It includes an assessment of the probability of default (PD) within one year for individual counterparties, and the loss given default (LGD) for individual transactions.
Pursuant to regulatory requirements, all counterparties in the banking portfolio and the related exposure must have an internal rating when they: a incur a loan or are assigned a limit; a guarantee a loan; a issue securities used as collateral for a loan.
FINANCIAL DATA6 Management Report a internal rating methodologies specific to the various Basel asset classes, consistent with Natixis’ risk profile; a an IT system used for managing the successive stages of the rating process, archiving every step in the process through to the validation of the final rating; a processes, procedures and controls that place internal ratings at the heart of the risk-management system, from transaction origination to ex-post analysis of defaulting counterparties and the losses incurred on the relevant loans; a periodic revisions to rating methodologies and risk parameters.
At the end of 2009, Natixis adopted internal rating methods specifi c to the various Basel asset classes with a view to complying with the IRBF internal rating approach for the following exposure categories: sovereigns, banks and corporate entities.
Natixis also has a system of LGD ratings for commitments across the same asset classes and, with a view to the pending switch to IRBA(*), a PD/LGD ratings systems for specialized fi nancing.
Natixis uses internal rating systems for exposure to securitization issues. Natixis acknowledges and uses, in determining securitization exposure limits, the assessments provided by external credit rating agencies.
A statistics-based model developed by the Groupe BPCE , which assesses the likelihood of default within one year, is also used for corporate entities for which corporate fi nancial statements are available.
Default probability scales are established: a using statistics models based on mapping showing the correlation between internal ratings and the associated rates of default for the three rating agencies with respect to major counterparties; a using historical internal default data for “small” corporate entities with corporate and consolidated financial statements; a using mapping based on rating-agency data for sovereigns.
Natixis checks whether default probability scales are consistent with actual default rates in its portfolio.
The Risk Control Department carries out various types of controls as part of its monitoring function. It ensures that procedures are correctly applied, that the internal rating system works properly, and that the data used in the various rating systems are reliable. The Risk Control Department also organizes regular training and support sessions aimed at rating-system users.
The principles used in identifying, measuring and managing credit risk hedging instruments comply with the recommendations of the Basel Committee agreement. The decision on whether a guarantee’s risk-reducing effects make it eligible to be included in risk-exposure calculations is made on a case-by-case basis. Checkpoints are set up throughout the process. They cover the approval of the transaction, the
The business lines carry out day-to-day monitoring, the middle offi ce oversees fi nancing, and the Risk Control Department conducts second-tier controls.
Breaches of exposure limits are reviewed during monthly dedicated Committee meeting. The Committee analyzes the evolution of these on the basis of specifi c indicators (number, business lines concerned, etc.). It looks closely at signifi cant breaches and monitors their return to normal.
The work of the Provisions Committee is based on reviews carried out by the Counterparty Watch List Committee, the same case analysis materials being presented at meetings.
For the latter, objective writedown indicators are sought using analysis and close monitoring of business sectors and countries. Objective writedown indices generally comprise a range of micro- or macroeconomic indicators specifi c to the sector or country concerned. When necessary, an expert opinion is sought to fi ne-tune the result.
The following table sets out the exposure of all the Natixis’ fi nancial assets to credit risk. This exposure does not take into account guarantees, sureties, credit-default swaps, collateral
Available-for-sale fi nancial assets (excluding variable-income securities) 25,256 (207) 25,049 25,572
Loans and receivables to customers 103,382 5,708 (3,187) * 105,903 115,604
Held-to-maturity fi nancial assets 5,485 5,485 6,411 * Including collective provisions.
Exposure at risk by category and average risk exposure over the period
Exposure at default by asset class, excluding securitization, deducted from regulatory capital
Small and medium-sized businesses recorded in the retail customers category 2,271 2,160 2,226 1,770
Other exposure recorded in the retail customer category 6,524 1,846 1,739 3,651
The decline in exposure at default in 2009 refl ected change in Natixis’ loans outstanding and the Company’s policy aimed at containing risk. It also stems from the exit of Caceis from the prudential scope.
(Breakdown as a %) Category of exposure Basel asset class France
Other exposure recorded in the corporate entities category 20.5% 10.3% 5.7% 4.0% 40.4% 40,7%
Sovereigns Governments and central banks 1.2% 0.8% 0.4% 0.9% 3.3% 1,4%
Small and medium-sized businesses recorded in the retail customers category 0.8% 0.0% 0.0% 0.0% 0.8% 0,7%
* O/w the portion relative to the Groupe BPCE : 10% at end 2009 compared with 5.8% at end 2008.
Other exposure recorded in the corporate entities category 14,663 15,850 13,047 34,627 18,910 286 97,382 119,211
Small and medium-sized businesses recorded in the corporate entities category 316 328 700 1,136 1,676 4,157 5,898
Sovereigns Governments and central banks 1,942 803 1,207 1,374 1,670 6,996 5,230
Small and medium-sized businesses recorded in the retail customers category 431 51 149 800 729 2,160 1,770
Breakdown of collective provisions by business sector as of December 31, 2009
78.6% of collective provisions on the Finance and Insurance sector comprise provisions covering CDPC (credit derivative product companies).
Exposure at risk by asset class and by approach as at December 31, 2009
Other exposure recorded in the corporate entities category 89,556 7,957 97,513
Small and medium-sized businesses recorded in the retail customers category 2,160 2,160
(Data excluding specialized fi nancing and equities; for the latter, see Section 5.11 “Exposure to the banking portfolio’s equities”).
The breakdown of exposure shows Natixis’ credit risk to be high quality, with more than 76% deemed to be of investment grade, up slightly compared with December 31, 2008.
Average weightings as of December 31, 2009 by internal rating (S&P equivalent)
For each transaction, the proportion of RWAs is calculated not only on the basis of the counterparty’s internal rating (probability of default), but also depending on whether the exposure is senior or subordinated, on the nature of the assets received as collateral (rate of loss in the event of default), the nature of off-balance sheet commitments (credit equivalent conversion factor) and the maturity.
Specialized fi nancing benefi ting from “strong” or “good” ratings (50%, 70% and 90% weightings) account for 79% of risk-weighted assets in this asset class.
Exposures covered by fi nancial and tangible collateral by category of exposure (client asset class) as at December 31, 2009
Small and medium-sized businesses recorded in the corporate entities category 1,044 123 233 615
Small and medium-sized businesses recorded in the retail customers category 47 47 47
Other physical collateral is collateral other than securities, fi nancial instruments, real estate or loans. Tangible assets collateral are real estate or related mortgages, in accordance with Articles 166.2 and 183.1 of the February 20, 2007 order.
Financial collateral are securities and other instruments constituting tangible collateral in accordance with lines b) to f) of Article 338.3 of the February 20, 2007 order.
The Market Risk Committee is tasked with defi ning the bank’s market risk policy and ensuring it is complied with. As the operational extension of the executive body, the Committee is endowed with all the decision-making powers required to carry out its role with regard to market risk issues.
It meets on a bi-monthly basis and is chaired by the Chief Executive Offi cer or his/her delegated representative, a member of the Executive Management Board. Extraordinary Meetings can be held if necessary.
The Market Risk Committee determines the market risk policy which comprises in particular the following elements: a setting and reviewing of VaR limits, operational limits, stress tests and loss alert limits; a establishing delegations for validation purposes; a reviewing risk exposure with a focus on a specific class of risk, class of asset or pay-off wherever necessary; a providing information on methodological changes to the calculation of VaR and stress tests; a providing quarterly summaries of breaches (VaR, loss alerts, operating limits); a providing communication on backtesting; a reviewing delegated decisions after they have been taken; a providing information on the validation of market risk methodologies and fair value adjustments, and on the validation of models.
In addition, procedures were reinforced internationally via the implementation of an international market risk charter. This charter set out the principles of a reinforcement of interactions between central and local staff.
The Market Risk Department has two divisions: an operational division and a cross-function division.
These sub-divisions are responsible for monitoring activity. They also represent the Department in its relations with the various front offi ces.
Each sub-division carries out the following functions for their specifi c scope: a analysis and control of market risks and preparation of the corresponding reports; a regular monitoring of positions and their gain/loss; a monitoring and analysis of specific stress tests; a proactive risk management; a setting of limits and risk indicators; a validation of valuation models (pricers); a defining provisioning and fair value adjustment policies (for liquidity risk, risks related to non-hedgeable parameters, model risks, etc.).
They are also tasked with defi ning appropriate risk-measurement methodologies for their respective sectors.
The cross-function division is responsible for all consolidated reports submitted to management and management bodies (executive management, BPCE, French Banking Commission and front offi ce management), implementing standards and procedures applicable to all entities (subsidiaries and branches) with respect to market risks, international coordination and technology watch, as well as relations with internal and external auditors and follow-up on their recommendations. It is also tasked with calculating VaR and carrying out backtesting. Lastly, it has a project-management role.
Natixis uses methodology designed to measure market risks incurred by its various entities to control market risks.
Different techniques are used to measure market risk: 1- Synthetic measures of VaR to identify potential losses in each business, based on a pre-determined confidence level (e.g. 99%) and time period (e.g. 1 day). They are compiled and monitored on a daily basis for all Natixis’ trading operations.
Procedures providing for the periodic revision of risk factors, rounding out the existing procedures, were defined. Quantitative and objective criteria for measuring the relevance of risk factors were also created.
Natixis mechanism is based on two categories of stress tests: overall stress tests and specific stress tests for each business.
The methodology formerly used to calculate VaR, based on one year historic data, is still monitored in parallel on a day-to-day basis.
The steady decline in VaR levels was accompanied by a gradual reduction in the associated VaR limits.
J OVERALL NATIXIS VaR – TRADING PORTFOLIO (1 DAY VaR 99%)
Breakdown of overall VaR for trading operations by type of risk
The strong reductions in general interest rate risk (-€27.9 million) and general equity risk (-€21.6 million) over the year are noteworthy, and testify to a considerable reduction in associated market positions and risk.
The robustness of the VaR indicator is regularly measured by comparison with the change in daily trading results: this exercise allows ex-post loss potential, as provided ex-ante by VaR, to be compared with actual outcomes.
The chart below sets out the results of this exercise on the regulatory scope.
Fi na nc ia l i ns tit ut io n de fa ul t
Natixis continued work done to adjust and redefi ne its overall stress tests (hypothetical and historic). Three new historic stress tests (in addition to the existing six) and two new hypothetical stress tests (in addition to the existing three) have been implemented.
For the Natixis S.A. parent company scope: a the financing business has no delegation for transformation in terms of rates and liquidity, and financing deals are individually backed to treasury. The operational management of liquidity and its transformation, a legacy of these operations, is delegated to the Global Treasury Department; a the market operations, whose portfolios rotate at a faster rate than those of the financing business , rely on the treasury for their net refinancing requirements, within the framework of predefined volumes of liquidities.
Natixis’ overall interest rate risk is defi ned as the risk of losses on the banking portfolio stemming from the mismatching of interest rates on assets and on liabilities. It is essentially linear and focused on the euro and the US dollar, and results primarily from mismatching positions on contractual transactions. The most signifi cant positions concern exposure to the short end 5.4.4 - REGULATORY CAPITAL REQUIREMENTS
Natixis’ overall interest rate risk is monitored to track the sensitivity of the portfolios’ economic value on the basis of their position on the yield curve and their currency. In the global Treasury Department, which centralizes most of the global mismatching positions, the system also includes 1-day 99% VaR measurements (1). These measurements are subject to limits set by the ALM Committee on proposal of the Risk Control Department and tracked on a day-to-day basis for the Treasury Department and on a monthly basis for subsidiaries.
Natixis’ overall interest rate risk is immaterial in respect to the volumes of the positions managed and does not warrant any special comments; the shock resulting from the application of Basel II standards (+200 bp instantaneous variation to yield curves) at December 31, 2009 would have resulted in writedown of approximately €50 million to the economic value of the portfolio. This represents a signifi cant reduction compared with the previous year.
With respect to transformations carried out over the medium term, liquidity gaps are calculated monthly on an annual basis until the relevant operations and the associated coverage ratios (3) by maturity class have been run down. These ratios are bound by minimum coverage ratios validated by the ALM Committee, which represent limits to transformation carried out by the g lobal Treasury Department under the operational delegation allowed by the ALM Committee.
(2) Defi ned for each type of maturity as the ratio of residual liabilities to residual assets. A negative gap on twelve-month maturities refl ects a projected refi nancing requirement at that date.
(3) Defi ned for each maturity class as the ratio of residual liabilities to residual assets.
The minimum coverage ratios at December 31, 2009 are as follows: One year
Lastly, in accordance with recommendations by regulatory authorities, this mechanism now includes liquidity stress tests aimed at measuring Natixis’ capacity to deal with systemic crisis scenarios, specifi c and combined, from a three-month perspective. Stress assumptions were reviewed in 2009 in the light of the crisis of the fourth quarter of 2008. The results of these simulations are consolidated by BPCE to allow the impact of offsetting between its affi liates to be monitored.
Structural foreign exchange risk comprises foreign exchange positions for which the revaluation involves recyclable equity. It stems from net investments refi nanced by purchases of currencies other than that of equity. Structural foreign exchange risk is accordingly defi ned as the risk of loss of recyclable equity generated by an adverse movement in exchange rates against the euro.
Given the presence of weighted risks denominated in currencies other than the euro (mainly the US dollar), the ALM Committee has approved continued currency purchases to refi nance long-term investments in order to immunize the bank’s capital-adequacy ratio against change in the exchange rates against the euro.
The Operational Risk Department is tasked with: a operational risk measurement procedures: j listing incidents, j investigating serious incidents, j risk mapping, j environment indicators and variables; a procedures for limiting operational risks: j drawing up and monitoring action plans, j setting policies with respect to limits.
Natixis’ Operational Risk sector is divided into fi ve control divisions following the business lines’ organization and corresponding to Natixis’ homogeneous operations and business lines: a two “Markets” and “Financing” divisions for the Corporate and Investment Banking businesses; a a “Services” division for Specialized Financial Services, encompassing the subsidiaries: Natixis Paiements, Natixis Interépargne, Natixis Intertitres, Cie Européenne de Garanties et Cautions, Natixis EuroTitres, Natixis Financement, Natixis Lease and, since the end of the year, Natixis Factor; a a “Support” division dedicated to Natixis support functions; a an “Investment Solutions” division for the Investment Solutions business line.
The fi rst four of these control divisions are directly integrated to the Operational Risk Department. They currently include 40 operational risk managers, fi ve of whom are based outside France (London, Asia, America) and 23 of whom work out of subsidiaries but report to the Operational Risk Department.
For the Investment Solutions business line, the Insurance (Natixis Assurances) and Private Banking (Banque Privée 1818) business lines are monitored within the Operational Risk Department, with six dedicated operational risk managers.
Natixis’ Operational Risks Committee is responsible for setting out operational risk policy. As the operational extension of the executive body, the Committee is endowed with all the decision-making powers required to carry out its role with regard to operational risk issues. It meets quarterly and is chaired by the Chief Executive Offi cer or his representative, the Chief Financial Offi cer.
(1) Except issues of real estate bonds by Crédit Foncier de France and structured issues in private investments.
The Business Line Operational Risks Committee is an offshoot of Natixis’ Operational Risks Committee. It closely manages operational risk exposure in the various business lines. This Committee is chaired by the head of the business line concerned, and the Operational Risk Department is represented by the Head of Department or the head of operational risks for the division to which the business line belongs.
Excluding this exceptional incident, Natixis’ exposure varied from one half to the next in 2009: a the first half was severely impacted by the crisis: j the impact of market volatility on losses, j the use/rediscovery of less usual processes in periods of growth on the exercise of guarantees/disputes; a exposure narrowed in the second half, reflecting: j the redirection of business lines towards client-focused operations, j the segregation of the most complex operations, j the effects of corrective measures taken.
Accordingly, in 2009, Natixis’ exposure excluding Madoff fraud stabilized at a level comparable to that seen in 2008 and is expected to decline in terms of amount in 2010.
(1) An incident is considered serious in the following cases: - if the real or estimated fi nancial impact exceeds €50,000; - if the real or estimated reputational risk is signifi cant; this includes in particular cases where information that is either erroneous or prejudicial to the bank’s reputation is spread in an uncontrolled manner; - if it is behind a malfunction in the production of data used for piloting the bank’s operations: false data, delays or an absence of data production over periods of several days or frequently; - if it stems from “internal” or “external” fraud; - if the Operational Risks Department considers the incident to be serious; - if it is a near miss.
For the 145 other more frequent risks, the methodology used aims to calculate operational VaR for each risk situation, then the entity’s overall exposure, and to carry out studies pertaining to the sensitivity to and effi ciency of action plans.
The Insurance Department, which reports to the Legal Department, in the Corporate Secretariat’s offi ce, is tasked with analyzing insurable operational risks and taking out appropriate insurance cover.
The main risks analyzed are: a internal or external fraud; a reduction in the value of property; a liability risk (the Company’s civil operating and professional liability, as well as managers’ and executive corporate officers’ civil liability); a damage to operational assets (buildings and contents, IT hardware and data), as well as losses on banking operations due to such damages.
All Natixis’ entities accordingly benefi t from: a “combined” Overall Banking (securities and fraud) and Company Civil Liability (operational and professional) policies providing cover of €125 million per claim and/or per year of insurance; a civil liability insurance policies covering managers and executive corporate officers, and providing cover of up to €100 million per claim and per year of insurance.
This cover extends throughout the entire world, except for professional civil liability, where the guarantee does not extend to permanent establishment s in the United States (cover for US operations is purchased locally by subsidiaries or branches).
The fi nancial consequences, assessed at December 31, 2009, of those deemed likely to, or those that have in the recent past had a material impact on Natixis’ fi nancial situation and/or that of Natixis and its consolidated subsidiaries as a whole, their profi tability or their business, have been included in Natixis’ consolidated fi nancial statements.
The most important litigation is described below. Other litigation is not deemed liable to have a material impact on Natixis’ fi nancial situation or profi tability and/or that of Natixis and its consolidated subsidiaries as a whole or is not at a stage where it can be determined whether it will have such an impact.
In August 2004, three shareholders acting in the name of and on behalf of three investment funds (Oakmark Fund, Oakmark Equity and Income Fund and Oakmark Global Fund) fi led a complaint against Harris Associates L.P., a wholly owned subsidiary of Natixis Global Asset Management, before the United States District Court for the Northern District of Illinois. The plaintiffs alleged that Harris Associates L.P. billed services to these three funds at an excessively high rate in the light of applicable regulations. These proceedings are among numerous legal claims initiated in recent years against investment advisors. Harris Associates and the plaintiffs fi led motions for summary judgment.
On June 2, 2008, the plaintiffs requested a rehearing of the appeal by the entire Court of Appeals. On August 8, 2008, the Court of Appeals denied the plaintiffs’ request for a rehearing of their appeal.
On March 9, 2009, the Supreme Court decided to hear the case. Hearings took place on November 2, 2009. A ruling is expected in the fi rst half of 2010.
Since March 13, 2008, Natixis and Natixis Funding have been named among the defendants in multiple class-action lawsuits fi led by and on behalf of certain state, county and municipal bond issuers in the US federal courts in New York, Washington D.C. and California. The plaintiffs allege a conspiracy between providers and brokers of municipal derivatives to fi x prices, rig bids and allocate customers between 1992 and the present time. The various plaintiffs have also named more than 30 other US and European banks and brokers as defendants. Some plaintiffs seek to certify a class of all state, local and municipal government entities, independent government agencies and private entities that purchased municipal derivatives from defendants or through brokers from 1992 to the present and to recover damages to the class that result from the alleged anticompetitive activities. The federal cases have been consolidated in the United States District Court for the Southern District of New York under the caption “Municipal Derivatives Antitrust Litigation.”
Individual plaintiffs not involved in the class action suit, but whose complaints were consolidated in the class action suit prior to sentencing also fi led modifi ed complaints. Natixis Funding is cited in each of the modifi ed individual complaints and Natixis in some of the complaints. The allegations against Natixis Funding are substantially the same as those made in the class action suit. The allegations against Natixis are that Natixis was Natixis Funding’s guarantor in derivatives transactions and that it was Natixis Funding’s agent. Natixis Funding and Natixis have fi led a brief refuting these allegations.
Natixis has estimated its maximum net exposure at €463 million, on the basis of year-end exchange rates. The effective impact of this exposure will depend both on the amount of the assets deposited on behalf of Natixis that are recovered and the outcome of any action the bank can take, including legal action. Natixis intends to defend its rights by taking any reasonable legal action open to it, in France or abroad. In this perspective, Natixis has retained the services of a law fi rm to assist it. A provision has been set aside.
Basing their argument on a report by the French market regulator, Autorité des Marchés Financiers (AMF) which has not been made public, the plaintiffs allege that Lagardère SCA failed to comply with market regulations when it issued bonds redeemable in EADS shares, subscribed by Natixis, in April 2006.
Complaint fi led by Natixis shareholders against BPCE, Natixis and Philippe Dupont and Charles Milhaud
As Natixis Assurances essentially markets savings products, the main risks resulting from its insurance contracts are of a fi nancial nature: The risk of no longer being able to meet the minimum contractual rate of return in the event of a decline in interest rates
The liability adequacy test carried out in accordance with IFRS 4 showed that insurance liabilities evaluated under local standards, for the year ended December 31, 2009, were greater than the fair value of these liabilities, taking into account the repurchase option incorporated in the contracts.
The sensitivity of equity to variations in interest rates is lessened by the classifi cation of approximately €5.7 billion of interestbearing securities in the category of held-to-maturity securities.
Natixis Assurances is confronted with variations in the value of its fi nancial assets. The management of fi nancial risks involves defi ning a strategic allocation taking into account liability commitments, regulatory constraints (particularly in terms of non-concentration) and commercial requirements. Thus, allocation ranges are defi ned for each type of asset.
Also, Natixis Assurances reinsures, at 100% the guaranteed minimum payment on unit-linked contracts.
Mortality and morbidity risks are limited by the implementation of a pricing structure appropriate for the population and guarantees that are insured, the use of experience tables and the upstream practice of medical selection of new policyholders.
Natixis Assurances makes use of reinsurance to limit its exposure to the risk of dispersion of capital guaranteed upon death, accidents of life and loss of autonomy, as well as the frequency of claims for cessation of work, invalidity and loss of autonomy. A reinsurance treaty in case of epidemic or pandemic has also been put in place in order to limit exposure to the increase in deaths that would ensue.
The annual reinsurance plan seeks to diversify reinsurers and to deal only with parties having a high-quality rating. No reinsurance treaty is concluded or renewed with parties that are not of investment grade. In practice, the ratings of reinsurers with which Natixis Assurances does business range between A- and AA+ (some reinsurers at a marginal level may not be rated but their shareholders are deemed of high quality).
Coface maintains a diversifi ed credit risk portfolio, in order to minimize the risk that a default by a debtor, a slowdown in a particular business sector or an adverse event in a given country might exert a disproportionate impact on Coface’s overall claims expense Furthermore, the great majority of risks to which Coface is exposed are short-term, which enables it to reduce the risk covered for a debtor or a group of debtors relatively quickly after having noticed a deterioration in their solvency.
J EXPOSURE TO RISK ON DEBTORS AT END DECEMBER 2009 Policies signed excluding transactions on behalf of the State/All guaranteed products
Natixis was exposed to the following risks as at December 31, 2009.
Further impairment losses were recognized in 2009 in the amount of €213 million (excluding foreign exchange impact and the effect of the BPCE guarantee), bringing total impairment to €1,741 million as at December 31, 2009, compared with €1,528 million at December 31, 2008.
Exposure in the fi nancial statements as at December 31 was as follows: (in millions of euros) US RMBSs
(a) Volumes of wrapped bonds were not provided for at December 31, 2008, but for 2009, and appear in the “Other changes” column.
Net exposure as at 12.31.2009 AAA AA A BBB BB B CCC CC
FINANCIAL DATA 6 Management Report 5.11 - Exposure to equities in the banking portfolio
The banking portfolio’s exposure to equities corresponds to fi nancial assets classifi ed in the following categories in accordance with IAS 39: a available-for-sale assets; a Financial assets at fair value through profit or loss.
J BREAKDOWN OF EXPOSURE AT DEFAULT IN THE EQUITIES ASSET CATEGORY BY DIVISION
Article 115 of the document relating to the methodology used to calculate the capital adequacy ratio defi nes diversifi ed Private Equity on the basis of a number of criteria considered to be indicators of diversifi cation (investment stage, years, business sector, supports, region or country, risk division). Other equity exposure is broken down into listed and unlisted equity.
J UNREALIZED CAPITAL GAINS OR LOSSES AS AT DECEMBER 31, 2009
Financial assets at fair value through profi t and loss 5,002 4,851 (150) 30 (180)
(in millions of euros) Assets Total amount of capital gains or losses on disposals
Financial assets at fair value through profi t and loss (1,083)
J FRACTION OF AMOUNTS OF UNREALIZED CAPITAL GAINS OR LOSSES INCLUDED IN TIER-1 OR TIER-2 CAPITAL AS AT DECEMBER 31, 2009
(in millions of euros) Assets Fraction of amounts included in Tier-1 or Tier-2 capital
Financial assets at fair value through profi t and loss and hedging derivatives 172.6 275.2
Financial liabilities at fair value through profi t and loss and derivatives 175.9 269.4
Financial assets at fair value through profi t and loss and hedging derivatives amounted to €172.6 billion as at December 31, 2009, compared with €275.2 billion a year earlier, a €102.6 billion decline linked primarily to lower valuations for credit derivatives and interest rate swaps. Financial assets at fair value comprise trading instruments (€153.3 billion), instruments recognized at fair value through profi t and loss (€16.9 billion) and hedging derivatives (€2.4 billion).
Reverse repurchased securities amounted to €59.8 billion as at December 31, 2009, a €5.9 billion increase stemming mainly from transactions with banks. These assets are fi nanced primarily by repurchased securities and recorded under liabilities.
Registered share capital amounted to €4,653,020,308.80, divided into 2,908,137,693 shares with a par value of €1.60 and was unchanged between December 31, 2008 and December 31, 2009.
Regulatory capital and risk-weighted assets are calculated in accordance with the February 20, 2007 order, amended on October 19, 2007, September 11, 2008 and October 29, 2009, relative to regulatory capital requirements applicable to banks operating within the Basel II framework.
Reclassifi cations of hybrids and fair value fi ltering (6.6) - (6.6)
The €5.4 billion increase in accounting equity resulted principally from the reclassifi cation of hybrid securities as equity for a total of €6.2 billion, the €1.7 billion loss in 2009, the shareholder advance of €0.5 billion and gains recorded in equity for €0.3 billion. The impact on accounting equity, and in particular the result of the reclassifi cation of hybrid securities, was fully fi ltered for the determination of prudential capital.
The other main changes in Tier-1 capital are as follows: a an increase of €1.2 billion in hybrid securities. This change stemmed from the issuance in June of two deeply subordinated perpetual notes for a unit value of €1 billion, subscribed by the shareholder groups, Banque Populaire and Caisses d’Epargne, since become Groupe BPCE , and the balance of the buyback of certain hybrid securities followed by the issuance of subordinated notes subscribed by Groupe BPCE . However, after applying a cap limiting hybrid securities to 35% of Tier-1 capital, an amount of €0.3 billion was put into Tier-2 capital; a a reduction of €0.2 billion in goodwill stemming from the buyout of minority interests in NGAM and the exit of Caceis from the scope of consolidation; a a reduction of €0.5 billion in other prudential restatements, mainly comprising the decline in minority interests in NGAM for €0.2 billion and a decline in prudential filters; a an additional deduction of €0.4 billion to Tier-1 capital resulting from the increase in the value of the CCIs and securities issued by banks.
Of the €14.0 billion decline in market risks, €3.7 billion was attributable to the impact of the fi nancial guarantee provided by BPCE and the reduction in exposure to risk.
(Of which the present value of residual exposure at default on fi nancial leases) - -
The liquidity ratio is designed to ensure that liquid assets with maturities of less than one month are equal to or exceed liabilities falling due within the same period. It is the ratio between liquidities and liabilities falling due in less than one month.
2009 was marked by the segregation of assets in run-off management within the GAPC at the start of the year, the creation of BPCE in the summer and the implementation of the BPCE guarantee on GAPC credit risks, the latter two events having helped boost investor confi dence.
Throughout the year, the Treasury Department consolidated work done in 2008, especially limits on the fi nanced balance sheet, the listing of collateral and the diversifi cation of its refi nancing.
The Bank benefi ted fully from monetary policy decisions thanks to active management of its collateral, in particular the long-term refi nancing transaction conducted by the European Central Bank in June.
In the second half, as credit markets and liquidity eased, the diversifi cation of our sources of fi nancing was reinforced.
This was rounded out by the creation of a Treasury branch in Hong Kong, as an integral part of the business line.
In 2009, it raised a gross total of €18.9 billion under its various programs and debt instruments.
A substantial portion of Natixis’ medium-and long term refi nancing was carried out by BPCE, which in August became the Group’s sole issuer in the public issue compartment.
As part of the French government’s regulatory capital support for French banks (SPPE), Natixis obtained €2 billion in the form of deeply subordinated perpetual notes issued in June and fully subscribed by CNCE and BFBP before the creation of BPCE. The fi rst redemption of the €1.9 billion tranche issued in December 2008 took place in December 2009, for a total of €750 million, thanks to the proceeds from the issue subscribed by BPCE.
Natixis’ MTN program includes a standard negative pledge. There are no covenants attached to Natixis’ EMTN programs, either fi nancial or linked to credit ratings.
The prepayment terms of the EMTN program contain a crossdefault clause restricted to the issuer, with a trigger threshold of €50 million.
The terms and conditions of notes issued under the USCP framework (these notes are issued by Natixis US Finance Company, LLC and Natixis Commercial Paper Corp., with Natixis’ guarantee), certifi cates of deposit (issued by Natixis and the Singapore branch), MTNs issued by Natixis Financial Products, ECPs, TCNs and Extendible Notes are not subject to any covenants.
FINANCIAL DATA6 Management Report 3. issue made at the time of the redemption of resources originating with the SPPE, subscribed by BPCE: j €750,000,000 – issued on November 12, 2009 – fi xed rate; the issue prospectus allows for early redemption as of April 22, 2015 and at every subsequent interest payment date.
These notes are subject to a number of covenants, in particular: a non-payment (suspension) of the coupon at the due date under certain circumstances; a reduction in the amount of accrued interest and the nominal value of the issue in the case of certain events affecting the issuer’s financial situation or certain ratios.
The subordination clause is set out below in the terms used in the prospectus: a Status of the notes: The notes are deeply subordinated notes of the Issuer issued pursuant to the provisions of Article L.228-97 of the French Commercial Code, as amended, in particular by law n° 2003-706 on financial security dated August 1, 2003.
The proceeds of the issue of the notes will be treated, for regulatory purposes, as consolidated fonds propres de base (Tier 1 Capital) for the Issuer subject to the limits on the portion of the Issuer’s fonds propres de base that may consist of hybrid securities in accordance with Applicable Banking Regulations (the “Hybrid Securities Limit”) as interpreted by the SGCB(*). Fonds propres de base (“Tier 1 Capital”) shall have the meaning given to it in Article 2 of Règlement no. 90-02 dated February 23, 1990, as amended, of the Comité de la Réglementation Bancaire et Financière (the “CRBF Regulation”) or otherwise recognized as fonds propres de base by the SGCB. The CRBF Regulation should be read in conjunction with the press release of the Bank for International Settlements dated October 27, 1998 concerning instruments eligible for inclusion in Tier 1 Capital (the “BIS Press Release”).
Coface’s share capital was increased in the fi rst quarter of 2010 by an approximate total amount of €175 million (including the issue premium). This comes after Coface’s €50 million capital increase in July 2009. The two transactions, combined with the signifi cant improvement in claims recorded by Coface in the second half of 2009, will offset the Company’s entire loss in 2009.
Natixis has opened negotiations for the divestment of part of the Natixis Private Equity portfolio.
Natixis completed on March 1, 2010, the reimbursement of the entire shareholder advance made by BPCE on June 18, 2009 for a total of €1.5 billion.
In 2009, net banking income increased by €3,320 million to €1,883 million, taking into account: a a €3,847 million reduction in the interest margin; a a €203 million increase in net fee and commission income; a a €402 million or 28% decline in income from variable-income securities; a a substantial €6,250 million increase in trading income (including €3,805 million in transactions of securities held for trading); and a a +€1,188 million increase in income on transactions on investment portfolios.
Operating expenses, excluding asset amortization and writedowns, fell by €82 million or 4%. The decline was 28%
Natixis’ parent company fi nancial statements at December 31, 2009 show a loss of €2,046,308,381. 66 .
Nevertheless, in the event that BPCE should no longer control Natixis following a public offer, Banques Populaires, Caisses d’Epargne or BPCE, depending on the case, would have the right to buyback Natixis’ 20% stake in Banques Populaires and Caisses d’Epargne (for further information on these buyback rights, see section 8 “Major contracts”). If these buyback rights were to be implemented, Natixis would no longer have an economic interest in the results of the Banques Populaires or Caisses d’Epargne concerned and its ability to sell products or services via the Banques Populaires or Caisses d’Epargne concerned could also be affected.
Financial assets at fair value through profi t and loss 6.1 181,226 285,493
Revaluation adjustments on portfolios hedged against interest rate risk 179 407
Deferred income, accrued charges and other liabilities 6.8 18,784 23,143 o/w institutional operations 3 2
Equity attributable to equity holders of the parent 20,918 15,552 - Share capital and reserves 12,081 17,135 - Gains and losses recorded directly in equity (1,631) (1,969)
Net gains or losses on fi nancial instruments at fair value through profi t and loss 7.3 (1,108) (3,024)
Net income/(loss) and gains and losses recorded directly in equity (1,294) (4,743)
Equity component of share-based payment plans 2007 dividend paid in 2008 (546)
Equity component of share-based payment plans 2008 dividend paid in 2009
(b) Shareholder advances: see Note 12 “Capital management and capital adequacy”.
(c) Issuance of other equity instruments: these consist of open-end super-subordinated notes and preference shares that were reclassifi ed as equity as of December 31, 2009 (see Notes 5.15 and 6.16).
+/- Net charge to depreciation and amortization of property, plant and equipment and intangible assets 251 206
+/- Decrease/(increase) in other fi nancial assets or liabilities 18,783 (2,277)
+/- Decrease/(increase) in fi nancial assets and investments in associates 1,262 89
Cash and cash equivalents at end of period * (3,056) (7,310)
In accordance with European regulation 809/2004 relating to information contained in prospectuses, the fi nancial statements for the year ended December 31, 2007 that were published in the 2007 registration document fi led with the AMF on April 18, 2008 are incorporated for reference into this registration document.
The following standards, amendments and interpretations were applicable for the fi rst time as of January 1, 2009: a IFRS 8 “Operating Segments”, adopted by the European Commission on November 21, 2007. This standard replaces IAS 14 “Segment reporting” and requires operating segments to be defined using the management approach. The segmentation by business sector presented in Note 9 complies with Natixis’ organizational structure, internal reporting system, risk structure and analysis of sources of profit. Accordingly, Natixis presents the information required by IFRS 8 on the basis of a sectoral breakdown by business line. The application of IFRS 8 has also given rise to additional information on performance indicators, which are determined using IFRS principles for each business sector. This information is included in the internal reporting transmitted to Executive Management: it consists of the cost of risk and the share in the net income of equity affiliates; a the revised IAS 1 “Presentation of Financial Statements” adopted by the European Commission on December 17, 2008. This revised standard replaces the current IAS 1. It aims to make it easier for users to analyze and compare information given in financial statements. The revised IAS 1 concerns only the presentation and contents of financial statements. The application of the amended IAS 1 on Natixis’ financial statements gives rise to a new financial statement presented below the income statement: “Net income/(loss) and gains and losses recorded directly in equity”. This new statement discloses the net income/(loss) and adds unrealized gains and losses recorded directly in equity, such as the revaluation of available-for-sale assets and the revaluation of hedging instruments. The presentation adopted by Natixis complies with CNC recommendation No. 2009-R-04 on the format of financial statements by credit institutions and investment firms under the international accounting standard of July 2, 2009.
Natixis did not early adopt the following standards, interpretations and amendments endorsed by the European Union at December 31, 2009: a the revised IFRS 3 “Business combinations” and IAS 27 (“Consolidated and separate financial statements”) adopted by the European Commission on June 3, 2009 and mandatorily applicable on a prospective basis to transactions occurring after the start of the first accounting period beginning on or after July 1, 2009. These revised standards modify the accounting treatment applicable to business acquisitions and disposals;
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts a the revised IFRS 1 “First-time adoption of international financial reporting standards”, adopted by the European Commission on November 25, 2009 and mandatorily applicable from January 1, 2010. The amendment principally consists of a reorganization of the structure of the standard to facilitate its use. It will have no impact on Natixis’ financial statements; a the amendment to IAS 39 “Eligible hedge items”, adopted by the European Commission on September 15, 2009 and mandatorily applicable for accounting periods beginning on or after July 1, 2009. This amendment clarifies the application of hedge accounting to the inflation component of financial instruments and options contracts when they are used as hedging instruments. The impact of this amendment is currently being assessed by Natixis; a the amendment to IAS 32 “Classification of rights issues” adopted by the European Commission on December 23, 2009 and mandatorily applicable from February 1, 2010. This amendment modifies the accounting of rights denominated in a currency other than the issuer’s functional currency. When certain conditions are met, these rights will no longer be recorded as derivatives but as equity instruments. The impact of this amendment is currently being assessed by Natixis; a IFRIC 12 “Service concession arrangements”, adopted by the European Commission on March 25, 2009 and mandatorily applicable for accounting periods beginning after March 29, 2009. This interpretation clarifies the accounting treatment by concessionaries of public-private service concession arrangements. It does not apply to Natixis’ operations and hence has no impact on its financial statements; a IFRIC 15 “Agreements for the construction of real estate”, adopted by the European Commission on July 22, 2009 and mandatorily applicable as of January 1, 2010. This interpretation does not apply to Natixis’ operations and hence has no impact on its financial statements; a IFRIC 16 “Hedges of a net investment in a foreign operation”, adopted by the European Commission on June 4, 2009 and applicable for accounting periods beginning as of July 1, 2009. This interpretation clarifies how standards IAS 21 and IAS 39 should be applied when an entity hedges the currency risk arising from its investment in a foreign operation. The impact of this interpretation is currently being assessed by Natixis; a IFRIC 17 “Distributions of non-cash assets to owners”, adopted by the European Commission on November 26, 2009 and applicable for accounting periods beginning after October 31, 2009. This interpretation clarifies how the distribution of dividends in the form of assets other than cash should be recorded. The impact of this interpretation is currently being assessed by Natixis; a IFRIC 18 “Transfers of assets from customers”, adopted by the European Commission on November 27, 2009 and applicable for accounting periods beginning after October 31, 2009. This interpretation makes it possible to determine in what situations and conditions the revenues corresponding to a contractual asset transfer by a customer should be recorded. This interpretation does not apply to Natixis’ operations and hence has no impact on its financial statements.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts of performance conditions and regardless of the year of payment; a with regard to financial accounting, under IFRS, of the local economic contribution, the press release of the National Accounting Standards Board dated January 14, 2010. The local economic contribution was introduced in the finance law for 2010 that reforms the business tax. It includes the company land tax (CFE) and the company value-added contribution (CVAE). Natixis has considered that there is no reason to apply to the CVAE and CFE a different accounting treatment from that applied to the business tax. These two new contributions will therefore be recorded in the 2010 financial statements as “General operating charges” on the income statement.
Materiality is determined based on specifi c thresholds for each of the Group’s business-lines and on a qualitative assessment of the relevance of each entity’s contribution to the consolidated fi nancial statements of Natixis.
The scope of consolidation includes all material entities over which Natixis exercises control or signifi cant infl uence. Three relationships of control are identifi ed under IFRS: control, joint control and signifi cant infl uence. Determining the type of control that exists is based on an analysis of the economic and legal relations between the parent and its subsidiaries, as well as any voting rights held.
In accordance with IAS 27.14, potential voting rights resulting from a put option granted to minority interests are not taken into account in calculating the percentage of ownership and voting rights held, since they are not currently exercisable by Natixis.
A review of potential voting rights held by Natixis had no impact on the entries into scope in 2009.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts a power to appoint or remove the majority of the members of the Board of Directors or equivalent governing body; a power to assemble the majority of voting rights at meetings of the Board of Directors or an equivalent governing body.
No majority shareholdings were consolidated as a result of applying IAS 27 to the Group’s Private Equity business, as the shareholdings concerned are not material.
IAS 31 also allows jointly controlled companies (joint ventures) to be accounted for using the equity method. Natixis has not elected to apply this option.
Ownership of the Banques Populaires and Caisses d’Epargne cooperative investment certifi cates (CCIs), representing 20% of the share capital of each entity, gives Natixis signifi cant infl uence over the Banques Populaires and Caisses d’Epargne banks. The fi nancial statements of these entities are therefore accounted for using the equity method in Natixis’ consolidated fi nancial statements.
Natixis and the Banques Populaires banks have also agreed to maintain any existing industrial and commercial relationships for a minimum period of 10 years as from the subscription date for the Banques Populaires CCIs: a provision of IT infrastructure; a supply of industrial services (custodial services, payment systems, operational management of foreign currency accounting); a design and management of customer products on behalf of the Banques Populaires (asset management, insurance products, factoring, lease financing, financial engineering, expansion capital, employee benefits planning, international operations, credit insurance and business information).
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts liabilities allocated to these institutional operations. The bank’s assets, liabilities and commitments relative to these operations are identifi ed on a separate line of the balance sheet under each of the headings concerned with operations for which the management has been given to Natixis by the State.
On June 9, 2008, a new fi nancial agreement was signed covering the four-year period from 2007 to 2010. This agreement was subject to an amendment signed on October 8, 2009. This amendment covers the period from January 1, 2009 to December 31, 2010.
IFRS 3 dealing with business combinations requires all identifi able assets, liabilities and contingent liabilities to be measured at fair value on the acquisition date. Adjustments may subsequently be made to these initial fair values for a period of 12 months from the acquisition date.
On its fi rst-time application of IFRS, Natixis elected to use the option available under IFRS 1 for fi rst-time adopters not to retrospectively restate business combinations carried out prior to January 1, 2004 in accordance with the provisions of IFRS 3 “Business combinations”.
An impairment test is performed on the goodwill, at least once a year or more frequently if there is objective evidence of possible impairment. Impairment test consists of comparing the carrying amount of the CGU or group of CGUs including goodwill with its recoverable amount.
Negative goodwill is recognized immediately in the income statement under “Changes in value of goodwill”, following the revaluation of identifi able assets, liabilities and contingent liabilities.
PRINCIPLES ADOPTED FOR MEASURING CONTRIBUTIONS BY GROUPE CAISSE D’EPARGNE TO NATIXIS
The contribution values used for consolidation purposes in respect of both categories of assets are the carrying amounts of these assets in the CNCE’s consolidated fi nancial statements, restated in accordance with IFRS as adopted in the European Union.
PRINCIPLES ADOPTED FOR MEASURING OTHER TRANSACTIONS AFFECTING THE STRUCTURE OF THE GROUP THAT LED TO THE CREATION OF NATIXIS
In accordance with IFRS 3, other transactions affecting the structure of the Group – contribution of the remaining Caisses d’Epargne CCIs, 1.23% of the share capital of IXIS CIB, and 4.63% of the share capital of IXIS AMG; subscription to the Banques Populaires CCIs, and acquisition of Novacrédit – have been accounted for by the purchase method for consolidation purposes.
As the contributions were recognized at their net carrying amount under IFRS, no valuation adjustments have been recorded on the various assets and liabilities contributed. The difference between the acquisition cost and the Group’s interest in the net assets of the contributed entities does not represent goodwill within the meaning of IFRS 3, since the acquisition cost takes into account the real value of the shares, while the contributions were recognized at their net carrying amount. Each of the differences observed was recognized in “consolidated reserves”.
At December 31, 2007, goodwill arising on the CCIs had been defi nitively allocated to the following accounts: a valuation adjustments on Banques Populaires land and buildings in an amount of €102 million (Banques Populaires CCIs); a valuation adjustments on Caisses d’Epargne land and buildings in an amount of €47 million (Caisses d’Epargne CCIs).
In 2009, goodwill decreased by €157 million excluding conversion losses of €22 million and writedown losses.
The sale of 35% of Caceis led to a €467 million reduction in goodwill.
No writedown was recognized as a result of these tests. Nor would any writedown have been recognized if the discount rate had been 1% higher or the perpetual growth rate 1% lower in each of Natixis’ core businesses (Corporate and Investment Banking, Invest ment solutions and Specialized Financial Services).
To take into account the fi nancial conditions of the offer received for part of the Private Equity portfolios, and notwithstanding the results of the tests, goodwill allocated to IFI and Natixis Investissement has been written down in full (impact of €8.6 million).
The assets and liabilities of subsidiaries which Natixis intends to sell within a maximum period of 12 months and for which it is actively seeking a buyer, are identifi ed separately on two specifi c lines of the consolidated balance sheet as non-current assets and liabilities.
On July 28, 2009, Natixis signed an agreement to sell its Natixis Algérie subsidiary to Banque Fédérale des Banques Populaires. However, this disposal awaits the authorization of Algerian regulatory authorities. In accordance with IFRS 5 “Non-current assets held for sale and discontinued operations”, Natixis has continued to show Natixis Algérie as fully consolidated in the consolidated statements for the year ending December 31, 2009 and has grouped Natixis Algérie’s assets and liabilities in two separate places on the balance sheet: “Non-current Assets Held for Sale” and “Non-current Liabilities Held for Sale”.
2.8 - Standardization of individual data and processing of intra-group transactions
The following rules are applied to consolidate the fi nancial statements of insurance subsidiaries: a income and expenses are classified by nature in accordance with banking accounting principles and not by function of expense; a balance sheet items are included under the corresponding line items of the financial statements presented in the banking format.
Technical reserves for provident insurance contracts are calculated using regula tory discount rates and mortality tables. Incapacity and disability risks are calculated using BCAC tables for provident insurance and experience tables for borrower insurance.
A liability adequacy test is carried out in accordance with IFRS 4 in order to ensure that the insurance liabilities as presented in the consolidated fi nancial statements are suffi cient to cover future cash fl ows estimated at that date. The test is based on a stochastic valuation model of discounted future cash fl ows .
The change in the deferred participation asset and liability is recognized: a in equity when it relates to changes in the value of assets classified as “available-for-sale”; a in income when it relates to changes in the value of assets “at fair value through profit and loss” or investment property held to cover insurance, as well as changes in provisions for prolonged declines in value in “Assets available-for-sale”: (in millions of euros) 2009 2008
Given the sharp downturn in the markets, a deferred participation asset was recognized on December 31, 2008 as a result of shadow accounting, corresponding to the unrealized losses that may be charged against the future returns associated with the technical liabilities. A deferred participation liability was recognized on December 31, 2009 as a result of unrealized capital gains that may be attributed to policyholder contracts.
The change in the deferred participation amount between 2008 and 2009 is due to the upturn in equity markets and the narrowing of credit spreads on debt instruments.
Natixis disposed of a 35% interest in Caceis to Crédit Agricole S.A. for €595 million in cash. This sum may be reduced pursuant to a price variation clause, in respect of which provisions were funded in the annual fi nancial statements for a present value amount of €70 million. Following this disposal, which took place on June 30, 2009, Natixis retains a 15% interest in Caceis.
Natixis acquired from CE Participations the 11.34% interest in Natixis Global Asset Management (NGAM) held by CNP Assurances. The transfer of NGAM shares from CNP Assurances to CE Participations was approved by the Board of Directors of CNP Assurances on October 20, 2009 and was carried out in the form of a put option to which CE Participations was the counterparty. This deal was fi nalized and ownership transferred on December 18, 2009. Following this deal, Natixis wholly owned NGAM.
3.2 - Changes in the scope of consolidation since January 1, 2009
The main changes in scope since January 1, 2009 were as follows: 3.2.1 - CORPORATE & INVESTMENT BANKING
a Creation of a special purpose entity “Lido A partements LLC” in July 2009 following the recovery of a property “ L ido A partments ”, which had been provided as collateral for a realestate loan. It is wholly owned by Natixis Real Estate Capital.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts a Creation of a special purpose entity WTC Owner LLC in Q4 2009 following the recovery of a real estate asset “Waikiki Trade Center”, which had been provided as collateral for a real-estate loan.
a Deconsolidation of Bedford Oliver Funding LLC, Ixis Loan Funding I LLC, Plaza Trinity LLC because they are in the process of being liquidated.
Internal restructuring a Merger of Banque Privée Saint-Dominique into Banque Privée 1818; a Merger of Banque Privée Saint-Dominique Gestion into 1818 – Gestion.
Newly consolidated entities a Consolidation of six special purpose entities: AEW Global Real Estate Securities Fund, Absolute Asia Dynamic Equities Fund, Gateway Hedge US Equities Fund, ASG Diversifying Strategies Fund, Loomis Sayles Muti-Strategy Master Alpha Fund Ltd and Loomis Sayles Muti-Strategy Alpha Fund Ltd.
Changes in percentage interest a Acquisition of 11.34% of Natixis Global Asset Management raising the interest to 100% from 88.66% in 2008. This acquisition generated goodwill of €293.1 million.
Deconsolidation of the entities listed below, in which Natixis has become a minority shareholder : a ASG Global Alternatives Fund; a Loomis Sayles International Bond Fund; a Vaughan Nelson Value Opportunities Fund.
Deconsolidation of the entities listed below following their liquidation: a Aew Investment Group Inc.; a Aew Management And Advisors LP; a Loomis Sayles Futures LLC; a Natixis Oakmark Global Large Cap; a Seaport Se nior Housing LLC; a ASG Quasar Fund; a Loomis Sayles Energy, LLC.
Newly consolidated entities a Creation of Natixis Factor Italie, a Natixis Factor subsidiary, active in the factoring business.
Internal restructuring a Transfer of all assets and liabilities of Natixis Garanties to Natixis at July 1, 2009.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 3.2.4 - FINANCIAL STAKES
Newly consolidated entities a Creation of Coface Austria Bank, which is in the factoring business.
Internal restructuring a Merger of Kompass Espagne (Kompass France subsidiary) into Coface Servicios Espana.
Newly consolidated entities a Consolidation of Nem Invest at July 1, 2009. Nem Invest exceeded the consolidation thresholds following the acquisition of assets previously held by NACS.
Deconsolidated entities a Liquidation of Fonds Natexis Actions Capital Structurant. The assets were disposed of to Nem Invest.
Other a Natixis Pramex International was disposed of to BPCE in Q4 2009 generating a capital gain of €0.5 million.
Deconsolidated entity a Disposal of units held in the NBP Invest. fund at September 30, 2009.
Newly consolidated entities a Consolidation of SAS Alpes Développement Durable Investissement.
The various legal entities specifi cally created to manage a transaction or group of similar transactions (special purpose entities - SPEs) and substantially controlled by Natixis, even where there is no equity relationship, are consolidated if they make a material contribution to the consolidated fi nancial statements. The main criteria for assessing the existence of such control as defi ned by SIC 12 are as follows: a activities: the activities of the SPE are substantially conducted on behalf of Natixis which, directly or indirectly, has created the SPE to meet its specific business needs; a decision-making powers: Natixis has decision-making and management powers enabling it to control or obtain control of the SPE or of its assets, including certain decision-making powers arising after the formation of the SPE. Such decisionmaking powers may have been delegated by putting in place an “autopilot” mechanism; a benefits: the right to obtain a majority of the benefits of the SPE’s activities; the right to a majority of any economic benefits distributed in the form of future net cash flows, earnings, net assets or other economic benefits or rights to the majority of residual interests; a risks: Natixis substantially retains the majority of the residual risks or risks inherent in ownership of the SPE or its assets in order to obtain benefits from its activities.
In the course of its business, Natixis has dealings with countless SPEs on whose behalf it, acts as: lender, investor, guarantor, manager, sponsor or arranger as the case may be.
An analysis of the characteristics of these entities and of their consolidation or otherwise is set out below by business and major categories of entities: 4.2.1 - SPEs INVOLVED IN ASSET MANAGEMENT BUSINESS LINES (MUTUAL FUNDS , CDOS, REAL ESTATE FUNDS)
SIC 12’s “risks” and “benefi ts” criteria must therefore be assessed in terms of any interest by the management company or any other Natixis entity in the fund. As neither NGAM nor any other Natixis entity have a majority interest in the fund, Natixis does not retain a majority of the benefi ts nor incur a majority of the risks associated with these non-guaranteed Mutual Funds . Accordingly, these Mutual Funds are not consolidated.
Several funds managed by the management companies in the NGAM Corp. sub-group are consolidated given the sub-group’s majority interest in these funds: a Natixis LS Global Growth Fund; a LS Consumer Discretionary LLC; a Loomis Sayles Trust Company LLC; a Loomis Sayles Multi-Strategy Alpha Master Fund, Ltd; a Loomis Sayles Multi-Strategy Fund, Ltd; a Loomis Sayles Multi-Strategy Fund LP; a AEW Global Real Estate Fund; a ASG Laser Fund (Lux Fund); a ASG Diversifying Strategies Funds; a Gateway Hedged US E quities F unds; a Absolute Asia Dynamic Equities F und -Singapore sleeve.
For risk analysis purposes, a distinction must be made between the contracts entered into by the German subsidiary Coface Kredit and those entered into by Coface in France: a under the German contracts, the credit insurer is only liable for losses in excess of a deductible termed the Aggregate First Loss. This first loss contractually defines the amount of first losses that are not covered by the credit insurer. The coverage provided by Coface Kredit via these contracts is similar to “Natural disaster ” type coverage. An analysis of these structures shows in effect that the amount of the first loss is systematically higher than the expected loss, namely the average losses expected over the year. Accordingly, the majority of risks criterion is deemed not to be satisfied. The SPEs involved in these structures are accordingly not consolidated; a the French contracts entered into by Coface rarely include non-covered “first losses”. But the contracts only cover a small portion of the receivables held by the SPE. Furthermore, the quality of portfolio risk covered by Coface, compared to that borne by the other stakeholders (other insurers, sponsors, sellers) is not such as to transfer the majority of the structure’s risks to Coface. Such entities are accordingly not consolidated.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 4.2.4 - PRIVATE EQUITY SPEs a As part of its Private Equity operations, Natixis Private Equity makes equity investments in unlisted companies via venture capital vehicles (Fonds Communs de Placement à Risque - FCPR – venture capital fund and SICAR – Sociétés d’Investissement à Capital Risqué – venture capital company) and limited partnerships. All SIC 12 criteria (“Activities”, “Decision-making powers”, “Majority of Benefits” and “Majority of Risks”) are assessed on the basis of the level of Natixis Private Equity’s interest in each investment tranche, as well as of any guarantees provided to these entities.
Such entities do not meet any of the consolidation criteria in SIC 12 because: a the SPE’s activities are conducted first and foremost on behalf of the client; a Natixis is rarely a shareholder in such entities and when it is, its interest is generally a minority one. Auto-pilot mechanisms are generally in place and Natixis has not structured them for its benefit; a Natixis merely acts as a lender to such structures; most credit facilities are syndicated and the risks are equitably shared between the lenders in proportion to the amounts they have lent.
a SPEs may be used to hold securities on behalf of a client.
Such SPEs include “Akhdar Investment Group” and “Gulf Capital Luxembourg” which were previously consolidated on the basis of the majority interests held in them by Natixis. At December 31, 2009, these vehicles no longer existed and were accordingly no longer included in the scope of consolidation at that date.
For the other SPEs, Natixis does not hold a majority interest in these entities. Furthermore, the risks and benefits criteria are not met because the risk is either borne by the capital provider or by a third party who provides Natixis with a guarantee as to the value of the assets in the vehicle.
a Natixis Immo Développement invests in real estate assets in partnership with other investors using two types of structures: j SEP type structures, which are not consolidated inasmuch as each partner recognizes its share of the SEP’s assets, liabilities and results; j other structures under which a separate legal entity (SCI, SAS, SNC etc.) acquires the assets. Natixis Immo Développement does not have any interest in structures that could have a material impact on the Natixis consolidated fi nancial statements. No such entity was accordingly consolidated as of December 31, 2009.
They were thus included in the Natixis scope of consolidation at that date: j SCI Valmy Coupole; j Fructibail Invest; j OPCI Natixis Lease Investissement; j SASU Immobilière Natixis Bail held by OPCI Natixis Lease Investissement.
a Natixis Garanties owns three SCI that hold the business line’s operating premises. All three were included in the Natixis scope of consolidation as of December 31, 2009. They are: j SCI Champs-Élysées; j SCI La Boétie; j SCI SACCEF.
4.2.8 - CIB SECURITIZATION ENTITIES (PARIS – NATIXIS CAPITAL MARKETS NEW YORK) AND THOSE RELATING TO GAPC
Securitization conduits are generally constituted in the form of SPEs used to segregate assets or derivatives representative of credit risks.
The purpose of such SPEs is to diversify and slice the underlying credit risks with a view to their acquisition by investors seeking a certain level of remuneration based on the level of risk assumed.
Natixis is also the sponsor of three ABCP conduits: Direct Funding, Elixir and Versailles.
It should be noted that at December 31, 2009, three entities were implicitly de facto consolidated, Natixis remaining the main investor and the risks associated with the underlying assets being factored in via the valuation of the Natixis interest classifi ed under “Instruments at fair value through profi t or loss – Trading” and in respect of which provisions have been fully funded.
These are non-derivative fi nancial assets with fi xed or determinable payments and fi xed maturity that Natixis has the positive intention and ability to hold through to maturity, other than those that are designated on initial recognition as at fair value through profi t and loss (fair value option) or available-forsale, and those that meet the defi nition of loans and receivables .
Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted on an active market, other than those designated as at fair value through profi t and loss or available-for-sale. This excludes assets for which the holder cannot recover the majority of its initial investment other than because of a credit deterioration, which should be classifi ed as available-for-sale. The vast majority of loans granted by the Group are classifi ed in this category. Loans and receivables also include the fair value of the hedged component of assets classifi ed in this category (fair value hedges).
Loans outstanding with a theoretical syndication date expired as at December 31, 2009 were analyzed on a case-by-case basis in order to take into account the market discounts observed at the end of the reporting period. Changes in the discounts recognized for the period are shown in “Net gains or losses on available-for-sale fi nancial assets” and are discussed in Note 7.4.
“Loans and receivables ” also include non-derivative fi nancial assets initially classifi ed at fair value through profi t and loss or available-for-sale, but subsequently reclassifi ed within the “Loans and receivables ” category under the conditions set out in the “Reclassifi cation of fi nancial assets” amendment to IAS 39 and IFRS 7 published on October 13, 2008. Assets reclassifi ed in accordance with this amendment meet the defi nition of loans and receivables at the reclassifi cation date, i.e., they are not quoted on an active market, or were no longer quoted on an active market at the reclassifi cation date. Assets reclassifi ed in accordance with this amendment cannot be held with the intention of being sold in the near term.
If the fair value of an available-for-sale financial asset increases during a subsequent period, and this increase can be objectively linked to an event occurring after the impairment loss was charged to income: j reversals of impairment losses on equity instruments are recorded in equity rather than in the income statement, j reversals of impairment losses on debt instruments are recorded in income up to the amount of the previously recorded impairment loss.
IAS 17 prescribing the accounting treatment for leases gives fi ve examples of situations where substantially all of the risks and rewards incidental to ownership are transferred to the lessee: a the lease transfers ownership of the asset to the lessee by the end of the lease term; a the lessee has the option to purchase the asset at a price that is expected to be sufficiently below the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; a the lease term is for the major part of the economic life of the asset; a at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; a the leased assets are of such a specialized nature that only the lessee can use them without major modifications.
IAS 17 also describes three indicators that individually or in combination could also lead to a lease being classifi ed as a fi nance lease: a if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee; a gains or losses from the change in the fair value of the residual value accrue to the lessee; a the lessee has the ability to continue the lease at a rent that is substantially below the market rent.
At inception, assets held under a fi nance lease are recognized in the lessor’s balance sheet and presented as a receivable at an amount equal to the net investment in the lease, corresponding to the present value of minimum lease payments due from the lessee discounted at the rate of return implicit in the lease, plus any unguaranteed residual value accruing to the lessor.
Revenues under the fi nance lease are recognized as income at the interest rate implicit in the lease so as to produce a constant periodic rate of return on the lessor’s net investment. The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes: a the aggregate present value of the minimum lease payments receivable by the lessor and the unguaranteed residual value, to be equal to the sum of: (i) the fair value of the leased asset and
At each reporting date, Natixis reviews assets classifi ed as loans and receivables to determine whether there is any objective evidence of impairment arising from one or more events occurring after initial recognition and having an impact on estimated future cash fl ows. This corresponds to loans identifi ed as doubtful or irrecoverable under French regulations (CRC regulation 2002-03).
For industry risk, microeconomic criteria include indicators of fi nancial health applied to a sample of companies representative of each industry sector. Examples of criteria tracked by industry analysts are trends in sales volumes, the extent to which companies in the industry meet their growth targets, profi t trends for companies in the industry, as well as available cash and gearing ratios. Examples of macroeconomic criteria include general market inputs such as the price of oil and the US dollar and commodities costs.
Changes in the fair value of derivative instruments contracted with counterparties on which a default risk is identifi ed after inception, are shown within “Net gains or losses on fi nancial instruments at fair value through profi t and loss” until the instruments are canceled, while a receivable or payable due from/to the counterparty is recognized on the same date representing the outstanding balance on cancellation. Any impairment charged against such amounts is recognized in income under cost of risk.
Natixis uses interest rate swaps borrowing at fi xed rates to fi x the cost of interbank borrowings and public/private issues.
The effective portion of the gain or loss on the hedge is recognized directly in equity, while the ineffective portion is taken to income at each reporting date under “Net gains or losses on fi nancial instruments at fair value through profi t and loss”. No specifi c entries are made to hedged items (other than those that would be made if they were not hedged).
The following criteria are used to determine whether or not a market is active: a a significant drop in market activity; a the length of historical data of prices observed in similar market transactions; a scarcity of prices recovered by a service provider; a disappearance of the primary market; a sharp bid-ask price spread; a steep price volatility over time or between different market participants.
These are securities and derivatives quoted on organized markets, such as futures and options, which are located in liquidity zones that can be demonstrated as such (active market). All instruments traded by Natixis on listed markets are included in this category.
b) Level 2: instruments measured based on recognized valuation models using observable inputs other than quoted prices
These instruments are valued using generally accepted models (discount future cash fl ow method, Black & Scholes model, interpolation techniques), and on the basis of directly observable inputs.
The following instruments are also classifi ed at level 2 of the fair value hierarchy: a investments not quoted on an active market whose fair value is determined using observable market data, for example market data from comparable listed companies or the earnings multiple method; a units in unlisted mutual funds (OPCVM) as priced by the fund managers based on their net asset value; a issued debt designated at fair value through profit and loss. For each medium-term debt issue designated at fair value through profit and loss, the value of the issuer spread component between two reporting dates is calculated as the product of the nominal amount of the debt outstanding weighted by its first-order sensitivity, and the change in the spread over the period. First-order sensitivity is the product of the sensitivity of the security, the price of the security and the change in interest rates.
At December 31, 2009, instruments on which the recognition of day one profi t/loss has been deferred include: a structured products with multiple underlyings (equities/ indexes); a options on funds; a hybrid interest rate and inflation-linked products; a interest rate derivatives; a securitization swaps; a structured credit products (CDS, CDOs and FTDs); a carbon-based derivative instruments.
Instruments measured using level 3 inputs also include: a unlisted shares whose fair value could not be determined using observable inputs; a instruments carried at fair value on the balance sheet and for which data are no longer available due to a freeze in trading in the wake of the financial crisis, which were not reclassified within “Loans and receivables ” pursuant to the amendment to IAS 39 and IFRS 7 published on October 13, 2008 (see below). When there is a significant drop in trading in a given market, a valuation model is used based on the only available relevant data. For example, in 2009 a valuation model was developed for CMBS due to a lack of pricing data.
In accordance with the decree of February 20, 2007 on requirements resulting from the Third Pillar of Basel II, a description of crisis simulations and ex-post controls (validation of the accuracy and consistency of internal models and modeling procedures) is provided for each model used in the “Risk Management” section of the management report.
Cumulative loss rate (subprime) Dec. 31, 2009 Jun 30, 2009 Dec 31, 2008
The following assumptions applied in previous years remained unchanged: a The current rating of assets posted as collateral rated CCC or below is taken into account by applying a 97% discount to the underlyings. This discount was reduced to 70% for underlying assets initially rated AAA in standard securitization transactions (i.e., excluding Commercial Real Estate CDOs – CRE CDO, ABS CDO, ABS CDO Mezzanine, on which a 97% discount continues to be applied).
In the case of structures in which Natixis holds the underlying assets, each underlying tranche is valued transparently, using the corresponding mark-to-model or mark-to-market techniques, in line with the approach adopted at June 30, 2009.
Writedowns against credit derivatives contracted with Credit Derivative Product Companies (CDPCs) were calculated as of the beginning of the period using a more sophisticated methodology than in previous periods. The probability of default of each CDPC was assessed by examining the portfolios on a transparency basis. A stress factor of 1.3 was applied to average historical probabilities of default for underlyings at maturity, based on a recovery rate of 20%. Counterparties are associated with a probability of default whenever the losses resulting from the calculation exceed the CDPC’s net available assets. An additional general provision is added to the provisions resulting from these calculations to refl ect the volatility of transactions and the risk that future cash fl ows will materialize earlier.
Since the probability of default associated with the CDPC Kiawah exceeded 50%, as of third-quarter 2009 it was decided to recognize a provision for the full amount of the related exposure. This procedure has the same impact on Natixis’ fi nancial statements as the consolidation of the entity itself.
At October 1, 2008, the majority of US RMBS portfolios classifi ed within available-for-sale and as through profi t and loss, were reclassifi ed to “loans and receivables ” under the at fair value conditions set out in the amendment to IAS 39 and IFRS 7. However, the valuation model used to measure the fair value disclosed in the notes to the fi nancial statements remains the same as that applied to the RMBS portfolio classifi ed at fair value through profi t and loss.
These instruments are valued using a credit stress approach based on a valuation model drawing on projected future cash fl ows and cumulative loss rates per structure. The cumulative loss rates per structure were established based on loss rates for the underlying loans, set at 10%. The available monoline insurance cover was taken into account, adjusted to refl ect the probability of default of the monoline insurers and the expected loss rate, given default. A minimum valuation (fl oor) was applied representing 3% for CRE CDOs and CMBS rated AAA, and 5% for other CMBS, in line with the estimated interest fl ows given the current ratings of the structures.
The same valuation model as in previous periods was applied, based on projected future cash fl ows and cumulative loss rates for each structure, adjusted for stress. The cumulative loss rates per structure were determined using the 84 default scenarios for this class of assets published by S&P in November 2008. Each scenario was applied to each structure and the average result of the worst 42 scenarios was used to determine the value to be allocated to each transaction.
The valuation method for US RMBS including subprime RMBS, European RMBS, CMBS, and CLOs reclassifi ed to “Loans and receivables ” is the same as that used for identical instruments classifi ed as at fair value through profi t and loss and availablefor -sale.
Loans classifi ed as “Loans and receivables ” and amounts payable under fi nance leases
On November 12, 2009, the Group set up an asset protection mechanism with BPCE for certain assets segregated in GAPC portfolios, with retroactive effect from July 1, 2009. This mechanism has allowed Natixis to free up a signifi cant portion of capital allocated to the segregated assets, and to protect itself against the risk of losses on these portfolios after June 30, 2009. The mechanism is based on two main processes: a a sub-participation with the characteristics of a financial guarantee, covering 85% of the face value of assets recognized in “loans and receivables ” and “available-for-sale financial assets”. Under this guarantee, Natixis is protected from the very first euro in default up to 85% of the default amount; a two Total Return Swaps (TRS), one in euros and one in US dollars, transferring to BPCE 85% of unrealized and realized gains and losses on the portfolio of instruments at fair value through profit and loss (cash and derivatives) since July 1, 2009. TRS are derivatives and are therefore carried at fair value on the balance sheet, with a matching entry to income. In parallel, Natixis purchases an option from BPCE which, if exercised, allows it to recover the net gains on this portfolio after a ten-year period in return for the payment of a premium estimated at €367 million. The premium is also recognized at fair value.
At December 31, 2009, the expense recognized in respect of the premium totaled €169.4 million, of which €97.3 million was posted to net banking income and -€72.1 million to cost of risk. Additional writedowns taken against assets covered by the fi nancial guarantee for second-half 2009 totaled -€40.3 million after taking into account the guarantee, representing €231.3 million in writedowns neutralized.
Changes in the fair value of TRS and calls at December 31, 2009 represented -€248 million and €168.6 million, respectively.
Expenses incurred during the development phase are capitalized if they meet the criteria for recognition as intangible assets set out in IAS 38: These include technical feasibility, the intention to complete the asset and use or sell it, the probability that the asset will generate future economic benefi ts, the availability of resources, and the ability to measure reliably the expenditure attributable during the asset’s development. Costs incurred during the research phase are not capitalized but are recognized in expenses.
In accordance with Article R.332-210-1 of the French Insurance Code, a fi ve-yearly appraisal is conducted by an independent expert approved by the French insurance regulator (ACAM). Between two appraisals, the market value of property is certifi ed by experts on a half-yearly basis.
Other items of property, plant and equipment are depreciated over their estimated useful lives, generally between fi ve to ten years.
Purchased software is amortized on a straight-line basis over its estimated useful life, which in most cases is less than fi ve years. Internally generated software is amortized over its estimated useful life, which may not exceed 15 years.
Other intangible assets primarily comprise: a purchased goodwill with an indefinite useful life, which is not amortized but tested for impairment at least annually; a components of the Coface portfolio, which are amortized over the term of the contracts (eight to ten years for France).
Assets are tested for impairment whenever there is objective evidence that they may be impaired and at least annually in the case of intangible assets with an indefi nite useful life. Natixis considers whether there is any evidence of impairment at each reporting date. When any such evidence exists, the recoverable amount of the individual asset is estimated wherever possible; otherwise the recoverable amount of the CGU to which the asset belongs. The recoverable amount is the higher of fair value less costs to sell and value in use, which is the present value of future cash fl ows expected to be derived from continuing use of the asset or cash-generating unit. If the recoverable amount of the asset or CGU is lower than its carrying amount, an impairment loss is recognized in income under “depreciation, amortization and impairment of property, plant and equipment and intangible assets”.
A discontinued operation is a clearly identifi able component of an entity that either has been disposed of, or is classifi ed as held for sale, and: a represents a separate major line of business or geographical area of operations; a is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or a is a subsidiary acquired exclusively with a view to resale.
In line with IAS 16, a specifi c depreciation schedule is defi ned for each signifi cant component of an item of property, plant and equipment which has a different useful life or is expected to consume future economic benefi ts differently from the item as a whole. For buildings used in the business and investment property, the following components and depreciation periods have been identifi ed:
If Natixis has neither transferred the contractual rights nor retained substantially all of the risks and rewards, Natixis then determines whether it has transferred control of the asset. If control is considered to have been relinquished, the fi nancial asset is derecognized. If the Group retains control of the asset, it remains on the balance sheet to the extent of the Natixis’ “continuing involvement”.
At subsequent reporting dates, the securities continue to be valued by the assignor in accordance with the rules applicable to the category in which they were initially classifi ed. In the assignee’s accounts, the amount receivable from the assignor continues to be carried at amortized cost within “Loans and receivables ”.
The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the reporting date. This amount is discounted when the effect of discounting is material. Provisions are reviewed at each reporting date and adjusted if necessary.
A provision for restructuring costs is recognized when the standard aforementioned criteria for recognizing provisions and the two following conditions are met: a there is a detailed formal plan for the restructuring, identifying at least: j the operations or part of the operations concerned, j the principal locations affected, j the location, function, and approximate number of employees who will be compensated upon termination of their services, j the expenditures that will be undertaken, and, j when the plan will be implemented; a the Group has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
At December 31, 2009, Natixis had set aside provisions for restructuring costs in respect of: a the work adjustment plan for Natixis S.A. employees which ran from September 2008 to the first half of 2009. Overall, this plan resulted in 800 redundancies; a a second work adjustment plan launched by Natixis on June 17, 2009 and completed on December 31, 2009. This plan concerned a total of 250 employees from BFI and Eurotitres.
The amount of these provisions is detailed in Note 6.15.2 “Provisions”. Charges to these provisions are disclosed in Note 7.6 “Operating expenses”
Movements in provisions are recognized in the income statement on the line items corresponding to the nature of future expenditure.
Short-term employee benefi ts are recognized as an expense in the period in which the employee provides the service in exchange for those benefi ts.
Other long-term benefi ts are accounted for on the same actuarial basis as post-employment defi ned benefi ts, except that no “corridor” is applied to actuarial gains and losses and all past service costs are recognized immediately.
Accordingly, at that date all issues of deeply subordinated notes and preference shares were reclassifi ed within equity at fair value.
The impact of this reclassifi cation on the fi nancial statements is detailed in Note 6.16 “Changes in subordinated debt”, and in Note 12 “Capital management and capital adequacy”.
Through its principal shareholder BPCE, Natixis indirectly benefi ts from fi nancing made available under the fi nancial sector bail-out plan approved by the European Commission in 2008. This plan has two key components: a inter-bank medium-term loans guaranteed by the transfer of full ownership of receivables meeting certain eligibility criteria. The transfer of ownership enables the lenders to pledge the receivables with Société de Financement de l’Économie Française (SFEF) as security for any loans they receive from SFEF. The corresponding loans granted to Natixis by BPCE, itself eligible for SFEF financing, are shown in the consolidated balance sheet within “deposits from financial institutions”. The receivables provided as security have been maintained in Natixis’ consolidated balance sheet with their original classification, since the criteria for derecognition defined by IAS 39 are not met. They are included in the “loans and receivables ” line item of the table entitled “Financial assets provided as security” presented in Note 6.6.3; a perpetual deeply subordinated bonds. These issues mirror those subscribed by Groupe BPCE with Société de Prise de Participation de l’État.
Up to December 30, 2009, these issues were classifi ed as debt instruments accordance with IAS 32 and with IFRIC’s policy statement, given the existence of an obligation to reimburse the interest relating to a prior “linker” issue of deeply subordinated debt securities with the same rank on which the payment of interest is obligatory.
Financing obtained indirectly from SFEF and the perpetual deeply subordinated notes subscribed by SPPE are detailed in Note 6.17. “State support”.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 5.17 - Share-based payments
Natixis and certain consolidated entities have set up sharebased payment plans for some of their employees. Under IFRS, share-based payments systematically result in the recognition of payroll costs, which are determined as described below: a Natixis grants stock options to certain of its employees. The options are exercisable over a period of three years after a lock-up period of four years. No performance conditions apply. As required by IFRS 2, stock options granted after November 7, 2002 which have not yet vested at the reporting date are stated at their fair value on the grant date using the Black & Scholes model. The fair value is recognized in payroll costs over the vesting period, with a corresponding entry in equity. The expense is revised at each reporting date and adjusted whenever subsequent information regarding the number of beneficiaries alters the initial estimates of rights vested. The resulting adjustments affect the expense for the period and for subsequent periods. Natixis has set up five stock option plans since 2002, two of which were still outstanding at December 31, 2009. The features of these plans are set out in Note 11.
Following the September 2008 rights issue, Natixis’ Executive Board of December 8 decided to adjust the exercise conditions and number of shares underlying the options. These adjustments are aimed at safeguarding the rights of stock option holders: j the reduction in the exercise price is intended to offset the decline in value of the shares resulting from the detachment of the preferential subscription rights, j the change in the number of shares underlying the options is intended to offset the impacts of the fall in the option exercise price on the overall amount to be subscribed in shares by each benefi ciary upon exercising the options. The number of options was changed accordingly, but the optionfor -share ratio remained the same.
The changes in the plans resulting from the adjustments described above are detailed in Note 11.
Employees of Natixis S.A. and Coface are entitled to participate in plans to purchase stock options at a discount. These plans give rise to an expense recognized in payroll costs with a corresponding entry in equity when the plan is set up. The cost of these plans is measured as the difference, at the subscription date, between the fair value of the shares purchased (taking into account the lock-up period) and subscription price paid by employees, multiplied by the number of shares effectively subscribed.
At the start of this period, each beneficiary in employment receives his or her shares, which are placed in a registered account or employee investment trust for a lock-up period of two years. Employees therefore become the owners of their shares at the start of this lock-up period. They are entitled to dividends, but may not sell their shares.
a November 14, 2011: shares become available. Shares become available with effect from this date. They may continue to be held under the same conditions, at no cost to the holder, or may be sold at any time.
In connection with the September 2008 rights issue, the preferential subscription rights attached to treasury shares owned by Natixis were sold. To safeguard the rights of benefi ciaries of the bonus share plan, on December 8, 2008 Natixis’ Executive Board approved a number of adjustments to the plan. These involved awarding 33 additional Natixis shares on top of the 60 shares initially awarded. The additional shares awarded are subject to the same vesting conditions and lock-up period as the initial 60 shares.
This compensation will be settled in two ways: a one portion will be settled in cash, indexed to the price of the Natixis share: one-third will be paid in March 2011, one-third in March 2012 and the last third in March 2013; a the other portion will be settled in Natixis shares: one-third in March 2011, one-third in March 2012, and the last third in March 2013. The delivery of the shares will be followed by a two-year holding period.
The accounting treatment applicable to cash-settled sharebased payments is governed by IFRS 2 “Share-based Payment”.
The compensation begins to be recognized at the beginning of the year in which the employees provide the related service, i.e., January 1, 2009.
The tax charge for the year comprises: a tax payable by French companies at the standard rate of 34.43%, and by foreign companies and branches at the local rate; a deferred taxes arising from temporary differences between the carrying amount of assets and liabilities and their tax basis, which are calculated using the balance sheet liability method.
Deferred tax assets are only recognized at the reporting date if it is probable that the tax entity concerned is likely to generate suffi cient taxable income in the foreseeable future against which the deferred tax assets can be utilized.
The French Finance Act for 2010 replaced business tax with the “contribution économique territoriale”. This tax includes the real property contribution, or “contribution foncière des entreprises“ (CFE) and the value added contribution, or “cotisation sur la valeur ajoutée des entreprises“ (CVAE). The CFE is treated as a tax other than on income, and will be recognized in the 2010 fi nancial statements within “Operating expenses” in the consolidated income statement. Natixis considers that the same treatment will be applied to the CVAE, since its calculation is not based on taxable income. As both components of the new tax will be treated as a tax other than on income rather than as income tax, no deferred taxes have been recognized in this respect in the December 31, 2009 fi nancial statements.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 5.22 - Financing and guarantee commitments
Financial guarantee commitments not classifi ed as derivatives are contracts requiring the issuer to make specifi c payments to repay the business guaranteed for a loss that it has incurred owing to the failure of a debtor to make the contractual installments due. The exercise of these rights is contingent on the occurrence of an uncertain future event.
In accordance with paragraph 43 of the amendment to IAS 39 and IFRS 4 (published by the IASB in August 2005 and adopted by the European Union), fi nancial guarantees given are carried at their fair value plus any transaction costs directly attributable to the issuance of the guarantees. For independent agreements entered into at market rates, fair value at the inception of the agreement is equal in theory to the amount of premium(s) received. All fi nancial guarantees issued within Natixis are entered into at market rates.
Financial guarantees received are not dealt with by any IFRS standard. In the absence of specifi c guidance, the accounting treatment applied must be determined by analogy with the accounting treatment prescribed by other standards in similar situations. Accordingly, guarantees received meeting the defi nition of a fi nancial guarantee for an issuer are accounted for in accordance with: a IAS 39, for guarantees received in respect of financial instruments; a IAS 37, for guarantees received in respect of liabilities falling within the scope of IAS 37.
At the reporting date, Natixis assesses whether or not there is any objective evidence of impairment for loans and receivables , either on an individual basis or collectively by risk category. To identify evidence of impairment, Natixis analyses trends in a number of objective criteria, but also relies on the judgment of its own expert teams. Similarly, Natixis may use its expert judgment to establish the likely timing of recoveries (where the aim is to calculate the amount of individual impairment losses), or to adjust the amount of expected losses under the Basel II framework, on which the amount of collective provision is based.
Natixis calls on independent actuaries to calculate its principal employee benefi ts. The discount rates, future salary increase rates and rates of return on plan assets used are based on observed market rates at the reporting date, for example the yield on French government bonds for discount rates. When applied to long-term benefi t obligations, these rates introduce uncertainty into the valuations.
Deferred tax assets are only recognized when they are expected to be recovered within a specifi ed timeframe.
At Natixis, the recognition of deferred tax assets is based on fi ve-year business plans drawn up for tax purposes within the scope of the New Deal business plan. Based on these forecasts, future transactions will generate suffi cient taxable income against which the deferred tax assets can be utilized.
Net income/(loss) attributable to the Group (in millions of euros) (1,707) (2,799) 1,101
Average number of shares used to calculate earnings/(loss) per share 2,897,417,712 1,786,024,375 1,219,395,341
Average number of shares used to calculate diluted earnings/ (loss) per share 2,903,968,968 1,791,784,463 1,224,841,727
(a) The difference represents interest paid following the partial repayment of the shareholder advance, treated as a dividend payment for accounting purposes.
6.1 - Financial assets and liabilities at fair value through profit and loss
These assets and liabilities are measured at fair value at the reporting date, with changes in value, including interest, recognized in income under “Net gains or losses on fi nancial instruments at fair value through profi t and loss”.
6.1.1 - FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS
6.1.1.1 - Variable-income securities at fair value through profi t and loss
Exposure to credit risk represents a signifi cant share of the fair value of loans and receivables designated at fair value through profi t and loss shown on the balance sheet. Purchases of credit derivatives covering exposure to credit risk on loans and receivables are shown at their fair value as recognized on the balance sheet. Changes in fair value are calculated for the period and in aggregate as from the date of initial recognition of the advance or loan.
The use of the fair value option is considered to provide more pertinent information in two situations: a where there is an accounting mismatch between economically linked assets and liabilities. This arises for example in the case of an asset and a hedging derivative when the criteria for hedge accounting are not met; a where a portfolio of financial assets and liabilities is managed and recognized at fair value as part of a documented policy of asset and liability management.
At December 31, 2009, fi nancial liabilities at fair value through profi t and loss primarily comprised derivatives not used as hedging instruments.
Other liabilities 2,165 3,444 6.1.2.1 - Financial liabilities designated at fair value through profi t and loss and credit risk
The above valuations were calculated using the methodology described in Note 5.6.
The use of the fair value option is considered to provide more pertinent information in two situations: a where there is an accounting mismatch between economically linked assets and liabilities. The fair value option is typically used when the criteria for hedge accounting are not met: in this case, changes in the fair value of the hedged item automatically offset changes in the fair value of the hedging derivative; a where a portfolio of financial assets and liabilities is managed and recognized at fair value as part of a documented policy of asset and liability management.
(b) Natixis has contracted a call option with BPCE, enabling it to recover, after a 10-year period, any net gains on changes in fair value transferred to BPCE using TRS. The call option was recognized in assets for €535.6 million at December 31, 2009.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.2 - Hedging derivatives
Cash fl ow hedging is mainly used by Natixis as a structural hedge of interest rate risk.
The fair value of loans and receivables to customers totaled €101,692 million at December 31, 2009 versus €112,785 million at December 31, 2008.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.6 - Other information relating to financial assets 6.6.1 - RECLASSIFICATION OF FINANCIAL ASSETS IN THE PERIOD PURSUANT TO THE AMENDMENT TO IAS 39 AND IFRS 7 PUBLISHED ON OCTOBER 13, 2008
The fi nancial instruments reclassifi ed in accordance with the October 13, 2008 amendment have been measured using the valuation models described in Note 5.6. Changes in the fair value of reclassifi ed assets that would have had an impact on income for 2009 if the October 1, 2008 reclassifi cation had not taken place, are summarized in the table below.
Impairment that would have been recognized in income in respect of assets previously classifi ed as available-for-sale
Changes in fair value that would have been recognized in equity to be recycled to the income statement in respect of assets previously classifi ed as available-for-sale
Instruments reclassifi ed within a Available-for-sale fi nancial assets a Held-to-maturity fi nancial assets 6.6.3 - FINANCIAL ASSETS PROVIDED AS SECURITY
The table below shows the carrying amount of: a repurchased securities and other items provided as security for liabilities; a receivables for which ownership has been transferred to BPCE or SFEF as security in connection with the financing indirectly received from SFEF through BPCE.
This caption consists of fi nancial assets received as security under fi nancial guarantee agreements with the right to reuse the assets in the absence of any default on the part of the owner of the guarantee. No material fi nancial assets were received by Natixis as security under fi nancial guarantee agreements.
Certain assets may be transferred without being fully or partly derecognized, on the grounds that they do not meet the criteria for derecognition set out in paragraphs 15 to 37 of IAS 39.
Such transfers are generally performed as part of synthetic securitization transactions.
Restructured assets mainly concern Natixis S.A. (€33 million in 2009 versus €36 million in 2008), Natixis Financement (€44 million in 2009 versus €35 million in 2008), and Natixis Moscou (€28 million in 2009).
6.6.7 - FINANCIAL ASSETS THAT ARE PAST DUE BUT NOT IMPAIRED
Amounts less than 90 days past due represent 39% of the total.
The table below presents the fair value of all fi nancial assets, whether or not they are recognized at fair value in the balance sheet.
(in millions of euros) Assets Carrying amount Level 1 Level 2 Level 3
Derivative instruments not eligible for hedge accounting (positive fair value) 99,695 2,117 94,329 3,249
Financial assets designated at fair value through profi t and loss 27,876 9,481 16,645 1,751
Securities designated at fair value through profi t and loss 15,371 9,148 5,231 993
Other fi nancial assets designated at fair value through profi t and loss 12,505 333 11,414 758
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.6.8.1 - Financial assets at fair value measured using level 3 of the fair value hierarchy
TOTAL FINANCIAL ASSETS RECORDED AT FAIR VALUE 4,986 540 (2,569) (12)
Sensitivity a nalysis of the fair value of fi nancial instruments measured according to level 3 (assets and liabilities)
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.8 - Accrual accounts, other assets and liabilities
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.8.3 - INSURANCE ACCRUAL ACCOUNTS
Other liabilities 3 3 6.9 - Property, plant and equipment, intangible assets, investment property 6.9.1 - CHANGES IN PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS OVER THE PERIOD
The table lists the assets obtained by taking possession of guarantees: it shows the type and carrying amount of such assets (securities, buildings, etc.), recognized after calling on guarantees or leveraging other forms of credit enhancement (e.g. surety ).
Natixis Real Estate Capital Inc. recovered property through mortgage loan guarantee foreclosures for an amount of €15 million.
Equity and debt instruments represent securities received following the default during the period of counterparties for repos and securitization transactions at Natixis Financial Product totaling €124 million.
(c) Impairment of goodwill relating to Natixis Private Equity subsidiaries (see Note 14).
The fair value of deposits from banks totaled €95,498 million at December 31, 2009 versus €96,402 million at December 31, 2008.
The fair value of customer deposits amounted to €42,607 million at December 31, 2009 versus €58,726 million at December 31, 2008.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.13 - Debt securities
(a) At December 31, 2008, the downturn in fi nancial markets led to the recognition of a deferred participation asset totaling €925 million (see Notes 2.9 and 6.8.3.1). At December 31, 2009, in light of improving market conditions, a net deferred participation liability was recognized for €485 million under “Profi t-sharing reserves”.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.15 - Provisions and impairment 6.15.1 - OVERVIEW OF PROVISIONS
Provisions for risks and costs 1,260 651 (280) (162) (17) (22) (47) 1,382
Provisions for current income tax 222 25 (21) (8) 0 7 225
(a) Of which €463 million in provisions at December 31, 2009 in respect of risks arising from the Madoff scam.
(b) Of which €26 million refl ecting the estimated cost relating to the purchase offer received for part of the Natixis Private Equity (NPE) portfolio.
At the same time, Natixis carried out a deeply subordinated securities issue which was fully subscribed by BPCE. The securities have the same characteristics as the securities issued by BCPE on the market (with the exception of the credit spread associated with both issuers) and concern the same principal amount.
(in millions of euros) 12.31.2008 Issues (a) Redemptions (b) Conversion differences Other (c) 12.31.2009
This table does not include: a preference shares; a accrued interest.
(a) Issues carried out in 2009 comprise: a €0.8 billion in deeply subordinated securities issued within the scope of the July 2009 exchange offer; a €2 billion in deeply subordinated loans subscribed by Société de Prise de Participation de l’État (SPPE) (see Note 6.17); a €0.7 billion in deeply subordinated securities subscribed by BPCE in the last quarter of the year.
(b) Redemptions in 2009 comprised: a cancellation of a euro-equivalent amount of €1 billion in deeply subordinated securities within the scope of the July 2009 exchange offer; a redemption of an amount of €0.7 billion from BCE in the last quarter of the year; a redemption of €0.1 billion in redeemable subordinated securities.
a level 1: prices quoted on an active market for an identical financial instrument; a level 2: inputs other than quoted prices included in level 1, either directly (prices), or indirectly (price-related data) observable; a level 3: unobservable inputs.
When several levels are used, the classifi cation of the instrument refl ects the most signifi cant input and the lowest level in the hierarchy.
Financial liabilities designated at fair value through profi t and loss 49,773 49,773
Other fi nancial liabilities designated at fair value through profi t and loss 8,437 8,437
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.18.1 - FINANCIAL LIABILITIES AT FAIR VALUE MEASURED USING LEVEL 3 OF THE FAIR VALUE HIERARCHY
Financial liabilities at fair value through profi t and loss - Trading 2,006 616
Financial liabilities at fair value through profi t and loss 78.8 33.2 17.3 9.8 9.9 13.8
Financial assets and liabilities valued at amortized cost give rise to the recognition of interest calculated using the effective interest rate (EIR) method.
Interest accrued on impaired loans and receivables (including restructured items) 16 16 13 13 7.2 - Net fee and commission income
The method of accounting for fees and commissions received in respect of services or fi nancial instruments depends on the ultimate purpose of the services rendered and the method of accounting for the fi nancial instruments to which the service relates. Fees and commissions for one-off services, such as business-provider commission, are recognized in income as soon as the service is provided. Fees and commissions for ongoing services such as guarantee commissions or management fees are recognized over the service period.
Fees and commissions that form an integral part of the effective yield on an instrument such as commitment fees or loan set-up fees are recognized as an adjustment to the effective interest rate over the estimated term of the applicable loan. These fees and commissions are recognized as interest income rather than fee and commission income.
(a) The premium paid to BPCE in respect of the guarantee given against GAPC assets classifi ed as “Loans and receivables ” and “Availablefor -sale fi nancial assets” is recognized in expenses pro rata to the write-back of the provisions and the discounts recognized in respect of reclassifi cations during the period.
The cost relating to the premium at December 31, 2009 is shown in commissions on guarantee commitments for €97 million.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 7.3 - Gains and losses on financial instruments at fair value through profit and loss
This item includes gains and losses on fi nancial assets and liabilities at fair value through profi t and loss, whether held for trading or designated as at fair value through profi t and loss, including interest.
(c) This item refl ects: a the balancing cash adjustment in respect of unwinding swaps previously contracted to hedge issues of deeply subordinated notes reclassifi ed to equity to be recycled to income at December 31, 2009 for €62 million (see Note 6.16); a a €92 million gain resulting from unwinding derivatives hedging exchanges of deeply subordinated notes as described in Note 6.16.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 7.4 - Net gains or losses on available-forsale financial assets
Variable-income securities classifi ed as available-for-sale are tested for impairment when their carrying amount is higher than their recoverable amount.
Loans outstanding with a theoretical syndication date expired as at December 31, 2009 were analyzed on a case-by-case basis in order to take into account the market discounts observed at the end of the reporting period.
Other related income and expenses 7.5.3 1,336 (234) 1,102 594 (465) 129
Gains or losses on sales 1 (12) (11) 1 (7) (6)
(b) The “Other operations” line refl ects: a a gain of €418 million on the reclassifi cation within equity of perpetual deeply subordinated notes and preference shares at December 31, 2009 (see Note 6.16); a a gain of €392 million relating to the July 2009 exchange of deeply subordinated notes (see Note 6.16).
Operating expenses comprise mainly payroll costs, including wages and salaries net of rebilled expenses, social security expenses and employee benefi ts such as pensions (defi ned benefi t plans), and expenses relating to share-based payment recognized in accordance with IFRS 2.
Deferred compensation awarded to fi nancial market professionals in respect of 2009 will be settled partly in cash indexed to the price of the Natixis share, and partly in Natixis shares. The cost relating to this compensation is calculated in accordance with IFRS 2 and recognized over the vesting period starting January 1, 2009, the date on which the employees began to provide the related services.
(a) Including tax on bonuses fully covered by a provision at December 31, 2009 for €37 million (see Note 11.2.2).
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 7.7 - Cost of risk
“Impairment of individual loans and receivables ” includes impairment recognized against securities classifi ed as “Loans and receivables ” (including items reclassifi ed following the October 13, 2008 amendment) and fi xed-income securities classifi ed within available-for-sale fi nancial assets.
Provisions for risks and other costs (391) 52 (339) (614) 34 (580)
Net capital gains/(losses) on disposals (30) 2 (28) 104 (4) 100
Share in unrealized or deferred gains or losses of associates (215) (468)
TOTAL CHANGES IN UNREALIZED OR DEFERRED GAINS OR LOSSES 587 (14) 358 (1,687) 138 (2,016)
Building on the technical expertise of its teams, combined with its widely recognized, award -winning research capabilities, Natixis designs bespoke solutions for its customers incorporating the most recent market developments.
a Debt and Financing provides a dedicated platform offering financing solutions and advisory services boosted by additional expertise in specialized origination, structured finance and distribution.
a Capital Markets: Natixis boasts leading expertise on interest rate, currency, commodity, credit and equity markets, which are used to develop its broad line-up of standard and bespoke products.
This business line groups together a number of service businesses primarily serving the Caisses d’Epargne and Banques Populaires networks, and other Natixis business lines: a Factoring: this is France’s third-leading factoring business, providing companies with invoicing management solutions such as financing, insurance, and collection. Natixis Factor uses the Banques Populaires and Caisses d’Epargne networks, which account for a significant portion of its business.
a Leas ing: this business line provides financing solutions for real estate and non real estate managed under finance leases or other long-term leasing arrangements.
a Securities Services: securities back office services for retail businesses: custody (account administration, back office outsourcing, depositary control), office services.
a Payment Services: systems and infrastructure: electronic banking, issuance and collection of high-volume electronic transfers, check processing.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 9.3 - Investment Solutions a Asset Management: Asset management activities are grouped together within Natixis Global Asset Management. They cover all asset categories and are carried out mainly in the US and France. These activities are performed by autonomous entities (specialized management companies and specialized distribution units) coordinated by a holding company that ensures the organization’s consistency by overseeing its strategic direction. These companies are thus able to focus on their core business of achieving high performance, while retaining the option of developing their own institutional clientele and benefiting from the business line’s other support functions, based on appropriate economic models. A number of them have forged a strong reputation, such as Loomis Sayles, Harris Associates, AEW and Natixis Asset Management.
More than two-thirds of Coface’s revenue is derived from its international operations. Coface has its own distribution network spanning 67 countries, plus a further 44 countries through the Credit Alliance network.
The above data are based on the accounting principles applied in accordance with IFRS as adopted by the European Union at December 31, 2009.
Loans and receivables to fi nancial institutions 60,578 462 613 255 41 2,971 3,757 68,677
Assets at fair value through profi t and loss 202,918 7,369 515 130 1,712 72,265 585 285,494
This information is an integral part of the fi nancial statements currently being audited.
Number of employees * 19,439 22,096 * Full-time equivalent current employees of the Natixis Group at the reporting date.
Payroll costs include wages and salaries net of rebilled expenses paid within 12 months of the end of the reporting period in which the services were rendered, deferred cash-settled or equity-settled compensation, employee incentives and profi tsharing for the period, the cost of pensions and other employee benefi t obligations such as long-service awards.
This item includes wages and salaries paid within 12 months of the end of the reporting period in which the related services were rendered, employee incentives and profi t-sharing, meeting the defi nition of short-term benefi ts under IAS 19 “Employee Benefi ts”. In accordance with this standard, short-term benefi ts are expensed in the period in which the employees render the services giving rise to such benefi ts.
As the compensation had not been formally awarded at the reporting date, the related costs involved were calculated using the best estimates of the inputs at the reporting date. These include the share price to be used as the basis for the number of shares awarded, and volatility and dividend assumptions. The features of the plans and the assumptions used are described in Note 11.2.4.
A provision was set aside in the 2009 fi nancial statements for the tax levied on bonuses. The provision is based on 50% of the deferred or non-deferred variable compensation basis (and any portion of individual compensation in excess of €27,500). An amount of €37 million was recognized in this respect at December 31, 2009.
The main defi ned contribution plans available to Natixis employees are operated in France. They include the mandatory old-age pension scheme and national schemes AGIRC and ARRCO.
Pension plans which employees can opt for on a discretionary basis are operated by certain Natixis entities and are also classifi ed as defi ned contribution plans. These entities have a single contribution obligation (“PERCO” contribution).
The amount of the provision for post-employment defi ned benefi t plans is calculated on an actuarial basis using a number of demographic and fi nancial assumptions.
The annual defi ned benefi t plan expense comprises: a additional entitlements vested by all employees; a interest cost (impact of unwinding the discount); a the expected return on plan assets; a amortization of actuarial gains and losses (application of the “corridor” method) and past service costs; a the impact of any plan curtailments or settlements.
These include long-service awards and compensation deferred more than 12 months after the reporting date and payable in cash, such as compensation paid under the retention plan (see Note 11.2.2).
The Social Security Financing Act (LFSS) for 2010: a doubles the contribution to defined benefit plans from 8% to 16%, based – in accordance with the option used by Natixis – on benefits paid as from January 1, 2010 exceeding one-third of the maximum social security threshold; a the two-fold increase in contributions to defined benefit plans leads to an increase of €3.1 million in the gross benefit obligation at December 31, 2009. This amount will be taken to income over the vesting period applicable to the rights under the plans, estimated at five years; a introduces an additional 30% contribution payable by employers on benefits exceeding eight times the maximum social security threshold and applicable to retirement benefits paid as at January 1, 2010.
Natixis is not affected by this additional contribution, since the level of benefi ts granted does not meet the specifi ed threshold.
For end-of-career allowances and long-service awards, employee turnover is calculated by age bracket and grade based on a three-year average. A rate of 0% is used for employees aged 55 and over.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts e) Employee benefi t obligations at December 31, 2009
Benefi ts vested over the period 4 9 4 12 29
Change in actuarial gains and losses not recognized 23 3 (10) 16
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts f) Change in the fair value of assets held to fund post-employment benefi ts granted to employees
Fair value of plan assets (in millions of euros) 175 115 22 2 25 339 h) Experience adjustments relating to post-employment defi ned benefi t plans and other long-term employee benefi ts
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts i) Analysis of sensitivity to assumptions applied to defi ned benefi t plans and other long-term employee benefi ts recognized at December 31, 2009
Post-employment defi ned benefi t plans Other long-term employee benefi ts
Impact on present value of gross benefi t obligations at December 31 12.25% 11.23% 7.49% 2.00%
Number of options at 01.01.2009 7,543,690 15,123,108 6,249,312 a Awarded in 2009 a Expired in 2009 a Exercised in 2009
(c) Dividend payment rates generally correspond to the last dividend payment made and no estimated future increases are taken into account.
In connection with the September 2008 rights issue, the preferential subscription rights attached to preferred shares owned by Natixis were sold. To safeguard the rights of benefi ciaries of the bonus share plan, it was decided that an adjustment would be made to the plan. These involved awarding 33 additional Natixis shares on top of the 60 shares initially awarded. The additional shares awarded are subject to the same vesting conditions and lock-up period as the initial shares. In accordance with IFRS 2, this new award increases the plan’s aggregate fair value. The fair value of the commitment corresponding to the 33 additional shares awarded to Natixis employees is added to the expense already recognized under IFRS 2 in respect of the initial award of 60 bonus shares.
This additional expense is recognized in payroll costs over the period remaining until the date the shares are effectively granted (November 12, 2009). The amount of the additional expense is calculated based on the share price at the grant date (December 8, 2008), taking into account the number of benefi ciaries and the proportion of those benefi ciaries that remained employed by the Group during that period.
Accordingly, at that date each employee became the owner of 93 shares, locked up for a further two-year period ending November 14, 2011.
(a) Allocations not having been formally carried out at the reporting date, these expenses have been estimated using best available estimates of inputs at the reporting date. These inputs relate to the share value determining the number of units to be allocated as well as volatility and dividend assumptions. These estimates will be revised at the allocation date.
Natixis adapts the management of its capital structure in line with changes in economic conditions and in the risk profi le of its operations. Its objectives, policies and procedures remained unchanged in 2009.
At December 31, 2009: a perpetual deeply subordinated notes totaled €6.018 billion; a preferred shares totaled €202.5 million.
On June 18, 2009, Natixis was granted two advances totaling €1.5 billion from its main shareholders, Banque Fédérale des Banques Populaires and Caisse Nationale des Caisses d’Epargne (1).
At December 31, 2009, the €500 million outstanding on the advance was included on the “Share capital and reserves” line in the consolidated balance sheet.
(1) On August 3, 2009, Banque Fédérale des Banques Populaires and Caisse Nationale des Caisses d’Epargne merged to form BPCE, the new central body for the Banque Populaire and Caisse d’Epargne groups.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 12.4 - Regulatory capital
As a lending institution, Natixis is subject to banking regulations and to supervision by the French Banking Commission. Supervision is on a consolidated basis and is designed to set a number of rules guaranteeing the bank’s capital adequacy, liquidity and fi nancial equilibrium. The measures deployed to meet these objectives are chiefl y quantitative (capital adequacy ratios, management of large exposures and liquidity risk). Qualitative measures are also used, based on internal control requirements.
The capital adequacy ratio encompasses credit risk, market risk and operational risk. This ratio measures the adequacy of regulatory capital in relation to risk. To obtain the capital adequacy ratio, the Bank’s consolidated regulatory capital, calculated in accordance with CRBF regulation 90-02, is divided by the entity’s weighted credit, market and operational risks. Natixis complied with the 8% minimum capital adequacy ratio at December 31, 2009.
The amounts shown represent the nominal value of the commitment undertaken: (in millions of euros) 12.31.2009 12.31.2008
To customers 103,331 105,339 a Real estate guarantees 486 1,133 a Administrative and tax bonds 438 550 a Other bonds and endorsements given 86,679 82,154 a Other guarantees 15,728 21,502
On November 12, 2009, BPCE provided Natixis with a guarantee covering 85% of the nominal value of the debt portfolio carried by GAPC and classifi ed in “Loans and receivables ” and “Available-for-sale fi nancial assets” as at July 1, 2009. Under the guarantee, an indemnity is due in the event of any default (on principal, interest, fees, costs and any other amount due in accordance with the contractual documentation for the asset in question) relating to one of the assets in the guaranteed portfolio. Natixis is covered as from the fi rst euro in default and up to 85% of the default amount. This guarantee is shown on the line “Guarantee commitments received from banks” for 85% of the nominal amount of the assets guaranteed.
The following financing commitments fall within the scope of IAS 39: a commitments classified as financial liabilities at fair value through profit and loss. If an entity has a practice of reselling or securitizing loans immediately after they are issued, these loans are accounted for in accordance with IAS 39 as from the date the loan commitment is undertaken; a those which are settled net (i.e., sold); a commitments which result in a loan granted at lower-thanmarket interest rates.
Financing commitments received a From banks 15,234 17,932 a From customers 1,378 1,008
A liquidity line in an amount of €1.02 billion was also granted to a vehicle (Hudson) for which the Natixis is a co-sponsor.
Natixis began negotiations to sell a portion of the Natixis Private Equity portfolio. This concerns the following entities: a the FCPR IXEN fund; a the FCPR IXEN II fund; a venture capital firm IXEN ; a Natixis Investissement and Initiative & Finance Investissement; a fund managers IXEN Partners, Natixis Investissement Partners and Initiative & Finance Gestion.
A provision for €35 million was recognized in the 2009 fi nancial statements to refl ect the estimated cost of this sale. This amount includes €8.6 million in impairment losses taken against the goodwill of the entities to be sold.
15.1 - Finance and operating leases 15.1.1 - LEASES AS LESSOR
Present value of minimum lease payments receivable 1,580 4,009 2,150 7,739
(in millions of euros) Real estate assets Non-real estate assets Total
Unsecured residual value accruing to lessor 363 109 472 15.1.2 - LEASES AS LESSEE
Affi liates consolidated by the equity method (excl. BP and CEP CCIs)
Assets at fair value through profi t and loss 2,502 906 4,394
Financial liabilities at fair value through profi t and loss 3,702 264 2,377
Financial assets at fair value through profi t and loss 10,923 6,020
Revaluation adjustments on portfolios hedged against interest rate risk 8 214
Net gains or losses on available-for-sale fi nancial assets 196 252
In 2008 attendance fees paid to members of the Supervisory Board included a fi xed portion (€10,000 per year per person) and a variable portion (€2,000 per board meeting per person). Members of the Audit Committee and of the Compensation Committee received a fi xed payment (€5,000 and €3,000, respectively) and a variable payment of €1,000 per meeting per person.
This compensation was paid in full at the end of the year.
(b) Total gross compensation paid to members of Natixis’ Executive Management Board during their term of offi ce during the period, including the Chief Executive Offi cer.
Number of members of the Executive Management Board in 2009: 9, members of Executive Board 2008: 17.
Philippe Dupont, Executive Chairman of Natixis (January 1 to March 2, 2009) 60,083 350,000
Dominique Ferrero, member of Natixis’ Executive Board (executive corporate offi cer from January 1 to April 30, 2009 and employment contract) 581,148 904,270
Jean- Pascal Beauffret, member of Natixis’ Executive Board (no corporate offi ce in 2009) - 1,000,647
Anthony Orsatelli, member of Natixis’ Executive Board (no corporate offi ce in 2009) - 695,161
No stock options were awarded to executive corporate offi cers in 2009 and 2008.
On proposal of the Compensation Committee, the Supervisory Board at its Meeting on December 18, 2008, formalized the scheme’s closure to new entrants as from December 15, 2008.
Following changes in the law and new recommendations by AFEP-Medef, Groupe BPCE has also been obliged to close its retirement benefi ts plans for executive offi cers (BP and CE).
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 15.3 - Insurance companies 15.3.1 - INSURANCE COMPANY RESULTS
The main reclassifi cations concern general operating expenses, which are reported by function in the insurance format and by nature in the banking format.
Balance sheet reclassifi cations are immaterial. Most of the balance sheet line items specifi c to insurance companies are shown under “insurance company investments” on the asset side and under “insurance companies’ technical reserves” on the liabilities side. Receivables and related payables, shown under accrued income, prepaid expenses and other assets or deferred income, accrued charges and other liabilities in the insurance format are reclassifi ed in the same lines as the principal in the banking format.
Capital gains and losses on disposal of investments (net of reversals, writedowns and amortization) 104 85 85 20 104
Investment income (net of expenses) 1,522 1,509 (5) 1,503 19 1,522
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 15.3.2 - INSURANCE COMPANIES’ CONTRIBUTION TO THE CONSOLIDATED INCOME STATEMENT
Net gains or losses on fi nancial instruments at fair value through profi t and loss 645 (1,399)
NET INCOME (GROUP SHARE) (66) 187 15.4 - Statutory Auditors’ fees
The bank’s fi nancial statements are audited by three independent accounting fi rms. The terms of Deloitte & Associés and Salustro Reydel will expire with the General Shareholders’ Meeting called to approve the 2009 fi nancial statements.
The Statutory Auditors were paid the following amounts in return for their work: (in thousands of euros)
Audit a Audit, certifi cation, review of individual and consolidated fi nancial statements 8,828 7,230 95% 73% 4,469 3,480 98% 74% 3,588 3,428 97% 87%
Fully and proportionally consolidated subsidiaries and branches 6,699 5,613 72% 56% 2,617 1,996 58% 42% 1,854 1,912 50% 48%
Legal, tax and employee-related 123 607 1% 6% 23 108 1% 2% 0 62 0% 2%
NATIXIS AUSTRALIA PTY LTD Financial institution FC 100 100 100 100 Australia
NATIXIS ALTERNATIVE INVESTMENTS INTERNATIONAL S.A. Holding company FC 100 100 100 100 Luxembourg
IXIS ALTERNATIVE HOLDING LIMITED Holding company FC 100 100 100 100 UK
NATIXIS SECURITIES NORTH AMERICA INC. Brokerage FC 100 100 100 100 USA
NATIXIS CAPITAL ARRANGER CORP Brokerage services FC 100 100 100 100 USA
Commercial real estate fi nance FC 100 100 100 100 USA
PLAZA SQUARE APPARTMENTS OWNERS LLC (1) Real estate fi nance FC 100 100 100 100 USA
NEXGEN REINSURANCE LTD (EX-NEXGEN RE LTD) * Reinsurance FC 100 100 100 100 Ireland
NATIXIS GLOBAL ASSET MANAGEMENT Holding company FC 100 100 89 89 France
AEW CAPITAL MANAGEMENT, LP Asset Management FC 100 100 89 89 USA
AEW GLOBAL ADVISORS (EUROPE) LTD Asset Management FC 100 100 89 89 UK
AEW II CORPORATION Asset Management FC 100 100 89 89 USA
AEW GLOBAL REAL ESTATE SECURITIES FUND (1) (5) Asset Management FC 100 100 0 0 USA
AEW PARTNERS VI, INC. (5) Asset Management FC 100 100 0 0 USA
AEW VIF INVESTORS, INC. Asset Management FC 100 100 89 89 USA
ALPHASIMPLEX GROUP LLC Asset Management FC 100 100 89 89 USA
ALTERNATIVE STRATEGIES GROUP LLC Asset Management FC 100 100 89 89 USA
ASG DIVERSIFYING STRATEGIES FUND (1) (5) Asset Management FC 60 60 0 0 USA
CAPITAL GROWTH MANAGEMENT, LP Asset Management EM 50 50 50 44 USA
CGW GESTION D’ACTIFS Asset Management EM 33 20 33 18 France
AEW GLOBAL UK LTD ( ex -Curzon Global UK LTD ) * Asset Management FC 100 60 89 53 UK
NATIXIS ÉPARGNE FINANCIÈRE GESTION (ex -Ecureuil G estion ) * Asset Management FC 100 100 89 89 France
NATIXIS ÉPARGNE FINANCIÈRE GESTION FCP (ex -Ecureuil G estion Fonds Commun Placement ) * Asset Management FC 100 100 89 89 France
FEDERAL STREET MANAGEMENT, INC. Asset Management FC 100 100 89 89 USA
GATEWAY HEDGE US EQUITIES FUND (1) (5) Asset Management FC 68 68 0 0 USA
HANSBERGER GLOBAL INVESTOR, INC. Asset Management FC 100 100 89 89 USA
AURORA INVESTMENT MANAGEMENT (ex -Harris Alternatives LLC ) * Asset Management FC 100 100 89 89 USA
HARRIS ASSOCIATES INVESTMENT TRUST Asset Management FC 100 100 89 89 USA
HARRIS ASSOCIATES, INC. Asset Management FC 100 100 89 89 USA
NATIXIS GLOBAL ASSOCIATES AUSTRALIA HOLDINGS, LLC Holding company FC 100 100 89 89 Australia
NATIXIS ASSET MANAGEMENT JAPAN CO., LTD Asset Management FC 100 100 89 89 Japan
NATIXIS INVESTMENT SERVICES JAPAN, LTD Distribution FC 100 100 89 89 Japan
LOOMIS SAYLES DISTRIBUTORS, INC. Distribution FC 100 100 89 89 USA
LOOMIS SAYLES DISTRIBUTORS, LP Distribution FC 100 100 89 89 USA
MC MANAGEMENT, LP Holding company FC 100 100 89 89 USA
NATIXIS GLOBAL ASSET MANAGEMENT CORPORATION Holding company FC 100 100 89 89 USA
NATIXIS GLOBAL ASSET MANAGEMENT HOLDINGS, LLC Holding company FC 100 100 89 89 USA
NATIXIS GLOBAL ASSET MANAGEMENT PARTICIPATIONS 1 Holding company FC 100 100 89 89 France
NATIXIS GLOBAL ASSET MANAGEMENT PARTICIPATIONS 4 Holding company FC 100 100 89 89 France
NATIXIS GLOBAL ASSET MANAGEMENT, LLC Holding company FC 100 100 89 89 USA
NATIXIS GLOBAL ASSOCIATES GERMANY Distribution FC 100 100 89 89 Germany
NATIXIS GLOBAL ASSOCIATES ITALIA Asset Management FC 100 100 89 89 Italy
NATIXIS GLOBAL ASSOCIATES UK Distribution FC 100 100 89 89 UK
NATIXIS GLOBAL ASSOCIATES, LLC Distribution FC 100 100 89 89 USA
NATIXIS GLOBAL ASSOCIATES SWITZERLAND Asset Management FC 100 100 89 89 Switzerland
NATIXIS CASPIAN PRIVATE EQUITY Asset Management EM 40 40 40 35 USA
REICH & TANG ASSET MANAGEMENT, LLC Asset Management FC 100 100 89 89 USA
SNYDER CAPITAL MANAGEMENT, LP Asset Management FC 100 100 89 89 USA
VAUGHAN NELSON TRUST COMPANY Asset Management FC 100 100 89 89 USA
VAUGHAN NELSON VALUE OPPORTUNITIES FUND (1) (20) Asset Management 0 0 89 89 USA
WESTPEAK GLOBAL ADVISORS, LP Asset Management FC 100 100 89 89 USA
BANQUE PRIVÉE SAINT DOMINIQUE (12) ** Private Banking 0 0 100 100 France
MANTRA GESTION Mutual fund holding company EM 34 34 34 33 France
NAMI INVESTMENT (1) (18) Insurance real estate investments FC 100 100 0 0 France
NATIXIS CONSUMER FINANCE IT (EX-NATIXIS CONSUMER FINANCE) Consumer loans FC 100 100 100 100 France
Institutional safekeeping - Mutual fund depositary bank 0 0 50 50 France
CACEIS BANK DEUTSCHLAND (7) Securities holding 0 0 50 50 Germany
CACEIS CORPORATE TRUST (7) Issuer services 0 0 50 50 France
PARTINVEST S.A. (7) Real estate operations 0 0 50 50 Luxembourg
NATIXIS PAIEMENTS ** Banking services FC 100 100 100 100 France
Promotion and international trade operations 0 0 100 99 Hong Kong
COFACE DEBITOREN Receivables management data FC 100 100 100 100 Germany
COFACE FINANS A/S DANMARK (EX-MIDTFACTORING) Factoring FC 75 75 75 75 Denmark
COFACE HOLDING ISRAEL Holding company FC 100 100 100 100 Israel
FIMIPAR ** Buyback of receivables FC 100 100 100 100 France
COFACE CENTRAL EUROPE HOLDING Holding company FC 75 75 75 75 Austria
KOMPASS BELGIQUE Marketing and other services FC 100 100 100 100 Belgium
COFACE UK - SUCC (COFACE S.A.) Insurance FC 100 100 100 100
COFACE FINANCES PAYS-BAS - SUCC COFACE FINANZ Factoring FC 100 100 100 100 Netherlands
COFACE CHILE - SUCC (COFACE S.A.) Insurance FC 100 100 100 100 Chile
COFACE POLAND (EX-ÖKVC POLAND) - SUCC (COFACE AUSTRIA) Insurance FC 100 100 100 100 Poland
COFACE CZECH INSURANCE - SUCC (COFACE AUSTRIA) Insurance FC 100 100 100 100 Czech Republic
COFACE HONG KONG - SUCC (COFACE S.A.) Insurance FC 100 100 100 100 Hong-Kong
COFACE FACTORING LITHUANIA - SUCC (COFACE FACTORING POLAND) (23) Insurance 0 0 100 100 Lithuania
FCPR IXEN II (1) Capital-Investment FC 98 98 98 98 France
NATIXIS PARTICIPATIONS 1 (EX-NXBP1) Holding company FC 100 100 100 100 France
SCI ALTAÏR 1 (1) Real estate operations FC 100 100 100 100 France
SCI VALMY COUPOLE (1) Real estate operations FC 100 100 100 100 France
BANQUE CHAIX (22) Lending institution/Bank EM 20 20 20 10 France
BANQUE MARZE (22) Lending institution/Bank EM 20 20 20 10 France
BGF Non-fi nancial services provider EM 20 20 20 20 France
B-PROCESS Non-fi nancial services provider EM 10 10 10 10 France
FCC AMAREN II Lending institution/other EM 20 20 20 20 France
Lending institution/ Real estate leasing EM 18 18 16 16 France
SMI Industrial and trading company EM 20 20 20 20 France
TISE Non-fi nancial services provider EM 20 20 20 20 France
TRANSIMMO Non-fi nancial/real estate company EM 20 20 20 20 France
** French subsidiaries whose individual prudential oversight is performed based on Group consolidated ratios in conformity with the provisions of Article 4.1 of Rule 2000.03 of the Accounting and Finance Rules Committee.
(7) Disposal of 35% of Caceis to Crédit Agricole on 06.30.2009.
(15) Dilution effect related to an increase in capital wholly subscribed by non-Group entity.
(18) Entry on September 30, 2009 as a result of consolidation thresholds exceeded.
In our opinion, the consolidated fi nancial statements give a true and fair view of the fi nancial position and the assets and liabilities of the group of consolidated companies at December 31, 2009, and of the results of its operations for the year then ended, in accordance with IFRS as adopted by the European Union.
The accounting estimates used to prepare the fi nancial statements for the year ended December 31, 2009 were made against the backdrop of the ongoing fi nancial and economic crisis begun in 2008. In this context, pursuant to Article L.823-9 of the French Commercial Code regarding the justifi cation of our assessments, we draw your attention to the issues set out below: Implementation of a guarantee mechanism for GAPC assets
As described in Note 5.7 to the consolidated financial statements, a guarantee mechanism was set up by BPCE in 2009 covering certain assets ring-fenced in the Workout Portfolio Management structure (GAPC). We analyzed the conditions in which this mechanism was set up and the accounting treatment adopted.
The Group recognizes impairment losses to cover the credit and counterparty risks inherent in its businesses (Notes 5.1, 5.3, 6.4 and 7.7 to the consolidated financial statements). We examined the control procedures relating to credit and counterparty risk monitoring, impairment methodology, the assessment of risks of non-collection and the provisions set aside for individual and collective impairment.
The Group revises its measurement of intangible assets and goodwill carried in its consolidated balance sheet (Notes 2.5, 5.8 and 6.11 to the consolidated financial statements). We examined how this work was carried out as well as the main assumptions and inputs used.
The Group recognized deferred tax assets in respect of tax loss carryforwards (Notes 5.21 and 6.7 to the consolidated financial statements). We examined the main estimates and assumptions on which the recognition of deferred tax assets was based.
3 Cash and balances with central banks 3,497 857 175 3 Government securities and equivalent 30,329 23,161 20,566 23 o/w institutional operations 83 5 Bonds and other fi xed-income securities 31,974 61,966 58,917 5 Shares and other variable-income securities 14,196 17,219 34,080 7 Investments and other long-term securities 10,258 9,644 9,385
Investments in related subsidiaries and affl iliates 15,279 14,760 12,788 4 Leasing 4 Operating leases 12 Property, plant and equipment 182 202 188
See notes no. Off-balance sheet items – Commitments given 2009 2008 2007
Commitments given to customers 19,618 23,016 27,918 23 o/w institutional operations
See notes no. Year ended December 31 2009 2008 2007 24 Interest and similar income 21,363 17,120 17,668
Net gains/(losses) on transactions on securities held for sale (6) (1,194) (789)
Writedown, amortization and impairment of property, plant and equipment and intangible assets (199) (947) (60)
GROSS OPERATING INCOME (LOSS) (259) (4,409) 24 33 Net gains/(losses) on fi xed assets (373) 164 (452)
NOTE 2 CHANGES TO ACCOUNTING METHODS AND COMPARABILITY OF FINANCIAL STATEMENTS 365
NOTE 4 TRANSACTIONS WITH CUSTOMERS AND LEASING OPERATIONS AND SIMILAR 366
NOTE 7 INVESTMENTS IN SUBSIDIARIES AND AFFILIATES, OTHER LONG-TERM SECURITIES AND TREASURY SHARES 369
NOTE 23 STATEMENT OF ASSETS, LIABILITIES AND COMMITMENTS RELATED TO MANAGEMENT OF PUBLIC PROCEDURES 392
NOTE 29 GAINS (LOSSES) ON SECURITIES HELD FOR SALE AND SIMILAR 395
NOTE 39 ESTABLISHMENTS AND OPERATIONS IN NON-COOPERATIVE STATES OR TERRITORIES UNDER THE MEANING OF ARTICLE L.238-0A OF THE FRENCH GENERAL TAX CODE 402
The fi nancial statements for the year are presented in identical format to those for the previous year. Generally accepted accounting principles have been applied in compliance with the principle of prudence based on the following principles: a going concern; a consistency of accounting methods; a principle of periodicity.
Non-performing loans are identifi ed and recognized in accordance with CRC rule 2002-03 as amended. This regulation and the notice issued by the CNC Urgent Issues Task Force on December 18, 2003 set out the rules for classifying nonperforming loans and reclassifying them as unrecoverable loans.
In addition, Natixis recognized the amortization of discounts on restructured loans and the reversal of impairment on unrecoverable loans related to the passage of time to net banking income.
Sectors are reviewed quarterly and, where appropriate, loans in sectors or countries where economic circumstances suggest problems may arise are included in the base for performing loans provisions.
Each group of assets is assessed for objective evidence of impairment based on observable data indicating a likely decrease in the estimated recoverable cash fl ows for that group of assets. A collective writedown in the balance sheet liabilities is taken against any asset group showing objective evidence of impairment. Assets belonging to that group which are subsequently specifi cally identifi ed as impaired (specifi c risk) are removed from the collective writedown calculation basis.
The impairment provision is calculated based on the expected loss at maturity.
Loans on the watch list, for which a Basel II default has been identifi ed, are written down collectively unless they are already subject to specifi c writedowns.
In accordance with Comité de la réglementation bancaire regulation 90-01 on recognizing securities transactions, as amended, the following rules are applied regardless of the legal form of the security concerned (shares, bonds and notes, treasury bills, certifi cates of deposit, negotiable instruments, promissory notes, etc.).
Securities are classifi ed, based on their nature and the purpose for which they are held , in one of the following categories: Securities held for trading, securities held for sale, portfolio investment securities, securities held for investment, other longterm securities, investments in associates and investments in related corporate entities.
a Securities held for trading: securities bought or sold from the start with the intention of reselling or repurchasing them in the short term, securities held as part of a market making operation and securities bought or sold as part of specialized management of a trading portfolio. When initially recognized these securities must be traded on an active market with accessible prices representing actual and regularly occurring market transactions on an arm’s length basis, On acquisition, securities held for trading are recognized at the price paid including any accrued interest. Transaction costs are recognized in expenses. They are valuated at market value at each reporting date and the resulting overall valuation adjustment balance is recognized in income.
a Investment portfolio securities: regular investments for the sole purpose of obtaining a medium-term capital gain and with no intention of long-term investment in the business of the issuing company, are regarded as being part of portfolio management. These notably include securities held as part of the venture capital business. They are carried at acquisition cost and, if necessary, an impairment charge is taken if their carrying amount is more than their value in use (based on transaction value, profitability value, stock market price or other valuation method applied on acquisition).
a Securities held for investment: Fixed-income dated securities acquired with the stated intention of holding them to maturity. These securities are recognized at acquisition cost less expenses and accrued interest. Any difference between the acquisition cost and the redemption price is recorded in income over the remaining life of the securities.
a Other long-term securities: investments made by Natixis in the form of securities, with the intention of forging lasting professional relationships and creating a special professional relationship with the issuing company but without any influence over the management of the corporate entities in which investments were made due to the low percentage of voting rights held.
a Investments in associates: investments that give Natixis significant influence over the corporate bodies of the issuing companies and strategic stakes for the development of Natixis’ operations. These securities are valued individually at the lower of value in use at the reporting date or acquisition cost. Value in use at the reporting date is based on criteria such as revalued net assets and profitability of the companies concerned.
a Investments in related companies : shares and other securities in related corporate entities over which Natixis exercises exclusive control, i.e. corporate entities likely to be fully consolidated in Natixis group. At year-end December 31, 2009, Natixis revalued the securities held in its consolidated subsidiaries. using the discounted cash flow valuation method. This valuation method makes use of projections in the business plans prepared by the management of the main subsidiaries and validated by Natixis’ Executive Management.
The results of this method were corroborated using other customary methods such as market comparison or revalued net assets.
Income, value adjustments and proceeds on disposal of securities portfolios are recognized as follows: a income from variable-income securities is recognized as and when received; a income from fixed-income securities is recognized following the accrual method; a value adjustments and proceeds from the disposal of securities are recognized under different headings depending on which portfolio they belong to: j under “Net banking income” for securities held for trading, securities held for investment and investment portfolio securities, j under either “Cost of risk”, when value adjustments refl ect counterparty risk, or “Gains/(losses) on disposals of fi xed assets”, when value adjustments refl ect market risks and for all gains or losses on disposal of securities held for investment, j under “Gains/ (losses) on disposals of fi xed assets” for investments in associates and related companies and other long-term securities.
In accordance with CRC regulation 2008-17 reclassifi cations from the “held for trading” to the “held for sale” and “held for investment” categories and from “held for sale” to “held for investment” are permitted in exceptional market circumstances requiring a change in strategy or when the securities concerned have ceased to be tradeable on an active market since their acquisition.
The regulation allows banks to sell all or part of the securities reclassifi ed as “held for investment” if the two following conditions are met: a the transfer was motivated by exceptional circumstances; a the market for these securities has become active again.
In line with applicable accounting principles , a specifi c amortization schedule is defi ned for each signifi cant component of an item of property, plant and equipment which has a different useful life or is expected to consume future economic benefi ts differently from the item as a whole. For buildings used in the business and investment property, the following components and depreciation periods are applied: a land: non-depreciable; a non-destructible buildings: non-depreciable; a walls, roofs and waterproofing: 20-40 years; a foundations and framework: 30-60 years; a external rendering: 10-20 years; a equipment and installations 10-20 years; a internal fixtures and fittings 8-15 years.
This item concerns perpetual and dated subordinated notes, for which the redemption, in the event of liquidation ranks behind all other creditors.
1.5 - Financial instruments (futures and options) held for Natixis’ proprietary account
Gains or losses on specifi c hedges are recognized in income on a symmetrical basis with the income and expenses of the position or transaction being hedged.
Forward currency hedging transactions are recognized on the income statement on an accrual basis, either as premiums or discounts where they are intended to hedge commercial transactions, or as accrued interest where they are intended to hedge long-term assets and liabilities denominated in foreign currencies.
Commitments likely to be given to banks within this framework, that extend export credits fi nanced in foreign currencies in order to fi x the exchange rate of their foreign currency borrowings are not included in published off-balance sheet commitments. Income and expenses from institutional operations (exchange rate swaps and guarantees) are charged or paid to the French Treasury in accordance with the terms and conditions agreed.
Contributions paid under defi ned contribution plans are expensed in the period in which the employee has rendered service in exchange for those contributions.
The main assumptions used at December 31, 2009 are: a discount rate: 3.57%; a inflation rate: 1.80%; a expected return on plan assets: 3.45%; a expected annual increase in salaries: 4.10%; a rise in medical expenses: 4.30%; a average working life of employees (years): 13.
However, exchange differences arising on the translation of loans whose exchange rates are guaranteed by the State or related to institutional operations are recognized under accrual accounts.
The tax charge for the year comprises current taxes payable in France at the rate of 34.43%, and at the local corporate tax rate for foreign branches.
As from January 1, 2009, Natixis has applied: a CRC regulation 2009-04 of December 3, 2009, on the valuing of swaps and amending CRB regulation 90-15 on the recognition of interest rate or currency swaps.
This has had no impact on the fi nancial statements at December 31, 2009.
Advances to banks 97,911 96,038 132,333 o/w writedowns of non-performing (2) (123) (1)
Current accounts overdrawn 3,963 3,977 4,688 o/w writedowns of non-performing (147) (86) 0 o/w accrued interest 0 5 o/w writedowns of non-performing (5) 0
IXIS CMNA – AUSTRALIA – HOLDINGS N°2 St Georges 111 76,432,688.93
BP VAL DE FRANCE – ST QUENTIN EN YVELINES 1,475,000 347,739,909.76
CEP LOIRE CENTRE – (formerly VAL DE FRANCE ORLÉANAIS) 3,261,614 270,194,391.00
ICMNA International Holding 1209 Orange Street – Wilmington New Castle County – Delaware
Allocated to employees 167,031 706,541 4.23 aBonus share allocation plan (SAGA) – “1”: data on shares purchased for this line show the additional shares bought in 2009 to cover all the shares allocated to employees in November 2009.
bonus share allocation plan (SAGA) – “2”: aExit data on this line shows the number of bonus shares attributed to employees in November 2009.
Non-operating fi xed assets 3 (1) 2 5 (2) 3 5 (4) 1
(in millions of euros) End 2008 Charges Reversals Other End 2009
Due to banks 100,574 105,553 137,318 o/w other amounts due 86 4 6
(in millions of euros) 2009 2008 2007 o/w securities held for trading 0 0 0 o/w liabilities on securities held for trading 40,087 48,833 46,665
The share capital is composed of 2,908,137,693 shares each with a par value of €1.60. All shares confer the same rights on their holders, except for treasury shares which have no voting rights.
Writedown, amortization and impairment of property, plant and equipment and intangible assets
The tax consolidation convention at Natixis group is based on the principle of neutrality, whereby each subsidiary determines its tax and contributes to the group tax as if it were not consolidated. The tax charge payable by each subsidiary is not affected by consolidation.
The provisions for restitution of corporate tax for consolidated and tax-consolidated subsidiaries are eliminated in the consolidated fi nancial statements.
Independent audit, certifi cation & examination of the separate and consolidated accounts 5.7 5.1 2.7
Article L.511-45 of the French Monetary and Financial Code and the Ministerial order of October 6, 2009, require banks to disclose in a note to their fi nancial statements their establishments and operations in states and territories that do not have an administrative assistance agreement with France to counter fraud and tax evasion, which provides access to banking information.
Company financial performance over the last five years (Articles 133, 135 and 148 of the Commercial Companies Decree)
Income after tax, but before amortization and provisions 7.30 0.51 0.81 (0.82) (0.52)
FINANCIAL DATA6 Statutory Auditors’ report on the parent company fi nancial statements
In our opinion, the parent company fi nancial statements give a true and fair view of the fi nancial position and assets and liabilities of the Company at December 31, 2009, and of the results of its operations for the year then ended.
The Company uses internal models and methodologies to measure fi nancial instruments that are not traded on an active market, as well as to book certain impairment losses (Note 1.5 to the parent company financial statements). We examined the control procedures relating to the assessment of whether a given market was inactive, the validation of models and the defi nition of the parameters used.
As required by law, we verifi ed that the management report contains the appropriate disclosures concerning the acquisition of controlling interests and other shareholdings, and the identity of the Company’s shareholders (or holders of voting rights).
As required by Article L.225-40 of the French Commercial Code , we have been advised of those agreements and commitments which were subject to prior authorization by the Supervisory Board (until April 30, 2009) or the Board of Directors (from April 30, 2009).
Corporate offi cers concerned: Philippe Dupont, Bernard Comolet, Jean Clochet, Jean-Claude Créquit, Stève Gentili, Francis Henry, Bernard Jeannin, Olivier Klein, Yvan de La Porte du Theil, Alain Lemaire, Bruno Mettling, Didier Patault, Philippe Queuille, Philippe Sueur and Jean-Louis Tourret.
On January 12, 2009, the Supervisory Board approved a commutation, or “switch ” agreement between CIFG, Natixis, BFBP, CNCE and key CIFG counterparties (BOA, BNPP, Calyon, CIBC, Citibank, Deutsche Bank, Dresdner, HSBC, Merrill Lynch, Morgan Stanley, SG, etc.). Under this agreement, the counterparties undertook to cancel, in exchange for a cash payment by CIFG, all CDS, insurance and fi nancial guarantees granted to them by CIFG to cover all ABS CDOs without exception and those CDO CRE transactions on which the risk of losses was considered the greatest for CIFG.
The expense recognized by Natixis in respect of this agreement totaled €2,082,393 in 2008 (included within accrued charges). This amount was paid during fi nancial year ended December 31 2009, and had no impact on the fi nancial statements for the year ended December 31, 2009.
1.2 - 2009 revisions to the €25 billion secured bond issue program launched by BFBP and with Natixis as arranger
On February 25, 2009, the Supervisory Board approved the revisions to BFBP’s €25 billion secured bond issue program described in section 2.1.7 below.
On May 13, 2009, the Board of Directors approved an addendum to the credit and fi nancial guarantee master agreement with BFBP, Banques Populaires Covered Bonds (BPCB), Natixis and
FINANCIAL DATA 6 Statutory Auditors’ special report on related party agreements and commitments all Banques Populaires banks (see section 2.1.7 below). The amendment is designed to incorporate Banque Monétaire et Financière and Compagnie Européenne de Garanties et Cautions as providers of loan collateral subsequently pledged by certain Banques Populaires banks participating in the BPCB program.
On July 10, 2009, the Board of Directors approved the tripartite agreements between Natixis, SFEF and each of the central institutions (BFBP and CNCE), designed to set up trust accounts
On August 25, 2009, the Board of Directors approved a number of agreements between Natixis, NTF, SFEF and BPCE, extending the scope of receivables that may be used for SFEF to Natixis Transport Finance. This makes use of a similar legal provision to the one approved by the Board of Directors in paragraph 1.5 above. The agreements cover: a the trust agreement between NTF, Natixis, BPCE and SFEF setting up a trust account (Compte d’Affectation Spécial – CAS) in the name of NTF, with Natixis acting as account administrator; a the representation agreement between Natixis and BPCE allowing BPCE to represent Natixis in its capacity as account administrator in its dealings with SFEF; a the intra-group credit master agreements between Natixis and NTF setting up the loans that can be granted by Natixis to NTF.
1.8 - agreement between natixis and bpce regarding the guarantee mechanism covering certain Gapc assets
On August 25, 2009, the Board of Directors approved an agreement between Natixis and BPCE designed to protect Natixis against future losses and earnings volatility resulting from the assets ring-fenced in its Workout Management Portfolio structure (GAPC).
This agreement resulted in the signature of several agreements between Natixis and BPCE related to the guarantee granted in respect of certain GAPC assets. Details of these agreements and their financial impact are described in paragraph 1.9.
1.9 - agreements between natixis and bpce concerning the Gapc asset guarantee
Corporate officers concerned: François Pérol, Jean-Claude Créquit, Jean Criton, Nicolas Duhamel, Stève Gentili, Bernard Jeannin, Olivier Klein, Yvan de La Porte du Theil, Alain Lemaire, Didier Patault and Philippe Sueur.
Changes in the fair value of total return swaps led to the recognition of an expense of €223,698,138.23 in respect of Natixis operations and an expense of US$43,204,556 in respect of subsidiaries. The US dollar expense is neutralized in Natixis’ financial statements by recording symmetrical income with these subsidiaries.
The premium paid by Natixis in respect of the Purchase Option totaled €367,000,000. The transaction was recognized immediately in the balance sheet, and its remeasurement led to the recognition of income totaling €168,600,000 for 2009.
FINANCIAL DATA 6 Statutory Auditors’ special report on related party agreements and commitments 1.10 - Agreement regarding MiFID between Natixis, BPCE and Crédit Foncier de France (CFF)
Income recognized by Natixis in respect of these agreements totaled €49,233.33 in 2009.
On December 17, 2009, the Board of Directors approved the agreement between Natixis and BPCE to sell Natixis Pramex International.
2.1 - Credit and fi nancial guarantee master agreements between (i) Natixis and BFBP, and (ii) Natixis and CNCE
The purpose of these agreements is to allow Natixis to borrow from its two central bodies in return for posting collateral. The amounts lent represent credit facilities granted under the terms of the agreements between the central bodies and SFEF. The terms therefore refl ect the agreement entered into between the central institutions (and all other banks in the marketplace) and SFEF.
To enable Natixis to act as Surety Agent for the €25 billion secured bond issue program launched by the Caisse d’Epargne group, on March 5, 2008 the Supervisory Board approved the Receivables Pledge Agreement, the Issuer Accounts Pledge Agreement, the Asset Monitor Agreement, and the Master Defi nitions and Constructions Agreement.
The expense recognized by Natixis in respect of this agreement amounted to €11,300,000 in 2009.
2.6 - Natixis’ participation as arranger in the €25 billion secured bond issue program launched by BFBP
To enable Natixis to act as the arranger for the €25 billion secured bond issue program launched by BFBP, on November 23, 2007 the Supervisory Board approved: a credit and financial guarantee frame agreements between BPCB, BFBP, Natixis, and initially, seven Banques Populaires banks; a a letter setting out hedging transactions between BPCB, BFBP and Natixis.
On June 6, 2007, the Supervisory Board approved a service agreement between Ixis CIB, CNCE and Banque Palatine relative to CNCE’s transfer of operational and technical responsibility for the “Click’n Trade” site to Banque Palatine. Under the agreement, CNCE remains the owner of the site and the counterparty for forward and spot exchange transactions carried out in relation to Ixis CIB.
2.9 - Letters of joint and several guarantees and commitments terminated or expired
Between 1996 and 2004, Ixis CIB (formerly CDC Marchés and then CDC Ixis Capital Markets) signed a number of letters of joint and several guarantees and commitments with its successive shareholders, namely Caisse des Dépôts (CDC), CDC Finance – CDC Ixis (replaced in its rights and obligations by CNCE further to the merger on December 31, 2004), and CNCE.
2.12 - Agreement entered into between Ixis CIB (formerly CDC Ixis Capital Markets) and Natixis Securities (formerly CDC Ixis Securities) relative to research offi ce services
On December 19, 2001, the Supervisory Board approved an agreement between Ixis CIB (formerly CDC Ixis Capital Markets) and Natixis Securities (formerly CDC Ixis Securities), setting the conditions for Natixis Securities to invoice Ixis CIB for a percentage of the cost of its research offi ce, set at 25%.
The expense recognized by Natixis in respect of this agreement totaled €3,900,546 in 2009.
2.13 - Service and partnership agreement between Ixis CIB and CNCE
Internal control procedures relating to accounting and fi nancial information 429
C omposition and conditions for the preparation and organization of the work of the Board
Natixis was formed from the merger of the corporate and investment banking operations and services of the Banques Populaires and Caisses d’Epargne in 2006, continuing in 2007 with Ixis CIBs’ merger/acquisition by Natixis. Following a merger that occurred in 2009 between Banque Fédérale des Banques Populaires and Caisse Nationale des Caisses d’Epargne, Natixis’ core shareholder is now BPCE. For further details about Natixis’ history, please refer to c hapter 1, Presentation of Natixis.
The regulatory and standards arrangements with which Natixis’ internal control mechanism complies are as follows: External standards
Many external standards apply due to the diversity of business lines in which Natixis operates. The main standards are as follows: a as a credit institution, Natixis is governed by the provisions of the French Monetary and Financial Code (which encompasses the provisions of the French Banking Act of January 24, 1984 and the French Financial Activity Modernization Act of July 2, 1996) and more particularly, it is subject to the specific banking guidelines resulting from the CRBF regulation relating to internal control; a as a provider of investment services, Natixis is subject to the provisions set out by the French financial market regulator (AMF), and especially the code of good conduct concerning market intervention and customer relations; a Natixis complies with the terms of the codes of good conduct published by professional associations whenever the regulator recommends or enforces their application (for example, the code of ethics and Compliance for Financial Analysts, made mandatory by the AMF); a Natixis applies anti-money laundering and terrorist financing regulations, under the control of the French Banking Commission; a regarding its foreign branches and subsidiaries, Natixis applies the Group’s organization standards and also the regulations defined by the regulators in the markets in which Natixis has offices (in particular, the Financial Services Authority in the United Kingdom, Bundesanstalt für Finanzdienstleistungsaufsicht/BAFIN in Germany, Banca Centrale in Italy, the Financial Supervisory Authority in Japan, the Federal Reserve, the National Association of Securities Dealers and the Securities and Exchange Commission in the United States, the Financial Supervisory Commission in Hong Kong, the Commission de Surveillance du Secteur Financier in Luxembourg, the Irish Financial Services Regulatory Authority in Ireland), where the operations exercised locally are subject to these regulations; a regarding periodic control, Natixis enforces the standards defined in the charter for the Groupe BPCE internal audit sector, in line with those established by the Institut Français de l’Audit et du Contrôle Interne (IFACI) and the Institute of Internal Auditors (IIA).
The objective of these standards is to ensure the effectiveness and quality of the internal operation of the Company, the reliability of accounting and fi nancial information distributed both internally and externally, the security of operations and compliance with laws, regulations and internal policies.
Permanent and periodic controls introduced by Natixis are organized from the fi rst operational or functional level up to the highest level. They are structured according to three principles: a Natixis separates its risk-taking and control functions, and different levels of control. This separation results in: j the distinction between front- and back-offi ce functions, j the existence of fi rst-level controls at the operational level, j the distinction between periodic and permanent controls.
Although responsibility for first-level internal control rests firstly to operational or functional departments, second-level permanent controls and periodic controls are carried out by independent central functional departments (whose heads within the meaning of Articles 7 and 11 of CRBF regulation, report directly to Natixis’ executive body within the meaning of Article 4 of the same regulation ); a Natixis internal control scope is organized by global sectors so as to ensure consistency of the internal control mechanism throughout the whole Company. The internal control system thus covers all risks and extends to all business lines and subsidiaries within Natixis. Local permanent and periodic control functions within subsidiaries or business lines report to Natixis’ corresponding central control departments, either on a functional basis in the case of subsidiaries or on a hierarchical basis in the case of business lines. The “risk”, “compliance” and “inspection/audit” functions constitute distinct business networks; a Natixis structures its control mechanism in a manner consistent with the principles set out by BPCE, with the objective of ensuring a consolidated approach to risk under the framework of control exercised by the shareholder group, the central body, as well as the monitoring requirements on a consolidated basis set down in the CRBF regulation.
These controls are carried out by operational or functional departments under managerial supervision. These departments are responsible for: a verification of the respect of transaction processing procedures and their compliance; a the justification of account balances of active accounts relating to the transactions they carry out.
Second-Level controls comprise two main actors : the Compliance Department (including IT systems security) and the Risk Department
Overall organization 1. The Compliance Department ensures the development of best practices in preventing and managing non-compliance risks at Natixis, thereby helping to prevent financial loss and the associated image risk. Its action takes place in compliance with instructions prescribed by BPCE and its scope of action covers Natixis, its subsidiaries and branches.
Natixis’ Compliance Department ensures, within the framework of sector functioning, a directing and prompting role with Compliance managers in subsidiaries and branches through strong functional reporting lines of a hierarchical nature. Compliance managers in subsidiaries and branches report to the executive body or, exceptionally, if the size of the entity warrants it, to a permanent control manager who, in turn, reports to the executive body, and through a functional reporting line of a hierarchical nature to Natixis’ Chief Compliance Officer.
The role of the professional ethics function is to ensure that regulations applicable to investment service providers that concern Natixis, its subsidiaries and all of its employees are fully known and enforced to ensure market integrity and primacy of customer interests.
The circulation of sensitive information and the detection of confl icts of interest are managed through an IT system used in the CIB business line. This facilitates the holding of lists of insiders and formalizes the recording and archiving of the identifi cation and the processing of potential or confi rmed confl icts of interest. In 2009, this tool was rolled out in all European corporate and investment banking operations and its functionalities have been further improved.
Regulatory developments have been refl ected in the internal compliance procedures. The internal rules, as well as the compliance manual were updated and the content of compliance training has been changed as a result. The Compliance Department has continued to be an active participant in fi nancial sector work on subjects such as short selling, investment advice or the remuneration of market professionals.
The Financial Security Department reports to the Compliance Department and is in charge of the organizational framework within Natixis and its subsidiaries (in coordination with the heads of these entities) to counter money laundering and terrorist fi nancing. Financial Security thus plays an essential advisory, monitoring, training and informational role within the Natixis group.
The anticipatory work undertaken in 2008 enabled Natixis to rapidly comply with regulatory changes (linked to the adaptation of the 3rd European Directive relating to money laundering by the ordinance of January 30, 2009), notably concerning: a the introduction of an approach based on the notion of risk with a graduated scale of the anti-money laundering measures according to the level of risk; a the strengthening of know-your-customer rules with the identification of effective beneficiaries and Politically Exposed Persons; a the extension of the field for the declaration of suspicion of terrorism financing and offenses carrying a prison term of more than one year, including notably, corruption and tax fraud.
Measures to counter the fi nancing of terrorism and compliance with embargos continued in 2009, to respond to obligations to freeze assets, notably with several updates of the European and American (OFAC) listings. This year, developments in the IT system Fircosoft enabled the scope of cash fl ows fi ltered to be extended by integrating new payment messages.
Controls performed by the Compliance Department may take three forms: a controls based on indicators arising from first-level controls; a controls based on warnings given by automated control systems, especially under the framework of anti-money laundering and market abuse detection plans; a controls through checks on accounting documents and, if appropriate, on-site checks, so as to ensure that automated controls are relevant. They also enable to confirm the application of more qualitative rules (knowledge and classification of the customer, application of Chinese walls, management of conflicts of interest, etc.).
CHAIRMAN’S REPORT ON THE COMPOSITION AND CONDITIONS FOR THE PREPARATION AND ORGANIZATION OF THE WORK OF THE BOARD, AND THE INTERNAL CONTROL PROCESS AND RISK MANAGEMENT PROCESS SET UP BY THE COMPANY (ARTICLE L.225-68 OF THE FRENCH COMMERCIAL CODE)7 Internal control process 3.2.2 - IT SYSTEMS SECURITY
He also participates in certain Committees responsible for the Bank’s controls and operational risks, and notably: a the Committee on Operational Risks and IT Systems Security; and a the Natixis Operational Risks Committee.
The Head of ITSS for Natixis oversees the IT security sector that brings together the various parties engaged in mana ging, implementing and controlling the IT system security policy including business continuity. The various participants are as follows: a heads of ITSS appointed in Natixis subsidiaries are responsible for applying the security policy locally according to the specific context of the subsidiary; a local correspondents within the business lines (notably Business Continuity Plan correspondents and logical security correspondents). They are responsible for relaying the security policy locally and delivering advice and assistance on the subject within their scope; and a correspondents within IT project management teams responsible for implementing and maintaining security mechanisms.
A central data base of natural persons is now in place, with a view to strengthening the adequacy of individual clearance control.
ITSS has carried out clearance reviews and, following the recommendations of the so-called Lagarde report, lead a biometric authentication project of trader users (authentication by automatic recognition of individual fi nger veins in place of by identifi er and password input).
To secure passwords of administrators with extensive clearance, an “electronic safe” software package was ordered in 2009. It shall be deployed in 2010.
In 2009 ITSS continued its program of employee awareness, legal monitoring and the establishment of a security policy. Two policies were promulgated in 2009: the physical security policy; and the supplier security policy. These two policies shall be subject to an implementation evaluation in 2010.
Natixis committed at the end of 2009 to a project to formalize the organization charter and functioning of the ITSS and business continuity network to align governance of IT Systems Security with the new directions of the so-called New Deal strategic plan. This charter has been integrated into the two BPCE charters referred to as “IT Systems Security” and “Business Continuity”. This new organization shall be put in place in 2010. Under the governance framework, mapping of security risks will be prepared in line with the mapping of existing operational risks.
The development focus is based around: a the establishment of service continuity plans by the associated support function heads (IT systems, Logistics, Human Resources, Communication) that meet business lines needs; a tracking the rollout of the protection plan against the flu pandemic and management of the various actions necessary. The development of a prevention plan to counter flood risk; a continuing the implementation of the business continuity and crisis management policy. The deployment of the PHENIX software package (management software and maintaining the operability of business continuity plans), the performance of second-level controls and the rollout of centralized reporting; a raising employee awareness about business continuity and training in the sector.
Internal Audit is responsible for verifying the bank’s controls and is one of the bodies responsible for the correct functioning of the Bank’s internal control system within the meaning of CRBF regulation. In this respect, it is independent from all operational entities and support functions. It has no operational role and can therefore never fi nd itself in a position of confl ict of interest.
Internal Audit conducts audit assignments across the entire Natixis scope (parent company, subsidiaries and branches), covering all classes of risk arising from the business lines involved. It has full and unrestricted access to all information, confi dential or otherwise. Its fi eld of investigation encompasses all of Natixis’ operational activities (including run off activities under the GAPC framework, for further information, please refer to chapter 4 “GAPC“ ), its functional sectors – including, notably, entities in charge of permanent control assignments – and its outsourced activities. In all business lines, it carries out in-depth analysis of operations, as well as the “front-to-back” processes by which operations are carried out. These analyses lead to an evaluation of existing control points in processes audited as well as an assessment of risks arising from the activities concerned. They lead, where necessary, to recommendations to strengthen the completeness and robustness of the control or the command mechanisms of risks audited. These recommendations are ranked by order of priority.
Internal Audit’s assignments are set out in a yearly audit plan, which itself forms part of a four-year plan defi ning the frequency of audits and assigning suitable resources according to the scale of risks to be verifi ed.
Natixis’ annual and multi-year audit plans are approved by the Chief Executive Offi cer and by BPCE’s Internal Audit Department. The annual audit plan is examined by the Audit Committee.
In 2009, the Internal Audit Department conducted audit assignments on all risk classes to which Natixis’ operations are exposed including operations managed on a runoff basis in the GAPC, whilst devoting a fairly signifi cant share of its resources to surveys of a regulatory nature, as part of the Bank’s Basel II certifi cation process undertaken by Natixis, as well as assignments conducted in Natixis subsidiaries pursuant to audit agreements entered into with them in 2008.
The Control Functions Coordination Committee (“CFCC”), which already existed within Natexis Banques Populaires, has seen its role renewed within Natixis since 2007.
The Committee is chaired by the Natixis Chief Executive Offi cer, or his substitute the Secretary General, and comprises the Chief Financial Offi cer, the Heads of Risk, Compliance and Internal Audit. The Head of Compliance is secretary of the Committee.
The Risk Department was involved, alongside the Compliance Department, in the work by the HR Department in order to implement the actions necessary for Natixis to comply with the January 14, 2009 order referred to in section 5(g) of CRBF regulation 97-02.
In 2009, in accordance with Articles 17b and 38 of the CRBF regulation, warning thresholds were defi ned by the Natixis Audit Committee.
The Risk Department is responsible for analyzing counterparty credit risk. It conducts this counter-analysis using a formalized credit fi le for each counterparty and benefi ciary group, including all information relevant and useful in taking a decision: a information regarding the client, its business and its environment: financial data, identification and analysis of the client conducted in accordance with review procedures ratified by the Group Compliance Department in the case of a new relationship, internal ratings of the counterparty, taking country risk into account; a external data: rating allocated by rating agencies, segmental analysis, country risk and sovereign risk analyses, etc.; a information regarding commitments, collateral and guarantees; a the credit file summarizing all credit risks incurred by Natixis, including those relating to market transactions; and a information concerning the counterparty’s profitability.
Each credit fi le submitted for a decision must include an internal rating proposal, a LGD (loss given default) proposal as well as recommendation of limits.
Management of credit risks requires a rating of risks and commitment procedures or the monitoring of operations in accordance to title II of CRBF regulation and the ministerial order of February 20, 2007.
An IT system allows for an overall consolidation of limits and credit exposures across a scope covering all of Natixis’ exposure to credit risk and most of its subsidiaries. Natixis counterparties identifi ed in the third party data base are subject to dedicated management: a counterparty is allocated a unique identifi er, the identifi er of the regulatory group to which it belongs, as well as the identifi er of its position within the group.
The Risk Department provides the Executive Management and the Bank‘s business line managers with Natixis risk analysis reports: trend studies, scorecards, etc. Natixis’ commitments as well as their development are presented according to risk indicators such as: a the category, internal rating, business sector or the counterparty location; a the type of commitment; a the Basel II segmentation.
Credit-risk monitoring is based on the accountability of the various business lines and the various control measures steered by a dedicated team within the Risk Department.
An examination is undertaken to see if they should be placed under supervision and, if necessary, acted upon by the Special Affairs and Restructuring Department, the Risk Department or the relevant Credit Committee depending on the level of exposure.
Sensitive cases are reviewed at least once a quarter, and a presentation is given to the Counterparty Watch List Committee, which meets quarterly.
In addition to individual provisions, Natixis also constitutes provisions to cover country risk and sector risk. With the transition to IFRS, these provisions are now categorized as collective provisions, established on the basis of similar types of assets according to the following three criteria: a rating for loans to private individuals and professionals; a sector risk; and a geographic risk for other counterparties (corporate, sovereign, etc.).
Natixis’ main market risks are generated by the Capital Markets, Debt & Financing, Active Risk Surveillance and Management and the GAPC (Workout Portfolio Management) unit within Natixis’ CIB.
The market risk management and control mechanism is primarily the responsibility of the front offi ce of business lines, which ensure the management and the continuous daily monitoring of limits that are allocated to them beforehand.
Market risk control is handled by the Market Risk Department within the Risk Department This department has complete independence in defi ning the risk measurement principles and developing the necessary tools.
The charter defi nes: a the principles and system governing Natixis’ market risk mechanism; a the conditions under which market risk limits are examined, allocated and monitored; and a the respective roles of the front office business lines, the Risk Department and Natixis’ Group Market Risk Committee.
The Charter applies to all Natixis entities whose operations entail market risks.
Natixis’ Risk Department plays a key role in the whole mechanism implemented: a it provides an independent view, from the business line, of the market risk decision process; a it defines risk measurement and fair value adjustment methods and submits them to the Market Risk Committee for approval; a it proposes or examines limits, whether they are requested by the business lines or on its own initiative under the aegis of the Market Risk Committee; a it is responsible for the proactive management of risks and counseling of business lines, quantitative analyses of the management of products according to the evolution of sensitivities − through stress tests in particular, detection of products which may have harmful effects on the portfolios, development of additional indicators of sensitivities, implementation of transverse analysis axes (products, asset classes, etc.), analysis of specific risks according to market events; a it is responsible for the day-to-day analysis and measurement of risks incurred, according to a process designed to ensure, on the one hand, that all risks to which Natixis has significant exposure are taken into account and, secondly, the reliability and uniformity of the calculations made within the business; a it is responsible for defining, implementing and operating the market risk measurement tools that enable risks to be aggregated on a Natixis consolidated basis, with decisions being validated on principle by the Market Risk Committee.
Any limit request should be subject to a prior recommendation by the Risk Department.
In addition to the Committee, a system of delegations was set up in order to enable decisions to be taken between scheduled Committee Meetings.
The risk management mechanism is based on a proved methodology for the measurement of risks, the allocation of trading limits for business lines under this framework and on the ex-post examination of compliance with these limits.
The extreme market volatility across all asset classes since the failure of Lehman Brothers has led Natixis to adopting a new calculation methodology, henceforth based on an econometric model whose standard deviations are calculated as being the maximum (risk factor by risk factor) standard deviations calculated over 12-month and 3-month roll-over periods.
This change in methodology has required the recalibrating of all limits during the implementation of the new method in December 2008, the former calculation methodology of VaR – based on a history of one year – continuing to be subject to parallel tracking on a daily basis.
No backtesting exception was observed in the whole year under review.
(2 ) Backtesting: In order to ensure the robustness of the model, the VaR calculated in D should be compared with the P&L realized in D+1. As the VaR is calculated for a confi dence interval of 99%, the amount of loss realized should statistically exceed the fi gure for VaR in 1% of cases, in other words on average 2.5 times a year (260 working days).
(3 ) The so-called regulatory VaR corresponds to the VaR of the scopes such as that approved by the French Banking Commission. This VaR approved by the regulator is used by Natixis for the calculation of capital in relation to market risk.
Similarly, Natixis continued its work on the overall recalibration and redefi nition of stress tests (hypothetic and historic). Three new historical stress tests (adding to the six existing already) and two new hypothetical stress tests (adding to the three already existing) have thus been put in place.
In this context of the reorganization within CIB and the creation of a single new Natixis central body as shareholder , BPCE, a guarantee has been put in place over the vast majority of the consolidation scope of credit workout assets in Paris and New York. Nevertheless, risk management carried out by the Market Risk Department was maintained on a standardized and exhaustive basis over all operations whether they are guaranteed or not by BPCE. A global VaR and stress tests taking into account the impact of this guarantee are henceforth produced and communicated to certain members of the Executive Committee daily.
As regards liquidity and structural foreign exchange risk monitoring, the scope of monitoring of the ALM Committee extends to all the consolidated scope excluding insurance subsidiaries that do not present any intrinsic liquidity risk and subject to specifi c management. The monitoring of overall interest rate risk by the ALM Committee is related to the banking portfolio of the Natixis parent company and the main credit institution subsidiaries.
In order to enable a consolidation of ALM risks at the group level, the Natixis ALM system is interfaced with that of BPCE and the ALM indicators produced on the Natixis scope are reported periodically to BPCE.
At Natixis this risk is essentially linear and focused on the euro and the US dollar, resulting primarily from mismatched positions between contractual transactions. The most signifi cant positions concern exposures over the short end of yield curves and are, notably, linked to the lag between IBOR reset dates. This risk is measured as the sensitivity of the economic value of portfolios by percentage point of the yield curve and by currency and controlled for the most important scopes through limits confi rmed and monitored by the Risk Department. This mechanism is completed by VaR measures and limits.
The liquidity transformation and the risk incurred are measured from static liquidity mismatches (1). In order to manage forecast short term liquidity requirements this indicator is produced dai ly for a three- month horizon based on current time for all contractual transactions of the parent company. It is managed through a permanent exposure limit for the overnight market through internal operating limits on global treasury for 1-month, 2-month and 3-month maturity classes of maturity.
Finally, in accordance with recommendations of regulatory authorities, this mechanism is completed by exercises referred to as liquidity stress exercises intended to measure the capaci ty of Natixis to face up to systemic, specifi c and combined crisis scenarios over a three month horizon. The assumptions of these stress situations were reviewed in 2009 in light of the crisis in the fourth quarter of 2008. The results of the simulations performed are consolidated by BPCE.
The missions and organization relating to operational risks are described in Natixis’ Charter for Measuring, Controlling and Managing Operational Risks which was approved by its Operational Risk Committee in September 2007. This charter defi nes: a operational risk measurement procedures: j incident recording, j investigation of serious incidents, j risk mapping, j environmental indicators and variables; a procedures for managing operational risks: j drawing up and monitoring action plans, j risk limits policy.
The mechanism is managed by Natixis’ Operational Risk Committee, a specialized body overseeing the operational risks policy. It is the operational extension of the Executive body and, as such, has its full decision-making power for issues relating to its fi eld of application. This Committee meets quarterly and is chaired by the Chief Executive Offi cer or his substitute the Chief Finance and Risk Offi cer, with the Head of the Operational Risk Department as secretary.