CONSOLIDATED ANNUAL REPORT 2015

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1 CONSOLIDATED ANNUAL REPORT

2 List of contents CONSOLIDATED MANAGEMENT REPORT 3 AUDIT REPORT 6 CONSOLIDATED BALANCE SHEET 9 CONSOLIDATED OFF BALANCE SHEET 11 CONSOLIDATED PROFIT AND LOSS ACCOUNT 13 NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS 16

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4 CONSOLIDATED MANAGEMENT REPORT CONSOLIDATED MANAGEMENT REPORT The economic environment throughout the year remained rather volatile starting with the Swiss National Bank discontinuing the floor in the exchange rate of CHF 1.20 per Euro and the move further into negative interest rates in January This unexpected event caused dislocation in financial markets and the market volatility of recent years has continued. This has influenced our result on financial operations of EUR 2.3m, which is EUR 3.6m lower than last year was characterized by the successful consolidation and integration of the new entities in Liechtenstein and Bahamas. The latest investments into our staff and infrastructure has positioned us well to continue to consolidate through selective acquisitions in existing and new markets. We are also continuously investing to meet the new regulatory challenges of the banking industry. The balance sheet rose from EUR 1.3 bn to EUR 1.4 bn as a consequence of the expansion of the Group. Investments into fixed income have seen an increase from EUR 554.9m to EUR 654.5m following the appliance of our prudent investment strategy across all group entities. The low interest rate environment has been and will be a challenge for the banking industry as a whole. The Group has therefore continued to grow its loan portfolio from EUR 202.3m to EUR 388.9m. Such lending activity is always ancillary to our core private banking business and is mainly focused on primary residence mortgages and Lombard loans, both at conservative loan to value levels. This prudent and solid approach results also in a very strong solvency ratio of 26.4%. The organic growth of the private banking business can be seen in the increase in client deposits from EUR 866.3m to EUR 1.1 bn. The total operating income of the Group was broadly unchanged at EUR 38.6m compared to EUR 37.4m for the previous period. The total operating income was driven by a strong net interest income of EUR 21.8m (2014: EUR 12.1m), which is a result of the shift from lower yielding fixed income bonds to loans to customers. The commission income increased by 62.8% to EUR 11.6m, which can be largely attributed to the first year of full consolidation of Banque Havilland (Liechtenstein) AG and Banque Havilland (Bahamas) Limited. 3

5 In early 2015, the Group continued to focus on its core business and sold its participations in Blackfish Capital Management Limited and Blackfish Capital Holdings Limited. At the same time, the Group has entered the Russian market with the establishment of BH International Limited Liability Company, which is acting as a marketing office in Russia. In addition, Kaupthing Life & Pension Luxembourg S.A. entered into an agreement to transfer its existing business to a professional insurance partner. This transfer was successfully closed at 30 th June It has been decided to return the licence to the Commissariat aux Assurances in Luxembourg and to liquidate the company. The accounts have been prepared as liquidation accounts. The Group continues its existing strategy of investing in systems and new personnel to handle the increased assets under management. This resulted in an increase in staff cost from EUR 11.4m to EUR 17.4m. The staff costs as well as other general expenses of EUR 13.3m (2014: EUR 8.1m) have also been strongly influenced by oneoff integration cost as well as by the first year of full consolidation of Banque Havilland (Liechtenstein) AG and Banque Havilland (Bahamas) Limited. The Group is pleased to report a profit of EUR 2.5m despite numerous transition costs and a rather volatile financial environment throughout CAPITAL AND RISK MANAGEMENT The Group business is exposed to several risks as customary for a banking business, such as credit, market, liquidity, operational and other business risks. The Group continues to maintain a robust approach to risk management with an independent department reporting directly to the Executive Management and the Board of Directors. The Risk Management Department ensures that each key risk of the business is identified and properly managed by applying a holistic view. Key risk areas are managed through a framework of policies, procedures and limits with regular reviews of such framework. During 2015, the Group has enhanced its control framework both in terms of staff and technology to face the increase in business. The Group has no direct or indirect exposure towards subprime credit or structured credit obligations (such as CDOs, SIVs and CLOs) in its loan or bond portfolios. Additional information on risk management is available on request in accordance with part 8 of the EU Regulation No 575/2013 (CRR: Capital Requirements Regulation ). For further information on the Group s exposure to risks, please refer to notes 7.3 and 7.4 of these annual accounts. OUR PRIORITIES FOR 2016 In February 2016, Banque Havilland S.A. acquired 100% of the share capital of 4

6 Banco Popolare Luxembourg S.A. and is a consequence of our strategy to expand our UHNW client base in Europe. Banco Popolare Luxembourg S.A. has been renamed Banque Havilland Institutional Services S.A. and enhances the capabilities of the Group in the shape of a platform to service investment funds and institutional clients. Banque Havilland Institutional Services S.A. will be fully consolidated into the Group from 29 th February The Group will also continue in 2016 to seek potential bolton acquisition targets to accelerate its expansion plans, based on the opportunities arising from competitors reducing their private banking exposures, while continuing its low risk approach to the management of the balance sheet and the business generally. On behalf of the Group s Executive Committee and the shareholder, we would like to express our deepest thanks to the clients and employees of the Group. Luxembourg, 4 th April 2016 Peter Lang Deputy CEO Harley Rowland Member of the Board of Directors 5

7 Audit report To the Board of directors of Banque Havilland S.A. REPORT ON THE CONSOLIDATED ANNUAL ACCOUNTS We have audited the accompanying consolidated annual accounts of Banque Havilland S.A., which comprise the consolidated balance sheet as at 31 st December 2015, the consolidated profit and loss account for the year then ended and a summary of significant accounting policies and other explanatory information. Board of Directors responsibility for the consolidated annual accounts The Board of Directors is responsible for the preparation and fair presentation of these consolidated annual accounts in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the consolidated annual accounts, and for such internal control as the Board of Directors determines is necessary to enable the preparation of the consolidated annual accounts that are free from material misstatement, whether due to fraud or error. Responsibility of the Réviseur d entreprises agréé Our responsibility is to express an opinion on these consolidated annual accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated annual accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated annual accounts. The procedures selected depend on the judgment of the Réviseur d entreprises agréé, including the assessment of the risks of material misstatement of the consolidated annual accounts, whether due to fraud or error. In making those risk assessments, the Réviseur d entreprises agréé considers 6

8 internal control relevant to the entity s preparation and fair presentation of the consolidated annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. 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 annual accounts. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated annual accounts give a true and fair view of the consolidated financial position of Banque Havilland S.A. as of 31 st December 2015, and of the consolidated results of its operations for the year then ended in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the consolidated annual accounts. Report on other legal and regulatory requirements The consolidated management report, which is the responsibility of the Board of Directors, is consistent with the consolidated annual accounts. PricewaterhouseCoopers Société coopérative 2, Rue Gerhard Mercator B.P L1014 Luxembourg Telephone Facsimile Cabinet de révision agréé. Expertcomptable (autorisation gouvernementale n ) R.C.S. Luxembourg B Capital social EUR TVA LU PricewaterhouseCoopers, Société coopérative Luxembourg, 4 th April 2016 Represented by Cyril Lamorlette 7

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10 CONSOLIDATED BALANCE SHEET AS AT 31 st DECEMBER 2015 (EXPRESSED IN EURO) ASSETS NOTES 31/12/ /12/2014 Cash in hand, balances with central banks and post office banks 4.1, Loans and advances to credit institutions repayable on demand other loans and advances 4.2, 7.1, Loans and advances to customers 2.4.3, 4.3, 7.1, Bonds and other fixedincome transferable securities Issued by public bodies Issued by other borrowers 2.4.1, 4.4, 7.1, Shares and other variableyield transferable securities 2.4.2, 4.5,7.1, Shares in affiliated undertakings Intangible assets 2.3.1, Goodwill of first consolidation 2.2, Tangible assets 2.3.2, Other assets Prepayments and accrued income TOTAL ASSETS The accompanying notes form an integral part of these consolidated annual accounts. 9

11 CONSOLIDATED BALANCE SHEET AS AT 31 st DECEMBER 2015 (EXPRESSED IN EURO) LIABILITIES NOTES 31/12/ /12/2014 Amounts owed to credit institutions repayable on demand with agreed maturity dates or periods of notice 5.1, Amounts owed to customers other debts repayable on demand with agreed maturity dates or periods of notice 5.2, Other liabilities Accruals and deferred income Provisions provisions for taxation other provisions Fund for general banking risks Subscribed capital 5.4, Share premium account Reserves 5.5, Profit or loss brought forward Profit for the financial year attributable to the Group Minority interests TOTAL LIABILITIES The accompanying notes form an integral part of these consolidated annual accounts. 10

12 CONSOLIDATED OFF BALANCE SHEET FOR THE YEAR ENDED 31 st DECEMBER 2015 (EXPRESSED IN EURO) OFF BALANCE SHEET NOTES 31/12/ /12/2014 Contingent liabilities of which: Guarantees and assets pledged as collateral security 6.1, 7.1, Fiduciary transactions Commitments The accompanying notes form an integral part of these consolidated annual accounts. 11

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14 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST DECEMBER 2015 (EXPRESSED IN EURO) NOTES Interest receivable and similar income of which: arising from fixedincome transferable securities Interest payable and similar charges ( ) ( ) Net interest income Income from transferable securities Income from shares and other variableyield securities Commission receivable Commission payable ( ) ( )) Net commission income Net profit or net loss on financial operations Other operating income Total operating income General administrative expenses Staff costs of which: wages and salaries social security costs of which: social security costs relating to pensions Other administrative expenses 9.3, ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Value adjustments in respect of tangible and intangible assets ( ) ( ) Other operating charges 8.3 ( ) ( ) Value adjustments in respect of loans and advances and 8.4 provisions for contingent liabilities and for commitments ( ) ( ) The accompanying notes form an integral part of these consolidated annual accounts. 13

15 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST DECEMBER 2015 (EXPRESSED IN EURO) NOTES Value readjustments in respect of loans and advances and provisions for contingent liabilities and for commitments Value readjustment in respect of securities held as financial fixed assets, participating interests and shares in affiliated undertakings ( ) Income from the reversal of amounts included in the fund for general banking risks ( ) Profit before tax ( ) Taxes on profit on ordinary activities 8.5 (26 750) (76 013) Profit or loss on ordinary activities after tax ( ) Extraordinary income Other taxes not shown in the preceding items ( ) ( ) Profit or loss for the financial year Thereof minority interests ( ) ( ) Profit for the financial year attributable to the Group The accompanying notes form an integral part of these consolidated annual accounts. 14

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17 Notes to the consolidated annual accounts as at 31 st DECEMBER GENERAL Banque Havilland S.A. (the Bank ) was incorporated in the GrandDuchy of Luxembourg on 10 th July 2009 as a limited liability company ( Société Anonyme ). The Ministry of Finance granted the company a banking licence on 25 th June The Bank was created through a noncash contribution of assets and liabilities from a former bank. This noncash contribution was calculated as the lower of net book value or fair value as at the date of the contribution. As a consequence, the Bank is now carrying all former assets and liabilities at its historical cost and accumulated depreciation. The Bank is registered at the Luxembourg Registre du Commerce et des Sociétés under the number B The head office is located 35a, Avenue J.F. Kennedy, L1855 Luxembourg. The share capital of the Bank is expressed in Euro (EUR) and the accounting records are prepared and maintained in this currency. The Bank s accounting year is defined as the calendar year. The Bank is permitted to carry out all banking activities. Its principal activity is private banking. The Bank and the subsidiaries described in note 3 are referred to as the Group. 16

18 Notes to the consolidated annual accounts as at 31 st DECEMBER SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND VALUATION RULES The Group prepares its consolidated accounts using the historical cost principle, in accordance with the laws and regulations in force in the Grand Duchy of Luxembourg and on the basis of accounting principles generally accepted by the banking sector in the Grand Duchy of Luxembourg. The accounting policies and the valuation principles are determined and applied by the Board of Directors, apart from those which are defined by law and by the Commission de Surveillance du Secteur Financier. 2.1 CONSOLIDATION METHOD The Group has adopted the full consolidation method for its subsidiaries (direct or indirect holding of more than 50%). 2.2 DIFFERENCES ON FIRST CONSOLIDATION Differences on first consolidation represent the difference between the cost of the parent company s investment in the consolidated subsidiaries and its share of the net assets of these companies as at the date of acquisition of its investment. Positive differences on first consolidation are disclosed on the asset side of the balance sheet (as goodwill of first consolidation) and amortized over 5 years on a linear basis. Negative differences on first consolidation are shown on the liabilities side of the consolidated balance sheet. 17

19 2.3 FIXED ASSETS Intangible assets Intangible assets are included at purchase price less accumulated depreciation. Intangible assets consist of software amortized over 4 years on a linear basis. Formation expenses and costs in relation to capital increases are directly expensed when incurred. Other intangible assets consist of leasehold right and are not amortized. Goodwill acquired for valuable consideration is amortised over 4 years on a linear basis. In case of durable reduction in value, intangible assets are subject to value adjustments regardless of whether their utilisation is limited. The valuation of the inferior value is not maintained if the reasons for which the value adjustment were made no longer exist Tangible assets Tangible assets are included at purchase price less accumulated depreciation. Tangible assets are depreciated over their expected useful life. The rates and methods of depreciation are as follows: RATES METHOD Office equipment, fixtures & fittings 25.0% linear Company cars 25.0% linear Building 2.5% linear 18

20 Fixtures and fittings costing less than EUR 867 or whose expected useful life does not exceed one year are charged directly to profit and loss account for the year. In case of durable reduction in value, tangible assets are subject to value adjustments regardless of whether their utilisation is limited. The valuation of the inferior value is not maintained if the reasons for which the value adjustment were made no longer exist Shares in affiliated undertakings Shares in affiliated undertakings are recorded at purchase price expressed in denomination currency. Value adjustments are made when the Board of Directors considers that there exists a durable reduction in their value at the balance sheet date. The value adjustment is not maintained if the reasons for which it was recorded no longer exist. 2.4 CURRENT ASSETS Debt securities and other fixedincome securities Debt securities and other fixedincome securities are recorded at purchase price. Value adjustments are made for securities in the structural portfolio for which the valuation is lower than the purchase price. The valuation is the market value on the balance sheet date or the estimated realisable value or the quotation which best represents the inherent value of the securities held Shares and other variableyield securities Shares and other variableyield securities are recorded at purchase price. At the balance sheet date, they are valued at the lower of purchase price or market value. A value adjustment is recorded when the market value is lower than the purchase price. 19

21 2.4.3 Loans and advances Loans and advances are disclosed at their nominal value. Accrued interests are recorded under the heading Prepayments and accrued income on the asset side of the balance sheet Value adjustments in respect of current assets The policy of the Group is to establish specific provisions to cover the risk of loss and of the nonrecovery of debtors. Value adjustments are deducted from the relevant current assets Provision for assets at risk A tax free lumpsum provision is accounted for based on the Group s assets at risk. These assets are determined in accordance with the regulatory provisions governing the computation of the capital adequacy ratio. The lumpsum provision is split between the relevant assets at risk in accordance with the provisions of the Luxembourg Monetary Institute circular letter dated 16 th December The portion related to the assets at risk is deducted from these assets. 2.5 FUND FOR GENERAL BANKING RISKS The Group has established a fund for general banking risks to cover the particular risks associated with banking. Transfers to this fund are booked from income after tax, but before determination of net income. This fund is not subject to any quantitative limit. 20

22 2.6 PURCHASE PRICE OF FUNGIBLE ASSETS The Group values fungible assets by the weighted average price method. 2.7 VALUATION OF FOREIGN CURRENCY BALANCES AND TRANSACTIONS Foreign currency The share capital of the Group is expressed in Euro ( EUR ) and the accounting records are maintained in that currency. Shares in affiliated undertakings included in fixed assets are converted at the spot rate prevailing at the balance sheet date. Intangible and tangible assets are converted at the historic rate. All other assets and liabilities denominated in a currency other than EUR are converted into EUR at the rate of exchange ruling at the balance sheet date. Income and charges in foreign currencies are converted into EUR at the rate of exchange ruling on the date of the transaction. Foreign currency differences arising from these valuation principles are taken to the profit and loss account. The annual accounts of subsidiaries whose operating currency is not EUR are converted using the closing rate method. Under this method, all assets, liabilities and result brought forward, both monetary and nonmonetary, are converted using the spot exchange rate at the balance sheet date. Income and expense items are converted at the average rate for the year. 21

23 2.7.2 Valuation of transactions not subject to currency risk Swap transactions not linked to balance sheet items The spot result realised in cash terms is offset by the result arising from the revaluation of the forward leg. The premium/discount is spread prorata temporis. Overthecounter closed forward transactions Future profits that are certain to arise are deducted from future losses that are certain to arise in the same currency. A provision is created for any excess losses; any excess profits are deferred Valuation of transactions subject to currency risk Overthecounter speculative forward transactions Provision is made for unrealised losses on forward transactions, which do not represent the hedging of a spot position. Unrealised gains are not accounted for. The Group only enters into financial instruments for hedging purposes. 22

24 3 SCOPE OF CONSOLIDATION NAME OF THE COMPANY REGISTERED OFFICE PROPORTION OF THE CAPITAL HELD BY THE PARENT COMPANY 31/12/ /12/2014 Parent company Banque Havilland S.A. Luxembourg Full consolidation Banque Havilland (Monaco) S.A.M. Monaco 100.0% 100.0% Kaupthing Life and Pension S.A. ( KLP )* Luxembourg 100.0% 100.0% Blackfish Capital Management Limited (1) United Kingdom 0.0% 100.0% Blackfish Capital Holdings Limited (1) United Kingdom 0.0% 100.0% Banque Havilland (Liechtenstein) AG Liechtenstein 52.5% 52.5% Banque Havilland (Bahamas) Ltd. Bahamas 100.0% 100.0% Out of consolidation scope BH International Limited Liability Company Russia 100.0%** N/A (1) Sold in March 2015 (*) 2015 annual accounts established on liquidation basis (impact of this valuation method is not significant on the consolidated annual accounts). (**) 99.5% held by Banque Havilland S.A. and 0.5% by Banque Havilland (Liechtenstein) AG. Please also refer to note

25 4 DETAILED DISCLOSURES RELATING TO ASSET HEADINGS 4.1 CASH IN HAND, BALANCES WITH CENTRAL BANKS AND POST OFFICE BANKS In accordance with the requirements of the European Central Bank, the Central Bank of Luxembourg implemented effective 1 st January, 1999, a system of mandatory minimum reserves which applies to all Luxembourg credit institutions. The reserve balance as at 31 st December 2015 held by the Group with the Central Bank of Luxembourg amounted to EUR (2014: EUR ). The Group has no overnight deposit at the Central Bank of Luxembourg as at 31 st December 2015 (2014: ). The reserve balance as at 31 st December 2015 held by the Group with the Banque de France amounted to EUR (2014: EUR ). The reserve balance as at 31 st December 2015 held by the Group with the Swiss National Bank amounted to EUR (2014: EUR ). The reserve balance as at 31 st December 2015 held by the Group with the Central Bank of the Bahamas amounted to EUR (2014: EUR 0). 4.2 LOANS AND ADVANCES TO CREDIT INSTITUTIONS As at 31 st December 2015, the Group has not granted any loan to affiliated credit institutions (2014: EUR 0). 24

26 4.3 LOANS AND ADVANCES TO CUSTOMERS As at 31 st December 2015, loans and advances to related parties amount to EUR (2014: EUR ). 4.4 TRANSFERABLE SECURITIES This heading includes debt securities, whether quoted on a recognised market or not, issued by public bodies, credit institutions or other issuers and which are not included under another balance sheet heading. Quoted and nonquoted securities are analysed as follows: 2015 EUR 2014 EUR Securities quoted on a recognised market Securities not quoted on a recognised market TOTAL Debt securities and other fixedincome securities held are included in the structural portfolio. The Group uses the European Central Bank Monetary Policy Operations to finance a part of its eligible securities portfolio. As at 31 st December 2015, the Group is committed in sale and repurchase agreements with a firm repurchase obligation. These securities still appear on the balance sheet of the Group for a total amount of EUR (2014: EUR ). 25

27 4.5 SHARES AND OTHER VARIABLEYIELD TRANSFERABLE SECURITIES This heading includes shares, holdings in investment funds and other variableyield securities whether quoted on a recognised market or not which are not included in fixed asset investments. Quoted and nonquoted shares and other variableyield securities are analysed as follows: 2015 EUR 2014 EUR Securities quoted on a recognised market Securities not quoted on a recognised market TOTAL All shares and other variableyield securities held are included in the structural portfolio. As at 31 st December 2015, the Group holds shares and other variableyield transferable securities amounting to EUR for hedging purposes in the frame of contracts for differences ( CFD ) with clients (2014: EUR ). 26

28 4.6 MOVEMENTS IN FIXED ASSETS FIXED ASSETS (IN EUR) GROSS VALUE AT THE BEGINNING OF THE FINANCIAL YEAR ADDITIONS DISPOSALS / ADJUST MENTS GROSS VALUE AT THE END OF THE FINANCIAL YEAR CUMULATIVE VALUE ADJUSTMENTS AT THE BEGINNING OF THE FINANCIAL YEAR CUMULATIVE VALUE ADJUSTMENT (*) NET BOOK VALUE AS AT 31/12/2015 NET BOOK VALUE AS AT 31/12/ Goodwill of first consolidation ( ) ( ) Shares in affiliated undertakings** ( ) Intangible assets of which: ( ) ( ) ( ) Goodwill acquire for valuable consideration Software Other intangible assets ( ) ( ) ( ) ( ) ( ) ( ) Tangible assets of which: ( ) ( ) ( ) Office equipment, fixtures and fittings ( ) ( ) ( ) Company cars ( ) ( ) ( ) Building ( ) ( ) TOTAL ( ) ( ) ( ) (*) Including lump sum provision. (**) Please refer to note 3. 27

29 4.7 OTHER ASSETS This heading consists of the following: 2015 EUR (*) 2014 EUR (*) Investment for the benefit of life insurance policyholders who bear the investment risk** Tax advances Guarantee called Management and performance fees receivable Margin calls on contracts for differences with clients Invoices issued Other receivables TOTAL (*) Including lumpsum provision (**) KLP has transferred its insurance business (policies and staff) to another Luxembourg insurance company. 4.8 ASSETS DENOMINATED IN FOREIGN CURRENCIES Assets denominated in currencies other than EUR have a total value of EUR (2014: EUR ) as at 31 st December The gap between non EUR denominated assets and non EUR denominated liabilities is covered by exchange rates derivatives instruments. 28

30 5 DETAILED DISCLOSURES RELATING TO LIABILITY HEADINGS 5.1 AMOUNTS OWED TO CREDIT INSTITUTIONS As at 31 st December 2015, the Group has no amount owed to affiliated credit institutions (2014: EUR 0). 5.2 AMOUNTS OWED TO CUSTOMERS As at 31 st December 2015, amounts owed to related parties amount to EUR (2014: EUR ). 5.3 OTHER LIABILITIES 2015 EUR (*) 2014 EUR (*) Technical provisions for life insurance policies where the investment is borne by the policyholders* Invoice payable Guarantee payable Payable on sales of securities Business introducers commissions payables Issued cheques Other payable Preferential creditors TOTAL (*) KLP has transferred its insurance business (policies and staff) to another Luxembourg insurance company.

31 5.4 SUBSCRIBED CAPITAL As at 31 st December 2015, the subscribed and fully paid share capital of the Group is EUR made up of shares with a nominal value of EUR each. 5.5 LEGAL RESERVE In accordance with article 72 of the Luxembourg company law, an amount of 5% of net profits should be allocated to a non distributable legal reserve, until this reserve reaches 10% of the subscribed capital. As a result, the annual general meeting of Banque Havilland S.A. held on 20 th April 2015 has allocated an amount of EUR to the legal reserve, in respect of the 2014 financial year. 30

32 5.6 CHANGES IN SHAREHOLDERS EQUITY The movements of shareholders equity of Banque Havilland S.A. may be summarised as follows: SUBSCRIBED CAPITAL EUR SHARE PREMIUM EUR LEGAL RESERVE EUR OTHER RESERVES EUR MINORITY INTERESTS EUR PROFIT BROUGHT FORWARD EUR PROFIT OF THE YEAR (GROUP) EUR TOTAL OWN FUNDS EUR Balance at 31 st December Transfer to legal reserve ( ) Translation impact on: group reserves minority interests ( ) ( ) Profit brought forward ( ) Current year profit ( ) BALANCE AT 31 ST DECEMBER LIABILITIES DENOMINATED IN FOREIGN CURRENCIES Liabilities denominated in currencies other than EUR have a total value of EUR (2014: EUR ) as at 31 st December The majority of the gap between non EUR denominated assets and non EUR denominated liabilities is covered by exchange rates derivative instruments. 31

33 6 CONTINGENT LIABILITIES AND COMMITMENTS 6.1 CONTINGENT LIABILITIES Contingent liabilities consist of guarantees and other direct substitutes for loans. 6.2 DEPOSIT GUARANTEE AND INVESTOR COMPENSATION SCHEME The Bank is member of the Association pour la Garantie des Dépôts, Luxembourg ( A.G.D.L. ). The sole purpose of the AGDL is to establish a system of mutual guarantee for cash deposits and receivables from investment operations made by individuals and small companies with the members of the AGDL regardless of nationality or residence. The AGDL will reimburse the deposit holder the amount of his guaranteed cash deposits and to the investor the amount of his guaranteed receivable up to EUR per guaranteed cash deposit and up to EUR per guaranteed receivable arising from investment operations other than that relating to a cash deposit. As at 31 st December 2015 a provision of EUR has been made in respect of specific liabilities arising under this scheme (2014: EUR ). 6.3 INTRODUCTION OF THE NEW BANK RESOLUTION SCHEME AND DEPOSIT GUARANTEE SCHEME The law related to the resolution, reorganisation and windingup measures of credit institutions and certain investment firms and on deposit guarantee and investor compensation schemes (the Law ), transposing into Luxembourgish law the directive 2014/59/EU establishing a framework for the recovery and resolution of credit 32

34 institutions and investment firms and the directive 2014/49/EU related to deposit guarantee and investor compensation schemes, was passed on 18 th December The deposit guarantee and investor compensation scheme currently in place through the Association pour la Garantie des Dépôts Luxembourg will be replaced by a new contribution based system of deposit guarantee and investor compensation. This new system will cover eligible deposits of each depositor up to an amount of EUR and investments up to an amount of EUR The Law also provides that deposits resulting from specific transactions or fulfilling a specific social or other purpose are covered for an amount above EUR for a period of 12 months. The provisions which have been created in the past by credit institutions for the purpose of AGDL in their annual accounts will be used/released (depending on the accounting treatment chosen) according to the contributions of the banks to the new Luxembourg banking resolution fund Fonds de resolution Luxembourg ( FRL ), respectively to the new Luxembourg deposit guarantee fund Fonds de garantie des dépôts Luxembourg ( FDGL ), which is still to be established. The funded amount of the FRL shall reach by the end of 2024 at least 1% of covered deposits, as defined in article 1 number 36 of the Law, of all authorized credit institutions in all participating Member States. This amount will be collected from the credit institutions through annual contributions during the years 2015 to The target level of funding of the FGDL is set at 0.8% of covered deposits, as defined in article 163 number 8 of the Law, of the relevant credit institutions and is to be reached by the end of 2018 through annual contributions. The contributions are to be made in the form of annual payments during the years 2016 to For 2015, the credit institutions have reflected a provision of 0.2% of covered deposits in order to anticipate these contributions, using/releasing (depending on the accounting treatment chosen) the existing AGDL provision in their annual accounts. 33

35 When the level of 0.8% is reached, the Luxembourgish credit institutions are to continue to contribute for 8 additional years in order to constitute an additional safety buffer of 0.8% of covered deposits as defined in article 163 number 8 of the Law. 6.4 OPEN FORWARD AGREEMENTS AT THE BALANCE SHEET DATE The Group is engaged in forward foreign exchange transactions (swaps, outrights) in the normal course of its business. A significant portion of these transactions has been contracted to hedge the effects of fluctuations in exchange rates. 6.5 MANAGEMENT AND FIDUCIARY SERVICES The Group s services to third parties consist of: Management and advice on asset management; Safekeeping and administration of marketable securities; Credit activities; Insurance services; Fund administration. 34

36 7 INFORMATION RELATING TO FINANCIAL INSTRUMENTS 7.1 DISCLOSURES RELATING TO PRIMARY FINANCIAL INSTRUMENTS IN RELATION TO NONTRADING ACTIVITIES The following tables provide an analysis of the carrying amount of primary financial assets and financial liabilities of the Group into relevant maturity groupings based on the remaining periods to repayment. As at 31 st December 2015, primary financial assets and liabilities are analysed as follows (in EUR): FINANCIAL ASSETS LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS NO MATURITY TOTAL Cash, balances with central banks and post office banks Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixedincome securities Shares and other variableyield securities TOTAL

37 FINANCIAL LIABILITIES LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS TOTAL Amounts owed to central banks Amounts owed to credit institutions Amounts owed to customers TOTAL The maturity mismatch between the assets and the liabilities of the Group are mainly related to the Group s bond portfolio. This portfolio mainly comprises of floating rate notes indexed on the 3 or 6 months Libor. A smaller portion relates to fixedcoupon bonds and structuredcoupon bonds, which are interest sensitive. The duration of this fixed and structuredcoupon portfolio is 1.8 years. About one third of the funding of the portfolio is made through the ECB Monetary Policy Operations via MRO s and LTRO s (medium and long term refinancing operations). A positive shift of 200 bps of the interest rate curve would mean a decrease of about EUR of the present value of our assets and liabilities. The portfolio is therefore slightly sensitive to the fluctuation of short term rates. These bonds are deemed sufficiently liquid should the Group decrease its ECB funding. 36

38 As at 31 st December 2014, primary financial assets and liabilities are analysed as follows (in EUR): FINANCIAL ASSETS LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS NO MATURITY TOTAL Cash, balances with central banks and post office banks Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixedincome securities Shares and other variableyield securities TOTAL FINANCIAL LIABILITIES LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS MORE THAN FIVE YEARS TOTAL Amounts owed to central banks Amounts owed to credit institutions Amounts owed to customers TOTAL

39 7.2 DISCLOSURES RELATING TO DERIVATIVE FINANCIAL INSTRUMENTS The following tables provide an analysis of the derivative financial assets and liabilities of the Group into relevant maturity groupings based on the remaining periods to repayment. As at 31 st December 2015, overthecounter derivative financial assets and liabilities are analysed as follows (in EUR): FINANCIAL ASSETS (notional amounts) LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS TOTAL POSITIVE FAIR VALUE Instruments linked to exchange rates forward currency contracts currency swap contracts TOTAL FINANCIAL LIABILITIES (notional amounts) LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS TOTAL NEGATIVE FAIR VALUE Instruments linked to exchange rates forward currency contracts currency swap contracts TOTAL

40 As at 31 st December 2014, overthecounter derivative financial assets and liabilities are analysed as follows (in EUR): FINANCIAL ASSETS (notional amounts) LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS TOTAL POSITIVE FAIR VALUE Instruments linked to exchange rates forward currency contracts currency swap contracts TOTAL FINANCIAL LIABILITIES (notional amounts) LESS THAN THREE MONTHS BETWEEN THREE MONTHS AND ONE YEAR BETWEEN ONE YEAR AND FIVE YEARS TOTAL NEGATIVE FAIR VALUE Instruments linked to exchange rates forward currency contracts currency swap contracts TOTAL

41 7.3 DISCLOSURES RELATING TO CREDIT RISK The Group is exposed to credit risk mainly through its lending, investing and hedging activities and in cases where the Group acts as an intermediary on behalf of customers and issues guarantees. The Group s primary exposure to credit risk arises from its loans and advances and debt securities. The credit exposure in this regard is represented by the carrying amounts of the assets in the balance sheet. The Group is also exposed to offbalance sheet credit risk through guarantees issued and instruments linked to exchange, interest and other market rates (forward transactions, swap and option contracts). The credit exposure in respect of instruments linked to exchange, interest and other market rates are equal to the equivalent at risk according to the initial risk approach. The credit risk exposure can be analysed as follows (in EUR): 2015 GROSS RISK EXPOSURE 2014 GROSS RISK EXPOSURE Loans and advances to credit institutions Loans and advances to customers Debt securities and other fixedincome securities Shares and other variableyield securities Contingent liabilities Instruments linked to exchange rates TOTAL

42 Loans and advances to customers are usually secured by cash, listed investments, third party guarantees and mortgage on real estate property. Credit risk concentrations on total on and off balance sheet are analysed as follows: 2015 EUR 2014 EUR Corporates Credit institutions Individuals Public sector TOTAL Credit institutions, corporates, individuals and public sector are essentially issued from OECD countries. 7.4 INFORMATION ON THE MANAGEMENT OF OTHER RISKS Liquidity Risk A cash management system enables the Group to achieve a daily automatic vostronostro reconciliation of its main correspondent accounts. The Group is able to identify possible cash flow errors, to determine adjusted opening balances and generate an accurate liquidity gap to better channel shortterm liquidity needs. The Asset and Liability Committee ( ALCO ) receives a daily report on the overall liquidity situation of the Group, the upcoming liquidity risks and the cash buffer. 41

43 Interest Rate Risk The Group monitors its interest rate risk by analysing the different maturity gaps in the balance sheet. The Group is not exposed to interest rate risks due to the nature of its business. Less than 10% of the assets are fixed rate denominated. Stress tests are performed quarterly by analysing parallel curve shifts. Exchange Rate Risk The Group s main exposure to foreign exchange risk ( FX ) arises from USD, CHF, DKK, GBP, SEK, NOK and ISK. A foreign exchange position system provides an overall view of the currency risk and related profit or loss impact by business line, turnover and margins. The implementation of a Value at Risk ( VaR ) model gives a view of the potential loss of the overnight position. The ALCO members monitor and control the exchange rate risk through the daily report received from the Treasury department. 42

44 Market Risk The Group s Market Risk is managed in both a qualitative and a quantitative manner. The profit and loss of the Group s investment and FX book is reported daily by the Treasury to the ALCO members. An indepth analysis of the Group s investment portfolio is performed twice a month in terms of geographic segmentation, sector segmentation, type of products, latest important news on the issuer, yield analysis, rating agency s views, liquidity, issuer s healthiness, etc... The FX overnight risk is computed daily through a 99% Expected Shortfall. These documents are sent to the ALCO. All the investment decisions are subject to ALCO approval and need to be compliant with the Investment Guidelines as agreed by the Board of Directors. The monitoring and control of CFD positions is operationalized, among others, through the production of two daily reports: a CFD control report and a CFD statement report. The details for each position, corresponding margin call, profit and loss, computed VaR are indicated in these documents. In case of any breach the Relationship Manager of the client and the Credit Department are immediately informed. The Credit Department with the support of the Relation Manager has to resolve the breach whether by margin calling the client, or by closing the CFD contract. The Treasury of the Group can hedge the client s CFDs either by backing the CFD on the market with a CFD provider, or by taking positions on the underlying. In any case, the Group s book has to be delta neutral. 43

45 8 INFORMATION ON THE PROFIT AND LOSS ACCOUNT 8.1 GEOGRAPHICAL ANALYSIS INCOME Interest receivable and similar income, commission receivable and net profit on financial operations mainly originate from Western Europe. 8.2 OTHER OPERATING INCOME Other operating income are analysed as follows: 2015 EUR 2014 EUR Provisions reversed Rental income Income on insurance activities* Fee reinvoicing Gain on sale of fixed assets Gain on deals/claims settled Gain on sale of building held as fixed assets Other TOTAL (*) KLP has transferred its insurance business (policies and staff) to another Luxembourg insurance company. 44

46 8.3 OTHER OPERATING CHARGES Other operating charges are analysed as follows: 2015 EUR 2014 EUR Impairment of loans to customers Administrative fees reinvoiced Restructuring costs Expenses on insurance activities* AGDL provision VAT expenses Other TOTAL (*) KLP has transferred its insurance business (policies and staff) to another Luxembourg insurance company. 45

47 8.4 NET VALUE ADJUSTMENTS IN RESPECT OF LOANS AND ADVANCES AND PROVISION FOR CONTINGENT LIABILITIES AND FOR COMMITMENTS This heading is analysed as follows: 2015 EUR 2014 EUR Specific value adjustments on loans to customers Additions Reversals ( ) ( ) Loan to customers fully impaired Reversal of value adjustment on loan to customers fully impaired ( ) (43 613) TOTAL ( ) (55 313) As at 31 st December 2015, the lumpsum provision amounts to EUR (2014: EUR ). 8.5 TAX INFORMATION The parent company is liable to taxes on income and net assets in line with Luxembourg legislation. 8.6 EXTRAORDINARY INCOME Extraordinary income is related to the gain realised by the Group on the transfer of the insurance business of KLP to another Luxembourg life insurance company. 46

48 9 OTHER INFORMATION 9.1 COUNTRY BY COUNTRY INFORMATION According to Article 383 of the law of 5 th April 1993 as amended by the law of 23 th July 2015, credit institutions, financial holding companies and investment companies must publish information on their locations and activities, included in their scope of consolidation in each state or territory. As at 31 st December 2015, country by country information are analysed as follows (in EUR): EU MEMBER COUNTRIES STATUTORY OPERATING INCOME STATUTORY PROFIT OR LOSS BEFORE TAX STATUTORY TAX ON PROFIT OR LOSS NUMBER OF EMPLOYEES (FTE) Luxembourg* ( ) 77 United Kingdom* ( ) 13 NONEU MEMBER COUNTRIES STATUTORY OPERATING INCOME STATUTORY PROFIT OR LOSS BEFORE TAX STATUTORY TAX ON PROFIT OR LOSS NUMBER OF EMPLOYEES (FTE) Bahamas ( ) (18 472) 11 Liechtenstein ( ) (1 123) 36 Monaco (*) Audited No public subsidies have been received by the Group during the year that ended 31 st December