P.52 > Human resources P.52 > ACCOMPANYING THE BANK’S STRATEGIC DEVELOPMENT
P.246 > Chairman’s report on internal control P.246 > Corporate governance P.246 > Internal control P.256 > Statutory auditor’s report on the Chairman’s report
P.257 > Legal information P.257 > General meetings of shareholders P.257 > Report of the Board of Directors on the resolutions to be put to the vote at the annual general meeting P.258 > Resolutions to be put to the vote at the Annual General Meeting of May 18, 2006
P.262 > Additional information P.262 > General information about Natexis Banques Populaires P.264 > General information about the capital stock P.268 > Ownership of capital stock and voting rights P.269 > Market in Natexis Banques Populaires shares P.270 > Dividends P.271 > Other information about Natexis Banques Populaires P.272 > Persons responsible for the annual report and information P.272 > Documents available to the public
Natexis Banques Populaires performed very well in 2005, posting net income attributable to equity holders of the parent up 43% over the previous year.
This performance validates the bank’s strategic choices and rewards the efforts of employees of the Group's financing, investment banking and services bank, expressed through their strategic plan.
The bank’s ambitious growth strategy is grounded in its profit -generating strengths. Now more than ever these strengths are being called upon to provide long-term security and ensure the bank’s ability to expand in an evolving banking sector.
All of the bank’s employees contributed to these results, as did significant investments undertaken with a long-term perspective in mind. In 2005, all four core businesses – Corporate and Institutional Banking and Markets, Private Equity and Wealth Management, Services and Receivables Management contributed to this healthy performance. Each core business benefited from the right conditions for harmonious growth, profitability and security.
To take full advantage of its strengths and achieve the ambitious targets of its strategic plan, our bank intends to: - build stronger relationships with corporate and institutional clients, thanks to better coordination of the various business teams and an enhanced range of products and services; - foster growth in insurance, asset management, leasing and factoring activities by federating the sales and marketing efforts of the Banque Populaire regional banks with those of the respective business line teams; - strengthen investment in high-potential activities,with particularly impressive performance in structured finance and private equity; - accelerate international growth by strengthening European subsidiaries, developing Coface's international operations and expanding Natexis Algérie’s network; - further improve the effectiveness of the core businesses and reinforce the main support functions, efforts that are already tangible through the revised IT governance system and the Compliance department that has been created within the General Secretariat.
I am convinced that our membership in the Banque Populaire Group, the strengthening of our strategic management tools and the skills and commitment of our 13,000 employees will lead us to success.
MARKET CAPITALIZATION AS OF DECEMBER 31 (NATEXIS BANQUES POPULAIRES SHARES) in billions of euros 07NATEXIS BANQUES POPULAIRES
NET BANKING INCOME BY CORE BUSINESS in millions of euros 01/01/05 12/31/05
Natexis Banques Populaires and its shareholders n NATEXIS BANQUES POPULAIRES SHARE PERFORMANCE
On January 3, 2005, the share was removed from the SBF 250, because the ratio of the number of shares traded to the total number of shares was less than 5%. Euronext Paris’ Committee of Experts readmitted Natexis Banques Populaires to the index on September 1, 2005, as the ratio had increased during the May 2004 - June 2005 period to 7.57%.
NATEXIS BANQUES POPULAIRES SHARE PRICE (REBASED 100 ON JANUARY 1, 2005)
Natexis Banques Populaires shares closed on December 30, 2005 at B140.7, up 39.7% from end-2004.
1st quarter 1,306,417 2nd quarter 992,875 3rd quarter 1,484,661 4th quarter 1,231,767
(1) Based on average number of shares outstanding during the year (excl. treasury shares). (2) Based on number of shares outstanding at end of year (excl. treasury shares). (3) Proposal to be submitted to shareholders at the May 18, 2006 Annual General Meeting. (4) Excl. exceptional items.
Natexis Banques Populaires measures shareholder value created for an individual shareholder over a six-year period, corresponding to a medium-to-long-term investment period.
Based on a share price of B140 on December 23, 2005, the initial investment had appreciated to B140 x 1.23 = B171.67 at that date, representing average annual growth of 15.4%.The initial 1999 investment increased 2.4 times.
Annual and interim results are announced in press releases and presented at meetings with the financial press and financial analysts. All of these documents are available on the Natexis Banques Populaires website, in both English and French. Earnings announcements are also published in the financial press.
For individual investors, the primary means of communication is the Shareholders’ Newsletter. Three Shareholders’ Newsletters were sent out in 2005 to all identified shareholders, including a special edition devoted to the Annual General Meeting. A similar newsletter is sent to the approximately 17,000 Banque Populaire Group employees who have subscribed to the employee stock ownership plan launched in June 2001.These documents are available upon request and may also be downloaded from the website.
Several hundred shareholders attended the Annual General Meeting on May 19, 2005. Held in the main auditorium of the Paris Bourse, it was a perfect opportunity for management and individual shareholders to exchange views. As in prior years, the Meeting was preceded by a broad-based consultation process to identify the topics of particular interest to shareholders, and the rate of response has increased every year. The 2005 themes included Natexis Banques Populaires’ financial performance and the 2007 strategic plan, the Group’s lines of business – a presentation this year focused on Corporate and Institutional Banking and Markets – as well as share price performance, dividend policy and sustainable development.
As in prior years, the Annual General Meeting could be viewed on the website beginning the following day, together with the results of voting on the resolutions.
The Group’s corporate website, pulaire.com/, offers a “Shareholders and investors” section, in both French and English.Visitors to the site can listen to the Annual General Meeting for several weeks after it is held, view the share price in real time, or download any document published by the Shareholder Relations team.
Holders of bearer shares must obtain from the bank or broker that manages their share account a certificate stating that a block has been placed on the shares up to the date of the Meeting (known as a certificat d’immobilisation). The certificate must be received by Natexis Banques Populaires at least five days prior to the Meeting date, in order to allow time for an admittance card to be issued and sent to the shareholder.
Shareholders will be given an electronic key pad to enable them to vote during the meeting on the ordinary resolutions.
NON-VOTING DIRECTOR: >>> Michel Goudard, Deputy Chief Executive Officer of Banque Fédérale des Banques Populaires
*The following individuals were members of the Executive Management Committee until December 31, 2005: JEAN-FRANÇOIS MASSON, Human Resources
1> The Board of Directors and its members 1.1 - Composition There are 15 members of the Board of Directors.
Board members can be divided into three groups: n Banque Populaire Group, n Independent directors, n Employee shareholders.
Each Board member owns at least 100 shares of the company, in accordance with the bylaws.
Mr. Bolloré and Mr. Zolade satisfy the independence criteria, and the banking relationships Natexis Banques Populaires maintains with their groups do not compromise their impartiality. The Bolloré group is a major client of Natexis Banques Populaires, as it is of many other large banks, but outstanding loans to the Bolloré group represent less than 1% of the bank’s outstandings. Natexis Banques Populaires holds no stake in the capital of these groups or in any of their subsidiaries.
Owing to their long-standing experience, these three directors provide valuable insight and a different point of view, complementing that of the bankers who represent the majority of Board members. Finally, no member of the Board of Directors of Natexis Banques Populaires sits on the Board of Directors of one of the groups managed by these three individuals.
1.3 - Competence and integrity of Board members In accordance with regulations, the table on page 18 lists the functions exercised by the executive directors of Natexis Banques Populaires.The brief summary of their responsibilities shows that they all have recognized business expertise, in particular through their positions as executives of banks or large industrial companies or as former bank executives.
In accordance with the enforcement rules of the EU directive 2003/71 (Article 14.1, paragraph 2), the bank reports that none of these Board members or members of Executive Management has been convicted of fraud over the past five years (minimum), has been subject to bankruptcy, liquidation or receivership over the past five years (minimum), has been officially incriminated or punished by corporate or regulatory authorities, has been enjoined from acting as a director or executive of an issuer or from managing or participating in the business of an issuer over the last five years (minimum).
1.4 - Agreements between the bank and the members of its Board of Directors The bank also reports, in accordance with EU regulations, that there are no agreements between members of the Board of Directors or Executive Management and the bank that could grant advantages to them at the termination of such an agreement and that might by their nature compromise their independence or interfere with their decisions.
No Natexis Banques Populaires director, except for the director representing employee-shareholders, has an employment contract with the bank or one of its subsidiaries.
1.5 - Potential conflicts of interest The members or the Natexis Banques Populaires Board of Directors are unlikely to be subject to conflicts of interest between their obligations to the bank and their private or other interests.
Specifically, the bank reports, in accordance with the abovementioned EU directive, that no there is no arrangement or agreement between the bank and one of its shareholders, customers or suppliers that has given rise to the appointment of a member of the Board of Directors or Executive Management.
Dupont Philippe Board meeting of 2007 Chairman Chairman and Chief Executive Officer November 25, 1997 of the Board, Banque Fédérale
Director des Banques Populaires Le Ponant de Paris - 5, rue Leblanc 75511 Paris cedex 15
Brevard Christian AGM of 2007 Director Deputy Vice-Chairman May 27, 2004 Banque Populaire d’Alsace
Nalpas Richard AGM of 2009 Director Chief Executive Officer May 23, 2002 Banque Populaire Toulouse-Pyrénées 33-43, avenue Georges Pompidou 31135 Balma cedex
Zolade Robert Board meeting of 2006 Director Chairman of H.B.I. September 22, 1999 (Holding Bercy Investissement)
Groupe Elior - 65, rue de Bercy 75589 Paris cedex 12
Goudard Michel AGM of 2010 Non-voting Deputy Chief Executive Officer May 23, 2002 director Banque Fédérale des Banques Populaires Le Ponant de Paris - 5, rue Leblanc 75511 Paris cedex 15
Other executive positions and directorships held by members of the Board of Directors of Natexis Banques Populaires in 2005
Permanent representative of Bolloré Participations, member of the Supervisory Board: Compagnie du Cambodge
Permanent representative of Compagnie du Cambodge,member of the Supervisory Board: Société Financière HR,
Vice Chairman: Société des Caoutchoucs de Grand Bereby – SOGB (Abidjan),
Permanent representative of Banque Populaire Côte d’Azur,Chairman: Foncière Victor Hugo, Société Méditerranéenne d’investissement
Vice-Chairman of the Board of Directors: Banque Fédérale des Banques Populaires
Permanent representative of BRED Gestion on the Board of Directors: Vialink
Permanent representative of BRED Banque Populaire,director: BICEC - Banque Internationale pour le Commerce, l’Épargne et le Crédit
Member of the Supervisory Board: SBE (renamed M.A. Banque - Multi Accès Banque on January 1, 2006)
Permanent representative of Banque Populaire Toulouse-Pyrénées, member of the Supervisory Board: Latécoère
Vice Chairman of the Board of Directors: Banque Fédérale des Banques Populaires
Legal representative of HBI, Chairman of the Board of Directors: M.R.C.
Legal representative of HBI, the company that is Chairman of: Bercy Participations (SAS)
Legal representative of Avenance SAS, the company that is Chairman of: Bercy Services I (SAS),
Legal representative of Elior, the company that is Chairman of: Elior Services (SAS)
2.1 - Internal rules of the Board of Directors and Director’s Charter The Board of Directors has had a set of Internal Rules and a Charter since 2001, summarized below. A copy of both of these documents is given to new directors when they join the Board.
The Director’s Charter sets out the rights and obligations of Board members. It reiterates the provisions of the bylaws requiring each director to hold at least 100 Natexis Banques Populaires shares. It prohibits directors from trading in the bank’s shares, either directly or through an intermediary, during the 30-day period preceding the announcement of the quar terly, half-yearly or annual results of Natexis Banques Populaires and from carrying out speculative or leveraged transactions in the shares.
2.2 - Meetings of the Board of Directors in 2005 The Board of Directors of Natexis Banques Populaires met seven times during 2005.The attendance rate was high: 96% on average over the year for all members at all meetings.
Several days before each meeting, directors were given documents containing detailed, comprehensive information about each item on the agenda.
Under the French Monetary and Financial Code, the Board has a oversight role vis-à-vis the bank. In this regard, the Board was particularly attentive to the recommendations of the Banking Commission.
In accordance with regulations, the Board approved, prior to signature, certain related party transactions concerning one or more of its members.This was particularly true of Banque Fédérale des Banques Populaires, the majority shareholder of Natexis Banques Populaires, with which the bank has several executives and directors in common. In 2005, the transfer of the electronic banking activities of Natexis Banques Populaires to its subsidiary Natexis Paiements was subject to this procedure, because Banque Fédérale des Banques Populaires is a director of both companies.
As at the beginning of every year, the Board set risk limits in January 2005.
n against a backdrop of profound changes in accounting and financial reporting, a detailed report on the consequences of the conversion to IFRS and on their impact on the consolidated financial statements was presented to the Board, as was a report on progress achieved in implementing the Basel II ratios.
Generally, for the presentation of technical subjects, the Board calls upon the heads of the relevant departments so as to have input from those individuals most directly connected with the subject matter at hand.
Whenever necessary, the Committees of the Board make inquiries of the head of Internal Audit, the Corporate Secretary, the Senior Executive Vice President, Finance, the Senior Executive Vice President, Risk Management, the Compliance Officer, the Senior Executive Vice President, Internal Control, the Financial Crime Prevention Officer, or any other persons in a position to provide the technical information required.The Auditors are invited to take par t in the Audit Committee’s meetings. Neither the Chairman nor the Chief Executive Officer attends meetings of the Committees. Formal minutes are produced after each meeting and the Committee chairmen report periodically to the Board on their activities and recommendations.
As well as meeting before the publication of the interim and annual financial statements, the Committee may also hold other meetings during the year to review any issues that fall within its purview. In 2005, the Committee met twice, with an 75% attendance rate, to review the 2004 annual financial statements and the 2005 interim financial statements, prior to their presentation to the Board.The Auditors attended both meetings.
The Auditors submit a summary of the nature and objectives of their work to the Committee.This summary includes their observations on the accounting choices made and on the technical aspects of the closing, their opinion on the level of provisions and on the various risks to which the bank is subject. The Auditors also draw the Committee’s attention to the consequences of regulatory and accounting changes affecting the presentation of the parent-only and consolidated financial statements. They make suggestions intended to improve the quality of the financial information that the bank produces.
n The Risk Management Committee has four members: Daniel Duquesne, Chairman, Jean-François Comas, Claude Cordel and Jean-Louis Tourret.
In 2005, the Risk Management Committee met four times, with a 100% attendance rate, and examined, in accordance with CRBF rule no. 97-02, the Chairman’s report on how the Board of Directors’ work is prepared and organized and on the bank’s internal control procedures, as stipulated in the Financial Security Act.The Committee was informed of the results of internal audit assignments carried out in 2004 and of the auditing schedule for 2005; finally, it was consulted on the proposed responses to the Banking Commission’s various audit reports.
To make more detailed information about the evaluation of market risks available to the members of the Board, the Risk Management Committee organized a meeting in 2005 attended by several heads of risk management and market units, who each presented the concepts and tools used to manage risk and furnished explanatory documentation on these complex topics.
Finally, given the importance of the topic, affecting both the quality and the reliability of financial reporting, a report was presented to the Committee on the bank’s enterprise systems development plan.
It considered various mechanisms for maintaining a steady flow of employee-owned shares, including stock options and bonus shares, so as to make proposals to the Board. In this context, the “Alizé” plan, instituted in 2001, will expire in 2006.
2.4 - Evaluation of the Board of Directors The work of the Board of Directors was evaluated for the first time in 2005, in accordance with corporate governance recommendations.
The evaluation was carried out in July/August 2005 via a 32point questionnaire addressed to all Board members, including the non-voting member, but excluding the Chairman.
The questionnaire included both yes-no and open questions, quantitative ratings and space for free-form comment, and was divided into three main parts: n the operating procedures of the Board of Directors; n discussions and deliberations; n advisory responsibilities and participation in debate.
No oral interviews were held for this initial survey.The survey was conducted internally, without any external consultant.
The Board discussed the results of the evaluation during one of its meetings in the second half of the year.
3 > Compensation paid to the Chairman, Chief Executive Officer and directors Articles 8 and 9 of the July 26, 2005 law intended to modernize and enhance confidence in the economy call for disclosure of “compensation and other benefits granted to executives”. Article L. 225-102-1 of the Commercial Code stipulates: “This report shall describe and distinguish between the fixed, variable and exceptional components of their compensation and benefits as well as the criteria used to calculate them or the circumstances in which they were determined. It shall also indicate any commitments undertaken by the company for the benefit of its executives that represent compensation, indemnities or benefits due or potentially due to them as a result of accepting, relinquishing or changing responsibilities or subsequent thereto.”
The Remuneration Committee, which rendered its opinion on these payments, emphasized that the amounts were moderate and virtually constant over the past few years, compared in particular with that of other companies and with regard to the growth in earnings.
CHAIRMAN Fixed and variable portions of the Chairman’s compensation n In his capacity as Chairman of Natexis Banques Populaires, Philippe Dupont was paid a fixed annual salary of B263,000 n The Board decided to pay Mr. Dupont a bonus of B75,000, as the variable portion of his 2005 compensation, together with his December 2005 salary. The Board decided that this bonus could be reduced should earnings for the 2005 fiscal year not meet projected levels.This procedure made it possible to compare Natexis Banques Populaires’ published earnings and the variable pay of its most senior executives.
n For 2006, the Board of Directors decided to hold the fixed portion of Mr. Dupont’s compensation constant at the level of the previous five years, i.e.B263,000.
n The variable portion of Mr. Dupont's 2006 compensation will be calculated through a formula proposed by the Remuneration Committee and approved by the Board of Directors on February 22, 2006.
In determining the formula, the Board emphasized simplicity, choosing a linear function, wherein variable pay would drop to zero if earnings were below a certain threshold.
The parameters of variable pay calculation are as follows: n if the full-year consolidated net income (after tax) of Natexis Banques Populaires is less than B250 million, the variable portion of compensation is equal to zero; n if the full-year consolidated net income (after tax) of Natexis Banques Populaires is equal to or greater than B250 million, the variable portion of compensation is equal to 2/10,000 (two ten thousandths) of this income.
Mr. Ladam has a company-owned apartment in Paris and a company car.The value of these benefits in 2005 was estimated at B18,064 for the apartment and B4,228 for the car.This brings the monetary equivalent of his compensation to B387,292.
Director’s fees include a small fixed annual fee of B1,525 (since 2001) and a variable fee of B1,220 per meeting attended by the director during the year (also since 2001). Members of the Committees of the Board are paid a fee of B915 per Committee meeting attended.This fee structure has not been changed since 2001.
The parameters of variable pay calculation are as follows: n if the full-year consolidated net income (after tax) of Natexis Banques Populaires is less than B250 million, the variable portion of compensation is equal to zero; n if the full-year consolidated net income (after tax) of Natexis Banques Populaires is equal to or greater than B250 million, the variable portion of compensation is equal to 1.5/10,000 (one point five ten thousandths) of this income.
Deputy Chief Chief Chief Chief Chief Executive Executive Executive Executive Executive Officer Officer Officer Officer Officer
Mr. Dupont did not receive any fringe benefits from Natexis Banques Populaires.
Fixed and variable portions of the Chief Executive Officer’s compensation n The Remuneration Committee, accepted the proposal of the Chairman, Philippe Dupont, and set the fixed portion of compensation paid to François Ladam in his capacity as Chief Executive Officer of Natexis Banques Populaires in 2005 at B365,000.
The Board of Directors set the variable portion of Mr. Ladam's compensation, to be paid in December 2005 and based on the likely earnings of the current year, at B100,000, provided projected results were achieved.The Board decided that this bonus could be reduced should earnings for the 2005 fiscal year not meet projected levels.
nbr €915 / nbr €915 / nbr €915 / m. meeting m. meeting m. meeting
Jean de La Chauvinière 2 1,830 2 1,830 - 0 13,725 2,700 -
Yvan de La Porte du Theil - 0 2 1,830 - 0 11,895 8,000 16,329
As authorized by shareholders on May 19, 2005 and in accordance with regulations, the Board of Directors granted 7,000 options to the Chairman of Natexis Banques Populaires with regard to 2005.The exercise price, as set by shareholders, is B119.24.
The Chairman was also granted 7,000 options in his capacity as Chairman and Chief Executive Officer of Banque Fédérale des Banques Populaires.
4 > Auditors The bank’s financial statements are audited by three independent accounting firms.Their terms will expire with the Annual General Meeting called to approve the 2009 financial statements: n Deloitte & Associés, 185 avenue Charles de Gaulle - 92200 Neuilly-sur-Seine n Salustro Reydel, 8, avenue Delcassé - 75378 Paris Cedex 08 n Barbier Frinault et Autres, 41, rue Ybry - 92576 Neuilly sur Seine
On the cost management side, Natexis Banques Populaires is implementing a multi-year program in its various business lines. The program uses activity-based costing methods to tighten cost controls and strengthen the profitability of each business line.
In 2005, work on managing operational risks also moved up a gear. Launched by Banque Fédérale des Banques Populaires, it aims to create a map of operational risks and to implement tools that can manage and consolidate them. The Cash Management & Operations department, Natexis Factorem, Natexis Altaïr and IT systems have already implemented this system and tested its reporting model and incident management capabilities. This approach will be employed bank-wide in stages between now and the end of 2006. Finally, in 2005, Natexis Banques Populaires remained very involved in the implementation of the Basel II ratios.
I n 2005, Natexis Banques Populaires implemented its 2005-07 strategic plan emphasizing growth through expansion.Through this medium-term plan, modelled on the aims of the Banque Populaire Group, the bank has created three-year business plans for each of its activities. To do so, Natexis Banques Populaires focused on four major growth avenues: diversifying and optimising business value deriving from its large and medium-sized corporate and institutional customers; developing the potential for expansion that the Banque Populaire regional banks and their customer base represent, optimising the strong positions the bank has established in specialized business lines; expand Natexis Banques Populaires’ international presence. In 2005, as a result of this focus on growth, both cross-selling and synergies between business lines were intensified and customer relationships were monitored comprehensively.
In the area of strategic management, Natexis Banques Populaires defined an enterprise systems development plan in 2005, with the aim to rethink the architecture of the bank’s financial and cost accounting systems, financial control and risk management.Apart from its regulatory aspects, this program aims to develop cross-functional strategic management tools and to foster the development of synergies between business lines, leading to a comprehensive customer approach.
ment. Reporting directly to the highest level and completely independent from sales functions, the Compliance department ’s purview extends to every activity the bank and its subsidiaries conduct.This new department brings Ethics and Compliance, Financial Crime Prevention and certain specific cross-functional activities under one roof. “New Products” committees have been created or modified in collaboration with representatives of the Compliance depar tment. Procedures for preventing conflicts of interest and handling management contracts and watch lists have been drawn up. Monitoring of adherence to ethical standards has been intensified.
Continued expansion abroad In line with the priorities it has set for itself, Natexis Banques Populaires continued to strengthen its activities in Italy, Spain and Germany.The bank augmented its presence in certain business lines in these countries, in particular in capital markets and in structured finance. At the same time, Natexis Banques Populaires determined the avenues that will support its growth in the United States in the coming years. Finally, Coface actively continued to develop its receivables management businesses abroad.
In support of its growth aspirations, the bank also worked hard to reinforce the coordination and efficiency of the various international offices. Country managers were given responsibility for driving sales efforts, and certain functions were mutualised, in particular in the US and the UK.
In systems, the bank undertook important projects in 2005 to re-equip the European branch offices with the tools they need.These projects will serve as a pilot program for more wide-scale deployment to other sites during the 2005-07 period.
Finally, communication with and integration of the employees of the bank’s international network remained a priority.
Natexis Banques Populaires develops products distributed by the Banque Populaire regional banks and is in charge of specific businesses not found elsewhere in the Group. Because the various entities complement each other, the Banque Populaire Group is present in all the business lines exercised by the major integrated banks.
Technical partnerships Natexis Banques Populaires also entered into several major technical partnerships in 2005. Since 2002, the bank has been in charge of creating a technical platform for MA Banque, a unit of Banque Populaire Group and MMA/MAAF that has been operational since the autumn of 2005.
BNP Paribas and the Banque Populaire Group – whose electronic banking is managed by Natexis Banques Populaires – have signed a definitive agreement to create a common electronic banking development platform in their retail banking units. Named Par tecis (PARTnership European Card Information System), the unit is held 50-50 by the two banking groups.
This partnership aims to improve performance in electronic banking, foster the pooling of capital expenditure and facilitate the changes that implementation of SEPA (Single Euro Payment Area) has necessitated.
Natexis ABM Corp. Portfolio management and mortgage lending in the US
Serving both corporate and institutional clients, the Corporate and Institutional Banking and Markets core business proposes solutions for customer needs – be they in loans and cash management, capital markets, employee savings or asset management – by drawing on all the business lines of Natexis Banques Populaires. Two business development departments – one dedicated to corporate clients, the other to institutions – ensure strategic and marketing oversight for these customers and coordinate the salesforces of the specialized business lines.
Corporate France has refined its organization to bring itself even closer to customers. It strengthened its salesforce in the 16 regional offices, in individual sector teams and at the Global Relationship Manager level. Every company is monitored by a “key banker” whose primary mission is to initiate and coordinate relationships with all product lines. Clients with a multi-business profile are followed by Global Relationship Managers. Moreover, the department offers its sectoral expertise, in particular in healthcare, media, agrifood, construction and environmental services. It also offers traditional loans and leases, as well as cash management services.
NO. 3 lead manager for French corporate bond issues, by volume (source: Bloomberg)
International The International department serves corporate and institutional clients outside France. In addition to business it conducts with foreign companies, it supports French companies by offering them a complete range of banking and advisory services abroad. It coordinates development of all the bank’s businesses in the international network.
In emerging countries, the volume of business was more mixed. Asian business stagnated, while Algeria, Brazil, Turkey and Russia saw robust growth leading to a significant rise in net banking income. In Algeria, for example, net banking income rose by 62%, as more resources were devoted to corporate business. Already present in three cities, Natexis Algérie expects to open 10 new branches by 2007.The International department covers 130 emerging markets in all.
Natural Resources and Related Industries The Natural Resources and Related Industries department strengthened its presence vis-à-vis all producers, traders, distributors and other service providers in the energy, metals and soft commodities markets.
A team dedicated to the mining sector was created in the Metals unit. In addition, the department intensified its liaison role so as to offer its specialized clients financing and hedging solutions developed by other specialized departments, such as Equity Group, Capital Markets, Project Finance and Natexis Commodity Markets Limited.
Emphasis on the relationship aspect >>> The Corporate and Financial Institutions Business Development departments expanded cross-selling in 2005 and structured their approach to customers active in several businesses. With new structures at their disposal – sales committees, business line strategic planning committees, pilot sales initiatives, strategic management tools – the Business Development units focused the efforts of the business lines and the sales teams on this specific customer base. As a result of the work of the Business Development units, the number of transactions handled for target clients of the Global Relationship Managers and Senior Bankers, particularly in the realm of financing, engineering and capital markets rose significantly.
Global Debt & Derivatives Markets The bank’s borrowing platform, which brings together the financing, engineering and issuing businesses, offers global borrowing, investment and risk hedging solutions, both for issuers and investors.
These businesses posted a sharp increase in sales volume, generated by an extension in the range of value-added services. New skills in the operational and functional areas led to the bank being named as arranger on 149 transactions.
Exported expertise Global Debt & Derivatives Markets continued to offer higher value-added services internationally.Aircraft financing increased its market share through the creation of a new dedicated entity, Natexis Transport Finance and won four “Deal of the year” awards for the Nouvelair, Air Asia and Jazeera Airways (2x) transactions.
With the financing of the la Rinascente stores acquisition, the real estate financing unit bolstered its position as a major player in the Italian market.The LBO and project financing units, as well as shipping, also obtained recurrent positions as arranger or underwriter in international transactions, specifically on transactions involving Amadeus, Jefferson Smurfit, Ebic, Grupo TMM and Pemex.
It is by bringing together a variety of products that the bank has been able to strengthen its position as a prominent arranger of structured debt facilities. Clients receive turnkey financing, both in France and abroad. For example, a financing package arranged for Eurazeo for the purchase of Financière Galaxie, the holding company of B&B Hotels, combined acquisition financing with real estate-backed borrowings.
Targeting specific client segments The Primary Markets and Securitization unit continued to grow, as customer targeting was enhanced. In France, despite a overall decline in new issues, this unit focused on significant corporate mandates, such as SFR, Bouygues, Schneider and Alstom, while expanding in the French and international financial institutions segment (Groupama, Banca Caja, IKB, Alpha Bank,Veneto Banca and Islandsbanki) and in inflationindexed instruments (Cades and Réseau Ferré de France). The bank continued to gain stature in syndicated credits in France, as a top-tier arranger and bookrunner (Gaz de France,Air France,Vinci, LVMH, Partouche and CMA CGM). It also played a significant role in the Europe,Middle East and Africa (EMEA) regions (Wincor Nixdorf, Barry Callebaut, Immobiliare Colonial).
In the United States, 2005 was a key year for Natexis Bleichroeder Inc. Following two difficult years in a lackluster market, net banking income increased significantly, outstripping the pace of the market recovery. It handled transactions on most of the world’s major trading markets, and international execution overall continued to advance. After undergoing reorganization, international sales increased significantly. Natexis Bleichroeder Inc. also acted as underwriter and co-manager in primary market transactions, drawing on relationships with the bank’s US corporate clientele. The subsidiary offers a wide-ranging distribution capacity vis-à-vis institutions and hedge funds. It also has particular sectoral expertise in energy, healthcare and media. Finally, Natexis Bleichroeder Inc. continued to invest in electronic platforms and in audit and compliance functions.
The Equity Derivatives unit continued to restructure and to invest in research.A new, more ambitious business development plan was approved in the second half of 2005. It calls for new hires and targets first and foremost products with low market risk.
This business is currently being integrated into Natexis Arbitrage, which posted excellent results in 2005 on certain portfolio strategies, such as risk arbitrage / event driven strategies in North America and securities repurchase agreements. The market for convertibles arbitrage was very unfavorable in the first half, and this business posted mixed results.
Sharp increase in number of arranger mandates In 2005, Natexis Banques Populaires was named arranger for 149 transactions, up 16% from 2004. It placed fourth as bookrunner in the syndicated loan market in France and fourth as bookrunner in LBO & acquisition financing in France in number of deals (source: Dealogic). It also placed fifth worldwide as arranger for aircraft financing, through its subsidiary Natexis Transport Finance (source: AirFinance Journal, H1 2005).
Natexis Private Equity Natexis Private Equity remained very active in the areas of expansion capital and buy-out/buy-in financing. It also contributed to a surge in the venture capital market, carrying out successful exits from the portfolios of its specialized subsidiaries.
At the same time, it gave its investment teams what they needed to be competitive and for them to adhere to the principles of corporate governance.This commitment helps ensure performance for its investment partners.
Buy-in/buy-out financing French teams dedicated to buy-in/buy-out financing were very active in 2005. Natexis Industrie, Initiative & Finance and Spef LBO assisted companies such as Maisons du Monde (household furnishings), Elexience (distribution of electronic components and scientific instrumentation), Européenne de la Mer and Datavance (IT services, systems and network engineering). Natexis Industrie, Initiative & Finance and Spef LBO also realized significant gains on sales, such as on Eau Ecarlate (household cleaning products), Cibleclick (affiliate marketing), Holophane (vehicle lighting systems) and Médiascience (publisher of teaching materials).
Banque Privée Saint Dominique Specialized in wealth management, Banque Privée Saint Dominique helps more than 1,600 families to protect and develop their assets. Funds under management totaled B2.9 billion in 2005.
Wealth Management has become a key business, particularly in the preparation and monitoring of corporate LBOs, in which Banque Privée Saint Dominique is able to provide its expertise.This is because Banque Privée Saint Dominique has developed a great deal of exper tise in wealth management and can offer personalized, premium services in asset management, legal and tax advice, life insurance, financing, real estate transactions and the art market.
In addition, Banque Privée Saint Dominique clients enjoy special access to unlisted investments offered by Natexis Private Equity.
During the year, the bank collected new funds and sealed new client relationships, bringing total managed assets to B2.4 billion at the end of the year, with a significant increase in the number of discretionary management contracts.
MANAGED ASSETS OF NATEXIS PRIVATE EQUITY in millions of euros n Proprietary management n Third-party management
The subsidiaries of Natexis Private Equity in France VENTURE CAPITAL Seventure (formerly Spef Venture) Ventech
EXPANSION CAPITAL EPF Partners Natexis Investissement Natexis Equity Management Naxicap Partners Providente (created in 2006)
Synergies between these business lines are leveraged to develop high value-added industrial and technological processes, as well as increasingly seamless information systems to provide an effective range of products and services, designed for maximum business sense and profitability.
In 1985, thanks to Natexis Intertitres, the Banque Populaire Group became the first banking network approved for distribution of a range of service vouchers exempt from employer and employee taxes and social welfare contributions. Owing to its expertise, Natexis Intertitres became the first issuer and distributor of prefinanced chèques emploi service to be approved by the Agence nationale des services à la personne, having received authorization for these simplified salary vouchers on December 20, 2005. Natexis Intertitres issued 47.7 million service vouchers in 2005, 20% more than in 2004 and has a market share of 8.26% (source: Centrale de Règlement des Titres). With the creation of chèques culture vouchers, giving access to cultural events, the regulatory context has also been favorable to Natexis Intertitres.
With a 22% increase over 2004 in assets under management and a rise in net new money, B7.5 billion excluding employee savings, Natexis Asset Management is the fourth-largest fund manager in France and has market share of 6.25% (source: Europerformance for mutual funds available as of December 31, 2005). It also has a leading position as financial manager of employee savings in France (source: AFG).
Natexis Asset Square posted an increase in managed or advised assets of 71.4% and remained one of France’s largest multi-manager fund managers.
Natexis Assurances saw its life insurance revenues rise 27%, outstripping the market average. Managed assets totaled B23.7 billion as of the end of 2005, of which 16.5% were under unit-linked policies, up 11% from 2004.
NO. 1 issuer of payment cards for small business customers in France (source: SAS Carte Bleue)
In individual “PERP” pension plans, Natexis Assurances signed more than 43,000 new contracts in 2005.The MAV personal accident policy and Fructi-famille, the personal risk policy are complementary, and this contributed to a 15.4% rise in revenues from these lines. At the same time, a range of property & casualty insurance products, Assur-BP Auto and Assur-BP Habitat, was launched and policies for young people and school-age children were relaunched, enabling the Banque Populaire Group to increase the number of new contracts signed to 162,500 in 2005. The number of contracts in the portfolio now exceeds 500,000.
A new discretionary management contract, Privilège, launched in the second half of 2005,was added to Natexis Asset Management’s range of products dedicated to wealthy clients. Natexis Assurances meanwhile added Solevia Patrimoine to its range of Solévia and Solévia Capi life insurance products. Solévia Patrimoine is more flexible and offers a wider range of investment vehicles. Natexis Asset Management Immobilier continued to attract new funds to the BP Résidence Patrimoine REIT, through which customers of the Banque Populaire Group can take advantage of the favorable loi Robien tax treatment.Through this innovative product, investors enjoy guaranteed liquidity throughout the life of the REIT (15 years).
A training program called “coeur de l’épargne financière” (the heart of financial savings) was designed, in collaboration with Banque Fédérale des Banques Populaires, to assist the network’s salesforce in selling the range of consumer mutual funds.
To accompany the restructuring of the corporate and institutional range, Natexis Asset Management created new products, such as Natexis Actions Euro, Money + AAA and Natexis Obli Euro Inflation.
Natexis Asset Management Immobilier attracted more than B39 million in 2005 to the Fructifonds Immobilier REIT. This fund enables institutional investors to diversify their exposure to corporate real estate markets. Similarly, good performance in the Fructipierre
Natexis Paiements, which handles electronic banking and all processing and management of domestic and international payments, posted a 23% advance in net banking income and 28% in electronic banking alone.
and Fructirégions REITs, also specialized in corporate real estate, opened the way for regular capital increases to take advantage of opportunities in real estate investment. These two REITs attracted new funds of B15 million and B26 million respectively.
At the same time, Financial Services continued to upgrade its processing and marketable securities management applications, integrating operational risk surveillance modules. The new on-line trading platform offers two levels of service and handles nearly 70% of Banque Populaire Group customer orders.
Banking Services, which includes Natexis Paiements and the Personal Banking Services department, created a single telecollection platform for credit/debit card transactions sent in by retailer customers of the Banque Populaire Group.The progressive implementation of TOGE simplified the handling of domestic and international funds transfers.
The software platform of LineBanque, the multi-channel bank catering to the clients of Natexis Banques Populaires, was deployed at MA Banque, a unit of the Banque Populaire Group, implementing a partnership strategy with MAAF and MMA to distribute banking products to their clients.
Employee benefits planning brings together several competencies to help companies improve their compensation policies >>> By federating expertise in employee savings, group insurance and service vouchers under a single “employee benefits planning” banner, Natexis Interépargne offers comprehensive, innovative compensation solutions to companies and independent professionals.
>>> The new organization combines several, traditionally distinct business lines that all address a single question: how to motivate employees and make them loyal to the company. If offers clients a single point of contact.
Rapid growth at Natexis Asset Management In 2005 Natexis Asset Management saw its business surge forward, driven essentially by commercial success with institutions.
Natexis Asset Management and Natexis Asset Square together managed nearly €100 billion at December 31, 2005. In 2005, their mutual funds attracted net new money of €8.4 billion.
Long-term strategy One of the main objectives of the Services core business lies in asset management and life insurance. Beginning in 2006, Services aims to boost new inflows to savings plans of individual customers of the Banque Populaire regional banks.
For Natexis Asset Management, developing its positions in long-term asset management in the institutional market will remain a priority, both in France and abroad, through its UK branch and in collaboration with Natexis Axeltis Ltd.
In property & casualty insurance, Natexis Assurances aims to double the number of contracts in the Banque Populaire Group’s portfolio to one million by 2010. Natexis Assurances also aims to expand significantly in personal risk insurance with the launch of a long-term care plan in April 2006.
Development of technical partnerships in all bank transaction processing and management systems will be examined in 2006, so as to pool IT costs arising from regulatory changes and ensure that services offered to clients of the Services core business remain competitive. In a similar vein, Natexis Banques Populaires has signed a definitive agreement with BNP Paribas to create a common electronic banking development platform in their retail banking units. Par tecis (PARTnership for European Card Information System), held 50-50 by the two banking groups, will spearhead the technical work involved in bringing together all the electronic banking application systems.
Asset Management The Banque Populaire Group places great importance on customer savings, and to accompany its development, Natexis Asset Management launched an advertising campaign in the second half of 2005 aimed at institutional investors. Benefiting from widespread media coverage, the campaign addressed the dual objective of raising awareness of the Group’s asset management capabilities and showcasing the areas of expertise of Natexis Asset Management.
W ith a net banking income of B781.3 million in 2005, up 14.4%, the Receivables Management core business contributed B223.2 million to Natexis Banques Populaires’ earnings before tax, an increase of 36%.
Further growth Coface posted premium income of B1,218 million in 2005, up 8%, and a 16% rise in net banking income. It was driven by three factors: I) changes in the scope of consolidation, as LEID and Cual, Lithuanian and South African credit insurers, respectively, entered the Group, II) factoring in Germany, up 18%, and III) a significant increase in business in countries Coface has recently entered. The claims rate (claims paid plus changes in the provision for IBNR claims) increased slightly over 2004, with a claims/premiums ratio of 49%.
In France, the network was further consolidated.On January 1, 2006, Coface Services, a new company information unit, was created bringing the expertise of Coface Scrl and Coface Ort, the two largest French company information firms, under one roof. As a result, Coface Services will be France’s largest collections and receivables management company.
Since January 2005, Natexis Factorem has been selling all of the services of the Receivables Management core business in the Banque Populaire regional banks and at Natexis Banques Populaires.This means it offers not only factoring but also company information, receivables management and credit insurance. Products dedicated to the Banque Populaire Group network follow a naming convention based on the French word for receivables: CREANCEinfo, CREANCEassur, CREANCEpro, CREANCEplus, and so on to emphasize the complementary nature of the range.This new positioning, which responds to corporate needs in receivables management, has led to an upsurge in sales.
The business lines within Receivables Management - Credit insurance protects financial and non-financial companies alike against the risk of non-payment of their customer receivables.
- Receivables management helps companies recover the amounts that are due to them.
- Factoring enables companies to monetize their accounts receivable by transferring them to a third party, the factor, who takes responsibility for collecting them and may suffer potential losses owing to debtor insolvency.
NET BANKING INCOME OF THE BUSINESS LINES WITHIN RECEIVABLES MANAGEMENT in millions of euros n Factoring (incl. Coface) n Company information and other services n Credit insurance
VR Factorem posts initial success in the German market Already present in the German factoring market for large companies through Coface Deutschland, the Receivables Management core business is now entering the corresponding market for SMEs, through its dedicated subsidiary, a joint venture with DZ Bank.VR Factorem’s objective is to use the network of German Volksbanken to position itself as the leading factor for small and medium-sized companies.
Coface has its own network of multiproduct sales teams and manages its relationships with major partners, be they other insurers or other banks. It also has partnerships in company information, credit insurance and receivables collection.
In France, more than 7,000 employees participated in nearly 200,000 hours of training in 2005.
Training programs focused on two themes: continued cross-functional skills, such as foreign languages, information technology, degree programs and regulations on the one hand and a new program that comes into play at key junctures in an employee’s professional life on the other. The objective of these programs is to consolidate technical expertise, develop managerial culture and strengthen the sense of belonging to a constantly-evolving enterprise.
H uman Resources contributed to the company’s development with a vigorous hiring policy. Nearly 730 employees were hired under permanent contracts, a 50% increase over 2004. Almost a third of new hires were relationship managers or market traders, 15% were managers in sales, technical or strategic teams and 15% were back-office administrators. The bank also recruited experts in risk management and strategic management tools. New employees had an average age of 33 and the majority of them were experienced and had significant educational credentials.
New training programs Natexis Banques Populaires actively encourages skills development throughout an individual’s professional life, so as to enable everyone to advance and strengthen the company’s performance.
knowledge of Natexis Banques Populaires, its values and its business lines.
Looking beyond the initiation program, employees receive skills training in their field as it evolves, or when they change jobs. This training is articulated around a set of skills common to all functions in their business line plus optional modules tailored to individual needs and special modules that apply to the employee’s entity. Skills training takes place a few days per month over several months.
Entitled “Vision”, this innovative program alternates leadershiporiented meetings with 100 business owners and 20 community leaders, athletes or prominent cultural figures with working sessions involving the members of the bank’s Executive Management Committee. In addition, Natexis Management continued to offer “Executive Management Forums”,“Banque Populaire Business Games” and breakfasts organized with Executive Management to imbue high-level managers with a common vision of the challenges facing the bank and the strategy it has adopted.
A profit-sharing agreement applicable to 6,000 bank employees and nine subsidiaries was also signed in 2005 and helped harmonize employee status.This was a first step in a plan to expand the agreement in 2006 to other subsidiaries of Natexis Banques Populaires.
Gross operating income and net income serve as the basis of the special profit-sharing reserve calculation.
A new, more progressive calculation method, based on net income, was implemented for the profit-sharing plan. Up to B500 per employee, profit-sharing is based solely on the number of hours or days worked in the company during the period. Above B500, it is a function of salary.
The bank is also negotiating with employee representative bodies in an effort to implement a group pension fund invested solely in socially-responsible funds. Socially-responsible funds will be added to the bank’s employee savings plan beginning in 2006.
Communication has been harmonized In 2005, internal communication was revamped to make it more responsive to reader concerns and needs. A reader survey supported this initiative. More international content will be included, information will circulate more efficiently and more accurately, and communication, whether the medium is paper, electronic or audiovisual,will be more attuned to employees.
A weekly newsletter, Trait d’Union, also has new content and a new format. It has been translated into English since September 2005 and sent electronically to all employees outside France.
Features have also been added to Forum, the bank’s video system and its 200 screens in Paris, Caen and Reims. More visual, more dynamic, with fewer categories but more content, Forum disseminates not only information about Natexis Banques Populaires and the Banque Populaire Group, but also, at some sites, specific, local information.
Finally, an English-language intranet called Cont@cts has been opened, with a home page that makes employees outside France feel closer to corporate events and that strengthens their ties with the bank.
The values of Natexis Banques Populaires The bank’s corporate culture is articulated around three clearly identified values.
Commitment: constantly implementing innovative and efficient solutions, we have long-term commitments with our clients and employees.
Team spirit: enriched by and supportive of our diversity, our relationships are based on respect, responsibility and confidence.
In 2005, these values were translated into concrete principles for managers in a document entitled “Être manager chez Natexis Banques Populaires” (“Being a Manager at Natexis Banques Populaires”).
Sustainable development – defined as healthy, controlled economic development that treats the environment with respect, while fostering social progress and attentiveness to the interests of society at large – is now an integral part of corporate life. Natexis Banques Populaires has chosen to undertake sustainable development initiatives within its reach, and to gradually upgrade its everyday practices by maximizing employee involvement.
A project team created at the end of 2004, drawing together expertise in human resources, environment and asset management has raised employee awareness and is leading to gradual integration of sustainable development issues in the business lines. The bank’s program has been customized to the needs of numerous subsidiaries, in coordination with Banque Populaire Group.
Gradually integrated into each business line A major focus in 2005 was financing and investment in favor of the environment. Indeed, these are business lines in which a financial institution can make one of the most significant contributions to sustainable development.
New environmental constraints taken into account Since 2004, Natexis Banques Populaires has been attentively watching the emerging carbon market (negotiable emission rights, carbon credits, Kyoto projects, etc.). Given its positioning in commodity and energy markets, the bank is well-qualified to support clients facing new environmental constraints and can offer them new products and services.
The new European system of CO2 quotas went into effect in 2005, and the bank is operational as an intermediary in this new market. It can now execute, buy and sell orders for negotiable emission rights on the European Climate Exchange (ECX).
To raise corporate awareness about global warming, the bank is also a signatory to the Carbon Disclosure Project, a questionnaire sent by 155 investors to the 500 largest companies in the world. The questionnaire asks them for information about their policies regarding CO2 emissions. This year, 70% of companies surveyed responded, vs. 58% last year.
Natexis Banques Populaires was also a partner in the most recent international conference sponsored by the IFP (Institut français du pétrole), the French oil & gas research institute, devoted to CO2 emissions and geological carbon storage.
Project financing and the environment In July 2005, credit committees began requiring an environmental score on all proposed financing, regardless of amount, so as to evaluate environmental impact. Scores take into account the project’s impact (level A, B or C depending on the sector or country), the extent to which regulations are adhered to, the conclusions of the environmental report and the risk of opposition to the project. Thanks to this information, now systematically provided by relationship managers, the evaluation of environmental impacts has become an integral part of the analysis of a project.
An Ethics, Compliance and Sustainable Development department was created in 2005 with dominion over all
Coface activities. Its mission is to evaluate Coface’s practices with regard to sustainable development values, to propose improvements where necessary, and to involve each employee directly in the company’s commitments by creating a code of conduct for all Coface employees in the 58 countries where it has a direct presence.
In addition, Natexis Asset Management is placing increasing importance on corporate governance, which aims to achieve the right balance between the rights and responsibilities of managers and shareholders. For example, it always exercises its right to vote at the shareholders’ meetings of companies in its equities portfolios. It examines each company in detail and analyzes the resolutions in light of Natexis Asset Management’s voting policy. Using this integrated approach, Natexis Asset Management exercised its voting rights on 150 European stocks in 2005.
SRI assets managed by Natexis Asset Management soared in 2005. At December 31, 2005, they totaled B465.65 million, up 138.11% since the previous year-end.
Natexis Banques Populaires is also actively promoting these funds to all employees. In January 2006, a range of SRI and solidarity-based savings was added to employee savings options.
Support for the solidarity-based economy The Fructi ISR range contains a solidarity-based fund,“Fructi ISR Rendement Solidaire”. Five percent of the fund’s assets are invested in securities issued by accredited associations or companies such as Habitat et Humanisme (aid for the financing of solidarity-based housing), Association pour le Droit à l’Initiative Economique (aid for the long-term unemployed to start their own business) and Société d’investissement France Active (investment in small firms creating jobs for people with financial difficulties). These three organizations promote economic development and help disenfranchised people.
“Fructi ISR Rendement Solidaire” has gained 12.67% since its December 2003 inception, demonstrating that it is possible to marry social responsibility with financial performance. With the support of Natexis Interépargne, France’s leader in employee savings, Natexis Asset Management is actively helping to structure and launch new solidarity-based projects. Many accredited solidarity-based organizations that might be able to use the resources collected through group employee pension plans (PERCOs) have been contacted. This type of fund is set to experience robust
It extended loans totaling €99 million, representing a significant increase over the €57 million it extended between 2001 and 2004.With market share of around 30%, Energeco thereby strengthened its position as one of the leaders in arranging and financing projects of this kind in France.
A socially-responsible asset management company Since the end of 2004, in line with the management of its socially-responsible funds and looking beyond products per se, Natexis Asset Management has been developing a comprehensive approach aimed at embodying and promoting the values of responsible financial management. Specifically, it has been integrating the components of sustainable development in its strategic planning, organization and all of its products.This initiative was rated A++* in September 2005 by BMJ Ratings, a European firm specialized in extra-financial ratings.
* on a ten point scale ranging from D to AAA.
growth in the years to come, because any company that wishes o set up a PERCO must propose at least one solidarity -based employee investment plan.
A surveillance system was implemented. The bank acquired a behavioral analysis software that will be used to detect suspicious transaction flows in the accounts of companies, correspondent banks and individuals.
Since the end of 2004, more rigorous prevention rules have been applied. For each new account and for each line of credit renewal, a customer identification form must be filled out.
Raising awareness about global warming Natexis Banques Populaires showed its commitment to sustainable development and the battle against climate change in joining Ademe’s “Planète Gagnante” club. Ademe, the Agence de l’environnement et de la maîtrise de l’énergie, is the French environment and energy management agency. The bank has agreed to promote the energy-saving message of Ademe’s publicity campaign.The campaign aims to make the general public aware of the environmental problems caused by greenhouse gas emissions and encourage people to control their energy consumption. Natexis Banques Populaires has greatly expanded the impact of the campaign. Its first act was to make employees aware that their everyday activities are responsible for half of all greenhouse gas emissions. Using the Climact test, available on the bank’s intranet, employees can measure their own greenhouse gas production in a few minutes, as well as how to reduce them. The test was also distributed outside the bank. It was distributed in paper form at a conference of French Association of Corporate Treasurers (AFTE).
Optimal use of office equipment Shared multi-function printers operating by default in double -sided, ink-saving mode contribute to reducing paper and ink cartridge consumption in the Liberté 2 building.
Participation in “gestes verts” campaign After increasing sensitivity to greenhouse gases, the bank included its employees in the “Gestes verts” (“eco-behavior”) campaign. Via a questionnaire distributed in June 2005, employees suggested measures to reduce energy, paper and fuel consumption or to optimize waste management.The key suggestions were published on a "Gestes verts" intranet at the end of September 2005. Certain suggestions have already been implemented. In 2006, the bank will focus on promoting five key measures for employees to keep in mind and on implementing new projects: widespread use of selective waste collection, research into a carpooling system and developing procurement of environment-friendly products.
Consumption under control >>> Given that the Liberté 2 building came on stream and the monitoring scope for water and energy consumption was expanded to include all subsidiaries, including Coface, 2005 was a transition year.
At constant scope, water, paper and energy consumption were kept under control.
Raising awareness among suppliers In fulfillment of its end-2004 commitments, the bank integrated sustainable development criteria into its 2005 calls for tender.The Purchasing department now follows this procedure systematically.To accomplish this, the bank called upon the expertise of Ademe’s “eco-design and sustainable consumption” department.This made it possible to choose products with less impact on the environment over their entire life cycle. Official eco-labels (e.g. EU, the French “NF Environnement” standard) were widely used. The results obtained in the various calls for tender were very encouraging and demonstrate that it is possible to combine economic and ecological goals.
For commercial printing, for example, the bank turned to printers carrying the “Imprim’vert” label, used natural, vegetable inks and replaced all previously used varnishes and coatings with acrylic varnish.
Going one step further, Natexis Banques Populaires integrated exclusion criteria into certain calls for tender at the end of 2005. Purchased furniture, for example, must not contain hazardous substances. The wood used must derive from forests managed according to the principles of sustainable development and exportation or commercial exploitation of the type of wood used must not be against the law.
A call for tenders on flat screens excluded suppliers that could not guarantee the absence of toxic substances in their equipment that could be harmful to employees.
Purchase of “green” products In 2005, the bank chose products having less impact on the environment, including: > paper containing recycled fibers or new fibers from forests managed according to the principles of sustainable development, > recyclable envelopes carrying the “NF Environnement” label, > recycled ink cartridges for printers and fax machines, > office supplies marked as “green products”; in 2005, out of a catalog of 572 products, 86 were designated as “green”.
Employees are directly involved Natexis Banques Populaires has decided to involve employees as much as possible in sustainable development efforts so as to make them common practice throughout the company.
An initial information stage took place in 2005, in particular via regular internal communication. Sustainable Development Week, in June, offered another opportunity to increase employee sensitivity. On that occasion, a traveling exhibit on the theme of sustainable development and the forms it takes at Natexis Banques Populaires was presented in the bank’s principal sites. In addition, conferences on such topics as ecological footprints, fair trade, socially-responsible investment and the struggle against malaria were offered throughout the week.
Sensitive to the realms at the crossroads of art and science, Natexis Banques Populaires complements its patronage initiatives with a scientific element.The bank is financing a study by the Centre de Recherche et de Restauration des Musées de France, a French government research center specialized in restoration, that will enable the BNF to restore the Coronelli globes before they are shown to the public.
Young musicians obtain help in star ting their career through scholarships lasting one to three years.Young people with disabilities receive financial aid enabling them to obtain professional training, higher education, to found a company or to buy a car customized to their professional requirements.
n Employees regularly informed through traditional communication channels n Traveling exhibit on sustainable development n Expand reporting scope to include all French subsidiaries (incl. Coface)
Promote dedication to diversity in all stages of human resource management
The total number of employees was 12,973 FTE as of December 31, 2005, including 9,438 FTE in France and 3,535 FTE in foreign offices.
The diversity of new employees reflects that of Natexis Banques Populaires’ needs and business lines. The bank needs complementary talents and cultures.
Of the 560 individuals hired at the parent company, 57.4% held four- or five-year higher education degrees. Positions of high responsibility or requiring specific, business-line expertise were filled by experienced candidates, both male and female.
Many new employees with two years of higher education were hired, principally for back-office positions. Many of them possess the technical and linguistic skills necessary for handling complex IT applications.
There were 221 lay-offs in France in 2005, including 137 at the parent company. Most of them were motivated by individual circumstances.
Overtime in France totaled 24,899 hours in 2005, including 15,530 at the parent company.
Services providers were used essentially for IT functions (IT consulting companies and project leadership assistance ).
As defined by French labor law, not applicable to Natexis Banques Populaires.
Seven collective bargaining agreements cover the varied lines of business exercised by Natexis Banques Populaires and its subsidiaries in France. The banking and insurance agreements apply to more than 80% of employees.
Labor negotiations at the Banque Populaire Group resulted in a 1.8% overall gross salary increase in May 2005. Natexis Banques Populaires applies the Group agreement to all employees whose contracts are governed by the collective bargaining agreement applicable to banks.
In 2005, management and employee representatives decided to take certain category-wide measures in favor of employees earning the lowest salaries and to look closely at employees who had not been promoted for four years.
As of December 31, 2005, women represented 51.8% of the total French workforce (47.3% of the parent company workforce).
The number of women hired by the parent company increased in 2005. Out of 560 new hires, 45.2% were women, compared with 41% in 2004.
Proportion of women in management-level positions (parent company): Proportion of women among promoted employees (parent company): Among all French employees, women received 59% of all promotions and 51.8% of all raises (note that the second percentage is equivalent to their representation in the bank’s French workforce).
Training (parent company): women represented 48.8% of trainees, slightly more than their percentage in the workforce.
In June 2005, a profit-sharing agreement was signed, applicable to more than 6,000 employees of the parent company and nine subsidiaries.
In compliance with the loi Breton, an agreement with employee representatives allowed employees to gain early access to their 2004 profit-sharing until December 31, 2005.
The Health, Safety and Working Conditions Commission (CHSCT) of the Paris metropolitan area has 16 members rather than the legally-required minimum of nine. Three committees handle issues related to stress and harassment, smoking on the company premises and the tracking of employees redeployed in the context of the Liberté 2 project.
Concerning employee health, the independent, occupational medicine department regularly monitors employees in the Paris metropolitan area. Independently of the new system of biennial physical examinations, employees requiring special surveillance will continue to be monitored on an annual basis.
A doctor who advises patients on medical reimbursement is available twice a week for employee consultations in the Paris metropolitan area.
As is the practice every year, an influenza vaccine campaign took place in the Group’s offices in October 2005.
In liaison with the Comité régional d’éducation pour la santé d’Ile-de-France, an association that promotes health education, the CHSCT smoking sub-committee organized antismoking events in the bank’s Paris offices, based on the results of an employee survey held at the end of 2004.
As part of the business recovery plan, a partnership was concluded in 2004 with the Institut de Victimologie to provide psychological support to employees in the event of a serious business interruption.
To reduce response time in the event of a problem, the personal data of French employees was updated in 2005.
Training offered by Natexis Banques Populaires on behalf of its subsidiaries tripled between 2002 and 2004 and continued to rise in 2005 to a total of 9,353 hours.
The bank and its French subsidiaries employ 146 people with disabilities.
In the wake of the tsunami that devastated southeast Asia at the end of December 2004, Natexis Banques Populaires employees came to the aid of victims. Donations to the Works Council were doubly matched by management and the total was contributed to humanitarian associations.
Similarly, every year many employees make charitable contributions to the Telethon. These donations are also doubly matched by management.
During 2005, the Central Works Council created a humanitarian commission to coordinate the Council’s solidarity activities.
Natexis Banques Populaires accompanies regional development by financing its client’s activities. It builds long-term partnerships with them (see chapter entitled “Businesses”).
Extent of subcontracting and adherence to fundamental conventions of the ILO code
The use of temporary workers has been scaled back over the last three years.
Methods employed by foreign subsidiaries to account for the impact of their activities on regional development and local inhabitants
n 2001: 730 metric tons n 2002: 684 metric tons n 2003: 642 metric tons n 2004: 578 metric tons n 2005: 583 metric tons (of which printing: 337 tons, copying: 22 tons and desktop publishing: 224 tons)
Energy consumption (electricity, heating and cooling), for all companies and locations of Natexis Banques Populaires (parent company and subsidiaries, including Coface) totaled nearly 80,000 MWh. On a comparable structure basis, it declined between 2004 and 2005.
n 2005: 77,425 MWh (26,868 MWh on a comparable structure basis)
Energy and fluid consumption generated by the activities of Natexis Banques Populaires is managed by the Logistics department. This department’s policy is to limit the direct environmental impact of the company’s activities, while maintaining high-quality working conditions for employees. In an effort to achieve this delicate balance, qualitative and quantitative consumption objectives are set annually for each building.
The Logistics department has individual building representatives who interact directly with users.They are responsible, among other things, for optimizing energy consumption.To do so, they use centralized technical management tools to optimize user comfort while minimizing energy consumption. These tools automatically manage technical installations, taking account, for example, of outside temperature and the thermal properties of the building.
The environmental quality of interior space in new buildings is also taken into account right from the design stage. The Liberté 2 building, which opened in 2005, is a perfect example. From the outset, financial, architectural and technical aspects were fully planned from a long-term perspective. Building materials and technical equipment were chosen not only on the basis of the initial investment, but through a comprehensive approach including future operational costs over the building’s estimated useful life.This approach made it possible to opt for modern, efficient solutions that minimize energy consumption while offering high-quality interior space. In 2005, Liberté 2 was awarded the year’s grand prize for office buildings at the corporate real estate trade fair in Paris (SIMI).The prize was awarded by a jury composed of corporate real estate managers of CAC 40 companies and was based on the building’s architectural, environmental and technical qualities.
Finally, through a partnership with Ademe, 2005 saw increased awareness of global warming on the part of employees. The “gestes verts” eco-behavior campaign (see above) involved them both on individual and collective levels.As a result, paper and energy consumption was reduced and waste management optimized.
In 2005, Natexis Banques Populaires considered a program to purchase electricity produced from renewable energy sources. However the program did not offer acceptable environmental guarantees, and was therefore not pursued.
Ground use, emissions of substances having a serious impact on the environment into the air, water and ground
Along these lines, the company has reinforced measures to prevent the spread of the legionella bacteria into the air. Installations prone to risk – particularly water heaters and refrigeration towers – are monitored very closely.The practice of taking and analyzing samples biennially has been extended to all buildings in operation. Maintenance is now performed more frequently on these installations, too. In addition, a program to replace installations at risk of proliferating legionella was initiated in 2005.
Natexis Banques Populaires implemented waste sorting in one of its largest central locations, Rives de Seine, in 2003. In 2004, the volume of waste sorted at this site was 1,316 cu. m., including 829 cu. m. of paper and cardboard. In 2005, this practice was extended to the new Liberté 2 building.
In addition, the bank encouraged employees to use and recycle more environment-friendly IT consumables. In 2005, 65% of laser cartridges used in 2005 were remanufactured, and 2,500 ink car tridges were recovered for recycling.
Measures taken to limit harm to biological equilibria, natural habitats and protected animal and plant species
ture covered the following areas: asbestos detection and removal, bacteriological testing, recovery and treatment of potential liquid pollutants,air conditioning replacement studies.
Existence of internal department for environmental protection, training and information dispensed to employees, resources devoted to reducing environmental risks, arrangements for dealing with pollution accidents whose consequences extend beyond the company's premises
A cross-functional unit within the Logistics department centralizes environmental issues related to building construction and operation. It tracks consumption on a consolidated basis, and it coordinates and federates the activities of the Logistics department’s operating units.
Amount of environmental penalties paid during the period as the result of court decisions and the action taken to repair the environmental damage
1> Changes in scope of consolidation The consolidated financial information presented in this report covers the entire scope of consolidation of the Natexis Banques Populaires Group. Changes in the scope of consolidation compared with 2004 were insignificant: - consolidation of LLD; - sale of OFIVM at the end of 2005; - acquisition of CUAL (February 2005), Coface’s insurance subsidiary in South Africa; - acquisition of LEID (April 2005), Coface’s insurance subsidiary in Lithuania.
n The figures presented in this report are based on the new organizational structure of Natexis Banques Populaires, with the following four core businesses: - Corporate and Institutional Banking and Markets, which comprises Corporate France, International, Global Debt and Derivatives Markets, Equity Group, Natural Resources & Related Industries and Mergers & Acquisitions; - Private Equity and Wealth Management, which comprises Private Equity, Private Banking and International Estate Planning; - Services, which comprises Insurance, Employee Benefits Planning, Asset Management, Financial Services, Banking Services and Investor Servicing, formed from the creation in 2005 of the Natexis Investor Servicing subsidiary, which groups together around 160 employees from the different Services activities and is responsible for a number of services intended for asset management companies; - Receivables Management, which comprises Coface and Natexis Factorem.
Gross operating income 1,034.4 842.6 +23% Impairment charges and other credit provisions (81.0) (101.2) -20% Gains and losses on disposals of fixed assets 98.1 (1.5) ns Share of income of associates 13.6 10.5 +30% Change in value of goodwill 1.6 (6.5) ns
3.1.1 - Corporate and Institutional Banking and Markets The Corporate and Institutional Banking and Markets core business was created in late 2004 to meet the bank’s goals of taking an increasingly client-centric approach, providing its corporate and institutional clientele with a comprehensive product offering tailored to their needs, and fully exploiting synergies between its various business lines. Its growth strategy is to capitalize on its existing corporate and institutional business franchise, particularly through cross-selling and developing high value-added business lines.
n Corporate France risk-weighted assets rose by B3.2 billion or 15% over the year to B24.5 billion.
Average loans outstanding amounted to B13.4 billion, up B1.2 billion or 10%. Financial institutions were still the main contributors, with 33% of outstandings coming from the New York branch and 22% from branches in Asia (robust business in India and China).
n Net banking income for International activities came to B127.6 million, up 4% compared with 2004.The adoption of IAS 32 and IAS 39 had a negative impact of B7.2 million. Excluding the impact of IAS, the department’s growth would have come to 9.5%.
LBO and acquisition financing was again the main contributor, with net banking income of B83.2 million in 2005. Real estate financing produced net banking income of B62 million,
up B26 million or 72% compared with 2004. Project financing saw a 15% increase in net banking income to B38.2 million, thanks to a sharp rise in service commissions, while margins on loans declined. Shipping financing also increased by 15% to B15.2 million, thanks to robust business and all-in margin holding up against the decline in spreads and commissions. Following a year of strong growth in 2004, aircraft financing produced net banking income of B17.6 million, despite fierce competition, the interruption of Japanese operating leases and the weakening of airlines’ profitability as a result of the fall in the dollar and the rise in fuel prices.
n Net banking income on fixed income activities more than doubled year-on-year. In the first half of 2005, against the flattening of the yield curve in the eurozone, positions anticipating an increase in ECB rates were reduced. Priority was given to more lucrative and less volatile customer activities, as part of the cross-selling strategy.These measures boosted income in the second half of the year.
n Having been affected by the crisis in spreads at the start of the year, credit activities picked up in the second half of the year. However, net banking income declined by 17% in 2005. Primary bond market activities also performed well, with 74 mandates (up 51%) and further expansion in international activities. Natexis Banques Populaires was ranked No. 3 in France for corporates and No. 4 in France for financial institutions in 2005 (source: Bloomberg).
Natexis Moscow continued to gain momentum, with origination rising from B103 million in 2004 to B192 million in 2005.
n Average outstandings increased by 42% to B6.0 billion, reflecting robust business and the development of commodities prices.
- Natexis Bleichroeder S.A. (B49.5 million) achieved a 17% increase in net banking income. Growth was fuelled by institutional equity sales (B14.2 million), which increased by B3.3 million or 30% thanks to improvement in the sales system and new stock lending/borrowing, as well as primary equity market activities, with major deals including Maurel et Prom, Entrepose, Gaz de France and Rue du Commerce.
- Natexis Bleichroeder Inc. generated net banking income of B54 million in 2005, an increase of B12.2 million or 29% compared with 2004; global trading activities saw growth of 54% thanks to strong business momentum; meanwhile, equity brokerage rose by 38% compared with 2004; the subsidiary was also involved in primary market transactions with energy companies in collaboration with the Houston office.
n Equity derivatives groups together the parent company’s equity derivatives activities and those of subsidiary Natexis Arbitrage. This business generated net banking income of B30.5 million in 2005, up B11.2 million compared with 2004. Risk arbitrage trebled its targets, primarily in the US, thanks in particular to anticipated growth relating to oil prices, while convertible bond arbitrage activities were penalized by the crisis in the first half of 2005.
n Mortgage securitization activities conducted by ABM Corp. sustained a 2% drop in net banking income to B13.7 million due to unfavorable market conditions relating to the yield curve and inflationary tensions.Equity option market making activities,conducted by Dupont-Denant Contrepartie, also sustained a fall in net banking income, down 8% at B7.1 million, due to limited index market volatility for the majority of the year.
Net banking income totaled B6.5 million, compared with B5.8 million in 2004. 2005 was a year of transition, with the replacement of over one-third of employees and the restructuring of the portfolio to include larger and higher quality transactions.
Private Equity produced net banking income of B221 million, a rise of B76.6 million compared with 2004.This was mainly thanks to the B74.5 million increase in unrealized capital gains from January 1, 2005, to December 31, 2005, on the invested portfolio under EU IFRS. Natexis Investment Corp in New York contributed B34.7 million in 2005 compared with B22.9 million in 2004.
Natexis Private Equity’s investments reached B370 million, an increase of B59 million compared with 2004. A breakdown of investments by activity reveals strong growth in international activity: Expansion capital €131 millions (+3%)
Total capital managed by Natexis Private Equity amounted to B2.3 billion, including funds raised but not yet invested and unrealized capital gains, up 12% or B252 million compared with 2004. The proprietary portfolio accounted for 51 % of total capital managed. The total portfolio breaks down as follows: Expansion capital €666 millions (+3%)
Total net banking income from Services rose by 19% to B724.4 million.The impact of the transition to EU IFRS was limited to B7.2 million.
Services contributed 24% of total net banking income generated by the core businesses.The six departments making up the core business contributed to this performance: n Insurance
Insurance delivered extremely strong growth: Life Insurance and Personal Risk Insurance premium income increased by 25% and broke the B3 billion level for the first time at B3.2 billion: - Individual Life Insurance premium income rose by 27% against market growth of 14% in 2005; the majority of Life Insurance premium income is now generated from multifund contracts, which account for 74.9% of total premium income, compared with 25.1% for euro-linked contracts. Total premium income invested in unit-linked contracts (B494 million, an increase of around 47.5%) accounted for around 16.5% of total premium income versus 14.7% in 2004; - Personal Risk Insurance premium income increased by 15.4% to B123.6 million in 2005.
Business was generally robust in 2005. Natexis Interépargne confirmed its market leading position (AFG data at end-June 2005), increasing its market share to 20.6% from 20.1% at the end of 2004.
Managed assets increased by 20% in 2005, as a result of: - the increase in new contracts due to considerable gains from competitors (18% of inflows compared with 2% in 2004), as well as the ‘return’ effect of withdrawals made in 2004 as a result of tax measures implemented by French finance minister Nicolas Sarkozy; - the 37% reduction in withdrawals, despite the effects of the Breton law (B140 million in all funds); - the positive effect of the B1.5 billion increase in valuation, thanks in particular to the rise in market indices.
The scope of activity of the Asset Management business developed significantly compared with 2004: n Natexis Asset Management took over the Group’s employee stock ownership plan management activities following the acquisition and merger of Natexis Epargne Entreprise, which had previously been dedicated to this activity; EU IFRS 2004 IFRS
Managed assets stood at B101.1 billion at end-2005 compared with B83.1 billion at end-2004.
In mid-December, BNP Paribas and Natexis Banques Populaires signed an agreement to create a shared e-banking software platform for retail banking. The two groups plan to form a joint venture called Partecis in early 2006.
Despite a slowdown in growth in the electronic banking market, Natexis Paiements’ electronic banking business achieved a 28% increase in net banking income.
Checks and payment systems delivered a contrasting but generally robust performance, with net banking income up 17%.
Personal banking services produced net banking income of B18.9 million, more or less stable compared with 2004.
These services are intended for asset management companies belonging to the Group or outside the Group, as well as institutional investors.
3.1.4 - Receivables Management Net banking income increased by 14% to B781.3 million, accounting for 26% of total net banking income generated by the core businesses.
Coface continued the worldwide roll-out of its product range. In the 58 countries in which it is present, company information services are now provided in 51 countries compared with 43 the previous year, with receivables management services available in 32 countries compared with 25 the previous year.
2005 was characterized by acceleration in revenue growth, maintaining a good claims rate of 49%, and favorable conditions in the financial markets, allowing for a sharp increase in income on the investment portfolio.
The cost of loss claims corresponds to the end cost paid to policyholders after all recovery and risk elimination efforts. Since 2005, it also includes provisions for future deterioration in economic conditions, which represented an additional cost of nearly B15 million, corresponding to 1.8 percentage points of the claims rate in 2005.
Potential revenues from new factoring contracts amount to B3.58 billion, up 7% compared with 2004.The proportion of potential sales from international contracts – as opposed to domestic contracts – increased by 10 percentage points from 5% to 15%.
The real estate subsidiaries contributed B12.1 million to net banking income compared with B9.7 million in 2004.
The main factors behind the increase in operating expenses in 2005 were as follows: - a significant increase in the number of employees (365 more permanent and contract full-time employees in 2005); - a significant increase in costs relating to incentive and profit -sharing payments and variable pay components, - greater use of external support in major cross-functional projects and development programs at Natexis Banques Populaires.
3.2.3 - Gross operating income Gross operating income amounted to B1,034.4 million, an increase of 23% compared with 2004.
(reversal of B17 million).A release of B6 million was made in the Africa-Middle East region due to losses or client defaults.
n The following table shows a breakdown of specific provisions by core business: EU IFRS 2004 IFRS
Capital Markets 15 4 n By core business, trends in total provisions were as follows: n Breakdown of Corporate and Institutional Banking and Markets: n Total provisions 3.3.2 - Other items n Gains and losses on asset disposals came to B98 million, including a capital gain of B95 million on the sale of the Liberté II building.
n The share of income from associates increased by B3 million to B13.6 million.
n Consequently, earnings before tax came to B1,066.8 million, up 43% compared with B743.8 million in 2004.
n Net income came to B695.4 million, also up 43% compared with the previous year.This includes a sharp increase in tax and takes into account minority interests.
3.4 - Analysis of income by core business All core businesses achieved significant growth in earnings before tax in 2005.
Due to the combined impact of strong growth in net banking income (up 19 %) and good cost discipline (up 7%), earnings before tax from Services increased by 50% to B281.8 million.
Receivables Management contributed B223.6 million to earnings before tax, an increase of 36%. Growth in costs was contained to 6%.
Audit departments. It monitors and measures trends in the bank’s major exposures and takes preventive measures. It also assesses the quality of each core business’s security systems and risk management tools. In 2005, its work covered commodities, major risks, optimization and loan placement.
4.2 - Risk Management department The Risk Management department has five sub-departments: - counterparty/country risk; - market risk; - risk management, control and reporting; - operational risk; - insurable risk.
Based on a wider scope compared with the previous year, the following table shows a breakdown of corporate, structured finance and banking exposure (fund assets excluding non-significant subsidiaries) at December 31, 2005: Investment grade equivalent 73.7%
n a) Breakdown of exposure by business sector and region (total fund assets excluding non-significant subsidiaries, excluding equity, enlarged scope compared with previous year)
The following table shows a breakdown of corporate, structured finance and banking exposure at December 31, 2005: Breakdown by industry
For the first time, the breakdown by industry is presented including all of Natexis Banques Populaires’ banking counterparties. This explains the predominance of the finance and insurance sector. Excluding this item, the breakdown is equally divided between all sectors, as in previous years.The services industry continues to make up a large part of Natexis Banques Populaires’ portfolio.
There was a further significant decrease in loan loss provisions in 2005, due to a continuing favorable business climate.
in € millions Specific Country Industry Total Provi- Provi- Provi- Total Region risks risks risks risks sions sions sions Provifor for for sions specific country industry risks risks risks 4.4.4 - Breakdown of loan loss provisions by region at December 31, 2005 IFRS
4.4.5 - Breakdown of risks and provisions at December 31, 2005 4.5 – Market risks 4.5.1 - Market risk organization and management Control over market risks is the responsibility of the middle office, Risk Management Department and the Internal Control Department. Internal Control and Risk Management report to the General Secretariat, while the middle office reports to the Corporate and Institutional Banking and Markets core business.
- ensuring internal and external reporting on market risks; - validating internally-developed models and software models used to value products; - validating the various delegated authorities and limits requested by Corporate and Institutional Banking and Markets and proposed by the middle office; - making recommendations on the risk management system; - leading Market Risk activities at Natexis Banques Populaires subsidiaries and branches.
Internal Audit is responsible for the operational component of controls: - ensuring that adequate procedures are in place and periodically assessing their appropriateness, particularly with regard to business activities and regulations; - ensuring that procedures are properly and correctly followed; - making recommendations on the risk management system; - more generally, ensuring that procedures governing the management and monitoring or market risks are respected.
4.5.2 - Market risk measurement The market risk management system is based on a risk metrics model that measures the risk run by each Natexis Banques Populaires entity.The current model consists of a number of standard metrics and VaR calculations.
The key standard metrics used are: - sensitivity to a +/- 1% change in interest rates (overall and by maturity); - yield curve exposure expressed as the potential loss; - currency exposure; - equity exposure; - sensitivity to a +/- 1% change in implied volatilities in the equity, foreign exchange and fixed income markets (overall, by maturity and by strike); - sensitivity to a change in delta of an underlying (equities, fixed income and currency); - sensitivity to dividend levels; - sensitivity to change in Treasury bond/swap spreads; - sensitivity to change in issuer spreads; - sensitivity to change in correlations; - monthly and annual loss alerts.
Natexis Banques Populaires’ VaR: jan-05 feb-05 mar-05 apr-05 may-05 june-05 jul-05 aug-05 sep-05 oct-05 nov-05 dec-05 dates Total Interest Currency Equities Commodities VaR rates VaR VaR VaR VaR
In addition to these standard metrics, Natexis Banques Populaires also uses the Value at Risk (VaR) method. It uses Riskmanager software developed by Riskmetrics to perform historical VaR calculations designed to quantify the risk of losses from capital markets activities, using conservative assumptions.VaR calculations are based on: - one year’s historical data; - a one-date potential loss horizon; - a 99% confidence level.
Market data are provided by Riskmetrics on the basis of information from Reuters and are subject to a data management process by Riskmetrics.
Organization and procedures: - In July 2005, the Risk Management department distributed the pricer and model validation chart, which sets out the duties of the Risk Management department in validating models and pricers, as well as the documents that must be provided by other divisions (Research and MO); - Distribution of the Executive Management directive, formalizing the structure of the different teams involved in managing market risks.This directive sets out the works carried out in 2004 to determine each department’s duties in terms of controlling market risks; - Creation of the risk monitoring and supervision committee. This committee meets on a quarterly basis to examine new risk measures and the developments required for their implementation. It comprises the head of Corporate and Institutional Banking and markets, the Director of the Risk Management division, as well as middle-office teams,market risk teams and a representative of the Internal Control department.
This centralized system permits optimum management of liquidity risk through a detailed knowledge of the various gaps. Observation ratios have been approved by the ALM Committee. In conjunction with the Finance Department, Corporate and Institutional Banking and Markets is also responsible for monitoring prudential requirements (shortterm liquidity ratio and long-term financing ratio) and internal prudential ratios validated by the ALM Committee.
The authorized liquidity gap and maturity mismatch limits are monitored and reviewed by the ALM Committee.
Currency risk is broken down into two components: n Operational currency risk, generated by the trading activities. The maximum potential loss is B3 million.This risk is monitored by the Market Risks Committee and the ALM Committee; n Structural currency risk, which is monitored by the ALM Committee.
The interest rate risk of Natexis Banques Populaires and its main subsidiaries is subject to maximum exposure limits,which are defined and validated annually by the ALM Committee.
As regards overall management of Natexis Banques Populaires’ interest rate and liquidity risks in respect of IFRS, Natexis Banques Populaires uses two types of hedge accounting.
“Shock” proposed by the banking regulator in the second pillar of the Basel II accord published in June 2004
Given the specific nature of Natexis Banques Populaires’ balance sheet (no behavioral option, no need to recognize potential early redemptions as financial compensation is paid), the use of this type of hedging is justified by the implementation of variable-rate future repayment schedules are represented by all transactions with a set maturity.
Hedging is demonstrated if for each maturity category of the target repayment schedule, the nominal amount of items to be hedged is higher than the notional amount of hedging derivatives.
At each accounting date, changes in the fair value excluding accrued interest of hedging instruments are compared with those of hypothetical assets and liabilities (synthetic instruments representing assets and liabilities to be hedged at the risk-free rate).The ratio of their respective changes should be between 80% and 125%.
n Periods for which cash flow hedging is justified (all currencies versus valued in euros)
n Cash Flow hedges of variable-rate loans 500,000,000 1,000,000,000 1,500,000,000 2,000,000,000 2,500,000,000 3,000,000,000
n Hedging of loans and securities held for sale: Natexis Banques Populaires uses vanilla interest rate borrower swaps at fixed rates to protect itself against unfavorable changes in interest rates.
n Prospective test: The prospective test is used to check that the financial characteristics of the hedged item and the hedging instrument are the same.
n Impact on consolidated income: Changes in the marked-to-market value of derivative instruments are recorded in the income statement (effective and ineffective portion).
Natexis Banques Populaires wanted to develop a credit derivatives business within its capital markets activities. As part of a cautious approach, the Group has implemented trading limits in several stages: - January 2004: creation of a credit derivatives trading portfolio. In January 2004, the risk committee delegated authorization to the trader to trade CDS within the framework of the base position (cash/CDS); - April 2004: delegation of the trading desk was extended to direction positions in CDS.This authorization is granted subject to a volume restriction, allowing for tight control of the operating process; - September 2004: the non-government bonds portfolio is authorized to trade in CDS.The delegated limits are fairly restrictive and the volume restriction also applies to transactions initiated by traders on this desk; - October 2004: as the operating process is considered satisfactory, the volume restriction is lifted; - Since December 2004: transfer of CDS trading positions within the scope of non-government bonds, which will now be in charge of trading in CDS.The idiosyncratic risk is measured using the Xsi indicator (Natexis Banques Populaires indicator), which is set monthly based on the historic levels of JP Morgan bond indices.An Xsi base measurement is also made in order to limit the base cash risk versus CDS.
A CDS steering committee met on a weekly basis from January 2004 to October 2004. Minutes were drawn up at the end of each committee meeting.
n Cash Flow hedges of variable-rate borrowings 1,000,000,000 2,000,000,000 3,000,000,000 4,000,000,000 5,000,000,000 6,000,000,000 7,000,000,000
In 2004, Natexis Banques Populaires redefined the duties and the composition of the operational risks committee in order to make it a body for the management of operational risks.As a result, the scope of the operational risks committee now includes the management of Natexis Banques Populaires’ operational risks and the business recovery plan. The operational risks committee is co-chaired by the General Secretary and the Head of Information Systems and Logistics; Natexis Banques Populaires’ four core businesses are represented by operating risk officers.The operational risks committee met five times in 2005.
All cover has been taken out with leading international insurers that are recognized for their claims-paying ability.
4.8 - Legal risks 4.8.1 - Dependency Natexis Banques Populaires is not dependent on any patents, licenses or industrial, commercial or financial sourcing agreements.
4.8.2 - Legal and arbitration proceedings There are no administrative, legal or arbitration proceedings pending likely to have a material impact on the financial statements of Natexis Banques Populaires.
Financial assets at fair value through profit or loss and hedging instruments 26.0 24.8
Financial liabilities at fair value through profit or loss and hedging instruments 5.5 7.2
Customer loans, including lease financing, amounted to B43.9 billion, an increase of B9.5 billion compared with December 31, 2004, mainly as a result of growth in shortterm loans, equipment loans and factoring operations.
At December 31, 2005, capital stock therefore amounted to B783,927,680, divided into 48,995,480 shares each with a par value of B16.
5.2.2 - Regulatory capital and international capital adequacy ratio At December 31, 2005, Natexis Banques Populaires’ total regulatory capital for international capital adequacy purposes, enlarged to encompass market risks, amounted to B8.6 billion compared with B6.7 billion at December 31, 2004.
Tier Two, Tier Three and other regulatory capital rose to B2.6 billion from B2.2 billion at December 31, 2004, mostly due to the issuance of B750 million of redeemable subordinated notes in October 2005.
As a result of these trends, the international capital adequacy ratio stood at 11.9%, including a Tier one ratio of 8.3% at December 31, 2005, compared with 12.3% and 8.3% respectively at December 31, 2004. Natexis Banques Populaires therefore maintained its financial structure, despite robust business growth.
It is defined as the ratio of available capital to the requirement for counterparty and market risks.
The ratio of liquid assets to liabilities falling due within one month must be higher than 100%. It stood at 139% at
Natexis Banques Populaires complies with the prudential rules governing large exposures.
6 > Refinancing In 2005, liquidity conditions on the financial markets were favorable for issuers and facilitated the refinancing of the Banque Populaire Group, provided by Natexis Banques Populaires.
In the market for public issues in euros, Natexis Banques Populaires preferred to offer a limited number of lines to investors but of a benchmark size, totaling B3,050,000 million, comprising two senior debt issues of B1 billion each, a
The USCP program (papers issued by NBP U.S. Finance Company LLC with a Natexis Banques Populaires guarantee ) the Natexis Banques Populaires ECP program, the French commercial paper (TCN) program and the extendible notes program do not contain any covenants.
Super-subordinated notes (issued for the first time in January 2005) contain certain covenants, notably: - Non-payment of interest at the due date under certain circumstances; - Reduction in the amount of accrued interest and the nominal amount of the issue in the case of certain events affecting the issuer’s financial situation or certain ratios.
There is a subordination clause, validated by the French Banking Commission.
7 > Subsequent events n In January 2006, credit rating agency Standard & Poor’s published new long and shor t-term credit ratings for Natexis Banques Populaires and Banque Fédérale des Banques Populaires, with a long-term rating of AA- (with a stable outlook) and a short-term rating of A1+.
This constitutes an upgrade in Natexis Banques Populaires’ long and short-term ratings, an upgrade in Banque Fédérale des Banques Populaires’ short-term rating and the first long-term rating for Banque Fédérale des Banques Populaires.
The plan has also been defined in line with the aims of the Group’s strategic development plan, of which it forms an integral part.
(1)The four major axes for growth are diversifying and increasing revenues from large and medium-sized companies and institutional companies, exploiting the growth potential offered by the Banque Populaire banks and their customers, optimizing the Group’s strong position in specialist areas and developing Natexis Banques Populaires’ international presence.
B750 million redeemable subordinated notes issue and a B300 million super-subordinated notes issue.
However, the private placement of a number of EMTN issues ensured that the majority of requirements of more than one year were covered.
In general, Natexis Banques Populaires’ issuing policy is based on the continuing search for maximum debt diversification in order to optimize the cost.
Natexis Banques Populaires was the first French bank to issue extendable notes of B1 billion on the US domestic market.
n Natexis Banques Populaires issues in 2005 (expressed in millions of euros equivalent except for extendible notes, expressed in millions of dollars)
Provisions for loan losses fell by 7% to B76 million compared with B82 million in 2004.
Net income came to B459 million versus B213 million in 2004.
At December 31, 2005, total assets stood at B127,425 million versus B100,587 million one year earlier.
8.2 - Proposed distribution of parent company net income Natexis Banques Populaires parent company reported net income of B459,177,494.14 for the year ended December
Shareholders will be asked to approve the following distribution of this sum: payment of a dividend in the sum of B244,977,400.00, transfer to the general reserve in the sum of B121,170,000.00 and transfer of the balance to retained earnings, in the sum of B4,299.25.
n On March 12, 2006, Groupe Banque Populaire issued a press release stating that the Board of Directors of Banque Fédérale des Banques Populaires had unanimously approved the star t of exclusive negotiations between Groupe Banque Populaire and Groupe Caisse d’Epargne concerning the creation of NATIXIS through the combination of some businesses.
n On March 12, 2006, Groupe Banque Populaire issued a joint press release with Groupe Caisse d’Epargne stating the following: “Groupe Banque Populaire and Groupe Caisse d’Epargne have entered into exclusive negotiations for the creation of NATIXIS Groupe Banque Populaire and Groupe Caisse d’Epargne, each one representing over 3,000,000 member stakeholders, have just signed a letter opening exclusive negotiations, which shall end at the latest June 1, 2006, for the combination of some of their respective businesses.
NATIXIS will be created by the combination of Natexis Banques Populaires and various Caisse Nationale des Caisses d’Epargne contributed subsidiaries in the finance and investment banking sector (IXIS Corporate & Investment Bank, IXIS Asset Management Group and CIFG), and in the specialist banking services sector (Crédit Foncier and Cefi) and private asset management (Compagnie 1818). Existing strategic partnerships at Groupe Banque Populaire and at Groupe Caisse d’Epargne, in particular CNP, will not be brought into the new entity.
Caisse Nationale des Caisses d’Epargne and Banque Fédérale des Banques Populaires will have equal stakes (34% each) in NATIXIS.This parity will be achieved by the combination of assets, the issue of cooperative investment cer tificates and cash contributions, where necessary. NATIXIS will have a free float of at least 25% and market capitalization of more than B20 billion. It will have the resources necessary to take part in consolidation moves currently underway in the industry. Both parties aim to propose a rate of dividend payout of 50% of NATIXIS’ consolidated net profits subject to profits, sufficient free reserves are to hand, then, taking into account all regulatory capital requirements.
Close ties between the two groups The intention is to strengthen ties between the two groups by putting in place cross equity holdings, within the constraints of current legislation and regulations, between Caisse Nationale des Caisses d’Epargne and Banque Fédérale des Banques Populaires.The chief executive of each group will have a seat on the board of the other party with the title of vice-chairman.The first Groupe Banque Populaire representative on Caisse Nationale des Caisses d’Epargne Supervisory Board will be Philippe Dupont and the first Caisse Nationale des Caisses d’Epargne representative on the Banque Fédérale des Banques Populaires Board of Directors will be Charles Milhaud.
Project to be launched end-2006 The timetable provides for the project to be implemented in the course of December 2006, after the period of exclusive negotiation, which will end at the latest on June 1, 2006, with the signature of the final agreements following the required consultations and agreement from the appropriate bodies in each group and in accordance with the commitments to and rights of shareholders. In this respect, it shall be noted that Caisse des Dépôts et Consignations, which holds a 35% stake in Caisse Nationale des Caisses d’Epargne, has specific shareholders’ rights pursuant to the shareholders agreement dated June 30, 2004. Consequently, when required, Caisse des Dépôts et Consignations will have to take a position on the proposed transaction to allow the execution of the final agreements.To date, Caisse des Dépôts et Consignations has stated it is opposed to this project.
VIII.1 Assets and liabilities at fair value through profit or loss VIII.1.1 Financial assets at fair value through profit or loss VIII.1.1.1 Variable-income securities at fair value through profit or loss VIII.1.2 Financial liabilities at fair value through profit or loss VIII.1.3 Derivative financial instruments held for trading
VIII.2 Hedging derivatives - assets and liabilities VIII.2.1 Cash flow hedges VIII.2.2 Fair value hedges
VIII.7 Other assets and liabilities VIII.7.1 Sundry other assets and liabilities
IX.11 Reconciliation of the tax charge in the financial statements and the theoretical tax charge
XI Segment reporting XI.1 Segment reporting by business segment XI.1.1 Income XI.1.2 Balance sheet items 99NATEXIS BANQUES POPULAIRES
XIII.6 Breakdown of notional amount of derivatives - reconciliation with fair value
PARENT COMPANY FINANCIAL STATEMENTS AND NOTES YEAR ENDED DECEMBER 31, 2005
Note 4 Investments in subsidiaries and associates, other securities held for investment and treasury stock
Financial assets measured at fair value through profit or loss VIII.1 26,013 24,494
Revaluation differences on portfolios hedged against interest rate risk - -
Financial liabilities at fair value through profit or loss VIII.1 5,288 6,724
Net gains or losses on available-for-sale financial assets IX.4 345 123
Net income attributable to equity holders of the parent 695 488
Equity at January 1, 2005 - EU IFRS 772 2,379 (160) 1,563
(1) Share premiums, statutory reserve, contractual reserves, long-term capital gains reserve and other reserves
Related Change in fair value of Net Shareholders’ Equity Total to financial instruments income, equity, attributable consolidated translation group group to equity reserves share share minorities
+/- Net charge to depreciation and amortization of property, plant & equipment and intangible assets 74 74 +/- Impairment of goodwill and other non-current assets (10) 5 +/- Net charge to other provisions (including insurance reserves) 2,507 1,492 +/- Share of results of associates (14) (10) +/- Net loss/(gain) on investing activities (308) (143) +/- Net loss/(gain) on financing activities 0 0 +/- Other movements (278) 337
= Total non-cash items included in income before income taxes and other adjustments 1,972 1,755
+/- Decrease/(increase) in financial assets and investments in associates (2,747) 506 +/- Decrease/(increase) in investment property (143) 35 +/- Decrease/(increase) in property, plant & equipment and intangible assets 105 (95)
+/- Cash received from/(paid to) shareholders (116) (157) +/- Other cash provided/(used) by financing activities 1,520 (1,721)
Net cash provided/(used) by operating activities (A) (490) 3,015 Net cash provided/(used) by investing activities (B) (2,786) 446 Net cash provided/(used) by financing activities (C) 1,404 (1,878) Effect of exchange rate changes (D) 98 (29)
Cash, central banks, post offices (assets & liabilities) (193) 170 Interbank balances (6,315) (4,906)
Natexis Banques Populaires has prospectively adopted the amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ of June 2005 relating to use of the fair value option.This amendment allows for the recognition of financial instruments at fair value through profit or loss provided that they meet one of the following three criteria: - hybrid instruments that contain one or more embedded derivatives; - a group of assets or liabilities measured and managed at fair value; - the elimination or significant reduction of an accounting treatment inconsistency between an asset and associated liability.
Meanwhile, Natexis Banques Populaires has elected not to adopt prospectively the following amendments adopted by the European Union as at December 31, 2005: - the amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ concerning cash flow hedges of forecast intragroup transactions in foreign currencies; - the amendment to IAS 19 ‘Employee Benefits’ concerning actuarial gains and losses, group plans and disclosures.
Natexis Banques Populaires will apply the first two amendments as of January 1, 2007.
The statement of changes in equity shows changes between January 1, 2004, and December 31, 2005, separately identifying the effects of first-time adoption of 2004 IFRS and then EU IFRS.
Note II > Impact of the first-time adoption of IFRS The 2004 financial statements provided by way of comparison have been prepared in accordance with IFRS excluding IAS 32, IAS 39 and IFRS4, applied in accordance with the option provided by IFRS 1 as of January 1, 2005.
Restatements relating to the adoption of IAS 32, IAS 39 and IFRS 4 were presented with the interim financial statements to June 30, 2005.
Some information previously provided about the transition to IFRS has been amended following the prospective adoption of the amendment to IAS 39 concerning the fair value option (endorsed by the EC regulation of November 15, 2005) and some adjustments to the method. The level of provisions for loans and receivables on a collective basis was based on expected losses resulting from the application of Basel II using probability of default on a one-year horizon. Expected losses have been recalculated in order to factor in the probability of default taking into account the actual maturity of each segment (activities and countries) to be impaired. Refining this parameter resulted in a B45 million increase in the level of provisions in the opening balance sheet, with a resulting deduction from equity (B30 million) and increase in deferred tax assets (B15 million).
Component accounting for property, plant and equipment (20) - (1) (4)
Breakdown of EU IFRS impacts on unrealized gains & losses AFS CFH Total
Breakdown of unrealized gains & losses at January 1, 2005 Total
II.1.1 Impact on equity and Tier One capital at December 31, 2004, under 2004 IFRS
This type of provision, which is booked by Coface (credit insurance) and ABP IARD, is a technical reserve permitted by French GAAP to protect insurance companies against the risk of catastrophe. IFRS does not permit the recognition of reserves covering risks of a general nature. Accordingly, the equalization reserve has been fully reclassified as equity as of January 1, 2004. Charges to the equalization reserve recorded during 2004 under French GAAP have been reversed.
IAS 19 stipulates more precise rules for the measurement and recognition of employee benefits. These new rules result in an increase in employee benefits, relating primarily to actuarial gains and losses.An additional provision is taken from opening capital.Actuarial gains and losses comprise differences relating to changes in assumptions used (mainly the discount rate used) owing to the transition from French GAAP to IFRS.
(5) Restatements of property, plant and equipment and intangible assets (excluding network assets)
(6) Goodwill and elimination of Coface network value - Goodwill: Unlike under French GAAP, goodwill is no longer amortized. Impairment tests are conducted as soon as any signs emerge of impairment in value or at least once a year, giving rise to the recognition of an impairment loss. Negative goodwill is reclassified under equity when the opening balance sheet is prepared and immediately recognized in the income statement in subsequent years.
- Reclassification of Coface network assets: Network assets previously recognized as intangible assets in the French GAAP financial statements do not satisfy the criteria laid down in IAS 38 for the recognition of intangible assets. In accordance with IFRS 1 on first-time adoption, these items have been reclassified as goodwill. Since this adjustment represents a reclassification, there is zero impact on opening equity.
Investments in private equity subsidiaries, which range from 20% to 50% of capital, have not been accounted for under the equity method because they are classified in the ‘instruments at fair value through profit or loss’ category as of January 1, 2005. IAS 28 and 31 covering investments in associates state that for such investments, fair value represents a superior level of information to consolidating them proportionally or accounting for them under the equity method.
The adoption of IAS 27 for the private equity business has not led to the consolidation of any majority investments, as none is material.
II.1.2 Impact on equity and Tier One capital at January 1, 2005, under EU IFRS
Most fee and commission income is recognized on a cash basis.
(2) Provisions - Specific provisions for credit risk – impact of discounting: The conditions for identifying impairment of specific loans are similar to those used by Natexis Banques Populaires under French GAAP. However, under IFRS, the amount of the provision is the difference between the net carrying amount of the loan and the estimated recoverable amount discounted at the effective interest rate applicable at the inception of the loan.
- Collective provisions: The rules for recognizing collective provisions are stricter under IAS 39 than under French GAAP. If there is no objective evidence of impairment for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment.
IFRS requires the following financial instruments to be measured at fair value: - Through profit or loss: derivative financial instruments, instruments held for trading, instruments subject to a fair value hedge (to the extent of the components hedged), instruments with separable embedded derivatives, instruments for which the management strategy and performance assessment are based on fair value, instruments for which changes in fair value may be offset by changes in the fair value of related instruments; - Through equity: financial instruments classified as available for sale and derivative financial instruments designated as cash flow hedges for macro-hedging purposes.
Natexis Banques Populaires has elected to designate the large majority of its private equity investments as at fair value through profit or loss and the remainder as available for sale.
- Impact of the restatement of day one P&L: Under French GAAP, some combined instruments give rise to the recognition of a gain or loss at inception due to the difference between the transaction price and their fair value based on internal models.
Under IFRS, if an instrument is not quoted on an active market, its fair value is determined by reference to prices of similar transactions or using internal measurement models. If an internal model is used, a gain may only be recognized at inception (day one P&L) if all the parameters used by the internal model are based on directly observable market data and if the model used complies with generally accepted economic methods for setting the price of these financial instruments. Otherwise, the gain is not recognized at inception but deferred over the period of the transaction.
On the basis of its analysis of its preferred shares, Natexis Banques Populaires has reclassified these shares as liabilities, the main effect of which is a reduction in minority interests of the same amount as the issues. Dividends paid on these preferred shares are treated as interest expense under IFRS.
Revaluation differences on portfolios hedged against interest rate risk - - - 231
Revaluation differences on portfolios hedged against interest rate risk - - - 0
Liabilities associated with non-current assets held for sale - - - 0
in € millions Cash due Financial Hedging Available Due Customer Held-to Deferred from assets at derivatives for-sale from loans maturity tax central fair value financial banks financial assets banks through assets assets profit or loss
Interbank and money market assets 47,068 (187) (4,370) - (2,088) (41,174) (29) - -
Non-current assets held for sale 0 108 Investments in associates 108 254 Investment property 254 418 Property, plant & equipment 418 427 Intangible assets 427
Net income for the period 407 - - - - - - - - -
Note II.2.1 - Main reclassifications made at December 31, 2004 (2004 IFRS) and January 1, 2005 (EU IFRS) - Liabilities and shareholders’ equity
Comments: The balance sheet reclassifications relate to the adoption of the new presentation format set out in CNC recommendation 2004-R-03 of October 27, 2004, and the main reclassifications made to December 31, 2004 (under 2004 IFRS) and to January 1, 2005 (under EU IFRS-), including the following reclassifications: (1) Breakdown of securities portfolio - Under 2004 IFRS: financial instruments at fair value by profit or loss comprise solely financial instruments held for trading; - Available-for-sale financial assets comprise securities in the investment portfolio, investments in affiliates and nonconsolidated companies, as well as other long-term investments.
The application of IAS 32 and IAS 39 at January 1, 2005, resulted in the reclassification of items making up the securities portfolio, in order to take into account the new classification rules based on the economic characteristics of financial instruments as well as the institution’s documented investment strategy.
Under IFRS, insurance investments (B 23.4 billion) are reclassified by type: - Investments in marketable securities have been reclassified taking into account the new classification rules under IAS 32 and IAS 39: ° Assets at fair value through profit or loss (B4.7 billion)
° Available-for-sale financial assets (B12.5 billion), of which B2 billion relates to long-term insurance investments
Under French GAAP, the fair value of financial instruments was recorded on the balance sheet under “Accrued income, prepaid expenses and other assets” or “Deferred income, accrued charges and other liabilities” and related solely to trading derivative financial instruments.
Under IFRS, all derivative financial instruments are recorded on the balance sheet at recognized at fair value on inception, whether they are trading derivatives or hedging derivatives: - Trading derivatives: these derivatives are included in financial assets or liabilities at fair value through profit or loss; - Hedging derivatives: these derivatives are recorded as a specific balance sheet item, separately from trading derivatives.
Equity attributable to equity holders of the parent (51) 242 (3) 89 Share capital and reserves - - - -
Note II.2.3 - Main restatements made at January 1, 2005 (EU IFRS)
n Liabilities in € millions Impact of fair value Amortized Private Insurance Other cost equity company instruments investments
Financial assets measured at fair value through profit or loss 1 128 149 635
Revaluation differences on portfolios hedged against interest rate risk - - - -
Note II.3 : Transition of the 2004 income statement (2004 IFRS)
Gains or losses on financial instruments at fair value through profit or loss /////// 305 (148) - 156
Net gains on securities held for sale 185 (185) - - ///////
Depreciation, amortization and provisions for impairment of property, plant & equipment and intangible assets (78) - - 1 (77)
Gains or losses on other assets 7 - (9) - (1)
Net income attributable to equity holders of the parent 407 0 0 80 488
Note II.3.1 : Analysis of reclassifications made at December 31, 2004 (2004 IFRS)
in € millions Exceptional Net gains/ Gross Interest on Other banking Other Total items (losses) margin preferred revenue and reclassion disposal on shares- expenses fications of long-term insurance investments operations
Gains or losses on available-for-sale financial assets - 6 23 - 29 - 0
Net gains/(losses) on trading account securities - - - - - - 0
Impairment charges and other credit provisions - 3 - - - - 3
in € millions Equalization Goodwill Component Information Employee Other Total reserves accounting for systems benefits restaproperty, plant & development tements equipment costs
Income from variable income securities - - - - - - 0
Net fee and commission income - - - - - - 0
Depreciation, amortization and provisions for impairment of property, plant & equipment and intangible assets - - 2 1 - (2) 0
Impairment charges and other credit provisions - - - - - - 0
Gains or losses on other assets - - - - - - 0
Change in value of goodwill - 47 - - - - 47
Potential voting rights Under IFRS, Natexis Banques Populaires is required to consider the existence and effect of potential voting rights currently exercisable or convertible when assessing whether it exercises control or significant influence. Potential voting rights include, for example, share call options and debt instruments that are convertible into ordinary shares. However, potential voting rights are not taken into account for the purpose of calculating the percentage holding.
Special purpose entities Special purpose entities (SPEs) created to manage a specific operation or group of similar operations are fully consolidated if they are controlled in substance by Natexis Banques Populaires, even where there is no equity relationship. The main criteria for assessing the existence of control as defined by SIC 12 are as follows: - Activities:The activities of the SPE, in substance, are being conducted on behalf of Natexis Banques Populaires, which directly or indirectly created the SPE according to its specific business needs.
- Decision-making: Natexis Banques Populaires, in substance, has the decision-making powers to control or to obtain control of the SPE or its assets, including certain decision -making powers coming into existence after the formation of the SPE. Such decision-making powers may have been delegated by establishing an “autopilot” mechanism.
- Risks: Natexis Banques Populaires retains residual or ownership risks in order to obtain the economic benefits of the SPE’s activities.
Special purpose entities cover four categories of transaction: n a) Securitization
SPE Currency Inception Maturity Gross Weighted Weighted First loss amount risks risks securitized securitized retained
NATIX USD (first loss in EUR) 2000 2008 190 190 34 3
Natix and Igloo II are not consolidated principally because Natexis Banques Populaires does not retain the majority of risks inherent in ownership.
Natexis Banques Populaires acts as arranger, depository, underwriter, cash provider, letter of credit guarantor and paying agent for Elixir Funding.
Asset financing is provided to certain clients via look-through entities set up by Natexis Banques Populaires either alone or in partnership with other banks. In these structures, Natexis Banques Populaires acts both as lender and seller of tax positions. It has the power to make decisions concerning the activities of these look-through entities, in substance in a fiduciary capacity on behalf of its clients. The look-through entities are not consolidated as they are not controlled by Natexis Banques Populaires within the meaning of SIC 12.
The purpose of these structures is to transfer ownership of participations in syndicated loans to a group of investors with different seniority rankings. In 2004, Natexis Banques Populaires carried out a transaction of this type called Vallauris CLO PLC. Its assets comprise a portfolio of bank loans managed by Natexis Banques Populaires and refinanced through senior,mezzanine and subordinated notes issued by the entity and purchased by external investors.As none of the four control conditions set out in SIC 12 is fulfilled, the SPE is not consolidated.
NBP letter of credit 10 5 in € millions 12/31/05 12/31/04
Majority interests held by private equity subsidiaries have not been consolidated as they do not meet materiality requirements.
Proportionate consolidation Companies which are jointly controlled by Natexis Banques Populaires are proportionally consolidated. Joint control is the contractually agreed sharing of control over an economic activity between a limited number of shareholders or investors, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the par ties sharing control.
IAS 31 also permits jointly controlled companies (joint ventures ) to be accounted for using the equity method. Natexis Banques Populaires has elected not to apply this option.
Equity method Companies over which Natexis Banques Populaires exercises significant influence are accounted for using the equity method.
IAS 28 and 31 recognize the specific nature of the private equity business. Private equity instruments between 20% and 50% do not have to be accounted for using the equity method if they are designated at inception as at fair value through profit or loss.Natexis Banques Populaires has opted for the latter method as it believes this provides investors with more relevant information.
Year end The consolidated financial statements are based on the separate financial statements of Group companies as of 3.4 Institutional activities Assets, liabilities and commitments arising from the institutional activities managed by Natexis Banques Populaires on behalf of the State are identified separately in the balance sheet under each line item concerned.
Insurance transactions managed by Coface on behalf of the State are not recognized in the financial statements. However, management fees received are recognized in the income statement under the heading “Net fee and commission income”.
3.5 Foreign currency translation The balance sheets of foreign subsidiaries and branches whose functional currency is not the euro are translated into euros at year-end exchange rates, except for share capital, reserves and capital allocations, which are translated at historical rates. Exchange gains and losses are recognized directly in equity.
The income statements of foreign subsidiaries and branches whose functional currency is not the euro are translated at average rates for the year. The difference between net income translated at the average rate and the year-end rate is also recognized directly in equity.
Natexis Banques Populaires has elected to use the option available under IFRS 1 on first-time adoption to transfer all exchange gains and losses existing at January 1, 2004, to retained earnings. If a foreign entity is subsequently sold, the gain or loss on sale will only include those exchange gains or losses arising after January 1, 2004.
3.6 Business combinations and goodwill IFRS 3 on business combinations requires all identifiable assets, liabilities and contingent liabilities acquired to be measured at their fair value on the acquisition date. Adjustments may subsequently be made to these initial fair values for a period of twelve months form the acquisition date.
Business combinations that took place after January 1, 2004, have been restated in accordance with IFRS 3.Those prior to January 1, 2004, have not been restated retrospectively, as permitted by IFRS 1.
When the recoverable amount is lower than the carrying amount, an irreversible impairment loss is recognized in the income statement and charged first against the goodwill allocated to the CGU or group of CGUs and then against other identifiable assets belonging to the CGU or group of CGUs.
These two CGUs correspond to two of the four core businesses used for segment reporting purposes, as presented in note 7.
The impairment tests conducted consisted of comparing the carrying value of each CGU with its fair value on the basis of the following principles.
The fair value is determined using the discounted free cash flow method. Estimated future cash flows are based on the projections of the medium-term business plans (2006-2008)
of the business lines, the principles of which were approved by Natexis Banques Populaires’ Board of Directors on
The discount rate applied is based on recent trading data. It represents the projected average rate of return on listed stocks in the sector concerned, based on their current share price, projected earnings for the coming years and extrapolation of these rates on the basis of a perpetual growth rate of 2%.This is obtained by adding together the risk-free rate (10–year OAT), the risk premium and the historical sector beta, both of which are calculated using a representative sample of listed companies in the sector.
- In credit insurance and business information, growth is mainly due to the continuing roll-out of products and services in new countries; in credit insurance, the return to a less favorable loss ratio than in 2004 and 2005 will be partly offset by further improvement in the cost ratio; - In factoring, growth stems from both the diversification of business development channels in France and more intense international expansion.
- In the relatively mature markets of banking services and financial services, in which Natexis Banques Populaires is a key player, growth in net banking income and improvement in the cost/income ratio should result mainly from synergies arising from strategic partnerships formed in 2005 with BNP Paribas in electronic banking and with Bank of New York in custodial services.
- In the other highly competitive market of insurance (life, personal risk and non-life insurance), growth in France should result from the optimization of the potential of the
- In employee benefits planning,with the support of Natexis Interépargne’s leading position in employee savings, growth should be fuelled by the continuation of measures undertaken over the last two years to expand the target market (offering for very small enterprises and small businesses with the support of the Group’s networks) and the product range (broad range of employee savings, group insurance and service voucher products).
A discount rate of 9.42% is applied for banking and financial services, fund management and employee benefits planning, compared with 10.21% for non-life insurance and 10.45% for life insurance and personal risk insurance.
At December 31, 2005, no goodwill impairment had been recognized on the basis of the impairment tests carried out for each CGU.
3.8 Standardization of individual data and elimination of intragroup transactions Prior to consolidation, the financial statements of companies included in the scope of consolidation are restated to bring them into line with the group accounting policies described below. Intragroup balances and gains and losses arising on intragroup transactions are eliminated.
Insurance companies investments are classified in the balance sheet under the various categories of financial asset defined in IAS 39.
Technical reserves for personal risk insurance contracts are calculated using mortality tables and statutory discount rates, as well as BCAC tables for incapacity and disability risks.
Loss reserves for personal risk insurance contracts correspond to the estimated cost of loss claims and are not discounted.
In addition to these principles, a liability adequacy test is carried out in accordance with IFRS 4.
The equalization reserve recognized by Coface (credit insurance business) and ABP IARD is a technical reserve permitted under French GAAP to protect insurance companies against the risk of catastrophe. IFRS does not permit the recognition of reserves covering risk of a general nature. Accordingly, the equalization reserve has been reclassified in equity as of January 1, 2004. Charges to the equalization reserve made under French GAAP have therefore been eliminated in the IFRS financial statements.
The liability adequacy test conducted in accordance with IFRS 4 shows that insurance liabilities valued under French GAAP were higher at fair value, taking into account the buyback option embedded in the contracts.The test carried out was based on a stochastic technique of measuring discounted future cash flows.
- Market risk: provisioning risk in the event of a stock market crash: To face this risk, ABP Vie has diversified its investments that come under article R.332-20 by investing not only in equity mutual funds but also bond, money market and property mutual funds. It has also purchased an equity put option maturing on December 30, 2005.
The personal risk insurance business is subject to an annual reinsurance plan, which aims to diversify reinsurers and to deal primarily only with parties with a rating of AA or above.
In addition to monthly monitoring of each underwriting center, a procedure is in place at group level based on: - A centralized system for reporting potential loss claims above a cer tain amount (currently B0.5 million for all underwriting centers, increased to B1 million for the two main centers - Coface France and AKC), with the intervention of a subsidiary specializing in recovery (RBI); - The “major risks committee”, which sets the maximum amount of risk for Coface accepted out of the group’s 250 greatest risks (risks of over B60 million) and sets maximum levels for each emerging market; - A rating system for corporate risks and country risks; - A system for the statistical assessment of “severity” (potential maximum loss in the event of a loss claim) by debtor, group of debtors or emerging market.
Exposure to non-payment risk: Coface insures the non-payment risks of nearly 1.5 million companies worldwide. At December 31, 2005, the average risk per debtor was B146,968. Individually, the majority of debtors pose an insignificant risk in relation to Coface’s total portfolio, as no single debtor represents more than 1% of Coface’s total outstandings.
Outstanding loans by loan size as at December 31, 2005 (agreed policies)
3.10 Notes to the financial statements Unless otherwise stated, the figures shown in the notes to the financial statements are expressed in millions of euros.
These companies, whose purpose is to hold investment property representing insurance company investments, are Fructifoncier, ABP Iéna, ABP Pompe and Neuilly Château for Assurances Banque Populaire Vie, the life insurance subsidiary of Natexis Assurances,and Cofimmo for the Coface sub-group.
Fully consolidated companies ADG COFACE ALLGEMEINE DEBITOREN Information and debt GESELLSCHAFT (2) management services 100 100 75 75 75 74 AK COFACE FINANZ GMBH (formerly ALLGEMEINE KREDIT FINANZ SERVICE AKFS) Factoring 100 100 100 100 100 98 AK COFACE HOLDING (formerly COFACE VERMÖGENSVERWALTUNG GMBH) Holding company 100 100 100 100 100 98 AKCO FUND (1) Mutual fund for insurance
These operations related to companies or subsidiaries that were already consolidated and therefore did not impact income and shareholders’ equity for 2005.
- BP Développement rights issue, subscribed by Natexis Private Equity, which increased its stake in BP Développement from 37% to 42%.After the rights issue, BP Développement was fully consolidated due to Natexis Private Equity’s exclusive control in relation to the remainder of the shareholding structure, made up of Banque Populaire regional banks, which individually hold less than 8% of share capital.The impact of the change in the method of consolidation for BP Développement and Sopromec, a 100% subsidiary of BP Développement, is reflected in the increase in shareholders’ equity attributable to minorities (B213 million).
COFACE CREDIT MANAGEMENT NORTH AMERICA Information and debt (formerly Coface Credit Management Services) management services 100 100 100 100 100 98 COFACE DEBT PURCHASE Information and debt management services 100 100 100 100 100 98 COFACE EUROPE (1) Mutual fund for insurance
COFACE SERVICE (formerly La Viscontea Servizi) Information and debt management services 100 100 100 100 100 98 COFACE SERVICES COLOMBIA Information and debt (formerly VERITAS COLOMBIA ) management services 100 100 100 100 100 98 COFACE SERVICES ECUADOR Information and debt (formerly VERITAS ANDINA ) management services 100 100 100 100 100 98 COFACE SERVICES NETHERLAND Information and debt
COFACE SERVICES NORTH AMERICA GROUP (formerly VERITAS SOUTH AMERICAN CORPORATION ) Holding company 100 100 100 100 100 98
COFACE SOUTH AFRICAN INSURANCE COMPANY (25) Credit insurance 100 100 - - - COFACE UK HOLDINGS (formerly London Bridge Finance Group) Holding company 100 100 100 100 100 98 COFACE UK SERVICES LTD Information and debt (formerly Cofacerating.uk) management services 100 100 100 100 100 98 COFACERATING HOLDING Information and debt management services 100 100 100 100 100 98 COFACERATING.CH (26) Information and debt
COFACERATING.COM (16) Information and debt management services (16) (16) 100 100 100 98 COFACERATING.DE Information and debt management services 100 100 100 100 100 98 COFACERATING.FR (17) Information and debt management services (17) (17) 100 100 100 98 COFACERATING.IT (17) Information and debt management services (17) (17) 100 100 100 98 COFACTION 2 (1) Mutual fund for insurance
CRISTAL NEGOCIATIONS (18) Realtor (18) (18) 100 100 100 100 DOMIMUR Rental of business premises 100 100 100 100 100 100 DUPONT-DENANT CONTREPARTIE Investment company 50 50 50 50 50 50 ECRINVEST 6 Real estate investment 100 100 100 100 100 100 EDVAL C INVESTMENTS Ltd Country risk defeasance structure 100 100 100 100 100 100 E-MARKET (3) IT services (3) (3) (3) (3) 100 100 ENERGECO Equipment lease financing 100 100 100 100 100 100 FCPR NATEXIS INDUSTRIE ** Buy-in/buy-out financing 90 82 90 86 100 100 FIMIPAR Debt purchase 100 100 100 100 100 98
FINANCIERE CLADEL Investment company 100 100 100 100 100 100 FINANCIERE NATEXIS SINGAPOUR ** International investment fund 100 86 100 100 100 100 FINATEM ** International investment fund 90 84 90 90 90 90 FNS2 ** Private equity 100 86 100 100 - -
N.V. COFACE EURO DB Business information and solvency 100 100 100 100 - NATEXIS ABM CORP. (formerly ASSET BACKED MANAGEMENT CORPORATION) Securitization arbitrage 100 100 100 100 100 100 NATEXIS ACTIONS AVENIR (30) Growth capital (30) (30) (30) (30) 75 74 NATEXIS ACTIONS CAPITAL STRUCTURANT Growth capital 56 56 58 58 74 72 NATEXIS ACTIONS NOUVEAUX MARCHES (30) Growth capital (30) (30) (30) (30) 80 77 NATEXIS ALGERIE Bank 100 100 100 100 100 100 NATEXIS ALTAIR IT services 100 100 100 100 100 100 NATEXIS AMBS ** Preferred share issues 100 100 100 100 51 34 NATEXIS ARBITRAGE Share and derivative arbitrage 100 100 100 100 100 100 NATEXIS ASSET MANAGEMENT (10) Management of collective savings schemes 100 100 100 100 100 100 NATEXIS ASSET SQUARE Mutual fund distribution 100 100 100 100 100 100 NATEXIS ASSET MANAGEMENT IMMOBILIER (formerly Natexis Immo Placement) Real estate management 100 100 100 100 100 100 NATEXIS ASSURANCES Insurance holding company 100 100 100 100 100 100 NATEXIS BAIL Real estate lease financing 100 100 100 100 100 100 NATEXIS BANQUES POPULAIRES INVEST Mutual funds 100 100 100 100 100 100 NATEXIS BANQUES POPULAIRES PREFERRED CAPITAL I ** Preferred share issues 100 100 100 100 100 100 NATEXIS BANQUES POPULAIRES PREFERRED CAPITAL II ** Preferred share issues 100 100 100 100 100 100 NATEXIS BANQUES POPULAIRES PREFERRED CAPITAL III ** Preferred share issues 100 100 100 100 100 100 NATEXIS BLEICHROEDER INC Investment company 100 100 100 100 100 100 NATEXIS BLEICHROEDER SA Investment company 100 100 100 100 100 100 NATEXIS BLEICHROEDER UK Investment company 100 100 100 100 100 100 NATEXIS CAPE ** International investment fund 98 84 99 100 99 85 NATEXIS COFICINE Finance company (audiovisual) 93 93 93 93 93 93 NATEXIS COMMODITY MARKETS Ltd (formerly NATEXIS METALS ) Precious metals broker 100 100 100 100 100 100 NATEXIS EPARGNE ENTREPRISE (11) Employee savings
NATEXIS PRAMEX UK LTD International commerce promotion and operations 100 99 100 99 100 99 NATEXIS PRIVATE BANKING LUXEMBOURG SA International private banking 96 96 88 88 88 88 NATEXIS PRIVATE EQUITY Private equity 100 100 100 100 100 100 NATEXIS PRIVATE EQUITY INTERNATIONAL Private equity 100 100 100 100 100 100 NATEXIS PRIVATE EQUITY INTERNATIONAL MANAGEMENT (8) Private equity 100 100 - - - NATEXIS PRIVATE EQUITY INTERNATIONAL SINGAPOUR Private equity 100 100 100 100 - NATEXIS PRIVATE EQUITY OPPORTUNITIES ** Private equity 100 89 100 100 - NATEXIS SERVICES LTD (8) UK companies management 100 100 - - - NATEXIS TRANSPORT FINANCE (formerly SOCIETE DE BANQUE FRANCAISE ET INTERNATIONALE) Bank 100 100 100 100 100 100 NATEXIS US FINANCE CORPORATION Negotiable debt instrument issues 100 100 100 100 - NATEXIS VENTURE SELECTION Investment fund 100 100 100 100 100 100 NAXICAP PARTNERS (formerly SPEF DEVELOPPEMENT) Venture capital 100 100 100 100 100 100 NEM 2** Private equity 100 100 100 100 88 88 NXBP1 Holding company 100 100 100 100 100 100 OKV KREDITINFORMATIONS GMBH (OKI) Information and debt
(3) Transfer of assets to Slib on April 1, 2004, with retrospective effect from January 1, 2004
(5) Buyout by Natexis Banques Populaires of minority interests following May 2004 squeeze-out
(7) Buyout of minority interests increasing the Group’s stake to 100% at June 2, 2004, followed by merger with Coface SA
(12) Buyout of minority interests increasing the Group’s stake to 100%, followed by disposal on October 13, 2005,with effect
(15) Created on June 29, 2005, to receive assets transferred by Coface ORT and SCRL
(18) Transfer of assets to Spafica with retrospective effect as of January 1, 2005
(23) Sold on September 9, 2005, with effect from June 30, 2005
(27) Merger on October 1, 2005, with LEID acquired on April 1, 2005
Note V > Accounting principles and valuation methods 5.1 Recognition and measurement of securities and loans
Treatment from January 1, 2004, to December n a) Loans and advances to customers
Non-consolidated investments and equity securities held for investment: - Non-consolidated investments are valued individually at the lower of cost and fair value at the year end. Fair value is determined on the basis of criteria such as restated net assets and profitability; - Equity securities held for investment are securities acquired with the intention of being held in the medium to longterm in order to sell them at a profit. They are booked at cost and a provision for impairment taken if their net book value is higher than their fair value (based on recent transaction values, profitability, market price for listed securities or other valuation methods used at the time of acquisition).
As required by IAS 39, securities and loans are classified in the following four categories: n a) Financial assets at fair value through profit or loss
accordance with the fair value option amendment to IAS 39 (published by the IASB in June 2005 and adopted by the European Union on November 15, 2005).
At initial recognition, these assets are measured at fair value, which is determined on the basis of bid price. Fair value is reviewed on each subsequent reporting date and any changes recognized through profit or loss on a separate line item entitled “gains or losses on financial instruments at fair value through profit or loss”.
Securities included in this category fall into one of the following three situations: - Hybrid instruments that contain one or more significant and separable embedded derivative features; - Instruments belonging to a group of financial assets valued and managed at fair value; - Instruments that present an inconsistency in accounting treatment with a related financial liability.
At initial recognition, held-to-maturity financial assets are measured at fair value including transaction costs. After initial recognition, they are measured at amortized cost using the effective interest method. They are tested for impairment on each reporting date and where necessary an impairment loss recognized through profit or loss, at the level of impairment charges and other credit provisions.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those designated as at fair value through profit or loss or available for sale. This excludes those for which the bearer cannot recovery the majority of his initial investment for reasons other than impairment of the loan, which should be classified as available for sale.The majority of loans and advances granted by Natexis Banques Populaires are classified in this category, which also includes the fair value of the hedged components of assets classified as loans and receivables (fair value hedges).
At initial recognition, loans and receivables are measured at fair value plus transaction costs and minus the discount and transaction revenues. In the case of loans, transaction costs include fees and any internal and external expenses directly attributable to the grant of the loan.
When loans are granted at conditions that are less favorable than market conditions, a discount corresponding to the difference between the face value of the loan and future cash flows discounted at the market rate of interest is deducted from the face value of the loan.The market rate of interest is the rate implemented by the majority of financial institutions at a given time for instruments and counterpar ties with similar characteristics. These discounts represented an insignificant amount as at January 1, 2005, and December 31, 2005.
Available-for-sale financial assets are non-derivative financial assets that are not classified as loans and receivables, heldto -maturity investments or financial assets at fair value through profit or loss. They notably include investments in non-consolidated companies.At initial recognition, availablefor -sale financial assets are measured at fair value plus transaction costs.After initial recognition and at each period-end, fair value is determined by reference to the bid price for quoted instruments.
provisions in the case of fixed-income instruments and by deduction from net banking income in the case of variableincome instruments.
Natexis Banques Populaires as lessor Leases are classified as finance leases when substantially all the risks and rewards incidental to legal ownership are transferred by the lessor, otherwise they are classified as operating leases.
IAS 17 gives five examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease: - the lease transfers ownership of the asset to the lessee by the end of the lease term; - the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonable certain, at the inception of the lease, that the option will be exercised; - the lease term is for the major part of the economic life of the asset; - 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; - 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 classified as a finance lease: - if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee; - gains or losses from the fluctuation in the fair value of the residual accrue to the lessee; - the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than the market rent.
At inception of the lease, assets held under a finance lease are recognized in the balance sheet and presented as a receivable at an amount equal to the net investment in the lease. Net investment in the lease is the gross investment in the lease discounted at the interest rate implicit in the lease plus any unguaranteed residual value accruing to the lessor.
Finance income is recognized based on a pattern reflecting a constant period rate of return on the net investment in the finance lease, using the interest rate implicit in the lease.The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments and the unguaranteed residual value to be equal to the sum of the fair value of the leased asset and any initial direct costs of the lessor.
IAS 17 requires unguaranteed residual values to be reviewed on a regular basis. If there has been a reduction in the estimated unguaranteed residual value, the income allocation over the lease term is revised.Any reduction in respect of amounts accrued is recognized immediately in profit or loss and any reduction in respect of future amounts is recognized by revising the interest rate implicit in the lease.
Provisions for finance leases are determined using the same method as that described for loans and receivables as of
The leased assets are depreciated in the same way as owned assets of the same nature.
Treatment from January 1, 2004, to December n a) Specific provisions
These provisions cover cer tain businesses of Natexis Banques Populaires that carry potential future risks.These businesses are reviewed quarterly and where necessary included in the basis of provisioning for sound exposure in countries or industries likely to experience difficulties During these quarterly reviews, the country and industry provisioning rates are adjusted according to Natexis Banques Populaires’ perception of how the businesses will evolve, either negatively or positively. Since 2003, additional provisions have been taken to cover potential risks arising as a result of major issues in the European marketplaces.
Treatment as of January 1, 2005 n a) Assets individually assessed for impairment
If an asset is found to be impaired, the recoverable amount of the asset is estimated and discounted at the original effective interest rate, taking account of any available guarantees.The difference between the carrying amount of the asset and the estimated recoverable amount is recognized in profit and loss under provisions.
Where there is no objective evidence of impairment for an individually assessed financial asset, the asset is included in a group of assets with similar credit risk characteristics and collectively assessed for impairment. Impairment losses are recognized on a group basis pending identification of impairment losses on individual assets in the group.
Financial assets are grouped according to three key characteristics: credit rating for retail and small business, and industry risk and country for other counterpar ties such as corporate or sovereign borrowers.
When a group of financial assets is found to be impaired, the impairment loss is calculated on the basis of expected losses, in accordance with the provisions of the Basel II accord.
In the case of specialized management of a trading portfolio, each instrument is marked to market on an individual basis. Changes in value during the period are taken immediately to the income statement.Valuations are adjusted for counterparty risk and the discounted present value of future contractual management costs.
Treatment as of January 1, 2005 Under IAS 39, at initial recognition, derivative financial instruments are measured at their fair value, whether they are held for trading or hedging purposes.
After initial recognition, any changes in the fair value of derivative financial instruments held for trading are recognized through profit or loss.
Derivative financial instruments designated as hedges are those which meet the conditions required by IAS 39 at inception and throughout the term of the hedging relationship, particularly with respect to documentation of an effective relationship between the hedging instrument and the hedged item, both prospectively and retrospectively. Hedging relationships are presumed to be effective when the ratio of actual changes in the value of the hedging instrument and the hedged item is between 80% and 125%.
Natexis Banques Populaires uses cash flow hedges for the management of macro-hedging transactions in particular.
Hedging of variable-rate loans Natexis Banques Populaires uses vanilla interest rate lender swaps at fixed rates to fix future variable-rate borrowing costs.
The use of this type of hedging is justified by the implementation of variable-rate future repayment schedules are represented by all transactions with a set maturity.
Retrospective test The retrospective test is used to ensure whether or not the hedging implemented at different accounting dates is effective.
If a hedging relationship is interrupted, particularly when the effectiveness ratio is outside 80% to 125%, the accounting treatment comprises reclassifying the derivative instrument as financial instruments at fair value through profit or loss and spreading out the effectiveness amount through profit or loss, accumulated over previous hedging periods in reversible equity under “unrealized or deferred gains or losses”.
Hedging of fixed-rate borrowings and issues Natexis Banques Populaires uses vanilla interest rate lender swaps at fixed rates to protect itself against unfavorable changes in interest rates.
Hedging of loans and securities held for sale Natexis Banques Populaires uses vanilla interest rate borrower swaps at fixed rates to protect itself against unfavorable changes in interest rates.
The net impact on the income statement is therefore limited for the ineffective portion of hedging.
Changes in the fair value excluding accrued interest of hedging instruments are recorded in the income statement under “gains or losses on financial instruments at fair value through profit or loss”. Accrued interest relating to these instruments is recorded under “interest income”.
An embedded derivative is a component of a hybrid (combined ) instrument that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument are linked to an interest rate, security prices, exchange rate or other index.
If the combined instrument (host contract and derivative) is not measured at fair value through profit or loss, the embedded derivative is separated from the host contract if it meets the definition of a derivative and its financial characteristics and associated risks are not closely related to those of the host contract.
Derivatives from host contracts are included in assets and liabilities at fair value through profit or loss.
Assets, liabilities and off-balance sheet commitments denominated in foreign currencies are translated into euros at yearend exchange rates. Realized and unrealized exchange gains and losses are taken to the income statement. Exchange differences arising on translation of borrowings for which the currency risk is guaranteed by the State or which relate to institutional activities are recorded in an accruals account.
Treatment as of January 1, 2005 Monetary assets and liabilities (notably bonds and other fixed-income instruments) denominated in foreign currencies are translated into euros at the spot rates prevailing on the reporting date. Exchange gains or losses are recognized in profit or loss, and directly in equity in the case of derivatives designated as cash flow hedges.
Non-monetary items denominated in foreign currencies which are measured at fair value are translated at the exchange rates prevailing on the fair value estimation date. When a gain or loss on a non-monetary item (e.g. available for sale financial assets) is recognized directly in equity, any exchange component of that gain or loss is recognized directly in equity. Conversely, when a gain or loss on a nonmonetary item (e.g. financial assets at fair value through profit or loss) is recognized in profit or loss, any exchange component of that gain or loss is recognized in profit or loss.
Treatment from January 1, 2004, to December n a) Securities portfolio
Derivative financial instruments held for trading are measured at their market value on the reporting date. If there is no active market in the instruments, market value is generally determined using internal models. A discount to market values may be applied depending on the instruments concerned and the associated risks.
At initial recognition, fair value is the price paid or received. On subsequent reporting dates, fair value is estimated on the following basis: - If the instrument is quoted on an active market, it is measured at its quoted price. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis; - If the market for a financial instrument is not active, fair value is established using a valuation technique. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.Values may be adjusted, depending on the instrument concerned and the associated risks, to take account of factors such as the bid-ask spread and modeling risk in the case of hybrid instruments.
These are listed securities and derivatives on organized markets, such as futures and options, which are in liquidity zones that can be demonstrated as such (active market).All transactions in which Natexis Banques Populaires is involved on listed markets are included in this category.
Standard instruments The majority of over-the-counter derivatives, swaps, forward rate agreements, caps, floors and standard options are traded in an active market, i.e. a liquid market with regular trading.
Measurement at recognition Property, plant and equipment and intangible assets existing at December 31, 2003, have been maintained in the IFRS balance sheet at their historic cost under French GAAP, except for investment property held by insurance companies, which is valued at fair value through profit or loss.
Assets acquired after that date are measured at cost including transaction costs (transfer duties, fees, commissions and registration expenses). Borrowing costs are not capitalized.
Internally-generated computer software is measured at the total cost of development, including related hardware costs, service costs and personnel costs directly attributable to the production and preparation of the software. Expenses incurred during the development phase are only recognized as intangible assets if they meet the conditions required by IAS 38 in terms of technical feasibility, intention to complete the asset for internal use or sale, probability of future economic benefits, availability of resources and ability to measure the development expenditure reliably.
Expenses incurred during the research phase are recognized as expenses when they are incurred.
Measurement after recognition After recognition, assets are carried at cost less any accumulated depreciation, amortization and impairment losses. Investment property held by insurance companies is measured at fair value through profit or loss in accordance with IAS 40 and IFRS 4.
In line with IAS 16, a specific deprecation schedule is drawn up for each significant component of an item of property, plant and equipment which has a different useful life or rate of consumption of future economic benefits than the items as a whole. For buildings used in the business and investment property, the following significant components and depreciation periods have been identified: Part Depreciation period
Other items of property, plant and equipment are depreciated over their estimated useful lives, which range from five to ten years.
The charge to depreciation or amortization is recognized in the income statement under the heading “depreciation, amortization and provisions for impairment of property, plant and equipment and intangible assets”.
Impairment Assets are tested for impairment whenever there is objective evidence that the asset may be impaired and at least once a year in the case of intangible assets with an indefinite useful life. Evidence of impairment is assessed on each reporting date. Impairment testing consists of estimating the recoverable amount of an asset, or if that is not possible, the cash-generating unit to which it belongs.Recoverable amount is the higher of fair value less costs to sell and value in use,which is the present value of future cash flows expected to be derived from continuing use of the asset or cash-generating unit. If the recoverable amount of an asset or CGU is lower than its carrying amount, an impairment loss is recognized in the income statement under the heading “depreciation, amortization and provisions for impairment of property, plant and equipment and intangible assets”.
The impairment tests carried out to December 31,2005,did not result in the recognition of any impairment of intangible assets.
Gains or losses on disposal Gains or losses on the sale of assets used in the business are recognized in the income statement under the hedging “gains or losses on other assets”. Gains or losses on the sale of investment property are recognized under the heading “other net banking income”.
At December 31, 2005, Natexis Banques Populaires did not have any non-current assets held for sale.
Financial liabilities at fair value through profit or loss are identified separately in the balance sheet and measured at fair value on the reporting date. Changes in fair value are recognized in the income statement under the heading “gains or losses on financial instruments at fair value through profit or loss”.
5.10 Debt Debt instruments issued by Natexis Banques Populaires which are not classified as financial liabilities at fair value through profit or loss are measured using the amortized cost method and recognized in the balance sheet under the headings “deposits from banks”,“customer deposits” or “debt securities”.
Debt securities are broken down into interbank market instruments, money market instruments and bonds. They do not include subordinated debt, which is identified separately and dealt with below.
5.11 Derecognition IAS 39 requires the derecognition of all or part of a financial asset if the contractual rights to the cash flows from the financial asset expire or if the contractual rights to the cash flows from the financial asset and substantially all the risks and rewards of ownership are transferred.
A financial liability is removed when it is extinguished, discharged or cancelled or expires.
Securities lending Securities lending/borrowing operations are not comparable to a transfer of financial assets in the sense of IFRS. Consequently, these operations cannot give rise to derecognition of the securities loaned. Loaned securities are not identified under IFRS.They are still recognized in their original IFRS category and valued accordingly. Borrowed securities are not recognized by the borrower.
The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.This amount is discounted where the effect is material. Provisions are reviewed at each balance sheet date and adjusted if necessary.
Provisions are not recognized for future operating losses or major repairs. No contingent assets or liabilities have been recognized.
5.13 Provisions for employee benefits The main provisions for employee benefits concern: - supplementary banking pension; - end-of-career allowances; - early retirement benefits and supplementary pension benefits; - “CATS” early retirement plan benefits; - employer’s contributions to private health insurance companies for retirees and early retirees; - long service awards.
Natexis Banques Populaires uses independent actuaries to measure its main liabilities.
The change in liability recognized in profit or loss therefore corresponds to: - incremental benefit entitlements (expenses); - benefits paid during the period; - interest cost on the opening liability (expenses); - expected return on plan assets; - amortization of actuarial gains and losses outside the corridor.
The corridor method is not used for other long-term employee benefits such as long service awards.
Treatment from January 1, 2004, to December 31, 2004 n a) Preferred shares
repayable in installments, each period payment is broken down between the repayment of principal, which is deducted from the outstanding debt and interest, which is recorded in the income statement under interest expense.
Following an analysis of the substance of the contractual agreements governing subordinated notes and preferred shares, these instruments have been classified as liabilities, whereas under French GAAP, subordinated notes were classified as equity. The combination of three criteria determines the classification of the majority of preferred shares as liabilities: - the existence of an issuer call option allowing Natexis Banques Populaires to repay investors as of a certain date; - the existence of a step-up clause, under which Natexis Banques Populaires pays an additional amount on top of the strike price of the call option; - in view of Natexis Banques Populaires’ current and future refinancing conditions (i.e. as anticipated by the market), the call option will definitely be exercised.
This classification may be reviewed in 2006 depending on details provided by the IFRIC on this issue.
Stock option plans Natexis Banques Populaires grants stock options to certain of its employees. As required by IFRS 2, stock options granted after November 7, 2002, which have not vested at the balance sheet date, are valued at their fair value on the grant date using the Black & Scholes model.The fair value is expensed in payroll costs on a straight-line basis over the vesting period with a corresponding increase in equity. Fair value is reviewed on each balance sheet date and adjusted if subsequent information indicates a change to the initial estimation of vested rights. The expense is then adjusted for the current and future years.
Natexis Banques Populaires has four stock option plans covered by IFRS 2.The options are exercisable over a period of three years after an unavailability period of four years.
Treasury shares may be purchased to regulate the share price by trading against the market, to take advantage of market opportunities, to pay for acquisitions or to allot to employees of the group under stock option plans or employee stock ownership plans.
Treatment as of January 1, 2005 All treasury shares held by Natexis Banques Populaires are deducted from equity regardless of their purpose and their classification in the separate financial statements. Any gains or losses recognized in the separate financial statements in respect of the sale, valuation or impairment of treasury shares held as trading securities or available-for-sale securities is eliminated in the consolidated financial statements through equity.
5.17 Fees and commissions received The method of accounting for fees and commissions received in respect of services or financial instruments depends on the ultimate purpose of the services rendered and the method of accounting for the financial instruments to which the service relates.
5.18 Income taxes The tax charge for the period comprises: - tax payable by French companies at the standard rate of 34.93% and by foreign companies and branches at the local rate; - deferred taxes arising on temporary differences existing in the separate financial statements between the book value and the tax value of assets and liabilities on the balance sheet or on specific consolidation adjustments, calculated using the liability method.
will be used to offset a future tax charge. Accordingly, the effect of tax losses is not recognized if the tax entity has incurred losses in the previous two years, as it is presumed that the future tax benefit will not be recovered. On this basis,B245 million of deferred tax assets were not recognized at December 31, 2005.
Guarantee commitments A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specific debtor fails to make payment when due. The exercise of these rights is subject to the occurrence of an uncertain future event.The amendment to IAS 39 and IFRS 4 concerning financial guarantee contracts, published by the IASB in August 2005 and adopted by the European Union in January 2006, will only apply as of 2006. In the meantime, they are treated in accordance with French GAAP. Details of the nominal value of commitments given are now provided in the notes to the balance sheet rather than in a statement of off-balance sheet items.
Financing commitments All financing commitments granted by Natexis Banques Populaires give rise to the grant of loans on market conditions which are classified as loans and receivables. These commitments constitute contingent liabilities and are recorded in accordance with IAS 37. At initial recognition, they are not recognized in the balance sheet. A provision for contingencies and losses, recorded under liabilities, is recognized after recognition in the event of the probability of default by the counterpar ty over the commitment period.
5.20 Fair value in the notes to the financial statements IAS 32 requires the notes to the financial statements to state the fair value of all financial instruments recognized at amortized cost, including loans. The following valuation methods are used to determine the fair value as presented in the notes to the financial statements: Loans recognized as “loans and receivables” and finance lease outstandings The majority of Natexis Banques Populaires loans are variable -rate loans and their fair value is determined on the basis of discounted future cash flows.The discount rate applied for a given loan is the rate that Natexis Banques Populaires would grant at the balance sheet date to a counterparty for a loan with similar characteristics.As these are primarily variable-rate loans, the contractual rate is adjusted according to the development of effective lending rates and the development of counterparty risk.
Debts and savings The fair value of borrowings and debt securities at variable rates is considered to correspond to their net carrying amount on the balance sheet.
Securities recorded as loans and receivables The quoted prices used may be obtained from an official market, contributories or quotations from brokers or pricing services representing the market consensus.
Investment property recognized at cost The fair value of investment property (excluding investment property held by insurance companies) is determined on the basis of capitalization of rents, a method that is widely used by real estate professionals.
The capitalization rate applied to the property depends on a number of factors such as location, quality and type of building, use,ownership structure,quality of lessees and characteristics of leases, interest rates and competition in the real estate market.
Average number of shares for earnings per share calculation 46,710,516 46,553,346
Note VI > Risk exposure and management 6.1 General system and principles Natexis Banques Populaires’ risk management system complies with French banking regulations and with the corporate governance principles of the Banque Populaire Group, of which it is a member.There are three levels of control, which are coordinated by Executive Management. First tier control comprises continuous self checks by employees as part of their normal daily duties. Second tier control is provided by the Risk Management, Compliance and Internal Control departments, which report to the General Secretariat, and the Information Systems Security department, which reports to Information Systems and Logistics. Third tier control is provided by the Internal Audit department. Under current regulations, the General Secretary, a member of the Executive Management Committee, is responsible for permanent controls.
The overarching committee created in 2003 coordinates the various departments involved. It is chaired by the Chief Executive Officer and meets once a month.
Impairment charges and other credit provisions decreased further in 2005, primarily due to ongoing favorable economic conditions.
a highly centralized delegation system.The Risk Management department issues an opinion on all counterparty risks when new facilities are granted or existing facilities renewed.
6.3 Implementation of the new capital accord The Basel II project conducted by the Banque Populaire Group and steered by Banque Fédérale des Banques Populaires is strongly supported by Natexis Banques Populaires, where the Finance, Risk Management and Information Systems departments are working alongside the business lines to set up the tools required to calculate the new capital adequacy ratio based on an internal ratings model.
The project is divided into a number of sub-projects, including ratings,defaults, collateral management,databases,deployment and ratio computation. The roll-out continued in 2005 to upgrade risk assessment methods, statistical and historical data monitoring and back-testing models to meet regulatory requirements. As planned, the new interbank ratings model and a system for calculating the regulatory ratio were implemented. 2006 will see the continuation of the roll-out and the implementation of a new sovereign risk ratings model.
in € millions Specific Country Industry Total Provi- Provi- Provi- Total Region risks risks risks risks sions sions sions Provifor for for sions specific country industry risks risks risks
Market risk organization and management Control over market risks is the responsibility of the middle office, the Risk Management department and the Internal Control department. Internal Control and Risk Management report to the General Secretariat, while the middle office reports to the Corporate and Institutional Banking and Markets core business.
Its key duties are: - producing and analyzing results and risks on a daily basis; - producing and analyzing provisions on a monthly basis; - ensuring the reliability of market parameters used to calculate results and risks; - proposing methods to calculate reserves while ensuring that they are exhaustive and correspond to the nature of risks; - developing the system of delegated limits and method of calculating risk, in conjunction with Risk Management; - monitoring and reporting any limit violations.
Its key duties are: - validating the proposals made by the middle office, ensuring their consistency throughout the Group and making recommendations where necessary; - monitoring market risks at the various consolidation levels and particularly at Group level; - ensuring internal and external reporting on market risks; - validating internally-developed models and software models used to value products; - validating the various delegated authorities and limits requested by Corporate and Institutional Banking and Markets and proposed by the middle office; - making recommendations on the risk management system; - leading Market Risk activities at Natexis Banques Populaires subsidiaries and branches.
In addition to these standard metrics, Natexis Banques Populaires also uses the Value at Risk (VaR) method. It uses
Riskmanager software developed by Riskmetrics to perform historical VaR calculations designed to quantify the risk of losses from capital markets activities, using conservative assumptions.VaR calculations are based on: - one year’s historical data; - a one-date potential loss horizon; - a 99% confidence level.
Organization and procedures - In July 2005, the Risk Management department distributed the pricer and model validation chart, which sets out the duties of the Risk Management department in validating models and pricers, as well as the documents that must be provided by other divisions (Research and MO); - Distribution of the Executive Management directive, formalizing the structure of the different teams involved in managing market risks.This directive sets out the works carried out in 2004 to determine each department’s duties in terms of controlling market risks; - Creation of the risk monitoring and supervision committee. This committee meets on a quarterly basis to examine new risk measures and the developments required for their implementation. It comprises the head of Corporate and Institutional Banking and markets, the Director of the Risk Management division, as well as middle-office teams,market risk teams and a representative of the Internal Control department.
Maximum sensitivity of interest rate maturity schedules to a +/-1% shift in the yield curve is B100 million for capital markets activities (including treasury desks). This limit also applies to a point-by-point distortion of the yield curve. Within the overall interest rate limits described above, the sub-limits for short-term and long-term treasury have been set at B40 million and B30 million respectively.
ALM interest rate limits for refinancing books – Adaptation to Banque Populaire Group system
Within the framework of its structural interest rate risk management, Natexis Banques Populaires uses primarily vanilla interest rate swaps as hedging instruments.
Note VII > Segment reporting Segment reporting is based on two levels: - by business segment (primary segment reporting); - by region (secondary segment reporting).
7.2 Private Equity and Wealth Management This core business comprises the following: - The private equity business provides expansion capital, buy-ins and buy-outs, venture capital (young companies) and international private equity for a clientele of small and medium-sized, mostly unlisted companies; - Wealth management provides advice, planning and asset management services for a clientele of high net worth individuals, mostly clients of the Banque Populaire retail banking network but also of Natexis Banques Populaires.
7.4 Receivables management This business includes Coface and Factorem, which have a shared management structure. It includes trade receivables management and offers client tailored products to manage, protect and finance their receivables: - Main activities: credit insurance, business information and credit rating (solvency and marketing), trade receivables management (from issuance to recovery), factoring (Factorem) and securitization; - Other activities: bonds, management of public procedures on behalf of the French State, trade receivables management training.
Receivables management has an extensive distribution network comprising: - the Coface network covering 57 countries, supported by the CreditAlliance network (91 countries); - the Banque Populaire retail banking network, which is a major source of factoring business for Factorem and offers substantial development potential for other activities.
Other activities not covered by these four core businesses are grouped under “Other businesses”, which primarily comprises the functional departments (information systems, human resources, finance and internal audit).
Results for each segment comprise directly attributable operating income and expenses, including transactions with other segments of Natexis Banques Populaires.
Note VIII > NOTES TO THE BALANCE SHEET VIII.1 Financial assets and liabilities at fair value through profit or loss These assets and liabilities are measured at fair value at the balance sheet date, with changes in value, including interest, in the balance sheet under “gains or losses on financial instruments at fair value through profit or loss”.
No impairment is recognized on these assets, as the counterparty risk is factored into the market value.
VIII.1.1 - Financial assets at fair value through profit or loss At December 31, 2005, assets at fair value through profit or loss comprised primarily: - fixed income securities - derivatives
Loans and advances at fair value through profit or loss 820 730 in € millions 12/31/2005 EU IFRS
Securities designated as at fair value through profit or loss 852 969 1,821 o/w securities held for trading within the Private Equity portfolio 99 969 1,068 161NATEXIS BANQUES POPULAIRES
Derivative financial instruments held for trading VIII.1.3 4,423 3,906 in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
VIII.2.1 - Cash flow hedges Natexis Banques Populaires uses cash flow hedges for the management of macro-hedging transactions.The method of documentation under IFRS corresponds to hedges of future cash flows.
At December 31, 2005, the fair value of loans and advances to banks, calculated in accordance with the methods set out in note V, amounted to €56,140 million.
(1) The hedging rate of non-performing loans at December 31, 2005, was 59% compared with 58% at January 1, 2005.
(1) The hedging rate of non-performing loans was 26% at December 31 compared with 28% at January 1, 2005.
VIII.5 - Held-to-maturity financial assets Natexis Banques Populaires only uses this category for fixed-income securities representing insurance company investments.
At December 31, 2005, the fair value of held-to-maturity financial assets, calculated in accordance with the methods set out in note V, amounted to €7,930 million.
(2) Including collective provisions and provisions for impact of discounting specific provisions.
Deferred taxes at standard rate (165) (110) Deferred tax liabilities (6) (4) Deferred taxes at reduced rate (2) (5)
VIII.7 - Other assets and liabilities Accrued income and prepaid expenses and deferred income and accrued charges correspond to technical accounts, details of which are given below.
Deferred charges - 1 n VIII.7.2.2 - Deferred income and accrued charges in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
Deferred acquisition costs 17 19 n VIII.7.3.2 - Deferred income and accrued charges - insurance companies in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
Non-current assets held for sale 0 0 0 0 0 0 in € millions Cost Increase Decrease Change Exchange Other Cost 01/01/2005 and other in differences 12/31/2005 disposals scope
(1) Insurance company investments. Changes in fair value give rise to the symmetrical recognition of a deferred participation reserve equal, on average to 92% of the base concerned.
EU IFRS EU IFRS Opening Acquisitions Change in im- Exchange Closing balance pairment losses differences balance
At December 31, 2005, the fair value of deposits from banks was B54,853 million.
VIII.10 - Deposits from banks and customer deposits Deposits from banks and customer deposits are presented by nature, taking into account whether they are demand or time deposits.The are measured in accordance with IAS 39 as other financial liabilities using the amortized cost method.
The fair value of liabilities with an initial duration of less than one year and variable-rate liabilities corresponds to the carrying amount.
At December 31, 2005, the fair value of customer deposits was B23,990 million.
At December 31, 2005, the fair value of debt securities was B37,760 million.
Borrowings and debt securiries at fixed rates are discounted on the basis of the value of market fixed rates (excluding spread) at the balance sheet date for a liability with the same residual maturity.
Life insurance 19,614 17,737 Non-life insurance 181 174 Unit-linked business 4,056 3,625
VIII.12 - Technical reserves of insurance companies In order to protect policyholders, insurance companies book technical reserves under liabilities, determined on the basis of statistical calculations towards policyholders.
Prepayments of insurance premiums relate to the proportion (calculated on a pro rata temporis basis) of premiums written over the period relating to a period prior to the inventory date.
Life insurance reserves correspond to total premiums received, plus income for investments distributed to policyholders and minus termination benefits. In addition to these reserves a provision is booked for future management of life insurance policies.
Other technical reserves comprise reserves for financial uncertainties and reserves for deferred acquisition costs.
VIII.13.1 - Summary of provisions in € millions 01/01/2005 Increase Utilization Surplus Exchange Change Other 12/31/2005 EU IFRS released differences in EU IFRS
Provisions 346 111 (53) (20) 1 3 (6) 382 Provisions for counterparty risk 53 25 (2) (17) 1 - 6 66 Provisions for impairment risk 19 10 - (3) - - (8) 18 Provisions for employee benefits 232 28 (17) - - 3 (5) 242 Provisions for operating risks 42 48 (34) - - - - 57 Provisions for regulated savings accounts - - - - - - - -
Amortization, depreciation and impairment of property, plant and equipment and intangible assets (0) 1 0
Subordinated debt with fixed maturities 3,255 2,523 Subordinated bonds 2,534 1,758
Accrued interest 97 91 in € millions 01/01/2005 Issue Redemption Exchange Change in Other 12/31/2005 EU IFRS (1) differences scope EU IFRS
Subordinated debt with fixed maturities 2,523 1,049 (308) 77 0 (86) 3,255
“Subordinated debts differ from receivables or bonds issued, as redemption only occurs after the relief of preferred or ordinary creditors but after the repayment of loans and participating interests and super-subordinated notes.They are valued using the amortized cost method.
Central banks and post offices 2 (7) (5) 2 0 2
Expiry of hedging relationship (CFH) - - - - - -
Impaired loans, including restructured loans 12 - 12 2 - 2
IX.3 - Gains or losses on financial assets and liabilities at fair value through profit of loss This item includes gains and losses on financial assets and liabilities at fair value through profit or loss, whether held for trading or designated as at fair value through profit or loss, including interest.
Net gains on financial assets and liabilities excluding hedging instruments 513 161
Variable income securities classified as available-for-sale are tested for impairment and an impairment provision recognized if their carrying amount is lower than their recoverable amount.
IX.5 - Income and expenses from other activities Income and expenses from other activities comprises mainly income and expenses relating to lease financing and investment property.
Impairment losses on variable income securities (22) 52 in € millions 12/31/2005 12/31/2004 Notes EU IFRS 2004 IFRS
Gains or losses on sale 9 (34) (25) 0 (10) (10)
Wages and salaries (1) X.1 (734) (668) (1) of which share-based payments X.4 (3) (2) Post-retirement and other benefits X.3 (99) (84) Social security charges (224) (205) Incentive and profit-sharing plans (71) (55) Payroll-based taxes (53) (47)
IX.7 - Impairment charges and other credit provisions This item comprises mainly impairment charges and other credit provisions relating to credit transactions: charges net of reversals of individual and collective provisions, receivables written off during the year and recoveries of bad debts written off.
At December 31, 2005, in accordance with IAS 32 and IAS 39,“Impairment of individual receivables” included securities classified as loans and advances.
Write-offs of individual receivables (169) 104 (8) 16 (56) (89) Collective provisions for performing loans (100) 63 - - (37) 6
Impairment charges and other credit provisions (294) 204 (8) 16 (81) (101)
o/w Releases of surplus provisions 204 Releases used 145 sub-total releases: 350 Write-offs covered by provisions (145) Total net releases: 204
Investments in Property, plant & Total Investments in Property, plant & Total consolidated equipment and consolidated equipment and companies intangible assets companies intangible assets
Net capital gains on disposals 20 109 129 3 6 9
Goodwill (net amortization) 0 (11) Natexis Private Banking Luxembourg - (6)
= Consolidated taxable income 986 598 x Standard rate 33% 33%
+ Contributions and minimum annual tax charges (11) (8) + Income taxed at reduced rates (16) (9) + Losses for the period, restricted for prudence (1) (8) + Impact of group tax relief 14 13 + Differences in foreign tax rates (3) (1) + Tax reassessments (32) (29) + Tax credits 7 7 + Exit tax on long-term capital gains reserves - (11) + Impact of annualizing the tax charge - -
Note X > PAYROLL COSTS, NUMBER OF EMPLOYEES, COMPENSATION AND EMPLOYEE BENEFITS