, 2015 MANAGEMENT REPORT OF SOCIETE GENERALE BANK & TRUST S.A. ACTIVITY OF THE BUSINESS LINES A wholly-owned subsidiary of Société Générale Group, Société Générale Bank & Trust S.A. ( SGBT ), which applies a diversified model, has four business lines: Private Banking, Capital Markets, Securities Services and Corporate Services, covering activities ranging from daily cash flow management to the arrangement of structured financing. In such contrasting environment (disparate conditions within the Euro zone and exceptional rate conditions with negative shortterm rates), SGBT has continued to rely on the solidity of its business assets, on the resilience of its business lines, and on the management and diversification of its risks, demonstrated by its ability to generate profit in 2014 (net profit of SGBT and branches of EUR 610 million compared with EUR million in 2013). In accordance with the economic objective and through an aggregated management, the net banking income amounts to EUR 782 million, thus, increased by 25% compared to the amount in 2013 (EUR million). This increase shows the quality of SGBT s business lines, generating sustainable profits, strengthening the general expenditure of EUR million by a growth of 8% (EUR million), and extending the perimeter of activity and ongoing investments in the information system. The 2014 gross operating profit amounted to EUR million, an increase of 37% compared to the profit in 2013 (EUR million). SGBT s adjustment to the present environment will stimulate the Group s future investment capacity to sustain growth of the business lines and to reinforce its operational efficiency. The Private Banking business line in Luxembourg operates in three branches: SGBT Singapore, SGBT Hong Kong and SGBT Middle East in Dubai. The activities of both the SGBT Singapore and SGBT Hong Kong branches were sold to DBS in October This sale redeemed an added value of EUR million (USD 220 million) for a transaction cost of EUR 3.6 million. Following the sale of the activities in Asia, assets under management were greatly reduced to about 10 billion Euros at the end of 2014 versus 20 billion Euros at the end of 2013, following the sale of the stocks in Asia. SGBT Luxembourg succeeded in preserving its business despite the unfavourable tax situation in Europe as well as the ever-growing competition that was favored by both diversification and innovation of products, and encouraged by the range of exhaustive private banking services (Wealth Planning, Fiduciary services, Wealth Investment Solution, Primary Market access). In spite of these unfavourable conditions, the cash position remained at the high levels of 2013: Rates continued to level out in 2014 and the ECB introduced negative rates. Despite that, the ALM profit remains close to the 2013 result (RBE at EUR million as against EUR million in 2013). By virtue of exceptional impacts (internal penalties) and a positive marked-to-market effect, the treasury, once again, breaks off.

5 MANAGEMENT REPORT AT APRIL 02, 2015 MANAGEMENT REPORT OF SOCIETE GENERALE BANK & TRUST S.A. As the result of a very good year end the FX almost achieved its objective, although it had been relatively slow during the first three quarters of The Bank s institutional investor services are part of the business line of the Société Générale Group. Notwithstanding the highly competitive market, the Bank continues to strengthen its customer base and the development of offers in niche markets, such as the structuring of Private Equity funds, SIF and Real Estate, in order to differentiate itself from competitors while strengthening the intra-group synergies, particularly within the Private Banking sector (Global Custody PRIV, etc.). These developments facilitated an increase of the RBE from EUR 17.2 million to EUR 18.8 million, while absorbing the costs for the outsourcing of certain functions. In addition, on July 31, 2014, the Bank added to its depositary bank activity the fund administration services which, until then, had been held by SGSS Luxembourg. The Corporate financial engineering activities continued to develop in 2014, by extending structured operations for investors. Gross Operating Income is increasing significantly (EUR 247 million in 2014, EUR 147 million in 2013) however, a non-recurring result following the transfer of a portfolio loan. Corporate banking activities benefit from the elaborated offer of banking services that are operated from Luxembourg and tailored for customers of the Société Générale Group or large Luxembourg SMEs (corporate, Institutional, Private Equity Funds). This year, the stock performance was sustained by an excellent Cash Management dynamic and by the implementation of a more vibrant ALM management. The Gross Operating Income is therefore showing a net progression of EUR 13.6 million (against EUR 3.3 million in 2013). OUTLOOK The Large Customer and Investor Solutions Banking Centre (to which SGBT Luxembourg belongs) forms the third pillar of the Group s overall banking strategy. After having greatly reduced its risk profile since 2007, the Group has strengthened its customer-oriented model and is now well-positioned to reinforce its market share in a changing competitive environment, where certain players are reviewing their strategy and reducing their activities. In particular, the Group is able to capitalise on the phenomenon of intermediaries cut in Europe and on the development of new after-market services. In 2015, the Group will continue to support and assist its broad and diversified customer base (companies, financial institutions, asset managers, public sector entities, high net-worth customers) by offering customized highly value-added solutions. The Group specifically intends: to consolidate its leading position in the market by continuing to upgrade the operation of flow derivatives, structured products and bond distribution; to win new customers in Europe, to strengthen the Group s presence within financial institutions and expand its base of wealthy customers in Europe; 4 5

6 MANAGEMENT REPORT AT APRIL 02, 2015 MANAGEMENT REPORT OF SOCIETE GENERALE BANK & TRUST S.A. to be the leading edge in the development of after-market services, particularly focusing on the integration of Newedge, over which it acquired exclusive control in To improve the platform for the custody and administration of funds and to offer new value-added after-market services; to develop the Private Bank and Lyxor in the European countries by using in particular the additional expertise developed in its European organization. In 2014, the Group finalised the transfer of its Private Banking activities in Asia to DBS. Operating in accordance to the readjusted organisation, the Private Bank accelerate the progression of its core markets and continue to strengthen the services provided to its customers in the EMEA areas (Europe, Middle East and Africa). In such a constrained context and within the framework of the Group s transformation, SGBT continues to adapt its sales organisation and to target the development of its Private Banking activities towards Investors, by relying on Luxembourg s advantages (stability and AAA rating) and providing sharp expertise to its customers (especially on Wealth planning, custody investment solutions and cash management), while maximising the synergies between the different operations. This process is sustained by the provision of new activities in Luxembourg. SGBT also pursues its efforts to streamline operations in order to support the development of its business lines and effectively address the regulatory changes such as the automatic exchange of information or the strengthening of investor protection. FINANCIAL STRUCTURE SGBT enjoys a favourable creditworthiness rating from Standard & Poor s as regards the financial soundness of the Group: A-1 in the short term, A in the long term (rating as of January 23, 2012 confirmed in July 2014). The Bank s capital is divided as follows: core tier one capital: EUR 2,856 million, additional eligible capital: EUR 345 million. SGBT has not issued any hybrid securities or subordinated borrowing not eligible for capital. As a result, the own funds equal the prudential capital. In the new Basel III framework, SGBT s Tier One ratio stands at 23.19% as at 31 December The ratio including the Tier II eligible capital stands at 25.99% as at 31/12/2014. In 2014, SGBT did not redeem any of its own shares. The reduced demand for capital equity between 2013 and 2014 was mainly due to the inclusion of banking guarantees received from the parent company Axus Luxembourg (more favourable risk-weighting of exposure) which compensated for the increased RWA.

7 MANAGEMENT REPORT AT APRIL 02, 2015 MANAGEMENT REPORT OF SOCIETE GENERALE BANK & TRUST S.A. RISK MANAGEMENT Running a strong and efficient organization and managing risks is of highest importance to SGBT. The main objectives of this organization are: to contribute to business expansion by optimizing overall risk-adjusted profitability; to guarantee the viability of the Bank by instituting effective risk analysis, valuation and control systems. The risk management governance is based on the active involvement of the company s management, clearly-defined internal rules and procedures, as well as permanent surveillance by teams that are independent of the operational departments and who are responsible for regulating the underwriting of new risks, ensuring regular monitoring and supervising the application of rules and procedures. The SGBT Risk Committee, which is chaired by a member of the SGBT Board of Directors, and assisted by the Deputy Head of the Risk Division of Société Générale Group, meets quarterly to review risk management and, if necessary, to channel the direction of risk acceptance and management. The risk monitoring process identifies five main risk categories: Credit risk: the risk of losses arising from the inability of clients, sovereign issuers or other counterparties to meet their financial obligations. This includes the counterparty s risk that emerges from the Bank s activities on the capital market; Operational risk: risk of losses or risk of fraud caused by defects or deficiencies in internal procedures or systems, human error or external events, including IT risk and management risk. Particular attention is paid to compliance risk, which is subject to enhanced monitoring; Market risk: the risk of losses arising from unfavourable market trends; Interest rate risk: the risk of losses or of a residual impairment of assets, whether documented or not, as a consequence of interest rate fluctuations. This excludes the interest rate risk on market activities, which is covered by market risk; Liquidity risk: the risk that the Group might be unable to meet its current or future liquidity requirements, whether expected or not, at a reasonable cost. 6 7

8 MANAGEMENT REPORT AT APRIL 02, 2015 MANAGEMENT REPORT OF SOCIETE GENERALE BANK & TRUST S.A. APPROVAL OF THE ANNUAL ACCOUNTS AND ALLOCATION OF EARNINGS As at December 31, 2014: profit for the period was EUR 610,326,937. retained earnings brought forward amounted to EUR 561,876,723 reversal of the special reserve for the wealth tax charge set up in 2009 amounted to EUR 24,137,905 all of which resulted in a total disposable income of EUR 1,196,341,565. The Shareholders Meeting will be demanded to allocate this total available amount as follows: Special reserve in respect of the wealth tax: EUR 35,146,177 Special reserve in respect of the wealth tax for fully consolidated companies: EUR 14,792,845 Dividends: EUR 610,000,000 Retained earnings: EUR 536,402,543 As at December 31, 2014, SGBT s Tier One capital amounted to EUR 3,133,574,000, prior to distribution. Subordinated debt of EUR 450,000,000 and a share of the reserves of EUR 17,254,770 recognised for the reinvestment of capital gains should be added to this amount, resulting in a total of EUR 3,600,829,770. The Board of Directors proposes that the Shareholders Meeting approve the annual accounts as at December 31, 2014, as they were presented, and fully granted and completely discharged to the directors for their management obligations. Véronique de la Bachelerie, CEO of Societe Generale Bank & Trust Luxembourg, April 02, 2015

9 REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉÉ REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉÉ TO THE BOARD OF DIRECTORS OF SOCIETE GENERALE BANK & TRUST SOCIÉTÉ ANONYME LUXEMBOURG REPORT ON THE ANNUAL ACCOUNTS Following our appointment by the Board of Directors on March 28, 2014, we have audited the accompanying annual accounts of Societe Generale Bank & Trust S.A., which comprise the balance sheet as at December 31, 2014 and the profit and loss account for the year then ended, and a summary of significant accounting policies and other explanatory information. Responsibilty of the Board of Directors for the annual accounts The Board of Directors is responsible for the preparation and fair presentation of these annual accounts in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts and for such internal controls as the Board of Directors determines is necessary to enable the preparation of annual accounts that are free from material misstatement, whether due to fraud or error. Responsibility of the réviseur d entreprises agréé Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with the International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance that the annual accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the réviseur d entreprises agrée s judgement, including the assessment of the risks of material misstatement in the annual accounts, whether due to fraud or error. In making those risk assessments, the réviseur d entreprises agrée considers internal control relevant to the entity s preparation and fair presentation of the annual accounts, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the annual accounts. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the annual accounts give a true and fair view of the assets and financial position of Societe Generale Bank & Trust S.A. as of December 31, 2014, and of the results for the year then ended, in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts. 8 9

10 REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉÉ REPORT OF THE RÉVISEUR D ENTREPRISES AGRÉÉ TO THE BOARD OF DIRECTORS OF SOCIETE GENERALE BANK & TRUST SOCIÉTÉ ANONYME LUXEMBOURG REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS The management report, which is the responsibility of the Board of Directors, is consistent with the annual accounts. For Deloitte Audit, Cabinet de révision agréé Stéphane Césari, Réviseur d entreprises agréé Partner Luxembourg, April 14, 2015

11 BALANCE SHEET (in EUR thousands) Notes Cash and demand deposits with central banks 3/33 530,638 7,119 Financial assets held for trading 4/18/33 581, ,599 Financial assets designated at fair value through profit or loss 5/18-248,129 Available-for-sale financial assets 6/18/33 8,141,631 6,427,150 Loans and receivables measured at amortised cost 7/33 25,073,540 33,240,153 Held-to-maturity investments 8/33 362, ,861 Derivatives Hedge Accounting 9/18/33 1,189 4,345 Tangible assets 10 10,875 13,628 Intangible assets 10 20,305 14,578 Tax assets 11 35,905 35,462 Other assets 12 1,040, ,099 TOTAL ASSETS 35,797,772 41,877,122 Due to central banks - 2,059 Financial liabilities held for trading 13/18 585,131 3,613,450 Financial liabilities measured at amortised cost 14 31,067,634 34,477,370 Derivatives Hedge Accounting 9/18 445, ,698 Provisions , ,183 Tax liabilities 11 74,897 52,348 Other liabilities , ,225 TOTAL LIABILITIES 32,664,198 39,088,333 The accompanying notes are an integral part of the annual accounts

12 BALANCE SHEET (in EUR thousands) Notes Share capital 17 1,389,043 1,389,043 Share premium 17 2,817 2,817 Revaluation reserves including available-for-sale assets , ,278 Other reserves (including retained earnings) , ,835 Profit for the year 610, ,816 TOTAL EQUITY 3,133,574 2,788,789 TOTAL EQUITY AND TOTAL LIABILITIES 35,797,772 41,877,122 Contingent liabilities 33 1,840,533 1,375,410 Financial guarantees 33 8,559,325 6,528,059 Other commitments ,040 3,395,754 TOTAL FINANCIAL GUARANTEES AND OTHER COMMITMENTS 10,697,898 11,299,223 INVESTMENT MANAGEMENT SERVICES Including fiduciary operations ,026,359 2,494, ,553,331 4,338,452 The accompanying notes are an integral part of the annual accounts.

13 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING ON DECEMBER 31, 2014 (in EUR thousands) Notes Interest receivable and similar income , ,527 Interest payable and similar expenses 19 (632,825) (684,341) Income from dividends , ,360 Commissions receivable , ,576 Commissions payable 21 (110,816) (93,875) Net gains or losses on financial assets available for sale 22 (14,065) (123,768) Net gains or losses on financial instruments designated at fair value through profit or loss ,112 29,257 Net gains or losses on financial instruments not designated at fair value through profit or loss 24 93,173 20,828 Other operating income 25 70,029 85,900 Other operating expenses 25 (21,044) (13,933) NET BANKING INCOME 782, ,531 Staff expenses 26 (152,159) (133,699) General and administrative expenses 27 (101,679) (103,540) Amortization expenses - property, plant and equipment 10 (4,395) (3,364) Amortization expenses - intangible assets 10 (3,586) (2,229) GENERAL AND ADMINISTRATIVE EXPENSES (261,819) (242,832) GROSS OPERATING INCOME 520, ,699 Net Cost of Risk 28 (84) (37,234) Income on non-current assets not fulfilling the conditions of an abandoned activity ,161 - TOTAL INCOME FROM ACTIVITIES BEFORE TAX 689, ,465 Tax on income from ordinary activities 30 (79,483) (31,648) NET INCOME FOR THE YEAR 610, ,817 Change in fair value reserve 17 45, ,137 TOTAL OTHER ITEMS OF COMPREHENSIVE INCOME 45, ,137 TOTAL COMPREHENSIVE INCOME 655, ,954 The accompanying notes are an integral part of the annual accounts

14 STATEMENT OF CHANGES IN EQUITY (in EUR thousands) SHARE CAPITAL SHARE PREMIUMS Balance at December 31, ,389,043 2,817 Allocation of previous year s net income - - Net income for the year - - Dividends for the year Change in fair value reserve - available-for-sale financial instruments - cash flow hedges - foreign exchange conversion - other items Actuarial gains and losses on post-employment benefits - - Balance at December 31, ,389,043 2,817 Allocation of previous year s net income - - Net income for the year - - Dividends for the year Change in fair value reserve - available-for-sale financial instruments cash flow hedges - foreign exchange conversion - other items - - Actuarial gains and losses on post-employment benefits - - Balance at December 31, ,389,043 2,817

15 REVALUATION RESERVES RESERVES AND RETAINED EARNINGS TOTAL RESERVES AND RETAINED EARNINGS NET INCOME FOR THE YEAR TOTAL EQUITY (41,859) 919, , ,021 2,702, , ,021 (433,021) , ,816 - (430,000) (430,000) - (430,000) 133, , ,795 69,033-69,033-69,033 3,226-3,226-3, (1,917) - (1,917) - (1,917) 162, ,835 1,085, ,816 2,788, , ,816 (311,816) , ,327 - (311,000) (311,000) - (311,000) 68,140-68,140-68,140 (8,903) - (8,903) - (8,903) (8,552) - (8,552) - (8,552) (5,294) - (5,294) - (5,294) 207, ,651 1,131, ,327 3,133,

16 NOTE 1 - ORGANIZATION Societe Generale Bank & Trust S.A. (the Bank ) was formed as Ingéfilux on April 11, Its name was changed to Luxbanque, Société Luxembourgeoise de Banque S.A. on May 7, In 1995, the Extraordinary Shareholders Meeting decided to change the Bank s name to Société Générale Bank & Trust S.A., with effect as of June 1, The Bank is governed by Luxembourg banking regulations and in particular the Law of April 5, 1993, as amended, on the financial sector. On December 19, 1995, the Bank increased its capital through a contribution in kind from the Swiss and Luxembourg branches of Société Générale Alsacienne de Banque S.A., Strasbourg ( Sogenal ). The Extraordinary Shareholders Meeting of Sogenal on December 20, 1995 approved the transfer to the Bank, which comprised the transfer of all assets and rights as held by the Swiss and Luxembourg branches as at June 30, On October 6, 2004, the Bank carried out another capital increase through non-cash contributions. This transaction modified its direct share ownership structure. As at December 31, 2014, the Bank s capital is wholly-owned by Sogeparticipations, a Société Anonyme incorporated under French law, part of the Société Générale Group. In 2005, the Bank opened a branch in Singapore. In 2006, it opened two branches, in Greece and in Hong Kong, also through contributions in kind from the private banking businesses of Société Générale s branches in these countries. In 2007, the Bank opened a branch in Dubai. On June 1, 2012, the Bank transferred the business of the SGBT Hellas branch to General Bank of Greece Geniki S.A.. This branch s activity had been dormant since then and was liquidated on October 31, On October 6, 2014, the Bank finalised the sale of the Private Banking activities of Singapore, Hong Kong and Dubai Branches. The sale greatly reduced the size of the balance sheet of these three branches. The annual accounts of the Bank as at December 31, 2014 include the financial statements of the Singapore, Hong Kong and Dubai branches (the Branches ). As the financial statements of the Branches were prepared using generally accepted accounting principles in their respective countries, they were subsequently adjusted to comply with the accounting principles applicable to the preparation of annual accounts in Luxembourg. The Bank provides asset management, investment advisory, financial engineering and depository services, in particular for collective investment undertakings. It is also active on the financial markets and with institutional clients, with a high volume

17 of proprietary cash management transactions and financing operations carried out on behalf of large corporations. Moreover, on July 31, 2014, the Bank added to its depositary bank activity the fund administration activity that, until then, had been held by SGSS Luxembourg. NOTE 2 - SIGNIFICANT ACCOUNTING PRINCIPLES 2.1 Applicable standards and comparability The Bank s accounting policies comply with the legal requirements in force in the Grand Duchy of Luxembourg and, in particular, the Law of June 17, 1992 as amended relating to the annual and consolidated financial statements of credit institutions governed by Luxembourg law ( Law on the accounts of banks ). On December 31, 2012, the Bank decided to amend certain accounting policies and elected to draw up its annual accounts in accordance with the mixed financial reporting framework ( mixed framework or Generally Accepted Accounting Principles in the Grand Duchy of Luxembourg, LUX-GAAP, with IAS options ). The amended Law of June 17, 1992 allows credit institutions to publish their LUX GAAP financial statements using some IAS/ IFRS ( IAS options ). These IAS options relate not only to the presentation of the financial statements but also to valuation rules. In this regard, the Bank has elected the following options: Use on December 31, 2014, of an alternative balance sheet layout, drawing mainly on the prudential reporting layout ( FINREP ); Use on December 31, 2014 of an alternative profit and loss account layout, drawing mainly on the FINREP layout; Inclusion of a statement of changes in equity. Nevertheless, the Bank ensure its compliance with the provisions of Articles 7 and 41 of the amended law of June 17, 1992 in respect of the layout of annual accounts. The accounting principles used by the Bank are based on the International Financial Reporting Standards (IFRS) as adopted by the European Union, among which only the following standards have been applied: IAS 10 - Events after the Reporting Period; IAS 12 - Income Taxes; IAS 16 - Property, plant and equipment; IAS 18 - Revenue from ordinary activities; IAS 19 - Employee Benefits; 16 17

18 IAS 21 - Effects of Changes in Foreign Exchange Rates; IAS 24 - Related Party Disclosures; IAS 32 - Financial Instruments: Presentation; IAS 36 - Impairment of Assets; IAS 38 - Intangible Assets; IAS 39 - Financial Instruments: Recognition and Measurement. Among the new standards, revisions to standards or interpretations published by the IASB (International Accounting Standards Board) in , the one used below will be applied to future reporting periods: IFRS 9 Financial Instruments, effective for annual periods beginning on or after January 1, 2018 with a presentation on January 1, 2017; With regard to the provisions in the texts mentioned above, with the exception of IFRS 9, the Bank does not expect any significant impact arising from their application. With regard to IFRS 9, which introduces in particular new requirements on the classification and measurement of financial assets, its application may bring about, depending on the options elected, a change in the recognition of profit and loss and an impact on the income statement. The changes introduced regarding depreciation in respect of expected credit losses may also impact the profit and loss account. The Bank is the ultimate parent company of a fiscally consolidated group of several entities (see note 2.14). The Bank has opted to continue recognizing a lump-sum provision and special line items with a reserve share and funds for general banking risks ( supervisory reserves ). See note 2.9. The main accounting principles used in the preparation of the financial statements are described below. These policies have been consistently applied to the annual periods presented. The business year runs from the 1st of January to the 31 st December of each year. In accordance with Article 80 of the Law on the Accounts of Banks, the Bank has not prepared any consolidated accounts since the financial year ended on December 31, Indeed, as at December 31, 2014 and 2013, the Bank was included in the consolidated financial statements of the Societe Generale group whose head office is located at 29 boulevard Haussmann, Paris, which constitutes the largest group of enterprises of which the Bank is subsidiary. The consolidated accounts are available at the head office indicated above.

19 2.2 Critical Accounting Estimates The preparation of the financial statements and the application of the accounting policies and methods described below require critical accounting estimates that involve judgements and the use of assumptions. By their nature, the assessments necessary for drawing up the financial statements require the formulation of hypotheses and carry risks and uncertainties as to their occurrence in the future. Although the Board of Directors believes that it has taken all available information into account in determining these judgements and estimates, the actual future profits and losses from the operations concerned could differ from these estimates and therefore have a material impact on the financial statements. The use of estimates mainly concerns the following valuations: the determination of the fair value of financial instruments that do not have a quoted market price; the determination of the useful life and the residual value of intangible assets and tangible assets; the estimation of the recoverable amount of impaired assets; the amount of deferred tax assets; assessment of a present obligation as a result of past events in connection with the recognition of provisions, including provisions related to employee benefits; more broadly, provisions recorded on the liabilities side of the balance sheet. The use of critical judgements in applying accounting policies may comprise the following: recognition of income; classification of financial instruments as prescribed by international standards and considering management intentions; the discount rate used for the supplemental defined benefit retirement plan. 2.3 Transactions in foreign currencies Items included in the Bank s financial statements are measured using the currency of the principal economic region in which the entity carries out its business (the functional currency ). The financial statements are presented in Euro ( EUR ), the functional currency and the reporting currency of the Bank. The branches in Asia and the Middle East report their results in USD. The Bank maintains a multi-currency accounting system, which records all foreign currency denominated transactions in separate accounts based on the underlying currency, expressed in terms of positions. At period-end, monetary assets and liabilities denominated in foreign currencies are converted into Euro at the prevailing spot exchange rate. Realized or unrealized foreign exchange losses or gains are recognized in the profit and loss account

20 Forward foreign exchange transactions are recognised at fair value based on the forward exchange rate for the remaining maturity. Spot foreign exchange positions are valued using the official spot rates applying at the end of the period. Unrealized gains and losses are recognised in the profit and loss account. Non-monetary financial assets denominated in foreign currencies, including shares and other variable income securities that are not part of the trading portfolio, are converted into the entity s functional currency at the exchange rate applying at the end of the period. Conversion differences arising from these financial assets are taken to equity and are recognised in the profit and loss account only when sold or impaired or where the currency risk is fair value hedged. In particular, non-monetary assets funded by a liability denominated in the same currency are converted by applying the prevailing spot rate at the end of the period by booking the impact of exchange rate fluctuations to profit or loss if there is a fair value hedging relationship between the two financial instruments. The balance sheets of the Branches are translated at the official exchange rates prevailing at year-end. The profit and loss account line items of these branches are converted at the average annual exchange rate. Gains and losses arising from the translation of capital, reserves, retained earnings and income-resulting from variations in exchange rates-are recognised in Equity - Revaluation Reserve - Foreign currency translation. The main spot exchange rates used by the Bank as at December 31, 2014 and 2013 are as follows: EUR 1 = USD USD EUR 1 = CAD CAD EUR 1 = JPY JPY EUR 1 = CHF CHF As an exemption to the principles outlined above, sales of assets valued in foreign currencies are converted at the rate on the transaction date. Therefore, the net gain recorded following the sale of the Private Banking activities of the Singapore, Hong Kong and Dubai branches was converted at the rate of EUR 1 = USD Cash and demand deposits with central banks Cash consists primarily of cash balances, debit balances outstanding from interbank accounts and the mandatory minimum reserve with the Central Bank of Luxembourg. The funds for the minimum reserves are not available for financing the current operations of the Bank. The reserve base, calculated monthly, is based on balance sheet assets in accordance with Luxembourg accounting principles. The baseline calculation that determines the reserve requirement is performed by the Central Bank.

21 2.5 Financial instruments At initial recognition, financial assets and financial liabilities are measured at fair value, including transaction costs (except for financial instruments recognised at fair value through profit or loss). After initial recognition, financial assets and financial liabilities, based on their category, are measured either at fair value or at amortised cost using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected (estimated) life of the financial instrument or, when appropriate, a shorter period to obtain the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. In addition, the calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. The Bank s balance sheet sets out all asset and liability items in accordance with the resource availability date criterion, that is, the date of effective transfer, except for derivative financial instruments, which are booked on the transaction (trade) date Determining the fair value of financial instruments Fair value is the price that would be received for the sale of an asset or paid for the transfer of a liability in a normal transaction between market participants. The best evidence of fair value of financial instruments is quoted prices in an active market. In the absence of such quoted prices, fair value is established by applying recognised valuation techniques. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. Determining whether a market is inactive relies on indicators such as a sharp decline in trading volume and in the level of market activity, a sharp pricing disparity over time and between the various market participants referred to above, or the fact that the latest transactions dealt on an arm s length basis are not recent enough. When the financial instrument is traded in several markets to which the Bank has immediate access, the fair value of the financial instrument is the most advantageous price on an active market. If a published price quotation in an active market does not exist for a given financial instrument, but active markets exist for its component parts, fair value is determined on the basis of the relevant market prices for the component parts by factoring in the bid price and the ask price of the net position, taking the direction of the trend into account

22 If the market for a financial instrument is not active or is no longer considered active, its fair value is established using a valuation technique (in-house valuation models). Depending on the instrument of interest, these models may use data derived from recent transactions concluded on an arm s length basis, from the current fair value of another instrument that is substantially the same, from discounted cash flow analysis or option pricing models, or from valuation parameters. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, then the Bank uses that technique. The use of internal assumptions for future cash flows and discount rates, correctly adjusted for the risks that market participants consider, is permitted. Such adjustments are made in a reasonable and appropriate manner after examining all available information. Notably, internal assumptions consider counterparty risk, non-performance risk, liquidity risk and model risk, as relevant. Amounts that would be received or paid in a forced transaction are not usually accepted as fair value. When the valuation criteria used are observable market data, the fair value is the market price and any difference between the transaction price and the price output by the in-house valuation model, i.e. the trade margin, is immediately recognised in profit or loss. However, if the valuation criteria are not observable or if the valuation models are not consistent with acceptable market models, the fair value of the financial instrument at the time of the transaction is deemed to be the transaction price and the trade margin is then usually recognised in profit or loss over the lifetime of the instrument. For some instruments, due to their complexity, this margin is not recognised in profit or loss until their maturity or in the event of early sale. Where substantial volumes of issued instruments are traded on a secondary market with quoted prices, the trade margin is recognised in profit or loss consistent with the instrument s pricing formula. When valuation parameters become observable, any portion of the trade margin that has not yet been booked is recognised in profit or loss at that time Financial assets and financial liabilities Each category has its own accounting treatment and specific pricing Financial assets held for trading Financial assets and liabilities held for trading are financial assets or liabilities acquired or incurred principally with an intention to sell or repurchase them in the near term or that are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. Such assets and liabilities are initially recognised at fair value on the transaction date (excluding transaction costs taken directly to profit or loss) and subsequently remeasured at fair value on the balance sheet date. Changes in fair value are recognised in profit or loss under Net gains or losses on financial instruments designated at fair value through profit and loss. Interest received or paid on non-derivative instruments is recognised under interest income or interest expense. Dividends received are

23 aggregated under Income from dividends. All derivative financial instruments with a positive (negative) substitution value are considered financial assets (liabilities) held for trading, with the exception of derivatives qualifying as hedge instruments. Changes in fair value are recognised under Net gains or losses on financial instruments designated at fair value through the profit and loss and any interest received or paid on derivatives is recognised under interest income or interest expense. Due to their nature, there is no allowance for impairment for this category of financial assets and financial liabilities Financial assets and liquidity designated at fair value through profit or loss Financial assets and financial liabilities are designated at fair value through profit or loss (or fair value option) only and irrevocably upon initial recognition, in accordance with the following use criteria if: this designation eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise if not used; or a group of financial assets or financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains one or more embedded derivative not closely related to the host contract. If the option to designate a financial asset or financial liability at fair value on initial recognition is used, it is irrevocable. This category has the same measurement rules as those applied to Financial assets and financial liabilities held for trading. The same headings as those defined for financial assets or liabilities held for trading are used to recognise interest and dividends. In contrast, changes in fair value are recognised under Net gains or losses on financial instruments designated at fair value through profit or loss. Due to their nature, there is no allowance for impairment for this category of financial assets and financial liabilities Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that are neither held for trading purposes nor intended for sale from the time they are purchased or originated. After initial recognition they are measured at amortised cost based on the effective interest rate and are tested for impairment at each balance sheet date and may give rise to, if applicable, an impairment loss (see note 7)

24 Held-to-maturity investments These are non-derivative financial assets with fixed or determinable payments and fixed maturity that are quoted in an active market and which the Bank has the positive intention and ability to hold to maturity. They are measured after acquisition at amortised cost and may be subject to impairment, if appropriate (note 8). Using the effective interest method, amortised cost includes premiums and discounts as well as transaction costs. These financial assets are recognised in the balance sheet under Held-to-maturity investments. Amortisation using the effective interest method is reported in the profit and loss account under Interest receivable and similar income. Impairment losses are recognised in profit or loss under Net cost of the risk Available-for-sale financial assets These are non-derivative financial assets held for an indeterminate period which the Bank may sell at any time. Available-forsale financial assets are non-derivative financial assets designated as available for sale or which are not allocated to any of the above-mentioned categories. These assets are measured at fair value at initial recognition on the transaction date, including transaction costs, and subsequently remeasured to fair value on the balance sheet date. All changes in fair value are recognised in a single line item under equity. Upon the sale or realisation of anything other than temporary impairment of these assets, the results of cumulative revaluation previously recognised in equity are reclassified in profit and loss under Net gains or losses on financial assets available for sale. The same applies to subsequent depreciations. For interest-bearing instruments, income recognised using the effective interest rate method is aggregated under Interest receivable and similar income. Dividends received are aggregated under Income from dividends. Available-for-sale financial assets include fixed-rate and floating-rate securities that are not classified as financial assets held for trading and that are designated at fair value through profit or loss as well as the instruments described in paragraph below, and the Bank s participating interests are measured at the acquisition cost less any permanent impairment in accordance with IAS 39; 46 (c) and 66 (note 28) Impairment of financial assets a) Impairment of financial assets measured at amortised cost At the end of every reporting period, the Bank assesses whether there is any objective evidence that a financial asset or group of financial assets is impaired as a result of one or more events occurring after the initial recognition of the asset and whether that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

25 The Bank first assesses whether any objective evidence exists that the financial assets that are individually significant are impaired. If there is objective evidence that Loans or other receivables, or financial assets classified as Held-to-maturity financial assets, are impaired, an impairment loss is booked for the difference between the carrying amount and the present value of estimated future recoverable cash flows, taking into account any guarantees, discounted at the financial assets original effective interest rate. This impairment is recognised in profit and loss under Net cost of the risk and the value of the financial asset is proportionately reduced. The Bank does not use collective assessments of impairment due to the lack of uniformity of the relevant assets. b) Impairment of available-for-sale financial assets Impairment of an available-for-sale financial asset is recognised through profit or loss, under Net gains or losses on financial assets available for sale, if there is an objective evidence of impairment as a result of one or more events occurring after the impairment was recognised. A significant or prolonged decline in the value of equity instruments to below their acquisition cost constitutes objective evidence of an impairment loss. An impairment is then recognised in the profit and loss account amounting to any capital loss deemed permanent. The criteria for impairment of debt instruments are similar to those for impairment of financial assets measured at amortised cost. Impairment losses recognised through profit or loss on an equity instrument classified as available-for-sale are reversed through profit or loss only when the instrument is sold. Once an equity instrument has been recognised as impaired, any further loss of value is booked as an additional impairment loss. In contrast, an impairment loss on a debt instrument is reversed through profit or loss only if it subsequently recovers in value. This cumulative loss is measured as the difference between the acquisition cost (net of any repayments of principal and amortisation) and the present fair value, less any impairment of the financial asset that has already been booked through profit and loss Financial derivatives and hedge accounting All derivatives are recognised at fair value as financial assets or financial liabilities on the balance sheet. Except for derivative financial instruments recognised as cash flow hedges (see below), changes in the fair value of derivative financial instruments are recognised in the profit and loss account for the period

26 Derivative financial instruments are divided into three categories: Derivative financial instruments held for trading Derivative financial instruments are considered to be financial instruments held for trading by default, unless they qualify as hedging instruments. They are reported on the balance sheet under Financial assets or liabilities at fair value through the profit or loss. Changes in fair value are recognised in profit or loss under Net gains or losses on financial instruments designated at fair value through profit and loss Derivative financial instruments - Hedge Accounting To qualify as a hedging derivative instrument, the Bank must document the hedging relationship at inception. This documentation specifies the hedged asset, liability, or future transaction, the risk to be hedged, the type of financial instrument used and the valuation method that will be applied to measure its effectiveness. The derivative financial instrument designated as a hedge is expected to be highly effective in offsetting the exposure to changes in the hedged item s fair value or cash flows attributable to the hedged risk. Such effectiveness is measured at inception of the hedge and thereafter throughout its life. Derivative financial instruments used as hedges are recognised on the balance sheet under Derivative Instruments - Hedge Accounting. Based on the hedged risk, the Bank designates the financial instrument as a fair value or cash flow hedging instrument. a) Fair value hedge In a fair value hedge, changes in the hedged item s fair value attributable to the hedged risk are recognised in the profit and loss account, offsetting the changes in the hedging instrument s fair value, proportionate to the efficiency ratio of the hedging relationship. The ineffective portion therefore remains recognised in profit and loss. As regards interest rate derivatives, accrued interest income or expenses are recognised in the profit and loss account under Interest receivables and similar incomes or Interest payable and similar expenses at the same time as the interest income or expense related to the hedged item. If it becomes apparent that the derivative financial instrument has ceased to meet the effectiveness criteria in connection with a hedging relationship or if it is sold, hedge accounting is prospectively discontinued. Thereafter, the carrying amount of the hedged asset or liability ceases to be adjusted for changes in fair value and the cumulative adjustments previously recognised in hedge accounting are amortised over the remaining life of the item previously hedged. Hedge accounting is discontinued automatically if the hedged item is sold before maturity or redeemed early. b) Cash flow hedge In a cash flow hedge, the effective portion of the changes in fair value of the derivative financial instrument is recognised in a single separate line in equity, while the ineffective portion is recognised in the profit and loss account under Net gains and losses on financial instruments designated at fair value through profit or loss.