Natexis Banques Populaires, the Banque Populaire Group’s listed entity, is a financing, investment banking and services bank and is currently developing a unique offering in receivables management.
W ith more than 12,900 employees and a network of 155 offices, including 117 abroad, Natexis Banques Populaires builds long-term domestic and international partnerships with its clientele of large and medium-sized companies, financial institutions and the Banque Populaire network.
Drawing on its expertise in a wide range of complementary areas, Natexis Banques Populaires provides not only traditional banking services but also high value-added technology-based services. In order to meet its clients’ needs and ensure the highest quality standards, the bank offers specialist services in each of its businesses.
A prominent player in financing activities, Natexis Banques Populaires maintains relationships with virtually all major French companies.Through its subsidiary Coface, it is one of the world’s leading providers of credit insurance and credit management services. At the same time, Natexis Banques Populaires is ranked among the leaders in private equity and financial engineering, and is one of the foremost brokerage firms. It also ranks among the top providers of high-tech services. Finally, it is a well-known and highly respected player in the bancassurance and asset management segments and the leading employee savings plan manager in France.
Table of contents P.01 > Profile P.04 > Chairman’s message P.05 > Chief Executive Officer’s message P.06 > Key figures 2005
P.08 > Natexis Banques Populaires and its shareholders P. 08 > NATEXIS BANQUES POPULAIRES SHARE PERFORMANCE
P.56 > Sustainable development P.56 > NATEXIS BANQUES POPULAIRES DEEPENS ITS COMMITMENT
P.69 > 2005 financial information P.69 > MANAGEMENT REPORT P.69 > Changes in scope of consolidation P.69 > Review of operations and results P.70 > Income statement analysis P.81 > Risk Management P.92 > Financial structure and regulatory ratios P.93 > Refinancing P.94 > Subsequent events P.95 > Information on Natexis Banques Populaires parent company and proposed distribution of net income
P.98 > FINANCIAL INFORMATION P.102 > Consolidated financial statements to December 31, 2005 P.202 > Auditors’ report on the consolidated financial statements P.204 > Parent company financial statements to December 31, 2005 P.243 > Auditors’ report on the parent company financial statements P.245 > Auditors’ report on related-party agreements
These record profits were right in line with management’s projections and market expectations, against a backdrop of fierce competition in banking and the financial markets. In this context, Natexis Banques Populaires was an active participant in the Banque Populaire Group’s success, and its net banking income represented 37% of that of the Group.
With sound fundamentals, Natexis Banques Populaires is gaining momentum and positioning itself as a unique and innovative market participant.
Natexis Banques Populaires is a vital force in the banking industry. It both designs solutions in the vanguard of the industry for its various client groups – large and mediumsized companies, financial institutions and the Banque Populaire network – and creates industry models.
By adhering to its fundamental values, the bank is able to achieve ambitious and regular growth for its clients, employees and shareholders.
“Natexis Banques Populaires is gaining momentum and positioning itself as a unique and innovative operator in its market.”
What is Natexis Banques Populaires’ expansion based on? Natexis Banques Populaires has a high-quality clientele, a strong business culture, a transparent structure and clear corporate governance.
All of these initiatives are aimed at ensuring robust, profitable and secure growth.
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT in millions of euros
Key figures 2005 155 offices, including 117 outside France 12,973 employees
“Solid growth in all business lines. Sharp increase in net income”
Corporate and Institutional Banking and Markets 1,159 1,259 Private Equity and Wealth Management 188 264
Receivables Management 683 781 Net banking income of core businesses 2,641 3,029 Other net banking income 67 62
Shares registered in the name of the same holder for at least two years carry double voting rights. As of December 31, 2005, there were 85,854,423 voting rights outstanding.
Banque Fédérale des Banques Populaires 74.97% 84.88% of which Alizé Levier employee investment plan 2.09% 2.39%
Employees (other employee investment plans) 1.34% 1.40% Banque Populaire regional banks and CASDEN BP 1.78% 1.91% ASB Holdings 1.57% 1.80% DZ BANK 1.85% 1.06%
The following calculations are based on a gross dividend, including the avoir fiscal tax credit at the 50% rate (except for 2004). Dividends are assumed to be reinvested in Natexis Banques Populaires shares. Returns were calculated as of December 23, 2005 and are shown before tax and brokerage costs.
(1) Dividend is assumed to be reinvested at the opening share price on the first trading day following payment.
FISCAL GROSS PAYMENT DIVIDEND FRACTIONAL TOTAL SHARES AFTER YEAR DIVIDEND DATE REINVESTMENT SHARE ACQUIRED REINVESTMENT OF
PER SHARE SHARE PRICE (1) THROUGH DIVIDEND GROSS DIVIDEND (IN EUROS) (IN EUROS) REINVESTMENT
An integral part of the Banque Populaire Group’s Financial Communication department, the Investor Relations unit aims to increase awareness of Natexis Banques Populaires in the financial community of individual and institutional investors, analysts and rating agencies, both as a corporate group and as an investment. It handles all contact with these groups and places prime importance on the regular issuance of accurate, high-quality financial information.
Shareholder Relations prepares Natexis Banques Populaires’ annual report and its updates, and ensures that they are filed with the AMF (Autorité des Marchés Financiers), the French market watchdog. Owing to the quality of its 2004 annual report, Natexis Banques Populaires was one of the eight SBF 120 companies nominated for the annual report “grand prix” awarded each year by the French financial publication “La Vie Financière”.
Whenever a significant event occurs, details are published in a press release and a special meeting is organized with the press and analysts. Specifically, Natexis Banques Populaires published a press release on April 21, 2005 regarding the impact of IFRS on its 2004 financial statements.
Regular roadshow presentations are organized for institutional investors in France and internationally, and information sessions are held for employees of the Banque Populaire regional banks who sell Natexis Banques Populaires shares.
Individual shareholders in France can also obtain information throughout the year by dialing a toll-free number
(0 800 600 525 calls originating in France only) or by sending email to relinvest@nxbp.fr. In an effort to personalize shareholder relations and ensure that the information provided is of a consistently high quality, all calls and emails are handled directly by members of the Shareholder Relations team.
Finally, for the fifth consecutive year, the Shareholder Relations team met individual shareholders at the Actionaria individual investors’ trade fair held on November 18 and 19, 2005 at the Palais des Congrès conference center in Paris.
Postal and proxy voting Shareholders who do not attend the Meeting in person can take part in the vote by: n giving proxy to the Chairman of the Meeting, by returning the signed form of proxy.The Chairman then casts a “Yes” vote on all resolutions presented or approved by the Board of Directors and a “No” vote on all other resolutions; n voting by post, by returning the signed postal voting form after checking the appropriate boxes so as to vote “Yes”, “No” or “Abstain” on each resolution presented to shareholders; n giving proxy to their spouse or another Natexis Banques Populaires shareholder to vote on their behalf.
The Notice of Meeting The Notice of Meeting presents the agenda of the Meeting and the resolutions that will be put to vote. It is sent directly to holders of registered shares who purchased their shares at least one month before the Meeting date. Included with the Notice is a form to apply for an admittance card, for shareholders planning to attend the meeting in person, and a form of proxy and a postal voting form for shareholders who are unable to attend.
Attending the Meeting in person Shareholders will be required to present their admittance card at the door. If they do not receive this card in time, they can still take part in the vote by presenting an official identity document (together with the certificat d’immobilisation in the case of holders of bearer shares).
DIRECTORS: >>> Philippe Dupont, Chairman of the Board of Directors of Natexis Banques Populaires >>> Banque Fédérale des Banques Populaires, represented by Pierre Desvergnes, Chairman of CASDEN Banque Populaire >>> Vincent Bolloré, Chairman and Chief Executive Officer of Groupe Bolloré
>>> Christian Brevard, Deputy Vice-Chairman of Banque Populaire Alsace >>> Jean-François Comas, Chief Executive Officer of Banque Populaire Côte d’Azur >>> Claude Cordel, Chairman of Banque Populaire du Sud >>> Daniel Duquesne, Chief Executive Officer of Banque Populaire Loire et Lyonnais >>> Stève Gentili, Chairman of BRED Banque Populaire >>> Jean de La Chauvinière >>> Yvan de La Porte du Theil, Chief Executive Officer of Banque Populaire Val de France >>> Richard Nalpas, Chief Executive Officer of Banque Populaire Toulouse-Pyrénées >>> Francis Thibaud, Chief Executive Officer of Banque Populaire du Sud-Ouest >>> Jean-Louis Tourret, Chairman of Banque Populaire Provençale et Corse >>> Robert Zolade, Chairman of H.B.I.
Chairman of the Board of Directors, Philippe Dupont Chief Executive Officer, François Ladam
Sections 1 and 2 below constitute part one of the Chairman’s report on the Board of Directors and how it prepares and organizes its assigned tasks (Articles 225-37 and 225-51 of the Commercial Code).
The Banque Populaire Group, the majority shareholder and by far the largest with 76% of the shares, holds 11 seats or 73% of the 15 seats on the Board.Aside from the Chairman, the directors from the Banque Populaire Group are equally divided between chairmen of Banque Populaire regional banks and Chief Executive Officers of Banque Populaire regional banks.
Employee shareholders, who hold approximately 3.4% of the shares, are represented by a Board member appointed by shareholders in accordance with legislation.The current holder of this position is the deputy head of the risks and results unit of the capital markets middle office.
All Board members,with the exception of Banque Fédérale des Banques Populaires, the principal shareholder, are individuals.
In accordance with EU regulations, the bank reports that apart from this obligation there is no restriction on the sale, within a given time period, of the shares owned by members of the Board of Natexis Banques Populaires. Except for Banque Fédérale des Banques Populaires, Board members own no shares other than those mentioned above.
1.2 - Independent directors The three independent directors satisfy the criteria endorsed by the AFEP-MEDEF report on corporate governance. They have no ties with any of the bank's direct or indirect shareholders, are not members of the bank’s management team and have not sat on the Board for more than 12 years. They can therefore take part in the work of the Board on an objective basis: n the first independent director, Jean de La Chauvinière, is a retired banker and stockbroker. He is now completely independent of any financial institution. Mr. de La Chauvinière is also Chairman of the Remuneration Committee and a member of the Audit Committee and is particularly attentive to the concerns of small, minority shareholders; n Robert Zolade is the Chief Executive and co-founder of one of France’s top two food services groups; n the third independent director is Vincent Bolloré, Chairman and Chief Executive Officer of the eponymous group, a leading company in a diversified range of manufacturing, service and communications industries.
Banque Fédérale des Board meeting of 2007 Director Chairman Banques Populaires November 25, 1997 CASDEN Banque Populaire represented by 91, cours des Roches – Noisiel Pierre Desvergnes 77424 Marne-la-Vallée cedex 2
Bolloré Vincent AGM of 2009 Director Chairman and Chief Executive Officer May 27, 2004 groupe Bolloré
Comas Jean-François AGM of 2009 Director Chief Executive Officer May 23, 2002 Banque Populaire Côte d’Azur 457, promenade des Anglais 06292 Nice cedex 3
Cordel Claude AGM of 2007 Director Chairman May 23, 2002 Banque Populaire du Sud 10, place de la Salamandre CS 98-001 - 30969 Nîmes cedex 9
Immeuble PDG Part-Dieu - 141, rue Garibaldi 69211 Lyon cedex 03
Gentili Stève AGM of 2005 Director Chairman BREDBanque Populaire May 23, 2002 18, quai de la Rapée 75012 Paris de La Chauvinière Jean AGM of 2007 Director 25, rue de Madrid 75008 Paris de La Porte du Theil Yvan AGM of 2005 Director Chief Executive Officer May 27, 2004 Banque Populaire Val-de-France 9, avenue Newton 78183 Saint-Quentin-en-Yvelines cedex
Thibaud Francis AGM of 2008 Director Chief Executive Officer May 23, 2002 Banque Populaire du Sud-Ouest 10, quai des Queyries 33072 Bordeaux cedex
Tourret Jean-Louis AGM of 2009 Director Chairman May 23, 2002 Banque Populaire Provençale et Corse 245, boulevard Michelet BP 25 - 13274 Marseille cedex 09
Chavaillard Jean-Pierre AGM of 2007 Director representing Natexis Banques Populaires May 23, 2002 employee 45, rue Saint-Dominique 75007 Paris shareholders
Ladam François Board meeting of Chief Executive Natexis Banques Populaires October 23, 2002 Officer 45, rue Saint-Dominique 75007 Paris
NAME OF PERSON FIRST TERM EXPIRES (AGM CALLED MAIN POSITION MAIN POSITION OR COMPANY ELECTED/ TO APPROVE THE FINANCIAL WITHIN THE COMPANY OUTSIDE THE COMPANY
Permanent representative of Natexis Assurances, member of the Supervisory Board: Assurances Banque Populaire IARD
Société des Chemins de Fer et Tramways du Var et du Gard,
Chairman of the Board of Directors: Plantations des Terres Rouges (Luxembourg)
Société de Gestion pour le Caoutchouc et les Oléagineux – Sogescol (Bruxelles)
Vice-Chairman of the Board of Directors: Banque Fédérale des Banques Populaires,
CHAIRMAN OF THE BOARD OF DIRECTORS: Banque Populaire Provençale et Corse,
Legal co-representative of HBI, co-manager and General Partner of: Société Elior
Legal representative of HBI, the company that is Chairman of Bercy Participations, the company that is manager and General Partner of: Elior (SCA)
Representative of Banque Fédérale des Banques Populaires on the Board of Directors: Natexis Assurances
Chairman and Chief Executive Officer: Informatique-Banque Populaire (until December 31, 2005)
The Internal Rules describe the matters falling within the competence of the Board, its rules of procedure, its code of ethics and its methods for resolving conflicts of interest.They also specifically provide for the Board to be assisted by three Committees. Lastly, they describe the rules of conduct to be followed by each individual director.
The Internal Rules also describe the method used to determine director’s fees.These include a small fixed annual fee (B1,525 since 2001) and a variable fee of B1,220 per meeting attended by the director during the year (also since 2001). In addition, members of the Committees of the Board are paid a fee of B915 per Committee meeting attended.
Detailed minutes are prepared after every meeting. They summarize the information presented, remarks made by the Board members, and the decisions of the Board.
Lastly, the Board continued to approve in advance all major equity investments planned by Natexis Banques Populaires. External growth operations planned by subsidiaries were also submitted to the Natexis Banques Populaires Board for approval. Even though the powers of the Chief Executive Officer are not specifically limited, the bylaws require the Board of Directors to approve any significant equity investment. The threshold has therefore been set particularly low (B1 million) so that the Board is required to make the decision on most transactions of this kind.
In addition to these regulatory responsibilities, the Board of Directors examined the following specific subjects in 2005: n the strategic plan drawn up by Executive Management for the 2005-07 period, approved its major themes and studied the consequences of the plan on the organization, operation and outlook of the bank’s principal lines of business.
In so doing: n the Board analysed the transverse sales organization implemented in the Corporate and Institutional Banking and Markets core business and the business development initiatives of Natexis Banques Populaires with regard to mid-cap corporate customers; n it also assessed developments in capital markets within the Corporate and Institutional Banking and Markets core business; n with regard to extending the bank’s activities abroad, the Board examined country risk policies, and more specifically, the bank’s business development plan in the United States.
n on several occasions, the Board focused on recent events and the outlook in the Services core business. In particular it examined this core business’ organization, which includes Banking Services, Financial Services, Insurance, Employee Benefits Planning, and Asset management. It also examined the creation of Natexis Investor Servicing, a new subsidiary dedicated to asset servicing; and various development and partnership projects in the corresponding business lines.
n in a similar vein, the Senior Executive Vice President, Finance presented a report to the Board on capital allocation methods.
2.3 - Committees of the Board of Directors The Board of Directors of Natexis Banques Populaires has had three special committees for the past several years. Their job is to assist the Board in the performance of its functions: n an Audit Committee (set up in 1996), n a Risk Management Committee (set up in 2000), n a Remuneration Committee (set up in 1996).
Operating rules have been prepared for the Risk Management Committee and the Audit Committee.
n The Audit Committee has four members: Richard Nalpas, Chairman, Pierre Desvergnes, Jean de La Chauvinière (independent director) and Francis Thibaud. Its overall responsibilities, pursuant to its operating rules, are to assist the Board of Directors in controlling risk at Natexis Banques Populaires, to review draft financial statements and related financial disclosures. Where necessary, the Committee obtains explanations about material items before the financial statements are presented to the Board. During its review, the Committee examines the accounting treatment of non-recurring transactions and obtains assurance concerning the appropriateness and consistent application of accounting principles and methods.
In accordance with its operating rules, the Risk Management Committee assists the Board of Directors in managing the risks incurred by Natexis Banques Populaires.To this end, the Committee analyses the bank’s main areas of risk – other than those concerning the accuracy of the financial statements and financial disclosures – and assesses the effectiveness of the internal control systems. In the same way as the Audit Committee, the Risk Management Committee may review any issues that fall within its purview.
n The Remuneration Committee has four members. Its chairman is Jean de La Chauvinière (independent director) and the other members are Stève Gentili, Vincent Bolloré (independent director) and Yvan de La Porte du Theil.
Analysis of the responses showed that overall, directors were positive about work carried out by the Board of Directors of Natexis Banques Populaires. Board members said they were satisfied with the volume, form and quality of the information they received during Board meetings.
Nevertheless, the Chairman made several specific proposals so as to take into account remarks and suggestions about how meetings are organized and run. He also made suggestions about topics in which directors showed keen interest, in particular strategy and human resources.These proposals can be implemented very soon. The Board decided to conduct evaluations regularly in the future, so as to have a constant barometer of how well improvements are working and to have wide-ranging input on corporate governance.
The report must therefore include not only the exact amount of each component of total compensation but also the context and the reasons that led to it.
3.1 - Compensation paid The compensation paid to the Chairman and Chief Executive Officer includes: n components of direct compensation plus, if applicable, fringe benefits; n director’s fees, if applicable.
As can be seen in the information presented below, direct compensation has been stable, composed essentially of a fixed portion and a “variable” portion, which, as in prior years, was adjusted only marginally. Director’s fees were very low.
Mr. Ladam received no director’s fees for the directorships he holds in two subsidiaries of Natexis Banques Populaires.
In accordance with these rules, the total fees paid to the directors and the one non-voting director for taking part in Board and Committee meetings in 2005 amounted to B171,410.This amount excludes the Chairman’s fees, detailed above, which were calculated on the same basis as those of the other directors. This amount broke down into B144,875 in fees for attendance at Board meetings (including B22,875 in fixed fees and B122,000 in variable, attendance -based fees) and B26,535 in fees for attendance at meetings of Committees of the Board.
The director paid the highest total fee received an amount of B13,725.
The table below provides details of the amounts received by each director, as a director of Natexis Banques Populaires and, where applicable, as a director of certain subsidiaries of the bank and/or of Banque Fédérale des Banques Populaires, the controlling shareholder of Natexis Banques Populaires.
Mr.Dupont received compensation of B299,427 and B63,868 in fringe benefits in his capacity as Chairman and Chief Executive Officer of Banque Fédérale des Banques Populaires, the controlling shareholder of Natexis Banques Populaires.
In his capacity as Chairman of the Board of Directors, Philippe Dupont received B10,065, calculated on the same basis as that used for all directors.
Mr. Dupont holds no other directorship at any subsidiary of Natexis Banques Populaires.
n The variable portion of Mr. Ladam’s 2006 compensation will be calculated by applying the same principles as those described for the Chairman’s variable pay.
Name Board Number Total a/b Variable Fixed Total (individuals) member from of Board number portion annual 01/01/2005 meetings of meetings €1,220 fee to 12/31/2005 attended during /meeting €1,525 the year a b
Jean de La Chauvinière x 7 7 100% 8,540 1,525 10,065
The system for compensating Board members was set by the Board of Directors of Natexis Banques Populaires on March 21, 2001.
Name Fee for Fee for Fee for Risk Total Fees paid Fees paid (individuals) Audit Remuneration Management amount by companies by company
In 2005, Mr. Dupont exercised 20,000 Natexis Banques Populaires options granted in 2001, at an exercise price of B94.30.
As authorized by shareholders on May 19, 2005 and in accordance with regulations, the Board of Directors granted 14,000 options to the Chief Executive Officer of Natexis Banques Populaires with regard to 2005.The exercise price, as set by shareholders, is B119.24.
In 2005, Mr. Ladam exercised 4,500 Natexis Banques Populaires options granted in 2001, at an exercise price of B94.30.
In this regard, the total of all pension benefits payable to executives may not exceed 60% of the income they received in their last year of service, with the income figure capped at B335,000. For executives appointed after January 1, 2005, this maximum has been reduced to 50%.
This system was implemented before May 1, 2005, i.e. prior to the effective date of the July 26, 2005 law (no. 2005-842).
3.3.2 Severance payments Should an executive be dismissed prior to the expiration of his term, except in the event of professional misconduct, the Banque Populaire Group will pay an indemnity equal to one year of compensation, plus 1/12 of annual compensation for every year of service in the Group and, if applicable, 1/12 of the same compensation for every year of service as Chief Executive Officer.The amount of the indemnity is limited to a maximum of 42/12 of annual compensation.
When an executive takes retirement or early retirement, he receives a payment equal to 1/40 of annual compensation per year of service in the Banque Populaire Group, capped at 40/40 of that compensation.
In return for their services, the Auditors were paid the following fees: Although there is no legislation regarding corporate governance in France today, Natexis Banques Populaires believes, based on the information disclosed above, that it follows the recommendations resulting from the consolidation of the AFEP, MEDEF and ANSA reports, published in 2003.
The substitute auditors are: n BEAS, 7/9 Villa Houssay - 92200 Neuilly-sur-Seine n Mr. François Chevreux, 40, rue Guersant - 75017 Paris n Mr. Pascal Macioce, 41, rue Ybry - 92576 Neuilly-sur-Seine in thousands of euros Deloitte & % Deloitte & % Salustro Reydel- % Salustro % Associés 2005 Associés 2004 KPMG 2005 Reydel 2004
in thousands of euros Barbier Frinault & % Barbier Frinault & % Autres-Ernst & Young 2005 Autres-Ernst & Young 2004
The capital allocation system, implemented in 2004,was also updated. Use of capital is now an integral part of the considerations of the business lines when setting their growth objectives.
In addition, Natexis Banques Populaires created a Purchasing department responsible for all types of purchases made by the various entities within the bank. The first phase of optimisation efforts focused on temporary work contracts, office supplies, IT consumables and travel expenses. The second phase includes executive search firms, attorneys ’ fees, printing, software and building use, which represent purchases totalling B80 million.
Compliance department In accordance with new regulatory requirements, Natexis Banques Populaires has also created a Compliance depart-
In 2005, Natexis Banques Populaires began to implement its 2005-07 strategic plan.A Strategy department is now in charge of updating and monitoring it. In so doing, the bank strengthened its strategic management and internal control systems, as well as its tools for managing and controlling risks, including operational risks. In addition, in accordance with regulatory requirements, a Compliance department was created.A new system of governance was implemented in the IT area so as to optimise the information systems dedicated to the various business lines. Finally, international expansion continued, and Natexis Banques Populaires revised the organization of its international offices.
Implementation of IT governance In information systems, an IT governance system was implemented in 2005 to tie the bank’s strategy and IT systems together in the most efficient manner. Functional domains were created, each headed by an individual.This person encourages discussion at the business line level and manages the available choices and all strategic decisions, thereby enabling the bank to optimise the contribution of its information systems. The objective is to be more demanding of maintenance work and to choose the most appropriate projects. Similarly, the bank began to reorganize the Research department so as to better distinguish between application maintenance and new projects. This separation will make the new projects more flexible and allow them to advance more rapidly.
A new set of rules for using IT, digital and technological resources came into force in 2005.The rules codify the use of these resources so that they benefit customers, improve individual efficiency and the bank’s overall performance.
Business lines are complementary Financing, investment banking and services now generate 37% of the Banque Populaire Group’s net banking income.
Properties used in the business have been rationalized In 2005, 2,300 employees moved into the new Liberté 2 premises in Charenton-le-Pont just outside Paris.This building has received the grand prize awarded by the real estate profession in the new building category for its aesthetic, architectural, technical and environmental qualities. Natexis Banques Populaires will continue to rationalize the properties it uses in the business in 2006. Specifically, Global Debt & Derivatives Markets and Equity Group will be brought together in the Montmartre premises. Separately, the bank carried out an important real estate transaction, selling the Liberté 2 building to an institutional investor and leasing it back for a minimum period of 12 years.
3,000,000 member-shareholders 19 Banque Populaire regional banks CASDEN Banque Populaire,Crédit Coopératif
CORPORATE AND INSTITUTIONAL BANKING AND MARKETS Client relationships based on proximity
C orporate and Institutional Banking and Markets posted net banking income of B1,259 million, up 9% from 2004, taking advantage of synergies between its various business lines and making better use of the bank’s business assets.
Natexis Banques Populaires has business relationships with 90% of the top 350 French companies, and with more than half of all companies with sales of more than B150 million. In 2005, the bank was increasingly successful, in particular with syndicated loans for clients such as Gaz de France, CMA CGM or Zodiac.
The Cash Management & Operations department was successful on several competitive bids, and its net banking income increased despite a backdrop of heightened competition. These successes validated organizational changes made at the end of 2004. Cash Management & Operations was turned into an integrated business line, from design to
Businesses € 1,259million in net banking income (up 9% from 2004)
€ 76.9 billion in outstanding loans processing, with sales teams encompassing both specialists and generalists. An entity dedicated to client assistance was also created.
The Cash Management & Operations department develops its line of products and services selectively. For example, Swiftnet plays a major role in transaction dematerialization. Domestic cash pooling has been redesigned and now constitutes the base for a nationwide range of cash management services, developed through a dense network of regional offices in close coordination with the Banque Populaire regional banks.
In equipment leasing, Natexis Lease advanced by 10%, with more than B1 billion in new business. New leases from the Banque Populaire regional banks, at Crédit Maritime Mutuel and with Natexis Banques Populaires’ corporate clientele contributed to this performance.
Vendor programs were put in place. In particular, a partnership was signed with the Manitowoc group (Potain) covering the French and Spanish markets. In energy management and environmental lease financing, Énergéco was a major player in wind farm financing.
With B530 million in new lease production, Natexis Lease is the second-largest property leasing company in France (source: Association française des sociétés financières). Internationally, Natexis Lease saw a significant rise in its business activity in Spain, two years after opening an office in Madrid.A new branch is to be opened in Barcelona in 2006. In the fourth quarter of 2005, a branch was opened in Milan. Lastly, Natexis Lease created a leasing depar tment at Natexis Algérie.
The international arena is the bank’s new vein of growth Against a background of excess liquidity and low cost of risk, the International department maintained its income level, because the bank did more business abroad. Net banking income from international entities advanced by 23% all businesses combined, driven in particular by the United States and Europe.
Finally, the International department launched an ambitious project aimed at strengthening its local presence while fostering cross-selling, in particular in Europe and North America. It has hired staff skilled in several business lines, and it assists clients in international capital markets activities.
Natexis Pramex International, a subsidiary specialized in advisory services for international corporate expansion, posted an increase in net banking income of 16%, thereby strengthening its position in France and abroad. Having opened subsidiaries in Montreal and Bombay in 2005, it plans to beef up its presence in Russia, Brazil and the Persian Gulf in 2006. Through this expanded, 14-country coverage, it will be able to develop its corporate management and delegated management services for its clients’ foreign subsidiaries.
In emerging countries, management emphasizes local client relationships. For this reason, the bank has commodities specialists in its offices in Singapore, Hong Kong, São Paulo, Buenos Aires, Santiago de Chile, Moscow and Abidjan, as well as New York and Houston. In 2005, a Kazakhstan office was added to the network.
The new financial engineering unit also made a significant contribution to overall performance, owing to innovative, structured deals, such as the financing of the Colony fund’s investment in Accor. Tailor-made solutions backed by a variety of underlying assets, from equities to real estate, are also offered to institutional and corporate clients.
Corporate Securitization continued the expansion it began in 2004, despite a significant decline in the number of market transactions. It also expanded its services to reach the entire Banque Populaire Group.
Capital markets The Capital Markets unit, consisting principally of the money market, foreign exchange, fixed-income and lending desks, advanced by 21%, benefiting from the combination of capital market and financing dimensions and a new organization fostering more sophisticated products on each desk (lending, fixed-income, foreign exchange). By raising the level of sophistication in its products this unit was able to increase profits realized in the institutional segment.The lending desk benefited from a portfolio of new products. The foreign exchange unit advanced by 54%, owing in particular to structured transactions. The money market unit continued to diversify its funding sources on behalf of the Banque Populaire Group, both from the point of view of markets (US & UK, public issues/structured issues, launch of a new, extendible notes program in the US) and investors.
Natexis Commodity Markets Limited is one of the 11 ring dealing members with access to open outcry trading on the London Metal Exchange. It expanding the range of products (metals, energy, soft commodities) it offers to its own clients and in support of Banque Populaire Group clients on organized markets and on OTC derivatives.
The investment portfolio management unit implemented an active management methodology. The objective is to allocate an investment envelope to each asset class depending on the extent to which they obey their risk/return relationship.
Equity Group A specialist in the French market, Natexis Bleichroeder S.A. continued to redeploy its equity research capabilities, in
Financing transaction in the Italian market Alongside two Italian banks, Natexis Banques Populaires acted as exclusive arranger for the financing of the acquisition of la Rinascente, the Italian store chain, from Eurofind SA.
coordination with Natexis Bleichroeder Inc. and its partner, DZ Bank. Investment in the execution platform enabled this brokerage unit to expand its range of services for institutional investors and make interaction with the New York platform more fluid. Market conditions were once again favorable, and brokerage income increased sharply. In 2005, Natexis Bleichroeder S.A. managed two IPOs (Entrepose Contracting and Rue du Commerce) and participated in seven equity issues, including three as lead manager. In cooperation with the Banque Populaire regional banks, the subsidiary participated in three privatizations during the year (SANEF, GDF, EDF). Natexis Bleichroeder S.A. also consolidated its already-strong position in public-sector issues.
Mergers & Acquisitions Benefiting from a strong position in middle-market banking, Natexis Finance improved its presence vis-à-vis corporate clients and investment funds. Cross-border transactions will gather pace once this unit forges partnerships in large European countries. Natexis Finance has built up its teams through targeted hiring efforts, making the mergers and acquisitions business of Natexis Banques Populaires more visible and more profitable against a more favorable market context.
In the LBO & acquisition financing market, Natexis Banques Populaires won Private Equity Magazine’s “LBO lender of the year” award in 2005 (debt and mezzanine). The prize was awarded by a jury of 18 professionals for the number and quality of arranger mandates.
The Private Equity and Wealth Management core business includes Natexis Private Equity, Banque Privée Saint Dominique and Natexis Private Banking Luxembourg S.A.
With 630 investments and B2.3 billion in assets under management in its 11 subsidiaries, Natexis Private Equity bolstered its position as a French specialist in private equity dedicated to small and medium-sized enterprises (SMEs).
Widening the lead In expansion capital, Natexis Private Equity strengthened its status as leading investment partner for unlisted French SMEs. Managed assets totaled B666 million and the amount invested B131 million.
On the strength of its expertise in these two business lines, Natexis Private Equity also expanded its range of products for individual clients of the Banque Populaire regional banks. Naxicap Partners launched three new “proximity” investment funds (Banque Populaire Proximité Sud-Est 2005, SudOuest 2005 and Ile-de-France Nord Centre 2005). In the meantime, Seventure participated in the launch of its tenth innovation mutual fund (Banque Populaire Innovation 10).
A new international dimension Through its role as an active sponsor of teams based in Europe, Asia and Latin America, Natexis Private Equity’s international commitment contributed significantly to the favorable 2005 results.
Uniquely placed to assist and advise business owners Banque Privée Saint Dominique and the various subsidiaries of Natexis Banques Populaires complement each other and offer clients a comprehensive range of products and services.
For example, synergies between Banque Privée Saint Dominique and Natexis Private Equity provide business owners with a range of services to accompany them in their growth and help them manage their company’s assets when the business is to be sold.
In this way, Banque Privée Saint Dominique enables the Banque Populaire Group, against a backdrop of fierce competition, to strengthen its positions in the wealth management market, increase loyalty among its clients and win new ones.
A new fund of funds In 2005, Natexis Private Equity launched a new €500 million fund of funds, Dahlia, in partnership with Fonds Européen d’Investissement. Designed for institutional investors and insurance companies, the fund draws on all the skills of its two sponsors to invest in all branches of private equity, at both primary and secondary levels. It supplements the LBO fund of funds, NPE LBO Europa, launched at the end of 2004 with €100 million.
Responding to the demands of its role as sponsor By working in close collaboration with private equity regulatory and oversight bodies (AFIC, EVCA,AMF) and by implementing a bona fide system of corporate governance, with internal controls, a compliance officer, risk management, a supervisory board and other safeguards, Natexis Private Equity is a conscientious sponsor, committed to responding to the demands of its investor and entrepreneur partners.
High value-added financial services To address the needs of an ever-more-demanding clientele, the expertise of Natexis Private Banking Luxembourg SA extends to all banking and financial services. The range of products offered includes discretionary asset management, various types of exclusive management, based in particular on an open architecture approach, financial engineering, innovative optimization and asset structuring, tailor-made lending solutions, life insurance products, mutual products and structured products with a guaranteed or protected capital feature.
Composed of more than 2,500 people,the Services core business now includes six business lines. It has two objectives.The first is to support the Banque Populaire regional banks and help them achieve their growth and new business development goals through the design of products and systems.The second is to adapt its services to the other client groups of Natexis Banques Populaires: large companies, institutions, retail banks, specialized banks with or without a branch network and other financial institutions.
T he Services core business was reorganized in 2005. It now encompasses asset management, employee benefits planning, insurance, custody, investor servicing, and domestic and international payment media management.
Natexis Interépargne benefited from growth in the pension funds market two years after “PERCO” employee pension plans were created by the loi Fillon.Moreover, 2005 was rich in new legislation. The work-time management plan was revised and new impetus was given to collective performance bonuses and employee share ownership in SMEs.As of December 31, 2005, Natexis Interépargne managed more than 2.6 million employee accounts for 25,756 client companies, representing market share of 20.6% (as of June 30, 2005).As such, Natexis Interépargne maintained its ranking as France’s leading administrative manager of employee savings.
Natexis Asset Management Immobilier ranked four th among French real estate investment trusts (REITs) (source: Institut de l’épargne immobilière et foncière). Its managed assets rose by B169 million, up 15% from 2004, with net new money of B82 million.This put it in second place, with market share of 6.7% in terms of managed assets (source: AEIF, December 31, 2005).
NO. 1 administrative and financial manager of employee savings in France (source: AFG)
11.7% market share in interbank teleclearing (SIT) transactions (source: 2005 SIT data)
Natexis Asset Management, Natexis Assurances and Natexis Asset Management Immobilier have reorganized the range of financial investments available to customers to better respond to the various customer segments and the distribution channels within the network of the Banque Populaire regional banks.
Natexis Assurances has added new services to its multivehicle life insurance range, enabling clients to safeguard or invigorate their investments to generate capital gains. Similarly, Hisséo Vie Plus gradually diversifies the client’s investments in the general fund toward more dynamic investment vehicles.
In its first year of operation, Natexis Investor Servicing performed more than 150,000 valuations and handled 164,000 middle office transactions.
Financial Services, after undergoing restructuring that saw it abandon unprofitable activities, posted better-than-expected results with net banking income of B148 million, up 15% compared with 2004.
Innovative product lines Individuals wanting to top up their retirement funds must invest their financial savings for the long term.
Complete range of property & casualty insurance After renewing its product range in 2004 (auto, homeowners, young people, schoolchildren) Natexis Assurances introduced two new policies in 2005,ASSUR-BP Moto and ASSUR-BP Cyclo. This expansion reflects Natexis Assurances’ desire to offer products that not only meet customer expectations but also cater to their behavior and way of life.Ten years after creating this business line, the Banque Populaire Group is continuing its policy of rapid growth so as to reach one million property & casualty policies by 2010.
2004-05 GROWTH IN NET BANKING INCOME OF BUSINESS LINES IN THE SERVICES CORE BUSINESS in millions of euros * external net banking income
A new sales organization was deployed for employee benefits planning in 2005, and this led to new products and services designed specifically for employees of companies that are clients of Natexis Interépargne. More self-employed professionals were attracted to ES-PL and small businesses in general to the Fructi Épargne + (PEI-PERCO-I), Fructi Professionnel (loi Madelin contracts) and Chèque de Table (restaurant vouchers) products. In the large companies segment, there were several successes on complex competitive bids.
Efficient systems Natexis Investor Servicing, created in 2005, offers three complementary services to management companies and more generally to institutional investors: fund administration, financial and regulatory reporting, transaction management and position keeping. In 2005 priority was on implementing a new fund valuation system and on integrating nearly 1,000 new funds into the system.
Continued expansion abroad The customer base of Natexis Axeltis Ltd is growing at a healthy pace, with 35 external distributors of Banque Populaire Group funds and third-party funds – private banks, insurance companies, brokers, multi-managers – in France, Luxembourg and Switzerland. Its catalog includes more than 5,400 funds offered by 87 large investment houses and boutiques in Europe, covering both traditional and alternative investment styles. In 2006, Natexis Axeltis Ltd’s priority will be on developing in the principal European markets, in particular with distributors in the UK, in collaboration with Natexis Asset Management.
To support its European business development strategy, Natexis Asset Management opened its first branch in the UK: Natexis Asset Management UK.
Natexis Assurances’ equity investments and technical cooperation agreements with local banking networks in Italy, Lebanon and Tunisia posted sharply increased results in 2005, which exceeded expectations in some cases. A project to open a new subsidiary in Algeria was also undertaken.
Finally, Slib, a subsidiary specialized in stock market order flow logistics for European brokers and banks, strengthened its pan-European reach in 2005, signing contracts with major European companies in securities services and brokerage. It also finalized its clearing risk management system for clearing houses and traders active on the major European markets.
Leader in employee savings, Natexis Interépargne is preparing to go on a sales offensive so as to achieve a comparable position in the pension funds market and in the employee benefits planning market in general.
Natexis Paiements innovates with a Monediag’ Santé sales assistance team >>> To help attract self-employed healthcare professionals, Natexis Paiements has created a department of technical representatives called Monediag’ Santé to assist the Banque Populaire regional banks in assessing needs and proposing the best electronic banking solutions for them. Monediag’ Santé will enable the Banque Populaire Group to position itself in the near term as a major player in supplying electronic banking capabilities to France’s 300,000 doctors, dentists and specialists.
Natexis Factorem’s financial indicators continued to improve in 2005. Factored receivables increased 8% over 2004 to B11.8 billion (incl.B0.5 billion at its German subsidiary VR Factorem). Net banking income, at B107 million, including B3.8 million from VR Factorem, increased by 5%.
Its long-term business development strategy is ambitious. Launched in 2005, the plan aims to make Coface a major player in each of the countries in which it is present within three years and the world leader in receivables management within ten years. Apart from meeting its growth targets for economic net income, the plan calls for Coface to deploy its four business lines in all of its entities, both subsidiaries and branch offices, in every country in which it is present, revise its new business organization so as to adapt it to the needs of its clients and complete its worldwide IT infrastructure around its four business lines, while integrating those of Natexis Factorem. It also calls for Coface to take advantage of acquisition opportunities that might arise in these business lines. In 2005, Coface met its plan targets. Specifically, it expanded the availability of its range of products and services in the countries in which it is present: company information in nine additional countries, receivables management in seven countries, credit insurance in two countries and factoring in two countries. It also strengthened its international network. It acquired the € 238 billion in guaranteed receivables € 674 million in net banking income
€ 111million in net income € 12 billion in factored receivables € 107million in net banking income
second-largest South African credit insurer CUAL and the Lithuanian credit insurer LEID, it opened credit insurance subsidiaries in Brazil and Mexico, acquired a majority interest in BDI, a large Israeli specialist in company information, and it signed an agreement with the Dubai insurer NGI (Emirates Bank group) to provide credit insurance in that country.
Synergies with Natexis Factorem are now stronger Natexis Factorem strengthened its position as the third-largest factor in France (source: ASF), growing in all client segments. In 2005, it continued to pursue its strategy to win new clients and heighten customer loyalty.
In an environment characterized by heightened competitive pressures, Natexis Factorem decided to differentiate itself through the quality of its services. It became the first factor to obtain certification.Delivered by BVQI, certification recognizes that Natexis Factorem has honored a specific set of commitments to its clients over the full range of its factoring services. One of its commitments, for example, is to finance 100% of every factored receivable from one day following reception.
At the same time, Natexis Factorem has renewed its range of factoring services for large companies and SMEs (confidential factoring and trade balance purchasing). In this way, Natexis Factorem strengthened its positioning in the segment that generates most of the growth in the French factoring market (up 10.7% in 2005 vs. 2004).
Natexis Factorem has also signed distribution agreements with the main brokers specialized in the distribution of
- Company information enables them to evaluate the financial condition of their business partners and their ability to meet their commitments (solvency information) and to detect business opportunities with solvent customers (marketing information).
receivables management services. This channel already generates a significant part of its new business.
In Germany, the success of VR Factorem, a joint venture with VR Leasing (subsidiary of DZ Bank), offers a new growth area. In the fast-growing German factoring market, VR Factorem’s business model, based on attracting small corporate customers of the Volksbanken network, has been working very well. After only two years of operation, the subsidiary, 51%-held by Natexis Factorem, is already profitable, with net income of B0.3 million.
Just the right density of sales offices >>> The Receivables Management core business has an extensive network of offices, enabling it to optimize sales, based on a customer-centric approach. Natexis Factorem sells all of the core business’ services in the Banque Populaire regional banks and at Natexis Banques Populaires. Brokers, very significant in the factoring and credit insurance business lines, complement this network.
All new employees participate in an initiation program The program includes several phases spread out over the employee’s first year in the bank. Initially, employees take part in an orientation day, during which the company’s organizational structure, operating procedures and environment are presented. Later, they attend modules devoted to security and money laundering. Finally, they participate in multiday seminars entitled “Objectif Découvertes” for management-level employees, who represent 60% of new hires, and “Premiers Contacts” for technical staff. During the seminar, they meet executives, Human Resources managers and other key people in the company.They broaden their
Natexis Banques Populaires has undertaken strategic and organizational changes to optimize its business assets, develop working relationships with the Banque Populaire network and its customers and expand international activities. In 2005, the Human Resources department accompanied the bank in these endeavors. To effect these changes, the bank had to strengthen support functions, such as information systems and strategic management tools.During the year,many new employees were hired, special training courses were held, incentives were added to the compensation policy, and the bank continued to harmonize the status of its various groups of employees.
The bank continued to encourage workforce mobility in 2005.At the individual level,more than 300 parent company employees changed department. Many others changed jobs within the same department.The members of a resources committee, drawn from the parent company and subsidiaries, exchanged information about available positions and employees available for transfer.Transfers were also facilitated by expanded internal communication about available positions through an intranet and internal memoranda.The monthly average of published offers increased from 20 in 2004 to 27 in 2005. Natexis Banques Populaires also helped integrate 20 people from two Banque Populaire Group entities, Société de Banque et d’Expansion and Crédit Maritime.
Committed to integrating young people Natexis Banques Populaires also places emphasis on introducing young people to the business world as a way to prepare them for their professional life. More than 660 student interns worked in the bank in 2005 in various departments and subsidiaries, for periods of six months to a year. In addition, 117 young people were on work-study programs leading to 2-5 year higher-education degrees and 34 participated in programs enabling young graduates to obtain international work experience (volontariat à l’international).
They were working for 18-24 months in one of the bank’s international offices, usually in North America or Asia. In all, more than 800 young people were consolidating their classroom training with practical experience.
Finally, various forms of managerial training are offered to managers depending on their experience. They address the role of the manager as team leader and as provider of information, in accordance with the managerial objectives outlined in “Être manager chez Natexis Banques Populaires”, an internal manager’s guidebook.
Attractive compensation policies In 2005,Natexis Banques Populaires was particularly attentive to trends in individual and collective compensation, both fixed and variable. Every year, individual compensation and changes therein are evaluated with respect to the employee’s performance targets. This individual compensation policy motivates employees and aims to retain talented people.
In addition, Natexis Banques Populaires applies the Banque Populaire Group salary increase agreement to all employees whose contracts are governed by the collective bargaining agreement applicable to banks. Employee compensation is also tied to the bank’s earnings. The profit-sharing and incentive plans now represent around two months of base salary.
The incentive plan is based solely on the net income figure.
Community projects financed by professional training taxes For the last ten years, Natexis Banques Populaires has devoted part of the special payroll tax devoted to professional training (taxe d’apprentissage) to teaching projects for young people with learning problems, difficulties in finding a job or who must cope with disabilities.
The Human Resources Charter Developed at the end of 2004, the Human Resources Charter aims to harmonize human resources policies across the bank and its subsidiaries.The charter clarifies the roles of the various HR positions and defines the principles and practices common to all human resources management. It fosters internal consistency, equal treatment and a sense of belonging. Potential action and areas for development were identified in six key aspects of human resources management: hiring, integrating new employees, mobility, career management, training, benefits / labor relations / administration and managerial culture.
The organization has embraced change During the year, the Human Resources (HR) department began to explore ways to adapt its structure to changes in the bank. It began to redeploy its HR teams to create an organization articulated around the core businesses. This organization emphasizes proximity, with HR managers who know the business representing HR on site. At the same time, certain functions started to be consolidated at the head office HR department, such as hiring and training.
An HR intranet for everyone Construction of a new HR intranet was undertaken in 2005. The site is to be open to all employees of Natexis Banques Populaires and its subsidiaries. Roundtable discussions were organized, with both employees and HR managers present, drawn from both the parent company and subsidiaries.The aim was to create a multi-purpose space that would bring employees closer together and address everyone’s needs.
The site is set to go on line in 2006 and should reinforce the feeling of belonging to Natexis Banques Populaires. It will also include two dedicated areas. In one, human resources specialists will exchange information regardless of which structure they belong to; in the other, managers will find information and tools for better monitoring of their employees’ development.
Horizons, the internal magazine for all employees, has a new layout and new categories, including an international one, to reflect the bank’s development strategy. An English version of the magazine is now sent to all employees outside France.
In addition, Natexis Banques Populaires created Traits d’Union Métier, a communication vehicle for certain business lines present in more than one entity or core business.
An exacting approach: motivated by a taste for challenge and success, we are responsive and pragmatic.We bring our professionalism and our expertise to bear to provide the most appropriate service to the client.
Natexis Banques Populaires has held onto its position as a major player in the environment and renewable energy. Not only has it greatly increased financing of wind farms, but it also is diversifying into solar, ethanol and biomass project finance.
Recognized contribution to sustainable development Rated byVigeo for the third year in a row, the bank made significant progress in all areas between 2004 and 2005. Natexis Banques Populaires is among the top-ranking banks for human resources, relations with customers and suppliers and its commitment to society. The bank is also a member of the rating agency’s “ASPI Eurozone” index, composed of the 120 euro-zone companies with the best social and environmental responsibility performance.
Asset management is also committed to sustainable development For several years now, Natexis Asset Management has been developing a range of socially-responsible funds covering all asset classes (equities, bonds, and money-market): Natexis Développement Durable. In managing these funds, the bank combines social, environmental and corporate governance criteria with traditional financial criteria.
In employees savings, Natexis Asset Management and Natexis Interépargne have jointly developed Fructi ISR, a complete range of six employee investment plans managed according to the principles of socially-responsible investing (SRI). Since 2002, the Comité Intersyndical de l’Epargne Salariale, an organization created by French labor unions to represent employees in employee savings plan negotiations, has given Fructi ISR its stamp of approval every year.
Sharp increase in wind farm financing >>> In 2005, Natexis Lease, in particular through its Energeco subsidiary, participated in the financing of 25 wind farms with a total capacity of 236 MW.
>>> Moreover, through the Project Finance department and it’s involvement in international projects, Natexis Banques Populaires doubled its portfolio of wind farm financing. The bank participated in the financing of ten new wind farms in France, Spain, Portugal, the United Kingdom, Ireland and the United States.
Financing amounted to €115 million for a total capacity of 1,100 MW.
Turning up the heat on financial crime Efforts in the battle against financial crime have been intensified. The team was reorganized, staff was beefed up, technical resources were strengthened and training in how to combat money-laundering continued. As of the end of 2005, 80% of parent-company staff and 75% of subsidiary staff had attending the training.
Development that treats the environment with respect In 2005, Natexis Banques Populaires endeavored to control the direct impact it has on the environment, which, given the scale of its operations and its 12,900 employees, is not negligible.
The Logistics department oversees consumption The Logistics department is in charge of managing the bank’s direct impact on the environment. On its various buildings, energy consumption – specifically electricity, heating and cooling – is managed by a centralized system so as to minimize operating costs while optimizing user comfort. Lights are configured to go off outside of normal working hours. Heating and air conditioning systems are regulated based on outside weather and the thermal properties of each building. System performance is monitored and improved by comparing actual, monthly consumption with budgeted energy requirements. In 2005, consumption monitoring was expanded to include subsidiaries and locations outside the Paris metropolitan area.
Partners in Solidaritybased Savings Week in the Paris region Natexis Asset Management and Natexis Interépargne participated in the fourth solidarity-based savings week organized by Finansol* in the Paris metropolitan area at the end of 2005.The aim of this event was to inform the general public about the advantages and mechanisms of solidarity-based savings and about projects supported by this type of investment, such as social integration, job creation, solidarity-based housing and renewable energy. Natexis Asset Management and Natexis Interépargne took advantage of the opportunity to invite employee-savings clients and Natexis Banques Populaires employees to conferences on the theme of solidarity-based employee savings.
From the outset the building was designed to maximize user comfort while minimizing impact on the environment. Selective waste collection was implemented and employees were informed of a procedure for collecting used ink cartridges. The Liberté 2 building is also scheduled to have a carbon assessment.
In 2005, Liberté 2 was awarded the year’s grand prize for office buildings at the corporate real estate trade fair in Paris (SIMI). Among the determining criteria, the jury appreciated the building’s approach to sustainable development and its high environmental quality, as well as functionality and flexibility from the user’s point of view.
In addition, when the bank purchased 2,600 new flat screens, the old screens were collected by a company proposing an attractive combination of environment-friendly (recycling, reconditioning, ISO 14001 certified factories) and social initiatives. The equipment is recovered and refurbished by a association that helps people integrate socially and professionnally and then sells IT material for a limited price to NGO’s.
In various product categories, Natexis Banques Populaires also placed importance on ISO 14001 or EMAS certification for supplier production sites. Finally, the Purchasing department indicated the working conditions at sub-contractor locations in all calls for tender concerning service contracts.
Development fostering progress in employment practices According to the Vigeo criteria, the bank is among the leaders in human resources management, given its determination with regard to training, employability and internal dialog (see chapter entitled “Human resources”).
The bank places particular importance on diversity. In 2005 it continued to seek the enrichment that comes with a broad cross-section of ages, cultures and backgrounds. In hiring, for example, the bank intentionally does not distinguish any category (sex, age, disability, ethnic minority, etc.).
Nevertheless, two categories were singled out for special attention. Several women were hired for high-level positions. The proportion of women among management-level employees at the parent company is gradually increasing. It was 33.7% in 2003, 34.1% in 2004 and 34.9% in 2005.The percentage of promotions that involved women has also been rising and should improve these figures. It was 52.2% in 2003, 56.4% in 2004 and 59.1% in 2005, the same percentage as among the bank’s French workforce.
Attentive to the interests of society at large Committed to the battle against malaria In 2005, Natexis Banques Populaires decided to join the struggle against malaria. A forgotten disease that kills over two million people a year, many of them children, malaria is advancing at an alarming rate.
Natexis Banques Populaires began by supporting the Franco-African fight-against-malaria day organized by Plan France, an NGO, on April 25, 2005, with an extensive outdoor advertising campaign in the Paris metropolitan area. It also finances, together with its subsidiaries, programs to increase awareness and distribute mosquito nets among affected populations. A campaign of this type has been underway in Cameroon since last May, with the support of Natexis Asset Management.
Two anti-malaria projects initiated by other NGOs were also supported by Natexis Banques Populaires at year-end. One was proposed by an employee of Banque Populaire
Toulouse-Pyrénées, who is president of an organization called “Les enfants de l’Aïr” (the children of Aïr).This program distributed mosquito nets and raised awareness about the disease in villages around Agadez, in Niger. In the other, the bank helped finance a biomedical research program run by the Institut Pasteur in Madagascar.
Active cultural patronage Natexis Banques Populaires continued its "Patrimoines d’hier, Trésors d'avenir" patronage program, launched two years ago. It helped promote knowledge about the Coronelli terrestrial and celestial globes and financed their exhibition at the Grand Palais in September 2005. The globes will join the permanent collection of the Bibliothèque Nationale de France (BNF), the French national library, in the Autumn of 2006.The bank also financed the acquisition of Coronelli’s “Terre Artiche” map, representing the North Pole, the most damaged part of the terrestrial globe.
A partnership between the BNF and the Centre National d’Études Spatiales will make it possible to draw a parallel between yesterday’s and today’s knowledge by comparing the globes and satellite images.
The Banque Populaire Group Foundation For the past ten years, the Banque Populaire Group Foundation, one-third financed by Natexis Banques Populaires, has supported projects in three areas: music, disabilities and more recently, marine and freshwater treasures. The Foundation helps three groups of people: young classical musicians starting out in their career, young people with disabilities who want to return to a professional activity, and individuals with projects centered around renewal or increasing understanding of oceans, lakes and rivers.Through its patronage initiatives in cultural and social fields, the Foundation ensures the Group’s commitment to those whose initiative, creativity, talent and energy deserve decisive and lasting support.
Finally, in the field of marine and freshwater heritage, the Foundation helps rehabilitate certain sites, improve or modernize specialized museums, renovate historically important ships, and protect certain species and their natural milieu.
n Raising awareness among sales teams n CO2 emission rights trading ability n Integration of an environmental scoring element in project financing proposals n Sharp increase in wind farm financing n Strong growth in managed SRI and solidarity-based funds n Natexis Asset Management and Natexis Interépargne are leaders in solidaritybased employee savings n 80% of parent-company employees and 75% of subsidiary employees have received training in anti-moneylaundering techniques. n A compliance form is filled out at each new account opening n Membership in Ademe’s “Planète gagnante” club n Raise employee awareness about eco-behavior through questionnaire and intranet n Partnership with Ademe’s eco-design and sustainable consumption department n Sustainable development criteria integrated in all calls for tender n New function dedicated to management of diversity, particularly regarding hiring of people with disabilities n Commitment to the struggle against malaria (support for several NGOs) n Raising awareness among employees (exhibit about malaria)
OUTLOOK FOR 2006 n Extend sensitivity to all employees n Develop a range of products for clients subject to new environmental constraints n Integrate environmental risk in project monitoring n Continue financing of renewable energy n Continue to promote SRI/solidaritybased products and growth in volume of managed assets n Forge new partnerships with companies in the solidarity-based economy n Finalize employee training. Make specialised training modules available to business lines. Put teaching materials on intranet (e-learning) n Implement a behavioral analysis tool to improve detection of suspicious transaction flows with regard to anti-money-laundering regulations n Codify an environmental policy and set quantified targets for the control of energy consumption n Follow up “gestes verts” initiative. Identify the five key measures, consider implementation of carpooling system, perform a carbon assessment, develop selective waste collection n Continue to include sustainable development criteria in all calls for tender n Incorporate discriminating environmental criteria in the selection of suppliers and products n Raise awareness of employees involved in recruiting and career planning (HR and managers) about diversity issues n Take better account of diversity in hiring practices n Implement a voluntary program to hire individuals with disabilities n Continue support for the struggle against malaria (new projects) n Involve employees (skills patronage, project participation) n Support microenterprises in developing countries n Build training program on sustainable development n Organize conferences n Integrate criteria proposed in the Global Reporting Initiative 2005 PROJECTS
Employees at the parent company totaled 4,902 FTE (including 67 fixed-term contracts) and at subsidiaries 8,071 FTE.
The percentage of management-level employees at the parent company has regularly increased: 53.5% in 2003, 56.6% in 2004, 60% in 2005.This percentage is close to that of the bank’s French worforce.
An active hiring policy led to a total of 984 new hires in 2005, of which 728 were under permanent contracts and 256 under fixed-term contracts. 60% of them were management -level employees.
At the parent company, the number of new hires under permanent contracts* increased by 76.6% over 2004.
No significant recruiting problems were encountered. In addition to the nxbp.fr web site, the bank used the major employment sites available on the internet to publish its job offers.
An industry-wide early retirement program forms the basis of a Banque Populaire Group agreement implemented in 2003.The program allows early retirement from the age of 58 until March 31, 2006, provided certain conditions are met. Under the agreement, 50% of all departures were to be replaced by new hires. Approximately 40 employees took advantage of the program.Their departure was more than offset by the high number of new hires over the last three years.
Temporary employees represented 2.8% of French employees at December 31, 2005, representing a monthly average number of 278.
At the parent company, the average number of temporary employees, after declining sharply in 2003, then stabilizing in 2004 at 167, was reduced to 143 in 2005.
The workweek is 38 hours long, with additional vacation days granted to employees. As a result, on an annualized
Management-level employees who work on a number-ofdays basis rather than an hourly basis worked 209 days, including the additional work day stipulated under the June 30, 2004 act for the protection of elderly and disabled people (loi sur la solidarité et l’autonomie des personnes âgées et handicapées).
11.2% of employees worked part time, either 50, 60, 70, 80 or 90% of a full-time schedule. Similarly, management-level employees on a number-of-days basis may opt for part-time
In addition, individual compensation and raises are evaluated every year in March with respect to the employee’s performance targets.
Since 2000, more than 90 agreements and amendments have been signed with employee representatives on subjects ranging from support for internal reorganization, to long-term service awards payable to employees on retirement, to labor union functions.
In accordance with an amendment to the Employee Savings Plan signed in 2004 (parent company and Natexis Paiements), the ceiling for matching contributions was increased, effective January 1, 2005.
Each labor union has space on the intranet to facilitate the expression and dissemination of its ideas within the company. In addition, since 2004, employees have been able to access the Central Works Council’s intranet site from outside the company.
To ensure that employees are properly informed, certain information the company is required to post were put on line in a new section of the HR intranet.
A new “charter” for using IT, digital and technological resources was discussed on several occasions with employee representatives and implemented on October 15, 2005.This charter and its accompanying user’s guide define employees’ rights and responsibilities regarding the IT resources made available by the employer.
Following on from the 2004 summer program, 2005 summer interns were informed of the company’s smoking policy during their initial orientation. In the summer of 2005, anti-stress balls replaced the candy boxes distributed in 2004.
A toll-free number was made available to employees to enable them to obtain practical information in the event of a business interruption. This number has been printed on employee pay slips since June 2005 and on badges issued since then.
The time devoted to training indicates the importance Natexis Banques Populaires and its subsidiaries place on developing the skills of their employees. More than 7,000 employees participated in nearly 200,000 hours of training in 2005.
The number of parent company employees participating in training totaled 3,554, including 2,159 management-level and 1,395 business line specialists, which is in line with the relative sizes of these categories.
Training hours broke down by subject according to the needs expressed in 2005. IT training represented 24.5% of total hours, languages 20.3% and business line topics 21.8% (products and markets, sales and financial techniques, risk analysis). In addition, management training continued to expand (15.4%), with degree programs accounting for 8.5% of total hours.
The number of employees with disabilities declined in 2005 because a certain number took retirement.The bank pays close attention to the management of diversity, and one of the parent company’s employees is responsible for developing a plan in 2006 to foster the hiring of disabled workers.
A mutual assistance organization helps employees who are confronted with a personal accident or other serious personal problem. Annual voluntary contributions are also matched by the company.
The Liberté 2 building project included a contribution to the community infrastructure.Tennis, basketball and handball courts, co-financed by the town of Charenton, the Île de France region and Natexis Banques Populaires were made available to the residents of Charenton and bank employees.
In addition, to make it easier for employees to use public transportation, a bus (line 109) runs continuously throughout the day. It is cofinanced by the Île-de-France transportation authority, the town of Charenton and the beneficiary companies, Natexis Banques Populaires and Crédit Foncier de France.
Methods employed by the company to account for the impact of its activities on employment and regional development
Natexis Banques Populaires maintains and develops relationships with certain university-level educational institutions, selected to match the company’s business lines (business and engineering colleges, graduate schools). In this context, 665 student interns worked in various capacities in the bank and its French subsidiaries in 2005.
Thirty-four young graduates participated in the Volontariat International en Entreprise program offered by the parent company and its Coface and Natexis Pramex International subsidiaries. The program offers young graduates an initial experience abroad as a step toward a subsequent hire either locally or in France.
In all, 117 young people worked in France in work-study programs.
The parent company pays 52% of the “apprenticeship tax” (taxe d’apprentissage) directly to the training and apprenticeship centers and 48% to secondary schools, universities and grandes écoles. In this way, it consolidates its relationship with partner organizations, while financing educational and social projects intended, among other things, to help youngsters having difficulty academically or socially (see chapter entitled “Human Resources”).
The company makes sure that its sub-contractors adhere to legal requirements regarding management of their personnel. The Purchasing department indicates working conditions at sub-contractor locations in all calls for tender on service contracts.
Natexis Banques Populaires contributes to local development outside France through its international locations. Virtually all of the 3,500 employees who work in foreign offices, branches and subsidiaries are recruited locally.
A new building (Liberté 2) came into service in 2005, and the monitoring scope has expanded. Natexis Banques Populaires consolidated water and energy consumption in its main buildings (Paris and Charenton-le-Pont) and in the rest of France with consumption at its subsidiaries, including Coface. Figures presented in 2005 cover 183,000 sq. m. of premises with 12,700 workstations.To facilitate comparison of water consumption from one year to the next, figures are also presented on a comparable basis between 2004 and 2005.
Water consumption, for all companies and locations of Natexis Banques Populaires (parent company and subsidiaries, including Coface) is estimated at 91,962 cu. m. On a comparable basis, consumption declined slightly.
n 2004: 56,132 cu. m. (39,096 cu. m. on a comparable structure basis)
n 2005: 91,962 cu. m. (37,449 cu. m. on a comparable structure basis)
Raw materials consumption includes primarily consumption of paper by the parent company, Natexis Banques Populaires. There was a downtrend between 2002 and 2004, because much supporting documentation now exists only in electronic form, copying and desktop publishing resources have been optimized and an ambitious environmental policy has been implemented. In 2005, consumption advanced slightly because of business growth and an increase in the number of employees.
n 2001: 31,046 MWh n 2002: 32,897 MWh n 2004: 34,485 MWh (28,812 MWh on a comparable structure basis)
Consumption of gas and heating oil remained low: 330,000 cu. m. and 200 cu. m., respectively, in 2005.
System performance is monitored and improved through regular comparison of actual consumption with budgeted energy requirements. Energy budgets are based on annual targets and take into account seasonal variations recorded for each building over several years.
Natexis Banques Populaires attaches particular importance to the environmental quality of the building work environment, so as to limit the impact of its activities on the environment immediately around its buildings.
Similarly, an asbestos detection program was launched in 2003 and completed in 2005. At the same time, materials containing asbestos were removed in 2005, and this program will continue in 2006.
Located essentially in an urban environment, the offices of Natexis Banques Populaires do not have a significant, direct impact on the natural environment. Nevertheless, preventive measures are taken to avoid any accidental water or air pollution. Sensitive installations are regularly maintained, premises containing potential pollutants are sealed, etc.
Used fluids from combustion engines (generators, vehicles, etc.) are also recovered and treated by specialized companies.
As it is a listed company, Natexis Banques Populaires is regularly evaluated and assigned “investor-solicited” ratings by extra-financial rating agencies. In particular, these agencies look at the company’s environmental strategy. In 2005, Natexis Banques Populaires asked an extra-financial agency to rate its sustainable development policy. The agency concluded that “integrated management of direct environmental impact is a reality at Natexis Banques Populaires.”
Measures taken, if any, to ensure compliance of the company’s activities with environmental legislation and regulation
Natexis Banques Populaires complies with legal and regulatory environmental requirements. The company has building -use experts who are in close contact with users and know the technical equipment intimately, thereby ensuring that monitoring is up to standards. Moreover, technical installations and maintenance processes are subject to regular inspection by outside, specialized entities.
Expenditure devoted to preventing undesirable consequences of the company's activities on the environment
In 2005, the company spent an estimated B500,000 (excl. VAT) on the prevention of environmental risk.This expendi-
In 2005, employees began to be informed about and trained in everyday behavior that can reduce the company’s impact on the environment (Ademe partnership, “gestes verts” campaign).
Elements of the above objectives that apply to the company’s foreign subsidiaries
Information is disseminated to employees in all locations, including those outside France.
Furthermore, in accordance with the new international financial reporting standards (IFRS), the Group’s non-trading real estate companies (SCIs) and mutual funds dedicated to insurance company investments are now fully consolidated.
The Group’s financial statements have been prepared using IFRS including IAS 32, IAS 39 and IFRS 4 (EU IFRS) for 2005 and using IFRS excluding IAS 32, IAS 39 and IFRS 4 (2004 IFRS) for 2004.
Net banking income 3,090.9 2,707.2 +14% Operating expenses, depreciation and amortization (2,056.5) (1,864.6) +10%
Natexis Banques Populaires achieved an excellent performance in 2005, with each of its four core businesses delivering strong growth compared with 2004: n Net banking income totaled B3,090.9 million, an increase of 14% on the previous year. Net banking income generated by the core businesses came to B3,029 million, an increase of 15% compared with 2004. Overall, the adoption of EU IFRS in 2005 had a positive impact of B20.5 million. The currency impact was insignificant given the stability of the dollar in 2005 compared with 2004, at an average of B1.24 per dollar ; n Operating expenses were up 10% at B2,056.5 million; n Consequently, gross operating income amounted to B1,034.4 million, an increase of 23% on 2004; n The cost/income ratio improved by 2.4 percentage points to 66.5%. Excluding Coface, it would have been 64.8%; n Impairment charges and other credit provisions came to just B81 million, despite an increase in collective provisions. The charge for the year represented 0.14% of Natexis Banques Populaires’ risk-weighted assets; n Gains and losses on disposals of fixed assets included the capital gain on the sale of the Liberté II building (B95 million ) and totaled B98.1 million in 2005; n Earnings before tax came to B1,066.8 million, up 43% compared with 2004; n Net income came to B695.4 million, also up 43% on the previous year. This includes a sharp increase in tax and minority interests; n Natexis Banques Populaires’ ROE stood at 15.9%.
Corporate and Institutional Banking and Markets generated net banking income of B1,259 million in 2005, an increase of B100 million or 9% compared with 2004.The adoption of IAS 32 and IAS 39 as of 2005 had a negative impact of B29.9 million. On the basis of the same accounting standards, net banking income would have increased by 11%.
Despite high new business volumes, Corporate France was penalized by the decline in margins, while International benefited from the growth in momentum of foreign branches. Global Debt & Derivatives Markets, Natural Resources & Related Industries and Equity Group delivered an excellent performance, with growth of 12%, 18% and 24% respectively, despite unfavorable market conditions in terms of interest rates and lending in H1.
3 > Income statement analysis 3.1 - Contribution of core businesses to net banking income
In respect of its traditional banking business, Corporate France produced net banking income of B385 million, down B16.2 million or 4% compared with 2004.The adoption of EU IFRS had a marginal negative impact of B0.4 million.
n Corporate lending activities achieved a high level of origination of B9.3 billion, following an exceptional year in 2004 with origination of B7.5 billion. New business was focused on credit lines (B7.5 billion, accounting for 81% of total new business), with a decline in margins and a low level of drawings. New lending business amounted to B1.7 billion compared with B1.3 billion in 2004 and margins on medium and long-term maturities did not fall as sharply.
Net banking income came to B272.0 million,down B29 million or 10% compared with 2004. Net banking income on financing activities fell by 13% or B32.6 million due to the year-on-year change in the composition of outstandings in favor of undrawn loans, as well as the decline in margins on average outstandings. Meanwhile, net banking income on cash management activities increased by 6% thanks to robust payment activities.
Average loans outstanding in lease financing increased by 3%, mainly due to property leasing (increase of 5%), to B5.59 billion at the end of 2005.
Net banking income on lease financing activities came to B113 million in 2005 compared with B100.2 million the previous year, an increase of 13%, due to a net release of B3 million in risk-related expenses in 2005 compared with a charge of B2.7 million in 2004.
n International n Medium and long-term origination totaled nearly B6 billion in 2005, an increase of B2.6 billion or 77% compared with 2004. Branches accounted for 83% of the department’s total medium and long-term origination.
Entities outside France accounted for 64% of the department ’s net banking income.
Global Debt & Derivatives Markets produced net banking income of B459 million in 2005, up 12% compared with 2004.
This increase was driven by strong growth in structured financing (up 16%), while capital markets activities delivered growth of 8%.
n Overall, risk-weighted assets increased by 57% or B3.9 billion to B10.8 billion.
n With net banking income of B218.6 million, up 16% compared with 2004, structured financing achieved a remarkable performance in 2005.
Capital markets contributed net banking income of B240.2 million in 2005, an increase of B18 million or 8% compared with 2004.The adoption of EU IFRS had a negative impact of B10.4 million and the department was penalized by the adoption of IAS 32 and IAS 39.Under the same accounting methods, net banking income would have increased by 13%.
n Treasury activities achieved a 3% increase in net banking income against the backdrop of less favorable market conditions.
n Optimization and credit placement activities sustained a slight fall in net banking income.Asset management activities generally held up well over the period, with cautious and diversified growth in the volume of the investment portfolio over the year.
n IPO and syndication activities achieved a 49% increase in net banking income thanks to the development of the financial engineering business and despite limited securitization activity in the first half of the year. Natexis Banques Populaires maintained its position as No. 4 arranger in France by number of transactions (source: Dealogic). The bank also diversified its activities outside France, with international mandates accounting for 28% of mandates signed out of a total of 90.
n Natexis Commodity Markets sustained a 22% drop in net banking income compared with 2004, which was an exceptional year.
n Natural Resources & Related Industries n Natural Resources & Related Industries achieved strong medium and long-term origination of B1.5 billion in 2005, up 62% compared with 2004. Activities in the energy sector, in which the bank acted as mandated lead manager in major deals such as Rosneftgas ($7.5 billion) and Sonangol ($3 billion),again constituted the main contributor, accounting for 76% of origination in 2005.
The New York branch achieved origination of B1.1 billion compared with B642 million the previous year.
Equity Group produced net banking income of B156 million in 2005, up B30.3 million or 24%.This includes adjustments of B3.6 million relating to the adoption of EU IFRS. Excluding these adjustments, net banking income would have increased by 21%.
n Equity brokerage is conducted by Natexis Bleichroeder S.A. in the eurozone and Natexis Bleichroeder Inc. in the Americas and Asia. This activity generated net banking income of B104.6 million in 2005, up 24% compared with 2004.
3.1.2 - Private Equity and Wealth Management Private Equity and Wealth Management delivered an excellent performance in 2005, with a 41% increase in net banking income. Private Equity was the main contributor, with an increase of B76.6 million compared with 2004.
Private Equity and Wealth Management contributed 9% of total net banking income generated by the core businesses.
Net banking income from Wealth Management amounted to B42.9 million, down 1% compared with 2004.
Banque Privée Saint-Dominique produced net banking income of B21.8 million, in line with that of 2004. Assets managed stood at B2.9 billion at end-2005 compared with B2.3 billion at end-2004, mainly due to the increase in valuation.
Natexis Private Banking Luxembourg S.A.,which specializes in international estate planning, generated net banking income of B21.1 million, down 3% on 2004, due to the closure of the
Monaco branch.Assets managed stood at B2.4 billion, with a cumulative inflows and valuation impact of B0.5 billion.
Net banking income totaled B202.1 million, an increase of 26% or B41.5 million compared with 2004,thanks to strong growth in net premium income, a further rise in managed assets and a low level of loss claims in personal risk insurance.
The number of corporate clients rose continually over the course of the year, increasing by 23%, mainly as a result of the success of Fructi-Epargne Plus (4,742 new contracts since the start of the year) and in particular the Perco group pension plan offering.
Net banking income totaled B74.4 million, an increase of 10% or B6.6 million compared with 2004, reflecting the solid performance of account holding activities and development of managed assets after the impact of the Sarkozy measures, as well as growth in securities activities, contributing B2 million.
n Natexis Asset Management outsourced its Asset Servicing activities (Middle Office and Reporting) through the partial transfer of assets to specialist subsidiary Natexis Investor Servicing, created in March 2005; n Finally, Natexis Asset Management took over the operations of Crédit Maritime Gestion, acquired at the end of 2004.
Net inflows came to B8.4 billion, broken down as follows: n Mutual funds and mandates: B6.2 billion (B4.6 billion short term and B1.6 billion long term)
Net banking income totaled B166.8 million in 2005, including B137.3 million for Natexis Asset Management,B18.5 million for Natexis Asset Square and Axeltis and B11 million for Natexis Asset Management Immobilier.
This constitutes an increase of 15% or B22.4 million, thanks to: - a 12% increase in assets managed; - a sharp increase in transfer fees relating to the restructuring of Natexis Asset Management’s product range and solid activity in “equities and other” portfolio management; - a high level of outperformance fees.
n Financial Services 2005 was marked by the reorganization of the Global Custody business on the basis of a partnership with Bank of New York. Funds deposited outside France are now traded on Fundsettle, Euroclear’s automated fund processing platform.
Procedures for controlling operating risks were reinforced with the creation of an alerts system, systematic analysis of incidents, the drawing up of operating procedures and the implementation of preventative measures. The choice of Fundsettle for mutual funds deposited outside France, allowing for automated and secure processing, made a significant contribution to the control of operating risks.
Funds held increased by 8% to B429 million, mainly thanks to an increase in customer assets and the positive development of stock market indices.
Net banking income from Financial Services increased by 15% to B148.3 million in 2005.This strong performance was primarily due to the increase in custodian activities, privatization operations (Sanef, GDF and in particular EDF) and the low level of operating risk.
This project entails the sharing of all IT developments and will be based principally on the Natexis Banques Populaires platform at the outset.
Banking Services produced net banking income of B129 million in 2005,an increase of B23 million or 22% compared with 2004.
Since March 31, the Group’s Investor Servicing activities have been grouped together in a new subsidiary, Natexis Investor Servicing, which offers a wide range of services: - administrative and accounting management of mutual funds and mandates; - middle-office services; - regulatory and financial reporting.
Natexis Investor Servicing is a key player in the asset servicing market,with 10% market share in fund administration in terms of the number of funds and 5.3% in terms of managed assets. Its aim is to develop its activities outside the Group.
Natexis Investor Servicing produced net banking income of B24.5 million in 2005. By way of convention, only net banking income generated outside the Group (B3.4 million) is taken into account in the contribution to net banking income for the Services division.
Coface made several acquisitions in 2005, mainly in credit insurance: - Cual in South Africa; - Leid in Lithuania; - Coface Chile, now 85% consolidated (retroactively as of January 2005).
Coface Scrl and Coface Ort were merged to create Coface Services, French market leader in business information and debt recovery, with market share of around 40%.
Revenues totaled B1,217.9 million, representing an increase of 7.7% or 4.8% like-for-like. Premium income from insurance activities rose by 6.9% to B973.3 million. In services, revenues increased by 11.1% to B244.6 million, driven partly by factoring activities, which benefited from a robust German market and the roll-out in the UK and Italy.
According to provisional data from the ASF, the factoring market grew by 10.7% to B89 million. Natexis Factorem therefore has market share of 12.7%.
Factoring fees fell to 0.57% from 0.59%, with a decline in each segment.
A total of 1,850 new factoring contracts were signed in 2005 compared with 1,396 in 2004. In France, 505 new CREANCEassur policies (versus 334 in 2004) and 802 new CREANCEinfo contracts were recorded in 2005.
3.1.5 - Non-core businesses Net banking income from non-core businesses totaled B61.9 million compared with B66.6 million in 2004, down B4.7 million.
Institutional Activities, which comprise a series of operations conducted on behalf of the government, contributed B11.5 million compared with B18.5 million the previous year, entirely due to the reduction in moratorium interest.
The proprietary portfolio and other activities made a negative contribution to net banking income of B12.7 million in 2005 compared with B0.3 million in 2004.This was primarily due to the elimination of income on treasury stock, in accordance with the adoption of IAS 32 and IAS 39 (B19 million in 2004).
3.2.1 - Operating expenses Operating expenses rose by 10% or B192 million to B2,056.5 million in 2005.This increase reflects investment in human resources and systems operated by Natexis Banques as part of its business development plan, as well as the increase in incentive and profit-sharing payments and performance-related variable pay components.
3.2.2 - Cost/income ratio The cost/income ratio stood at 66.5%, an improvement of 2.4 percentage points compared with the previous year (68.9%).
3.3 - Net income 3.3.1 - Provisions for loan losses Impairment charges and other credit provisions, calculated in accordance with IFRS, came to B81 million, with specific provisions accounting for B44.3 million and provisions for the portfolio accounting for B36.7 million.
As in 2004, the level of loss claims remained low in 2005. Client defaults required a provision charge of B50 million due to just 10 or so borrowers.
Provisions amounted to close to 60% of non-performing loans, down slightly compared with the end of 2004; this relative reduction also reflects the decreased risk relating to non-performing loans.
n Country risks: release of B21.3 million, relating to South America following repayments and reductions in outstandings
n The following table shows a breakdown of specific provisions by region: n Breakdown of Corporate and Institutional Banking and Markets: n Breakdown of provisions by core business
Corporate and Institutional Banking and Markets contributed B472 million in earnings before tax, an increase of 17% on 2004. Gross operating income rose by 6% to B533 million as a result of symmetrical growth in net banking income and operating expenses. Impairment charges and other credit provisions decreased further to B65 million.
Earnings before tax in Private Equity and Wealth Management rose by B74.5 million, almost entirely due to the B76.3 million increase in net banking income, with operating expenses remaining stable compared with 2004.
The risk management system is also structured around the Large Exposures Committee and the various risk committees. The Large Exposures Committee includes the Chairman, the business line heads and representatives of the Risk Management, Internal Control and Internal
The Risk Management department sets delegated limits for each business line. Natexis Banques Populaires has retained a highly centralized delegation system.The Risk Management department issues an opinion on all counterparty risks when new facilities are granted or existing facilities renewed.
4.3 - Implementation of the new capital accord The Basel II project conducted by the Banque Populaire Group and steered by Banque Fédérale des Banques Populaires is strongly supported by Natexis Banques Populaires, where the Finance, Risk Management and Information Systems departments are working alongside the business lines to set up the tools required to calculate the new capital adequacy ratio based on an internal ratings model.
The project is divided into a number of sub-projects, including ratings, defaults, collateral management, databases, deployment and ratio computation.The roll-out continued in 2005 to upgrade risk assessment methods, statistical and historical data monitoring and back-testing models to meet regulatory requirements. As planned, the new interbank ratings model and a system for calculating the regulatory ratio were implemented. 2006 will see the continuation of the roll-out and the implementation of a new sovereign risk ratings model.
4.4 - Credit risk 4.4.1 - Average client exposure (on and offbalance sheet) in 2005, management data: n Corporate and Institutional Banking and Markets:B76.9 billion - Corporate France:B39.2 billion - Lease Financing:B5.6 billion - International:B13.4 billion - Natural Resources & Related Industries:B6.0 billion - Global Debt & Derivatives Markets:B12.8 billion n Factoring:B2.4 billion 4.4.2 - Breakdown of exposure by internal rating at December 31, 2005 Natexis Banques Populaires continued to roll out its internal ratings system in 2004, in line with work carried out within the Banque Populaire Group. The corporate rating scale has 16 ratings for healthy counterparties (1 being the top rating), plus four default categories. Counterparty risks borne by the Bank showed satisfactory resilience in 2005.
The development of the Group’s activities in Europe is reflected in the breakdown by region in 2005, with the growth in momentum of the Rest of the Europe Economic Area to the detriment of the relative proportion in France. Exposure to emerging markets remained under control.
Total fund assets at December 31, 2005 (consolidated, excluding insignificant subsidiaries, excluding equity)
The major responsibilities of each control entity are as follows: First tier controls are carried out by the middle office, which plays an operational role through the applications it manages and uses daily. Its key duties are: - producing and analyzing results and risks on a daily basis; - producing and analyzing provisions on a monthly basis; - ensuring the reliability of market parameters used to calculate results and risks; - proposing methods to calculate reserves while ensuring that they are exhaustive and correspond to the nature of risks; - developing the system of delegated limits and method of calculating risk, in conjunction with Risk Management; - monitoring and reporting any limit violations.
The Board of Directors validates overall risk limits for all entities.
Global Debt & Derivatives Markets Equity Group Natural Resources & Related Industries Finance Department
Confidence level: 99 % Horizon: 1 day History: 1 year non-weighted n VaR
Data is inputted into Riskmanager primarily using automatic interfaces developed between the front office/middle office systems and the software.These interfaces supply the characteristics of an operation, enabling the software to understand the various operations.
For the US subsidiary ABM Corp., which trades in the mortgage -backed securities market, stress tests are performed based on a uniform 100 bp distortion of the yield curve and its impact on the market (in the shape of early repayments, increased volatility etc.). At December 30, 2005, the impact of the worst-case scenario would be an $18.31 million (B15.52 million) fall in the value of the portfolio.
The market risk management system covers the capital markets activities conducted by Natexis Banques Populaires and its subsidiaries.The improvement program launched by Natexis Banques Populaires in 2002 continued during 2005. Improvements concerned organization, procedures and risk measurement.
4.5.4 - Structural interest rate risk, currency and liquidity risk The Asset & Liability Committee (ALM Committee), which is chaired by the Chief Executive Officer and includes representatives of Corporate and Institutional Banking and Markets, the Finance depar tment and the Risk Management department, is responsible for setting out the broad guidelines for ALM, liquidity and investment of own funds.An ALM officer reporting to the Finance department is responsible for the coordination of asset and liability management.
Interest rate limits for capital markets activities: Maximum sensitivity of interest rate maturity schedules to a +/-1% shift in the yield curve is B100 million for capital markets activities (including treasury desks). This limit also applies to a point-by-point distortion of the yield curve. Within the overall interest rate limits described above, the sub-limits for short-term and long-term treasury have been set at B40 million and B30 million respectively.
ALM interest rate limits for refinancing books – Adaptation to Banque Populaire Group system: The ALM Committee validated the principles of expressing sensitivity limits for refinancing books as a percentage of regulatory capital. For sensitivity to a 200bp change in interest rates, the Committee set an overall limit of 2.5% of regulatory capital or B164 million. This limit has been delegated by the Board of Directors to the Chief Executive Officer with the ability to sub-delegate all or part.
Current sub-limits are: in € millions Limits for Limits for 100bp 200 bp
Corporate and Institutional Banking and Markets refinances all the liquidity needs of the various Natexis Banques Populaires business and charges back the cost.
Previous macro-hedging transactions under French GAAP are documented mainly as cash flow hedges under IFRS.
n Hedging of variable rate borrowings and issues: Natexis Banques Populaires uses vanilla interest rate borrower swaps at fixed rates to fix future variable-rate borrowing costs and private or public issues.
n Hedging of variable-rate loans: Natexis Banques Populaires uses vanilla interest rate lender swaps at fixed rates to fix future variable-rate borrowing costs (commercial loans, interbank loans, loans to subsidiaries and branches).
For cash flow hedge management, Natexis Banques Populaires uses mainly derivative financial instruments to hedge income or expenses relating to variable-rate assets/liabilities.
n Prospective test: The prospective test entails the establishment of (by index type and currency): - a schedule of cumulative variable-rate borrowings and fixed-rate borrower swaps by maturity; - a schedule of cumulative variable-rate loans and fixed-rate lender swaps by maturity.
The prospective test is used to verify that the scope of derivatives is admissible in a macro-hedging relationship.
By default, derivative financial instruments could not be justified in a hedging relationship of this kind.
n Fair value hedges n Hedging of fixed-rate borrowings and issues: Natexis Banques Populaires uses vanilla interest rate lender swaps at fixed rates to protect itself against unfavorable changes in interest rates.
At the same time, changes in the marked-to-market value of “hypothetical” assets and liabilities are also recorded in the income statement.
Apart from securitization transactions, credit derivatives held by Natexis Banques Populaires and its subsidiaries represented a nominal amount of around B2 billion, principally in credit default swaps, about 60% in protection purchased and 40% in protection sold.
One restriction applies to trading positions: piling up of positions is not allowed – in order to close a position, the trader either has to cancel or assign the transaction.
4.6 - Operational risks Operational risk is defined as the risk of loss due to inadequacies or deficiencies in processes, people and systems, or to external events.
Operational risk management is based primarily on the principle of the responsibility of business line management for first tier risks and an internal control system applicable to all activities.
In 2004, Natexis Banques Populaires also redefined the accounting, analysis and control procedure at parent company level for unusual income and expenses relating to operational risks. The implementation of this procedure at the end of 2004 enabled the Group in 2005 to step up the process for the recording of these incidents, conduct more extensive analysis and improve the reporting system.
4.7 - Insurable risks The Risk Management Department and the Insurance Department which reports to it are responsible for analyzing insurable operational risks, seeking adequate cover and purchasing it in the market.
The 2005 insurance program for general risks and risks specific to the business of Natexis Banques Populaires and its subsidiaries (excluding Coface) included the following: - Buildings used in the business in France and their contents (excluding IT equipment) are insured against the usual risks (fire, explosion, terrorism, flooding etc.) at reconstruction or replacement value. Buildings outside France are insured locally; - IT equipment and consequential loss of banking business is covered under a blanket group policy taken out by Banque Fédérale des Banques Populaires. Capital insured varies depending on the geographical sites insured (maximum of B175 million); - Risk of theft and fraud are also covered by two blanket group policies taken out by Banque Fédérale des Banques Populaires for the entire Banque Populaire Group; - Liability is covered by several policies for different amounts depending on their nature and, in some cases, legal requirements (operations, motor, professional liability worldwide excluding the US and Canada, Directors’ liability, specific business line liability etc.).
Most policies include deductions or retentions determined in relation to the financial capacity of the Banque Populaire Group and/or Natexis Banques Populaires.
Total insurance premiums paid by Natexis Banques Populaires for the risks described above amounted to just over B4.6 million in 2005.
5 > Financial structure and regulatory ratios 5.1 - Analysis of the consolidated balance sheet
Total consolidated assets amounted to B168.3 billion at December 31, 2005, compared with B140.0 billion the previous year, after restatements in accordance with IFRS, an increase of B28.3 billion or 20%.
The increase in loans and advances to banks was mainly due to a B4.4 billion increase in forward accounts and loans.
Securities held under resale agreements – chiefly government securities – increased by B8.5 billion.These assets are financed by securities delivered under repurchase agreements, recorded under liabilities.
Refinancing of activities excluding securities delivered under repurchase agreements was reflected in a significant increase in debt securities in issue, which rose to B37.8 billion from B30.8 billion the previous year, in particular through the issue of CDs and forward and ordinary accounts with financial institutions.
5.2.1 - Capital stock Capital stock increased to 739,518 shares following the exercise of stock options, a capital increase reserved for Banque Fédérale des Banques Populaires and shares issued to existing employee stock ownership plans.
Tier One capital amounted to B6.0 billion at December 31, 2005, against B4.6 billion one year earlier.The increase was mainly due to 2005 earnings transferred to reserves, the proportion of the dividend for which the share-based payment option will be exercised, proceeds from the issuance of B300 million of super-subordinated securities, the increase in minority interests, the positive impact of the rise in the dollar and capital increases.
5.2.3 - European capital adequacy ratio Since 1996, French financial institutions have been required to measure and comply with an overall capital adequacy ratio covering not only counterparty risks but also market risks such as interest rate and currency risks.
5.2.4 - Other regulatory ratios The liquidity ratio is designed to ensure that liquid assets with a maturity of less than one month are at least equal to liabilities falling due within the same period.
In order to cover medium- and long-term requirements of a total of B7 billion, use of the EMTN program was frequently favored.
As regards bond, money market, commercial paper and extendible notes issuance: senior debt (bonds, EMTN, ECP, USCP, extendible notes, TCN) or subordinated debt (redeemable subordinated notes and super-subordinated notes), the main contractual clauses are as follows: n Senior debt: (i) Issuance programs: The EMTN program contains a standard negative pledge. There are no financial or rating-related covenants.
(ii) Non-program issuance: Bonds issued in the French domestic market contain a negative pledge similar to the EMTN program.
n Subordinated debt: Redeemable subordinated notes do not contain any covenants.
Finally, the issue prospectus should provide for an early redemption option (partial or total, as decided by the issuer).
n Natexis Banques Populaires’ medium-term business plan(1) has been revised to take into account new economic conditions and the change in accounting standards.
Despite these changes, the major axes of the three-year plan have been confirmed: - Growth in net banking income of 9-10% a year ; - Maintaining provisions at around 35bp of risk-weighted assets; - Reduction in the cost/income ratio; - ROE of around 15%.
n In accordance with the European Commission’s regulation n° 809/2004 implementing the Prospectus Directive, no material changes in Natexis Banques Populaires’ financial or commercial situation have been seen since the end of the last financial year for which audited financial statements have been published.
Cumulative issuance during the year 247,032 29,381 6,315 3,260 317 2,250 1,000
Gross operating income amounted to B520 million, an increase of 20% over 2004.The cost/income ratio stood at 63.9%.
Gains on fixed assets came to B32 million and exception income of B82 million included the company’s share of the capital gain realized on the sale of the Liberté II building.
The third resolution to be put to the annual general meeting on May 18, 2006, proposes to deduct from net income the negative balance held on the retained earnings account, being B89,039,924.52, and to transfer the sum of B3,985,870.37 to the legal reserve, leaving the sum of B366,151,699.25 available for distribution.
The project dovetails naturally into both groups’ current development strategies. For Groupe Caisse d’Epargne, this is a natural extension of their current reorganization. For Groupe Banque Populaire, it provides their finance and investment banking business with the necessary growth to take it to new dimensions.
There are three guiding principles to the negotiations underway between the two groups: n respect for the identity and independence of each of the two networks’ regional banks and their head office organizations; n the implementation of cross stockholdings between the BFBP (Banque Fédérale des Banques Populaires) and the CNCE (Caisse Nationale des Caisses d’Epargne) so as to reinforce the overall cohesion of the new entity; n the combination of all their investment and finance banking and banking services in one single vehicle. The name of the legal entity will be NATIXIS. It is listed and will be jointly and equally controlled by Groupe Banque Populaire and Groupe Caisse d’Epargne.
NATIXIS, a major player in finance and investment banking and in banking services The new entity NATIXIS will be a leader in a number of sectors in France (especially employee savings, asset management, automated payment systems and bancassurance). It will be a subsidiary of Caisse Nationale des Caisses d’Epargne and Banque Fédérale des Banques Populaires and will have its own client base and strong distribution networks based on a high quality service platform designed to deliver best practices aimed at achieving the best performance on the market.
NATIXIS’ corporate governance will be conducted through a Supervisory Board and a Management Board. Both groups will have equal representation on the Supervisory Board and the chairmanship will alternate between representatives of each group. Mr Charles Milhaud will be the first chairman of the Supervisory Board. The chairman of the Management Board, appointed by the Supervisory Board, will be selected by mutual agreement between the two groups. Mr Philippe Dupont will be the first chairman of the Management Board.
Groupe Banque Populaire will be assisted in this project by Citigroup, Rothschild & Cie and Philippe Villin Conseil. Groupe Caisse d’Epargne is assisted by Bucéphale Finance, Lazard Frères & Cie and Merrill Lynch.
Building on the strengths and mutually society culture of each group, the implementation of this project should result in the creation of NATIXIS, a strong player in the finance and investment banking sector and banking services sector in its French domestic market and with the capability to develop in Europe and beyond.”
Notes to the Consolidated financial statements I Basis of presentation II Impact of the first-time adoption of IFRS III Consolidation methods and principles IV Scope of consolidation V Accounting principles and valuation methods VI Risk exposure and management VII Segment reporting VIII Notes to the balance sheet
VIII.7.1.1 Other assets VIII.7.1.2 Other liabilities VIII.7.2 Accrued income and prepaid expenses and deferred income and accrued charges VIII.7.2.1 Accrued income and prepaid expenses VIII.7.2.2 Deferred income and accrued charges VIII.7.3 Accrued income and prepaid expenses and deferred income and accrued charges insurance companies VIII.7.3.1 Accrued income and prepaid expenses - insurance companies VIII.7.3.2 Deferred income and accrued charges - insurance companies
VIII.8 Property, plant & equipment, intangible assets, investment property VIII.8.1 Development of non-current assets over the period VIII.8.2 Investment property
VIII.10 Deposits from banks and customer deposits VIII.10.1 Deposits from banks VIII.10.2 Customer deposits
VIII.13 Provisions and impairment charges VIII.13.1 Summary of provisions VIII.13.2 Provisions
IX.5 Income and expenses from other activities IX.5.1 Finance leases IX.5.2 Other insurance income and expense IX.5.3 Other income and expense
X Payroll costs, number of employees, compensation and employee benefits X.1 Payroll costs
XI.2 Segment reporting by region XI.2.1 Income XI.2.2 Balance sheet items
XIII.3 Information about finance leases and operating leases XIII.3.1 Leases as lessor XIII.3.2 Leases as lessee
XIII.5 Results of insurance companies XIII.5.1 Results of insurance companies XIII.5.2 Insurance companies’ contribution to the consolidated income statement
Notes to the parent company financial statements Accounting policies and valuation methods
Note 3 Bonds, equities and other fixed and variable income securities
Due from banks VIII.4 56,099 41,120 o/w institutional activities 250 333
Due to banks VIII.10 54,853 39,320 o/w institutional activities 322 408
Equity attributable to equity holders of the parent 5,357 4,590 Share capital and reserves 3,224 3,116 Retained earnings 1,232 951 Unrealized or deferred capital gains or losses 206 35 Net income 695 488
Net gains or losses on financial instruments at fair value through profit and loss IX.3 555 156
Amortization, depreciation and impairment of property, plant and equipment and intangible assets (74) (77)
Earnings per share 14.9 10.5 Consolidated net income - group share - per share, calculated on the basis of the average number of shares over the period excluding treasury shares
Share capital and reserves Retained earnings in € millions Share Reserves Elimination Retained capital (1) of earnings treasury (2) shares
Equity at December 31, 2003, before appropriation - French GAAP 769 2,261 (4) 644
Total movement related to relations with shareholders 3 11 - (115)
Impact of acquisitions and divestments on minority interests (4) - - - -
Equity at December 31, 2004, before appropriation - 2004 IFRS 772 2,342 (4) 983
Elimination of treasury shares - - (6) Equity component of share-based payment plans - - - 3
Change in fair value of financial instruments through equity (5) - - - Net income at December 31, 2005 - EU IFRS - - - Impact of acquisitions and divestments on minority interests - - - Change in translation reserves - - - Change of accounting method and correction of errors (6) (7) - - - (14)
Equity at December 31, 2005 - EU IFRS after dividends 784 2,439 (166) 1,162
(4) Including: Change in minority interests in Coface following squeeze-out (9) Coface’s buyout of minorities in Unistrat (15) Change in method of consolidating Sopromec (9) Dilution Natexis Private Equity’s percentage holding in FCPR Industrie. 9 Divestment by Nem2 of its holding in Natexis Capital Structurant 4 Buyout of minorities in Line bourse (6) Total (26)
(5) Includes changes in fair value of derivative financial instruments designated as cash flow hedges
(7) Includes equity attributable to minorities following the change in method of consolidating BP Développement and Sopromec 213
+/- Decrease/(increase) in interbank and money market items 405 5,526 +/- Decrease/(increase) in customer items (7,274) (9,173) +/- Decrease/(increase) in other financial assets or liabilities 454 522 +/- Decrease/(increase) in non-financial assets or liabilities 3,196 3,830 - Income taxes paid (309) (188)
Effect of exchange rate changes on cash and cash equivalents (D) 98 (29)
Net increase/(decrease) in cash & cash equivalents (A + B + C + D) (1,773) 1,554
Note I > Basis of presentation As required by European regulation 1606/2002 of July 19, 2002, concerning the application of international accounting standards, Natexis Banques Populaires has, for the first time, prepared its consolidated financial statements for the year ending December 31, 2005, using the International Financial Reporting Standards (IFRS) as adopted in the European Union and applicable on that date.These standards include IAS 1 to 41, IFRS 1 to 6 and their interpretations adopted by the European Union as at December 31, 2005.
Natexis Banques Populaires’ consolidated financial statements include a balance sheet, income statement, statements of changes in equity, cash flow statement and notes to the financial statements.
The application of these two amendments as of January 1, 2006, is not expected to have a significant impact.
The Group has also elected not to adopt the following amendments which have been published by the IASB or IFRIC and were adopted by the European Union on January 11, 2006: - the amendment to IAS 1 concerning capital disclosures; - IFRS 7 ‘Financial Instruments: Disclosures’; - the amendment to IAS 39 and IFRS 4 concerning financial guarantee contracts, which will be applied by Natexis Banques Populaires as of January 1, 2006.
As permitted by IFRS 1, Natexis Banques Populaires elected not to adopt IAS 32, IAS 39 and IFRS 4 for its opening balance sheet at January 1, 2004.These standards have been adopted for the first time as of January 1, 2005.The 2004 comparative data affected by these standards are therefore based on the French GAAP previously used by Natexis Banques Populaires in accordance with standards CRC 1999-07 and 2000-04 of the Comité de la Réglementation Comptable.
The principles of first-time adoption of IFRS are described in note II of this document.
The comparative figures presented in these financial statements include: - comparative income statement data at December 31, 2004, prepared using 2004 IFRS (i.e. excluding IAS 32, IAS 39 and IFRS 4, which have been adopted as of January 1, 2005); - comparative balance sheet and cash flow statement data at January 1, 2005, prepared using 2004 IFRS.
The effects of the transition to IFRS on the 2004 financial statements were described in a press release issued by Natexis Banques Populaires on April 21, 2005.
Details of all of the effects of the transition to IFRS on equity, capital, the balance sheet and the income statements are given in this report.
The following terminology has been used for all of the financial documents provided: - 2004 IFRS: IFRS excluding IAS 32, IAS 39 and IFRS 4; - EU IFRS: IFRS as adopted by a series of EU regulations, comprising IAS 1 to 41, IFRS 1 to 6 and their interpretations as adopted by the European Union as at December 31, 2005.
Restatement of fund for general banking risks +242 - - -
Restatement of capitalization reserve (deferred tax liability) (24) - +1 (4)
(1) Including unrealized gains on AFS instruments held by Coface +9
II.1 - Impact on equity and Tier One capital 111NATEXIS BANQUES POPULAIRES
Under international accounting standards (IAS 30 and IAS 37), provisions of a general nature do not qualify for recognition as liabilities.The fund for general banking risks was therefore reclassified in full as equity at January 1, 2004. Charges or reversals have been eliminated from the income statement.
The capitalization reserve in the individual financial statements of insurance companies is intended to defer capital gains realized on the disposal of certain bonds to offset subsequent capital losses. Any portion considered by management as never likely to be used is reclassified as equity. Under French GAAP, no deferred taxation is recognized.Conversely, IAS 12 treats this restatement as a temporary difference that gives rise to the recognition of a deferred tax liability.
- Implementation of component accounting for property, plant and equipment: The impact of this approach relates primarily to property. Under French GAAP, (operating or non-operating) property assets are depreciated over a period that is unique to the whole of the relevant property. Under IFRS, when one or more components of a property derive economic benefits at a pace that differs from that of the property as a whole, these components are depreciated over their own useful life. The depreciation differential resulting from adoption of the component approach was charged against opening equity.
IAS 17 imposes stricter rules for the recognition of finance leases and operating leases. Certain contracts have therefore been reclassified as operating leases, as a result of which the unrealized reserve recognized under French GAAP is no longer recognized.
Analysis of the criteria for control as defined under IFRS did not have any material impact on the scope of consolidation. The only changes in the scope of consolidation related to ad hoc entities that were not consolidated under French GAAP. This concerns four real estate trusts (‘Sociétés Civiles Immobilières’) relating to the property investments of Natexis Assurances and SCI Cofimmo of the Coface sub-group.
Under French GAAP, loans are measured at cost with accrued interest for the period recognized in profit or loss.
Under IFRS, loans and receivables are measured at amortized cost using the effective interest method. Under this method, certain fees and commissions received or paid which are directly connected with the loan transaction are deferred over the term of the loan on an actuarial basis.
(3) Measurement of certain financial instruments at fair value - Impact of measurement at fair value: Under French GAAP, the only financial instruments measured at fair value through profit or loss are securities and derivatives held for trading purposes.
Under French GAAP, private equity investments were recognized as equity securities held for investment and provisions taken only for unrealized losses. IFRS requires different treatment according to the percentage holding: - Holdings under 20% may be classified either as available for sale or at fair value through profit or loss; - Holdings between 20% and 50% may be classified either as at fair value through profit or loss or accounted for using the equity method; - Holdings over 50% are consolidated if they are material or classified as at fair value through profit or loss otherwise.
Under IFRS, insurance company investments are recognized and measured in accordance with IAS 39. However, unrealized gains or losses on investments representing contracts with a discretionary participation feature are largely offset (about 92%) by the recognition of a deferred participation liability under the shadow accounting principle permitted by IFRS 4, which equates to considering that a proportion of revaluations will be passed on to policyholders in the form of interest paid on their contracts.
(4) Other impacts - Preferred shares: Under French GAAP, preferred shares issued by Natexis Banques Populaires are recognized as equity and classified as minority interests.
Under IFRS, preferred shares are classified, after analysis of the contracts, as liabilities or equity, depending on whether the issuer is contractually obliged to pay cash to holders of these shares.
- Treasury shares: IFRS does not permit treasury shares to be recognized in the balance sheet regardless of their purpose and classification under French GAAP. All treasury shares owned by Natexis Banques Populaires have therefore been eliminated through equity, as have any income statement items connected with the treasury shares.
after 2004 IFRS EU IFRS 01/01/2005 reclassifications impacts impacts EU IFRS
Financial assets measured at fair value through profit or loss 23,756 - 738 24,494
Equity attributable to equity holders of the parent 4,170 370 49 4,589 Share capital and reserves 3,116 - - 3,116
Unrealized or deferred capital gains or losses (70) 29 76 35
Investments in affiliates and associates and other securities held for investment 449 - - - (2,355) - - - -
Note II.2.1 - Main reclassifications made at December 31, 2004 (2004 IFRS) and January 1, 2005 (EU IFRS) - Assets
Other Investments Investment Property, Intangible Goodwill Other assets in property plant & assets reclassiassociates equipment fications
Financial assets measured at fair value through profit or loss 23,756
in € millions Due to Financial Hedging Due to Customer Debt Deferred Current Other central liabilities derivatives banks deposits securities income income liabilities banks at fair value in issue tax tax through liabilities liabilities profit or loss
Interbank and money market liabilities 41,425 (22) (2,162) - (39,271) - - - - -
Fund for general banking risks 242 - - - - - - - - -
Technical Provisions Subor- Minority Share Retained Unrealized Net Other reserves dinated interests capital earnings or deferred income reclassiof debt and gains or fications insurance reserves losses companies
Liabilities associated with non-current assets held for sale 0 22,785 Technical reserves of insurance companies 22,785 2,681 Subordinated debt 2,681 778 Minority interests 778
(70) Unrealized or deferred gains or losses (70) 407 Net income 407
Under French GAAP, premiums received by insurance companies are invested in insurance investments grouped into three categories: marketable securities (mainly bonds at fixed or revisable rates), equities, property investments and loans and deposits.
- Property investments are included under “Investment property” (B0.1 billion); - Finally, B0.3 billion has been reclassified as “Loans and advances to customers”.
* Within the Natexis Banques Populaires group, the “Heldto -maturity financial assets” category has been used for fixed-income securities representing insurance company investments.
n Liabilities in € millions Employee Elimination Restatement Goodwill and benefits of FGBR of lease value of Coface financing network
Financial assets measured at fair value through profit or loss - - - -
Liabilities associated with non-current assets held for sale - - - -
Non-current Equalization Deferred tax on Reclassification Changes in Other Total 2004 assets reserve capitalization of translation scope of IFRS impacts reserve reserve consolidation 123NATEXIS BANQUES POPULAIRES
Financial liabilities at fair value through profit or loss - - 1 (148)
effect provisions shares treasury factoring receivables impacts shares & payables 125NATEXIS BANQUES POPULAIRES
in € millions French Reallocation Reclassifications Restatements 2004 IFRS GAAP of financial instruments
Gains or losses on available-for-sale financial assets /////// 94 29 - 123
Net gains/(losses) on trading account securities 183 (183) - - ///////
Impairment charges and other credit provisions (104) - 3 - (101)
Gains or losses on financial instruments at fair value through profit or loss - - (148) - - - (148)
Gross margin on insurance operations - - (744) - - - (744)
Gains or losses on other assets - (9) - - - - (9)
Change in value of goodwill - - - - - -
Net income attributable to equity holders of the parent 0 0 0 0 0 0 0 127NATEXIS BANQUES POPULAIRES
Note II.3.2 : Analysis of restatements made at December 31, 2004 (2004 IFRS)
Gains or losses on financial instruments at fair value through profit or loss - - - - - - 0
Gains or losses on available-for-sale financial assets - - - - - - 0
Gross margin on insurance operations - - - - - - 0
Share of income of associates - - - - - - 0
Net income attributable to equity holders of the parent 33 47 (1) 3 1 (3) 79
Note III > Consolidation methods and principles 3.1 Scope of consolidation The consolidated financial statements of Natexis Banques Populaires include the separate financial statements of Natexis Banques Populaires and its main subsidiaries. Only those subsidiaries providing a material contribution are consolidated.The materiality of a subsidiary is not determined with respect to numerical thresholds but based on a qualitative appraisal of the relevance of its contribution to the consolidated financial statements.
The scope of consolidation includes all significant entities over which the consolidating entity exercises control or influences its management. As under French GAAP, three types of control are identified under IFRS: companies that are exclusively controlled, companies that are jointly controlled and companies over which the entity exercises significant influence.Analysis of the control of the consolidating entity is not restricted to identifying voting rights in subsidiaries but includes economic and legal analysis of relations between the consolidating entity and its subsidiaries.
A review of potential voting rights held by Natexis Banques Populaires did not lead to any changes in the scope of consolidation in 2004 and 2005.
- Benefits: Natexis Banques Populaires, in substance, has rights to obtain a majority of the benefits of the SPE’s activities distributed in the form of future net cash flows, earnings, net assets or other economic benefits, or rights to majority residual interests.
The purpose of these transactions is to transfer a significant portion of the counterparty risk relating to certain loan portfolios (collateralized loan obligations) or bonds (collateralized bond obligations), using credit derivatives (credit default swaps) or market derivatives (credit linked notes).
These transactions amounted to B1.7 billion at December 31, 2005 (B2.9 billion at December 31, 2004), with total weighted risks of B1.3 billion (B2.3 billion at December 31, 2004).
NATIX USD (first loss in EUR) 2000 2008 145 145 29 3 129NATEXIS BANQUES POPULAIRES
Elixir Funding is not consolidated as it does not meet the control conditions required by SIC 12.
Non-trading real estate companies (SCIs) are set up to hold finance leases grated by leasing subsidiaries or the SCIs themselves to finance clients’ real estate acquisitions. Natexis Banques Populaires acts in a fiduciary capacity at the request of its clients and does not exercise control over the real estate structures within the meaning of SIC 12.
For entities that are 40-50% owned, IAS 27 requires control to be demonstrated for the entity to be fully consolidated.
Significant influence is the power to participate in the financial and operating policy decisions of an economic activity but is not control or joint control over those policies. Significant influence is presumed to exist when the reporting entity directly or indirectly owns at least 20% of the voting rights.
The amount of fees received and financing outstanding in connection with institutional activities is not material. Accordingly, the financing outstanding has not been restated at amortized cost. Activities other than financing, where Natexis Banques Populaires acts as intermediary on behalf of the State, have been accounted for using French GAAP in the IFRS financial statements.
Goodwill is not amortized but tested for impairment at least once a year and whenever there is objective evidence that the goodwill might be impaired. Impairment testing consists of comparing the carrying amount of the CGU or group of CGUs (including goodwill) with its recoverable amount.
At December 31, 2005, the total carrying value of goodwill came to B733 million, of which 92.4% or B677 million is allocated to two CGUs: - B441 million or 60.2% of the total value is allocated to the “Receivables Management” CGU; - B236 million of 32.2% of the total value is allocated to the “Services” CGU.
For after 2008, perpetual cash flows for the third year are estimated on the basis of a long-term average annual growth of 2%.
Key assumptions made in calculating the recoverable amount of the “Receivables management” CGU The three business lines of the Receivables Management core business (credit insurance, business information and factoring) are expected to achieve robust annual sales growth.
Cash flows are projected over a three-year period, which corresponds to the period covered by the medium-term plan (2006-2008).The discount rate applied is 9.42%.
Key assumptions made in calculating the recoverable amount of the “Services” CGU A steady rate of growth is expected in the four business lines of the Services core business, comparable to that of the last two years.
- In the highly competitive fund management market, growth should be fuelled by the development of the long component of Natexis Banques Populaires’ offering and the growing momentum of fund administration services, which were made into a subsidiary in 2005.
distribution network of the Banque Populaire regional banks, while growth outside France should result from the creation of further partnerships, made possible by Natexis Banques Populaires’ strong reputation in bancassurance.
3.7 Non-current assets held for sale The assets and liabilities of subsidiaries which Natexis Banques Populaires intends to sell within a period of twelve months and for which it has initiated an active plan to locate a buyer are identified separately in the balance sheets as non-current assets held for sale and liabilities associated with non-current assets held for sale.
3.9 Consolidation of insurance companies The following rules apply to fully consolidated insurance companies: - items of income and expense are classified by nature in accordance with banking accounting policy and not by destination; - balance sheet items are included under the corresponding line items of the financial statements presented in the banking format.
Contracts managed by the insurance subsidiaries of Coface and Natexis Assurances sub-groups meet the definition of insurance contracts or investment contracts with a discretionary participation feature provided in IFRS 4.Accordingly, they give rise to the recognition of an insurance liability measured in accordance with French GAAP, in anticipation of the publication of an IFRS standard concerning technical liabilities of insurance companies.
Investment contracts with a discretionary participation feature (life insurance) give rise to the recognition of a deferred participation liability to offset the difference in value between assets and liabilities, in accordance with IFRS 4 (shadow accounting).The deferred participation liability is equal to the share of gains or losses on investments due to policyholders in respect of their insurance contracts.The amount is calculated on the basis of the average rate of distribution to policyholders (average contractual distribution rate for each product weighted by the value of investments on the calculation date).The change in the deferred participation liability is recognized directly in equity for changes in value of available-for-sale assets and in profit or loss for changes in assets at fair value through profit or loss.
As Natexis Assurances sells mainly savings products, the main risks arising from insurance contracts are financial in nature: - Risk of not being able to meet the minimum contractual distribution rate in the event of a fall in interest rates: To face this risk, ABP Vie now only sells contracts with no guaranteed minimum distribution rate, which account for 65% of contracts.
- Risk of a buyout of contracts if interest rates rise: To face this risk, ABP Vie has used cap contracts to hedge around 25% of its interest rate risk on assets and liabilities and purchased variable-income notes with a minimum rate. The risk of a buyout is limited given the loss of tax advantages that may result from a transaction of this kind.
In addition, ABP Vie has reinsured 100% of the minimum guarantee granted on unit-linked contracts.
The liability adequacy test carried out at the end of 2004 at the request of the CCA shows that, in order to cope with a 2 point increase in interest rates, a 30% fall in the CAC 40, a 20% fall in property values and a 3x increase in the average buyout rate, ABP Vie would have to realize capital losses of B8 million.This is an insignificant amount in relation to its equity.
In personal risk insurance, the risks insured are short-cycle risks, as reserves liquidated over a period of more than one year do not represent a significant amount.
Given the nature of its activities, Coface is exposed to two main types of risk.
Credit risk (technical risk) is the risk of losses generated by the insurance policy portfolio. A distinction is made between frequency risk and target risk: - Frequency risk represents the risk of a sudden and significant increase in amounts owed from a number of debtors. This risk is measured for each business unit by monitoring the loss ratio, by business sector (domestic credit), by country (export credit) or by product line (guarantees, single risks etc.).The loss ratios of the different underwriting centers are also monitored at group level, as are the amount and number of outstanding debts per month; - Target risk represents the risk of unusually high losses from a single debtor or group of debtors, or accumulated losses in the same country.
Diversification of the credit risk portfolio: Coface maintains a diversified credit risk portfolio in order to minimize the risks of default by a debtor, the slowdown in a particular business sector or an unfavorable event in a par ticular country, which may have a disproportionate impact on Coface’s overall loss ratio. In addition, the majority of risks to which Coface is exposed are short-term risks, which enables it to reduce the risk covered on a particular debtor or group of debtors relatively quickly after noticing deterioration in their solvency.
The group’s total theoretical outstandings amount to B238 billion, comprising B218 billion for credit, B12 billion for guarantees and B8 billion for investment and equipment risks.
The following table shows the breakdown of credit insurance debtors as at December 31, 2005, based on the total level of risk borne by Coface (in thousands of euros):
Financial risk is the risk of losses as a result of unfavorable changes in interest rates, exchange rates or the market value of securities or property investments.
Note IV > Scope of consolidation 4.1 First-time adoption of IFRS First-time adoption of 2004 IFRS led Natexis Banques Populaires to consolidate five non-trading real estate companies (SCIs) in 2004.
4.2 Changes in the scope of consolidation in 2005 The main changes in the scope of consolidation in 2005 were as follows: Inclusions in the scope of consolidation (in addition to the aforementioned mutual funds) - First-time consolidation of FSN 3, a private equity subsidiary of NPEIS operating in Asia; - First-time consolidation of Natexis LLD, a long-term vehicle leasing company and 100% subsidiary of Natexis Lease; - First-time consolidation of NPEIM, a private equity management company; - First-time consolidation of Natexis Services Ltd, a management company for offices in London; - First-time consolidation of Coface Factoring Italia Spa, an Italian subsidiary created by Coface to house the factoring business; - First-time consolidation of Coface LEID, a Lithuanian credit insurance company acquired by Coface; - First-time consolidation of Cofacerating.ch, a Swiss business information and debt management company created by Coface; - First-time consolidation of Credit Underwriting Agency Limited (CUAL), a company providing insurance-related services in South Africa; - First-time consolidation of Coface South African Insurance Company, an insurance company created in 2005; - First-time consolidation of Coface Chili, 84%-owned by Coface SA; - First-time consolidation of the Natexis Lease branches in Madrid and Milan,specializing in equipment and property leasing.
Removals from the scope of consolidation - Minority buyout (24%) of Samic prior to the sale of 75% of the share capital of the IT services subsidiary.The disposal 135NATEXIS BANQUES POPULAIRES
ALLGEMEINE KREDIT COFACE (AK COFACE) Credit insurance and services 100 100 100 100 100 98 ALLGEMEINE KREDIT COFACE Information and debt INFORMATIONS GMBH (AKI) management services 100 100 100 100 100 98 ASM ALTERNATIF GARANTI 1 (1) Mutual fund for insurance
ASSURANCES BANQUE POPULAIRE Mutual fund for insurance CROISSANCE RENDEMENT (1) et (13) company investments 98 98 - - - ASSURANCES BANQUE POPULAIRE Mutual fund for insurance
ASSURANCES BANQUE POPULAIRE VIE Life insurance 100 100 100 100 100 100 AUXILIAIRE ANTIN Real estate company 100 100 100 100 100 98 price of B6.4 million generated a consolidated capital gain of B4 million. Following this asset sale, Samic is no longer consolidated; - Sale of Bancassurance Popolari, previously proportionally consolidated (51%), for which the disposal price of B7.8 million generated a consolidated capital gain of B3.2 million; - Sale of the Neuilly Château non-trading real estate company, with shares sold for B74 million representing the value of the property recognized as an insurance company investment; this disposal generated a consolidated capital gain of B5.3 million; - Sale of OFIVM, a subsidiary consolidated under the equity method, the entire stake in which (34%) was sold to Ofivalmo.The disposal price of B10.6 million did not generate any capital gain or loss; - Sale of Cofimmo, the non-trading real estate company holding the registered office of Coface SCRL: the sale of the building and the real estate company for B20 million generated a consolidated capital gain of B7 million.
COFACE EXPERT Training 100 100 100 100 100 98 COFACE FACTORING ITALIA (13) Factoring 100 100 - - - COFACE HOLDING AMERICA LATINA Business information 100 100 100 100 - COFACE INTERCREDIT HOLDING AG Holding company 75 75 75 75 75 73 COFACE INTERCREDIT CZECHIA (2) Information and debt management services 100 75 100 75 97 71 COFACE INTERCREDIT BULGARIA Information and debt management services 100 75 100 75 100 73 COFACE INTERCREDIT HRATSKA (CROATIA) Information and debt management services 100 75 100 75 100 73 COFACE INTERCREDIT HUNGARY Information and debt management services 100 75 100 75 100 73 COFACE INTERCREDIT POLAND Information and debt management services 97 73 97 73 97 71 COFACE INTERCREDIT ROMANIA Information and debt management services 100 75 100 75 60 44 COFACE INTERCREDIT SLOVAKIA (2) Information and debt management services 100 75 100 75 100 73 COFACE INTERCREDIT SLOVENIA (2) Information and debt management services 100 75 100 75 60 44 COFACE ITALIA Holding company 100 100 100 100 100 98 COFACE MOPE Information and debt management services 100 100 100 100 100 98 COFACE NORTH AMERICA HOLDING COMPAGNY Holding company 100 100 100 100 100 98 COFACE NORTH AMERICA Credit insurance and services 100 100 100 100 100 98 COFACE NORTH AMERICA INSURANCE COMPAGNY Credit insurance and services 100 100 100 100 100 98 COFACE O.R.T. (14) Business information and solvency (14) (14) 100 100 - COFACE SCRL (formerly Coface Information and debt Scrl Participations) (14) management services (14) (14) 100 100 100 98 COFACE SERVICE (15) Information and debt
COFACE SERVICES PERU Information and debt (formerly VERITAS PERU ) management services 100 100 100 100 100 98 COFACE SERVICES VENEZUELA Information and debt (formerly VERITAS VENEZUELA ) management services 100 100 100 100 100 98 COFACE SERVICIOS CHILE Information and debt ( formerly VERITAS CHILE ) management services 100 100 100 100 100 98 COFACE SERVICIOS COSTA RICA Information and debt (formerly VERITAS DE CENTRO AMERICA) management services 100 100 100 100 100 98 COFACE SERVICIOS ARGENTINA Information and debt ( formerly VERITAS ARGENTINA ) management services 100 100 100 100 - COFACE SERVICIOS DO BRAZIL Information and debt
COFACE SERVICIOS ESPANA S.L. Information and debt (formerly COFACERATING.SP) management services 100 100 100 100 100 98 COFACE SERVICIOS MEXICO SA DE CV Information and debt (formerly Informes Veritas) management services 100 100 100 100 100 98 COFACE SERVICIOS PANAMA Information and debt
COGERI Information and debt management services 100 100 100 100 100 98 COMPAGNIE FONCIERE NATEXIS Real estate investment 100 100 100 100 100 100 CREDICO LTD (formerly Cimco Ltd) Information and debt management services 100 100 100 100 100 98 CREDIT MARITIME VIE Life insurance 100 100 100 100 - CREDITORS GROUP HOLDING LTD Information and debt management services 100 100 100 100 100 98 CREDITORS GROUP LTD Information and debt management services 100 100 100 100 100 98 CREDITORS INFORMATION CO LTD Information and debt
NATEXIS FACTOREM Factoring 100 100 100 100 100 100 NATEXIS FINANCE M&A advisory services 100 100 100 100 100 100 NATEXIS FUNDING Secondary debt market operator 100 100 100 100 100 100 NATEXIS IMMO DEVELOPPEMENT Real estate development and renovation 100 100 100 100 100 100 NATEXIS IMMO EXPLOITATION Real estate company 100 100 100 100 100 100 NATEXIS INDUSTRIE ** Buy-in/buy-out financing 100 89 100 88 100 100 NATEXIS INTEREPARGNE Employee savings account management 100 100 100 100 100 100 NATEXIS INTERTITRES Service voucher management 100 100 100 100 100 100 NATEXIS INVERSIONES ** International investment fund 100 84 100 100 100 100 NATEXIS INVESTISSEMENT ** Growth capital 100 90 100 100 99 90 NATEXIS INVESTMENT ASIA (19) International investment fund (19) (19) (19) 100 100 100 100 NATEXIS INVESTMENT CORP. Investment management 100 100 100 100 100 100 NATEXIS INVESTOR SERVICING (9) Fund administration 100 100 - - - NATEXIS LEASE Equipment lease financing 100 100 100 100 100 100 NATEXIS LEASE MADRID (13) Equipment and real estate lease financing 100 100 - - - NATEXIS LEASE MILAN (13) Equipment and real estate lease financing 100 100 - - - NATEXIS LIFE Life insurance 100 99 100 96 100 96 NATEXIS LLD (8) Long-term vehicle leasing 100 100 - - - NATEXIS LUXEMBOURG Bank 100 100 100 100 100 100 NATEXIS MOSCOW Foreign bank 100 100 100 100 100 100 NATEXIS PAIEMENTS Banking services 100 100 100 100 100 100 NATEXIS PRAMEX ASIA LTD International commerce promotion and operations 100 99 100 99 100 99 NATEXIS PRAMEX DEUTSCHLAND International commerce promotion and operations 100 99 100 99 100 99 NATEXIS PRAMEX France International commerce promotion and operations 100 98 100 98 100 99 NATEXIS PRAMEX IBERICA SA International commerce promotion and operations 100 99 100 99 100 99 NATEXIS PRAMEX INTERNATIONAL International commerce promotion and operations 99 99 99 99 99 99 NATEXIS PRAMEX INTERNATIONAL INC. (13) International commerce promotion
NATEXIS PRAMEX NORTH AMERICA CORP. International commerce promotion and operations 100 99 100 99 100 99 NATEXIS PRAMEX POLSKA International commerce promotion and operations 100 99 100 99 100 99 NATEXIS PRAMEX RUS Ltd (13) International commerce promotion
OR INFORMATIQUE Business information and solvency 100 100 100 100 - ORCHID TELEMATICS LIMITED Business information and solvency 100 100 100 100 - OSTERREICHISCHE KREDITVERSICHERUNGS COFACE (OKV COFACE) (27) Credit insurance and services 94 94 94 94 94 92 PARIS OFFICE FUND* Real estate agent 50 50 50 50 - PRAMEX ITALIA SRL International commerce promotion and operations 100 95 100 98 100 51 S.A.G.P Investment company 100 100 100 100 100 100 S.C.I. ABP IENA (1) Insurance real estate investment 100 100 100 100 100 100 S.C.I. ABP POMPE (1) Insurance real estate investment 100 100 100 100 100 100 S.C.I. ALTAIR 1 Real estate company 100 100 100 100 100 100 S.C.I. ALTAIR 2 Real estate company 100 100 100 100 100 100 S.C.I. COFIMMO (1) et (28) Real estate company (28) (28) 100 100 100 98 S.C.I. FRUTIFONCIER (1) Insurance real estate investment 100 100 100 100 100 100 S.C.I. NEUILLY CHÂTEAU (1) et (23) Insurance real estate investment (23) (23) 100 100 100 100 S.C.I. VALMY COUPOLE Real estate company 100 100 100 100 100 100 SAMIC (12) IT services (12) (12) 76 76 76 76 SEGEX Investment company 100 100 100 100 100 100 SEPIA Investment management 100 100 100 100 100 100 SLIB IT services 100 100 100 100 100 100 SOCIETE FINANCIERE DE LA BFCE Investment management 100 100 100 100 100 100 SODETO Investment management 100 100 100 100 100 100 SOGAFI Guarantee company 100 100 100 100 100 100 SOPRANE SERVICES Private asset management 100 100 100 100 100 100 SOPROMEC (6) Private equity 100 42 (6) (6) 78 78 SPAFICA Real estate investment 100 100 100 100 100 100 SPEF LBO Venture capital 100 100 100 100 100 100 SPEF VENTURE Innovation mutual fund management 100 100 100 100 100 100 UNISTRAT ASSURANCES (7) Credit insurance and services (7) (7) 100 100 50 49 UNISTRAT COFACE Insurance business introducer 100 100 100 100 - VAL A Investment portfolio holding 100 100 98 98 98 98 VERITAS SA (ARGENTINA) Information and debt management services 100 100 100 100 100 98 VERITAS PUERTO RICO CORP. Information and debt management services 100 100 100 100 100 98 VISCONTEA COFACE Credit insurance and services 100 100 100 100 100 98 VISCONTEA IMMOBILIARE Real estate company 100 100 100 100 100 98 VITALIA VIE Life insurance 100 100 100 100 100 100 VR FACTOREM * Factoring 51 51 51 51 - WORLEDGE A INVESTMENTS Ltd Country risk put-option structure 100 100 100 100 100 100
Companies accounted for using the equity method ADIR P&C insurance 34 34 34 34 34 34 ASSURANCES BANQUE POPULAIRE IARD P&C insurance 50 50 50 50 50 50 BP DEVELOPPEMENT (20) Venture capital (20) (20) 37 37 28 28 CODINF SERVICES (29) Information and debt management services (29) (29) (29) (29) 30 29 COFACREDIT Credit insurance and services 36 36 36 36 36 35 EIOS Business information and solvency 30 30 30 30 - GRAYDON HOLDING Information and debt management services 28 28 28 28 28 27 IFCIC Cinema and TV guarantee company 20 20 20 20 20 20 OFIVM (21) Custody and brokerage (21) (21) 34 34 34 34 SOCECA Insurance broker 25 25 25 25 25 25 SOPROMEC (6) Private equity (6) (6) 37 37 (6) (6)
** In earnings: For companies with share classes conferring different rights to earnings, the percentages indicated represent the Group’s share in earnings; For companies no longer within the scope of consolidation, the percentage indicated is tat existing on the date of removal from scope; For companies with preferred shares, net income(loss) comprises the company’s net income(loss) after payment of the preferred dividend to holders of preferred shares.
(2) Buyout of minority interests increasing the Group’s stake to 100%
(4) Buyout of minority interests (BPR) increasing the Group’s stake to 100% at December 13, 2004
(6) Following the transfer of Sopromec shares by Natexis Private Equity to BP Développement on November 22, 2004, Sopromec is accounted for using the equity method Following the increase in NPE’s stake in BP Développement (which owns 100% of Sopromec), Sopromec has again been fully consolidated since October 1, 2005
(9) Transfer of NAM’s and NEE’s asset servicing business to Natexis Investor Servicing
(19) Merger with Financière Natexis Singapore with retrospective effect as of January 1, 2005
(20) Change of consolidation method from equity method to full consolidation following the increase in NPE’s stake in BP Développement in October 2005
(21) Sold on December 25, 2005, with effect from September 30, 2005
(22) Sold on September 26, 2005, with effect from June 30, 2005
(26) Acquisition of 100% of shares by Coface SA on June 30, 2005
Loans are measured at their face value. Undrawn amounts on loans already committed and agreed are recognized as off-balance sheet items under the heading “financing commitments ”.
Trading account securities, securities held for sale, debt securities held for investment: Securities are classified according to the purpose of the transaction regardless of their legal form (equities, bonds and notes, treasury bills, certificates of deposits, negotiable instruments, money market securities etc.) based on the following rules: - Trading account securities: these are securities traded on liquid markets which are bought or sold with the intention of reselling or repurchasing them within a short period.They are carried in the balance sheet at cost, including transaction expenses and accrued interest. At the period-end, they are marked to market and the resulting unrealized gain or loss is recognized as income or expense in the income statement. Trading account securities that are still in the portfolio six months from the date of acquisition are transferred to “securities held for sale” at their market price on the transfer date; - Securities held for sale: these are securities acquired with the intention of holding them for a period of more than six months.They are valued individually at the year-end at the lower of cost or estimated fair value. A provision is taken for unrealized losses but unrealized gains are not recognized. Premiums and discounts, corresponding to the difference between the cost of fixed-income securities (excluding accrued interest) and their redemption price, are written to the income statement over the remaining life of the securities; - Debt securities held for investment: these are fixedincome securities acquired with the intention of being held to maturity.They are either match-funded or hedged against interest rate risk. They are recorded at cost (excluding accrued interest) and any premium or discount between cost and redemption price is deferred and written to the income statement over the remaining life of the securities. In accordance with French banking regulations, no provisions are taken for unrealized losses, unless there is an intention to dispose of the securities in the short term. In this case, provisions for market risk are charged to “net gains/(losses) on disposals of fixed assets” and provisions for counterparty risk to “impairment charges and other credit provisions”.
Treatment as of January 1, 2005 At initial recognition, financial assets and liabilities are measured at fair value plus, in the case of assets that are not recognized at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue.
These are securities held for trading purposes or designated as at fair value through profit or loss at initial recognition in 143NATEXIS BANQUES POPULAIRES
Securities held for trading purposes are those acquired principally for the purpose of selling them in the near term and those forming part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profittaking.
These are non-derivative financial assets with fixed or determinable payments and fixed maturity that Natexis Banques Populaires has the positive intention and ability to hold to maturity, other than those that are designated at initial recognition as at fair value through profit or loss, those designated as available for sale and those that meet the definition of loans and receivables.
The fair value of investments in non-consolidated companies is determined by reference to the latest quoted price in the case of quoted instruments and by price earnings or discounted cash flow models in the case of non-quoted instruments.
If, in a subsequent period, the fair value of an available-forsale financial asset increases and if this increase can be objectively linked to an event occurring after the impairment loss is recognized in the income statement, reversals of impairment losses are recognized in equity for equity instruments and in the income statement for debt instruments.
For equity instruments, any reduction in the fair value as a result of impairment is recognized in the income statement under “net gains/(losses) on available-for-sale financial assets”.
Upon adoption of IFRS, Natexis Banques Populaires analyzed the substance of its lease contracts in accordance with the provisions of IAS 17, which are more specific than French GAAP.This led to certain finance leases being reclassified as operating leases.
Finance income corresponding to interest is recognized in the income statement under “interest income”.
Where there is a risk of partial or total non-recovery of loans or non-compliance with loan terms or covenants, provisions are taken and charged to the income statement under “impairment charges and other credit provisions”.
Non-performing loans are identified and accounted for in accordance with standard CRC 2002-03 and the opinion issued by the CNC Urgent Issues Task Force on December 18, 2003,which set out the rules for classifying loans as non-performing and irrecoverable.
In accordance with banking regulations: - interest past due on loans to borrowers subject to bankruptcy proceedings is deducted from the interest account in which it was initially recorded. If the interest in substantially recovered, it is credited back to the same account on receipt; - interest on non-performing loans three, or where applicable, six or nine months past due is also provided for in full by deduction from the interest account in which it was initially recorded; - all other loans made to these customers are also classified as non-performing, even where the risk appraisal does not call for a provision against the principal amount outstanding.
At each balance sheet date, assets classified as loans and receivables are reviewed to evaluate whether there is any objective evidence of impairment as the result of one or more events occurring after the initial recognition of the asset with an impact on estimated future cash flows.
As regards retail and small business risks, loans in default in accordance with Basel II are depreciated.
For the industry and country risks, objective evidence of impairment is based on in-depth analysis and monitoring of business sectors and countries. It typically arises from a combination of micro or macroeconomic factors specific to the industry or country.
The probability of default used to calculate impairment losses on loans to individuals and small businesses is based on a one-year horizon in order to maintain a level of standardization with the principles applied by the Banque Populaire Group for this risk category.
If necessary, Natexis Banques Populaires uses expert opinion to adapt the results of this model to its real perceived risk.
The notional amount of these instruments is recorded offbalance sheet for internal monitoring and regulatory purposes, but they are not included in the published statement of off-balance sheet items. Further details are provided in the notes to the French GAAP consolidated financial statements at December 31, 2004.
The accounting treatment depends on the instruments involved and the purpose of the transaction (hedging or trading): n a) Interest rate instruments
These instruments are classified according to the purpose for which they are acquired: - micro-hedging (hedging of specific transactions or positions); - macro-hedging (structural balance sheet management);
The first two categories are treated for income statement purposes as equivalent to lending/borrowing transactions and the amounts received or paid are taken to the income statement on an accruals basis.
The accounting treatment of speculative positions is identical with respect to interest flows, but the positions are marked to market at the period end and a provision taken against any unrealized losses.
Spot currency transactions outstanding at the year-end are valued at the year-end rate.
n c) Interest rate, currency and equity options and forward contracts (including commodities)
The notional value of the instrument underlying the option or forward contract is recorded off-balance sheet, with hedging and trading transactions identified separately.
Commitments given to banks that grant export credits financed in foreign currencies in order to fix the exchange rate of their foreign currency borrowings are published in off-balance sheet commitments.
This type of IFRS documentation corresponds to the use of cash flow hedges.
Hedging of variable rate borrowings and issues Natexis Banques Populaires uses vanilla interest rate borrower swaps at fixed rates to fix future variable-rate borrowing costs and private or public issues.
Tests are carried out on a quarterly basis. In addition, each time a new swap is implemented, checks are made to ensure that there are sufficient resources.
Hedging is established if for each maturity group, the nominal amount of items to be hedged is larger than the notional amount of hedging derivatives.
By default, derivative instruments may not justified in a hedging relationship of this kind.
At each accounting date, changes in the fair value excluding accrued interest of hedging instruments are compared with those of hypothetical derivative instruments (synthetic instruments representing assets and liabilities and the management intention).The ratio of their respective changes should be between 80% and 125%.
Outside these limits, the hedging ratio would no longer be justified under IFRS.
Prospective test The prospective test is used to check that the financial characteristics of the hedged item and the hedging instrument are the same.The test consists of checking that the characteristics of hedging derivatives and hedged instruments are more or less identical (value date, maturity date, notional amount, fixed rate, payment frequency).
Impact on consolidated income Changes in the fair value of derivative instruments are recorded in the income statement (effective and ineffective portion).
If a hedging relationship is interrupted, the hedging instrument is reclassified as financial instruments at fair value through profit or loss and the unrealized profit on the hedged item at the date the hedging relationship ceases is fixed and depreciated up to the maturity date of the item.
Natexis Banques Populaires does not hold any hedges of net investments in foreign operations. These hedges are accounted for in the same way as cash flow hedges.
The credit derivatives used by Natexis Banques Populaires are not considered as financial guarantees but as derivative instruments, and therefore fall within the scope of IAS 39.
Apart from securitization transactions, credit derivatives represent an insignificant proportion of Natexis Banques Populaires’ portfolio.They comprise primarily credit default swaps, with purchases making up around 60% and sales making up around 40%.
A number of internal contracts exist between Natexis Banques Populaires and its subsidiaries. In order to allow for the qualification of hedging at consolidated level, Natexis Banques Populaires ensures daily that transactions are turned around correctly, in terms of the notional amount, sensitivity, index-byindex, currency-by-currency and for each maturity group.
Trading account securities are recognized and measured at the latest market price. Latest market price means the last quoted price for listed securities and likely realizable value for unlisted securities. Likely realizable value is estimated on the basis of objective criteria such as recent transaction values, mathematical yield etc.
Treatment as of January 1, 2005 The fair value of a financial asset or liability at fair value through profit or loss is the amount that can be obtained in an arm’s length transaction between knowledgeable, willing parties.
n b) Over-the-counter instruments valued using recognized models and observable parameters
Valuations are determined using generally accepted models (discounted future cash flows, Black and Scholes model, interpolation techniques) and on the basis of directly observable parameters.
Hybrid instruments Certain hybrid and/or long-maturity financial instruments are valued using a recognized internal model and on the basis of market parameters derived from observable data such as yield curves, implicit volatility layers of options and 149NATEXIS BANQUES POPULAIRES
loss assumptions obtained from consensus data or from active over-the-counter markets.
For all of these instruments, the parameter has been demonstrated to be observable in nature. In terms of methodology, the observability of parameters is based on four key criteria: - the parameter is derived from external sources (via a recognized contributor if possible); - the parameter is updated periodically; - the parameter is representative of recent transactions; - the characteristics of the parameter are identical to those of the transaction. If necessary, a proxy may be used, subject to demonstration and documentation of its relevance.
The margin generated on trading of these instruments is immediately recognized as income.
n c) Over-the-counter instruments valued using unrecognized models or unobservable parameters
Under IAS 39, profits should be recognized after initial recognition only if it is generated by a change in a factor taken into account by market observers in price setting, i.e. only if the model and the parameters used to obtain the valuation are observable.
At December 31, 2005, unobservable instruments comprised only certain hybrid optional derivatives. The margin generated on the trading of these instruments is deferred and spread out as income over the duration of the transaction or until the date the parameter becomes observable.
The value attributed to the Coface network under French GAAP does not meet the conditions for recognition as an intangible asset under IAS 38. In line with IFRS 1 on firsttime adoption, it has been reclassified as goodwill.
The fair value is obtained using a multicriteria approach based on capitalization of rents at the market rate and a comparison with the trading market.
In accordance with ar ticle R332-210-1 of the French Insurance Code, a five-yearly appraisal is conducted by an independent expert approved by the ACAM (Autorité de Contrôle des Assurances et des Mutuelles). Between two appraisals, the market value of assets is certified by experts on a half-yearly basis.
Impairment losses are recognized in the income statement under “depreciation and amortization” and “provisions for impairment of property,plant & equipment or intangible risks”. They may be reversed if conditions change (e.g.disappearance of indications of impairment).
5.8 Non-current assets held for sale and associated liabilities Non-current assets that Natexis Banques Populaires intends to sell within a period not exceeding twelve months and for which an active plan to locate a buyer has been initiated are identified separately in the balance sheet.They are no longer amortized but an impairment loss is recognized if the carrying amount is hither than the fair value less costs to sell.
At December 31, 2005, one issue comprising separable embedded derivatives was classified at fair value through profit or loss.The change in fair value over the period was insignificant.
At recognition, debt securities are measured at their issue price including transaction costs. After recognition, they are measured at their amortized cost which includes expenses deferred over the term of the instruments issued.
If substantially all the risks and rewards of ownership of the financial asset are neither retained nor transferred, Natexis Banques Populaires then determines whether it has retained control of the financial asset. If control is not retained, the financial asset is derecognized. If control is retained, the financial asset continues to be recognized to the extent of the group’s continuing involvement. Continuing involvement is evidenced by the existence of contractual conditions such as: - an option or obligation to repurchase the assets transferred; - receipt of financial compensation related to the performance of the asset transferred.
Securities sold are not derecognized. Natexis Banques Populaires recognizes a liability representing the commitment to return funds received (“securities sold under repurchase agreements”). This financial liability is recorded at amortized cost, not at fair value.
Securities bought are not recognized but a receivable on the assignee representing the funds provided is recognized.The amount disbursed in respect of the asset is recognized under “securities bought under repurchase agreements”. This receivable is recorded under “loans and receivables”.
At subsequent year-end dates, securities will continue to be valued by the assignor in accordance with the rules in their original category. For the assignee, the receivable is recorded at face value under loans and receivables.
5.12 Provisions and contingent liabilities A provision is a liability of uncertain timing or amount.A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits that can be reliably measured.
Provision charges and reversals are recognized in the income statement on the line items corresponding to the nature of future expenditure.
The provision recognized in the balance sheet is equal to: - the amount of the actuarial liability in respect of post-retirement and similar benefits for employees and retirees; - less the market value of plan assets; - less or plus any actuarial gains or losses arising from: • experience adjustments in respect of demographic variables; • changes in actuarial assumptions such as the discount rate, employee turnover and future salary increases; • differences between the actual return and expected return on plan assets.
The main assumptions used at December 31, 2005, are: - actuarial assumptions are reviewed annually; - for end-of-career allowances and long service awards, employee turnover is calculated by age bracket and grade based on a three-year average.The rate is 0% for employees over 55. Future salary increases are estimated by grade based on a constant population and a three-year average.
Natexis Banques Populaires has used the option available under IFRS 1 to recognize all as yet unrecognized actuarial gains or losses in equity on the transition date, i.e. in the opening balance sheet at January 1, 2004.
Preferred shares issued by Natexis Banques Populaires are classified in equity (minority interests).
Natexis Banques Populaires has issued perpetual and fixedterm subordinated notes, which in the event of the issuer’s liquidation rank behind all other creditors.Where perpetual subordinated loan notes are treated as equivalent to debt
Treatment as of January 1, 2005 In line with IAS 32, financial instruments issued are classified as liabilities or equity depending upon whether or not they incorporate a contractual obligation to deliver cash to the holder.
5.15 Share-based payments Natexis Banques Populaires offers its employees stock option plans and share purchase plans. IFRS requires the cost of these plans to be recognized through profit or loss as payroll expenses.
Share purchase plans Natexis Banques Populaires offers its employees the opportunity to purchase shares at a discount, accompanied by a lock-up period during which the shares may not be transferred. The fair value of these plans is measured as the difference, on the purchase date, between the fair value of the shares purchased taking account of the lock-up period, and the price paid.The value is recognized through profit or loss as a payroll expense with a corresponding increase in equity.
Fees and commissions for one-off services, such as business introduction fees, are recognized in income immediately the service is provided.
Deferred income tax assets and liabilities are set off at the level of each tax entity.The tax entity may either be a single entity or a group of entities that have elected for group tax relief. Natexis Banques Populaires does not recognize net deferred tax assets unless it is reasonably certain that they 153NATEXIS BANQUES POPULAIRES
The capitalization reserve recognized in the separate financial statements of insurance companies is intended to defer capital gains arising on the sale of certain bonds to offset subsequent capital losses. The portion presumed unlikely ever to be used is reclassified in equity. Under French GAAP, this does not give rise to the recognition of deferred income tax. Under IAS 12, it is treated as a temporary difference that gives rise to a deferred tax liability.
All temporary differences have been recognized regardless of the recovery or payment date.
The net deferred income tax balance is recognized in the balance sheet as deferred income tax liabilities.
Borrowings and debt securities at fixed rates are discounted on the basis of the value of market fixed rates (excluding spread) at the balance sheet date for a debt with the same residual maturity.
Earnings per share Diluted earnings per share correspond to net income for the period (Group share), divided by the weighted average number of shares adjusted for the maximum impact of the conversion of dilutive instruments into ordinary shares. Stock options issued are taken into account in calculating diluted earnings per share.The conversion of these instruments does not impact net income used to calculate diluted earnings per share.
Average number of ordinary shares in circulation over the period 48,338,000 48,052,000
Average number of treasury shares in circulation over the period 1,627,484 1,498,654
Number of potential dilutive shares resulting from stock option plans 403,001 119,745
Average number of shares for diluted earnings per share calculation 47,113,517 46,673,091
The risk management system is also structured around the Large Exposures Committee and the various risk committees. The Large Exposures Committee includes the Chairman, the business line heads and representatives of the Risk Management, Internal Control and Internal Audit departments. It monitors and measures trends in the bank’s major exposures and takes preventive measures. It also assesses the quality of each core business’s security systems and risk management tools. In 2005, its work covered commodities, major risks, optimization and loan placement.
The risk committees established by each of the core businesses include business line heads and representatives of the Risk Management and Internal Audit departments. They include: - Credit Committee of Corporate and Institutional Banking and Markets and the subsidiaries that report to it; - Country Risk Committee; - Risk Committees of the Capital Markets core business and the subsidiaries that report to it; - Risk Committee of the Banking, Financial and Technology Services business; - Risk Committee of the Asset Management business; - Risk Committees and Investment Committees of the Private Equity and Wealth Management core business; - Risk Committees of the Receivables Management core business (Coface and Natexis Factorem); - various limit violation committees.
The Risk Management department sets delegated limits for each business line. Natexis Banques Populaires has retained
Breakdown of impairment charges and other credit provisions by region at December 31, 2005 IFRS
The major responsibilities of each control entity are as follows: First tier controls are carried out by the middle office, which plays an operational role through the applications it manages and uses daily.
Risk Management is responsible for the financial component of second tier controls, in particular overseeing market risks and models.
- a market risks committee, which meets monthly and comprises the heads of the various control levels together with front office managers. It is chaired by the head of capital markets activities.The committee validates new limits, proposes changes to limits and reviews any identified limit violations; - a risk monitoring and supervision committee, which meets quarterly, comprising front office and middle office managers, the Risk Management department and the Internal Audit department to present new methods for measuring risks and divide up developments for their implementation.
In addition, the Internal Audit departments of Natexis Banques Populaires and Banque Fédérale des Banques Populaires periodically conduct specific audit assignments.
The key standard metrics used are: - sensitivity to a +/- 1% change in interest rates (overall and by maturity); - yield curve exposure expressed as the potential loss; - currency exposure; - equity exposure; - sensitivity to a +/- 1% change in implied volatilities in the equity, foreign exchange and fixed income markets (overall, by maturity and by strike); - sensitivity to a change in delta of an underlying (equities, fixed income and currency); - sensitivity to dividend levels; - sensitivity to change in swap spreads; - sensitivity to change in issuer spreads; - sensitivity to change in correlations; - monthly and annual loss alerts.
The scope of VaR calculations is as follows: - trading and investment portfolios of the Corporate and Institutional Banking and Markets core business, excluding the “structured equities” portfolio; - trading portfolios of Natexis Bleichroeder S.A.; - trading portfolios of Natexis Arbitrage; - trading portfolios of Natexis Metals; - the investment portfolio of the Finance department.
For the Corporate and Institutional Banking and Markets core business,VaR calculations are conducted daily by the middle office and monthly by the Risk Management department.
Natexis Metals’ VaR calculations are conducted daily using local Riskmanager software and monthly by the Risk Management department.
Measurement of risks and limits - Deployment of the methodology for interest-rate risk measurement: curve risk indicator ; - Specific indicators relating to product developments giving rise to new types of risk (correlations).All of these new products have been subject to the “new products” procedure and model validation; - Further improvements to limits for interest-rate products and hybrid derivatives; - Significant increase in assets authorized for money market securities, with deployment of the spread risk measurement metric (Xsi) for this portfolio; - Launch of high-yield activities; - Increased sensitivity to yields on short-term treasury instruments; - Increase in limits for long/short equity, capital structure arbitrage and convertible bonds from Natexis Arbitrage; - Tightening of loss alert levels.
The currency risk limit is B3 million expressed in terms of a one-day potential loss with a 99% confidence level.
Maximum sensitivity to a change in issuer spreads in the secondary bond market trading book is B10 million, expressed in terms of a one-day potential loss and a 99% confidence level.
Volatility limits for interest rate, currency and equity options are: - B2.5 million for a 1% change in interest rate volatility; - B1.35 million for a 1% change in equity volatility; - B0.683 million to B0.975 million per currency for a 1% change in foreign exchange volatility.
Structural interest rate risk, currency and liquidity risk The Asset & Liability Committee (ALM Committee), which is chaired by the Chief Executive Officer and inclu-
des representatives of Corporate and Institutional Banking and Markets, the Finance department and the Risk Management department, is responsible for setting out the broad guidelines for ALM, liquidity and investment of own funds. An ALM officer reporting to the Finance department is responsible for the coordination of asset and liability management.
Interest rate, currency and liquidity risks have been centralized at Natexis Banques Populaires since 2000.These risks are monitored and managed by Corporate and Institutional Banking and Markets.
The ALM Committee validated the principles of expressing sensitivity limits for refinancing books as a percentage of regulatory capital. For sensitivity to a 200bp (1) change in interest rates, the Committee set an overall limit of 2.5% of regulatory capital or B164 million.This limit has been delegated by the Board of Directors to the Chief Executive Officer with the ability to sub-delegate all or part.
Current sub-limits are: in € millions Limits for Limits for 100bp 200bp
The objectives of the Group’s strategy for the management of financial risks – namely interest rate and liquidity risks – are based on the centralization of these risks within the treasury department.
(1) “Shock” proposed by the banking regulator in the second pillar of the Basel II accord published in June 2004
Natexis Banques Populaires has four business segments that correspond to its four identified core businesses: 7.1 Corporate and Institutional Banking and Markets Corporate and Institutional Banking and Markets includes financing and capital markets activities for a clientele of large companies, banks and institutions. It has a highly integrated sales force that is responsible for marketing Natexis Banques Populaires products and developing sales of all products to its clients, and particularly products provided by the core business, which include: - Financing products: working capital finance (overdrafts, spot credits, discounting, credit lines, guarantees and bonds, documentary credits), financing for equipment, assets, acquisitions, projects and international trade; - Capital market products: interest rate, equity, credit and currency derivatives, brokerage and arbitrage; - Cash management and payment services: payment systems, EDI, authorizations, checks, letters of credit, transfers, cash management.
7.3 Services This business line comprises the following: - Financial services provide back-office services including custody (accounting holding, back-office outsourcing, depository control), fund administration and accounting, issuer services, order receipt and transmission, office service. Most of this business comes from Natexis Banques Populaires clients; - Banking services provide payment systems services including electronic payments, issuance and collection of low volume electronic transfers, check processing; - Asset management provides savings, investment and insurance products through three business lines: insurance (individual life, group life, non-life, personal risk), financial management (mutual funds, multi-manager funds, multi-distribution ), employee benefits planning (development and marketing of products, administration of employee share ownership plans, employee account holding, fund administration and accounting).
Natexis Banques Populaires has four main regions: - France; - Other EU countries; - North America (Canada, US); - Other OECD countries.
This reflects the main regions in which it operates, of which France is by far the largest market.
Segment reporting is based on financial aggregates taken from the balance sheet and income statement and reconciled with the consolidated financial statements.
Variable income securities valued on a listed market (listed securities) or using another valuation method (unlisted securities valued on the basis of price-earnings ratio or discounted cash flows) break down as follows: n VIII.1.1.1 - Variable income securities at fair value through profit or loss in € millions Notes 12/31/2005 01/01/2005 EU IFRS EU IFRS
For financial liabilities measured at fair value, changes in credit risk are not included in the fair value.
VIII.1.3 - Derivative financial instruments held for trading Derivative financial instruments not held for hedging purposes are held for trading, irrespective of the period for which they are held.
Securities designated as at fair value through profit or loss 0 0
VIII.2.2 - Fair value hedges Fair value hedges are used for the management of micro-hedging transactions.The method of documentation under IFRS corresponds to fair value hedges of fixed rate assets and liabilities.
Comments: (1) Variable income securities traded on an active market amounted to €3,444 million as at December 31, 2005.
n VIII.4.1.1 - Performing loans to banks in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
At December 31, 2005, the fair value of loans and advances to customers, calculated in accordance with the methods set out in note V, amounted to €49,780 million.
Performing loans VIII.4.2.1. 49,099 40,527 Collective provisions (372) (306) Impairment provisions (38) (32)
n VIII.4.2.3 - Other loans and advances to customers in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
Home purchase loans 107 100 n VIII.4.2.1 - Performing loans to customers in € millions Notes 12/31/2005 01/01/2005 EU IFRS EU IFRS
Accrued interest 151 109 n VIII.4.2.2 - Lease financing in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
(1) Positive amounts correspond to sources of deferred tax assets and negative amounts to sources of deferred tax liabilities.
Including: -deferred tax assets 248 231 -deferred tax liabilities (414) (346) -deferred taxes of associates (7) (4)
VIII.7.1 - Sundry other assets and liabilities n VIII.7.1.1 - Other assets
Accrued income and prepaid expenses - insurance companies VIII.7.3.1 988 841 in € millions Notes 12/31/2005 01/01/2005 EU IFRS EU IFRS
Accrued interest 7 4 n VIII.7.1.2 - Other liabilities in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
VIII.7.2 - Accrued income and prepaid expenses and deferred income and accrued charges n VIII.7.2.1 - Accrued income and prepaid expenses in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
VIII.7.3 - Accrued income and prepaid expenses and deferred income and accrued charges - insurance companies n VIII.7.3.1 - Accrued income and prepaid expenses - insurance companies in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
VIII.8.1 - Development of non-current assets over the period in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
Shares in non-trading real estate companies - - - - - - -
The fair value of investment property is obtained by discounting the rental yield of these assets at the market rate: (1) The value assigned on recognition to the Coface network under French GAAP (B341 million) does not meet the criteria for recognition as an intangible asset under IAS 38. In line with IFRS 1 on first-time adoption of IFRS, this item has been reclassified as goodwill.
Fair value of investment property in € millions 12/31/2005 EU IFRS
Natexis Private Equity and subsidiaries 19 2 - - 21 173NATEXIS BANQUES POPULAIRES
The fair value of deposits from banks and customer deposits is calculated on the basis of future cash flows.The discount rate applied is the market rate at the balance sheet date. If a quoted price is available that meets the criteria of IAS 39, the quoted price is used.
VIII.10.1 - Deposits from banks in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
Accrued interest payable 117 74 in € millions 12/31/2005 01/01/2005 EU IFRS EU IFRS
VIII.11 - Debt securities in issue Debt securities (interest-bearing notes, interbank market instruments etc.) are broken down by nature, apart from subordinated debt, which is recorded separately in a specific line item.
Debt securities are measured at fair value on inception, i.e. at their issue price minus transaction costs, and then measured at amortized cost using the effective interest rate method, which includes issue expenses deferred over the term of the instruments issued.
The fair value of variable-rate debt securities is equal to their net carrying amount in the balance sheet.
In life insurance, loss reserves correspond to amounts due after occurrence of a loss claim. In credit insurance, they correspond to the estimated cost of all loss claims declared and not settled at the accounting date. In addition to the amount of loss claims to be paid, a provision is booked for unknown loss claims calculated on a statistical basis.
Provisions deducted from assets 1,374 337 (191) (254) 42 (3) 14 1,319 Provisions for performing loans 364 100 - (63) 18 - - 419 Provisions for non-performing loans 896 153 (145) (120) 24 - (3) 805
Provisions for current income taxes 94 42 (17) - 1 - (0) 120
in € millions Notes 01/01/2005 Increase Utilization Surplus Exchange Change Other 12/31/2005 released differences in
At December 31, 2005, the fair value of subordinated debt came to B4,345 million.
Depending on the analysis of contracts, preferred shares may be classified as debt or equity. All preferred shares issued by Natexis Banques Populaires are recognized as debt. Under French GAAP, these shares were included in the consolidated financial statements as minority interests.”
Note IX > NOTES TO THE INCOME STATEMENT IX.1 - Net interest income In accordance with recommendation 2004-R.03 of October, 27 2004,“Interest and similar income” and “Interest and similar expenses” comprise interest on fixed-income securities recognized as available-for-sale financial assets, and interest on loans and advances to banks and loans and advances to customers, and deposits from banks and customer deposits.
These items also include interest on held-to-maturity financial assets (which concerns only insurance companies).
IX.2 - Net fees and commission The method of accounting for fees and commissions received in respect of services or financial instruments depends on the ultimate purpose of the services rendered and the method of accounting for the financial instruments to which the service relates. Fees and commissions for one-off services are recognized in income immediately the service is provided. Fees and commissions for ongoing services such as guarantee commissions or management fees are spread over the period during which the service is provided.
Fees and commissions that form an integral part of the effective yield of an instrument such as commitment fees or loan set-up fees are recognized as an adjustment to the effective interest rate over the term of the loan.Accordingly, under EU IFRS, these fees are recognized as interest income rather than fees and commission.
Hedging instruments includes changes in fair value of fair value hedges, including interest, plus the symmetrical revaluation of items hedged. It also includes the ineffective portion of cash flow hedges.
Net gains on financial assets and liabilities held for trading (73) 129 o/w hedging instruments (371) (274)
Net gains on other financial assets and liabilities delegated as at fair value 311 156
Impairment losses on fixed income securities are recognized as impairment charges and other impairment provisions.
Other insurance income and expense IX.5.2 4,269 (3,010) 1,259 3,354 (2,555) 798
(1) Corresponding to sales of credit information services, marketing information services and receivables collection services provided by Coface subsidiaries.
Other activities 94 106 in € millions 12/31/2005 12/31/2004 EU IFRS 2004 IFRS
As IAS 32 and IAS 39 were not applied at December 31, 2004, charges and reversals against non-performing securities were recognized under “Other”.
(1) The decline in the value of associates is due to the change in the method of consolidation for BP Développement and Sopromec, which were fully consolidated as at December 31, 2005. The share of the net assets of these two subsidiaries amounted to €80 million at December 31, 2004.
Share of Share of Share of Share of net assets net income net assets net income in € millions 12/31/2005 EU IFRS 12/31/2004 Charge Net Write-offs not Recoveries of Net Net releases covered by bad debts provisions written off
IX.9 - Gains or losses on other assets This item comprises capital gains and losses on the disposal of property, plant and equipment and intangible assets, as well as capital gains and losses on the disposal of investments in consolidated companies.
IX.10 - Change in value of goodwill This item includes amortization of positive goodwill. Amortization is recognized where there is evidence of impairment.
Capital gains on disposals of property, plant and equipment and intangible assets include €95 million corresponding to the sale of Liberté 2.
Net capital losses on disposals (15) (16) (31) (1) (9) (10)
IX.11 - Reconciliation of the tax charge in the financial statements and the theoretical tax charge
(1) The main deductions in respect of permanent timing differences concern the tax-exempt net income of venture capital subsidiaries. Under IFRS, results of subsidiaries that have issued preferred shares have been eliminated after reclassifying interest due to minority shareholders as interest expense. As under French GAAP, this no longer qualifies as a permanent timing difference.
(2) The positive change is due to the reduction of tax on revenues from private equity subsidiaries (the law of July 26, 2006, extends the new long-term capital gains tax regime to French venture capital companies) representing €17 million, as well as income on the taxation of financing leases for €7 million.
+ Net income attributable to equity holders of the parent 695 488 + Net income attributable to minority interests 30 17 + Income tax charge 342 239 + Goodwill amortization (2) 7 - Share of income of associates (14) (10)
= Consolidated net income before tax, goodwill amortization and share of income of associates 1,052 740
X.1 - Payroll costs Payroll costs amounted to B1,179 million in 2005.
Payroll costs not only include wages and salaries net of rebilled expenses but also employee benefits such as pensions (defined benefit plans) and share-based payments in accordance with IFRS 2.
The annual charge for defined benefit plans includes: - incremental benefit entitlement for all employees; - interest cost (impact of discounting); - gross return on plan assets; - amortization of actuarial gains or losses (corridor method) and past service costs.
X.3 - Employee benefits The main provisions for employee-related liabilities concern: n CAR supplementary banking pension n Natexis Banques Populaires supplementary banking pension n end-of-career awards and allowances n long-service awards.
Pension liabilities to active and retired employees comprise supplementary pensions specific to the Banque Populaire Group and a residual supplementary banking pension calculated on the basis of the difference between banking rights to December 31, 1993, and social security pensions.
Provisions are booked for all subsdiaries’ commitments not covered by insurance policies.