Corporate Governance 8 Executive Management Committee 8 Board of Directors 8 Corporate governance rules 10
Financial Information 77 Management report 79 Financial information 103 Reports on the internal control procedures 196 Legal information 205 Additional information 212
Natexis Banques Populaires, Photodisc, Planet Images, Stone, Thinkstock, Triangle Images, Zefa
MARKET CAPITALIZATION AS OF DECEMBER 31 (Natexis Banques Populaires shares) in billions of euros
Information on Natexis Banques Populaires parent company and proposed distribution of net income 101
2 – Review of operations and results in millions of euros 2004 2003 2003 % change comparable reported 2004/2003
Net banking income 2,708.1 2,486.0 2,454.7 +9 Operating expenses, depreciation and amortization (1,857.0) (1,764.7) (1,738.5) +5
Operating income before exceptional items and tax 764.3 533.4 528.4 +43
Corporate income tax (220.5) (157.0) (153.8) +40 Amortization of goodwill (53.9) (64.0) (64.0) -16 Net charge to fund for general banking risks 0 0 0 n.m.
The eurozone made only a moderate contribution to this recovery. Its domestic economy was not strong enough to offset the impact of a series of exogenous shocks during the year, including the rise in oil prices and commodities and a further depreciation of the dollar against the euro, which fell from €0.79 to €0.73 over the year. Eurozone GDP growth was only 1.8% in 2004.
n Operating expenses were up 5% to €1,857 million. n Consequently, gross operating income amounted to €851 million, an increase of 18% on 2003. n The cost/income ratio improved by 2.4 percentage points to 68.6%. Excluding Coface, it would have improved even further, to 64.8% versus 67.5% in 2003.
Financial Information Management report n After gains and losses on disposals of fixed assets and income from companies accounted for at equity, income before exceptional items and tax came to €764 million versus €533 million in 2003.
CORPORATE AND INSTITUTIONAL BANKING AND MARKETS The new Corporate and Institutional Banking and Markets core business was created to meet the bank’s goals of taking an increasingly client-centric approach,providing its corporate and institutional clientele with a comprehensive product offering tailored to their needs, and fully exploiting synergies between its various business lines. Its growth strategy is to capitalize on its existing corporate and institutional business franchise, particularly through cross-selling and developing high value-added business lines.
Receivables Management 633.6 616.8 +3 in millions of euros 2004 2003 % change
Despite a fall in average loans outstanding,risk-weighted assets rose by 3% over the year to ¤20.7 billion.
Aircraft financing had an excellent year, contributing €19.2 million in net banking income, an increase of 30%.This business won the ‘Aircraft Debt Deal of the Year Europe Award’ for its arrangement and financing of two Airbus A360-600s for Virgin and the ‘Aircraft Debt Deal of the Year Africa Award’ for its arrangement and financing of two Airbus A340-300s for South African Airways. Most of the other business lines had a good year, with project financing up 9% to €33.3 million, real estate financing down 6% to €30.3 million, financial engineering up 43% to €26.4 million and syndications up 9% to €16.1 million. In Dealogic’s 2004 league tables, Natexis Banques Populaires ranked fourth in the French syndication market on number of deals.
Origination amounted to €4.6 billion in 2004, an increase of more than 13% and well above target.Average loans outstanding were down 4% to €10.7 billion, principally due to off-balance sheet exposure which fell by 7% compared with the previous year.Meanwhile, risk-weighted assets fell by 3% to €8.1 billion.
n Capital markets contributed net banking income of €181 million, a decrease of €23.6 million on 2003, with contrasting trends according to business line: – Credit activities had an excellent year with 8% growth in net banking income to €62.4 million, driven by: • A good performance in spread trading (primary and secondary) amid a climate of sharp contraction in volumes on the primary bond markets (down 35% for corporates, a strategic sector for Natexis Banques Populaires), which hit all European banks and led to increased competition, coupled with a contraction in primary fees throughout the year.Meanwhile, secondary trading was able to capitalize on the market’s appetite for credit throughout the year and on the underlying trend towards narrower spreads, which fell by about 10 to 15 basis points depending on the segment. It also succeeded in managing the higher volatility in spreads in the Telecoms and Utilities sectors in the first half and then the Automotive and Retailing sectors towards the year end. • Good results from securities portfolios (held for sale and held for investment), boosted by the new dynamic management approach introduced in the second half of 2003, which helped capitalize on the tighter credit spreads in 2004.
– Commodities trading, a business conducted by Natexis Commodity Markets, a UK-based subsidiary, produced net banking income of €28.5 million, a twofold increase on the previous year. Investor appetite for commodities was strong throughout the year, driven by growth in Chinese demand and spiraling oil prices.As is the case in any buoyant market, this was reflected in strong volumes, a sustained upward trend in prices and high volatility.
– Fixed-income activities suffered a €6.8 million drop in net banking income, due to weak trading volumes in the markets, especially during the second half.The general rise in interest rates expected early in the year failed to materialize, causing investors to steer clear.The volatility profile was atypical due to the lack of volume and clear trends. In addition, margins on derivatives continued to contract in 2004 in an increasingly competitive market.
n Commodities contributed net banking income of €88.9 million in 2004, unchanged from the previous year despite the severe adverse dollar effect. Excluding the dollar effect, net banking income would have risen by 9% to €96.6 million. Origination rose by 75% compared with 2003, driven by the energy sector. Origination in the New York branch rose twofold to €643 million, while Natexis Moscow increased significantly in scale with origination rising from €19 to €103 million.
n Equity Group produced net banking income of €124.5 million compared with €36.6 million in 2003, reflecting a recovery in equity derivatives, a business line that was radically
Financial Information Management report restructured in 2003 after incurring major losses in 2002. Within this business line, equity brokerage and origination is conducted by Natexis Bleichroeder S.A. in the eurozone and by Natexis Bleichroeder Inc. in the Americas and Asia. – Natexis Bleichroeder S.A. benefited from improved market conditions and substantial growth in synergies with Natexis Banques Populaires. It contributed €42.3 million in net banking income,an increase of 35% compared with 2003,driven chiefly by good results in brokerage for institutional investors, which virtually doubled, coupled with increased scale in stock lending/borrowing and growth in electronic transmission following the transfer of Xéod’s business at end February 2004. In the last few months, further synergies have been developed with the Financial Services business, particularly in selling foreign stocks to clients of management companies for whom Natexis Banques Populaires acts as custodian. – Natexis Bleichroeder Inc., on the other hand, suffered from tensions in the international environment and the wait-andsee attitude ahead of the November elections, which put pressure on volumes throughout the year. In addition, investor attention was diverted towards commodities and away from the equity markets, which suffered a slowdown. Net banking income amounted to €42.4 million, a decrease of €4.7 million compared with the previous year. Excluding the dollar effect, net banking income would have been unchanged over the period.
Arbitrage activities contributed €40 million to net banking income. Apart from the recovery in equity derivatives, ABM Corp. (mortgage-backed securities arbitrage) achieved an excellent performance, with net banking income up twofold compared with 2003, to €13.9 million. Natexis Arbitrage also performed well,with net banking income up 7% to €7.8 million in difficult market conditions caused by low growth in the equity markets, extremely tight corporate credit spreads and a sharp fall in equity volatility.
Despite this significant profit-taking, the stock of unrealized capital gains remained high at the year end,totaling €148 million, down just €55 million compared with end-2003.
Banque Privée Saint Dominique, whose asset management activities previously focused principally on securities, expanded its capability during 2004 to become a genuine wealth management firm.Early in the year, its offering was extended to encompass all major asset classes, not just securities but also real estate, tax-driven products and works of art.
Assets managed stood at €2.3 billion at end-2004,up 6% over the year. 57% of assets were held in mutual funds and 43% in straight securities.
Banque Privée Saint Dominique contributed €21.3 million in net banking income, an increase of 9% compared with 2003.
Asset Management & Insurance 371.0 316.1 +17 in millions of euros 2004 2003 % change
Asset Management & Insurance Asset Management and Insurance delivered 17% growth in net banking income, while assets under management were up 7%.
The contribution by business line was as follows: n Asset Management
Net banking income from fund management was up sharply,by 45% to €120.2 million.This strong performance was driven by both volumes (following a rebound in the financial markets and strong new inflows in 2004), and by the quality of investment performance, which led to major outperformance fees on some dedicated funds.
During 2005,Natexis Banques Populaires plans to combine its asset management activities within Natexis Asset Management, which will take over a subsidiary of Natexis Interépargne specializing in employee savings plan management. The research and management capabilities of both entities will be combined.
Meanwhile, Natexis Asset Management continues to outsource its administration activities. In addition to fund administration, very shortly the middle office, performance calculation, reporting and some information systems services will also be outsourced.This process will lead to the creation of Natexis Investor Servicing, a wholly-owned subsidiary of Natexis Banques Populaires.
Total assets managed 82.8 77.2 +7 in millions of euros 2004 2003 % change
Employee savings contributed net banking income of €84.2 million, including €9.8 million from Natexis Intertitres and €74.4 million from Natexis Interépargne.This represents an increase of 17% or €12.2 million on 2003.
The government’s tax measures to stimulate consumer spending posed a real challenge for Natexis Interépargne in 2004.These measures led to total withdrawals of €1.2 billion over the year.This had a non-negligible impact on net banking income, as fees received on withdrawal requests more than offset the increase in expenses due to processing withdrawals and the relatively insignificant fall in management fees.
At end 2004, assets managed stood at €11.7 billion compared with €11.4 billion at end 2003, with market effect offsetting the outflows caused by the government’s consumer spending stimulation measures.
Consolidated premium income rose by 10.7% in 2004.Growth in premium income from French business (excluding Natexis Life and Bancassurance Popolari) was stronger at 13%, with Fructi-Sélection Vie products (up 12.5%) and Solévia (up 35%) accounting for 67.5% of premium income. Premium income from French unit-linked business grew by 12.8% to €285.9 million, accounting for 13% of total premium income, unchanged from the previous year.These figures confirm client reticence towards risky assets. Other bancassurers are experiencing the same trends, as unit-linked business accounted for 13% of total premium income in the G11 countries.
n Coface’s equivalent net banking income amounted to €531.4 million in 2004, a 2% increase on the previous year: – Insurance contributed €228 million, an increase of 5%.The cost of claims amounted to €366.5 million compared with €313.1 million in 2003.The loss ratio therefore came to a highly respectable 45%. In 2003, the German subsidiary AKC changed its provisioning method, as its previous practice had led to serious over-provisioning compared with the ultimate loss ratio method used in France.This had a positive impact on the cost of claims in 2003. Excluding this effect, the loss ratio would have been 52% in 2003.
in millions of euros 2004 2003 2003 % change comparable reported 2004/2003
– Net banking income from services rose by only 1% to €303.4 million, due to the decrease in fees for managing public procedures.
Factoring After a sharp slowdown in growth in 2002 and 2003 (3.8% and 1.5% respectively), the factoring market returned to doubledigit growth, rising by 11.3% to €81.6 billion. Natexis Factorem consolidated on its number three position, with 12.9% market share.
Natexis Factorem capitalized fully on the buoyant market conditions in 2004. Potential revenues from new contracts signed in 2004 were up 15% on 2003 to €3.34 billion. This performance, reflected in the addition of almost 1,400 new clients, was also due to Natexis Factorem’s dynamic and responsive commercial approach.
NON-CORE BUSINESSES Net banking income from non core businesses amounted to €119.8 million compared with €90.7 million in 2003, an increase of €29 million.
n Information Systems and Logistics produced 7% growth in revenues to €38 million, driven chiefly by Altaïr, which delivered 27% growth in net banking income from own clients.
Headcount After two years of virtual stability in 2002 and 2003, the total number of full time equivalent (FTE) employees amounted to 12,532 at end December 2004,an increase of 1.7% or 212 FTEs compared with December 2003.
Support functions +38 n Corporate and Institutional Banking and Markets added a net 132 FTEs compared with end-2003, almost half of which are based outside France, including 57 in Natexis Algeria. Global Debt & Derivatives Markets accounted for 43 of the additional FTEs, due partly to a selective recruitment drive in front office and commercial functions and partly to significant investment in strengthening the control functions.
n In Services, the number of FTEs fell significantly in Banking, Financial and Technology Services as part of the measures introduced under the “Cap 2005” rationalization plan. Conversely, in Asset Management and Insurance, half the increase was in asset management and half in employee savings to meet the new demands imposed by growth in this business.
n Receivables Management added a net 106 FTEs in 2004, split 83 for Coface and 23 for the new German factoring subsidiary VR Factorem.
n Lastly, the increase in the support functions was designed to strengthen the group’s control functions and to provide the staffing required for its major cross-functional projects.
Personnel costs Personnel costs rose significantly in 2004,by 6% or €63 million, due to: n An increase in the number of employees, with the average number of permanent and contract FTEs up by 179 in the year.
n An increase in total payroll costs due to increases granted during the year.
n A significant rise in incentive and profit-sharing payments and certain variable pay components, following growth in earnings.
Other operating expenses Other operating expenses rose by a moderate 4% or €28.8 million,with two contrasting trends:growth in expenses
GROSS OPERATING INCOME Gross operating income amounted to €851.1 million, an increase of 18% compared with 2003.
Natexis Banques Populaires provides for loan losses at three levels: n Specific provisions represented 62.8% of total nonperforming loans against 59.5% in 2003. The net charge to specific provisions amounted to €116 million in 2004, down 22% on the previous year.
n The fund for general banking risks was kept at its end-2003 level of €242 million.
Industry provisions amounted to €186 million, after a net reversal of €3.5 million arising from a decrease in exposure made possible by the group’s improved corporate rating systems, the impact of which was partially offset by an increase in provisioning rates in the more risky industries. In addition, the €90 million provision taken at end-2003 to cover potential risks arising on some major European borrowers was maintained in the balance sheet at end 2004,as was the USD80 million provision to cover non investment grade risk in the United States (which led to a reversal of €4.5 million in euro equivalent).
Most of the specific provision charge was concentrated in Western Europe and, to a lesser extent, North America. InWestern Europe,provisions were mainly concentrated in France (€83 million) while in 2003 the breakdown was €59 million for France and €44 million for other countries.
n The table below shows the contribution to loan loss provisions by core business: in millions of euros 2004 2003
Commodities took a charge of €7 million due to an increase in industry provisions.
n Income from companies accounted for by the equity method totaled €10 million, unchanged from the previous year. The contribution from private equity companies rose by €2 million due to a strong performance from BP Développement, while the contribution from Services companies decreased by €2 million due to Assurances Banque Populaire IARD.
Corporate and Institutional Banking and Markets contributed €398 million in income before exceptional items and tax, an increase of 44% on 2003. Gross operating income rose by 6% to €501.8 million under the impact of symmetrical growth in net banking income and operating expenses.The cost/income ratio improved slightly to 56.6%. Provisions for loan losses were slashed by more than a half compared with 2003, which was badly affected by industry provisions for potential risks on some major European borrowers and by a few material specific exposures.
Receivables Management 126 123 +2 in millions of euros 2004 2003 % change
GENERAL SYSTEM AND PRINCIPLES The risk management system of Natexis Banques Populaires complies with French banking regulations and with the corporate governance principles of the Banque Populaire Group, of which it is a member. There are three levels of control,which are coordinated by Executive Management.First tier control comprises continuous self checks by employees as part of their normal daily duties.Second tier control is provided by the Risk Management, Compliance, Fraud Prevention, and Internal Control departments, which report to the General Secretariat, and the Information Systems Security department which reports to Information Systems and Logistics. These departments are completely independent from the business lines. Third tier control is provided by the Internal Audit Department. The overarching committee created in 2003 coordinates the various departments involved. It is chaired by the Chief Executive Officer and meets once a month.
The risk management system is also structured around the Large Exposures Committee and various risk committees.The Large Exposures Committee includes the Chairman, the business line heads and representatives of the Risk Management, Internal Control and Internal Audit departments.
Receivables Management contributed €125.7 million to income before exceptional items and tax, an increase of 2%. Growth in costs was contained to 2%.
Financial Information Management report n Risk Committees and Investment Committees of the Private Equity and Wealth Management businesses; n Risk Committees of the Receivables Management core business (Coface and Natexis Factorem); n Various Limit Violation Committees.
The Operational Risks Committee is responsible for assessing all operational risks within Natexis Banques Populaires on a cross-functional basis.
RISK MANAGEMENT DEPARTMENT The Risk Management Department has five sub-departments: n counterparty/country risk; n market risk; n risk management, control and reporting; n operational risk; n insurable risk.
IMPLEMENTATION OF THE NEW CAPITAL ACCORD The Basel II project conducted by the Banque Populaire Group and steered by Banque Fédérale des Banques Populaires is strongly supported by Natexis Banques Populaires, where the Finance, Risk Management and Information Systems departments are working alongside the business lines to set up the tools required to calculate the new capital adequacy ratio in 2005, based on an internal ratings model.
The project is divided into a number of sub-projects, including ratings,defaults, collateral management,databases,deployment, and ratio computation.
The default and loss database has been enriched with historical data.This work has been gradually extended to cover the whole of the Natexis Banques Populaires group. It will continue throughout 2005, with the implementation of a new interbank ratings system and a dedicated regulatory ratio computation system in the first half.
– Global Debt & Derivatives Markets €10.7 billion n Factoring €2.3 billion
BREAKDOWN OF EXPOSURE BY INTERNAL RATING AT DECEMBER 31, 2004 Natexis Banques Populaires continued to roll out its internal ratings system in 2004, in line with the work carried out within the Banque Populaire Group.The corporate rating scale has 16 ratings for healthy counterparties (1 being the top rating), plus four default categories. The quality of risk remained relatively stable in 2004, while there was an improvement in external corporate credit ratings.
Compared with 2003, exposure remains highly diversified by industry. Exposure to emerging countries is also under control.
There was a significant decrease in provisions for loan losses in 2004, due to a more favorable business climate and a continued highly selective approach to exposure.
MARKET RISK ORGANIZATION AND MANAGEMENT Control over market risks is the responsibility of the middle office, the Risk Management Department and the Internal Control Department. Internal Control and Risk Management report to the General Secretariat while the middle office reports to the Corporate and Institutional Banking and Markets core business.
The major responsibilities of each control entity are as follows: The middle office plays an operational role through the systems and applications it manages and uses daily. Its key duties are: n developing the system of delegated limits and method of calculating risk and provisions, in conjunction with Risk Management; n producing and analyzing daily calculations of risk, results and provisions; n reporting and monitoring limit violations.
Risk Management is responsible for overseeing market risks and models. Its key duties are: n validating the proposals made by the middle office, ensuring their consistency throughout the group and making recommendations on any other appropriate metrics; n monitoring market risks at the various consolidation levels, and particularly at group level; n validating the theory behind internally-developed models; n validating the various delegated authorities and limits requested by Corporate and Institutional Banking and Markets and proposed by the middle office; n making recommendations on the risk management system.
This structure is completed by the market risks committee, which meets monthly and comprises the heads of the various control levels together with front office managers. The committee validates new limits,proposes changes to limits and reviews any identified limit violations.
Standard metrics The key standard metrics used are: n sensitivity to a +/- 1% change in interest rates (overall and by maturity); n currency exposure; n equity exposure; n sensitivity to a +/- 1% change in implied volatilities in the equity, foreign exchange and fixed-income markets (overall, by maturity and by strike); n sensitivity to a change in delta of an underlying (equities, fixed-income and currency); n sensitivity to dividend levels; n sensitivity to a change in swap spreads; n sensitivity to a change in issuer spreads; n monthly and annual loss alerts.
During the year, a number of mission-critical procedures were upgraded either to provide a more detailed description of the actions to be taken within the bank or to incorporate methodological improvements for better monitoring of capital markets activities.The procedures concerned were: n new products; n loss alerts; n limit violations.
n Provisioning models covering modeling risk, liquidity risk, assumption uncertainties and provisioning for specific risks. A provisioning committee has been set up and meets quarterly.
The currency risk limit is €3 million expressed in terms of a one-day potential loss with a 99% confidence level.
Interest rate,currency and liquidity risks have been centralized at Natexis Banques Populaires since 2002. These risks are monitored and managed by Corporate and Institutional Banking and Markets.
ALM interest rate limits for refinancing books On December 20, 2004, the ALM Committee validated the principle of expressing sensitivity limits for refinancing books as a percentage of regulatory capital. For sensitivity to a 200bp(1) change in interest rates, the Committee set an overall limit of 2.5% of regulatory capital, or €164 million based on regulatory capital of €6.55 billion at June 30, 2004.This limit has been delegated by the Board of Directors to the Chief Executive Officer with the ability to sub-delegate all or part.
Apart from securitizations, credit derivatives held by Natexis Banques Populaires and its subsidiaries (chiefly Natexis
Arbitrage) were not material at end December 2004. They amounted to approximately €1 billion in nominal value, principally in credit default swaps, about three quarters in protection purchased and one quarter in protection sold.
OPERATIONAL RISKS Operational risk is defined as the risk of loss due to inadequacies or deficiencies in processes, people and systems, or to external events.
INSURABLE RISKS The Risk Management Department and the Insurance Department which reports to it are responsible for analyzing insurable operational risks, seeking adequate cover and purchasing it in the market.
The 2004 insurance program for general risks and risks specific to the business of Natexis Banques Populaires and its subsidiaries in France included the following: n Buildings used in the business and their contents (excluding IT equipment) are insured against the usual risks (fire, explosion, terrorism, flooding, etc.) at reconstruction or replacement value.
Total insurance premiums for the risks described above amounted to just over €4.4 million in 2004.
LEGAL RISKS Natexis Banques Populaires is currently involved in a limited number of liability claims. After review and based on the current status of claims pending, the bank does not believe these claims will have a material adverse impact on its results or financial position. Provisions have been booked in the financial statements at December 31, 2004 for all legal and tax risks that can be reasonably estimated.
Total consolidated assets amounted to €139.4 billion at December 31, 2004 compared with €135.9 billion one year earlier, an increase of 3%.
ASSETS Interbank and money market assets rose by 8% to €19.8 billion, driven by a €1.7 billion increase in the bank’s portfolio of government securities held for trading.
Customer loans, including lease financing, amounted to €32.7 billion,unchanged from the previous year as the weaker dollar offset controlled growth in the loan book.
The securities portfolio increased by a significant 25% to €20.5 billion, mainly due to growth in fixed-income trading in the capital markets business.
Insurance company investments, held mostly for the life insurance business, rose to €23.4 billion.This was matched by a corresponding increase on the liabilities side in insurance company technical reserves held to meet future obligations to policyholders, which rose to €22.8 billion.
Other assets fell to €7.4 billion in connection with the nonrenewal of reinsurance contracts, which led to a significant decrease in the reinsurers' share of technical reserves.
The €1.2 billion decrease in other securities held for investment reflects the unwinding of the Editis (formerly Vivendi Universal Publishing) temporary holding operation carried out on behalf of the Lagardère Group.
LIABILITIES AND SHAREHOLDERS’ EQUITY Interbank and money market liabilities fell to €14.5 billion and customer deposits to €8.1 billion. Refinancing of growth in assets was reflected in a significant increase in debt securities, which rose to €33.8 billion from €30.2 billion the previous year, the issuance of money market securities and an increase in securities delivered under repurchase agreements, which rose to €42.4 billion.
CAPITAL STOCK The capital stock was raised during 2004 to 210,823 shares following the exercise of stock options and shares issued to existing employee stock ownership plans.
Tier One capital amounted to €4.48 billion at December 31, 2004 against €4.29 billion one year earlier.The increase was mainly due to 2004 earnings transferred to reserves, partially offset by the dollar effect.
EUROPEAN CAPITAL ADEQUACY RATIO Since 1996, French financial institutions have been required to measure and comply with an overall capital adequacy ratio covering not only counterparty risks but also market risks such as interest rate and currency risks.
It is defined as the ratio of available capital to the capital requirement for counterparty and market risks. It must be higher than 100%.At December 31, 2004, the ratio stood at 160% versus 154% one year earlier.
The ratio of liquid assets to liabilities maturing within one month must be higher than 100%. It stood at 146% at
Natexis Banques Populaires complies with prudential rules governing large exposures. In line with banking regulations, no single exposure may exceed 25% of regulatory capital and the cumulative total of individual exposures in excess of 10% of regulatory capital may not exceed eight times regulatory capital.
Financial Information Management report 6 – Refinancing Natexis Banques Populaires is responsible for refinancing the Banque Populaire Group’s activities, including the Banque Populaire regional banks, through regular recourse to the financial markets.
Its FRN and benchmark issues in 2004, which totaled €2 billion, were all oversubscribed.
– Issuance programs: the EMTN program contains a standard negative pledge. There are no financial or rating-related covenants. There is a cross-default clause restricted to the issuer,with a €30 million trigger.
To comply with its usual year-end reporting schedule, the group will publish its 2004 French GAAP financial statements before completing the work on first-time adoption of IFRS. The 2004 IFRS financial statements will therefore be published on April 21, 2005.
NATEXIS BANQUES POPULAIRES ISSUANCE IN 2004 (EXPRESSED IN MILLIONS OF EUROS EQUIVALENT EXCEPT FOR USCP EXPRESSED IN MILLIONS OF DOLLARS)
n Capitalization of development costs: IFRS requires software development costs to be capitalized whereas under French GAAP they are currently expensed during the year of occurrence. Similar accounting treatment will be used in the French GAAP financial statements as of January n Goodwill: under IFRS, as is the case for French GAAP, goodwill will no longer be amortized but will be tested for impairment at least once a year, and an impairment loss recognized where necessary. Previously recognized negative goodwill will be reclassified in opening shareholders’ equity and negative goodwill arising in subsequent years will be taken immediately to income. Furthermore, intangible assets previously recognized under French GAAP upon business combinations and which do not satisfy the recognition criteria required by IFRS, will be reclassified as goodwill.
Natexis Banques Populaires has elected to adopt IAS 32 and 39 as of January 1, 2005.
8 – Recent developments and outlook On February 25, 2005, upon publication of its 2004 results, Natexis Banques Populaires unveiled the broad outlines of its 2007 strategic plan. This medium-term business plan is designed to leverage earnings through sustained growth.
The key goals of the plan are: n Fully exploit business line growth potential: – strengthen positions with French corporate and institutional clients through greater cross- and up-selling; – develop synergies with Banque Populaire banks customers; – enhance the value of strong centers of business expertise such as employee benefit planning, commodities financing, structured financing, and receivables management; – step up expansion in the most buoyant continental European countries.
9 – Information on Natexis Banques Populaires parent company and proposed distribution of net income
INFORMATION ON THE PARENT COMPANY Net banking income rose by €80 million or 7% in 2004, including a €57 million increase in gains on trading portfolios and an increase of €35 million or 21% in income from variable income securities.
Gross operating income amounted to €434 million, an increase of 11% over the previous year. The cost/income ratio stood at 65.5%.
Financial Information Management report n A net reversal of €13 million was made from industry and country risk provisions compared with a net charge of €63 million in 2003.This reflects the improved credit ratings of major corporates and the healthier economic climate in some emerging countries.
At December 31, 2004, total assets stood at €100.59 billion versus €98.41 billion one year earlier.
PROPOSED DISTRIBUTION OF PARENT COMPANY NET INCOME Natexis Banques Populaires parent company reported net income of €213,582,296.25 for the year ended December 31, 2004.
The fourth resolution to be put to the annual general meeting on May 19, 2005 proposes to deduct from net income the negative balance held on the retained earnings account, being €12,749,384.87,and to transfer the sum of €10,679,114.81 to the legal reserve, leaving the sum of €190,153,796.57 available for distribution.
Interbank and money market assets 3 47,068 46,987 42,084 of which institutional activities 333 421 1,379
Customer loans 4 34,568 33,467 33,021 of which institutional activities 1,133 1,099 96
Bonds, equities and other fixed and variable income securities 5 20,432 16,351 19,166
Deferred income, accrued charges and other liabilities 14 11,961 13,693 13,956 of which institutional activities 100 98 108
Commitments on securities 111 329 463 of which securities acquired with repurchase option - - -
Commitments on securities 99 596 436 of which securities sold with repurchase option - - -
Depreciation, amortization and provisions for impairment of property and equipment and intangible assets (78) (88) (67)
Income from companies accounted for by the equity method 10 10 3
Earnings per share 8.48 5.57 2.42 Net income per share, based on the average number of shares in issue during the year
Notes to the consolidated financial statements 1 – Consolidation methods and principles The consolidated financial statements have been prepared in accordance with French generally accepted accounting principles and the standards formulated by the Comité de la Réglementation Comptable (CRC), including standard CRC 99-07 on consolidation methods and principles and standard CRC 2000-04 on the presentation of consolidated financial statements.
1.1 – SCOPE OF CONSOLIDATION The Natexis Banques Populaires consolidated financial statements include the financial statements of Natexis Banques Populaires and its main subsidiaries.
Subsidiaries that are not material in relation to the Group as a whole are not consolidated. Materiality is determined on the basis of the subsidiary’s qualitative contribution to the Group accounts without applying any threshold in terms of net assets or revenues.Accordingly, IT logistics subsidiaries are consolidated as they have a material impact on the split of consolidated general expenses between payroll costs and other operating expenses.
SPECIAL PURPOSE ENTITIES: consolidation of special purpose entities was reviewed in light of paragraph 10052 of standard CRC 1999-07 as amended by standard CRC 2004-04. Specialpurpose entities encompass four types of transactions: A – SECURITIZATION
These transactions amounted to €2.9 billion at December 31, 2004 (€4.1 billion at December 31, 2003), with total weighted risks of €2.3 billion (€3.3 billion at December 31, 2003).
As part of its active portfolio management policy and in agreement with the supervisory authorities, in the first half of 2004 Natexis Banques Populaires decided to wind up the Paris I and Paris II transactions prematurely.
NATIX $ (initial in € million equivalent value at December 31, 2003
Transactions on behalf of clients In 2002,Natexis Banques Populaires carried out a securitization on behalf of clients. The purpose of the transaction was to refinance these clients’ receivables portfolios on the commercial paper market. Natexis Banques Populaires acts as arranger, custodian, placing agent and liquidity provider and also guarantees the letter of credit.The transaction involves a multiseller conduit named Elixir Funding.
Of the three criteria applied to determine whether a special purpose entity should be consolidated, the criterion concerning the retention of the majority of ownership risks is the determining factor: during the period when the conduit’s asset pool is being built up, Natexis Banques Populaires aims to transfer the majority of risks to a banking syndicate within one year. Once the conduit is fully operational, over 50% of the liquidity lines and the letter of credit will be financed by a banking syndicate at all times.The special purpose entity has therefore not been consolidated.
C – REAL ESTATE STRUCTURES SCI non-trading real estate companies are set up to hold finance leases granted by NBP’s leasing subsidiaries or the SCIs themselves to finance clients’ real estate acquisitions (car parks, offices, headquarters buildings, etc.). As in the case of tax structures, Natexis Banques Populaires acts in a fiduciary capacity at the request of clients and does not exercise control over the real estate structures according to the criteria set out in paragraph 10052 of standard CRC 99-07.
D – FINANCING STRUCTURES The purpose of these structures is to transfer ownership of participations in syndicated loans to a group of investors, with different seniority rankings. In 2004, Natexis Banques
Populaires carried out a transaction of this type through a non-consolidated entity called Vallauris CLO plc. Its assets comprise a portfolio of bank loans managed by Natexis Banques Populaires and refinanced through senior, mezzanine and subordinated notes issued by the entity and purchased by external investors. As none of the three criteria relating to control, economic benefits or risk retention apply, the entity is not consolidated.
1.21 – CONSOLIDATED FINANCIAL STATEMENTS The financial statements are presented in millions of euros, with prior year comparatives covering three years.
Under article 84 of the 2001 amended Finance Act (law 20011276 of December 28, 2001), the mandate entrusted to Natexis Banques Populaires and companies under its control to manage certain public procedures on behalf of the State has been extended until December 31,2005.These transactions are recorded separately in the financial statements and some of them may be guaranteed by the State. The State and other related creditors have a specific right over the assets and liabilities allocated to these institutional activities.
1.3 – CONSOLIDATION METHODS Companies under exclusive control are fully consolidated. Jointly controlled companies are accounted for by the proportional method.
1.4 – YEAR END The consolidated financial statements are based on the financial statements of group companies drawn up at December 31.
The alternative accounting treatment permitted under Section 215 of standard CRC 99-07 was used for the Natexis Bleichroeder Inc. acquisition, and the related goodwill deducted directly from shareholders' equity.
1.6 – FOREIGN CURRENCY TRANSLATION The balance sheets of foreign subsidiaries and branches are translated into euros at the year-end exchange rate with the exception of their capital stock or capital allocation and reserves, which are translated at the historical rate. Differences arising on translation are taken directly to shareholders’ equity.
1.7 – LEASING TRANSACTIONS AS LESSOR Lease financing transactions entered into by Natexis Banques Populaires subsidiaries which specialize in this business are recorded separately and carried at a value corresponding to the net investment in the lease and not the net book value in the individual company accounts. Deferred taxes are recorded on the total difference between accumulated book depreciation of the leased assets and accumulated amortization of the net investment in the lease.
1.8 – LEASING TRANSACTIONS AS LESSEE Natexis Banques Populaires elected to apply the benchmark accounting treatment for leasing transactions as lessee as of December 31, 2000. Fixed assets financed under leasing contracts are restated in consolidation and recorded as
1.10 – OTHER LONG-TERM PROVISIONS TREATED AS RESERVES The special revaluation reserve and the provision for investments, which are purely tax-driven, are incorporated in consolidated reserves.Annual movements in these provisions are recognized through the income statement.
n Balance sheet and off-balance sheet items are included under the corresponding captions of the financial statements presented in the banking format.
Items specific to insurance activities are grouped together under the following captions: n “insurance company investments” on the assets side and “insurance company technical reserves” on the liabilities side; n “gross margin on insurance operations” in the income statement.
1.12 – NOTES TO THE FINANCIAL STATEMENTS Unless otherwise stated, the figures shown in the notes to the financial statements are expressed in millions of euros.
2 – Accounting policies and valuation methods 2.1 – CUSTOMER LOANS Loans are recorded in the balance sheet at face value. Undrawn amounts on loans already committed and agreed
Financial Information Consolidated financial statements are included in off-balance sheet items under the heading “financing commitments given”.
On the assets side of the consolidated balance sheet, the net outstanding balance of the loans concerned by the put option is covered by zero-coupon bonds held by the two entities.The results of the two entities consist solely of annual accruals to recognize the value appreciation of the zero-coupon bonds up to their redemption value in 2014,when the bonds mature and the defeasance structure will be wound up. Over this period, the value appreciation exactly matches the provisions required to write down the full amount of the loans covered by the put option. Consequently, the operation has no impact on the income statement and the cash required to refinance the transactions is offset by a cash inflow.
Accordingly, the €5.3 million profit arising in 2004 relating to these subsidiaries was offset in full by a charge to provisions for country risks.This accounting treatment is consistent with the principle of matching provision charges to the entities’ revenues.
At December 31, 2004, the loans covered by the put option had a net book value of €62 million (€142 million gross less provisions of €80 million). The entire portfolio of loans covered by the defeasance operation has been sold on the secondary market.
C – FUND FOR GENERAL BANKING RISKS A fund for general banking risks, consisting of amounts set aside from post-tax income, completes the range of provisions for general risks.
2.3 – SECURITIZATION TRANSACTIONS Securitizations are transactions that transfer credit risk without disposing of the underlying portfolios.They consist of synthetic securitizations based on credit derivatives carried out jointly with third party banks and special purpose entities. In substance, the credit derivatives are equivalent to credit insurance protecting Natexis Banques Populaires against the risk of borrower default or debt rescheduling. The special purpose entities are not consolidated because their accounts only reflect the protection obtained by Natexis Banques
Exchange differences arising on conversion of borrowings for which the currency risk is guaranteed by the State or which relate to institutional activities are recorded in an accruals account.
B – NON-CONSOLIDATED INVESTMENTS AND EQUITY SECURITIES HELD FOR INVESTMENT n Non-consolidated investments are valued individually at the lower of cost and fair value at the year end. Fair value is determined on the basis of criteria such as restated net assets and profitability.
n Equity securities held for investment are securities acquired with the intention of being held in the medium to long-term in order to sell them at a profit.They are booked at cost and a provision for impairment taken if their net book value is higher than their fair value (based on recent transaction values, profitability,market price for listed securities or other valuation methods used at the time of acquisition).
A – ASSETS USED IN THE BUSINESS n Fixed assets of the former Crédit National purchased prior to December 31, 1976 are stated at fair value as determined at the time of the 1976 legal revaluation. Assets purchased since 1976 are stated at cost.
Fixed assets of the former BFCE are carried in the consolidated balance sheet at their fair value as determined at the time of BFCE’s acquisition by Crédit National.
Financial Information Consolidated financial statements n Property and equipment are depreciated over their estimated useful lives, predominantly on a straight-line basis, as follows: Buildings used in the business 25 to 40 years
Other property and equipment 5 to 10 years n Intangible assets mainly comprise the value attributed to the Coface networks. The Coface insurance network has been valued on the basis of 40% of premium income. The credit information and credit management network has been valued using a range of criteria, including discounted cash flows, P/E multiples and revenue multiples. The networks are not amortized but are tested for impairment at each year end. Further information on the value of Coface group networks is provided in Note 9.
B – NON-OPERATING ASSETS Non-operating property and equipment are depreciated over their estimated useful lives (30 to 40 years).
In accordance with the terms of the letter dated October 21, 1997 from the Secretary General of the French Banking Commission (Commission Bancaire Française), provisions for impairment in value have been recorded for individual investment properties and other properties not used in the business,whose market value is less than their net book value. Most of Natexis Banques Populaires’ investment properties are carried by specialized real estate companies which are fully consolidated as they are exclusively controlled by Natexis Banques Populaires (see Note 1.3).
C – BUILDINGS LEASED TO THIRD PARTIES In accordance with the letter referred to above, a provision for impairment in value is recorded where the book value of the leased property is higher than its estimated market value and there is a probable or certain risk of it remaining the property of the lessor when the lease expires.
D – COMPUTER SOFTWARE AND HARDWARE Computer hardware is depreciated on a declining balance basis over five years. Purchased software is amortized on a straight-line basis over one year. In-house software development is expensed in the year of occurrence where intended for internal use. Where intended for commercialization, costs are capitalized and amortized over an appropriate period.
2.8 – PERPETUAL AND FIXED-TERM SUBORDINATED NOTES Natexis Banques Populaires group has issued perpetual and fixed-term subordinated notes, which in the event of the issuer’s liquidation, rank behind all other creditors.
2.9 – PARTICIPATING NOTES Remuneration paid in respect of participating notes is treated as interest payable and expensed in the income statement on an accruals basis.
2.10 – INTEREST, PREMIUMS, FEES AND COMMISSIONS Interest, together with premiums, fees and commissions treated as interest income are recorded in the income statement on an accruals basis. Other fees and commissions are accounted for on a cash basis.
n The cost of share issuance by the parent company is offset, net of tax, against the issue premium. The cost of share issuance by subsidiaries is expensed in the year of occurrence.
C – INTEREST RATE, CURRENCY AND EQUITY OPTIONS AND FORWARD CONTRACTS (INCLUDING COMMODITIES): The notional value of the instrument underlying the option or forward contract is recorded off-balance sheet, with hedging and trading transactions identified separately.
2.14 – EXCEPTIONAL ITEMS Exceptional income and expenses are items of income and expense that are unusual in terms of their nature, amount or frequency.
Deferred tax assets and liabilities are netted off at the level of each taxable entity. In the case of companies that have elected for group relief, deferred tax assets and liabilities are netted off at the level of the tax group. Net deferred tax assets are recognized only where their future recovery is deemed probable. Accordingly, tax loss carryforwards are not recognized, and future tax savings are not deemed to be recoverable if the tax entity has reported tax losses in the last two fiscal years. On this basis, deferred tax assets totaling €283 million were not recognized as of December
All temporary differences are taken into account, regardless of the year in which they are expected to reverse.
The net deferred tax balance is recorded in the balance sheet under “accrued income, prepaid expenses and other assets” or “ deferred income, accrued charges and other liabilities”.
Commitments are calculated using the following assumptions: n vested rights on the reporting date; n discount rates ranging from 3.5% to 5.5%; n statutory mortality tables:TV 88/90; n most recent projected salaries, including employer’s social security contributions; n historical staff turnover rates.
In accordance with opinion 2000-C issued by the CNC Urgent Issues Task Force, retirement obligations were provided for in full using the benchmark treatment set out in standard CRC 99-07, that is by deduction from 2000 opening shareholders' equity.
Pursuant to the recommendation of the Autorité des Marchés Financiers (AMF), the French Securities Regulator, on the monitoring of intangible assets and goodwill, Natexis Banques Populaires undertook a full review of these items at December 31, 2003 and December 31, 2004 (see Note 9 for further details).
Securities held for sale (5) (8) (9) Debt securities held for investment - - -
(3)Including accrued interest receivable: 67 79 130 Securities held for sale 59 66 117 Debt securities held for investment 8 13 13
Financial Information Consolidated financial statements 4 – CUSTOMER LOANS AND LEASE FINANCING
France Western Eastern North Latin Africa & Asia Not Total in millions of euros Europe Europe America America Middle East Pacific analyzed 4.1 – OTHER LOANS TO CUSTOMERS
Short-term loans and consumer loans 11,177 9,837 10,807 Equipment loans 2,184 2,679 3,232 Export loans 1,052 1,164 1,412 Home loans 100 103 152 Securities purchased under resale agreements 7,825 6,369 4,406
Equipment lease financing 1,669 1,491 1,404 Outstandings 1,616 1,451 1,400 Temporarily unleased assets and non-performing loans 75 64 24 Accrued interest receivable 7 3 3 Provisions for asset impairment (10) (12) (12) Provisions for loan losses (19) (15) (11)
Operating leases 588 576 589 Outstandings 583 569 588 Temporarily unleased assets and non-performing loans 8 9 3 Accrued interest receivable - 1 1 Provisions for asset impairment (2) (1) (1) Provisions for loan losses (1) (2) (2)
Non-performing loans and advances to banks 38 27 27 28 Gross non-performing loans 60 74 3 37 Provisions for non-performing loans (23) (48) - (20) Gross irrecoverable loans 26 12 83 53 Provisions for irrecoverable loans (25) (11) (59) (42)
Non-performing customer loans 362 442 442 512 Gross non-performing loans 587 690 276 398 Provisions for non-performing loans (267) (301) (105) (138) Gross irrecoverable loans 415 416 830 777 Provisions for irrecoverable loans (373) (363) (559) (525)
Non-performing lease financing 129 137 137 104 Gross non-performing loans 123 74 77 47 Provisions for non-performing loans (48) (38) (40) (34) Gross irrecoverable loans 154 237 234 233 Provisions for irrecoverable loans (100) (136) (134) (142)
(3) Of which: Listed 3,145 3,362 5,451 Transferred to/from debt securities held for investment (85) - (18)
Issued by public institutions 28 55 742 Doubtful securities 143 143 92 Provisions (103) (75) (50) Disposals before maturity (881) (347) (1,104) Unrealized capital losses for which no specific provision has been taken (146) - -
Net book Estimated Net book Estimated Net book Estimated in millions of euros value fair value value fair value value fair value
Provisions for irrecoverable securities against gross irrecoverable securities 76% 75% 66% 68%
Breakdown of securities between non-performing and irrecoverable At December 31, 2003, in accordance with standard 2002-03, securities that have been classified as non-performing for more than one year are downgraded to irrecoverable.
At December 31, 2004, in accordance with the opinion issued by the CNC Urgent Issues Task Force on December 18, 2003, securities that have been classified as non-performing for counterparty risk for more than a year are downgraded to irrecoverable when a write-off is envisaged. *The pro forma 2003 figures show a breakdown between non-performing and irrecoverable securities based on the provisions of the opinion issued by the CNC Urgent Issues Task Force on December 18, 2003.
Insurance company investments corresponding to securities issued by other consolidated entities are qualified as intercompany receivables and are therefore eliminated in consolidation.
(1)The significant decrease in reinsurers' share of technical reserves is due to the expiration in 2004 of the proportional reinsurance treaty entered into in 1998.
in millions of euros 2004 2003 2002 of which: n Life business 17,737 16,037 14,935 n Non-life insurance 174 160 128 n Unit-linked business 3,625 3,309 2,821
Insurance activities 38 35 28 Coface subsidiaries 16 15 15 Natexis Assurances subsidiaries 22 20 13 of which share in net income/(loss) 7 9 4
Financial services activities 7 7 6 OFIVM 7 7 7 of which share in net income/(loss) - - (1)
Other activities 1 1 1 of which share in net income/(loss) 1 - -
Sub-total 108 71 62 of which share in net income/(loss) 10 9 3
in millions of euros Gross Deprec., Net Gross Deprec., Net Gross Deprec., Net book amort., book book amort., book book amort., book value provs. value value provs. value value provs. value
Assets used in the business Intangible assets 605 (178) 427 586 (151) 435 560 (126) 434 Property and equipment 727 (310) 417 711 (308) 403 692 (300) 392
Assets leased to third parties under operating leases 213 (110) 103 227 (110) 117 226 (105) 121
Intangible assets: 586 33 (20) 12 (6) 605 Purchased goodwill 386 - - 4 3 393 Software 177 21 (14) 7 3 194 Other 23 12 (6) 1 (12) 18
Non-operating property and equipment: 27 10 (3) 8 57 99 Land and buildings 24 10 (2) 8 57 97 Other 3 - (1) - - 2
Charge to depreciation, amortization and provisions - - - - - -
Assets leased to third parties under operating leases (110) (7) 7 - - (110)
Additions Reversal Removals Net Net Net in millions of euros to income
At December 31, 2003, Natexis Banques Populaires valued the intangible assets and goodwill/negative goodwill carried in its balance sheet.
The valuation covered material items exceeding €4 million and was based on an appraisal made by an independent expert.
The valuation was based on discounted cash flows, although market value was used where possible for some tangible assets such as real estate assets or securities.
The discount rate used for each subsidiary was based on the following: n the average 10-year OAT (French government bond) yield, n the risk premium in the subsidiary’s market, n a beta value based on a sample of comparable companies.
As a result of this process, an additional write-down of goodwill arising on certain subsidiaries, which are not expected to return to profit until the medium-term, was made in the sum of €17.8 million in 2003 and €7.7 million in 2004.
The discounted cash flow method was applied to the Coface group under the same conditions as for other subsidiaries.The result corroborates the carrying value of the Coface group in Natexis Banques Populaires' books and bears out the methods used to value the business upon its acquisition in July 2002, that is 40% of average net revenues over 3 years for the insurance companies and a multi-criteria valuation for the business information and credit management companies.
Deferred tax assets 172 150 139 11 – INTERBANK AND MONEY MARKET LIABILITIES
(1)Including securities issued directly by: in millions of euros 2004 2003 2002
Trading account securities – liabilities on borrowed securities 4,146 2,872 2,339
(1)Including deferred income of €1,166 million and €1,247 million at December 31, 2003 and December 31, 2002 respectively, arising from the temporary holding of Vivendi Universal Publishing securities. The assets of Vivendi Universal Publishing (VUP) were sold to the Lagardère Group in the first half of 2004, winding up the temporary holding operation.
(2)The significant decrease in cash deposits is due to the expiration in 2004 of the proportional reinsurance treaty entered into in 1998.
(1)Provisions for litigation cover the risk of the bank having to pay compensation to a third party. When a third party makes a claim against the bank's liability, the bank’s legal department reviews the admissibility of the claim in the courts and, where admissible, assesses the potential damages. The provision is adjusted according to the status of legal proceedings (first instance, appeal, etc.). Provisions for litigation recorded in the bank’s financial statements mostly cover claims made by customers or court-appointed representatives (claims for damages, liability actions for unfair support or unjustified contract termination, etc.).
Provisions for future losses on index-based contracts 8 - (8) - - -
(2)Perpetual subordinated debt: - USD 100 million at a post-swap rate of 12.7% and with an effective maturity date of February 25, 2004, treated as amortizable debt
Populaires shares, issued in May 1996 - - 1 - Non-redeemable participating notes issued in 1985 by BFCE, where the remuneration comprises a fixed component payable at TAM x 45% (benchmark money market rate) and a variable component linked to the year-on-year increase in consolidated net income 86 100 107
Financial Information Consolidated financial statements 17 – MOVEMENTS IN SHAREHOLDERS' EQUITY (AS PER PROPOSED APPROPRIATION OF INCOME)
Common Additional Reserves Shareholder’s Fund for Total Minority stock paid-in and retained equity before general shareholder’s interests in millions of euros capital earnings (1) FGBR banking risks equity
Shareholders' equity at December 31, 2003 after appropriation 769 1,791 1,237 3,797 242 4,039 781
change of method in providing for long service awards to active employees (1) (6)Including: Change in Coface minority interests following the squeeze-out (15)
Hedging transactions (micro and macro hedges) 297,775 286,299 247,368 Management of trading positions 553,323 518,832 396,482
Futures 61,287 96,164 59,128 Interest rate caps, floors and options 65,909 46,691 42,942
As required by article 2 of standard CRC 2004-16, the fair value of futures and forward contracts at December 31, 2004 was €46 million and the fair value of options was €(7) million.
Currency Country of issue Long Short Long Short Long Short 21 – INTEREST INCOME
In 2002 and 2003, interest income on macro-hedging transactions was booked under interest income on interbank transactions. The 2002 and 2003 figures have therefore been restated accordingly.
Real estate sales and rental income recorded by real estate subsidiaries 17 16 18
Average number of employees (full time equivalent) 13,465 12,912 9,875 2002 financial and employee data include Coface Group companies as of July 1, 2002.
Financial Information Consolidated financial statements 30 – PROVISIONS FOR LOAN LOSSES
Net provision charge recorded as liabilities 30 (43) 18 in millions of euros 2003 Charges Reversals Net Other** 2004 banking income*
Country and industry risks (liabilities) 460 36 (44) - (10) 442 *Provisions for unpaid interest are recorded under net banking income. **Primarily translation differences and account transfers.
Investments in affiliates and other securities held for investment 9 34 51 Debt securities held for investment 4 1 1
Property and equipment and intangible assets (4) 1 9 32 – EXCEPTIONAL ITEMS
Net income from defeasance and put-option structures Charge to country risk provisions for loans covered by the put option - - (6) Exceptional income arising on first-time consolidation of Edval and Worledge - - 6
Net loss from first-time consolidation of companies in the scope of consolidation (2) (10) -
(1)Mainly VAT reassessment in 2003 and Coface Group stock option plan expenses in 2004. (2)Including €30 million in accrued subsidy from the parent company and €24 million in VAT and payroll tax rebates in 2003.
= Consolidated accounting net income before tax, goodwill amortization, and income from companies accounted for by the equity method 744 532 211 plus/minus permanent timing differences (1) (202) (194) (209)
= Consolidated tax income 542 338 2 x Standard tax rate 33.33% 33.33% 33.33%
= Corporate income tax charge for the year (220) (154) (13)
(1)The main deductions in respect of permanent timing differences concern the tax-exempt net income of venture capital subsidiaries and subsidiaries that have issued preferred stock, dividends on which are treated as interest expenses for tax purposes.
in millions of euros Corporate and Private Equity & Services Receivables Other Total Institutional Wealth Management
General operating expenses, depreciation, amortization and provisions (656) (89) (408) (503) (202) (1,857)
Financial Information Consolidated financial statements 34.1 – CONTRIBUTION OF FULLY CONSOLIDATED NON-BANKING COMPANIES TO CONSOLIDATED NET INCOME
The main fully consolidated companies belong to Natexis Assurances (Natexis Life, ABP Prévoyance, ABP Vie, Vitalia Vie and Bancassurance Popolari) and the Coface consolidated group.
Contrib. to Insurance Contrib. to Insurance Contrib. to Insurance consolidated underwriting consolidated underwriting consolidated underwriting in millions of euros net income income net income income net income income
Net fee and commission income (153) (262) (128) (234) (112) (157)
Net gains/(losses) on securities held for sale - - - - (3) -
Depreciation, amortization and provisions for impairment of property and equipment and intangible assets (16) (18) (24) (16) (9) (10)
Income from companies accounted for by the equity method 4 - 4 - - -
(1)In 2004, as in previous years, directors’ fees included a fixed component (€1,525 per year and per director) and a variable component (€1,220 per Board meeting and per director). Members of the Audit Committee, Risk Management Committee and Remuneration Committee received an additional €915 per meeting and per director. All compensation is paid in full at the year end.
(2)Total gross compensation paid to members of the Natexis Banques Populaires Executive Management Committee for their time in office during the period, including the Chairman and the Chief Executive Officer (see Note 35 A).
Loans and advances from banks 8,409 13,629 10,911 661 - 33,610
AK COFACE FINANZ GMBH (formerly ALLGEMEINE KREDIT FINANZ SERVICE AKFS) Factoring 100 100 100 98 100 98
AK COFACE HOLDING (formerly ALLGEMEINE COFACE VERMÖGENSVERWALTUNG GMBH) Holding company 100 100 100 98 100 98
ALLGEMEINE KREDIT COFACE (AK COFACE) Credit insurance and services 100 100 100 98 100 98
ALLGEMEINE KREDIT COFACE INFORMATIONS GMBH (AKI) Credit information and management 100 100 100 98 100 98
AXELTIS LTD (Asset Square London) Mutual fund distribution 100 100 100 100 100 100
BANQUE PRIVEE SAINT DOMINIQUE Private asset management 100 100 100 100 100 100
CIMCO SYSTEMS LTD Credit information and management 100 100 100 98 100 98
COFACE (21) Credit insurance and services 100 100 98 98 98 98
COFACE CREDIT MANAGEMENT NORTH AMERICA (formerly Coface Credit Management Services) Credit information and management 100 100 100 98 100 98
COFACE DEBT PURCHASE Credit information and management 100 100 100 98 100 98
COFACE HOLDING LATINA AMERICA Business information 100 100 - - - -
COFACE INTERCREDIT HOLDING AG Holding company 75 75 75 73 75 73
COFACE INTERCREDIT HRATSKA (CROATIA) Credit information and management 100 75 100 73 100 73
COFACE INTERCREDIT SLOVAKIA (27) Credit information and management 100 75 100 73 100 73
COFACE NORTH AMERICA Credit insurance and services 100 100 100 98 100 98
COFACE RECEIVABLE MANAGEMENT (formerly Veritas Brazil) Credit information and management (12) (12) (12) (12) 100 98
COFACE SERVICE (formerly La Viscontea Servizi) Credit information and management 100 100 100 98 100 98
COFACE SERVICIOS DO BRAZIL Credit information and management 100 100 - - - -
COFACE SERVICIOS MEXICO SA DE CV (formerly Informes Veritas) Credit information and management 100 100 100 98 100 98
COFACE UK HOLDINGS (formerly London Bridge Finance Group) Holding company 100 100 100 98 100 98
COFACERATING HOLDING Credit information and management 100 100 100 98 100 98
COFACERATING.AT Credit information and management (13) (13) (13) (13) 100 92
COFACERATING.DE Credit information and management 100 100 100 98 100 98
COFACERATING.FR Credit information and management 100 100 100 98 100 98
COGERI Credit information and management 100 100 100 98 100 98
CREDICO LTD (formerly Cimco Ltd) Credit information and management 100 100 100 98 100 98
EDVAL C INVESTMENTS Ltd Country risk defeasance structure 100 100 100 100 100 100
FINANCIERE NATEXIS SINGAPOUR International investment fund holding company 100 100 100 100 - -
KOMPASS CZECH REPUBLIC Marketing and other services 93 93 93 91 - -
KOMPASS JAPAN Marketing and other services 100 100 100 98 - -
KOMPASS UNITED STATES Marketing and other services 100 100 100 98 - -
LONDON BRIDGE FINANCE LIMITED Factoring 100 100 - - - -
N.V. COFACE EURO DB Business and credit information 100 100 - - - -
NATEXIS ACTIONS CAPITAL STRUCTURANT Expansion capital 58 58 74 72 - -
NATEXIS ACTIONS NOUVEAUX MARCHES (4) Expansion capital (4) (4) 80 77 81 77
NATEXIS ALGERIE (formerly AL AMANA BANQUE) Banking 100 100 100 100 100 100
NATEXIS AMBS ** Preferred stock issuance 100 100 51 34 50 20
NATEXIS ASSET SQUARE (formerly ASSET SQUARE) Mutual fund distribution 100 100 100 100 100 100
NATEXIS BANQUES POPULAIRES INVEST Mutual funds 100 100 100 100 100 100
CAPITAL I (formerly Natexis preferred shares) ** Preferred stock issuance 100 100 100 100 100 100
CAPITAL II ** Preferred stock issuance 100 100 100 100 100 100
NATEXIS BLEICHROEDER INC Investment company 100 100 100 100 100 100
NATEXIS BLEICHROEDER SA (formerly NATEXIS CAPITAL) Investment company 100 100 100 100 100 100
NATEXIS BLEICHROEDER UK Investment company 100 100 100 100 - -
NATEXIS CAPE ** International investment fund 99 100 99 85 - -
NATEXIS COFICINE Finance company (audiovisual sector) 93 93 93 93 93 93
NATEXIS EPARGNE ENTREPRISE (5) Employee savings plan management 100 100 100 100 100 100
NATEXIS FUNDING (formerly Sofingest) Secondary debt market maker 100 100 100 100 100 100
NATEXIS IMMO EXPLOITATION (formerly INVEST SIGMA) Real estate used in business 100 100 100 100 100 100
NATEXIS METALS (formerly SOGEMIN) (16) Precious metals brokerage 100 100 100 100 80 80
NATEXIS PRIVATE BANKING LUXEMBOURG SA (formerly B.P. Luxembourg) International private banking 88 88 88 88 88 88
NATEXIS VENTURE SELECTION Investment fund 100 100 100 100 - -
OKV KREDITINFORMATIONS GMBH (OKI) Credit information and management 100 94 100 92 100 92
OR INFORMATIQUE Business and credit information 100 100 - - - -
PARIS OFFICE FUND * Real estate trading 50 50 - - - -
PRAMEX ITALIA SRL International trade promotion and operations 100 98 100 51 100 51
S.C.I. ALTAIR 1 (19) Real estate used in business 100 100 100 100 70 70
S.C.I. ALTAIR 2 (19) Real estate used in business 100 100 100 100 70 70
S.C.I. VALMY COUPOLE Real estate used in business 100 100 100 100 100 100
SOCIETE DE BANQUE FRANCAISE ET INTERNATIONALE Banking 100 100 100 100 100 100
SOCIETE FINANCIERE DE LA BFCE Asset management company 100 100 100 100 100 100
SOCIETE IMMOBILIERE A.B.C (10) Real estate used in business (10) (10) (10) (10) 100 100
SPEF VENTURE (formerly SOPAGEST) Innovation mutual fund management 100 100 100 100 100 100
UNISTRAT ASSURANCES (25) Credit insurance and services 100 100 50 49 50 49
VERITAS CARIBBEAN CORPORATION Credit information and management (12) (12) (12) (12) 100 98
VERITAS CREDIT CORPORATION Credit information and management (12) (12) (12) (12) 100 98
COFACE (2) Credit insurance and services (2) (2) (2) (2) 19 19
COFACREDIT Credit insurance and services 36 36 36 35 36 35
EIOS Business and credit information 30 30 - - - -
(8) After transfer of venture capital fund management business from Spef and Spef Venture.
(11) Fructigestion was absorbed by Natexis Banques Populaires on November 25, 2002.
(12) Merger with Coface Services North America on May 1, 2003.
(19) Buy-out by Natexis Altaïr of shares held by Casden, bringing NBP's interest to 100%.
(20) Merger with Coface SCRL Participations in the second half of 2003, renamed Coface SCRL.
(22) Following transfer of Sopromec shares to BP Développement on November 22, 2004, Sopromec is now accounted for by the equity method.
(23) Buyout of minority interests (BPR), bringing NBP's interest to 100% at December 13, 2004.
(24) Transfer of entire business to Slib on April 1, 2004, with retrospective effect from 1 January 2004.
This report, together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal control, should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
We conducted our audit in accordance with professional standards applicable in France.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position and the assets and liabilities of the group as of December 31,2004 and the results of its operations for the year then ended in accordance with accounting principles generally accepted in France.
In accordance with the requirements of Art. L225-235 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we draw your attention to the following matters: n The Natexis Banques Populaires group records provisions to cover the risks inherent in its business.As part of our assessment of the significant estimates used to prepare the consolidated financial statements, we examined the control procedures applicable for monitoring credit risks, assessing the risks of non-recovery and determining the related specific provisions as well as general provisions for industry and country risks.
Investments in affiliates and other securities held for investment 4 165 174 179
Guarantees received from financial institutions 5,143 1,692 1,771 Guarantees received from customers 2,640 2,091 3,092 of which institutional activities 16 345 450 646
Loans and advances from banks 7 39,847 35,930 45,640 of which institutional activities 16 408 515 1,453 of which institutional activities 16 1,166 1,137 106
Deferred income and accrued charges 10 2,456 2,829 2,561 of which institutional activities 16 - - 4
Regulated reserves & investment grants 13b 111 108 114 of which institutional activities 16 100 98 104
Off-balance sheet items in millions of euros note 2004 2003 2002
Commitments given on behalf of financial institutions 2,020 1,344 1,859 Commitments given on behalf of customers 15,959 15,284 13,810 of which institutional activities 16 2 5 9
Parent company income statements Year ended December 31, in millions of euros note 2004 2003 2002
Finance lease transactions (12) (1) Operating lease transactions (4) (1) Bonds and other fixed-income securities (704) (715) (857) Other interest expense (283) (299) (420)
Net gains/(losses) on trading account securities 21 92 35 (93) Net gains/(losses) on trading account securities 257 43 (33) Net foreign exchange gains/(losses) 41 3 38 Net gains/(losses) on financial instruments (206) (11) (98)
Net gains/(losses) on securities held for sale 22 68 73 (21)
Net gains/(losses) on disposals of fixed assets 26 (108) (18) 34
Net (charge to)/reversal of fund for general banking risks 13 (1) (1) 17
1 – Accounting policies and valuation methods The Natexis Banques Populaires financial statements have been prepared in accordance with generally accepted accounting principles applicable to credit institutions, including standard CRC 2000-03 on financial statement presentation.
Loan principal Where there is a risk of partial or total non-recovery of loans or non-compliance with loan terms or covenants, provisions are taken and charged to the income statement under “provisions for loan losses”. Provisions are determined on a case-by-case and country-by-country basis and adjusted at quarterly intervals, based on an analysis of the related risk and available collateral. In the case of lease financing transactions, capital gains and losses on disposal and charges to and reversals of provisions (leased assets and temporarily unleased assets) are recognized in net banking income. Termination compensation is booked as interest income. Only the principal amount of payments on non-performing leases is provided for under provisions for loan losses.
Loan interest In accordance with banking regulations: n unpaid accrued interest on loans to borrowers subject to bankruptcy proceedings is deducted from the interest account in which it was initially recorded. If the interest is subsequently recovered, it is credited to income upon receipt through the same account; n interest on non-performing loans three or, where applicable, six or nine months past due is also provided for in full by deduction from the interest account in which it was initially recorded; n all other loans made to these customers are also classified as non-performing, even where the risk appraisal does not call for a provision against the principal outstanding; n the same rules apply to lease financing transactions, where a provision is taken for the amount outstanding when a lease payment or any incidental costs are more than three months (equipment) or six months (real estate) past due.
Restatement of former BFCE sovereign risks In 1991 and 1992, a defeasance transaction was carried out and a put option was purchased on BFCE sovereign risks.The defeasance structure, Edval Investment Ltd, and the structure set up to hold the put option,Worledge Investment Ltd, were consolidated for the first time at December 31, 2002. In accordance with paragraph 10052 of standard CRC 99-07, consolidation of these two entities led to an adjustment of provisions covering at-risk loans covered by the put option.
On the assets side of the balance sheet, the net outstanding balance of the loans concerned by the put option is covered by zero-coupon bonds held by the two entities.The results of the two entities consist solely of annual accruals to recognize the value appreciation of the zero-coupon bonds up to their redemption value in 2014, when the bonds mature and the defeasance structure will be wound up. Over this period, the value appreciation exactly matches the provisions required to write down the full amount of the loans covered by the put option. Consequently, the operation has no impact on the income statement and the cash required to refinance the transactions is offset by a cash inflow.
1.22 – INDUSTRY AND COUNTRY RISK PROVISIONS These provisions cover certain businesses of Natexis Banques Populaires that carry potential future risks.These businesses are reviewed quarterly and where necessary included in the basis of provisioning for sound exposure in countries or industries likely to experience difficulties. During these quarterly reviews, the country and industry provisioning rates are adjusted according to Natexis Banques Populaires' perception on how the businesses will evolve, either negatively or positively. In 2003, additional provisions of €90 million were taken to cover potential risks arising as a result of major issues in the European marketplaces.This sum was maintained in the balance sheet at December 31, 2004.
1.51 – SECURITIES TRANSACTIONS (TRADING ACCOUNT SECURITIES, SECURITIES HELD FOR SALE, DEBT SECURITIES HELD FOR INVESTMENT) Securities are classified according to the purpose of the transaction regardless of their legal form (equities, bonds and notes, treasury bills, certificates of deposit, negotiable instruments, money market securities, etc.), based on the following rules: n Trading account securities: these are securities traded on liquid markets which are bought or sold with the intention of reselling or repurchasing them within a short period.They are carried in the balance sheet at cost, including transaction expenses and accrued interest.At the period-end, they are marked to market and the resulting unrealized gain or loss is recognized as income or expense in the income statement.Trading account securities that are still in the portfolio six months from the date of acquisition are transferred to “securities held for sale” at their market price on the transfer date.
n Securities held for sale: these are securities acquired with the intention of holding them for a period of more than six months. They are valued individually at the year-end at the lower of cost or estimated fair value.A provision is taken for unrealized losses but unrealized gains are not recognized. Premiums and discounts, corresponding to the difference between the cost of fixed-income securities (excluding accrued interest) and their redemption price, are written to the income statement over the remaining life of the securities.
n Equity securities held for investment are securities acquired with the intention of being held in the medium to longterm in order to sell them at a profit.They are booked at cost and a provision for impairment taken if their net book value is higher than their fair value (based on recent transaction values, profitability, market price for listed securities or other valuation methods used at the time of acquisition).
n Value adjustments and gains or losses on disposal of securities appear under different headings depending on the nature of the transaction: – trading account securities, securities held for sale and equity securities held for investment: value adjustments and gains or losses are recorded in net banking income; – debt securities held for investment: value adjustments and gains or losses are recorded under “provisions for loan losses” where they reflect counterparty risk, and “net gains/(losses) on disposals of fixed assets” where they reflect market risk or the result of disposal; – investments in affiliates and other long-term equity investments:value adjustments and gains or losses are recorded under “net gains/(losses) on disposals of fixed assets”.
n Property and equipment are depreciated over their estimated useful lives, predominantly on a straight-line basis, as follows: Buildings used in the business 25 to 40 years
Other property and equipment 5 to 10 years 1.72 – NON-OPERATING ASSETS Non-operating property and equipment are depreciated over their estimated useful lives (30 to 40 years).
1.73 – COMPUTER SOFTWARE AND HARDWARE Computer hardware is depreciated on a declining balance basis over five years. Purchased software is amortized on a straight-line basis over one year. In-house software development is expensed in the year of occurrence where intended for internal use.
Where intended for commercialization, costs are capitalized and amortized over an appropriate period.
1.12 – DEBT AND SHARE ISSUANCE COSTS With effect from January 1, 1994, Natexis Banques Populaires elected to defer all debt issuance expenses over the life of the debt, as permitted by tax legislation (law of August 8, 1994) and in line with trends in the nature of such expenses, which are in substance an additional financing cost.
1.13 – FINANCIAL FUTURES AND OPTIONS HELD FOR OWN ACCOUNT The notional amount of these instruments is recorded offbalance sheet for internal monitoring and regulatory purposes, but they are not included in the published statement of offbalance sheet items. Further details are provided in the notes to the financial statements.
1.131 – INTEREST RATE INSTRUMENTS These instruments are classified according to the purpose for which they are acquired: – micro-hedging (hedging of specific transactions or positions); – macro-hedging (structural balance sheet management);
n In the case of specialized management of a trading portfolio, each instrument is marked to market on an individual basis. Changes in value during the period are taken immediately to the income statement. Valuations are adjusted for counterparty risk and the discounted present value of future contractual management costs.
n Forward currency hedging transactions are taken to income on an accruals basis, either as premiums or discounts where they are intended to hedge commercial transactions, or as accrued interest where they are intended to hedge longterm assets and liabilities denominated in foreign currencies.
1.134 – INSTITUTIONAL ACTIVITIES: Commitments given to banks that grant export credits financed in foreign currencies in order to fix the exchange rate of their foreign currency borrowings are not included in published offbalance sheet commitments. Income and expenses arising on institutional activities (swaps and exchange rate guarantees) are charged to or paid to the French Treasury in accordance with agreed terms and conditions.
1.18 – NOTES TO THE FINANCIAL STATEMENTS Unless otherwise stated, the figures shown in the notes to the parent company financial statements are expressed in millions of euros.
Accrued interest receivable 41 3 3 Non-performing loans 1 1 1 Provisions for loan losses - - -
Accrued interest receivable 244 315 579 Non-performing loans 85 85 89 Provisions for loan losses (48) (59) (62)
Securities received under repurchase agreements: 28,502 28,719 23,332 Accrued interest receivable 179 196 454
Short-term loans and consumer loans 12,149 10,296 11,206 Accrued interest receivable 41 47 52
Securities purchased under resale agreements - 1,012 1,902 Accrued interest receivable - 7 2
Accrued interest receivable 28 27 34 Non-performing loans 755 817 953 Provisions for loan losses (515) (503) (561)
Temporarily unleased assets and non-performing loans - - Accrued interest receivable - - Provisions for asset impairment - - Provisions for loan losses - - -
Equities and other variable income securities 977 785 1,277 Trading account securities 618 506 765 Securities held for sale 358 279 508 Non-performing securities 1 - 4
Non- Irrecover- Non- Irrecover- Non- Irrecover- Non- Irrecoverin millions of euros performing able performing able performing able performing able
At December 31, 2004, in accordance with the opinion issued by the CNC Urgent Issues Task Force on December 18, 2003, irrecoverable loans comprise loans where an event of default has occurred and loans classified as non-performing for more than one year, where a write-off is envisaged.
*The pro forma 2003 figures show a breakdown between non-performing and irrecoverable loans based on the provisions of the opinion issued by the CNC Urgent Issues Task Force on December 18, 2003.
NOTE 4 – INVESTMENTS IN SUBSIDIARIES AND AFFILIATES, OTHER SECURITIES HELD FOR INVESTMENT AND TREASURY STOCK
Investments in subsidiaries 3,857 3,989 3,926 Carrying value 3,970 4,029 3,985
B) Financial institutions NATEXIS PRIVATE EQUITY 17,470,555 465,121,212.11 NATEXIS AMBS Ordin. (New York) 285,351 209,493,429.27 NATEXIS ASSET MANAGEMENT 1,633,480 155,254,504.64 ARNHOLD & BLEICHROEDER Inc 100 142,974,672.14 SOCIETE FINANCIERE BFCE 6,052,992 92,950,977.55 NATEXIS INTEREPARGNE 555,654 81,837,556.38 SPAFICA 42,823 63,472,935.72 NATEXIS BLEICHROEDER 673,542 50,548,024.75 NATEXIS METALS Ltd 20,000,000 24,037,340.85 NATEXIS MOSCOW 37,908 15,767,290.18 NATEXIS ASSET-BACKED MANAGEMENT CORPORATION 100 10,028,858.59 NBP Preferred Capital 3 (New York) 11,500 8,443,579.77 NBP Preferred Capital 2 (New York) 10,000 7,341,604.88 INVESTIMA 6 690,922 6,562,719.00 NATEXIS INVESTMENT CORP 3,217 2,552,930.37 SOGAFI - Société de garantie financière 49,994 1,807,862.41 NATEXIS FINANCE 162,004 1,599,718.42 SPAFIC 2,494 651,221.92 IFCIC 37,708 574,854.75 LUGDUNUM GESTION 7,995 289,653.21 COMPAGNIE FINANCIERE EUROPEENNE ABS 7,647 116,652.04 CRENINVEST 1 4,994 76,133.04 NATEXIS US FINANCE CORPORATION (New York) 1 47,720.44 INVESTIMA 1 3,850 38,500.00 INVESTIMA 11 3,850 38,500.00 INVESTIMA 5 3,850 38,500.00 INVESTIMA 7 3,850 38,500.00 SAINT DOMINIQUE RADIO 3,850 38,500.00 CONTANGO TRADING SA 3,844 38,440.00 INVESTIMA 12 3,700 37,000.00 INVESTIMA 13 3,700 37,000.00 INVESTIMA 14 3,700 37,000.00 INVESTIMA 16 3,700 37,000.00 INVESTIMA 17 3,700 37,000.00 INVESTIMA 3 3,850 19,250.00 INVESTIMA 8 3,850 19,250.00 INVESTIMA 9 3,850 19,250.00 OMNIUM NATEXIS GIE 1,250 19,056.13 SAGP 990 15,092.45
II - Investments in affiliates and other securities held for investment
C) Other SOPARIND 36,956 25,887,797.52 EMBRAER 273,120 10,492,370.08 CABLECOM (London) 2,450 3,137,000.00 PAI EUROPE 3 FCPR 908,800 5,359,862.08 LUCIA 186,000 3,965,687.02 PATRIMOINE EUROPE (SCPI) 2,941 2,767,864.37 GIE SPRING RAIN 17,599,140 2,682,971.60 SYSTRA 7,300 1,779,789.65 JACQUET SA 142,141 3,250,388.36 BANQUE INTERNATIONALE ARABE DE TUNISIE 192,000 1,891,157.21 IMMOBILIERE PRIVEE 8,040 1,295,816.64 SAINT AUBIN CHIMIE GIE 7,617,500 1,161,280.39 AXELTIS 627,000 1,025,777.75 EUROMEZZANINE 2 .SCA. 460,000 701,265.48 GIE FIRST SNOW 396,086,798 603,830.43 PORCHER INDUSTRIES 506 517,830.10 NATEXIS PRAMEX INTERNATIONAL 33,984 487,977.56 SOCIETE CONCESSIONNAIRE DU GRAND LOUVRE 16,009 457,361.32 SOFRANTEM 15,002 388,822.74 EUROPOLIS INVEST 32,399 383,721.29 GIE VULCAIN ENERGIE 24,446 372,676.87 LES JEUNES BOIS GIE 251,540 251,534.70 SRITHAI SUPERWARE (Singapore) 8,511,685 227,593.72 GIE STAR TROIS 149,902,077 228,524.24 INDUSTRI KAPITAL 1 112,500.00 LOXLEY PUBLIC Co Ltd (Singapore) 16,150,000 169,137.58 ECICs (Singapore) 250,000 134,792.05 ASSURANCES BANQUE POPULAIRE IARD (formerly Fructi-MAAF) 44 132,000.00 SEPIA 14,099 107,468.93 PARNASSE IMMO 300 78,128.30 I.D.P.C. 37 57,168.38 ECONOCOM GROUP 13,252 56,031.24 UNICEREALES 2,750 41,923.48 NAM GERANCE 2,496 38,370.63 DEVELOPPEMENT DE L’HORLOGERIE (Sté) 2,400 36,587.76 SNPE 500 36,206.64 SWIFT 353 34,326.77 SOFIMAC 221 33,521.89 O.G.I.F. - Omnium de gestion Financière de l’Ile de France 77,350 31,556.95 MARCHES DE TITRES - France 305,555 28,947.30
Cristal négociation - Euromezzanine SCA - - Pacifique bail - -
Company or group of companies Common Reserves Percentage Book value of Outstanding loans Guarantees Total revenues Net income/(loss) Dividends Comment stock interest at investment and advances at given in previous year in previous year received
NATEXIS ARBITRAGE 115, rue Montmartre - 75002 PARIS 60,298 EUR (15,269) EUR 100.00% 60,615 60,615 668,663 270,000 11,671 EUR (2,267) EUR - *
NATEXIS BLEICHROEDER INC 1345 avenue of the Americas - NY 10105 - NEW YORK 151,503 USD (9,767) USD 100.00% 186,908 142,975 55,062 - 53,153 USD (11,080) USD - *
NATEXIS BLEICHROEDER SA 100, rue Réaumur - 75002 PARIS 73,636 EUR (23,089) EUR 100.00% 7
NATEXIS INTEREPARGNE 16 - 18, rue Jules César - 75012 PARIS 8,891 EUR 19,329 EUR 100.00% 81,838 81,838 - - 62,762 EUR 5,786 EUR 3,740 *
NATEXIS METALS 47-53, Cannon Street - LONDON EC4M 5SH 20,000 GBP (6,226) GBP 100.00% 20,741 24,037 163,578 7,709 18,319 GBP 3,741 GBP - * (1)
SBFI 45, rue Saint-Dominique - 75007 PARIS 8,623 EUR (1,854) EUR 94.69% 8,644 6,410 1,500 - 501 EUR 469 EUR - *
NATEXIS MOSCOW Business Center Parus, 1th Tverskaya - YANSKAYA STR.23/1 125047 MOSCOW - RUSSIA 379,080 RUR 79,100 RUR 100.00% 10,013 15,767 125,463 68,522 139,407 RUR 16,937 RUR - * (1)
In thousands In thousands In thousands In thousands In thousands In thousands In thousands of euros of euros of euros of euros of units of units of euros
Quantity Purchase Average Quantity Selling Average Closing % of purchased price purchase sold price selling price stock common price stock
Intangible assets 83 (47) 36 79 (40) 39 74 (35) 39 Property and equipment 189 (114) 75 190 (105) 85 194 (101) 93
Non-operating assets 9 (3) 6 12 (3) 9 14 (4) 10 Intangible assetss - - - - - - - - - Property and equipment 9 (3) 6 12 (3) 9 14 (4) 10 in millions of euros 2003 Additions Disposals Other 2004
Non-operating property and equipment 12 - (3) - 9 Land and buildings 7 - (1) - 6 in millions of euros 2003 Charges Disposals Other 2004 and reversals
Non-operating property and equipment 3 - - - 3 Land and buildings 3 - - - 3 Other - - - - -
(*)Including securities delivered under repurchase agreements: 7,252 11,172 7,978 Accrued interest payable 49 49 67
Interbank and money market securities 25,855 21,990 18,464 Accrued interest payable 143 154 172
Securities transactions 2,389 2,695 1,980 Trading account securities - - 48 Liabilities on trading account securities 2,361 2,694 1,933 Accrued interest payable - - -
in millions of euros Employee Off-balance Country Specific Provisions Industry Tax-driven Fin. instr. Sundry Total benefits sheet risks credit for risks provisions risks risks commitments risks litigation
Charges 24 3 13 77 - 30 46 51 15 259 Reversals (13) (4) (47) (48) (3) (40) (21) (45) (3) (224) Translation differences - - (23) - (1) (6) (2) - - (32) Other changes - - - - - - - - - 0
(*)of which provisions for major repairs: 1 of which risks in subsidiaries and affiliates: 8
Perpetual subordinated debt 335 382 397 Participating loans - 107 107
in millions of euros Euro Currency Currency Total FGBR FGBR provision
At January 1, 2003 190 29 26 245 Charges - - - 0 Reversals - - - 0 Translation differences - (5) (4) (9) Other changes - - - 0
Reversals - - - 0 Translation differences - - - 0 Other changes - - - 0
At January 1, 2002 709 1,579 40 180 140 11 0 2,659 Appropriation of 2001 income - - 3 - - - 71 74 Dividends paid in 2002 - - - (39) - - (71) (110) Arnhold & S. Bleichroeder acquisition 22 83 - - - - - 105 Conversion of convertible perpetual subordinated notes 28 86 - - - - - 114 Other movements in equity - (2) - - - - 1 (1)
Interbank and money market assets 333 421 1,379 in millions of euros 2004 2003 2002
Total commitments given 2 5 9 in millions of euros 2004 2003 2002
Off-balance sheet items: Guarantee commitments 13 11 7 Other commitments given 5 (4) 153 Other - 1 3
Charges to provisions (53) (35) (18) Reversals from provisions 21 2 7 Losses covered by provisions - - (3) Losses not covered by provisions - - Recovery of bad debts written off - - -
Country risks: 5 2 34 Charges to provisions (23) (12) (37) Reversals from provisions 28 17 71 Losses covered by provisions - (3) Losses not covered by provisions - - Recovery of bad debts written off - - -
Losses Investments in affiliates and other securities held for investment (33) (9) (26) Debt securities held for investment (7) (14) -
Charges to provisions Investments in affiliates and other securities held for investment (129) (33) (17) Debt securities held for investment - - -
Charge to provisions for contingencies & losses Investments in affiliates and other securities held for investment (2) - -
Personnel costs Charges to provisions for departures under the employee assistance program - - (15) Charges to restructuring provisions - - (5) Reversals from restructuring provisions - - 5 Reversals from provision for departures under the employee assistance program 4 5 Transfer of personnel costs in connection with the employee assistance program (4) (5) -
Spot transactions Currencies purchased not received 8,258 5,524 1,788 Currencies sold not delivered 8,205 5,538 1,789
Foreign currency lending / borrowing Currencies loaned not delivered 116 40 93 Currencies borrowed not received 267 124 936
Forward transactions Euros receivable / currencies deliverable 35,045 42,217 36,360 Currencies receivable / euros deliverable 42,745 46,268 28,600 Currencies receivable / currencies deliverable 22,450 16,330 16,247 Currencies deliverable / currencies receivable 21,150 16,801 16,760 Premium / discount receivable 189 109 112 Premium / discount payable 259 131 119
Income after tax, depreciation, amortization and provisions (230,860,374.57) 74,450,533.63 206,037,266.02 200,728,250.83 213,582,296.25
Income after tax, but before depreciation, amortization and provisions (3.10) 6.19 6.62 5.06 5.24
We conducted our audit in accordance with professional standards applicable in France.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements give a true and fair view of the financial position and the assets and liabilities of the company as of December 31, 2004 and the results of its operations for the year then ended, in accordance with accounting principles generally accepted in France.
In accordance with the requirements of Art. L225-235 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we draw your attention to the following matters: n As described in paragraph 2 of the section on accounting policies and valuation methods in the notes to the financial statements, Natexis Banques Populaires records provisions to cover the risks inherent in its business. As part of our assessment of the significant estimates used to prepare the financial statements,we examined the control procedures applicable for monitoring credit risks, assessing the risks of non-recovery and determining the related specific provisions as well as general provisions for industry and country risks.
n Paragraph 17 of the section on accounting policies and valuation methods in the notes to the financial statements describes the change in method of accounting for provisions for long service awards pursuant to first-time adoption of standard CRC 2004-04. Provisions for long service awards have been deducted from opening shareholders’ equity at January 1, 2004 in the sum of €11.7 million.We verified the appropriateness of the basis for and presentation of this change.
Financial Information Parent company financial statements n As described in paragraph 5.2 of the section on accounting policies and valuation methods in the notes to the financial statements, Natexis Banques Populaires reviewed the value of its investments in subsidiaries, assisted by a firm of independent valuers for the most material investments. As part of our assessment of the significant estimates used to prepare the financial statements, we obtained an understanding of the conclusions provided by the firm of independent valuers and verified that they had been taken into consideration in preparing the balance sheet at December 31, 2004.
It is not our responsibility to ascertain the existence of such agreements, nor to comment on their relevance or substance.We are simply required to report to shareholders, based on the information provided, on the basic terms and conditions of agreements that have been disclosed to us. Under the provisions of article 92 of the decree of March 23, 1967, it is the shareholders’ responsibility to determine whether the agreements are appropriate and should be approved.
Nature and purpose Transfer of Natexis Altaïr’s systems design engineering business to Natexis Banques Populaires.This transfer took the form of a sale of business assets agreed and accepted for the price of €1,570,896, including transaction costs.
Terms The Board of Directors authorized this agreement at its meeting of May 25, 2004.
Directors concerned Banque Fédérale des Banques Populaires and Messrs. de La Chauvinière and Duquesne.
Nature and purpose Implementation of a “Collateralized Loan Obligation” (CLO). Natexis Banques Populaires entered into a Collateral Management Agreement with Natexis Asset Management and Vallauris CLO plc under the terms of which Natexis Asset Management agreed to negotiate the purchase of mezzanine notes (similar to financial instruments) and enter into contracts to hedge the interest rate and exchange rate risk (also similar to financial instruments). In consideration whereof 10% of the management fees payable by Vallauris CLO plc will be paid over to Natexis Asset Management, via Natexis Banques Populaires.The fees paid to Natexis Asset Management under this agreement in respect of the first six months of the Collateralized Loan Obligation (July 28, 2004 to January 28, 2005) amounted to €74,998.
Terms The Board of Directors authorized this agreement at its meeting of July 7, 2004.
The system is based on periodical and continuous control supported by dedicated risk management and monitoring teams. It complies with French banking and finance regulations and with the corporate governance principles of the Banque Populaire Group.
2.1 – GENERAL ORGANIZATION Internal controls are organized from the lowest to the highest level. The organizational structure is defined by the Chief Executive Officer with the approval of the Chairman. Responsibilities and resources are allocated as effectively as possible, in line with the guidance issued by the Board of Directors, to ensure exhaustive coverage, identification and management of risks.
2.11 – INTERNAL INVOLVEMENT IN CONTROL In line with the guidance set out in the Banque Populaire Group’s internal control charter, Natexis Banques Populaires has a three-tier control system coordinated by Executive Management.
These departments are supported by the Internal Control department, which is structured into five sub-departments covering all business lines and support functions. Internal Control reports to the General Secretariat and is therefore independent from the business lines. It is decentralized, with team members based locally in all operating entities, thereby covering both the parent company and its subsidiaries and branches.
During 2004, this instruction was drilled down to operating unit level. By the year end, the Internal Control department had entered into 35 agreements with the core businesses, subsidiaries and branches, setting out the responsibilities,
Chairman’s report on corporate governance and internal control (Article L225-37 of the French Commercial Code)
In 2004, a new internal control model was developed and gradually rolled out in the Internal Control department. It is inspired largely by the most up-to-date audit methods and will be supported by a central information system, the first components of which were delivered at the year end. The number of internal control officers was significantly strengthened during 2004. The information systems tools available to them were also upgraded during the year to improve the effectiveness of their controls.
n Third-tier control Third-tier or periodical control is the responsibility of the Internal Audit department, which reports directly to the Chairman and the Chief Executive Officer of Natexis Banques Populaires. Internal Audit is responsible for ensuring the effectiveness of first and second tier control and for the smooth operation of the bank’s internal control system, as required by CRBF Regulation 97-02. It is independent from all business lines and support functions. It has no operational role and can never be in the position of both judge and interested party.
Unlike continuous control, which consists of ongoing analysis and periodical reporting – audit assignments consist of specific investigations which lead to a specific reporting process.After discussions with the audited unit, internal audit reports and the audited unit’s response are sent up the reporting line, with a copy to the Chief Executive Office and the Chairman of Natexis Banques Populaires. The Internal Audit department of Banque Fédérale des Banques Populaires also receives a copy of all internal audit reports issued by Natexis Banques Populaires.
Audit reports always include recommendations ranked in order of priority. In the twelve to eighteen months after the initial audit, the Internal Audit team conducts follow-up audits to monitor progress in implementing its recommendations.
Internal Audit prepares an annual internal audit plan on a consolidated basis, which is presented to Executive Management, the Risk Management committee and the Board of Directors.The plan covers audit assignments conducted by Internal Audit and by the decentralized internal control teams in the various business units.As required by banking law, the purpose of the plan is to ensure that the entire Natexis Banques Populaires group structure is fully covered within a reasonable time period (five years), taking account of the degree of risk to which its business activities are exposed.The plan also takes account of any assignments planned by the Internal Audit department of Banque Fédérale des Banques Populaires in order to avoid duplication.
The plan is therefore based on a hierarchy of priorities defined according to a risk map of Natexis Banques Populaires activities and the status of risk within the group structure as perceived by Internal Audit from the information reported by the bank's business units. It may be revised during the year at the request of Executive Management or if dictated by circumstances.
Procedures have been formally documented to make them more effective, through audit guides, information databases, and automated analysis tools.
The committee met eleven times in 2004 to review the results of continuous and periodic internal control, and audits carried out by external organizations (Banque Fédérale des
Banques Populaires, French Banking Commission, etc.). It also discussed issues relating to the structure of the bank’s internal control system and changes required by regulatory developments or developments in the bank’s business activities or environment. It also invited various business line heads to present their progress report on recommendations made as a result of internal or external audit assignments.
2.12 – THE ROLE OF THE BOARD OF DIRECTORS See section on the Board of Directors on page 197.
Risk measurement and management is the responsibility of the Risk Management Department which reports to the Board Secretary and is therefore independent from the business lines.
2.21 – CREDIT RISK The Risk Management department is responsible for analyzing the credit risk on a group of counterparties, using financial information, external ratings and the internal rating system, supported by the expertise of the bank’s credit analysts,which itself draws on the specialist knowledge of various areas of the bank.
n Monitoring exposure Exposure is monitored on the basis of internal ratings and client categories. Natexis Banques Populaires has a conservative risk provisioning policy that includes provisions for country and industry risk and well as specific provisions.
n Aggregation of exposure to a single counterparty or group Exposures are automatically aggregated by the bank’s SIRisques system, which covers all its major subsidiaries.
Natexis Banques Populaires can therefore consolidate risk either daily or on specific reporting dates. In addition to this internal system, the bank also has access to reports produced by Banque Fédérale des Banques Populaires, notably following meetings of the Group risk management committee.
n Client credit ratings Natexis Banques Populaires bases its credit decisions on an internal rating system that covers both banking and other counterparties. In preparation for the new Basel II capital requirements, Natexis Banques Populaires is taking an active part in the Banque Populaire Group’s internal project. In 2004, the internal rating system was revised and now has a scale of 16 ratings for healthy borrowers and four default categories. Corporate borrowers are assessed on the basis of internal ratings supported by specialist opinion. Specific models for banks and sovereign risks are currently being developed.
n Counterparty risk Counterparties in the capital markets business are mostly banks and financial institutions. Counterparty exposure is governed by limits which are set by an ad hoc committee and monitored by the bank’s risk management systems. Any violations of these limits are handled at specific monthly committee meetings.
Risks are managed by a system of limits for each of these metrics, delegated to the head of each capital markets business line. Limits are set by the market risks committee, which meets monthly. The middle office is responsible for measuring market risk on a daily basis using front office systems or specific tools.They also control compliance with limits on a daily basis and report any violations to the head of the business line concerned, Internal Control and Risk Management. For each violation, the decision either to remedy the position immediately or to accept a temporary violation is taken jointly by the business line, the middle office and the Risk Management department.
n Structural interest rate risk Maximum sensitivity of interest rate maturity schedules to a +/-1% shift in the yield curve remains unchanged at €100 million.This arrangement was supplemented in 2004 by a stress scenario sensitivity limit expressed as a percentage of regulatory capital.
n Liquidity risk The Global Debt & Derivatives Markets department refinances all the liquidity needs of the various Natexis Banques Populaires businesses and subsidiaries and charges back the cost. This centralized system permits optimum management of liquidity risk through a detailed knowledge of the various gaps. Observation ratios have been approved by the ALM committee. In conjunction with the Finance Department, Global Debt & Derivatives Markets is also responsible for monitoring prudential requirements (shortterm liquidity ratio and long-term financing ratio) and internal prudential ratios validated by the ALM committee.
n Currency risk Currency risk is broken down into two components: n Operational currency risk, generated by the trading activities. The potential loss limit is €3 million.This risk is monitored by the Markets Risk committee and the ALM committee.
2.24 – OPERATIONAL RISKS Operational risk is defined as the risk of loss due to inadequacies or deficiencies in processes, people and systems, or to external events.
The operational risks committee met six times in 2004. Its work mainly covered the introduction of an operational risk management system in each business line, in conjunction with the work being carried out at group level, and continuation of work on the group business recovery plan and more specific plans for each business line.
Work on identifying and systematically measuring operational risks, and identifying and analyzing losses continued during 2004.
n Organization structure and resources The Compliance department was further restructured in 2004 by hiring new people and assigning them to the various business lines.
Most of the business lines have made considerable progress in making the compliance officers an integral part of their operating team.
The compliance officers have an ongoing relationship with the supervisory authorities and take part in various marketplace projects and working groups.
2.26 – FRAUD PREVENTION The Fraud Prevention department was created in October 2003 and reports to the General Secretariat. Its mission is to ensure that Natexis Banques Populaires meets all legal and regulatory requirements concerning money laundering, terrorism financing and corruption. Its resources have been considerable strengthened.
It had two key focuses during the year. First, continuous campaigns to heighten employee awareness of the issues involved in money laundering through information and training, and second, the implementation of a new payments filtering software used by most major banks to comply with the requirement to freeze the assets of entities suspected of taking part in terrorism financing.
With this in mind, the money laundering manual was updated and circulated to employees on a named basis in June 2004.
The payments filtering software, developed by Fircosoft, was installed in early 2004.
2.27 – INFORMATION SYSTEMS SECURITY The Information Systems Security department is responsible for drawing up the information systems security policy and rules to be respected within Natexis Banques Populaires.The information systems security officer plays a central role in designing, developing and overseeing information systems security.His role in managing information technology risk is as follows: n providing advice to Executive Management and all employees, and providing an interface with external partners (service providers, auditors, etc.) and internal units (IS unit, departments, subsidiaries, Executive Management, etc.); n drawing up rules, procedures and products to ensure information systems security, and their documentation (security policy, charter, etc.) encompassing both logical and physical security; n providing training and awareness campaigns, in close coordination with the communications department, for all group staff, partners and even institutional and retail clients. Organizing training seminars for employees is an integral part of the awareness function; n control and oversight incorporating a risk approach, effective action plans and procedures to follow in case of incident; n managing risk from both a planning and operational point of view, covering information technology risks and developing business backup and recovery plans.
The information systems security officer sits on and takes an active part in all the main committees responsible for operational risk, including: n internal control overarching committee; n operational risks committee; n information systems security committee.
Apart from its ongoing responsibilities, in 2004 the ISS department placed a special focus on security policy, legal developments and staff awareness, including: n the security policy and security standards for networks, data and transactions; n upgrading the information systems security charter, which will be included in the bank’s handbook in early 2005; n a review of the impact on Natexis Banques Populaires of regulatory developments as a result of law 2004-575 of June 21, 2004 on confidence in the digital economy and law 2004801 on the protection of personal data.
2.31 – PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS The Finance department is responsible for preparing the consolidated financial statements of Natexis Banques Populaires using the consolidation system and manual developed by Banque Fédérale des Banques Populaires. As a listed company, Natexis Banques Populaires is required to prepare its own consolidated financial statements, although it also forms a subset of the Banque Populaire Group, which has a much broader scope of consolidation. Its consolidation process is therefore independent from but still inextricably linked with that of its parent.
The reliability of this process is based on the following core principles: n definition and communication of accounting principles applicable to group companies including the analysis and interpretation of new texts issued during the period; n use of the direct consolidation method (currently under development in the Coface sub-group), to permit detailed examination of the consolidation packages of consolidated entities according to a formal review process; n use of a single consolidation system for all consolidations and sub-consolidations conducted within the Natexis Banques Populaires group (currently under development in the Coface sub-group) in order to guarantee the internal consistency of the scope of consolidations, definitions, standards, charts of accounts, processing sequences and analyses; n checking of data reported by consolidated entities through the use of a consolidation package including more than 5,800 accuracy and consistency tests which must be completed for the data to be transmitted; n item by item analysis of all entries that impact on consolidated shareholders’ equity and production of a tax proof for each consolidated entity in order to provide full evidence of consolidated shareholders’ equity and individual justification of deferred taxes; n an audit trail system to trace the accounting data published in the financial statements and the notes back to the accounts of each consolidated entity and the consolidation adjustments; n archiving and security procedures including twice-daily back-up of the unified consolidation database and regular data recovery testing; n regular training of accounting teams in the consolidated entities and promoting the use of best practice throughout the Natexis Banques Populaires group.
Further measures were taken in 2004 to improve the reliability of this process: n In early 2004, the Finance department launched a project to reduce deadlines for producing the consolidated financial statements, which led to a gain of eight days compared with the 2003 timetable.
n Following the project to include the Coface sub-group in the consolidation process, Natexis Banques Populaires was able to analyze and control the contribution of Coface subsidiaries to consolidated earnings, shareholders’ equity and deferred taxes in 2004.
2.32 – INTERNAL CONTROL PROCESSES AT THE LEVEL OF THE CONSOLIDATED ENTITIES As part of the regulatory process implemented by the French Banking Commission (CRBF Regulation 97-02) for prudential monitoring of credit institutions, the Internal Audit department of Natexis Banques Populaires uses the results of its periodic audits to assess the internal control procedures, and particularly accounting and financial procedures, of all entities within the scope of consolidation, whether or not they have credit institution status.
Reflecting the decentralized nature of the Natexis Banques Populaires group, as most subsidiaries have their own management and control functions, internal control procedures are tailored to the organization of each of the consolidated entities. In all cases, the process includes several layers of controls: n basic permanent controls are included in processing programs at the operational level; n second-tier independent checks of processing operations performed by the Finance and Accounting departments, to ensure the accuracy and completeness of accounting data;
n Audits carried out by the French Banking Commission in its role as banking regulator. The bank’s parent company and consolidated accounting procedures and accounting controls were audited in early 2004.
These strategies will remain a key focus for Natexis Banques Populaires in 2005. Work will continue on harmonizing its internal control and risk management system in line with developments in its business activities and in accounting, banking and financial regulations (IFRS, CRBF 97-02 as amended on operational risk and compliance control).
It is our responsibility to report to you on the information and statements contained in the Chairman’s report with respect to internal control over the financial reporting process.
We conducted our investigations in accordance with the professional standards applied in France.Those standards require that we perform procedures to assess the fairness of the information contained in the Chairman’s report with respect to internal control procedures over the financial reporting process.These procedures principally consisted of: n familiarizing ourselves with the internal control objectives and general organization, as well as internal controls over the financial reporting process, as presented in the Chairman’s report; n familiarizing ourselves with the procedures underlying the information presented in the report.
On the basis of our investigations, we have no particular comment to make on the information and statements with respect to internal control over the financial reporting process contained in the Chairman’s report, prepared in accordance with Article L225-37 of the French Commercial Code.
Resolutions to be put to the vote at the Annual General Meeting of May 19, 2005 207
NOTICE OF MEETING Shareholders’ meetings are called by the Board of Directors in accordance with the provisions of the law. Meetings take place either at the company’s head office or at any other place specified in the notice of meeting.
ADMISSION TO MEETINGS All shareholders are entitled to attend and vote at general meetings in person or by proxy in accordance with the provisions of the law, regardless of the number of shares they hold.
Shareholders may vote by mail using a voting form completed and returned to the company in accordance with the provisions of the law.
EXERCISE OF VOTING RIGHTS Under article 26 of the bylaws, shareholders are entitled to one vote for each share held subject to the following conditions.
Double voting rights are attached to all fully paid registered shares which have been registered in the name of the same shareholder for at least two years and to any bonus shares issued upon capitalization of reserves, retained earnings or additional paid-in capital in respect of shares entitled to double voting rights.
IDENTIFICATION OF SHAREHOLDERS Under article 5 of the bylaws, the company may, in accordance with the provisions of the law, request any authorized organization or intermediary to provide information about the identity of holders of securities conferring immediate or future voting rights in the company, including their name, nationality and address, the number of securities held, and any restrictions attached thereto.
2 – Report of the Board of Directors on the resolutions to be put to the vote at the annual general meeting
The second resolution seeks approval of the related party agreements described in the Statutory Auditors’ special report.
The third resolution concerns the transfer of sums between reserve accounts pursuant to the provisions of the French 2004 amended Finance Act.
COMPOSITION OF THE BOARD OF DIRECTORS (SEVENTH RESOLUTION) A non-voting Director is due to retire by rotation and the Board is seeking his re-election.
AUTHORITY TO THE BOARD OF DIRECTORS TO INCREASE THE CAPITAL STOCK (EIGHTH TO TWELFTH RESOLUTIONS) The Board of Directors is proposing a series of resolutions pursuant to the new French Securities Act passed on
June 24, 2004.They include a resolution seeking authority to increase the capital stock on one or more occasions at the Board’s discretion, with or without pre-emptive rights, for a period of twenty-six months in accordance with the law.They also include a resolution seeking authority to increase the capital stock in connection with certain specific transactions, such as share exchange offers.
AUTHORITY TO THE BOARD TO MAKE EMPLOYEE SHARE ISSUES (FOURTEENTH RESOLUTION) On December 31, 2004, the employees held 3.37% of the capital stock. Accordingly, there is no need to call an extraordinary general meeting as provided for under paragraph 2 of article L225-129-6 of the French Commercial Code, as is the case when the employees of a company hold less than 3% of the capital stock.
Having received and considered the management report on the operations of Natexis Banques Populaires for the year ended December 31, 2004, the financial statements for that year and the reports of the Statutory Auditors, the shareholders hereby approve the financial statements as presented, including the following transfers to and from the retained earnings account since December 31, 2003: n Retained earnings at December 31, 2003 after appropriation of 2003 net income €39,362.12 – Transfer of 2003 dividends in respect of Natexis Banques Populaires shares held by the company at the time of payment in 2004 €3,746,387.50
Summary: the purpose of this resolution is to seek approval of any related party agreements governed by article L225-38 of the French Commercial Code as presented in the Statutory Auditors’ special report.
The shareholders hereby approve the special report of the Statutory Auditors on related party agreements governed by article L225-38 of the French Commercial Code.
Third resolution: Appropriation of reserves pursuant to the French 2004 amended Finance Act
Summary: the purpose of this resolution is to take account of the provisions of the French 2004 amended Finance Act, which requires
Pursuant to the provisions of article 39-IV of the French 2004 amended Finance Act, which requires sums carried in the long-term capital gains reserve at the end of the first financial year after December 31, 2004 to be transferred to another reserve account before December 31, 2005, the shareholders hereby authorize: – the transfer of the long-term capital gains account carried in the balance sheet at December 31, 2004 in the sum of €192,427,259.70 to an ordinary reserve account; – the transfer of the exit tax payable at the rate of 2.5%,being €4,798,181.49 , recognized in retained earnings at December 31, 2004, to the same ordinary reserve account.
Having considered the appropriation of earnings proposed by the Board of Directors, the shareholders hereby approve their proposal and resolve as follows: n first: – to allocate the year’s net earnings of €213,582,296.25
– to the legal reserve in the sum of €10,679,114.81 leaving a sum available for distribution of €190,153,796.57 n second: – to pay a dividend of €159,244,674.60
– to make a transfer to the general reserve in the sum of €30,900,000.00
– to transfer the balance to retained earnings, in the sum of €9,121.97 making a total sum distributed of €190,153,796.57
The dividend for the year ended December 31, 2004 is therefore €3.30 per share for each of the 48,255,962 shares comprising the capital stock. The dividend is payable as of May 25, 2005.
For information, as required by law, dividends paid in the previous three years were as follows: Dividend per €16 par value share €2.50 €1.50 €2.50
All dividend payments made after January 1, 2005 to natural persons resident in France for tax purposes are eligible for the 50% tax allowance referred to in article 93 of the French 2004 Finance Act.
Summary: the purpose of this resolution is to authorize the company to trade in its own shares under the new terms and conditions set out in European Directive 2003/6/EC of January 28, 2003, which came into effect on October 13, 2004, and in European regulation 2273/2003 of December 22, 2003.
Having received and considered the Board of Directors’ report and the information provided in the prospectus approved by the Autorité des Marchés Financiers, the shareholders hereby authorize the Board of Directors, which authority may be delegated, to purchase shares in the company in accordance with the provisions of article L225-209 et seq. of the French Commercial Code, for a period of eighteen months.
The purpose of this authority is to enable the company to: – ensure liquidity or make a market in the shares through an independent investment services provider under the terms of a liquidity agreement; – optimize management of the company’s financial and equity position; – allot shares to employees under the terms and conditions provided for by law, more particularly as part of a profitsharing agreement, a stock option plan or an employee stock ownership plan; – offer the shares in payment or exchange, particularly with respect to acquisitions; – cancel the shares purchased; – hold, exchange, sell, contribute or otherwise transfer the shares.
of the date of this meeting, and the total investment cost may not exceed €337.79 million.
The shareholders hereby re-elect Michel Goudard as nonvoting Director for a term of six years ending on the date of the annual general meeting held to approve the financial statements for the year ending December 31, 2010.
The shareholders shall have pre-emptive rights over the securities issued pursuant to this resolution in proportion to the number of shares they hold.
Ninth resolution: Authority to the Board of Directors to increase the capital stock by issuing common shares or other securities conferring rights in the capital stock, without pre-emptive rights in favor of existing shareholders
This authority is granted for a period of twenty-six months with effect from the date of this meeting.
Financial Information Legal information exchange during the three trading sessions preceding the date on which the price is fixed, and may be accompanied by a discount of up to 5% maximum in accordance with the provisions of the decree of February 10, 2005.
Tenth resolution: Authority to increase the amount of shares issued in the event of oversubscription
For each of the share issues made pursuant to the eighth and ninth resolutions, the number of shares to be issued may be increased in accordance with the provisions of article L225135 -1 of the French Commercial Code and of the decree of February 10, 2005, if the issue is oversubscribed, within thirty days of the issue’s closing date and up to a maximum of 15% of the original amount of the issue and at the same price, without exceeding the overall limit referred to in the eighth resolution.
The shareholders hereby authorize the Board of Directors to issue shares,within the limit set in the ninth resolution and for a period of twenty-six months, as follows: n for the purpose of paying for shares transferred to the company under a offer in accordance with the provisions of article L225-148 of the French Commercial Code; n to pay for contributions in kind comprising equity securities or other securities conferring rights in the capital stock, where the provisions of article L225-148 of the Commercial Code do not apply, after obtaining a report from the accountants appointed to value the transaction and up to a maximum limit of 10% of the company’s capital stock.
Capital increases made pursuant to this resolution shall be deducted from the global maximum limit set in the ninth resolution.
Twelfth resolution: Authority to the Board of Directors to increase the capital stock by capitalizing additional paid-in capital, reserves, earnings or other
Summary: the purpose of this resolution is to renew the authority granted at the annual general meeting of May 31, 2001, which expires this year, to grant employees of Natexis Banques Populaires and its subsidiaries and other employees of the Banque Populaire Group, options to subscribe for new or purchase existing shares in the company.
The shareholders accordingly authorize the Board of Directors to increase the share capital on one or more occasions up to a maximum limit of 500,000 options, plus the additional number of options to be granted as required by law to preserve the rights of stock option holders.
In the case of options to purchase existing shares, the exercise price may not be less than 97% of the average purchase price paid by the company for its shares under the provisions of articles L225-208 and L225-209 of the French Commercial Code.
The shareholders confer full powers on the Board of Directors to designate the beneficiaries of the options, to fix any additional terms and conditions of grant and exercise of the options in line with the principles set out above, and to complete all formalities required to place on record the capital increase arising from exercise of the options.
Having received and considered the report of the Board of Directors and the special report of the Statutory Auditors, the shareholders hereby authorize the Board of Directors to increase the share capital on one or more occasions by issuing new shares to employees of the company.
The total number of shares that may be issued pursuant to this authority may not exceed 500,000.
The shareholders confer full powers on the Board of Directors to set the terms and conditions of eligibility for the share issues, and more particularly any length of service conditions, the opening and closing dates for applications and other terms and conditions of the capital increase.
In accordance with the law, this authority is valid for a period of twenty-six months.
Fifteenth resolution: Authority to the Board of Directors to reduce the share capital as part of a share buyback program
Having received and considered the report of the Board of Directors and the special report of the Statutory Auditors, and voting under the quorum and majority conditions required to transact extraordinary business, the shareholders hereby authorize the Board of Directors to cancel at its own discretion on one or more occasions shares purchased or which may be purchased in the company pursuant to the provisions of article L225-209 of the French Commercial Code, up to a maximum of 500,000 shares or 1.03% of the capital stock, and to reduce the capital stock accordingly in accordance with the provisions of the law.
The maximum par value of capital stock cancelled may not exceed €8 million.
The shareholders hereby confer full powers on the bearer of a copy or abstract of the minutes of this meeting for the purpose of completing any filing or publication formalities required by law.
FINANCIAL YEAR The company’s financial year runs from January 1 to December 31.
APPROPRIATION OF EARNINGS (TITLE V, ARTICLE 34 OF THE BYLAWS) After deduction of any prior year losses, a minimum of 5% of each year's earnings shall be transferred to the legal reserve as required by law.This provision shall no longer apply once the legal reserve has reached one tenth of the value of the company's capital stock, but shall be reinstated if for any reason the legal reserve falls back below this minimum requirement.
*Under some circumstances, options may be exercised early (e.g. offers by third parties involving Natexis Banques Populaires S.A.’s capital stock, beneficiary’s retirement, negotiated departure or death).
CAPITAL STOCK AUTHORIZED BUT NOT YET ISSUED At their annual general meeting of May 31, 2001, the shareholders authorized the Board of Directors to make capital increases on one or more occasions, with or without pre-emptive rights in favor of existing shareholders.This was a global authority for a maximum non-cumulative amount of €150 million, granted in accordance with article L 225-129 para. 3 of the French Commercial Code for a period of twenty-six months.
This authority was renewed for the same amount and the same period at the extraordinary general meeting of shareholders held on June 22, 2003.
The exercise price is equal to the average price quoted in the twenty trading sessions preceding the date on which the Board of Directors fixed the terms and conditions of grant, with a discount of 5%, as provided for by law.
Total number of Average weighted 1998 plan 1999 plan options exercised price (€)
The table below shows the additional paid-in capital arising on each capital increase.
Year Transaction Number of shares Capital stock Additional paid-in capital (€) arising on the capital increase (€)
New shares issued in exchange for transfer of the Bail Banque Populaire shares owned by the Banque Populaire regional banks 606,225 9,699,600 25,256,952.52
Conversion of perpetual subordinated notes convertible into shares 258,527 4,136,432 13,007 869.36
Shares issued in exchange for the acquisition of Arnhold & S. Bleichroeder shares 1,401,082 22,417,312 83,448 443.92
Banque Fédérale des Banques Populaires 75.59 83.84 o/w employees (Alizé Levier plan) 2.18 2.54
EMPLOYEE STOCK OWNERSHIP By extraordinary resolution at their general meeting of June 16, 1998, the shareholders renewed for a further five years the provisions adopted at their meeting of April 27, 1993 concerning the creation of employee stock ownership plans, with a maximum authorized cumulative capital increase of FRF 100 million or its equivalent in euro. As of December 31, 2004, these plans held 1,624,830 shares.
By extraordinary resolution at their general meeting of May 31, 2001, the shareholders authorized the Board of Directors to issue new shares to employees of the Banque Populaires Group on one or more occasions, up to a maximum of 2,500,000 shares, for a period of five years.
SHARES HELD BY DIRECTORS AND EXECUTIVE DIRECTORS Members of the Board of Directors, whether natural or legal persons, own 73.41% of the capital stock of Natexis Banques Populaires (almost entirely Banque Fédérale des Banques Populaires).
TRENDS IN AVERAGE MONTHLY PRICES AND TRADING VOLUMES SINCE SEPTEMBER 2003
Dividends paid in the past five years: Number of shares comprising the share capital 42,719,392 44,314,352 47,442,837 48,045,139 48,255,962 *To be proposed at the annual general meeting of May 19, 2005.
BACKGROUND Natexis Banques Populaires was created following the transfer of the operating activities of Caisse Centrale des Banques Populaires (CCBP) to Natexis S.A.The transfer was approved by the shareholders of both entities in extraordinary general meetings held on July 27, 1999.
Under the law of May 15, 2001, BFBP replaced CCBP as central body of the Banque Populaire Group.
HISTORY OF THE ENTITIES COMPRISING NATEXIS Founded in 1919, Crédit National initially focused on developing its business as a medium and long-term lender before branching out into related activities in order to offer its corporate clients a broader and more comprehensive solution to their needs.
During 1996, Crédit National increased its stake in Banque Française du Commerce Extérieur (BFCE) from 10.06% to 88% and then 100%. BFCE, which was founded in 1947, had focused on developing its commercial banking activities while gradually scaling back its export support activities on behalf of the French State.
SIMPLIFICATION AND UNIFICATION OF LEGAL STRUCTURES Natexis Banques Populaires was created in July 1999 following the transfer of CCBP’s operating activities to Natexis S.A.
At their extraordinary general meeting of June 28, 2000, the shareholders of Natexis Banques Populaires approved the merger of Natexis Banque into Natexis Banques Populaires, with effect from June 30, 2000.As the transaction involved a wholly-owned subsidiary, it took place under the simplified merger regime and no new shares were issued.
From 2000 to 2002, Natexis Banques Populaires took measures to obtain full control over its subsidiaries. In 2000, it carried out transactions giving it 100% control over Assurances Banque Populaire and Factorem.A similar process took place in 2001 in the private equity and asset management arms.The program was completed in 2002 with
the buyout of the Banque Populaire banks’ holdings in BPAM and Interépargne.
ARRIVAL OF NEW SHAREHOLDERS IN NATEXIS BANQUES POPULAIRES IN 2002 In May 2002, the German bank DZ Bank AG acquired shares in Natexis Banques Populaires as part of its partnership with the Banque Populaire Group. At December 31, 2004, its holding amounted to 1.88%.
In July 2002,Natexis Banques Populaires agreed to acquire the entire capital stock of Arnhold & S. Bleichroeder Holdings Inc. (“ASB”), a company incorporated under the laws of New York State, for the sum of USD105 million, payable in Natexis Banques Populaires shares.
At an extraordinary general meeting held on December 6, 2002, the shareholders of Natexis Banques Populaires approved all the provisions of this agreement, as well as the transfer value of ASB shares. The shareholders approved a capital increase of €22,417,312 via the issuance of 1,401,082 fully paid €16 par value shares to pay for the acquisition.
At December 31, 2004, ASB held 2.89% of Natexis Banques Populaires.
EXCEPTIONAL EVENTS AND LITIGATION There are no exceptional events or litigation pending likely to have a material adverse impact on the company’s operations, results or financial position.
SUBSTITUTE AUDITORS – BEAS: 7/9 Villa Houssay - 92200 Neuilly-sur-Seine – François Chevreux: 40, rue Guersant - 75017 Paris – Pascal Macioce: 41, rue Ybry - 92576 Neuilly sur Seine
The acting and substitute auditors were appointed or re-appointed at the annual general meeting held on May 27, 2004 for a term of six years ending on the date of the annual general meeting held to approve the financial statements for the year ended December 31, 2009.
This is a free translation into English of the statutory auditors’ report on the shelf-registration document issued in the French language and is provided solely for the convenience of English speaking readers. The statutory auditors' reports on the individual company financial statements and consolidated financial statements, referred to in this report, include information specifically required by French law in all audit reports, whether qualified or not, and this is presented after the opinion on the financial statements.This information includes explanatory paragraphs discussing the auditors’ assessments of certain significant accounting and auditing matters.These assessments were considered for the purpose of issuing an audit opinion on the individual company financial statements and consolidated financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the individual company financial statements and consolidated financial statements.This report should be read in conjunction with, and construed in accordance with French law and professional auditing standards applicable in France.
As statutory auditors to Natexis Banques Populaires and as required by article 211-5-2 of the general regulations of the Autorité des Marchés Financiers, we have verified the information concerning the financial position and historical financial statements included in this shelf-registration document in accordance with the professional standards applied in France.
This shelf-registration document is the responsibility of François Ladam, Chief Executive Officer of Natexis Banques Populaires. Our role is to express an opinion on the fairness of the financial information contained therein.
The shelf-registration document does not include any isolated forward-looking information resulting from a structured modeling process.Accordingly, we were not required to review any assumptions or related estimates made by the company’s management.
The parent company financial statements for the year ended December 31, 2003, as approved by the Board of Directors, were audited by Barbier Frinault & Autres, Salustro Reydel and Deloitte Touche Tohmatsu in accordance with the professional standards applied in France.They expressed an unqualified opinion on those financial statements.Their report contained an emphasis of matter paragraph concerning a change in method of accounting for loan loss provisions and for major repair programs, as described in note 17 to the financial statements.
Based on our investigations,we have no comments as to the fairness of the financial information and financial statements presented in this shelf-registration document.
As this annual report is registered as the company’s shelf-registration document, the following table indicates the page numbers containing the headings required under Autorité des Marchés Financiers regulations.
BUSINESS OPERATIONS Organization structure p. 30, 220 Key figures inside cover Industry data p. 79 to 91, 141 Markets and competitive positioning p. 32 to 57
CORPORATE GOVERNANCE Composition and operation of the Board of Directors p. 8, 10 Composition and operation of the Board committees p. 17 Executive directors (compensation and benefits, stock options granted and exercised) p. 20, 214 Top ten employees excluding executive directors p. 215 Related party agreements p. 195
Only the original French version can be used to support a financial transaction, provided it is accompanied by a note d’opération duly certified by the Autorité des Marchés Financiers. The shelf-registration document was produced by the issuer, and the signatories to it are responsible for its contents.