Significant events of the year 2 Financial performance 6 La Poste Group balance sheet 13 Outlook for

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1 a history of trust F I N A N C I A L R E P O R T

2 SUMMARY MANAGEMENT REPORT OF THE LA POSTE GROUP 1 Significant events of the year 2 Financial performance 6 La Poste Group balance sheet 13 Outlook for CONSOLIDATED FINANCIAL STATEMENTS OF LA POSTE GROUP 17 Auditors Report on the consolidated financial statements 18 Consolidated financial statements 19 Consolidated balance sheet 20 Statement of changes in equity 22 Consolidated cash flow statement 23 Consolidated financial statements appendix > Significant events of the year 24 > Accounting standards, principles and methods 25 > Scope of consolidation 33 > Segment information 42 > Notes to the profit and loss account 44 > Notes to the balance sheet 51 > Notes to off balance sheet commitments 67 > Notes to the cash flow statement 73 FINANCIAL STATEMENTS OF LA POSTE 75 General auditors report financial statements 76 Profit and loss account 77 Balance sheet 78 Cash flow statement 80 Financial statements appendix > Specific nature of La Poste 81 > Significant events of the year 81 > Subsequent events 83 > Pro forma accounts 83 > Summary of significant accounting policies 83 > Notes to the profit and loss account 84 > Notes to the balance sheet 89 > Off-balance sheet items 98 > Notes to the cash flow statement 102 > Table of subsidiaries and affiliates 103

3 MANAGEMENT REPORT 1 MANAGEMENT REPORT OF THE LA POSTE GROUP 1. SIGNIFICANT EVENTS OF THE YEAR Economic overview Regulatory environment Reorganisation measures Modernisation projects Changes in Group structure and partnerships Transition to IAS-IFRS Changes in accounting methods Changes in financial statement presentation 5 2. FINANCIAL PERFORMANCE La Poste Group results Group business revenues up 4.3%, reflecting sustained activity of our businesses Contained operating expenses Operating profit of 949 million resulted in a significant improvement in the Group s operating margin Financial expenses on the rise Other profit and loss items Net profit reaches 789 million LA POSTE GROUP BALANCE SHEET OUTLOOK FOR Recent trends 13 APPENDIX 14

4 2 1. SIGNIFICANT EVENTS OF THE YEAR Last year s performance, which exceeded forecasts, makes La Poste even more confident that it can achieve the four-fold goal it has set itself for 2010, namely becoming one of the leading European postal operators, France s number one local service provider, an innovative and high-performing retail banking model and a major up-to-date provider of public services that is accessible to all. These results were made possible through the commitment and determination of postal workers to achieve these goals. 1.1 ECONOMIC OVERVIEW In 2006, the global macroeconomic environment continued to be conducive to growth. The United States managed to maintain a healthy GDP growth rate of 3.4% in 2006, compared with 3.2% in 2005 despite successive increases in oil prices and interest rates. In Europe, GDP grew by 2.7%, mainly anchored by increased German exports and the gradual resumption of investment expenditure. In Asia, it was China that drove growth in the region with a rise of GDP more than 10%, although economic growth in Japan was encouraging at 2.2%. The positive results led to successive increases in key interest rates by the Federal Reserve and the European Central Bank to help curb potential inflation. In Europe, the increase in short-term interest rates pushed long-term rates up slightly, while in the US, this increase had a marginal effect on changes in long-term rates. France recorded 2% of economic growth thanks to a high level of consumer spending, boosted by the improved job market. 1.2 REGULATORY ENVIRONMENT Public service employee pensions Article 150 of the Amended Finance Law for 2006, published in the Journal Officiel of 31 December 2006, sets out reform in the funding of the pensions of public service employees working at La Poste. The law imposes employer contributions in full discharge of liabilities with effect from 1 January 2006 based on pensionable remuneration. The rate of employer contributions will be calculated to gradually align mandatory tax and employee costs based on the salaries of La Poste employees with those of other companies in the postal and banking sectors. This reform aims to place La Poste in a so-called fair competition situation by As part of this reform, La Poste paid an exceptional one-off contribution of 2 billion to the French Treasury at the end of The contribution was financed through a bond issue of 1.8 billion. The cash flows between the State, La Poste and any other relevant bodies will be centralised and distributed by the National public institution for financing La Poste pensions created for this purpose. This institution can conclude agreements with ordinary law pension schemes to negotiate mutualisation agreements that are in the interests of all the parties concerned. The European Commission was notified of this reform Implementation of the mechanism for reducing social contributions on low wages Pursuant to the French Postal Sector Regulation Act and in accordance with the Contrat de Plan agreement entered into with the State, La Poste benefited, like other French companies, from the Act (known as the Fillon Act ) regarding the mechanism for reducing social contributions on low wages. The reduction exclusively concerns personnel employed under contract and was implemented as from 1 January 2006 and amounted to 192 million in New universal postal service regulatory pricing framework concluded with ARCEP The postal regulation law enacted on 20 May 2005 assigned the regulation of prices for universal postal services to the postal regulator, ARCEP (Autorité de Régulation des Communications Électroniques et des Postes), after reviewing La Poste s proposals. Therefore, during the first half-year, ARCEP laid down a new framework for postal regulatory pricing, negotiated with La Poste for This multi-year framework is in line with common postal regulation practice in Europe and allows La Poste to plan price increases to match the inflation rate, while providing correction factors based, in particular, on business volumes over the period in question. This formalisation by contract allows La Poste to ensure the development of postal services across the national territory and gives it the means to modernise its structures to offer its customers a constantly improving service.

5 1.2.4 Change in commissions on regulated savings products The State brought down commissions on regulated savings products: Livret A, LEP and Codevi. The Livret A commission rate was reduced from 1.4% to 1.3% at 1 November 2005, the commission rate on outstanding LEP accounts centralised in the CDC went from 1% to 0.5% on 1 October 2006 and the rate on industrial development securities in which outstanding Codevi accounts are invested slipped from 1.5% to 1% on 1 July These successive reductions had a negative impact of 58 million on La Banque Postale s Net Banking Income (NBI) in Accountability of the Group s business sectors The transfer at the end of 2005 of rural delivery operations (approximately 15,000 mail carriers) from La Poste Retail Outlets to the Mail business (2DS project) fits into the logic of empowering the businesses. This has allowed the Mail sector to monitor all delivery activities since 1 January Creation of CiPoste SAS CiPoste, a wholly-owned La Poste subsidiary, was created on 1 October Its purpose is to pay the individual property charges (maintenance, cleaning, energy and utilities) in its capacity as a representative of other Group entities that rent or own property. MANAGEMENT REPORT REORGANISATION MEASURES Launch of La Banque Postale Following law No concerning the regulation of postal activities, La Banque Postale commenced business on 1 January All of the property, rights and obligations of any kind related to La Poste s financial services were transferred to La Banque Postale including all accounts and deposits open at La Poste, as well as insurance and international money order activities as of 31 December La Banque Postale now exercises activities on its own account that were previously exercised by La Poste by way of Caisse Nationale d Épargne (CNE), with the exception of the Livret A, the entire outstanding amounts of which are still centralised at the CDC. Moreover, La Poste and La Banque Postale constitute a de facto grouping governed by article 161B of the General Tax Code, formalised with the signing of a Distribution of expenses agreement De facto Grouping dated 2 february This group, which is not a legal entity, manages all human and material resources for the services set out in the agreements between La Banque Postale and La Poste Finalisation of the Cross-Function Performance project (CFP) Under the Cross-Function Performance project (CFP), La Poste has transferred the purchasing, accounting, IT and human resource management processes, plus the corresponding functional resources, to the businesses units to give each of them all of the levers necessary to manage its business and results. The transfer procedure, which started in 2005, was completed at the beginning of the second half of MODERNISATION PROJECTS Rolling out the Mail Quality Project The aim of this project to modernise the mail processes, which was launched in 2004, is to improve quality of service to customers with 90% next-day delivery by 2010, as well as to adapt the service to customers needs. La Poste has earmarked 3.4 billion for the entire duration of the project. In 2006, La Poste recorded an average of 81.2% of next-day deliveries, up 2.1 points over At the end of 2006, it had launched four Industrial Mail Centres (IMC): Paris Nord Gonesse, Lognes, Val de Loire and Lorraine. La Poste is currently rolling out 20 more IMCs. In order to ensure coverage of the entire country, the Mail Quality Project also includes reconfiguring some one hundred Mail Preparation and Delivery Centres (at least one per département) and several thousand other delivery centres. At the same time, the operational subdivisions of the Mail division signed five employee-related agreements to enable postal workers to develop their career plans in line with the new organisation of the Mail Quality Project (training courses allotment of mobility and adaptation bonuses). A major project was also launched to overhaul the organisation of delivery and the coverage of the postal network. This new organisation is structured around solidarity and teamwork and is intended to redefine operating methods, make the mail rounds more efficient and reduce the use of fixed-term contracts by restoring the prestige attached to the mail carrier profession through team bonuses and revised classifications for mail carrier team and quality leaders.

6 Modernisation of La Poste Retail Outlets Launch of the Customer Relationship Project In 2006, La Poste launched its post office modernisation plan, the Customer Relationship Project. The first phase to renovate the post office network was implemented in 2006, with 261 modernisations and 780 renovations, involving a total investment of 120 million. The new office concept has had a significant impact on customer satisfaction. For example, 56% of customers questioned are very satisfied, compared with 25% in traditional post offices. Creation of Logistics Support Platform To improve the management of its business, La Poste Retail Outlets created 23 Logistics Support Warehouses in January 2006 and transferred some employees from the departmental subdivisions under the new local organisation. Partnerships 1,500 partnerships were set up with villages and shopkeepers in 2006, bringing the total to 4,361 at the end of The aim of La Poste Retail Outlets is to make its network of post offices and other postal outlets and partnerships, a highly efficient multi-product distribution network: the leading banking and local services provider, with an efficient and profitable network; be the mail distribution network for consumers and the business community; be the benchmark network for the sale and pick-up of parcels; become the leading distribution network for personal services Modernisation of the Parcel Division The modernisation of the production tools and the increase in parcel processing capacity is continuing with the opening of the Mer hub in September 2006 and capital expenditures in equipment and sorting machines. Bulk loading and unloading, which cuts down on transportation costs, has now been rolled out at all Parcel centres. Finally, the programme launched in 2000 to implement dedicated distribution centres in urban areas (ColiPoste Agencies) has almost been completed with the opening in 2006 of agencies in Reims, Saint-Ouen, Metz and Caen. A new delivery service, Cityssimo, allows customers 24/7 access to their tracked parcels delivered to an automatic parcel office. The installations will be established in areas with a high concentration of e-buyers (business centres, train stations, etc.). There are already 11 Cityssimo agencies (9 in the Paris region, 1 in Nantes and 1 in Lille). Delivery performance, measured by the national two-day delivery time, went from 89% in 2005 to an average of 91% in Group personal risk insurance contract La Poste has concluded a Collective personal risk contract relative to supplementary social protection of its employees under contract. The agreement was concluded on 31 May 2006 and came into effect on 1 January Group Savings plan In the last quarter of 2006 La Poste signed an agreement to set up a Group Savings Plan at the beginning of CHANGES IN GROUP STRUCTURE AND PARTNERSHIPS Strengthening the Mail business upstream of its value chain The Group s Mail subsidiary, Sofipost, acquired 100% of the shares of the electronic publishing group Orsid in July Today, with its Aspheria and Orsid subsidiaries, La Poste Group has approximately 20% of market share in the outsourced electronic publishing market External growth of the Express business steps up in France and Europe Acquisition of Exapaq The Group s Express subsidiary, GeoPost, continued its external growth policy in France and Europe. It acquired the Exapaq group in February 2006 and consolidated it in La Poste Group s consolidated financial statements as of 1 January This network, comprised of approximately 70 entities, specialised in the express B-to-B parcel delivery complements the Group s service in France for parcels less than 30 kg. For the record, La Poste already has a B-to-B express specialist (Chronopost) and a B-to-C parcel specialist (ColiPoste, La Poste s Parcel division). Expansion of the European Express network to Spain and Greece GeoPost has continued its expansion into Spain by acquiring 100% of the capital of Transparcel Baix, Seur Gerona, Seur Granollers and Seur Jobacu. In January 2006, GeoPost acquired 86.6% of the capital of Interattica, the fourth largest parcel operator in the Greek market. GeoPost has a call option on the remaining shares in January These acquisitions reinforce, through GeoPost and ColiPoste, the Group s rank as No. 3 in European parcel delivery.

7 Acquisition of a stake in the American group IBC Group GeoPost has acquired a minority interest in the capital of the American international express and parcel transportation group, IBC, which offers services throughout the entire American continent. This first step will enable La Poste Group, via GeoPost, to acquire technical and strategic skills and to gain a foothold in the American market Increase in La Poste s stake in Sogéposte (now La Banque Postale Asset Management) In September 2006, La Banque Postale acquired 35% of Sogéposte s capital from the Caisse des Dépôts et Consignations (CDC). The Group now owns the entire capital of this company, which is now called La Banque Postale Asset Management and will benefit fully from the potential of the asset management market Renewal of agreements concerning CNP Assurances The shareholders agreement that the CDC, the Caisses d Épargne group, La Poste Group and the State are party to has been extended to In addition, CNP Assurances and La Banque Postale have signed a new commercial partnership agreement. 1.6 TRANSITION TO IAS-IFRS Pursuant to European regulation No. 1606/2002 dated 19 July 2002, and the exception specified by this regulation concerning companies that carry out public issues but only have their debt securities listed, La Poste Group s consolidated financial statements will be established for the first time according to the international accounting standards (IFRS) for the financial year ended 31 December 2007 with comparative financial statements for fiscal La Poste s IFRS transition project is proceeding smoothly. The main options have been defined and the costing of impacts is being finalised. IFRS 1 specifies a number of specific options that facilitate the first-time application of some standards. La Poste Group has decided to apply the following optional treatments in the opening balance sheet: companies combinations prior to 1 January 2006 will not be restated; La Poste has chosen the option that allows tangible assets to be valued at their fair value at the transition date for all its property assets; the total amount to date of translation reserves as at 1 January 2006 will be reversed as compensation for consolidated reserves, with the amount of equity remaining unchanged; the total amount to date of actuarial gains and losses on personnel commitments will be charged to equity at 1 January 2006; IFRS 1 imposes a long-term application of provisions regarding the accounting of financial instrument hedges. Consequently, only financial instruments designed as hedging instruments according to French GAAP, and that comply with IAS 39 criteria at 1 January 2006, will be recognised in the opening balance sheet as hedging operations. the CNP Assurances Group, consolidated by the equity method in La Poste Group s financial statements, became the first entity to adopt IFRS in fiscal Pursuant to the provisions of IFRS 1, La Poste Group will value CNP Assurances assets and liabilities at 1 January 2006 based on their book value in CNP s IFRS financial statements at 31 December 2005, after consolidation restatements; some financial instruments previously recorded at cost have been classified as financial assets and liabilities at fair value through earnings or as available for sale. These financial instruments will be recorded at their fair value at 1 January 2006 in the opening balance sheet and the variance with their prior book value will be charged against equity. Based on the analyses to date, the standards with a significant impact on the net situation at 1 January 2006 are presented in the appendix to this report. 1.7 CHANGES IN ACCOUNTING METHODS There were no changes in accounting method in CHANGES IN FINANCIAL STATEMENT PRESENTATION The financial statements of La Banque Postale, a wholly-owned La Poste subsidiary, have been prepared in accordance with generally accepted accounting principles applicable to credit institutions in France. The format of the financial statements presented by La Poste Group has been revised to take into account the creation of this subsidiary at 31 December 2005 and therefore better reflect the banking business. In this context, the Group s profit and loss account now shows Net Banking Income (NBI) established according to banking regulations. Furthermore, the main asset and liability accounts related to banking operations are presented separately in the consolidated balance sheet. MANAGEMENT REPORT 5

8 2. FINANCIAL PERFORMANCE 2.1 LA POSTE GROUP RESULTS (in euro millions) Variation Variation pro forma in M in % 6 TURNOVER FROM ACTIVITIES 18,677 19,274 20, Other income from operations Operating expenses (18,336) (18,684) (19,365) (681) +3.6 OPERATING PROFIT Interest income and expense (126) (86) (111) (25) Non-recurring income and expense (11) (73.1) Corporate income tax (109) (215) (120) +95 (44.1) Income from companies accounted for by the equity method Amortisation of goodwill (51) (53) (76) (23) Minority interests (3) (13) (6) +7 NET PROFIT The net profit Group share amounted to 789 million, up 232 million or 42% on This increase comes from a net improvement in operating profit and concurrently a decrease in the tax expense as the Group benefited in fiscal 2006 from significant deferred tax income. As a result, the net profit of fully consolidated subsidiaries amounted to 722 million, up 47%. Income from companies accounted for by the equity method continued to rise (13%) and was primarily contributed by CNP Assurances. The relative weight of this contribution in the Group s net profit represented nearly 19% in 2006, vs. 30% in 2004, reflecting the net improvement in profitability of La Poste and the subsidiaries it controls. Operating profit surged 22% to 949 million, up +22% over On a like-for-like basis, this represented a 16%- increase. The rise was due to the combined impacts of strong revenues from operations, which increased by 4.3% in 2006, exceeding the 20 billion mark for the first time, and contained operating costs which only edged up 3.6%. The Group s operating margin has increased regularly for five years now. It has gone from 1.7% in 2003 to 2.8% in 2004, 4% in 2005 and 4.7% in All the Group s divisions have contributed to this improvement, although we still have to catch up with our main competitors. Consequently, one of the core objectives of each business sector for the coming years is to shore up their operating margin. The Group s Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) amounted to 1,641 million, up 6.6% compared with GROUP BUSINESS REVENUES UP 4.3%, REFLECTING SUSTAINED ACTIVITY OF OUR BUSINESSES (in euro millions) Variation Variation pro forma in M in % Mail 10,873 11,242 11, Parcels/Express 3,484 3,689 4, Financial Services 4,292 4,310 4, La Poste Retail Outlets (1) and others (2) (7.4) TURNOVER FROM ACTIVITIES 18,677 19,274 20, (1) Excluding intra-company turnover.

9 The breakdown of business revenues by major businesses reflects La Poste Group s internal organisation structure (1). This new aggregate corresponds to the total turnover from La Poste s industrial and commercial businesses and the NBI of the Financial Services. The contribution of La Poste Retail Outlets business corresponds to third-party products sold to the customers at La Poste counters. This contribution is not very significant and does not reflect the central role that this business plays in the distribution of Mail, Parcel and Financial Service products. La Poste Group s business turnover amounted to 20.1 billion, up 4.3% over Like-for like, organic growth of business income went up 3% at 571 million. The increase in revenues for the year was driven mainly by the Express, Parcel and Financial Service businesses. Turnover generated by the Mail sector went up, although fewer volumes were processed. Moreover, 70% of turnover was generated in competitive markets (64.5% in 2005) with 15.2% from international sales. MANAGEMENT REPORT Turnover from Group activities by sector (in euro millions) % +4.3% 4,292 4,310 4,583 3,484 3,689 4,170 10,873 11,242 11,316 Financial Services Parcels/Express Mail Mail turnover edges up (in euro millions) Variation Variation in M in % Mail postage turnover 10,236 10,494 10,487 (7) (0.1) Business & public sector mail 7,162 7,376 7, Retail 2,048 2,124 2,113 (11) (0.5) International (47) (6.3) Press contributions paid by the French State Services & other products TURNOVER MAIL 10,873 11,242 11, Turnover from the Mail sector was 11.3 billion, representing an increase of 0.7%, or 74 million from Like-for-like, organic growth of Mail revenues was 0.5%. This increase is primarily due to services and other products. They accounted for 829 million in 2006, and are again growing significantly. They accounted for 7.3% of Mail revenues in 2006, vs. 6.7% in 2005 and 5.9% in (1) The definition of the Group s business sectors is provided in the Segment information section of the notes to the consolidated financial statements.

10 8 Mail Postage Mail postage revenues represented 10.5 billion, down 0.1% or 7 million from This near stability is primarily due to: the 1.1%-drop in mail volumes, which had a negative impact of 119 million; the negative working-day effect of 92 million, corresponding to a 0.9%-drop in volumes; the impact of price increases (stamp prices, press, forwarding) that generated a positive price effect in the order of 196 million, or 1.8%. ARCEP authorised La Poste to increase postal charges for letters of less than 20 g by one centime to 0.54 for domestic mail and by 5 centimes to 0.60 for international mail to the 26 countries of the European Union. Delivery performance improved in 2006, with an average of 81.2% next-day delivery for first-class mail sent, compared to 79.1% in Business and Public Sector Mail Business and public sector mail reported turnover of 7.4 billion. It consisted primarily of turnover from franking machines and Postimpact, Postcontact and Tem post products. It was up 0.7% or 51 million over 2005 (with Tem post direct marketing performing well). Retail Mail Retail mail turnover generated from La Poste Retail Outlets counters was 2.1 billion, down slightly from the 2005 level. International Mail Revenues from international mail slipped 6.3% to 47 million. This drop is primarily related to a 71 million decrease in export volumes (post office counter and business mail franking) offset by an 8 million increase in import revenues (terminal fees) and a 15 million increase in contribution from Brokers, an American subsidiary. Services & other Mail products These services include: additional services provided by La Poste, primarily home-service mail collection and delivery ( 155 million in 2006). These services dropped 3.1% compared with 2005 to 216 million at the end of 2006; services sold by the French subsidiaries of the Mail sector. These subsidiaries contributed 613 million at the end of 2006, representing a 17%-increase or 88 million. The main subsidiaries that contributed to this figure were: Mediapost, which reported 339 million turnover from delivery and marketing operations; Europe Airpost, which registered a significant increase for the third year running, with turnover up 36% to 117 million; lastly, turnover generated from the document management sector through Orsid, acquired in July 2006, contributed 19 million. Like-for-like, turnover from this division went up 8.6% to 126 million Parcels and Express Deliveries report strong turnover growth (in euro millions) Variation Variation in M in % Express Deliveries 2,387 2,534 2, Parcels 1,097 1,155 1, PARCELS/EXPRESS 3,484 3,689 4, The Group s express deliveries operations are carried out by GeoPost, and parcel services are provided by ColiPoste, an in-house operator. These two separate market segments are defined as follows: express delivery services are provided primarily in the B-to-B segment and involve next-day delivery; parcels services are offered mainly in the B-to-C segment with delivery taking place within two to five days. Express collections take place across a wide area while deliveries are concentrated, resulting in higher production costs and customer prices for express deliveries.

11 Express sector GeoPost performed excellently over the period, posting a 16%- or 398 million increase from 2005 which represented a 2.9 billion contribution to Group turnover. This sharp increase is partly related to the acquisitions and partnerships in France, Europe and overseas, and also to the Group s organic growth, especially in Central and Eastern Europe. Thus, like-for-like, organic growth was 6.5% and was primarily related to the growth in volumes of parcels delivered in domestic European markets. This performance was achieved in a buoyant market where competition remained very intense in the domestic and international markets. To adapt to this change in volumes and the economic environment marked by a strong increase in the cost of fuel and environmental standards limiting the speed of transportation vehicles, the Group launched major capital expenditure programmes to step up its production capacity in France, the United Kingdom and Eastern European countries, and carried out programmes to revamp its processes (2007 Energy plan in France for Chronopost). Parcels sector ColiPoste s turnover climbed 7.2% or 83 million to 1,238 million. Two factors explain this growth: a slight increase of 1.1% in delivered parcel volumes (excluding working-day effect). This change includes a distortion in the market, which is primarily driven by the C-to-C flows (+8.2%) due in particular to increased online sales between people and a slowdown in business transactions; a price increase and a favourable product mix due to the shift to high-end products in 2006 both on the B-to-C and C-to-C markets. All customers have moved towards tracked product services with a guaranteed 48-hour delivery. Consequently, ColiPoste satisfies what has become the market standard: a fast and traceable service with insurance and home delivery. Delivery performance, measured by the national two-day delivery time, went from 89% in 2005 to an average of 91% in MANAGEMENT REPORT Net banking income (NBI) rose sharply in 2006 Change in outstanding savings funds under management Outstanding funds under management climbed 3.8% between December 2005 and December (in euro billions) Variation Variation in M in % Postal banking accounts Bank savings products Investment savings products TOTAL Postal Banking accounts Postal banking accounts under management were up substantially at 4.5%. The deposits inflow increased and the sector largely exceeded its target. This net inflow is explained by the increase in the number of active clients and their equipment, especially cards. Bank Savings products Bank savings products comprise passbook savings accounts, home saving accounts, PEP tax-efficient savings plans, and time accounts. Managed funds remained stable overall at the end of December 2006 compared to the previous financial year and are the result of a sharp drop in outstanding home ownership savings ( 2.1 billion) offset by a 2.5 billion-increase in savings accounts. Common Savings products Outstanding savings accounts and Codevi accounts amounted to 68.7 billion. These savings accounts benefited in particular from the favourable effect of the increase in regulated rates in 2006: up 25 points on 1 February 2006 and up 50 points on 1 August This change in rates once again generated a net positive inflow of 653 million in the Livret A accounts in 2006.

12 10 Home Savings products Outstanding Home ownership Savings products dropped sharply by 7% from 2005 to stand at 29.1 billion at the end of Highly affected by the change in tax treatment for home saving plans at the end of 2005, Home Saving inflows were down sharply in However this phenomenon affects all banking networks and La Banque Postale s market share in home savings (11.9% of outstanding savings) remains stable compared to Investment Savings products Investment savings are comprised of life insurance policies, unit trusts and securities accounts. These increased 7%, due to the 10%-increase in Life Insurance funds, fuelled primarily by strong net inflows of new money representing 4.8 billion, coming partly from the closing of home savings products. In conclusion, in 2006, net inflow was oriented either towards more liquid investments (demand deposits and passbook savings accounts) or Life Insurance. This trend was primarily at the expense of Home Savings. Change in loans outstanding La Banque Postale is authorised to distribute property loans without prior savings since 1 January In this new regulatory framework, the institution s loans outstanding jumped up 8.7% to 20.9 billion at 31 December 2006, for an increase compared with the end of New loans increased significantly, reaching 5 billion in Change in NBI (in euro millions) Variation Variation pro forma in M in % Interest margin 2,725 2, Commissions 1,585 1, NET BANKING INCOME 4,310 4, was La Banque Postale s first financial year. The remuneration conditions for assets and liabilities were significantly changed from These changes along with the Caisse Nationale d Épargne s transfer to La Banque Postale required the establishment of a pro forma profit and loss account. Nevertheless, it is still difficult to conduct a detailed comparative analysis of the NBI, especially regarding the interest margin. Overall, La Banque Postale s net banking income amounted to nearly 4.6 billion, up 6.3% over 2005, or nearly 273 million. However, several specific elements have to be taken into account to measure La Banque Postale s intrinsic performance. They are listed below: a 237 million write-back of the provision for home ownership saving products was recorded in 2006, related to the rising interest rates and, to a lesser extent, to the fall-off in balances of outstanding accounts; the increase in interest rates also had the effect of reducing the investment portfolio s value by 105 million; the regulatory changes in commission rates on Livret A passbook accounts (1 November 2005), LEP accounts (as of October 2006) and Codevi accounts (as of July 2006) had a total negative impact of 58 million on the entire year. Other than these specific elements, NBI was up 199 million, a 4.6%-increase over This growth is primarily related to the increase in customer commissions and breaks down as follows: growth of 2.4 billion in outstanding commissioned savings accounts (Livret A, LEP and Codevi) with a positive impact of 5.3 million on the financial year; increase of 46.8 million in life insurance commissions. This performance includes the impact of the new agreement with CNP Assurances, which takes retroactive effect as from 1 January 2006 and is the result of the substantial increase in the net inflow in FY 2006 as well as the growth in average funds under management; 4 million increase in commissions on unit trusts to 168 million at the end of The annual increase in unit of account funds at the expense of euro accounts is the primary cause of this increase; banking service commissions rise sharply by 8.5% or 84 million. The growth in the number of active clients and a rise in customer take-up of services (stock of packages up 674,000 units in twelve months) easily explain this increase. The favourable stock market environment in 2006 supported the brokerage and custody account fees business. Lastly, there was a similar growth in inter-bank commissions, driven in particular by bank card purchases.

13 2.2.4 La Poste Retail Outlets La Poste Retail Outlets acts first and foremost as a network for distributing the Group s products, and as such receives income from the Group s other business sectors of approximately 4.3 billion. La Poste Retail Outlets contribution to consolidated turnover of 25 million, therefore solely comprises commissions received on sales of external products (such as telephone cards, faxes and photocopies) carried out at the post office network counters. 2.3 CONTAINED OPERATING EXPENSES (in euro millions) Variation Variation in M in % Personnel costs 11,632 11,638 11, Other operating expenses 6,703 7,046 7, GROSS OPERATING EXPENSES 18,335 18,684 19, MANAGEMENT REPORT Personnel costs up 1.7% The Group s personnel costs grew 1.7% to 11.8 billion in They accounted for 61% of total operating expenses in 2006, vs. 62.3% in (in euro millions) Variation Variation in M in % Wages and salaries, bonuses 7,801 7,749 7, Social security contributions 1,431 1,523 1,463 (61) (4.0) Pension costs 2,139 2,176 2, Other expenses (17) (8.9) PERSONNEL COSTS 11,632 11,638 11, These expenses include several specific elements that must be put aside to better understand the change in the payroll: like other French companies, La Poste was able to benefit as of 1 January 2006 from the measure to reduce social contributions on low wages instituted by the Fillon Law. This resulted in a positive impact of 192 million; changes in scope increased personnel charges by 61 million; La Poste recorded a 45 million-urssaf (social security contribution collection agency) adjustment in the financial year. Provisions had been set up for this adjustment and a concurrent write-back was recorded (see below); pension expenses increased by 59 million, pursuant to the agreements between the State and La Poste. Other than these elements, the Group s personnel expenses increased 2% between 2005 and Other operating expenses (in euro millions) Variation Variation pro forma in M in % Purchases and other external charges 4,979 5,330 5, Taxes other than on income , Charges to amortisation, depreciation and provisions (71) (9.6) OTHER OPERATING EXPENSES 6,703 7,046 7, Other operating expenses amounted to 7.5 billion, up 6.8% over External purchases and other expenses amounted to 5.8 billion at the end of 2006, up 8.6% over The scope effect, following the acquisitions of Exapaq, Orsid and the Spanish express companies, contributed 143 million to this increase.

14 After this element was offset, external purchases and expenses increased 5.8% and include in particular the costs of the major projects by the Mail, Retail Outlet network and Financial Services sectors. Allocations to depreciation and provisions amounted to 662 million in 2006, down 9.6% from Allocations to depreciation remained stable, but the allocations to provisions were notably less than in 2005 due to write-backs on social security disputes (URSSAF, see personnel expenses) and the drop in the cost of bank risk. 2.4 OPERATING PROFIT OF 949 MILLION RESULTED IN A SIGNIFICANT IMPROVEMENT IN THE GROUP S OPERATING MARGIN Changes to the operating profit (in millions) and the operating profit/income % +4.7% +2.8% Operating profit 2005 pro forma Operating Profit/Income 2006 Operating profit surged 22% to 949 million over On a like-for-like basis, operating profit increased by 16%. In this context, operating margin (Operating Profit/revenues) continued to increase, going from 2.8% in 2004, 4.0% in 2005 and 4.7% in 2006, thereby enabling the Group to close the gap with its main competitors. 2.5 INTEREST EXPENSES ON THE RISE Net interest expenses increased 25 million to 111 million, primarily due to the increase in the Group s net debt, which went from 3.8 billion at the end of 2005 to 5.9 billion at the end of Of this amount, 2 billion of this increase was the result of the reform in the funding of public service pensions of employees working at La Poste. La Poste Group s operating needs were amply self-financed, making it borrow only 136 million. 2.6 OTHER PROFIT AND LOSS ITEMS For 2006, La Poste Group recorded a corporate income tax of 120 million, compared with 215 million in This positive change is the result of two elements: the transition from two to three years in the period for recognising deferred tax credits had a positive impact on earnings for the year of 45 million; the non-taxable write-back of the provision for Home ownership Saving products of 237 million in 2006 resulted in an 82 million write-back on the Group s deferred tax liabilities. The net deferred tax liability amounted to 86 million at 31 December 2006, against 146 million at 31 December The share of companies accounted for by the equity method went from 131 million to 148 million. It mostly corresponds to the share in CNP Assurances earnings. The net allocation to amortisation of consolidated goodwill was 76 million, against 53 million in Its growth is directly related to new acquisitions in NET PROFIT REACHES 789 MILLION After deducting minority interests, the net profit Group share improved by 232 million or nearly 42%. After offsetting the decrease in the tax expense related, in 2006, to the specific elements concerning deferred taxes, income grew 19%.

15 3. LA POSTE GROUP BALANCE SHEET Net fixed assets increased from 8.3 billion at 31 December 2005 to 9.3 billion at 31 December Acquisitions of tangible and intangible assets hit a record high during the year, totalling 1,135 million compared with 878 million in Taking into account these investments, combined with acquisitions ( 504 million), disposals and depreciation for the period, tangible and intangible assets went from 5,861 million in 2005 to 6,283 million in Due to the write-back of the Home Saving provision and impairment of marketable securities, the Group s cash flow slipped from 1,230 million to 1,082 million. The drain on consolidated reserves following the reform in the funding of public service employee pensions reduced consolidated equity from 4,275 million to 2,935 million at 31 December 2006, after incorporating the net profit for the year. Net debt (excluding La Banque Postale) went from 3,781 million to 5,916 million. The net debt/equity ratio went from 0.88 at the end of 2005 to 2.02 at the end of 2006 and the net debt/ebitda from 2.46 to OUTLOOK FOR will be the last year of the Efficiency and Convergence agreement (Contrat de Plan) signed between La Poste and the French State in 2003, which set out the mutual commitments made in connection with the upcoming changes to La Poste s structure and operations. The Group s solid financial results since 2004, the creation of La Banque Postale and the completion of negotiations between La Poste and the State on the system for financing the pensions of public-service employees working for La Poste clearly shows common drive to stand by these mutual commitments. Faced with the prospect of the total opening up of the postal markets to competition in 2009, the Group is pursuing and completing the implementation of its major modernisation projects, to ensure that it is ready to confront the European and world competitors on equal terms. RECENT TRENDS The results of commercial activity for the first months of 2007 are equal to or better than expectations for Mail, Parcels and Express sectors. The Financial Services sector has recorded a sharp increase in inflows, but still has to cope with significant withdrawals from Home Savings and grants even more new property loans than the substantial production in With respect to employee relations, an agreement on professional development of mail carriers was signed on 19 January It strengthens permanent full-time employment, provides attractive career paths for 100,000 postmen and women and also enhances promotion opportunities. The agreement reinforces every element building the path to La Poste s goal of providing a top quality service six days out of seven. MANAGEMENT REPORT 13

16 14 APPENDIX IAS 19 Employee benefits La Poste Group grants its employees a certain number of post-employment benefits. In accordance with the possibility offered by the French accounting regulations, the major portion of these commitments to employees were not recorded in the financial statements under French standards, but presented as off balance sheet commitments. Under IFRS, all of these commitments to employees concerning defined benefit plans are recorded in the opening balance sheet and offset against equity. These commitments are valued based on an actuarial calculation based on applying the projected units of credit method, pursuant to the provisions of IAS 19. For defined contribution plans, the payments made are recorded as expenses in the period in which they are incurred. Existing post-employment benefits in the Group are mostly defined benefit plans and primarily concern: public service employee pensions; public service employee legal pre-retirement schemes; various welfare services for retired public service employees; various types of assistance granted to associations that provide assistance to pensioners. The reform for financing the pensions of public-service employees working for La Poste, adopted in December 2006, enables this pension plan to be qualified as a defined contribution plan as from this date. IAS 39 Financial instruments related to bond debt management Bonds designated at fair value As part of the Group s strategy to manage its bonded debt, some fixed-rate bonds are converted to floating-rate through fixed-rate call/floating-rate put swaps. Pursuant to IAS 39 and its Fair value option amendment, adopted by the European Union on 15 November 2005, bonds backed by fixed-/floating-rate swaps are recognised at fair value through profit and loss in the IFRS financial statements. The corresponding swaps are also valued at fair value through profit and loss in the opening balance sheet, pursuant to the general rule for valuing derivatives set out in IAS 39. Moreover, depending on market developments, the Group may be led to freeze the interest rates of some borrowings again by subscribing to floating-rate call/fixed-rate put swaps. These re-fixed swaps are also valued at fair value through profit and loss. Bonds valued at amortised cost Bonds not secured by fixed-/floating-rate swaps are valued according to the amortised cost method based on the effective interest rate (EIR). Pre-hedge bond swaps In some cases, La Poste Group subscribes to pre-hedge swaps to protect itself against an increase in interest or exchange rates. These hedging instruments are terminated when the bond is issued, which gives rise to the payment of a fee (fee paid or received depending on the swap s situation). These fees are reclassified in the opening balance sheet as recyclable reserves and will be recycled into earnings over the life of the initially hedged bond, pursuant to the provisions of IAS 39 concerning hedge terminations. IAS 32/39 Financial instruments in the Financial Services business Postal banking account (CCP) demand deposits La Banque Postale uses financial instruments (swaps) to cover the overall structural interest-rate risk related to its retail banking business (postal banking account deposits). For the accounting treatment of these operations, the Group will apply the provisions set out in IAS 39 as adopted by the European Union (IAS 39 Carve out ), which facilitate adoption of fair value hedge accounting for macro-hedging operations realised as part of assetsliabilities management including customer current accounts deposits. The rest of the swap portfolio concerning the postal banking accounts (CCP) consists of: lender (fixed-rate call) swaps that back CCP demand deposits, borrower (fixed-rate put) swaps that back investment securities. These swaps will be recognised at fair value through profit or loss. Interest-rate risk hedging on time deposits Fixed-rate time deposits offered to clients are reinvested as floating-rate time deposits with credit institutions. The exposure to interest-rate risk thus generated is hedged by swaps and swaptions that can be exercised in case of early redemption. An overall fair value hedging relationship is recognised between a portion of this swap portfolio ( zero-coupon swaptions) and the time deposits.

17 Securities portfolio Some securities previously recorded at cost will be classified in new categories: Financial assets at fair value through profit and loss or Assets available for sale. They will be recorded at their fair value at 1 January 2006 in the opening balance sheet and the difference with their prior book value will be charged against equity, non-recyclable or recyclable as applicable. At each balance-sheet date, they will be valued at their fair value on the profit and loss account for Financial assets at fair value through profit and losses and equity for Assets available for sale. Derivatives (IAS 39) All derivatives will be recorded on the balance sheet at their fair value through earnings. At 1 January 2006 these revaluations will be recorded as equity. Hedging (IAS 39) The Group has chosen to use the provisions of European Commission regulation No. 2086/2004 adopting IAS 39, except for some clauses that make provisions to elect as fair value hedging relationships, as from 1 January 2006, some macro-hedging transactions realised as part of ALM (including in particular clientele time deposits). Items hedged as micro and macro fair value hedging will be re-valued for the portion concerning the hedging risk, at the fair value through earnings symmetrically to the revaluation of the hedging derivative. At 1 January 2006, these revaluations will be recorded as equity. IAS 16 Tangible assets Tangible assets will be valued in the opening balance sheet pursuant to the provisions of IAS 16 and the provisions and options provided for in IFRS 1 concerning the first-time adoption of IAS 16. The valuation method used is amortised cost. First-time application procedures La Poste Group has adopted for its entire property stock the option set out in IFRS 1 allowing the use of an asset s fair value as the presumed cost in the opening balance sheet. This fair value at 1 January 2006 was determined based on appraisals conducted at the beginning of 2005, adjusted for one year of depreciation. All the other tangible fixed assets will be valued in the opening balance sheet by applying the normal treatment provided for by IFRS 1; namely IAS 16 applied retrospectively. Component approach The components and useful lives used are the same as those already identified and applied in the consolidated financial statements according to French standards since 1 January IAS 37 Provisions for liabilities and charges Provisions for liabilities and charges were valued and recorded in the financial statements according to La Poste Group s French standards in compliance with the provisions of IAS 37, except for the following points. Discounting Provisions for liabilities and charges will be recognised in the Group s IFRS financial statements at their present value, when the effect of the time value is deemed to be significant. The accretion effect is recorded as financial income for the period. Provision for General Banking Risks In accordance with the option offered by the French bank accounting regulations, La Banque Postale recorded in its balance sheet a provision for General Banking Risks. This provision does not fulfil the liability recognition criteria set out by IAS 37 and therefore will be written back to equity in the opening IFRS balance sheet. Provisions for major repairs The Group recorded in its previously established financial statements provisions for major maintenance and repairs, in accordance with the option provided by French accounting regulations. These provisions do not fulfil the definition of a liability according to IAS 37 and therefore will be cancelled through equity in the opening balance sheet. IFRS 3/IAS 36 Goodwill La Poste Group applies IFRS 3 for business combinations prior to 1 January 2006, in accordance with the option offered by IFRS 1. According to this standard, business combinations are recognised based on the acquisition cost method: the assets and liabilities of the acquired company are valued at their fair value at the acquisition date. The positive variance between the acquisition cost and the acquired share of the net asset thus revalued is recognised as goodwill. In case of a negative variance, it is recognised immediately in profit and loss account. Goodwill will no longer be amortised, but maintained on the balance sheet at its historical cost denominated in the currency of the acquired subsidiary and converted at the exchange rate as of the closing date. Goodwill will be tested for impairment tests annually, or more frequently if events or circumstances indicate that it might be impaired, in accordance with IAS 36. La Poste Group has already carried out such tests for the needs of its French financial statements. No impact is expected in this regard on the opening balance sheet. MANAGEMENT REPORT 15