The information provided in the following sections is an integral part of the financial statements certified by the Statutory Auditors: a 5.1 Natixis’ general risk management system; a 5.2 Natixis’ Risk Management Department; a 5.3 Credit risk (for audited data only); a 5.4 Market risk (for audited data only); a 5.5 Overall interest rate, liquidity and structural foreign exchange risk; a 5.9 Insurance risk; a 5.10 Sensitive exposure in the light of the recommendations of the Financial Stability Board.
The Chief Executive Offi cer is responsible for ensuring the consistency and effectiveness of permanent controls (pursuant to Article 7-1, sub-point 4 of CRBF regulation 97-02 as amended).
The Risk Control and Compliance Departments carry out permanent controls. The control system comes under the overall supervision of the Chief Executive Offi cer and Natixis’ Board of Directors, which is assisted in its duties by the Audit Committee.
FINANCIAL DATA 6 Management Report a delegations; a risk assessment; a risk supervision .
It also plays an active part in the Natixis Provisions and ALM Committees, which are chaired and organized by the Finance Department.
Lastly, it reports regularly on its work, submitting its analyses and fi ndings to Natixis’ executive and decision-making bodies, and to the Groupe BPCE .
To carry out its duties in terms of measuring, consolidating, monitoring and reporting risks, Natixis’ Risk Control Department uses a dedicated IT system suited to the Company’s various core business lines (Corporate and Investment Banking, Investment Solutions, Specialized Financial Services).
It uses a basic structure of risk tools, with data provided by the management systems of each business line. The Risk Control Department helps design the management tools of operational business lines in order to ensure the quality and relevance of the data provided.
5.3 - Credit risk 5.3.1 - GENERAL PRINCIPLES GOVERNING THE ALLOCATION AND MANAGEMENT OF CREDIT RISK
Natixis’ credit risk measurement and management procedures are based on: a a standardized risk-taking process, structured via a system of delegations and decision-making Committees; a independent analysi s providing a second opinion, carried out by the Risk Control Department as part of the loan request review process; a rating tools and methodologies providing standardized and adapted counterparty risk assessments, thereby making it possible to evaluate the probability of default within one year and the extent of the loss in the event of default; a IT systems providing an overview of outstanding loans and exposure limits using a single risk-consolidation tool.
These procedures are updated so as to remain consistent with those of the Groupe BPCE , particularly with respect to rating methodologies for different asset classes and market segments.
The rating system is fully integrated into Natixis’ counterparty risk supervision and control mechanism.
Similarly, internal ratings for some counterparties are only calculated after the rating for another entity or counterparty (the parent company for a subsidiary, for instance) has been set.
The process of assessing and updating ratings for counterparties and their commitments involves several departments.
Generally speaking, the relevant business line prepares a credit fi le providing the appropriate amount of detail and looking at all the questions needed to form an opinion, and proposes a rating, using the appropriate engine for the asset class and segment.
After conducting his or her own independent analysis, the credit analyst issues an opinion or a recommendation, including the rating. The Risk Control Department validates the rating on the basis of a decision taken either under delegations or authorizations given to the business lines and certain members of the Risk Control Department, or by the appropriate Credit Committees, after a second opinion has been obtained.
With respect to country risk, the system is based on the ratings of sovereigns and the setting, for each country, of a rating that caps the rating that can be given to non-sovereign counterparties. These ratings are reviewed annually, or more often should the need arise, as it has for numerous countries since mid 2008. The decisions of the Credit Committee with respect to transactions presenting an exposure deemed signifi cant in the light of the amount or the situation of the relevant country are based on country risk analysis. As such, the limits governing Natixis’ exposure in more than 150 countries considered to be at risk are endorsed by Natixis’ Risk Committee on the basis of country ratings.
Ratings are set on the basis of two approaches: statistics-based approaches and advanced techniques.
For exposure to non-OECD banks and corporate entities with consolidated revenue of less than €1 billion, internal rating models are statistics-based and use available fi nancial data to assign the exposure to a specifi c class of risk.
Backtesting and performance-monitoring programs are also used to ensure the quality and reliability of rating models and default probability scales. They include a detailed analysis conducted using indicators such as: differences in terms of severity and migration compared with agency ratings, actual defaults and change in ratings prior to default, and the predictive power of indicators used in statistics-based models.
Statistics and the results of this work are reviewed by oversight c ommittees in charge of monitoring as well as imposing corrective measures or adjustments wherever necessary, such as the enrichment or redefi nition of models, or the modifi cation of reference samples.
Natixis uses credit risk reduction techniques including: set-off agreements, guarantees, collateral and credit-default swaps.
FINANCIAL DATA 6 Management Report monitoring of credit risk exposure and the calculation of the resulting capital requirements.
Natixis’ Credit Portfolio Management Department takes action to reduce exposure by counterparty, by sector and by region through commitment reduction actions. Exposure limits are set on the basis of stress test methodologies (rating migration on the basis of macroeconomic scenarios).
Natixis buys credit-default swaps and enters into synthetic securitization transactions in order to reduce all or part of the credit risk exposure attached to some assets by transferring the risk to the market.
Credit risk monitoring is based on the accountability of the business lines and the control measures steered by a dedicated team within the Risk Control Department.
Cases presenting an increase in risk are identifi ed as they arise and reported immediately to the Risk Control Department, the Restructuring and Special Affairs Department and the business line concerned, in accordance with counterparty under surveillance and alert procedures.
A decision as to whether these cases are subjected to special monitoring is then made by the Restructuring and Special Affairs Department and the Risk Control Department, and validated by the appropriate Credit Committee, depending on the level of exposure.
Sensitive cases are reviewed at least once a quarter, and are passed on to the Counterparty Watch List Committee.
Sensitive, doubtful or disputed risks are monitored by the Restructuring and Special Affairs Department, which intervenes whenever necessary in the management of diffi cult cases and recovers debt in the event of litigation.
Provisions Committee meetings are held quarterly in each sector. They look at all cases liable to give rise to provisions or adjustments to existing provisions, and decide on the amount of provisions necessary.
A Natixis Provisions Committee meets once a quarter. Organized by the Finance Department, it is chaired by the Chief Executive Offi cer and includes the heads of the Risk Control Department, the Restructuring and Special Affairs Department, and the sectors concerned.
Natixis also constitutes provisions to cover country risk and sector risk (see Note 5.3b to the financial statements) assessed from three angles: a ratings for exposures on private individuals and professionals; a sector risk and geographical risk for other counterparties (corporate entities, sovereigns, etc.).
Financial assets at fair value through profi t and loss (excluding variable-income securities) 157,139 157,139 262,963
The reclassifi cation of consolidated accounting volumes as gross exposure and exposure at default with respect to prudential credit risk involves the following key operations: a exclusion of equity-accounted insurance companies in the prudential scope; a exclusion of exposure classified in the trading scope; a inclusion of n etting agreements on market transactions; a restatement of factoring positions to take into account exposure to the risk of default and a position on risk of dilution; a application of a credit-equivalent conversion factor on financing and guarantee commitments.
Small and medium-sized businesses recorded in the corporate entities category 4,443 4,157 4,302 5,898
Governments and central banks 7,290 6,996 8,135 5,230 * Exposure averages correspond to the average of the four quarter-end fi gures (these data are not audited).
French and European Union counterparties account for 75% of Natixis’ exposure.
Breakdown of exposure at risk by category for the main geographic areas
Small and medium-sized businesses recorded in the corporate entities category 1.5% 0.2% 0.0% 0.2% 2.0% 2,3%
Banks and investment fi rms 18.8% 11.2% 4.7% 1.1% 35.8% 33,3%
Retail customers Other exposure recorded in the retail customer category 0.1% 0.0% 0.1% 0.0% 0.1% 0,3%
Breakdown of exposure at risk by residual maturity and by category of exposure
(Breakdown of exposure at risk with the exception of other assets that do not represent a credit obligation, equities or securitization positions).
Banks and investment fi rms 11,842 6,970 8,727 24,328 25,369 248 77,484 88,870
Other exposure recorded in the retail customer category 49 1,441 486 152 157 2,286 3,651
Breakdown of individual and collective provisions by geographic area as of December 31, 2009
Africa and the Middle East 62 1,062 1,124 18 78 96
(Data certifi ed by the Statutory Auditors in accordance with IFRS 7.).
The standard approach is used for European subsidiaries, exposure in the retail asset class, liquidity lines provided to ABCP conduits, securitization positions with retail underlyings and real estate leasing.
Small and medium-sized businesses recorded in the corporate entities category 3,057 1,100 4,157
(Data certifi ed by the Statutory Auditors in accordance with IFRS 7).
Average risk-weightings are broken down by internal rating (S&P equivalent) for asset classes assessed using the IRB approach (sovereigns, banks, corporate entities) after excluding specialized fi nancing (calculated using slotting criteria) and exposure to equities (calculated using a simple weighting). Pool-based exposure (acquired portfolios) and accounting adjustments have also been excluded.
Exposures calculated using the IRB approach had an average risk weighting of 45% at December 31, 2009, compared with 40% at December 31, 2008. The increase in the average weighting stems in particular from the increase in margins of prudence on probabilities of default.
J IMPACT OF RISK-REDUCTION TECHNIQUES ON DERIVATIVES OTHER THAN CREDIT DERIVATIVES (DATA AS AT DECEMBER 31, 2009)
J IMPACT OF RISK-REDUCTION TECHNIQUES ON CREDIT DERIVATIVES (DATA AS OF DECEMBER 31, 2009)
Credit-default swaps constitute substantially all of the underlying instruments to these exposures.
Small and medium-sized businesses recorded in the corporate entities category 53 756
Small and medium-sized businesses recorded in the retail customers category 2
Small and medium-sized businesses recorded in the corporate entities category 49
Other physical collateral o/w tangible assets o/w fi nancial assets 12.31.2008
Other exposure recorded in the corporate entities category 13,000 3,212 6,232 10,127
Exposure covered by personal collateral by category of exposure (client asset class)
Small and medium-sized businesses recorded in the corporate entities category 851 666
Small and medium-sized businesses recorded in the retail customers category 603 626
The increase in personal collateral in 2009 is attributable chiefl y to the guarantee provided by BPCE to Natixis.
Breakdown of aggregate amounts represented by securitization positions kept or acquired by risk-weighting category
Securitization positions rated lower than BB- are deducted from regulatory capital.
Presentation of securitization positions in the banking portfolio with the exclusion of positions rated below BB- as at 12.31.2009
(in millions of euros) Exposure at risk Weighted assets Regulatory capital requirements 5.4 - Market risk 5.4.1 - ORGANIZATION OF CONTROL OF MARKET RISK
The Market Risk Department independently defi nes the methodologies for measuring risk, examines limits and supervises all of the market risks within Natixis’ scope of consolidation. The market risk control mechanism is based on a delegation structure, for which the Natixis Risk Committee has overall responsibility and where the Market Risk Committee plays an essential role.
Natixis’ Risk Control Department validates market product valuation models and regularly ensures that models used are consistent with market and best practice developments.
In 2009, Natixis’ risk policy was focused on implementing limits within the framework of specifi c stress tests.
Pursuant to Articles 17c and 38 of regulation 97-02 as amended, market risk alert thresholds were laid down by the Audit Committee.
The operational division is responsible for day-to-day control of market risks. It is split into three sub-divisions monitoring operations for the main front offi ce business lines (Fixed Income business, Equities and Equity Derivatives, and Commodities, Treasury – ALM – GAPC – subsidiaries).
It provides the Market Risk Committee and the executive management member in charge of the CIB division with a bi-monthly assessment of the market risk situation and any changes thereto.
After the seggregation of part of the CIB division’s activity into a separate division and the creation of a new single central body, BPCE implemented a guarantee covering a large majority of Natixis’ segregated Paris and New York credit assets. Overall VaR and stress tests taking into account the effects of this guarantee are now produced on a daily basis. Specifi c reports are now also produced on the guaranteed assets.
To this end, a statistical model has been constructed to track the combined behavior of market parameters affecting portfolio value over a period of 1 rolling year. More than 5,200 market risk factors are currently modeled and used.
Natixis uses VaR calculated using numerical simulations, based on Monte Carlo-type methodology taking into account a portfolio’s possible non-linear characteristics with respect to different risk factors. Calculation methods are harmonized using a single calculation tool, Scenarisk. In order to monitor compliance with VaR limits set by the regulator, Natixis’ Risk Management Department determines VaR for Natixis’ entire scope of consolidation.
The extreme volatility affecting all asset classes since the collapse of Lehman Brothers has prompted Natixis to adopt a new calculation methodology, now based on econometrics in which standard deviation for individual risk factors is assumed to be the maximum standard deviation seen over the following time periods: 12 rolling months and 3 rolling months. This change in methodology caused all limits to be redrawn when the new methodology was implemented.
The new method was approved by the French Banking Commission in January 2009; since December 31, 2008, Natixis has used so-called “new econometrics” VaR to calculate its regulatory capital requirements in respect to market risks on the scopes for which the use of internal models has been authorized.
A “risk factors” project was completed in 2009. Work done to revise the various options in respect to risk factors involved all of the various bodies concerned (Risk Control Department, front offices and Results Service).
2- Operational indicators are used to manage activity on an overall and/or by homogenous business basis, by focusing on more directly observable criteria (for example: sensitivity to change in the value of the underlying, sensitivity to change in volatility or to correlation, diversification indicators). Limits corresponding to these operational qualitative and quantitative indicators thereby complement VaR and loss alert limits. They are determined consistently with the latter. This mechanism was rounded out by the implementation of specific stress test limits covering a large part of the CIB division’s scopes: Equity, commodities, foreign exchange and exotic interest rate derivatives.
Any breaches of the limits (operational, VaR, stress test and loss alert limits) are notified. Breaches of loss alert limits may lead to a management decision concerning the positions in question (closure, hedging, maintaining, etc.).
3- Stress tests to measure potential losses on portfolios in extreme market conditions.
Overall stress tests are redrawn and reinforced on a constant basis. They are carried out using Natixis’ VaR calculation tool, and can be divided into three categories: j historic stress tests aim to reproduce sets of variations in market parameters observed during past crises, in order to provide ex-post simulations of the magnitude of resulting change on the income statement. While stress tests do not have any predictive powers, they do make it possible to gauge exposure of the scope to known scenarios. Nine historic stress tests have been devised; j hypothetical stress tests are used to simulate variations in market parameters in all operations, on the basis of plausible hypotheses of one market’s reaction compared with another’s, depending on the nature of the initial shock. These shocks are defi ned jointly by front offi ce staff and economists. Their scenarios can be defi ned on the basis of economic criteria (e.g. real estate crisis, economic crisis), geopolitical considerations (e.g. terrorist attacks in Europe, overthrow of a Middle East regime) or other factors (e.g. avian fl u). Five hypothetical stress tests were devised; j adverse stress tests are designed to detect the most adverse situations for the bank, based on the characteristics of its portfolio. The calculations involve running stress scenarios through a matrix, adverse stress being the level that gives rise to the maximum loss.
The 99% 1-day VaR level for Natixis’ trading portfolios averaged €31.2 million, peaking at €58.4 million on January 5, 2009 and standing at €18.6 million on December 31, 2009.
These numbers should be seen in the light of the change in market conditions after the collapse of Lehman Brothers, which prompted Natixis to adopt a new methodology to calculate VaR, changing the way it takes historical data into account (standard deviation = maximum 12 rolling months, 3 rolling months). The new methodology, applied to individual risk factors, was fi rst applied on December 15, 2008.
VaR, as shown in the chart below, has consistently narrowed over the year, testifying to the combined impact of a policy of reducing exposure and the ”normalization” of market data (reduced volatility) and standard deviation used in calculating VaR.
On an equivalent scope and without taking into account the BPCE guarantee, the main market VaR associated with Natixis’ trading portfolios as at December 31, 2008 and December 31, 2009 work out as follows (99% 1-day Monte-Carlo VaR): (in millions of euros)
The following table sets out VaR data before and after the BPCE guarantee is taken into account, and its impact.
Sl um p in s to ck -m ar ke t i nd ic es
Cr is is in e m er gi ng m ar ke ts
The introduction of the new VaR methodology on the approved scope at end 2008 had the effect of reducing the number of backtesting exceptions over the entire year under review, with none noted over a rolling year.
The ALM Committee is in charge of the management and monitoring of structural balance sheet risk for Natixis S.A. The ALM Committee is chaired by the Chief Executive Offi cer and includes members of the CIB division, the Finance Department, the Risk Management Department and BPCE. The Committee, which meets quarterly, has overall responsibility on the issue and is tasked with: a validating overall ALM rules (including those relating to the internal pricing of liquidity), conventions, indicators and limits used for the monitoring, management and minimizing of structural balance sheet risks, in conjunction with the normative ALM framework laid down by BPCE; a approving overall policies with respect to refinancing; a monitoring change on the balance sheet; a monitoring structural balance sheet risks and compliance with limits.
For the Natixis S.A. subsidiaries scope: a those with no treasury do not have an operational delegation to manage their structural balance sheet positions; they therefore finance their individual positions through the Global Treasury Department. Their projected refinancing requirements are reviewed and validated at least once a year in meetings of the Subsidiary Financing Committee; a those that have market operations are subject to the same rules as those applying to the market operations of Natixis S.A.; a those that have specific banking activities (leasing, factoring, Private Banking, consumer finance, etc.), for which the operational management of ALM risks cannot be totally transferred to the Global Treasury Department, have a delegation from the central ALM Committee to manage their own mismatching risks, bearing in mind that their positions rank below those of the Treasury Department. These subsidiaries are required to adopt similar governance methods for monitoring their structural balance sheet risks to those adopted by Natixis S.A., involving the creation of a special-purpose local Committee tasked with monitoring these risks and the organization of periodic meetings attended by a representative of Natixis’ Finance Department. Their projected refinancing requirements are also reviewed and validated at least once a year in meetings of the Subsidiary Financing Committee.
Lastly, the Finance Department is responsible for the measurement and supervision of structural balance sheet risks on Natixis’ scope of consolidation. It is also responsible for the secretariat of the ALM Committee.
FINANCIAL DATA 6 Management Report of the yield curve and are linked in particular to gaps between dates on which IBOR is reset.
The transformation into liquidity and its related risk are measured by calculating static liquidity gaps and mismatching ratios (2). For the operational management of short-term projected liquidity requirements, liquidity gaps are calculated every day on a dayby -day basis over a three-month timeframe for all contractual operations carried out in the parent company scope. It is bound by permanent overnight exposure limits and operating thresholds within the Global Treasury Department for maturities of one, two and three months.
(1) As treasury portfolios are housed within the banking scope, the interest rate risk they generate is not included in overall trading VaR.
3. Management of liquidity in 2009 and the outlook for 2010
After a challenging fi rst quarter in 2009, marked by the continued consequences of the collapse of Lehman Brothers in September 2008, Natixis regained a satisfactory level of liquidity in the second quarter thanks to renewed confi dence among investors and the gradual return to normal in the capital markets. These conditions were used to reduce signifi cantly the short-term liquidity gaps and bring them down to more comfortable levels for their operational management. In the second half, following an exceptional one-year tender by the European Central Bank, Natixis was once again able to optimize its liquidity autonomously.
This more tranquil environment led Natixis’ ALM Committee, in conjunction with BPCE, to extend the average maturity of the refi nancing of illiquid GAPC assets, the divestment of which will extend over several years. At the same time, work got underway in the fi nal quarter of 2009, in conjunction with BPCE, on the implementation of new quantitative limits on short- and medium-term transformation into liquidity in 2010. The target mechanism will gradually be rolled out in 2010, helping further reinforce Natixis’ fi nancial solidity. It will, however, translate into an increase in the medium-term refi nancing program with
BPCE, which is now the sole issuer of medium-term public debt on behalf of the entire Groupe BPCE (1).
Most of Natixis’ structural foreign exchange risk is focused on the US dollar structural positions due to the presence in its scope of consolidation of foreign branches and subsidiaries working in that currency.
The Asset Management business line reports to the Operational Risk Department.
As such, the corporate entity as a whole is covered by a matrix organization structured around two main focuses: operations and location.
This structure is complemented within each business line by a network of operational risk correspondents (more than 150 people across all the business lines excluding Asset Management). They are responsible for reporting any incidents to the Operational Risk Department and for providing data constituting operational risk: indicators, progress on action plans, etc.
The steering of Natixis’ operational risks covers the following elements: a validation of standards and methods, measures, operational risk management procedures; a risk management: j review of the most serious incidents, j decisions relating to and monitoring of action plans, j setting of limits and monitoring of Natixis’ key indicators.
In 2009, the organization of the Committees was modifi ed in keeping with the change in the layout of the business lines.
Losses are listed from the very fi rst euro and as they are incurred. A single defi nition of “serious incident” is adopted throughout the Company (1). All serious incidents are passed up to the Operational Risks Department and the risk manager as they occur. A departmental investigation is then conducted, and a report giving the facts and recommending action plans is drawn up. This report is then debated by the relevant parties within the relevant Operational Risk Committee. It is up to the Committee Chairman to decide which action plans should be implemented. Incidents involving more than €1 million are immediately declared to the Groupe BPCE Risk Department.
In each of its operating entities, Natixis has implemented action plans geared towards reducing its exposure to operational risks. Signifi cant efforts have been made to implement action plans that help reinforce the Bank’s structure. In addition to the business continuity plan, Natixis’ Operational Risks Committee has worked closely on the major action plans, including: a work relating to back office suspense items, the reduction in their number, and the time taken to resolve them; a follow-up of legal master agreements; a anti-market-fraud taskforce set up in the wake of the “Kerviel affair.”
The 152 largest risks were identifi ed in coordination with the relevant business lines and on the basis of interviews. Each of these risk situations was analyzed and modeled in the form of a quantifi ed fault tree: a the risk situation is modeled on the basis of cause and effect; a for initial causes, known as loss-generating events, a law of probability in terms of frequency is defined; a for each consequence, known as a process fault, a law of probability in terms of severity is defined.
Seven stress scenarios with very low likelihood were identifi ed and assessed: fl ood of the Seine, pandemic, rogue trading (illicit trades) on the equity markets or in the treasury business, paralysis of payment means, management of procedures relating to State export assistance and failure to provide information to customers with respect to alternative asset activities.
“Overall Banking,” “Company Civil Liability” (operational and professional) and “Management Civil Liability” insurance is subscribed to by Natixis on behalf of the parent company and all subsidiaries. Its policies were all renewed on July 1, 2009.
Cover for the buildings housing the Company’s operations in France, their contents, IT risks and the resulting banking operations losses (reconstruction and/or replacement cost, capped at €200 million per claim) was renewed on January 1, 2009.
All insurance covers are purchased with claim excesses (retention level accepted) in accordance with Natixis’ capacities.
Insurance premiums for all these covers cost a total of €9 million in the 2009 fi nancial year.
On February 27, 2007, the judge accepted all aspects of the Harris Associates motion and rejected the motion of the plaintiffs. On March 20, 2007, the plaintiffs appealed that decision. Both parties fi led written arguments and appeared before the Court of Appeals on September 10, 2007.
On May 19, 2008, a panel of judges from the Court of Appeals for the Seventh Circuit issued a decision confi rming the decision of the District Court in favor of Harris Associates L.P.
On November 3, 2008, the plaintiffs sought relief from the United States Supreme Court, demanding that the denial of their appeal be overturned.
On April 30, 2009, the Court rejected the class-action suit against all defendants, but allowed the plaintiffs to modify their complaint. On June 18, 2009, these plaintiffs fi led a second complaint under a class action. Natixis Funding was cited as a defendant on the same grounds as previously and the complaint expressly cites a former Natixis Funding employee, although Natixis itself is no longer cited in the new complaints. The defendants have petitioned for the rejection of the second complaint. In a ruling handed down on March 25, 2010, the Court rejected the inadmissibility motion fi led by the defendants. The procedure against the defendants will therefore continue.
In a decision handed down on January 27, 2010, the Commercial Court of Paris refused to hear the suit fi led by CIC and Crédit Mutuel, and sentenced them to pay €120,000 euros to Natixis and €50,000 to Lagardère in accordance with Article 700 of the French Civil Procedure Code. The plaintiffs appealed against this decision.
In March 2009, the Paris public prosecutor’s offi ce launched a preliminary investigation into a complaint fi led by Natixis minority shareholders and coordinated by the Association de défense des actionnaires minoritaires (Association to Defend Minority Shareholder Rights, ADAM). As part of this investigation, Natixis’ headquarters were searched in May 2009. The investigation is ongoing.
On November 13, 2009, Maximus Master Fund Limited and its portfolio manager, Anakena, fi led a complaint against Natixis before the Commercial Court of Paris (Tribunal de Commerce de Paris) seeking the payment of €59.9 million in damages, and alleging that Natixis has abused its rights as the majority investor by asking the fund to redeem its investment in the middle of the fi nancial crisis.
On December 31, 2009, 735 Natixis shareholders lodged a complaint with the Commercial Court of Paris (Tribunal de Commerce de Paris) against BPCE, Natixis and Philippe Dupont and Charles Milhaud seeking the payment of a total of roughly €4 million, alleging the spreading of misleading information and the violation of market rules.
To deal with this risk, ABP Vie has only sold contracts without a minimum guaranteed rate in recent years: more than 90% of its contracts do not have a minimum guaranteed rate. The guaranteed minimum rate averages 0.19%.
Natixis Assurances has identifi ed the insured population for whom the risk of repurchase is high, the differential criteria being age, fi scal seniority and the amount of capital. For this population, Natixis Assurances has hedged the risk from rate increases with Cap contracts, and has limited the scope covered by such contracts to approximately a quarter of its interest rate assets. It has also subscribed to variable-rate bonds with a minimum rate.
Concerning securities in other categories, the sensitivity analysis carried out at end December 2009 shows that an increase of 1 point in bond rates would have a negative impact of €35 million on equity (taking into account the variation attributable to policyholders and taxation), i.e. 3.4% of equity.
The sensitivity analysis carried out on December 31, 2009, shows that: a a drop by 10% in the stock market would have a negative impact of €16.6 million on equity (after taking into account the variation attributable to policyholders and taxation), i.e. 1.6% of equity; a a drop by 10% in the real estate market would have a negative impact of €4.1 million on equity (after taking into account the variation attributable to policyholders and taxation), i.e. 0.4% of equity.
The monitoring and management of counterparty risk is carried out in compliance with Natixis’ standards and internal limits, as determined by the Credit Risk Committee, as well as the regulatory constraints imposed on insurance companies. Thus, 88% of the fi xed-income portfolio is invested in securities rated A- or higher.
Through its activities, Coface is exposed to two main types of risk. The fi rst is the technical risk constituted by the risk of losses on Coface’s portfolio of insurance policies. The second is the fi nancial risk related to the risk of loss arising from adverse movements in interest rates, exchange rates or the market value of securities or real estate investments. Coface has implemented sophisticated tools designed to control these risks rigorously and to ensure they remain within prudent limits.
The credit risk concerns the risk of loss generated by the portfolio of insurance policies.
In addition to monthly monitoring at the level of each underwriting center, Coface has implemented a system that includes: a the centralization of declarations of threats of claims exceeding a certain amount (currently €0.5 million for all the underwriting centers, and €1 million for the two main underwriting centers, Coface S.A. and Coface Kredit), with the intervention of a subsidiary specialized in recovery (Coface Recovery Business Intelligence); a the Large Risks Committee, which sets the maximum outstanding risk accepted by Coface over the 400 greatest risks for Coface (maximum loss in a stressed scenario of €15 million and severity greater than €35 million) and allocates ceilings for each emerging country; a a system for rating major corporate and country risks; a a scoring system for minor risks; a a system for the statistic assessment of “severities” (maximum losses that may be recorded in case of claim) by debtor, group of debtors or emerging country.
In the context of the fi nancial crisis, non-investment-grade risks – i.e. ratings below BBB- and their score equivalents − have been severely scaled back, and now account for only 10% of the total portfolio.
All the signifi cant risks are subject to centralized monitoring both for inventory and monthly fl ows.
The rate of acceptance of non-investment-grade risks is monitored on a monthly basis.
Outstanding (in millions of euros) Number of limits Number of buyers As a % of loans
FINANCIAL DATA 6 Management Report 5.10 - Sensitive exposure in accordance with the recommendations of the Financial Stability Forum
Subprime ABS CDOs represented a gro ss exposure of €2,272 million as at December 31, 2009. Impairments were recognized in the amount of -€392 million (excluding the effect of the BPCE guarantee) in 2009, bringing total impairment to €1,389 million.
Breakdowns by rating and type of underlying for US RMBSs were as follows as at December 31, 2009.
Available-for-sale asset portfolio 143 0 (22) 121 10 8 28 28 46 1 1
Available-for-sale asset portfolio 18 (4) 5 19 8 1 3 4 3
5.11.1 - BREAKDOWN OF EXPOSURE TO EQUITIES ON THE BASIS OF THE INTENTION IN HOLDING THE ASSET (MANAGEMENT DATA)
The banking portfolio’s exposure to equities is treated in credit risk on the basis of the following methods: a exclusion of positions representing interests of more than 10% in banks. These holdings are deducted directly from regulatory capital; a exclusion of holdings in the Group’s insurance companies, which are consolidated under the equity method; a exclusion of holdings in clearing houses. These assets are reclassified and listed on the “other assets” exposure line; a exclusion of holdings that do not generate weighted risks.
J BREAKDOWN OF AMOUNTS BY EQUITY PORTFOLIO AND BY TYPE AND NATURE OF EXPOSURE
Prudential restatement of unrealized capital gains or losses on available-for-sale equity instruments (84)
Prudential restatement of unrealized capital gains or losses on available-for-sale equity instruments as a percentage of upper Tier-2 capital 44
Total consolidated assets amounted to €449.2 billion as at December 31, 2009, compared with €555.8 billion as at December 31, 2008, a decline of €106.6 billion or 19%. The decline was linked primarily to the signifi cant drop in the value of transactions recognized at fair value on the balance sheet, both assets and liabilities.
Available-for-sale fi nancial assets amounted to €31.5 billion. These assets are split fairly evenly between life insurance investment portfolios, mainly in the form of fi xed-income securities, and the banking investment portfolio.
The customer loan portfolio, including leasing and factoring, amounted to €92.5 billion, down €10.6 billion compared with December 31, 2008. This increase stemmed chiefl y from a reduction of drawdowns of cash loans.
The reclassifi cation of subordinated notes as equity explains the decline in subordinated debt matching an increase in equity.
The following holdings are deducted from regulatory capital: (in billions of euros) Entity Amount
CFDI is Natixis’ sole subsidiary to be subject to capital-adequacy requirements individually. The parent company and other French subsidiaries are credit institutions that are exempt from compliance with these requirements on an individual basis, by authorization of the French Banking Commission.
Regulatory capital is structured as follows with respect to the various rules: (in billions of euros) 12.31.2009 12.31.2008 Change
Natixis’ Tier-1 capital was €12.7 billion as at December 31, 2009, taking into account the following changes.
Risk-weighted assets under Basel II totaled €131.0 billion, a signifi cant decline. Three risk categories contributed to this change: (in billions of euros) 12.31.2009 12.31.2008 Change
The €14.7 billion decline in credit risks was attributable for €7.1 billion to the impact of the fi nancial guarantee provided by BPCE and for €7.6 billion to the reduction in gross exposure and exposure to risk.
Operational risks fell by a substantial €3.5 billion due to the substitution of 2009 NBI for 2006 NBI, the standard calculation being to take the average NBI for the previous three years.
The overall Tier-1 ratio stood at 9.7% as at December 31, 2009, after taking into account these changes, compared with 8.2% as at December 31, 2008. The Core Tier-1 ratio, excluding hybrid securities, was 8.5% as at December 31, 2009.
It must exceed 100%. It stood at 106.3% as of December 31, 2009.
Natixis complies with regulatory rules governing large exposures. In accordance with banking regulations, no single exposure may exceed 25% of regulatory capital, and the aggregate total of individual exposures in excess of 10% of regulatory capital may not exceed eight times regulatory capital.
In the wake of the events linked to the 2008 liquidity crisis, which prompted the collapse of Lehman Brothers and heightened aversion to banking risk among investors, market conditions remained challenging for all fi nancial institutions in 2009.
However, Natixis managed, with the support of its reference shareholder, BPCE, to successfully complete its medium-and long term refi nancing program.
In the structured EMTN compartment, net volumes fell by €2.3 billion in 2009. This was chiefl y attributable to investor prudence with respect to complex products.
The exchange carried out by BPCE, in the summer of 2009, on deeply subordinated notes issued by Natixis led in September to the issuance, in exchange, of new deeply subordinated notes, equivalent to a total of €0.8 billion. These issues, fully subscribed by BPCE, offset in the long term and after their redemption by Natixis, the cancellation of €1 billion in bonds tendered by investors.
(ii) With respect to super subordinated notes, issues made by Natixis in 2009 were as follows: 1. resources originating with the SPPE, transmitted by our shareholders: BFBP and CNCE each subscribed: j €1,000,000,000 – issued on June 26, 2009 – fi xed then fl oating rate; the issue prospectus allows for early redemption as of June 26, 2014 and at every subsequent interest payment date and the possibility of offering to redeem at any time following the issue date; 2. issues subscribed by BPCE and made as part of exchange offers initiated by BPCE aimed at deeply subordinated notes issued by Natixis and preferred shares issued by NBP Capital Trust I and NBP Capital Trust III: j €52,356,000 – issued on September 8, 2009 – fi xed rate; the issue prospectus allows for early redemption as of September 30, 2015 and at every subsequent interest payment date, j US$133,560,000 – issued on September 8, 2009 – fi xed rate; the issue prospectus allows for early redemption as of September 30, 2015 and at every subsequent interest payment date, j €374,450,000 – issued on September 8, 2009 – fi xed then fl oating rate; the issue prospectus allows for early redemption as of September 30, 2019 and at every subsequent interest payment date, j US$443,690,000 – issued on September 8, 2009 – fi xed then fl oating rate; the issue prospectus allows for early redemption as of September 30, 2019 and at every subsequent interest payment date;
The principal and interest on the notes (which constitute obligations under French law) are direct, unconditional, unsecured, perpetual and deeply subordinated obligations of the Issuer and rank and will rank pari passu among themselves and with all other present and future Support Agreement Claims and Deeply Subordinated Obligations, but shall be subordinated to the present and future prêts participatifs granted to the Issuer and present and future titres participatifs issued by the Issuer, Ordinarily Subordinated Obligations and Unsubordinated Obligations of the Issuer.
In the event of liquidation of the Issuer, the notes shall rank in priority to any payments to any classes of share capital and any other equity securities issued by the Issuer. There will be no limitations on issuing debt, at the level of the Issuer or of any consolidated subsidiaries.
8.2 - Start of negotiations for the divestment of part of the Natixis Private Equity portfolio
The transaction is expected to close in the fi rst half of 2010.
The proposed merger of Natixis and Natixis Securities (Natixis being the remaining legal entity), a wholly owned subsidiary, is currently underway. The proposed merger treaty was fi nalized by the Natixis and Natixis Securities Boards of Directors on April 1, 2010 and April 9, 2010, respectively. The merger will be put to the General Shareholders’ Meeting on May 27, 2010.
8.5 - Start of a plan to set up a single payments operator
Plans to set up a single operator in payments, as part of the merger between Natixis Paie ments and GCE Paie ments, are now underway. The plan is currently being discussed with employee representatives.
including asset amortization and writedowns, 2008 having seen the writedown of the value of the business relating to the Natexis Banques Populaires/Ixis CIB merger.
The cost of risk - €1,556 million increased signifi cantly in 2009 compared with 2008 (+58%).
Gains or losses on fi xed assets were a loss of €373 million.
The net loss was -€2,046 million, compared with a loss of €5,054 million in 2008.
As at December 31, 2009, total assets amounted to €319,879 million, compared with €357,664 million as at December 31, 2008.
The third resolution to be put to the May 27, 2010 General Shareholders’ Meeting proposes that the entire €2,046,308,381. 66 loss be charged against the share premium.
Pursuant to Articles L.441-6-1 and D.441-4 of the French Commercial Code, the following table breaks down the balance of trade payables by due date: J SUPPLIERS INVOICES UNPAID AS AT DECEMBER 31, 2009
Article L.225-100-3 requires that companies whose securities are admitted to trading on a regulated market should make available and explain a certain number of factors when these may have an impact in the event of a public offer.
Natixis’ main shareholder, BPCE, holds 71.54% of the capital and 71.66% of the voting rights of Natixis at December 31, 2009. In light of this capital structure, Natixis considers that a hostile public offer would be unlikely to succeed.
Loans and receivables to banks 6.4 68,677 65,573 o/w institutional operations
Loans and receivables to customers 6.4 105,903 115,604 o/w institutional operations 512 407
Deposits from fi nancial institutions 6.12 95,510 96,600 o/w institutional operations 55 72 o/w institutional operations 743 665
Net gains or losses on available-for-sale fi nancial assets 7.4 (306) (419)
Writedown, amortization and writedown of property, plant and equipment and intangible assets (206) (208)
o/w: a Attributable to equity holders of the parent (1,707) (2,799)
S TATEMENT OF CHANGES IN EQUITY (FROM JANUARY 1, 2008 TO DECEMBER 31, 2009)
+/- Net charge to other provisions (including insurance companies’ technical reserves) 4,026 2,574
+/- Decrease/(increase) in non fi nancial assets or liabilities 911 (5,480)
+/- Decrease/(increase) in property, plant and equipment and intangible assets (247) 35
Effect of exchange rate changes on cash and cash equivalents (2) (71)
1.1 - IFRS standards and IFRIC interpretations applied by the group
Natixis’ consolidated fi nancial statements include a balance sheet, income statement, net income/(loss) and gains and losses recorded directly in equity, a statement of changes in equity, cash fl ow statement and notes to the fi nancial statements.
The fi nancial statements presented for comparative purposes were published by Natixis in the 2008 registration document fi led with the French securities regulator (Autorité des Marchés Financiers – AMF) on April 7, 2009.
The impacts of the fi rst-time application of IFRS on shareholders’ equity, equity capital, assets, liabilities and earnings, and the fi rst-time application options used in accordance with IFRS 1 “First-time adoption of International Financial Reporting Standards”, were published in the 2005 registration document.
Two new notes relating to this standard have been added. These are Note 8.1 “Change in gains and losses recorded directly in equity” and Note 8.2 “Detail of tax on gains and losses recorded directly in equity”; a the amendment to IFRS 7 adopted by the European Union on November 27, 2009 has given rise to additional information presented in the notes to the financial statements. This amendment aims to enrich financial information on fair-value valuations and the liquidity risk associated with financial instruments. The following notes and tables have been introduced: j Notes 6.6.8 and 6.18 “Fair value of fi nancial assets and liabilities recorded at fair value on the balance sheet”. This note discloses the fair value of fi nancial instruments according to the hierarchy of the parameters used for the valuation of instruments on the balance sheet, j Notes 6.6.8.1 and 6.18.1 “Changes over the period in the fair value of fi nancial assets and liabilities presented in level 3”, j Note 6.19 “Breakdown of fi nancial liabilities by contractual maturity”; a the amendment to IFRS 2 “Share-based payment”, adopted by the European Commission on December 16, 2008.
This amendment clarifies vesting conditions and specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This amendment has no impact on the way in which share-based payments made by Natixis are accounted for; a the revised IAS 23 “Borrowing costs”, adopted by the European Commission on December 10, 2008. This revised standard eliminates the possibility of recognizing borrowing costs within expenses and borrowing costs directly attributable to the acquisition, construction or production of qualifying assets must be capitalized. Eligible assets are those that require a long period of preparation before being used or sold. This standard has not had a significant impact on Natixis’ financial statements; a the amendment to standards IAS 32 and IAS 1 “Puttable Financial Instruments and Obligations Arising on Liquidation”, adopted by the European Commission on January 21, 2009. This amendment requires the issuer to classify as equity some puttable financial instruments that share certain of the characteristics of equity instruments. This amendment has not had any impact on Natixis’ financial statements; a amendments relating to the IFRS annual improvement process published by the IASB in May 2008 and adopted by the European Commission on January 23, 2009. The IFRS annual improvement process introduced by the IASB makes amendments once a year to a series of standards when the modifications are minor or non-urgent in nature. With the exception of amendments to IFRS 5, which are effective for accounting periods beginning on or after July 1, 2009, the other amendments are effective for accounting periods beginning on or after January 1, 2009. These amendments have not had any impact on Natixis’ financial statements; a the amendment to IFRS 1 and IAS 27 “Cost of an investment in a subsidiary, jointly controlled entity or associate” and adopted by the European Commission on January 23, 2009. This amendment concerns entities using IFRS to prepare their individual financial statements and does not therefore affect the consolidated financial statements of Natixis; a the amendments made to IFRIC 9 “Reassessment of embedded derivatives” and IAS 39 “Financial instruments: recognition and measurement”, published by the IASB on March 12, 2009 and adopted by the EU on November 30, 2009, aim to clarify the accounting treatment of embedded derivatives if a hybrid financial asset is reclassified out of the fair-value category via the income statement. When the asset is reclassified the incorporated derivative must be subject to a separate assessment as if the asset had not been assessed at fair value with recording of the changes in fair value via the income statement. When such an assessment is not possible, this reclassification is prohibited and the hybrid contract continues to be recorded in full at fair value via the income statement. These amendments have not had any impact on Natixis’ consolidated financial statements; a IFRIC 11 “Group and treasury share transactions”, adopted by the European Union on June 1, 2007 and effective for accounting periods beginning as of January 1, 2009. This interpretation addresses two application points of IFRS 2. It clarifies the accounting treatment of transactions with share-based payment: j for which the entity chooses or is bound to acquire treasury shares from a third party independently of the fact that the rights are granted or settled by the entity itself or by its shareholders, j that involve several entities of the same group (parent company or another entity of the same group) in the individual or separate fi nancial statements of each entity of the Group that receives the services of plan benefi ciaries.
STANDARDS, AMENDMENTS AND INTERPRETATIONS ADOPTED BY THE EUROPEAN UNION ON DECEMBER 31, 2009, BUT NOT EARLY ADOPTED IN THE 2009 CONSOLIDATED FINANCIAL STATEMENTS
The consolidated fi nancial statements have been prepared in accordance with the assessment and presentation principles set out in Notes 2 and 5 below.
The consolidated fi nancial statements are based on the individual fi nancial statements as at December 31, 2009 of the entities included in Natixis’ scope of consolidation.
Only subsidiaries making a material contribution to the group’s fi nancial statements are consolidated.
If the written put is associated with a currently exercisable call option, in principle the potential voting rights are included in the calculation of the percentage of ownership and voting rights held.
Under IAS 28 and IAS 31, Private Equity investments between 20% and 50%-owned do not have to be accounted for using the equity method if they are designated at inception as at fair value through profi t and loss. Natixis has opted for the latter method which it believes provides investors with more relevant information.
Since the Banques Populaires CCIs and the Caisses d’Epargne CCIs do not carry any voting rights, Natixis’ signifi cant infl uence over the issuers is characterized by (i) de jure infl uence resulting from its involvement in the operational and fi nancial management of the Banques Populaires and Caisses d’Epargne networks, and (ii) de facto infl uence deriving from operational and technical cooperation by the Banques Populaires and Caisses d’Epargne banks with Natixis.
Natixis’ signifi cant de jure infl uence over the Banques Populaires and Caisses d’Epargne banks derives from the following rights conferred on Natixis by certain corporate documents relating to BPCE and by the memorandum of understanding relating to CCIs issued by Banque Populaire and Caisse d’Epargne: a participation in certain Committees of Groupe BPCE ; a right regarding certain decisions made within BPCE (Natixis’ opinion to be sought and Natixis to be consulted in its capacity as a non-voting member; rights to a second deliberation regarding certain matters); a right to receive information (information relating to the CCIs); a delegation of powers concerning the risk management function (definition of risk standards and risk assessment methods).
Lastly, Natixis and the Caisses d’Epargne banks have agreed to maintain, for a minimum period of 10 years as from the date of the contributions, any industrial and commercial relations existing in the following areas: a custodial services; a design and management of customer products (asset management, revolving credit facilities, guarantee insurance for borrowers, factoring and non-real estate lease financing, financial engineering and capital market products, local authority financing and debt management); a securities and derivatives brokerage.
In accordance with Article 116 of the amended fi nance law for 2005 (no. 2005-1720 of December 30, 2005) and the agreement signed with the French State on December 28, 2006, Natixis manages certain public procedures on behalf of the French State, mainly consisting of loans and gifts to foreign States conferred in the framework of the Public Development Aid and the stabilization of export credit rates. The related transactions, some of which may be guaranteed by the State, are recognized separately in the fi nancial statements. The State and other related creditors have a specifi c right over the assets and
Fees received and loans outstanding in connection with institutional operations are not material. Accordingly, these items were not restated at amortized cost. Operations other than fi nancing where Natixis acts as an intermediary on behalf of the French State, have been accounted for using the previous treatment in the IFRS fi nancial statements.
A sum of €64 million was recorded with respect to 2009, compared with €66.8 million in 2008. This drop in premiums did not result from a decline in activity but from a combination of a 2008 comparison base that incorporated a catch-up with respect to 2007 and a contractual ceiling on premiums at an 11% margin.
2.4 - Currency conversion of the statements of foreign subsidiaries and branches
The balance sheet of foreign subsidiaries and branches whose functional currency is not the euro are translated into euros at the closing exchange rate, except for share capital, reserves and capital allocations, which are translated at the historical exchange rate. The income statements of foreign subsidiaries and branches whose functional currency is not the euro are translated at the average exchange rate for the year. Any resulting conversion gains or losses arising on both balance sheet and income statement items are recognized in equity under “Conversion differences” for the portion attributable to the Group and “Minority interests” for the portion attributable to third parties.
Natixis elected to use the option available under IFRS 1 on fi rsttime adoption to transfer the cumulative balance of conversion adjustments existing at January 1, 2004 to consolidated reserves. If a foreign entity is subsequently sold, the gain or loss on sale will include only those conversion gains or losses arising after January 1, 2004.
These valuation adjustments were split into a depreciable and non-depreciable component in proportion to the value of the land and buildings in question. The depreciable component is depreciated in line with the rules and residual useful life applicable to similar assets (15 years on average).
NGAM: the acquisition of 11.34% of minority interests generated an additional €293.1 million in goodwill.
Coface: the 100% acquisition of Trust Kredit Beheer (TKB) generated €14 million in goodwill.
Goodwill on the subsidiaries of Natixis Private Equity, whose sale is under negotiation (see Note 14), was fully impaired in 2009 for a total amount of €8.6 million.
All items of goodwill are writedown tested based on the value in use of the cash-generating units (CGUs) to which they have been allocated.
Value in use is determined principally by discounting the expected future cash fl ows from the CGU on the basis of the medium-term business plans drawn up by Natixis. However, for the Private Equity business, value in use is calculated based on net assets, since all assets in these entities are recorded at fair value.
The following assumptions have been used: a expected future cash flows: forecast data covering the next 5 years drawn from Natixis’ medium-term business plans, established in conjunction with the businesses. These assumptions are underpinned by external information sources published by the Economic Research Department; a perpetual growth rate: 2.5%, except for Coface (2%); a discount rate: use of a different rate for each CGU: 9.9% for Invest ment solutions , 10.4% for Specialized Financial Services, 10% for Coface and 11% for Corporate and Investment Banking.
Note that Natixis wrote down goodwill allocated to the CIB business and the GAPC portfolio at the end of 2008.
Loss reserves for provident insurance contracts correspond to the estimated cost of loss claims and are not discounted.
In accordance with IFRS 4, insurance and investment contracts with a discretionary participation feature (life insurance) give rise to the recognition of a deferred participation asset or liability to offset the difference in value between assets and liabilities (shadow accounting).
The deferred participation asset or liability is equal to the portion of unrealized gains and losses on investments carried in assets, payable to policyholders pursuant to their insurance contracts or arising on consolidation adjustments. The rate is calculated on the basis of the average participation rate of policyholders recognized in the individual fi nancial statements under contractual rules (average contractual participation rate for each product weighted by the value of the investments on the calculation date). This rate was around 92% at December 31, 2009 (virtually unchanged from 2008).
Deferred participation assets and liabilities arise mainly on: a the remeasurement of available-for-sale financial assets and financial assets at fair value through profit and loss; a the remeasurement of real estate assets held to cover insurance contracts; a the restatement in the consolidated financial statements of the capitalization reserve and the liquidity risk reserve.
The merger of Banque Privée Saint-Dominique and of Compagnie 1818 - Banquiers Privés was approved on June 30, 2009 by their respective General Shareholders’ Meetings. The resulting new entity took the name of Banque Privée 1818. Backed by the new Groupe BPCE and a wholly owned Natixis subsidiary, Banque Privée 1818 is positioned as one of the leading private banks in France. Banque Privée 1818 is organized around three businesses: a wealth management services for direct clients mainly consisting of businesspeople to whom it offers tailored financial and technical solutions; a the provision of a wealth management offering for high networth individual clients across the Caisse d’Epargne and Banque Populaire networks built around the private bank’s wealth management expertise; a the marketing of products and services to Independent Wealth Management Advisors (IWMA) via the Centre Français du Patrimoine, the top two multi-product platform in the market, the goal of which is to work with the 300 most active IWMA.
Natixis agreed the outright disposal of its Natixis Algeria subsidiary to Banque Fédérale des Banques Populaires. The sale agreement between the two parties was signed on July 28, 2009. Finalization of the sale is nevertheless subject to receipt of approval from the Algerian supervisory authorities (Conseil de la Monnaie et du Crédit Algérien – Algerian Currency and Credit Board and/or the Governor of the Bank of Algeria) and is thus not yet refl ected in the Natixis fi nancial statements.
Newly consolidated entities a Creation of a special purpose entity “Gamma”, an FCT (Fonds commun de titrisation - securitization investment fund), to securitize a loan portfolio for the purposes of issuing medium term negotiable notes that qualify as eligible collateral for the ECB.
a Creation of a special purpose entity “Sahara Finance Euro Limited”, a securitization vehicle for a segregated portfolio of securitization tranches (ABS, CLO, RMBS, etc.) for the purposes of issuing senior and junior tranches wholly subscribed for by Natixis and mezzanine tranches subscribed for by a non-group investor.
a Creation of a special purpose entity “MSR Trust” to manage Mortgage Servicing Rights (MSR) issued by Freddie Mac and Fannie Mae. It is owned by CM REO Holdings Trust which is in turn owned by Natixis Real Estate.
Changes in percentage interest a 8.01% dilution in EDF Investissement Groupe following a capital increase wholly subscribed for by non-group entities without triggering a change in the consolidation method. This transaction generated a capital gain of €9.8 million.
a Liquidation of special purpose vehicle LIME CDO Ltd (Natixis Corporate Solutions sub-consolidation level).
a Liquidation of a special purpose entity, within the Natixis Capital Markets sub-consolidation level, “Ixis Municipal Products Inc. Saratoga Series 2004-4 Trust”.
Newly consolidated entities a Consolidation of Nami Investment following the exceeding of consolidation thresholds, a special purpose entity, which carries on insurance real estate investment.
Changes in percentage interest a 2% dilution of ABP Croissance Rendement.
Deconsolidated entities a Disposal of 35% of the Caceis Group at June 30, 2009, generating a capital loss of €31 million following inclusion of the impact of the price variation clause.
a Outright acquisition of Trust Kredit Beheer (TKB) generating goodwill of €14.0 million.
a Creation of Coface Luxembourg (COFACE S.A. subsidiary), which is in the insurance business.
Deconsolidated entities a Disposal of Cerved outside the group generating a capital gain of €19.7 million.
a Deconsolidation of Coface Factoring Lithuania, a Coface Factoring Poland subsidiary, as a result of the criteria being under the consolidation thresholds.
a Deconsolidation of NEM2 and FNS2 because under the materiality thresholds for consolidation.
Internal restructuring a Merger of Financière Natexis Singapour into Natexis Private Equity International Singapour in Q2 2009.
Changes in percentage interest a Buyout of 9.8% minority interests by Banque Populaire du Sud-Ouest in: la Banque Pelletier, Crédit Commercial du Sud-Ouest, la Banque de Savoie, la Banque Chaix, la Banque Dupuy De Perceval and la Banque Marze; Internal restructuring a IPAB merged into Vialink.
a ACEF Occitane and Socami Haute Garonne Habitat merged into Socami Occitane.
SIC 12 does not apply to SPEs designed to manage postemployment and long-term employee benefi ts, which are covered by IAS 19, “Employee Benefi ts”. Employee pension funds and mutual insurance companies are accordingly not consolidated.
The analysis differs depending on whether Natixis is a guarantor of the fund: 1. Non-guaranteed Mutual Funds
Natixis guarantees the capital and/or performance of certain Mutual Funds . An analysis of the risk incurred by Natixis as a result of such guarantees shows that it is controlled, either via the management policies and control procedures applied, via the fund structure (money market assets), via rigorous monitoring of counterparty risk, or via systematic covering of swaps in the market (when Natixis is the counterparty to the performance swap put in place by the fund). These Mutual Funds are accordingly not consolidated.
The NGAM sub-group is involved in such funds as manager of the underlying portfolio for third-party investors. Its role is strictly defi ned by the management agreement, which never provides it with effective control of the structure. Neither NGAM nor any other Natixis entity holds a majority interest in these funds. Natixis does not thus retain a majority of the benefi ts or incur a majority of risks. No such fund was thus consolidated as of December 31, 2009.
Real estate funds are generally set up by NGAM, but it may only be manager of a portfolio of real estate assets under a management mandate entered into with a third party. Its role is strictly defi ned by the management agreement, which never provides it with effective control of the structure.
The management fees paid are not such as to allow it to benefi t from the bulk of the returns generated. If provision has been made for an out-performance fee it generally takes the form of a liquidation bonus, the major portion of which accrues to the unit holders. The “majority of risks” and “majority of benefi ts” criteria are assessed on the ba sis of the Group’s interest in such funds.
On this basis, a single real estate fund managed by the NGAM sub-group was consolidated as of December 31, 2009: a the EPI SLP fund.
The interests of the Natixis Assurances sub-group in UCITS and SCI are subscribed in the form of euro or unit-linked insurance contracts.
The Coface sub-group’s credit enhancement operations consist of insuring receivables securitized by a third party for investors via an SPE for losses in excess of a predefi ned amount. In this type of structure, the Coface sub-group has no role whatsoever in determining the SPE’s activity or in its operational management. The insurance premium received on the insurance contract is a small sum compared to all the benefi ts generated by the structure, the bulk of which fl ow to the investors.
Based on these factors, four subsidiaries were consolidated as of December 31, 2009: j the “Dahlia A SICAR SCA” SICAR venture capital company; j the “IXEN” FCPR venture capital fund *, j the “IXEN II” FCPR venture capital fund *, j the “IXEN III” FCPR venture capital fund.
a Natexis Investment Corp., a wholly owned Natixis subsidiary, holds a series of interests in Private Equity funds. The vehicles aren’t consolidated given that they represent marginal interests (generally under 1%) in each fund and thus do not meet all the SIC 12 criteria (activities, decision-making powers, majority of benefits and majority of risks).
4.2.5 - SPEs FOR CIB’S STRUCTURED FINANCE OPERATIONS, WITH THE EXCEPTION OF FINANCIAL ENGINEERING OPERATIONS.
In order to satisfy needs relating to the fi nancing of projects (for industrial or infrastructure projects), movable assets (involving air, sea or land transport), real estate, corporate acquisitions (LBO fi nancing) or commodities, Natixis may be required to create SPEs structured around a specifi c fi nancial transaction on behalf of a client.
Accordingly, none of these entities had been consolidated as of December 31, 2009.
a SPEs may be used to transform a debt type instrument (on the asset side of their balance sheet) into a more equity type instrument (on the liability side of their balance sheet) through for example the issue of preference shares. Within the scope consolidated and controlled by Natixis, four material entities were consolidated as of December 31, 2009. They are: j Natexis Banque Populaire Preferred Capital 1; j Natexis Banque Populaire Preferred Capital 2; j Natexis Banque Populaire Preferred Capital 3; j Garbo Invest.
a The Natixis Lease sub-group holds a certain number of SPEs which own real estate assets. Four of them are controlled by Natixis (interests in excess of 50%) and were material as of December 31, 2009.
The assets of these conduits, and the liabilities they issue, are rated by the rating agencies which continually scrutinize the match between the level of risk associated with each tranche sold and the rating attributed.
Given the segregation of risk and their aim of spreading credit risk for investors other than Natixis, securitization conduits do not generally require consolidation under IFRS: j the activities have been principally conducted on behalf of third party investors so as to provide them with access to diversifi ed portfolios; j a third party entity manages the assets to the extent required. Natixis has no decision-making or management powers within such entities; j in comparison to third party investors, Natixis never derives the majority of the benefi ts; j Natixis only holds the most senior shares in these structures and is thus not exposed to the majority of risks.
The main changes in entity scope in 2009 were as follows: a creation of a special purpose entity “Gamma”, which was consolidated as of December 31, 2009, an FCT (Fonds commun de titrisation - securitization investment fund), to securitize a loan portfolio for the purposes of issuing medium term negotiable notes that qualify as eligible collateral for the ECB; a creation of a special purpose entity “Sahara Finance Euro Limited”, which was consolidated as of December 31, 2009, a securitization vehicle for a portfolio of securitization tranches (ABS, CLO, RMBS, etc.) for the purposes of issuing senior and junior tranches wholly subscribed for by Natixis and mezzanine tranches subscribed for by a non-group investor.
Securities accounted for under the fair value option fall into one of the following three categories: a hybrid instruments that contain one or more significant and separable embedded derivative features; a instruments belonging to a group of financial assets valued and managed on a fair value basis; a instruments that present an inconsistency in accounting treatment with a related financial liability.
As stated in Note 2, Natixis has elected to use the option provided by IAS 28 and not to account for Private Equity investments between 20% and 50%-owned using the equity method if they are designated as “Financial assets at fair value through profi t and loss”. In accordance with the fair value option amendment, Private Equity investments less than 20%-owned are also recognized as “Financial assets at fair value through profi t and loss”, since managing and measuring these investments at fair value is a well-established practice within Private Equity companies.
On initial recognition, held-to-maturity fi nancial assets are measured at fair value including transaction costs, and subsequently measured at amortized cost using the effective interest rate method. They are tested for impairment at each reporting date, and an impairment loss is recognized where appropriate in income under “Cost of risk”. Transactions intended to hedge interest rate risk on these securities are not permitted under IFRS.
After initial recognition, loans and receivables are measured at amortized cost using the effective interest rate method, and tested for impairment at each reporting date. Where necessary, an impairment charge is recorded in income under “Cost of risk”.
The liquidity crisis has led to delays in syndication arrangements and diffi culties in placing on the secondary market the portion of syndicated loans initially subscribed with the intention of short-term resale. Real estate and LBO fi nancing have been the most affected.
The instruments are reclassifi ed based on their fair value at the reclassifi cation date. The difference between this amount and the estimated cash fl ows the entity expects to recover at the reclassifi cation date is recognized within net banking income over the instrument’s expected maturity, based on the effective interest rate at that date. After reclassifi cation, the assets are measured at amortized cost using the effective interest rate method and will be tested for impairment at each reporting date. Any resulting impairment losses will be recognized in income under “Cost of risk”.
The reserve to be recycled to the income statement in respect of instruments reclassifi ed from “available-for-sale fi nancial assets” to “loans and receivables ” remains fi xed at its level as of the reclassifi cation date. The amounts in question are recycled to income using the effective interest rate method over the residual life of the assets, or immediately if the instrument has been impaired or sold since reclassifi cation.
Available-for-sale fi nancial assets are non-derivative fi nancial assets that are not classifi ed as loans and receivables , heldto -maturity investments or fi nancial assets at fair value through profi t and loss. Assets in this category include Natixis’ investments in non-consolidated companies. On initial recognition, available-for-sale fi nancial assets are measured at fair value including transaction costs. Subsequently, and at each reporting date, the assets are remeasured to fair value based on the bid price for listed instruments.
Determining whether there is objective evidence of impairment is based on a multi-criteria approach and independent expert opinions, particularly in the case of debt instruments. Evidence of impairment includes: a for debt instruments: default on interest or principal payments, existence of mediation, warning or legal reorganization procedures; counterparty bankruptcy and any other indicator pointing to a material decline in the counterparty’s financial position, such as losses on completion projected by discounted cash flow models or stress tests; a for equity instruments (excluding investments in unlisted companies): indications suggesting that the entity is unlikely to recover all or part of its initial investment. Securities presenting an unrealized capital loss of over 30% on their face value, or presenting an unrealized capital loss for a period of at least six months, are systematically tested for impairment. The test involves a qualitative analysis considering a variety of factors such as share price performance over a given period or information relating to the issuer’s financial position. Where necessary, an impairment loss is recognized based on the market price at the reporting date. Irrespective of this analysis, an impairment loss is systematically recognized when securities present an unrealized capital loss of over 50% at the reporting date, or an unrealized capital loss on their face value for a period of at least 24 months; a for investments in unlisted, non-consolidated companies: unrealized capital losses of over 20% on their face value for a period of more than 18 months, or significant changes in the technological, market, economic or legal environment suggesting that the amount invested in the equity instrument may not be recoverable; a for shares in venture capital funds (FCPR), net asset value alone is not enough to determine whether there is any evidence that the initial investment might not be recovered. This is because net asset value during the investment phase is reduced by start-up costs (structuring and brokerage fees, etc.). Accordingly, for investments of this type which are not quoted on an active market, the following impairment principles apply: j no impairment is recognized if, at the reporting date, the position and results of the fund are in line with the business plan, j if this is not the case, the business plan is to be revised in order to determine whether or not the securities should be impaired.
(ii) any initial direct costs of the lessor i.e. the costs incurred specifically by the lessor during the set up of the leasing contract. These two items form the initial value of the asset.
IAS 17 requires that unguaranteed residual value 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 (revised depreciation schedule) and any reduction in respect of amounts accrued is recognized immediately.
Provisions for fi nance leases are determined using the same method as that described for loans and receivables .
Assets provided under operating leases are shown in the balance sheet under property, plant and equipment or intangible assets in the case of equipment leases, and investment property in the case of property leases. Lease income from operating leases is recognized in the income statement on a linear basis over the lease term, under “income or expenses from other activities.”
5.3 - Credit risk on assets classified as loans and receivables
The impairment loss is recorded against the line on which the asset was initially shown for its net amount. Impairment charges and reversals are recorded in the income statement under cost of risk.
For the other two risk classes (industry and geographical risk), objective evidence of impairment is based on in-depth analysis and monitoring of business sectors and countries. Objective evidence of impairment generally comprises a range of micro or macroeconomic indicators specifi c to the sector or country concerned.
For geographical risk, the analysis takes into account the sovereign rating, which itself includes a number of inputs such as the country’s political situation, its ability to withstand extreme stress, economic fundamentals (e.g., GDP per capita, external debt ), government effi ciency, economic performance and economic outlook. In turn, each of these inputs is itself measured by one or more indicators. Analyses also draw on information published by major rating agencies for country and sovereign risk in order to establish the thresholds for assessing a given situation and the health of the country’s banking system. Qualitative information from specialist independent agencies is also considered.
Outstanding placed under credit watch, identifi ed as in default within the meaning of Basel II, are collectively assessed for impairment provided they are not assessed for impairment on an individual basis.
Where necessary, Natixis calls on the opinion of experts to adjust the results of this calculation to the Natixis’ actual risks.
Natixis Capital Markets North America documents overall hedging of its interest rate risk in accordance with fair value hedging rules. To account for these transactions, the subsidiary applies the carve-out provisions of IAS 39 as adopted by the European Union. The accounting treatment of derivative fi nancial instruments designated for accounting purposes as structural fair value hedges is similar to that applied to fair value hedging derivatives. Changes in the fair value of portfolios of hedged instruments are reported on a specifi c line of the balance sheet (“Revaluation adjustments on portfolios hedged against interest rate risk”), with a corresponding entry in income.
Changes in the fair value of derivatives relating to the effective and ineffective portion of fair value hedges are recorded in income.
Symmetrically with changes in the fair value of the hedged items.
On initial recognition, fair value is the price paid or received. On subsequent reporting dates, fair value is estimated on the following basis: a if the instrument is quoted on an active market, fair value is 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; a if the market for a financial instrument is not active, fair value is established using various valuation techniques. Valuation techniques may refer to observable data from recent transactions, the fair value of similar instruments, discounted cash flow analysis and option pricing models, proprietary models in the case of complex products or unobservable data when no pricing or market data are available. The fair values obtained using these models may be adjusted, depending on the instruments concerned and the associated risks, to take account of factors such as the bid-ask spread and modeling risk.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts
Inputs relating to all such instruments were demonstrated to be observable. From a methodological perspective, observability is based on four inseparable criteria: a inputs are derived from external sources (a recognized contributor wherever possible); a they are updated periodically; a they are representative of recent transactions; a their characteristics are identical to the characteristics of the transaction. If necessary, a proxy may be used, provided that the relevance of such an arrangement is demonstrated and documented.
c) Level 3: instruments measured using models that are not commonly used and/or that draw on unobservable inputs
Under IAS 39, day one profi t should be recognized only if it is generated by a change in the factors that market participants would consider in setting a price, i.e., only if the model and parameters input into the valuation are observable.
If the selected valuation model is not recognized by current market practices, or if one of the inputs used is not observable, the trading profi t on the trade date cannot be recognized immediately in the income statement, but is taken to income on a straight-line basis over the life of the transaction or until the date the inputs become observable. Any losses incurred at the trade date are immediately recognized in income.
In the absence of observable market data, directly-held ABS CDO portfolios with subprime exposure were valued based on estimates of losses on completion made by Workout Portfolio Management (GAPC) teams supervised by Risk Management. This was also the approach adopted at the previous reporting date. At December 31, 2009, the methodology used was fi netuned by adopting a cash fl ow model identical to the model used to value direct US RMBS exposures for all US RMBS standing as underlyings for ABS CDOs.
a Non-subprime underlying assets held (excluding US RMBS) are valued using a discount matrix taking into account transaction types, ratings and vintages.
Further writedowns were taken against CDS contracted with credit enhancers during the year, refl ecting the deterioration in the ratings of these counterparties and the wider spreads for the assets they guarantee. These writedowns were calculated by assuming a standard rate of recovery of 10% for unrealized capital losses on the underlying assets concerned (rate justifi ed by the low capitalization of monoline insurers given their risk exposures) and a probability of default calibrated to the credit risk associated with the credit enhancer.
The probability of default for three monoline insurers (AMBAC, MBIA and CIFG) was revised upwards in the third quarter of 2009 to refl ect the escalation in the associated counterparty risk.
At October 1, 2008, the entire portfolio of European RMBS rated AAA or AA and classifi ed at fair value through profi t and loss or available-for-sale was reclassifi ed within “loans and receivables ” under the conditions set out in the amendment to IAS 39 and IFRS 7. However, the valuation model used to measure the fair value disclosed in the notes to the fi nancial statements remains the same as that applied to the European RMBS portfolio classifi ed at fair value through profi t and loss.
The same model was applied as in previous years, based on detailed knowledge of the characteristics of transactions and an assessment of credit risk using several inputs, including an average cumulative default rate of 30%, a recovery rate of 65%, and a default distribution of 0.8.
At October 1, 2008, the majority of unhedged CLO portfolios classifi ed as at fair value through profi t and loss or availablefor -sale, were reclassifi ed to “Loans and receivables ” under the conditions set out in the amendment to IAS 39 and IFRS 7. However, the valuation model used to measure the fair value of these instruments disclosed in the notes to the fi nancial statements remains the same.
The fair value of investment property (excluding investment property held by insurance companies) is determined by reference to the capitalization of rents, a method widely used by real estate professionals. The capitalization rate applied to the property depends on a number of factors such as location, the quality and type of building, use, type of ownership, quality of lessee and characteristics of the lease, the interest rate and competition in the real estate market.
Instead, the premium is initially recognized on the accruals line and taken to income over the same period, in the same amount and on the same line as: a reversals of the provisions for impairment (in cost of risk); a the deferred recognition of the discount arising on October 1, 2008 on assets reclassified within “loans and receivables ” at that date pursuant to the amendment to IAS 39 and IFRS 7 published on October 13, 2008.
5.8 - Property, plant and equipment, intangible assets (excluding goodwill) and investment property
After initial recognition, assets are measured at cost less accumulated depreciation, amortization and impairment losses. Investment property held by insurance companies is measured at fair value through profi t and loss in accordance with IAS 40 and IFRS 4.
Non-current assets that Natixis intends to sell within a period not exceeding 12 months and for which it is actively seeking a buyer are identifi ed separately in the balance sheet under “noncurrent assets held for sale” (see Note 2.7). Assets reclassifi ed to this category are no longer depreciated or amortized as from the reclassifi cation date. An impairment loss is recognized if their carrying amount is higher than their fair value less costs to sell. Associated liabilities are also identifi ed on a separate line of the balance sheet.
5.10 - Financial liabilities at fair value through profit and loss
IAS 39 requires the derecognition of all or part of a fi nancial asset if the contractual rights to the cash fl ows from the fi nancial asset expire, or if these contractual rights or substantially all of the risks and rewards of ownership are transferred.
Continuing involvement is evidenced by the existence of contractual conditions such as: a an option or obligation to repurchase the assets transferred; a collection of financial compensation linked to the performance of the asset transferred.
No provisions were recognized in respect of future operating losses or major repairs. There are no contingent assets or liabilities.
In accordance with IAS 19, employee benefi ts are classifi ed in one of four categories: a “short-term employee benefits”, such as wages, salaries and social security contributions, paid annual leave, profitsharing, matching employer contributions to employee savings plans, and bonuses (if payable within 12 months of the end of the period); a “termination benefits”, which should be recognized when the entity is demonstrably committed to terminate the employment of an employee before the normal retirement date, or provide termination benefits as a result of an offer made in order to encourage voluntary redundancy; a “post-employment benefits”, such as pensions, other supplementary retirement benefits applicable to the banking industry, end-of-career awards and other contractual benefits payable to retirees; a “other long-term employee benefits”, including long-service awards and deferred compensation payable in cash 12 months or more after the end of the period.
In accordance with the principles of recognition set out in IAS 19, Natixis has identifi ed the following types of postemployment benefi t: a defined contribution plans, under which an entity has no obligation to pay a specified benefit amount; a defined benefit plans, under which Natixis has a legal or constructive obligation to pay a specified benefit amount.
A provision is set aside for defi ned benefi t plans based on an actuarial assessment of the benefi t obligation using the projected unit credit method. This method draws on demographic and fi nancial assumptions. The value of any plan assets is deducted from the obligation to determine the provision to be recognized on the balance sheet. An actuarial assessment is carried out on a regular basis by independent actuaries, and the actuarial assumptions used are reviewed each year. Differences resulting from changes in actuarial assumptions and experience adjustments (impact of differences between actuarial assumptions and actual experience) give rise to actuarial gains and losses.
The amount recognized as a provision in the balance sheet represents the present value of the obligation under defi ned benefi t plans: a minus any past service cost not yet recognized in income; a plus or minus any actuarial gains or losses arising from: j experience adjustments linked to demographic variables; j changes in actuarial assumptions, j differences between the actual return and expected return on plan assets, a minus the market value of plan assets.
The defi ned benefi t expense for the year recognized within payroll costs includes: a benefits vested by beneficiaries during the period; a the interest cost reflecting the impact of unwinding the discount on the obligation; a the expected return on plan assets; a amortization of actuarial gains and losses and past service costs; a the effects of plan curtailments and settlements.
Natixis used the option available under IFRS 1 to recognize all unrecognized actuarial gains and losses in equity in its opening IFRS balance sheet at January 1, 2004.
Up to December 30, 2009, deeply subordinated notes and preference shares were treated as debt based on the criteria set out in IFRS. This classifi cation refl ected the fact that the issue (i) contained a clause requiring the entity to pay a coupon in the event of consolidated available income, and (ii) was linked to other similar-ranking issues also requiring the entity to pay a coupon. On December 31, the issue agreement was renegotiated and the payment of the coupon is now at the issuer’s discretion.
Following the legal restructuring of the aforementioned issue on December 30, 2009, these issues were reclassifi ed as equity as at December 31, 2009 since there was no longer any contractual obligation to pay interest.
These two adjustments maintain the fair value of the sharebased payment within the meaning of IFRS 2 at the level it stood before detachment of the preferential subscription rights. Consequently, the expense recognized under IFRS in respect of these plans was not adjusted.
On November 12, 2007, Natixis’ Executive Board awarded 60 bonus Natixis registered shares on a fair and equitable basis to each employee of Natixis, the Banque Populaire and Caisse d’Epargne groups. The bonus share plan covers employees in France with at least three months’ service at the grant date, who hold an employment contract with one of the following: a Natixis; a BPCE; a credit institutions affiliated to either of these central institutions; a entities in which 50% or more of the capital is directly or indirectly, exclusively or jointly held by Natixis, BPCE or an affiliated credit institution.
This bonus share award scheme is governed by the French 2006 law on the fi nancing of employee profi t-sharing and share ownership, and was approved by Natixis’ Extraordinary General Meeting of May 24, 2007.
At the grant date, each eligible employee is entitled to receive 60 shares after two years provided that they continue to be employed by the Company at that date. The statutory two-year vesting period begins at the grant date. During this period, employees do not own the shares. They have a nontransferable right until the end of the vesting period, but no voting or dividend rights; a November 12, 2009: vesting of the shares provided that employees are still with the Company, and start of the two-year lock-up period.
BCPE bears the cost of expenses incurred in setting up and running bonus share plans in proportion to the number of shares awarded to its employees (this basis is also used to determine the allocation of most rebilled costs). The costs payable by each entity essentially represent the purchase cost of the shares.
Consequently, Natixis’ income statement only includes within expenses the value of the benefi ts granted to Natixis employees. In accordance with IFRS 2, the cost of the benefi ts was measured based on the share price at the grant date, less the present value of dividends to which employees were not entitled during the vesting period. The amount is recognized in payroll costs over the two-year vesting period.
In accordance with IFRS 2, this new award increases the plan’s aggregate fair value. The fair value of the commitment corresponding to the 33 additional shares awarded to Natixis employees is added to the expense already recognized under IFRS 2 in respect of the initial award of 60 bonus shares.
In accordance with IFRS 2, the fair value of the commitment corresponding to the 93 shares awarded, based on the share price at the grant dates (November 2, 2007 for the award of 60 shares and December 8, 2008 for the award of the additional 33 shares) was recognized within payroll costs over the period during which the rights vest, ended November 12, 2009.
Portion of d eferred compensation settled in cash and indexed to the price of the Natixis share
Under IFRS 2, the services acquired and the liability incurred are measured at fair value. Until the liability is settled, debt is remeasured at each reporting date and at the date of settlement, with any changes in fair value recognized in income for the period. The remeasurement of the liability at the reporting date will take into account any changes in the value of the underlying shares, as well as whether or not the presence conditions and performance criteria have been met.
Since the compensation is payable only when specifi ed presence conditions are met, the corresponding compensation expense is recognized on a straight-line basis over the vesting period.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts services received is calculated by reference to the fair value of the shares at the grant date, less the present value of dividends forfeited by employees during the vesting period, taking into account the presence conditions.
The expense is recognized on a straight-line basis over the vesting period. The fi rst date for recognizing the expense is the beginning of the period in which the employees start to provide the related services, i.e., January 1, 2009.
The expense will be adjusted to take account of any rights lapsed.
All treasury shares held by Natixis are deducted from equity regardless of the purpose for which they are acquired/held. Any gains or losses recognized in the parent company fi nancial statements in respect of the sale, measurement or impairment of treasury shares held for trading or available-for-sale are eliminated in the consolidated fi nancial statements through equity.
In accordance with IAS 32, minority interests in the equity of dedicated mutual funds (OPCVM) represent a fi nancial liability recognized under “Financial liabilities at fair value through profi t and loss”.
Subsequently, fi nancial guarantees are stated at the higher of: a the amount initially recognized upon inception less, where appropriate, the amount of amortization recorded in line with the principles outlined in IAS 18 “Revenue”. This amortization represents the deferred recognition of the fees received over the period covered by the guarantee; a the value determined under IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, which is the amount that the entity would normally pay to settle the obligation or to transfer it to a third party.
However, given the preponderant impact of operational risk on the fair value of the guarantee, guarantees granted to mutual funds are treated as fi nancial guarantees.
All fi nancing commitments granted by Natixis give rise to loans granted at market rates at the grant date. The drawn-down portion of these commitments is classifi ed in “Loans and receivables ”. These commitments represent contingent liabilities and are recorded in accordance with IAS 37. At inception, they are not recognized in the balance sheet. A provision is recognized in liabilities if the cost of the commitment exceeds the associated revenue.
In preparing its fi nancial statements, Natixis is required to make certain estimates and assumptions based on available information that is likely to require expert judgment. These estimates and assumptions constitute sources of uncertainty which may affect the calculation of income and expenses in the income statement, the value of assets and liabilities in the balance sheet, and/or certain disclosures in the notes to the fi nancial statements. The fi nancial crisis has led to greater use of accounting estimates. As a result, future results of certain operations may differ signifi cantly from the estimates used in the fi nancial statements at December 31, 2009.
The fair value of hybrid market instruments not traded on an active market is calculated using valuation techniques. Valuations produced using valuation models are adjusted, depending on the instruments concerned and the associated risks, to take account of the bid and offer price for the net position, modeling, counterparty and input risks. The fair values obtained from these methods may differ from the actual prices at which such transactions might be concluded in the event of a sale on the market.
All goodwill is assigned to a CGU so that it may be tested for impairment. The tests conducted by Natixis consist of comparing the carrying amount of each CGU (including goodwill) with its value in use. Value in use is calculated by discounting annual free cash fl ows to infi nity (excluding the Private Equity CGU
which is stated at fair value). Use of the discounted cash fl ow method involves: a estimating future cash flows. Natixis has based these estimates on forecasts included in its business units’ medium-term plans spanning five years; a projecting cash flows for the last year of the plan to infinity, at a rate reflecting the expected annual growth rate; a discounting cash flows at a specific rate for each CGU.
Insurance technical reserves are calculated using estimates and assumptions that may lead to adjustments in amounts reported over the subsequent period: a for personal risk insurance, claims reserves are calculated by modeling claims experience; a for life insurance, technical reserves are computed based on economic and financial assumptions, mortality and morbidity tables, and behavioral statistics, for example concerning surrenders; a for credit insurance, claims reserves include an estimate of claims reported but not settled at the reporting date. Besides this amount of claims payable, a provision is set aside for unknown claims, calculated on a statistical basis by reference to the final amount of claims to be paid following settlement of risks and any debt recovery measures. Provisions for debt recovery procedures, representing estimates of expected recoveries, are calculated by applying a terminal recovery rate to all subscription periods not yet settled.
Deferred tax assets are only recognized if the tax entity concerned is likely to generate suffi cient taxable income in the foreseeable future against which temporary differences or tax loss carryforwards can be utilized.
Diluted earnings/(loss) per share corresponds to net income/ (loss) for the period attributable to the Group, divided by the weighted average number of shares, adjusted for the maximum impact resulting from the conversion of dilutive instruments into ordinary shares. Stock options issued are taken into account in calculating diluted earnings/(loss) per share. The conversion of these instruments does not impact net income/(loss) used to calculate diluted earnings/(loss) per share.
Net income/(loss) attributable to shareholders (in millions of euros) (a) (1,732)
Average number of ordinary shares issued and outstanding over the period 2,908,137,693 1,794,666,986 1,220,693,389
Average number of treasury shares issued and outstanding over the period 10,719,981 8,642,611 1,298,047
Number of potential dilutive shares resulting from stock option plans 6,551,256 5,760,088 5,446,385
At December 31, 2009, fi nancial assets at fair value primarily comprised securities and derivative instruments.
Securities designated at fair value through profi t and loss 6.1.1.3 26,334 35,894
Loans and receivables designated at fair value through profi t and loss
Securities designated at fair value through profi t and loss 7,091 3,583 10,674 of which: Private Equity securities 60 1,681 1,741
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.1.1.2 - Loans and receivables designated at fair value through profi t and loss and credit risk
Financial assets are designated at fair value through profi t and loss when this choice provides more pertinent information or when these instruments incorporate one or more signifi cant and separable embedded derivatives.
Other assets 10,963 10,963 6.1.2 - FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT AND LOSS
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.1.2.2 - Conditions for classifi cation of fi nancial liabilities designated at fair value through profi t and loss
(in millions of euros) Carrying amount Accounting mismatch Managed on a fair value basis Embedded derivatives
Other liabilities 6,329 6,329 6.1.3 - DERIVATIVES INSTRUMENTS NOT ELIGIBLE FOR HEDGE ACCOUNTING
Fair value hedging is used to hedge changes in the fair value of fi xed-income securities on an individual basis, and also as a structural hedge of Natixis Capital Markets North America’s interest rate risk.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.3 - Available-for-sale financial assets
Available-for-sale fi nancial assets are subject to impairment testing at the end of each reporting period (i.e. every quarter). When there is objective evidence of impairment and a reduction in fair value has previously been recognized in equity, the aggregate impairment loss is removed from equity and taken to income.
Loans outstanding 62 a Loans and receivables 62 a Accrued interest a Fixed-income 24,807 25,141 a Variable-income (a) 7,603 6,233 a Accrued interest 449 492
6.4 - Loans and receivables 6.4.1 - LOANS AND RECEIVABLES TO BANKS
The fair value of loans and receivables to banks totaled €67,408 million at December 31, 2009 compared with €65,337 million at December 31, 2008.
Provisions covered 75% of outstanding non-performing loans and receivables to banks at December 31, 2009, compared with 54% at December 31, 2008.
TOTAL PERFORMING LOANS 68,653 65,381 6.4.2 - LOANS AND RECEIVABLES TO CUSTOMERS
Provisions covered 36% of outstanding non-performing loans and receivables to customers (excluding guarantees but including reclassifi ed segmented assets) at December 31, 2009, compared with 69% at December 31, 2008.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.4.2.2 - Customer lease fi nancing
Customer lease fi nancing outstandings 3,782 3,784 7,566 3,489 3,888 7,378
Provisions for impairment of non-performing balances (55) (70) (125) (42) (55) (97)
The fair value of held-to-maturity fi nancial assets totaled €5,761 million at December 31, 2009 versus €6,492 million at December 31, 2008.
No fi nancial assets were reclassifi ed in 2009 by Natixis pursuant to the IASB’s “Reclassifi cation of fi nancial assets” amendment to IAS 39 and IFRS 7 published on October 13, 2008.
6.6.2 - INFORMATION ON FINANCIAL INSTRUMENTS RECLASSIFIED AS AT OCTOBER 1, 2008
Pursuant to the options provided for by the IASB’s amendment to IAS 39 and IFRS 7 published on October 13, 2008, Natixis reclassifi ed the following items within “Loans and receivables ” as at October 1, 2008: a €8.8 billion relating to the fair value of assets previously classified as “Financial assets at fair value through profit and loss – Trading”; a €2.8 billion relating to the fair value of assets previously classified within “Available-for-sale financial assets”.
Changes in fair value that would have been recognized in income in respect of assets previously classifi ed at fair value through profi t and loss
These instruments continue to be disclosed in the consolidated balance sheet in accordance with their original classifi cation.
Other 1,827 6.6.4 - FINANCIAL ASSETS RECEIVED AS SECURITY AND ABLE TO BE SOLD OR REUSED AS SECURITY
The table below provides, by type of fi nancial instrument, an analysis of the age of fi nancial assets which past due but not impaired at the reporting date. It does not take into account any portfolio impairment losses which may be assessed.
Amounts less than 90 days past due represent 57% of the total.
6.6.8 - FAIR VALUE OF FINANCIAL ASSETS CARRIED AT FAIR VALUE IN THE BALANCE SHEET
In such cases, no gains or losses may be recognized on initial recognition. Any day-one margin must, in this situation, be deferred over the period during which the inputs are unobservable.
The fair value of these fi nancial assets is broken down according to the hierarchy of inputs used to value these assets as set out in the March 2009 amendment to IFRS 7, effective as at January 1, 2009.
The different levels in the fair value hierarchy are set out in Note 5.6 “Fair value of fi nancial instruments”.
The “Fair value based on listed prices” column shows the fair value of quoted securities and derivatives traded on organized markets.
The “Fair value based on valuation techniques” column includes the following observable inputs: a the fair value of over-the-counter derivatives. For most of these instruments, documentation exists demonstrating that the techniques are commonly used by market participants and that the parameters are observable; a the fair value of complex instruments and/or instruments with long-term maturities valued based on internal pricing models (which may or may not be commonly used) and using market inputs based on observable data; a units held in securitization transactions for which no market price was available at December 31 and which were therefore valued using the valuation techniques described in Note 5.6.
Financial assets at fair value through profi t and loss - Trading 2,714 540 (2,535)
Derivative instruments not eligible for hedge accounting (positive fair value) 989 (2,108)
Financial assets designated at fair value through profi t and loss 1,780 35 (17)
Other fi nancial assets designated at fair value through profi t and loss 876 30 (17)
Other reclassifi cations to level 3 refl ect presentation adjustments with regard to December 31, 2008 and concern mainly securities hedged by monoline insurers.
(1) Representing the standard price spread used by consensus analysts to assess the inputs (TOTEM, etc.).
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.7 - Deferred tax assets and liabilities
(a) Positive amounts represent sources of deferred tax giving rise to deferred tax assets, while negative amounts represent sources giving rise to deferred tax liabilities.
(b) Including collective provisions and provisions for the impact of discounting specifi c provisions.
This caption corresponds to technical accounts, details of which are given below: 6.8.1 - OTHER ASSETS AND LIABILITIES
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.8.2 - ACCRUAL ACCOUNTS
Other accrual accounts 7,558 5,052 6.8.2.2 - Accrual accounts (excluding insurance) - Liabilities
Accrued charges 987 1,348 6.8.2.2.1 - Restatement of day one P&L
The table below shows the deferred day-one margin on instruments priced using valuation techniques drawing on unobservable inputs or market models not commonly used classifi ed as level 3 in the fair value hierarchy, at the beginning and end of the period, along with changes during the period.
Deferred participation – debit balances 4 925 6.8.3.2 - Insurance accrual accounts - Liabilities
(a) Insurance company investments. Changes in fair value give rise to the symmetrical recognition of a deferred profi t-sharing reserve, equal to 92% of the related base amount on average (see Note 2.9).
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.10 - Assets obtained by taking possession of guarantees
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.12 - Deposits from banks and customer deposits
Deposits from banks and customer deposits are presented according to their nature, taking into account whether they are demand or time deposits. They are measured in accordance with IAS 39 within other fi nancial liabilities using the amortized cost method.
These debt securities are initially recognized at fair value, which is the issue price less transaction costs, and subsequently stated at amortized cost using the effective interest rate method to defer issue costs over the life of the securities.
The reserves for deferred profi t-sharing represent the portion of investment income attributable to policyholders, but not yet paid out.
Other technical reserves include reserves for fi nancial contingencies and for deferred acquisition costs.
Provisions for impairment deducted from assets 3,794 3,297 (1,323) (678) (57) (2) 63 5,096
Provisions for loans and receivables 2,690 2,649 (1,110) (623) (54) (121) 3,431
Provisions for employee benefi ts 257 52 (19) (13) (2) 275
Impairment and amortization of property, plant and equipment and intangible assets (8) 3 (5)
(c) Of which at December 31, 2009 (see Note 5.13): a €14.1 million relating to the work adjustment plan launched in 2008; a €28.1 million relating to the work adjustment plan launched in 2009.
(a) Subordinated debt issue agreements do not incorporate a clause providing for early redemption in the event that the covenants are not complied with.
(b) At December 31, 2009, all deeply subordinated securities and preference shares were reclassifi ed within equity (see Note 5.15) for a euro-equivalent amount of €6.2 billion. The difference between the value at which these instruments were recognized within liabilities (€6.6 billion) and their fair value was taken to income and represents a euro-equivalent gain of €418 million at December 31, 2009, included in net banking income. This reclassifi cation also led to the swaps used in designated fair value hedges of these liabilities to be disqualifi ed from hedge accounting. As a result, the fi nancial instruments were unwound, giving rise to balancing cash adjustments recognized in income for €61.8 million at December 31, 2009.
The fair value of dated subordinated debt at December 31, 2009 was €8,248 million (€13,631 million at December 31, 2008).
In July 2009, BPCE made a number of exchange offers involving securities issued by various Natixis entities (Natixis S.A., NBP Capital Trust I and NBP Capital Trust III). Within the scope of these transactions, BPCE offered holders of Natixis securities the possibility of exchanging their securities for new deeply subordinated securities issued by BPCE. BPCE therefore purchased Natixis securities for a nominal euro-equivalent value of €1,187 million, and subsequently sold them to Natixis for cancellation. The cancellation of these securities gave rise to a gain of €392 million, shown on the line “Other income from operations” in Natixis’ consolidated income statement, along with issue costs totaling €23 million.
Lastly, fi nancial instruments were unwound resulting in income of €92 million recognized in net banking income.
(c) Other changes refl ect: a the reclassifi cation of a euro-equivalent amount of €6.411 billion outstanding under perpetual deeply subordinated securities; a the reclassifi cation in equity of a euro-equivalent amount of €0.235 billion outstanding under preference shares; a the deconsolidation of Caceis for €95 million.
(a) SFEF issues for €847 million and US$4,313 million, and SPPE issues for €2,000 million in 2009.
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 6.18 - Fair value of financial liabilities carried at fair value in the balance sheet
IAS 39 establishes a hierarchy to be used in determining fair value: a the best estimate of fair value is the price quoted on an active market. A market is considered active if prices are readily and regularly available from an exchange, dealer, broker, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions; a failing this, fair value must be determined using valuation techniques. These techniques include recent transactions, reference to the fair value of another substantially identical instrument, discounted cash flow analysis, option pricing models and any other techniques commonly used by market participants.
When a valuation model is applied, it must make maximum use of market inputs. In the case of certain customized structured products, the valuation model sometimes incorporates unobservable inputs.
In such cases, no gains or losses may be recognized on initial recognition. Any day-one margin must, in this situation, be deferred over the life of the instrument.
The fair value of fi nancial liabilities carried at fair value on the balance sheet is broken down according to the hierarchy of inputs used to value the assets as set out in the March 2009 amendment to IFRS 7, effective as at January 1, 2009.
(in millions of euros) Liabilities Carrying amount Level 1 Level 2 Level 3
Other fi nancial liabilities issued for trading purposes 1,458 3 1,455
Securities designated at fair value through profi t and loss 41,336 41,336
The amounts in the notes to the fi nancial statements do not take into account day-one deferred margin, although this is measured using level 3 of the fair value hierarchy (see Note 6.8.2.2.1).
Other reclassifi cations refl ect amounts adjusted with respect to the published fi nancial statements at December 31, 2008.
Due and accrued interest on derivatives 1,363 (1,485) (122) 2,214 (2,532) (318)
Fiduciary or similar fees and commissions are those that result in assets being held or invested on behalf of personal customers, pension schemes or other institutions. In particular, trust transactions cover asset management and custody activities performed on behalf of third parties.
Financing, guarantee, securities, and derivative commitments (a) 139 (141) (3) 156 (24) 132
Hedging instruments include changes in the fair value of derivatives classifi ed as fair value hedges, including interest, plus the symmetrical revaluation of the items hedged. They also include the “ineffective“ portion of cash fl ow hedges.
Net gains/(losses) on fi nancial assets and liabilities excluding hedging instruments (1,329) (3,096)
Net gains/(losses) on fi nancial assets and liabilities held for trading (a) (905) (2,026)
Net gains/(losses) on other fi nancial assets and liabilities designated at fair value through profi t and loss (b) (478) (1,385)
(a) The “Net gains/(losses) on fi nancial assets and liabilities held for trading” line item includes: a the valuation of unhedged ABS CDOs with subprime exposure (see Note 5.6), resulting in the recognition of an expense totaling €392 million in 2009 (excluding the impact of the BPCE guarantee), for a net exposure of €883 million; awritedowns taken against the fair value of CDS entered into with monoline insurers (see Note 5.6), which led to an increase of €213 million in writedowns during 2009 (excluding the impact of exchange rate fl uctuations, commutations, and the BPCE guarantee), bringing cumulative writedowns to €1,741 million at December 31, 2009; the reversal of all outstanding collective provisions at December 31, 2008 totaling €300 million (excluding the impact of the BPCE guarantee).
aWritedowns taken against credit derivatives contracted with Credit Derivatives Product Companies (see Note 5.6), amounted to €63 million in 2009 (excluding the impact of the BPCE guarantee), bringing cumulative writedowns to €144 million for an economic exposure of €144 million at December 31, 2009.
At the same time, an amount of €203 million was added to the collective provision during the year (excluding the impact of the BPCE guarantee), bringing the cumulative balance to €393 million for an exposure of €524 million at December 31, 2009 and €2,015 million at the end of the previous reporting period.
(b) Net gains and losses include the valuation of the issuer spread on issues carried out by Natixis and designated at fair value through profi t and loss with a negative €248 million impact on income for the period (see Note 6.1.2.1).
This item also includes income and expenses relating to insurance activities, in particular life insurance premium income, paid benefi ts and claims, and changes in insurance liabilities.
Net charge to/reversal of insurance companies’ technical reserves (1,687) (1,687) (128) (128)
Other insurance income and expenses 7.5.2 4,905 (4,075) 830 4,491 (3,045) 1,446
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 7.5.1 - FINANCE LEASES
Other related income and expenses 155 (101) 54 138 (99) 39 7.5.2 - OTHER INSURANCE INCOME AND EXPENSES
FINANCIAL DATA 6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 7.6 - Operating expenses
The cost recognized in 2009 was €15.9 million for the portion paid in cah instruments indexed to the share price and €6.8 million for the portion settled in shares .
Pensions and other employee benefi ts 11.2.2 & 11.2.3 (131) (123)
(b) A net writeback of €130.7 million from the provision for the fi rst work adjustment plan launched in 2008 was recognized in 2009 to refl ect the payments already made in respect of the initial redundancies under the plan. A net charge of €28 million to the provision for the second job protection plan was recognized at December 31, 2009.
This fi gure refl ects the following items: a capital losses on the disposal of Caceis for €31 million; a capital gains on the disposal of Cerved for €19.7 million; a a provision for €26 million corresponding to the estimated cost expected to arise on the sale of a portion of the Natixis Private Equity (NPE) portfolio expected in first-half 2010.
Share of net income 7.9 - Gains or losses on other assets
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 7.10 - Reconciliation of the tax charge in the financial statements and the theoretical tax charge
+ Impairment of goodwill 9 73 - Share in income from associates (425) (484)
= Consolidated net income/(loss) before tax, goodwill amortization and share in income from associates (3,356) (3,843)
+ Losses for the period not recognized for deferred tax purposes (327) (932)
= Tax charge for the period 1,288 705 o/w: current tax 3 (103)
(a) The main deductions in respect of permanent differences in 2009 related to tax-exempt earnings of foreign subsidiaries based in Luxembourg and Belgium, fi scal amortization of goodwill in the US, and income from reclassifying subordinated debt within equity.
(b) The 2008 fi gure includes deferred tax assets for €135 million recorded by the New York branch, while the amount for 2009 refl ects carry-back income recorded by the parent company of the French tax consolidation group and US subsidiaries for €188 million and €51 million, respectively.
(c) Based on a detailed review of the strategy and in light of the GAPC asset guarantee granted by BPCE, the Group as a whole is expected to return to taxable profi t. The acquisition of minority interests in NGAM will also result in an enlarged tax consolidation group at January 1, 2010. Accordingly, a deferred tax asset of €1,285 million was recognized at December 31, 2009.
8.1 - Change in gains and losses recorded directly in equity
8.2 - Breakdown of tax on gains and losses recognized in equity
Revaluation of available-for-sale fi nancial assets 614 (19) 595 (1,101) 55 (1,046)
In 2009, Natixis carried out an in-depth review of its business lines. After considering the growth potential of each business line and its strategic fi t with Natixis’ other operations and with BPCE, Executive Management identifi ed three core businesses: a Corporate and Investment Banking, representing banking services for large companies and BPCE institutional investors; a Investment Solutions, including Asset Management, Life Insurance and Private Banking; a Specialized Financial Services, which includes Factoring, Lease Financing, Consumer Credit, Guarantees, Employee Benefits Planning, and Payment and Securities Services. These services are the key growth drivers for BPCE’s retail banking business going forward.
Coface and Private Equity businesses are now managed as fi nancial stakes as they present fewer synergies with Natixis’ other operations and with BPCE.
a Corporate and Institutional Relations ensures that Natixis maintains close ties with its customers both within and outside France, partnering them over time and leveraging its robust knowledge of numerous business sectors to optimize risk management.
a Sureties and Guarantees: this business line is operated by Natixis Garanties. The main services it provides are guarantees for mortgage loans granted to retail and business customers by the Caisses d’Epargne, and more recently the Banques Populaires networks, along with legal guarantees and bail bonds.
a Consumer Finance: this Natixis business line includes a broad range of activities throughout the value chain for revolving loans (marketing, origination, administrative management, out-of-court collection) and administrative management services for personal loans. These activities are operated by Natixis Financement, which carries and manages revolving loans granted by the Banques Populaires and Caisses d’Epargne networks, and manages personal loans granted by the Caisses d’Epargne.
a Employee Benefits Planning: (a comprehensive B2B employee benefits planning offering), Employee Share Ownership: keeping employee share accounts, fund administration and accounting, collective life insurance, special payment vouchers.
a Insurance: Natixis Assurances is a holding company for various operating insurance subsidiaries. It offers a comprehensive range of individual and collective life insurance, personal risk insurance and property and casualty insurance solutions. These diversified, customized solutions are designed for retail and small business customers, farmers, companies and associations.
a Private Banking: this business line encompasses wealth management activities in France and Luxembourg, financial planning solutions, and services for independent wealth managers. In 2009, Banque Privée 1818 emerged from the merger between Banque Privée Saint Dominique (BPSD) and Compagnie 1818 as a major player on the French market. Its clientele derives mainly from Caisses d’Epargne and Banques Populaires, and to a lesser extent from Natixis. Private Banking offers advisory services, financial planning and expertise, and fund management solutions.
The Private Equity business is carried out by several small investor teams within Natixis Private Equity (NPE). The teams have extensive expertise in equity fi nancing for generally unlisted small and medium-sized businesses within and outside France. NPE covers the entire private equity spectrum: development capital (equity fi nance for mature companies), leveraged buy-outs, venture capital for start-ups and innovative companies, Private Equity for international fi rms and funds of funds.
Its main activities are credit insurance, international factoring solutions, business information and ratings (solvency and marketing), receivables management (from issuance through to collection), and management of public procedures on behalf of the French State.
At the end of 2008, Natixis ring-fenced its most illiquid and/ or high-risk exposures within GAPC (Gestion Active des Portefeuilles Cantonnées, or Workout Portfolio Management) in its CIB division. Segregated assets include convertible arbitrage, complex equity and interest rate derivatives, trading correlation derivatives, structured fund-based derivatives, proprietary credit activities, residential ABS...
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts
The scope of activities covered by GAPC was fi nalized in 2009 and breaks down as: a GAPC 0 – Management; a GAPC 1 – Structured Credit Euro; a GAPC 2 – Structured Credit US; a GAPC 3 – Vanilla Credit; a GAPC 4 – Correlation trading; a GAPC 5 – Complex interest rate derivatives; a GAPC 6 – Convertible arbitrage; a GAPC 7 – Complex equity derivatives; a GAPC 8 – Fund-based structured products (formerly Alternative Assets).
Amid a prevailing climate of economic uncertainty, Natixis set up a guarantee mechanism in the third quarter of 2009 with BPCE. This mechanism is designed to offer protection against future losses and earnings volatility resulting from GAPC portfolios.
The above data are based on the accounting principles applied in accordance with IFRS as adopted by the European Union at December 31, 2008. It is presented in accordance with the new business organization adopted by Natixis’ new management team in 2009.
Assets at fair value through profi t and loss 118,500 7,889 105 1,742 52,944 46 181,226
Available-for-sale fi nancial assets 3,068 22,348 1,227 1,151 15 1,757 1,930 31,496
Available-for-sale fi nancial assets 5,840 18,294 2,078 1,100 15 2,011 415 29,753
Loans and receivables to customers 85,271 1,265 13,154 3,851 55 7,960 4,047 115,603
Financial liabilities at fair value through profi t and loss 221,211 137 720 39 65 52,512 696 275,380
Deposits from fi nancial institutions 56,282 768 9,780 2,868 226 25,490 1,186 96,600
Assets at fair value through profi t and loss 131,349 22,518 26,235 1 1,122 181,225
The information on risk management required under IFRS 7 is presented in sections 5.1 to 5.5 and 5.9 of the management report, and section 5.10 of Chapter V “Risk Management”.
The number of employees fell in 2009, refl ecting the impact of two work adjustment plans (PACEC): a the first plan for Natixis S.A. employees ran from September 2008 to the first half of 2009, and resulted in 800 redundancies; a the second plan ran from June 17, 2009 to December 31, 2009 and concerned a total of 250 employees from CIB and Eurotitres.
This plan is considered to fall within the scope of IAS 19 and is accounted for as a long-term benefi t. As the rights to such benefi ts vest over the period during which the related services are provided, the obligation representing the likely amount of benefi ts payable is recognized gradually over the vesting period. The calculation of the obligation takes into account actuarial assumptions regarding the likelihood that benefi ciaries will meet the presence conditions, and performance and exercise criteria. These assumptions are revised on a regular basis. The Company does not apply the “corridor” method, and all actuarial gains and losses are therefore recognized immediately in income. At the reporting date, the obligation represents an actuarial assessment carried out in the same way as for obligations under defi ned benefi t plans. The total cost recognized in respect of the retention plan in Natixis’ fi nancial statements at December 31, 2009 amounts to €11.7 million.
The portion of deferred variable compensation awarded to fi nancial market professionals in respect of the benchmark 2009 fi nancial year represents, on average, more than 50% of their total variable compensation, pursuant to the decree of November 5, 2009 and the professional standards adopted by the French Banking Federation on November 5, 2009.
This compensation will be settled in two ways: a one portion will be settled in cash instruments , indexed to the value of the Natixis share: one-third will be paid in March 2011, one-third in March 2012 and the last third in March 2013; a the other portion will be settled in Natixis shares: one-third in March 2011, one-third in March 2012, and the last third in March 2013.
The accounting treatment applied to deferred compensation is described in Note 5.17.
The estimated cost of the deferred compensation is recognized on a straight-line basis over the period during which benefi ciaries must be present according to the plan, starting at the beginning of the reporting period in which the employee begins to provide the related service i.e., January 1, 2009 for compensation awarded in respect of 2009. The estimated cost recognized in the 2009 fi nancial statements is: a €15.9 million for the portion settled in cash instruments indexed to the price of the Natixis share; a €6.8 million for the portion settled in Natixis shares.
Post-employment defi ned benefi t plans and other long-term employee benefi ts
Other long-term employee benefi ts comprise benefi ts other than post-employment and termination benefi ts not wholly due within 12 months of the end of the period in which employees have provided the related services.
During 2009, the following changes took place in the scope of benefi ciaries for Natixis’ benefi t plans: a following the exit of Caceis from the scope of consolidation, provisions are no longer accrued in Natixis’ balance sheet for the obligations relating to this entity. The resulting decrease in the obligation was €12.9 million at December 31, 2009; a on January 1, 2009, the employees of the former Compagnie 1818 were transferred to the benefit plan operated by Banque Privée Saint-Dominique (BPSD) following the legal merger of Compagnie 1818 (see Note 3). With effect from this date, the employees concerned are eligible for end-ofcareer awards, supplementary healthcare benefits and longservice awards offered to BPSD employees. This merger does not have a material impact on the amount of Natixis’ obligation at December 31, 2009.
Remaining average working lives of employees (in years) 13 13 15
Recognized actuarial gains and losses over the period 4 1 5
Change in obligation taken to income (1) 7 4 12 22
TOTAL BENEFIT OBLIGATION AT DECEMBER 31, 2009 167 168 42 12 389 * Including -€19 million relating to a funding surplus.
Transfers, curtailments and other g) Breakdown of assets held to fund post-employment benefi ts granted to employees
Impact on the present value of gross benefi t obligations at December 31 (9.66)% (9.74)% (6.50)% (1.94)%
Impact on the present value of gross benefi t obligations at December 31 1.56%
j) Analysis of sensitivity to assumptions applied to defi ned benefi t plans and other long-term employee benefi ts at December 31, 2009
Impact on present value of gross benefi t obligations at December 31 (1.16)%
Natixis grants stock options to certain of its employees. As required by IFRS 2, stock options granted after November 7, 2002 which have not yet vested at the reporting date are stated at their fair value on the grant date using the Black & Scholes model, and is charged to payroll costs over the vesting period with an adjustment to equity. The expense is revised at each reporting date and adjusted whenever subsequent information regarding the number of benefi ciaries alters the initial estimates of rights vested. Any adjustment required also affects both current and subsequent accounting periods.
Share price at grant date 2005 plan 2007 plan 2008 plan
Valuation method Black & Scholes Black & Scholes Black & Scholes
(b) Volatility was based on the historic volatility of the Natixis share and the estimated gap between historical and implicit volatility for companies with a similar profi le.
On November 12, 2007, Natixis’ Executive Board awarded 60 bonus Natixis registered shares on an equitable basis to each employee of the Natixis, the Banque Populaire and the Caisse d’Epargne groups. The bonus share plan covers employees in France with at least three months’ service at the grant date with one of the following: a Natixis; a BPCE; a credit institutions affiliated to either of these central institutions; a entities in which 50% or more of the capital is directly or indirectly, exclusively or jointly held by Natixis, one of the central institutions or an entity affiliated to these institutions.
A total of 6,084,120 shares were awarded to 101,402 employees on November 12, 2007.
The plan consists of three stages spanning four years: a November 12, 2007: grant date and start of the two-year vesting period.
At the grant date, each eligible employee is entitled to receive 60 shares after two years provided that they continue to be employed by the Group at that date. The statutory two-year vesting period begins at the grant date. During this period, employees do not own the shares. They have a non-transferable allocation right until the end of the vesting period, but no voting or dividend rights.
In accordance with IFRS 2, the fair value of the commitment corresponding to the 93 shares awarded, based on the share price at the grant dates (November 12, 2007 for the award of 60 shares and December 8, 2008 for the award of the additional 33 shares) was recognized within payroll costs over the period during which the rights vest, ended November 12, 2009.
J PAYMENT PLANS SETTLED IN CASH AND INDEXED TO THE NATIXIS SHARE PRICE
J anuary 2009 – M arch 2011 M arch 2011 – M arch 2012
Plan year Date of allocation Number of units allocated Period of acquisition Estimated share price
J VALUATION BASE USED TO ACCESS THE EXPENSE OF THE TWO PLANS
12.3 - Equity instruments issued 12.3.1 - PERPETUAL SUBORDINATED NOTES AND PREFERENCE SHARES
As described in Note 5.15 “Distinction between debt and equity”, as at December 31, 2009 perpetual deeply subordinated notes and preference shares previously classifi ed as debt instruments are treated as equity instruments and are shown on the “Share capital and reserves” line of the consolidated balance sheet.
Since the dividend payment clauses were only modifi ed as at December 31, 2009, these issues continued to be shown within fi nancial liabilities up to December 30, 2009 inclusive. Accordingly, interest paid or accrued on these instruments in 2009 is shown in interest expenses in Natixis’ consolidated income statement for the year ended December 31, 2009.
Changes in these items over the period are set out in Note 6.16 “Subordinated debt”.
Natixis repaid €1 billion of this amount on November 13, 2009.
The liquidity ratio is designed to ensure that liquid assets with maturities of less than one month are equal to or exceed liabilities falling due within the same period. The liquidity ratio is obtained by dividing assets with a maximum maturity of one month by liquid liabilities with the same maturity.
The minimum liquidity ratio under prudential rules is 100%. At December 31, 2009, Natixis’ liquidity ratio was 106%.
Procedures for managing large exposures are designed to prevent excessive concentration of risks on a single benefi ciary. The requirement is based on a two-fold obligation to be respected at all times: (i) the aggregate risk exposure arising on a single benefi ciary must not exceed 25% of the Bank’s regulatory capital, and (ii) risk exposure relating to entities individually representing more than 10% of the Bank’s regulatory capital must not exceed 800% of its regulatory capital. Natixis complied with this requirement during 2009.
To banks 1,999 4,674 a Confi rmation of documentary credits 967 1,042 a Other guarantees 1,032 3,632
In accordance with IAS 39.2, fi nancing commitments outside the scope of IAS 39 are recognized in accordance with IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”.
A fi nancing commitment given is a contingent liability, defi ned by IAS 37 as: a a potential obligation arising from past events whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity; or a a present obligation arising as a result of past events but is not recognized because: j it is not likely that an outfl ow of economic benefi ts will be required to settle the obligation, or j the amount of the obligation cannot be measured with suffi cient reliability .
To customers 46,721 46,680 a Documentary credits 2,027 1,709 a Other confi rmed lines of credit 37,647 38,228 a Other commitments 7,047 6,743
Natixis sets up securitization transactions on behalf of its customers and investors using specifi c conduits. Natixis extends liquidity lines to fi ve of these vehicles, including two ABCP conduits (Versailles and Elixir). These lines totaled €3.3 billion at December 31, 2009.
Natixis also extended liquidity lines to several funds arranged by third parties (Thésée, LMA S.A., Landale, Northwest, Cedulas and Banca Popolare d ell’ Al to ) for a total of €952 million.
At December 31, 2009, none of these vehicles was consolidated as Natixis does not exercise control and is not exposed to the majority of the risks and rewards associated with the securitized assets.
On December 17, 2009, the Board of Directors of Natixis decided to increase the share capital of Coface in an amount of €175 million. The share capital increase will take place before the end of the fi rst quarter of 2010, and follows the €50 million capital injection granted to Coface by Natixis on June 26, 2009. These two transactions, coupled with the sharp rise in claims recorded by Coface in second-half 2009, will fully offset Coface’s net loss for 2009 and refl ect Natixis’ support to its subsidiary.
The sale is expected to take place in the fi rst half of 2010.
FINANCIAL DATA6 Consolidated fi nancial statements and notes // Notes to the consolidated accounts 15.2 - Related parties
The main transactions between Natixis and related parties (BPCE and subsidiaries, Banque Populaire including Banque Populaire banks and their subsidiaries, Caisse d’Epargne, including Caisses d’Epargne banks and their subsidiaries, investments consolidated proportionally with respect to the portion not eliminated on consolidation and all affi liates consolidated by the equity method) are described below: (in millions of euros)
Net gains or losses on fi nancial instruments at fair value through profi t and loss (418) 334 851
Revaluation adjustments on portfolios hedged against interest rate risk 52 194
Financial liabilities at fair value through profi t and loss 3,201 895
Net gains or losses on fi nancial instruments at fair value through profi t and loss 329 99
Writedown, amortization and impairment of property, plant and equipment and intangible assets (235) (230)
Net income (group share) for 20% shareholdings in CCIs 194 134
Restatements on consolidation: a Profi t from the increase in the share in income 27 60 a Other restatements (9) (2)
(a) It was decided at the Board Meeting of December 17, 2009, that no attendance fees would be paid to Directors in respect of 2009.
Total gross compensation paid to executive corporate offi cers was as follows: (in euros) 12.31.2009 12.31.2008
Jean Marc Moriani, member of Natixis’ Executive Board (executive corporate offi cer from January 1 to May 13, 2009 and employment contract) 1,013,101 828,333
Laurent Mignon, Chief Executive Offi cer (from May 13, 2009) 510,119 -
François Ladam, member of Natixis’ Executive Board (no corporate offi ce in 2009) - 644,124
No stock options previously granted to executive corporate offi cers vested in 2009 and 2008.
Between November 17, 2006 and December 15, 2008, Natixis provided a collective retirement benefi ts scheme “analogous” to the group scheme applying to the CEOs of Banque Populaire banks.
This collective retirement benefi ts scheme did not comply with new laws and the AFEP-Medef recommendations after October 2008 and it was agreed to close the scheme to new entrants as from December 15, 2008.
Natixis’ Chief Executive Offi cer currently enjoys the retirement benefi ts plan offered to upper management offi cers ( “hors classifi cation“)
a Social security system: tranche A; a Mandatory ARRCO contributions in tranche A (overall rate 7.50%); a Additional ARRCO contributions in tranches A (6.563%) and B * (5.625%); a AGIRC contributions in tranches B (20.30%) and C (20.30%).
The Supervisory Board at its December 18, 2008 Meeting agreed that no severance payments should be paid to the departing Chairman and Chief Executive Offi cer.
The insurance industry companies within Natixis’ scope of consolidation are: Coface and its subsidiaries (credit insurance, business information and debt management services), Natixis Assurances and its subsidiaries (life insurance, personal risk insurance, property and casualty insurance), Foncier Assurances (life insurance) and Natixis Garanties (legal guarantees and bonds).
The following table shows a reconciliation between insurance companies’ fi nancial statements as presented and how they would translate into banking format.
As regards net banking income, in the interest of consistency, insurance income and expenses that are similar to banking income and expenses (principally interest and fees and commissions) are reclassifi ed under the corresponding line items in the banking format. Technical reserves and claims expenses are charged to net banking income rather than recognized as cost of risk.
Change in fair value of investments carried at fair value through profi t and loss 570 570 570 570
Income and expenses net of reinsurance transfers 38 38 38 38
Other recurring operating income and expenses (414) (58) (356) (414) (414)
Net gains or losses on available-for-sale fi nancial assets (235) (155)
Mazars was appointed by the shareholders at the Combined General Meeting of November 17, 2006, for a term of six years ending as of the General Shareholders’ Meeting called to approve the 2012 fi nancial statements.
Fully and proportionally consolidated subsidiaries and branches 101 765 1% 8% 7 39 0% 1% 0 4 0% 0%
Other services provided by the firms to fully and proportionally consolidated subsidiaries
The Deputy Auditors are: a BEAS, 7-9 Villa Houssay – 92200 Neuilly-sur-Seine; a François Chevreux – 40 rue Guersant - 75017 Paris; a Patrick de Cambourg, Immeuble Exaltis – 61 rue Henri-Régnault – 92075 La Défense Cedex.
NATIXIS ASIA LTD Other fi nancial company FC 100 100 100 100 Hong Kong
NATIXIS ALTERNATIVE INVESTMENTS LIMITED Fund management FC 100 100 100 100 UK
NATIXIS REAL ESTATE CAPITAL INC. Real estate fi nance FC 100 100 100 100 USA
CDC HOLDING TRUST Secondary markets fi nance FC 100 100 100 100 USA
PLAZA/ TRINITY LLC (1) (4) Real estate fi nance 0 0 100 100 USA
NH PHILADELPHIA PROPERTY LP (1) Real estate fi nance FC 100 100 100 100 USA
SUMMER COMMONS LLC (1) (5) Real estate fi nance FC 100 100 0 0 USA
MSR TRUST (1) (5) Real estate fi nance FC 100 100 0 0 USA
LIDO APARTMENTS LLC (1) (5) Real estate fi nance FC 100 100 0 0 USA
WTC OWNER LLC (1) (5) Real estate fi nance FC 100 100 0 0 USA
ABSOLUTE ASIA DYNAMIC EQUITIES FUND (1) (5) Asset Management FC 100 100 0 0 USA
AEW ADVISORS, INC. Asset Management FC 100 100 89 89 USA
AEW CAPITAL MANAGEMENT, INC. Asset Management FC 100 100 89 89 USA
AEW CENTRAL EUROPE Asset Management FC 100 60 89 89 Poland
AEW GLOBAL ADVISORS (ASIA) LTD Asset Management FC 100 100 89 89 Singapore
AEW INVESTMENT GROUP, INC. (4) Asset Management 0 0 89 89 USA
AEW MANAGEMENT AND ADVISORS, LP (4) Asset Management 0 0 89 89 USA
AEW PARTNERS III, INC. Asset Management FC 100 100 89 89 USA
AEW PARTNERS IV, INC. Asset Management FC 100 100 89 89 USA
AEW REAL ESTATE ADVISORS, INC. Asset Management FC 100 100 89 89 USA
AEW VIF II INVESTORS, INC. Asset Management FC 100 100 89 89 USA
ASG QUASAR FUND (1) (4) Asset Management 0 0 89 89 USA
CASPIAN CAPITAL MANAGEMENT, LLC Asset Management FC 51 51 51 45 USA
CREA WESTERN INVESTORS I, INC. Asset Management FC 100 100 89 89 USA
AEW EUROPE ADVISORY LTD (ex -Curzon Global Advisory LTD ) * Asset Management FC 100 60 89 53 UK
AEW EUROPE CC LTD (ex -Curzon Global CC LTD ) * Asset Management FC 100 60 89 53 UK
AEW GLOBAL LTD (ex -Curzon Global LTD ) * Asset Management FC 100 60 89 53 UK
AEW EUROPE PARTNERSHIP (ex -Curzon Global Partners ) * Asset Management FC 100 60 89 53 UK
EPI SLP LLC (1) Asset Management FC 100 60 89 53 UK
GATEWAY INVESTMENT ADVISERS, LLC Asset Management FC 100 100 89 89 USA
HANSBERGER GROUP, INC. Asset Management FC 99 99 88 88 USA
HANSBERGER GLOBAL (HK) LTD Asset Management FC 100 100 89 89 USA
HARRIS ALTERNATIVES HOLDING INC. Holding company FC 100 100 89 89 USA
HARRIS ASSOCIATES LP Asset Management FC 100 100 89 89 USA
HARRIS ASSOCIATES SECURITIES, LP Distribution FC 100 100 89 89 USA
AEW EUROPE S.A. Asset Management FC 60 60 60 53 France
NATIXIS ASSET MANAGEMENT ADVISERS, LP Distribution FC 100 100 89 89 USA
MC MANAGEMENT, INC. Holding company FC 100 100 89 89 USA
NATIXIS ASSET MANAGEMENT Asset Management FC 100 100 89 89 France
NATIXIS ASSET MANAGEMENT PARTICIPATIONS 1 Holding company FC 100 100 89 89 France
NATIXIS GLOBAL ASSET MANAGEMENT PARTICIPATIONS 2 Holding company FC 100 100 89 89 France
NATIXIS GLOBAL ASSET MANAGEMENT, LP Holding company FC 100 100 89 89 USA
NATIXIS GLOBAL ASSOCIATES LUXEMBOURG Distribution FC 100 100 89 89 Luxembourg
NATIXIS OAKMARK GLOBAL LARGE CAP (1) (4) Asset Management 0 0 89 89 USA
NATIXIS SECURITIES INVESTMENT CONSULTING CO. LTD (5) Asset Management FC 100 100 0 0 Taiwan
REICH & TANG DISTRIBUTORS, INC. Distribution FC 100 100 89 89 USA
REICH & TANG SERVICES, INC. Asset Management FC 100 100 89 89 USA
SEAPORT SENIOR HOUSING, LLC (4) Asset Management 0 0 89 89 USA
SNYDER CAPITAL MANAGEMENT, INC. Asset Management FC 100 100 89 89 USA
VAUGHAN NELSON INVESTMENT MANAGEMENT, INC. Asset Management FC 100 100 89 89 USA
VAUGHAN NELSON INVESTMENT MANAGEMENT, LP Asset Management FC 100 100 89 89 USA
WESTPEAK INVESTMENT ADVISORS, INC. Asset Management FC 100 100 89 89 USA
NATIXIS AXELTIS LTD (EX-AXELTIS LTD) * Fund distribution FC 100 100 100 100 UK
ANTEIS ÉPARGNE Insurance brokerage FC 51 51 51 50 France 1818 PARTENAIRES (EX-CENTRE FRANÇAIS DU PATRIMOINE) *
BANQUE PRIVÉE 1818 * (EX-LA COMPAGNIE 1818 - BANQUIERS PRIVÉS) ** (12) Holding company FC 100 100 100 98 France 1818 - GESTION (EX-LA COMPAGNIE 1818 - GESTION) * (13)
Mutual fund holding company FC 100 100 100 98 France 1818 IMMOBILIER (EX-LA COMPAGNIE 1818 IMMOBILIER) *
FRUCTIFONCIER (1) Insurance real estate investments FC 100 100 100 100 France
NATIXIS CONSUMER FINANCE * (EX-ECRINVEST 11) Holding company FC 100 100 100 100 France
NATIXIS FACTOR ITALIE - SUCC (NATIXIS FACTOR) (5) Factoring FC 100 100 0 0 Italy
CACEIS FASTNET AMERICAN ADMINISTRATION (7) Holding company 0 0 50 50 France
Credit insurance and related services FC 100 100 100 100 Italy
COFACE AUSTRIA BANK (5) Factoring FC 100 100 0 0 Austria
COFACE HOLDING AUSTRIA Holding company FC 100 100 100 100 Austria
COFACE LUXEMBOURG (SUCC-COFACE S.A.) (5) Insurance FC 100 100 0 0 Luxembourg
COFACE IBERICA - SUCC (COFACE S.A.) Insurance FC 100 100 100 100 Spain
COFACE ARGENTINA - SUCC (COFACE S.A.) Insurance FC 100 100 100 100 Argentina
COFACE HUNGARY (EX-ÖKVC FIÓKTELEPE) - SUCC (COFACE AUSTRIA) Insurance FC 100 100 100 100 Hungary
COFACE ROMANIA INSURANCE - SUCC (COFACE AUSTRIA) Insurance FC 100 100 100 100 Romania
COFACE SLOVAKIA INSURANCE - SUCC (COFACE AUSTRIA) Insurance FC 100 100 100 100 Slovakia
COFACE LATVIA INSURANCE - SUCC (COFACE AUSTRIA) Insurance FC 100 100 100 100 Latvia
COFACE SINGAPOR - SUCC (COFACE S.A.) Insurance FC 100 100 100 100 Singapore
INITIATIVE ET FINANCE INVESTISSEMENT Capital-Investment FC 93 93 87 87 France
FCPR IXEN III (1) Capital-Investment FC 99 99 99 99 France
NATEXIS PRIVATE EQUITY OPPORTUNITIES Private Equity FC 89 89 90 90 France
SAS VAL A (1) Investment portfolio holding FC 100 100 100 100 France
BANQUE DE SAVOIE (22) Lending institution/Bank EM 20 20 20 10 France
BANQUE PELLETIER (22) Lending institution/Bank EM 20 20 20 10 France
BCI MER ROUGE Lending institution/Bank EM 10 10 10 10 France
CREPONORD Non-fi nancial/real estate company EM 20 20 20 20 France
EXPANDE INVEST Non-fi nancial services provider EM 20 20 20 20 France
GIE USC Non-fi nancial institution/Other EM 20 20 20 20 France
GROUPEMENT DE FAIT Non-fi nancial institution/Other EM 20 20 20 20 France
SASU BFC CROISSANCE Lending institution/Bank EM 20 20 20 20 France
VIALINK Non-fi nancial services provider EM 20 20 20 20 France
CAISSE D’EPARGNE ÎLE-DE-FRANCE (ex -Caisse d’E pargne Île-de-F rance P aris ) *
(12) Merger of Banque Privée Saint-Dominique into La Compagnie 1818-Banquiers Privées.
In accordance with our appointment as Statutory Auditors at the General Shareholders’ Meeting, we hereby present our report for the year ended December 31, 2009, on: a our audit of the accompanying consolidated financial statements of Natixis; a the justification of our assessments; a the specific verifications required by law.
We conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated fi nancial statements are free of material misstatement. An audit includes examining, on a test basis or using other sampling techniques, evidence supporting the amounts and disclosures in the consolidated fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As indicated in Notes 6.6.8 and 6.18 to the consolidated financial statements, the Group uses internal models and methodologies to measure fi nancial instruments that are not traded on an active market, as well as to book certain impairment losses. We examined the control procedures relating to the assessment of whether a given market was inactive, the validation of models and the defi nition of the parameters used.
FINANCIAL DATA6 Statutory Auditors’ report on the consolidated fi nancial statements
The Group records provisions to cover employee benefi ts (Notes 5.14 and 11.2 to the consolidated financial statements). We examined the methodology used to measure these benefi t obligations, as well as the main assumptions and inputs applied.
In accordance with the auditing standards applicable in France, we also verifi ed the information provided in the Group’s management report as required by French law.
See notes no. Off-balance sheet items – Commitments received 2009 2008 2007
Revaluation adjustments 20 Regulated provisions and investment subsidies 25 24 47 21 Retained earnings
Other interest and similar income 3,447 760 1,137 25 Interest and similar expenses (24,598) (16,508) (18,689)
26 Income from variable-income securities 1,015 1,417 1,078 27 Fee and commission income 2,126 745 798
Balance of transactions on securities held for trading 1,891 (1,914) 2,113
Non-recurring income 0 0 0 20 Funding/reversal of fund for general banking risks and regulated provisions 1 (1) (5)
FINANCIAL DATA6 Parent company fi nancial statements and notes // Notes to the parent company fi nancial statements
NOTE 5 BONDS, SHARES AND OTHER FIXED- AND VARIABLE-INCOME SECURITIES 367
NOTE 9 DISCLOSURES REGARDING SHAREHOLDINGS EXCEEDING THE INVESTMENT THRESHOLD IN FRENCH COMPANIES DURING THE YEAR 376
NOTE 37 OFF-BALANCE SHEET – FOREIGN CURRENCY COMMITMENTS AND TRANSACTIONS 401
FINANCIAL DATA 6 Parent company fi nancial statements and notes // Notes to the parent company fi nancial statements
Natixis’ separate fi nancial statements have been prepared and presented in accordance with the standards laid down by France’s Comité de la réglementation comptable (CRC) and Comité de la réglementation bancaire et fi nancière (CRBF).
The fi nancial statements are presented in accordance with CRC rule 2000-03 as amended for the individual summary fi nancial statements of companies coming under CRBF regulation.
Loans are carried on the balance sheet at their nominal value. Accrued interest is credited to the corresponding receivables item on the income statement.
Unpaid amounts of loans already committed are included in off-balance sheet items under “Financing commitments given”. Performing and non-performing loans are identifi ed separately.
Where there is a risk of partial or total non-recovery of loans or borrowers’ breaching their covenants, impairment charges or provisions are recognized on the income statement under “Cost of risk”. Impairment is assessed quarterly on a case-by-case basis taking into account an analysis of the risk and available collateral.
The impairment charge is calculated as the difference between the net carrying amount of the loan and the estimated recoverable amount discounted at the original effective interest rate.
Financial assets that present no specifi c credit risk are bundled into portfolios with homogenous risk profi les by operating sector or country.
a Securities held for sale: securities that are not classified as held for trading, held for investment, other long-term investments, investments in associates or investments in related corporate entities. They are recognized on the balance sheet at acquisition cost less expenses and, regarding bonds, less accrued interest due at the acquisition date. Any difference between the acquisition cost (excluding accrued interest) and the redemption price is recognized in income over the remaining life of the securities. They are valued on an individual basis at year end at the lower of their carrying amount or market value. An impairment charge is taken for unrealized losses but unrealized gains are not recognized.
In accordance with regulations, impairment charges on unrealized losses are only taken if there is a strong likelihood that they will be sold before maturity due to new circumstances, notwithstanding impairment charges imposed as required by CRC regulation 2002-03 if there is a risk of default by the issuer (cost of risk). Unrealized gains are not recognized.
The discount rate of cash fl ows applied to each subsidiary was based on: a the average yield on the 10-year French government bond (OAT); a the risk premium in the market where the subsidiary operates; a a beta based on a sample of comparable companies.
Natixis holds treasury shares to regulate the share price under a liquidity agreement. These shares are recognized as securities held for trading and follow the same rules as other securities in this category.
Internally generated software is carried on the balance sheet assets at its direct development cost, including outsourcing expenses and personnel costs directly attributable to its production and preparation where they meet the criteria for capitalization.
After acquisition, fi xed assets are carried at cost less any cumulative writedown, amortization and impairment losses.
Interest rate swaps are classifi ed in four categories according to purpose: a micro-hedging (hedging of specific transactions or positions); a macro-hedging (overall balance sheet management); a speculative position-taking; a specialized management of a trading portfolio.
Each instrument in the fi nal category is marked to market on an individual basis. Changes in value during the period are recognized immediately on the income statement. Valuations are adjusted for counterparty risk and the discounted present value of future contractual management costs.
Spot currency transactions outstanding at year end are valued at the year-end price.
For non-hedging activities, positions in a class of option or forward contract are marked to market at the reporting dates. Changes in market value are recognized directly on the income statement. For over-the-counter market instruments, a discount may be applied to the market value based on modeling risks or uncertainty over parameters, and recognized on the income statement via provisions for fi nancial instruments.
FINANCIAL DATA 6 Parent company fi nancial statements and notes // Notes to the parent company fi nancial statements 1.6 - Employee benefits
Employee benefi ts fall into four categories: a “Short-term benefits” , including salaries, social security contributions, annual leave, employee profit-sharing, incentive plans, top-up contributions and bonuses payable in the twelve months following year-end; a “Termination benefits” , which should be recognized when the entity is demonstrably committed to terminate the employment of an employee before the normal retirement date, or provide termination benefits as a result of an offer made in order to encourage voluntary redundancy; a “Post-employment benefits” , such as pensions, other supplementary retirement benefits applicable to the banking industry, end-of-career awards and other contractual benefits payable to retirees; a “ Other long-term employee benefits” , including longservice awards and deferred compensation payable in cash 12 months or more after the end of the period.
Natixis distinguishes two types of post-employment benefi ts: a defined contribution plans, under which an entity has no obligation to pay a specified benefit amount; a defined benefit plans, under which Natixis has a legal or constructive obligation to pay a specified benefit amount.
The amount recognized as a provision in the balance sheet represents the present value of the obligation under defi ned benefi t plans: a minus any past service cost not yet recognized in income; a plus or minus any unrecognized actuarial gains or losses arising from: j experience adjustments linked to demographic variables, j changes in actuarial assumptions, j differences between the actual return and expected return on plan assets; a minus the market value of plan assets.
The annual payroll costs recognized in respect of defi ned benefi ts plans consist of: a rights vested by beneficiaries over the period; a the interest cost reflecting the impact of unwinding the discount on the obligation; a the expected return on plan assets; a amortization of actuarial gains and losses and past service costs; a the effects of plan curtailments and settlements.
Other long-term benefi ts are valued using the same actuarial method as that applied to post-employment benefi ts under defi ned benefi t plans, except that actuarial gains and losses are not subject to the corridor method and past service costs are recognized directly as an expense.
The portion of deferred variable compensation awarded to fi nancial market professionals in respect of the benchmark 2009 fi nancial year represents, on average, more than 50% of their total variable compensation, pursuant to the decree of November 5, 2009 and the professional standards adopted by the French banking federation on November 5, 2009.
This compensation will be settled in two ways: a one part in cash indexed to the value of Natixis shares. A third of the units will be paid in March 2011, another third in March 2012 and the final third in March 2013; a the other portion will be settled in Natixis shares: a third in March 2011, a third in March 2012 and the final third in March 2013. There will be a two-year lock-in period following delivery of the shares.
Receivables, payables and off-balance sheet commitments in foreign currencies are translated into euros at the rate prevailing on the reporting date. Exchange differences are recognized directly in income.
INTERBANK AND SIMILAR TRANSACTIONS 131,737 120,056 153,074 * o/w subordinated loans: 214 o/w reverse repurchased securities: 41,854 38,017 76,696
Cash and consumer credit 25,079 34,010 32,008 o/w accrued interest 2 0
Reverse repurchased securities 10,319 10,526 18,527 o/w non-performing 0 0 o/w writedowns of non-performing 0 0 o/w writedowns of non-performing (1,085) (574) (431)
NET NON-PERFORMING AND UNRECOVERABLE LOANS 2,439 84 487 140 204 15
NOTE 7 INVESTMENTS IN SUBSIDIARIES AND AFFILIATES , OTHER LONG-TERM SECURITIES AND TREASURY SHARES
D) Investments with an inventory amount of less than or equal to €150,000 1,539,951.20
D) Investments with an inventory amount of less than or equal to EUR 150,000 1,505,265.35
The table below has been drawn up in accordance with Article L.247-1 of the French Commercial Code: No. of shares at 12.31.2009
NATIXIS ALGÉRIE 62, chemin Drareni Mohamed Hydra Algiers DZD10,000,002 DZD 143,752 100.00%
(a) The net value of these lines of securities is higher than their gross value due to a positive translation difference.
Bonus share allocation plan (SAGA) – “1” 3,200,000 13,544,954 4.23 167,031 706,541 4.23
a The exit data shows the number of surplus shares acquired under the SAGA program and reclassifi ed as “Attributed to employees”.
(in millions of euros) End 2008 Purchases Sales Other End 2009
Special savings accounts 115 77 87 o/w other amounts due 5 54 5
(in millions of euros) Revaluation reserve for depreciable fi xed assets Provisions for investment Accelerated depreciation Total
NOTE 23 STATEMENT OF ASSETS, LIABILITIES AND COMMITMENTS RELATED TO MANAGEMENT OF PUBLIC PROCEDURES
Net gains (losses) on securities held for trading 1,891 (1,914) 2,113
Net gains (losses) on forward fi nancial instruments 978 (1,567) (235)
Other than swaps o/w hedges a of interest rate instruments 43,496 a of exchange rate instruments 22 a of other instruments 25,096
Other procedures and services directly related to the Statutory Auditor’s engagement 0.4 0.8 0.6
NOTE 39 ESTABLISHMENTS AND OPERATIONS IN NON-COOPERATIVE STATES OR TERRITORIES UNDER THE MEANING OF ARTICLE L.238-0A OF THE FRENCH GENERAL TAX CODE
These obligations form part of the global struggle against territories that are non-cooperative on tax matters based on the work of various OECD working groups and summits, and is also part of the fi ght against money laundering and the fi nancing of terrorism.
Monitoring of Natixis’ subsidiaries and branches in noncooperative countries forms an integral part of Natixis’ risk monitoring process overseen by the Risk group . It involves: a l ocal R isks officers/groups that have a functional link to the c entral Risk Control Department; a specific reporting procedures that respect local constraints but also comply with global risk requirements.
At December 31, 2009, in accordance with the abovementioned article, Natixis reports that its subsidiary Coface owns 100% of “Coface Servicios Costa Rica S.A.” , a services company in Costa Rica with 2009 revenues of US$400,000.
Number of bonds convertible in shares 0 0 0 0 0
Income before tax, amortization and provisions 457,665,461.91 677,795,500.73 852,134,041.69 (2,548,305,710.82) (1,664,174,176.79)
Income after tax, amortization and provisions 459,177,494.14 744,399,468.97 (467,183,610.92) (5,053,779,558.57) (2,046,308,381.66)
Income after tax, amortization and provisions 9.37 0.61 (0.38) (1.74) (0.70)
Social security and other employee benefi ts 193,645,949.43 233,880,070.04 269,404,568.47 273,921,026.89 264,166,185.19
We conducted our audit in accordance with the professional standards applicable in France. Those standards require that we plan and perform our audit to obtain reasonable assurance that the fi nancial statements are free of material misstatement. An audit includes examining, on a test basis or using other sampling techniques, evidence supporting the amounts and disclosures in the fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1.9 to the parent company financial statements, a guarantee mechanism was set up by BPCE in 2009 covering certain assets ring-fenced in the Workout Portfolio Management structure (GAPC). We analyzed the conditions in which this mechanism was set up and the accounting treatment adopted.
The Company recognizes impairment losses to cover the credit and counterparty risks inherent in its business (Note 1.1 to the parent company financial statements). We examined the control procedures relating to credit and counterparty risk monitoring, impairment methodology, the assessment of risks of non-collection and the provisions set aside in this respect for individual and collective impairment.
FINANCIAL DATA 6 Statutory Auditors’ report on the parent company fi nancial statements
Natixis revises its measurement of investments in subsidiaries (Note 1.2 to the parent company financial statements). We examined how this work was carried out as well as the main assumptions and parameters used.
The Company records provisions to cover employee benefi ts (Note 1.6 to the parent company financial statements). We examined the methodology used to measure these benefi t obligations, as well as the main assumptions and inputs applied.
These assessments were made in the context of our audit of the parent company fi nancial statements taken as a whole, and therefore contributed to the formation of the unqualifi ed opinion expressed in the fi rst part of this report.
We also conducted the specifi c verifi cations required by law in accordance with the auditing standards applicable in France.
We have nothing to report regarding the fairness of the information provided in the management report of the Board of Directors and in the documents addressed to shareholders on the Company’s fi nancial position and fi nancial statements, or its consistency with those fi nancial statements.
We reviewed the information provided in accordance with Article L.225-102-1 of the French Commercial Code concerning compensation and benefi ts paid to corporate offi cers as well as commitments granted to corporate offi cers, and the consistency of this information with the parent company fi nancial statements or with the data used to prepare the fi nancial statements and, where applicable, with the information obtained by the Company from companies controlling it or controlled by it. Based on our work, we certify that the information provided is accurate and fair.
FINANCIAL DATA6 Statutory Auditors’ special report on related party agreements and commitments
It is not our responsibility to ascertain the existence of such agreements, nor to comment on their relevance or substance. We are simply required to report to shareholders, based on the information provided, on the basic terms and conditions of agreements and commitments that have been disclosed to us. Under the provisions of Article R.225-31 of the French Commercial Code , it is the shareholders’ responsibility to determine whether the agreements and commitments are appropriate and should be approved (fourth resolution put to the vote at the Annual General Meeting).
1.1 - Commutation agreement concerning CIFG between Natixis, CIFG, Banque Fédérale des Banques Populaires (BFBP), Caisse Nationale des Caisses d’Epargne (CNCE) and key CIFG counterparties
Corporate offi cers concerned: Philippe Dupont, Jean Clochet, Stève Gentili, Bernard Jeannin, Yvan de La Porte du Theil, Bruno Mettling, Philippe Queuille, and Jean-Louis Tourret.
On May 13, 2009, the Board of Directors approved shareholder advances from BFBP for €750,000,000 and from CNCE for €750,000,000, accounted for as equity. Repayments on these advances amounted to €1,000,000,000 in 2009.
The expense recognized by Natixis in respect of these agreements totaled €41,880,584.13 in 2009.
On June 25, 2009, the Board of Directors approved the agreement between Natixis and BFBP concerning the sale of Natixis Algérie to BFBP.
1.5 - Tripartite agreements between Natixis, Société de Financement de l’Economie Française (SFEF), and BFBP and CNCE, respectively
(Comptes d’Affectation Spéciaux – CAS) to allow Natixis collateral to be pledged directly to SFEF. The agreements also establish SFEF’s direct right of recourse against Natixis. These agreements cover: a “délégation imparfaite” agreements (agreements in which the original debtor remains liable as well as the person instructed to pay on its behalf), establishing SFEF’s right of recourse against Natixis, between (i) Natixis, BFBP and SFEF, and (ii) Natixis, CNCE and SFEF; a subsidiary financial guarantee frame agreements, allowing Natixis collateral to be pledged directly to SFEF, between (i) Natixis, BFBP and SFEF, and (ii) Natixis, CNCE and SFEF; a trust agreements, setting up trust accounts (Comptes d’Affectation Spéciaux – CAS) between (i) Natixis, BFBP and SFEF, and (ii) Natixis, CNCE and SFEF; a representation agreements, allowing Natixis’ central institutions to represent it in its dealings with SFEF, between (i) Natixis and BFBP, and (ii) Natixis and CNCE; a side agreements aimed at limiting the credit risk incurred by Natixis in respect of its central institutions by allowing early repayments to be made at Natixis’ initiative, between (i) Natixis and CNCE, and (ii) Natixis and BFBP; a addendums to the revised intra-group financial guarantee master agreements signed in 2008 with BFBP and CNCE (see section 2.1.1 below), between (i) Natixis and CNCE, and (ii) Natixis and BFBP.
Corporate offi cers concerned: François Pérol, Jean Clochet, Jean-Claude Créquit, Nicolas Duhamel, Stève Gentili, Francis Henry, Bernard Jeannin, Olivier Klein, Yvan de La Porte du Theil, Alain Lemaire, Didier Patault, Philippe Sueur and Jean-Louis Tourret.
On August 25, 2009, the Board of Directors approved an agreement between Natixis and BPCE regarding the purchase of securities and the issue and subscription of perpetual deeply subordinated bonds.
Income recognized by Natixis in respect of this agreement totaled €358,155,272 in 2009.
Statutory Auditors’ special report on related party agreements and commitments 1.7 - agreements between natixis, natixis transport finance (ntf), sfef and bpce
Corporate officers concerned: François Pérol, Jean Clochet, JeanClaude Créquit, Nicolas Duhamel, Stève Gentili, Francis Henry, Bernard Jeannin, Olivier Klein, Yvan de La Porte du Theil, Alain Lemaire, Didier Patault, Philippe Sueur and Jean-Louis Tourret.
Corporate officers concerned: François Pérol, Jean Clochet, Jean-Claude Créquit, Nicolas Duhamel, Stève Gentili, Francis Henry, Bernard Jeannin, Olivier Klein, Yvan de La Porte du Theil, Alain Lemaire, Didier Patault, Philippe Sueur and Jean-Louis Tourret.
The premium paid by Natixis in return for setting up the financial guarantee totals €1,183,734,486.16, breaking down as €534,090,998.16 for Natixis and €649,643,487.99 for the subsidiaries whose assets are covered by the guarantee. The transaction was recognized immediately in the balance sheet, with the premium paid by Natixis recorded in income for €98,843,016.29 in 2009. The recognition of the premium in respect of the reciprocal guarantees with subsidiaries has no impact on Natixis’ income statement.
1.11 - Credit and fi nancial guarantee master agreements between Natixis and Natixis Lease
1.12 - Agreement between Natixis and BPCE to sell Natixis Pramex International
Corporate offi cers concerned: François Pérol, Jean-Claude Créquit, Jean Criton, Nicolas Duhamel, Stève Gentili, Bernard Jeannin, Olivier Klein, Yvan de La Porte du Theil, Alain Lemaire, Didier Patault and Philippe Sueur.
Income recognized in respect of this agreement totaled €1,398,082 in 2009.
In accordance with the French Commercial Code , we have been informed that the following agreements and commitments that were approved during previous fi scal years were still in effect over the last fi scal year.
Under the agreements, Natixis can indirectly benefi t from the facilities granted by SFEF, according to the following principles: a each central body borrows from SFEF against a pledge of collateral; a all or part of the income arising on this arrangement is used to grant Natixis a loan, in return for a guarantee in the form of collateral, which will be pledged by the central body to SFEF as guarantee for its loan.
The expense recognized by Natixis in respect of these agreements totaled €97,585,597.46 in 2009.
FINANCIAL DATA6 Statutory Auditors’ special report on related party agreements and commitments 2.2 - Natixis’ participation as arranger in the €25 billion secured bond issue program launched by the Caisses d’Epargne group
2.3 - Adoption of regulations for the closed collective pension scheme
On December 18, 2008, the Supervisory Board: a adopted regulations for the closed collective pension scheme insofar as those regulations define the potential rights of members of the Executive Board eligible to benefit from the scheme, provided that the members were appointed to the Board between November 2007, 2006 and December 15, 2008. It also closed the scheme to any new members of the Executive Board (the regulations exclude any indemnities resulting from the termination of professional relations with members of the Executive Board); a regarding the collective welfare benefit scheme, agreed to continue offering in 2009 the welfare scheme available to the Chief Executive Officers of the Banques Populaires banks to members of Natixis’ Executive Board, as there is conclusive evidence that the scheme adapts the guarantees applicable to all former Natixis Banques Populaires personnel to the specific situation of each member; a regarding termination and retirement indemnities, approved the decision not to apply the provisions regarding early termination or retirement indemnity arrangements for the Chief Executive Officers of the Banques Populaires banks to Natixis’ corporate officers appointed after May 1, 2005.
2.4 - Agreement providing for the distribution of Natixis products and services to the regional banks acquired by the Banque Populaire group from HSBC
Income recognized by Natixis in respect of this agreement totaled €1,456,841.14 in 2009.
2.5 - Invoicing agreements regarding the affi liation of Natixis to BFBP and CNCE
On December 19, 2007, the Supervisory Board approved an agreement providing for the sale by Natixis of its shares in CIFG Holding to BFBP and CNCE, with the following main characteristics: a sale price of US$2; a if BFBP and CNCE were to sell over 34% of the capital of CIFG Holding to a third party before December 31, 2009, Natixis would receive additional price consideration; a Natixis’ entitlement to the additional price consideration would apply for up to US$800,000,000 of any gross capital gains (before factoring in capital gains tax) generated by BFBP and CNCE. Natixis would not be entitled to any additional price consideration on the portion of capital gains exceeding US$800,000,000.
2.8 - “Click’n Trade” partnership and service agreement between Ixis CIB, CNCE and Banque Palatine
Similarly, Ixis CIB signed a number of letters of joint and several guarantees and commitments with its US subsidiaries, namely Natixis Municipal Products Inc. (formerly CDC Municipal Products Inc.), Natixis Derivatives Inc. (formerly CDC Derivatives Inc.), Natixis Financial Products Inc. (formerly CDC Financial
Products Inc.), Natixis Funding Corp. (formerly CDC Ixis Funding Corp.) and Natixis Commercial Paper Corp. (formerly CDC Ixis Commercial Paper Corp.).
All of these letters of joint and several guarantees and commitments had terminated or expired at the date of this report, but continue to retrospectively apply to all guaranteed transactions entered into prior to the date on which the underlying joint and several guarantees terminated or expired, until these transactions have been fully unwound.
For joint and several guarantees entered into with CDC Finance – CDC Ixis, the creditors of Ixis CIB for transactions secured under these guarantees that were entered into before the expiry of the respective guarantees, may, in accordance with the letter from the Chief Executive Offi cer of CDC dated October 12, 2004, exercise their rights directly against CDC through to the maturity of the transactions guaranteed, as if this commitment had been taken out directly by CDC on behalf of Ixis CIB’s creditors.
2.10 - Letters of joint and several guarantees and commitments in force
On June 15, 2006, the Supervisory Board approved letters of joint and several guarantees and commitments between Ixis CIB and: a) Natixis Financial Products Inc. (formerly Ixis Financial Products Inc.) for the USMTN program. The guarantee given by Ixis CIB in connection with this agreement may be invoiced at 0.02%; b) Natixis Financial Products Inc. (formerly Ixis Financial Products Inc.) for the warrants issue program. The guarantee given by Ixis CIB in connection with this agreement may be invoiced at 0.02%; c) Natixis Securities North America Inc. (formerly Ixis Securities NA) for lending/borrowing transactions. The guarantee given by Ixis CIB in connection with this agreement may be invoiced at 0.02% per year, applicable to the overall exposure with average risk over the period.
On December 19, 2001, the Supervisory Board approved a de facto association agreement between CDC, CNCE (replacing CDC Ixis in its rights and obligations) and Ixis CIB (formerly CDC Ixis Capital Markets). This agreement, automatically renewed every three years, replaces the agreement entered into on August 30, 1996 between CDC and CDC Ixis Capital Markets (formerly CDC Marchés).
On November 17, 2005, the Supervisory Board approved an addendum to this agreement providing for a reduction in the percentage at which the services provided would be invoiced, from 25% to 18.75%.
On November 17, 2005, the Supervisory Board approved a service and partnership agreement between Ixis CIB and CNCE under which Ixis CIB agreed to develop and host a website for CNCE for placing orders on forward and spot foreign exchange transactions.
2.14 - Agreements to transfer software user rights and services between Ixis CIB and CFF
On June 15, 2006, the Supervisory Board approved a number of agreements providing for the transfer of software user rights and services between Ixis CIB and CFF.
Under these agreements, Ixis CIB grants CFF a non-transferable, non-exclusive and personal right to use the AMeRisC software, and also provides any available market and econometric data to CFF on a daily basis for running the AMeRisC software. In connection with the implementation of the software within CFF, Ixis CIB also provides consulting services at cost price.
COMPOSITION AND CONDITIONS FOR THE PREPARATION AND ORGANIZATION OF THE WORK OF THE BOARD 414
CHAIRMAN’S REPORT ON THE COMPOSITION AND CONDITIONS FOR THE PREPARATION AND ORGANIZATION OF THE WORK OF THE BOARD, AND THE INTERNAL CONTROL PROCESS AND RISK MANAGEMENT PROCESS SET UP BY THE COMPANY (ARTICLE L.225-68 OF THE FRENCH COMMERCIAL CODE)7 Composition and conditions for the preparation and organization of the work of the Board
The information relating to the conditions for the preparation and organization of the work of the Board are included in C hapter 2 “Corporate Governance”.
Natixis’ internal control system complies with the principles on which the CECEI (Credit Institution and Investment Firms Commission) based the approval given to Natixis as well as governance rules defi ned in Groupe BPCE . This control is also in line with the legal and regulatory framework applicable to Natixis set out, notably, in CRBF regulation 97-02, as modifi ed (the “CRBF regulation”), which provides, in particular for the implementation, on a consolidated basis, of an internal control system including arrangements enabling to ensure: a permanent controls of compliance, security and validation of transactions, as well as compliance with other audit tests related to the monitoring of risks of any nature resulting from transactions; a periodic checks in the form of enquiries and audits implemented centrally and, if necessary, locally, regarding the compliance of transactions, compliance with procedures and the effectiveness of the permanent control mechanisms.
In reference to its regulatory requirements to commitments made to the CECEI and under the governance framework put in place in Groupe BPCE , Natixis has structured its internal control system around a periodic control department that performs audits and units responsible for permanently testing transaction compliance and security as well as overseeing the effectiveness of Natixis’ risk management and monitoring mechanisms.
CHAIRMAN’S REPORT ON THE COMPOSITION AND CONDITIONS FOR THE PREPARATION AND ORGANIZATION OF THE WORK OF THE BOARD, AND THE INTERNAL CONTROL PROCESS AND RISK MANAGEMENT PROCESS SET UP BY THE COMPANY (ARTICLE L.225-68 OF THE FRENCH COMMERCIAL CODE)7 Internal control process a Natixis complies with recommendations from international organizations dealing with prudential regulation issues for international banks, the most important being the Basel Committee.
The body of rules structuring the organization of the internal control system for Natixis is as follows: a a group of charters and procedures to govern and manage the group risk processes (such as the procedure governing the credit decision process, the Market Risk Management Charter, charter for measurement, the control and management of operational risks, the charter relating to the management of non-compliance risks, etc.); a the Natixis Group audit charter; a the general policy for information security establishing the governance rules for the security and continuity of IT systems, as well as the security principles that should be implemented; a the charter formalizing areas of responsibility for country managers in Natixis’ foreign operations and organizing relations with heads of the business lines represented locally; a the “compliance manual” which defines all rules of good conduct applicable to Natixis’ employees (especially concerning preventing conflicts of interest, coun tering money laundering, employee professional ethics, protection of confidential information, etc.).
Executive Management, under the direction of the Board of Directors, is responsible for the entirety of the Group internal control mechanism.
Operational departments Internal controls under management supervision 3.1 - First-level control
Depending on the situation and activiti es, these fi rst-level controls are carried out by the operating entities themselves or by ad hoc control units, such as middle offi ce or accounting control entities.
CHAIRMAN’S REPORT ON THE COMPOSITION AND CONDITIONS FOR THE PREPARATION AND ORGANIZATION OF THE WORK OF THE BOARD, AND THE INTERNAL CONTROL PROCESS AND RISK MANAGEMENT PROCESS SET UP BY THE COMPANY (ARTICLE L.225-68 OF THE FRENCH COMMERCIAL CODE)7 Internal control process 2. The main powers of the Compliance Department consist of: j ensuring legal and regulatory monitoring relating to compliance, in conjunction with the legal function; j defi ning standards and methods for assessing noncompliance, control and reporting risks. These standards were devised in order to ensure market integrity, the primacy of customer interest, to prevent confl icts of interest (including independence in third-party account management) as well as to counter money laundering and the fi nancing of terrorism; j ensuring the conduct of permanent second-level controls (including control of the respect of compliance standards and the application of procedures); j establishing and maintaining a non-compliance risk map; j implementing a system of cooperation with the Risk Department, through reports and corrective measures relating to operational defects which may entail risks of non-compliance; j issuing a written compliance opinion regarding all new operations, structures, processes, products and transactions, as well as signifi cant changes to existing products. This opinion is accompanied by the right of blockage or appeal, under the New Product Committees framework set up within Natixis’ business lines and its subsidiaries, or centrally for products common to several business lines; j involvement, in an advisory role, to support operations with a view to security and compliance with standards; j contributing to employee training in conjunction with the Human Resources Department; j ensuring the project management of information systems dedicated to the monitoring and management of noncompliance risk on a consolidated basis at the Natixis group level; j centralizing the reporting of dysfunctions resulting in a situation of non-compliance at the subsidiary or businessline level, with a view to their consolidation by the Natixis group; j centralizing possible dysfunctions as meant by Article 11-2 of amended regulation 97-02, at subsidiary or businessline level, with a view to their consolidation by the Natixis group and their communication to BPCE; and defi ning the conditions for exercising the alert mechanism provided for by this article whilst respecting the confi dentiality of declaring parties; j preparing regular summary communications, notably, for Natixis’ and BPCE Executive Management; j overseeing the consistency and effectiveness of permanent controls of non-compliance risk.
The challenges in 2009 have been fi rstly, to roll out the system internationally to enable the systematic detection of confl icts of interest and notifi cation to the Compliance Department of sensitive transactions in terms of confi dentiality, and secondly, taking into account regulatory developments in the code of conduct and compliance procedures.
CHAIRMAN’S REPORT ON THE COMPOSITION AND CONDITIONS FOR THE PREPARATION AND ORGANIZATION OF THE WORK OF THE BOARD, AND THE INTERNAL CONTROL PROCESS AND RISK MANAGEMENT PROCESS
The “Know-your-customer” procedural framework was updated in February 2009, to take account of regulatory developments and its adaptation to various business lines of Natixis continues.
Training and communication on countering money laundering and terrorism fi nancing for employees continued. Specifi c training was delivered to the business lines concerned by the new procedure known as “Know-your-customer”.
The permanent second-level controls, for which the Compliance Department has responsibility, focus on: a transaction compliance: this involves checking not only transactions, but also that transaction execution processes comply with applicable banking and financial rules, and market rules; a organizational compliance; a the quality of data transmitted to the Compliance Department (through automated systems and indicators); and a the application of procedures. This controls consists of ensuring that procedures exist and are effectively applied (in accordance with Article 40 of regulation 97-02), in addition to their compliance with the rules governing the various types of risk.
The process of mapping non-compliance risks continued in 2009 and focused on French subsidiaries as well as subsidiaries and branches of the international CIB network. The mapping of noncompliance risks of each entity, following that of Natixis S.A., serves as the basis for control plans according to emerging areas of risks that should be given management priority.
The mapping process also takes into account risk areas highlighted by the Operational Risk Department and that could have an impact in the compliance area.
Finally, the monitoring of fraud risk is subject to specifi c tracking through a dedicated unit in the Compliance Department.
The Head of ITSS works for Natixis and its subsidiaries as well as with its customers. His role includes: a ensuring at all times the adequacy of the security policy to the risks incurred; a promoting the security policy and ensuring its compliance at all levels; a providing, if necessary, the security services necessary; a verifying and monitoring compliance with this policy and ensuring overall tracking across the entire Natixis group.
The governance of the Security and information sector is ensured, notably, through the following Committees: a a strategic ITSS Committee, which is the highest level decision-making body in the field of IT security for Natixis. This Committee is chaired by a member of the Executive Management Board and is responsible for approving the annual security plan prepared for Natixis. All business lines are featured in it. It met twice in 2008, but did not meet in 2009 in the context of the sector’s reorganization; a an IT Systems Security Coordination Committee that regularly brings together the various participants involved in security, and especially the Heads of ITSS within subsidiaries and business lines. It is responsible for monitoring the annual security plan, coordinating and steering all actions of the sector and pooling security projects. It met five times in 2009; a subsidiary or Business Line Security Committees, run by the Heads of ITSS in the subsidiaries, ensure the management of actions in the area of IT system security at the subsidiary or business line level. An IT Security Committee chaired by the CIB Head of I TSS, is dedicated to CIB.
ITSS activities in 2009 focused on: a permanent controls; a the implementation of a plan of a hundred or so controls classified according to the standards referred to as COBIT and ISO27002; a the assessment of business lines in relation to various security policies; a carrying out a plan for intrusion testing, vulnerability testing and internal enquiries; and a permanent monitoring of IT systems, integrating mainly the correlation of security events, Internet monitoring and the tracking of security breaches.
ITSS administers the digital certifi cates of its customers, employees and servers. In 2009, a new certifi cation authority meeting the highest level of security planned by the Government Modernization Directorate (Direction Générale de la Modernisation de l’État - DGME) was created. It allows for the robustness of the authentication and signature of operations with our fi nal customers to be strengthened.
In parallel, standards have been established in various fi elds, notably for the security of BlackBerrys, WiFi security, security of domain names, management of employee hires and departures and archiving of messages.
Finally, the “chain of confi dence” program implementing security services (creation and validation of electronic signature, time and date stamping, conclusive electronic archiving) under the framework of the dematerialization of services between Natixis and its clients was completed in 2009. The work consisted of implementing, beyond the corporate level, strong authentication services based on dynamic passwords over SMS intended for individuals and professionals. This service enables the Bank of France Governor’s request on security of transactions and online purchases to be met.
The continuity mechanism in place at Natixis is placed under the responsibility of the Natixis Head of ITSS. Work in 2009 focused on: a action in relation to the H1N1 flu pandemic. A prevention plan was put in place including the acquisition of a stock of masks, implementation of procedures and infrastructure for distance working as well as two safety drills with the use of masks; a the implementation of a balanced scorecard evaluation of the state of development of business continuity plans and compliance with business continuity and crisis management policies. This scorecard is the subject of a consolidation and a publication to business line managers; a the implementation of a crisis management policy. An observation and support unit was created, with responsibility, in the event of a crisis, for coordinating and managing the various crisis units and informing members of the executive crisis unit chaired by the Chief Executive Officer; a testing of business continuity plans. Natixis has over 1,500 backup positions for users, an IT backup site and crisis meeting rooms. In 2009, Natixis carried out 27 user standby drills, fifty or so IT backup tests, including three simulation tests of a real disaster, on central sites for a duration of a week each and five crisis management training sessions, including an observation and support unit drill; a the gradual setting up of a centralized system for the management of the business continuity plan.
The focus of work aimed at ensuring permanent control, which will be continued in 2010, is as follows: a continuation of the Security Information and Events Management (SIEM) project of security events data collection and analysis; a the measurement of Natixis’ level of compliance with security guidelines, rollout of first-level and second-level controls of IT Systems Security and the introduction of scorecards; a the monitoring of audit recommendations in a transverse manner across the sector; a the operational tracking of security and the automation of intrusion tests, notably, on Group institutional sites; a the rollout of security policies.
The following policies will be subject to action plans in 2010: a the logical access control policy (authentications and clearances): “workflows” of clearances will be improved; a network security policy: t he various areas of confidence should be put in place and controlled. A survey shall be undertaken on the opportunity to implement security through Network Access Control (NAC); a the security policy in projects: i t shall be deployed in order to make project managers responsible for the delivery of applications that, firstly, integrate the security requirements of the project itself and, secondly, existing policies and security guidelines; The rollout of security policies shall be accompanied whenever required by awareness campaigns targeted at Natixis employees.
CHAIRMAN’S REPORT ON THE COMPOSITION AND CONDITIONS FOR THE PREPARATION AND ORGANIZATION OF THE WORK OF THE BOARD, AND THE INTERNAL CONTROL PROCESS AND RISK MANAGEMENT PROCESS SET UP BY THE COMPANY (ARTICLE L.225-68 OF THE FRENCH COMMERCIAL CODE)7 Internal control process
Scenario 3 “unavailability of key employees” (e.g.: management plan, pandemic, fl ooding of the Seine) will be dealt with as a priority.
Internal Audit reports directly to Natixis’ Chief Executive Offi cer. It has strong functional ties with the BPCE Internal Audit Department, in accordance with the principles approved by the CECEI in its decision on November 15, 2007 and the BPCE Internal Audit sector charter. Also in accordance with these principles, Internal Audit steers a global audit sector.
Internal audit reports are sent to the audited units, as well as to Natixis’ Executive Management. In addition, BPCE’s Internal Audit Department receives a copy of all internal audit reports issued by Natixis Internal Audit, in accordance with the provisions targeted by the CECEI document in its decision of November 15, 2007, as well as those of the charter of the Groupe BPCE internal audit sector.
Internal Audit is responsible for following up progress in implementing its recommendations. It conducts follow-up audits and checks, making use if, necessary, of recurrent work in the area carried out by permanent control teams.
The audit plan may be revised during the year at the request of the Executive Management or if required by circumstances.
In addition to conventional audit assignments, the Internal Audit Department is also able to carry out ad hoc audits in order to address issues arising during the year and not initially included in the audit plan.
This work was carried out within a framework of active coordination with BPCE Internal Audit. To this end, six Internal Audit Coordination Committee Meetings were held during the year.
Efforts aimed at streamlining and standardizing internal audit methodologies and tools were carried out in 2009, notably in the areas of the organization of audit assignments as well as the formalization of the result of audit works.
Finally, specifi c work undertaken in the monitoring of audit recommendations aimed at enabling Natixis to be in compliance with the provisions of Article 9.1 of the CRBF regulation. Several assignments to follow up recommendations issued by the French Banking Commission were undertaken, whilst recommendations issued by Natixis Internal Audit are subject to formal follow up assignments on site as well as campaigns to monitor declarations.
SET UP BY THE COMPANY (ARTICLE L.225-68 OF THE FRENCH COMMERCIAL CODE) 7 Internal control process 3.4 - Control coordination
Its role and methods of operation are set out in a charter. It deals with all issues relating to the organization and planning of control services, as well as highlighting areas of emerging or recurring risk within the consolidation scope and reports any signifi cant dysfunctions observed to the executive body. It also supplies the executive body with updates on ongoing controls performed by internal or external control functions or regulators, and ensures that the conclusions from these undertakings are taken into account by the operational lines.
It may also meet with operational managers when necessary. The Control Functions Coordination Committee held three meetings in 2009.
The Natixis Risk Department is part of the BPCE framework organized into networks, with the relationship between the central body as shareholder and its subsidiary Natixis being governed by the Group Risk Charter.