Annual report. BHF Kleinwort Benson Group

Transcription

1 2014 Annual report BHF Kleinwort Benson Group

2 BHF Kleinwort Benson Group is a merchant bank with principal activities in private banking, asset management and financial markets & corporates. Awards and recognition Elite Portfolio Management Number 1 Winner 9th time in a row Portfolio Management Excellence Number 1 5 year horizon Risk Service Family office Top Market leader in Germany Disclaimer Cautionary statement regarding forward looking statements This report contains certain forward-looking statements concerning BHF Kleinwort Benson s operations, economic performance and financial condition. Such forward-looking statements are based on management s current expectations, estimates and projections and are subject to a number of assumptions and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Group has no obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report. Rounding Numbers presented throughout this report may not add up precisely to the totals provided in the tables and text. Percentages, percent changes and absolute variances are calculated based on the underlying figures and not on the rounded figures which are displayed in the tables and text and ; Therefore, such information may not precisely reflect the percentages, percent changes and absolute variances that would be derived based on figures that are rounded.

3 Strategic report Overview Strategic report Shareholders information 00 Chief Executive s review 00 Business model 00 Our vision and strategy 00 Business review 00 Financial services 00 Corporate Holding segment 00 Discontinued operations 00 Portfolio as at 31 December Principal risks and uncertainties BHF Kleinwort Benson Annual report and accounts 2014 Annual report and accounts 2014 BHF Kleinwort Benson 00 Overview Strategic report Shareholders information 00 Consolidated income statement 00 Consolidated statement of comprehensive income 00 Consolidated statement of financial position 00 Consolidated statement of changes in equity 00 Consolidated statement of cash flow 00 Notes to the consolidated financial statements 00 Directors report on the consolidated financial statements 00 Auditor s report on the consolidated financial statements 00 Condensed non-consolidated financial staements BHF Kleinwort Benson Annual report and accounts 2014 Annual report and accounts 2014 BHF Kleinwort Benson Shareholders information 00 Overview Strategic report Shareholders information BHF Kleinwort Benson Annual report and accounts 2014 Annual report and accounts 2014 BHF Kleinwort Benson 00 Overview 00 Introduction 00 Board of Directors 00 Board committees 00 Executive management 00 Remuneration report 00 Internal control and risk management systems 00 Disclosure required by Article 34 of the Belgium Royal Decree of 14 November Statutory Auditor 00 Shareholders meeting 00 Business conduct and Ethics code 00 Dealing and Disclosure code 00 Compliance officer Strategic report Shareholders information 00 BHF Kleinwort Benson share 00 Shareholder structure 00 Financial calendar 00 Investor relations BHF Kleinwort Benson Annual report and accounts 2014 Annual report and accounts 2014 BHF Kleinwort Benson 00 Overview Strategy and business review Contents BHF Kleinwort Benson Strategic report BHF Kleinwort Benson is a focused financial services group with principal activities in Private banking, Asset Management and Financial Markets & Corporate Banking. operates under the Belgian Corporate Governance Code, the foremost code of best practice for Belgian listed companies Strategy and business review BHF Kleinwort Benson BHF Kleinwort Benson Shareholders information A resilent performance across our Wealth Management and Asset is listed on the NYSE- Euronext Brussels and has been part of the Management operations, BEL Mid Index since despite the challenging 1 July low interest rate and credit spread environment Overview 02 At a glance 04 Chief Executive s review Strategy and business review 08 Our vision and strategy 09 Strategic update 10 Business review 30 Principal risks and uncertainties 40 Introduction 41 Board of Directors 46 Board committees 47 Executive management 48 Remuneration report 58 Internal control and risk management systems 60 Disclosure required by Article 34 of the Belgian Royal Decree of 14 November Statutory Auditor 61 Shareholders meeting 61 Business conduct and ethics code 62 Dealing and disclosure code 62 Compliance officer 66 Consolidated statement of profit and loss 67 Consolidated statement of comprehensive income 68 Consolidated statement of financial position 69 Consolidated statement of changes in equity 70 Consolidated statement of cash flow 71 Notes to the consolidated financial statements 126 Directors report on the consolidated financial statements 127 Auditor s report on the consolidated financial statements 128 Condensed non-consolidated financial statements 132 BHF Kleinwort Benson share 132 Shareholder structure 133 Financial calendar 133 Investor relations 134 Glossary Annual report 2014 BHF Kleinwort Benson 01

4 Overview At a glance Our business BHF Kleinwort Benson has been delivering improved financial results across all businesses, demonstrating strong momentum in building the business, and is on track to meet stated financial targets. BHF Kleinwort Benson made significant operational progress during 2014 and successfully transformed into a financial services group with strong focus on private banking, asset management and financial markets & corporates. Assets under Management (AuM) grew to 54.2 billion (an increase of 4.7 billion or 9.4%). Operating income rose by 4.7 million or 1.4 % to million. Adjusted underlying operating loss 1 almost halved to 23.5 million ( 18.8 million improvement compared to 2013). Efficiency programmes yielded 17.0 million of recurring cost savings against the 20 million costs saving target identified at the time of the acquisition of BHF-BANK. On track to reach targets set for 2017 of over 60 million operating profit. Solid capital with a tier 1 ratio at 17%. 1 Adjusted results exclude the impact of the of non-recurring items which management believe should be excluded when analysing the operating results. BHF-BANK was acquired on 26 March 2014 and contributed to the significant operational progress of the Group by producing an operating profit of 12.2 million compared to the 17.1 million loss in the Since the acquisition, BHF-BANK was focused on stabilising and normalising its business following the extended sales process with encouraging results. Overall AuM rose by 5% to 40.4 billion (2013: 38.5 billion). Private Banking AuM increased by 8% to 20.7 billion mainly driven by inflows (2013: 19.2 billion). Asset Management AuM grew by 2% to 16.9 billion with good market performance (2013: 16.6 billion). Significant increase (12%) in net fees and commissions reflecting growth in AuM, shift to higher margin asset classes and successful ECM/DCM activities. Operating expenses reduced by 7%. Solid capital with a tier 1 ratio at 14.7%. Kleinwort Benson 2 more than halved its operating loss in 2014 as Kleinwort Benson Investors ( KBI ) increased operating profit almost threefold reflecting continued strong growth in both AuM and margins, while KBWM also reported improved results despite the impact of the continued low interest rate environment. AuM increased by 24% reflecting buoyant equity markets and strong inflows in Asset Management (KBI) from international investors through wholesale and institutional channels. Operating profits of KBI increased almost threefold reflecting continued strong growth in both AuM and margins. Good improvement in the underlying operating result at KBWM, with cost savings from operational efficiencies partly offset by the impact of the current low interest rate environment on revenues. KBWM solid capital with a Tier 1 ratio at 23.5%. 2 Kleinwort Benson refers to the combination of Kleinwort Benson Bank, Kleinwort Benson Channel Islands and Kleinwort Benson Investors. 02 BHF Kleinwort Benson Annual report 2014

5 Overview Strategy and business review BHF Kleinwort Benson Assets under Management by segment million BHF Kleinwort Benson operating income split million 54,242m 334.6m Private Banking 51% Asset Management 44% Corporates 5% Net fees and commissions 74% Net interest income including gains/ losses on financial instruments 20% Gain on financial instruments 5% BHF-BANK Assets under Management million BHF-BANK operating income split million 40,377m 211.6m Private Banking 51% Asset Management 42% Corporates 7% Net fees and commissions 68% Net interest income including gains/ losses on financial instruments 27% Other operating income 5% Kleinwort Benson Assets under Management by category million Kleinwort Benson operating income split million 13,864m 120.5m Private Banking 50% Asset Management 50% Corporates 0% Net fees and commissions 86% Net interest income including gains/ losses on financial instruments 2% Other operating income 3% Annual report 2014 BHF Kleinwort Benson 03

6 Overview Chief Executive s review BHF Kleinwort Benson is a clientcentric merchant bank, combining tradition with a forward-looking approach. On 26 March 2014, we completed the acquisition of BHF BANK, marking the conclusion of RHJ International s transformation into a dynamic merchant banking group. We have renamed RHJI to BHF Kleinwort Benson, reflecting the importance of our brands in realising our ambition to become a leading wealth management and corporate banking platform in Europe. Dear Shareholders, This has been a pivotal year, during which we acquired BHF BANK and disposed of all legacy business. During our first year of operation as a new Group, we have made significant progress towards meeting our targets, including good levels of net new money flows, as Kleinwort Benson Investors showed strong growth and private banking in Germany continued to attract new assets. Combined with strong cost management discipline, this has driven an improved financial performance across BHF Kleinwort Benson Group. Overview Consolidated pro-forma operating income increased by 4.7 million to million, and adjusted operating losses almost halved to 23.5 million. Total assets under management were up over 9% to 54.2 billion, supported by net new flows of 1.7 billion, while strong investment performance with all of our business units continued to receive industry recognition and investment awards. Ongoing efficiency programmes and sustained cost discipline yielded 17.0 million of recurring cost savings, a significant step towards our 20 million cost saving target identified when we acquired BHF BANK. On 26 March 2014, we completed the acquisition of BHF BANK, marking the conclusion of RHJ International s ( RHJI ) transformation into a dynamic merchant banking group. We have renamed RHJI to BHF Kleinwort Benson, reflecting the importance of our brands in realising our ambition to become a leading wealth management and corporate banking platform in Europe, with principal activities in Private Banking, Asset Management, Financial Markets and Corporates. The continued support and the determination of our co-investors have proved instrumental to the successful conclusion of our transformation strategy. After backing and cofinancing the acquisition of BHF BANK, their long-term commitment to our vision of merchant banking was sealed by the conversion of their ownership in Kleinwort Benson Group into BHF Kleinwort Benson Group. This will clear the way to the further simplification of the Group towards a single-tier holding structure, and the streamlining of our operations. Significant progress towards meeting our targets While 2014 was, in many respects, a year of transition and of change, I am delighted by our significant operational progress as demonstrated by the headline numbers. Leonhard Fischer Chief Executive Officer Net inflows 1.7 billion Assets under Management 54.2 billion Cost savings 17 million 04 BHF Kleinwort Benson Annual report 2014

7 Overview Strategy and business review We recognise that there is still some way to go, but we are encouraged by the improvement in results across all business units. At BHF BANK, total assets under management increased by 5% to 40.4 billion. Within this, Private Banking delivered 1.5 billion growth in assets under management. After a long-running acquisition process, BHF BANK reported a pretax operating profit of 2.2 million, compared with an operating loss of 2.5 million in In addition to the growth in assets under management, BHF BANK s performance in this pivotal year was lifted by the successful execution of its multi-year cost reduction programme, which has resulted in a cut in operating expenses of almost 20% since BHF BANK s positive results have also confirmed the potential to leverage its strong franchise, and connect international capital with the Ultra High and High Net Worth Individual client segments. Kleinwort Benson comprises our private banking operations under Kleinwort Benson Wealth Management and the asset management activities of Kleinwort Benson Investors. Kleinwort Benson reported headline assets under management up 24% to 13.9 billion with 1.4 billion of net new asset growth, in particular benefiting from continued strong momentum at Kleinwort Benson Investors. Kleinwort Benson s revenues consequently increased by 8%, while cost growth was contained to just 2%, reflecting the scalability of Kleinwort Benson Investors business and the continued effort to move Kleinwort Benson Wealth Management s business to a streamlined and focused operating model. Against this background, we took a number of steps to consolidate activities over the year; including exiting from our Banking and Trust Operations in the Isle of Man and the migration of our Offshore Private Wealth Management services into a single location. As a result, Kleinwort Benson s underlying operating loss more than halved from 11.4 million to 4.9 million despite the adverse impact on revenues from the low interest rate environment. Finally, as can be expected in a year of considerable change, we incurred a significant amount of non-recurring costs, mostly associated with the acquisition of BHF BANK. Nevertheless, underlying Group costs decreased by 15%. The simplification of the BHF Kleinwort Benson structure is expected to bring further cost savings and to contribute to achieving our overall cost target. Looking Ahead Overall, 2014 has been an encouraging year, and while we recognise we are at an early stage in our development as a leading merchant bank, these results demonstrate significant progress in the execution of this latest phase of our strategic blueprint. We have taken an important step towards achieving our medium-term financial targets and we remain on track to achieve 60 million of operating profit by the end of In an environment of continuing low interest rates, financial markets have been resilient despite constant macroeconomic challenges. We are in no doubt that a possible increase in volatility may affect client behaviour during the upcoming year. BHF Kleinwort Benson has made a good start to 2015, and our focus remains on the long term, where we expect to further leverage the potential of our strong franchises for the benefit of our clients and our shareholders. I would like to thank all of our employees for their effort and enthusiasm over Together, we share a vision of a client-centric modern merchant bank and would like to take the opportunity to express, once again, our gratitude to you, our shareholders, for your support during Annual report 2014 BHF Kleinwort Benson 05

8 Strategy and business review BHF Kleinwort Benson provides contemporary wealth management and corporate banking in Europe for sophisticated private and corporate clients and family offices. 06 BHF Kleinwort Benson Annual report 2014

9 Overview Strategy and business review Strategy and business review 08 Our vision and strategy 09 Strategic update 10 Business review 30 Principal risks and uncertainties Annual report 2014 BHF Kleinwort Benson 07

10 Strategy and business review Our vision and strategy Vision To be a leading contemporary wealth management and corporate banking platform in Europe for sophisticated private and corporate clients and family offices. Strategy Combine traditional and contemporary build on the strength and reputation of the Group s brands to bring a unique perspective to merchant banking; deeply rooted tradition combined with a forward-looking approach. Private since 1854, BHF BANK s tradition as a private bank goes back 160 years. During this long period of time, the bank has proven its skill in initiating and recognising new developments. For over 200 years, Kleinwort Benson has offered private banking and wealth management services to private clients, families, business owners and entrepreneurs, and to institutions such as pension funds, endowments and charities. Kleinwort Benson Investors has been managing assets for institutional investors since Client-centric develop long-term relationships with clients. Assisting them to grow and protect their wealth. With experienced and committed teams across the organisation. Connecting international capital with High Net Worth (HNW) and Ultra High Net Worth (UHNW) individuals. A focused business model in a simplified single-tier holding structure streamline the legal structure and focus on private banking, asset management and financial markets & corporates, offering: A comprehensive suite of wealth management Services. Experienced asset management with complementary capabilities, channels and focus. Strategic advice for entrepreneurs and access to the institutional and family office investment community. 08 BHF Kleinwort Benson Annual report 2014

11 Overview Strategy and business review Strategic update Successful transformation into a financial services group During the year, BHF KB completed the acquisition of BHF BANK and took several decisive steps in the simplification of its legal structure. In March 2014, BHF KB and KBG 1 acquired BHF BANK for a final purchase price of 347 million. The combination of BHF BANK and Kleinwort Benson creates a merchant bank focused on private banking, asset management and financial markets & corporates. KBG acquired 91% of BHF BANK, with BHF KB acquiring 9% of BHF BANK directly. KBG financed the transaction through the issuance of new shares to BHF KB and to a group of co-investors 2 that collectively owned 35.13% of KBG. Since this initial transaction, the structure was simplified further in September 2014 with the conversion of the co-investors ownership in KBG into BHF KB shares through a capital increase of 41,198,419 new shares issued at their par value of 5.56 and bringing the total number of issued BHF KB shares to 132,244,164. After the capital increase, BHF KB now fully owns KBG and the coinvestors hold 31.2% 3 of BHF KB. As announced at the interim results in August 2014, the conversion of the co-investors holding in BHF KB shares paved the path for the further reorganisation of the Group s legal structure towards a more costefficient single-tier holding structure. This reorganisation is scheduled to take place over the next few months and further updates will be communicated in due course. On 24 March 2015, the renaming of the group to BHF Kleinwort Benson became effective. This highlights the Group s focus on its core activities of private banking, asset management and financial markets & corporates. BHF Kleinwort Benson has already made significant operational progress in 2014 due to cost efficiency programmes and operating income growth. Legal structure after BHF-BANK acquisition BHF Kleinwort Benson shareholders New legal structure BHF Kleinwort Benson shareholders Co-investor 2 Group 9% 68.8% 31.2% BHF Kleinwort Benson Group SA 1 BHF Kleinwort Benson Group SA % Kleinwort Benson Group Limited Co-investor Group 35.13% 100% Kleinwort Benson Group Limited 100% 100% 100% 91% 100% 100% 100% 100% KBB KBCIH KBI BHF-BANK KBB KBCIH KBI BHF-BANK 1 KBG is the holding company that owns 100% of Kleinwort Benson Bank, Kleinwort Benson Channel Islands, Kleinwort Benson Investors and 91% of BHF-BANK. 2 The co-investors refer to the following investors: Fosun Group, AQTON SE (the wholly owned strategic investment company of German entrepreneur Stefan Quandt), and entities affiliated with Timothy C. Collins. 3 Excluding shares held by Timothy C. Collins and affiliated entities prior to the conversion. Annual report 2014 BHF Kleinwort Benson 09

12 Strategy and business review Business review Key highlights Successful transformation into a financial services group Renaming to BHF Kleinwort Benson Group SA highlights the Group s focus on private banking, asset management and financial markets & corporates. Completion of the acquisition of BHF BANK in March Agreement on the conversion of the co-investors 1 ownership in KBG 2 into shares of BHF Kleinwort Benson in September Re-organisation to a single-tier holding structure underway. Significant operational progress improves results 3 across the group Assets under Management % 54.2 billion Assets under Management 4 (AuM) grew to 54.2 billion, an increase of 4.7 billion or 9.4% Adjusted underlying operating loss m Adjusted underlying operating loss 5 of 23.5 million, representing a 18.8 million improvement on prior year Operating income +1.4% million Operating income rose by 4.7 million or 1.4% to million Cost savings m Ongoing efficiency programmes already yielded 17.0 million of recurring cost savings against the 20 million costs saving target identified at the time of the acquisition of BHF BANK Statutory consolidated profit m (2013: 66.4 million loss) Statutory consolidated profit 6 of 71.6 million (2013: 66.4 million loss) benefited from negative goodwill arising on the acquisition of BHF BANK 1 The co-investors refer to the following investors: Fosun Group, AQTON SE (the wholly owned strategic investment company of German entrepreneur Stefan Quandt), and entities affiliated with Timothy C. Collins. 2 KBG is the holding company that owns 100% of Kleinwort Benson Bank, Kleinwort Benson Channel Islands, Kleinwort Benson Investors and 91% of BHF BANK. 3 Operational progress is presented on a pro-forma basis for comparability. Pro-forma results include the results of BHF BANK as if it had been part of the Group from 1 January Opening AuM restated to exclude a 1.4 billion fixed term advisory mandate from KBI s former parent KBC Asset Management NV. 5 Adjusted results exclude the impact of non-recurring items which management believe should be excluded when analysing the operating results. 6 Statutory results include the results of BHF BANK for the 9 months since the date of acquisition. 10 BHF Kleinwort Benson Annual report 2014

13 Overview Strategy and business review BHF KB Group key financial data 1 Consolidated income statement (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Change in EUR millions Change in % Net fee and commission income % Net interest income % Gains and losses from financial instruments at fair value (12.4) (69.5%) Other income and expense (14.0) (43.2%) Total operating income % Operating expenses 2 (356.9) (373.9) 17.0 (4.6%) Movements in loan loss provisions (1.3) 1.6 (2.9) (181.6%) Adjusted operating profit (loss) (23.5) (42.4) 18.8 (44.5%) Non-recurring items 2 (19.2) (20.0) 0.8 (4.2%) Operating profit (loss) (42.7) (62.4) 19.7 (31.5%) Client assets 3 (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Change in EUR millions Change in % Assets under Management 54,242 49,588 4, % Loans 4,091 3, % Assets under control 58,332 53,024 5, % Net new money 3.1% 3.4% Consolidated balance sheet 3 (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Change in EUR millions Change in % Total assets 9,376 9,501 (125) (1.3%) Total equity (45) (5.3%) Tier 1 capital % Tier 1 capital ratio 17% 17% Capital structure Year ended: 31 Dec 14 Year ended: 31 Dec 13 Change in EUR millions Change in % Total equity (In EUR millions) % Total number of shares 132,244,164 85,545,547 46,698, % Book value per share ( ) (1.2%) Year end share price ( ) % Market capitalisation (In EUR millions) % 1 Pro-forma results include the results of BHF BANK as if it had been part of the Group from 1 January Operating income and operating expenses exclude items which management believe are non-recurring in nature and hence should be excluded when analysing the operating results. Non-recurring items principally include (i) acquisition related costs, (ii) costs in relation to the settlement of the PBGC liability, (iii) restructuring costs (iv) tax and VAT refunds and (v) provision releases. 3 The comparative balance sheet and client asset data have been restated to include BHF BANK in order to ensure comparability. Annual report 2014 BHF Kleinwort Benson 11

14 Strategy and business review Business review Statutory consolidated profit of 71.6 million (2013: 66.4 million loss) benefited from negative goodwill arising on the acquisition of BHF BANK. Detailed statutory numbers, which only include the results for BHF BANK since the date of acquisition, are available in the financial statements section. In this section, we focus the comments on the pro-forma results, reflecting BHF BANK as if it had been part of the group since 1 January Strong growth in Group AuM to 54.2 billion At the headline level, AuM increased during the year by 4.7 billion or 9.4% to 54.2 billion (2013: 49.6 billion). Excluding the expected outflow of a 1.4 billion fixed-term advisory mandate with KBI s former Parent Company, KBC Asset Management NV, the increase was attributable to net new money ( 1.7 billion) and positive market and foreign exchange movements. Net flows benefited from continued strong growth in KBI s AuM during the year while private banking in Germany also continued to attract new assets. Adjusted operating/underlying loss reduced by 18.8 million to 23.5 million reflecting a significant improvement in the trading performance of the underlying operating businesses. During the year, total operating income increased by 1.4% to million (2013: million), driven by an improvement of both net fees and commission as well as net interest income. Net fee and commission income increased by 10.8% to million (2013: million) in line with the increase in AuM across the group and continued strengthening of margins. Net interest income increased by 12.5% to 62.9 million (2013: 55.9 million), mainly driven by growth in the loan book during the year as BHF BANK and Kleinwort Benson both increased lending to high quality counterparties. Interest margins remained stable against the background of subdued interest rates. Other income decreased as the 2013 pro-forma number included a gain on the sale of real estate and certain tax refunds within BHF-BANK. Operating expenses decreased by 17.0 million (4.6%) to million (2013: million). This operating expense reduction across the Group is a significant step towards the 20 million cost saving target identified at the time of the acquisition of BHF BANK. Efficiency programmes and sustained cost discipline at BHF BANK and Kleinwort Benson have also resulted in significant headcounts reductions. Full Time Equivalent ( FTE ) employees were reduced by 4.3% to 1,026 and by 5.3% to 676 respectively. Loan loss provisions of 1.3 million remained very low with the growth in lending volumes achieved without increasing the portfolio s conservative risk profile. Excluding non-recurring expenses for both periods, operating expenses included Group costs of 23.4 million (2013: 27.5 million). The reduction of the Group costs by 15% resulted from ongoing efforts to reduce headcount and property costs. As a result of the further reorganisation of the Group s structure, the annualised run rate for the fixed Group costs will further reduce in the course of 2015 and additional subletting arrangements will substantially reduce the Group s share of the London premises costs. Non-recurring items of 24.6 million included expenses associated with the acquisition of BHF BANK, taxes resulting from the conversion of the coinvestors minority interest in KBG into shares of BHF KB and the Company s share of Asahi Tec s settlement of its claim with the US Pension Benefit Guaranty Corporation. These expenses were partly offset by the release of tax provisions and tax refunds. BHF KB AuM by category 1 million 46,540 2,758 18,529 25,253 49,588 2,684 20,623 26,281 54,242 2,808 23,754 27,679 Financial Markets & Corporates Asset Management Private Banking YE 2012 YE 2013 YE Comparative AuMs have been restated to exclude fixed term advisory mandate from KBI s former parent KBC Asset Management NV (YE2013: million; YE million). Source: BHF KB Group Management BHF KB consolidated balance sheet overview 1 million 9,376 9,376 Loans and advances 2,531 7,341 to customers Investable assets Derivative financial assets Other assets 5,867 Deposits Derivative financial liabilities Provisions for liabilities Other liabilities 2,958 2,958 Total equity 539 2, , Assets Liabilities Assets Liabilities Statutory balance sheet. Source: BHF KB Group Management BHF Kleinwort Benson Annual report 2014

15 Overview Strategy and business review Balance sheet & capital ratios remain strong On a statutory basis, the Group s total assets increased by 6.4 billion to 9.4 billion at 31 December 2014 (2013: 3.0 billion) as the acquisition of BHF BANK has had a significant impact on the Company s consolidated statement of financial position. Across the Group, we are committed to maintaining a solid capital and liquidity position with key metrics comfortably exceeding local regulatory requirements. At 31 December 2014, our Group Tier 1 ratio was 17%. On a pro-forma basis, loans increased by 19.1% to 4,091 million (2013: 3,436 million). This is the result of an increase in the loan book within both BHF BANK and Kleinwort Benson as the business continued to offer lending opportunities to both new and existing clients within its target market and risk appetite. The loan to deposit ratio consequently increased to 34% and we are confident that we can continue to further grow the loan book without compromising its high quality and its low-risk profile. Tier 1 ratio 1 % Loan to deposit ratio % BNP Paribas 12 Vontobel 24 J.P. Morgan 12 KB WM 30 Commerzbank 12 BHF KB 34 HSBC 13 BHF-BANK 37 RBS 13 Julius Baer 55 Societe Generale 13 J.P. Morgan 55 Close Brothers 14 EFG International 70 EFG International 14 HSBC 72 BHF-BANK 15 Credit Suisse 74 Deutsche Bank 16 Deutsche Bank 75 Credit Suisse 17 UBS 77 BHF KB 17 RBS 94 UBS 19 BNP Paribas 103 SEB 20 Societe Generale 107 Vontobel 21 Commerzbank 108 Julius Baer 22 Close Brothers 128 KB WM 24 SEB Figures as reported under Basel III. As of 31 December 2014 Source: Bloomberg and Company information As of 31 December 2014 Source: Bloomberg and Company information Progress against our stated targets BHF Kleinwort Benson Pro-forma 1 Year ended: 31 Dec 13 Year ended: 31 Dec 14 Target 2017 Net new money 2 3.1% 3.4% 4 6% Cost savings 17.0 million > 20 million Operating profit ( 42.4 million) ( 23.5 million) > 60 million 1 BHF KB Group adjusted to include pro-forma BHF BANK numbers for 2013 period pre-acquisition. 2 Net new money includes BHF BANK, KBI and KBWM AuM movement, excluding market impact and foreign exchange expressed as a % of AuM at the start of the year. Net new money at KBI excludes a fixed-term advisory mandate from KBI s former parent KBC Asset Management. Outlook We are confident that despite the macro-economic and geopolitical challenges, we can develop our franchise to assist our clients to grow and protect their wealth. We are committed to continue to focus on further improving operating results for the Group during 2015 towards our targets for Annual report 2014 BHF Kleinwort Benson 13

16 Strategy and business review Business review BHF BANK BHF BANK is a modern private bank for discerning middlemarket entrepreneurs and their families. The bank has a clear strategic focus on wealth management and corporate advisory services. BHF BANK s business activities are pooled in the Wealth Management as well as the Corporates divisions. The close cooperation between these divisions which are geared to the needs of entrepreneurs in the Mittelstand segment is one of the bank s hallmarks. Headquarters: Frankfurt Activities: Private banking, asset management, financial markets and corporates. Assets under Management +5% 40.4 million (2013: 38.5 million) Operating profit before tax +171% 12.2 million (2013: 17.1 million) Adjusted operating profit +187% 2.2 million (2013: 2.5 million) Operating income 4% million (2013: million) Operating expenses 7% million (2013: million) 14 BHF Kleinwort Benson Annual report 2014

17 Overview Strategy and business review BHF BANK key financial data (In EUR millions) Year ended: 31 Dec 14 Pro-forma 1 Year ended: 31 Dec 13 Delta % change Net fee and commission income % Net interest income (3.2) (7%) Gains and losses from financial instruments at fair value % Other operating income (22.7) (69%) Total operating income (8.3) (4%) Operating expenses (208.1) (224.1) 16.0 (7%) Movements in loan loss provisions (1.3) 1.6 (2.9) (180%) Adjusted operating profit (loss) 2.2 (2.5) % Non recurring items (14.6) % Operating profit (loss) 12.2 (17.1) % Client assets (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % change Assets under Management 40,377 38,451 1,926 5% Loans 3,413 2, % Assets under control 43,790 41,352 2,438 6% 1 In 2014, non-recurring items primarily relate to tax refunds received during the period and the release of certain provisions made in Good growth in Assets under Management AuM increased by 5% to 40.4 billion in 2014 (2013: 38.5 billion). Private banking AuM increased by 8% to 20.7 billion driven by strong inflows (2013: 19.2 billion). Asset Management AuM totalled 16.9 billion, representing an increase of 2% with good market performance (2013: 16.6 billion). BHF-BANK AuM by category million BHF-BANK consolidated balance sheet overview million 37,354 2,758 15,710 18,887 38,451 2,684 16,557 19,210 40,377 2,808 16,879 20,690 Corporates Asset Management Private Banking 6,711 1,448 4,424 6,711 5,070 6,687 1,848 3,962 6,687 5,046 Loans and advances to customers Investable assets Derivative financial assets Other assets Deposits Derivative financial liabilities Provisions for liabilities Other liabilities Total equity YE 2012 YE 2013 YE 2014 Assets Liabilities Assets Liabilities Source: BHF-BANK Management Source: BHF-BANK Management Annual report 2014 BHF Kleinwort Benson 15

18 Strategy and business review Business review Profitability BHF BANK reported an operating profit before tax of 12.2 million (2013: 17.1 million loss), including an adjusted operating result of 2.2 million (2013: 2.5 million loss). The improvement of the adjusted operating result by 4.7 million was driven by strong progress in net fees and commissions as well as a reduction in operating expenses. During the year, Private banking activities contributed strongly to the operational progress. Operating income decreased by 4% to million for the full year (2013: million). The trend noted during the half-year results was confirmed during the second half of 2014: continued strong increase in net fees and commissions to million for 2014 overall (+12%). Consistent with the bank s strategy, the proportion of net fee and commission income increased to 68% of operating income from 59% in the previous year. The year-on-year reduction in net interest income reflects the very conservative set-up of the Treasury portfolio together with the ongoing low interest rate environment. Other operating income decreased by 22.7 million to 10.2 million as 2013 included 4.4 million gain on the sale of real estate assets, 9 million of provision releases and 8 million of VAT refunds. Operating expenses decreased by 16 million or 7% to million over the year (2013: million) due to successful cost-cutting measures including considerable headcount reductions and cost cutting measures. The number of Full Time Equivalent staff was 1,026 at the end of December 2014 (1,072 in December 2013). Non-recurring items resulted in a positive income of 10 million, which related primarily to tax issues. Since the acquisition, BHF BANK continued to normalise its lending volumes and grew the total loan book by 17.7% over the year. Total additions to the loan loss provisions for 2014 amounted to 1.3 million and we expect them to remain at low levels going forward given the bank s conservative attitude to risk. As at 31 December 2014, the Tier 1 capital ratio stood at 14.7% (2013: 15.0% pro-forma BIS III). Outlook for BHF BANK During a large part of 2014, BHF BANK was focused on stabilisation and a return to normal business following the extended sales process. The results since the bank joined the group in March 2014 are encouraging and we expect further growth in client related revenues in 2015 as well as a continued focus on cost-related efficiencies. BHF-BANK operating income by driver 1 million BHF-BANK operating expenses 1 million Other operating income Gains/losses on financial instruments Net interest income Net fee and commission income Operating costs Personnel costs YE 2013 YE 2014 YE 2013 YE BHF-BANK numbers pro-forma for 2013 period. Source: BHF-BANK Management 1 BHF-BANK numbers pro-forma for 2013 period. Source: BHF-BANK Management 16 BHF Kleinwort Benson Annual report 2014

19 Overview Strategy and business review BHF-BANK segmental information (In EUR millions) Private Banking Asset Management Year ended: 31 Dec 14 Financial Markets Corporates Other Total Operating income Operating expenses (52.1) (19.4) (22.8) (16.0) (97.8) (208.1) Movements in loan loss provisions (0.2) 1.6 (2.5) (0.2) (1.3) Contribution (85.0) 2.2 Allocated costs (27.7) (5.3) (18.2) (33.7) Adjusted operating profit (loss) (2.6) (10.5) Non-recurring items Operating profit (loss) (0.3) (8.0) (In EUR millions) Private Banking Asset Management Year ended: 31 Dec 13 1 Financial Markets Corporates Other Total Operating income Operating expenses (54.3) (18.1) (26.5) (16.1) (109.1) (224.1) Movements in loan loss provisions (0.3) (1.6) Contribution (81.8) (2.5) Allocated costs (23.8) (4.7) (17.6) (35.7) Adjusted operating profit (loss) (13.7) 0.0 (2.5) Non-recurring items 2 (4.3) (0.8) (3.1) (6.4) (14.6) Operating profit (loss) (0.2) 5.2 (2.2) (20.0) 0.0 (17.1) 1 BHF-BANK pro-forma for 2013 period. 2 Non-recurring items includes items that distort the understanding of the underlying operational performance i.e reorganisation costs, one-off or unusual income receipts etc. Good underlying performance of all divisions During the year, the bank achieved substantial improvement of the contribution of private banking, stable performance of asset management and an improvement in the corporates division. The comparison of the contribution of financial markets was affected by the inclusion of VAT refunds for 8 million in Annual report 2014 BHF Kleinwort Benson 17

20 Strategy and business review Business review BHF private banking key financial data (In EUR millions) Year ended: 31 Dec 14 Pro-forma 1 Year ended: 31 Dec 13 Delta % chg Net fee and commission income % Net interest income % Gains and losses on financial instruments at fair value 1.6 (0.6) % Other operating income (2.4) (91%) Total operating income % Operating expenses (52.1) (54.3) 2.2 (4%) Movements in loan loss provisions (0.2) (0.0) (0.1) 910% Contribution % Allocated costs (27.7) (23.8) (3.9) 16% Adjusted operating profit (loss) % Non-recurring items (4.3) % Operating profit (loss) 11.9 (0.2) % Client assets (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % chg Assets under Management 20,690 19,210 1,480 8% Loans % Assets under control 21,340 19,691 1,649 8% Notes: 1 BHF-BANK numbers pro-forma for 2013 period. 2 Non-recurring items includes items that distort the understanding of the underlying operational performance i.e. reorganisation costs, M&A expenses, one-off or unusual income receipts etc. Private banking Private banking revenues increased by 9% to 89.7 million during the year underpinned by growth in AuM and the continued change in mix to higher margin discretionary portfolio asset management. Private banking benefited from 1.5 billion growth in AuM: 1.1 billion new assets from private clients and family offices, 0.2 billion outflows from low margin intermediaries and 0.6 billion of favourable market-related movements. Operating expenses decreased due to lower personnel and administration costs. The Private Bank was again ranked first in the Elite Report 2015 published by German business newspaper Handelsblatt as the best portfolio manager in the German-speaking area. BHF private banking AuM by category million 20,690 18,887 19,210 1,504 1,460 3,728 2,893 4,019 1,391 3,647 3,237 4,318 3,720 3,651 5,192 Deposits Institutional clients & ext. advisors Family Office Discretionary Advisory & Execution only 6,787 6,617 6,623 YE 2012 YE 2013 YE 2014 Source: BHF-BANK Management 18 BHF Kleinwort Benson Annual report 2014

21 Overview Strategy and business review BHF asset management key financial data (In EUR millions) Year ended: 31 Dec 14 Pro-forma 1 Year ended: 31 Dec 13 Delta % chg Net fee and commission income % Net interest income n/a Gains and losses on financial instruments at fair value n/a Other operating income (0.1) 0.5 (0.6) (114%) Total operating income % Operating expenses (19.4) (18.1) (1.3) 7% Movements in loan loss provisions n/a Contribution % Allocated costs (5.3) (4.7) (0.7) 14% Adjusted operating profit (loss) (0.6) (10%) Non-recurring items (0.8) % Operating profit (loss) % Client assets (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % chg Assets under Management 16,879 16, % Loans n/a Assets under control 16,879 16, % Notes: 1 BHF-BANK numbers pro-forma for 2013 period. 2 Non-recurring items includes items that distort the understanding of the underlying operational performance i.e.reorganisation costs, M&A expenses, one-off or unusual income receipts etc. Asset management Operating income rose by 5% to 30.2 million for This was the result of growth in AuM to 16.9 billion and a progressive change in mix towards higher margin mandates. AuM growth should allow further improvement in operating margins The growth in AuM was underpinned by good market performance of the funds of 1 billion. Net outflows of 0.7 billion tempered AuM growth as a low margin large institutional mandate the BHF Flexible Allocation FT and offer potential for further growth. The platform is also starting to distribute selected funds from KBI such as the Global Equity Strategies and the Environment Equity Strategies to complement its strong existing European offering was terminated, in part compensated by higher margin new asset wins. Strategies attracting net new money in 2014 were the BHF Total return FT fund and the BHF Flexible Allocation FT. BHF asset management AuM by source million 15,710 4,649 16,557 5,051 16,879 5,103 Retail funds Institutional mandates Administration mandates 6,011 6,422 6,525 5,050 5,084 5,252 YE 2012 YE 2013 YE 2014 Source: BHF-BANK Management Annual report 2014 BHF Kleinwort Benson 19

22 Strategy and business review Business review BHF financial markets key financial data (In EUR millions) Year ended: 31 Dec 14 Pro-forma 1 Year ended: 31 Dec 13 Delta % chg Net fee and commission income % Net interest income (7.2) 48% Gains and losses on financial instruments at fair value % Other operating income (8.9) 88% Total operating income (8.4) 19% Operating expenses (22.8) (26.5) % Movements in loan loss provisions 1.6 (0.3) % Contribution (2.9) 16% Allocated costs (18.2) (17.6) (0.7) 4% Adjusted operating profit (loss) (2.6) 1.0 (3.5) 366% Non-recurring items (3.1) % Operating profit (loss) (0.3) (2.2) % Notes: 1 BHF-BANK numbers pro-forma for 2013 period. 2 Non-recurring items includes items that distort the understanding of the underlying operational performance i.e.reorganisation costs, M&A expenses, one-off or unusual income receipts etc. Financial markets During the year, BHF BANK participated in syndicates for 3 successful IPOs: Alibaba on the NYSE, SLM Solutions in Frankfurt and Jimmy Choo in London. Within Financial Markets, the 2013 operating income included 8 million of VAT refunds which account for the drop in operating income in The continued conservative stance of Treasury portfolio management and the low interest rate environment led to lower net interest income. 20 BHF Kleinwort Benson Annual report 2014

23 Overview Strategy and business review BHF corporates key financial data (In EUR millions) Year ended: 31 Dec 14 Pro-forma 1 Year ended: 31 Dec 13 Delta % chg Net fee and commission income % Net interest income % Gains and losses on financial instruments at fair value (1.5) 0.7 (2.2) 320% Other operating income 0.5 (0.5) 104% Total operating income % Operating expenses (16.0) (16.1) 0.1 1% Movements in loan loss provisions (2.5) (1.6) (0.9) 59% Contribution % Allocated costs (33.7) (35.7) 2.0 6% Adjusted operating profit (loss) (10.5) (13.7) % Non-recurring items (6.4) % Operating profit (loss) (8.0) (20.0) % Client assets (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % chg Assets under Management 2,808 2, % Loans 2,763 2, % Assets under control 5,571 5, % Notes: 1 BHF-BANK numbers pro-forma for 2013 period. 2 Non-recurring items includes items that distort the understanding of the underlying operational performance i.e. reorganisation costs, M&A expenses, one-off or unusual income receipts etc. Corporates Total lending to corporates increased by 14% to 2.8 billion (2013: 2.4 billion) during the year as the bank continues to replenish its loan exposures with first-class counterparties. Annual report 2014 BHF Kleinwort Benson 21

24 Strategy and business review Business review Kleinwort Benson Kleinwort Benson is the combination of Kleinwort Benson Bank, Kleinwort Benson Channel Islands and Kleinwort Benson Investors. Assets under Management +24% million (2013: million) Operating loss before tax 30% 9.5 million (2013: 13.7 million) Adjusted operating loss 56% 4.9 million (2013: 11.4 million) Operating income +8% million (2013: million) Operating expenses +2% million (2013: million) 22 BHF Kleinwort Benson Annual report 2014

25 Overview Strategy and business review Kleinwort Benson key financial data (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % change Net fee and commission income % Net interest income % Gains and losses from financial instruments at fair value (8.7) 3.9 (12.7) 322% Other operating income % Total operating income % Operating expenses (125.4) (122.4) (3.1) 2% Movements in loan loss provisions (0.1) % Adjusted operating loss (4.9) (11.4) % Non-recurring items 1 (4.6) (2.3) (2.3) 98% Operating loss before tax (9.5) (13.7) % Client assets (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % change Assets under Management 13,864 11,137 2,728 24% Loans % Assets under control 14,542 11,672 2,870 25% 1 Non-recurring items primarily comprise restructuring expenses. Overall, Kleinwort Benson business units improved the adjusted operating loss by 6.4 million to 4.9 million during the year (2013: 11.4 million). Operating income was up 8% benefiting from strong growth in Asset Management revenues during the year while operating expenses increased by 3.1 million or 2% as growth in variable costs (linked to income growth) was partially offset by operational efficiencies. Operating losses more than halved with all business units contributing to the performance improvement. Kleinwort Benson Investors was a major driver of the improvement as its profits almost increase threefold during the year. AuM were up 24% with an increased focus on higher margin mandates across the businesses. Lending at Kleinwort Benson Wealth Management was up 27%, also at good margins, despite the low interest rate environment. Kleinwort Benson AuM by category million 13,864 9,185 2,819 6,367 YE ,137 4,066 7,071 YE ,875 6,990 YE 2014 Source: BHF Kleinwort Benson Group Management Asset Management (KBI) Private Banking (KBWM) Kleinwort Benson balance sheet overview 1 million 2, ,829 2,524 2,638 2,638 Loans and advances to customers Investable assets 683 2,314 Derivative financial assets 2,220 Other assets Deposits 1,887 Derivative financial liabilities Provisions for liabilities Other liabilities Total equity 3 66 Assets 252 Liabilities & Equity Assets Source: BHF KB Group Management 256 Liabilities & Equity Kleinwort Benson is the combination of Kleinwort Benson Bank, Kleinwort Benson Channel Islands and Kleinwort Benson Investors. 2 Kleinwort Benson Balance Sheet pro-forma for 2014 and Annual report 2014 BHF Kleinwort Benson 23

26 Strategy and business review Business review Kleinwort Benson 1 segmental information (In EUR millions) KB Wealth Management Year ended: 31 Dec 14 Kleinwort Benson Investors Operating income Operating expenses (108.2) (17.2) (125.4) Movements in loan loss provisions 0.0 Adjusted operating profit (loss) (12.4) 7.4 (4.9) Non-recurring items 2 (4.6) (4.6) Operating profit (loss) (17.0) 7.4 (9.5) Total (In EUR millions) KB Wealth Management Year ended: 31 Dec 13 Kleinwort Benson Investors Operating income Operating expenses (109.2) (13.1) (122.4) Movements in loan loss provisions (0.1) (0.1) Adjusted operating profit (loss) (13.8) 2.5 (11.4) Non recurring items 2 (2.3) (2.3) Operating profit (loss) (16.2) 2.5 (13.7) Total 1 Kleinwort Benson is the combination of Kleinwort Benson Bank, Kleinwort Benson Channel Islands and Kleinwort Benson Investors. 2 Non-recurring items primarily relate to restructuring expenses. Operating profits within Kleinwort Benson Investors increased almost threefold, benefiting from continued strong growth in both AuM and margins. Adjusting for foreign exchange movements, underling operating results showed steady improvement within Kleinwort Benson Wealth Management ( KBWM ), with cost savings from operational efficiencies partly offset by the impact on revenues of the current low interest rate environment. Kleinwort Benson operating income by driver million Other operating 3.7 income Gains/losses on 3.9 financial instruments 11.9 Net interest income Net fee and 94.7 commission income Kleinwort Benson operating expenses million Operating costs Personnel costs (8.7) YE 2013 YE 2014 YE 2013 YE 2014 Source: BHF Kleinwort Benson Group Management Source: BHF Kleinwort Benson Group Management 24 BHF Kleinwort Benson Annual report 2014

27 Overview Strategy and business review Kleinwort Benson Wealth Management Kleinwort Benson is an independently owned private bank providing advisory, wealth management and administration services to private clients and institutions from its offices in the UK, Channel Islands and Isle of Man. Kleinwort Benson has been helping clients create, conserve and grow their wealth for over 200 years. This commitment continues today, and our business has evolved to meet the modern banking needs of our clients. We provide our clients with a holistic and broad spectrum service covering both private client and institutional needs. Headquarters: London Activities: Wealth management. Kleinwort Benson Wealth Management key financial data 1 In the table below, we show the results for Kleinwort Benson Wealth Management ( KBWM ) 1 in GBP as well as in EUR to explain the underlying trends more accurately. KBWM (EUR) KBWM (GBP) (In millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Year ended: 31 Dec 14 Year ended: 31 Dec 13 Net fee and commission income Net interest income Gains and losses on financial instruments at fair value (8.7) 3.9 (7.1) 3.4 Other operating income Total operating income Operating expenses (108.2) (109.2) (87.3) (92.8) Movements in loan loss provisions (0.1) Adjusted operating profit (loss) (12.4) (13.8) (10.0) (11.8) Non-recurring items 2 (4.6) (2.3) (3.7) (2.0) Operating profit (loss) (17.0) (16.2) (13.7) (13.7) Client assets (In millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Year ended: 31 Dec 14 Year ended: 31 Dec 13 Assets under Management 6,990 7,071 5,444 5,895 Loans Assets under control 7,667 7,606 5,972 6,341 Notes: 1 KBWM is the aggregation of Kleinwort Benson Bank and Kleinwort Benson Channe Islands. 2 Non-recurring items includes items that distort the understanding of the underlying operational performance i.e. reorganisation costs, one-off or unusual income receipts etc. Annual report 2014 BHF Kleinwort Benson 25

28 Strategy and business review Business review Asset under Management Core discretionary management AuM at KBWM increased by 2% year-on-year to 2.9 billion (2013: 3 billion) with margins continuing to hold up well. Total AuM were down 8% to 5.4 billion (2013: 5.9 billion) with strong inflows offset by outflows from lower margin mandates and the impact of exiting banking operations in the Isle of Man. Investment performance, including delivery of positive real returns, has remained a feature across all investment strategies and core to our client proposition. During the period the Business continued to receive industry recognition for its investment performance, including the more recent Platinum award for Cautious Portfolio Manager of the year from Portfolio Adviser. Profitability KBWM reported an improvement of 1.8 million at the adjusted operating results level, with losses of 10 million for 2014 (2013: 11.8 million loss). Total income was down 3.8 million (5%) year on year, reflecting the impact of the current low interest rate environment and a reduction in revenue associated with the refocusing of business lines. The impact on revenues of re-focusing the business model was more than compensated for by an associated reduction in operating costs, with a 5.5 million (6%) improvement year on year. The total headcount in KBWM was reduced by 7% during the year to 620 full-time employees. Net fees and Commissions declined by 5% to 64.2 million (2013: 67.6 million) attributable in part to the decision to exit the Group s trust administration operations in the Isle of Man, consistent with the strategy to move to a more streamlined and focused operating model. In addition fee revenues were impacted by the loss of a small number of institutional mandates in the funds administration and private fiduciary business. KBWM AuM by category million KBWM balance sheet million 81 5,175 1,335 2,674 5,895 1, ,932 5,444 1,322 2, Deposits Family Office Discretionary Advisory & Execution only 2, ,825 2,344 2,105 2, ,457 2,036 1,806 Loans and advances to customers Investable assets Derivative financial assets Other assets Deposits Derivative financial liabilities Provisions for liabilities Other liabilities Total equity 1,085 1,096 1, YE 2012 YE 2013 YE 2014 Assets Liabilities & Equity Assets Liabilities & Equity Source: Kleinwort Benson Management Source: Kleinwort Benson Management 26 BHF Kleinwort Benson Annual report 2014

29 Overview Strategy and business review Net interest income increased by 75% to 17.5 million (2013: 10 million) reflecting increased returns from both lending and deposit taking activity. Over the course of the year the loan book increased by 18.4% to 528 million (2013: 446 million) with the business continuing to offer lending opportunities to both new and existing clients within its target market and risk appetite. Lending revenues also benefited from upward re-pricing of existing loan maturities. On the deposit side of the business, a modest re-alignment of deposit rates also helped contribute to the overall uplift in net interest income. KBWM continues to maintain a solid capital and liquidity position, with key metrics comfortably exceeding regulatory requirements and at the top end of the European banking peer set. The Tier 1 ratio was 23.5% as at 31 December 2014 and the loan to deposit ratio is 30%. Outlook Going forward, we expect continued operational progress as the business continues to focus on efficiencies and revenue growth. In order to facilitate these improvements, we are planning to invest further in the client proposition. KBWM operating income by driver million Other operating income Gains/losses on 17.5 financial instruments 67.6 Net interest income Net fee and 64.2 commission income KBWM operating expenses million Operating costs Personnel costs (7.1) YE 2013 YE 2014 YE 2013 YE 2014 Source: BHF Kleinwort Benson Management Source: Kleinwort Benson Management Annual report 2014 BHF Kleinwort Benson 27

30 Strategy and business review Business review Kleinwort Benson Investors Kleinwort Benson Investors is an established institutional asset manager with headquarters in Dublin, Ireland. The firm has been managing assets for institutional investors since 1980 and it currently manages specialist strategies for public and corporate pension schemes, sub-advisory investors and foundations/endowments. Investment services are offered on both a segregated and unitised basis, with the majority of the firm s assets under management coming from international clients. Headquarters: Dublin Activities: Asset management. Kleinwort Benson Investors key financial data (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % chg Net fee and commission income % Net interest income (0.1) 43% Gains and losses on financial instruments at fair value n/a Other operating income % Total operating income % Operating expenses (17.2) (13.1) (4.1) 31% Movements in loan loss provisions n/a Adjusted operating profit (loss) % Non-recurring items 1 n/a Operating profit (loss) % Client assets (In EUR millions) Year ended: 31 Dec 14 Year ended: 31 Dec 13 Delta % chg Assets under Management 2 6,875 4,066 2,809 69% Loans n/a Assets under control 6,875 4,066 2,809 69% Notes: 1 Non-recurring items includes items that distort the understanding of the underlying operational performance i.e. reorganisation costs, one-off or unusual income receipts etc. 2 AuM as at the 31 December 2013 excludes 1.4 billion assets under advisement that had a fixed contract agreed at the time of the KBI acquisition. 28 BHF Kleinwort Benson Annual report 2014

31 Overview Strategy and business review Asset under Management The business saw a significant progress in both wholesale and institutional channels which extends and deepens the international client base and KBI s geographic footprint. Adjusting 2013 for a 1.4 billion KBC mandate 1, AuM increased by 69% to 6.9 billion (2013: 4.1 billion), underpinned by strong growth in net new assets of 2.0 billion, together with investment performancedriven growth of 0.8 billion. The strongest growing product segment was global equity strategies, where AuM increased by 114% supported by strong investment performance in 2014 and a positive long-term track record. The environmental equity strategies also recorded a very satisfactory increase in AuM, growing by 58% during the year. Multi asset strategies recorded solid investment performance but experienced some decline in AuM from Irish pension fund de-risking. KBI saw positive industry endorsement for several strategies from Morningstar, Lipper and Investment Week. Profitability KBI had an excellent performance in 2014 with operating profit increasing almost threefold to 7.4 million (2013: 2.5 million). Revenue increased by 58% to 24.6 million (2013: 15.6 million) while costs only increased by 31% to 17.2 million (2013: 13.1 million). This was largely driven by variable costs linked to AuM growth as well as higher personnel-related costs to support continuing business growth. This scalability of the business model is reflected in the uplift of the operating margin 2 from 16% in 2013 to 30% in Outlook KBI is well positioned to benefit from converting its strong pipeline of new business prospects into mandates. Assuming supportive market conditions continued AuM growth should lead to further improvements in operating margins for Looking ahead, KBI is well positioned for further international expansion. The company has built a stable business with differentiated products, an experienced team and well established distribution capabilities in multiple geographic markets. The product range is expanding and at the end of 2014, KBI launched an Emerging Market Environmental, Social and Corporate Governance strategy following an extensive market research and product design phase. The business model is operationally robust with scope to leverage specialist expertise and the operating model further driven by strong pipeline of new business prospects into AuM as at the 31 December 2013 excludes 1.4 billion assets under advisement that had a fixed contract agreed at the time of the KBI acquisition. 2 Operating margin = operating profit before tax/operating income. KBI AuM by category 1 million 6, ,481 Multi Asset Environmental Global Equity 2,819 1, ,079 4,066 1, ,078 4,437 YE 2012 YE 2013 YE AuM as at the 31 December 2013 excludes 1.4 billion assets under advisement (2012: 824m) that had a fixed-term contract agreed at the time of the KBI acquisition. Source: KBI Management Annual report 2014 BHF Kleinwort Benson 29

32 Strategy and business review Principal risks and uncertainties This section forms part of the financial statements The Group is a focused financial services business with principal activities in private banking & wealth management, asset management and financial markets & corporates. These complementary businesses are offered by various businesses: Private banking and wealth management are offered by Kleinwort Benson ( KBWM ) in the UK and the Channel Islands and by German-based BHF BANK; Asset management services are offered by Kleinwort Benson Investors ( KBI ) and BHF BANK s subsidiary Frankfurt Trust; Financial markets and corporate banking services are mostly provided through BHF BANK. Through the combined businesses, the Group faces and accepts risks in order to generate returns for its shareholders. The Group has set strategic objectives and its medium-term performance tar-gets against following qualitative risk appetite principles: Maintenance of a strong capital position with sufficient regulatory capital surpluses which are at the high-end of European peers, set in the context of the prevailing global economic environment, market conditions, regulatory environment and reflecting the potential impact from several appropriate stress tests. Maintenance of a strong liquidity position ensuring that liabilities can be met, even under adverse business and market conditions. The Company s approach to liquidity is based on the maintenance of highly liquid low-risk treasury portfolios and stable funding with limited reliance on wholesale funding. Conduct of business in accordance with the highest ethical standards aimed at maintaining an excellent reputation with clients, employees, regulators and other stakeholders. The above qualitative principles are translated into risk appetite statements with appropriate risk tolerance levels and quantitative risk limits defined in comprehensive risk frameworks for each of the Company s businesses developed under the responsibility of their respective Board of Directors: BHF BANK ensures the operational capability and effectiveness of their risk management system by means of a clear functional organisation of the risk control process. The individual management bodies and committees as well as the organisational units involved in the risk management process have clearly defined functions and responsibilities. BHF BANK s risk management, measurement and control processes ensure that significant risks are identified at an early stage, fully evaluated and outlined adequately. The risk and control processes are promptly adapted to changing conditions. Interactions between the various types of risk are considered where material-ly relevant. BHF BANK monitors and manages risks through (a) comprehensive risk reporting, (b) the definition of a controlled acceptance of risks within well-defined limits, (c) an early warning system which monitors eco-nomic capital usage and various quantitative and qualitative indicators of significant risks, (d) adequately staffed and technically skilled resources, and (e) internal audit. Within BHF BANK risk-bearing capacity, the material risks are quantified by means of economic capital which must be covered by available cover at all times (risk cover fund) under a liquidation approach. The economic capital is allocated and translated into risk limits for BHF BANK s individual risk-bearing units. Such allocation limits concentration of risks and provides for adequate capital cover for potential losses, even in worst case scenarios. KBWM s three-tiered approach to risk management builds on (a) the businesses primary responsibility for risk management, (b) risk management and control functions in various areas (legal, finance, compliance, information security, risk) providing independent assessments or monitoring of risks and effectiveness of controls, and (c) an internal audit function having the tertiary responsibility for providing assurance that the business operates effectively in the management and oversight of its risks. Kleinwort Benson s operates under a risk appetite statement and a comprehensive risk management framework, setting out a number of principal policy statements including limits to control its key risks. To define its risk appetite, KBI uses the concept of Risk Appetite Frontier, which sets the tolerance range of acceptable versus unacceptable risks. This approach (a) identifies and measures risk by assessing the impact and the frequency of various identified risks and (b) defines risk acceptability with zero tolerance for risks with a potentially severe impact and a high probability. KBI maintains a risk register identifying material risks. As a result of the simplification of its legal structure, the group will seek to harmonize its approach to risk management and measurement and will review options to better align the risk governance within the boundaries of applicable laws and regulations under which the various regulated businesses operate. The main risks faced by the Group in its different segments of activity and the main principles of the Company s approach to risk mitigation and management are set out overleaf. Additional information on certain risk exposures and the risk assessment processes in relation to the Company s capital can be found in the Company s Pillar III disclosures, which are available on the Company s website at These have been prepared in accordance with the European Capital Requirement Directive, as transposed in the Prudential Regulation Authority s ( PRA ) Prudential Sourcebook for Banks, Building Societies and Investment Firms ( BIPRU ). 30 BHF Kleinwort Benson Annual report 2014

33 Overview Strategy and business review Key risk and uncertainty Risk mitigation and management Business risk Business risk is the risk to earnings or capital arising from changes to the business environment, from adverse business decisions, from improper implementation of business decisions, or from lack of responsiveness to changes in the business environment. The Group and its subsidiaries have a comprehensive and conservative medium-term plan which sets out a three year strategy to manage the business in the face of the changing economic environment. Progress against this plan is measured on a regular basis through regular business reviews and Change Boards enabling tactical planning. The Group and its subsidiaries maintain a solid capital position including sufficient cover to mitigate unexpected losses resulting from unforeseen events. The financial position is regularly stress tested to ensure resilience in adverse economic conditions. Key risk and uncertainty Risk mitigation and management Market risk Market risk is defined as the risk that the value of an investment will increase or decrease due to movement in market factors. Market risk arises when an overall market or asset class changes in value according to economic conditions or other factors that may override any characteristics specific to a particular stock, bond, commodity, alternative investment or currency. Market risk arises: (a) in the Treasury business and in BHF BANK s trading portfolio, deriving from fixed income, interest rate and foreign exchange positions; (b) when taking investment risk on behalf of its clients in its capacity as an investment manager; and (c) as a result of the impact of changes in the exchange rate between the Euro and the Pound Sterling on BHF KB s Euro denominated stock price. BHF BANK determines its market risk-bearing capacity using a Value at Risk ( VaR ) based methodology. The economic capital for market risk is calculated to ensure that potential losses, with a certain probability (confidence level) or resulting from stress-based scenario analysis are covered at all times. The limit utilisation is monitored on a daily basis. KBWM adopted a Risk Framework document that is overseen and monitored by the Strategic Risk Committee. At the Executive level the Risk and Compliance Committee approves and maintains detailed Market Risk Policies. KBWM maintains limited market risk exposure and does not engage in proprietary trading on its own account. As such, the main market risks relate to interest rate risk and foreign currency exposures that arise due to the risk management and hedging strategies adopted by the Treasury Department. The net interest rate risk and the foreign exchange exposure are managed within prescribed internal limits and reported daily. KBI maintains minimal Market Risk exposure as it does not trade for its own account. BHF KB s Executive management monitors the evolution of the exchange rate between the Euro and the Pound Sterling to measure the impact on the valuation of its investment in KBWM, and may enter into currency hedges from time to time. The Group does not hedge the potential negative impact of increasing interest rates on the market valuation of its assets. Annual report 2014 BHF Kleinwort Benson 31

34 Strategy and business review Principal risks and uncertainties This section forms part of the financial statements Key risk and uncertainty Risk mitigation and management Liquidity risk BHF KB requires sufficient liquid resources to support its growth strategy and to expand its financial services business. In its banking business, the primary driver of liquidity and funding risk arises through the taking of deposits that are often repayable on demand or at short notice and using these deposits to fund credit facilities to borrowers and to purchase securities. The Group defines liquidity as the ability to meet its liabilities as they fall due. The Group primarily considers its liquidity at an entity by entity level. The nature of the Group business model is such that liquidity risks arise in BHF BANK and in KBWM. Liquidity risk also includes (a) refinancing risk or the inability to obtain sufficient liquidity at expected conditions when required, and (b) market disruptions resulting in the inability to settle transactions or only at a loss. At 31 December 2014, BHF KB had 36.2 million cash available to pursue its business strategy and had no indebtedness. BHF KB made certain representations and gave certain warranties in connection with the sale of certain industrial subsidiaries. The potential maximum liability which could result from claims raised against the Group by the respective buyers for breaching such representations and warranties has reduced compared to the prior year and amounts to JPY 2,897million or 19.9 million (31 December 2013: JPY 5,302 million or 36.6 million). The potential exposure solely relates to the sale of Niles. With the exception of the items listed below, BHF KB s businesses generally do not benefit from any guarantee from BHF KB: (a) a letter of support to the Guernsey Financial Services Commission, confirming protection against non-performing loans and losses and ensuring that Kleinwort Benson Channel Island Holdings Limited will meet its liabilities and obligations at all times; (b) an undertaking by KBG to the Prudential Regulation Authority (the PRA ) to contribute 15 million of capital to Kleinwort Benson Bank Limited in the event that the Kleinwort Benson Bank Limited s capital would be projected to fall below the Individual Capital Guidance set by the PRA; (c) a guarantee provided in connection with all obligations owed by Kleinwort Benson Bank Limited to the Bank of England; (d) a guarantee provided to the benefit of Kleinwort Benson Investors Dublin Ltd, Kleinwort Benson Investors International Ltd, and Kleinwort Benson Fund Managers Ltd in connection with all liabilities arisen in respect of the financial year ended 31 December 2014 and amounting to 8.3 million; and (e) a commitment to contribute additional capital to BHF BANK up to a total of 44.1 million (out of a total commitment of 60 million by BHF KB and its co-investors in the acquisition of BHF BANK) in the event that BHF BANK s capital would fall below the minimum capital requirement set by BaFin. The risk associated with the aforementioned guarantees is closely monitored by the Company s senior management and is limited as a result of the related business strong capital positions and high liquidity. The Groups subsidiaries constantly maintain a high level of liquidity by (a) holding sufficient immediately available cash and liquid assets, (b) manage their long-term liquidity by limiting the cumulative mismatch in maturities between assets and liabilities and limiting the mismatch by limits on individual maturity buckets, (c) maintaining a diversified pool of deposits. BHF BANK s Asset and Liability Committee ( ALCO ) assumes all tasks within the context of the liquidity control of the bank its subsidiaries. ALCO ensures that the liquidity position of BHF is efficiently controlled, that appropriate processes and guidelines for monitoring and limiting risks exist, and that sufficient resources for evaluating and controlling the risks are available. BHF BANK employs a survival period-based approach to analyse and manage its liquidity risk. The Group s liquidity management falls under the responsibility of the financial markets & corporates division and the relevant organisational units of the subsidiaries in collaboration with financial markets. The task of liquidity management is to ensure that under normal circumstances the bank is able to finance predictable deficits at market conditions. This means that losses from borrowing at excessively high interest rates and the investment of surplus funds at rates below the market level are to be avoided. BHF BANK s refinancing is based largely on deposits made by a diversified group of clients (national and international), collateralised borrowing via Eurex Repo (using our portfolio of unencumbered securities) as well as a limited volume of money market transactions(unsecured) on the OECD interbank market. KB operates under a Risk Framework document that describes and quantifies appetite both for short-term liquidity risk as well as Asset and Liability Management. The Treasury department is responsible for day-to-day management of funding and liquidity within the limits set out in detailed liquidity and Asset and Liability Management policies which are maintained and approved by KB s ALCO. 32 BHF Kleinwort Benson Annual report 2014

35 Overview Strategy and business review Key risk and uncertainty Risk mitigation and management Counterparty credit risk and settlement risk Counterparty credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment obligation under a contract. KBG incurs counterparty credit risk within its banking entities where financial instrument contracts are entered into with other counterparties for the purpose of hedging. Settlement risk is defined as the risk that a settlement in a transfer system does not take place as expected. Generally, this happens because a party defaults on its clearing obligations to one or more counterparties. This could be caused by an operational issue, a shortage of stock, liquidity issues or insolvency. Settlement Risk within the Group is principally in relation to BHF BANK s trading activities in Financial Markets, BHF BANK s Private Banking and Asset Management when executing derivative transactions for brokerage clients, and KB s treasury activities. Counterparty risk in relation to derivatives arises counterparty risks arising from over-the-counter ( OTC ) transactions and the derivatives clearing services for private and investment fund clients. BHF BANK established internal counterparty limits and issuer lines for purposes of the operational control of the credit risks from trading activities in its Financial Markets segment. These counterparty and issuer lines are only granted to clients/counterparties with investment grade rating and selectively to clients without investment-grade. KBWM has approved a Risk Framework document that describes and quantifies appetite for counterparty credit risk. This includes maximum limits for credit exposure, country and concentration risk. Positions not in full conformance with the Risk Framework are required to be approved by the Credit Committee on an exceptional basis and are subject to Board ratification. KBWM takes a prudent approach to the calculation and assignment of settlement risk. Trading for underlying clients is performed on an agency basis and, given the nature of the client base, is generally with stock or cash already held in custody. In addition to the formal assessments provided for each approved counterparty broker, additional monitoring and control is performed for the assessment and assignment of settlement risk. In accordance with the requirements from European Markets Infrastructure Regulations ( EMIR ) OTC derivatives are cleared through central clearing parties. Furthermore, several mitigation techniques, such as Global Master Repurchase Agreements ( GMRA ), allow netting of collateral. Annual report 2014 BHF Kleinwort Benson 33

36 Strategy and business review Principal risks and uncertainties This section forms part of the financial statements Key risk and uncertainty Risk mitigation and management Credit risk Credit risk is defined as the risk of loss due to a debtor s non-payment of a loan or other line of credit (either the principal or interest or both) and possible impairments of financial instruments due to a decline in the counterparties creditworthiness. Credit risk predominantly arises within KBWM and BHF BANK as a result of direct lending to customers and the investment of customer deposits into third party institutional assets. There is also a small degree of settlement risk. BHF BANK faces credit risk in its Corporate and its Private Banking segments. The Board of Managing Directors determines the credit risk strategy and sets out the central framework for the assumption of credit risks and lending business in BHF BANK. By defining appropriate credit policy targets, the credit risk strategy sets the parameters for the operations of the individual divisions as well as for the central credit risk management and finance units as regards managing credit risks at client level and throughout the entire bank. The credit portfolio strategy additionally restricts default risks at client, country, sector and portfolio level. Credit is granted and collateral monitored in accordance with the credit risk strategy, the credit policy guidelines determined therein and further credit guidelines. Credit management responsibilities are strictly segregated from the front office of the relevant business segment engaging in lending activities.the delegation of lending authority is based, in particular, on the experience of the credit risk manager involved, the client segment, the rating, the amount and the term of the loan as well as the type of transaction. BHF BANK Group uses separate internal rating procedures for loans and advances granted to banks, corporate and private clients. Each rating model includes quantitative and qualitative elements as well as assessments as regards the borrower. Specific industry risks and external ratings are also taken into account, as are current market indicators. The use of collateral instruments reduces the risk of economic default in the bank s loan portfolio. The security provided is assessed by the collateral department taking account of the recovery rates estimated by experts. The responsibility for making provisions for risk lies with a committee comprising representatives from credit risk management and finance. Credit risk is measured and monitored independently against the economic capital limits within the defined risk-bearing capacity. KBWM operates a Risk Framework document that describes and quantifies appetite for credit risk. This is overseen and monitored by the Strategic Risk Committee. At the Executive level a Credit Committee maintains detailed credit policies for customer lending, covering all aspects of credit risk management including, inter-alia: credit strategy; delegated approval authority; and underwriting criteria, including collateral quality and provisioning. KBWM adopts a range of measures to reduce inherent risk in its lending, including a thorough analysis and assessment of each borrower with reference to the ability to service and repay the requested facility. In almost all cases, risk is further mitigated by the taking of collateral to cover the funds advanced. This comprises recognised banking security including, but not limited to cash deposits, portfolios of stocks and shares, charges over UK & Channel Island Residential Property and charges over UK Commercial Property. Property-backed transactions are always subject to a professional and independent appraisal to determine valuation and suitability as lending collateral. Residential property values are reviewed according to published Land Registry indexation figures on a regular basis and, where deemed appropriate, by formal revaluation. In respect of commercial premises, it is KBWM s practice to revalue properties held as collateral on a regular basis, at the Credit Committee s discretion. All other security, which is subject to fluctuation in value, is reassessed with a suitable frequency ranging from daily to monthly (as a minimum). Standard facility and security documents used have been prepared by external lawyers and are subject to periodic review to ensure that they remain robust and enforceable. Non-standard loans are subject to bespoke and independently commissioned documentation on a case-by-case basis. 34 BHF Kleinwort Benson Annual report 2014

37 Overview Strategy and business review Key risk and uncertainty Risk mitigation and management Operational risk Operational risk is the risk of loss or other material adverse impact resulting from inadequate or failed internal processes, people or systems, or from external events. BHF KB does not seek to take operational risk, but accepts it is inherent within its activities. BHF BANK identifies and assesses operational risk through an annual Risk Control Self-Assessment, maintaining a loss events database, monitoring of Key Risk Indicators, reporting of operating loss events to the Risk Controlling department. Operational risks are categorised on expert evaluations of probability of occurrence and potential level of losses. KBWM identifies monitors and mitigates its exposure to operational risk through a Risk Event Policy, Risk and Control Self-Assessment policies and formal reporting of operational risk events. The Risk Event Policy is designed to ensure that risk events are identified, reported and managed in a timely and appropriate manner. The top ten key risks facing KBWM are determined by the Risk and Compliance Committee on an annual basis. Each risk is owned by a Management Committee member. The monthly key risk indicator data is reported to the Risk and Compliance Committee on a quarterly basis for review and action where required. Key risk and uncertainty Risk mitigation and management Regulation, compliance, tax and legislation BHF KB and its operating subsidiaries operate in a highly-regulated environment. Changes in regulation or the basis of taxation could materially affect the financial position and performance. Changes in legislation could result in BHF KB and/or its operating subsidiaries failing to comply with laws, spending significant resource and effort in order to comply, or deciding to exit a service or product. The loss or injury from breaches or non-compliance with applicable laws and regulations may result in fines imposed by regulatory authorities or sanctions such as restrictions on business activities or the imposition of remedial action. Being listed on Euronext Brussels, the Company is subject to Belgian legislation and regulation regarding, amongst other things: financial, governance and other disclosure; internal controls; and insider trading. The Group actively monitors legislative and regulatory developments and engages in dialogue with regulatory authorities on a regular basis. BHF KB and its regulated entities maintain a conservative model with a strong, well capitalised balance sheet, and believe they are well placed to react to legislative and regulatory change. Compliance is an independent function within BHF BANK, KBWM and KBI, reporting into the Audit, Risk and Compliance Committees of the respective entities, which monitor Compliance and Legal policies and manuals, which set out standards to ensure that business is conducted in accordance with all applicable laws, rules, codes and standards required by regulators, respecting the principles of integrity and fair dealing at all times. Compliance is also responsible for comprehensive training and education of staff on compliance and regulatory matters. The Group will continue to invest necessary resources to comply with evolving laws, regulations and standards and manage the risks related to its stock exchange. Annual report 2014 BHF Kleinwort Benson 35

38 Strategy and business review Principal risks and uncertainties This section forms part of the financial statements Key risk and uncertainty Risk mitigation and management Group risk Group risk is the risk that the financial position of a firm may be adversely affected by its relationships with other entities in the same Group or by risks which may affect the financial position of the whole Group. This includes reputation risk, which can be described as the decline in the reputation of a firm from the point of view of its stakeholders (e.g. clients, shareholders, staff, regulators and the general public) that damages the reputation of the Group, or the environment in which it operates, leading to a loss of profitability or liquidity or capital. At BHF BANK, Early identification and avoidance of potential reputational risks is supported by the application and adherence to policies and guidelines, such as compliance policy, money laundering prevention guideline, securities compliance risk analysis, money laundering embargo risk analysis, fraud risk analysis, pre-screening of new business, new products process, project and process governance, media relations and liquidity management. KBWM maintains a Reputational Risk policy which defines forbidden activities (e.g. illegal activities, corruption) and sensitive activities (e.g. the defence equipment industry, the betting industry, high profile clients, politically exposed persons, conflicts of interests, tax related transactions etc.) Escalation procedures exist across the Group as necessary to the reputational risk committee and the respective Boards. Furthermore stress tests are undertaken to assess the impact of events, that may damage the businesses reputation and to ensure adequate liquidity and capital cover. 36 BHF Kleinwort Benson Annual report 2014

39 Overview Strategy and business review Annual report 2014 BHF Kleinwort Benson 37

40 BHF Kleinwort Benson operates under the Belgian Corporate Governance Code, the foremost code of best practice for Belgian listed companies. 38 BHF Kleinwort Benson Annual report 2014

41 Overview Strategy and business review 40 Introduction 41 Board of Directors 46 Board committees 47 Executive management 48 Remuneration report 58 Internal control and risk management systems 60 Disclosure required by Article 34 of the Belgian Royal Decree of 14 November Statutory Auditor 61 Shareholders Meeting 61 Business Conduct and Ethics Code 62 Dealing and Disclosure Code 62 Compliance Officer Annual report 2014 BHF Kleinwort Benson 39

42 Introduction On 9 December 2004, the Belgian Corporate Governance Committee, formed by the Financial Services and Markets Authority (the FSMA ), Euronext Brussels and the Federation of Belgian Enterprises published a Code on Corporate Governance. This code of best practice applying to Belgian listed companies on a non-binding basis, was amended and restated on 12 March 2009, and is available at The Company has adopted the Belgian Code on Corporate Governance as its reference code and has established a Corporate Governance Charter, which describes the main aspects of the rules and practices under which the Company operates. This is available on the Company s website ( This section summarises the Company s corporate governance structure and provides certain information that the Belgian Code on Corporate Governance recommends, and the Belgian Law of 6 April 2010 enhancing corporate governance in listed companies and autonomous state enterprises (the Law of 6 April 2010 on Corporate Governance ) requires, to be included in this Annual Report. The section also contains information concerning the obligations of issuers of financial instruments admitted to trading on a regulated market, which is required by Article 34 of the Belgian Royal Decree of 14 November BHF Kleinwort Benson Annual report 2014

43 Overview Strategy and business review Board of Directors Powers and responsibilities In accordance with the Belgian Companies Code, the Company is administered by a Board of Directors (the Board ) with full powers and authority to undertake any action, except where specific powers are reserved for action at a Shareholders Meeting, either by law or pursuant to the Company s Articles of Association. Among others, the Board approves the Company s strategy, reviews and approves the annual and six-month financial statements and presents to the Annual Shareholders Meeting an evaluation of the Company s financial situation. The Board appoints members of the Board s Committees, the Chief Executive Officer and the other members of Executive Management. The Board may assign special mandates to one or more directors, but all other Board decisions must be taken by the Board as a collegial body. The Board has delegated to Mr Fischer, the Company s Chief Executive Officer, general executive authority over the Company s affairs arising in the ordinary course of business (see the section titled Chief Executive Officer on page 47). Appointment Board members are appointed by the shareholders at a Shareholders Meeting upon proposal by the Board. The Company s Articles of Association provide that the Board must have at least five and at most twelve directors. The Company s Articles of Association also provide that as long as Mr Collins, together with his affiliates, owns, directly or indirectly, at least 5% of the Company s outstanding shares, he will have the right to present a pool of two candidates, from which the Shareholders Meeting must select one, but may select both, for election to the Board 1. The Nomination and Remuneration Committee (see the section titled Nomination and Remuneration Committee on page 46) makes recommendations to the Board as to all candidates for election to the Board. To qualify as an independent director, such person must comply with the conditions set forth in Article 526ter of the Belgian Companies Code (see the section titled Independence opposite). Pursuant to the Belgian Law of 28 July 2011 ensuring gender diversity on boards of autonomous state enterprises, listed companies and the National Lottery, at least one-third of the directors of the Company will need to be of a different gender from that of the other Board members as of 1 January Taking into account this requirement, the Shareholders Meeting held on 24 February 2015 appointed to the Board a member of a different gender from that of the other Board members. As a result the Board is currently composed of one-sixth of the members of a different gender from that of the other Board members. 1 Based on their most recent transparency declaration, the aggregate shareholding in the Company held by Mr Collins and affiliated entities amounts to 9.13% of BHF KB s outstanding shares. Based on their most recent transparency declaration, the aggregate shareholding in the Company held by Fidelidade and Billion Infinity, indirectly non wholly-owned subsidiaries of Fosun International Limited ( Fosun ), amounts to 19.49% of BHF KB s outstanding shares. By press release dated 23 March 2015, Fosun announced that Fidelidade and Billion Infinity had entered into share purchase agreements whereby Fidelidade and Billion Infinity would acquire from Mr Collins and affiliated entities an aggregate stake in the Company amounting to 9.12%. Upon completion of the acquisition which remains subject to closing conditions including regulatory approvals, Fidelidade and Billion Infinity s aggregate shareholding in BHF KB would increase from 19.49% to 28.61% and Mr Collins and affiliated entities special board representation rights under the Articles of Association would automatically terminate. For an overview of share ownership in the Company, see the section titled Shareholder structure on page 132. Functioning The Board is a collegial body. It deliberates if a majority of its members are present or represented (except in the event of force majeure, in which case the quorum is three directors present or represented). The Board meets as regularly and frequently as required by the Company s interests. In accordance with Article 523 of the Belgian Companies Code, any director with a conflict of interest must bring the existence of such conflict to the notice of his fellow directors and may not take part in the related Board deliberations. This must also be brought to the notice of the statutory auditor (see the section titled Statutory Auditor on page 60). During the year ended 31 December 2014, the Board held eleven meetings (including one session during which non-executive directors assessed their interaction with Executive Management in the absence of the Company s executive director) and one workshop. Major topics considered by the Board during the year included, among others: financial statements and associated reports relating to the years ended 31 December 2013 and 2014; the operations and performance of the Company, and; potential acquisitions and divestitures. The conflict of interest procedure provided by Article 523 of the Belgian Companies Code was applied three times (please refer to the statutory report of the Board on the non-consolidated financial statements dated 30 April 2015, which is published separately from this Annual Report and may be viewed on the Company s website at Except for Mr Collins who did not attend one meeting when he was a member of the Board, directors attended or were represented at all meetings. Independence Except for Mr Fischer who serves as the Company s Chief Executive Officer, the Board consists solely of directors who have no executive functions within the Company. As of 30 April 2015, three out of the Company s six Board members are independent (for details see the section titled Composition on page 43). To qualify as an independent director, such person must comply with the conditions set forth in Article 526ter of the Belgian Companies Code, which are listed below: (i) not being an executive member of the Board, or exercising a function as a member of the legal management committee or as a person entrusted with daily management of the Company or a related company or person (as defined in Article 11 of the Belgian Companies Code), and not having been in such a position for the previous five years before his or her appointment; Annual report 2014 BHF Kleinwort Benson 41

44 Board of Directors (ii) not having served for more than three terms as a non-executive director of the Board, without exceeding a total term of more than twelve years; (iii) not being a member of the senior management (as defined in Article 19, 2 of the law of 20 September 1948 regarding the organisation of the economy), of the Company or a related company or person (as defined in Article 11 of the Belgian Companies Code) and not having been in such a position for the previous three years before his or her appointment; (iv) not receiving, or having received, any remuneration or other significant advantage of a patrimonial nature from the Company, or a related company or person (as defined in Article 11 of the Belgian Companies Code) apart from any bonus or fee received as a non-executive member of the Board; (v) not holding any shareholder rights representing onetenth or more of the Company s capital, the Company s social funds or of a class of shares of the Company; If the independent director holds shareholder rights representing less than one-tenth: not holding shareholder rights representing, together with the shareholder rights owned in the same company by companies controlled by the independent director, one-tenth or more of the Company s capital, the social funds or of a class of shares of the Company; or the disposal of those shares or the exercise of the related rights not being subject to contractual stipulations or unilateral undertakings given by the independent director. not representing, in any circumstances, a shareholder fulfilling the conditions covered under this clause (v); (vi) not having, or having had during the last year, a significant business relationship with the Company or a related company or person (as defined in Article 11 of the Belgian Companies Code), either directly or as partner, shareholder, member of the Board, member of the senior management (as defined in Article 19, 2 of the law of 20 September 1948 regarding the organisation of the economy) of a company or person who maintains such a relationship; (vii) not being or having been within the last three years, a partner or employee of the current or former external auditor of the Company or a related company or person (as defined in Article 11 of the Belgian Companies Code); (viii) not being an executive director of another company in which an executive director of the company is a non-executive member of the board, and not having other significant links with executive directors of the Company through involvement in other companies or bodies; and (ix) not being a spouse, legal partner or close family member to the second degree of a director or member of the legal management committee or person entrusted with the daily management or member of the senior management (as defined in Article 19, 2 of the law of 20 September 1948 regarding the organisation of the economy) in the Company or a related company or person (as defined in Article 11 of the Belgian Companies Code) or of the persons referred to in clauses (i) through (viii) above. 42 BHF Kleinwort Benson Annual report 2014

45 Overview Strategy and business review Composition Name Born Classification Audit, Risk and Compliance Committee Nomination and Remuneration Committee Gerd Häusler, 1951 Non-executive, independent director (1) Member Chairman Chairman of the Board of Directors Leonhard Fischer 1963 Director and Chief Executive Officer Johannes Fritz 1954 Non-executive director Member Anne van Aaken 1969 Non-executive, independent director (1) Konstantin Graf von Schweinitz 1961 Non-executive, independent director (1) Chairman Member Patrick Lei Zhong 1971 Non-executive director Member (1) Independent director pursuant to Article 526ter of the Belgian Companies Code. Annual report 2014 BHF Kleinwort Benson 43

46 Board of Directors Gerd Häusler (1) Chairman of the Board and of the Nomination and Remuneration Committee Leonhard Fischer Director and Chief Executive Officer Background and experience Johannes Fritz Director Mr Häusler has over 35 years international banking and financial markets experience, most recently as CEO of Bayerische Landesbank ( ) and, prior to that, as non-executive Deputy Chairman and Chairman of the Risk Committee of Bayerische Landesbank ( ). Mr Häusler was Counsellor and Director of the International Capital Markets Department of the IMF ( ), responsible for all financial markets-related work. After two years as Vice Chairman and Managing Director at Lazard, he served as a member of the Company s Board from 2008 to 2013 and as Senior Advisor to the Company from 2008 until Mr Häusler was a member of the Board of Managing Directors of Dresdner Bank AG in Frankfurt (1996 to 2000) and Chairman of Dresdner Kleinwort Benson in London (1997 to 2000). During the first 18 years of his career Mr Häusler held various positions at Deutsche Bundesbank, latterly on the Executive Board and the Central Bank Council ( ). He has served as non-executive director at various companies, most recently Munich Re, and has been a member of the Group of Thirty, a think tank on international economic and monetary affairs, since For most of 2014, Mr Häusler served as Chairman and independent member of the Board of Directors of Kleinwort Benson Group Limited. Prior to joining BHF KB Mr Fischer was, from 2003 to 2006, Chief Executive Officer of Winterthur Group, an insurance subsidiary of Credit Suisse, and from 2003 to March 2007 a member of the Executive Board of Credit Suisse Group. Mr Fischer joined Credit Suisse Group from Allianz AG, where he had been a Member of the Management Board and Head of the Corporate and Markets Division since Previously, he had been with Dresdner Bank AG as a member of the Executive Board since 1998 and with JP Morgan in Frankfurt since Mr Fischer also served as a member of the Board of Directors of AXA Konzern AG from January 2007 until May Mr Fischer holds an MA in Finance from the University of Georgia and a Business Management Degree from the University of Bielefeld. Date of appointment Dr Fritz has been Head of the Quandt/Klatten Family Office since 2000 and was previously its Managing Director, responsible for all financial questions and running the day-to-day-business ( ). Previously, he was with KPMG covering financial institutions and industrial companies ( ) and, prior to that, was assistant to the CEO of Bertelsmann. Dr Fritz holds an MBA from Mannheim University and a post-graduate qualification from NYU Stern School of Business. Mr Häusler has been a member of the Board since February Mr Häusler s current appointment will end immediately after the 2017 Annual Shareholders Meeting. Consistent with the terms applied to all the Company s other directors, Mr Häusler may be reappointed. Mr Fischer has been a member of the Board since September Mr Fischer s current appointment will end immediately after the 2017 Annual Shareholders Meeting. Consistent with the terms applied to all the Company s other directors, Mr Fischer may be reappointed. External appointments Dr Fritz has been a member of the Board since February Dr Fritz s current appointment will end immediately after the 2017 Annual Shareholders Meeting. Consistent with the terms applied to all the Company s other directors, Mr Fritz may be reappointed. Mr Häusler currently serves as Chairman of the Supervisory Board and Chairman of the Risk Committee of Bayerische Landesbank and as a member of the Supervisory Board of Munich Re. Mr Fischer has served as a member of the Board of Directors of Glencore plc since April 2011, and was a member of the Board of Directors of Julius Baer Group Ltd from April 2009 to April Dr Fritz currently serves as Head of the Quandt/ Klatten Family Office, Managing Director of Seedamm-Vermögensverwaltungs GmbH, Chairman of the Supervisory Board of Solarwatt GmbH, member of the Supervisory Boards of Avista AG and Drees & Sommer AG, and member of the Board of Directors of Gemalto N.V. Committee membership Mr Häusler is the Chairman of Board of Directors and the Nomination and Remuneration Committee. He is also a member of the Audit, Risk and Compliance Committee. None. Dr Fritz is a member of the Audit, Risk and Compliance Committee. (1) Independent director pursuant to Article 526ter of the Belgian Companies Code. 44 BHF Kleinwort Benson Annual report 2014

47 Overview Strategy and business review Konstantin Graf von Schweinitz (1) Director and Chairman of the Audit, Risk and Compliance Committee Anne van Aaken (1) Director Patrick Lei Zhong Director Background and experience Graf von Schweinitz has over 30 years of investment banking experience, principally in capital markets and risk management. Until March 2007, he spent 19 years within the investment banking divisions of Dresdner Bank and Dresdner Kleinwort Wasserstein. During this time, he worked in various roles including derivatives trading, hedge fund management and as Chief Operating Officer of Dresdner Kleinwort Wasserstein UK, before becoming Chief Risk Officer of Dresdner Kleinwort Wasserstein and Head of Risk Management Investment Banking. He was also the Deputy Chairman of Dresdner Group s Credit Committee and a member of Dresdner Kleinwort Wasserstein s Executive Committee. From 1982 to 1988, he worked at the Chase Manhattan Bank where he headed the European Swap Group. Since 2007, Graf von Schweinitz has been an independent advisor to hedge funds, banks and private equity companies. Graf von Schweinitz holds a BA and MA from Oxford University. Prof van Aaken teaches law and economics at the University of St. Gallen, Switzerland. Prof van Aaken has acted as an expert consultant to the World Bank, the Organisation for Economic Co-operation and Development and the United Nations Conference on Trade and Development. Prof van Aaken holds a PhD in Law from the University of Frankfurt/Oder, a Master in Law from the University of Munich, a Master in Economics from the University of Fribourg, and is admitted to the bar in Germany. From 2011 until 2014, Prof van Aaken served as independent member of the Board of Directors of Kleinwort Benson Group Limited. Mr Zhong has over 18 years experience in international strategic investment and has broad experience working with CEOs, entrepreneurs and government leaders both in China and globally, most recently within the Fosun group. Date of appointment Graf von Schweinitz has been a member of the Board since June Graf von Schweinitz s current appointment will end immediately after the 2017 Annual Shareholders Meeting. Consistent with the terms applied to all the Company s other directors, Graf von Schweinitz may be reappointed. Prof van Aaken has been a member of the Board since February Prof van Aaken s current appointment will end immediately after the 2017 Annual Shareholders Meeting. Consistent with the terms applied to all the Company s other directors, Prof van Aaken may be reappointed. External appointments Mr Zhong has been a member of the Board since February Mr Zhong s current appointment will end immediately after the 2017 Annual Shareholders Meeting. Consistent with the terms applied to all the Company s other directors, Mr Zhong may be reappointed. Graf von Schweinitz is a partner at DII Capital, a London-based financial advisory firm. Since 2007 he has acted as advisor on various risk and investment-related assignments for hedge funds, banks and private equity companies. Prof van Aaken is Professor of Law and Economics, Legal Theory, Public International Law and European Law at the University of St. Gallen, Switzerland. She currently serves as Vice President of the European Society of International Law and member of the Executive Committee of the International Society of Public Law. Committee membership Mr Zhong is Senior Managing Director and Head of Global Investments and Strategies at Shanghai Fosun High Technology (Group) Co. Ltd, President of China Momentum Fund LP, a member of the Supervisory Board of Tom Tailor Holding AG and a member of the Boards of Directors of St. John Knits International Inc. and Raffaele Caruso SpA. Mr Zhong also serves as Chairman of Forbes China and Chairman of Fosun Media. Graf von Schweinitz is the Chairman of the Audit, Risk and Compliance Committee and a member of the Nomination and Remuneration Committee. None. Mr Zhong is a member of the Nomination and Remuneration Committee. (1) Independent director pursuant to Article 526ter of the Belgian Companies Code. Annual report 2014 BHF Kleinwort Benson 45

48 Board committees The following Board Committees assist and advise the Board: the Audit, Risk and Compliance Committee and the Nomination and Remuneration Committee. The Board has adopted formal charters for each of these Committees. Amendments with respect to the composition and tasks of these Committees, as set out in their respective charters, may be made by the Board. Audit, Risk and Compliance Committee The Audit, Risk and Compliance Committee must consist of at least three non-executive directors, a majority of whom must be independent. Directors may be appointed to the Audit, Risk and Compliance Committee for terms of up to four years and may be reappointed, provided that no member of the Audit, Risk and Compliance Committee shall serve for consecutive terms collectively exceeding twelve years. The Audit, Risk and Compliance Committee s role is to assist and advise the Board regarding, among others: (i) the quality and integrity of the Company s financial statements; (ii) the relationship with the Company s statutory auditor; (iii) risk management; (iv) compliance with legal and regulatory requirements; and (v) compliance with internal codes of conduct and other policies. The Audit, Risk and Compliance Committee currently consists of Graf von Schweinitz, Mr Häusler and Dr Fritz. Graf von Schweinitz is the Chairman of the Audit, Risk and Compliance Committee. Given their professional background all members of the Committee were confirmed to possess adequate expertise in the areas of auditing and accounting within the meaning of Article 526bis of the Belgian Companies Code. In addition, a majority of the members of the Committee, including its Chairman, are independent directors within the meaning of Article 526ter of the Belgian Companies Code. During the year ended 31 December 2014, the Audit, Risk and Compliance Committee held eight meetings. The main topics considered by the Committee during the year were: financial statements and reports relating to the years ended 31 December 2013 and 2014; reports from the external and internal auditors; risk management and controls; and compliance with the Belgian Code on Corporate Governance and the Law of 6 April 2010 on Corporate Governance. Committee members attended or were represented at all meetings during the year. Nomination and Remuneration Committee The Nomination and Remuneration Committee must consist of at least three non-executive directors, a majority of whom must be independent. Directors may be appointed to the Nomination and Remuneration Committee for terms of up to four years and may be reappointed, provided that no member of the Nomination and Remuneration Committee shall serve for consecutive terms collectively exceeding twelve years. The Nomination and Remuneration Committee s role is to assist and advise the Board regarding, among others: (i) the size and composition of, and appointment to, the Board; (ii) the size and composition of, and appointment to, the Committees of the Board; (iii) the appointment and evaluation of members of Senior Management and Executive Management; and (iv) the remuneration policy. The Nomination and Remuneration Committee currently consists of Mr Häusler, Graf von Schweinitz and Mr Zhong. Mr Häusler is the Chairman of the Nomination and Remuneration Committee. A majority of the members of the Committee, including its Chairman, are independent directors within the meaning of Article 526ter of the Belgian Companies Code. During the year ended 31 December 2014, the Nomination and Remuneration Committee held six meetings. The main topics considered by the Committee during the year were: the Company s remuneration policy; the Company s corporate governance structure; and the composition of the Board. Committee members attended or were represented at all meetings during the year. Assessment of the Board and Board Committees The Board has adopted a policy to review and assess its own performance and interaction with Executive Management at least every two or three years. In addition, the Board periodically assesses its size and composition. The assessment is conducted at the initiative of the Chairman of the Board (with the assistance of the Nomination and Remuneration Committee and of an external specialist when deemed necessary). During such evaluation process, each director is requested to consider and provide comments on topics such as: the effectiveness of the Board (availability and adequacy of background materials, time available for discussing important issues etc.); qualifications and responsibilities of individual directors (contribution, presence at meetings, outside commitments, understanding of the business and risks, independence of relevant directors etc.); and effectiveness of oversight of, and interaction with, management. Where appropriate, part of such evaluation can be conducted on the basis of a written process, each director being requested to comment and provide a numerical rating on a number of questions included in a written questionnaire. Following review and discussion, the Chairman of the Board may make proposals to enhance the performance or effectiveness of the functioning of the Board. The Audit, Risk and Compliance Committee and the Nomination and Remuneration Committee review at least every two to three years their respective terms of reference and own effectiveness and submit such evaluation, including any recommendations for change, to the Board. The evaluation process for the Committees is similar to the process described above for the Board and is coordinated by the Nomination and Remuneration Committee. 46 BHF Kleinwort Benson Annual report 2014

49 Overview Strategy and business review Executive management Composition of Executive Management The individuals who compose BHF KB s Executive Management are as follows: Name Born Title Leonhard Fischer 1963 Chief Executive Officer Martha Böckenfeld 1965 Chief Financial Officer Rüdiger Schmid- Kühnhöfer 1974 Chief Operating Officer & General Counsel Jean-Marc Roelandt 1965 Belgian Managing Director Chief Executive Officer Mr Leonhard Fischer is the Company s Chief Executive Officer. Mr Fischer is engaged full-time with the Company for an indefinite term. Delegation of authority The Board has delegated to Mr Fischer the powers typically exercised by a Chief Executive Officer. These comprise the general executive authority over the Company s affairs arising in the ordinary course of business. Mr Fischer has authority to cause the Company to enter into any transaction or proceeding in all matters not exceeding 25 million, including, without limitation: to initiate or defend legal proceedings; incur or grant any form of financing; grant any form of collateral; effect any renting or leasing transaction; enter into any services (including consultancy) agreement (as provider or recipient), and/or; effect any investment or divestment (including treasury or hedging) transaction. Notwithstanding anything to the contrary, Mr Fischer has authority to cause the Company to effect any treasury or hedging transaction exceeding 25 million where so permitted under the Company s Treasury Management Policy and subject to the terms and limitations thereof. Mr Fischer has authority to cause the Company to hire, dismiss and determine the terms of employment or separation of any employee of the Company (including any member of senior management except for the Chief Executive Officer, Chief Financial Officer, General Counsel and Belgian Managing Director). Mr Fischer does not have authority over any matters that are reserved for the Board of Directors or the Shareholders Meeting pursuant to law or the Company s Articles of Association. Mr Fischer has authority to represent the Company in dealings with third parties and in legal proceedings within the scope of the powers described above. Mr Fischer is authorised to sub-delegate, under his own responsibility, one or more specific powers falling within the scope of the powers described above, to employees of the Company or any other person of his choice. However, he may not sub-delegate to anybody as a whole the powers described above. At any time the Board has the power to withdraw or modify the authority it has delegated or terminate the agreement with the Chief Executive Officer with or without cause. While the Chief Executive Officer is supported by the other members of Executive Management for the fulfilment of his duties, the Chief Executive Officer retains sole decisionmaking power. The Chief Executive Officer and the other members of Executive Management do not constitute (nor exercise their functions through) any formal or informal management committee. Annual report 2014 BHF Kleinwort Benson 47

50 Remuneration report In 2014, the Company completed the acquisition of BHF- BANK and converted the co-investors stake in KBG into BHF KB shares allowing for the further simplification of the legal structure of the group with a view to achieving a single-tier ownership structure for the Group s assets. During 2014, Group AuM increased by 9.4% or 4.7 billion 1 to 54.2 billion (2013: 49.6 billion). The Group realised 17 million of recurring cost savings demonstrating significant progress towards the more than 20 million cost saving target identified at the time of the acquisition of BHF-BANK. Furthermore, pro-forma 2 operating income increased from 330 million in 2013 to million in As a result, the Group reported a pro-forma operating loss reduced to 42.7 million (2013: 62.4 million) which represents an improvement of 19.7 million in 2014 and which reflects the significant operating progress across all business units: BHF-BANK reported an adjusted operating profit of 2.2 million in 2014 (2013: loss of 2.5 million) and a profit before tax of 12.2 million. AuM increased by 5% to 40.4 billion in 2014 (2013: 38.5 billion); Kleinwort Benson 3 reported an adjusted operating loss reduced by 58%, from 11.4 million in 2013 to 4.9 million in 2014, and; excluding non-recurring expenses for both periods, operating expenses included Group costs of 23.4 million in 2014 (2013: 27.5 million). The reduction of Group costs by 15% in 2014 resulted from ongoing efforts to reduce headcount and property costs. The progress made over the year is reflected in a share price increase of 24.9 % in 2014 compared to an evolution of the Eurostoxx Banks index of -3.4% in In accordance with the requirements of the Law of 6 April 2010 on Corporate Governance, awards of variable remuneration to Executive Management are subject to satisfaction of predetermined award criteria; half of variable remuneration awarded to Executive Management is deferred, and; effective earning of such deferred variable remuneration is conditional upon fulfilment of predetermined and objectively measurable entitlement criteria (see the section titled Variable remuneration on page 49). In addition, effectively earned deferred variable remuneration remains subject to clawback rights in favour of the Company (see the section titled Claw-backs applicable to Deferred Variable Remuneration on page 51). 1 Opening AuM of KBI restated to exclude a 1.4 billion fixed term advisory man-date from KBI s former parent KBC Asset Management NV. 2 Pro-forma results include the results of BHF-BANK for the year ended 31 December Statutory results include the results of BHF-BANK since acquisition. 3 Kleinwort Benson is the aggregation of Kleinwort Benson Bank, Kleinwort Benson Channel Islands and Kleinwort Benson Investors. Remuneration granted to the Company s non-executive directors for their services as directors of the Company decreased by 29% in 2014 to 0.62 million (compared to 0.88 million for the year ended 31 December 2013). Remuneration granted to the Company s Chief Executive Officer in 2014 amounted to 2.97 million (compared to 2.33 million for the year ended 31 December 2013). Remuneration granted to the other members of Executive Management in 2014 amounted to 4.11 million (compared to 3.13 million for the year ended 31 December 2013). This remuneration report contains information related to the following topics: (i) the procedure applied by the Company for establishing a remuneration policy; (ii) the Company s remuneration policy; (iii) the remuneration of the Company s non-executive directors, and; (iv) the remuneration of Executive Management. Procedure for establishing a remuneration policy In line with best practice, the Nomination and Remuneration Committee periodically assesses the remuneration policy for directors, including the Chairman of the Board, and its implementation. Any modification to the remuneration of directors proposed by the Nomination and Remuneration Committee is subject to approval by the Board and is subsequently submitted to the Annual Shareholders Meeting for approval. The Nomination and Remuneration Committee also oversees the Company s remuneration policy including for Executive Management and makes recommendations to the Board regarding the selection and remuneration of Executive Management. In line with best practice, the Nomination and Remuneration Committee periodically reviews the remuneration policy for Executive Management and its implementation, retains the services of internationally recognised remuneration consultants, and applies a benchmarking approach against international financial institutions with a similar strategic remit and executive management composition with which the Company competes for talent. Any modification to the remuneration of Executive Management proposed by the Nomination and Remuneration Committee is subject to approval by the Board. Remuneration policy Objective and key principles The objective of BHF KB s remuneration policy is to provide a framework for remuneration in such a form and amount as to continue to attract, motivate and retain top talent to (i) determine, implement and execute the business strategy and (ii) drive strong long-term business performance. Consistent with this objective, the Company applies a total remuneration approach, which includes a significant element of deferred variable remuneration. Total remuneration is sub-divided into two principal components: fixed remuneration (comprising base remuneration and benefits) and variable remuneration. The individual mix varies and depends, in particular, on the employee s role, seniority, business and location. 48 BHF Kleinwort Benson Annual report 2014

51 Overview Strategy and business review The key principles of the Company s remuneration policy are: (a) linking rewards to sustainable performance: rewards are determined by business performance, with appropriate account taken of risk factors associated with the Company s business; and (b) alignment with shareholders interests: Part of the employees variable remuneration may take the form of equity or equity-based instruments, thereby aligning the interests of the employees with those of the Company s shareholders. Directors The Company s remuneration policy for non-executive directors is designed to attract, motivate and retain individuals who have the profile determined by the Board, taking into account the responsibilities and time commitment associated with the function. The remuneration of non-executive directors for their services as directors consists of fixed fees. It currently does not make directors eligible for any variable remuneration linked to results or other performance related criteria, nor does it grant rights to stock options, pension plans or other benefits. Considering their supplementary duties and liabilities, directors who are also members of a Board Committee are entitled to additional fixed remuneration (for details see the section titled Remuneration of Non-Executive Directors in the year ended 31 December 2014 on page 53). Executive Management The Company s remuneration policy for Executive Management is designed to attract, motivate and retain individuals who have the profile determined by the Board. Previously, the selection and remuneration of Executive Management took into account the experience and expertise needed to successfully execute the Company s transformation from an industrial holding company to a financial services group. Following the completion of this transformation, the key criteria used for selection and remuneration are increasingly moving towards operational expertise in the financial services sector. In its assessment of targeted candidates for executive management positions at the Company, the Board applies requirement standards that are consistent with those used by leading international financial institutions. In addition to the objective and key principles of the Company s remuneration policy outlined above, the Board, acting upon recommendation of the Nomination and Remuneration Committee, has designed and applied remuneration principles for Executive Management (i.e. the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer & General Counsel and the Belgian Managing Director) that are in accordance with the requirements of the Law of 6 April 2010 on Corporate Governance. These are summarised below. Base remuneration Base remuneration recognises the duties and responsibilities assumed by Executive Management within the organisation, having due consideration to each member s role and level of experience. Variable remuneration Variable remuneration rewards Executive Management for the Company s performance and business development, with individual awards reflecting each member s individual contribution under these criteria. Determination of variable remuneration (the Award Criteria) The following criteria are applied by the Board, acting upon recommendation of the Nomination and Remuneration Committee, to determine the award and amount of any variable remuneration (collectively, the Award Criteria ): (a) overall annual financial performance of the Company relevant for the assessment is the evolution of the Company s year-end financial statements, including the evolution of profitability, holding costs and key metrics relevant for financial services businesses (e.g. capital and liquidity); (b) achievement of the Company s objectives relevant for the assessment is the development of the Group s financial services activities. This takes into account the occurrence of operational events (e.g. integration, synergies or development of new client services/ business activities) and transactional events (e.g. M&A and corporate reorganisations); and (c) individual recipient s contribution to the Company s development relevant for the assessment is, in particular, the individual s contribution to the design and implementation of the Group s strategy and relevant events in this respect. Having regard to the key remuneration principles and assessing the fulfilment by Executive Management of the Award Criteria outlined above, the Nomination and Remuneration Committee makes recommendations to the Board to support it in its determination of an overall bonus pool and the amount of variable remuneration, if any, which should be awarded to individual members of Executive Management. Cap on variable remuneration The pool eligible for award to Executive Management as variable remuneration for the year ended 31 December 2014 was capped at 300% of Executive Management s base remuneration, and at 200% for the year ending 31 December Deferral of variable remuneration In accordance with the requirements of the Law of 6 April 2010 on Corporate Governance, the Company operates a deferred bonus plan pursuant to which: (a) up to 50% of Executive Management s variable remuneration is earned by and paid out to the individual recipient upon determination of the variable remuneration using the Award Criteria (the Non- Deferred Variable Remuneration ); (b) the remaining 50% or more of Executive Management s variable remuneration (the Deferred Variable Remuneration ) is deferred as follows: Annual report 2014 BHF Kleinwort Benson 49

52 Remuneration report (i) half of the Deferred Variable Remuneration can be earned two years after the beginning of the year for which the Deferred Variable Remuneration is granted (in the case of equity-based awards, this also remains subject to applicable vesting periods, i.e. three years from grant date), if the relevant predetermined and objectively measurable entitlement criteria (the Entitlement Criteria ) are met; and (ii) the other half of the Deferred Variable Remuneration can be earned three years after the beginning of the year for which the Deferred Variable Remuneration is granted (in the case of equitybased awards, this also remains subject to applicable vesting periods, i.e. three years from grant date), if the Entitlement Criteria are met. Entitlement Criteria are established by the Board at the beginning of the year for which the variable remuneration is granted, based on recommendations provided by the Nomination and Remuneration Committee. Balance between cash and equity-based awards Non-Deferred Variable Remuneration generally takes the form of cash awards, which can be paid out upon determination that the Award Criteria have been met. Deferred Variable Remuneration may, at the Company s discretion, consist of: (a) Equity-based awards in the form of restricted stock units ( RSUs ), which can be earned at the end of the relevant deferral period if the Entitlement Criteria are met. If earned, the equity-based component is paid out after the expiration of the applicable RSU vesting period; and/or (b) Cash awards, which can be earned and paid out at the end of the relevant deferral period, if the Entitlement Criteria are met. With effect from the year ended 31 December 2011, the Company has implemented the Law of 6 April 2010 on Corporate Governance. In the intervening period 100% of Deferred Variable Remuneration has taken the form of equity-based (RSU) awards. For a description of the Company s equity-based incentive plan, see the section titled Restricted stock units on page 52. Entitlement Criteria In the period since the Company implemented the Law of 6 April 2010 on Corporate Governance, the Board has established Entitlement Criteria, based on recommendations provided by the Nomination and Remuneration Committee. These Entitlement Criteria, which are set at the beginning of the year for which the variable remuneration is granted, have evolved over time reflecting the respective status of completion of the Company s strategy to transform itself from an industrial holding company to a financial services group as well as the concurrent development of its financial services activities. Furthermore, the Board has determined to use multiple Entitlement Criteria to provide a more complete picture of the Company s performance. (a) Year ending 31 December 2015 The completion of the Company s transformation to a financial services group is reflected in the Entitlement Criteria for the year ending 31 December 2015 which relate to: (i) the evolution of the operating profit of the Group and; (ii) adherence to the consolidated regulatory capital requirements applicable to the Group. As regards the Entitlement Criterion related to the operating profit of the Group which determine the earning of 50% of the Deferred Variable Remuneration that may be granted in 2015, the Company has adopted stretch targets that incentivise executive management to strive for demanding results. As regards the Entitlement Criterion related to the consolidated regulatory capital requirements which determine the earning of 50% of the Deferred Variable Remuneration that may be granted in 2015, the target is aligned with the consolidated regulatory capital requirements applicable to the Group. The Company does not disclose specific targets for the Entitlement Criteria related to the operating KPIs of relevant business entities as such disclosure would compromise the confidentiality of the Company s business objectives. (b) Year ended 31 December 2014 The Entitlement Criteria for the year ended 31 December 2014 relate to: (i) the performance of the Company s share price measured against the EuroSTOXX Banks index; (ii) the evolution of the aggregate fixed operating holding costs of the Company and its management subsidiaries as resulting from the consolidated income statement for the Company and the relevant management subsidiaries, and; (iii) operating KPIs (capital, liquidity and operating profit) of relevant business entities. As regards the Entitlement Criterion related to the performance of the Company s share price which determines the earning of 25% of the Deferred Variable Remuneration granted for services performed during the year, the Company has chosen the EuroSTOXX Banks index to measure the Company s relative performance in light of the Company s completed transformation from an industrial holding company to a European financial services group. As regards the Entitlement Criterion related to the aggregate fixed operating holding costs which determines the earning of 25% of the Deferred Variable Remuneration granted for services performed during the year, the target is aligned with the publicly disclosed target of less than 10 million, excluding costs related to variable remuneration and certain non-recurring items, for each of the years ending 31 December 2014, 2015 and As regards the Entitlement Criteria related to the operating KPIs of relevant business entities which determine the earning of 50% of the Deferred Variable Remuneration granted for services performed during the year, the Company has adopted stretch targets 50 BHF Kleinwort Benson Annual report 2014

53 Overview Strategy and business review that incentivise executive management to strive for demanding results. The Company does not disclose specific targets for the Entitlement Criteria related to the operating KPIs of relevant business entities as such disclosure would compromise the confidentiality of the Company s business objectives. (c) Year ended 31 December 2013 The Entitlement Criteria for the year ended 31 December 2013 relate to: (i) the evolution of the Company s share price; (ii) the evolution of the aggregate fixed operating holding costs of the Company and its management subsidiaries, and; (iii) operating KPIs (capital, liquidity and operating profit) of relevant business entities. Entitlement Criteria (i), (ii) and (iii) determine 50%, 12.5% and 37.5% respectively of the earning of the Deferred Variable Remuneration granted for services performed during the year. The Company does not disclose specific targets for the Entitlement Criteria related to the share price and operating KPIs of relevant business entities as such disclosure would compromise the confidentiality of the Company s business objectives. The target linked to the cost-based Entitlement Criterion is aligned with the publicly disclosed target, i.e. for aggregate fixed operating holding costs excluding costs related to variable remuneration and certain non-recurring items to be reduced to less than 15 million for each of the years ending 31 December 2013, 2014 and (d) Year ended 31 December 2012 The Entitlement Criteria for the year ended 31 December 2012 relate to: (i) the evolution of the Company s share price, and; (ii) the development of a programme to reduce the aggregate fixed operating holding costs of the Company and its management subsidiaries, as well as the subsequent success in reducing these costs. Each Entitlement Criterion determines the earning of 50% of the Deferred Variable Remuneration granted for services performed during the year. The Company does not disclose specific targets for the share price-based Entitlement Criterion as such disclosure would compromise the confidentiality of the Company s business objectives. The target linked to the cost-based Entitlement Criterion is aligned with the publicly disclosed target, i.e. for aggregate fixed operating holding costs excluding costs related to variable remuneration and certain non-recurring items to be reduced to less than 15 million for each of the years ending 31 December 2013 and Earning/forfeiture of Deferred Variable Remuneration upon fulfilment of/failure to meet the Entitlement Criteria Upon expiry of each relevant deferral period, the Company assesses whether the Entitlement Criteria have been fulfilled (e.g. for the Deferred Variable Remuneration granted for services performed during the year ended 31 December 2015, the Company assesses whether the evolution of the Company s share price measured against the EuroSTOXX Banks index, the consolidated regulatory capital amounts and the evolution of the operating profit of the Group meet the relevant targets with respect to the relevant deferral period) and determines whether (part of) the Deferred Variable Remuneration is effectively earned/forfeited by Executive Management. Such assessment is made by the Board upon recommendation of the Nomination and Remuneration Committee. For information on effectively earned/forfeited Deferred Variable Remuneration, see the section titled RSUs awarded, vested, forfeited and outstanding on page 56. Claw-backs applicable to Deferred Variable Remuneration Deferred Variable Remuneration awarded (upon fulfilment of the applicable Award Criteria) in the form of RSUs and effectively earned (upon fulfilment of the applicable Entitlement Criteria) but not yet vested remains subject to certain claw-back rights in favour of the Company. The Board may, with respect to any unvested RSUs, reduce, cancel or terminate any award when, as a minimum: (a) There is reasonable evidence of misbehaviour or material error by the award recipient; (b) The Company s or one of its (direct or indirect) subsidiary s financial statements are materially restated, corrected or amended (provided that if relating to the financial statements of a (direct or indirect) subsidiary, such restatement, correction or amendment materially impacts the Company s financial statements); (c) The Company or the relevant business unit suffers a material failure of risk management; or (d) The Company is compelled to do so under express requirements from the regulator of the Company or one of its (direct or indirect) subsidiaries. Overview of Entitlement Criteria and timetable for assessment of earning/forfeiture and vesting of Deferred Variable Remuneration in relation to the year ending 31 December 2015 as well as the years ended 31 December 2014, 2013 and 2012 The Entitlement Criteria and timetable applicable to the assessment of earning/forfeiture and the vesting of Deferred Variable Remuneration for the ongoing year ending 31 December 2015 as well as the years ended 31 December 2014, 2013 and 2012 are summarised in the table overleaf. Annual report 2014 BHF Kleinwort Benson 51

54 Remuneration report Year for which Deferred Variable Remuneration ( DVR ) is granted Entitlement Criteria determining earning/forfeiture (weight) Year ending Group operating profit 31 December 2015 (1) (50%) Adherence to consolidated regulatory capital requirements (50%) Year ended 31 December 2014 Year ended 31 December 2013 Year ended 31 December 2012 Company s share price (25%) Aggregate fixed operating holding costs (25%) Operating KPIs (capital, liquidity and operating profit) (50%) Company s share price (50%) Aggregate fixed operating holding costs (12.5%) Operating KPIs (capital, liquidity and operating profit) (37.5%) Company s share price (50%) Aggregate fixed operating holding costs (50%) Timetable for assessment by Board of earning/forfeiture of 1st 50% of DVR Timetable for vesting of earned 1st 50% of DVR (subject to claw-back) Timetable for assessment by Board of earning/forfeiture of 2nd 50% of DVR Timetable for vesting of earned 2nd 50% of DVR (subject to claw-back) March 2017 December 2018 March 2018 December 2018 April 2016 December 2017 April 2017 December 2017 April 2015 December 2016 April 2016 December 2016 April 2014 December 2015 April 2015 December 2015 (1) Provided that the Award Criteria have been met (see the section titled Determination of variable remuneration on page 49), Deferred Variable Remuneration may be awarded to Executive Management for services performed during Restricted stock units On 18 September 2007 the Board approved a long-term equity-based incentive plan (the Incentive Plan ). The purpose of the Incentive Plan is to serve the Company s interests and its affiliates by attracting, motivating and retaining qualified employees, consultants and independent contractors, while also aligning their interests with the interests of the Company s shareholders and reinforcing the creation of long-term value. While the Belgian Code on Corporate Governance recommends that such equity-based incentive plan be submitted to the shareholders for approval, information on the equity-based remuneration granted to Executive Management is (along with other remuneration granted to them) disclosed in the Remuneration Report. The Company believes that such disclosure provides sufficient information for shareholders (who, under the Law of 6 April 2010 on Corporate Governance, vote on the Remuneration Report at the Annual Shareholders Meeting) to assess whether the level and structure of Executive Management remuneration is such that qualified professionals can be attracted, motivated and retained, taking into account the international nature of the Group s business and the competitive environment in which it operates. The Company further believes that the process whereby the determination of Executive Management s remuneration requires the approval of the Board, upon recommendation of the Nomination and Remuneration Committee, is designed to ensure that such remuneration is fair and equitable. Awards under the Incentive Plan are made in the form of RSUs, which vest at such times, in such manner and subject to such terms and conditions as determined under the relevant award agreement. As mentioned above (see the section titled Deferral of variable remuneration on page 49), the vesting of RSUs awarded to Executive Management as Deferred Variable Remuneration is subject to the fulfilment of relevant Entitlement Criteria and the expiration of a three-year vesting period. For each RSU which vests, the award recipient receives one Company share or, at the option of the Company and subject to the award recipient s consent, a cash amount equal to the fair market value of such share as of the vesting date. The award recipient may also request, subject to the Company s consent, that a portion of the RSUs vests in cash in order to satisfy any tax liabilities that may become due upon or after such vesting. With a view to maintaining the economic substance of the RSU awards, the Incentive Plan contains a capital decrease distribution protection feature. Upon vesting of any RSU, this protection feature ensures that the award recipient is paid a cash amount equal to all capital decrease distributions paid on the Company share between the award date and vesting of the RSU. The Board may also, at its discretion, adjust RSU awards in the event of distributions other than a capital decrease or under certain other circumstances. 52 BHF Kleinwort Benson Annual report 2014

55 Overview Strategy and business review The Incentive Plan contains claw-back rights in favour of the Company. The claw-back rights entitle the Board to reduce, cancel or terminate any award in respect of any unvested RSUs, when, as a minimum: (a) there is reasonable evidence of misbehaviour or material error by the award recipient; (b) the Company s or one of its (direct or indirect) subsidiary s financial statements are materially restated, corrected or amended (provided that, when this relates to a (direct or indirect) subsidiary s financial statements, it materially impacts the Company s financial statements); or (c) the Company or the relevant business unit suffers a material failure of risk management. (d) the Company is compelled to do so under express requirements from the regulator of the Company or one of its (direct or indirect) subsidiaries. In the period since the year ended 31 December 2011, when the Company implemented the Law of 6 April 2010 on Corporate Governance, 100% of Deferred Variable Remuneration granted has taken the form of RSU awards under the Incentive Plan. As a result, Deferred Variable Remuneration granted in the form of RSUs is subject to the above listed claw-back provisions as well as to the mechanism under which Deferred Variable Remuneration granted in any form (including RSU awards) is forfeited if the applicable Entitlement Criteria are not met. Finally, the Incentive Plan does not provide for an automatic acceleration of unvested RSUs in the event of a change of control in the Company. Other elements of remuneration Members of Executive Management are typically entitled to participate in a company-sponsored defined contribution pension plan as well as other customary fringe benefits (including insurance and allowances) (see the section titled Benefits on page 56). Changes to remuneration policy No substantive changes were made to the remuneration policy during the year ended 31 December During the year, certain technical adjustments were made to the Incentive Plan. A claw-back provision in the event of a material downturn was deleted and a claw-back provision granting the Board the authority to claw-back awards where the Company is compelled to do so under express requirements from the regulator of the Company or one of its (direct or indirect) subsidiaries was included. Remuneration policy going forward The procedure for establishing, the objectives pursued by, and the principles of, the Company s remuneration policy are expected to remain generally constant for the next two years. In contrast, the Award Criteria, which in combination with the principles of the Company s remuneration policy are used to determine Executive Management s variable remuneration, may be adapted from time to time by the Board upon recommendation of the Nomination and Remuneration Committee. Remuneration of Non-Executive Directors in the year ended 31 December 2014 In the year ended 31 December 2014 total remuneration granted to the Company s non-executive directors for their services as directors of the Company decreased by 29% in 2014 to 0.62 million (compared to 0.88 million for the year ended 31 December 2013). The annual retainer for each non-executive director other than the Chairman of the Board amounts to 75,000. The annual retainer for the Chairman of the Board amounts to 150,000. In addition, the annual retainer for the Chairman of the Audit, Risk and Compliance Committee amounts to 45,000, while the annual retainer paid to each of the other members of this Committee amounts to 30,000. The annual retainer paid to the Chairman of the Nomination and Remuneration Committee amounts to 30,000, while the annual retainer paid to each of the other members of this Committee amounts to 20,000. As a result, the remuneration of non-executive directors for their services as directors and Board Committee members of the Company during the years ended 31 December 2014 and 2013 was as follows: (In EUR) (as of 31 December) D. Ronald Daniel (1) 47, ,667 Timothy C. Collins (2) 25,562 75,000 Mathias Döpfner (3) 95,000 95,000 Peter Foy (3) 125, ,000 Gerd Häusler (4) N/A 37,500 Jun Makihara (5) 48, ,000 Lucio A. Noto (3) 112, ,000 Konstantin von Schweinitz (6) 167, ,000 Total 621, ,167 (1) Ceased to be a member of the Board on 17 June Includes for 2013 payment in arrears of 36,667 for services as Chairman of the Nomination and Remuneration Committee during (2) Ceased to be a member of the Board on 3 May (3) Ceased to be a member of the Board on 24 February (4) A member of the Board between 1 January 2013 and 30 June 2013, Mr Häusler was reappointed to the Board on 24 February (5) Ceased to be a member of the Board on 17 June (6) In addition to his remuneration for his services as non-executive director of the Company, Graf von Schweinitz received, for his services as nonexecutive director, chair of the audit committee and member of the risk committee of Kleinwort Benson Group Limited as well as for his services as non-executive director of Kleinwort Benson Bank Limited, a remuneration of GBP 100,250 during 2014 and GBP 115,000 during Annual report 2014 BHF Kleinwort Benson 53

56 Remuneration report Remuneration of Executive Management in the year ended 31 December In 2014, the Company completed the acquisition of BHF-BANK and converted the co-investors stake in KBG into BHF KB shares allowing for the further simplification of the legal structure of the Group with a view to achieving a single-tier ownership structure for the Group s assets. During 2014, Group AuM increased by 9.4% or 4.7 billion to 54.2 billion 2 (2013: 49.6 billion). The Group realised 17 million of recurring cost savings demonstrating significant progress towards the more than 20 million cost saving target identified at the time of the acquisition of BHF-BANK. Furthermore, pro-forma operating income increased from 330 million in 2013 to million in As a result, the Group reported a pro-forma 3 operating loss reduced to 42.7 million (2013: 62.4 million) which represents an improvement of 19.7 million in 2014 and which reflects the significant operating progress across all business units: BHF-BANK reported an adjusted operating profit of 2.2 million in 2014 (2013: loss of 2.5 million) and a profit before tax of 12.2 million. AuM increased by 5% to 40.4 billion in 2014 (2013: 38.5 billion); Kleinwort Benson 12 reported an adjusted operating loss reduced by 58%, from 11.4 million in 2013 to 4.9 million in 2014, and; excluding non-recurring expenses for both periods, operating expenses included Group costs of 23.4 million in 2014 (2013: 27.5 million). The reduction of the Group costs by 15% in 2014 resulted from ongoing efforts to reduce headcount and property costs. The progress made over the year is reflected in a share price increase of 24.9 % in 2014 compared to an evolution of the Eurostoxx Banks index of -3.4% in In 2014, remuneration granted to Executive Management reflected the progress that had been made in respect of the Company s strategic objectives, while also taking into account the overall financial performance of the Company. Remuneration granted to Executive Management for the year ended 31 December 2014 amounted to 7.08 million (compared to 5.46 million for the year ended 31 December 2013). Total remuneration granted to the Chief Executive Officer amounted to 2.97 million (compared to 2.33 million for the year ended 31 December 2013). Remuneration granted to the other members of Executive Management amounted to 4.11 million (compared to 3.13 million for the year ended 31 December 2013). The breakdown of the total remuneration received by the Chief Executive Officer and the other members of Executive Management as a group in the years ended 31 December 2014 and 2013 is given in the table below: Other members of Chief Executive Officer Executive Management (In million EUR) (as of 31 December) Base remuneration Cash variable remuneration (1) Equity-based (RSU) variable remuneration (2)(3)(4) Benefits Total remuneration (1) Non-deferred variable remuneration (see the section titled Deferral of Variable Remuneration on page 49). (2) Deferred Variable Remuneration, the earning of which is subject to fulfilment of Entitlement Criteria as applicable (see the section titled Deferral of Variable Remuneration on page 49). (3) Fair value of the RSUs awarded in 2014 and 2013 (excluding the fair value of the RSUs granted in 2012 and 2011 which were forfeited in 2014 and 2013 as a consequence of the Entitlement Criterion relating to the evolution of the Company s share price not being met in the relevant deferral periods, each forfeiture representing 25% of the Deferred Variable Remuneration granted for services performed during 2012 and 2011). (4) For 2014, the RSUs awarded to the CEO had a fair value at grant date of 0.74 million (compared to a share value at grant date, of 0.9 million) and the RSUs awarded to the other members of executive management had a fair value of 1.14 million (compared to a share value, at grant date, of 1.4 million). For 2013, the RSUs awarded to the CEO had a fair value at grant date of 0.32 million (compared to a share value at grant date of 0.59 million) and the RSUs awarded to the other members of executive management had a fair value of 0.52 million (compared to a share value, at grant date, of 0.95 million). More detailed information regarding the remuneration, benefits, termination and certain other terms for the Chief Executive Officer and the other members of Executive Management is given in the following paragraph: 1 For the principles underlying the selection and remuneration of Executive Management, see the section titled Remuneration Policy on page Opening AuM of KBI restated to exclude a 1.4 billion fixed term advisory mandate from KBI s former parent KBC Asset Management NV. 3 Pro-forma results include the results of BHF-BANK for the year ended 31 December Statutory results include the results of BHF-BANK since acquisition. 4 Kleinwort Benson is the aggregation of Kleinwort Benson Bank, Kleinwort Benson Channel Islands and Kleinwort Benson Investors. 54 BHF Kleinwort Benson Annual report 2014

57 Overview Strategy and business review Base remuneration The Board applies the remuneration policy in a way that results in the Company not incurring any mid to long-term liability towards the Chief Executive Officer or the other Members of Executive Management (limitation of notice periods to six months and absence of pension scheme contributions or other commitments that extend beyond the term of employment at the Company). Under this approach, the Chief Executive Officer and other members of Executive Management are remunerated with a competitive base remuneration, while the Company s exposure to benefits and severance claims is limited. Executive Management s benefits are restricted to a contribution by the Company into a defined contribution pension scheme and customary fringe benefits (see the section titled Benefits on page 56), both of which would cease upon termination of employment. In light of the Board s desire to establish in case of a separation a predetermined capped contractual framework for executive severance based on fixed remuneration (i.e. base remuneration and benefits) and excluding variable remuneration, the terms of employment of the Chief Executive Officer and the other Members of Executive Management provide for severance that is limited to nine months of fixed remuneration, excluding variable remuneration. Chief Executive Officer Consistent with the approach adopted by the Company, the remuneration for the Company s Chief Executive Officer is viewed on a total remuneration basis. The base remuneration granted to Mr Fischer during the year ended 31 December 2014 was unchanged from the prior year at 1.5 million. Other members of Executive Management Remuneration for the Company s Executive Management is viewed on a total remuneration basis. The aggregate base remuneration granted to the other members of Executive Management during the year ended 31 December 2014 was also unchanged from the prior year at 1.7 million. Variable remuneration The awards to Executive Management as variable remuneration for services performed during the year ended 31 December 2014 reflect financial, strategic and operational progress made at the Company in Within the framework of the Company s key remuneration principles (linking rewards to sustainable performance and ensuring alignment with shareholders interest), the awards were determined having regard to the following Award Criteria: (a) the improved overall financial performance of the Company, in particular, further progress made in reducing holding company costs and the improved pro-forma consolidated operating result of BHFKB reflecting the aforementioned underlying enhanced performance of Kleinwort Benson and BHF-BANK; (b) the achievement of the Company s strategic objectives, in particular, through the successful completion of the closing of the BHF-BANK acquisition (using Kleinwort Benson Group as the acquisition and co-investment vehicle) which was followed by the conversion of the co-investors Kleinwort Benson Group shareholding into BHF KB shares only six months after the co-investors first subscribed for shares in Kleinwort Benson Group, allowing for the further simplification of the legal structure of the group with a view to achieving a single-tier ownership structure for the Group s assets, and; (c) the individual contribution of the members of Executive Management to the Company s development. As highlighted above (see the section titled Variable remuneration on page 49), the vesting of RSUs awarded to Executive Management as Deferred Variable Remuneration is subject to the fulfilment of applicable Entitlement Criteria and the expiration of a three-year vesting period. For information on effectively vested/forfeited Deferred Variable Remuneration, see the next section titled RSUs awarded, vested, forfeited and outstanding. Chief Executive Officer During the year ended 31 December 2014 and for services performed during that year, Mr Fischer received 0.9 million of Non-Deferred Variable Remuneration in the form of cash and was awarded 230,356 RSUs as Deferred Variable Remuneration under the Company s Incentive Plan (see the section titled Restricted stock units on page 52). The RSUs awarded had a fair value at grant date of 0.74 million (compared to a share value at grant date of 0.9 million) 1. Other members of Executive Management During the year ended 31 December 2013 and for services performed during that year, the other members of Executive Management collectively received 1.4 million of Non- Deferred Variable Remuneration in the form of cash and were awarded 358,332 RSUs as Deferred Variable Remuneration under the Company s Incentive Plan (see the section titled Restricted stock units on page 52). At the date of grant the RSUs had a fair value of 1.14 million (compared to a share value, at grant date, of 1.4 million) 1. 1 As presented in note 34 to the consolidated financial statements ( Related Parties ) on page 122, the discount of fair value to share value reflects, inter alia, the fact that earning of Deferred Variable Remuneration is subject to fulfilment of Performance Criteria as applicable (see the section titled Variable Remuneration on page 49). Annual report 2014 BHF Kleinwort Benson 55

58 Remuneration report RSUs awarded, vested, forfeited and outstanding The following table sets forth, for each member of Executive Management, information regarding: (i) the number of RSUs granted; (ii) the number of previously granted RSUs which vested; (iii) the number of previously granted RSUs which were forfeited, and; (iv) the aggregate number of outstanding RSUs for the years ended 31 December 2014 and Awarded (1) Vested (2) Forfeited (3) Outstanding (4) RSUs (in units) As of 31 December Leonhard Fischer 230, , ,981 87, ,164 91, , ,099 Martha Boeckenfeld 159, , ,579 43,554 91,625 81, , ,570 Rüdiger Schmid-Kühnhöfer 102,381 79,625 97,791 19,955 57,428 38, , ,231 Jean-Marc Roelandt 95,982 50,671 64,060 43,876 36,545 25, , ,796 Total 588, , , , , ,866 1,434,211 (5) 1,789,696 (6) (1) RSUs granted during 2014 or 2013 as Deferred Variable Remuneration for services performed in those years. (2) RSUs vested during 2014 or (3) RSUs granted during 2013, 2012 and 2011 as Deferred Variable Remuneration for services performed in these years which were forfeited in 2014 (25% of the 2013 Deferred Variable Remuneration and 25% of the 2012 Deferred Variable Remuneration) and 2013 (25% of the 2011 Deferred Variable Remuneration) as the Entitlement Criterion relating to the evolution of the Company s share price was not met in the relevant deferral periods. (4) Aggregate awarded, unvested RSUs. (5) The earning of all RSUs that were outstanding as of 31 December 2014 is subject to fulfilment of applicable Entitlement Criteria. (6) With the exception of 2,533 RSUs, the earning of all RSUs that were outstanding as of 31 December 2013 is subject to fulfilment of applicable Entitlement Criteria. Benefits Chief Executive Officer Mr Fischer is entitled to participate in a defined contribution pension scheme. In line with the Board s approach to limit the Company s exposure to mid to long-term liabilities, this entitlement would cease upon termination of Mr Fischer s employment at the Company. In 2014, the Company paid contributions of 0.1 million to such a plan on behalf of Mr Fischer. Other members of Executive Management The other members of Executive Management are also generally entitled to participate in a defined contribution pension plan. In line with the Board s approach to limit the Company s exposure to mid to long-term liabilities, this entitlement would cease upon termination of the individual member of Executive Management s employment at the Company. In 2014, the Company contributed 0.23 million in aggregate to such plans on behalf of the other members of Executive Management. During the year ended 31 December 2014, the other members of Executive Management also received other customary fringe benefits (including insurance and allowances) for an aggregate amount of 0.03 million. Weighting of remuneration components The relative weighting of each component of remuneration paid to Executive Management for services performed in 2014 was as follows: Chief Executive Officer Base remuneration: 51% Variable remuneration: 46% Benefits: 3% Other members of Executive Management as a group Base remuneration: 42% Variable remuneration: 52% Benefits: 6% 56 BHF Kleinwort Benson Annual report 2014

59 Overview Strategy and business review Termination and certain other terms Chief Executive Officer Mr Fischer s terms of employment provide for customary non-compete, non-solicitation and no hire restrictions. In light of the Board s desire to establish in case of a separation a predetermined capped contractual framework for executive severance based on fixed remuneration (i.e. base remuneration and benefits) and excluding variable remuneration, the Chief Executive Officer s terms of employment include severance that is limited to nine months of fixed remuneration, excluding variable remuneration. Company shares controlled by directors and executive management As of 31 December 2014: all directors and Executive Management as a group controlled approximately 2.13% of the Company s total outstanding shares, and; Executive Management as a group controlled approximately 2.13% of the Company s total outstanding shares. The Chief Executive Officer s employment may be terminated by either party, subject to a six-month notice period, with or without cause. Upon termination by the Company without cause, severance that is limited to nine months of fixed remuneration, excluding variable remuneration, will be paid to Mr Fischer. Upon termination, Mr Fischer will receive payment for any accrued remuneration and unreimbursed expenses. Upon termination, Mr Fischer will also resign from any position on the Board or Board Committees as well as from any position on the Board of Directors of any companies owned directly or indirectly by the Company. Other members of Executive Management The other members of Executive Management are generally subject to customary non-compete, non-solicitation and no hire restrictions. In light of the Board s desire to establish in case of a separation a predetermined capped contractual framework for executive severance based on fixed remuneration (i.e. base remuneration and benefits) and excluding variable remuneration, the employment terms of the other members of Executive Management include severance that is limited to nine months of fixed remuneration, excluding variable remuneration. The agreements may be terminated at any time by either party, subject to a six-month notice period, with or without cause. Upon termination by the Company without cause, severance that is limited to nine months of fixed remuneration, excluding variable remuneration, will be paid to such other members of Executive Management. Upon termination, such other members of Executive Management will receive payment for any accrued remuneration and unreimbursed expenses. Annual report 2014 BHF Kleinwort Benson 57

60 Internal control and risk management systems Financial reporting The Company s risk management and internal controls relating to financial reporting are organised with a view to ensure: (i) the presentation of management accounts that allow the Group s performance to be measured and monitored; (ii) the presentation of financial statements that comply with IFRS, as adopted by the EU, and other additional Belgian disclosure requirements for the annual reports of listed companies, and that provide a true and fair view of the Company s financial position, and; (iii) the presentation of financial information that complies with regulatory reporting requirements of the relevant authorities entrusted with the prudential supervision of financial institutions. The internal controls and risk management systems are updated on an ongoing basis and have been designed with a view to preventing or detecting and correcting errors and misstatements in the financial statements. Although risks of misappropriation of assets, unexpected losses, etc. can never be totally eliminated, the internal control and risk management systems should provide reasonable security that all material errors and misstatements are detected and corrected. The composition of Executive Management has been designed so as to provide relevant expertise in risk management and the assessment of internal controls in relation to financial reporting. Executive Management is responsible for preparing the Company s financial statements and for developing and maintaining adequate systems of internal accounting and financial controls. The Company prepares consolidated financial statements twice a year, based on the submission of reporting packages prepared by the consolidated subsidiaries in accordance with IFRS. The Company regularly organises training and information seminars to enhance the knowledge of IFRS among accounting and reporting staff involved in the preparation of financial information for the consolidated subsidiaries. The Company relies on representations from the management of the consolidated subsidiaries that the audited reporting packages present a true and fair view of such subsidiaries financial position and results. The Company uses specialised software to consolidate financial information and has a team of well-trained professionals to perform adequate controls on the consolidated financial statements. Audit, Risk and Compliance Committee The Audit, Risk and Compliance Committee monitors the adequacy of the Group s internal controls on an ongoing basis and assesses material risks in connection with the financial reporting process. The Audit, Risk and Compliance Committee regularly reports to the Board on the exercise of its duties, identifying any matters where it considers that action is needed, and making recommendations as to the steps to be taken. The Audit, Risk and Compliance Committee considers, and makes recommendations to the Board with regard to, the group s risk appetite in the context of the Company s overall business strategy, the economic and regulatory environment as well as the group s financial performance and position. While neither the Audit, Risk and Compliance Committee nor the Board has any direct authority over the policies of the Group s regulated operating businesses with regard to risk management and monitoring, the Committee critically reviews: the alignment between the group s risk appetite statement and the frameworks for risk management and monitoring in the group s operating subsidiaries; and the adequacy and effectiveness of the frameworks for risk management and monitoring in the group s operating subsidiaries. The Company is a financial services group with principal activities in private banking and wealth management, asset management and financial markets and corporates. Comprehensive governance frameworks are implemented at the level of all operating subsidiaries. The respective frameworks are based on a committee structure including an Audit and Risk Committee at each of BHF-BANK and Kleinwort Benson Wealth Management as well as an Audit Committee at Kleinwort Benson Investors (the Audit and Risk Committees ). To enable the Company s Audit, Risk and Compliance Committee to perform its duties without creating undue duplication, the chairman of BHF s Audit, Risk and Compliance Committee is a member of the Audit and Risk Committees at BHF-BANK and Kleinwort Benson Wealth Management. Furthermore, the Company s Audit, Risk and Compliance Committee has access to the relevant information through the following channels: (i) the review of the minutes of the operating subsidiaries Audit and Risk Committees; (ii) reporting by the chairpersons of the operating subsidiaries Audit and Risk Committees in view of the preparation of the Annual Report, and; (iii) access to key risk and compliance functions within the respective businesses for a yearly presentation of major risk policies and a report on compliance with legal and regulatory requirements. 58 BHF Kleinwort Benson Annual report 2014

61 Overview Strategy and business review Key principles with respect to the composition and role of the Company s Audit, Risk and Compliance Committee can be found in the section titled Audit, Risk and Compliance Committee on page 46. Internal audit The Belgian Code on Corporate Governance recommends the establishment of an internal audit function. The Company ensures compliance with this requirement through: Reliance on the internal audit functions of BHF-BANK, Kleinwort Benson Wealth Management and Kleinwort Benson Investors. The different operating businesses have adopted a comprehensive audit plan based on an assessment of the risk and control environment, and have independent internal audit policies, procedures and systems. The reliance by the Company s Audit, Risk and Compliance Committee on the operating businesses internal audit function is based on: (i) access to relevant internal audit documentation, and; (ii) access to senior internal audit functions for a yearly presentation of the audit plan and any ad hoc request for information upon the discretion of the Company s Audit, Risk and Compliance Committee. Outsourcing of the review of BHF KB s corporate functions to a reputable provider. Maintenance of a framework of policies and procedures for the Company s holding activities, including treasury and payroll, under the responsibility of the Company s Chief Financial Officer. The Company has adopted an authorisation and approval process, which governs the authorisation of expenditure and release of funds, based on adequate segregation of duties. A complete description of the risks associated with the Company s activities can be found in the section titled Principal Risks and Uncertainties on page 30. Annual report 2014 BHF Kleinwort Benson 59

62 Disclosure required by Article 34 of the Belgian Royal Decree of 14 November 2007 Article 34 of the Belgian Royal Decree of 14 November 2007 requires disclosing certain items when these may be susceptible to have an adverse effect on the ability of a third party to launch a public take-over bid on the Company. According to this provision, the Company discloses the following: See Article 12 of the Company s Articles of Association (as published on on the ability of the Board to cause the Company to acquire and dispose of its own shares under certain conditions. Under the authority granted by the Extraordinary Shareholders Meeting of 17 June 2014 and pursuant to Regulation (EC) 2273/2003 of 22 December 2003 (as regards exemptions for buy-back programmes), the Company carried out between 31 October 2014 and 30 January 2015 a share buy-back programme whereby the Company acquired 1,140,118 of its own shares at an average price of EUR 4.48 per share and for an aggregate amount of EUR 5.11 million (the Programme ). During 2014, the Company made the following share buy-backs under the Programme: Number of shares 883,759 Par value per share EUR 5.56 Percentage of share capital 0.67% Average purchase price per share EUR Aggregate purchase price EUR 3,953,073 The shares purchased under the Programme will be allocated to employees of the Company or the Company s affiliates or associated companies pursuant to relevant shareparticipation schemes. Details on all share buy-backs carried out by the Company under the Programme can be found on the Company s website ( Given the position of 549,028 treasury shares held by the Company on 31 December 2013, the acquisition of 883,759 shares under the Programme during 2014 and the allocation of 676,398 shares to Group employees during 2014, the position of treasury shares held by the Company as of 31 December 2014 was as follows: Number of shares 756,389 Par value per share EUR 5.56 Percentage of share capital 0.57% Average purchase price per share EUR Aggregate purchase price EUR 3,383,344 Statutory Auditor Under Belgian law, the statutory auditor is appointed by a resolution adopted by a simple majority vote at a Shareholders Meeting. The statutory auditor is appointed for renewable terms of three years. During its term of office, the statutory auditor can be removed only by a Shareholders Meeting for just cause. KPMG Reviseurs d Entreprises/ Bedrijfsrevisoren (represented by Mr Olivier Macq, partner) is the Company s statutory auditor. KPMG was appointed until immediately after the Annual Shareholders Meeting deciding on the non-consolidated financial statements relating to the year ended 31 December The Shareholders Meeting determines the remuneration of the Company s statutory auditor for its services in connection with the audit of the Company s financial statements. In the year ended 31 December 2014, the aggregate annual fee for these services amounted to 0.2 million, excluding valueadded tax and outlays. Information about the total remuneration received by KPMG and certain of KPMG s member firms for audit and other services is presented in note 10 to the Consolidated Financial Statements on page BHF Kleinwort Benson Annual report 2014

63 Overview Strategy and business review Shareholders meeting The Company holds its Annual Shareholders Meeting on the third Tuesday of June of each year. If this falls on a legal public holiday, the meeting will be held on the following business day. At the Annual Shareholders Meeting, the Board and the statutory auditor report on the management and the Company s financial situation at the end of the previous year and the Nomination and Remuneration Committee elaborates on the Remuneration Report. the Company s shareholders then vote on the approval of the statutory annual accounts, the allocation of the profit or loss, the appointment, if necessary, of new directors or statutory auditor, the release from liability of the directors and the statutory auditor (see the section titled Statutory Auditor on page 60 and the Remuneration Report, for the previous year). The Board or the statutory auditor may convene an Extraordinary Shareholders Meeting at any time the Company s interests so require. Shareholders representing one-fifth of the Company s total issued share capital may also convene an Extraordinary Shareholders Meeting. Shareholders representing 3% of the Company s total issued share capital may also move to include a new item of business on the agenda for a Shareholders Meeting or new proposed resolutions regarding an item of business on the agenda (except in relation to a second Extraordinary Shareholders Meeting that is convened for lack of quorum at the first Extraordinary Shareholders Meeting). The Company encourages participation at shareholders meeting and promotes proxy voting. Time is always allocated for questions during the Shareholders Meetings. Notices of all Shareholders Meetings contain the agenda of the meeting and the Board s recommendations on the matters to be voted upon. These notices are published in accordance with the Belgian Companies Code and posted on the Company s website ( Except as described below, no quorum is required for a Shareholders Meeting and decisions are taken upon a simple majority vote of the shares present in person or represented by proxy. Each ordinary share is entitled to one vote. Resolutions relating to amendments of BHF KB s Articles of Association are subject to special quorum and majority requirements. Specifically, any resolution on these matters requires the presence in person or by proxy of shareholders holding an aggregate of at least 50% of BHF KB s total issued share capital and, generally, the approval by at least 75% of the shares present in person or represented by proxy at the meeting (and, in some cases, such as, among others, a modification to BHF KB s corporate purposes or legal form, a majority of at least 80%). If a quorum is not present, a second meeting must be convened. At the second meeting, the quorum requirement does not apply. The special majority requirement, however, will continue to apply. Business conduct and ethics code The Company s Business Conduct and Ethics Code summarises the values, standards, principles and business practices which BHF KB will apply, and which the Company s employees (including, but not limited to, officers and members of Executive Management) and directors are required to apply, in conducting business on behalf of the Company. The Company s employees and directors are expected to apply the spirit of the Business Conduct and Ethics Code as well as complying with its specific provisions. They are expected to become familiar with the Business Conduct and Ethics Code and to comply with it at all times in the performance of their duties for, or in relation to, the Company. The Business Conduct and Ethics Code also provides procedures for addressing complaints concerning auditing issues. The Business Conduct and Ethics Code encourages the reporting of any potential unethical or illegal conduct and sets forth specific compliance procedures. This includes the opportunity for all complaints to be brought anonymously. The Business Conduct and Ethics Code is intended to supplement the Company s other policies including the Dealing and Disclosure Code (see the section titled Dealing and Disclosure Code on page 62) and the Company s general commitment to comply with applicable laws, and is not intended to replace those laws. In addition to general principles, there are specific provisions which address various legal and ethical compliance issues, including, among others, conflicts of interest (including conflicts of interest not covered by Article 523 of the Belgian Companies Code), outside directorships and other outside activities, business gifts and entertainment, whether offered or received, competition and fair dealing, discrimination and harassment, health and safety, confidentiality, protection of personal data as well as protection of proprietary information. Annual report 2014 BHF Kleinwort Benson 61

64 Dealing and disclosure code The Company s Dealing and Disclosure Code applies to all of the Company s employees and directors, as well as to the other persons and entities (including, to the extent indicated in the Code, to employees and directors of the Company s management subsidiaries) indicated therein. The purpose of the Dealing and Disclosure Code is to ensure that such persons and entities do not abuse, nor place themselves under suspicion of abusing, and maintain the confidentiality of, price sensitive information that they may have or may be thought to have, especially in periods leading up to an announcement of financial results or of price sensitive events or decisions. To this end, the Dealing and Disclosure Code sets out minimum standards to be followed. In particular, subject to special clearance that can only be granted in very limited circumstances, the persons that are subject to the Dealing and Disclosure Code may not deal in Company shares during a closed period or a prohibited period. A closed period is substantially defined as the period of one month before publication of the annual, semi-annual or any IAS 34 quarterly results for BHF KB and of 15 days before publication of any quarterly trading update for the Company or the annual, semi-annual, any IAS 34 (or equivalent) quarterly results or any quarterly trading update of any subsidiary of the Company which publicly announces results. A prohibited period is a period that BHF KB s General Counsel has determined to be a sensitive period. The Dealing and Disclosure Code also provides that directors and Executive Management (and certain persons associated with them) must comply with the Belgian law requirement to notify their transactions in Company shares (or other financial instruments linked to such shares) to the FSMA in accordance with applicable Belgian rules and the guidance published by the FSMA. The Dealing and Disclosure Code is not intended to replace the applicable laws prohibiting insider dealing and disclosure of price sensitive information. Compliance officer The Company s General Counsel serves as Compliance Officer. The key responsibilities of the Compliance Officer include: (i) monitoring compliance with the obligations set forth in the Business Conduct and Ethics Code; (ii) monitoring compliance with the obligations set forth in the Dealing and Disclosure Code; and (iii) monitoring overall compliance with laws and regulations. 62 BHF Kleinwort Benson Annual report 2014

65 Overview Strategy and business review Annual report 2014 BHF Kleinwort Benson 63

66 BHF Kleinwort Benson Significant operational progress improves results across the Group as cost savings and strong growth in assets under management drive uplift. 64 BHF Kleinwort Benson Annual report 2014

67 Overview Strategy and business review 66 Consolidated statement of profit and loss 67 Consolidated statement of comprehensive income 68 Consolidated statement of financial position 69 Consolidated statement of changes in equity 70 Consolidated statement of cash flow 71 Notes to the consolidated financial statements 126 Directors report on the consolidated financial statements 127 Auditor s report on the consolidated financial statements 128 Condensed non-consolidated financial statements Annual report 2014 BHF Kleinwort Benson 65

68 Consolidated statement of profit and loss for the year ended 31 December 2014 (In EUR millions) Note 2014 (Restated) 2013 (1) Fee and commission income Fee and commission expense (62.9) (6.6) Net fee and commission income Interest income Interest expense (88.4) (37.9) Net interest income Gains and losses on financial instruments at fair value Other income and expense (5.6) Total operating income Operating expenses 10 (343.8) (156.7) Movements in loan loss provisions (0.1) Negative goodwill Operating profit (loss) 71.0 (51.2) Share of profit of equity accounted investees (net of income tax) Profit (loss) before income tax 71.8 (50.7) Income tax expense 12 (0.2) (0.3) Loss from discontinued operations (net of income tax) 30 (15.4) Profit (loss) for the year 71.6 (66.4) The losses are entirely attributable to owners of the Company. Loss per share (in EUR) Note Basic and diluted Continuing operations 0.7 (0.6) Discontinued operations (0.2) (0.8) (1) The consolidated statement of profit and loss has been represented to show the group as a focused merchant banking group. Items previously presented as net finance income have been reclassified to operating income as appropriate. The Group has also reclassified realised gains and losses from the sale of investment securities from Net interest income to Gains and losses on financial instruments at fair value. The notes to the consolidated financial statements, including the audited sections in the Principal risks and uncertainties on pages 30 to 37 are an integral part of these statements. 66 BHF Kleinwort Benson Annual report 2014

69 Overview Strategy and business review Consolidated statement of comprehensive income for the year ended 31 December 2014 (In EUR millions) Note Profit (loss) for the year 71.6 (66.4) Other comprehensive income (expense) Items that will be or have been reclassified to profit or loss Currency translation gains (losses) 17.0 (6.3) Realised currency translation gains 5.4 Net change in the fair value of available for sale financial assets 6.0 (0.4) Tax related to items that will be or have been reclassified to profit or loss (2.4) Items that will not be reclassified subsequently to profit or loss Actuarial gains (losses) (14.5) (5.0) Tax related to items that will not be reclassified subsequently to profit or loss 4.0 (10.5) (5.0) Other comprehensive income (expense) 10.1 (6.3) Total comprehensive income (expense) 81.7 (72.7) The total comprehensive income (expense) is entirely attributable to owners of the Company. Annual report 2014 BHF Kleinwort Benson 67

70 Consolidated statement of financial position as at 31 December 2014 (In EUR millions) Note 31 December December 2013 Assets Cash and balances with central banks Placements with, and loans and advances to other banks 15 1, Investment securities 16 4, ,451.2 Derivative assets Loans and advances to customers 15 2, Current tax assets Accrued income and other assets Employee benefits Investments in equity accounted investees Property, plant and equipment Intangible assets Deferred tax assets Total assets 9, ,957.8 Liabilities and equity Loans and deposits due to other banks 22 1, Loans and deposits due to customers 22 6, ,279.0 Other financial liabilities 1.3 Derivative liabilities Current tax liabilities Accrued expenses and other liabilities Provisions Employee benefits Deferred tax liabilities Subordinated capital Total liabilities 8, ,435.6 Share capital Share premium Reserves 27 (7.1) (16.0) Retained earnings Equity attributable to owners of the Company Total equity and liabilities 9, , BHF Kleinwort Benson Annual report 2014

71 Overview Strategy and business review Consolidated statement of changes in equity for the year ended 31 December 2014 (In EUR millions) Share capital Share premium Reserves (note 27) Retained earnings Balance at 1 January (16.0) Total comprehensive income Profit for the year Other comprehensive income Currency translation gains Net fair value change of available for sale assets (net of tax) Actuarial losses (net of tax) (10.5) (10.5) Other comprehensive income (expense) (10.5) 10.1 Total comprehensive income (expense) Transactions with owners Share-based payment transactions Issue of new shares Difference between fair value and par value of shares issued (10.1) (10.1) Acquisition of own shares (3.9) (3.9) Distribution of own shares 5.3 (5.3) 0.0 Change in ownership of subsidiaries (note 27.7) (49.6) (49.6) Remeasurement of liabilities to NCI (3.0) (3.0) Transactions with owners, recorded directly in equity (11.7) (54.4) Balance at 31 December (7.1) Total equity (In EUR millions) Share capital Share premium Reserves (note 27) Retained earnings Balance at 1 January (17.2) (5.1) Total comprehensive income Loss for the year (66.4) (66.4) Other comprehensive income Currency translation losses (6.3) (6.3) Net change in the fair value of available for sale assets (0.4) (0.4) Realised currency translation gains Actuarial losses (5.0) (5.0) Other comprehensive expense (1.3) (5.0) (6.3) Total comprehensive expense (1.3) (71.4) (72.7) Transactions with owners Share-based payment transactions Capital reduction (104.4) Distribution of own shares Remeasurement of liabilities to NCI (0.9) (0.9) Transactions with owners, recorded directly in equity (104.4) Reclassifications (0.7) Balance at 31 December (16.0) Total equity As at 1 January 2013, 0.2 million of equity was attributable to non-controlling interests in Arecon. During the course of 2013, management took the decision to cease the operations of Arecon, which resulted in the amounts attributable to noncontrolling interests being absorbed within equity attributable to group shareholders in accordance with IAS 27. Due to the immaterial impact of this transaction the amounts disclosed above assume that this transaction took place on 1 January Annual report 2014 BHF Kleinwort Benson 69

72 Consolidated statement of cash flow for the year ended 31 December 2014 (In EUR millions) Note Operating activities Profit (loss) for the year 71.6 (66.4) Adjustments for non-cash items included in profit (loss): Depreciation and amortisation 20 & Negative goodwill 29 (131.4) Impairment of property, plant and equipment and intangible assets Net movement investment securities at fair value through profit or loss Net loss on disposal of available for sale assets (3.6) 3.0 Net gain on disposal of property, plant and equipment (2.2) Foreign exchange 0.4 (3.2) Share of profit loss of equity accounted investees 18 (0.8) (0.5) Equity-settled share-based payment transactions Gain/(loss) on disposal of discontinued operations 4.5 Income tax benefit/(expense) Other non-cash items (17.6) (42.2) Changes in operating assets and liabilities: Change in derivative assets (27.6) (1.4) Change in loans and receivables due from other banks and customers (218.2) (88.3) Change in investment securities 27.9 Change in accrued income and other assets (2.6) 1.4 Change in derivative liabilities (28.6) (0.2) Change in loans and deposits due to other banks and customers (220.7) Change in employee benefits Change in provisions (9.5) (2.5) Change in accrued expenses and other liabilities (24.3) (1.9) Income tax received 3.3 (1.2) Income tax paid 0.1 Net cash used in operating activities (501.5) Investing activities Acquisition of investment securities (4,125.2) (2,404.6) Proceeds from sale of investment securities 4, ,867.8 Acquisition of property, plant and equipment 20 (4.0) (0.8) Proceeds from sale of property, plant and equipment Acquisition of intangible assets 21 (7.7) (2.6) Acquisition of subsidiaries, net of cash acquired 29 (4.0) (0.8) Proceeds from sale of equity accounted investees Proceeds from sale of investments Net cash from investing activities (498.9) Financing activities Net cash inflow from issuance of share capital Repurchase of own shares 27.4 (4.0) Net cash from financing activities Cash and cash equivalents at the beginning of the year ,009.4 Net increase in cash and cash equivalents (102.9) (311.0) Effect of exchange rate fluctuations 33.6 (28.5) Cash and cash equivalents at the end of the year There is no material difference between net interest recognised in the Consolidated statement of profit and loss on an effective interest rate basis and that on a cash basis, therefore no adjustment to the profit (loss) for the year from operating activities has been made. No interest was capitalised in 2014 or BHF Kleinwort Benson Annual report 2014

73 Overview Strategy and business review Notes to the consolidated financial statements for the year ended 31 December Reporting entity BHF Kleinwort Benson Group SA ( BHF KB ) (formerly known as RHJ International SA ( RHJI )) is a company domiciled in Belgium. The consolidated financial statements of BHF KB as at and for the year ended 31 December 2014 comprise BHF KB, its subsidiaries and its businesses accounted for under the equity method (together referred to as the Group ). The consolidated financial statements of the Company as at and for the year ended 31 December 2014 are available upon request at BHF KB s registered office at Avenue Louise, 326 at 1050 Brussels or at BHF Kleinwort Benson Group SA is a merchant bank with principal activities in private banking, asset management and financial markets & corporates. It offers a comprehensive suite of wealth management services, strategic advice for entrepreneurs and access to the institutional and family office investment community through its subsidiaries BHF-BANK AG ( BHF-BANK ), Kleinwort Benson ( KBWM ) and Kleinwort Benson Investors ( KBI ). The Group s associate Quirin Bank AG ( Quirin ), incorporated in Germany in which the Group has a 27.8% holding, also offers private banking services. 2. Basis of preparation 2.1. Statement of compliance The Company s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and endorsed by the European Union ( EU ) ( Adopted IFRS ). The financial statements have been authorised for issue by the Board of Directors on 21 April Functional and presentation currency These financial statements are presented in Euro ( EUR ), which is the Company s functional currency. All information presented in EUR has been rounded to the nearest tenth of a million Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position: derivative financial instruments are measured at fair value; non-derivative financial instruments at fair value through profit or loss are measured at fair value; available for sale financial assets are measured at fair value; and the defined benefit liability is recognised as the fair value of the plan s assets less the present value of the defined benefit obligation. 3. Significant accounting policies The Group has applied the same accounting policies in its consolidated financial statements for the year ended 31 December 2014 as were applied in its consolidated financial statements as at and for the year ended 31 December 2013, except for the adoption of: IFRS 10 Consolidated Financial Statements ; IFRS 11 Joint Arrangements ; IFRS 12 Disclosure of Interests in Other Entities ; and Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities. The adoption of the above standards have not had a significant impact on the consolidated financial statements. Following the acquisition of BHF-BANK in the period the Group assumed BHF-BANK s subordinated capital in its statement of financial position. This subordinated debt, in accordance with IFRS 3 was measured at fair value at the acquisition date, and is subsequently measured at amortised cost. Additionally the Group has realigned its presentation of the consolidated income statement to that of a fully-focused financial services group. Items previously presented as net finance income have been reclassified to operating income as appropriate. The Company has also reclassified realised gains and losses from the sale of investment securities from Net interest income to Gains and losses on financial Instruments. Annual report 2014 BHF Kleinwort Benson 71

74 Notes to the consolidated financial statements for the year ended 31 December Significant accounting policies continued 3.1. Basis of consolidation Subsidiaries Subsidiaries are entities controlled by BHF KB. Control exists when BHF KB has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control is presumed to exist when BHF KB, directly or indirectly through subsidiaries, owns more than half of the voting power of an entity unless in exceptional circumstances it can be clearly demonstrated that such ownership does not constitute control. Transactions with non-controlling interests that do not result in the loss of control, or mean that the Group retains control of a subsidiary, are accounted for as transactions with shareholders and are recorded directly in equity. As at 31 December 2014, all significant subsidiaries are owned 100% by the Group Loss of control On the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control, being the difference between any disposal proceeds received and the net consolidated carrying amount of the subsidiary s equity, is recognised in profit or loss Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated to the extent of BHF KB s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment Foreign currency Foreign currency transactions Transactions in foreign currencies other than the functional currency are translated at the foreign exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising from the settlement of foreign currency transactions or on translation of monetary assets and liabilities are recognised in profit or loss. Non-monetary assets and liabilities that are measured at of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on retranslation of available for sale equity instruments, a financial liability designated as a hedge of net investment in a foreign operation or qualifying cash flow hedges which are recognised in other comprehensive income Foreign operations The assets and liabilities of a foreign operation with a functional currency other than EUR are translated to EUR at foreign exchange rates prevailing at the reporting date. The revenues and expenses of foreign operations are translated to EUR at exchange rates at the dates of the transactions, which for practical reasons are approximated by using average exchange rates for the year. All resulting exchange differences are recognised directly in the translation reserve, a separate component of equity. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal Exchange rates The following major exchange rates have been used in preparing the financial statements. Closing rate Average rate One EUR equals British Pound ( GBP ) Swiss Franc ( CHF ) US Dollar ( USD ) BHF Kleinwort Benson Annual report 2014

75 Overview Strategy and business review 3. Significant accounting policies continued 3.3. New standards and interpretations not yet adopted The Group has not adopted any standards which were in issue and which were not required to be implemented by 31 December The following Standards and Interpretations relevant to the Group that had been issued but not yet endorsed by the EU or adopted at the year end were: IFRS 9 Financial Instruments ; IFRS 15 Revenue from Contracts with Customers. IFRS 9 has yet to be endorsed by the EU and replaces the classification and measurement models for financial instruments in IAS 39 with three classification categories: amortised cost, fair value through profit or loss and fair value through other comprehensive income. The Group s business model and the contractual cash flows arising from its investments in financial instruments determine the classification. Equity instruments will be recorded at fair value, with gains or losses reported either in the Income statement or through equity. However, where fair value gains and losses are recorded through equity there will no longer be a requirement to transfer gains or losses to the Income statement on impairment or disposal. IFRS 9 also introduces an expected loss model for the assessment of impairment. The current incurred loss model (under IAS 39) requires the Group to recognise impairment losses when there is objective evidence that an asset is impaired; under the expected loss model, impairment losses are recorded if there is an expectation of credit losses, even in the absence of a default event. IFRS 15 deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The Standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. The Standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted subject to EU endorsement. The Group is currently assessing the impact of IFRS 15 on its financial statements. No other Standards or Interpretations issued and not yet effective are expected to have an impact on the Group s financial statements. 4. Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: Note 11 Measurement of share-based payments Note 13 Valuation of financial instruments Note 21 Measurement of the recoverable amount for intangible assets of cash generating units Note 23 Provisions Note 25 Utilisation of tax losses Note 29 Acquisitions of subsidiaries Note 33 Commitments and contingencies Annual report 2014 BHF Kleinwort Benson 73

76 Notes to the consolidated financial statements for the year ended 31 December Operating segments An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group s other components whose operating results are reviewed regularly by the Group s chief operating decision-maker ( CODM ). Following the acquisition of BHF-BANK, the Group has reassessed its operating segments. For 31 December 2014 the Group has determined that it has eight reportable segments as detailed below. The segments for 2013 have been restated as appropriate, namely the change of name of Corporate Holdings to Group. Segment information is presented on the same basis as that provided for internal reporting purposes to the CODM. The CODM is the Chief Executive. One of the key measures used in respect of performance measurement is adjusted operating profit. At present only the results of BHF show a result before allocated costs - the allocation of costs to individual business segments is undertaken in order to provide management information on the business performance and to provide managers with a tool to manage and control expenditure. Costs are allocated on a basis that aligns the charge with the resources employed in a particular area of the business. The results for 2014 for the operating segments are as reported to the CODM and prior to purchase price adjustments that arise on consolidation. Such adjustments are shown within the Adjustments and reclassifications column and mainly comprise the reversal of tax credits which under the BHF purchase price mechanism will flow back to Deutsche Bank (see note 29 for further details). Segment assets and liabilities are disclosed on the basis of their IFRS consolidated values in the Group s balance sheet. For the purpose of this disclosure, the Group s investment in Quirin forms part of assets of the Financial Services business. (In EUR millions) Private Banking Asset Management BHF 2014 Financial Markets Corporates Other (1) Kleinwort Benson Wealth Management Kleinwort Benson Investors Group Adjustments and reclassifications (2) Net fee and commission income (0.8) (0.3) Net interest income Gains/losses on financial instruments at fair value (1.5) (8.7) (2.1) Other operating income 0.2 (0.2) Operating income Operating expenses (39.5) (14.8) (16.1) (11.9) (72.7) (108.2) (17.2) (23.4) (40.0) (343.8) Movement in loan loss provisions (0.1) (0.6) (1.0) (0.1) Contribution (66.8) (12.2) 7.4 (20.8) (33.1) (60.4) Allocated costs (22.0) (4.3) (14.3) (26.2) Adjusted operating profit (loss) (2.4) (8.5) 0.0 (12.2) 7.4 (20.8) (33.1) (60.4) Non-recurring items (4.6) (24.6) Adjusted profit (loss) before income tax (3) (2.0) (7.8) 0.0 (16.8) 7.4 (45.4) (8.8) (60.4) Segment assets 6, , ,376.0 Segment liabilities 6, , ,578.4 Total (1) The BHF-Other segment records income that is not directly attributable to other operating segments. Non direct expenses are also recorded within this segment prior to being reallocated to BHF s other operating segments. The CODM only receives profit and loss information on a segment basis and as such, the assets and liabilities of BHF-BANK have been included within the Other segment. (2) Includes reclassification of non-recurring items. (3) Adjusted profit (loss) before income tax does not include million Negative goodwill or 0.8 million Share of profit of equity accounted investees (net of tax). 74 BHF Kleinwort Benson Annual report 2014

77 Overview Strategy and business review 5. Operating segments continued (In EUR millions) Kleinwort Benson Wealth Management Kleinwort Benson Investors 2013 Group Adjustments and reclassifications (1) Net fee and commission income Net interest income Gains/losses on financial instruments at fair value 3.9 (1.0) 2.9 Other operating income (8.1) (5.6) Operating income (7.5) Operating expenses (109.2) (13.1) (27.5) (6.9) (156.7) Movement in loan loss provisions (0.1) Adjusted operating profit (loss) (13.8) 2.5 (25.6) (14.3) (51.2) Non-recurring items (2.3) 0.0 (3.1) Profit (loss) before income tax (16.1) 2.5 (28.7) (8.9) (51.2) Segment assets 2, ,957.8 Segment liabilities 2, ,435.6 Total (1) Includes reclassification of non-recurring items. It also includes includes a 3.0 million loss on disposal resulting from the winding down of the Ripplewood Fund and subsequent disposal of GoGo shares, as well as a net finance expense of 6.0 million. Following the representation of the consolidated statementof profit and loss to a focused financial services group, these amounts have been recorded in operating income but have not been allocated to a segment. Included in operating expenses for the year ended 31 December 2014 is depreciation of property, plant and equipment and amortisation of intangible assets of 12.0 million (2013: 7.1 million), of which 10.3 million (2013: 5.0 million) relates to the Group s Financial Services business with the balance of 1.8 million (2013: 2.1 million) relating to the Group segment. Additionally, impairment losses on property, plant and equipment and intangibles assets totalled 0.5 million and 0.2 million respectively for 2014 (2013: nil and 0.8 million respectively) see note 21 for further details of the impairment of intangible assets. The 0.2 million taxation charge for 2014 relates to tax expenses in the Group s Financial Services businesses (2013: 1.3 million charge for the Group s financial services businesses offset by a 1.0 million tax credit in the Group segment resulting from the remeasurement of deferred tax balances as a result of corporation tax rate change. 6. Net fee and commission income The Group s primary source of revenue is from fee and commission income from its merchant banking services. Fees and commissions are recognised on an accruals basis. Transaction-based fees, which vary based on the volume of transactions, are recorded as income as the service is provided and the receipt of income is almost certain. Asset management fees are generally based on an agreed percentage of the valuation of the AuM and are recognised as the service is provided and it is probable that the fee will be received. If fees are received in advance, the amounts received are only recognised in the income statement once the Group provides the service for which the client has paid. Brokerage income comprises fees charged to customers, primarily from corporate finance and private banking transactions. Revenues from trust and fiduciary activities are recognised based on the value of work done and estimated recovery rates. Annual report 2014 BHF Kleinwort Benson 75

78 Notes to the consolidated financial statements for the year ended 31 December Net fee and commission income continued (In EUR millions) 2014 (Restated) 2013 Asset management fees Brokerage Trust and other fiduciary activities Lending business and guarantees 9.7 Corporate commissions Payments, forex and foreign commercial business 5.5 Securities business 4.3 Financial advisory fees Other Fee and commission income Asset management fee expense (52.2) Inter bank transaction fees (4.2) Brokerage (2.7) (2.1) Fiduciary fees (0.8) (0.8) Other (3.0) (3.7) Fee and commission expense (62.9) (6.6) Net fee and commission income Net interest income Net interest income comprises income earned from placing loans and deposits with other financial institutions, advancing loans and overdrafts to clients and holding debt and other fixed income securities. Interest income is recognised as it is earned using the effective interest method, which allocates interest income at a constant rate of return over the expected life of the financial instrument based on the estimated future cash flows. The effective interest rate is the rate, which on initial recognition, exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not the future credit losses. Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. 7.1 Interest income and expense by financial instruments (In EUR millions) Held for trading At fair value through profit or loss Available for sale 2014 Held to maturity Loans and receivables (amortised cost) Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Derivative assets Loans and advances to customers Other Interest income Investment securities (17.4) (17.4) Loans and deposits due to other banks (5.2) (5.2) Loans and deposits due to customers (34.5) (34.5) Derivative liabilities (3.0) (28.0) (31.0) Other (0.2) (0.1) (0.3) Interest expense (3.2) (45.4) (39.8) (88.4) Net interest income (3.2) Total 76 BHF Kleinwort Benson Annual report 2014

79 Overview Strategy and business review 7. Net interest income continued (In EUR millions) At fair value through profit or loss (Restated) 2013 Held to maturity Loans and receivables Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Derivative financial instruments Loans and advances due to customers Interest income Investment securities (20.9) (20.9) Loans and deposits due to other banks (0.1) (0.1) Loans and deposits due to customers (12.6) (12.6) Derivative financial instruments (4.3) (4.3) Interest expense (25.2) 0.0 (12.7) (37.9) Net interest income Total Interest income on impaired loans in the year was 1.3 million (2013: 0.1 million). 8. Gains and losses on financial instruments at fair value The Group s treasury portfolio includes investments in liquid high quality corporate bonds. These bonds are typically measured at fair value, and where those bonds are designated at fair value through profit and loss (FVTPL) the gains and losses representing market movements (both realised and unrealised) are recognised in this line of the income statement as are any gains and losses on derivatives (which mainly arise from hedging activities). Unrealised gains and losses on available-for-sale investments are recorded in other comprehensive income, but the cumulative gains and losses are transferred to the income statement if the investment is impaired, sold or otherwise realised. The fair value reserve in the statement of changes in equity represents the difference between the cost (or, if the asset has been reclassified or impaired, the fair value at date of reclassification or impairment) and the fair value of financial assets that are classified as available-for-sale. The Group reviews its available-for-sale investments and loans and receivables for impairment at the end of each reporting period. The net gains on items at fair value by financial asset class are as follows: (In EUR millions) Held for trading At fair value through profit or loss 2014 Available for sale Other financial liabilities (amortised cost) Net income from debt securities and corporate bonds Net income from equity securities (4.2) (1.8) Net income from derivatives (1.5) (18.0) (19.5) Net gains or losses from hedge-accounting (13.2) 30.8 (17.4) 0.2 Total (14.6) (3.9) 37.3 (17.4) 1.4 Total (1) Net gains and losses from hedging include gains and losses on hedged items that are part of a fair value hedge relationship and have been classified as available for sale or amortised cost as appropriate. Annual report 2014 BHF Kleinwort Benson 77

80 Notes to the consolidated financial statements for the year ended 31 December Gains and losses on financial instruments at fair value continued (In EUR millions) At fair value through profit or loss (Restated) 2013 Available for sale Net income from debt securities and corporate bonds (2.7) (2.7) Net income from equity securities 1.5 (3.0) (1.5) Net income from derivatives Total 5.9 (3.0) 2.9 Total 9. Other operating income and expense Other operating income are items of income and associated expenses that are incidental to the Group s operations. The other operating income and expenses can be broken down as follows: (In EUR millions) Provision releases 4.6 Net income (expense) from foreign exchange 4.1 (6.0) Gain on disposal of Ripplewood Advisors (note 30) 3.2 Rendering of services 2.6 Refund of non income taxes 2.2 Net gain on disposal of property, plant and equipment 2.2 Other Total 19.8 (5.6) 10. Operating expenses Operating expenses comprise the Group s general administrative costs. Costs are recognised when the service is provided to the Group. Certain costs, such as depreciation and amortisation of capitalised costs, as well as operating lease expenses, are charged evenly over the useful economic life of the asset/life of the contract as appropriate. The largest component of expenses are personnel expenses, which includes wages and salaries, the cost of other benefits provided to employees, the cost to the Group of the tax thereon and variable compensation. Certain employees of the Group are also members of defined benefit pension schemes and further details can be found in note 26. Also the Group operates an equity-based compensation plan, further details of the plans are in note 11. (In EUR millions) 2014 (Restated) 2013 Personnel expenses (note 10.1) (181.3) (94.7) Fees (note 10.2) (17.1) (12.0) Rent and leases (23.0) (11.8) IT costs (41.0) (11.3) Travel and entertainment expenses (5.5) (4.9) Amortisation and depreciation (notes 20 and 21) (12.0) (7.1) Insurance (4.5) (3.3) Acquisition related (10.1) PBGC settlement (note 30) (9.6) Outsourcing (1) (9.4) Other taxes (not income related) (5.9) Marketing and advertising (4.2) (0.8) Other (20.2) (10.8) Total (343.8) (156.7) (1) Mainly IT-related costs. 78 BHF Kleinwort Benson Annual report 2014

81 Overview Strategy and business review 10. Operating expenses continued Personnel expenses (In EUR millions) Wages and salaries (144.5) (72.9) Compulsory social security contributions (15.8) (6.8) Recruitment and training expenses (7.7) (3.0) Contributions to defined contribution plans (6.6) (6.0) Equity-settled share-based payment transactions (5.6) (6.0) Expenses related to defined benefit plans (1.1) Total (181.3) (94.7) Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss as incurred. The average number of employees employed by the Group and its subsidiary undertakings was: (In EUR millions) Full time employees 1, Contract and temporary employees Total 1, Fees (In EUR millions) Legal and consulting fees (12.0) (8.8) Audit fees (3.4) (1.3) Regulatory fees (0.7) (1.1) Tax fees (1.0) (0.8) Total (17.1) (12.0) The audit fees encompass fees paid to the Company s statutory auditor KPMG Réviseurs d Entreprises, and other KPMG member firms. For the years ended 31 December 2014 and 2013 the Group paid KPMG 5.6 million and 1.8 million respectively the for the following services: (In EUR millions) KPMG Réviseurs d Entreprises Audit KPMG Network Audit Audit-related services 1.0 Tax-related services Other services Total Annual report 2014 BHF Kleinwort Benson 79

82 Notes to the consolidated financial statements for the year ended 31 December Operating expenses continued Operating lease commitments The Group leases a number of properties from which it conducts its operations. These properties are leased under operating leases (the Group has no finance leases). When the Group receives an incentive from entering into a lease, such as a rent free period, these benefits are considered to be an integral part of the overall lease payments and are spread over the life of the lease. At the end of the financial year, the future minimum lease payments under non-cancellable operating leases are payable as follows: (In EUR millions) Less than one year Between one and five years More than five years Total The Group also sublets a portion of its office space for which it receives income. The future minimum lease payments receivable from non-cancellable operating leases are as follows: (In EUR millions) Less than one year Between one and five years More than five years Total Share-based payments The Group operates an equity based incentive plan, allowing recipients to acquire/receive shares in the Company with the purpose of attracting and retaining exceptional employees, consultants and independent contractors, and to align their interests with the interests of the Company s shareholders thereby reinforcing the creation of long-term value. The Group recognises an expense for equity-based incentive plans based on the fair value at grant date of the awards. This fair value is charged to the income statement over the vesting period, with a corresponding increase in equity. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. Such adjustments are made in the period in which the true-up event happens, and expenses already recognised in prior years are not restated. For share-based payment awards with non-vesting conditions, the fair value at grant date of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Where awards have transfer restrictions which apply after the vesting period, the Group uses various methods (such as Finnerty and/or Chaffee) to determine the discount from the Group s publicly quoted market price resulting from such transfer restrictions. Inputs into the calculation of the grant date fair value of awards include the share price, the exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. Awards take the form of restricted stock units ( RSUs ). For each RSU which vests, the award recipient shall receive one share of the Company or, at the option of the Group and subject to the award recipient s consent, a cash amount equal to the fair market value of such share as of the vesting date. The award recipient may also request, subject to the Company s consent, that a portion of the RSUs vest in cash in order to satisfy any tax liabilities that may become due upon or after such vesting. All the Group s awards are considered to be equity settled. 80 BHF Kleinwort Benson Annual report 2014

83 Overview Strategy and business review 11. Share-based payments continued Awards to Executive Management During the year ended 31 December 2014, an aggregate number of 588,688 RSUs were awarded to Executive Management as remuneration for services performed during the year (2013: 412,601 RSUs), 304,762 RSUs were forfeited as the entitlement criterion with respect to the evolution of the Company s share price was not met (2013: 237,866). As further described in the Corporate Governance Statement (see the section titled Remuneration policy on page 48), such RSU awards form Executive Management s deferred variable remuneration. Earning of deferred variable remuneration granted to Executive Management for services performed during the year is conditional upon meeting a combination of three predetermined and objectively measurable entitlement criteria, whose fulfilment in each case (i) is assessed over two periods of two and three years, respectively, and (ii) determines the earning of half of the deferred variable remuneration. These criteria relate to (i) the performance of BHF KB s share price measured against the EuroSTOXX Banks index; (ii) the evolution of the aggregate fixed operating holding costs of BHF KB and its management subsidiaries as resulting from the consolidated income statement for BHF KB and the relevant management subsidiaries, and; (iii) operating KPIs (capital, liquidity and operating profit) of relevant business entities. Upon expiry of each relevant deferral period, the Group assesses whether the predetermined and objectively measurable performance criteria are met (i.e. whether the performance of BHF KB s share and consolidated regulatory capital are in line with the predetermined thresholds determined by the Board) and determines whether (part of) the deferred variable remuneration is effectively earned by Executive Management. Such assessment is made by the Board upon recommendation of the Nomination and Remuneration Committee. Awards to other employees During the year ended 31 December 2014, an aggregate number of 855,537 RSUs were awarded to certain employees other than Executive Management as remuneration for services performed during the year (2013: 998,693 RSUs awarded for performance during 2013). RSUs vest rateably over three or four years. During the year, an aggregate number of 215,667 RSUs were forfeited (2013: 357,270). Outstanding RSU awards (all recipients including Executive Management) (In units) Outstanding and unvested Opening balance 4,032,111 4,404,597 Granted during the period 1,444,225 1,411,294 Forfeited during the period (503,767) (595,136) Vested during the period (1,827,968) (1,188,644) Outstanding and unvested Closing balance 3,144,601 4,032, Income tax The Group and its subsidiaries are liable to tax at rates according to the relevant legislation in the jurisdictions in which they operate. Income tax comprises current (taxes payable for the reporting period) and deferred tax. Taxes are typically recognised in the income statement except to the extent that the tax relates to items recognised in other comprehensive income, in which case it is recognised in other comprehensive income Income tax benefit in the statement of profit and loss (In EUR millions) Note Current tax expense Current year (3.6) (1.1) Total (3.6) (1.1) Deferred tax benefit Impact of temporary differences Total Total income tax expense (0.2) (0.3) All tax relates to continuing operations. Annual report 2014 BHF Kleinwort Benson 81

84 Notes to the consolidated financial statements for the year ended 31 December Income tax continued Reconciliation of effective tax rate (In EUR millions) Profit (loss) for the year 71.6 (66.4) Income tax expense Profit (loss) before income tax 71.8 (66.1) Income tax using the average corporate tax rate of 33.99% (2013: 33.99%) (24.4) 22.5 Difference in local tax rates 10.2 (1.2) Non-deductible expenses (5.4) (0.7) Tax exempt income/profits not subject to tax Net creation utilisation of current year losses for which no deferred tax asset was recognised (4.7) (22.6) Deferred tax adjustments in respect of changes in corporation tax rates (0.3) 1.0 Other short-term timing differences 0.5 (0.6) Total Income tax expense (0.2) (0.3) During million of tax benefit was recognised in other comprehensive income (2013: nil). Of this amount, tax income of 4.0 million was recorded in relation to actuarial losses recognised in the period, and 2.4 million of tax expense was recorded in relation to fair value movements on available for sale financial assets. The tax impact on exempt income of 23.9 million for the year ended 31 December 2014 mainly related to 23.2 million for the tax impact of the negative goodwill. The tax impact on exempt income of 1.3 million for the year ended 31 December 2013 mainly related to the gain on the disposal of SigmaXYZ. 13. Financial risk management Risk management and control The Group is a focussed financial services group with principal activities in private banking & wealth management, asset management and financial markets & corporates through its subsidiaries. Through these subsidiaries, the Group faces and accepts risks in order to generate returns for its shareholders. The Group has set strategic objectives and its medium-term performance targets against following qualitative risk appetite principles: Maintenance of a strong capital position with sufficient regulatory capital surpluses which are at the high-end of European peers, set in the context of the prevailing global economic environment, market conditions, regulatory environment and reflecting the potential impact from several appropriate stress tests; Maintenance of a strong liquidity position ensuring that liabilities can be met, even under adverse business and market conditions. The Group s approach to liquidity is based on the maintenance of highly liquid low-risk treasury portfolios and stable funding with limited reliance on wholesale funding; Conduct of business in accordance with the highest ethical standards aimed at maintaining an excellent reputation with clients, employees, regulators and other stakeholders. The above qualitative principles are translated into risk appetite statements with appropriate risk tolerance levels and quantitative risk limits defined in comprehensive risk frameworks for each of the Group s businesses developed under the responsibility of their respective Board of Directors. The key risks facing the Company s subsidiaries and their approach to risk mitigation and management are set out in the Principal risks and uncertainties section on pages 30 to 37. Disclosures under IFRS 7, Financial Instruments: Disclosures, which concerns the nature and extent of risks arising from financial instruments, are incorporated in the consolidated annual financial statements by reference to the audited sections of the Principal risks and uncertainties on pages 30 to 37. Recognition and derecognition The Group initially recognises loans and advances, and deposits on the date that they are originated. All other financial assets and liabilities (including assets and liabilities designated at fair value through profit or loss) are initially recognised on the settlement date at which the Group becomes party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. 82 BHF Kleinwort Benson Annual report 2014

85 Overview Strategy and business review 13. Financial risk management continued Financial assets The Group s financial assets include cash, customer loans, debt securities and derivatives which are used as part of the Group s capital and investment strategies. The Group initially records all financial assets at fair value, which is normally the cost of acquiring the asset or the amount loaned to customers. Financial assets are then classified as either being measured at fair value ( fair value through profit or loss and available for sale ) or at amortised cost ( held to maturity and loans and receivables ). The classification is, in part, dependent on accounting rules but with some scope for the Group to select a treatment. Financial assets measured at fair value Financial assets designated as being at fair value through profit and loss These assets have been so classified to reduce the accounting mismatch that would otherwise arise from the fact that the fair value movements on the derivatives which economically hedge market risks on the securities are recognised in the income statement. The market risks of these assets are treated as non-traded risk, the principal risks being interest rate and/or foreign exchange risks. The Group does not hedge credit risk. Financial assets designated at fair value through profit and loss typically comprise high quality corporate bonds. Financial assets classified as available for sale This classification is selected typically when the investment is expected to be held for the long term but not necessarily to maturity and where short-term volatility does not reflect long-term expected returns. Generally, unrealised gains and losses on available-for-sale investments are recorded in other comprehensive income, but the cumulative gains and losses are transferred to the income statement if the investment is impaired, sold or otherwise realised. The fair value reserve in the statement of changes in equity represents the difference between the cost (or, if the asset has been reclassified or impaired, the fair value at date of reclassification or impairment) and the fair value of financial assets that are classified as availablefor-sale. Financial assets measured at amortised cost Financial assets classified as held to maturity or as a loan and recievable Assets measured at amortised cost are initially recorded at fair value; the carrying amount is adjusted over time, using the effective interest rate, to take account of any premium or discount on acqusition so that the amount at maturity equals the amounts to be received. Where there is evidence that the full amount will not be recovered, in which case the cost is adjusted to reflect the recoverable amount (see below for impairment indicators). Financial liabilities The Group s financial liabilities principally comprise customer deposits. They also include derivatives held for risk management purposes and subordinated capital. Customer accounts and deposits by banks are recorded at the amount deposited. After initial recognition they are accounted for at amortised cost using the effective interest method. Subordinated capital is also measured at amortised cost. Hedging and derivatives Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. The Group does not hold or issue derivative financial instruments for trading purposes. Derivatives held for risk management purposes are measured at fair value in the statement of financial position with the gain or loss on remeasurement recognised immediately in profit or loss. Determination of fair value Where possible the Group will use quoted market prices to determine fair value but where those are not available judgement is required. The degree of judgement involved is discussed in section Derivatives The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties based on broker quotes. The fair value of forward exchange contracts is their quoted market price at the reporting date, being the present value of the quoted forward price. If a quoted market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds). Annual report 2014 BHF Kleinwort Benson 83

86 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued Investment securities The determination of fair values for investment securities designated at fair value through profit or loss is based on quoted market prices or dealer price quotations for financial instruments traded in active markets. The determination of the fair value of available for sale investments depends on what instruments the investment is in. Investments in quoted equities are stated at the quoted price at the balance sheet date. For investments without a quoted price fair values are typically determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable prices exist, and valuation models. Presentation of financial assets and liabilities Offsetting Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by accounting standards. Impairment Non-derivative financial assets A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event had an impact on the estimated future cash flows of that asset. Objective evidence that financial assets are impaired includes default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers, economic conditions that correlate with defaults or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Typically the Group considers a decline of 20% to be significant and a period of nine months to be prolonged. Financial assets measured at amortised cost The Group considers evidence of impairment for financial assets measured at amortised cost (loans and receivables and held-to-maturity investment securities) at both a specific asset and collective level. All individually significant assets are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows at the asset s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investment securities. Interest on the impaired asset continues to be recognised. When an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Available for sale financial assets Impairment losses on available for sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The Group has no available for sale financial assets that are currently impaired. Fair value hedge accounting When a derivative is designated as the hedging instrument of the change in fair value of a recognised asset or liability, changes in the fair value of the derivative are recognised immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedge risk (in the same line item in the statement of profit or loss and OCI as the hedged item). If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those that are necessary for the novation, then the derivative is not considered as expired or terminated. 84 BHF Kleinwort Benson Annual report 2014

87 Overview Strategy and business review 13. Financial risk management continued Classification of financial assets and liabilities Financial assets Financial assets and liabilities are classified based on four recognition principles: at fair value through profit or loss, available for sale, loans and receivables or held to maturity. The Group s classification of its principal financial assets and liabilities is summarised below: (In EUR millions) Held for trading At fair value through profit or loss Available for sale 2014 Held to maturity Loans and receivables Cash and balances with central banks Placements with, and loans and advances to other banks 1, ,483.5 Investment securities 2.4 1, , ,175.1 Derivative assets Loans and advances to customers 2, ,530.9 Total , , , ,063.2 Total (In EUR millions) At fair value through profit or loss Available for sale 2013 Held to maturity Loans and receivables Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities 1, ,451.2 Derivative assets Loans and advances to customers Total 1, , ,830.8 Total Financial liabilities (In EUR millions) Held for trading At fair value through profit or loss At amortised cost Total At fair value through profit or loss At amortised cost Loans and deposits due to other banks 1, , Loans and deposits due to customers 6, , , ,279.0 Other financial liabilities Derivative liabilities Subordinated capital Total , , , ,374.1 Total Credit risk of financial assets Credit risk is the risk of financial loss arising from the failure of a customer or counterparty to settle financial obligations to the Group as they fall due. As part of it s banking and corporate lending business the Group offers clients a range of loan facilities. Failure to recover amounts lent or the interest and fees associated with the loans could result in bad debt charges. The Company s subsidiaries maintain detailed credit policies for customer lending, covering all aspects of credit risk management including, inter-alia, credit strategy, delegated approval authority, underwriting criteria including collateral quality and provisioning. Annual report 2014 BHF Kleinwort Benson 85

88 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued Credit risk by financial asset class The following is a breakdown of the credit risk borne by each class of financial asset: (In EUR millions) Individually impaired Past due but not impaired 2014 Neither past due nor impaired Carrying amount Collateralised Net exposure Cash and balances with central banks Placements with, and loans and advances to other banks 3.9 1, , ,118.3 Investment securities Debt and other fixed income securities 1, , ,387.1 Available for sale investments , , ,730.0 Held to maturity securities Derivative assets Loans and advances to customers , , , Total financial assets , , , ,945.9 Of the amounts shown above 2,560.8 million are subject to collective provisioning. As at 31 December 2014 the Group had recorded collective provisions of 3.2 million against placements with, and loans and advances to other banks and 12.0 million from loans and advances to customers. The amount of collective provision is determined based on a portfolio approach of identifying loans with similar risk characteristics and then allowing for internal default probabilities using both historic and current data. (In EUR millions) Individually impaired Past due but not impaired 2013 Neither past due nor impaired Carrying amount Collateralised Net exposure Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Debt and other fixed income securities 1, , ,355.9 Available for sale investments Held to maturity securities Derivative assets Loans and advances to customers Total financial assets , , ,194.0 The Group applies the following definitions when presenting amounts as impaired or past due: i) Impaired financial instruments These are instruments for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the financial instrument agreement(s). The Group recognises a provision against these amounts which represents its best estimate of amounts that may not be recovered. ii) Past due but not impaired financial instruments These are instruments where contractual interest or principal payments are past due but the Group believes that specific impairment is not appropriate on the basis of the level of security/capital available and/or the stage of collection of amounts owed to the Group. Ageing analysis of amounts past due but not impaired 2014 (In EUR millions) Less than 1 month Between 1 and 3 months Between 3 months and 1 year Between 1 and 3 years Total Loans and advances to customers Total BHF Kleinwort Benson Annual report 2014

89 Overview Strategy and business review 13. Financial risk management continued (In EUR millions) Less than 1 month Between 1 and 3 months 2013 Between 3 months and 1 year Between 1 and 3 years Total Loans and advances to customers Total Details of collateral held against loans and receivables The table below details the fair value of collateral held, at 31 December 2014, by the Group against loans it has given to customers. (In EUR millions) Carrying amount of loans and receivables Collateral held Carrying amount of loans and receivables Collateral held Against individually impaired: Property Other 29.7 Against past due but not impaired: Property Equities 0.9 Other Against neither past due nor impaired: 2, , Property Debt securities Equities Other Total 2, , Net exposure to credit risk The following is a breakdown of the net exposure to credit risk by type of credit enhancement: (In EUR millions) Maximum exposure Property Debt securities 2014 Equities Other collateral Other credit enhancement Net amount Cash and balances with central banks Placements with, and loans and advances to other banks 1, ,118.3 Investment securities Debt and other fixed income securities 1, ,387.1 Available for sale investments 2, ,730.0 Held to maturity securities Derivative assets Loans and advances to customers 2, Total financial assets 9, ,945.9 Annual report 2014 BHF Kleinwort Benson 87

90 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued (In EUR millions) Maximum exposure Property Debt securities 2013 Equities Other collateral Other credit enhancement Net amount Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Debt and other fixed income securities 1, ,355.9 Available for sale investments Held to maturity securities Derivative assets Loans and advances to customers Total financial assets 2, , Geographical concentration of financial assets The following table identifies the geographical concentrations of financial assets: (In EUR millions) United Kingdom Germany 2014 Rest of Europe Asia America Rest of the world Cash and balances with central banks Placements with, and loans and advances to other banks ,483.5 Investment securities Debt and other fixed income securities ,387.1 Available for sale investments , ,730.0 Held to maturity securities Derivative assets Loans and advances to customers ,530.9 Total 1, , , ,063.2 Total (In EUR millions) 2013 United Kingdom Europe Asia America Rest of the world Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Debt and other fixed income securities ,355.9 Available for sale investments Held to maturity securities Derivative assets Loans and advances to customers Total 1, ,830.8 Total 88 BHF Kleinwort Benson Annual report 2014

91 Overview Strategy and business review 13. Financial risk management continued Concentration of financial assets by sector The following table identifies the concentrations of financial assets by sector: (In EUR millions) Corporate Government 2014 Other banks Retail customers Cash and balances with central banks Placements with, and loans and advances to other banks 1, ,483.5 Investment securities Debt and other fixed income securities ,387.1 Available for sale investments , , ,730.0 Held to maturity securities Derivative assets Loans and advances to customers 1, ,530.9 Total 2, , , ,063.2 Total (In EUR millions) Corporate Government 2013 Other banks Retail customers Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Debt and other fixed income securities ,355.9 Available for sale investments Held to maturity securities Derivative assets Loans and advances to customers Total , ,830.8 Total Credit quality by financial asset class The following is a breakdown of the credit quality of the Group s financial assets: Internal rating (In EUR millions) Low risk Fair risk Impaired loans Total Low risk Fair risk Impaired loans Cash and balances with central banks Placements with, and loans and advances to other banks 1, , Investment securities Debt and other fixed income securities 1, , , ,355.9 Available for sale investments 2, , Held to maturity securities Derivative assets Loans and advances to customers 1, , Total financial assets 7, , , , ,830.8 Total Annual report 2014 BHF Kleinwort Benson 89

92 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued External rating (In EUR millions) AAA to AA3 A1 to A3 Other Total AAA to AA3 A1 to A3 Other Total Cash and balances with central banks Placements with, and loans and advances to other banks , , Investment securities Debt and other fixed income securities 1, , ,355.9 Available for sale investments 2, , Held to maturity securities Derivative assets Loans and advances to customers 2, , Total financial assets 3, , , , , ,830.8 Consistent with the Group s prudent investment strategy 74% of the Group s investment in cash, placements with, and loans and advances to other banks, and investment securities are invested with institutions rated A3 and above (2013: 94%). Loans and advances to customers primarily comprise (i) corporate loans and (ii) mortgage lending to retail customers. Typically there is no external credit rating attributable to these customers, however, such loans are continuously monitored for credit worthiness with over 99% being deemed low risk on an internal basis for the year ended 31 December 2014 (2013: 98%). Details of collateral held can be found in note Loan to values ratios Included within loans and receivables due from customers is million (2013: million) of mortgage loans (see note 15.1). The loan to values of the mortgages are disclosed below: 2014 Mortgage lending amount 2013 Mortgage lending amount Fully collateralised: Less than 25% % to 50% % to 70% % to 90% % to 100% Partially collateralised: Total The following loan to value ratios are for commitments to advance mortgage loans Fully collateralised: Less than 25% % to 50% % to 70% % to 90% 91% to 100% Partially collateralised: Total BHF Kleinwort Benson Annual report 2014

93 Overview Strategy and business review 13. Financial risk management continued Liquidity risk of financial assets and liabilities Liquidity risk is the risk that the Group cannot pay its obligations as they fall due. The table below summarises the residual contractual maturities and contractual cash flows of the Group s financial assets and liabilities. The amounts presented below are inclusive of interest and principal repayments and are shown on an undiscounted basis. Whilst the disclosure is based on contractual cash flows, there is the possibility that amounts are received earlier than contracted, for example, if a customer repays a loan earlier, or amounts may be received at a later date, for example, if a deposit is extended. (In EUR millions) Carrying amount Contractual cash flows On demand 2014 Between 1 and 3 months Between 3 and 12 months Between 1 and 5 years More than 5 years Financial assets Non-derivative assets Cash and balances with central banks Placements with, and loans and advances to other banks 1, , Investment securities Debt and other fixed income securities 1, , , Available for sale investments 2, , , Held to maturity securities Loans and advances to customers 2, , , Total 8, , , , , Derivative assets Interest rate swaps and futures Forward exchange contracts Total Total financial assets 9, , , , , ,258.9 Financial liabilities Non-derivative liabilities Loans and deposits due to Other banks 1, , Customers 6, , , Other financial liabilities Subordinated capital Total 7, , , Derivative liabilities Interest rate swaps and futures Forward exchange contracts Total Total financial liabilities 8, , , The subordinated capital is issued by BHF-BANK. 100 million was issued in December 2004 and is repayable in two equal amounts in 2015 and In 2005, a further million was raised, of which 56.5 million is repayble in 2020 and 47 million in The subordinated capital is part of a fair value interest rate hedge and hence is remeasured for changes in the underlying interest rate. Annual report 2014 BHF Kleinwort Benson 91

94 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued (In EUR millions) Carrying amount Contractual cash flows Less than 1 month 2013 Between 1 and 3 months Between 3 and 12 months Between 1 and 5 years More than 5 years Financial assets Non-derivative assets Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Debt and other fixed income securities 1, , , Available for sale investments Held to maturity securities Loans and advances to customers Total 2, , , Derivative assets Interest rate swaps and futures (0.3) 0.8 Forward exchange contracts Total (0.3) Total financial assets 2, , , Financial liabilities Non-derivative liabilities Loans and deposits due to Other banks Customers 2, , , Total 2, , , Derivative liabilities Interest rate swaps and futures Forward exchange contracts Total Total financial liabilities 2, , , Liquidity risk encumbered and unencumbered assets As part of it s treasury operations the Group will sometimes pledge financial assets as collateral or has the ability to pledge its assets should it need to raise funds. The table below details which of the Group s financial assets are encumbered or are available to be pledged as collateral. (In EUR millions) Encumbered Pledged as collateral Other 2014 Unencumbered Available as collateral Other Total Carrying Amount Cash and balances with central banks Placements with, and loans and advances to other banks , ,483.5 Investment securities Debt and other fixed income securities , ,387.1 Available for sale investments , ,730.0 Held to maturity securities Derivative assets Loans and advances to customers 3.6 2, ,530.9 Total , , BHF Kleinwort Benson Annual report 2014

95 Overview Strategy and business review 13. Financial risk management continued (In EUR millions) Pledged as collateral Encumbered Other 2013 Unencumbered Available as collateral Total Carrying Amount Cash and balances with central banks Placements with, and loans and advances to other banks Investment securities Debt and other fixed income securities , ,355.9 Available for sale investments Held to maturity securities Derivative assets Loans and advances to customers Total , ,830.8 Other 13.4 Fair values of financial assets and liabilities The following table summarises the carrying amounts and fair values of the Group s financial assets and liabilities. Given that the majority of the Group s financial assets are invested in short-term cash, or in instruments that are measured at fair value, there is little difference between the carrying amounts and the respective fair values. (In EUR millions) Carrying amount Fair value Carrying amount Fair value Cash and balances with central banks Placements with, and loans and advances to other banks 1, , Investment securities Debt and other fixed income securities 1, , , ,355.9 Available for sale investments 2, , Held to maturity securities Derivative assets Loans and advances to customers 2, , Total financial assets 9, , , ,830.7 Loans and deposits due to Other banks 1, , Customers 6, , , ,280.2 Other financial liabilities Derivative liabilities Subordinated capital Total financial liabilities 8, , , ,375.3 Estimation of fair value of financial instruments at cost Loans and receivables due from and to other banks Loans and receivables due from other banks include inter-bank placements and items in the course of collection. The fair value of floating rate placements and overnight deposits is estimated as their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. Loans and receivables due from and to customers Loans and receivables due from customers are net of provisions for impairment. The estimated fair value of loans and receivables represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. Other financial assets and liabilities The fair value of other assets and liabilities has been estimated as the carrying value due to the short maturities on the amounts held. Annual report 2014 BHF Kleinwort Benson 93

96 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued Valuation methods of financial instruments at fair value Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm s length transaction. The fair value of financial instruments may require some judgement or may be derived from readily available sources. The degree of judgement involved is described below, although this does not necessarily indicate that the fair value is more or less likely to be realised. For investments that are actively traded in financial markets, fair value is determined by reference to official quoted market bid prices. For investments that are not actively traded, fair value is determined by using quoted prices from third parties such as brokers, market makers and pricing agencies as well as widely recognised valuation methods. Each instrument has been categorised using a fair value hierarchy that reflects the extent of judgements used in the valuation. These levels are based on the degree to which the fair value is observable and are defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities and principally comprise investments in quoted equities and bonds; Level 2: input other than quoted prices included within Level 1 that is observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) principally comprising of derivatives which have been valued using widely recognised valuation models; Level 3: input for the asset or liability that is not based on observable market data (unobservable inputs). Level 3 items consist of equity investments in unquoted companies which have been recorded at cost which the Group believes is the best indicator of fair value based. For details of how the Group has calculated the fair value of instruments held at cost within the Consolidated statement of financial position, please see note (In EUR millions) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Financial assets measured at fair value: Debt and other fixed income securities 1, , , ,355.9 Available for sale financial assets , , Derivative assets Financial assets not measured at fair value: Cash and balances with central banks Placements with, and loans and advances to other banks , , Held to maturity securities Loans and advances to customers , , Total 2, , , , , , ,830.7 Financial liabilities measured at fair value: Other financial liabilities Derivatives liabilities Financial liabilities not measured at fair value: Loans and deposits due to Other banks , Customers 2, , , , ,280.2 Subordinated capital Total 3, , , , , , BHF Kleinwort Benson Annual report 2014

97 Overview Strategy and business review 13. Financial risk management continued The movement in financial assets measured at fair value categorised as Level 3 during the year were: (In EUR millions) Opening balance Effect of foreign exchange 0.3 (0.3) Disposals (10.0) (15.3) Acquired through business combinations 10.2 Total unrealised gains in the income statement 0.2 Transfers in 4.0 Total The roll forward of level 3 items does not include 41.9 million of assets classed as available for sale but recorded at cost. These are investments in equity instruments that do not have a market price in an active market, hence fair value cannot be reliably measured and so cost is used Transfers of financial assets that are not derecognised in their entirety The following table shows transferred assets and associated liabilities only when the counterparty has recourse only to the transferred asset. The Group transfers of financial assets primarily through sale and repurchase of securities. The Group continues to recognise the securities in their entirety because it retains substantially all the risks and rewards of ownership. (In EUR millions) Carrying amount of assets before transfer Carrying amount of transferred assets 2014 Carrying amount of associated liabilities Fair value of transferred assets Fair value of associated liabilities Repurchase agreements Investment securities at fair value through P&L Investment securities classified as available for sale Total (In EUR millions) Carrying amount of assets before transfer Carrying amount of transferred assets 2013 Carrying amount of associated liabilities Fair value of transferred assets Fair value of associated liabilities Repurchase agreements Investment securities at fair value through P&L Total Annual report 2014 BHF Kleinwort Benson 95

98 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued Foreign currency risk The Group is exposed to market risk from changes in exchange rates that could impact the results of operations and the financial position. The Group is exposed to both translation as well as transaction risk. The translation risk is the risk that the consolidated financial statements are affected by changes in the prevailing exchange rates of the various currencies of the businesses or their subsidiaries relative to EUR. Transaction risk is the risk that the currency structure of the costs and liabilities deviates from the currency structure of the sales proceeds and assets. The main currencies the Group is exposed to are EUR, GBP, USD and CHF. CHF has been included in the disclosures for 2014 following the acquisition of BHF-BANK. When granting loans, booking deposits or taking positions in investments denominated in a foreign currency, the Group incurs foreign exchange risk if those positions are not closed by either investing or refinancing those positions in the respective currency, or by contracting cross currency swaps or foreign exchange forward contracts. The open foreign exchange positions (defined as the present value of the future cash flows discounted with the foreign interest rates) are monitored daily against pre-set limits and form the basis of foreign exchange risk controlling. The Group s currency exposure as at 31 December 2014 and comparative period are stated in EUR equivalent as follows: (In EUR millions) Gross exposure 2014 Hedged Net exposure GBP (221.7) USD (58.7) CHF (9.1) Other (58.4) Total currency exposure (61.9) EUR Total (60.1) (In EUR millions) Gross exposure 2013 Hedged Net exposure GBP (151.9) USD (63.5) Other (38.6) Total currency exposure EUR (33.4) Total (3.1) A strengthening of EUR against GBP or USD at 31 December 2014, of 10% would have decreased (increased) equity and profit/(loss) for the period by the amounts shown below. The analysis is performed on the same basis for the year ended 31 December A weakening of the GBP or USD against the EUR would have had the equal but opposite effect on the amounts shown below. (In EUR millions) Equity Profit/(loss) for the period Equity Profit/(loss) for the period GBP (6.9) (2.3) USD (19.9) 1.1 (1.3) (0.9) 96 BHF Kleinwort Benson Annual report 2014

99 Overview Strategy and business review 13. Financial risk management continued Interest rate risk Interest rate risk arises in the balance sheet as a result of fixed and variable rate assets and liabilities. Exposure to interest rate movements arises when a mismatch is created between interest rate sensitive assets and liabilities. Interest rate mismatches associated with the Group s financial services activities are monitored daily. The exposure to movements in interest rates is monitored in basis point values to a given rise in interest rates. The given rise in interest rates is calculated as 100 basis points (1%). Positions are monitored both individually and on an aggregated basis. Positions are monitored against approved limits. These limits have been assigned and approved on an individual currency and total position basis. The future principal and interest cash flows of each asset and liability are included based on their present value. The present value of future cash flows of interest bearing assets and liabilities are sensitive to changes in interest rates and thus this sensitivity represents the direction and degree of change in the value of a cash flow for a given change in the underlying interest rate. This approach to market risk exposure has the effect of showing the aggregated potential profit or loss, which the Group would be exposed to if interest rates were to rise or fall by 100 basis points. On such a basis points move, the value of any profits or losses would not be immediately recognised in the financial accounts. The value represents the potential gain or loss that would be realised over the life of the assets and liabilities if the move in interest rates were affected and all interest rates and positions remained static for their remaining life. (In EUR millions) Carrying amount Less than 3 months Between 3 and 12 months 2014 Repricing dates Between 1 and 5 years Non interest bearing More than 5 years Total Cash and balances with central banks Placements with, and loans and advances to other banks Fixed rate Variable rate Non-interest bearing Investment securities Debt and other fixed income securities 1, , ,381.7 Available for sale 2, , ,619.1 Held to maturity Non-interest bearing Loans and advances to customers Fixed rate Variable rate 1, ,007.5 Non-interest bearing Total 8, , , ,398.3 Loans and deposits due to other banks Fixed rate Variable rate Non-interest bearing Loans and deposits due to customers Fixed rate 2, , ,223.8 Variable rate 3, , ,247.3 Non-interest bearing Other liabilities Fixed rate Non-interest bearing Subordinated liabilities Fixed rate Total 7, , ,584.9 Interest rate derivatives (gross notional inflows) 4, , , , ,917.2 Interest rate derivatives (gross notional outflows) (4,237.6) (9,858.8) (11,228.5) (1,592.3) (26,917.2) Net notional inflow (outflow) (236.0) 1,450.5 (1,012.0) (202.5) Annual report 2014 BHF Kleinwort Benson 97

100 Notes to the consolidated financial statements for the year ended 31 December Financial risk management continued (In EUR millions) Carrying amount Less than 3 months Between 3 and 12 months 2013 Repricing dates Between 1 and 5 years More than 5 years Total Cash and balances with central banks Placements with, and loans and advances to other banks Fixed rate Variable rate Non-interest bearing Investment securities At fair value through profit or loss 1, ,349.7 Held to maturity Non-interest bearing Loans and advances to customers Fixed rate Variable rate Non-interest bearing Total 2, , , ,813.9 Loans and deposits due to other banks Fixed rate Non-interest bearing Loans and deposits due to customers Fixed rate 2, , ,059.5 Variable rate Total 2, , ,368.0 Interest rate derivatives (gross notional inflows) , ,523.1 Interest rate derivatives (gross notional outflows) (442.0) (400.9) (5,680.2) (6,523.1) Net notional inflow (outflow) (83.1) (199.0) For the purpose of comparability we have separately disclosed amounts that are non-interest bearing. These are principally current accounts held with other banks. The weighted average interest rates are as follows: (In %) Other banks Customers Other banks Customers Loans and advances to Loans and deposits due to Amounts due to and from other banks are typically short-term in nature with interest linked to LIBOR. An increase in the interest rate of 100 basis points would have an adverse affect on equity of 14.4 million in 2014 (2013: 1.4 million). 98 BHF Kleinwort Benson Annual report 2014

101 Overview Strategy and business review 14. Cash and balances with central banks Cash and balances with central banks are carried at amortised cost in the statement of financial position. Cash and cash equivalents include unrestricted balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. For the purposes of the cash flow statement, cash also includes loans and deposits to other banks that can be accessed without significant penalties for withdrawal. Loans and deposits repayable to customers on demand are included as cash and cash equivalents for the purpose of the cash flow Breakdown of cash and cash equivalents (In EUR millions) Cash and cash equivalents Unrestricted balances with central banks Cash restricted or pledged (see note ) Total Reconciliation with the statement of cash flow (In EUR millions) Cash and balances with central banks Loans and advances to other banks repayable on demand Loans and deposits from other banks repayable on demand (0.9) (0.5) Total Placements with, and loans and advances to other banks and customers Placements with, and loans and advances to other banks typically represent investments the Group has made in money market and Short-term deposits of other financial institutions. Loans and advances to customers represents amounts the Group has lent to customers, typically in the form of mortgages or other secured lending Detail of loans and advances (In EUR millions) Other banks 1, Customers Retail mortgages Retail other loans Corporate 1, Loan loss provision (31.0) (0.9) 2, Total 4, , Investment securities The Group maintains a high quality, liquid treasury portfolio, the majority of investments being classified as fair value through profit and loss. Available for sale financial assets principally comprise the Group s investment in a large number of small equity securities. Annual report 2014 BHF Kleinwort Benson 99

102 Notes to the consolidated financial statements for the year ended 31 December Investment securities continued (In EUR millions) Financial assets at fair value through profit or loss Debt securities and corporate bonds 1, ,349.7 Equity securities & other investments , ,355.9 Available for sale financial assets Equity securities Debt securities and corporate bonds 2, , Held to maturity investments Corporate bonds Total 4, , Derivatives The tables below show the Group s use of derivatives. Derivatives are only used for risk management and hedge accounting purposes. The Group uses fair value hedge accounting (see note 13) to hedge the interest rate risk associated with debt securities classified as available for sale. See note 8 for the net gains and losses on hedging instruments and the corresponding movements attributable to the hedged risk. Derivatives which for accounting purposes are classified as held for trading relate to a legacy trading book helf by BHF-BANK. This book is in run-off and all future risk is hedged. The Group has no material active trading positions Derivative assets (In EUR millions) Notional principal amount Held for risk management 2014 Designated in a hedging relationship Held for trading Fair value total Interest rate Interest rate swap ( Over the Counter ) 7, Interest rate options ( Over the Counter ) Interest rate futures (Exchange Traded) Foreign currency Currency swaps Forward exchange contracts Forex options Total 9, (In EUR millions) Notional principal amount Held for risk management 2013 Designated in a hedging relationship Held for trading Fair value total Interest rate Interest rate swap ( Over the Counter ) Interest rate options ( Over the Counter ) Interest rate futures (Exchange Traded) Foreign currency Currency swaps Forward exchange contracts Forex options Total 1, BHF Kleinwort Benson Annual report 2014

103 Overview Strategy and business review 17. Derivatives continued 17.2 Derivative liabilities (In EUR millions) Notional principal amount Held for risk management 2014 Designated in a hedging relationship Held for trading Interest rate Interest rate swap ( Over the Counter ) 7, Interest rate options ( Over the Counter ) Interest rate futures (Exchange Traded) 7, Foreign currency Currency swaps Forward exchange contracts Forex options Total 16, Total (In EUR millions) Notional principal amount Held for risk management 2013 Designated in a hedging relationship Held for trading Interest rate Interest rate swap ( Over the Counter ) Interest rate futures (Exchange Traded) 5,343.1 Foreign currency Currency swaps Forward exchange contracts Total 5, Total 18. Investments in equity accounted investees During 2013, the Group sold its investments in SigmaXYZ and Shaklee, the latter having been accounted for as an asset held for sale during At 31 December 2014 the Group s remaining equity accounted investment comprised its non-controlling interest in Quirin Bank AG which had a carrying value of 18.4 million. Associates Associates are those entities in which BHF KB has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when BHF KB owns, directly or indirectly through subsidiaries, between 20% and 50% of the voting power of an entity unless it can be clearly demonstrated that such ownership does constitute control, in which case, the associate is considered to be a subsidiary. The consolidated financial statements include the Group s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group s share of losses exceeds its interest in an associate, the Group s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate. Annual report 2014 BHF Kleinwort Benson 101

104 Notes to the consolidated financial statements for the year ended 31 December Investments in equity accounted investees continued Financial information Investments in equity accounted investees at 31 December 2014 and 2013 are broken down as follows: (In EUR millions) Quirin Total The summary of the latest available financial information is as follows: Quirin (In EUR millions) Assets Financial assets Non-financial assets Equity and liabilities Equity Liabilities Revenue Profit (loss) for the period There were no other items of other comprehensive income in either 2014 or Changes during the period (In EUR millions) Balance at the start of the year Disposal of SigmaXYZ (2.9) Group s share of profit for the period Balance at the end of the year Goodwill and impairment of goodwill The table below shows the historic cost of ownership interests in associates as well as the associated goodwill embedded in the carrying value at the time of acquisition. Quirin (In EUR millions unless otherwise stated) Note Historic cost of investment Ownership % 27.8% Goodwill The recoverable amount of BHF KB s investment in Quirin was tested for impairment by applying a market based multiple to its assets under management. At 31 December 2014, based on the quoted price of Quirin Bank AG, the Group s investment was valued at 17.0 million (2013: 16.9 million). 102 BHF Kleinwort Benson Annual report 2014

105 Overview Strategy and business review 19. Accrued income and other assets Trade and other receivables are stated at their cost less impairment losses. An estimate is made for doubtful receivables based on a review of all outstanding amounts at each reporting date. Impairment losses are recorded during the year in which they are identified. Prepayments arise where the Group pays cash in advance for services. As the service is provided, the prepayment is reduced and the operating expense recognised in the income statement. (In EUR millions) Fee debtors Settlement balances 19.6 Prepayments Accrued income Trade receivables Due from brokers 3.6 Other assets Total Included in other receivables for 2014 and 2013 is 7.8 million and 7.4 million respectively due from Kleinwort Benson s former parent, Commerzbank AG, in respect of indemnities given to cover a proportion of the maximum expected costs incurred in settling claims against the Group from business concluded in periods prior to ownership by the Group. Annual report 2014 BHF Kleinwort Benson 103

106 Notes to the consolidated financial statements for the year ended 31 December Property, plant and equipment The Group s property, plant and equipment provides the infrastructure needed to enable the Group to operate and includes buildings, leasehold improvements, office equipment and motor vehicles. Cost Property, plant and equipment is stated at historic cost less accumulated depreciation and accumulated impairment losses. Depreciation Depreciation is charged as an operating expense on a straight-line basis over the asset s estimated useful life. The estimated useful lives are as follows: (In years) Buildings 99 Leasehold improvements 3 10 Motor vehicles and computer hardware 3 10 Fixtures and fittings 1 5 (In EUR millions) Buildings and leasehold improvements Motor vehicles and computer hardware Fixtures and fittings Other Total 1 January Additions Depreciation (1.4) (1.7) (0.4) (3.5) Disposals (0.1) (0.1) Effect of exchange rates (0.4) (0.4) Transfers 1.6 (1.6) December January Acquired in business combination Additions Depreciation (2.1) (1.5) (1.6) (5.2) Impairment (0.5) (0.5) Disposals (3.7) (0.1) (3.8) Effect of exchange rates 0.6 (0.1) 0.5 Transfers (0.1) (0.3) 0.6 (0.2) December Intangible assets The Group s intangible assets comprise two main categories: (i) intangible assets arising from a business combination, and (ii) software development costs. Intangible assets arising from a business combination include goodwill, brand names and customer relationships. Goodwill Goodwill arising from a business combination represents the excess of the fair value of the consideration transferred less the Group s interest in the fair value of the assets and liabilities of subsidiaries at the date of the acquisition. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is tested at least annually for impairment. Goodwill is expressed in the currency of the subsidiary to which it relates to and is translated to EUR using the year-end exchange rate, with the resulting foreign exchange difference recognised in other comprehensive income. Negative goodwill arising on an acquisition is recognised in profit or loss. Expenditure on internally generated goodwill and brands is recognised in profit or loss as incurred. 104 BHF Kleinwort Benson Annual report 2014

107 Overview Strategy and business review 21. Intangible assets continued Development costs Software Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. Expenditure on internally developed software is capitalised if it results in the design for new or substantially improved products and processes. Development expenditure is capitalised only if development costs can be measured reliably, the process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use the asset. The expenditure capitalised includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in profit or loss as incurred. Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives and is recognised within general and administrative expenses in the income statement (see note 10). The estimated useful lives are as follows: (In years) Software 3 5 Customer relationships 10 Customer relationships have a remaining useful life of 5.5 years. Fair value The fair value of brands acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the brand being owned. The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method. Impairment Goodwill and brand names are tested annually for impairment, or whenever there is an indicator that the recoverable amount of assets has declined. An impairment loss is recognised if the carrying amount of an asset or the cash generating unit ( CGU ) to which the assets relate exceeds its recoverable amount. Recoverable amount is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to an operating segment ceiling test, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Annual report 2014 BHF Kleinwort Benson 105

108 Notes to the consolidated financial statements for the year ended 31 December Intangible assets continued Breakdown and roll forward (In EUR millions) Goodwill Brand names Customer relationships Software Total 1 January Additions Amortisation (0.7) (2.9) (3.6) Impairment (0.8) (0.8) Effect of exchange rates (0.5) (0.2) (0.4) (1.1) 31 December January Acquired in business combination Additions Amortisation (0.7) (6.1) (6.8) Impairment (0.2) (0.2) Effect of exchange rates December Impairment testing Analysis In accordance with IAS 36 (Impairment of Assets), the Group reviewed the carrying values of its intangible assets at 31 December 2014 and 31 December As a result of this review the Group recognised an impairment charge of 0.2 million (2013: 0.8 million) relating to software that was previously under development but will no longer be used Impairment testing for cash generating units containing goodwill For the purpose of impairment testing, goodwill is allocated to the Group s CGU which represent the lowest level within the Group at which the goodwill is monitored for internal management purposes which is not higher than the level of the Group s operating segments. Allocation of goodwill to CGUs (In EUR millions) Kleinwort Benson Investors The Group determined the potential impairment of its CGUs containing goodwill by comparing their carrying value, including goodwill, with their recoverable amount. The assessment of the recoverable amount included a review and analysis of (a) valuation multiples for groups of publicly listed, comparable companies and (b) the projected financial performance based on budgets and business plans prepared by the consolidated subsidiaries respective managements. Goodwill attributable to Kleinwort Benson Investors The value in use for Kleinwort Benson Investors was determined by discounting their future cash flows, based on management s five year business plans, as approved by Kleinwort Benson Investors Board of Directors. For the calculation of the terminal or residual value for the period beyond the discrete projections, the Group used a terminal growth rate of nil (2013: nil). The present value of estimated future cash flows and residual cash flows was discounted using a discount rate that was based on the weighted average cost of capital ( WACC ) of a group of comparable publicly traded companies adjusted for risks specific to Kleinwort Benson. The calculation utilised (a) a peer group average as pre-tax required cost of debt and (b) the industry debt-to-capital ratio and the observed median of betas in the group. The risk adjusted WACC for Kleinwort Benson Investors amounted to 11.3% (2013: 10.8%). 106 BHF Kleinwort Benson Annual report 2014

109 Overview Strategy and business review 21. Intangible assets continued Testing goodwill for impairment involves a significant amount of estimation. Cash flow projections necessarily take into account changes in the market in which a business operates including the level of growth, competitive activity and the impacts of regulatory change. Determining both the expected pre-tax cash flows and the risk adjusted WACC appropriate to the CGU requires the exercise of judgement. The estimation of pre-tax cash flows is sensitive to the assumptions underlying the detailed forecasts and to assumptions regarding the long-term sustainable cash flows. Following sensitivity analysis, management have concluded that an impairment would not result following reasonably possible changes to the key assumptions used to determined value in use. Additionally, a comparison of Kleinwort Benson Investors actual results to the projected results used to assess goodwill impairment in prior years reveals that there would be no changes to the carrying value of the goodwill related to Kleinwort Benson Investors in the year as a result of inaccuracies in its projections Impairment testing for brand names The Kleinwort Benson brand name was acquired as part of the acquisition of Kleinwort Benson by the Group in The brand has been tested for impairment by estimating the future royalty payments that have been avoided as a result of the brand name being owned. A royalty rate of 1.5% has been applied to the estimated future revenue streams from the Group s financial services businesses based on management s four year business plans as approved by the respective Board of Directors. For periods beyond those covered by management s projections the Group used a terminal growth rate of 1% (2013: 1%). The business plans were based on (a) conservative estimates of market performance of AuM reflecting historical average returns on balanced private banking portfolios derived from independent research, (b) a low interest rate environment with base rates remaining at current low levels and (c) costs increasing as a result of steady inflation rates. The present value of estimated future cash flows was discounted using a discount rate based on the WACC of a group of comparable publicly traded companies adjusted for risks specific to the Group. The calculation utilised (a) risk free rates observed in the UK, (b) a peer group average of debt to equity ratios and (c) the observed median of betas in the group. The discount rate used by the Group was 8.8% (2013: 10.8%). Based on the impairment test performed, the Group concluded that the brand was not impaired at 31 December 2014 or Testing intangible assets for impairment involves a significant amount of estimation. Cash flow projections necessarily take into account changes in the market in which a business operates including the level of growth, competitive activity and the impacts of regulatory change. Determining both the expected pre-tax cash flows and the risk adjusted WACC appropriate to the CGU requires the exercise of judgement. The estimation of pre-tax cash flows is sensitive to the assumptions underlying the detailed forecasts and to assumptions regarding the long-term sustainable cash flows. A combination of a decrease in the growth rate and an increase of the discount rate of 1%, would reduce the recoverable amount of the brand by 4.3 million, but this would not lead to the recognition of an impairment charge (in 2013 applying the same sensitivities would have lead to a reduction in the recoverable amount of 3.5 million and the recognition of an impairment charge of 0.5 million). A comparison of Kleinwort Benson s actual results to the projected results used to assess impairment in prior years reveals that the Group would have recognised no changes to the carrying value of the intangibles related to Kleinwort Benson in the year as a result of inaccuracies in its projections. Annual report 2014 BHF Kleinwort Benson 107

110 Notes to the consolidated financial statements for the year ended 31 December Loans and deposits due to other banks and customers Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over the period of the borrowings on an effective interest basis. (In EUR millions) Other banks Deposits Settlement balances , Customers Retail 1, ,173.4 Corporate 4, ,105.6 Cash collateral on derivatives 4.2 Promissory notes , ,279.0 Total 7, ,368.0 The deposits due to customers are classified as follows: (In EUR millions) Retail customers Term deposits Current deposits , ,173.4 Corporate customers Term deposits Current deposits 3, , ,105.6 Total 5, , Provisions Provisions A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The timing and amount of settlement of each legal claim or potential claim and constructive obligation is uncertain. The Group has performed an assessment of the timing and amount and reviews this assessment periodically. Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for. Termination benefits Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. 108 BHF Kleinwort Benson Annual report 2014

111 Overview Strategy and business review 23. Provisions continued Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with the contract. The provisions have increased from 14.8 million to 50.6 million during the year due to the following changes: (In EUR millions) Restructuring Legal proceedings Onerous contracts Other Total 1 January Additions Increases through business combinations Utilisations (10.3) (0.6) (0.3) (8.6) (19.8) Reversals (0.1) (0.2) (8.3) (8.6) Transfers to other liabilities (1.1) (1.1) Effect of exchange rate December Restructuring provisions primarily relate to the outsourcing of back office functions; these provisions are short-term in nature and are expected to be utilised in Included within legal provisions are amounts of approximately 8.7 million for historic claims that were brought against Kleinwort Benson prior to the Group s ownership. The claims have been indemnified by the previous parent undertaking, Commerzbank AG, to approximately 90% of the expected maximum value of any such claims (see note 19). As the amounts that may have to be paid are subject to legal negotiations it is not possible to reasonably estimate when these may be settled. Additionally the Group has taken on provisions brought against BHF prior to its ownership. Deductions for these provisions were incorporated into the negotiations of the purchase price of BHF. These provisions are subject to indemnities which could result in flows to the Group if the provision is found to be inadequate. Other provisions mainly comprise accrued expenses for which the timing of when the amounts will be paid is unknown. As such they have been included within provisions Expected maturity of provisions (In EUR millions) Restructuring Legal proceedings Onerous contracts Other Total Less than 1 year Between 1 and 5 years Over 5 years Total Annual report 2014 BHF Kleinwort Benson 109

112 Notes to the consolidated financial statements for the year ended 31 December Trade payables, accrued expenses and other liabilities Trade and other payables Trade and other payables are stated at cost. Trade creditors are costs that have been billed; accruals represent costs, including remuneration, that are not yet billed or due for payment, but for which the goods or services have been received. Deferred income represents fees received in advance of services being performed. (In EUR millions) Accrued expenses Personnel expenses Settlement balances 24.5 Other creditors Deferred income Remuneration liabilities Trade payables Due to brokers Other Total Deferred tax assets and liabilities Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: initial recognition of goodwill; initial recognition of assets or liabilities in a transaction other than a business combination that affect neither accounting nor taxable profit; investments in subsidiaries to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is reviewed at each reporting date and probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised Net deferred tax assets (liabilities) (In EUR millions) Deferred tax assets Deferred tax liabilities (6.9) (4.8) Net deferred tax assets (liabilities) 26.6 (4.3) 110 BHF Kleinwort Benson Annual report 2014

113 Overview Strategy and business review 25. Deferred tax assets and liabilities continued Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: (In EUR millions) Assets Liabilities Net Assets Liabilities Net Intangible assets 0.9 (4.6) (3.7) (4.5) (4.5) Employee benefits (2.3) (2.3) (0.3) (0.3) Other items Tax value of loss carry-forwards Total 33.5 (6.9) (4.8) (4.3) Movement in temporary differences during the period A deferred tax asset is recognised only to the extent that it is reviewed at each reporting date and probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (In EUR millions) Opening balance Acquired through business combination Effect of exchange rates 2014 Transfers Recognised in profit or loss Recognised in other comprehensive income Closing balance Intangible assets (4.5) 0.9 (0.3) 0.2 (3.7) Employee benefits (0.3) (2.6) (0.7) (2.3) Other items Tax loss carry forwards Net tax assets (liabilities) (4.3) 25.8 (0.3) (In EUR millions) Opening balance Effect of exchange rates 2013 Recognised in profit or loss Recognised in other comprehensive income Closing balance Intangible assets (5.7) (4.5) Employee benefits (0.2) (0.1) (0.3) Other items Tax loss carry forwards 0.5 (0.2) 0.3 Net tax assets (liabilities) (5.3) (4.3) Tax losses At 31 December 2014, the Group had net operating losses in aggregate of million (2013: million), which are available to be offset against future taxable income. These losses, if not utilised, will expire as follows: (In EUR millions) Less than one year Between one and five years More than five years Total The tax losses are available for carry forward in the following tax jurisdictions: (In EUR millions) Belgium United Kingdom Switzerland Germany 6.4 Luxembourg 2.0 Republic of Ireland USA 5.2 Total Annual report 2014 BHF Kleinwort Benson 111

114 Notes to the consolidated financial statements for the year ended 31 December Deferred tax assets and liabilities continued The movement between periods can be summarised by the addition of 39.6 million from current year losses, change in ownership 22.1 million and adjustments relating to prior years which reduce brought forward balances by 9.4 million Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items as management do not currently consider them to be recoverable: (In EUR millions) Tax losses Total These tax losses are typically ringfenced by subsidiary and can not be transferred across businesses. 26. Employee benefits The Group has two types of pension plans for employees: defined benefit plans where the Group has an obligation to provide participating employees with pension payments that represent a specified percentage of their final salary for each year of service, and defined contribution plans, where the Group s contribution to an employee s pension is measured as, and limited to, a specified percentage of salary. Defined benefit plans exist in BHF and Kleinwort Benson Channel Islands Holdings Limited. As at 31 December 2014, the net positions of the defined benefit pension schemes is broken down as follows: (In EUR millions) Kleinwort Benson schemes 1.6 BHF-BANK schemes 50.6 N/A Total The KBCIH scheme has been closed to new members since 2001 and only has a small number of members. The net position of the scheme within the Consolidated statement of financial position at 31 December 2014 is nil and as such the disclosures that follow comprise the defined benefit schemes of BHF-BANK. Defined benefit plans Accounting for defined benefit plans requires an estimate of likely future pension payments to be made. The Group periodically reviews its defined benefit plans using actuarial specialists to assess whether it is on course to meet the expected pension payments that current and former employees are or will be entitled to. The income statement charge or credit represents the sum of pension entitlements earned by employees in the period, plus a notional net interest charge (if the scheme is in deficit) or income (if it is in surplus) based on the market yields on high-quality corporate bonds. This charge is presented within operating expenses. Differences between actual investment returns and the notional interest amount, as well as actuarial changes in estimating the present value of future liabilities, are recorded in other comprehensive income. Assets or liabilities in the statement of financial position represent the differences between the fair value of plan assets (if any) and the actuarially-determined estimates of the present value of future liabilities. Any net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan. Defined contribution plans The Group s exposure to funding DC pension schemes is limited to the contributions it has agreed to make. These contributions generally stop when employment ceases. The income statement charge represents the contributions the Group has agreed to make into employees pension schemes in that period. Financial impact of defined benefit plans Pensions and similar obligations gave rise both to underfunding and overfunding. These amounts are shown within employee benefits in the consolidated statement of financial position. The following information takes account of both underfunding and overfunding and is therefore presented on a net basis. 112 BHF Kleinwort Benson Annual report 2014

115 Overview Strategy and business review 26. Employee benefits continued Movement in the fair value of the plan assets Acquired scheme assets Contribution paid by the Group into the plan (7.3) Contribution paid by the participants into the plan 0.3 Benefits paid by the plan (9.4) Interest on assets 8.7 Exchange gains (losses) 0.1 Assets distributed on settlement (25.6) Actuarial gains (losses) 31.6 Administration expenses (0.4) Closing balance Movement in the present value of defined obligations Acquired defined benefit obligation Current service cost 3.5 Past service cost (0.1) Interest on obligation 9.6 Employee contributions 0.6 Settlements (27.9) Exchange (gains) losses 0.4 Benefits paid by the plan (9.5) Experience losses (gains) (4.0) Losses (gains) from changes in financial assumptions 48.5 Closing balance The plan assets are comprised of the following asset classes for which there are quoted market prices in an active market (assets do not comprise either own financial instruments or owner occupied property): Cash and cash equivalents 6.5 Securities funds Miscellaneous assets The key actuarial assumptions used to value the plans are as follows: (% per annum) 2014 (1) Discount rate 1.4% 2.3% Rate of increase in pension obligations 0.3% 1.8% Salary increases 1.5% 2.5% (1) Assumptions apply to BHF-BANK and its subsidiaries in Germany and Luxembourg, separate assumptions apply to the plan for BHF-BANK s Swiss subsidiary. Annual report 2014 BHF Kleinwort Benson 113

116 Notes to the consolidated financial statements for the year ended 31 December Employee benefits continued Mortality assumptions The anticipated life expectancy for current pensioners ranges from 84 years to 89 years. The sensitivities to the key assumptions are as follows: Obligation Sensitivity to changes in the discount rate Discount rate increase by 50bp Discount rate decrease by 50bp Sensitivity to changes in the rate of increase in pension obligations Rate on pension increase increase by 50bp Rate on pension increase decrease by 50bp Sensitivity to changes in the rate of inflation Inflation increase by 50bp Inflation decrease by 50bp Sensitivity to changes in mortality Improvement by 10% Benefit payments fall due as follows: Obligation to The income statement charge for retirement benefit costs is as follows: (In EUR millions) 2014 Pension (credit)/charge defined benefit plans 1.1 Pension costs defined contribution plans 6.6 Total 7.7 The defined benefit income statement charge is comprised of the following: (In EUR millions) 2014 Current service cost 2.5 Past service cost (0.1) Interest on obligation 9.6 Return on plan assets (8.7) Curtailments and settlements (2.2) Total BHF Kleinwort Benson Annual report 2014

117 Overview Strategy and business review 27. Capital and reserves Share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares are classified as treasury shares and presented as a deduction from total equity. Dividends are recognised as a liability in the period in which they are declared. Transaction costs related to the issuance of shares are accounted for as a deduction from equity, net of any tax effects Share capital and share premium At 31 December 2014, the share capital of BHF KB amounted to million (2013: million) represented by 132,244,164 shares without nominal value (2013: 85,545,547 shares). All shares are listed on Euronext Brussels, have the same rights and are fully paid up. Each share entitles the holder to one voting right. On 26 March 2014 the Company issued 5,500,198 shares with an aggregate par value of 30.6 million as part of the consideration relating to the acquisition of BHF-BANK AG. On 23 September 2014 the Company issued 41,198,419 shares in exchange for the shares held in Kleinwort Benson Group (a subsidiary of the Company) by the co-investors in the BHF-BANK acquisition. These shares are subject to a minimum holding period that expires in March Breakdown of the consolidated reserves (In EUR millions) Translation reserve 7.1 (10.0) Reserve for own shares (3.4) (4.7) Fair value reserve 3.2 (0.4) Other reserve (14.0) (0.9) Total (7.1) (16.0) The consolidated reserves have increased from (16.0) million as of 31 December 2013 to (7.1) million as of 31 December 2014 due to the following changes: (In EUR millions) Other reserve Translation reserve Reserve for own shares Fair value reserve Opening balance (0.9) (10.0) (4.7) (0.4) (16.0) Currency translation gains Difference between fair value and par value of shares issued (10.1) (10.1) Remeasurement of liabilities to NCI (3.0) (3.0) Net change in the fair value of available for sale financial assets Purchase of own shares (3.9) (3.9) Distribution of own shares Closing balance (14.0) 7.0 (3.3) 3.2 (7.1) Total Translation reserve The translation reserve comprises all foreign currency exchange differences arising from the translation of the financial statements of foreign operations. Annual report 2014 BHF Kleinwort Benson 115

118 Notes to the consolidated financial statements for the year ended 31 December Capital and reserves continued Reserve for own shares The reserve for the Company s own shares comprises the cost of the Company s shares held by BHF KB. At 31 December 2014, BHF KB held 756,389 own shares compared to 549,028 own shares at 31 December The movement during the year in the number of shares held is as follows: (In EUR millions) Opening balance 549,028 1,258,811 Acquisitions 883,759 Distributions (676,398) (709,783) Closing balance 756, ,028 On 31 October 2014 the Company launched a share buyback program under the authority granted by the Shareholders Meeting of 17 June The program lasted until 30 January 2015 and during the period 1,140,118 of shares were purchased for an aggregate consideration of 5.1 million of which 883,759 were purchased in the period to 31 December 2014 for consideration of 4.0 million. No shares were acquired in The distributions resulted from the vesting of restricted stock units granted to certain employees Fair value reserve The fair value reserve comprises the gains or losses on available for sale financial assets, except for impairment losses and foreign exchange gains and losses, until the financial assets are derecognised Other reserve The movements in the other reserve relate to the remeasurement of a put option granted to Virtus Investment Partners who entered in a strategic partnership with the Group s asset management business KBI. The partnership aims to develop KBI s offering in the lucrative US retail market. The strong commitment of both parties to this agreement is shown by Virtus acquiring a 24% interest in Kleinwort Benson Investors International Ltd. In accordance with current practice under IFRS, the Group has chosen not to present a non-controlling interest in the consolidated financial statements and has decided to take the fair value movements arising from the remeasurement of the put option directly to equity. Additionally, as mentioned in note 27.1, the Company issued 5,500,198 shares with an aggregate par value of 30.6 million linked to the acquisition of BHF-BANK. IFRS 3 requires these shares to be measured at the fair value at the date of issue. At 26 March 2014 the aggregate fair value of the shares was 20.5 million, the difference of 10.1 million has been recorded in other reserves Transaction with shareholders In March 2014, to fund the acquisition of BHF-BANK (see note 29) and to cover acquisition related expenses, Kleinwort Benson Group Limited ( KBG ) issued capital to a group of co-investors which resulted in them taking a 34.22% stake in KBG in exchange for million. BHF KB, at the same time, also injected million of cash into KBG. Following the finalisation of the purchase price of BHF-BANK, the co-investor group s share of KBG was adjusted to 35.13%. Prior to these transactions KBG was 100% owned by BHF KB. In September 2014 the Company announced that it had reached agreement with the co-investors to convert their shares in KBG into 41,198,419 shares of the Company giving them a holding of 31.2% (excluding shares held by Timothy C. Collins and affiliated entities prior to the conversion). After this transaction KBG became a fully-owned subsidiary once again. In accordance with IAS 27 gains and losses resulting from changes in stakes in subsidiaries without losing control have been accounted for as an equity transaction. The difference between the capital that the co-investors injected and their proportionate share of the book value of assets acquired of 49.6 million has been recorded within retained earnings. 116 BHF Kleinwort Benson Annual report 2014

119 Overview Strategy and business review 28. Capital management The Group s policy is to maintain a capital base which preserves investor and creditor confidence and to sustain future development of the business. Since the Company has a degree of flexibility regarding its capital usage and associated regulatory requirement, due to the liquid nature of its asset base, management believes it would be able to maintain suitable Tier 1 and solvency ratios even in the event of stresses to the profit or loss account. The impact of the level of capital on shareholders return is also recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position, especially in the light of the current market conditions. The Group s capital adequacy and capital resources are managed and monitored in accordance with the regulatory capital requirements of the PRA. The Group must at all times monitor and demonstrate the compliance with the relevant regulatory capital requirements of the PRA. The Group has put in place processes and controls, including a range of detailed stress testing scenarios, to monitor and manage the Group s capital adequacy. Certain subsidiaries are subject to dividend restrictions resulting from minimum capital and solvency requirements imposed by regulations in the countries in which those subsidiaries operate. Below is the consolidated Tier 1 capital ratio and risk weighted assets ( RWA ) of the Group. The figures for 2014 have been calculated on a Basel III basis, whereas 2013 are shown on a Basel II basis (the figures below are unaudited). (In EUR millions) Capital Tier 1 unaudited Total assets 9, ,957.8 RWA unaudited Credit risk 3, Market risk Operational risk Total RWA 4, ,352.7 Tier 1 ratio 17% 34% 29. Acquisitions of subsidiaries and non-controlling interests Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Please see note 21 for how the Group measures goodwill at the acquisition date. If negative goodwill arises on the acquisition this amount is recognised immediately in profit or loss. Transactions costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Acquisitions of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and are therefore recorded in equity. No goodwill is recognised as a result. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. Annual report 2014 BHF Kleinwort Benson 117

120 Notes to the consolidated financial statements for the year ended 31 December Acquisitions of subsidiaries and non-controlling interests continued Business combinations completed during 2014 On 27 March 2014, the Group announced the completion of the acquisition of 100% of the share capital of BHF-BANK AG from Deutsche Bank for consideration with a book value of 340 million. The acquisition complements the Group s merchant banking offering by adding further scale and strengthening our private banking, wealth management and asset management businesses and allowing expansion into financial markets and corporate banking. KBG (which prior to the acquisition was a 100% owned subsidiary of the Company) acquired a 91% interest in BHF-BANK for cash consideration of million, with the Company acquiring the remaining 9% of BHF-BANK directly for shares with a par value of 30.6 million. At the same time the Company diluted its holding in KBG from 100% to 65.78% following the injection of million of capital into KBG by co-investors comprised of Fosun Group, AQTON SE (the wholly owned strategic investment company of German entrepreneur Stefan Quandt), and entities affiliated with Timothy C. Collins. Following agreed post closing adjustments, the final purchase price increased to 347 million mainly as a result of upward adjustments to the underlying net asset value of BHF-BANK which formed the basis of the purchase price. 3.5 million of this increase was funded by the co-investors and their holding in KBG increased to 35.13%. As more fully described in note 27, on 23 September 2014 the Company announced that it had reached agreement with the co-investors to convert their shares in KBG into 41,198,419 shares of the Company meaning that KBG became a fully owned subsidiary once again. As is customary with business combinations there are indemnity mechanisms in place which mean that the resolution of significant uncertainties that existed at the balance sheet date will result in either the flow of money back to the Group, or will result in receipts received by BHF-BANK flowing back to the BHF-BANK s former parent, Deutsche Bank. As at 31 December 2014, a provisional amount of 11.6 million has been accrued as being owed to Deutsche Bank. Fair value of consideration transferred As noted above the purchase price comprised both cash and shares. The cash transferred amounted to million, whilst the share component, in accordance with IFRS 3, had a fair value of 20.5 million on the date of the acquisition compared to a par value of 30.6 million. For the purposes of calculating the negative goodwill arising on the acquisition the provisional indemnity accrual of 11.6 million is included within the purchase price. Fair values of the identifiable assets acquired and liabilities assumed The following table summarises the fair value of recognised amounts of assets acquired and liabilities assumed at the acquisition date. (In EUR millions) Fair values Cash and balances with central banks 16.4 Placements with, and loans and advances to other banks 1,477.1 Investment securities 2,878.1 Loans and advances to customers 1,478.8 Property plant and equipment 56.1 Intangible assets 11.3 Other receivables Loans and deposits due to other banks (1,316.1) Loans and deposits due to customers (3,719.0) Net derivative liabilities (92.1) Other liabilities (226.2) Subordinated capital (231.7) Total identifiable net assets acquired The gross contractual amounts of acquired loans and receivables due from credit institutions and customers was 2,991.5 million with 35.6 million contractual cash flows not expected to be collected and hence have been provided for on acquisition. 118 BHF Kleinwort Benson Annual report 2014

121 Overview Strategy and business review 29. Acquisitions of subsidiaries and non-controlling interests continued Negative goodwill arising Based on the fair value of consideration transferred of million, the fair value of assets acquired of million, and taking account of the indemnity mechanism negative goodwill of million has been recognised and credited to the consolidated statement of profit and loss. Impact of the acquisition on the statement of consolidated profit and loss In the nine months to 31 December 2014, BHF-BANK contributed operating income of million and profit of 3.2 million before adjusting for the indemnified items to the Group s results. If the acquisition had occurred on 1 January 2014, on a pro-forma basis, operating income would have been million and consolidated profit for the period would have been 81.6 million. The Group incurred acquisition related costs of 10.1 million; these have been included in operating expenses (see note 10). 30. Discontinued operations In recent years the Company has transformed from an industrial holding group into a focused financial services group and has divested all of its legacy investments. There were no discontinued operations in 2014, although Asahi Tec, a former part of the legacy portfolio of the Company, announced that it had resolved its dispute with the US Pension Benefit Guaranty Corporation ( PBGC ) settling PBGC s claim for USD 39.5 million. Under the terms of an indemnity given in connection with the sale, the Group paid 9.6 million as final settlement to Asahi Tec. This amount has been included within operating expenses (see note 10). Discontinued operations in 2013 related to the disposal of the non-controlling interests of Shaklee Global Group, SigmaXYZ and the results of the merchant banking business conducted through Ripplewood. To qualify for presentation as a discontinued operation, the operation must be a separate major line of business or geographical area of operations that has been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is restated as if the operation had been discontinued from the start of the comparative period. Immediately before classification as held for sale, the measurement of all assets and liabilities in the disposal group is brought up to date in accordance with applicable IFRSs. On initial classification as held for sale, non-current assets and disposal groups are recognised at the lower of carrying amount and fair value less cost to sell. Impairment losses on initial classification as held for sale are included in profit or loss. The same applies to gains and losses on subsequent remeasurement Year ended 31 December (In EUR millions) Merchant Banking Shaklee SigmaXYZ Total Operating expenses (10.2) (10.2) Final contribution to fund wind down expenses (3.6) (3.6) Operating loss (13.8) (13.8) Gain (loss) on disposal (13.7) 12.1 (1.6) Profit (loss) for the period (13.8) (13.7) 12.1 (15.4) There are no separate cash flows for discontinued operations for the year ended 31 December 2013 as Shaklee and SigmaXYZ were accounted for on an equity basis and the merchant banking operations were funded by intra-group recharges. Annual report 2014 BHF Kleinwort Benson 119

122 Notes to the consolidated financial statements for the year ended 31 December Discontinued operations continued Shaklee Global Group On 27 June 2013 the Group disposed of 96% of its non-controlling interest in Shaklee by means of a share buyback. The sale resulted in a consolidated loss of 13.7 million after the recycling of foreign exchange movements that had previously been recognised through other comprehensive income. Part of the consideration from the sale was deferred in the form of an unsecured loan note of JPY 1 billion which was due for repayment by 2016 at the latest, which is interest bearing and yields a rate of 2.37% per annum. The interest income and related foreign exchange movements are recorded in the statement of comprehensive income. The Group agreed to the early redemption of the loan note in 2015 for JPY 928 million in full and final settlement. The remaining 4% of the Group s interest in Shaklee, representing less than 1.6% of Shaklee s issued share capital, was subject to a call option at the price of JPY 500 per share. This option was exercised in SigmaXYZ The disposal of the Group s 21.8% interest in SigmaXYZ, a business consulting services company, was completed in two tranches. Firstly through the disposal of half of the Group s 21.8% interest to a number of Japanese buyers in September 2013 with the second half being realised through an initial public offering on the Tokyo Stock Exchange in December These transactions generated cash proceeds of 17 million and resulted in a gain on disposal of 12.1 million. Merchant banking operations of Ripplewood In December 2013 the Group completed the spin-off of its merchant banking operations previously conducted by Ripplewood into a separate legal entity, Kleinwort Benson Advisors LLC ( KBA ). As part of this arrangement, the Group held a 19% interest in KBA which granted it access to potential investment products and services. The Group made a capped and final cash payment of $5 million ( 3.6 million) as consideration for our equity stake and as a contribution to the costs of winding down the operations of Ripplewood Holdings LLC. This was fully expensed in Following this divestment we have presented the results of the merchant banking operations as discontinued. During 2014, KBA changed its name to Ripplewood Advisors LLC ( Ripplewood Advisors ). Since its formation, Ripplewood Advisors pace of investment and capital needs have outpaced expectations. The Group determined that it was unwilling to fund its share of these capital needs, and as such, in December 2014, agreed to sell its interest in Ripplewood Advisors to an affiliate of Mr. Collins (Mr Collins was a director of the Company until 3 May 2014) for cash consideration of $4 million. The licence of the name Kleinwort Benson Advisors granted to Ripplewood has also been terminated. As the access to potential investments and services was for the benefit of the Group s Wealth Management business, the interest had previously been transferred to KBWM, which recorded the gain on disposal within other income. 120 BHF Kleinwort Benson Annual report 2014

123 Overview Strategy and business review 31. Earnings per share The calculation of earnings per share ( EPS ) shows the amount of profit (or loss) attributable to each share (excluding shares held by the Company). Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees. As detailed in note 27 the Company issued 46,698,617 million of shares during the period. (In EUR millions unless otherwise stated) Continuing operations Discontinued operations Total Continuing operations Discontinued operations Profit/(Loss) for the period attributable to shareholders of the Company (51.0) (15.4) (66.4) Issued ordinary shares at the beginning of the period, net of own shares 84,996,519 84,996,519 84,996,519 84,286,736 84,286,736 84,286,736 Issued during the period 13,966,403 13,966,403 13,966, Weighted effect of own shares Acquired during the period (26,809) (26,809) (26,809) 0.0 Distributed during the period 300, , , , , ,457 Weighted average number of ordinary shares at the end of the period, net of own shares 99,236,668 99,236,668 99,236,668 84,530,193 84,530,193 84,530,193 Basic and diluted loss per share (in EUR) (0.6) (0.2) (0.8) Total 32. Assets under management Assets under management include all clients private banking assets (securities, investment funds, interest, and non-interest deposits/accounts) including both discretionary and advisory investment relationships. Structured products are included when they form part of a client s investment portfolio, notwithstanding the fact that this may be the sole product offering taken up by the client. The following products are excluded from the assets under management: Loans to customers. Trust and Fund administration relationships where the assets of the trust are not managed by the Group. Global custody relationships where the Group is safekeeping assets only. The Group manages various assets for its clients and the main categories of assets are: Discretionary: Assets that are managed and monitored on a client s behalf subject to an agreed mandate. Advisory: Assets that are managed based on a client s specific risk requirements. The client maintains the final decision on whether to purchase, hold or sell any investment. Deposits: Cash deposits received from customers. At 31 December 2014 and 31 December 2013, the assets under management are composed as follows: (In EUR millions) BHF Kleinwort Benson (Restated) (1) Kleinwort Benson Investors Total Kleinwort Benson Kleinwort Benson Investors Deposits 1, , , , ,855.6 Advisory 25, , , , ,676.4 Discretionary 5, , , , , , ,604.4 Family office 3, , External asset managers and institutions 3, , Total 40, , , , , , ,136.4 Total (1) AuM restated to exclude a 1.4 billion fixed term advisory mandate from Kleinwort Benson Investors ( KBI ) former parent KBC Asset Management NV. Annual report 2014 BHF Kleinwort Benson 121

124 Notes to the consolidated financial statements for the year ended 31 December Commitments and contingencies The Group s financial services subsidiaries offer clients various credit facilities and guarantees which the Group accounts for as contingent liabilities. The details of such commitments are detailed below. Linked to the Kleinwort Benson s lease of its London premises, Kleinwort Benson has placed cash collateral of 12.7 million as a guarantee for the future lease payments to the benefit of the lessor. As part of the disposals of its legacy industrial investments the Group made certain representations and gave certain warranties in connection with these sales. As more fully described in note 30, Asahi Tec, a former part of the legacy portfolio of the Group, announced that it has resolved its dispute with PBGC. The remaining exposure from representations and warranties given in connection with the sale of the legacy industrial assets has been substantially reduced to approximately JPY 2.9 billion or 19.9 million and solely relates to the sale of Niles. The representations and warranties will gradually expire by June 2017, with the exception of certain general representations, which will expire in June As at 31 December 2014, the Group is subject to other claims and litigation in the ordinary course of business, but does not believe that any such claims or litigation will have a material impact on its financial results. For more details on guarantees given by BHF KB in respect of subsidiaries please see page 32 within the Principal risks and uncertainties section. (In EUR millions) Guarantees Letters of credit Undrawn credit facilities of one year or less Undrawn credit facilities over one year Commitments against regulatory authorities (outside Germany) 0.6 Capital commitments for private equity funds 16.0 Total 1, Related parties The Company has related party relationships with its subsidiaries and businesses accounted for under the equity method, as well as with members of its Board of Directors and Executive Management. Transactions with Executive Management During the year, the Company s Board of Directors decided to: Grant the Chief Executive Officer a bonus of 0.9 million in cash, as non deferred variable remuneration for services performed during the year ended 31 December 2014; Grant the Chief Executive Officer 230,356 RSUs, with a fair value, at grant date, of 0.7 million (compared to a share value at grant date of 0.9 million), as deferred variable remuneration for services performed during the year ended 31 December 2014; Grant members of Executive Management other than the Chief Executive Officer an aggregate bonus of 1.4 million in cash, as non deferred variable remuneration for services performed during the year ended 31 December 2014; Grant members of Executive Management other than the Chief Executive Officer an aggregate number of 358,332 RSUs, with a fair value, at grant date, of 1.1 million (compared to a share value, at grant date, of 1.4 million), as deferred variable remuneration for services performed during the year ended 31 December BHF Kleinwort Benson Annual report 2014

125 Overview Strategy and business review 34. Related parties continued Cash remuneration and benefits The cash remuneration and benefits of Executive Management recognised as personnel expense during the years ended 31 December 2014 and 2013 can be broken down as follows: Other members of Chief Executive Officer Executive Management (In EUR millions) Fixed cash remuneration Variable cash remuneration Benefits in the form of pensions, insurance coverage and other fringe benefits, including allowances Total Deferred variable remuneration As described in the Remuneration Report beginning on page 48, Executive Management received during the year ended 31 December 2014 deferred variable remuneration in the form of RSUs, which can be paid out subject to fulfilment of applicable entitlement criteria and expiration of a three-year vesting period. Upon expiry of each relevant deferral period, the Company assesses whether the entitlement criteria are met and determines whether (part of) the deferred variable remuneration is effectively earned/forfeited by Executive Management. As of 31 December 2014, a total of 780,495 RSUs (representing 50% of the deferred variable remuneration granted for services performed during the fiscal year ended 31 December 2014, and 25% of each of the deferred variable remuneration granted for services performed during the years ended 31 December 2012 and 2013) were forfeited during the years ended 31 December 2012, 2013 and 2014 as the entitlement criterion with respect to the evolution of the Company s share price was not met in the relevant deferral periods. In accordance with the provisions of IFRS 2 on share-based payments, the fair value of deferred variable remuneration granted in the form of RSUs, determined at the date of the grant of the RSUs, is expensed over the period between the beginning of the performance measurement period and the date upon which the recipients become unconditionally entitled to the awards. The number and fair value of RSUs granted to, and forfeited by, Executive Management during the years ended 31 December 2014 and 2013 are as follows: Other members of Chief Executive Officer Executive Management (In EUR millions unless otherwise stated) Total number of granted RSUs 230, , , ,352 Total number of forfeited RSUs (1) (119,164) (91,937) (185,598) (145,929) Total fair value of granted RSUs (in EUR millions) Total fair value of forfeited RSUs (in EUR millions) (1) (0.3) (0.2) (0.4) (0.3) (1) RSUs granted during 2013, 2012 and 2011 as Deferred Variable Remuneration for services performed in these years which were forfeited in 2014 (25% of the 2013 Deferred Variable Remuneration and 25% of the 2012 Deferred Variable Remuneration) and 2013 (25% of the 2011 Deferred Variable Remuneration) as the Entitlement Criterion relating to the evolution of the Company s share price was not met in the relevant deferral periods. The expense recognised during the years ended 31 December 2014 and 2013 related to RSUs granted during the years ended 31 December 2010, 2011, 2012, 2013 and 2014 is broken down as follows: Other members of Chief Executive Officer Executive Management (In EUR millions) Share-based remuneration expense related to RSUs granted in Share-based remuneration expense related to RSUs granted in Share-based remuneration expense related to RSUs granted in Share-based remuneration expense related to RSUs granted in Share-based remuneration expense related to RSUs granted in Total Annual report 2014 BHF Kleinwort Benson 123

126 Notes to the consolidated financial statements for the year ended 31 December Related parties continued The following table sets forth information regarding (i) the number of RSUs granted, (ii) the number of previously granted RSUs which vested, (iii) the number of previously granted RSUs which were forfeited and (iv) the aggregate number of outstanding RSUs (in each case per individual member of Executive Management): Awarded (1) Vested (2) Forfeited (3) Outstanding (4) RSUs (in units) Leonhard Fischer 230, , ,981 87, ,164 91, , ,099 Martha Boeckenfeld 159, , ,579 43,554 91,625 81, , ,570 Rüdiger Schmid-Kühnhöfer 102,381 79,625 97,791 19,955 57,428 38, , ,231 Jean-Marc Roelandt 95,982 50,671 64,060 43,876 36,545 25, , ,796 Total 588, , , , , ,866 1,434,211 (5) 1,789,696 (6) (1) RSUs granted during 2014 or 2013 as Deferred Variable Remuneration for services performed in those years. (2) RSUs vested during 2014 or (3) RSUs granted during 2013, 2012 and 2011 as Deferred Variable Remuneration for services performed in these years which were forfeited in 2014 (25% of the 2013 Deferred Variable Remuneration and 25% of the 2012 Deferred Variable Remuneration) and 2013 (25% of the 2011 Deferred Variable Remuneration) as the Entitlement Criterion relating to the evolution of the Company s share price was not met in the relevant deferral periods (4) Aggregate awarded, unvested RSUs. (5) The earning of all RSUs that were outstanding as of 31 December 2014 is subject to fulfilment of applicable Entitlement Criteria. (6) With the exception of 2,533 RSUs, the earning of all RSUs that were outstanding as of 31 December 2013 is subject to fulfilment of applicable entitlement criteria. Transactions with members of the Board of Directors Non-executive directors received remuneration in the form of fixed fees for an aggregate amount of 0.6 million and 0.9 million for their services as directors of the Company during the years ended 31 December 2014 and 2013, respectively. In addition to his remuneration for his services as a non-executive director of the Company, Graf von Schweinitz received, for his services as nonexecutive director, chair of the audit committee and member of the risk committee of Kleinwort Benson Group Limited ( KBG ) as well as for his services as non-executive director of Kleinwort Benson Bank Limited, a remuneration of 0.1 million during each of the years ended 31 December 2014 and Pursuant to a consulting agreement with Ripplewood Holdings LLC, Mr. Collins received benefits of nil million and 0.4 million for the years ended 31 December 2014 and 2013, respectively. In December 2013 the Company completed the spin-off of its merchant banking operations previously conducted by Ripplewood into a separate legal entity, Kleinwort Benson Advisors LLC ( KBA ). As part of this arrangement, the Company held a 19% interest in KBA which granted it access to potential investment products and services. The Company made a capped and final cash payment of $5 million ( 3.6 million) as consideration for our equity stake and as a contribution to the costs of winding down the operations of Ripplewood Holdings LLC. This was fully expensed in Following this divestment we have presented the results of the merchant banking operations as discontinued. During 2014, KBA changed its name to Ripplewood Advisors LLC ( Ripplewood Advisors ). Since its formation, Ripplewood Advisors pace of investment and capital needs have outpaced expectations. The Group determined that it was unwilling to fund its share of these capital needs, and as such, in December 2014, agreed to sell its interest in Ripplewood Advisors to an affiliate of Mr. Collins (Mr Collins was a director of the Company until 3 May, 2014) for cash consideration of $4 million. The license of the name Kleinwort Benson Advisors granted to Ripplewood has also been terminated. The Group held a 30% limited partnership interest in RP II Partners L.P., which in turn held a limited partnership interest of approximately 40% in Ripplewood Partners II GP, L.P., acting as the General Partner of the Ripplewood Fund. On 18 December 2013, the Group received 665,474 shares of Gogo Inc., the main portfolio investment of the fund, in full satisfaction of all obligations as set forth in the partnership agreement of RP II Partners, L.P. The shares of Gogo Inc. were distributed in accordance with the Ripplewood Fund agreements at $31.06 per share or $20.7 million in aggregate and had a market value of $24.82 per share or $16.5 million at 31 December In 2014, the 665,474 shares of Gogo Inc. were sold for an aggregate net consideration of $10.3 million. The Timothy C. Collins 2003 Descendants Trust and Windmere Investments LLC, entities associated with Mr. Collins, entered into subscription agreements on 2 April 2012, as amended on 20 September 2012 and 29 October 2013, with respect to the investment of up to 8.25 million each into Kleinwort Benson Group with a view of acquiring BHF-BANK. The Group reimbursed $0.2 million of legal costs incurred by the Timothy C. Collins 2003 Descendants Trust. DII Capital UK Advisor LLP, a company associated with Mr. von Schweinitz, paid 0.5 million and 0.3 million to Kleinwort Benson Bank Ltd. for the financial year ended 31 December 2014 and 2013 respectively pursuant to the subletting of 2,000 square feet of office space in Kleinwort Benson Bank s leased premises in London. At 31 December 2014, there was no receivable (2013: 0.2 million). 124 BHF Kleinwort Benson Annual report 2014

127 Overview Strategy and business review 35. List of significant consolidated subsidiaries and equity accounted investees Ownership interest in consolidated subsidiaries Country of incorporation Direct Indirect Direct Indirect BHF-BANK AG Germany 9.0% 91.0% BHF-BANK International S.A. Luxembourg 100.0% BHF-BANK (Switzerland) Ltd Switzerland 100.0% BHF Trust Management Gesellschaft für Vermögensverwaltung mbh Germany 100.0% Frankfurt Family Office GmbH Germany 100.0% FRANKFURT-TRUST Investment-Gesellschaft mbh Germany 100.0% KB Investors Dublin Ltd. Ireland 100.0% 100.0% Kleinwort Benson (Channel Islands) Ltd. Channel Islands 100.0% 100.0% Kleinwort Benson Bank Ltd. United Kingdom 100.0% 100.0% Ownership direct interest in equity accounted investees Country of incorporation Quirin Bank AG Germany 27.8% 27.8% 36. Subsequent events On 24 March 2015 BHF Kleinwort Benson Group changed its name from RHJ International. There were no other significant events. Annual report 2014 BHF Kleinwort Benson 125

128 Directors report on the consolidated financial statements for the year ended 31 December 2014 The Directors report on the consolidated financial statements for the fiscal year ended 31 December 2014, prepared in accordance with the Belgian Companies Code, is presented in the different sections of this Annual Report: Our strategy (page 8); Business and financial review of the consolidated financial statements for the years ended 31 December 2014 and 31 December 2013 (pages 10 to 29); Material events subsequent to 31 December 2014 (note 36, page 125); Principal risks and uncertainties (pages 30 to 37); Disclosure with respect to research and development: not applicable; Risk management and the use of derivative financial instruments (note 13, page 82); Independence and expertise of the Audit and Compliance Committee (page 58); Internal control and risk management systems (page 58); statement (page 40); Disclosure with respect to the ability of a third party to launch a public take-over bid on BHF KB (page 60). 126 BHF Kleinwort Benson Annual report 2014

129 Overview Strategy and business review Statutory auditor s report to the general meeting of BHF Kleinwort Benson Group SA as of and for the year ended 31 December 2014 In accordance with the legal requirements, we report to you in the context of our statutory auditor s mandate. This report includes our report on the consolidated financial statements as of and for the year ended 31 December 2014, as defined below, as well as our report on other legal and regulatory requirements. Report on the consolidated financial statements unqualified opinion We have audited the consolidated financial statements of BHF Kleinwort Benson Group SA ( the Company ) and its subsidiaries (jointly the Group ), prepared in accordance with International Financial Reporting Standards as adopted by the European Union, and with the legal and regulatory requirements applicable in Belgium. These consolidated financial statements comprise the consolidated statement of financial position as at 31 December 2014, the consolidated statement of profit and loss, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. The total of the consolidated statement of financial position amounts to EUR 9,376.0 million and the consolidated statement of comprehensive income shows a profit for the year of EUR 81.7 million. Board of directors responsibility for the preparation of the consolidated financial statements The Board of directors is responsible for the preparation of these consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, and with the legal and regulatory requirements applicable in Belgium, and for such internal control as the Board of directors determines, is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Statutory auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (ISAs). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the statutory auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the statutory auditor considers internal control relevant to the Group s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. 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 consolidated financial statements. We have obtained from the Company s officials and the Board of directors the explanations and information necessary for performing our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our unqualified opinion. Unqualified opinion In our opinion, the consolidated financial statements give a true and fair view of the Group s equity and consolidated financial position as at 31 December 2014 and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, and with the legal and regulatory requirements applicable in Belgium. Report on other legal and regulatory requirements The Board of directors is responsible for the preparation and the content of the annual report on the consolidated financial statements. In the context of our mandate and in accordance with the Belgian standard which is complementary to the International Standards on Auditing as applicable in Belgium, our responsibility is to verify, in all material respects, compliance with certain legal and regulatory requirements. On this basis, we provide the following additional statement which does not modify the scope of our opinion on the consolidated financial statements: The annual report on the consolidated financial statements includes the information required by law, is consistent, in all material respects, with the consolidated financial statements and does not present any material inconsistencies with the information that we became aware of during the performance of our mandate. Brussels, April 30, 2015 KPMG Réviseurs d Entreprises/Bedrijfsrevisoren Statutory Auditor represented by Olivier Macq Réviseur d Entreprises/Bedrijfsrevisor Annual report 2014 BHF Kleinwort Benson 127

130 Condensed non-consolidated financial statements for the year ended 31 December 2014 Condensed non-consolidated balance sheet as at (In EUR millions) Assets Tangible fixed assets Financial fixed assets Trade and other receivables Total non-current assets Trade and other receivables Short-term investments Cash and cash equivalents Other Total current assets Total assets Equity Issued capital Share premium Reserves Legal reserve Reserves not available for distribution Reserves available for distribution Retained earnings (145.8) (106.0) Total equity Current liabilities Trade and other payables Total current liabilities Total equity and liabilities Condensed non-consolidated income statement for the year ended 31 December 2014 (In EUR millions) Revenue Other operating income 0.1 Cost of sales Services and other goods (27.8) (29.6) Depreciation, amortisation and impairment Operating loss (27.7) (29.6) Financial income Financial expenses (1.6) (14.4) Net financing gains (costs) 4.3 (13.2) Extraordinary expenses (16.3) (63.2) Loss before tax (39.7) (106.0) Income tax expense Loss for the period (39.7) (106.0) 128 BHF Kleinwort Benson Annual report 2014

131 Overview Strategy and business review The appropriation of the loss for the period is as follows: (In EUR millions) Loss carried forward from last period (106.0) (72.8) Share capital reduction 72.8 Loss for the period (39.7) (106.0) Retained earnings (145.8) (106.0) Declaration pursuant to Article 96, 1, 6º of the Belgian Companies Code Despite the consecutive losses reported for the last two fiscal years, the Board of Directors believes those losses are not representative for BHF KB s potential to generate profits and create value for its shareholders. BHF KB completed its transformation from a diversified industrial holding company into an active and dynamic financial services firm. BHF KB intends to become a profitable merchant bank focusing on wealth management, specialised asset management and financial markets & corporates, which is expected to generate dividend income in excess of BHF KB s operating expenses, which are being gradually reduced as the group s legal structure is being simplified. As a result, the Board of Directors proposes to continue BHF KB s activities and believes that there is no need for any particular remedial action other than the continued implementation of the components of the transformation strategy. Furthermore, the Board of Directors believes that BHF KB s financial position is adequate to conduct its activities and therefore prepared the financial statements for the fiscal year ended 31 December 2014 under the assumption that BHF KB is a going concern. Annual report 2014 BHF Kleinwort Benson 129

132 BHF Kleinwort Benson is listed on NYSE-Euronext Brussels and was renamed on 24 March Its new identity reflects an investment proposition built on private banking, asset management and financial markets & corporates. 130 BHF Kleinwort Benson Annual report 2014

133 Overview Strategy and business review 132 BHF Kleinwort Benson share 132 Shareholder structure 133 Financial calendar 133 Investor relations Annual report 2014 BHF Kleinwort Benson 131